Annual Report of the Federal Reserve Board, 2010

97th Annual Report 2010 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Toorderadditionalcopiesof thisorotherFederalReserveBoardpublications,contact: PublicationsFulfillment MailStopN-127 Boardof Governorsof theFederalReserveSystem Washington,DC20551 (ph)202-452-3245 (fax)202-728-5886 (e-mail)Publications-BOG@frb.gov ThisandotherFederalReserveBoardreportsarealsoavailableonlineat www.federalreserve.gov/boarddocs/rptcongress/default.htm.

Letter of Transmittal Boardof Governorsof theFederalReserveSystem Washington,D.C. June2011 TheSpeakerof theHouseof Representatives: Pursuanttotherequirementsof section10of theFederalReserveAct,Iampleasedtosubmittheninetyseventhannualreportof theBoardof Governorsof theFederalReserveSystem. Thisreportcoversoperationsof theBoardduringcalendaryear2010. Sincerely, BenBernanke Chairman

i Contents Overview .....................................................................................................................................1 AboutthisReport .......................................................................................................................1 AbouttheFederalReserveSystem ..............................................................................................1 Monetary Policy and Economic Developments ............................................................5 MonetaryPolicyReportofMarch2011 ........................................................................................5 MonetaryPolicyReportofJuly2010 ..........................................................................................48 Banking Supervision and Regulation ..............................................................................71 Overview ..................................................................................................................................71 2010Developments ..................................................................................................................71 Supervision ..............................................................................................................................74 Regulation ................................................................................................................................94 Consumer and Community Affairs .................................................................................97 RulemakingandRegulations .....................................................................................................97 OversightandEnforcement .....................................................................................................103 RespondingtoConsumerComplaintsandInquiries ..................................................................112 SupportingCommunityEconomicDevelopment .......................................................................114 ConsumerAdvisoryCouncil .....................................................................................................116 Federal Reserve Banks ........................................................................................................121 DevelopmentsinFederalReservePricedServices ....................................................................121 DevelopmentsinCurrencyandCoin ........................................................................................124 DevelopmentsinFiscalAgencyandGovernmentDepositoryServices .......................................124 DevelopmentsintheUseofFederalReserveIntradayCredit .....................................................127 ElectronicAccesstoReserveBankServices ............................................................................128 InformationTechnology ...........................................................................................................128 ExaminationsoftheFederalReserveBanks .............................................................................128 IncomeandExpenses .............................................................................................................129 SOMAHoldingsandLoans ......................................................................................................129 FederalReserveBankPremises ...............................................................................................132 Other Federal Reserve Operations ..................................................................................141 TheBoardofGovernorsandtheGovernmentPerformanceandResultsAct ..............................141 FederalLegislativeDevelopments ............................................................................................144

ii Record of Policy Actions of the Board of Governors .............................................153 RulesandRegulations .............................................................................................................153 PolicyStatementsandOtherActions .......................................................................................157 SpecialLiquidityFacilitiesandOtherInitiatives .........................................................................159 DiscountRatesforDepositoryInstitutionsin2010 ....................................................................161 Minutes of Federal Open Market Committee Meetings .........................................163 MeetingHeldonJanuary26–27,2010......................................................................................164 MeetingHeldonMarch16,2010 .............................................................................................190 MeetingHeldonApril27–28,2010 ...........................................................................................200 MeetingHeldonJune22–23,2010 ..........................................................................................220 MeetingHeldonAugust10,2010 ............................................................................................241 MeetingHeldonSeptember21,2010 ......................................................................................251 MeetingHeldonNovember2–3,2010......................................................................................260 MeetingHeldonDecember14,2010 .......................................................................................280 Litigation .................................................................................................................................291 Statistical Tables ....................................................................................................................293 Federal Reserve System Audits ........................................................................................321 BoardofGovernorsFinancialStatements .................................................................................322 FederalReserveBanksCombinedFinancialStatements ...........................................................342 OfficeofInspectorGeneralActivities ........................................................................................406 GovernmentAccountabilityOfficeReviews...............................................................................407 Federal Reserve System Organization ...........................................................................409 BoardofGovernors .................................................................................................................409 FederalOpenMarketCommittee .............................................................................................414 BoardofGovernorsAdvisoryCouncils .....................................................................................415 FederalReserveBankBranches ..............................................................................................418 Index .........................................................................................................................................435

1 Overview TheFederalReserve,thecentralbankof theUnited For More Background on Board States,isafederalsystemcomposedof acentralgov- Operations ernmentalagency—theBoardof Governors—and12 regionalFederalReserveBanks. FormoreinformationabouttheFederalReserve BoardandtheFederalReserveSystem,visitthe Board’swebsiteatwww.federalreserve.gov/ TheBoardof Governors,locatedinWashington, aboutthefed/default.htm.Anonlineversionofthis D.C.,consistsof sevenmembersappointedbythe AnnualReportisavailableatwww.federalreserve Presidentof theUnitedStatesandsupportedbya .gov/boarddocs/rptcongress. 2,200-personstaff.Besidesconductingresearch, analysis,andpolicymakingrelatedtodomesticand internationalfinancialandeconomicmatters,the in2009,anditalsoincludesthepolicyactionsof Boardplaysamajorroleinthesupervisionandregu- theFederalOpenMarketCommittee(FOMC).1 lationof theU.S.bankingsystemandadministers mostof thenation’slawsregardingconsumercredit • StatisticalTables.Section9(beginningonpage protection.Italsohasbroadoversightresponsibility 293)includes14statisticaltablesthatprovide forthenation’spaymentssystemandtheoperations updatedhistoricaldataconcerningBoardand andactivitiesof theFederalReserveBanks. Systemoperationsandactivities. • FederalReserveSystemAudits.Section10(beginningonpage321)providesdetailedinformationon About this Report theseverallevelsof auditandreviewconducted thatconcernSystemoperationsandactivities, ThisreportcoversBoardandSystemoperationsand includingthoseprovidedbyoutsideauditorsand activitiesduringcalendar-year2010.Thereport theBoard’sOfficeof InspectorGeneral. includes11sections: • FederalReserveSystemOrganization.Section11 • MonetaryPolicyandEconomicDevelopments.Sec- (beginningonpage409)provideslistingsof key tion1(beginningonpage5)providesadaptedver- officialsattheBoardandintheFederalReserve sionsof theFebruary2011andJuly2010Mon- System,includingtheBoardof Governors,itsoffietaryPolicyReporttotheCongress. cers,FOMCmembers,severalSystemcouncils,and FederalReserveBankandBranchofficersand • FederalReserveOperations.Sections2through5 directors. (beginningonpage121)providesummariesof BoardandSystemactivitiesintheareasof bankingsupervisionandregulation,consumerandcom- About the Federal Reserve System munityaffairs,andReserveBankoperations.It alsosummarizesBoardcompliancewiththeGovernmentPerformanceandResultsActof 1993and TheFederalReserveSystem,whichservesasthe itsactivitiesregardinglegislativedevelopmentsthat nation’scentralbank,wascreatedbyanactof ConaffectedBoardoperationsin2010. gressonDecember23,1913.TheSystemconsistsof aseven-memberBoardof Governorswithheadquar- • Recordof PolicyActions.Sections6through8 (beginningonpage153)provideanaccountof 1 FormoreinformationontheFOMC,seetheBoard’swebsiteat actionstakenbytheBoardonquestionsof policy www.federalreserve.gov/monetarypolicy/fomc.htm.

2 97thAnnualReport|2010 tersinWashington,D.C.,andthe12ReserveBanks companiesandstate-charteredbanksthatarememlocatedinmajorcitiesthroughouttheUnitedStates. bersof theSystem;servingasfiscalagentsof the U.S.Treasury;andprovidingavarietyof financial TheFederalReserveBanksaretheoperatingarmsof servicesfortheTreasury,othergovernmentagencies, thecentralbankingsystem,carryingoutavarietyof andotherfiscalprincipals. Systemfunctions,includingoperatinganationwide paymentsystem;distributingthenation’scurrency ThemapsbelowandoppositeidentifyFederal andcoin;underauthoritydelegatedbytheBoardof ReserveDistrictsbytheirofficialnumber,city,and Governors,supervisingandregulatingbankholding letterdesignation. ■FederalReserveBankcity ■NBoardofGovernorsoftheFederalReserveSystem,Washington,D.C.

Overview 3 ■FederalReserveBankcity ●FederalReserveBranchcity ■NBoardofGovernorsoftheFederalReserveSystem,Washington,D.C. —Branchboundary

5 Monetary Policy and Economic Developments Asrequiredbysection2Bof theFederalReserveAct, numberof keyindicatorsof economicactivitysofttheFederalReserveBoardsubmitswrittenreportsto enedrelativetothereadingspostedinlate2009and theCongressthatcontaindiscussionsof “thecon- thefirstpartof 2010,raisingconcernsaboutthe ductof monetarypolicyandeconomicdevelopments durabilityof therecovery.Inlightof thesedevelopandprospectsforthefuture.”TheMonetaryPolicy ments—andinordertoputtheeconomicrecovery ReporttotheCongress,submittedsemiannuallytothe onafirmerfooting—theFederalOpenMarketCom- SenateCommitteeonBanking,Housing,andUrban mittee(FOMC)providedadditionalmonetarypolicy AffairsandtotheHouseCommitteeonBankingand stimulusduringthesecondhalf of 2010byreinvest- FinancialServices,isdeliveredconcurrentlywithtes- ingprincipalrepaymentsfromitsholdingsof agency timonygivenbytheChairmanof theFederalReserve debtandagencymortgage-backedsecuritiesin Board. longer-termTreasurysecuritiesandbyannouncing itsintentiontopurchaseanadditional$600billionof Thefollowingdiscussionisanannualreviewof U.S. Treasurysecuritiesbytheendof thesecondquarter monetarypolicyandeconomicdevelopmentsin2010. of 2011. Itincludesthetext,tables,andselectedfiguresfrom theMarch1,2011,report;thefigureshavebeen Financialmarketconditionsimprovednotablyinthe renumbered,andthereforethefigurenumbersdiffer fallof 2010,partlyinresponsetoactualandexpected fromthoseinthereport.Alsoincludedarethetext increasesinmonetarypolicyaccommodation.In andtablefromParts1–3of theJuly21,2010,report; addition,laterintheyear,thetenorof incomingeco- Part4of thatreportisidenticaltotheaddendumto nomicnewsstrengthenedsomewhat,andthedowntheminutesof theJune22−23,2010,meetingof the sideriskstoeconomicgrowthappearedtorecede. FederalOpenMarketCommittee(FOMC)andis Nonetheless,thejobmarkethasimprovedonly presentedwiththoseminutesinthe“Minutes”sec- slowly.Employmentgainshavebeenmodest,and tionof thisannualreport. althoughtheunemploymentratefellnoticeablyin DecemberandJanuary,themarginof slackinthe ThecompleteMonetaryPolicyReportsareavailable labormarketremainswide.Meanwhile,despiterapid ontheBoard’swebsiteatwww.federalreserve.gov/ increasesincommodityprices,longer-terminflation boarddocs/hh.Othermaterialsinthisannualreport expectationsremainedstable,andmeasuresof relatedtotheconductof monetarypolicyincludethe underlyingconsumerpriceinflationcontinuedto minutesof the2010meetingsof theFOMC(seethe trenddownwardonnet. “Minutes”sectiononpage163)andstatisticaltables1–4 (seethe“StatisticalTables”sectiononpage293). Realgrossdomesticproduct(GDP)roseatamoderaterateinthethirdquarter.Inventoriesprovidedthe principalimpetustogrowthwhilefinalsalesshowed Monetary Policy Report littlevigor—thesamepatternthatprevailedinthe of March 2011 firsthalf of theyear.Lessfavorablereadingsthat begantoemergeduringthesecondquarterfora Part 1 rangeof indicators—newclaimsforunemployment Overview: Monetary Policy insurance,industrialproduction,andnumeroussurand the Economic Outlook veysof businessactivity,amongothers—pointedtoa slowinginthepaceof therecoveryandsuggested EconomicactivityintheUnitedStatesexpandedata thatthetransitionfromarecoveryboostedimpormoderatepace,onaverage,inthesecondhalf of 2010 tantlybytheinventorycycletoonepropelledmainly andearly2011.Inthespringandearlysummer,a byprivatefinaldemandwasproceedingonlyvery

6 97thAnnualReport|2010 gradually.Laterintheyear,however,thisprocess excludepricesforfoodandenergy—rose¾percent appearedtogaintraction.Indeed,realGDPisesti- inthe12monthsendinginJanuary. matedtohaverisenalittlefasterinthefourthquarterthaninthethirdquarterdespiteasubstantial Financialmarketconditionscontinuedtobesupportslowdowninthepaceof inventoryinvestmentinthe iveof economicgrowthinthesecondhalf of 2010 fourthquarter;finalsalesincreasedmuchmorerap- andinto2011.Equitypricesrosesolidly,reflecting idlyinthefourthquarterthanearlier. themoreaccommodativestanceof monetaryandfiscalpolicy,animprovedeconomicoutlook,and Overthesecondhalf of 2010,consumerspending better-than-expectedcorporateearningsreports. postedasolidgain,boostedinpartbycontinued, Yieldsonlonger-termTreasurysecuritiesdeclinedin albeitmodest,increasesinrealwageandsalary thesummerandearlyautumn,reflectinginpart income;somewaningof thedragonoutlaysfrom anticipationof additionalmonetarypolicystimulus, earlierdeclinesinhouseholdnetworth;andamodest butsubsequentlyroseaseconomicprospects improvementintheavailabilityof consumercredit. improvedandasmarketexpectationsof theultimate Businessescontinuedtostepuptheirspendingon sizeof FOMCTreasurypurchaseswererevised equipmentandsoftwareinresponsetoabrighter down.Despitesomevolatility,yieldsonTreasury outlookforsalesaswellasmorefavorableconditions securitiesremainedrelativelylowonbalance. increditmarkets.Intheexternalsector,thecontinued Medium-andlonger-terminflationcompensation reboundinexportswassupportedbyfirmingforeign derivedfrominflation-indexedTreasurysecurities demand.Meanwhile,theconstructionsector increasedsincethesummerasconcernsaboutdeflaremainedexceptionallyweak. tioneased,thoughthesemeasuresremainedwithin historicalranges.Interestratesonfixed-rateresiden- Thecontinuedrecoveryineconomicactivityhasbeen tialmortgagesmovedbroadlyinlinewithyieldson accompaniedbyonlyaslowimprovementinlabor Treasurysecuritieswhilethespreadsbetweenyields marketconditions.Privatepayrollemploymenthas oncorporatebondsandthoseonTreasurysecurities movedupatarelativelytepidrate—about115,000 declined;overall,bothmortgageratesandcorporate permonth,onaverage,sincetheFebruary2010 yieldscontinuedtobeatlowlevels.Althoughbank troughinemployment—recoupingonlyasmallpor- lendingpoliciesgenerallystayedtight,banks tionof the8¾millionjobslostduring2008and reportedsomeeasinginthoseconditionsonnet. 2009.Overmostof thisperiod,thepaceof hiring Afterpostingsubstantialdeclinessincethethird wasinsufficienttosubstantiallyreducetheunem- quarterof 2008,totalloansheldonthebooksof ploymentrate.InDecemberandJanuary,however, banksshowedsignsof stabilizinginrecentmonths. thejoblessratewasreportedtohavedeclinednoticeably.Inadditiontotherecentdropintheunemploy- Largernonfinancialcorporationswithaccesstocapimentrate,someotherindicatorsof labormarket talmarketstookadvantageof favorablefinancial conditions—forexample,measuresof firms’hiring conditionstoissuedebtatarobustpace.Bondand plans—havebrightenedabit,raisingtheprospect syndicatedloanissuancewasstrong,particularly thatapickupinthepaceof hiringmaybeintheoff- amonglower-ratedcorporateborrowers.Commercial ing.Thatsaid,thelevelof theunemploymentrate andindustrialloansonbanks’booksstartedto remainsveryelevated,andthelong-termunemployed expandaroundtheendof 2010.Nevertheless,small, continuetoaccountforahistoricallylargefractionof bank-dependentbusinessesremainedconstrainedin overalljoblessness. theiraccesstocredit,althoughsomeindicatorssuggestedthatcreditavailabilityforthesefirmswas Consumerpriceinflationtrendeddownduring2010 beginningtoimprove. asslackinresourceutilizationrestrainedcostpressureswhilelonger-terminflationexpectations Householddebtappearstohavecontractedinthe remainedstable.Althoughthepricesof crudeoiland secondhalf of 2010,butatasomewhatslowerpace manyindustrialandagriculturalcommoditiesrose thanearlierintheyear.Householdmortgagedebt rapidlyinthelatterhalf of 2010andtheearlypartof likelycontinuedtodecline,ashousingdemand 2011,overallpersonalconsumptionexpenditures remainedweakandlendingstandardswerereport- (PCE)pricesincreasedatanannualrateof just edlystillstringent.Revolvingconsumercreditalso 1¼percentoverthe12monthsendinginJanuary, contracted.Bycontrast,nonrevolvingconsumer whichcompareswitha2½percentriseduringthe credit—primarilyautoandstudentloans—increased preceding12months.CorePCEprices—which solidlyinthefinalquarterof 2010.

MonetaryPolicyandEconomicDevelopments 7 Afterfirstemergingduringthespring,concerns federalfundsrateof between0and¼percentand aboutfiscalandbankingdevelopmentsinEurope reiterateditsexpectationthateconomicconditions, resurfacedlaterintheyear.AlthoughsomeEuro- includinglowratesof resourceutilization,subdued peansovereignsandfinancialinstitutionsfaced inflationtrends,andstableinflationexpectations, renewedfundingpressuresinthefourthquarter,the werelikelytowarrantexceptionallylowlevelsforthe repercussionsinbroaderglobalfinancialmarkets federalfundsrateforanextendedperiod. weremuted.Tohelpminimizetheriskthatstrains abroadcouldspreadtotheUnitedStates,aswellas TheFederalReservecontinuedtodevelopandtest tocontinuetosupportliquidityconditionsinglobal toolstodrainorimmobilizelargevolumesof bankmoneymarkets,theFOMCinDecemberapproved ingsystemreservesinordertoensurethatitwillbe anextensionof thetemporaryU.S.dollarliquidity abletosmoothlyandeffectivelyexitfromthecurrent swaparrangementswithanumberof foreigncentral extraordinarilyaccommodativepolicystanceatthe banks. appropriatetime.TheCommitteecontinuestomonitortheeconomicoutlookandfinancialdevelop- Apparentlyseekingtoboostreturnsinanenviron- ments,anditwillemployitspolicytoolsasnecessary mentof lowinterestrates,investorsdisplayedan tosupporttheeconomicrecoveryandtohelpensure increasedappetiteforhigher-yieldingfixed-income thatinflation,overtime,returnstolevelsconsistent instrumentsinthesecondhalf of 2010andinto2011, withitsmandate. whichlikelysupportedstrongissuanceof theseproductsandcontributedtoanarrowingof riskspreads, Theeconomicprojectionspreparedinconjunction suchasthoseoncorporatedebtinstruments.Infor- withtheJanuaryFOMCmeetingarepresentedin mationfromavarietyof sources,includingtheFed- Part4of thisreport.Inbroadterms,FOMCparticieralReserveBoard’sSeniorCreditOfficerOpinion pantsanticipatedasustainedbutmodestrecoveryin SurveyonDealerFinancingTerms,suggeststhatuse realeconomicactivitythisyearthatwouldpickup of dealer-intermediatedleveragebyfinancialmarket somewhatin2012and2013.Theexpansionwas participantsroseabitinrecentquartersbut expectedtobeledbygainsinconsumerandbusiness remainedwellbelowitspre-crisislevels.1Thecondi- spendingthataresupportedbyimprovementsin tionof financialinstitutionsgenerallyappearedto householdandbusinessconfidence.Nevertheless, improvefurther,andtheregulatorycapitalratiosof economicgrowthwasexpectedtobedampedbya commercialbanks,particularlythelargestbanks, numberof headwinds,includingthegradualpaceof movedhigher. improvementsinthelabormarket,still-stringentborrowingconditionsforhouseholdsandbank- Withthepaceof recoveryinoutputandemployment dependentsmallbusinesses,lingeringhouseholdand seenasdisappointinglyslowandmeasuresof infla- businessuncertainty,andongoingweaknessinreal tionviewedassomewhatlowrelativetolevelsjudged estatemarkets.Onbalance,FOMCparticipants consistentwiththeCommittee’smandate,the anticipatedthatrealGDPwouldincreaseatabove- FOMCtookseveralactionstoprovideadditional trendratesoverthenextthreeyears,butnotasrapsupporttotheeconomicrecoveryduringthesecond idlyasinpreviousrecoveries.Meanwhile,theunemhalf of lastyear.InAugust,theFOMCdecidedto ploymentratewasprojectedtofallgradually.Inflareinvestprincipalpaymentsfromagencydebtand tionwasexpectedtodriftupslowlytowardthelevels agencymortgage-backedsecuritiesheldintheSystem thatCommitteeparticipantsbelievetobemostcon- OpenMarketAccount(SOMA)inlonger-term sistentwiththeCommittee’smandate.Reflecting Treasurysecuritiestokeepconstantthesizeof the theirassessmentthattherecoveryappearedtobeon SOMAportfolioandsoavoidanimplicittightening afirmerfooting,theparticipantsupgradedslightly of monetarypolicy.InNovember,toprovidefurther theirprojectionsfornear-termeconomicgrowthrelapolicyaccommodationtohelpsupporttheeconomic tivetotheonestheypreparedinconjunctionwiththe recovery,theFOMCannounceditsintentiontopur- NovemberFOMCmeeting;otherwise,theirprojecchaseanadditional$600billioninlonger-termTreas- tionsforeconomicgrowthandinflationwerelittle urysecuritiesbytheendof thesecondquarterof changed. 2011.Throughoutthesecondhalf of 2010andearly 2011,theFOMCmaintainedatargetrangeforthe Participantsgenerallyjudgedthattheuncertainty attachedtotheirprojectionsforbotheconomicactivityandinflationwasgreaterthanhistoricalnorms.A 1 Thesurveyisconductedquarterlyandisavailableat www.federalreserve.gov/econresdata/releases/scoos.htm. substantialmajorityof participantsviewedtherisks

8 97thAnnualReport|2010 tobotheconomicgrowthandinflationasbalanced; ever,thetoneof theincomingdataoneconomic onlyafewsawthemastiltedeithertotheupsideor activitybrightenedsomewhat,finalsalesstrengthtothedownside.InNovember,anoticeableshareof ened,andtherecoveryappearedtobeonafirmer participantshadseentherisks—particularlythoseto footing. economicgrowth—astiltedtothedownside.Participantsalsoreportedtheirassessmentsof theratesto Sincethemiddleof 2010,consumerspendinghas whichkeymacroeconomicvariableswouldbe risensolidlyonaverage,businesseshavecontinuedto expectedtoconvergeoverthelongertermunder increasetheiroutlaysforequipmentandsoftware, appropriatemonetarypolicyandintheabsenceof andexportshavemovedupfurther.Incontrast,confurthershockstotheeconomy.Thecentraltenden- structionof newhomesandnonresidentialbuildings ciesof theselonger-runprojectionswere2.5to remainsexceptionallyweak.Conditionsinthelabor 2.8percentforrealGDPgrowth,5.0to6.0percent markethaveimprovedonlyslowly,withpayrolls fortheunemploymentrate,and1.6to2.0percentfor increasingatamodestpace.Throughoutnearlyallof theinflationrate. 2010,thatpaceof employmentexpansionwasinsufficienttobringtheunemploymentratedownmean- Part 2 ingfullyfromitsrecentpeak.InDecember2010and Recent Economic Januaryof thisyear,however,theunemploymentrate and Financial Developments isestimatedtohavedroppedmorenoticeably,even thoughpayrollemploymentgainsremainedlacklus- Economicactivityexpandedatamoderatepace,on ter.Meanwhile,long-durationjoblessnesspersistedat balance,inthesecondhalf of 2010.Accordingtothe near-recordlevels.WithregardtoinflationdevelopcurrentlyavailableestimatesfromtheBureauof Eco- ments,despiterapidincreasesincommodityprices, nomicAnalysis,realgrossdomesticproduct(GDP) longer-terminflationexpectationshaveremained increasedatanannualrateof about2¾percent,on stableandconsumerpriceinflationhascontinuedto average,overthatperiod(figure1).Inthethirdquar- trenddownwardonnet. ter,ashadbeenthecaseinthefirsthalf of theyear, muchof theincreasewastheresultof inventory Conditionsinfinancialmarketsgenerallyimproved accumulation;incontrast,finalsalescontinuedto overthecourseof thesecondhalf of 2010andearly riseatasubduedrate.Meanwhile,severalindicators 2011andcontinuedtobesupportiveof economic of economicactivityhadsoftenedfromthereadings activity.Thisimprovementreflected,inpart,addiobservedearlierintheyear,raisingconcernsabout tionalmonetarypolicystimulusprovidedbytheFedthedurabilityof therecovery.Laterintheyear,how- eralReserve,aswellasgrowinginvestorconfidence inthesustainabilityof theeconomicrecovery. AlthoughyieldsonTreasurysecuritiesrosesome- Figure1.Changeinrealgrossdomesticproduct,2004–10 what,onnet,sincemid-2010,yieldsoninvestmentgradecorporatebondswerelittlechangedatlowlev- Percent, annual rate els,andyieldsonspeculative-gradebondsdeclined. Inequitymarkets,priceindexesgenerallyrose, 4 H2 Q4 buoyedbysolidcorporateearningsandamoreposi- H 1 Q3 tiveeconomicoutlook.Commercialbanksreported 2 thattheyhadeasedsomeof theirlendingstandards + H1 andterms,thoughlendingstandardsremainedgener- 0_ allytightandsomebusinessesandhouseholdscon- 2 tinuedtofacedifficultiesobtainingcredit.Changes ininterestratesfacedbyhouseholdsweremixed.The 4 improvementinfinancialconditionswasaccompaniedbysomesignsof apickupinthedemandfor credit.Borrowercreditqualitygenerallyimproved, 2004 2005 2006 2007 2008 2009 2010 althoughproblemspersistedinsomesectorsof the Note:Hereandinsubsequentfigures,exceptasnoted,changeforagivenperiod ismeasuredtoitsfinalquarterfromthefinalquarteroftheprecedingperiod. economy.ConcernsaboutEuropeanbankingandfis- Source:DepartmentofCommerce,BureauofEconomicAnalysis. calstrainsincreasedagaininlate2010afterhaving

MonetaryPolicyandEconomicDevelopments 9 easedforatime;however,incontrasttowhatwas Figure2.Changeinrealdisposablepersonalincomeandin observedinthespring,theseconcernsleftlittle realwageandsalarydisbursements,2004–10 imprintonU.S.financialmarkets. Percent, annual rate DomesticDevelopments Real disposable personal income Real wage and salary disbursements 8 TheHouseholdSector 6 ConsumerSpendingandHouseholdFinance HH11 4 HH22 Realpersonalconsumptionexpenditures(PCE) 2 + increasedatanannualrateof about3¼percentin 0_ thesecondhalf of 2010,withaparticularlybriskrise 2 inthefourthquarter.Thespendinggainsweresup- 4 portedbythecontinued,thoughmodest,pickupin realhouseholdincomes,bysomefadingof the 6 restrainingeffectsof theearliersharpdeclinesin 2004 2005 2006 2007 2008 2009 2010 households’networth,andbyamodestimprove- Source:DepartmentofCommerce,BureauofEconomicAnalysis. mentintheavailabilityof consumercredit.Outlays fordurablegoodsalsomayhavebeenboostedto someextentbypurchasesthathadbeendeferreddur- likelymorethanoffsetfurtherdeclinesinhouse ingtherecession.Theincreasesinspendingexceeded prices.Althoughthewealth-to-incomeratiohas theriseinincome,andthesavingrateedgeddown trendedupsincethebeginningof 2009andhas duringthesecondhalf of theyear,thoughitremains returnedtothelevelsthatprevailedpriortothelate wellabovelevelsthatprevailedpriortotherecession. 1990s,itremainswellbelowitshighsin2006and 2007.Consumersentimentroselateintheyear, Theincreaseinconsumeroutlaysinthesecondhalf boostedbygradualimprovementsinhousehold of 2010partlyreflectedastep-upinsalesof newlight assessmentsof financialandbusinessconditionsas motorvehicles(cars,sportutilityvehicles,and wellasjobprospects;nevertheless,thesegainsonly pickuptrucks).Salesof lightvehiclesrosefroman movedsentimentbacktoorabitabovethelowlevels annualrateof 11¼millionunitsinthesecondquar- thatprevailedatthestartof lastyear. terof 2010tomorethan12¼millionunitsinthe fourthquarterandmovedupfurtherinthefirstpart Householddebtlikelyfellatjustundera2percent of 2011.Salesweresupported,inpart,byfurther annualrateinthesecondhalf of 2010,aslightly improvementsincreditconditionsforautobuyersas slowerpacethaninthefirsthalf.Thecontractionfor wellasbymore-generoussalesincentivesfromthe 2010asawhole,whichwasdueprimarilytoongoing automakers.Realspendinginothergoodscategories decreasesinmortgagedebt,markedthesecondconalsoroseappreciably,whiletheincreaseinoutlaysfor secutiveannualdecline.Thereductioninoverall serviceswasmoresubdued. householddebtlevels,combinedwithincreasesin personalincome,resultedinafurtherdeclineinthe Thedeterminantsof consumeroutlaysshowedfur- ratioof householddebttoincomeandinthedebt ther,albeitgradual,improvementduringthesecond serviceratio—therequiredprincipalandinterestpayhalf of 2010.Thelevelof realdisposablepersonal mentsonexistingmortgageandconsumerdebtrelaincome(DPI)—after-taxincomeadjustedforinfla- tivetoincome(figure3). tion—whichroserapidlyinthefirsthalf of theyear, continuedtoadvanceinthesecondhalf,asrealwages Theslowdownintherateatwhichhouseholddebt andsalariesmovedupatanannualrateof 2percent contractedinthelatterpartof 2010stemmedinlarge (figure2).Theincreaseinrealwageandsalary partfromamodestrecoveryinconsumercredit. incomereflectedthecontinued,thoughtepid,recov- Althoughrevolvingconsumercredit—mostlycredit eriesinbothemploymentandhoursworked;incon- cardborrowing—continuedtocontract,thedecline trast,hourlypaywaslittlechangedinrealterms. wasataslightlyslowerratethaninthefirsthalf of theyear.Nonrevolvingconsumercredit,whichcon- Theratioof householdnetworthtoDPImovedupa sistslargelyof autoandstudentloansandaccounts littleinthethirdquarterof 2010andappearstohave forabouttwo-thirdsof totalconsumercredit,rose risenfurthersincethen,asincreasesinequityvalues 2percentinthesecondhalf of 2010afterbeingabout

10 97thAnnualReport|2010 lingeringadjustmentsbybankstotheimpositionof Figure3.Householddebtservice,1980–2010 newrulesundertheCreditCardAccountability ResponsibilityandDisclosureAct(CreditCard Percent of disposable income Act).3 14 Issuanceof consumerasset-backedsecurities(ABS) inthesecondhalf of 2010occurredataboutthe 13 samepaceasinthefirsthalf of theyear.Autoloan ABSissuancecontinuedtobehealthy,andtheability tosecuritizetheseloanslikelyhelddowninterest 12 ratesontheunderlyingloans.Issuanceof ABS backedbycreditcardloans,however,remainedvery 11 weak,asthesharpcontractionincreditcardlending limitedtheneedfornewfundingandaccountingrule changesimplementedatthebeginningof 2010made 1982 1986 1990 1994 1998 2002 2006 2010 securitizationof theseloanslessattractive.4Yieldson Note:Thedataarequarterlyandextendthrough2010:Q3.Debtservicepayments consistofestimatedrequiredpaymentsonoutstandingmortgageandconsumer ABSsecuritiesandthespreadsof suchyieldsover debt. comparable-maturityinterestrateswaprateswere Source:FederalReserveBoard,“HouseholdDebtServiceandFinancialObliganotmuchchanged,onnet,overthesecondhalf of tionsRatios,”statisticalrelease. 2010andearly2011. unchangedinthefirsthalf of theyear.Thepickupin ResidentialInvestmentandHousingFinance nonrevolvingconsumercreditisconsistentwith Housingactivityremaineddepressedinthesecond responsestotheSeniorLoanOfficerOpinionSurvey half of 2010.Homebuildingcontinuestobe onBankLendingPractices(SLOOS)indicatingthat restrainedbysluggishdemand,thelargeinventoryof bankshavebecomeincreasinglywillingtomakecon- foreclosedordistressedpropertiesonthemarket,and sumerinstallmentloans;however,lendingstandards thetightcreditconditionsfacedbyhomebuilders.In fortheseloanslikelyremainedfairlytight.2Inaddithesingle-familysector,newunitswerestartedatan tion,inthemostrecentsurvey,asmallnetfractionof averageannualrateof about430,000unitsfrom respondentsnotedincreaseddemandforconsumer July2010toJanuary2011,just70,000unitsabovethe loans,thefirsttimestrongerdemandwasreported quarterlylowreachedinthefirstquarterof 2009 sincemid-2005. (figure4).Inthemultifamilymarket,demandfor apartmentsappearstobeincreasingandoccupancy Someof theincreasedwillingnesstomakeconsumer rateshavebeenedgingup,assomepotentialhomeloansmayreflectimprovementsinconsumercredit buyersmaybechoosingtorentratherthantopurquality.Thedelinquencyrateonautoloansatcaptive chaseahome.Nevertheless,theinventoryof unoccufinancecompaniesmoveddowninthesecondhalf of piedmultifamilyunitscontinuestobeelevated,and 2010to2.6percent,closetoitslonger-runhistorical constructionfinancingremainstight.Asaresult, average.Delinquencyratesoncreditcardsatcom- startsinthemultifamilysectorhaveaveragedan mercialbanksandinsecuritizedpoolsalsomoved annualrateof only135,000unitssincethemiddleof downtoaroundlonger-runaverages.However, 2010,wellbelowthe300,000-unitratethathadprecharge-off ratesonsuchloansremainedwellabove vailedformuchof thepreviousdecade. historicalnormsdespitehavingmovedlowerinthe secondhalf of theyear. Changesininterestratesonconsumerloanswere 3 TheCreditCardActincludessomeprovisionsthatplacerestricmixed.Interestratesonnewautoloanswerelittle tionsonissuers’abilitytoimposecertainfeesandtoengagein changed,onnet,inthesecondhalf of 2010andinto risk-basedpricing. 4 InJune2009,theFinancialAccountingStandardsBoard 2011.Bycontrast,interestratesoncreditcardsgen- (FASB)publishedStatementsofFinancialAccountingStanerallyroseoverthesameperiod.Aportionof the dardsNos.166(AccountingforTransfersofFinancialAssets,an increaseincreditcardinterestratesmaybedueto AmendmentofFASBStatementNo.140)and167(Amendments toFASBInterpretationNo.46(R)).Thestatementsbecame effectiveatthestartofacompany’sfirstfiscalyearbeginning 2 TheSLOOSisavailableontheFederalReserveBoard’swebsite afterNovember15,2009,or,forcompaniesreportingearnings atwww.federalreserve.gov/boarddocs/SnLoanSurvey. onacalendar-yearbasis,afterJanuary1,2010.

MonetaryPolicyandEconomicDevelopments 11 Figure4.Privatehousingstarts,1997–2011 Figure5.Pricesofexistingsingle-familyhouses,2001–10 Millions of units, annual rate Index value 100 Single-family 1.6 90 CoreLogic 1.2 price index F in H d F e A x 80 70 .8 60 Multifamily .4 S&P/Case-Shiller 20-city index 50 1997 1999 2001 2003 2005 2007 2009 2011 2001 2004 2007 2010 Note:ThedataaremonthlyandextendthroughJanuary2011. Note:Thedataaremonthlyandextendinto2010:Q4.Eachindexhasbeennor- Source:DepartmentofCommerce,BureauoftheCensus. malizedsothatitspeakis100.BoththeCoreLogicpriceindexandtheFHFAindex (formerlycalculatedbytheOfficeofFederalHousingEnterpriseOversight)include purchasetransactionsonly.TheS&P/Case-Shillerindexreflectsallarm’s-length salestransactionsinselectedmetropolitanareas. Homesalessurgedinthespringaheadof theexpira- Source:ForCoreLogic,CoreLogic;forFHFA,FederalHousingFinanceAgency;for tionof thehomebuyertaxcredit,plungedforafew S&P/Case-Shiller,Standard&Poor’s. monthsduringapaybackperiod,andthenrecovered somewhatasthepaybackeffectwaned.5Bylate2010 index—housepricesfell6percentbetweenJuneand andearly2011,salesof existingsingle-familyhomes Decemberandmovedbelowtheirmid-2009trough. wereabitabovelevelsthatprevailedinmid-2009, Housepricescontinuedtobeweigheddownbythe beforetheenactmentof thefirsthomebuyertax largeinventoryof unsoldhomes—especiallydiscredit,whilesalesof newsingle-familyhomes tressedproperties—andbythesluggishdemandfor remainedbelowtheirmid-2009levels.Housing housing. demandhasbeenheldbackbytightmortgagecredit availability,uncertaintyaboutfuturerealestateval- Indicatorsof creditqualityinthissectorpointedto ues,andcontinuedhouseholdconcernsaboutthe continueddifficultiesamiddepressedhomevalues outlookforemploymentandincome.Nonetheless, andelevatedunemployment.Seriousdelinquency otherdeterminantsof housingdemandarefavorable ratesonprimeandnear-primemortgagesedged andholdthepotentialtoprovidesupporttohome downtoaround15percentforadjustable-rateloans salesastheeconomicrecoveryproceeds.Inparticuandtoabout5percentforfixed-rateloans—levels lar,thelowlevelof mortgageratesandtheearlier thatremainhighbyhistoricalstandards.Delindeclinesinhousepriceshavemadehousingmore quencyratesforsubprimemortgagesmovedup affordableforthoseabletoobtainmortgages. slightlytowardtheendof theyearandremained extremelyelevated.Onesignof improvement,how- Houseprices,asmeasuredbyseveralnational ever,wasthattherateatwhichmortgagestransiindexes,decreasedinthelatterhalf of 2010afterhavtionedfrombeingcurrenttobeingnewlydelinquent ingshowntentativesignsof levelingoff earlierinthe trendedlowertowardtheendof 2010. year(figure5).Accordingtoonemeasurewithwide geographiccoverage—theCoreLogicrepeat-sales Reflectingtheongoingcreditqualityissues,thenumberof homesthatenteredforeclosureinthethird 5 Inordertoreceivethehomebuyertaxcredit,apurchaserhadto signasalesagreementbytheendofApril2010andcloseonthe quarterof 2010jumpedtomorethan700,000,well propertybytheendofSeptember.Thefirst-timehomebuyer abovethepaceseenearlierintheyear.Lateinthe taxcredit,whichwasenactedinFebruary2009aspartofthe thirdquarter,concernsaboutthemishandlingof AmericanRecoveryandReinvestmentAct,wasoriginally scheduledtoexpireonNovember30,2009.Shortlybeforeit documentationledsomeinstitutionstotemporarily expired,theCongressextendedthecredittosalesoccurring suspendsomeorallof theirforeclosureproceedings.6 throughApril30,2010,andexpandedittoincluderepeat homebuyerswhohadownedandoccupiedahouseforatleast fiveofthepasteightyears.Salesofexistinghomesaremeas- 6 TheFederalReserve,theOfficeoftheComptrolleroftheCururedatclosing,whilesalesofnewhomesaremeasuredatthe rency,theOfficeofThriftSupervision,andtheFederalDeposit timethecontractissigned. InsuranceCorporationareconductinganin-depthinteragency

12 97thAnnualReport|2010 (GSE)ortheFederalHousingAdministration Figure6.Mortgageinterestrates,1995–2011 remainedessentiallyclosed. Percent TheBusinessSector 9 FixedInvestment 8 Realbusinessspendingonequipmentandsoftware, Fixed rate 7 whichsurgedinthefirsthalf of 2010,rosefurtherin thesecondhalf (figure7).Firmswerelikelymoti- 6 vatedpartlybyadesiretoreplaceagingequipment 5 andtoundertakecapitalspendingthathadbeen deferredduringtherecession.Improvingbusiness 4 prospectsalsoappeartohavebeenafactorboosting Adjustable rate 3 capitalexpenditures.Asagroup,largefirmscontinue tohaveampleinternalfunds,andthosewithaccess 1996 1999 2002 2005 2008 2011 tocapitalmarketsgenerallyhavebeenabletoobtain Note:Thedata,whichareweeklyandextendthroughFebruary23,2011,areconbondfinancingatfavorableterms.Althoughcredit tractrateson30-yearmortgages. Source:FederalHomeLoanMortgageCorporation. availabilityforsmallerfirmsandotherbankdependentbusinessesremainsconstricted,sometentativesignsof easinglendingstandardshave Despitetheseannouncedmoratoriums,thepaceof emerged. newforeclosuresdippedonlyslightlyinthefourth quarter.Moreover,thesemoratoriumswilllikelyonly extend,andnotputanendto,theforeclosureprocess Figure7.Changeinrealbusinessfixedinvestment, inmostcases. 2004–10 Interestratesonfixed-ratemortgagesremainedquite Percent, annual rate low,onnet,byhistoricalstandardsduringthesecond Structures half of 2010andreachedrecordlowsinthefourth Equipment and software 30 HH11 quarter(figure6).Theverylowlevelsof mortgage 20 ratespromptedasizablepickupinrefinancingactiv- HH22 ityforatime,althoughsomehouseholdswereunable 10 + torefinancebecauseof depressedhomevalues,weak 0_ creditscores,andtightlendingstandardsformort- 10 gages.Mortgageapplicationsforhomepurchases weregenerallysubduedinthesecondhalf of the 20 year.Overall,mortgagedebtoutstandinglikely 30 declinedinthesecondhalf of 2010atapaceonly slightlyslowerthanthatof thefirsthalf. 2004 2005 2006 2007 2008 2009 2010 Percent, annual rate Netissuanceof mortgage-backedsecurities(MBS) High-tech equipment and software Other equipment excluding transportation 30 guaranteedbyFannieMae,FreddieMac,andGinnie Maewasfairlylowinthesecondhalf of 2010,con- HH11 20 sistentwiththesubduedoriginationsof mortgages HH22 usedtofinancehomepurchases.Thesecuritization 10 marketformortgageloansnotguaranteedbya + 0_ housing-relatedgovernment-sponsoredenterprise 10 reviewofpracticesatthelargestmortgageservicingoperations toexamineforeclosurepracticesgenerally,butwithanemphasis 20 onthebreakdownsthatledtoinaccurateaffidavitsandother questionablelegaldocumentsbeingusedintheforeclosureprocess.SeeElizabethA.Duke(2010),“ForeclosureDocumenta- 2004 2005 2006 2007 2008 2009 2010 tionIssues,”statementbeforetheFinancialServicesSubcom- Note:High-techequipmentconsistsofcomputersandperipheralequipmentand mitteeonHousingandCommunityOpportunity,U.S.Houseof communicationsequipment. Representatives,November18,www.federalreserve.gov/ Source:DepartmentofCommerce,BureauofEconomicAnalysis. newsevents/testimony/duke20101118a.htm.

MonetaryPolicyandEconomicDevelopments 13 Overallspendingonequipmentandsoftwareroseat thanexpectedneartheendof theyear.Asforother anannualrateof about10percentinthesecondhalf itemsasidefrommotorvehicles,inventoryinvestof 2010.Althoughbusinessoutlaysinthevolatile mentroseduringthesecondhalf of theyear,albeit transportationequipmentcategoryplungedinthe morerapidlyinthethirdquarterthaninthefourth. fourthquarter,thatdeclinecameinthewakeof sev- Theinventory-to-salesratiosformostindustriescoveralquartersof sharpincreaseswhenvehiclerental eredbytheCensusBureau’sbook-valuedata,which firmswererebuildingtheirfleetsof carsandlight hadrisensignificantlyin2009,havemovedbackto trucks.Meanwhile,spendingoninformationtechnol- levelsthatprevailedbeforetherecession,andsurveys ogy(IT)capital—computers,software,andcommu- suggestthatinventorypositionsformostbusinesses nicationsequipment—increasedappreciablythrough- generallyareinacomfortablerange. outthesecondhalf.Gainswereapparentlyspurred byoutlaystoreplaceolder,less-efficientITcapitalas CorporateProfitsandBusinessFinance wellascontinuedinvestmentsbywirelessservicepro- OperatingearningspershareforS&P500firmsconviderstoupgradetheirnetworks.Inaddition,spend- tinuedtoincreaseatasolidpaceinthethirdand ingincreasesforequipmentotherthantransporta- fourthquartersof 2010.Mostindustrygroups tionandIT—nearlyone-half of totalequipmentout- reportedgains.Inaggregate,earningspershare lays—werewellmaintainedandbroadbased.More climbedtonearthelevelspostedinmid-2007,just recently,newordersfornondefensecapitalgoods priortothefinancialcrisis. otherthantransportationandITitemswerelittle changed,onnet,inDecemberandJanuary;however, Thealreadysturdycreditqualityof nonfinancialcorthelevelof ordersremainsaboveshipments,and porationsimprovedfurtherinthesecondhalf of businesssurveyssuggestthatrespondentsareupbeat 2010.Theaggregatedebt-to-assetratio,whichproaboutbusinessconditionsaswellastheirequipment videsanindicationof corporateleverage,moved spendingplans. downinthethirdquarter,asnonfinancialcorporationsincreasedtheirassetsbymorethanthey Realspendingonnonresidentialstructuresother increasedtheirdebt.Creditratingupgradesagain thanthoseusedfordrillingandminingremained outpaceddowngradesandcorporatebonddefaults depressed,withthelevelof investmentattheendof remainedsparse.Thedelinquencyrateoncommer- 2010downalmost40percentfromitspeakinearly cialandindustrial(C&I)loansatcommercialbanks 2008.However,therateof declineappearstobe moveddowninthesecondhalf of 2010to3percent. abating:Spendingfellatanannualrateof nearly Bycontrast,withfundamentalsremainingweak, 10percentinthesecondhalf of 2010afterplunging delinquencyandcharge-off ratesoncommercialreal ata25percentrateinthefirsthalf.Althoughoutlays estate(CRE)loansatcommercialbanksdecreased fornewpowerfacilitiesjumpedinthesecondhalf of onlymodestlyfromquiteelevatedlevels.Moreover, theyear,constructionof officebuildings,commercial thedelinquencyrateonCREloansinsecuritized structures,andmanufacturingplantsallmoveddown poolscontinuedtorisesharply. further.Alargeoverhangof vacantspace,depressed propertyprices,andanunwillingnessof banksto Borrowingbynonfinancialcorporationscontinuedat addtotheiralreadyhighconstructionloanexposure arobustpaceinthesecondhalf of 2010,drivenby stillweighedheavilyonthesector.Incontrast,spend- goodcorporatecreditquality,attractivefinancing ingondrillingandminingstructurescontinuedto conditions,andanimprovingeconomicoutlook. risesharplyinresponsetoelevatedenergyprices. Issuanceof corporatebondswasheavyforboth investment-gradeandhigh-yieldissues.Borrowingin InventoryInvestment thesyndicatedloanmarketwasalsosizable,particu- Stockbuildingcontinuedinthesecondhalf of 2010 larlybyspeculative-gradeborrowers,withthedollar atanaveragepaceaboutinlinewiththegrowthof volumeof suchloansreboundingsharplyfromthe finalsales.Inventoryinvestmentsurgedinthethird lowlevelsseenin2008and2009.Demandforsuch quarter,butthepaceof accumulationslowedsharply loansfrominstitutionalinvestorswasstrong.Some inthefourthquarter,withtheswingmagnifiedby of thestrengthindebtoriginationwasreportedly developmentsinthemotorvehiclesector.Vehicle duetocorporationstakingadvantageof lowinterest stocksroseappreciablyinthethirdquarterasdealers ratestoreducedebtservicecostsandextendmaturiattemptedtorebuildinventoriesthathadbecome tiesbyrefinancing;issuancetofinancemergersand depletedearlierintheyear,butinventoriesfellinthe acquisitionsalsoreportedlypickedupinthesecond fourthquarterasautosalesmovedupmorerapidly half of theyear.Meanwhile,commercialpaperout-

14 97thAnnualReport|2010 standingremainedaboutflat.C&Iloansonbanks’ borrowers.JudgingfromresponsestoboththeNFIB booksdecreasedduringthethirdquarterbutstarted surveyandtheSLOOS,loandemandbysmallbusiexpandingtowardtheendof theyear,consistent nessesremainedsubdued. withresponsestotheJanuary2011SLOOSthat reportedsomeeasingof standardsandtermsand Banks’holdingsof CREloanscontinuedtocontract somefirmingof demandforC&Iloansfromlarge fairlysharplythroughoutthesecondhalf of 2010. firmsoverthepreviousthreemonths.Relativelylarge Overallcommercialmortgagedebtdeclinedatan fractionsof respondentstothemostrecentsurvey annualrateof 6percentinthethirdquarter,about indicatedthattheynarrowedthespreadof C&Iloan thesamepaceasinthepreviousquarter.Responses ratesovertheircostof fundssomewhatfurtherdur- totheJanuarySLOOSsuggestthatbankshavenot ingthesecondhalf of 2010(figure8).Nevertheless, yetstartedreversingtheirtightlendingstandardsin lendingstandardsreportedlyremainedtight;about thissectorandthatdemand,whilestartingtopick one-half of therespondentstospecialquestions up,likelyremainedweak.DespitethestrainsinCRE includedintheOctober2010surveyindicatedthat markets,thecommercialmortgage-backedsecurities theirlendingstandardsonC&Iloansweretighter (CMBS)marketshowedtentativesignsof improvethanlonger-runaveragesandwerelikelytoremainso mentinthesecondhalf of 2010andearly2011. untilatleast2012. Pricesforsomeof themorehighlyratedtranchesof existingCMBSrose.Althoughissuanceof newsecu- Borrowingconditionsforsmallbusinessescontinued ritiesremainedtepid,thepacehasbeenpickingup. tobetighterthanforlargerfirms,althoughsome ResponsestospecialquestionsontheSeptember signsof easingbegantoemerge.Inparticular,sur- SeniorCreditOfficerOpinionSurveyonDealer veysconductedbytheNationalFederationof Inde- FinancingTerms(SCOOS)indicatedthatdemand pendentBusiness(NFIB)showedagradualdecline forwarehousingof CREloansforsecuritizationhad intheshareof respondentsreportingthatcreditwas increasedsincethebeginningof 2010,andthatthe moredifficulttoobtainthanthreemonthsprevi- willingnesstofundCREloansonaninterimbasis ously.Similarly,inthepastseveralsurveys,moderate hadincreasedsomewhat. netfractionsof SLOOSrespondentshaveindicated thatbankshaveeasedsomeloantermsforsmaller Asubstantialnumberof initialandsecondaryequity offeringsfornonfinancialfirmswerebroughttomarketinthesecondhalf of 2010.Dealsincludedanini- Figure8.Netpercentageofdomesticbankstightening tialpublicofferingbyGeneralMotorsthatwasused standardsandwideningspreadsoverthebanks’costof torepayaportionof thegovernment’scapitalinfufundsforlargeandmedium-sizedbusinessborrowers, sion.Nevertheless,equityretirementsinthethird 1998–2011 quarterthroughcash-financedmergersandacquisitionsandsharerepurchasesonceagainoutpaced Percent issuance;preliminarydataforthefourthquarter(not 100 shown)suggestasimilarpattern. Spreads 80 TheGovernmentSector 60 40 FederalGovernment 20 Standards + Thedeficitinthefederalunifiedbudgethasremained 0_ verywide.Thebudgetdeficitforfiscalyear2010, 20 althoughdownsomewhatfromfiscal2009,was 40 $1.3trillion.Thefiscal2010figurewasequalto 60 8¾percentof nominalGDP,substantiallyabovethe averagevalueof 2percentrecordedduringthethree- 1999 2002 2005 2008 2011 yearperiodpriortotheonsetof therecession.The Note:Thedataaredrawnfromasurveygenerallyconductedfourtimesperyear; budgetdeficitcontinuedtobeboostedbyspending thelastobservationisfromtheJanuary2011survey,whichcovers2010:Q4. Netpercentageisthepercentageofbanksreportingatighteningofstandardsora commitmentsfromtheAmericanRecoveryand wideningofspreadslessthepercentagereportinganeasingoranarrowing.The ReinvestmentAct(ARRA)andotherstimuluspolicy definitionforfirmsizesuggestedfor,andgenerallyusedby,surveyrespondentsis thatlargeandmedium-sizedfirmshaveannualsalesof$50millionormore. actionsandbytheweaknessof theeconomy,which Source:FederalReserveBoard,SeniorLoanOfficerOpinionSurveyonBankLend- hasreducedtaxrevenuesandboostedpaymentsfor ingPractices. incomesupport.Bycontrast,thebudgeteffectsof

MonetaryPolicyandEconomicDevelopments 15 severalfinancialtransactionsreducedthedeficitin incomesupportpayments;bycontrast,otherspend- 2010:OutlaysrelatedtotheTroubledAssetRelief inghasbeenincreasingatratescomparabletothose Program(TARP),whichaddedsignificantlytothe recordedduringfiscal2010. deficitin2009,helpedtoshrinkthedeficitin2010as estimatedlosseswerereviseddownwhenmanyof the Asmeasuredinthenationalincomeandproduct largerTARPrecipientsrepaidtheirobligationstothe accounts(NIPA),realfederalexpendituresoncon- Treasury;inaddition,newassistanceforthe sumptionandgrossinvestment—thepartof federal mortgage-relatedGSEswasextendedataslower spendingthatisadirectcomponentof GDP—roseat pace,anddepositoryinstitutionsprepaidthreeyears’ anannualrateof about4percentinthesecondhalf worthof federaldepositinsurancepremiums.More- of 2010,abitlessthaninthefirsthalf of theyear. over,thenascentrecoveryintheeconomyledtoa Nondefenseoutlaysincreasedmoreslowlythanin smallincreaseinrevenues.Thedeficitisprojectedby thefirsthalf of theyear—whenspendingforthe theCongressionalBudgetOfficetowideninfiscal decennialcensusrampedup—whiledefensespending 2011toalevelsimilartotheshortfallrecordedinfis- roseatroughlythesamepaceasinthefirsthalf. cal2009. FederalBorrowing Despiteincreasing3percentinfiscal2010,tax Federaldebtexpandedappreciablyinthesecondhalf receiptsremainedatverylowlevels;indeed,atless of lastyear,thoughataslightlyslowerpacethanin than15percentof GDP,theratioof receiptsto thefirsthalf.Theratioof federaldebtheldbythe nationalincomewasatitslowestlevelin60years. publictonominalGDProsetomorethan60percent Corporateincometaxessurgednearly40percentin attheendof 2010andisprojectedtoreachnearly fiscal2010asprofitsincreasedbriskly,andFederal 70percentbytheendof 2011.DemandforTreasury ReserveremittancestotheTreasuryrosemarkedly securitieshasbeenwellmaintained.Bid-to-cover owingtotheexpansionof itsbalancesheet.Bycon- ratiosatauctions,althoughsomewhatmixed,were trast,despiterisinghouseholdincomes,individual generallywithinhistoricalrangesduringthesecond incomeandpayrolltaxesmoveddowninfiscal2010, half of 2010andearly2011.Indicatorsof foreign reflectingthetaxcutsputinplacebytheARRA. participationatauctionsaswellasariseinforeign Totaltaxreceiptsincreasednearly10percentoverthe custodyholdingsof TreasurysecuritiesbytheFedfirstfourmonthsof fiscal2011relativetothecompa- eralReserveBankof NewYorkpointedtosteady rableyear-earlierperiod;individualincomeandpay- demandfromabroad.Demandforthesesecurities rolltaxesturnedup,aconsequenceof thefurther mayhavebeensupportedbyaheighteneddesirefor recoveryinhouseholdincomes,andcorporate relativelysafeandliquidassetsinlightof fiscal incometaxescontinuedtorise. troublesinsomeEuropeancountries. Outlaysdecreased2percentinfiscal2010,adevelop- StateandLocalGovernment mentattributabletofinancialtransactions.Excluding Despitethesubstantialfederalaidprovidedbythe financialtransactions,spendingrose9percentcom- ARRA,stateandlocalgovernmentsremainedunder paredwithfiscal2009,mainlybecauseof theeffects significantfiscalpressureinthesecondhalf of 2010. of theweaklabormarketonoutlaysforincomesup- Thestrainsreflectseveralfactors,includingasharp portprograms(suchasunemploymentinsuranceand dropintaxrevenuesinlate2008and2009and foodstamps)aswellasincreasesinMedicaidexpen- increasedcommitmentsforMedicaidoutlays—a dituresandspendingassociatedwiththeARRAand cyclicallysensitivetransferprogram—allintheconotherstimulus-relatedpolicies.Netinterestpayments textof balancedbudgetrequirements.Toaddress rose5percentinfiscal2010,andSocialSecurity theirbudgetshortfalls,thesegovernmentshavebeen spendingincreased3½percent—itssmallestrisein paringbackoperatingexpenditures.Indeed,realcon- 11years—asthelowrateof consumerpriceinflation sumptionexpendituresof stateandlocalgoverninthepreviousyearresultedinnocostof living ments,asmeasuredintheNIPA,fellabout1percent adjustment.Inthefirstfourmonthsof fiscal in2010afterdecreasingasimilaramountin2009. 2011,totalfederaloutlaysrosenearly5percentrela- Theweaknessinspendingwasreflectedinthecontintivetothecomparableyear-earlierperiod.Excluding uedreductionsinpayrolls.Totalemploymentof state financialtransactions,outlayswereupabout1per- andlocalgovernmentsfell250,000during2010,with cent.Therelativelysmallincreasesofarthisfiscal nearlyallof thecutbacksatthelocallevel.Construcyearforoutlaysexcludingfinancialtransactions tionspendingundertakenbythesegovernmentswas reflectsaflatteningoutof ARRAspendingand volatileduring2010but,onnet,wasdownabitfor

16 97thAnnualReport|2010 theyearandremainedbelowthelevelthatprevailed Figure9.Changeinrealimportsandexportsofgoodsand beforetherecessiondespitetheinfrastructuregrants services,2004–10 providedbythefederalgovernmentaspartof the ARRA.Whilemostcapitalexpendituresarenotsub- Percent, annual rate jecttobalancedbudgetrequirements,someof these Imports expendituresarefundedoutof operatingbudgets Exports H1 subjecttotheserequirements.Inaddition,asubstan- 20 Q3 tialshareof debtservicepaymentsonthebondsused tofinancecapitalprojectsismadeoutof operating Q4 10 budgets—afactorthatmaybelimitingthewillingnessof governmentstoundertakesomenewinfra- + structureprojects. 0_ Withoveralleconomicactivityrecovering,stategov- 10 ernmentrevenuesfromincome,business,andsales taxesroseinthesecondhalf of 2010.Nevertheless, statetaxcollectionsremainwellbelowtheirpre- 2004 2006 2008 2010 recessionlevels,andavailablebalancesinreserve Source:DepartmentofCommerce,BureauofEconomicAnalysis. fundsarelow.Taxcollectionsatthelocallevelhave faredrelativelybetter.Inparticular,somelocalities appeartohaveadjustedstatutorytaxratessothat securitiescomingtomarketlikelyalsoplayedarole. decliningrealestateassessments,whichtypicallysig- Spreadsoncreditdefaultswapsforsomestates nificantlylagmarketprices,areholdingdownprop- remainedvolatilebutnarrowed,onnet,fromtheir ertytaxrevenuesbylessthantheyotherwisewould. peaklevelslastsummer.Downgradesof thecredit However,manylocalitieshaveseensharpcutbacksin ratingsof stateandlocalgovernmentscontinuedto theirgrants-in-aidfromstategovernments,andthus outpaceupgradesduringthesecondhalf of 2010. haveexperiencedsignificantfiscalpressures.State Nonetheless,thepaceof actualdefaultsonmunicipal andlocalgovernmentswillcontinuetofaceconsider- issuescontinuedtocomedownfromitspeakin2008. ablebudgetstrains,inpartbecausefederalstimulus Inrecentmonths,thereweresubstantialoutflows grantswillbewindingdown.Moreover,manystate fromlong-termmutualfundsthatinvestinmunicipal andlocalgovernmentswillneedtosetasideaddi- bonds. tionalresourcesincomingyearsbothtomeettheir pensionobligationsandtopayforhealthbenefits TheExternalSector providedtotheirretiredemployees. Supportedbytheexpansionof foreigneconomic activity,realexportsof goodsandservicescontinued StateandLocalGovernmentBorrowing toincreaseatasolidpaceinthesecondhalf of 2010, Issuanceof securitiesbystateandlocalgovernments risingatanannualrateof 8¼percent(figure9). wasrobustduringthelatterhalf of 2010;itsurged Nearlyallmajorcategoriesof exportsrose,with neartheendof theyearasstategovernmentssought exportsof machinery,agriculturalgoods,andsertotakeadvantageof theBuildAmericaBondpro- vicesregisteringthelargestgains.Moreover,the grambeforetheprogramexpired.7Issuanceof short- increaseinexportdemandwasbroadbasedacross termmunicipalsecuritieswasalsostrong. tradingpartners. Yieldsonstateandlocalgovernmentbondsrose Realimportsof goodsandservicesdeceleratedconnoticeablymorethanthoseoncomparable-maturity siderablyinthesecondhalf of 2010,increasingatan Treasurysecuritiesinthesecondhalf of 2010and annualrateof only1¼percentaftersurgingmore early2011.Theriseinyieldsonmunicipalsecurities than20percentduringthefirsthalf of lastyear.The mayhavereflectedincreasedconcernsaboutthefis- sharpstep-downpartlyreflectedanunusuallylarge calpositionandfinancialhealthof stateandlocal declineinrealoilimports,butmoreimportant,the governments,althoughtheheavysupplyof these growthinnon-oilimportsmoderatedtoapacemore inlinewiththeexpansioninU.S.economicactivity. 7 TheBuildAmericaBondprogramallowedstateandlocalgov- Duringthesecondhalf of 2010,importsof conernmentstoissuetaxablebondsforcapitalprojectsandreceive sumergoods,machinery,andservicespostedthe asubsidypaymentfromtheTreasuryfor35percentofinterest costs. largestincreases.Aswithexports,theincreasein

MonetaryPolicyandEconomicDevelopments 17 supply,hasputconsiderableupwardpressureonoil Figure10.Pricesofoilandnonfuelcommodities,2006–11 pricesinrecentweeks. December 2005 = 100 Dollars per barrel Thepriceof thelong-termfuturescontractforcrude 200 140 oil(expiringinDecember2019)hasgenerallyfluctuatedintheneighborhoodof $95perbarreloverthe 180 120 pastsixmonths,notmuchdifferentfromtheaverage 160 overthefirsthalf of 2010,althoughithasmovedup Nonfuel 100 140 commodities somerecently.Accordingly,thesharplyupwardslop- 80 ingfuturescurvethatcharacterizedtheoilmarket 120 sincetheonsetof thefinancialcrisishasflattened 100 Oil 60 considerably.Concurrentwiththisflatteningof the futurescurve,measuredglobalinventoriesof crude 80 40 oilhavedeclinedinrecentmonths,althoughthey remainhighbyhistoricalstandards. 2006 2007 2008 2009 2010 2011 Note:Thedataaremonthly.TheoilpriceisthespotpriceofWestTexasIntermediatecrudeoil,andthelastobservationistheaverageforFebruary1–22,2011.The Nonfuelcommoditypricesalsorosemarkedlyover priceofnonfuelcommoditiesisanindexof45primary-commoditypricesand thesecondhalf of theyearandintoearly2011,with extendsthroughJanuary2011. increasesbroadbasedacrossavarietyof commodi- Source:Foroil,theCommodityResearchBureau;fornonfuelcommodities,InternationalMonetaryFund. ties.Aswithoil,thesepriceshavebeensupportedby strengtheningglobaleconomicactivity,primarilyin ChinaaswellasinotherEMEs,and,toalesser importsoccurredacrossawiderangeof trading extent,bythelowerdollar.Inaddition,adverse partners. weatherconditionshavereducedharvestsandcurtailedsuppliesof importantagriculturalproductsin Alltold,netexportsshaved½percentagepointoff anumberof keyexportingcountries,includingRusrealGDPgrowthlastyearasthereboundinimports sia,Ukraine,andtheUnitedStates. outpacedtherecoveryinexportsfortheyearasa whole.Thecurrentaccountdeficitwidenedfrom Pricesof non-oilimportedgoodsrose1¼percentat $378billionin2009toanaverageof $479billionat anannualrateoverthesecondhalf of 2010andhave anannualrate,orabout3¼percentof nominal increasedatanacceleratedpaceinJanuary,boosted GDP,inthefirstthreequartersof 2010. byhighercommodityprices,thedepreciationof the U.S.dollar,andforeigninflation.Onnet,non-oil Thespotpriceof WestTexasIntermediate(WTI) importpricesroseabitmoreslowlyoverthesecond crudeoilmovedhigheroverthesecondhalf of the half of 2010thaninthefirsthalf andfinishedthe year,risingtoanaverageof $89perbarrelinDecemyear2percenthigherthanattheendof 2009. ber,about$11abovetheaveragepricethatprevailed overthefirstsixmonthsof theyear(figure10).The NationalSaving upwardmovementinoilpricesduringthesecond Totalnetnationalsaving—thatis,thesavingof half of theyearlargelyreflectedawidespread households,businesses,andgovernmentsexcluding strengtheninginglobaloildemand,particularlyin depreciationcharges—remainslowbyhistoricalstanemergingmarketeconomies(EMEs),againstabackdards.Afterhavingreached3¾percentof nominal dropof constrainedsupply.Thedepreciationof the GDPin2006,netnationalsavingdroppedsteadily dollaroverthisperiodalsocontributedsomewhatto overthesubsequentthreeyears,reachingroughly theriseinthepriceof oil.SpotWTIcontinuedto negative3percentinthethirdquarterof 2009.The fluctuatearounditsDecemberaverageformuchof wideningof thefederalbudgetdeficitduringthe thefirsttwomonthsof thisyearbutmovedup courseof therecessionmorethanaccountedforthe sharplyinlateFebruary.8UnrestinseveralMiddle downswinginnetsaving.Sincelate2009,netnational EasternandNorthAfricancountries,anduncersavinghasmovedup,reflectingasharpriseinprivate taintyaboutitspotentialimplicationsforglobaloil saving.Nonetheless,thetotalaveragedaboutnegative1percentinthethirdquarterof 2010(thelatest 8 Thepricesofothergradesofcrudeoilhaverisenbymoreover availabledata),andthelargefederaldeficitwilllikely thefirsttwomonthsofthisyearasthehighlevelofinventories keepitatlowlevelsinthenearterm.Currently,real accumulatedatCushing,Oklahoma,thedeliverypointforWTI, hasdepressedWTIprices. interestratesarestilllowdespitethedepressedrateof

18 97thAnnualReport|2010 Figure11.Netchangeinprivatepayrollemployment, Figure12.Civilianunemploymentrate,1977–2011 2004–11 Percent Thousands of jobs, 3-month moving average 200 10 + 0_ 8 200 6 400 600 4 800 1979 1987 1995 2003 2011 2004 2005 2006 2007 2008 2009 2010 2011 Note:ThedataaremonthlyandextendthroughJanuary2011. Note:ThedataaremonthlyandextendthroughJanuary2011. Source:DepartmentofLabor,BureauofLaborStatistics. Source:DepartmentofLabor,BureauofLaborStatistics. ploymentrateremainedatorabove9½percent nationalsaving.If nationalsavingweretoremainlow throughNovember(figure12).However,theunemastheeconomyrecovers,interestrateswouldlikely ploymentrateisestimatedtohavemoveddown experienceupwardpressure,capitalformationrates noticeablyinDecemberandJanuary,reaching wouldlikelybelow,andborrowingfromabroad 9.0percent—about1percentagepointbelowthe wouldlikelybeheavy.Incombination,suchdevelophighestreadingduringthisepisode.Therecent mentswouldlimittheriseinthestandardof livingof declineinthejoblessrateisencouraging,butthe U.S.residentsandhampertheabilityof thenationto extentof theimprovementinunderlyinglabormeettheretirementneedsof anagingpopulation. marketconditionsis,asyet,difficulttojudge.The levelof unemploymentremainsveryelevated,and TheLaborMarket long-durationjoblessnesscontinuestoaccountforan especiallylargeshareof thetotal.Indeed,inJanuary, EmploymentandUnemployment nearly6¼millionpersonsamongthosecountedas Conditionsinthelabormarkethavecontinuedto unemployed—about44percentof thetotal—had improveonlyslowlysincethemiddleof 2010.Private beenoutof workformorethansixmonths,figures payrollemploymentrosejust120,000permonth,on thatwereonlyalittlebelowrecordlevelsobservedin average,overthesecondhalf of lastyear,andpayroll themiddleof 2010(figure13).10Moreover,thenumemploymentgainsremainedlacklusterinJanuaryof berof individualswhoareworkingparttimeforeco- 2011(figure11).9Alltold,onlyaboutone-seventhof nomicreasons—anotherindicatorof theunderutithe8¾millionjobslostfromthebeginningof lizationof labor—remainedroughlytwiceitspre- 2008tothetroughinprivatepayrollsinFebrurecessionvalue.Meanwhile,thelaborforce ary2010havebeenrecovered.Ratherthanadding participationratemoveddownfurtherinthesecond jobsbriskly,businesseshavebeenachievingmuchof half of theyear.Thedeclineinparticipationwas theirdesiredincreasesinlaborinputoverthepast mainlyconcentratedamongmenaged25andover yearbylengtheningthehoursworkedbytheir withoutacollegedegree. employees;indeed,byJanuary,theaverageworkweek hadrecoupedmorethanone-half of itsdecreasedur- Severalotherindicatorsof labormarketconditions, ingtherecession. however,havebrightenedabitrecently.Aftershowinglittleprogressoverthefirsthalf of theyear,initial Formostof lastyear,theoverallnetincreaseinhirclaimsforunemploymentinsurance(anindicatorof ingwasbarelysufficienttoaccommodatethe thepaceof layoffs)generallyhavetrendeddownin increaseinthesizeof thelaborforce,andtheunemrecentmonths.Moreover,surveymeasuresof labor marketexpectations—suchasbusinessplansfor 9 Totalemployment—privateplusgovernment—exhibitedsharp swingsfromMarch2010toSeptember2010asaresultofthe hiringoftemporaryworkersforthedecennialcensus. 10 Thedataonthedurationofunemploymentbeginin1948.

MonetaryPolicyandEconomicDevelopments 19 fromthelaborcompensationdataintheNIPA—in- Figure13.Long-termunemployed,1977–2011 creasedonly1½percentin2010,wellbelowtheaveragegainof about4percentintheyearsbeforethe Percent recession.Afteradjustingfortheriseinconsumer prices,hourlycompensationwaslittlechangedin 40 2010.Becausenominalhourlycompensationand laborproductivityinthenonfarmbusinesssector roseatroughlythesamepacein2010,unitlabor 30 costswereaboutflatlastyear.Duringthepreceding year,unitlaborcostshadplunged3½percentasa 20 resultof themoderateriseinnominalhourlycompensationandthesizableadvanceinoutputperhour. 10 Prices Consumerpriceinflationhasbeentrendingdown- 1979 1987 1995 2003 2011 ward,onnet,andsurveymeasuresof longer-term Note:ThedataaremonthlyandextendthroughJanuary2011.Theseriesshown inflationexpectationshaveremainedstable,despite isthepercentageoftotalunemployedpersonswhohavebeenunemployedfor morethan26weeks. therapidincreasesinavarietyof commodityprices Source:DepartmentofLabor,BureauofLaborStatistics. duringthesecondhalf of 2010.Overallpricesfor personalconsumptionexpendituresincreased 1¼percentoverthe12monthsendinginJanufuturehiringandconsumerattitudesaboutfuture ary2011,comparedwithariseof 2½percentinthe labormarketconditions—improved,onnet,overthe preceding12-monthperiod(figure14).ThecorePCE secondhalf of 2010andearlythisyearafterhaving priceindex—whichexcludesthepricesof energy softenedaroundthemiddleof lastyear. itemsaswellasthoseof foodandbeverages—increasedjust¾percentoverthe12monthsendingin ProductivityandLaborCompensation January,downfroma1¾percentriseoverthepre- Laborproductivityrosefurtherinthesecondhalf of ceding12months. 2010.Accordingtothemostrecentpublisheddata, outputperhourinthenonfarmbusinesssector Theindexof consumerenergyprices,whichdeclined increasedatanannualrateof about2½percentover inthefirsthalf of 2010,roserapidlyduringthesecthatperiod.Productivityhadsurgedin2009asfirms ondhalf of theyearandearly2011.Theindexwas aggressivelyeliminatedmanyoperationalinefficien- boostedbyasurgeinthepricesof gasolineand ciesandreducedtheirlaborinputinanenvironment of severeeconomicstress.Althoughtherecentgains inproductivityhavebeenlessrapid,firmsnonethe- Figure14.Changeinthechain-typepriceindexfor lesscontinuetomakeeffortstoimprovetheefficiency personalconsumptionexpenditures,2004–11 of theiroperations,andtheyappeartoremainreluctanttoincreasestaffinglevelsinaclimateof linger- Percent ingeconomicuncertainty. 5 Increasesinhourlycompensationremainedsubdued 4 in2010,restrainedbythewidemarginof labormar- Total 3 ketslack.Theemploymentcostindex(ECI)forprivateindustryworkers,whichmeasuresbothwages 2 Excluding food andthecosttoemployersof providingbenefits,rose and energy 1 just2percentinnominaltermsin2010—upfroman + especiallysmallincreasein2009butstilllowerthan 0_ theroughly3percentpaceaveragedintheseveral 1 yearsprecedingtherecession.TheriseintheECIlast yearreflectedapickupinthegrowthof benefits, 2004 2005 2006 2007 2008 2009 2010 2011 afterasubduedincreasein2009,andamodestaccel- Note:ThedataaremonthlyandextendthroughJanuary2011;changesarefrom erationinwagesandsalaries.Nominalcompensation oneyearearlier. Source:DepartmentofCommerce,BureauofEconomicAnalysis. perhourinthenonfarmbusinesssector—derived

20 97thAnnualReport|2010 homeheatingoil,whichreflectedtherun-upinthe Figure15.Alternativemeasuresofunderlyingprice priceof crudeoilthatbeganinlatesummer.Inconchangesinpersonalconsumptionexpenditures,2005–11 trast,consumernaturalgaspricesfellasincreasesin supplyfromnewdomesticwellshelpedboostinven- Percent toriesabovetypicallevels.Alltold,theoverallindex of consumerenergypricesrosenearly7percentduringthe12monthsendinginJanuary2011. Trimmed mean 3 Theindexof consumerfoodpricesrose1¾percent overthe12monthsendinginJanuary2011asthe 2 pricesof beef andporkpostedsizableincreases.The Market based excluding priceof fruitsandvegetablesranupbrisklyearlyin food and energy 2010followingacoupleof damagingfreezes,but Excluding 1 food and energy thesepricesturneddowninthesecondhalf of the year,leavingthemuponlyslightlyfortheyearasa whole.However,spotpricesincommoditymarkets 2005 2006 2007 2008 2009 2010 2011 forcropsandforlivestockmovedupsharplytoward Note:ThedataaremonthlyandextendthroughJanuary2011.Thetrimmed-mean theendof lastyear,pointingtosomeupwardpres- personalconsumptionexpenditurespriceindexexcludesthebottom24percent andthetop31percentofthedistributionofmonthlypricechangesandisbased sureonconsumerfoodpricesinthefirstpartof on178components. 2011. Source:Fortrimmedmean,FederalReserveBankofDallas;forallelse,DepartmentofCommerce,BureauofEconomicAnalysis. TheslowdownincorePCEpriceinflationoverthe pastyearwasparticularlyevidentinthepricesof goodsotherthanfoodandenergy,whichfell0.6per- contrast,survey-basedmeasuresof longer-terminflacentoverthe12monthsendinginJanuary2011.The tionexpectationshaveremainedrelativelystableover declineinthesecoregoodspricesoccurreddespite thepastyear.IntheThomsonReuters/Universityof sizableincreasesinthepricesof someindustrialcom- MichiganSurveysof Consumers,medianyear-ahead moditiesandmaterials;themodestdegreeof pass- inflationremainedbetween2¾percentand3percent throughfromcommodityinputcoststoretailprices formostof 2010butthenroseabove3percentin reflectstherelativelysmallweightof materialsinputs early2011.Longer-termexpectationsinthesurvey,at intotalproductioncosts.Pricesforservicesother 2.9percentinFebruary,remainedinthenarrow thanenergyroseabout1¼percentoverthe rangethathasprevailedoverthepastfewyears.In 12monthsendinginJanuary,downfromanincrease theSurveyof ProfessionalForecasters,conductedby of almost2percentinthepreceding12months,as theFederalReserveBankof Philadelphia,expectathecontinuedweaknessinthehousingmarketput tionsfortheincreaseintheconsumerpriceindex downwardpressureontheriseinhousingcostsand overthenext10yearsedgeddown,onbalance,durasthewidemarginof economicslackcontinuedto ing2010afterhavingbeenessentiallyunchangedfor restrainpriceincreasesforotherservices. manyyears. FinancialDevelopments Thewidespreadslowingininflationoverthepast yearisalsoapparentinavarietyof alternativeindi- Inlightof thedisappointingpaceof theprogress catorsof theunderlyingtrendininflation(figure15). towardtheFederalReserve’sdualobjectivesof maxi- Theseindicatorsincludetrimmed-meanprice mumemploymentandpricestability,theFederal indexes,whichexcludethemostextremeprice OpenMarketCommittee(FOMC)tookstepsinthe increasesandpricedeclinesineachperiod,and secondhalf of theyeartoreducedownsideriskto market-basedmeasuresof coreprices,whichexclude thesustainabilityof therecoveryandtoprovidefurpricesthatmustbeimputed.Theseimputedprices thersupporttoeconomicactivity.AtitsAugust2010 (oftenreferredtoas“nonmarket”prices)tendtobe meeting,theFOMCdecidedtokeeptheFederal highlyerratic. Reserve’sholdingsof longer-termsecuritiesconstant attheirthen-currentlevelbyreinvestingprincipal Survey-basedmeasuresof near-terminflationexpec- paymentsfromholdingsof agencydebtandagency tationshaveincreasedinrecentmonths,likelyreflect- MBSinlonger-termTreasurysecurities.InNovemingtherecentrun-upinenergyandfoodprices;in ber,theFOMCannounceditsintentiontopurchase

MonetaryPolicyandEconomicDevelopments 21 Box 1. The Effects of Federal Reserve Asset Purchases Betweenlate2008andearly2010,withshort-term oftheresponsesofassetpricestoannouncements interestratesalreadynearzero,theFederalReserve bytheFederalReserveregardingitsfirstroundof providedadditionalmonetaryaccommodationby assetpurchaseshavefoundthatthepurchasesof purchasing$1.25trillioninagencymortgage-backed Treasurysecurities,agencydebt,andagencyMBS securities(MBS),about$175billioninagencydebt, significantlyreducedtheyieldsonthosesecurities.1 and$300billioninlonger-termTreasurysecurities. Similarly,analysesoftheresponsesofassetpricesto Whenincomingeconomicdatainmid-2010sug- thepurchasesthemselvesalsodocumentedaneffect gestedthattherecoverymightbesoftening,theFed- onthepricesoftheacquiredsecurities.2Spillover eralOpenMarketCommittee(FOMC)decidedto effectsofthepurchaseprogramstootherfinancial takefurtheractiontofulfillitsmandatedobjectivesof markets,inturn,appeartohaveresultedinlower promotingmaximumemploymentandpricestability. interestratesoncorporatedebtandresidentialmort- First,theCommitteedecidedatitsAugust2010 gagesandtohavecontributedtohigherequityvaluameetingtoreinvesttheprincipalpaymentsfromits tionsandasomewhatlowerforeignexchangevalue holdingsofagencydebtandagencyMBSinlonger- ofthedollar.Theseeffectsarequalitativelysimilarto termTreasurysecurities.Second,itannouncedin thosethattypicallyresultfromconventionalmonetary Novemberitsintentiontopurchaseanadditional policyeasing. $600billionoflonger-termTreasurysecuritiesbythe endofthesecondquarterof2011. RecentresearchbyFederalReservestaffhasprovidedsomeestimatesofthemagnitudeoftheresult- Thetheoryunderlyingtheseassetpurchases,which ingeffectsontheeconomyusingtheFRB/USmacdatesbacktotheearly1950s,positsthatasset roeconomicmodel—oneofthemodelsdevelopedby pricesareaffectedbytheoutstandingquantityof theFederalReserveBoardstaffandusedforpolicy assets.Insomemodels,forexample,short-and long-termassetsareimperfectsubstitutesforone (continuedonnextpage) anotherininvestors’portfolios,andthetermstructureofinterestratescanbeinfluencedbychangesto thesupplyofsecuritiesatdifferentmaturities.Asa result,purchasesoflonger-termsecuritiesbythe 1 See,forexample,JosephGagnon,MatthewRaskin,JulieRemcentralbankcanpushupthepricesanddrivedown ache,andBrianSack(2010),“Large-ScaleAssetPurchasesby theyieldsonthosesecurities.Assetpurchasescan theFederalReserve:DidTheyWork?”FederalReserveBankof alsoaffectlonger-terminterestratesbyinfluencing NewYorkStaffReportsNo.441(NewYork:FederalReserveBank ofNewYork,March);andJamesHamiltonandJing(Cynthia)Wu investors’expectationsofthefuturepathofshort- (2010),“TheEffectivenessofAlternativeMonetaryPolicyToolsin termrates.Similarly,theeffectofcentralbankasset aZeroLowerBoundEnvironment,”workingpaper(SanDiego: purchasesdependsonexpectationsregardingthe UniversityofCalifornia,SanDiego,November).Evidenceofsimitimingandpaceoftheeventualunwindingofthepur- lareffectsintheUnitedKingdomfromassetpurchasesbythe BankofEnglandwasfoundbyMichaelJoyce,AnaLasaosa,Ibrachases.Thus,centralbankcommunicationmayplay himStevens,andMatthewTong(2010),“TheFinancialMarket akeyroleininfluencingtheresponseoffinancial ImpactofQuantitativeEasing,”WorkingPaper393(London: marketstosuchaprogram. BankofEngland,August). 2 See,forexample,StefaniaD’AmicoandThomasB.King(2010), RecentempiricalworksuggeststhattheFederal “FlowandStockEffectsofLarge-ScaleAssetTreasuryPurchases,”FinanceandEconomicsDiscussionSeries2010-52 Reserve’sassetpurchaseprogramshaveindeedpro- (Washington:BoardofGovernorsoftheFederalReserveSystem, videdsignificantmonetaryaccommodation.Studies September). afurther$600billioninlonger-termTreasurysecuri- togetherwithareassessmentonthepartof investors tiesbytheendof thesecondquarterof 2011(see of theultimatesizeof FederalReserveTreasurypurbox1). chases,contributedtoabackupininterestratesand inmeasuresof inflationcompensationthatcontinued Financialmarketconditions,whichhadworsened throughyear-end.Incontrasttothedevelopments earlyinthesummerasaresultof developmentsin earlierintheyear,thereemergencelaterintheyearof Europeandconcernsaboutthedurabilityof the concernsaboutthefinancialsituationinEuropeleft globalrecovery,subsequentlyimprovedasinvestors littleimprintondomesticfinancialmarkets. increasinglypricedinfurthermonetarypolicy accommodation.Accordingly,realTreasuryyields MonetaryPolicyExpectations declined,assetpricesincreased,andcreditspreads andTreasuryRates narrowed.Abrighteningtonetotheeconomicnews Inresponsetoindicationsof aslowingpaceof startinginthefallbolsteredinvestorsentimentand, recoveryinU.S.outputandemploymentandacon-

22 97thAnnualReport|2010 Box 1. The Effects of Federal Reserve Asset Purchases—continued analysis.3Asimulationexercisesuggeststhatthe long,leadingtoexcessiveinflation.However,in cumulativeeffectoftheFederalReserve’sassetpur- preparationforremovingmonetaryaccommodation, chasessince2008—includingtheoriginalpurchases theFederalReservehascontinuedtodevelopthe ofTreasurysecurities,agencydebt,andagency toolsitwillneedtoraiseshort-terminterestratesand MBS;thereinvestmentofprincipalpayments;and drainlargevolumesofreserveswhendoingso theadditional$600billioninTreasurysecuritypur- becomesnecessarytoachievethepolicystancethat chasesnowintended—hasbeentoprovidesignifi- bestfosterstheFederalReserve’smacroeconomic cantandmountingsupporttoeconomicactivityover objectives.5Moreover,thecurrentlevelofresource time.Althoughestimatesoftheseeffectsaresubject slackintheeconomyandtherecentlowreadingson toconsiderableuncertainty,themodelresultssug- underlyinginflationsuggestthatpointisnotyetnear. gestthatthepurchaseshavealreadyboostedthe levelofrealgrossdomesticproduct1¾percentrela- Asecondconcernisthattheassetpurchaseprotivetowhatitwouldhavebeenifnosuchpurchases gramcouldresultinadversefinancialimbalancesif, hadoccurred,andthatthiseffectwillriseto3per- forexample,thelowerleveloflonger-terminterest centby2012.4Asaresultofthisstrongerrecoveryin ratesencouragedpotentialborrowerstoemploy output,themodelalsosuggeststhatby2012the excessiveleveragetotakeadvantageoflowfinancassetpurchaseprogramwillboostprivateemploy- ingcostsorledinvestorstoacceptanimprudently mentabout3million,andtrimtheunemployment smallamountofcompensationforbearingriskinan rate1½percentagepointsrelativetowhattheyoth- efforttoenhancetheirratesofreturn.TheFederal erwisewouldbe.Finally,thesimulationresultssug- Reserveiscarefullymonitoringfinancialindicators, gestthatinflationiscurrently1percentagepoint includingcreditflowsandpremiumsforcreditrisk, higherthanotherwisewouldhavebeenthecaseif forsignsofpotentialthreatstofinancialstability.For theFOMChadneverinitiatedsecuritiespurchases, example,tomonitorleverageprovidedbydealersto implyingthat,intheabsenceofsuchpurchases,the financialmarketparticipants,inJune2010theFedeconomywouldnowbeclosetoastateofdeflation. eralReservelaunchedtheSeniorCreditOfficerOpinionSurveyonDealerFinancingTerms.Thissurvey Althoughtheassetpurchaseprogramsseemtohave providesinformationonthetermsonandavailability providedsignificantsupporttoeconomicactivity, ofvariousformsofdealer-intermediatedfinancing, someobservershavenotedthattheyarenotwithout includingfundingforsecuritiespositions.Moreover, risk.Oneconcernthathasbeenvoicedisthatthese tobettermonitorlinkagesamongfirmsandmarkets purchaseprogramshaveincreasedthesizeofthe thatcouldunderminethestabilityofthefinancial FederalReserve’sbalancesheetandcouldresultin system,theFederalReservehasincreasedits monetaryaccommodationbeingleftinplacefortoo emphasisontakingamultidisciplinaryapproachthat integratesthecontributionsofeconomists,specialistsinparticularfinancialmarkets,banksupervisors, 3 HessChung,Jean-PhillipeLaforte,DavidReifschneider,andJohn paymentsystemsexperts,andotherprofessionals. Williams(2011),“HaveWeUnderestimatedtheLikelihoodand SeverityofZeroLowerBoundEvents?”FederalReserveBankof AnOfficeofFinancialStabilityPolicyandResearch SanFranciscoWorkingPaperSeries2011-01(SanFrancisco: wascreatedwithintheFederalReservetocoordinate FederalReserveBankofSanFrancisco,January). staffeffortstoidentifyandanalyzepotentialrisksto 4 Theseeffectsarebasedoncertainassumptionsregardingthe thefinancialsystemandbroadereconomy. periodassetsareheldandtheunwindingofthepurchases. These,andother,assumptionsaredescribedinmoredetailin Chungandothers,“ZeroLowerBoundEvents,”inboxnote3. 5 TheongoingdevelopmentofthesetoolsisdiscussedinPart3. tinueddownwardtrendinmeasuresof underlying somewhat,andatax-cutdealthatwasseenassupinflation,expectationsregardingthepathforthefed- portiveof economicactivitywaspassedintolaw. eralfundsrateduring2011and2012wererevised downsharplyinthethirdquarterandinvestorscame Thecurrenttargetrangeforthefederalfundsrateof toanticipatefurtherFederalReserveassetpurchases. 0to¼percentisconsistentwiththelevelthatinves- TheFOMC’sdecisiontobeginadditionalpurchases torsexpectedattheendof June2010.However,the of longer-termTreasurysecuritiesoccurredagainst dateatwhichmonetarypolicytighteningisexpected thebackdropof thisdownwardshiftinexpectations tocommencehasmovedbacksomewhatsincethe aboutmonetarypolicy.Subsequently,expectations timeof theJuly2010MonetaryPolicyReporttothe regardingtheultimatesizeof suchpurchaseswere Congress.Quotesonmoneymarketfuturescontracts scaledbackastherecoveryappearedtostrengthen, indicatethat,asof lateFebruary,investorsanticipate downsideriskstotheoutlookseemedtorecede thatthefederalfundsratewillriseaboveitscurrent

MonetaryPolicyandEconomicDevelopments 23 Figure16.InterestratesonselectedTreasurysecurities, Figure17.Spreadsofcorporatebondyieldsover 2004–11 comparableoff-the-runTreasuryyields,bysecurities rating,1997–2011 Percent Percentage points 10-year 5 18 16 4 14 2-year 3-month 3 12 10 2 High-yield 8 1 6 + 4 0_ BBB 2 AA + 0_ 2004 2005 2006 2007 2008 2009 2010 2011 Note:ThedataaredailyandextendthroughFebruary22,2011. 1997 1999 2001 2003 2005 2007 2009 2011 Source:DepartmentoftheTreasury. Note:ThedataaredailyandextendthroughFebruary22,2011.Thespreads shownaretheyieldson10-yearbondslessthe10-yearTreasuryyield. Source:DerivedfromsmoothedcorporateyieldcurvesusingMerrillLynchbond rangeinthefirstquarterof 2012,aboutayearlater data. thanthedateimpliedinJuly2010.Bytheendof 2012,investorsexpectthattheeffectivefederalfunds 10-yearTreasurysecurities,rosesignificantlyfrom ratewillbearound1.3percent,fairlysimilartothe Novembertomid-December,likelyinpartbecauseof levelanticipatedinmid-2010.11 increaseduncertaintyabouttheultimatesizeof the FederalReserve’sassetpurchaseprogram.Interest YieldsonnominalTreasurysecuritiesfluctuatedcon- rateuncertaintydeclinedsubsequentlyandbyearly siderablyinthesecondhalf of 2010andinearly2011 2011wasonlyabithigher,onnet,thaninmid-2010, duetoshiftsininvestors’expectationsregardingthe apparentlyreflectingcoalescingmarketexpectations prospectsforeconomicgrowthandthesizeof any regardingFederalReservepurchases. assetpurchaseprogramthatwouldbeconductedby theFederalReserve(figure16).Recently,Treasury Measuresof medium-andlong-terminflationcomyieldsdeclinedasinvestorsincreasedtheirdemand pensationderivedfrominflation-indexedTreasury fortherelativesafetyandliquidityof Treasurysecubondsrose,onbalance,duringthesecondhalf of ritiesfollowingpoliticalturmoilintheMiddleEast 2010butremainedwithintheirhistoricalranges. andNorthAfrica.Onnet,yieldson2-yearTreasury Bothmedium-andlong-termmeasuresof inflation noteswereupabitfromtheirlevelsinmid-2010, compensationfellearlyinthethirdquarterasinveswhilethoseon10-yearTreasurysecuritiesrose torsgrewmoreconcernedaboutthedurabilityof the approximately40basispoints.Nonetheless,yieldson economicrecovery,buttheythenmovedbackupas Treasurysecuritiesremainedquitelowbyhistorical theFOMCwasseenastakingadditionalstepsto standards.Uncertaintyaboutlonger-terminterest helpmoveinflationbacktowardlevelsmoreconsisrates,asmeasuredbytheimpliedvolatilityon tentwithitsmandateandaseconomicprospects improved.Risingenergypricesmayalsohavecon- 11 Wheninterestratesareclosetozero,determiningthepointat tributedtotheincreasesinmedium-terminflation whichfinancialmarketquotesindicatethatthefederalfunds ratewillmoveaboveitscurrentrangecanbechallenging.The compensation. pathdescribedinthetextisthemeanofadistributioncalculatedfromderivativescontractsonfederalfundsandEurodol- CorporateDebtandEquityMarkets lars.Theskewnessinducedinthisdistributionbythezerolower boundcausesthemeantobeinfluencedstronglybychangesin Duringthesecondhalf of 2010andearly2011,the uncertaintyregardingthepolicypath,complicatingitsinterpre- spreadsbetweentheyieldsoninvestment-gradecortation.Alternatively,onecanusesimilarderivativestocalculate poratebondsandthoseoncomparable-maturity themostlikely—or“modal”—pathofthefederalfundsrate, whichtendstobemorestable.Thispathhasalsomoveddown, Treasurysecuritiesnarrowedmodestly(figure17). onnet,sincelastsummer,butitsuggestsaflatteroveralltrajec- Similarriskspreadsoncorporatebondswithbelowtoryforthetargetfederalfundsrate,accordingtowhichthe investment-graderatingsnarrowedmoresubstaneffectiveratedoesnotriseaboveitscurrentleveluntilaround themiddleof2012. tially—asmuchas200basispoints.Thisspreadcom-

24 97thAnnualReport|2010 pressionwasconsistentwithcontinuedimprovements maturityovernightindexswaprates—ameasureof incorporatecreditqualityaswellasincreasedinves- stressinshort-termbankfundingmarkets—reversed torconfidenceinthedurabilityof therecovery. thewideningobservedinthespringandthen Nonetheless,bondspreadsnowstandnearthelower remainedfairlynarrowdespitethereemergenceof endof theirhistoricalranges.Inthesecondarymar- concernsaboutthesituationinEuropeinthefall ketforsyndicatedleveragedloans,theaveragebid (figure18).Nevertheless,amidtherenewedconcerns, pricemovedupfurther,adevelopmentthatreflected tieringwasreportedlyevidentindollarfundingmarstronginvestordemandaswellasimprovedfunda- ketsabroad,asinstitutionslocatedinperipheral mentals.Anotableshareof loanstradedatorabove Europeancountriesapparentlyfacedreducedaccess parinearly2011. tofunding.Issuanceof commercialpaperinthe UnitedStatesbyinstitutionsheadquarteredin Equitypriceshaverisensharplysincemid-2010.The peripheralEuropedeclinedasinvestorsrequired rallybeganamidexpectationsof furthermonetary notablyhigherratestoholdthispaper. policyaccommodationandwasfurthersupportedby robustcorporateearningsandanimprovedeconomic Besidesthesestrainsandsomemodest,short-lived outlook.Thegainsinequitypriceswerebroadbased. year-endpressures,conditionsinshort-termfunding ImpliedvolatilityfortheS&P500,calculatedfrom marketscontinuedtobestable.Thespreadsbetween optionsprices,generallytrendeddowninthesecond yieldsonlower-qualityA2/P2-ratedpaperand half of 2010andearly2011andreachedfairlylow AA-ratedasset-backedcommercialpaperoverthose levels,althoughitincreasedrecentlyagainstaback- onhigher-qualityAA-ratednonfinancialpaper dropof risingpoliticalturmoilintheMiddleEast remainednarrowthroughthefallandinto2011. andNorthAfrica. Sincelastsummer,haircutsonsecuritiesusedascollateralinrepurchaseagreements(repos),whileexhib- Withsomeinvestorsapparentlyseekingtoboost itingsomevolatilityinthefourthquarterandearly returnsinanenvironmentof lowinterestrates,net 2011,weregenerallylittlechanged. inflowsintomutualfundsthatinvestinhigheryieldingfixed-incomeinstruments,including InformationfromtheFederalReserve’squarterly speculative-gradebondsandleveragedloans,were SeniorCreditOfficerOpinionSurveyonDealer robustinthesecondhalf of 2010andearly2011. FinancingTermssuggestedthatthemajordealers Theseinflowslikelysupportedstrongissuanceand easedcredittermstomosttypesof counterparties contributedtothenarrowingof bondspreadsduring duringthesecondhalf of 2010,primarilyinresponse thisperiod.Mutualfundsfocusingoninternational debtsecuritiesalsoattractedstronginflows.Inflows toothercategoriesof bondfundsweremoremodest Figure18.Liborminusovernightindexswaprate,2007–11 sothatoverallinflowstobondfundsinthesecond half of 2010weresimilartothoseinthefirsthalf of Basis points theyear.DespitethestronggainsinU.S.equitymar- 350 kets,mutualfundsinvestingindomesticequities experiencedsizableoutflowsformuchof thesecond 300 half of lastyear,butthesefundsattractednetinflows 250 inearly2011.Investmentsinmoneymarketmutual 200 fundschangedlittleinthesecondhalf of 2010—fol- Three-month lowingnotableoutflowsearlierintheyear—asthe 150 assetsheldbythesefundscontinuedtogeneratevery 100 lowyields. 50 One-month + MarketFunctioningand 0_ Dealer-IntermediatedCredit Jan. July Jan. July Jan. July Jan. July Jan. 2007 2008 2009 2010 2011 Conditionsinshort-termfundingmarkets,whichhad Note:ThedataaredailyandextendthroughFebruary22,2011.Anovernight experiencednotablestrainsinthespringwheninves- indexswap(OIS)isaninterestrateswapwiththefloatingratetiedtoanindexof torsbecameconcernedaboutEuropeansovereign dailyovernightrates,suchastheeffectivefederalfundsrate.Atmaturity,twopartiesexchange,onthebasisoftheagreednotionalamount,thedifferencebetween debtandbankingissues,generallyimprovedearlyin interestaccruedatthefixedrateandinterestaccruedbyaveragingthefloating, thesecondhalf of 2010.Spreadsof Londoninter- orindex,rate.LiboristheLondoninterbankofferedrate. Source:ForLibor,BritishBankers’Association;fortheOISrate,Prebon. bankofferedrates,orLibor,overcomparable-

MonetaryPolicyandEconomicDevelopments 25 tomore-aggressivecompetitionfromotherinstitu- Figure19.SpreadsoncreditdefaultswapsforselectedU.S. tionsandtoanimprovementinthecurrentor banks,2007–11 expectedfinancialstrengthof thecounterparties.The easingof termsoccurredprimarilyforsecurities- Basis points financingtransactions,whilenonpricetermsforoverthe-counterderivativestransactionswerereportedly 400 littlechangedonnet.Surveyrespondentsalsonoted 350 ageneralincreaseinthedemandforfundingforall 300 typesof securitiescoveredinthesurvey. Large bank 250 holding companies Whileremainingwellbelowpre-crisislevels,theuse 200 of dealer-intermediatedleverageappearstohave 150 graduallyincreasedsincetheendof thesummer, Other banks 100 interruptedbyabrief retrenchmentinearlyDecem- 50 berwhenconcernsaboutdevelopmentsinEurope intensified.Thistrendisreflectedintheincreased Jan. July Jan. July Jan. July Jan. July Jan. fundingof equitiesbyhedgefundsandotherlevered 2007 2008 2009 2010 2011 investorsandinanuptickindemandforthefunding Note:ThedataaredailyandextendthroughFebruary22,2011.Medianspreads forsixbankholdingcompaniesandnineotherbanks. of someothertypesof securities.Inaddition,recent Source:Markit. leveragedfinancedeals—involvingthenewissuance of high-yieldcorporatebondsandsyndicatedleveragedloans—onaveragereflectedgreaterleveringof recover,althoughtheyremainedabovethelevels theunderlyingcorporateassets,buttheynonetheless observedpriorto2007.Estimatesof bid-asked generatedstronginterestonthepartof investorsina spreadsincorporatebondmarketswerewithinhisverylowinterestrateenvironment.However,there toricalranges,aswasthedispersionof dealerquotes waslittleevidencethatdealer-intermediatedfunding inthecreditdefaultswapmarket. of less-liquidassetsincreasedmaterially,andnew issuanceof structuredproductsthatembedleverage BankingInstitutions andwereoriginatedinlargevolumespriortothecri- Returnsonequityandreturnsonassetsforcommersis—including,forexample,complexmortgage cialbanksinthesecondhalf of 2010improvedmodderivatives—hasnotresumedonanysignificant eratelyfromearlierintheyearbutremainedwell scale.Ingeneral,theappetiteforadditionalleverage belowthelevelsthatprevailedbeforethefinancial onthepartof mostmarketparticipants—asreflected crisis.ProfitsfortheindustryasawholehavebenefitinresponsestospecialquestionsontheSeptember tedconsiderablyinrecentquartersfromreductionsin SCOOS,tripartyrepomarketvolumes,andother loanlossprovisioning.However,pre-provisionnet indicators—appearstohaveremainedgenerally revenuedecreasedoverthesecondhalf of theyearas muted,withmostinvestorsnotfullyutilizingtheir netinterestmarginsslidandincomefromboth existingfundingcapacity. depositfeesandtradingactivitiesdeclined.12About 70of themorethan6,500commercialbanksinthe Measuresof liquidityandfunctioninginmostfinan- UnitedStatesfailedbetweenJulyandDecemcialmarketspointedtogenerallystableconditions ber2010,downslightlyfromthe86failuresthat sincemid-2010.IntheTreasurymarket,variousindi- occurredinthefirsthalf of theyear. cators,suchasdifferencesinpricesof securitieswith similarremainingmaturitiesandspreadsbetween Spreadsoncreditdefaultswapswrittenonbanking yieldsonon-andoff-the-runissues,suggestthatthe organizationsgenerallyheldsteadyormoveddown, marketcontinuedtooperatenormally,includingdur- onnet,sincemid-2010(figure19).Moreover,indicaingtheperiodwhentheFederalReservewasimple- torsof creditqualityatcommercialbanksshowed mentingitsnewassetpurchaseprogram.Bid-asked signsof improvement.Aggregatedelinquencyand spreadsweregenerallyaboutinlinewithhistorical charge-off ratesmoveddown,althoughtheyremain averages,anddealertransactionvolumeshavecontin- high.Lossprovisioningstayedelevated,butthe uedtoreversethedeclinesobservedduringthefinan- recentreductionsgenerallyexceededthedeclinesin cialcrisis.Inthesyndicatedloanmarket,bid-asked spreadstrendeddownfurtherinthesecondhalf of 12 Pre-provisionnetrevenueisthesumofnetinterestincomeand 2010andinearly2011asthemarketcontinuedto noninterestincomelessnoninterestexpense.

26 97thAnnualReport|2010 charge-offs,whichsuggeststhatbanksexpectcredit than$50billioninassetstoadditionalcapitaland qualitytoimprovefurtherincomingquarters. liquidityrequirements. Indeed,foreverymajorloantype,significantnet fractionsof banksreportedontheJanuarySenior MonetaryAggregatesand LoanOfficerOpinionSurveythattheyexpectcredit theFederalReserve’sBalanceSheet qualitytoimproveduringthecurrentyearif eco- TheM2monetaryaggregatehasexpandedatamodnomicactivityprogressesinlinewithconsensus eratepacesincemid-2010afterrisingonlyslightlyin forecasts. thefirsthalf of lastyear;fortheyearasawhole,M2 grew3.2percent,theslowestannualincreasesince Equitypricesof commercialbanksmovedhigher,on 1994.13Ashasbeenthecaseforsometime,thestronnet,sincemid-2010.Duringthisperiod,largecom- gestincreasewasinliquiddeposits,thelargestcommercialbanksgenerallyreportedearningsthatbeat ponentof M2,whilesmalltimedepositsandretail analysts’expectations,andimprovedeconomicpros- moneymarketmutualfundassetscontinuedtoconpectswereseenasboostingloandemandandsup- tract.Liquiddepositstendedtopayslightlymoreportingloanqualitygoingforward,developments favorableinterestratesthandidtheirclosesubstithatwouldbuoybanks’profitability.Nevertheless, tutes.Thecurrencycomponentof themoneystock investorswereanxiousaboutthedegreetowhich expandedatafasterrateinthesecondhalf of 2010 futureprofitabilitymightbenegativelyaffectedbya thanithadearlierintheyear.Themonetarybase— numberof factors,includingthequalityof assetson essentiallyequaltothesumof currencyincirculation banks’books,changesintheregulatorylandscape, andthereservebalancesof depositoryinstitutions mortgagedocumentationandforeclosureissues,and heldattheFederalReserve—contractedslightlydurthepotentialforsomenonperformingmortgagesin ingthesecondhalf of 2010,althoughthedownward securitizedpoolstobeputbacktosomeof thelarge trendstartedtoreverselateintheperiodinresponse banks. totheFederalReserve’snewTreasurysecuritypurchaseprogram. Totalassetsof commercialbankschangedlittle,on net,duringthesecondhalf of 2010,althoughthere Thesizeof theFederalReserve’sbalancesheet werenotablecompositionalshifts.Withdemand remainedatahistoricallyhighlevelthroughoutthe weakandlendingstandardstight,totalloanscon- secondhalf of 2010.Inearly2011,thebalancesheet tracted.Nevertheless,thepaceatwhichloans stoodatabout$2.5trillion,anincreaseof around decreasedwasnotasrapidasinthefirsthalf of the $200billionfromitslevelinearlyJuly(table1).The year,inpartbecausebanks’holdingsof commercial expansionof thebalancesheetwasmorethan andindustrialloanspickedupandtheirholdingsof accountedforbyanincreaseinholdingsof Treasury closed-endresidentialmortgagesgrewsteadily.Partly securities,whichwereupnearly$450billionsincethe offsettingthedeclinesintotalloans,banksexpanded summer.Theadditionalholdingsof Treasurysecuritheirholdingsof Treasurysecuritiesandagency tiesresultedfromtheFOMC’sAugustdecisionto MBS,althoughthegrowthintheirsecuritiesholdings reinvesttheproceedsfrompaydownsof agencydebt slowedlateintheyearandinto2011. andMBSinlonger-termTreasurysecuritiesandthe assetpurchaseprogramannouncedattheNovember Regulatorycapitalratiosatcommercialbanksmoved FOMCmeeting.Toprovideoperationalflexibility higher,onbalance,overthesecondhalf of 2010.The andtoensurethatitisabletopurchasethemost upwardtrendincapitalratiosoverthepastseveral yearshasbeenmostpronouncedatthelargestbanks 13 M2consistsof(1)currencyoutsidetheU.S.Treasury,Federal ReserveBanks,andthevaultsofdepositoryinstitutions; astheyaccumulatedcapitalwhilerisk-weighted (2)traveler’schecksofnonbankissuers;(3)demanddepositsat assetsdecreasedandtangibleassetswereabout commercialbanks(excludingthoseamountsheldbydepository unchanged.Capitalrequirementsformanyof these institutions,theU.S.government,andforeignbanksandofficial institutions)lesscashitemsintheprocessofcollectionandFedbankswillincreasesignificantlyunderthenewintereralReservefloat;(4)othercheckabledeposits(negotiableorder nationalcapitalstandards,whichwillrestrictthedefi- ofwithdrawal,orNOW,accountsandautomatictransfersernitionof regulatorycapitalandincreasetherisk viceaccountsatdepositoryinstitutions;creditunionsharedraft accounts;anddemanddepositsatthriftinstitutions);(5)savings weightsassignedtosomeassetsandoff-balance-sheet deposits(includingmoneymarketdepositaccounts);(6)smallexposures.Inaddition,theDodd-FrankWallStreet denominationtimedeposits(timedepositsissuedinamountsof ReformandConsumerProtectionActrequiresthat lessthan$100,000)lessindividualretirementaccount(IRA) andKeoghbalancesatdepositoryinstitutions;and(7)balances theFederalReserveissuerulesbyJanuary31,2012, inretailmoneymarketmutualfundslessIRAandKeoghbalthatwillsubjectbankholdingcompanieswithmore ancesatmoneymarketmutualfunds.

MonetaryPolicyandEconomicDevelopments 27 Table1.SelectedcomponentsoftheFederalReservebalancesheet,2009–11 Millionsofdollars Balancesheetitem Dec.30,2009 July7,2010 Feb.23,2011 Totalassets 2,237,258 2,335,457 2,537,175 Selectedassets Creditextendedtodepositoryinstitutionsanddealers Primarycredit 19,111 17 24 Termauctioncredit 75,918 0 0 PrimaryDealerCreditFacilityandotherbroker-dealercredit 0 … … Centralbankliquidityswaps 10,272 1,245 70 Creditextendedtoothermarketparticipants Asset-BackedCommercialPaperMoneyMarketMutualFundLiquidityFacility 0 … … NetportfolioholdingsofCommercialPaperFundingFacilityLLC 14,072 1 … TermAsset-BackedSecuritiesLoanFacility 47,532 42,278 20,997 Supportofcriticalinstitutions NetportfolioholdingsofMaidenLaneLLC,MaidenLaneIILLC,andMaidenLaneIIILLC1 65,024 66,996 64,902 CreditextendedtoAmericanInternationalGroup,Inc. 22,033 24,560 … PreferredinterestsinAIAAuroraLLCandALICOHoldingsLLC 25,000 25,733 … Securitiesheldoutright U.S.Treasurysecurities 776,587 776,997 1,213,425 Agencydebtsecurities 159,879 164,762 144,119 Agencymortgage-backedsecurities(MBS)2 908,257 1,118,290 958,201 Memo TermSecuritiesLendingFacility3 0 … … Totalliabilities 2,185,139 2,278,523 2,484,141 Selectedliabilities FederalReservenotesincirculation 889,678 907,698 956,012 Reverserepurchaseagreements 70,450 62,904 59,484 Depositsheldbydepositoryinstitutions 1,025,271 1,061,239 1,297,905 Ofwhich:Termdeposits … 2,122 5,070 U.S.Treasury,generalaccount 149,819 16,475 23,123 U.S.Treasury,SupplementaryFinancingAccount 5,001 199,963 124,976 Totalcapital 52,119 56,934 53,035 Note:LLCisalimitedliabilitycompany. 1 TheFederalReservehasextendedcredittoseveralLLCsinconjunctionwitheffortstosupportcriticalinstitutions.MaidenLaneLLCwasformedtoacquirecertainassetsof theBearStearnsCompanies,Inc.MaidenLaneIILLCwasformedtopurchaseresidentialmortgage-backedsecuritiesfromtheU.S.securitieslendingreinvestmentportfolio ofsubsidiariesofAmericanInternationalGroup,Inc.(AIG).MaidenLaneIIILLCwasformedtopurchasemultisectorcollateralizeddebtobligationsonwhichtheFinancial ProductsgroupofAIGhaswrittencreditdefaultswapcontracts. 2 IncludesonlyMBSpurchasesthathavealreadysettled. 3 TheFederalReserveretainsownershipofsecuritieslentthroughtheTermSecuritiesLendingFacility. …Notapplicable. Source:FederalReserveBoard,StatisticalReleaseH.4.1,“FactorsAffectingReserveBalancesofDepositoryInstitutionsandConditionStatementofFederalReserveBanks.” attractivesecuritiesonarelative-valuebasis,theFed- addition,holdingsof agencydebtdeclinedasthese eralReservetemporarilyrelaxedits35percentper- securitiesmatured. issuelimitonSystemOpenMarketAccount (SOMA)holdingsof individualTreasurysecurities Useof regulardiscountwindowlendingfacilities, andwillallowSOMAholdingstoriseabovethepre- suchastheprimarycreditfacility,hasbeenminimal viousthresholdinmodestincrementsuptoa70per- forsometime.TheTermAsset-BackedSecurities centper-issuelimit;holdingsof particularissues LoanFacility(TALF)wasclosedonJune30,2010. exceedthepreviouslimitforonlyasmallnumberof LoansoutstandingundertheTALFdeclinedfrom securities.Incontrast,holdingsof agencydebtand $42billioninmid-2010to$21billioninearly2011as agencyMBSdeclinedabout$180billionbetween improvedconditionsinsomesecuritizationmarkets earlyJulyandearly2011.Thewaveof mortgagerefi- resultedinprepaymentsof loansmadeunderthe nancingthatoccurredintheautumninthewakeof facility.Theotherbroad-basedcreditfacilitiesthat thedropinmortgageratescontributednotablytothe theFederalReservehadintroducedtoprovideliquidsharpdeclineinFederalReserveholdingsof MBS.In itytofinancialinstitutionsandmarketsduringthe

28 97thAnnualReport|2010 financialcrisiswereclosedearlyin2010.Allloans Figure20.U.S.dollarnominalexchangerate,broadindex, extendedthroughtheseprogramshadbeenrepaidby 2006–11 thesummer. December 31, 2007 = 100 Theportfolioholdingsof MaidenLaneLLC, MaidenLaneIILLC,andMaidenLaneIIILLC, 120 whichwerecreatedtoacquirecertainassetsfrom troubledsystemicallyimportantinstitutionsduring 115 thecrisis,havegenerallychangedlittle,onnet,since 110 mid-2010.Currentestimatesof thefairvaluesof the portfoliosof thethreeMaidenLaneLLCsexceedthe 105 correspondingloanbalancesoutstandingtoeach 100 limitedliabilitycompanyfromtheFederalReserve Bankof NewYork.Consistentwiththetermsof the 95 MaidenLaneLLCtransaction,onJuly15,2010,this limitedliabilitycompanybeganmakingdistributions 2006 2007 2008 2009 2010 2011 torepaytheloanreceivedfromtheFederalReserve Note:Thedata,whichareinforeigncurrencyunitsperdollar,aredaily.Thelast Bankof NewYork.OnJanuary14,2011,American observationfortheseriesisFebruary22,2011.Thebroadindexisaweighted averageoftheforeignexchangevaluesoftheU.S.dollaragainstthecurrenciesof InternationalGroup,Inc.,orAIG,repaidthecredit alargegroupofthemostimportantU.S.tradingpartners.Theindexweights, extendedbytheFederalReserveundertherevolving whichchangeovertime,arederivedfromU.S.exportsharesandfromU.S.and foreignimportshares. creditline,andtheFederalReservewaspaidinfull Source:FederalReserveBoard,StatisticalReleaseH.10,“ForeignExchange foritspreferredinterestsinthespecialpurpose Rates.” vehiclesAIAAuroraLLCandALICOHoldings LLC,therebyreducingthebalancesintheseaccounts tozero. releaseof theresultsof theEuropeanUnion(EU) stresstests—andbyfearsthattherecoveryinthe StressesinEuropeandollarfundingmarketsinMay UnitedStateswasslowing.Mountingexpectations ledtothereestablishmentof liquidityswaplines thattheFederalReservemightundertakefurther betweentheFederalReserveandforeigncentral assetpurchasesinresponsetotheweakeningecobanks.Onlyasmallamountof credithasbeenissued nomicoutlookalsoweighedonthedollar.Although underthereestablishedfacilities,whichinDecember thedollarinitiallydroppedabitmorefollowingthe wereextendedthroughAugust1,2011. FederalReserve’sannouncementinearlyNovember thatitwouldpurchaseadditionallong-termTreasury Ontheliabilityside,FederalReservenotesincirculasecurities,itsubsequentlyreversedcourseasdataon tionincreasedabit,from$908billionto$956billion. economicactivityintheUnitedStatesbeganto Reversereposedgeddown.DepositsheldattheFedstrengthenandasinvestorsbegantoscalebacktheir eralReservebydepositoryinstitutionsrosetoabout expectationsof theultimatesizeof theFederal $1.3trillion.TheSupplementaryFinancingAccount Reserve’spurchaseprogram.Inthefirsttwomonths declinedearlyin2011followingtheannouncement of thisyear,thedollaredgeddownagainastheoutbytheTreasurythatitwassuspendingnewissuance lookforeconomicactivityabroadappearedto undertheSupplementaryFinancingProgramand strengthenandthefinancialsituationinEuropestathatitwouldallowthataccounttofallto$5billion bilized.Onnet,thedollardeclined7percentona aspartof itseffortstomaximizeflexibilityindebt trade-weightedbasisagainstabroadsetof currencies managementasfederaldebtapproachedthestatuoverthesecondhalf of lastyearandintothefirst torydebtlimit. twomonthsof thisyear. InternationalDevelopments Foreignbenchmarksovereignyieldsalsodeclined InternationalFinancialMarkets overmuchof thethirdquarterasconcernsaboutthe Theforeignexchangevalueof thedollardeclined U.S.recoveryandworriesthatChina’seconomy overmuchof thethirdquarterof 2010(figure20). mightdeceleratemorequicklythanhadbeen Thisdeclinewasspurredinpartbysomereversalof expectedledinvestorstoquestiontheoverallstrength flight-to-safetyflows—asfinancialsystemstrainsin of globaleconomicgrowth.However,foreignyields EuropetemporarilydiminishedfollowingtheJuly subsequentlyroseasconfidenceintheglobalrecov-

MonetaryPolicyandEconomicDevelopments 29 erystrengthened,leavingforeignbenchmarkyields ontheircurrenciesandreportedlytriggeredfurther 15to60basispointshigheronnet. interventioninforeignexchangemarketsbyEME authorities.AuthoritiesinseveralEMEsalso Foreignequitymarketsralliedfollowingtherelease announcednewmeasurestodiscourageportfolio of theEUstresstestsinJuly,and,althoughthose capitalinflowsinanattempttoeaseupwardpresmarketsgavebackpartof thesegainsinAugustover suresontheircurrenciesandintheirassetmarkets. heightenedworriesaboutthepaceof globaleco- AlthoughcapitalflowstoEMEsappearedtomodernomicgrowth,theynonethelessendedthethirdquar- atelateintheyearaslong-terminterestratesinthe terhigher.Overthefourthquarterandintothisyear, advancedeconomiesrose,interventionandtheimpoforeignequitypricesrosefurtherastheglobaleco- sitionof capitalcontrolmeasurescontinued. nomicoutlookimproved,notwithstandingrenewed stressesinperipheralEurope.Onnet,headlineequity TheFinancialAccount indexesintheeuroareaandJapanareupabout10to 20percentfromtheirlevelsinmid-2010,while Financialflowsin2010reflectedchangesininvestor indexesinthemajoremergingmarketeconomiesare sentimentoverthecourseof theyear,driveninpart about20percenthigher;allthoseindexesincreased, byconcernsoverfiscaldifficultiesinEurope.Foreign onbalance,evenafterhavingdeclinedabitrecently privateinvestorsmadelargepurchasesof U.S.Treasinthefaceof uncertaintiesabouttheMiddleEast urysecuritiesinthefirsthalf of theyear,butthese andNorthAfrica. “flighttoquality”demandseasedsomewhatinthe thirdquarterwiththeimprovementinconditionsin Althoughsomebanksintheeuro-areaperiphery Europeanmarkets.Indicatorsforthefourthquarter countries,particularlyinSpain,seemedtohavebet- aremixedbutsuggestthatforeignprivatedemandfor teraccesstocapitalmarketsimmediatelyfollowing U.S.Treasurysecuritiespickedupagainlateinthe thestresstest,theircostsof fundingroseagainlatein yearastensionsinEuropeanmarketsreemerged. theyearasmarketconcernsabouttheIrishand ForeigndemandforotherU.S.securitiesstrength- Spanishbankingsectorsresurfaced.Banksinthe enedinthesecondhalf of theyear.Netprivatepureuro-areaperipheryreliedheavilyontheweeklyand chasesof bothU.S.agencydebtandU.S.equities longer-termfundingoperationsof theEuropean werestrong,andforeigninvestorsmadesmallnet CentralBank(ECB)overmuchof thisperiod.The purchasesof corporatedebtsecurities,incontrastto strainsneverthelessspilledoverintoincreasedfund- netsalesoverthepreviousseveralquarters.U.S.resiingcostsindollarsforsomeEuropeanbanks, dentscontinuedtopurchasesizableamountsof foralthoughthereactionwaslessseverethanithadbeen eignbondsandequities,includingbothemerging inMay.Reportedly,manyEuropeanbankshad marketandEuropeansecurities. alreadymettheirdollarfundingneedsthroughyearendbeforethesestrainsoccurred.Marketpartici- BankslocatedintheUnitedStatescontinuedtolend pantswelcomedtheannouncementthattheswap abroad,onnet,inthethirdquarter,butataslower linesbetweentheFederalReserveandtheECB,the pacethaninthefirsthalf of theyear,asdollarfund- Bankof England,theSwissNationalBank,theBank ingpressuresinEuropeaninterbankmarketseased of Japan,andtheBankof Canadawouldbe andbanksabroadreliedlessonU.S.counterparties extendedthroughAugust1. forfunding.Asaresult,inflowsfromincreasedforeignprivatepurchasesof U.S.securitiesmorethan Withtheyenata15-yearhighagainstthedollarin offsetthebankingoutflowsinthethirdquarter,gennominalterms,Japaneseauthoritiesintervenedin eratingnetprivatefinancialinflowsforthefirsttime currencymarketsonSeptember15.Japan’sMinistry sincelate2008. of Financepurchaseddollarsovernighttoweaken thevalueof theyen,itsfirstinterventionoperation Inflowsfromforeignofficialinstitutionsincreasedin sinceMarch2004.Theoperationcausedtheyento thethirdquarter,withinflowsprimarilycomingfrom depreciateimmediatelyabout3percentagainstthe countriesseekingtocounteractupwardpressureon dollar,butthismovementwasfairlyshortlived,as theircurrenciesbypurchasingU.S.dollarsinforeign theyenrosepastitspre-interventionlevelwithina currencymarkets.Thesecountriesthenusedthepromonth. ceedstoacquireU.S.assets,primarilyTreasurysecurities.Availabledataforthefourthquarterindicate Duringthethirdquarter,theEMEssawanincrease thatforeignofficialpurchasesof U.S.Treasurysecuincapitalinflows,whichaddedtoupwardpressures ritiesslowedasthedollarstabilized.

30 97thAnnualReport|2010 AdvancedForeignEconomies andpointtosolidexpansion.Moreover,therecovery Economicgrowthintheadvancedforeigneconomies appearstobegraduallyspillingovertotheretailand steppeddowninthesecondhalf of 2010.Toalarge servicesectors,withhouseholddemandbenefiting extent,thisslowdownreflectedstandardbusiness fromimprovinglabormarketconditionsandrising cycledynamics,assupportfromfiscalstimulusand incomes. thereboundinglobaltradeandinventoriesdiminishedoverthecourseof theyear.InCanada,signsof Towardyear-end,consumerpricesintheadvanced thematuringrecoveryweremostevidentinthe foreigneconomieswereboostedbyarun-upinfood domesticsector,whereasinJapan,exportsdeceler- andenergyprices.Japanese12-monthheadlineconatedasgrowthinemergingAsianeconomiesmoder- sumerpriceinflationturnedslightlypositiveforthe ated.InEurope,therecoverywasfurtherrestrained firsttimesinceearly2009,inpartbecauseof ahike byareemergenceof concernsoverfiscalsustainabil- inthetobaccotax,andheadlineinflationinCanada ityandbankingsectorvulnerabilitiesinsomecoun- andtheeuroarearecentlymovedabove2percent. tries.(Seebox2.)However,recentindicatorsof eco- However,inflationincoreconsumerprices,which nomicactivityacrosstheadvancedforeigneconomies excludesfoodandenergyprices,remainedsubdued suggestthatperformanceimprovedmoderately amidconsiderableslackintheseeconomies.One towardtheendof 2010.Inthemanufacturingsector, exceptionwastheUnitedKingdom,whereconsumer purchasingmanagersindexeshaveresumedrising priceinflation—bothheadlineandcore—persisted Box 2. An Update on the European Fiscal Crisis and Policy Responses TheEuropeanfiscalcrisishasremainedasourceof depositflightanddifficultiesraisingfundsintheinterconcerninglobalfinancialmarketsdespiteofficial bankmarket,Irishbanksbecameincreasinglydepenresponsesoverthepastyear.Thecrisisbeganearly dentonfundingfromtheECB. in2010afterlargeupwardrevisionstothestatistics onGreekgovernmentdeficitsledtoanerosionof Withaccesstomarketfundingincreasinglylimited, marketconfidenceintheabilityofGreecetomeetits IrelandagreedonNovember28toa€67.5billion fiscalobligations.Thissituationcreatedspilloversto financialsupportpackagefromtheEUandtheIMF, othereuro-areacountrieswithhighdebtordeficit withanadditional€17.5billionofIreland’sownfunds levels.InearlyMay,theEuropeanUnion(EU)andthe goingtostabilizeandrecapitalizethecountry’sbank- InternationalMonetaryFund(IMF)announcedajoint ingsector.Irelandagreedtoimplementafour-year €110billionfinancialsupportpackageforGreece;in fiscalconsolidationeffortequalto9percentofgross addition,theEUestablishedlendingfacilitiesofupto domesticproduct,two-thirdsofwhichwillbespend- €500billion,andtheEuropeanCentralBank(ECB) ingcuts,ontopoftheausteritymeasuresalready beganpurchasingsovereignsecuritiestoensurethe adoptedintheprevioustwoyears. depthandliquidityofeuro-areadebtmarkets.In responsetosignsofrenewedpressuresindollar Followingthisannouncement,marketsappearedto fundingmarkets,theFederalOpenMarketCommit- shifttheirfocustothepossibilitythatofficialassisteereopeneddollarswapfacilitieswithanumberof tancewouldalsoberequiredforothereuro-area foreigncentralbanks. countrieswithhighfiscaldeficitsordebtsandvulnerablebankingsystems.Thisdevelopmentledtoarise Financialtensionsmoderatedsomewhatoverthe inthesovereignbondspreadsofPortugal,Spain, summer,inpartbecauseoffavorablemarketreaction and,toalesserextent,ItalyandBelgium.Thefear totheresultsofEurope-widebankstresstests thattheIrishproblemsmightspreadwasexacerreleasedinJuly.Nevertheless,thespreadsofyields batedbyconcernsthatfundsavailableunderexisting onthesovereignbondsofthemostvulnerableeuro- supportmechanismscouldbeinsufficientifSpain areacountriesoverthoseofGermanbondsremained weretoneedexternalassistance.Partlyinresponse elevated.Intheautumn,peripheralEuropeansover- totheincreaseinfinancialstrains,theECBtemporareignbondspreads,particularlythoseofIreland,wid- ilysteppedupitspurchasesofthedebtofvulnerable enedfurther.Twodevelopmentscontributedtothe euro-areacountriesandannouncedfollowingits heightenedtensions:(1)thediscussionofaproposal Decemberpolicymeetingthatitwoulddelayexit foramorepermanentfinancialstabilitymechanism fromitsnonstandardliquiditymeasures.Inaddition, fortheeuroareastartingin2013,whichcouldeven- Europeanleadershaveincreasinglyindicatedtheir tuallyrequiretherestructuringofprivateholdingsof desiretoexpandorbroadenthemandateofcurrent sovereigndebt;and(2)increasedconcernsoverthe supportfacilities,andEuropeangovernmentsare growingrealestateloanlossesofIrishbanksandthe organizinganotherroundofbankstresstests. associatedfundingdifficulties.Afflictedinpartby

MonetaryPolicyandEconomicDevelopments 31 above3percentthroughout2010,drivenbyprior aboutthepossibilityof anoverheatinginassetprices. exchangeratedepreciationandincreasesinthevalue- EMEauthoritieshavesofaradoptedavarietyof addedtax. strategiestocopewithincreasedcapitalflows,includinginterventioninforeignexchangemarketstoslow Majorcentralbanksintheadvancedforeignecono- theupwardmovementof domesticcurrencies,prumieshavemaintainedanaccommodativemonetary dentialmeasurestargetedtospecificmarkets(suchas policystance,althoughsomehavetakenstepsto thepropertymarket),and,inseveralcases,capital removethedegreeof accommodation.TheBankof controls. Canadaraiseditstargetfortheovernightrate 50basispointsinthethirdquarterbutsincethenhas RealGDPgrowthinChinaslowedabitinthefirst helditspolicyrateat1percent.TheECBdiscontin- half of lastyear,butitmovedbackupinthesecond uedrefinancingoperationsat6-and12-month half alongwithapickupininflation,promptingChimaturitiesbutextendedfixed-raterefinancingat neseauthoritiestocontinuetotightenmonetary shortermaturitiesandkeptitsmainrefinancingrate policy.SincelastJune,bankreserverequirements at1percent.TheBankof Englandmaintainedits increasedatotalof 250basispointsforthelargest policyrateat0.5percentandthesizeof itsAsset banks,andthebenchmarkone-yearbanklending PurchaseFacilityat£200billion.TheBankof Japan ratehasrisen75basispoints.Chineseauthorities tookadditionalstepstoeasepolicybycuttingitstar- havealsoraisedtheminimumdownpayment getinterestratefrom10basispointstoarangeof requiredforresidentialpropertyinvestmentinorder 0to10basispoints.Inaddition,itextendedfrom toslowrisingpropertyprices.Sincetheannouncethreetosixmonthsthetermforitsfixed-ratefunds- mentlastJunebyChineseauthoritiesthatthey supplyingoperation,anditestablishedanassetpur- wouldallowmoreexchangerateflexibility,therenchaseprogramof ¥5trilliontobuyabroadrangeof minbihasappreciatedabout4percentagainstthe financialassets,includinggovernmentsecurities, dollar.However,onarealmultilateral,tradecommercialpaper,corporatebonds,exchange-traded weightedbasis,whichgaugestherenminbi’svalue funds,andrealestateinvestmenttrusts. againstChina’smajortradingpartnersandadjusts fordifferencesininflationrates,therenminbihas EmergingMarketEconomies depreciatedslightly. Afterarobustexpansioninthefirsthalf of 2010, economicactivityintheEMEssteppeddowninthe InemergingAsiaexcludingChina,thepaceof ecothirdquarterbeforebouncingbacktosolidgrowthin nomicgrowthsoftenedinthethirdquarterof last thefourth.Onaverageoverthetwoquarters,real year.TherewasasteepdeclineinSingapore’sreal GDPgrowthintheEMEswaswellabovethat GDP,whichoftenexhibitswidequarterlyswings. observedintheadvancedeconomies.Economic Considerableweaknessinthird-quartereconomic activityintheEMEswasboostedbydomestic activitywasalsoobservedinMalaysia,thePhilipdemand,supportedbyaccommodativemonetaryand pines,andThailand.However,availableindicators fiscalpolicies.However,withoutputappearingto suggestthatfourth-quarterGDPgrowthinthe approachcapacityformostcountries,authoritiesin regionhaspickedupagain. manyEMEshavebeguntounwindthestimulus measures,bothmonetaryandfiscal,putinplacedur- InLatinAmerica,realGDPinMexicoandBrazil ingthecrisis.Thewithdrawalof monetarystimulus alsodeceleratedinthethirdquarter.Mexicanoutput hasalsobeendrivenbyarecentpickupinconsumer hasyettorecoverfullyfromthefinancialcrisis;total priceinflation,whichhasreflected,inpart,arisein manufacturingoutputslowedoverthefinaltwo commodityprices. quartersof theyear,largelyreflectinglowerU.S. manufacturinggrowth,whichhasdepresseddemand MonetarypolicytighteningintheEMEshaslikely forexportsfromMexico.EconomicactivityinBrazil, beentemperedbyuncertaintiesaboutthepaceand thoughhavingslowedfromaverybriskpaceinthe durabilityof theeconomicrecoveryinadvanced firsthalf of theyear,hasremainedsolid,supported economies,whichremainanimportantsourceof bycontinuedfiscalstimulusandhighcommodity demandfortheEMEs.Inaddition,theexitfrom prices.Brazil’scentralbanktightenedreserverequireaccommodativestanceshasbeencomplicatedbythe mentsinDecember,promptedbyconcernsabout returnof privatecapitalflowstotheseeconomies. boththepaceof creditcreationandthequalityof Capitalinflowsappeartohaveexertedsomeupward thecreditbeingextended.Inaddition,theBrazilian pressureoncurrenciesandhaveraisedconcerns centralbankraiseditspolicyrate50basispointsin

32 97thAnnualReport|2010 Januaryof thisyear.ThenewBraziliangovernment growthsincetheJunemeeting,inpartreflectingperhasannouncedsomespendingcutstoreduceaggre- ceptionsof diminishedriskof financialdislocations gatedemandandinflationarypressures. inEurope.Moreover,participantssawsomeindicationsthatcreditconditionsforhouseholdsand Part 3 smallerbusinesseswerebeginningtoimprove,albeit Monetary Policy: gradually.Afurtherdeclineinenergypricesand Recent Developments and Outlook unchangedpricesforcoregoodsandservicesledtoa fallinheadlineconsumerpricesinJune. MonetaryPolicyovertheSecondHalf of2010andEarly2011 Againstthisbackdrop,theCommitteeagreedto TheFederalOpenMarketCommittee(FOMC) makenochangeinitstargetrangeforthefederal maintainedatargetrangeforthefederalfundsrate fundsrateattheAugustmeeting.Theeconomic of 0to¼percentthroughoutthesecondhalf of 2010 expansionwasseenascontinuing,andmostmemandinto2011.Inthestatementaccompanyingeach bersbelievedthatinflationwaslikelytostabilizein regularlyscheduledFOMCmeeting,theCommittee comingquartersatratesnearrecentlowreadingsand notedthateconomicconditions,includinglowrates thengraduallyrisetowardlevelstheyconsidered of resourceutilization,subduedinflationtrends,and moreconsistentwiththeCommittee’sdualmandate. stableinflationexpectations,werelikelytowarrant Nonetheless,membersgenerallyjudgedthattheecoexceptionallylowlevelsof thefederalfundsratefor nomicoutlookhadsoftenedsomewhatmorethan anextendedperiod.Withtheunemploymentrate theyhadanticipated,andsomesawincreaseddownelevatedandmeasuresof underlyinginflationsome- sideriskstotheoutlookforbotheconomicgrowth whatlowrelativetolevelsthattheCommitteejudged andinflation.TheCommitteenotedthatthedecline tobeconsistent,overthelongrun,withitsdualman- inmortgageratessincethespringwasgenerating dateof maximumemploymentandpricestability,the increasedmortgagerefinancingactivity,whichwould FOMCtookstepsduringthesecondhalf of 2010to acceleraterepaymentsof principalonMBSheldin provideadditionalmonetaryaccommodationin theSystemOpenMarketAccount(SOMA),andthat ordertopromoteastrongerpaceof economicrecov- privateinvestorswouldhavetoholdmorelongereryandtohelpensurethatinflation,overtime, termsecuritiesastheFederalReserve’sholdingsran returnstolevelsconsistentwithitsmandate.In off,makinglonger-terminterestratessomewhat August,theFOMCannouncedthatitwouldkeep higherthantheywouldhavebeenotherwise.The constanttheFederalReserve’sholdingsof longer- Committeeconcludedthatitwouldbeappropriateto termsecuritiesattheirthen-currentlevelbyreinvest- beginreinvestingprincipalpaymentsreceivedfrom ingprincipalpaymentsfromagencydebtandagency agencydebtandMBSheldintheSOMAbypurchasmortgage-backedsecurities(MBS)inlonger-term inglonger-termTreasurysecurities;suchanaction Treasurysecurities.Then,inNovember,theFOMC wouldkeepconstantthefacevalueof securitiesheld announcedthatitintendedtopurchaseanadditional intheSOMAandthusavoidtheupwardpressureon $600billionof longer-termTreasurysecuritiesbythe longer-terminterestratesthatmightresultif those endof thesecondquarterof 2011.TheCommittee holdingswereallowedtodecline. notedthatitwouldregularlyreviewthepaceof its securitiespurchasesandtheoverallsizeof theasset Asof theSeptember21FOMCmeeting,thedata purchaseprograminlightof incominginformation. continuedtosuggestthattheeconomicexpansion wasdeceleratingandthatinflationremainedlow.Pri- TheinformationreviewedattheAugust10FOMC vatebusinessesincreasedemploymentmodestlyin meetingindicatedthatthepaceof theeconomic August,butthelengthof theworkweekwas recoveryhadslowedinrecentmonthsandthatinfla- unchangedandtheunemploymentrateremained tionremainedsubdued.Privateemploymenthad elevated.Theriseinbusinessoutlaysforequipment increasedslowlyinJuneandJuly,andindustrialpro- andsoftwareseemedtohavemoderatedfollowing ductionwaslittlechangedinJuneafteralarge outsizedgainsinthefirsthalf of theyear.Housing increaseinMay.Consumerspendingcontinuedto activityweakenedfurther,andnonresidentialconriseatamodestrateinJune.However,housingactiv- structionremaineddepressed.Industrialproduction itydroppedback,andnonresidentialconstruction advancedatasolidpaceinJulyandrosefurtherin remainedweak.Inaddition,thetradedeficitwidened August.Consumerspendingcontinuedtoincreaseat sharplyinMay.Conditionsinfinancialmarketshad amoderaterateinJulyandappearedtobemoving becomesomewhatmoresupportiveof economic upagaininAugust.Afterfallinginthepreviousthree

MonetaryPolicyandEconomicDevelopments 33 months,headlineconsumerpriceshadriseninJuly policyframework,includingalternativewaysto andAugustasenergypricesretracedsomeof their expressandcommunicatetheCommittee’sobjecearlierdeclines,andpricesforcoregoodsandser- tives,possibilitiesforsupplementingtheCommittee’s vicesedgedupslightly.Creditwasviewedbypartici- communicationaboutitspolicydecisions,themerits pantsasremainingreadilyavailableforlargercorpo- of makingsmallerandmore-frequentadjustmentsin rationswithaccesstocapitalmarkets,andsome theFederalReserve’sintendedsecuritiesholdings reportssuggestedthatcreditconditionshadbegunto ratherthanlargerandless-frequentadjustments,and improveforsmallerfirms.Assetpriceshadbeenrela- thepotentialcostsandbenefitsof targetingaterm tivelysensitivetoincomingeconomicdataoverthe interestrate.Theagendadidnotencompassconsidintermeetingperiodbutgenerallyendedtheperiod erationof anypolicyactions,andnoneweretaken. littlechangedonnet.StressesinEuropeanfinancial marketswereseenbyparticipantsasbroadlycon- TheinformationreviewedattheNovember2–3 tainedbutwerethoughttobearwatchinggoingfor- FOMCmeetingcontinuedtoindicatethattheecoward.Althoughparticipantsdidnotexpectthatthe nomicrecoverywasproceedingatamodestrate,with economywouldreenterarecession,manyexpressed onlyagradualimprovementinlabormarketcondiconcernthatoutputgrowth,andtheassociatedprog- tions.Moreover,measuresof underlyinginflation ressinreducingthelevelof unemployment,couldbe weresomewhatlowrelativetolevelsthattheComslowforsometime.Participantsnotedanumberof mitteejudgedtobeconsistent,overthelongerrun, factorsthatwererestrainingeconomicgrowth, withitsdualmandate.Consumerspending,business includinglowlevelsof householdandbusinessconfi- investmentinequipmentandsoftware,andexports dence,heightenedriskaversion,andthestill-weak postedfurthergainsinthethirdquarter,andnonfinancialconditionsof somehouseholdsandsmall farminventoryinvestmentsteppedup.However,conbusinesses. structionactivityinboththeresidentialandnonresidentialsectorsremaineddepressed,andasignificant TheCommitteeagreedattheSeptembermeetingto portionof theriseindomesticdemandwasagain maintainthetargetrangeforthefederalfundsrateof metbyimports.U.S.industrialproductionslowed 0to¼percentandtoleaveunchangedthelevelof its noticeablyinAugustandSeptember,hiringremained combinedholdingsof Treasurysecurities,agency modest,andtheunemploymentratestayedelevated. debt,andagencyMBSintheSOMA.Inaddition, Whileparticipantsconsidereditquiteunlikelythat membersagreedthatthestatementtobereleasedfol- theeconomywouldslidebackintorecession,they lowingthemeetingshouldbeadjustedtoclarifytheir notedthatcontinuedslowgrowthandhighlevelsof assessmentthatunderlyinginflationhadbeenrun- resourceslackcouldleavetheeconomicexpansion ningbelowlevelsthattheCommitteejudgedtobe vulnerabletonegativeshocks.Participantssawfinanconsistentwithitsdualmandateformaximum cialconditionsashavingbecomemoresupportiveof employmentandpricestability.Theclarificationwas economicgrowthoverthecourseof theintermeeting intended,inpart,tohelpanchorinflationexpecta- period;most,thoughnotall,of thechangeappeared tionsandtoreinforcetheindicationthateconomic toreflectinvestors’increasedanticipationof afurconditionswerelikelytowarrantexceptionallylow thereasingof monetarypolicy.Headlineconsumer levelsof thefederalfundsrateforanextended priceinflationhadbeensubduedinrecentmonths, period.Inlightof theconsiderableuncertaintyabout despiteariseinenergyprices,ascoreconsumerprice thetrajectoryof theeconomy,memberssawmeritin inflationtrendedlower. accumulatingfurtherinformationbeforereachinga decisionaboutprovidingadditionalmonetarystimu- Thoughtheeconomicrecoverywascontinuing, lus.Inaddition,memberswantedtoconsiderfurther FOMCmembersconsideredprogresstowardmeetthemosteffectiveframeworkforcalibratingand ingtheCommittee’sdualmandateof maximum communicatinganyadditionalstepstoprovidesuch employmentandpricestabilityashavingbeendisapstimulus.Theynotedthatunlessthepaceof eco- pointinglyslow.Moreover,membersgenerally nomicrecoverystrengthenedorunderlyinginflation thoughtthatprogresswaslikelytoremainslow. moveduptowardlevelsconsistentwiththeFOMC’s Accordingly,mostmembersjudgeditappropriateto mandate,theCommitteewouldconsidertaking provideadditionalpolicyaccommodation.Intheir appropriateactionsoon. discussionof monetarypolicyfortheperiodimmediatelyahead,Committeemembersagreedtomaintain OnOctober15,theCommitteemetbyvideoconfer- thetargetrangeforthefederalfundsrateat0to encetodiscussissuesassociatedwithitsmonetary ¼percentandtocontinuetheCommittee’sexisting

34 97thAnnualReport|2010 policyof reinvestingprincipalpaymentsfromits bankingandsovereigndebtproblemsinEuropewere securitiesholdingsintolonger-termTreasurysecuri- toworsenfurther. ties.TheCommitteealsoannounceditsintentionto purchaseafurther$600billionof longer-termTreas- Membersnotedthat,whileincominginformation urysecuritiesatapaceof about$75billionper overtheintermeetingperiodhadincreasedtheirconmonththroughthesecondquarterof 2011.Pur- fidencethattheeconomicrecoverywouldbesuschasesof additionalTreasurysecuritieswere tained,progresstowardtheCommittee’sdualobjecexpectedtoputdownwardpressureonlonger-term tivesof maximumemploymentandpricestability interestrates,boostassetprices,andleadtoamodest continuedtobemodest,andunemploymentand reductionintheforeignexchangevalueof thedollar. inflationappearedlikelytodeviatefromtheCommit- Thesechangesinfinancialconditionswereexpected tee’sobjectivesforsometime.Accordingly,intheir topromoteasomewhatstrongerrecoveryinoutput discussionof monetarypolicyfortheperiodimmediandemploymentwhilealsohelpingreturninflation, atelyahead,Committeemembersagreedtocontinue overtime,tolevelsconsistentwiththeCommittee’s expandingtheFederalReserve’sholdingsof longermandate. termsecuritiesasannouncedinNovember.The Committeealsodecidedtomaintainthetargetrange ThedatapresentedattheDecember14FOMCmeet- forthefederalfundsrateat0to¼percentandto ingindicatedthateconomicactivitywasincreasingat reiterateitsexpectationthateconomicconditions amoderateratebutthattheunemploymentrate werelikelytowarrantexceptionallylowlevelsof the remainedelevated.Thepaceof consumerspending federalfundsrateforanextendedperiod.Whilethe pickedupinOctoberandNovember,exportsrose economicoutlookwasseenasimproving,members rapidlyinOctober,andtherecoveryinbusiness generallyfeltthatthechangeintheoutlookwasnot spendingonequipmentandsoftwareappearedtobe sufficienttowarrantanyadjustmentstotheasset continuing.Incontrast,residentialandnonresiden- purchaseprogram,andsomenotedthatmoretime tialconstructionactivitywasstilldepressed.Manu- wasneededtoaccumulateinformationonthe facturingproductionregisteredasolidgaininOcto- economybeforeconsideringanyadjustment.Member.Nonfarmbusinessescontinuedtoaddworkersin bersemphasizedthatthepaceandoverallsizeof the OctoberandNovember,andtheaverageworkweek purchaseprogramwouldbecontingentoneconomic movedup.Thefiscalpackageagreedtobythe andfinancialdevelopments;however,someindicated AdministrationandtheCongresswasgenerally thattheyhadafairlyhighthresholdformaking expectedbyparticipantstosupportthepaceof changestotheprogram. recoveryin2011.Participantsnotedthatinterest ratesatintermediateandlongermaturitieshadrisen OnDecember21,theFederalReserveannouncedan substantiallyovertheintermeetingperiod,while extensionthroughAugust1,2011,of itstemporary creditspreadswereroughlyunchangedandequity U.S.dollarliquidityswaparrangementswiththe priceshadrisenmoderately.Financialpressuresin Bankof Canada,theBankof England,theEuroperipheralEuropehadincreased,leadingtoafinan- peanCentralBank,theBankof Japan,andtheSwiss cialassistancepackageforIreland.Longer-runinfla- NationalBank.Theauthorizationof theswap tionexpectationswerestable,butcoreinflationcon- arrangementshadpreviouslybeensettoexpireon tinuedtotrendlower.Overall,theinformation January31,2011. receivedduringtheintermeetingperiodpointedto someimprovementinthenear-termoutlook,and ThedatareviewedattheJanuary25–26FOMC participantsexpectedeconomicgrowthtopickup meetingindicatedthattheeconomicrecoverywas somewhatgoingforward.Anumberof factors,how- gainingafirmerfooting,thoughtheexpansionhad ever,wereseenaslikelytocontinuerestrainingthe notyetbeensufficienttobringaboutasignificant recovery,includingthedepressedhousingmarket, improvementinlabormarketconditions.Consumer employers’continuedreluctancetoaddtopayrolls, spendinghadrisenstronglylatein2010,andthe andongoingeffortsbysomehouseholdsandbusi- ongoingexpansioninbusinessoutlaysforequipment nessestoreduceleverage.Moreover,therecovery andsoftwareappearedtohavebeensustainedin remainedsubjecttosomedownsiderisks,suchasthe recentmonths.Industrialproductionhadincreased possibilityof amoreextendedperiodof weakactiv- solidlyinNovemberandDecember.However,conityandlowerpricesinthehousingsectoraswellas structionactivityinboththeresidentialandnonresipotentialfinancialandeconomicspilloversif the dentialsectorsremainedweak.Modestgainsin

MonetaryPolicyandEconomicDevelopments 35 employmenthadcontinued,buttheunemployment reserves,theFederalReservewillbeabletoputsigrateremainedelevated.Conditionsinfinancialmar- nificantupwardpressureonshort-termmarketinterketswereviewedbyparticipantsashavingimproved estratesbecausebankswillnotsupplyshort-term somewhatfurtherovertheintermeetingperiod,as fundstothemoneymarketsatratessignificantly equitypriceshadrisenandcreditspreadsonthedebt belowwhattheycanearnbysimplyleavingfundson of nonfinancialcorporationshadcontinuedtonar- depositattheFederalReserveBanks.Twoother rowwhileyieldsonlonger-termnominalTreasury tools,executingtermreverserepurchaseagreements securitieswerelittlechanged.Creditconditionswere (RRPs)withtheprimarydealersandothercounterstilltightforsmaller,bank-dependentfirms,although partiesandissuingtermdepositstodepositoryinstibankloangrowthhadpickedupinsomesectors. tutionsthroughtheTermDepositFacility(TDF), Despitefurtherincreasesincommodityprices,meas- canbeusedtoreducethelargequantityof reserves uresof underlyinginflationremainedsubduedand heldbythebankingsystem;suchareductionwould longer-runinflationexpectationswerestable. improvetheFederalReserve’scontrolof financial conditionsbytighteningtherelationshipbetweenthe Theinformationreceivedovertheintermeeting interestratepaidonreservesandothershort-term periodhadincreasedmembers’confidencethatthe interestrates.TheFederalReservecouldalsoreduce economicrecoverywouldbesustained,andthe thequantityof reservesinthebankingsystemby downsideriskstobotheconomicgrowthandinfla- redeemingmaturingandprepaidsecuritiesheldby tionwereviewedashavingdiminished.Nevertheless, theFederalReservewithoutreinvestingtheproceeds membersnotedthatthepaceof therecoverywas orbysellingsomeof itssecuritiesholdings. insufficienttobringaboutasignificantimprovement inlabormarketconditions,andthatmeasuresof Duringthesecondhalf of 2010,theFederalReserve underlyinginflationweretrendingdownward.More- Bankof NewYork(FRBNY)conductedaseriesof over,theeconomicprojectionssubmittedforthis small-scaletripartyRRPtransactionswithprimary meetingindicatedthatunemploymentwasexpected dealersusingalleligiblecollateraltypes,including, toremainabove,andinflationtoremainsomewhat forthefirsttime,agencydebtandagencyMBSfrom below,levelsconsistentwiththeCommittee’sobjec- theSOMAportfolio.14TheFederalReservealsocontivesforsometime.Accordingly,theCommittee ductedaseriesof small-scaletripartyRRPtransacdecidedtomaintainitsexistingpolicyof reinvesting tionswithasetof counterpartiesthathadbeen principalpaymentsfromitssecuritiesholdingsand expandedtoincludeapprovedmoneymarketmutual reaffirmeditsintentiontopurchase$600billionof funds,usingTreasurysecurities,agencydebt,and longer-termTreasurysecuritiesbytheendof thesec- agencyMBSascollateral. ondquarterof 2011.Membersemphasizedthatthe Committeewouldcontinuetoregularlyreviewthe OnSeptember8,theFederalReserveBoardauthorpaceof itssecuritiespurchasesandtheoverallsizeof izedaprogramof regularlyscheduledsmall-value theassetpurchaseprogram.Inaddition,theCom- offeringsof termdepositsundertheTDF.15Theaucmitteemaintainedthetargetrangeof 0to¼percent tions,whicharetooccurabouteveryothermonth, forthefederalfundsrateandreiterateditsexpecta- areintendedtoensuretheoperationalreadinessof tionthateconomicconditionswerelikelytowarrant theTDFandtoincreasethefamiliarityof eligible exceptionallylowlevelsof thefederalfundsratefor participantswiththeauctionprocedures.SinceSepanextendedperiod. tember,theFederalReservehasconductedthreeauctions,eachof whichoffered$5billionin28-day ToolsfortheWithdrawal deposits.Allof theseauctionswerewellsubscribed. ofMonetaryPolicyAccommodation RecentStepstoIncreaseTransparency AlthoughtheFOMCcontinuestoanticipatethat economicconditionsarelikelytowarrantexception- Transparencyisanessentialprincipleof moderncenallylowlevelsof thefederalfundsrateforan tralbankingbecauseitappropriatelycontributesto extendedperiod,ultimatelytheFederalReservewill 14 Inatripartyrepurchaseagreement,bothpartiestotheagreeneedtobegintotightenmonetaryconditionstoprementmusthavecashandcollateralaccountsatthesametriventthedevelopmentof inflationarypressuresasthe partyagent,whichisbydefinitionalsoaclearingbank.Thetrieconomyrecovers.TheFederalReservehasthetools partyagentwillensurethatcollateralpledgedissufficientand meetseligibilityrequirements,andallpartiesagreetousecollatitneedstoremovepolicyaccommodationatthe eralpricessuppliedbythetripartyagent. appropriatetime.Onetoolistheinterestratepaidon 15 AfewTDFauctionshadoccurredpreviously,buttheywerenot reservebalances.Byincreasingtheratepaidon partofaregularprogram.

36 97thAnnualReport|2010 theaccountabilityof centralbankstothegovern- supportedmortgageandhousingmarkets;these mentandthepublicandbecauseitcanenhancethe transactionsloweredlonger-terminterestratesand effectivenessof centralbanksinachievingmacroeco- fosteredeconomicgrowth.Dollarliquidityswaplines nomicobjectives.TheFederalReserveprovides withforeigncentralbanksposednofinancialriskto detailedinformationconcerningtheconductof theFederalReservebecausetheFederalReserve’s monetarypolicy.16Duringthefinancialcrisis,the counterpartiesweretheforeigncentralbanksthem- FederalReservedevelopedapublicwebsitethatcon- selves,nottheinstitutionstowhichtheforeigncentainsextensiveinformationonitscreditandliquidity tralbanksthenlentthefunds;theseswapfacilities programs,and,in2009,theFederalReservebegan helpedstabilizedollarfundingmarketsabroad,thus issuingdetailedmonthlyreportsontheseprograms.17 contributingtotherestorationof stabilityinU.S. markets.Othertransactionsprovidedliquidityto Recently,theFederalReservehastakenfurthersteps particularinstitutionswhosedisorderlyfailurecould toenhanceitstransparencyandexpandtheamount haveseverelystressedanalreadyfragilefinancial of informationitprovidestothepublic.First,on system. December1,theFederalReserveposteddetailed informationonitspublicwebsiteabouttheindividual Asecondsteptowardenhancedtransparency creditandothertransactionsconductedtostabilize involvesdisclosuresgoingforward.TheDodd-Frank marketsduringthefinancialcrisis,restoretheflowof Actestablishedaframeworkforthedisclosureof credittoAmericanfamiliesandbusinesses,andsup- informationoncreditextendedafterJuly21,2010, porteconomicrecoveryandjobcreationintheafter- throughthediscountwindowundersection10Bof mathof thecrisis.18AsmandatedbytheDodd- theFederalReserveActorfromasection13(3)facil- FrankWallStreetReformandConsumerProtection ity,aswellasinformationonallopenmarketopera- Actof 2010(Dodd-FrankAct),transaction-level tion(OMO)transactions.Generally,thisframework detailsfromDecember1,2007,toJuly21,2010,were requirestheFederalReservetopubliclydisclosecerprovidedaboutentitiesthatparticipatedinthe taininformationaboutdiscountwindowborrowers agencyMBSpurchaseprogram,usedFederal andOMOcounterpartiesapproximatelytwoyears Reserveliquidityswaplines,borrowedthroughthe aftertherelevantloanortransaction;information TermAuctionFacility,orreceivedloansorother aboutborrowersunderfuturesection13(3)facilities financialassistancethroughaprogramauthorized willbedisclosedoneyearaftertheauthorizationfor undersection13(3)of theFederalReserveAct. thefacilityisterminated.Theinformationtobedis- Manyof thesetransactionswereconductedthrough closedincludesthenameandidentifyingdetailsof avarietyof broad-basedlendingfacilitiesandpro- eachborrowerorcounterparty,theamountborvidedliquiditytofinancialinstitutionsandmarkets rowed,theinterestratepaid,andinformationidentithroughfullysecured,mostlyshort-termloans.Other fyingthetypesandamountsof collateralpledgedor transactionsinvolvedpurchasesof agencyMBSand assetstransferredinconnectionwiththeborrowing ortransaction. 16 Immediatelyfollowingeachmeeting,theFOMCreleasesa statementthatlaysouttherationaleforthepolicydecision. Finally,theFederalReservehasalsoincreasedtrans- DetailedminutesofeachFOMCmeetingaremadepublicthree weeksfollowingthemeeting.Lightlyeditedtranscriptsof parencywithrespecttotheimplementationof mon- FOMCmeetingsarereleasedtothepublicwithafive-yearlag. etarypolicy.Inparticular,theFederalReservetook FOMCstatements,minutes,andtranscripts,aswellasother stepstoprovideadditionalinformationaboutits relatedinformation,areavailableontheFederalReserve Board’swebsite.SeeBoardofGovernorsoftheFederal securitypurchaseoperationswiththeobjectiveof ReserveSystem,“FederalOpenMarketCommittee,”webpage, encouragingwiderparticipationinsuchoperations. www.federalreserve.gov/monetarypolicy/fomc.htm. TheFRBNYpublishes,onanongoingbasis,sched- 17 SeeBoardofGovernorsoftheFederalReserveSystem,“Credit andLiquidityProgramsandtheBalanceSheet,”webpage,www ulesof purchaseoperationsexpectedtotakeplace .federalreserve.gov/monetarypolicy/bst.htm;andBoardofGov- overthenextfourweeks;detailsprovidedinclude ernorsoftheFederalReserveSystem,“MonthlyReporton listsof operationdates,settlementdates,security CreditandLiquidityProgramsandtheBalanceSheet,”webpage,www.federalreserve.gov/monetarypolicy/clbsreports.htm. typestobepurchased,thematuritydaterangeof eli- 18 ThesedataareavailableatBoardofGovernorsoftheFederal gibleissues,andanexpectedrangeforthesizeof ReserveSystem,“RegulatoryReform:UsageofFederalReserve eachoperation.Resultsof eachpurchaseoperation CreditandLiquidityFacilities,”webpage,www.federalreserve arepublishedshortlyafterithasconcluded.Inaddi- .gov/newsevents/reform_transaction.htm.

MonetaryPolicyandEconomicDevelopments 37 tion,theFRBNYhascommencedpublicationof tent,overthelongerrun,withtheCommittee’sdual informationonthepricespaidforindividualsecuri- mandateof maximumemploymentandprice tiesinitspurchaseoperations.19 stability. Part 4 Asindicatedintable1,relativetotheirpreviouspro- Summary of Economic Projections jectionsinNovember2010,participantsanticipated somewhatmorerapidgrowthinrealGDPthisyear, Thefollowingmaterialappearedasanaddendumto buttheydidnotsignificantlyaltertheirexpectations theminutesof theJanuary25–26,2011,meetingof forthepaceof theexpansionin2012and2013orfor theFederalOpenMarketCommittee. thelongerrun.Participantsmadeonlyminor changestotheirforecastsforthepathof theunem- InconjunctionwiththeJanuary25–26,2011,Federal ploymentrateandfortherateof inflationoverthe OpenMarketCommittee(FOMC)meeting,the nextthreeyears.Althoughmostparticipantsanticimembersof theBoardof Governorsandthepresi- patedthattheeconomywouldlikelyconvergetosusdentsof theFederalReserveBanks,allof whompar- tainableratesof increaseinrealGDPandpricesover ticipateinthedeliberationsof theFOMC,submitted fiveorsixyears,anumberof participantsindicated projectionsforgrowthof realoutput,theunemploy- thattheyexpectedthattheconvergenceof theunemmentrate,andinflationfortheyears2011to2013 ploymentratetoitslonger-runlevelwouldrequire andoverthelongerrun.Theprojectionswerebased additionaltime. oninformationavailablethroughtheendof the meetingandoneachparticipant’sassumptionsabout AstheydidinNovember,participantsjudgedthe factorslikelytoaffecteconomicoutcomes,including levelof uncertaintyassociatedwiththeirprojections hisorherassessmentof appropriatemonetarypolicy. forrealeconomicactivityandinflationasunusually “Appropriatemonetarypolicy”isdefinedasthe highrelativetohistoricalnorms.Mostcontinuedto futurepathof policythateachparticipantdeems seetheriskssurroundingtheirforecastsof GDP mostlikelytofosteroutcomesforeconomicactivity growth,theunemploymentrate,andinflationover andinflationthatbestsatisfyhisorherinterpreta- thenextthreeyearstobegenerallybalanced.Howtionof theFederalReserve’sdualobjectivesof maxi- ever,fewernoteddownsideriskstothelikelypaceof mumemploymentandstableprices.Longer-runpro- theexpansionand,accordingly,upsideriskstothe jectionsrepresenteachparticipant’sassessmentof unemploymentratethaninNovember;feweralso theratetowhicheachvariablewouldbeexpectedto sawdownsideriskstoinflation. convergeovertimeunderappropriatemonetary policyandintheabsenceof furthershocks. TheOutlook Thecentraltendencyof participants’forecastsforthe Asdepictedinfigure1,FOMCparticipants’projec- changeinrealGDPin2011was3.4to3.9percent, tionsforthenextthreeyearsindicatedthatthey somewhathigherthanintheNovemberprojections. expectasustainedrecoveryinrealeconomicactivity, Participantsstatedthattheeconomicinformation markedbyastep-upintherateof increaseinreal receivedsinceNovemberindicatedthatconsumer grossdomesticproduct(GDP)in2011followedby spending,businessinvestment,andnetexports furthermodestaccelerationin2012and2013.They increasedmorestronglyattheendof 2010than anticipatedthat,overthisperiod,thepaceof the expectedearlier;industrialproductionalsoexpanded recoverywouldexceedtheirestimatesof thelonger- morerapidlythantheypreviouslyanticipated.In runsustainablerateof increaseinrealGDPby addition,aftertheNovemberprojectionswerepreenoughtograduallylowertheunemploymentrate. pared,theCongressapprovedfiscalstimulusmeas- However,bytheendof 2013,participantsprojected uresthatwereexpectedtoprovidefurtherimpetusto thattheunemploymentratewouldstillexceedtheir householdandbusinessspendingin2011.Moreover, estimatesof thelonger-rununemploymentrate.Most participantsnotedthatfinancialconditionshad participantsexpectedthatinflationwouldlikely improvedsinceNovember,includingariseinequity moveupsomewhatovertheforecastperiodbut prices,apickupinactivityincapitalmarkets,reports wouldremainatratesbelowthosetheyseeasconsis- of easingof creditconditionsinsomemarkets,and anupturninbanklendinginsomesectors.Many 19 GeneralinformationonOMOs,includinglinkstotheprices participantsviewedthestrongertenorof therecent paidinrecentpurchasesofTreasurysecurities,isavailableon information,alongwiththeadditionalfiscalstimulus, theFRBNY’swebsiteatwww.newyorkfed.org/markets/pomo/ display/index.cfm. assuggestingthattherecoveryhadgainedsome

38 97thAnnualReport|2010 Figure1.Centraltendenciesandrangesofeconomicprojections,2011–13andoverthelongerrun Percent Change in real GDP 5 Central tendency of projections Range of projections 4 3 2 1 + Actual 0_ 1 2 2006 2007 2008 2009 2010 2011 2012 2013 Longer run Percent Unemployment rate 10 9 8 7 6 5 2006 2007 2008 2009 2010 2011 2012 2013 Longer run Percent PCE inflation 3 2 1 2006 2007 2008 2009 2010 2011 2012 2013 Longer run Percent Core PCE inflation 3 2 1 2006 2007 2008 2009 2010 2011 2012 2013 Note:Definitionsofvariablesareinthenotestotable1.Thedatafortheactualvaluesofthevariablesareannual.ThedataforthechangeinrealGDP,PCEinflation,andcore PCEinflationshownfor2010incorporatetheadvanceestimateofGDPforthefourthquarterof2010,whichtheBureauofEconomicAnalysisreleasedonJanuary28,2011. ThisinformationwasnotavailabletoFOMCmeetingparticipantsatthetimeoftheirmeeting.

MonetaryPolicyandEconomicDevelopments 39 Table1.EconomicprojectionsofFederalReserveGovernorsandReserveBankpresidents,January2011 Percent Centraltendency1 Range2 Variable 2011 2012 2013 Longerrun 2011 2012 2013 Longerrun ChangeinrealGDP 3.4to3.9 3.5to4.4 3.7to4.6 2.5to2.8 3.2to4.2 3.4to4.5 3.0to5.0 2.4to3.0 Novemberprojection 3.0to3.6 3.6to4.5 3.5to4.6 2.5to2.8 2.5to4.0 2.6to4.7 3.0to5.0 2.4to3.0 Unemploymentrate 8.8to9.0 7.6to8.1 6.8to7.2 5.0to6.0 8.4to9.0 7.2to8.4 6.0to7.9 5.0to6.2 Novemberprojection 8.9to9.1 7.7to8.2 6.9to7.4 5.0to6.0 8.2to9.3 7.0to8.7 5.9to7.9 5.0to6.3 PCEinflation 1.3to1.7 1.0to1.9 1.2to2.0 1.6to2.0 1.0to2.0 0.7to2.2 0.6to2.0 1.5to2.0 Novemberprojection 1.1to1.7 1.1to1.8 1.2to2.0 1.6to2.0 0.9to2.2 0.6to2.2 0.4to2.0 1.5to2.0 CorePCEinflation3 1.0to1.3 1.0to1.5 1.2to2.0 0.7to1.8 0.6to2.0 0.6to2.0 Novemberprojection 0.9to1.6 1.0to1.6 1.1to2.0 0.7to2.0 0.6to2.0 0.5to2.0 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andininflationarefromthefourthquarterofthepreviousyeartothefourthquarteroftheyearindicated.PCE inflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures(PCE)andthepriceindexforPCE excludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarteroftheyearindicated.Eachparticipant’s projectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’sassessmentoftheratetowhicheach variablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.TheNovemberprojectionsweremadein conjunctionwiththemeetingoftheFederalOpenMarketCommitteeonNovember2–3,2010. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearconsistsofallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected. strength—adevelopmentseenaslikelytocarryinto businesses,increasinghouseholdandbusinessconfi- 2011—andthattheexpansionwasonfirmerfooting. dence,andafavorableoutlookforU.S.exports.Sev- Participantsexpectedthattheexpansioninrealeco- eralparticipantsnotedthat,insuchanenvironment, nomicactivitythisyearwouldcontinuetobesup- andwithlabormarketconditionsanticipatedto portedbyaccommodativemonetarypolicyandby improvegradually,therestraintsonhousehold ongoingimprovementincreditandfinancialmarket spendingfrompastdeclinesinwealthandthedesire conditions.Thestrengtheninginprivatedemandwas torebuildsavingsshouldabate.Anumberof particianticipatedtobeledbyincreasesinconsumerand pantssawsuchconditionsfosteringabroaderand businessspending;overtime,improvementsinhouse- strongerrecoveryinbusinessinvestment,withafew holdandbusinessconfidenceandinlabormarket notingthatthemarketforcommercialrealestatehad conditionswouldlikelyreinforcetheriseindomestic recentlyshownsignsof stabilizing.Nonetheless,pardemand.Nonetheless,participantsrecognizedthat ticipantssawanumberof factorsthatwouldlikely theinformationavailablesinceNovemberalsoindi- continuetomoderatethepaceof theexpansion. catedthattheexpansionremainedunevenacrosssec- Mostparticipantsexpectedthattherecoveryinthe torsof theeconomy,andtheyexpectedthatthepace housingmarketwouldremainslow,restrainedbythe of economicactivitywouldcontinuetobemoderated overhangof vacantproperties,prospectsforweak bytheweaknessinresidentialandnonresidentialcon- houseprices,andthedifficultiesinresolvingforeclostruction,thestillrelativelytightcreditconditionsin sures.Inaddition,someparticipantsexpectedthat somesectors,anongoingdesirebyhouseholdsto thefiscalstrainsonthebudgetsof stateandlocal repairtheirbalancesheets,businesscautionabout governmentswoulddamptheirspendingforatime hiring,andthebudgetdifficultiesfacedbystateand andthatthefederalgovernmentsectorwouldlikely localgovernments. beadragoneconomicactivityafter2011. Participantsexpectedthattheeconomicexpansion Participantsanticipatedthatagradualbutsteady wouldstrengthenfurtherin2012and2013,withthe reductionintheunemploymentratewouldaccomcentraltendenciesof theirprojectionsforthegrowth panythepickupinthepaceof theeconomicexpaninrealGDPmovingupto3.5to4.4percentin2012 sionoverthenextthreeyears.Thecentraltendency andthento3.7to4.6percentin2013.Participants of theirforecastsfortheunemploymentrateatthe cited,asamongthelikelycontributorstoasustained endof 2011was8.8to9.0percent—adeclineof less pickupinthepaceof theexpansion,acontinued than1percentagepointfromtheactualrateinthe improvementinfinancialmarketconditions,further fourthquarterof 2010.Althoughparticipantsgenerexpansionof creditavailabilitytohouseholdsand allyexpectedfurtherdeclinesintheunemployment

40 97thAnnualReport|2010 rateoverthesubsequenttwoyears—toacentralten- Table2.Averagehistoricalprojectionerrorranges dencyof 6.8to7.2percentattheendof 2013—they Percentagepoints anticipatedthat,attheendof thatperiod,unemploymentwouldremainnoticeablyhigherthantheiresti- Variable 2011 2012 2013 matesof thelonger-runrate.Manyparticipants ChangeinrealGDP1 ±1.3 ±1.7 ±1.8 thoughtthat,withappropriatemonetarypolicyand Unemploymentrate1 ±0.7 ±1.3 ±1.5 intheabsenceof furthershocks,theunemployment Totalconsumerprices2 ±1.0 ±1.0 ±1.1 ratewouldcontinuetoconvergegraduallytowardits Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared longer-runratewithinfivetosixyears,butanumber errorofprojectionsfor1990through2009thatwerereleasedinthewinterby of participantsindicatedthattheconvergencepro- variousprivateandgovernmentforecasters.Asdescribedinbox3,undercertain assumptions,thereisabouta70percentprobabilitythatactualoutcomesforreal cesswouldlikelybemoreextended. GDP,unemployment,andconsumerpriceswillbeinrangesimpliedbythe averagesizeofprojectionerrorsmadeinthepast.FurtherinformationisinDavid Whileparticipantsviewedtheprojectedpaceof the ReifschneiderandPeterTulip(2007),“GaugingtheUncertaintyoftheEconomic OutlookfromHistoricalForecastingErrors,”FinanceandEconomicsDiscussion expansionineconomicactivityastheprincipalfactor Series2007-60(Washington:BoardofGovernorsoftheFederalReserveSystem, underlyingtheirforecastsforthepathof theunem- November). 1 Fordefinitions,refertogeneralnoteintable1. ploymentrate,theyalsoindicatedthattheirprojec- 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen tionswereinfluencedbyanumberof otherfactors mostwidelyusedingovernmentandprivateeconomicforecasts.Projection thatwerelikelytocontributetoarelativelygradual ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof theyearindicated. recoveryinthelabormarket.Inthatregard,several participantsnotedthatdislocationsassociatedwith theunevenrecoveryacrosssectorsof theeconomy in2012and2013widenedsomewhatrelativeto2011 mightretardthematchingof workersandjobs.In andshowedthatinflationwasexpectedtodriftup addition,anumberof participantsviewedthemodmodestly.In2013,thecentraltendencyof forecasts estpaceof hiringin2010as,inpart,theresultof forboththetotalandcoreinflationrateswas1.2to businesscautionaboutthedurabilityof therecovery 2.0percent.Formostparticipants,inflationin2013 andof employers’effortstoachieveadditional wasnotexpectedtohaveconvergedtothelonger-run increasesinproductivity;severalparticipantsalso rateof inflationthattheyindividuallyconsidered citedtheparticularlyslowrecoveryindemandexperimostconsistentwiththeFederalReserve’sdualmanencedbysmallbusinessesasafactorrestrainingnew dateformaximumemploymentandstableprices. jobcreation.Withdemandexpectedtostrengthen However,anumberof participantsanticipatedthat acrossarangeof businessesandwithbusinessconfiinflationwouldreachitslonger-runratewithinthe denceexpectedtoimprove,participantsanticipated nextthreeyears. thathiringwouldpickupovertheforecastperiod. UncertaintyandRisks Participantscontinuedtoexpectthatinflationwould Mostparticipantscontinuedtosharetheviewthat berelativelysubduedoverthenextthreeyearsand theirprojectionsforeconomicactivityandinflation kepttheirlonger-runprojectionsof inflation weresubjecttoahigherlevelof uncertaintythanwas unchanged.Manyparticipantsindicatedthattheperthenormduringtheprevious20years.20Theyidentisistenceof largemarginsof slackinresourceutilizafiedanumberof uncertaintiesthatcompoundedthe tionshouldcontributetorelativelylowratesof inflainherentdifficultiesinforecastingoutputgrowth, tionovertheforecasthorizon.Inaddition,particiunemployment,andinflation.Amongthemwere pantsnotedthatappropriatemonetarypolicy, uncertaintiesaboutthenatureof economicrecoveries combinedwithstablelonger-runinflationexpectafromrecessionsassociatedwithfinancialcrises,the tions,shouldhelpkeepinflationincheck.Thecentral effectsof unconventionalmonetarypolicies,thepertendencyof theirprojectionsforoverallpersonal sistenceof structuraldislocationsinthelabormarconsumptionexpenditures(PCE)inflationin2011 ket,thefuturecourseof federalfiscalpolicy,andthe was1.3to1.7percent,whilethecentraltendencyof globaleconomicoutlook. theirforecastsforcorePCEinflationwaslower— 1.0to1.3percent.Increasesinthepricesof energy 20 Table2providesestimatesofforecastuncertaintyforthechange andothercommodities,whichwereveryrapidin inrealGDP,theunemploymentrate,andtotalconsumerprice 2010,wereanticipatedtocontinuetopushheadline inflationovertheperiodfrom1990to2009.Box3discussesthe sourcesandinterpretationofuncertaintyintheeconomicfore- PCEinflationabovethecoreratethisyear.Thecencastsandexplainstheapproachusedtoassesstheuncertainty traltendencyof participants’forecastsforinflation andrisksattendingtheparticipants’projections.

MonetaryPolicyandEconomicDevelopments 41 Almostallparticipantsviewedtheriskstotheirfore- Box 3. Forecast Uncertainty castsforthestrengthof therecoveryinrealGDPas Theeconomicprojectionsprovidedbythemembers broadlybalanced.Bycontrast,inNovember,thedisoftheBoardofGovernorsandthepresidentsofthe tributionof viewshadbeensomewhatskewedtothe FederalReserveBanksinformdiscussionsofmondownside.Inweighingtheriskstotheprojected etarypolicyamongpolicymakersandcanaidpublic growthrateof realeconomicactivity,someparticiunderstandingofthebasisforpolicyactions.Considerableuncertaintyattendstheseprojections,how- pantsnotedtheupsideriskthattherecentstrengthever.Theeconomicandstatisticalmodelsandrela- eningof aggregatespendingmightmarkthebegintionshipsusedtohelpproduceeconomicforecasts ningof amorenormalcyclicalreboundineconomic arenecessarilyimperfectdescriptionsofthereal activityinwhichconsumerspendingmightbe world.Andthefuturepathoftheeconomycanbe spurredbypent-updemandforhouseholddurables affectedbymyriadunforeseendevelopmentsand events.Thus,insettingthestanceofmonetary andinwhichbusinessinvestmentmightbeaccelerpolicy,participantsconsidernotonlywhatappearsto atedbythedesiretorebuildstocksof fixedcapital.A bethemostlikelyeconomicoutcomeasembodiedin more-rapid-than-expectedeasingof creditavailabiltheirprojections,butalsotherangeofalternative itywasalsoseenasafactorthatmightboostthe possibilities,thelikelihoodoftheiroccurring,andthe pickupinprivatedemand.Astothedownsiderisks, potentialcoststotheeconomyshouldtheyoccur. manyparticipantspointedtotherecentdeclinesin Table2summarizestheaveragehistoricalaccuracyof housepricesandthepotentialforaslowerresolution arangeofforecasts,includingthosereportedinpast of existingproblemsinmortgageandrealestatemar- MonetaryPolicyReportsandthosepreparedbyFederalReserveBoardstaffinadvanceofmeetingsof ketsasfactorsthatcouldhavemore-adverse-thantheFederalOpenMarketCommittee.Theprojection expectedconsequencesforhouseholdspendingand errorrangesshowninthetableillustratetheconsid- bankbalancesheets.Inaddition,severalparticipants erableuncertaintyassociatedwitheconomicforeexpressedconcernsthat,inanenvironmentof only casts.Forexample,supposeaparticipantprojects gradualimprovementinlabormarketandcreditconthatrealgrossdomesticproduct(GDP)andtotal consumerpriceswillrisesteadilyatannualratesof, ditions,householdsmightbeunusuallyfocusedon respectively,3percentand2percent.Iftheuncer- reducingdebtandboostingsaving.Anumberof partaintyattendingthoseprojectionsissimilartothat ticipantsalsosawadownsideriskinthepossibility experiencedinthepastandtherisksaroundtheprothatthefiscalproblemsof somestateandlocalgovjectionsarebroadlybalanced,thenumbersreported ernmentsmightleadtoagreaterretrenchmentin intable2wouldimplyaprobabilityofabout70percentthatactualGDPwouldexpandwithinarangeof theirspendingthancurrentlyanticipated.Finally, 1.7to4.3percentinthecurrentyear,1.3to4.7per- severalparticipantsexpressedconcernsthatthe centinthesecondyear,and1.2to4.8percentinthe financialandfiscalstrainsintheeuroareamightspill thirdyear.Thecorresponding70percentconfidence overtoU.S.financialmarkets. intervalsforoverallinflationwouldbe1.0to3.0percentinthecurrentandsecondyears,and0.9to 3.1percentinthethirdyear. Theriskssurroundingparticipants’forecastsof the unemploymentratewerealsobroadlybalancedand Becausecurrentconditionsmaydifferfromthose generallyreflectedtherisksattendingparticipants’ thatprevailed,onaverage,overhistory,participants providejudgmentsastowhethertheuncertainty viewsof thelikelystrengthof theexpansioninreal attachedtotheirprojectionsofeachvariableis activity.However,anumberof participantsnoted greaterthan,smallerthan,orbroadlysimilartotypi- thattheunemploymentratemightdeclinelessthan callevelsofforecastuncertaintyinthepastasshown theyprojectedif businessesweretoremainhesitant intable2.Participantsalsoprovidejudgmentsasto toexpandtheirworkforcesbecauseof uncertainty whethertheriskstotheirprojectionsareweightedto theupside,areweightedtothedownside,orare aboutthedurabilityof theexpansionorabout broadlybalanced.Thatis,participantsjudgewhether employmentcostsorif mismatchesof workersand eachvariableismorelikelytobeaboveorbelow jobsweremorepersistentthananticipated. theirprojectionsofthemostlikelyoutcome.These judgmentsabouttheuncertaintyandtherisks Mostparticipantsjudgedtheriskstotheirinflation attendingeachparticipant’sprojectionsaredistinct fromthediversityofparticipants’viewsaboutthe outlookovertheperiodfrom2011to2013tobe mostlikelyoutcomes.Forecastuncertaintyiscon- broadlybalancedaswell.Comparedwiththeirviews cernedwiththerisksassociatedwithaparticular inNovember,severalparticipantsnolongersawthe projectionratherthanwithdivergencesacrossa risksastiltedtothedownside,andanadditionalparnumberofdifferentprojections. ticipantviewedtherisksasweightedtotheupside.In assessingtherisks,anumberof participantsindicatedthattheysawtherisksof deflationorfurther

42 97thAnnualReport|2010 unwanteddisinflationtohavediminished.Manypar- GDPandfortheunemploymentrateweresomewhat ticipantsidentifiedthepersistentgapbetweentheir narrowerthantheywerelastNovember,whilethe projectedunemploymentrateanditslonger-runrate rangesof viewsfor2013andforthelongerrunwere asariskthatinflationcouldbelowerthantheypro- littlechanged. jected.Afewof thosewhoindicatedthatinflation riskswereskewedtotheupsideexpressedconcerns Figures2.Cand2.Dprovidethecorrespondinginforthattheexpansionof theFederalReserve’sbalance mationaboutthediversityof participants’views sheet,if leftinplacefortoolong,mighterodethe regardingtheoutlookfortotalandcorePCEinflastabilityof longer-runinflationexpectations.Alter- tion.Thesedistributionsweresomewhatmoretightly natively,severalparticipantsnotedthatupsiderisks concentratedfor2011,butfor2012and2013,they toinflationcouldarisefrompersistentlyrapid weremuchthesameastheywereinNovember.In increasesinthecostsof energyandother general,thedispersionintheparticipants’inflation commodities. forecastsforthenextthreeyearsrepresenteddifferencesinjudgmentsregardingthefundamentaldeter- DiversityofViews minantsof inflation,includingestimatesof the Figures2.Aand2.Bdetailthediversityof partici- degreeof resourceslackandtheextenttowhichsuch pants’viewsregardingthelikelyoutcomesforreal slackinfluencesinflationoutcomesandexpectations GDPgrowthandtheunemploymentratein2011, aswellasestimatesof howthestanceof monetary 2012,2013,andoverthelongerrun.Thedispersion policymayinfluenceinflationexpectations.Although intheseprojectionsreflecteddifferencesinpartici- thedistributionsof participants’inflationforecasts pants’assessmentsof manyfactors,includingthe for2011through2013continuedtoberelatively likelyevolutionof conditionsincreditandfinancial wide,thedistributionof projectionsof thelongermarkets,thetimingandthedegreetowhichvarious runrateof overallinflationremainedtightlyconcensectorsof theeconomyandthelabormarketwill trated.Thenarrowrangeillustratesthebroadsimirecoverfromthedislocationsassociatedwiththe larityinparticipants’assessmentsof theapproximate deeprecession,theoutlookforeconomicandfinan- levelof inflationthatisconsistentwiththeFederal cialdevelopmentsabroad,andappropriatefuture Reserve’sdualobjectivesof maximumemployment monetarypolicyanditseffectsoneconomicactivity. andpricestability. For2011and2012,thedispersionsof participants’ forecastsforthestrengthintheexpansionof real

MonetaryPolicyandEconomicDevelopments 43 Figure2.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2011–13andoverthelongerrun Number of participants 2011 14 January projections November projections 12 10 8 6 4 2 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0- 4.2- 4.4- 4.6- 4.8- 5.0- 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 Percent range Number of participants 2012 14 12 10 8 6 4 2 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0- 4.2- 4.4- 4.6- 4.8- 5.0- 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 Percent range Number of participants 2013 14 12 10 8 6 4 2 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0- 4.2- 4.4- 4.6- 4.8- 5.0- 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 Percent range Number of participants Longer run 14 12 10 8 6 4 2 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0- 4.2- 4.4- 4.6- 4.8- 5.0- 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

44 97thAnnualReport|2010 Figure2.B.Distributionofparticipants’projectionsfortheunemploymentrate,2011–13andoverthelongerrun Number of participants 2011 14 January projections November projections 12 10 8 6 4 2 5.0- 5.2- 5.4- 5.6- 5.8- 6.0- 6.2- 6.4- 6.6- 6.8- 7.0- 7.2- 7.4- 7.6- 7.8- 8.0- 8.2- 8.4- 8.6- 8.8- 9.0- 9.2- 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 7.5 7.7 7.9 8.1 8.3 8.5 8.7 8.9 9.1 9.3 Percent range Number of participants 2012 14 12 10 8 6 4 2 5.0- 5.2- 5.4- 5.6- 5.8- 6.0- 6.2- 6.4- 6.6- 6.8- 7.0- 7.2- 7.4- 7.6- 7.8- 8.0- 8.2- 8.4- 8.6- 8.8- 9.0- 9.2- 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 7.5 7.7 7.9 8.1 8.3 8.5 8.7 8.9 9.1 9.3 Percent range Number of participants 2013 14 12 10 8 6 4 2 5.0- 5.2- 5.4- 5.6- 5.8- 6.0- 6.2- 6.4- 6.6- 6.8- 7.0- 7.2- 7.4- 7.6- 7.8- 8.0- 8.2- 8.4- 8.6- 8.8- 9.0- 9.2- 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 7.5 7.7 7.9 8.1 8.3 8.5 8.7 8.9 9.1 9.3 Percent range Number of participants Longer run 14 12 10 8 6 4 2 5.0- 5.2- 5.4- 5.6- 5.8- 6.0- 6.2- 6.4- 6.6- 6.8- 7.0- 7.2- 7.4- 7.6- 7.8- 8.0- 8.2- 8.4- 8.6- 8.8- 9.0- 9.2- 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 7.5 7.7 7.9 8.1 8.3 8.5 8.7 8.9 9.1 9.3 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

MonetaryPolicyandEconomicDevelopments 45 Figure2.C.Distributionofparticipants’projectionsforPCEinflation,2011–13andoverthelongerrun Number of participants 2011 14 January projections November projections 12 10 8 6 4 2 0.3- 0.5- 0.7- 0.9- 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2012 14 12 10 8 6 4 2 0.3- 0.5- 0.7- 0.9- 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2013 14 12 10 8 6 4 2 0.3- 0.5- 0.7- 0.9- 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants Longer run 14 12 10 8 6 4 2 0.3- 0.5- 0.7- 0.9- 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

46 97thAnnualReport|2010 Figure2.D.Distributionofparticipants’projectionsforcorePCEinflation,2011–13 Number of participants 2011 14 January projections November projections 12 10 8 6 4 2 0.5- 0.7- 0.9- 1.1- 1.3- 1.5- 1.7- 1.9- 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 Percent range Number of participants 2012 14 12 10 8 6 4 2 0.5- 0.7- 0.9- 1.1- 1.3- 1.5- 1.7- 1.9- 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 Percent range Number of participants 2013 14 12 10 8 6 4 2 0.5- 0.7- 0.9- 1.1- 1.3- 1.5- 1.7- 1.9- 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

MonetaryPolicyandEconomicDevelopments 47 Abbreviations ABS asset-backedsecurities AIG AmericanInternationalGroup,Inc. ARRA AmericanRecoveryandReinvestmentAct C&I commercialandindustrial CMBS commercialmortgage-backedsecurities CRE commercialrealestate CreditCard Act CreditCardAccountabilityResponsibilityandDisclosureAct DPI disposablepersonalincome ECB EuropeanCentralBank ECI employmentcostindex EME emergingmarketeconomy EU EuropeanUnion FASB FinancialAccountingStandardsBoard FOMC FederalOpenMarketCommittee;also,theCommittee FRBNY FederalReserveBankof NewYork GDP grossdomesticproduct GSE government-sponsoredenterprise IMF InternationalMonetaryFund IRA individualretirementaccount IT informationtechnology Libor Londoninterbankofferedrate LLC limitedliabilitycompany MBS mortgage-backedsecurities NFIB NationalFederationof IndependentBusiness NIPA nationalincomeandproductaccounts NOW negotiableorderof withdrawal OMO openmarketoperation PCE personalconsumptionexpenditures repo repurchaseagreement RRP reverserepurchaseagreement SCOOS SeniorCreditOfficerOpinionSurveyonDealerFinancingTerms SLOOS SeniorLoanOfficerOpinionSurveyonBankLendingPractices SOMA SystemOpenMarketAccount TALF TermAsset-BackedSecuritiesLoanFacility TARP TroubledAssetRelief Program TDF TermDepositFacility WTI WestTexasIntermediate

48 97thAnnualReport|2010 Monetary Policy Report of July 2010 toryinvestmentasbusinessesstartedtorebuild stocksafterthemassiveliquidationinthelatterpart of 2008andin2009.Inaddition,finalsalescontin- Part 1 uedtofirmaspersonalconsumptionexpenditures Overview: Monetary Policy (PCE)roseandasbusinessfixedinvestmentwas and the Economic Outlook spurredbycapitaloutlaysthathadbeendeferred duringthedownturnandbytheneedof manybusi- Economicactivityexpandedatamoderatepacein nessestoreplaceagingequipment.Intheexternal thefirsthalf of 2010afterpickingupinthesecond sector,exportscontinuedtorebound,providing half of 2009.Someof theincreaseinrealgross impetustodomesticproduction,whileimportswere domesticproduct(GDP)inthefirsthalf of theyear liftedbytherecoveryindomesticdemand.Onthe camefromacontinuedturnintheinventorycycle. lessfavorableside,outlaysfornonresidentialcon- Butmorebroadly,activitywasbolsteredbyongoing structionhavedeclinedfurtherthisyear,anddespite stimulusfrommonetaryandfiscalpoliciesandgeneratransitoryboostfromthehomebuyertaxcredit, allysupportivefinancialconditions.Inthelabormarhousingconstructionhascontinuedtobeweighed ket,payrollsrosemodestlyandhoursperworker downbyweakdemand,alargeinventoryof disincreased;nevertheless,employmentremainedsignifitressedorvacanthouses,andtightcreditconditions cantlybelowpre-recessionlevelsandunemployment forbuildersandsomepotentialbuyers.Inaddition, recededonlyslightlyfromitsrecenthigh.Meanwhile, stateandlocalgovernmentsarestillcuttingspending consumerpriceinflationedgedlower. inresponsetoongoingfiscalpressures. Financialmarkets,althoughvolatile,generallysup- Theupturnineconomicactivityhasbeenaccompaportedeconomicgrowthinthefirsthalf of 2010. niedbyamodestimprovementinlabormarketcon- Bankcredit,however,remainedtightformanyborditions.Onaverage,private-sectoremploymentrose rowers.Moreover,inthesecondquarter,uncertainty 100,000permonthoverthefirsthalf of 2010,with abouttheconsequencesof thefiscalpressuresina increasesacrossawiderangeof industries;businumberof Europeancountriesandabouttheduranessesalsoraisedtheirlaborinputbyincreasing bilityof theglobalrecoveryledtolargedeclinesin hoursperworker.Nonetheless,thepaceof hiringto equitypricesaroundtheworldandproducedstrains datehasnotbeensufficienttobringaboutasignifiinsomeshort-termfundingmarkets.Accordingto cantreductionintheunemploymentrate,whichavertheprojectionspreparedinconjunctionwiththeJune aged9¾percentinthesecondquarter,onlyslightly meetingof theFederalOpenMarketCommittee belowitsrecessionhighof 10percentinthefourth (FOMC),meetingparticipants(membersof the quarterof 2009.Long-termunemploymenthascon- Boardof Governorsandpresidentsof theFederal tinuedtoworsen. ReserveBanks)continuetoexpectthateconomic activitywillexpandatamoderaterateoverthesecondhalf of 2010andin2011.However,participants’ Ontheinflationfront,pricesof energyandother currentprojectionsforeconomicgrowtharesome- commoditieshavedeclinedinrecentmonths,and whatweakerthanthosepreparedfortheApril underlyinginflationhastrendedlower.Theoverall FOMCmeeting,andunemploymentisexpectedto PCEpriceindexroseatanannualrateof about fallevenmoreslowlythanhadbeenanticipatedin ¾percentoverthefirstfivemonthsof 2010(com- April.Largelybecauseof uncertaintyaboutthe paredwithanincreaseof about2percentoverthe implicationsof developmentsabroad,thepartici- 12monthsof 2009),whilepriceincreasesforconpantsalsoindicatedsomewhatgreaterconcernabout sumerexpendituresotherthanfoodandenergy thedownsideriskstotheeconomicoutlookthan items—so-calledcorePCE—slowedfrom1½percent theyhadatthetimeof theAprilmeeting. overthe12monthsof 2009toanannualrateof 1percentoverthefirstfivemonthsof 2010.FOMC Afterrisingatanannualrateof about4percent,on participantsexpectthat,withsubstantialresource average,inthesecondhalf of 2009,U.S.realGDP slackcontinuingtorestraincostpressuresand increasedatarateof 2¾percentinthefirstquarter longer-terminflationexpectationsstable,inflationis of 2010,andavailableinformationpointstoanother likelytobesubduedforsometime. moderategaininthesecondquarter.Someof the impetustothecontinuedrecoveryineconomicactiv- Domesticfinancialconditionsgenerallyshowed ityduringthefirsthalf of theyearcamefrominven- improvementthroughthefirstquarterof 2010,but

MonetaryPolicyandEconomicDevelopments 49 thefiscalstrainsinEuropeandtheuncertaintythey tosupportthewithdrawalof policyaccommodation engenderedsubsequentlyweighedonfinancialmar- whensuchactionbecomesappropriate.TheCommitkets.Asaresult,foreignanddomesticequityprice teeismonitoringtheeconomicoutlookandfinancial indexesfellappreciablyinthesecondquarter,and developments,anditwillemployitspolicytoolsas pressuresemergedindollarfundingmarkets;safe- necessarytopromoteeconomicrecoveryandprice havenflowsloweredsovereignyieldsinmostof the stability. majoradvancedeconomiesandboostedtheforeign exchangevalueof thedollarandtheJapaneseyen. Theeconomicprojectionspreparedinconjunction withtheJuneFOMCmeetingarepresentedinPart4 Overthefirsthalf of theyear,investorsmarked of thisreport.Ingeneral,FOMCparticipantsanticidownexpectationsforthepathof U.S.monetary patedthattheeconomicrecoverywouldproceedata policyinresponsetoeconomicandfinancialdevelop- moderatepace.Theexpansionwasexpectedtobe mentsandtotheFOMC’scontinuedindicationthat restrainedinpartbyhouseholdandbusinessunceritexpectedeconomicconditionstowarrantexcep- tainty,persistentweaknessinrealestatemarkets,only tionallylowlevelsof thefederalfundsrateforan gradualimprovementinlabormarketconditions, extendedperiod.Thesesamefactors,aswellassafe- waningfiscalstimulus,andsloweasingof creditconhavenflows,contributedtoadeclineinTreasury ditionsinthebankingsector.Theprojectedincrease rates.Someprivateborrowingrates,includingmort- inrealGDPwasonlyalittlefasterthantheeconogagerates,alsofell.Broadequitypriceindexes my’slonger-runsustainablegrowthrate,andthusthe declined,onnet,overthefirsthalf of 2010. unemploymentratewasanticipatedtofallonly slowlyoverthenextfewyears.Inflationwasexpected Consumercreditoutstandingcontinuedtofall, toremainsubduedoverthisperiod.Theparticipants’ thoughatalessrapidpacethaninthesecondhalf of projectionsforeconomicactivityandinflationwere lastyear.Largercorporationswithaccesstocapital bothsomewhatlowerthanthosepreparedinconmarketswereabletoissuebondstomeettheir junctionwiththeAprilFOMCmeeting,mainly financingneeds,althoughsomesmallerbusinesses becauseof theincomingeconomicdataandthe reportedlyhadconsiderabledifficultiesobtaining anticipatedeffectsof developmentsabroadonthe credit.Standardsonmanycategoriesof bankloans U.S.economy. remainedtight,andloansonbanks’bookscontinued tocontract,althoughsomewhatlessrapidlythan Participantsgenerallyjudgedthatthedegreeof aroundyear-end.Commercialbankprofitability uncertaintysurroundingtheoutlookforbothecostayedlowbyhistoricalstandards,asloanlosses nomicactivityandinflationwasgreaterthanhistoriremainedatveryhighlevels. calnorms.Aboutone-half of theparticipantsviewed theriskstothegrowthoutlookastiltedtothedown- Tosupporttheeconomicexpansion,theFOMC side,whereasinApril,alargemajorityhadseenthe maintainedatargetrangeforthefederalfundsrate riskstogrowthasbalanced;mostcontinuedtosee of 0to¼percentthroughoutthefirsthalf of 2010. balancedriskssurroundingtheirinflationprojec- Tocompletethepurchasespreviouslyannounced, tions.Participantsalsoreportedtheirassessmentsof overthefirstthreemonthsof theyear,theFederal theratestowhichmacroeconomicvariableswouldbe Reservealsoconductedlarge-scalepurchasesof expectedtoconvergeoverthelongerrununder agencymortgage-backedsecuritiesandagencydebt appropriatemonetarypolicyandintheabsenceof inordertoprovidesupporttomortgagelendingand furthershockstotheeconomy.Thecentraltendenhousingmarketsandtoimproveoverallconditionsin ciesof theselonger-runprojectionswere2.5to privatecreditmarkets.Inlightof improvedfunction- 2.8percentforrealGDPgrowth,5.0to5.3percent ingof financialmarkets,theFederalReserveclosed fortheunemploymentrate,and1.7to2.0percentfor bytheendof Juneallof thespecialliquidityfacilities theinflationrate. thatithadcreatedtosupportmarketsinlate2007 andin2008.However,inresponsetoreneweddollar Part 2 fundingpressuresabroad,inMaytheFederal Recent Economic ReservereestablishedswaplineswiththeBankof and Financial Developments Canada,theBankof England,theBankof Japan, theEuropeanCentralBank,andtheSwissNational Realgrossdomesticproduct(GDP)increasedatan Bank.TheFederalReservecontinuedtodevelopits annualrateof 2¾percentinthefirstquarterof 2010 toolsfordrainingreservesfromthebankingsystem afterrisingabout4percentonaverageinthesecond

50 97thAnnualReport|2010 half of 2009,anditapparentlypostedanothermod- dropinstockpricesduringthespringunwoundsome erategaininthesecondquarter.1Someof theimpe- of theearlierincreaseinwealthand—allelsebeing tustothecontinuedrecoveryineconomicactivityin equal—mayrestraintheriseinrealPCEinthesecthefirsthalf of theyearcamefrominventoryinvest- ondhalf of theyear.Thepersonalsavingratehas mentasbusinessesstartedtorebuildstocksafterthe fluctuatedinafairlynarrowrangesincethemiddle massiveliquidationinthelatterpartof 2008andin of 2009,anditstoodat4percentinMay. 2009.Inaddition,finalsalescontinuedtofirmas consumerspendingmovedup,businessesraisedtheir Thegainsinconsumerspendingduringthefirsthalf outlaysforequipmentandsoftware,anddemandfor of 2010werewidespread.Salesof newlightmotor U.S.exportsstrengthened.Incontrast,theunderly- vehicles(cars,sportutilityvehicles,andpickup ingpaceof activityinthehousingsectorhas trucks)rosefromanannualrateof 10¾millionunits improvedonlymarginallysincehittingbottomin inthefourthquarterof 2009to11¼millionunitsin 2009.Inthelabormarket,employmentrosegradu- thesecondquarter,supportedinpartbyfavorable allyoverthefirsthalf of 2010andaverageweekly financingconditionsforautobuyers.Spendingfor hoursworkedincreased,buttheunemploymentrate othergoodsstartedtheyearonastrongnote—perfelljustslightly.Headlineconsumerpriceinflation hapsboostedbypent-updemandforpurchasesthat hasbeenlowthisyear,asenergypriceshavedropped hadbeendeferredduringtherecession—thoughit andcoreinflationhasslowed. appearstohavecooledsomewhatduringthespring. Realoutlaysforservicesincreasedmodestlyafter Thegradualhealingof thefinancialsystemthat havingonlyedgedupin2009. beganinthespringof 2009continuedthroughthe earlyspringof 2010.Inthefirstquarter,financial Aggregaterealdisposablepersonalincome(DPI)— marketconditionsgenerallybecamemoresupportive personalincomelesspersonalcurrenttaxes,adjusted of economicactivity,withyieldsandspreadsoncor- toremovepricechanges—roseatanannualrateof poratebondsdeclining,broadequitypriceindexes morethan3½percentoverthefirstfivemonthsof rising,andmeasuresof stressinmanyshort-term theyearafterbarelyincreasingin2009.Realwage fundingmarketsfallingtoneartheirpre-crisislevels. andsalaryincome,whichhadfallenappreciablyin InlateAprilandearlyMay,however,concernsabout 2009,hasregainedsomelostgroundthisyear,as theeffectsof fiscalpressuresinanumberof Euro- employmentandhoursof workhaveturnedupand peancountriesledtoincreasesincreditspreadson asrealhourlywageshavebeenbolsteredbythevery manyU.S.corporatebonds,declinesinbroadequity lowrateof PCEpriceinflation.Onemeasureof real priceindexes,andarenewalof strainsinsomeshort- wages—averagehourlyearningsof allemployees, termfundingmarkets.Evenso,overthefirsthalf of adjustedfortheriseinPCEprices—increasedatan theyear,mortgageratesandyieldsonU.S.corporate annualrateof roughly1percentoverthefirstfive securitiesremainedatlowlevels. monthsof 2010afterhavingbeenaboutflatoverthe 12monthsof 2009. DomesticDevelopments Withequityvaluesupandhousepricesholding TheHouseholdSector steady,theratioof householdnetworthtoDPI edgedhigherinthefirstquarterof 2010after ConsumerSpendingandHouseholdFinance increasingappreciablyoverthelastthreequartersof Personalconsumptionexpenditures(PCE)appearto 2009.Nonetheless,thewealth-to-incomeratioatthat havepostedamoderateadvanceinthefirsthalf of timewaswellbelowthehighsof 2006and2007. 2010afterturningupinthesecondhalf of 2009.The Moreover,equitypriceshavefallensubstantiallysince improvementinemploymentandhoursworked,and theendof thefirstquarter,adevelopmentthathas theassociatedpickupinrealhouseholdincomes,pronotonlydepressednetworthbuthasalsoadversely videdimportantimpetustospending.Therisein affectedconsumersentimentinrecentmonths. householdnetworthin2009andthefirstquarterof 2010alsolikelyhelpedbuoyspending,althoughthe Householdscontinuedtoreducetheirdebtinthefirst half of 2010.Totalhouseholddebtcontractedatan 1 TheoilspillintheGulfofMexicoishavingseriousconse- annualrateof about2½percentinthefirstquarter quencesfortheenvironmentandformanyindividualsandfirms of 2010,withbothmortgagedebtandconsumer intheaffectedlocalities.However,thedisasterdoesnotappear creditpostingdeclines.Thefallinconsumercredit tohaveregisteredsizableeffectsonthenationaleconomyto date. waslessrapidthanithadbeeninthesecondhalf of

MonetaryPolicyandEconomicDevelopments 51 2009,adevelopmentthatisconsistentwithbanks’ housingactivityappearstohaveremainedweakthis increasedwillingnesstoextendconsumerinstallment yeardespiteahistoricallylowlevelof mortgageinterloansthathasbeenreportedinrecentresultsof the estrates.Inanenvironmentof softdemand,alarge SeniorLoanOfficerOpinionSurveyonBankLend- inventoryof foreclosedordistressedpropertieson ingPractices(SLOOS).2However,SLOOSrespon- themarket,andlimitsontheavailabilityof financing dentsalsocontinuedtoreportweakdemandforsuch forbuildersandsomepotentialbuyers,homebuilding loans.Reflectingthecontractioninhouseholddebt, hasstayedataslowpace.Inthesingle-familysector, debtservicepayments—therequiredprincipaland newunitswerestartedatanaverageannualrateof interestonexistingmortgagesandconsumerdebt— about510,000unitsbetweenJanuaryandJune—just fellasafractionof disposableincome. 150,000unitsabovethequarterlylowreachedinthe firstquarterof 2009.Activityinthemultifamilysec- Changesininterestratesonconsumerloanswere torhascontinuedtobehelddownbyelevated mixedduringthefirsthalf of 2010.Interestrateson vacancyratesandtightcreditconditions;startsavernewautoloansedgeddownonbalance,andspreads agedjust100,000unitsatanannualrateduringthe ontheseloansrelativetoTreasurysecuritiesof com- firsthalf of 2010,essentiallythesameasinthesecparablematurityremainedneartheiraveragelevels ondhalf of 2009andwellbelowthenormof overthepastdecade.Interestratesoncreditcard 350,000unitsperyearthathadprevailedoverthe loansrosethroughthefirsthalf of 2010;partof the decadepriortothefinancialcrisis. increaseearlyintheyearmaybeattributableto adjustmentsmadebybankspriortotheimposition Homesalessurgedinthespring,buttheseincreases of newrulesinFebruaryundertheCreditCard likelyweredrivenbypurchasesthatwerepulledfor- AccountabilityResponsibilityandDisclosure(Credit wardtoqualifyforthehomebuyertaxcredit.5Sales CARD)Act.3 of existingsingle-familyhousesjumpedtoanannual rateof 5millionunitsonaverageinAprilandMay, Althoughdelinquencyratesonautoloansatcaptive ½millionunitsabovetheirfirst-quarterpace.Howfinancecompaniesandoncreditcardloansatcom- ever,newhomesalesagreements—whichalsoappear mercialbanksedgeddowninthefirstquarterof tohavegottenaliftinAprilfromtheloomingexpira- 2010,theyremainedatelevatedlevels.Charge-off tionof thetaxcredit—plummetedinMay,andother ratesforcreditcardloansatcommercialbankswere indicatorsof housingdemandgenerallyremain alsohigh. lackluster. TheFederalReserve’sTermAsset-BackedSecurities Meanwhile,houseprices,asmeasuredbyanumber LoanFacility(TALF)continuedtosupporttheissu- of nationalindexes,appeartobereachingbottom. anceof consumerasset-backedsecurities(ABS)until Forexample,theLoanPerformancerepeat-salesprice itsclosureforsuchsecuritiesonMarch31.4Subse- index,whichhaddropped30percentfromitspeakin quently,issuanceof consumerABSwassolidduring 2006toitstroughin2009,hasessentiallymovedsidethesecondquarter.Yieldsonsuchsecuritiesfellon waysthisyear.Thisapparentendtothesteepdropin balanceduringthefirstquarter,andspreadsonhigh- housepricesshouldbegintodrawintothemarket qualitycreditcardandautoloanABSrelativeto potentialbuyerswhohadbeenreluctanttopurchase comparable-maturityTreasurysecuritiesdeclinedto homeswhenpriceswereperceivedtobeatriskof levelslastseenin2007. significantfurtherdeclines. ResidentialInvestmentandHousingFinance Delinquencyratesonmostcategoriesof mortgages Homesalesandconstructionwereboostedinthe showedtentativesignsof levelingoff overthefirst springbythehomebuyertaxcredit.Butlooking severalmonthsof 2010butremainwellabovelevels throughthistemporaryimprovement,underlying postedayearearlier.Asof May,seriousdelinquency ratesonprimeandnear-primeloanshadedgeddown 2 TheSLOOSisavailableontheFederalReserveBoard’swebsite toabout15percentforvariable-rateloansandto atwww.federalreserve.gov/boarddocs/SnLoanSurvey. 3 TheCreditCARDActincludessomeprovisionsthatplace 5 Inordertoreceivethehomebuyertaxcredit,apurchaserhadto restrictionsonissuers’abilitytoimposecertainfeesandto signasalesagreementbytheendofApril.Asthelawwaswritengageinrisk-basedpricing. ten,thepurchaserhadtocloseonthepropertybyJune30,but 4 TheTALFextendedloanstofinanceinvestmentinABS.The theclosingdeadlinewasrecentlychangedtoSeptember30. TALFremainedopenuntilJune30forloansbackedbynewly Salesofexistinghomesaremeasuredatclosing,whilesalesof issuedcommercialmortgage-backedsecurities. newhomesaremeasuredatthetimethecontractissigned.

