annual reports · December 31, 2010

Annual Report of the Federal Reserve Board, 2011

98th Annual Report 2011 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

2011AnnualReportErrata Onp.83,under‘‘Performanceof bankholdingcompanies’’thefourthsentencewasprintedincorrectlyandhas beenrevised.(5/24/12) 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/pubs/alpha.htm.

Letter of Transmittal Boardof Governorsof theFederalReserveSystem Washington,D.C. May2012 TheSpeakerof theHouseof Representatives: Pursuanttotherequirementsof section10of theFederalReserveAct,Iampleasedtosubmittheninety-eighth annualreportof theBoardof Governorsof theFederalReserveSystem. Thisreportcoversoperationsof theBoardduringcalendaryear2011. Sincerely, BenBernanke Chairman

i Contents Overview .....................................................................................................................................1 AboutthisReport .......................................................................................................................1 AbouttheFederalReserveSystem ..............................................................................................1 Monetary Policy and Economic Developments ............................................................5 MonetaryPolicyReportofFebruary2012 ....................................................................................5 MonetaryPolicyReportofJuly2011 ..........................................................................................55 Supervision and Regulation ................................................................................................83 2011Developments ..................................................................................................................83 Supervision ..............................................................................................................................84 Regulation ..............................................................................................................................107 Consumer and Community Affairs ................................................................................111 RulemakingandRegulations ...................................................................................................111 OversightandEnforcement .....................................................................................................115 RespondingtoConsumerComplaintsandInquiries ..................................................................125 ConsumerPolicyandEmergingIssuesAnalysis .......................................................................127 SupportingCommunityEconomicDevelopment .......................................................................127 ConsumerAdvisoryCouncil .....................................................................................................129 Federal Reserve Banks ........................................................................................................135 FederalReservePricedServices ..............................................................................................135 CurrencyandCoin ..................................................................................................................138 FiscalAgencyandGovernmentDepositoryServices .................................................................139 UseofFederalReserveIntradayCredit ....................................................................................141 ElectronicAccesstoReserveBankServices ............................................................................142 InformationTechnology ...........................................................................................................142 ExaminationsoftheFederalReserveBanks .............................................................................143 IncomeandExpenses .............................................................................................................144 SOMAHoldingsandLoans ......................................................................................................145 FederalReserveBankPremises ...............................................................................................146 Other Federal Reserve Operations ..................................................................................155 RegulatoryDevelopments:Dodd-FrankActImplementation ......................................................155 TheBoardofGovernorsandtheGovernmentPerformanceandResultsAct ..............................163

ii Record of Policy Actions of the Board of Governors .............................................165 RulesandRegulations .............................................................................................................165 PolicyStatementsandOtherActions .......................................................................................169 DiscountRatesforDepositoryInstitutionsin2011 ....................................................................170 Minutes of Federal Open Market Committee Meetings .........................................173 MeetingHeldonJanuary25–26,2011......................................................................................174 MeetingHeldonMarch15,2011 .............................................................................................200 MeetingHeldonApril26–27,2011 ...........................................................................................210 MeetingHeldonJune21–22,2011 ..........................................................................................231 MeetingHeldonAugust9,2011 ..............................................................................................252 MeetingHeldonSeptember20–21,2011 .................................................................................262 MeetingHeldonNovember1–2,2011......................................................................................274 MeetingHeldonDecember13,2011 .......................................................................................296 Litigation .................................................................................................................................309 Statistical Tables ....................................................................................................................311 Federal Reserve System Audits ........................................................................................339 BoardofGovernorsFinancialStatements .................................................................................340 FederalReserveBanksCombinedFinancialStatements ...........................................................361 OfficeofInspectorGeneralActivities ........................................................................................427 GovernmentAccountabilityOfficeReviews...............................................................................428 Federal Reserve System Organization ...........................................................................431 BoardofGovernors .................................................................................................................431 FederalOpenMarketCommittee .............................................................................................436 BoardofGovernorsAdvisoryCouncils .....................................................................................437 FederalReserveBankBranches ..............................................................................................440 Index .........................................................................................................................................457