52 97thAnnualReport|2010 about5percentforfixed-rateloans.6Forsubprime TheBusinessSector loans,asof April(thelatestdataavailable),delinquencyratesmoveddowntoabout40percentfor FixedInvestment variable-rateloansandslightlylessthan20percent Realbusinessfixedinvestmentturnedupinthe forfixed-rateloans.About650,000homesentered fourthquarterof 2009aftermorethanayearof theforeclosureprocessinthefirstquarterof 2010, steepdeclines,anditappearstohaverisenfurtherin onlyslightlybelowtheelevatedpaceseenin2009. thefirsthalf of 2010.Thepickupoccurredentirelyin spendingforequipmentandsoftware(E&S),which Onbalance,interestratesonfixed-ratemortgages reboundedinresponsetotheimprovementinsales, decreasedoverthefirsthalf of 2010,amovethat production,andprofits.Moreover,businesseshave partlyreflectedthedeclineinTreasuryyieldsover ampleinternalfundsattheirdisposal.Andalthough thatperiod.Somefinancialmarketparticipantshad banklendingremainsconstrained—especiallyfor reportedlyexpressedconcernsthatrateswouldrise smallbusinesses—firmswithaccesstocapitalmarfollowingtheMarch31endof large-scalepurchases ketshavegenerallybeenabletofinanceE&Sprojects of agencymortgage-backedsecurities(MBS)bythe withtheproceedsof bondissuanceatfavorable FederalReserve.However,mortgagerateschanged terms. littlearoundthatdate,andspreadshaveremained relativelynarrow. RealoutlaysforE&Sroseatanannualrateof 11½percentinthefirstquarterafteranevenlarger Despitethefurtherfallinmortgagerates,theavail- increaseinthefourthquarter.Asithadinthefourth abilityof mortgagefinancingcontinuedtobecon- quarter,businessspendingonmotorvehiclesrose strained.TheApril2010SLOOSindicatedthatwhile briskly,andoutlaysoninformationtechnology(IT) bankshadgenerallyceasedtighteninglendingstan- capital—computers,software,andcommunications dardsonalltypesof mortgages,theyhadnotyet equipment—continuedtobespurredbytheneedto beguntoeasethosestandardsfromtheverystringent replaceolder,less-efficientequipmentandbythe levelsthathadbeenimposedoverthepastfewyears. expansionof theinfrastructureforwirelesscommu- Perhapsreflectingthestringencyof lendingstan- nicationsnetworks.Inaddition,investmentinequipdardsandlowlevelsof homeequityformanyhome- mentotherthantransportationandITjumpedinthe owners,overthefirstquarterof 2010indicatorsof firstquarterafterfallingmorethan15percentin refinancingactivityshowedonlyamodestpickup 2009.Morerecently,ordersandshipmentsforawide fromthesubduedlevelspostedinthesecondhalf of rangeof equipmentroseappreciablythisspring, 2009.Refinancingappearedtopickuplateinthesec- pointingtoanothersizableincreaseinrealE&Soutondquarter.Overall,residentialmortgagedebtcon- laysinthesecondquarter. tractedatasomewhatfasterpaceinthefirsthalf of 2010thanithadinthesecondhalf of theprevious Investmentinnonresidentialstructurescontinuedto year. declineinthefirsthalf of 2010againstabackdropof highvacancyrates,lowpropertyprices,anddifficult Netissuanceof MBSguaranteedbyFannieMae, financingconditions.Realoutlaysonstructuresout- FreddieMac,orGinnieMaefellduringthefirsthalf sideof thedrillingandminingsectorfellatanannual of 2010afterhavingexpandedbrisklyinthesecond rateof 27½percentinthefirstquarterafterfalling half of 2009;thefallwaslargelyattributabletoweak 18percentin2009,andtheincomingdatapointto demandformortgagesandtosizableprepaymentson continuedweaknessinthesecondquarter.ConstrucoutstandingMBSstemmingfromrepurchasesby tionof manufacturingfacilitiesappearstohave FannieMaeandFreddieMacof largenumbersof firmedsomewhatinrecentmonthsandoutlaysinthe delinquentmortgagesoutof thepoolsof mortgages powercategory—thoughvolatilefromquarterto backingagencyMBS.Thesecuritizationmarketfor quarter—haveretainedconsiderablevigor,butspendmortgageloansnotguaranteedbyahousing-related ingonofficeandcommercialstructuresremainedon government-sponsoredenterprise(GSE)ortheFedasteepdowntrendthroughMay.Meanwhile,real eralHousingAdministrationremainedessentially spendingondrillingandminingstructureshas closed. postedsolidincreasesinrecentquartersinresponse tothereboundinoilandnaturalgaspricesinthesec- 6 Amortgageisdefinedasseriouslydelinquentiftheborroweris ondhalf of lastyear;nonetheless,thispickupin 90daysormorebehindinpaymentsorthepropertyisin foreclosure. activityfollowsamassivedeclineinthefirsthalf of

MonetaryPolicyandEconomicDevelopments 53 2009,andspendinginthissectorisstillwellbelow tivelylowinterestratestoissuelonger-termdebt,and late-2008levels. netissuanceof commercialpaperturnedpositive. However,bondissuancefellinMayasaresultof the InventoryInvestment marketvolatilityandpullbackfromriskthataccom- Thepaceof inventoryliquidationsloweddramati- paniedEuropeanfinancialdevelopments.C&Iloans callyinlate2009asfirmsactedtobringproduction declinedthroughMaybeforeflatteningoutinJune, intocloseralignmentwithsales,andbusinessesbegan whileCRElendingcontractedsteeplythroughoutthe restockinginthefirstquarterof 2010.Thatswingin firsthalf of theyear. inventoryinvestmentaddednearly2percentage pointstotheriseinrealGDPinthefirstquarter. Thedeclineincommercialbanklendingtobusinesses Nonetheless,firmsappeartobekeepingatightrein ispartlyattributabletoweakdemandforsuchloans, onstocks.Forexample,inthemotorvehiclesector, assuggestedbyanswerstotheApril2010SLOOS.In manufacturersheldsecond-quarterproductionof addition,respondentstotheAprilsurveyreported lightvehiclestoapacethatpusheddays’supply thatbanksincreasedpremiumschargedonriskier belowhistoricalnorms—evenafteradjustingforthe C&Iloansoverthepreviousthreemonths;and reductionoverthepastcoupleof yearsinthenumber althoughasmallnetfractionof banksreportedeasof models,trimlines,anddealerships.Outsideof ingstandardsonthoseloans,thesevereboutof motorvehicles,realinventoriesrosemodestlyinthe tighteningreportedoverthepastseveralyearshasyet firstquarter,andthelimitedavailableinformation tobemateriallyunwound.Moreover,amoderatenet suggeststhatstockbuildingremainedataboutthis fractionof bankstightenedstandardsonCREloans paceinthespring.Theinventory-to-salesratiosfor overthefirstquarterof 2010. mostindustriescoveredbytheCensusBureau’s book-valuedatahavemovedbackintoamorecom- Smallbusinessesfacerelativelytightcreditconditions fortablerangeafterrisingsharplyin2009. giventheirlackof directaccesstocapitalmarkets. ResultsfromtheMay2010Surveyof Termsof Busi- CorporateProfitsandBusinessFinance nessLendingindicatedthatthespreadbetweenthe OperatingearningspershareforS&P500firmscon- averageinterestrateonloanswithcommitmentsizes tinuedtobouncebackinthefirstquarterof 2010. of lessthan$1million—loansthatwerelikelymade Inpercentageterms,therecentadvanceswere tosmallerbusinesses—andswapratesof comparable strongeramongfinancialfirms,astheirprofits maturityedgeddowninthesecondquarterbut reboundedfromdepressedlevels,thoughprofitsat remainedquiteelevated.Insurveysconductedbythe nonfinancialfirmsalsopostedsolidincreases.Ana- NationalFederationof IndependentBusiness,the lysts’forecastspointtoanexpectedmoderationin netfractionof smallbusinessesreportingthatcredit profitgainsinthesecondquarter. hadbecomemoredifficulttoobtainovertheprecedingthreemonthsremainedathistoricallyhighlevels Thecreditqualityof nonfinancialcorporationshas duringthefirsthalf of 2010.However,thefractionof shownimprovementthisyear.Creditratingupgrades businessesthatcitedcreditavailabilityasthemost outpaceddowngradesthroughMay,andveryfew importantproblemthattheyfacedremainedsmall. corporatebonddefaultshaveoccurredthisyear. Althoughdelinquencyratesforcommercialand Newissuanceinthecommercialmortgage-backed industrial(C&I)loansedgeddowntoabout4percent securities(CMBS)market,whichhadresumedin inthefirstquarterof 2010,theyremainednearthe November2009withasecuritizationsupportedby higherendof theirrangeoverthepast20years. theFederalReserve’sTALFprogram,continuedata Delinquencyratesforcommercialrealestate(CRE) verylowlevelinthefirsthalf of 2010.Theexpiration loansheldsteadyasratesonconstructionandland of thelegacyCMBSportionof theTALFprogram developmentloansremainednear20percent. onMarch31hadlittleapparenteffectonissuance, andspreadsonAAA-ratedCMBSrelativeto Reflectinganimprovedeconomicoutlookanda comparable-maturityTreasurysecuritiesgenerallyfell somewhatmorehospitablefinancingenvironment, overthefirsthalf of theyear,thoughtheyremained particularlyforlargerfirms,borrowingbynonfinan- elevatedincomparisonwiththeirpre-crisislevels. cialbusinessesexpandedoverthefirsttwoquarters of 2010afterhavingfallenduringthesecondhalf of Intheequitymarket,combinedissuancefromsea- 2009.Netissuanceof corporatebondsincreased sonedandinitialofferingsbynonfinancialfirms throughAprilasbusinessestookadvantageof rela- slowedabitinthefirstquarterof 2010.Meanwhile,

54 97thAnnualReport|2010 equityretirementsduetocash-financedmergerand OutlaysthroughJunewerenearly3percentlower acquisitiondealsandsharerepurchasesincreased thanthoseduringthefirstninemonthsof fiscal somewhat,leavingnetequityissuancemodestly 2009,butthedecreasewasmorethanaccountedfor negative. byamarkeddownswingintotalnetoutlaysforthe TARP,theGSEconservatorship,andfederaldeposit TheGovernmentSector insurance.Excludingthesefinancialtransactions, outlaysrose10percentcomparedwithayearearlier, FederalGovernment mainlybecauseof theeffectsof theweaklabormarketonincome-supportprograms(suchasunemploy- Thedeficitinthefederalunifiedbudgetappearstobe mentinsuranceandfoodstamps)andbecauseof the stabilizing—albeitataveryhighlevel—afteritssharp spendingassociatedwithARRAandotherstimulusrun-upinfiscalyear2009.Indeed,overthefirstnine relatedpolicies.Inaddition,netinterestpayments monthsof fiscal2010,thedeficitwasalittlesmaller havebeenpushedupbythehigherlevelsof outthanthatrecordedayearearlier,andtheongoing standingdebt. recoveryineconomicactivityshouldhelpshoreup revenuesovertheremainderof thefiscalyear.Nonetheless,thedeficitisstillontracktoexceed9percent Asmeasuredinthenationalincomeandproduct of nominalGDPforfiscal2010asawhole,onlya accounts(NIPA),realfederalexpendituresonconshadebelowthe10percentfigurefor2009andsub- sumptionandgrossinvestment—thepartof federal stantiallyabovetheaveragevalueof 2percentof spendingthatisadirectcomponentof GDP—roseat GDPforfiscalyears2005to2007,priortotheonset anannualrateof only1percentinthefirstquarter. of therecessionandfinancialcrisis.Thebudgetcosts Defensespending—whichtendstobeerraticfrom of financialstabilizationprograms,whichaddedsig- quartertoquarter—postedjustasmallrise,andnonnificantlytothedeficitinfiscal2009,havehelped defensepurchasesonlyinchedupafteralarge reducethedeficitthisyearasthesumof (1)repay- stimulus-relatedincreaseinthesecondhalf of 2009. mentsanddownwardrevisionsof expectedlossesin Realfederalpurchaseslikelyincreasedsomewhat theTroubledAssetRelief Program(TARP)and fasterinthesecondquarter,boostedbythesurgein (2)banks’requiredprepaymentstotheFederal hiringforthedecennialcensus. DepositInsuranceCorporationof threeyearsof FederalBorrowing depositinsurancepremiumshasexceededtheadditionalpaymentsbytheTreasurytothehousing- Federaldebtheldbythepublicisprojectedtoreach relatedGSEs.However,thedeficithascontinuedto morethan65percentof nominalGDPbytheendof beboostedbytheAmericanRecoveryandReinvest- thisyear,thehighestratioseeninmorethan50years. mentAct(ARRA)andotherpolicyactionsandby Despitetheincreaseinfinancingneeds,Treasuryaucthestill-lowlevelof economicactivity,whichis tionshavebeenmostlywellreceivedsofarthisyear, dampingrevenuesandpushingupcyclicallysensitive andbid-to-coverratiosatthoseauctionsweregeneroutlays. allystrong.DemandforTreasurysecuritieswaslikely boostedbyadesireforrelativelysafeandliquid Afterfalling16½percentinfiscal2009,federal assetsinlightof concernsabouttheconsequencesof receiptsedgedup½percentinthefirstninemonths fiscalstrainsinanumberof Europeancountries. of fiscal2010comparedwiththesameperiodinfis- Indicatorsof foreigndemandforU.S.Treasurydebt cal2009;theycurrentlystandaround14½percentof remainedsolid. GDP—thelowestpercentagein60years.Taken together,individualincomeandpayrolltaxeswere StateandLocalGovernment 4½percentlowerthanayearearlier,inpartbecause Stateandlocalgovernments,facingdifficultsituaof theweaknessinwageandsalaryincomelastfall tions,havecontinuedtoreduceexpendituresonconandthelowlevelof netfinalpaymentson2009tax sumptionandgrossinvestment.Overthefirstsix liabilitiesthisspring;inaddition,therevenueprovi- monthsof 2010,thesegovernmentscutroughly sionsinARRAhadalargernegativeeffectonindi- 100,000jobsafterasimilarreductioninthesecond vidualcollectionsduringthefirstninemonthsof fis- half of 2009andkeptatightreinonoperating cal2010thantheydidduringthecomparableperiod expenditurestosatisfybalancedbudgetrequirements. of fiscal2009.Incontrast,corporatereceiptsturned Realconstructionexpendituresdroppedinthefourth backupafteradramaticdropin2008and2009. quarterof 2009andremainedlowinthefirsthalf of

MonetaryPolicyandEconomicDevelopments 55 2010despitetheavailabilityof federalstimulusfunds TheExternalSector andsupportiveconditionsinmunicipalbondmar- Followingasubstantialreboundinthesecondhalf of kets.Capitalexpendituresarenottypicallysubjectto 2009,bothrealexportsandimportscontinuedto balancedbudgetrequirements;however,debtservice increaseatarobustpaceinthefirstquarterof this paymentsonthebondsusedtofinancecapitalproj- year.Whilethecyclicalrecoveryinrealexportsof ectsaregenerallymadeoutof operatingbudgets goodsandservicesremainedstrong,growthslowed (andthusmustcompetewithMedicaidandother fromits20percentannualrateinthesecondhalf of high-priorityprogramsforscarcefunding),which lastyeartoan11percentrateinthefirstquarterof maybedeterringgovernmentsfromundertakingnew 2010.Exportsinalmostallmajorcategories infrastructureprojects. expanded,withsalesof industrialsupplies,high-tech equipment,andservicesregisteringlargeincreases. Asisthecaseatthefederallevel,thehemorrhaging Exportsof aircraftweretheexception,asthey of revenuesthattookaheavytollonstateandlocal slumpedafterasizableincreaseinthefourthquarter budgetsin2008and2009seemstobeeasing,and of lastyear.ExportdemandfromMexico,Japan, governmentswillcontinuetoreceivesignificant Canada,andemergingAsiaexcludingChinawas amountsof federalstimulusaidthroughtheendof especiallyvigorous,whileexportstotheEuropean theyear.Still,totalstatetaxcollectionsarewell UnionandChinawereflat.DataforAprilandMay belowtheirpre-recessionlevels,andavailablebal- suggestthatexportscontinuedtoriseatasolidpace ancesinreservefundsarelow.Atthelocallevel, inthesecondquarter. propertytaxesheldupwellthroughthefirstquarter, likelyinpartbecauselowerrealestateassessments Realimportsof goodsandservicesroseatanannual havebeenoffsetbyhikesinstatutorytaxratesin rateof 15percentinthefirstquarter,aboutthesame someareas;however,furtherincreasesintaxrates paceasinthefourthquarterof lastyear.Allmajor mayencounterresistance,andmanylocalgovern- categoriesof importsrose,especiallyindustrialsupmentsarefacingsteepcutbacksinstateaid.More- plies(includingpetroleum),capitalgoods,andconover,manystateandlocalgovernmentswillneedto sumergoods.DataforAprilandMaysuggestthat setasidemoneyincomingyearstorebuildtheir importscontinuedtoclimbrobustlyinthesecond employeepensionfundsafterthefinanciallosses quarter,withautomotiveproductsandcomputers experiencedoverthepastcoupleof yearsandtofund registeringnotableincreases. theirongoingobligationstoprovidehealthcareto theirretiredemployees. Inthefirstquarterof 2010,theU.S.currentaccount deficitreachedanannualrateof $436billion, StateandLocalGovernmentBorrowing approximately3percentof GDP.Thecurrent Despiteconcernsoverthefiscalpositionsandthe accountdeficithaswidenedalittleoverthepastfew financialhealthof stateandlocalgovernments,the quarters,asimportshaveoutpacedexports. municipalbondmarketremainedreceptivetoissuers overthefirsthalf of theyear.Issuanceof long-term Thespotpriceof abarrelof WestTexasIntermedimunicipalbondswassolidandcontinuedtobesup- atecrudeoilstartedtheyearatabout$80andhad portedbytheBuildAmericaBondprogram,which risento$86byearlyMay,continuingtherebound wasauthorizedunderARRA.7Short-termmunicipal fromlastyear’srecession-inducedlowsastheglobal bondissuancewasmoderatebutgenerallyconsistent economicrecoveryprogressed.Thepricehassince withtypicalseasonalpatterns. movedbackdowntoabout$77asaresultof increasedconcernsaboutthesustainabilityof the Interestratesonlong-termmunicipalbondsonbal- globalrecovery.Thepricesof longer-termfutures ancefellabitlessthanthoseoncomparable-maturity contractsforcrudeoil(thatis,thoseexpiringin Treasurysecurities,leavingtheratioof theiryields December2018)alsofell,from$100perbarrelin slightlyelevatedbyhistoricalstandards.Downgrades earlyMayto$92perbarrelinmid-July.Theupwardof stateandlocalgovernmentdebtbycreditagencies slopingfuturescurveisconsistentwiththeviewthat, continuedtoexceedupgrades. despitemountingworriesaboutthenear-term growthoutlook,oilpriceswillriseagainasglobal demandstrengthensoverthemediumterm. 7 TheBuildAmericaBondprogramallowsstateandlocalgovernmentstoissuetaxablebondsforcapitalprojectsandreceive Nonfuelcommoditypriceshavebeenmixedin2010. asubsidypaymentfromtheTreasuryfor35percentofinterest costs. Foodpriceshavebeenroughlyflatsofarthisyear.

56 97thAnnualReport|2010 Pricesformetalsandagriculturalrawmaterialshave overthefirsthalf of theyear.8Firmshavealsoraised beenvolatile;pricesforthesecommoditiesroseinto theirlaborinputbyincreasinghoursperworker. earlyApril,astheglobalrecoverycontinued,but Indeed,theaverageworkweekof employees,which sincethenhavefallensharply,reflectingthestronger haddroppedsharplyoverthecourseof therecession, valueof thedollarandgrowinguncertaintyabout tickeduptowardtheendof 2009androseconsidertheoutlookfortheglobaleconomy.Marketcom- ablyoverthefirsthalf of 2010;byJune,ithad mentaryalsosuggeststhatpricesformetalshave recoupednearlyone-half of itsearlierdecrease.The fallenbecauseof concernsthatpolicytighteningin jobgainstodatehaveonlybeensufficienttoabout Chinamayslowitsdemandforthosecommodities. matchtheriseinthenumberof jobseekers,andthe unemploymentrateinthesecondquarter,at9¾per- Pricesof importedgoodsrosebrisklyinearly2010, centonaverage,wasonlyslightlybelowtherecession boostedbythedepreciationof thedollarinforeign highof 10percentreachedinthefourthquarterof exchangemarketsandtheriseincommoditypricesin lastyear. late2009.Inthesecondquarterof thisyear,ascommoditypricesdeclinedandthedollarappreciated, Otherindicatorsarealsoconsistentwithagradual importpriceinflationslowed.Pricesforimportsof improvementinlabormarketconditionsthisyear. finishedgoodshave,onaverage,beenlittlechanged Measuresof hiringandjobopeningshavemovedup in2010. fromthelowlevelsof 2009,ashavereadingsfrom privatesurveysof hiringplans.Inaddition,layoffs havecomedown,althoughtherelativelyflatprofile NationalSaving of initialclaimsforunemploymentinsurancein Totalnetnationalsaving—thatis,thesavingof recentmonthssuggeststhatthepaceof improvement households,businesses,andgovernmentsexcluding mayhaveslowedlately. depreciationcharges—remainsverylowbyhistorical standards.Afterhavingreached3¾percentof nomi- Theeconomyremainsfarfromfullemployment.The nalGDPin2006,netnationalsavingdropped jobgainsthisyearhavereversedonlyasmallportion steadilyoverthesubsequentthreeyears;sincethe of thenearly8½millionjobslostduring2008and startof 2009,ithasaveragednegative2½percentof 2009,andtheunemploymentrateisstillatitshighest nominalGDP.Thewideningof thefederalbudget levelsincetheearly1980s.Moreover,long-term deficitoverthecourseof therecessionhasmorethan unemploymenthascontinuedtoworsen—inJune, accountedforthedownswinginnetsavingsince 6.8millionpersons,600,000morethanattheendof 2006,andthelargefederaldeficitwilllikelycause 2009andnearlyone-half of thetotalunemployed, nationalsavingtoremainlowinthenearterm. hadbeenoutof workforsixmonthsormore.Also, Becausethedemandforfundsforcapitalinvestment thenumberof workerswhoareworkingparttimefor iscurrentlyrelativelymeager,thelowrateof national economicreasons—anotherindicatorof theundersavingisnotbeingtranslatedintohigherrealinterest utilizationof labor—hasfallenonlyslightlythisyear ratesorincreasedforeignborrowing.However,if not andstandsatnearlytwiceitspre-recessionlevel. boostedoverthelongerterm,persistentlowlevelsof nationalsavingwilllikelybeassociatedwithupward ProductivityandLaborCompensation pressureoninterestrates,lowratesof capitalforma- Laborproductivityhascontinuedtorisebriskly, tion,andheavyborrowingfromabroad,whichwould althoughnotasrapidlyasin2009.Accordingtothe limittheriseinthestandardof livingof U.S.resi- latestpublisheddata,outputperhourinthenonfarm dentsovertimeandhampertheabilityof thenation businesssectorroseatanannualrateof 2¾percent tomeettheretirementneedsof anagingpopulation. inthefirstquarteraftera5½percentadvancein 2009.Thecontinuingstrongproductivitygains reflectongoingeffortsbyfirmstoimprovetheeffi- TheLaborMarket 8 Totalemployment—privateplusgovernment—hasexhibited EmploymentandUnemployment unusuallysharpswingsoflate,mainlybecauseofthehiringof temporaryworkersforthedecennialcensus.Censushiring Thelabormarketbottomedoutaroundtheturnof startedinearnestinMarchandpeakedatabout400,000in theyearandisnowaddingjobsacrossarangeof May.InJune,thewindingdownofthecensussubtracted industries,albeitatamodestpace.Afterfalling 225,000workersfromgovernmentpayrolls.Apartfromthecensus,governmentemploymentfellslightlyonnetoverthefirst steeplythroughmostof 2009,nonfarmprivatepayhalfoftheyearbecauseofcutbacksatstateandlocalgovernrollemploymentrose100,000permonth,onaverage, ments.

MonetaryPolicyandEconomicDevelopments 57 ciencyof theiroperationsandtheirreluctanceto throughmidyear.Gasolinepricesregisteredsizable increasetheirlaborinputinanuncertaineconomic decreases—especiallyinMayandJune—reflecting environment. theampleinventoriesanddropinthepriceof crude oilinMay.Althoughspotpricesfornaturalgaswere Increasesinhourlycompensationcontinuetobe pushedupduringthewinterbyunusuallycold restrainedbythewidemarginof slackinthelabor weatherinsomemajorconsumingregions,theytoo market.The12-monthchangeintheemployment fellonnetoverthespringandearlysummerasinvencostindexforprivateindustryworkers,whichmeas- toriesremainedhigh.Retailpricesforelectricityhave uresbothwagesandthecosttoemployersof provid- fluctuatedthisyearinresponsetomovementsinthe ingbenefits,hasbeen2percentorlesssincethestart costof fossilfuelinputs,butonnettheyhave of 2009afterseveralyearsof increasesintheneigh- changedlittlesincetheendof 2009. borhoodof 3percent.Compensationperhourinthe nonfarmbusinesssector—ameasurederivedfrom Consumerfoodpricesroseatanannualrateof thelaborcompensationdataintheNIPA—hasalso 1¾percentbetweenDecember2009andMay2010, slowednoticeablyoverthepastcoupleof years; boostedbyhigherpricesformeatsandforfruitsand thougherraticfromquartertoquarter,thismeasure vegetables.Farmpricesdrifteddownthroughtheend rosejust1½percentovertheyearendinginthefirst of Juneasreportsoncropproductionpointedtoan quarterof 2010.Similarly,averagehourlyearnings— abundantharvest,thoughtheyhavemovedupabit thetimeliestmeasureof wagedevelopments—rose inrecentweeks. 1¾percentinnominaltermsoverthe12monthsendinginJune;assuggestedearlier,thismeasureappears TheslowdownincorePCEinflationhasbeencentohavepostedamodestincreaseinrealtermsover teredinpricesof coregoods,whichdeclinedatan thisperiodasaconsequenceof thelowrateof con- annualrateof 1½percent,onnet,overthefirstfive sumerpriceinflationof late. monthsof 2010afterrising1½percentin2009.The decelerationincoregoodspriceswaswidespreadand Reflectingthesmallriseinhourlycompensationand occurreddespitesizableincreasesinpricesforsome thesizableadvanceinlaborproductivity,unitlabor industrialcommoditiesandmaterials.Meanwhile, costsinthenonfarmbusinesssectordeclined4¼per- pricesof servicesotherthanenergypostedonlya centovertheyearendinginthefirstquarterof 2010. smallincreaseoverthisperiod,asthesoftnessinthe Overtheprecedingyear,unitlaborcostshadbeen housingmarketcontinuedtoputdownwardpressure flat. onhousingcostsandaspricesof otherserviceswere restrainedbythewidemarginof economicslack. Prices Inflationdiminishedfurtherinthefirsthalf of 2010. Surveymeasuresof inflationexpectationshavebeen Afterrising2percentoverthe12monthsof 2009, relativelystablethisyear.InthepreliminaryThomtheoverallPCEchain-typepriceindexincreasedat sonReuters/Universityof MichiganSurveysof Conanannualrateof just¾percentbetweenDecem- sumersforJuly,medianyear-aheadinflationexpectaber2009andMay2010asenergypricesfell.Thecore tionsstoodat2.9percent.Median5-to10-yearinfla- PCEpriceindex—whichexcludesthepricesof tionexpectationswerealsoat2.9percentinearly energyitemsaswellasthoseof foodandbeverages— July—areadingthatisinlinewiththeaveragevalue roseatanannualrateof 1percentoverthefirst for2009andthefirsthalf of 2010.IntheSurveyof 5monthsof theyear,comparedwitharateof ProfessionalForecasters,conductedbytheFederal 1½percentoverthe12monthsof 2009.Thismod- ReserveBankof Philadelphia,expectationsforthe erationwasalsoevidentintheappreciableslowingof increaseintheconsumerpriceindexoverthenext inflationmeasuressuchastrimmedmeansandmedi- 10yearsremainedaround2½percentinthesecond ans,whichexcludethemostextremepricemove- quarter,alevelthathasbeenessentiallyunchanged mentsineachperiod.Longer-runinflationexpecta- formanyyears. tionshavebeenstablethisyear,withmostsurveybasedmeasuresremainingwithinthenarrowranges FinancialDevelopments thathaveprevailedforthepastfewyears. Therecoveryof thefinancialsystemthatbeganin thespringof 2009generallycontinuedthroughthe Consumerenergypricescontinuedtoincreasein earlyspringof 2010,butinrecentmonthsconcerns Januaryafterasteepriseinthesecondhalf of 2009, aboutspilloversfromthefiscalpressuresinanumber buttheyturneddowninFebruaryandfellfurther of Europeancountriesandthedurabilityof the

58 97thAnnualReport|2010 globalrecoveryhaveledtothereemergenceof strains expectationsbasedonTIPShavebeencomplicated insomemarkets. overrecentyearsbyspecialfactorssuchasthesafehavendemandsfornominalTreasurysecuritiesand MonetaryPolicyExpectations changesovertimeintherelativeliquidityof TIPS andTreasuryRates andnominalTreasurysecurities. Onbalanceoverthefirsthalf of 2010,marketparticipantspushedbacktheirexpectedtimingof the OtherInterestRatesandEquityMarkets firstincreaseinthetargetfederalfundsratefromits currentrangeof 0to¼percent,andtheyscaledback Inthecommercialpapermarket,overthefirsthalf of theirexpectationsof thepacewithwhichmonetary 2010,yieldsonlower-qualityA2/P2-ratedpaperand policyaccommodationwouldberemoved.Quoteson onAA-ratedasset-backedcommercialpaperrosea moneymarketfuturescontractsimplythat,asof bitfromlowlevels,pushingupspreadsoverhighermid-July2010,investors’expectedtrajectoryforthe qualityAA-ratednonfinancialcommercialpaper. federalfundsraterisesabovethecurrenttargetrange Evenso,spreadsonbothtypesof assetsremainnear inthefirstquarterof 2011,twoquarterslaterthan thelowendof therangeobservedsincethefallof thequotesimpliedatthestartof 2010.Investorsalso 2007. expect,onaverage,thattheeffectivefederalfunds ratewillbearound1percentbythemiddleof 2012, YieldsoncorporatebondsratedAAandBBBfellby about1¼percentagepointslowerthananticipatedat lessthanthoseoncomparable-maturityTreasury thebeginningof thisyear.Theexpectedpathfor securitiesoverthefirsthalf of theyear,resultingina monetarypolicyappearedtomovelowerinresponse noticeableincreaseinriskspreads.Yieldson tothemountingfiscalstrainsinEuropeandweaker- speculative-gradecorporatebondsfellduringmuch than-expectedU.S.economicdatareleases.Thedrop of thefirstquarterbutrosesharplyduringthesecprobablyalsoreflectedFederalReservecommunica- ond,leavingyieldshigheronnetovertheperiodand tions,includingtherepetitioninthestatement spreadssomewhatmoreelevated.Thewideningof releasedaftereachmeetingof theFederalOpenMar- spreadsappearstoreflectadecreaseindemandfor ketCommitteethateconomicconditionsarelikelyto riskyassetsstemmingfromconcernsaboutdevelopwarrantexceptionallylowlevelsof thefederalfunds mentsinEuropeandtheoutlookfortheglobal rateforanextendedperiod. economy. Yieldsonlonger-termnominalTreasurysecuritiesfell Similarly,broadequitypriceindexes,whichrosein noticeably,onnet,overthefirsthalf of theyear, thefirstquarter,owingbothtorelativelystrongearnwhiletwo-yearyieldsfellsomewhatless.Yieldswere ingsreportsandtosomebetter-than-expectedecogenerallylittlechangedduringthefirstquarterbut nomicdatareleases,fellbackinthesecondquarter. droppedinthesecondquarteralongwiththedecline Thesecond-quarterdeclinewasbroadbased,encomintheexpectedpathformonetarypolicy.Increased passingmostmajorequitymarketcategories,and demandforTreasurysecuritiesbyinvestorslooking wasconsistentwithmovementsinthepricesof a forahavenfromvolatilityinothermarketshaslikely widevarietyof otherassetclasses.Impliedvolatility contributedtothedeclineinyields.Onbalance,over of theS&P500,ascalculatedfromoptionprices, thefirsthalf of theyear,yieldson2-yearTreasury spikedupwardinMaybeforerecedingsomewhat, notesdecreasedabout½percentagepointtoabout thenendedthefirsthalf of theyearatastill-elevated ¾percent,andyieldson10-yearnotesfellabout level. ¾percentagepointtoabout3percent. Againstabackdropof decliningequitypricesand YieldsonTreasuryinflation-protectedsecurities,or increasesinequitymarketvolatility,equitymutual TIPS,declinedsubstantiallylessthanthoseontheir fundsexperiencedoutflowsinthesecondquarter; nominalcounterpartsoverthefirsthalf of theyear, theyhadpostedmodestinflowsinthefirstquarter resultinginlowermedium-andlong-terminflation afterhavingbeennearlyflatformuchof 2009.Most compensation.Thedeclineininflationcompensation categoriesof bondfundsandhybridfunds(which mayhavepartlyreflectedadropininflationexpecta- investinamixof bondsandequities)continuedto tionsgiventhesubduedratesof growthinmajor showsizableinflowsinthefirsthalf of 2010, priceindexesovertheperiodandindicationsthat althoughhigh-yieldbondfundsregisteredoutflows economicslackwouldremainsubstantialforsome asspreadswidenedinthesecondquarter.Money time.However,inferencesaboutinvestors’inflation marketmutualfundsrecordedlargeoutflows,likely

MonetaryPolicyandEconomicDevelopments 59 reflectingtheverylowyieldsonthoseassetsrelative Conditionsintheleveragedloanmarketcontinuedto toothershort-terminvestments. improveonbalanceoverthefirsthalf of 2010.Gross issuanceof suchloanspickedupslightlyduringthat FinancialMarketFunctioning periodfromverylowlevelsin2009,asloanpools Financialmarketfunctioningcontinuedtoimprove, issuingcollateralizedloanobligations(CLOs)moved onbalance,duringthefirsthalf of 2010.However, toreinvestthecashreceivedfromcompaniesthathad strainsemergedinsomemarkets.Forexample,the paiddownolderloanswiththeproceedsof bond spreadbetweentheLondoninterbankofferedrate issues.NewCLOissuance,whichhadnearlyceased (Libor)andtherateoncomparable-maturityover- inthesecondhalf of 2009,alsobegantopickupin nightindexswaps(OIS)—ameasureof stressin thesecondquarterof 2010.Therecoveryininvestor short-termbankfundingmarkets—widenedoverthe demandforsyndicatedloanswasevidentinthesecfirsthalf of theyear.TheincreasesinLibor-OIS ondarymarketaswell,whereaveragebid-asked spreadsweremorepronouncedatlongermaturities. spreadsdeclined,onnet,overthefirsthalf of 2010, Insecuritiesfinancingmarkets,bid-askedspreads andbidpricesmovedclosertopar. andhaircutsappliedtocollateralfellslightly. FinancialInstitutions Inordertoexpandtheavailabilityof informationon Investorsentimentregardingtheoutlookforcomdevelopmentswithrespecttocreditandleverageout- mercialbanks,whichhadgenerallyimprovedduring sidethetraditionalbankingsector,theFederal thefirstquarter,becamemorepessimisticduringthe ReserveinitiatedaSeniorCreditOfficerOpinion secondquarter.Equitypricesof commercialbanks SurveyonDealerFinancingTerms(SCOOS).The generallyoutperformedthebroadermarketoverthe SCOOSsurveysseniorcreditofficersatabout firstquarter,beforedecliningaboutinlinewith 20U.S.andforeigndealersthat,intheaggregate, equitymarketindexesduringthesecond.Bank providethevastmajorityof thefinancingof dollar- equitypriceswerelikelyboostedslightlybymodest denominatedsecuritiestonondealersandarethe improvementsinreturnsonequityandassetsinthe mostactiveintermediariesinover-the-counter(OTC) firstquarter,althoughbothprofitabilitymeasures derivativeinstruments.Thesurveywillbeconducted remainednearthebottomendof theirrangesof the onaquarterlybasis.Inthefirstsurvey,conductedin past20years.Afteradjustingfortheeffectsof lateMayandearlyJune,dealersgenerallyreported changesintheaccountingtreatmentof securitized thatthetermsatwhichtheyprovidedcreditwere assets,netinterestmarginsrosenoticeablyinthefirst tightrelativetothoseattheendof 2006.9However, quarter,whileprovisionsforloanlossesdeclined, theynotedsomelooseningof termsforbothsecuri- consistentwithresponsestotheJanuarySLOOSthat tiesfinancingandOTCderivativetransactions,on pointedtoanimprovementinbanks’outlookon net,overthepreviousthreemonthsforcertainclasses creditquality.10Smallercommercialbankscollecof clients—includinghedgefunds,institutionalinves- tivelyregisteredtheirfirstprofitablequarterinmore tors,andnonfinancialcorporations—andintensified thanayearinthefirstquarter. pressuresbythoseclientstonegotiatemore-favorable terms.Atthesametime,theyreportedapickupin Creditdefaultswap(CDS)spreadsforbankinginstidemandforfinancingacrossseveralcollateraltypes tutions—whichprimarilyreflectinvestors’assessoverthepastthreemonths. mentsof andwillingnesstobeartheriskthatthose institutionswilldefaultontheirdebtobligations—in- TheSCOOSresultsareconsistentwithmarketcommentarysuggestingthatfinancialsystemleverage 10 TheFinancialAccountingStandardsBoard’sStatementsof hadbeguntopickupinearly2010.However,lever- FinancialAccountingStandardsNos.166and167(FAS166 agereportedlyfellbackinMayagainstthebackdrop and167)modifiedthebasisfordeterminingwhetherafirm mustconsolidatesecuritizedassets(aswellastheassociated of heightenedmarketvolatility.Hedgefunds,which liabilitiesandequity)ontoitsbalancesheet.Mostbankinginstihadearnedsolidreturnsonaverageduringthefirst tutionswererequiredtoimplementthestandardsinthefirst fewmonthsof theyear,postedasharpdecline quarterof2010.Banksareestimatedtohavebrought$435billionofloansbackontotheirbooks,ofwhichaboutthreeinMay. fourthswerecreditcardloans,andincreasedtheirallowancefor loanandleaselossesbyabout$36billion.Foradditionaldetail ontheeffectsofFAS166and167onbanks’balancesheets,see the“NotesontheData”portionofBoardofGovernorsofthe FederalReserveSystem,StatisticalReleaseH.8,“Assetsand 9 TheSCOOSisavailableontheFederalReserveBoard’swebsite LiabilitiesofCommercialBanksintheUnitedStates,” atwww.federalreserve.gov/econresdata/releases/scoos.htm. www.federalreserve.gov/releases/h8/h8notes.htm.

60 97thAnnualReport|2010 creasedonnetoverthefirsthalf of theyear,particu- rencyincirculationandthereservebalancesof larlyforlargerbankingorganizations.Thewidening depositoryinstitutionsheldattheFederalReserve— inCDSspreadsreportedlyreflecteduncertainty increasedata3½percentannualrateinthefirsthalf abouttheoutcomeof legislationtoreformthefinan- of 2010,wellbelowthe30percentratepostedinthe cialsystemaswellasconcernsaboutdevelopmentsin secondhalf of 2009.Theslowergrowthratewas Europeandtheirimplicationsfortherobustnessof largelyattributabletothemoregradualexpansionin theU.S.andglobaleconomicrecovery.Theoverall reservebalancesastheFederalReserve’sprogramof delinquencyrateonloansheldbycommercialbanks large-scaleassetpurchasescametoanend. increasedsomewhatinthefirstquarterof 2010,as continueddeteriorationinthecreditqualityof resi- Thesizeof theFederalReserve’sbalancesheet dentialmortgagesoffsetdecreasesindelinquency remainedatahistoricallyhighlevelinmid-2010 ratesonmostothercategoriesof loans. (table1).TotalFederalReserveassetsonJuly7,2010, stoodatabout$2.3trillion,about$100billionmore Withloandemandreportedlycontinuingtobeweak thanattheendof 2009.Theincreaseislargelyattribandcreditconditionsremainingtight,totalloanson utabletothecompletiononMarch31of theFederal banks’bookscontractedduringthefirsthalf of the Reserve’sprogramtopurchaseagencydebtand year,thoughlessrapidlythantheyhadduringthe agencymortgage-backedsecurities.Securitiesholdsecondhalf of 2009.Afteradjustingfortheeffectsof ings,thevastmajorityof FederalReserveassets, changesintheaccountingtreatmentof securitiza- increasedfromabout$1.8trilliontoabout$2.1triltions,allmajorcategoriesof loanspostedsizable lionoverthefirsthalf of theyear. declines.Securitiesholdingsrose,onbalance,reflectingsubstantialaccumulationof Treasurysecurities. OnFebruary1,2010,inlightof improvedfunction- Cashassetsalsopostednoticeableincreases.How- inginfinancialmarkets,theFederalReserveclosed ever,totalandrisk-weightedassetsshrankevenas theAsset-BackedCommercialPaperMoneyMarket bankscontinuedtoraisecapital,resultingin MutualFundLiquidityFacility,theCommercial increasesinregulatorycapitalratiostohistorical PaperFundingFacility,thePrimaryDealerCredit highs. Facility,andtheTermSecuritiesLendingFacility.On March8,theFederalReserveconductedthefinal MonetaryAggregatesand auctionundertheTermAuctionFacility.Withthe theFederalReserve’sBalanceSheet closureof thesefacilities,theamountof credit TheM2monetaryaggregateroseonlymodestlyin extendedbytheseprogramsfelltozerofromroughly thefirsthalf of 2010.11Liquiddepositsexpanded $100billionatyear-end.Inaddition,thetermson moderately,likelyreflectingheightenedhousehold theprimarycreditfacilitywereadjustedtoincrease demandforsafeandliquidassets.Thatincreasewas thecostof fundsto¾percentandtoreducethetypionlypartiallyoffsetbycontinuedlargeoutflowsfrom calmaturityof theseloanstooneday.12Inresponse, smalltimedepositsandretailmoneymarketmutual primarycreditdeclinedfromabout$19billionto fundsthatlikelyreflectedtheverylowratesof return about$17millionoverthefirsthalf of theyear.On offeredonthoseproductscomparedwithother June30,theFederalReserveclosedtheTermAssetassets.Thecurrencycomponentof themoneystock BackedSecuritiesLoanFacility(TALF).About expandedmoderatelyinthefirsthalf of theyear.The $42billioninTALFloans,whichhavematuritiesof monetarybase—roughlyequaltothesumof cur- threeorfiveyears,remainontheFederalReserve’s balancesheet. 11 M2consistsof(1)currencyoutsidetheU.S.Treasury,Federal ReserveBanks,andthevaultsofdepositoryinstitutions; (2)traveler’schecksofnonbankissuers;(3)demanddepositsat Thesebroad-basedprograms,whichwereintroduced commercialbanks(excludingthoseamountsheldbydepository duringthecrisistoprovideliquiditytofinancialinstiinstitutions,theU.S.government,andforeignbanksandofficial tutionsandmarkets,contributedtothestabilization institutions)lesscashitemsintheprocessofcollectionandFederalReservefloat;(4)othercheckabledeposits(negotiableorder of financialmarketsandhelpedsupporttheflowof ofwithdrawal,orNOW,accountsandautomatictransferser- credittotheeconomy—atnolosstothetaxpayer.All viceaccountsatdepositoryinstitutions;creditunionsharedraft of theloansextendedthroughtheseprogramsthat accounts;anddemanddepositsatthriftinstitutions);(5)savings deposits(includingmoneymarketdepositaccounts);(6)small- havecomeduehavebeenrepaidinfull,withinterest. denominationtimedeposits(timedepositsissuedinamountsof lessthan$100,000)lessindividualretirementaccount(IRA) andKeoghbalancesatdepositoryinstitutions;and(7)balances inretailmoneymarketmutualfundslessIRAandKeoghbal- 12 Theprimarycreditratehadbeen½percent,andthemaximum ancesatmoneymarketmutualfunds. maturityofprimarycreditloanshadbeen90days.

MonetaryPolicyandEconomicDevelopments 61 totheCommercialPaperFundingFacilityLLC(lim- Table1.SelectedcomponentsoftheFederalReserve itedliabilitycompany).Thenetportfolioholdingsof balancesheet,2009–10 MaidenLaneLLC—whichwascreatedinconjunc- Millionsofdollars tionwitheffortstoavoidadisorderlyfailureof the Balancesheetitem Dec.30,2009 July7,2010 BearStearnsCompanies,Inc.—increasedasthe recoveryinfinancialmarketsboostedthefairvalue Totalassets 2,237,258 2,335,457 of theassetsheldinthatLLC.Consistentwiththe Selectedassets Creditextendedtodepositoryinstitutions termsof thetransaction,thedistributionof theproanddealers ceedsrealizedontheassetportfolioheldbyMaiden Primarycredit 19,111 17 LaneLLCwilloccuronamonthlybasisgoingfor- Termauctioncredit 75,918 … wardunlessotherwisedirectedbytheFederal Centralbankliquidityswaps 10,272 1,245 PrimaryDealerCreditFacilityandother Reserve.Themonthlydistributionswillcoverthe broker-dealercredit 0 … expensesandrepaytheobligationsof theLLC, Creditextendedtoothermarketparticipants includingtheprincipalandinterestontheloanfrom Asset-BackedCommercialPaperMoneyMarket MutualFundLiquidityFacility 0 … theFederalReserveBankof NewYork,accordingto NetportfolioholdingsofCommercialPaper thepriorityestablishedinthetermsof thetransac- FundingFacilityLLC 14,072 1 tion.Theportfolioholdingsof MaidenLaneIILLC TermAsset-BackedSecuritiesLoanFacility 47,532 42,278 Supportofcriticalinstitutions andMaidenLaneIIILLC—whichwerecreatedin NetportfolioholdingsofMaidenLaneLLC, conjunctionwitheffortstoavoidthedisorderlyfail- MaidenLaneIILLC,andMaidenLaneIIILLC1 65,024 66,996 ureof AIG—decreasedasprepaymentsandredemp- CreditextendedtoAmericanInternationalGroup, Inc. 22,033 24,560 tionsof someof thesecuritiesheldinthoseportfo- PreferredinterestsinAIAAuroraLLCandALICO lioswereusedtopaydowntheloansextendedbythe HoldingsLLC 25,000 25,733 FederalReserveBankof NewYork.TheFederal Securitiesheldoutright Reservedoesnotexpecttoincuranetlossonanyof U.S.Treasurysecurities 776,587 776,997 Agencydebtsecurities 159,879 164,762 thesecuredloansprovidedduringthecrisistohelp Agencymortgage-backedsecurities(MBS)2 908,257 1,118,290 preventthedisorderlyfailureof systemicallysignifi- Memo cantfinancialinstitutions. TermSecuritiesLendingFacility3 0 … Totalliabilities 2,185,139 2,278,523 Ontheliabilitiessideof theFederalReserve’sbal- Selectedliabilities FederalReservenotesincirculation 889,678 907,698 ancesheet,reservebalancesaveragedjustover$1tril- Reverserepurchaseagreements 70,450 62,904 lionoverthefirstsixmonthsof 2010.TheFederal Depositsheldbydepositoryinstitutions 1,025,271 1,061,239 Reservemadepreparationstoconductsmall-scale Ofwhich:Termdeposits … 2,122 reverserepurchaseoperationstoensureitsabilityto U.S.Treasury,generalaccount 149,819 16,475 useagencyMBScollateralforsuchtransactions,and U.S.Treasury,supplementalfinancingaccount 5,001 199,963 thefirstsmall-valueauctionsintheTermDeposit Totalcapital 52,119 56,934 FacilityprogramwereconductedinJuneandJuly. Note:LLCisalimitedliabilitycompany. ReverserepurchaseoperationsandtheTermDeposit 1 TheFederalReservehasextendedcredittoseveralLLCsinconjunctionwith effortstosupportcriticalinstitutions.MaidenLaneLLCwasformedtoacquire FacilityareamongthetoolsthattheFederalReserve certainassetsoftheBearStearnsCompanies,Inc.MaidenLaneIILLCwas willhaveatitsdisposaltodrainreservesfromthe formedtopurchaseresidentialmortgage-backedsecuritiesfromtheU.S. securitieslendingreinvestmentportfolioofsubsidiariesofAmerican bankingsystemattheappropriatetime.TheTreas- InternationalGroup,Inc.(AIG).MaidenLaneIIILLCwasformedtopurchase ury’ssupplementaryfinancingaccount,whichhad multisectorcollateralizeddebtobligationsonwhichtheFinancialProducts groupofAIGhaswrittencreditdefaultswapcontracts. fallentoabout$5billionwhenthestatutorydebt 2 IncludesonlyMBSpurchasesthathavealreadysettled. ceilingwasapproachedlastyear,returnedtoitspre- 3 TheFederalReserveretainsownershipofsecuritieslentthroughtheTerm viouslevelof about$200billionafterthestatutory SecuritiesLendingFacility. debtceilingwasraisedinearly2010. …Notapplicable. Source:FederalReserveBoard. OnApril21,theFederalReserveSystemreleasedthe 2009annualcomparativefinancialstatementsforthe combinedFederalReserveBanks,the12individual ThecreditprovidedtoAmericanInternational FederalReserveBanks,theLLCsthatwerecreatedas Group,Inc.(AIG),increasedslightly,onnet,over partof theFederalReserve’sresponsetostrainsin thefirsthalf of theyear,inpartbecauseadditional financialmarkets,andtheBoardof Governors.The borrowingthroughthisfacilitywasusedtopaydown statementsshowedthattheReserveBanks’compreoutstandingcommercialpaperthathadbeenissued hensiveincomewasjustover$53billionfortheyear

62 97thAnnualReport|2010 endingDecember31,2009,anincreaseof nearly cialinstitutionstoGreeceandothervulnerableeuro- $18billionfrom2008.Theincreaseinearningswas areacountriesalsoresultedinpressureindollar primarilyattributabletotheincreaseintheFederal fundingmarkets(seebox2).Risk-relatedflowsinto Reserve’sholdingsof agencydebtandagencyMBS. safeinvestmentsliftedthevalueof thedollarand TheconsolidatedLLCsalsocontributedtothe loweredyieldsonthesovereignbondsof mostmajor increaseintheReserveBanks’comprehensive advancedeconomies,includingtheUnitedStates.On income.TheReserveBankstransferredmorethan netforthefirsthalf of theyear,thedollarhasappre- $47billionof their$53billionincomprehensive ciated,andforeignstockmarketsandtheyieldson incometotheU.S.Treasuryin2009,anincreaseof benchmarksovereignbondshavemoveddown. morethan$15billion—orabout50percent—from theamounttransferredin2008. Inthefirstquarterof thisyear,asensethattheU.S. recoverywasproceedingmorerapidlythantherecov- InternationalDevelopments eryinEuropeledthedollartoappreciateagainstthe euroandsterling,whilestronggrowthinemerging InternationalFinancialMarkets Asialedthedollartodepreciateagainstmanyemerg- Inrecentmonths,globalfinancialmarketshavebeen ingmarketcurrencies.Thesedivergentmovements roiledbytheGreekfiscalcrisisandtheresultantconlefttheFederalReserve’sbroadestmeasureof the cernsabouttheEuropeanoutlookmorebroadly(see nominaltrade-weightedforeignexchangevalueof box1).Fearsabouttheexposureof euro-areafinan- Box 1. European Fiscal Stress and Policy Responses ThefiscalcrisisinGreeceanditsramificationsfor €500billioninfunds—€60billionthroughaEuropean Europehavebeenasourceofanxietyinglobalfinan- FinancialStabilizationMechanismand€440billion cialmarketsinrecentmonths.Concernsabout fromaspecialpurposevehicle,theEuropeanFinan- Greecebeganmountingaroundtheturnoftheyear cialStabilizationFacility,whichisauthorizedtoraise afterannouncementsrevealedthegovernment’sdefi- fundsincapitalmarketsbackedbyguaranteesfrom cittobeconsiderablylargerthaninitiallyestimated. euro-areamemberstates.Thesefundsmayalsobe DespitetheannouncementbytheGreekgovernment augmentedwithbilateralloansfromtheIMF.The ofplanstoimplementsignificantfiscalconsolidation, EuropeanCentralBank(ECB)simultaneously thespreadofyieldsonGreeksovereignbondsover announcedthatitwaspreparedtopurchasegovernthoseofGermanbondssoaredduringthespring,as mentandprivatedebtsecuritiestoensurethedepth marketconfidenceintheabilityofGreecetomeetits andliquidityofeuro-areadebtmarketsthatwere fiscalobligationsdiminished.Atthesametime,con- considereddysfunctional.Inaddition,theECB cernsalsospreadtoothereuro-areacountrieswith expandeditsliquidityprovisionfacilities.Finally,to highdebtanddeficitratios,includingPortugal, forestallanemergingshortageofdollarliquidity,the Spain,andIreland.OnMay2,withtheGreekgovern- FederalReservereopenedtemporaryU.S.dollar mentandbankingsectorshavingdifficultyobtaining liquidityswaplineswiththeECBandfourother marketfinance,theEuropeanUnionandInternational majorcentralbanks. MonetaryFund(IMF)announcedajoint€110billion financialsupportpackageforGreece.Disbursement Theannouncementofthesemeasuresandthesubofthesupport,intheformofloanstobedistributed sequentpurchasesofsovereigndebtbytheECBled overthreeyears,iscontingentonaggressivefiscal toanimprovementinmarketsentimentandaconconsolidation,whichwouldbringthecountry’sbud- siderabledropinspreads,butspreadshavesince getdeficitfromalmost14percentofgrossdomestic movedup.Thisrenewedincreaseisdue,atleastin productin2009tobelow3percentby2014. part,tomarketconcernsaboutthegrowthimplicationsofthesignificantandsynchronizedfiscalcon- TheannouncementoftheMay2packageassuaged solidationeffortsbeingimplementedacrosstheeuro investorconcernsonlybriefly.SpreadsonGreeksov- area. ereigndebtandthatofothervulnerableeuro-area economiesmovedupsharplyintheweekafterthe Considerableuncertaintiesalsoremainaboutthe announcement,anddollarfundingstrainsformany exposureoffinancialinstitutionstovulnerablecouneuro-areainstitutionsintensified. triesandaboutthefinancialpositionoftheseinstitutionsmoregenerally.Europeangovernmentsarecur- Inresponse,Europeanleadersannouncedmuch rentlyworkingtoaddresstheseuncertaintiesthrough broaderstabilizationmeasuresonMay10.Onesetof acoordinatedsetofbankstresstests. initiativesaddressedsovereignrisk,providingupto

MonetaryPolicyandEconomicDevelopments 63 fiscalvulnerabilitiessupportedsomeimprovementin Box 2. Dollar Funding Pressures and marketsentiment;equitypricestemporarilyhalted the Reinstitution of Central Bank theirdeclinebyearlyJuneandthedollardepreciated Swap Lines somewhat,likelyreflectingamodestreversalof InMarch,dollarfundingpressuresbeganto flight-to-safetyflows.Overthepastmonth,however, reemergeintheeuroareaasuncertaintiesaboutthe worriesaboutglobalgrowthprospectshaveintensiconditionofsomeeuro-areafinancialinstitutions fied,andyieldsonadvancedeconomysovereign wereamplifiedbyconcernsabouttheirpossible bondshavedrifteddownfurther. exposurestoGreeceandotherperipheraleuro-area economies.TheLondoninterbankofferedrate,or TheFinancialAccount Libor,forU.S.dollarsincreasedsharplyinlateApril. Financialflowsinthefirstquarterof thisyear Inresponsetotheintensificationofthesedollarfund- reflectedagrowingimprintof thestrainsinEurope. ingstrains,theFederalOpenMarketCommittee DataforthefirstquarterandindicatorsforthesecreestablisheddollarliquidityswaplinesonMay9and ondquarterpointtounusuallylargepurchasesof 10withtheEuropeanCentralBank(ECB),theBank U.S.Treasurysecuritiesbyprivateforeignerssofar ofEngland,theBankofCanada,theBankofJapan, andtheSwissNationalBank.Sofar,drawingsonthe thisyear,likelyindicatingaflighttoqualityasfiscal lineshavebeenlimited,withonlytheECBandthe problemsinEuropemounted.Foreigndemandfor BankofJapanattractinganybiddersintheirdollar otherU.S.securitiesremainedmixed.Netpurchases tenderoperations. of U.S.agencydebtstayedweak,whilenetpurchases of U.S.equities,whichwerestronginthefirstquar- Drawsontheselineshavebeenlimitedbecausethe centralbanksareofferingdollarliquidityintheirmar- ter,appeartohaveweakenedinthesecondquarter. ketsatratesequaltotheovernightindexswaprate ForeignprivateinvestorscontinuedtosellU.S.corplus100basispoints—ratesthathaveexceededthe poratedebtsecurities,onnet,butataslowerpacein costofdollarfundingavailabletomostinstitutions thesecondquarter.Conversely,U.S.residentscontinfromalternativesources.However,thesefacilities uedtopurchasesizableamountsof foreignbonds weredesignedtoprovideabackstop,andassuch, evenwithlimitedcreditextensions,theyaresupport- andequities,includingbothemergingmarketand ingthefunctioningofdollarfundingmarketsand Europeansecurities. helpingtocurtailuncertaintiesinthosemarkets. BankslocatedintheUnitedStatessharplyincreased netlendingabroad,generatingnetprivatecapital thedollarlittlechangedbytheendof thefirstquar- outflows.Theseoutflowswerespurredinpartbythe ter.Foreignequityindexesgenerallyrosemodestly reemergenceof dollarfundingpressuresinEuropean duringthefirstquarter,astheeffectof improving interbankmarkets;suchpressureshadbeenacuteat growthprospectsinsomeregionswasonlypartlyoff- theheightof theglobalfinancialcrisisinlate2008 setbyconcernsaboutGreece.Thoseconcernsled buthadsubsidedbythemiddleof lastyear. yieldsonthesovereignbondsof Germanyand Francetodriftdown,asinvestorsshiftedintothose Inflowsfromforeignofficialinstitutionsremained assets. strongthroughthefirstquarter.Mostof these inflowswerefromcountriesseekingtocounteract BylateApril,theproblemsinGreecewereexacerbat- upwardpressureontheircurrenciesbypurchasing ingconcernsaboutfiscalsustainabilityinEuropeand U.S.dollarsonforeigncurrencymarkets.These growthintheregionmorebroadly.Theincreasein countriesthenusedtheproceedstoacquireU.S. perceivedriskcausedthedollartoappreciatenotice- assets,primarilyTreasurysecurities.Availabledata ablyfrommid-Apriltotheendof Mayandledto forthesecondquarterindicatethatforeignofficial sharpdeclinesinforeignstockmarkets.Theyieldson purchasesof U.S.Treasurysecuritiesslowedinline thesovereignbondsof FranceandGermanyfellfur- withthestrengtheningof thedollar. ther,andyieldsonthesovereignbondsof other advancedeconomiesbeganfallingaswell,drivenby AdvancedForeignEconomies flight-to-safetyflowsandexpectationsthatpolicy NotwithstandingtheongoingstrainsontheEurotighteningwouldoccurlaterthanhadpreviously peaneconomy,thedataoneconomicactivityabroad beenexpected. thatwehavereceivedtodatedonotshowsignificant effectsof thesestrainsandsuggestthatamoderate StepstakenbyEuropeancountriesinearlyMayto recoveryisunderway.Inthefirstquarter,therecovprovideassistancetoGreeceandothercountrieswith eryfromlastyear’srecessiongatheredmomentumin

64 97thAnnualReport|2010 theadvancedforeigneconomies,drivenbyarebound rateat1percentand,inthesecondquarter,took inworldtradeandcontinuingimprovementinbusi- additionalmeasurestoprovideliquidity:extending nesssentiment.Growthwasparticularlyrobustin theperiodoverwhichitpromisedtoprovidefixed- Japan,whichbenefitedfromrisingexportstoemerg- raterefinancingwithfullallotment,adjustingitscolingAsia,andinCanada,whereprivatedomestic lateralrequirementsonrepurchaseagreementsto demandremainedstrong.Economicgrowthwasless ensurethatGreekgovernmentdebtwouldremainelivigorousintheeuroarea,whereconsumptionand gible,andbuyingthedebtof someeuro-areacouninvestmentspendingdeclinedagain,andinthe triesinthesecondarymarket.TheBankof Japan UnitedKingdom,whereconsumptionwasheldback keptitstargetedratenearzeroandaddedanewlendbythehikeinthevalue-addedtaxinJanuary. ingfacilityaimedatencouragingprivate-banklendingtobusinesses. Monthlyindicatorsof economicactivityacrossthe advancedforeigneconomiessuggestwidespread EmergingMarketEconomies growthinthesecondquarter.Industrialproduction Theemergingmarketeconomies,whichhaveledthe hascontinuedtorebound,businessconfidencehas recoveryfromtheglobalfinancialcrisis,havecontinimprovedfurther,andpurchasingmanagersindexes uedtogrowstronglythusfarthisyear. remainatlevelsconsistentwithsolidexpansion. However,indicatorsof householdspendingshowed InemergingAsia,aggregaterealGDPgrowthpicked considerablevariationacrosscountries,withretail uptoanimpressivedouble-digitpaceinthefirst salesexpandingrapidlyinCanadabutdecliningin quarter.Indicatorssuggestthatgrowthlikelyslowed theeuroarea.Suchvariationinpartreflecteddiffer- toamoresustainablebutstill-rapidpaceinthesecencesinlabormarketdevelopments.Canadian ondquarter.InChina,domesticdemandhasbeen employmenthasreboundedthisyear,whileeuro-area strong,withretailsalesregisteringsignificantgains. employmenthasstagnated.Asdescribedearlier, Theaccompanyingrapidgrowthof importshasproincreasingconcernsaboutsovereigndebtandbank- videdaboosttoothereconomiesintheregionandto ingsystemsinsomeeuro-areacountrieshaveaffected commodityexportersaroundtheworld.However, awidearrayof financialmarkets.However,while ChineserealGDPdeceleratedinthesecondquarter, thesestressesaremateriallyrestrainingeconomic reflectingaslowdowninfixedinvestmentandtighter activityinGreeceandseveralotherEuropeancoun- creditconditions.Risingpropertypricesandcontries,theyhavenotyethadabroadereffectoneco- cernsaboutthevolumeandqualityof lendingled nomicindicatorsintheothermajoradvancedforeign authoritiestoclampdownonbanklendingthrough economies. avarietyof prudentialmeasures.Authoritiesalso begantotightenmonetarypolicyandhaveraised Twelve-monthconsumerpriceinflationpickedupa requiredreserveratiosforbanksacumulative bitintheadvancedforeigneconomiesearlythisyear, 150basispointssinceJanuary.InlateJune,Chinese largelyowingtoincreasesinthepricesof energyand authoritiesannouncedthattheywouldtakestepsto othercommodities,butinflationremainedbelowtar- increasetheflexibilityof therenminbi.Therenminbi getintheeuroareaandCanadaandcontinuedtobe hassubsequentlyappreciatedabout1percentagainst negativeinJapan.Coreconsumerpriceinflation, thedollar. excludingfoodandenergy,remainedsubduedin theseeconomies,asconsiderableeconomicslackper- InLatinAmerica,realGDPgrowthdippedinthe sisted.Incontrast,headlineinflationintheUnited firstquarter,withoutputdeclinesinMexico,Chile, Kingdomroseabove3percentthisyear,drivenby andVenezuelaoffsettingrapidgrowthinBrazil.The exchangeratedepreciationandtheincreaseinthe fallinoutputinMexicoreflectedbothasharp value-addedtax. declineinMexico’sagriculturalsectoranddecelerationinthemanufacturingsector,butotherindica- Aftercuttingpolicyratestoverylowlevelsin2009, tors,includingverystrongexports,weremore mostmajorforeigncentralbankshavekeptrates upbeat.Brazilianeconomicactivitycontinuedto unchangedsofarthisyear.TheBankof Canada, showstrengthinthefirstquarter,withrealGDP however,tightenedmonetarypolicyinJune,raising expandingatadouble-digitrate,boostedbyfiscal itstargetfortheovernightrate25basispointsto stimulusandstrongdemandforthecountry’scom- ½percent,amidsignsof stronggrowthanddimin- modityexports.Brazil’scentralbankhasrecently ishingexcesscapacityintheCanadianeconomy.The tightenedmonetarypolicy,raisingthepolicyratea EuropeanCentralBankkeptitsmainrefinancing cumulative150basispointssincelateApril.

MonetaryPolicyandEconomicDevelopments 65 Inflationinemergingmarketeconomiesroseatthe ploymentrateremainedelevatedandhiringstayed endof 2009andinto2010,reflectingincreasesin quitelimited.Theweaknessinlabormarketscontinfoodandenergypricesand,particularlyinthecaseof uedtobeanimportantconcernfortheCommittee; Mexico,specialfactorssuchastaxincreases.Con- moreover,theprospectsforjobgrowthremaineda sumerpricereadingsfromrecentmonthssuggestthat significantsourceof uncertaintyintheeconomic thesepricepressuresarewaning. outlook,particularlyforconsumerspending.Financialmarketconditionsweresupportiveof economic Part 3 growth.Nonetheless,netdebtfinancingbynonfinan- Monetary Policy: cialbusinesseswasnearzerointhefourthquarter Recent Developments and Outlook afterbeingnegativeinthethird,consistentwithsluggishdemandforcreditandtightlendingstandards MonetaryPolicyovertheFirstHalfof2010 andtermsatbanks.Increasesinenergypricespushed TheFederalOpenMarketCommittee(FOMC) upheadlineconsumerpriceinflation,butcoreconmaintainedatargetrangeforthefederalfundsrate sumerpriceinflationremainedsubdued. of 0to¼percentthroughoutthefirsthalf of 2010in ordertocontinuetopromoteeconomicrecoveryand Intheirdiscussionof monetarypolicyfortheperiod pricestability.Inthestatementaccompanyingeach ahead,Committeemembersagreedthatneitherthe regularlyscheduledFOMCmeeting,theCommittee economicoutlooknorfinancialconditionshad notedthateconomicconditions,includinglowrates changedappreciablysincetheDecembermeetingand of resourceutilization,subduedinflationtrends,and thatnochangestotheCommittee’slarge-scaleasset stableinflationexpectations,werelikelytowarrant purchaseprogramsortoitstargetrangeforthefedexceptionallylowlevelsof thefederalfundsratefor eralfundsrateof 0to¼percentwerecalledfor.Furanextendedperiod.Attheendof March,theFed- ther,policymakersreiteratedtheiranticipationthat eralReserveconcludeditspurchasesof agency economicconditionswerelikelytowarrantexcepmortgage-backedsecurities(MBS)andagencydebt tionallylowratesforanextendedperiod.TheComunderitslarge-scaleassetpurchaseprograms,which mitteeaffirmeditsintentiontopurchaseatotalof wereundertakentoprovidesupporttomortgage $1.25trillionof agencyMBSandabout$175billion lendingandhousingmarketsandtoimproveoverall of agencydebtbytheendof thefirstquarterandto conditionsinprivatecreditmarkets.Also,inlightof graduallyslowthepaceof thesepurchasestoproimprovedfunctioningof financialmarkets,bythe moteasmoothtransitioninmarkets.Committee endof JunetheFederalReservehadclosedallof the membersagreedthatwithsubstantialimprovements specialliquidityfacilitiesthatithadcreatedtosup- inmostfinancialmarkets,includinginterbankmarportmarketsduringthecrisis.However,inresponse kets,thestatementfollowingthemeetingwouldinditothereemergenceof strainsinU.S.dollarshort- catethatonFebruary1,2010,theFederalReserve termfundingmarketsinEurope,theFederalReserve wouldcloseseveralspecialliquidityfacilitiesandthat andfiveforeigncentralbanksannouncedinMaythe thetemporaryswaplineswithforeigncentralbanks reestablishmentof temporaryU.S.dollarliquidity wouldexpire.Inaddition,thestatementwouldsay swapfacilities. thattheFederalReservewasintheprocessof windingdowntheTermAuctionFacility(TAF)andthat AtitsJanuary26–27meeting,theCommitteeagreed thefinalauctionwouldtakeplaceinMarch2010. thattheincominginformation,thoughmixed,indicatedthatoveralleconomicactivityhadstrengthened Ashadbeenannounced,onFebruary1,2010,the inrecentmonths,aboutinlinewithexpectations. FederalReserveclosedthePrimaryDealerCredit Consumerspendingwaswellmaintainedinthe Facility,theTermSecuritiesLendingFacility,the fourthquarter,andbusinessexpendituresonequip- CommercialPaperFundingFacility,andtheAssetmentandsoftwareappearedtoexpandsubstantially. BackedCommercialPaperMoneyMarketMutual However,theimprovementinthehousingmarket FundLiquidityFacility.Thetemporaryswaplines hadslowed,andspendingonnonresidentialstruc- withforeigncentralbanksexpiredonthesameday. turescontinuedtofall.Availabledatasuggestedthat OnFebruary18,2010,theFederalReserve thepaceof inventoryliquidationhaddiminished announcedafurthernormalizationof thetermsof considerablyinthefourthquarter,providingasizable loansmadeundertheprimarycreditfacility.Therate boosttoeconomicactivity,andespeciallytoindus- chargedontheseloanswasincreasedfrom½percent trialproduction.Inthelabormarket,layoffssubsided to¾percent,effectiveonFebruary19,andthetypinoticeablyinthefinalmonthsof 2009,buttheunem- calmaximummaturityforsuchloanswasshortened

66 97thAnnualReport|2010 toovernight,effectiveonMarch18,2010.TheFed- exceptionallylowlevelsof thefederalfundsratefor eralReservealsoannouncedonFebruary18thatthe anextendedperiod.Inlightof theimprovedfuncminimumbidrateonthefinalTAFauctionon tioningof financialmarkets,Committeemembers March8hadbeenraisedto50basispoints,¼per- agreedthatitwouldbeappropriateforthestatement centagepointhigherthaninpreviousauctions.The toindicatethatthepreviouslyannouncedschedule FederalReservenotedthatthemodificationswere forclosingtheTermAsset-BackedSecuritiesLoan notexpectedtoleadtotighterfinancialconditions Facility(TALF)wasbeingmaintained.On forhouseholdsandbusinessesanddidnotsignalany March31,theTALFclosedforloansbackedbycolchangeintheoutlookfortheeconomyorformon- lateralotherthannewlyissuedcommercialMBS. etarypolicy. TheinformationreviewedattheApril27–28FOMC ThedatareviewedattheMarch16FOMCmeeting meetingsuggestedthat,onbalance,theeconomic suggestedthateconomicactivityexpandedatamod- recoverywasproceedingatamoderatepaceandthat eratepaceinearly2010.Businessinvestmentin thedeteriorationinthelabormarketwaslikelycomequipmentandsoftwareseemedtohavepickedup, ingtoanend.Consumerspendingcontinuedtopost andconsumerspendingincreasedfurtherinJanuary. solidgainsinthefirstthreemonthsof theyear,and Privateemploymentwouldlikelyhaveturnedupin businessinvestmentinequipmentandsoftware Februarybutforthesnowstormsthataffectedthe appearedtohaveincreasedsignificantlyfurtherin EastCoast.Meetingparticipantsagreedthatavail- thefirstquarter.Inaddition,growthof manufacturableindicatorssuggestedthatthelabormarket ingoutputremainedbrisk,andgainsbecamemore appearedtobestabilizing.Outputinthemanufactur- broadlybasedacrossindustries.However,residential ingsectorcontinuedtotrendhigherasfirms construction,whilehavingedgedup,wasstill increasedproductiontomeetstrengtheningfinal depressed,constructionof nonresidentialbuildings demandandtoslowthepaceof inventoryliquida- remainedonasteepdownwardtrajectory,andstate tion.Onthedownside,housingactivityremainedflat andlocalgovernmentscontinuedtoretrench.Conandnonresidentialconstructionweakenedfurther. sumerpriceinflationremainedlow.Meetingpartici- Meanwhile,asizableincreaseinenergypriceshad pantsexpectedthatbusinessinvestmentwouldbe pushedupheadlineconsumerpriceinflationin supportedbyimprovedconditionsinfinancialmarrecentmonths;incontrast,coreconsumerpriceinfla- kets.Largefirmswithaccesstocapitalmarkets tionwasquitelow.Participantsagreedthatfinancial appearedtobehavinglittledifficultyinobtaining marketconditionsremainedsupportiveof economic credit,andinmanycasestheyalsohadample growth.Spreadsinshort-termfundingmarketswere retainedearningswithwhichtofundtheiroperations nearpre-crisislevels,andriskspreadsoncorporate andinvestment.However,manyparticipantsnoted bondsandmeasuresof impliedvolatilityinequity that,whilefinancialmarketconditionshadgenerally marketswerebroadlyconsistentwithhistorical improved,banklendingwasstillcontractingandthat normsgiventheoutlookfortheeconomy.Partici- smallerfirmsinparticularcontinuedtofacesubstanpantswerealsoreassuredbytheabsenceof anysigns tialdifficultyinobtainingbankloans.Memberssaw of renewedstrainsinfinancialmarketfunctioningas anescalationof financialstrainsinEuropeasarisk aconsequenceof theFederalReserve’swinding totheoutlook,althoughtheattendanteffectson downof itsspecialliquidityfacilities.However,bank globalmarketconditionswereonlybeginningtobe lendingwasstillcontracting,andinterestrateson felt. manybankloanshadrisenfurtherinrecentmonths. Membersagreedthatnoadjustmentstothefederal Againstthisbackdrop,Committeemembersagreed fundsratetargetrangewerewarrantedatthemeetthatitwouldbeappropriatetomaintainthetarget ing.Onbalance,theeconomicoutlookhadchanged rangeof 0to¼percentforthefederalfundsrateand littlesincetheMarchmeeting.Eventhoughthe tocompletetheCommittee’spreviouslyannounced recoveryappearedtobecontinuingandwasexpected purchasesof $1.25trillionof agencyMBSandabout tostrengthengraduallyovertime,mostmembers $175billionof agencydebtbytheendof March. projectedthateconomicslackwouldcontinuetobe Nearlyallmembersjudgedthatitwasappropriateto elevatedforsometime,withinflationremaining reiterateintheCommittee’sstatementtheexpecta- belowratesthatwouldbeconsistentinthelongerrun tionthateconomicconditions—includinglowlevels withtheFederalReserve’sdualobjectivesof maxiof resourceutilization,subduedinflationtrends,and mumemploymentandpricestability.Inaddition, stableinflationexpectations—werelikelytowarrant nearlyallmembersjudgedthatitwasappropriateto

MonetaryPolicyandEconomicDevelopments 67 reiteratetheexpectationthateconomicconditions withthecapacitytoconducttendersof U.S.dollars werelikelytowarrantexceptionallylowlevelsof the intheirlocalmarketsatfixedratesforfullallotment, federalfundsrateforanextendedperiod.Inlightof similartoarrangementsthathadbeeninplaceprevitheimprovedfunctioningof financialmarkets,Com- ously.ThearrangementwiththeBankof Canada mitteemembersagainagreedthatitwouldbeappro- wouldsupportdrawsof upto$30billion,aswasthe priateforthestatementtoindicatethattheprevi- casepreviously.TheswaparrangementswereauthorouslyannouncedscheduleforclosingtheTALFwas izedthroughJanuary2011. beingmaintained. TheinformationreviewedattheJune22–23FOMC OnMay9,2010,theCommitteemetbyconference meetingsuggestedthattheeconomicrecoverywas calltodiscussdevelopmentsinglobalfinancialmar- proceedingatamoderatepaceinthesecondquarter. ketsandpossiblepolicyresponses.Overtheprevious Businessescontinuedtoincreaseemploymentand severalmonths,financialmarketconcernsaboutthe lengthenworkweeksinAprilandMay,buttheunemabilityof Greeceandsomeothereuro-areacountries ploymentrateremainedelevated.Industrialproductocontaintheirsizablebudgetdeficitsandfinance tionregisteredstrongandwidespreadgains,and theirdebthadincreased.Conditionsinshort-term businessinvestmentinequipmentandsoftwarerose fundingmarketsinEuropehaddeteriorated,and rapidly.Consumerspendingappearedtohavemoved globalfinancialmarketsmoregenerallyhadbeen upfurtherinAprilandMay.However,housingstarts volatileandlesssupportiveof economicgrowth. droppedinMay,andnonresidentialconstruction remaineddepressed.Fallingenergypriceshelddown Inconnectionwiththepossibleimplementationby headlineconsumerpricesinAprilandMay,while theEuropeanauthoritiesof anumberof measuresto coreconsumerpricesedgedup. promotefiscalsustainabilityandsupportfinancial marketfunctioning,somemajorcentralbankshad Financialmarketshadbecomesomewhatlesssuprequestedthatdollarliquidityswaplineswiththe portiveof economicgrowthsincetheAprilmeeting, FederalReservebereestablished.TheCommittee withdevelopmentsinEuropealeadingcauseof agreedthatsucharrangementscouldbehelpfulin greaterglobalfinancialmarkettensions.Riskspreads limitingthestrainsindollarfundingmarketsandthe formanycorporateborrowershadwidenednoticeadverseimplicationsof recentdevelopmentsforthe ably,equitypriceshadfallenappreciably,andthedol- U.S.economy.Inordertopromotethetransparency larhadriseninvalueagainstabroadbasketof other of thesearrangements,participantsalsoagreedthat currencies.Participantssawthesechangesaslikelyto itwouldbeappropriatefortheFederalReserveto weightosomedegreeonhouseholdandbusiness publishtheswapcontractsandtoreleaseonaweekly spendingovercomingquarters. basistheamountsof drawsundertheswaplinesby centralbankcounterparty.Itwasrecognizedthatthe TheCommitteeagreedtomakenochangeinitstar- Committeewouldneedtoconsidertheimplications getrangeforthefederalfundsrateatthemeeting. of swaplinesforbankreservesandoverallmanage- Althoughtheeconomicoutlookhadsoftenedsomementof theFederalReserve’sbalancesheet.Partici- what,andanumberof meetingparticipantssawthe pantsnotedtheimportanceof appropriateconsulta- riskstotheoutlookashavingshiftedtothedowntionwithU.S.governmentofficialsandemphasized side,allsawtheeconomicexpansionaslikelytobe thatareestablishmentof thelinesshouldbecontin- strongenoughtocontinueraisingresourceutilizagentonstrongandeffectiveactionsbyauthoritiesin tion,albeitmoreslowlythantheyhadpreviously Europetoaddressfiscalsustainabilityandsupport anticipated.Inaddition,theysawinflationaslikely financialmarkets. tostabilizenearrecentlowreadingsincomingquartersandthengraduallyrisetowardmoredesirable Attheconclusionof itsdiscussion,theCommittee levels.Nearlyallmembersagainjudgedthatitwas votedunanimouslytoauthorizetheChairmanto appropriatetoindicateinthestatementreleasedfolagreetoreestablishswaplineswiththeEuropean lowingthemeetingthateconomicconditionswere CentralBank(ECB),theBankof England,theSwiss likelytowarrantexceptionallylowlevelsof thefed- NationalBank,theBankof Japan,andtheBankof eralfundsrateforanextendedperiod.Participants Canada.ThearrangementswiththeBankof Eng- notedthatinadditiontocontinuingtodevelopand land,theECB,theSwissNationalBank,andthe testinstrumentstoexitfromtheperiodof unusually Bankof Japanwouldprovidethosecentralbanks accommodativemonetarypolicy,theCommittee

68 97thAnnualReport|2010 wouldneedtoconsiderwhetherfurtherpolicystimu- Withrespecttolonger-runapproachestoimplementlusmightbecomeappropriateif theeconomicout- ingmonetarypolicy,mostpolicymakerssawbenefits lookweretoworsenappreciably. incontinuingtousethefederalfundsrateasthe operatingtargetforimplementingmonetarypolicy, ToolsfortheWithdrawal solongasothermoneymarketratesremainedclosely ofMonetaryPolicyAccommodation linkedtothefederalfundsrate.Manythoughtthat AlthoughtheFOMCcontinuestoanticipatethat anapproachinwhichtheprimarycreditratewasset economicconditionsarelikelytowarrantexception- abovetheCommittee’stargetforthefederalfunds allylowlevelsof thefederalfundsrateforan rateandtheIOERratewassetbelowthattarget—a extendedperiod,ultimatelytheFederalReservewill corridorsystem—wouldbebeneficial.Participants needtobegintotightenmonetaryconditionstopre- recognized,however,thatthesupplyof reservebalventthedevelopmentof inflationpressuresasthe anceswouldneedtobereducedconsiderablytolift economyrecovers.Thattighteningwillbeaccom- thefederalfundsrateabovetheIOERrate.Participlishedpartlythroughchangesthatwillaffectthe pantsnotedthattheirjudgmentsweretentative,that compositionandsizeof theFederalReserve’sbal- theywouldcontinuetodiscusstheultimateoperating ancesheet. regime,andthattheymightwellgainusefulinformationaboutlonger-runapproachesduringtheeventual TheFederalReservehasdevelopedanumberof tools withdrawalof policyaccommodation. thatwillfacilitatetheremovalof policyaccommodationandreducethequantityof reservesheldbythe ReverseRepurchaseAgreements bankingsystemattheappropriatetime.Thesetools AttheJanuarymeeting,staff reportedonsuccessful encompass(1)raisingtheinterestratepaidonexcess testsof theFederalReserve’sabilitytoconductterm reservebalances(theIOERrate),(2)executingterm RRPswithprimarydealersbyarrangingseveral reverserepurchaseagreements(RRPs)withthepri- small-scaletransactionsusingTreasurysecuritiesand marydealersandothercounterparties,(3)issuing agencydebtascollateral;staff anticipatedthatthe termdepositstodepositoryinstitutionsthroughthe FederalReservewouldbeabletoexecutetermRRPs TermDepositFacility(TDF),(4)redeemingmatur- againstMBSlaterintheyearandwouldhavethe ingandprepaidsecuritiesheldbytheFederal capabilitytoconductRRPswithanexpandedsetof Reservewithoutreinvestingtheproceeds,and(5)sell- counterpartiesshortlythereafter.Thestaff updated ingsecuritiesheldbytheFederalReserve.Allbutthe theCommitteeonthestatusof workonRRPsat firstof thesetoolswouldshrinkthesupplyof reserve subsequentmeetings. balances;thelasttwowouldalsoreducethesizeof theFederalReserve’sbalancesheet. TermDepositFacility InlateDecember2009,theFederalRegisterpub- InterestonExcessReservesRate lishedanoticerequestingthepublic’sinputonapro- Intheirdiscussionof theIOERrateattheJanuary posalforaTDF.AttheJanuaryFOMCmeeting, meeting,allparticipantsagreedthatraisingthatrate FederalReservestaff indicatedthattheywouldanaandthetargetforthefederalfundsratewouldbea lyzecommentsfromthepublicinthecomingweeks keyelementof amovetoless-accommodativemon- andthenprepareafinalproposalfortheBoard’s etarypolicy.Mostparticipantsthoughtthatitlikely consideration.OnApril30,theFederalReserve wouldbeappropriatetoreducethesupplyof reserve Boardannouncedthatithadapprovedamendments balances,tosomeextent,beforeraisingtheIOER toRegulationD(ReserveRequirementsof Deposirateandthetargetforthefederalfundsrate,inpart toryInstitutions)authorizingtheReserveBanksto becausereducingthesupplyof reservebalances offertermdepositstoinstitutionsthatareeligibleto wouldtightenthelinkbetweenshort-termmarket receiveearningsontheirbalancesatReserveBanks. ratesandtheIOERrate.However,severalpartici- OnMay10,theFederalReserveBoardauthorized pantsnotedthatdrainingoperationsmightbeseen uptofivesmall-valueofferingsof termdeposits asaprecursortotighteningandshouldbeunder- undertheTDF,whichweredesignedtoensurethe takenonlywhentheCommitteejudgedthatan effectivenessof TDFoperationsandtoprovideeliincreaseinitstargetforthefederalfundsratewould gibleinstitutionswithanopportunitytogainfamilsoonbeappropriate.Forthesamereason,afew iaritywiththeprocedures.Thefirstof theseofferbelievedthatitwouldbebettertodrainreservescon- ings,for$1billionin14-daytermdeposits,wasconcurrentlywiththeeventualincreaseintheIOERand ductedonJune14.Theauctionhadastop-outrate targetrates. of 27basispointsandabid-to-coverratioof slightly

MonetaryPolicyandEconomicDevelopments 69 morethan6.Thesecondoffering,for$2billionin tool.Participantsagreedthatthecurrentpolicyof 28-daydeposits,wasconductedonJune28.That redeemingandnotreplacingagencydebtandagency auctionhadastop-outrateof about27basispoints MBSasthosesecuritiesmatureorareprepaidhelped andabid-to-coverratioof about5½.Thethird,for makeprogresstowardtheCommittee’sgoalsregard- $2billionin84-daytermdeposits,wasconductedon ingthesizeandcompositionof theFederalReserve’s July12.Thatauctionhadastop-outrateof 31basis balancesheet.Manypolicymakerssawbenefitsto pointsandabid-to-coverratioof about3¾. eventuallyadoptinganapproachof reinvesting maturingTreasurysecuritiesinbillsandshorter-term AssetRedemptionsandSales couponissuestoshiftthematuritycompositionof Overthecourseof theFOMCmeetingsconductedin theFederalReserve’sportfoliotowardthestructure thefirsthalf of 2010,participantsdiscussedtheeven- thathadprevailedpriortothefinancialcrisis.Several tualsizeandcompositionof theFederalReserve’s meetingparticipantsthoughttheFederalReserve balancesheetandlonger-runstrategiesforasset shouldeventuallyholdaportfoliocomposedlargely redemptionsandsales.Participantsagreedthatany of shorter-termTreasurysecurities. longer-runstrategyforassetsalesandredemptions shouldbeconsistentwiththeachievementof the Participantsexpressedarangeof viewsaboutthe Committee’sobjectivesof maximumemployment appropriatetimingandpaceof assetsalesand andpricestability.Policymakerswerealsounani- redemptions,andCommitteemembersdidnotreach mousintheviewthatitwillbeappropriatetoshrink finaldecisionsaboutthoseissuesoverthecourseof thesupplyof reservebalancesandthesizeof the themeetingsinthefirsthalf of 2010.Participants FederalReserve’sbalancesheetsubstantiallyover agreedthatitwouldbeimportanttomaintainflextime.Moreover,theyagreedthatitwilleventuallybe ibilityregardingtheseissuesgiventheuncertainties appropriatefortheSystemOpenMarketAccountto associatedwiththeunprecedentedsizeandcomposireturnitsdomesticholdingstoonlysecuritiesissued tionof theFederalReserve’sbalancesheetandits bytheU.S.Treasury,aswasthecasebeforethefinan- effectsonfinancialconditions.Forthetimebeing, cialcrisis.Meetingparticipantsalsoagreedthatsales meetingparticipantsagreedthattheFederalReserve of agencydebtandagencyMBSshouldbeimple- shouldcontinuetheinterimapproachof allowingall mentedinaccordancewithaframeworkcommuni- maturingagencydebtandallprepaymentsof agency catedwellinadvanceandbeconductedatagradual MBStoberedeemedwithoutreplacementwhilerollpacethatpotentiallycouldbeadjustedinresponseto ingoverallmaturingTreasurysecurities.AttheJune developmentsineconomicandfinancialconditions. meeting,participantsrecognizedthatinlightof the increaseddownsideriskstoanalreadygradualrecov- Mostparticipantsfavoreddeferringassetsalesfor eryfromadeeprecession,theCommitteealso sometime,andamajoritypreferredbeginningasset neededtoreviewitsoptionsforprovidingadditional salesafterthefirstincreaseintheFOMC’stargetfor monetarystimulusshoulddoingsobecomenecesshort-terminterestrates.Suchanapproachwould sary.ParticipantswillcontinuetoconsidertheCompostponeanyassetsalesuntiltheeconomicrecovery mittee’sportfoliomanagementstrategyatfuture waswellestablishedandwouldmaintainshort-term meetings. interestratesastheCommittee’skeymonetarypolicy

71 Banking Supervision and Regulation TheFederalReservehassupervisoryandregulatory MergerAct(withregardtostatememberbanks),the authorityoveravarietyof financialinstitutionsand ChangeinBankControlAct(withregardtoBHCs activitieswiththegoalof promotingasafe,sound, andstatememberbanks),andtheInternational andstablebankingandfinancialsystemthatsup- BankingAct.TheFederalReserveisalsoresponsible portsthegrowthandstabilityof theU.S.economy. forimposingmarginrequirementsonsecuritiestransactions.Incarryingoutitsresponsibilities,theFederalReservecoordinatessupervisoryactivitieswith Overview theotherfederalbankingagencies,stateagencies, functionalregulators(thatis,regulatorsforinsur- TheFederalReserveisthefederalsupervisorand ance,securities,andcommoditiesfirms),andforeign regulatorof allU.S.bankholdingcompanies bankregulatoryagencies. (BHCs),includingfinancialholdingcompaniesand state-charteredcommercialbanksthataremembers Thisreporthighlightsseveraltopicsrelevanttothe of theFederalReserveSystem.Attheendof 2010, FederalReserve’ssupervisoryandregulatoryactivi- 2,193banksweremembersof theFederalReserve tiesin2010: Systemandwereoperating57,694branches.These • safetyandsoundness banksaccountedfor34percentof allcommercial banksintheUnitedStatesandfor71percentof all • supervisorypolicy commercialbankingoffices.Inoverseeingtheseorga- • supervisoryinformationtechnology nizations,theFederalReserveseeksprimarilytopromotetheirsafeandsoundoperation,includingtheir • staff development compliancewithlawsandregulations. • regulationof theU.S.bankingstructure TheFederalReservealsohasresponsibilityforsuper- • enforcementof otherlawsandregulations visingtheoperationsof allEdgeActandagreement corporations,theinternationaloperationsof state 2010 Developments memberbanksandU.S.BHCs,andtheU.S.operationsof foreignbankingorganizations.Furthermore, throughtheDodd-FrankWallStreetReformand During2010,theU.S.bankingsystemandfinancial ConsumerProtectionActof 2010(Dodd-Frank marketsimprovedfurther,continuingtheirrecovery Act),theFederalReservehasbeenassignedaddi- fromthefinancialcrisisthatstartedinmid-2007. tionalresponsibilitiesforadditionalinstitutions, includingsystemicallyimportantnonbankfinancial Performanceof bankholdingcompanies.Whilea firmsandsystemicallyimportantfinancialutilities.In turnaroundinBHCperformancewasevidentduring addition,theacttransfersauthorityforconsolidated 2010,performanceremainsweakbyhistoricalstansupervisionof morethan400savingsandloanhold- dards,andtheindustryrecoverycouldfacechalingcompanies(SLHCs)andtheirnon-depository lengesduetoongoingandelevatednonperforming subsidiariesfromtheOfficeof ThriftSupervision assetlevels.U.S.BHCs,inaggregate,reportedearn- (OTS)totheFederalReserve,effectiveJuly21,2011. ingsof $80.8billionfortheyearendingDecember31,2010,comparedto$12.9billionforthefull TheFederalReserveexercisesimportantregulatory year2009.Muchof thisimprovementwasdueto influenceoverentryintotheU.S.bankingsystem, lowerloanlossprovisioningandconsequentreserve andthestructureof thesystem,throughitsadminis- releases.Theproportionof unprofitableBHCs, trationof theBankHoldingCompanyAct,theBank althoughdownfrom42percentin2009,remainshigh

72 97thAnnualReport|2010 at27percent,whichencompassesroughly24percent Impactof theDodd-FrankAct.Oneof themost of industryassets.Nonperformingassetspresenta prominenteventsof 2010wasthepassageof the significantchallengetoindustryrecovery,withthe Dodd-FrankAct.TheDodd-FrankActclosedagap nonperformingassetratiodownonlyslightlyto intheregulatoryframeworkbysubjectingdesignated 4.1percentof loansandforeclosedassetsfrom systemicallyimportantnonbankfinancialinstitutions 4.7percentin2009.Weaknesseswerebroadbased, toprudentialregulationandconsolidatedsupervision encompassingresidentialmortgages(first-lien),com- andbyprovidingamechanismfororderlyresolution mercialrealestate—especiallynon-ownernonfarm intheeventof thefailureof suchaninstitution.A nonresidentialandconstructionotherthansingle- keyaspecttheDodd-FrankActisasetof enhanced family—andcommercialandindustrial(C&I)loans. standardsforallsystemicallyimportantfinancial In2010,anadditional73BHCsthatreceivedfunds institutions.Otherelementsof theactincludedcrefromtheU.S.Departmentof theTreasury’s(Treas- ationof aFinancialStabilityOversightCouncil,2 ury)TroubledAssetRelief Program(TARP)repaid limitsoncertaintypesof proprietarytrading,estaballfundsreceived.Asof year-end,73BHCsthat lishmentof financialsectorconcentrationlimits, receivedfundsfromTreasury’sTARPrepaidall developmentof risk-retentionrequirementsforsecufundsreceived,andTreasuryreportsthatapproxi- ritizations,andimprovedoversightof over-themately82percentof alldistributedTARP’sfunds counter(OTC)derivativesactivity.In2010,theFedhasbeenrepaid.1(Alsosee“BankHolding eralReservebegantheprocessof implementingele- Companies”onpage76). mentsof theDodd-FrankActthroughseveral proposedrulemakings(see“CapitalAdequacy Performanceof statememberbanks.Similarto Standards”onpage83).Formoredetailonthe BHCs,theturnaroundatstatememberbanksin2010 impactof Dodd-Frank,see“SavingsandLoan wasmuted.Asagroup,statememberbanksreported HoldingCompanyTransfer”onpage77and“Fedaprofitof $6.1billion,upfromaggregatelosses eralLegislativeDevelopments”onpage144. totaling$4.6billionin2009,butlowbyhistorical norms.Whileearningswereupduelargelytolower Capitaladequacy.Inaddition,during2010,theFedprovisions($17.7billionversus$26.4billionin eralReservewasinstrumentalinaugmentingstan- 2009)andmodestsecuritiesgains($0.6billionversus dardsrelatedtocapitaladequacyof bankinginstitulossesof $4.2billionin2009),almostafifthof all tions.FederalReservestaff workedproactivelywith statememberbankscontinuetoreportlosses.Mir- theotherfederalbankingagenciesandwithbanking roringtrendsatBHCs,thenonperformingassets supervisorsfromotherBaselCommitteemember ratioremainedrelativelyunchangedat4.3percentof countriestofinalizeacomprehensiveandfarloansandforeclosedassets,reflectingbothcontract- reachingreformpackageforinternationallyactive ingloanbalancesandongoingweaknessesinasset bankingorganizations,issuedinDecember2010. quality.Growthinproblemloansslowedduring Thispackageaimstostrengthenglobalcapitaland 2010,butweaknessencompassednonfarmnonresi- liquidityregulations,tobeimplementedinvarious dentiallending,residentialmortgages,andC&I stagesinthecomingyears.Inaddition,theFederal loans.Thenumberof foreclosedpropertiescontinued ReserveworkedwithotherU.S.bankingagenciesto toincrease,particularlythoseassociatedwithcon- issueforcommentproposedrulestorevisetheir structionandlanddevelopmentandone-tofour- market-riskcapitalrules,consistentwithchanges familyresidentiallending.Therisk-basedcapital madeattheBaselCommitteelevel.Also,theFederal ratiosforstatememberbanksimprovedduring2010 Reservebeganimplementingsomeof theprovisions intheaggregate,andthepercentof statemember of theDodd-FrankActrelatedtocapitaladequacy. banksdeemedwellcapitalizedunderpromptcorrec- (See“SupervisoryPolicy”onpage83.) tiveactionstandardsincreasedmoderatelyto97percentfrom95percentatyear-end2009.In2010,18 Otherpolicyinitiatives.Otherkeypolicyinitiatives statememberbankswith$8.5billioninassetsfailed, includedguidelinesforevaluatingproposalsbylarge withlossesof $1.4billionaccordingtoFederal BHCstoundertakecapitalactionsin2011.The DepositInsuranceCorporation(FDIC)estimates. guidelinesoutlinedthecriteriatobeusedbysupervi- (Alsosee“StateMemberBanks”onpage76.) sorswhenevaluatinganycapitaldistributionproposal(see“CapitalAdequacyStandards”on page83).TheFederalReserveandotherbanking 1 TheTARPstatisticsonlyincludethoseBHCsthatdidnotparticipateintheSupervisoryCapitalAssessmentProgramin2009. 2 TheFederalReserveisamemberofthisnewlyformedcouncil.

BankingSupervisionandRegulation 73 agenciesalsoissuedpolicystatementsonunderwrit- Bankexaminationsandinspections.Inlightof superingstandardsforsmallbusinessloansoriginated visorylessonslearned,theFederalReservebegan undertheTreasury’sSmallBusinessLendingFund augmentingitsprocessesforconductingexamina- (SBLF)Program.Theagenciesalsoissuedguidelines tionsandinspectionsasneeded.Aprominent forfundingandliquidityriskmanagement,apprais- exampleistheenhancedapproachtosupervisionof als,andincentivecompensation.(Seebox1and thelargest,mostcomplexorganizationsthattakesa “OtherPolicyIssues”onpage90). macroprudentialandmultidisciplinaryapproachto Box 1. Incentive Compensation InJune2010,theFederalReserveissuedfinalsuper- andtheguidancemoregenerally,areconsistentwith visoryguidanceaimedatensuringthatincentive thePrinciplesforSoundCompensationPractices compensationarrangementsatfinancialorganiza- issuedinApril2009bytheFinancialStabilityBoard tionstakeintoaccountriskandareconsistentwith andassociatedimplementationstandards. safeandsoundpractices(GuidanceonSoundIncentiveCompensationPoliciesatwww.federalreserve TheBoard,incooperationwithotherregulatory .gov/newsevents/press/bcreg/20100621a.htm). agencies,alsoconductedtwosupervisoryinitiatives Importantly,theotherfederalbankingagencies—the designedtospurandmonitorprogresstoward OfficeoftheComptrolleroftheCurrency,theOTS, improvedarrangements,identifyemergingbestpracandtheFDIC—joinedtheFederalReserveinadopt- tices,andadvancethestateofpracticemoregeneringtheguidance,ensuringthattheprinciplesembed- allyintheindustry.Thefirstinitiative,ahorizontal dedintheguidancewillapplytoallbankingorgani- reviewofincentivecompensationpracticesatlarge zationsregardlessoftheirfederalsupervisor. complexbankingorganizations,willbecompletedin early2011.Thisreviewhasinvolvedamultidisci- Theinteragencyguidanceisprinciples-based,recogplinarygroupofover150individuals,allofthebanknizingthatthemethodsusedtoachieveappropriingagencies,andmultipleprojectphases.Superviatelyrisk-sensitivecompensationarrangementslikely soryteamsreviewedexistingincentivecompensation willdiffersignificantlyacrossandwithinorganizapracticesandrelatedrisk-managementandcorpotions.Importantly,theinteragencyguidanceisorirategovernanceprocesses,evaluatedplansand entedtotherisk-takingincentivescreatedbyincentimetablesforenhancements,andconductedmore tivecompensationarrangementsandnotthelevelor detailedreviewsofafewspecificbusinesslines. amountofincentivecompensation.Becauseimprop- Supervisorshaveobservedandencouragedreal, erlystructuredcompensationarrangementsforboth positivechangeintheincentivecompensationpracexecutiveandnon-executiveemployeesmaypose ticesofthesebankingorganizations. safety-and-soundnessrisks,theguidanceapplies notonlytotop-levelmanagers,butalsotoother Additionally,theagenciesincorporatedoversightof employeeswhohavetheabilitytomateriallyaffect incentivecompensationarrangementsintotheregutheriskprofileofanorganization,eitherindividually larexaminationprocessforsmallerorganizations. oraspartofagroup. Thesereviewswillbetailoredtotakeaccountofthe Theguidanceadoptedbythefederalbankingagen- size,complexity,andothercharacteristicsofthese ciesisbasedonthreekeyprinciples:(1)incentive bankingorganizations. compensationarrangementsatabankingorganizationshouldprovideemployeesincentivesthatappro- FederalReservestaffwillprepareareportsometime priatelybalanceriskandfinancialresultsinamanner aftertheconclusionofthe2010bonusseason,in thatdoesnotencourageemployeestoexposetheir consultationwiththeotherfederalbankingagencies, organizationstoimprudentrisk;(2)thesearrange- ontrendsanddevelopmentsincompensationpracmentsshouldbecompatiblewitheffectivecontrols ticesatbankingorganizations.(Forinformationon andriskmanagement;and(3)thesearrangements rulemaking/guidancerequiredundertheDodd-Frank shouldbesupportedbystrongcorporategover- Actonincentive-basedcompensation,see“Changes nance,includingactiveandeffectiveoversightbythe toBankingRegulationandSupervision”inthe“Fedorganization’sboardofdirectors.Theseprinciples, eralLegislativeDevelopments”chapter.)

74 97thAnnualReport|2010 supervision,makinggreateruseof thebroadrangeof sidiaries.Whetheranexaminationoraninspectionis skillsof theFederalReservestaff topromotefinan- beingconducted,thereviewof operationsentails cialstability.(Alsosee“ExaminationsandInspec- 1. anevaluationof theadequacyof governanceprotions”belowandtable1.) videdbytheboardandseniormanagement, includinganassessmentof internalpolicies,pro- Supervision cedures,controls,andoperations; 2. anassessmentof thequalityof therisk- Safety and Soundness managementandinternalcontrolprocessesin placetoidentify,measure,monitor,andcontrol Topromotethesafetyandsoundnessof banking risks; organizations,theFederalReserveconductson-site 3. anassessmentof thekeyfinancialfactorsof examinationsandinspections,conductsoff-sitesurcapital,assetquality,earnings,andliquidity;and veillanceandmonitoring,andtakesenforcementand othersupervisoryactionsasnecessary.TheFederal 4. areviewforcompliancewithapplicablelawsand Reservealsoprovidestrainingandtechnicalassis- regulations. tancetoforeignsupervisorsandminority-ownedand denovodepositoryinstitutions. Table1providesinformationonexaminationsand inspectionsconductedbytheFederalReserveduring ExaminationsandInspections thepastfiveyears. TheFederalReserveconductsexaminationsof state memberbanks,theU.S.branchesandagenciesof TheFederalReserveusesarisk-focusedapproachto foreignbanks,andEdgeActandagreementcorpora- supervision,withactivitiesdirectedtowardidentifytions.Inaprocessdistinctfromexaminations,itcon- ingtheareasof greatestrisktobankingorganizaductsinspectionsof BHCsandtheirnonbanksub- tionsandassessingtheabilityof theorganizations’ Table1.StateMemberBanksandBankHoldingCompanies,2006–2010 Entity/item 2010 2009 2008 2007 2006 Statememberbanks Totalnumber 829 845 862 878 901 Totalassets(billionsofdollars) 1,697 1,690 1,854 1,519 1,405 Numberofexaminations 912 850 717 694 761 ByFederalReserveSystem 722 655 486 479 500 Bystatebankingagency 190 195 231 215 261 Top-tierbankholdingcompanies Large(assetsofmorethan$1billion) Totalnumber 482 488 485 459 448 Totalassets(billionsofdollars) 15,986 15,744 14,138 13,281 12,179 Numberofinspections 677 658 519 492 566 ByFederalReserveSystem1 654 640 500 476 557 Onsite 491 501 445 438 500 Offsite 163 139 55 38 57 Bystatebankingagency 23 18 19 16 9 Small(assetsof$1billionorless) Totalnumber 4,362 4,486 4,545 4,611 4,654 Totalassets(billionsofdollars) 991 1,018 1,008 974 947 Numberofinspections 3,340 3,264 3,192 3,186 3,449 ByFederalReserveSystem 3,199 3,109 3,048 3,007 3,257 Onsite 167 169 107 120 112 Offsite 3,032 2,940 2,941 2,887 3,145 Bystatebankingagency 141 155 144 179 192 Financialholdingcompanies Domestic 430 479 557 597 599 Foreign 43 46 45 43 44 1 Forlargebankholdingcompaniessubjecttocontinuous,risk-focusedsupervision,includesmultipletargetedreviews.

BankingSupervisionandRegulation 75 managementprocessestoidentify,measure,monitor, estextentpossibleonassessmentsandinformaandcontrolthoserisks.Keyaspectsof therisk- tiondevelopedbyotherrelevantdomesticand focusedapproachtoconsolidatedsupervisionof the foreignsupervisorsandfunctionalregulators; largestinstitutions(seebox2)supervisedbytheFed- 3. maintainingcontinualsupervisionof theseorgaeralReserveinclude nizations—includingthroughmeetingswith 1. developinganunderstandingof eachorganiza- bankingorganizationmanagementandanalysis tion’slegalandoperatingstructure,anditspri- of internalandexternalinformation—sothatthe marystrategies,businesslines,andrisk- FederalReserve’sunderstandingandassessment managementandinternalcontrolfunctions; of eachorganization’sconditionremainscurrent; 2. developingandexecutingatailoredsupervisory 4. assigningtoeachorganizationasupervisoryteam planthatoutlinestheworkrequiredtomaintaina composedof ReserveBankstaff whohaveskills comprehensiveunderstandingandassessmentof appropriatefortheorganization’sriskproeachinstitution,incorporatingreliancetothefull- file;and Box 2. Large Bank Supervision TheDodd-FrankActclosedcriticalgapsintheregu- plinaryapproachsupportedbyrigorousquantitative latoryframeworkbyensuringsystemicallyimportant analysis.Further,tofacilitategreateragilityandeffecnonbankfinancialinstitutionswouldbesubjectto tivenessinoursupervisoryresponses,ourcorporate consolidatedsupervisionandbyprovidingamecha- governanceforlargebanksupervisionnowinvolves nismfororderlyresolutionintheeventofthefailure moreseniorandcentralizedSystemexpertise. ofsuchaninstitution.But,thecrisisof2008also highlightedthecriticalimportanceofeffectivesuper- Thestructureandgovernanceoflargebanksupervivisionofallsystemicallyimportantinstitutionsto sionhasbeenreorganizedtosupporttheseobjecreducethepotentialforadestabilizingcollapseofa tives.TheLargeInstitutionSupervisionCoordinating troubledfinancialinstitution. Committee(LISCC)wasestablishedasamultidisciplinarygroupofseniorFederalReserveofficialsto WellinadvanceofthepassageoftheDodd-Frank providestrategicandpolicydirectionforsupervisory Act,theFederalReserveestablishedaninternal activities,toensurethatsystemicriskconcernsare workinggrouptoenhancetheeffectivenessofthe fullyintegratedinsupervisoryplanning,andtofaciliconductofitssupervisoryactivities.Theworking tateimprovedconsistencyandqualityofsupervision. group,whichcomprisedseniorofficialsfromthe ThroughtheLISCC,anexpansivebreadthofexper- BoardofGovernorsandtheReserveBanks,was tisefromwithintheFederalReserveSystem—inthe chargedwithidentifyingkeyareasforimproving researchdivisions,marketsgroup,andclearingand supervision,aswellaswithlayingouttheactions settlementfunctions—informsandcomplementsthe necessarytoeffectthoseimprovements.Thework- workofoursupervisors.AmultidisciplinaryOperating inggroupidentifiedneededimprovementsineachof Committeehasbeenimplementedtosupportthe threecriticalsupervisoryactivities: LISCCatthestafflevel.LiketheLISCC,theOperatingCommitteeincorporatesparticipationfromspe- 1. theidentificationofkeyrisksandvulnerabilities; cializedskillsfromacrosstheSysteminallphasesof 2. thedesignandexecutionoftheappropriate supervisionforthemostcomplexinstitutions. supervisoryresponsestotheserisksandconcerns;and Increaseduseofdata-drivenmodelingandforecastingtechniques,suchasinthestresstestingoflow- 3. effectivecommunicationfromsupervisorsto probability,high-impactevents,willallowsupervisors institutionsabouttherisksandvulnerabilities tobetteranticipateandmitigatesystemicrisks. thathavebeenidentifiedandrelatedremedial Thesetoolsarebeingusedtoassesspotentialrisks requirements. andtosupportsupervisors’assessmentofaninstitution’sinternalcapitalassessmentpractices.Under Inresponse,toimproveriskidentificationofboth thisframework,theFederalReservewillincreaseits safety-and-soundnessissuesatindividualinstitutions useofhorizontalexaminationsandscenarioanalysis, andbroaderriskstothefinancialsystem,theFederal extenditsfocustomacroprudentialissues,and Reserveisincorporatingamoremacroprudentialori- increasecooperationwithprimaryandfunctional entation.Toenhancethedesignandexecutionof supervisors. supervisoryactivities,suchashorizontalexaminationsandstresstests,weareadoptingamultidisci-

76 97thAnnualReport|2010 5. promotingSystemwideandinteragency thefederalandstatebankingauthoritiesthathave information-sharingthroughautomatedsystems primaryresponsibilityforthesupervisionof those andothermechanisms. banks,therebyminimizingduplicationof effortand reducingthesupervisoryburdenonbankingorgani- Forothersizedbankingorganizations,therisk- zations.Inspectionsof BHCs,includingfinancial focusedconsolidatedsupervisionprogramprovides holdingcompanies,arebuiltaroundaratingsystem thatexaminationandinspectionproceduresaretai- introducedin2005.Thesystemreflectstheshiftin loredtoeachbankingorganization’ssize,complexity, supervisorypracticesawayfromahistoricalanalysis riskprofile,andcondition.Thesupervisoryprogram of financialconditiontowardamoredynamic, foraninstitution,regardlessof itsassetsize,entails forward-lookingassessmentof risk-management bothoff-siteandon-sitework,includingdevelop- practicesandfinancialfactors.Underthesystem, mentof supervisoryplans,pre-examinationvisits, knownasRFIbutmorefullytermedRFI/C(D), detaileddocumentation,andpreparationof exami- holdingcompaniesareassignedacompositerating nationreportstailoredtothescopeandfindingsof (C)thatisbasedonassessmentsof threecompotheexamination. nents:RiskManagement(R),FinancialCondition (F),andthepotentialImpact(I)of theparentcom- StateMemberBanks panyanditsnondepositorysubsidiariesonthesub- Attheendof 2010,829state-charteredbanks sidiarydepositoryinstitution.Thefourthcompo- (excludingnondepositorytrustcompaniesandpri- nent,DepositoryInstitution(D),isintendedtomirvatebanks)weremembersof theFederalReserve rortheprimarysupervisor’sratingof thesubsidiary System.Thesebanksrepresentedapproximately depositoryinstitution.4NoncomplexBHCswith 13percentof allinsuredU.S.commercialbanksand consolidatedassetsof $1billionorlessaresubjectto heldapproximately14percentof allinsuredcommer- aspecialsupervisoryprogramthatpermitsamore cialbankassetsintheUnitedStates.Theguidelines flexibleapproach.5In2010,theFederalReserveconforFederalReserveexaminationsof statemember ducted654inspectionsof largeBHCsand3,199 banksarefullyconsistentwithsection10of theFed- inspectionsof small,noncomplexBHCs. eralDepositInsuranceAct,asamendedbysec- FinancialHoldingCompanies tion111of theFederalDepositInsuranceCorporationImprovementActof 1991andbytheRiegle UndertheGramm-Leach-BlileyAct,BHCsthat CommunityDevelopmentandRegulatoryImprove- meetcertaincapital,managerial,andotherrequirementActof 1994.Afull-scope,on-siteexamination mentsmayelecttobecomefinancialholdingcompaof thesebanksisrequiredatleastonceayear, niesandtherebyengageinawiderrangeof financial althoughcertainwell-capitalized,well-managedorga- activities,includingfull-scopesecuritiesunderwritnizationshavingtotalassetsof lessthan$500million ing,merchantbanking,andinsuranceunderwriting maybeexaminedonceevery18months.3TheFed- andsales.Asof year-end2010,430domesticBHCs eralReserveconducted722examsof statemember and43foreignbankingorganizationshadfinancial banksin2010. holdingcompanystatus.Of thedomesticfinancial holdingcompanies,34hadconsolidatedassetsof BankHoldingCompanies $15billionormore;101,between$1billionand Atyear-end2010,atotalof 5,464U.S.BHCswerein $15billion;68,between$500millionand$1billion; operation,of which4,844weretop-tierBHCs.These and227,lessthan$500million. organizationscontrolled5,443insuredcommercial banksandheldapproximately99percentof all insuredcommercialbankassetsintheUnitedStates. FederalReserveguidelinescallforannualinspections of largeBHCsandcomplexsmallercompanies.In 4 Eachofthefirsttwocomponentshasfoursubcomponents:Risk judgingthefinancialconditionof thesubsidiary Management—(1)BoardandSeniorManagementOversight; banksownedbyholdingcompanies,FederalReserve (2)Policies,Procedures,andLimits;(3)RiskMonitoringand ManagementInformationSystems;and(4)InternalControls. examinersconsultexaminationreportspreparedby FinancialCondition—(1)Capital,(2)AssetQuality,(3)Earnings,and(4)Liquidity. 3 TheFinancialServicesRegulatoryReliefActof2006,which 5 Thespecialsupervisoryprogramwasimplementedin1997and becameeffectiveinOctober2006,authorizedthefederalbank- modifiedin2002.SeeSRletter02-01foradiscussionofthefacingagenciestoraisethethresholdfrom$250millionto torsconsideredindeterminingwhetheraBHCiscomplexor $500million,andfinalrulesincorporatingthechangeintoexist- noncomplex(www.federalreserve.gov/boarddocs/srletters/2002/ ingregulationswereissuedonSeptember21,2007. sr0201.htm).

BankingSupervisionandRegulation 77 • evaluatingrisksposedbynonbankingactivitiesina Box 3. Interagency Coordination of holdingcompanystructure, the Savings and Loan Holding Company Transfer • imposingprudentialstandardsonaconsolidated basis,and TheFederalReserveisengagedinarangeofactivitiestoimplementthetransferofconsolidatedsuper- • assessingtheconsumercomplianceriskprofilefor visionofSLHCsfromtheOTS.FederalReservestaff holdingcompanies. isworkingcloselywiththeOTS,whosestaffisprovidingvaluableinformation,expertise,andconsultationduringthistransitionperiod.Additionally,the AstheFederalReservedevelopsplansforother FederalReserveisworkingwithstaffattheOfficeof aspectsof theDodd-FrankAct,itwillextendthese theComptrolleroftheCurrencyandtheFDICinlight existingapproachestothesupervisoryprogramsfor ofthecriticalrolethattheseprimaryfederalregula- SLHCs,asappropriate. torsplayincontributingtotheFederalReserve’s knowledgeofconsolidatedholdingcompanies. TheDodd-FrankActgivestheFederalReservethe authoritytorequiregrandfatheredunitarySLHCs thatconductactivitiesotherthanfinancialactivities SavingsandLoanHoldingCompanyTransfer toestablishanintermediateholdingcompanyover TheDodd-FrankActtransfersauthorityforconsoli- all,oraportionof,thefinancialactivities.TheFeddatedsupervisionof SLHCsandtheirnon- eralReservehasestablishedaworkinggrouptocondepositorysubsidiariesfromtheOTStotheFederal sidertheissuesassociatedwiththisauthorityandits Reserve,effectiveJuly21,2011.Theoverridingprin- potentialadvantagestoeffectivesupervisionof such ciplesincludesecuringanorderlytransferof infor- grandfatheredcompanies.TheFederalReservewill mationandknowledge(seebox3),ensuringthat implementthisauthorityonlyafteraproposedrule therearenogapsinholdingcompanysupervision, hasbeenpublishedfornoticeandpubliccomment. andprovidingthethriftindustrywithinformationon aflowbasissoastoincreasecertaintyandminimize TheFederalReserveanticipatesthatallregulations, unnecessarydisruptionduringthetransitionperiod. asappropriate,relatingto(1)supervisionof SLHCs andnondepositoryinstitutionsubsidiariesof Anycompanythatcontrolsadepositoryinstitution SLHCs;(2)transactionswithaffiliates;(3)extensions shouldbeheldtoappropriateprudentialstandards, of credittoexecutiveofficers,directors,andprincipal includingthoseforcapital,liquidity,andriskman- shareholders;and(4)tyingarrangementswillconagement.Assuch,theFederalReserveintendstocre- tinueandwillbeenforceablebytheappropriate ateanoversightregimeforthriftholdingcompanies agency.Aworkinggroupisconductingananalysisof thatisconsistentwith,andisasrigorousas,the OTSandFederalReserveregulationsandguidance supervisoryregimeapplicabletoBHCs.Conse- documentstodeterminepolicyortechnicaldifferquently,theFederalReserveintends,tothegreatest encesandtoassesswhetherthereareanygaps.The extentpossible,takingintoaccountanyuniquechar- FederalReservewilldecidewhichOTSregulations acteristicsof SLHCsandtherequirementsof the shouldbeamendedafterthetransferdate,incon- HomeOwners’LoanAct(HOLA),tocarryout junctionwithabroadassessmentof theholding supervisoryoversightof SLHCsonacomprehensive companystandardstobeappliedtoSLHCsand consolidatedbasis,consistentwiththeestablished otherpolicyconsiderations.TheFederalReservewill approachtoBHCsupervision.6Tothisend,Federal makechanges,whennecessary,toanytransferred Reservestaff isreviewingallelementsof itsBHC OTSregulationsafterpublicnoticeandopportunity supervisionprogramtodeterminewhetherandhow forcomment. toincorporateSLHCsintotheprogram,consistent withHOLA.Theprogramincludes TheFederalReserveandtheOTSareengagedin detaileddiscussionsontherangeof operational • understandingthestructureof holdingcompanies issuesthattheyneedtoaddressduringthetransition andmaterialactivitiesof thesecompanies, period.Inadditiontodetailedbriefingsonlegaland regulatoryissues,theOTSstaff hasprovidedinfor- 6 SeeSRletter08-9/CA08-12,whichsetsforththeholdingcom- mationonitsholdingcompanyprogramandoncurpanysupervision,“ConsolidatedSupervisionofBankHolding rentsupervisoryissues.Theagenciessignedamemo- CompaniesandtheCombinedU.S.OperationsofForeign randumof understanding(MOU)tofacilitatethe BankingOrganizations”(www.federalreserve.gov/boarddocs/ srletters/2008/SR0809.htm). sharingof confidentialsupervisoryinformationdur-

78 97thAnnualReport|2010 ingthetransition.ThiswillallowtheFederalReserve bankswereoperating567branchesinforeigncountobecomefamiliarwiththeconditionof eachSLHC triesandoverseasareasof theUnitedStates;31 comingunderitsjurisdictionandtoidentifyresource nationalbankswereoperating508of thesebranches, requirementsneededonthetransferdate.TheFed- and22statememberbankswereoperatingthe eralReservewillintegrateSLHCsintoitsexisting remaining59.Inaddition,18nonmemberbanks programsthataligninstitutionswithinstitutional wereoperating26branchesinforeigncountriesand portfoliosbasedontheirsizeandcomplexity.For overseasareasof theUnitedStates. instance,smaller,noncomplexSLHCswillbesupervisedintheCommunityBankingOrganizationport- EdgeActandAgreementCorporations foliowhilelarger,morecomplexSLHCswillbe EdgeActcorporationsareinternationalbanking supervisedintheRegionalorLargeBankingOrgani- organizationscharteredbytheBoardtoprovideall zationportfolios.TheFederalReserveBoardhas segmentsof theU.S.economywithameansof assignedeachSLHCtoaresponsibleReserveBank.7 financinginternationalbusiness,especiallyexports. Tofacilitatethetransitionprocess,andpursuantto Agreementcorporationsaresimilarorganizations, theMOU,examinersfromtheFederalReserveare statecharteredorfederallychartered,thatenterinto joiningcertainOTSexaminationspriortothetrans- agreementswiththeBoardtorefrainfromexercising ferdatetogatherinformationandlearnaboutthe anypowerthatisnotpermissibleforanEdgeAct OTSsupervisoryprocess.Discussionsarewellunder corporation.Sections25and25Aof theFederal wayabouttheorderlytransitionof thecaseloadfrom ReserveActgrantEdgeActandagreementcorporatheOTStotheReserveBanks. tionspermissiontoengageininternationalbanking andforeignfinancialtransactions.Thesecorpora- InternationalActivities tions,mostof whicharesubsidiariesof member TheFederalReservesupervisestheforeignbranches banks,may(1)conductadepositandloanbusiness andoverseasinvestmentsof memberbanks,Edge instatesotherthanthatof theparent,providedthat Actandagreementcorporations,andBHCs(includ- thebusinessisstrictlyrelatedtointernationaltransingtheinvestmentsbyBHCsinexporttradingcom- actions,and(2)makeforeigninvestmentsthatare panies).Inaddition,itsupervisestheactivitiesthat broaderthanthosepermissibleformemberbanks.At foreignbankingorganizationsconductthroughenti- year-end2010,51bankingorganizations,operating tiesintheUnitedStates,includingbranches,agen- 10branches,werecharteredasEdgeActoragreecies,representativeoffices,andsubsidiaries. mentcorporations.Thesecorporationsareexamined annually. ForeignOperationsof U.S.BankingOrganizations U.S.ActivitiesofForeignBanks Insupervisingtheinternationaloperationsof state TheFederalReservehasbroadauthoritytosupervise memberbanks,EdgeActandagreementcorpora- andregulatetheU.S.activitiesof foreignbanksthat tions,andBHCs,theFederalReservegenerallycon- engageinbankingandrelatedactivitiesintheUnited ductsitsexaminationsorinspectionsattheU.S.head Statesthroughbranches,agencies,representative officesof theseorganizations,wheretheultimate offices,commerciallendingcompanies,EdgeActcorresponsibilityfortheforeignofficeslies.Examiners porations,commercialbanks,BHCs,andcertain alsovisittheoverseasofficesof U.S.bankstoobtain nonbankingcompanies.Foreignbankscontinueto financialandoperatinginformationand,insome besignificantparticipantsintheU.S.banking instances,totesttheiradherencetosafeandsound system.Asof year-end2010,173foreignbanksfrom bankingpracticesandcompliancewithrulesand 52countriesoperated205state-licensedbranches regulationsortoevaluateanorganization’seffortsto andagencies,of whichsixwereinsuredbytheFDIC, implementcorrectivemeasures.Examinationsabroad and50OCC-licensedbranchesandagencies,of areconductedwiththecooperationof thesupervi- whichfourwereinsuredbytheFDIC.Theseforeign soryauthoritiesof thecountriesinwhichtheytake banksalsoownedeightEdgeActandagreementcorplace;fornationalbanks,theexaminationsarecoor- porationsandtwocommerciallendingcompanies.In dinatedwiththeOfficeof theComptrollerof the addition,theyheldacontrollinginterestin55U.S. Currency(OCC).Attheendof 2010,53member commercialbanks.Altogether,theU.S.officesof theseforeignbanksattheendof 2010controlled approximately17percentof U.S.commercialbank- 7 SeeSRletter05-27/CAletter05-11,“ResponsibleReserveBank ingassets.These173foreignbanksalsooperated92 andInter-DistrictCoordination,”(www.federalreserve.gov/ boarddocs/srletters/2005/SR0527.htm). representativeoffices;anadditional54foreignbanks

BankingSupervisionandRegulation 79 operatedintheUnitedStatesthrougharepresenta- separateBoardregulationsrequirebankingorganizativeoffice. tionssupervisedbytheBoardtofilereportsonsuspiciousactivityrelatedtopossibleviolationsof federal State-licensedandfederallylicensedbranchesand law,includingmoneylaundering,terrorismfinancagenciesof foreignbanksareexaminedon-siteat ing,andotherfinancialcrimes.Inaddition,BSAand leastonceevery18months,eitherbytheFederal Boardregulationsrequirethatbanksdevelopwritten Reserveorbyastateorotherfederalregulator.In BSAcomplianceprogramsandthattheprogramsbe mostcases,on-siteexaminationsareconductedat formallyapprovedbybankboardsof directors.The leastonceevery12months,buttheperiodmaybe FederalReserveisresponsibleforexamininginstituextendedto18monthsif thebranchoragencymeets tionsforcompliancewithapplicableAMLlawsand certaincriteria. regulationsandconductssuchexaminationsinaccordancewiththeFederalFinancialInstitutionsExami- Incooperationwiththeotherfederalandstatebank- nationCouncil(FFIEC)BankSecrecyAct/Antiingagencies,theFederalReserveconductsajoint MoneyLaunderingExaminationManual.8 programforsupervisingtheU.S.operationsof foreignbankingorganizations.Theprogramhastwo SpecializedExaminations mainparts.Onepartinvolvesexaminationof those TheFederalReserveconductsspecializedexaminaforeignbankingorganizationsthathavemultipleU.S. tionsof bankingorganizationsintheareasof inforoperationsandisintendedtoensurecoordination mationtechnology,fiduciaryactivities,transferagent amongthevariousU.S.supervisoryagencies.The activities,andgovernmentandmunicipalsecurities otherpartisareviewof thefinancialandoperational dealingandbrokering.TheFederalReservealsoconprofileof eachorganizationtoassessitsgeneralabil- ductsspecializedexaminationsof certainnonbank itytosupportitsU.S.operationsandtodetermine entitiesthatextendcreditsubjecttotheBoard’smarwhatrisks,if any,theorganizationposesthroughits ginregulations. U.S.operations.Together,thesetwoprocessesprovidecriticalinformationtoU.S.supervisorsinalogi- InformationTechnologyActivities cal,uniform,andtimelymanner.TheFederal Inrecognitionof theimportanceof information Reserveconductedorparticipatedwithstateandfed- technologytosafeandsoundoperationsinthefinaneralregulatoryauthoritiesin465examinationsin cialindustry,theFederalReservereviewstheinfor- 2010. mationtechnologyactivitiesof supervisedbanking organizationsaswellascertainindependentdata CompliancewithRegulatoryRequirements centersthatprovideinformationtechnologyservices TheFederalReserveexaminesinstitutionsforcom- totheseorganizations.Allsafety-and-soundness pliancewithabroadrangeof legalrequirements, examinationsincludearisk-focusedreviewof inforincludinganti-money-laundering(AML)andcon- mationtechnologyrisk-managementactivities.Dursumerprotectionlawsandregulations,andother ing2010,theFederalReservecontinuedasthelead lawspertainingtocertainbankingandfinancial agencyinfourinteragencyexaminationsof large, activities.Mostcompliancesupervisionisconducted multiregionaldataprocessingservicers,andit undertheoversightof theBoard’sDivisionof Bank- assumedleadershipinoneadditionalexamination ingSupervisionandRegulation,butconsumercom- lateintheyear. pliancesupervisionisconductedundertheoversight of theDivisionof CommunityandConsumer FiduciaryActivities Affairs.Thetwodivisionscoordinatetheirefforts TheFederalReservehassupervisoryresponsibility witheachotherandalsowiththeBoard’sLegalDivi- forstatememberbanksandstatemembernondesiontoensureconsistentandcomprehensiveFederal positorytrustcompaniesthatreported$53.1trillion Reservesupervisionforcompliancewithlegal and$36.5trillionof assets,respectively,asof yearrequirements. end2010.Theseassetswereheldinvariousfiduciary Anti-Money-LaunderingExaminations 8 TheFFIECisaninteragencybodyoffinancialregulatoryagen- TheTreasuryregulationsimplementingtheBank ciesestablishedtoprescribeuniformprinciples,standards,and SecrecyAct(BSA)generallyrequirebanksandother reportformsandtopromoteuniformityinthesupervisionof typesof financialinstitutionstofilecertainreports financialinstitutions.TheCouncilhassixvotingmembers:the BoardofGovernorsoftheFederalReserveSystem,theFDIC, andmaintaincertainrecordsthatareusefulincrimitheNationalCreditUnionAdministration,theOCC,theOTS, nal,tax,orregulatoryproceedings.TheBSAand andthechairoftheStateLiaisonCommittee.

80 97thAnnualReport|2010 andcustodialcapacities.On-siteexaminationsof SecuritiesCreditLenders fiduciaryandcustodialactivitiesarerisk-focusedand UndertheSecuritiesExchangeActof 1934,the entailthereviewof anorganization’scompliance Boardisresponsibleforregulatingcreditincertain withlaws,regulations,andgeneralfiduciaryprin- transactionsinvolvingthepurchaseorcarryingof ciples,includingeffectivemanagementof conflictsof securities.Aspartof itsgeneralexaminationprointerest;managementof legal,operational,andrepu- gram,theFederalReserveexaminesthebanksunder tationalriskexposures;andauditandcontrolproce- itsjurisdictionforcompliancewithBoardReguladures.In2010,FederalReserveexaminersconducted tionU(CreditbyBanksandPersonsotherthanBro- 111on-sitefiduciaryexaminations,excludingtransfer kersorDealersforthePurposeof Purchasingor agentexaminations,of statememberbanks. CarryingMarginStock).Inaddition,theFederal Reservemaintainsaregistryof personsotherthan TransferAgents banks,brokers,anddealerswhoextendcreditsubject AsdirectedbytheSecuritiesExchangeActof 1934, toRegulationU.TheFederalReservemayconduct theFederalReserveconductsspecializedexamina- specializedexaminationsof theselendersif theyare tionsof thosestatememberbanksandBHCsthat notalreadysubjecttosupervisionbytheFarmCredit areregisteredwiththeBoardastransferagents. Administration(FCA)ortheNationalCreditUnion Amongotherthings,transferagentscountersignand Administration(NCUA). monitortheissuanceof securities,registerthetransferof securities,andexchangeorconvertsecurities. Attheendof 2010,531lendersotherthanbanks, On-siteexaminationsfocusontheeffectivenessof an brokers,ordealerswereregisteredwiththeFederal organization’soperationsanditscompliancewith Reserve.Otherfederalregulatorssupervised178of relevantsecuritiesregulations.During2010,theFed- theselenders,andtheremaining353weresubjectto eralReserveconductedon-sitetransferagentexami- limitedFederalReservesupervision.TheFederal nationsatsevenof the38statememberbanksand Reserveexempted153lendersfromitson-siteinspec- BHCsthatwereregisteredastransferagents. tionprogramonthebasisof theirregulatorystatus andannualreports.Thirty-fourinspectionswerecon- GovernmentandMunicipalSecurities ductedduringtheyear. DealersandBrokers EnforcementActions TheFederalReserveisresponsibleforexamining statememberbanksandforeignbanksforcompli- TheFederalReservehasenforcementauthorityover ancewiththeGovernmentSecuritiesActof 1986 thebankingorganizationsitsupervisesandtheir andwiththeTreasuryregulationsgoverningdealing affiliatedparties.Enforcementactionsmaybetaken andbrokeringingovernmentsecurities.Twelvestate toaddressunsafeandunsoundpracticesorviolamemberbanksandsixstatebranchesof foreign tionsof anylaworregulation.Formalenforcement bankshavenotifiedtheBoardthattheyaregovern- actionsincludecease-and-desistorders,written mentsecuritiesdealersorbrokersnotexemptfrom agreements,promptcorrectiveactiondirectives, theTreasury’sregulations.During2010,theFederal removalandprohibitionorders,andcivilmoneypen- Reserveconductedsixexaminationsof broker–dealer alties.In2010,theFederalReservecompleted264 activitiesingovernmentsecuritiesattheseorganiza- formalenforcementactions.Civilmoneypenalties tions.Theseexaminationsaregenerallyconducted totaling$33,010wereassessed.Asdirectedbystatute, concurrentlywiththeFederalReserve’sexamination allcivilmoneypenaltiesareremittedtoeitherthe of thestatememberbankorbranch. TreasuryortheFederalEmergencyManagement Agency.Enforcementordersandpromptcorrective TheFederalReserveisalsoresponsibleforensuring actiondirectives,whichareissuedbytheBoard,and thatstatememberbanksandBHCsthatactas writtenagreements,whichareexecutedbythe municipalsecuritiesdealerscomplywiththeSecuri- ReserveBanks,aremadepublicandarepostedon tiesActAmendmentsof 1975.Municipalsecurities theBoard’swebsite(www.federalreserve.gov/apps/ dealersareexamined,pursuanttotheMunicipal enforcementactions/). SecuritiesRulemakingBoard’sruleG-16,atleast onceeverytwocalendaryears.Of the10entitiesthat Inadditiontotakingtheseformalenforcement dealtinmunicipalsecuritiesduring2010,sevenwere actions,theReserveBankscompleted639informal examinedduringtheyear. enforcementactionsin2010.Informalenforcement

BankingSupervisionandRegulation 81 actionsincludeMOUandboardof directorsresolu- majorupgradestotheweb-basedPRISMapplication tions.Informationabouttheseactionsisnotavailable werecompleted. tothepublic. TheFederalReserveworksthroughtheFFIECTask SurveillanceandOff-SiteMonitoring ForceonSurveillanceSystemstocoordinatesurveil- TheFederalReserveusesautomatedscreeningsys- lanceactivitieswiththeotherfederalbanking temstomonitorthefinancialconditionandperfor- agencies. manceof statememberbanksandBHCsinthe periodbetweenon-siteexaminations.Suchmonitor- TrainingandTechnicalAssistance ingandanalysishelpsdirectexaminationresourcesto TheFederalReserveprovidestrainingandtechnical institutionsthathavehigher-riskprofiles.Screening assistancetoforeignsupervisorsandminority-owned systemsalsoassistintheplanningof examinations anddenovodepositoryinstitutions. byidentifyingcompaniesthatareengaginginnewor complexactivities. InternationalTrainingandTechnicalAssistance In2010,theFederalReservecontinuedtoprovide Theprimaryoff-sitemonitoringtoolusedbythe technicalassistanceonbanksupervisorymattersto FederalReserveistheSupervisionandRegulaforeigncentralbanksandsupervisoryauthorities. tionStatisticalAssessmentof BankRiskmodel(SR- TechnicalassistanceinvolvesvisitsbyFederal SABR).Drawingmainlyonthefinancialdatathat Reservestaff memberstoforeignauthoritiesaswell banksreportontheirReportsof Conditionand asconsultationswithforeignsupervisorswhovisit Income(CallReports),SR-SABRuseseconometric theBoardortheReserveBanks.TheFederal techniquestoidentifybanksthatreportfinancial Reserve,alongwiththeOCC,theFDIC,andthe characteristicsweakerthanthoseof otherbanks Treasury,wasanactiveparticipantintheMiddle assignedsimilarsupervisoryratings.Tosupplement EastandNorthAfricaFinancialRegulators’TraintheSR-SABRscreening,theFederalReservealso ingInitiative,whichispartof theU.S.government’s monitorsvariousmarketdata,includingequity MiddleEastPartnershipInitiative.TheFederal prices,debtspreads,agencyratings,andmeasuresof Reservealsocontributestotheregionaltrainingproexpecteddefaultfrequency,togaugemarketpercepvisionundertheAsiaPacificEconomicCooperation tionsof theriskinbankingorganizations.Inaddi- FinancialRegulators’TrainingInitiative. tion,theFederalReservepreparesquarterlyBank HoldingCompanyPerformanceReports In2010,theFederalReserveofferedanumberof (BHCPRs)foruseinmonitoringandinspecting trainingcoursesexclusivelyforforeignsupervisory supervisedbankingorganizations.TheBHCPRs, authorities,bothintheUnitedStatesandinanumwhicharecompiledfromdataprovidedbylarge berof foreignjurisdictions.FederalReservestaff also BHCsinquarterlyregulatoryreports(FRY-9Cand tookpartintechnicalassistanceandtrainingmis- FRY-9LP),contain,forindividualcompanies,finansionsledbytheInternationalMonetaryFund(IMF), cialstatisticsandcomparisonswithpeercompanies. theWorldBank,theAsianDevelopmentBank,the BHCPRsaremadeavailabletothepubliconthe BaselCommitteeonBankingSupervision(Basel NationalInformationCenter(NIC)website,which Committee),andtheFinancialStabilityInstitute. canbeaccessedatwww.ffiec.gov. FederalReserveanalystsusePerformanceReport TheFederalReserveisalsoanassociatememberof InformationandSurveillanceMonitoring(PRISM), theAssociationof Supervisorsof Banksof the aqueryingtool,toaccessanddisplayfinancial,sur- Americas(ASBA),anumbrellagroupof banksuperveillance,andexaminationdata.Intheanalytical visorsfromcountriesintheWesternHemisphere. module,userscancustomizethepresentationof Thegroup,headquarteredinMexico, institutionalfinancialinformationdrawnfromCall • promotescommunicationandcooperationamong Reports,UniformBankPerformanceReports,FR banksupervisorsintheregion; Y-9statements,BHCPRs,andotherregulatory reports.Inthesurveillancemodule,userscangener- • coordinatestrainingprogramsthroughoutthe atereportssummarizingtheresultsof surveillance regionwiththehelpof nationalbankingsuperviscreeningforbanksandBHCs.During2010,four sorsandinternationalagencies;and

82 97thAnnualReport|2010 • aimstohelpmembersdevelopbankinglaws,regu- • presentationsontheNewMarketsTaxCredits lations,andsupervisorypracticesthatconformto Program(NMTC)attheNationalInteragency internationalbestpractices. CommunityReinvestmentConferenceinNew Orleans,inpartnershipwiththeCDFIFund; TheFederalReservecontributessignificantlyto • apresentationonNMTCsattheNationalBankers ASBA’sorganizationalmanagementandtoitstrain- AssociationLegislativeRegulatoryConferingandtechnicalassistanceactivities. ence;and InitiativesforMinority-Ownedand • aseriesof advancedNMTCwebinarsaspartof a DeNovoDepositoryInstitutions collaborativeinteragencyeffort. ThePartnershipforProgressprogramisaFederal ReserveSystemprogramcreatedtopreserveandpro- TheseminarsontheNMTCandCDFIprograms moteminority-owned,woman-owned,anddenovo helpedminoritybankerstobetterunderstandhow depositoryinstitutions(MBOs).Launchedin2008, theseprogramscanbeusedasasourceof funding. theprogramseekstohelptheseinstitutionscompete AlongwiththeFDIC,OCC,andOTS,theFederal effectivelyintoday’smarketplacebyofferingthema ReservesponsoredtheNMTCguidanceprogram. combinationof one-on-oneguidanceandtargeted workshopsontopicsof particularrelevanceinterms TheFederalReserveparticipatedintheFDICInvesof startingandgrowingabankinasafeandsound torSeriestoshareinformationwithminoritybankers manner.Inaddition,trainingandinformationon andinvestorsinterestedinpurchasingbankassetsor resourcesareprovidedthroughanextensivepublic startingbanks.9TheFederalReservealsoparticiwebsite(www.fedpartnership.gov).DesignatedPart- patedintheNationalBankersAssociation(NBA) nershipforProgresscoordinatorsserveaslocalpro- AnnualConventiontodiscussprioritiesfortheNBA gramcontactsineachof the12ReserveBankDis- andminoritybanksduring2011andpossibleprotrictsandattheBoardtoanswerquestionsandcoor- graminitiativestoimprovesupportforminority dinateassistanceforinstitutionsrequestingguidance. banks. Additionally,theFederalReservecoordinatesits TheBoardOversightCommitteeiscommittedtofureffortswiththoseof theotheragenciesthroughpartherenhancingsupportforMBOswhoarefacing ticipationinanannualinteragencyconferencefor increasingmarketplacechallenges,asmanyoperate minoritydepositoryinstitutions.Forthefederalbank insomeof thehardesthitregionsandareadversely regulatoryagencies,theconferenceprovidesan impactedbytherecentrecessionandsluggishecoopportunitytomeetwithseniormanagersfrom nomicrecovery.TheBoardalsoappointedanew minority-ownedinstitutionsandgainabetterundernationalcoordinatortoleadtheprogram.Theprostandingof theinstitutions’uniquechallengesand gramdistrictcoordinatorsandtheBoardOversight opportunities.Finally,theagenciesoffertraining Committeewillconducttwoprogramconferences classesandsessionsonemergingbankingissues. annuallytodiscusstheprogramactivities,meetwith MBObankersandindustryexperts,andreport/ BusinessContinuity/PandemicPreparedness coordinatetheprogramSystemwideinitiatives. In2010,theFederalReservecontinueditseffortsto strengthentheresilienceof theU.S.financialsystem During2010,theFederalReservehostedavarietyof intheeventof unexpecteddisruptions,including workshopsandseminarsincluding focusedsupervisoryeffortstoevaluatetheresiliency • aninformationsessionforFederalReserveexami- of thebankinginstitutionsunderitsjurisdiction.The nationstaff ontheconditionof minoritybanks FederalReserverevised,jointlywithotherregulatory andtheapplicationof thePartnershipforProgress agencies,itsanalysisof firmssubjecttotheInterprogram; agencyPaperonSoundPracticestoStrengthenthe Resilienceof theU.S.FinancialSystem(SoundPrac- • aseriesof sevenseminarsonCommunityDevelopticespaper).10Subsequently,theFederalReserve mentFinancialInstitutions(CDFI)programsand notifiedfirmswithbusinesslinesfallingwithinthe SmallBusinessLendingprograms; • aworkshoponFinancialIntelligenceforDevelop- 9 TheFDICInvestorSerieswasheldateventsinAtlanta,Harlem,Houston,LosAngeles,Miami,andSanFrancisco. ingExecutivestoincreaseexpertiseinanalyzing 10 Thepopulationunderreviewincludedcoreclearingandsettlefinancialdataandperformancemetrics; mentorganizationsandfirmsthatplayacriticalroleinfinancial

BankingSupervisionandRegulation 83 parametersof theSoundPracticespaperof theresil- • InresponsetotheDodd-FrankAct’srequirement iencyrequirementsandbeganmeetingwiththose toremovereferencesto,orrequirementsof relifirmstoassesstheirimplementationplansandtime- anceon,theuseof creditratingsinfederalregulaframesforimplementation. tions,thefederalbankingagenciesissuedan advancednoticeof proposedrulemaking(ANPR) TheFederalReserve,togetherwithotherfederaland seekingcommentonalternativestotheuseof statefinancialregulators,isamemberof theFinan- creditratingsintherisk-basedcapitalrules.The cialBankingInformationInfrastructureCommittee ANPR(1)describeshowtheagencies’risk-based (FBIIC),whichwasformedtoimprovecoordination capitalstandardscurrentlyreferenceratings; andcommunicationamongfinancialregulators, (2)setsforththefactorstheagencieswillconsider enhancetheresiliencyof thefinancialservicessector inassessingpotentialalternativestotheuseof of U.S.criticalinfrastructuresandkeyresources,and creditratings;and(3)describesbriefly,and promotethepublic/privatepartnership.TheFBIIC requestscommenton,potentialalternativestothe hasestablishedemergencycommunicationprotocols useof creditratings.TheANPRisavailableat tomaintaineffectivecommunicationamongmem- www.gpo.gov/fdsys/pkg/FR-2010-08-25/pdf/2010bersintheeventof anemergency.Themembersof 21051.pdf. theFBIICwillconvenebyconferencecallnolater • Thefederalbankingagenciesissuedforcommenta than90minutesfollowingthefirstpublicreportof noticeof proposedrulemaking(NPR)toamend aneventtosharesituationalandoperationalstatus theadvancedapproachescapitaladequacyframereports.Asamemberof FBIIC,theFederalReserve work,consistentwithcertainprovisionsof the isthenresponsibleforestablishingandmaintaining Dodd-FrankAct.Theproposedrulewouldrequire communicationwiththeinstitutionsforwhichthey abankingorganizationoperatingunderthe haveprimarysupervisoryauthorityandforensuring advancedapproachesframeworktomeet,onan coordinationbetweenpublicaffairsandmediarelaongoingbasis,thehigherof thegenerallyapplitionsstaff. cableandtheadvancedapproachesminimumriskbasedcapitalstandards.TheNPRisavailableat Supervisory Policy http://edocket.access.gpo.gov/2010/pdf/2010-32190 .pdf. TheFederalReserve’ssupervisorypolicyfunction, carriedoutbytheBoard,isresponsiblefordevelop- • Inordertoimplementcertainmarketrisk-related ingguidanceforexaminersandbankingorganiza- changestotheBaselAccord,theBoard,theOCC, tionsaswellasregulationsforbankingorganizations andtheFDICissuedforcommentanNPRto undertheFederalReserve’ssupervision.TheBoard, revisetheirmarket-riskcapitalrules.Theproposed ofteninconjunctionwiththeotherfederalbanking revisionswould(1)bettercapturepositionsfor agencies,issuesrulemakings,publicSRletters,and whichthemarket-riskcapitalrulesareappropriate, otherpolicystatementsandguidanceinorderto (2)reduceprocyclicalityinmarket-riskcapital carryoutitssupervisorypolicyfunction.Federal requirements,(3)enhancetherules’sensitivityto Reservestaff alsoparticipateinsupervisoryand risksthatarenotadequatelycapturedbythecurregulatoryforums,providesupportfortheworkof rentregulatorymeasurementmethodologies,and theFFIEC,andparticipateininternationalforums (4)increasemarketdisciplinethroughenhanced suchastheBaselCommittee,theFinancialStability disclosures.TheNPRisavailableathttp://edocket Board,theJointForum,andtheInternational .access.gpo.gov/2011/pdf/2010-32189.pdf. AccountingStandardsBoard. • Thefederalbankingagenciesissuedastatement clarifyingtheriskweightforclaimson,orguaran- CapitalAdequacyStandards teedby,theFDIC.Thestatementisavailableat In2010,theBoardissuedseveralrulemakingsand www.federalreserve.gov/boarddocs/srletters/2010/ guidancedocumentsrelatedtocapitaladequacystansr1004a1.pdf. dards,includingseveraljointproposedrulemakings withtheotherfederalbankingagenciestoaddress • TheFederalReserveissuedguidelinesforevaluatprovisionsof theDodd-FrankAct. ingproposalsbylargeBHCstoundertakecapital actionsin2011inarevisedtemporaryaddendum toSRletter09-4,“DividendIncreasesandOther marketsandaresubjecttoresiliencyguidelinesissuedin CapitalDistributionsforthe19SupervisoryCapi- April2003(www.federalreserve.gov/boarddocs/srletters/2003/ sr0309.htm). talAssessmentProgramFirms.”Theguidelines

84 97thAnnualReport|2010 statethatanycapitaldistributionproposalwillbe Box 4. Risk Management evaluatedonthebasisof anumberof criteria including,forexample,thefirm’sabilitytoabsorb TheFederalReservecontributedtosupervisory lossesoverthenexttwoyearsunderseveralsce- policypapers,reports,andrecommendationsissued bytheBaselCommitteeduring2010andaimedat narios,thefirm’splanstomeetBaselIIIcapital improvingthesupervisionofbankingorganizations’ requirements,andthefirm’splanstorepayU.S. risk-managementpractices.Publicationsduring2010 governmentinvestments,if applicable.Theguide- included linesareavailableatwww.federalreserve.gov/ • Soundpracticesforbacktestingcounterparty boarddocs/srletters/2009/SR0904_Addendum.pdf. creditriskmodels(finaldocument,issuedin Decemberatwww.bis.org/publ/bcbs185.htm); In2010,BoardandReserveBankstaff conducted • ReportandrecommendationsoftheCross-border supervisoryanalysesof anumberof complexcapital BankResolutionGroup(finaldocument,issuedin issuances,privatecapitalinvestments,andnovel Marchatwww.bis.org/publ/bcbs169.htm); transactionstodeterminetheirqualificationfor • Operationalrisk–supervisoryguidelinesforthe inclusioninregulatorycapitalandconsistencywith AdvancedMeasurementApproaches(consultative safetyandsoundness.Forcertaintransactions,staff paper,issuedinDecemberatwww.bis.org/publ/ requiredbankingorganizationstomakechangesnec- bcbs184.htm);and essaryforinstrumentstosatisfythesecriteria. • Rangeofmethodologiesforriskandperformance alignmentofremuneration(consultativepaper, Boardstaff participatedinmakingdeterminations issuedinOctoberatwww.bis.org/publ/bcbs178 regardingtier1qualificationof capitalissuancesaris- .htm). ingfromthereviewof applicationsforprivatecapital investmentsinbankingorganizations,including bankingorganizationsinseverelyimpairedcondi- withbankingsupervisorsfromBaselCommittee tion.Thefocusof theseanalysesiscompliancewith membercountriestofinalizeacomprehensiveand theBoard’scapitalstandardsforinclusionintier1 far-reachingreformpackageforinternationallyactive capital,aswellasconsistencywithsafetyandsound- bankingorganizations.OnDecember16,2010,the nesstoensurethatthetermsof suchprivateinvest- BaselCommitteeissued“BaselIII:Aglobalregulamentsdonot(1)impedeprudentactionbyissuing toryframeworkformoreresilientbanksandbanking bankingorganizationstoaddressfinancialproblems systems,”withtheoverarchinggoalof increasingthe or(2)impairtheFederalReserve’sabilitytotake resiliencyof thebankingsystembystrengthening appropriatesupervisoryaction. globalcapitalandliquidityregulations.International implementationof BaselIIIisscheduledtobegin Boardstaff alsocontinuedin2010toworkclosely January1,2013,andcertainaspectsaresubjectto withtheTreasuryandtheotherfederalbanking transitionalarrangements. agenciesinmakingdeterminationsrelatedtothetier 1capitaleligibilityof capitalinstrumentsissuedto BaselIIIincreasesthequantityandqualityof the TreasuryundertheCommunityDevelopmentFinan- regulatorycapitalbaseinseveralways.Importantly, cialInstitutionsProgramandsecuritiesissuedtothe itestablishesanewminimumcommonequitytier SmallBusinessLendingFund,initiatedbyCongress 1torisk-weightedassetsratioof 4.5percent.Thisis in2010. thefirsttimethattherisk-basedcapitalframework willincludeanexplicitcapitalstandardbasedontan- InternationalGuidanceonSupervisoryPolicies giblecommonequity,whichisthehighestformof Asamemberof theBaselCommittee,theFederal capital.Toinstillmarketconfidenceintheregulatory Reserveparticipatesineffortstoadvancesound capitalframework,commonequitytier1issubjectto supervisorypoliciesforinternationallyactivebank- stricteligibilitycriteria,andregulatorydeductions ingorganizationsandimprovethestabilityof the fromcapitalaretakenfromcommonequitytier1. internationalbankingsystem.(Seebox4foralistof Regulatorydeductionsincludedeferredtaxassets BaselCommitteepublicationsonrisk-management associatedwithnetoperatinglosses,allintangible practices.) assets(exceptmortgageservicingrights),anddefined benefitpensionfundassetstowhichthebanking BaselIII organizationdoesnothaveunfetteredandunre- During2010,FederalReservestaff workedproac- strictedaccess.Mortgageservicingrights,deferred tivelywiththeotherfederalbankingagenciesand taxassetsassociatedwithtimingdifferences,andsig-

BankingSupervisionandRegulation 85 nificantinvestmentsinunconsolidatedfinancial financingactivities.Thereformsalsoprovidemarket firmsaresubjecttoastrictindividualandaggregate participantswithincentivestomoveOTCderivative limitof 10percentand15percentof commonequity contractstocentralcounterparties,helpingreduce tier1,respectively;amountsabovetheselimitsmust systemicriskacrossthefinancialsystem. bedeductedfromcommonequitytier1. BaselIIIintroducesaninternationalleverageratio BaselIIItightensthecriteriafortier1eligibilityto designedtocontainthebuildupof excessiveon-and ensurethatalltier1capitalcanabsorblossesona off-balance-sheetleverageinthebankingsystemand goingconcernbasis—thoseinstrumentsthatnolon- tosafeguardagainstattemptstoarbitragetheriskgerqualifyastier1capitalwillbephased-outoveran basedcapitalrequirements.Theleverageratiowillbe agreed-upontimeframeandeitherincludedintier2 subjecttoaparallelrunperiod,duringwhichthe capitalorfullyexcludedfromregulatorycapital. BaselCommitteewilltestaminimumtier1toquar- Instrumentsthatnolongerqualifyastier2capital terlyaverageon-andoff-balance-sheetassetsratioof willbephased-outfromregulatorycapital.Under 3percent.U.S.bankingorganizationshavelongbeen BaselIII,theminimumtier1torisk-weightedassets subjecttoasimpleleverageratio,butmostbanks ratioisincreasedfrom4percentto6percent,while outsidetheUnitedStateshavenot.Adoptionof an thetotalcapitaltorisk-weightedassetsratioremains internationalleverageratioshouldhelptoputU.S. at8percent. bankingorganizationsonamorelevelplayingfield withtheirforeignbankpeers. BaselIIIintroducesaseriesof measurestopromote thebuildupof capitalbuffersingoodtimesthatcan BaselIIIadoptsaglobalminimumliquiditystandard bedrawnuponinperiodsof stress.Itrequiresbank- forinternationallyactivebankingorganizationsthat ingorganizationstoholdacapitalconservationbuf- includesa30-dayliquiditycoverageratiorequirefercomposedof commonequitytier1abovethe mentunderpinnedbyalonger-termstructuralliquidregulatoryminimumlevels.Thecapitalconservation ityratio(thenetstablefundingratio).Theliquidity bufferiscalibratedat2.5percentof risk-weighted coverageratiopromotesshort-termresiliencyby assetstoenablebankingorganizationstomaintain ensuringthatbankingorganizationshavesufficient capitallevelsabovetheminimumrequirements high-qualityliquidassetstosurviveanacutestress throughoutasignificantsector-widedownturn. scenariolastingforonemonth,whereasthenetstable UnderBaselIII,bankingorganizationsthatfailto fundingratiowasdesignedtocapturestructural maintainthis2.5percentcapitalconservationbuffer liquiditymismatchesandtopromoteresiliencyovera willfacemandatoryregulatoryrestrictionson longer-termhorizon.Theframeworkalsoincludesa thepercentageof earningsthattheycanpayoutin commonsetof monitoringmetricstoassistsupervitheformof capitaldistributionsoremployeediscre- sorsinidentifyingandanalyzingliquidityrisktrends tionarybonuspayments.Together,theminimum atboththebankingorganizationandsystemwide capitalrequirementsplusthecapitalconservation levels. buffertranslateinto7percentcommonequitytier1, 8.5percenttier1,and10.5percenttotalcapitalto TheBoard,alongwiththeotherfederalbanking risk-weightedassetsratiorequirements. agencies,expectstoissueduring2011aninteragency NPRdescribinghowtheagenciesintendtoimple- Subjecttonationaldiscretion,BaselIIIalsointro- mentBaselIIIintheUnitedStates,followedbyan ducesacountercyclicalcapitalbufferthatfluctuates interagencyfinalrulein2012. between0and2.5percentof risk-weightedassets thatcouldbetriggeredwhenarelevantmeasure JointForum indicativeof steepcreditexpansionhitsaspecified In2010,theFederalReservecontinuedtoparticipate threshold.Thecountercyclicalbufferwouldeffec- intheJointForum—aninternationalgroupof supertivelyworkasanextensionof thecapitalconserva- visorsof thebanking,securities,andinsurance tionbufferandshouldcontributetoamorestable industriesestablishedtoaddressvariedissuescrossbankingsystembyhelpingtodampeneconomicand ingthetraditionalbordersof thesesectors,including financialshocks. theregulationof financialconglomerates.TheJoint Forumoperatesundertheaegisof theBaselCom- Moreover,BaselIIIstrengthenscapitalrequirements mittee,theInternationalOrganizationof Securities forcounterpartycredit-riskexposuresarisingfrom Commissions,andtheInternationalAssociationof bankingorganizations’derivativesandsecurities InsuranceSupervisors.Nationalsupervisorsof these

86 97thAnnualReport|2010 threesectors,whoaremembersof theJointForum’s AccountingPolicy foundingorganizations,worktogethertocarryout TheFederalReservestronglyendorsessoundcorpotheresponsibilitiesof theJointForum. rategovernanceandeffectiveaccountingandauditingpracticesforallregulatedfinancialinstitutions. TheJointForum,throughitsfoundingorganizations, Accordingly,theFederalReserve’ssupervisorypolicy issuedareportin2010thatrevieweddevelopmentsin functionisresponsibleformonitoringmajordomesmodelingriskaggregationandsuggestedimprove- ticandinternationalproposals,standards,andother mentstothecurrentmodelingtechniquesusedby developmentsaffectingthebankingindustryinthe complexfirmstoaggregaterisks.Duringtheyear,the areasof accounting,auditing,internalcontrolsover FederalReservealsocontributedtoJointForum financialreporting,financialdisclosure,andsuperviprojectsthatwillresultintheissuanceof reportsor soryfinancialreporting. papersinthenearfuture. FederalReservestaff interactwithkeyconstituents FinancialSectorAssessmentProgram intheaccountingandauditingprofessions,including Beginningin2009andextendinginto2010,theFedstandard-setters,accountingfirms,thefinancialsereralReserveandotherbankingagenciesunderwenta vicesindustry,accountingandfinancialsectortrade FinancialSectorAssessmentProgram(FSAP) groups,andotherfinancialsectorregulators.The review.TheFSAPisajointIMFandWorldBank FederalReservealsoparticipatesintheBaselComprogramdesignedtopromotenationalandinternamittee’sAccountingTaskForce,whichrepresentsthe tionalfinancialstabilityandgrowthandtohelp BaselCommitteeatinternationalmeetingson strengthenthefinancialsystemsof membercounaccounting,auditing,anddisclosureissuesaffecting tries.TheIMFviewstheFSAPasanintegralpartof globalbankingorganizations.Theseeffortshelp theirnationalassessments. informourunderstandingof currentdomesticand internationalpracticesandproposedstandardsand TheDivisionof BankingSupervisionandRegulation ourformulationof policypositionsbasedonthe ledaninteragencyefforttopreparefor,andrespond potentialimpactof changesinstandardsorguidance to,theIMF’sassessmentof theeffectivenessof U.S. (orotherevents)onthefinancialsector.Asaconsebankingsupervision.Aspartof thisreview,theFedquence,FederalReservestaff routinelyprovideinforeralReserveandotherfederalbankingagencies malinputtostandard-setters,aswellasformalinput jointlypreparedaself assessmentagainsttheBasel throughpubliccommentlettersonproposals,to CorePrinciplesforEffectiveBankingSupervision ensureappropriateandtransparentfinancialstate- (BCPs).Foreachprincipleandassociatedcriteria, mentreporting. theself assessmentincludesasummaryof applicable legalandregulatoryprovisionsandadescriptionof During2010,addressingchallengesrelatedtofinanhowtheprinciplesareputintopractice,withspecific cialsectoraccountingandreportingremainedapricitationsregardingprocedures.TheU.S.BCPself orityforFederalReservestaff.Issuesduringtheyear assessmentwasmadepublicinAugustof 2009on includedfairvalueaccounting,accountingfor Treasury’swebsite(www.treasury.gov). impairmentinsecuritiesandotherfinancialinstruments,andaccountingforassetsecuritizationsand Basedontheself assessmentandseveralweeksof otheroff-balance-sheetitems.Asdiscussedbelow,to on-sitework,theIMFconcludedthattheU.S.bankaddresstheseandotherissues,theFederalReserve ingagencieswerecompliantwith96percentof the participatedinactivitiesarisingfromgeneralmarket BCPs,whichareeffectivelybestpracticesforbanking conditionsandinsupportof effortsrelatedtofinansupervision.TheIMF’srecommendationsfor cialstability. improvementincorporatedanumberof initiatives alreadyinprocess,includingconductingstresstests; FederalReservestaff participatedinanumberof joininginternationaleffortstoinitiatesupervisory discussionswithaccountingandauditingstandardcollegesforlarge,globallyactiveU.S.banks;and setters.Inresponsetorequestsforcomment,staff directinglargebankstoimprovetheirabilityto aggregaterisksacrosslegalentitiesandproductlines • providedcommentletterstotheFinancial toidentifyriskconcentrationsandcorrelations. AccountingStandardsBoard(FASB)onproposals

BankingSupervisionandRegulation 87 relatedtotheaccountingforfinancialinstruments, tionalFinancialReportingStandards(IFRS),includderivativeinstruments,hedgingactivities,troubled ingchallengesthatwouldneedtobeaddressedbefore debtrestructurings,andleases;and establishingadateforU.S.companiestoutilize IFRS.TheFederalReservesupportedtheeffortsof • providedacommentletterontheInternational theFASBandtheIASBtocontinuetowardthe AccountingStandardsBoard’s(IASB’s)financial achievementof convergedstandards,whichshould instrumentimpairmentproposalandcontributed helptoimprovecomparabilityof financialreporting tothedevelopmentof numerousothercomment acrossnationaljurisdictionsandpromotemoreeffilettersrelatedtoaccountingandauditingmatters cientcapitalallocation.GiventheFederalReserve’s thatweresubmittedtotheIASBandtheInternauniqueperspectivesonthechallengesfacingfinancial tionalAuditingandAssuranceStandardsBoard institutionsandourroleinthefinancialmarkets, throughtheBaselCommittee. staff participatedonthejointFASBandIASB FinancialCrisisAdvisoryGroup.FederalReserve FederalReservestaff participatedinthedevelopment staff alsoparticipatedontheFASB’sValuation andissuanceof aRiskRetentionreporttoCongress ResourceGroup,whichwascreatedtoassistthe onthepotentialimpactof credit-riskretention FASBinmattersinvolvingvaluationforfinancial requirementsonsecuritizationmarkets.Thereport reportingpurposes. wasrequiredbytheDodd-FrankActandhighlights thepotentialinteractionbetweenriskretention, Credit-RiskManagement accountingstandards,andregulatorycapitalrequire- TheFederalReserveworkswiththeotherfederal ments.FederalReservestaff alsoparticipatedin bankingagenciestodevelopguidanceonthemanothersupervisoryactivitiestoassessadditionalinteragementof creditrisk;tocoordinatetheassessment actionsbetweenaccountingstandardsandregulatory of regulatedinstitutions’creditrisk;andtoensure reformefforts. thatinstitutionsproperlyidentify,measure,andman- TheFederalReserveissuedsupervisoryguidanceto agecreditrisk. financialinstitutionsandsupervisorystaff on LendingtoCreditworthySmallBusinesses accountingmatters,asappropriate,andparticipated inanumberof supervisoryrelatedactivities.For InFebruary2010,theFederalReserve,alongwith example,FederalReservestaff theotherbankingagencies,issuedguidancetoexaminersthatreinforcedthemessagethatinstitutions • issuedguidancetoaddresssupervisoryconsidershouldstrivetomeetthecreditneedsof creditworthy ationsrelatingtobusinesscombinationsandother smallbusinessborrowersandthatthesupervisory acquisitionswhenthefairvalueof netassets agencieswillnothinderthoseefforts.11Thisguidance acquiredexceededtheacquisitionprice; directsexaminersandbankersaliketobemindfulof • participatedinactivitiesrelatedtostructured theeffectsof excessivecredittighteningonthe finance,derivatives,trustpreferredsecurities,new broadereconomy.Asageneralmatter,theFederal capitalinstruments,andloanparticipations; Reservedoesnotexpectexaminerstoadverselyclassifyloansbasedsolelyonadeclineincollateralvalue • developedandparticipatedinanumberof domeswhere,forexample,theborrowerhasstablerevenue ticandinternationaltrainingprogramstoeducate streamsanddemonstratestheabilitytorepaythe supervisorsaboutnewandemergingaccounting loan.Tothisend,weimplementedtrainingforexamandreportingtopicsaffectingfinancialinstituinersandconductedoutreachtothebankingindustions;and trytounderscorethisexpectation.The2010guid- • supportedtheeffortsof theReserveBanksin anceisthelatestinaseriesof actionstakenbythe financialinstitutionsupervisoryactivitiesrelatedto FederalReserveandtheotherbankingagenciesto financialaccounting,auditing,reporting,and supportsoundbanklendingandthecreditintermedisclosure. diationprocess. TheFederalReservesupportstheconceptof achiev- Inanefforttoencourageprudentcommercialreal ingasinglewidelyacceptedsetof high-qualityglobal estate(CRE)loanworkouts,theFederalReserveled accountingstandards.FederalReservestaff provided inputtotheSecuritiesandExchangeCommission 11 SeeInteragencyStatementonMeetingtheCreditNeedsof (SEC)onissuesrelatedtotheconvergenceof U.S. CreditworthySmallBusinessBorrowers,(February2010),www generallyacceptedaccountingprinciplesandInterna- .federalreserve.gov/newsevents/press/bcreg/20100205a.htm.

88 97thAnnualReport|2010 thedevelopmentof interagencyguidanceissuedin thepastseveralyearsregardingindependenceinthe October2009regardingCREloanrestructuringsand appraisalandevaluationfunctions,appraisalsfor workouts.12InJanuary2010,theFederalReserve residentialtractdevelopmentlending,andrevisions launchedacomprehensiveSystemwidetrainingini- toUniformStandardsof ProfessionalAppraisal tiativetofurtherunderscoreourexpectationsregard- Practice.Thereisalsoanexpandeddiscussiononthe ingCRE.Theseinitiativesthemselvesbuildoff of conditionsunderwhichaninstitution’srealestate– guidancethattheFederalReserveandotherfederal relatedtransactionsmightbeexemptedfromthe bankingagenciesissuedinNovember2008to agencies’appraisalregulations. encouragebankstomeettheneedsof creditworthy borrowers,inamannerconsistentwithsafeand SharedNationalCreditProgram soundbankingpractices,andtotakeabalanced InSeptember2010,theFederalReserveandthe approachinassessingaborrower’sabilitytorepay.13 otherfederalbankingagenciesreleasedsummary Achievingthisbalancewillnotalwaysbeeasy.Thatis resultsof the2010annualreviewof theShared whywehaveemphasizedtobothbankersandour NationalCredit(SNC)Program.Theagenciesestabexaminerstheimportanceof carefulanalysisof the lishedtheprogramin1977topromotetheefficient circumstancesof individualborrowers. andconsistentreviewandclassificationof shared nationalcredits.ASNCisanyloanorformalloan Inadditiontoouroutreachtobanksandbankexam- commitment—andanyasset,suchasotherreal iners,theFederalReservehasconductedanumberof estate,stocks,notes,bonds,anddebenturestakenas forumsin2010tobetterunderstandthedifficulties debtspreviouslycontracted—extendedtoborrowers facedbysmallbusinesses.Inmid-November,the byasupervisedinstitution,itssubsidiaries,andaffili- BoardandtheFederalReserveBankof SanFran- ates.ASNCmusthaveanoriginalloanamountthat cisco,inconjunctionwiththeSmallBusinessAdmin- aggregatesto$20millionormoreandeither(1)is istration,heldsmallbusinessforumsinSanFrancisco sharedbythreeormoreunaffiliatedsupervisedinstiandLosAngeles.Wethenconductedaseriesof tutionsunderaformallendingagreementor(2)a meetingsonsmallbusinessaccesstocredithostedby portionof whichissoldtotwoormoreunaffiliated theReserveBanks,followedbyacapstoneeventat supervisedinstitutions,withthepurchasinginstitutheBoardof Governors. tionsassumingtheirproratashareof thecreditrisk. InteragencyAppraisalandEvaluationGuidelines The2010SNCreviewwasbasedonanalysesof InDecember2010,theFederalReserve,FDIC, creditdataasof December31,2009,providedby NCUA,OCC,andOTSjointlyissuedtherevised federallysupervisedinstitutions.TheSNCportfolio InteragencyAppraisalandEvaluationGuidelines14 totaled$2.5trillion,with8,292creditfacilitiesto thatreplacesthe1994InteragencyAppraisaland approximately5,600borrowers.Fromtheprevious EvaluationGuidelinesandreflectsconsiderationof period,thedollarvolumeof theportfoliodeclinedby commentsreceivedontheNovember2008proposal $362billionor12.6percent,andthenumberof credtorevisetheguidelines.Thenewguidelinesclarifythe itsdeclinedby663,or7.4percent.Althoughthe2010 agencies’long-standingexpectationsforaninstitu- reviewfoundthatcreditqualityimprovedfromthe tion’sappraisalandevaluationprogram.Thecore previousperiod,thevolumeandpercentageof critiprinciplesof the1994guidelinesareretainedinthe cizedandclassifiedassetsremainedhigh.15Criticized newguidelines.Further,thenewguidelinesclarifythe assetsdeclinedby$194billionto$448billion,a agencies’expectationsforaninstitution’scollateral 30percentdeclinefrom2009findings.Criticized valuationfunction,consideringchangesinappraisal assetsrepresented17.8percentof theportfolio,compracticesandtechnologiessince1994.Thenewmate- paredwith22.3percentinthe2009review.Classified rialinthe2010guidelinesisbasedlargelyonguid- creditsdeclinedby$142billion,a31.8percent ancedocumentsthattheagencieshaveissuedover decline.Classifiedcreditsrepresented12.1percentof theportfolio,comparedwith15.5percentinthe2009 review.Creditsratedspecialmention(orpotentially 12 SeePolicyStatementonPrudentCommercialRealEstate(CRE) LoanWorkouts,(October2009),www.federalreserve.gov/ weak)declinedby$52billionto$143billion,a newsevents/press/bcreg/20091030a.htm. 13 SeeInteragencyStatementonMeetingtheNeedsofCreditworthy 15 Criticizedassetsarecomposedofspecialmentionandclassified Borrowers(November2008),www.federalreserve.gov/ assets.Specialmentionassetsareloansandsecuritiesthat newsevents/press/bcreg/20081112a.htm. exhibitpotentialweaknessbutarenotclassified.Classified 14 SeeSRletter10-16,www.federalreserve.gov/boarddocs/srletters/ assetsareloansandsecuritiesthatexhibitwell-definedweak- 2010/sr1016.htm. nessesoradistinctpossibilityofloss.

BankingSupervisionandRegulation 89 26.7percentdecline.Specialmentioncreditsrepre- theBSA.Since2009,theFFIECBSA/AMLworking sented5.7percentof theportfolio,comparedwith groupmeetingshaveincluded,onaquarterlybasis, 6.8percentinthe2009review.Thereductioninthe theSEC,theCommodityFuturesTradingCommislevelof criticizedandclassifiedassetsisattributedto sion,theInternalRevenueService,andtheOfficeof improvedborroweroperatingperformance,debt ForeignAssetsControl(OFAC)inordertoshareand restructurings,bankruptcyresolutions,andgreater discussinformationonBSA/AMLexaminationproborroweraccesstobondandequitymarkets.Indus- ceduresandgeneraltrendsmorebroadly. trygroupsdemonstratingsignificantimprovementin creditqualityincludedautomotive,materialsand TheFFIECBSA/AMLworkinggroupalsois commodities,andfinanceandinsurance. responsibleforupdatingtheFFIECBSA/AML ExaminationManual(Manual).TheFFIECcreated Continuingthetrendfrom2008,thenumberof cred- andpubliclyreleasedtheManualaspartof itsongoitsoriginatedin2009declinedcomparedwithprior ingcommitmenttoprovidecurrentandconsistent years,butobservedunderwritingstandardsweregen- guidanceonrisk-basedpolicies,procedures,andproerallysatisfactoryandimprovedoverprioryears.Per- cessesforbankingorganizationstocomplywiththe formanceof theSNCportfolioremainedinfluenced BSAandsafeguardtheiroperationsfrommoney byitssignificantexposuretocreditsoriginatedin launderingandterroristfinancing. 2006and2007thatarecharacterizedbyweakunderwritingstandards.Refinancingriskwithintheportfo- In2009and2010,theFederalReservechairedthe lioisalsosignificant,withnearly67percentof criti- draftinggroupthatupdatedtheManual;arevised cizedcommitmentsmaturingbetween2012and2014. versionwasissuedinApril2010.AmongthesignificantmodificationstotheManualarethefollowing: ComplianceRiskManagement streamlinedandreorganizedproceduresforreview- TheFederalReserveworkswithinternationaland ingBSA/AMLcomplianceprograms;anewsection domesticsupervisorstodevelopguidancethatpro- onreviewingbulkcurrencyshipments;areorganized motecompliancewithBSA/AMLandcounterter- discussionof suspiciousactivitymonitoringand rorismlaws. reporting;updatedrequirementsforCurrencyTransactionReportexemptions;clarificationof expecta- BankSecrecyActand tionsfordeterminingtheseverityof regulatoryviola- Anti-Money-LaunderingCompliance tions;andupdateddiscussionsof recentdevelop- In2010,theFederalReservecontinuedtoactively mentsinelectronicbanking,AutomatedClearing promotetheestablishmentandmaintenanceof effec- Housetransactions,prepaidcards,coverpayments, tiveBSA/AMLcompliancerisk-managementpro- andthird-partyprocessorcustomers. grams.Forexample,theFederalReserveissuedguidanceinApril2010providingBHCsandtheirnon- TheFederalReserveandotherfederalbankingagenbanksubsidiariesmoreflexibilityinfilingSuspicious ciescontinuedduring2010toregularlyshareexami- ActivityReports(SARs).Thisadditionalflexibility nationfindingsandenforcementproceedingswith permitstheseentitiestofilethetypeof SARform theFinancialCrimesEnforcementNetworkunder thatismostapplicabletotheirbusinessactivities. theinteragencyMOUthatwasfinalizedin2004,and Also,FederalReservesupervisorystaff participated withtheTreasury’sOFACundertheinteragency inseveralinteragencyprojectsdesignedtoclarify MOUthatwasfinalizedin2006. regulatoryexpectations,includingdevelopingand issuingguidanceon(1)beneficialownership, InternationalCoordinationon (2)sharingSARs,and(3)examinationproceduresfor Sanctions,Anti-MoneyLaundering,and monitoringcompliancewiththeUnlawfulInternet Counter-TerrorismFinancing GamblingEnforcementAct. TheFederalReserveparticipatesinanumberof internationalcoordinationinitiativesrelatedtosanc- TheFederalReservecurrentlychairstheFFIEC tions,moneylaundering,andterrorismfinancing. BSA/AMLworkinggroup,whichisamonthlyforum Forexample,theFederalReservehasalong-standing forthediscussionof pendingBSApolicyandregula- roleintheU.S.delegationtotheintergovernmental torymatters,andparticipatesintheTreasury-led FinancialActionTaskForce(FATF)anditsworking BSAAdvisoryGroup,whichincludesrepresentatives groups,contributingabankingsupervisoryperspecof regulatoryagencies,lawenforcement,andthe tivetoformulationof internationalstandardson financialservicesindustryandcoversallaspectsof thesematters.In2010,theFederalReserveactively

90 97thAnnualReport|2010 contributedtothedevelopmentof aFATFtypolo- • Thefederalbankingagencies,alongwiththe giesreportthataddressedtheuseof newpayment NCUAandtheFFIECStateLiaisonCommittee, methodstolaundermoney.Also,theFederalReserve issuedanadvisoryremindingdepositoryinstitucontinuedtoparticipateinasubcommitteeof the tionsof supervisoryexpectationsforsoundprac- BaselCommitteethatfocusesonAMLandcounter- ticesinmanaginginterest-raterisk.Theadvisory terrorismfinancingissues. reiteratedtheimportanceof effectiveriskmanagementpracticesrelatedtointerest-riskexpo- Banks’SecuritiesActivities suresanddescribedinterest-rate-riskmanagement In2010,theFederalReservecontinuedtoprovide techniquesusedbyeffectiveriskmanagers.The examinertrainingonRegulationR,whichimple- advisoryisavailableatwww.federalreserve.gov/ mentedcertainkeyexceptionsforbanksfromthe newsevents/press/bcreg/20100107a.htm. definitionof theterm“broker”undersec- • Thefederalbankingagenciesissuedguidance tion3(a)(4)of theSecuritiesExchangeActof 1934, remindinginstitutionsof supervisoryexpectations asamendedbytheGramm-Leach-BlileyAct.Reguonsoundpracticesformanagingrisksassociated lationRwasadoptedjointlybytheBoardandthe withfundingandcreditconcentrationsarising SEC,withacompliancedateformostbanksof fromcorrespondentrelationshipswithotherfinan- January1,2009,formostaspectsof theregulation, cialinstitutions.Theguidanceisavailableatwww andJanuary1,2011forcertaintrustandfiduciary .federalreserve.gov/newsevents/press/bcreg/ activity-relatedaspectsof theregulation. 20100430a.htm. OtherPolicyIssues • Thefederalbankingagenciesissuedsupervisory In2010,theBoardapprovedguidanceandpolicy guidancerelatedtobargainpurchasesandacquisistatementsonanumberof issues. tionsassistedbytheFDICandtheNCUA.The guidancewasissuedprimarilytoaddresssupervi- • Theagenciesissuedastatementonunderwriting soryconsiderationsrelatingtobargainpurchase standardsforsmallbusinessloansoriginatedunder gainsandtheimpactsuchgainshaveontheapplitheTreasury’sSBLFProgram.Pursuanttothe cationapprovalprocess.Theguidanceisavailable SmallBusinessJobsActof 2010,theSecretaryof atwww.federalreserve.gov/boarddocs/srletters/ theTreasuryisauthorizedtopurchaseupto 2010/SR1012a1.pdf. $30billioninpreferredstockandotherfinancial instrumentsfromeligiblefinancialinstitutionsto • Thefederalbankingagencies,theNCUA,andthe increasetheavailabilityof creditforsmallbusi- CSBSissuedaninteragencystatementtoassist nessesthatqualifyfortheprogram.Thestatement financialinstitutionsandtheircustomersaffected isavailableatwww.federalreserve.gov/boarddocs/ bytheexplosionandoilspillrelatedtotheDeepsrletters/2010/sr1017a1.pdf. waterHorizonMobileOffshoreDrillingUnitin theGulf of Mexico.Thestatementencouraged • Thefederalbankingagencies,inconjunctionwith financialinstitutionstoconsidermeasurestoassist theConferenceof StateBankSupervisors(CSBS), creditworthyborrowersaffectedbytheGulf oil releasedsupervisoryguidanceinMarch2010on spillandstatedthatexaminerswouldconsiderthe theirexpectationsforsoundfundingandliquidity unusualcircumstancesof banksandcreditunions risk-managementpractices.Thispolicystatement, inaffectedareaswhendeterminingtheappropriate adoptedbyeachof theagencies,summarizesthe supervisoryresponsetosafety-and-soundness principlesof soundliquidityriskmanagement issues.Theinteragencystatementisavailableat issuedpreviouslyand,whenappropriate,supplewww.federalreserve.gov/newsevents/press/bcreg/ mentsthemwiththe“PrinciplesforSoundLiquid- 20100714a.htm. ityRiskManagementandSupervision”(issuedin September2008bytheBaselCommitteeonBank- • Thefederalbankingagencies,togetherwiththe ingSupervision).Thepolicystatementemphasizes FCAandtheNCUA,issuedjointlydevelopedrules theimportanceof cash-flowprojections;diversi- requiringmortgageloanoriginatorswhoare fiedfundingsources;stresstesting;acushionof employeesof institutionsregulatedbytheseagenliquidassets;andaformal,well-developedcontin- ciestomeettheregistrationrequirementsof the gencyfundingplanasprimarytoolsformeasuring SecureandFairEnforcementforMortgageLicensandmanagingliquidityrisk.Theguidanceisavail- ingActof 2008(theS.A.F.E.Act).TheS.A.F.E. ableatwww.federalreserve.gov/newsevents/press/ Actrequirestheseagenciestojointlydevelopand bcreg/20100317a.htm. maintainasystemforregisteringresidentialmort-

BankingSupervisionandRegulation 91 gageloanoriginatorsusingtheNationalMortgage exposurestoaffiliatesandtoensurebanks’compli- LicensingSystemandRegistry.TheFederal ancewithsection23Aof theFederalReserveAct. Reservealsoissuedguidancethatdiscussed • TheFRY-10reportprovidesdataonchangesin S.A.F.E.Actrequirementsandimplementation organizationstructureatdomesticandforeign considerations.Therulesareavailableatwww bankingorganizations. .federalreserve.gov/newsevents/press/bcreg/ 20100728a.htm. • TheFRY-6andFRY-7reportsgatheradditional informationonorganizationstructureandshare- RegulatoryReports holdersfromdomesticbankingorganizationsand TheFederalReserve’ssupervisorypolicyfunctionis foreignbankingorganizations,respectively;the alsoresponsiblefordeveloping,coordinating,and informationisusedtomonitorstructuresoasto implementingregulatoryreportingrequirementsfor determinecompliancewithprovisionsof theBank variousfinancialreportingformsfiledbydomestic HoldingCompanyActandRegulationYandto andforeignfinancialinstitutionssubjecttoFederal assesstheabilityof aforeignbankingorganization Reservesupervision.FederalReservestaff members tocontinueasasourceof strengthtoitsU.S. interactwithotherfederalagenciesandrelevantstate operations. supervisors,includingforeignbanksupervisorsas needed,torecommendandimplementappropriate During2010,anumberof revisionstotheFRY-9C andtimelyrevisionstothereportingformsandthe reportwereimplemented.Therevisionsincluded attendantinstructions. itemstoidentifyother-than-temporaryimpairment lossesondebtsecurities;additionalitemsforunused creditcardlinesandotherunusedcommitmentsand BankHoldingCompanyRegulatoryReports arelatedadditionalitemforotherloans;reformatting TheFederalReserverequiresthatU.S.BHCsperiof theschedulethatcollectsinformationonquarterly odicallysubmitreportsthatprovideinformation averages;additionalitemsforassetscoveredbyFDIC abouttheirfinancialconditionandstructure.This loss-sharingagreements;andclarificationof the informationisessentialtoformulatingandconductinstructionsforunusedcommitments. ingbankregulationandsupervision.Itisalsousedin respondingtorequestsbyCongressandthepublic AlsoeffectiveDecember2010,theFRY-9CandFR forinformationaboutBHCsandtheirnonbanksub- Y-9SPwererevisedtocollectnewfootnoteitems sidiaries.Foreignbankingorganizationsalsoare associatedwiththeTreasury’sCommunityDeveloprequiredtoperiodicallysubmitreportstotheFederal mentCapitalInitiativeprogram. Reserve. • FRY-9seriesreports—theFRY-9C,FRY-9LP, In2010,theFederalReserveproposedthefollowing andFRY-9SP—providestandardizedfinancial revisionstotheFRY-9Cforimplementationin2011: statementsforBHCsonbothaconsolidatedanda (1)breakoutbyloancategoryof otherloansand parent-onlybasis.Thereportsareusedtodetect leasesthataretroubleddebtrestructuringsforthose emergingfinancialproblems,toreviewperfor- that(a)arepastdue30daysormoreorinnonacmanceandconductpre-inspectionanalysis,to crualstatusor(b)areincompliancewiththeirmodimonitorandevaluateriskprofilesandcapital fiedtermsandclarifyreportingof restructured adequacy,toevaluateproposalsforBHCmergers troubleddebtconsumerloans;(2)breakoutother andacquisitions,andtoanalyzeaholdingcompa- consumerloansintoautomobileloansandallother ny’soverallfinancialcondition. consumerloansinseveralschedules;(3)breakout commercialmortgage-backedsecuritiesissuedor • Nonbanksubsidiaryreports—theFRY-11,FR guaranteedbyU.S.governmentagenciesandspon- 2314,FRY-7N,andFR2886b—helptheFederal soredagencies;(4)createanewScheduleHC-V,Vari- Reservedeterminetheconditionof BHCsthatare ableInterestEntities,forreportingmajorcategories engagedinnonbankactivitiesandalsoaidinmoniof assetsandliabilitiesof consolidatedvariableintertoringthenumber,nature,andconditionof the estentities(VIEs);(5)breakoutloansandotherreal companies’nonbanksubsidiaries. estateowned(OREO)informationcoveredbyFDIC • TheFRY-8reportprovidesinformationontrans- loss-sharingagreementsbyloanandOREOcatactionsbetweenaninsureddepositoryinstitution egory;(6)breakoutlifeinsuranceassetsintodata anditsaffiliatesthataresubjecttosection23Aof itemsforgeneralaccountandseparateaccountlife theFederalReserveAct;itisusedtomonitorbank insuranceassets;(7)addnewdataitemsforthetotal

92 97thAnnualReport|2010 assetsof captiveinsuranceandreinsurancesubsidiar- thosethat(a)arepastdue30daysormoreorinnonies;(8)addnewincomestatementitemsforcredit accrualstatusor(b)areincompliancewiththeir valuationadjustmentsanddebitvaluationadjust- modifiedtermsandclarifyreportingof restructured mentsincludedintradingrevenues(forBHCswith troubleddebtconsumerloans;(2)breakoutother totalassetsof $100billionormore);(9)revisereport- consumerloansintoautomobileloansandallother inginstructionsintheareasof constructionlending, consumerloansinseveralschedules;(3)breakout one-tofour-familyresidentialmortgagebanking commercialmortgage-backedsecuritiesissuedor activities,andmaturityandrepricingdata;and guaranteedbyU.S.governmentagenciesandspon- (10)collectexpandedinformationonthequarterly- soredagencies;(4)addanewmemorandumitemfor averagesschedule. theestimatedamountof nonbrokereddeposits obtainedthroughtheuseof depositlistingservice CommercialBankRegulatoryFinancialReports companies;(5)breakoutexistingitemsfordeposits Asthefederalsupervisorof statememberbanks,the of individuals,partnerships,andcorporationsinto FederalReserve,alongwiththeotherbankingagen- depositsof individualsanddepositsof partnerships cies(throughtheFFIEC),requiresbankstosubmit andcorporations;(6)createanewScheduleHC-V, quarterlyCallReports.CallReportsaretheprimary VariableInterestEntities,forreportingmajorcategosourceof dataforthesupervisionandregulationof riesof assetsandliabilitiesof consolidatedVIEs; banksandtheongoingassessmentof theoverall (7)breakoutloansandOREOinformationcovered soundnessof thenation’sbankingsystem.Call byFDICloss-sharingagreementsbyloanand Reportdataprovidethemostcurrentstatisticaldata OREOcategory;(8)breakoutlifeinsuranceassets availableforevaluatinginstitutions’corporateappli- intodataitemsforgeneralaccountandseparate cations,identifyingareasof focusforbothon-site accountlifeinsuranceassets;(9)addnewdataitems andoff-siteexaminations,andconsideringmonetary forthetotalassetsof captiveinsuranceandreinsurandotherpublicpolicyissues.CallReportdata, ancesubsidiaries;(10)addnewincomestatement whichalsoserveasbenchmarksforthefinancial itemsforcreditvaluationadjustmentsanddebitvaluinformationrequiredbymanyotherFederalReserve ationadjustmentsincludedintradingrevenues(for regulatoryfinancialreports,arewidelyusedbystate bankswithtotalassetsof $100billionormore); andlocalgovernments,statebankingsupervisors,the (11)changereportingfrequencyfromannuallyto bankingindustry,securitiesanalysts,andtheaca- quarterlyforthedatareportedinScheduleRC-T, demiccommunity. FiduciaryandRelatedServices,oncollectiveinvestmentfundsandcommontrustfunds;and(11)revise During2010,theFFIECimplementedrevisionsto reportinginstructionsintheareasof construction theCallReport.Therevisionsincluded(1)itemsto lending,one-tofour-familyresidentialmortgage identifyother-than-temporaryimpairmentlosseson bankingactivities,andmaturityandrepricingdata. debtsecurities;(2)additionalitemsforunusedcredit cardlinesandotherunusedcommitmentsanda Inaddition,during2010,theFFIECproposedsevrelatedadditionalitemforotherloans;(3)newitems eralrevisionstotheReportof AssetsandLiabilities pertainingtoreversemortgages;(4)anadditional of U.S.BranchesandAgenciesof ForeignBanks itemontimedepositsandrevisionstoreportingof (FFIEC002)to(1)collectadditionaldetailontradbrokereddeposits;and(5)additionalitemsforassets ingassets,(2)revisethereportinginstructionsin coveredbyFDICloss-sharingagreements.Inaddi- ScheduleEforreportingof timedepositsof tion,revisionsweremadetochangethereportingfre- $100,000ormore,and(3)expandthedatacollected quencyof thenumberof certaindepositaccounts onScheduleQ,FinancialAssetsandLiabilities fromannuallytoquarterly;toeliminateanitemfor MeasuredatFairValue. internalallocationsof incomeandexpensefromforeignoffices;toclarifytheinstructionsforunused commitments;andtochangethereportingfrequency Supervisory Information Technology of loanstosmallbusinessesandsmallfarmsfrom annuallytoquarterly. TheFederalReserve’ssupervisoryinformationtechnologyfunction,carriedoutbytheBoard’sDivision Alsoduring2010,theFFIECproposedthefollowing of BankingSupervisionandRegulationandthe revisionstotheCallReportforimplementationin ReserveBanksundertheguidanceof theSubcom- 2011:(1)breakoutbyloancategoryof otherloans mitteeonSupervisoryAdministrationandTechnolandleasesthataretroubleddebtrestructuringsfor ogy,workstoidentifyrequirementsandsetpriorities

BankingSupervisionandRegulation 93 forinformationtechnologyinitiativesinthesupervi- theyear,numerousprogrammingchangesweremade sionandregulation(S&R)businessline. toNICapplicationsinsupportof businessneedsand toconvergeandstreamlinesupervisoryapplications In2010,thesupervisoryinformationtechnology wherepossible.Asystemof recordwascreatedfor function(1)developedanApplicationPortfolio exam/inspectiondates,includingthecalculationof frameworkandestablishedanapplicationarchitec- thestartdatesforinstitutionssupervisedbytheFedturerepositoryforallof thesupervisoryapplications; eralReserveSystemandtransmittingthoserequire- (2)deployedsimplifiedandsecuresinglesign-onfor mentstoaworkschedulingsystem.Anothersystem mostS&Rapplications;(3)identifiedandimple- of recordwascreatedfortrackingissuesresulting mentedtechnologyinfrastructureimprovementsto fromexaminations. shiftinformationtechnologyinvestmentstomore efficientcomputingplatformsandtechnologies; TheNICalsosupportstheSharedNationalCredit (4)researchedandprovidedinfrastructureinsupport Modernizationproject(SNCMod),amultiyear, of workgroupteamcollaborationandworkflow interagency,informationtechnologydevelopment automationtoefficientlysharetechnologydemand efforttoimprovetheefficiencyandeffectivenessof acrossinfrastructureassets;(5)conductedSystem- thesystemsthatsupporttheSNCProgram.SNC widearchitectureblueprintworkshopstoshiftfrom Modfocusesonacompleterewriteof thecurrent buildingcustomsystemstoadoptinglighttechnolo- legacysystemstotakeadvantageof moderntechnolgiesandsharedsolutions;and(6)establishedatech- ogytoenhanceandextendthesystem’scapabilities. nologycommunityplantoexchangebestpractices, Theprimaryfocusduring2010wasthedevelopment casestudies,andallowforproactivesharingof of asetof examinationsupporttools(SNCnet)tobe knowledgeandimprovetechnicalproblemsolving. usedbytheinteragencyteamsof examinersduring theannualSNCexamination.ThenewSNCnet NationalInformationCenter systemwillbeusedduringtheexecutionof the2011 TheNationalInformationCenter(NIC)istheFed- SNCexam. eralReserve’scomprehensiverepositoryforsupervisory,financial,andbanking-structuredata.Itisalso Finally,theFederalReserveparticipatedinanumber themainrepositoryformanysupervisorydocuments. of technology-relatedinitiativessupportingthe NICincludes(1)dataonbankingstructurethrough- supervisionfunctionaspartof FFIECtaskforces outtheUnitedStatesaswellasforeignbankingcon- andinteragencycommittees.Theseeffortssupport cerns;(2)theNationalExaminationDesktop,which standardizeddatacollectionsandcrossagencyinforenablessupervisorypersonnelaswellasfederaland mationsharing.Workinthisareawillcontinuetobe statebankingauthoritiestoaccessNICdata;(3)the importantastheagenciesworkthroughtheimple- BankingOrganizationNationalDesktop,anapplica- mentationof theDodd-FrankAct. tionthatfacilitatessecure,real-timeelectronic information-sharingandcollaborationamongfederal Staff Development andstatebankingregulatorsforthesupervisionof bankingorganizations;and(4)theCentralDocu- TheFederalReserve’sstaff developmentprogramis mentandTextRepository,whichcontainsdocu- responsiblefortheongoingdevelopmentof nearly mentssupportingthesupervisoryprocesses. 2,605professionalsupervisorystaff toensurethat theyhavetheskillsnecessarytomeettheirevolving WithintheNIC,thesupportingsystemshavebeen supervisoryresponsibilities.TheFederalReservealso modifiedovertimetoextendtheirusefullivesand providescourseofferingstostaff atstatebanking improvebusinessworkflowefficiency.During2010, agencies.Trainingactivitiesin2010aresummarized workcontinuedonupgradingtheentireNICinfra- intable2. structuretoprovideeasieraccesstoinformation,a consistentFederalReserveenterpriseinformation ExaminerCommissioningProgram datarepository,acomprehensivemetadatareposi- TheExaminerCommissioningProgram(ECP) tory,anduniformsecurityacrosstheFederalReserve involvesapproximately22weeksof instruction.Indi- System.Comprehensivetestingwasperformedand vidualsmovethroughacombinationof classroom implementationbeganinMay2010.Application offerings,self-pacedassignments,andon-the-job developersbegantotransitiontheirapplicationsto trainingoveraperiodof twotofiveyears.Achieveusethenewinfrastructure,andallapplicationsare mentismeasuredbytwoprofessionallyvalidated expectedtobecompletedduring2011.Alsoduring proficiencyexaminations:thefirstproficiencyexam

94 97thAnnualReport|2010 Table2.TrainingforBankingSupervisionandRegulation,2010 Numberofenrollments Instructionaltime Numberofcourse Coursesponsorortype FederalReserve S b t a a n te ki a n n g d a f g e e d n e c r y al (approxi d m ay a s te )1 training offerings personnel personnel FederalReserveSystem 1,464 279 395 79 FFIEC 208 254 268 67 TheOptionsInstitute2 9 6 3 1 RapidResponseTM 11,855 1,471 10 75 1 Trainingdaysareapproximate.Systemcourseswerecalculatedusingfivedaysasanaverage,withFFIECcoursescalculatedusingfourdaysasanaverage. 2 TheOptionsInstitute,aneducationalarmoftheChicagoBoardOptionsExchange,providesathree-dayseminarontheuseofoptionsinriskmanagement. isrequiredof allECPparticipants,andthesecond tionaloperationsof domesticbankingorganizations; proficiencyexamisofferedintwospecialtyareas— ortheU.S.bankingoperationsof foreignbanks.The (a)safetyandsoundnessand(b)consumercompli- proposalsconcernBHCformationsandacquisitions, ance.Athirdspecialty,ininformationtechnology, bankmergers,andothertransactionsinvolvingbank requiresthatindividualsearntheCertifiedInforma- ornonbankfirms.In2010,theFederalReserveacted tionSystemsAuditorcertificationofferedbythe on699proposalsrepresenting1,366individualappli- InformationSystemsAuditControlAssociation.In cationsfiledunderthefivestatutes.Manyof these 2010,227examinerspassedthefirstproficiencyexam proposalsinvolvedbankingorganizationsinlessthan and87passedthesecondproficiencyexam(69in satisfactoryfinancialcondition. safetyandsoundnessand18inconsumer compliance). BankHoldingCompanyAct UndertheBankHoldingCompanyAct,acorpora- ContinuingProfessionalDevelopment tionorsimilarlegalentitymustobtaintheFederal Otherformalandinformallearningopportunitiesare Reserve’sapprovalbeforeformingaBHCthrough availabletoexaminers,includingotherschoolsand theacquisitionof oneormorebanksintheUnited programsofferedwithintheSystemandFFIEC- States.Onceformed,aBHCmustreceiveFederal sponsoredschools.Systemprogramsarealsoavail- Reserveapprovalbeforeacquiringorestablishing abletostateandfederalbankingagencypersonnel. additionalbanks.Also,BHCsgenerallymayengage TheRapidResponse®program,introducedin2008, inonlythosenonbankingactivitiesthattheBoard offersSystemandstatepersonnel60–90minutetele- haspreviouslydeterminedtobecloselyrelatedto conferencepresentationsonemergingissuesor bankingundersection4(c)(8)of theBankHolding urgenttrainingneedsassociatedwithimplementation CompanyAct.Dependingonthecircumstances, orissuanceof newlaws,regulations,orguidance. theseactivitiesmayormaynotrequireFederal Reserveapprovalinadvanceof theircommencement. Regulation WhenreviewingaBHCapplicationornoticethat requirespriorapproval,theFederalReservemaycon- Regulation of the U.S. Banking Structure siderthefinancialandmanagerialresourcesof the applicant,thefutureprospectsof boththeapplicant TheFederalReserveadministersfivefederalstatutes andthefirmtobeacquired,theconvenienceand thatapplytoBHCs,financialholdingcompanies, needsof thecommunitytobeserved,thepotential memberbanks,andforeignbankingorganizations— publicbenefits,thecompetitiveeffectsof theprotheBankHoldingCompanyAct,theBankMerger posal,andtheapplicant’sabilitytomakeavailableto Act,theChangeinBankControlAct,theFederal theFederalReserveinformationdeemednecessaryto ReserveAct,andtheInternationalBankingAct. ensurecompliancewithapplicablelaw.Inthecaseof aforeignbankingorganizationseekingtoacquire Inadministeringthesestatutes,theFederalReserve controlof aU.S.bank,theFederalReservealsoconactsonavarietyof proposalsthatdirectlyorindi- siderswhethertheforeignbankissubjecttocomprerectlyaffectthestructureof theU.S.bankingsystem hensivesupervisionorregulationonaconsolidated atthelocal,regional,andnationallevels;theinterna- basisbyitshome-countrysupervisor.In2010,the

BankingSupervisionandRegulation 95 FederalReserveactedon312applicationsand thebankorBHCbeingacquired;thefutureprosnoticesfiledbyBHCstoacquireabankoranon- pectsof theinstitutiontobeacquired;theeffectof bankfirm,ortootherwiseexpandtheiractivities, theproposedchangeoncompetitioninanyrelevant includingproposalsinvolvingprivateequityfirms. market;thecompletenessof theinformationsubmittedbytheacquiringperson;andwhetherthepro- ABHCmayrepurchaseitsownsharesfromits posedchangewouldhaveanadverseeffectonthe shareholders.Whenthecompanyborrowsmoneyto DepositInsuranceFund.Aproposedtransaction buytheshares,thetransactionincreasesthecompa- shouldnotjeopardizethestabilityof theinstitution ny’sdebtanddecreasesitsequity.TheFederal ortheinterestsof depositors.Duringitsreviewof a Reservemayobjecttostockrepurchasesbyholding proposedtransaction,theFederalReservemayconcompaniesthatfailtomeetcertainstandards,includ- tactotherregulatoryorlawenforcementagenciesfor ingtheBoard’scapitaladequacyguidelines.In2010, informationaboutrelevantindividuals.In2010,the theFederalReserveactedonthreestockrepurchase FederalReserveapproved133changeincontrol proposalsbyaBHC. noticesrelatedtostatememberbanksandBHCs, includingproposalsinvolvingprivateequityfirms. TheFederalReservealsoreviewselectionssubmitted byBHCsseekingfinancialholdingcompanystatus FederalReserveAct undertheauthoritygrantedbytheGramm-Leach- UndertheFederalReserveAct,amemberbankmay BlileyAct.BHCsseekingfinancialholdingcompany berequiredtoseekFederalReserveapprovalbefore statusmustfileawrittendeclarationwiththeFederal expandingitsoperationsdomesticallyorinternation- Reserve.In2010,12domesticfinancialholdingcom- ally.StatememberbanksmustobtainFederal panydeclarationsandoneforeignbankdeclaration Reserveapprovaltoestablishdomesticbranches,and wereapproved. allmemberbanks(includingnationalbanks)must obtainFederalReserveapprovaltoestablishforeign BankMergerAct branches.Whenreviewingproposalstoestablish TheBankMergerActrequiresthatallproposals domesticbranches,theFederalReserveconsiders, involvingthemergerof insureddepositoryinstitu- amongotherthings,thescopeandnatureof the tionsbeactedonbytherelevantfederalbanking bankingactivitiestobeconducted.Whenreviewing agency.TheFederalReservehasprimaryjurisdiction proposalsforforeignbranches,theFederalReserve if theinstitutionsurvivingthemergerisastatemem- considers,amongotherthings,theconditionof the berbank.Beforeactingonamergerproposal,the bankandthebank’sexperienceininternational FederalReserveconsidersthefinancialandmanage- banking.In2010,theFederalReserveactedonnew rialresourcesof theapplicant,thefutureprospectsof andmerger-relatedbranchproposalsfor584domestheexistingandcombinedorganizations,theconve- ticbranchesandgrantedpriorapprovalfortheestabnienceandneedsof thecommunity(ies)tobeserved, lishmentof sevennewforeignbranches. andthecompetitiveeffectsof theproposedmerger. TheFederalReservealsomustconsidertheviewsof StatememberbanksmustalsoobtainFederal theU.S.Departmentof Justiceregardingthecom- Reserveapprovaltoestablishfinancialsubsidiaries. petitiveaspectsof anyproposedbankmergerinvolv- Thesesubsidiariesmayengageinactivitiesthatare ingunaffiliatedinsureddepositoryinstitutions.In financialinnatureorincidentaltofinancialactivities, 2010,theFederalReserveapproved96mergerappli- includingsecurities-relatedandinsuranceagencycationsundertheact. relatedactivities.In2010,nofinancialsubsidiary applicationwasapproved. ChangeinBankControlAct TheChangeinBankControlActrequiresindividuals OverseasInvestmentsby andcertainotherpartiesthatseekcontrolof aU.S. U.S.BankingOrganizations bankorBHCtoobtainapprovalfromtherelevant U.S.bankingorganizationsmayengageinabroad federalbankingagencybeforecompletingthetrans- rangeof activitiesoverseas.Manyof theactivitiesare action.TheFederalReserveisresponsibleforreview- conductedindirectlythroughEdgeActandagreeingchangesinthecontrolof statememberbanks mentcorporationsubsidiaries.AlthoughmostforandBHCs.Initsreview,theFederalReserveconsid- eigninvestmentsaremadeundergeneralconsentproersthefinancialposition,competence,experience, ceduresthatinvolveonlyafter-the-factnotificationto andintegrityof theacquiringperson;theeffectof theFederalReserve,largeandothersignificant theproposedchangeonthefinancialconditionof investmentsrequirepriorapproval.In2010,theFed-

96 97thAnnualReport|2010 eralReserveapproved51applicationsandnoticesfor H.2Areleasegivesthedeadlineforcomments.The overseasinvestmentsbyU.S.bankingorganizations, Board’swebsite(www.federalreserve.gov)provides manyof whichrepresentedinvestmentsthrough informationonordersandannouncementsaswellas EdgeActoragreementcorporations. aguideforU.S.andforeignbankingorganizations thatwishtosubmitapplications. InternationalBankingAct TheInternationalBankingAct,asamendedbythe Enforcement of ForeignBankSupervisionEnhancementActof 1991,requiresforeignbankstoobtainFederal Other Laws and Regulations Reserveapprovalbeforeestablishingbranches,agen- TheFederalReserve’senforcementresponsibilities cies,commerciallendingcompanysubsidiaries,or alsoextendtothedisclosureof financialinformation representativeofficesintheUnitedStates. bystatememberbanksandtheuseof credittopurchaseandcarrysecurities. Inreviewingproposals,theFederalReservegenerally considerswhethertheforeignbankissubjecttocom- FinancialDisclosuresbyStateMemberBanks prehensivesupervisionorregulationonaconsolidatedbasisbyitshome-countrysupervisor.Italso Statememberbanksthatarenotmembersof BHCs considerswhetherthehome-countrysupervisorhas andthatissuesecuritiesregisteredundertheSecuriconsentedtotheestablishmentof theU.S.office;the tiesExchangeActof 1934mustdisclosecertain financialconditionandresourcesof theforeignbank informationof interesttoinvestors,includingannual anditsexistingU.S.operations;themanagerial andquarterlyfinancialreportsandproxystatements. resourcesof theforeignbank;whetherthehome- Bystatute,theBoard’sfinancialdisclosurerulesmust countrysupervisorsharesinformationregardingthe besubstantiallysimilartothoseof theSEC.Atthe operationsof theforeignbankwithothersupervi- endof 2010,13statememberbankswereregistered soryauthorities;whethertheforeignbankhaspro- withtheBoardundertheSecuritiesExchangeAct. videdadequateassurancesthatinformationconcern- SecuritiesCredit ingitsoperationsandactivitieswillbemadeavailable totheFederalReserve(if deemednecessarytodeter- UndertheSecuritiesExchangeAct,theBoardis mineandenforcecompliancewithapplicablelaw); responsibleforregulatingcreditincertaintransacwhethertheforeignbankhasadoptedandimple- tionsinvolvingthepurchasingorcarryingof securimentedprocedurestocombatmoneylaundering; ties.TheBoard’sRegulationTlimitstheamountof whetherthehomecountryof theforeignbankis creditthatmaybeprovidedbysecuritiesbrokersand developingalegalregimeorisparticipatinginmulti- dealerswhenthecreditisusedtopurchasedebtand lateraleffortstoaddressmoneylaundering;andthe equitysecurities.TheBoard’sRegulationUlimitsthe foreignbank’srecordincomplyingwithU.S.law.In amountof creditthatmaybeprovidedbylenders 2010,theFederalReserveapprovednineapplications otherthanbrokersanddealerswhenthecreditis byforeignbankstoestablishbranches,agencies,or usedtopurchaseorcarrypubliclyheldequitysecurirepresentativeofficesintheUnitedStates. tiesif theloanissecuredbythoseorotherpublicly heldequitysecurities.TheBoard’sRegulationX PublicNoticeofFederalReserveDecisions appliesthesecreditlimitations,ormarginrequire- CertaindecisionsbytheFederalReservethatinvolve ments,tocertainborrowersandtocertaincredit anacquisitionbyaBHC,abankmerger,achangein extensions,suchascreditobtainedfromforeignlendcontrol,ortheestablishmentof anewU.S.banking ersbyU.S.citizens. presencebyaforeignbankaremadeknowntothe publicbyanorderoranannouncement.Ordersstate SeveralregulatoryagenciesenforcetheBoard’ssecuthedecision,theessentialfactsof theapplicationor ritiescreditregulations.TheSEC,theFinancial notice,andthebasisforthedecision;announcements IndustryRegulatoryAuthority,andtheChicago stateonlythedecision.Allordersandannounce- BoardOptionsExchangeexaminebrokersanddealmentsaremadepublicimmediately;theyaresubse- ersforcompliancewithRegulationT.Withrespectto quentlyreportedintheBoard’sweeklyH.2statistical compliancewithRegulationU,thefederalbanking release.TheH.2releasealsocontainsannouncements agenciesexaminebanksundertheirrespectivejurisof applicationsandnoticesreceivedbytheFederal dictions;theFCAandtheNCUAexaminelenders Reserveuponwhichactionhasnotyetbeentaken. undertheirrespectivejurisdictions;andtheFederal Foreachpendingapplicationandnotice,therelated ReserveexaminesotherRegulationUlenders.

97 Consumer and Community Affairs TheDivisionof ConsumerandCommunityAffairs Rulemaking and Regulations (DCCA)hasprimaryresponsibilityforcarryingout theBoard’sconsumerprotectionprogram.DCCA Credit Card Reform augmentsitsdedicatedexpertiseinconsumerprotectionlaw,regulation,andpolicywithresourcesfrom Throughout2010,theFederalReserveworkedto otherfunctionsof theBoardandtheFederalReserve implementtheCreditCardAccountabilityResponsi- Systemtowriteandinterpretregulations,educate bilityandDisclosureActof 2009(theCreditCard andinformconsumers,andenforcelawsandregula- Act).ConsistentwiththeeffectivedatessetbyContionsforconsumerfinancialproductsandservices. gress,theFederalReserve’srulemakingstoimple- Keyelementsof thedivision’sprograminclude: menttheCreditCardActweredividedintothree stages.AsdiscussedintheFederalReserve’s2009 • rulemaking,utilizingateamof attorneystowrite AnnualReport,thefirststagewascompletedin2009 regulationsthatimplementlegislation,update andthesecondstageinJanuary2010.InJune2010, regulationstorespondtochangesinthemarkettheBoardcompletedthethirdstageof rulemaking, place,designconsumer-testeddisclosurestoprowhichisdiscussedingreaterdetailbelow.Subsevideconsumersconsistentandvitalinformationon quently,theBoardproposedclarificationstothe financialproducts,andprohibitunfairanddeceprulesimplementingtheCreditCardAct.Inaddition, tiveactsandpractices; theBoardreleasedreportsoncreditcardusebysmall • supervisionandenforcementof statemember businessesandoncollegecreditcardagreements. banksandbankholdingcompaniesandtheirnonbankaffiliatestoensurethatconsumerprotection ImplementingtheCreditCardAct:StageThree rulesarebeingfollowed; InJune,theBoardapprovedafinalruletoprotect creditcardusersfromunreasonablelatepaymentand • consumercomplaintandinquiryprocessestoassist otherpenaltyfeesandtorequirecreditcardissuersto consumersinresolvinggrievanceswiththeirfinanreconsiderinterestrateincreasesimposedsincethe cialinstitutionsandtoanswertheirquestions; beginningof 2009.Thisrulewentintoeffecton • consumereducationtoinformconsumersabout August22,2010.1Withtheapprovalof thisrule,the whattheyneedtoknowwhenmakingdecisions Board’srulemakingtoimplementtheprovisionsof abouttheirfinancialservicesoptions; theCreditCardActwascomplete. • researchtounderstandtheimplicationsof policy ReasonablePenaltyFees onconsumerfinancialmarkets; Thefinalrulerequiresthatpenaltyfeesimposedby • outreachtonationalandlocalgovernmentagen- cardissuersbereasonableandproportionaltothe violationof theaccountterms.Amongotherthings, cies,consumerandcommunitygroups,academia, theruleprohibitscreditcardissuersfromcharginga andindustrytogainabroadrangeof perspectives, penaltyfeeof morethan$25forpayinglateorotherandtoinformpolicydecisionsandeffectivepracwiseviolatingtheaccount’sterms,unlessthecontices;and sumerhasengagedinrepeatedviolationsorthe • supportfornationalandlocalagenciesandorgani- issuercanshowthatahigherfeerepresentsareasonzationsthatworktoprotectandpromotecommunitydevelopmentandeconomicempowermentto 1 Seepressrelease(June15,2010),www.federalreserve.gov/ historicallyunderservedcommunities. newsevents/press/bcreg/20100615a.htm.

98 97thAnnualReport|2010 ableproportionof thecostsitincursasaresultof SmallBusinessCreditCardUse violations.Therulealsoprohibitscreditcardissuers andCreditCardMarket fromchargingpenaltyfeesthatexceedthedollar InMay,theBoardreleasedaReporttoCongresson amountassociatedwiththeconsumer’sviolation. theUseof CreditCardsbySmallBusinessesandthe Forexample,cardissuerswillnolongerbepermitted CreditCardMarketforSmallBusinesses.3Thereport tochargea$39feewhenaconsumerislatemakinga wassubmittedtoCongressinaccordancewithapro- $20minimumpayment.Instead,thefeecannot visionof theCreditCardActrequiringtheBoardto exceed$20.Inaddition,therulebans“inactivity” conductareviewof theuseof creditcardsbybusifees,suchasfeesimposedwhenaconsumerdoesn’t nesseswithnomorethan50employeesandof the usetheaccounttomakenewpurchases.Lastly,the creditcardmarketforthesebusinesses.Inperforming rulepreventsissuersfromchargingmultiplepenalty itsreviewandpreparingthereport,theBoardgathfeesbasedonasinglelatepaymentorotherviolation ereddataandotherinformationfromanumberof of theaccountterms. sources:majorissuersof smallbusinesscreditcards, tradeassociationsrepresentingsmallbusinessown- ReevaluationofInterestRateIncreases ers,andtwoconsumercreditreportingagencies. Therulesalsorequireissuersthathaveincreaseda Boardstaff alsoworkedwithasmallbusinesstrade consumer’sinterestratestoevaluatewhethertherea- associationtohelpdevelopsomecreditcard-related sonsfortheincreasehavechangedand,if appropri- questionsforinclusionintheirsurveyof smallbusiate,toreducetherate.Specifically,therulerequires nessowners,addedspecialquestionstoaquarterly creditcardissuerstoreevaluateatleasteverysix Boardsurveyof banks’seniorloanofficers,and monthsannualpercentageratesincreasedonorafter obtainedfromavendordataregardingcreditcard January1,2009.Inaddition,therulerequiresthat directmailofferstosmallbusinesses.Boardstaff noticesof rateincreasesforcreditcardaccountsdis- reviewedtheresultsof consumertestingconducted closetheprincipalreasonsfortheincrease. from2006to2008pertainingtodisclosuresgivenin connectionwithconsumercreditcardaccounts,and Clarifications consideredcustomercomplaintinformationmain- InOctober,theBoardproposedclarificationstoits tainedwithintheBoard’sowndatabasesandprorulesimplementingtheCreditCardAct.2Theprovidedbysmallbusinesscreditcardissuers.Finally, posalisintendedtoenhanceconsumerprotections Boardstaff reviewedexistingsurveys,studies, andtoresolveareasof uncertaintysothatcardissu- reports,andresearchrelatedtosmallbusinesses’use ersfullyunderstandtheircomplianceobligations.In of creditcards. particular,theproposalwouldclarifythat: Amongotherthings,thereportdiscusseshowsmall • thesameprotectionsexistforpromotionalprobusinessesusecreditcardsanddescribesissuers’ gramsthatwaiveinterestchargesforaspecified practicesinmarketingandpricingsmallbusiness periodof timeasexistforpromotionalprograms creditcards.Thereportalsosummarizessmallbusithatapplyareducedrateforaspecifiedperiod; nesses’accesstonewcreditcardsduring2009and • feeschargedtoconsumerspriortotheopeningof smallbusinesscreditcardtermsandconditions.In acreditcardaccountarecoveredbythesamelimi- addition,thereportreviewsdisclosuresprovidedto tationsasfeeschargedduringthefirstyearafter smallbusinesscreditcardcustomersandotherissuer theaccountisopened;together,thesefeesmaynot practices.Finally,thereportconsidersthepotential exceed25percentof theaccount’sinitialcredit benefitsandadverseeffectsof applyingdisclosure limit;and andsubstantiverequirementssimilartothoseinthe TruthinLendingAct,asamendedbytheCredit • acardissuermustconsideraconsumer’sindividual CardAct,tosmallbusinesscreditcards. income,nothouseholdincome,whenevaluatingthe consumer’sabilitytomaketherequiredpayments CollegeCreditCardAgreements foranewcreditcardorforahighercreditlimiton InOctober,theBoardreleasedareportthatcontains anexistingaccount. paymentandaccountinformationaboutmorethan 1,000agreementsbetweencreditcardissuersand 3 SeeOtherReportstotheCongress(May2010),www 2 Seepressrelease(October19,2010),www.federalreserve.gov/ .federalreserve.gov/boarddocs/rptcongress/smallbusinesscredit/ newsevents/press/bcreg/20101019a.htm. smallbusinesscredit.pdf.

ConsumerandCommunityAffairs 99 Box 1. Credit Where Credit Is Due: Supporting Small Business Access to Credit Smallbusinessesareoftencharacterizedasthelife- nationalaudienceofkeydecision-makers,including bloodofAmerica’seconomy,providingvitaljobsand leadersfromcommunitydevelopmentfinancialinstiservices,andtheembodimentofthenation’sentre- tutions,banks,smallbusinessesandtradegroups, preneurialspirit.In2010,intheaftermathofthe andgovernmentagenciesaspanelistsandparticifinancialcrisisandlingeringeconomicchallenges, pants.Theforumprovidedanopportunitytodiscuss creditforsmallbusinesseswastight.Thematterof promisingsolutionsandkeypolicyrecommendations accesstocreditforsmallbusinessesemergedasan identifiedintheregionalgatherings.Keynoteremarks importantissuefortheSystem’scommunityaffairs weregivenbyFederalReserveChairmanBenBeragenda.Inresponse,theBoardledaninitiativeon nanke,GovernorElizabethDuke,andAdministrator financingforsmallbusinesses.Theinitiativewas oftheU.S.SmallBusinessAdministrationKaren designedtogatherinformationandperspectivesto Mills.Additionally,asummaryofkeyinsightsand helptheFederalReserveandotherkeystakeholders themesfromthesemeetingswasincludedasan craftresponsestotheimmediateandintermediate addendumtoChairmanBernanke’smonetarypolicy needsofcreditworthysmallbusinesses. testimony,providedonJuly21,2010(seetheBoard’s websiteatwww.federalreserve.gov/newsevents/ Thefirstphaseofthesmallbusinessinitiativewasto testimony/bernanke20100721a.htm). collectinformationaboutthefinancingchallenges facingsmallbusinessesgiventheeconomicclimate Throughout2010,thesmallbusinessinitiative atthetime.TheFederalReserve’sCommunityAffairs assistedinidentifyingstrategiesforenhancing Offices(CAOs)leveragedtheirroleasconvenerand accesstofinancingforsmallbusinesses,andfor catalysttohostaseriesofmorethan40meetings, improvingthequalityandinfrastructureofsmallbusiworkshops,andconferenceswithkeyplayersinthe nesstechnicalsupport.Theinitiativealsounderpublicsector,smallbusiness,andlendingcommuni- scoredtheneedforgreatercoordinationbetween ties.Thegatheringswereusedtocollectandshare keystakeholdergroups,includingfederal,state,and informationonfactorsaffectingthesupplyofand localagencies,aswellasrepresentativesfromthe demandforsmallbusinesscreditandcapital.The public,nonprofit,andprivatesectors.Goingforward, communityaffairsstaffaggregatedtheinformation theCAOswillcontinuetoworkwithpartnerstofoster andelicitedkeythemesandfindingsfromthe promisingsolutionsforsmallbusinessesacrossthe regionalmeetingssothatpotentialsolutionsand countrybycoordinatingaseriesofregionalforums follow-updiscussionscouldbeaddressed. withReserveBanksforfinancialinstitutionsand CommunityDevelopmentFinancialInstitutions,and Theinformation-gatheringprocessculminatedin identifyingkeylessonsandpromisingpracticesto July2010whentheBoardhostedtheAddressingthe ensurethatsmallbusinessesgetthecreditthey FinancingNeedsofSmallBusinessessummitfora need. institutionsof highereducationoraffiliatedorgani- Inaddition,theBoardlaunchedanewonlinedatabase, zationsthatprovidefortheissuanceof creditcards www.federalreserve.gov/collegecreditcardagreements, tostudents.4TheCreditCardActrequiresissuersto whichprovidesadditionalinformationaboutthe submittotheBoardannuallytheiragreementswith agreementssubmittedtotheBoard.Userscanaccess educationalinstitutionsoraffiliatedorganizations, thecompleteagreementtexttoseetheinformation suchasalumniassociations.TheBoard’sreportcov- submittedbycardissuersregardingpaymentsand ers1,044agreementsthatwereineffectduring2009. accounts.Usersmayalsosearchforagreementsby Amongotherthings,thereportliststhelargestagree- cardissuer,byeducationalinstitutionororganizamentsbythedollaramountof paymentsmadetothe tion,orbythecityorstateinwhichtheinstitutionor institutionororganizationduring2009,bythetotal organizationislocated. numberof accountsopenedundertheagreement during2009,andbythetotalnumberof accounts Overdraft Services and Gift Card Rules openedundertheagreementthatremainedopenat RestrictionsonOverdraftFees theendof 2009(regardlessof whentheaccountwas opened). InMay,theBoardannouncedfinalclarificationsto aspectsof itsNovember2009finalruleunderRegulationE(ElectronicFundTransfers)anditsDecem- 4 Seepressrelease(October25,2010),www.federalreserve.gov/ newsevents/press/bcreg/20101025b.htm. ber2008finalruleunderRegulationDD(Truthin

100 97thAnnualReport|2010 Savings)pertainingtooverdraftservices.5Thefinal ary31,2011,providedthatseveralconditionsare clarificationsaddressquestionsthathavearisen met.InOctober,afterapubliccommentperiod,the underboththeRegulationEandDDfinalrulesand BoardfinalizedtheAugustinterimfinalrule.8 providefurtherguidanceregardingcompliancewith certainaspectsof thefinaloverdraftrules.Inparticu- Mortgage Reform lar,thefinalclarificationsexplainthattheprohibitioninRegulationEonassessingoverdraftfeeswith- Throughout2010,theBoardproposedsignificant outtheconsumer’saffirmativeconsentappliestoall newrulesdesignedtoenhanceconsumerprotections institutions,includingthosewithapolicyandprac- anddisclosuresforhomemortgagetransactions, ticeof decliningautomatedtellermachine(ATM) includingreversemortgages.TheBoardalsoproandone-timedebitcardtransactionswhenan posedaruletorevisethecoverageof escrowaccount accounthasinsufficientfunds.Thefinalclarifications requirementsforfirst-lien“jumbo”mortgages,in alsomakecertaintechnicalcorrectionsandconform- ordertoimplementprovisionsof theDodd-Frank ingamendments. WallStreetReformandConsumerProtectionActof 2010(theDodd-FrankAct).Inaddition,theBoard RestrictionsonFeesand adoptedfinalrulestoprotectmortgageborrowers ExpirationDatesforGiftCards fromunfair,abusive,ordeceptivelendingpractices InMarch,theBoardannouncedfinalrulestorestrict thatcanarisefromloanoriginatorcompensation thefeesandexpirationdatesthatmayapplytogift practices,aswellasrulestoimplementprovisionsof cards.6Therulesprotectconsumersfromcertain theMortgageDisclosureImprovementActof 2008 unexpectedcostsandrequirethatgiftcardtermsand (MDIA)andtheHelpingFamiliesSaveTheirHomes conditionsbeclearlystated.Thefinalrulesprohibit Actof 2009. dormancy,inactivity,andservicefeesongiftcards ConsumerProtectionsandDisclosuresfor unless(1)theconsumerhasnotusedthecertificate HomeMortgageTransactions orcardforatleastoneyear,(2)nomorethanone suchfeeischargedpermonth,and(3)theconsumer InAugust,theBoardproposedenhancedconsumer isgivenclearandconspicuousdisclosuresaboutthe protectionsanddisclosuresforhomemortgagetransfees.Inaddition,expirationdatesforfundsunderly- actions.9Theproposalincludessignificantchangesto inggiftcardsmustbeatleastfiveyearsafterthedate RegulationZandrepresentsthesecondphaseof the of issuance,orfiveyearsafterthedatewhenfunds Board’scomprehensivereviewandupdateof the werelastloaded.Thenewrulesgenerallycoverretail mortgagelendingrules.Theproposedchangesreflect giftcards,whichcanbeusedtobuygoodsorservices theresultsof consumertestingbytheBoard. atasinglemerchantoraffiliatedgroupof merchants, ReverseMortgages andnetwork-brandedgiftcards,whichareredeemableatanymerchantthatacceptsthecardbrand. Reversemortgagesarecomplexproductsavailableto Thefinalrules,whichhadaneffectivedateof olderconsumers,someof whommaybemorevul- August22,2010,wereissuedunderRegulationEto nerabletoabusivepractices.Tohelpconsumers implementthegiftcardprovisionsintheCredit understandtheseproducts,theFederalReserve’spro- CardAct. posalwouldrequirecreditorstoprovideimproved disclosuresthatexplainparticularfeaturesuniqueto InAugust,theBoardannouncedaninterimfinalrule reversemortgages.Inordertoprotectconsumers implementingrecentlegislationmodifyingtheeffec- fromunfairpracticesrelatedtoreversemortgages, tivedateof certaindisclosurerequirementsappli- theproposalalsowould: cabletogiftcardsundertheCreditCardAct.7For • prohibitcreditorsfromconditioningareverse giftcertificates,storegiftcards,andgeneral-usepre- mortgageontheconsumer’spurchaseof another paidcardsproducedpriortoApril1,2010,thelegis- financialorinsuranceproduct,sothatconsumers lationandinterimfinalruledelaytheAugust22, arenotforcedtobuyfinancialproductsthatcanbe 2010effectivedateof thesedisclosuresuntilJanu- costlyormaynotbebeneficial,suchasannuitiesor long-termcareinsurance; 5 Seepressrelease(May28,2010),www.federalreserve.gov/ newsevents/press/bcreg/20100528a.htm. 6 Seepressrelease(March23,2010),www.federalreserve.gov/ 8 Seepressrelease(October19,2010),www.federalreserve.gov/ newsevents/press/bcreg/20100323a.htm. newsevents/press/bcreg/20101019b.htm. 7 Seepressrelease(August11,2010),www.federalreserve.gov/ 9 Seepressrelease(August16,2010),www.federalreserve.gov/ newsevents/press/bcreg/20100811a.htm. newsevents/press/bcreg/20100816e.htm.

ConsumerandCommunityAffairs 101 • requirethataconsumerreceivecounselingabout ratehigherthantheraterequiredbythelender(comreversemortgagesbeforeanynonrefundablefee monlyreferredtoasa“yieldspreadpremium”). canbeimposed(exceptafeeforthecounseling Underthenewrule,however,aloanoriginatormay itself)ortheloancanbeclosed,tohelpensurethat notreceivecompensationthatisbasedontheinterest consumersunderstandthesecomplexproducts rateorotherloanterms.Thiswillpreventloanorigibeforetheybecomeobligatedontheloan;and natorsfromprovidingconsumersloanswithhigher interestratesorotherless-favorabletermstoincrease • prohibitcreditorsfromsteeringconsumerstospetheirowncompensation.Loanoriginatorscanconcificreversemortgagecounselorsorcompensating tinuetoreceivecompensationthatisbasedonapercounselorsorcounselingagencies,toensurethat centageof theloanamount,whichisacommon thecounselingisunbiased. practice. RightofRescission Therulealsoprohibitsaloanoriginatorthatreceives Aconsumergenerallyhasthreebusinessdaysafter compensationdirectlyfromtheconsumerfromalso theloanclosingtorescindcertainhome-secured receivingcompensationfromthelenderoranother loans,butthisrightmaybeextendedforuptothree party.Inconsumertesting,theBoardfoundthatconyearsif thecreditorfailstoprovidetheconsumer sumersgenerallyarenotawareof thepaymentslendwithcertaindisclosuresorthenoticeof therightto ersmaketoloanoriginatorsandhowthosepayments rescind.Theproposedrevisionswould: canaffecttheconsumer’stotalloancost.Thenew • simplifyandimprovethenoticeof therightto ruleseekstoensurethatconsumerswhoagreetopay rescindprovidedtoconsumersatclosing; theoriginatordirectlydonotalsopaytheoriginator indirectlythroughtheinterestrate,therebypaying • revisethelistof disclosuresthat,if notproperly moreintotalcompensationthantheyrealize. made,cantriggeranextendedrighttorescind,to focusondisclosuresthattestingshowsaremost Anti-SteeringProtections importanttoconsumers;and Thefinalruleprohibitsloanoriginatorsfromdirect- • clarifycreditors’obligationswhentheextended ing,or“steering,”aconsumertoacceptamortgage righttorescindisasserted. loanthatisnotintheconsumer’sbestinterestin ordertoincreasetheoriginator’scompensation.To Inaddition,theBoard’sproposalincludesother facilitatecompliancewiththeanti-steeringrule,loan amendmentsrelatedtohome-securedcredit.For originatorswouldbedeemedtocomplybyensuring example,theproposedruleswouldensurethatcon- thatconsumerscanchoosefromloanoptionsthat sumersreceivenewdisclosureswhenthepartiesagree includetheloanwiththelowestinterestrateandthe tomodifythekeytermsof anexistingmortgageloan loanwiththeleastamountof pointsandorigination andclarifyloanservicers’dutytorespondwithina fees,ratherthantheloansthatmaximizetheoriginareasonableamountof timewhenaconsumer tor’scompensation. requestsinformationabouttheownerof theloan. ThefinalrulestakeeffectonApril1,2011.11 ProtectionsagainstMortgage LoanOriginatorPractices DisclosuresforMortgagePaymentChanges InAugust,theBoardissuedfinalrulestoprotect InAugust,theBoardissuedaninterimfinalrule mortgageborrowersfromunfairorabusivepractices revisingthedisclosurerequirementsforclosed-end relatedtoloanoriginatorcompensation.10Thenew mortgageloansunderRegulationZ,inorderto rulesapplytomortgagebrokersandthecompanies implementprovisionsof theMDIAthatrequire thatemploythem,aswellasmortgageloanofficers lenderstodisclosehowborrowers’regularmortgage employedbydepositoryinstitutionsandother paymentscanchangeovertime.12TheMDIA,which lenders. amendedTILA,seekstoensurethatmortgageborrowersarealertedtotherisksof paymentincreases YieldSpreadPremiums Previously,lenderscommonlycompensatedloan 11 Atthetimetheruleswereissued,theyweretotakeeffecton April1,2011.However,adelayimposedunderatemporary originatorsmoreif aborroweracceptsaninterest courtorderresultedintherulesbecomingeffectiveonApril6, 2011. 10 Seepressrelease(August16,2010),www.federalreserve.gov/ 12 Seepressrelease(August16,2010),www.federalreserve.gov/ newsevents/press/bcreg/20100816d.htm. newsevents/press/bcreg/20100816b.htm.

102 97thAnnualReport|2010 beforetheytakeoutmortgageloanswithvariable first-lienjumbomortgages.InJuly2008,theBoard ratesorpayments.Accordingly,undertheinterim issuedrulesrequiringcreditorstoestablishescrow rule,lenders’costdisclosuresmustincludeapayment accountsforfirst-lienloansif aloan’sAPRis summaryintheformof atable,statingthefollowing: 1.5percentagepointsabovetheapplicableprime offerrate.Undertheproposedrevisions,theescrow • theinitialinterestratetogetherwiththecorrerequirementswouldapplyforjumbomortgagesonly spondingmonthlypayment; if theloan’sAPRis2.5percentagepointsormore • foradjustable-rateorstep-rateloans,themaximum abovetheapplicableprimeofferrate.TheAPR interestrateandpaymentthatcanoccurduringthe thresholdfornon-jumbomortgagesremains firstfiveyearsanda“worstcase”exampleshowing unchanged. themaximumrateandpaymentpossibleoverthe NotifyingConsumersWhen lifeof theloan;and MortgagesAreSoldorTransferred • thefactthatconsumersmightnotbeabletoavoid InAugust,theBoardissuedfinalrulesamending increasedpaymentsbyrefinancingtheirloans. RegulationZtoimplementaprovisionof theHelpingFamiliesSaveTheirHomesActof 2009requiring Theinterimrulealsorequireslenderstodisclosecerthatconsumersreceivenoticewhentheirmortgage tainfeatures,suchasballoonpaymentsoroptionsto loanissoldortransferred.15Thenewdisclosure makeonlyminimumpaymentsthatwillcauseloan requirementbecameeffectivewhenthestatutewas amountstoincrease.Allof thedisclosuresrequired enactedandaimstoensurethatconsumersknow intheinterimruleweredevelopedthroughseveral whoownstheirmortgageloan.Consistentwiththe roundsof qualitativeconsumertesting,including statute,thefinalrulerequirespurchasersorassignees one-on-oneinterviewswithconsumersaroundthe thatacquireloanstoprovidewrittendisclosuresnoticountry. fyingconsumersof thesaleortransferof theirmortgageloanswithin30days. LendersmustcomplywiththeinterimruleforapplicationstheyreceiveonorafterJanuary30,2011,as Toprovidecomplianceguidance,theBoardhad specifiedintheMDIA. issuedinterimrulesinNovember2009.Compliance withtheAugust2010finalrulesismandatoryon InDecember,theBoardapprovedaninterimrule January1,2011. amendingRegulationZtoclarifycertainaspectsof theAugustinterimruleimplementingprovisionsof RealEstateAppraisals theMDIA,inresponsetopubliccomments.13Credi- InOctober,theBoardissuedaninterimfinalruleto torshavetheoptionof complyingwitheitherthe ensurethatrealestateappraisersarefreetousetheir Board’sAugust2010interimruleasoriginallypubindependentprofessionaljudgmentinassigning lishedorasrevisedbytheDecemberinterimrule homevalueswithoutinfluenceorpressurefromthose untilOctober1,2011,atwhichtimecompliancewith withinterestsinthetransactions.16Therulealso theDecemberinterimrulewillbecomemandatory. seekstoensurethatappraisersreceivecustomaryand reasonablepaymentsfortheirservices.Theinterim RulesforJumboMortgageEscrowAccounts finalruleincludesseveralprovisionsthatprotectthe InAugust,theBoardproposedaruletorevisethe integrityof theappraisalprocesswhenaconsumer’s escrowrequirementsforhigher-pricedfirst-lien homeissecuringtheloan.Theinterimfinalrule “jumbo”mortgages,inordertoimplementaprovisionof theDodd-FrankAct.14Jumbomortgagesare • prohibitscoercionandothersimilaractions loansthatexceedtheconformingloan-sizelimitfor designedtocauseappraiserstobasetheappraised purchasebyFreddieMac,asspecifiedintheDodd- valueof propertiesonfactorsotherthantheirinde- FrankAct.Theproposedrulewouldincreasethe pendentjudgment; annualpercentagerate(APR)thresholdthatdeter- • prohibitsappraisersandappraisalmanagement mineswhetheramortgagelendermustestablishan companieshiredbylendersfromhavingfinancial escrowaccountforpropertytaxesandinsurancefor 13 Seepressrelease(December22,2010),www.federalreserve.gov/ 15 Seepressrelease(August16,2010),www.federalreserve.gov/ newsevents/press/bcreg/20101222a.htm. newsevents/press/bcreg/20100816a.htm. 14 Seepressrelease(August16,2010),www.federalreserve.gov/ 16 Seepressrelease(October19,2010),www.federalreserve.gov/ newsevents/press/bcreg/20100816a.htm. newsevents/press/bcreg/20101018a.htm.

ConsumerandCommunityAffairs 103 orotherinterestsinthepropertiesorthecredit sionof theholdingcompany.Thedivisionalsoovertransactions; seestheeffortsof the12ReserveBankstoensure thatconsumerprotectionlawsandregulationsare • prohibitscreditorsfromextendingcreditbasedon fullyandfairlyenforced.Divisionstaff provideguidappraisalsif theyknowbeforehandof violations anceandexpertisetotheReserveBanksonconsumer involvingappraisercoercionorconflictsof interprotectionregulations,bankandbankholdingcomest,unlessthecreditorsdeterminethatthevaluesof panyapplicationanalysisandprocessing,examinathepropertiesarenotmateriallymisstated; tionandenforcementtechniquesandpolicymatters, • requiresthatcreditorsorsettlementserviceprovid- examinertraining,andemergingissues.Staff also ersthathaveinformationaboutappraisermiscon- reviewReserveBanksupervisoryreports,examinaductfilereportswiththeappropriatestatelicensing tionworkproducts,andconsumercomplaintanalyauthorities;and sesandresponses.Finally,staff membersparticipate ininteragencyactivitiesthatpromoteuniformityin • requiresthepaymentof reasonableandcustomary examinationprinciples,standards,andprocesses. compensationtoappraiserswhoarenotemployees of thecreditorsorof theappraisalmanagement Inaddition,throughout2010,theSystemestablished companieshiredbythecreditors. andimplementedapolicyforconductingriskfocusedconsumercompliancesupervisionof,andthe TheinterimfinalruleisrequiredbytheDodd-Frank investigationof consumercomplaintsagainst,non- Act,andcomplianceismandatoryasof April1, banksubsidiariesof bankholdingcompanies 2011. (BHCs)andforeignbankingorganizations (FBOs)withactivitiescoveredbytheconsumerpro- PublicHearingsonRegulationC tectionlawsandregulationstheFederalReservehas BetweenJulyandSeptember2010,theBoardhelda theauthoritytoenforce.Thispolicyisdesignedto seriesof fourpublichearingsonRegulationC,which enhanceunderstandingof theconsumercompliance implementstheHomeMortgageDisclosureAct riskprofileof nonbanksubsidiariesandtoguide (HMDA),attheFederalReserveBanksof Atlanta, supervisoryactivitiesfortheseentities.Initialsuper- SanFrancisco,andChicago,andattheBoardin visoryactivitiesfirsttargetedthosenonbanksubsid- Washington,D.C.17Thepurposeof thesehearings iariesconsideredtobeof highestrisktotheFederal wasthreefold:(1)toevaluatewhetherrevisionsto ReserveSystem.18 RegulationCin2002helpedgatherusefulandaccurateinformationonthemortgagemarket,(2)to ExaminationsaretheFederalReserve’sprimary assesstheneedforadditionaldataandother methodof enforcingcompliancewithconsumerproimprovements,and(3)toidentifyareasforfuture tectionlawsandassessingtheadequacyof consumer researchonemergingmortgagemarketissues. compliancerisk-managementsystemswithinregulatedentities.Duringthe2010reportingperiod,the Oversight and Enforcement ReserveBanksconducted300consumercompliance examinationsof theSystem’s858statemember banksandthreeexaminationsof foreignbanking TheBoard’sDivisionof ConsumerandCommunity organizations.19 Affairsdevelopsandsupportssupervisorypolicyand examinationproceduresforconsumerprotection lawsandregulations,aswellastheCommunityReinvestmentAct(CRA),aspartof itssupervisionof state-chartered,depositoryinstitutions,andforeign 18 FederalReserveBoardofGovernors,2009ConsumerAffairs Letters,ConsumerComplianceSupervisionPolicyforNonbank bankingorganizationsthataremembersof theFed- SubsidiariesofBankHoldingCompaniesandForeignBanking eralReserveSystem.Thedivisionalsoadministers Organizations,CA-09-8,September14,2009,www theFederalReserveSystem’srisk-focusedprogram .federalreserve.gov/boarddocs/caletters/2009/0908/caltr0908.htm. 19 TheforeignbankingorganizationsexaminedbytheFederal forassessingconsumercomplianceriskinthelargest Reserveareorganizationsthatoperateundersection25or25A bankandfinancialholdingcompaniesintheSystem. oftheFederalReserveAct(EdgeActandagreementcorpora- Divisionstaff ensureconsumercomplianceriskis tions)andstate-charteredcommerciallendingcompaniesowned orcontrolledbyforeignbanks.Theseinstitutionsarenotsubject effectivelyintegratedintotheconsolidatedsupervitotheCommunityReinvestmentActandtypicallyengagein relativelyfewactivitiescoveredbyconsumerprotectionlaws. 17 Seepressrelease(April23,2010),www.federalreserve.gov/ Thereare197suchinstitutionsthroughouttheFederalReserve newsevents/press/bcreg/20100423a.htm. System.

104 97thAnnualReport|2010 Community Reinvestment Act Compliance criteriadescribedinsection2301(c)of theHousing andEconomicRecoveryActof 2008(HERA),as TheCRArequiresthattheFederalReserveandother amended,andthatareconductedindesignatedtarfederalbankingandthriftagenciesencouragefinan- getareasidentifiedinplansapprovedbytheU.S. cialinstitutionstohelpmeetthecreditneedsof the Departmentof HousingandUrbanDevelopment localcommunitiesinwhichtheydobusiness,includ- (HUD)undertheNeighborhoodStabilizationProinglowandmoderateincomeareas,consistentwith gram(NSP). safeandsoundoperations. InadditiontothisrevisiontotheCRAregulations, Tocarryoutthismandate,theFederalReserve theFederalReserveandtheotherfederalbanking • examinesstatememberbankstoassesstheircom- andthriftregulatoryagenciesheldpublichearingsin pliancewiththeCRA, fourcities(Arlington,VA;Atlanta,GA;Chicago,IL; andLosAngeles,CA)andinvitedthepublictocom- • analyzesapplicationsformergersandacquisitions mentonwaysthattheCRAregulationsshouldbe bystatememberbanksandbankholdingcomparevisedtobetterreflectcurrentbankingpractices. niesinrelationtoCRAperformance,and Theagenciesareconsideringwaystoupdatethe • disseminatesinformationoncommunitydevelop- regulationstoreflectchangesinthefinancialservices menttechniquestobankersandthepublicthrough industry,includinghowbankingservicesaredeliv- CommunityDevelopmentofficeswithinthe eredtoconsumers,toensurethatCRAcontinuesto ReserveBanks. encourageinstitutionstomeetcommunitycredit needseffectively.Inadditiontopublichearings,the TheFederalReserveassessesandratestheCRAper- agenciesinvitedwrittencommentsthrough formanceof statememberbanksinthecourseof August31,2010.TheFederalReservereceivednearly examinationsconductedbystaff attheReserve 1,200commentletters. Banks.Duringthereportingperiod,theReserve MergersandAcquisitions BanksconductedCRAexaminationsof 267banks. inRelationtotheCRA Of thosebanks,24wererated“Outstanding,”237 wererated“Satisfactory,”fivewererated“Needsto During2010,theBoardconsideredandapprovedsix Improve,”andonewasrated“Substantial bankingmergerapplications. Non-Compliance.” • AnapplicationbyFirstNiagaraFinancialGroup, Inc.,Buffalo,NY,toacquireHarleysvilleNational InSeptember2010,theFederalReserveandother Corp.,Harleysville,PA,wasapprovedinMarch. federalbankingandthriftregulatoryagencies announcedafinalruletoimplementaprovisionof • AnapplicationbyPremierCommerceBancorp, theHigherEducationOpportunityAct(HEOA), Inc.,PalosHills,IL,toacquireG.R.Bancorp,Ltd., whichrequirestheagenciestoconsiderlow-cost GrandRidge,IL,wasapprovedinJuly. highereducationloanstolow-incomeborrowersasa • AnapplicationbyTheToronto-DominionBank, positivefactorwhenassessingafinancialinstitution’s Toronto,Canada,toacquireTheSouthFinancial recordof meetingcommunitycreditneedsunderthe Group,Inc.Greenville,SC,wasapprovedinJuly. CRA.Inaddition,therulealsoincorporatedaCRA statutoryprovisionthatallowstheagenciestocon- • AnapplicationbyMetcalf Bank,LeesSummit, siderafinancialinstitution’scapitalinvestment,loan MO,topurchasecertainassetsandassumecertain participation,andotherventureswithminority- liabilitiesof TheFirstNationalBankof Olathe, ownedfinancialinstitutions,women-ownedinstitu- Olathe,KS,wasapprovedinSeptember. tions,andlow-incomecreditunionsasfactorsin • AnapplicationbySKBHCHoldings,LLC, assessingtheinstitution’sCRArecord. CoronaDelMar,CA,toacquireStarbuckBancshares,Inc.,Starbuck,MN,wasapprovedin InDecember2010,theFederalReserveandtheother October. federalbankingandthriftregulatoryagenciesrevised theCRAregulationstosupportcommunitystabiliza- • AnapplicationbyCajadeAhorrosdeValencia, tionactivitiesinneighborhoodsaffectedbyhigh CatellonYAlicante,Valencia,Spaintobecomea numbersof foreclosures.Thefinalruleencourages bankholdingcompanybyacquiringcontrolof depositoryinstitutionstosupport,enable,orfacili- CMFloridaHoldings,Inc.,CoralGables,FL,and tateprojectsoractivitiesthatmeetthe“eligibleuses” CityNationalBancshares,Inc.anditssubsidiary,

ConsumerandCommunityAffairs 105 CityNationalBankof Florida,bothof Miami, criminatingagainstanyapplicant,inanyaspectof a FL,wasapprovedinDecember. credittransaction,onthebasisof race,color,religion,nationalorigin,sexormaritalstatus,orage.In (Fourotherprotestedapplicationswerewithdrawn addition,creditorsmaynotdiscriminateagainstan bytheapplicants.) applicantbecausetheapplicantreceivesincomefrom apublicassistanceprogramorhasexercised,ingood Membersof thepublichadtheopportunitytosub- faith,anyrightundertheConsumerCreditProtecmitcommentsontheapplications;theircomments tionAct.TheFairHousingActprohibitsdiscriminaraisedvariousissues.Severalcommentsreferenceda tioninresidentialrealestaterelatedtransactions, failuretomakecreditavailabletocertainminority includingthemakingandpurchasingof mortgage groupsandtolow-andmoderate-incomeindividuals loans,onthebasisof race,color,religion,sex,handiandinlow-andmoderate-incomegeographies, cap,familialstatus,ornationalorigin. includinginsufficientbranchpresenceinlow-income geographies.Othercommentscitedpredatoryand PursuanttotheECOA,if theBoardhasreasonto discriminatorylendingpracticeswithrespecttoresi- believethatacreditorhasengagedinapatternor dentialmortgages,creditcardloans,andsmallbusi- practiceof discriminationinviolationof theECOA, nessloans.Anothercommentallegedenablingpreda- thematterwillbereferredtotheU.S.Departmentof toryservicingandlossmitigationpractices,aswellas Justice(DOJ).TheDOJreviewsthereferraland unethicalbusinesspractices,asevidencedbyarecent determineswhetherfurtherinvestigationiswar- U.S.SecuritiesandExchangeCommissioncivillaw- ranted.ADOJinvestigationmayresultinapublic suit.Severalcommentswarnedof inadequateplans civilenforcementactionorsettlement.TheDOJmay tomeetcommunities’creditneedsandareductionin decideinsteadtoreturnthemattertotheFederal accesstocreditforaffectedcommunities. Reserveforadministrativeenforcement.WhenamatterisreturnedtotheFederalReserve,staff ensures thattheinstitutiontakesallappropriatecorrective TheBoardalsoconsidered75applicationswithoutaction. standingissuesinvolvingcompliancewithconsumer protectionstatutesandregulations,includingfair During2010,theBoardreferredeightmattersto lendinglawsandtheCRA.Someof thoseissues theDOJ. involvedunfairanddeceptivepractices,aswellas concernsaboutstoredvaluecards.Sixtyof those • Threereferralsinvolvedredlining,ordiscriminaapplicationswereapprovedand15werewithdrawn. tionagainstpotentialborrowersbaseduponthe racialcompositionof theirneighborhoods,invio- Fair Lending Enforcement lationof theECOAandtheFairHousingAct. Basedonananalysisof eachbank’slendingprac- TheFederalReserveiscommittedtoensuringthat tices,itsmarketing,thelocationof itsbranches, theinstitutionsitsupervisescomplyfullywiththe anditsdelineatedassessmentareaundertheCRA, federalfairlendinglaws—theEqualCreditOpportu- theBoarddeterminedthatthebanksavoidedlendnityAct(ECOA)andtheFairHousingAct.Fair inginminorityneighborhoods. lendingreviewsareconductedregularlywithinthe • Onereferralinvolveddiscriminationinmortgage supervisorycycle.Additionally,examinersmayconpricing,inviolationof theECOAandtheFair ductfairlendingreviewsoutsideof theusualsupervi- HousingAct.ThelenderchargedAfricansorycycle,if warrantedbyfairlendingrisk.When AmericanborrowershigherAPRsthannonexaminersfindevidenceof potentialdiscrimination, Hispanicwhiteborrowersformortgageloansorigitheyworkcloselywiththedivision’sFairLending natedthroughitswholesalechannelandguaran- EnforcementSection,whichbringsadditionallegal teedbytheFederalHousingAdministrationorthe andstatisticalexpertisetotheexaminationand Departmentof VeteransAffairs.Legitimatepricing ensuresthatfairlendinglawsareenforcedconsisfactorsfailedtoexplainthepricingdisparities. tentlyandrigorouslythroughouttheFederalReserve System. • Onereferralinvolveddiscriminationinthepricing of unsecuredandautomobileloansonthebasisof TheFederalReserveenforcestheECOAandthepro- nationalorigin,inviolationof theECOA.The visionsof theFairHousingActthatapplytolending lenderchargedHispanicborrowershigherinterest institutions.TheECOAprohibitscreditorsfromdis- ratesthannon-Hispanicborrowersforunsecured

106 97thAnnualReport|2010 andautomobileloans,andthedisparitiescouldnot ensureconsistentandcollaborativeenforcementof beexplainedbylegitimatepricingfactors. thefairlendinglaws.Thedirectorof theFederal Reserve’sDivisionof ConsumerandCommunity • Threereferralsinvolveddiscriminationonthebasis Affairsco-chairstheFFETF’sNondiscrimination of maritalstatus,inviolationof theECOA.The WorkingGroupwiththeassistantattorneygeneral banksimproperlyrequiredspousalguaranteesand forDOJ’sCivilRightsDivision,deputygeneral signaturesoncommercialoragriculturalloans,in counselof HUD,andtheattorneygeneralforthe violationof RegulationB. Stateof Illinois.Oneof theWorkingGroup’skeyinitiatives,ledbyHUD,DOJ,andtheFederalReserve, If afairlendingviolationdoesnotconstituteapatistoensurethatdiscriminationdoesnotoccurwhen ternorpracticethatisreferredtotheDOJ,theFedborrowersreceiveloansbackedbytheFederalHouseralReserveactsonitsowntoensurethattheviolaingAdministration(FHA).Inaddition,theFederal tionisremediedbythebank.Mostlendersreadily ReserveistakingaleadingroleintheWorking agreetocorrectfairlendingviolations.Infact,lend- Group’sefforttoanalyzedataonTreasury’sHome ersoftentakecorrectivestepsassoonastheybecome AffordableModificationProgramforanyevidenceof awareof aproblem.Thus,theFederalReservegenerpotentialdiscriminationbyparticipatingservicers. allyusesinformalsupervisorytools(suchasmemorandaof understandingbetweenthebank’sboardof Flood Insurance directorsandtheReserveBank)orboardresolutions toensurethatviolationsarecorrected.If necessary TheNationalFloodInsuranceActimposescertain toprotectconsumers,however,theBoardcanand requirementsonloanssecuredbybuildingsormobile doesbringpublicenforcementactions. homeslocatedin,ortobelocatedin,areasdeterminedtohavespecialfloodhazards.UndertheFed- MonitoringEmergingFairLendingIssues eralReserve’sRegulationH,whichimplementsthe TheFederalReservecontinuestocarefullymonitor act,statememberbanksaregenerallyprohibited creditmarketsforemergingfairlendingrisks.Develfrommaking,extending,increasing,orrenewingany opmentsinthefinancialindustrysurroundingloan suchloanunlessthebuildingormobilehome,aswell modificationandcredit-tighteningpracticescontinue asanypersonalpropertysecuringtheloan,arecovtoraisepotentialfairlendingconcerns.Mortgagesereredbyfloodinsuranceforthetermof theloan.The vicersfacechallengesmanagingthefairlendingrisk lawrequirestheBoardandotherfederalfinancial of theiractivitiesinthemidstof increasingmodificainstitutionregulatoryagenciestoimposecivilmoney tionactivity.Additionally,somelendershaveadopted penaltieswhentheyfindapatternorpracticeof viopoliciesthatcouldpotentiallyposeadisproportionlationsof theregulation.Thecivilmoneypenalties ateimpactonminorities,suchasbranchclosingsand arepayabletotheFederalEmergencyManagement tightercreditstandardsinspecificgeographicmar- Agency(FEMA)fordepositintotheNationalFlood kets.Inresponsetothesetrends,theFederalReserve MitigationFund. continuestocarefullymonitorlenders’practicesfor potentialfairlendingviolations.Inaccordancewith During2010,theBoardimposedcivilmoneypenaltheInteragencyFairLendingExaminationProceties(CMPs)againstthreestatememberbanks.The dures,theFederalReserveconductsexaminationsto dollaramountof thepenalties,whichwereassessed evaluatewhetherlenders’policiesmayviolatefair viaconsentorders,totaled$33,010. lendinglawsbyhavinganillegaldisparateimpacton minorities,andtoidentifysteering,redlining,reverse Coordination with Other redlining,andotherfairlendingviolations.These Federal Banking Agencies risk-focusedexaminationsincludeloanmodification reviewswhenappropriate.Loanmodificationfair Thememberagenciesof theFederalFinancialInstilendingreviewsincludeananalysisof servicerdata tutionsExaminationCouncil(FFIEC)developuniforanyevidenceof potentialdisparatetreatmentor formexaminationprinciples,standards,procedures, impact. andreportformats.In2010,theFFIECmember organizationsissuedtheexaminationproceduresand FinancialFraudEnforcementTaskForce guidanceregardinganumberof regulations. Asanactivememberof theFinancialFraud EnforcementTaskForce(FFETF),theFederal • InteragencyExaminationProceduresfortheRegula- Reservecoordinateswithotherfederalagenciesto tiononRisk-BasedPricingNotices(RegulationV).

ConsumerandCommunityAffairs 107 Therevisedexaminationproceduresaddress paymentfeesandotherpenaltyfees.Theyalso changestotheFairCreditReportingAct(FCRA), requirecreditcardissuerstoevaluateinterestrate asamendedbytheFairandAccurateCreditTrans- increasesimposedsinceJanuary1,2009.23(These actionsActof 2003.Theregulationrequiresa proceduresweresupersededbyrevisedRegulacreditortoprovideaconsumerwithanoticewhen, tionZexaminationproceduresissuedonJanubasedontheconsumer’screditreport,thecreditor ary28,2011,andultimatelybyrevisedprocedures providescredittotheconsumeronmateriallyless issuedonMarch18,2011.) favorabletermsthanitprovidestootherconsum- • InteragencyExaminationProceduresforRegulaers.Theregulationprovidescreditorswithseveral tionDD–TruthinSavings(revised).Therevised methodsfordeterminingwhichconsumersmust examinationproceduresincorporatethe2010techreceiverisk-basedpricingnotices.Asanalternative nicalclarificationstoRegulationDD.Theseclarifitoprovidingrisk-basedpricingnotices,theregulacationsrequireuseof thetermTotalOverdraftFees tionpermitscreditorstoprovideconsumerswho whendisclosingsuchfeesonperiodicstatements applyforcreditwithafreecreditscoreandinforandprovideguidancefordisclosingconsumer mationabouttheirscore.20 accountbalanceinformationthroughautomated • InteragencyExaminationProceduresforRegula- systemsforretailsweepaccounts.24 tionE–ElectronicFundTransfers(revised).The • InteragencySupervisoryGuidanceforInstitutions revisedexaminationproceduresincorporatethe AffectedbytheDeepwaterHorizonOilSpill.This Board’srevisionstothegiftcardprovisionsof guidanceremindsfinancialinstitutionsthatthey RegulationE.ForcardsproducedpriortoApril1, retaintheflexibilitytoworkwithborrowersthat 2010,therevisionsmodifytheeffectivedateof cermayneedadditionaltimetoresolvefinancial taindisclosureandcardexpirationrequirementsin uncertaintiesrelatedtotheeffectsof theoilspill.25 thegiftcardprovisionsof theCreditCardAct.21 • InteragencyExaminationProceduresforRegula- • ReverseMortgageProducts:GuidanceforManagtionE–ElectronicFundTransfers(revised).The ingComplianceandReputationRisks.Theinterrevisedexaminationproceduresincorporatedthe agencyguidanceaddressesthecomplianceand Board’srecentamendmentstoRegulationE reputationrisksassociatedwithreversemortgages regardingoverdraftfeesandgiftcards,whichwent andfocusesonwaysinwhichlenderscanmitigate intoeffectonJuly1,2010,andAugust22,2010, severalareasof regulatoryconcern,includingmisrespectively.Section205.17of amendedRegulaleadingcommunicationwithconsumersthrough tionEprohibitsfinancialinstitutionsfromchargmarketingandadvertisements,andpotentialconingfeesforoverdraftsonATMandone-timedebit flictsof interestandabusivepracticesinconneccardtransactions,unlessaconsumeroptsintothe tionwithreversemortgagetransactions.22 overdraftserviceforthosetypesof transactions. • InteragencyExaminationProceduresforRegula- Section205.20of amendedRegulationErestricts tionZ–TruthinLending(revised).Therevised thefeesandexpirationdatesthatmayapplytogift examinationproceduresincorporatethe2009 cards.Therulesprotectconsumersfromcertain amendmentstoRegulationZ,asaresultof the unexpectedcostsandrequirethatgiftcardterms CreditCardAct.TheCreditCardActamended andconditionsbeclearlystated.Therulesgener- TILAandestablishedanumberof newrequire- allycoverretailgiftcards,whichcanbeusedtobuy mentsforopen-endconsumercreditplans.The goodsorservicesatasinglemerchantoraffiliated CreditCardActprovisionswereeffectiveinthree groupof merchants,andnetwork-brandedgift stages,andtheseproceduresreflectthethirdand cards,whichareredeemableatanymerchantthat finalstageof revisions,whichincorporaterulesto protectcreditcardusersfromunreasonablelate 20 FederalReserveBoard,BankingInformationandRegulation, 23 FederalReserveBoard,BankingInformationandRegulation, Supervision,ConsumerAffairsLetters,www.federalreserve.gov/ Supervision,ConsumerAffairsLetters,www.federalreserve.gov/ boarddocs/caletters/2010/1014/caltr1014.htm. boarddocs/caletters/2011/1103/caltr1103.htm. 21 FederalReserveBoard,BankingInformationandRegulation, 24 FederalReserveBoard,BankingInformationandRegulation, Supervision,ConsumerAffairsLetters,www.federalreserve.gov/ Supervision,ConsumerAffairsLetters,www.federalreserve.gov/ boarddocs/caletters/2010/1012/caltr1012.htm. boarddocs/caletters/2010/1009/caltr1009.htm. 22 FederalReserveBoard,BankingInformationandRegulation, 25 FederalReserveBoard,BankingInformationandRegulation, Supervision,ConsumerAffairsLetters,www.federalreserve.gov/ Supervision,ConsumerAffairsLetters,www.federalreserve.gov/ boarddocs/caletters/2010/1011/caltr1011.htm. boarddocs/srletters/2010/SR1013.htm.

108 97thAnnualReport|2010 acceptsthecardbrand.26(Theseprocedureswere low-andmoderate-incomeindividuals.Inaddition, supersededbyrevisedRegulationEexamination theagenciesrevisedthequestionandansweron proceduresissued,onOctober22,2010.) reportingrequirementsforcommunitydevelopmentloansandmadeaconformingchangetothe • InteragencyExaminationProceduresforRegulaquestionandanswerthatprovidesexamplesof tionZ–TruthinLending(revised).Therevised “otherloandata.”29 examinationproceduresincorporatedamendments toRegulationZthatbecameeffective,onJuly1, • InteragencyExaminationProceduresforRegula- 2010,whichrevisedtherequirementsforcredit tionZ–TruthinLending(revised).Therevised carddisclosuresprovidedwithapplicationsand examinationproceduresincorporatethe2009 solicitations,ataccountopening,andonperiodic amendmentstoRegulationZ,asaresultof the statements.Thenewdisclosurerequirementswere CreditCardAct.TheCreditCardActamended alsoimposedforconveniencechecksandadvertise- TILAandestablishedanumberof newrequirements.27(Theseprocedureswereinitiallysuper- mentsforopen-endconsumercreditplans.The sededbyrevisedRegulationZexaminationproce- CreditCardActprovisionswereeffectiveinthree duresissuedonAugust20,2010,whichwerethen stages,andtheseproceduresreflectthesecond replacedbyrevisedexaminationproceduresissued stageof revisions,whichprotectconsumersfrom onJanuary28,2011,andultimatelybyrevisedpro- unexpectedincreasesincreditcardinterestrateson ceduresissuedonMarch18,2011.) existingbalances,requirecardissuerstoconsidera consumer’sabilitytomaketherequiredpayments, • InteragencyExaminationProceduresRegardingthe establishspecialrequirementsforextensionsof Dutiesof Furnishersof Information.Theseexamicredittoconsumerswhoareundertheageof 21, nationproceduresincorporatethe2010changesto andlimittheassessmentof feesforexceedingthe RegulationV,whichimplementstheFairCredit creditlimitonacreditcardaccount.Theexamina- ReportingAct,asamendedbytheFairandAccutionproceduresalsoimplementedprovisionsof rateCreditTransactionsActof 2003.Thechanges HEOAthatbecameeffectiveonFebruary14,2010. requirefurnishersof consumerinformationto UndertheHEOAamendments,creditorsthat (1)implementwrittenpoliciesandprocedures extendprivateeducationloansmustprovidediscloregardingtheaccuracyandintegrityof consumer suresaboutloantermsonorwiththeloanapplicainformationthatitfurnishestoaconsumerreporttion,whentheloanisapproved,andwhentheloan ingagency,(2)considertheinteragencyguidelines isconsummated.30(Theseprocedureswereinitially concerninginformationaccuracyandintegrity supersededbyrevisedRegulationZexamination whendevelopingwrittenpoliciesandprocedures, proceduresissuedonJune25,2010,thenJanuand(3)conductareasonableinvestigationof disary28,2011,andultimatelyreplacedbyrevised putessubmittedbyconsumersconcerningthe examinationproceduresissuedonMarch18, accuracyof anyinformationcontainedinacon- 2011.) sumerreportthatpertainstoanaccountorother relationshipthatthefurnisherhasorhadwiththe Training for Bank Examiners consumer.28 Ensuringthatfinancialinstitutionscomplywithlaws • RevisedInteragencyQuestionsandAnswerson thatprotectconsumersandencouragecommunity CommunityReinvestment.Theinteragencyquesreinvestmentisanimportantpartof thebankexamitionsandanswersinterprettheCRAregulations nationandsupervisionprocess.Asthenumberand andprovideguidancetofinancialinstitutionsand complexityof consumerfinancialtransactionsgrow, thepublic.Therevisedquestionsandanswersprotrainingforexaminersof theorganizationsunderthe videexamplesof waysaninstitutioncoulddeter- FederalReserve’ssupervisoryresponsibilitybecomes minethatitscommunityservicesaretargetedto evenmoreimportant.Thestaff developmentfunctionisresponsiblefortheongoingdevelopmentof 26 FederalReserveBoard,BankingInformationandRegulation, theprofessionalconsumercompliancesupervisory Supervision,ConsumerAffairsLetters,www.federalreserve.gov/ boarddocs/caletters/2010/1012/caltr1012.htm. 27 FederalReserveBoard,BankingInformationandRegulation, 29 FederalReserveBoard,BankingInformationandRegulation, Supervision,ConsumerAffairsLetters,www.federalreserve.gov/ Supervision,ConsumerAffairsLetters,www.federalreserve.gov/ boarddocs/caletters/2011/1103/caltr1103.htm. boarddocs/caletters/2010/1002/caltr1002.htm. 28 FederalReserveBoard,BankingInformationandRegulation, 30 FederalReserveBoard,BankingInformationandRegulation, Supervision,ConsumerAffairsLetters,www.federalreserve.gov/ Supervision,ConsumerAffairsLetters,www.federalreserve.gov/ boarddocs/caletters/2010/1005/caltr1005.htm. boarddocs/caletters/2011/1103/caltr1103.htm.

ConsumerandCommunityAffairs 109 staff,andensuringthatthesestaff membershavethe mentoringprograms,andanannualconsumercomskillsnecessarytomeettheirsupervisoryresponsi- plianceexaminerforum,whereseniorconsumercombilitiesnowandinthefuture. plianceexaminersreceiveinformationonemerging complianceissues,andareabletosharebestprac- ConsumerCompliance ticesfromacrosstheSystem. ExaminerTrainingCurriculum Theconsumercomplianceexaminertrainingcurricu- In2010,theSystemcontinuedtooffer“Rapid lumconsistsof sixcoursesfocusedonvariouscon- Response”sessions,whichareapowerfuldelivery sumerprotectionlaws,regulations,andexamining methodforjust-in-timetraining.Debutedin2008, concepts.In2010,thesecourseswereofferedin10 RapidResponsesessionsofferexaminersone-hour sessions,andtrainingwasdeliveredtoatotalof 165 teleconferencepresentationsonemergingissuesor Systemconsumercomplianceexaminersandstaff urgenttrainingneedsthatresultfromtheimplemenmembers,and12statebankingagencyexaminers. tationof newlaws,regulations,orsupervisoryguidance.Atotalof sixconsumercomplianceRapid Whenappropriate,coursesaredeliveredviaalterna- Responsesessionsweredesigned,developed,andpretivemethods,suchastheInternetorotherdistance- sentedtoSystemstaff during2010. learningtechnologies.Forinstance,severalcourses useacombinationof instructionalmethods: Agency Reports on Compliance with (1)classroominstructionfocusedoncasestudiesand Consumer Protection Laws (2)speciallydevelopedcomputer-basedinstruction thatincludesinteractiveself-checkexercises. TheBoardreportsannuallyoncompliancewithconsumerprotectionlawsbyentitiessupervisedbyfed- BoardandReserveBankstaff regularlyreviewthe eralagencies.Thissectionsummarizesdatacollected corecurriculumforexaminertraining,updatingsub- fromthe12FederalReserveBanks,theFFIECmemjectmatterandaddingnewelementsasappropriate. beragencies,andotherfederalenforcementagen- During2010,staff initiatedonecurriculumreview. cies.31 TheFairLendingExaminationTechniques(FLET) coursewasreviewedinordertoincorporatetechnical RegulationB(EqualCreditOpportunity) changesinpolicyandlaws,alongwithchangesin TheFFIECagenciesreportedthatapproximately instructionaldeliverytechniques.Thiscourseis 82percentof theinstitutionsexaminedduringthe designedtoequipassistantlevelexaminerswiththe 2010reportingperiodwereincompliancewithReguskillsandknowledgetoplanandconductarisk- lationB,comparedwith81percentforthe2009 focusedfairlendingexamination,andincorporates reportingperiod.ThemostfrequentlycitedviolatheFFIECfairlendingexaminationprocedures.The tionsinvolved risk-focusedexaminationapproachandtheproce- • failuretoprovideatimelyand/oraccuratenoticeof duresrequireconsiderableexaminerjudgmentinthe approval,counteroffer,oradverseactionwithin30 planningstagesof anexamination. daysafterreceivingacompletedcreditapplication; Inaddition,arealestateworkshopwasheldtotrain • improperlyrequiringaborrowertoobtainthesigconsumercomplianceexaminers.Theworkshoppronatureof aspouseorotherpersoninordertobe videdanoverviewof newandrevisedmortgagereguconsideredforcreditapproval;and lations,includingin-classexercisesforparticipantsto applytheirknowledge.Subsequenttotheworkshop, • failuretocollectinformationaboutapplicants staff producedanddistributedcompactdiscsof the seekingcreditprimarilyforthepurchaseorrefiworkshoptothe12ReserveBanksforusein“train- nancingof aprincipalresidence,includingapplithe-trainer”sessions. cantrace,ethnicity,sex,maritalstatus,andage,for governmentmonitoringpurposes. Life-longLearning Inadditiontoprovidingcoreexaminertraining,the TheBoardandtheOfficeof theComptrollerof the Staff Developmentfunctionemphasizestheimpor- Currency(OCC)eachinitiatedoneformalRegulatanceof continuinglife-longlearning.Opportunities forcontinuinglearningincludespecialprojectsand 31 Becausetheagenciesusedifferentmethodstocompilethedata, theinformationpresentedheresupportsonlygeneralconcluassignments,self-studyprograms,rotationalassignsions.The2010reportingperiodwasJuly1,2009,through ments,theopportunitytoinstructatSystemschools, June30,2010.

110 97thAnnualReport|2010 tionB-relatedpublicenforcementactionduringthe TherewerenootherenforcementactionsbyFFIEC reportingperiod,whiletheOfficeof ThriftSupervi- agenciesortheSEC.TheFTCfiledoneaction sion(OTS)initiatedfiveandtheFederalDeposit againstacompanyforviolatinga2008courtorder InsuranceCorporation(FDIC)initiated15.32There relatedto,amongotherthings,aRegulationE werenootherenforcementactionsbyFFIEC violation. agencies. RegulationM(ConsumerLeasing) TheotheragenciesthatenforcetheECOA—theFed- TheFFIECagenciesreportedthat100percentof the eralTradeCommission(FTC),theFarmCredit institutionsexaminedduringthe2010reporting Administration(FCA),theDepartmentof Transpor- periodwereincompliancewithRegulationM,which tation(DOT),theSecuritiesandExchangeCommis- isthesamecompliancerateasthe2009reporting sion(SEC),theSmallBusinessAdministration,and period.TheFFIECagenciesdidnotissueanypublic theGrainInspection,PackersandStockyards enforcementactionsspecifictoRegulationMduring Administrationof theDepartmentof Agriculture— theperiod. reportedsubstantialcomplianceamongtheentities theysupervise.TheFCA’sexaminationactivities RegulationP(PrivacyofConsumer revealedthatmostRegulationBviolationsinvolved FinancialInformation) either(1)creditors’failuretorequestorprovide TheFFIECagenciesreportedthatapproximately informationforgovernmentmonitoringpurposesor 98percentof theinstitutionsexaminedduringthe (2)creditorsprovidinginadequateand/oruntimely 2010reportingperiodwereincompliancewithRegustatementsof specificreasonsforadverseactions. lationP,whichisthesamerateof complianceasthe Noneof theseagenciesinitiatedformalenforcement 2009reportingperiod.ThemostfrequentlycitedvioactionsrelatingtoRegulationBduringthereporting lationsinvolvedfailureto period. • provideclearandconspicuousinitialprivacy noticestocustomers, RegulationE(ElectronicFundTransfers) TheFFIECagenciesreportedthatapproximately • providecustomerswithaclearandconspicuous 93percentof theinstitutionsexaminedduringthe annualnoticereflectingtheinstitution’sprivacy 2010reportingperiodwereincompliancewithRegu- policiesandpractices,and lationE,comparedwith94percentforthe2009 • disclosetheinstitution’sinformationsharingpracreportingperiod.Themostfrequentlycitedviolaticesininitial,annual,andrevisedprivacynotices. tionsinvolvedfailureto • provideawrittenexplanationtotheconsumer TheOCCinitiatedtwoformalRegulationP-related whenaninvestigationdeterminesthatnoaccount enforcementactionsduringthereportingperiod, errororadifferenterrorhasoccurred; whiletheFDICinitiatedsix.33Therewerenoother enforcementactionsbyFFIECagencies. • provisionallycredittheconsumer’saccountforthe amountof anallegederrorwhenaninvestigation RegulationZ(TruthinLending) intotheallegederrorcannotbecompletedwithin TheFFIECagenciesreportedthatapproximately 10businessdays;and 82percentof theinstitutionsexaminedduringthe • provideinitialdisclosuresthatcontainrequired 2010reportingperiodwereincompliancewithReguinformation,includinglimitationsonthetypesof lationZ,comparedwith92percentforthe2009 transferspermittedanderror-resolutionproce- reportingperiod.Themostfrequentlycitedvioladures,atthetimeaconsumercontractswithan tionsinvolved institutionforanelectronicfundtransferservice. • failuretoaccuratelydisclosethefinancechargesin closed-endcredittransactions; TheFDICinitiated12formalRegulationE-related enforcementactionsduringthereportingperiod. • forcertainresidentialmortgagetransactions,failuretoprovideagoodfaithestimateof therequired 32 Consumercompliancepublicenforcementactionsarecategodisclosuresbeforeconsummation,ornotlaterthan rizedbyregulationthroughoutthereport.Becausesome enforcementactionsincludeviolationsofmorethanoneregulation,theoverallsumofactionsderivedfromeachregulation 33 TheFDIC’sreportedinformationinthisarearelatestopart willbegreaterthantheactualtotalnumberofenforcement 332—PrivacyofConsumerFinancialInformation—ofthe actionsinitiated,whichwas54. agency’sregulationsandnotRegulationP.

ConsumerandCommunityAffairs 111 threebusinessdaysafterreceiptof awrittenloan • makeavailableonthenextbusinessdaythelesser application;and of $100ortheaggregateamountof checksdepositedthatarenotsubjecttothenext-dayavailability • failuretoprovidecompleteandaccuratedisclorequirement, suresforopen-endcreditsecuredbyaconsumer’s dwelling(homeequityplans). • makefundsdepositedfromlocalandcertainother checksavailableforwithdrawalwithinthetimes Inaddition,170bankssupervisedbytheFederal prescribedbytheregulation,and Reserve,FDIC,OCC,andOTSwererequired,under • providerequiredinformationtotheconsumer theInteragencyEnforcementPolicyinRegulationZ, whenplacinganexceptionholdonanaccount. toreimburseatotalof approximately$2.12million toconsumersforunderstatingAPRsand/orfinance TheOCCinitiatedtwoformalRegulationCC-related chargesintheirconsumerloandisclosures. enforcementactionsduringthereportingperiod, whiletheFDICinitiatedseven.Therewerenoother TheBoardinitiatedoneformalRegulationZ-related enforcementactionsbyFFIECagencies. enforcementactionduringthereportingperiod,the OTSinitiatedone,theOCCinitiatedfour,andthe RegulationDD(TruthinSavings) FDICinitiated18.TheDOTcontinuedtoprosecute oneaircarrierforitsallegedimproperhandlingof TheFFIECagenciesreportedthatapproximately creditcardrefundrequestsandotherFederalAvia- 86percentof institutionsexaminedduringthe2010 tionActviolations. reportingperiodwereincompliancewithRegulationDD,comparedwith87percentforthe2009 RegulationAA(UnfairorDeceptive reportingperiod.Themostfrequentlycitedviola- ActsorPractices) tionsinvolved TheFFIECagenciesreportedthatapproximately • failuretoproviderequiredinitialaccount 99percentof theinstitutionsexaminedduringthe disclosures; 2010reportingperiodwereincompliancewithRegulationAA,whichisthesamerateof complianceas • inappropriateuseof thephrase“annualpercentage forthe2009reportingperiod.TheOTSinitiated yield”inanadvertisementwithoutproviding threeformalRegulationAA-relatedenforcement requiredadditionaltermsandconditions;and actions,theOCCinitiatedthree,andtheFDICiniti- • failuretoprovideaccountdisclosuresclearlyand atedsevenduringthereportingperiod.Therewere conspicuously,inwriting,andinaformthatthe nootherenforcementactionsbyFFIECagencies. consumermaykeep. RegulationCC(AvailabilityofFunds andCollectionofChecks) TheFDICinitiated17formalRegulationDD-related enforcementactionsduringthereportingperiod. TheFFIECagenciesreportedthatapproximately TherewerenootherenforcementactionsbyFFIEC 90percentof institutionsexaminedduringthe2010 agencies. reportingperiodwereincompliancewithRegulationCC,whichisthesamerateof complianceasfor the2009reportingperiod.Themostfrequentlycited violationsinvolvedfailureto

112 97thAnnualReport|2010 Responding to Consumer Complaints Table1.Complaintsagainststatememberbanksand and Inquiries selectednonbanksubsidiariesofbankholdingcompanies aboutregulatedpractices,byRegulation/Act,2010 TheFederalReserveinvestigatescomplaintsagainst Regulation/Act Number statememberbanksandselectednonbanksubsidiar- RegulationAA(UnfairorDeceptiveActsorPractices) 39 iesof bankholdingcompanies(FederalReserve RegulationB(EqualCreditOpportunity) 82 RegulatedEntities),andforwardscomplaintsagainst RegulationBB(CommunityReinvestment) 3 othercreditorsandbusinessestotheappropriate RegulationC(HomeMortgageDisclosure) 1 enforcementagency.34EachReserveBankinvesti- RegulationCC(ExpeditedFundsAvailability) 103 gatescomplaintsagainststatememberbanksand RegulationD(ReserveRequirements) 5 selectednonbanksubsidiariesinitsDistrict.The RegulationDD(TruthinSavings) 370 RegulationE(ElectronicFundsTransfers) 203 FederalReservealsorespondstoconsumerinquiries RegulationG(Disclosure/ReportingofCRA-Related onabroadrangeof bankingtopics,includingcon- Agreements) 0 sumerprotectionquestions. RegulationH(NationalFloodInsuranceAct/InsuranceSales) 30 RegulationM(ConsumerLending) 7 RegulationP(PrivacyofConsumerFinancialInformation) 26 Inlate2007,theFederalReserveestablishedFederal RegulationQ(PaymentofInterest) 7 ReserveConsumerHelp(FRCH)tocentralizethe RegulationV(FairandAccurateCreditTransactions) 3 processingof consumercomplaintsandinquiries.In RegulationZ(TruthinLending) 403 2010,FRCHprocessed49,525cases.Of thesecases, FairCreditReportingAct 69 morethanhalf (26,324)wereinquiriesandthe FairDebtCollectionPracticesAct 62 FairHousingAct 22 remainder(23,201)werecomplaints,withmostcases HomeOwnershipCounseling 0 receiveddirectlyfromconsumers.Approximately HOPA(HomeownersProtectionAct) 4 3percentof caseswerereferredtotheFederal RealEstateSettlementProceduresAct 67 Reservefromotheragencies. RighttoFinancialPrivacyAct 4 Total 1,510 WhileconsumerscancontactFRCHbytelephone, fax,mail,e-mail,oronline,mostFRCHconsumer contactsoccurredbytelephone(51percent).Never- insufficientfundsoroverdraftchargesandprocetheless,44percent(21,563)of complaintandinquiry dures(52percent),disputedwithdrawalof funds submissionsweremadeelectronically(including (10percent),fundsavailabilitynotasexpected(7pere-mail,onlinesubmissions,andfax)andtheonline cent),anddisputedcreditingof funds(5percent). formpagereceivedover406,000visitsduringthe Themostcommonrealestatecomplaintsbyproblem year. coderelatedto:creditdenied—other(13percent), paymenterrorsanddelays(10percent),credit— Consumer Complaints rates,terms,andfees(10percent),andescrow accountproblems(9percent).Complaintsbyprod- ComplaintsagainstFederalReserveRegulatedEnti- uctcoderelatedto:home-purchaseloans(60pertiestotaled7,461in2010.Approximately33percent cent),homerefinanceandclosed-endloans(25per- (2,468)of thesecomplaintswereclosedwithout cent),andhomeequitycreditlines(10percent).35 investigationpendingthereceiptof additionalinfor- Themostcommoncreditcardcomplaintsrelatedto mationfromconsumers.Nearly2percent(140)of interestrates,terms,andfees(17percent),payment thetotalcomplaintsarestillunderinvestigation.Of errorsanddelays(11percent),billingerrorresolutheremainingcomplaints,69percent(3,343)involved tions(11percent),andbankdebtcollectiontactics unregulatedpracticesand31percent(1,510)involved (10percent). regulatedpractices. Forty-sixregulatedcomplaintsallegingdiscrimina- ComplaintsaboutRegulatedPractices tionwerereceived.Of these,22complaints(lessthan Themajorityof regulatedpracticecomplaintscon- 2percentof totalregulatedcomplaints)allegeddiscernedcheckingaccounts(32percent),realestate criminationonthebasisof prohibitedborrower (27percent),andcreditcards(11percent).Themost commoncheckingaccountcomplaintsrelatedto 35 Realestateloansincludeadjustable-ratemortgages;residential constructionloans;open-endhomeequitylinesofcredit;home 34 EffectiveSeptember14,2009,CALetter09-08,www improvementloans;homepurchaseloans;homerefinance/ .federalreserve.gov/boarddocs/caletters/2009/0908/caltr0908.htm. closed-endloans;andreversemortgages.

ConsumerandCommunityAffairs 113 Table2.Complaintsagainststatememberbanksandselectednonbanksubsidiariesofbankholdingcompaniesabout regulatedpractices,byproducttype,2010 Subjectofcomplaint/producttype Allcomplaints Complaintsinvolvingviolations Number Percent Number Percent Total 1,510 100 68 4.5 Discriminationalleged Realestateloans 27 1.8 2 0.1 CreditCards 6 0.4 0 0 Otherloans 13 0.9 1 0.1 Nondiscriminationcomplaints Checkingaccounts 486 32.2 18 1.2 Realestateloans 384 25.4 23 1.5 Creditcards 165 10.9 4 0.3 traitsorrights.36Twenty-eightpercentof discrimina- Morespecifically,consumersmostfrequentlycomtioncomplaintswererelatedtotherace,color, plainedaboutissuesinvolvinginsufficientfundsor nationalorigin,orethnicityof theapplicantorbor- overdraftchargesandprocedures;debtcollection/ rower.Thirteenpercentof discriminationcomplaints foreclosures;interestrates,terms,andfees;deposiwererelatedtoeithertheageorhandicapof the toryforgery,fraud,embezzlement,ortheft;opening applicantorborrower.Thereweretwoviolations andclosingdepositaccounts;procedureandpolicy wherediscriminationwasalleged;oneinvolvedareal concerns;anddisputedwithdrawalsof funds. estateloanandtheotherinvolvedamotorvehicle loan. ComplaintsaboutLoanModifications andForeclosures In87percentof investigatedcomplaintsagainstFed- In2010,theFederalReservereceived1,050comeralReserveRegulatedEntities,evidencerevealed plaintsrelatedtoloanmodificationsandforeclothatinstitutionscorrectlyhandledthesituation.Of sures.Of these,consumerscomplainedprimarily theremaining13percentof investigatedcomplaints, abouthomepurchaseloans(79percent),home 34percentweredeemedviolationsof law,21percent refinance/closed-endloans(9percent),andadjustwereidentifiederrorswhichwerecorrectedbythe ableratemortgageloans(6percent).Thetopthree bank,8percentwerereferredtootheragencies,and consumerprotectionissuesdocumentedwithspecific theremainderweremattersinvolvinglitigationor codeswere:debtcollection/foreclosure(47percent); factualdisputes,withdrawncomplaints,internally interestrates,terms,andfees(27percent);andcredit referredcomplaints,orinformationwasprovidedto denied(4percent). theconsumer.Themostcommonviolationsinvolved realestateloansandcheckingaccounts. ComplaintReferrals In2010,theFederalReserveforwarded15,505com- ComplaintsaboutUnregulatedPractices plaintsagainstotherbanksandcreditorstothe Asrequiredbysection18(f)of theFederalTrade appropriateregulatoryagenciesandgovernment CommissionAct,theBoardcontinuedtomonitor officesforinvestigation.Tominimizethetime complaintsaboutbankingpracticesnotsubjectto requiredtore-routecomplaintstotheseagencies, existingregulations,withafocusoninstancesof referralsweretransmittedelectronically. potentialunfairordeceptivepractices.In2010,the Boardreceived3,343complaintsagainstFederal TheFederalReserveforwarded21complaintsto ReserveRegulatedEntitiesthatinvolvedthese HUDthatallegedviolationsof theFairHousing unregulatedpractices.Mostcomplaintswererelated Act.37TheFederalReserve’sinvestigationof these torealestateconcerns(37percent),checkingaccount complaintsrevealednoevidenceof illegalcredit activity(33percent),andcreditcards(6percent). discrimination. 36 Prohibitedbasisincludes:race,color,religion,nationalorigin, sex,maritalstatus,age,applicantincomederivedfrompublic 37 AmemorandumofunderstandingbetweenHUDandthefedassistanceprograms,orapplicantrelianceonprovisionsofthe eralbankregulatoryagenciesrequiresthatcomplaintsalleginga ConsumerCreditProtectionAct. violationoftheFairHousingActbeforwardedtoHUD.

114 97thAnnualReport|2010 Consumer Inquiries ers,communityleaders,andgovernmentofficialsto supportsmallbusinesses’accesstocredit.(See“Box1. TheFederalReservereceived26,324consumerinqui- CreditWhereCreditIsDue:SupportingSmallBusiriesin2010,coveringawiderangeof topics.Thetop nessAccesstoCredit”onpage99,formoredetails.) threeconsumerprotectionissuesdocumentedwith specificcodeswere:adverseactionnoticesreceived Inaddition,DCCArecognizedtheimportanceof pursuanttotheEqualCreditOpportunityAct(7per- understandingandgaininginsightintothefastcent),exchangeorissuanceof coinorcurrency evolvingdynamicsinmobilebanking.In2010,staff (2percent),andcreditdenialsforreasonsotherthan convenedanemergingissuesforumentitledCash, prohibitedbasis(2percent).Consumersweretypi- Check,orCellPhone?ProtectingConsumersina callydirectedtootherresources,includingotherfed- MobileFinanceWorld.Theforumbroughttogether eralagenciesorwrittenmaterials,toaddresstheir bankingandindustryleaders,vendorsof mobile inquiries. financialservices,researchers,consultants,payment servicesfirms,consumeradvocates,andregulatorsto TheSystem’sFRCHalsoempowersconsumersin discussthenewopportunitiesandchallengesprerecognizingandreportingscams.Thesitecontains sentedbyemergingtechnologiesinbankingandpayconsumerinformationalertingconsumerstocharac- ments.Theforumproceedings,includingpodcasts teristicsof ascamandprovidesalinkforreporting andpresentations,areavailabletothepublicthrough informationonaproductorservicetheysuspectof theBoard’swebsite.38Theimportantinnovationsin beingascam.Fifty-fourscamsweretrackedthrough mobilefinancenowunderwaywillchangetheway FRCHin2010,andsenttotheappropriatefederal consumersconductfinancialtransactionswiththeir authoritiesforinvestigationandprosecution. bank,merchants,andotherconsumers.Asmobile financetechnologies,standards,andbusinessmodels continuetoadvance,DCCAwillcontinuetomonitor Supporting Community theirevolutiontoensurethatconsumersare Economic Development adequatelyprotectedastheytakeadvantageof promisingnewproductsandservices. TheFederalReserveSystem’sCommunityAffairs Offices(CAOs)worktopromotecommunityeco- Vacant Properties and nomicdevelopmentandfairaccesstocreditforlow- Neighborhood Stabilization andmoderate-incomecommunitiesandpopulations. Asadecentralizedfunction,theCAOsateachof the In2010,issuesrelatedtohighratesof foreclosure 12ReserveBanksdesignactivitiestorespondtothe continuedtodominatetheSystem’scommunity specificneedsof thecommunitiestheyserve,with affairsagenda.WhileeachReserveBankaddressed oversightfromBoardstaff.Theyprovideinformation theimpactof foreclosureonlow-andmoderateandpromoteawarenessof investmentopportunities incomecommunities—throughprogrammingtaitofinancialinstitutions,governmentagencies,and loredtotheparticularneedsof communitiesintheir organizationsthatservelow-andmoderate-income Districts—theCAOsof the12ReserveBanks(under communitiesandpopulations.Similarly,theBoard’s thesponsorshipof theirpresidents)workedclosely CAOpromotesandcoordinatesSystemwide,high- withtheBoardtodeveloptheMortgageOutreach priorityefforts;inparticular,Boardcommunity andResearchEfforts(MORE)Initiative.39Thegoal affairsstaff focusonissuesthathavepublicpolicy of MOREistoleveragetheFederalReserve’ssubimplications. stantialknowledgeof andexpertiseinmortgagemarketsinwaysthatareusefultopolicymakers,commu- Small Business Finance and nityorganizations,financialinstitutions,andthe Mobile Banking Issues public.40 Thefinancialcrisisandtheeconomicdownturn Asakeyelementof theMOREinitiative,theSystem resultedinconstrainedcreditconditionsduring2010, producedavolumeonrealestateowned(REO)propraisingsignificantconcernsregardingaccesstocredit forsmallbusinesses.Togainabetterunderstanding 38 Moreinformationabouttheforumisavailableatwww .federalreserve.gov/communityaffairs/national/2010mobile. of theissues,needs,andprogramsandpoliciesthat 39 ToreadabouttheMOREinitiative,seewww.chicagofed.org. wouldbehelpful,theCAOsundertookacomprehen- 40 ResourcesforStabilizingCommunitiesisavailableatwww siveinitiativetoconvenesmallbusinessowners,lend- .federalreserve.gov/communitydev/stablecommunities.htm.

ConsumerandCommunityAffairs 115 Box 2. What You Need to Know: Consumer Ed from the Fed TheFederalReserve’sconsumerprotectionregula- InJune,theBoardaddedWhatYouNeedtoKnow: tionsaffectconsumerseveryday,but,duetonumer- NewOverdraftRulesforDebitandATMCardstothe ousrecentregulatoryandlegislativechanges,many seriestoaccompanythereleaseofnewdebitcard consumersmaynotunderstand,orbeawareof,their rules.Thispieceprovidesconsumerswithaneasynewrightsandobligationsasconsumers.Thenew to-understandoverviewofthefactsaboutbanks’ regulatoryprotectionscanimpactconsumerswho overdraftpoliciesandconsumers’rightsunderthe aremakingapurchasewithacreditordebitcard, newrulesinordertohelpthemmakeeducateddeciopeningacheckingaccount,takingoutamortgage sionsaboutwhetherornotto“optin”tooverdraft loan,orusinganotherfinancialproductorservice. protectionandwhattodoiftheychangetheirmind. Itiscrucialthatconsumersunderstandhowcredit Recognizingthisasanopportunitytoeducatecondecisionsaremade,andtheFederalReserveandthe sumersaboutthechanges,theBoardlauncheda FederalTradeCommissionissuednewrulesin newconsumereducationseries,WhatYouNeedto 2010tohelpconsumersgetmoreinformationabout Know,in2010toprovideconsumerswithplainhowtheircreditreportorcreditscorecanimpacta languageinformationaboutnewconsumerproteclender’sdecision.Inadvanceoftherules’2011effections(seetheBoard’swebsiteatwww.federalreserve tivedate,WhatYouNeedtoKnow:NewRulesabout .gov/consumerinfo/wyntk.htm). CreditDecisionsandNoticeswasreleasedtohelp consumersfindandunderstandtheircreditstanding Thefirstpublicationintheseries,WhatYouNeedto andtoexercisetheirrightsinapplyingforcredit.This Know:NewCreditCardRules,wasreleasedinFeb- publicationalsodescribesthevariousnoticesthat ruary2010tocoincidewiththelaunchofanew maybeissuedtoconsumersinresponsetoacredit micrositethatfocusesonthechangestocreditcard applicationorcreditaccount,andinstructionsabout rules.Thesitealsoincludesbasicfactsaboutcom- whattodoiftheyreceiveanotice. moncreditcardoptions,interestrates,andfees,as WhatYouNeedtoKnow:NewRulesforMortgage wellasinformationaboutcommoncreditcardprob- Transferswascreatedinconjunctionwithnewregulems,suchaslostorstolencards.InteractivefealationseffectiveJanuary1,2011,whichrequirethat tureshelpconsumerslearnmoreaboutcreditcard consumersbenotifiedwhentheirmortgageloanhas offersandnewfeaturesoftheirmonthlystatements. beensoldortransferred.Thispublicationhelpsconsumersunderstandwhoownstheirmortgageloan WhentheBoardissuednewrulesregardinggift andwhotheycancontacttohandlecertainissues, cards,anotherpublicationwasaddedtotheseries. includingpaymentdisputesandloanmodifications. WhatYouNeedtoKnow:NewRulesforGiftCards describesthedifferenttypesofgiftcards(storevs. TheWhatYouNeedtoKnowseriesdemonstrates logocards)andthenewlimitationsandrequiredfee theFederalReserve’scommitmenttohelpingcondisclosures.Theeducationalpiecealsoinformscon- sumersunderstandhowconsumerprotectionregulasumersthatcertaintypesofcards—reloadablepre- tionsimpactthemandtoprovidingthemwiththe paidcardsandrewardscards—arenotcovered informationtheyneedtomakegoodfinancial underthenewrules. decisions. ertiesandneighborhoodstabilizationissues.More profits,andmunicipalities.41Theauthorsweredrawn specifically,withthegoalof helpingcommunitiesto fromnationalnonprofits,largeholdersof servicersof addresstheeffectsof concentratedforeclosures,the REOs,communityaffairsresearchers,andacademics. BoardworkedwiththeFederalReserveBanksof Chaptersinthepublicationaddressedawiderange BostonandClevelandtoproduceaspecialvolumeof of questions:Whatfactorscanbringaboutstability researchthatexaminesimportantquestionsabout inahigh-foreclosureneighborhood?andWhatare lender-ownedrealestate. theincentivesof thevariouspartiestoREOtransactions?ThepublicationwasmadepublicattheREO Thepublication,REOandVacantProperties:Strate- andVacantPropertyStrategiesforNeighborhoodStagiesforNeighborhoodStabilization,consistsof a bilizationSummit,aBoard-hostedeventthatexamseriesof papersthatexploreregionaldifferencesand presentperspectivesfromthevariousparticipants 41 Thepublicationisavailableonlineatwww.federalreserve.gov/ involvedinREOdisposition—sellers,buyers,non- events/conferences/2010/reovpsns/downloads/reo_20100901.pdf.

116 97thAnnualReport|2010 inedthecommunityimpactsof foreclosedand Other Community Development Initiatives vacantproperties,heldinSeptember2010.Atthe summit,keyfindingsfromaFederalReserveresearch In2010,theBoardbeganworkingwiththeFederal projectonlocalusesof NSPfundsinitiatedin2009 ReserveBankof SanFranciscotoprepareforthe werealsoreleased. 2011biennialCommunityAffairsResearchConference.44AcallforpaperswasreleasedinMayand Inanefforttoaddressthecurrentforeclosureissues, submissionsweredueinSeptember.Community theBoardalsocontinueditspartnershipwithNeigh- AffairsexpandeditspapersubmissionreviewcomborWorksAmerica®(NWA),whichwasinitiatedin mitteetoincludeanumberof keyeconomistsfrom 2009tocontinuetoleveragetheSystem’sresources theBoard’sDivisionof ResearchandStatistics,as withthoseof theNWA.42Aspartof thepartnership, wellastheBoard’sDCCAstaff,inordertotapthe theBoardhascoordinatedthedevelopmentanddis- Board’spoolof subjectmatterexperts. tributionof anewquarterlysurveytotheNWA organizationsandtheNationalForeclosureMitiga- Consumer Advisory Council tionCounseling(NFMC)Programgranteesandsubgrantees.Thesurveyisintendedtogatherinforma- TheConsumerAdvisoryCouncil—whosemembers tiononloanmodificationefforts,rentalhousing, representconsumerandcommunityorganizations, unemployment,andkeyemergingissuesfacedby thefinancialservicesindustry,academicinstitutions, low-andmoderate-incomecommunities.Thesurvey andstateagencies—advisestheBoardonmattersof wasdistributedtoapproximately850organizations. Board-administeredlawsandregulationsaswellas otherconsumer-relatedfinancialservicesissues. Community Data Initiative Councilmeetings,opentothepublic,wereheldin March,June,andOctoberof 2010.Seealistof Bycomplementinginformation-sharingandpartner- Councilmembersonpage416;also,visittheBoard’s shiproleswitharigorousanalyticalcapacity,commuwebsitefortranscriptsof Councilmeetings.45 nityaffairsisabletoprovidereliableinformationthat hashelpedtoidentifyandclosedatagapsforlow- Amongthesignificanttopicsof discussionforthe andmoderate-incomecommunities.In2010,the Councilin2010were BoardlaunchedtheCommunityDataInitiative (CDI),aCAOcollaborativeresearchproject.The • theCreditCardAct, goalof theCDIprojectistoprovideBoardand • proposedchangestoRegulationZtoenhancecon- ReserveBankleadershipwithsystematicandrelevant sumerprotectionandimprovedisclosuresfor communityconditionsandtrendinformationona reversemortgagetransactionsandotherhome consistentbasis.Thequarterlyorbiannuale-polling mortgageloans, of selecteddistrictcommunitystakeholdersprovides ongoingintelligenceof currentandemergingcom- • HMDA, munitydevelopmentissues.Todate,thereareseven • CRA,and betasiteReserveBanksthatareadministeringwebbasedpollsandsurveys.TwoadditionalReserve • issuesrelatedtoforeclosuresandneighborhood Banksarereviewingtheircapacityandresourcesfor stabilization. launchingcommunitystakeholderpollsin2011. The Credit Card Act CRA Public Hearings InitsMarchmeeting,theCouncildiscussedpro- Throughout2010,theBoardpartneredwiththe posedamendmentstoRegulationZthatwould FDIC,OCC,andOTStoholdaseriesof jointpublic implementtheprovisionsof theCreditCardAct hearingsinfourcitiestoreceivepubliccommentsas requiringthatcreditcardpenaltyfeesbereasonable theyconsiderupdatestoregulationsgoverningproceduresforassessingafinancialinstitution’sperfor- 44 Moreinformationabouttheconferenceisavailableatwww.frbsf manceundertheCRA.43 .org/community/conferences/2011ResearchConference. 45 ThetranscriptfromtheMarchmeetingisavailableatwww .federalreserve.gov/aboutthefed/cac_20100325.pdf.Thetran- 42 MoreinformationabouttheNWAisavailableatwww scriptfromtheJunemeetingisavailableatwww.federalreserve .stablecommunities.org. .gov/aboutthefed/cac_20100617.pdf.Thetranscriptfromthe 43 Moreinformationaboutthehearingsisavailableatwww Octobermeetingwillbeavailableatwww.federalreserve.gov/ .federalreserve.gov/communitydev/cra_hearings.htm. aboutthefed/cac.htm.

ConsumerandCommunityAffairs 117 andproportionalandthatcreditcardissuersreevalu- industryrepresentativesalsosupportedtherequireateannualpercentagerateincreasesatleastonce mentthatborrowersobtaincounselingfromacouneverysixmonths.Membersgenerallycommendedthe selororcounselingagencythatmeetsthecounselor overallshifttowardtransparencyandsimplicityin qualificationstandardsestablishedbyHUD,with creditcardtermsandpricingrepresentedbytheregu- membersemphasizingtheimportanceof in-person, lationsimplementingtheCreditCardAct.They one-on-onecounselingandtheneedforcounselingin commentedthatadditionalandclearerup-front languagesotherthanEnglish. informationwouldbenefitconsumersintheirshoppingandhelpcreditcardissuerstobemore Membersalsosupportedtheprovisiontoprohibit competitive. creditorsfromrequiringaconsumertopurchase anotherfinancialorinsuranceproductasacondition Themembersalsoengagedindiscussionsregarding of obtainingareversemortgage.Consumerrepresentherequirementtoreevaluaterateincreases,aswellas tativesexpressedconcernabouttheproposed10-day theissueof definingpenaltyfeeprovisions,withsev- safeharborintheanti-tyingrule,urgingtheBoardto eralconsumerrepresentativesandanindustryrepre- designatealongertimeperiodornottoestablisha sentativeurgingtheBoardtosetspecificdollar safeharboratall. amountsforpenaltyfeesandexpressingconcern aboutgivingdiscretiontoissuerstosetpenaltyfees. RightofRescission Consumerrepresentativescriticizedproposed Ontheotherhand,severalindustryrepresentatives changestotherighttorescissionunderRegulationZ expressedtheviewthattheBoardshouldnotsetspe- thatwouldrequiretheconsumertotendertheprincicificpenaltyfees,butratherthatissuersshouldbe palbalancelessinterestandfees,andanydamages permittedtosetthefeesbasedontheBoard’srules andcosts,beforethecreditorisrequiredtoreleaseits aboutwhatfactorsshouldbeconsideredandhow securityinterest.Consumerrepresentativesnoted certaincalculationsshouldbemade.Theyalsonoted thatfewborrowerswouldbeabletotendertheprinthatotherCreditCardActprovisionsrequireclear cipalandexpressedpreferenceforthecurrentformof disclosuresof penaltyfeestoconsumers.Regarding therescissionprocess,whichgivesborrowerssome theprovisionsaboutcostsincurredasaresultof vio- leverageandtemporarilyhaltstheforeclosureprocess lationsof accountterms,someindustryrepresenta- sothatthelenderandborrowercannegotiatea tivesexpressedconcernabouttherestrictivenessof workout. theproposedstandardsandurgedtheBoardtoallow considerationof abroaderrangeof costsrelatedto MembershadamixedreactiontotheBoard’s violations. consumer-tested,proposedrevisednoticeof theright torescind,whichwouldincludea“tear-off”formfor Proposed Rules Regarding Home consumerstosignandsendtothecreditorandalso Mortgage Transactions wouldrequirecreditorstoprovideonlyonecopyof therescissionnoticetotheconsumer.Whilesome InitsOctobermeeting,theCouncildiscussedthe memberssupportedtheone-copyrequirementand Board’sproposedrulestoamendRegulationZto tear-off formatasawaytosimplifypaperwork,othenhanceconsumerprotectionandimprovedisclo- ersheldtheviewthatconsumersshouldcontinueto suresforreversemortgagetransactionsandother receivetwocopies,andstillothersurgedtheBoardto homemortgageloans. developastandardformfortherescissionnoticethat alllendersmustuse. ReverseMortgages MemberspraisedtheBoard’sstepstoimprovethe Inthediscussionabouttheproposedrulesrelatingto disclosuresforreversemortgages,pointingparticu- materialdisclosures,someconsumerrepresentatives larlytotheproposedrevisionof thetotalannualloan expressedtheiroppositiontotheprovisionallowinga costdisclosuresothatitshowshowthereversemort- $100toleranceforerroneousdisclosureof the gagebalancegrowsovertimeindollaramounts.A monthlypaymentamount,statingthat$100isasigconsumerrepresentativeurgedtheBoardtogofur- nificantamountformanyborrowersandthatan theranddevelopstandarddisclosuresthatallreverse errorof thatmagnitudeshouldbeconsidered mortgagecreditorsmustuse.Bothconsumerand material.

118 97thAnnualReport|2010 Home Mortgage Disclosure Act (HMDA) mentneeds.MemberspraisedtheFederalReserve andotherfederalregulatorsfortheproposedruleto Membersdiscussedtheadvantagesanddisadvan- expandexistingCRAconsiderationforneighbortagesof suggestedchangestoRegulationC,which hoodstabilizationactivities.TwoconsumerrepresenimplementsHMDA,includingaproposaltocollect tativesexpressedtheviewthatinstitutions’perforadditionalinformation.Industryrepresentatives mancerelatedtoREOproperties,suchasmaintainurgedtheBoardtotakeintoaccountthetimeand ingpropertiesandpayingtaxes,shouldbecarefully resourceburdensthatwouldbeimposedoninstitu- scrutinizedundertheCRAandrecommended tions,particularlysmallerinstitutions,incollecting deductionsforinstitutionsengaginginpracticesthat andensuringtheintegrityof anexpandedsetof negativelyimpactcommunities. data,aswellaspotentiallyreportingitmorequickly. Theyalsoindicatedthatthereshouldbeaclearpur- Bothconsumerandindustryrepresentativessupposeandbenefitforrequiringanyadditionaldata portedextendingCRAcoveragebeyonddepository collectionandrecommendedwaitinguntilother institutionstoincludeallinstitutionsthatoffercerfinancialregulatoryreformshavebeenimplemented tainfinancialproductsandservices,suchasnonbank beforemakingsignificantchangestoHMDA. affiliatesof depositoryinstitutions,creditunions, andothernon-bankfinancialservicesproviders. Consumerrepresentativessupportedthecollectionof moredatasothatregulatorsandpolicymakerscan Consumerandindustrymembersalsoagreedthat betteridentifyandtrackproblematicproductsand regulatorsshoulddifferentiateamongstrong,mediopractices,suchasfairlendingissues,andmoreeffec- cre,andinadequateCRAperformancemoreconsistivelydirectresourcestoparticularpopulationsor tentlyandeffectively.Inparticular,theyrecomcommunities.Theyexpressedtheviewthatthevalue mendedtheimplementationof incentivestoencourof additionaldataoutweighsthecostsof collecting ageinstitutionstostriveforan“Outstanding”rating, andreportingit.Consumerrepresentativesrecom- suchasalongertimebetweenexaminationsorother mendedseveraladditionstothedata,including operationalorfinancialbenefitsthatwoulddecrease applicants’creditscore,age,andprimarylanguage, institutions’costsandwhosesavingscouldbereinaswellasadditionalloaninformation,suchasloan- vestedincommunities. to-valueratio,originatorchannel,andunderwriting characteristics(interestrate,prepaymentpenalty, Consumerandindustrymembersstatedthatcommufees).Theinclusionof expandedunderwritingdata nitydevelopmentservicesgetrelativelylittlecredit wassupportedbyanindustryrepresentative,who currentlyinCRAexaminationsandsupportedgiving notedthatsuchinformationcouldbehelpfulinclari- moreweighttosuchactivitiesbyallocatinga fyingwhetherdisparatepricingisjustified. largerpercentageof theservicetesttothemorby creatinganewcommunitydevelopmenttest.The Bothconsumerandindustryrepresentativespointed activitiesforwhichtheyrecommendedmorecredit toprivacyissuesthatcouldarisewiththecollection includedcommunitydevelopmentloans,particularly of moredata.Somemembersrecommendedthe thoseotherthansingle-familylending;productsand adoptionof amodellikethatof theU.S.Census, servicestoreachunbankedorformerlybankedconusingacredentialingandmonitoringsystemtogive sumers;loanmodifications;financialeducationand limiteddataaccesstotrustedresearchers.Members asset-buildingefforts;andindirectservicesandlendalsocommentedontheneedtostandardizeand ingthroughpartners. streamlinedata-collectioneffortsacrossgovernment agenciesandtocoordinatewithotherdatarequire- Memberspresentedavarietyof viewsrelatedtogeomentsof theDodd-FrankAct. graphiccoverageundertheCRA,butbothindustry andconsumermembersurgedregulatorstoloosen Community Reinvestment Act (CRA) theconstraintsthattheassessment-areaanalysisputs onbanks’investmentsinnationalfunds,whichoften Inthecontextof theinteragencyhearings,Council directresourcestoruralareasandotherunderserved membersdiscussedpossiblewaystomodernizethe markets.Membersstatedthat,underthecurrent regulationsthatimplementtheCRAtoreflect approach,banksarelimitedtoinvestinginproprichangesinthefinancialservicesindustry,changesin etaryfundsdirectedtowardtheirgeographicassesshowbankingservicesaredeliveredtoconsumers mentareas.However,someindustryrepresentatives today,andcurrenthousingandcommunitydevelop- alsorecommendedthatthegeographicscopecon-

ConsumerandCommunityAffairs 119 tinuetoincorporateaconnectiontothelocaldeposit significantresourcestoaddresstheincreasingvolume baseandtothephysicaldistributionof productsand of foreclosureswiththegoalof keepingborrowersin servicesthroughlocalbranches. theirhomes.Theyalsonotedthatinstitutionsmust balancethesometimescompetinginterestsof bor- Foreclosures and Neighborhood rowers,investors,andsafetyandsoundness Stabilization considerations. Throughout2010,theCouncildiscussedloss- Membersprovidedavarietyof perspectivesabout mitigationefforts,includingtheAdministration’s HAMPitself andpossibleareasof improvementfor HomeAffordableModificationProgram(HAMP), theprogram.Bothconsumerandindustrymembers neighborhoodstabilizationinitiativesandchallenges, expressedsupportforthechangeinHAMPrequiring andotherissuesrelatedtoforeclosures. up-frontincomeverificationandfortheHAMP efforttargetingunemployedborrowers.Notingthe InthediscussionsaboutHAMPandotherloss- qualificationlimitsfortheHAMPunemployment mitigationefforts,someconsumerrepresentatives initiative,memberspointedtotheneedforother notedthattheyhadseenslightimprovementinmort- approachestohelpunemployedandunderemployed gageservicers’capacity,butgenerallyheldtheview borrowers,suchasthesuccessfulprogramsusedin thatservicingproblemscontinuedtobenumerous Pennsylvaniaandotherstates.Bothindustryand andsystemic.Theypointedtoissuessuchaslostor consumerrepresentativesexpressedconcernsabout misplaceddocumentation,delaysinmakingadeci- HAMP’snet-present-value(NPV)model,suchasthe sionaboutwhethertograntaloanmodification, wayredefaultratesareassignedandtheresultsprodelaysinmovingborrowersfromtrialmodifications ducedforborrowerswithsecondliensorwithsubtopermanentmodifications,steeringof borrowersto stantialequityintheirhome in-housemodificationprogramswithlessfavorable terms,alackof responsetoborrowercommunica- Severalconsumerandindustryrepresentatives tions,andtheuseof “foreclosuremill”lawfirmsthat endorsedafocusonprincipalwrite-downsasakey chargehighfeestoborrowerstomakethemodifica- waytoachievesustainablemodifications.Somecontioneffective.Theyalsostatedthatforeclosurescon- sumerrepresentativesalsoexpressedsupportforjuditinuetobefiledwhileborrowersareinthetrialmodi- cialmortgagemodificationsinthebankruptcyconficationperiod.Inaddition,consumerrepresenta- textasanadditionaltooltodealwithforeclosures. tivesexpressedconcernaboutthelackof information providedtoborrowerswhoaredeniedaHAMP Throughout2010,theCouncilalsodiscussedthe modificationandtheabsenceof aprocesstoappeal effectsof foreclosuresthatextendbeyondhouseholds thedenial. tothesurroundingcommunityandeffortssuchas thefederalNSPtoaddressthechallengesof stabiliz- Laterin2010,membersdiscussedreportsof ingcommunities.Membersexpressedconcernabout improper“robo-signing”activitiesbyservicers,with banksnotmaintainingtheirREOpropertiesornot severalconsumerrepresentativesnotingthathousing completingforeclosuresales,leadingto“toxictitles,” counselorshadlongwarnedaboutsuchproblematic andurgedfederalregulatorstoincreaseoversightof practicesandquestioningwhyregulatorshadnot regulatedinstitutionsregardingtheseissues.Aconscrutinizedthemsooner.Thoughmembersgenerally sumerrepresentativeemphasizedtheneedforpostexpressedhesitationabouttheadvisabilityof a foreclosuresolutionstopreventprolongednegative nationalmoratorium,consumerrepresentativesurged impactsparticularlyonlower-incomecommunities servicersandlenderstohaltforeclosuresuntilthey andcommunitiesof color,wherepropertiesarelikely hadreviewedtheirprocessesandcorrectedanydefi- toremainREOstatusformuchlongerthaninother ciencies.Theyalsourgedregulatorstoinvestigate areas.Inaddition,anindustryrepresentative carefullyservicers’practices,particularlypayments expressedconcernaboutincreasinginvestorpurbyvolumeforaffidavitsandotherdocumentation chasesof REOsandurgedconsiderationof waysto workperformedbyoutsidevendors. givepotentialowner-occupantsabetterchanceto acquireproperties.Severalmemberspointedtothe Industryrepresentativesexpressedsupportforthe importanceof collaborativeeffortsamongpublic, correctiveactiontoaddressproblematicpracticesbut private,andnonprofitentitiesandinitiativesthat statedthatmanyfinancialinstitutionshadtargeted strategicallytargetparticularneighborhoods.

120 97thAnnualReport|2010 Other Discussion Topics highlightSBAprogramsandensuretheircontinued effectiveness,suchasbybolsteringthesecondary AttheMarchmeeting,Councilmembersdiscussed marketforcertainSBAloans. short-term,small-dollarloanproductsofferedby depositoryinstitutions,includingtaxrefundanticipa- Aconsumerrepresentativecommentedthatsmall tionloans(RALs),andconsumerprotectionissues businesscreditisoftencloselyconnectedwithperrelatedtosuchproducts.Bothconsumerandindus- sonalcreditandencouragedlenderstoconsideraltertryrepresentativesagreedthatRALsshouldbe nativecreditdatarelatedtopersonalcredithistory strictlyregulatedandrecommendedmoreeducation whenunderwritingsmallbusinessborrowers.One aboutthetimingof taxrefundsandmoreoutreach memberexpressedsupportforadditionalconsumer tounbankedconsumers,particularlyattaxtime, protectionsforsmallbusinesscreditcards,muchlike aboutsavingandbuildingwealth. theprotectionsprovidedbytheCreditCardActof 2009forconsumercreditcards. Membersalsoencouragedregulatedfinancialinstitutionstoofferaffordable,sustainablesmall-dollar AttheOctobermeeting,Councilmembersdiscussed loansandexpressedconcernaboutunregulatedentitheBoard’sinterimfinalruletoensurethatreal tiesofferingsuchloanswithproblematicfeatures, estateappraisersarefreetousetheirindependent includinghighAPRsthatresultfromtheshortterm professionaljudgmentinassigninghomevalueswithandfeesof theseloans.Somemembersexpressedthe outinfluenceorpressurefromthosewithinterestsin viewthattheAPRisnotausefulshoppingtoolfor thetransactions.Membersgenerallyagreedthatthe consumers.Anindustryrepresentativenotedthe appraisalindependencerequirementsshouldapply challengesinthebusinessmodelforthisproduct, notonlytoconsumercredittransactionssecuredbya statingthatinstitutionsfacereputationalrisk.Aconconsumer’sprincipaldwellingbutalsotoconsumer sumerrepresentativeurgedtheBoardandotherreguloanssecuredbyotherdwellings,suchasasecond latorstohelpimprovethedevelopmentof thisprodhome.Membersdisagreed,however,aboutwhether uctbyclarifyingcapitalrequirementsandassistingto appraisersshouldbepermittedtoconsiderthesales definewhatconstitutesaresponsible,profitable contractinconnectionwithrenderinganopinionof small-dollarloanproduct. value. AttheJunemeeting,theCounciladdressedissues Regardingotherappraisalissues,onememberurged relatingtotheflowof credittosmallbusinesses, theBoardtoimposebonding,insurance,orcapitalincludingspecificcreditgaps,theroleof smallbusiizationrequirementsonappraiserssothatjudgments nesssupportserviceproviders,promisingpractices againstthemcanbeeffective.Anindustryrepresentarelatedtotechnicalassistance,andalternativelending tiveexpressedconcernaboutthequalityof appraisals sources.Severalmembersnotedtheneedtogivepargenerally,particularlyforthosefromappraisalmanticularattentiontosmallbusinessesinruralareas, agementcompanieswithhighvolume,andcomwhichareoftenundercapitalized.Somemembers mentedthattheproposedruleswouldhelpto alsorecommendedmeasurestomaketheTreasury improveappraisalquality.Someconsumerrepresen- Department’sNewMarketsTaxCreditprogram tativescommentedontheimportanceof beingable moreamenabletoinvestmentsinsmallbusinesses.A tocommunicatewithappraisers,especiallythosewho consumerrepresentativepraisedtheBoardforits arenotfamiliarwithacertaincommunityorneighongoingdialoguewiththeSmallBusinessAdminisborhood,tohelpinformthemaboutthearea. tration(SBA)andexpressedsupportforeffortsto

121 Federal Reserve Banks TheFederalReserveBanksprovide“paymentser- rities,andprovidingamultilateralsettlementservice. vices”todepositoryandcertainotherinstitutions, TheReserveBankschargefeesforprovidingthese distributethenation’scurrencyandcointodeposi- “pricedservices.” toryinstitutions,andserveasfiscalagentsand depositoriesfortheU.S.governmentandotherenti- TheMonetaryControlActof 1980requiresthatthe ties.TheReserveBanksalsocontributetosetting FederalReserveestablishfeesforpricedservicespronationalmonetarypolicyandsupervisionandregula- videdtodepositoryinstitutionssoastorecover,over tionof banksandotherfinancialentitiesoperatingin thelongrun,alldirectandindirectcostsactually theUnitedStates(discussedintheprecedingsections incurredaswellastheimputedcoststhatwouldhave of thisreport). beenincurred—includingfinancingcosts,taxes,and certainotherexpenses—andthereturnonequity (profit)thatwouldhavebeenearnedif aprivatebusi- Developments in Federal nessfirmhadprovidedtheservices.1Theimputed Reserve Priced Services costsandimputedprofitarecollectivelyreferredto FederalReserveBanksprovidearangeof payment andrelatedservicestodepositoryinstitutions,includ- 1 Financialdatareportedthroughoutthischapter—includingrevenue,otherincome,costs,incomebeforetaxes,andnet ingcollectingchecks,operatinganautomatedclearincome—canbelinkedtotheproformafinancialstatements inghouse(ACH)service,transferringfundsandsecu- foundatthecloseofthissection. Table1.PricedServicesCostRecovery Millionsofdollars,exceptasnoted Operatingexpensesand Year Revenuefromservices1 Targetedreturnonequity3 Totalcosts Costrecovery(percent)4,5 imputedcosts2 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 1,036.0 85.1 2004 914.6 842.6 112.4 955.0 95.8 2005 993.8 834.4 103.0 937.4 106.0 2006 1,029.7 874.8 72.0 946.8 108.8 2007 1,012.3 912.9 80.4 993.3 101.9 2008 873.8 820.4 66.5 886.9 98.5 2009 675.4 707.5 19.9 727.5 92.8 2010 574.7 532.8 13.1 545.9 105.3 2001–2010 8,834.6 8,250.4 773.7 9,024.1 97.9 Note:Hereandelsewhereinthischapter,componentsmaynotsumtototalsoryieldpercentagesshownbecauseofrounding.Amountsinboldarerestatedduetochangesin previouslyreporteddata. 1 Forthe10-yearperiod,includesrevenuefromservicesof$8,286.2millionandotherincomeandexpense(net)of$548.4million. 2 Forthe10-yearperiod,includesoperatingexpensesof$7,900.5million,imputedcostsof$95.5million,andimputedincometaxesof$254.4million. 3 Beginningin2009,giventheuncertainlong-termeffectthatthepaymentofinterestonreservebalancesheldbydepositoryinstitutionsattheReserveBankswouldhaveon thelevelofclearingbalances,thePSAFhasbeenadjustedtoreflecttheactualclearingbalancelevelsmaintained;previously,thePSAFwascalculatedbasedonaprojection ofclearingbalancelevels. 4 Revenuefromservicesdividedbytotalcosts. 5 Forthe10-yearperiod,costrecoveryis95.1percent,includingthereductioninequityrelatedtoASC715reportedbythepricedservices.

122 97thAnnualReport|2010 astheprivate-sectoradjustmentfactor(PSAF).2Over andotherincometotaled$4.9million,resultingin thepast10years,ReserveBankshaverecovered netincomeof $31.9million.In2010,check-service 97.9percentof theirpricedservicescosts,including revenuefromoperationsdecreased$128.1million thePSAF(seetable1).3 from2009.6ReserveBankshandled7.7billionchecks in2010,adecreaseof 10.2percentfrom2009(see In2010,ReserveBanksrecovered105.3percentof table2).ThedeclineinReserveBankcheckvolume totalpricedservicescosts,includingthePSAF.4The continuestobeinfluencedbynationwidetrendsaway Banks’operatingcostsandimputedexpensestotaled fromtheuseof checksandtowardgreateruseof $532.8million.Revenuefromoperationstotaled electronicpaymentmethods.7Byyear-end2010, $566.7millionandotherincomewas$7.9million, 99.7percentof ReserveBankcheckdepositsand resultinginnetincomefrompricedservicesof 98.4percentof ReserveBankcheckpresentments $41.8million.5 werebeingmadeelectronicallythroughCheck21 products.8 TheReserveBanksareengagedinanumberof technologyinitiativesthatwillmodernizetheirpricedser- Becauseof therapidadoptionof electroniccheck vicesprocessingplatformsoverthenextseveralyears. processing,theReserveBankswereabletocomplete TheBanksareintheprocessof implementinganew theconsolidationof theirpapercheck-processing end-to-endelectroniccheck-processingsystemto officesaheadof schedule,in2010insteadof 2011. improvetheefficiencyandreliabilityof theircurrent Underthismultiyearinitiative,whichbeganin2003, check-processingoperations.Theyalsocontinued theReserveBankshavereducedthenumberof effortstomigratetheFedACHandFedwireFunds officesatwhichtheyprocesspaperchecksfrom45to servicesoff amainframesystemandtoadistributed one.BeginninginFebruary2010,theCleveland computingenvironment. ReserveBankoperatedtheonlypapercheckprocessingsitefortheSystem.Further,theSystem’s Commercial Check-Collection Service electroniccheckprocessingwasconsolidatedatone FederalReservesite. In2010,ReserveBanksrecovered107.1percentof thetotalcostsof theircommercialcheck-collection Commercial Automated service,includingtherelatedPSAF.TheBanks’oper- Clearinghouse Services atingexpensesandimputedcoststotaled$326.5mil- In2010,theReserveBanksrecovered103.4percent lion.Revenuefromoperationstotaled$353.6million of thetotalcostsof theircommercialACHservices, includingtherelatedPSAF.ReserveBankoperating 2 Inadditiontoincometaxesandthereturnonequity,thePSAF expensesandimputedcoststotaled$105.2million. includesthreeotherimputedcosts:interestondebt,salestaxes, andanassessmentfordepositinsurancebytheFederalDeposit InsuranceCorporation(FDIC).BoardofGovernorsassetsand 6 In2008,theReserveBanksdiscontinuedthetransportationof coststhatarerelatedtopricedservicesarealsoallocatedto commercialchecksbetweentheircheck-processingoffices.Asa pricedservices;intheproformafinancialstatementsattheend result,in2010,therewerenocostsorimputedrevenuesassociofthischapter,Boardassetsarepartoflong-termassets,and atedwiththetransportationofcommercialchecksbetween Boardexpensesareincludedinoperatingexpenses. ReserveBankcheck-processingoffices. 3 EffectiveDecember31,2006,theReserveBanksimplemented 7 TheFederalReserveSystem’sretailpaymentsresearchsuggests theFinancialAccountingStandardsBoard’sStatementof thatthenumberofcheckswrittenintheUnitedStateshasbeen FinancialAccountingStandards(SFAS)No.158,Employers’ decliningsincethemid-1990s.Fordetails,seeFederalReserve AccountingforDefinedBenefitPensionandOtherPostretirement System,“The2010FederalReservePaymentsStudy:Noncash Plans[AccountingStandardsCodification(ASC)Topic715 PaymentTrendsintheUnitedStates,2006–2009”(Decem- (ASC715),Compensation–RetirementBenefits],whichhas ber2010),www.frbservices.org/files/communications/pdf/press/ resultedintherecognitionofa$267.6millionreductionin 2010_payments_study.pdf. equityrelatedtothepricedservices’benefitplansthrough2010. 8 TheCheckClearingforthe21stCenturyAct(Check21),which Includingthisreductioninequity,whichrepresentsadeclinein becameeffectivein2004,wasdesignedtofosterinnovationin economicvalue,resultsincostrecoveryof95.1percentforthe paymentsystemsandtoenhanceefficiencybyreducingsomeof 10-yearperiod.FordetailsonhowimplementingASC715 thelegalimpedimentstochecktruncation.Thelawfacilitates affectedtheproformafinancialstatements,refertonotes3and checktruncationbycreatinganewnegotiableinstrumentcalled 5tothe“ProFormaFinancialStatementsforFederalReserve asubstitutecheck,whichpermitsbankstotruncateoriginal PricedServices”attheendofthischapter. checks,toprocesscheckinformationelectronically,andto 4 Totalcostisthesumofoperatingexpenses,imputedcosts(inter- deliversubstitutecheckstobanksthatwanttocontinuereceivestondebt,interestonfloat,salestaxes,andtheFDICassess- ingpaperchecks. ment),imputedincometaxes,andthetargetedreturnonequity. TheReserveBanksalsooffernon-Check21electronic- 5 Otherincomeisinvestmentincomeearnedonclearingbalances presentmentproducts.In2010,0.3percentofReserveBanks’ netofthecostofearningscredits,anamounttermednet depositvolumewaspresentedtopayingbanksusingthese incomeonclearingbalances. products.

FederalReserveBanks 123 Table2.ActivityinFederalReservepricedservices,2008–2010 Thousandsofitems Percentchange Service 2010 2009 2008 2009to2010 2008to2009 Commercialcheck 7,711,833 8,584,929 9,545,424 -10.2 -10.1 CommercialACH 10,232,757 9,966,260 10,040,388 2.7 -0.7 Fedwirefundstransfer 127,762 127,357 134,220 0.3 -5.1 Nationalsettlement 522 464 469 12.5 -1.1 Fedwiresecuritiestransfer 7,913 10,519 11,717 -24.6 -10.2 Note:Activityincommercialcheckisthetotalnumberofcommercialcheckscollected,includingprocessedandfine-sortitems;incommercialACH,thetotalnumberof commercialitemsprocessed;inFedwirefundstransferandsecuritiestransfer,thenumberoftransactionsoriginatedonlineandoffline;andinnationalsettlement,thenumber ofsettlemententriesprocessed. RevenuefromACHoperationstotaled$109.9million fromtheseservicestotaled$79.1million,andother andotherincometotaled$1.6million,resultingin incomeamountedto$1.2million,resultinginanet netincomeof $6.3million.TheReserveBankspro- incomeof $2.4million. cessed10.2billioncommercialACHtransactions,an increaseof 2.7percentfrom2009,whichwasinline FedwireFundsService withindustryACHvolumegrowth. TheFedwireFundsServiceallowsparticipantstouse theirbalancesatReserveBankstotransferfundsto TheDodd-FrankWallStreetReformandConsumer otherparticipants.In2010,thenumberof Fedwire ProtectionActof 2010requiredtheBoardtowork fundstransfersoriginatedbydepositoryinstitutions withtheReserveBankstoexpandtheuseof the increased0.3percentfrom2009,toapproximately ACHformakinginternationalpaymentsandremit- 127.8million.Theaveragedailyvalueof Fedwire tances.In2010,theReserveBanksexpandedtheir fundstransfersin2010was$2.4trillion,adecreaseof cross-borderACHproductofferingstoadditional 3.6percentfromthepreviousyear. countriesinLatinAmericaandEuropetofacilitate theprovisionof low-costpaymentandremittance NationalSettlementService servicesbydepositoryinstitutionsintheUnited TheNationalSettlementServiceisamultilateral States.Byyear-end2010,depositoryinstitutionswere settlementsystemthatallowsparticipantsinprivateabletosendpaymentsusingtheReserveBanks’Fed- sectorclearingarrangementstosettletransactions Globalserviceto22countriesinEurope,12countries usingFederalReservebalances.In2010,theservice inLatinAmerica,andCanada.TheReserveBanks, processedsettlementfilesfor19localandnational however,founditchallengingtoincreasetheuseof private-sectorarrangements,adecreasefromthe41 FedGlobalservicesbyindividualsandbusinessesfor arrangementsactivein2009.Thedecreaseinthe makingoutboundpayments.Inparticular,whileout- numberof arrangementswasprimarilytheresultof boundgovernmentpaymentsincreased1.8percentin consolidationamongcheckclearinghouses.The 2010,toabout103,000paymentspermonth,out- ReserveBanksprocessedslightlymorethan6,900 boundpaymentsbyindividualsandbusinesses filesthatcontainedaround522,000settlemententries declined5.4percent,toslightlylessthan3,000pay- forthesearrangementsin2010.Activityin2010repmentspermonth,whichincludedpaymentssent resentsbothadecreasefromthe10,500filesprothroughthelong-establishedserviceofferingsto cessedin2009andanincreasefromthe464,000 CanadaandMexico. settlemententriesprocessedin2009. Fedwire Funds and National Settlement Fedwire Securities Service Services In2010,theReserveBanksrecovered102.8percent In2010,ReserveBanksrecovered100.6percentof of thetotalcostsof thepriced-servicecomponentof thecostsof theirFedwireFundsandNationalSettle- theirFedwireSecuritiesService,includingtherelated mentServices,includingtherelatedPSAF.Reserve PSAF.TheBanks’operatingexpensesandimputed Bankoperatingexpensesandimputedcostsforthese costsforprovidingthisservicetotaled$23.2million operationstotaled$77.9millionin2010.Revenue in2010.Revenuefromtheservicetotaled$24.1mil-

124 97thAnnualReport|2010 lion,andotherincometotaled$0.4million,resulting In2010,theReserveBanksfinishedimplementinga inanetincomeof $1.2million. programtoextendtheusefullifeof theSystem’sBPS 3000high-speedcurrency-processingmachines.The TheFedwireSecuritiesServiceallowsparticipantsto programreplacedtheoperatingsystemsof theequiptransferelectronicallytootherparticipantsintheser- ment,significantlyimprovingtheReserveBanks’ vicecertainsecuritiesissuedbytheU.S.Treasury, processingefficiency.ReserveBankscontinueto federalgovernmentagencies,government-sponsored developanewcashautomationplatformthatwill enterprises,andcertaininternationalorganizations.9 enhancecontrolsof theBanks’cashoperationsand In2010,thenumberof non-Treasurysecuritiestrans- improvetheirefficiency,providearesponsivemanfersprocessedviatheservicedecreased24.6percent agementinformationreportingsystemwithsuperior from2009,toapproximately7.9million. andflexiblereportingtools,facilitatebusinesscontinuityandcontingencyplanning,andenhancethe Float supportprovidedtoReserveBankcustomersand businesspartners.In2010,theBanksterminatedthe TheFederalReservehaddailyaveragecreditfloatof developmentcontractwiththeprimaryvendorand $1,795.7million,comparedwithdailyaveragecredit redefinedthedesignforthenewsystem. floatof $1,976.4millionin2009.10 TheBoardcontinuestoworkwiththeBEPandthe U.S.SecretServicetoproduceandissueamore- Developments in Currency and Coin secure,new-design$100note.Inlate2010,theBoard announcedthatthenew-design$100notewouldbe TheFederalReserveBoardistheissuingauthority releasedlaterthantheplannedFebruary2011issue forthenation’scurrency(intheformof Federal datebecausetheBEPobservedthatthepaperwas Reservenotes).In2010,theBoardpaidtheU.S. occasionallycreasingduringproduction.TheBoard Treasury’sBureauof EngravingandPrinting(BEP) willannounceanewissuedateoncetheproblemhas $598.2millionforproducing5.6billionFederal beenresolved. Reservenotes. Developments in Fiscal Agency and TheFederalReserveBanksdistributecurrencyand cointhroughdepositoryinstitutionstomeetpublic Government Depository Services demand.TheReserveBanksalsoreceivecurrency andcoinfromcirculationthroughtheseinstitutions. Asfiscalagentsanddepositoriesforthefederalgov- TheReserveBanksreceived35.4billionFederal ernment,theFederalReserveBanksauctionTreasury Reservenotesfromcirculationin2010,a0.4percent securities,processelectronicandcheckpaymentsfor increasefrom2009,anddistributed36.3billionnotes Treasury,collectfundsowedtothefederalgovernintocirculation(payments)in2010,a1.4percent ment,maintainTreasury’sbankaccount,and increasefrom2009.Thevalueof FederalReserve develop,operate,andmaintainanumberof autonotesincirculationincreased6.0percentin2010,to matedsystemstosupportTreasury’smission.The $942.0billion,largelybecauseof demandfor$100 ReserveBanksalsoprovidecertainfiscalagencyand notes.TheReserveBanksreceived62.4billioncoins depositoryservicestootherentities;theseservicesare fromcirculationin2010,a4.5percentdecreasefrom primarilyrelatedtobook-entrysecurities. 2009,andmadepaymentsof 69.1billioncoinsinto circulation,a0.2percentincreasefrom2009. Treasuryandotherentitiesfullyreimbursedthe ReserveBanksforthecostsof providingfiscal 9 Theexpenses,revenues,volumes,andfeesreportedherearefor agencyanddepositoryservices.In2010,reimbursable transfersofsecuritiesissuedbyfederalgovernmentagencies, government-sponsoredenterprises,andcertaininternational expensesamountedto$456.4million,comparedwith organizations.ReserveBanksprovideTreasurysecuritiesser- $450.3millionin2009(seetable3).Supportfor vicesintheirroleastheU.S.Treasury’sfiscalagent.Theseser- Treasuryprogramsaccountedfor93.9percentof the vicesarenotconsideredpricedservices.Fordetails,see“TreasurySecuritiesService,”onpage125. cost,andsupportforotherentitiesaccountedfor 10 CreditfloatoccurswhentheReserveBankspresentitemsfor 6.1percent.TheReserveBanksactivelymonitorprocollectiontothepayingbankpriortoprovidingcredittothe gramexpenses,andtheystrivetocontainthesecosts depositingbank(debitfloatoccurswhentheReserveBanks whileprovidingtheresourcesnecessarytoaccomcreditthedepositingbankpriortopresentingitemsforcollectiontothepayingbank). plishprogramobjectives.

FederalReserveBanks 125 Table3.ExpensesoftheFederalReserveBanksforFiscalAgencyandDepositoryServices,2008–2010 Thousandsofdollars Agencyandservice 2010 2009 2008 DepartmentoftheTreasury BureauofthePublicDebt Treasuryretailsecurities 73,104 73,679 72,374 Treasurysecuritiessafekeepingandtransfer 10,136 8,815 9,305 Treasuryauction 30,750 30,216 37,072 Computerinfrastructuredevelopmentandsupport 1,980 2,333 4,464 Otherservices 1,646 1,375 910 Total 117,615 116,417 124,124 FinancialManagementService Paymentservices 112,224 104,355 108,219 Collectionservices 37,611 37,967 49,180 Cash-managementservices 48,226 49,046 48,676 Computerinfrastructuredevelopmentandsupport 66,461 66,958 65,059 Otherservices 8,815 7,393 7,577 Total 273,337 265,719 278,711 OtherTreasury Total 37,793 40,390 27,017 Total,Treasury 428,744 422,527 429,852 OtherFederalAgencies Total,otheragencies 27,700 27,758 31,292 Totalreimbursableexpenses 456,445 450,285 461,144 Treasury Securities Services abletopurchasepapersavingsbondsthroughpayroll deduction.TheReserveBanksprintedandmailed TheReserveBanksworkcloselywithTreasury’s morethan16millionsavingsbondsin2010,a20per- Bureauof thePublicDebtinsupportof theborrow- centdecreasefrom2009.Treasuryalsoannounceda ingneedsof thefederalgovernment.TheBanksauc- strategytotransitionretailcustomersfromlegacy tion,issue,maintain,andredeemsecurities;provide products(suchaspapersavingsbonds)totheBureau customerservice;andoperatetheautomatedsystems of thePublicDebt’sweb-basedTreasuryDirect supportingpaperU.S.savingsbondsandbook-entry system,whichsupportsinvestmentsinmarketable marketableTreasurysecurities(bills,notes,and Treasurysecuritiesandelectronicsavingsbonds. bonds).Treasurysecuritiesservicesconsistof retail securitiesprograms(whichprimarilyserveindividual TheReserveBankscontinuedworkingwiththe investors)andwholesalesecuritiesprograms(which Bureauof thePublicDebtontheTreasuryRetail serveinstitutionalcustomers). E-Servicesinitiative,whichaimstolowercosts,provideahigh-qualitycustomerserviceexperience,pro- Retail Securities Programs videmoreopportunitiesforcustomerself-service, andeliminateduplicativeprocesses. TheReserveBankscontinuedtosupportTreasury’s effortstoimprovethequalityandefficiencyof secu- Wholesale Securities Programs ritiesservicesprovidedtoretailcustomers.The BanksprocesspaperU.S.savingsbondstransactions TheReserveBankssupportwholesalesecuritiesproandbook-entrymarketableTreasurysecuritiestrans- gramsthroughthesale,issuance,safekeeping,and actionsforsecuritiesheldinLegacyTreasuryDirect. transferof marketableTreasurysecuritiesforinstitu- ReserveBankoperatingexpensesfortheretailsecuri- tionalinvestors.ReserveBankoperatingexpensesin tiesprogramswere$73.1millionin2010,compared 2010insupportof Treasurysecuritiesauctionswere with$73.7millionin2009. $30.7million,comparedwith$30.2millionin2009. In2010,theBanksconducted301Treasurysecurities Inearly2010,Treasuryannouncedplanstoeliminate auctions,comparedwith283in2009.Theincreasein theissuanceof paperpayrollsavingsbondsthrough thenumberof auctionswasattributableprimarilyto traditionalemployer-sponsoredsavingsplans.Asof theincreasednumberof cash-managementbill September30,2010,federalemployeesarenolonger auctions.

126 97thAnnualReport|2010 Operatingexpensesassociatedwithsecuritiessafe- responsibilityfortheFederalReserveElectronicTax keepingandtransferactivitieswere$10.1millionin Applicationfunctiontoacommercialbankdesig- 2010,comparedwith$8.8millionin2009.Thecost natedbyTreasury. increaseisattributabletohigherTreasurysecurities transfervolume.In2010,thenumberof Fedwire TheReserveBankscontinuetooperatePay.gov,an Treasurysecuritiestransfersincreased13percent applicationsupportingTreasury’sprogramthat from2009,toapproximately11.5million. allowsthepublictousetheInternettoauthorizeand initiatepaymentstofederalagencies.Duringtheyear, Payments Services thePay.govprogramwasexpandedtoincludeseveral newagenciesand,asaresult,collectionvolumes TheReserveBanksworkcloselywithTreasury’s increased. FinancialManagementServiceandothergovernmentagenciestoprocesspaymentstoindividualsand TheReserveBanksalsosupportthegovernment’s companies.Forexample,theBanksprocessSocial centralizeddelinquentdebt-collectionprogram.Spe- Securityandveterans’benefits,incometaxrefunds, cifically,theBanksdevelopandmaintainsoftware vendorpayments,andothertypesof payments. thatfacilitatesthecollectionof delinquentdebts ReserveBankoperatingexpensesforpayments- owedtofederalagenciesandstatesbymatchingfedrelatedactivitytotaled$112.2millionin2010,com- eralpaymentsagainstdelinquentdebts,including paredwith$104.4millionin2009.Theincreasein past-duechildsupportpaymentsowedtocustodial expensesislargelyduetoexpandedrequirementsfor parents. severalTreasuryprojects,notablythestoredvalue card(SVC)andGoDirectprograms. Treasury Cash-Management Services TheReserveBanksmanagetheSVCprogram,which Treasurymaintainsanoperatingcashaccountatthe providesstoredvaluecardsforusebymilitaryper- ReserveBankstofunctionthevarioustransactions sonnelonmilitarybases.In2010,theSVCprogram’s discussedintheprecedingsectionsof thischapter, expensesincreased14percent,to$17.1million, anditmayinstructtheBankstoinvestfundsfromits becauseof programexpansion.TheReserveBanks accountininterest-bearingaccountswithqualified alsosupportTreasury’sGoDirectinitiative,anongo- depositoryinstitutions. ingeffortfocusedonconvertingcheckbenefitpaymentstodirectdepositordebitcard.In2010, TheReserveBanksalsoprovidecollateralexpensesforGoDirectincreased23percent,tomore managementandcollateral-monitoringservicesfor than$2.8million,inconnectionwiththeexpansion Treasuryprogramsthathavecollateralrequirements. of theGoDirectmarketingcampaignandacall- ReserveBankoperatingexpensesrelatedtoTreasury centerbuildout. cash-managementservicestotaled$48.2millionin 2010,comparedwith$49.0millionin2009. Collection Services During2010,theReserveBankscontinuedtosup- TheReserveBanksalsoworkcloselywithTreasury’s portTreasury’sefforttomodernizeitsfinancialman- FinancialManagementServicetocollectfundsowed agementprocesses,withafocusonimprovingcenthefederalgovernment,includingfeesforgoodsand tralizedgovernmentaccountingandreportingfuncservices.ReserveBankoperatingexpensesin2010 tions.TheBanksworkedwithTreasurytoidentify relatedtocollectionsservicesremainedroughlythe potentiallong-termefficiencyimprovementsinthe sameasin2009,totaling$37.6million. waytheBanksaccountforgovernmentpayments andcollectionsprocesses.TheBanksalsocollabo- Throughout2010,theReserveBankscontinuedto ratedwiththeFinancialManagementServiceonsevsupportTreasury’sCollectionsandCashManage- eralongoingsoftwaredevelopmentefforts,suchas mentModernization(CCMM)initiative,amultiyear theGovernmentwideAccountingandReporting efforttosimplify,modernize,andimprovetheser- Modernizationinitiative. vices,systems,andprocessessupportingTreasury’s collectionsandcash-managementprograms.Incon- Services Provided to Other Entities nectionwiththeCCMMinitiative,theReserve Banksdiscontinuedprocessingpaperfederaltax Whenpermittedbyfederalstatuteorwhenrequired depositcouponsand,inlate2010,transitioned bytheSecretaryof theTreasury,theReserveBanks

FederalReserveBanks 127 Figure1.AggregateDaylightOverdrafts,2008–2010 $ Billions 200 180 160 140 120 100 80 Peak daylight overdrafts 60 Average daylight overdrafts 40 20 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008 2009 2010 providefiscalagencyanddepositoryservicestoother $1.1trillionintheirFederalReserveaccountsoverdomesticandinternationalentities.ReserveBank night,whilethedailyvalueof fundstransferredover operatingexpensesforservicesprovidedtoother justtheFederalReserve’sfundstransfersystemwas entitieswere$27.7millionin2010,comparedwith about$2.4trillion.Institutionsheldhistoricallyhigh $27.8millionin2009.Book-entrysecuritiesissuance levelsof overnightbalancesattheReserveBanksin andmaintenanceactivitiesaccountforasignificant 2010whiledemandfordaylightoverdraftsonaverage amountof theworkperformedforotherentities, remainedhistoricallylow.12In2010,averagedaylight withthemajorityperformedfortheFederalHome overdraftsacrosstheSystemdecreasedtoabout LoanMortgageAssociation,theFederalNational $6billionfromnearly$10billionin2009,adecrease MortgageAssociation,andtheGovernment of about35percent(seefigure1).13Theaveragelevel NationalMortgageAssociation.Costincreasesasso- of peakdaylightoverdrafts,however,increasedto ciatedwithbook-entrysecuritiesissuanceandmain- almost$60billionin2010from$55billionin2009, tenanceactivitieswereoffsetprimarilybyreductions anincreaseof about8percent.14In2010,institutions inthecostof postalmoney-orderprocessing.Postal paidabout$6millionindaylightoverdraftfees. moneyordersareprocessedprimarilyinimageform, resultinginoperationalimprovements,lowerstaffing levels,andlowercoststotheU.S.PostalService. 11 Whenaninstitutionendsadaywithanegativebalance,the institutionincursanovernightoverdraft.TheFederalReserve stronglydiscouragesovernightoverdraftsbyimposingpenalties andtakingadministrativeactionagainstinstitutionsthatincur Developments in the Use of Federal overnightoverdrafts.Institutionsthatrequireovernightcredit Reserve Intraday Credit areencouragedtoapproachtheFederalReserve’sdiscountwindowtoborrowfundsasnecessary. 12 Thedecisiontopayinterestonreservebalances,implemented TheBoard’sPaymentSystemRisk(PSR)policygov- October2008,likelycontributedsignificantlytotheincreasein overnightbalancesandthesubsequentreductionindaylight ernstheuseof FederalReserveBankintradaycredit, overdrafts.Forexample,in2007,averageovernightbalances alsoknownasdaylightoverdrafts.Adaylightover- heldattheReserveBankswere$15billionandaveragedaylight draftoccurswhenaninstitution’saccountactivity overdraftswere$60billion. 13 Averagedaylightoverdraftsarecalculateddailybysummingall createsanegativebalanceintheinstitution’sFederal negativebalancesincurredbyinstitutionsacrosstheFederal Reserveaccountatanytimeintheoperatingday.11 ReserveSystemforeachminuteoftheFedwireoperatingday(9 Daylightoverdraftsenableinstitutionstosendpay- p.m.to6:30p.m.ET,or21.5hours).Thissumisthendividedby thenumberofminutesintheday(1,291minutes)toarriveatthe mentsmorefreelythroughoutthedaythanif instituaverageoverdraft. tionswerelimitedstrictlybytheiravailablefundsbal- 14 Peakoverdraftsarecalculateddailybysummingthenegative ance.In2010,institutionsheldonaverageabout balancesofallinstitutionsonaminute-by-minutebasis

128 97thAnnualReport|2010 InpreparationforPSRpolicychangeseffectiveasof Inaddition,FederalReserveInformationTechnology March24,2011,throughout2010theReserveBanks (FRIT)continuedtoleadtheReserveBanks’transimodifiedthesystemstheyusetorecordcollateral tiontoamorerobustinformationsecurityprogram, pledgesandtotrackdaylightoverdrafts.15Therevi- onethatisbasedonguidancefromtheNational sions,inpart,alloweligibleinstitutionstocollateral- Instituteof ScienceandTechnologyandadaptedto izedaylightoverdraftsandpaynofeeforthese theFederalReserve’senvironment.16 overdrafts. Examinations of the Electronic Access to Federal Reserve Banks Reserve Bank Services TheReserveBanksandtheconsolidatedlimited liabilitycompany(LLC)entitiesaresubjecttoseveral TheReserveBanksprovidedepositoryinstitutions levelsof auditandreview.17Thecombinedfinancial withavarietyof alternativesforelectronicallyaccessstatementsof theReserveBanks(see“Federal ingtheBanks’financialservicespaymentandinfor- ReserveBanksCombinedFinancialStatements”on mationservices.Theseelectronic-accesssolutionsare page342inthe“FederalReserveSystemAudits”secdesignedtomeettheindividualconnectivityandcontionof thisreport)aswellastheannualfinancial tingencyrequirementsof depositoryinstitutioncusstatementsof eachof the12Banksandtheconsolitomers.FedLineDirectisaReserveBankservicethat datedLLCentitiesareauditedannuallybyanindepermitsunattendedcomputer-to-computeraccessto pendentauditingfirmretainedbytheBoardof GovtheBanks’paymentservicesthroughdedicatedconernors.18Inaddition,theReserveBanks,including nections.Anotherservice,FedLineCommand,offers theconsolidatedLLCentities,aresubjecttooveranunattended,computer-to-computer,batch-file sightbytheBoardof Governors,whichperformsits solutionforaccessingReserveBankACHservicesat ownreviews. acostlowerthanthatforFedLineDirect.Yet anotherservice,FedLineAdvantage,providesweb- TheReserveBanksusetheframeworkestablishedby basedaccesstotheBanks’paymentservices,while theCommitteeof SponsoringOrganizationsof the FedLineWebpermitsaccesstoinformationservices TreadwayCommission(COSO)toassesstheirinterandlimitedtransactionservices.In2010,theReserve nalcontrolsoverfinancialreporting,includingthe Banksannouncedtherestructuringof theirelecsafeguardingof assets.Withinthisframework,the tronicaccessofferingstobettermeetdepositoryinstimanagementof eachReserveBankannuallyprovides tutions’needforaccessoptionsthatincludecertain anassertionlettertoitsboardof directorsthatconvalue-addedservices. firmsadherencetoCOSOstandards.Similarly,each consolidatedLLCentityannuallyprovidesanasser- Information Technology tionlettertotheboardof directorsof theFederal ReserveBankof NewYork(theNewYorkReserve Bank). In2010,theFederalReserveBankscontinuedto improvetheefficiency,effectiveness,andsecurityof In2010,theBoardengagedDeloitte&ToucheLLP informationtechnology(IT)servicesandoperations. (D&T)toauditthecombinedandindividualfinancialstatementsof theReserveBanksandthoseof the Toimprovetheefficiencyandoverallqualityof operations,majormultiyearinitiativeswereunder- 16 FRITsuppliesnationalinfrastructureandbusinesslinetechnologyservicestotheFederalReserveBanksandprovidesthought takentoconsolidatethemanagementandfunctionof leadershipregardingtheSysteminformationtechnologyarchitheFederalReserve’shelpdesk,server,andnetwork tectureandbusinessuseoftechnology.TheNationalInstituteof operations.Significantprogresswasmade,andthe ScienceandTechnologyisanonregulatoryfederalagency withintheU.S.DepartmentofCommerce. overallprogrammetorexceededitsgoalsforthe 17 TheconsolidatedLLCswerefundedbytheNewYorkReserve year. Bank,andacquiredfinancialassetsandfinancialliabilitiespursuanttothepolicyobjectives.TheconsolidatedLLCswere throughouttheFedwireoperatingday.Themostnegativeof determinedtobevariableinterestentities,andtheNewYork theseminute-by-minutebalancesisthepeakoverdraft. ReserveBankisconsideredtobethecontrollingfinancialinter- 15 DetailsabouttherevisionstothePSRpolicyareavailableat estholderofeach. www.federalreserve.gov/newsevents/press/other/20081219a.htm, 18 EachLLCreimbursestheBoardofGovernors—fromtheentiandthepolicythatbecameeffectiveonMarch24,2011,isavail- ty’savailablenetassets—forthefeesrelatedtotheauditofits ableatwww.federalreserve.gov/paymentsystems/psr_policy.htm. financialstatements.

FederalReserveBanks 129 consolidatedLLCentities.In2010,D&Talsocon- Expensestotaled$7,358million:$3,489millionin ductedauditsof internalcontrolsoverfinancial operatingexpenses,$2,687millionininterestpaidto reportingforeachof theReserveBanksandthefour depositoryinstitutionsonreservebalancesandearnconsolidatedLLCentitiesthatremainedinoperation ingscreditsgrantedtodepositoryinstitutions, atDecember31,2010.19FeesforD&T’sservices $94millionininterestexpenseonsecuritiessold totaled$8million,of which$2millionwasforthe underagreementstorepurchase,$422millionin auditsof theconsolidatedLLCentities.Toensure assessmentsforBoardof Governorsexpenditures, auditorindependence,theBoardrequiresthatD&T $623millionfornewcurrencycosts,and$43million beindependentinallmattersrelatingtotheaudits. forConsumerFinancialProtectionBureauand Specifically,D&Tmaynotperformservicesforthe Officeof FinancialResearchcosts.Netadditionsto ReserveBanksorothersthatwouldplaceitinaposi- anddeductionsfromcurrentnetincomeshoweda tionof auditingitsownwork,makingmanagement netprofitof $9,746million,whichconsistsof decisionsonbehalf of theReserveBanks,orinany $782millioninrealizedgainsonfederalagencyand otherwayimpairingitsauditindependence. government-sponsoredenterprisemortgage-backed securities(GSEMBS),$7,560millioninnetincome TheBoard’sreviewsof theReserveBanksincludesa associatedwithconsolidatedLLCs,$850millionof widerangeof off-siteandon-siteoversightactivities, otheradditions,and$554millioninunrealizedgains conductedprimarilybytheDivisionof ReserveBank oninvestmentsdenominatedinforeigncurrencies OperationsandPaymentSystems.Divisionpersonnel revaluedtoreflectcurrentmarketexchangerates. monitortheactivitiesof eachBankandconsolidated Dividendspaidtomemberbanks,setat6percentof LLCentityonanongoingbasisandconductacom- paid-incapitalbysection7(1)of theFederalReserve prehensiveon-sitereviewof eachBankatleastonce Act,totaled$1,583million,$155millionmorethan everythreeyears. in2009;thisreflectsanincreaseinthecapitaland surplusof memberbanksandaconsequentincrease Thereviewsalsoincludeanassessmentof theinter- inthepaid-incapitalstockof theReserveBanks. nalauditfunction’sconformancetoInternational StandardsfortheProfessionalPracticeof Internal DistributionstotheU.S.Treasuryintheformof Auditing,conformancetoapplicablepoliciesandpro- interestonFederalReservenotestotaled$79,268milcedures,andtheauditdepartment’sefficiency. lionin2010,upfrom$47,431millionin2009;thedistributionsequalnetincomeafterthedeductionof Toassesscompliancewiththepoliciesestablishedby dividendspaidandtheamountnecessarytoequate theFederalReserve’sFederalOpenMarketCommittheReserveBanks’surplustopaid-incapital. tee(FOMC),thedivisionalsoreviewstheaccounts andholdingsof theSystemOpenMarketAccount The“StatisticalTables”sectionof thisreportpro- (SOMA)attheNewYorkReserveBankandtheforvidesmoredetailedinformationontheReserve eigncurrencyoperationsconductedbythatReserve BanksandtheLLCs.Table9isastatementof condi- Bank.Inaddition,D&Tauditstheyear-endschedule tionforeachReserveBank;table10detailsthe of participatedassetandliabilityaccountsandthe incomeandexpensesof eachReserveBankfor2010; relatedscheduleof participatedincomeaccounts. table11showsacondensedstatementforeach TheFOMCreceivestheexternalauditreportsanda ReserveBankfortheyears1914through2010;and reportonthedivision’sexamination. table13givesthenumberandannualsalariesof officersandemployeesforeachReserveBank.A Income and Expenses detailedaccountof theassessmentsandexpenditures of theBoardof GovernorsappearsintheBoardof Table4summarizestheincome,expenses,anddistri- GovernorsFinancialStatements(see“Federal butionsof netearningsof theReserveBanksfor ReserveSystemAudits”onpage407). 2010and2009.Incomein2010was$79,301million, comparedwith$54,463millionin2009. SOMA Holdings and Loans 19 ThefinancialstatementsoftheCommercialPaperFunding FacilityLLC(CPFF),whichwerereleasedonAugust17,2010, TheReserveBanks’averagenetdailyholdingsof didnotincludeanauditofinternalcontrolsoverfinancial reporting. securitiesandloansduring2010amountedto

130 97thAnnualReport|2010 Table4.Income,Expenses,andDistributionofNetEarningsoftheFederalReserveBanks,2010and2009 Millionsofdollars Item 2010 2009 Currentincome 79,301 54,463 Currentexpenses 6,270 5,979 Operatingexpenses1 3,489 3,694 Interestpaidtodepositoryinstitutionsandearningscreditsgranted 2,687 2,187 Interestexpenseonsecuritiessoldunderagreementstorepurchase 94 98 Currentnetincome 73,031 48,484 Netadditionsto(deductionsfrom)currentnetincome 9,746 4,820 Profitonsalesoffederalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities 782 879 Profitonforeignexchangetransactions 554 172 Netincome(loss)fromconsolidatedLLCs 7,560 5,588 Provisionsforloanrestructuring2 0 -2,621 Otheradditions3 850 802 AssessmentsbytheBoardofGovernors 1,088 888 ForBoardexpenditures 422 386 Forcurrencycosts 623 502 ForConsumerFinancialProtectionBureauandOfficeofFinancialResearchcosts4 43 0 Changeinfundedstatusofbenefitplans 46 1,007 ComprehensiveincomebeforedistributionstoTreasury 81,735 53,423 Dividendspaid 1,583 1,428 Transferredtosurplusandchangeinaccumulatedothercomprehensiveincome 884 4,564 DistributionstoU.S.Treasury5 79,268 47,431 1 Includesanetperiodicpensionexpenseof$529millionin2010and$663millionin2009. 2 RepresentstheeconomiceffectoftheinterestratereductionmadepursuanttotheApril17,2009,restructuringoftheAmericanInternationalGroup,Inc.loan. 3 Includesdividendsonpreferredsecurities,unrealizedgain(loss)onTermAsset-BackedSecuritiesLoanFacilityloans,andcompensationpaidbyCitigroup,Inc.andBankof AmericaCorporationfortheNewYorkReserveBank’sandRichmondReserveBank’scommitmentstoprovidefundingsupport,netofrelatedexpenses. 4 TheBoardofGovernorsassessestheReserveBankstofundtheoperationsoftheConsumerFinancialProtectionBureauand,foratwo-yearperiod,theOfficeofFinancial Research. 5 InterestonFederalReservenotes. $2,123,773million,anincreaseof $344,327million Theseincreasesareduetothepurchaseof Treasury from2009(seetable5).20 securities,GSEdebtsecurities,andfederalagency andGSEMBSthroughalarge-scaleassetpurchase SOMA Securities Holdings program.Therewerenoholdingsof securitiespurchasedunderagreementstoresellin2010,compared Theaveragedailyholdingsof Treasurysecurities withaveragedailyholdingsof $3,616millioninsimiincreasedby$177,595million,toanaveragedaily larpurchasesfrom2009;theaveragedailybalanceof amountof $837,078million.Theaveragedailyhold- securitiessoldunderagreementstorepurchasewas ingsof GSEdebtsecuritiesincreasedby$68,717mil- $58,476million,adecreaseof $9,361millionfrom lion,toanaveragedailyamountof $166,810million. 2009.Averagedailyholdingsof foreigncurrency Theaveragedailyholdingsof federalagencyand denominatedassetsin2010were$24,936million, GSEMBSincreasedby$605,375million,toanaver- comparedwith$24,898millionin2009.Theaverage agedailyamountof $1,079,230million. dailybalanceof centralbankliquidityswapdrawings was$989millionin2010and$177,688millionin 2009. 20 Openmarketoperations(OMOs)—thepurchaseandsaleof securitiesintheopenmarketbyacentralbank—areakeytool usedbytheFederalReserveintheimplementationofmonetary Theaverageratesof interestearnedontheReserve policy.TheSystemOpenMarketAccount(SOMA)istheFed- Banks’holdingsof Treasurysecuritiesdecreasedto eralReserve’sportfolioofsecuritiesheldforthepurposeof thesepurchasesandsales. 3.15percentandtheaverageratesonGSEdebtsecu-

FederalReserveBanks 131 Table5.SystemOpenMarketAccount(SOMA)HoldingsandLoansoftheFederalReserveBanks,2010and2009 Millionsofdollarsexceptasnoted Item Averagedailyassets(+)/liabilities(–) Currentincome(+)/expense(–) Averageinterestrate(percent) 2010 2009 2010 2009 2010 2009 U.S.Treasurysecurities1 837,078 659,483 26,373 22,873 3.15 3.47 Government-sponsoredenterprisedebtsecurities1 166,810 98,093 3,510 2,048 2.10 2.09 Federalagencyandgovernment-sponsoredenterprise mortgage-backedsecurities2 1,079,230 473,855 44,839 20,407 4.15 4.31 Foreigncurrencydenominatedassets3 24,936 24,898 223 296 0.89 1.19 Centralbankliquidityswaps4 989 177,688 12 2,168 1.21 1.22 Securitiespurchasedunderagreementstoresell … 3,616 … 13 0.00 0.36 OtherSOMAassets5 288 458 … 1 0.00 0.22 Securitiessoldunderagreementstorepurchase -58,476 -67,837 -94 -98 0.16 0.14 OtherSOMAliabilities6 -799 -182 … … 0.00 0.00 TotalSOMAholdings 2,050,056 1,370,072 74,863 47,708 3.65 3.48 Primary,secondary.andseasonalcredit 4,709 40,405 32 204 0.68 0.50 Termauctioncredit 7,105 291,487 18 786 0.25 0.27 Totalloanstodepositoryinstitutions 11,814 332,892 50 990 0.42 0.30 Asset-BackedCommercialPaperMoneyMarketMutual FundLiquidityFacility(AMLF) … 7,653 … 73 … 0.95 PrimaryDealerCreditFacility(PDCF)andother broker-dealercredit … 7,502 … 36 … 0.48 CreditextendedtoAmericanInternationalGroup,Inc. (AIG),net7 22,874 39,099 2,728 3,996 11.93 10.22 TermAsset-BackedSecuritiesLoanFacility(TALF)8 39,029 23,228 750 414 1.92 1.78 Totalloanstoothers 61,903 77,482 3,478 4,519 5.62 5.83 Totalloans 73,717 409,374 3,528 5,509 1.35 1.35 TotalSOMAholdingandloans 2,123,773 1,779,446 78,391 53,217 3.69 2.99 1 Facevalue,netofunamortizedpremiumsanddiscounts. 2 Facevalueofthesecurities,whichistheremainingprincipalbalanceoftheunderlyingmortgages,netofunamortizedpremiumsanddiscounts.Doesnotincludeunsettled transactions. 3 Includesaccruedinterest.Foreigncurrencydenominatedassetsarerevalueddailyatmarketexchangerates. 4 Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. 5 Cashandshort-terminvestmentsrelatedtothefederalagencyandgovernment-sponsoredenterprisemortgage-backedsecuritiesportfolio. 6 Relatedtothepurchasesoffederalagencyandgovernment-sponsoredenterprisemortgage-backedsecuritiesthatthesellerfailstodeliveronthesettlementdate. 7 Averagedailybalanceincludesoutstandingprincipalandcapitalizedinterestnetofunamortizeddeferredcommitmentfeesandallowanceforloanrestructuring,and excludesundrawnamountsandcreditextendedtoconsolidatedlimitedliabilitycompanies. 8 Representstheremainingprincipalbalance.ExcludesamountnecessarytoadjustTALFloanstofairvalueatDecember31,whichisreportedin“Otherassets”inthe StatementofConditionoftheFederalReserveBanksinTable9Ainthe“StatisticalTables”sectionofthisreport. …Notapplicable. ritiesincreasedto2.10percentin2010.Theaverage extendedundertheTermAuctionFacilitydecreased rateof interestearnedonfederalagencyandGSE $284,382millionto$7,105million.Theaveragerate MBSdecreasedto4.15percentin2010.Theaverage of interestearnedonprimary,secondary,andseainterestratesforsecuritiessoldunderagreementsto sonalcreditincreasedto0.68percentin2010,from repurchaseincreasedto0.16percentin2010.The 0.50percentin2009,whiletheaverageinterestrate averageratesof interestearnedonforeigncurrency ontermauctioncreditdecreasedto0.25percentin denominatedassetsandcentralbankliquidityswaps 2010,from0.27percentin2009. decreasedto0.89percentand1.21percent,respectively,in2010. Theaveragedailybalanceof creditextendedtothe AmericanInternationalGroup,Inc.(AIG)in2010 Lending was$22,874million;thisbalanceearnedinterestat anaveragerateof 11.93percent.OnJanuary14, In2010,averagedailyprimary,secondary,andsea- 2011,alloutstandingdrawsundertheAIGrevolving sonalcreditextendeddecreasedby$35,696millionto lineof creditandtherelatedaccruedinterest,capital- $4,709million,andaveragedailytermauctioncredit izedinterest,andcapitalizedcommitmentfeeswere

132 97thAnnualReport|2010 paidinfullasaresultof theclosingof theAIG proceedsatthematurityortheliquidationof the recapitalizationplan.21 consolidatedLLCs’assetswillbeusedtorepaythe loansextendedbytheNewYorkReserveBank. Theaveragedailybalanceof TermAsset-Backed SecuritiesLoanFacility(TALF)loansin2010was Federal Reserve Bank Premises $39,029million,whichearnedinterestatanaverage rateof 1.92percent.TheBoardof Governors’ authorizationfortheextensionof newTALFloans SeveralReserveBankstookactionin2010to expiredin2010.TheauthorizationforTALFloans upgradeandrefurbishtheirfacilities.Themultiyear collateralizedbynewly-issuedasset-backedsecurities renovationprogramsattheNewYorkandSt.Louis (ABS)andlegacycommercialmortgage-backedsecu- ReserveBanks’headquartersbuildingscontinued. rities(CMBS)expiredMarch31andTALFloans TheNewYorkReserveBankcompletedaprogram collateralizedbynewlyissuedCMBSexpiredJune30. toenhancethebusinessresiliencyof itsITsystems andtoupgradefacilitysupportfortheBank’sopen marketoperations,centralbankservices,anddata TheauthorizationtolendunderthePrimaryDealer centeroperations. CreditFacilityandtheAsset-BackedCommercial PaperMoneyMarketMutualFundLiquidityFacil- Security-enhancementprogramscontinuedatseveral ityexpiredonFebruary10,2010.Therewerenobalfacilities,includingtheconstructionof aremote ancesoutstandingunderthesefacilitiesduring2010. vehicle-screeningfacilityfortheDallasReserve Investments of the Consolidated LLCs Bank,andthedesignof mainentrancelobbysecurity improvementsfortheChicagoandDallasReserve Additionallendingfacilitiesestablishedduring2008 Banks’headquartersbuildings. and2009,underauthorityof section13(3)of the FederalReserveAct,involvedcreatingandlendingto Additionally,theSanFranciscoReserveBankcontheconsolidatedLLCentities(seetable6).Consis- tinueditseffortstoselltheformerSeattleBranch tentwithgenerallyacceptedaccountingprinciples, building. theassetsandliabilitiesof theseLLCshavebeen consolidatedwiththeassetsandliabilitiesof theNew Formoreinformationontheacquisitioncostsand YorkReserveBankinthepreparationof thestate- netbookvalueof theFederalReserveBanksand mentsof conditionincludedinthisreport.22The Branches,seetable14onpage320inthe“Statistical Tables”sectionof thisreport. 21 OnSeptember30,2010,AIGannouncedanagreementwiththe U.S.DepartmentoftheTreasury,theFederalReserveBankof NewYorkandthetrusteesoftheAIGCreditFacilityTrustona receivebenefitsoftheentitythatcouldpotentiallybesignificant recapitalizationplandesignedtoacceleraterepaymentofits totheVIE.Todeterminewhetheritisthecontrollingfinancial obligationstoAmericantaxpayers.Theplanresultedinthefull interestholderofaVIE,theReserveBankevaluatestheVIE’s repaymentandterminationoftheReserveBank’sAIGcredit design,capitalstructure,andrelationshipswiththevariable facility. interestholders.Asaconsequenceoftheconsolidation,the 22 Theconsolidationofthevariableinterestentities(VIEs)was extensionsofcreditfromtheNewYorkReserveBanktothe assessedinaccordancewithFinancialAccountingStandards consolidatedLLCsareeliminated,thenetassetsoftheconsoli- BoardAccountingStandardsCodificationTopic810(ASC datedLLCsappearasassetsintable9inthe“StatisticalTables” 810)Consolidation,whichrequiresaVIEtobeconsolidatedby sectionofthisreport,andtheliabilitiesoftheconsolidated itscontrollingfinancialinterestholder.AReserveBankconsoli- LLCstoentitiesotherthantheNewYorkReserveBank,includdatesaVIEifithasacontrollingfinancialinterest,whichis ingthosewithrecourseonlytotheportfolioholdingsofthe definedasthepowertodirectthesignificanteconomicactivities consolidatedLLCs,areincludedin“Otherliabilities”instatistioftheentityandtheobligationtoabsorblossesortherightto caltable9A.

FederalReserveBanks 133 Table6.KeyfinancialdataforConsolidatedLimitedLiabilityCompanies,2010and2009 Millionsofdollars CommercialPaper FundingFacilityLLC TALFLLC1 MaidenLaneLLC1 MaidenLaneIILLC1 MaidenLaneIIILLC1 TotalLLCs Item (CPFF)1 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 NetportfolioassetsoftheconsolidatedLLCsandthenetpositionoftheNewYorkReserveBank(FRBNY)andsubordinatedinterestholders Netportfolioassets2 … 14,233 665 298 27,961 28,140 16,457 15,912 23,583 22,797 68,666 81,380 LiabilitiesofconsolidatedLLCs … -173 0 0 -915 -1,137 -2 -2 -4 -3 -921 -1,315 Netportfolioassetsavailable3 … 14,060 665 298 27,046 27,003 16,455 15,910 23,579 22,794 67,745 80,065 Loansextendedtothe consolidatedLLCsbythe FRBNY4 … 9,379 0 0 25,845 29,233 13,485 16,005 14,071 18,500 53,401 73,117 Otherbeneficialinterests4,5 … … 106 102 1,315 1,248 1,071 1,037 5,366 5,193 7,858 7,580 Totalloansandotherbeneficial interests … 9,379 106 102 27,160 30,481 14,556 17,042 19,437 23,693 61,259 80,697 Cumulativechangeinnetassetssincetheinceptionoftheprogram6 AllocatedtoFRBNY … 4,681 -65 20 0 -2,230 1,582 -95 2,775 0 4,292 2,654 Allocatedtootherbeneficial interests … … 624 176 -114 -1,248 317 -1,037 1,367 -899 2,194 -3,184 Cumulativechangeinnetassets … 4,681 559 196 -114 -3,478 1,899 -1,366 4,142 -899 6,486 -530 SummaryofconsolidatedLLCnetincome,includingareconciliationoftotalconsolidatedLLCnetincometotheconsolidatedLLCnetincomerecordedbyFRBNY Portfoliointerestincome7 213 4,224 1 0 1,133 1,476 794 1,088 2,299 3,032 4,440 9,820 Interestexpenseonloans extendedbyFRBNY8 -4 -598 0 0 -205 -146 -186 -238 -204 -296 -599 -1,278 Interestexpense–other 0 0 -4 -2 -66 -61 -34 -33 -173 -171 -277 -267 Portfolioholdingsgains(losses) 1 8 0 0 2,571 -102 2,467 -604 3,141 -1,239 8,180 -1,937 Professionalfees -2 -30 -1 -1 -69 -55 -10 -12 -22 -27 -104 -125 Netincome(loss)ofconsolidated LLCs 208 3,604 -4 -3 3,364 1,112 3,031 201 5,041 1,299 11,640 6,213 Less:Netincome (loss)allocatedtoother beneficialinterests … … -75 699 1,135 -61 1,353 -34 2,266 1,299 4,679 1,903 Netincome (loss)allocatedtoFRBNY 208 3,604 71 -702 2,229 1,173 1,678 235 2,775 0 6,961 4,310 Add:Interestexpenseonloans extendedbyFRBNY,eliminated inconsolidation 4 598 0 0 205 146 186 238 204 296 599 1,278 Netincome(loss)recordedby FRBNY 212 4,202 719 (702) 2,434 1,319 1,864 473 2,979 296 7,560 5,588 1 CPFFLLCwasformedtoprovideliquiditytothecommercialpapermarket.ThelastcommercialpaperpurchasesbytheCPFFmaturedonApril26,2010,andtheCPFFwas dissolvedonAugust30,2010.TALFLLCwasformedin2009topurchaseassetsoftheTermAsset-BackedSecuritiesLoanFacility,whichwasformedtoimprovemarket conditionsforasset-backedsecurities.MaidenLaneLLCwasformedtoacquirecertainassetsofBearStearns;MaidenLaneIILLCandMaidenLaneIIILLCwereformedto acquirecertainassetsofAIGanditssubsidiaries. 2 TALF,MaidenLane,MaidenLaneII,andMaidenLaneIIIholdingsarerecordedatfairvalue.Fairvaluereflectsanestimateofthepricethatwouldbereceiveduponsellingan assetifthetransactionweretobeconductedinanorderlymarketonthemeasurementdate.CPFFholdingsarerecordedatbookvalue,whichincludesamortizedcostand relatedfees. 3 RepresentsthenetassetsavailableforrepaymentofloansextendedbyFRBNYand“otherbeneficiaries”oftheconsolidatedLLCs. 4 Bookvalue.Includesaccruedinterest. 5 TheotherbeneficialinterestholdersaretheU.S.TreasuryforTALFLLC,JPMorganChaseforMaidenLaneLLC,andAIGforMaidenLaneIILLCandMaidenLaneIIILLC. 6 RepresentstheallocationofthechangeinnetassetsandliabilitiesoftheconsolidatedLLCsthatareavailableforrepaymentoftheloansextendedbyFRBNYandtheother beneficiariesoftheconsolidatedLLCs.Thedifferencesbetweenthefairvalueofthenetassetsavailableandthefacevalueoftheloans(includingaccruedinterest)are indicativeofgainsorlossesthatwouldbeincurredbythebeneficiariesiftheassetshadbeenfullyliquidatedatpricesequaltothefairvalue. 7 Interestincomeisrecordedwhenearnedandincludesamortizationofpremiums,accretionofdiscounts,andpaydowngainsandlosses. 8 InterestexpenserecordedbyeachconsolidatedLLContheloansextendedbyFRBNYiseliminatedwhentheLLCsareconsolidatedinFRBNY'sfinancialstatementsand,asa result,theconsolidatedLLCs’netincome(loss)recordedbyFRBNYisincreasedbythisamount. 9 FRBNYearned$327milliononTALFloansduringtheyearendedDecember31,2010,inadditiontothenetincomeattributabletoTALFLLC.EarningsonTALFloansinclude interestincomeof$750million,lossonthevaluationofloansof$436million,andadministrativefeesof$13million.

134 97thAnnualReport|2010 Pro Forma Financial Statements for Federal Reserve Priced Services Table7:ProFormaBalanceSheetforFederalReservePricedServices,December31,2010and2009 Millionsofdollars Item 2010 2009 Short-termassets(Note1) Imputedreserverequirementsonclearingbalances 248.8 317.4 Imputedinvestments 3,463.4 4,112.9 Receivables 45.6 49.8 Materialsandsupplies 1.2 1.5 Prepaidexpenses 17.2 19.4 Itemsinprocessofcollection 374.5 449.7 Totalshort-termassets 4,150.6 4,950.7 Long-termassets(Note2) Premises 245.3 346.3 Furnitureandequipment 57.3 81.4 Leases,leaseholdimprovements,andlong-termprepayments 65.6 76.3 Prepaidpensioncosts 354.7 77.1 PrepaidFDICasset 25.0 31.2 Deferredtaxasset 132.4 231.4 Totallong-termassets 880.2 843.7 Totalassets 5,030.8 5,794.5 Short-termliabilities Clearingbalancesandbalances 2,487.6 3,173.6 Deferred-availabilityitems 1,814.7 1,728.3 Short-termdebt 0.0 0.0 Short-termpayables 43.6 146.9 Totalshort-termliabilities 4,345.9 5,048.8 Long-termliabilities Long-termdebt 0.0 0.0 Accruedbenefitcosts 392.3 436.8 Totallong-termliabilities 392.3 436.8 Totalliabilities 4,738.2 5,485.5 Equity(includingaccumulatedothercomprehensivelossof$267.6million and$478.3millionatDecember31,2010and2009,respectively) 292.6 309.0 Totalliabilitiesandequity(Note3) 5,030.8 5,794.5 Note:Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements.

FederalReserveBanks 135 Table8:ProFormaIncomeStatementforFederalReservePricedServices,2010and2009 Millionsofdollars Item 2010 2009 Revenuefromservicesprovidedtodepositoryinstitutions(Note4) 566.7 662.7 Operatingexpenses(Note5) 503.9 713.8 Incomefromoperations 62.9 -51.1 Imputedcosts(Note6) Interestonfloat -3.2 -3.2 Interestondebt 0.0 0.0 Salestaxes 5.1 9.1 FDICInsurance 6.3 8.2 3.4 9.2 Incomefromoperationsafterimputedcosts 54.6 -60.3 Otherincomeandexpenses(Note7) Investmentincome 10.7 16.6 Earningscredits -2.7 7.9 -3.9 12.7 Incomebeforeincometaxes 62.5 -47.6 Imputedincometaxes(Note6) 20.7 -15.5 Netincome 41.8 -32.1 Memo:Targetedreturnonequity(Note6) 13.1 19.9 Note:Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements. Table9:ProFormaIncomeStatementforFederalReservePricedServices,byService,2010 Millionsofdollars Commercialcheck Item Total CommercialACH Fedwirefunds Fedwiresecurities collection Revenuefromservices(Note4) 566.7 353.6 109.9 79.1 24.1 Operatingexpenses(Note5) 503.9 306.5 100.1 75.1 22.1 Incomefromoperations 62.9 47.0 9.8 4.0 2.0 Imputedcosts(Note6) 8.2 4.2 2.0 1.6 0.5 Incomefromoperationsafterimputedcosts 54.6 42.9 7.9 2.4 1.5 Otherincomeandexpenses,net(Note7) 7.9 4.9 1.6 1.2 0.4 Incomebeforeincometaxes 62.5 47.7 9.4 3.5 1.8 Imputedincometaxes(Note6) 20.7 15.8 3.1 1.2 0.6 Netincome 41.8 31.9 6.3 2.4 1.2 Memo:Targetedreturnonequity(Note6) 13.1 8.1 2.6 1.9 0.6 Costrecovery(percent)(Note8) 105.3 107.1 103.4 100.6 102.8 Note:Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements.

136 97thAnnualReport|2010 Notes to Pro Forma Financial Statements for Priced Services (1)Short-TermAssets TheimputedreserverequirementonclearingbalancesheldatReserveBanksby depositoryinstitutionsreflectsatreatmentcomparabletothatof compensating balancesheldatcorrespondentbanksbyrespondentinstitutions.Thereserve requirementimposedonrespondentbalancesmustbeheldasvaultcashorasbalancesmaintainedataReserveBank;thus,aportionof pricedservicesclearing balancesheldwiththeFederalReserveisshownasrequiredreservesontheasset sideof thebalancesheet.Anotherportionof theclearingbalancesisusedto financeshort-termandlong-termassets.Theremainderof clearingbalancesand depositbalancesarisingfromfloatareassumedtobeinvestedinaportfolioof investments,shownasimputedinvestments. Receivablesarecomposedof feesduetheReserveBanksforprovidingpricedservicesandtheshareof suspense-accountanddifference-accountbalancesrelatedto pricedservices. Materialsandsuppliesaretheinventoryvalueof short-termassets. Prepaidexpensesincludesalaryadvancesandtraveladvancesforpriced-service personnel. Itemsinprocessof collectionaregrossFederalReservecashitemsinprocessof collection(CIPC),statedonabasiscomparabletothatof acommercialbank. Theyreflectadjustmentsforintra-SystemitemsthatwouldotherwisebedoublecountedonaconsolidatedFederalReservebalancesheet;adjustmentsforitems associatedwithnonpriceditems(suchasthosecollectedforgovernmentagencies); andadjustmentsforitemsassociatedwithprovidingfixedavailabilityorcredit beforeitemsarereceivedandprocessed.Amongthecoststoberecoveredunder theMonetaryControlActisthecostof float,ornetCIPCduringtheperiod(the differencebetweengrossCIPCanddeferred-availabilityitems,whichistheportion of grossCIPCthatinvolvesafinancingcost),valuedatthefederalfundsrate. (2)Long-TermAssets Long-termassetsconsistof long-termassetsusedsolelyinpricedservices,the priced-serviceportionof long-termassetssharedwithnonpricedservices,anestimateof theassetsof theBoardof Governorsusedinthedevelopmentof priced services,animputedprepaidFDICasset(seenote6),andadeferredtaxasset relatedtothepricedservicespensionandpostretirementbenefitsobligation(see note3). (3)LiabilitiesandEquity Underthematched-bookcapitalstructureforassets,short-termassetsare financedwithshort-termpayablesandclearingbalances.Long-termassetsare financedwithlong-termliabilitiesandcoreclearingbalances.Asaresult,noshortorlong-termdebtisimputed.Othershort-termliabilitiesincludeclearingbalances maintainedatReserveBanks.Otherlong-termliabilitiesconsistof accrued postemployment,postretirement,andqualifiedandnonqualifiedpensionbenefits costsandobligationsoncapitalleases. EffectiveDecember31,2006,theReserveBanksimplementedtheFinancial AccountingStandardBoard’s(FASB)Statementof FinancialAccountingStandards(SFAS)No.158,Employers’AccountingforDefinedBenefitPensionand

FederalReserveBanks 137 OtherPostretirementPlans(codifiedinFASBAccountingStandardsCodification (ASC)Topic715(ASC715),Compensation–RetirementBenefits),whichrequires anemployertorecordthefundedstatusof itsbenefitplansonitsbalancesheet.In ordertoreflectthefundedstatusof itsbenefitplans,theReserveBanksrecognized thedeferreditemsrelatedtotheseplans,whichincludepriorservicecostsand actuarialgainsorlosses,onthebalancesheet.Thisresultedinanadjustmentto thepensionandbenefitplansrelatedtopricedservicesandtherecognitionof an associateddeferredtaxassetwithanoffsettingadjustment,netof tax,toaccumulatedothercomprehensiveincome(AOCI),whichisincludedinequity.The ReserveBankpricedservicesrecognizedanetpensionassetin2010and2009.The increaseinthefundedstatusresultedinacorrespondingdecreaseinaccumulated othercomprehensivelossof ($210.7)millionin2010. TosatisfytheFDICrequirementsforawell-capitalizedinstitution,equityis imputedat10percentof totalrisk-weightedassets. (4)Revenue Revenuerepresentsfeeschargedtodepositoryinstitutionsforpricedservicesand isrealizedfromeachinstitutionthroughoneof twomethods:directchargestoan institution’saccountorchargesagainstitsaccumulatedearningscredits(see note7). (5)OperatingExpenses Operatingexpensesconsistof thedirect,indirect,andothergeneraladministrative expensesof theReserveBanksforpricedservicesplustheexpensesof theBoard of Governorsrelatedtothedevelopmentof pricedservices.Boardexpenseswere $7.2millionin2010and$7.8millionin2009. EffectiveJanuary1,1987,theReserveBanksimplementedSFASNo.87,Employers’AccountingforPensions(codifiedinASC715).Accordingly,theReserveBank pricedservicesrecognizedqualifiedpension-planoperatingexpensesof $53.8millionin2010and$121.2millionin2009.Operatingexpensesalsoincludethenonqualifiedpensionexpenseof $4.4millionin2010and$2.3millionin2009.The implementationof SFASNo.158(ASC715)doesnotchangethesystematic approachrequiredbygenerallyacceptedaccountingprinciplestorecognizethe expensesassociatedwiththeReserveBanks’benefitplansintheincomestatement. Asaresult,theseexpensesdonotincludeamountsrelatedtochangesinthe fundedstatusof theReserveBanks’benefitplans,whicharereflectedinAOCI (seenote3).

138 97thAnnualReport|2010 Theincomestatementbyservicereflectsrevenue,operatingexpenses,imputed costs,otherincomeandexpenses,andcostrecovery.Certaincorporateoverhead costsnotcloselyrelatedtoanyparticularpricedserviceareallocatedtopricedservicesbasedonanexpense-ratiomethod.Corporateoverheadwasallocatedamong thepricedservicesduring2010and2009asfollows(inmillions): 2010 2009 Check 14.6 22.0 ACH 5.5 5.0 Fedwirefunds 3.9 3.3 Fedwiresecurities 1.9 1.8 Total 25.9 32.1 (6)ImputedCosts Imputedcostsconsistof incometaxes,returnonequity,interestondebt,sales taxes,anFDICassessment,andinterestonfloat.Manyimputedcostsarederived fromtheprivate-sectoradjustmentfactor(PSAF)model.Thecostof debtandthe effectivetaxratearederivedfrombankholdingcompanydata,whichserveasthe proxyforthefinancialdataof arepresentativeprivate-sectorfirm,andareusedto imputedebtandincometaxesinthePSAFmodel.Theafter-taxrateof returnon equityisbasedonthereturnsof theequitymarketasawholeandisappliedtothe equityonthebalancesheettoimputetheprofitthatwouldhavebeenearnedhad theservicesbeenprovidedbyaprivate-sectorfirm.OnOctober9,2008,theFederalReservebeganpayinginterestonrequiredreserveandexcessbalancesheldby depositoryinstitutionsatReserveBanksasauthorizedbytheEmergencyEconomicStabilizationActof 2008.Beginningin2009,giventheuncertainlong-term effectthatpaymentof interestonreservebalanceswouldhaveonthelevelof clearingbalances,theequityusedtodeterminetheimputedprofithasbeen adjustedtoreflecttheactualclearingbalancelevelsmaintained;previously,projectionsof clearingbalancelevelswereused. Interestisimputedonthedebtassumednecessarytofinancepriced-serviceassets; however,nodebtwasimputedin2010or2009. Effectivein2007,theReserveBankpricedservicesimputedaone-timeFDIC assessmentcredit.In2009,thecreditoffset$8.0millionof theimputed$11.4millionassessment,resultinginzeroremainingcredit.TheimputedFDICassessment alsoreflectstheincreasedratesandnewassessmentcalculationmethodology approvedin2009,whichresultedinaprepaidFDICassetof $25.0millionin2010 and$31.2millionin2009onthepricedservicesbalancesheet. Interestonfloatisderivedfromthevalueof floattoberecovered,eitherexplicitly orthroughper-itemfees,duringtheperiod.Floatcostsincludecostsforthe Check,FedwireFunds,ACH,andFedwireSecuritiesservices. Floatcostorincomeisbasedontheactualfloatincurredforeachpricedservice. Otherimputedcostsareallocatedamongpricedservicesaccordingtotheratioof operatingexpenses,lessshippingexpenses,foreachservicetothetotalexpenses, lessthetotalshippingexpenses,forallservices.

FederalReserveBanks 139 Thefollowingshowsthedailyaveragerecoveryof actualfloatbytheReserve Banksfor2010inmillionsof dollars: Totalfloat -1,795.1 Unrecoveredfloat 1.4 Floatsubjecttorecovery -1,796.5 Sourcesofrecoveryoffloat As-ofadjustments 0.6 Directcharges 4.7 Per-itemfees -1,801.8 Unrecoveredfloatincludesfloatgeneratedbyservicestogovernmentagenciesand byothercentralbankservices.As-of adjustmentsanddirectchargesrefertofloat thatiscreatedbytheobservanceof nonstandardholidaysbysomedepository institutions.Suchfloatmayberecoveredfromthedepositoryinstitutionsthrough adjustmentstoinstitutionreserveorclearingbalancesorbybillinginstitutions directly.Floatrecoveredthroughdirectchargesandper-itemfeesisvaluedatthe federalfundsrate;creditfloatrecoveredthroughper-itemfeeshasbeensubtracted fromthecostbasesubjecttorecoveryin2010and2009. (7)OtherIncomeandExpenses Otherincomeandexpensesconsistof investmentandinterestincomeonclearing balancesandthecostof earningscredits.Investmentincomeonclearingbalances for2010and2009representstheaveragecoupon-equivalentyieldonthree-month Treasurybillsplusaconstantspread,basedonthereturnonaportfolioof investments.Theinvestmentreturnisappliedtotherequiredportionof theclearingbalance.Otherincomealsoincludesimputedinterestontheportionof clearingbalancessetasideasrequiredreserves.Expensesforearningscreditsgrantedto depositoryinstitutionsontheirclearingbalancesarebasedonadiscountedaveragecoupon-equivalentyieldonthree-monthTreasurybills. (8)CostRecovery Annualcostrecoveryistheratioof revenue,includingotherincome,tothesumof operatingexpenses,imputedcosts,imputedincometaxes,andtargetedreturnon equity.

141 Other Federal Reserve Operations The Board of Governors and the performanceplans,arelistedbelow.Updateddocumentswillbepostedonthewebsiteastheyare Government Performance and completed. Results Act Mission Overview Themissionof theBoardistofosterthestability, TheGovernmentPerformanceandResultsAct integrity,andefficiencyof thenation’smonetary, (GPRA)of 1993requiresthatfederalagencies,in financial,andpaymentsystemstopromoteoptimal consultationwithCongressandoutsidestakeholders, macroeconomicperformance. prepareastrategicplancoveringamultiyearperiod andsubmitanannualperformanceplanandperfor- Goals and Objectives mancereport.AlthoughtheFederalReserveisnot TheFederalReservehassixprimarystrategicgoals coveredbytheGPRA,theBoardof Governorsvolwithinterrelatedandmutuallyreinforcingelements. untarilycomplieswiththespiritof theact. Toachievethesestrategicgoals,whichcoverfourdifferentfunctionalareas,theBoardhasestablisheda Strategic Plan, Performance Plan, numberof annualperformancegoals,whichare and Performance Report describedinthissection. TheBoard’sstrategicplanarticulatestheBoard’s MonetaryPolicyFunction mission,setsforthmajorgoals,outlinesstrategiesfor achievingthosegoals,anddiscussestheenvironment StrategicGoal andotherfactorsthatcouldaffecttheirachievement. Conductingmonetarypolicythatpromotesthe Italsoaddressesissuesthatcrossagencyjurisdicachievementof theFederalReserve’sstatutoryobjectionallines,identifieskeyquantitativemeasuresof tivesof maximumemploymentandstableprices performance,anddiscussestheevaluationof performance. AnnualPerformanceGoals Informedmonetarypolicy:Stayingabreastof recent Theperformanceplanincludesspecifictargetsfor developmentsinandprospectsfortheU.S.and someof theperformancemeasuresidentifiedinthe globaleconomiesandfinancialmarketssothatmonstrategicplananddescribestheoperationalprocesses etarypolicydecisionsarewellinformed andresourcesneededtomeetthosetargets.Italso discussesvalidationof dataandverificationof Understandingof macroeconomicsandmarkets: results.TheperformancereportdiscussestheBoard’s Enhancingourknowledgeof thestructuraland performanceinrelationtoitsgoals. behavioralrelationshipsinthemacroeconomicand financialmarkets,andimprovingthequalityof the Thestrategicplan,performanceplan,andperfor- datausedtogaugeeconomicperformance,through mancereportareavailableontheBoard’swebsite,at developmentalresearchactivities www.federalreserve.gov/boarddocs/rptcongress.The Board’smissionstatementandasummaryof the Effectiveimplementationof monetarypolicy:Imple- FederalReserve’sstrategicandperformancegoals,as mentingmonetarypolicyeffectivelyinhighlyunusual setforthinthemostrecentlyreleasedstrategicand economic,financial,andmonetarycircumstances

142 97thAnnualReport|2010 Contributiontointernationalefforts:Contributingto rationsbetweentheBoard,theFederalReserve thedevelopmentof U.S.internationalpoliciesand Banks,andotheragenciesandorganizations procedures,incooperationwiththeU.S.Department of theTreasuryandotheragencies,withrespectto PaymentSystemPolicyand globalfinancialmarkets,internationalorganizations, OversightFunction andparticipationininternationalgroups StrategicGoals Expandedpublicawarenessof monetarypolicy:Pro- Policy:Fosteringtheintegrity,efficiency,andaccessimotingunderstandingof FederalReservepolicy bilityof U.S.paymentandsettlementsystems amongothergovernmentofficialsandthegeneral public Oversight:Providingoversightof ReserveBanks SupervisoryandRegulatoryFunction AnnualPerformanceGoals EffectiveSystemstrategies,projects,andoperations: StrategicGoals Producinghigh-qualityassessmentsandoversightof Safetyandsoundness:Promotingasafe,sound,com- FederalReserveSystemstrategies,projects,and petitive,andaccessiblebankingsystemandfinancial operations,includingadoptionof technologytomeet stability thebusinessandoperationalneedsof theFederal Reserve Consumerprotection:Developingregulations,policies,andprogramsdesignedtoinformandprotect Efficient,accessiblepaymentsystems:Developing consumers,toenforcefederalconsumerprotection sound,effectivepoliciesandregulationsthatfoster laws,tostrengthenmarketcompetition,andtoprotheintegrity,efficiency,andaccessibilityof payment, moteaccesstobankingservicesinhistoricallyunderclearing,andsettlementsystemsandoverseeingU.S. servedmarkets dollarpayment,clearing,andsecuritiessettlement systemsbyassessingtheirrisksandrisk-management AnnualPerformanceGoals approachesagainstrelevantpolicyobjectivesand Financialstabilityandriskcontainment:Promoting standards overallfinancialstabilitybyidentifyingemerging financialproblemssothatsignificantcrisescanbe Analysisof systemdynamicsandrisks:Conducting averted researchandanalysisthatcontributestopolicydevelopmentandincreasestheBoard’sandothers’under- Accessibilityof thebankingsystem:Providingasafe, standingof paymentsystemdynamicsandrisk sound,competitive,andaccessiblebankingsystem throughcomprehensiveandeffectivesupervisionof InternalBoardSupport U.S.banks,bankandfinancialholdingcompanies, foreignbankingorganizations,andrelatedentities StrategicGoal Fosteringtheintegrity,efficiency,andeffectivenessof Financialsystemefficiency:Enhancingefficiencyand Boardprogramsandoperations effectivenessbyaddressingthesupervisionfunction’s procedures,technology,andresourceallocation AnnualPerformanceGoals High-caliberstaff:Developingappropriatepolicies, Effectiveoversightof financialinstitutions:Promoting oversightmechanisms,andmeasurementcriteriato thecomplianceof domesticandforeignbanking ensurethattherecruiting,training,andretentionof organizations(thoseunderFederalReservesupervistaff meetBoardneeds sion)withrelevantlaws,rules,regulations,policies, andguidelinesthroughacomprehensiveandeffective Fair,equaltreatmentof employees:Establishing, supervisionprogram encouraging,andenforcingaclimateof fairand Consumerprotection:Beingaleaderin,andafacilita- equitabletreatmentforallemployeesregardlessof torinhelpingshapethenationaldialogueon,con- race,creed,color,nationalorigin,age,orsex sumerprotectioninthefinancialservicesarena Effectiveplanningandmanagement:Providingstrate- Relationshipbuilding:Promoting,developing,and gicplanningandfinancialmanagementsupport strengtheningeffectivecommunicationsandcollabo- neededforsoundbusinessdecisions

OtherFederalReserveOperations 143 Securityof information:Providingcost-effectiveand Safe,secureworkenvironment:Providingsafe,modsecureinformationresourcemanagementservicesto ern,securefacilitiesandnecessarysupportforactivi- Boarddivisions,supportingdivisionaldistributed- tiesconducivetoefficientandeffectiveBoard processingrequirements,andprovidinganalysison operations informationtechnologyissuestotheBoard,Reserve Banks,otherfinancialregulatoryinstitutions,and centralbanks

144 97thAnnualReport|2010 Federal Legislative Developments theFSOC);theChairmanof theFederalReserve Board;theheadsof theConsumerFinancialProtectionBureau,Officeof theComptrollerof theCur- TheDodd-FrankWallStreetReformandConsumer rency(OCC),SecuritiesandExchangeCommission ProtectionAct(theDodd-FrankAct)(Pub.L. (SEC),FederalDepositInsuranceCorporation No.111–203),enactedonJuly21,isoneof themost (FDIC),CommodityFuturesTradingCommission significantpiecesof legislationaffectingtheU.S. (CFTC),FederalHousingFinanceAgency(FHFA), financialregulatoryframeworkinmanyyears.The andNationalCreditUnionAdministration(NCUA); actincludesmanyof thereformschampionedbythe andanindependentmemberwithinsuranceexpertise FederalReservetohelpstrengthenthefinancial appointedbythePresidentandconfirmedbythe systemandreducethelikelihoodof futurefinancial Senate. crises.Forexample,thelegislationcreatesaninteragencycounciltomonitorandcoordinateresponses TheactinstructstheFSOCtodesignateassystemitoemergingthreatstothefinancialsystem;requires callyimportantlarge,interconnectednonbankfinanthatlargebankholdingcompaniesandsystemically cialcompaniesandfinancialmarketutilities designatedfinancialfirmsbesubjecttoenhanced (FMUs)thatcouldposeathreattoU.S.financial prudentialstandardstoreducetheriskstheymay stability.Further,theactidentifiestheBoardasthe presenttothefinancialsystem;providesfortheconconsolidatedsupervisorof anynonbankfinancial solidatedsupervisionof allsystemicallyimportant firmdesignatedbytheFSOCassystemicallyimporfinancialinstitutions;givesthegovernmentanimportant(referredtointheactas“nonbankfinancial tantadditionaltooltosafelywinddownfinancial companiessupervisedbytheBoard”). firmswhosefailurecouldposeathreattoU.S.financialstability;andprovidesforthestrengthenedsuper- TheactrequirestheFSOCtoannuallyreporttoand visionof systemicallyimportantpayment,settlement, testifybeforeCongressonsignificantfinancialmarandclearingutilities.Inaddition,theactenhances ketandregulatorydevelopments,potentialemerging thetransparencyof theFederalReservewhileprethreatstoU.S.financialstability,andrecommendaservingtheFederalReserve’sindependence,whichis tionsforpromotingmarketdisciplineandmaintaincrucialtotheeffectiveimplementationof monetary inginvestorconfidence.Withthesubmissionof the policy. annualreporttoCongress,eachvotingmemberof theFSOCmusteitherstatethatheorshebelievesthe TheSmallBusinessJobsActof 2010(theJobs FSOC,thegovernment,andtheprivatesectorare Act)(Pub.L.No.111–240),enactedonSeptem- takingallreasonablestepstoensurefinancialstabilber27,establisheda$30-billionSmallBusinessLend- ityandmitigatesystemicrisk,oridentifywhat ingFund(SBLF),whichisdesignedtopromotesmall actionsheorshebelievesneedtobetaken. businesslendingthroughTreasuryinvestmentincapitalinstrumentsissuedbyeligiblebanking TheactalsoestablishesanewOfficeof Financial organizations. Research(OFR)withintheTreasuryDepartmentto collect,standardize,andanalyzedatafortheFSOC andmemberagenciesinconnectionwiththeFSOC’s Followingisasummaryof thekeyprovisionsof the duties.TheOFRwillbeheadedbyadirector Dodd-FrankActastheyrelatetotheFederal appointedbythePresidentwiththeadviceandcon- Reserve,aswellasamoredetailedoverviewof the sentof theSenate. SBLF. SystemicDesignationsandEnhanced The Dodd-Frank Act PrudentialStandardsforFinancialFirms FinancialStabilityOversightCouncil TheactrequirestheBoardtoestablishheightened prudentialstandardsfornonbankfinancialcompa- TheactestablishesanewFinancialStabilityOverniessupervisedbytheBoardandforbankholding sightCouncil(FSOC)chargedwithanumberof companies(BHCs)withassetsof $50billionor importantduties,includingmonitoringandidentifymore.1Theseheightenedstandardsmustbemore ingemergingriskstofinancialstabilityacrossthe stringentthanthestandardsthatapplytoothernonentirefinancialsystem,identifyingpotentialregulatorygaps,andcoordinatingtheagencies’responses 1 ForeignbankingorganizationsthataresubjecttotheBank topotentialsystemicrisks.TheFSOCiscomposedof HoldingCompanyAct(BHCAct)andmeettheassetthreshold theTreasurySecretary(whoisalsochairpersonof arealsosubjecttotheBoard’sheightenedprudentialstandards.