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/pubs/alpha.htm. 2,400-personstaff.Besidesconductingresearch, analysis,andpolicymakingrelatedtodomesticand internationalfinancialandeconomicmatters,the bytheBoardin2011,includingneworamended Boardplaysamajorroleinthesupervisionandregu- rulesandregulationsandotheractionsaswellas lationof U.S.financialinstitutionsandactivities,has thedeliberationsanddecisionsof theFederalOpen broadoversightresponsibilityforthenation’spay- MarketCommittee(FOMC);Section8summamentssystemandtheoperationsandactivitiesof the rizeslitigationinvolvingtheBoard.1 FederalReserveBanks,andplaysanimportantrole • StatisticalTables.Section9includes14statistical inpromotingconsumerprotection,fairlending,and tablesthatprovideupdatedhistoricaldataconcerncommunitydevelopment. ingBoardandSystemoperationsandactivities. • FederalReserveSystemAudits.Section10provides About this Report detailedinformationontheseverallevelsof audit andreviewconductedinregardstoSystemopera- ThisreportcoversBoardandSystemoperationsand tionsandactivities,includingthoseprovidedby activitiesduringcalendar-year2011.Thereport outsideauditorsandtheBoard’sOfficeof Inspecincludes11sections: torGeneral. • MonetaryPolicyandEconomicDevelopments. • FederalReserveSystemOrganization.Section11 Section1providesadaptedversionsof theBoard’s provideslistingsof keyofficialsattheBoardandin semiannualmonetarypolicyreportstoCongress. theFederalReserveSystem,includingtheBoardof Governors,itsofficers,FOMCmembers,several • FederalReserveOperations.Section2providesa Systemcouncils,andFederalReserveBankand summaryof BoardandSystemactivitiesinthe Branchofficersanddirectors. areasof supervisionandregulation;Section3,in consumerandcommunityaffairs;andSection4,in ReserveBankoperations. About the Federal Reserve System • Dodd-FrankActImplementationandOther Requirements.Section5summarizestheBoard’s TheFederalReserveSystem,whichservesasthe effortsin2011toimplementprovisionsof the nation’scentralbank,wascreatedbyanactof Con- Dodd-FrankWallStreetReformandConsumer gressonDecember23,1913.TheSystemconsistsof ProtectionActaswellastheBoard’scompliance aseven-memberBoardof GovernorswithheadquarwiththeGovernmentPerformanceandResultsAct tersinWashington,D.C.,andthe12ReserveBanks of 1993. locatedinmajorcitiesthroughouttheUnitedStates. • PolicyActionsandLitigation.Section6and 1 FormoreinformationontheFOMC,seetheBoard’swebsiteat Section7provideaccountsof policyactionstaken www.federalreserve.gov/monetarypolicy/fomc.htm.

2 98thAnnualReport|2011 TheFederalReserveBanksaretheoperatingarmsof thecentralbankingsystem,carryingoutavarietyof Systemfunctions,includingoperatinganationwide paymentsystem;distributingthenation’scurrency andcoin;underauthoritydelegatedbytheBoardof Governors,supervisingandregulatingavarietyof financialinstitutionsandactivities;servingasfiscal agentsof theU.S.Treasury;andprovidingavariety of financialservicesfortheTreasury,othergovernmentagencies,andotherfiscalprincipals. ThemapsbelowandoppositeidentifyFederal ReserveDistrictsbytheirofficialnumber,city,and letterdesignation. ■FederalReserveBankcity ■NBoardofGovernorsoftheFederalReserveSystem,Washington,D.C.

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

5 Monetary Policy and Economic Developments Asrequiredbysection2Bof theFederalReserveAct, of expansionappearstohavecontinuedintothe theFederalReserveBoardsubmitswrittenreportsto openingmonthsof 2012.Activitywashelddownin theCongressthatcontaindiscussionsof “thecon- thefirsthalf of 2011bytemporaryfactors,particuductof monetarypolicyandeconomicdevelopments larlysupplychaindisruptionsstemmingfromthe andprospectsforthefuture.”TheMonetaryPolicy earthquakeinJapanandthedampingeffectof ReporttotheCongress,submittedsemiannuallytothe higherenergypricesonconsumerspending.Asthe SenateCommitteeonBanking,Housing,andUrban effectsof thesefactorswanedoverthesecondhalf of AffairsandtotheHouseCommitteeonBankingand theyear,economicactivitypickedup.Conditionsin FinancialServices,isdeliveredconcurrentlywithtes- thelabormarkethaveimprovedsincelastsummer, timonyfromtheFederalReserveBoardChairman. withanincreaseinthepaceof jobgainsanda noticeablereductionintheunemploymentrate. Meanwhile,consumerpriceinflationhasstepped Thefollowingdiscussionisanannualreviewof U.S. downfromthetemporarilyhighlevelsobservedover monetarypolicyandeconomicdevelopmentsin2011. thefirsthalf of 2011,ascommodityandimport Itincludesthetext,tables,andselectedfiguresfrom pricesretreatedandaslonger-terminflationexpectatheFebruary29,2012,report;thefigureshavebeen tionsremainedstable.Lookingahead,growthis renumbered,andthereforethefigurenumbersdiffer likelytobemodestduringthecomingyear,asseveral fromthoseinthereport.Alsoincludedarethetext factorsappearlikelytocontinuetorestrainactivity, andtablefromParts1–3of theJuly13,2011,report; includingrestrictedaccesstocreditformanyhouse- Part4of thatreportisidenticaltotheaddendumto holdsandsmallbusinesses,thestill-depressedhoustheminutesof theJune21−22,2011,meetingof the ingmarket,tightfiscalpolicyatalllevelsof govern- FederalOpenMarketCommittee(FOMC)andis ment,andsomeslowinginglobaleconomicgrowth. presentedwiththoseminutesinthe“Minutes”sectionof thisannualreport. Inlightof theseconditions,theFederalOpenMarket Committee(FOMC)tookanumberof stepsduring ThecompleteMonetaryPolicyReportsareavailable thesecondhalf of 2011andearly2012toprovide ontheBoard’swebsite.Othermaterialsinthisannual additionalmonetarypolicyaccommodationand reportrelatedtotheconductof monetarypolicy therebysupportastrongereconomicrecoveryinthe includetheminutesof the2011meetingsof the contextof pricestability.Thesestepsincludedmodi- FOMC(seethe“Minutes”sectiononpage173)and fyingtheforwardrateguidanceincludedinpostmeetstatisticaltables1–4(seethe“StatisticalTables” ingstatements,increasingtheaveragematurityof the sectiononpage311). FederalReserve’ssecuritiesholdings,andshiftingthe reinvestmentof principalpaymentsonagencysecuri- Monetary Policy Report tiesfromTreasurysecuritiestoagency-guaranteed mortgage-backedsecurities(MBS). of February 2012 Throughoutthesecondhalf of 2011andearly2012, Part 1 participantsinfinancialmarketsfocusedonthefiscal Overview: Monetary Policy andbankingcrisisinEurope.Concernsregardingthe and the Economic Outlook potentialforspilloverstotheU.S.economyand financialmarketsweighedoninvestorsentiment, EconomicactivityintheUnitedStatesexpandedata contributingtosignificantvolatilityinawiderange moderaterateinthesecondhalf of 2011followingan of assetpricesandattimespromptingsharppullanemicgaininthefirsthalf,andthemoderatepace backsfromrisk-taking.Strainseasedsomewhatina