OtherFederalReserveOperations 145 bankfinancialcompaniesandBHCsthatdonot rowingandlendingtransactionswithsuchaffiliate. posesimilarriskstothefinancialsystem.Inparticu- Inaddition,theacteliminatescertainexemptions lar,theseheightenedstandardsmustincluderisk- fromsections23Aand23Bforsubsidiariesof BHCs basedcapitalandleveragerequirements,liquidity andrequiresthatanypurchaseof assetsbyabank requirements,overallrisk-managementrequirements, fromaninsidermustbeonmarketterms. concentrationlimits,and“livingwill”andcredit exposurereportingrequirements.Inadditiontothe TheactalsorequirestheBoardtoincorporatea mandatoryheightenedstandards,theBoardmay financialstabilityfactorintocertainregulatorydeterestablishstandardsfordesignatednonbankfinancial minations.Specifically,forcertaintransactionsgovcompaniesandBHCswithassetsof $50billionor ernedbytheBankHoldingCompanyActandBank morerelatingtocontingentcapital,enhancedpublic MergerAct,sections163and604requiretheBoard disclosure,short-termdebtlimits,andsuchother totakeintoaccountriskstothestabilityof theU.S. prudentialstandardsasdeemedappropriate. bankingorfinancialsystem.Moreover,section173 addsfinancialstabilitytothelistof factorsthatthe TheactalsorequirestheBoardtoconductandpub- Boardmayconsiderwhenactingonanapplication lishsummaryresultsof annualstresstestsof sys- byaforeignbanktoopenanofficeintheUnited temicnonbankfinancialfirmsandBHCswith States.Specifically,theBoardmayconsiderwhether $50billionormoreinassets.Suchfirmsalsoare theforeignbank’shomecountryhasadoptedoris requiredtoconducttheirownstresstestsonasemi- makingdemonstrableprogresstowardadoptinga annualbasis.Theactrequiresfinancialfirmswith financialregulatorysystemthatmitigatesrisktothe morethan$10billioninassetstoconductannual stabilityof theU.S.financialsystem.Section604of stresstestsinaccordancewithregulationsestablished theactauthorizestheBoardtoincorporatefinancial bytherespectiveprimaryfederalfinancialregulatory stabilityintoitssupervisionof BHCs. agency. Section606(a)of theactprovidesthataBHCmust ChangestoBanking bewellcapitalizedandwellmanagedattheholding RegulationandSupervision companylevelinordertobecomeandremaina Theactmakesavarietyof changestothelaws financialholdingcompany(FHC)eligibletoengage designedtoprotectthesafetyandsoundnessof inexpandedactivities.Inaddition,section163(b) bankingorganizationsandthatareadministeredby providesthatinordertouseauthorityundersectheFederalReserve.Forexample,section171of the tion4(k)of theFederalReserveActtoacquirea actestablishesfloorsforregulatorycapitalrequire- nonbankcompanywith$10billionormoreinassets, mentsappliedtodomesticBHCs,savingsandloan anonbankfinancialcompanythatissupervisedby holdingcompanies(SLHCs),anddesignatednon- theBoardoraBHCwith$50billionormoreinconbankfinancialcompaniessupervisedbytheBoard. solidatedassetsmustobtaintheBoard’sprior Specifically,section171requirestheminimumlever- approval.Further,section164appliesrestrictionson ageandrisk-basedcapitalrequirementsforsuch managementinterlockstononbankfinancialcompainstitutionstobenolowerthantherequirements niessupervisedbytheBoard. appliedtoinsureddepositoryinstitutionsatanytime inthefutureandnotquantitativelylowerthanthe Section956of theactrequirestheBoardtoissuea requirementsappliedtoinsureddepositoryinstitu- jointrulemakingorguidancewithotherfederalregutionsonJuly21,2010.TheBoard’sBaselII latorstoprohibitincentive-basedcompensation Advancedrules,proposedonDecember15,2010, arrangementsatinstitutionswith$1billionormore incorporatethefloorsprescribedbytheact.Inaddi- inassets(coveredfinancialinstitutions)thatencourtion,theactsetsguidelinesforwhethercertain ageinappropriaterisksbyprovidingexcessivecominstrumentsmaybecountedasregulatorycapital. pensation,orpotentiallyleadingtomaterialfinancial loss.Inaddition,theregulationsorguidancemust Sections608,609,and615of theactenhancethe requirecoveredfinancialinstitutionstodiscloseto limitationsontransactionsamongaBHC,asubsid- theirappropriatefederalregulatorsufficientinformaiarybank,anditsaffiliates.Specifically,theactclari- tionconcerningthestructureof incentive-basedcomfiesthata“coveredtransaction”forthepurposesof pensationarrangementstomonitorcompliancewith sections23Aand23Bof theFederalReserveAct theserestrictions.Thesenewregulationsorguidelines includesanycreditexposureof abanktoanaffiliate willsupplementtheguidancetheBoardandother arisingfromderivativetransactionsorsecuritiesbor- federalbankingregulatorsissuedonJune21,

146 97thAnnualReport|2010 2010,toensurethatincentivecompensationarrange- Finally,effectiveJuly21,2011,section627of theact mentsatfinancialorganizationstakeintoaccount repealstheprohibitiononpaymentof intereston riskandareconsistentwithsafeandsoundpractices. demanddepositscurrentlyimplementedbythe Board’sRegulationQ. Section165(d)requirestheBoardandtheFDICto jointlyissuearulerequiringthatnonbankfinancial SavingsandLoanHoldingCompanies companiessupervisedbytheBoardandBHCswith Theacttransfersallsupervisoryandregulatory $50billionormoreintotalconsolidatedassetspre- authorityoverSLHCstotheBoardfromtheOffice pareandupdateplansfororderlyresolutionunder of ThriftSupervision(OTS).EffectiveonJuly21, theBankruptcyCodeandreport(1)creditexposures 2011,theactgrantstheBoardtheauthoritytoexamtoothersignificantfinancialfirmsand(2)credit ine,obtainreportsfrom,andestablishconsolidated exposuresof significantfinancialfirmstothereport- capitalstandardsforSLHCs.TheFDICandOCC ingcompany. willexercisesimilarauthorityoverthriftinstitutions. OnJanuary25,2011,theBoard,inconjunctionwith Further,theactgenerallyeliminatesthelimitations theOTS,OCC,andFDIC,issuedareporttoConundertheGramm-Leach-BlileyActthatrestricted gressontheagencies’planstoimplementthetransfer theBoard’sabilitytoexamine,obtainreportsfrom, of OTSauthorities. ortakeenforcementactionagainstafunctionally regulatedsubsidiaryof aBHC,suchasabroker- Theactcontainsseveralprovisionsdesignedtopredealerorinsurancecompany.TheBoard,however, servethetraditionalseparationof bankingandcommustcontinuetorelyonexaminationsconductedby mercialactivitiesandsupporttheBoard’ssupervithesubsidiary’sprimarybanksupervisorsorfunc- sionandregulationof SLHCs.First,theactprovides tionalregulatorstothefullestextentpossibleand thatanSLHCwillbeallowedtoconductexpanded notifysuchsupervisorsbeforeconductinganexami- activitiespermissibletoanFHC,suchasinsurance nationof thesubsidiary. underwriting,onlyif suchSLHCsatisfiesthesame capital,managerial,andCommunityReinvestment Separately,section605of theactrequirestheBoard ActcriteriathatgovernwhetheraBHCqualifiesas toexaminetheactivitiesof nonbanksubsidiariesof anFHC.Inaddition,theactinstructstheBoardto BHCs—otherthanfunctionallyregulatedsubsidiar- issueregulationsestablishingcriteriafordetermining ies—thatarepermissiblefortheorganization’ssub- whenagrandfatheredunitarySLHCthatengagesin sidiarybanksinthesamemanner,subjecttothe commercialactivitiesmustformanintermediate samestandards,andwiththesamefrequencyasif holdingcompany(IHC)throughwhichtoconduct suchactivitieswereconductedintheorganization’s itsfinancialactivities.SuchIHCswouldbesubjectto leadsubsidiarydepositoryinstitution.Section612of BoardsupervisionasanSLHC,andtheBoardmay theactprohibitsadepositoryinstitutionthatissub- promulgateregulationstorestrictorlimittransacjecttoaformalenforcementorderormemorandum tionsbetweentheIHCandanyaffiliate. of understandingwithrespecttoasignificantsupervisorymatterfromconvertingitscharterunlessthe The“VolckerRule”:Prohibitionsagainst currentandproposedsupervisorsestablishaplan ProprietaryTradingandOtherActivities thataddressestheproblemsatthedepositoryinstitu- Section619of theactgenerallyprohibitsbanking tionandthatwillbeimplementedandmonitoredby entitiesfromengaginginproprietarytradingorfrom thenewsupervisor. investingin,sponsoring,orhavingcertainrelationshipswithahedgefundorprivateequityfund.Pro- Section939Aof theactrequiresallfederalagencies prietarytradingdoesnotincludetransactions toreviewtheirregulations,includingcapitalrules, enteredintoonbehalf of customersorinconnection andremoveanyreferencetocreditratings.Each withunderwritingormarket-making-relatedactiviagencymustsubstituteanalternativestandardof ties,risk-mitigatinghedgingactivities,orinvestments credit-worthinessthatitdeemsappropriate.On insmallbusinessinvestmentcompaniesorothersimi- August10,2010,thefederalbankingagenciesissued larqualifyinginvestments.Theactalsoprovidesthat anadvancenoticeof proposedrulemakingregarding nonbankfinancialcompaniessupervisedbythe alternativestotheuseof creditratingsinrisk-based Boardthatengageinsuchactivitiesorhavesuch capitalrulesforbankingorganizations. investmentswillbesubjecttoadditionalcapital

OtherFederalReserveOperations 147 requirements,quantitativelimits,orotherrestric- actgenerallyrequires(1)allstandardizedderivatives tions.Theseprohibitionsandotherprovisionsof sec- tobecentrallyclearedandtradedonanexchangeor tion619arecommonlyknownasthe“VolckerRule.” registeredexecutionfacility;(2)allderivativestobe reportedtoregistereddatarepositories;(3)allderiva- Asrequiredbytheact,onJanuary18,2011,the tivesdealers(“swapdealers”)andmajormarketpar- FSOCissuedastudyandmaderecommendationson ticipants(“majorswapparticipants”)toregisterwith theimplementationof theVolckerRule.TheBoard, theSECand/ortheCFTC;and(4)theestablishment OCC,FDIC,CFTC,andSECareresponsiblefor of new,regulatedorganizationstosupportthe developingandadoptingregulationstoimplement derivativesmarket,includingexchanges,clearing theprohibitionsandrestrictionsof theVolckerRule, organizations,anddatarepositories.Ingeneral,the andmustadoptimplementingrulesnotlaterthan actmandatesthattheSECandCFTCconsultwith October18,2011. theBoardbeforeissuingrulestoimplementthenew regulatoryregimeapplicabletoderivatives. TheBoardaloneisresponsibleforadoptingrulesto implementtheconformanceprovisionsof theVol- Inaddition,theBoardandtheotherfederalbanking ckerRule,whichprovideabankingentityoranon- agenciesarerequiredtoadoptjointrulesthatestabbankfinancialcompanysupervisedbytheBoarda lishcapitalandmarginrequirementsforbanks, periodof timeaftertheeffectivedateof theVolcker BHCs,SLHCs,foreignbanks,foreignbankbranches, Ruletobringitsactivitiesintocompliancewiththe andEdgeActandagreementcorporationsthatare VolckerRuleandtheagencies’implementingregula- swapdealersormajorswapparticipants. tions.OnFebruary9,2011,theBoardissuedafinal ruleimplementingtheconformanceperiod. Derivatives“Push-Out” Section716of theact,commonlyreferredtoasthe FinancialSectorConcentrationLimit derivatives“push-out”provision,prohibitsbanks Section622of theactestablishesafinancialsector andotherinstitutionsreceivingcertainkindsof fedconcentrationlimitthatgenerallyprohibitsafinan- eralassistancefromengaginginderivativesactivities, cialcompanyfrommergingorconsolidatingwith,or exceptforderivativesusedforhedgingorotherriskacquiring,anothercompanyif theresultingcompa- mitigatingpurposesandderivativesinvolvinginterest ny’sconsolidatedliabilitieswouldexceed10percent orotherrates;derivativesthatreferenceassetsthat of theaggregateconsolidatedliabilitiesof allfinan- areeligibleforbankinvestment(includingforeign cialcompanies.Asrequiredbytheact,onJanu- exchange,gold,andsilver);andclearedcreditdefault ary18,2011,theFSOCcompletedastudyof the swaps.Theseinstitutionswillberequiredtopushout concentrationlimit’seffectonfinancialstabilityand allotherderivativesactivities,includingderivatives otherfactorsandmaderecommendationsregarding onagriculturalcommodities,energy,andothermetmodificationstotheconcentrationlimitthatthe als;equityderivatives;andunclearedcreditdefault FSOCbelieveswouldmoreeffectivelyimplementsec- swapstoaseparatelycapitalizedaffiliate.TheBoard tion622. andtheotherfederalbankingagenciesmustestablish atransitionperiodof upto24monthsaftertheeffec- TheBoardisrequiredtoadoptregulationstoimple- tivedateof thederivativespush-outprovisionfor mentthefinancialsectorconcentrationlimitthat institutionstobringtheiractivitiesintocompliance reflect,andareinaccordancewith,theFSOC’srec- withthederivativespush-outrestrictions. ommendations.TheBoardmustprescribetheserules nolaterthanOctober18,2011. Credit-RiskRetentionStudyandRegulations Section941(b)of theactimposescertaincredit-risk RegulationofDerivatives retentionobligationsonsecuritizersororiginatorsof MarketsandProducts assetssecuritizedthroughtheissuanceof asset- Theactmakesanumberof significantchangestothe backedsecurities.Section941alsorequiresthe regulationof derivatives,whichitreferstoas Board,inconjunctionwithotherfederalagencies,to “swaps”and“security-basedswaps,”andpartici- jointlyprescriberegulationsimplementingthese pantsinthederivativesmarkets.Theactdividesthe credit-riskretentionrequirements.OnOctober19, regulationof thederivativesmarketsbetweenthe 2010,theBoardissuedareportontheeffectof the SEC,whichwillregulatesecurity-basedswaps,and newrisk-retentionrequirementstobedevelopedand theCFTC,whichwillregulateallotherswaps.The implementedbythefederalagencies,andof State-

148 97thAnnualReport|2010 mentsof FinancialAccountingStandardsNos.166 that,inunusualandexigentcircumstancesandwhen and167.2Thereporthighlightsthesignificantdiffer- adesignatedFMUdemonstratesthatitisunableto encesinmarketpracticesandperformanceacross secureadequatecreditaccommodationsfromother securitizationsbackedbydifferenttypesof assets. bankinginstitutions,theBoard,afterconsultation withtheSecretaryof theTreasury,mayauthorizea Payment,Settlement,andClearing ReserveBanktoprovidediscountandborrowing ActivitiesandUtilities privilegestothedesignatedFMU. Sections112(a)(2)(J)and804(a)of theactgivethe FSOCtheauthoritytoidentifyanddesignateassys- DebitInterchange temicallyimportantanFMUif theFSOCdeter- Section1075of theactrestrictstheinterchangefees minesthatfailureof oradisruptiontotheFMU thatissuersmayreceiveforelectronicdebitcard couldcreateorincreasetheriskof significantliquid- transactions.Specifically,theinterchangefeean ityorcreditproblemsspreadingamongfinancial issuerreceivesforaparticulartransactionmustbe institutionsormarketsandtherebythreatenthesta- reasonableandproportionaltothecostincurredby bilityof theU.S.financialsystem.Inaddition,the theissuerwithrespecttothetransaction.Theact FSOCmaydesignatepayment,clearing,orsettle- requirestheBoardtosetstandardsfordetermining mentactivitiesitdeterminesaresystemicallyimpor- whetheraninterchangefeeisreasonableandproportant.OnNovember23,2010,theFSOCissuedan tionaltotheissuer’scostandpermitstheBoardto advancednoticeof proposedrulemakingonthecri- adjusttheinterchangefeetoaccountforanissuer’s teriaandanalyticalframeworkthatitshouldapplyin fraud-preventioncosts.ItalsoauthorizestheBoard designatingFMUsundertheact. toprescriberegulationsinordertopreventcircumventionorevasionof theinterchangefeerestrictions. Inaddition,section805(a)of theactauthorizesthe Theinterchangefeerestrictionsdonotapplytoissu- Boardtoprescriberisk-managementstandardsgov- ersthat,togetherwithaffiliates,havelessthan erningtheoperationsof designatedFMUs(except $10billioninassets,todebitcardsissuedpursuantto fordesignatedFMUsthatareregisteredwiththe government-administeredpaymentprograms,orto CFTCasderivativeclearingorganizationsorregis- certaingeneral-useprepaidcards.Inaddition,theact teredwiththeSECasclearingagencies,whichare requirestheBoardtoprescriberulesprohibitingnetsubjecttotheapplicablerisk-managementstandards workexclusivityarrangementsandroutingrestriccontainedinregulationsprescribedbytheCFTCor tionsinconnectionwithelectronicdebitcardtrans- SEC,respectively).Undersection807,theBoardmay actions.OnDecember16,2010,theBoardrequested examineandtakeenforcementactionagainstdesig- commentonproposedrulesimplementingsecnatedFMUsforwhichitisthesupervisoryagency. tion1075of theact. Inaddition,theBoardmayconsultonandparticipateinanyexaminationof adesignatedFMUledby ResolutionFramework anothersupervisoryagencyandrecommendthe Theactcreatesaspecialresolutionprocessthat supervisoryagencytakeenforcementactionagainst allowsthegovernmenttowinddownafailingsysthedesignatedFMU.Section809of theactalso temicallyimportantfinancialinstitutionwhosedisorauthorizestheBoardtorequireadesignatedFMUto derlycollapsewouldposesubstantialriskstothe submitreportsanddatainordertoassessthesafety financialsystemandthebroadereconomy.Specifiandsoundnessof theutilityandthesystemicrisk cally,titleIIof theactpermitstheFDICtobe thattheFMU’soperationsposetothefinancial appointedasreceiverforafailingnonbankfinancial system. company.Thisoptionalresolutionframeworkistriggeredonlybyarecommendationof two-thirdsof the Section806(a)of theactalsomakesdesignated FederalReserveBoardandtheFDIC’sboardof FMUseligibleforFederalReserveservices.Specifi- directorsandadeterminationbytheSecretaryof the cally,theBoardmayauthorizeaReserveBankto Treasury,inconsultationwiththePresident,that establishandmaintainanaccountforandprovide (1)thecompanyisindefaultorindangerof default, depositandpaymentservicestothedesignated (2)thefailureof thecompanyanditsresolution FMU.Inaddition,section806(b)of theactstates underotherwiseapplicablefederalorstatelawwould haveseriousadverseeffectsonfinancialstabilityin 2 SeeBoardofGovernorsoftheFederalReserveSystem(2010), theUnitedStates,and(3)resolutionunderthenew “ReporttotheCongressonRiskRetention”(October),availregimewouldavoidormitigatetheseadverseeffects. ableathttp://federalreserve.gov/boarddocs/rptcongress/ securitization/riskretention.pdf. TheSECwouldsubstitutefortheFDICintherec-

OtherFederalReserveOperations 149 ommendationprocessif thefirmoritslargestsubsid- tiesestablishedundersection13(3).Inthecaseof iaryisabroker-dealer. broad-basedfacilities,detailsprovidedbytheBoard includedthenameof theborrower,theamountbor- TheactvestsintheFDIC,asreceiverforthefailed rowed,thedatethecreditwasextended,theinterest company,powerssimilartothoseithaswhenacting ratecharged,informationaboutcollateral,andother asareceiverforafailedbank.Specifically,theFDIC relevantcreditterms.Similarinformationwaspromaystabilizethecompanywithloansorguarantees, videdforthedrawsof foreigncentralbanksontheir sellassetsoroperations,andtransferassetsand dollarliquidityswaplineswiththeFederalReserve. liabilitiestoabridgecompany.Theactrequiresthe Foragencymortgage-backedsecuritiestransactions, FDICtoensurethatcreditorsandshareholdersof detailsincludedthenameof thecounterparty,the thefailedcompanybearlossesandthatdirectorsand securitypurchasedorsold,andthedate,amount, managementresponsibleforthecompany’sfailure andpriceof thetransaction.Goingforward,theact areremoved.TheactalsoallowstheFDICtoobtain requirestheBoardtopubliclydisclosecertaininfortemporaryfundingforaresolutionbyborrowing mationregardingparticipantsinallfuturecredit fromtheTreasury,subjecttocertainlimits.Impor- facilitiesestablishedundersection13(3),andborrowtantly,anyborrowingsfromtheTreasurymustbe ersorcounterpartiesindiscountwindowandopen repaidthroughproceedsfromthesaleof thefailed markettransactions.Allsuchdisclosureisrequired company’soperations.If suchproceedsareinsuffi- withinoneyearaftertheterminationof anyseccienttofullyrepayallborrowingsfromtheTreasury, tion13(3)facilityortwoyearsafteranydiscount assessmentswouldbemadeoncertaincreditorsof windoworopenmarkettransactionoccurs. thefailedfirmand,if necessary,onfinancialcompaniesthathave$50billionormoreintotalassets. Additionally,theactdirectstheGovernment AccountabilityOffice(GAO)toconductauditsof FederalReserveLending, certainFederalReservefunctions.Specifically,theact Transparency,andGovernance requirestheGAOtoconductaone-timeauditof any liquidityprogramorfacilityestablishedbetween Lending December1,2007,andJuly21,2010.GAOis TheacteliminatestheBoard’sauthoritytoauthorize instructedtoanalyzetheoperationalintegrity, aFederalReserveBanktoextendcredittoaspecific accounting,financialreporting,andinternalcontrols individual,partnership,orcorporationundersec- of eachfacility;theeffectivenessof securityandcoltion13(3)of theFederalReserveAct.Importantly, lateralpoliciesinmitigatingrisktotheFederal however,theactprovidesthattheBoardmayautho- Reserveandtaxpayers;whetheroneormorespecific rizeaFederalReserveBanktoextendcreditunder participantswerefavoredoverothereligibleinstitusection13(3)toanindividual,partnership,orcorpo- tions;theuseof contractorsforthefacilityorprorationaspartof aprogramorfacilitywithbroad- gram;andtheexistenceof anyconflictsof interest. basedeligibility,withtheapprovalof theSecretaryof TheactalsoallowstheGAOtoconductsimilar theTreasury.TheBoardmust,inconsultationwith operationalauditsof futurecreditfacilitiesanddistheSecretaryof theTreasury,promulgaterulesand countwindowandopenmarkettransactions. proceduresforsection13(3)lending.Suchpolicies andproceduresmustensurethatcollateralisof suffi- TheactfurtherrequirestheGAOtoconductan cientqualitytoprotecttaxpayersfromlosses,creditis auditof ReserveBankgovernancetoexamine extendedtoprovideliquidityandnottoassistafail- whethertheselectionprocessforClassBandClassC ingfinancialcompany,andtheFederalReserveBank directorsfulfillstheFederalReserveAct’spublic assignsalendablevaluetoallcollateralforthepur- interestrequirementandwhethertheselectionof posesof determiningthattheloanissecured. ClassAdirectorsbymemberbankscreatesactualor potentialconflictsof interest.ClassAdirectorsof Transparency eachReserveBankrepresentthestockholdingmem- Asrequiredbytheact,onDecember1,2010,the berbanksof theFederalReserveDistrict.ClassB Boardpubliclyidentifiedeachentity,includingfor- andClassCdirectorsrepresentthepublicandare eigncentralbanks,thathadparticipatedinor chosenbymemberbanksandbytheBoardof GovreceivedassistancebetweenDecember1,2007,and ernors,respectively,withdue,butnotexclusive,con- July21,2010,throughtheTermAuctionFacility,the siderationtotheinterestsof agriculture,commerce, AgencyMortgage-BackedSecuritiesPurchasePro- industry,services,labor,andconsumers.ClassBand gram,foreigncurrencyliquidityswaplines,orfacili- ClassCdirectorsmaynotbeofficers,directors,or

150 97thAnnualReport|2010 employeesof anybank.Inaddition,ClassCdirec- moreintotalassets),theCFPBwillhaveexclusive torsmaynotbestockholdersof anybank.The authoritytoconductexaminationsandrequire BoardannuallydesignatesoneClassCdirectorat reportsandprimaryauthoritytotakeenforcement eachDistrictBankaschairof theboardof directors actionswithrespecttothefederalconsumerprotecandanotherClassCdirectorasdeputychair. tionlaws.Employeesof theFederalReserveand otherfederalagencieswhoarenecessarytothe Governance administrationof federalconsumerprotectionlaws Theactmodifiestheproceduresforappointing willbetransferredfromtheircurrentagencytothe ReserveBankpresidentsbyexcludingClassAdirec- CFPB.TheSecretaryof theTreasury,inconsultation torsfromtheappointmentprocess.Accordingly, withtheaffectedregulatoryagencies,hasdesignated ReserveBankpresidentswillbechosenonlybythe July21,2011,asthetransferdatetotheCFPB. ClassBandClassCdirectors.Theactalsoprevents theBoardfromdelegatingtotheReserveBankscer- AdditionalEnhancementsto tainBoardresponsibilities,includingtheestablish- ConsumerFinancialProtection mentof policiesrelatingtosupervisionand Theactprohibitscertainmortgagelendingpractices regulation. andplacesnewrestrictionsonpredatorylending. Manyof thesestatutoryreformsaresimilartorecent Pursuanttosection342of theact,theBoard,and regulatoryinitiativesbytheBoard.Forexample, eachReserveBank,hasestablishedanOfficeof similartofinalrulesissuedbytheBoardin MinorityandWomenInclusionresponsibleformat- August2010,section1403of theactprohibitsmorttersrelatingtodiversityinmanagement,employgageoriginatorsfromreceivingcompensationbased ment,andbusinessactivities. onloantermsotherthanprincipalamountandfrom steeringconsumerstounaffordableorpredatory TheactalsoestablishesanewViceChairmanfor mortgages.Othermortgageprovisionsintheactbear SupervisionattheBoard,tobeappointedbythe resemblancetotheBoard’s2008rulesforhigher- Presidentwiththeadviceandconsentof theSenate. pricedloansundertheHomeOwnershipandEquity TheViceChairmanforSupervisionwillberespon- ProtectionActandbroadensomerulestoapplytoall siblefordevelopingpolicyrecommendationsforthe mortgages.Forinstance,theactprohibitscreditors Boardregardingthesupervisionandregulationof frommakingresidentialmortgageloansunlessthe financialfirms,andforoverseeingthesupervision consumerhasareasonableabilitytorepaytheloan. andregulationof suchfirms.TheViceChairmanfor Supervisionmustalsotestifysemiannuallybefore Further,section1461of theactrequiresescrow Congress. accountsfortaxesandinsuranceonhigher-priced ConsumerFinancialProtection first-lienmortgages.Thissectionalsoamendsthe TruthinLendingActtoprovideaseparate,higher EstablishmentoftheConsumer thresholdformortgageloansthatexceedthemaxi- FinancialProtectionBureau mumprincipalbalanceeligibleforsaletoFreddie TitleXof theactcreateswithintheFederalReserve Macindeterminingcoverageof theescrowrequireanindependentConsumerFinancialProtection ment.TheBoardrequestedcommentonAugust16, Bureau(CFPB)toensurethatconsumershaveaccess 2010,onaproposedruletoincreasetheannualpertofinancialmarketsandthatsuchmarketsarefair, centageratethresholdusedtodeterminewhethera transparent,andcompetitive.TheCFPBwillbeled mortgagelenderisrequiredtoestablishanescrow byadirectorselectedbythePresidentandconfirmed accountforpropertytaxesandinsuranceforfirst-lien bytheSenate.TheCFPBwillassumerulemaking jumbomortgageloans. authorityformostfederalconsumerprotectionstatutes.Italsowillhaveexclusiveauthoritytoconduct Inaddition,theactinstructstheBoardtoprescribe examinations,requirereports,andtakeenforcement interimfinalrulestoensuretheindependenceof real actionsregardingthefederalconsumerprotection estateappraisers,withfinalrulestobeissuedjointly lawswithrespecttonondepositoryinstitutionsthat bythefederalbankingagencies,theCFPB,and areengagedincertainmarkets,suchasthemortgage FHFA.TheBoardissuedsuchinterimfinalruleson business,orthatareotherwiselargerparticipantsin October18,2010.Theactalsorequirescertainnew theconsumerfinancialservicesindustry.Withrespect disclosuresfornegativeamortization,adjustablerate tolargedepositoryinstitutions(with$10billionor mortgages,andescrows.

OtherFederalReserveOperations 151 The Small Business Jobs Act unlesstheinstitutionhasnotalreadyrepaidthe SBLFfunding. TheJobsActestablishedtheSBLFandauthorized theSecretaryof theTreasurytopurchaseupto Toapply,eligibleinstitutionsmustprovideasmall $30billionintier1-qualifyingpreferredstockor businesslendingplantotheinstitution’sprimaryfedequivalentsfromeligiblefinancialinstitutionswith eralregulator.Aninstitutionmaynotparticipatein nomorethan$10billioninconsolidatedassets.The theprogramif itoranyof itssubsidiarydepository SBLFpromoteslendingtosmallbusinessesbycondi- institutions(asapplicable)areontheFDIC’sprobtioningaparticipatinginstitution’sdividendrateon lembanklistorhavebeenonthelistinthepast90 theamountbywhichitincreasesitssmallbusiness days.Aparticipatinginstitutionmayexittheprolending. grambyrepayingtheSBLFfundingatanytimewith theapprovalof itsprimaryfederalregulator.Subject ThedividendrateonSBLFfundingwillbeginat tocertainconditions,participatinginstitutionsmay 5percentandmaybereducedtoaslowas1percent, refinancecapitalpurchaseprograminstrumentsthey dependingontheamountbywhichtheparticipating previouslyissuedtoTreasurythroughtheSBLF.3 institutionincreaseslendingtosmallbusinesses.If theinstitutiondoesnotincreaselendinginthefirst 3 FormoreinformationontheSBLF,visittheTreasuryDeparttwoyears,however,theratewillincreaseto7percent. ment’swebsiteatwww.treasury.gov/resource-center/sb- After4.5years,theratewillincreaseto9percent programs/Pages/Small-Business-Lending-Fund.aspx.

153 Record of Policy Actions of the Board of Governors Thisreportprovidesasummaryaccountof policy Votingforthisaction:ChairmanBernanke,Vice actionstakenbytheBoardin2010,asimplemented ChairmanKohn,andGovernorsWarsh,Duke, through(1)rulesandregulations,(2)policystate- andTarullo. mentsandotheractions,(3)specialliquidityfacilities andotherinitiatives,and(4)discountratesfor depositoryinstitutions.Allactionswereapprovedby Regulation E aunanimousvoteof theBoardmembers,unlessindi- Electronic Fund Transfers catedotherwise.1Moreinformationontheactions withitalicizeddatesisavailableviatheonlineversion [DocketNo.R-1377] of theAnnualReport,fromthe“ReadingRooms”on theBoard’sFOIAwebpage,oronrequestfromthe OnMarch19,2010,theBoardapprovedafinalrule Board’sFreedomof InformationOffice. toimplementthegiftcardprovisionsof theCredit CardAccountabilityResponsibilityandDisclosure Rules and Regulations Act(theCreditCardAct).Thefinalruleprohibits dormancy,inactivity,andservicefeesongiftcards, Regulation D unless(1)theconsumerhasnotusedthegiftcertifi- Reserve Requirements of cateorcardforatleastoneyear,(2)nomorethan Depository Institutions onesuchfeeischargedpermonth,and(3)theconsumerisgivenclearandconspicuousdisclosures aboutthefees.Expirationdatesforfundsunderlying [DocketNo.R-1381] giftcardsmustbeatleastfiveyearsafterthedateof issuance,orfiveyearsafterthedatewhenfundswere OnApril21,2010,theBoardapprovedafinalruleto lastloadedonthecard.Therulegenerallycovers authorizeReserveBankstoofferinterest-bearing retailgiftcards,whichcanbeusedtobuygoodsor depositsof aspecifiedmaturity,or“termdeposits,” servicesfromasinglemerchantoranaffiliatedgroup toinstitutionsthatareeligibletoreceiveearningson of merchants,andnetwork-brandedgiftcards,which balancesheldintheirFederalReserveaccounts.Term areredeemableatanymerchantthatacceptsthecard depositswillbeofferedthroughaTermDeposit brand.TheruleiseffectiveAugust22,2010. Facilityandareintendedtofacilitatetheconductof monetarypolicybyprovidingatoolformanaging Votingforthisaction:ChairmanBernanke,Vice theaggregatequantityof reservebalances.(See“Spe- ChairmanKohn,andGovernorsWarsh,Duke, cialLiquidityFacilitiesandOtherInitiatives”on andTarullo. page159.)Termdepositsareseparateanddistinct frombalancesmaintainedinaninstitution’smaster accountataReserveBankaswellasfromthose OnAugust10,2010,theBoardapprovedaninterim maintainedinanexcessbalanceaccount.TheBoard finalrulewithrequestforcommenttoimplementlegalsoapprovedminoramendmentstoitsPolicyon islationmodifyingtheeffectivedateof certaindisclo- PaymentSystemRisktoaddresstransactionsassoci- surerequirementsapplicabletogiftcardsunderthe atedwithtermdeposits.Thefinalruleiseffective CreditCardAct.Forgiftcertificates,storegiftcards, June4,2010. andgeneral-useprepaidcardsproducedbefore April1,2010,thelegislationandinterimfinalrule 1 ViceChairmanKohn’stermasViceChairmanexpiredon delaytheAugust22,2010,effectivedateof thesedis- June23,2010,andheremainedamemberoftheBoarduntil closuresuntilJanuary31,2011,providedthatseveral September1,2010.ViceChairYellenandGovernorRaskin specifiedconditionsaremet. joinedtheBoardonOctober4,2010.

154 97thAnnualReport|2010 Votingforthisaction:ChairmanBernankeand CreditAdministration,approvedfinalrulestoimple- GovernorsKohn,Warsh,Duke,andTarullo. menttheregistrationrequirementsof theSecureand FairEnforcementforMortgageLicensingAct OnOctober18,2010,theBoardapprovedafinalrule (S.A.F.E.Act).UndertheS.A.F.E.Act,mortgage implementingtheJanuary31,2011,effectivedatefor loanoriginatorswhoareemployeesof agencycertaingiftcards,asspecifiedintheinterimfinalrule. regulatedinstitutionsmustregisterwiththeNationwideMortgageLicensingSystemandRegistryand Votingforthisaction:ChairmanBernanke,Vice aregenerallyprohibitedfromoriginatingresidential ChairYellen,andGovernorsWarsh,Duke, mortgageloansunlesstheyregister.Aspartof the Tarullo,andRaskin. registrationprocess,residentialmortgageloanoriginatorsmustfurnishinformationandfingerprintsfor Regulation E backgroundchecks,andoriginatorswillreceivea Electronic Fund Transfers uniqueidentifierthatwillenableconsumerstoaccess employmentandotherinformationaboutthemfrom theregistry.Thefinalrulesfurtherprovidethat Regulation DD agency-regulatedinstitutionsmust(1)requiretheir Truth in Savings employeeswhoactasresidentialmortgageloanoriginatorstocomplywiththeS.A.F.E.Act’sregistration [DocketNos.R-1343andR-1315] andotherrequirementsand(2)adoptandfollow writtenpoliciesandproceduresdesignedtoensure OnMay27,2010,theBoardapprovedamendments compliancewiththeserequirements.Theagencies toclarifycertainprovisionsof theNovember2009 publishedtheirfinalrulesonJuly28,2010.The finalruleonRegulationEandtheDecember2008 Boardalsoapprovedconformingamendmentsto finalruleonRegulationDD.Inparticular,the RegulationK(InternationalBankingOperations)to amendmentsclarifythattheRegulationEprohibiincludeanuninsuredstate-licensedbranchoragency tiononassessingoverdraftfeeswithoutaconsumer’s of aforeignbankorcommerciallendingcompany affirmativeconsent,or“optin,”appliestoallinstituownedorcontrolledbyaforeignbankandanyresitions,includingthosethathaveapolicyof declining dentialmortgageloanoriginatorthatitemploys.The ATMandone-timedebitcardtransactionswhenan rulesareeffectiveOctober1,2010,andthe180-day accounthasinsufficientfunds.ForRegulationDD, registrationperiodformortgageloanoriginators theamendmentsaddresstheapplicationof the2008 subjecttotheagencies’rulesbeginsJanuary31,2011. ruletoretailsweepprogramsandclarifytheterminologyforoverdraftfeedisclosures.Theamend- Votingforthisaction:ChairmanBernanke,Vice ments,whichmakeothertechnicalandconforming ChairmanKohn,andGovernorsWarsh,Duke, changes,areeffectiveJuly6,2010(exceptforthe andTarullo. RegulationDDprovisionregardingthe“TotalOverdraftFees”terminology,whichiseffectiveOctober1, Regulation H 2010). Membership of Votingforthisaction:ChairmanBernanke,Vice State Banking Institutions ChairmanKohn,andGovernorsWarsh,Duke, in the Federal Reserve System andTarullo. Regulation Y Regulation H Bank Holding Companies Membership of and Change in Bank Control State Banking Institutions in the Federal Reserve System [DocketNo.R-1368] [DocketNo.R-1357] OnJanuary4,2010,theBoard,actingwiththeFederalDepositInsuranceCorporation,Officeof the OnApril12,2010,theBoard,actingwiththeFederal Comptrollerof theCurrency,andOfficeof Thrift DepositInsuranceCorporation,Officeof theComp- Supervision,approvedfinalrulesamendingthegentrollerof theCurrency,Officeof ThriftSupervision, eralandadvancedrisk-basedcapitaladequacyframe- NationalCreditUnionAdministration,andFarm worksto(1)eliminatetheexclusionof certaincon-

Recordof PolicyActionsof theBoardof Governors 155 solidatedasset-backedcommercialpaperprograms [DocketNo.R-1378] fromrisk-weightedassets;(2)addareservationof authoritypermittingtheagenciestorequirebanking OnAugust1,2010,theBoardapprovedafinalruleto organizationstotreatoff-balance-sheetentitiesasif implementarequirementintheHelpingFamilies theywereconsolidatedforrisk-basedcapitalpur- SaveTheirHomesActthatconsumersreceivewritten poses;and(3)provideforanoptionaltwo-quarter noticeaftertheirmortgageloanhasbeensoldor delay,followedbyanoptionaltwo-quarterpartial transferred.Undertheact,apurchaserorassignee implementationperiod,formostof theeffectson thatacquiresamortgageloanmustprovidethe risk-weightedassetsandtier2capitalresultingfrom requireddisclosuresinwritingwithin30days.The abankingorganization’simplementationof Finan- finalruleiseffectiveJanuary1,2011. cialAccountingStandardsNos.166and167.The finalruleiseffectiveMarch29,2010.Bankingorga- Votingforthisaction:ChairmanBernankeand nizationsmayelecttocomplywiththeruleasof the GovernorsKohn,Warsh,Duke,andTarullo. beginningof theirfirstannualreportingperiodthat beginsafterNovember15,2009. [DocketNo.R-1366] Votingforthisaction:ChairmanBernanke,Vice OnAugust11,2010,theBoardapprovedaninterim ChairmanKohn,andGovernorsWarsh,Duke, rulewithrequestforcommentthatrevisesthediscloandTarullo. surerequirementsforclosed-endmortgageloans. Undertheinterimrule,whichimplementscertain requirementsof theMortgageDisclosureImprove- Regulation Z mentAct,creditorsextendingconsumercredit Truth in Lending securedbyrealpropertyoradwellingmustdisclose certainsummaryinformationaboutinterestratesand [DocketNo.R-1384] paymentchangesinatabularformat,includingthe initialinterestratetogetherwiththecorresponding monthlypayment.Thedisclosuresmustalsoinclude OnJune14,2010,theBoardapprovedafinalruleto astatementthatconsumersmightnotbeableto implementcertainprovisionsof theCreditCardAct avoidincreasedpaymentsbyrefinancingtheirloans. intendedtoensurethatpenaltyfeesimposedby Foradjustable-rateorstep-rateloans,creditorsmust creditcardissuersarereasonableandproportionalto disclosethemaximuminterestrateandpaymentthat theviolation.Amongotherchanges,therule(1)procanoccurduringthefirstfiveyearsanda“worsthibitscreditcardissuersfromchargingapenaltyfee case”exampleshowingthepossiblemaximumrate of morethan$25if aconsumerpayslateorotherandpaymentdueoverthelifeof theloan.Therule wiseviolatestheaccount’sterms,unlesstheconalsorequirescreditorstodisclosecertainfeatures, sumerhasengagedinrepeatedviolationsorthe suchasballoonpaymentsoroptionstomakeonly issuercanshowthatahigherfeerepresentsareasonminimumpayments,thatwillcauseloanamountsto ableproportionof thecostsitincurredasaresultof increase.TheinterimfinalruleiseffectiveOctotheviolations;(2)prohibitsissuersfromcharging ber25,2010,andcomplianceismandatoryJanupenaltyfeesthatexceedthedollaramountassociated ary30,2011. withaconsumer’sviolation;(3)preventsissuersfrom chargingmultiplepenaltyfeesbasedonasinglelate Votingforthisaction:ChairmanBernankeand paymentorotherviolationof theaccountterms;and GovernorsKohn,Warsh,Duke,andTarullo. (4)bans“inactivity”fees,suchasfeesbasedona consumer’sfailuretousetheaccounttomakenew purchases.Therulealsorequirescreditcardissuers OnDecember21,2010,theBoardapprovedan thathaveincreasedratessinceJanuary1,2009,to interimrulewithrequestforcommenttoclarifycerevaluatewhetherthereasonsfortheincreasehave tainaspectsof theAugust11,2010,interimrule changedand,if appropriate,toreducetherate.The (publishedinSeptember2010),inresponsetopublic ruleiseffectiveAugust22,2010. comments.ThisrevisedinterimruleiseffectiveJanuary30,2011,andcomplianceismandatoryOcto- Votingforthisaction:ChairmanBernanke,Vice ber1,2011. ChairmanKohn,andGovernorsWarsh,Duke, andTarullo.

156 97thAnnualReport|2010 Votingforthisaction:ChairmanBernanke,Vice Votingforthisaction:ChairmanBernanke,Vice ChairYellen,andGovernorsWarsh,Duke, ChairYellen,andGovernorsWarsh,Duke, Tarullo,andRaskin. Tarullo,andRaskin. [DocketNo.R-1366] Regulation Z Truth in Lending OnAugust11,2010,theBoardapprovedafinalrule toprotectmortgageborrowersfromunfairorabusive Regulation AA lendingpracticesthatcanarisefromcertainloan- Unfair or Deceptive Acts or Practices originatorcompensationpractices.Thefinalruleprohibitspaymentstoloanoriginators,includingmort- [DocketNos.R-1370,R-1286,andR-1383] gagebrokersandloanofficers,thatarebasedonthe termsorconditionsof atransaction,otherthanthe OnJanuary7,2010,theBoardapprovedafinalrule amountof creditextended.ThefinalrulealsoproamendingRegulationZtoimplementcertainprovihibitsaloanoriginatorreceivingcompensation sionsof theCreditCardAct.Thefinalruleprotects directlyfromaconsumerfromalsoreceivingcomconsumerswhousecreditcardsfromanumberof pensationfromthelenderoranotherparty.Inaddicostlypractices.Inparticular,therule(1)protects tion,thefinalruleprohibitsloanoriginatorsfrom consumersfromunexpectedincreasesincreditcard directing,or“steering,”consumerstoaloanthatis interestratesbygenerallyprohibitingincreasesina notintheconsumer’sinterestinordertoincreasethe rateduringthefirstyearafteranaccountisopened originator’scompensation.Thefinalruleiseffective andincreasesinaratethatappliestoanexisting April1,2011. creditcardbalance;(2)prohibitscreditorsfromissuingacreditcardtoaconsumerwhoisyoungerthan Votingforthisaction:ChairmanBernankeand theageof 21,unlesscertainrequirementsaremet; GovernorsKohn,Warsh,Duke,andTarullo. (3)requirescreditorstoobtainaconsumer’sconsent beforechargingfeesfortransactionsthatexceedthe [DocketNo.R-1394] creditlimit;(4)limitsthehighfeesassociatedwith subprimecreditcards;and(5)prohibitscreditors OnOctober18,2010,theBoardapprovedaninterim fromallocatingpaymentsinwaysthatmaximize finalrulewithrequestforcommenttoimplement interestcharges.Inaddition,therulebanscreditors provisionsof theDodd-FrankWallStreetReform fromimposinginterestchargesusingthe“two-cycle” andConsumerProtectionAct(theDodd-Frank billingmethod,inwhichchargesarebasedonbal- Act)thatestablishnewrequirementsforappraiser ancesondaysinthecurrentbillingcycleandinthe independenceinconsumercredittransactions previousbillingcycle.TheBoardalsowithdrewcersecuredbyaconsumer’sprincipaldwelling.Therule tainamendmentstoRegulationZandRegulaensuresthatrealestateappraisersarefreetousetheir tionAAbecausethoseamendmentsweresuperseded. independentprofessionaljudgment,withoutinflu- ThefinalruleiseffectiveFebruary22,2010.Complienceorpressurefrompartieswhomayhaveaninterancewithmostaspectsof theruleismandatory estinatransaction.Therulealsoseekstoensurethat July1,2010,althoughcompliancewithcertainproviappraisersreceivecustomaryandreasonablepaysionsismandatoryFebruary22,2010. mentsfortheirservices.Amongotherprovisions,the interimfinalrule(1)prohibitscoercionandother Votingforthisaction:ChairmanBernanke,Vice similaractionsdesignedtocauseappraiserstobase ChairmanKohn,andGovernorsWarsh,Duke, theappraisedvalueof propertiesonfactorsother andTarullo. thantheirindependentjudgment,(2)prohibits appraisersandappraisalmanagementcompanies Regulation BB hiredbylendersfromhavingfinancialorotherinterestsinthepropertiesorthecredittransactions,and Community Reinvestment (3)requirescreditorsorsettlementserviceproviders thathaveinformationaboutappraisermisconductto [DocketNo.R-1360] filereportswiththeappropriatestatelicensing authorities.TheinterimfinalruleiseffectiveDecem- OnAugust31,2010,theBoard,actingwiththeFedber27,2010,andcomplianceismandatoryApril1, eralDepositInsuranceCorporation,Officeof the 2011. Comptrollerof theCurrency,andOfficeof Thrift

Recordof PolicyActionsof theBoardof Governors 157 Supervision,approvedajointfinalruletoimplement minoreditorialandtechnicalchangesforclarityand aprovisionof theHigherEducationOpportunity consistencywiththeBoard’spublishedsystemsof Actthatrequirestheagenciestoconsiderlow-cost records.ThefinalruleiseffectiveOctober18,2010. educationloansprovidedtolow-incomeborrowers whenassessinganinstitution’srecordof meeting Votingforthisaction:ChairmanBernankeand communitycreditneedsundertheCommunityRein- GovernorsWarsh,Duke,andTarullo. vestmentAct(CRA).ThejointfinalrulealsoincorporatesaCRAprovisionthatallowstheagenciesto considerafinancialinstitution’scapitalinvestment, Policy Statements and Other Actions loanparticipation,andotherventuresundertakenin cooperationwithminority-orwomen-ownedfinan- Maximum Maturity of cialinstitutionsandlow-incomecreditunionsasa Primary Credit Loans factorwhenassessingtheinstitution’sCRArecord. ThejointfinalruleiseffectiveNovember3,2010. OnFebruary17,2010,theBoardapprovedareductioninthemaximummaturityof primarycredit Votingforthisaction:ChairmanBernankeand loansatthediscountwindowformostdepository GovernorsKohn,Warsh,Duke,andTarullo. institutionsfrom28daystoovernight,effective March18,2010.BeforeAugust2007,themaximum [DocketNo.R-1387] availabletermof primarycreditwasgenerallyovernightbutwassubsequentlylengthenedinorderto OnNovember22,2010,theBoard,actingwiththe enhancebanks’accesstotermfundsandthussup- FederalDepositInsuranceCorporation,Officeof porttheirabilitytolendtohouseholdsandbusitheComptrollerof theCurrency,andOfficeof nesses.Themaximumavailabletermwaslengthened ThriftSupervision,approvedajointfinalrule to30days(onAugust17,2007)andto90days(on amendingtheagencies’CRAregulationstorevisethe March16,2008)andthenshortenedto28days(on term“communitydevelopment”toincludeloans, November12,2009). investments,orservicesof thetypeeligibleforfundingundertheNeighborhoodStabilizationProgram Votingforthisaction:ChairmanBernanke,Vice thatbenefitcertainareasdesignatedbytheDepart- ChairmanKohn,andGovernorsWarsh,Duke, mentof HousingandUrbanDevelopment.Thejoint andTarullo. finalruleiseffectiveJanuary19,2011. Interagency Questions and Answers Votingforthisaction:ChairmanBernanke,Vice Regarding Community Reinvestment ChairYellen,andGovernorsWarsh,Duke, Tarullo,andRaskin. [DocketNo.OP-1349] Rules Regarding OnMarch1,2010,theBoard,actingwiththeFederal Access to Personal Information DepositInsuranceCorporation,Officeof theCompunder the Privacy Act of 1974 trollerof theCurrency,andOfficeof ThriftSupervision,approvedfinalrevisedInteragencyQuestions [DocketNo.R-1313] andAnswersRegardingCommunityReinvestment. Therevisionsincludeexamplesof waysaninstitution OnOctober4,2010,theBoardapprovedafinalrule coulddeterminethatitscommunityservicesaretaramendingitsPrivacyActregulationtowaivecopying getedtolow-andmoderate-incomeindividualsanda feesforPrivacyActrequestsbycurrentorformer discussionof reportingrequirementsforcommunity BoardemployeesorapplicantsforBoardemploy- developmentloans.Therevisedquestionsand mentandtopermitcurrentandformerBoard answers,whichconsolidateandsupersedetheagenemployeestomakePrivacyActrequestsinpersonor cies’previouslypublishedversions,areeffective inwritingtotheBoardofficethatmaintainsthe March11,2010. record.Therulealsopermitscertainconsultations regardingthedisclosureof medicalrecords,changes Votingforthisaction:ChairmanBernanke,Vice thetimelimitsforrespondingtorequestsforaccess ChairmanKohn,andGovernorsWarsh,Duke, toinformation,updatesexemptions,andmakes andTarullo.

158 97thAnnualReport|2010 Interagency Policy Statement on Guidance on Sound Incentive Funding and Liquidity Risk Management Compensation Policies [DocketNo.OP-1362] [DocketNo.OP-1374] OnJune16,2010,theBoard,actingwiththeFederal OnMarch12,2010,theBoard,actingwiththeFed- DepositInsuranceCorporation,Officeof theComperalDepositInsuranceCorporation,Officeof the trollerof theCurrency,andOfficeof ThriftSupervi- Comptrollerof theCurrency,Officeof ThriftSupersion,approvedfinalinteragencyguidanceonincenvision,NationalCreditUnionAdministration,and tivecompensationpoliciesatbankingorganizations. theConferenceof StateBankSupervisors,approved Theguidanceisdesignedtoensurethatincentive aninteragencystatementtoprovidedepositoryinsticompensationarrangementsdonotencourage tutionswithconsistentsupervisoryexpectations imprudentrisktakinganddonotunderminethe regardingsoundpracticesformanagingfundingand safetyandsoundnessof theorganizationorcreate liquidityrisk.Thepolicystatementsummarizesthe undueriskstothefinancialsystem.Theguidance agencies’pastprinciplesinthisarea,andwhen appliesnotonlytotop-levelmanagersbutalsoto appropriate,supplementsthemwiththe“Principles otheremployeeswhohavetheabilitytomaterially forSoundLiquidityRiskManagementandSuperviaffecttheriskprofileof anorganization,eitherindision,”issuedbytheBaselCommitteeonBanking viduallyoraspartof agroup.Theguidanceiseffec- SupervisioninSeptember2008. tiveJune25,2010. Votingforthisaction:ChairmanBernanke,Vice Votingforthisaction:ChairmanBernanke,Vice ChairmanKohn,andGovernorsWarsh,Duke, ChairmanKohn,andGovernorsWarsh,Duke, andTarullo. andTarullo. Reverse Mortgage Products: Correspondent Concentration Risks Guidance for Managing Compliance and Reputation Risks [DocketNo.OP-1369] OnAugust2,2010,theBoardapprovedfinalinter- OnApril26,2010,theBoard,actingwiththeFederal agencyguidance,issuedbytheFederalFinancial DepositInsuranceCorporation,Officeof theComp- InstitutionsExaminationCouncilonbehalf of its trollerof theCurrency,andOfficeof ThriftSupervi- members,addressingreversemortgages,whichare sion,approvedfinalinteragencyguidanceonmanag- loanproductstypicallyofferedtoelderlyconsumers. ingconcentrationrisksarisingfromcorrespondent Theguidanceemphasizestheconsumerprotection bankingrelationships.Theguidancehighlightsthe concernsraisedbytheseproductsandstressesthe needforfinancialinstitutionstoidentify,monitor, importanceof mitigatingtheircomplianceandrepuandmanagecreditandfundingconcentrationsto tationalrisks.TheguidanceiseffectiveOctober18, otherinstitutionsonastand-aloneandorganization- 2010. widebasis.Inaddition,theguidanceaddressesthe supervisoryexpectationthatfinancialinstitutions Votingforthisaction:ChairmanBernankeand shouldperformappropriateduediligenceonall GovernorsKohn,Warsh,Duke,andTarullo. creditexposuresto,andfundingtransactionswith, otherfinancialinstitutionsaspartof theirrisk- Community Depository Institutions managementpoliciesandprocedures.Thepolicyis Advisory Council effectiveMay4,2010. OnSeptember10,2010,theBoardapprovedthe Votingforthisaction:ChairmanBernanke,Vice establishmentof anadvisorycounciltorepresent ChairmanKohn,andGovernorsWarsh,Duke, insuredcommunitydepositoryinstitutions.Members andTarullo. of theCommunityDepositoryInstitutionsAdvisory Council(CDIAC)willbeselectedfromtherepresentativesof banks,thriftinstitutions,andcreditunions whoserveonnewlycreatedlocaladvisorycouncilsat the12ReserveBanks.CDIACwillreplacetheThrift

Recordof PolicyActionsof theBoardof Governors 159 InstitutionsAdvisoryCouncil.TheReserveBank Votingforthisaction:ChairmanBernanke,Vice councilsareexpectedtobeginmeetingin2011,with ChairYellen,andGovernorsWarsh,Duke, meetingsof CDIACtofollowlaterintheyear. Tarullo,andRaskin. Votingforthisaction:ChairmanBernankeand GovernorsWarsh,Duke,andTarullo. Office of Diversity and Inclusion Office of Financial Stability OnDecember16,2010,theBoardapprovedthe establishmentof theOfficeof DiversityandInclu- Policy and Research sioninaccordancewithaprovisionof theDodd- OnOctober26,2010,theBoardapprovedtheestab- FrankActthatalsoappliestotheReserveBanksand lishmentof theOfficeof FinancialStabilityPolicy otherfederalfinancialregulatoryagencies.Theoffice andResearchtobringtogethereconomists,banking willincorporatetheactivitiesof theBoard’scurrent supervisors,marketsexperts,andotherFederal EqualEmploymentOpportunityProgramsOffice,as Reservestaff tosupporttheBoard’sfinancialstabil- wellasfosterdiversityintheBoard’sprocurements ityresponsibilities,includingitsexpandedresponsi- andassistwithdevelopingstandardstoassessthe bilitiesinthisareaundertheDodd-FrankAct.The diversitypracticesof theentitiestheBoardregulates. officewilldevelopandcoordinatestaff effortsto TheofficewillworkwithBoardstaff inareasthat identifyandanalyzepotentialriskstothefinancial includeprocurement,staffing,bankingsupervision systemandthebroadereconomyby,amongother andregulation,andconsumerandcommunityaffairs activities,monitoringassetprices,leverage,financial tocarryoutitsstatutoryresponsibilities. flows,andothermarket-riskindicators;following developmentsatkeyinstitutions;andanalyzingpoli- Votingforthisaction:ChairmanBernanke,Vice ciestopromotefinancialstability.Itwillalsosupport ChairYellen,andGovernorsWarsh,Duke, thesupervisionof largefinancialinstitutionsandthe Tarullo,andRaskin. Board’sparticipationontheFinancialStabilityOversightCouncil. Special Liquidity Facilities Votingforthisaction:ChairmanBernanke,Vice and Other Initiatives ChairYellen,andGovernorsWarsh,Duke, Tarullo,andRaskin. Special Liquidity Facilities Interagency Appraisal and Evaluation Guidelines OnJanuary27,2010,theFederalReserveannounced thatthefollowingspecialliquidityfacilitieswould [DocketNo.OP-1338] closeasscheduledonFebruary1,2010,inlightof improvedfunctioningof financialmarkets:Asset- OnDecember1,2010,theBoard,actingwiththe BackedCommercialPaperMoneyMarketMutual FederalDepositInsuranceCorporation,Officeof FundLiquidityFacility,CommercialPaperFunding theComptrollerof theCurrency,Officeof Thrift Facility,PrimaryDealerCreditFacility,andTerm Supervision,andNationalCreditUnionAdministra- SecuritiesLendingFacility.TheFederalReservealso tion,approvedfinalsupervisoryguidanceonsound announcedthefinalTermAuctionFacility(TAF) practicesbyfinancialinstitutionsforrealestate amountsanddates($50billionin28-daycrediton appraisalsandevaluations.Theguidelines,which February8and$25billionin28-daycrediton replace1994appraisalguidelines,(1)addressthe March8,2010)andaffirmedthattheexpiration agencies’recentsupervisoryissuancesonappraisal datesfortheTermAsset-BackedSecuritiesLoan practices;(2)addressadvancementsininformation Facility(TALF)remainedsetatJune30,2010,for technologyusedincollateralvaluationpractices;and loansbackedbynewlyissuedcommercialmortgage- (3)clarifystandardsfortheindustry’sappropriate backedsecuritiesandMarch31,2010,forloans useof analyticalmethodsandtechnologicaltoolsin backedbyallothertypesof collateral.Formore developingevaluations.Financialinstitutionsshould informationontheestablishmentandpurposesof reviewtheirappraisalandevaluationprogramsto theseandtheFederalReserve’sotherspecialfacilities ensuretheyareconsistentwiththeguidelines.The andinitiatives,seetheAnnualReportsfor2008and guidelinesareeffectiveDecember10,2010. 2009.

160 97thAnnualReport|2010 OnFebruary17,2010,theBoardapprovedan atedbasisusingthecashproceedsfromthedisposiincreaseintheminimumbidratefortheTAFfrom tionsof certainAIGassets,notablytheinitialpub- ¼percentagepointto½percentforthefinalauction licofferingof theAIAGroupLimited(AIA)and onMarch8,2010.(See“DiscountRatesforDeposi- thesaleof AmericanLifeInsuranceCompany toryInstitutionsin2010”onpage161forfurtherdis- (ALICO),andterminationof thefacility. cussionof theTAF.) • AIG’spurchaseof upto$22billionof theReserve Bank’spreferredinterestsintwospecial-purpose Votingforthisaction:ChairmanBernanke,Vice vehiclesthatownedAIAandALICO,respectively ChairmanKohn,andGovernorsWarsh,Duke, (theReserveBankhadearliertakenthepreferred andTarullo. interestsinpartialrepaymentof therevolving creditfacility).Tofundthepurchaseof thepre- OnJuly9,2010,theBoardapprovedarequestbythe ferredinterests,AIGwoulddrawonTreasury’s Departmentof theTreasury(Treasury)toreduce preferredstockcommitmentforAIGunderthe from$20billionto$4.3billionthecreditprotection TARPandthentransferthepreferredintereststo providedfortheTALFundertheTroubledAsset TreasuryinconsiderationfortheTARPfunding. Relief Program(TARP).AnylossesontheTALF program,whichclosedonJune30,2010,with • Repaymentof theReserveBank’sremainingpre- $43billioninloansoutstanding,wouldfirstbe ferredinterestswiththeproceedsof thedisposiabsorbedbytheaccumulatedexcessof theTALF tionsof AIAandALICO,andretentionof any loaninterestpaymentsovertheFederalReserve’s unpaidpreferredinterestsbytheReserveBank. costof fundsandthenbytheTARPfunds. • Conversionof Treasury’soutstandingpreferred equityinterestsinAIGintocommonstock Votingforthisaction:ChairmanBernankeand of AIG. GovernorsKohn,Warsh,Duke,andTarullo. • Conversionof thepreferredequityinterestissued OnDecember1,2010,theBoardposteddetailed byAIGandheldtotheAIGCreditFacilityTrust informationonitspublicwebsiteabouttransactions asaconditionof theReserveBank’srevolving conductedthroughtheFederalReserve’sspecial creditfacilityintocommonstockof AIGand liquidityfacilitiesfromDecember1,2007,toJuly21, transferof thecommonstocktoTreasury. 2010,inaccordancewiththeDodd-FrankAct.Similartransaction-leveldetailwasprovidedfortheFed- Votingforthisaction:ChairmanBernankeand eralReserve’sdollarliquidityswapswithforeigncen- GovernorsWarsh,Duke,andTarullo. tralbanksandforpurchasesof agencymortgagebackedsecurities.Thetransaction-leveldetails TermDepositFacility availableincludethenameof theinstitution,the OnMay7,2010,theBoardapproveduptofive amountof thetransaction,theinterestratecharged, small-valueofferingsof termdepositsunderthe informationaboutcollateral,andotherrelevant TermDepositFacility(TDF).(TheBoardhadprevitermsof theprograms. ouslyauthorizedReserveBankstooffertermdepositstoeligibleinstitutions.See“Rulesand Other Initiatives Regulations”onpage153.)Thesmall-valueofferings aredesignedtoensuretheeffectivenessof TDF AmericanInternationalGroup,Inc. operationsandprovideeligibleinstitutionswithan OnSeptember29,2010,theBoardauthorizedthe opportunitytogainfamiliaritywithtermdeposit FederalReserveBankof NewYork(Reserve procedures.TheBoardalsoapprovedabasicstruc- Bank)toenterintoarecapitalizationplanforthe tureforthesmall-valueTDFofferings.Similarto AmericanInternationalGroup,Inc.(AIG).The manymoneymarketinstruments,thetermdeposits recapitalizationplanisdesignedtorestructureand offeredwillbesimplefixed-rateinstrumentswith facilitaterepaymentof thefinancialsupportprovided maturitiesof 84daysorlessandwillbeissuedpritoAIGbytheReserveBankandTreasury.Theplan marilythroughcompetitivesingle-priceauctions. consistsof thefollowingbasicterms: TDFofferingswillalsoincludeanoncompetitive biddingoptiontoensureaccesstotermdepositsfor • Repaymentof theoutstandingbalance(including smallerinstitutions. allaccruedinterestandfees)onAIG’srevolving creditfacilitywiththeReserveBankonanacceler-

Recordof PolicyActionsof theBoardof Governors 161 Votingforthisaction:ChairmanBernanke,Vice Secondary and Seasonal Credit ChairmanKohn,andGovernorsWarsh,Duke, andTarullo. Secondarycreditisavailableinappropriatecircumstancestodepositoryinstitutionsthatdonotqualify OnSeptember7,2010,theBoardapprovedapro- forprimarycredit.Thesecondarycreditrateissetat gramof ongoingsmall-valueTDFauctions. aspreadabovetheprimarycreditrate.Throughout Althoughthetermsandfrequencyof theseauctions 2010,thespreadwassetat50basispoints. mayevolveovertime,theBoardanticipatesthatthey willbeheldabouteveryothermonth. Seasonalcreditisavailabletosmallerdepository institutionstomeetliquidityneedsthatarisefrom Votingforthisaction:ChairmanBernankeand regularswingsintheirloansanddeposits.Therate GovernorsWarsh,Duke,andTarullo. onseasonalcreditiscalculatedeverytwoweeksasan averageof selectedmoney-marketyields,typically resultinginarateclosetothefederalfundsrate Discount Rates for Depository target. Institutions in 2010 Atyear-end,thesecondaryandseasonalcreditrates were1¼percentand¼percent,respectively.3 UndertheFederalReserveAct,theboardsof directorsof theFederalReserveBanksmustestablish Term Auction Facility Credit ratesondiscountwindowloanstodepositoryinstitutionsatleastevery14days,subjecttoreviewand InDecember2007,theFederalReserveestablisheda determinationbytheBoardof Governors. temporaryTermAuctionFacility(TAF).Underthe TAF,theFederalReserveauctionedtermfundsto Primary Credit depositoryinstitutionsthatwereingenerallysound financialconditionandwereeligibletoborrowunder Primarycredit,theFederalReserve’smainlending theprimarycreditprogram.Theamountof each programfordepositoryinstitutions,isextendedata auctionwasdeterminedinadvancebytheFederal rateabovethefederalfundsratetargetsetbythe Reserve,andtheinterestrateonTAFcreditwas FederalOpenMarketCommittee(FOMC).Itistypideterminedastherateatwhichallbidscouldbefulcallymadeavailable,withminimaladministration filled,uptothemaximumauctionamountandsubandforveryshortterms,asabackupsourceof jecttoaminimumbidrate.Originally,theminimum liquiditytodepositoryinstitutionsthat,inthejudgbidrateforTAFauctionswasdeterminedbasedona mentof thelendingFederalReserveBank,arein measureof theaverageexpectedovernightfederal generallysoundfinancialcondition. fundsrateoverthetermof thecreditbeingauctioned.ForTAFauctionsfromJanuary2009toFeb- Overtheperiodfrommid-August2007toearly2010, ruary2010,theminimumbidratewassetatalevel theFederalReservealloweddepositoryinstitutions equaltotherateof interestthatbanksearnonexcess toborrowprimarycreditforlongerperiodsto reservebalances,whichwas¼percentoverthis addressliquiditypressuresduringthefinancialcrisis. period.OnFebruary18,2010,theBoardannounced Atthebeginningof 2010,themaximummaturityof thatithadraisedtheminimumbidrateto½percent. primarycreditwas90days,renewablebytheborrower.EffectiveJanuary14,2010,themaximum OnJune25,2009,inlightof theimprovementin maturityof suchfinancingwasreducedto28daysin financialconditionsandreducedusageof theTAF, lightof improvementinfinancialmarketconditions. theFederalReservetrimmedthesizeof upcoming OnFebruary18,2010,theBoardannouncedafur- TAFauctions.TheFederalReserveanticipatedthat, therreductioninthetypicalmaturityforprimary creditloanstoovernighteffectiveMarch18,2010. FOMC’stargetratewasordinarily100basispoints.In August2007,theBoardapprovedanarrowingofthisspreadto During2010,theBoardapprovedonechangetothe 50basispointsandin2008,approvedafurthernarrowingto primarycreditrate,anincreasefrom½percentto 25basispoints.The2010increaseintheprimarycreditrate widenedthespreadbackto50basispoints.Throughout2010, ¾percenteffectiveFebruary19,2010.2 theFOMCmaintainedatargetrangeforthefederalfundsrate of0to¼percent. 2 Fromtheinceptionoftheprimarycreditprogramin2003 3 Forcurrentandhistoricaldiscountrates,seewww throughmid-2007,thespreadoftheprimarycreditrateoverthe .frbdiscountwindow.org/.

162 97thAnnualReport|2010 if marketconditionscontinuedtoimproveincoming maintaintheformulasforcomputingthesecondary months,TAFfundingwouldbereducedgradually andseasonalcreditrates.UntilthefinalTAFauction further.Throughoutthesecondhalf of 2009,the wasconducted,theBoardalsoapprovedtheauction FederalReservegraduallyreducedtheamountspro- procedurefordeterminingtheratefortheTAFabout videdundertheTAF.OnJanuary27,2010,theFed- everytwoweeks.Detailsontheoneactionbythe eralReserveannouncedthatthefinalTAFauction Boardtoapprovechangestotheprimarycreditrate wouldtakeplaceonMarch8,2010.Therewerea areprovidedbelow. totalof threeTAFauctionsheldin2010:$75billion in28-daycreditwasofferedonJanuary11,$50bil- February17,2010.EffectiveFebruary19,2010,the lionin28-daycreditwasofferedonFebruary8,and Boardapprovedestablishmentof theratefordis- $25billionin28-daycreditwasofferedatthefinal countsandadvancesundertheprimarycreditproauctiononMarch8.4 gram(primarycreditrate)of ¾percent(anincrease from½percent)forthe12FederalReserveBanks. Votes on Changes to Discount Rates for Depository Institutions Votingforthisaction:ChairmanBernanke,Vice ChairmanKohn,andGovernorsWarsh,Duke, Abouteverytwoweeksduring2010,theBoard andTarullo. approvedproposalsbythe12ReserveBanksto 4 FormoreinformationonTAFauctions,includingminimum bidratesandtheauction-determinedratesonTAFcredit,see www.federalreserve.gov/monetarypolicy/taf.htm.

163 Minutes of Federal Open Market Committee Meetings Thepolicyactionsof theFederalOpenMarketCom- adecision,theyareidentifiedintheminutesanda mittee,containedintheminutesof itsmeetings,are summaryof thereasonsfortheirdissentisprovided. presentedintheAnnualReportof theBoardof Governorspursuanttotherequirementsof section10of Policydirectivesof theFederalOpenMarketComtheFederalReserveAct.Thatsectionprovidesthat mitteeareissuedtotheFederalReserveBankof New theBoardshallkeepacompleterecordof theactions YorkastheBankselectedbytheCommitteeto takenbytheBoardandbytheFederalOpenMarket executetransactionsfortheSystemOpenMarket Committeeonallquestionsof policyrelatingtoopen Account.Intheareaof domesticopenmarketoperamarketoperations,thatitshallrecordthereinthe tions,theFederalReserveBankof NewYorkopervotestakeninconnectionwiththedeterminationof atesunderinstructionsfromtheFederalOpenMaropenmarketpoliciesandthereasonsunderlyingeach ketCommitteethattaketheformof anAuthorizapolicyaction,andthatitshallincludeinitsannual tionforDomesticOpenMarketOperationsanda reporttoCongressafullaccountof suchactions. DomesticPolicyDirective.(AnewDomesticPolicy Directiveisadoptedateachregularlyscheduled Theminutesof themeetingscontainthevotesonthe meeting.)Intheforeigncurrencyarea,theFederal policydecisionsmadeatthosemeetingsaswellasa ReserveBankof NewYorkoperatesunderanAuthosummaryof theinformationanddiscussionsthatled rizationforForeignCurrencyOperations,aForeign tothedecisions.Inaddition,fourtimesayear,start- CurrencyDirective,andProceduralInstructionswith ingwiththeOctober2007Committeemeeting,a RespecttoForeignCurrencyOperations.Changesin Summaryof EconomicProjectionsispublishedasan theinstrumentsduringtheyeararereportedinthe addendumtotheminutes.Thedescriptionsof eco- minutesfortheindividualmeetings.1 nomicandfinancialconditionsintheminutesandthe Summaryof EconomicProjectionsarebasedsolely ontheinformationthatwasavailabletotheCommit- 1 AsofJanuary1,2010,theFederalReserveBankofNewYork teeatthetimeof themeetings. wasoperatingundertheDomesticPolicyDirectiveapprovedat theDecember15–16,2009,CommitteemeetingandtheAuthorizationforDomesticOpenMarketOperationsasamended Membersof theCommitteevotingforaparticular June23,2009.Theotherpolicyinstruments(theAuthorization actionmaydifferamongthemselvesastothereasons forForeignCurrencyOperations,theForeignCurrencyDirective,andProceduralInstructionswithRespecttoForeignCurfortheirvotes;insuchcases,therangeof theirviews rencyOperations)ineffectasofJanuary1,2010,wereapproved isnotedintheminutes.Whenmembersdissentfrom attheJanuary27–28,2009,meeting.

164 97thAnnualReport|2010 Meeting Held on January 26–27, 2010 AlanD.Barkema,ThomasA.Connors, WilliamB.English,Jeff Fuhrer,StevenB.Kamin, SimonPotter,LawrenceSlifman,MarkS.Sniderman, Ajointmeetingof theFederalOpenMarketCom- ChristopherJ.Waller,andDavidW.Wilcox mitteeandtheBoardof Governorsof theFederal AssociateEconomists ReserveSystemwasheldintheofficesof theBoard of GovernorsinWashington,D.C.,onTuesday, BrianSack January26,2010,at2:00p.m.andcontinuedon Manager,SystemOpenMarketAccount Wednesday,January27,2010,at8:30a.m. JenniferJ.Johnson Secretaryof theBoard,Officeof theSecretary, Present Boardof Governors BenBernanke PatrickM.Parkinson Chairman Director,Divisionof BankSupervisionand WilliamC.Dudley Regulation,Boardof Governors ViceChairman RobertdeV.Frierson1 JamesBullard DeputySecretary,Officeof theSecretary, Boardof Governors ElizabethDuke CharlesS.Struckmeyer ThomasM.Hoenig DeputyStaff Director,Officeof theStaff Director DonaldL.Kohn forManagement,Boardof Governors SandraPianalto JamesA.Clouse DeputyDirector,Divisionof MonetaryAffairs, EricRosengren Boardof Governors DanielK.Tarullo LindaRobertson2 KevinWarsh AssistanttotheBoard,Officeof BoardMembers, ChristineCumming,CharlesL.Evans,RichardFisher, Boardof Governors NarayanaKocherlakota,andCharlesI.Plosser SherryEdwards,AndrewT.Levin,and AlternateMembersof theFederalOpenMarket WilliamR.Nelson Committee SeniorAssociateDirectors,Divisionof Monetary JeffreyM.Lacker,DennisP.Lockhart,and Affairs,Boardof Governors JanetL.Yellen DavidReifschneiderandWilliamWascher Presidentsof theFederalReserveBanksof SeniorAssociateDirectors,Divisionof Researchand Richmond,Atlanta,andSanFrancisco,respectively Statistics,Boardof Governors BrianF.Madigan StephenA.Meyer SecretaryandEconomist SeniorAdviser,Divisionof MonetaryAffairs, MatthewM.Luecke Boardof Governors AssistantSecretary StephenD.Oliner DavidW.Skidmore SeniorAdviser,Divisionof ResearchandStatistics, AssistantSecretary Boardof Governors MichelleA.Smith MichaelLeahy AssistantSecretary AssociateDirector,Divisionof InternationalFinance, Boardof Governors ScottG.Alvarez GeneralCounsel DanielE.Sichel AssociateDirector,Divisionof Researchand NathanSheets Statistics,Boardof Governors Economist DavidJ.Stockton 1 AttendedTuesday’ssessiononly. Economist 2 AttendedWednesday’ssessiononly.

Minutesof FederalOpenMarketCommitteeMeetings 165 MichaelG.Palumbo Annual Organizational Matters DeputyAssociateDirector,Divisionof Researchand Statistics,Boardof Governors Intheagendaforthismeeting,itwasreportedthat advicesof theelectionof thefollowingmembersand EgonZakrajšek alternatemembersof theFederalOpenMarketCom- DeputyAssociateDirector,Divisionof Monetary mitteeforatermbeginningJanuary26,2010,had Affairs,Boardof Governors beenreceivedandthattheseindividualshadexecuted DavidH.Small theiroathsof office. ProjectManager,Divisionof MonetaryAffairs, Boardof Governors Theelectedmembersandalternatememberswereas CarolC.Bertaut follows: SeniorEconomist,Divisionof InternationalFinance, Boardof Governors WilliamC.Dudley Presidentof theFederalReserveBankof NewYork, LouiseSheiner with SeniorEconomist,Divisionof Researchand ChristineCumming Statistics,Boardof Governors FirstVicePresidentof theFederalReserveBank MarkA.CarlsonandKurtF.Lewis of NewYork,asalternate. Economists,Divisionof MonetaryAffairs, Boardof Governors EricRosengren PenelopeA.Beattie Presidentof theFederalReserveBankof Boston, AssistanttotheSecretary,Officeof theSecretary, with Boardof Governors CharlesI.Plosser Presidentof theFederalReserveBank CarolLow of Philadelphia,asalternate. OpenMarketSecretariatSpecialist,Divisionof MonetaryAffairs,Boardof Governors SandraPianalto RandallA.Williams Presidentof theFederalReserveBankof Cleveland, RecordsManagementAnalyst,Divisionof Monetary with Affairs,Boardof Governors CharlesL.Evans HarveyRosenblum Presidentof theFederalReserveBank ExecutiveVicePresident,FederalReserveBank of Chicago,asalternate. of Dallas JamesBullard DavidAltig,SpenceHilton,LorettaJ.Mester,and Presidentof theFederalReserveBankof St.Louis, GlennD.Rudebusch with SeniorVicePresidents,FederalReserveBanksof RichardFisher Atlanta,NewYork,Philadelphia,andSanFrancisco, Presidentof theFederalReserveBankof Dallas,as respectively alternate. WarrenWeber SeniorResearchOfficer,FederalReserveBank ThomasM.Hoenig of Minneapolis Presidentof theFederalReserveBankof Kansas DavidC.Wheelock City,with VicePresident,FederalReserveBankof St.Louis NarayanaKocherlakota,Presidentof theFederal ReserveBankof Minneapolis,asalternate. JulieAnnRemache AssistantVicePresident,FederalReserveBank Byunanimousvote,thefollowingofficersof theFedof NewYork eralOpenMarketCommitteewereselectedtoserve HesnaGenay untiltheselectionof theirsuccessorsatthefirstregu- EconomicAdvisor,FederalReserveBankof Chicago larlyscheduledmeetingof theCommitteein2011, RobertL.Hetzel withtheunderstandingthatintheeventof thedis- SeniorEconomist,FederalReserveBank continuanceof theirofficialconnectionwiththe of Richmond Boardof GovernorsorwithaFederalReserveBank,

166 97thAnnualReport|2010 theywouldceasetohaveanyofficialconnectionwith Byunanimousvote,theFederalReserveBankof theFederalOpenMarketCommittee: NewYorkwasselectedtoexecutetransactionsfor theSystemOpenMarketAccount. BenBernanke Chairman Byunanimousvote,BrianSackwasselectedtoserve atthepleasureof theCommitteeasManager,System WilliamC.Dudley OpenMarketAccount,withtheunderstandingthat ViceChairman hisselectionwassubjecttobeingsatisfactorytothe FederalReserveBankof NewYork. BrianF.Madigan SecretaryandEconomist Inhisannualreviewof theCommittee’sauthorizationsfordomesticopenmarketoperationsandfor- MatthewM.Luecke eigncurrencytransactions,theManagernotedthat AssistantSecretary theDeskrecommendedcontinuingtousedollarroll transactionsintheprocessof settlingagency DavidW.Skidmore mortgage-backedsecurities(MBS)purchases,and AssistantSecretary thatstaff proposedaddingasentencetothedirective toauthorizeusingdollarrolltransactionsafter MichelleA.Smith March31forthepurposeof settlingMBSpurchases AssistantSecretary executedbythatdate.HealsonotedthattheDesk intendedtoconductreverserepurchaseagreements ScottG.Alvarez (RRPs)overthecourseof thecomingyeartoensure GeneralCounsel thereadinessof theFederalReserve’stoolsfor absorbingbankreserves.Suchtransactionswere ThomasBaxter authorizedbytheCommittee’sresolutionof Novem- DeputyGeneralCounsel ber24,2009.Finally,heindicatedthattheDeskwas developingthecapabilitytoconductagencyMBS RichardM.Ashton administration,trading,andsettlementusinginternal AssistantGeneralCounsel resources,butitwouldcontinuetouseagentstoconductthesetasksuntilthatcapabilitywasfully NathanSheets developed. Economist Byunanimousvote,theCommitteeapprovedthe DavidJ.Stockton AuthorizationforDomesticOpenMarketOpera- Economist tions(shownbelow)withamendmentstoparagraph 4thatallowtheuseof “securitiesthataredirectobli- AlanD.Barkema gationsof,orfullyguaranteedastoprincipaland ThomasA.Connors interestby,anyagencyof theUnitedStates”intem- WilliamB.English poraryshort-terminvestmenttransactionswithfor- Jeff Fuhrer eignandinternationalaccountsandfiscalagency StevenB.Kamin accounts.TheGuidelinesfortheConductof System SimonPotter OpenMarketOperationsinFederal-AgencyIssues LawrenceSlifman remainedsuspended. MarkS.Sniderman ChristopherJ.Waller Authorization for Domestic Open Market DavidW.Wilcox Operations (Amended January 26, 2010) AssociateEconomists 1. TheFederalOpenMarketCommitteeauthorizes Byunanimousvote,theCommitteeamendeditsPro- anddirectstheFederalReserveBankof New gramforSecurityof FOMCInformationwiththe York,totheextentnecessarytocarryoutthe additionof asummaryof therulethatgovernsnon- mostrecentdomesticpolicydirectiveadoptedat citizenaccesstoFOMCinformation. ameetingof theCommittee:

Minutesof FederalOpenMarketCommitteeMeetings 167 A. TobuyorsellU.S.governmentsecurities, mayrejectbidsthatcouldfacilitateadealer’sabilincludingsecuritiesof theFederalFinancing itytocontrolasingleissueasdeterminedsolely Bank,andsecuritiesthataredirectobliga- bytheFederalReserveBankof NewYork. tionsof,orfullyguaranteedastoprincipal andinterestby,anyagencyof theUnited 4. Inordertoensuretheeffectiveconductof open Statesintheopenmarket,fromortosecuri- marketoperations,whileassistingintheprovision tiesdealersandforeignandinternational of short-terminvestmentsforforeignandinteraccountsmaintainedattheFederalReserve nationalaccountsmaintainedattheFederal Bankof NewYork,onacash,regular,or ReserveBankof NewYorkandaccountsmaindeferreddeliverybasis,fortheSystemOpen tainedattheFederalReserveBankof NewYork MarketAccountatmarketprices,and,for asfiscalagentof theUnitedStatespursuantto suchAccount,toexchangematuringU.S. section15of theFederalReserveAct,theFederal governmentandfederalagencysecurities OpenMarketCommitteeauthorizesanddirects withtheTreasuryortheindividualagencies theFederalReserveBankof NewYork: ortoallowthemtomaturewithoutreplacement;and A. FortheSystemOpenMarketAccount,tosell U.S.governmentsecurities,andsecurities B. TobuyorsellintheopenmarketU.S.gov- thataredirectobligationsof,orfullyguaranernmentsecurities,andsecuritiesthatare teedastoprincipalandinterestby,any directobligationsof,orfullyguaranteedasto agencyof theUnitedStates,tosuchaccounts principalandinterestby,anyagencyof the onthebasessetforthinparagraph1.Aunder UnitedStates,fortheSystemOpenMarket agreementsprovidingfortheresalebysuch Accountunderagreementstoresellorrepur- accountsof thosesecuritiesin65business chasesuchsecuritiesorobligations(including daysorlessontermscomparabletothose suchtransactionsasarecommonlyreferred availableonsuchtransactionsinthemartoasrepoandreverserepotransactions)in ket;and 65businessdaysorless,atratesthat,unless otherwiseexpresslyauthorizedbytheCom- B. FortheNewYorkBankaccount,when mittee,shallbedeterminedbycompetitive appropriate,toundertakewithdealers,subbidding,afterapplyingreasonablelimitations jecttotheconditionsimposedonpurchases onthevolumeof agreementswithindividual andsalesof securitiesinparagraphl.B, counterparties. repurchaseagreementsinU.S.government securities,andsecuritiesthataredirectobli- 2. Inordertoensuretheeffectiveconductof open gationsof,orfullyguaranteedastoprincipal marketoperations,theFederalOpenMarket andinterestby,anyagencyof theUnited CommitteeauthorizestheFederalReserveBank States,andtoarrangecorrespondingsaleand of NewYorktouseagentsinagencyMBS-related repurchaseagreementsbetweenitsown transactions. accountandsuchforeign,international,and fiscalagencyaccountsmaintainedatthe 3. Inordertoensuretheeffectiveconductof open Bank. marketoperations,theFederalOpenMarket CommitteeauthorizestheFederalReserveBank Transactionsundertakenwithsuchaccounts of NewYorktolendonanovernightbasisU.S. undertheprovisionsof thisparagraphmayprogovernmentsecuritiesandsecuritiesthatare videforaservicefeewhenappropriate. directobligationsof anyagencyof theUnited States,heldintheSystemOpenMarketAccount, 5. Intheexecutionof theCommittee’sdecision todealersatratesthatshallbedeterminedby regardingpolicyduringanyintermeetingperiod, competitivebidding.TheFederalReserveBank theCommitteeauthorizesanddirectstheFederal of NewYorkshallsetaminimumlendingfee ReserveBankof NewYork,upontheinstruction consistentwiththeobjectivesof theprogramand of theChairmanof theCommittee,toadjust applyreasonablelimitationsonthetotalamount somewhatinexceptionalcircumstancesthedegree of aspecificissuethatmaybeauctionedandon of pressureonreservepositionsandhencethe theamountof securitiesthateachdealermay intendedfederalfundsrateandtotakeactions borrow.TheFederalReserveBankof NewYork thatresultinmaterialchangesinthecomposition

168 97thAnnualReport|2010 andsizeof theassetsintheSystemOpenMarket Koreanwon Accountotherthanthoseanticipatedbythe Mexicanpesos Committeeatitsmostrecentmeeting.Anysuch NewZealanddollars adjustmentshallbemadeinthecontextof the Norwegiankroner Committee’sdiscussionanddecisionatitsmost Poundssterling recentmeetingandtheCommittee’slong-run Singaporedollars objectivesforpricestabilityandsustainableeco- Swedishkronor nomicgrowth,andshallbebasedoneconomic, Swissfrancs financial,andmonetarydevelopmentsduringthe intermeetingperiod.ConsistentwithCommittee B. Toholdbalancesof,andtohaveoutstanding practice,theChairman,if feasible,willconsult forwardcontractstoreceiveortodeliver,the withtheCommitteebeforemakingany foreigncurrencieslistedinparagraphA adjustment. above. Byunanimousvote,theAuthorizationforFor- C. TodrawforeigncurrenciesandtopermitforeignCurrencyOperations,theForeignCurrency eignbankstodrawdollarsundertherecipro- Directive,andtheProceduralInstructionswith calcurrencyarrangementslistedinparagraph RespecttoForeignCurrencyOperationswere 2below,providedthatdrawingsbyeither reaffirmedintheformshownbelow.Thevoteto partytoanysucharrangementshallbefully reaffirmthesedocumentsincludedapprovalof liquidatedwithin12monthsafterany theSystem’swarehousingagreementwiththe amountoutstandingatthattimewasfirst U.S.Treasury. drawn,unlesstheCommittee,becauseof exceptionalcircumstances,specificallyautho- Authorization for Foreign Currency rizesadelay. Operations (Reaffirmed January 26, 2010) D. Tomaintainanoverallopenpositioninall 1. TheFederalOpenMarketCommitteeauthorizes foreigncurrenciesnotexceeding$25.0billion. anddirectstheFederalReserveBankof New Forthispurpose,theoverallopenpositionin York,fortheSystemOpenMarketAccount,to allforeigncurrenciesisdefinedasthesum theextentnecessarytocarryouttheCommittee’s (disregardingsigns)of netpositionsinindiforeigncurrencydirectiveandexpressauthoriza- vidualcurrencies,excludingchangesindollar tionsbytheCommitteepursuantthereto,andin valueduetoforeignexchangeratemoveconformitywithsuchproceduralinstructionsas mentsandinterestaccruals.Thenetposition theCommitteemayissuefromtimetotime: inasingleforeigncurrencyisdefinedas holdingsof balancesinthatcurrency,plus A. Topurchaseandsellthefollowingforeign outstandingcontractsforfuturereceipt, currenciesintheformof cabletransfers minusoutstandingcontractsforfuturedelivthroughspotorforwardtransactionsonthe eryof thatcurrency,i.e.,asthesumof these openmarketathomeandabroad,including elementswithdueregardtosign. transactionswiththeU.S.Treasury,withthe U.S.ExchangeStabilizationFundestablished 2. TheFederalOpenMarketCommitteedirectsthe bysection10of theGoldReserveActof FederalReserveBankof NewYorktomaintain 1934,withforeignmonetaryauthorities,with reciprocalcurrencyarrangements(“swap” theBankforInternationalSettlements,and arrangements)fortheSystemOpenMarket withotherinternationalfinancialinstitutions: Accountforperiodsuptoamaximumof 12monthswiththefollowingforeignbanks, Australiandollars whichareamongthosedesignatedbytheBoard Brazilianreais of Governorsof theFederalReserveSystem Canadiandollars undersection214.5of RegulationN,Relations Danishkroner withForeignBanksandBankers,andwiththe euro approvalof theCommitteetorenewsuch Japaneseyen arrangementsonmaturity:

Minutesof FederalOpenMarketCommitteeMeetings 169 atforeigninstitutions.Inaddition,whenappro- Amountof arrangement(mil- priateinconnectionwitharrangementstopro- Foreignbank lionsofdollars videinvestmentfacilitiesforforeigncurrency equivalent) holdings,U.S.governmentsecuritiesmaybepur- BankofCanada 2,000 chasedfromforeigncentralbanksunderagree- BankofMexico 3,000 mentsforrepurchaseof suchsecuritieswithin30 calendardays. Anychangesinthetermsof existingswap 6. Alloperationsundertakenpursuanttotheprearrangements,andtheproposedtermsof any cedingparagraphsshallbereportedpromptlyto newarrangementsthatmaybeauthorized,shall theForeignCurrencySubcommitteeandthe bereferredforreviewandapprovaltothe Committee.TheForeignCurrencySubcommittee Committee. consistsof theChairmanandViceChairmanof theCommittee,theViceChairmanof theBoard 3. Alltransactionsinforeigncurrenciesundertaken of Governors,andsuchothermemberof the underparagraph1.Aaboveshall,unlessother- BoardastheChairmanmaydesignate(orinthe wiseexpresslyauthorizedbytheCommittee,beat absenceof membersof theBoardservingonthe prevailingmarketrates.Forthepurposeof pro- Subcommittee,otherBoardmembersdesignated vidinganinvestmentreturnonSystemholdings bytheChairmanasalternates,andintheabsence of foreigncurrenciesorforthepurposeof adjust- of theViceChairmanof theCommittee,theVice inginterestratespaidorreceivedinconnection Chairman’salternate).Meetingsof theSubcomwithswapdrawings,transactionswithforeign mitteeshallbecalledattherequestof anymemcentralbanksmaybeundertakenatnonmarket ber,orattherequestof theManager,System exchangerates. OpenMarketAccount(“Manager”),forthepurposesof reviewingrecentorcontemplatedopera- 4. Itshallbethenormalpracticetoarrangewith tionsandof consultingwiththeManageron foreigncentralbanksforthecoordinationof for- othermattersrelatingtotheManager’sresponsieigncurrencytransactions.Inmakingoperating bilities.Attherequestof anymemberof theSubarrangementswithforeigncentralbankson committee,questionsarisingfromsuchreviews Systemholdingsof foreigncurrencies,theFederal andconsultationsshallbereferredfordetermina- ReserveBankof NewYorkshallnotcommit tiontotheFederalOpenMarketCommittee. itself tomaintainanyspecificbalance,unless authorizedbytheFederalOpenMarketCommit- 7. TheChairmanisauthorized: tee.Anyagreementsorunderstandingsconcerningtheadministrationof theaccountsmain- A. Withtheapprovalof theCommittee,toenter tainedbytheFederalReserveBankof NewYork intoanyneededagreementorunderstanding withtheforeignbanksdesignatedbytheBoardof withtheSecretaryof theTreasuryaboutthe Governorsundersection214.5of RegulationN divisionof responsibilityforforeigncurrency shallbereferredforreviewandapprovaltothe operationsbetweentheSystemandthe Committee. Treasury; 5. Foreigncurrencyholdingsshallbeinvestedto B. TokeeptheSecretaryof theTreasuryfully ensurethatadequateliquidityismaintainedto advisedconcerningSystemforeigncurrency meetanticipatedneedsandsothateachcurrency operations,andtoconsultwiththeSecretary portfolioshallgenerallyhaveanaverageduration onpolicymattersrelatingtoforeigncurrency of nomorethan18months(calculatedas operations; Macaulayduration).Suchinvestmentsmay includebuyingorsellingoutrightobligationsof, C. Fromtimetotime,totransmitappropriate orfullyguaranteedastoprincipalandinterestby, reportsandinformationtotheNational aforeigngovernmentoragencythereof;buying AdvisoryCouncilonInternationalMonetary suchsecuritiesunderagreementsforrepurchase andFinancialPolicies. of suchsecurities;sellingsuchsecuritiesunder agreementsfortheresaleof suchsecurities;and 8. Staff officersof theCommitteeareauthorizedto holdingvarioustimeandotherdepositaccounts transmitpertinentinformationonSystemforeign

170 97thAnnualReport|2010 currencyoperationstoappropriateofficialsof the C. Inamannerconsistentwiththeobligations TreasuryDepartment. of theUnitedStatesintheInternational MonetaryFundregardingexchangearrange- 9. AllFederalReserveBanksshallparticipateinthe mentsunderIMFArticleIV. foreigncurrencyoperationsforSystemAccount inaccordancewithparagraph3G(1)of theBoard Procedural Instructions with Respect to of Governors’Statementof Procedurewith Foreign Currency Operations (Reaffirmed RespecttoForeignRelationshipsof Federal January 26, 2010) ReserveBanksdatedJanuary1,1944. Inconductingoperationspursuanttotheauthoriza- Foreign Currency Directive (Reaffirmed tionanddirectionof theFederalOpenMarketCom- January 26, 2010) mitteeassetforthintheAuthorizationforForeign CurrencyOperationsandtheForeignCurrency 1. Systemoperationsinforeigncurrenciesshallgen- Directive,theFederalReserveBankof NewYork, throughtheManager,SystemOpenMarketAccount erallybedirectedatcounteringdisorderlymarket (“Manager”),shallbeguidedbythefollowingproceconditions,providedthatmarketexchangerates duralunderstandingswithrespecttoconsultations fortheU.S.dollarreflectactionsandbehavior andclearanceswiththeCommittee,theForeignCurconsistentwithIMFArticleIV,Section1. rencySubcommittee,andtheChairmanof theCommittee,unlessotherwisedirectedbytheCommittee. 2. ToachievethisendtheSystemshall: AlloperationsundertakenpursuanttosuchclearancesshallbereportedpromptlytotheCommittee. A. Undertakespotandforwardpurchasesand salesof foreignexchange. 1. TheManagershallclearwiththeSubcommittee (orwiththeChairman,if theChairmanbelieves B. Maintainreciprocalcurrency(“swap”) thatconsultationwiththeSubcommitteeisnot arrangementswithselectedforeigncentral feasibleinthetimeavailable): banks. A. Anyoperationthatwouldresultinachange C. Cooperateinotherrespectswithcentral intheSystem’soverallopenpositioninforbanksof othercountriesandwithinternaeigncurrenciesexceeding$300milliononany tionalmonetaryinstitutions. dayor$600millionsincethemostrecent regularmeetingof theCommittee. 3. Transactionsmayalsobeundertaken: B. Anyoperationthatwouldresultinachange A. ToadjustSystembalancesinlightof probonanydayintheSystem’snetpositionina ablefutureneedsforcurrencies. singleforeigncurrencyexceeding$150million,or$300millionwhentheoperationis B. ToprovidemeansformeetingSystemand associatedwithrepaymentof swapdrawings. Treasurycommitmentsinparticularcurrencies,andtofacilitateoperationsof the C. Anyoperationthatmightgenerateasubstan- ExchangeStabilizationFund. tialvolumeof tradinginaparticularcurrencybytheSystem,eventhoughthechange C. Forsuchotherpurposesasmaybeexpressly intheSystem’snetpositioninthatcurrency authorizedbytheCommittee. mightbelessthanthelimitsspecifiedin1.B. 4. Systemforeigncurrencyoperationsshallbe D. Anyswapdrawingproposedbyaforeign conducted: banknotexceedingthelargerof (i)$200millionor(ii)15percentof thesizeof theswap A. Incloseandcontinuousconsultationand arrangement. cooperationwiththeUnitedStatesTreasury; 2. TheManagershallclearwiththeCommittee(or B. Incooperation,asappropriate,withforeign withtheSubcommittee,if theSubcommittee monetaryauthorities;and believesthatconsultationwiththefullCommittee

Minutesof FederalOpenMarketCommitteeMeetings 171 isnotfeasibleinthetimeavailable,orwiththe onthesamedayitsexistingholdingsmatured;par- Chairman,if theChairmanbelievesthatconsul- ticipantsagreedthattheDeskshouldcontinuethis tationwiththeSubcommitteeisnotfeasiblein practicefornow,buttheCommitteewouldconsider thetimeavailable): furtheritspolicyforredeemingorreinvestingmaturingTreasurysecurities.Therewerenoopenmarket A. Anyoperationthatwouldresultinachange operationsinforeigncurrenciesfortheSystem’s intheSystem’soverallopenpositioninfor- accountduringtheintermeetingperiod. eigncurrenciesexceeding$1.5billionsince themostrecentregularmeetingof the Staff briefedtheCommitteeoncurrentusageof the Committee. discountwindowandotherliquidityfacilitiesand suggestedadditionalstepspolicymakerscouldtaketo B. Anyswapdrawingproposedbyaforeign normalizetheFederalReserve’sliquidityprovision. bankexceedingthelargerof (i)$200million Thesestepsincludedcontinuingtoscaleback or(ii)15percentof thesizeof theswap amountsofferedthroughtheTermAuctionFacility arrangement. (TAF);returningtothepre-crisisstandardof onedaymaturityforprimarycreditloanstoallbutthe 3. TheManagershallalsoconsultwiththeSubcom- smallestdepositoryinstitutions;andincreasing,inimitteeortheChairmanaboutproposedswap tiallyto50basispointsfrom25basispoints,the drawingsbytheSystemandaboutanyoperations spreadbetweentheprimarycreditrateandtheupper thatarenotof aroutinecharacter. endof theCommittee’stargetrangeforthefederal fundsrate.Settingthespreadreflectsabalance DevelopmentsinFinancialMarketsandthe betweentwoobjectives:encouragingdepositoryinsti- FederalReserve’sBalanceSheet tutionstousethediscountwindowasabackup TheManagerof theSystemOpenMarketAccount sourceof liquiditywhentheyarefacedwithtemporeportedondevelopmentsindomesticandforeign raryliquidityshortfallsorwhenfundingmarketsare financialmarketsduringtheperiodsincetheCom- disrupted,anddiscouragingdepositoryinstitutions mitteemetonDecember15–16,2009.Financialmar- fromrelyingonthediscountwindowasaroutine ketconditionsremainedsupportiveof economic sourceof fundswhenotherfundingisgenerallyavailgrowth,thoughvolatilityinsecuritiesmarkets able.Thespreadwas100basispointsbeforethe increasednotablytowardtheendof theintermeeting financialcrisisemerged;theFederalReservenarperiod.Year-endfundingpressureswereminimal.No rowedthespreadto50basispointsandthento marketstrainshadappearedasaresultof theimmi- 25basispointsaspartof itsresponsetothefinancial nentclosing,onFebruary1,of mostof theFederal crisis.Participantsjudgedthatimprovementsinbank Reserve’sspecialliquidityfacilities.TheManager fundingmarketswarrantedreducingamountsoffered alsoreportedonSystemopenmarketoperationsin atTAFauctionstowardzerointhreestepsoverthe agencydebtandagencyMBSduringtheintermeet- nextfewmonths,whilenotingthattheywouldbe ingperiod.TheDeskcontinuedtograduallyslowthe preparedtomodifythatplanif necessarytosupport paceof itspurchasesof thesesecuritiesasitmoved financialstabilityandeconomicgrowth.Theyagreed towardcompletingtheCommittee’sprogramof asset thatitwouldsoonbeappropriatetoreturnthematupurchasesbyMarch31.TheDeskalsocontinuedto rityof primarycreditloanstoovernightandto engageindollarrolltransactionsinagencyMBS widenthespreadbetweentheprimarycreditrateand securitiestofacilitatesettlementof itsoutrightpur- thetopof theCommittee’stargetrangeforthefedchases.TheFederalReserve’stotalassetsremaineda eralfundsrate.Severalparticipantsnotedthatthe bitabove$2.2trillion,astheincreaseintheSystem’s optimalspreadcoulddepend,inpart,ontheComholdingsof securitieswasalmostentirelyoffsetbya mittee’seventualdecisionsaboutthemostsuitable furtherdeclineinusageof theSystem’screditand approachtoimplementingU.S.monetarypolicyover liquidityfacilities.Byunanimousvote,theCommit- thelongerterm.Participantsgenerallyagreedthat teeratifiedtheDesk’stransactions.Participants suchstepstoreturntheFederalReserve’sliquidity agreedthattheDeskshouldcontinuetheinterim provisiontoanormalfootingwouldbetechnical approachof notreinvestingtheproceedsof maturing adjustmentstoreflectthenotablediminutionof the orprepaidagencysecuritiesandMBSheldbythe marketstrainsthathadmadethecreationof new FederalReserve.TheDeskhadcontinuedtoreinvest liquidityfacilitiesandexpansionof existingfacilities theproceedsof maturingTreasurysecuritiesby necessaryandemphasizedthatsuchstepswouldnot acquiringnewlyauctionedTreasurysecuritiesissued indicateachangeintheCommittee’sassessmentof

172 97thAnnualReport|2010 theappropriatestanceof monetarypolicyorthe ingtheIOERrateinlinewithanincreaseinthefedpropertimetobeginmovingtoalessaccommodative eralfundsratetargetandconcurrentlyusingoneor policystance. moretoolstoreducethesupplyof reservebalances; and(3)raisingtheIOERrateandthetargetforthe Secretary’snote:AftertheFOMCmeeting,the federalfundsrateandusingreservedrainingtools Chairman,actingunderauthoritydelegatedby onlyif thefederalfundsratedidnotincreaseinline theBoardof Governors,directedthatTAFauc- withtheCommittee’starget. tionamountsbereducedto$50billionforthe February8auctionandto$25billionforthefinal Participantsexpressedarangeof viewsaboutthe TAFauction,tobeheldonMarch8. toolsandstrategiesforremovingpolicyaccommodationwhenthatstepbecomesappropriate.Allagreed Staff alsobriefedpolicymakersabouttoolsandstrat- thatraisingtheIOERrateandthetargetforthefedegiesforaneventualwithdrawalof policyaccommo- eralfundsratewouldbeakeyelementof amoveto dationandsummarizedlinkagesbetweenthesetools lessaccommodativemonetarypolicy.Mostthought andstrategiesandalternativeframeworksforimple- thatitlikelywouldbeappropriatetoreducethesupmentingmonetarypolicyinthelongerrun.Thetools plyof reservebalances,tosomeextent,beforethe formovingtoalessaccommodativepolicystance eventualincreaseintheIOERrateandinthetarget encompassed(1)raisingtheinterestratepaidon forthefederalfundsrate,inpartbecausedoingso excessreservebalances(theIOERrate);(2)executing wouldtightenthelinkbetweenshort-termmarket termreverserepurchaseagreementswiththeprimary ratesandtheIOERrate;however,severalnotedthat dealers;(3)executingtermRRPswithabroader drainingoperationsmightbeseenasaprecursorto rangeof counterparties;(4)usingatermdeposit tighteningandshouldonlybeundertakenwhenthe facility(TDF)toabsorbexcessreserves;(5)redeem- Committeejudgedthatanincreaseinitstargetfor ingmaturingandprepaidsecuritiesheldbytheFed- thefederalfundsratewouldsoonbeappropriate.For eralReservewithoutreinvestingtheproceeds;and thesamereason,afewjudgedthatitwouldbebetter (6)sellingsecuritiesheldbytheFederalReserve todrainreservesconcurrentlywiththeeventual beforetheymature.Allbutthefirstof thesetools increaseintheIOERandtargetrates. wouldshrinkthesupplyof reservebalances;thelast twowouldalsoshrinktheFederalReserve’sbalance Withrespecttolonger-runapproachestoimplementsheet.TheDeskalreadyhadsuccessfullytestedits ingmonetarypolicy,mostpolicymakerssawbenefits abilitytoconducttermRRPswithprimarydealers incontinuingtousethefederalfundsrateasthe byarrangingseveralsmall-scaletransactionsusing operatingtargetforimplementingmonetarypolicy, Treasurysecuritiesandagencydebtascollateral;staff solongasothermoneymarketratesremainedclosely anticipatedthattheFederalReservewouldbeableto linkedtothefederalfundsrate.Manythoughtthat executetermRRPsagainstMBSearlythisspring anapproachinwhichtheprimarycreditratewasset andwouldhavethecapabilitytoconductRRPswith abovetheCommittee’stargetforthefederalfunds anexpandedsetof counterpartiessoonafter.In rateandtheIOERratewassetbelowthattarget—a comingweeks,staff wouldanalyzecomments corridorsystem—wouldbebeneficial.Participants receivedinresponsetoaFederalRegisternotice,pub- recognized,however,thatthesupplyof reserveballishedinlateDecember,requestingthepublic’sinput anceswouldneedtobereducedconsiderablytolift ontheTDFproposal.Staff wouldthenpreparea thefundsrateabovetheIOERrate.Severalsaw finalproposalfortheBoard’sconsideration.ATDF advantagestousingtheIOERrate,ratherthanatarcouldbeoperationalassoonasMay. getforamarketrate,toindicatethestanceof policy. Participantsnotedthattheirjudgmentsweretenta- Staff describedseveralfeasiblestrategiesforusing tive,thattheywouldcontinuetodiscusstheultimate thesesixtoolstosupportagradualreturntowarda operatingregime,andthattheymightwellgainusemorenormalstanceof monetarypolicy:(1)using fulinformationaboutlonger-runapproachesduring oneormoreof thetoolstoprogressivelyreducethe theeventualwithdrawalof policyaccommodation. supplyof reservebalances—whichrosetoanexceptionallyhighlevelasaconsequenceof theexpansion Finally,staff notedthattheCommitteemightwant of theFederalReserve’sliquidityandlendingfacili- toaddressboththeeventualsizeof theFederal tiesandsubsequentlarge-scaleassetpurchasesdur- Reserve’sbalancesheetanditscomposition.Policyingthefinancialcrisis—beforeraisingtheIOERrate makerswereunanimousintheviewthatitwillbe andthetargetforthefederalfundsrate;(2)increas- appropriatetoshrinkthesupplyof reservebalances

Minutesof FederalOpenMarketCommitteeMeetings 173 andthesizeof theFederalReserve’sbalancesheet wellmaintainedinthefourthquarter,andbusiness substantiallyovertime.Moreover,theyagreedthatit expendituresonequipmentandsoftwareappearedto willeventuallybeappropriatefortheSystemOpen expandsubstantially.However,theimprovementin MarketAccounttoreturntoholdingonlysecurities thehousingmarketslowed,andspendingonnonresiissuedbytheU.S.Treasury,asitdidbeforethefinan- dentialstructurescontinuedtofall.Recentdatasugcialcrisis.SeveralthoughttheFederalReserveshould gestedthatthepaceof inventoryliquidationdiminhold,eventually,aportfoliocomposedlargelyof ishedconsiderablylastquarter,providingasizable shorter-termTreasurysecurities.Participantsagreed boosttoeconomicactivity.Indeed,industrialprothatapolicyof redeemingandnotreplacingagency ductionadvancedatasolidpaceinthefourthquardebtandMBSasthosesecuritiesmatureorarepre- ter.Inthelabormarket,layoffssubsidednoticeably paidwouldcontributetoachievingbothgoalsand inthefinalmonthsof lastyear,buttheunemploythuswouldbeappropriate.Manythoughtitwould mentrateremainedelevatedandhiringstayedweak. alsobedesirabletoredeemsomeorallof theTreas- Meanwhile,increasesinenergypricespushedup urysecuritiesownedbytheFederalReserveasthey headlineconsumerpriceinflationevenascoreconmature,recognizingthatatsomepointinthefuture sumerpriceinflationremainedsubdued. theFederalReservewouldneedtoresumepurchases of Treasurysecuritiestooffsetreductionsinother Someindicatorssuggestedthatthedeteriorationin assetsandtoaccommodategrowthinthepublic’s thelabormarketwasabating.Thepaceof joblosses demandforU.S.currency.Participantsexpresseda continuedtomoderate:Thethree-monthchangein rangeof viewsaboutassetsales.Mostjudgedthata privatenonfarmpayrollshadbecomeprogressively futureprogramof gradualassetsalescouldbehelp- lessnegativesinceearly2009;thatpatternwaswidefulinshrinkingthesizeof theFederalReserve’sbal- spreadacrossindustries.Theunemploymentratewas ancesheet,reducingreservebalances,andshiftingthe essentiallyunchangedfromOctoberthroughDecemcompositionof securitiesholdingsbacktoward ber.Thelaborforceparticipationrate,however,had Treasurysecurities;however,manywereconcerned declinedsteeplysincethespring,likelyreflecting,at thatsuchtransactionscouldcausemarketdisrup- leastinpart,adverselabormarketconditions.Moretionsandhaveadverseimplicationsfortheeconomic over,hiringremainedweak,thetotalnumberof indirecovery,particularlyif theyweretobeginbeforethe vidualsreceivingunemploymentinsurance—includrecoveryhadbecomeself-sustainingandbeforethe ingextendedandemergencybenefits—continuedto Committeehaddeterminedthatatighteningof climb,theaveragelengthof ongoingunemployment financialconditionswasappropriateandhadbegun spellsrosesteeply,andjoblessnessbecameincreastoraiseshort-terminterestrates.Severalthoughtit inglyconcentratedamongthelong-term importanttobeginaprogramof assetsalesinthe unemployed. nearfuturetoensurethattheFederalReserve’sbalancesheetshrinksmorequicklyandinamorepre- Totalindustrialproduction(IP)roseinDecember, dictablemannerthancouldbeachievedsolelyby thesixthconsecutiveincreasesinceitstrough.The redeemingmaturingsecuritiesandnotreinvesting gaininDecemberprimarilyresultedfromajumpin prepayments;theyjudgedthataprogramof asset outputatelectricandnaturalgasutilitiescausedby salesspreadoveranumberof yearswouldunder- unseasonablycoldweather.ManufacturingIPedged scoretheCommittee’sdeterminationtoexitfromthe downafterlargeandwidespreadgainsinNovember. periodof exceptionallyaccommodativemonetary Forthefourthquarterasawhole,thesolidincrease policyinamannerandatapacethatwouldkeep inmanufacturingIPreflectedarecoveryinmotor inflationcontainedwithouthavinglargeeffectson vehicleoutput,risingexportdemand,andaslower assetpricesormarketinterestrates.Afewsuggested paceof businessinventoryliquidation.Outputof thatthepaceof assetsales,andpotentiallyof pur- consumergoods,businessequipment,andmaterials chases,couldbeadjustedovertimeinresponseto allroseinthefourthquarter,thoughtheaverage developmentsintheeconomyandtheevolutionof monthlygainsinthesecategorieswerealittlesmaller theeconomicoutlook.TheCommitteemadenodeci- thaninthethirdquarter.Theavailablenear-term sionsaboutassetsalesatthismeeting. indicatorsof productionsuggestedthatIPwould increasefurtherincomingmonths. StaffReviewoftheEconomicSituation TheinformationreviewedattheJanuary26–27meet- Consumerspendingcontinuedtotrenduplatelast ingsuggestedthateconomicactivitycontinuedto yearbutremainedwellbelowitspre-recessionlevel. strengtheninrecentmonths.Consumerspendingwas AfterastrongincreaseinNovember,realpersonal

174 97thAnnualReport|2010 consumptionexpendituresappearedtodropback quarter.Thepaceof realbusinessinventoryliquidasomeinDecember.Retailsalesmayhavebeenheld tionappearedtodecreaseconsiderablyinthefourth downbyunusuallybadweather,butpurchasesof quarter.Afterthreequartersof sizabledeclines,real newlightmotorvehiclescontinuedtoincrease.The nonfarminventoriesshrankatamoremodestpacein fundamentaldeterminantsof householdspending— October,andbook-valuedataforthiscategorysugincludingrealdisposableincomeandwealth— gestedthatinventoriesmayhaveincreasedinreal strengthenedmodestly,onbalance,neartheendof termsinNovember.Availabledatasuggestedthatthe theyearbutwerestillrelativelyweak.Despitethe changeininventoryinvestment—includingasizable improvementfromearlylastyear,measuresof con- accumulationinwholesalestocksof farmproducts— sumersentimentremainedlowrelativetohistorical madeanappreciablecontributiontotheincreasein norms,andtermsandstandardsonconsumerloans, realgrossdomesticproduct(GDP)inthefourth particularlycreditcardloans,stayedverytight. quarter. Therecoveryinthehousingmarketslowedinthesec- ConsumerpriceinflationwasmodestinDecember ondhalf of 2009,eventhoughanumberof factors afterbeingboostedintheprecedingtwomonthsby supportedhousingdemand.Interestratesforcon- increasesinenergyprices.Coreconsumerpriceinflaforming30-yearfixed-ratemortgagesremainedhis- tionremainedsubdued.Priceincreasesfornontoricallylow.Inaddition,theReuters/Universityof energyservicesslowedearlylastyearandremained MichiganSurveysof Consumersreportedthatthe modestthroughout2009,reflectingdecliningprices numberof respondentswhoexpectedhousepricesto forhousingservicesandperhapsthedecelerationin increasecontinuedtoexceedthenumberwho laborcosts.Priceincreasesforcoregoodswerequite expectedpricestodecrease.Salesof existingsingle- modestduringthesecondhalf of 2009.Accordingto familyhomesrosestronglyfromJulytoNovember surveyresults,households’expectationsof near-term butfellinDecember,apatternthatsuggestedsales inflationincreasedinJanuary;inaddition,median werepulledaheadinanticipationof theoriginally longer-terminflationexpectationsedgedup,though scheduledexpirationof thefirst-timehomebuyer theyremainednearthelowerendof thenarrow creditonNovember30.Still,existinghomesales rangethathasprevailedoverthepastfewyears. remainedabovetheirlevelinearlierquarters.Salesof newhomesalsoturneddowninNovemberand TheU.S.internationaltradedeficitwidenedin December,retracingpartof theirrecoveryearlierin November,asasharpriseinnominalimportsouttheyear.Similarly,startsof single-familyhomes pacedanincreaseinexports.Theriseinexportswas retreatedalittlefromJunetoDecemberafter drivenprimarilybyalargegaininagricultural advancingbrisklylastspring.Thepaceof construc- exports,whichwaspartiallyoffsetbyadeclinein tionwasslowenoughthateventhemodestpaceof exportsof consumergoodsthatfollowedrobust newhomesaleswassufficienttofurtherreducethe growthinOctober.Importsof oilaccountedfor overhangof unsoldnewsingle-familyhouses. roughlyone-thirdof theincreaseintotalimports, thoughmostothercategoriesof importsalso Realspendingonequipmentandsoftwareapparently recordedgains. roserobustlyinthefourthquarterfollowingaslight increaseinthepreviousquarter.Spendingonhigh- Incomingdatasuggestedthatactivityinadvanced techequipment,inparticular,appearedtoincreaseat foreigneconomiescontinuedtoexpandinthefourth aconsiderablymorerapidclipinthefourthquarter quarter,thoughatamoderatepace.However,unemthaninthethird;bothordersandshipmentsof high- ploymentratesremainedelevatedandconsumption techequipmentrosemarkedly,onnet,inOctober indicatorsweremixed.Creditconditionsimproved andNovember.Businesspurchasesof motorvehicles further,aslendingtotheprivatesectorexpandedin likelyalsoclimbedinthefourthquarter.Outsideof someeconomies.Increasesinexportandimportvolthetransportationandhigh-techsectors,business umespointedtoagradualrecoveryininternational outlaysonequipmentandsoftwareappearedto trade.Economicactivityinemergingmarketeconochangelittleinthefourthquarter.Conditionsinthe miescontinuedtoexpandinthefourthquarter, nonresidentialconstructionsectorgenerallyremained althoughatapaceslowerthanthatof thethirdquarpoor.Realspendingonstructuresoutsideof the ter.WithinemergingAsia,growthappearedtohave drillingandminingsectordroppedinthethirdquar- remainedrobustinChinaandtohaveslowedelseter;dataonnominalexpendituresthroughNovember where.InLatinAmerica,indicatorspointedtoaconpointedtoanevenfasterrateof declineinthefourth tinuationof growthinmuchof theregion,although

Minutesof FederalOpenMarketCommitteeMeetings 175 growthinMexicoappearedtoslowsignificantlyfol- intermeetingperiod,andmarketcommentarysuglowingthethirdquarter’soutsizedgain.Amidrising gestedlittleconcernabouttheimpendingexpiration energyprices,12-monthheadlineinflationfor of anumberof thefacilities. DecemberpickedupinalladvancedforeigneconomiesexceptJapan,wheredeflationmoderatedonly Aftertrendinghigherformostof theintermeeting mildly.Headlineinflationcontinuedtoriseinemerg- period,broadstockpriceindexessubsequently ingAsia,drivenbyenergyandfoodprices.InLatin reversedcourseamidelevatedvolatility,endingthe America,headlineinflationremainedbelowitsear- periodlittlechangedonbalance.Thegapbetween lierelevatedpace. thestaff’sestimateof theexpectedrealequityreturn overthenext10yearsforS&P500firmsandthereal StaffReviewoftheFinancialSituation 10-yearTreasuryyield—aroughgaugeof theequity ThedecisionbytheFOMCtokeepthetargetrange riskpremium—stayedaboutthesameandremained forthefederalfundsrateunchangedattheDecember wellaboveitsaveragelevelduringthepastdecade. meetinganditsretentionof the“extendedperiod” Overtheintermeetingperiod,yieldsonboth languageinthestatementwerewidelyanticipatedby investment-gradeandspeculative-gradecorporate marketparticipantsandelicitedlittlepriceresponse. bondsedgeddown,whilethoseoncomparable- Laterintheintermeetingperiod,theexpectedpathof maturityTreasurysecuritiesheldsteady.Estimatesof thefederalfundsrateimpliedbyfederalfundsand bid-askedspreadsforcorporatebonds—ameasureof Eurodollarfuturesquotesshifteddownslightlyas liquidityinthecorporatebondmarket—remained investorsapparentlyinterpretedFederalReserve steady.Intheleveragedloanmarket,averagebid communications,includingthediscussionof large- pricesrosefurtherandbid-askedspreadswerelittle scaleassetpurchasesintheFOMCminutes,aspoint- changed. ingtoamoreprotractedperiodof accommodative monetarypolicythanhadbeenanticipated.Bycon- Overall,netdebtfinancingbynonfinancialbusitrast,yieldson2-and10-yearnominalTreasurysecu- nesseswasnearzerointhefourthquarterafter ritieswereaboutunchangedonnet.Inflationcom- declininginthethird,consistentwithweakdemand pensationbasedon5-yearTreasuryinflation- forcreditandstilltightcreditstandardsandtermsat protectedsecurities(TIPS)increased;theincrease banks.InDecember,grosspublicequityissuanceby likelyreflectedhigherinflationriskpremiumsanda nonfinancialfirmsmaintaineditssolidpaceandissufurtherimprovementinTIPSmarketliquidity,along ancebyfinancialfirmsincreasednoticeably,assevwithsomeriseininflationexpectationsowing,in erallargebanksissuedsharesandusedtheproceeds part,toincreasesinoilprices.Inflationcompensa- torepaycapitalinjectionstheyhadreceivedfromthe tion5to10yearsaheaddeclinedslightly. TroubledAssetRelief Program.Financingconditionsforcommercialrealestate,however,remained Financialmarketconditionsremainedsupportiveof strained.Moody’sindexof commercialproperty economicgrowthovertheintermeetingperiod,and pricesshowedanotherdropinOctober,bringingthe short-termfundingmarketsweregenerallystable. indexbacktoits2002level.Delinquencyrateson SpreadsbetweenLondoninterbankofferedrates loansincommercialmortgage-backedsecurities (Libor)andovernightindexswap(OIS)ratesatone- poolsincreasedfurtherinDecember.Theaverage andthree-monthmaturitiesremainedlow,while interestrateon30-yearconformingfixed-rateresispreadsatthesix-monthmaturitycontinuedtoedge dentialmortgagesincreasedslightlyovertheinterdown.SpreadsonA2/P2-ratedcommercialpaper meetingperiodbutremainedwithinthenarrowrange (CP)andAA-ratedasset-backedCPheldsteadyat of valuesoverrecentmonths.Consumercreditconthelowendof therangethathasprevailedsincemid- tractedforthe10thconsecutivemonthinNovember, 2007.StrongdemandforTreasurybillsinthecash owingtoafurthersteepdeclineinrevolvingcredit. andrepurchaseagreement(repo)market,together Creditcardinterestratespreadscontinuedto withaseasonaldeclineinbillsoutstanding,put increaseinNovember.Incontrast,spreadsonnew downwardpressureonbothbillyieldsandshort- autoloansextendedtheirdowntrendthroughearly termreporates.Althoughyear-endpressuresin January.Delinquencyratesonconsumerloans short-termfundingmarketsweregenerallymodest remainedhighinrecentmonths.Issuanceof credit amidampleliquidity,therepomarketexperienced cardasset-backedsecuritieswasminimalinOctober someyear-enddislocations,withafewtransactions andNovemberbutpickedupinDecemberafterthe reportedlyoccurringatnegativeinterestrates.Useof FederalDepositInsuranceCorporationannounceda FederalReservecreditfacilitiesedgedloweroverthe temporaryextensionof safe-harborrulesforitshan-

176 97thAnnualReport|2010 dlingof securitizedassetsshouldasponsoringbank increaseinrealGDPinthefourthquarterof 2009. betakenintoreceivership. Theupwardrevisionwasininventoryinvestment;the staff’sprojectionof theincreaseinfinaldemandwas Commercialbankcreditcontinuedtocontractin unchanged.Nonfarmbusinessesapparentlymoved December,asanincreaseinbanks’securitieshold- earliertostemthepaceof inventoryliquidationthan ingswasmorethanoffsetbyalargedropintotal thestaff hadanticipated.Asaresult,theeconomy loans.Commercialandindustrialloansandcommer- likelyentered2010withproductionincloseraligncialrealestateloansagainfellmarkedly.Althougha mentwithsalesthanthestaff hadexpectedinmidsubstantialfractionof bankscontinuedtotighten December.Apartfromthefluctuationsininventotheircreditpoliciesoncommercialrealestateloansin ries,economicdevelopmentslargelywereasthestaff thefourthquarter,lendingstandardsformostother hadanticipated.Theincominginformationonthe typesof loanswerelittlechanged,accordingtothe labormarketandindustrialproductionwasbroadly JanuarySeniorLoanOfficerOpinionSurveyon consistentwithstaff expectations,and,thoughhous- BankLendingPractices.Nonetheless,standardsand ingactivityseemedtobeonalower-than-anticipated termsonallmajorloantypesremainedtight,andthe trajectory,recentdataonbusinesscapitalspending demandforloansreportedlyweakenedfurther. wereslightlyaboveexpectations.Thestaff continued toprojectamoderaterecoveryineconomicactivity M2continuedtoexpandsluggishlyinDecember. overthenexttwoyears,witheconomicgrowthsup- Growthof liquiddepositsremainedrobust,butsmall portedbytheaccommodativestanceof monetary timedepositsandretailmoneymarketmutualfunds policyandbyafurtherwaningof thefactorsthat againcontractedatarapidpaceinresponsetothe weighedonspendingandproductionoverthepast lowyieldsonthoseassets.Themonetarybaseand twoyears.Thestaff alsocontinuedtoexpectthat totalbankreserveswereroughlyflat,asthecontrac- resourceslackwouldbetakenuponlygraduallyover tionincreditoutstandingfromtheFederalReserve’s theforecastperiod. liquidityandcreditfacilitieswasaboutoffsetbythe Desk’spurchasesof agencydebtandMBS. Thestaff’sforecastsforsomeslowingof coreand headlineinflationoverthenexttwoyearswerelittle Overtheintermeetingperiod,benchmarksovereign changed.Therewerenosignificantsurprisesinthe yieldsinmostadvancedforeigneconomiesdisplayed incomingpricedata,substantialslackinresourceutisomevolatilitybutendedlittlechangedonnet. lizationwasstillexpectedtoputdownwardpressure Globalsovereignbondofferingssincethestartof the oncosts,andlonger-terminflationexpectations yearhadbeenreasonablywellreceived,although remainedrelativelystable.Givenstaff projectionsfor mountingfiscalconcernsmadeinvestorsmorereluc- consumerenergyprices,headlineinflationwasprotanttoholddebtissuedbytheGreekgovernment; jectedtorunsomewhatabovecoreinflationin2010 sovereignyieldsroseinGreeceand,toalesserextent, buttoslowtothesamesubduedrateascoreinflation inseveralothercountrieswherefiscalissueshave in2011. raisedconcernsamonginvestors.Allmajorforeign centralbankskepttheirpolicyratesunchanged.For- Participants’ViewsonCurrentConditionsand eignequitypricesgenerallyendedtheintermeeting theEconomicOutlook perioddown.Europeanfinancialstocksdeclined InconjunctionwiththisFOMCmeeting,allmeeting substantially,asearlyprofitreportsforthefourth participants—thefivemembersof theBoardof quarterfromafewbanksrekindledsomeconcerns Governorsandthepresidentsof the12Federal aboutthehealthof thebankingsystem.Thebroad ReserveBanks—providedprojectionsforeconomic nominalindexof theforeignexchangevalueof the growth,theunemploymentrate,andconsumerprice dollarrose,reportedlyreflectingagrowingpercep- inflationforeachyearfrom2010through2012and tionthatU.S.growthprospectswerebetterthan overalongerhorizon.Longer-runprojectionsreprethoseinEuropeandJapan.Concernsthatpolicy senteachparticipant’sassessmentof therateto tighteningbyChinamightrestraintheglobalrecov- whicheachvariablewouldbeexpectedtoconverge eryalsomayhavecontributedtothedollar’sappre- overtimeunderappropriatemonetarypolicyandin ciationagainstmanycurrencieslateintheperiod. theabsenceof furthershocks.Participants’forecasts through2012andoverthelongerrunaredescribed StaffEconomicOutlook intheSummaryof EconomicProjections,whichis IntheforecastpreparedfortheJanuaryFOMC attachedasanaddendumtotheseminutes. meeting,thestaff revisedupitsestimateof the

Minutesof FederalOpenMarketCommitteeMeetings 177 Intheirdiscussionof theeconomicsituationand sourceof uncertaintyintheeconomicoutlook,paroutlook,participantsagreedthattheincomingdata ticularlyintheoutlookforconsumerspending. andinformationreceivedfrombusinesscontacts, Whiletheaveragepaceof layoffsdiminishedsubstanthoughmixed,indicatedthateconomicgrowthhad tiallyinrecentmonths,fewfirmswerehiring.The strengthenedinthefourthquarter,thatfirmswere unusuallylargefractionof individualswhowere reducingpayrollsatalessrapidpace,andthatdown- workingparttimeforeconomicreasons,aswellas sideriskstotheoutlookforeconomicgrowthhad theuncommonlylowlevelof theaverageworkweek, diminishedabitfurther.Participantssawtheeco- pointedtoagradualincreaseinpayrollsforsome nomicnewsasbroadlyinlinewiththeexpectations timeevenif hoursworkedweretoincreasesubstanformoderategrowthandsubduedinflationin2010 tiallyastheeconomicrecoveryproceeded.Indeed, thattheyheldwhentheCommitteemetinmid- manybusinesscontactsagainreportedthatthey December;moreover,financialconditionsweremuch wouldbecautiousinhiring,sayingtheyexpectedto thesame,onbalance,aswhentheFOMClastmet. meetanynear-termincreaseindemandbyraising Accordingly,participants’viewsabouttheeconomic existingemployees’hoursandboostingproductivity, outlookhadnotchangedappreciably.Manynoted thusdelayingtheneedtoaddemployees.If busitheevidencethatthepaceof inventorydecumulation nesseswereabletocontinuegeneratinglargeproducslowedquitesubstantiallyinthefourthquarterof tivitygains,asinrecentquarters,thenfirmswould 2009asfirmsincreasedoutputtobringproduction needtohirefewerworkersintheneartermtomeet intocloseralignmentwithsales.Participantssawthe risingdemandsfortheirproducts.Butif theunususlowerpaceof inventoryreductionsasawelcome allyrapidproductivitygrowthseeninrecentquarters indicationthat,ingeneral,firmsnolongerhadlarge wasnotsustained,thenjobgrowthcouldpickupsiginventoryoverhangs.Buttheyobservedthatbusiness nificantlyasproductivityreturnedtosustainablelevcontactscontinuedtoreportgreatreluctancetobuild els.Theriseinemploymentof temporaryworkersin inventories,increasepayrolls,andexpandcapacity. recentmonthsappearedtobecontinuing;historical Participantsexpectedtheeconomicrecoverytocon- experiencesuggestedthatincreaseduseof temporary tinue,butmostanticipatedthatthepickupinoutput helpcouldpresageabroaderincreaseinjobgrowth. andemploymentgrowthwouldberatherslowrelativetopastrecoveriesfromdeeprecessions.Amoder- Participantsgenerallysawthedataandanecdotaleviatepaceof expansionwouldimplyslowimprove- denceasindicatingmoderategrowthindemandsfor mentinthelabormarketthisyear,withunemploy- goodsandservices,althoughwithsubstantialvariamentdecliningonlygradually.Mostparticipants tionacrosssectors.Consumerspendingappearedto againprojectedthattheeconomywouldgrowsome- beincreasingmodestly.Reportsonholidaysaleswere whatmorerapidlyin2011and2012,generatinga mixed.Retailersindicatedthatconsumersappeared morepronounceddeclineintheunemploymentrate, morewillingtobuybutthattheyremainedunusually asfinancialconditionsandtheavailabilityof credit sensitivetopricing.Businesscontactscontinuedto continuetoimprove.Ingeneral,participantssawthe reportthattheywerelimitinginvestmentoutlays upsideanddownsideriskstotheoutlookforeco- pendingresolutionof uncertaintyaboutsalesprosnomicgrowthasroughlybalanced.Participants pectsandfuturetaxandregulatorypolicies;moreagreedthatunderlyinginflationcurrentlywassub- over,theyhadsubstantialexcesscapacityandthus duedandwaslikelytoremainsoforsometime. littleneedtoexpandproductionfacilities.Evenso, Somenotedtheriskthat,withoutputwellbelow thedataindicatedsolidgrowthinbusinessspending potentialoverthenextcoupleof years,inflation onhigh-techequipmentinrecentmonths.Anecdotal couldedgefurtherbelowtheratestheyjudgedmost evidencesuggestedthatsuchspendingwasbeing consistentwiththeFederalReserve’sdualmandate drivenbyopportunitiestoreducecostsandby formaximumemploymentandpricestability;others, replacementinvestmentthatfirmshaddeferreddurfocusingonriskstoinflationexpectationsandthe ingthedownturn.Byandlarge,participantsjudged challengeof removingmonetaryaccommodationina thatresidentialinvestmenthadstabilizedbutdidnot timelymanner,sawinflationrisksastiltedtowardthe expecthousingconstructiontomakeasizablecontriupside,especiallyinthemediumterm. butiontoeconomicgrowthduringthenextyearor two.Commercialconstructioncontinuedtotrend Theweaknessinlabormarketscontinuedtobean down,primarilyreflectingweakfundamentals, importantconcernfortheFOMC;moreover,the thoughfinancingconstraintsprobablywerealso prospectsforjobgrowthremainedanimportant playingarole.Strongereconomicgrowthabroadwas

178 97thAnnualReport|2010 contributingtogrowthinU.S.exports,thushelping pointormoreof theincreaseintheunemployment supporttherecoveryinindustrialproductioninthe rateduringthisrecession—thenthereportedunem- UnitedStates. ploymentratemightbeoverstatingtheamountof slackinresourceutilizationrelativetopastperiodsof Policymakersjudgedthatfinancialconditionswere, highunemployment.Severalparticipantsobserved onbalance,aboutassupportiveof growthaswhen thatthenecessityof reallocatinglaboracrosssectors theCommitteemetinDecember.Thoughvolatility astherecoveryproceeds,aswellasthelossof skills inequitypricesincreasedlateintheintermeeting causedbyhighlevelsof long-termunemployment period,broadequitypriceindexeswereabout andpermanentseparations,couldreducetheeconounchangedoverall,privatecreditspreadsnarrowed my’spotentialoutput,atleasttemporarily;historical somewhat,andfinancialmarketsgenerallycontinued experiencefollowinglargeadversefinancialshocks tofunctionsignificantlybetterthanearlylastyear. suggestssuchaneffect.Ontheotherhand,if recent Allcategoriesof bankloans,however,continuedto productivitygainsweretobesustained,assomebusicontractsharply.Surveyevidencesuggestedthat nesscontactsindicatedtheywouldbe,potentialoutbankshadceasedtighteningstandardsonmosttypes putcurrentlycouldbehigherthanstandardmeasures of businessandconsumerloans,thoughcommercial suggested,andthehighlevelof theunemployment realestateloanswereanotableexception.Anecdotal ratecouldbeamoreaccurateindicationof slackin evidencesuggestedthatsomebankswerestartingto resourceutilizationthanusualmeasuresof theoutlookforopportunitiestoexpandlending. putgap. Thoughheadlineinflationhadbeenvariable,largely Committee Policy Action reflectingswingsinenergyprices,coremeasuresof inflationweresubduedandwereexpectedtoremain Intheirdiscussionof monetarypolicyfortheperiod so.Oneparticipantnotedthatcoreinflationhad ahead,membersagreedthatnochangestotheCombeenhelddowninrecentquartersbyunusuallyslow mittee’slarge-scaleassetpurchaseprogramsortoits increasesinthepriceindexforshelter,andthatthe targetrangeforthefederalfundsratewerewarranted recentbehaviorof coreinflationmightbeamislead- atthismeeting,inasmuchastheassetpurchaseproingsignalof theunderlyinginflationtrend.Reports gramswerenearingcompletionandneithertheecofrombusinesscontactssuggestedlesspricediscount- nomicoutlooknorfinancialconditionshadchanged ing,butpricingpowerremainedlimited.Wage appreciablysincetheDecembermeeting.Accordgrowthcontinuedtoberestrained,andunitlabor ingly,theCommitteeaffirmeditsintentiontopurcostswerestillfalling.Energypriceshaddropped chaseatotalof $1.25trillionof agencyMBSand backinrecentweeks,butmanyparticipantssaw about$175billionof agencydebtbytheendof the upwardpressuresoncommoditypricesassociated currentquarterandtograduallyslowthepaceof withexpandingglobaleconomicactivityasaninfla- thesepurchasestopromoteasmoothtransitionin tionrisk.However,somenotedthatthehighdegree markets.TheCommitteeemphasizedthatitwould of slackinresourceutilizationposedadownsiderisk continuetoevaluateitspurchasesof securitiesin toinflation.Surveymeasuresof expectedfuture lightof theevolvingeconomicoutlookandcondiinflationwerefairlystable,butsomemarket-based tionsinfinancialmarkets.Membersrecognizedthat measuresof inflationexpectationsandinflationrisk referencesto“purchases”of securitieswouldneedto suggestedcontinuingconcernamongmarketpartici- bemodifiedasthecompletionof theassetpurchase pantsabouttheriskof highermedium-terminfla- programsdrawsnear.Onememberrecommended tion,perhapsreflectinglargefiscaldeficitsandthe thattheFOMCreplacetheportionof thestatement sizeof theFederalReserve’sbalancesheet. thatindicatestheCommitteewillevaluateits“purchases”of securitieswithanindicationthatthe Thoughparticipantsagreedtherewasconsiderable Committeewillevaluateits“holdings”of securities. slackinresourceutilization,theirjudgmentsabout Thechangeinwordingwouldencompassthepossithedegreeof slackvaried.Theseveralextensionsof bilitythattheCommitteemightdecide,atsome emergencyunemploymentinsurancebenefits point,eithertosellsecuritiesortopurchaseaddiappearedtohaveraisedthemeasuredunemployment tionalsecurities.Othermembersjudgedthatitwould rate,relativetolevelsrecordedinpastdownturns,by beprematuretomakesuchachangeinthestatement encouragingsomewhohavelosttheirjobstoremain beforeobservingeconomicandfinancialconditions inthelaborforce.If thateffectwerelarge—some astheCommittee’scurrentassetpurchaseprogram estimatessuggesteditcouldaccountfor1percentage comestoaclose.Accordingly,theCommittee

Minutesof FederalOpenMarketCommitteeMeetings 179 decidedtoretainthereferencetosecurities“pur- marketsconsistentwithfederalfundstradingin chases”forthetimebeing.TheCommitteealso arangefrom0to¼percent.TheCommittee affirmedits0to¼percenttargetrangeforthefed- directstheDesktopurchaseagencydebtand eralfundsrateand,basedontheoutlookfora agencyMBSduringtheintermeetingperiod gradualeconomicrecovery,decidedtoreiterateits withtheaimof providingsupporttoprivate anticipationthateconomicconditions,includinglow creditmarketsandeconomicactivity.Thetiming levelsof resourceutilization,subduedinflation andpaceof thesepurchasesshoulddependon trends,andstableinflationexpectations,werelikely conditionsinthemarketsforsuchsecuritiesand towarrantexceptionallylowratesforanextended onabroaderassessmentof privatecreditmarket period.Membersagreedthatthepathof short-term conditions.TheDeskisexpectedtoexecutepurratesgoingforwardwoulddependontheevolution chasesof about$175billioninhousing-related of theeconomicoutlook. agencydebtandabout$1.25trillionof agency MBSbytheendof thefirstquarter.TheDeskis CommitteemembersandBoardmembersagreed expectedtograduallyslowthepaceof thesepurthat,withfewexceptions,thefunctioningof most chasesastheynearcompletion.TheCommittee financialmarkets,includinginterbankmarkets,no anticipatesthatoutrightpurchasesof securities longershowedsignificantimpairment.Accordingly willcausethesizeof theFederalReserve’sbaltheyagreedthatthestatementtobereleasedfollow- ancesheettoexpandsignificantlyincoming ingthemeetingwouldindicatethattheFederal months.TheCommitteedirectstheDeskto ReservewouldbeclosingtheAsset-BackedCommer- engageindollarrolltransactionsasnecessaryto cialPaperMoneyMarketMutualFundLiquidity facilitatesettlementof theFederalReserve’s Facility,theCommercialPaperFundingFacility,the agencyMBStransactionstobeconducted PrimaryDealerCreditFacility,andtheTermSecuri- throughtheendof thefirstquarter,asdirected tiesLendingFacilityonFebruary1,2010.Commit- above.TheSystemOpenMarketAccountManteemembersalsoagreedtoannouncethattemporary agerandtheSecretarywillkeeptheCommittee liquidityswaparrangementsbetweentheFederal informedof ongoingdevelopmentsregarding Reserveandothercentralbankswouldexpireon theSystem’sbalancesheetthatcouldaffectthe February1.Inaddition,thestatementwouldsaythat attainmentovertimeof theCommittee’sobjecamountsavailablethroughtheTermAuctionFacility tivesof maximumemploymentandprice wouldbescaledbackfurther,with$50billionof stability.” 28-daycredittobeofferedonFebruary8and $25billionof 28-daycredittobeofferedatthefinal Thevoteencompassedapprovalof thestatement auctionof March8.Thestatementalsowouldnote belowtobereleasedat2:15p.m.: thattheanticipatedexpirationdatesfortheTerm Asset-BackedSecuritiesLoanFacilityremained “InformationreceivedsincetheFederalOpen June30,2010,forloansbackedbynew-issuecom- MarketCommitteemetinDecembersuggests mercialmortgage-backedsecurities,andMarch31, thateconomicactivityhascontinuedto 2010,forloansbackedbyallothertypesof collateral. strengthenandthatthedeteriorationinthe Membersemphasizedthattheywerepreparedto labormarketisabating.Householdspendingis modifytheseplansif necessarytosupportfinancial expandingatamoderateratebutremainsconstabilityandeconomicgrowth. strainedbyaweaklabormarket,modestincome growth,lowerhousingwealth,andtightcredit. Attheconclusionof thediscussion,theCommittee Businessspendingonequipmentandsoftware votedtoauthorizeanddirecttheFederalReserve appearstobepickingup,butinvestmentin Bankof NewYork,untilitwasinstructedotherwise, structuresisstillcontractingandemployers toexecutetransactionsintheSystemAccountin remainreluctanttoaddtopayrolls.Firmshave accordancewiththefollowingdomesticpolicy broughtinventorystocksintobetteralignment directive: withsales.Whilebanklendingcontinuestocontract,financialmarketconditionsremainsup- “TheFederalOpenMarketCommitteeseeks portiveof economicgrowth.Althoughthepace monetaryandfinancialconditionsthatwillfos- of economicrecoveryislikelytobemoderatefor terpricestabilityandpromotesustainable atime,theCommitteeanticipatesagradual growthinoutput.Tofurtheritslong-runobjec- returntohigherlevelsof resourceutilizationina tives,theCommitteeseeksconditionsinreserve contextof pricestability.

180 97thAnnualReport|2010 Withsubstantialresourceslackcontinuingto Kohn,SandraPianalto,EricRosengren,DanielK. restraincostpressuresandwithlonger-term Tarullo,andKevinWarsh. inflationexpectationsstable,inflationislikelyto besubduedforsometime. Votingagainstthisaction:ThomasM.Hoenig. TheCommitteewillmaintainthetargetrange Mr.Hoenigdissentedbecausehebelieveditwasno forthefederalfundsrateat0to¼percentand longeradvisabletoindicatethateconomicandfinancontinuestoanticipatethateconomiccondi- cialconditionswerelikelyto“warrantexceptionally tions,includinglowratesof resourceutilization, lowlevelsof thefederalfundsrateforanextended subduedinflationtrends,andstableinflation period.”Inrecentmonths,economicandfinancial expectations,arelikelytowarrantexceptionally conditionsimprovedsteadily,andMr.Hoenigwas lowlevelsof thefederalfundsrateforan concernedthat,undertheseimprovingconditions, extendedperiod.Toprovidesupporttomort- maintainingshort-terminterestratesnearzeroforan gagelendingandhousingmarketsandto extendedperiodof timewouldlaythegroundwork improveoverallconditionsinprivatecreditmar- forfuturefinancialimbalancesandriskanincreasein kets,theFederalReserveisintheprocessof inflationexpectations.Accordingly,Mr.Hoenig purchasing$1.25trillionof agencymortgage- believedthatitwouldbemoreappropriateforthe backedsecuritiesandabout$175billionof Committeetoexpressanexpectationthatthefederal agencydebt.Inordertopromoteasmoothtran- fundsratewouldbelowforsometime—ratherthan sitioninmarkets,theCommitteeisgradually exceptionallylowforanextendedperiod.Sucha slowingthepaceof thesepurchases,andit changeincommunicationwouldprovidetheComanticipatesthatthesetransactionswillbe mitteeflexibilitytobeginraisingratesmodestly.He executedbytheendof thefirstquarter.The furtherbelievedthatmovingtoamodestlyhigher Committeewillcontinuetoevaluateitspur- federalfundsratesoonwouldlowertherisksof chasesof securitiesinlightof theevolvingeco- longer-runimbalancesandanincreaseinlong-run nomicoutlookandconditionsinfinancial inflationexpectations,whilecontinuingtoprovide markets. neededsupporttotheeconomicrecovery. Inlightof improvedfunctioningof financial Itwasagreedthatthenextmeetingof theCommittee markets,theFederalReservewillbeclosingthe wouldbeheldonTuesday,March16,2010.The Asset-BackedCommercialPaperMoneyMarket meetingadjournedat1:20p.m.onJanuary27,2010. MutualFundLiquidityFacility,theCommercial PaperFundingFacility,thePrimaryDealer Notation Vote CreditFacility,andtheTermSecuritiesLending FacilityonFebruary1,aspreviously BynotationvotecompletedonJanuary5,2010,the announced.Inaddition,thetemporaryliquidity Committeeunanimouslyapprovedtheminutesof the swaparrangementsbetweentheFederalReserve FOMCmeetingheldonDecember15–16,2009. andothercentralbankswillexpireonFebruary1.TheFederalReserveisintheprocessof BrianF.Madigan windingdownitsTermAuctionFacility:$50bil- Secretary lionin28-daycreditwillbeofferedonFebruary8and$25billionin28-daycreditwillbe Addendum: offeredatthefinalauctiononMarch8.The Summary of Economic Projections anticipatedexpirationdatesfortheTermAsset- BackedSecuritiesLoanFacilityremainsetat InconjunctionwiththeJanuary26–27,2010,FOMC June30forloansbackedbynew-issuecommer- meeting,themembersof theBoardof Governors cialmortgage-backedsecuritiesandMarch31 andthepresidentsof theFederalReserveBanks,all forloansbackedbyallothertypesof collateral. of whomparticipateindeliberationsof theFOMC, TheFederalReserveispreparedtomodifythese submittedprojectionsforoutputgrowth,unemployplansif necessarytosupportfinancialstability ment,andinflationfortheyears2010to2012and andeconomicgrowth.” overthelongerrun.Theprojectionswerebasedon informationavailablethroughtheendof themeeting Votingforthisaction:BenBernanke,WilliamC. andoneachparticipant’sassumptionsaboutfactors Dudley,JamesBullard,ElizabethDuke,DonaldL. likelytoaffecteconomicoutcomes,includinghisor

Minutesof FederalOpenMarketCommitteeMeetings 181 herassessmentof appropriatemonetarypolicy. uncertainty,onlygradualimprovementinlabormar- “Appropriatemonetarypolicy”isdefinedasthe ketconditions,andsloweasingof creditconditions futurepathof policythattheparticipantdeemsmost inthebankingsector.Participantsgenerallyexpected likelytofosteroutcomesforeconomicactivityand thatitwouldtakesometimefortheeconomytoconinflationthatbestsatisfyhisorherinterpretationof vergefullytoitslonger-runpath—characterizedbya theFederalReserve’sdualobjectivesof maximum sustainablerateof outputgrowthandbyratesof employmentandstableprices.Longer-runprojec- employmentandinflationconsistentwiththeirintertionsrepresenteachparticipant’sassessmentof the pretationof theFederalReserve’sdualobjectives— ratetowhicheachvariablewouldbeexpectedtocon- withasizableminorityof theviewthattheconververgeovertimeunderappropriatemonetarypolicy genceprocesscouldtakemorethanfivetosixyears. andintheabsenceof furthershocks. AsinNovember,nearlyallparticipantsjudgedthe riskstotheirgrowthoutlookasgenerallybalanced, FOMCparticipants’forecastsforeconomicactivity andmostalsosawroughlybalancedriskssurroundandinflationwerebroadlysimilartotheirprevious ingtheirinflationprojections.Participantscontinued projections,whichweremadeinconjunctionwiththe tojudgetheuncertaintysurroundingtheirprojec- November2009FOMCmeeting.Asdepictedin tionsforeconomicactivityandinflationasunusually figure1,theeconomicrecoveryfromtherecentreces- highrelativetohistoricalnorms. sionwasexpectedtobegradual,withrealgross domesticproduct(GDP)expandingataratethatwas TheOutlook onlymoderatelyaboveparticipants’assessmentof its Participants’projectionsforrealGDPgrowthin2010 longer-runsustainablegrowthrateandtheunem- hadacentraltendencyof 2.8to3.5percent,asomeploymentratedecliningslowlyoverthenextfew whatnarrowerintervalthaninNovember.Recent years.Mostparticipantsalsoanticipatedthatinfla- readingsonconsumerspending,industrialproductionwouldremainsubduedoverthisperiod.Asindi- tion,andbusinessoutlaysonequipmentandsoftcatedintable1,afewparticipantsmademodest warewereseenasbroadlyconsistentwiththeview upwardrevisionstotheirprojectionsforrealGDP thateconomicrecoverywasunderway,albeitata growthin2010.Beyond2010,however,thecontours moderatepace.Businesseshadapparentlymade of participants’projectionsforeconomicactivityand progressinbringingtheirinventorystocksintocloser inflationwerelittlechanged,withparticipantscon- alignmentwithsalesandhencewouldbelikelyto tinuingtoexpectthatthepaceof theeconomic raiseproductionasspendinggainedfurthermomenrecoverywillberestrainedbyhouseholdandbusiness tum.Participantspointedtoanumberof factorsthat Table1.EconomicprojectionsofFederalReserveGovernorsandReserveBankpresidents,January2010 Percent Centraltendency1 Range2 Variable 2010 2011 2012 Longerrun 2010 2011 2012 Longerrun 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)andininflationarefromthefourthquarterofthepreviousyeartothefourthquarteroftheyearindicated.PCE inflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures(PCE)andthepriceindexforPCE excludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarteroftheyearindicated.Eachparticipant’s projectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’sassessmentoftheratetowhicheach variablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.TheNovemberprojectionsweremadein conjunctionwiththemeetingoftheFederalOpenMarketCommitteeonNovember3–4,2009. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearconsistsofallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

182 97thAnnualReport|2010 Figure1.Centraltendenciesandrangesofeconomicprojections,2010–12andoverthelongerrun

Minutesof FederalOpenMarketCommitteeMeetings 183 wouldsupportthecontinuedexpansionof economic growth,participantsgenerallyexpectedthatthe activity,includingaccommodativemonetarypolicy, unemploymentratewoulddeclineonlyabout2½perongoingimprovementsintheconditionsof financial centagepointsbytheendof 2012andwouldstillbe marketsandinstitutions,andapickupinglobaleco- wellaboveitslonger-runsustainablerate.Someparnomicgrowth,especiallyinemergingmarketecono- ticipantsalsonotedthatconsiderableuncertainty mies.Severalparticipantsalsonotedthatfiscalpolicy surroundedtheirestimatesof theproductivepotenwascurrentlyprovidingsubstantialsupporttoreal tialof theeconomyandthesustainablerateof activity,butsaidthattheyexpectedlessimpetusto employment,owingpartlytosubstantialongoing GDPgrowthfromthisfactorlaterintheyear.Many structuraladjustmentsinproductandlabormarkets. participantsindicatedthattheexpansionwaslikely Nonetheless,participants’longer-rununemployment toberestrainednotonlybyfirms’cautioninhiring projectionshadacentraltendencyof 5.0to5.2perandspendinginlightof theconsiderableuncertainty cent,thesameasinNovember. regardingtheeconomicoutlookandgeneralbusiness conditions,butalsobylimitedaccesstocreditby Mostparticipantsanticipatedthatinflationwould smallbusinessesandconsumersdependentonbank- remainsubduedoverthenextseveralyears.Thecenintermediatedfinance. traltendencyof theirprojectionsforpersonalconsumptionexpenditures(PCE)inflationwas1.4to Lookingfurtherahead,participants’projectionswere 1.7percentfor2010,1.1to2.0percentfor2011,and forrealGDPgrowthtopickupin2011and2012;the 1.3to2.0percentfor2012.Manyparticipantsanticiprojectionsforgrowthinbothyearshadacentral patedthatglobaleconomicgrowthwouldspur tendencyof about3½to4½percent.AsinNovem- increasesinenergyprices,andhencethatheadline ber,participantsgenerallyexpectedthatthecontin- PCEinflationwouldrunslightlyabovecorePCE uedrepairof householdbalancesheetsandgradual inflationoverthenextyearortwo.Mostexpected improvementsincreditavailabilitywouldbolster thatsubstantialresourceslackwouldcontinueto consumerspending.Respondingtoanimprovedsales restraincostpressures,butthatinflationwouldrise outlookandreadieraccesstobankcredit,businesses graduallytowardtheirindividualassessmentsof the werelikelytoincreaseproductiontorebuildtheir measuredrateof inflationjudgedtobemostconsisinventorystocksandincreasetheiroutlaysonequip- tentwiththeFederalReserve’sdualmandate.Asin mentandsoftware.Inaddition,improvedforeign November,thecentraltendencyof projectionsof the economicconditionswereviewedassupporting longer-runinflationratewas1.7to2.0percent.A robustgrowthinU.S.exports.However,participants majorityof participantsanticipatedthatinflationin alsoindicatedthatelevateduncertaintyonthepartof 2012wouldstillbebelowtheirassessmentsof the householdsandbusinessesandtheveryslowrecov- mandate-consistentinflationrate,whiletheremaineryof labormarketswouldlikelyrestrainthepaceof derexpectedthatinflationwouldbeatorslightly expansion.Moreover,althoughconditionsinthe aboveitslonger-runvaluebythattime. bankingsystemappearedtohavestabilized,distress incommercialrealestatemarketswasexpectedto UncertaintyandRisks poseriskstothebalancesheetsof bankinginstitu- Nearlyallparticipantssharedthejudgmentthattheir tionsforsometime,therebycontributingtoonly projectionsof futureeconomicactivityandunemgradualeasingof creditconditionsformanyhouse- ploymentcontinuedtobesubjecttogreater-thanholdsandsmallerfirms.Intheabsenceof further averageuncertainty.3Participantsgenerallysawthe shocks,participantsgenerallyanticipatedthatreal riskstotheseprojectionsasroughlybalanced, GDPgrowthwouldconvergeovertimetoanannual althoughafewindicatedthattheriskstotheunemrateof 2.5to2.8percent,thelonger-runpacethat ploymentoutlookremainedtiltedtotheupside.Asin appearedtobesustainableinviewof expecteddemo- November,manyparticipantshighlightedthediffigraphictrendsandimprovementsinlaborproductivity. cultiesinherentinpredictingmacroeconomicoutcomesinthewakeof afinancialcrisisandasevere Participantsanticipatedthatlabormarketconditions wouldimproveonlyslowlyoverthenextseveral 3 Table2providesestimatesofforecastuncertaintyforthechange years.TheirprojectionsfortheaverageunemployinrealGDP,theunemploymentrate,andtotalconsumerprice mentrateinthefourthquarterof 2010hadacentral inflationovertheperiodfrom1989to2008.Attheendofthis tendencyof 9.5to9.7percent,onlyalittlebelowthe summary,thebox“ForecastUncertainty”discussesthesources andinterpretationofuncertaintyineconomicforecastsand levelsof about10percentthatprevailedlatelastyear. explainstheapproachusedtoassesstheuncertaintyandrisk Consistentwiththeiroutlookformoderateoutput attendingparticipants’projections.

184 97thAnnualReport|2010 pricesof energyandothercommoditiesthatwould Table2.Averagehistoricalprojectionerrorranges placeupwardpressureonoverallinflation. Percentagepoints DiversityofViews Variable 2010 2011 2012 Figures2.Aand2.Bprovidefurtherdetailsonthe ChangeinrealGDP1 ±1.3 ±1.5 ±1.6 diversityof participants’viewsregardingthelikely Unemploymentrate1 ±0.6 ±0.8 ±1.0 Totalconsumerprices2 ±0.9 ±1.0 ±1.0 outcomesforrealGDPgrowthandtheunemploymentratein2010,2011,2012,andoverthelonger Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared run.Thedistributionof participants’projectionsfor errorofprojectionsfor1989through2008thatwerereleasedinthewinterby variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast realGDPgrowththisyearwasslightlynarrowerthan Uncertainty,”undercertainassumptions,thereisabouta70percentprobability thedistributionof theirprojectionslastNovember, thatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Further butthedistributionsof theprojectionsforrealGDP informationisinDavidReifschneiderandPeterTulip(2007),“Gaugingthe growthin2011andin2012werelittlechanged.The UncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,”Finance andEconomicsDiscussionSeries2007-60(Washington:BoardofGovernorsof dispersioninparticipants’outputgrowthprojections theFederalReserveSystem,November). reflected,amongotherfactors,thediversityof their 1 Fordefinitions,refertogeneralnoteintable1. 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen assessmentsregardingthecurrentdegreeof underlymostwidelyusedingovernmentandprivateeconomicforecasts.Projection ingmomentumineconomicactivity,theevolutionof ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof consumerandbusinesssentiment,andthelikelypace theyearindicated. of easingof banklendingstandardsandterms. Regardingparticipants’unemploymentrateprojecrecession.Inaddition,somepointedtouncertainties tions,thedistributionfor2010narrowedslightly,but regardingtheextenttowhichtherecentrun-upin thedistributionsof theirunemploymentrateprojeclaborproductivitywouldprovetobepersistent,while tionsfor2011and2012didnotchangeappreciably. othersnotedtheriskthatthedeterioratingperfor- Thedistributionsof participants’estimatesof the manceof commercialrealestatecouldadversely longer-runsustainableratesofoutputgrowthandunemaffectthestill-fragilestateof thebankingsystemand ploymentwereessentiallythesameasinNovember. restrainthegrowthof outputandemploymentover comingquarters. Figures2.Cand2.Dprovidecorrespondinginformationaboutthediversityof participants’viewsregard- AsinNovember,mostparticipantscontinuedtosee ingtheinflationoutlook.ForoverallandcorePCE theuncertaintysurroundingtheirinflationprojec- inflation,thedistributionsof participants’projectionsashigherthanhistoricalnorms.However,afew tionsfor2010werenearlythesameasinNovember. judgedthatuncertaintyintheoutlookforinflation Thedistributionsof overallandcoreinflationfor wasaboutinlinewithtypicallevels,andoneviewed 2011and2012,however,werenoticeablymoretightly theuncertaintysurroundingtheinflationoutlookas concentratedthaninNovember,reflectingthe lowerthanaverage.Nearlyallparticipantsjudgedthe absenceof forecastsof especiallylowinflation.The riskstotheinflationoutlookasroughlybalanced; dispersioninparticipants’projectionsoverthenext however,twosawtheserisksastiltedtotheupside, fewyearswasmainlyduetodifferencesintheirjudgwhileoneregardedtherisksasweightedtothedown- mentsregardingthedeterminantsof inflation, side.Someparticipantsnotedthatinflationexpecta- includingtheirestimatesof prevailingresourceslack tionscoulddriftdownwardinresponsetopersis- andtheirassessmentsof theextenttowhichsuch tentlylowinflationandcontinuedslackinresource slackaffectsactualandexpectedinflation.Inconutilization.Otherspointedtothepossibilityof an trast,therelativelytightdistributionof participants’ upwardshiftinexpectedandactualinflation,espe- projectionsforlonger-runinflationillustratestheir ciallyif extraordinarilyaccommodativemonetary substantialagreementaboutthemeasuredrateof policymeasureswerenotunwoundinatimelyfash- inflationthatismostconsistentwiththeFederal ion.Participantsalsonotedthatanaccelerationin Reserve’sdualobjectivesof maximumemployment globaleconomicactivitycouldinduceasurgeinthe andstableprices.

Minutesof FederalOpenMarketCommitteeMeetings 185 Figure2.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2010–12andoverthelongerrun

186 97thAnnualReport|2010 Figure2.B.Distributionofparticipants’projectionsfortheunemploymentrate,2010–12andoverthelongerrun

Minutesof FederalOpenMarketCommitteeMeetings 187 Figure2.C.Distributionofparticipants’projectionsforPCEinflation,2010–12andoverthelongerrun

188 97thAnnualReport|2010 Figure2.D.Distributionofparticipants’projectionsforcorePCEinflation,2010–12

Minutesof FederalOpenMarketCommitteeMeetings 189 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers experiencedinthepastandtherisksaroundtheprooftheBoardofGovernorsandthepresidentsofthe jectionsarebroadlybalanced,thenumbersreported FederalReserveBanksinformdiscussionsofmon- intable2wouldimplyaprobabilityofabout70peretarypolicyamongpolicymakersandcanaidpublic centthatactualGDPwouldexpandwithinarangeof understandingofthebasisforpolicyactions.Con- 1.7to4.3percentinthecurrentyear,1.5to4.5persiderableuncertaintyattendstheseprojections,how- centinthesecondyear,and1.4to4.6percentinthe ever.Theeconomicandstatisticalmodelsandrela- thirdyear.Thecorresponding70percentconfidence tionshipsusedtohelpproduceeconomicforecasts intervalsforoverallinflationwouldbe1.1to2.9perarenecessarilyimperfectdescriptionsofthereal centinthecurrentyearand1.0to3.0percentinthe world.Andthefuturepathoftheeconomycanbe secondandthirdyears. affectedbymyriadunforeseendevelopmentsand Becausecurrentconditionsmaydifferfromthose events.Thus,insettingthestanceofmonetary thatprevailed,onaverage,overhistory,participants policy,participantsconsidernotonlywhatappearsto providejudgmentsastowhethertheuncertainty bethemostlikelyeconomicoutcomeasembodiedin attachedtotheirprojectionsofeachvariableis theirprojections,butalsotherangeofalternative greaterthan,smallerthan,orbroadlysimilartotypipossibilities,thelikelihoodoftheiroccurring,andthe callevelsofforecastuncertaintyinthepastasshown potentialcoststotheeconomyshouldtheyoccur. intable2.Participantsalsoprovidejudgmentsasto Table2summarizestheaveragehistoricalaccuracyof whethertheriskstotheirprojectionsareweightedto arangeofforecasts,includingthosereportedinpast theupside,areweightedtothedownside,orare MonetaryPolicyReportsandthosepreparedbyFed- broadlybalanced.Thatis,participantsjudgewhether eralReserveBoardstaffinadvanceofmeetingsof eachvariableismorelikelytobeaboveorbelow theFederalOpenMarketCommittee.Theprojection theirprojectionsofthemostlikelyoutcome.These errorrangesshowninthetableillustratetheconsid- judgmentsabouttheuncertaintyandtherisks erableuncertaintyassociatedwitheconomicfore- attendingeachparticipant’sprojectionsaredistinct casts.Forexample,supposeaparticipantprojects fromthediversityofparticipants’viewsaboutthe thatrealgrossdomesticproduct(GDP)andtotal mostlikelyoutcomes.Forecastuncertaintyisconconsumerpriceswillrisesteadilyatannualratesof, cernedwiththerisksassociatedwithaparticular respectively,3percentand2percent.Iftheuncer- projectionratherthanwithdivergencesacrossa taintyattendingthoseprojectionsissimilartothat numberofdifferentprojections.

190 97thAnnualReport|2010 Meeting Held on March 16, 2010 ThomasA.Connors,WilliamB.English, StevenB.Kamin,LawrenceSlifman, ChristopherJ.Waller,andDavidW.Wilcox Ajointmeetingof theFederalOpenMarketCom- AssociateEconomists mitteeandtheBoardof Governorsof theFederal ReserveSystemwasheldintheofficesof theBoard BrianSack of GovernorsinWashington,D.C.,onTuesday, Manager,SystemOpenMarketAccount March16,2010,at8:00a.m. JenniferJ.Johnson Secretaryof theBoard,Officeof theSecretary, Present Boardof Governors BenBernanke PatrickM.Parkinson Chairman Director,Divisionof BankSupervisionand WilliamC.Dudley Regulation,Boardof Governors ViceChairman RobertdeV.Frierson JamesBullard DeputySecretary,Officeof theSecretary, Boardof Governors ElizabethDuke CharlesS.Struckmeyer ThomasM.Hoenig DeputyStaff Director,Officeof theStaff Director DonaldL.Kohn forManagement,Boardof Governors SandraPianalto JamesA.Clouse EricRosengren DeputyDirector,Divisionof MonetaryAffairs, Boardof Governors DanielK.Tarullo LindaRobertson KevinWarsh AssistanttotheBoard,Officeof BoardMembers, ChristineCumming,CharlesL.Evans, Boardof Governors RichardW.Fisher,NarayanaKocherlakota, SherryEdwardsandAndrewT.Levin andCharlesI.Plosser SeniorAssociateDirectors,Divisionof Monetary AlternateMembersof theFederalOpenMarket Affairs,Boardof Governors Committee DavidReifschneiderandWilliamWascher JeffreyM.Lacker,DennisP.Lockhart,and SeniorAssociateDirectors,Divisionof Researchand JanetL.Yellen Statistics,Boardof Governors Presidentsof theFederalReserveBanksof Richmond,Atlanta,andSanFrancisco,respectively MichaelG.Palumbo DeputyAssociateDirector,Divisionof Researchand BrianF.Madigan Statistics,Boardof Governors SecretaryandEconomist DavidH.Small MatthewM.Luecke ProjectManager,Divisionof MonetaryAffairs, AssistantSecretary Boardof Governors DavidW.Skidmore MinWei AssistantSecretary SeniorEconomist,Divisionof MonetaryAffairs, MichelleA.Smith Boardof Governors AssistantSecretary PenelopeA.Beattie ScottG.Alvarez AssistanttotheSecretary,Officeof theSecretary, GeneralCounsel Boardof Governors ThomasC.Baxter ValerieHinojosaandRandallA.Williams DeputyGeneralCounsel RecordsManagementAnalysts,Divisionof Monetary NathanSheets Affairs,Boardof Governors Economist JamesM.Lyon DavidJ.Stockton FirstVicePresident,FederalReserveBank Economist of Minneapolis

Minutesof FederalOpenMarketCommitteeMeetings 191 JamieJ.McAndrewsandHarveyRosenblum othertypesof collateral.1Spreadsonasset-backed ExecutiveVicePresidents,FederalReserveBanks securitiesremainedtightwhileissuance—thebulkof of NewYorkandDallas,respectively whichwasbeingfinancedoutsideof TALF—continuedtobefairlystrong.Whilethecumulativevolume DavidAltig,CraigS.Hakkio,LorettaJ.Mester, of borrowingfromtheTALFhadexpandedfairly GlennD.Rudebusch,MarkE.Schweitzer, steadilyinrecentmonths,thevolumeof repayments DanielG.Sullivan,andJohnA.Weinberg of TALFloanshadalsorisenasborrowerswereable SeniorVicePresidents,FederalReserveBanksof tosecurefundingfromothersourcesonmorefavor- Atlanta,KansasCity,Philadelphia,SanFrancisco, ableterms.Asaresult,thenetamountof outstand- Cleveland,Chicago,andRichmond,respectively ingTALFcredithadleveledoutandwouldlikely GiovanniOlivei declinegoingforwardasaresultof continuing VicePresident,FederalReserveBankof Boston repayments. JoshuaFrost AssistantVicePresident,FederalReserveBank InhisreportonSystemopenmarketoperations,the of NewYork ManagernotedthatovertheperiodsincetheCommitteehadmetinJanuary,theFederalReserve’stotal JonathanHeathcote assetshadrisentoabout$2.3trillion,asanincrease SeniorEconomist,FederalReserveBank intheSystem’sholdingsof securitieswaspartlyoffof Minneapolis setbythedecliningusageof theSystem’screditand liquidityfacilities.TheDeskcontinuedtogradually Developments in Financial Markets and slowthepaceof itspurchasesof agencymortgagethe Federal Reserve’s Balance Sheet backedsecurities(MBS)andagencydebtasitmoved towardcompletingtheCommittee’spreviously TheManagerof theSystemOpenMarketAccount announcedassetpurchasesbytheendof March.The reportedondevelopmentsindomesticandforeign Desk’spurchasesof agencyMBSwereontrackto financialmarketsduringtheperiodsincetheCommeetthetargetedamountof $1.25trillion,whileits mitteemetonJanuary26–27,2010.Theneteffectof purchasesof agencydebtwouldlikelycumulateto thesedevelopmentswasthatfinancialconditionshad slightlylessthan$175billion.TheDeskcontinuedto becomemodestlymoresupportiveof economic engageindollarrolltransactionsinagencyMBS growth.Nomarketstrainsemergedinconjunction securitiestofacilitatesettlementof itsoutrightpurwiththeFederalReserve’sclosingof nearlyallof its chases.TherewerenoopenmarketoperationsinforremainingspecialliquidityfacilitiesovertheintereigncurrenciesfortheSystem’saccountoverthe meetingperiod.OnFebruary1,thePrimaryDealer intermeetingperiod.Byunanimousvote,theCom- CreditFacility,theCommercialPaperFundingFacilmitteeratifiedtheDesk’stransactions.Participants ity,theAsset-BackedCommercialPaperMoney alsoagreedthattheDeskshouldcontinuetheinterim MarketMutualFundLiquidityFacility,andthe approachof allowingallmaturingagencydebtand TermSecuritiesLendingFacilitywereclosed,andthe allprepaymentsof agencyMBStoberedeemedwith- FederalReserve’stemporarycurrencyswaplineswith outreplacement. foreigncentralbanksexpired.Financialmarketsalso adjustedsmoothlytothefinalofferingof funds Inaddition,theManagerreportedonrecentprogress throughtheTermAuctionFacilityonMarch8. inthedevelopmentof reservedrainingtools,includingtheinitiationof aprogramforexpandingtheset TheManagernotedthatsecuritizedcreditmarkets of counterpartiesinconductingreverserepurchase hadnotshownsubstantialstrainfromtheanticipated agreements,andthestaff gaveapresentationon endof newcreditextensionsundertheTermAssetpotentialapproachesfortighteningthelinkbetween BackedSecuritiesLoanFacility(TALF),whichwas short-termmarketinterestratesandtheinterestrate scheduledtocloseonJune30forloansbackedby paidonreservebalancesheldattheFederalReserve new-issuecommercialmortgage-backedsecurities Banks. (CMBS)andonMarch31forloansbackedbyall 1 Thefinalnon-CMBSsubscriptionhadalreadyoccurredinearly MarchandthefinalsubscriptionforlegacyCMBSwouldtake placesoonaftertheFOMCmeeting;subscriptionsfornewissueCMBSwouldcontinuethroughJune.

192 97thAnnualReport|2010 Secretary’snote:Astaff memorandumwaspro- slowedmarkedlyinrecentmonths,and,inthe videdtomembersof theBoardof Governorsand absenceof thesnowstorms,privateemployment FederalReserveBankpresidentssummarizing probablywouldhaveriseninFebruary.Theaverage publiccommentsonlastDecember’sFederalReg- workweekforproductionandnonsupervisoryworkisternoticeregardingtheestablishmentof aterm ersfellbackinFebruaryaftertickingupinJanuary; depositfacility,butthattopicwasnotdiscussedat however,thedropwaslikelyduetothestorms.The thismeeting. unemploymentratewasunchangedat9.7percentin February,andthelaborforceparticipationrate Thestaff alsobriefedtheCommitteeonpotential inchedupoverthepasttwomonths.However,the approachesformanagingtheTreasurysecuritiesheld levelof initialclaimsforunemploymentinsurance bytheFederalReserve.Todate,theDeskhadbeen benefitsremainedhigh. reinvestingallmaturingTreasurysecuritiesby exchangingthoseholdingsfornewlyissuedTreasury Afterincreasingbrisklyinthesecondhalf of 2009, securities,butanalternativestrategywouldbeto industrialproduction(IP)continuedtoexpand,on allowsomeorallof thoseTreasurysecuritiesto net,intheearlymonthsof 2010,risingsharplyin maturewithoutreinvestment.Redeemingallof its JanuaryandremaininglittlechangedinFebruary maturingTreasuryholdingswouldsignificantly despitesomeadverseeffectsof thesnowstorms. reducethesizeof theFederalReserve’sbalancesheet Recentproductiongainsremainedbroadlybased overcomingyearsandhencecouldbehelpfulinlim- acrossindustries,asfirmscontinuedtoboostproducitingtheneedtouseotherreservedrainingtoolssuch tiontomeetrisingdomesticandforeigndemandand asreverserepurchaseagreementsandtermdeposits. toslowthepaceof inventoryliquidation.Capacity Redemptionswouldalsolowertheinterestratesensi- utilizationinmanufacturingrosefurther,toalevel tivityof theFederalReserve’sportfolioovertime. noticeablyaboveitstroughinJune,butremainedwell Nevertheless,theinitiationof aredemptionstrategy belowitslonger-runaverage.Asaresult,incentives mightgenerateupwardpressureonmarketrates, formanufacturingfirmstoexpandproductioncapacespeciallyif thatmeasureledinvestorstomoveup itywereweak.Theavailableindicatorsof near-term theirexpectedtimingof policyfirming.Participants manufacturingactivitypointedtomoderategainsin agreedthattheCommitteewouldgivefurtherconsid- IPincomingmonths. erationtothesemattersandthatintheinterimthe Deskshouldcontinueitscurrentpracticeof reinvest- Consumerspendingcontinuedtomoveup.Although ingallmaturingTreasurysecurities. salesof newautomobilesandlighttruckssoftened slightly,onaverage,inJanuaryandFebruary,real Staff Review of the Economic Situation outlaysforawidevarietyof non-autogoodsand foodservicesincreasedappreciably,andrealoutlays TheinformationreviewedattheMarch16meeting forotherservicesremainedonagradualuptrend.In suggestedthateconomicactivityexpandedatamod- contrasttothemodestrecoveryinspending,measeratepaceinearly2010.Businessinvestmentin uresof consumersentimentremainedrelatively equipmentandsoftwareseemedtohavepickedup, downbeatinFebruaryandhadimprovedlittle,on consumerspendingincreasedfurtherinJanuary,and balance,sinceamodestreboundlastspring.Houseprivateemploymentwouldlikelyhaveturnedupin holdincomeappearedlesssupportiveof spending Februaryintheabsenceof thesnowstormsthat thanattheJanuarymeeting,reflectingdownward affectedtheEastCoast.Outputinthemanufacturing revisionstoestimatesbytheBureauof Economic sectorcontinuedtotrendhigherasfirmsincreased Analysisof wagesandsalariesinthesecondhalf of productiontomeetstrengtheningfinaldemandand 2009.Theratioof householdnetworthtoincome toslowthepaceof inventoryliquidation.Onthe waslittlechangedinthefourthquarteraftertwo downside,housingactivityremainedflatandthe consecutivequartersof appreciablegains. nonresidentialconstructionsectorweakenedfurther. Meanwhile,asizableincreaseinenergypricespushed Activityinthehousingsectorappearedtohaveflatupheadlineconsumerpriceinflationinrecent tenedoutinrecentmonths.Salesof bothnewand months;incontrast,coreconsumerpriceinflation existinghomeshadturneddown,whilestartsof wasquitelow. single-familyhomeswereaboutunchangeddespite thesubstantialreductionininventoriesof unsold Availableindicatorssuggestedthatthelabormarket newhomes.Someof therecentweaknessinsales mightbestabilizing.Declinesinprivatepayrolls mighthavebeenduetotransactionsthathadbeen

Minutesof FederalOpenMarketCommitteeMeetings 193 pulledforwardinanticipationof theoriginally changebasis,corepersonalconsumptionexpendischeduledexpirationof thetaxcreditforfirst-time tures(PCE)priceinflationslowedinJanuary2010 homebuyersinNovember2009;nonetheless,the comparedwithayearearlier,asamarkedandfairly underlyingpaceof housingdemandlikelyremained widespreaddecelerationinmarket-basedcorePCE weak.Theslowdowninsalesnotwithstanding,hous- priceswaspartlyoffsetbyanaccelerationinnonmaringdemandwasbeingsupportedbylowinterestrates ketprices.Surveyexpectationsfornear-terminflaforconformingfixed-rate30-yearmortgagesand tionwereunchangedovertheintermeetingperiod; reportedlybyaperceptionthatrealestatevalueswere medianlonger-terminflationexpectationsedged neartheirtrough. downtonearthelowerendof thenarrowrangethat prevailedoverthepreviousfewyears.Withregardto Realspendingonequipmentandsoftwareincreased laborcosts,thereviseddataonwagesandsalaries atasolidpaceinthefourthquarterof 2009and showedthatlastyear’sdecelerationinhourlycomapparentlyrosefurtherearlyinthefirstquarterof pensationwasevensharperthanwasevidentatthe 2010.Businessoutlaysformotorvehiclesseemedto Januarymeeting. beholdingupafterasharpincreaseinthefourth quarter,purchasesof high-techequipmentappeared TheU.S.internationaltradedeficitwidenedin toberisingbriskly,andincomingdatapointedto DecemberbutnarrowedslightlyinJanuary,ending somefirminginoutlaysonotherequipment.The theperiodalittlelarger.Bothexportsandimports recentgainsininvestmentspendingwereconsistent rosesharplyinDecemberbeforepullingbacksomewithimprovementsinmanyindicatorsof business whatthefollowingmonth.Fortheperiodasawhole, demand.Incontrast,conditionsinthenonresidential theriseinexportswasbroadlybased,withnotable constructionsectorgenerallyremainedpoor.Real gainsinaircraftandindustrialsupplies.Oilandother outlaysonstructuresoutsideof thedrillingandmin- industrialsuppliesaccountedformuchof the ingsectorfellagaininthefourthquarter,andnomi- increaseinimportsoverthetwomonths,whilepurnalexpendituresdroppedfurtherinJanuary.The chasesof consumerproductsdeclined. weaknesswaswidespreadacrosscategoriesandlikely reflectedrisingvacancyrates,fallingpropertyprices, Economicperformanceintheadvancedforeign anddifficultfinancingconditionsfornewprojects. economieswasmixedinthefourthquarter,withreal However,realspendingondrillingandminingstruc- grossdomesticproduct(GDP)advancingsharplyin turesincreasedstronglyinresponsetotheearlier CanadaandJapanbutrisingonlyslightlyintheeuro reboundinoilandnaturalgasprices. areaandtheUnitedKingdom.Thatdivergence appearedtohavepersistedinthefirstquarter,as Thepaceof inventoryliquidationslowedconsider- indicatorspointedtocontinuedrapideconomic ablyinlate2009.Asmeasuredinthenationalincome growthinCanadaandmoderateexpansioninJapan andproductaccounts,realnonfarminventories butsomewhatanemicgrowthinEurope.Inthe excludingmotorvehiclesweredrawndownatamuch emergingmarketeconomies,reboundingglobal slowerpaceinthefourthquarterthanineachof the trade,inventoryrestocking,andincreaseddomestic precedingtwoquarters.AvailabledataforJanuary demandsupportedgenerallyrobustfourth-quarter indicatedafurthersmallliquidationof realstocks growth.ContinuedrapidexpansioninChinaand earlythisyearinthemanufacturingandwholesale severalotherAsianeconomiesoffsetslowdownselsetradesectors.Theratioof book-valueinventoriesto whereintheregion.InLatinAmerica,Mexican sales(excludingmotorvehiclesandparts)edged activitywasbuoyedbyrisingmanufacturingand downagaininJanuaryandstoodwellbelowthe exportstotheUnitedStates,whileBrazil’seconomy recentpeakrecordedneartheendof 2008.Invento- againgrewbriskly.Headlineconsumerpriceinflation riesremainedelevatedforequipment,materials,and, pickeduparoundtheworldoverthepasttwo toalesserdegree,constructionsupplies,whileinven- months,principallyreflectingincreasesinfoodand toriesof consumergoodsandbusinesssupplies energyprices.Excludingfoodandenergy,consumer appearedtobelowrelativetodemand. pricesweregenerallymoresubdued. Althoughrisingenergypricescontinuedtoboost Staff Review of the Financial Situation overallconsumerpriceinflation,consumerprices excludingfoodandenergyweresoft,asawidevari- ThedecisionbytheFederalOpenMarketCommittee etyof goodsandservicesexhibitedpersistentlylow (FOMC)attheJanuarymeetingtokeepthetarget inflationoroutrightpricedeclines.Ona12-month rangeforthefederalfundsrateunchangedandto

194 97thAnnualReport|2010 retainthe“extendedperiod”languageinthestate- tighteningandfiscalstrainsinEurope.Nonetheless, mentwaswidelyanticipatedbymarketparticipants. thegapbetweenthestaff’sestimateof theexpected However,investorsreportedlyreadthestatement’s realequityreturnoverthenext10yearsforS&P500 characterizationof theeconomicoutlookassome- firmsandthereal10-yearTreasuryyield—arough whatmoreupbeatthantheyhadanticipated,and measureof theequityriskpremium—remainedwell Eurodollarfuturesratesroseabitinresponse.The aboveitsaverageoverthepastdecade.Yieldson changestothetermsforprimarycreditandtheTerm investment-gradecorporatebonds,aswellastheir AuctionFacilitythatwereannouncedonFebru- spreadsoveryieldsoncomparable-maturityTreasury ary18resultedinasmallincreaseinnear-term securities,wereaboutunchangedovertheintermeetfuturesrates,butthisreactionprovedshortlived,as ingperiod;investment-graderiskspreadswerenear thestatementandsubsequentFederalReservecom- thelevelsthatprevailedlatein2007.Yieldsand munications—includingtheChairman’ssemiannual spreadsonspeculative-gradebondsedgeddown,and congressionaltestimony—emphasizedthatthemodi- secondary-marketpricesof leveragedloansrose ficationsweretechnicaladjustmentsanddidnotsig- further. nalanynear-termshiftsintheoverallstanceof monetarypolicy. Overall,netdebtfinancingbynonfinancialfirmswas aboutzerooverthefirsttwomonthsof 2010,consis- Onbalance,incomingeconomicdataledinvestorsto tentwithfirms’weakdemandforcreditandbanks’ markdowntheexpectedpathof thefederalfunds tightcreditpolicies.Grosspublicequityissuanceby rateovertheintermeetingperiod.Bycontrast,yields nonfinancialfirmswasrobustinthefourthquarter on2-yearand10-yearnominalTreasurysecurities of 2009.Sincetheturnof theyear,grosspublic edgedup,onnet,overtheperiod.YieldsonTreasury equityissuancebynonfinancialfirmsslowedsomeinflation-protectedsecurities(TIPS)roseatall what,whileannouncementsof bothnewsharerepurmaturities,reportedlybuoyedbyinvestoranticipa- chaseprogramsandcash-financedmergersand tionof heavierTIPSissuanceandbyreduced acquisitionspickedup.Publicequityissuanceby demandforTIPSbyretailinvestors.Reflectingthese financialfirmsdeclinedinJanuaryandFebruaryfoldevelopments,inflationcompensation—thediffer- lowingverystrongissuanceinDecember,whensevencebetweennominalyieldsandTIPSyieldsfora erallargebanksissuedequitytofacilitatetherepaygiventermtomaturity—declinedovertheperiod,a mentof capitalreceivedundertheTroubledAsset movethatwassupportedbythesomewhatweaker- Relief Program.Grossbondissuancebyfinancial than-expectedeconomicdataandthepublicationof firmsremainedsolid.Thecontractionincommercial lower-than-expectedreadingsonconsumerprices. mortgagedebtacceleratedinthefourthquarter.The dollarvalueof commercialrealestatesalesremained Conditionsinshort-termfundingmarketsremained verylowinFebruary,andtheshareof properties generallystableovertheintermeetingperiod.Spreads soldatanominallossinchedhigher.Thedelinquency betweenLondoninterbankofferedrates(Libor)and rateoncommercialmortgagesinsecuritizedpools overnightindexswap(OIS)ratesatone-andthree- increasedinJanuary,andthedelinquencyrateon monthmaturitiesstayedlow,whilesix-month commercialmortgagesatcommercialbanksrosein spreadsedgeddownsomewhatfurther.Spreadsof thefourthquarter.Thepercentageof delinquentconratesonA2/P2-ratedcommercialpaperandon structionloansatbanksalsotickedhigherinthe AA-ratedasset-backedcommercialpaperoverthe fourthquarter.Nonetheless,indexesof commercial AAnonfinancialratewerealsolittlechangedatlow mortgagecreditdefaultswapschangedlittle,onballevels.TheFederalReservecontinuedtotaperits ance,overtheintermeetingperiod. large-scaleassetpurchasesandwinddowntheemergencylendingfacilitieswithnoapparentadverse SincetheJanuarymeeting,yieldsandspreadson effectsonfinancialmarketsorinstitutions. agencyMBSwerelittlechangeddespitethecontinuedtaperingof theFederalReserve’spurchasesof Broadstockpriceindexesrose,onnet,overtheinter- thesesecurities,andresidentialmortgageinterest meetingperiod,boostedinpartbyfavorableearnings ratesandspreadswereroughlyflat.Netissuanceof reportsfromtheretailsector.Bankequitypricesout- MBSbyFannieMaeandFreddieMacremained performedthebroaderequitymarkets.Option- subduedthroughtheendof January.Consumer impliedvolatilityontheS&P500indexdropped creditexpandedinJanuary,itsfirstincreasesince backtopost-crisislowsafterincreasingearlierinthe January2009.DespitelowandstablespreadsonconperiodonconcernsaboutChinesemonetarypolicy sumerasset-backedsecurities(ABS),theamountof

Minutesof FederalOpenMarketCommitteeMeetings 195 ABSissuedinthefirsttwomonthsof theyearwas cernsoverfiscalproblemsinGreece.Spreadson somewhatbelowthatinthefourthquarter,reflecting GreekgovernmentdebtrelativetoGermanbunds theveryweakpaceof consumercreditoriginations widenedappreciablybeforefallingbackaspress latelastyear.Thespreadof creditcardinterestrates reportsindicatedthateuro-areacountriesweredisovertwo-yearTreasuryyieldstickedupinJanuary, cussingapossibleaidpackageforGreeceandthe whilespreadsonnewautoloansdeclinedslightly,on Greekgovernmentannouncedfurtherdeficitreducnet,overtheintermeetingperiod.Delinquencyrates tionmeasures.Spreadsondebtissuedbyseveral oncreditcardloansinsecuritizedpoolsandonauto otherEuropeancountriesfollowedasimilarpattern loansatcaptivefinancecompaniesremainedelevated overtheintermeetingperiod.TheBankof England inJanuarybutweredownabitfromtheirrecent (BOE)andtheEuropeanCentralBank(ECB)held peaks. ratessteadyduringtheperiod,andtheBOEelected nottoexpanditsAssetPurchaseFacility,which TotalbankcreditcontractedsubstantiallyinJanuary reacheditslimitattheendof January.Inearly andFebruary.Banks’securitiesholdingsdeclinedat March,theECBannouncedseveralstepstonormalamodestpaceafterseveralmonthsof steadygrowth, izeitsprovisionof liquidity.Equitypricesinmost andtotalloansonbanks’bookscontinuedtodrop. foreigncountrieswereupmoderatelysincetheJanu- Commercialandindustrial(C&I)loanscontinued aryFOMCmeeting.Likelyreflectingtheconcerns falling,asspreadsof interestratesonC&Iloansover aboutGreeceaswellasweakeconomicdatain comparable-maturitymarketinstrumentsclimbed Europe,thedollarappreciatednotablyagainststerfurtherinthefirstquarterandnonfinancialfirms’ lingandtheeuroovertheintermeetingperiod.Howneedforexternalfinanceapparentlyremainedsub- ever,thedollardeclinedagainstmostemergingmardued.Commercialrealestateloansalsopostedsig- ketcurrencies,whichwerebuoyedbybrightening nificantdeclines.Householdloansonbanks’books growthprospects,leavingthebroadtrade-weighted contractedaswell,inpartbecauseof apickupin valueof thedollardownabitsincetheJanuary banksecuritizationsof first-lienresidentialmort- meeting. gageswiththegovernment-sponsoredenterprisesin February.Consumerloansoriginatedbybanks Staff Economic Outlook declined,primarilyreflectingalargedropincredit cardloans.Incontrast,otherconsumerloans—in- IntheforecastpreparedfortheMarchFOMCmeetcludingauto,student,andtaxadvanceloans—were ing,thestaff’soutlookforrealeconomicactivitywas roughlyflatduringJanuaryandFebruary. broadlysimilartothatatthetimeof theJanuary meeting.Inparticular,thestaff continuedtoantici- M2decreasedinJanuary,owingpartlytoacontrac- pateamoderatepaceof economicrecoveryoverthe tioninliquiddeposits.Manyinstitutionsoptedout nexttwoyears,reflectingtheaccommodativestance of theFederalDepositInsuranceCorporation’s of monetarypolicyandafurtherdiminutionof the TransactionAccountGuaranteeProgrambecauseof factorsthathadweighedonspendingandproduction thehigherfeesassociatedwithparticipationafter sincetheonsetof thefinancialcrisis.Thestaff did year-end,reportedlydrivingdepositorstotransfer makemodestdownwardadjustmentstoitsprojecfundsoutof transactionaccountsandintoalterna- tionsforrealGDPgrowthinresponsetounfavorable tiveinvestmentsoutsideof M2.M2expandedinFeb- newsonhousingactivity,unexpectedlyweakspendruary,however,asliquiddepositsresumedtheir ingbystateandlocalgovernments,andasubstantial growth.Smalltimedepositsandretailmoneymarket reductionintheestimatedlevelof householdincome mutualfundscontractedinJanuaryand,toalesser inthesecondhalf of 2009.Thestaff’sforecastforthe extent,inFebruary,whilecurrencydeclinedabitin unemploymentrateattheendof 2011wasaboutthe JanuarybutadvancednotablyinFebruary.Themon- sameasinitspreviousprojection. etarybaseroseinbothmonths,astheincreasein reservebalancesresultingfromtheongoinglarge- Recentdataonconsumerpricesandunitlaborcosts scaleassetpurchasesbytheFederalReservemore ledthestaff torevisedownslightlyitsprojectionfor thanoffsetthecontractioninbalancesassociated corePCEpriceinflationfor2010and2011;asbefore, withthedeclineincreditoutstandingunderthe coreinflationwasprojectedtobequitesubduedat System’sliquidityandcreditfacilities. ratesbelowlastyear’space.Althoughincreasedoil priceshadboostedoverallinflationoverrecent Movementsinforeignfinancialmarketssincethe months,thestaff anticipatedthatconsumerprices Januarymeetingwereimportantlyinfluencedbycon- forenergywouldincreasemoreslowlygoingforward,

196 97thAnnualReport|2010 consistentwithquotesonoilfuturescontracts.Con- recoverywouldcontributetostrongerbankbalance sequently,totalPCEpriceinflationwasprojectedto sheetsandsotoanincreasedavailabilityof creditto runalittleabovecoreinflationthisyearandthen householdsandsmallbusinesses,whichwouldinturn edgedowntothesamerateascoreinflationin2011. helpboosttheeconomyfurther. Participants’ Views on Current Conditions Whileparticipantssawincominginformationas and the Economic Outlook broadlyconsistentwithcontinuedstrengtheningof economicactivity,theyalsohighlightedavarietyof Intheirdiscussionof theeconomicsituationand factorsthatwouldbelikelytorestraintheoverall outlook,participantsagreedthateconomicactivity paceof recovery,especiallyinlightof thewaning continuedtostrengthenandthatthelabormarket effectsof fiscalstimulusandinventoryrebalancing appearedtobestabilizing.Incominginformationon overcomingquarters.Whilerecentdatapointedtoa economicactivityreceivedovertheintermeeting noticeablepickupinthepaceof consumerspending periodwassomewhatmixedbutgenerallyconfirmed duringthefirstquarter,participantsagreedthat thattheeconomicrecoverywaslikelytoproceedata householdspendinggoingforwardwaslikelyto moderatepace.Onthepositiveside,recentdata remainconstrainedbyweaklabormarketconditions, pointedtosignificantgainsinretailsales,asubstan- lowerhousingwealth,tightcredit,andmodest tialpickupinbusinessspendingonequipmentand incomegrowth.Forexample,realdisposablepersonal software,andafurtherexpansionof goodsexports. incomeinJanuarywasvirtuallyunchangedfroma Moreover,thelatestlabormarketreadingshadbeen yearearlierandwouldhavebeenevenlowerinthe mildlyencouraging,withaconsiderableincreasein absenceof asubstantialriseinfederaltransferpaytemporaryemployment,especiallyinthemanufactur- mentstohouseholds.Businessspendingonequipingandinformationtechnologysectors.However, mentandsoftwarepickedupsubstantiallyover housingstartshadremainedflatatadepressedlevel, recentmonths,butanecdotalinformationsuggested investmentinnonresidentialstructureswasstill thatthispickupwasdrivenmainlybyincreased declining,andstateandlocalgovernmentexpendi- spendingonmaintainingexistingcapitalandupdattureswerebeingdepressedbylowerrevenues.More- ingtechnologyratherthanexpandingcapacity.The over,consumersentimentcontinuedtobedampedby continuedgainsinmanufacturingproductionwere veryweaklabormarketconditions,andfirms bolsteredbygrowingdemandfromforeigntrading remainedreluctanttoaddtopayrollsortocommitto partners,especiallyemergingmarketeconomies. newcapitalprojects.Participantssawrecentinflation However,afewparticipantsnotedthepossibilitythat readingsassuggestingaslightlygreaterdeceleration fiscalretrenchmentinsomeforeigncountriescould inconsumerpricesthanhadbeenexpected.Inlight triggeraslowdownof thoseeconomiesandhence of stablelonger-terminflationexpectationsandthe weighonthedemandforU.S.exports. likelycontinuationof substantialresourceslack,they generallyanticipatedthatinflationwouldbesubdued Somelabormarketindicatorsdisplayedpositivesigforsometime. nalsovertheintermeetingperiod,includingapickup intemporaryemploymentandincreasedjobpost- Participantsagreedthatfinancialmarketconditions ings.Indeed,nonfarmpayrollsmightwellhave remainedsupportiveof economicgrowth.Spreadsin increasedinFebruaryintheabsenceof weatherdisshort-termfundingmarketswerenearpre-crisislev- ruptions.Nevertheless,participantswereconcerned els,andriskspreadsoncorporatebondsandmeas- aboutthescarcityof jobopenings,theelevatedlevel uresof impliedvolatilityinequitymarketswere of unemployment,andtheextentof longer-term broadlyconsistentwithhistoricalnormsgiventhe unemployment,whichwasseenaspotentiallyleading outlookfortheeconomy.Participantswerealsoreas- tothelossof workerskills.Moreover,thedownward suredbytheabsenceof anysignsof renewedstrains trendininitialunemploymentinsuranceclaims infinancialmarketfunctioningasaconsequenceof appearedtohaveleveledoff inrecentweeks,while theFederalReserve’swindingdownof itsspecial hiringremainedathistoricallylowrates.Information liquidityfacilities.Incontrast,banklendingwasstill frombusinesscontactsandevidencefromregional contractingandinterestratesonmanybankloans surveysgenerallyunderscoredthedegreetowhich hadrisenfurtherinrecentmonths.Participants firms’reluctancetoaddtopayrollsorstartlarge anticipatedthatcreditconditionswouldgradually capitalprojectsreflectedtheirconcernsaboutthe improveovertime,andtheynotedthepossibilityof a economicoutlookanduncertaintyregardingfuture beneficialfeedbackloopinwhichtheeconomic governmentpolicies.Anumberof participants

Minutesof FederalOpenMarketCommitteeMeetings 197 pointedoutthattheeconomicrecoverycouldnotbe ments.Surveyreadingsandfinancialmarketdata sustainedovertimewithoutasubstantialpickupin pointedtoamodestdeclineinlonger-terminflation jobcreation,whichtheystillanticipatedbuthadnot expectationsoverrecentmonths.Whileallparticiyetbecomeevidentinthedata. pantsanticipatedthatinflationwouldbesubdued overthenearterm,afewnotedthattheriskstoinfla- Participantswerealsoconcernedthatactivityinthe tionexpectationsandthemedium-terminflationouthousingsectorappearedtobelevelingoff inmost lookmightbetiltedtotheupsideinlightof thelarge regionsdespitevariousformsof governmentsup- fiscaldeficitsandtheextraordinarilyaccommodative port,andtheynotedthatcommercialandindustrial stanceof monetarypolicy. realestatemarketscontinuedtoweaken.Indeed, housingsalesandstartshadflattenedoutat Committee Policy Action depressedlevels,suggestingthatpreviousimprovementsinthoseindicatorsmayhavelargelyreflected Intheirdiscussionof monetarypolicyfortheperiod transitoryeffectsfromthefirst-timehomebuyertax ahead,membersagreedthatitwouldbeappropriate creditratherthanafundamentalstrengtheningof tomaintainthetargetrangeof 0to¼percentforthe housingactivity.Participantsindicatedthatthepace federalfundsrateandtocompletetheCommittee’s of foreclosureswaslikelytoremainquitehigh; previouslyannouncedpurchasesof $1.25trillionof indeed,recentdataontheincidenceof seriously agencyMBSandabout$175billionof agencydebt delinquentmortgagespointedtothepossibilitythat bytheendof March.Nearlyallmembersjudgedthat theforeclosureratecouldmovehigherovercoming itwasappropriatetoreiteratetheexpectationthat quarters.Moreover,theprospectof furtheradditions economicconditions—includinglowlevelsof tothealreadyverylargeinventoryof vacanthomes resourceutilization,subduedinflationtrends,and poseddownsideriskstohomeprices. stableinflationexpectations—werelikelytowarrant exceptionallylowlevelsof thefederalfundsratefor Participantsreferredtoawidearrayof evidenceas anextendedperiod,butonememberbelievedthat indicatingthatunderlyinginflationtrendsremained communicatingsuchanexpectationwouldcreate subdued.Thelatestreadingsoncoreinflation— conditionsthatcouldleadtofinancialimbalances.A whichexcludetherelativelyvolatilepricesof food numberof membersnotedthattheCommittee’s andenergy—weregenerallylowerthantheyhad expectationforpolicywasexplicitlycontingenton anticipated,andwithpetroleumpriceshavingleveled theevolutionof theeconomyratherthanonthepasout,headlineinflationwaslikelytocomedowntoa sageof anyfixedamountof calendartime.Conserateclosetothatof coreinflationovercoming quently,suchforwardguidancewouldnotlimitthe months.Whiletheongoingdeclineintheimplicit Committee’sabilitytocommencemonetarypolicy rentalcostforowner-occupiedhousingwasweighing tighteningpromptlyif evidencesuggestedthatecooncoreinflation,anumberof participantsobserved nomicactivitywasacceleratingmarkedlyorunderlythatthemoderationinpricechangeswaswidespread inginflationwasrisingnotably;conversely,theduraacrossmanycategoriesof spending.Thismoderation tionof theextendedperiodpriortopolicyfirming wasevidentintheappreciableslowingof inflation mightlastforquitesometimeandcouldeven measuressuchastrimmedmeansandmedians,which increaseif theeconomicoutlookworsenedappreciaexcludethemostextremepricemovementsineach blyorif trendinflationappearedtobedecliningfurperiod. ther.Afewmembersalsonotedthatatthecurrent juncturetherisksof anearlystarttopolicytighten- Indiscussingtheinflationoutlook,participantstook ingexceededthoseassociatedwithalaterstart, noteof signsthatinflationexpectationswerereason- becausetheCommitteecouldbeflexibleinadjusting ablywellanchored,andmostagreedthatsubstantial themagnitudeandpaceof tighteninginresponseto resourceslackwascontinuingtorestraincostpres- evolvingeconomiccircumstances;incontrast,its sures.Measuresof gainsinnominalcompensation capacityforprovidingfurtherstimulusthroughconhadslowed,andsharpincreasesinproductivityhad ventionalmonetarypolicyeasingcontinuedtobe pusheddownproducers’unitlaborcosts.Anecdotal constrainedbytheeffectivelowerboundonthefedinformationindicatedthatplannedwageincreases eralfundsrate. weresmallornonexistentandsuggestedthatlarge marginsof underutilizedcapitalandlaboranda Membersnotedtheimportanceof continuedclose highlycompetitivepricingenvironmentwereexerting monitoringof financialmarketsandinstitutions—inconsiderabledownwardpressureonpriceadjust- cludingassetprices,levelsof leverage,andunderwrit-

198 97thAnnualReport|2010 ingstandards—tohelpidentifysignificantfinancial Thevoteencompassedapprovalof thestatement imbalancesatanearlystage.Atthetimeof themeet- belowtobereleasedat2:15p.m.: ingtheinformationcollectedinthisprocess,includingthatbysupervisorystaff,hadnotrevealedemerg- “InformationreceivedsincetheFederalOpen ingmisalignmentsinfinancialmarketsorwidespread MarketCommitteemetinJanuarysuggeststhat instancesof excessiverisk-taking.Allmembers economicactivityhascontinuedtostrengthen agreedthattheCommitteewouldcontinuetomoni- andthatthelabormarketisstabilizing.Housetortheeconomicoutlookandfinancialdevelopments holdspendingisexpandingatamoderaterate andwouldemployitspolicytoolsasnecessaryto butremainsconstrainedbyhighunemployment, promoteeconomicrecoveryandpricestability. modestincomegrowth,lowerhousingwealth, andtightcredit.Businessspendingonequip- Inlightof theimprovedfunctioningof financial mentandsoftwarehasrisensignificantly.Howmarkets,Committeemembersagreedthatitwouldbe ever,investmentinnonresidentialstructuresis appropriateforthestatementtobereleasedfollowing declining,housingstartshavebeenflatata themeetingtoindicatethatthepreviously depressedlevel,andemployersremainreluctant announcedscheduleforclosingtheTermAsset- toaddtopayrolls.Whilebanklendingcontinues BackedSecuritiesLoanFacilitywasbeingmain- tocontract,financialmarketconditionsremain tained.TheCommitteealsodiscussedpossible supportiveof economicgrowth.Althoughthe approachesforformulatingandcommunicatingkey paceof economicrecoveryislikelytobemoderelementsof itsstrategyforremovingextraordinary ateforatime,theCommitteeanticipatesa monetarypolicyaccommodationattheappropriate gradualreturntohigherlevelsof resourceutilitime.NodecisionsabouttheCommittee’sexitstrat- zationinacontextof pricestability. egyweremadeatthismeeting,butparticipants agreedtogivefurtherconsiderationtotheseissuesat Withsubstantialresourceslackcontinuingto alaterdate. restraincostpressuresandlonger-terminflation expectationsstable,inflationislikelytobesub- Attheconclusionof thediscussion,theCommittee duedforsometime. votedtoauthorizeanddirecttheFederalReserve Bankof NewYork,untilitwasinstructedotherwise, TheCommitteewillmaintainthetargetrange toexecutetransactionsintheSystemAccountin forthefederalfundsrateat0to¼percentand accordancewiththefollowingdomesticpolicy continuestoanticipatethateconomiccondidirective: tions,includinglowratesof resourceutilization, subduedinflationtrends,andstableinflation “TheFederalOpenMarketCommitteeseeks expectations,arelikelytowarrantexceptionally monetaryandfinancialconditionsthatwillfos- lowlevelsof thefederalfundsrateforan terpricestabilityandpromotesustainable extendedperiod.Toprovidesupporttomortgrowthinoutput.Tofurtheritslong-runobjec- gagelendingandhousingmarketsandto tives,theCommitteeseeksconditionsinreserve improveoverallconditionsinprivatecreditmarmarketsconsistentwithfederalfundstradingin kets,theFederalReservehasbeenpurchasing arangefrom0to¼percent.TheCommittee $1.25trillionof agencymortgage-backedsecuridirectstheDesktocompletetheexecutionof its tiesandabout$175billionof agencydebt;those purchasesof about$1.25trillionof agencyMBS purchasesarenearingcompletion,andthe andof about$175billioninhousing-related remainingtransactionswillbeexecutedbythe agencydebtbytheendof March.TheCommit- endof thismonth.TheCommitteewillcontinue teedirectstheDesktoengageindollarroll tomonitortheeconomicoutlookandfinancial transactionsasnecessarytofacilitatesettlement developmentsandwillemployitspolicytoolsas of theFederalReserve’sagencyMBStransac- necessarytopromoteeconomicrecoveryand tions.TheSystemOpenMarketAccountMan- pricestability. agerandtheSecretarywillkeeptheCommittee informedof ongoingdevelopmentsregarding Inlightof improvedfunctioningof financial theSystem’sbalancesheetthatcouldaffectthe markets,theFederalReservehasbeenclosing attainmentovertimeof theCommittee’sobjec- thespecialliquidityfacilitiesthatitcreatedto tivesof maximumemploymentandprice supportmarketsduringthecrisis.Theonly stability.” remainingsuchprogram,theTermAsset-

Minutesof FederalOpenMarketCommitteeMeetings 199 BackedSecuritiesLoanFacility,isscheduledto warrant“alowlevelof thefederalfundsratefor closeonJune30forloansbackedbynew-issue sometime.”Suchachangeincommunicationwould commercialmortgage-backedsecuritiesandon providetheCommitteeflexibilitytobeginraising March31forloansbackedbyallothertypesof ratesmodestly.Hefurtherbelievedthatmakingsuch collateral.” anadjustmenttotheCommittee’stargetforthefederalfundsratesoonerratherthanlaterwouldreduce Votingforthisaction:BenBernanke,WilliamC. longer-runriskstomacroeconomicandfinancialsta- Dudley,JamesBullard,ElizabethDuke,DonaldL. bilitywhilecontinuingtoprovideneededsupportto Kohn,SandraPianalto,EricRosengren,DanielK. theeconomicrecovery. Tarullo,andKevinWarsh. Itwasagreedthatthenextmeetingof theCommittee Votingagainstthisaction:ThomasM.Hoenig. wouldbeheldonTuesday–Wednesday,April27–28, 2010.Themeetingadjournedat1:00p.m.on Mr.Hoenigdissentedbecausehebelieveditwasno March16,2010. longeradvisabletoindicatethateconomicandfinancialconditionswerelikelytowarrant“exceptionally Notation Vote lowlevelsof thefederalfundsrateforanextended period.”Mr.Hoenigwasconcernedthatcommuni- BynotationvotecompletedonFebruary16,2010, catingsuchanexpectationcouldleadtothebuildup theCommitteeunanimouslyapprovedtheminutesof of futurefinancialimbalancesandincreasetherisks theFOMCmeetingheldonJanuary26–27,2010. tolonger-runmacroeconomicandfinancialstability. Accordingly,Mr.Hoenigbelievedthatitwouldbe BrianF.Madigan moreappropriatefortheCommitteetoexpressits Secretary anticipationthateconomicconditionswerelikelyto

200 97thAnnualReport|2010 Meeting Held on April 27–28, 2010 DavidJ.Stockton Economist Ajointmeetingof theFederalOpenMarketCom- AlanD.Barkema,ThomasA.Connors, mitteeandtheBoardof Governorsof theFederal WilliamB.English,Jeff Fuhrer,StevenB.Kamin, ReserveSystemwasheldintheofficesof theBoard SimonPotter,LawrenceSlifman,MarkS.Sniderman, of GovernorsinWashington,D.C.,onTuesday, ChristopherJ.Waller,andDavidW.Wilcox April27,2010,at2:00p.m.andcontinuedon AssociateEconomists Wednesday,April28,2010,at9:00a.m. BrianSack Manager,SystemOpenMarketAccount Present JenniferJ.Johnson BenBernanke Secretaryof theBoard,Officeof theSecretary, Chairman Boardof Governors WilliamC.Dudley PatrickM.Parkinson ViceChairman Director,Divisionof BankSupervisionand JamesBullard Regulation,Boardof Governors ElizabethDuke RobertdeV.Frierson1 DeputySecretary,Officeof theSecretary, ThomasM.Hoenig Boardof Governors DonaldL.Kohn CharlesS.Struckmeyer SandraPianalto DeputyStaff Director,Officeof theStaff Director EricRosengren forManagement,Boardof Governors DanielK.Tarullo JamesA.Clouse DeputyDirector,Divisionof MonetaryAffairs, KevinWarsh Boardof Governors ChristineCumming,CharlesL.Evans, LindaRobertson NarayanaKocherlakota,andCharlesI.Plosser AssistanttotheBoard,Officeof BoardMembers, AlternateMembersof theFederalOpenMarket Boardof Governors Committee WilliamNelson JeffreyM.Lacker,DennisP.Lockhart,and JanetL.Yellen SeniorAssociateDirector,Divisionof Monetary Affairs,Boardof Governors Presidentsof theFederalReserveBanksof Richmond,Atlanta,andSanFrancisco,respectively NellieLiang,DavidReifschneider,and HelenE.Holcomb WilliamWascher FirstVicePresident,FederalReserveBankof Dallas SeniorAssociateDirectors,Divisionof Researchand Statistics,Boardof Governors BrianF.Madigan SecretaryandEconomist SethB.Carpenter AssociateDirector,Divisionof MonetaryAffairs, MatthewM.Luecke Boardof Governors AssistantSecretary ChristopherJ.Erceg DavidW.Skidmore DeputyAssociateDirector,Divisionof International AssistantSecretary Finance,Boardof Governors MichelleA.Smith EgonZakrajšek AssistantSecretary DeputyAssociateDirector,Divisionof Monetary ScottG.Alvarez Affairs,Boardof Governors GeneralCounsel BrianJ.Gross ThomasC.Baxter SpecialAssistanttotheBoard,Officeof Board DeputyGeneralCounsel Members,Boardof Governors NathanSheets Economist 1 AttendedTuesday’ssessiononly.