6 98thAnnualReport|2011 numberof financialmarketsinlate2011andearly Consumerpriceinflationsteppeddowninthesecond thisyearasinvestorsseemedtobecomemoreconfi- half of 2011.Afterrisingatanannualrateof dentthatEuropeanpolicymakerswouldtakethe 3½percentinthefirsthalf of theyear,pricesforperstepsnecessarytoaddressthecrisis.Themoreposi- sonalconsumptionexpenditures(PCE)rosejust tivemarketsentimentwasbolsteredbyrecentU.S. 1½percentinthesecondhalf.PCEpricesexcluding datareleases,whichpointedtogreaterstrength,on foodandenergyalsodecelerated,risingatanannual balance,thaninvestorshadexpected.Nonetheless, rateof roughly1½percentinthesecondhalf of marketparticipantsreportedlyremaincautious 2011,comparedwithabout2percentinthefirsthalf. aboutrisksinthefinancialsystem,andcreditdefault Thedeclineininflationwaslargelyinresponseto swapspreadsforU.S.financialinstitutionshavewid- decreasesinglobalcommoditypricesfollowingtheir ened,onnet,sinceearlylastsummer. surgeearlyin2011,aswellasarestorationof supply chainsformotorvehicleproductionthathadbeen Afterrisingatanannualrateof just¾percentinthe disruptedaftertheearthquakeinJapanandsome firsthalf of 2011,realgrossdomesticproduct(GDP) decelerationinthepricesof importedgoodsother isestimatedtohaveincreasedata2¼percentratein thanrawcommodities. thesecondhalf.1Thegrowthrateof realconsumer spendingalsofirmedabitinthesecondhalf of the TheEuropeanfiscalandbankingcrisisintensifiedin year,althoughthefundamentaldeterminantsof thesecondhalf of theyear.Duringthesummer,the householdspendingimprovedlittle:Realhousehold governmentsof ItalyandSpaincameundersignifiincomeandwealthstagnated,andaccesstocredit cantfinancialpressureandborrowingcostsincreased remainedtightformanypotentialborrowers.Con- formanyeuro-areagovernmentsandbanks.Inearly sumersentimenthasreboundedfromthesummer’s August,theEuropeanCentralBank(ECB) depressedlevelsbutremainslowbyhistoricalstan- respondedbyresumingpurchasesof marketabledebt dards.Meanwhile,realinvestmentinequipmentand securities.Althoughyieldsonthegovernmentdebtof softwareandexportspostedsolidgainsoverthesec- ItalyandSpaintemporarilymovedlower,market ondhalf of theyear.Incontrast,thehousingmarket conditionsdeterioratedinthefallandfundingpresremainsdepressed,weigheddownbythelargeinven- suresforsomegovernmentsandbanksincreasedfurtoryof vacanthousesforsale,thesubstantialvolume ther.Overthesecondhalf of theyear,European of distressedsales,andhomebuyers’concernsabout leadersworkedtowardbolsteringthefinancialbackthestrengthof therecoveryandthepotentialforfur- stopforeuro-areagovernments,reinforcingthefiscal therdeclinesinhouseprices.Inthegovernmentsec- disciplineof thosegovernments,andstrengthening tor,realpurchasesof goodsandservicescontinuedto thecapitalandliquiditypositionsof banks.Addideclineoverthesecondhalf of theyear. tionally,theECBmadeasignificantinjectionof euro liquidityviaitsfirstthree-yearrefinancingoperation, Labormarketconditionshaveimproved.Theunem- andcentralbanksagreedtoreducethepriceof U.S. ploymentratemoveddownfromaround9percent dollarliquiditybasedonswaplineswiththeFederal overthefirsteightmonthsof 2011to8¼percentin Reserve.SinceDecember,followingtheseactions, January2012.However,evenwiththisimprovement, yieldsonthedebtof vulnerableEuropeangovernthejoblessrateremainsquiteelevated.Furthermore, mentsdeclinedtosomeextentandfundingpressures theshareof theunemployedwhohavebeenjobless onEuropeanbankseased. formorethansixmonths,althoughdownslightly fromitspeak,wasstillabove40percentinJanuary— Anumberof sourcesof investoranxiety—including roughlydoublethefractionthatprevailedduringthe theEuropeancrisis,concernsaboutthesustainability economicexpansionof thepreviousdecade.Mean- of U.S.fiscalpolicy,andaslowdowninglobal while,privatepayrollemploymentgainsaveraged growth—weighedonU.S.financialmarketsearlyin 165,000jobspermonthinthesecondhalf of 2011,a thesecondhalf of 2011.Morerecently,theseconbitslowerthanthepaceinthefirsthalf of theyear, cernseasedsomewhat,reflectingactionstakenby butgainsinDecemberandJanuaryweremore globalcentralbanksaswellasU.S.datareleasesthat robust,averagingalmost240,000permonth. pointedtogreaterstrength,onbalance,thanmarket participantshadanticipated.Broadequitypricesfell notablyinAugustbutsubsequentlyretraced,and 1 ThenumbersinthisreportarebasedontheBureauofEco- theyarenowlittlechanged,onnet,sinceearlyJuly. nomicAnalysis’s(BEA)advanceestimateoffourth-quarter Corporatebondspreadsremainelevated.Partlyasa GDP,whichwasreleasedonJanuary27,2012.TheBEAwill releasearevisedestimateonFebruary29,2012. resultof theforwardguidanceandongoingmaturity

MonetaryPolicyandEconomicDevelopments 7 extensionprogramprovidedbytheFederalReserve, of eitherthedownpaymentorcredithistoryrequired marketparticipantsexpectthetargetfederalfunds toqualifyfortheseloans,andmanyappearreluctant ratetoremainlowforalongerperiodthanthey tobuyahousenowbecauseof concernsabouttheir thoughtearlylastJuly,andTreasuryyieldshave incomeprospectsandemploymentstatus,aswellas moveddownsignificantly.Meanwhile,measuresof theriskof furtherdeclinesinhouseprices.Delininflationcompensationoverthenextfiveyears quencyratesonmostcategoriesof residentialmortderivedfromyieldsonnominalandinflation-indexed gagesedgedlowerbutstayednearrecenthighs,and Treasurysecuritiesarelittlechanged,onbalance, thenumberof propertiesintheforeclosureprocess thoughtheforwardmeasure5-to-10yearsahead remainedelevated.Issuanceof consumerassetremainsbelowitslevelinthemiddleof lastyear. backedsecuritiesinthesecondhalf of 2011ranat aboutthesamerateasithadovertheprevious Amongnonfinancialcorporations,largerandhigher- 18months.Amodestnetfractionof SLOOSresponcredit-qualityfirmswithaccesstocapitalmarkets dentstoboththeOctoberandJanuarysurveysinditookadvantageof generallyattractivefinancingcon- catedthattheyhadeasedtheirstandardsonallcatditionstoraisefundsinthesecondhalf of 2011.On egoriesof consumerloans. theotherhand,forsmallerfirmswithoutaccessto creditmarketsandthosewithless-solidfinancialsitu- Measuresof theprofitabilityof theU.S.banking ations,borrowingconditionsremainedmorechal- industryhaveedgedup,onnet,sincemid-2011,as lenging.Reflectingthesedevelopments,investment- indicatorsof creditqualitycontinuedtoshowsigns gradenonfinancialcorporationscontinuedtoissue of improvementandbankstrimmednoninterest debtatarobustpacewhilespeculative-gradeissuance expenses.Meanwhile,banks’regulatorycapitalratios declined,asinvestors’appetiteforriskierassets remainedathistoricallyhighlevels,asauthorities diminished.Similarissuancepatternswereevidentin continuedtotakestepstoenhancetheirregulationof themarketforsyndicatedloans,whereinvestment- financialinstitutions.Nonetheless,conditionsin gradeissuancecontinuedtobestrongwhilethatof unsecuredinterbankfundingmarketsdeteriorated. higher-yieldingleveragedloansfellback.Inaddition, StrainswereparticularlyevidentforEuropeanfinancommercialandindustrial(C&I)loansonbanks’ cialinstitutions,withfundingcostsincreasingand booksexpandedstrongly,particularlyforlarger maturitiesshortening,onbalance,asinvestors domesticbanksthataremostlikelytolendtobig focusedoncounterpartycreditriskamidgrowing firms.AccordingtotheJanuarySeniorLoanOfficer anxietyabouttheongoingcrisisinEurope.Given OpinionSurveyonBankLendingPractices soliddepositgrowthandmodestexpansioninbank (SLOOS),domesticbankseasedtermsonC&Iloans creditacrosstheindustry,mostdomesticbanks andexperiencedincreasedloandemandduringthe reportedlyhadlimitedneedforunsecuredfunding. fourthquarterof theyear,thelatterdevelopmentin partreflectingashiftinsomeborrowingawayfrom Concernsabouttheconditionof financialinstitu- Europeanbanks.2Bycontrast,althoughcreditsup- tionsgaverisetoheightenedinvestoranxietyregardplyconditionsforsmallerfirmsappeartohaveeased ingcounterpartyexposuresduringthesecondhalf of somewhatinthelastseveralmonths,theyremained 2011.ResponsestotheDecemberSeniorCreditOffitighterrelativetohistoricalnormsthanforlarger cerOpinionSurveyonDealerFinancingTerms,or firms.Commercialmortgagedebtcontinuedto SCOOS,indicatedthatdealersdevotedincreased declinethroughthethirdquarterof 2011,albeitata timeandattentiontothemanagementof concenmoremoderatepacethanin2010. tratedcreditexposurestootherfinancialintermediariesoverthepreviousthreemonths,and80percent Householddebtappearstohavedeclinedataslightly of dealersreportedreducingcreditlimitsforsome slowerpaceinthesecondhalf of 2011thaninthe specificcounterparties.3Respondentsalsoreporteda firsthalf,withthecontinuedcontractioninmortgage broadbutmoderatetighteningof credittermsapplidebtpartiallyoffsetbygrowthinconsumercredit. cabletoimportantclassesof counterpartiesoverthe Eventhoughmortgageratescontinuedtobenear previousthreemonths,importantlyreflectingaworshistoricallylowlevels,thevolumeof newmortgage eningingeneralmarketliquidityandfunctioningas loansremainedmuted.Thesmallerquantityof new wellasareducedwillingnesstotakeonrisk. mortgageoriginationreflectspotentialbuyers’lack 2 TheSLOOSisavailableontheFederalReserveBoard’swebsite 3 TheSCOOSisavailableontheFederalReserveBoard’swebsite atwww.federalreserve.gov/boarddocs/SnLoanSurvey. atwww.federalreserve.gov/econresdata/releases/scoos.htm.