Minutesof FederalOpenMarketCommitteeMeetings 201 DavidH.Small mentswiththeBankof CanadaandtheBancode ProjectManager,Divisionof MonetaryAffairs, Mexicoforanadditionalyear,beginninginmid- Boardof Governors December2010;thesearrangementsareassociated withtheFederalReserve’sparticipationintheNorth JenniferE.Roush AmericanFrameworkAgreementof 1994.The SeniorEconomist,Divisionof MonetaryAffairs, arrangementwiththeBankof Canadaisinthe Boardof Governors amountof $2billionequivalent,andthearrange- KurtF.Lewis mentwiththeBancodeMexicoisintheamountof Economist,Divisionof MonetaryAffairs, $3billionequivalent.ThevotetorenewtheSystem’s Boardof Governors participationintheseswaparrangementswastaken PenelopeA.Beattie atthismeetingbecauseof aprovisioninthearrange- AssistanttotheSecretary,Officeof theSecretary, mentsthatrequireseachpartytoprovidesixmonths’ Boardof Governors priornoticeof anintentiontoterminateits participation. KimberleyE.Braun RecordsProjectManager,Divisionof Monetary Affairs,Boardof Governors Thestaff alsobriefedtheCommitteeonrecentprogressinthedevelopmentof reservedrainingtools.The RandallA.Williams Deskwaspreparingtoconductsmall-scalereverse RecordsManagementAnalyst,Divisionof Monetary repurchaseoperationstoensureitsabilitytouse Affairs,Boardof Governors agencyMBScollateral.Italsocontinuedtowork EstherL.George towardexpansionof thesetof counterpartiesfor FirstVicePresident,FederalReserveBank reverserepurchaseoperations.Thestaff notedthat of KansasCity theBoardhadrecentlyapprovedchangestoRegulationDthatwouldbenecessaryfortheestablishment LorettaJ.Mester,HarveyRosenblum,and of atermdepositfacility. JohnC.Williams ExecutiveVicePresidents,FederalReserveBanksof Philadelphia,Dallas,andSanFrancisco,respectively Thestaff nextgaveapresentationonpotential longer-runstrategiesformanagingtheSOMA.At DavidAltig,RichardP.Dzina,DanielG.Sullivan,and previousmeetings,Committeeparticipantshad JohnA.Weinberg expressedsupportforstepstoreducethesizeof the SeniorVicePresidents,FederalReserveBanks FederalReserve’sbalancesheetovertimeandreturn of Atlanta,NewYork,Chicago,andRichmond, thecompositionof theSOMAtoonlyTreasurysecurespectively rities.Thestaff discussedthepotentialportfolio WarrenWeber pathsandmacroeconomicconsequencesof anumber SeniorResearchOfficer,FederalReserveBank of differentstrategiesforaccomplishingtheseobjecof Minneapolis tives.Todate,theDeskhadbeenreinvestingtheproceedsof allmaturingTreasurysecuritiesinnewly Developments in Financial Markets and issuedTreasurysecurities,butithadnotbeenreinthe Federal Reserve’s Balance Sheet vestingprincipalandinterestpaymentsonmaturing agencydebtandagencyMBS,norhaditbeenselling TheManagerof theSystemOpenMarketAccount securities.Onestrategyconsideredinthestaff pre- (SOMA)reportedondevelopmentsindomesticand sentationwasacontinuationof thecurrentpractice, foreignfinancialmarketsduringtheperiodsincethe whichwouldnormalizethebalancesheetverygradu- CommitteemetonMarch16,2010.TheManager ally.Inaddition,thestaff presentedinformationona alsoreportedonSystemopenmarketoperationsin numberof otherstrategiesthatincludedsalesof Treasurysecuritiesandinagencydebtandagency SOMAholdingsof agencydebtandMBSandunder mortgage-backedsecurities(MBS)duringtheinter- whichtheproceedsof maturingTreasurysecurities meetingperiod.Byunanimousvote,theCommittee wouldnotbereinvested;thesestrategiesdifferedby ratifiedthosetransactions.Therewerenoopenmar- thedateandcircumstancesunderwhichsaleswould ketoperationsinforeigncurrenciesfortheSystem’s beinitiated,bytheaveragepaceof sales,andbythe accountovertheintermeetingperiod. degreetowhichthetimingandpaceof suchsales wouldbeadjustedinresponsetofinancialandeco- Byunanimousvote,theCommitteedecidedto nomicdevelopments. extendthereciprocalcurrency(“swap”)arrange-

202 97thAnnualReport|2010 Meetingparticipantsagreedbroadlyonkeyobjec- announcedpaceof salesthatwasunlikelytovary tivesof alonger-runstrategyforassetsalesand muchwouldprovideahighdegreeof certaintyabout redemptions.Thestrategyshouldbeconsistentwith sales,helpingtolimitdisruptionsinfinancial theachievementof theCommittee’sobjectivesof markets. maximumemploymentandpricestability.Inaddition,thestrategyshouldnormalizethesizeandcom- Theviewsof participantsalsodifferedtosomeextent positionof thebalancesheetovertime.Reducingthe regardingtheappropriatepaceof assetsales.Most sizeof thebalancesheetwoulddecreasetheassoci- preferredthattheagencydebtandMBSheldinthe atedreservebalancestoamountsconsistentwith portfoliobesoldatagradualpacethatwouldcommorenormaloperationsof moneymarketsandmon- pletethesalesaboutfiveyearsaftertheybegan.One etarypolicy.Returningtheportfoliotoitshistorical possibilitywouldbeforthepacetoberelativelyslow compositionof essentiallyallTreasurysecurities initiallybuttoincreaseovertime,allowingmarketsto wouldminimizetheextenttowhichtheFederal adjustgradually.Acoupleof participantsthought Reserveportfoliomightbeaffectingtheallocationof fastersales,conductedoveraboutthreeyears,would creditamongprivateborrowersandsectorsof the beappropriateandfeltthatsuchapacewouldnot economy. putunduestrainonfinancialmarkets.Intheirview,a relativelybriskpaceof saleswouldreducethechance Mostparticipantsexpressedapreferenceforstrate- thattheelevatedsizeof theFederalReserve’sbalance giesthatwouldeventuallyentailsalesof agencydebt sheetandtheassociatedhighlevelof reservebalandMBSinordertoreturnthesizeandcomposition ancescouldraiseinflationexpectationsandinflation of theFederalReserve’sbalancesheettoamorenor- beyondlevelsconsistentwithpricestabilityorcould malconfigurationmorequicklythanwouldbe generateexcessivegrowthof creditwhenthe accomplishedbysimplylettingMBSandagency economyandbankingsystemrecovermorefully. securitiesrunoff.Theyagreedthatsalesof agency debtandMBSshouldbeimplementedinaccordance Participantssawbothadvantagesanddisadvantages withaframeworkcommunicatedinadvanceandbe tonotrollingoverTreasurysecuritiesastheymature. conductedatagradualpacethatpotentiallycouldbe Ontheonehand,redeemingTreasurysecurities adjustedinresponsetochangesineconomicand wouldcontributetoamoreexpeditiousnormalizafinancialconditions. tionof thesizeof thebalancesheetandthequantity of reserves.Ontheotherhand,suchredemptions Participantsexpressedarangeof viewsonsomeof couldputupwardpressureoninterestratesand thedetailsof astrategyforassetsales.Mostpartici- wouldtendtoworkagainsttheobjectiveof returning pantsfavoreddeferringassetsalesforsometime.A theSOMAtoanall-Treasuriescomposition. majoritypreferredbeginningassetsalessometime afterthefirstincreaseintheFederalOpenMarket NodecisionsabouttheCommittee’slonger-runstrat- Committee’s(FOMC)targetforshort-terminterest egyforassetsalesandredemptionsweremadeatthis rates.Suchanapproachwouldpostponeanyasset meeting.Forthetimebeing,participantsagreedthat salesuntiltheeconomicrecoverywaswellestablished theDeskshouldcontinuetheinterimapproachof andwouldmaintainshort-terminterestratesasthe allowingallmaturingagencydebtandallprepay- Committee’skeymonetarypolicytool.Otherpartici- mentsof agencyMBStoberedeemedwithout pantsfavoredastrategyinwhichtheCommittee replacementwhilerollingoverallmaturingTreasury wouldsoonannounceageneralscheduleforfuture securities.Participantsagreedtogivefurtherconsidassetsales,withadatefortheinitiationof salesthat erationtotheirlonger-runstrategyatalaterdate. wouldnotnecessarilybelinkedtotheincreaseinthe Committee’sinterestratetarget.Afewpreferredto Staff Review of the Economic Situation beginsalesrelativelysoon.Earliersaleswouldnormalizethesizeandcompositionof thebalancesheet TheinformationreviewedattheApril27–28meeting soonerandwouldunwindatleastpartof theuncon- suggestedthat,onbalance,theeconomicrecovery ventionalpolicystimulusputinplaceduringthecri- wasproceedingatamoderatepaceandthatthedetesisbeforeconventionalpolicyfirminggotunderway. riorationinthelabormarketwaslikelycomingtoan Someparticipantssawadvantagestovaryingthe end.Consumerspendingcontinuedtopostsolid FOMC’sholdingsof longer-termassetssystemati- gainsinthefirstthreemonthsof theyear,andbusicallyinresponsetoeconomicandfinancialdevelop- nessinvestmentinequipmentandsoftwareappeared ments.However,othersthoughtthatapre- tohaveincreasedsignificantlyfurtherinthefirst

Minutesof FederalOpenMarketCommitteeMeetings 203 quarter.Inaddition,growthof manufacturingout- thecrisis.Furthermore,althoughbanksindicateda putremainedbrisk,andgainsbecamemorebroadly somewhatgreaterwillingnesstolendtoconsumersin basedacrossindustries.However,residentialcon- recentmonths,termsandstandardsonconsumer struction,whilehavingedgedup,wasstilldepressed, loansremainedrestrictive.Additionally,consumer constructionof nonresidentialbuildingsremainedon sentimentdroppedbackinearlyAprilandwaslittle asteepdownwardtrajectory,andstateandlocalgov- changed,onnet,sincethebeginningof theyear. ernmentscontinuedtoretrench.Consumerprice inflationremainedlow. Startsof newsingle-familyhomesedgedup,onnet, overFebruaryandMarch,butmuchof thisincrease Thelabormarketshowedsignsof anascentrecovery likelyreflecteddelayedprojectsgettingunderwayas inrecentmonths.Privatenonfarmpayrollemploy- weatherconditionsreturnedtonormal.Homesales mentincreasedoverthefirstquarterof 2010—the strengthenednoticeably,assalesof newsingle-family firstquarterlyincreasesincetheonsetof thereces- homesjumpedandsalesof existingsingle-family sion.Theaverageworkweekalsoroselastquarter homesroseaswell.However,bothnewhomesales anddatafromthehouseholdsurveypointedtoa andexistinghomesaleswerelikelyboosted,atleast firminginlabormarketconditions.Theunemploy- inpart,bytheanticipatedexpirationof thehomementrateheldsteadyat9.7percentthroughoutthe buyertaxcredit.Interestratesforconforming firstquarter,andthelaborforceparticipationrate 30-yearfixed-ratemortgageschangedlittleinrecent increasedoverthepastfewmonthsfollowingsharp monthsandremainedatlevelsthatwereverylowby declinesoverthesecondhalf of lastyear.Thenum- historicalstandards. berof newjoblosersasapercentageof household employmentcontinuedtodrop,andthefractionof Realspendingonequipmentandsoftwarecontinued workersonpart-timeschedulesforeconomicreasons toreboundinthefirstquarter.Investmentinhighmoveddownsincetheendof lastyear.Nonetheless, techequipmentandtransportationadvancedfurther, findingajobremainedverydifficult,andtheaverage andrealspendingforequipmentotherthanhigh-tech durationof unemploymentspellsincreasedfurther. andtransportationappearedtoturnupsharplyafter fallingformorethanayear,suggestingthatthe Industrialproductioncontinuedtoexpandatabrisk recoveryinequipmentandsoftwareinvestment paceduringthefirstquarter.Recentproduction becamemorebroadlybased.Therecoveryinequipgainsremainedbroadlybasedacrossindustries,as mentandsoftwarespendingwasconsistentwiththe bothforeigndemandandamildrestockingof inven- strengtheninginmanyindicatorsof businessactivity. toriescontributedpositivelytooutputgrowth. Incontrast,thenonresidentialconstructionsector Capacityutilizationstoodsignificantlyabovethe continuedtocontract.RealoutlaysonstructuresouttroughrecordedlastJunebutwasstillwellbelowits sidedrillingandminingfellsteeplylastyear,and long-runaverage.Lightmotorvehicleproduction recentdataonnominalexpendituresthroughFebrusteppedupinMarch,andassembliesinthefirst arysuggestedafurtherdeclineinthefirstquarter. quarterwereabovetheirfourth-quarteraverageas Theweaknesswaswidespreadacrosscategoriesand automakerscautiouslybegantorebuilddealers’ likelyreflectedelevatedvacancyrates,lowlevelsof inventories.Productioninhigh-techindustries propertyprices,anddifficultiesinobtainingfinancincreasedsolidly,andavailableindicatorspointed ingfornewprojects.Realspendingondrillingand towardfurtherexpansioninthissectorinthenear miningstructurespickedupstronglyoverthesecond term.Onbalance,indicatorsof near-termmanufac- half of lastyearinresponsetothereboundinoiland turingactivityremainedquitepositive. naturalgasprices. Consumerspendingcontinuedtoriseatasolidpace Availabledatasuggestedthatthepaceof inventory throughMarch,withrecentgainspronouncedfor liquidationmoderatedfurtherinthefirstquarter mostnon-autogoodsandfoodservices.Despitesigns afterslowingsharplyinthefourthquarterof last of improvementrecently,thedeterminantsof spend- year.Inventoriesappearedtoapproachcomfortable ingremainedsubdued.Whilewagesandsalaries levelsrelativetosalesintheaggregate,although pickedupearlythisyear,realdisposableincomewas inventorypositionsacrossindustriesvaried.Months’ flatinFebruaryafteraslightdeclineinJanuary; supplyremainedelevatedforequipment,materials, housingwealthwasstillwellbelowitslevelpriorto and,toalesserdegree,constructionsupplies.Bycon-

204 97thAnnualReport|2010 trast,inventoriesof consumergoods,businesssup- sition,andimplementationof suchanaidpackage. plies,andhigh-techgoodsappearedlowrelativeto Economicactivityinemergingmarketscontinuedto demand. expandrobustlyinthefirstquarter.Despitethe strengthof exports,merchandisetradebalances Consumerpriceinflationwaslowinrecentmonths; declinedforsomecountrieswherestrongdomestic bothheadlineandcorepersonalconsumptionexpen- demandcausedimportstooutpaceexports.In ditures(PCE)priceswereestimatedtohaverisen China,realgrossdomesticproduct(GDP)increased slightlyinMarchafterremainingunchangedinFeb- atahigher-than-expectedannualrateinthefirst ruary.Ona12-monthchangebasis,corePCEprices quarterastheeconomicrecoveryremainedbroad slowedovertheyearendinginMarch,withdecelera- based,withindustrialproduction,investment,and tionwidespreadacrosscategoriesof expenditures.In domesticdemandcontinuingtogrowbriskly.In contrast,thecorrespondingchangeintheheadline LatinAmerica,indicatorssuggestedthateconomic indexmovedupnoticeably,asenergyprices activityinMexicoandBrazilexpandedfurtherinthe rebounded.Surveymeasuresof long-terminflation firstquarter.Foreigninflationwasboostedby expectationswerefairlystableinrecentmonthsat increasesinthepricesof oilandothercommodities, levelsslightlylowerthanthosepostedayearago. butcoreinflationgenerallyremainedsubdued. Meanwhile,measuresof inflationcompensation basedonTreasuryinflation-protectedsecurities Staff Review of the Financial Situation (TIPS)edgedupslightly.Costpressuresfromrising commoditypricesshowedthroughtopricesatearly ThedecisionbytheFOMCattheMarchmeetingto stagesof processing,andtheproducerpriceindexfor keepthetargetrangeforthefederalfundsrate coreintermediatematerialscontinuedtoriserapidly unchangedandtoretainthe“extendedperiod”lanthroughMarch.However,measuresof laborcosts guageinthestatementwaslargelyanticipatedby deceleratedsharplylastyear,ascompensationper marketparticipants.However,somemarketparticihourinthenonfarmbusinesssectorincreasedonly pantsreportedlyinterpretedtheretentionof the slightlyoverthefourquartersof 2009. “extendedperiod”languageaspointingtoalonger periodof lowratesthanpreviouslyexpected,and TheU.S.internationaltradedeficitwidenedinFeb- Eurodollarfuturesratestemporarilydeclinedabitin ruary,asariseinnominalimportsoutpacedasmall response. increaseinexports.Increasedexportsof industrial supplies,capitalgoods,andautomotiveproducts Onbalanceovertheintermeetingperiod,the werepartlyoffsetbydeclinesinagriculturalgoods expectedpathof policyedgeddownslightly.Yields andconsumergoods.TheFebruaryriseinimports on2-yearand10-yearnominalTreasurysecurities reversedasimilarlysizeddecreaseinJanuary. postedsmallmixedchangesamidsomevolatilitythat Importsof oilaccountedformorethanone-thirdof reportedlyreflectedevolvingviewsabouttheU.S.fistheJanuarydecline,reflectinglowervolumes,but caloutlook,prospectsforU.S.economicgrowth,and theyaccountedforonlyaboutone-tenthof theFeb- thefiscalsituationinperipheralEuropeancountries. ruaryincrease,asvolumesreboundedbutpricesfell. Inflationcompensation—thedifferencebetween Importsof capitalgoodsroseasstrongcomputer nominalTreasuryyieldsandyieldsonTIPS—rose importsmorethanoffsetfallingaircraftpurchases, someovertheperiod,butsurveymeasuresof longerandimportsof industrialsuppliesandconsumer terminflationexpectationswereaboutunchanged. goodsalsomovedup. Overall,conditionsinshort-termfundingmarkets Recentindicatorsintheadvancedforeigneconomies remainedgenerallystableduringtheintermeeting suggestedacontinueddivergenceinthepaceof period.SpreadsbetweenLondoninterbankoffered recovery,withastrongperformanceinCanada,a rates(Libor)andovernightindexswap(OIS)rates moderateexpansioninJapan,andamoresubdued wereaboutunchangedatlevelsnearthosethatprereboundinEurope.FiscalstrainsinGreeceintensi- vailedinlate2007,althoughtheybegantoedgeupin fiedduringtheintermeetingperiod,andinmid- thefinaldaysof theintermeetingperiod.Spreadsin April,euro-areamemberstatesannouncedaplanto thecommercialpapermarketwerelittlechanged. providefinancingaidtoGreeceincoordinationwith Equityindexesrose,onbalance,overtheintermeettheInternationalMonetaryFund.However,atthe ingperiod,withbanksharesoutperformingthe timeof theAprilFOMCmeeting,noofficialagree- broadermarket.Stockpricesweresupportedby menthadbeenreachedconcerningthescale,compo- somewhatbetter-than-expectedmacroeconomicdata

Minutesof FederalOpenMarketCommitteeMeetings 205 andafavorableresponsebyinvestorstotheinitial loans.Consumercreditcontinuedtotrendlowerin batchof first-quarterearningsreports,especially recentmonths,pusheddownbyasteepdeclinein thoseof bankinginstitutions.Option-impliedvolatil- revolvingcredit.Spreadsonhigh-qualitycreditcard ityontheS&P500indexgenerallydeclinedoverthe andautoloanasset-backedsecurities(ABS)edged periodbutjumpedatendof Aprilonrenewedcon- downovertheperiod,withlittleupwardpressureevicernsregardingthefiscalsituationinGreece.Thegap dentfromtheendof theportionof theTermAssetbetweenthestaff’sestimateof theexpectedreal BackedSecuritiesLoanFacilitysupportingABS. equityreturnoverthenext10yearsforS&P500 Nonetheless,fewerABSwereissuedinthefirstquarfirmsandthereal10-yearTreasuryyield—arough terthaninthefourthquarter,reflectingcontinued measureof theequityriskpremium—remainedwell weaknessinloanoriginations.Delinquencyrateson aboveitsaverageoverthepastdecade.Yieldson consumerloansedgeddownfurtherinFebruarybut investment-gradecorporatebondsedgeddown,leav- remainedveryelevated.Spreadsof interestrateson ingtheirspreadstocomparable-maturityTreasury creditcardsoveryieldsontwo-yearTreasurysecurisecuritiesabitlower,atlevelsaroundthosethatpre- tiescontinuedtodriftupward,whileinterestrateson vailedinlate2007.Consistentwithmore-favorable newautoloansatdealershipsandtheirspreadsover investorsentimenttowardriskyassets,yieldsand yieldsonfive-yearTreasurysecuritiesextendedtheir spreadsonspeculative-gradecorporatebonds previousdecline. declined,andsecondarymarketpricesof syndicated leveragedloansrosefurther. Afteradjustingtoremovetheeffectsof banks’adoptionof FinancialAccountingStandards166and167, Overall,netdebtfinancingbynonfinancialfirmswas bankcreditcontractedagaininMarch,asbothloans positiveinMarch.Issuanceof nonfinancialbonds andsecuritiesholdingsdeclined.2Thecontractionin surged,andnetissuanceof commercialpaper commercialandindustrialloansremainedproreboundedappreciably.Netequityissuancebynonfi- nounced.Thedropincommercialrealestateloans nancialfirmswasnegativeagaininthefirstquarter persisted,reflectingweakfundamentalsthatlimited asthesolidpaceof grosspublicissuancewasmore originationsaswellascharge-offsof existingloans. thanoffsetbyequityretirementsfrombothcash- Residentialrealestateloansalsodecreasedfurtherin financedmergersandsharerepurchases.Financial March,asdidcreditcardloansandotherconsumer firmsissuedasignificantvolumeof debtsecuritiesin loans. thefirstquarterandalsoraisedamoderateamount of grossfundsintheequitymarket,apatternthat M2fellinMarch,reflectingaslowingintheexpanappearedtocontinueinthefirsthalf of April.Credit sionof liquiddepositsalongwithafurthercontracqualityinthecommercialrealestatesectorcontinued tioninsmalltimedepositsandasteeprunoff inretail todeteriorateasthedelinquencyrateforsecuritized moneymarketmutualfunds.Currencygrewata commercialmortgagesincreasedagaininMarch.The moderatepace,likelyasaresultof continued declineinoutstandingcommercialmortgagedebtin demandforU.S.banknotesfromabroadcoupled thefourthquarterof lastyearwasthelargeston withsoliddomesticdemand.Themonetarybaseconrecord.Nonetheless,indexesof pricesforcredit tractedastheeffectonreservesof purchasesunder defaultswapsoncommercialmortgage-backedsecu- theFederalReserve’slarge-scaleassetpurchaseproritiestickedupnoticeablyovertheperiod,inline gramswasmorethanoffsetbyafurthercontraction withtheoverallreductioninfinancialmarketrisk increditoutstandingunderliquidityandcreditfacilipremiums. tiesandanincreaseintheTreasury’sbalancesatthe FederalReserve. Theconclusionof purchasesundertheFederal Reserve’sagencyMBSprogramhadonlyamodest 2 ThenewaccountingstandardsmakeitmoredifficultforU.S. marketeffect.Overtheintermeetingperiod,spreads bankstoholdassetsoffbalancesheet.Banksadoptedthestandardsinthefourthquarterof2009andthefirstquarterof onagencyMBSretracedmuchof theincreaseseen 2010.Thecumulativeeffectsoftheresultingassetconsolidation aroundthetimeof theprogram’sconclusion,ending wereincorporatedinthebankcreditdatapublishedontheFedtheperiodroughlyunchanged.Thefactorscontribut- eralReserve’sH.8StatisticalRelease“AssetsandLiabilitiesof CommercialBanksintheUnitedStates”asofMarch31,2010. ingtotherecentnarrowingof MBSandmortgage Whileallmajorloancategorieswereaffectedtosomedegreeby spreadsincludedthelowlevelof mortgageorigina- banks’adoptionofFinancialAccountingStandards166and tions,whichdampedthesupplyof newMBS,and 167,thelargesteffectwasoncreditcardloansoncommercial bankbalancesheets;banksalsoconsolidatedsignificant FannieMae’sandFreddieMac’sincreasedpurchases amountsofotherconsumerloans,commercialandindustrial of mortgagesthroughtheirbuyoutsof delinquent loans,andresidentialrealestateloans.

206 97thAnnualReport|2010 Untiltheintensificationof theGreekcrisisnearthe Participants’ Views on Current Conditions endof theintermeetingperiod,equityindexeswere and the Economic Outlook higherinnearlyallcountries,andemerging-market riskspreadshadgenerallydeclined.Thesemoves InconjunctionwiththisFOMCmeeting,allmeeting appearedtoreflectgrowingconfidencethatthe participants—thefivemembersof theBoardof globalrecoverywasgainingmomentum,particularly Governorsandthepresidentsof the12Federal inemergingmarketeconomies.However,sovereign ReserveBanks—providedprojectionsof economic debtspreadsinGreece,Portugal,andotherperiph- growth,theunemploymentrate,andconsumerprice eralEuropeancountrieswidenedinthedaysleading inflationforeachyearfrom2010through2012and uptotheAprilFOMCmeeting,asinvestoranxiety overalongerhorizon.Longer-runprojectionsrepreaboutthefiscalsituationinthosecountriesincreased. senteachparticipant’sassessmentof therateto Downgradestothecreditratingsof GreeceandPor- whicheachvariablewouldbeexpectedtoconverge tugalweighedoninvestorsentiment,andglobalmar- overtimeunderappropriatemonetarypolicyandin ketsretracedsomeof theirearliergains. theabsenceof furthershocks.Participants’forecasts through2012andoverthelongerrunaredescribed Overtheintermeetingperiod,theBankof Japan intheSummaryof EconomicProjections,whichis doubledthesizeof itsthree-monthfixed-ratefunds attachedasanaddendumtotheseminutes. facility,theBankof Canadadroppeditsconditional commitmenttokeepingratessteadythroughthefirst Intheirdiscussionof theeconomicsituationand half of theyear,andtheReserveBankof Australia outlook,meetingparticipantsagreedthattheincomraiseditspolicyrate.Thetrade-weightedvalueof the ingdataandinformationreceivedfrombusinesscondollarchangedlittle,onnet;gainsagainsttheeuro tactsindicatedthateconomicactivitycontinuedto andyenwereoffsetbydeclinesagainstmanyemerg- strengthenandthelabormarketwasbeginningto ingmarketcurrencies. improve.Althoughsomeof therecentdataoneconomicactivityhadbeenbetterthananticipated,most Staff Economic Outlook participantssawtheincominginformationasbroadly inlinewiththeirearlierprojectionsformoderate Theeconomicforecastpreparedbythestaff forthe growth;accordingly,theirviewsontheeconomicout- AprilFOMCmeetingwassimilartothatdeveloped lookhadnotchangedappreciably.Participants fortheMarchmeeting.Thestaff continuedtoproj- expectedtheeconomicrecoverytocontinue,but, ectthattheaccommodativestanceof monetary consistentwithexperiencefollowingpreviousfinanpolicy,togetherwithafurtherattenuationof finan- cialcrises,mostanticipatedthatthepickupinoutput cialstress,thewaningof adverseeffectsof earlier wouldberatherslowrelativetopastrecoveriesfrom declinesinwealth,andimprovinghouseholdand deeprecessions.Amoderatepaceof expansion,in businessconfidence,wouldsupportamoderate turn,wouldimplyonlyamodestimprovementinthe recoveryineconomicactivityandagradualdecline labormarketthisyear,withtheunemploymentrate intheunemploymentrateoverthenexttwoyears. declininggradually.Mostparticipantsagainpro- Thestaff forecastforbothrealGDPgrowthandthe jectedthattheeconomywouldgrowsomewhatfaster unemploymentratethroughtheendof 2011was in2011and2012,generatingamorepronounced roughlyinlinewithpreviousprojections. declineintheunemploymentrate.Inlightof stable longer-terminflationexpectationsandthelikelycon- Recentdataoncoreconsumerpricesledthestaff to tinuationof substantialresourceslack,policymakers markdownslightlyitsforecastforcorePCEinfla- anticipatedthatbothoverallandcoreinflationwould tion.Thestaff continuedtoanticipatethatdown- remainsubduedthrough2012,withmeasuredinflawardpressureoninflationfromthesubstantial tionsomewhatbelowratesthatpolicymakersconsidamountof projectedresourceslackwouldbetem- eredtobeconsistentoverthelongerrunwiththe peredbystableinflationexpectations.Withenergy FederalReserve’sdualmandate. priceincreasesexpectedtoslownextyear,totalPCE inflationwasseenaslikelytofallbackinlinewith Participantsexpectedthateconomicgrowthwould coreinflationbytheendof 2011,asinprevious continue:Recentdatapointedtosignificantgainsin projections. retailsales,businessspendingonequipmentandsoft-

Minutesof FederalOpenMarketCommitteeMeetings 207 warehadpickedupsubstantially,andreportsfrom rioratingfundamentals,includingdecliningoccubusinesscontactsandregionalsurveysindicatedthat pancyandrentalratesandtightcreditconditions. productionwasincreasingbrisklyinmanysectors. However,anumberof participantsnotedthatinvest- ParticipantsagreedthatthegrowthinrealGDP mentinequipmentandsoftwarehadbeenstrengthappearedtoreflectastrengtheningof privatefinal ening,andtheyrelayedanecdotalinformationfrom demandandnotjustfiscalstimulusandaslower theirbusinesscontactsthatsuggestedcontinued paceof inventorydecumulation;thiswelcomedevel- growthinordersforcapitalequipment. opmentlessenedpolicymakers’concernsaboutthe economy’sabilitytomaintainaself-sustainingrecov- Businessinvestmentwasexpectedtobesupportedby erywithoutgovernmentsupport.Businesses improvedconditionsinfinancialmarkets.Large appearedtobegainingconfidenceintheeconomic firmswithaccesstocapitalmarketsappearedtobe recovery,andnarrowingcreditspreadsinprivate havinglittledifficultyinobtainingcredit,andin debtmarketswereallowinglowpolicyratestobe manycasestheyalsohadampleretainedearnings reflectedmorefullyinthecostof capital.Atthe withwhichtofundtheiroperationsandinvestment. sametime,risingstockpricesandtheapparentstabi- However,manyparticipantsnotedthatwhilefinanlizationof housepriceswerehelpingtorepairhouse- cialmarketshadimproved,banklendingwasstill holdbalancesheets.Asaresult,consumersandfirms contractingandcreditremainedtightformanyborwerebeginningtosatisfydemandsfordurablegoods rowers.Smallerfirmsinparticularreportedlycontinandcapitalequipmentthathadbeenpostponeddur- uedtofacesubstantialdifficultyinobtainingbank ingtheeconomicdownturn.Manyparticipants loans.Becausesuchfirmstendtobemoredependent notedthatemploymenthadincreasedinrecent oncommercialbanksforfinancing,participantssaw months,andthattheyexpectedafurtherfirmingof limitedcreditavailabilityasapotentialconstrainton labormarketconditionsgoingforward.Astronger futureinvestmentandhiringbysmallbusinesses, labormarketcouldcontinuetoboostconsumerand whichnormallyareasignificantsourceof employbusinessconfidenceandsocontributetofurther mentgrowthinrecoveries.Someparticipantsnoted gainsinspending. thatmanysmallandregionalbankswerevulnerable todeterioratingperformanceof commercialreal Althoughthesedevelopmentswerepositive,partici- estateloans. pantsnotedseveralfactorsthatlikelywouldcontinue torestrainexpansionineconomicactivityandposed Economicconditionsabroad,especiallyinseveral somedownsiderisks.Therecentincreaseincon- emergingAsianeconomies,continuedtostrengthen sumerspendingappearedtobesupportedimpor- inrecentmonths,contributingtogainsinU.S. tantlybypent-updemandsandpossiblybyother exports.However,participantssawtheescalationof temporaryfactors,suchasunusuallylargeincome fiscalstrainsinGreeceandspreadingconcernsabout taxrefunds.Withthepersonalsavingratehaving otherperipheralEuropeancountriesasweighingon droppedbacktoarelativelylowlevel,itseemed financialconditionsandconfidenceintheeuroarea. unlikelythatconsumerspendingwouldbethemajor If otherEuropeancountriesrespondedbyintensifyfactordrivinggrowthastherecoveryprogressed. ingtheirfiscalconsolidationefforts,theresultwould Moreover,therecoveryinthehousingmarket likelybeslowergrowthinEuropeandpotentiallya appearedtohavestalledinrecentmonthsdespite weakerglobaleconomicrecovery.Someparticipants variousformsof governmentsupport.Althoughresi- expressedconcernthatacrisisinGreeceorinsome dentialrealestatevaluesseemedtobestabilizingand otherperipheralEuropeancountriescouldhavean insomeareashadreportedlymovedhigher,housing adverseeffectonU.S.financialmarkets,whichcould salesandstartshadleveledoff inrecentmonthsat alsoslowtherecoveryinthiscountry. depressedlevels.Someparticipantssawthepossibilityof elevatedforeclosuresaddingtothealreadyvery Developmentsinlabormarketswerepositiveoverthe largeinventoryof vacanthomesasposingadown- intermeetingperiod.Nonfarmpayrollsposteda siderisktohomeprices,therebylimitingtheextentof modestgaininMarch,andtheupturninprivate thepickupinresidentialinvestmentforawhile. employmentwaswidespreadacrossindustries.Nevertheless,participantsremainedconcernedabout Inthebusinesssector,prospectsfornonresidential elevatedunemployment,includinghighlevelsof constructionoutsidetheenergysectorremained long-termunemploymentandpermanentseparaweak.Commercialrealestateactivitycontinuedto tions,whichwereseenaspotentiallyleadingtothe fallinmostpartsof thecountryasaresultof dete- lossof workerskillsandgreaterneedsforlaborreal-

208 97thAnnualReport|2010 locationthatcouldslowemploymentgrowthgoing anchored,allparticipantsagreedthatitwasimporforward.Moreover,informationfrombusinesscon- tantforpolicytoberesponsivetochangesintheecotactsgenerallyunderscoredthedegreetowhich nomicoutlookandfortheFederalReservetoconfirms’reluctancetoaddtopayrollsorstartlarge tinuetocommunicateclearlyitsabilityandintentto capitalprojectsreflecteduncertaintyabouttheeco- beginwithdrawingmonetarypolicyaccommodation nomicoutlookandfuturegovernmentpolicies.A attheappropriatetimeandpace. numberof participantspointedoutthattheeconomicrecoverycouldeventuallylosetractionwith- Committee Policy Action outasubstantialpickupinjobcreation. Inthemembers’discussionof monetarypolicyfor Participantscitedawidearrayof evidenceasindica- theperiodahead,theyagreedthatnochangestothe tionsthatunderlyinginflationremainedsubdued. Committee’sfederalfundsratetargetrangewere Thelatestreadingsoncoreinflation—whichexclude warrantedatthismeeting.Onbalance,theeconomic therelativelyvolatilepricesof foodandenergy— outlookhadchangedlittlesincetheMarchmeeting. weregenerallylowerthantheyhadanticipated.One Eventhoughtherecoveryappearedtobecontinuing participantnotedthatcoreinflationhadbeenheld andwasexpectedtostrengthengraduallyovertime, downinrecentquartersbyunusuallyslowincreases mostmembersprojectedthateconomicslackwould inthepriceindexforshelter,andthattherecent continuetobequiteelevatedforsometime,with behaviorof coreinflationmightbeamisleadingsig- inflationremainingbelowratesthatwouldbeconsisnalof theunderlyinginflationtrend.However,a tentinthelongerrunwiththeFederalReserve’sdual numberof participantspointedoutthattherecent objectives.Basedonthisoutlook,membersagreed moderationinpricechangeswaswidespreadacross thatitwouldbeappropriatetomaintainthetarget manycategoriesof spendingandwasevidentin rangeof 0to1∕ 4 percentforthefederalfundsrate.In measuresthatexcludethemostextremepricemove- addition,nearlyallmembersjudgedthatitwas mentsineachperiod.Inaddition,surveymeasuresof appropriatetoreiteratetheexpectationthatecolonger-terminflationexpectationsremainedfairly nomicconditions—includinglowlevelsof resource stable,wagegrowthcontinuedtoberestrained,and utilization,subduedinflationtrends,andstableinflaunitlaborcostswerestillfalling;reportsfrombusi- tionexpectations—werelikelytowarrantexceptionnesscontactsalsosuggestedthatpricingpower allylowlevelsof thefederalfundsrateforan remainedlimited.Againstthisbackdrop,mostpar- extendedperiod.Asatpreviousmeetings,afew ticipantsanticipatedthatsubstantialresourceslack membersnotedthatatthecurrentjuncture,therisks andstablelonger-terminflationexpectationswould of anearlystarttopolicytighteningexceededthose likelykeepinflationsubduedforsometime. associatedwithalaterstart,becausethescopefor moreaccommodativepolicywaslimitedbytheeffec- Participants’assessmentsof theriskstotheinflation tivelowerboundonthefederalfundsrate,whilethe outlookweremixed.Someparticipantssawtherisks Committeecouldbeflexibleinadjustingthemagnitoinflationastiltedtothedownsideinthenearterm, tudeandpaceof tighteninginresponsetoevolving reflectingthequiteelevatedlevelof economicslack economiccircumstances.Inlightof theimproved andthepossibilitythatinflationexpectationscould functioningof financialmarkets,Committeemembegintodeclineinresponsetothelowlevelof actual bersagreedthatitwouldbeappropriateforthestateinflation.Others,however,sawthebalanceof risksas menttobereleasedfollowingthemeetingtoindicate pointingtopotentiallyhigherinflationandcited thatthepreviouslyannouncedscheduleforclosing pressuresoncommodityandenergypricesassociated theTermAsset-BackedSecuritiesLoanFacilitywas withexpandingglobaleconomicactivityasanupside beingmaintained. inflationrisk;somealsonotedthepossibilitythat inflationexpectationscouldriseasaresultof the Attheconclusionof thediscussion,theCommittee public’sconcernsabouttheextraordinarysizeof the votedtoauthorizeanddirecttheFederalReserve FederalReserve’sbalancesheetinaperiodof very Bankof NewYork,untilitwasinstructedotherwise, largefederalbudgetdeficits.Whilesurveymeasures toexecutetransactionsintheSystemAccountin of longer-terminflationexpectationshadbeenfairly accordancewiththefollowingdomesticpolicy stable,somemarket-basedmeasuresof inflation directive: expectationsandinflationrisksuggestedincreased concernamongmarketparticipantsabouthigher “TheFederalOpenMarketCommitteeseeks inflation.Tokeepinflationexpectationswell monetaryandfinancialconditionsthatwillfos-

Minutesof FederalOpenMarketCommitteeMeetings 209 terpricestabilityandpromotesustainable extendedperiod.TheCommitteewillcontinue growthinoutput.Tofurtheritslong-runobjec- tomonitortheeconomicoutlookandfinancial tives,theCommitteeseeksconditionsinreserve developmentsandwillemployitspolicytoolsas marketsconsistentwithfederalfundstradingin necessarytopromoteeconomicrecoveryand arangefrom0to1∕ 4 percent.TheCommittee pricestability. directstheDesktoengageindollarrolltransactionsasnecessarytofacilitatesettlementof the Inlightof improvedfunctioningof financial FederalReserve’sagencyMBStransactions.The markets,theFederalReservehasclosedallbut SystemOpenMarketAccountManagerandthe oneof thespecialliquidityfacilitiesthatitcre- SecretarywillkeeptheCommitteeinformedof atedtosupportmarketsduringthecrisis.The ongoingdevelopmentsregardingtheSystem’s onlyremainingsuchprogram,theTermAssetbalancesheetthatcouldaffecttheattainment BackedSecuritiesLoanFacility,isscheduledto overtimeof theCommittee’sobjectivesof closeonJune30forloansbackedbynew-issue maximumemploymentandpricestability.” commercialmortgage-backedsecurities;itclosed onMarch31forloansbackedbyallothertypes Thevoteencompassedapprovalof thestatement of collateral.” belowtobereleasedat2:15p.m.: Votingforthisaction:BenBernanke,WilliamC. “InformationreceivedsincetheFederalOpen Dudley,JamesBullard,ElizabethDuke,DonaldL. MarketCommitteemetinMarchsuggeststhat Kohn,SandraPianalto,EricRosengren,DanielK. economicactivityhascontinuedtostrengthen Tarullo,andKevinWarsh. andthatthelabormarketisbeginningto improve.Growthinhouseholdspendinghas Votingagainstthisaction:ThomasM.Hoenig. pickeduprecentlybutremainsconstrainedby highunemployment,modestincomegrowth, Mr.Hoenigdissentedbecausehebelieveditwasno lowerhousingwealth,andtightcredit.Business longeradvisabletoindicatethateconomicandfinanspendingonequipmentandsoftwarehasrisen cialconditionswerelikelytowarrant“exceptionally significantly;however,investmentinnonresiden- lowlevelsof thefederalfundsrateforanextended tialstructuresisdecliningandemployersremain period.”Mr.Hoenigwasconcernedthatcommunireluctanttoaddtopayrolls.Housingstartshave catingsuchanexpectationcouldleadtothebuildup edgedupbutremainatadepressedlevel.While of futurefinancialimbalancesandincreasetherisks banklendingcontinuestocontract,financial tolonger-runmacroeconomicandfinancialstability, marketconditionsremainsupportiveof eco- whilelimitingtheCommittee’sflexibilitytobegin nomicgrowth.Althoughthepaceof economic raisingratesmodestlyinthenearterm.Mr.Hoenig recoveryislikelytobemoderateforatime,the believedthatthetargetforthefederalfundsrate Committeeanticipatesagradualreturnto shouldbeincreasedtoward1percentthissummer, higherlevelsof resourceutilizationinacontext andthattheCommitteecouldthenpausetofurther of pricestability. assesstheeconomicoutlook.Hebelievedthis approachwouldleaveconsiderablepolicyaccommo- Withsubstantialresourceslackcontinuingto dationinplacetofosteranexpectedgradualdecline restraincostpressuresandlonger-terminflation inunemploymentinthequartersaheadandwould expectationsstable,inflationislikelytobesub- reducetheriskof anincreaseinfinancialimbalances duedforsometime. andinflationpressuresincomingyears.Itwouldalso mitigatetheneedtopushthepolicyratetohigher TheCommitteewillmaintainthetargetrange levelslaterintheexpansionaryphaseof theecoforthefederalfundsrateat0to1∕ 4 percentand nomiccycle. continuestoanticipatethateconomicconditions,includinglowratesof resourceutilization, Itwasagreedthatthenextmeetingof theCommittee subduedinflationtrends,andstableinflation wouldbeheldonTuesday–Wednesday,June22–23, expectations,arelikelytowarrantexceptionally 2010.Themeetingadjournedat12:50p.m.on lowlevelsof thefederalfundsrateforan April28,2010.

210 97thAnnualReport|2010 Notation Vote vergeovertimeunderappropriatemonetarypolicy andintheabsenceof furthershocks. BynotationvotecompletedonApril5,2010,the Committeeunanimouslyapprovedtheminutesof the FOMCparticipants’forecastsforeconomicactivity FOMCmeetingheldonMarch16,2010. andinflationwerebroadlysimilartotheirprevious projections,whichweremadeinconjunctionwiththe BrianF.Madigan January2010FOMCmeeting.Asdepictedin Secretary figure1,theeconomicrecoverywasexpectedtobe gradual,withrealgrossdomesticproduct(GDP) Addendum: expandingatarateonlymoderatelyabovethepar- Summary of Economic Projections ticipants’assessmentof itslonger-runsustainable growthrateandunemploymentdecliningslowlyover InconjunctionwiththeApril27–28,2010,FOMC thenextfewyears.Mostparticipantsalsoanticipated meeting,themembersof theBoardof Governors thatinflationwouldremainsubduedoverthisperiod. andthepresidentsof theFederalReserveBanks,all Asindicatedintable1,participantsgenerallymade of whomparticipateindeliberationsof theFOMC, modestupwardrevisionstotheirprojectionsforreal submittedprojectionsforoutputgrowth,unemploy- GDPgrowthin2010.Beyond2010,however,the ment,andinflationfortheyears2010to2012and contoursof participants’projectionsforeconomic overthelongerrun.Theprojectionswerebasedon activityandinflationwerelittlechanged.Participants informationavailablethroughtheendof themeeting continuedtoexpectthepaceof theeconomicrecovandoneachparticipant’sassumptionsaboutfactors erytoberestrainedbyhouseholdandbusinessuncerlikelytoaffecteconomicoutcomes,includinghisor tainty,onlygradualimprovementinlabormarket herassessmentof appropriatemonetarypolicy. conditions,andsloweasingof creditconditionsin “Appropriatemonetarypolicy”isdefinedasthe thebankingsector.Participantsgenerallyexpected futurepathof policythattheparticipantdeemsmost thatitwouldtakesometimefortheeconomytoconlikelytofosteroutcomesforeconomicactivityand vergefullytoitslonger-runpath—characterizedbya inflationthatbestsatisfyhisorherinterpretationof sustainablerateof outputgrowthandbyratesof theFederalReserve’sdualobjectivesof maximum employmentandinflationconsistentwithparticiemploymentandstableprices.Longer-runprojec- pants’interpretationof theFederalReserve’sdual tionsrepresenteachparticipant’sassessmentof the objectives—butonlyaminorityanticipatedthatthe ratetowhicheachvariablewouldbeexpectedtocon- convergenceprocesswouldtakemorethanfivetosix Table1.EconomicprojectionsofFederalReserveGovernorsandReserveBankpresidents,April2010 Percent Centraltendency1 Range2 Variable 2010 2011 2012 Longerrun 2010 2011 2012 Longerrun ChangeinrealGDP 3.2to3.7 3.4to4.5 3.5to4.5 2.5to2.8 2.7to4.0 3.0to4.6 2.8to5.0 2.4to3.0 Januaryprojection 2.8to3.5 3.4to4.5 3.5to4.5 2.5to2.8 2.3to4.0 2.7to4.7 3.0to5.0 2.4to3.0 Unemploymentrate 9.1to9.5 8.1to8.5 6.6to7.5 5.0to5.3 8.6to9.7 7.2to8.7 6.4to7.7 5.0to6.3 Januaryprojection 9.5to9.7 8.2to8.5 6.6to7.5 5.0to5.2 8.6to10.0 7.2to8.8 6.1to7.6 4.9to6.3 PCEinflation 1.2to1.5 1.1to1.9 1.2to2.0 1.7to2.0 1.1to2.0 0.9to2.4 0.7to2.2 1.5to2.0 Januaryprojection 1.4to1.7 1.1to2.0 1.3to2.0 1.7to2.0 1.2to2.0 1.0to2.4 0.8to2.0 1.5to2.0 CorePCEinflation3 0.9to1.2 1.0to1.5 1.2to1.6 0.7to1.6 0.6to2.4 0.6to2.2 Januaryprojection 1.1to1.7 1.0to1.9 1.2to1.9 1.0to2.0 0.9to2.4 0.8to2.0 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andininflationarefromthefourthquarterofthepreviousyeartothefourthquarteroftheyearindicated.PCE inflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures(PCE)andthepriceindexforPCE excludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarteroftheyearindicated.Eachparticipant’s projectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’sassessmentoftheratetowhicheach variablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.TheJanuaryprojectionsweremadein conjunctionwiththemeetingoftheFederalOpenMarketCommitteeonJanuary26–27,2010. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearconsistsofallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

Minutesof FederalOpenMarketCommitteeMeetings 211 Figure1.Centraltendenciesandrangesofeconomicprojections,2010–12andoverthelongerrun

212 97thAnnualReport|2010 years.AsinJanuary,mostparticipantsjudgedthe residentialconstruction.Moreover,althoughfinanriskstotheirgrowthoutlookasbalanced,andmost cialconditionshadimprovednoticeablyinrecent alsosawbalancedriskssurroundingtheirinflation months,ongoingstrainsinthecommercialrealestate projections.Participantsingeneralcontinuedto sectorwereexpectedtoposeriskstothebalance judgetheuncertaintysurroundingtheirprojections sheetsof bankinginstitutionsforsometime.Terms foreconomicactivityandinflationasunusuallyhigh andstandardsonbankloansremainedrestrictive, relativetohistoricalnorms. andparticipantsanticipatedonlyagradualeasingof creditconditionsformanyhouseholdsandsmaller TheOutlook firms.Intheabsenceof furthershocks,participants Participants’projectionsforrealGDPgrowthin2010 generallyexpectedthatrealGDPgrowthwouldconhadacentraltendencyof 3.2to3.7percent,alittle vergeovertimetoanannualrateof 2.5to2.8perhigherthaninJanuary.Readingsonconsumer cent,thelonger-runpacethatappearedtobesustainspendingandbusinessoutlaysforequipmentand ableinviewof expectedtrendsinthelaborforceand softwarewereseenasbroadlyconsistentwithamod- improvementsinlaborproductivity. eratepaceof economicrecovery.Thelabormarket appearedtobestartingtoimprove,butjobgrowth Participantsanticipatedthatlabormarketconditions wasexpectedtobemodest.Participantspointedtoa wouldimproveslowlyoverthenextseveralyears.The numberof factorsthatwouldsupportthecontinued centraltendencyof theirprojectionsfortheaverage expansionof economicactivity,includingaccommo- unemploymentrateinthefourthquarterof 2010was dativemonetarypolicyandtheimprovedcondition 9.1to9.5percent,onlymodestlybelowthelevelsof of financialmarketsandinstitutions.Severalpartici- latelastyear.Inlinewiththeiroutlookformoderate pantsalsonotedthatfiscalpolicywascurrentlypro- outputgrowth,participantsgenerallyexpectedthat vidingsubstantialsupporttorealactivity.However, theunemploymentratewoulddeclineonlytoabout theyexpectedlessimpetustoGDPgrowthfromthis 6.6to7.5percentbytheendof 2012,remainingwell factorlaterintheyearandanticipatedthatbudget- abovetheirassessmentsof itslonger-runsustainable arypressureswouldprobablycontinuetoweighon rate.Althoughsomeparticipantsnotedconcernsthat spendingatthestateandlocallevels.Manypartici- substantialongoingstructuraladjustmentsinprodpantsthoughtthattheexpansionwaslikelytobe uctandlabormarketswouldreducethesustainable restrainedbyfirms’cautioninhiringandspendingin levelof employment,participants’longer-term lightof theconsiderableuncertaintyregardingthe unemploymentprojectionshadacentraltendencyof economicoutlook,andbylimitedaccesstocreditby 5.0to5.3percent,essentiallythesameasinJanuary. smallbusinessesandconsumers. Mostparticipantsreviseddownslightlytheirnear- Lookingfurtherahead,participants’projectionswere termprojectionsforinflation,andparticipantsgenerforrealGDPgrowthtopickupsomewhatin2011 allyanticipatedthatinflationwouldremainsubdued and2012;theprojectionsforgrowthinbothyears overthenextseveralyears.Thecentraltendencyof hadacentraltendencyof about3½to4½percent. theirprojectionsforpersonalconsumptionexpendi- AsinJanuary,participantsgenerallyexpectedthe tures(PCE)inflationwas1.2to1.5percentfor2010, ongoingrecoveryinhouseholdwealthandgradual 1.1to1.9percentfor2011,and1.2to2.0percentfor improvementsincreditavailabilitytobolstercon- 2012.Manyparticipantsanticipatedthatincreasesin sumerspending.Astherecoverybecamemorefirmly foodandenergypriceswouldleadheadlinePCE established,businesseswereseenaslikelytoboost inflationtorunslightlyabovecorePCEinflation theiroutlaysonequipmentandsoftwareandto overthenextfewyears.Mostexpectedthatinflation increaseproductioninordertorebuildtheirinvento- wouldrisegraduallytowardtheirindividualassessries.Nevertheless,participantsindicatedseveralfac- mentsof themeasuredrateof inflationjudgedtobe torsthatwouldlikelyrestrainthepaceof expansion, mostconsistentwiththeFederalReserve’sdualmanincludingahigherhouseholdsavingrateashouse- date.AsinJanuary,thecentraltendencyof projecholdsrepairbalancesheets,significantuncertainty tionsof thelonger-runinflationratewas1.7to onthepartof householdsandbusinessesaboutthe 2.0percent.Amajorityof participantsanticipated outlookfortheeconomy,andaslowrecoveryinnon- thatinflationin2012wouldstillbebelowtheir

Minutesof FederalOpenMarketCommitteeMeetings 213 Mostparticipantscontinuedtoseetheuncertainty Table2.Averagehistoricalprojectionerrorranges surroundingtheirinflationprojectionsaselevated. Percentagepoints However,afewjudgedthatuncertaintyintheout- Variable 2010 2011 2012 lookforinflationwasaboutinlinewithtypicallevels, andoneviewedtheuncertaintysurroundingthe ChangeinrealGDP1 ±1.1 ±1.7 ±1.8 inflationoutlookaslowerthanaverage.Nearlyall Unemploymentrate1 ±0.5 ±1.2 ±1.5 participantsjudgedtheriskstotheinflationoutlook Totalconsumerprices2 ±0.9 ±1.0 ±1.1 asroughlybalanced;however,twosawtheserisksas Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared tiltedtotheupside,whiletworegardedtherisksas errorofprojectionsfor1990through2009thatwerereleasedinthespringby variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast weightedtothedownside.Severalparticipantsnoted Uncertainty,”undercertainassumptions,thereisabouta70percentprobability thatinflationexpectationswerewellanchored,likely thatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Further mitigatingthetendencyforinflationtodeclinein informationisinDavidReifschneiderandPeterTulip(2007),“Gaugingthe responsetocontinuedslackinresourceutilization. UncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,”Finance andEconomicsDiscussionSeries2007-60(Washington:BoardofGovernorsof OtherscitedtheriskthatexpectedandactualinflatheFederalReserveSystem,November). tioncouldincrease,especiallyif extraordinarily 1 Fordefinitions,refertogeneralnoteintable1. accommodativemonetarypolicymeasureswerenot 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen mostwidelyusedingovernmentandprivateeconomicforecasts.Projection unwoundinatimelyfashion. ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof theyearindicated. DiversityofViews Figures2.Aand2.Bprovidefurtherdetailsonthe diversityof participants’viewsregardingthelikely assessmentsof themandate-consistentinflationrate, outcomesforrealGDPgrowthandtheunemploywhiletheremainderexpectedthatinflationwouldbe mentrate.Thedistributionsof participants’projecatorslightlyaboveitslonger-runvaluebythattime. tionsforrealGDPgrowththisyearandnextyear wereslightlynarrowerthanthedistributionsof their UncertaintyandRisks projectionsinJanuary,butthedistributionof projec- Mostparticipantscontinuedtoseetheirprojections tionsforrealGDPgrowthin2012waslittlechanged. of futureeconomicactivityandunemploymentas Asinearlierprojections,thedispersioninparticisubjecttogreater-than-averageuncertainty.3Partici- pants’forecastsforoutputgrowthappearedtoreflect pantsgenerallyperceivedtheriskstotheirprojec- thediversityof theirassessmentsregardingthecurtionsasroughlybalanced,althoughafewindicated rentdegreeof underlyingmomentumineconomic thattheynowviewedtheriskstoeconomicgrowthas activity,theevolutionof consumerandbusinesssentiltedtotheupside.Manyparticipantspointedto timent,thelikelypaceof easingof banklending strongerincomingdataassuggestingthattheeco- standardsandterms,andotherfactors.Regarding nomicrecoverywasmorefirmlyestablishedthanhad participants’unemploymentrateprojections,thedisbeenthecaseinJanuary,buttheyemphasizedthat tributionfor2010shifteddownsomewhat,butthe predictingmacroeconomicoutcomesinthewakeof a distributionsof theirunemploymentrateprojections financialcrisisandasevererecessionwasparticularly for2011and2012didnotchangeappreciably.The difficult.Inaddition,participantsciteduncertainties distributionsof participants’estimatesof thelongerregardingthelikelypersistenceof boththerecent runsustainableratesof outputgrowthandunempickupinthegrowthof consumerspendingand ploymentwereessentiallythesameasinJanuary. rapidlaborproductivitygrowthandnotedtherisk thatseverestrainsinthecommercialrealestatesector Correspondinginformationaboutthediversityof couldcontinuetoimpairbankbalancesheets,thus participants’viewsregardingtheinflationoutlookis limitingcreditavailabilityandrestraininggrowthof providedinfigures2.Cand2.D.Foroverallandcore outputandemployment. PCEinflation,thedistributionsof participants’projectionsfor2010shiftedabitlowerrelativetothedistributionsinJanuary.Thedistributionsof overall andcoreinflationfor2011and2012,however,were 3 Table2providesestimatesofforecastuncertaintyforthechange littlechangedandremainedfairlywide.ThedisperinrealGDP,theunemploymentrate,andtotalconsumerprice inflationovertheperiodfrom1990to2009.Attheendofthis sioninparticipants’projectionsoverthenextfew summary,thebox“ForecastUncertainty”discussesthesources yearswasmainlyduetodifferencesintheirjudgandinterpretationofuncertaintyineconomicforecastsand mentsregardingthedeterminantsof inflation, explainstheapproachusedtoassesstheuncertaintyandrisk attendingparticipants’projections. includingtheirestimatesof prevailingresourceslack

214 97thAnnualReport|2010 Figure2.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2010–12andoverthelongerrun

Minutesof FederalOpenMarketCommitteeMeetings 215 Figure2.B.Distributionofparticipants’projectionsfortheunemploymentrate,2010–12andoverthelongerrun

216 97thAnnualReport|2010 Figure2.C.Distributionofparticipants’projectionsforPCEinflation,2010–12andoverthelongerrun

Minutesof FederalOpenMarketCommitteeMeetings 217 Figure2.D.Distributionofparticipants’projectionsforcorePCEinflation,2010–12

218 97thAnnualReport|2010 andtheirassessmentsof theextenttowhichsuch substantialagreementaboutthemeasuredrateof slackaffectsactualandexpectedinflation.Incon- inflationthatismostconsistentwiththeFederal trast,therelativelytightdistributionof participants’ Reserve’sdualobjectivesof maximumemployment projectionsforlonger-runinflationillustratestheir andstableprices.

Minutesof FederalOpenMarketCommitteeMeetings 219 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers experiencedinthepastandtherisksaroundtheprooftheBoardofGovernorsandthepresidentsofthe jectionsarebroadlybalanced,thenumbersreported FederalReserveBanksinformdiscussionsofmon- intable2wouldimplyaprobabilityofabout70peretarypolicyamongpolicy-makersandcanaidpublic centthatactualGDPwouldexpandwithinarangeof understandingofthebasisforpolicyactions.Con- 1.9to4.1percentinthecurrentyear,1.3to4.7persiderableuncertaintyattendstheseprojections,how- centinthesecondyear,and1.2to4.8percentinthe ever.Theeconomicandstatisticalmodelsandrela- thirdyear.Thecorresponding70percentconfidence tionshipsusedtohelpproduceeconomicforecasts intervalsforoverallinflationwouldbe1.1to2.9perarenecessarilyimperfectdescriptionsofthereal centinthecurrentyear,1.0to3.0percentinthesecworld.Andthefuturepathoftheeconomycanbe ondyear,and0.9to3.1percentinthethirdyear. affectedbymyriadunforeseendevelopmentsand Becausecurrentconditionsmaydifferfromthose events.Thus,insettingthestanceofmonetary thatprevailed,onaverage,overhistory,participants policy,participantsconsidernotonlywhatappearsto providejudgmentsastowhethertheuncertainty bethemostlikelyeconomicoutcomeasembodiedin attachedtotheirprojectionsofeachvariableis theirprojections,butalsotherangeofalternative greaterthan,smallerthan,orbroadlysimilartotypipossibilities,thelikelihoodoftheiroccurring,andthe callevelsofforecastuncertaintyinthepastasshown potentialcoststotheeconomyshouldtheyoccur. intable2.Participantsalsoprovidejudgmentsasto Table2summarizestheaveragehistoricalaccuracyof whethertheriskstotheirprojectionsareweightedto arangeofforecasts,includingthosereportedinpast theupside,areweightedtothedownside,orare MonetaryPolicyReportsandthosepreparedbyFed- broadlybalanced.Thatis,participantsjudgewhether eralReserveBoardstaffinadvanceofmeetingsof eachvariableismorelikelytobeaboveorbelow theFederalOpenMarketCommittee.Theprojection theirprojectionsofthemostlikelyoutcome.These errorrangesshowninthetableillustratetheconsid- judgmentsabouttheuncertaintyandtherisks erableuncertaintyassociatedwitheconomicfore- attendingeachparticipant’sprojectionsaredistinct casts.Forexample,supposeaparticipantprojects fromthediversityofparticipants’viewsaboutthe thatrealgrossdomesticproduct(GDP)andtotal mostlikelyoutcomes.Forecastuncertaintyisconconsumerpriceswillrisesteadilyatannualratesof, cernedwiththerisksassociatedwithaparticular respectively,3percentand2percent.Iftheuncer- projectionratherthanwithdivergencesacrossa taintyattendingthoseprojectionsissimilartothat numberofdifferentprojections.

220 97thAnnualReport|2010 Meeting Held on June 22–23, 2010 ThomasA.Connors,WilliamB.English,Jeff Fuhrer, StevenB.Kamin,SimonPotter,LawrenceSlifman, ChristopherJ.Waller,andDavidW.Wilcox Ajointmeetingof theFederalOpenMarketCom- AssociateEconomists mitteeandtheBoardof Governorsof theFederal ReserveSystemwasheldintheofficesof theBoard BrianSack of GovernorsinWashington,D.C.,onTuesday, Manager,SystemOpenMarketAccount June22,2010,at2:00p.m.andcontinuedon JenniferJ.Johnson Wednesday,June23,2010,at9:00a.m. Secretaryof theBoard,Officeof theSecretary, Boardof Governors Present PatrickM.Parkinson BenBernanke Director,Divisionof BankSupervisionand Chairman Regulation,Boardof Governors WilliamC.Dudley RobertdeV.Frierson1 ViceChairman DeputySecretary,Officeof theSecretary, JamesBullard Boardof Governors ElizabethDuke CharlesS.Struckmeyer DeputyStaff Director,Officeof theStaff Director ThomasM.Hoenig forManagement,Boardof Governors DonaldL.Kohn JamesA.Clouse SandraPianalto DeputyDirector,Divisionof MonetaryAffairs, Boardof Governors EricRosengren DanielK.Tarullo LindaRobertson2 AssistanttotheBoard,Officeof BoardMembers, KevinWarsh Boardof Governors CharlesL.Evans,RichardW.Fisher, NellieLiang,DavidReifschneider,and NarayanaKocherlakota,andCharlesI.Plosser WilliamWascher AlternateMembersof theFederalOpenMarket SeniorAssociateDirectors,Divisionof Researchand Committee Statistics,Boardof Governors JeffreyM.Lacker,DennisP.Lockhart,and WilliamNelson JanetL.Yellen SeniorAssociateDirector,Divisionof Monetary Presidentsof theFederalReserveBanksof Affairs,Boardof Governors Richmond,Atlanta,andSanFrancisco,respectively SethB.Carpenter BrianF.Madigan AssociateDirector,Divisionof MonetaryAffairs, SecretaryandEconomist Boardof Governors MatthewM.Luecke ChristopherJ.Erceg AssistantSecretary DeputyAssociateDirector,Divisionof International DavidW.Skidmore Finance,Boardof Governors AssistantSecretary MichaelG.PalumboandJoyceK.Zickler MichelleA.Smith DeputyAssociateDirectors,Divisionof Researchand AssistantSecretary Statistics,Boardof Governors ThomasBaxter BrianJ.Gross DeputyGeneralCounsel SpecialAssistanttotheBoard,Officeof Board Members,Boardof Governors RichardM.Ashton AssistantGeneralCounsel FabioM.Natalucci AssistantDirector,Divisionof MonetaryAffairs, NathanSheets Boardof Governors Economist DavidJ.Stockton 1 AttendedTuesday’ssessiononly. Economist 2 AttendedWednesday’ssessiononly.

Minutesof FederalOpenMarketCommitteeMeetings 221 DavidH.Small ingreverserepurchaseagreementsandtheTerm ProjectManager,Divisionof MonetaryAffairs, DepositFacility.Inpreparationforpossiblefuture Boardof Governors reservedrainingoperations,inJunetheFederal Reserveconductedthefirstof severalsmall-value BethAnneWilson auctionstotesttheTermDepositFacility.Inaddi- SectionChief,Divisionof InternationalFinance, tion,theManagerreportedonSystemopenmarket Boardof Governors operationsduringtheintermeetingperiod.Byunani- JohnC.DriscollandJenniferE.Roush mousvote,theCommitteeratifiedthosetransactions. SeniorEconomists,Divisionof MonetaryAffairs, Therewerenoopenmarketoperationsinforeigncur- Boardof Governors renciesfortheSystem’saccountovertheintermeet- AndreaL.Kusko ingperiod. SeniorEconomist,Divisionof Researchand Statistics,Boardof Governors InhispresentationtotheCommittee,theManager notedthat“failstodeliver”inthemortgage-backed JohnW.Schindler securities(MBS)markethadreachedveryhighlevels SeniorEconomist,Divisionof InternationalFinance, inrecentmonths.Undertheseconditions,dealers Boardof Governors hadexperienceddifficultyinarrangingdeliveryof a PenelopeA.Beattie smallamount—includingabout$9billionof securi- AssistanttotheSecretary,Officeof theSecretary, tieswith5.5percentcouponsissuedbyFannie Boardof Governors Mae—of the$1.25trillionof MBSthattheDeskat ValerieHinojosaandRandallA.Williams theFederalReserveBankof NewYorkhadpur- RecordsManagementAnalysts,Divisionof Monetary chasedbetweenJanuary2009andMarch2010.The Affairs,Boardof Governors Deskhadpostponedsettlementof someof these transactionsthroughtheuseof dollarrolls.The PatrickK.BarronandJohnF.Moore Managerdiscussedalternativemethodsof settling FirstVicePresidents,FederalReserveBanks theoutstandingtransactionsandrecommendedthat of AtlantaandSanFrancisco,respectively theCommitteeauthorizetheDesktoengageincou- LorettaJ.Mester,HarveyRosenblum,and ponswaptransactionstofacilitatethesettlementof JohnC.Williams thesepurchases.TheManagernotedthatacoupon ExecutiveVicePresidents,FederalReserveBanksof swapisacommontransactioninthemarketforMBS Philadelphia,Dallas,andSanFrancisco,respectively inwhichthetwocounterpartiesexchangesecurities atmarketprices.Byengaginginacouponswap,the DavidAltig,RichardP.Dzina,ArthurRolnick,and FederalReservewouldeffectivelysellthescarcesecu- MarkE.Schweitzer ritiesthatithadnotyetreceivedandpurchase SeniorVicePresidents,FederalReserveBanksof insteadsecuritiesthataremorereadilyavailablein Atlanta,NewYork,Minneapolis,andCleveland, themarket.Afterdiscussingvariousapproaches, respectively meetingparticipantsagreedthatcouponswapswere DanielAaronson,ToddE.Clark,and anappropriatemethodtoachievesettlementof out- AndreasL.Hornstein standingtransactions. VicePresidents,FederalReserveBanksof Chicago, KansasCity,andRichmond,respectively AsbackgroundfortheCommittee’scontinuingcon- JoshuaL.Frost siderationof itsportfoliomanagementpolicies,the AssistantVicePresident,FederalReserveBank Managergaveapresentationonalternativestrategies of NewYork forreinvestingtheproceedsfrommaturingTreasury securities.Undercurrentpractice,theDeskreinvests Developments in Financial Markets and theproceedsof maturingTreasurycouponsecurities the Federal Reserve’s Balance Sheet innewTreasurysecuritiesthatareissuedonthedate theoldersecuritiesmature,allocatingtheinvestments TheManagerof theSystemOpenMarketAccount acrossthenewsecuritiesinproportiontotheissu- (SOMA)reportedondevelopmentsindomesticand anceamounts.TheManagerpresentedtwoalternaforeignfinancialmarketsduringtheperiodsincethe tivestothestatusquo.First,theCommitteecould CommitteemetonApril27–28,2010.Healsobriefed considerhaltingallreinvestmentof theproceedsof theCommitteeontheSystem’sprogressindevelop- maturingsecurities.Suchastrategywouldshrinkthe ingtoolsformanagingthesupplyof reserves,includ- sizeof theFederalReserve’sbalancesheetand

222 97thAnnualReport|2010 reducethequantityof reservebalancesinthebank- wellinadvanceof theinitiationof suchtransactions, ingsystemgraduallyovertime.Second,theCommit- andthatsalesshouldbeconductedatagradualpace teecouldreinvesttheproceedsof maturingsecurities andpotentiallybeadjustedinresponsetodeveloponlyinnewissuesof Treasurysecuritieswithrela- mentsineconomicandfinancialconditions. tivelyshortmaturities—billsonly,orbillsaswellas couponissueswithtermsof threeyearsorless.This Staff Review of the Economic Situation strategywouldmaintainthesizeof theFederal Reserve’sbalancesheetbutwouldreducesomewhat TheinformationreviewedattheJune22–23meeting theaveragematurityof theportfolioandincreaseits suggestedthattheeconomicrecoverywasproceeding liquidity.Oneparticipantfavoredhaltingallreinvest- atamoderatepaceinthesecondquarter.Businesses ment,andmanysawbenefitstoeventuallyadopting continuedtoincreaseemploymentandlengthen anapproachof reinvestinginbillsandshorter-term workweeksinAprilandMay,buttheunemployment couponissuestoshiftthematuritycompositionof rateremainedelevated.Industrialproductionregistheportfoliotowardthestructurethathadprevailed teredstrongandwidespreadgains,andbusiness priortothefinancialcrisis.However,theCommittee investmentinequipmentandsoftwareroserapidly. madenochangetoitsreinvestmentpolicyatthis Consumerspendingappearedtohavemovedupfurmeeting. therinAprilandMay.However,housingstarts droppedinMay,andnonresidentialconstruction Continuingadiscussionfrompreviousmeetings,par- remaineddepressed.Fallingenergypriceshelddown ticipantsagainaddressedissuesregardingassetsales. headlineconsumerpricesinAprilandMaywhile Participantscontinuedtoagreethatgradualsalesof coreconsumerpricesedgedup. MBSshouldbeundertaken,atsomepoint,tospeed thereturntoaTreasury-securities-onlyportfolio.A Labordemandcontinuedtofirminrecentmonths. fewparticipantssupportedbeginningsuchsalesfairly Whilethechangeintotalnonfarmpayrollemploysoon;theynotedthat,giventheevidentdemandin mentinMaywasboostedsignificantlybythehiring themarketforsafe,longer-termassets,modestsales of temporaryworkersforthedecennialcensus,priof MBSmightnotputmuch,if any,upwardpressure vateemploymentpostedonlyasmallincrease.This onlong-terminterestratesorbedisruptivetothe increase,however,followedsizablegainsinMarch functioningof financialmarkets.However,many andApril,andtheaverageworkweekof allprivateparticipantsstillsawassetsalesaspotentiallytighten- sectoremployeesincreasedovertheMarch-to-May ingfinancialconditionstosomeextent.Mostpartici- period.Asaresult,aggregatehoursworkedby pantscontinuedtojudgeitappropriatetodeferasset employeesonprivatenonfarmpayrollsrosesubstansalesforsometime;severalnotedthemodestweaken- tiallythroughMay.Theunemploymentratemoved ingintheeconomicoutlooksincetheCommittee’s upinAprilbutdroppedbackinMayto9.7percent, lastmeetingasanadditionalreasontodoso.A itsfirst-quarteraverage.Thelaborforceparticipation majorityof participantscontinuedtoanticipatethat ratewas,onaverage,higherinrecentmonthsthanin assetsaleswouldstartaftertheCommitteehad thefirstquarter,asrisingemploymentwasaccompabeguntofirmpolicybyincreasingshort-terminterest niedbyanincreasingnumberof jobseekers. rates;suchanapproachwouldpostponeassetsales Althoughthenumberof workerswhowereemployed untiltheeconomicrecoverywaswellestablishedand parttimeforeconomicreasonsleveledoff inrecent maintainshort-terminterestratesastheCommittee’s months,theproportionof unemployedworkerswho keymonetarypolicytool.Afewparticipantssug- werejoblessformorethan26weekscontinuedto gestedsellingMBSandusingtheproceedstopur- moveup.Initialclaimsforunemploymentinsurance chaseTreasurysecuritiesof comparableduration, werelittlechangedovertheintermeetingperiod, arguingthatdoingsowouldhastenthemovetoward remainingatastill-elevatedlevel. aTreasury-securities-onlyportfoliowithouttighteningfinancialconditions.Participantsagreedthatit IndustrialproductionroseatarobustrateinApril wouldbeimportanttomaintainflexibilityregarding andMay,withproductionincreasesbroadlybased theappropriatetimingandpaceof assetsales,given acrossindustries.Firmingdomesticdemand,rising theuncertaintiesassociatedwiththeunprecedented exports,andbusinessinventoryrestockingappeared sizeandcompositionof theFederalReserve’sbal- tohaveprovidedupwardimpetustofactoryproducancesheetanditseffectsonfinancialconditions. tion.InAprilandMay,productioninhigh- Overall,participantsemphasizedthatanydecisionto technologyindustriesagainrosestrongly,withsubengageinassetsaleswouldneedtobecommunicated stantialgainsintheoutputof semiconductorsand

Minutesof FederalOpenMarketCommitteeMeetings 223 furthersolidincreasesintheproductionof comput- riseatabriskpacethroughApril,andshipmentsof ersandcommunicationsequipment.Theproduction aircrafttodomesticcarriersrebounded.Ordersand of othertypesof businessequipmentcontinuedto shipmentsof nondefensecapitalgoodsexcluding rebound,andtheoutputof constructionsupplies transportationandhigh-techequipmentstayedona advancedfurther.Productionof lightmotorvehicles noticeableuptrend,onnet,inMarchandApril,with turnedupinMay;nonetheless,dealers’inventories theincreasesbroadlybasedbytypeof equipment. remainedlean.Capacityutilizationinmanufacturing Therecoveryinequipmentandsoftwarespending roseinMaytoaratenoticeablyabovethelow wasconsistentwiththerelativelystronggainsinproreachedinmid-2009,butitwasstillsubstantially ductioninrecentmonths,improvedfinancialcondibelowitslonger-runaverage. tionsoverthefirstpartof theyear,andthepositive readingsfromsurveysonbusinessconditionsand Theriseinconsumerspendingslowedinrecent earningsreportsforproducersof capitalgoods.Busimonthsafterabriskincreaseinthefirstquarter. nessoutlaysfornonresidentialconstructionappeared Althoughsalesof lightmotorvehiclescontinuedto tobecontractingfurther,onbalance,inMarchand trendhigher,nominalsalesof non-autoconsumer April,althoughtherateof declineseemedtobemodgoodsandfoodserviceswerelittlechangedinApril erating.OutlaysfornewpowerplantsandformanuandMay.Themoderationinspendingappeared,on facturingfacilitiesfirmed,andinvestmentindrilling balance,tobealigningthepaceof consumptionwith andminingstructurescontinuedtorisestrongly. recenttrendsinincome,wealth,andconsumersenti- However,spendingonofficeandcommercialstrucment.Realdisposablepersonalincomemovedupata tureswasstillfallingsteeplythroughApril,withthe solidrateinMarchandApril,reflectingincreasesin weaknesslikelyrelatedtohighvacancyrates,falling employmentandhoursworkedaswellasslightly propertyprices,andthelightvolumeof sales. higherrealwages,buthomevaluesdeclinedinrecent monthsandequitypricesmoveddownsincethe Businessesappearedtohavebeguntorestocktheir Aprilmeeting.Measuresof consumersentiment inventories.Realnonfarminventoryinvestment improvedinMayandearlyJunebutwerestillatrela- turnedpositiveinthefirstquarter,anddataforApril tivelylowlevels. pointedtofurthermodestaccumulation.Ratiosof inventoriestosalesformostindustrieslookedtobe Theanticipatedexpirationof thehomebuyertax withincomfortableranges. creditappearedtohavepulledhomesalesforward, boostingtheirlevelinrecentmonths.Salesof exist- ConsumerpriceinflationremainedlowinApriland ingsingle-familyhomesrosestronglyinApril,and, May.Thecoreconsumerpriceindexroseonly althoughtheymoveddowninMay,thesesaleswere slightlyovertheperiod,andtheyear-over-year stillabovetheirlevelearlierintheyear.Purchasesof changeintheindexwaslowerthanearlierthisyear. newsingle-familyhomesalsojumpedinApril,but Coregoodspricescontinuedtodecline,onnet,and thenfellsteeplyinMay.Onnet,theupswinginthe pricesof non-energyservicesremainedsoft.The volumeof realestatetransactionsinrecentmonths headlineconsumerpriceindexedgeddowninboth waslikelytoboostthebrokers’commissionscompo- months,asthedropinthepriceof crudeoilsince nentof residentialinvestmentinthesecondquarter. Aprilledconsumerenergypricestoretraceaportion However,startsof newsingle-familyhomes,which of therun-upthatoccurredduringtheninemonths hadtrendedhigherinthefirstfourmonthsof the endinginJanuary.Atearlierstagesof processing, year,declinedsharplyinMay.Inaddition,thenum- producerpricesof coreintermediatematerialsrose berof permitsfornewhomes,whichtendstolead moderatelyinMayafterfivemonthsof large starts,fellforasecondmonthinMay.Houseprices increases.InflationcompensationbasedonTreasury declinedsomewhatinrecentmonths,reversingsome inflation-protectedsecuritiesdecreasedrecentlyin of themodestincreasesthatoccurredinthespring responsetolowreadingsoninflationandfallingoil andsummerof 2009.Afterchanginglittleonnet prices.Surveymeasuresof bothshort-andlong-term duringtheprecedingyear,interestratesfor30-year inflationexpectationsremainedrelativelystable. fixed-rateconformingmortgagesmovedlowerin MayandJune. Unitlaborcostscontinuedtoberestrainedbyweaknessinhourlycompensationandfurthergainsin Realspendingonequipmentandsoftwareincreased productivity.Revisedestimatesof laborcompensafurtherearlyinthesecondquarter.Businessoutlays tionindicatedthathourlycompensationinthenonforcomputingequipmentandsoftwarecontinuedto farmbusinesssectorwasaboutflat,onnet,during

224 97thAnnualReport|2010 thefourthquarterof 2009andthefirstquarterof Economicactivityinemergingmarketeconomies 2010.Theemploymentcostindexshowedamoderate continuedtoexpandbrisklyinthefirsthalf of this riseovertheperiod,boostedbyasizableincreasein year.Growthof economicactivitywasparticularly benefitcostsinthefirstquarter.Theyear-over-year robustinemergingAsia,driveninpartbystrong increaseinaveragehourlyearningsof allemployees increasesinindustrialproductionandexportsassociwasalsomoderatethroughMay.Outputperhourin atedwithsolidgainsinfinaldemandaswellasthe thenonfarmbusinesssector,whichroserapidlyin turnintheinventorycycle.Theriseof realGDPin 2009,postedamoremoderatebutstill-solidgainin LatinAmericaappearedtohavestalledinthefirst thefirstquarterof 2010. quarter,butthisdevelopmentreflectedacontraction inMexicothatmore-favorablemonthlyindicators TheU.S.internationaltradedeficitwidenedslightly suggestedshouldprovetemporary.Incontrast,the inApril,asnominalexportsfellabitmorethan increaseinBrazilianrealGDPwasverystrong.Connominalimports.TheAprildeclinesinbothexports sumerpriceinflationintheforeigneconomiesin andimportsfollowedrobustincreasesinMarch.The aggregatewasbuoyedbyhigherfoodandenergy Aprilfallinexportsreflecteddeclinesinexportsof pricesinthefirstquarter,whilecoreinflationgenerconsumergoods,primarilyduetoadropinpharma- allyremainedsubdued.Morerecentinformationsugceuticals,andinagriculturalgoods.Exportsof gestedsomemoderationinforeigninflationinthe industrialsuppliesmovedupwhileexportsof capital secondquarter. goodswereflatafterincreasingstronglyinMarch. ImportsinAprilwerepulleddownbylowerimports Staff Review of the Financial Situation of consumergoods,whichmorethanoffsetsharply higherimportsof capitalgoods,particularlycomput- TheFOMC’sdecisionatitsAprilmeetingtomainingequipment.Importsof automotiveproductsand tainthe0to¼percenttargetrangeforthefederal non-oilindustrialsuppliesdeclinedslightly,and fundsrateandthewordingof theaccompanying importsof petroleumproductswereflatfollowinga statementwerelargelyinlinewithexpectationsand largeincreaseinMarch. promptedlittlemarketreaction.Economicdata releasesweremixed,onbalance,overtheintermeet- Incomingdatasuggestedthateconomicactivity ingperiod,butmarketparticipantswereespecially abroadcontinuedtoexpandatastrongpaceinthe attentivetoincominginformationonthelabormarfirsthalf of theyear.Amongtheadvancedforeign ket—mostnotably,theprivatepayrollfiguresinthe economies,growthof realgrossdomesticproduct employmentreportforMay,whichwereconsiderably (GDP)inthefirstquarterwasparticularlystrongin weakerthaninvestorsexpected.Thosedata,com- CanadaandJapan,andrecentindicatorsforthose binedwithheightenedconcernsabouttheglobalecocountriespointedtocontinuedsolidincreasesinthe nomicoutlookstemminginpartfromEurope’ssovsecondquarter.Incontrast,theriseineconomic ereigndebtproblems,contributedtoadownward activityintheeuroareawassubdued,asfavorable revisionintheexpectedpathof policyimpliedby readingsforthemanufacturingsectorwerecounter- moneymarketfuturesrates. balancedbyweaknessindomesticdemand.Sincethe timeof theAprilmeetingof theFederalOpenMar- InthemarketforTreasurycouponsecurities,2-and ketCommittee(FOMC),concernsaboutthefiscal 10-yearnominalyieldsfellconsiderablyoverthe situationof severaleuro-areacountriesintensified intermeetingperiod.Marketparticipantspointedto sharply.Inresponse,Europeanauthorities flight-to-qualityflowsandgreaterconcernaboutthe announcedanumberof policymeasures,including economicoutlookasfactorsboostingthedemand accelerationof fiscalconsolidationplansinsome forTreasurysecurities.ThedropinTreasuryyields countries,finalizationof anInternationalMonetary wasaccompaniedbyasmallwideningof swap Fund(IMF)andEuropeanUnion(EU)assistance spreads. packageforGreece,andtheintroductionof a broader€500billionfinancialassistanceprogram Conditionsinshort-termfundingmarketsdeteriothatcouldbecomplementedbybilateralIMFlend- ratedsomewhat,particularlyforEuropeanfinancial ing.TheEuropeanCentralBank(ECB)also institutions.Spreadsof thetermLondoninterbank announcedfurthermeasurestoimproveliquidity offeredrate,orLibor,overratesonovernightindex conditionsinimpairedmarkets,includingaprogram swapswidenednoticeably,withtheavailabilityof topurchasesovereignandprivatedebt. fundingatmaturitieslongerthanoneweekreport-

Minutesof FederalOpenMarketCommitteeMeetings 225 edlyquitelimited.Marketparticipantsalsoreduced Netdebtfinancingbynonfinancialcorporations holdingsof commercialpapersponsoredbyentities increasedinAprilandMayrelativetoitspaceinthe thoughttohaveexposurestoperipheralEuropean firstquarter.Grossbondissuancebyinvestmentfinancialinstitutionsandgovernments.Evenso, gradenonfinancialcorporationsintheUnitedStates spreadsof high-gradeunsecuredfinancialcommer- remainedsolid,onaverage,overthosetwomonths; cialpapertononfinancialcommercialpaperwidened nonfinancialcommercialpaperoutstandingincreased onlymodestlyovertheintermeetingperiod.In aswell.High-yieldcorporatebondissuanceinthe securedfundingmarkets,spreadsonasset-backed UnitedStatesbrieflypausedinMay,reflectingthe commercialpaperalsowidenedmodestly,whilerates market’spullbackfromriskyassets,although onrepurchaseagreementsinvolvingTreasuryand speculative-gradeU.S.firmscontinuedtoissuebonds agencycollateralchangedlittle.Intheinaugural abroadandafewplacedissuesdomesticallyinthe SeniorCreditOfficerOpinionSurveyonDealer firsthalf of June.Grossequityissuancefellabit,on FinancingTerms,whichwasconductedbytheFed- net,inAprilandMay,likelydueinparttorecent eralReservebetweenMay24andJune4,dealersgen- declinesinequitypricesandelevatedmarketvolatilerallyreportedthatthetermsonwhichtheyprovided ity.Measuresof thecreditqualityof nonfinancial creditremainedtightrelativetothoseattheendof firmsgenerallycontinuedtoimprove,andfirst- 2006.However,theynotedsomelooseningof terms quarterprofitsforfirmsintheS&P500jumpedsubforbothsecuritiesfinancingandover-the-counter stantially,primarilyreflectinganupturninfinancial derivativestransactions,onnet,overtheprevious sectorprofitsfromquitedepressedlevels.Theoutthreemonthsforcertainclassesof clients—including lookincommercialrealestatemarketsstayedweak; hedgefunds,institutionalinvestors,andnonfinancial pricesof commercialpropertiesfellabitfurtherin corporations—andintensifiedeffortsbythoseclients thefirstquarter,andthevolumeof commercialproptonegotiatemore-favorableterms.Atthesametime, ertysalesremainedlight.Thedelinquencyratefor theyreportedapickupindemandforfinancing securitizedcommercialmortgagescontinuedtoclimb acrossseveralcollateraltypesoverthepastthree inMay,andindexesof pricesof creditdefaultswaps months. oncommercialmortgagesdeclined,onnet,overthe intermeetingperiod. BroadU.S.stockpriceindexesfellovertheintermeetingperiod,inpartreflectingdeepeningconcerns Consumercreditcontractedagaininrecentmonths, abouttheEuropeanfiscalsituationanditspotential asrevolvingcreditcontinuedonasteepdowntrend. foradversespilloverstoglobaleconomicgrowth. Issuanceof consumercreditasset-backedsecurities Option-impliedvolatilityontheS&P500index (ABS)increasedinMay,althoughthepacewasstill spikedinmid-May,tomorethandoubleitsvalueat wellbelowthatobservedbeforetheonsetof the thetimeof theAprilFOMCmeeting,butlargely financialcrisis.CreditcardABSissuanceremained reverseditsrun-upbythetimeof theJunemeeting. subdued,partlyreflectingregulatorychangesthat Thespreadbetweenthestaff’sestimateof the madefinancingcreditcardreceivablesviasecuritizaexpectedrealreturnonequitiesoverthenext10years tionlessdesirable.Inprimarymarkets,spreadsof andanestimateof theexpectedrealreturnona creditcardinterestratesoverthoseonTreasurysecu- 10-yearTreasurynote—ameasureof theequityrisk ritiesremainedextremelyhighinApril,whileinterest premium—increasedfromitsalreadyelevatedlevel. ratespreadsonautoloansstayedneartheiraverage levelof thepastdecade.Consumercreditquality Investors’attitudestowardfinancialinstitutionsdete- improvedfurther,withdelinquencyratesoncredit rioratedsomewhat,astheequityof financialfirms cardsandautoloansmovingdownabitinApril. underperformedthebroadermarketamiduncertaintyabouttheimplicationsof developmentsin Bankcreditdeclined,onaverage,inAprilandMayat Europeandthepotentialeffectsof financialregula- aboutthesamepaceasinthefirstquarter.Commertoryreform.Yieldsoninvestment-andspeculative- cialandindustrialloans,afterdroppingrapidlyin gradecorporatebondsmovedhigherovertheinter- April,decreasedataslowerpaceinMay.Whilecommeetingperiod,andhigh-yieldbondmutualfunds mercialrealestateandhomeequityloansfellata recordedsubstantialnetoutflows.Spreadsoncorpo- slightlyfasterratethaninrecentquarters,theconratebondswidened,althoughtheyremainedwithin tractioninclosed-endresidentialloansabated,partly therangeprevailingsincelastsummer.Secondary- becauseof areducedpaceof salestoFannieMae marketbidpricesonsyndicatedleveragedloansfell, andFreddieMac.Consumerloansdeclinedagain, whilebid-askedspreadsinthatmarketwidened. onaverage,inAprilandMay.Theamountof Treas-

226 97thAnnualReport|2010 uryandagencysecuritiesheldbylargedomestic highevenaftertheseannouncementsandmovedup banksandforeign-relatedinstitutionsdeclinedin subsequently,notwithstandingtheECB’spurchases May,contributingtoasizabledropinbanks’securi- of governmentdebt.Amidaweakeningoutlookfor tiesholdings. economicgrowthinEurope,centralbanksinseveral emergingEuropeaneconomiesbegantodecrease Onaseasonallyadjustedbasis,M2contractedin policyrates.Bycontrast,brightereconomicpros- AprilbutsurgedinMay,withmuchof themonth-to- pectsinCanadaandChinapromptedtheBankof monthvariationapparentlyassociatedwiththe Canadatoraiseitstargetfortheovernightrateto effectsof federaltaxpaymentsandrefunds.Averag- 50basispointsatitsJunemeetingandChinese ingacrossthetwomonths,M2expandedmoderately authoritiestoraisebanks’reserverequirementfurafterhavingbeenaboutunchangedinthefirstquar- therinMay.Inaddition,thePeople’sBankof China ter;liquiddepositsaccountedformostof thenet announcedlateintheperiodthatitwouldallowthe change. renminbitomovemoreflexibly,andthecurrency appreciatedslightlyimmediatelyfollowingthe Thethreattoglobaleconomicgrowthandfinancial announcement. stabilityposedbythefiscalsituationinsomeEuropeannationssparkedwidespreadflight-to-quality Staff Economic Outlook flowsovermostof theintermeetingperiod.This retreatledtoabroadappreciationof thedollaras IntheeconomicforecastpreparedfortheJune wellasdeclinesinequitypricesabroadandinyields FOMCmeeting,thestaff continuedtoanticipatea onbenchmarksovereignbonds.However,investor moderaterecoveryineconomicactivitythrough sentimentimprovedneartheendof theperiod,lead- 2011,supportedbyaccommodativemonetarypolicy, ingtoapartialreversalinsomeof thesemovements, anattenuationof financialstress,andstrengthening despiteMoody’sdowngradeof Greecetobelow- consumerandbusinessconfidence.Whiletherecent investment-gradestatusinmid-June.Onnet,thedol- dataonproductionandspendingwerebroadlyinline larendedtheintermeetingperiodup,mostheadline withthestaff’sexpectations,thepaceof theexpanequityindexesfell,andbenchmarkgovernmentbond sionoverthenextyearandahalf wasexpectedtobe yieldsdeclined.Strainsineuro-areabankfunding somewhatslowerthanpreviouslypredicted.The marketsreemergedduringtheperiod.Inresponse, intensifyingconcernsamonginvestorsaboutthe theECBannouncedsomechangestoitsliquidity implicationsof thefiscaldifficultiesfacedbysome operationsthatwouldprovidegreatermarketaccess Europeancountriescontributedtoanincreaseinthe totermfundingineuros.3Difficultiesalsoappeared foreignexchangevalueof thedollarandadropin incorporatedebtmarketsasbothnonfinancialand equityprices,whichseemedlikelytodampsomewhat financialcorporatedebtissuancedroppedsubstan- theexpansionof domesticdemand.Theimplications tiallyinMay.Inaddition,pressuresindollarfunding of theseless-favorablefactorsforU.S.economic marketsreappearedforforeignfinancialinstitutions, activityappearedlikelytobeonlypartlyoffsetby especiallythosethoughttohavesignificantexposure lowerinterestratesonTreasurysecurities,other toGreeceandotherperipheraleuro-areacountries. highlyratedsecurities,andmortgages,aswellasbya Tohelpcontainthesepressuresandtopreventtheir lowerpriceforcrudeoil.Thestaff stillexpectedthat spreadtootherinstitutionsandregions,theFederal thepaceof economicactivitythrough2011wouldbe Reservereestablisheddollarliquidityswaparrange- sufficienttoreducetheexistingmarginsof economic mentswiththeECB,theBankof England,theBank slack,althoughtheanticipateddeclineintheunemof Japan,theBankof Canada,andtheSwiss ploymentratewassomewhatslowerthaninthepre- NationalBank. viousprojection. Yieldsonthesovereignobligationsof peripheral Thestaff’sforecastsforheadlineandcoreinflation Europeancountriesdeclinednoticeablyfollowinga werealsoreducedslightly.Thechangeswerea May10announcementof aframeworkestablished responsetothelowerpricesof oilandothercombytheEUforprovidingfinancialaidtoeuro-area modities,theappreciationof thedollar,andthe governmentsandof theECB’sintentiontopurchase greateramountof economicslackintheforecast. euro-areasovereigndebt.However,yieldsremained Despitethesedevelopments,inflationexpectations hadremainedstable,likelylimitingmovementsin 3 TheECBreinstitutedasix-monthlendingoperationand inflation.Onbalance,coreinflationwasexpectedto switcheditsthree-monthlendingoperationsfromfixed-quantity auctionstofull-allotmentofferingsatafixedrateof1percent. continueatasubduedrateovertheprojectionperiod.

Minutesof FederalOpenMarketCommitteeMeetings 227 Asinearlierforecasts,headlineinflationwaspro- Financialmarketshadbecomesomewhatlesssupjectedtomoveintolinewiththecorerateby2011. portiveof economicgrowthsincetheAprilmeeting, withthedevelopmentsinEuropecitedasaleading causeof greaterglobalfinancialmarkettensions. Participants’ Views of Current Conditions Riskspreadsformanycorporateborrowershadwidand the Economic Outlook enednoticeably,equitypriceshadfallenappreciably, andthedollarhadriseninvalueagainstabroadbas- InconjunctionwiththisFOMCmeeting,allmeeting ketof othercurrencies.Participantssawthese participants—thefivemembersof theBoardof changesaslikelytoweightosomedegreeonhouse- Governorsandthepresidentsof the12Federal holdandbusinessspendingovercomingquarters. ReserveBanks—providedprojectionsof economic Participantsalsonotedongoingdifficultiesinfinancgrowth,theunemploymentrate,andconsumerprice ingcommercialrealestate.Nonetheless,reportssuginflationforeachyearfrom2010through2012and gestedthatmore-creditworthybusinessborrowers overalongerhorizon.Longer-runprojectionsrepre- werestillabletoobtainfundingintheopenmarkets senteachparticipant’sassessmentof therateto onfairlyattractiveterms,andacoupleof particiwhicheachvariablewouldbeexpectedtoconverge pantsnotedthatcreditfromthebankingsector, overtimeunderappropriatemonetarypolicyandin whichhadbeencontractingforsometime,wasshowtheabsenceof furthershocks.Participants’forecasts ingsometentativesignsof stabilizing.Moreover,sevthrough2012andoverthelongerrunaredescribed eralparticipantsobservedthatthedeclineinyields intheSummaryof EconomicProjections,whichis onTreasurysecuritiesresultingfromtheglobalflight attachedasanaddendumtotheseminutes. toqualitywaspositiveforthedomesticeconomy;in particular,theassociateddeclineinmortgagerates Intheirdiscussionof theeconomicsituationand wasseenaspotentiallyhelpfulinsupportingthe outlook,meetingparticipantsgenerallysawthe housingsector. incomingdataandinformationreceivedfrombusinesscontactsasconsistentwithacontinued,moder- Supportingtheviewof acontinuedrecovery,incomaterecoveryineconomicactivity.Participantsnoted ingdataandanecdotalreportspointedtostrengthin thatthelabormarketwasimprovinggradually, anumberof businesssectors,particularlymanufachouseholdspendingwasincreasing,andbusiness turingandtransportation.Policymakersnotedthat spendingonequipmentandsoftwarehadrisensig- firms’investmentinequipmentandsoftwarehad nificantly.Withprivatefinaldemandhavingstrength- advancedrapidlyof late,andtheyanticipatedthat ened,inventoryadjustmentsandfiscalstimuluswere suchspendingwouldcontinuetorise,thoughpernolongerthemainfactorssupportingeconomic hapsatasomewhatslowerpace.Businesscontacts expansion.Inlightof stableinflationexpectations suggestedthatinvestmentspendinghadbeensupandincomingdataindicatinglowratesof inflation, portedbythereplacementandupgradingof existing policymakerscontinuedtoanticipatethatbothover- capital,makingupforsomespendingthathadbeen allandcoreinflationwouldremainsubduedthrough postponedinthedownturn,andthiscomponentof 2012.However,financialmarketsweregenerallyseen investmentdemandwasseenasunlikelytoremain asrecentlyhavingbecomelesssupportiveof eco- robust.Inaddition,inventoryaccumulation,which nomicgrowth,largelyreflectinginternationalspill- hadbeenasignificantcontributortorecentgainsin oversfromEuropeanfiscalstrains.Inpartasaresult production,appearedlikelytoprovidelessimpetusto of thechangeinfinancialconditions,mostpartici- growthincomingquarters.Participantsalsonoted pantsreviseddownslightlytheiroutlookforeco- thatseveraluncertainties,includingthoserelatedto nomicgrowth,andaboutone-half of theparticipants legislativechangesandtodevelopmentsinglobal judgedthebalanceof riskstogrowthashaving financialmarkets,weregeneratingaheightenedlevel movedtothedownside.Mostparticipantscontinued of cautionthatcouldleadsomefirmstodelayhiring toseetheriskstoinflationasbalanced.Anumberof andplannedinvestmentoutlays. participantsexpressedtheviewthat,overthenext severalyears,bothemploymentandinflationwould Participantscommentedthathouseholdspending likelybebelowlevelstheyconsidertobeconsistent continuedtoadvance,withnotableincreasesinauto withtheirdualmandate,buttheyanticipatedthat, salesandexpendituresonotherdurablegoods. withappropriatemonetarypolicy,bothwouldrise Goingforward,consumptionspendingwasexpected overtimetolevelsconsistentwiththeFederal tocontinuetopostmoderategains,withtheeffects Reserve’sobjectives. of incomegrowthandimprovedconfidenceasthe

228 97thAnnualReport|2010 economyrecoversmorethanoffsettingtheeffectsof viewedthesubstantialslackinlaborandresource lowerstockpricesandhousingwealth.However,con- marketsaslikelytoreduceinflation.Thefinancial tinuedlabormarketweaknesscouldweighoncon- strainsinEuropehadledtoanincreaseintheforeign sumersentiment,andhouseholdswerestillrepairing exchangevalueof thedollar,andtheresultingdowntheirbalancesheets;bothfactorscouldrestraincon- wardpressureonimportpricesalsowasexpectedto sumerspendinggoingforward.Althoughreadings weighonconsumerpricesforatime.However,inflafromthehousingsectorhadbeenstrongthrough tionexpectationswereseenbymostparticipantsas mid-spring,participantsnotedthatthestrengthlikely wellanchored,whichwouldtendtocurbanytenreflectedtheeffectsof thetemporarytaxcreditsfor dencyforactualinflationtodecline.Onbalance, homebuyers.Indeed,dataforthemostrecentmonth meetingparticipantsreviseddownmodestlytheir suggestedthat,withtheexpirationof thoseprovi- outlookforinflationoverthenextcoupleof years; sions,homesalesandstartshadsteppeddown theygenerallyexpectedinflationtobequitelowin noticeablyandcouldremainweakinthenearterm; theneartermandtotrendslightlyhigherovertime. withlowerdemandandacontinuingsupplyof foreclosedhousescomingtomarket,participantsjudged Someparticipantsjudgedtheriskstotheoutlookfor thathousepriceswerelikelytoremainflatordecline inflationastiltedtothedownside,particularlyinthe somewhatfurtherinthenearterm. nearterm,inlightof thelargeamountof resource slackalreadyprevailingintheeconomy,thesignifi- Meetingparticipantsinterpretedthedataonthe cantdownsideriskstotheoutlookforrealactivity, labormarketasconsistentwiththeiroutlookfor andthepossibilitythatinflationexpectationscould gradualrecovery.Employerswereaddinghoursto begintodeclineinresponsetolowactualinflation.A theworkweekandhiringtemporaryworkers,sug- fewparticipantscitedsomeriskof deflation.Other gestingapickupinlabordemand;however,themost participants,however,thoughtthatinflationwas recentdataonemploymenthadbeendisappointing, unlikelytofallappreciablyfurthergiventhestability andnewclaimsforunemploymentinsurance of inflationexpectationsinrecentyearsandvery remainedelevated.Reportedly,employerswerestill accommodativemonetarypolicy.Overthemedium cautiousaboutaddingtopayrolls,givenuncertainties term,participantssawbothupsideanddownside abouttheoutlookfortheeconomyandgovernment riskstoinflation.Severalparticipantsnotedthata policies.Participantsexpectedthepaceof hiringto continuationof lower-than-expectedinflationand remainlowforsometime.Indeed,theunemployment highunemploymentcouldeventuallyleadtoadownratewasgenerallyexpectedtoremainnoticeably wardmovementininflationexpectationsthatwould aboveitslong-runsustainablelevelforseveralyears, reinforcedisinflationarypressures.Bycontrast,afew andparticipantsexpressedconcernaboutthe participantsnotedthepossibilitythatapotentially extendeddurationof unemploymentspellsforalarge unsustainablefiscalpositionandthesizeof theFednumberof workers.Participantsalsonotedarisk eralReserve’sbalancesheetcouldboostinflation thatcontinuedrapidgrowthinproductivity,though expectationsandactualinflationovertime. clearlybeneficialinthelongerterm,couldinthenear termacttomoderategrowthinthedemandforlabor Committee Policy Action andthusslowthepaceatwhichtheunemployment ratenormalizes. Intheirdiscussionof monetarypolicyfortheperiod ahead,membersagreedthatitwouldbeappropriate Abroadsetof indicatorssuggestedthatunderlying tomaintainthetargetrangeof 0to1∕ 4 percentfor inflationremainedsubduedandwas,onnet,trending thefederalfundsrate.Theeconomicoutlookhad lower.Thelatestreadingsoncoreinflation—which softenedsomewhatandanumberof memberssaw excludestherelativelyvolatilepricesof foodand theriskstotheoutlookashavingshiftedtothe energy—hadslowed,andothermeasuresof the downside.Nonetheless,allsawtheeconomicexpanunderlyingtrajectoryof inflation,suchasmedian sionaslikelytobestrongenoughtocontinueraising andtrimmed-meanmeasures,alsohadmoveddown resourceutilization,albeitmoreslowlythantheyhad thisyear.Crudeoilpricesdeclinedsomewhatover previouslyanticipated.Inaddition,theysawinflation theintermeetingperiod,afactorthatwaslikelyto aslikelytostabilizenearrecentlowreadingsincomdampheadlineinflationattheconsumerlevelin ingquartersandthengraduallyrisetowardmore comingmonths.Othercommoditypricesweremod- desirablelevels.Insum,thechangestotheoutlook erating,andnominalwagesappearedtoberising wereviewedasrelativelymodestandasnotwarrantonlyslowly.Someparticipantsindicatedthatthey ingpolicyaccommodationbeyondthatalreadyin

Minutesof FederalOpenMarketCommitteeMeetings 229 place.However,membersnotedthatinadditionto labormarketisimprovinggradually.Household continuingtodevelopandtestinstrumentstoexit spendingisincreasingbutremainsconstrained fromtheperiodof unusuallyaccommodativemon- byhighunemployment,modestincomegrowth, etarypolicy,theCommitteewouldneedtoconsider lowerhousingwealth,andtightcredit.Business whetherfurtherpolicystimulusmightbecomeappro- spendingonequipmentandsoftwarehasrisen priateif theoutlookweretoworsenappreciably. significantly;however,investmentinnonresiden- Giventheslightlysoftercastof recentdataandthe tialstructurescontinuestobeweakandemployshifttolessaccommodativefinancialconditions, ersremainreluctanttoaddtopayrolls.Housing membersagreedthatsomechangestothestatement’s startsremainatadepressedlevel.Financialconcharacterizationof theeconomicandfinancialsitua- ditionshavebecomelesssupportiveof economic tionwerenecessary.Nearlyallmembersjudgedthat growthonbalance,largelyreflectingdevelopitwasappropriatetoreiteratetheexpectationthat mentsabroad.Banklendinghascontinuedto economicconditions—includinglowlevelsof contractinrecentmonths.Nonetheless,the resourceutilization,subduedinflationtrends,and Committeeanticipatesagradualreturnto stableinflationexpectations—werelikelytowarrant higherlevelsof resourceutilizationinacontext exceptionallylowlevelsof thefederalfundsratefor of pricestability,althoughthepaceof economic anextendedperiod.Onemember,however,believed recoveryislikelytobemoderateforatime. thatcontinuingtocommunicateanexpectationinthe Committee’sstatementthatthefederalfundsrate Pricesof energyandothercommoditieshave wouldremainatanexceptionallylowlevelforan declinedsomewhatinrecentmonths,andunderextendedperiodwouldcreateconditionsthatcould lyinginflationhastrendedlower.Withsubstanleadtomacroeconomicandfinancialimbalances. tialresourceslackcontinuingtorestraincost pressuresandlonger-terminflationexpectations Attheconclusionof thediscussion,theCommittee stable,inflationislikelytobesubduedforsome votedtoauthorizeanddirecttheFederalReserve time. Bankof NewYork,untilitwasinstructedotherwise, toexecutetransactionsintheSystemAccountin TheCommitteewillmaintainthetargetrange accordancewiththefollowingdomesticpolicy forthefederalfundsrateat0to1∕ 4 percentand directive: continuestoanticipatethateconomicconditions,includinglowratesof resourceutilization, “TheFederalOpenMarketCommitteeseeks subduedinflationtrends,andstableinflation monetaryandfinancialconditionsthatwillfos- expectations,arelikelytowarrantexceptionally terpricestabilityandpromotesustainable lowlevelsof thefederalfundsrateforan growthinoutput.Tofurtheritslong-runobjec- extendedperiod. tives,theCommitteeseeksconditionsinreserve marketsconsistentwithfederalfundstradingin TheCommitteewillcontinuetomonitorthe arangefrom0to1∕ 4 percent.TheCommittee economicoutlookandfinancialdevelopments directstheDesktoengageindollarrollandcou- andwillemployitspolicytoolsasnecessaryto ponswaptransactionsasnecessarytofacilitate promoteeconomicrecoveryandpricestability.” settlementof theFederalReserve’sagencyMBS transactions.TheSystemOpenMarketAccount Votingforthisaction:BenBernanke,WilliamC. ManagerandtheSecretarywillkeeptheCom- Dudley,JamesBullard,ElizabethDuke,DonaldL. mitteeinformedof ongoingdevelopments Kohn,SandraPianalto,EricRosengren,DanielK. regardingtheSystem’sbalancesheetthatcould Tarullo,andKevinWarsh. affecttheattainmentovertimeof theCommittee’sobjectivesof maximumemploymentand Votingagainstthisaction:ThomasM.Hoenig. pricestability.” Mr.Hoenigdissentedbecausehebelievedthat,asthe Thevoteencompassedapprovalof thestatement economycompleteditsfirstyearof modestrecovery, belowtobereleasedat2:15p.m.: itwasnolongeradvisabletoindicatethateconomic andfinancialconditionswerelikelytowarrant “InformationreceivedsincetheFederalOpen “exceptionallylowlevelsof thefederalfundsratefor MarketCommitteemetinAprilsuggeststhat anextendedperiod.”Althoughriskstotheforecast theeconomicrecoveryisproceedingandthatthe remained,Mr.Hoenigwasconcernedthatcommuni-

230 97thAnnualReport|2010 catingsuchanexpectationwouldlimittheCommit- TheCommitteediscussedconsiderationssurroundtee’sflexibilitytobeginraisingratesmodestlyina ingthepossiblereestablishmentof dollarliquidity timelyfashionandcouldresultinabuildupof future swaplines.Participantsagreedthatsucharrangefinancialimbalancesandincreasetheriskstolonger- mentscouldbehelpfulinlimitingthestrainsindolrunmacroeconomicandfinancialstability. larfundingmarketsandtheadverseimplicationsof recentdevelopmentsfortheU.S.economy.Partici- Byunanimousvote,theCommitteeselectedWilliam pantsobservedthat,incurrentcircumstances,the B.EnglishtoserveasSecretaryandEconomist,and dollarswaplinesshouldbemadeavailabletoa JamesA.ClousetoserveasAssociateEconomist, smallernumberof majorforeigncentralbanksthan effectiveJuly23,2010,untiltheselectionof theirsuc- previously.Inordertopromotethetransparencyof cessorsatthefirstregularlyscheduledmeetingof the thesearrangements,participantsagreedthatitwould Committeein2011. beappropriatefortheFederalReservetopublishthe swapcontractsandtoreleaseonaweeklybasisthe Itwasagreedthatthenextmeetingof theCommittee amountsof drawsundertheswaplinesbycentral wouldbeheldonTuesday,August10,2010.The bankcounterparty.ItwasrecognizedthattheCommeetingadjournedat12:10p.m.onJune23,2010. mitteewouldneedtoconsidertheimplicationsof swaplinesforbankreservesandoverallmanagement Conference Call of theFederalReserve’sbalancesheet.Participants notedtheimportanceof appropriateconsultation OnMay9,2010,theCommitteemetbyconference withU.S.governmentofficialsandemphasizedthata calltodiscussdevelopmentsinglobalfinancialmar- reestablishmentof thelinesshouldbecontingenton ketsandpossiblepolicyresponses.Overtheprevious strongandeffectiveactionsbyauthoritiesinEurope severalmonths,marketconcernsabouttheabilityof toaddressfiscalsustainabilityandsupportfinancial Greeceandsomeothereuro-areacountriestocon- markets. taintheirsizablebudgetdeficitsandfinancetheir debthadincreased.ByearlyMay,financialstrains Attheconclusionof thediscussion,theCommittee hadintensified,reflectinginvestors’uncertainty votedunanimouslytoapprovethefollowing aboutwhetherfiscallystrongereuro-areagovern- resolution: mentswouldprovidefinancialsupporttotheweakest members,theextentof thedragoneuro-areaecono- “TheCommitteeauthorizestheChairmanto miesthatcouldresultfromeffortsatfiscalconsolida- agreetoestablishswaplineswiththeEuropean tion,andthedegreeof exposureof majorEuropean CentralBank,theBankof England,theSwiss banksandfinancialinstitutionstovulnerablecoun- NationalBank,theBankof Japan,andthe tries.Conditionsinshort-termfundingmarketsin Bankof Canada,asdiscussedbytheCommittee Europehadalsodeteriorated,andglobalfinancial today.” marketsmoregenerallyhadbeenvolatileandless supportiveof economicgrowth. Secretary’snote:LateronMay9,2010,theFederalReserve,incoordinationwiththeBankof TheChairmanindicatedthatEuropeanauthorities Canada,theBankof England,theEuropeanCenwereconsideringanumberof measurestopromote tralBank(ECB),andtheSwissNationalBank, fiscalsustainabilityandtoprovideincreasedliquidity announcedthatU.S.dollarliquidityswapfacilities andsupporttomoneymarketsandmarketsfor hadbeenreestablishedwiththosecentralbanks. Europeansovereigndebt.Inconnectionwiththepos- ThearrangementswiththeBankof England,the sibleimplementationof thesemeasures,somemajor ECB,andtheSwissNationalBankprovidethese centralbankshadrequestedthatdollarliquidity centralbankswiththecapacitytoconducttenders swaplineswiththeFederalReservebereestablished. of U.S.dollarsintheirlocalmarketsatfixedrates Theseswaplineswouldenhancetheabilityof these forfullallotment,similartoarrangementsthat centralbankstoprovidesupportfordollarfunding hadbeeninplacepreviously.Thearrangement marketsintheirjurisdictions.Thetermsandcondi- withtheBankof Canadawouldsupportdrawings tionsof theswaplineswouldgenerallybesimilarto of upto$30billion,aswasthecasepreviously.On thoseinplacepriortotheirexpirationearlierinthe May10,theFederalReserveandtheBankof year. Japan(BOJ)announcedthatatemporaryU.S.

Minutesof FederalOpenMarketCommitteeMeetings 231 dollarliquidityswaparrangementhadbeenestab- theFederalReserve’sdualobjectivesof maximum lishedthatwouldprovidetheBOJwiththecapac- employmentandstableprices.Longer-runprojecitytoconducttendersof U.S.dollarsatfixedrates tionsrepresenteachparticipant’sassessmentof the forfullallotment. ratetowhicheachvariablewouldbeexpectedtoconvergeovertimeunderappropriatemonetarypolicy Notation Vote andintheabsenceof furthershocks. BynotationvotecompletedonMay17,2010,the FOMCparticipants’forecastsforeconomicactivity Committeeunanimouslyapprovedtheminutesof the andinflationsuggestedthattheyexpectedtherecov- FOMCmeetingheldonApril27–28,2010. erytocontinueandinflationtoremainsubdued,but with,onbalance,slightlyweakerrealactivityanda BrianF.Madigan bitlowerinflationthanintheprojectionstheymade Secretary inconjunctionwiththeApril2010FOMCmeeting. Asdepictedinfigure1,theeconomicrecoverywas Addendum: anticipatedtobegradual,withrealgrossdomestic Summary of Economic Projections product(GDP)expandingatapaceonlymoderately abovetheparticipants’assessmentof itslonger-run InconjunctionwiththeJune22–23,2010,FOMC sustainablegrowthrateandtheunemploymentrate meeting,themembersof theBoardof Governors slowlytrendingloweroverthenextfewyears.Most andthepresidentsof theFederalReserveBanks,all participantsalsoanticipatedthatinflationwould of whomparticipateindeliberationsof theFOMC, remainrelativelylowovertheforecastperiod.As submittedprojectionsforoutputgrowth,unemploy- indicatedintable1,participantsgenerallymademodment,andinflationfortheyears2010to2012and estdownwardrevisionstotheirprojectionsforreal overthelongerrun.Theprojectionswerebasedon GDPgrowthfortheyears2010to2012,aswellas informationavailablethroughtheendof themeeting modestupwardrevisionstotheirprojectionsforthe andoneachparticipant’sassumptionsaboutfactors unemploymentrateforthesameperiod.Participants likelytoaffecteconomicoutcomes,includinghisor alsoreviseddownalittletheirprojectionsforinflaherassessmentof appropriatemonetarypolicy. tionovertheforecastperiod.Severalparticipants “Appropriatemonetarypolicy”isdefinedasthe notedthattheserevisionswerelargelytheresultof futurepathof policythattheparticipantdeemsmost theincomingeconomicdataandtheanticipated likelytofosteroutcomesforeconomicactivityand effectsof developmentsabroadonU.S.financial inflationthatbestsatisfyhisorherinterpretationof marketsandtheeconomy.Overall,participantscon- Table1.EconomicprojectionsofFederalReserveGovernorsandReserveBankpresidents,June2010 Percent Centraltendency1 Range2 Variable 2010 2011 2012 Longerrun 2010 2011 2012 Longerrun ChangeinrealGDP 3.0to3.5 3.5to4.2 3.5to4.5 2.5to2.8 2.9to3.8 2.9to4.5 2.8to5.0 2.4to3.0 Aprilprojection 3.2to3.7 3.4to4.5 3.5to4.5 2.5to2.8 2.7to4.0 3.0to4.6 2.8to5.0 2.4to3.0 Unemploymentrate 9.2to9.5 8.3to8.7 7.1to7.5 5.0to5.3 9.0to9.9 7.6to8.9 6.8to7.9 5.0to6.3 Aprilprojection 9.1to9.5 8.1to8.5 6.6to7.5 5.0to5.3 8.6to9.7 7.2to8.7 6.4to7.7 5.0to6.3 PCEinflation 1.0to1.1 1.1to1.6 1.0to1.7 1.7to2.0 0.9to1.8 0.8to2.4 0.5to2.2 1.5to2.0 Aprilprojection 1.2to1.5 1.1to1.9 1.2to2.0 1.7to2.0 1.1to2.0 0.9to2.4 0.7to2.2 1.5to2.0 CorePCEinflation3 0.8to1.0 0.9to1.3 1.0to1.5 0.7to1.5 0.6to2.4 0.4to2.2 Aprilprojection 0.9to1.2 1.0to1.5 1.2to1.6 0.7to1.6 0.6to2.4 0.6to2.2 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andininflationarefromthefourthquarterofthepreviousyeartothefourthquarteroftheyearindicated.PCE inflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures(PCE)andthepriceindexforPCE excludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarteroftheyearindicated.Eachparticipant’s projectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’sassessmentoftheratetowhicheach variablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.TheAprilprojectionsweremadeinconjunction withthemeetingoftheFederalOpenMarketCommitteeonApril27–28,2010. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearconsistsofallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

232 97thAnnualReport|2010 Figure1.Centraltendenciesandrangesofeconomicprojections,2010–12andoverthelongerrun

Minutesof FederalOpenMarketCommitteeMeetings 233 tinuedtoexpectthepaceof theeconomicrecoveryto andbytightcreditconditionsforsmallbusinesses beheldbackbyanumberof factors,including andhouseholds. householdandbusinessuncertainty,persistentweaknessinrealestatemarkets,onlygradualimprovement Lookingfurtherahead,thecentraltendenciesof parinlabormarketconditions,waningfiscalstimulus, ticipants’projectionsforrealGDPgrowthwere andsloweasingof creditconditionsinthebanking 3.5to4.2percentin2011and3.5to4.5percentin sector.Participantsgenerallyanticipatedthat,inlight 2012.Participantsgenerallyexpectedareboundin of theseverityof theeconomicdownturn,itwould spendingonhousing,consumerdurables,andbusitakesometimefortheeconomytoconvergefullyto nesscapitalequipmentashouseholdincomeandbalitslonger-runpathascharacterizedbysustainable ancesheetsstrengthen,creditbecomesmorewidely ratesof outputgrowth,unemployment,andinflation available,andtherecoveryisseenbyhouseholdsand consistentwithparticipants’interpretationof the firmsasmorefirmlyestablished.Nevertheless,par- FederalReserve’sdualobjectives;mostexpectedthe ticipantscitedseveralfactorsthatcouldrestrainthe convergenceprocesstotakenomorethanfivetosix paceof expansionoverthenexttwoyears,including years.Aboutone-half of theparticipantsnowjudged arisinghouseholdsavingrateashouseholdsseekto theriskstothegrowthoutlooktobetiltedtothe makefurtherprogressinrepairingbalancesheets, downside,whilemostcontinuedtoseebalancedrisks persistentuncertaintyonthepartof householdsand surroundingtheirinflationprojections.Participants businessesaboutthestrengthof therecovery,spillgenerallycontinuedtojudgetheuncertaintysur- oversfromfiscalstrainsabroadtoU.S.financialmarroundingtheirprojectionsforbotheconomicactivity ketsandtheU.S.economy,andcontinuedweakness andinflationtobeunusuallyhighrelativetohistori- inresidentialconstruction.Moreover,despite calnorms. improvementsintheconditionof bankinginstitutions,strainsinthecommercialrealestatesectorwere TheOutlook seenasposingriskstothebalancesheetsof such Participants’projectionsforrealGDPgrowthin2010 institutionsforsometime.Termsandstandardson hadacentraltendencyof 3.0to3.5percent,slightly bankloanscontinuedtoberestrictive,andparticilowerthaninApril.Participantsnotedthattheeco- pantsanticipatedonlyagraduallooseningof credit nomicrecoverywasproceeding.Consumerspending conditionsformanyhouseholdsandsmallerfirms.In wasincreasing,supportedbyrisingdisposable theabsenceof furthershocks,participantsgenerally incomeaslabormarketsgraduallyimproved.Busi- expectedthatrealGDPgrowthwouldeventually nessoutlaysonequipmentandsoftwarewerealsoris- settledownatanannualrateof 2.5to2.8percent,a ing,drivenbyreplacementspending,thelowcostof pacethatappearedtobesustainableinviewof capital,andincreasedproduction.Participants expectedlong-runtrendsinthelaborforceandlabor pointedtoanumberof factorsthatwouldprovide productivity. ongoingsupporttoeconomicactivity,including accommodativemonetarypolicyandstillgenerally Participantsanticipatedthatlabormarketconditions supportiveconditionsinfinancialmarkets.Fiscal wouldimproveslowlyoverthenextseveralyears.The policywasalsoseenascurrentlycontributingtoeco- centraltendencyof theirprojectionsfortheaverage nomicgrowth,althoughparticipantsexpectedthat unemploymentrateinthefourthquarterof 2010was theeffectsof fiscalstimuluswoulddiminishgoing 9.2to9.5percent.Consistentwiththeirexpectations forwardandalsoanticipatedthatbudgetarypres- of agradualeconomicrecovery,participantsgenersureswouldcontinuetoweighonspendingatthe allyanticipatedthattheunemploymentratewould stateandlocallevels.Participantsnotedthatfinancial declineto7.1to7.5percentbytheendof 2012, conditionshadtightenedsomewhatbecauseof devel- remainingwellabovetheirassessmentsof itslongeropmentsabroad.Theeffectsof astrongerdollar,a runsustainablerate.Althoughafewparticipants lowerstockmarket,andwidercorporatecredit wereconcernedaboutapossibledecreaseinthesusspreadswereexpectedtobeoffsetonlypartiallyby tainablelevelof employmentresultingfromongoing loweroilandcommoditypricesandadeclinein structuraladjustmentsinproductandlabormarkets, Treasuryyields.Manyparticipantsanticipatedthat participants’longer-termunemploymentprojections theeconomicexpansionwouldbeheldbackby hadacentraltendencyof 5.0to5.3percent,thesame firms’cautioninhiringandspendinginlightof the asinApril. considerableuncertaintyregardingtheeconomicoutlook,byhouseholds’focusonrepairingbalance Participantsnotedthatpricesof energyandother sheetsweakenedbyequityandhousepricedeclines, commoditiesdeclinedsomewhatinrecentmonths,

234 97thAnnualReport|2010 andunderlyinginflationtrendedlower.Theygener- Table2.Averagehistoricalprojectionerrorranges allyexpectedinflationtoremainsubduedoverthe Percentagepoints nextseveralyears.Indeed,mostof theparticipants markeddownabittheirprojectionsforinflationover Variable 2010 2011 2012 theforecastperiod:Thecentraltendencyof their ChangeinrealGDP1 ±1.0 ±1.6 ±1.8 projectionsforpersonalconsumptionexpenditures Unemploymentrate1 ±0.4 ±1.2 ±1.5 (PCE)inflationwas1.0to1.1percentfor2010,1.1to Totalconsumerprices2 ±0.9 ±1.0 ±1.1 1.6percentfor2011,and1.0to1.7percentfor2012, Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared generallyabout1∕ 4 percentagepointlowerthanin errorofprojectionsfor1990through2009thatwerereleasedinthesummerby April.Thecentraltendenciesof participants’projec- variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast Uncertainty,”undercertainassumptions,thereisabouta70percentprobability tionsforcorePCEinflationfollowedabroadlysimithatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein larpath,althoughheadlinePCEinflationwas rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Further informationisinDavidReifschneiderandPeterTulip(2007),“Gaugingthe expectedtorunslightlyabovecorePCEinflation UncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,”Finance overtheforecastperiod,reflectingsomewhatmore andEconomicsDiscussionSeries2007-60(Washington:BoardofGovernorsof theFederalReserveSystem,November). rapidincreasesinfoodandenergyprices.Mostpar- 1 Fordefinitions,refertogeneralnoteintable1. ticipantsanticipatedthat,withappropriatemonetary 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen policy,inflationwouldrisegraduallytowardthe mostwidelyusedingovernmentandprivateeconomicforecasts.Projection ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof inflationratethattheyindividuallyconsidermost theyearindicated. consistentwiththeFederalReserve’sdualmandate formaximumemploymentandstableprices.Thecentraltendencyof participants’projectionsof the ploymentratelastyear,whichwasassociatedwith longer-run,mandate-consistentinflationratewas rapidgrowthinlaborproductivity,ascontributingto 1.7to2.0percent,unchangedfromApril.Amajority increaseduncertaintyregardingtheoutlookfor of participantsanticipatedthatinflationin2011and employmentandeconomicactivity.Participantswho 2012wouldcontinuetobebelowtheirassessmentsof judgedthattheriskstotheirgrowthoutlookwere themandate-consistentinflationrate. tiltedtothedownsidepointedtorecentdevelopments abroadandtheriskof furthercontagion,together UncertaintyandRisks withthepotentialforanincreaseinriskaversion Mostparticipantsjudgedthattheirprojectionsof amonginvestors,asimportantfactorscontributing futureeconomicactivityandunemploymentcontintotheirassessment.Participantsnotedthatproblems uedtobesubjecttogreater-than-averageuncertainty, inthecommercialrealestatemarketandtheeffects whileafewviewedtheuncertaintysurroundingtheir of financialregulatoryreformcouldleadtogreater outlookforgrowthandunemploymentasinlinewith constraintsoncreditavailability,therebyrestraining typicallevels.4Aboutone-half of theparticipants growthof outputandemployment.However,some sawtheriskstotheirgrowthoutlookastiltedtothe participantsviewedthedownsideriskstothegrowth downside;incontrast,inAprilalargemajorityof outlookasroughlybalancedbyupsiderisks;they participantssawtheriskstogrowthasbalanced.In sawthepossibilitythatmonetarypolicymight thecurrentsurvey,asubstantialnumberof particiremainaccommodativefortoolongasonereason pantsalsoviewedtheriskstounemploymentastilted thatgrowthcouldprovestrongerthanexpected. totheupside.Theremainingparticipantssawthe riskstotheprojectionsforeconomicgrowthand AsinApril,mostparticipantscontinuedtoseethe unemploymentasroughlybalanced.Participants uncertaintysurroundingtheirinflationprojectionsas pointedtodevelopmentsabroadandtheirpossible aboveaverage.Still,afewjudgedthatuncertaintyin ramificationsforU.S.financialmarketsandtheU.S. theoutlookforinflationwasaboutinlinewithor economyassuggestingsomewhatgreateruncertainty lowerthantypicallevels.Mostparticipantsjudged aboutthepathof economicgrowth.Inaddition, theriskstotheinflationoutlookasroughlybalsomeparticipantscitedtheunusualriseintheunemanced.Asfactorsaccountingforelevateduncertainty regardingtheoutlookforinflation,participants 4 Table2providesestimatesofforecastuncertaintyforthechange pointedtotheextraordinarydegreeof monetary inrealGDP,theunemploymentrate,andtotalconsumerprice inflationovertheperiodfrom1990to2009.Attheendofthis policyaccommodation,theuncertaintimingof the summary,thebox“ForecastUncertainty”discussesthesources exitfromaccommodation,andtheunusuallylarge andinterpretationofuncertaintyineconomicforecastsand gapbetweenexpectedinflation,asmeasuredbysurexplainstheapproachusedtoassesstheuncertaintyandrisk attendingparticipants’projections. veysof householdsandbusinesses,andcurrentinfla-

Minutesof FederalOpenMarketCommitteeMeetings 235 tion.Participantsnotedthat,despitethedownward ploymentrate,thedistributionsshiftedsomewhat trendinunderlyinginflationinrecentmonths,infla- higherfortheyears2010to2012.Thedistributions tionexpectationscontinuedtobewellanchored. of theirestimatesof thelonger-runsustainablerates Nonetheless,thepossibilitythatinflationexpecta- of outputgrowthandunemploymentwerelittle tionsmightstarttodeclineinresponsetopersistently changedfromApril. lowlevelsof actualinflationandthepotentialeffects of continuedweaknessof theeconomyonprice Correspondinginformationaboutthediversityof trendswereseenbyafewparticipantsasposingsome participants’viewsregardingtheinflationoutlookis downsideriskstotheinflationoutlook. providedinfigures2.Cand2.D.Thedistributionsof projectionsforoverallandcorePCEinflationfor DiversityofViews 2010shiftedlowerrelativetothedistributionsin Figures2.Aand2.Bprovidefurtherdetailsonthe April,andthedistributionswerenoticeablymore diversityof participants’viewsregardingthelikely tightlyconcentrated.Thedistributionsof overalland outcomesforrealGDPgrowthandtheunemploy- coreinflationfor2011and2012,however,weregenmentrate.Thedistributionof participants’projec- erallylittlechangedandremainedfairlywide.The tionsforrealGDPgrowththisyearwasslightlynar- dispersioninparticipants’projectionsoverthenext rowerthanthedistributioninApril,butthedistribu- fewyearswasmainlyduetodifferencesintheirjudgtionsforrealGDPgrowthin2011and2012were mentsregardingthedeterminantsof inflation, aboutunchanged.Asinearlierprojections,thedis- includingtheirestimatesof prevailingresourceslack persioninforecastsforoutputgrowthappearedto andtheirassessmentsof theextenttowhichsuch reflectthediversityof theirassessmentsregardingthe slackaffectsactualandexpectedinflation.Inconcurrentdegreeof underlyingmomentumineconomic trast,therelativelytightdistributionof participants’ activity,theevolutionof consumerandbusinesssen- projectionsforlonger-runinflationillustratestheir timent,thedegreeof supporttoeconomicgrowth substantialagreementaboutthemeasuredrateof providedbyfinancialmarkets,theeffectsof mon- inflationthatismostconsistentwiththeFederal etarypolicyaccommodation,andotherfactors. Reserve’sdualobjectivesof maximumemployment Regardingparticipants’projectionsfortheunem- andstableprices.

236 97thAnnualReport|2010 Figure2.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2010–12andoverthelongerrun

Minutesof FederalOpenMarketCommitteeMeetings 237 Figure2.B.Distributionofparticipants’projectionsfortheunemploymentrate,2010–12andoverthelongerrun

238 97thAnnualReport|2010 Figure2.C.Distributionofparticipants’projectionsforPCEinflation,2010–12andoverthelongerrun

Minutesof FederalOpenMarketCommitteeMeetings 239 Figure2.D.Distributionofparticipants’projectionsforcorePCEinflation,2010–12

240 97thAnnualReport|2010 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers experiencedinthepastandtherisksaroundtheprooftheBoardofGovernorsandthepresidentsofthe jectionsarebroadlybalanced,thenumbersreported FederalReserveBanksinformdiscussionsofmon- intable2wouldimplyaprobabilityofabout70peretarypolicyamongpolicymakersandcanaidpublic centthatactualGDPwouldexpandwithinarangeof understandingofthebasisforpolicyactions.Con- 2.0to4.0percentinthecurrentyear,1.4to4.6persiderableuncertaintyattendstheseprojections,how- centinthesecondyear,and1.2to4.8percentinthe ever.Theeconomicandstatisticalmodelsandrela- thirdyear.Thecorresponding70percentconfidence tionshipsusedtohelpproduceeconomicforecasts intervalsforoverallinflationwouldbe1.1to2.9perarenecessarilyimperfectdescriptionsofthereal centinthecurrentyear,1.0to3.0percentinthesecworld.Andthefuturepathoftheeconomycanbe ondyear,and0.9to3.1percentinthethirdyear. affectedbymyriadunforeseendevelopmentsand Becausecurrentconditionsmaydifferfromthose events.Thus,insettingthestanceofmonetary thatprevailed,onaverage,overhistory,participants policy,participantsconsidernotonlywhatappearsto providejudgmentsastowhethertheuncertainty bethemostlikelyeconomicoutcomeasembodiedin attachedtotheirprojectionsofeachvariableis theirprojections,butalsotherangeofalternative greaterthan,smallerthan,orbroadlysimilartotypipossibilities,thelikelihoodoftheiroccurring,andthe callevelsofforecastuncertaintyinthepastasshown potentialcoststotheeconomyshouldtheyoccur. intable2.Participantsalsoprovidejudgmentsasto Table2summarizestheaveragehistoricalaccuracyof whethertheriskstotheirprojectionsareweightedto arangeofforecasts,includingthosereportedinpast theupside,areweightedtothedownside,orare MonetaryPolicyReportsandthosepreparedbyFed- broadlybalanced.Thatis,participantsjudgewhether eralReserveBoardstaffinadvanceofmeetingsof eachvariableismorelikelytobeaboveorbelow theFederalOpenMarketCommittee.Theprojection theirprojectionsofthemostlikelyoutcome.These errorrangesshowninthetableillustratetheconsid- judgmentsabouttheuncertaintyandtherisks erableuncertaintyassociatedwitheconomicfore- attendingeachparticipant’sprojectionsaredistinct casts.Forexample,supposeaparticipantprojects fromthediversityofparticipants’viewsaboutthe thatrealgrossdomesticproduct(GDP)andtotal mostlikelyoutcomes.Forecastuncertaintyisconconsumerpriceswillrisesteadilyatannualratesof, cernedwiththerisksassociatedwithaparticular respectively,3percentand2percent.Iftheuncer- projectionratherthanwithdivergencesacrossa taintyattendingthoseprojectionsissimilartothat numberofdifferentprojections.

Minutesof FederalOpenMarketCommitteeMeetings 241 Meeting Held on August 10, 2010 NathanSheets Economist Ajointmeetingof theFederalOpenMarketCom- JamesA.Clouse,ThomasA.Connors, mitteeandtheBoardof Governorsof theFederal StevenB.Kamin,LawrenceSlifman, ReserveSystemwasheldintheofficesof theBoard MarkS.Sniderman,andDavidW.Wilcox of GovernorsinWashington,D.C.,onTuesday, AssociateEconomists August10,2010,at8:00a.m. BrianSack Manager,SystemOpenMarketAccount Present JenniferJ.Johnson BenBernanke, Secretaryof theBoard,Officeof theSecretary, Chairman Boardof Governors WilliamC.Dudley PatrickM.Parkinson ViceChairman Director,Divisionof BankSupervisionand JamesBullard Regulation,Boardof Governors ElizabethDuke RobertdeV.Frierson DeputySecretary,Officeof theSecretary, ThomasM.Hoenig Boardof Governors DonaldL.Kohn CharlesS.Struckmeyer SandraPianalto DeputyStaff Director,Officeof theStaff Director EricRosengren forManagement,Boardof Governors WilliamNelson DanielK.Tarullo DeputyDirector,Divisionof MonetaryAffairs, KevinWarsh Boardof Governors ChristineCumming,CharlesL.Evans, LindaRobertson RichardW.Fisher,NarayanaKocherlakota, AssistanttotheBoard,Officeof BoardMembers, andCharlesI.Plosser Boardof Governors AlternateMembersof theFederalOpenMarket SethB.Carpenter Committee SeniorAssociateDirector,Divisionof Monetary JeffreyM.Lacker,DennisP.Lockhart,and Affairs,Boardof Governors JanetL.Yellen DavidReifschneiderandWilliamWascher Presidentsof theFederalReserveBanksof SeniorAssociateDirectors,Divisionof Researchand Richmond,Atlanta,andSanFrancisco,respectively Statistics,Boardof Governors WilliamB.English StephenA.Meyer SecretaryandEconomist SeniorAdviser,Divisionof MonetaryAffairs, MatthewM.Luecke Boardof Governors AssistantSecretary StephenD.Oliner DavidW.Skidmore SeniorAdviser,Divisionof ResearchandStatistics, AssistantSecretary Boardof Governors MichelleA.Smith BrianJ.Gross AssistantSecretary SpecialAssistanttotheBoard,Officeof Board ThomasC.Baxter Members,Boardof Governors DeputyGeneralCounsel EricM.Engen RichardM.Ashton AssistantDirector,Divisionof Researchand AssistantGeneralCounsel Statistics,Boardof Governors

242 97thAnnualReport|2010 DavidH.Small numberof theCommittee’searlieragencyMBSpur- ProjectManager,Divisionof MonetaryAffairs, chasesthatremainedtobesettled.Inaddition,the Boardof Governors ManagerbriefedtheCommitteeontheSystem’s progressindevelopingtoolsforpossiblefuture JohnC.DriscollandJenniferE.Roush reservedrainingoperations.TheFederalReservesuc- SeniorEconomists,Divisionof MonetaryAffairs, cessfullyconductedtwomoresmall-valueauctionsof Boardof Governors termdepositstoconfirmoperationalreadinessfor PenelopeA.Beattie suchauctionsattheFederalReserveandatthe AssistanttotheSecretary,Officeof theSecretary, depositoryinstitutionsthatchosetoparticipate.The Boardof Governors Managernotedthatthestaff wasdevelopingplans KimberleyE.Braun foradditionalsmall-valuetestsof theTermDeposit RecordsProjectManager,Divisionof Monetary Facility.InearlyAugust,theFederalReservesuccess- Affairs,Boardof Governors fullyexecutedafewsmall-valuetermreverserepurchaseoperations,includingthefirsttheFederal RandallA.Williams ReserveconductedusingagencyMBSascollateral, RecordsManagementAnalyst,Divisionof Monetary toensureoperationalreadinessforsuchtransactions Affairs,Boardof Governors attheFederalReserve,theclearingbanks,andthe DavidSapenero primarydealers.Therewerenoopenmarketopera- FirstVicePresident,FederalReserveBank tionsinforeigncurrenciesfortheSystem’saccount of St.Louis overtheintermeetingperiod.Byunanimousvote,the LorettaJ.MesterandRobertH.Rasche CommitteeratifiedtheDesk’stransactionsoverthe ExecutiveVicePresidents,FederalReserveBanks intermeetingperiod. of PhiladelphiaandSt.Louis,respectively TheManageralsonotedthestaff’sprojectionthat,if DavidAltig,RonFeldman,CraigS.Hakkio, mortgageratesweretoremainneartheirlevelsatthe GlennD.Rudebusch,DanielG.Sullivan, timeof themeeting,repaymentsof principalonthe andGeoff Tootell agencyMBSheldintheSOMAlikelywouldreduce SeniorVicePresidents,FederalReserveBanksof thefacevalueof thoseholdingsbyroughly$340bil- Atlanta,Minneapolis,KansasCity,SanFrancisco, lionfromAugust2010throughtheendof 2011.The Chicago,andBoston,respectively levelof repaymentswouldbeexpectedtoincrease LindaGoldberg furtherif mortgageratesweretodeclinefromthose VicePresident,FederalReserveBankof NewYork levels.Inaddition,about$55billionof agencydebt AnnmarieS.Rowe-Straker heldintheSOMAportfoliowouldmatureoverthe AssistantVicePresident,FederalReserveBank sametimeframe. of NewYork Staff Review of the Economic Situation PiaOrrenius ResearchOfficer,FederalReserveBankof Dallas TheinformationreviewedattheAugust10meeting RobertL.Hetzel indicatedthatthepaceof theeconomicrecovery SeniorEconomist,FederalReserveBank slowedinrecentmonthsandthatinflationremained of Richmond subdued.Inaddition,reviseddatafor2007through 2009fromtheBureauof EconomicAnalysisshowed Developments in Financial Markets and thattherecentrecessionwasdeeperthanpreviously the Federal Reserve’s Balance Sheet thought,and,asaresult,thelevelof realgross domesticproduct(GDP)attheendof 2009was TheManagerof theSystemOpenMarketAccount noticeablylowerthanestimatedearlier.Private (SOMA)reportedondevelopmentsindomesticand employmentincreasedslowlyinJuneandJuly,and foreignfinancialmarketsduringtheperiodsincethe industrialproductionwaslittlechangedinJuneafter CommitteemetonJune22–23,2010.Healso alargeincreaseinMay.ConsumerspendingcontinreportedonSystemopenmarketoperationsduring uedtoriseatamodestrateinJune,andbusinessouttheintermeetingperiod,notingthattheDeskatthe laysforequipmentandsoftwaremovedupfurther. FederalReserveBankof NewYorkhadengagedin However,housingactivitydroppedback,andnoncouponswaptransactionsinagencymortgage- residentialconstructionremainedweak.Additionally, backedsecurities(MBS)tosubstantiallyreducethe thetradedeficitwidenedsharplyinMay.Afurther

Minutesof FederalOpenMarketCommitteeMeetings 243 declineinenergypricesandunchangedpricesfor meetingperiod.Consumerconfidencefellbackin coregoodsandservicesledtoafallinheadlinecon- July,withhouseholdsexpressinggreaterconcern sumerpricesinJune. abouttheirpersonalfinancesandtheoutlookforthe recovery. Privatenonfarmemploymentexpandedslowlyin recentmonths.Theaveragemonthlygaininprivate Thehousingmarket,whichhadbeensupportedearpayrollemploymentduringthethreemonthsending lierintheyearbyactivityassociatedwiththehomeinJulywassmall,considerablylessthantheaverage buyertaxcredits,wasquitesoftforasecondconincreaseovertheprecedingthreemonths.However, secutivemonthinJune.Salesof newsingle-family averageweeklyhoursof allemployeescontinuedto homesreboundedsomeinJuneaftertheirsharpdrop recover.Thenetadditionof jobsinmanufacturing inMay,buttheyremainedatadepressedlevel.Sales andrelatedindustries,andinnonbusinessservices of existinghomesfellforasecondmonthinJune, suchashealthandeducation,continuedtocontrib- andtheindexof pendinghomesalessuggested uteimportantlytothenetincreaseinprivateemploy- anotherdeclineinJuly.Startsof newsingle-family ment.Employmentinconstructionandfinancial houses,whichhaddroppedsteeplyinMay,edged activitiesfellfurther.Theunemploymentratemoved downinJunetothelowestlevelsincethespringof downinJunefromitslevelearlierintheyear,and 2009.Thelownumberof newpermitsissuedinJune wasunchangedinJuly,asdecliningcivilianemploy- appearedtosignalthatlittleimprovementinnew mentwasaccompaniedbydecreasesinlaborforce homebuildingwaslikelyinJuly.Housepriceswere participation.Initialclaimsforunemploymentinsur- largelystable,onbalance,inrecentmonths.The anceremainedatanelevatedlevelovertheintermeet- interestrateon30-yearfixed-rateconformingmortingperiod. gagesfellfurtherduringJuly,reachingarecordlow forthe39-yearhistoryof theseries. IndustrialproductionwaslittlechangedinJuneafter threemonthsof strongincreases.Theoutputof utili- Realbusinessspendingonequipmentandsoftware tieswasboostedbyunseasonablyhotweatherwhile rosestronglyagaininthesecondquarter,with manufacturingproductiondeclined.Thedropin increaseswidespreadacrossthecategoriesof spendmanufacturingoutputincludedareductioninmotor ing.Newordersfornondefensecapitalgoodsexcludvehicleassemblies,buttheywerescheduledto ingaircraftremainedonasoliduptrend,although increasenoticeablyinJuly.TheJunedecreaseinfac- theirthree-monthchangefortheperiodendingin toryoutputalsoreflectedweakerproductionin Junewaslessrapidthanearlierintheyear.Survey industriesproducingnon-automotiveconsumer indicatorsof businessconditionsandsentimentsoftgoodsandconstructionandbusinesssupplies.The enedinJulybutremainedconsistentwithfurther outputof high-technologyitemsandotherbusiness gainsinproductionandcapitalspendinginthenear equipmentcontinuedtorise.Capacityutilizationin term.BusinessinvestmentinnonresidentialstrucmanufacturinginJunestoodwellaboveitsmid-2009 turesturnedupinthesecondquarter,withspending low,butitwasstillsubstantiallyshortof itslonger- boostedbytheriseinoutlaysfordrillingandmining runaverage. structures.Thedeclineinspendingforothertypesof nonresidentialbuildingsappearedtobeslowing,and Reviseddataindicatedthatconsumerspendingfell therewereafewsignsthatfinancialconditionsin moresharplyin2008andinthefirsthalf of 2009, commercialrealestatemarkets,thoughstilldifficult, andsubsequentlyrecoveredmoreslowly,thanprevi- werestabilizing.Inthesecondquarter,businesses ouslyestimated.Realpersonalconsumptionexpendi- appearedtoaddtoinventoriesatafasterrate.Howtures(PCE)rosegraduallyduringthesecondquarter. ever,ratiosof inventoriestosalesformostindustries Salesof lightmotorvehiclescontinuedtomoveup, didnotpointtoanysizableoverhangs. onbalance,withthelevelof salesinJulyslightly higherthanthesecond-quarteraverage.Realdispos- Inflationremainedsubduedinrecentmonths.Headablepersonalincomeincreasedatanoticeably lineconsumerpricesdeclinedinMayandJune strongerpacethanspendinginrecentmonths,and becauseof sizabledropsinconsumerenergyprices. thepersonalsavingratemovedupfurtherfromthe Atthesametime,thecorePCEpriceindexmovedup upwardlyrevisedlevelreportedintherevisionstothe onlyslightly,andtheyear-over-yearincreaseinthe nationalincomeandproductaccounts.Indicatorsof indexinJunewaslowerthanearlierintheyear.In householdnetworth—suchasstockpricesandhouse recentmonths,pricesof coreconsumergoodsconprices—werelittlechanged,onnet,overtheinter- tinuedtodeclinewhilepricesof non-energyservices

244 97thAnnualReport|2010 rosemoderately.Atearlierstagesof production,pro- manycountriesbegantodecelerate.Incontrast, ducerpricesof coreintermediatematerialsfellback Mexicanindicatorssuggestedthateconomicactivity inJune;incontrast,mostindexesof spotcommodity reboundedinthesecondquarteraftercontractingin pricesmovedupduringJuly.Inflationcompensation thefirstquarter.Headlineinflationratesgenerally basedonTreasuryinflation-protectedsecurities declinedabroad,reflectingpriordeclinesinoiland moveddownfurtherovertheintermeetingperiod, othercommodityprices. partlyinresponsetosofter-than-expecteddataon economicactivity,butsurveymeasuresof short-and Staff Review of the Financial Situation long-terminflationexpectationswerelargelystable. ThedecisiontakenbytheFederalOpenMarket Nominalhourlylaborcompensation—asmeasured Committee(FOMC)atitsJunemeetingtomaintain bycompensationperhourinthenonfarmbusiness the0to1∕ 4 percenttargetrangeforthefederalfunds sectorandtheemploymentcostindex—rosemod- ratewasaboutinlinewithinvestorexpectationsand estlyduringtheyearendinginthesecondquarter. elicitedlittlemarketreaction;thesamewastrueof Averagehourlyearningsof allemployeesroseslowly thewordingof theaccompanyingstatement.Over overthe12monthsendinginJuly.Outputperhour theintermeetingperiod,investorsappearedtomark inthenonfarmbusinesssectordeclinedinthesecond downthepathformonetarypolicyinresponseto quarterafterrisingrapidlyintheprecedingthree weaker-than-expectedeconomicdatareleasesand quarters.Onnet,unitlaborcostsremainedwell FederalReservecommunicationsthatwerereadas belowtheirleveloneyearearlier. suggestingthatpolicymakers’concernsaboutthe economicoutlookhadincreased. TheU.S.internationaltradedeficitwidenedsharply inMay,asasignificantincreaseinexportswasmore Reflectingthesamefactors,yieldsonnominalTreasthanoffsetbyasurgeinimports.Thecorresponding urycouponsecuritiesfellnoticeablyonnet.Treasury declineinrealnetexportsmadeasignificantnegative auctionsweregenerallywellreceived,withbid-tocontributiontoU.S.GDPgrowthinthesecondquar- coverratiosmostlyexceedinghistoricalaverages. ter.Theincreaseinexportswasbroadlybased,with Yieldsoninvestment-andspeculative-gradecorpoparticularstrengthinexportsof capitalequipment. ratebondsdecreased,andtheirspreadsrelativeto Importsof capitalgoodsalsowerestrong,aswere yieldsoncomparable-maturityTreasurysecurities importsof consumergoodsandautomotiveprod- declinedmoderately.Secondary-marketbidpriceson ucts.Incontrast,importsof petroleumproductsfell syndicatedleveragedloansroseabit,whilebid-asked inMay,heldbackbybothlowerpricesandreduced spreadsinthatmarketedgeddown. volumes. Conditionsinshort-termfundingmarketsimproved AvailabledatasuggestedthataggregateGDPgrowth somewhatovertheintermeetingperiod.Spreadsof inforeigneconomiesremainedstronginthesecond termLondoninterbankofferedrates(Libor)over quarter.Recentindicatorsof economicactivityfor ratesonovernightindexswapsmoveddownatmost theeuroareashowedlittleimprintof thefiscal horizons,andliquidityintermfundingmarkets stressesthatemergedinthespring.Industrialproduc- reportedlyincreased.SpreadsonunsecuredcommertioncontinuedtogrowinMay,withparticularly cialpaperwerelittlechanged.Insecuredfunding solidgainsinGermanyandFrance,andpurchasing markets,spreadsonasset-backedcommercialpaper managersindexesandeconomicsentimentturnedup moveddown,whileratesandhaircutsoncollateral inJuly.InJapan,exportscontinuedtosupporteco- forrepurchaseagreementsinvolvingTreasuryand nomicgrowth,evenasindicatorsof household agencycollateralheldsteady. spendingremainedweak.Machineryordersdeclined inMay,however,andindustrialproductionmoved BroadU.S.equitypriceindexesincreasedslightly,on downinJune,suggestingsomedecelerationineco- net,asgenerallypositivecorporateearningsnewsand nomicactivity.Intheemergingmarketeconomies aneasingof investors’worriesaboutthepotential (EMEs),incomingdatagenerallypointedtoamod- effectsof fiscalstrainsinEuropewerepartlyoffsetby erationof economicgrowth,albeittoastill-solid concernsaboutthestrengthof theeconomicrecovpace,withanotableslowinginChinainthesecond ery.MostfirmsintheS&P500reportedsecondquarter.InotherEMEs,purchasingmanagers quarterearningsthatexceededanalysts’forecasts. indexesgenerallystillpointedtoexpansionsinmanu- Option-impliedvolatilityontheS&P500index facturingactivity,thoughindustrialproductionin declinedbutremainedsomewhatelevatedbyhistori-

Minutesof FederalOpenMarketCommitteeMeetings 245 calstandards.Thespreadbetweenthestaff’sestimate straightquarter,thatasmallnetfractionof responof theexpectedrealreturnonequitiesoverthenext dentshadeasedstandardsforC&Iloansoverthe 10yearsandanestimateof theexpectedrealreturn previousthreemonths.Commercialrealestateloans ona10-yearTreasurynote—aroughmeasureof the continuedtodeclinesteeplyinJuneandJuly,and equityriskpremium—waslittlechangedatan residentialrealestateloansalsodecreased.Consumer elevatedlevel.Financialstockpricesmovedaboutin loansatcommercialbankswereaboutflat,onballinewithbroaderindexes,andcreditdefaultswap ance,asreductionsincreditcardloansaboutoffset spreadsforlargefinancialinstitutionsnarrowed anincreaseinnonrevolvingconsumerloans.Securimoderately. tiesholdingsbybanksincreasedsubstantiallyin recentweeks. GrossbondissuancebyU.S.investment-gradenonfinancialcorporationsreboundedinJulyfromrela- M2waslittlechangedinJulyafterexpandingslightly tivelysubduedlevelsinMayandJune.Nonfinancial inthesecondquarter.Itssubduedgrowthinrecent commercialpaperoutstandingalsoincreased.Issu- monthslikelyreflectedacontinuedunwindingof anceof syndicatedleveragedloansroseinthesecond earliersafe-havenflowsaswellastheverylowrates quarter,buttermsonsuchdealsreportedlytightened of returnonsomecomponentsof M2,particularly somewhat.Measuresof thecreditqualityof nonfi- smalltimedepositsandretailmoneymarketmutual nancialfirmsremainedsolid.Grossequityissuance funds. wasmoderateinJuneandJuly. Inforeignexchangemarkets,thevalueof thedollar Pricesof commercialrealestateappearedtohave declinedonbalanceovertheintermeetingperiod, increasedinthesecondquarter,thoughthenumber likelyreflectingsomereversalof flight-to-safety of transactionswassmall.Nonetheless,commercial flows,better-than-expectedEuropeaneconomicdata, realestatemarketsremainedunderpressure.Delin- andthesoftereconomicoutlookfortheUnited quencyratesforsecuritizedcommercialmortgages States.Thereleaseof theresultsof theEuropean continuedtoriseinJune,andcommercialmortgage Unionstress-testexercise,includingdataonEurodebtwasestimatedtohavecontractedbyasizable peanbanks’exposurestosovereigndebt,appearedto amountagaininthesecondquarter.However,inves- easeconcernsaboutthepotentialforseverefinancial tordemandforhigh-qualitycommercialmortgage- dislocationsinEurope.Investorsalsoseemedtotake backedsecurities(CMBS)reportedlywasrobust, comfortfromseveraloversubscribedauctionsof govalthoughissuanceof CMBSremainedmuted. ernmentdebtbySpain,Portugal,Ireland,and Greece.Accordingly,riskspreadsonthesegovern- Consumercreditcontractedagaininthesecond ments’bonds,thoughelevated,generallydeclined, quarter,asrevolvingcreditcontinuedtodeclineand andEuropeanbanks’accesstodollarfunding nonrevolvingcreditedgeddown.Issuanceof con- improvedsomewhat.Thelackof anydisruptionto sumerasset-backedsecuritiesslowedabitinJuly, marketfunctioningfollowingtheexpiration,on reflecting,inpart,typicalseasonalpatterns.Con- July1,of theEuropeanCentralBank’sfirstone-year sumercreditqualitycontinuedtoshowimprovement. refinancingoperationalsosupportedinvestorsenti- Delinquencyandcharge-off ratesformosttypesof ment.Marketindicatorsof expectationsforfuture consumerloansmoveddowninrecentmonths, overnightratesintheeuroareashiftedupduringthe althoughtheseratesremainedelevated.Spreadsof period.Nochangesweremadetopolicyinterestrates creditcardinterestratesoverthoseonTreasurysecu- intheeuroarea,theUnitedKingdom,orJapan.The ritiesstayedelevatedinMay,whileinterestrate Bankof Canadatightenedpolicyastepfurtherdurspreadsonautoloansremainedneartheiraverage ingtheperiod,raisingitstargetfortheovernightrate leveloverthepastdecade. 25basispointsto3∕ 4 percent. Commercialbanks’coreloans—thesumof commer- Notwithstandingtheimprovedinvestorsentiment cialandindustrial(C&I),realestate,andconsumer towardEurope,datareleasespointingtolower-thanloans—continuedtocontractinJuneandJuly.How- expectedgrowthineconomicactivityintheUnited ever,therecentrunoff incoreloanswasappreciably StatesandChinamayhaveweighedonglobalsoversmallerthanthedeclinespostedearlierintheyear, eignbondyields,whichdeclinedonnetinCanada, reflectingamoremodestcontractioninC&Iloans. Germany,theUnitedKingdom,andJapan.Equity TheJulySeniorLoanOfficerOpinionSurveyon prices,whileupinEuropeovertheintermeeting BankLendingPracticesshowed,forthesecond period,werelittlechangedinCanadaanddownin

246 97thAnnualReport|2010 Japan.Bycontrast,sharepricesroseinemerging recoveryremainedsluggishgoingintothethirdquarmarketsandflowsintoemergingmarketequityfunds ter.Privatepayrollsandconsumerspendinghadrisen continuedtobestrong.Thecentralbanksof anum- lessthanexpected.Businessspendingonequipment berof EMEs,includingBrazil,Chile,India,Malay- andsoftwarehadincreasedstronglybutreportedly sia,SouthKorea,Taiwan,andThailand,increased wasconcentratedinreplacementsandupgradesthat policyinterestrates. hadbeenpostponedduringtheeconomicdownturn. Investmentinnonresidentialstructurescontinuedto Staff Economic Outlook beweak.Housingstartsandsalesremainedat depressedlevels,fallingbackaftertheexpirationof IntheeconomicforecastpreparedfortheAugust thetemporaryhomebuyertaxcredits.Theincoming FOMCmeeting,thestaff lowereditsprojectionfor datasuggestedthateconomicgrowthabroadhad theincreaseinrealeconomicactivityduringthesec- beensomewhatstrongerthananticipatedand ondhalf of 2010butcontinuedtoanticipateamod- remainedsolid,boostingU.S.exportsandsupporting eratestrengtheningof theexpansionin2011.The apickupinU.S.manufacturingoutputandemploysoftertoneof incomingeconomicdatasuggested ment,thoughasurprisingsurgeinimportsinthesecthatthepaceof theexpansionwouldbeslowerover ondquarterwidenedtheU.S.tradedeficit.Conditheneartermthanpreviouslyprojected.Financial tionsinfinancialmarketshadbecomesomewhat conditions,however,becamesomewhatmoresup- moresupportiveof growthovertheintermeeting portiveof economicgrowth.InterestratesonTreas- period,inpartreflectingperceptionsof diminished urysecurities,corporatebonds,andmortgages riskof financialdislocationsinEurope:Mediummoveddownfurtherovertheintermeetingperiod; andlonger-terminterestrateshadfallen,somerisk thedollarreverseditsApriltoJuneappreciation;and spreadshadnarrowed,andthedeclineinequity equitypricesedgedhigher.Overthemediumterm, pricesthathadoccurredinthemonthsbeforethe therecoveryineconomicactivitywasexpectedto Committee’sJunemeetinghadbeenpartlyreversed. receivesupportfromaccommodativemonetary Moreover,participantssawsomeindicationsthat policy,furtherimprovementinfinancialconditions, creditconditionsforhouseholdsandsmallerbusiandgreaterhouseholdandbusinessconfidence.Over nesseswerebeginningtoimprove,albeitgradually. theforecastperiod,theincreaseinrealGDPwaspro- Thus,whiletheysawgrowthaslikelytobemore jectedtobesufficienttoslowlyreduceeconomic modestinthenearterm,participantscontinuedto slack,althoughresourceslackwasstillanticipatedto anticipatethatgrowthwouldpickupin2011. remainquiteelevatedattheendof 2011. Revisednationalincomeandproductaccountdata Overallinflationwasprojectedtoremainsubdued showedthatthecontractioninaggregateoutputduroverthenextyearandahalf.Thestaff’sforecastsfor ingtherecentrecessionhadbeenlargerthanpreviheadlineandcoreinflationin2010wererevisedup ouslyreported.Inparticular,consumerspendinghad slightlyinresponsetothehigherpricesof oiland contractedmoreoverthecourseof 2008andthefirst othercommoditiesandthedepreciationof thedol- half of 2009,andrecoveredlessrapidly,thanprevilar.Evenso,thewidemarginof economicslackwas ouslyestimated,evenashouseholds’after-tax projectedtocontributetosomeslowingincoreinfla- incomeshadincreasedmorethanshownbytheeartionin2011,thoughtheextentof thatslowingwould lierdata.Incombination,theserevisionsindicated betemperedbystableinflationexpectations. thatthepersonalsavingratehadbeenhigherandhad risensomewhatmoreduringthepastthreeyearsthan Participants’ Views on Current Conditions previouslythought.Participantsrecognizedthatthe and the Economic Outlook implicationsof thesenewdatafortheoutlookwere unclear.Ontheonehand,thereviseddatamight Intheirdiscussionof theeconomicsituationand indicatethathouseholdshavemadegreaterprogress outlook,meetingparticipantsgenerallycharacterized inrepairingtheirbalancesheetsthanhadbeenrealtheeconomicinformationreceivedduringtheinter- ized,potentiallyallowingstrongergrowthinconmeetingperiodasindicatingaslowinginthepaceof sumerspendingastherecoveryproceeds.Onthe recoveryinoutputandemploymentinrecent otherhand,thereviseddatamightsignifythathousemonths.RealGDPgrowthwasnoticeablyweakerin holdsareseekingtoraisetheirnetworthmoresubthesecondquarterof 2010thanmosthadantici- stantiallythanpreviouslyunderstood,ortobuild pated,andmonthlydatasuggestedthatthepaceof greaterprecautionarybalancesinwhattheyperceive

Minutesof FederalOpenMarketCommitteeMeetings 247 tobeamoreuncertaineconomicenvironment,with wastheirmostimportantproblem.Standardsfor theresultthatgrowthinconsumerspendingcould commercialrealestateloansandresidentialmortremainrestrainedforsometime. gagesremainedverytight,andbanksdidnotappear tobeeasingstandardsonsuchloans.Somelimited Manyparticipantsnotedthattheprotracteddown- easingof lendingstandardswasnotedforconsumer turninhousepricesandinresidentialinvestment loans,butcreditavailabilityremainedaconstraint seemedtohaveended,althoughupsanddownsin andconsumercreditcontinuedtocontract.However, housingstartsandhomesalesassociatedwiththe severalparticipantsnotedthatwithcreditquality temporarytaxcreditforhomebuyersmadeitdifficult improving,somebankersweremoreactivelyseeking tobecertain.Afewcommentedthathomesalesand loangrowth,thoughthesamebankersalsoindicated pricesappearedtobeedgingupintheirDistricts. thatthedemandforloansremainedweak. Whilerecognizingthatthehousingsectorlikelyhad bottomedout,participantsobservedthatlargeinven- ManyparticipantsnotedthatEuropeancountries’ toriesof vacantandunsoldhomes,alongwithcon- effortstoaddresstheirfiscalimbalances,andthe tinuingforeclosuresthatwouldincreasethenumber releaseof theresultsof thestresstestof European of housesforsale,likelywouldcontinuetodamp banksalongwithinformationabouttheirexposures residentialconstruction,indicatingthatasustained tosovereigndebt,hadreducedinvestorconcern upturnfromverylowlevelswasnotimminent. aboutdownsiderisksinEurope.Thesefactors appearedtohavesupportedimprovementsinfinan- Businessinvestmentinequipmentandsoftwarehad cialmarketsbothhereandabroad.Moreover,growth grownatarobustpace,butgrowthinnewordersfor inEuropeandAsiaapparentlyremainedsolid, nondefensecapitalgoods,thoughvolatilefrom boostingU.S.exports.Nonetheless,acontinuationof monthtomonth,appearedtohavesteppeddown. strongforeigngrowthwouldrequireapickupinpri- Manyparticipantsnotedthatcapitalinvestmentwas vatedemandabroadtooffsetadeclineinpolicy heavilyconcentratedinreplacementinvestmentand stimulusandasmallerboostfrominventoryinvestupgradesthatfirmshadpostponedduringtheeco- ment.Severalparticipantsnotedthatthesameshift nomicdownturn.Anumberof participantsreported inthesourcesof demandwouldneedtotakeplacein thatbusinesscontactsagainindicatedthattheir theUnitedStates:Waningfiscalstimulusonthepart uncertaintyaboutthefiscalandregulatoryenviron- of thefederalgovernmentandcontinuingretrenchmentmadethemreluctanttoexpandcapacity.Other mentinspendingbystateandlocalgovernments participantscitedbusinesssurveysandreportsfrom wouldweighontheeconomicrecovery,andrecent businesscontactsindicatingthatslowgrowthinsales dataraisedquestionsastowhetherprivatedemand anduncertaintyaboutthestrengthanddurabilityof wouldstrengthenenoughtoincreaseresource therecoverylikelyweremoreimportantfactors. utilization. Exceptintheextractiveindustries(drillingandmining),investmentinnonresidentialstructureshadcon- Theincomingdataonthelabormarketwereweaker tinuedtodecline.Thenear-termoutlookforcom- thanmeetingparticipantshadanticipated.Privatemercialrealestateinvestmentremainedweakdespite sectorpayrollsgrewsluggishlyinrecentmonths.The adeclineinvacancyratesinsomemarkets. unemploymentratedeclinedabit,butthatreflecteda decreaseinlaborforceparticipationratherthanan Participantsagreedthatcreditconditionsdidnot increaseinemployment.Policymakersdiscusseda appeartobeanimportantrestraintoninvestment varietyof factorsthatappearedtobecontributingto spendingbylargerfirmsthathaveaccesstothecapi- theslowpaceof jobgrowth.Anumberof particitalmarkets.Suchfirmswereabletoborrowreadily pantsreportedthatbusinesscontactsagainindicated andatrelativelylowrates;moreover,manybusinesses thatuncertaintyaboutfuturetaxes,regulations,and heldsubstantialcashbalances.Inaddition,survey health-carecostsmadethemreluctanttoexpand resultssuggestedthatasizablefractionof bankshad theirworkforces.Instead,businesseshadcontinued easedloanterms,andafewhadeasedlendingstan- tomeetgrowthindemandfortheirproductslargely dards,onC&Iloans.Someparticipantsobserved throughproductivitygainsandbyincreasingexisting thatsmallbusinessescontinuedtofindcredithardto employees’hours.Severalparticipantssuggestedthat obtain.However,severalparticipantsnotedrecent structuralfactorssuchasmismatchesbetweenunemsurveyevidenceindicatingthatmostsmallfirmsthat ployedworkers’skillsandtheneedsof employers requestedcreditwereabletoborrow,andthatrela- withjobopenings,orunemployedworkers’inability tivelyfewsmallfirmsthoughtthataccesstocredit tomovetoanewlocale,werecontributingtothe

248 97thAnnualReport|2010 elevatedlevelandlongaveragedurationof unem- continuationof exceptionallyaccommodativemonployment.Otherparticipants,whileagreeingthat etarypolicyintheUnitedStatesasposingsome suchfactorscouldrestrainjobgrowthandcontribute upsiderisktoinflationexpectationsandactualinflatohighratesof unemployment,notedthatemploy- tioninthemediumrun. mentwaslowerthanayearearlierandthatjobopeningswereonlyslightlyabovetheirlowestlevelin Committee Policy Action 10years,indicatingthatfewfirmssawaneedtoadd employees.Mostparticipantsviewedweakdemand Intheirdiscussionof monetarypolicyfortheperiod forfirms’outputsastheprimaryproblem;theysaw ahead,Committeemembersagreedthatitwouldbe substantialscopeforstrongeraggregatedemandfor appropriatetomaintainthetargetrangeof 0to goodsandservicestospuremploymentinawide 1∕ 4 percentforthefederalfundsrate.Membersstill rangeof industries. sawtheeconomicexpansioncontinuing,andmost believedthatinflationwaslikelytostabilizenear Weighingtheavailableinformation,participants recentlowreadingsincomingquartersandthen againexpectedtherecoverytocontinueandtogather graduallyrisetowardlevelstheyconsidermoreconstrengthin2011.Nonetheless,mostsawtheincoming sistentwiththeCommittee’sdualmandateformaxidataasindicatingthattheeconomywasoperating mumemploymentandpricestability.Nonetheless, fartherbelowitspotentialthantheyhadthought, membersgenerallyjudgedthattheeconomicoutlook thatthepaceof recoveryhadslowedinrecent hadsoftenedsomewhatmorethantheyhadanticimonths,andthatgrowthwouldbemoremodestdur- pated,particularlyforthenearterm,andsomesaw ingthesecondhalf of 2010thantheyhadanticipated increaseddownsideriskstotheoutlookforboth atthetimeof theCommittee’sJunemeeting.Some growthandinflation.Somemembersexpresseda policymakerswhoseforecastsforgrowthhadbeenin concernthatinthiscontextanyfurtheradverse thelowendof therangeof participants’earlierpro- shockscouldhavedisproportionateeffects,resulting jectionsviewedtherecentdataasconsistentwith inasignificantslowingingrowthgoingforward. theirearlierforecastsforaweakrecovery.Afewpar- Whilenomembersawanappreciableriskof deflaticipants,observingthatmonth-to-monthdata tion,somejudgedthattheriskof furthernear-term releasesarenoisyandsubjecttorevision,didnotsee disinflationhadincreasedsomewhat.Morebroadly, therecentdataasclearlyindicatingachangeinthe membersgenerallysawbothemploymentandinflaoutlook.Manypolicymakersjudgedthatdownside tionaslikelytofallshortof levelsconsistentwiththe riskstotheU.S.recoveryhadbecomesomewhat dualmandateforlongerthanhadbeenanticipated. larger;afewsawtheincomingdataassuggestinga greaterriskthatprivatedemandforgoodsandser- Againstthisbackdrop,theCommitteediscussedthe vicesmightnotgrowenoughtooffsetwaningfiscal implicationsforfinancialconditionsandtheecostimulusandasmallerimpetusfrominventory nomicoutlookof continuingitspolicyof notreinrestocking.Incontrast,mostsawareducedriskof vestingprincipalrepaymentsreceivedonMBSor financialturmoilinEuropeandattendantspillovers maturingagencydebt.Thedeclineinmortgagerates toU.S.financialmarkets. sincespringwasgeneratingincreasedmortgagerefinancingactivitythatwouldacceleraterepaymentsof Policymakersgenerallysawtheinflationoutlookas principalonMBSheldintheSOMA.Privateinveslittlechanged.Theyobservedthatarangeof meas- torswouldhavetoholdmorelonger-termsecurities urescontinuedtoindicatesubduedunderlyinginfla- astheFederalReserve’sholdingsranoff,making tionandthatgrowthinwagesandcompensation longer-terminterestratessomewhathigherthanthey remainedquitemoderate.Manysaidtheyexpected wouldbeotherwise.Mostmembersthoughtthatthe underlyinginflationtostay,forsometime,belowlev- resultingtighteningof financialconditionswouldbe elstheyjudgedmostconsistentwiththedualman- inappropriate,giventheeconomicoutlook.However, datetopromotemaximumemploymentandprice membersnotedthatthemagnitudeof thetightening stability.Participantsviewedtheriskof deflationas wasuncertain,andafewthoughtthattheeconomic quitesmall,butanumberjudgedthattheriskof fur- effectsof reinvestingprincipalfromagencydebtand therdisinflationhadincreasedsomewhatdespitethe MBSlikelywouldbequitesmall.Mostmembers stabilityof longer-runinflationexpectations.One judged,inlightof currentconditionsintheMBS notedthatsurveymeasuresof longer-runinflation marketandtheCommittee’sdesiretonormalizethe expectationshadremainedpositiveinJapanthrough- compositionof theFederalReserve’sportfolio,that outthatcountry’sboutof deflation.Afewsawthe itwouldbebettertoreinvestinlonger-termTreasury

Minutesof FederalOpenMarketCommitteeMeetings 249 securitiesthaninMBS.WhilereinvestinginTreasury “TheFederalOpenMarketCommitteeseeks securitieswasseenaspreferablegivencurrentmarket monetaryandfinancialconditionsthatwillfosconditions,reinvestinginMBSmightbecomedesir- terpricestabilityandpromotesustainable ableif conditionsweretochange.Afewmembers growthinoutput.Tofurtheritslong-runobjecworriedthatreinvestingprincipalfromagencydebt tives,theCommitteeseeksconditionsinreserve andMBSinTreasurysecuritiescouldsendaninap- marketsconsistentwithfederalfundstradingin propriatesignaltoinvestorsabouttheCommittee’s arangefrom0to1∕ 4 percent.TheCommittee readinesstoresumelarge-scaleassetpurchases. directstheDesktomaintainthetotalfacevalue Anothermemberarguedthatreinvestingrepayments of domesticsecuritiesheldintheSystemOpen of principalfromagencydebtandMBS,thereby MarketAccountatapproximately$2trillionby postponingareductioninthesizeof theFederal reinvestingprincipalpaymentsfromagencydebt Reserve’sbalancesheet,waslikelytocomplicatethe andagencymortgage-backedsecuritiesin eventualexitfromtheperiodof exceptionallyaccom- longer-termTreasurysecurities.TheCommittee modativemonetarypolicyandcouldhaveadverse directstheDesktoengageindollarrollandcoumacroeconomicconsequencesinfutureyears. ponswaptransactionsasnecessarytofacilitate settlementof theFederalReserve’sagencyMBS Allbutonememberconcludedthatitwouldbe transactions.TheSystemOpenMarketAccount appropriatetobeginreinvestingprincipalreceived ManagerandtheSecretarywillkeeptheComfromagencydebtandMBSheldintheSOMAby mitteeinformedof ongoingdevelopments purchasinglonger-termTreasurysecuritiesinorder regardingtheSystem’sbalancesheetthatcould tokeepconstantthefacevalueof securitiesheldin affecttheattainmentovertimeof theCommittheSOMAandthusavoidtheupwardpressureon tee’sobjectivesof maximumemploymentand longer-terminterestratesthatmightresultif those pricestability.” holdingswereallowedtodecline.Severalmembers emphasizedthatinadditiontocontinuingtodevelop Thevoteencompassedapprovalof thestatement andtestinstrumentstofacilitateaneventualexit belowtobereleasedat2:15p.m.: fromtheperiodof unusuallyaccommodativemonetarypolicy,theCommitteewouldneedtoconsider “InformationreceivedsincetheFederalOpen stepsitcouldtaketoprovideadditionalpolicystimu- MarketCommitteemetinJuneindicatesthat lusif theoutlookweretoweakenappreciablyfurther. thepaceof recoveryinoutputandemployment Giventhesoftertoneof recentdataandthemore hasslowedinrecentmonths.Householdspendmodestnear-termoutlook,membersagreedthat ingisincreasinggradually,butremainsconsomechangestothestatement’scharacterizationof strainedbyhighunemployment,modestincome theeconomicandfinancialsituationwerenecessary. growth,lowerhousingwealth,andtightcredit. Allmembersbutonejudgedthatitwasappropriate Businessspendingonequipmentandsoftwareis toreiteratetheexpectationthateconomiccondi- rising;however,investmentinnonresidential tions—includinglowlevelsof resourceutilization, structurescontinuestobeweakandemployers subduedinflationtrends,andstableinflationexpec- remainreluctanttoaddtopayrolls.Housing tations—werelikelytowarrantexceptionallylowlev- startsremainatadepressedlevel.Banklending elsof thefederalfundsrateforanextendedperiod. hascontinuedtocontract.Nonetheless,the Onememberarguedthattherecoverywasproceed- Committeeanticipatesagradualreturnto ingaboutasoutlinedearlierthisyearandthatstart- higherlevelsof resourceutilizationinacontext ingagradualprocessof removingpolicyaccommo- of pricestability,althoughthepaceof economic dationfairlysoonwouldbetterfostertheCommit- recoveryislikelytobemoremodestinthenear tee’slong-runobjectivesof maximumemployment termthanhadbeenanticipated. andpricestability. Measuresof underlyinginflationhavetrended Attheconclusionof thediscussion,theCommittee lowerinrecentquartersand,withsubstantial votedtoauthorizeanddirecttheFederalReserve resourceslackcontinuingtorestraincostpres- Bankof NewYork,untilitwasinstructedotherwise, suresandlonger-terminflationexpectations toexecutetransactionsintheSystemAccountin stable,inflationislikelytobesubduedforsome accordancewiththefollowingdomesticpolicy time. directive:

250 97thAnnualReport|2010 TheCommitteewillmaintainthetargetrange Mr.Hoenigdissentedbecausehethoughtitwasnot forthefederalfundsrateat0to1∕ 4 percentand appropriatetoindicatethateconomicandfinancial continuestoanticipatethateconomiccondi- conditionswere“likelytowarrantexceptionallylow tions,includinglowratesof resourceutilization, levelsof thefederalfundsrateforanextended subduedinflationtrends,andstableinflation period”ortoreinvestprincipalpaymentsfrom expectations,arelikelytowarrantexceptionally agencydebtandagencymortgage-backedsecurities lowlevelsof thefederalfundsrateforan inlonger-termTreasurysecurities.Mr.Hoenigfelt extendedperiod. thatthe“extendedperiod”expectationcouldlimit theCommittee’sflexibilitytobeginraisingrates Tohelpsupporttheeconomicrecoveryinacon- modestlyinatimelyfashion,andhebelievedthatthe textof pricestability,theCommitteewillkeep recovery,whichhadentereditssecondyearandwas constanttheFederalReserve’sholdingsof secu- expectedtocontinueatamoderatepace,didnot ritiesattheircurrentlevelbyreinvestingprinci- requiresupportfromadditionalaccommodationin palpaymentsfromagencydebtandagency monetarypolicy.Mr.Hoenigwasalsoconcernedthat mortgage-backedsecuritiesinlonger-term theseaccommodativepolicypositionscouldresultin Treasurysecurities.1TheCommitteewillcon- thebuildupof futurefinancialimbalancesand tinuetorollovertheFederalReserve’sholdings increasetheriskstolonger-runmacroeconomicand of Treasurysecuritiesastheymature. financialstability. TheCommitteewillcontinuetomonitorthe Itwasagreedthatthenextmeetingof theCommittee economicoutlookandfinancialdevelopments wouldbeheldonTuesday,September21,2010.The andwillemployitspolicytoolsasnecessaryto meetingadjournedat1:35p.m.onAugust10,2010. promoteeconomicrecoveryandpricestability. 1TheOpenMarketDeskwillissueatechnicalnoteshortly Notation Vote afterthestatementprovidingoperationaldetailsonhowit willcarryoutthesetransactions.” BynotationvotecompletedonJuly13,2010,the Committeeunanimouslyapprovedtheminutesof the Votingforthisaction:BenBernanke,WilliamC. FOMCmeetingheldonJune22–23,2010. Dudley,JamesBullard,ElizabethDuke,DonaldL. Kohn,SandraPianalto,EricRosengren,DanielK. Tarullo,andKevinWarsh. WilliamB.English Secretary Votingagainstthisaction:ThomasM.Hoenig.

Minutesof FederalOpenMarketCommitteeMeetings 251 Meeting Held on September 21, 2010 AlanD.Barkema,JamesA.Clouse, ThomasA.Connors,Jeff Fuhrer,StevenB.Kamin, LawrenceSlifman,MarkS.Sniderman, Ajointmeetingof theFederalOpenMarketCom- ChristopherJ.Waller,andDavidW.Wilcox mitteeandtheBoardof Governorsof theFederal AssociateEconomists ReserveSystemwasheldintheofficesof theBoard of GovernorsinWashington,D.C.,onTuesday,Sep- BrianSack,Manager tember21,2010,at8:00a.m. SystemOpenMarketAccount JenniferJ.Johnson Present Secretaryof theBoard,Officeof theSecretary, BenBernanke Boardof Governors Chairman CharlesS.Struckmeyer WilliamC.Dudley DeputyStaff Director,Officeof theStaff Director, ViceChairman Boardof Governors JamesBullard MaryannF.Hunter DeputyDirector,Divisionof BankingSupervision ElizabethDuke andRegulation,Boardof Governors ThomasM.Hoenig WilliamNelson SandraPianalto DeputyDirector,Divisionof MonetaryAffairs, EricRosengren Boardof Governors DanielK.Tarullo LindaRobertson AssistanttotheBoard,Officeof BoardMembers, KevinWarsh Boardof Governors ChristineCumming,CharlesL.Evans, DavidReifschneiderandWilliamWascher RichardW.Fisher,NarayanaKocherlakota, SeniorAssociateDirectors,Divisionof Researchand andCharlesI.Plosser Statistics,Boardof Governors AlternateMembersof theFederalOpenMarket Committee EricM.EngenandMichaelG.Palumbo DeputyAssociateDirectors,Divisionof Researchand JeffreyM.Lacker,DennisP.Lockhart,and Statistics,Boardof Governors JanetL.Yellen Presidentsof theFederalReserveBanksof BrianJ.Gross Richmond,Atlanta,andSanFrancisco,respectively SpecialAssistanttotheBoard,Officeof Board Members,Boardof Governors WilliamB.English SecretaryandEconomist DavidH.Small ProjectManager,Divisionof MonetaryAffairs, DeborahJ.Danker Boardof Governors DeputySecretary JenniferE.Roush MatthewM.Luecke SeniorEconomist,Divisionof MonetaryAffairs, AssistantSecretary Boardof Governors DavidW.Skidmore PenelopeA.Beattie AssistantSecretary AssistanttotheSecretary,Officeof theSecretary, MichelleA.Smith Boardof Governors AssistantSecretary RandallA.Williams ScottG.Alvarez RecordsManagementAnalyst,Divisionof Monetary GeneralCounsel Affairs,Boardof Governors ThomasC.Baxter GordonWerkema DeputyGeneralCounsel FirstVicePresident,FederalReserveBank NathanSheets of Chicago Economist HarveyRosenblumandDanielG.Sullivan DavidJ.Stockton ExecutiveVicePresidents,FederalReserveBanks Economist of DallasandChicago,respectively

252 97thAnnualReport|2010 DavidAltig,JohnA.Weinberg,andKei-MuYi mutualfundsthathavebeenacceptedascounterpar- SeniorVicePresidents,FederalReserveBanksof tiesforreverserepurchaseoperations.TheManager Atlanta,Richmond,andMinneapolis,respectively alsodiscussedplanstopublishanewsetof criteria thatwouldallowabroadersetof moneymarket ChrisBurke,JohnFernald,JamesM.Nason fundstobecomeeligiblecounterparties.Therewere VicePresidents,FederalReserveBanksof NewYork, noopenmarketoperationsinforeigncurrenciesfor SanFrancisco,andPhiladelphia,respectively theSystem’saccountovertheintermeetingperiod. GautiB.Eggertsson Byunanimousvote,theCommitteeratifiedthe ResearchOfficer,FederalReserveBankof NewYork Desk’stransactionsovertheintermeetingperiod. Byunanimousvote,theCommitteeselectedDeborah Staff Review of the Economic Situation J.DankertoserveasDeputySecretaryuntilthe selectionof asuccessoratthefirstregularlysched- TheinformationreviewedattheSeptember21meetuledmeetingof theCommitteein2011. ingindicatedthatthepaceof theeconomicexpansionslowedinrecentmonthsandthatinflation Developments in Financial Markets and remainedlow.Privatebusinessesincreasedemploythe Federal Reserve’s Balance Sheet mentmodestlyinAugust,butthelengthof theworkweekwasunchangedandtheunemploymentrate TheManagerof theSystemOpenMarketAccount remainedelevated.Industrialproductionadvancedat (SOMA)reportedondevelopmentsindomesticand asolidpaceinJulyandrosefurtherinAugust.Conforeignfinancialmarketsduringtheperiodsincethe sumerspendingcontinuedtoincreaseatamoderate CommitteemetonAugust10,2010.Healsoreported rateinJulyandappearedtomoveupagainin onSystemopenmarketoperationsduringtheinter- August.Theriseinbusinessoutlaysforequipment meetingperiod,includingtheimplementationof the andsoftwarelookedtohavemoderatedrecentlyfol- Committee’sdecisionattheAugustmeetingtorein- lowingoutsizedgainsinthefirsthalf of theyear. vestprincipalpaymentsonagencydebtandagency Housingactivityweakenedfurther,andnonresidenmortgage-backedsecurities(MBS)inlonger-term tialconstructionremaineddepressed.Afterfallingin Treasurysecurities.FollowingtheAugustmeeting, thepreviousthreemonths,headlineconsumerprices theOpenMarketDeskattheFederalReserveBank roseinJulyandAugustasenergypricesretraced of NewYorkannouncedthatpurchaseoperations someof theirearlierdeclinewhilepricesforcore wouldfollowaschedulethatwouldbereleasedinthe goodsandservicesedgedupslightly. middleof eachmonth,withtheamountscalibrated tooffsettheamountof principalpaymentsfrom Thelabormarketsituationcontinuedtoimprove agencydebtandagencyMBSexpectedtobereceived onlyslowly.Theaveragemonthlyincreaseinprivate fromthemiddleof themonthtothemiddleof the payrollemploymentoverthethreemonthsendingin followingmonth.TheDeskconducted12such Augustwassmallandwaslessthantheaveragegain operationsovertheintermeetingperiodandpur- earlierintheyear.Moreover,averageweeklyhoursof chasedabout$28billionof Treasurysecurities,with allemployeeswerelittlechanged,onnet,inrecent maturitiesconcentratedinthe2-to10-yearsectorof monthsafterrisingduringthefirsthalf of theyear. thenominalTreasurycurve,althoughpurchaseswere TheunemploymentratetickedupinAugustand madeacrossboththenominalandinflation- remainedclosetothelevelthathasprevailedsince protectedTreasurycouponyieldcurves.TheMan- thebeginningof thisyear.ThelaborforceparticipaageralsobriefedtheCommitteeonprogressindevel- tionratemovedupalittleinAugustbutwasstilllow. opingtemporaryreservedrainingtools.Overthe Initialclaimsforunemploymentinsuranceremained intermeetingperiod,theFederalReserveannounced atanelevatedlevelovertheintermeetingperiod.In ascheduleforongoingsmall-valueauctionsof term addition,otherindicatorsof labordemand,suchas deposits.Theauctions,whichwillbeheldaboutevery measuresof hiringandjobvacancies,didnot othermonth,areintendedtoensuretheoperational improve. readinessof thetermdepositfacilityandtoincrease thefamiliarityof eligibleparticipantswiththeauc- IndustrialproductionincreasedsolidlyinJulyand tionprocedures.Inaddition,theDeskcontinuedto thenrosemoremoderatelyinAugust.Manufacturing conductsmall-scaletri-partyreverserepurchase productionwasboostedinJulybyapickupinmotor operationsusingMBScollateralwiththeprimary vehicleassembliesasautomakersreplenishedlean dealers,anditpublishedalistof moneymarket stocksatdealers.However,theproductionof motor

Minutesof FederalOpenMarketCommitteeMeetings 253 vehicleswasparedbackinAugust.Morebroadly,the decreasedinthesecondquarterbutataslowerpace outputof high-technologyitemsandotherbusiness thanovertheprecedingyear.Increasesinspending equipmentexpandedatasolidpaceinJulyand fordrillingandminingstructuresweremorethanoff- August.Theoutputof utilitiesdeclinedoverthepast setbycontinueddeclinesinoutlaysforothertypesof twomonthsafteritwasboostedbyunseasonablyhot nonresidentialbuildings.Despitesomeindications weatherintheprecedingtwomonths.Capacityutili- thatthedifficultfinancialconditionsincommercial zationinmanufacturingtickedupfurtherinAugust realestatemarketsmightbestabilizing,creditwas fromitsmid-2009low,butitwasstillsubstantially stilltightandvacancyratesforofficeandcommercial belowitslonger-runaverage. spaceremainedhigh.Inthesecondquarter,businessesappearedtobuildtheirinventoriesatafaster Realpersonalconsumptionexpendituresrosemod- pacethanearlierintheyear,butratiosof inventories estlyinJuly,similartotheaverageincreaseoverthe tosalesformostindustriesdidnotpointtoanysizprecedingtwomonths.Dataforretailsalesandthe ableoverhangs. salesof lightmotorvehiclespointedtoamoderate gaininrealconsumerspendinginAugust.Realdis- Inflationremainedsubduedinrecentmonths.HeadposablepersonalincomedeclinedabitinJulyafter lineconsumerpricesroseinJulyandAugustas increasingatasolidpaceinthesecondquarter.The energypricesreboundedaftertheirdeclineoverthe personalsavingrateedgeddowninJulybutremained previousthreemonths.Atthesametime,pricesfor nearthehighlevelregisteredinthesecondquarter. coregoodsandservicesmovedupslightly.Atearlier Indicatorsof householdnetworthweremixed;home stagesof production,producerpricesof coreinterpricesmoveddowninJuly,whileequitypricesinched mediatematerialsmoveddown,onnet,duringJuly up,onbalance,overtheintermeetingperiod.After andAugustwhilemostindexesof spotcommodity fallingbackinJuly,consumerconfidenceremained pricesincreased.Surveymeasuresof short-andlongdownbeatinAugustandearlySeptember,with terminflationexpectationswereessentially householdsmorepessimisticabouttheoutlookfor unchanged. theirpersonalfinancialsituationsandgeneraleconomicconditions. Unitlaborcostsattheendof thesecondquarter remainedbelowtheirleveloneyearearlier,aslabor Housingactivity,whichhadbeensupportedearlierin compensationcontinuedtoincreaseonlyslowlyand theyearbytheavailabilityof homebuyertaxcredits, laborproductivitystayednearitsrecenthighlevel. softenedfurtherinJuly.Salesof newsingle-family Hourlylaborcompensation—asmeasuredbycomhomesremainedatadepressedlevel.Salesof existing pensationperhourinthenonfarmbusinesssector homesfellsubstantiallyinJuly,andtheindexof andtheemploymentcostindex—rosemodestlydurpendinghomesalessuggestedthatsalesweremuted ingtheyearendinginthesecondquarter.More inAugust.Startsof newsingle-familyhousesinJuly recently,theyear-over-yearchangeinaveragehourly andAugustwerebelowthelowlevelseeninJune, earningsof allemployeesinJulyandAugust andthenumberof newpermitsissuedinAugust remainedsubdued.Whileoutputperhourinthe appearedtosignalthatlittleimprovementinnew nonfarmbusinesssectordeclinedinthesecondquarhomebuildingwaslikelyinSeptember.Houseprices terfollowinglargeincreasesintheprecedingthree declinedmodestlyinJulyafterchanginglittle,onnet, quarters,productivitywasstillwellaboveitslevelone inrecentmonths.Theinterestratefor30-yearfixed- yearearlier. rateconformingmortgagesremainedessentially unchangedovertheintermeetingperiodatahistori- TheU.S.internationaltradedeficitnarrowedinJuly callylowlevel. afterwideninginJune.TheriseinexportsinJuly morethanoffsettheirdeclineinJune,asoverseas Realbusinessspendingonequipmentandsoftware salesof capitalgoodsrosesharply.Mostothermajor appearedtohaveslowedinJulyafterexpandingrap- categoriesof exportswerelittlechangedinJuly, idlyovertheprecedingthreequarters.Bothnew althoughexportsof automotiveproductsposted ordersandshipmentsof nondefensecapitalgoods theirfirstdeclinesinceMay2009.Thenarrowingof excludingaircraftdippedinJuly.Moreover,survey thetradedeficitinJulyalsoreflectedabroad-based indicatorsof businessconditionssoftenedfurtherin declineinimportsfollowingtheirlargeincreasein August.Incomingconstructiondataindicatedthat June.Importsof consumergoodsfellsubstantiallyin businessinvestmentinnonresidentialstructures July,whileimportsof industrialsupplies,capital

254 97thAnnualReport|2010 goods,andautomotiveproductsalsomoveddown. YieldsonnominalTreasurycouponsecuritieswere Incontrast,importsof petroleumproductsremained volatileandendedtheperiodsomewhatlower,paraboutflatinJuly. ticularlyforintermediate-andlonger-termmaturities.InadditiontoFederalReservecommunications Increasesinforeigneconomicactivitywererobust, andnewsabouttheeconomicoutlook,marketparonaverage,inthesecondquarter.Inparticular,gross ticipantspointedtostrongdemandforlong-duration domesticproduct(GDP)grewstronglyintheemerg- assetsbyinstitutionalinvestorsandspeculation ingmarketeconomies,eventhoughgainsinChina aboutadditionallarge-scaleassetpurchasesbythe apparentlymoderated.Amongtheadvancedforeign FederalReserveasfactorscontributingtothedropin economies,Europepostedanotableriseineconomic longer-termyields.Five-yearinflationcompensation activityinthesecondquarter;rapidexpansionin basedonTreasuryinflation-protectedsecurities Germanymorethanoffsetweakeroutcomesinother (TIPS)fell,whileforwardinflationcompensation euro-areaeconomies,particularlythoseexperiencing 5to10yearsaheadedgedup,onnet,overtheinterfinancialstressrelatedtoconcernsabouttheirfiscal meetingperiodbutremainedatalowerlevelthanin situationsandpotentialvulnerabilitiesintheirbank- thespring.Treasuryauctionsovertheintermeeting ingsectors.InCanadaandJapan,theriseinreal periodweregenerallywellreceived.Yieldson GDPslowednoticeablyinthesecondquarter.Recent investment-andspeculative-gradecorporatebonds indicatorsof foreigneconomicactivityforthethird movedroughlyinlinewiththoseoncomparablequarter,includingdataonexports,production,and maturityTreasurysecurities,leavingriskspreadslittle purchasingmanagersindexes,generallypointedtoa changed.Measuresof liquidityinsecondarymarkets slowinginthepaceof expansionineconomicactivity forcorporatebondsremainedstable.Inthesecondabroad.Headlineinflationratesinforeigneconomies arymarketforsyndicatedleveragedloans,theavergenerallywererestrainedinthesecondquarterbya agebidpricemovedupandbid-askedspreadsedged decelerationinfoodandenergyprices,butprices down. appearedtoberisingabitmorerapidlyof late. Conditionsinshort-termfundingmarketscontinued Staff Review of the Financial Situation toimprovefollowingtherecentstressesrelatedto concernsaboutfinancialstabilityinEurope.Indollar ThedecisionbytheFederalOpenMarketCommittee fundingmarkets,spreadsof termLondoninterbank (FOMC)atitsAugustmeetingtomaintainthe0to offeredrates(orLibor)overthoseonovernightindex 1∕ 4 percenttargetrangeforthefederalfundsratewas swapsfellfurtheratmosthorizonsovertheinterwidelyanticipated,butTreasuryyieldsdeclinedas meetingperiod.Spreadsonunsecuredfinancialcominvestorsreportedlyfocusedontheindicationinthe mercialpaperwerelittlechangedatlowlevels.In accompanyingstatementthatprincipalpayments securedfundingmarkets,spreadsonasset-backed fromagencydebtandMBSintheFederalReserve’s commercialpaperremainednarrow,andrateson portfoliowouldbereinvestedinlonger-termTreasury repurchaseagreementsinvolvingvarioustypesof securitiesandalsoonthecharacterizationof theeco- collateralheldsteady.IntheSeptemberSeniorCredit nomicoutlook,whichwasseenassomewhatmore OfficerOpinionSurveyonDealerFinancingTerms downbeatthanexpected.Theexpectedpathof the (SCOOS),dealersindicated,onnet,thattheyloosfederalfundsratemoveddownearlyintheintermeet- enedcredittermsapplicabletoseveralimportant ingperiodinresponsetoweaker-than-expectedeco- classesof counterpartiesandtypesof collateralover nomicdata.TheChairman’sJacksonHolespeech thepastthreemonthsamidincreaseddemandfor wasreportedlyviewedbymarketparticipantsas fundingformosttypesof securitiescoveredinthe moreencouragingabouteconomicprospectsandas survey. providingmoreclarityaboutthepolicyoptionsavailabletotheFOMC,butitdidnothaveasustained BroadU.S.stockpriceindexesedgedup,onbalance, effectonpolicyexpectations.Theexpectedpathof overtheintermeetingperiod,andoption-implied thefederalfundsrateroseforatimefollowingthe volatilityontheS&P500indexwaslittlechangedon more-positive-than-expecteddataonmanufacturing net.Thespreadbetweenthestaff’sestimateof the activityandthelabormarketreleasedinearlySep- expectedrealreturnonequitiesoverthenext10years tember,butthepathendedtheintermeetingperiod andanestimateof theexpectedrealreturnona downonbalance. 10-yearTreasurynote—aroughmeasureof the

Minutesof FederalOpenMarketCommitteeMeetings 255 equityriskpremium—remainedatanelevatedlevel. typesof loansdroppedfurtherinrecentmonths, Bankstocksunderperformedthebroaderequity althoughtheyremainedelevated. marketandcontinuedtobemorevolatile,while creditdefaultswapspreadsforlargebankingorgani- BankcreditexpandedinAugust,reflectingsignifizationsedgedup.Thegreatervolatilityinbank cantpurchasesof Treasurysecuritiesandagency stocksreportedlyreflected,inpart,theeffectsof MBSbylargebanks.Bankloanscontinuedtocondomesticandinternationalfinancialregulatory tract,butthepaceof contractionslowednoticeably reformefforts. fromearlierintheyear.Commercialandindustrial loansroseslightlyinJuly,thefirstincreaseona NetdebtfinancingbyU.S.nonfinancialcorporations monthlybasissincelate2008,andheldsteadyin remainedrobustinAugust.Grossbondissuancewas August.Inaddition,holdingsof closed-endresidenstrong,apatternthatappearedtopersistintothe tialmortgageloansexpandedmoderatelyinAugust, firstpartof September.Meanwhile,nonfinancial reportedlyspurredbyrefinancingactivity.However, commercialpaperoutstandingcontractedasverylow bothhomeequityloansandcommercialrealestate yieldsoncorporatebondsledtosomesubstitution loanscontractedfurtherinAugust,whileconsumer towardlonger-termdebt.Measuresof thecredit loansfellsharply. qualityof nonfinancialcorporationsremainedsolid. Thepaceof initialpublicofferingsandseasoned OnaverageoverJulyandAugust,M2expandedata equityofferingsbynonfinancialfirmsslowedin rateslightlyaboveitspaceinthesecondquarter.Liq- August,partlyreflectingtypicalseasonalpatterns. uiddepositsgrewfairlyrapidlyoverthetwomonths, reflectinginpartacompositionalshiftfromother Commercialrealestatemarketscontinuedtofacedif- lower-yieldingM2assets.Currencytrendedhigher, ficultfinancialconditions,althoughsomefurther whilesmalltimedepositsandretailmoneymarket signsemergedthatthissectormightbestabilizing. mutualfundscontractedfurther,asyieldsonthese Thepricesof commercialpropertiesappearedto assetsremainedatextremelylowlevels. haveedgedupinthefirsthalf of theyear,andthe volumeof commercialrealestatesalesroseagainin Inforeignmarkets,concernsabouttheglobaleco- August.Afewsmallcommercialmortgage-backed nomicoutlookpromptedsubstantialdropsinequity securities(CMBS)dealswereissuedovertheinter- pricesandbenchmarksovereignbondyieldsinmany meetingperiodandwerereportedlywellreceivedby countriesinAugust,andthedollarappreciated investors,consistentwithaneasingof conditionsand broadlyonsafe-havendemands.InSeptember,howrenewedinterestintheCMBSmarketsincethe ever,asbettereconomicnewsledtosomeimprovebeginningof theyearthatwasreportedinthe mentininvestorsentiment,equitypricesandbond SCOOS.Nonetheless,thevolumeof CMBSissuance yieldsmovedbackup,andthedollarretraceditsearin2010remainedquitelowcomparedwiththelevels lierappreciation.YieldspreadsrelativetoGerman seenbeforetheonsetof thefinancialcrisis,andtotal bundsonthe10-yearsovereignbondsof Greece,Irecommercialmortgagedebtcontinuedtocontract land,andPortugalwidenedtonear-recordlevelsover amidfurtherincreasesindelinquencyratesoncom- theperiod.Moreover,euro-areabankstockprices mercialmortgages. felloncontinuedconcernsabouttheconditionof sometroubledinstitutions. Forhouseholds,record-lowmortgageratessupportedarelativelyhighlevelof refinancingactivity, Withtheyenata15-yearhighagainstthedollarin butmanyborrowersreportedlyremainedunableto nominalterms,Japan’sMinistryof Financeinterrefinancebecauseof insufficienthomeequityorpoor venedincurrencymarketsonSeptember15tobuy credithistories.Consumercreditdeclinedinthesec- dollarsagainstyen,andtheBankof Japan(BOJ) ondquarterandappearedtocontractfurtherinJuly. notedthatitwouldcontinuetoprovideampleliquid- Issuanceof consumerasset-backedsecuritiesin ity.Inreaction,theyendepreciatedabout3percent Augustproceededatamoderatepacethatwassimi- againstthedollar,essentiallyreversingitsriseover lartothatpostedinJuly.Spreadsof interestrateson theprecedingpartof theintermeetingperiod.The consumerloansrelativetotheyieldonthetwo-year EuropeanCentralBank(ECB)saidthatitwould Treasurynotewerelittlechangedonbalance.The continuetoprovidetermliquiditybyofferingseveral creditqualityof consumerloanscontinuedto morefull-allotmentthree-monthrefinancingoperaimprove;delinquencyandcharge-off ratesformost tionsthroughtheendof theyear.Incontrasttothe

256 97thAnnualReport|2010 continuedaccommodativestanceof theECBandthe forsometime.Participantsnotedanumberof fac- BOJ,theBankof Canadaincreaseditstargetforthe torsthatwererestraininggrowth,includinglowlevels overnightrateby25basispointsto1percent,its of householdandbusinessconfidence,heightened thirdhikesinceJune.Severalothercentralbanks riskaversion,andthestillweakfinancialconditions tightenedmonetarypolicyovertheintermeeting of somehouseholdsandsmallfirms.Afewparticiperiod,includingthoseof Chile,India,Indonesia, pantsnotedthateconomicrecoverieswereoften Sweden,andThailand. unevenandweretypicallyslowfollowingdownturns triggeredbyfinancialcrises.Anumberof partici- Staff Economic Outlook pantsobservedthatthesluggishpaceof growthand continuedhighlevelsof slacklefttheeconomy IntheeconomicforecastpreparedfortheSeptember exposedtopotentialnegativeshocks.Nevertheless, FOMCmeeting,thestaff lowereditsprojectionfor participantsjudgedtheeconomicrecoverytobecontheincreaseinrealeconomicactivityoverthesecond tinuingandgenerallyexpectedgrowthtopickup half of 2010.Thestaff alsoreducedslightlyitsfore- graduallynextyear. castof growthnextyearbutcontinuedtoanticipatea moderatestrengtheningof theexpansionin2011as Indicatorsof spendingbybusinessesandhouseholds wellasafurtherpickupineconomicgrowthin2012. weremixed.Severalparticipantsobservedthatdata Thesoftertoneof incomingeconomicdatasug- onretailsaleshadbeenabitstrongerthanexpected gestedthattheunderlyinglevelof demandwas overtheintermeetingperiod,althoughbusinessconweakerthanprojectedatthetimeof theAugust tactsindicatedthatshoppersremainedverypricesenmeeting.Moreover,theoutlookforforeigneconomic sitive.Thereweresomereportsof retailerscautiously activityalsoappearedabitweaker.Inthemedium boostinginventoriesaheadof theholidayseasonby term,therecoveryineconomicactivitywasexpected somewhatmorethantheydidayearago.Housetoreceivesupportfromaccommodativemonetary holdswerecontinuingeffortstorepairtheirbalance policy,furtherimprovementsinfinancialconditions, sheetsbysavingmoreandpayingdowndebt.Particiandgreaterhouseholdandbusinessconfidence.Over pantsnotedthatelevateduncertaintyaboutemploytheforecastperiod,theincreaseinrealGDPwaspro- mentprospectscontinuedtoweighonconsumption jectedtobesufficienttoslowlyreduceeconomic spending.Manybusinesseshadbuiltuplarge slack,althoughresourceslackwasanticipatedtostill reservesof cash,inpartbyissuinglong-termdebt, remainelevatedattheendof 2012. butwererefrainingfromaddingworkersorexpandingplantsandequipment.Anumberof business Overallinflationwasprojectedtoremainsubdued, contactsindicatedthattheywereholdingbackon withthestaff’sforecastsforheadlineandcoreinfla- hiringandspendingplansbecauseof uncertainty tionlittlechangedfromthepreviousprojection.The aboutfuturefiscalandregulatorypolicies.However, currentandprojectedwidemarginsof economic businessesalsoindicatedthatconcernsaboutactual slackwereexpectedtocontributetoasmallslowing andanticipateddemandwereimportantfactorslimincoreinflationin2011,whichwasanticipatedtobe itinginvestmentandhiring.Businessesreportedcontemperedbystableinflationexpectations.Inflation tinuedstrongforeigndemandfortheirproducts,parwasprojectedtochangelittlein2012,asconsiderable ticularlyfromAsia. economicslackwasexpectedtoremainevenaseconomicactivitywasanticipatedtostrengthen. Participantsnotedthatthehousingsector,including residentialconstructionandhomesales,continuedto Participants’ Views on Current Conditions beveryweak.Despiteeffortsaimedatmitigation, and the Economic Outlook foreclosurescontinuedtoaddtotheelevatedsupply of availablehomes,puttingdownwardpressureon Intheirdiscussionof theeconomicsituationand homepricesandhousingconstruction. outlook,meetingparticipantsgenerallyagreedthat theincomingdataindicatedthatoutputandemploy- Financialdevelopmentsweremixedovertheintermentwereincreasingonlyslowlyandatrateswell meetingperiod.Banksremainedgenerallycautious belowthoserecordedearlierintheyear.Although anduncertainabouttheregulatoryoutlook, participantsconsidereditunlikelythattheeconomy althoughinvestorsappearedconfidentthatU.S. wouldreenterarecession,manyexpressedconcern bankscouldmeetthenewinternationalstandardsfor thatoutputgrowth,andtheassociatedprogressin bankcapitalandliquiditythatwereannouncedover reducingthelevelof unemployment,couldbeslow theintermeetingperiod.Improvinghouseholdfinan-

Minutesof FederalOpenMarketCommitteeMeetings 257 cialconditionswerecontributingtobetterconsumer changedlittle,onnet,overtheintermeetingperiod loanperformance,andcreditproblemsmorebroadly andthatanalysisof thecomponentsof priceindexes appearedtohavemostlypeaked,althoughbanks suggesteddisinflationmightbeabating.However, continuedtoreportelevatedlossesoncommercial TIPS-basedinflationcompensationhaddeclined,on realestateloans,especiallyconstructionandland balance,inrecentquarters.Whileunderlyinginfladevelopmentloans.Creditremainedreadilyavailable tionremainedsubdued,participantssawonlysmall forlargercorporationswithaccesstofinancialmar- oddsof deflation. kets,andthereweresomesignsthatcreditconditions hadbeguntoimproveforsmallerfirms.Assetprices Participantsdiscussedthemedium-termoutlookfor hadbeenrelativelysensitivetoincomingeconomic monetarypolicyandissuesrelatedtomonetary dataovertheintermeetingperiodbutgenerallyended policyimplementation.Manyparticipantsnotedthat theperiodlittlechangedonnet.StressesinEuropean if economicgrowthremainedtooslowtomakesatisfinancialmarketsremainedbroadlycontainedbut factoryprogresstowardreducingtheunemployment borewatchinggoingforward. rateorif inflationcontinuedtocomeinbelowlevels consistentwiththeFOMC’sdualmandate,itwould Anumberof participantsnotedthatthecurrentslug- beappropriatetoprovideadditionalmonetarypolicy gishpaceof employmentgrowthwasinsufficientto accommodation.However,othersthoughtthataddireduceunemploymentatasatisfactorypace.Several tionalaccommodationwouldbewarrantedonlyif participantsreportedfeedbackfrombusinesscon- theoutlookworsenedandtheoddsof deflation tactswhoweredelayinghiringuntiltheeconomic increasedmaterially.Meetingparticipantsdiscussed andregulatoryoutlookbecamemorecertain.Partici- severalpossibleapproachestoprovidingadditional pantsdiscussedthepossibleextenttowhichthe accommodationbutfocusedprimarilyonfurther unemploymentratewasbeingboostedbystructural purchasesof longer-termTreasurysecuritiesandon factorssuchasmismatchesbetweentheskillsof the possiblestepstoaffectinflationexpectations.Particiworkerswhohadlosttheirjobsandtheskillsneeded pantsreviewedthelikelybenefitsandcostsassociated inthesectorsof theeconomywithvacancies,the withaprogramof purchasingadditionallonger-term inabilityof theunemployedtorelocatebecausetheir assets—withsomenotingthattheeconomicbenefits homeswereworthlessthantheirmortgages,andthe couldbesmallincurrentcircumstances—aswellas effectsof extendedunemploymentbenefits.Partici- thebestmeanstocalibrateandimplementsuchpurpantsagreedthatfactorslikethesewerepushingthe chases.Anumberof participantscommentedonthe unemploymentrateup,buttheydifferedintheir importantroleof inflationexpectationsformonetary assessmentsof theextentof sucheffects.Neverthe- policy:Withshort-termnominalinterestratesconless,manyparticipantssawevidencethatthecurrent strainedbythezerobound,adeclineinshort-term unemploymentratewasconsiderablyabovelevels inflationexpectationsincreasesshort-termrealinterthatcouldbeexplainedbystructuralfactorsalone, estrates(thatis,thedifferencebetweennominal pointing,forexample,todeclinesinemployment interestratesandexpectedinflation),therebydampacrossawiderangeof industriesduringthereces- ingaggregatedemand.Conversely,insuchcircumsion,jobvacancyratesthatwererelativelylow,and stances,anincreaseininflationexpectationslowers reportsthatweakdemandforgoodsandservices short-termrealinterestrates,stimulatingthe remainedakeyreasonwhyfirmswereadding economy.Participantsnotedanumberof possible employeesonlyslowly. strategiesforaffectingshort-terminflationexpectations,includingprovidingmoredetailedinformation Inflationhaddeclinedsincethestartof therecession, abouttheratesof inflationtheCommitteeconsidandmostparticipantsindicatedthatunderlyinginfla- eredconsistentwithitsdualmandate,targetinga tionwasatlevelssomewhatbelowthosethatthey pathforthepricelevelratherthantherateof inflajudgedtobeconsistentwiththeCommittee’sdual tion,andtargetingapathforthelevelof nominal mandateformaximumemploymentandpricestabil- GDP.Asageneralmatter,participantsfeltthatany ity.Althoughpricesof somecommoditiesand neededpolicyaccommodationwouldbemosteffecimportedgoodshadrisenrecently,manybusiness tiveif enactedwithinaframeworkthatwasclearly contactsreportedthattheycurrentlyhadlittlepric- communicatedtothepublic.Theminutesof FOMC ingpowerandthattheyanticipatedlimited,if any, meetingswereseenasanimportantchannelforcomincreasesinlaborcosts.Meetingparticipantsnoted municatingparticipants’viewsaboutmonetary thatseveralmeasuresof inflationexpectationshad policy.

258 97thAnnualReport|2010 Committee Policy Action appropriatebeforelong,butalsomadeclearthatany decisionswoulddependuponfutureinformation Intheirdiscussionof monetarypolicyfortheperiod abouttheeconomicsituationandoutlook. immediatelyahead,nearlyallof theCommittee membersagreedthatitwouldbeappropriateto Attheconclusionof thediscussion,theCommittee maintainthetargetrangeforthefederalfundsrateof votedtoauthorizeanddirecttheFederalReserve 0to1∕ 4 percentandtoleaveunchangedthelevelof Bankof NewYork,untilitwasinstructedotherwise, thecombinedholdingsof Treasury,agencydebt,and toexecutetransactionsintheSystemAccountin agencymortgage-backedsecuritiesintheSOMA. accordancewiththefollowingdomesticpolicy Althoughmanymembersconsideredtherecentand directive: anticipatedprogresstowardmeetingtheCommittee’s mandateof maximumemploymentandpricestabil- “TheFederalOpenMarketCommitteeseeks itytobeunsatisfactory,membersobservedthat monetaryandfinancialconditionsthatwillfosincomingdataovertheintermeetingperiodindicated terpricestabilityandpromotesustainable thattheeconomicrecoverywascontinuing,albeit growthinoutput.Tofurtheritslong-runobjecslowly.Moreover,thedatahadbeenmixed,with tives,theCommitteeseeksconditionsinreserve readingsearlyintheperiodgenerallyweakerthan marketsconsistentwithfederalfundstradingin anticipatedbutthemore-recentdatacominginon arangefrom0to1∕ 4 percent.TheCommittee thestrongsideof expectations.Inlightof theconsid- directstheDesktomaintainthetotalfacevalue erableuncertaintyaboutthecurrenttrajectoryforthe of domesticsecuritiesheldintheSystemOpen economy,somememberssawmeritinaccumulating MarketAccountatapproximately$2trillionby furtherinformationbeforereachingadecisionabout reinvestingprincipalpaymentsfromagencydebt providingadditionalmonetarystimulus.Inaddition, andagencymortgage-backedsecuritiesin memberswantedtoconsiderfurtherthemosteffec- longer-termTreasurysecurities.TheSystem tiveframeworkforcalibratingandcommunicating OpenMarketAccountManagerandtheSecreanyadditionalstepstoprovidesuchstimulus.Several tarywillkeeptheCommitteeinformedof ongomembersnotedthatunlessthepaceof economic ingdevelopmentsregardingtheSystem’sbalrecoverystrengthenedorunderlyinginflationmoved ancesheetthatcouldaffecttheattainmentover backtowardalevelconsistentwiththeCommittee’s timeof theCommittee’sobjectivesof maximum mandate,theywouldconsideritappropriatetotake employmentandpricestability.” actionsoon. Thevoteencompassedapprovalof thestatement Withrespecttothestatementtobereleasedfollowing belowtobereleasedat2:15p.m.: themeeting,membersagreedthatitwasappropriate toadjustthestatementtomakeitclearthatunderly- “InformationreceivedsincetheFederalOpen inginflationhadbeenrunningbelowlevelsthatthe MarketCommitteemetinAugustindicatesthat Committeejudgedtobeconsistentwithitsmandate thepaceof recoveryinoutputandemployment formaximumemploymentandpricestability,inpart hasslowedinrecentmonths.Householdspendtohelpanchorinflationexpectations.Nearlyall ingisincreasinggradually,butremainsconmembersagreedthatthestatementshouldreiterate strainedbyhighunemployment,modestincome theexpectationthateconomicconditionswerelikely growth,lowerhousingwealth,andtightcredit. towarrantexceptionallylowlevelsof thefederal Businessspendingonequipmentandsoftwareis fundsrateforanextendedperiod.Onemember,how- rising,thoughlessrapidlythanearlierinthe ever,believedthatcontinuingtocommunicatethat year,whileinvestmentinnonresidentialstrucexpectationintheCommittee’sstatementwouldcre- turescontinuestobeweak.Employersremain ateconditionsthatcouldleadtomacroeconomicand reluctanttoaddtopayrolls.Housingstartsare financialimbalances.Membersgenerallythought atadepressedlevel.Banklendinghascontinued thatthestatementshouldnotethattheCommittee tocontract,butatareducedrateinrecent waspreparedtoprovideadditionalaccommodation months.TheCommitteeanticipatesagradual if neededtosupporttheeconomicrecoveryandto returntohigherlevelsof resourceutilizationina returninflation,overtime,tolevelsconsistentwith contextof pricestability,althoughthepaceof itsmandate.Suchanindicationaccordedwiththe economicrecoveryislikelytobemodestinthe members’sensethatsuchaccommodationmaybe nearterm.

Minutesof FederalOpenMarketCommitteeMeetings 259 Measuresof underlyinginflationarecurrentlyat andthat,whilethezerointerestratepolicyand levelssomewhatbelowthosetheCommittee “extendedperiod”languagewereappropriateduring judgesmostconsistent,overthelongerrun,with thecrisisanditsimmediateaftermath,theywereno itsmandatetopromotemaximumemployment longerappropriatewiththerecoveryunderway.Mr. andpricestability.Withsubstantialresource Hoenigalsoemphasizedthat,inhisview,thecurrent slackcontinuingtorestraincostpressuresand highlevelsof unemploymentwerenotcausedbyhigh longer-terminflationexpectationsstable,infla- interestratesbutbyanextendedperiodof exceptiontionislikelytoremainsubduedforsometime allylowratesearlierinthedecadethatcontributedto beforerisingtolevelstheCommitteeconsiders thehousingbubbleandsubsequentcollapseand consistentwithitsmandate. recession.Hebelievedthatholdingratesartificially lowwouldinvitethedevelopmentof newimbalances TheCommitteewillmaintainthetargetrange andunderminelong-rungrowth.Hewouldprefer forthefederalfundsrateat0to1∕ 4 percentand removingthe“extendedperiod”languageandtherecontinuestoanticipatethateconomiccondi- aftermovingthefederalfundsrateupward,consistions,includinglowratesof resourceutilization, tentwithhisviewsatpastmeetingsthatitapproach subduedinflationtrends,andstableinflation 1percent,beforepausingtodeterminewhatfurther expectations,arelikelytowarrantexceptionally policyactionswereneeded.Also,givencurrentecolowlevelsforthefederalfundsrateforan nomicandfinancialconditions,Mr.Hoenigdidnot extendedperiod.TheCommitteealsowillmain- believethatcontinuingtoreinvestprincipalpayments tainitsexistingpolicyof reinvestingprincipal fromSOMAsecuritiesholdingswasrequiredtosuppaymentsfromitssecuritiesholdings. porttheCommittee’spolicyobjectives. TheCommitteewillcontinuetomonitorthe Itwasagreedthatthenextmeetingof theCommittee economicoutlookandfinancialdevelopments wouldbeheldonTuesday–Wednesday,Novemandispreparedtoprovideadditionalaccommo- ber2–3,2010.Themeetingadjournedat1:10p.m.on dationif neededtosupporttheeconomicrecov- September21,2010. eryandtoreturninflation,overtime,tolevels consistentwithitsmandate.” Notation Vote Votingforthisaction:BenBernanke,WilliamC. Dudley,JamesBullard,ElizabethDuke,SandraPian- BynotationvotecompletedonAugust30,2010,the alto,EricRosengren,DanielK.Tarullo,andKevin Committeeunanimouslyapprovedtheminutesof the Warsh. FOMCmeetingheldonAugust10,2010. Votingagainstthisaction:ThomasM.Hoenig. WilliamB.English Mr.Hoenigdissented,emphasizingthattheeconomy Secretary wasenteringthesecondyearof moderaterecovery

260 97thAnnualReport|2010 Meeting Held ThomasC.Baxter DeputyGeneralCounsel on November 2–3, 2010 NathanSheets Economist Ameetingof theFederalOpenMarketCommittee washeldintheofficesof theBoardof Governorsin DavidJ.Stockton Washington,D.C.,onTuesday,November2,2010,at Economist 1:00p.m.andcontinuedonWednesday,November3, JamesA.Clouse,ThomasA.Connors,Jeff Fuhrer, 2010,at9:00a.m. StevenB.Kamin,SimonPotter,LawrenceSlifman, ChristopherJ.Waller,andDavidW.Wilcox Present AssociateEconomists BenBernanke BrianSack Chairman Manager,SystemOpenMarketAccount WilliamC.Dudley PatrickM.Parkinson ViceChairman Director,Divisionof BankSupervisionand JamesBullard Regulation,Boardof Governors ElizabethDuke NellieLiang Director,Officeof FinancialStabilityPolicyand ThomasM.Hoenig Research,Boardof Governors SandraPianalto WilliamNelson SarahBloomRaskin DeputyDirector,Divisionof MonetaryAffairs, EricRosengren Boardof Governors DanielK.Tarullo LindaRobertson AssistanttotheBoard,Officeof BoardMembers, KevinWarsh Boardof Governors JanetL.Yellen CharlesS.Struckmeyer ChristineCumming,CharlesL.Evans, DeputyStaff Director,Officeof theStaff Director, RichardW.Fisher,NarayanaKocherlakota, Boardof Governors andCharlesI.Plosser SethB.CarpenterandAndrewT.Levin AlternateMembersof theFederalOpenMarket SeniorAssociateDirectors,Divisionof Monetary Committee Affairs,Boardof Governors JeffreyM.LackerandDennisP.Lockhart MichaelLeahy Presidentsof theFederalReserveBanksof SeniorAssociateDirector,Divisionof International RichmondandAtlanta,respectively Finance,Boardof Governors JohnF.Moore DavidReifschneider FirstVicePresident,FederalReserveBank SeniorAssociateDirector,Divisionof Researchand of SanFrancisco Statistics,Boardof Governors WilliamB.English StephenA.Meyer SecretaryandEconomist SeniorAdviser,Divisionof MonetaryAffairs, DeborahJ.Danker Boardof Governors DeputySecretary DanielM.CovitzandDavidE.Lebow MatthewM.Luecke DeputyAssociateDirectors,Divisionof Researchand AssistantSecretary Statistics,Boardof Governors DavidW.Skidmore GretchenC.Weinbach AssistantSecretary DeputyAssociateDirector,Divisionof Monetary MichelleA.Smith Affairs,Boardof Governors AssistantSecretary BrianJ.Gross ScottG.Alvarez SpecialAssistanttotheBoard,Officeof Board GeneralCounsel Members,Boardof Governors

Minutesof FederalOpenMarketCommitteeMeetings 261 MarkA.Carlson centratedinnominalTreasurysecuritieswithmaturi- Economist,Divisionof MonetaryAffairs, tiesof 2to10years,thoughsomeshorter-termand Boardof Governors somelonger-termsecuritieswerepurchasedalong withsomeTreasuryinflation-protectedsecurities RandallA.Williams (TIPS).Overtheintermeetingperiod,theDeskalso RecordsManagementAnalyst,Divisionof Monetary conductedanumberof small-valuetri-partyreverse Affairs,Boardof Governors repurchaseoperationswiththeprimarydealersand SarahG.Green withmoneymarketmutualfundsthathavebeen FirstVicePresident,FederalReserveBank acceptedascounterpartiesforsuchoperations;these of Richmond transactions,whichtheDeskconductedtoensure LorettaJ.Mester,HarveyRosenblum, continuingoperationalandsystemsreadiness,used DanielG.Sullivan,andJohnC.Williams Treasurysecurities,agencydebt,andagency- ExecutiveVicePresidents,FederalReserveBanksof guaranteedMBSascollateral.Inaddition,theFed- Philadelphia,Dallas,Chicago,andSanFrancisco, eralReserveconductedanothersmall-valueauction respectively of termdepositstoensurethecontinuedoperational readinessof thetermdepositfacilityandtoincrease DavidAltig,RichardP.Dzina,MarkE.Schweitzer, thefamiliarityof eligibledepositoryinstitutionswith andKei-MuYi theauctionprocedures.Therewerenoopenmarket SeniorVicePresidents,FederalReserveBanksof operationsinforeigncurrenciesfortheSystem’s Atlanta,NewYork,Cleveland,andMinneapolis, accountovertheintermeetingperiod.Byunanimous respectively vote,theCommitteeratifiedtheDesk’stransactions ToddE.Clark overtheintermeetingperiod. VicePresident,FederalReserveBankof KansasCity RobertL.Hetzel TheManagerdescribedthetentativeplanstheDesk SeniorEconomist,FederalReserveBank hadpreparedforimplementingapossibleCommittee of Richmond decisiontoexpandfurthertheSystem’sholdingsof longer-termTreasurysecurities.Purchaseswould Themeetingopenedwithashortdiscussionregard- continuetobeconcentratedinnominalTreasury ingcommunicatingwiththepublicaboutmonetary securitieswithremainingmaturitiesbetween2and policydeliberationsanddecisions.Meetingpartici- 10years,withsomepurchasesof shorter-andlongerpantssupportedareviewof theCommittee’scom- termsecuritiesandof TIPS;withthismaturitydistrimunicationguidelineswiththeaimof ensuringthat bution,newlypurchasedsecuritieswouldbeexpected thepubliciswellinformedaboutmonetarypolicy tohaveanaveragedurationof 5to6years,essenissueswhilepreservingthenecessaryconfidentiality tiallythesameastheaveragedurationof the of policydiscussionsuntiltheirscheduledrelease. System’sexistingholdingsof Treasurysecurities.The GovernorYellenagreedtochairasubcommitteeto Deskplannedtopublishadditionalinformation conductsuchareview. aboutitstransactionstoincreasethetransparencyof, andencouragewiderparticipationin,futurepur- Developments in Financial Markets and chaseoperations.TheDeskjudgedthatif itcontinthe Federal Reserve’s Balance Sheet uedreinvestingprincipalpaymentsfromtheFederal ReserveSystem’sholdingsof agencydebtandagency TheManagerof theSystemOpenMarketAccount MBSinlonger-termTreasurysecurities,thenitcould (SOMA)reportedondevelopmentsindomesticand purchaseadditionallonger-termTreasurysecurities foreignfinancialmarketssincetheCommitteemeton atapaceof about$75billionpermonthwhileavoid- September21,2010.HealsoreportedonSystem ingdisruptionsinmarketfunctioning.TheManager openmarketoperations,includingthecontinuing indicatedthatimplementingasizableincreaseinthe reinvestmentintolonger-termTreasurysecuritiesof System’sholdingsof TreasurysecuritiesmosteffecprincipalpaymentsreceivedontheSOMA’sholdings tivelylikelywouldentailatemporaryrelaxationof of agencydebtandagency-guaranteedmortgage- the35percentper-issuelimitonSOMAholdings backedsecurities(MBS).TheOpenMarketDeskat underwhichtheDeskhadbeenoperating;whether, theFederalReserveBankof NewYorkpurchaseda andtowhatextent,theSystem’sholdingsof some totalof about$65billionof Treasurysecuritiessince issueswouldexceed35percentwoulddependonthe theCommitteedecided,onAugust10,tobeginrein- specificsecuritiesthatdealerschoosetoofferat vestingsuchprincipalpayments.Purchaseswerecon- futureauctions.Finally,theManagersummarized

262 97thAnnualReport|2010 theimplicationsfortheFederalReserve’sbalance edgeddowninSeptember.Inthemanufacturingsecsheetandincomestatementof alternativedecisions tor,outputgainsacrossawiderangeof industries thattheCommitteemightmakeaboutthesizeand weresmallerinrecentmonths,andcapacityutilizamaturitydistributionof theSOMA’ssecuritieshold- tionleveledoff ataratestillwellbelowitslonger-run ings.ParticipantsdiscussedtheDesk’stentative average.Productionof motorvehiclespickedupduroperationalplans;theyalsodiscussedthepotential ingthethirdquarterasautomakersreplenisheddealeffectsof anexpansionof theSystem’sholdingsof ers’stocks,butmotorvehicleassemblieswereschedlonger-termsecuritiesonfinancialmarketsandinsti- uledtodropbackincomingmonths.Morebroadly, tutionsandontheeconomy,andthechannels Octobersurveysof newordersreceivedbymanufacthroughwhichthoseeffectscouldoccur. turerssuggestedthatdemandforfactorygoodshad continuedtoincrease. Staff Review of the Economic Situation Realpersonalconsumptionexpenditures(PCE)rose TheinformationreviewedattheNovember2–3meet- atamoderaterateinthethirdquarter.Risingequity ingindicatedthattheeconomicrecoveryproceeded priceslikelyresultedinsomefurtherimprovementin atamodestrateinrecentmonths,withonlya networthoverthesameperiod.However,realdisgradualimprovementinlabormarketconditions,and posablepersonalincome,whichrosestronglyinthe wasaccompaniedbyacontinuedlowrateof infla- firsthalf of theyear,increasedonlyslightlyinthe tion.Consumerspending,businessinvestmentin thirdquarter.Asaresult,thepersonalsavingrate equipmentandsoftware,andexportspostedfurther droppedbacksomewhatinthethirdquarter, gainsinthethirdquarter,andnonfarminventory althoughitremainednearthehighlevelsthathave investmentsteppedup.Butconstructionactivityin prevailedsincelate2008.Banklendingstandards boththeresidentialandnonresidentialsectors werestillrelativelytight,andhouseholdborrowing remaineddepressed,andasignificantportionof the remainedlow.SurveystakeninSeptemberandOctoriseindomesticdemandwasagainmetbyimports. berindicatedthatconsumerswereslightlymorepes- U.S.industrialproductionslowednoticeablyin simisticabouttheeconomicoutlookthanearlierin AugustandSeptember,hiringatprivatebusinesses theyear. remainedmodest,andtheunemploymentratestayed elevated.Headlineconsumerpriceinflationwassub- Activityinthehousingmarketremainedexceptionduedinrecentmonths,despiteariseinenergyprices, allyweak.Althoughsalesof newandexistinghomes ascoreconsumerpriceinflationtrendedlower. turnedupinAugustandSeptember,thestill-lowlevel of demandsuggestedthatthepaybackfortheearlier Privatebusinessescontinuedtoincreasetheir boosttosalesfromthehomebuyertaxcredithadnot demandforlaboronlymodestly.InSeptember,pri- yetfaded.Moreover,despitefurtherdeclinesinmortvatenonfarmpayrollemploymentremainedona gageinterestratesinrecentmonths,otherfactors gradualuptrend,andtheaverageworkweekof all continuedtorestrainhousingdemand,including private-sectoremployeeswasunchangedforathird consumerpessimismabouttheoutlookforjobsand month.Inaddition,thenumberof individualswork- income,thedepressedrateof householdformation, ingparttimeforeconomicreasonsmovedbackup andtightunderwritingstandardsformortgages.In forasecondmonth,andtheavailablemeasuresof addition,themoratoriumsrecentlyannouncedby jobopeningsandhiringwerestilllow.Theunem- somebanksonthesaleof propertiestheyhadseized ploymentrateremainedat9.6percentinSeptember, inforeclosureswerelikelytodamphomesalesfurther leavingtheaveragerateforthethirdquarteronly inthenearterm.Startsof newsingle-familyhouses slightlybelowitsaverageoverthefirsthalf of the rosesomewhatinAugustandSeptember,butthe year.Long-durationunemploymentcontinuedto paceof constructionwasstillnoticeablybelowthe recedesomewhatbutwasstillveryhigh.Indicatorsof already-depressedlevelof theprecedingyear.New layoffsremainedelevated,althoughinitialclaimsfor homebuildingappearedtobeweigheddownbythe unemploymentinsurancedrifteddownalittleduring backlogof unsoldexistinghomesandtightlending October.ThelaborforceparticipationrateinSep- conditionsforacquisition,development,andcontemberwasunchangedatalevellowerthanearlierin structionloans. theyear. Afteraverystrongincreaseinthefirsthalf of the Afterrisingrapidlyfrommid-2009tomid-2010, year,businessinvestmentinequipmentandsoftware industrialproductiondeceleratedinAugustand postedasmaller,butstillsolid,gaininthethirdquar-

Minutesof FederalOpenMarketCommitteeMeetings 263 ter.Nominalshipmentsof nondefensecapitalgoods benefitcostsacceleratedthisyearafterpostingavery fromdomesticmanufacturersremainedonamoder- smallincreasein2009. ateuptrendthroughSeptember.Butrisingdemand forequipmentandsoftwareduringthethirdquarter TheU.S.internationaltradedeficitwidenedin wasalsosatisfiedinpartbyafurtherriseinimports August,afternarrowinginJuly,asamodestincrease of capitalgoods.Near-termindicatorsof business innominalexportswasmorethanoffsetbyastrong spendingonequipmentandsoftwareweregenerally increaseinimports.Followingwidespreaddeclinesin positive.Newordersfornondefensecapitalgoods, July,mostmajorcategoriesof importsreboundedin excludingaircraft,continuedtooutpaceshipments August,withimportsof consumergoodsandcapital throughSeptember.Creditconditionsimprovedfur- goodsexhibitingparticularstrength.Importsof therinthethirdquarter,particularlyforlargerfirms petroleumproductsalsoincreasedsubstantially, withaccesstothecapitalmarkets.Financingflowsto reflectingbothhighervolumesandhigherprices.The smallerfirms,whicharemoredependentonbanks, increaseinexportswasconcentratedinagricultural weremoresubdued. goods,partlyboostedbyrisingprices,andinservices;mostothermajorcategorieseitherdeclinedor Realnonfarminventoryinvestmentwasestimatedto wereflat. havepickedupduringthethirdquarter.Rebuilding of dealers’stocksof motorvehiclesaccountedfor Recentindicatorsof foreigneconomicactivitysugpartof thestep-up,butsomeof itlikelyreflected gestedthatgrowthabroadhadslowedappreciably anotherlargeincreaseinimports.InAugust, aftermidyear.Followinganunsustainablyhighrate inventory-to-salesratiosformostindustriesremained of expansioninthesecondquarter,growthof real wellbelowtheirpreviouspeaks.Surveysof purchas- grossdomesticproduct(GDP)intheemergingmaringmanagersinSeptemberandOctoberindicated keteconomiesappearedtohaveslowedmarkedly, thatmostdidnotperceivetheircustomers’invento- notwithstandinganapparentaccelerationinecoriestobetoohigh.Businessinvestmentinnonresi- nomicactivityinChina.RealGDPgrowthappardentialstructureswasaboutflatinthethirdquarter entlymoderatedintheadvancedforeigneconomies asanotherstrongincreaseinspendingfordrilling aswell.Intheeuroarea,industrialproductionrose andminingstructuresoffsetfurtherdeclinesinout- sharplyinAugust,butpurchasingmanagersindexes laysoncommercialandindustrialbuildings. moveddowninrecentmonths.TheGerman economycontinuedtoperformstrongly,whilerecent Consumerpriceinflationremainedlowinrecent datashowedweaknessintheperipheraleuro-area months.ThetotalPCEpriceindexincreasedslightly countries.Areaccelerationof foodandenergyprices inSeptemberasconsumerenergypricesmovedup helpedpushupinflationabroad,albeitgenerallyto noticeablyforathirdmonth.ThecorePCEprice still-moderatelevels,inthethirdquarter. indexwasunchangedinSeptember,andthe 12-monthincreaseinthisindexcontinuedtotrend Staff Review of the Financial Situation down.Atearlierstagesof processing,theriseinproducerpricesforintermediatematerialsremained ThedecisionbytheFederalOpenMarketCommittee moderateinSeptember,butpricesof globallytraded (FOMC)atitsSeptembermeetingtomaintainthe industrialandagriculturalcommoditiesaccelerated 0to1∕ 4 percenttargetrangeforthefederalfundsrate considerablyinOctober,reflectinginpartthelower waswidelyanticipated.However,yieldsdeclinedas foreignexchangevalueof thedollaraswellascon- marketparticipantsreportedlyinterpretedthelancernsaboutsupplyforcertaincommodities.InSep- guageof theaccompanyingstatementtoimply temberandOctober,surveymeasuresof households’ higheroddsof additionalassetpurchasesandalonshort-andlong-termexpectationsforinflation gerperiodof exceptionallylowshort-terminterest remainedintherangesthathaveprevailedsincethe rates.Investorstookparticularnoteof thestatespringof 2009. ment’sindicationthatinflationwasbelowthelevels consistentwiththeFOMC’sdualmandateformaxi- Laborcompensationroseatamoderaterateinthe mumemploymentandpricestability.Intheweeks thirdquarter.Private-sectorwageincreases,asmeas- followingtheFOMCmeeting,FederalReservecomuredbybothaveragehourlyearningsof allemploy- munications,alongwitheconomicdatareleasesthat eesandtheemploymentcostindex(ECI),remained continuedtopointtoatepideconomicoutlook, subdued.However,accordingtotheECI,employer appearedtoreinforcemarketexpectationsthataddi-

264 97thAnnualReport|2010 tionalpolicyaccommodationwouldbeforthcoming mentsandpossiblelackof compliancewithsecuritiinthenearterm. zationagreements. YieldsonnominalTreasurycouponsecuritiesand NetdebtfinancingbyU.S.nonfinancialcorporations thoseonTIPSdeclined,onnet,overtheintermeeting wasverystronginSeptember,withsizablegrosscorperiod,largelyinresponsetoFederalReservecom- poratebondissuanceacrossthecreditspectrumand municationsandsomewhatweaker-than-expected asubstantialincreaseincommercialpaperoutstandeconomicdatareleases.Five-yearinflationcompen- ing,butdataforOctoberpointedtoamoderationin sationincreasedovertheintermeetingperiod,and theseflows.Issuanceof syndicatedleveragedloansin forwardinflationcompensation5to10yearsahead thethirdquarterremainedneartheaveragepace alsorose.Anecdotalreportspointedtotheincreased recordedinthefirsthalf of theyear.Measuresof the likelihoodof additionalassetpurchasesbytheFed- creditqualityof nonfinancialcorporationsremained eralReserveandtoFOMCcommunicationsnoting solid.Thepaceof grosspublicequityissuancefrom thattheCommitteeviewedunderlyinginflationas seasonedandinitialpublicofferingsbynonfinancial somewhatbelowthelevelsjudgedtobemostconsis- firmsremainedmoderateinSeptemberandappeared tentwiththeCommittee’sdualmandateasfactors toslowinOctober. contributingtoloweryieldsandtotheincreasein inflationcompensationovertheperiod.Yieldson Commercialrealestatemarketsremainedstrained. investment-andspeculative-gradecorporatebonds Commercialmortgagedebtinthethirdquarterwas declinedsomewhatmorethanthoseoncomparable- estimatedtohavedeclinedataratesimilartothe maturityTreasurysecurities,leavingriskspreads dropinthesecondquarter,andthedelinquencyrate slightlylower.Inthesecondarymarketforsyndicated forsecuritizedcommercialmortgagescontinuedto leveragedloans,pricesof loanscontinuedtomoveup climbinSeptember.However,somesignalsoffered andbid-askedspreadsnarrowedabitfurther. modestencouragement.Inparticular,vacancyrates forcommercialbuildingsstabilizedinthethirdquar- Conditionsinshort-termfundingmarketsweregen- ter,andthepipelineof newcommercialmortgageerallystableovertheintermeetingperiod.Indollar backedsecuritiespickedupabitfromverylowlevels. fundingmarkets,spreadsof termLondoninterbank offeredrates(orLibor)overthoseonovernightindex Residentialmortgagerefinancingactivitymovedup swapsedgedupbutremainedatlevelssimilarto inlateSeptemberandearlyOctober,fromanalready thoseobservedpriortotheemergenceof euro-area highlevel,astheaverageinterestrateonfixed-rate concernsearlierthisyear.Spreadsonunsecured mortgagesfellfurtherovertheintermeetingperiod. financialcommercialpaperandonasset-backed Incontrast,thelevelof applicationsformortgagesto commercialpaperremainedlow.Ratesonrepurchase purchasehomesremainedanemic.Totalconsumer agreements(repos)involvingvarioustypesof collat- creditcontractedinAugustatapaceroughlyinline eralwerelittlechangedonnet.Bid-askedspreadsin withthedeclinespostedearlierintheyear.Issuance mostrepotransactionsgenerallydeclinedwhile of consumerasset-backedsecuritieswassolidinSepchangesinhaircutsondifferenttypesof repocollat- tember.Consumercreditqualitygenerallycontinued eralweremixed. toimprove,thoughdelinquencyratesremained elevated. BroadU.S.stockpriceindexesrose,onbalance,over theintermeetingperiod,reflectinginvestorexpecta- BankcreditedgedupinSeptemberandOctober,as tionsof furthermonetarypolicyaccommodation briskgrowthinbanks’holdingsof securitiesmore andbetter-than-expectedthird-quarterearnings thanoffsetafurtherdeclineintotalloans.Commernews;option-impliedvolatilityontheS&P500index cialandindustrial(C&I)loansturneddowninSepwaslittlechanged.Thespreadbetweenthestaff’s temberafterhavingincreasedslightlyoverthetwo estimateof theexpectedrealreturnonequitiesover previousmonths.Amoderatenetfractionof banks thenext10yearsandanestimateof theexpectedreal reported,intheirresponsestotheOctoberSenior returnona10-yearTreasurynote—aroughmeasure LoanOfficerOpinionSurveyonBankLendingPracof theequityriskpremium—narrowedabitbut tices,thattheyhadeasedstandardsonC&Iloans remainedatanelevatedlevel.Bankstocksgenerally andnarrowedspreadsof C&Iloanratesovertheir underperformedthebroadermarketamidconcerns costof funds;demandforsuchloansreportedly aboutthehandlingof mortgageforeclosuredocu- declined,onnet,overtheprecedingthreemonths.

Minutesof FederalOpenMarketCommitteeMeetings 265 Commercialrealestateloans,homeequityloans,and tothestaff’snear-termoutlookrelativetotheforeconsumerloanscontracted.However,closed-end castpreparedfortheSeptemberFOMCmeeting. residentialmortgageloansonbanks’booksincreased However,thestaff revisedupitsforecastforecomodestlyforthesecondmonthinarow. nomicactivityin2011and2012.Inlightof asset marketdevelopmentsovertheintermeetingperiod, OverSeptemberandOctober,M2expandedatan whichinlargepartappearedtoreflectheightened averageannualratethatwasnoticeablyaboveitspace expectationsamonginvestorsthattheFederal earlierintheyear.Thegrowthrateof liquiddeposits Reservewouldundertakeadditionalpurchasesof movedup,whilesmalltimedepositsandretailmoney longer-termsecurities,theNovemberforecastwas marketmutualfundscontinuedtocontract.The conditionedonlowerlong-terminterestrates,higher compositionalshiftlikelyreflectedtherelatively stockprices,andalowerforeignexchangevalueof attractiveyieldsonliquiddeposits.Currencygrowth thedollarthanwasthestaff’spreviousforecast. strengthened,withindicatorssuggestingstrong Thesefactorswereexpectedtoprovideadditional demandfromabroad. supporttotherecoveryineconomicactivity.Accordingly,theunemploymentratewasanticipatedto Thedollardeclinedabout3percentagainstabroad recedesomewhatmorethaninthepreviousforecast, arrayof othercurrenciesduringtheintermeeting althoughthemarginof slackattheendof 2011was period,depreciatingevenmoreagainsttheeuroand stillexpectedtobesubstantial. theyen.Inaddition,Chineseauthoritiesallowedthe renminbitoappreciateslightlyagainstthedollar. Thestaff’sforecastcontinuedtoshowsubduedrates Marketcommentaryhighlightedthepossibilitythat of headlineandcoreinflationduring2011and2012. majorcentralbankswouldfurthereasemonetary However,thedownwardpressureoninflationfrom policy,andtheBankof Japanexpandeditsassetpur- slackinresourceutilizationwasexpectedtobe chaseprogramandreduceditspolicytargetratetoa slightlylessthanpreviouslyprojected,andpricesof rangeof 0to10basispoints.Benchmark10-year importedgoodswereanticipatedtorisesomewhat sovereignyieldsgenerallydeclinedinthemajor faster.Asinpreviousforecasts,furtherdisinflation advancedforeigneconomies,buttheovernightratein wasexpectedtobecheckedbytheongoingstability theeuroareaincreasedastheEuropeanCentral of inflationexpectations. Bankcontinuedtoallowtheamountof liquidityprovidedtothebankingsystemtodecline.Spreadsrela- Participants’ Views on Current Conditions tivetoGermanbundsonthe10-yearsovereignbonds and the Economic Outlook of mostperipheraleuro-areacountrieseither declinedorwerelittlechangedovertheperiod,but InconjunctionwiththisFOMCmeeting,allmeeting Irishsovereignspreadsmovedhigheronconcerns participants—thesixmembersof theBoardof Govoverthefiscalburdensassociatedwithlossesinthe ernorsandtheheadsof the12FederalReserve Irishbankingsector.Majorequityindexesinthe Banks—providedprojectionsof outputgrowth,the euroareaandintheUnitedKingdomincreased unemploymentrate,andinflationforeachyearfrom moderately,whereastheNikkeiindexdeclined. 2010through2013andoverthelongerrun.Longerrunprojectionsrepresenteachparticipant’sassess- Severalemergingmarketcentralbankstightened mentof theratetowhicheachvariablewouldbe monetarypolicy,includingthePeople’sBankof expectedtoconverge,overtime,underappropriate China.Againstthebackdropof interestratedeclines monetarypolicyandintheabsenceof further inmanyof theadvancedeconomies,aswellasheavy shocks.Participants’forecastsaredescribedinthe capitalflowstowardemergingmarketcountries, Summaryof EconomicProjections,whichis manyemergingmarketcurrenciesstrengthened, attachedasanaddendumtotheseminutes. reportedlypromptingfurtherofficialinterventionin foreignexchangemarkets. Intheirdiscussionof theeconomicsituationand outlook,meetingparticipantsgenerallyagreedthat Staff Economic Outlook theincomingdataindicatedthatoutputandemploymentwerecontinuingtoincrease,butonlyslowly. Becausetherecentdataonproductionandspending ProgresstowardtheCommittee’sdualobjectivesof werebroadlyinlinewiththestaff’sexpectations,the maximumemploymentandpricestabilitywas forecastforeconomicactivitythatwaspreparedfor describedasdisappointinglyslow.ParticipantsvaritheNovemberFOMCmeetingshowedlittlechange ouslynotedanumberof factorsthatwererestraining

266 97thAnnualReport|2010 growth,includinglowlevelsof householdandbusi- ited,butlowinterestrateswerehelpingstabilize nessconfidence,concernsaboutthedurabilityof the prices. economicrecovery,continuinguncertaintyaboutthe futuretaxandregulatoryenvironment,still-weak Participantsagreedthatprogressinreducingunemfinancialconditionsof somehouseholdsandsmall ploymentwasdisappointing;indeed,severalnoted businesses,thedepressedhousingmarket,andwan- thattherecentrateof outputgrowth,if continued, ingfiscalstimulus.Althoughparticipantsconsidered wouldmorelikelybeassociatedwithanincreasethan itquiteunlikelythattheeconomywouldslideback adecreaseintheunemploymentrate.Participants intorecession,somenotedthatcontinuedslow againdiscussedtheextenttowhichemploymentwas growthandhighlevelsof resourceslackcouldleave beinghelddown,andtheunemploymentrate theeconomicexpansionvulnerabletonegative boosted,bystructuralfactorssuchasmismatches shocks.Intheabsenceof suchshocks,andassuming betweentheskillsof theworkerswhohadlosttheir appropriatemonetarypolicy,participants’economic jobsandtheskillsneededinthesectorsof the projectionsgenerallyshowedgrowthpickinguptoa economywithvacancies,theinabilityof theunemmoderatepaceandtheunemploymentratedeclining ployedtorelocatebecausetheirhomeswereworth somewhatnextyear.Participantsgenerallyexpected lessthantheprincipaltheyowedontheirmortgages, growthtostrengthenfurtherandunemploymentto andtheeffectsof extendedunemploymentbenefits declinesomewhatmorerapidlyin2012and2013. onthedurationof unemployedworkers’searchfora newjob.Participantsagreedthatsuchfactorswere Indicatorsof spendingbyhouseholdsandbusinesses contributingtocontinuedhighunemploymentbut remainedmixed.Consumerspendingwasexpanding differedintheirassessmentsof themagnitudeof gradually.Participantsnotedthathouseholdswere sucheffects.Manyparticipantssawevidencethatthe continuingtheireffortstorepairtheirbalancesheets, currentunemploymentratewaswellabovelevelsthat aprocessthatwasrestraininggrowthinconsumer couldbeexplainedbystructuralfactorsalone,notspending.Sluggishemploymentgrowthandelevated ing,forexample,reportsfrombusinesscontactsindiuncertaintyaboutjobprospectsalsocontinuedto catingthatweakgrowthindemandfortheirfirms’ weighonhouseholdspending.Withrespecttobusi- productsremainedakeyreasonwhytheywererelucnessspending,contactsgenerallyreportedthatthey tanttoaddemployees,andjobvacancyratesthat wereinvestingtoreducecostsbutwererefraining werelowrelativetohistoricalexperience.Anumber fromaddingworkersorexpandingcapacityinthe of participantsnotedthatcontinuedhighunemploy- UnitedStates.Energyproducerswereanexception. ment,particularlywithlargenumbersof workerssuf- Participantsobservedthatfirmshadgeneratedrising feringverylongspellsof unemployment,wouldlead profits,butthatbusinesscontactsindicatedthose toanerosionof workers’skillsthatwouldhave gainslargelyreflectedcost-cuttingratherthantop- adverseconsequencesforthoseworkersandforthe linegrowthinrevenues.Anumberof businessescon- economy’spotentiallevelof outputinthelonger tinuedtoreportthattheywereholdingbackonhir- term. ingandcapitalspendingbecauseof uncertainty aboutfuturetaxes,health-carecosts,andregulations. Participantssawfinancialconditionsashaving Butconcernsaboutactualandanticipateddemand becomemoresupportiveof growthoverthecourse alsowereimportantfactorslimitinginvestmentand of theintermeetingperiod;most,thoughnotall,of hiring.Firmscontinuedtoreportstrongforeign thechangeappearedtoreflectinvestors’increasing demandfortheirproducts,particularlyfromAsia. anticipationof afurthereasingof monetarypolicy. Mostlonger-termnominalinterestratesdeclined, Participantsnotedthatthehousingsector,including realinterestratesfellevenmore,creditspreadstightresidentialconstructionandhomesales,remained ened,andequitypricesrose,inpartreflectingbetterdepressed.Foreclosureswereaddingtotheelevated than-expectedcorporateearningsreports.Inflation supplyof availablehomesandputtingdownward compensationrosenoticeably,returningtoalevel pressureonhomepricesandhousingconstruction. moretypicalof recentyears.Participantsnotedthat Someparticipantssawdisputesovermortgageand creditremainedreadilyavailable—indebtmarkets foreclosuredocumentsaslikelytodelaytheeventual andfrombanks—forlargercorporations,andthere recoveryinhousingmarkets.Commercialrealestate weresomesignsthatcreditconditionshadbegunto marketsalsowereweak,andtheavailabilityof credit improveforsmallerfirmsthatobtaincreditprimarily forcommercialrealestatetransactionsremainedlim- frombanks.Bankinginstitutionsreportedsignsof

Minutesof FederalOpenMarketCommitteeMeetings 267 improvingcreditquality.Improvementsinhousehold thedownside.Similarly,amajoritysawtherisksto financialconditionswerecontributingtobetterper- inflationasbalanced;some,however,sawdownside formanceof consumerloans.However,bankscontin- riskspredominatingwhileacouplesawinflationrisks uedtoreportelevatedlossesoncommercialreal astiltedtotheupside.Participantsalsodifferedin estateloans,especiallyconstructionandlanddevel- theirassessmentsof thelikelybenefitsandcosts opmentloans.Participantsnotedtheriskof lossesat associatedwithaprogramof purchasingadditional financialinstitutionsstemmingfrominvestorsput- longer-termsecuritiesinanefforttoprovideadditingmortgagesbacktosellersif thequalityof the tionalmonetarystimulus,thoughmostsawthebenloanswasmisrepresentedwhenthemortgageswere efitsasexceedingthecostsincurrentcircumstances. soldintosecuritizationvehicles. Mostparticipantsjudgedthataprogramof purchasingadditionallonger-termsecuritieswouldput Measuresof priceinflationhadgenerallytrended downwardpressureonlonger-terminterestratesand lowersincethestartof therecession;thesamewas boostassetprices;someobservedthatitcouldalso trueof nominalwagegrowth.Mostparticipantsindi- leadtoareductionintheforeignexchangevalueof catedthatunderlyinginflationwassomewhatlow thedollar.Mostexpectedthesechangesinfinancial relativetolevelsthattheyjudgedtobeconsistent conditionstohelppromoteasomewhatstronger withtheCommittee’sstatutorymandatetofoster recoveryinoutputandemploymentwhilealsohelpmaximumemploymentandpricestability.While ingreturninflation,overtime,tolevelsconsistent underlyinginflationremainedsubdued,meetingpar- withtheCommittee’smandate.Inaddition,several ticipantsgenerallysawonlysmalloddsof deflation, participantsarguedthatthestimulusprovidedby giventhestabilityof longer-terminflationexpecta- additionalsecuritiespurchaseswouldhelpprotect tionsandtheanticipatedrecoveryineconomicactiv- againstfurtherdisinflationandthesmallprobability ity.Theygenerallydidnotexpectappreciablyhigher thattheU.S.economycouldfallintopersistentdeflainflation,either.Whilepricesof somecommodities tion—anoutcomethattheythoughtwouldbevery andimportedgoodshadrisenrecently,businesscon- costly.Someparticipants,however,anticipatedthat tactsreportedthattheycurrentlyhadlittlepricing additionalpurchasesof longer-termsecuritieswould powerandthattheywouldcontinuetoseekproduc- haveonlyalimitedeffectonthepaceof therecovery; tivitygainstooffsethigherinputcosts.Smallwage theyjudgedthattheeconomy’sslowgrowthlargely increases,coupledwithproductivitygains,meant reflectedtheeffectsof factorsthatwerenotlikelyto thatunitlaborcostswerelowerthanayearearlier. respondtoadditionalmonetarypolicystimulusand Manyparticipantspointedtosubstantialslackin thoughtthatadditionalactionwouldbewarranted resourceutilization,alongwithwell-anchoredinfla- onlyif theoutlookworsenedandtheoddsof deflationexpectations,aslikelytocontributetosubdued tionincreasedmaterially.Someparticipantsnoted inflationforsometime.Afewparticipantsexpected concernsthatadditionalexpansionof theFederal thatcontinuingresourceslackwouldleadtosome Reserve’sbalancesheetcouldputunwanteddownfurtherdisinflationincomingyears.However,afew wardpressureonthedollar’svalueinforeign othersthoughtthattheexceptionallyaccommodative exchangemarkets.Severalparticipantssawariskthat stanceof monetarypolicy,coupledwithrisingprices afurtherincreaseinthesizeof theFederalReserve’s of energyandothercommoditiesaswellasrising assetportfolio,withanaccompanyingincreaseinthe pricesof otherimports,madeitmorelikelythat supplyof excessreservesandinthemonetarybase, inflationwouldincrease,withinayearortwo,tolev- couldcauseanundesirablylargeincreaseininflation. elstheyjudgedconsistentwiththeCommittee’sdual However,itwasnotedthattheCommitteehadin mandate. placetoolsthatwouldenableittoremovepolicy accommodationquicklyif necessarytoavoidan Participantsgenerallyagreedthatthemostlikelyeco- undesirableincreaseininflation. nomicoutcomewouldbeagradualpickupingrowth withslowprogresstowardmaximumemployment. Committee Policy Action Theyalsogenerallyexpectedthatinflationwould remain,forsometime,belowlevelstheCommittee Thoughtheeconomicrecoverywascontinuing, considersmostconsistent,overthelongerrun,with membersconsideredprogresstowardmeetingthe maximumemploymentandpricestability.However, Committee’sdualmandateof maximumemployment participantsheldarangeof viewsabouttherisksto andpricestabilityashavingbeendisappointingly thatoutlook.Mostsawtheriskstogrowthas slow.Moreover,membersgenerallythoughtthat broadlybalanced,butmanysawtherisksastiltedto progresswaslikelytoremainslow.Accordingly,most

268 97thAnnualReport|2010 membersjudgeditappropriatetotakeactiontopro- tives,theCommitteeseeksconditionsinreserve moteastrongerpaceof economicrecoveryandto marketsconsistentwithfederalfundstradingin helpensurethatinflation,overtime,isatlevelscon- arangefrom0to1∕ 4 percent.TheCommittee sistentwiththeCommittee’smandate.Intheirdis- directstheDesktoexecutepurchasesof longercussionof monetarypolicyfortheperiodimmedi- termTreasurysecuritiesbytheendof June2011 atelyahead,nearlyallCommitteemembersagreedto inordertoincreasethetotalfacevalueof keepthefederalfundsrateatitseffectivelower domesticsecuritiesheldintheSystemOpen boundbymaintainingthetargetrangeforthatrate MarketAccounttoapproximately$2.6trillion. at0to1∕ 4 percentandtoexpandtheFederal TheCommitteealsodirectstheDesktoreinvest Reserve’sholdingsof longer-termsecurities.To principalpaymentsfromagencydebtandagency increaseitssecuritiesholdings,theCommittee mortgage-backedsecuritiesinlonger-term decidedtocontinueitsexistingpolicyof reinvesting Treasurysecurities.TheSystemOpenMarket principalpaymentsfromitssecuritiesholdingsinto AccountManagerandtheSecretarywillkeep longer-termTreasurysecuritiesandintendedtopur- theCommitteeinformedof ongoingdevelopchaseafurther$600billionof longer-termTreasury mentsregardingtheSystem’sbalancesheetthat securitiesatapaceof about$75billionpermonth couldaffecttheattainmentovertimeof the throughthesecondquarterof 2011.Onemember Committee’sobjectivesof maximumemploydissentedfromthisaction,judgingthattherisksof mentandpricestability.” additionalsecuritiespurchasesoutweighedthebenefits.MembersagreedthattheCommitteewillregu- Thevoteencompassedapprovalof thestatement larlyreviewthepaceof itssecuritiespurchasesand belowtobereleasedat2:15p.m.: theoverallsizeof theasset-purchaseprograminlight of incominginformationandwilladjusttheprogram “InformationreceivedsincetheFederalOpen asneededtobestfosteritsgoalsof maximum MarketCommitteemetinSeptemberconfirms employmentandpricestability. thatthepaceof recoveryinoutputandemploymentcontinuestobeslow.Householdspending Withrespecttothestatementtobereleasedfollowing isincreasinggradually,butremainsconstrained themeeting,membersagreedthatitwasappropriate byhighunemployment,modestincomegrowth, toadjustthestatementtomakeitclearthatthe lowerhousingwealth,andtightcredit.Business unemploymentratewaselevated,andthatmeasures spendingonequipmentandsoftwareisrising, of underlyinginflationweresomewhatlow,relative thoughlessrapidlythanearlierintheyear,while tolevelsthattheCommitteejudgedtobeconsistent, investmentinnonresidentialstructurescontinues overthelongerrun,withitsdualmandate.Nearlyall tobeweak.Employersremainreluctanttoadd membersagreedthatthestatementshouldreiterate topayrolls.Housingstartscontinuetobe theexpectationthateconomicconditionswerelikely depressed.Longer-terminflationexpectations towarrantexceptionallylowlevelsof thefederal haveremainedstable,butmeasuresof underlyfundsrateforanextendedperiod.Membersagreed inginflationhavetrendedlowerinrecent thatthestatementshouldnotethattheCommittee quarters. willemployitspolicytoolsasnecessarytosupport theeconomicrecoveryandtohelpensurethatinfla- Consistentwithitsstatutorymandate,theComtion,overtime,isatlevelsconsistentwithits mitteeseekstofostermaximumemployment mandate. andpricestability.Currently,theunemployment rateiselevated,andmeasuresof underlying Attheconclusionof thediscussion,theCommittee inflationaresomewhatlow,relativetolevelsthat votedtoauthorizeanddirecttheFederalReserve theCommitteejudgestobeconsistent,overthe Bankof NewYork,untilitwasinstructedotherwise, longerrun,withitsdualmandate.Althoughthe toexecutetransactionsintheSystemAccountin Committeeanticipatesagradualreturnto accordancewiththefollowingdomesticpolicy higherlevelsof resourceutilizationinacontext directive: of pricestability,progresstowarditsobjectives hasbeendisappointinglyslow. “TheFederalOpenMarketCommitteeseeks monetaryandfinancialconditionsthatwillfos- Topromoteastrongerpaceof economicrecovterpricestabilityandpromotesustainable eryandtohelpensurethatinflation,overtime, growthinoutput.Tofurtheritslong-runobjec- isatlevelsconsistentwithitsmandate,theCom-

Minutesof FederalOpenMarketCommitteeMeetings 269 mitteedecidedtodaytoexpanditsholdingsof backedsecuritiesinlong-termTreasurysecurities.In securities.TheCommitteewillmaintainitsexist- hisassessment,thiscontinuedhighlevelof monetary ingpolicyof reinvestingprincipalpayments policyaccommodationcouldputatrisktheachievefromitssecuritiesholdings.Inaddition,the mentof theCommittee’slong-runpolicyobjectives. Committeeintendstopurchaseafurther $600billionof longer-termTreasurysecurities Itwasagreedthatthenextmeetingof theCommittee bytheendof thesecondquarterof 2011,apace wouldbeheldonTuesday,December14,2010.The of about$75billionpermonth.TheCommittee meetingadjournedat1:15p.m.onNovember3, willregularlyreviewthepaceof itssecurities 2010. purchasesandtheoverallsizeof theassetpurchaseprograminlightof incominginformationandwilladjusttheprogramasneededto Notation Vote bestfostermaximumemploymentandprice stability. BynotationvotecompletedonOctober8,2010,the Committeeunanimouslyapprovedtheminutesof the TheCommitteewillmaintainthetargetrange FOMCmeetingheldonSeptember21,2010. forthefederalfundsrateat0to1∕ 4 percentand continuestoanticipatethateconomicconditions,includinglowratesof resourceutilization, Videoconference Meeting of October 15 subduedinflationtrends,andstableinflation expectations,arelikelytowarrantexceptionally TheCommitteemetbyvideoconferenceonOctolowlevelsforthefederalfundsrateforan ber15todiscussissuesassociatedwithitsmonetary extendedperiod. policyframework,includingalternativewaysto expressandcommunicatetheCommittee’sobjec- TheCommitteewillcontinuetomonitorthe tives,possibilitiesforsupplementingtheCommittee’s economicoutlookandfinancialdevelopments communicationaboutitspolicydecisions,themerits andwillemployitspolicytoolsasnecessaryto of smallerandmorefrequentadjustmentsintheFedsupporttheeconomicrecoveryandtohelp eralReserve’sintendedsecuritiesholdingsversus ensurethatinflation,overtime,isatlevelscon- largerandlessfrequentadjustments,andthepotensistentwithitsmandate.” tialcostsandbenefitsof targetingaterminterest rate.Theagendadidnotcontemplateanypolicy Votingforthisaction:BenBernanke,WilliamC. decisionsandnoneweretaken. Dudley,JamesBullard,ElizabethDuke,SandraPianalto,SarahBloomRaskin,EricRosengren,DanielK. Participantsagreedthatgreaterpublicunderstanding Tarullo,KevinWarsh,andJanetL.Yellen. of theCommittee’sinterpretationof itsstatutory objectivescouldcontributetobettermacroeconomic Votingagainstthisaction:ThomasM.Hoenig. outcomes.Participantsexpressedarangeof views aboutthepotentialcostsandbenefitsof quantifying Mr.Hoenigdissentedbecausehejudgedthataddi- theCommittee’sinterpretationof itsstatutorymantionalaccommodationwoulddolittletoaccelerate datetopromotepricestabilitybyadoptinganumeritheeconomy’scontinuing,gradualrecovery.Inhis calinflationobjectiveoratargetpathfortheprice assessment,therisksof additionalpurchasesof level.Intheend,participantsnotedthatthelonger- Treasurysecuritiesoutweighedthebenefits.Mr.Hoe- runprojectionscontainedintheSummaryof Econigbelievedthatadditionalpurchaseswouldriska nomicProjections,whichisreleasedonceperquarter furthermisallocationof resourcesandfuturefinan- inconjunctionwiththeminutesof fourof theComcialimbalancesthatcoulddestabilizetheeconomy. mittee’smeetings,conveyconsiderableinformation Healsosawapotentialforadditionalpurchasesto aboutparticipants’assessmentsof theirstatutory underminetheFederalReserve’sindependenceand objectives.Participantsdiscussedwhetheritmightbe causelong-terminflationexpectationstorise.Mr. usefulfortheChairmantoholdoccasionalpress Hoenigalsobelieveditwasnotappropriatetoindi- briefingstoprovidemoredetailedinformationtothe catethateconomicandfinancialconditionswere publicregardingtheCommittee’sassessmentof the “likelytowarrantexceptionallylowlevelsof thefed- outlookanditspolicydecisionmakingthanis eralfundsrateforanextendedperiod”ortoreinvest includedinCommittee’sshortpost-meeting principalpaymentsfromagencydebtandmortgage- statements.

270 97thAnnualReport|2010 Intheirdiscussionof therelativemeritsof smaller of whomparticipateinthedeliberationsof the andmorefrequentadjustmentsversuslargerandless FOMC,submittedprojectionsforoutputgrowth, frequentadjustmentsintheFederalReserve’s unemployment,andinflationfortheyears2010to intendedsecuritiesholdings,participantsgenerally 2013andoverthelongerrun.Theprojectionswere agreedthatlargeadjustmentshadbeenappropriate basedoninformationavailablethroughtheendof wheneconomicactivitywasdecliningsharplyin themeetingandoneachparticipant’sassumptions responsetothefinancialcrisis.Incurrentcircum- aboutfactorslikelytoaffecteconomicoutcomes, stances,however,mostsawadvantagestoamore includinghisorherassessmentof appropriatemonincrementalapproachthatwouldinvolvesmaller etarypolicy.“Appropriatemonetarypolicy”is changesintheCommittee’sholdingsof securities definedasthefuturepathof policythateachparticicalibratedtoincomingdata. pantdeemsmostlikelytofosteroutcomesforeconomicactivityandinflationthatbestsatisfyhisor Finally,participantsdiscussedthepotentialbenefits herinterpretationof theFederalReserve’sdual andcostsof settingatargetforaterminterestrate. objectivesof maximumemploymentandstable Somenotedthattargetingtheyieldonatermsecu- prices.Longer-runprojectionsrepresenteachparticiritycouldbeaneffectivewaytoreducelonger-term pant’sassessmentof theratetowhicheachvariable interestratesandthusprovideadditionalstimulusto wouldbeexpectedtoconvergeovertimeunder theeconomy.Butparticipantsalsonotedpotentially appropriatemonetarypolicyandintheabsenceof largerisks,includingtheriskthattheFederalReserve furthershocks. mightfinditself buyingundesirablylargeamountsof therelevantsecurityinordertokeepitsyieldcloseto Asdepictedinfigure1,FOMCparticipants’projecthetargetlevel. tionsof economicactivityoverthenextseveralyears indicatedthattheyexpectedtheeconomicrecovery WilliamB.English tocontinue,withunemploymentdecliningslowlyand Secretary inflationremainingsubdued.Asindicatedintable1, relativetotheirpreviousprojectionsinJune,partici- Addendum: pantssawweakerrealactivitythisyearandexpected Summary of Economic Projections asomewhatmoregradualeconomicrecoveryover thenextseveralyears.Mostparticipantsexpectedthe InconjunctionwiththeNovember2–3,2010,FOMC unemploymentratewouldslowlydeclineoverthe meeting,themembersof theBoardof Governors forecasthorizon,whiletherateof inflationwould andthepresidentsof theFederalReserveBanks,all edgeupbutstaysubdued.Participantsgenerallyindi- Table1.EconomicprojectionsofFederalReserveGovernorsandReserveBankpresidents,November2010 Percent Centraltendency1 Range2 Variable 2010 2011 2012 2013 Longerrun 2010 2011 2012 2013 Longerrun ChangeinrealGDP 2.4to2.5 3.0to3.6 3.6to4.5 3.5to4.6 2.5to2.8 2.3to2.5 2.5to4.0 2.6to4.7 3.0to5.0 2.4to3.0 Juneprojection 3.0to3.5 3.5to4.2 3.5to4.5 n.a. 2.5to2.8 2.9to3.8 2.9to4.5 2.8to5.0 n.a. 2.4to3.0 Unemploymentrate 9.5to9.7 8.9to9.1 7.7to8.2 6.9to7.4 5.0to6.0 9.4to9.8 8.2to9.3 7.0to8.7 5.9to7.9 5.0to6.3 Juneprojection 9.2to9.5 8.3to8.7 7.1to7.5 n.a. 5.0to5.3 9.0to9.9 7.6to8.9 6.8to7.9 n.a. 5.0to6.3 PCEinflation 1.2to1.4 1.1to1.7 1.1to1.8 1.2to2.0 1.6to2.0 1.1to1.5 0.9to2.2 0.6to2.2 0.4to2.0 1.5to2.0 Juneprojection 1.0to1.1 1.1to1.6 1.0to1.7 n.a. 1.7to2.0 0.9to1.8 0.8to2.4 0.5to2.2 n.a. 1.5to2.0 CorePCEinflation3 1.0to1.1 0.9to1.6 1.0to1.6 1.1to2.0 0.9to1.4 0.7to2.0 0.6to2.0 0.5to2.0 Juneprojection 0.8to1.0 0.9to1.3 1.0to1.5 n.a. 0.7to1.5 0.6to2.4 0.4to2.2 n.a. Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andininflationarefromthefourthquarterofthepreviousyeartothefourthquarteroftheyearindicated.PCE inflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures(PCE)andthepriceindexforPCE excludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarteroftheyearindicated.Eachparticipant’s projectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’sassessmentoftheratetowhicheach variablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.TheJuneprojectionsweremadeinconjunction withthemeetingoftheFederalOpenMarketCommitteeonJune22–23,2010. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearconsistsofallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

Minutesof FederalOpenMarketCommitteeMeetings 271 Figure1.Centraltendenciesandrangesofeconomicprojections,2010–13andoverthelongerrun

272 97thAnnualReport|2010 catedthatthepaceof expansioninrealgrossdomes- tion,participantsgenerallyviewedtheincomingdata ticproduct(GDP)wouldriseovertheprojection onhousing,manufacturing,trade,andlabormarket periodtoonethatwassomewhatabovetheirassess- activityasweakerthantheyhadexpectedatthetime mentof theeconomy’slonger-runrateof growth. of theJunemeeting.Participantsalsonotedthatthe Theyjudgedthatthepickupineconomicactivity supporttogrowthfromearlierfiscalstimulusand wouldbespurredinpartbyaccommodativemon- inventoryinvestmenthadwaned. etarypolicyandagradualeasingincreditconditions thatwouldhelpbuoyspendingbyconsumersand Participantscontinuedtoexpectamodestpickupin businesses.Strongerspending,inturn,wouldleadto thepaceof therecoveryoverthenextcoupleof improvedconfidenceintheeconomy,apickupinhir- years.Thecentraltendencyof theirprojectionsfor ing,andafurtherimprovementincreditcondi- outputgrowthin2011was3.0to3.6percent,foltions—forcesthatwouldcontinuetosupportspend- lowedbycentraltendenciesof 3.6to4.5percentin ing.Butparticipantsthoughtthatseveralfactors 2012and3.5to4.6percentin2013.Participants wouldlikelycontinuetorestraineconomicgrowthfor notedthatfactorssuchaspreviouslydeferredspendawhile,includingahighdegreeof cautionexhibited ingonconsumerdurablesandbusinessequipment byconsumersandbusinesses,persistentweaknessin andsoftware,stabilizationinresidentialinvestment, theresidentialandcommercialrealestatesectorsof accommodativeconditionsinfinancialmarkets,and theeconomy,andstill-tightcreditconditions.Some- someeasingincreditconditionswouldlikelyprovide whatmorethanhalf of theparticipantsjudgedthat, impetustoeconomicgrowthgoingforward.Howintheabsenceof anyadditionalshockstothe ever,participantscitedseveralforcesthatwerelikely economy,theeconomywouldconvergefullytoits toweighonthepaceof theeconomicexpansionover longer-runratesof outputgrowth,unemployment, thenextfewyears,includingtheongoingpoorperandinflationwithinaboutfiveorsixyears;therest formanceof thecommercialrealestatesector,the indicatedthatitcouldtakelongerforunemployment unevenpaceof therecoveryinhousingmarkets,the tofallbacktoitslonger-runrateorforinflationto potentialeffectsof thehomemortgagedocumentarisebacktotheleveltheydeemeddesirableinthe tionproblemsthathadrecentlysurfaced,the longerrun.Participantscontinuedtoattachan restraintingovernmentspendingresultingfromthe unusuallyhighdegreeof uncertaintytotheirprojec- strainedfiscalconditionsof manystatesandmunicitionsrelativetolonger-runnorms.Whilemanypar- palities,andcreditconditionsatbanksthatwere ticipantsjudgedtheriskssurroundingtheirprojec- likelytoeasefairlyslowly.Participantsanticipated tionsof eachvariabletobebroadlybalanced,asimi- that,intheabsenceof furthershocks,theeconomy larnumberindicatedthatthecombinationof wouldconvergeovertimetoalonger-runrateof real downsideriskstogrowthandupsideriskstounem- GDPgrowthof 2.5to2.8percent,unchangedfrom ploymentpredominated. June. TheOutlook Participantsexpectedthatconditionsinlabormar- Thecentraltendencyof participants’projectionsof ketswouldimprovegraduallybeginningnextyear. realGDPgrowthin2010wasanarrowbandfrom Thecentraltendencyof theirprojectionsof theaver- 2.4to2.5percent,downfrom3.0to3.5percentin ageunemploymentrateinthefourthquarterof this June.Participantsstatedthatincomingeconomic yearwas9.5to9.7percent.Uncertaintyonthepart datahadweighedheavilyontheirforecastsfor of employersaboutthesustainabilityof therecovery growththisyear.TheBureauof EconomicAnalysis wasgenerallyanticipatedtoebbovertheforecast publisheditscomprehensiveannualrevisionsand period,andparticipantsexpectedthathiringwould advanceestimateof second-quarterGDPafterpar- graduallypickupandunemploymentwoulddecline ticipantssubmittedtheirJuneprojections,andthese slowly.Thecentraltendencyof theirunemployment datashowedthattheexpansioninrealGDPinthe rateprojectionsfortheendof theforecastperiodin firsthalf of theyearhadbeenslowerthanthepar- 2013was6.9to7.4percent.Onthewhole,theprojecticipantshadexpected.Themostrecentdataonout- tionssuggestamoregradualdeclineinunemployputgrowthinthethirdquarterindicatedthatthe mentoverthenextfewyearsthanhadbeenexpected economyhadcontinuedtoexpandmodestly.Partici- inJune,consistentwiththeparticipants’assessments pantsnotedthatconsumerspendingappeared of somewhatweakergrowthprospects.Participants restrainedbylowerhouseholdwealth,relativelytight notedthatthemoregradualrecoverywasreflectedin creditconditionsinsomemarkets,andhouseholds’ improvementsinthelabormarkettodatethathad ongoingdesiretorepairtheirbalancesheets.Inaddi- beenslowertomaterializethanpreviouslyantici-

Minutesof FederalOpenMarketCommitteeMeetings 273 pated.Someparticipantsattributedaportionof the Table2.Averagehistoricalprojectionerrorranges upwardrevisionintheirprojectionsof unemploy- Percentagepoints mentoverthenexttwoyearstolonger-livedstructuraladjustmentsinlabormarkets,andtheyraised Variable 2010 2011 2012 2013 theirestimatesof theunemploymentratethatwould ChangeinrealGDP1 ±0.6 ±1.4 ±1.8 ±1.8 prevailinthelongerrunaccordingly.Asaresult,par- Unemploymentrate1 ±0.2 ±0.9 ±1.4 ±1.5 ticipants’longer-runprojectionsof unemployment Totalconsumerprices2 ±0.5 ±1.0 ±1.1 ±1.1 exhibitedacentraltendencyof 5.0to6.0percent, Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared substantiallywiderthanthecentraltendencyof errorofprojectionsfor1990through2009thatwerereleasedinthefallby 5.0to5.3percentreportedinJune. variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast Uncertainty,”undercertainassumptions,thereisabouta70percentprobability thatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein Participants’inflationprojectionsedgedupsince rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Further informationisinDavidReifschneiderandPeterTulip(2007),“Gaugingthe Junebutcontinuedtoindicatethatinflationwas UncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,”Finance expectedtoremainsubduedoverthenextseveral andEconomicsDiscussionSeries2007-60(Washington:BoardofGovernorsof theFederalReserveSystem,November). years.Participantsnotedthatthehighdegreeof 1 Fordefinitions,refertogeneralnoteintable1. slackinresourcemarketswouldhelpkeepinflation 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen relativelylowovertheforecasthorizon.Atthesame mostwidelyusedingovernmentandprivateeconomicforecasts.Projection ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof time,appropriatemonetarypolicy,combinedwith theyearindicated. well-anchoredinflationexpectations,wasseenas likelytoresultinamodestlevelof inflation,avoiding eitheranundesirableincreaseorafurtherdecreasein downside,theriskstotheirforecastof unemployinflation.Thecentraltendencyof participants’promentastiltedtotheupside,orboth.Someof these jectionsforpersonalconsumptionexpenditures participantsnotedthatitwouldbemoredifficult (PCE)inflationwas1.2to1.4percentin2010,1.1to thanusualtoaddressfuturenegativeshockstothe 1.7percentin2011,1.1to1.8percentin2012,and realeconomy,shouldtheymaterialize,becausethe 1.2to2.0percentin2013.Increasesinenergyand FederalReservehadalreadymovednominalshortothercommoditypriceswereexpectedtoboostheadterminterestratesclosetozero,andbecausetheysaw linePCEinflationovertheforecastperiod,withcore thelikelihoodof furtherfiscalstimulusasbeingquite inflationlikelytorunatasomewhatlowerpace. limited.Inaddition,someof theseparticipantsnoted Mostparticipants’projectionsof inflationoverthe thattheanticipatedrecoveryof thehousingmarket nextseveralyearsdidnotexceedtherateof longermighttakelongerthanexpected. runinflationthattheyindividuallyconsideredmost consistentwiththeFederalReserve’sdualmandate Regardinginflation,afewparticipantsjudgedthat formaximumemploymentandstableprices.Particitheuncertaintysurroundingtheirprojectionswas pants’projectionsof thismandate-consistentrateof broadlysimilartohistoricalnorms,butmostcontininflationexhibitedacentraltendencyof 1.6to uedtoattachanunusuallyhighdegreeof uncertainty 2.0percent,littlechangedfromJune. totheseprojections.Mostparticipantscontinuedto assesstheriskstotheirinflationforecastsasbroadly UncertaintyandRisks balanced,althoughsomejudgedthatdownsiderisks AstheydidinJune,mostparticipantsattacheda predominatedandacouplejudgedthatupsiderisks higherdegreeof uncertaintytotheirprojectionsof predominated.Participantscitingdownsiderisks outputgrowthandunemploymentovertheforecast notedconcernsaboutthedegreetowhichlingering horizonthanishistoricallytypical.1Whileamajority resourceslackintheeconomywasputtingdownward of participantsjudgedtheriskstooutputgrowthas pressureoninflation,oraboutthepossibleeffects broadlybalanced,manyparticipantsviewedtherisks thatanextendedperiodof lowreadingsonactual totheirforecastof outputgrowthasweightedtothe inflationmighthaveinreducinginflationexpectations.Thosewhoindicatedupsideriskstoinflation 1 Table2providesestimatesofforecastuncertaintyforthechange generallypointedtoconcernsrelatingtotheunusual inrealGDP,theunemploymentrate,andtotalconsumerprice inflationovertheperiodfrom1989to2009.Attheendofthis sizeof theFederalReserve’sbalancesheet,which,if summary,thebox“ForecastUncertainty”discussesthesources leftinplacefortoolong,mighteventuallybeginto andinterpretationofuncertaintyineconomicforecastsand erodethestabilityof longer-terminflation explainstheapproachusedtoassesstheuncertaintyandrisks attendingparticipants’projections. expectations.

274 97thAnnualReport|2010 DiversityofViews tivetoJune.Thedistributionof theirestimatesof the Informationaboutthediversityof participants’ longer-runrateof unemploymentshowedmodest viewsregardingthelikelyoutcomesforrealGDP changessinceJune,and,asnotedpreviously,thecengrowthandtheunemploymentrateoverthenextfew traltendencyof theseprojectionswidened. yearsisprovidedinfigures2.Aand2.B,respectively. Thedispersionintheseprojectionsreflectsdiffer- Figures2.Cand2.Dprovidecorrespondinginformaencesinparticipants’assessmentsof manyfactors, tionaboutthediversityof participants’outlooksfor includingthecurrentdegreeof underlyingmomen- inflation.Thedistributionsof participants’projectumineconomicactivity,theamountof restrainton tionsforoverallandcorePCEinflationin2010nareconomicactivitylikelytoresultfromlowreadings rowedsomewhatandmovedabithighercompared onconsumerandbusinesssentimentandrelatively withthepatternstheseprojectionsdisplayedinJune. tightcreditconditions,howquicklyandtowhat Mostof thedistributionsof theparticipants’infladegreeparticularlyhard-hitsectorsof theeconomy tionprojectionsfor2011and2012alsobecamesomewillrecover,thedegreeof supportforeconomic whatmoreconcentratedrelativetoJune.Particiactivityfromconditionsinfinancialmarkets,andthe pants’forecastsof overallinflationoverthelonger formanddegreeof appropriatefuturemonetary runremainedinarelativelynarrowband.Ingeneral, policyanditseffectsoneconomicactivity.With participants’projectionsof inflationoverthenext muchof thedatafor2010nowinhand,thedisper- fewyearsexhibitdispersionbecauseof differencesin sionof participants’projectionsof outputgrowth theirjudgmentsregardingthedeterminantsof inflathisyearnarrowedquiteabitrelativetoJune.While tion,includingtheirestimatesof thedegreeof thedistributionsof participants’projectionsof real resourceslackandtheirassessmentsof theextentto GDPgrowthin2011and2012shiftedlowersince whichsuchslackinfluencesinflationoutcomesand June,thedegreeof dispersiondisplayedinthesepro- expectations.Bycontrast,therelativelyconcentrated jectionswaslittlechanged.Thedispersionassociated distributionof participants’longer-runinflationprowithparticipants’longer-runprojectionsof output jectionsshowsthesubstantialsimilarityinthepargrowthalsochangedlittlefromJune.Regarding ticipants’assessmentsof theapproximatelevelof unemployment,thedistributionsof participants’ inflationthatismostconsistentwiththeFederal projectionsof thisvariablefor2010through2012 Reserve’sdualobjectivesof maximumemployment generallyshiftedupsomewhat,andthedistribution andstableprices. of theirforecastsfor2012widenednoticeably,rela-

Minutesof FederalOpenMarketCommitteeMeetings 275 Figure2.A.Distributionofparticipants’projectionsforchangeinrealGDP,2010–13andoverthelongerrun

276 97thAnnualReport|2010 Figure2.B.Distributionofparticipants’projectionsfortheunemploymentrate,2010–13andoverthelongerrun

Minutesof FederalOpenMarketCommitteeMeetings 277 Figure2.C.Distributionofparticipants’projectionsforPCEinflation,2010–13andoverthelongerrun

278 97thAnnualReport|2010 Figure2.D.Distributionofparticipants’projectionsforcorePCEinflation,2010–13

Minutesof FederalOpenMarketCommitteeMeetings 279 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers jectionsarebroadlybalanced,thenumbersreported oftheBoardofGovernorsandthepresidentsofthe intable2wouldimplyaprobabilityofabout70per- FederalReserveBanksinformdiscussionsofmon- centthatactualGDPwouldexpandwithinarangeof etarypolicyamongpolicymakersandcanaidpublic 2.4to3.6percentinthecurrentyear,1.6to4.4perunderstandingofthebasisforpolicyactions.Con- centinthesecondyear,and1.2to4.8percentinthe siderableuncertaintyattendstheseprojections,how- thirdandfourthyears.Thecorresponding70percent ever.Theeconomicandstatisticalmodelsandrela- confidenceintervalsforoverallinflationwouldbe tionshipsusedtohelpproduceeconomicforecasts 1.5to2.5percentinthecurrentyear,1.0to3.0perarenecessarilyimperfectdescriptionsofthereal centinthesecondyear,and0.9to3.1percentinthe world.Andthefuturepathoftheeconomycanbe thirdandfourthyears. affectedbymyriadunforeseendevelopmentsand events.Thus,insettingthestanceofmonetary Becausecurrentconditionsmaydifferfromthose policy,participantsconsidernotonlywhatappearsto thatprevailed,onaverage,overhistory,participants bethemostlikelyeconomicoutcomeasembodiedin providejudgmentsastowhethertheuncertainty theirprojections,butalsotherangeofalternative attachedtotheirprojectionsofeachvariableis possibilities,thelikelihoodoftheiroccurring,andthe greaterthan,smallerthan,orbroadlysimilartotypipotentialcoststotheeconomyshouldtheyoccur. callevelsofforecastuncertaintyinthepastasshown Table2summarizestheaveragehistoricalaccuracyof intable2.Participantsalsoprovidejudgmentsasto arangeofforecasts,includingthosereportedinpast whethertheriskstotheirprojectionsareweightedto MonetaryPolicyReportandthosepreparedbyFed- theupside,areweightedtothedownside,orare eralReserveBoardstaffinadvanceofmeetingsof broadlybalanced.Thatis,participantsjudgewhether theFederalOpenMarketCommittee.Theprojection eachvariableismorelikelytobeaboveorbelow errorrangesshowninthetableillustratetheconsid- theirprojectionsofthemostlikelyoutcome.These erableuncertaintyassociatedwitheconomicfore- judgmentsabouttheuncertaintyandtherisks casts.Forexample,supposeaparticipantprojects attendingeachparticipant’sprojectionsaredistinct thatrealgrossdomesticproduct(GDP)andtotal fromthediversityofparticipants’viewsaboutthe consumerpriceswillrisesteadilyatannualratesof, mostlikelyoutcomes.Forecastuncertaintyisconrespectively,3percentand2percent.Iftheuncer- cernedwiththerisksassociatedwithaparticular taintyattendingthoseprojectionsissimilartothat projectionratherthanwithdivergencesacrossa experiencedinthepastandtherisksaroundthepro- numberofdifferentprojections.

280 97thAnnualReport|2010 Meeting Held on December 14, 2010 DavidJ.Stockton Economist Ameetingof theFederalOpenMarketCommittee AlanD.Barkema,JamesA.Clouse, washeldintheofficesof theBoardof Governorsin ThomasA.Connors,Jeff Fuhrer,StevenB.Kamin, Washington,D.C.,onTuesday,December14,2010, LawrenceSlifman,ChristopherJ.Waller, at8:30a.m. andDavidW.Wilcox AssociateEconomists Present BrianSack BenBernanke Manager,SystemOpenMarketAccount Chairman PatrickM.Parkinson Director,Divisionof BankSupervisionand WilliamC.Dudley Regulation,Boardof Governors ViceChairman NellieLiang JamesBullard Director,Officeof FinancialStabilityPolicyand ElizabethDuke Research,Boardof Governors ThomasM.Hoenig WilliamNelson SandraPianalto DeputyDirector,Divisionof MonetaryAffairs, Boardof Governors SarahBloomRaskin LindaRobertson EricRosengren AssistanttotheBoard,Officeof BoardMembers, DanielK.Tarullo Boardof Governors KevinWarsh CharlesS.Struckmeyer JanetL.Yellen DeputyStaff Director,Officeof theStaff Director, Boardof Governors ChristineCumming,CharlesL.Evans, RichardW.Fisher,NarayanaKocherlakota, DavidReifschneiderandWilliamWascher andCharlesI.Plosser SeniorAssociateDirectors,Divisionof Researchand AlternateMembersof theFederalOpenMarket Statistics,Boardof Governors Committee AndrewT.Levin JeffreyM.LackerandDennisP.Lockhart SeniorAdviser,Officeof BoardMembers, Presidentsof theFederalReserveBanksof Boardof Governors RichmondandAtlanta,respectively MichaelG.PalumboandJoyceK.Zickler JohnF.Moore DeputyAssociateDirectors,Divisionof Researchand FirstVicePresident,FederalReserveBank Statistics,Boardof Governors of SanFrancisco GretchenC.Weinbach WilliamB.English DeputyAssociateDirector,Divisionof Monetary SecretaryandEconomist Affairs,Boardof Governors DeborahJ.Danker FabioM.Natalucci DeputySecretary AssistantDirector,Divisionof MonetaryAffairs, Boardof Governors MatthewM.Luecke AssistantSecretary RandallA.Williams RecordsManagementAnalyst,Divisionof Monetary DavidW.Skidmore Affairs,Boardof Governors AssistantSecretary DaleRoskom MichelleA.Smith FirstVicePresident,FederalReserveBank AssistantSecretary of Cleveland ScottG.Alvarez HarveyRosenblum,DanielG.Sullivan,and GeneralCounsel JohnC.Williams NathanSheets ExecutiveVicePresidents,FederalReserveBanksof Economist Dallas,Chicago,andSanFrancisco,respectively

Minutesof FederalOpenMarketCommitteeMeetings 281 DavidAltig,RichardP.Dzina,MarkE.Schweitzer, Inlightof ongoingstrainsinsomeforeignfinancial andKei-MuYi markets,theCommitteeconsideredaproposalto SeniorVicePresidents,FederalReserveBanksof extenditsdollarliquidityswaparrangementswith Atlanta,NewYork,Cleveland,andMinneapolis, foreigncentralbankspastJanuary31,2011.After respectively discussingpossiblealternativeperiodsforsuchan extension,theCommitteeunanimouslyapprovedthe TobiasAdrian followingresolution: VicePresident,FederalReserveBankof NewYork SatyajitChatterjee TheFederalOpenMarketCommitteedirectsthe SeniorEconomicAdviser,FederalReserveBank FederalReserveBankof NewYorktoextend of Philadelphia theexistingtemporaryreciprocalcurrency AlexanderL.Wolman arrangements(“swaparrangements”)forthe SeniorEconomist,FederalReserveBank SystemOpenMarketAccountwiththeBankof of Richmond Canada,theBankof England,theBankof Japan,theEuropeanCentralBank,andthe SwissNationalBank.Theswaparrangements Developments in Financial Markets and shallnowterminateonAugust1,2011,unless the Federal Reserve’s Balance Sheet furtherextendedbytheCommittee. Themanagerof theSystemOpenMarketAccount Staff Review of the Economic Situation (SOMA)reportedondevelopmentsindomesticand foreignfinancialmarketssincetheFederalOpen TheinformationreviewedattheDecember14meet- MarketCommittee(FOMC)metonNovember2–3, ingindicatedthateconomicactivitywasincreasingat 2010.HealsoreportedonSystemopenmarket amoderaterate,butthattheunemploymentrate operations,includingthecontinuingreinvestment remainedelevated.Thepaceof consumerspending intolonger-termTreasurysecuritiesof principalpay- pickedupinOctoberandNovember,exportsrose mentsreceivedontheSOMA’sholdingsof agency rapidlyinOctober,andtherecoveryinbusiness debtandagency-guaranteedmortgage-backedsecuri- spendingonequipmentandsoftware(E&S) ties(MBS)aswellastheongoingpurchasesof addi- appearedtobecontinuing.Incontrast,residential tionalTreasurysecuritiesauthorizedattheNovem- andnonresidentialconstructionactivitywasstill ber2–3FOMCmeeting.Sincethelastmeeting,the depressed.Manufacturingproductionregistereda OpenMarketDeskattheFederalReserveBankof solidgaininOctober.Nonfarmbusinessescontinued NewYorkpurchasedatotalof about$105billionof toaddworkersinOctoberandNovember,andthe Treasurysecurities,reflectingabout$30billionof averageworkweekmovedup.Longer-runinflation purchaseswiththeproceedsof principalpayments expectationswerestable,butcoreinflationcontinued andabout$75billionaspartof theauthorized totrendlower. expansionof theFederalReserve’ssecuritiesholdings.PurchaseswereconcentratedinnominalTreas- Labordemandrosefurtherinrecentmonths,but urysecuritieswithmaturitiesof 2to10years,though unemploymentstayedatahighlevel.Theaverage somelonger-termsecuritieswerepurchasedalong increaseinprivatenonfarmpayrollemploymentin withsomeTreasuryinflation-protectedsecurities OctoberandNovemberwasclosetothepaceover (TIPS).TheManageralsodiscussedtheDesk’s theprecedingsixmonths,whiletheaverageworkintentiontoplaceadditionallimitsonitspurchases weekforallemployeesedgedhigher.Thebulkof the of individualsecurities,astheFederalReserve’shold- private-sectorjobgainscontinuedtobeintheseringsof suchsecuritiesincreasedbeyond35percentof vicesindustries;employmentinmanufacturing,conthetotaloutstanding;theselimitswereintendedto struction,andretailtradedeclined,onaverage,in helpensurethatFederalReservepurchasesdonot OctoberandNovember.Employmentatstateand impairtheliquidityinTreasurymarkets.Inaddition, localgovernmentsroseslightlyoverthetwo-month theManagerupdatedtheCommitteeontheSOMA’s period.Anumberof indicatorsof jobopeningsand holdingsof foreign-currencyinstruments.Therewere hiringplansimprovedinOctoberandNovember, noopenmarketoperationsinforeigncurrenciesfor andinitialclaimsforunemploymentinsurance theSystem’saccountovertheintermeetingperiod. trendedsteadilylowerthroughNovemberandearly Byunanimousvote,theCommitteeratifiedthe December.However,theunemploymentrate,which Desk’stransactionsovertheintermeetingperiod. remainedat9.6percentduringtheprecedingthree

282 97thAnnualReport|2010 months,increasedto9.8percentinNovember,while Octoberwereatthelowestlevelinthe48-yearhistory thelaborforceparticipationrateandthe of theseries.Purchasesof existinghomesedged employment-populationratioremaineddepressed. lowerinOctober;inpart,thestill-lowlevelof sales likelyreflectedthepaybackfromtheearliersurgein Industrialproductioninthemanufacturingsector salesassociatedwiththehomebuyertaxcreditand increasedatasolidpaceinOctober,withadvances alsothemoratoriumsonsalesof bank-ownedpropwidespreadacrossindustries;totalindustrialproduc- erties.Measuresof housepricesdeclinedrecently, tionwasunchangedduetoanoffsettingweather- andhouseholds’concernsthathomevaluesmight relateddropintheoutputof utilities.Themanufac- continuetofall,theirpessimismabouttheoutlook turingcapacityutilizationratecontinuedtomoveup foremploymentandincome,andthetightstandards inOctober,althoughitremainedsignificantlybelow facedbymanymortgageborrowersappearedtobe its1972–2009average.Mostindicatorsof near-term weighingondemand. industrialactivity,suchasthenewordersdiffusion indexesinthenationalandregionalmanufacturing Realbusinessinvestmentinequipmentandsoftware surveys,wereatlevelsconsistentwithmoderategains appearedtobeincreasing,althoughthepaceof inindustrialproductioninthenearterm.Motor spendingseemedtohavemoderatedfromtherapid vehicleassemblies,whichroseinOctober,fellbackin rateof thefirsthalf of theyear.TheriseinE&S Novemberbutwerescheduledtomoveupagainin spendingduringthethirdquarter,whilesomewhat comingmonths. slowerthanearlierintheyear,remainedsolidand broadbased,buttheavailabledataforthefourth Thepaceof consumerspendingpickedupinrecent quarterweremixed.Nominalordersandshipments monthsfromthemodestratethatprevailedearlierin of nondefensecapitalgoodsexcludingaircraft theyear.Nominalretailsales,excludingpurchasesat declinedinOctober,andbusinesspurchasesof new motorvehiclesandpartsoutlets,postedastronggain vehiclesinOctoberandNovemberweredownabit inNovember,andrevisedestimatesshowedlarger fromtheirthird-quarterlevel.Incontrast,salesof increasesinSeptemberandOctoberthanpreviously softwarestillappearedtobeonasoliduptrend,and reported.Inaddition,salesof newlightmotor deliveriesof completedaircraftpickedupinNovemvehiclessteppedupinOctoberandremainedatthat ber.Surveysof purchasingmanagersreportedplans higherlevelinNovember.Anumberof factorssup- tostepupcapitalspendingin2011;however,reports portingconsumerspendingalsoimproved.Revised fromsmallbusinessesontheirplannedexpenditures dataonpersonalincomeindicatedthatitwas remaineddownbeat.Businessoutlaysonnonresidenstrongerlastspringandsummerthanpreviously tialstructuresappearedtobedecliningfurther,witha reported.Householdnetworthrosefurtherinthe dropinspendingonbuildingconstructionoffsetonly thirdquarter,asanincreaseinequityvaluesmore slightlybyincreasedinvestmentindrillingandminthanoffsettheeffectof adropinhouseprices.Con- ingstructures.Overallborrowingbynonfinancial sumersentimentturnedmorepositiveinNovember corporationswasrobustagaininNovember,indicaandearlyDecember,retracingmostof thedecline torsof creditqualitycontinuedtoimprove,andsmall thatoccurredduringthesummer.However,while businessesnotedsomeeasingincreditavailability. consumercreditoutstandingshowedsignsof stabi- However,financingconditionsforcommercialreal lizingaftertwoyearsof runoffs,credittermswere estateremainedtight. stillnoticeablylessfavorablethaninthepast,and demandforcreditappearedtoremainweak. Realinventoryinvestmentrosesharplyinthethird quarter,butbook-valuedataforOctobersuggested Activityinthehousingmarketwasstillquite thatthepaceof accumulationwasslowing.Although depressed.InOctober,startsof newsingle-family inventory-salesratiosroseduringthethirdquarter, homesremainedattheverylowlevelthathadpre- surveydataimpliedthatfewbusinessesperceived vailedsinceAugust.Moreover,thelevelof permit inventorystocksasbeingtoohigh. issuance,whichistypicallyanear-termindicatorof newhomebuilding,continuedtorunbelowstarts. ConsumerpriceinflationtrendedlowerinOctober. Thepersistenceof alargeexcesssupplyof existing The12-monthchangeinthetotalpersonalconsumphomesonthemarketandtightcreditconditionsfor tionexpenditures(PCE)priceindexreacheditslowconstructionappearedtoconstituteasignificant estlevelof thepastyear;the12-monthchangeinthe restraintonnewhomebuilding.Demandforhousing PCEpriceindexforcoregoodsandservicesalso alsoremainedveryweak:Salesof newhomesin moveddown.InOctober,corePCEpriceswere

Minutesof FederalOpenMarketCommitteeMeetings 283 unchangedforasecondmonth,asgoodsprices purchasingmanagersindexes(PMIs),pointedtoa declinedandpricesof non-energyservicesposteda reboundineconomicactivityinthefourthquarter. smallincrease.Thebroad-baseddecelerationin Theadvancedforeigneconomies(AFEs)alsosawa underlyinginflationwasalsoapparentinothermeas- slowerriseinrealeconomicactivityinthethirdquarures,suchasthetrimmed-meanPCEpriceindexand terthanoccurredearlierintheyear.Intheeuroarea, adiffusionindexof PCEpricechanges.Despitethe economicperformancecontinuedtodivergeacross riseinagriculturalcommodityprices,theincreasein countries.TheincreaseinGermaneconomicactivity retailfoodpriceswasmodest.Incontrast,consumer inthethirdquarterwasnearlytwicetheeuro-area energypricescontinuedtoriserapidlyinOctober, averagerate,andrecentindicators,includingPMIs andspotpricesof importedcrudeoilmovedhigher, andconsumerandbusinesssentiment,showedfuronnet,duringNovemberandearlyDecember.The thersolidperformance.Incontrast,Spanishecoriseinpricesof nonfuelindustrialcommoditiesmod- nomicactivitystagnatedinthethirdquarter,Greek eratedovertheintermeetingperiodasspotpricesof GDPextendeditsdecline,andmore-recentindicators metalsdeclined,buttheproducerpriceindexfor pointtocontinuedweaknessinperipheralEuropean domesticallymanufacturedintermediategoodsaccel- economies.Headlineinflationratesgenerallypicked eratedinOctoberandNovember.InNovemberand upintheforeigneconomies,drivenlargelybyfood earlyDecember,surveymeasuresof households’ andenergyprices;measuresof inflationexcluding short-andlong-terminflationexpectationsremained foodandenergypriceswererelativelysteady. intherangesthathaveprevailedsincethespringof 2009. Staff Review of the Financial Situation Availablemeasuresof laborcompensationshowed ThedecisionbytheFOMCatitsNovembermeeting thatlaborcostpressureswerestillrestrained.The tomaintainthe0to1∕ 4 percenttargetrangeforthe 12-monthchangeinaveragehourlyearningsforall federalfundsratewaswidelyanticipated.ThedeciemployeesremainedlowinNovember.Inthethird siontoexpanditsholdingsof longer-termsecurities quarter,themodestriseinhourlycompensationin by$600billionbytheendof thesecondquarterof thenonfarmbusinesssectorwasmatchedbyasimi- 2011wasalsoroughlyinlinewithmarketexpectalarincreaseinproductivity. tions,althoughmarketparticipantsappearedto expectthepurchaseprogramwouldbeincreasedover TheU.S.internationaltradedeficitnarrowedconsid- time.IntheweeksfollowingtheNovembermeeting, erablyinOctober,shrinkingtoitslowestlevelsince yieldsonnominalTreasurysecuritiesincreasedsigthebeginningof theyear,asexportssurgedand nificantly,asinvestorsreportedlyreviseddowntheir importsedgeddown.Thestrengthinexportswas estimatesof theultimatesizeof theFOMC’snew relativelybroadbased.Exportsof industrialsupplies asset-purchaseprogram.Incomingeconomicdata andagriculturalgoodsregisteredthelargest thatwereviewed,onbalance,asfavorabletotheoutincreases,althoughrisingpricesaccountedforsome lookandnewsof atentativeagreementbetweenthe of thosegains.Exportsof machineryandautomotive Administrationandsomemembersof theCongress productsalsorosestrongly.Thedecreaseinimports regardingapackageof fiscalmeasuresalsoreportwasconcentratedinpetroleumproducts,reflecting edlycontributedtothebackupinyields.Marketparlowervolumes,andincomputers.Incontrast, ticipantspointedtoabruptchangesininvestorposiimportsof consumergoodspostedanoticeable tions,theeffectsof theapproachingyear-endon increase. marketliquidity,andhedgingflowsassociatedwith investors’holdingsof MBSasfactorsthatmayhave Recentdatareleasesconfirmedthat,intheaggregate, amplifiedtheriseinyields.Futuresquotessuggested theriseinforeignrealgrossdomesticproduct(GDP) thatthepathforthefederalfundsrateexpectedby slowedsharplyinthethirdquarterfromthevery marketparticipantsroseovertheintermeeting rapidpaceearlierintheyear.Theslowdownwas period. mostpronouncedintheemergingmarketeconomies (EMEs),whereeconomicactivitywasrestrainedby TheincreaseinyieldsonnominalTreasurycoupon theabatementof inventoryrebuildingandtheassoci- securitieswasaccompaniedbyincreasesinyieldson atedwaningof thereboundinglobaltrade,the TIPS.TIPS-basedinflationcompensationmovedup unwindingof fiscalstimulusmeasures,andacontin- atthe5-yearhorizonamidrisingenergyprices,but uedtighteningof monetarypoliciesinseveralcoun- forwardinflationcompensation5to10yearsahead tries.MorerecentindicatorsfortheEMEs,including wasaboutunchanged.Yieldsoninvestment-grade

284 97thAnnualReport|2010 corporatebondsroseaboutinlinewiththoseon high.Nonfinancialcommercialpaperoutstanding comparable-maturityTreasurysecurities,leavingrisk declinednoticeablyduringOctoberandNovember, spreadsaboutunchanged;spreadsonspeculative- inpartbecausesomefirmsreportedlyshiftedto gradecorporatebondsmoveddownsomewhat. bondfinancing.Grosspublicequityissuancebynon- Secondary-marketpricesforleveragedloansrose financialfirmsthroughseasonedandinitialpublic slightlyovertheintermeetingperiod,whilebid-asked offeringswasparticularlystronginNovember.Measspreadsinthatmarketcontinuedtodriftdown. uresof thecreditqualityof nonfinancialcorporationscontinuedtoimprove. Somesignsof modeststressemergedincertainshorttermfundingmarketsovertheintermeetingperiodas Conditionsinthecommercialrealestatemarket investorsfocusedincreasinglyontheevolvingsitua- remainedtight.CommercialmortgagedebtwasestitioninEurope.Thespreadof thethree-monthLon- matedtohavedeclinedinthethirdquarter,andthe doninterbankofferedrate(orLibor)forwardrate delinquencyratesforsecuritizedcommercialmortagreementoverthethree-monthforwardovernight gagesandthoseforexistingpropertiesatcommercial indexswap(OIS)ratemovedabithigher,onbalance, banksincreasedfurther.However,somemodestsigns perhapspointingtoheightenedconcernsabout of improvementcontinuedtosurface.Pricesof comfuturefundingconditions.Inthecommercialpaper mercialrealestatechangedlittle,onbalance,over market,spreadsincreasedonpaperissuedbyfinan- SeptemberandOctober,holdingintherelativelynarcialinstitutionswithparentsinperipheralEuropean rowrangethathadprevailedsincethespringwhen countries,andtheamountoutstandingof suchpaper thesteepdeclineinthesepricesended.Issuanceof declined.Spreadsonasset-backedcommercialpaper commercialmortgage-backedsecuritiesincreasedin weresomewhatvolatileovertheintermeetingperiod. Novemberbutwasstillfarbelowpre-crisislevels. Nonetheless,spreadsonnonfinancialcommercial paperremainedatlowlevels,asdidthespreadsof Residentialmortgageratesroseconsiderablyoverthe dollarLiboroverOISratesatone-andthree-month intermeetingperiod,thoughnotbyasmuchasrates maturities. onlonger-termTreasurysecurities.Thespread betweenmortgageratesandMBSyieldsdropped BroadU.S.equitypriceindexesincreasedmoderately, back,reversingthewideningof thespreadthat onnet,overtheintermeetingperiod,inpartreflect- occurredovertheprecedingseveralmonths.Refiingincomingeconomicdatathatwerereadbyinves- nancingactivitydeclinedinresponsetothehigher torsassuggestingthattherecoverycouldbegaining mortgagerates.Outstandingresidentialmortgage traction,atleastoutsidethehousingsector.Stock debtwasestimatedtohavecontractedinthethird pricesfordomesticcommercialbankswerevolatile quarteratabouttheaveragerateof declineseenover butoutperformedbroadindexesonbalance.Option- theprecedingyear.Delinquencyratesonprimeand impliedvolatilityontheS&P500indexfellmodestly, subprimemortgagestickeddownbutremained andthespreadbetweenthestaff’sestimateof the extremelyelevated. expectedrealreturnonequityforS&P500firmsand thereal10-yearTreasuryyield—aroughmeasureof Incontrast,theconsumercreditmarketexhibited theequityriskpremium—narrowedabit,althoughit continuedsignsof stabilization.Althoughconsumer remainedelevatedrelativetolonger-runnorms. creditcontractedinthethirdquarter,thedeclinewas thesmallestsincelate2008,andconsumercredit IntheDecember2010SeniorCreditOfficerOpinion edgedhigherinOctober.Thepaceof issuanceof SurveyonDealerFinancingTerms,dealersreported consumerasset-backedsecuritiesinNovemberwas aneasingof credittermsovertheprecedingthree slightlyabovetheaveragefortheyeartodate,and monthswithrespecttosecuritiesfinancingtransac- thedelinquencyrateonconsumerloansatbanks tionsandacrossarangeof counterparties.Dealers declinedfurtherinthethirdquarter. alsonotedthatdemandforfundingof alltypesof securitiesincreasedoverthesamereferenceperiod. Commercialbankcreditwasaboutflat,onaverage, duringOctoberandNovember.Bankscontinuedto NetdebtfinancingbyU.S.nonfinancialcorporations increasetheirholdingsof securities,whilecore continuedtoberobustinNovember.Grossissuance loans—thesumof commercialandindustrial(C&I), of corporatebondswasveryheavy,particularlyfor realestate,andconsumerloans—decreasedmoderspeculative-gradefirms.Investordemandforsyndi- ately.Thedeclineswereattributabletoadropinconcatedleveragedloansalsoappearedtohaveremained sumerloansaswellastocontinuedrunoffsincom-

Minutesof FederalOpenMarketCommitteeMeetings 285 mercialrealestateandhomeequityloans.Incon- ECBtonormalizepolicy,butroseinsomeother trast,C&Iloansedgedup,endinganearlytwo-year AFEs.Ten-yearsovereignyieldsincreasedsignifistringof monthlydeclines.Inaddition,theSurveyof cantlythroughouttheAFEs,althoughbylessthan Termsof BusinessLendingconductedinthefirst yieldsintheUnitedStates.Headlinestockprice weekof NovembershowedthatinterestratesonC&I indexesintheAFEsgenerallyendedtheperiod loansweregenerallylittlechangedwhilespreads higher,whereasbankstocksinEuropedeclined. remainedextremelywide. ThePeople’sBankof Chinaraisedtherequired AccordingtothelatestCallReportdata,bankprofit- reserveratioforbanksacumulative150basispoints abilitywaslittlechangedinthethirdquarter,remain- overtheintermeetingperiod,andothercentralbanks ingpositivebutwellbelowpre-crisislevels.Asinthe inemergingAsiaincreasedpolicyrates.China’s secondquarter,banks’netincomesweresupported ShanghaiCompositeIndexfellinthewakeof Chibydeclinesinloanlossprovisioning,whilerevenues nesepolicyactions,whileotheremergingmarket declined.Bankscontinuedtoboostregulatorycapital stockindexesweremixedovertheperiod.InLatin ratios,likely,atleastinpart,inanticipationof the America,Brazil’scentralbankalsoraisedreserve needtoeventuallymeetstricterBaselIIIstandards. requirementslateintheperiod.Thedollarappreciatedslightly,onaverage,againsttheemergingmarket M2expandedatamoderaterateinNovember.Inter- currencies,althoughitedgeddownagainsttheChiestratesavailableonallM2assetsremainedverylow, neserenminbi. andhouseholdscontinuedtoshifttheirholdingsof M2assetstowardliquiddeposits,whichcontinuedto Staff Economic Outlook riserapidly,andawayfromsmalltimedepositsand retailmoneymarketmutualfunds.Currency Withtherecentdataonproductionandspending increasedstrongly,withindicatorssuggestingrobust stronger,onbalance,thanthestaff anticipatedatthe demandfromabroad. timeof theNovemberFOMCmeeting,thestaff revisedupitsprojectedincreaseinrealGDPinthe Theforeignexchangevalueof thedollar,which nearterm.However,thestaff’soutlookforrealecodepreciatedimmediatelyfollowingtheFOMC’s nomicactivityoverthemediumtermwaslittle Novemberannouncementof furtherassetpurchases, changed,onnet,relativetotheprojectionprepared subsequentlyappreciatedamidintensifyingconcerns fortheNovembermeeting.Thestaff forecastincoraboutstressesintheeuroareaandsomeapparent poratedtheassumptionthatnewfiscalactions,some reassessmentbyinvestorsof themonetarypolicy of whichhadnotbeenanticipatedinitsprevious outlookintheUnitedStates.Onnet,thedollar forecast,werelikelytoboostthelevelof realGDPin endedtheintermeetingperiodupagainstmostcur- 2011and2012.But,comparedwiththeNovember rencies,withparticularlylargegainsagainsttheeuro. forecast,anumberof otherconditioningassump- Theannouncementof theEuropeanUnion(EU)- tionswerelessfavorable:Housepricesandhousing InternationalMonetaryFund(IMF)financialaid activitywerelikelytobelower,whileinterestrates,oil packageforIrelandonNovember28didlittleto prices,andtheforeignexchangevalueof thedollar reversethedepreciationof theeuro,asinvestors wereprojectedtobehigher,onaverage,thanprevireportedlybecameincreasinglyconcernedabout ouslyassumed.Asaresult,althoughthestaff projecothereuro-areaeconomiesandtheadequacyof tionshowedahigherlevelof realGDP,theaverage resourcesavailabletosupportthemshouldtheycome paceof growthover2011and2012waslittlechanged understress.Spreadsof sovereignyieldsinsome fromtheNovemberforecast,andtheunemployment peripheraleuro-areacountriesoverthoseonGerman ratewasstillprojectedtodeclineslowly. bundsrosetonewhighs,althoughtheyfellbacknear theendof theintermeetingperiodamidreportsthat Theunderlyingrateof consumerpriceinflationin theEuropeanCentralBank(ECB)hadincreasedits recentmonthswaslowerthanthestaff expectedat purchasesof IrishandPortuguesesovereigndebt. thetimeof theNovembermeeting,andthestaff Banksintheeuro-areaperipherycontinuedtorely forecastanticipatedthatcorePCEpriceswouldrisea heavilyonfundingfromtheECB,andsomesignsof bitmoreslowlyin2011and2012thanpreviously increaseddollarfundingpressuresemerged.Implied projected.Asinearlierforecasts,thepersistentwide short-terminterestratesforthecomingyearshifted marginof economicslackintheprojectionwas downintheeuroarea,asmarketparticipantsappar- expectedtosustaindownwardpressureoninflation, entlyscaledbackthepaceatwhichtheyexpectedthe buttheongoingstabilityininflationexpectationswas

286 97thAnnualReport|2010 anticipatedtostemfurtherdisinflation.Thestaff closedhomeswerecontributingtoafurtherdecline anticipatedthatrelativelyrapidincreasesinenergy inhouseprices.Thelowerhouseprices,inturn,were priceswouldraisetotalconsumerpriceinflation seenasreducinghouseholdwealthandthusrestrainabovethecorerateinthenearterm,butthatthis inggrowthinconsumerspending. upwardpressurewoulddissipateby2012. Anumberof participantsnotedthattheirbusiness Participants’ Views on Current Conditions contactshadbecomemoreoptimisticabouttheoutand the Economic Outlook lookforsalesandproduction.Nonetheless,many contactsremainedcautiousabouthiringandinvest- Intheirdiscussionof theeconomicsituationand ment,withsomereportedlyconcernedaboutthe outlook,meetingparticipantssawtheinformation potentialeffectsof governmentpolicies.Themanureceivedduringtheintermeetingperiodaspointing facturing,agriculture,andenergysectorsshowed tosomeimprovementinthenear-termoutlook,and particularsignsof strength,andthehigh-techsector theyexpectedthateconomicgrowth,whichhadbeen appearedtobeimproving.However,nonresidential moderate,wouldpickupsomewhatgoingforward. constructionremainedveryweak,apartfromdrilling Indicatorsof productionandhouseholdspending andmining.Itwasnotedthatcreditconditionshad hadstrengthened,andthetoneof thelabormarket easedfurther,althoughnonfinancialcorporations wasalittlebetteronbalance.Thenewfiscalpackage continuedtoholdveryhighlevelsof cash. wasgenerallyexpectedtosupportthepaceof recoverynextyear.However,anumberof factorswere Conditionsinthelabormarketappearedtobe seenaslikelytocontinuerestraininggrowth,includ- improvingonbalance.Thatimprovementwas ingthedepressedhousingmarket,employers’contin- reflectedinarangeof recentindicators,includinga uedreluctancetoaddtopayrolls,andongoingefforts decliningnumberof newjoblessclaims,anincrease bysomehouseholdsandbusinessestodelever.More- injobopenings,andanuptickintheaverageworkover,therecoveryremainedsubjecttosomedownside week.Nonetheless,participantsnotedthatthepace risks,suchasthepossibilityof amoreextended of hiringwasstillsluggish;indeed,theunemployperiodof weakactivityandlowerpricesinthehous- mentratehadedgedhigherinNovember,andthe ingsectorandpotentialfinancialandeconomicspill- employment-populationratioremainedverylow. oversif thebankingandsovereigndebtproblemsin Europeweretoworsen.Inlightof recentreadingson Interestratesatintermediateandlongermaturities consumerinflation,participantsnotedthatunderly- rosesubstantiallyovertheintermeetingperiod,while inginflationhadcontinuedtrendingdownward,but creditspreadswereroughlyunchangedandequity severalsawtheriskof deflationashavingreceded pricesrosemoderately.Participantspointedtoa somewhat. numberof factorsthatappearedtohavecontributed tothesignificantbackupinyields,includingan Inthehouseholdsector,incomingdataonretailsales apparentdownwardreassessmentbyinvestorsof the weresomewhatstrongerthanexpected,andthere likelyultimatesizeof theFederalReserve’sassetweresomereasonablyupbeatreportsfrombusiness purchaseprogram,economicdatathatwereseenas contactsregardingholidayspending.Consumercon- suggestinganimprovedeconomicoutlook,andthe fidenceappearedtobeimproving.Financialobliga- announcementof apackageof fiscalmeasuresthat tionsanddebtservicecostshadbeendecliningasa wasexpectedtobolstereconomicgrowthand shareof householdincome,andthatprocesswas increasethedeficitovercomingquarters.Itwas seenasprovidinggreaterlatitudeforapickupindis- notedthatthebackupinratesmayhavebeenamplicretionarypurchases.Nonetheless,therewereindica- fiedbyyear-endpositioning,aswellasbysome tionsthatretailspendingbymiddle-andlower- reportedmortgage-relatedhedgingflows.Anumber incomehouseholdshadrisenlessthanspendingby of participantsindicatedthat,becausethebackupin high-incomehouseholds,suggestiveof ongoing ratesappearedtoimportantlyreflectchangesin financialpressuresonthoseof moremodestmeans. investors’expectationsaboutthesizeof Federal Furthermore,thehousingsector,includingresiden- Reserveassetpurchases,thebackupwasconsistent tialconstructionandhomesales,continuedtobe withpurchaseshelpingtokeeplonger-termyields depressed.Someparticipantsnotedthattheelevated lowerthanwouldotherwisebethecase.Severalmeetsupplyof availablehomesandtheoverhangof fore- ingparticipantsmentionedthecommunicationschal-

Minutesof FederalOpenMarketCommitteeMeetings 287 lengesfacedinconductingeffectivepolicy,including authoritiesweretakingstepstostabilizeconditionsin theneedtoclearlyconveytheCommittee’sviews theeuroarea. whileappropriatelyairingindividualperspectives. Regardingtheoutlookforinflation,participantsgen- Measuresof underlyinginflationcontinuedtotrend erallyanticipatedthatinflationwouldremainfor downwardovertheintermeetingperiod,withthe sometimebelowlevelsjudgedtobemostconsistent, slowdowninpriceincreasesevidentacrosscategories overthelongerrun,withmaximumemploymentand of goodsandservicesandacrossdifferentinflation pricestability.Inparticular,mostparticipants measures.Althoughthepricesof somecommodities expectedthatunderlyingmeasuresof inflationwould andimportedgoodshadrisenappreciably,several bottomoutaroundcurrentlevelsandthenmove participantsnotedthatbusinessesseemedtohave graduallyhigherastherecoveryprogresses.Afew littleabilitytopasstheseincreasesontotheircus- participantspointedtotheriskthattheongoing tomers,giventhesignificantslackintheeconomy. expansionof theFederalReserve’sbalancesheetand Also,thehighlevelof unemploymentwaslimiting thesustainedlowlevelof short-terminterestrates gainsinwagesandtherebycontributingtothelow couldtriggerundesirableincreasesininflationexpeclevelof inflation.TIPS-basedmeasuresof inflation tationsandsoinactualinflation.Tominimizesuch compensationhadrisenmodestlyovertheintermeet- risks,itwasnotedthattheCommitteeshouldconingperiod,whilesurveysof householdsandprofes- tinueitsplanningfortheeventualexitfromthecursionalforecasterscontinuedtosuggestthatlonger- rentexceptionallyaccommodativestanceof policy. terminflationexpectationsremainedstable. Otherparticipantsnotedthat,withsubstantial resourceslackpersisting,underlyinginflationmight Regardingtheiroveralloutlookforeconomicactiv- fallfurtherbelowthelevelsthattheCommitteesees ity,participantsgenerallyagreedthat,evenwiththe asconsistentwithitsmandate.Nonetheless,several positivenewsreceivedovertheintermeetingperiod, participantssawtheriskof deflationashaving themostlikelyoutcomewasagradualpickupin recededsomewhatoverrecentmonths. growthwithslowprogresstowardmaximumemployment.However,theyheldarangeof viewsaboutthe Committee Policy Action riskstothatoutlook.Afewmentionedthepossibility thatgrowthcouldpickupmorerapidlythan Membersnotedthat,whileincominginformation expected,particularlyinlightof theveryaccommo- overtheintermeetingperiodhadincreasedtheircondativestanceof monetarypolicycurrentlyinplace.It fidenceintheeconomicrecovery,progresstowardthe wasnotedthatsuchanaccelerationwouldlikelybe Committee’sdualobjectivesof maximumemployaccompaniedbysignificantlymorerapidgrowthin mentandpricestabilitywasdisappointinglyslow.In banklendingandinthemonetaryaggregates,sug- addition,membersgenerallyexpectedthatprogress gestingthatsuchindicatorsmightprovetobeuseful waslikelytoremainmodest,withunemploymentand sourcesof information.Otherspointedtodownside inflationdeviatingfromtheCommittee’sobjectives riskstogrowth.Onecommonconcernwasthatthe forsometime.Accordingly,intheirdiscussionof housingsectorcouldweakenfurtherinlightof the monetarypolicyfortheperiodimmediatelyahead, considerablesupplyof houseseitheronthemarket nearlyallCommitteemembersagreedtocontinue orlikelytocometomarket.Anotherconcernwasthe expandingtheFederalReserve’sholdingsof longerongoingdeteriorationinthefiscalpositionof U.S. termsecuritiesasannouncedinNovemberinorder statesandlocalities,whichcouldleadtosharpcutsin topromoteastrongerpaceof economicrecoveryand spendingandincreasesintaxes.Inaddition,partici- tohelpensurethatinflation,overtime,isatlevels pantsexpressedconcernsaboutapossibleworsening consistentwiththeCommittee’smandate.TheComof thebankingandfinancialstrainsinEurope,which mitteedecidedtomaintainitsexistingpolicyof reincouldspillovertoU.S.financialmarketsandinstitu- vestingprincipalpaymentsfromitssecuritiesholdtions,andsotothebroaderU.S.economy.They ingsintolonger-termTreasurysecurities.Inaddition, observedthatmarketstressesinEuropeintensified theCommitteeagreedtocontinuebuyinglongerduringtheintermeetingperiod,requiringanassis- termTreasurysecuritieswiththeintentionof purtancepackageforIrelandfromtheEUandtheIMF, chasing$600billionof suchsecuritiesbytheendof andthatafterthatpackagewasannounced,market thesecondquarterof 2011,apaceof about$75bilattentionappearedtoshifttootherEuropeancoun- lionpermonth.Whiletheeconomicoutlookwas tries.Participantsnoted,however,thattheEuropean seenasimproving,membersgenerallyfeltthatthe

288 97thAnnualReport|2010 changeintheoutlookwasnotsufficienttowarrant AccountManagerandtheSecretarywillkeep anyadjustmentstotheasset-purchaseprogram,and theCommitteeinformedof ongoingdevelopsomenotedthatmoretimewasneededtoaccumulate mentsregardingtheSystem’sbalancesheetthat informationontheeconomybeforeconsideringany couldaffecttheattainmentovertimeof the adjustment.Membersemphasizedthatthepaceand Committee’sobjectivesof maximumemployoverallsizeof thepurchaseprogramwouldbecon- mentandpricestability.” tingentoneconomicandfinancialdevelopments; however,someindicatedthattheyhadafairlyhigh Thevoteencompassedapprovalof thestatement thresholdformakingchangestotheprogram.The belowtobereleasedat2:15p.m.: Committeealsodecidedtomaintainthetargetrange forthefederalfundsrateat0to1∕ 4 percentandto “InformationreceivedsincetheFederalOpen reiterateitsexpectationthateconomicconditionsare MarketCommitteemetinNovemberconfirms likelytowarrantexceptionallylowlevelsforthefed- thattheeconomicrecoveryiscontinuing, eralfundsrateforanextendedperiod.Onemember thoughataratethathasbeeninsufficientto dissentedfromtheCommittee’spolicydecision, bringdownunemployment.Householdspendjudgingthat,inlightof theimprovingeconomy,a ingisincreasingatamoderatepace,butremains continuedhighlevelof monetaryaccommodation constrainedbyhighunemployment,modest wouldincreasetherisksof futureeconomicand incomegrowth,lowerhousingwealth,andtight financialimbalances.MembersagreedthattheCom- credit.Businessspendingonequipmentand mitteeshouldcontinuetoregularlyreviewthepaceof softwareisrising,thoughlessrapidlythanearitssecuritiespurchasesandtheoverallsizeof the lierintheyear,whileinvestmentinnonresidenprograminlightof incominginformation—including tialstructurescontinuestobeweak.Employers informationontheeconomicoutlook,theefficacyof remainreluctanttoaddtopayrolls.Thehousing theprogram,andanyunintendedconsequencesthat sectorcontinuestobedepressed.Longer-term mightarise—andmakeadjustmentsasneededtobest inflationexpectationshaveremainedstable,but fostermaximumemploymentandpricestability. measuresof underlyinginflationhavecontinued Withrespecttothestatementtobereleasedfollowing totrenddownward. themeeting,membersagreedthatonlysmallchanges werenecessarytoreflectthemodestimprovementin Consistentwithitsstatutorymandate,theComthenear-termeconomicoutlook. mitteeseekstofostermaximumemployment andpricestability.Currently,theunemployment Attheconclusionof thediscussion,theCommittee rateiselevated,andmeasuresof underlying votedtoauthorizeanddirecttheFederalReserve inflationaresomewhatlow,relativetolevelsthat Bankof NewYork,untilitwasinstructedotherwise, theCommitteejudgestobeconsistent,overthe toexecutetransactionsintheSystemAccountin longerrun,withitsdualmandate.Althoughthe accordancewiththefollowingdomesticpolicy Committeeanticipatesagradualreturnto directive: higherlevelsof resourceutilizationinacontext of pricestability,progresstowarditsobjectives “TheFederalOpenMarketCommitteeseeks hasbeendisappointinglyslow. monetaryandfinancialconditionsthatwillfosterpricestabilityandpromotesustainable Topromoteastrongerpaceof economicrecovgrowthinoutput.Tofurtheritslong-runobjec- eryandtohelpensurethatinflation,overtime, tives,theCommitteeseeksconditionsinreserve isatlevelsconsistentwithitsmandate,theCommarketsconsistentwithfederalfundstradingin mitteedecidedtodaytocontinueexpandingits arangefrom0to1∕ 4 percent.TheCommittee holdingsof securitiesasannouncedinNovemdirectstheDesktoexecutepurchasesof longer- ber.TheCommitteewillmaintainitsexisting termTreasurysecuritiesinordertoincreasethe policyof reinvestingprincipalpaymentsfromits totalfacevalueof domesticsecuritiesheldinthe securitiesholdings.Inaddition,theCommittee SystemOpenMarketAccounttoapproximately intendstopurchase$600billionof longer-term $2.6trillionbytheendof June2011.TheCom- Treasurysecuritiesbytheendof thesecond mitteealsodirectstheDesktoreinvestprincipal quarterof 2011,apaceof about$75billionper paymentsfromagencydebtandagency month.TheCommitteewillregularlyreviewthe mortgage-backedsecuritiesinlonger-term paceof itssecuritiespurchasesandtheoverall Treasurysecurities.TheSystemOpenMarket sizeof theasset-purchaseprograminlightof

Minutesof FederalOpenMarketCommitteeMeetings 289 incominginformationandwilladjustthepro- runmandate.Mr.Hoenignotedthattheeconomic gramasneededtobestfostermaximumemploy- recoverywasshiftingfromtransitorytomoresusmentandpricestability. tainablesourcesof growthandwaspickingup momentum.Inhisassessment,maintaininghighly TheCommitteewillmaintainthetargetrange accommodativemonetarypolicyinthecurrentecoforthefederalfundsrateat0to1∕ 4 percentand nomicenvironmentwouldincreasetheriskof future continuestoanticipatethateconomiccondi- imbalancesand,overtime,causeanincreasein tions,includinglowratesof resourceutilization, longer-terminflationexpectations.Mr.Hoenigalso subduedinflationtrends,andstableinflation wasconcernedthattheeventualorderlyreductionof expectations,arelikelytowarrantexceptionally policyaccommodationwouldbecomemoredifficult lowlevelsforthefederalfundsrateforan thelongerthefirststepinthatprocesswasdelayed. extendedperiod. InMr.Hoenig’sview,theCommitteeshouldbegin preparingmarketsforareductioninpolicyaccom- TheCommitteewillcontinuetomonitorthe modation.Accordingly,hethoughtthepressstateeconomicoutlookandfinancialdevelopments mentshouldindicatethatsufficientmonetarystimuandwillemployitspolicytoolsasnecessaryto luswasinplacetosupporttherecovery. supporttheeconomicrecoveryandtohelp ensurethatinflation,overtime,isatlevelscon- Itwasagreedthatthenextmeetingof theCommittee sistentwithitsmandate.” wouldbeheldonTuesday–Wednesday,January25– 26,2011.Themeetingadjournedat12:55p.m.on Votingforthisaction:BenBernanke,WilliamC. December14,2010. Dudley,JamesBullard,ElizabethDuke,SandraPianalto,SarahBloomRaskin,EricRosengren,DanielK. Notation Vote Tarullo,KevinWarsh,andJanetL.Yellen. BynotationvotecompletedonNovember22,2010, Votingagainstthisaction:ThomasM.Hoenig. theCommitteeunanimouslyapprovedtheminutesof theFOMCmeetingheldonNovember2–3,2010. Mr.Hoenigdissentedbecausehejudgedthateconomicconditionswereimproving,andthatthecur- WilliamB.English renthighlyaccommodativestanceof monetary Secretary policywasinconsistentwiththeCommittee’slong-

291 Litigation During2010,theBoardof Governorswasapartyin JudicialWatchInc.v.Boardof Governors,No.09sixlawsuitsorappealsfiledthatyearandwasaparty 2138(D.Districtof Columbia,filedNovember13, innineothercasespendingfrompreviousyears,fora 2009),isaFreedomof InformationActcase. totalof 15cases.In2009,theBoardhadbeenaparty inatotalof 17cases.Asof December31,2010,11 CitizensforResponsibilityandEthicsinWashingtonv. caseswerepending. Boardof Governors,No.09-2113(D.Districtof Columbia,filedNovember10,2009),wasaFreedom McKinleyv.Boardof Governors,No.10-5353(Dis- of InformationActcase.OnApril1,2010,theparties trictof ColumbiaCircuit,filedOctober22,2010),is stipulatedtothedismissalof thecase. anappealfromanorderof thedistrictcourtgranting theBoard’smotionforsummaryjudgmentinaFree- BloombergL.P.v.Boardof Governors,09-4083(Secdomof InformationActcase(see2010WL3833667, ondCircuit,filedOctober1,2009),isanappealof a issuedSeptember29,2010). judgmentforBloombergL.P.inaFreedomof InformationActcase(see649F.Supp.2d262).On TCFNationalBankv.Bernanke,No.10-4149(D. March19,2010,thecourtof appealsaffirmedthe SouthDakota,filedOctober12,2010),isachallenge districtcourt’sjudgment.601F.3d143.OnOctototheconstitutionalityof section1075of theDodd- ber26,2010,TheClearingHouse,whichhadinter- FrankWallStreetReformandConsumerFinancial venedinthecase,filedapetitionforawritof certio- ProtectionAct,requiringtheBoardtosetstandards rariwiththeUnitedStatesSupremeCourt(No.10fordebitcardinterchangefees. 543). Qaderv.FederalReserveBoard,No.10-3696(Second FoxNewsNetworkv.Boardof Governors,No.09- Circuit,filedAugust18,2010),isanappealof the 3795(SecondCircuit,filedSeptember9,2009),isan districtcourt’sdismissalof anactionarisingoutof appealof ajudgmentfortheBoardinaFreedomof appellant’sdisputewithabank. InformationActcase(see639F.Supp.2d384).On March19,2010,thecourtof appealsvacatedthedis- McKinleyv.Boardof Governors,No.10-00751(D. trictcourt’sjudgmentandremandedthematterto Districtof Columbia,filedMay11,2010),isaFree- thedistrictcourt.601F.3d158.OnNovember18, domof InformationActcase. 2010,TheClearingHouse,whichhadintervenedin thecase,filedapetitionforawritof certiorariwith FoxNewsNetworkv.Boardof Governors,No.10- theUnitedStatesSupremeCourt(No.10-660). 3320(S.D.NewYork,filedApril20,2010),isaFreedomof InformationActcase. Artisv.Greenspan,No.09-5121(Districtof ColumbiaCircuit,filedApril9,2009),isanappealfromthe Weirichv.Boardof Governors,No.2:10-cv-5031(E.D. districtcourt’sdismissalof theplaintiffs’employ- Washington,filedMarch23,2010),wasaFreedom mentdiscriminationclaim.OnJanuary11,2011,the of InformationActcase.OnNovember15,2010,the courtof appealsvacatedthedistrictcourtorderand districtcourtgrantedtheBoard’smotiontodismiss remandedthecasetothedistrictcourt. theaction. Murrayv.Boardof Governors,No.08-cv-15147(E.D. GoldAnti-TrustActionCommitteeInc.v.Boardof Michigan,filedDecember15,2008),isachallengeto Governors,No.09-2436(D.Districtof Columbia, theconstitutionalityof federalexpendituresrelating filedDecember30,2009),isaFreedomof Informa- toAmericanInternationalGroup(AIG).OnJanutionActcase. ary14,2011,thedistrictcourtgrantedtheBoard’s

292 97thAnnualReport|2010 motionforsummaryjudgment,andtheplaintiff filed Jonesv.Greenspan,No.04-1696(D.Districtof anoticeof appeal. Columbia,filedOctober4,2004),wasanemploymentdiscriminationcase.OnMarch10,2008,the Schulzv.UnitedStatesFederalReserveSystem, districtcourtgrantedtheBoard’smotionanddis- No.08-4810(SecondCircuit,filedSeptember30, missedtheplaintiff’sclaims.Ontheplaintiff’sappeal 2008(N.D.NewYork,filedSeptember18,2008)), (No.08-5092,filedApril21,2008),theDistrictof wasanappealof thedistrictcourt’sdismissalof an ColumbiaCircuitaffirmedinpartandreversedin actionrelatingtotheFederalReserve’sloanto part,andremandedtheactiontothedistrictcourt. AmericanInternationalGroup.OnMarch23,2010, 557F.3d670.OnJuly27,2010,theplaintiff volunthecourtof appealsaffirmedthedistrictcourt’s tarilydismissedtheaction. dismissal.

293 Statistical Tables Table1.FederalReserveopenmarkettransactions,2010 Millionsofdollars Typeofsecurity Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total andtransaction U.S.Treasurysecurities1 Outrighttransactions2 Treasurybills Grosspurchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 18,423 27,519 18,633 20,841 18,423 21,639 24,361 21,838 22,204 18,423 18,423 24,708 255,435 Fornewbills 18,423 27,519 18,633 20,841 18,423 21,639 24,361 21,838 22,204 18,423 18,423 24,708 255,435 Redemptions 0 0 0 0 0 0 0 0 0 0 0 0 0 Otherswithin1year Grosspurchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Maturityshifts 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 0 0 0 0 0 0 0 0 0 0 0 0 0 Redemptions 0 0 0 0 0 0 0 0 0 0 0 0 0 1to5years Grosspurchases 0 0 0 0 0 0 0 3,888 13,287 10,202 33,294 57,155 117,826 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Maturityshifts 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 0 0 0 0 0 0 0 0 0 0 0 0 0 5to10years Grosspurchases 0 0 0 0 0 0 0 3,622 11,787 12,592 34,944 45,963 108,908 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Maturityshifts 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 0 0 0 0 0 0 0 0 0 0 0 0 0 Morethan10years Grosspurchases 0 0 0 0 0 0 0 1,775 253 4,925 2,680 7,373 17,006 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Maturityshifts 0 0 0 0 0 0 0 0 0 0 0 0 0 Discountnotes 0 0 0 0 0 0 0 0 0 0 0 0 0 Allmaturities Grosspurchases 0 0 0 0 0 0 0 9,285 25,327 27,719 70,918 110,491 243,740 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Redemptions 0 0 0 0 0 0 0 0 0 0 0 0 0 NetchangeinU.S. Treasury securities 0 0 0 0 0 0 0 9,285 25,327 27,719 70,918 110,491 243,740 Federalagencyobligations Outrighttransactions2 Grosspurchases 3,862 5,361 3,000 0 0 0 0 0 0 0 0 0 12,223 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Redemptions 68 1,523 1,523 876 1,397 1,953 5,381 2,879 2,397 4,424 1,503 718 24,642 Netchangeinfederal agencyobligations 3,794 3,838 1,477 -876 -1,397 -1,953 -5,381 -2,879 -2,397 -4,424 -1,503 -718 -12,419 Mortgage-backedsecurities3 Netsettlements2 Netchangein mortgage-backed securities 61,748 56,659 41,919 28,596 16,219 4,614 -538 -14,420 -24,630 -27,502 -28,384 -30,512 83,770 (continuedonnextpage)

294 97thAnnualReport|2010 Table1—continued Typeofsecurity Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total andtransaction Temporarytransactions Repurchaseagreements4 Grosspurchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Reverserepurchaseagreements5 Grosspurchases 1,212,833 1,048,567 1,290,814 1,197,845 1,130,219 1,351,516 1,321,719 1,339,291 1,278,890 1,205,451 1,224,830 1,210,365 14,812,340 Grosssales 1,194,260 1,046,105 1,291,882 1,200,397 1,129,118 1,359,522 1,317,549 1,338,459 1,282,296 1,209,256 1,219,749 1,216,195 14,804,788 Netchangein temporary transactions 18,572 2,461 -1,068 -2,552 1,101 -8,006 4,170 832 -3,406 -3,805 5,081 -5,829 7,551 Totalnetchangein SystemOpenMarket Account 84,114 62,958 42,328 25,168 15,923 -5,345 -1,749 -7,182 -5,106 -8,012 46,112 73,432 322,642 Note:Sales,redemptions,andnegativefiguresreduceholdingsoftheSystemOpenMarketAccount;allotherfiguresincreasesuchholdings.Componentsmaynotsumtototals becauseofrounding. 1 Transactionsexcludechangesincompensationfortheeffectsofinflationontheprincipalofinflation-indexedsecurities.Transactionsincludetherolloverofinflation compensationintonewsecurities. 2 Excludestheeffectoftemporarytransactions—repurchaseagreementsandreverserepurchaseagreements. 3 GuaranteedbyFannieMae,FreddieMac,andGinnieMae.Monthlynetchangeinfacevalueofthesecuritiesheld,whichistheremainingprincipalbalanceoftheunderlying mortgages. 4 Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities,andmortgage-backedsecurities. 5 Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecuritiesandfederalagencydebtsecurities.

StatisticalTables 295 Table2.FederalReserveBankholdingsofU.S.Treasuryandfederalagencysecurities,December31,2008–10 Millionsofdollars December31 Change Description 2010 2009 2008 2009to2010 2008to2009 U.S.Treasurysecurities Heldoutright1 1,021,493 776,588 475,921 244,905 300,667 Byremainingmaturity Bills 1–90days 18,423 18,423 153,829 0 -135,406 91daysto1year 0 0 74,012 0 -74,012 Notesandbonds 1yearorless 54,253 72,818 85,011 -18,565 -12,193 Morethan1yearthrough5years 439,594 326,874 173,328 112,720 153,546 Morethan5yearsthrough10years 333,955 213,720 97,325 120,235 116,395 Morethan10years 159,072 144,753 101,834 14,319 42,919 Bytype Bills 18,423 18,423 18,423 0 0 Notes 773,285 568,323 334,779 204,962 233,544 Bonds 229,786 189,843 122,719 39,943 67,124 Federalagencysecurities Heldoutright1 147,460 159,879 19,708 -12,419 140,171 Byremainingmaturity Discountnotes 1–90days 0 0 3,731 0 -3,731 91daysto1year 0 0 946 0 -946 Coupons 1yearorless 43,466 24,642 4,707 18,824 19,935 Morethan1yearthrough5years 71,050 99,402 11,361 -28,352 88,041 Morethan5yearsthough10years 30,597 33,788 3,640 -3,191 30,148 Morethan10years 2,347 2,047 0 300 2,047 Bytype Discountnotes 0 0 4,677 0 -4,677 Coupons 147,460 159,879 15,031 -12,419 144,848 Byissuer FederalHomeLoanMortgageCorporation 57,515 61,769 9,556 -4,254 52,213 FederalNationalMortgageAssociation 58,568 63,662 7,091 -5,094 56,571 FederalHomeLoanBanks 31,377 34,448 3,061 -3,071 31,387 Mortgage-backedsecurities2 Heldoutright1 992,141 908,371 0 83,770 908,371 Byremainingmaturity 1yearorless 0 0 0 0 0 Morethan1yearthrough5years 24 12 0 12 12 Morethan5yearsthough10years 20 20 0 0 20 Morethan10years 992,097 908,340 0 83,757 908,340 Byissuer FederalHomeLoanMortgageCorporation 346,959 304,964 0 41,995 304,964 FederalNationalMortgageAssociation 547,545 513,398 0 34,147 513,398 GovernmentNationalMortgageAssociation 97,637 90,010 0 7,627 90,010 Temporarytransactions Repurchaseagreements3 0 0 80,000 0 -80,000 Reverserepurchaseagreements4 59,703 77,732 88,352 -18,029 -10,620 Foreignofficialandinternationalaccounts 59,703 77,732 88,352 -18,029 -10,620 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.

296 97thAnnualReport|2010 Table3.FederalReserveBankinterestratesonloansto Table4.Reserverequirementsofdepositoryinstitutions, depositoryinstitutions December31,2010 Percent Requirements RatesonselectedloansasofDecember31,20101 Typeofdeposit Percentage ReserveBank ofdeposits Effectivedate Primary Secondary Seasonal credit credit credit Nettransactionaccounts1 Allbanks 0.75 1.25 0.25 $0million–$10.7million2 0 12/30/2010 Morethan$10.7million–$58.8million3 3 12/30/2010 1 Fordetailsonratechangesoverthecourseof2010,seethesectionon Morethan$58.8million 10 12/30/2010 discountratesonpage161inthechapter“RecordofPolicyActionsofthe Nonpersonaltimedeposits 0 12/27/1990 BoardofGovernors.”Inordinarycircumstances,primarycreditisavailablefor veryshorttermsasabackupsourceofliquiditytodepositoryinstitutionsthat Eurocurrencyliabilities 0 12/27/1990 areingenerallysoundfinancialconditioninthejudgmentofthelendingFederal ReserveBank.Overtheperiodfrommid-August2007toearly2010,the Note:Requiredreservesmustbeheldintheformofvaultcashand,ifvaultcash FederalReservealloweddepositoryinstitutionstoborrowprimarycreditfor isinsufficient,alsointheformofadepositwithaFederalReserveBank.An longerperiodstoaddressliquiditypressuresduringthefinancialcrisis.In institutionmustholdthatdepositdirectlywithaReserveBankorwithanother March2010,theFederalReservereturnedtoitsusualpracticeofextending institutioninapass-throughrelationship.Reserverequirementsareimposedon primarycreditforshorterterms,typicallyovernight.Secondarycreditis commercialbanks,savingsbanks,savingsandloanassociations,creditunions, availableinappropriatecircumstancestodepositoryinstitutionsthatdonot U.S.branchesandagenciesofforeignbanks,Edgecorporations,andagreement qualifyforprimarycredit.Seasonalcreditisavailabletohelprelativelysmall corporations. depositoryinstitutionsmeetregularseasonalneedsforfundsthatarisefroma 1 Totaltransactionaccountsconsistofdemanddeposits,automatictransfer clearpatternofintra-yearlymovementsintheirdepositsandloans.The service(ATS)accounts,NOWaccounts,sharedraftaccounts,telephoneor discountrateonseasonalcredittakesintoaccountratesonmarketsourcesof preauthorizedtransferaccounts,ineligibleacceptances,andaffiliate-issued fundsandisreestablishedonthefirstbusinessdayofeachtwo-weekreserve obligationsmaturinginsevendaysorless.Nettransactionaccountsaretotal maintenanceperiod. transactionaccountslessamountsduefromotherdepositoryinstitutionsand lesscashitemsintheprocessofcollection. Foramoredetaileddescriptionofthesedeposittypes,seeFormFR2900. 2 Theamountofnettransactionaccountssubjecttoareserverequirementratio of0percent(the“exemptionamount”)isadjustedeachyearbystatute.The exemptionamountisadjustedupwardby80percentofthepreviousyear’s (June30toJune30)rateofincreaseintotalreservableliabilitiesatall depositoryinstitutions.Noadjustmentismadeintheeventofadecreasein suchliabilities. 3 Theamountofnettransactionaccountssubjecttoareserverequirementratio of3percentisthe“lowreservetranche.”Bystatute,theupperlimitofthelow reservetrancheisadjustedeachyearby80percentofthepreviousyear’s (June30toJune30)rateofincreaseordecreaseinnettransactionaccounts heldbyalldepositoryinstitutions.

StatisticalTables 297 Table5.BankingofficesandbanksaffiliatedwithbankholdingcompaniesintheUnitedStates,December31,2009and2010 Commercialbanks1 Statechartered Typeofoffice Total Member savings Total Nonmember banks Total National State Allbankingoffices Banks Number,Dec.31,2009 7,158 6,808 2,286 1,445 841 4,522 350 Changesduring2010 Newbanks 17 14 7 6 1 7 3 Banksconvertedintobranches -174 -171 -55 -38 -17 -116 -3 Ceasedbankingoperations2 -156 -148 -52 -33 -19 -96 -8 Other3 0 0 7 -12 19 -7 0 Netchange -313 -305 -93 -77 -16 -212 -8 Number,Dec.31,2010 6,845 6,503 2,193 1,368 825 4,310 342 Branches&additionaloffices Number,Dec.31,2009 84,563 81,385 57,718 43,244 14,474 23,667 3,178 Changesduring2010 Newbranches 1,571 1,508 1,041 867 174 467 63 Banksconvertedtobranches 174 169 74 17 57 95 5 Discontinued2 -1,926 -1,877 -1,394 -987 -407 -483 -49 Other3 0 -1 255 149 106 -256 1 Netchange -181 -201 -24 46 -70 -177 20 Number,Dec.31,2010 84,382 81,184 57,694 43,290 14,404 23,490 3,198 Banksaffiliatedwithbankholdingcompanies Banks Number,Dec.31,2009 5,785 5,656 2,010 1,269 741 3,646 129 Changesduring2010 BHC-affiliatednewbanks 42 41 16 9 7 25 1 Banksconvertedintobranches -161 -159 -51 -35 -16 -108 -2 Ceasedbankingoperations2 -146 -141 -51 -31 -20 -90 -5 Other3 0 0 8 -11 19 -8 0 NetChange -265 -259 -78 -68 -10 -181 -6 Number,Dec.31,2010 5,520 5,397 1,932 1,201 731 3,465 123 Note:Includesbanks,bankingoffices,andbankholdingcompaniesinU.S.territoriesandpossessions(affiliatedinsularareas). 1 Forpurposesofthistable,banksareentitiesthataredefinedasbanksintheBankHoldingCompanyAct,asamended,whichisimplementedbyFederalReserve RegulationY.Generally,abankisanyinstitutionthatacceptsdemanddepositsandisengagedinthebusinessofmakingcommercialloansoranyinstitutionthatisdefined asaninsuredbankinsection3(h)oftheFDICAct. 2 InstitutionsthatnolongermeettheRegulationYdefinitionofabank. 3 Interclasschangesandsalesofbranches.

298 97thAnnualReport|2010 Table6A.Reservesofdepositoryinstitutions,FederalReserveBankcredit,andrelateditems,year-end1984–2010 andmonth-end2010 Millionsofdollars Factorssupplyingreservefunds FederalReserveBankcreditoutstanding Period Special Treasury Gold drawingrights Sec h u e r l i d ties a R g e r p e u e r m ch en as ts e 2 o L t o h a e n r s cr a e n d d it Float Oth R e e r s F e e r d ve eral Total stock c a e c rt c if o ic u a n t t e ou c ts u t r a re n n d c in y g4 outright1 extensions3 assets 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 2003r 666,665 43,750 62 -319 40,847 751,005 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 2007r 740,611 46,500 72,636 -19 41,799 901,528 11,041 2,200 38,681 2008r 495,629 80,000 1,605,848 -1,494 43,553 2,223,537 11,041 2,200 38,674 2009r 1,844,838 0 281,095 -2,097 92,851 2,216,687 11,041 5,200 42,691 2010 2,161,094 0 138,311 -1,421 110,261 2,408,245 11,041 5,200 43,563 Jan 1,910,416 0 226,508 -1,680 95,962 2,231,206 11,041 5,200 42,727 Feb 1,970,826 0 200,531 -1,438 93,336 2,263,254 11,041 5,200 42,743 Mar 2,014,390 0 182,646 -1,625 94,057 2,289,468 11,041 5,200 42,745 Apr 2,042,123 0 176,805 -1,422 96,561 2,314,066 11,041 5,200 43,056 May 2,057,135 0 171,114 -1,391 93,244 2,320,103 11,041 5,200 43,090 Jun 2,059,878 0 162,780 -1,948 93,141 2,313,849 11,041 5,200 43,205 Jul 2,053,994 0 160,566 -1,374 96,144 2,309,330 11,041 5,200 43,266 Aug 2,045,954 0 151,447 -2,151 91,747 2,286,997 11,041 5,200 43,341 Sep 2,044,313 0 142,992 -1,574 94,376 2,280,107 11,041 5,200 43,413 Oct 2,040,235 0 142,484 -1,342 99,439 2,280,817 11,041 5,200 43,455 Nov 2,081,470 0 141,342 -2,070 100,845 2,321,586 11,041 5,200 43,493 Dec 2,161,094 0 138,311 -1,421 110,261 2,408,245 11,041 5,200 43,563 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 IncludesU.S.Treasurysecurities,federalagencydebtsecurities,andmortgage-backedsecurities.U.S.Treasurysecuritiesandfederalagencydebtsecuritiesinclude securitieslenttodealers,whicharefullycollateralizedbyU.S.Treasurysecurities,federalagencysecurities,andotherhighlyrateddebtsecurities. 2 Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities,andagencymortgage-backedsecurities. 3 Refertotable6Bfordetail. 4 Includescurrencyandcoin(otherthangold)issueddirectlybytheU.S.Treasury.Thelargestcomponentsarefractionalanddollarcoins.Fordetailsreferto“U.S.Currency andCoinOutstandingandinCirculation,”TreasuryBulletin. (continuedonnextpage)

StatisticalTables 299 Table6A—continued Factorsabsorbingreservefunds Reserve DepositswithFederalReserveBanks,otherthanreservebalances balances Period Reverse Treasury Required OtherFederal withFederal C c u ir r c r u e l n a c t y io i n n a r g e r p e u e r m ch e a n s ts e 5 ho c ld a i s n h gs6 de T p e o rm sits T g r e e n a e su ra r l y sup T p r l e e a m su e r n y tary Foreign Other b c a le la a n ri c n e g s an l R i d a e b c s i a e li p t r i v i e t e a s l7 R B e a s n e k rv s e account financingaccount 1984 183,796 0 513 … 5,316 … 253 867 1,126 5,952 20,693 1985 197,488 0 550 … 9,351 … 480 1,041 1,490 5,940 27,141 1986 211,995 0 447 … 7,588 … 287 917 1,812 6,088 46,295 1987 230,205 0 454 … 5,313 … 244 1,027 1,687 7,129 40,097 1988 247,649 0 395 … 8,656 … 347 548 1,605 7,683 37,742 1989 260,456 0 450 … 6,217 … 589 1,298 1,618 8,486 36,713 1990 286,963 0 561 … 8,960 … 369 528 1,960 8,147 36,081 1991 307,756 0 636 … 17,697 … 968 1,869 3,946 8,113 25,051 1992 334,701 0 508 … 7,492 … 206 653 5,897 7,984 25,544 1993 365,271 0 377 … 14,809 … 386 636 6,332 9,292 27,967 1994 403,843 0 335 … 7,161 … 250 1,143 4,196 11,959 25,061 1995 424,244 0 270 … 5,979 … 386 2,113 5,167 12,342 22,960 1996 450,648 0 249 … 7,742 … 167 1,178 6,601 13,829 17,310 1997 482,327 0 225 … 5,444 … 457 1,171 6,684 15,500 23,447 1998 517,484 0 85 … 6,086 … 167 1,869 6,780 16,354 19,164 1999 628,359 0 109 … 28,402 … 71 1,644 7,481 17,256 16,039 2000 593,694 0 450 … 5,149 … 216 2,478 6,332 17,962 11,295 2001 643,301 0 425 … 6,645 … 61 1,356 8,525 17,083 8,469 2002 687,518 21,091 367 … 4,420 … 136 1,266 10,534 18,977 11,988 2003r 724,187 25,652 321 … 5,723 … 162 995 11,829 19,793 11,054 2004 754,877 30,783 270 … 5,912 … 80 1,285 9,963 26,378 14,137 2005 794,014 30,505 202 … 4,573 … 83 2,144 8,651 30,466 10,678 2006 820,176 29,615 252 … 4,708 … 98 972 6,842 36,231 11,847 2007r 828,938 43,985 259 … 16,120 … 96 1,830 6,614 41,622 13,986 2008r 889,898 88,352 259 … 106,123 259,325 1,365 21,221 4,387 48,921 855,599 2009r 928,249 77,732 239 … 186,632 5,001 2,411 35,262 3,020 63,219 973,854 2010 982,772 59,703 177 0 140,773 199,964 3,337 13,631 2,378 99,602 965,714 Jan 917,637 59,159 233 0 84,536 5,001 4,050 395 2,754 65,249 1,151,160 Feb 931,242 56,698 200 0 14,779 24,997 2,689 433 2,741 66,730 1,221,731 Mar 934,589 57,766 223 0 91,519 124,979 1,668 19,463 2,688 64,994 1,050,565 Apr 935,398 60,318 202 0 98,277 199,958 4,115 392 2,662 71,648 1,000,391 May 943,135 59,217 205 0 19,925 199,958 2,057 393 2,643 71,810 1,080,089 Jun 945,131 67,223 233 1,152 87,615 199,965 1,214 27,516 2,475 70,931 969,841 Jul 943,741 63,054 212 2,119 3,191 199,960 2,914 480 2,457 74,138 1,076,570 Aug 949,283 60,404 239 2,119 75,533 199,956 2,052 387 2,434 72,410 981,762 Sep 954,749 63,810 237 2,119 107,888 199,962 2,473 4,152 2,407 71,953 930,012 Oct 962,959 58,955 188 5,113 24,212 199,960 2,641 727 2,396 76,102 1,007,260 Nov 978,210 53,874 197 0 79,426 199,959 2,847 1,103 2,366 99,832 963,505 Dec 982,772 59,703 177 0 140,773 199,964 3,337 13,631 2,378 99,602 965,714 5 Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities,andagencymortgage-backedsecurities. 6 CoinandpapercurrencyheldbytheTreasury. 7 IncludesfundsfromAmericanInternationalGroup,Inc.assetdispositions,heldasagent. …Notapplicable. r Revised.

300 97thAnnualReport|2010 Table6B.Loansandothercreditextensions,bytype,year-end1984–2010andmonth-end2010 Millionsofdollars Otherloans Netportfolioholdingsof Preferred Period T e a o x n t t c a e d r l n e o l s d o t i h i o a t e n n r s s a c T u r e c e r t d m io it n s s e P e c r a i o a m s n n o a d d n r a y a r , y l , a P b n d r r d e i o m a k o l a e t e h r r r - e y r AMLF3 TALF4 AIG5 C LL P C FF 6 M L M LC IF 7 F M L L a a L i n d C e e 8 n M L L a a L n id C e e 8 I n I M L L a a L n id C e e 8 I n II T L A LC LF 9 A i I n L A t L / e C i A r n e s L s 1 IC 0 ts O s l C i w q b e u a a n i p n d tr s k i a t 1 y l 1 dealer credit1 credit2 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 40,000 8,636 … … … … … … … … … … … 24,000 2008 1,605,848 450,219 93,791 37,404 23,765 … 38,914 334,102 0 27,023 20,117 26,785 … … 553,728 2009 281,095 75,918 20,700 0 0 47,532 22,184 14,064 … 26,701 15,659 22,661 298 25,106 10,272 2010 138,311 0 221 … … 24,703 19,953 … … 26,967 16,198 23,143 665 26,385 75 Jan 226,508 38,531 15,804 0 0 47,352 25,846 8,664 … 26,784 15,497 22,488 334 25,106 100 Feb 200,531 15,425 14,592 … … 46,801 25,293 7,743 … 27,233 15,562 22,403 372 25,106 0 Mar 182,646 3,410 8,113 … … 47,221 25,377 7,786 … 27,364 15,405 22,150 404 25,416 0 Apr 176,805 0 5,921 … … 45,168 27,087 4,891 … 28,226 16,061 23,595 439 25,416 0 May 171,114 0 498 … … 44,032 26,420 1 … 28,334 15,908 23,385 478 25,416 6,642 Jun 162,780 0 673 … … 42,477 24,676 1 … 28,498 15,763 23,208 506 25,733 1,245 Jul 160,566 0 112 … … 40,239 23,554 1 … 29,424 16,172 23,546 540 25,733 1,246 Aug 151,447 0 115 … … 36,531 20,055 … … 29,030 16,029 23,336 575 25,733 44 Sep 142,992 0 296 … … 29,699 18,891 … … 28,473 15,875 23,040 601 26,057 61 Oct 142,484 0 123 … … 28,002 19,124 … … 28,484 16,475 23,537 622 26,057 60 Nov 141,342 0 142 … … 25,637 21,524 … … 27,587 16,336 23,351 648 26,057 60 Dec 138,311 0 221 … … 24,703 19,953 … … 26,967 16,198 23,143 665 26,385 75 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Priorto2003,categorywas“Adjustment,extended,andseasonalcredit.” 2 IncludescreditextendedthroughthePrimaryDealerCreditFacility(PDCF)andcreditextendedtocertainotherbroker-dealers.ThePDCFwasdissolvedinFebruary2010. 3 IncludescreditextendedthroughtheAsset-BackedCommercialPaperMoneyMarketMutualFundLiquidityFacility(AMLF).TheAMLFwasdissolvedinFebruary2010. 4 IncludescreditextendedbytheFederalReserveBankofNewYork(FRBNY)toeligibleborrowersthroughtheTermAsset-BackedSecuritiesLoanFacility(TALF),netof unamortizeddeferredadministrativefees.TheTALFwasdiscontinuedinJune2010. 5 CreditextendedtoAmericanInternationalGroup,Inc.,includesoutstandingprincipalandcapitalizedinterestnetofunamortizeddeferredcommitmentfeesandallowancefor loanrestructuring.ExcludescreditextendedtoconsolidatedLLCs. 6 NetportfolioholdingsofCommercialPaperFundingFacility(CPFF)LLC.TheCPFFwasdiscontinuedinFebruary2010. 7 NetportfolioholdingsofMoneyMarketInvestorFundingFacility(MMIFF)LLC.TheMMIFFwasdiscontinuedinOctober2009. 8 Netportfolioholdingsatfairvalue. 9 NetportfolioholdingsofTALFLLC,alimitedliabilitycompanyformedtopurchaseandmanageanyasset-backedsecuritiesthatmightbesurrenderedbyaTALFborroweror otherwiseclaimedbytheFRBNYinconnectionwithitsenforcementrightstotheTALFcollateral. 10PreferredinterestsinAIAAuroraLLCandALICOHoldingsLLCatbookvalue. 11Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. …Notapplicable.

StatisticalTables 301 Table6C.Reservesofdepositoryinstitutions,FederalReserveBankcredit,andrelateditems,year-end1918–1983 Millionsofdollars Factorssupplyingreservefunds FederalReserveBankcreditoutstanding Special Period drawing Treasury Sec h u e r l i d ties Repurchase Loans Float3 All F O ed th e e ra r l Total s G to o c l k d 6 ce r r i t g if h ic ts ate ou c ts u t r a re n n d c in y g7 outright1 agreements2 other4 Reserve account 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 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 (continuedonnextpage)

302 97thAnnualReport|2010 Table6C—continued Factorssupplyingreservefunds FederalReserveBankcreditoutstanding Special Period drawing Treasury Sec h u e r l i d ties Repurchase Loans Float3 All F O ed th e e ra r l Total s G to o c l k d 6 ce r r i t g if h ic ts ate ou c ts u t r a re n n d c in y g7 outright1 agreements2 other4 Reserve account assets5 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:Foradescriptionoffiguresanddiscussionoftheirsignificance,seeBankingandMonetaryStatistics,1941–1970(BoardofGovernorsoftheFederalReserveSystem, 1976),pp.507–23.Componentsmaynotsumtototalsbecauseofrounding. 1 In1969andthereafter,includessecuritiesloaned—fullyguaranteedbyU.S.governmentsecuritiespledgedwithFederalReserveBanks—andexcludessecuritiessoldand scheduledtobeboughtbackundermatchedsale–purchasetransactions.OnSeptember29,1971,andthereafter,includesfederalagencyissuesboughtoutright. 2 OnDecember1,1966,andthereafter,includesfederalagencyobligationsheldunderrepurchaseagreements. 3 In1960andthereafter,figuresreflectaminorchangeinconcept;refertoFederalReserveBulletin,vol.47(February1961),p.164. 4 Principallyacceptancesand,untilAugust21,1959,industrialloans,theauthorityforwhichexpiredonthatdate. 5 FortheperiodbeforeApril16,1969,includesthetotalofFederalReservecapitalpaidin,surplus,othercapitalaccounts,andotherliabilitiesandaccrueddividends,lessthe sumofbankpremisesandotherassets,andisreportedas‘‘OtherFederalReserveaccounts;”thereafter,‘‘OtherFederalReserveassets’’and‘‘OtherFederalReserve liabilitiesandcapital’’areshownseparately. 6 BeforeJanuary30,1934,includesgoldheldinFederalReserveBanksandincirculation. 7 Includescurrencyandcoin(otherthangold)issueddirectlybytheTreasury.Thelargestcomponentsarefractionalanddollarcoins.Fordetailsreferto‘‘U.S.Currencyand CoinOutstandingandinCirculation,’’TreasuryBulletin. (continuedonnextpage)

StatisticalTables 303 Table6C.Reservesofdepositoryinstitutions,FederalReserveBankcredit,andrelateditems,year-end1918–1983—continued Millionsofdollars Factorsabsorbingreservefunds Memberbankreserves9 DepositswithFederalReserveBanks, otherthanreservebalances Other Period Currency Treasury Other Required Federal Federal circu in lation ho c ld a i s n h gs8 Treasury Foreign Other a R cc e o se u r n v t e s5 b c a le la a n ri c n e g s an l R i d a e b c s i a e li p t r i v i e t e a s l5 R F e e W s d i e e t r h r v a e l Cu a rr n e d ncy Required11 Excess11,12 coin10 Banks 1918 4,951 288 51 96 25 118 0 0 1,636 … 1,585 51 1919 5,091 385 31 73 28 208 0 0 1,890 … 1,822 68 1920 5,325 218 57 5 18 298 0 0 1,781 … … … 1921 4,403 214 96 12 15 285 0 0 1,753 … 1,654 99 1922 4,530 225 11 3 26 276 0 0 1,934 … … … 1923 4,757 213 38 4 19 275 0 0 1,898 … 1,884 14 1924 4,760 211 51 19 20 258 0 0 2,220 … 2,161 59 1925 4,817 203 16 8 21 272 0 0 2,212 … 2,256 -44 1926 4,808 201 17 46 19 293 0 0 2,194 … 2,250 -56 1927 4,716 208 18 5 21 301 0 0 2,487 … 2,424 63 1928 4,686 202 23 6 21 348 0 0 2,389 … 2,430 -41 1929 4,578 216 29 6 24 393 0 0 2,355 … 2,428 -73 1930 4,603 211 19 6 22 375 0 0 2,471 … 2,375 96 1931 5,360 222 54 79 31 354 0 0 1,961 … 1,994 -33 1932 5,388 272 8 19 24 355 0 0 2,509 … 1,933 576 1933 5,519 284 3 4 128 360 0 0 2,729 … 1,870 859 1934 5,536 3,029 121 20 169 241 0 0 4,096 … 2,282 1,814 1935 5,882 2,566 544 29 226 253 0 0 5,587 … 2,743 2,844 1936 6,543 2,376 244 99 160 261 0 0 6,606 … 4,622 1,984 1937 6,550 3,619 142 172 235 263 0 0 7,027 … 5,815 1,212 1938 6,856 2,706 923 199 242 260 0 0 8,724 … 5,519 3,205 1939 7,598 2,409 634 397 256 251 0 0 11,653 … 6,444 5,209 1940 8,732 2,213 368 1,133 599 284 0 0 14,026 … 7,411 6,615 1941 11,160 2,215 867 774 586 291 0 0 12,450 … 9,365 3,085 1942 15,410 2,193 799 793 485 256 0 0 13,117 … 11,129 1,988 1943 20,449 2,303 579 1,360 356 339 0 0 12,886 … 11,650 1,236 1944 25,307 2,375 440 1,204 394 402 0 0 14,373 … 12,748 1,625 1945 28,515 2,287 977 862 446 495 0 0 15,915 … 14,457 1,458 1946 28,952 2,272 393 508 314 607 0 0 16,139 … 15,577 562 1947 28,868 1,336 870 392 569 563 0 0 17,899 … 16,400 1,499 1948 28,224 1,325 1123 642 547 590 0 0 20,479 … 19,277 1,202 1949 27,600 1,312 821 767 750 706 0 0 16,568 … 15,550 1,018 1950 27,741 1,293 668 895 565 714 0 0 17,681 … 16,509 1,172 1951 29,206 1,270 247 526 363 746 0 0 20,056 … 19,667 389 1952 30,433 1,270 389 550 455 777 0 0 19,950 … 20,520 -570 1953 30,781 761 346 423 493 839 0 0 20,160 … 19,397 763 1954 30,509 796 563 490 441 907 0 0 18,876 … 18,618 258 1955 31,158 767 394 402 554 925 0 0 19,005 … 18,903 102 1956 31,790 775 441 322 426 901 0 0 19,059 … 19,089 -30 1957 31,834 761 481 356 246 998 0 0 19,034 … 19,091 -57 1958 32,193 683 358 272 391 1,122 0 0 18,504 … 18,574 -70 1959 32,591 391 504 345 694 841 0 0 18,174 310 18,619 -135 1960 32,869 377 485 217 533 941 0 0 17,081 2,544 18,988 637 1961 33,918 422 465 279 320 1,044 0 0 17,387 2,823 20,114 96 1962 35,338 380 597 247 393 1,007 0 0 17,454 3,262 20,071 645 1963 37,692 361 880 171 291 1,065 0 0 17,049 4,099 20,677 471 1964 39,619 612 820 229 321 1,036 0 0 18,086 4,151 21,663 574 1965 42,056 760 668 150 355 211 0 0 18,447 4,163 22,848 -238 1966 44,663 1,176 416 174 588 -147 0 0 19,779 4,310 24,321 -232 1967 47,226 1,344 1,123 135 653 -773 0 0 21,092 4,631 25,905 -182 (continuedonnextpage)

304 97thAnnualReport|2010 Table6C—continued Factorsabsorbingreservefunds Memberbankreserves9 DepositswithFederalReserveBanks, otherthanreservebalances Other Period Currency Treasury Other Required Federal Federal circu in lation ho c ld a i s n h gs8 Treasury Foreign Other a R cc e o se u r n v t e s5 b c a le la a n ri c n e g s an l R i d a e b c s i a e li p t r i v i e t e a s l5 R F e e W s d i e e t r h r v a e l Cu a rr n e d ncy Required11 Excess11,12 coin10 Banks 1968 50,961 695 703 216 747 -1,353 0 0 21,818 4,921 27,439 -700 1969 53,950 596 1,312 134 807 0 0 1,919 22,085 5,187 28,173 -901 1970 57,093 431 1,156 148 1,233 0 0 1,986 24,150 5,423 30,033 -460 1971 61,068 460 2,020 294 999 0 0 2,131 27,788 5,743 32,496 1,035 1972 66,516 345 1,855 325 840 0 0 2,143 25,647 6,216 32,044 98 1973 72,497 317 2,542 251 1,14913 0 0 2,669 27,060 6,781 35,268 -1,360 1974 79,743 185 3,113 418 1,27513 0 0 2,935 25,843 7,370 37,011 -3,798 1975 86,547 483 7,285 353 1,090 0 0 2,968 26,052 8,036 35,197 -1,10314 1976 93,717 460 10,393 352 1,357 0 0 3,063 25,158 8,628 35,461 -1,535 1977 103,811 392 7,114 379 1,187 0 0 3,292 26,870 9,421 37,615 -1,265 1978 114,645 240 4,196 368 1,256 0 0 4,275 31,152 10,538 42,694 -893 1979 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 -2,835 1980 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675 1981 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 -1,442 1982 154,908 429 5,033 328 1,033 0 436 4,990 26,053 16,666 41,391 1,328 1983 171,935 479 3,661 191 851 0 1013 5,392 20,413 17,821 39,179 -945 8 CoinandpapercurrencyheldbytheTreasury,aswellasanygoldinexcessofthegoldcertificatesissuedtotheReserveBank. 9 InNovember1979andthereafter,includesreservesofmemberbanks,EdgeActcorporations,andU.S.agenciesandbranchesofforeignbanks.OnNovember13,1980,and thereafter,includesreservesofalldepositoryinstitutions. 10BetweenDecember1,1959,andNovember23,1960,partwasallowedasreserves;thereafter,allwasallowed. 11Estimatedthrough1958.Before1929,datawereavailableonlyoncalldates(in1920and1922thecalldatewasDecember29).SinceSeptember12,1968,theamounthas beenbasedonclose-of-businessfiguresforthereserveperiodtwoweeksbeforethereportdate. 12FortheweekendingNovember15,1972,andthereafter,includes$450millionofreservedeficienciesonwhichFederalReserveBanksareallowedtowaivepenaltiesfora transitionperiodinconnectionwithbankadaptationtoRegulationJasamended,effectiveNovember9,1972.Allowabledeficienciesareasfollows(beginningwithfirst statementweekofquarter,inmillions):1973—Q1,$279;Q2,$172;Q3,$112;Q4,$84;1974—Q1,$67;Q2,$58.Thetransitionperiodendedwiththesecondquarterof 1974. 13FortheperiodbeforeJuly1973,includescertaindepositsofdomesticnonmemberbanksandforeign-ownedbankinginstitutionsheldwithmemberbanksandredepositedin fullwithFederalReserveBanksinconnectionwithvoluntaryparticipationbynonmemberinstitutionsintheFederalReserveSystemprogramofcreditrestraint.Asof December12,1974,theamountofvoluntarynonmemberbankandforeign-agencyandbranchdepositsatFederalReserveBanksthatareassociatedwithmarginalreserves isnolongerreported.However,twoamountsarereported:(1)depositsvoluntarilyheldasreservesbyagenciesandbranchesofforeignbanksoperatingintheUnitedStates and(2)Eurodollarliabilities. 14Adjustedtoincludewaiversofpenaltiesforreservedeficiencies,inaccordancewithchangeinBoardpolicy,effectiveNovember19,1975. …Notapplicable.

StatisticalTables 305 Table7.Principalassetsandliabilitiesofinsuredcommercialbanks,byclassofbank,June30,2010and2009 Millionsofdollars,exceptasnoted Memberbanks Item Total Nonmemberbanks Total National State 2010 Assets Loansandinvestments 8,371,801 6,787,197 5,624,413 1,162,784 1,584,605 Loans,gross 6,165,112 4,915,308 4,094,863 820,445 1,249,804 Net 6,164,923 4,915,121 4,094,732 820,390 1,249,802 Investments 2,206,689 1,871,888 1,529,550 342,338 334,801 U.S.Treasuryandfederalagencysecurities 401,552 304,475 251,340 53,135 97,077 Other 1,805,138 1,567,413 1,278,210 289,204 237,724 Cashassets,total 758,748 605,277 470,459 134,818 153,470 Liabilities Deposits,total 6,715,615 5,284,410 4,304,167 980,243 1,431,205 Interbank 104,002 81,377 64,552 16,825 22,625 Othertransactions 805,822 609,825 470,208 139,616 195,997 Othernontransactions 5,805,791 4,593,208 3,769,406 823,802 1,212,583 Equitycapital 1,336,929 1,128,279 929,954 198,326 208,650 Numberofbanks 6,649 2,248 1,425 823 4,401 2009 Assets Loansandinvestments 8,242,505 6,603,148 5,414,826 1,188,322 1,639,357 Loans,gross 6,238,169 4,933,958 4,048,106 885,853 1,304,210 Net 6,236,242 4,933,137 4,047,602 885,535 1,303,104 Investments 2,004,336 1,669,190 1,366,720 302,469 335,146 U.S.Treasuryandfederalagencysecurities 249,731 172,378 123,917 48,461 77,352 Other 1,754,605 1,496,811 1,242,803 254,008 257,794 Cashassets,total 615,637 485,460 379,577 105,883 130,176 Liabilities Deposits,total 6,548,003 5,080,081 4,138,166 941,915 1,467,921 Interbank 138,693 115,114 98,413 16,702 23,579 Othertransactions 777,885 590,655 468,296 122,360 187,229 Othernontransactions 5,631,425 4,374,312 3,571,458 802,853 1,257,113 Equitycapital 1,248,840 1,040,403 861,931 178,471 208,437 Numberofbanks 6,963 2,346 1,502 844 4,617 Note:IncludesU.S.-insuredcommercialbankslocatedintheUnitedStatesbutnotU.S.-insuredcommercialbanksoperatinginU.S.territoriesorpossessions.Dataare domesticassetsandliabilities(exceptforthosecomponentsreportedonaconsolidatedbasisonly).Componentsmaynotsumtototalsbecauseofrounding.Datafor2009 havebeenrevised.

306 97thAnnualReport|2010 Table8.Initialmarginrequirements underRegulationsT,U,andX Percentofmarketvalue Short Margin Effectivedate Convertiblebonds sales, stocks 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,adoptedbytheBoardofGovernorspursuanttothe SecuritiesExchangeActof1934,limittheamountofcreditthatmaybeextended forthepurposeofpurchasingorcarryingmarginsecurities(asdefinedinthe regulations)whentheloaniscollateralizedbysuchsecurities.Themargin requirement,expressedasapercentage,isthedifferencebetweenthemarket valueofthesecuritiesbeingpurchasedorcarried(100percent)andthemaximum loanvalueofthecollateralasprescribedbytheBoard.RegulationTwasadopted effectiveOctober1,1934;RegulationU,effectiveMay1,1936;andRegulationX, effectiveNovember1,1971.TheformerRegulationG,whichwasadopted effectiveMarch11,1968,wasmergedintoRegulationU,effectiveApril1,1998. 1 FromOctober1,1934,toOctober31,1937,therequirementwasthemargin “customarilyrequired”bythebrokersanddealers. …Notapplicable.

StatisticalTables 307 Table9A.StatementofConditionoftheFederalReserveBanks,byBank,December31,2010and2009 Millionsofdollars Total Boston NewYork Philadelphia Cleveland Richmond Item 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 Assets Goldcertificateaccount 11,037 11,037 369 412 4,038 3,895 404 450 463 467 846 882 Specialdrawingrights certificateaccount 5,200 5,200 196 196 1,818 1,818 210 210 237 237 412 412 Coin 2,180 2,053 47 64 71 77 172 165 164 154 354 293 Loansandsecurities Termauctioncredit 0 75,918 0 4,052 0 58,254 0 1,613 0 751 0 995 Primary,secondary,and seasonalloans 221 20,700 1 109 36 19,504 0 122 0 1 61 102 TermAsset-BackedSecurities LoanFacility(TALF)1 24,732 47,626 … … 24,732 47,626 … … … … … … Creditextended toAmericanInternational Group,Inc.,net2 20,603 21,250 … … 20,603 21,250 … … … … … … Treasurysecurities,bought outright3 1,021,493 776,588 25,851 14,897 416,823 303,549 23,855 12,048 34,706 30,681 116,337 27,986 Government-sponsored enterprisedebtsecurities, boughtoutright3 147,460 159,879 3,732 3,067 60,171 62,493 3,444 2,480 5,010 6,317 16,794 5,762 Federalagencyand governmentsponsoredenterprise mortgage-backedsecurities, boughtoutright 992,141 908,371 25,108 17,425 404,846 355,060 23,169 14,093 33,709 35,888 112,994 32,735 Totalloansandsecurities 2,206,650 2,010,332 54,691 39,550 927,212 867,735 50,468 30,356 73,425 73,638 246,186 67,579 Netportfolioholdingsof consolidatedvariableinterest entities4 68,666 81,380 … … 68,666 81,380 … … … … … … Preferredinterests5 26,385 25,106 … … 26,385 25,106 … … … … … … Foreigncurrencydenominated assets6 26,049 25,272 959 1,012 7,560 6,724 2,847 2,776 1,941 1,861 7,253 7,171 Centralbankliquidityswaps7 75 10,272 3 411 22 2,733 8 1,128 6 756 21 2,915 Otherassets Itemsinprocessofcollection 510 611 10 19 0 0 74 51 89 182 8 9 Bankpremises 2,228 2,249 126 121 258 263 69 71 140 144 240 239 Allotherassets8 81,910 65,459 2,096 1,274 33,400 25,557 1,933 1,338 2,784 2,541 9,372 2,748 Interdistrictsettlementaccount 0 0 4,414 25,668 225,756 120,324 12,749 35,084 -15,854 -19,789 -62,496 111,074 Totalassets 2,430,890 2,238,971 62,912 68,728 1,295,186 1,135,612 68,932 71,630 63,395 60,192 202,195 193,321 Liabilities FederalReservenotes outstanding 1,121,643 1,080,987 41,012 35,787 383,595 398,052 45,360 38,422 45,905 44,922 89,693 82,410 Less:NotesheldbyFederal ReserveBank 180,082 193,141 4,714 3,618 64,698 71,925 4,826 5,591 7,304 7,535 12,999 10,026 FederalReservenotes outstanding,net 941,561 887,846 36,297 32,169 318,897 326,127 40,533 32,831 38,601 37,387 76,694 72,384 Securitiessoldunder agreementstorepurchase9 59,703 77,732 1,511 1,491 24,362 30,383 1,394 1,206 2,028 3,071 6,800 2,801 Deposits Depositoryinstitutions 968,052 976,988 22,935 32,934 536,589 525,907 21,083 31,597 18,152 15,198 105,026 103,288 Treasury,generalaccount 140,773 186,632 … … 140,773 186,632 … … … … … … Treasury,supplementary financingaccount10 199,964 5,001 … … 199,964 5,001 … … … … … … Foreign,officialaccounts 3,337 2,411 1 2 3,308 2,382 4 4 3 3 11 11 Other11 13,630 35,627 5 18 13,461 34,787 1 0 1 24 63 61 Totaldeposits 1,325,756 1,206,659 22,942 32,954 894,095 754,710 21,088 31,602 18,156 15,225 105,101 103,360 (continuedonnextpage)

308 97thAnnualReport|2010 Table9A—continued Total Boston NewYork Philadelphia Cleveland Richmond Item 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 Otherliabilities FundsfromAmerican InternationalGroup,Inc.asset disposition,heldasagent12 26,896 … … … 26,896 … … … … … … … InterestonFederalReserve notesduetoU.S.Treasury13 5,124 … 90 … 1,877 … 334 … 26 … 2,041 … Deferredcredititems 1,931 2,206 71 56 10 14 271 220 410 422 74 73 Consolidatedvariableinterest entities14 10,972 6,411 … … 10,972 6,411 … … … … … … Allotherliabilities15 5,899 6,836 168 169 2,712 3,083 173 168 239 267 608 423 Totalliabilities 2,377,842 2,187,690 61,079 66,839 1,279,822 1,120,728 63,794 66,026 59,460 56,371 191,318 179,042 Capitalaccounts Capitalpaidin 26,524 25,640 917 944 7,682 7,442 2,569 2,802 1,968 1,910 5,439 7,140 Surplus(includingaccumulated othercomprehensiveloss) 26,524 25,640 917 944 7,682 7,442 2,569 2,802 1,968 1,910 5,439 7,140 Totalliabilitiesandcapital accounts 2,430,890 2,238,971 62,912 68,728 1,295,186 1,135,612 68,932 71,630 63,395 60,192 202,195 193,321 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Includesremainingprincipalbalance.TALFloansarerecordedatfairvalue,andthefairvalueadjustmentasofDecember31isreportedin“Allotherassets.” 2 Includesoutstandingprincipalandcapitalizedinterestnetofunamortizeddeferredcommitmentfeesandallowanceforloanrestructuring.Excludescreditextendedto MaidenLaneIILLCandMaidenLaneIIILLC. 3 Includessecuritiesloaned—fullycollateralizedbyU.S.Treasurysecurities,otherinvestment-gradesecurities,andcollateraleligiblefortripartyrepurchaseagreements pledgedwithFederalReserveBanks. 4 TheFederalReserveBankofNewYorkistheprimarybeneficiaryofCommercialPaperFundingFacilityLLC,TALFLLC,MaidenLaneLLC,MaidenLaneIILLC,andMaiden LaneIIILLCand,asaresult,theaccountsandresultsofoperationsoftheseentitiesareincludedinthecombinedfinancialstatementsoftheFederalReserveBanks.For additionaldetails,see“Table6.KeyFinancialDataforConsolidatedLimitedLiabilityCompanies”onpage133. 5 InMarch2009,theFederalReserveBankofNewYorkreceivedpreferredinterestsintwospecialpurposevehicles,AIAAuroraLLCandALICOHoldingsLLC,inexchangefor thereductionoftheoutstandingbalanceofrevolvingcreditprovidedtoAmericanInternationalGroup,Inc.(AIG).Thepreferredinterestsarerecordedatcost. 6 Valueddailyatmarketexchangerates. 7 Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. 8 Includespremiumsonsecurities,accruedinterest,thefairvalueadjustmentforTALFloans,anddepositoryinstitutionoverdrafts. 9 Contractamountofagreements. 10RepresentsamountsdepositedbytheU.S.Treasurythatresultfromatemporarysupplementaryprogramthatoffsets,inpart,thereserveimpactoftheReserveBanks’ lendingandliquidityinitiatives. 11Includesdepositsofgovernment-sponsoredenterprises,theConsumerFinancialProtectionBureau,andinternationalorganizations.Thesedepositsareprimarilyheldbythe FederalReserveBankofNewYork. 12PendingtheclosingoftherecapitalizationplanannouncedbyAIGonSeptember30,2010,thecashproceedsfromthedispositionofcertainAIGassetswereheldbyFRBNY asagent.AttheclosingoftherecapitalizationplanwhichoccurredJanuary14,2011,theproceedswereusedfirsttorepayinfullthecreditextendedtoAIGbytheFRBNY undertherevolvingcreditfacilityandthentoredeemaportionoftheFRBNY’spreferredinterestsinALICOHoldingsLLC(preferredinterests). 13RepresentstheestimatedweeklyremittancestoU.S.TreasuryasinterestonFederalReservenotesor,inthosecaseswheretheReserveBank’snetearningsarenot sufficienttoequatesurplustocapitalpaid-in,thedeferredassetforinterestonFederalReservenotes.TheamountsonthislinearecalculatedinaccordancewithBoardof Governorspolicy,whichrequirestheFederalReserveBankstoremitresidualearningstotheU.S.TreasuryasinterestonFederalReservenotesafterprovidingforthecosts ofoperations,paymentofdividends,andtheamountnecessarytoequatesurpluswithcapitalpaid-in. 14TheotherbeneficialinterestholderrelatedtotheTALFLLCistheU.S.Treasury;toMaidenLaneLLC,itisJPMorganChase;andtoMaidenLaneIIandMaidenLaneIIILLCs,it isAIG. 15Includesdiscountsonsecurities,accruedbenefitcosts. …Notapplicable. (continuedonnextpage)

StatisticalTables 309 Table9A.StatementofConditionoftheFederalReserveBanks,byBank,December31,2010and2009—continued Millionsofdollars Atlanta Chicago St.Louis Minneapolis KansasCity Dallas SanFrancisco Item 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 Assets Goldcertificateaccount 1,385 1,356 887 911 324 329 203 197 296 335 652 621 1,170 1,182 Specialdrawingrights certificateaccount 654 654 424 424 150 150 90 90 153 153 282 282 574 574 Coin 188 220 336 301 35 32 60 62 161 140 239 214 353 329 Loansandsecurities Termauctioncredit 0 363 0 1,934 0 593 0 214 0 941 0 390 0 5,818 Primary,secondary,and seasonalloans 14 175 79 459 2 26 8 28 7 7 0 2 14 166 TermAsset-BackedSecurities LoanFacility(TALF)1 … … … … … … … … … … … … … … Creditextended toAmericanInternational Group,Inc.,net2 … … … … … … … … … … … … … … Treasurysecurities,bought outright3 96,661 93,568 77,007 84,035 26,312 30,424 13,984 12,857 35,041 35,055 42,893 37,549 112,023 93,939 Government-sponsored enterprisedebtsecurities, boughtoutright3 13,954 19,263 11,116 17,301 3,798 6,263 2,019 2,647 5,058 7,217 6,192 7,730 16,171 19,339 Federalagencyand governmentsponsoredenterprise mortgage-backedsecurities, boughtoutright 93,884 109,446 74,794 98,296 25,556 35,586 13,582 15,038 34,034 41,003 41,660 43,921 108,804 109,880 Totalloansandsecurities 204,513 222,815 162,996 202,025 55,668 72,892 29,593 30,784 74,141 84,223 90,745 89,593 237,013 229,142 Netportfolioholdingsof consolidatedvariableinterest entities4 … … … … … … … … … … … … … … Preferredinterests5 … … … … … … … … … … … … … … Foreigncurrencydenominated assets6 1,606 1,933 629 844 244 251 723 389 213 249 358 325 1,714 1,737 Centralbankliquidityswaps7 5 785 2 343 1 102 2 158 1 101 1 132 5 706 Otherassets Itemsinprocessofcollection 149 178 40 31 12 19 69 26 16 24 21 33 22 39 Bankpremises 218 221 209 207 136 136 107 111 265 268 247 253 214 214 Allotherassets8 7,741 7,719 6,134 6,902 2,126 2,523 1,143 1,084 2,805 2,896 3,447 3,121 8,930 7,756 Interdistrictsettlementaccount -48,131 -83,531 -31,780 -75,509 -18,011 -35,273 -8,382 -8,558 -14,671 -30,440 -3,007 -17,174 -40,587 -21,875 Totalassets 168,328 152,351 139,878 136,478 40,685 41,162 23,607 24,342 63,379 57,950 92,985 77,399 209,407 219,804 Liabilities FederalReservenotes outstanding 142,659 136,496 86,072 85,293 32,240 31,054 19,855 19,330 33,041 28,699 76,154 63,373 126,059 117,148 Less:NotesheldbyFederal ReserveBank 20,851 32,645 12,147 12,092 4,381 4,106 5,781 2,628 3,560 3,022 11,980 13,731 26,839 26,221 FederalReservenotes outstanding,net 121,807 103,851 73,925 73,201 27,858 26,948 14,074 16,702 29,481 25,677 64,174 49,642 99,219 90,927 Securitiessoldunder agreementstorepurchase9 5,650 9,366 4,501 8,411 1,538 3,045 817 1,287 2,048 3,509 2,507 3,758 6,547 9,403 Deposits Depositoryinstitutions 37,040 34,951 59,416 52,624 10,492 10,315 6,657 4,502 31,063 27,940 25,112 22,826 94,486 114,905 Treasury,generalaccount … … … … … … … … … … … … … … Treasury,supplementary financingaccount10 … … … … … … … … … … … … … … Foreign,officialaccounts 2 3 1 1 0 0 1 1 0 0 1 1 3 3 Other11 2 176 26 244 56 61 3 19 4 54 - 54 8 128 Totaldeposits 37,044 35,130 59,443 52,869 10,548 10,377 6,662 4,522 31,067 27,994 25,113 22,881 94,497 115,036 (continuedonnextpage)

310 97thAnnualReport|2010 Table9A—continued Atlanta Chicago St.Louis Minneapolis KansasCity Dallas SanFrancisco Item 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 Otherliabilities FundsfromAmerican InternationalGroup,Inc.asset disposition,heldasagent12 … … … … … … … … … … … … … … InterestonFederalReserve notesduetoU.S.Treasury13 248 … 118 … 69 … 37 … 56 … 69 … 158 … Deferredcredititems 98 218 151 178 67 67 263 271 81 112 73 109 361 466 Consolidatedvariableinterest entities14 … … … … … … … … … … … … … … Allotherliabilities15 440 624 395 579 173 245 116 137 169 239 245 303 461 599 Totalliabilities 165,288 149,189 138,534 135,239 40,253 40,682 21,969 22,918 62,902 57,531 92,181 76,694 201,244 216,430 CapitalAccounts Capitalpaidin 1,520 1,581 672 619 216 240 819 712 239 210 402 353 4,082 1,687 Surplus(includingaccumulated othercomprehensiveloss) 1,520 1,581 672 619 216 240 819 712 239 210 402 353 4,082 1,687 Totalliabilitiesandcapital accounts 168,328 152,351 139,878 136,478 40,685 41,162 23,607 24,342 63,379 57,950 92,985 77,399 209,407 219,804 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Includesremainingprincipalbalance.TALFloansarerecordedatfairvalue,andthefairvalueadjustmentasofDecember31isreportedin“Allotherassets.” 2 Includesoutstandingprincipalandcapitalizedinterestnetofunamortizeddeferredcommitmentfeesandallowanceforloanrestructuring.Excludescreditextendedto MaidenLaneIILLCandMaidenLaneIIILLC. 3 Includessecuritiesloaned—fullycollateralizedbyU.S.Treasurysecurities,otherinvestment-gradesecurities,andcollateraleligiblefortripartyrepurchaseagreements pledgedwithFederalReserveBanks. 4 TheFederalReserveBankofNewYorkistheprimarybeneficiaryofCommercialPaperFundingFacilityLLC,TALFLLC,MaidenLaneLLC,MaidenLaneIILLC,andMaiden LaneIIILLCand,asaresult,theaccountsandresultsofoperationsoftheseentitiesareincludedinthecombinedfinancialstatementsoftheFederalReserveBanks.For additionaldetails,see“Table6.KeyFinancialDataforConsolidatedLimitedLiabilityCompanies”onpage133. 5 InMarch2009,theFederalReserveBankofNewYorkreceivedpreferredinterestsintwospecialpurposevehicles,AIAAuroraLLCandALICOHoldingsLLC,inexchangefor thereductionoftheoutstandingbalanceofrevolvingcreditprovidedtoAmericanInternationalGroup,Inc.(AIG).Thepreferredinterestsarerecordedatcost. 6 Valueddailyatmarketexchangerates. 7 Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. 8 Includespremiumsonsecurities,accruedinterest,thefairvalueadjustmentforTALFloans,anddepositoryinstitutionoverdrafts. 9 Contractamountofagreements. 10RepresentsamountsdepositedbytheU.S.Treasurythatresultfromatemporarysupplementaryprogramthatoffsets,inpart,thereserveimpactoftheReserveBanks’ lendingandliquidityinitiatives. 11Includesdepositsofgovernment-sponsoredenterprises,theConsumerFinancialProtectionBureau,andinternationalorganizations.Thesedepositsareprimarilyheldbythe FederalReserveBankofNewYork. 12PendingtheclosingoftherecapitalizationplanannouncedbyAIGonSeptember30,2010,thecashproceedsfromthedispositionofcertainAIGassetswereheldbyFRBNY asagent.AttheclosingoftherecapitalizationplanwhichoccurredJanuary14,2011,theproceedswereusedfirsttorepayinfullthecreditextendedtoAIGbytheFRBNY undertherevolvingcreditfacilityandthentoredeemaportionoftheFRBNY’spreferredinterestsinALICOHoldingsLLC(preferredinterests). 13RepresentstheestimatedweeklyremittancestoU.S.TreasuryasinterestonFederalReservenotesor,inthosecaseswheretheReserveBank’snetearningsarenot sufficienttoequatesurplustocapitalpaid-in,thedeferredassetforinterestonFederalReservenotes.TheamountsonthislinearecalculatedinaccordancewithBoardof Governorspolicy,whichrequirestheFederalReserveBankstoremitresidualearningstotheU.S.TreasuryasinterestonFederalReservenotesafterprovidingforthecosts ofoperations,paymentofdividends,andtheamountnecessarytoequatesurpluswithcapitalpaid-in. 14TheotherbeneficialinterestholderrelatedtotheTALFLLCistheU.S.Treasury;toMaidenLaneLLC,itisJPMorganChase;andtoMaidenLaneIIandMaidenLaneIIILLCs,it isAIG. 15Includesdiscountsonsecurities,accruedbenefitcosts. …Notapplicable.