8 98thAnnualReport|2011 Inordertosupportastrongereconomicrecovery allycomplementary,butwhentheyarenot,theComandhelpensurethatinflation,overtime,isatlevels mitteewillfollowabalancedapproachinitsefforts consistentwithitsdualmandate,theFOMCpro- toreturnbothinflationandemploymenttolevels videdadditionalmonetarypolicyaccommodation consistentwithitsmandate. duringthesecondhalf of 2011andearly2012.In August,theCommitteemodifieditsforwardrate Inaddition,theJanuarySummaryof EconomicProguidance,notingthateconomicconditionswere jections(SEP)providedinformationforthefirsttime likelytowarrantexceptionallylowlevelsforthefed- aboutFOMCparticipants’individualassessmentsof eralfundsrateatleastthroughmid-2013.The theappropriatetimingof thefirstincreaseinthetar- FOMCdecidedatitsSeptembermeetingtoextend getfederalfundsrategiventheirviewof theecotheaveragematurityof itsTreasuryholdings,andto nomicsituationandoutlook,aswellasparticipants’ reinvestprincipalpaymentsfromitsholdingsof assessmentsof theappropriatelevelof thetargetfedagencydebtandagencyMBSinagencyMBSrather eralfundsrateinthefourthquarterof eachyear thaninTreasurysecurities.4Finally,attheCommit- through2014andoverthelongerrun.TheSEPalso tee’sJanuary2012meeting,theFOMCmodifiedits includedqualitativeinformationregardingindividual forwardguidancetoindicatethatitexpectedeco- participants’expectationsfortheFederalReserve’s nomicconditionstowarrantexceptionallylowlevels balancesheetunderappropriatemonetarypolicy. forthefederalfundsrateatleastthroughlate2014. TheCommitteenotedthatitwouldregularlyreview TheeconomicprojectionsintheJanuarySEP(prethesizeandcompositionof itssecuritiesholdings sentedinPart4of thisreport)indicatedthatFOMC andispreparedtoadjustthoseholdingsasappropri- participants(themembersof theBoardof Goveratetopromoteastrongereconomicrecoveryinthe norsandthepresidentsof the12FederalReserve contextof pricestability. Banks)generallyanticipatedaggregateoutputto increaseatasomewhatfasterpacein2012thanin Inadditiontothesepolicyactions,theFederal 2011.Althoughtheparticipantsmarkeddowntheir Reservetookfurtherstepstoimprovecommunica- GDPgrowthprojectionsslightlycomparedwith tionsregardingitsmonetarypolicydecisionsand thosepreparedinNovember,theystatedthattheecodeliberations.AttheCommittee’sJanuary2012 nomicinformationreceivedsincethattimeshowed meeting,theFOMCreleasedastatementof its continuedgradualimprovementinthepaceof ecolonger-rungoalsandpolicystrategyinaneffortto nomicactivityduringthesecondhalf of 2011,asthe enhancethetransparency,accountability,andeffec- influenceof thetemporaryfactorsthatdamped tivenessof monetarypolicyandtofacilitatewell- activityinthefirsthalf of theyearsubsided.Howinformeddecisionmakingbyhouseholdsandbusi- ever,anumberof additionalfactors,includingongonesses.ThestatementemphasizestheFederal ingweaknessinthehousingsector,modestgrowthin Reserve’sfirmcommitmenttopursueitscongres- realdisposableincome,andtherestrainingeffectsof sionalmandatetopromotemaximumemployment, fiscalconsolidation,suggestedthatthepaceof the stableprices,andmoderatelong-terminterestrates. recoverywouldbemodestincomingquarters.Par- Toclarifyhowitseekstoachievetheseobjectives,the ticipantsalsoreadtheinformationoneconomic FOMCstatedthatinflationattherateof 2percent, activityabroad,particularlyinEurope,aspointingto asmeasuredbytheannualchangeinthePCEprice weakerdemandforU.S.exports.Asthesefactors index,ismostconsistentoverthelongerrunwiththe wane,FOMCparticipantsanticipatedthatthepace FederalReserve’sstatutorymandate.Whilenoting of theeconomicexpansionwillgraduallystrengthen thattheCommittee’sassessmentsof themaximum overthe2013–14period,pushingtherateof increase levelof employmentarenecessarilyuncertainand inrealGDPabovetheirestimatesof thelonger-run subjecttorevision,thestatementindicatedthatthe rateof outputgrowth.WithrealGDPexpectedto centraltendencyof FOMCparticipants’currentesti- increaseatamodestratein2012,theunemployment matesof thelonger-runnormalrateof unemploy- ratewasprojectedtodeclineonlyalittlethisyear. mentisbetween5.2and6.0percent.Itstressedthat Participantsexpectedfurthergradualimprovementin theFederalReserve’sstatutoryobjectivesaregener- labormarketconditionsover2013and2014asthe paceof outputgrowthpicksup.Theyalsonotedthat 4 BetweentheAugust2010andSeptember2011FOMCmeet- inflationexpectationshadremainedstableoverthe ings,principalpaymentsfromsecuritiesheldontheFederal pastyeardespitefluctuationsinheadlineinflation. Reservebalancesheethadbeenreinvestedinlonger-termTreasurysecurities. Mostparticipantsanticipatedthatbothheadlineand

MonetaryPolicyandEconomicDevelopments 9 coreinflationwouldremainsubduedoverthe Part 2 2012–14periodatratesatorbelowtheFOMC’s Recent Economic longer-runobjectiveof 2percent. and Financial Developments Withtheunemploymentrateprojectedtoremain Realgrossdomesticproduct(GDP)increasedatan elevatedovertheprojectionperiodandinflation annualrateof 2¼percentinthesecondhalf of 2011, expectedtobesubdued,mostparticipantsexpected accordingtotheadvanceestimatepreparedbythe thatthefederalfundsratewouldremainextraordi- Bureauof EconomicAnalysis,followinggrowthof narilylowforsometime.Sixparticipantsanticipated lessthan1percentinthefirsthalf (figure1).Activity that,underappropriatemonetarypolicy,thefirst washelddowninthefirsthalf of theyearbytempoincreaseinthetargetfederalfundsratewouldoccur raryfactors,particularlysupplychaindisruptions after2014,andfiveexpectedpolicyfirmingtocom- stemmingfromtheearthquakeinJapanandthe menceduring2014.Theremainingsixparticipants dampingeffectof higherenergypricesonconsumer judgedthatraisingthefederalfundsratesooner spending.Astheeffectsof thesefactorswanedover wouldberequiredtoforestallinflationarypressures thesecondhalf of theyear,thepaceof economic oravoiddistortionsinthefinancialsystem.Allof the activitypickedup.Butgrowthremainedquitemodindividualassessmentsof theappropriatetargetfed- estcomparedwithpreviouseconomicexpansions, eralfundsrateoverthenextfewyearswerebelowthe andanumberof factorsappearlikelytocontinueto participants’estimatesof thelonger-runlevelof the restrainthepaceof activityinto2012;thesefactors federalfundsrate.Elevenof the17participants includerestrictedaccesstocreditformanyhouseplacedthetargetfederalfundsrateat1percentor holdsandsmallbusinesses,thedepressedhousing lowerattheendof 2014,while5sawtheappropriate market,tightfiscalpolicy,andthespillovereffectsof rateas2percentorhigher. thefiscalandfinancialdifficultiesinEurope. Asizablemajorityof participantscontinuedtojudge Conditionsinthelabormarkethaveimprovedsince thelevelof uncertaintyassociatedwiththeirprojec- lastsummer.Thepaceof privatejobgainshas tionsforrealactivityandtheunemploymentrateas increased,andtheunemploymentratehasmoved exceedingtheaverageof thepast20years.Manyalso lower.Nonetheless,at8¼percent,thejoblessrateis attachedagreater-than-normallevelof uncertainty stillquiteelevated.Meanwhile,consumerpriceinflatotheirforecastsforinflation.AsinNovember,many participantssawdownsiderisksattendingtheirfore- Figure1.Changeinrealgrossdomesticproduct,2005–11 castsof realGDPgrowthandupsideriskstotheir forecastsof theunemploymentrate;mostpartici- Percent, annual rate pantsviewedtheriskstotheirinflationprojectionsas broadlybalanced.Participantsalsoreportedtheir H1 4 assessmentsof thevaluestowhichkeymacroeco- H2 Q4 Q3 nomicvariableswouldbeexpectedtoconvergeover 2 H1 thelongertermunderappropriatemonetarypolicy + andintheabsenceof furthershockstotheeconomy. 0_ Thecentraltendenciesof theselonger-runprojectionswere2.3to2.6percentforrealGDPgrowth 2 and5.2to6.0percentfortheunemploymentrate.In 4 lightof the2percentinflationthatistheobjective includedinthestatementof longer-rungoalsand policystrategyadoptedattheJanuarymeeting,the 2005 2006 2007 2008 2009 2010 2011 rangeandcentraltendencyof participants’projec- Note:Hereandinsubsequentfigures,exceptasnoted,changeforagivenperiod tionsof longer-runinflationwereallequalto ismeasuredtoitsfinalquarterfromthefinalquarteroftheprecedingperiod. Source:DepartmentofCommerce,BureauofEconomicAnalysis. 2percent.