StatisticalTables 311 Table9B.StatementofConditionoftheFederalReserve Banks,December31,2010and2009 Supplementalinformation—collateralheldagainstFederal Reservenotes:FederalReserveagents’accounts Millionsofdollars Item 2010 2009 FederalReservenotesoutstanding 1,121,643 1,080,987 Less:NotesheldbyFederalReserve Banksnotsubjectto collateralization 180,082 193,141 CollateralizedFederalReservenotes 941,561 887,846 CollateralforFederalReservenotes Goldcertificateaccount 11,037 11,037 Specialdrawingrightscertificateaccount 5,200 5,200 U.S.Treasurysecuritiesand government-sponsoredenterprisedebt securities1 925,324 858,607 Othereligibleassets 0 13,002 Totalcollateral 941,561 887,846 1 Facevalue.Includescompensationtoadjustfortheeffectofinflationonthe originalfacevalueofinflation-indexedsecurities,cashvalueofrepurchase agreements,andparvalueofreverserepurchaseagreements.

312 97thAnnualReport|2010 Table10.IncomeandexpensesoftheFederalReserveBanks,byBank,2010 Thousandsofdollars Kansas San Item Total Boston NewYork Philadelphia Cleveland Richmond Atlanta Chicago St.Louis Minneapolis Dallas City Francisco Currentincome Interestincome Termauctioncredit, primary, secondary,and seasonalloans 50,319 907 43,424 575 161 482 450 1,168 291 186 201 520 1,955 TermAsset- Backed Securities LoanFacility 750,456 … 750,456 … … … … … … … … … … American International Group,Inc.,net 2,727,790 … 2,727,790 … … … … … … … … … … Treasurysecurities 26,372,927 621,47210,632,686 557,078 937,5422,419,5542,689,5962,234,404 779,979 382,537 985,9821,155,1312,976,967 Governmentsponsored enterprisedebt securities 3,510,486 82,393 1,414,384 73,729 125,094 317,863 359,406 299,192 104,547 51,074 131,828 154,102 396,872 Federalagencyand governmentsponsored enterprise mortgagebackedsecurities 44,839,1691,055,22218,073,722 945,345 1,595,2744,095,8684,578,7713,806,4521,329,195 651,045 1,678,8481,965,4085,064,020 Foreigncurrency denominated assets 222,801 8,266 64,219 24,358 16,584 62,137 14,011 5,553 2,099 5,959 1,852 3,047 14,715 Centralbank liquidityswaps1 11,547 437 3,263 1,264 857 3,234 766 313 110 276 101 156 771 Otherinvestments2 441 11 178 9 16 42 45 37 13 6 16 19 50 Totalinterest income 78,485,9351,768,70833,710,121 1,602,358 2,675,5286,899,1807,643,0456,347,1192,216,234 1,091,083 2,798,8283,278,3838,455,350 Pricedservices 566,735 … 74,853 … … … 420,010 71,871 … … … … … Compensation receivedfor services provided3 233,565 19,363 3,742 7,015 27,058 19,788 438 24,892 3,762 51,988 41,887 13,379 20,252 Securitieslending fees 6,638 155 2,671 138 238 585 685 573 200 97 252 293 753 Otherincome 8,065 7 7,807 115 5 22 19 22 6 15 7 23 16 Totalcurrent income 79,300,9371,788,23233,799,194 1,609,626 2,702,8296,919,5758,064,1976,444,4752,220,202 1,143,184 2,840,9743,292,0768,476,372 Currentexpenses Interestexpenseon securitiessold under agreementsto repurchase 94,465 2,290 38,264 2,077 3,300 9,479 9,364 7,661 2,654 1,340 3,419 4,071 10,545 Interestonreserves andterm deposits4 2,683,942 42,217 1,412,598 81,963 41,025 446,346 98,478 110,868 27,871 41,070 63,955 51,200 266,352 Earningscredits costs 2,730 184 361 147 104 206 194 253 67 94 107 225 787 Personnel Salariesandother personnel expenses 1,673,334 86,014 406,186 74,811 91,909 237,445 144,628 122,587 82,328 80,019 99,584 91,061 156,762 Retirementand otherbenefits 554,448 27,919 118,185 28,582 36,977 75,589 49,825 42,289 27,572 25,726 30,002 34,215 57,567 Netperiodicpension expense5 528,936 1,511 512,447 1,401 756 1,448 1,740 1,645 1,328 1,312 1,085 846 3,417 Administrative Fees 198,351 2,547 65,704 5,154 3,039 63,144 25,920 7,291 10,110 2,659 6,278 2,512 3,994 Travel 76,471 3,003 11,528 2,690 4,067 12,479 8,478 8,248 4,608 3,204 5,210 4,337 8,620 Postageandother shippingcosts 30,168 322 1,146 346 2,224 763 17,931 440 768 518 920 1,433 3,358 (continuedonnextpage)

StatisticalTables 313 Table10—continued Kansas San Item Total Boston NewYork Philadelphia Cleveland Richmond Atlanta Chicago St.Louis Minneapolis Dallas City Francisco Communications 46,072 864 5,479 682 818 26,741 1,983 1,910 1,313 1,533 1,137 1,790 1,823 Materialsand supplies 58,669 3,583 20,107 4,758 2,912 5,358 5,087 3,805 2,287 1,309 2,390 3,492 3,581 Building Taxesonrealestate 41,037 5,898 7,852 1,589 1,918 2,398 3,385 3,432 664 2,701 3,681 3,255 4,264 Property depreciation 120,283 9,337 18,903 5,679 7,751 13,877 11,231 13,887 7,481 4,299 7,642 10,002 10,193 Utilities 40,851 3,992 8,438 2,587 2,421 4,240 3,827 2,251 1,793 1,841 2,033 4,202 3,224 Rent 46,177 1,446 22,471 913 22 17,135 351 936 1,020 271 738 210 663 Otherbuilding 49,680 3,963 7,665 3,827 3,696 4,944 4,041 6,944 2,270 1,909 1,814 5,224 3,382 Equipment/software Purchases 30,096 4,134 5,643 1,109 1,119 6,342 1,232 2,120 1,303 1,419 1,806 2,346 1,523 Rentals 3,502 295 1,410 372 333 164 453 289 25 9 12 48 92 Depreciation 86,433 5,123 12,108 4,686 3,507 32,169 4,335 4,321 2,835 1,738 4,709 4,478 6,423 Repairsand maintenance 61,768 4,156 7,140 2,906 3,002 17,386 7,811 4,369 1,732 1,503 2,195 3,450 6,116 Software 171,401 5,046 32,277 8,588 3,306 57,792 10,227 3,903 2,983 4,961 5,998 9,032 27,288 Otherexpenses Compensationpaid forservicecosts incurred3 233,565 … 31,571 … … … 193,246 8,748 … … … … … Otherexpenses 68,678 11,712 58,816 10,179 3,862 -243,911 49,433 50,048 67,792 18,393 5,400 17,119 19,835 Recoveries -139,681 -17,183 -17,320 -4,398 -5,212 -36,807 -13,821 -12,037 -3,646 -2,306 -7,324 -12,500 -7,127 Expenses capitalized6 -34,424 -3,266 -10,626 -2,037 -1,381 -1,981 -1,254 -2,018 -653 -5,592 -1,029 -1,384 -3,202 Totalcurrent expenses 6,726,952 205,107 2,778,353 238,611 211,474 752,746 638,125 394,191 246,505 189,931 241,761 240,664 589,481 Reimbursements -456,532 -30,041 -114,539 -34,065 -45,789 -39,664 -16,234 -3,778 -105,066 -27,317 -12,368 -14,286 -13,386 Netexpenses 6,270,420 175,066 2,663,814 204,547 165,685 713,083 621,891 390,413 141,439 162,614 229,393 226,378 576,095 Profitandloss Currentnetincome 73,030,5171,613,16631,135,381 1,405,080 2,537,1446,206,4927,442,3066,054,0612,078,764 980,570 2,611,5813,065,6987,900,277 Additionsto(+)anddeductionsfrom(-)currentnetincome Profitonsalesof federalagency andgovernmentsponsored enterprise mortgage-backed securities 782,267 17,566 312,949 15,413 28,593 60,734 83,443 70,928 25,037 11,753 30,782 35,165 89,903 Foreigncurrency gains(losses) 554,079 20,460 160,426 60,558 41,269 154,371 34,403 13,534 5,202 15,189 4,556 7,603 36,508 Dividendson preferred interests 1,279,041 … 1,279,041 … … … … … … … … … … TermAsset- Backed Securities LoanFacility unrealized losses7 -436,045 … -436,045 … … … … … … … … … … Netincomefrom consolidated variableinterest entities8 7,560,077 … 7,560,077 … … … … … … … … … … Otheradditions 115,968 3 115,882 16 1 2 … 24 1 … 1 21 17 Totaladditions 9,855,388 38,029 8,992,331 75,987 69,864 215,107 117,846 84,487 30,240 26,942 35,338 42,789 126,428 Otherdeductions -109,818 -1 -103,067 0 0 0 0 -4 0 0 0 0 -6,746 Totaldeductions -109,818 -1 -103,067 0 0 0 0 -4 0 0 0 0 -6,746 Netadditionto(+) currentnet income 9,745,570 38,028 8,889,264 75,987 69,864 215,107 117,846 84,483 30,240 26,942 35,338 42,789 119,682 Costof unreimbursed Treasury services 7 … 7 … … … … … … … … … … (continuedonnextpage)

314 97thAnnualReport|2010 Table10—continued Kansas San Item Total Boston NewYork Philadelphia Cleveland Richmond Atlanta Chicago St.Louis Minneapolis Dallas City Francisco AssessmentsbyBoard Boardexpenditures9 422,200 15,267 122,485 45,652 31,095 109,294 25,600 10,069 3,902 11,970 3,421 5,920 37,525 Costofcurrency 622,846 29,390 128,669 32,047 33,558 60,546 91,868 59,147 20,861 14,168 22,883 41,805 87,903 ConsumerFinancial Protection Bureauand Officeof Financial Research10 42,286 1,500 12,305 4,530 3,082 10,131 2,521 1,016 374 1,222 341 605 4,658 Netincomebefore distributions 81,688,7471,605,03739,761,179 1,398,838 2,539,2736,241,6277,440,1636,068,3122,083,866 980,153 2,620,2743,060,1577,889,873 Changeinfunded statusofbenefit plans 45,881 9,083 27,560 6,091 -17,656 10,870 5,335 -3,181 1,031 1,479 1,638 4,202 -570 Comprehensive incomebefore distributions 81,734,6281,614,12039,788,739 1,404,929 2,521,6176,252,4977,445,4986,065,1312,084,897 981,632 2,621,9123,064,3597,889,303 Dividendspaid 1,582,785 55,160 455,362 170,590 114,996 348,978 93,754 38,615 13,619 46,470 12,877 23,608 208,755 PaymentstoU.S. Treasury(interest onFederal Reservenotes) 79,268,1241,586,76139,092,783 1,467,087 2,349,5047,604,3357,412,8435,974,0182,095,393 827,941 2,579,8332,991,4055,286,222 Transferredto/from surplusand changein accumulated other comprehensive income 883,724 -27,799 240,593 -232,745 57,117-1,700,816 -61,099 52,497 -24,115 107,222 29,201 49,3442,394,327 Surplus,January1 25,640,333 944,417 7,441,692 2,801,953 1,910,4037,139,6721,581,065 619,494 240,281 712,046 209,566 352,5051,687,238 Surplus, December31 26,524,057 916,618 7,682,284 2,569,208 1,967,5195,438,8561,519,966 671,991 216,166 819,267 238,767 401,8494,081,565 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Representsinterestincomerecognizedonswapagreementswithforeigncentralbanks. 2 Representsinterestincomeearnedonshort-terminvestmentsrelatedtothefederalagencyandgovernment-sponsoredenterprisemortgage-backedsecuritiesportfolio. 3 TheFederalReserveBankofAtlantahasoverallresponsibilityformanagingtheReserveBanks’provisionofcheckandACHservicesandrecognizestotalSystemrevenuefor theseservices.TheFederalReserveBankofNewYorkhasoverallresponsibilityformanagingtheReserveBanks’provisionofFedwirefundstransferandsecuritiestransfer services,andrecognizesthetotalSystemrevenuefortheseservices.TheFederalReserveBankofChicagohasoverallresponsibilityformanagingtheReserveBanks’ provisionofelectronicaccessservicestodepositoryinstitutions,andrecognizesthetotalSystemrevenuefortheseservices.TheFederalReserveBankofAtlanta,theFederal ReserveBankofNewYork,andtheFederalReserveBankofChicagocompensatetheotherReserveBanksforthecostsincurredinprovidingtheseservices. 4 InOctober2008,theReserveBanksbegantopayinteresttodepositoryinstitutionsonqualifyingbalancesheldattheFederalReserveBanks.InApril2010,theReserve BanksbegantopayinterestontermdepositsundertheTermDepositFacility. 5 ReflectstheeffectoftheFinancialAccountingStandardsBoard’sCodificationTopic(ASC715)Compensation-RetirementBenefits.TheSystemRetirementPlanfor employeesisrecordedonbehalfoftheSystemonthebooksoftheFederalReserveBankofNewYork.NetpensionexpensefortheSystem,whichwas$492,956thousand. isrecordedinthebooksoftheFederalReserveBankofNewYork.TheRetirementBenefitEqualizationPlanandtheSupplementalEmployeeRetirementPlanarerecordedby eachFederalReserveBank. 6 Includesexpensesforlaborandmaterialscapitalizedanddepreciatedoramortizedaschargestoactivitiesintheperiodsbenefited. 7 RepresentsthevaluationadjustmentforTALFloans,whicharerecordedatfairvalue.Inadditiontothevaluationadjustment,earningsonTALFloansincludeinterestincome of$750million,administrativefeesof$13million,andtheFRBNY’sallocatedshareofTALFLLC’snetincome. 8 Representstheportionoftheconsolidatedvariableinterestentities’netincomerecordedbytheFederalReserveBankofNewYork.Theamountincludesinterestincome, interestexpenses,realizedandunrealizedgainsandlosses,andprofessionalfees. 9 Foradditionaldetails,seethe“BoardofGovernorsFinancialStatements”onpage322inthe“FederalReserveSystemAudits”sectionofthisreport. 10TheBoardofGovernorsassessestheReserveBankstofundtheoperationsoftheConsumerFinancialProtectionBureau(CFPB)andOfficeofFinancialResearch(OFR). TheseassessmentsareallocatedtoeachReserveBankbasedoneachReserveBank’scapitalandsurplusbalancesasofthemostrecentquarter. ...Notapplicable.

StatisticalTables 315 Table11.IncomeandexpensesoftheFederalReserveBanks,1914–2010 Thousandsofdollars AssessmentsbytheBoard Distributionstothe ofGovernors U.S.Treasury Transferred Change to/from Federal Net Consumer in surplus Re B a s a n e n d r k ve C in u c r o r m en e t exp N e e n t ses d a e d d d u o i c t r i t o io n n s s Board Costsof P F r B i o n u t a e r n e c c a ti i u o a n l f s u t n a o d t f u e s d Div p id a e id nds Statutory Inte o r n est Tr s a t u o n r / s p fr f l e o u r m s r 4 ed ac c c h u a a m n n g u d e la i t n ed period (-)1 expenditures currency and benefit transfers3 Federal other Officeof plans Reserve comprehensive Financial notes income5 Research2 AllBanks 1914–15 2,173 2,018 6 302 … … … 217 … … … … 1916 5,218 2,082 -193 192 … … … 1,743 … … … … 1917 16,128 4,922 -1,387 238 … … … 6,804 1,134 … … 1,134 1918 67,584 10,577 -3,909 383 … … … 5,541 … … … 48,334 1919 102,381 18,745 -4,673 595 … … … 5,012 2,704 … … 70,652 1920 181,297 27,549 -3,744 710 … … … 5,654 60,725 … … 82,916 1921 122,866 33,722 -6,315 741 … … … 6,120 59,974 … … 15,993 1922 50,499 28,837 -4,442 723 … … … 6,307 10,851 … … -660 1923 50,709 29,062 -8,233 703 … … … 6,553 3,613 … … 2,546 1924 38,340 27,768 -6,191 663 … … … 6,682 114 … … -3,078 1925 41,801 26,819 -4,823 709 … … … 6,916 59 … … 2,474 1926 47,600 24,914 -3,638 722 1,714 … … 7,329 818 … … 8,464 1927 43,024 24,894 -2,457 779 1,845 … … 7,755 250 … … 5,044 1928 64,053 25,401 -5,026 698 806 … … 8,458 2,585 … … 21,079 1929 70,955 25,810 -4,862 782 3,099 … … 9,584 4,283 … … 22,536 1930 36,424 25,358 -93 810 2,176 … … 10,269 17 … … -2,298 1931 29,701 24,843 311 719 1,479 … … 10,030 … … … -7,058 1932 50,019 24,457 -1,413 729 1,106 … … 9,282 2,011 … … 11,021 1933 49,487 25,918 -12,307 800 2,505 … … 8,874 … … … -917 1934 48,903 26,844 -4,430 1,372 1,026 … … 8,782 … … -60 6,510 1935 42,752 28,695 -1,737 1,406 1,477 … … 8,505 298 … 28 607 1936 37,901 26,016 486 1,680 2,178 … … 7,830 227 … 103 353 1937 41,233 25,295 -1,631 1,748 1,757 … … 7,941 177 … 67 2,616 1938 36,261 25,557 2,232 1,725 1,630 … … 8,019 120 … -419 1,862 1939 38,501 25,669 2,390 1,621 1,356 … … 8,110 25 … -426 4,534 1940 43,538 25,951 11,488 1,704 1,511 … … 8,215 82 … -54 17,617 1941 41,380 28,536 721 1,840 2,588 … … 8,430 141 … -4 571 1942 52,663 32,051 -1,568 1,746 4,826 … … 8,669 198 … 50 3,554 1943 69,306 35,794 23,768 2,416 5,336 … … 8,911 245 … 135 40,327 1944 104,392 39,659 3,222 2,296 7,220 … … 9,500 327 … 201 48,410 1945 142,210 41,666 -830 2,341 4,710 … … 10,183 248 … 262 81,970 1946 150,385 50,493 -626 2,260 4,482 … … 10,962 67 … 28 81,467 1947 158,656 58,191 1,973 2,640 4,562 … … 11,523 36 75,284 87 8,366 1948 304,161 64,280 -34,318 3,244 5,186 … … 11,920 … 166,690 … 18,523 1949 316,537 67,931 -12,122 3,243 6,304 … … 12,329 … 193,146 … 21,462 1950 275,839 69,822 36,294 3,434 7,316 … … 13,083 … 196,629 … 21,849 1951 394,656 83,793 -2,128 4,095 7,581 … … 13,865 … 254,874 … 28,321 1952 456,060 92,051 1,584 4,122 8,521 … … 14,682 … 291,935 … 46,334 1953 513,037 98,493 -1,059 4,100 10,922 … … 15,558 … 342,568 … 40,337 1954 438,486 99,068 -134 4,175 6,490 … … 16,442 … 276,289 … 35,888 1955 412,488 101,159 -265 4,194 4,707 … … 17,712 … 251,741 … 32,710 1956 595,649 110,240 -23 5,340 5,603 … … 18,905 … 401,556 … 53,983 1957 763,348 117,932 -7,141 7,508 6,374 … … 20,081 … 542,708 … 61,604 1958 742,068 125,831 124 5,917 5,973 … … 21,197 … 524,059 … 59,215 1959 886,226 131,848 98,247 6,471 6,384 … … 22,722 … 910,650 … -93,601 1960 1,103,385 139,894 13,875 6,534 7,455 … … 23,948 … 896,816 … 42,613 1961 941,648 148,254 3,482 6,265 6,756 … … 25,570 … 687,393 … 70,892 1962 1,048,508 161,451 -56 6,655 8,030 … … 27,412 … 799,366 … 45,538 1963 1,151,120 169,638 615 7,573 10,063 … … 28,912 … 879,685 … 55,864 1964 1,343,747 171,511 726 8,655 17,230 … … 30,782 … 1,582,119 … -465,823 (continuedonnextpage)

316 97thAnnualReport|2010 Table11—continued AssessmentsbytheBoard Distributionstothe ofGovernors U.S.Treasury Transferred Change to/from Federal Net Consumer in surplus Re B a s a n e n d r k ve C in u c r o r m en e t exp N e e n t ses d a e d d d u o i c t r i t o io n n s s Board Costsof P F r B i o n u t a e r n e c c a ti i u o a n l f s u t n a o d t f u e s d Div p id a e id nds Statutory Inte o r n est Tr s a t u o n r / s p fr f l e o u r m s r 4 ed ac c c h u a a m n n g u d e la i t n ed period (-)1 expenditures currency and benefit transfers3 Federal other Officeof plans Reserve comprehensive Financial notes income5 Research2 1965 1,559,484 172,111 1,022 8,576 23,603 … … 32,352 … 1,296,810 … 27,054 1966 1,908,500 178,212 996 9,022 20,167 … … 33,696 … 1,649,455 … 18,944 1967 2,190,404 190,561 2,094 10,770 18,790 … … 35,027 … 1,907,498 … 29,851 1968 2,764,446 207,678 8,520 14,198 20,474 … … 36,959 … 2,463,629 … 30,027 1969 3,373,361 237,828 -558 15,020 22,126 … … 39,237 … 3,019,161 … 39,432 1970 3,877,218 276,572 11,442 21,228 23,574 … … 41,137 … 3,493,571 … 32,580 1971 3,723,370 319,608 94,266 32,634 24,943 … … 43,488 … 3,356,560 … 40,403 1972 3,792,335 347,917 -49,616 35,234 31,455 … … 46,184 … 3,231,268 … 50,661 1973 5,016,769 416,879 -80,653 44,412 33,826 … … 49,140 … 4,340,680 … 51,178 1974 6,280,091 476,235 -78,487 41,117 30,190 … … 52,580 … 5,549,999 … 51,483 1975 6,257,937 514,359 -202,370 33,577 37,130 … … 54,610 … 5,382,064 … 33,828 1976 6,623,220 558,129 7,311 41,828 48,819 … … 57,351 … 5,870,463 … 53,940 1977 6,891,317 568,851 -177,033 47,366 55,008 … … 60,182 … 5,937,148 … 45,728 1978 8,455,309 592,558 -633,123 53,322 60,059 … … 63,280 … 7,005,779 … 47,268 1979 10,310,148 625,168 -151,148 50,530 68,391 … … 67,194 … 9,278,576 … 69,141 1980 12,802,319 718,033 -115,386 62,231 73,124 … … 70,355 … 11,706,370 … 56,821 1981 15,508,350 814,190 -372,879 63,163 82,924 … … 74,574 … 14,023,723 … 76,897 1982 16,517,385 926,034 -68,833 61,813 98,441 … … 79,352 … 15,204,591 … 78,320 1983 16,068,362 1,023,678 -400,366 71,551 152,135 … … 85,152 … 14,228,816 … 106,663 1984 18,068,821 1,102,444 -412,943 82,116 162,606 … … 92,620 … 16,054,095 … 161,996 1985 18,131,983 1,127,744 1,301,624 77,378 173,739 … … 103,029 … 17,796,464 … 155,253 1986 17,464,528 1,156,868 1,975,893 97,338 180,780 … … 109,588 … 17,803,895 … 91,954 1987 17,633,012 1,146,911 1,796,594 81,870 170,675 … … 117,499 … 17,738,880 … 173,771 1988 19,526,431 1,205,960 -516,910 84,411 164,245 … … 125,616 … 17,364,319 … 64,971 1989 22,249,276 1,332,161 1,254,613 89,580 175,044 … … 129,885 … 21,646,417 … 130,802 1990 23,476,604 1,349,726 2,099,328 103,752 193,007 … … 140,758 … 23,608,398 … 180,292 1991 22,553,002 1,429,322 405,729 109,631 261,316 … … 152,553 … 20,777,552 … 228,356 1992 20,235,028 1,474,531 -987,788 128,955 295,401 … … 171,763 … 16,774,477 … 402,114 1993 18,914,251 1,657,800 -230,268 140,466 355,947 … … 195,422 … 15,986,765 … 347,583 1994 20,910,742 1,795,328 2,363,862 146,866 368,187 … … 212,090 … 20,470,011 … 282,122 1995 25,395,148 1,818,416 857,788 161,348 370,203 … … 230,527 … 23,389,367 … 283,075 1996 25,164,303 1,947,861 -1,676,716 162,642 402,517 … … 255,884 5,517,716 14,565,624 … 635,343 1997 26,917,213 1,976,453 -2,611,570 174,407 364,454 … … 299,652 20,658,972 0 … 831,705 1998 28,149,477 1,833,436 1,906,037 178,009 408,544 … … 343,014 17,785,942 8,774,994 … 731,575 1999 29,346,836 1,852,162 -533,557 213,790 484,959 … … 373,579 … 25,409,736 … 479,053 2000 33,963,992 1,971,688 -1,500,027 188,067 435,838 … … 409,614 … 25,343,892 … 4,114,865 2001 31,870,721 2,084,708 -1,117,435 295,056 338,537 … … 428,183 … 27,089,222 … 517,580 2002 26,760,113 2,227,078 2,149,328 205,111 429,568 … … 483,596 … 24,495,490 … 1,068,598 2003 23,792,725 2,462,658 2,481,127 297,020 508,144 … … 517,705 … 22,021,528 … 466,796 2004 23,539,942 2,238,705 917,870 272,331 503,784 … … 582,402 … 18,078,003 … 2,782,587 2005 30,729,357 2,889,544 -3,576,903 265,742 477,087 … … 780,863 … 21,467,545 … 1,271,672 2006 38,410,427 3,263,844 -158,846 301,014 491,962 … … 871,255 … 29,051,678 … 4,271,828 2007 42,576,025 3,510,206 198,417 296,125 576,306 … 324,481 992,353 … 34,598,401 … 3,125,533 2008 41,045,582 4,870,374 3,340,628 352,291 500,372 … -3,158,808 1,189,626 … 31,688,688 … 2,626,053 2009 54,463,121 5,978,795 4,820,204 386,400 502,044 … 1,006,813 1,428,202 … 47,430,237 … 4,564,460 2010 79,300,937 6,270,420 9,745,562 422,200 622,846 42,286 45,881 1,582,785 … 79,268,124 … 883,724 Total, 1914–2010 928,275,307 73,977,051 22,146,607 6,161,816 11,033,580 42,286 -1,781,633 13,931,743 44,113,958766,913,410 -4 32,466,4466 (continuedonnextpage)

StatisticalTables 317 Table11—continued AssessmentsbytheBoard Distributionstothe ofGovernors U.S.Treasury Transferred Change to/from Federal Net Consumer in surplus Re B a s a n e n d r k ve C in u c r o r m en e t exp N e e n t ses d a e d d d u o i c t r i t o io n n s s Board Costsof P F r B i o n u t a e r n e c c a ti i u o a n l f s u t n a o d t f u e s d Div p id a e id nds Statutory Inte o r n est Tr s a t u o n r / s p fr f l e o u r m s r 4 ed ac c c h u a a m n n g u d e la i t n ed period (-)1 expenditures currency and benefit transfers3 Federal other Officeof plans Reserve comprehensive Financial notes income5 Research2 AggregateforeachBank,1914–2010 Boston 44,850,469 4,167,947 187,131 263,799 634,206 1,500 -4,159 610,043 2,579,504 35,665,561 135 1,092,581 NewYork 338,706,86615,622,9327 13,678,194 1,559,905 3,252,777 12,305 -1,846,378 3,599,299 17,307,161299,071,743 -433 10,057,872 Philadelphia 32,843,096 3,446,284 691,526 357,115 498,263 4,530 -167 965,291 1,312,118 24,215,455 291 2,722,930 Cleveland 50,696,563 4,016,748 719,322 447,132 621,557 3,082 -14,767 1,014,440 2,827,043 40,195,146 -10 2,311,292 Richmond 72,429,879 6,634,705 2,044,813 1,058,001 928,343 10,131 41,005 2,729,975 3,083,928 53,551,185 -72 6,497,760 Atlanta 62,879,531 9,702,453 1,003,032 456,719 975,799 2,521 12,500 978,405 2,713,230 47,225,305 5 1,829,956 Chicago 103,184,617 7,893,763 1,136,855 582,387 1,211,602 1,016 -117 1,117,860 4,593,811 87,830,240 12 1,097,024 St.Louis 30,625,809 3,118,007 213,608 129,420 397,741 374 10,855 257,298 1,833,837 24,773,710 -27 337,850 Minneapolis 15,885,099 3,133,265 267,008 171,323 210,064 1,222 4,440 377,527 416,227 10,869,497 65 974,402 KansasCity 32,905,522 4,223,650 292,092 160,963 409,767 341 -3,708 296,805 1,249,703 26,491,499 -9 357,911 Dallas 41,143,992 4,294,154 559,358 239,833 556,866 605 14,377 425,784 1,510,802 34,119,781 55 561,441 SanFrancisco 102,123,863 7,723,141 1,353,670 735,220 1,336,594 4,658 4,485 1,559,015 4,686,594 82,904,287 -17 4,533,667 Total 928,275,30773,977,051 22,146,607 6,161,816 11,033,580 42,286 -1,781,633 13,931,743 44,113,958766,913,410 -4 32,374,684 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 For1987andsubsequentyears,includesthecostofservicesprovidedtotheTreasurybyFederalReserveBanksforwhichreimbursementwasnotreceived. 2 Startingin2010,asrequiredundertheDodd-FrankWallStreetReformandConsumerProtectionActof2010,theBoardofGovernorsbeganassessingtheReserveBanksto fundtheoperationsoftheConsumerFinancialProtectionBureauandOfficeofFinancialResearch.TheseassessmentsareallocatedtotheReserveBanksbasedoneach ReserveBank’scapitalandsurplusbalancesasofthemostrecentquarter. 3 Representstransfersmadeasafranchisetaxfrom1917through1932;transfersmadeundersection13boftheFederalReserveActfrom1935through1947;andtransfers madeundersection7oftheFederalReserveActfor1996and1997. 4 Transfersaremadeundersection13boftheFederalReserveAct. 5 Transfersaremadeundersection7oftheFederalReserveAct.Beginningin2006,accumulatedothercomprehensiveincomeisreportedasacomponentofsurplus. 6 The$32,466,446thousandtransferredtosurpluswasreducedbydirectchargesof$500thousandforcharge-offonBankpremises(1927),$139,300thousandfor contributionstocapitaloftheFederalDepositInsuranceCorporation(1934),$4thousandnetuponeliminationofsection13bsurplus(1958),and$106,000thousand(1996), $107,000thousand(1997),$3,752,000thousandtransferredtotheTreasuryasstatutorilyrequired(2000),and$1,848,716thousandrelatedtotheimplementationofSFAS No.158(2006);andwasincreasedbyatransferof$11,131thousandfromreservesforcontingencies(1955),leavingabalanceof$26,524,057thousandonDecember31, 2010. 7 Thisamountisreducedby$4,097,630thousandforexpensesoftheSystemRetirementPlan.Seenote5,table10. …Notapplicable.

318 97thAnnualReport|2010 Table12.OperationsinprincipaldepartmentsoftheFederalReserveBanks,2007–10 Operation 2010 2009 2008 2007 Millionsofpieces Currencyprocessed 32,143 31,891 33,256 35,653 Currencydestroyed 5,948 6,049 6,517 6,509 Coinreceived 62,345 65,349 64,438 63,255 Checkshandled U.S.governmentchecks1 185 202 269 214 Postalmoneyorders 121 131 146 164 Allotherchangeto“Commercial” 7,712 8,585 9,545 10,001 Securitiestransfers2 20 21 25 24 Fundstransfers3 125 125 131 135 Automatedclearinghousetransactions Commercial 10,233 9,966 10,040 9,363 Government 1,222 1,195 1,132 1,027 Millionsofdollars Currencyprocessed 569,249 561,013 604,882 642,168 Currencydestroyed 120,049 92,708 148,460 104,082 Coinreceived 6,014 6,288 6,286 6,124 Checkshandled U.S.governmentchecks1 292,261 311,667 316,713 256,994 Postalmoneyorders 23,210 23,675 25,544 31,626 Allotherchangeto“Commercial” 11,066,409 13,758,963 15,216,147 14,841,249 Securitiestransfers2 320,123,901 295,741,666 419,347,256 435,577,505 Fundstransfers3 608,325,851 631,127,108 754,974,633 670,665,569 Automatedclearinghousetransactions Commercial 16,941,077 15,418,718 15,662,805 14,547,234 Government 4,426,808 4,297,071 4,008,022 3,716,928 1 Includesgovernmentcheckshandledelectronically(electronicchecks). 2 Dataonsecuritiestransfersdonotincludereversals.In2006,thetitleofthiscategorychangedfrompreviousyears,butthecompositionofthecategoryremainedthesame. Therefore,thedataarecomparablewithdatareportedinpreviousyears. 3 Dataonfundstransfersdonotincludenon-valuetransfers.

StatisticalTables 319 Table13.NumberandannualsalariesofofficersandemployeesoftheFederalReserveBanks,December31,2010 President1 Otherofficers Employees Total FederalReserveBank Number (includingbranches) Annualsalary Annualsalaries Annualsalaries Annualsalaries Number Number (dollars)2 (dollars)2 (dollars)2 (dollars)2 Full-time Part-time Boston 350,400 63 12,906,449 765 35 66,470,310 864 79,727,159 NewYork 410,780 406 94,432,384 2,534 42 256,567,921 2,983 351,411,085 Philadelphia 350,400 59 10,598,888 740 24 55,001,615 824 65,950,903 Cleveland 347,400 57 10,400,200 1,179 25 72,763,870 1,262 83,511,470 Richmond 347,400 78 13,534,900 1,339 30 100,683,036 1,448 114,565,336 Atlanta 314,400 87 17,491,030 1,523 16 111,098,660 1,627 128,904,090 Chicago 350,400 94 17,612,760 1,138 49 95,320,721 1,282 113,283,881 St.Louis 281,300 74 13,471,940 823 36 60,265,479 934 74,018,719 Minneapolis 313,500 48 8,485,225 912 51 63,334,083 1,012 72,132,808 KansasCity 380,500 71 13,102,500 1,108 14 73,171,732 1,194 86,654,732 Dallas 350,400 56 9,955,605 1,047 10 70,513,045 1,114 80,819,050 SanFrancisco3 74 16,115,623 1,413 24 124,088,889 1,511 140,204,512 FederalReserveInformationTechnology … 49 8,721,500 863 1 84,200,812 913 92,922,312 OfficeofEmployeeBenefits … 11 2,631,525 35 1 3,417,805 47 6,049,330 Total 3,796,880 1,227 249,460,529 15,419 358 1,236,897,978 17,015 1,490,155,387 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Undercurrentpolicy,appointmentsalariesarenormally85percentofthesalary-rangemidpoint(an85compa-ratio),withtheexceptionoftheNewYorkReserveBank president,whoseappointmentsalarynormallyissetata95compa-ratio.TheBoardhasdiscretiontoapproveahigherstartingsalaryifrequestedbyaReserveBank’sboard ofdirectors. Exceptasnotedbelow,onJanuary1eachyear,allpresidentsreceivesalaryincreasesequaltothepercentageincreaseinthemidpointoftheirrespectivesalaryranges.In addition,oneverythird-yearanniversaryofhisorherinitialappointment(throughyear9),eachpresidentreceivesasalaryincreasethatresultsinacompa-ratioasfollows: year3:95(fortheNewYorkBank:105);year6:105(NewYork:115);year9:115(NewYork:125).In2011,allpresidents’salariesarefrozenattheirDecember31,2010, levels. TherearetieredsalaryrangesforReserveBankofficers,includingpresidents,reflectingdifferencesinthecostsoflaborinthehead-officecities.TheBoardreviewsReserve BankofficersalaryrangesandReserveBankplacementinthesalarytiersannually.SalariesforReserveBankofficers,includingpresidents,arelimitedbycompensation capsestablishedforeachtier.In2010,thecapswere$431,300fortier1;$419,600fortier2;and$400,000fortier3.In2010,NewYorkandSanFranciscowereintier1, whichhadarangemidpointforpresidents’salariesof$432,400.Boston,Philadelphia,Chicago,Minneapolis,andDallaswereintier2,whichhadamidpointforpresidents’ salariesof$368,800.Cleveland,Richmond,Atlanta,St.Louis,andKansasCitywereintier3,whichhadamidpointforpresidents’salariesof$330,900.Asnotedabove, salarymidpointsareusedtocalculatepresidents’compa-ratios. 2 Annualizedsalaryliability(excludingoutsideagencycosts)basedonsalariesineffectonDecember31,2010. 3 AsofDecember31,2010,theSanFranciscoBank’spresidentpositionwasvacant. …Notapplicable.

320 97thAnnualReport|2010 Table14.AcquisitioncostsandnetbookvalueofthepremisesoftheFederalReserveBanksandBranches,December31,2010 Thousandsofdollars Acquisitioncosts Other FederalReserveBank Net real orBranch Land Buildings Buildingmachinery Total2 bookvalue estate3 (includingvaults)1 &equipment Boston 27,293 163,027 29,695 220,015 126,249 … NewYork 20,900 334,276 79,268 434,443 257,659 … Philadelphia 7,929 103,302 17,128 128,359 68,648 … Cleveland 4,219 124,403 29,378 158,000 101,128 … Cincinnati 3,075 28,012 15,987 47,073 20,764 … Pittsburgh 2,751 19,638 16,791 39,180 18,375 … Richmond 31,631 151,835 49,931 233,397 158,370 … Baltimore 7,917 39,235 13,142 60,294 37,415 … Charlotte 7,884 42,957 13,204 64,046 44,015 … Atlanta 22,995 151,524 17,945 192,465 153,364 … Birmingham 5,347 12,973 1,465 19,785 11,094 … Jacksonville 1,779 23,035 4,729 29,542 17,392 … Nashville 603 6,341 3,597 10,541 4,066 … NewOrleans 3,785 11,147 5,219 20,151 9,945 … Miami 4,254 27,799 6,181 38,234 21,957 … Chicago 4,512 196,401 25,783 226,696 123,450 … Detroit 12,329 73,377 11,029 96,735 85,774 … St.Louis 9,377 136,210 15,280 160,867 123,548 … Memphis 2,472 14,999 5,160 22,632 12,177 … Minneapolis 15,522 108,162 14,958 138,642 97,591 … Helena 2,890 10,294 1,358 14,542 9,360 … KansasCity 38,320 198,579 27,286 264,185 248,010 … Denver 3,691 10,595 6,363 20,649 10,159 … Omaha 3,559 7,692 1,933 13,185 6,438 … Dallas 36,732 117,596 30,767 185,095 121,114 … ElPaso 262 3,426 1,843 5,531 692 … Houston 25,119 103,575 9,020 137,714 120,721 7,204 SanAntonio 826 8,082 2,491 11,399 4,341 … SanFrancisco 20,988 109,885 26,811 157,684 90,017 … LosAngeles 6,306 74,095 18,845 99,246 56,511 … SaltLakeCity 1,294 4,810 1,413 7,516 2,511 … Seattle 13,098 49,976 6,741 69,815 64,809 3,400 Total 349,658 2,467,260 510,739 3,327,657 2,227,664 10,604 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Includesexpendituresforconstructionatsomeoffices,pendingallocationtoappropriateaccounts. 2 Excludescharge-offsof$17,699thousandbefore1952. 3 IncludesrealestateheldforfutureBankuseandBankpremisesformerlyoccupiedandbeingheldpendingsale. …Notapplicable.

321 Federal Reserve System Audits TheBoardof Governors,theFederalReserveBanks,andtheFederalReserve Systemasawholeareallsubjecttoseverallevelsof auditandreview.TheBoard’s financialstatements,anditscompliancewithlawsandregulationsaffectingthose statements,areauditedannuallybyanoutsideauditorretainedbytheBoard’s Officeof InspectorGeneral.TheOfficeof InspectorGeneralalsoconductsaudits, reviews,andinvestigationsrelatingtotheBoard’sprogramsandoperationsaswell astoBoardfunctionsdelegatedtotheReserveBanks. TheReserveBanks’financialstatementsareauditedannuallybyanindependent outsideauditorretainedbytheBoardof Governors.Inaddition,theReserve BanksaresubjecttoannualexaminationbytheBoard.Asdiscussedinthechapter “FederalReserveBanks,”theBoard’sexaminationincludesawiderangeof ongoingoversightactivitiesconductedonsiteandoffsitebystaff of theBoard’sDivisionof ReserveBankOperationsandPaymentSystems. FederalReserveoperationsarealsosubjecttoreviewbytheGovernment AccountabilityOffice.

322 97thAnnualReport|2010 Board of Governors Financial Statements Thefinancialstatementsof theBoardof Governorsfor2010and2009were auditedbyDeloitte&ToucheLLP,independentauditors. February28,2011 MANAGEMENT’SASSERTION TotheCommitteeonBoardAffairs: ThemanagementoftheBoardofGovernorsoftheFederalReserveSystem(“theBoard”)isresponsibleforthe preparationandfairpresentationofthebalancesheetasofDecember31,2010,andfortherelatedstatementofrevenuesandexpensesandchangesincumulativeresultsofoperations,andcashflowsfortheyearthenended(the “FinancialStatements”).TheFinancialStatementshavebeenpreparedinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericaand,assuch,includesomeamountswhicharebasedonmanagement judgmentsandestimates.Toourknowledge,theFinancialStatementsare,inallmaterialrespects,fairlypresentedin conformitywithgenerallyacceptedaccountingprinciplesandincludealldisclosuresnecessaryforsuchpresentation. BoardmanagementisalsoresponsibleforestablishingandmaintainingeffectiveinternalcontroloverfinancialreportingasitrelatestotheFinancialStatements.SuchinternalcontrolisdesignedtoprovidereasonableassurancetomanagementandtotheCommitteeonBoardAffairsregardingthepreparationoftheFinancialStatementsinaccordance withaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.Internalcontrolincludesselfmonitoringmechanisms,including,butnotlimitedto,divisionsofresponsibilityandacodeofconduct.Onceidentified,anymaterialdeficienciesininternalcontrolarereportedtomanagementandappropriatecorrectivemeasuresare implemented. Eveneffectiveinternalcontrol—nomatterhowwelldesigned—hasinherentlimitations,includingthepossibilityof humanerror.Internalcontrol,therefore,canprovideonlyreasonableassurancewithrespecttothepreparationof reliablefinancialstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttothe riskthatspecificcontrolsmaybecomeinadequatebecauseofchangesinconditionsorthatthedegreeofcompliance withpoliciesorproceduresmaydeteriorate. BoardmanagementassesseditsinternalcontroloverfinancialreportingreflectedintheFinancialStatementsbased uponthecriteriaestablishedintheInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoring OrganizationsoftheTreadwayCommission. Basedonthisassessment,webelievethattheBoardhasmaintainedeffectiveinternalcontroloverfinancialreporting asitrelatestoitsFinancialStatements. KevinM.Warsh WilliamL.Mitchell AdministrativeGovernor ChiefFinancialOfficer

FederalReserveSystemAudits 323 INDEPENDENTAUDITORS’REPORT TotheBoardofGovernorsoftheFederalReserveSystem: WehaveauditedtheaccompanyingbalancesheetsoftheBoardofGovernorsoftheFederalReserveSystem(the “Board”)asofDecember31,2010and2009,andtherelatedstatementsofrevenuesandexpensesandchangesin cumulativeresultsofoperations,andcashflowsfortheyearsthenended.ThesefinancialstatementsaretheresponsibilityoftheBoard’smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedon ouraudits. WeconductedourauditsinaccordancewithgenerallyacceptedauditingstandardsasestablishedbytheAuditing StandardsBoard(UnitedStates),auditingstandardsofthePublicCompanyAccountingOversightBoard(United States),andthestandardsapplicabletofinancialauditscontainedinGovernmentAuditingStandardsissuedbythe ComptrollerGeneraloftheUnitedStates.Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesconsiderationofinternalcontroloverfinancialreportingasabasisfordesigningauditproceduresthatareappropriateinthe circumstances.Anauditalsoincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresin thefinancialstatements,assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,as wellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasis forouropinion. Inouropinion,suchfinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionoftheBoardof GovernorsoftheFederalReserveSystemasofDecember31,2010and2009,andtheresultsofitsoperationsandits cashflowsfortheyearsthenendedinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStates ofAmerica. Wehavealsoaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(United States),theBoard’sinternalcontroloverfinancialreportingasofDecember31,2010,basedonthecriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsofthe TreadwayCommissionandourreportdatedFebruary28,2011expressedanunqualifiedopinionontheBoard’s internalcontroloverfinancialreporting. InaccordancewithGovernmentAuditingStandards,wehavealsoissuedourreportdatedFebruary28,2011,onour testsoftheBoard’scompliancewithcertainprovisionsoflaws,regulations,contracts,andgrantagreementsand othermatters.Thepurposeofthatreportistodescribethescopeofourtestingofcomplianceandtheresultsofthat testing,andnottoprovideanopiniononcompliance.ThatreportisanintegralpartofanauditperformedinaccordancewithGovernmentAuditingStandardsandshouldbeconsideredinassessingtheresultsofouraudit. February28,2011 McLean,VA

324 97thAnnualReport|2010 INDEPENDENTAUDITORS’REPORTONINTERNALCONTROLOVERFINANCIALREPORTING TotheBoardofGovernorsoftheFederalReserveSystem: WehaveauditedtheinternalcontroloverfinancialreportingoftheBoardofGovernorsoftheFederalReserve System(the“Board”)asofDecember31,2010,basedoncriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission.TheBoard’smanagement isresponsibleformaintainingeffectiveinternalcontroloverfinancialreportingandforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreporting,includedintheaccompanyingManagement’sAssertionreport.Our responsibilityistoexpressanopinionontheBoard'sinternalcontroloverfinancialreportingbasedonouraudit. WeconductedourauditinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard (UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceabout whethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Ourauditincluded obtaininganunderstandingofinternalcontroloverfinancialreporting,assessingtheriskthatamaterialweakness exists,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrolbasedontheassessedrisk,and performingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditprovides areasonablebasisforouropinion. TheBoard’sinternalcontroloverfinancialreportingisaprocessdesignedby,orunderthesupervisionof,theBoard’s principalexecutiveandprincipalfinancialofficers,orpersonsperformingsimilarfunctions,andeffectedbythe Board’sCommitteeonBoardAffairs,management,andotherpersonneltoprovidereasonableassuranceregarding thereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordance withaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.TheBoard’sinternalcontrolover financialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsoftheBoard;(2)provide reasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsin accordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresoftheBoardarebeing madeonlyinaccordancewithauthorizationsofmanagementandgovernorsoftheBoard;and(3)providereasonable assuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionoftheBoard's assetsthatcouldhaveamaterialeffectonthefinancialstatements. Becauseoftheinherentlimitationsofinternalcontroloverfinancialreporting,includingthepossibilityofcollusion orimpropermanagementoverrideofcontrols,materialmisstatementsduetoerrororfraudmaynotbepreventedor detectedonatimelybasis.Also,projectionsofanyevaluationoftheeffectivenessoftheinternalcontroloverfinancial reportingtofutureperiodsaresubjecttotheriskthatthecontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate. Inouropinion,theBoardmaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasof December31,2010,basedonthecriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission. Wehavealsoaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(United States),generallyacceptedauditingstandardsasestablishedbytheAuditingStandardsBoard(UnitedStates),andthe standardsapplicabletofinancialauditscontainedinGovernmentAuditingStandardsissuedbytheComptrollerGeneraloftheUnitedStates,theaccompanyingbalancesheet,statementsofrevenuesandexpensesandchangesincumulativeresultsofoperations,andcashflowsasofandfortheyearendedDecember31,2010oftheBoardandour reportdatedFebruary28,2011expressedanunqualifiedopiniononthosefinancialstatements. February28,2011 McLean,VA

FederalReserveSystemAudits 325 BoardofGovernorsoftheFederalReserveSystemBalanceSheets AsofDecember31, 2010 2009 ASSETS CURRENTASSETS: Cash $ 55,142,632 $ 54,792,831 Accountsreceivable 3,234,076 2,948,984 Prepaidexpensesandotherassets 2,657,914 3,693,970 Totalcurrentassets 61,034,622 61,435,785 NONCURRENTASSETS: Property,equipment,andsoftware—net 156,767,186 159,267,605 Otherassets 576,659 1,837,995 Totalnoncurrentassets 157,343,845 161,105,600 Totalassets $218,378,467 $222,541,385 LIABILITIESANDCUMULATIVERESULTSOFOPERATIONS CURRENTLIABILITIES: Accountspayableandaccruedliabilities $ 15,403,521 $ 20,765,464 Accruedpayrollandrelatedtaxes 21,894,036 10,940,984 Accruedannualleave 26,337,190 24,821,044 Capitalleasepayable 544,878 533,110 Unearnedrevenuesandotherliabilities 556,846 2,982,629 Totalcurrentliabilities 64,736,471 60,043,231 LONG-TERMLIABILITIES: Capitalleasepayable 237,479 782,357 Accumulatedretirementbenefitobligation 21,979,219 13,021,387 Accumulatedpostretirementbenefitobligation 10,219,672 9,304,324 Accumulatedpostemploymentbenefitobligation 13,813,254 14,463,965 Otherlong-termliabilities 3,545,936 415,324 Totallong-termliabilities 49,795,560 37,987,357 Totalliabilities 114,532,031 98,030,588 CUMULATIVERESULTSOFOPERATIONS: Fundbalance 118,473,958 133,677,902 Accumulatedothercomprehensiveincome(loss) (14,627,522) (9,167,105) Totalcumulativeresultsofoperations 103,846,436 124,510,797 TOTAL $218,378,467 $222,541,385 Seenotestofinancialstatements.

326 97thAnnualReport|2010 BoardofGovernorsoftheFederalReserveSystemStatementsofRevenuesandExpensesandChangesinCumulativeResults ofOperations FortheyearsendedDecember31, 2010 2009 BOARDOPERATINGREVENUES: AssessmentsleviedonFederalReserveBanksforBoardoperatingexpensesandcapitalexpenditures $ 422,200,00 $386,399,900 Otherrevenues 8,693,489 9,413,565 Totaloperatingrevenues 430,893,489 395,813,465 BOARDOPERATINGEXPENSES: Salaries 268,168,023 243,664,276 Retirementandinsurance 56,788,740 50,458,964 Contractualservicesandprofessionalfees 48,698,913 40,065,160 Depreciation,amortization,andnetgainsondisposals 15,865,704 13,885,165 Utilities 8,628,394 8,676,782 Travel 10,847,795 11,346,880 Software 8,057,580 8,699,031 Postageandsupplies 7,100,302 8,157,780 Repairsandmaintenance 3,384,994 5,115,155 Printingandbinding 2,240,489 2,597,982 Otherexpenses 16,316,499 13,553,896 Totaloperatingexpenses 446,097,433 406,221,071 RESULTSOFOPERATIONS (15,203,944) (10,407,606) CURRENCYCOSTS: AssessmentsleviedonFederalReserveBanksforcurrencycosts 622,858,648 502,144,883 Expensesforcostsrelatedtocurrency 622,858,648 502,144,883 CurrencyAssessmentsover(under)Expenses - - BUREAUOFCONSUMERFINANCIALPROTECTION(BUREAU): AssessmentsleviedonReserveBanksfortheBureau 32,770,000 - TransfertotheBureau 32,770,000 - Bureauassessmentsover(under)transfers - - OFFICEOFFINANCIALRESEARCH(OFFICE): AssessmentsleviedonReserveBanksfortheOffice 9,515,944 - TransfertotheOffice 9,515,944 - Officeassessmentsover(under)transfers - - TotalResultsofOperations (15,203,944) (10,407,606) CumulativeResultsofOperations,Beginningofyear 124,510,797 134,811,346 OTHERCOMPREHENSIVEINCOME: Priorservicecredit(cost)arisingduringtheyear - (315,842) Amortizationofpriorservice(credit)cost 518,195 541,162 Amortizationofnetactuarial(gain)loss 576,736 353,551 Netactuarialgain(loss)arisingduringtheyear (6,555,348) (471,814) Totalothercomprehensiveincome(loss) (5,460,417) 107,057 CUMULATIVERESULTSOFOPERATIONS,Endofyear $103,846,436 $124,510,797 Seenotestofinancialstatements.

FederalReserveSystemAudits 327 BoardofGovernorsoftheFederalReserveSystemStatementsofCashFlows FortheyearsendedDecember31, 2010 2009 CASHFLOWSFROMOPERATINGACTIVITIES: Resultsofoperations $(15,203,944) $(10,407,606) Adjustmentstoreconcileresultsofoperationstonetcashprovidedby(usedin)operating activities: Depreciation 15,877,105 13,869,221 Netloss(gain)ondisposalofpropertyandequipment (11,401) 15,944 Otheradditionalnon-cashadjustmentstoresultsofoperations 658,587 - (Increase)decreaseinassets: Accountsreceivable,prepaidexpensesandotherassets 730,143 1,499,641 Increase(decrease)inliabilities: Accountspayableandaccruedliabilities (822,981) 1,668,788 Accruedpayrollandrelatedtaxes 10,953,052 1,627,747 Accruedannualleave 1,516,146 2,586,938 Unearnedrevenuesandotherliabilities (2,425,783) 1,139,571 Netretirementbenefitobligation 3,911,348 2,592,406 Netpostretirementbenefitobligation 501,415 445,903 Netpostemploymentbenefitobligation (650,711) 563,965 Otherlong-termliabilities 3,130,612 (233,210) Netcashprovidedby(usedin)operatingactivities 18,163,588 15,369,308 CASHFLOWSFROMINVESTINGACTIVITIES: Proceedsfromdisposals - 866 Capitalexpenditures (17,296,078) (18,346,427) Netcashprovidedby(usedin)investingactivities (17,296,078) (18,345,561) CASHFLOWSFROMFINANCINGACTIVITIES Capitalleasepayments (517,709) (486,906) Netcashprovidedby(usedin)financingactivities (517,709) (486,906) NETINCREASE(DECREASE)INCASH 349,801 (3,463,159) CASHBALANCE—Beginningofyear 54,792,831 58,255,990 CASHBALANCE—Endofyear $55,142,632 $54,792,831 Seenotestofinancialstatements.

328 97thAnnualReport|2010 Board of Governors of the Federal Reserve System Notes to Financial Statements as of and for the Years ended December 31, 2010 and 2009 (1)Structure TheFederalReserveSystem(theSystem)wasestablishedbyCongressin1913and consistsof theBoardof Governors(theBoard),theFederalOpenMarketCommittee,thetwelveregionalFederalReserveBanks,theFederalAdvisoryCouncil, andtheprivatecommercialbanksthataremembersof theSystem.TheBoard, unliketheReserveBanks,wasestablishedasafederalgovernmentagencyandis supportedbyWashington,D.C.basedstaff numberingapproximately2,100,asit carriesoutitsresponsibilitiesinconjunctionwithothercomponentsof theFederal ReserveSystem. TheBoardisrequiredbytheFederalReserveAct(theAct)toreportitsoperations totheSpeakerof theHouseof Representatives.TheActalsorequirestheBoard, eachyear,toorderafinancialauditof eachFederalReserveBankandtopublish eachweekastatementof thefinancialconditionof eachsuchReserveBankanda consolidatedstatementforallof theReserveBanks.Accordingly,theBoard believesthatthebestfinancialdisclosureconsistentwithlawisachievedbyissuing separatefinancialstatementsfortheBoardandfortheReserveBanks.Therefore, theaccompanyingfinancialstatementsincludeonlytheresultsof operationsand activitiesof theBoard.CombinedfinancialstatementsfortheFederalReserve BanksareincludedintheBoard’sannualreporttotheSpeakerof theHouseof Representatives. (2)OperationsandServices TheBoard’sresponsibilitiesrequirethoroughanalysisof domesticandinternationalfinancialandeconomicdevelopments.TheBoardcarriesoutthoseresponsibilitiesinconjunctionwithothercomponentsof theFederalReserveSystem.The Boardalsosupervisesandregulatestheoperationsof theFederalReserveBanks, exercisesbroadresponsibilityinthenation’spaymentssystem,andcurrently administersmostof thenation’slawsregardingconsumercreditprotection.Policy regardingopenmarketoperationsisestablishedbytheFederalOpenMarket Committee.However,theBoardhassoleauthorityoverchangesinreserverequirements,anditmustapproveanychangeinthediscountrateinitiatedbyaFederal ReserveBank.TheBoardalsoplaysamajorroleinthesupervisionandregulation of theU.S.bankingsystem.Ithassupervisoryresponsibilitiesforstate-chartered banksthataremembersof theFederalReserveSystem,bankholdingcompanies, foreignactivitiesof memberbanks,andU.S.activitiesof foreignbanks. TheDodd-FrankWallStreetReformandConsumerProtectionActof 2010 (Dodd-FrankAct),whichwassignedintolawandbecameeffectiveonJuly21, 2010,changedthescopeof someservicesperformedbytheSystem.Amongother things,theDodd-FrankActestablishesaBureauof ConsumerFinancialProtection(Bureau)asanindependentbureauwithintheSystemthatwillhaverulewritingauthoritywithrespecttomostfederalfinancialconsumerprotectionstatutesandsupervisoryauthoritywithrespecttothesestatutesoversomeinstitutions previouslysupervisedbytheBoard.TheDodd-FrankActwillalsovesttheBoard withallsupervisoryandrule-writingauthorityforsavingsandloanholdingcompanies.Inaddition,theDodd-FrankActcreatesaFinancialStabilityOversight Council(FSOC)of whichtheChairmanof theBoardisamember.Someof the FSOC’sresponsibilitiesincludeidentifyingsystemicallyimportantnonbankfinan-

FederalReserveSystemAudits 329 cialcompaniestobesupervisedbytheBoard.TheDodd-FrankActalsoestablishestheOfficeof FinancialResearch(Office)withintheU.S.Departmentof TreasurytoprovidesupporttotheFSOCandthememberagencies. Section1017of theDodd-FrankActprovidesthatthefinancialstatementsof the Bureauarenottobeconsolidatedwiththoseof theBoardortheSystem.The BoardhasalsodeterminedthatneithertheFSOCnortheOfficeshouldbeconsolidatedintheBoard’sfinancialstatements.Accordingly,theBoard’sfinancial statementsdonotincludefinancialdataof theBureau,theOffice,ortheFSOC otherthanthefundingthattheBoardisrequiredbytheDodd-FrankActtoprovide.(SeeNotes13and14) (3)SignificantAccountingPolicies Basisof Accounting—TheBoardpreparesitsfinancialstatementsinaccordance withaccountingprinciplesgenerallyacceptedintheUnitedStates(GAAP). Revenues—TheFederalReserveActauthorizestheBoardtolevyanassessment ontheReserveBankstofunditsoperations.TheBoardleviestheassessment basedoneachReserveBank’scapitalandsurplusbalancesasof December31of theprioryear. AssessmentstoFundtheBureauandtheOffice—TheBoardassessestheFederal ReserveBanksforthefundstransferredtotheBureauandtheOfficebasedon eachFederalReserveBank’scapitalandsurplusbalances.Theseassessmentsand transfersarereportedseparatelyfromtheBoard’soperatingactivitiesinthe Board’sStatementsof RevenuesandExpensesandChangesinCumulativeResults of Operations. CurrencyCosts—TheFederalReserveBoardissuesthenation’scurrency(inthe formof FederalReservenotes),andtheFederalReserveBanksdistributecurrency andcointhroughdepositoryinstitutions.TheBoardincursexpensesandassesses theReserveBanksfortheexpensesrelatedtoproducing,issuing,andretiringFederalReservenotes.TheassessmentisallocatedbasedoneachReserveBank’sshare of thenumberof notescomprisingtheFederalReserveBankSystem’snetliability forFederalReservenotesonDecember31of theprioryear.Theseexpensesand assessmentsarereportedseparatelyfromtheBoard’soperatingactivitiesinthe Board’sStatementsof RevenuesandExpensesandChangesinCumulativeResults of Operations. AllowanceforDoubtfulAccounts—Accountsreceivableareshownnetof the allowancefordoubtfulaccounts.Accountsreceivableconsidereduncollectibleare chargedagainsttheallowanceaccountintheyeartheyaredeemeduncollectible. Theallowancefordoubtfulaccountsisadjustedmonthly,baseduponareviewof outstandingreceivables. Property,Equipment,andSoftware—TheBoard’sproperty,buildings,equipment, andsoftwarearestatedatcostlessaccumulateddepreciationandamortization. Depreciationandamortizationarecalculatedonastraight-linebasisovertheestimatedusefullivesof theassets,whichrangefromthreetotenyearsforfurniture andequipment,tentofiftyyearsforbuildingequipmentandstructures,andtwo totenyearsforsoftware.Uponthesaleorotherdispositionof adepreciableasset, thecostandrelatedaccumulateddepreciationoramortizationareremovedand anygainorlossisrecognized.

330 97thAnnualReport|2010 TheBoard’sinternallydevelopedsoftwareprojectsareeachrecordedatcostand capitalizedandamortizedovertheproject’susefullifeasrequiredbytheInternal UseSoftwareTopicof theFinancialAccountingStandardsBoard(FASB) AccountingStandardsCodification(ASC). ArtCollections—TheBoardhascollectionsof worksof art,historicaltreasures, andsimilarassets.Thesecollectionsaremaintainedandheldforpublicexhibition infurtheranceof publicservice.Proceedsfromanysalesof collectionsareusedto acquireotheritemsforcollections.AspermittedbytheRevenueRecognition Topicof theASC,thecostof collectionspurchasedbytheBoardischargedto expenseintheyearpurchasedanddonatedcollectionitemsarenotrecorded.The valueof theBoard’scollectionshasnotbeendetermined. DeferredRent—Theleasescontainscheduledrentincreasesoverthetermof the lease.AsrequiredbytheLeasesTopicof theASC,rentabatementsandscheduled rentincreasesmustbeconsideredindeterminingtheannualrentexpensetoberecognized.Thedeferredrentrepresentsthedifferencebetweentheactualleasepaymentsandtherentexpenserecognized. Estimates—Thepreparationof financialstatementsinconformitywithGAAP requiresmanagementtomakeestimatesandassumptionsthataffectthereported amountsof assetsandliabilitiesatthedateof thefinancialstatementsandthe reportedamountsof revenuesandexpensesduringthereportingperiod.Actual resultscoulddifferfromthoseestimates. (4)Property,Equipment,andSoftware Thefollowingisasummaryof thecomponentsof theBoard’sproperty,equipment,andsoftware,atcost,netof accumulateddepreciationandamortizationas of December31,2010and2009: AsofDecember31, 2010 2009 Land $ 18,640,314 $ 18,640,314 Buildingsandimprovements 163,868,033 155,403,350 Furnitureandequipment 68,789,408 66,411,669 Softwareinuse 24,244,811 16,196,241 Softwareinprocess 1,985,544 6,276,842 Constructioninprocess 4,810,307 8,100,559 282,338,417 271,028,975 Lessaccumulateddepreciationandamortization (125,571,231) (111,761,370) Property,equipment,andsoftware—net $156,767,186 $159,267,605 Constructioninprocessincludecostsincurredinthecurrentorprioryearsfor long-termprojectsandbuildingenhancements. (5)Leases CapitalLeases—TheBoardenteredintocapitalleasesin2008and2009.Furnitureandequipmentincludes$2,086,000undercapitalleasesinboth2010and 2009.Accumulateddepreciationincludes$1,319,000and$789,000undercapital leasesasof 2010and2009,respectively.

FederalReserveSystemAudits 331 Thefutureminimumleasepaymentsrequiredunderthecapitalleasesandthepresentvalueof thenetminimumleasepaymentsasof December31,2010,areas follows: YearsEndingDecember31 Amount 2011 $ 978,315 2012 421,925 Totalminimumleasepayments 1,400,240 Lessamountrepresentingmaintenance (604,906) Netminimumleasepayments 795,334 Lessamountrepresentinginterest (12,977) Presentvalueofnetminimumleasepayments 782,357 Lesscurrentmaturitiesofcapitalleasepayments (544,878) Long-termcapitalleaseobligations $ 237,479 OperatingLeases—TheBoardhasenteredintoseveraloperatingleasestosecure office,trainingandwarehousespace.Minimumannualpaymentsundertheoperatingleaseshavinganinitialorremainingnoncancelableleaseterminexcessof oneyearatDecember31,2010,areasfollows: YearsEndingDecember31 2011 $ 6,251,496 2012 6,414,807 2013 6,608,976 2014 6,788,468 After2014 35,626,043 $61,689,790 Rentalexpensesundertheoperatingleaseswere$6,882,000and$3,947,000forthe yearsendedDecember31,2010and2009,respectively.TheBoardenteredintoa newoperatingleaseinJanuary2011.Theestimatedfutureminimumleasepaymentsassociatedwiththenewleasetotal$78,702,000overatenyearperiod. TheBoardleasesandsubleasesspace,primarilytoothergovernmentalagencies. Therevenuescollectedfromtheseleasesare$1,937,000and$2,504,000in2010 and2009,respectively. DeferredRent—Thechangeindeferredrentwas$528,000and$1,666,000forthe yearsendedDecember31,2010and2009,respectively. (6)AccumulatedRetirementBenefits Substantiallyallof theBoard’semployeesparticipateintheRetirementPlanfor Employeesof theFederalReserveSystem(theSystemPlan).TheSystemPlanprovidesretirementbenefitstoemployeesof theBoard,theFederalReserveBanks, andtheOfficeof EmployeeBenefitsof theFederalReserveSystem(OEB).In addition,undertheDodd-FrankAct,employeesof theBureaucanelecttoparticipateintheSystemPlan;however,therewerenoBureauparticipantsintheSystem Planasof December31,2010.TheFederalReserveBankof NewYork(FRB NY),onbehalf of theSystem,recognizesthenetassetsandcostsassociatedwith theSystemPlaninitsfinancialstatements.CostsassociatedwiththeSystemPlan arenotredistributedtootherparticipatingemployers. Employeesof theBoardwhobecameemployedpriorto1984arecoveredbya contributorydefinedbenefitsprogramundertheSystemPlan.Employeesof the Boardwhobecameemployedafter1983arecoveredbyanon-contributory

332 97thAnnualReport|2010 definedbenefitsprogramundertheSystemPlan.ContributionstotheSystem Planareactuariallydeterminedandfundedbyparticipatingemployers.In2010, theSystemmade$580millionincontributionstotheSystemPlan;thecontributionsmaybeadjusteduponcompletionof the2011actuarialvaluation.TheBoard wasnotassessedacontributionfor2010. EffectiveJanuary1,1996,BoardemployeescoveredundertheSystemPlanare alsocoveredunderaBenefitsEqualizationPlan(BEP).Benefitspaidunderthe BEParelimitedtothosebenefitsthatcannotbepaidfromtheSystemPlandueto limitationsimposedbySections401(a)(17),415(b)and415(e)of theInternalRevenueCodeof 1986.ActivityfortheBEPasof December31,2010and2009,is summarizedinthefollowingtables: AsofDecember31, 2010 2009 Changeinprojectedbenefitobligation: Benefitobligation—beginningofyear $ 5,900,567 $ 4,591,374 Servicecost 1,359,828 712,515 Interestcost 545,688 307,501 Planparticipants’contributions Actuarial(gain)loss 4,155,013 (175,635) Grossbenefitspaid (27,661) (27,649) Planamendments 492,461 Benefitobligation—endofyear $ 11,933,435 $ 5,900,567 Accumulatedbenefitobligation—endofyear $ 1,686,998 $ 1,245,465 Weighted-averageassumptionsusedtodeterminebenefitobligationas ofDecember31: Discountrate 5.50% 6.00% Rateofcompensationincrease 5.00% 5.00% Changeinplanassets: Fairvalueofplanassets—beginningofyear $ - $ - Employercontributions 27,661 27,649 Planparticipants’contributions Grossbenefitspaid (27,661) (27,649) Fairvalueofplanassets—endofyear $ - $ - Fundedstatus: Reconciliationoffundedstatus—endofyear: Fairvalueofplanassets $ - $ - Benefitobligations 11,933,435 5,900,567 Fundedstatus (11,933,435) (5,900,567) Amountrecognized—endofyear $(11,933,435) $(5,900,567) Amountsrecognizedinthestatementsoffinancialpositionconsistof: Asset $ - $ - Liability (11,933,435) (5,900,567) Netamountrecognized $(11,933,435) $(5,900,567) Amountsrecognizedinaccumulatedothercomprehensiveincome consistof: Netactuarialloss(gain) $ 5,575,910 $ 1,708,854 Priorservicecost(credit) 701,833 714,123 $ 6,277,743 $ 2,422,977 (continuedonnextpage)

FederalReserveSystemAudits 333 Table—continued AsofDecember31, 2010 2009 Expectedcashflows: Expectedemployercontributions—2011 $ 203,387 Expectedbenefitpayments:* 2011 $ 203,387 2012 245,726 2013 270,697 2014 288,871 2015 317,411 2016–2020 2,036,841 Componentsofnetperiodicbenefitcost: Servicecost $1,359,828 $ 712,515 Interestcost 545,688 307,501 Expectedreturnonplanassets Amortization: Actuarial(gain)loss 287,957 146,780 Priorservice(credit)cost 12,290 35,257 Netperiodicbenefitcost(credit) $2,205,763 $1,202,053 Weighted-averageassumptionsusedtodeterminenetperiodicbenefit cost: Discountrate 6.00% 6.00% Rateofcompensationincrease 5.00% 5.00% Otherchangesinplanassetsandbenefitobligationsrecognizedinother comprehensiveincome: Currentyearpriorservice(credit)cost $ - $ 492,461 Currentyearactuarial(gain)loss 4,155,013 (175,635) Amortizationofpriorservicecredit(cost) (12,290) (35,257) Amortizationofactuarialgain(loss) (287,957) (146,780) Totalrecognizedinothercomprehensiveincome $3,854,766 $ 134,789 Totalrecognizedinnetperiodicbenefitcostandothercomprehensiveincome $6,060,529 $1,336,842 *ExpectedbenefitpaymentstobemadefromSystemassets. Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive incomeintonetperiodicbenefitcost(credit)in2011areshownbelow: Netactuarial(gain)loss $446,472 Priorservice(credit)cost 1,881 Total $448,353

334 97thAnnualReport|2010 OnOctober30,2008,theBoardapprovedanon-qualifiedplanforOfficersof the Board.TheretirementbenefitscoveredundertheBoardOfficerPensionEnhancement(BOPE)increasesthepensionbenefitcalculationfrom1.8%abovetheSocial Securityintegrationlevelto2.0%.ActivityfortheBOPEasof December31,2010 and2009,issummarizedinthefollowingtables: AsofDecember31, 2010 2009 Changeinprojectedbenefitobligation: Benefitobligation—beginningofyear $ 7,120,820 $ 6,275,285 Servicecost 409,007 333,034 Interestcost 493,780 402,680 Planparticipants’contributions Actuarial(gain)loss 1,935,668 286,440 Grossbenefitspaid (9,638) Planamendments - (176,619) Benefitobligation—endofyear $ 9,949,637 $ 7,120,820 Accumulatedbenefitobligation—endofyear $ 7,063,653 $ 5,175,331 Weighted-averageassumptionsusedtodeterminebenefitobligationas ofDecember31: Discountrate 5.50% 6.00% Rateofcompensationincrease 5.00% 5.00% Changeinplanassets: Fairvalueofplanassets—beginningofyear $ - $ - Employercontributions 9,638 Planparticipants’contributions Grossbenefitspaid (9,638) Fairvalueofplanassets—endofyear $ - $ - Fundedstatus: Reconciliationoffundedstatus—endofyear: Fairvalueofplanassets $ - $ - Benefitobligations 9,949,637 7,120,820 Fundedstatus (9,949,637) (7,120,820) Amountrecognized—endofyear $(9,949,637) $(7,120,820) Amountsrecognizedinthestatementsoffinancialpositionconsistof: Asset $ - $ - Liability (9,949,637) (7,120,820) Netamountrecognized $(9,949,637) $(7,120,820) Amountsrecognizedinaccumulatedothercomprehensiveincomeconsistof: Netactuarialloss(gain) $ 3,465,859 $ 1,742,746 Priorservicecost(credit) 3,243,278 3,774,673 $ 6,709,137 $ 5,517,419 Expectedcashflows: Expectedemployercontributions—2011 $ 57,224 Expectedbenefitpayments:* 2011 $ 57,224 2012 101,577 2013 152,569 2014 211,829 2015 275,788 2016–2020 2,463,754 (continuedonnextpage)

FederalReserveSystemAudits 335 Table—continued AsofDecember31, 2010 2009 Componentsofnetperiodicbenefitcost: Servicecost $ 409,007 $ 333,034 Interestcost 493,780 402,680 Expectedreturnonplanassets Amortization: Actuarial(gain)loss 212,555 150,893 Priorservice(credit)cost 531,395 531,395 Netperiodicbenefitcost(credit) $1,646,737 $1,418,002 Weighted-averageassumptionsusedtodeterminenetperiodicbenefit cost: Discountrate 6.00% 6.00% Rateofcompensationincrease 5.00% 5.00% Otherchangesinplanassetsandbenefitobligationsrecognizedinother comprehensiveincome: Currentyearpriorservice(credit)cost $ - $ (176,619) Currentyearactuarial(gain)loss 1,935,668 286,440 Amortizationofpriorservicecredit(cost) (531,395) (531,395) Amortizationofactuarialgain(loss) (212,555) (150,893) Totalrecognizedinothercomprehensiveincome $1,191,718 $ (572,467) Totalrecognizedinnetperiodicbenefitcostandothercomprehensiveincome $2,838,455 $ 845,535 *ExpectedbenefitpaymentstobemadefromSystemassets. Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive incomeintonetperiodicbenefitcost(credit)in2011areshownbelow: Netactuarial(gain)loss $287,715 Priorservice(credit)cost 531,395 Total $819,110 Thetotalaccumulatedretirementbenefitobligationincludesaliabilityfora supplementalretirementagreementandabenefitsequalizationplanunderthe FederalReserveSystem’sThriftPlan.Thetotalobligationasof December31, 2010and2009issummarizedinthefollowingtable: 2010 2009 Accumulatedretirementbenefitobligation: Benefitobligation—BEP $11,933,435 $ 5,900,567 Benefitobligation—BOPE 9,949,637 7,120,820 Additionalbenefitobligation 96,147 - Totalaccumulatedretirementbenefitobligation $21,979,219 $13,021,387 Arelativelysmallnumberof BoardemployeesparticipateintheCivilService RetirementSystem(CSRS)ortheFederalEmployees’RetirementSystem(FERS). ThesedefinedbenefitplansareadministeredbytheU.S.Officeof PersonnelManagement,whichdeterminestherequiredemployercontributionlevels.TheBoard’s contributionstotheseplanstotaled$452,000and$329,000in2010and2009, respectively.TheBoardhasnoliabilityforfuturepaymentstoretireesunderthese programsandisnotaccountablefortheassetsof theplans.

336 97thAnnualReport|2010 Employeesof theBoardmayalsoparticipateintheFederalReserveSystem’s ThriftPlanorRoth401(k).Boardcontributionstomembers’accountswere $16,695,000and$14,342,000in2010and2009,respectively. (7)AccumulatedPostretirementBenefits TheBoardprovidescertainlifeinsuranceprogramsforitsactiveemployeesand retirees.Activityasof December31,2010and2009,issummarizedinthefollowingtables: AsofDecember31, 2010 2009 Changeinprojectedbenefitobligation: Benefitobligation—beginningofyear $ 9,304,324 $ 8,527,800 Servicecost 188,357 169,687 Interestcost 532,592 516,194 Planparticipants’contributions - - Actuarial(gain)loss 464,667 361,009 Grossbenefitspaid (270,268) (270,366) Curtailments - - Benefitobligation—endofyear $ 10,219,672 $ 9,304,324 Weighted-averageassumptionsusedtodeterminebenefitobligationasof December31—discountrate 5.25% 5.75% Changeinplanassets: Fairvalueofplanassets—beginningofyear $ - $ - Employercontributions 270,268 270,366 Grossbenefitspaid (270,268) (270,366) Fairvalueofplanassets—endofyear $ - $ - Fundedstatus: Reconciliationoffundedstatus—endofyear: Fairvalueofplanassets $ - $ - Benefitobligations 10,219,672 9,304,324 Fundedstatus (10,219,672) (9,304,324) Amountrecognized—endofyear $(10,219,672) $(9,304,324) Amountsrecognizedinthestatementsoffinancialpositionconsistof: Asset $ - $ - Liability (10,219,672) (9,304,324) Netamountrecognized $(10,219,672) $(9,304,324) Amountsrecognizedinaccumulatedothercomprehensiveincome consistof: Netactuarialloss(gain) $ 1,917,176 $ 1,528,733 Priorservicecost(credit) (276,534) (302,024) $ 1,640,642 $ 1,226,709 Expectedcashflows: Expectedemployercontributions—2011 $ 337,952 Expectedbenefitpayments:* 2011 $ 337,952 2012 354,971 2013 383,010 2014 411,414 2015 439,387 2016–2020 2,623,724 (continuedonnextpage)

FederalReserveSystemAudits 337 Table—continued AsofDecember31, 2010 2009 Componentsofnetperiodicbenefitcost: Servicecost $ 188,357 $ 169,687 Interestcost 532,592 516,194 Expectedreturnonplanassets - - Amortization: Actuarial(gain)loss 76,224 55,878 Priorservice(credit)cost (25,490) (25,490) Netperiodicbenefitcost(credit) $ 771,683 $ 716,269 Weighted-averageassumptionsusedtodeterminenetperiodicbenefitcost —discountrate 5.75% 6.00% Otherchangesinplanassetsandbenefitobligationsrecognizedinother comprehensiveincome: Currentyearactuarial(gain)loss $ 464,667 $ 361,009 Amortizationofpriorservicecredit(cost) 25,490 25,490 Amortizationofactuarialgain(loss) $ (76,224) $ (55,878) Totalrecognizedinothercomprehensiveincome $ 413,933 $ 330,621 Totalrecognizedinnetperiodicbenefitcostandothercomprehensiveincome $1,185,616 $1,046,890 *ExpectedbenefitpaymentstobemadefromSystemassets. Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive incomeintonetperiodicbenefitcost(credit)in2011areshownbelow: Netactuarial(gain)loss $110,901 Priorservice(credit)cost (25,490) Total $ 85,411 (8)AccumulatedPostemploymentBenefits TheBoardprovidescertainpostemploymentbenefitstoeligibleformerorinactive employeesandtheirdependentsduringtheperiodsubsequenttoemploymentbut priortoretirement.Postemploymentcostswereactuariallydeterminedusinga December31measurementdateanddiscountratesof 3.50%and4.00%asof December31,2010and2009,respectively.Theaccruedpostemploymentbenefit costsrecognizedbytheBoardasof December31,2010and2009,were$701,000 and$1,754,000,respectively.

338 97thAnnualReport|2010 (9)AccumulatedOtherComprehensiveIncome(Loss) Areconciliationof beginningandendingbalancesof accumulatedothercomprehensiveincome(loss)fortheyearsendedDecember31,2010and2009,isas follows: Amount AmountRelatedto TotalAccumulated RelatedtoDefined Postretirement Other BenefitRetirement BenefitsOther Comprehensive Plans ThanPensions Income(Loss) Balance—January1,2009 $ 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—other comprehensiveincome(loss) (437,678) 330,621 107,057 Balance—December31,2009 7,940,396 1,226,709 (9,167,105) Changeinfundedstatusofbenefitplans: Priorservice(credit)costarisingduringtheyear Amortizationofpriorservicecredit(costs) (543,685) 25,490 518,195 Amortizationofnetactuarialgain(loss) (500,512) (76,224) 576,736 Netactuarial(gain)lossarisingduringtheyear 6,090,681 464,667 (6,555,348) Changeinfundedstatusofbenefitplans-other comprehensiveincome(loss) 5,046,484 413,933 (5,460,417) Balance—December31,2010 $12,986,880 $1,640,642 $(14,627,522) Additionaldetailregardingtheclassificationof accumulatedothercomprehensive income(loss)isincludedinNotes6and7. (10)FederalReserveBanks TheBoardperformscertainfunctionsfortheReserveBanksinconjunctionwith itsresponsibilitiesfortheSystem,andtheReserveBanksprovidecertainadministrativefunctionsfortheBoard.ActivityrelatedtotheBoardandReserveBanksas of December31,2010and2009,issummarizedinthefollowingtable: AsofDecember31, 2010 2009 ReserveBankexpenseschargedtotheBoard: Dataprocessingandcommunication $ 919,889 $ 776,835 Contingencysite 1,254,331 1,171,808 TotalReserveBankexpenseschargedtotheBoard $ 2,174,220 $ 1,948,643 BoardexpenseschargedtotheReserveBanks: Assessmentsforcurrencycosts: Printing $ 598,238,821 $479,255,288 Shipping 16,900,584 15,367,546 Retirement 3,513,538 3,608,937 Researchanddevelopment 4,205,705 3,913,112 AssessmentsforoperatingexpensesoftheBoard 422,200,000 386,399,900 Dataprocessing 483,512 635,235 TotalBoardexpenseschargedtotheReserveBanks $1,045,542,160 $889,180,018 AccountsreceivableduefromtheReserveBanks $ 856,685 $ 1,071,932 TheBoardcontractedforauditservicesonbehalf of entitiesthatareincludedin thecombinedfinancialstatementsof theFederalReserveBanks.Theentitiesreim-

FederalReserveSystemAudits 339 bursetheBoardforthecostof theauditservices.TheBoardaccruedliabilitiesof $322,000and$138,000inauditservicesandrecordedreceivablesof $322,000and $138,000fromtheentitiesasof December31,2010and2009,respectively. (11)FederalFinancialInstitutionsExaminationCouncil TheBoardisoneof thefivememberagenciesof theFederalFinancialInstitutions ExaminationCouncil(theCouncil),andcurrentlyperformscertainmanagement functionsfortheCouncil.ThefiveagenciesthatarerepresentedontheCouncil aretheBoard,FederalDepositInsuranceCorporation,NationalCreditUnion Administration,Officeof theComptrollerof theCurrency,andOfficeof Thrift Supervision. TheBoard’sfinancialstatementsdonotincludefinancialdatafortheCouncil. ActivityrelatedtotheBoardandCouncil,asof December31,2010and2009,is summarizedinthefollowingtable: AsofDecember31, 2010 2009 CouncilexpenseschargedtotheBoard: Assessmentsforoperatingexpenses $ 126,469 $ 67,998 Assessmentsforexaminereducation 672,153 734,359 CentralDataRepository 1,202,704 1,522,597 UniformBankPerformanceReport 154,877 210,293 TotalCouncilexpenseschargedtotheBoard $2,156,203 $2,535,247 BoardexpenseschargedtotheCouncil: Dataprocessingrelatedservices $4,897,107 $4,884,868 Administrativeservices 245,000 245,000 TotalBoardexpenseschargedtotheCouncil $5,142,107 $5,129,868 AccountsreceivableduefromtheCouncil $ 579,792 $ 618,861 AccountspayableduetotheCouncil 290,047 209,922 In2007,theCouncilbeganarewriteof theHomeMortgageDisclosureActprocessingsystem,forwhichtheBoardprovidesdataprocessingservices.Thetotal costof therewritefortheCouncilis$2.7millionof whichtheBoardexpenseto supportthiseffortwas$464,000throughDecember31,2010. (12)TheOfficeofEmployeeBenefitsoftheFederalReserveSystem TheOfficeof EmployeeBenefitsof theFederalReserveSystem(OEB)administerscertainSystembenefitprogramsonbehalf of theBoardandtheReserve Banks,andcostsassociatedwiththeOEB’sactivitiesareassessedtotheBoard andReserveBanks.TheBoardwasassessed$2,371,000and$2,166,000asof December31,2010and2009,respectively. (13)TheBureauofConsumerFinancialProtection Sec.1017of theDodd-FrankActrequirestheBoardtofundtheBureauthe amountneededtocarryouttheauthoritiesgrantedtotheBureauunderFederal consumerfinanciallaw.BeginningJuly2011,theActlimitstheamounttobe transferredeachfiscalyeartoafixedpercentageof theSystem’stotaloperating expenses.During2010,theBoardreceivedandprocessedfundingrequestsforthe Bureautotaling$32,770,000.

340 97thAnnualReport|2010 (14)TheOfficeofFinancialResearch Sec.155(c)of theDodd-FrankActrequirestheBoardtoprovideanamountsufficienttocovertheexpensesof theOfficeforthe2-yearperiodfollowingthedateof theenactment(July21,2010).Theexpensesof theFSOCareincludedinthe expensesof theOffice.During2010,theBoardreceivedandprocessedfunding requestsfortheOfficetotaling$9,515,944. (15)BureauofEngravingandPrinting TheBureauof EngravingandPrintingisthesolesupplierforcurrencyprinting andalsoprovidesretirementservices.Thecurrencycostsincurredasof December31,2010and2009,arereflectedinthefollowingtable: AsofDecember31, 2010 2009 CurrencyexpenseschargedtotheBoard: Printing $598,238,821 $479,255,288 Retirement 3,513,538 3,608,937 TotalcurrencyexpenseschargedtotheBoard $601,752,359 $482,864,225 (16)CommitmentsandContingencies Commitments—TheBoardhasenteredintoanagreementwiththeFederal DepositInsuranceCorporationandtheOfficeof theComptrollerof theCurrency,throughtheCouncil,tofundaportionof theenhancementsandmaintenancefeesforacentraldatarepositoryprojectthrough2010withanoptionto extendmaintenancethrough2013.TheestimatedBoardexpensetosupportthis effortis$7.9millionforthebaseperiodand$2.6millionfortheoptionperiod. LitigationandContingentLiabilities—TheBoardissubjecttocontingentliabilitieswhicharisefromlitigationcasesandvariousbusinesscontracts.Thesecontingentliabilitiesariseinthenormalcourseof operationsandtheirultimatedispositionisunknown.Basedoninformationcurrentlyavailabletomanagement,itis management’sopinionthattheexpectedoutcomeof thesematters,intheaggregate,willnothaveamateriallyadverseeffectonthefinancialstatements. CivilcasesagainsttheBoardarisingoutof TheFreedomof InformationActpermitsrecoveryof attorneysfeesincivilcaseswheretheplaintiff “substantiallyprevails”.TherearetwopendingcasesinwhichitispossiblethattheBoardcouldbe requiredtopayfeesinexcessof $205,000percase. (17)SubsequentEvents Therewerenosubsequenteventsthatrequireadjustmentstoordisclosuresinthe financialstatementsasof December31,2010.Subsequenteventswereevaluated throughFebruary28,2011,whichisthedatethefinancialstatementswereavailabletobeissued.

FederalReserveSystemAudits 341 INDEPENDENTAUDITORS’REPORTONINTERNALCONTROLOVERFINANCIALREPORTINGAND ONCOMPLIANCEANDOTHERMATTERSBASEDONANAUDITOFFINANCIALSTATEMENTS PERFORMEDINACCORDANCEWITHGOVERNMENTAUDITINGSTANDARDS TotheBoardofGovernorsoftheFederalReserveSystem: WehaveauditedthefinancialstatementsoftheBoardofGovernorsoftheFederalReserveSystem(the“Board”)as ofandfortheyearendedDecember31,2010,andhaveissuedourreportthereondatedFebruary28,2011.WeconductedourauditinaccordancegenerallyacceptedauditingstandardsasestablishedbytheAuditingStandardsBoard (UnitedStates),auditingstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),andthe standardsapplicabletofinancialauditscontainedinGovernmentAuditingStandards,issuedbytheComptrollerGeneraloftheUnitedStates. InternalControloverFinancialReporting InaccordancewithstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates)andGovernment AuditingStandards,wehavealsoissuedourreportdatedFebruary28,2011,onourtestsoftheBoard’sinternalcontroloverfinancialreporting.Thepurposeofthatreportistodescribethescopeandtheresultsofthattesting.That reportisanintegralpartofanauditperformedinaccordancewithstandardsofthePublicCompanyAccounting OversightBoard(UnitedStates)andGovernmentAuditingStandardsandshouldbeconsideredinassessingtheresults ofouraudit. ComplianceandOtherMatters AspartofobtainingreasonableassuranceaboutwhethertheBoard’sfinancialstatementsarefreeofmaterialmisstatement,weperformedtestsofitscompliancewithcertainprovisionsoflaws,regulations,contracts,andgrant agreements,noncompliancewithwhichcouldhaveadirectandmaterialeffectonthedeterminationoffinancialstatementamounts.However,providinganopiniononcompliancewiththoseprovisionswasnotanobjectiveofouraudit, andaccordingly,wedonotexpresssuchanopinion.Theresultsofourtestsdisclosednoinstancesofnoncompliance orothermattersthatarerequiredtobereportedunderGovernmentAuditingStandards. Distribution ThisreportisintendedsolelyfortheinformationanduseoftheBoard,management,andotherswithintheorganization,OfficeofInspectorGeneral,theUnitedStatesCongress,andisnotintendedtobeandshouldnotbeusedby anyoneotherthanthesespecifiedparties. February28,2011 McLean,VA

342 97thAnnualReport|2010 Federal Reserve Banks Combined Financial Statements Thecombinedfinancialstatementsof theFederalReserveBankswereauditedby Deloitte&ToucheLLP,independentauditors,fortheyearsendedDecember31, 2010and2009. INDEPENDENTAUDITOR’SREPORT TotheBoardofGovernorsoftheFederalReserveSystemandtheBoardsofDirectorsoftheFederalReserveBanks: WehaveauditedtheaccompanyingCombinedStatementsofConditionoftheFederalReserveBanks(the“Reserve Banks”)asofDecember31,2010and2009andtherelatedCombinedStatementsofIncomeandComprehensive Income,andofChangesinCapitalfortheyearsthenended,whichhavebeenpreparedinconformitywithaccounting principlesestablishedbytheBoardofGovernorsoftheFederalReserveSystem.TheseCombinedFinancialStatementsaretheresponsibilityoftheDivisionofReserveBankOperationsandPaymentSystem’smanagement.Our responsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits. WeconductedourauditsinaccordancewithgenerallyacceptedauditingstandardsasestablishedbytheAuditing StandardsBoard(UnitedStates)andinaccordancewiththeauditingstandardsofthePublicCompanyAccounting OversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonable assuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.TheReserveBanksarenot requiredtohave,norwereweengagedtoperform,anauditoftheirinternalcontroloverfinancialreporting.Our auditsincludedconsiderationofinternalcontroloverfinancialreportingasabasisfordesigningauditprocedures thatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessofthe ReserveBank’sinternalcontroloverfinancialreporting.Accordingly,weexpressnosuchopinion.Anauditalso includesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements, assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingthe overallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion. AsdescribedinNote4totheCombinedFinancialStatements,theReserveBankshavepreparedtheseCombined FinancialStatementsinconformitywithaccountingprinciplesestablishedbytheBoardofGovernorsoftheFederal ReserveSystem,assetforthintheFinancialAccountingManualforFederalReserveBanks,whichisacomprehensive basisofaccountingotherthanaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.Theeffects onsuchCombinedFinancialStatementsofthedifferencesbetweentheaccountingprinciplesestablishedbythe BoardofGovernorsoftheFederalReserveSystemandaccountingprinciplesgenerallyacceptedintheUnitedStates ofAmericaarealsodescribedinNote4. Inouropinion,suchCombinedFinancialStatementsreferredtoabovepresentfairly,inallmaterialrespects,thecombinedfinancialpositionoftheReserveBanksasofDecember31,2010and2009,andthecombinedresultsoftheir operationsfortheyearsthenended,onthebasisofaccountingdescribedinNote4. March22,2011 Washington,DC

343 97thAnnualReport|2010 The Federal Reserve Banks Abbreviations ABCP Asset-backedcommercialpaper ABS Asset-backedsecurities ACH Automatedclearinghouse AIA AmericanInternationalAssuranceCompanyLtd. AIG AmericanInternationalGroup,Inc. AIGTrust AIGCreditFacilityTrust AIGFP AIGFinancialProductsCorp. ALICO AmericanLifeInsuranceCompany AMLF Asset-BackedCommercialPaperMoneyMarketMutualFundLiquidityFacility ARM Adjustableratemortgage ASC AccountingStandardsCodification BEP BenefitEqualizationRetirementPlan Bureau Bureauof ConsumerFinancialProtection CDO Collateralizeddebtobligation CDS Creditdefaultswaps CIP CommitteeonInvestmentPerformance(relatedtoSystemRetirementPlan) CMBS Commercialmortgage-backedsecurities CPFF CommercialPaperFundingFacility ESF ExchangeStabilizationFund FAM FinancialAccountingManualforFederalReserveBanks FASB FinancialAccountingStandardsBoard FDIC FederalDepositInsuranceCorporation FFCB FederalFarmCreditBanks FHLB FederalHomeLoanBanks FannieMae FederalNationalMortgageAssociation FreddieMac FederalHomeLoanMortgageCorporation FOMC FederalOpenMarketCommittee FRBA FederalReserveBankof Atlanta FRBC FederalReserveBankof Chicago FRBNY FederalReserveBankof NewYork FRBR FederalReserveBankof Richmond FRBSF FederalReserveBankof SanFrancisco GAAP AccountingprinciplesgenerallyacceptedintheUnitedStatesof America GSE Government-sponsoredenterprise IMF InternationalMonetaryFund IRS Interestrateswaps JPMC JPMorganChase&Co. Libor Londoninterbankofferedrate

344 97thAnnualReport|2010 LLC Limitedliabilitycompany MBS Mortgage-backedsecurities ML MaidenLaneLLC MLII MaidenLaneIILLC MLIII MaidenLaneIIILLC MTM Mark-to-market OEB Officeof EmployeeBenefitsof theFederalReserveSystem OFR Officeof FinancialResearch OIS Overnightindexedswap PDCF PrimaryDealerCreditFacility RMBS Residentialmortgage-backedsecurities SBA SmallBusinessAdministration SDR Specialdrawingrights SERP SupplementalRetirementPlanforSelectOfficersof theFederalReserveBanks SFAS Statementof FinancialAccountingStandards SOMA SystemOpenMarketAccount STRIP SeparateTradingof RegisteredInterestandPrincipalof Securities TAF TermAuctionFacility TALF TermAsset-BackedSecuritiesLoanFacility TARP TroubledAssetRelief Program TBA Tobeannounced TCE TransitionalCreditExtension TDF TermDepositFacility TIPS TreasuryInflation-ProtectedSecurities TRS Totalreturnswapagreement TOP TermSecuritiesLendingFacilityOptionsProgram TSLF TermSecuritiesLendingFacility VIE Variableinterestentity

FederalReserveSystemAudits 345 FederalReserveBanksCombinedStatementsofCondition asofDecember31,2010andDecember31,2009 (inmillions) 2010 2009 Assets Goldcertificates $ 11,037 $ 11,037 Specialdrawingrightscertificates 5,200 5,200 Coin 2,180 2,053 Itemsinprocessofcollection 374 507 Loans: Depositoryinstitutions 221 96,618 TermAsset-BackedSecuritiesLoanFacility(measuredatfairvalue) 24,853 48,183 AmericanInternationalGroup,Inc.,net 20,603 21,250 SystemOpenMarketAccount: Treasurysecurities,net 1,066,952 805,972 Government-sponsoredenterprisedebtsecurities,net 152,972 167,362 Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities,net 1,004,695 918,927 Foreigncurrencydenominatedassets,net 26,049 25,272 Centralbankliquidityswaps 75 10,272 Otherinvestments - 5 Consolidatedvariableinterestentities: Investmentsheldbyconsolidatedvariableinterestentities(ofwhich$68,469and$71,648ismeasured atfairvalueasofDecember31,2010and2009,respectively) 68,666 81,380 Preferredinterests 26,385 25,106 Accruedinterestreceivable 14,231 12,641 Bankpremisesandequipment,net 2,613 2,624 Otherassets 738 638 Totalassets $2,427,844 $2,235,047 LiabilitiesandCapital FederalReservenotesoutstanding,net $ 941,561 $ 887,846 SystemOpenMarketAccount: Securitiessoldunderagreementstorepurchase 59,703 77,732 Otherliabilities - 601 Consolidatedvariableinterestentities: Beneficialinterestinconsolidatedvariableinterestentities(measuredatfairvalue) 10,051 5,095 Otherliabilities(ofwhich$203and$143ismeasuredatfairvalueasofDecember31,2010and2009, respectively) 921 1,316 Deposits: Depositoryinstitutions 968,052 976,988 Treasury,generalaccount 140,773 186,632 Treasury,supplementaryfinancingaccount 199,964 5,001 Otherdeposits 16,967 36,228 FundsfromAmericanInternationalGroup,Inc.assetdispositions,heldasagent 26,896 - Interestpayabletodepositoryinstitutions 113 113 Accruedbenefitcosts 2,597 2,631 Deferredcredititems 1,794 2,103 AccruedinterestonFederalReservenotes 5,124 1,191 Otherliabilities 280 290 Totalliabilities 2,374,796 2,183,767 Capitalpaid-in 26,524 25,640 Surplus(includingaccumulatedothercomprehensivelossof$3,630and$3,676atDecember31,2010 and2009,respectively) 26,524 25,640 Totalcapital 53,048 51,280 Totalliabilitiesandcapital $2,427,844 $2,235,047 Theaccompanyingnotesareanintegralpartof thesecombinedfinancialstatements.

346 97thAnnualReport|2010 FederalReserveBanksCombinedStatementsofIncomeandComprehensiveIncome fortheyearsendedDecember31,2010andDecember31,2009 (inmillions) 2010 2009 InterestIncome Loans: Depositoryinstitutions $ 50 $ 990 TermAsset-BackedSecuritiesLoanFacility 750 414 AmericanInternationalGroup,Inc.,net 2,728 3,996 Other - 109 SystemOpenMarketAccount: Securitiespurchasedunderagreementstoresell - 13 Treasurysecurities,net 26,373 22,873 Government-sponsoredenterprisedebtsecurities,net 3,510 2,048 Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities,net 44,839 20,407 Foreigncurrencydenominatedassets,net 223 296 Centralbankliquidityswaps 12 2,168 Otherinvestments - 1 Investmentsheldbyconsolidatedvariableinterestentities 4,440 9,820 Totalinterestincome 82,925 63,135 InterestExpense SystemOpenMarketAccount: Securitiessoldunderagreementstorepurchase 94 98 Beneficialinterestinconsolidatedvariableinterestentities 277 267 Deposits: Depositoryinstitutions 2,680 2,183 TermDepositFacility 4 - Totalinterestexpense 3,055 2,548 Provisionforloanrestructuring - (2,621) Netinterestincomeafterprovisionforloanrestructuring 79,870 57,966 Non-InterestIncome(Loss) TermAsset-BackedSecuritiesLoanFacility,unrealized(losses)gains (436) 557 SystemOpenMarketAccount: Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecuritiesgains,net 782 879 Foreigncurrencygains,net 554 172 Consolidatedvariableinterestentities: Investmentsheldbyconsolidatedvariableinterestentitiesgains(losses),net 8,180 (1,937) Beneficialinterestinconsolidatedvariableinterestentities(losses),net (4,679) (1,903) Dividendsonpreferredinterests 1,279 106 Incomefromservices 567 663 Reimbursableservicestogovernmentagencies 457 450 Otherincome 187 443 Totalnon-interestincome(loss) 6,891 (570) OperatingExpenses Salariesandbenefits 2,722 2,802 Occupancy 297 280 Equipment 180 183 Assessments: BoardofGovernorsoperatingexpensesandcurrencycosts 1,045 888 BureauofConsumerFinancialProtection 33 - OfficeofFinancialResearch 10 - Professionalfeesrelatedtoconsolidatedvariableinterestentities 104 125 Other 681 702 Totaloperatingexpenses 5,072 4,980 Netincomepriortodistribution 81,689 52,416 Changeinfundedstatusofbenefitplans 46 1,007 Comprehensiveincomepriortodistribution $81,735 $53,423 Distributionofcomprehensiveincome: Dividendspaidtomemberbanks $ 1,583 $ 1,428 Transferredtosurplusandchangeinaccumulatedothercomprehensiveloss 884 4,564 PaymentstoTreasuryasinterestonFederalReservenotes 79,268 47,431 Totaldistribution $81,735 $53,423 Theaccompanyingnotesareanintegralpartof thesecombinedfinancialstatements.

FederalReserveSystemAudits 347 FederalReserveBanksCombinedStatementsOfChangesInCapital fortheyearsendedDecember31,2010andDecember31,2009 (inmillions,exceptsharedata) Surplus Capital Accumulated Total paid-in Netincome other Total capital retained comprehensive surplus (loss) BalanceatJanuary1,2009(421,517,467shares) $21,076 $25,759 $(4,683) $21,076 $42,152 Netchangeincapitalstockissued(91,289,192shares) 4,564 - - - 4,564 Transferredtosurplusandchangeinaccumulatedother comprehensiveincome - 3,557 1,007 4,564 4,564 BalanceatDecember31,2009(512,806,659shares) $25,640 $29,316 $(3,676) $25,640 $51,280 Netchangeincapitalstockissued(17,674,477shares) 884 - - - 884 Transferredtosurplusandchangeinaccumulatedother comprehensiveincome - 838 46 884 884 BalanceatDecember31,2010(530,481,136shares) $26,524 $30,154 $(3,630) $26,524 $53,048 Theaccompanyingnotesareanintegralpartof thesecombinedfinancialstatements.

348 97thAnnualReport|2010 (1)Structure ThetwelveFederalReserveBanks(ReserveBanks)arepartof theFederalReserve System(System)createdbyCongressundertheFederalReserveActof 1913(FederalReserveAct),whichestablishedthecentralbankof theUnitedStates.The ReserveBanksarecharteredbythefederalgovernmentandpossessauniquesetof governmental,corporate,andcentralbankcharacteristics. InaccordancewiththeFederalReserveAct,supervisionandcontrolof each ReserveBankisexercisedbyaboardof directors.TheFederalReserveActspecifiesthecompositionof theboardof directorsforeachof theReserveBanks.Each boardiscomposedof ninemembersservingthree-yearterms:threedirectors, includingthosedesignatedaschairmananddeputychairman,areappointedby theBoardof Governorsof theFederalReserveSystem(Boardof Governors)to representthepublic,andsixdirectorsareelectedbymemberbanks.Banksthatare membersof theSystemincludeallnationalbanksandanystate-charteredbanks thatapplyandareapprovedformembership.Memberbanksaredividedintothree classesaccordingtosize.Memberbanksineachclasselectonedirectorrepresentingmemberbanksandonerepresentingthepublic.Inanyelectionof directors, eachmemberbankreceivesonevote,regardlessof thenumberof sharesof ReserveBankstockitholds. Inadditiontothe12ReserveBanks,theSystemalsoconsists,inpart,of theBoard of GovernorsandtheFederalOpenMarketCommittee(FOMC).TheBoardof Governors,anindependentfederalagency,ischargedbytheFederalReserveAct withanumberof specificduties,includinggeneralsupervisionovertheReserve Banks.TheFOMCiscomposedof membersof theBoardof Governors,the presidentof theFederalReserveBankof NewYork(FRBNY),and,onarotating basis,fourotherReserveBankpresidents. (2)OperationsandServices TheReserveBanksperformavarietyof servicesandoperations.Thesefunctions includeparticipatinginformulatingandconductingmonetarypolicy;participatinginthepaymentsystem,includinglarge-dollartransfersof funds,automated clearinghouse(ACH)operations,andcheckcollection;distributingcoinandcurrency;performingfiscalagencyfunctionsfortheU.S.Departmentof theTreasury (Treasury),certainFederalagencies,andotherentities;servingasthefederalgovernment’sbank;providingshort-termloanstodepositoryinstitutions;providing loanstoindividuals,partnerships,andcorporationsinunusualandexigentcircumstances;servingconsumersandcommunitiesbyprovidingeducationalmaterials andinformationregardingfinancialconsumerprotectionrightsandlawsand informationoncommunitydevelopmentprogramsandactivities;andsupervising bankholdingcompanies,statememberbanks,andU.S.officesof foreignbanking organizations.Certainservicesareprovidedtoforeignandinternationalmonetary authorities,primarilybytheFRBNY. TheDodd-FrankWallStreetReformandConsumerProtectionActof 2010 (Dodd-FrankAct),whichwassignedintolawandbecameeffectiveonJuly21, 2010,changedthescopeof someservicesperformedbytheReserveBanks. Amongotherthings,theDodd-FrankActestablishesaBureauof Consumer FinancialProtection(Bureau)asanindependentbureauwithintheFederal ReserveSystemthatwillhavesupervisoryauthorityoversomeinstitutionspreviouslysupervisedbytheReserveBanksunderdelegatedauthorityfromtheBoard of Governorsinconnectionwiththoseinstitutions’compliancewithconsumer

FederalReserveSystemAudits 349 protectionstatutes;limitstheReserveBanks’authoritytoprovideloansinunusual andexigentcircumstancestolendingprogramsorfacilitieswithbroad-basedeligibility;andveststheBoardof Governorswithallsupervisoryandrule-writing authorityforsavingsandloanholdingcompanies. TheFOMC,inconductingmonetarypolicy,establishespolicyregardingdomestic openmarketoperations,overseestheseoperations,andissuesauthorizationsand directivestotheFRBNYtoexecutetransactions.TheFOMCauthorizesand directstheFRBNYtoconductoperationsindomesticmarkets,includingthe directpurchaseandsaleof Treasurysecurities,Federalagencyandgovernmentsponsoredenterprise(GSE)debtsecurities,FederalagencyandGSEmortgagebackedsecurities(MBS),thepurchaseof thesesecuritiesunderagreementsto resell,andthesaleof thesesecuritiesunderagreementstorepurchase.The FRBNYholdstheresultingsecuritiesandagreementsinaportfolioknownasthe SystemOpenMarketAccount(SOMA).TheFRBNYisauthorizedtolendthe TreasurysecuritiesandFederalagencyandGSEdebtsecuritiesthatareheldinthe SOMA. Inadditiontoauthorizinganddirectingoperationsinthedomesticsecuritiesmarket,theFOMCauthorizestheFRBNYtoconductoperationsinforeignmarkets inordertocounterdisorderlyconditionsinexchangemarketsortomeetother needsspecifiedbytheFOMCtocarryouttheSystem’scentralbankresponsibilities.Specifically,theFOMCauthorizesanddirectstheFRBNYtoholdbalances of,andtoexecutespotandforwardforeignexchangeandsecuritiescontractsfor, 14foreigncurrenciesandtoinvestsuchforeigncurrencyholdings,whilemaintainingadequateliquidity.TheFRBNYisauthorizedanddirectedbytheFOMCto maintainreciprocalcurrencyarrangementswiththeBankof Canadaandthe Bankof Mexicoandto“warehouse”foreigncurrenciesfortheTreasuryandthe ExchangeStabilizationFund(ESF). AlthoughtheReserveBanksareseparatelegalentities,theycollaborateinthe deliveryof certainservicestoachievegreaterefficiencyandeffectiveness.Thiscollaborationtakestheformof centralizedoperationsandproductorfunctionoffices thathaveresponsibilityforthedeliveryof certainservicesonbehalf of theReserve Banks.Variousoperationalandmanagementmodelsareusedandaresupported byserviceagreementsbetweentheReserveBanks.Insomecases,costsincurredby aReserveBankforservicesprovidedtootherReserveBanksarenotshared;in othercases,theReserveBanksarereimbursedforcostsincurredinprovidingservicestootherReserveBanks. (3)FinancialStabilityActivities TheReserveBankshaveimplementedthefollowingprogramsthatsupportthe liquidityof financialinstitutionsandfosterimprovedconditionsinfinancial markets. Large-ScaleAssetPurchasePrograms TheFOMCauthorizedanddirectedtheFRBNYtopurchase$300billionof longer-termTreasurysecuritiestohelpimproveconditionsinprivatecreditmarkets.TheFRBNYbeganthepurchasesof theseTreasurysecuritiesinMarch2009 andcompletedtheminOctober2009.OnAugust10,2010,theFOMCannounced thattheFederalReservewillmaintainthelevelof domesticsecuritiesholdingsin theSOMAportfoliobyreinvestingprincipalpaymentsfromGSEdebtsecurities andFederalagencyandGSEMBSinlonger-termTreasurysecurities.OnNovem-

350 97thAnnualReport|2010 ber3,2010,theFOMCannounceditsintentiontoexpandtheSOMAportfolio holdingsof longer-termTreasurysecuritiesbyanadditional$600billionby June2011.TheFOMCwillregularlyreviewthepaceof thesesecuritiespurchases andtheoverallsizeof theassetpurchaseprogramandwilladjusttheprogramas neededtobestfostermaximumemploymentandpricestability. TheFOMCauthorizedanddirectedtheFRBNYtopurchaseGSEdebtsecurities andFederalagencyandGSEMBS,withagoaltoprovidesupporttomortgage andhousingmarketsandtofosterimprovedconditionsinfinancialmarketsmore generally.TheFRBNYwasauthorizedtopurchaseupto$175billioninfixed-rate, non-callableGSEdebtsecuritiesand$1.25trillioninfixed-rateFederalagencyand GSEMBS.Purchasesof GSEdebtsecuritiesbeganinNovember2008,andpurchasesof FederalagencyandGSEMBSbeganinJanuary2009.TheFRBNY completedthepurchasesof GSEdebtsecuritiesandFederalagencyandGSE MBSinMarch2010.Thesettlementof allFederalagencyandGSEMBStransactionswascompletedbyAugust2010. CentralBankLiquiditySwaps TheFOMCauthorizedanddirectedtheFRBNYtoestablishcentralbankliquidityswaparrangements,whichcouldbestructuredaseitherU.S.dollarliquidityor foreigncurrencyliquidityswaparrangements.U.S.dollarliquidityswaparrangementswereauthorizedwith14foreigncentralbankstoprovideliquidityinU.S. dollarstooverseasmarkets.Theauthorizationfortheseswaparrangements expiredonFebruary1,2010.InMay2010,U.S.dollarliquidityswaparrangementswerereestablishedwiththeBankof Canada,theBankof England,the EuropeanCentralBank,theBankof Japan,andtheSwissNationalBank;these arrangementswillexpireonAugust1,2011. ForeigncurrencyliquidityswaparrangementsprovidedtheReserveBankswith thecapacitytoofferforeigncurrencyliquiditytoU.S.depositoryinstitutions.The authorizationfortheseswaparrangementsexpiredonFebruary1,2010. LendingtoDepositoryInstitutions TheTermAuctionFacility(TAF)promotedtheefficientdisseminationof liquidity byprovidingtermfundstodepositoryinstitutions.ThelastTAFauctionwasconductedonMarch8,2010,andtherelatedloansmaturedonApril8,2010. LendingtoPrimaryDealers TheTermSecuritiesLendingFacility(TSLF)promotedliquidityinthefinancing marketsforTreasurysecurities.UndertheTSLF,theFRBNYcouldlenduptoan aggregateamountof $200billionof TreasurysecuritiesheldintheSOMAtoprimarydealersonasecuredbasisforatermof 28days.Theauthorizationforthe TSLFexpiredonFebruary1,2010. TheTermSecuritiesLendingFacilityOptionsProgram(TOP)offeredprimary dealerstheopportunitytopurchaseanoptiontodrawuponshort-term,fixed-rate TSLFloansinexchangeforeligiblecollateral.Theprogramwassuspendedeffectivewiththematurityof theJune2009TOPoptions,andauthorizationforthe programexpiredonFebruary1,2010. ThePrimaryDealerCreditFacility(PDCF)wasdesignedtoimprovetheabilityof primarydealerstoprovidefinancingtoparticipantsinthesecuritizationmarkets. PrimarydealerscouldobtainsecuredovernightfinancingunderthePDCFinthe

FederalReserveSystemAudits 351 formof repurchasetransactions.TheauthorizationforthePDCFexpiredonFebruary1,2010,andthelastloanmaturedonMay13,2009. TheTransitionalCreditExtension(TCE)programprovidedliquiditysupport throughsecuredloanstobroker-dealersthatwereintheprocessof transitioningto thebankholdingcompanystructure.TheauthorizationfortheTCEprogram expiredonFebruary1,2010,andthelastloanmaturedonApril29,2009. OtherLendingFacilities TheAsset-BackedCommercialPaperMoneyMarketMutualFundLiquidity Facility(AMLF)providedfundingtodepositoryinstitutionsandbankholding companiestofinancethepurchaseof eligiblehigh-qualityasset-backedcommercialpaper(ABCP)frommoneymarketmutualfunds.TheFederalReserveBankof BostonadministeredtheAMLFandwasauthorizedtoextendtheseloanstoeligibleborrowersonbehalf of theotherReserveBanks.Theauthorizationforthe AMLFexpiredonFebruary1,2010. TheCommercialPaperFundingFacility(CPFFprogram)enhancedtheliquidity of thecommercialpapermarketintheU.S.byincreasingtheavailabilityof term commercialpaperfundingtoissuersandbyprovidinggreaterassurancetoboth issuersandinvestorsthatissuerswouldbeabletorollovertheirmaturingcommercialpaper.Theauthorizationtopurchasehigh-qualitycommercialpaperthrough theCPFFprogramexpiredonFebruary1,2010.TheCommercialPaperFunding FacilityLLC(CPFF)wasaDelawarelimitedliabilitycompanyformedonOctober14,2008,inconnectionwiththeimplementationof theCPFFprogram,to purchaseeligiblethree-monthunsecuredcommercialpaperandABCPdirectly fromeligibleissuersusingtheproceedsof loansmadetoCPFFbytheFRBNY. TheFRBNY’sloanstoCPFFwereeliminatedinconsolidationof CPFFintothe combinedfinancialstatements.ThelastcommercialpaperpurchasedbytheCPFF maturedonApril26,2010,andtheCPFFwasdissolvedonAugust30,2010. CPFF’sfinancialstatementsasof May31,2010andfortheperiodJanuary1, 2010,throughMay31,2010,andasof andfortheyearendedDecember31,2009 werelastpublishedonAugust30,2010. TheTermAsset-BackedSecuritiesLoanFacility(TALF)assistedfinancialmarketsinaccommodatingthecreditneedsof consumersandbusinessesof allsizesby facilitatingtheissuanceof asset-backedsecurities(ABS)collateralizedbyavariety of consumerandbusinessloans.TheBoardof Governorsauthorizedtheoffering of TALFloanscollateralizedbynewly-issuedABSandlegacycommercial mortgage-backedsecurities(CMBS)untilMarch31,2010,andTALFloanscollateralizedbynewly-issuedCMBSuntilJune30,2010.UndertheTALF,theFRBNY wasauthorizedtolendupto$200billiontoeligibleborrowers. TALFloanshavematuritiesuptofiveyearsandaresecuredbyeligiblecollateral, withtheFRBNYhavinglentanamountequaltothevalueof thecollateral,as determinedbytheBank,lessamargin.LoanproceedsweredisbursedtotheborrowercontingentonreceiptbytheFRBNY’scustodianof theeligiblecollateral, anadministrativefee,and,if applicable,amargin. TheTALFloanswereextendedonanonrecoursebasis.If theborrowerdoesnot repaytheloan,theFRBNYwillenforceitsrightsinthecollateralandmaysellthe collateraltoTALFLLC,aDelawarelimitedliabilitycompany,establishedonFebruary4,2009,forthepurposeof purchasingsuchassets.Asof December31,

352 97thAnnualReport|2010 2010,theFRBNYhasnotenforceditsrightstothecollateralbecausetherehave beennodefaults. PursuanttoaputagreementwiththeFRBNY,TALFLLChascommittedtopurchaseassetsthatsecureaTALFloanatapriceequaltotheprincipalamountoutstandingplusaccruedbutunpaidinterest,regardlessof thefairvalueof thecollateral.FundingfortheTALFLLC’spurchasesof thesesecuritiesisderivedfirst throughthefeesreceivedbyTALFLLCfromtheFRBNYforthiscommitment andanyinterestearnedonitsinvestments.Intheeventthatsuchfundingproves insufficientfortheassetpurchasesthatTALFLLChascommittedtomakeunder theputagreement,theTreasurycommittedtolendupto$20billion,andon March25,2009,theTreasuryfunded$100million.OnJuly19,2010,thiscommitmentwasreducedto$4.3billiontoreflectthefactthatonly$43billionof TALF loanswereoutstandingwhentheprogramclosedtonewlendingonJune30,2010. Treasury’sloantoTALFLLCbearsinterestatarateof theone-monthLondon interbankofferedrate(Libor)plus300basispoints.InadditiontoTreasury’scommitment,theFRBNYcommitted,asaseniorlender,tolendupto$180billionto TALFLLCif itneededthefundingtopurchaseassetspursuanttotheputagreement.TheFRBNY’smaximumexposurewassubsequentlyreducedto$38.7billionwhentheprogramclosedtonewlending.AnyloanthattheFRBNYmakesto TALFLLCwouldbeseniortoanyTreasuryloanandwouldbearinterestatarate of theone-monthLiborplus100basispoints.TotheextentthatTreasuryandthe FRBNYhaveextendedcredittoTALFLLC,theirloansaresecuredbyallof the assetsof TALFLLC.TheFRBNYisthemanagingmemberandthecontrolling partyof TALFLLCandwillremainthecontrollingpartyaslongasitretainsan economicinterestinTALFLLC.AfterTALFLLChaspaidalloperating expensesandprincipalduetotheFRBNY,theremainingproceedsof theportfolio holdingswillbedistributedinthefollowingorder:principalduetoTreasury,interestduetotheFRBNY,andinterestduetoTreasury.Anyresidualcashflowswill besharedbetweentheFRBNY,whichwillreceive10percent,andtheTreasury, whichwillreceive90percent. SupportforSpecificInstitutions BearStearnsCompanies,Inc. Tofacilitatethemergerof TheBearStearnsCompanies,Inc.(BearStearns)and JPMorganChase&Co.(JPMC),theFRBNYextendedcredittoMaidenLane LLC(ML)inJune2008.MLisaDelawarelimitedliabilitycompanyformedby theFRBNYtoacquirecertainassetsof BearStearnsandtomanagethoseassets overtime,inordertomaximizethepotentialfortherepaymentof thecredit extendedtoMLandtominimizedisruptiontothefinancialmarkets.Theassets acquiredbyMLwerevaluedat$29.9billionasof March14,2008,thedatethat theFRBNYcommittedtothetransaction,andlargelyconsistedof Federalagency andGSEMBS,non-agencyresidentialmortgage-backedsecurities(RMBS),commercialandresidentialmortgageloans,andderivativesandassociatedhedges. TheFRBNYextendedaseniorloanof approximately$28.8billionandJPMC extendedasubordinatedloanof $1.15billiontofinancetheacquisitionof the assets.Theloansarecollateralizedbyallof theassetsof MLthroughapledgeto thecollateralagent.TheFRBNYisthesoleandmanagingmemberandthecontrollingpartyof MLandwillremainassuchaslongastheFRBNYretainsan economicinterestinML.Theinterestrateontheseniorloanistheprimarycredit rateineffectfromtimetotime.TheinterestrateontheJPMCsubordinatedloan istheprimarycreditrateplus450basispoints.JPMCbearslossesassociatedwith

FederalReserveSystemAudits 353 theportfoliothroughitssubordinatedloanplusaccruedinterestontheloan.Once theprincipalandinterestarepaid,residualgains,if any,willbeallocatedtothe FRBNY.Thetwo-yearaccumulationperiodthatfollowedtheclosingdateforML endedonJune26,2010.Consistentwiththetermsof theMLtransaction,thedistributionsof theproceedsrealizedontheassetportfolioheldbyML,afterpaymentof certainfeesandexpenses,nowoccuronamonthlybasisunlessotherwise directedbytheFederalReserve. AmericanInternationalGroup,Inc. InSeptember2008,theBoardof GovernorsauthorizedtheFRBNYtolendto AmericanInternationalGroup,Inc.,(AIG).Initially,theFRBNYprovidedAIG witharevolvinglineof creditcollateralizedbythepledgeof asubstantialportion of theassetsof AIG.Undertheprovisionsof theoriginalagreement,theFRBNY wasauthorizedtolendupto$85billiontoAIGfortwoyearsatthethree-month Libor,withafloorof 350basispoints,plus850basispoints.Inaddition,the FRBNYassessedAIGaone-timecommitmentfeeof 200basispointsonthefull amountof thecommitmentandafeeof 850basispointsperannumonthe undrawncreditline.Aconditionof thecreditagreementwasthatAIGwouldissue toatrust,forthesolebenefitof thefiscaltreasury,preferredsharesconvertibleto approximately78percentof theissuedandoutstandingsharesof thecommon stockof AIG.TheAIGCreditFacilityTrust(AIGTrust)wasformedJanuary16, 2009andthepreferredshareswereissuedtotheAIGTrustonMarch4,2009.The AIGTrusthadthreeindependenttrusteeswhocontroltheAIGTrust’svotingand consentrights.TheFRBNYcannotexercisevotingorconsentrights. TheBoardandtheTreasuryannouncedarestructuringof thegovernment’sfinancialsupporttoAIGinNovember2008.Aspartof therestructuring,theTreasury purchased$40billionof newly-issuedAIGpreferredsharesundertheTroubled AssetRelief Program(TARP).Themajorityof theTARPfundswereusedtopay downAIG’sdebttotheFRBNY.Inaddition,thetermsof theoriginalcredit agreementweremodifiedtoreducetherevolvinglineof creditto$60billion; reducetheinterestratetothethree-monthLiborwithafloorof 350basispoints, plus300basispoints;reducethefeeonundrawnfundsto75basispoints;and extendthetermof theagreementtofiveyears.Theothermaterialtermsof the fundingwereunchanged.Theserevisedtermsweremoreconsistentwithterms generallyavailabletootherentitieswithsimilarcreditrisk. ConcurrentwiththeNovember2008restructuringof itsfinancialsupporttoAIG, theFRBNYestablishedtwolimitedliabilitycompanies(LLCs).TheFRBNY extendedcredittoMaidenLaneIILLC(MLII),aDelawarelimitedliabilitycompanyformedtopurchasenon-agencyRMBSfromthereinvestmentpoolof the securitieslendingportfoliosof severalregulatedU.S.insurancesubsidiariesof AIG.MLIIborrowed$19.5billionfromtheFRBNYandusedtheproceedsto purchasenon-agencyRMBSthathadanapproximatefairvalueof $20.8billionas of October31,2008fromAIG’sdomesticinsurancesubsidiaries.TheFRBNYis thesoleandmanagingmemberandthecontrollingpartyof MLIIandwill remainasthecontrollingpartyaslongastheFRBNYretainsaneconomicinterestinMLII.Aspartof theagreement,theAIGsubsidiariesalsoreceivedfrom MLIIafixeddeferredpurchasepriceof upto$1.0billion,plusinterestonany suchfixeddeferredpurchasepriceoutstanding.TheinterestrateontheFRBNY’s seniorloanisone-monthLiborplus100basispoints,andtheinterestrateonthe fixeddeferredpurchasepriceisone-monthLiborplus300basispoints.AfterML IIhasfirstpaidtheFRBNY’sseniorloan,includingaccruedandunpaidinterest,

354 97thAnnualReport|2010 andthenthefixeddeferredpurchasepriceinfull,includingaccruedandunpaid interest,anynetproceedswillbedividedbetweentheFRBNY,whichisentitledto receivefive-sixths,andtheAIGsubsidiaries,whichareentitledtoreceiveonesixth.TheFRBNY’sloanandthefixeddeferredpurchasepricepayabletothe AIGsubsidiariesarecollateralizedbyallof theassetsof MLIIthroughapledge tothecollateralagent. TheFRBNYalsoextendedcredittoMaidenLaneIIILLC(MLIII),aDelaware limitedliabilitycompanyformedtopurchaseABScollateralizeddebtobligations (CDOs)fromcertainthird-partycounterpartiesof AIGFinancialProductsCorp. (AIGFP).Inconnectionwiththeacquisitions,thethird-partycounterparties agreedtoterminatetheirrelatedcreditdefaultswap(CDS)contractswithAIGFP. MLIIIborrowedapproximately$24.3billionfromtheFRBNY,andAIGprovidedanequitycontributionof $5billiontoMLIII.Theproceedswereusedto purchaseABSCDOswithafairvalueof $29.6billion.Thecounterpartiesreceived $26.8billionnetof principal,interestreceived,andfinancechargespaid.MLIII alsomadeapaymenttoAIGFPof $2.5billion,representingthereturnof excess collateralpreviouslypostedbyAIGFPwiththecounterparties.TheFRBNYisthe managingmemberandthecontrollingpartyof MLIIIandwillremainasthecontrollingpartyaslongastheFRBNYretainsaneconomicinterestinMLIII.Net proceedsreceivedbyMLIIIwillfirstbeappliedtorepaytheFRBNY’ssenior loanplusinterestatone-monthLiborplus100basispoints.TheFRBNY’ssenior loaniscollateralizedbyallof theassetsof MLIIIthroughapledgetothecollateralagent.AftertheFRBNYispaidinfull,AIG,oritsassignee,isentitledto receiverepaymentof itsequitycontributionplusinterestattheone-monthLibor plus300basispoints.AfterMLIIIhaspaidtheFRBNY’sseniorloanandAIG’s equitycontributioninfull,theFRBNYwillbeentitledtoreceive67percentof anyadditionalnetproceedsreceivedbyMLIIIasacontingentinterestonthe seniorloanandAIG,oritsassignee,willbeentitledtoreceive33percentof any netproceedsreceivedbyMLIIIascontingentdistributionsonitsequityinterest. OnApril17,2009,theFRBNY,aspartof theU.S.government’scommitmentto theorderlyrestructuringof AIGovertime,inthefaceof continuingmarketdislocations,furtherrestructuredtheAIGloanbyeliminatingthe350basis-pointfloor ontheLiborusedtocalculatetheinterestrateontheloan.Theinterestrateonthe modifiedloanisthethree-monthLiborplus300basispoints. OnDecember1,2009,theFRBNY’scommitmenttolendtoAIGwasreducedto $35billionfrom$60billionwhentheoutstandingbalanceof theFRBNY’sloan toAIGwasreducedby$25billioninexchangeforaliquidationpreferenceof nonvotingperpetualpreferredinterestsintwolimitedliabilitycompanies.AIGcreatedtheselimitedliabilitycompaniestohold,directlyorindirectly,allof theoutstandingcommonstockof AmericanLifeInsuranceCompany(ALICO)and AmericanInternationalAssuranceCompanyLtd.(AIA),twolifeinsuranceholdingcompanysubsidiariesof AIG.TheFRBNYwastobepaida5percentcumulativedividendonitsnonvotingpreferredintereststhroughSeptember22,2013 anda9percentcumulativedividendthereafter.AlthoughtheFRBNYhadcertain governancerightstoprotectitsinterests,AIGretainedcontrolof theLLCsand theunderlyingoperatingcompanies.Theinitialvalueof theFRBNY’spreferred interestsasof December1,2009was$16billionfortheAIAAuroraLLC(AIA LLC)and$9billionfortheALICOHoldingsLLC(ALICOLLC),whichrepresentedapercentageof thefairmarketvalueof AIAandALICO,respectively.

FederalReserveSystemAudits 355 OnSeptember30,2010,AIGannouncedanagreementwiththeTreasury, FRBNY,andthetrusteesof theAIGTrustonacomprehensiverecapitalization plandesignedtorepayallitsobligationstoAmericantaxpayers.Theagreement includedanacceleratedrepaymentof theoutstandingbalanceof theFRBNY revolvinglineof creditincludingallaccruedinterestandfees,terminationof that facility,therepaymentof theFRBNY’spreferredinterestsinAIALLCand ALICOLLC,andtheconversionof theAIGpreferredstockcurrentlyownedby theTreasuryandtheAIGTrustintocommonequityof AIG. Pendingtheclosingof therecapitalizationplan,thecashproceedsfromcertain AIGassetdispositionswereheldbytheFRBNYasagent.OnOctober29,2010, AIGcompletedtheinitialpublicoffering(IPO)of AIA,successfullyobtaininga listingontheHongKongStockExchangeandraisingtotalgrossproceedsof $20.5billion.OnNovember1,2010,AIGcompletedthesaleof ALICOto MetLife,initiallyannouncedonMarch8,2010,forapproximately$15.5billion, including$6.8billionincashandtheremainderinequityandequity-linkedsecuritiesof MetLife. OnJanuary14,2011,uponclosingof therecapitalizationplan,thecashproceeds fromcertainassetdispositions,specificallytheinitialpublicofferingof AIAand thesaleof ALICO,wereusedfirsttorepayinfulltherevolvinglineof credit extendedtoAIGbytheFRBNY,includingaccruedinterestandfees,andthento redeemaportionof theFRBNY’spreferredinterestsinALICOLLCtakenearlier bytheFRBNYinsatisfactionof aportionof therevolvinglineof credit.The remainingFRBNYpreferredinterestsinALICOLLCandAIALLC,valuedat approximately$20billion,werepurchasedbyAIGthroughadrawontheTreasury’sSeriesFpreferredstockcommitmentandthentransferredbyAIGtothe TreasuryaspartialconsiderationforthetransfertoAIGof alloutstandingSeries Fshares.Inaddition,theFRBNY’scommitmenttolendanyfundsunderthe revolvinglineof creditwasterminated. Citigroup,Inc. TheBoardof Governors,theTreasury,andtheFederalDepositInsuranceCorporation(FDIC)(parties)jointlyannouncedonNovember23,2008,thattheywould providefinancialsupporttoCitigroup,Inc.(Citigroup).Theagreement,whichwas executedonJanuary16,2009,providedfundingsupportforpossiblefutureprincipallossesrelatingtoadesignatedpoolof upto$301billionof Citigroup’sassets. Thefundingsupportwasforaperiodof 10yearsforresidentialassetsand5years fornonresidentialassets.NofundingsupportwasprovidedtoCitigroupunderthis agreement,andonDecember23,2009,thepartiesterminatedtheagreement.Asa result,theBankhadnocontractualobligationatDecember31,2010or2009.As considerationforterminatingtheagreement,CitigrouppaidtheFRBNYa $50millionterminationfeeandreimbursedtheFRBNYforitsout-of-pocket expenses.Theterminationfeewasrecognizedduringtheyear-endedDecember31, 2009,andisreportedasacomponentof “Otherincome”intheConsolidated Statementsof Income. Bankof AmericaCorporation TheBoardof Governors,theTreasury,andtheFDIC(parties)jointlyannounced onJanuary15,2009thattheywouldprovidefinancialsupporttoBankof America Corporation(Bankof America).Underthisarrangement,theFederalReserve Bankof Richmond(FRBR)wouldhaveprovidedfundingsupportforpossible futureprincipallossesrelatingtoadesignatedpoolof upto$118billionof finan-

356 97thAnnualReport|2010 cialinstruments.OnSeptember21,2009,thepartiesannouncedthattheyhad reachedanagreementwithBankof Americatoterminatetheagreement.Aspart of theterminationof theagreement,Bankof Americapaid$57millionincompensationforout-of-pocketexpensesincurredbytheFRBRandforcommitment feesrequiredbytheagreement. (4)SignificantAccountingPolicies Accountingprinciplesforentitieswiththeuniquepowersandresponsibilitiesof a nation’scentralbankhavenotbeenformulatedbyaccountingstandard-setting bodies.TheBoardof Governorshasdevelopedspecializedaccountingprinciples andpracticesthatitconsiderstobeappropriateforthenatureandfunctionof a centralbank.Theseaccountingprinciplesandpracticesaredocumentedinthe FinancialAccountingManualforFederalReserveBanks(FAM),whichisissuedby theBoardof Governors.TheReserveBanksarerequiredtoadoptandapply accountingpoliciesandpracticesthatareconsistentwiththeFAMandthecombinedfinancialstatementshavebeenpreparedinaccordancewiththeFAM. Limiteddifferencesexistbetweentheaccountingprinciplesandpracticesinthe FAMandaccountingprinciplesgenerallyacceptedintheUnitedStates(GAAP), duetotheuniquenatureof theReserveBanks’powersandresponsibilitiesaspart of thenation’scentralbankandgiventheSystem’suniqueresponsibilitytoconductmonetarypolicy.Theprimarydifferencesarethepresentationof allSOMA securitiesholdingsatamortizedcostandtherecordingof suchsecuritiesona settlement-datebasis.Thecostbasisof Treasurysecurities,GSEdebtsecurities, andforeigngovernmentdebtinstrumentsisadjustedforamortizationof premiumsoraccretionof discountsonastraight-linebasis,ratherthanusingtheinterestmethodrequiredbyGAAP.Amortizedcost,ratherthanthefairvaluepresentation,moreappropriatelyreflectstheReserveBanks’securitiesholdingsgiventhe System’suniqueresponsibilitytoconductmonetarypolicy.Accountingforthese securitiesonasettlement-datebasis,ratherthanthetrade-datebasisrequiredby GAAP,moreappropriatelyreflectsthetimingof thetransaction’seffectonthe quantityof reservesinthebankingsystem.Althoughtheapplicationof fairvalue measurementstothesecuritiesholdingsmayresultinvaluessubstantiallygreater orlessthantheircarryingvalues,theseunrealizedchangesinvaluehavenodirect effectonthequantityof reservesavailabletothebankingsystemorontheprospectsforfutureBankearningsorcapital.Boththedomesticandforeigncomponentsof theSOMAportfoliomayinvolvetransactionsthatresultingainsor losseswhenholdingsaresoldbeforematurity.Decisionsregardingsecuritiesand foreigncurrencytransactions,includingtheirpurchaseandsale,aremotivatedby monetarypolicyobjectivesratherthanprofit.Accordingly,fairvalues,earnings, andgainsorlossesresultingfromthesaleof suchsecuritiesandcurrenciesare incidentaltoopenmarketoperationsanddonotmotivatedecisionsrelatedto policyoropenmarketactivities. Inaddition,theReserveBanksdonotpresentaCombinedStatementof Cash FlowsasrequiredbyGAAPbecausetheliquidityandcashpositionof theReserve BanksarenotaprimaryconcerngiventheReserveBanks’uniquepowersand responsibilities.OtherinformationregardingtheReserveBanks’activitiesisprovidedin,ormaybederivedfrom,theCombinedStatementsof Condition,Income andComprehensiveIncome,andChangesinCapital.TherearenoothersignificantdifferencesbetweenthepoliciesoutlinedintheFAMandGAAP.

FederalReserveSystemAudits 357 PreparingthecombinedfinancialstatementsinconformitywiththeFAMrequires managementtomakecertainestimatesandassumptionsthataffectthereported amountsof assetsandliabilities,thedisclosureof contingentassetsandliabilities atthedateof thefinancialstatements,andthereportedamountsof incomeand expensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.Uniqueaccountsandsignificantaccountingpoliciesareexplainedbelow. a.Consolidation Thecombinedfinancialstatementsincludetheaccountsandresultsof operations of theReserveBanksaswellasseveralvariableinterestentities(VIEs),which includeML,MLII,MLIII,CPFF,andTALFLLC.Theconsolidationof the VIEswasassessedinaccordancewithFinancialAccountingStandardsBoard (FASB)AccountingStandardsCodification(ASC)Topic810(ASC810)Consolidation,whichrequiresavariableinterestentitytobeconsolidatedbyitscontrollingfinancialinterestholder.Intercompanybalancesandtransactionshavebeen eliminatedinconsolidation. AReserveBankconsolidatesaVIEif ithasacontrollingfinancialinterest,which isdefinedasthepowertodirectthesignificanteconomicactivitiesof theentity andtheobligationtoabsorblossesortherighttoreceivebenefitsof theentitythat couldpotentiallybesignificanttotheVIE.Todeterminewhetheritisthecontrollingfinancialinterestholderof aVIE,theReserveBankevaluatestheVIE’s design,capitalstructure,andrelationshipswiththevariableinterestholders.The ReserveBankreconsiderswhetherithasacontrollingfinancialinterestinaVIE, asrequiredbyASC810,ateachreportingdate. TheDodd-FrankActestablishedtheBureauasanindependentbureauwithinthe FederalReserveSystem,andsection1017of theDodd-FrankActprovidesthat thefinancialstatementsof theBureauarenottobeconsolidatedwiththoseof the Boardof GovernorsortheFederalReserveSystem.Section152of theDodd- FrankActestablishedtheOfficeof FinancialResearch(OFR)withintheTreasury. TheBoardof GovernorsfundstheBureauandOFRthroughassessmentsonthe ReserveBanksasrequiredbytheDodd-FrankAct.TheReserveBanksreviewed thelawandevaluatedthedesignof andtheirrelationshipstotheBureauandthe OFRanddeterminedthatneithershouldbeconsolidatedintheReserveBanks’ combinedfinancialstatements. b.GoldandSpecialDrawingRightsCertificates TheSecretaryof theTreasuryisauthorizedtoissuegoldandspecialdrawing rights(SDR)certificatestotheReserveBanks.Uponauthorization,theReserve Banksacquiregoldcertificatesbycreditingequivalentamountsindollarstothe accountestablishedfortheTreasury.ThegoldcertificatesheldbytheReserve BanksarerequiredtobebackedbythegoldownedbytheTreasury.TheTreasury mayreacquirethegoldcertificatesatanytimeandtheReserveBanksmustdeliver themtotheTreasury.Atsuchtime,theTreasury’saccountischarged,andthe ReserveBanks’goldcertificateaccountsarereduced.Thevalueof goldforpurposesof backingthegoldcertificatesissetbylawat$422∕ 9 perfinetroyounce. TheBoardof GovernorsallocatesthegoldcertificatesamongtheReserveBanks onceayearbasedontheaverageFederalReservenotesoutstandingateach ReserveBank. SDRcertificatesareissuedbytheInternationalMonetaryFund(IMF)toits membersinproportiontoeachmember’squotaintheIMFatthetimeof issu-

358 97thAnnualReport|2010 ance.SDRcertificatesserveasasupplementtointernationalmonetaryreserves andmaybetransferredfromonenationalmonetaryauthoritytoanother.Under thelawprovidingforU.S.participationintheSDRsystem,theSecretaryof the TreasuryisauthorizedtoissueSDRcertificatestotheReserveBanks.WhenSDR certificatesareissuedtotheReserveBanks,equivalentamountsinU.S.dollarsare creditedtotheaccountestablishedfortheTreasuryandtheReserveBanks’SDR certificateaccountsareincreased.TheReserveBanksarerequiredtopurchase SDRcertificates,atthedirectionof theTreasury,forthepurposeof financing SDRacquisitionsorforfinancingexchangestabilizationoperations.Atthetime SDRtransactionsoccur,theBoardof GovernorsallocatesSDRcertificatetransactionsamongtheReserveBanksbaseduponeachReserveBank’sFederal Reservenotesoutstandingattheendof theprecedingyear.SDRsarerecordedby theReserveBanksatoriginalcost.In2009,theTreasuryissued$3billioninSDR certificatestotheReserveBanks.TherewerenoSDRtransactionsin2010. c.Coin TheamountreportedascoinintheCombinedStatementsof Conditionrepresents thefacevalueof allUnitedStatescoinheldbytheReserveBanks.TheReserve BanksbuycoinatfacevaluefromtheU.S.Mintinordertofilldepositoryinstitutionorders. d.Loans Loanstodepositoryinstitutionsarereportedattheiroutstandingprincipalbalances,andinterestincomeisrecognizedonanaccrualbasis. TheFRBNYrecordstheTALFloansatfairvalueinaccordancewiththefair valueoptionprovisionsof FASBASCTopic825(ASC825)FinancialInstruments. Unrealizedgains(losses)onTALFloansthatarerecordedatfairvalueare reportedas“Non-interestincome(loss):TermAsset-BackedSecuritiesLoanFacility,unrealizedgains(losses)”intheCombinedStatementsof IncomeandComprehensiveIncome.TheinterestincomeonTALFloansisrecognizedbasedonthe contractedrateandisreportedasacomponentof “InterestIncome:TermAsset- BackedSecuritiesLoanFacility”intheCombinedStatementsof Incomeand ComprehensiveIncome.Administrativefeespaidbyborrowersattheinitiationof eachTALFloan,whicharerecognizedasincurredandnotdeferred,arereported asacomponentof “Non-interestincome(loss):Otherincome”intheCombined Statementsof IncomeandComprehensiveIncome. TheloantoAIGisreportedattheoutstandingprincipalbalancenetof unamortizedadministrativeandcommitmentfees,andinterestincomeisrecognizedonan accrualbasis.Loanadministrativeandcommitmentfeesaredeferredandamortizedonastraight-linebasis,ratherthanusingtheinterestmethodrequiredby GAAP,overthetermof theloanorcommitmentperiod.Thismethodresultsin aninterestamountthatapproximatestheamountdeterminedusingtheinterest method. Loans,otherthanthoserecordedatfairvalue,areimpairedwhencurrentinformationandeventsindicatethatitisprobablethattheReserveBankswillnotreceive theprincipalandinterestthatisdueinaccordancewiththecontractualtermsof theloanagreement.Impairedloansareevaluatedtodeterminewhetheranallowanceforloanlossisrequired.TheReserveBankshavedevelopedproceduresfor assessingtheadequacyof anyallowanceforloanlossesusingallavailableinformationtoidentifyincurredlosses.Thisassessmentincludesmonitoringinformation

FederalReserveSystemAudits 359 obtainedfrombankingsupervisors,borrowers,andothersourcestoassessthe creditconditionof theborrowersand,asappropriate,evaluatingcollateralvalues. Generally,theReserveBanksdiscontinuerecognizinginterestincomeonimpaired loansuntiltheborrower’srepaymentperformancedemonstratesprincipaland interestwouldbereceivedinaccordancewiththetermsof theloanagreement.If theReserveBanksdiscontinuerecordinginterestonanimpairedloan,cashpaymentsarefirstappliedtoprincipaluntiltheloanbalanceisreducedtozero;subsequentpaymentsareappliedasrecoveriesof amountspreviouslydeemeduncollectible,if any,andthenasinterestincome. Impairedloansincludeloansthathavebeenmodifiedindebtrestructurings involvingborrowersexperiencingfinancialdifficulties.Theallowanceforloan restructuringisdeterminedbydiscountingtherestructuredcashflowsusingthe originaleffectiveratefortheloan.Unlesstheborrowercandemonstratethatitcan meettherestructuredterms,theReserveBanksdiscontinuerecognizinginterest income.Performancepriortotherestructuring,orsignificanteventsthatcoincide withtherestructuring,areconsideredinassessingwhethertheborrowercanmeet thenewterms. e.SecuritiesPurchasedUnderAgreementstoResell,SecuritiesSoldUnder AgreementstoRepurchase,andSecuritiesLending TheFRBNYmayengageinpurchasesof securitieswithprimarydealersunder agreementstoresell(repurchasetransactions).Theserepurchasetransactionsare settledthroughatri-partyarrangement.Inatri-partyarrangement,twocommercialcustodialbanksmanagethecollateralclearing,settlement,pricing,andpledging,andprovidecashandsecuritiescustodialservicesforandonbehalf of the FRBNYandcounterparty.Thecollateralpledgedmustexceedtheprincipal amountof thetransactionbyamargindeterminedbytheFRBNYforeachclass andmaturityof acceptablecollateral.CollateraldesignatedbytheFRBNYas acceptableunderrepurchasetransactionsprimarilyincludesTreasurysecurities (includingTIPSandSTRIPTreasurysecurities);directobligationsof severalFederalagencyandGSE-relatedagencies,includingFannieMaeandFreddieMac; andpass-throughMBSof FannieMae,FreddieMac,andGinnieMae.Therepurchasetransactionsareaccountedforasfinancingtransactionswiththeassociated interestincomerecognizedoverthelifeof thetransaction.Repurchasetransactionsarereportedattheircontractualamountas“SystemOpenMarketAccount: Securitiespurchasedunderagreementstoresell,”andtherelatedaccruedinterest receivableisreportedasacomponentof “Accruedinterestreceivable”intheCombinedStatementsof Condition. TheFRBNYmayengageinsalesof securitiesunderagreementstorepurchase (reverserepurchasetransactions)withprimarydealersand,beginning August2010,withselectedmoneymarketfundsasanopenmarketoperation. Thesereverserepurchasetransactionsmaybeexecutedthroughatri-party arrangement,similartorepurchasetransactions.Reverserepurchasetransactions mayalsobeexecutedwithforeignofficialandinternationalaccountholdersas partof aserviceoffering.Reverserepurchaseagreementsarecollateralizedbya pledgeof anamountof Treasurysecurities,GSEdebtsecurities,andFederal agencyandGSEMBSthatareheldintheSOMA.Reverserepurchasetransactionsareaccountedforasfinancingtransactions,andtheassociatedinterest expenseisrecognizedoverthelifeof thetransaction.Thesetransactionsare reportedattheircontractualamountsas“SystemOpenMarketAccount:Securitiessoldunderagreementstorepurchase”andtherelatedaccruedinterestpayable

360 97thAnnualReport|2010 isreportedasacomponentof “Otherliabilities”intheCombinedStatementsof Condition. TreasurysecuritiesandGSEdebtsecuritiesheldintheSOMAmaybelenttoprimarydealerstofacilitatetheeffectivefunctioningof thedomesticsecuritiesmarkets.OvernightsecuritieslendingtransactionsarefullycollateralizedbyTreasury securitiesthathavefairvaluesinexcessof thesecuritieslent.TheFRBNYcharges theprimarydealerafeeforborrowingsecurities,andthesefeesarereportedasa componentof “Otherincome”intheCombinedStatementsof IncomeandComprehensiveIncome. Activityrelatedtosecuritiespurchasedunderagreementstoresell,securitiessold underagreementstorepurchase,andsecuritieslendingisallocatedtoeachof the ReserveBanksonapercentagebasisderivedfromanannualsettlementof the interdistrictsettlementaccountthatoccursinAprileachyear. f.TreasurySecurities;Government-SponsoredEnterpriseDebtSecurities; FederalAgencyandGovernment-SponsoredEnterpriseMortgage-Backed Securities;ForeignCurrencyDenominatedAssets;andWarehousing Agreements InterestincomeonTreasurysecurities,GSEdebtsecurities,andforeigncurrency denominatedassetscomprisingtheSOMAisaccruedonastraight-linebasis. InterestincomeonFederalagencyandGSEMBSisaccruedusingtheinterest methodandincludesamortizationof premiums,accretionof discounts,andgains orlossesassociatedwithprincipalpaydowns.Premiumsanddiscountsrelatedto FederalagencyandGSEMBSareamortizedoverthetermof thesecurityto statedmaturity,andtheamortizationof premiumsandaccretionof discountsare acceleratedwhenprincipalpaymentsarereceived.Paydowngainsandlossesrepresentthedifferencebetweentheprincipalamountpaidandtheamortizedcostbasis of therelatedsecurity.Gainsandlossesresultingfromsalesof securitiesaredeterminedbyspecificissuebasedonaveragecost.Treasurysecurities,GSEdebtsecurities,andFederalagencyandGSEMBSarereportednetof premiumsanddiscountsontheCombinedStatementsof Conditionandinterestincomeonthose securitiesisreportednetof theamortizationof premiumsandaccretionof discountsontheCombinedStatementsof IncomeandComprehensiveIncome. Inadditiontooutrightpurchasesof FederalagencyandGSEMBSthatareheld intheSOMA,theFRBNYenteredintodollarrolltransactions(dollarrolls), whichprimarilyinvolveaninitialtransactiontopurchaseorsell“tobe announced”(TBA)MBSfordeliveryinthecurrentmonthcombinedwithasimultaneousagreementtosellorpurchaseTBAMBSonaspecifiedfuturedate.The FRBNYalsoexecutedalimitednumberof TBAMBScouponswaptransactions, whichinvolveasimultaneoussaleof aTBAMBSandpurchaseof anotherTBA MBSof adifferentcouponrate.TheFRBNY’sparticipationinthedollarrolland couponswapmarketsfurtheredtheMBSpurchaseprogramgoalof providingsupporttothemortgageandhousingmarketsandfosteredimprovedconditionsin financialmarketsmoregenerally.TheFRBNYaccountedforoutstandingcommitmentsunderdollarrollandcouponswapsonasettlement-datebasis.Basedonthe termsof theFRBNYdollarrollandcouponswaptransactions,transfersof MBS uponsettlementof theinitialTBAMBStransactionsareaccountedforaspurchasesorsalesinaccordancewithFASBASCTopic860(ASC860),Transfersand Servicing,andtherelatedoutstandingcommitmentsareaccountedforassalesor purchasesuponsettlement.Netgains(losses)resultingfromdollarrollandcouponswaptransactionsarereportedas“Non-interestincome(loss):SystemOpen

FederalReserveSystemAudits 361 MarketAccount:Federalagencyandgovernment-sponsoredenterprisemortgagebackedsecuritiesgains(losses),net”intheCombinedStatementsof Incomeand ComprehensiveIncome. Foreigncurrencydenominatedassetsarerevalueddailyatcurrentforeigncurrency marketexchangeratesinordertoreporttheseassetsinU.S.dollars.Realizedand unrealizedgainsandlossesonforeigncurrencydenominatedassetsarereportedas “Foreigncurrencygains,net”intheCombinedStatementsof IncomeandComprehensiveIncome. ActivityrelatedtoTreasurysecurities,GSEdebtsecurities,andFederalagencyand GSEMBS,includingthepremiums,discounts,andrealizedgainsandlosses,is allocatedtoeachReserveBankonapercentagebasisderivedfromanannual settlementof theinterdistrictsettlementaccountthatoccursinAprilof eachyear. Activityrelatedtoforeigncurrencydenominatedassets,includingthepremiums, discounts,andrealizedandunrealizedgainsandlosses,isallocatedtoeachReserve Bankbasedontheratioof eachReserveBank’scapitalandsurplustoaggregate capitalandsurplusattheprecedingDecember31. WarehousingisanarrangementunderwhichtheFOMChasapprovedthe exchange,attherequestof theTreasury,of U.S.dollarsforforeigncurrenciesheld bytheTreasuryoveralimitedperiodof time.Thepurposeof thewarehousing facilityistosupplementtheU.S.dollarresourcesof theTreasuryforfinancing purchasesof foreigncurrenciesandrelatedinternationaloperations.Warehousing agreementsaredesignatedasheld-for-tradingpurposesandarevalueddailyatcurrentmarketexchangerates.Activityrelatedtotheseagreementsisallocatedto eachReserveBankbasedontheratioof eachReserveBank’scapitalandsurplus toaggregatecapitalandsurplusattheprecedingDecember31. TheFRBNYisauthorizedtoholdforeigncurrencyworkingbalancesandexecute foreignexchangecontractstofacilitateinternationalpaymentsandcurrencytransactionsitmakesonbehalf of foreigncentralbankandU.S.officialinstitutioncustomers.Theseforeigncurrencyworkingbalancesandcontractsarenotrelatedto theBank’smonetarypolicyoperations.Foreigncurrencyworkingbalancesare reportedasacomponentof “Otherassets”intheConsolidatedStatementsof Conditionandtherelatedforeigncurrencyvaluationgainsandlossesthatresult fromthedailyrevaluationof theforeigncurrencyworkingbalancesandcontracts arereportedasacomponentof “Non-interestincome(loss):Otherincome”inthe CombinedStatementsof IncomeandComprehensiveIncome. g.CentralBankLiquiditySwaps Centralbankliquidityswaps,whicharetransactedbetweentheFRBNYandaforeigncentralbank,canbestructuredaseitherU.S.dollarliquidityorforeigncurrencyliquidityswaparrangements. Centralbankliquidityswapsactivity,includingtherelatedincomeandexpense,is allocatedtoeachReserveBankbasedontheratioof eachReserveBank’scapital andsurplustoaggregatecapitalandsurplusattheprecedingDecember31.The foreigncurrencyamountsassociatedwiththesecentralbankliquidityswap arrangementsarerevaluedatcurrentforeigncurrencymarketexchangerates.

362 97thAnnualReport|2010 U.S.dollarliquidityswaps Attheinitiationof eachU.S.dollarliquidityswaptransaction,theforeigncentral banktransfersaspecifiedamountof itscurrencytoarestrictedaccountforthe FRBNYinexchangeforU.S.dollarsattheprevailingmarketexchangerate.Concurrentwiththistransaction,theFRBNYandtheforeigncentralbankagreetoa secondtransactionthatobligatestheforeigncentralbanktoreturntheU.S.dollars andtheFRBNYtoreturntheforeigncurrencyonaspecifiedfuturedateatthe sameexchangerateastheinitialtransaction.Theforeigncurrencyamountsthat theFRBNYacquiresarereportedas“Centralbankliquidityswaps”ontheCombinedStatementsof Condition.Becausetheswaptransactionwillbeunwoundat thesameU.S.dollaramountandexchangeratethatwereusedintheinitialtransaction,therecordedvalueof theforeigncurrencyamountsisnotaffectedby changesinthemarketexchangerate. TheforeigncentralbankcompensatestheFRBNYbasedontheforeigncurrency amountsitholdsfortheFRBNY.TheFRBNYrecognizescompensationduring thetermof theswaptransactionandreportsitas“Interestincome:Centralbank liquidityswaps”intheCombinedStatementsof IncomeandComprehensive Income. Foreigncurrencyliquidityswaps Thestructureof foreigncurrencyliquidityswaptransactionsinvolvesthetransfer bytheFRBNY,attheprevailingmarketexchangerate,of aspecifiedamountof U.S.dollarstoanaccountfortheforeigncentralbankinexchangeforitscurrency. Theforeigncurrencyamountreceivedwouldbereportedasaliabilitybythe ReserveBanks. h.InvestmentsHeldbyConsolidatedVariableInterestEntities TheinvestmentsheldbyconsolidatedVIEsincludeinvestmentsinFederalagency andGSEMBS,non-agencyRMBS,commercialandresidentialrealestatemortgageloans,CDOs,commercialpaper,otherinvestmentsecurities,otherrealestate owned,andderivativesandassociatedhedges.Investmentsarereportedas“Consolidatedvariableinterestentities:Investmentsheldbyconsolidatedvariableinterestentities”intheCombinedStatementsof Condition.Theseinvestmentsare accountedforandclassifiedasfollows: • CommercialpaperheldbytheCPFFwasdesignatedasheld-to-maturityunder FASBASCTopic320(ASC320)Investments–DebtandEquitySecuritiesaccordingtothetermsof theCPFFprogram.TheFRBNYhadthepositiveintentand theabilitytoholdthesecuritiestomaturity,and,therefore,thecommercial paperwasrecordedatamortizedcost.Theamortizationof premiumsandaccretionof discountswasrecordedonastraight-linebasis,whichwasnotmaterially differentfromtheinterestmethod.Allotherinvestments,consistingof shorttermhighlyliquidassets,heldbytheCPFFwereclassifiedastradingsecurities underASC320andwererecordedatfairvalue. • ML’sinvestmentsindebtsecuritiesareaccountedforinaccordancewithASC 320andMLelectedthefairvalueoptionforalleligibleassetsandliabilitiesin accordancewithASC825.Otherfinancialinstruments,includingswapcontracts andotherderivativesinstrumentsinML,arerecordedatfairvalueinaccordancewithFASBASCTopic815(ASC815)DerivativesandHedging.Otherreal estateownedmaybeacquiredbyMLasaresultof defaultontherelatedloan. Otherrealestateownedareconsideredheld-for-sale,andarerecordedinitiallyat fairvalue,lessestimatedsellingcosts,inaccordancewithFASBASCTopic360

FederalReserveSystemAudits 363 (ASC360)Property,Plant,andEquipment.Consistentwiththerequirementsof ASC360,theassetsarenotdepreciated,andareadjustedforsubsequent changesinfairvalueuptotheoriginalfairvaluebasis. • MLIIandMLIIIqualifyasnonregisteredinvestmentcompaniesundertheprovisionsof FASBASCTopic946(ASC946)FinancialServices–InvestmentCompaniesand,therefore,allinvestmentsarerecordedatfairvalueinaccordance withASC946. • TALFLLCfollowstheguidanceinASC320whenaccountingforanyacquired ABSinvestments,andhaselectedthefairvalueoptionforalleligibleassetsin accordancewithASC825. i.PreferredInterests TheFRBNYpresentsitspreferredinterestsinAIALLCandALICOLLCatcost consistentwithASC320.The5percentcumulativedividendsaccruedbythe FRBNYonthepreferredinterestsarereportedas“Dividendsonpreferredinterests”ontheCombinedStatementsof IncomeandComprehensiveIncome.Ona quarterlybasis,theaccrueddividendsarecapitalizedandincreasetherecorded costof theFRBNY’spreferredinterestsinAIALLCandALICOLLC.Apreferredinterestisimpairedif itsfairvaluefallsbelowitsrecordedvalueandthe declineisconsideredother-than-temporary.Another-than-temporaryimpairment occursif (1)theFRBNYhastheintenttoselltheinterest,(2)itismorelikelythan notthattheFRBNYwillberequiredtoselltheinterestbeforerecoveryof its recordedinvestment,or(3)theFRBNYdoesnotexpecttorecovertheentire amortizedcostbasisof theinterestevenif itdoesnotintendtosellthesecurity. Dividendsareaccruedunlesstheimpairmentanalysisindicatesthatthedividends willnotbecollected. j.BankPremises,Equipment,andSoftware Bankpremisesandequipmentarestatedatcostlessaccumulateddepreciation. Depreciationiscalculatedonastraight-linebasisovertheestimatedusefullivesof theassets,whichrangefrom2to50years.Majoralterations,renovations,and improvementsarecapitalizedatcostasadditionstotheassetaccountsandare depreciatedovertheremainingusefullifeof theassetor,if appropriate,overthe uniqueusefullifeof thealteration,renovation,orimprovement.Maintenance, repairs,andminorreplacementsarechargedtooperatingexpenseintheyear incurred. Costsincurredforsoftwareduringtheapplicationdevelopmentstage,whether developedinternallyoracquiredforinternaluse,arecapitalizedbasedonthepurchasecostandthecostof directservicesandmaterialsassociatedwithdesigning, coding,installing,andtestingthesoftware.Capitalizedsoftwarecostsareamortizedonastraight-linebasisovertheestimatedusefullivesof thesoftwareapplications,whichgenerallyrangefromtwotofiveyears.Maintenancecostsrelatedto softwarearechargedtoexpenseintheyearincurred. Capitalizedassets,includingsoftware,buildings,leaseholdimprovements,furniture,andequipment,areimpairedandanadjustmentisrecordedwheneventsor changesincircumstancesindicatethatthecarryingamountof assetsorasset groupsisnotrecoverableandsignificantlyexceedstheassets’fairvalue.

364 97thAnnualReport|2010 k.FederalReserveNotes FederalReservenotesarethecirculatingcurrencyof theUnitedStates.These notes,whichareidentifiedasissuedtoaspecificReserveBank,mustbefullycollateralized.Allof theReserveBanks’assetsareeligibletobepledgedascollateral. Thecollateralvalueisequaltothebookvalueof thecollateraltenderedwiththe exceptionof securities,forwhichthecollateralvalueisequaltotheparvalueof thesecuritiestendered.Theparvalueof securitiessoldunderagreementstorepurchaseisdeductedfromtheeligiblecollateralvalue. TheBoardof Governorsmay,atanytime,calluponaReserveBankforadditional securitytoadequatelycollateralizeoutstandingFederalReservenotes.Tosatisfy theobligationtoprovidesufficientcollateralforoutstandingFederalReserve notes,theReserveBankshaveenteredintoanagreementthatprovidesforcertain assetsof theReserveBankstobejointlypledgedascollateralfortheFederal ReservenotesissuedtoallReserveBanks.Intheeventthatthiscollateralisinsufficient,theFederalReserveActprovidesthatFederalReservenotesbecomeafirst andparamountlienonalltheassetsof theReserveBanks.Finally,FederalReserve notesareobligationsof theUnitedStatesgovernment. “FederalReservenotesoutstanding,net”intheCombinedStatementsof ConditionrepresentstheFederalReservenotesoutstanding,reducedbytheReserve Banks’currencyholdingsof $180billionand$193billionatDecember31,2010 and2009,respectively. AtDecember31,2010and2009,allFederalReservenotesissuedtotheReserve Bankswerefullycollateralized.AtDecember31,2010,allgoldcertificates,allspecialdrawingrightcertificates,and$925billionof domesticsecuritiesheldinthe SOMAwerepledgedascollateral.AtDecember31,2010,noinvestmentsdenominatedinforeigncurrencieswerepledgedascollateral. l.BeneficialInterestinConsolidatedVariableInterestEntities ML,MLII,andMLIIIhaveoutstandingseniorandsubordinatedfinancialinterests,inclusiveof afixeddeferredpurchasepriceinMLIIandanequitycontributioninMLIII,andTALFLLChasanoutstandingfinancialinterest.Uponissuanceof thefinancialinterests,ML,MLII,MLIII,andTALFLLCeachelected tomeasuretheseobligationsatfairvalueinaccordancewithASC825.Principal, interest,andchangesinfairvalueontheseniorfinancialinterest,whichwere extendedbytheFRBNY,areeliminatedinconsolidation.Thefinancialinterests arerecordedatfairvalueas“Beneficialinterestinconsolidatedvariableinterest entities”intheCombinedStatementsof Condition.Interestexpenseandchanges infairvalueof thefinancialinterestarerecordedin“Interestexpense:Beneficial interestinconsolidatedvariableinterestentities”and“Non-interestincome(loss): Beneficialinterestinconsolidatedvariableinterestentities(losses),net,”respectively,intheCombinedStatementsof IncomeandComprehensiveIncome. m.Deposits DepositoryInstitutions Depositoryinstitutionsdepositsrepresentthereserveandservice-relatedbalances intheaccountsthatdepositoryinstitutionsholdattheReserveBanks.Theinterest ratespaidonrequiredreservebalancesandexcessbalancesaredeterminedbythe Boardof Governors,basedonanFOMC-establishedtargetrangeforthefederal fundsrate.Interestpayableisreportedas“Interestpayabletodepositoryinstitutions”ontheCombinedStatementsof Condition.

FederalReserveSystemAudits 365 TheTermDepositFacility(TDF)consistsof depositswithspecificmaturitiesheld byeligibleinstitutionsattheReserveBanks.TheReserveBankspayintereston thesedepositsatinterestratesdeterminedbyauction.Interestpayableisreported as“Interestpayabletodepositoryinstitutions”ontheCombinedStatementsof Condition.TherewerenodepositsheldbytheReserveBanksundertheTDFat December31,2010. Treasury TheTreasurygeneralaccountistheprimaryoperationalaccountof theTreasury andisheldattheFRBNY. TheTreasury’stemporarysupplementaryfinancingprogramconsistsof aseriesof Treasurybillauctions,inadditiontoTreasury’sstandardborrowingprogram.The proceedsof thisdebtareheldinanaccountattheFRBNYthatisseparatefrom theTreasury’sgeneralaccount,andthisseparateaccountisreportedas“Treasury, supplementaryfinancingaccount”intheCombinedStatementsof Condition.The purposeof placingfundsinthisaccountistodrainreservesfromthebanking systemandpartiallyoffsetthereserveimpactof theReserveBanks’lendingand liquidityinitiatives. Other Otherdepositsincludeforeigncentralbankandforeigngovernmentdepositsheld attheFRBNY.OtherdepositsalsoincludeGSEdepositsheldbytheBank. n.FundsfromAmericanInternationalGroup,Inc.AssetDispositions,Heldas Agent Pendingtheclosingof theAIGrecapitalizationplandiscussedinNote3,thecash proceedsfromcertainAIGassetdispositionswereheldbytheFRBNYasagent. o.ItemsinProcessofCollectionandDeferredCreditItems “Itemsinprocessof collection”primarilyrepresentsamountsattributableto checksthathavebeendepositedforcollectionandthat,asof thebalancesheet date,havenotyetbeenpresentedtothepayingbank.“Deferredcredititems”are thecounterpartliabilitytoitemsinprocessof collection.Theamountsinthis accountarisefromdeferringcreditfordepositeditemsuntiltheamountsarecollected.Thebalancesinbothaccountscanvarysignificantly. p.CapitalPaid-in TheFederalReserveActrequiresthateachmemberbanksubscribetothecapital stockof theReserveBankinanamountequalto6percentof thecapitalandsurplusof thememberbank.Thesesharesarenonvotingwithaparvalueof $100and maynotbetransferredorhypothecated.Asamemberbank’scapitalandsurplus changes,itsholdingsof ReserveBankstockmustbeadjusted.Currently,onlyonehalf of thesubscriptionispaidinandtheremainderissubjecttocall.Amember bankisliableforReserveBankliabilitiesuptotwicetheparvalueof stocksubscribedbyit. Bylaw,eachReserveBankisrequiredtopayeachmemberbankanannualdividendof 6percentonthepaid-incapitalstock.Thiscumulativedividendispaid semiannually.TomeettheFederalReserveActrequirementthatannualdividends bedeductedfromnetearnings,dividendsarepresentedasadistributionof comprehensiveincomeintheCombinedStatementsof IncomeandComprehensive Income.

366 97thAnnualReport|2010 q.Surplus TheBoardof GovernorsrequirestheReserveBankstomaintainasurplusequal totheamountof capitalpaid-inasof December31of eachyear.Accumulated othercomprehensiveincomeisreportedasacomponentof “Surplus”intheCombinedStatementsof ConditionandtheCombinedStatementsof ChangesinCapital.Additionalinformationregardingtheclassificationsof accumulatedother comprehensiveincomeisprovidedinNotes13,14,and15. r.InterestonFederalReserveNotes TheBoardof GovernorsrequirestheReserveBankstotransferexcessearningsto theTreasuryasinterestonFederalReservenotesafterprovidingforthecostsof operations,paymentof dividends,andreservationof anamountnecessaryto equatesurpluswithcapitalpaid-in.Thisamountisreportedas“Paymentsto TreasuryasinterestonFederalReservenotes”intheCombinedStatementsof IncomeandComprehensiveIncome.TheamountduetotheTreasuryisreported as“AccruedinterestonFederalReservenotes”intheCombinedStatementsof Condition. If earningsduringtheyeararenotsufficienttoprovideforthecostsof operations, paymentof dividends,andequatingsurplusandcapitalpaid-in,paymentstothe Treasuryaresuspended.Adeferredassetisrecordedthatrepresentstheamountof netearningsaReserveBankwillneedtorealizebeforeremittancestoTreasury resume.Thisdeferredassetisperiodicallyreviewedforimpairment. Intheeventof adecreaseincapitalpaid-in,theexcesssurplus,afterequatingcapitalpaid-inandsurplusatDecember31,isdistributedtotheTreasuryinthefollowingyear. s.IncomeandCostsRelatedtoTreasuryServices WhendirectedbytheSecretaryof theTreasury,theReserveBanksarerequiredby theFederalReserveActtoserveasfiscalagentanddepositaryof theUnited StatesGovernment.Bystatute,theTreasuryhasappropriationstopayforthese services.DuringtheyearsendedDecember31,2010and2009,theReserveBanks werereimbursedforsubstantiallyallservicesprovidedtotheTreasuryasitsfiscal agent. t.Assessments TheBoardof GovernorsassessestheReserveBankstofunditsoperationsandthe operationsof theBureauand,foratwo-yearperiod,theOFR.Theseassessments areallocatedtoeachReserveBankbasedoneachReserveBank’scapitalandsurplusbalancesasof December31of theprioryearfortheBoardof Governor’s operationsandasof themostrecentquarterfortheBureauandOFRoperations. TheBoardof GovernorsalsoassesseseachReserveBankfortheexpenses incurredbytheTreasurytoproduceandretireFederalReservenotesbasedon eachReserveBank’sshareof thenumberof notescomprisingtheSystem’snet liabilityforFederalReservenotesonDecember31of theprioryear. DuringtheperiodpriortotheBureautransferdateof July21,2011,thereisno limitonthefundingthatcanbeprovidedtotheBureauandthatisassessedtothe ReserveBanks;theBoardof Governorsmustprovidetheamountestimatedbythe Secretaryof theTreasuryneededtocarryouttheauthoritiesgrantedtothe BureauundertheDodd-FrankActandotherfederallaw.Afterthetransferdate, theDodd-FrankActrequirestheBoardof GovernorstofundtheBureauinan

FederalReserveSystemAudits 367 amountnottoexceedafixedpercentageof thetotaloperatingexpensesof the FederalReserveSystemasreportedintheBoardof Governors’2009annual report.Thefixedpercentageof totaloperatingexpensesof theSystemis10%for 2011,11%for2012,and12%for2013.After2013,theamountwillbeadjustedin accordancewiththeprovisionsof theDodd-FrankAct. TheBoardof GovernorsassessestheReserveBankstofundtheoperationsof the OFRforthetwo-yearperiodfollowingenactmentof theDodd-FrankAct;thereafter,theOFRwillbefundedbyfeesassessedoncertainbankholdingcompanies. u.FairValue CertainassetsandliabilitiesreportedontheReserveBanks’CombinedStatements of ConditionaremeasuredatfairvalueinaccordancewithASC820,including TALFloans,investmentsandbeneficialinterestsof theconsolidatedVIE’s,and assetsof theRetirementPlanforEmployeesof theFederalReserveSystem.ASC 820definesfairvalueasthepricethatwouldbereceivedtosellanassetorpaidto transferaliabilityinanorderlytransactionbetweenmarketparticipantsatthe measurementdate.ASC820establishesathree-levelfairvaluehierarchythatdistinguishesbetweenassumptionsdevelopedusingmarketdataobtainedfromindependentsources(observableinputs)andtheReserveBank’sassumptionsdevelopedusingthebestinformationavailableinthecircumstances(unobservable inputs).ThethreelevelsestablishedbyASC820aredescribedasfollows: • Level1–Valuationisbasedonquotedpricesforidenticalinstrumentstradedin activemarkets. • Level2–Valuationisbasedonquotedpricesforsimilarinstrumentsinactive markets,quotedpricesforidenticalorsimilarinstrumentsinmarketsthatare notactive,andmodel-basedvaluationtechniquesforwhichallsignificant assumptionsareobservableinthemarket. • Level3–Valuationisbasedonmodel-basedtechniquesthatusesignificantinputs andassumptionsnotobservableinthemarket.Theseunobservableinputsand assumptionsreflecttheReserveBank’sestimatesof inputsandassumptionsthat marketparticipantswoulduseinpricingtheassetsandliabilities.Valuationtechniquesincludetheuseof optionpricingmodels,discountedcashflowmodels, andsimilartechniques. Theinputsormethodologyusedforvaluingassetsandliabilitiesarenotnecessarilyanindicationof theriskassociatedwiththoseassetsandliabilities. v.Taxes TheReserveBanksareexemptfromfederal,state,andlocaltaxes,exceptfortaxes onrealproperty.TheReserveBanks’realpropertytaxeswere$41millionand $37millionfortheyearsendedDecember31,2010and2009,respectively,andare reportedasacomponentof “Operatingexpenses:Occupancy”intheCombined Statementsof IncomeandComprehensiveIncome. w.RestructuringCharges TheReserveBanksrecognizerestructuringchargesforexitordisposalcosts incurredaspartof theclosureof businessactivitiesinaparticularlocation,the relocationof businessactivitiesfromonelocationtoanother,orafundamental reorganizationthataffectsthenatureof operations.Restructuringchargesmay includecostsassociatedwithemployeeseparations,contractterminations,and assetimpairments.ExpensesarerecognizedintheperiodinwhichtheReserve

368 97thAnnualReport|2010 Bankscommittoaformalizedrestructuringplanorexecutethespecificactions contemplatedintheplanandallcriteriaforfinancialstatementrecognitionhave beenmet. Note16describestheReserveBanks’restructuringinitiativesandprovidesinformationaboutthecostsandliabilitiesassociatedwithemployeeseparationsand contractterminations.Thecostsassociatedwiththeimpairmentof certain ReserveBanks’assetsarediscussedinNote11.Costsandliabilitiesassociated withenhancedpensionbenefitsinconnectionwiththerestructuringactivitiesfor allof theReserveBanksarerecordedonthebooksof theFRBNYanddiscussed inNote13.Costsandliabilitiesassociatedwithenhancedpostretirementbenefits arediscussedinNote14. x.RecentlyIssuedAccountingStandards InJune2009,theFASBissuedStatementof FinancialAccountingStandards (SFAS)166,AccountingforTransfersof FinancialAssets–AnAmendmenttoFASB StatementNo.140,(codifiedinASC860).Thenewstandardrevisesthecriteriafor recognizingtransfersof financialassetsassalesandclarifiesthatthetransferor mustconsiderallarrangementswhendeterminingif thetransferorhassurrendered control.Theadoptionof thisaccountingguidancewaseffectivefortheReserve BanksfortheyearbeginningonJanuary1,2010,anddidnothaveamaterialeffect ontheReserveBanks’combinedfinancialstatements. InJune2009,theFASBissuedSFASNo.167,AmendmentstoFASBInterpretation No.46(R),(codifiedinASC810),whichexpandsthescopeof Interpretation46R, Consolidationof VariableInterestEntitiesandchangestheapproachfordeterminingwhetheranentityhasacontrollinginterestinaVIEbymakingaqualitative assessmentof itsfinancialinterests.AdditionaldisclosuresarerequiredforavariableinterestinaVIE.Theadoptionof thisaccountingguidancewaseffectivefor theReserveBanksfortheyearbeginningonJanuary1,2010,andearlieradoption wasprohibited.Theadoptionof thisaccountingguidancedidnothaveamaterial effectontheReserveBanks’combinedfinancialstatements. InJanuary2010,theFASBissuedAccountingStandardsUpdate2010-06,Fair ValueMeasurementsandDisclosures(Topic820).Newrequirementsfordisclosure of informationabouttransfersamongthehierarchy’sclassificationandthelevelof disaggregationof classesof assetswereeffectivefortheReserveBanksfortheyear beginningonJanuary1,2010,andtherequireddisclosuresareincludedinNote5, Note9,andNote13.Otherrequirements,includingthegrosspresentationof purchases,sales,issuances,andsettlementsinthereconciliationforLevel3fairvalue measurementsareeffectivefortheReserveBanksin2011andarenotexpectedto haveamaterialeffectontheReserveBanks’combinedfinancialstatements. InMarch2010,theFASBissuedAccountingStandardsUpdate2010-11,DerivativesandHedging,(Topic815),whichclarifiesembeddedcreditderivativesthatare subjecttotheFASB’sguidanceonderivativesandhedginganddefinestheembeddedcreditderivativesthatarerequiredtobeevaluatedforbifurcationandseparate accounting.Theadoptionof thisaccountingguidancewaseffectiveforthe ReserveBanksonJuly1,2010anddidnothaveamaterialeffectontheReserve Banks’combinedfinancialstatements. InJuly2010,theFASBissuedAccountingStandardsUpdate2010-20,Receivables (Topic310),whichrequiresadditionaldisclosuresabouttheallowanceforcredit

FederalReserveSystemAudits 369 lossesandthecreditqualityof loanportfolios.Theadditionaldisclosuresincludea rollforwardof theallowanceforcreditlossesonadisaggregatedbasisandmore information,bytypeof receivable,oncreditqualityindicators,includingthe amountof certainpastduereceivablesandtroubleddebtrestructuringsandsignificantpurchasesandsales.Theadoptionof thisaccountingguidanceiseffective fortheReserveBanksonDecember31,2011,andisnotexpectedtohaveamaterialeffectontheReserveBanks’combinedfinancialstatements. (5)Loans Theremainingmaturitydistributionof loansoutstandingatDecember31,2010, andtotalloansoutstandingatDecember31,2009,wereasfollows(inmillions): 2010 2009 Over Within 16days 1year Total Total 15days to90days to5years Primary,secondary,andseasonalcredit $215 $6 $ - $ 221 $20,700 TAF - - - - $75,918 Loanstodepositoryinstitutions $215 $6 $ - $ 221 $96,618 TALFloans,fairvalue $ - $- $24,853 $24,853 $48,183 AIGloan,net $ - $- $20,603 $20,603 $21,250 LoanstoDepositoryInstitutions TheReserveBanksofferprimary,secondary,andseasonalcredittoeligibleborrowers,andeachprogramhasitsowninterestrate.Interestisaccruedusingthe applicableinterestrateestablishedatleastevery14daysbytheReserveBanks’ boardsof directors,subjecttoreviewanddeterminationbytheBoardof Governors.Primaryandsecondarycreditareextendedonashort-termbasis,typically overnight,whereasseasonalcreditmaybeextendedforaperiodof uptonine months. Primary,secondary,andseasonalcreditlendingiscollateralizedtothesatisfaction of eachReserveBanktoreducecreditrisk.Assetseligibletocollateralizethese loansincludeconsumer,business,andrealestateloans;Treasurysecurities;GSE debtsecurities;foreignsovereigndebt;municipal,corporate,andstateandlocal governmentobligations;asset-backedsecurities(ABS);corporatebonds;commercialpaper;andbank-issuedassets,suchascertificatesof deposit,banknotes,and depositnotes.Collateralisassignedalendingvaluethatisdeemedappropriateby eachReserveBank,whichistypicallyfairvaluereducedbyamargin. DepositoryinstitutionsthatareeligibletoborrowundertheReserveBanks’primarycreditprogramwereeligibletoparticipateintheTAFprogram.Underthe TAFprogram,theReserveBanksconductedauctionsforafixedamountof funds, withtheinterestratedeterminedbytheauctionprocess,subjecttoaminimumbid rate.TAFloanswereextendedonashort-termbasis,withtermsrangingfrom 28to84days.AlladvancesundertheTAFprogramwerecollateralizedtothesatisfactionof eachReserveBank.AllTAFloanprincipalandaccruedinterestwas fullyrepaid. Loanstodepositoryinstitutionsaremonitoreddailytoensurethatborrowerscontinuetomeeteligibilityrequirementsfortheseprograms.Thefinancialcondition of borrowersismonitoredbytheReserveBanksand,if aborrowernolonger qualifiesfortheseprograms,theReserveBankswillgenerallyrequestfullrepay-

370 97thAnnualReport|2010 mentof theoutstandingloanor,forprimaryorseasonalcreditlending,mayconverttheloantoasecondarycreditloan. Collaterallevelsarerevieweddailyagainstoutstandingobligationsandborrowers thatnolongerhavesufficientcollateraltosupportoutstandingloansarerequired toprovideadditionalcollateralortomakepartialorfullrepayment. AtDecember31,2010and2009,theReserveBanksdidnothaveanyimpaired loansandnoallowancesforloanlosseswererequired.Therewerenoimpaired loansduringtheyearsendedDecember31,2010and2009. TALF TALFloansarenon-recourseloanssecuredbyeligiblecollateral.EachTALFloan hasathree-yearmaturity,exceptloanssecuredbySBAPoolCertificates,loans securedbySBADevelopmentCompanyParticipationCertificates,orABSbacked bystudentloansorcommercialmortgageloans,whichhaveafive-yearmaturityif theborrowersoelects. TheFRBNYhaselectedthefairvalueoptionforallTALFloansinaccordance withASC825.RecordingallTALFloansatfairvalue,ratherthanattheremainingprincipalamountoutstanding,improvesaccountingconsistencyandprovides themostappropriatepresentationonthefinancialstatementsbymatchingthe changeinfairvalueof TALFloans,therelatedputagreementwithTALFLLC, andthevaluationof thebeneficialinterestsinTALFLLC.Informationregarding theTALFLLC’sassetsandliabilitiesispresentedinNote9. Incertaincaseswherethereislimitedactivityaroundinputstothevaluation,loans areclassifiedwithinLevel3of thevaluationhierarchy.Becauseexternalprice informationwasnotavailable,market-basedmodelswereusedtodeterminethe fairvalueof theTALFloans.Thefairvalueof theTALFloanswasdeterminedby valuingthefuturecashflowsfromloaninterestincomeandtheestimatedfair valuelossesassociatedwithcollateralthatmaybeputtotheFRBNY.Thevaluationmodeltakesintoaccountarangeof outcomesonTALFloanrepayments, marketpricesof thecollateral,riskpremiumsestimatedusingmarketprices,and thevolatilitiesof marketriskfactors.Othermethodologiesemployedorassumptionsmadeindeterminingfairvaluecouldresultinanamountthatdifferssignificantlyfromtheamountreported. ThefollowingtablepresentstheTALFloansatfairvalueasof December31by ASC820hierarchy(inmillions): 2010 2009 Level3 $24,853 $48,183 Totalfairvalue $24,853 $48,183

FederalReserveSystemAudits 371 Thefollowingtablepresentsareconciliationof TALFloansmeasuredatfairvalue usingsignificantunobservableinputs(Level3)duringtheyear-endedDecember31,2010andfortheperiodFebruary4,2009,toDecember31,2009,(in millions): TALFLoans FairvalueatFebruary4,2009 $ - Netloansoriginated 61,626 Loanrepaymentsandprepayments (14,000) Totalrealizedandunrealizedgains(losses) 557 FairvalueatDecember31,2009 $48,183 Netloansoriginated 9,484 Loanrepaymentsandprepayments (32,378) Totalrealizedandunrealizedgains(losses) (436) FairvalueatDecember31,2010 $24,853 Thefairvalueof TALFloansreportedintheCombinedStatementsof Condition asof December31,2010and2009includes$121millionand$557millioninunrealizedgains,respectively.FRBNYattributessubstantiallyallchangesinfairvalue of non-recourseloanstochangesininstrument-specificcreditspreads. EligiblecollateralincludesU.S.dollar-denominatedABSthatarebackedbyauto loans,studentloans,creditcardloans,equipmentloans,floorplanloans,insurance premiumfinancialloans,loansguaranteedbytheSBA,residentialmortgageservicingadvances,orcommercialmortgageloans.Tobeconsideredeligible,collateralmusthaveacreditratinginthehighestinvestment-graderatingcategoryfrom atleasttwoeligiblenationally-recognizedstatisticalratingorganizations (NRSROs)andmustnothaveacreditratingbelowtheinvestment-graderating categoryfromaneligibleNRSRO.Inadditiontotheaforementionedeligibility requirements,collateralalsomustmeetothercriteriaasstipulatedintheTALF program’stermsandconditions.Thefollowingtablepresentsthecollateralconcentrationandmaturitydistributionfortheremainingunpaidprincipaland accruedinterestasof December31,2010(inmillions): Yearstomaturity Collateraltypeandcreditrating1 1-3 4-5 Total StudentLoan $ 2,427 $4,556 $ 6,983 CreditCard 6,918 - 6,918 CMBS 2,504 1,725 4,229 Floorplan 2,489 - 2,489 Auto 1,673 - 1,673 SBAs 424 228 652 Other2 1,788 - 1,788 Total $18,223 $6,509 $24,732 1 AllcreditratingsareAAA. 2 Includesequipmentloans,insurancepremiumfinancialloans,andresidentialmortgageservicingadvances. TheaggregateremainingprincipalamountoutstandingonTALFloansasof December31,2010and2009,was$24,703millionand$47,574million, respectively. AtDecember31,2010and2009,noTALFloanswereover90dayspastdueorin nonaccrualstatus.

372 97thAnnualReport|2010 EarningsreportedbytheFRBNYrelatedtotheTALFincludeincomeandunrealizedgainsandlossesonTALFloansaswellastheFRBNY’sallocatedshareof theTALFLLC’snetincome.Additionalinformationregardingtheincomeof the TALFLLCispresentedinNote9.Thefollowingtablepresentsthecomponentsof TALFearningsrecordedbytheFRBNYfortheyearsendedDecember31(in millions): 2010 2009 Interestincome $750 $ 414 Administrativefeeincome 13 54 Unrealizedgains(losses) (436) 557 TotalincomeonTALFloans $327 $1,025 AllocatedshareofTALFLLC 71 (702) EarningsofTALF $398 $ 323 AIGloan,net Thefollowingtablepresentsthecomponentsof theAIGloanatDecember31(in millions): Loancomponents 2010 2009 Lineofcreditdrawn $14,621 $17,900 Capitalizedinterest 4,663 3,835 Capitalizedcommitmentfees 1,700 1,700 AIGloan,gross $20,984 $23,435 Unamortizeddeferredcommitmentfees (335) (697) Allowanceforloanrestructuring,net (46) (1,488) AIGloan,net $20,603 $21,250 Thefairvalueof theAIGrevolvinglineof creditprovidedbytheFRBNY,based onestimatedandactualdrawsandrepayments,wasnotmateriallydifferentfrom thenetamountreportedintheCombinedStatementsof Conditionasof December31,2010and2009. TheactivityrelatedtotheallowanceforAIGloanrestructuringfortheyearsendedDecember31wasasfollows(inmillions): 2010 2009 AllowanceforloanrestructuringJanuary1 $(1,488) $ - Provisionforloanrestructuring - (2,621) Adjustmentstotheallowance 1,442 1,133 AllowanceforloanrestructuringDecember31 $ (46) $(1,488) Theallowanceforloanrestructuringrepresentedtheeconomiceffectof thereductionof theinterestrateonloanstheFRBNYmadetoAIGpriortoApril17,2009 aspartof theloanrestructuringthatoccurredonthatdate.Therestructuring chargeswererecoveredovertheremainingtermof therelatedloanasadjustments totheallowance,whichresultedfromperiodicevaluationsandarereportedasa componentof “Interestincome:AmericanInternationalGroup,Inc.,net”onthe CombinedStatementsof IncomeandComprehensiveIncome.Theaveragebalanceof theloanstoAIGundertherevolvinglineof credit,netof theallowance forrestructuring,duringtheyearendedDecember31,2010and2009,was $22,874millionand$39,099million,respectively.

FederalReserveSystemAudits 373 Asaresultof theclosingof theAIGrecapitalizationplanonJanuary14,2011,all outstandingdrawsundertherevolvinglineof creditandtherelatedaccruedinterest,capitalizedinterestandcapitalizedcommitmentfeeswerepaidinfull.The remainingamountof theunamortizeddeferredcommitmentfeesandtheallowanceforloanrestructuringasof theclosingof therecapitalizationwerefullyrecognizedatthatdate. (6)TreasurySecurities;Government-SponsoredEnterpriseDebt Securities;FederalAgencyandGovernment-SponsoredEnterprise Mortgage-BackedSecurities;SecuritiesPurchasedUnderAgreements toResellSecuritiesSoldUnderAgreementstoRepurchase;and SecuritiesLending TheFRBNY,onbehalf of theReserveBanks,holdssecuritiesboughtoutrightin theSOMA. Thetotalof theTreasurysecurities,GSEdebtsecurities,andFederalagencyand GSEMBS,netexcludingaccruedinterest,heldintheSOMAatDecember31was asfollows(inmillions): 2010 Total Unamortized Unaccreted Par amortized Fairvalue premiums discounts cost Bills $ 18,423 $ - $ (1) $ 18,422 $ 18,422 Notes 773,284 14,056 (765) 786,575 804,703 Bonds 229,786 32,739 (570) 261,955 289,757 TotalTreasurysecurities $1,021,493 $46,795 $(1,336) $1,066,952 $1,112,882 GSEdebtsecurities $ 147,460 $ 5,532 $ (20) $ 152,972 $ 156,780 FederalagencyandGSEMBS $ 992,141 $14,106 $(1,552) $1,004,695 $1,026,003 2009 Total Unamortized Unaccreted Par amortized Fairvalue premiums discounts cost Bills $ 18,423 $ - $ - $ 18,423 $ 18,422 Notes 568,323 6,544 (991) 573,876 583,040 Bonds 189,843 24,460 (630) 213,673 230,717 TotalTreasurysecurities $776,589 $31,004 $(1,621) $805,972 $832,179 GSEdebtsecurities $159,879 $ 7,509 $ (26) $167,362 $167,444 FederalagencyandGSEMBS $908,371 $12,110 $(1,554) $918,927 $914,290 Thefairvalueamountsintheabovetablesarepresentedsolelyforinformational purposes.Althoughthefairvalueof securityholdingscanbesubstantiallygreater thanorlessthantherecordedvalueatanypointintime,theseunrealizedgainsor losseshavenoeffectontheabilityof theReserveBanks,asthecentralbank,to meettheirfinancialobligationsandresponsibilities.Thefairvalueof Federal agencyandGSEMBSwasdeterminedusingamodel-basedapproachthatconsidersobservableinputsforsimilarsecurities;fairvalueforallotherSOMAsecurity holdingswasdeterminedbyreferencetoquotedpricesforidenticalsecurities. Thefairvalueof thefixed-rateTreasurysecurities,GSEdebtsecurities,andFederalagencyandGSEMBSintheSOMA’sholdingsissubjecttomarketrisk,arisingfrommovementsinmarketvariables,suchasinterestratesandsecurities prices.Thefairvalueof FederalagencyandGSEMBSisalsoaffectedbytherate of prepaymentsof mortgageloansunderlyingthesecurities.

374 97thAnnualReport|2010 Thefollowingtableprovidesadditionalinformationontheamortizedcostandfair valuesof theFederalagencyandGSEMBSportfolioatDecember31(in millions): 2010 2009 Distribution ofMBSholdings bycouponrate Amortized Fairvalue Amortized Fairvalue cost cost SOMA: 3.5% $ 341 $ 352 $ 363 $ 365 4.0% 167,675 168,403 170,119 165,740 4.5% 497,672 508,798 434,352 431,646 5.0% 231,420 237,545 195,418 196,411 5.5% 93,119 95,873 103,379 104,583 6.0% 12,910 13,376 12,710 12,901 6.5% 1,558 1,656 2,586 2,644 Total $1,004,695 $1,026,003 $918,927 $914,290 Financialinformationrelatedtosecuritiespurchasedunderagreementstoresell andsecuritiessoldunderagreementstorepurchasefortheyearsendedDecember31wasasfollows(inmillions): Securitiespurchasedunder Securitiessoldunder agreementstoresell agreementstorepurchase 2010 2009 2010 2009 Contractamountoutstanding,endofyear $- $ - $59,703 $77,732 Averagedailyamountoutstanding,duringtheyear - 3,616 58,476 67,837 Maximumbalanceoutstanding,duringtheyear - 80,000 77,732 89,525 Securitiespledged(parvalue),endofyear - - 43,642 77,860 Thecontractamountsforsecuritiespurchasedunderagreementstoreselland securitiessoldunderagreementstorepurchaseapproximatefairvalue.The FRBNYexecutestransactionsforthepurchaseof securitiesunderagreementsto resellprimarilytotemporarilyaddreservebalancestothebankingsystem.Conversely,transactionstosellsecuritiesunderagreementstorepurchaseareexecuted primarilytotemporarilydrainreservebalancesfromthebankingsystem. Theremainingmaturitydistributionof Treasurysecurities,GSEdebtsecurities, FederalagencyandGSEMBSboughtoutright,andsecuritiessoldunderagreementstorepurchaseatDecember31,2010wasasfollows(inmillions): Over Over Within 16days 91days Over 1year 5years Total 15days to90days to1year 10years to5years to10years Treasurysecurities (parvalue) $ 9,802 $24,816 $54,254 $439,594 $333,955 $159,072 $1,021,493 GSEdebtsecurities (parvalue) 1,129 13,836 28,501 71,050 30,597 2,347 $ 147,460 FederalagencyandGSE MBS(parvalue) - - - 24 20 992,097 $ 992,141 Securitiessoldunder agreementstorepurchase (contractamount) 59,703 - - - - - $ 59,703 FederalagencyandGSEMBSarereportedatstatedmaturityinthetableabove. Theestimatedweightedaveragelifeof thesesecuritiesatDecember31,2010, whichdiffersfromthestatedmaturityprimarilybecauseitfactorsinprepayment assumptions,isapproximately4.2years.

FederalReserveSystemAudits 375 Theparvalueof TreasurysecuritiesandGSEdebtsecuritiesthatwereloaned fromtheSOMAatDecember31wasasfollows(inmillions): SOMA 2010 2009 Treasurysecurities $22,081 $20,502 GSEdebtsecurities 1,610 1,108 Otherinvestmentsconsistof cashandshort-terminvestmentsrelatedtotheFederalagencyandGSEMBSportfolio.Otherliabilities,whicharerelatedtopurchasesof FederalagencyandGSEMBS,arisefromthefailureof asellertodeliver securitiestotheFRBNYonthesettlementdate.AlthoughtheReserveBankshave ownershipof andrecordstheirinvestmentsintheMBSasof thecontractual settlementdate,theyarenotobligatedtomakepaymentuntilthesecuritiesare delivered,andtheamountreportedasotherliabilitiesrepresentstheReserve Banks’obligationtopayforthesecuritieswhendelivered.Theamountof other investmentsandotherliabilitiesheldintheSOMAatDecember31wasasfollows (inmillions): 2010 2009 Otherinvestments - $ 5 Otherliabilities - 601 TheFRBNYentersintocommitmentstobuyTreasuryandGSEdebtsecurities andrecordstherelatedsecuritiesonasettlement-datebasis.TherewerenocommitmentstobuyTreasuryandGSEdebtsecuritiesasof December31,2010. TheFRBNYentersintocommitmentstobuyFederalagencyandGSEMBSand recordstherelatedMBSonasettlement-datebasis.Therewerenocommitments tobuyorsellFederalagencyorGSEMBSasof December31,2010. DuringtheyearsendedDecember31,2010and2009,theReserveBanksrecorded netgainsfromdollarrollandcouponswaprelatedtransactionsof $782million and$879million,respectively.Thesenetgainsarereportedas“Non-interest income(loss):Federalagencyandgovernment-sponsoredenterprisemortgagebackedsecuritiesgains,net”intheCombinedStatementsof IncomeandComprehensiveIncome. (7)ForeignCurrencyDenominatedAssets TheFRBNYholdsforeigncurrencydepositswithforeigncentralbanksandthe BankforInternationalSettlementsandinvestsinforeigngovernmentdebtinstruments.Theseforeigngovernmentdebtinstrumentsareguaranteedastoprincipal andinterestbytheissuingforeigngovernments.Inaddition,theFRBNYenters intotransactionstopurchaseEuro-denominatedgovernmentdebtsecuritiesunder agreementstoresellforwhichtheacceptedcollateralisthedebtinstrumentsissued bythegovernmentsof Belgium,France,Germany,Italy,theNetherlands,and Spain.

376 97thAnnualReport|2010 TheReserveBank’sforeigncurrencydenominatedassets,includingaccruedinterest,valuedatamortizedcostandforeigncurrencymarketexchangeratesat December31wasasfollows(inmillions): 2010 2009 Euro: Foreigncurrencydeposits $ 7,057 $ 7,396 Securitiespurchasedunderagreementstoresell 2,467 2,591 Governmentdebtinstruments 4,603 4,936 Japaneseyen: Foreigncurrencydeposits 3,883 3,403 Governmentdebtinstruments 8,039 6,946 Total $26,049 $25,272 AtDecember31,2010and2009,thefairvalueof foreigncurrencydenominated assets,includingaccruedinterest,was$26,213millionand$25,480million,respectively.Thefairvalueof governmentdebtinstrumentswasdeterminedbyreference toquotedpricesforidenticalsecurities.Thecostbasisof foreigncurrencydeposits andsecuritiespurchasedunderagreementstoresell,adjustedforaccruedinterest, approximatesfairvalue.SimilartotheTreasurysecurities,GSEdebtsecurities, andFederalagencyandGSEMBSdiscussedinNote6,unrealizedgainsorlosses havenoeffectontheabilityof theReserveBanks,asthecentralbank,tomeet theirfinancialobligationsandresponsibilities.Thefairvalueispresentedsolelyfor informationalpurposes. Theremainingmaturitydistributionof foreigncurrencydenominatedassetsat December31,2010,wasasfollows(inmillions): Within 16days 91days Over1year Total 15days to90days to1year to5years Euro $5,422 $3,000 $2,023 $3,682 $14,127 Japaneseyen 4,102 560 2,437 4,823 11,922 Total $9,524 $3,560 $4,460 $8,505 $26,049 AtDecember31,2010and2009,theauthorizedwarehousingfacilitywas$5billion,withnobalanceoutstanding. TherewerenotransactionsrelatedtotheauthorizedreciprocalcurrencyarrangementswiththeBankof CanadaandtheBankof Mexicoduringtheyearsended December31,2010and2009. Therewerenoforeignexchangecontractsrelatedtoopenmarketoperationsoutstandingasof December31,2010. TheFRBNYentersintocommitmentstobuyforeigngovernmentdebtinstrumentsandrecordstherelatedsecuritiesonasettlement-datebasis.Asof December31,2010,therewereoutstandingcommitmentstopurchaseEuro-denominated governmentdebtinstrumentsof $209million.ThesesecuritiessettledonJanuary4,2011,andreplacedEuro-denominatedgovernmentdebtinstrumentsheldin theSOMAthatmaturedonthatdate. Inconnectionwithitsforeigncurrencyactivities,theFRBNYmayenterinto transactionsthataresubjecttovaryingdegreesof off-balance-sheetmarketrisk andcounterpartycreditriskthatresultfromtheirfuturesettlement.TheFRBNY

FederalReserveSystemAudits 377 controlstheserisksbyobtainingcreditapprovals,establishingtransactionlimits, receivingcollateralinsomecases,andperformingdailymonitoringprocedures. Foreigncurrencyworkingbalancesheldandforeignexchangecontractsexecuted bytheFRBNYtofacilitateinternationalpaymentsandcurrencytransactionsit makesonbehalf of foreigncentralbanksandU.S.officialinstitutioncustomers werenotmaterialasof December31,2010and2009. (8)CentralBankLiquiditySwaps U.S.DollarLiquiditySwaps ThetotalforeigncurrencyheldunderU.S.dollarliquidityswapsintheSOMAat December31,2010and2009,was$75millionand$10,272million,respectively. Allof theU.S.dollarliquidityswapsoutstandingatDecember31,2010were transactedwiththeEuropeanCentralBankandhadremainingmaturitydistributionsof lessthan15days. ForeignCurrencyLiquiditySwaps Therewerenotransactionsrelatedtotheforeigncurrencyliquidityswapsduring theyearsendedDecember31,2010and2009. (9)InvestmentsHeldByConsolidatedVariableInterestEntities a.SummaryInformationforConsolidatedVariableInterestEntities Thetotalassetsof consolidatedVIEs,includingcash,cashequivalents,and accruedinterest,atDecember31wereasfollows(inmillions): 2010 2009 ML $27,961 $28,140 MLII 16,457 15,912 MLIII 23,583 22,797 TALFLLC 665 298 CPFF - 14,233 Total $68,666 $81,380 TheFRBNY’smaximumexposuretolossatDecember31,2010and2009was $55,434millionand$73,879million,respectively.Theseestimatesincorporate potentiallossesassociatedwithassetsrecordedontheFRBNY’sConsolidated Statementsof Condition,netof thefairvalueof subordinatedinterests(beneficial interestinconsolidatedVIEs).

378 97thAnnualReport|2010 Theclassificationof significantassetsandliabilitiesof theconsolidatedVIEsat December31wasasfollows(inmillions): 2010 2009 Assets: CDOs $23,112 $22,650 Non-agencyRMBS 18,360 17,552 FederalagencyandGSEMBS 16,842 18,149 Commercialmortgageloans 5,130 4,025 Swapcontracts 851 1,127 Residentialmortgageloans 603 583 Commercialpaper - 9,421 Otherinvestments 587 5,467 Subtotal $65,485 $78,974 Cash,cashequivalents,andaccrued interestreceivable 3,181 2,406 Totalinvestmentsheldby consolidatedVIEs $68,666 $81,380 Liabilities: BeneficialinterestinconsolidatedVIEs $10,051 $ 5,095 Otherliabilities1 $ 921 $ 1,316 1 Theamountreportedas“Consolidatedvariableinterestentities:Otherliabilities”intheCombinedStatementsofCondition includes$695millionand$980millionrelatedtocashcollateralreceivedonswapcontractsatDecember31,2010and2009, respectively.Theamountalsoincludesaccruedinterest,unearnedregistrationfees,andaccruedotherexpenses. Totalrealizedandunrealizedgains(losses)fortheyear-endedDecember31,2010, wereasfollows(inmillions): Totalportfolio Fairvalue Totalportfolio holdingsrealized changesunrealized holdingsrealized/ gains(losses) gains(losses) unrealizedgains(losses) CDOs $ 52 $3,201 $3,253 Non-agencyRMBS 108 3,082 3,190 FederalagencyandGSEMBS 291 320 611 Commercialmortgageloans1 (879) 2,319 1,440 Residentialmortgageloans1 (86) 197 111 Swapcontracts (150) (255) (405) Otherinvestments 53 103 156 Otherassets (203) 27 (176) Total $(814) $8,994 $8,180 1 Substantiallyallunrealizedgains(losses)onthecommercialandresidentialmortgageloansareattributabletochangesin instrument-specificcreditrisk.

FederalReserveSystemAudits 379 Totalrealizedandunrealizedgains(losses)fortheyear-endedDecember31,2009, wereasfollows(inmillions): Totalportfolio Fairvalue Totalportfolio holdingsrealized changesunrealized holdingsrealized/ gains(losses) gains(losses) unrealizedgains(losses) CDOs $ (3) $(1,211) $(1,214) Non-agencyRMBS 217 (991) (774) FederalagencyandGSEMBS 322 521 843 Commercialmortgageloans1 (47) (1,177) (1,224) Residentialmortgageloans1 (48) (219) (267) Swapcontracts (119) 212 93 Otherinvestments 12 712 724 Otherassets (182) 64 (118) Total $152 $(2,089) $(1,937) 1 Substantiallyallunrealizedgains(losses)onthecommercialandresidentialmortgageloansareattributabletochangesin instrument-specificcreditrisk. Thenetincome(loss)attributabletoML,MLII,MLIII,CPFF,andTALFLLC fortheyear-endedDecember31,2010wasasfollows(inmillions): ML MLII MLIII CPFF TALFLLC Total Interestincome: Portfoliointerestincome $1,133 $ 794 $2,299 $213 $ 1 $4,440 Less:Interestexpense 66 34 173 - 4 277 Netinterestincome 1,067 760 2,126 213 (3) 4,163 Non-interestincome: Portfolioholdingsgains 2,571 2,467 3,141 1 - 8,180 Less:Unrealizedgains(losses)on beneficialinterestinconsolidated VIEs (1,135) (1,353) (2,266) - 751 (4,679) Netnon-interestincome 1,436 1,114 875 1 75 3,501 Totalnetinterestincomeandnon-interest income 2,503 1,874 3,001 214 72 7,664 Less:Professionalfees 69 10 22 2 1 104 Netincomeattributableto consolidatedVIEs $2,434 $1,864 $2,979 $212 $712 $7,560 1 TheTALFLLC’sunrealizedlossonbeneficialinterestrepresentsTreasury’sfinancialinterestinthenetincomeofTALFLLCfor theyearendedDecember31,2010. 2 AdditionalinformationregardingTALF-relatedincomerecordedbytheFRBNYispresentedinNote5.

380 97thAnnualReport|2010 Thenetincome(loss)attributabletoML,MLII,MLIII,andCPFFfortheyearendedDecember31,2009andforTALFLLCfromtheinceptiondateof February4,2009toDecember31,2009wasasfollows(inmillions): ML MLII MLIII CPFF TALFLLC 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: Portfolioholdings(losses)gains (102) (604) (1,239) 8 - (1,937) Less:Unrealizedgains(losses)on beneficialinterestinconsolidated VIEs 61 34 (1,299) - (699)1 (1,903) Netnon-interest(loss)income (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 TheTALFLLC’sunrealizedlossonbeneficialinterestrepresentsTreasury’sfinancialinterestinthenetincomeofTALFLLCfor theyearendedDecember31,2009. 2 AdditionalinformationregardingTALF-relatedincomerecordedbytheFRBNYispresentedinNote5. Followingisasummaryof theconsolidatedVIEs’subordinatedfinancialinterest fortheyearsendedDecember31,2010and2009(inmillions): MLII ML MLIII TALF deferred subordinated equity financial Total purchase loan contribution interest price Fairvalue,January31,2009 $ - $ - $2,824 $ - $ 2,824 Interestaccruedandcapitalized 61 34 171 2 268 Treasuryloan - - - 100 100 Unrealizedgain/(loss) (61) (34) 1,299 699 1,903 Fairvalue,December31,2009 $ - $ - $4,294 $801 $ 5,095 Interestaccruedandcapitalized 66 34 173 4 277 Unrealized(gain)/loss 1,135 1,353 2,266 (75) 4,679 Fairvalue,atDecember31,2010 $1,201 $1,387 $6,733 $730 $10,051 b.CommercialPaperFundingFacilityLLC TheCPFFProgramchargedalendingrateforunsecuredcommercialpaperequal toathree-monthovernightindexedswap(OIS)rateplus100basispointsper annum,withanadditionalsurchargeof 100basispointsperannumasanunsecuredcreditenhancementfee.TherateimposedforABCPwasthethree-month OISrateplus300basispoints.Thecreditenhancementandregistrationfeeswere amortizedonastraight-linebasisoverthetermof thecommercialpaper. c.MaidenLaneLLC ML’sinvestmentportfolioconsistsprimarilyof FederalagencyandGSEMBS, non-agencyRMBS,commercialandresidentialmortgageloans,andderivatives andassociatedhedges.Followingisadescriptionof thesignificantholdingsat December31,2010andtheassociatedcreditriskforeachholding: i.DebtSecurities FederalagencyandGSEMBSrepresentfractionalownershipinterestsinMBS guaranteedbyFederalagenciesandGSEs.Therateof delinquenciesanddefaults

FederalReserveSystemAudits 381 ontheunderlyingresidentialmortgageloansandtheaggregateamountof the resultinglosseswillbeaffectedbyanumberof factors,includinggeneraleconomic conditions,particularlythoseintheareawheretherelatedmortgagedpropertyis located;thelevelof theborrower’sequityinthemortgagedproperty;andtheindividualfinancialcircumstancesof theborrower.Changesineconomicconditions, includingdelinquenciesanddefaultsonassetsunderlyingthesesecurities,can affectthesecurities’value,income,andliquidity. ML’snon-agencyRMBSinvestmentportfolioissubjecttovaryinglevelsof credit, interestrate,generalmarket,andconcentrationrisk.Credit-relatedriskonnonagencyRMBSarisesfromlossesduetodelinquenciesanddefaultsbyborrowers ontheunderlyingmortgageloansandbreachesbyoriginatorsandservicersof theirobligationsundertheunderlyingdocumentationpursuanttowhichthenonagencyRMBSwereissued.Therateof delinquenciesanddefaultsonresidential mortgageloansandtheaggregateamountof theresultinglosseswillbeaffected byanumberof factors,includinggeneraleconomicconditions,particularlythose intheareawheretherelatedmortgagedpropertyislocated;thelevelof theborrower’sequityinthemortgagedproperty;andtheindividualfinancialcircumstancesof theborrower. Therateof interestpayableoncertainnon-agencyRMBSmaybesetoreffectively cappedattheweightedaveragenetcouponof theunderlyingmortgageloans themselves,oftenreferredtoasan“availablefundscap.”Asaresultof thiscap, thereturntoMLonsuchnon-agencyRMBSisdependentontherelativetiming andrateof delinquenciesandprepaymentsof mortgageloansbearingahigher interestrate. Asof December31,2010,approximately38.3percentand12.3percentof the propertiescollateralizingthenon-agencyRMBSheldbyMLwerelocatedinCaliforniaandFlorida,respectively,basedonthetotalunpaidprincipalbalanceof the underlyingloans. Thefairvalueof anyparticularnon-agencyRMBSassetmaybesubjecttosubstantialvariation.Theentiremarketorparticularinstrumentstradedonamarket maydeclineinvalue,evenif projectedcashfloworotherfactorsimprove,because thepricesof suchinstrumentsaresubjecttonumerousotherfactorsthathavelittle ornocorrelationtotheperformanceof aparticularinstrument.Adversedevelopmentsinthenon-agencyRMBSmarketcouldhaveaconsiderableeffectonML becauseof itsinvestmentconcentrationinnon-agencyRMBS.

382 97thAnnualReport|2010 AtDecember31,2010,theratingsbreakdownof the$19.6billionof debtsecurities,whicharerecordedatfairvalueintheMLportfolioasapercentageof aggregatefairvalueof allsecuritiesintheportfoliowasasfollows: Ratings2,3 SecurityType:1 AA+ BBB+ BB+and Government/ AAA A+toA- Total toAA- toBBB- lower4 agency Federalagencyand GSEMBS 0.0% 0.0% 0.0% 0.0% 0.0% 85.8% 85.8% Non-agencyRMBS 0.3% 0.4% 0.2% 0.2% 8.4% 0.0% 9.5% Other5 0.6% 0.9% 0.2% 1.5% 1.4% 0.0% 4.7% Total 1.0% 1.3% 0.4% 1.7% 9.8% 85.8% 100.0% 1 ThistabledoesnotincludeMLswapsandotherderivativecontracts,commercialandresidentialmortgageloans,orTBA investments. 2 Lowestofallratingsisusedforthepurposesofthistableifratedbytwoormorenationallyrecognizedstatisticalrating organizations. 3 Rowsandcolumnsmaynottotalduetorounding. 4 BB+andlowerincludesdebtsecuritiesthatwerenotratedasofDecember31,2010. 5 Includesallassetsectorsthat,individually,representlessthan5percentofaggregateportfoliofairvalue. ii.CommercialandResidentialMortgageLoans Commercialandresidentialmortgageloansaresubjecttoahighdegreeof credit riskbecauseof exposuretolossfromloandefaults.Defaultratesaresubjecttoa widevarietyof factors,including,butnotlimitedto,propertyperformance,propertymanagement,supplyanddemand,constructiontrends,consumerbehavior, regionaleconomicconditions,interestrates,andotherfactors. Theperformanceprofileforthecommercialandresidentialmortgageloansat December31,2010,wasasfollows(inmillions): Fairvalueasa Unpaidprincipal percentageof Fairvalue balance unpaidprincipal balance Performingloans: Commercial $6,454 $4,966 76.9% Residential 788 440 55.8% Subtotal 7,242 5,406 74.6% Non-performing/Non-accrualloans:1 Commercial 315 164 52.1% Residential 491 163 33.2% Subtotal 806 327 40.6% Total: Commercial 6,769 5,130 75.8% Residential 1,279 603 47.1% Totalloans $8,048 $5,733 71.2% 1 Non-performing/non-accrualloansincludeloanswithpaymentspastduegreaterthan90days.

FederalReserveSystemAudits 383 Thefollowingtablesummarizesthestateinwhichresidentialmortgageloansare collateralizedandthepropertytypesof thecommercialmortgageloansheldinthe MLportfolioatDecember31,2010: Concentrationofunpaidprincipalbalances Residential Commercial1 Bystate: California 36.7% Florida 8.9% Other2 54.4% Total 100.0% Byproperty: Hospitality 81.8% Office 11.0% Other2 7.2% Total 100.0% 1 Oneborrowerrepresentsapproximately55percentoftotalunpaidprincipalbalanceofthecommercialmortgageloanportfolio. 2 Nootherindividualstateorpropertytypecomprisesmorethan5percentofthetotal. CommercialmortgageloansheldbyMLarecomposedof differentlevelsof subordinationwithrespecttotheunderlyingproperties,andrelativetoeachother. Seniormortgageloansaresecuredpropertyloansevidencedbyafirstmortgage thatisseniortoanysubordinateormezzaninefinancing.Subordinatemortgage interests,sometimesknownasBNotes,areloansevidencedbyajuniornoteora juniorparticipationinamortgageloan.Mezzanineloansareloansmadetothe directorindirectownerof theproperty-owningentity.Mezzanineloansarenot securedbyamortgageonthepropertybutratherbyapledgeof themezzanine borrower’sdirectorindirectownershipinterestintheproperty-owningentity. ThefollowingtablesummarizescommercialmortgageloansheldbyMLat December31,2010(inmillions): Concentrationofunpaid Loantype Unpaidprincipalbalances principalbalances Seniormortgageloan $3,886 57.4% Subordinatemortgageinterests 63 0.9% Mezzanineloans 2,820 41.7% Total 6,769 100.0% iii.DerivativeInstruments Derivativecontractsareinstruments,suchasfuturesorswapcontracts,thatderive theirvaluefromunderlyingassets,indices,referenceratesoracombinationof thesefactors.TheMLportfolioincludesvariousderivativefinancialinstruments, primarilyconsistingof atotalreturnswapagreement(TRS)withJPMC.MLand JPMCenteredintotheTRSwithreferenceobligationsrepresentingsingle-name CDSprimarilyonRMBSandCMBS,andinterestrateswaps(IRS)withvarious marketparticipants,includingJPMC.ML,throughitsinvestmentmanager,currentlymanagestheCDScontractswithintheTRSasarunoff portfolioandmay unwind,amend,ornovatereferenceobligationsonanongoingbasis. MLentersintoadditionalderivativecontractsconsistingof futuresandIRSto economicallyhedgeitsexposuretointerestrates.For2010,therewere29trades executedasIRS.AllderivativesarerecordedatfairvalueinaccordancewithASC

384 97thAnnualReport|2010 815.Noneof thederivativesheldbyMLaredesignatedashedginginstrumentsfor accountingpurposes. Onanongoingbasis,MLpledgescollateralforcreditorliquidityrelatedshortfalls basedon20percentof thenotionalamountof soldCDSprotectionand10percentof thepresentvalueof futurepremiumsonpurchasedCDSprotection.FailuretopostthiscollateralconstitutesaTRSeventof default.Separately,MLand JPMCengageinbilateralpostingof collateraltocoverthenetmark-to-market (MTM)variationsintheswapportfolio.MLnetsthecollateralreceivedfrom JPMCfromthebilateralMTMpostingonlytotheextentthatthereferenceobligationsindicateJPMCastheoriginalcounterpartytoBearStearnsonMarch14, 2008.Thevaluesof ML’scashequivalentsandinvestments,purchasedbythe re-hypothecationof cashcollateralassociatedwiththeTRS,were$0.8billionand $0billion,respectively,asof December31,2010,and$0.8billionand$0.5billion, respectively,asof December31,2009.Inaddition,MLhaspledged$1.0billion and$1.5billionof FederalagencyandGSEMBStoJPMCasof December31, 2010and2009,respectively. ThefollowingrisksareassociatedwiththederivativeinstrumentsheldbyMLas partof theTRSagreementwithJPMCaswellasanyderivativesoutsideof theTRS: MarketRisk CDSareagreementsthatprovideprotectionforthebuyeragainstthelossof principaland,insomecases,interestonabondorloanincaseof adefaultbythe issuer.Thenatureof acrediteventisestablishedbytheprotectionbuyerandprotectionsellerattheinceptionof atransaction,andsucheventsincludebankruptcy, insolvencyorfailuretomeetpaymentobligationswhendue.Thebuyerof the CDSpaysapremiuminreturnforpaymentprotectionupontheoccurrence,if any,of acreditevent.Upontheoccurrenceof atriggeringcreditevent,themaximumpotentialamountof futurepaymentsthesellercouldberequiredtomake underaCDSisequaltothenotionalamountof thecontract.Suchfuturepaymentscouldbereducedoroffsetbyamountsrecoveredunderrecourseorbycollateralprovisionsoutlinedinthecontract,includingseizureandliquidationof collateralpledgedbythebuyer.ML’sderivativesportfolioconsistsof purchased creditprotectionwithunderlyingreferencednamesnotcorrelatedtooffsetits exposuretosoldcreditprotection. IRSobligatetwopartiestoexchangeoneormorepaymentstypicallycalculated withreferencetofixedorperiodicallyresetratesof interestappliedtoaspecified notionalprincipalamount.Notionalprincipalistheamounttowhichinterestrates areappliedtodeterminethepaymentstreamsunderIRS.Suchnotionalprincipal amountsoftenareusedtoexpressthevolumeof thesetransactionsbutarenot actuallyexchangedbetweenthecounterparties. Futurescontractsareagreementstobuyandsellfinancialinstrumentsforaset priceonafuturedate.Initialmargindepositsaremadeuponenteringintofutures contractsintheformof cashorsecurities.Duringtheperiodthatafuturescontractisopen,changesinthevalueof thecontractarerecordedasunrealizedgains orlossesbyrevaluingthecontractsdailytoreflectthemarketvalueof thecontract attheendof eachday’strading.Variationmarginpaymentsarepaidorreceived, dependinguponwhetherunrealizedgainsorlossesresult.Whenthecontractis closed,MLwillrecordarealizedgainorlossequaltothedifferencebetweenthe

FederalReserveSystemAudits 385 proceedsfrom(orcostof)theclosingtransactionandML’scostbasisinthecontract.Theuseof futurestransactionsinvolvestheriskof imperfectcorrelationin movementsinthepriceof futurescontracts,interestrates,andtheunderlying hedgedassets.MLisalsoatriskof notbeingabletoenterintoaclosingtransactionforthefuturescontractbecauseof anilliquidsecondarymarket.MLhad pledgedcashcollateralrelatedtofuturecontractsof $18millionand$40millionas of December31,2010and2009,respectively. CreditRisk Creditriskistheriskof financiallossresultingfromfailurebyacounterpartyto meetitscontractualobligationstoML.Thiscanbecausedbyfactorsdirectly relatedtothecounterparty,suchasbusinessormanagement.Takingcollateralis themostcommonwaytomitigatecreditrisk.MLtakesfinancialcollateralinthe formof cashandmarketablesecuritiestocoverJPMCcounterpartyriskaspartof theTRSagreementwithJPMCaswellastheover-the-counterderivativesactivitiesoutsideof theTRS. Thefollowingtablesummarizesthenotionalamountsof derivativecontractsoutstandingasof December31,2010and2009,andthechangeinnotionalamounts isrepresentativeof thevolumeof activityfortheyearendedDecember31,2010 (inmillions): Notionalamounts1,2 2010 2009 Interestratecontracts: IRS $ 4,130 $ 3,185 Futuresandoptionsonfutures3 18 70 Creditderivatives: CDS 5,856 7,323 Total $10,004 $10,578 1 Representsthesumofgrosslongandshortnotionalderivativecontracts. 2 Therewere1,400and1,764CDSandIRScontractsoutstandingasofDecember2010,and2009,respectively. 3 Futuresandoptionsonfuturesrelatetocontractobligationsandnotgrossnotionalamounts Thefollowingtablesummarizesthefairvalueof derivativeinstrumentsbycontracttypeonagrossbasisasof December31,2010and2009,whichisreportedas acomponentof “Consolidatedvariableinterestentities:Investmentsheldbyconsolidatedvariableinterestentities”intheCombinedStatementof Condition(in millions): 2010 2009 Gross Gross Gross Gross derivative derivative derivative derivative assets liabilities assets liabilities Interestratecontracts: IRS $ 9 $ 229 $ 5 $ 195 Futuresandoptionsonfutures 4 2 20 - Creditderivatives: CDS 2,317 1,347 3,271 1,816 Counterpartynetting (1,375) (1,374) (1,868) (1,868) Cashcollateral (100) - (281) - Total $ 855 $ 204 $1,147 $ 143

386 97thAnnualReport|2010 Thetablebelowsummarizescertaininformationregardingprotectionsoldthrough CDSasof December31(inmillions): Maximumpotentialpayout/notional 2010 2009 Creditratings Yearstomaturity Fair Fair ofthereferenceobligation value value After After Total 1year 1year 3years After Asset/ Asset/ Total orless through through 5years (liability) (liability) 3years 5years Investmentgrade(AAAtoBBB-) $ - $ - $- $ 120 $ 120 $ (23) $ 350 $ (154) Non-investmentgrade 10 250 - 1,564 1,824 (1,284) 2,099 (1,640) Totalcreditprotectionsold $10 $250 $- $1,684 $1,944 $(1,307) $2,449 $(1,794) Thetablebelowsummarizescertaininformationregardingprotectionbought throughCDSasof December31(inmillions): Maximumpotentialrecovery/notional 2010 2009 Creditratings Yearstomaturity Fairvalue Fair ofthereferenceobligation value After After Total 1year 1year 3years After Asset/ Asset/ Total orless through through 5years (liability) (liability) 3years 5years Investmentgrade(AAAtoBBB-) $ - $ - $- $ 263 $ 263 $ 76 $ 702 $ 404 Non-investmentgrade 38 501 5 3,104 3,648 2,190 4,172 2,808 Totalcreditprotectionbought $38 $501 $5 $3,367 $3,911 $2,266 $4,874 $3,212 OtherAssets Otherassetsareprimarilycomposedof otherrealestateownedof approximately $19million,andoptionsof $4million. d.MaidenLaneIILLC MLII’sinvestmentsinnon-agencyRMBSaresubjecttovaryinglevelsof credit, interestrate,generalmarket,andconcentrationrisk.Credit-relatedriskonnonagencyRMBSarisesfromlossesduetodelinquenciesanddefaultsbyborrowers ontheunderlyingresidentialmortgageloansandbreachesbyoriginatorsandservicersof theirobligationsundertheunderlyingdocumentationpursuanttowhich thenon-agencyRMBSareissued.Therateof delinquenciesanddefaultsonresidentialmortgageloansandtheaggregateamountof theresultinglosseswillbe affectedbyanumberof factors,includinggeneraleconomicconditions,particularlythoseintheareawheretherelatedmortgagedpropertyislocated;thelevelof theborrower’sequityinthemortgagedproperty;andtheindividualfinancialcircumstancesof theborrower. Therateof interestpayableoncertainnon-agencyRMBSmaybesetoreffectively cappedattheweightedaveragenetcouponof theunderlyingresidentialmortgage loansthemselves,oftenreferredtoasan“availablefundscap.”Asaresultof this cap,thereturntotheholderof suchnon-agencyRMBSisdependentontherelativetimingandrateof delinquenciesandprepaymentsof mortgageloansbearing ahigherrateof interest.

FederalReserveSystemAudits 387 Thefairvalueof anyparticularnon-agencyRMBSassetmaybesubjecttosubstantialvariation.Theentiremarketorparticularinstrumentstradedonamarket maydeclineinvalue,evenif projectedcashfloworotherfactorsimprove,because thepricesof suchinstrumentsaresubjecttonumerousotherfactorsthathavelittle ornocorrelationtotheperformanceof aparticularinstrument.Adversedevelopmentsinthenon-agencyRMBSmarketcouldhaveaconsiderableeffectonMLII becauseof itsinvestmentconcentrationinnon-agencyRMBS. AtDecember31,2010,thetype/sectorandratingcompositionof theMLII’s $16.2billionnon-agencyRMBSportfolio,recordedatfairvalue,asapercentage of aggregatefairvalue,wereasfollows: Rating1,2 AssetType: AAA AA+toAA- A+toA- BBB+toBBB- BB+andlower Total Alt-AARM 0.3% 1.3% 0.9% 0.3% 26.5% 29.4% Subprime 4.1% 2.6% 1.3% 1.2% 46.4% 55.6% OptionARM 0.0% 0.0% 0.0% 0.0% 6.8% 6.8% Other3 0.0% 0.5% 1.1% 0.1% 6.4% 8.2% Total 4.5% 4.4% 3.3% 1.6% 86.2% 100.0% 1 Lowestofallratingsisusedforthepurposesofthistableifratedbytwoormorenationallyrecognizedstatisticalrating organizations. 2 Rowsandcolumnsmaynottotalduetorounding. 3 Includesallassettypesthat,individually,representlessthan5%ofaggregateportfoliofairvalue. AtDecember31,2010,approximately30percentand13percentof theproperties collateralizingthenon-agencyRMBSheldbyMLIIwerelocatedinCalifornia andFlorida,respectively,basedonthegeographicallocationdataavailableforthe underlyingloansbyaggregateunpaidprincipalbalance. e.MaidenLaneIIILLC TheprimaryholdingswithinMLIIIareABSCDOs.AnABSCDOisasecurity issuedbyabankruptcy-remoteentitythatisbackedbyadiversifiedpoolof debt securities,whichinthecaseof MLIIIareprimarilyRMBSandCMBS.Thecash flowsof ABSCDOscanbesplitintomultiplesegments,called“tranches,”which varyinriskprofileandyield.Thejuniortranchesbeartheinitialriskof loss,followedbythemoreseniortranches.TheABSCDOsintheMLIIIportfoliorepresentseniortranches.Becausetheyareshieldedfromdefaultsbythesubordinated tranches,seniortranchestypicallyhavehighercreditratingsandloweryieldsthan theunderlyingsecurities,andwilloftenreceiveinvestment-graderatingsfromone ormoreof thenationallyrecognizedratingagencies.Despitetheprotection affordedbythesubordinatedtranches,seniortranchescanexperiencesubstantial lossesfromactualdefaultsontheunderlyingnon-agencyRMBSorCMBS. CertainABSCDOissuerscanissueshort-termeligibleinvestmentsunderRule 2a-7of theInvestmentCompanyActof 1940if theABSCDOcontainsarrangementstoremarketthesecuritiesatdefinedperiods.Theinvestmentsmustcontain putoptions(2a-7Puts)thatallowthepurchaserstoselltheABSCDOatpartoa third-party(PutProvider),if ascheduledremarketingisunsuccessfulduetoreasonsotherthanacreditorbankruptcyevent.Thetotalnotionalvalueof ABS CDOsheldbyMLIIIwithembedded2a-7Puts,forwhichAIGFPwas,directlyor indirectly,thePutProvider,was$1.6billionat2009.TherewerenoremainingABS CDOinvestmentsheldbytheLLCwithembedded2a-7putsasof December31, 2010.

388 97thAnnualReport|2010 MLIII’sinvestmentinCMBSandRMBScontainvaryinglevelsof credit,interest rate,liquidity,andconcentrationrisk.Credit-relatedriskarisesfromlossesdueto delinquenciesanddefaultsbyborrowersontheunderlyingmortgageloansand breachesbyoriginatorsandservicersof theirobligationsundertheunderlying documentationpursuanttowhichthesecuritiesareissued.Therateof delinquenciesanddefaultsonresidentialandcommercialmortgageloansandtheaggregate amountof theresultinglosseswillbeaffectedbyanumberof factors,including generaleconomicconditions,particularlythoseintheareawheretherelatedmortgagedpropertyislocated;thelevelof theborrower’sequityinthemortgaged property;andtheindividualfinancialcircumstancesof theborrower.Adverse developmentsintheRMBSandCMBSmarketscouldhaveaconsiderableeffect onMLIIIbecauseof itsinvestmentconcentrationinCDOsbackedbyCMBSand RMBS. AtDecember31,2010,theinvestmenttype/vintageandratingcompositionof ML III’s$23billionportfolio,recordedatfairvalue,asapercentageof aggregatefair valueof allsecuritiesintheportfoliowasasfollows: Rating1,2,3 AA+ BBB+ BB+and Not AAA A+toA- Total toAA- toBBB- lower rated ABSCDOs: High-gradeABSCDOs 0.0% 0.0% 0.0% 0.0% 64.2% 1.0% 65.3% Pre-2005 0.0% 0.0% 0.0% 0.0% 22.1% 0.0% 22.1% 2005 0.0% 0.0% 0.0% 0.0% 29.1% 1.0% 30.1% 2006 0.0% 0.0% 0.0% 0.0% 6.3% 0.0% 6.3% 2007 0.0% 0.0% 0.0% 0.0% 6.7% 0.0% 6.7% MezzanineABSCDOs 0.0% 0.0% 0.0% 0.1% 8.2% 0.1% 8.5% Pre-2005 0.0% 0.0% 0.0% 0.1% 4.7% 0.1% 4.9% 2005 0.0% 0.0% 0.0% 0.0% 2.9% 0.0% 2.9% 2006 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2007 0.0% 0.0% 0.0% 0.0% 0.6% 0.0% 0.6% CommercialReal-EstateCDOs 0.0% 0.0% 0.0% 0.0% 25.1% 0.0% 25.1% Pre-2005 0.0% 0.0% 0.0% 0.0% 3.2% 0.0% 3.2% 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% 0.0% 0.0% 21.9% 0.0% 21.9% RMBS,CMBS,&Other: 0.1% 0.2% 0.1% 0.0% 0.9% 0.0% 1.3% Pre-2005 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.2% 2005 0.1% 0.2% 0.1% 0.0% 0.7% 0.0% 1.1% 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 0.1% 0.2% 0.1% 0.1% 98.4% 1.2% 100.0% 1 Lowestofallratingswasusedforthepurposeofthistableifratedbytwoormorenationallyrecognizedstatisticalrating organizations. 2 Theyearofissuancewiththehighestconcentrationofunderlyingassetsasmeasuredbyoutstandingprincipalbalance determinesthevintageoftheCDO. 3 Rowsandcolumnsmaynottotalduetorounding. f.TALFLLC CashreceiptsresultingfromtheputoptionfeespaidtoTALFLLCandproceeds fromtheTreasury’sloanareinvestedinthefollowingtypesof U.S.dollardenominatedshort-terminvestmentsandcashequivalentseligibleforpurchaseby theLLC:(1)USTreasurysecurities,(2)Federalagencysecuritiesthataresenior, negotiabledebtobligationsof theFannieMae,FreddieMac,FederalHomeLoan Banks(FHLB)andFederalFarmCreditBanks(FFCB),whichhaveafixedrateof

FederalReserveSystemAudits 389 interest,(3)repurchaseagreementsthatarecollateralizedbyTreasuryandFederal agencysecuritiesandfixed-rateagencymortgage-backedsecurities,and(4)money marketmutualfundsregisteredwiththeSecuritiesandExchangeCommissionand regulatedunderRule2a-7of theInvestmentCompanyActthatinvestexclusively inUSTreasuryandFederalagencysecurities.Cashmayalsobeinvestedina demandinterest-bearingaccountheldattheBankof NewYorkMellon. g.FairValueMeasurement TheconsolidatedVIEshaveadoptedASC820andASC825andhaveelectedthe fairvalueoptionforallsecuritiesandcommercialandresidentialmortgagesheld byMLandTALFLLC.MLIIandMLIIIqualifyasnonregisteredinvestment companiesundertheprovisionsof ASC946and,therefore,allinvestmentsare recordedatfairvalueinaccordancewithASC820.Inaddition,theFRBNYhas electedtorecordthebeneficialinterestsinML,MLII,MLIII,andTALFLLCat fairvalue. Theaccountingandclassificationof theseinvestmentsappropriatelyreflectthe VIEs’andtheFRBNY’sintentwithrespecttothepurposeof theinvestmentsand mostcloselyreflecttheamountof theassetsavailabletoliquidatetheentities’ obligations. i.Determinationof FairValue TheconsolidatedVIEsvaluetheirinvestmentsonthebasisof thelastavailablebid pricesorcurrentmarketquotationsprovidedbydealersorpricingservicesselected bythedesignatedinvestmentmanagers.Todeterminethevalueof aparticular investment,pricingservicesmayuseinformationontransactionsinsuchinvestments;quotationsfromdealers;pricingmetrics;markettransactionsincomparableinvestments;relationshipsobservedinthemarketbetweeninvestments;and calculatedyieldmeasuresbasedonvaluationmethodologiescommonlyemployed inthemarketforsuchinvestments. Marketquotationsmaynotrepresentfairvalueincircumstancesinwhichthe investmentmanagerbelievesthatfactsandcircumstancesapplicabletoanissuer,a seller,apurchaser,orthemarketforaparticularsecurityresultinthecurrentmarketquotationsreflectinganinaccuratefairvalueof thesecurity.Todeterminefair value,theinvestmentmanagerappliesproprietaryvaluationmodelsthatusecollateralperformancescenariosandpricingmetricsderivedfromthereportedperformanceof theuniverseof bondswithsimilarcharacteristicsaswellastheobservablemarket. Becauseof theuncertaintyinherentindeterminingthefairvalueof investments thatdonothaveareadilyavailablefairvalue,thefairvalueof theseinvestments maydiffersignificantlyfromthevaluesthatwouldhavebeenreportedif areadily availablefairvaluehadexistedfortheseinvestmentsandmaydiffermaterially fromthevaluesthatmayultimatelyberealized. Thefairvalueof theliabilityforthebeneficialinterestsof consolidatedVIEsis estimatedbaseduponthefairvalueof theunderlyingassetsheldbytheVIEs.The holdersof thesebeneficialinterestsdonothaverecoursetothegeneralcreditof theFRBNY.

390 97thAnnualReport|2010 ii.ValuationMethodologiesforLevel3AssetsandLiabilities Incertaincaseswherethereislimitedactivityaroundinputstothevaluation,securitiesareclassifiedwithinLevel3of thevaluationhierarchy.Forexample,invaluingCDOs,certaincollateralizedmortgageobligations,andcommercialandresidentialmortgageloans,thedeterminationof fairvalueisbasedoncollateralperformancescenarios.Thesevaluationsalsoincorporatepricingmetricsderivedfrom thereportedperformanceof theuniverseof bondsandfromobservationsand estimatesof marketdata.Becauseexternalpriceinformationisnotavailable, market-basedmodelsareusedtovaluethesesecurities.Keyinputstothemodel mayincludemarketspreadsoryieldestimatesforcomparableinstruments,data foreachcreditrating,valuationestimatesforunderlyingpropertycollateral,projectedcashflows,andotherrelevantcontractualfeatures.Becausethereislackof observablepricing,securitiesandinvestmentloansthatarecarriedatfairvalueare classifiedwithinLevel3. ThefollowingtablespresentthefinancialinstrumentsrecordedinVIEsatfair valueasof December31byASC820hierarchy(inmillions): 2010 Total Level1 Level2 Level3 Netting1 fairvalue Assets: CDOs $ - $ 301 $22,811 $ - $23,112 Non-agencyRMBS - 11,551 6,809 - 18,360 FederalagencyandGSEMBS - 16,812 30 - 16,842 Commercialmortgageloans - 3,199 1,931 - 5,130 Cashequivalents 3,003 - - - 3,003 Swapcontracts - 9 2,317 (1,475) 851 Residentialmortgageloans - - 603 - 603 Otherinvestments 85 400 79 - 564 Otherassets - 4 - - 4 Totalassets $3,088 $32,276 $34,580 $(1,475) $68,469 Liabilities: BeneficialinterestinconsolidatedVIEs $ - $ - $10,051 $ - $10,051 Swapcontracts - 229 1,347 (1,375) 201 Otherliabilities 2 - - - 2 Totalliabilities $ 2 $ 229 $11,398 $(1,375) $10,254 1 Derivativereceivablesandpayablesandtherelatedcashcollateralreceivedandpaidareshownnettedwhenamasternetting agreementexists. 2009 Total Level1 Level2 Level3 Netting1 fairvalue Assets: CDOs $ - $ 241 $22,409 $ - $22,650 FederalagencyandGSEMBS - 18,125 24 - 18,149 Non-agencyRMBS - 9,461 8,091 - 17,552 Commercialmortgageloans - - 4,025 - 4,025 Cashequivalents 1,933 142 - - 2,075 Swapcontracts - 5 3,272 (2,150) 1,127 Residentialmortgageloans - - 583 - 583 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 Derivativereceivablesandpayablesandtherelatedcashcollateralreceivedandpaidareshownnettedwhenamasternetting agreementexists.

FederalReserveSystemAudits 391 Thetablesbelowpresentareconciliationof allassetsandliabilitiesmeasuredat fairvalueonarecurringbasisusingsignificantunobservableinputs(Level3)asof December31,2010and2009(inmillions).Unrealizedgainsandlossesrelatedto thoseassetsstillheldatDecember31,2010and2009,arereportedasacomponent of “Consolidatedvariableinterestentities:Investmentsheldbyconsolidatedvariableinterestentities,net”intheCombinedStatementsof Condition. 2010 Changein unrealized Total gains(losses) Net Net realized/ relatedto Fairvalue purchases, transfers Fairvalue unrealized financial January1 sales,and inor December31 gains instruments settlements out1,2,3,4 (losses) heldat December31, 2010 Assets: CDOs5 $22,200 $(2,474) $3,096 $ (11) $22,811 $3,043 Non-agencyRMBS5 8,300 (1,046) 1,144 (1,589) 6,809 1,044 Commercialmortgage loans 4,025 (335) 681 (2,440) 1,931 542 Residentialmortgage loans 583 (91) 111 - 603 197 Federalagencyand GSEMBS 24 (34) 2 38 30 2 Otherinvestments 23 (39) 65 30 79 11 Totalassets $35,155 $(4,019) $5,099 $(3,972) $32,263 $4,839 Netswapcontracts6 $ 1,456 $ (325) $ (161) $ - $ 970 $ (137) Liabilities: Beneficialinterestin consolidatedVIEs $(5,095) $ (277)7 $(4,679) $ - $(10,051) $(4,679) 1 Theamountoftransfersisbasedonthefairvaluesofthetransferredassetsatthebeginningofthereportingperiod. 2 TherewerenosignificanttransfersbetweenLevel1andLevel2duringtheyear-endedDecember31,2010. 3 Commercialmortgageloans,withaDecember31,2009fairvalueof$2,440million,weretransferredfromLevel3toLevel2 becausetheyarevaluedatDecember31,2010basedonquotedpricesforidenticalorsimilarinstrumentsinnon-active markets(Level2).Theseinvestmentswerevaluedintheprioryearbasedonnon-observableinputs(Level3). 4 Non-agencyRMBS,withaDecember31,2009fairvalueof$3,830million,weretransferredfromLevel3toLevel2because theyarevaluedatDecember31,2010basedonquotedpricesinnon-activemarkets(Level2).Theseinvestmentswerevalued intheprioryearonnon-observablemodelbasedinputs(Level3).Therewerealsocertainnon-agencyRMBSforwhich valuationinputsbecamelessobservableduringtheyearendedDecember31,2010whichresultedin$2,647millionin transfersfromLevel2toLevel3.TherewerenoothersignificanttransfersbetweenLevel2andLevel3duringtheyear. 5 Investmentswithafairvalueof$209millionasofDecember31,2009werereclassifiedfromCDOstoNon-agencyRMBS. 6 Level3derivativeassetsandliabilitiesarepresentednetforpurposesofthistable. 7 Includes$277millionincapitalizedinterest. 2009 Changein unrealized Net Total gains/(losses) purchases, realized/ Net relatedto Fairvalue Fairvalue sales, unrealized transfers financial January1 December31 and gains inorout instruments settlements (losses) heldat 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) Commercialmortgage loans 5,553 (305) (1,223) - 4,025 (1,177) Residentialmortgage loans 937 (86) (268) - 583 (219) Federalagencyand GSEMBS 895 (248) - (623) 24 - Otherinvestments 348 (263) 30 (92) 23 29 Totalassets $47,045 $(5,506) $(3,227) $(3,157) $35,155 $(3,165) Netswapcontracts1 $ 2,454 $ (906) $ 94 $ (186) $ 1,456 $ 212 Liabilities: Beneficialinterestin consolidatedVIEs $(2,824) (368)2 $(1,903) $ - $(5,095) $(1,903)

392 97thAnnualReport|2010 1 Level3derivativeassetsandliabilitiesarepresentednetforthepurposesofthistable. 2 Includes$268millionincapitalizedinterest. h.ProfessionalFees TheconsolidatedVIEshaverecordedcostsforprofessionalservicesprovided, amongothers,byseveralnationallyrecognizedinstitutionsthatserveasinvestment managers,administrators,andcustodiansfortheVIEs’assets.Thefeeschargedby theinvestmentmanagers,custodians,administrators,auditors,attorneys,and otherserviceproviders,arerecordedin“Professionalfeesrelatedtoconsolidated variableinterestentities”intheCombinedStatementsof IncomeandComprehensiveIncome. (10)Non-consolidatedVariableInterestEntities InDecember2009,theFRBNYreceivedpreferredinterestsintwoVIEs,AIA LLCandALICOLLC.TheFRBNYdoesnotconsolidatetheseVIEsbecauseit doesnothaveacontrollingfinancialinterest.TheFRBNY’smaximumexposure toanypotentiallossesof theVIEs,shouldanyoccur,islimitedtotherecorded valueof theFRBNY’sinvestmentinthepreferredinterestsanddividendsreceivablefromtheVIEs.Thefollowingtableshowsfinancialinformationasof December31,2010(inmillions): 2010 Total AIALLC ALICOLLC non-consolidated VIEs Totalassets $31,223 $17,417 $48,640 Totalliabilities - 898 898 Maximumexposuretoloss 16,886 9,499 26,385 Therecordedvalueof theFRBNY’spreferredinterests,includingcapitalizeddividends,was$16,886millionand$16,068millionforAIALLCand$9,499million and$9,038millionforALICOLLCatDecember31,2010and2009,respectively. TheFRBNY’spreferredinterestsandcapitalizeddividendsarereportedas“Preferredinterests”anddividendsreceivablearereportedasacomponentof “Other Assets”intheCombinedStatementsof Condition. Thefairvalueof FRBNY’spreferredinterestsinAIALLCandALICOLLCwas notmateriallydifferentfromtheamountsreportedas“Preferredinterests”inthe CombinedStatementsof Conditionasof December31,2010and2009. Asaresultof theclosingof theAIGrecapitalizationplanonJanuary14,2011,the FRBNYwaspaidinfullforitspreferredinterestsinAIALLCandALICOLLC, includingaccrueddividends.

FederalReserveSystemAudits 393 (11)BankPremises,Equipment,andSoftware BankpremisesandequipmentatDecember31wereasfollows(inmillions): 2010 2009 Bankpremisesandequipment: Landandlandimprovements $ 350 $ 344 Buildings 2,436 2,378 Buildingmachineryandequipment 511 492 Constructioninprogress 31 43 Furnitureandequipment 1,034 1,010 Subtotal 4,362 4,267 Accumulateddepreciation (1,749) (1,643) Bankpremisesandequipment,net $2,613 $2,624 Depreciationexpense,fortheyears endedDecember31 $ 204 $ 202 BankpremisesandequipmentatDecember31includedthefollowingamountsfor capitalizedleases(inmillions): 2010 2009 Leasedpremisesandequipmentundercapitalleases $18 $10 Accumulateddepreciation (8) (6) Leasedpremisesandequipmentundercapitalleases,net $10 $ 4 Depreciationexpenserelatedtoleasedpremises andequipmentundercapitalleases $ 3 $ 2 TheReserveBanksleasespacetooutsidetenantswithremainingleasetermsrangingfromonetofourteenyears.Rentalincomefromsuchleaseswas$34million and$32millionfortheyearsendedDecember31,2010and2009,respectively,and isreportedasacomponentof “Otherincome”intheCombinedStatementsof IncomeandComprehensiveIncome.Futureminimumleasepaymentsthatthe ReserveBankswillreceiveundernoncancelableleaseagreementsinexistenceat December31,2010areasfollows(inmillions): 2011 $ 28 2012 24 2013 24 2014 24 2015 19 Thereafter 41 Total $160 TheReserveBankshadcapitalizedsoftwareassets,netof amortization,of $146millionand$134millionatDecember31,2010and2009,respectively.Amortizationexpensewas$54millionand$52millionfortheyearsendedDecember31, 2010and2009,respectively.Capitalizedsoftwareassetsarereportedasacomponentof “Otherassets”intheCombinedStatementsof Conditionandtherelated amortizationisreportedasacomponentof “Operatingexpenses:Other”inthe CombinedStatementsof IncomeandComprehensiveIncome. In2008,afterrelocatingoperationstoanewfacility,theFederalReserveBankof SanFrancisco(FRBSF)classifieditsformerSeattlebranchofficebuildingasheld forsale,andthebuildingisreportedatfairvalueasacomponentof “Other Assets”intheCombinedStatementsof Condition.DuringtheyearendedDecember31,2010,theFRBSFrecordedanadjustmentof $6.7milliontothefairvalue of thebuildingandreportedthechargeasacomponentof “Operatingexpenses:

394 97thAnnualReport|2010 Other”intheCombinedStatementsof IncomeandComprehensiveIncome.The fairvalueof thebuildingasof December31,2010wasbasedonappraised valuation. TheFRBSFdisclosedasubsequenteventinits2009financialstatements,related totheterminationof acontractforsoftwaredevelopment.TheFRBSFhasdeterminedthataportionof thesoftwaredevelopmentprogramwillnotbeused,and in2010reducedthecarryingvalueof theassetby$20.2million.Theadjustmentto theassetvalueisreportedasacomponentof “Operatingexpenses:Other”inthe CombinedStatementsof IncomeandComprehensiveIncome.TheFRBSF expectstheremainingassetvaluewillberecoveredthroughuseinothercontinuing softwaredevelopmentprograms. (12)CommitmentsandContingencies Conductingitsoperations,theReserveBanksenterintocontractualcommitments, normallywithfixedexpirationdatesorterminationprovisions,atspecificrates andforspecificpurposes. AtDecember31,2010,theReserveBankswereobligatedundernoncancelable leasesforpremisesandequipmentwithremainingtermsrangingfromoneto approximatelythirteenyears.Theseleasesprovideforincreasedrentalpayments baseduponincreasesinrealestatetaxes,operatingcosts,orselectedpriceindices. Rentalexpenseunderoperatingleasesforcertainoperatingfacilities,warehouses, anddataprocessingandofficeequipment(includingtaxes,insurance,andmaintenancewhenincludedinrent),netof subleaserentals,was$30millionand$27millionfortheyearsendedDecember31,2010and2009,respectively. Futureminimumrentalpaymentsundernoncancelableoperatingleases,netof subleaserentals,withremainingtermsof oneyearormore,atDecember31,2010, areasfollows(inmillions): Operatingleases 2011 $ 13 2012 12 2013 12 2014 11 2015 11 Thereafter 85 Futureminimumrentalpayments $144 AtDecember31,2010,theReserveBankshadunrecordedunconditionalpurchase commitmentsandlong-termobligationsextendingthroughtheyear2021witha remainingfixedcommitmentof $178million.Purchasesof $54millionand $28millionweremadeagainstthesecommitmentsduring2010and2009,respectively.Thesecommitmentsareformaintenanceof currencyprocessingmachines andhavevariableand/orfixedcomponents.Thevariableportionof thecommitmentsisforadditionalservicesabovethefixedcontractualservicelimits.

FederalReserveSystemAudits 395 Thefixedpaymentsforthenextfiveyearsunderthesecommitmentsareasfollows (inmillions): 2011 $ 2 2012 26 2013 45 2014 27 2015 25 TheReserveBanksareinvolvedincertainlegalactionsandclaimsarisinginthe ordinarycourseof business.Althoughitisdifficulttopredicttheultimateoutcomeof theseactions,inmanagement’sopinion,basedondiscussionswithcounsel,theaforementionedlitigationandclaimswillberesolvedwithoutmaterial adverseeffectonthefinancialpositionorresultsof operationsof theReserve Banks. OtherCommitments Insupportof financialmarketstabilityactivities,theReserveBanksenteredinto commitmentstoprovidefinancialassistancetofinancialinstitutions.ThecontractualamountsshownbelowaretheReserveBanks’maximumexposurestolossin theeventthatthecommitmentsarefullyfundedandthereisadefaultbytheborrowerortotallossinvalueof pledgedcollateral.TotalcommitmentsatDecember31,2010and2009wereasfollows(inmillions): 2010 2009 Contractual Unfunded Contractual Unfunded amount amount amount amount Securedrevolvinglineofcredit(AIG) $24,512 $9,891 $35,000 $17,100 Commercialloancommitments(ML) 72 72 157 157 Additionalloancommitments(ML)1 9 9 - - Total $24,593 $9,972 $35,157 $17,257 1 In2010,thereisadditionalrestrictedcashtotaling$9millionthatmayberequiredtobeadvancedbyMLforpropertylevel expensesorimprovements. Thecontractualamountof thecommitmentrelatedtotheAIGsecuredrevolving lineof creditrepresentsthemaximumcommitmentatDecember31,2010,tolend toAIGandtheunfundedamountrepresentsthemaximumcommitmentreduced bydrawsoutstanding.Theamountof theFRBNY’scommitmenttolendtoAIG wasreducedduringtheyearendedDecember31,2009asaresultof thedebt restructuringsdescribedinNote3,Note4,andNote5.TheFRBNY’scommitmentwasfurtherreducedduringtheyearendedDecember31,2010,asaresultof AIGassetsales.CollateraltosecuretheFRBNY’sloantoAIGincludesequity interestsof variousAIGsubsidiaries.TheFRBNYdidnotincuranylossesrelated totheunfundedcommitmentasof December31,2010. Asaresultof theclosingof theAIGrecapitalizationplanonJanuary14,2011,the revolvinglineof creditwaspaidinfull,includinginterestandfees,andFRBNY’s commitmenttolendanyfurtherfundswasterminated. Theundrawnportionof theFRBNY’scommercialloancommitmentsrelatesto commercialmortgageloancommitmentsacquiredbyML.

396 97thAnnualReport|2010 (13)RetirementandThriftPlans RetirementPlans TheReserveBankscurrentlyofferthreedefinedbenefitretirementplanstotheir employees,basedonlengthof serviceandlevelof compensation.Substantiallyall of theemployeesof theReserveBanks,Boardof Governors,andOfficeof EmployeeBenefitsof theFederalReserveSystem(OEB)participateintheRetirementPlanforEmployeesof theFederalReserveSystem(SystemPlan).Inaddition,employeesatcertaincompensationlevelsparticipateintheBenefitEqualizationRetirementPlan(BEP)andcertainReserveBankofficersparticipateinthe SupplementalRetirementPlanforSelectOfficersof theFederalReserveBanks (SERP).UndertheDodd-FrankAct,employeesof theBureaucanelecttoparticipateintheSystemPlan.Asof December31,2010,therewerenoBureauparticipantsintheSystemPlan. TheSystemPlanprovidesretirementbenefitstoemployeesof theFederalReserve Banks,Boardof Governors,andOEBandinthefuturewillprovideretirement benefitstocertainemployeesof theBureau.TheFRBNY,onbehalf of the System,recognizesthenetassetornetliabilityandcostsassociatedwiththe SystemPlaninitscombinedfinancialstatements.DuringtheyearsendedDecember31,2010and2009,costsassociatedwiththeSystemPlanwerenotreimbursed byotherparticipatingemployers. Followingisareconciliationof thebeginningandendingbalancesof theSystem Planbenefitobligation(inmillions): 2010 2009 EstimatedactuarialpresentvalueofprojectedbenefitobligationatJanuary1 $7,364 $7,031 Servicecost-benefitsearnedduringtheperiod 223 204 Interestcostonprojectedbenefitobligation 450 427 Actuarialloss(gain) 508 (28) Contributionsbyplanparticipants 9 3 Specialterminationbenefits 11 9 Benefitspaid (307) (291) Planamendments - 9 Estimatedactuarialpresentvalueofprojectedbenefitobligationat December31 $8,258 $7,364

FederalReserveSystemAudits 397 Followingisareconciliationshowingthebeginningandendingbalanceof the SystemPlanassets,thefundedstatus,andtheaccruedpensionbenefitcosts(in millions): 2010 2009 EstimatedplanassetsatJanuary1(ofwhich$6,252and$5,037ismeasured atfairvalueasofJanuary1,2010and2009,respectively) $6,281 $5,053 Actualreturnonplanassets 710 1,016 Contributionsbytheemployer 580 500 Contributionsbyplanparticipants 9 3 Benefitspaid (307) (291) EstimatedplanassetsatDecember31(ofwhich$6,998and$6,252is measuredatfairvalueasofDecember31,2010and2009,respectively) $7,273 $6,281 Fundedstatusandaccruedpensionbenefitcosts $ (985) $(1,083) Amountsincludedinaccumulatedothercomprehensivelossareshown below: Priorservicecost $ (771) $ (883) Netactuarialloss (2,589) (2,488) Totalaccumulatedothercomprehensiveloss $(3,360) $(3,371) Accruedpensionbenefitcostsarereportedasacomponentof “Accruedbenefit costs”intheCombinedStatementsof Condition. TheaccumulatedbenefitobligationfortheSystemPlan,whichdiffersfromthe estimatedactuarialpresentvalueof projectedbenefitobligationbecauseitisbased oncurrentratherthanfuturecompensationlevels,was$7,136millionand $6,430millionatDecember31,2010and2009,respectively. Theweighted-averageassumptionsusedindevelopingtheaccumulatedpension benefitobligationfortheSystemPlanasof December31wereasfollows: 2010 2009 Discountrate 5.50% 6.00% Rateofcompensationincrease 5.00% 5.00% NetperiodicbenefitexpensesfortheyearsendedDecember31,2010and2009, wereactuariallydeterminedusingaJanuary1measurementdate.Theweightedaverageassumptionsusedindevelopingnetperiodicbenefitexpensesforthe SystemPlanfortheyearswereasfollows: 2010 2009 Discountrate 6.00% 6.00% Expectedassetreturn 7.75% 7.75% Rateofcompensationincrease 5.00% 5.00% Discountratesreflectyieldsavailableonhigh-qualitycorporatebondsthatwould generatethecashflowsnecessarytopaytheSystemPlan’sbenefitswhendue.The expectedlong-termrateof returnonassetsisanestimatethatisbasedonacombinationof factors,includingtheSystemPlan’sassetallocationstrategyandhistoricalreturns;surveysof expectedratesof returnforotherentities’plans;aprojected returnforequitiesandfixedincomeinvestmentsbasedonrealinterestrates,inflationexpectations,andequityriskpremiums;andsurveysof expectedreturnsin equityandfixedincomemarkets.

398 97thAnnualReport|2010 Thecomponentsof netperiodicpensionbenefitexpensefortheSystemPlanfor theyearsendedDecember31areshownbelow(inmillions): 2010 2009 Servicecost-benefitsearnedduringthe period $223 $204 Interestcostonaccumulatedbenefit obligation 450 427 Amortizationofpriorservicecost 112 116 Amortizationofnetloss 188 285 Expectedreturnonplanassets (491) (389) Netperiodicpensionbenefitexpense 482 643 Specialterminationbenefits 11 9 Totalperiodicpensionbenefitexpense $493 $652 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive lossintonetperiodicpensionbenefitexpensein2011areshownbelow: Priorservicecost $110 Netactuarialloss 182 Total $292 Therecognitionof specialterminationlossesisprimarilytheresultof enhanced retirementbenefitsprovidedtoemployeesduringtherestructuringdescribedin Note16. Followingisasummaryof expectedbenefitpayments,excludingenhancedretirementbenefits(inmillions): Expectedbenefitpayments 2011 $ 326 2012 347 2013 370 2014 394 2015 417 2016-2019 2,454 Total $4,308 TheSystem’sCommitteeonInvestmentPerformance(CIP)isresponsiblefor establishinginvestmentpolicies,selectinginvestmentmanagers,andmonitoring theinvestmentmanagers’compliancewithitspolicies.TheCIPissupportedby staff intheOEBincarryingouttheseresponsibilities.AtDecember31,2010,the SystemPlan’sassetswereheldinseveninvestmentvehicles:aliability-linked account,twoactivelymanagedlong-durationfixedincomeportfolios,anindexed U.S.investment-gradebondfund,anindexedU.S.equityfund,anindexednon- U.S.developed-marketsfund,andamoneymarketfund. Thediversificationof thePlan’sinvestmentsisdesignedtolimitconcentrationof riskandtheriskof lossrelatedtoanindividualassetclass.Theliability-linked account,fundedin2008,seekstodefeaseaportionof theSystemPlan’sliability relatedtoretiredlivesusingaTreasurysecuritiesportfolio.Thepolicygoverning thisaccountcallsforcash-matchingthefirsttwoyearsof aportionof retireebenefitspaymentsandimmunizingtheremainingobligation.Thetwolong-duration fixedincomeportfoliosareseparateaccountsbenchmarkedtotheBarclaysLong Government/CreditIndex,whichwasselectedasaproxyfortheliabilitiesof the Plan.Whiletheseportfoliosarebothactivelymanaged,theguidelinesaredesigned

FederalReserveSystemAudits 399 tolimitportfoliodeviationsfromthebenchmark.TheindexedU.S.investmentgradebondfundtrackstheBarclaysU.S.AggregateIndex,whichisabroader fixedincomeindexthantheBarclaysLongGovernment/CreditIndex,buthasa shorterdurationandaveragematurity.TheindexedU.S.equityfundisintendedto tracktheoverallU.S.equitymarketacrossmarketcapitalizations.Theindexed non-U.S.developedmarketsequityfundisintendedtotracktheMorganStanley CapitalInternational(MSCI)EmergingMarketsIndex,Europe,Australia,Far EastplusCanadaIndex,whichincludesstocksfrom23marketsdeemedbyMSCI tobe“developedmarkets”.Finally,themoneymarketfund,whichinvestsinhighqualitymoneymarketsecurities,istherepositoryforcashbalancesandadheresto aconstantdollarmethodology. Permittedandprohibitedinvestments,includingtheuseof derivatives,aredefined ineitherthetrustagreement(forcommingledindexvehicles)ortheinvestment guidelines(forthethreeseparateaccounts).TheCIPreviewsthetrustagreement andapprovesallinvestmentguidelinesaspartof theselectionof eachinvestment toensurethatthetrustagreementisconsistentwiththeCIP’sinvestmentobjectivesfortheSystemPlan’sassets. TheSystemPlan’spolicyweightandactualassetallocationsatDecember31,by assetcategory,areasfollows: ActualAssetAllocations PolicyWeight 2010 2009 U.S.equities 42.8% 45.4% 53.0% Internationalequities 12.2% 12.6% 12.9% Fixedincome 45.0% 41.7% 33.8% Cash 0.0% 0.3% 0.3% Total 100.0% 100.0% 100.0% EmployercontributionstotheSystemPlanmaybedeterminedusingdifferent assumptionsthanthoserequiredforfinancialreporting.TheSystemPlan’sactuarialfundingmethodisexpectedtoproducearecommendedannualfundingrange between$350and$400million.In2011,theSystemwillmakemonthlycontributionsof $35millionandwillreevaluatethemonthlycontributionsuponcompletionof the2011actuarialvaluation.TheReserveBanks’projectedbenefitobligation,fundedstatus,andnetpensionexpensesfortheBEPandtheSERPat December31,2010and2009,andfortheyearsthenended,werenotmaterial. TheSystemPlan’sinvestmentsarereportedatfairvalueasrequiredbyASC820. ASC820establishesathree-levelfairvaluehierarchythatdistinguishesbetween marketparticipantassumptionsdevelopedusingmarketdataobtainedfromindependentsources(observableinputs)andtheReserveBanks’assumptionsabout marketparticipantassumptionsdevelopedusingthebestinformationavailablein thecircumstances(unobservableinputs). Determinationof FairValue TheSystemPlan’sinvestmentsarevaluedonthebasisof thelastavailablebid pricesorcurrentmarketquotationsprovidedbydealers,orpricingservices.To determinethevalueof aparticularinvestment,pricingservicesmayuseinformationontransactionsinsuchinvestments;quotationsfromdealers;pricingmetrics; markettransactionsincomparableinvestments;relationshipsobservedinthemar-

400 97thAnnualReport|2010 ketbetweeninvestments;andcalculatedyieldmeasuresbasedonvaluationmethodologiescommonlyemployedinthemarketforsuchinvestments. Becauseof theuncertaintyinherentindeterminingthefairvalueof investments thatdonothaveareadilyavailablefairvalue,thefairvalueof theseinvestments maydiffersignificantlyfromthevaluesthatwouldhavebeenreportedif areadily availablefairvaluehadexistedfortheseinvestmentsandmaydiffermaterially fromthevaluesthatmayultimatelyberealized. Thefollowingtablespresentthefinancialinstrumentsrecordedatfairvalueasof December31byASC820hierarchy(inmillions): 2010 Description Level1 Level2 Level3 Total Short-terminvestments $ - $ 30 $- $ 30 TreasuryandFederalagencysecurities 1,065 39 - 1,104 GSEdebtsecurities - - - - Otherfixedincomesecurities - 644 - 644 Commonstocks - - - - Commingledfunds - 5,220 - 5,220 Total $1,065 $5,933 $- $6,998 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 TheSystemPlanentersintofuturescontracts,tradedonregulatedexchanges,to managecertainrisksandtomaintainappropriatemarketexposureinmeetingthe investmentobjectivesof theSystemPlan.TheSystemPlanbearsthemarketrisk thatarisesfromanyunfavorablechangesinthevalueof thesecuritiesorindexes underlyingthesefuturescontracts.Theuseof futurescontractsinvolves,tovaryingdegrees,elementsof marketriskinexcessof theamountrecordedintheStatementsof Condition.TheguidelinesestablishedbytheCIPfurtherreduceriskby limitingthenetfuturespositions,formostfundmanagers,to15percentof the marketvalueof theadvisor’sportfolio.Nolimithasbeenestablishedonthe futurespositionsof theliability-driveninvestmentsbecausethefundmanageronly executesTreasuryfutures. AtDecember31,2010and2009,aportionof short-terminvestmentswasavailable forfuturestrading.Therewere$1millionof Treasurysecuritiespledgedascollateralforeachof theyearsendedDecember31,2010and2009. ThriftPlan Employeesof theReserveBanksparticipateinthedefinedcontributionThrift PlanforEmployeesof theFederalReserveSystem(ThriftPlan).TheReserve Banksmatchemployeecontributionsbasedonaspecifiedformula.Effective April1,2009,theReserveBanksmatch100percentof thefirst6percentof employeecontributionsfromthedateof hireandprovideanautomaticemployer

FederalReserveSystemAudits 401 contributionof 1percentof eligiblepay.Forthefirstthreemonthsof theyear endedDecember31,2009,theReserveBanksmatched80percentof thefirst 6percentof employeecontributionsforemployeeswithlessthanfiveyearsof serviceand100percentof thefirst6percentof employeecontributionsforemployees withfiveormoreyearsof service.TheReserveBanks’ThriftPlancontributions totaled$94millionand$82millionfortheyearsendedDecember31,2010and 2009,respectively,andarereportedasacomponentof “Salariesandbenefits”in theCombinedStatementsof IncomeandComprehensiveIncome. (14)PostretirementBenefitsOtherThanRetirementPlansand PostemploymentBenefits PostretirementBenefitsOtherThanRetirementPlans InadditiontotheReserveBank’sretirementplans,employeeswhohavemetcertainageandlength-of-servicerequirementsareeligibleforbothmedicalbenefits andlifeinsurancecoverageduringretirement. TheReserveBanksfundsbenefitspayableunderthemedicalandlifeinsurance plansasdueand,accordingly,havenoplanassets. Followingisareconciliationof thebeginningandendingbalancesof thebenefit obligation(inmillions): 2010 2009 AccumulatedpostretirementbenefitobligationatJanuary1 $1,324 $1,221 Servicecost-benefitsearnedduringtheperiod 47 40 Interestcostonaccumulatedbenefitobligation 76 74 Netactuarialloss(gain) (9) 54 Specialterminationbenefitsloss 1 1 Contributionsbyplanparticipants 18 16 Benefitspaid (88) (79) MedicarePartDsubsidies 5 5 Planamendments (16) (8) AccumulatedpostretirementbenefitobligationatDecember31 $1,358 $1,324 AtDecember31,2010and2009,theweighted-averagediscountrateassumptions usedindevelopingthepostretirementbenefitobligationwere5.25percentand 5.75percent,respectively. Discountratesreflectyieldsavailableonhigh-qualitycorporatebondsthatwould generatethecashflowsnecessarytopaytheplan’sbenefitswhendue.

402 97thAnnualReport|2010 Followingisareconciliationof thebeginningandendingbalanceof theplan assets,theunfundedpostretirementbenefitobligation,andtheaccruedpostretirementbenefitcosts(inmillions): 2010 2009 FairvalueofplanassetsatJanuary1 $ - $ - Contributionsbytheemployer 65 58 Contributionsbyplanparticipants 18 16 Benefitspaid (88) (79) MedicarePartDsubsidies 5 5 FairvalueofplanassetsatDecember31 $ - $ - Unfundedobligationandaccruedpostretirementbenefitcost $1,358 $1,324 Amountsincludedinaccumulatedothercomprehensivelossareshownbelow: Priorservicecost $ 31 $ 33 Netactuarial(loss) (301) (338) Totalaccumulatedothercomprehensiveloss $ (270) $ (305) Accruedpostretirementbenefitcostsarereportedasacomponentof “Accrued benefitcosts”intheCombinedStatementsof Condition. Formeasurementpurposes,theassumedhealthcarecosttrendratesatDecember31areasfollows: 2010 2009 Healthcarecosttrendrateassumedfornextyear 8.00% 7.50% Ratetowhichthecosttrendrateisassumedtodecline(theultimatetrendrate) 5.00% 5.00% Yearthattheratereachestheultimatetrendrate 2017 2015 Assumedhealthcarecosttrendrateshaveasignificanteffectontheamountsreportedforhealthcareplans.A1percentagepoint changeinassumedhealthcarecosttrendrateswouldhavethefollowingeffectsfortheyearendedDecember31,2010(inmillions): 1percentage 1percentage pointincrease pointdecrease Effectonaggregateofserviceandinterestcostcomponentsofnetperiodic postretirementbenefitcosts $ 17 $ (14) Effectonaccumulatedpostretirementbenefitobligation $140 $(120) Thefollowingisasummaryof thecomponentsof netperiodicpostretirement benefitexpensefortheyearsendedDecember31(inmillions): 2010 2009 Servicecost-benefitsearnedduringtheperiod $ 47 $ 40 Interestcostonaccumulatedbenefitobligation 76 74 Amortizationofpriorservicecost (18) (20) Amortizationofnetactuarialloss 28 29 Totalperiodicexpense 133 123 Curtailment(gain) - (4) Specialterminationbenefitsloss 1 1 Netperiodicpostretirementbenefitexpense $134 $120

FederalReserveSystemAudits 403 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive lossintonetperiodicpostretirementbenefitexpensein2011areshownbelow: Priorservicecost $(8) Netactuarialloss 21 Total $13 NetpostretirementbenefitcostsareactuariallydeterminedusingaJanuary1measurementdate.AtJanuary1,2010and2009,theweighted-averagediscountrate assumptionsusedtodeterminenetperiodicpostretirementbenefitcostswere 5.75percentand6.00percent,respectively. Netperiodicpostretirementbenefitexpenseisreportedasacomponentof “Salariesandbenefits”intheCombinedStatementsof IncomeandComprehensive Income. TheMedicarePrescriptionDrug,ImprovementandModernizationActof 2003 establishedaprescriptiondrugbenefitunderMedicare(MedicarePartD)anda federalsubsidytosponsorsof retireehealthcarebenefitplansthatprovidebenefitsthatareatleastactuariallyequivalenttoMedicarePartD.ThebenefitsprovidedundertheReserveBanks’plantocertainparticipantsareatleastactuarially equivalenttotheMedicarePartDprescriptiondrugbenefit.Theestimatedeffects of thesubsidyarereflectedinactuarialloss(gain)intheaccumulatedpostretirementbenefitobligationandnetperiodicpostretirementbenefitexpense. FederalMedicarePartDsubsidyreceiptswere$4.3millionand$6.4millioninthe yearsendedDecember31,2010and2009,respectively.Expectedreceiptsin2011, relatedtobenefitspaidintheyearsendedDecember31,2010and2009,are $1million. Followingisasummaryof expectedpostretirementbenefitpayments(inmillions): Withoutsubsidy Withsubsidy 2011 $ 75 $ 70 2012 79 73 2013 83 77 2014 87 80 2015 92 83 2016–2020 523 469 Total $939 $852 PostemploymentBenefits TheReserveBanksofferbenefitstoformerorinactiveemployees.PostemploymentbenefitcostsareactuariallydeterminedusingaDecember31measurement dateandincludethecostof medicalanddentalinsurance,survivorincome,disabilitybenefits,andself-insuredworkers’compensationexpenses.Theaccrued postemploymentbenefitcostsrecognizedbytheReserveBanksatDecember31, 2010and2009,were$146millionand$153million,respectively.Thiscostis includedasacomponentof “Accruedbenefitcosts”intheCombinedStatements of Condition.Netperiodicpostemploymentbenefitexpenseincludedin2010and 2009operatingexpenseswere$11millionand$56million,respectively,andare recordedasacomponentof “Salariesandbenefits”intheCombinedStatements of IncomeandComprehensiveIncome.

404 97thAnnualReport|2010 (15)AccumulatedOtherComprehensiveIncomeAndOther ComprehensiveIncome Followingisareconciliationof beginningandendingbalancesof accumulated othercomprehensiveincome(loss)(inmillions): Amount relatedto Total Amount postretirement accumulated relatedto benefits other definedbenefit otherthan comprehensive retirementplan retirement income(loss) plans BalanceatJanuary1,2009 $(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–othercomprehensive income(loss) 1,047 (40) 1,007 BalanceatDecember31,2009 $(3,371) $(305) $(3,676) Changeinfundedstatusofbenefitplans: Priorservicecostsarisingduringtheyear - 16 16 Netactuarialgain(loss)arisingduringtheyear (289) 9 (280) Amortizationofpriorservicecost 112 (18) 94 Amortizationofnetactuarialloss 188 28 216 Changeinfundedstatusofbenefitplans–othercomprehensive income 11 35 46 BalanceatDecember31,2010 $(3,360) $(270) $(3,630) Additionaldetailregardingtheclassificationof accumulatedothercomprehensive lossisincludedinNotes13and14. (16)BusinessRestructuringCharges In2010,theReserveBanksannouncedtheconsolidationof someof theircurrencyprocessingoperations.Asaresultof thisinitiative,currencyprocessing operationsperformedbytwoReserveBankBranchofficeswillbeconsolidated. In2009,theReserveBankscontinuedtheircheckrestructuringinitiativestoalign checkprocessinginfrastructureandoperationswithdecliningcheckprocessing volumes.Additionalannouncementsin2009includedrestructuringplansassociatedwithdiscontinuingcheckprintsites. Restructuringplansannouncedpriorto2009includedtheaccelerationof their checkrestructuringinitiativestoalignthecheckprocessinginfrastructureand operationswithdecliningcheckprocessingvolumes.ThenewinfrastructureconsolidatedoperationsintotworegionalReserveBankprocessingsites;oneinCleveland,forpapercheckprocessing,andoneinAtlanta,forelectroniccheckprocessing.Additionalannouncementsin2008includedrestructuringplansassociated withtheclosureof acheckprocessingcontingencycenterandtheconsolidationof checkadjustmentssites.

FederalReserveSystemAudits 405 Followingisasummaryof financialinformationrelatedtotherestructuringplans (inmillions): 2008 2010 2009 andprior restructuring restructuring Total restructuring plans plans plans InformationrelatedtorestructuringplansasofDecember31,2010: Totalexpectedcostsrelatedtorestructuringactivity $ 4 $ 4 $ 53 $61 Estimatedfuturecostsrelatedtorestructuringactivity 1 - - 1 Expectedcompletiondate 2011 2010 2010 Reconciliationofliabilitybalances: BalanceatJanuary1,2009 $ - $ - $ 40 $40 Employeeseparationcosts - 4 - 4 Adjustments - - (2) (2) Payments - - (23) (23) BalanceatDecember31,2009 $ - $ 4 $ 15 $19 Employeeseparationcosts 3 - - 3 Contractterminationcosts - - 1 1 Adjustments - (1) (1) (2) Payments - (2) (9) (11) BalanceatDecember31,2010 $ 3 $ 1 $ 6 $10 Employeeseparationcostsareprimarilyseverancecostsforidentifiedstaff reductionsassociatedwiththeannouncedrestructuringplans.Separationcoststhatare providedundertermsof ongoingbenefitarrangementsarerecordedbasedonthe accumulatedbenefitearnedbytheemployee.Separationcoststhatareprovided underthetermsof one-timebenefitarrangementsaregenerallymeasuredbased ontheexpectedbenefitasof theterminationdateandrecordedratablyoverthe periodtotermination.Restructuringcostsrelatedtoemployeeseparationsare reportedasacomponentof “Salariesandbenefits”intheCombinedStatements of IncomeandComprehensiveIncome. Contractterminationcostsincludethechargesresultingfromterminatingexisting leaseandothercontractsandareshownasacomponentof “Operatingexpenses: Other”intheCombinedStatementsof IncomeandComprehensiveIncome. Adjustmentstotheaccruedliabilityareprimarilyduetochangesintheestimated restructuringcostsandareshownasacomponentof theappropriateexpensecategoryintheCombinedStatementsof IncomeandComprehensiveIncome. Restructuringcostsassociatedwiththeimpairmentof certainBankassets,includingsoftwareandbuildings,arediscussedinNote11. (17)SubsequentEvents Theclosingof theAIGrecapitalizationplan,whichoccurredonJanuary14,2011, isdiscussedinNote3.OnFebruary11,2011,Treasuryannouncedtheconsolidationof theTreasuryRetailSecuritiesoperationsand,asaresult,therelatedoperationscurrentlyperformedattheFederalReserveBankof ClevelandwillbeconsolidatedattheFederalReserveBankof Minneapolis.Treasuryplanstocomplete theconsolidationbytheendof 2011,andtheFederalReserveBankof Cleveland isevaluatingtheconsolidationeffortsandhasnotyetdeterminedtheeffectsonthe 2011financialstatements.Therewerenoothersubsequenteventsthatrequire adjustmentstoordisclosuresinthecombinedfinancialstatementsasof December31,2010.SubsequenteventswereevaluatedthroughMarch22,2011,whichis thedatethattheBoardissuedthecombinedfinancialstatements.

406 97thAnnualReport|2010 Office of Inspector General Activities During2010,theOIGcompleted21audits,inspections,andevaluations(table1)andconductedanumberof follow-upreviewstoevaluateactiontakenon TheOfficeof InspectorGeneral(OIG)fortheFedpriorrecommendations.Duetothesensitivenature eralReserveBoardoperatesinaccordancewiththe of someof thematerial,certainreportswereonly InspectorGeneralActof 1978,asamended.The issuedinternaltotheBoard,asindicated.OIGinves- OIGconductsactivitiesandmakesrecommendations tigativeworkresultedinfivearrests,fiveindictments, topromoteeconomyandefficiency;enhancepolicies onecriminalinformation,sixconvictions,andone andprocedures;andpreventanddetectwaste,fraud, termination,aswellas$837,148inmonetaryrecoverandabuseinBoardprogramsandoperations,includiesand$3,810,050incriminalfinesandrestitution. ingfunctionsthattheBoardhasdelegatedtothe Twoinvestigationswereclosedduringtheyear.The FederalReserveBanks.Accordingly,theOIGplans OIGalsoissuedtwosemiannualreportstoCongress andconductsaudits,inspections,evaluations,investiandperformedapproximately50reviewsof legislagations,andotherreviewsrelatingtoBoardand tionandregulationsrelatedtotheoperationsof the Board-delegatedprogramsandoperations.Italso Boardand/ortheOIG. retainsanindependentauditortoannuallyauditthe Board’sandtheFederalFinancialInstitutions ExaminationCouncil’sfinancialstatements.Inaddi- Formoreinformation,visittheOIGwebsiteat tion,theOIGkeepstheCongressandtheBoardof www.federalreserve.gov/oig/. Governorsfullyinformedaboutseriousabusesand deficiencies. Table1.OIGaudit,inspection,andevaluationreportsissuedin2010 Reporttitle Monthissued MaterialLossReviewofNeighborhoodCommunityBank January MaterialLossReviewofCommunityBankofWestGeorgia January MaterialLossReviewofBankFirst February MaterialLossReviewofCommunityFirstBank March MaterialLossReviewofCapitalSouthBank March MaterialLossReviewofCommunityBankofNevada March FederalFinancialInstitutionsExaminationCouncilFinancialStatementsasofandfortheYearsEndedDecember31,2009and2008, andIndependentAuditors’Report March BoardofGovernorsoftheFederalReserveSystemFinancialStatementsasofandfortheYearsEndedDecember31,2009and2008, andIndependentAuditors’Report March MaterialLossReviewofWarrenBank April MaterialLossReviewofIrwinUnionBankandTrust April MaterialLossReviewofBankofElmwood May MaterialLossReviewofSanJoaquinBank May MaterialLossReviewofOrionBank June MaterialLossReviewofSolutionsBank June SecurityControlReviewoftheLotusNotesandLotusDominoInfrastructure(InternalReport) June MaterialLossReviewofBarnesBankingCompany September ReviewoftheFailureofMarcoCommunityBank September AuditoftheBoard’sInformationSecurityProgram November TheFederalReserve’sSection13(3)LendingFacilitiestoSupportOverallMarketLiquidity:Function,Status,andRiskManagement November MaterialLossReviewofMidwestBankandTrustCompany December SecurityControlReviewoftheInternetElectronicSubmissionSystem(InternalReport) December

FederalReserveSystemAudits 407 Government Accountability section13(3),andof discountwindowandopenmarkettransactionsengagedinafterJuly21,2010.How- Office Reviews ever,GAOisprohibitedfromdisclosingparticipantandtransaction-specificinformationuntiltheFederal TheFederalBankingAgencyAuditAct(Pub.L. ReserveBoardisrequiredtodisclosethisinforma- No.95–320)authorizestheGovernmentAccounttion.Additionally,GAOisrequiredtocompletean abilityOffice(GAO)toauditcertainaspectsof Fedauditof ReserveBankgovernancenolaterthan eralReserveSystemoperations.TheDodd-Frank July21,2011. WallStreetReformandConsumerProtectionActof 2010(Dodd-FrankAct)directsGAOtoconduct additionalauditswithrespecttotheseoperations.For In2010,theGAOcompletedeightreportsonselected example,undertheDodd-FrankAct,GAOis aspectsof FederalReserveoperations(table1).In requiredtoconductaone-timeauditof theexisting addition,10projectsconcerningtheFederalReserve creditfacilitiesestablishedbytheFederalReserve wereinvariousstagesof completionatyear-end,5of undersection13(3)of theFederalReserveAct whichwererequiredundertheDodd-FrankAct betweenDecember1,2007,andJuly21,2010.GAO (table2).TheFederalReservealsoprovidedinformaisinstructedtoexaminetheinvolvementof the tiontotheGAOduringtheyearonnumerousother ReserveBanksintheestablishmentandoperationof GAOinvestigations,including4completedreviews anysuchemergencyfacilityorprogram.TheDodd- and15ongoingreviews,8of whichresultedfromthe FrankActalsoinstructsGAOtoconductoperational Dodd-FrankAct.Thereportsareavailabledirectly auditsof allfuturecreditfacilitiesestablishedunder fromtheGAOwebsite. Table1.Reportscompletedduring2010 Reporttitle Reportnumber Monthissued(2010) TroubledAssetReliefProgram:TreasuryNeedstoStrengthenItsDecision-MakingProcessontheTerm Asset-BackedSecuritiesLoanFacility GAO-10-25 February FederalDepositInsuranceAct:Regulators’UseofSystemicRiskExceptionRaisesMoralHazardConcerns andOpportunitiesExisttoClarifytheProvision GAO-10-100 April TroubledAssetReliefProgram:UpdateofGovernmentAssistanceProvidedtoAIG GAO-10-475 April FederalReserveBanks:AreasforImprovementinInformationSecurityControls GAO-10-640R April FinancialAssistance:OngoingChallengesandGuidingPrinciplesRelatedtoGovernmentAssistancefor PrivateSectorCompanies GAO-10-719 August TroubledAssetReliefProgram:BankStressTestOffersLessonsasRegulatorsTakeFurther ActionstoStrengthenSupervisoryOversight GAO-10-861 September TroubledAssetReliefProgram:OpportunitiesExisttoApplyLessonsLearnedfromtheCapitalPurchase ProgramtoSimilarlyDesignedProgramsandtoImprovetheRepaymentProcess GAO-11-47 October FinancialAudit:BureauofthePublicDebt’sFiscalYears2010and2009SchedulesofFederalDebt GAO-11-52 November Table2.Projectsactiveatyear-end2010 Subjectofproject Monthinitiated(2010) SecondAnniversaryTARPReport March TroubledAssetReliefProgram:UpdateofAIGindicators May AIGfederalassistance May Bankexaminationsandcredits June Reservebankgovernance July Promptcorrectiveaction July Emergencylendingandotherfacilities July Proprietarytrading October Overseeingmortgageservicerforeclosureprocedures October Capitalrequirements December

409 Federal Reserve System Organization CongressdesignedtheFederalReserveSystemtogiveitabroadperspectiveontheeconomyandoneconomic activityinallpartsof thenation.Assuch,theSystemiscomposedof acentral,governmentalagency—the Boardof Governors—inWashington,D.C.,and12regionalFederalReserveBanks.ThissectionlistskeyofficialsacrosstheSystem,includingtheBoardof Governors,itsofficers,FederalOpenMarketCommitteemembers,severalsystemcouncils,andFederalReserveBankandBranchdirectorsandofficers. BOARD OF GOVERNORS Members TheBoardof Governorsof theFederalReserveSystemiscomposedof sevenmembers,whoarenominatedby thePresidentandconfirmedbytheSenate.TheChairmanandtheViceChairmanof theBoardarealsonamed bythePresidentfromamongthemembersandareconfirmedbytheSenate.TwopositionsontheBoardare currentlyvacant.Forafulllistingof Boardmembersfrom1913throughthepresent,visitwww.federalreserve .gov/bios/boardmembership.htm. BenS.Bernanke KevinM.Warsh DanielK.Tarullo Chairman ElizabethA.Duke SarahBloomRaskin JanetL.Yellen ViceChair DivisionsandOfficers Thirteendivisionssupportandcarryoutthemissionof theBoardof Governors,whichisbasedin Washington,D.C. OfficeofBoardMembers MichelleA.Smith RosannaPianalto-Cameron LucretiaM.Boyer Director AssistanttotheBoard SpecialAssistanttotheBoardfor PublicInformation LindaL.Robertson DavidW.Skidmore AssistanttotheBoard AssistanttotheBoard WinthropP.Hambley BrianJ.Gross SeniorAdviser LarickeD.Blanchard SpecialAssistanttotheBoardfor AssistanttotheBoard CongressionalLiaison

410 97thAnnualReport|2010 LegalDivision ScottG.Alvarez StephanieMartin KieranJ.Fallon GeneralCounsel AssociateGeneralCounsel AssociateGeneralCounsel RichardM.Ashton AnnMisback StephenH.Meyer DeputyGeneralCounsel AssociateGeneralCounsel AssistantGeneralCounsel KathleenM.O’Day KatherineH.Wheatley CaryK.Williams DeputyGeneralCounsel AssociateGeneralCounsel AssistantGeneralCounsel OfficeoftheSecretary JenniferJ.Johnson RobertdeV.Frierson MargaretM.Shanks Secretary DeputySecretary AssociateSecretary DivisionofInternationalFinance D.NathanSheets TrevorA.Reeve CharlesP.Thomas Director AssociateDirector AssistantDirector ThomasA.Connors RalphW.Tryon MarkS.Carey DeputyDirector AssociateDirector SeniorAdviser StevenB.Kamin ChristopherJ.Erceg JohnH.Rogers DeputyDirector DeputyAssociateDirector SeniorAdviser MichaelP.Leahy DavidH.Bowman JaneHaltmaier SeniorAssociateDirector AssistantDirector Adviser OfficeofFinancialStabilityPolicyandResearch J.NellieLiang AndreasW.Lehnert SethF.Wheeler Director DeputyDirector Chief of Staff DivisionofMonetaryAffairs WilliamB.English EgonZakrajsek FabioM.Natalucci Director DeputyAssociateDirector AssistantDirector JamesA.Clouse WilliamF.Bassett StephenA.Meyer DeputyDirector AssistantDirector SeniorAdviser DeborahJ.Danker MargaretG.DeBoer AndrewT.Levin DeputyDirector AssistantDirector SeniorAdviser WilliamNelson JaneE.Ihrig MaryT.Hoffman DeputyDirector AssistantDirector Adviser SethB.Carpenter J.DavidLopez-Salido SeniorAssociateDirector AssistantDirector GretchenC.Weinbach MatthewM.Luecke DeputyAssociateDirector AssistantDirector

FederalReserveSystemOrganization 411 DivisionofResearchandStatistics DavidJ.Stockton DanielM.Covitz SeanD.Campbell Director DeputyAssociateDirector AssistantDirector DavidW.Wilcox MichaelS.Cringoli JeffreyC.Campione DeputyDirector DeputyAssociateDirector AssistantDirector DavidL.Reifschneider MatthewJ.Eichner SandraA.Cannon SeniorAssociateDirector DeputyAssociateDirector AssistantDirector LawrenceSlifman EricM.Engen JoshuaGallin SeniorAssociateDirector DeputyAssociateDirector AssistantDirector WilliamL.WascherIII DianaHancock ArthurB.Kennickell SeniorAssociateDirector DeputyAssociateDirector AssistantDirector AlicePatriciaWhite MichaelT.Kiley SeniorAssociateDirector DeputyAssociateDirector MaryM.West AssistantDirector MichaelS.Gibson DavidE.Lebow AssociateDirector DeputyAssociateDirector GlennB.Canner SeniorAdviser S.WaynePassmore MichaelG.Palumbo AssociateDirector DeputyAssociateDirector StephenD.Oliner JaniceShack-Marquez RobinA.Prager SeniorAdviser AssociateDirector DeputyAssociateDirector DanielE.Sichel JoyceK.Zickler AssociateDirector DeputyAssociateDirector DivisionofBankingSupervisionandRegulation PatrickM.Parkinson BetsyCross MichaelJ.Kraemer Director AssociateDirector AssistantDirector MaryannF.Hunter NidaDavis RobertT.Maahs DeputyDirector AssociateDirector AssistantDirector BarbaraJ.Bouchard GeraldA.EdwardsJr. RichardA.NaylorII SeniorAssociateDirector AssociateDirector AssistantDirector MichaelR.Foley DavidS.Jones DanaE.Payne SeniorAssociateDirector AssociateDirector AssistantDirector JackP.JenningsII PhilipAquilino NancyJ.Perkins SeniorAssociateDirector AssistantDirector AssistantDirector ArthurW.Lindo RobertT.Ashman SarkisYoghourtdjian SeniorAssociateDirector AssistantDirector AssistantDirector PeterJ.Purcell KevinJ.Clarke NorahM.Barger SeniorAssociateDirector AssistantDirector SeniorAdviser WilliamG.Spaniel LisaM.DeFerrari TimothyP.Clark SeniorAssociateDirector AssistantDirector SeniorAdviser MarkE.VanDerWeide AdrienneT.Haden CharlesH.Holm SeniorAssociateDirector AssistantDirector SeniorAdviser KevinM.Bertsch AnnaL.Hewko WilliamF.Treacy AssociateDirector AssistantDirector Adviser

412 97thAnnualReport|2010 DivisionofConsumerandCommunityAffairs SandraF.Braunstein TondaE.Price AllenJ.Fishbein Director SeniorAssociateDirector AssistantDirector LeonardChanin AnnaAlvarezBoyd SuzanneG.Killian DeputyDirector AssociateDirector AssistantDirector TimothyR.Burniston JosephA.Firschein JamesA.Michaels SeniorAssociateDirector AssistantDirector AssistantDirector DivisionofReserveBankOperationsandPaymentSystems LouiseL.Roseman Jeff J.Stehm MichaelJ.Stan Director AssociateDirector AssistantDirector DonaldV.Hammond GregoryL.Evans LeonardJ.Tanis DeputyDirector DeputyAssociateDirector AssistantDirector JeffreyC.Marquardt SusanV.Foley PaulW.Bettge DeputyDirector DeputyAssociateDirector SeniorAdviser KennethD.Buckley LisaK.Hoskins AssociateDirector DeputyAssociateDirector DorothyLaChapelle MichaelJ.Lambert AssociateDirector AssistantDirector OfficeofStaffDirector StephenR.Malphrus SheilaClark AdrienneD.Hurt Staff Director EqualEmploymentOpportunity Adviser ProgramsDirector CharlesS.Struckmeyer DeputyStaff Director LynnS.Fox SeniorAdviser ManagementDivision H.FayPeters JamesR.Riesz TheresaA.Trimble Director AssociateDirector AssistantDirector MichellC.Clark MarieS.Savoy KarenL.Vassallo DeputyDirector AssociateDirector AssistantDirector DonaldA.Spicer ElaineM.Boutilier ToddA.Glissman DeputyDirector DeputyAssociateDirector SeniorAdviser WilliamL.Mitchell TaraC.Tinsley-Pelitere BillyJ.Sauls SeniorAssociateDirector DeputyAssociateDirector SeniorAdviser ChristineM.Fields KeithF.Bates CarolA.Sanders AssociateDirector AssistantDirector SpecialAdviser CharlesF.O’Malley JeffreyR.Peirce ChristopherJ.Suma AssociateDirector AssistantDirector SpecialAdviser

FederalReserveSystemOrganization 413 DivisionofInformationTechnology MaureenT.Hannan PoKyungKim GlennS.Eskow Director DeputyAssociateDirector AssistantDirector GearyL.Cunningham SusanF.Marycz KofiA.Sapong DeputyDirector DeputyAssociateDirector AssistantDirector WayneA.Edmondson RaymondRomero RajasekharR.Yelisetty DeputyDirector DeputyAssociateDirector AssistantDirector SharonL.Mowry LisaM.Bell TillenaG.Clark DeputyDirector AssistantDirector Adviser OfficeofInspectorGeneral ElizabethA.Coleman AnthonyJ.Castaldo AndrewPatchanJr. InspectorGeneral AssociateInspectorGeneral AssociateInspectorGeneral JacquelineM.Becker EliseM.Ennis HarveyWitherspoon AssociateInspectorGeneral AssociateInspectorGeneral AssociateInspectorGeneral

414 97thAnnualReport|2010 FEDERAL OPEN MARKET COMMITTEE TheFederalOpenMarketCommitteeismadeupof thesevenmembersof theBoardof Governors;thepresidentof theFederalReserveBankof NewYork;andfourof theremaining11ReserveBankpresidents,who serveone-yeartermsonarotatingbasis.During2010theFederalOpenMarketCommitteeheldeightregularly scheduledmeetingsandtwoconferencecalls(see“Minutesof FederalOpenMarketCommitteeMeetings”on page163). Members BenS.Bernanke ThomasM.Hoenig DanielK.Tarullo Chairman,Boardof Governors President,FederalReserveBank Boardof Governors of KansasCity WilliamC.Dudley KevinM.Warsh ViceChairman,President,Federal SandraPianalto Boardof Governors ReserveBankof NewYork President,FederalReserveBank JanetL.Yellen of Cleveland JimBullard Boardof Governors SarahBloomRaskin President,FederalReserveBank Boardof Governors of St.Louis EricS.Rosengren ElizabethA.Duke President,FederalReserveBank Boardof Governors of Boston AlternateMembers ChristineM.Cumming RichardW.Fisher CharlesI.Plosser FirstVicePresident,Federal President,FederalReserveBank President,FederalReserveBank ReserveBankof NewYork of Dallas of Philadelphia CharlesL.Evans NarayanaKocherlakota President,FederalReserveBank President,FederalReserveBank of Chicago of Minneapolis Officers WilliamB.English RichardM.Ashton StevenB.Kamin SecretaryandEconomist AssistantGeneralCounsel AssociateEconomist DeborahJ.Danker D.NathanSheets SimonPotter DeputySecretary Economist AssociateEconomist LawrenceSlifman MatthewM.Luecke DavidJ.Stockton AssociateEconomist AssistantSecretary Economist MarkS.Sniderman DavidW.Skidmore AlanD.Barkema AssociateEconomist AssistantSecretary AssociateEconomist ChristopherJ.Waller MichelleA.Smith JamesA.Clouse AssociateEconomist AssistantSecretary AssociateEconomist DavidW.Wilcox ScottG.Alvarez ThomasA.Connors AssociateEconomist GeneralCounsel AssociateEconomist BrianSack ThomasC.BaxterJr. JeffreyFuhrer Manager,SystemOpenMarket DeputyGeneralCounsel AssociateEconomist Account

FederalReserveSystemOrganization 415 BOARD OF GOVERNORS ADVISORY COUNCILS TheFederalReserveSystemusesadvisorycommitteesincarryingoutitsvariedresponsibilities.Threeof these committeesadvisetheBoardof Governorsdirectly:theFederalAdvisoryCouncil,theConsumerAdvisory Council,andtheThriftInstitutionsAdvisoryCouncil.Thesecouncils,whosemembersaredrawnfromeachof the12FederalReserveDistricts,meettwotofourtimesayear.TheindividualReserveBankshaveadvisory committeesaswell,includingthriftinstitutionsadvisorycommittees,smallbusinesscommittees,andagriculturaladvisorycommittees.Moreover,officialsfromallReserveBanksmeetperiodicallyinvariouscommittees. Tolearnmore,visitwww.federalreserve.gov/aboutthefed/advisorydefault.htm. FederalAdvisoryCouncil TheFederalAdvisoryCouncil—astatutorybodyestablishedundertheFederalReserveAct—consultswith, andadvises,theBoardof GovernorsonallmatterswithintheBoard’sjurisdiction.Itiscomposedof onerepresentativefromeachFederalReserveDistrict,chosenbytheReserveBankinthatDistrict.TheFederalReserve ActrequiresthecounciltomeetinWashington,D.C.,atleastfourtimesayear.Threemembersof thecouncil serveasitspresident,vicepresident,andsecretary.In2010,itmetonFebruary11–12,May6–7,September2–3, andDecember2–3.ThecouncilmetwiththeBoardonFebruary12,May7,September3,andDecember3, 2010. Members District1 District5 District9 EllenAlemany RichardD.Fairbank RichardK.Davis ChairmanandChief Executive Chief ExecutiveOfficerand Chairman,President,andChief Office,RBSAmericas/Citizens Chairman,CapitalOneFinancial ExecutiveOfficer,U.S.Bancorp, FinancialGroup,Greenwich,CT Corporation,McLean,VA Minneapolis,MN District2 District6 District10 RobertP.Kelly RichardG.Hickson BruceR.Lauritzen ChairmanandChief Executive ChairmanandChief Executive Chairman,FirstNationalBankof Officer,TheBankof NewYork Officer,TrustmarkCorporation, Omaha,Omaha,NE Mellon,NewYork,NY Jackson,MS District11 District3 District7 RichardW.EvansJr. R.ScottSmithJr. DavidW.Nelms ChairmanandChief Executive Chairman,President,andChief ChairmanandChief Executive Officer,Cullen/FrostBankers ExecutiveOfficer,Fulton Officer,DiscoverFinancial Inc.,SanAntonio,TX FinancialCorporation, Services,Riverwoods,IL Lancaster,PA District12 District8 RussellGoldsmith District4 BryanJordan ChairmanandChief Executive HenryL.MeyerIII PresidentandChief Executive Officer,CityNationalBank, Chairman,President,andChief Officer,FirstHorizonNational BeverlyHills,CA ExecutiveOfficer,KeyCorp, Corporation,Memphis,TN Cleveland,OH Officers RobertP.Kelly RussellGoldsmith JamesE.Annable President VicePresident Secretary

416 97thAnnualReport|2010 ConsumerAdvisoryCouncil TheConsumerAdvisoryCouncil—astatutorybodyestablishedpursuanttothe1976amendmentstotheEqual CreditOpportunityAct—advisestheBoardof Governorsonconsumerfinancialservices.Itsmembers,whoare appointedbytheBoard,areacademics,stateandlocalgovernmentofficials,andrepresentativesof thefinancial servicesindustryandof consumerandcommunityinterests.In2010,theCouncilmetwiththeBoardon March25,June17,andOctober21. Members MaeveEliseBrown PatriciaGarciaDuarte RonaldPhillips ExecutiveDirector,Housingand PresidentandChief Executive President,CoastalEnterprises, EconomicRightsAdvocates, Officer,NeighborhoodHousing Inc.,Wiscasset,ME Oakland,CA Servicesof Phoenix,Phoenix,AZ DoryRand PaulaBryant-Ellis IraGoldstein President,WoodstockInstitute, SeniorVicePresident, Director,PolicySolutions,The Chicago,IL CommunityDevelopment ReinvestmentFund, KevinRhein BankingGroup,BOKFinancial Philadelphia,PA GroupExecutiveVicePresident, Corporation, MikeGriffin CardServicesandConsumer Tulsa,OK SeniorVicePresident,KeyBank, Lending,WellsFargo&Co., JoanneBudde N.A.,Cleveland,OH Minneapolis,MN PresidentandChief Executive GretaHarris Officer,ConsumerCredit PhyllisSalowe-Kaye VicePresident–SoutheastRegion, CounselingServiceof San ExecutiveDirector,NewJersey LocalInitiativesSupport Francisco,SanFrancisco,CA CitizenAction,Newark,NJ Corporation,Richmond,VA AlanCameron ShannaSmith BrianHudsonSr. PresidentandChief Executive PresidentandChief Executive ExecutiveDirectorandChief Officer,IdahoCreditUnion Officer,NationalFairHousing ExecutiveOfficer,Pennsylvania League,Boise,ID Alliance,Washington,DC HousingFinanceAgency, JohnP.Carey Harrisburg,PA CoreyStone Chief AdministrativeOfficer, Chair,FirstCommunityBankof KirstenKeefe ConsumerBanking,North NewHaven,NewHaven,CT SeniorStaff Attorney,Empire America,Citigroup,New JusticeCenter,Albany,NY JenniferTescher York,NY Director,CenterforFinancial LorenzoLittles TinoDiaz ServicesInnovation,Chicago,IL Consultant,Foundationfor ManagingDirectorandChief ExecutiveOfficer,CharisPros– CommunityEmpowerment, MaryTingerthal MortgageCenter,Miami,FL Grapevine,TX President,CapitalMarkets Companies,HousingPartnership KerryDoi LarryB.LittonJr. Network,St.Paul,MN PresidentandChief Executive PresidentandChief Executive Officer,PacificAsianConsortium Officer,LittonLoanServicing MarkWiseman inEmployment,LosAngeles,CA LP,Houston,TX PrincipalAssistantAttorney KathleenEngel SaurabhNarain General,ConsumerProtection Professorof Law,Suffolk Chief FundAdvisor,National Section,OhioAttorneyGeneral’s UniversityLawSchool, CommunityInvestmentFund, Office,Cleveland,OH Boston,MA Chicago,IL BetsyFlynn AndyNavarrete Chief ExecutiveOfficer,President, SeniorVicePresident,Chief andChairman,Community Counsel–NationalLending, FinancialServicesBank, CapitalOneFinancial Benton,KY Corporation,McLean,VA

FederalReserveSystemOrganization 417 Officers MichaelCalhoun JimPark CouncilChair,President,Center CouncilViceChair,Chief forResponsibleLending, ExecutiveOfficer,NewVista Durham,NC AssetManagement,San Diego,CA ThriftInstitutionsAdvisoryCouncil TheThriftInstitutionsAdvisoryCouncilwasestablishedbytheBoardof Governorstoconsultwith,and advise,theBoardonissuespertainingtothethriftindustryandonothermatterswithintheBoard’sjurisdiction.Itsmembers,whoareappointedbytheBoard,representcreditunions,savingsandloanassociations,and savingsbanks.In2010,thecouncilmetwiththeBoardonFebruary26,June25,andDecember17.TheCouncil wasreplacedwiththenewCommunityDepositoryInstitutionsAdvisoryCouncil,whosefirstmeetingwillbein 2011. Members F.EdwardBroadwellJr. MichaelKloiber RichardG.Harwood ChairmanandChief Executive PresidentandChief Executive PresidentandChief Executive Officer,HomeTrustBank, Officer,TinkerFederalCredit Officer,NewportFederalBank, Asheville,NC Union,TinkerAirForce Newport,TN Base,OK BarrieG.Christman KayM.Hoveland Chairman,PrincipalBank,Des WilliamT.Stapleton PresidentandChief Executive Moines,IA PresidentandChief Executive Officer,KaiserFederalBankand Officer,Northampton K-FedBancorp,Covina,CA HowardT.Boyle Co-OperativeBank, RandyM.Smith PresidentandChief Executive Northampton,MA Chief ExecutiveOfficerand Officer,HomeSavingsBank, DennisM.Terry President,Randolph-Brooks Kent,OH PresidentandChief Executive FederalCreditUnion,Universal PeterJ.Johnson Officer,FirstCloverLeaf Bank, City,TX PresidentandChief Executive Edwardsville,IL WilliamR.White Officer,AmericanFederalSavings RichardJ.Green ChairmanandChief Executive Bank,Helena,MT Chief ExecutiveOfficer,Firstrust Officer,DearbornFederalSavings Bank,Conshohocken,PA Bank,Dearborn,MI Officer F.EdwardBroadwellJr. President

418 97thAnnualReport|2010 FEDERAL RESERVE BANK BRANCHES Tocarryouttheday-to-dayoperationsof theFederalReserveSystem,thenationhasbeendividedinto12FederalReserveDistricts,eachwithaReserveBank.AsrequiredbytheFederalReserveActof 1913,eachof the ReserveBanksissupervisedbyaboardof directorswhoarefamiliarwitheconomicandcreditconditionsinthe District.Similarly,eachof the24ReserveBankBrancheshasaboardof directorswhoarefamiliarwithconditionsintheareaencompassedbytheBranch. ReserveBankandBranchDirectors EachFederalReserveBank’sboardismadeupof threeClassAandthreeClassBdirectors,whoareelectedby thestockholdingmemberbanks,andthreeClassCdirectors,whoareappointedbytheBoardof Governors.1 FederalReserveBrancheshaveeitherfiveorsevendirectors,amajorityof whomareappointedbytheparent FederalReserveBank;theothersareappointedbytheBoardof Governors.Oneof thedirectorsappointedby theBoardisdesignatedannuallyaschairof theboardof thatBranchinamannerprescribedbytheparentFederalReserveBank. Thedirectorsof theBanksandBranchesarelistedbelow.Foreachdirector,theclassof directorship,thedirector’sprincipalorganizationalaffiliation,andthedatethedirector’stermexpiresareshown. District1–Boston ClassA ClassB ClassC JamesC.Smith,2010 JohnF.Fish,2010 KirkA.Sykes,2010 Chairman,President,andChief Chief ExecutiveOfficer,Suffolk President,UrbanStrategy ExecutiveOfficer,WebsterBank, ConstructionCompany,Inc., AmericaFund,L.P.,Boston,MA N.A.,Waterbury,CT Boston,MA HenriA.Termeer,2011 KathrynG.Underwood,2011 MichaelT.Wedge,2011 Chairman,President,andChief PresidentandChief Executive FormerPresidentandChief ExecutiveOfficer,Genzyme Officer,LedyardNationalBank, ExecutiveOfficer,BJ’sWholesale Corporation,Cambridge,MA Hanover,NH Club,Inc.,Natick,MA CatherineD’Amato,2012 DavidA.Lentini,20122 WilliamD.Nordhaus,2012 PresidentandChief Executive Chairman,President,andChief SterlingProfessorof Economics, Officer,TheGreaterBostonFood ExecutiveOfficer,The YaleUniversity,NewHaven,CT Bank,Boston,MA ConnecticutBankandTrust Company,Hartford,CT 1 ClassAdirectorsrepresentthestockholdingmemberbanksineachFederalReserveDistrict.ClassBandClassCdirectorsrepresentthe publicandarechosenwithdue,butnotexclusive,considerationtotheinterestsofagriculture,commerce,industry,services,labor,and consumers;theymaynotbeofficers,directors,oremployeesofanybankorbankholdingcompany.Inaddition,ClassCdirectorsmay notbestockholdersofanybankorbankholdingcompany.FortheelectionofClassAandClassBdirectors,thememberbanksofeach FederalReserveDistrictareclassifiedintothreegroups.Eachgroup,whichcomprisesbankswithsimilarcapitalization,electsoneClass AdirectorandoneClassBdirector.Annually,theBoardofGovernorsdesignatesoneoftheClassCdirectorsaschairoftheboardand FederalReserveagentofeachDistrictBank,anditdesignatesanotherClassCdirectorasdeputychair.FormoreinformationonBank andBranchdirectors,seewww.federalreserve.gov/pubs/frseries/frseri4.htm. 2 Director’stermexpiresonDecember31oftheyearindicated.

FederalReserveSystemOrganization 419 District2–NewYork ClassA ClassB ClassC RichardL.Carrión,2010 JamesS.Tisch,2010 KathrynS.Wylde,2010 Chairman,President,andChief PresidentandChief Executive PresidentandChief Executive ExecutiveOfficer,Popular,Inc., Officer,LoewsCorporation,New Officer,PartnershipforNewYork SanJuan,PR York,NY City,NewYork,NY CharlesV.Wait,2011 JeffreyR.Immelt,2011 DenisM.Hughes,2011 President,Chief ExecutiveOfficer, ChairmanandChief Executive President,NewYorkState andChairman,TheAdirondack Officer,GeneralElectric AFL-CIO,NewYork,NY TrustCompany,Saratoga Company,Fairfield,CT Springs,NY LeeC.Bollinger,2012 JeffreyB.Kindler,2012 President,ColumbiaUniversity, JamesDimon,2012 FormerChairmanandChief NewYork,NY ChairmanandChief Executive ExecutiveOfficer,Pfizer,Inc., Officer,JPMorganChase&Co., NewYork,NY NewYork,NY District3–Philadelphia ClassA ClassB ClassC Vacancy,2010 KeithS.Campbell,2010 JeremyNowak,2010 Chairman,ManningtonMills, PresidentandChief Executive FrederickC.Peters,2011 Inc.,Salem,NJ Officer,TheReinvestmentFund, ChairmanandChief Executive MichaelF.Camardo,2011 Philadelphia,PA Officer,BrynMawrTrust RetiredExecutiveVicePresident, Company,BrynMawr,PA CharlesP.Pizzi,2011 LockheedMartinITS,Cherry PresidentandChief Executive AaronL.Groff Jr.,2012 Hill,NJ Officer,TastyBakingCompany, Chairman,President,andChief DeborahM.Fretz,2012 Philadelphia,PA ExecutiveOfficer,Ephrata RetiredPresidentandChief NationalBank,Ephrata,PA JamesE.Nevels,2012 ExecutiveOfficer,Sunoco Chairman,TheSwarthmore LogisticsPartners, Group,Philadelphia,PA Philadelphia,PA

420 97thAnnualReport|2010 District4–Cleveland ClassA CincinnatiBranch PittsburghBranch JamesE.Rohr,2010 AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank ChairmanandChief Executive Vacancy,2010 ToddD.Brice,2010 Officer,ThePNCFinancial Chief ExecutiveOfficer,S&T ServicesGroup,Inc., GregoryB.Kenny,2011 Bancorp,Inc.,Indiana,PA Pittsburgh,PA PresidentandChief Executive Officer,GeneralCable HowardW.HannaIII,2011 CharlotteW.Martin,2011 Corporation,Highland ChairmanandChief Executive PresidentandChief Executive Heights,KY Officer,HowardHannaReal Officer,GreatLakesBankers EstateServices,Pittsburgh,PA Bank,Worthington,OH JanetB.Reid,2011 C.DanielDeLawder,2012 ManagingPartnerandDirector, PetraMitchell,2011 ChairmanandChief Executive GlobalNovations,LLC, President,CatalystConnection, Officer,ParkNationalBank, Cincinnati,OH Pittsburgh,PA Newark,OH DonaldE.Bloomer,2012 Vacancy,2012 PresidentandChief Executive ClassB AppointedbytheBoardofGovernors Officer,CitizensNationalBank, LesC.Vinney,2010 Somerset,KY GlennR.Mahone,2010 Chairman,ClevelandHeartLab, PartnerandAttorneyatLaw, Cleveland,OH AppointedbytheBoardofGovernors ReedSmithLLP,Pittsburgh,PA PeterS.Strange,2010 TilmonF.Brown,2011 SunilT.Wadhwani,2011 Chairman,Messer,Inc., PresidentandChief Executive Co-Chairman,iGATE Cincinnati,OH Officer,NewHorizonsBaking Corporation,Pittsburgh,PA Company,Norwalk,OH JamesM.Anderson,2011 RobertA.Paul,2012 AdvisortothePresident, SusanTomasky,2012 ChairmanandChief Executive CincinnatiChildren’sHospital President,AEPTransmission, Officer,Ampco-Pittsburgh MedicalCenter,Cincinnati,OH Columbus,OH Corporation,Pittsburgh,PA DanielB.Cunningham,2012 ClassC PresidentandChief Executive RoyW.Haley,2010 Officer,Long-Stanton Chairman,WESCOInternational, ManufacturingCompanies, Inc.,Pittsburgh,PA Cincinnati,OH AlfredM.RankinJr.,2011 Chairman,President,andChief ExecutiveOfficer,NACCO Industries,Inc.,Cleveland,OH RichardK.Smucker,2012 ExecutiveChairmanandCo-Chief ExecutiveOfficer,TheJ.M. SmuckerCompany,Orrville,OH

FederalReserveSystemOrganization 421 District5–Richmond ClassA BaltimoreBranch CharlotteBranch RobertH.GilliamJr.,2010 AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank PresidentandChief Executive WilliamB.Grant,2010 BarryL.Slider,2010 Officer,FirstNationalBank, ChairmanandChief Executive PresidentandChief Executive Altavista,VA Officer,FirstUnitedCorp.and Officer,FirstSouthBancorp,Inc. KellyS.King,2011 FirstUnitedBank&Trust, andFirstSouthBank, Chief ExecutiveOfficer,BB&T Oakland,MD Spartanburg,SC Corporation,Winston-Salem,NC BianaJ.Arentz,2011 JamesH.SpeedJr.,2011 RichardJ.Morgan,2012 PresidentandChief Executive PresidentandChief Executive PresidentandChief Executive Officer,Hemingway’sInc., Officer,NorthCarolinaMutual Officer,CommerceFirstBank, Stevensville,MD LifeInsuranceCompany, Annapolis,MD Durham,NC JamesT.Brady,2012 ClassB ManagingDirector–Mid-Atlantic, LuciaZ.Griffith,2012 BallantraeInternational,Ltd., Chief ExecutiveOfficerand PatrickC.GraneyIII,2010 Ijamsville,MD Principal,METROLandmarks, MaxumEastRegionalPresident, Charlotte,NC MaxumPetroleum,Belle,WV AnitaG.Newcomb,2012 PresidentandManagingDirector, JohnS.Kreighbaum,2012 DanaS.Boole,2011 A.G.Newcomb&Co., PresidentandChief Executive PresidentandChief Executive Columbia,MD Officer,CarolinaPremierBank, Officer,CommunityAffordable Charlotte,NC HousingEquityCorporation, AppointedbytheBoardofGovernors Raleigh,NC WilliamR.Roberts,2010 AppointedbytheBoardofGovernors WilburE.Johnson,2012 President–VerizonMaryland/DC, ClaudeC.Lilly,2010 ManagingPartner,Young VerizonMarylandInc., Dean,ClemsonUniversity, ClementRivers,LLP, Baltimore,MD Collegeof Businessand Charleston,SC BehavioralScience,Clemson,SC JennyG.Morgan,2011 President,basys,inc., LindaL.Dolny,2011 ClassC Linthicum,MD FormerPresident,PML MargaretE.McDermid,2010 Associates,Inc.,Greenwood,SC SeniorVicePresidentandChief RonaldBlackwell,2012 InformationOfficer,Dominion Chief Economist,AFL-CIO, DavidJ.Zimmerman,2012 Resources,Inc.,Richmond,VA Washington,DC President,SouthernShows,Inc., Charlotte,NC LindaD.Rabbitt,2011 ChairmanandChief Executive Officer,RandConstruction Corporation,Washington,DC LemuelE.Lewis,2012 President,LocalWeather.com, Suffolk,VA

422 97thAnnualReport|2010 District6–Atlanta ClassA BirminghamBranch OscarJ.Horton,2012 President,SunStateInternational T.AnthonyHumphries,2010 AppointedbytheFederalReserveBank Trucks,LLC,Tampa,FL PresidentandChief Executive C.RichardMooreJr.,2010 Officer,NobleBankandTrust, Chairman,President,andChief D.KevinJones,2012 N.A.,Anniston,AL ExecutiveOfficer,Peoples PresidentandChief Executive JamesM.WellsIII,2011 SouthernBank,Clanton,AL Officer,MIDFLORIDACredit ChairmanandChief Executive Union,Lakeland,FL MackeB.Mauldin,2011 Officer,SunTrustBanks,Inc., President,BankIndependent, AppointedbytheBoardofGovernors Atlanta,GA Sheffield,AL H.BrittLandrumJr.,2010 RudyE.Schupp,2012 PresidentandChief Executive JohnA.Langloh,2012 PresidentandChief Executive Officer,LandrumHuman PresidentandChief Executive Officer,1stUnitedBank,West ResourceCompanies,Inc., Officer,UnitedWayof Central PalmBeach,FL Pensacola,FL Alabama,Birmingham,AL ClassB Vacancy,2012 LyndaL.Weatherman,2011 PresidentandChief Executive LeeM.Thomas,2010 AppointedbytheBoardofGovernors Officer,EconomicDevelopment ChairmanandChief Executive MaryamB.Head,2010 Commissionof Florida’sSpace Officer,Rayonier, Chairman,RamToolandSupply Coast,Rockledge,FL Jacksonville,FL Company,Inc.,Birmingham,AL LeerieT.JenkinsJr.,2012 RenéeLewisGlover,2011 ThomasR.Stanton,2011 ChairmanandChief Executive PresidentandChief Executive ChairmanandChief Executive Officer,Reynolds,Smithand Officer,AtlantaHousing Officer,ADTRAN,Inc., Hills,Inc.,Jacksonville,FL Authority,Atlanta,GA Huntsville,AL ClarenceOtisJr.,2012 MiamiBranch F.MichaelReilly,2012 ChairmanandChief Executive Officer,DardenRestaurants,Inc., Chairman,President,andChief AppointedbytheFederalReserveBank Orlando,FL ExecutiveOfficer,Randall-Reilly DennisS.HudsonIII,2010 PublishingCo.,LLC, ChairmanandChief Executive ClassC Tuscaloosa,AL Officer,SeacoastBanking Corporationof Florida, CarolB.Tomé,2010 JacksonvilleBranch Stuart,FL Chief FinancialOfficerand ExecutiveVicePresident,The AppointedbytheFederalReserveBank WalterBanks,2011 HomeDepot,Atlanta,GA JackB.HealanJr.,2010 President,LagoMarResortand ThomasI.Barkin,2011 President,AmeliaIsland Club,FortLauderdale,FL Director,McKinsey&Company, Company,AmeliaIsland,FL ThomasH.Shea,2011 Atlanta,GA HughF.Dailey,2011 Chief ExecutiveOfficer, RichardH.Anderson,2012 PresidentandChief Executive Florida/CaribbeanRegion,Right Chief ExecutiveOfficer,DeltaAir Officer,CommunityBank& Management,Fort Lines,Inc.,Atlanta,GA Trustof Florida,Ocala,FL Lauderdale,FL

FederalReserveSystemOrganization 423 LeonardL.Abess,2012 CordiaW.Harrington,2012 R.KingMilling,2011 Chief ExecutiveOfficer,City PresidentandChief Executive Member,Boardof Directors, NationalBankof Florida, Officer,TennesseeBunCompany, WhitneyHoldingCorporation Miami,FL Nashville,TN andWhitneyNationalBank,New Orleans,LA JenniferS.Banner,2012 AppointedbytheBoardofGovernors Chief ExecutiveOfficer,Schaad MatthewG.StullerSr.,2012 GayRebelThompson,2010 Companies,LLC,Knoxville,TN ChairmanandChief Executive PresidentandChief Executive Officer,Stuller,Inc., Officer,CementIndustries,Inc., AppointedbytheBoardofGovernors Lafayette,LA FortMyers,FL DebraK.London,2010 RetiredPresidentandChief AnthonyJ.Topazi,2012 W.CodyEstesSr.,2011 ExecutiveOfficer,MercyHealth ExecutiveVicePresidentand PresidentandOwner,EstesCitrus, Partners,Knoxville,TN Chief OperatingOfficer,Southern Inc.,VeroBeach,FL RichardQ.Ford,2011 Company,Birmingham,AL EduardoJ.Padrón,2012 President,HylantGroupof President,MiamiDadeCollege, AppointedbytheBoardofGovernors Nashville,Nashville,TN Miami,FL ChristelC.Slaughter,2010 WilliamJ.Krueger,2012 Partner,SSAConsultants,LLC, NashvilleBranch SeniorVicePresident–The BatonRouge,LA Americas,Manufacturing, AppointedbytheFederalReserveBank Purchasing,SupplyChain JoséS.Suquet,2011 PaulG.Willson,2010 ManagementandTotalCustomer Chairman,President,andChief ChairmanandChief Executive Satisfaction,NissanNorth ExecutiveOfficer,Pan-American Officer,CitizensNationalBank, America,Inc.,Franklin,TN LifeInsuranceGroup,New Orleans,LA Athens,TN NewOrleansBranch RobertS.Boh,2012 DanW.Hogan,2011 PresidentandChief Executive PresidentandChief Executive AppointedbytheFederalReserveBank Officer,BohBros.Construction Officer,FifthThirdBank, GerardR.Host,2010 Co.,LLC,NewOrleans,LA Tennessee,Nashville,TN PresidentandChief Operating Officer,TrustmarkNational Bank,Jackson,MS District7–Chicago ClassA ClassB ClassC MarkC.Hewitt,2010 AnnD.Murtlow,2010 ThomasJ.Wilson,2010 PresidentandChief Executive PresidentandChief Executive Chairman,President,andChief Officer,ClearLakeBank&Trust Officer,IndianapolisPower& ExecutiveOfficer,TheAllstate Company,ClearLake,IA LightCompany,Indianapolis,IN Corporation,Northbrook,IL FrederickH.Waddell,2011 Vacancy,2011 JeffreyA.Joerres,2011 Chairman,President,andChief ChairmanandChief Executive TerryMazany,2012 ExecutiveOfficer,NorthernTrust Officer,ManpowerInc., PresidentandChief Executive CorporationandTheNorthern Milwaukee,WI Officer,TheChicagoCommunity TrustCompany,Chicago,IL Trust,Chicago,IL WilliamC.Foote,2012 StephenJ.Goodenow,2012 ChairmanandChief Executive PresidentandChief Executive Officer,USGCorporation, Officer,BankMidwest,Spirit Chicago,IL Lake,IA

424 97thAnnualReport|2010 DetroitBranch BrianC.Walker,2011 TimothyM.Manganello,2011 PresidentandChief Executive ChairmanandChief Executive AppointedbytheFederalReserveBank Officer,HermanMiller,Inc., Officer,BorgWarnerInc.,Auburn MichaelM.MageeJr.,2010 Zeeland,MI Hills,MI PresidentandChief Executive SheilahP.Clay,2012 LouAnnaK.Simon,2012 Officer,IndependentBank PresidentandChief Executive President,MichiganState Corporation,Ionia,MI Officer,NeighborhoodService University,EastLansing,MI MarkT.Gaffney,2011 Organization,Detroit,MI President,MichiganAFL-CIO, AppointedbytheBoardofGovernors Lansing,MI CarlT.Camden,2010 PresidentandChief Executive Officer,KellyServices,Inc., Troy,MI District8–St.Louis ClassA ClassC LittleRockBranch RobertG.Jones,2010 SharonD.Fiehler,2010 AppointedbytheFederalReserveBank PresidentandChief Executive ExecutiveVicePresidentand SharonPriest,2010 Officer,OldNationalBancorp, Chief AdministrativeOfficer, ExecutiveDirector,Downtown Evansville,IN PeabodyEnergy,St.Louis,MO LittleRockPartnership,Little J.ThomasMay,2011 WardM.Klein,2011 Rock,AR ChairmanandChief Executive Chief ExecutiveOfficer,Energizer PhillipN.Baldwin,2011 Officer,SimmonsFirstNational Holdings,Inc.,St.Louis,MO PresidentandChief Executive Corporation,PineBluff,AR StevenH.Lipstein,2012 Officer,SouthernBancorp, WilliamE.Chappell,2012 PresidentandChief Executive Arkadelphia,AR PresidentandChief Executive Officer,BJCHealthCare,St. Officer,TheFirstNationalBank, RobertA.YoungIII,2011 Louis,MO Vandalia,IL Chairman,ArkansasBest Corporation,FortSmith,AR ClassB WilliamC.Scholl,2012 PaulT.Combs,2010 President,FirstSecurityBancorp, President,BakerImplement Searcy,AR Company,Kennett,MO AppointedbytheBoardofGovernors GregoryM.Duckett,2011 KaleybraMitchellMorehead, SeniorVicePresidentand 2010, CorporateCounsel,Baptist VicePresidentforCollege MemorialHealthCare Affairs/Advancement,Southeast Corporation,Memphis,TN ArkansasCollege,PineBluff,AR SonjaYatesHubbard,2012 CalMcCastlain,2011 Chief ExecutiveOfficer,E-ZMart Partner,DoverDixonHorne Stores,Inc.,Texarkana,TX PLLC,LittleRock,AR

FederalReserveSystemOrganization 425 C.SamWalls,2012 AppointedbytheBoardofGovernors SusanS.Stephenson,2011 Chief ExecutiveOfficer,Arkansas GaryA.Ransdell,2010 Co-ChairmanandPresident, CapitalCorporation,Little President,WesternKentucky IndependentBank,Memphis,TN Rock,AR University,BowlingGreen,KY AllegraC.Brigham,2012 JohnA.HillerichIV,2011 InterimPresident,Mississippi LouisvilleBranch PresidentandChief Executive UniversityforWomen, AppointedbytheFederalReserveBank Officer,Hillerich&BradsbyCo., Columbus,MS StevenE.Trager,2010 Inc.,Louisville,KY AppointedbytheBoardofGovernors ChairmanandChief Executive BarbaraAnnPopp,2012 Officer,RepublicBank&Trust Chief ExecutiveOfficer,Schuler CharlesS.Blatteis,2010 Company,Louisville,KY BauerRealEstateServices,New ManagingMember/President, Blatteis&Associates,PLLC, JohnC.Schroeder,2011 Albany,IN Memphis,TN President,WabashPlastics,Inc., Evansville,IN MemphisBranch LawrenceC.Long,2011 Partner,St.RestPlantingCo., KevinShurn,2011 AppointedbytheFederalReserveBank Indianola,MS PresidentandOwner,Superior ThomasG.Miller,2010 MaintenanceCo., President,SouthernHardware Vacancy,2012 Elizabethtown,KY Co.,Inc.,WestHelena,AR JonA.Lawson,2012 ClydeWarrenNunn,2011 President,Chief ExecutiveOfficer ChairmanandPresident,Security andChairman,Bankof Ohio Bancorpof Tennessee,Inc., County,BeaverDam,KY Halls,TN District9–Minneapolis ClassA ClassB ClassC JamesA.Espeland,2010 ToddL.Johnson,2010 MaryK.Brainerd,2010 PresidentandChief Executive Chairman,President,andChief PresidentandChief Executive Officer,FirstNationalBank, ExecutiveOfficer,Reuben Officer,HealthPartners, Henning,MN Johnson&Son,Inc.&Affiliated Minneapolis,MN Companies,Superior,WI MichaelJ.O’Meara,2011 JohnW.Marvin,2011 Chairman,PeoplesBankof HowardA.Dahl,2011 ChairmanandChief Executive Wisconsin,EauClaire,WI PresidentandChief Executive Officer,MarvinWindowsand Officer,AmityTechnology,LLC, Doors,Warroad,MN RichardL.Westra,2012 Fargo,ND PresidentandChief Executive RandallJ.Hogan,2012 Officer,DacotahBanks,Inc., WilliamJ.Shorma,2012 ChairmanandChief Executive Aberdeen,SD President,Shur-Co.,Yankton,SD Officer,Pentair,Incorporated, Minneapolis,MN

426 97thAnnualReport|2010 HelenaBranch TimothyJ.Bartz,2012 JosephF.McDonald,2012 Chief ExecutiveOfficer, PresidentEmeritus,Salish AppointedbytheFederalReserveBank AndersonZurMuehlen& KootenaiCollege,Pablo,MT Vacancy,2010 Company,P.C.,Helena,MT JohnL.Franklin,2011 AppointedbytheBoardofGovernors PresidentandChief Executive DavidB.Solberg,2011 Officer,1stBank,Sidney,MT Owner,SevenBlackfootRanch Company,Billings,MT District10–KansasCity ClassA LuM.Córdova,2011 LarissaL.Herda,2011 Chief ExecutiveOfficer,Corlund Chairman,Chief Executive RobertC.Fricke,2010 Industries;PresidentandGeneral Officer,andPresident,twtelecom PresidentandChief Executive Manager,AlmacenStorage inc.,Littleton,CO Officer,FarmersandMerchants Group,Boulder,CO Bankof Ashland,Ashland,NE BarbaraMowry,2012 PaulDeBruce,2012 SeniorVicePresident,Oracle, JohnA.Ikard,2011 Chief ExecutiveOfficerand Broomfield,CO PresidentandChief Executive Founder,DeBruceGrain,Inc., Officer,FirstBankHolding KansasCity,MO OklahomaCityBranch Company,Lakewood,CO AppointedbytheFederalReserveBank DavidW.Brownback,2012 DenverBranch JacquelineR.Fiegel,2010 PresidentandChief Executive AppointedbytheFederalReserveBank SeniorExecutiveVicePresident Officer,CitizensStateBank& MarkA.Zaback,2010 andChief OperatingOfficer, TrustCompany,Ellsworth,KS PresidentandChief Executive CoppermarkBank,Oklahoma Officer,JonahBankof Wyoming, City,OK ClassB Casper,WY DouglasE.Tippens,2010 MarkGordon,2010 BruceK.Alexander,2011 PresidentandChief Executive Owner,MerlinRanch, PresidentandChief Executive Officer,Bankof Commerce, Buffalo,WY Officer,VectraBankColorado, Yukon,OK RichardK.Ratcliffe,2011 Denver,CO K.Vasudevan,2011 Chairman,Ratcliffe’sInc., CharlesH.BrownIII,2012 ChairmanandFounder,Service& Weatherford,OK President,C.H.BrownCo., TechnologyCorporation, Wheatland,WY Bartlesville,OK JohnT.StoutJr.,2012 Chief ExecutiveOfficer,Plaza AnneHainesYatskowitz,2012 RoseWashingtonRentie,2012 BelmontManagementGroup PresidentandChief Executive ExecutiveDirector,TEDC LLC,ShawneeMission,KS Officer,ACCIONNew CreativeCapital,Tulsa,OK Mexico–Arizona–Colorado, AppointedbytheBoardofGovernors ClassC Albuquerque,NM StevenC.Agee,2010 TerryL.Moore,2010 AppointedbytheBoardofGovernors Professorof Economicsand President,OmahaFederationof MargaretM.Kelly,2010 Director,EconomicResearchand Labor,AFL-CIO,Omaha,NE Chief ExecutiveOfficer, PolicyInstitute,MeindersSchool RE/MAXInternationalInc., of BusinessOklahomaCity Denver,CO University,OklahomaCity,OK

FederalReserveSystemOrganization 427 JamesD.Dunn,2011 MarkA.Sutko,2011 JamesC.Farrell,2011 Chairman,MillCreekLumber& PresidentandChief Executive PresidentandChief Executive SupplyCompany,Tulsa,OK Officer,PlatteValleyStateBank, Officer,FarmersNational Kearney,NE Company,Omaha,NE BillAnoatubby,2012 Governor,ChickasawNation, ToddS.Adams,2012 G.RichardRussell,2012 Ada,OK Chief ExecutiveOfficer,Adams PresidentandChief Executive Bank&Trust,Ogallala,NE Officer,MillardLumberInc., OmahaBranch JamesL.Thom,2012 Omaha,NE VicePresident,T-LIrrigationCo., AppointedbytheFederalReserveBank Hastings,NE JoAnnM.Martin,2010 Chairman,President,andChief AppointedbytheBoardofGovernors ExecutiveOfficer,AmeritasLife LynWallinZiegenbein,2010 InsuranceCorp.,Lincoln,NE ExecutiveDirector,PeterKiewit Foundation,Omaha,NE District11–Dallas ClassA JamesT.Hackett,2011 RobertE.McKnightJr.,2011 Chairman,President,andChief Owner,McKnightRanch JoeKimKing,2010 ExecutiveOfficer,Anadarko Company,FortDavis,TX Chief ExecutiveOfficerand PetroleumCorporation, Chairmanof theBoard,Texas D.KirkEdwards,2012 Houston,TX CountryBancshares,Inc., President,MacLondonRoyalty Brady,TX MyronE.UllmanIII,2012 Company,Odessa,TX GeorgeF.JonesJr.,2011 Chief ExecutiveOfficerand Chief ExecutiveOfficerTexas Chairmanof theBoard,J.C. HoustonBranch CapitalBank,Dallas,TX PenneyCompany,Inc.,Plano,TX AppointedbytheFederalReserveBank PeteCook,2012 ElPasoBranch JodieL.Jiles,2010 Chief ExecutiveOfficer,First ManagingDirector,RBCCapital NationalBankinAlamogordo, AppointedbytheFederalReserveBank Markets,Houston,TX Alamogordo,NM LarryL.Patton,2010 KirkS.Hachigian,2011 PresidentandChief Executive ClassB Officer,Bankof theWest,El ChairmanandChief Executive Officer,CooperIndustries,Ltd., RobertA.Estrada,2010 Paso,TX Houston,TX Chairman,EstradaHinojosa& LauraM.Conniff,2011 Company,Inc.,Dallas,TX AnnB.Stern,2011 QualifyingBroker,Mathers ExecutiveVicePresident,Texas JamesB.Bexley,2011 Realty,Inc.,LasCruces,NM Children’sHospital,Houston,TX Professor,Finance,SamHouston MarthaI.Dickason,2011 StateUniversity,Huntsville,TX President,dmDickasonPersonnel PaulB.MurphyJr.,2012 MargaretH.Jordan,2012 Services,ElPaso,TX PresidentandChief Executive PresidentandChief Executive Officer,CommunityBancorp Officer,DallasMedicalResource, Vacancy,2012 LLC,Houston,TX Dallas,TX AppointedbytheBoardofGovernors AppointedbytheBoardofGovernors CindyJ.Ramos-Davidson,2010 DouglasL.Foshee,2010 ClassC PresidentandChief Executive PresidentandChief Executive HerbertD.Kelleher,2010 Officer,ElPasoHispanic Officer,ElPasoCorporation, FounderandChairmanEmeritus, Chamberof Commerce,El Houston,TX SouthwestAirlines,Dallas,TX Paso,TX

428 97thAnnualReport|2010 PaulW.Hobby,2011 YgnacioD.Garza,2011 StevenR.Vandegrift,2011 ChairmanandChief Executive CPA,LongChiltonLLP, FounderandPresident,SRV Officer,Alpheus Brownsville,TX Holdings,Austin,TX Communications,Houston,TX GuillermoF.Trevino,2011 CatherineM.Burzik,2012 JorgeA.Bermudez,2012 President,SouthernDistributing, PresidentandChief Executive PresidentandChief Executive Laredo,TX Officer,KineticConcepts,Inc., Officer,ByebrookGroup,College ThomasE.Dobson,2012 SanAntonio,TX Station,TX ChairmanandChief Executive Officer,Whataburger SanAntonioBranch Restaurants,LP,San Antonio,TX AppointedbytheFederalReserveBank GPSingh,2010 AppointedbytheBoardofGovernors Chief ExecutiveOfficer,Gur RicardoRomo,2010 ParsaadProperties,Ltd.,San President,TheUniversityof Antonio,TX TexasatSanAntonio,San Antonio,TX District12–SanFrancisco ClassA KarlaS.Chambers,2011 LosAngelesBranch VicePresidentandCo-Owner, ArnoldT.Grisham,2010 AppointedbytheFederalReserveBank StahlbushIslandFarms,Inc., Director,AltaAllianceBank, Corvallis,OR DominicNg,2010 Oakland,CA ChairmanandChief Executive BlakeW.Nordstrom,2012 DannH.Bowman,2011 Officer,EastWestBank, President,Nordstrom,Inc., PresidentandChief Executive Pasadena,CA Seattle,WA Officer,ChinoCommercialBank, KeithE.Smith,2011 N.A.,Chino,CA ClassC PresidentandChief Executive KennethP.Wilcox,2012 Officer,BoydGaming PatriciaE.Yarrington,2010 Chief ExecutiveOfficer,SVB Corporation,LasVegas,NV VicePresidentandChief Financial FinancialGroup,Santa Officer,ChevronCorporation, JamesL.Sanford,2012 Clara,CA SanRamon,CA Consultant,NorthropGrumman Corporation,LosAngeles,CA ClassB DouglasW.Shorenstein,2011 ChairmanandChief Executive Vacancy,2012 WilliamD.Jones,2010 Officer,ShorensteinProperties PresidentandChief Executive LLC,SanFrancisco,CA AppointedbytheBoardofGovernors Officer,CityLinkInvestment GraceEvansCherashore,2010 T.GaryRogers,2012 Corporation,SanDiego,CA PresidentandChief Executive FormerChairmanof theBoard, Officer,EvansHotels,San LeviStrauss&Co.,San Diego,CA Francisco,CA

FederalReserveSystemOrganization 429 AnnE.Sewill,2011 RoderickC.Wendt,2011 EdwinE.Dahlberg,2012 President,CommunityFoundation PresidentandChief Executive RetiredPresidentandChief LandTrust,California Officer,JELD-WEN,Inc., ExecutiveOfficer,St.Luke’s CommunityFoundation,Los KlamathFalls,OR HealthSystem,Boise,ID Angeles,CA DavidY.Chen,2012 SeattleBranch AndrewJ.Sale,2012 ManagingDirector,Equilibrium Partner,Retail,Consumer CapitalGroupLLC, AppointedbytheFederalReserveBank ProductsandMedia& Portland,OR RichardGalanti,2010 EntertainmentLeader–West ExecutiveVicePresidentand Region,Ernst&YoungLLP,Los SaltLakeCityBranch Chief FinancialOfficer,Costco Angeles,CA WholesaleCorporation, AppointedbytheFederalReserveBank Issaquah,WA PortlandBranch MichaelM.Mooney,2010 President,IdahoRegion,Bankof Vacancy,2011 AppointedbytheFederalReserveBank theCascades,Boise,ID PatrickG.Yalung,2011 RogerW.Hinshaw,2010 AnnetteHarder,2011 RegionalPresident,Washington, President,OregonandSW President,HermanConsulting, WellsFargoBank,N.A., Washington,Bankof America LLC,ParkCity,UT Seattle,WA Oregon,N.A.,Portland,OR RobertA.Hatch,2011 HenryL.(Skip)KotkinsJr.,2012 PeggyY.Fowler,2011 President,RegenceBlueCross ChairmanandChief Executive RetiredChief ExecutiveOfficer BlueShieldof Utah,SaltLake Officer,SkywayLuggage andPresident,PortlandGeneral City,UT Company,Seattle,WA Electric,Portland,OR Vacancy,2011 CarolCarter,2012 AppointedbytheBoardofGovernors PresidentandChief Executive WilliamS.Ayer,2010 MeganF.Clubb,2012 Officer,IndustrialCompressor Chairman,President,andChief PresidentandChief Executive Products,Inc.,ParkCity,UT ExecutiveOfficer,AlaskaAir Officer,BakerBoyerNational Group,Seattle,WA Bank,WallaWalla,WA AppointedbytheBoardofGovernors ScottL.Hymas,2010 AdaM.Healey,2011 AppointedbytheBoardofGovernors Chief ExecutiveOfficer,RC VicePresident,RealEstate, JamesH.Rudd,2010 Willey,SaltLakeCity,UT VulcanInc.,Seattle,WA Chief ExecutiveOfficerand Principal,FergusonWellman ClarkD.Ivory,2011 MaryO.McWilliams,2012 CapitalManagement,Inc., Chief ExecutiveOfficer,Ivory ExecutiveDirector,PugetSound Portland,OR Homes,Ltd.,SaltLakeCity,UT HealthAlliance,Seattle,WA

430 97thAnnualReport|2010 ReserveBankandBranchOfficers Asmentioned,eachFederalReserveBankanditsbrancheshasaboardof directors.Theofficersof eachBank andBrancharedrawnfromthispoolof directors.Specifically,twodirectorsof eachReserveBankaredesignatedbytheBoardof Governorsaschair3anddeputychair,respectively,of theirnine-memberboard.Each ReserveBankalsohasapresidentandfirstvicepresident,whoareappointedbytheboardof directorsof the Bank,subjecttoapprovalbytheBoardof Governors.Additionally,eachDistrictBranchalsohasachair,who isselectedfromamongthoseBranchdirectorsappointedbytheBoardof Governors. Cincinnatti Birmingham Boston JamesM.Anderson,Chair MaryamB.Head,Chair HenriA.Termeer,Chair LaVaughnM.Henry,Officerin JuliusWeyman,OfficerinCharge KirkA.Sykes,DeputyChair Charge EricS.Rosengren,President Jacksonville Pittsburgh PaulM.Connolly,FirstVice H.BrittLandrumJr.,Chair President SunilT.Wadhwani,Chair ChristopherL.Oakley,Officerin Charge RobertB.Schaub,Officerin AdditionalofficeatWindsorLocks,CT Charge Miami NewYork GayRebelThompson,Chair Richmond DenisM.Hughes,Chair JuandelBusto,OfficerinCharge LemuelE.Lewis,Chair LeeC.Bollinger,DeputyChair MargaretE.McDermid,Deputy Nashville WilliamC.Dudley,President Chair DebraK.London,Chair ChristineM.Cumming,FirstVice President JeffreyM.Lacker,President LeeC.Jones,OfficerinCharge SarahG.Green,FirstVice AdditionalofficeatEastRutherford,NJ President NewOrleans ChristelC.Slaughter,Chair Philadelphia Baltimore RobertJ.Musso,Officerin CharlesP.Pizzi,Chair WilliamR.Roberts,Chair Charge JeremyNowak,DeputyChair DavidE.Beck,OfficerinCharge CharlesI.Plosser,President Chicago Charlotte WilliamH.StoneJr.,FirstVice WilliamC.Foote,Chair ClaudeC.Lilly,Chair President ThomasJ.Wilson,DeputyChair MatthewA.Martin,Officerin Charge CharlesL.Evans,President Cleveland GordonWerkema,FirstVice AlfredM.RankinJr.,Chair Atlanta President RichardK.Smucker,Deputy CarolB.Tomé,Chair AdditionalofficeatDesMoines,IAandat Chair MidwayatBedfordPark,IL ThomasI.Barkin,DeputyChair SandraPianalto,President DennisP.Lockhart,President DaleRoskom,FirstVicePresident PatrickK.Barron,FirstVice President 3 ThechairofaFederalReserveBankserves,bystatute,asFederalReserveagent.

FederalReserveSystemOrganization 431 Detroit SanAntonio KansasCity TimothyM.Manganello,Chair StevenR.Vandegrift,Chair LuM.Córdova,Chair RobertWiley,OfficerinCharge BlakeHastings,OfficerinCharge PaulDeBruce,DeputyChair St.Louis ThomasM.Hoenig,President SanFrancisco EstherL.George,FirstVice StevenH.Lipstein,Chair President T.GaryRogers,Chair WardM.Klein,DeputyChair DouglasW.Shorenstein,Deputy JamesBullard,President Denver Chair DavidA.Sapenaro,FirstVice BarbaraMowry,Chair Vacant,President President MarkC.Snead,OfficerinCharge JohnF.Moore,FirstVice LittleRock OklahomaCity President C.SamWalls,Chair StevenC.Agee,Chair AdditionalofficeatPhoenix,AZ RobertA.Hopkins,Officerin ChadR.Wilkerson,Officerin LosAngeles Charge Charge GraceEvansCherashore,Chair Louisville Omaha MarkL.Mullinix,Officerin GaryA.Ransdell,Chair LynWallinZiegenbein,Chair Charge MariaGerwingHampton,Officer JasonR.Henderson,Officerin inCharge Portland Charge JamesH.Rudd,Chair Memphis Dallas LawrenceC.Long,Chair StevenH.Walker,Officerin Charge MarthaPerineBeard,Officerin JamesT.Hackett,Chair Charge HerbertD.Kelleher,DeputyChair SaltLakeCity RichardW.Fisher,President ScottL.Hymas,Chair Minneapolis HelenE.Holcomb,FirstVice RobinA.Rockwood,Officerin JohnW.Marvin,Chair President Charge MaryK.Brainerd,DeputyChair ElPaso Seattle NarayanaR.Kocherlakota, President D.KirkEdwards,Chair WiliamS.Ayer,Chair JamesM.Lyon,FirstVice RobertW.Gilmer,Officerin MarkA.Gould,OfficerinCharge President Charge Helena Houston DavidB.Solberg,Chair DouglasL.Foshee,Chair R.PaulDrake,OfficerinCharge RobertSmithIII,Officerin Charge

432 97thAnnualReport|2010 OfficerConferences Anumberof theofficersof eachBankalsoserveoncouncilsthatexamineissuesof importancetotheir districts. ConferenceofChairs Thechairsof theFederalReserveBanksareorganizedintotheConferenceof Chairs,whichmeetstoconsider mattersof commoninterestandtoconsultwithandadvisetheBoardof Governors.Suchmeetings,also attendedbythedeputychairs,wereheldinWashington,D.C.,onMay18and19andNovember16and17, 2010.Theconference’sexecutivecommitteemembersfor2010and2011arelistedbelow. ConferenceofChairs ConferenceofChairs ExecutiveCommittee–2010 ExecutiveCommittee–2011 LemuelE.Lewis,Chair, CharlesP.Pizzi,Chair, FederalReserveBankof FederalReserveBankof Richmond Philadelphia CharlesP.Pizzi,ViceChair, AlfredM.RankinJr.,ViceChair, FederalReserveBankof FederalReserveBankof Philadelphia Cleveland AlfredM.RankinJr., HerbertD.Kelleher,Member, Member, FederalReserveBankof Dallas FederalReserveBankof Cleveland ConferenceofPresidents Thepresidentsof theFederalReserveBanksareorganizedintotheConferenceof Presidents,whichmeetsperiodicallytoidentify,define,anddeliberateissuesof strategicsignificancetotheFederalReserveSystem;toconsidermattersof commoninterest;andtoconsultwithandadvisetheBoardof Governors.Conferenceofficers for2010arelistedbelow.4 ConferenceofPresidents–2010 JeffreyM.Lacker,Chair, FederalReserveBankof Richmond RichardW.Fisher,ViceChair, FederalReserveBankof Dallas SandraTormoen,Secretary, FederalReserveBankof Richmond HarveyR.Mitchell,Assistant Secretary, FederalReserveBankof Dallas 4 OnOctober5,2010,theconferenceelectedRichardW.Fisheraschairfor2011–12andCharlesI.Plosser,presidentoftheFederal ReserveBankofPhiladelphia,asvicechair.TheconferencealsoelectedHarveyR.Mitchellassecretaryfor2011–12andFrankJ.Doto, FederalReserveBankofPhiladelphia,asassistantsecretary.

FederalReserveSystemOrganization 433 ConferenceofFirstVicePresidents TheConferenceof FirstVicePresidentsof theFederalReserveBankswasorganizedin1969tomeetperiodicallyfortheconsiderationof operationsandothermatters.Conferenceofficersfor2010arelistedbelow. ConferenceofFirstVice Presidents–2010 SallyGreen,Chair, FederalReserveBankof Richmond EstherL.George,ViceChair, FederalReserveBankof KansasCity AnneC.Gossweiler,Secretary, FederalReserveBankof Richmond W.ToddMackey,Assistant Secretary, FederalReserveBankof KansasCity

435 Index A byOfficeof theInspectorGeneral,406 Automatedclearinghouse(ACH)services,89,121,123,128 Accountingpolicy,86–87 Automatedtellermachine(ATM)cardfees,100,107–108, Adjustable-ratemortgages(SeeMortgageproducts, 154 nontraditional) Availabilityof FundsandCollectionof Checks Advancedforeigneconomies,30–31,63–64,174–175,193, (RegulationCC),111 204,283 AgencyMortgage-BackedSecuritiesPurchaseProgram,149 Agreementcorporations,71,74–76,78,86,95–96,147 B Agriculture,U.S.Departmentof,GrainInspection, Balancesheets: PackersandStockyardsAdministration,110 Boardof Governors,324 AmericanInternationalGroup,Inc.(AIG),28,61,132, FederalReserveBanks,26–28,60–62,67,68,69, 160,299 171–173,191–192,221–222,242,252,261–262,281 AmericanRecoveryandReinvestmentAct(ARRA), BancodeMexico,swaparrangementwith,201 14–16,54 Bankexaminertraining,108–109 Anti-moneylaundering(AML): BankHoldingCompaniesandChangeinBankControl Compliancewithregulatoryrequirements,79,89 (RegulationY),91,154–155 Examinations,79 Bankholdingcompanies(BHCs): Internationalcoordinationon,89 Assetsandliabilities,71–72,76,91 Anti-steeringprotections,101,156 Banksaffiliatedwith,297 Applications,notices,andproposals,94–96 Capitaladequacystandards,72,83 ARRA(SeeAmericanRecoveryandReinvestmentAct) Examinationsandinspections,74–76 AsiaPacificEconomicCooperationFinancialRegulators’ Financialholdingcompanystatus,76,145 TrainingInitiative,81 Numberof,76,297 AsianDevelopmentBank,81 Performanceof,71–72 Asset-backedcommercialpaper(ABCP),24–25,58, Prudentialstandards,144–145 154–155,194 Ratingsystem,76 Asset-BackedCommercialPaperMoneyMarketMutual Regulatorycapitalrequirements,145 FundLiquidityFacility,60,65,133,159–160,179,300 Regulatoryreports,91 Asset-backedsecurities(ABSs),10,61,133,194–195,205, Surveillanceandoff-sitemonitoring,81 225,284 BankHoldingCompanyAct,71,91,94–95,145 Assetsandliabilities: BankHoldingCompanyPerformanceReports(BHCPRs), Bankholdingcompanies,71–72,91 81 Boardof Governors,325 BankMergerAct,71,95,145 Commercialbanks,26,305 Bankof Canada: FederalReserveBanks,28,60–62,299,301–304, Monetarypolicyrate,31,64 307–311,345 Swaparrangementwith,29,34,49,63,67,201 Nonmemberbanks,305 Bankof England: Statememberbanks,72,74 Monetarypolicyrate,31,195 Associationof Supervisorsof Banksof theAmericas Swaparrangementwith,29,34,49,63,67 (ASBA),81 Bankof Japan: Auditors’reports,324,342,406,407 Monetarypolicyrate,31,64,206 Audits,reviews,andassessments: Swaparrangementwith,29,34,49,63,67 of theBoardof Governors,321 BankSecrecyAct/Anti-MoneyLaunderingExamination of FederalReserveBanks,128–129,149–150 Manual,79,89 of theFederalReserveSystem,321 BankSecrecyAct(BSA),79,89 byGovernmentAccountabilityOffice,407 Bankingorganizations,U.S.:(SeealsoBankholding Internationalstandards,129 companiesandCommercialbanks)

436 97thAnnualReport|2010 Capitaladequacystandards,72 GovernmentPerformanceandResultsActand,141–143 Creditavailabilityand,14,48,60 H.2statisticalreleases,96 Creditdefaultswaps(CDS),59–60 Incentivecompensation,73,158 Denovodepositoryinstitutions,81–82 Incomeandexpenses,129,325 Developmentsin2010,71–74 InteragencyAppraisalandEvaluationGuidelines,88,159 Equityinvestments,59 InternalBoardsupport,142–143 Examinationsandinspections,73 LegalDivision,79 Foreignoperationsof,78 Litigationinvolving,291–292 Minority-ownedinstitutions,81–82 Maximummaturityof primarycreditloans,157 Numberof,297 Membersandofficers,409–413 Overseasinvestmentsby,95–96 Missionof,141 Regulationof,94–96 Monetarypolicyfunction,141–142 Supervisionof,74–94 Officeof DiversityandInclusion,159 BankruptcyCode,146 Officeof MinorityandWomenInclusion,150 Banks’securitiesactivities,90 OversightCommittee,82 BaselAccord,83 Oversightfunction,142 BaselCommitteeonBankingSupervision,72,81 PartnershipforProgress,82 AccountingTaskForce,86 Paymentsystempolicy,142 “BaselIII:Aglobalregulatoryframeworkformore Performanceplan,141 resilientbanksandbankingsystems,”84–85 Performancereport,141 JointForum,85–86 Policyactions,153–162 “PrinciplesforSoundLiquidityRiskManagementand Policystatements,90–91,157–159 Supervision,”90,158 Primarycredit,157 Risk-managementpublications,84 Regulatoryfunction,142 BaselCorePrinciplesforEffectiveBankingSupervision “REOandVacantPropertyStrategiesfor (BCPs),86 NeighborhoodStabilizationSummit,”115–116 BaselIIAdvancedrules,145 ReporttoCongressontheUseofCreditCardsbySmall “BaselIII:Aglobalregulatoryframeworkformore BusinessesandtheCreditCardMarketforSmall resilientbanksandbankingsystems,”84–85 Businesses,98 BearStearnsCompanies,Inc.,61 Reversemortgageproducts,guidanceformanaging Boardof Governors complianceandreputationrisks,107,158 “AddressingtheFinancingNeedsof SmallBusinesses” Secondaryandseasonalcredit,161,162,300 summit,99 Specialliquidityfacilities,159–160 Assessmentsby,315–317 Strategicplan,141 Assetsandliabilities,325 Supervisoryfunction,142 Audits,reviews,andassessmentsof,321 ThriftInstitutionAdvisoryCouncil,417 Balancesheets,325 Website,5 Businesscontinuity,82–83 Borrowersof SecuritiesCredit(RegulationX),96,306 Capitaladequacystandards,83–84 Branches(SeeFederalReserveBanks) Cashflows,327 Brazil,economyof,31,32,64,204,224 CommunityAffairsResearchConference,116 BuildAmericaBondprogram,55 CommunityDepositoryInstitutionsAdvisoryCouncil, Bureauof ConsumerFinancialProtection,129 158–159 Bureauof EngravingandPrinting(BEP),FederalReserve ConsumerAdvisoryCouncil,116–120,416–417 noteproduction,124 Correspondentconcentrationrisks,158 Bureauof thePublicDebt,125–126 Decisions,publicnoticeof,96 Businesscontinuity,82–83 Disclosurerules,96 Businessinvestment,profits,andfinance,12–14,39,52–54, Discountratesfordepositoryinstitutions,161–162 66,67 Divisionof BankingSupervisionandRegulation,79,92 Businesssector,8,12–14,39,52–54,66,67,174,193, Divisionof CommunityandConsumerAffairs,79, 203–204,207,223 97–120 Divisionof ReserveBankOperationsandPayment C Systems,129 Economicprojections,summaryof,37–42 CajadeAhorrosdeValencia,acquisitionof CMFlorida FFIECactivities,79,89,90,92,106–111,158 Holdings,Inc.andCityNationalBancshares,Inc., Financialstatements,321–341 anditssubsidiary,CityNationalBankof Florida, Forecastuncertainty,41 104–105 Goalsandobjectivesof,141–143 CallReports,81,92,285

Index 437 Canada: CommunityDevelopmentFinancialInstitutions(CDFIs),82 Economicrecovery,30,226,245–246,254 CommunityReinvestmentAct(CRA): Exportdemandfrom,55 Applicationsformergersandacquisitions,104–105 Inflation,31,64 ConsumerAdvisoryCouncildiscussionof,116,118–119 Capital,changesin,FederalReserveBanks,347 Examinationsforcompliancewith,104–105 Capitalaccounts,FederalReserveBanks,308,310 Interagencyquestionsandanswerson,108,157 Capitaladequacystandards,72,83–84 Mergersandacquisitionsinrelationto,104–105 “Cash,Check,orCellPhone?ProtectingConsumersina Publichearingson,116 MobileFinanceWorld”forum,114 CommunityReinvestment(RegulationBB),156–157 Cashflows,Boardof Governors,327 Compensationperhour(CPH),57 Cash-managementservices,FederalReserveBanks,126–127 Complianceexaminations,103–106 CertifiedInformationSystemAuditorcertification,93 Complianceriskmanagement,89–90 ChangeinBankControlAct,71,95 Comptrollerof theCurrency,Officeof the(OCC),73,78, Checkcollectionandprocessing,FederalReserveBanks, 81,83,88,110,111,116,144,146,147,154,156–158 122–123 Conditionstatements,FederalReserveBanks,307–311,345 Chile,economyof,64 Conferenceof Chairs,FederalReserveBanks,432 China: Conferenceof FirstVicePresidents,FederalReserve Economyof,17,28,31,64,204,226 Banks,433 Exportdemandfrom,55 Conferenceof Presidents,FederalReserveBanks,432 ShanghaiCompositeIndex,285 Conferenceof StateBankSupervisors(CSBS),90 CityNationalBancshares,Inc.,acquisitionof byCajade CongressionalBudgetOffice,15 AhorrosdeValencia,104–105 ConsumerAdvisoryCouncil: CityNationalBankof Florida,acquisitionof byCajade Meetingsandtopicsof discussion,116–120 AhorrosdeValencia,104–105 Membersandofficers,416–417 Civilmoneypenalties(CMPs),againststatememberbanks, Consumerandcommunityaffairs: 106 Anti-steeringprotections,101,156 CMFloridaHoldings,Inc.,acquisitionof byCajade “Cash,Check,orCellPhone?ProtectingConsumersin AhorrosdeValencia,104–105 aMobileFinanceWorld”forum,114 Collateralizedloanobligations(CLOs),59 CommunityAffairsOffices,99,114,116 Collectionservices,FederalReserveBanks,126 CommunityDataInitiative,116 CollectionsandCashManagementModernization ConsumerAdvisoryCounciladvice,116–120 (CCMM)initiative,126 Consumercomplaints,112–114 Collegecreditcardagreements,98–99 Consumercomplianceexaminertrainingcurriculum,109 Combinedfinancialstatements,FederalReserveBanks, Consumereducation,115 342–405 Consumerinquiries,114 Commercialandindustrial(C&I)loans,13,14,53,72,176, Creditcardreform,97–99 195,205,245,264,284–285 Giftcardfees,100 Commercialbanks: Mortgagereform,100–103 Assetsandliabilities,26,305 Neighborhoodstabilization,114–116 Equityprices,25–26,59 Failuresof,25 Overdraftservices,99–100,107–108,154 Numberof,296 Oversightandenforcement,103–112 Profitabilityof,25,49,176 Rightof rescission,101,117–118 Regulatoryfinancialreports,92 Risk-basedpricing,106–107 Commercialmortgage-backedsecurities(CMBSs),14,53, Rulemakingandregulations,97–103 132,245 Smallbusinessaccesstocredit,99 CommercialPaperFundingFacility,60,61,65,159–160, Supportingcommunityeconomicdevelopment,114–116 179,300 Consumercomplaints,112–114 Commercialrealestate(CRE)loans,13,14,53,87–88 Consumercomplianceexaminertrainingcurriculum,109 Committeeof SponsoringOrganizationsof theTreadway ConsumerCreditProtectionAct,105 Commission(COSO),129 Consumereducation,115 CommodityFuturesTradingCommission(CFTC),89, ConsumerFinancialProtectionBureau(CFPB),144,150 144,147,148 Consumerinquiries,114 Communityaffairs(SeeConsumerandcommunityaffairs) ConsumerLeasing(RegulationM),110 CommunityAffairsOffices(CAOs),99,114,116 Consumerprices,6,9,19,33,48,57,66 CommunityDataInitiative(CDI),116 Consumerprotectionlaws(SeealsoCreditCard CommunityDepositoryInstitutionsAdvisoryCouncil Accountability,ResponsibilityandDisclosureAct) (CDIAC),158–159 Agencyreportsoncompliancewith,109–110

438 97thAnnualReport|2010 “Cash,Check,orCellPhone?ProtectingConsumersin Reservesof,298–299,301–302 aMobileFinanceWorld”forum,114 Deposits: Supervisionforcompliancewith,103–112 Commercialbanks,305 Consumerspending,6,8,33,34,35,48,50–51,65,66,67, FederalReserveBanks,299,303,304,307,309,345 173–174,192,196,202,203,223,227–228,242,281, Directors,FederalReserveBanks,418–433 282 Disclosures: Corporatedebt,13–14,23–24 Financialdisclosuresbystatememberbanks,96 Corporateprofits,13–14,53–54 Mortgages,101–102 Correspondentconcentrationrisks,158 Statememberbanks,financialdisclosuresby,96 Counterterrorismactivities,89 Discountratesfordepositoryinstitutions,161–162 Creditavailability,7,14,33,39,41,49,51–52,60,225,245, Discrimination: 255,264 Departmentof Justicereviewsof,105–106 CreditbyBanksandPersonsotherthanBrokersorDealers Regulatedcomplaintsalleging,112–113 forthePurposeof PurchasingorCarryingMargin Disposablepersonalincome(DPI),9,50,196,223 Stock(RegulationU),80,96,306 DiversityandInclusion,Officeof,159 CreditbyBrokersandDealers(RegulationT),96,306 Dodd-FrankWallStreetReformandConsumerProtection CreditCardAccountabilityResponsibilityandDisclosure Act,26,36,71,72,75,77,83,100,102,103,123,156, Act(CreditCARDAct),10,51,97–98,107,108,116, 159 117,120,153–154,155 Changestobankingregulationandsupervision,145–146 CreditCARDAct(SeeCreditCardAccountability ConsumerFinancialProtectionBureau,150 ResponsibilityandDisclosureAct) Creditriskretentionstudyandregulations,147–148 Creditcards: Debitinterchange,148 Agerequirements,156 Derivatives“pushout,”147 Collegecreditcardagreements,98–99 FederalReservelending,transparency,andgovernance, Consumercomplaintsabout,112,113 149–150 Inactivityfees,155 Financialsectorconcentrationlimit,147 Interestrates,98,156,175 FinancialStabilityOversightCouncil(FSOC),144,148, Penaltyfees,97–98,155 159 Smallbusinessusesof,98,99 Keyprovisions,144–150 “Two-cycle”billingmethod,156 Payment,settlement,andclearingactivitiesandutilities, Creditdefaultswaps(CDSs),59–60 148 Creditriskmanagement,87–89 Regulationof derivativesmarketsandproducts,147 Currencyandcoin,operationsanddevelopmentsin,124, Resolutionframework,148–149 298–299,301–304 Savingsandloanholdingcompanies,authorityover,146 Systemicdesignationsandenhancedprudential D standardsforfinancialfirms,144–145 VolckerRule,146–147 Denovodepositoryinstitutions,81–82 DOJ(SeeJustice,U.S.Departmentof) Debitcardfees,100,107–108,148 Dollarexchangerate,28–29,49,62–63,195,206,245,265, Debt: 285 Corporate,13–14,23 DOT(SeeTransportation,U.S.Departmentof) Domesticnonfinancialsector,7,13–14,53,65,175,194, 205,255,264,284 Government,15,54 E Household,6,9–10,51–52 Stateandlocalgovernments,16,54–55 ECOA(SeeEqualCreditOpportunityAct) Debtservicesforthefederalgovernment,FederalReserve Economy,U.S.: Banks,125–126 Businesssector,8,12–14,39,52–54,66,67,174,193, Decisions,publicnoticeof,96 203–204,207,223 DeepwaterHorizonMobileOffshoreDrillingUnit Debt,domesticnonfinancialsector,7,53,175,205,255, explosionandoilspill,90,107 264,284 Delinquenciesandforeclosures,10,12,51–52,113, Externalsector,8,16–18,39,48,50,55–56,64 119–120,175,194 Federalborrowing,15,54 Deloitte&ToucheLLP(D&T),129,323–324,341 Financialmarkets,5–6,8–9,21–22,24–25,35,39,48,50, Departmentof VeteransAffairs(VA),105 59 Depositoryinstitutions: Governmentsector,14–16,54–55 InterestratesonFederalReserveBankloansto,296 Householdsector,7,9–12,39,41,48,50–52 Reserverequirements,296 Interestrates,10,12,24,34,51,55,58,69,173,175

Index 439 Labormarket,6,8,18–20,40,48,50,56–57,65,66,173, Financialholdingcompanies,76 192,195,196,203,207–208,222,228,243,253,262, Foreignbanks,78–79,103 281–282 Informationtechnologyactivities,79 M2moneyaggregates,26–28,60,176,195,205,226, Internationalactivities,78–79 245,255,265,285 RFIratingsystem,76 Nationalsaving,18,56 Risk-focusedapproach,74–76,79 Outlookandprojections,5–8,37–42,48–49,65–69, Securitiesdealersandbrokers,governmentand 176–178,181–183,196–197,206,233–234,272–273 municipal,80 Policyactions,32–37,65–69 Specialized,79–80 Prices,6,9,17–20,33,48,55–57,65–68 Statememberbanks,74–76,79,103 Productivityandlaborcompensation,19,35,56–57, Transferagents,80 173,192 ExaminerCommissioningProgram(ECP),93–94 Recenteconomicandfinancialdevelopments,8–37, Examinertraining,87,90,108–109 49–65 ExceptionsforBanksfromtheDefinitionof Brokerinthe Recoveryof,5,32,35,37–39,48,49,57–58,60,62,65, SecuritiesandExchangeActof 1934(RegulationR), 66,67,173–176,192,196–197,202,206,227,252, 90 256,262,285 Expenses(SeeIncomeandexpenses) Stateandlocalgovernments,15–16,39,41,48,54–55 Exports,8,16–17,39,48,50,55,64,174,196,224,253 Tradedeficit,174,193,224,244,253,263,283 Externalsector,8,16–18,39,50,55–56,64 EdgeActcorporations,71,74–76,78,95–96,147 Electronicaccess,toFederalReserveBankservices, 127–128 F ElectronicFundTransfers(RegulationE),99–100, FairandAccurateCreditTransactionsAct,107,108 107–108,110 FairCreditReportingAct(FCRA),107,108 Emergingmarketeconomies,17,29,31–32,64–65,207, FairCreditReporting(RegulationV),106–107 224,244,246,263,265,283 FairHousingAct,105,113–114 Employment,18–19,33,35,48,50,56,66,196,228,243, FairLendingExaminationTechniques(FLETs),109 252,262,281(SeealsoUnemployment) Fairlendinglaws,compliancewith,105–106 Employmentcostindex(ECI),263 Energyprices,17,19–20,48,57,65,66,67,193,195–196, FannieMae: 223,228,252 FederalReserveBankservicesto,127 Enforcementactions: Mortgage-backedsecuritiesissuedby,12,52,194,205 FederalReserveSystem,80,103–112 FarmCreditAdministration(FCA),80,90,110 Otherfederalagencies,106–108 FedACHservice,122 EqualCreditOpportunityAct(ECOA),105–106,114 FederalAdvisoryCouncil,membersandofficers,415 EqualCreditOpportunity(RegulationB),109–110 Federalagencysecuritiesandobligations: Equipmentandsoftware,8,12–13,33,34,50,52,66,67, Commercialbankholdings,305 174,193,196,203,206–207,223,243,252,253, FederalReserveBankholdings,298,301 262–263,282 Openmarkettransactions,293 Equitymarketsandprices,6,23–24,25–26,28–29,49, FederalAviationAct,111 53–54,58–59,175,206,244–245,264,284 FederalDepositInsuranceAct,76 Ethnicdiscrimination(SeeDiscrimination) FederalDepositInsuranceCorporation(FDIC),72,73,81, Europe:(Seealsospecificcountries) 82,83,88,90,91,92,110,111,116,146,147, Fiscalcrises,9,28,30,33,34,48,49,50,57,58,62–63, 148–149,151,154,157–158,175–176 66,226,284 FederalEmergencyManagementAgency(FEMA),106 EuropeanCentralBank(ECB): FederalFinancialInstitutionsExaminationCouncil Debtpurchasesby,224 (FFIEC): Fundingoperations,29 BankSecrecyAct/Anti-MoneyLaunderingExamination Greekeconomiccrisisand,30,62,63,64,195 Manual,79,89 Swaparrangementwith,33,49,63,67 BSA/AMLworkinggroup,89 EuropeanUnion(EU),28,30,55 Examinationproceduresandguidance,106–109,110, Examinationsandinspections: 111 Anti-moneylaundering,79 Reportof AssetsandLiabilitiesof U.S.Branchesand Bankholdingcompanies,74–76 Agenciesof ForeignBanks,92 CommunityReinvestmentActcompliance,104–105 Reversemortgageproducts,guidanceformanaging Consumerprotectionlawcompliance,103 complianceandreputationrisks,107,158 FederalReserveBanks,128–129 StateLiaisonCommittee,90 Fiduciaryactivities,79–80 TaskForceonSurveillanceSystems,81

440 97thAnnualReport|2010 Federalfundsrate,22,32,33,34,35,49,58,65,66,67,175, Depositoryservicesforthefederalgovernment,124–127 193–194,197,198,204,208,244,245,250,254,263, Deposits,299,303,304,307,309,345 268,269,283,288,289 Directors,418–433 Federalgovernment: Discountratesfordepositoryinstitutions,161–162 Budgetdeficit,14–15,18,54,56,208 Dualmandate,21,32,33,34,66 Delinquentdebt-collectionprogram,126 Economicgrowthprojections,37–42 FederalReserveBankdepositoryservicesto,124–127 Electronicaccesstoservices,127–128 Spending,receipts,andborrowing,15,54,125 Examinationsof,128–129 FederalHousingAdministration(FHA),12,52,105,106 Examinertraining,87,90,108–109 FederalHousingFinanceAgency(FHFA),144,150 FedACHservice,122 FederalNationalMortgageAssociation(SeeFannieMae) FedGlobalservices,123 FederalOpenMarketCommittee:(SeealsoOpenmarket FedLineAdvantage,128 operations) FedLineCommand,128 Annualorganizationalmatters,165–166 FedLineDirect,128 Authorizations,166–170 FedLineWeb,128 Conferencecallminutes,230–231 FedwireFundsService,122,123 Diversityof participants’views,42–46,176–178, FedwireSecuritiesService,124 184–188,202,206–208,213–218,227–228,236–239, Financialstatementsof,combined,342–405 246–248,256–257,265–267,274–278,286–287 FirstVicePresidents,Conferenceof,433 Domesticpolicydirectives,5,7–8,32–35,65–68,163, Fiscalagencyservices,124–127 166–168,171–176,178–180,198–199,208–209, Float,124,298,301 229–230,249–250,258–259,268–269,288–289 GoDirectprogram,126 Forecastuncertainty,40–42,183,189,213,219,234–235, Governanceof,150 240,273–274,279 Governmentdepositoryservices,124–127 Foreigncurrencydirectivesandproceduralinstructions, Incomeandexpenses,61–62,125,129–130,312–317,346 168–170 Informationtechnologydevelopments,128 Meetings,minutesof,163–289 Intradaycredit,developmentsintheuseof,127 Membersandofficers,414 Lendingauthorization,149 Notationvotes,180,199,210,231,250,259,269,289 Loansandothercreditextensions,65,298,300,301,302 Summaryof economicprojections,37–42,180–188, NationalSettlementService,123–124 210–218,231–239,270–278 Numberof,71 SystemOpenMarketAccount(SOMA),7,27,32–33, Numberof officersandemployees,319 35,69,129,130–132,173,201,221,261–262,281 Officers,listof,430–431 Videoconferencemeetingminutes,269–270 Officersandemployees,numberandsalariesof,319 FederalReserveAct,36,77,78,95,129,132,145 Operations,volumeof,318 FederalReserveBanks: Paymentsservices,126 AssessmentsbytheBoardof Governors,316,317 PaymentstotheU.S.Treasury,315,316,317 Assetpurchaseprogram,21–22,23,27,32,49,60,65, Premisesof,132,319 69,171–173,178–179,191,195,201–202,205, Presidents,Conferenceof,432 221–222,261,281,283 Pricedservices,121–124,134–139 Assetsandliabilities,28,60–62,299,301,302,303,304, Privatesectoradjustmentfactor,122–123,124 307–311,345 Repurchaseandreverserepurchaseagreements,35,68, Audits,reviews,andassessmentsof,128–129,149–150 172,191,294,298,299,301,302 Automatedclearinghouse(ACH)services,121,123,128 Reservebalances,299 Balancesheets,26–28,60–62,67,68,69,171–173, Salariesof officersandemployees,319 191–192,221–222,242,252,261–262,281 Savingsandloanholdingcompanyintegrationinto, Branches,71,78,418–433 77–78 Capitalaccounts,308,309 Securitiesandloans,holdingsof,298 Cash-managementservices,126–127 Statementsforpricedservices,134–139 Chairs,Conferenceof,432 Transparencyinitiatives,36–37,149 Changesincapital,347 Treasurysecuritiesservices,125–126 Checkcollectionandprocessing,122–123 Website,36 Collectionservices,126 FederalReserveConsumerHelp(FRCH),112,114 Conditionstatements,307–311,345 FederalReserveSystem:(SeealsoBoardof Governorsand Creditoutstanding,298,301,302 FederalReserveBanks) Currencyandcoin,operationsanddevelopmentsin,124 Accountingpolicy,86–87 Debtcollectionservicesforthefederalgovernment,126 Audits,reviews,andassessmentsof,321 Debtservicesforthefederalgovernment,125–126 BaselCommitteeactivities,84–86

Index 441 Decisions,publicnoticeof,96 FederalReservepricedservices,121–122 Divisionof ConsumerandCommunityAffairs,106 FirstNationalBankof Olathe,purchaseof certainassets Enforcementactions,80,103–112 andliabilitiesof byMetcalf Bank,104 FinancialActionTaskForce,89 FirstNiagaraFinancialGroup,Inc.,acquisitionof FinancialSectorAssessmentProgram,86 HarleysvilleNationalCorp.,104 GAOreviewsof,149,407 Fiscalagencyservices,FederalReserveBanks,124–127 Incentivecompensation,73 Float,FederalReserveBanks,124,298,301 Internationalguidanceonsupervisorypolicies,84–86 Floodinsurance,106 Internationaltraining,81 Foodprices,20,55–56,57 JointForumparticipation,85–86 Foreclosures(SeeDelinquenciesandforeclosures) Lendingtocreditworthysmallbusinesses,87–88 ForeignAssetsControl,Officeof (OFAC),89 Maps,2–3 ForeignBankSupervisionEnhancementAct,96 Overview,1–2 Foreignbanks:(Seealsospecificbanks) Regulationresponsibilities,94–96 Examinationsandinspections,78–79 Regulatoryreports,90–92 Financialholdingcompanystatus,76 RiskRetentionreporttoCongress,86–87 Technicalassistanceto,FederalReserve,81–82 Safetyandsoundnessresponsibilities,73–74 U.S.activitiesof,78–79 Supervisionresponsibilities,73–94,108–109 Foreigncurrencyoperations: Supervisorypolicy,83–84 Directives,170 Surveillanceandoff-sitemonitoring,80–81 Proceduralinstructions,170–171 Technicalassistance,81–82 Foreigneconomies,7,28–29(SeealsoAdvancedforeign Transparencyinitiatives,36–37,149 economiesandEmergingmarketeconomies) FederalTradeCommissionAct,113 Foreignoperationsof U.S.bankingorganizations,78 FederalTradeCommission(FTC),110 Foreigntrade,16–18,55–56 FedGlobalservices,123 FR-Y9statements,81,91 FedLineAdvantage,128 France,yieldsof sovereignbonds,63 FedLineCommand,128 FreddieMac: FedLineDirect,128 FederalReserveBankservicesto,127 FedLineWeb,128 Mortgage-backedsecuritiesissuedby,12,52,194,205 FedwireFundsService,122,123 FedwireSecuritiesService,123–124 Fiduciaryactivities,FederalReserveexaminationof,79–80 G FiduciaryandRelatedServices(ScheduleRC-T),92 GAO(SeeGovernmentAccountabilityOffice,U.S.) Finance: GDP(grossdomesticproduct),6,7–8,15,17,18,31, Business,13–14,53–54 37–39,41,48,49–50,53,54,55,56,174,176,181, Household,9–10,50–52 183,193,195,224,242,244,246,254,256,285 Financialaccount,U.S.,29–30,63 GeneralMotors,14 FinancialAccountingStandardsBoard(FASB),86,87 Germany: FinancialActionTaskForce(FATF),89 Economyof,245,254 FinancialAssetsandLiabilitiesMeasuredatFairValue Yieldsof sovereignbonds,63 (ScheduleQ),92 FinancialBankingInformationInfrastructureCommittee Giftcards,100,107–108 (FBIIC),83 GinnieMae: FinancialCrimesEnforcementNetwork,89 FederalReserveBankservicesto,127 FinancialFraudEnforcementTaskForce(FFETF),106 Mortgage-backedsecuritiesissuedby,12,52 Financialholdingcompanies,76,145 GoDirectprogram,126 Financialmarkets,5–6,8–9,21–22,24–25,35,39,48,50, Goldstock,298,301,302,307 59,191–192,196,198,221–222,227,242,252, GovernmentAccountabilityOffice,U.S.(GAO),149,407 261–262,281 Governmentdepositoryservices,FederalReserveBanks, FinancialRecords,Officeof,129 124–127 FinancialSectorAssessmentProgram(FSAP),86 GovernmentPerformanceandResultsAct(GPRA), FinancialStabilityInstitute,81 141–143 FinancialStabilityOversightCouncil(FSOC),72,144, Governmentsector,14–16,54–55(SeealsoFederal 148,159 governmentandStateandlocalgovernments) FinancialStabilityPolicyandResearch,Officeof,159 GovernmentSecuritiesAct,80 Financialstatements: GovernmentSecuritiesActAmendments,80 Boardof Governors,321–341 Governmentsecuritiesdealersandbrokers,FederalReserve FederalReserveBanks,combined,342–405 examinationof,80

442 97thAnnualReport|2010 Government-sponsoredenterprises(GSEs)(SeeFannie InteragencyExaminationProceduresfortheRegulationon Mae,FreddieMac,andGinnieMae) Risk-BasedPricingNotices(RegulationV),106–107 GovernmentwideAccountingandReporting InteragencyFairLendingExaminationProcedures,106 Modernizationinitiative,127 InteragencyPaperonSoundPracticestoStrengthenthe G.R.Bancorp,Ltd.,acquisitionof byPremierCommerce ResilienceoftheU.S.FinancialSystem,82 Bancorp,Inc.,104 InteragencyQuestionsandAnswersonCommunity GrainInspection,PackersandStockyardsAdministration Reinvestment(revised),108 of theDepartmentof Agriculture,110 InteragencySupervisoryGuidanceforInstitutions Gramm-Leach-BlileyAct,76,89–90,146 AffectedbytheDeepwaterHorizonOilSpill,107 Greece,fiscalcrisis,30,62–63,67,195,204,205,224,226 Interestonexcessreservesrate(IOER),68,172 Interestrates,10,12,24,34,51,55,58,69,173,175 InternalRevenueService(IRS),89 H InternationalAccountingStandardsBoard(IASB),87 H.2statisticalreleases,96 InternationalAssociationof InsuranceSupervisors,85 HarleysvilleNationalCorp.,acquisitionof byFirst InternationalBankingOperations(RegulationK),154 NiagaraFinancialGroup,Inc.,104 InternationalBankingAct,71,96 HelpingFamiliesSaveTheirHomesAct,100,102,155 InternationalFinancialReportingStandards(IFRS),87 HigherEducationOpportunityAct(HEOA),104,108,157 InternationalMonetaryFund(IMF),30,62,81,86,224,285 HomeAffordableModificationProgram(HAMP),106, InternationalOrganizationof SecuritiesCommissions,85 119–120 InternationalStandardsfortheProfessionalPracticeof HomeMortgageDisclosureAct(HMDA),103,116,118 InternalAuditing,129 HomeMortgageDisclosure(RegulationC),103,118 Internationaltrade,16–18,55–56 HomeOwners’LoanAct(HOLA),77 Internationaltraining,FederalReserveSystem,81 HomeOwnershipandEquityProtectionAct,150 Intradaycredit,developmentsintheuseof,127 Homebuyertaxcredit,223 Inventoryinvestment,13,50,53,264,282 Householdsector,7,9–12,39,41,48,50–52 Investments: HousingandEconomicRecoveryAct(HERA),104 Businesssector,12–13,52–53 HousingandUrbanDevelopment,U.S.Departmentof Inventory,13,50,53,263,282 (HUD),104,106,117 Overseas,byU.S.bankingorganizations,95–96 Referralsof consumercomplaintsto,113–114 Residential,10–12,51–52 HUD(SeeHousingandUrbanDevelopment,U.S. Ireland,fiscalcrisis,30,285 Departmentof) J I Japan: Imports,16,17–18,48,55,174,224,253–254 Consumerpriceinflation,30–31,245–246 Incomeandexpenses: Economyof,254 Boardof Governors,129,326 Exportdemandfrom,55 FederalReserveBanks,61–62,125,129–130,312–317,346 Inflation,64 FederalReservepricedservices,121,122,135 Yenvaluation,29,255 Inflation,8,20,23,32,40,41–42,48,49,57,65,66,67,68, Joblosses(SeeUnemployment) 196,197,204,208,226–228,246,253,256,263,265, JointForum,85–86 285–286 Jumbomortgages(SeeMortgageproducts,nontraditional) InformationSystemsAuditControlAssociation,93 Justice,U.S.Departmentof (DOJ),95 Informationtechnology(IT): CivilRightsDivision,106 Businesssectorspendingon,13 Discriminationcasesreferredto,105–106 FederalReserveBankdevelopments,128 FederalReserveexaminationof activities,79 L SupportingFederalReservesupervisoryactivities,92–93 Inspections(SeeExaminationsandinspections) Labormarket,6,8,18–20,40,48,50,56–57,65,66,173, InspectorGeneral,Officeof (OIG),406 192,195,196,203,207–208,222,228,243,253,262, Insuredcommercialbanks(SeeCommercialbanks) 281–282 InteragencyAppraisalandEvaluationGuidelines,88,159 Largebanks,supervisionof,75 InteragencyExaminationProceduresforRegulation LargeInstitutionSupervisionCoordinatingCommittee DD—TruthinSavings(revised),107 (LISCC),75 InteragencyExaminationProceduresforRegulation LegacyTreasuryDirect,125 E—ElectronicFundTransfers(revised),107–108 Legislativedevelopments: InteragencyExaminationProceduresforRegulation Dodd-FrankWallStreetReformandConsumer Z—TruthinLending(revised),107,108 ProtectionAct,144–150

Index 443 SmallBusinessJobsAct,144,151 Metcalf Bank,purchaseof certainassetsandliabilitiesof Liabilities(SeeAssetsandliabilities) FirstNationalBankof Olathe,104 Life-longlearning,focusof examinertraining,109 Mexico: LitigationinvolvingtheBoardof Governors: Economyof,31–32,64,204,224 Artis,291 Exportdemandfrom,55 BloombergL.P.,291 MiddleEast,unrestin,17,23,24,29 CitizensforResponsibilityandEthicsinWashington,291 MiddleEastandNorthAfricaFinancialRegulators’ FoxNewsNetwork,291 TrainingInitiative,81 GoldAnti-TrustActionCommitteeInc.,291 MinorityandWomenInclusion,Officeof,150 Jones,292 Minority-ownedinstitutions,81–82 JudicialWatchInc.,291 Mobilefinancetechnologies,114 McKinley,291 MonetaryControlAct,121–122 Murray,291 Monetarypolicy,5–8,22–23,32–42,58,65–69,171–173, Qader,291 197–199,206 Schulz,292 MonetarypolicyreportstoCongress TCFNationalBank,291 July2010,48–69 Weirich,291 March2011,5–47 Loanmodificationsandforeclosures,consumercomplaints Moneyaggregates(M2),26–28,60,176,195,205,226,245, about,113 255,265,285 Loanoriginatorpractices,101 Moneylaunderingprevention(SeeAnti-money Loans:(Seealsospecifictypesofloans) laundering) Collateralizedloanobligations,59 MoneyMarketInvestorFundingFacility,300 Creditworthysmallbusinesses,87–88 Moody’sindexof commercialpropertyprices,175 FederalReserveBankholdings,62,65,298,300 Mortgage-backedsecurities(MBS),5,12,21–22,26,32, InterestratesonFederalReserveBankloansto 35,36,52,149,194–195,255,284,292–293 depositoryinstitutions,296 MortgageDisclosureImprovementAct(MDIA),100, Predatorylendingrestrictions,150 101–102,155 Rightof rescission,101,117–118 MortgageOutreachandResearchEfforts(MORE) Taxrefundanticipation,120 Initiative,114–116 Localgovernments(SeeStateandlocalgovernments) Mortgageproducts,nontraditional,102,155 Londoninterbankofferedrates(Libor),24,59,63,175, Mortgageproducts,traditional,12,52,100–101,150,253, 194,204,224,244,264,284,343 255,264,284 Municipalsecuritiesdealersandbrokers,FederalReserve examinationof,80 M MunicipalSecuritiesRulemakingBoard,ruleG-16,80 M2moneyaggregates,26–28,60,176,195,205,226,245, 255,265,285 N MaidenLaneIILLC,28,61,300 MaidenLaneIIILLC,28,61,300 NationalBankersAssociation(NBA),82 MaidenLaneLLC,28,61,300 NationalCreditUnionAdministration(NCUA),80,88, Malaysia,economyof,31 90,144,154 Maps,FederalReserveSystem,2–3 NationalFederationof IndependentBusiness(NFIB),13, Medicaid,15,55 53 Memberbanks:(SeealsoNonmemberbanksandState NationalFloodInsuranceAct,106 memberbanks) NationalFloodMitigationFund,106 Assetsandliabilities,305 NationalForeclosureMitigationCounseling(NFMC) Examinationsof foreignoperations,78–79 Program,116 Numberof,78,296 Nationalincomeandproductaccounts(NIPAs),15,16,54, Reserves,303,304 57 Membersandofficers: NationalInformationCenter(NIC),81,93 Boardof Governors,408–413 NationalMortgageLicensingSystemandRegistry,90 ConsumerAdvisoryCouncil,416–417 Nationalsaving,18,56 FederalAdvisoryCouncil,415 NationalSettlementService,123–124 FederalOpenMarketCommittee,414 Neighborhoodstabilization,114–116,119–120 FederalReserveBanks,430–431 NeighborhoodStabilizationProgram(NSP),104,115–116, ThriftInstitutionsAdvisoryCouncil,417 119–120,157 Membershipof StateBankingInstitutionsintheFederal NeighborWorksAmericat(NWA),116 ReserveSystem(RegulationH),106,154 NewMarketsTaxCreditprogram(NMTC),82,120

444 97thAnnualReport|2010 Nonmemberbanks:(SeealsoMemberbanksandState Energy,17,19–20,48,57,65,66,67,193,195–196,223, memberbanks) 228,252 Assetsandliabilities,305 Exportsandimports,17–18,55–56,174 Numberof,78 Food,20,55–56,57 NorthAfrica,unrestin,17,23,24,29 Primarycredit,157,300 NorthAmericanFrameworkAgreement,201 PrimaryDealerCreditFacility,60,65,132,159–160,179 “PrinciplesforSoundLiquidityRiskManagementand Supervision,”90,158 O PrivacyAct,157 Off-sitemonitoring,80–81 Privacyof ConsumerFinancialInformation Officeof FinancialRecords,129 (RegulationP),110 Officeof FinancialResearch(OFR),144 Privatesectoradjustmentfactor(PSAF),122–123,124 Officeof FinancialStabilityPolicyandResearch,159 Productivityandlaborcompensation,19,35,56–57,173, Officeof ForeignAssetsControl(OFAC),89 192 Officeof InspectorGeneral(OIG),405 ProfessionaldevelopmentFederalReserve,93–94 Officeof MinorityandWomenInclusion,150 Publicnotice,FederalReservedecisions,96 Officeof theComptrollerof theCurrency(OCC),73,78, Purchasingmanagersindexes(PMIs),283 81,83,88,110,111,116,144,146,147,154,157–158 Officeof ThriftSupervision(OTS),71,73,76,77–78,88, 110,111,116,154,157–158 R Oilprices(SeeEnergyprices) Racialdiscrimination(SeeDiscrimination) Openmarketoperations:(SeealsoFederalOpenMarket Rangeof methodologiesforriskandperformance Committee) alignmentof remuneration,84 Frameworkfor,36 RapidResponsetprogram,94,109 Volumeof transactions,293–294 Realestate,consumercomplaintsabout,112,113 Operationalrisk—supervisoryguidelinesfortheAdvanced Realestateappraisers,102–103,120,150,156 MeasurementApproaches,84 Realestateowned(REO)properties,114–116,118, Operations,volumeof,FederalReserveBanks,318 119–120 Otherrealestateowned(OREO)information,91,92 Regulatedpractices,consumercomplaintsabout,112–113 Over-the-counter(OTC)derivativetransactions,59 Regulationresponsibilities,FederalReserveSystem,94–96 Overdraftservices,99–100,107–108,154 Regulations: Overnightindexswaps(OIS),59,175,194,204,224–225, AA,UnfairorDeceptiveActsorPractices,111,156 244,264,284 B,EqualCreditOpportunity,109–110 BB,CommunityReinvestment,156–157 P C,HomeMortgageDisclosure,103,118 Pandemicpreparedness,82–83 CC,Availabilityof FundsandCollectionof Checks,111 PartnershipforProgress,81–82 D,ReserveRequirementsof DepositoryInstitutions,68, Pay.gov,126 153 Paymentsservices,FederalReserveBanks,126 DD,TruthinSavings,99–100,107,111,154 PaymentstoU.S.TreasuryDepartment,FederalReserve E,ElectronicFundTransfers,99–100,107–108,110, Banks,15,315–317 153–154 PCEs(personalconsumptionexpenditures),6,9,19,20, H,Membershipof StateBankingInstitutionsinthe 40,42,48,57,174,183,193,195–196,204,206, FederalReserveSystem,106,154 243–244,253,262,282–283 K,InternationalBankOperations,154 People’sBankof China,226,285 M,ConsumerLeasing,110 Philippines,economyof,31 P,Privacyof ConsumerFinancialInformation,110 Policyactions: R,ExceptionsforBanksfromtheDefinitionof Broker Boardof Governors,153–162 intheSecuritiesandExchangeActof 1934,90 FederalOpenMarketCommittee,163–289 T,CreditbyBrokersandDealers,96,306 Policystatements,Boardof Governors,157–159 U,CreditbyBanksandPersonsotherthanBrokersor Pre-paidcards,100 DealersforthePurposeof PurchasingorCarrying Predatorylending,restrictionson,150 MarginStock,80,96,306 PremierCommerceBancorp,Inc.,acquisitionof G.R. V,FairCreditReporting,106–107 Bancorp,Ltd.,104 X,Borrowersof SecuritiesCredit,96,305 Premises,FederalReserveBanks,132,319 Y,BankHoldingCompaniesandChangeinBank Pricedservices,FederalReserveBanks,121–124,134–139 Control,91,154–155 Prices: Z,TruthinLending,100,101–102,107,108,110–111, Consumer,6,9,19,33,48,55–56,57,66,243–244 116,117,155–156

Index 445 Regulatoryreports,90–92 SecuritiesandExchangeCommission(SEC),87,89,105, REOandVacantProperties:StrategiesforNeighborhood 110,144,147,148–149 Stabilization,115–116 Securitiescredit,96 ReportandrecommendationsoftheCross-borderBank SecuritiesExchangeAct,80,90,96 ResolutionGroup,84 SeniorCreditOfficerOpinionSurveyonDealerFinancing Repurchaseandreverserepurchaseagreements,Federal Terms(SCOOS),7,22,25,59,225,254,284 ReserveBanks,35,68,172,191,294,298,299,301, SeniorLoanOfficerOpinionSurveyonBankLending 302 Practices(SLOOS),10,14,25,51,52,59,176, ReserveBankof Australia,monetarypolicyrate,206 264–265 ReserveRequirementsof DepositoryInstitutions SharedNationalCreditModernization(SNCMod) (RegulationD),68,153 project,93 Residentialinvestment,10–12,51–52 SharedNationalCredit(SNC)Program,88–89 Revenue(SeeIncomeandexpenses) Singapore,economyof,31 ReverseMortgageProducts:GuidanceforManaging SKBHCHoldings,LLC,acquisitionof Starbuck ComplianceandReputationRisks,107,158 Bancshares,Inc.,104 Reversemortgages,100–101,117 SLOOS(SeeSeniorLoanOfficerOpinionSurveyonBank RevisedInteragencyQuestionsandAnswerson LendingPractices) CommunityReinvestment,108 SmallBusinessAdministration(SBA),88,110,120 RiegleCommunityDevelopmentandRegulatory SmallBusinessJobsAct,90,144,151 ImprovementAct,76 SmallBusinessLendingFund(SBLF)Program,73,90, Rightof rescission,101,117–118 144,151 Risk-basedpricing,106–107 Smallbusinesses: Risk-focusedsupervision,FederalReserveSystem,74–76, Creditcarduseby,98,99 79,103 Lendingtocreditworthybusinesses,87–88,120 Riskmanagement,87–89 SNCMod(SeeSharedNationalCreditModernization project) RRPs(SeeRepurchaseandreverserepurchaseagreements) SNCProgram(SeeSharedNationalCreditProgram) Russia,economyof,17 SNCnetsystem,93 SocialSecurity,15 S Software(SeeEquipmentandsoftware) Soundpracticesforbacktestingcounterpartycreditrisk Safeharborrules,175–176 models,84 Salaries,FederalReserveBankofficersandemployees,319 SouthFinancialGroup,Inc.,acquisitionof by Savingrate(SeeNationalsaving) Toronto-DominionBank,104 Savingsandloanholdingcompanies(SLHCs): S&P500,13,24,58,225,244–245,254,264,284 Interagencycoordinationof thetransferof,77 Spain,economyof,29 Numberof,71 Specialdrawingrightscertificateaccount,298,301,302 Regulatorycapitalrequirements,145 Specialliquidityfacilities,159–160(Seealsospecific Supervisionof,77–78 facilities) Supervisoryandregulatoryauthorityover,146 Staff development,FederalReserve,93–94,108–109 Scams,consumerinquiriesabout,114 StarbuckBancshares,Inc.,acquisitionof bySKBHC ScheduleHC-V,VariableInterestEntities,91–92 Holdings,LLC,104 ScheduleQ,FinancialAssetsandLiabilitiesMeasuredat Stateandlocalgovernments,15–16,39,41,48,54–55 FairValue,92 Statememberbanks:(SeealsoMemberbanksand ScheduleRC-T,FiduciaryandRelatedServices,92 Nonmemberbanks) SCOOS(SeeSeniorCreditOfficerOpinionSurveyon Assetsandliabilities,74 DealerFinancingTerms) Capitaladequacystandards,72 Seasonalcredit,161,162,300 Civilmoneypenaltiesagainst,106 Secondarycredit,161,162,300 Examinationsandinspectionsof,74–76,79 SecretService,U.S.,securedesignforthe$100note,124 Financialdisclosuresby,96 SecureandFairEnforcementforMortgageLicensingAct Numberof,74,76 (S.A.F.E.Act),90,154 Performanceof,72 Securities(SeealsoFederalagencysecuritiesandTreasury Storedvaluecards(SVCs),126 securities) SupervisionandRegulationStatisticalAssessmentof Bank Creditlenders,examinationof,80 Risk(SR-SABR),81 Governmentandmunicipal,examinationof dealersand Supervisionresponsibilities,FederalReserveSystem,73–94 brokers,80 SupplementaryFinancingAccount,28 Transferagents,80 Surveillanceandoff-sitemonitoring,80–81

446 97thAnnualReport|2010 Surveyof ProfessionalForecasters,20,57 TreasuryDirect,125 Surveyof Termsof BusinessLending,53 Treasuryinflation-protectedsecurities(TIPS),58,175,194, SuspiciousActivityReports(SARs),89 204,254,261,264,281,283 Swaparrangements,7,29,34–35,49,63,65,67,147,149, Treasurysecurities: 179,201,226,281,300 Commercialbankholdings,26 SwissNationalBank,swaparrangementwith,29,34–35, Demandfor,15,54 49,63,67 FederalReserveBankholdings,5,32,69,130–131,192, 202,261,268–269,295,298,300,301,302 FOMCpurchases,6,21,22,34,35 T Foreignpurchasesof,29–30,63 Taxrefundanticipationloans(RALs),120 Openmarkettransactions,293 Technicalassistance,FederalReserveSystem,81–82 Repurchaseandreverserepurchase,294,298,299,301, TermAsset-BackedSecuritiesLoanFacility(TALF), 302 27–28,51,53,60,65,66,132,159–160,179,191, Retailsecuritiesprogram,125–126 198–199,205,300 Wholesalesecuritiesprogram,126 TermAuctionFacility(TAF),36,60,65–66,131,149, Yields,6,8,21,23,25,35,58,204,224,227,244,254, 159–160,161–162,171–172,179 264,283–284 TermDepositFacility(TDF),35,36,61,68–69,153, TroubledAssetRelief Program(TARP),15,54,72,160, 160–161,172 175,194 TermSecuritiesLendingFacility,60,159–160,179 TruthinLendingAct(TILA),101–102,107 Thailand,economyof,31 TruthinLending(RegulationZ),100,101–102,107,108, ThomsonReuters/Universityof MichiganSurveysof 110–111,116,117,155–156 Consumers,20,57,174 TruthinSavings(RegulationDD),99–100,107,111,154 ThriftInstitutionAdvisoryCouncil,membersandofficers, 417 U ThriftSupervision,Officeof (OTS),71,73,76,77–78,88, 110,111,116,154,157–158 Ukraine,economyof,17 Toronto-DominionBank,acquisitionof SouthFinancial Unemployment,8,18–19,32,35,37,40,41,48,50,56,65, Group,Inc.,104 195,196–197,203,222,228,243,252,281–282 Trade,international,16–18,55–56 UnfairorDeceptiveActsorPractices(RegulationAA), Tradedeficit,174,193,224,244,253,263,283 111,156 Transferagents,FederalReserveexaminationof,80 UniformStandardsof ProfessionalAppraisalPractice,88 Transparencyinitiatives,36–37,149 UnitedKingdom: Transportation,U.S.Departmentof (DOT),110,111 Consumerpriceinflation,31 Treasury,U.S.Departmentof the:(SeealsoTroubledAsset Economyof,245 Relief Program) Inflation,64 Cashholdings,299,303,304 Unregulatedpractices,consumercomplaintsabout,113 CollectionsandCashManagementModernization U.S.Congress(SeeMonetarypolicyreportstoCongress; (CCMM)initiative,126 specificlegislation) Currencyincirculationandoutstanding,298–299,301, U.S.PostalService,FederalReserveBankservicesto,127 302,303,304 U.S.savingsbonds,processingof,125 FederalReserveBankpaymentsto,15 FinancialManagementService,126,127 FinancialResearch,Officeof (OFR),144 V GoDirectprogram,126 Vacantproperties,114–116 HomeAffordableModificationProgram,106,119–120 VariableInterestEntities(VIEs)(ScheduleHC-V),91–92 Internationaltraining,81 Venezuela,economyof,64 LegacyTreasuryDirect,125 NewMarketsTaxCreditprogram,120 Officeof ForeignAssetsControl,89 W Paymentsto,byFederalReserveBanks,15,315,316, 317 WestTexasIntermediate(WTI)crudeoilprices,17,55 Redesignof the$100bill,124 WhatYouNeedtoKnowconsumereducationseries,115 RetailE-Services,125 WorldBank,81,86 SmallBusinessLendingFund(SBLF)Program,73,90, 144,151 Y U.S.savingsbonds,processingof,125 Website,86 Yieldspreadpremiums,101