10 98thAnnualReport|2011 tionsteppeddownfromthehigherlevelsobserved Figure2.Changeinrealpersonalconsumption overthefirsthalf of lastyear,ascommodityand expenditures,2005–11 importpricesretreatedwhilelonger-terminflation expectationsremainedstable. Percent, annual rate 4 ThefiscalandbankingcrisisinEuropewasapri- H2 maryfocusof financialmarketsoverthecourseof H1 3 thesecondhalf of 2011andearly2012.Growing H2 2 H1 concernsregardingthepotentialforspilloverstothe 1 + U.S.economyandfinancialmarketsweighedon 0_ investorsentiment,contributingtosignificantvolatil- 1 ityinawiderangeof assetprices.Nonetheless,devel- 2 opmentsinfinancialmarketshavebeenmixed,on 3 balance,sinceJuly.Unsecureddollarfundingmarkets becamesignificantlystrained,particularlyforEuro- 4 peaninstitutions,thoughU.S.institutionsgenerally 2005 2006 2007 2008 2009 2010 2011 didnotappeartofacesubstantialfundingdifficulties. Note:Thedataarequarterlyandextendthrough2011:Q4. Riskspreadsoncorporatedebtstayedelevated,on Source:DepartmentofCommerce,BureauofEconomicAnalysis. net,butyieldsoncorporatebondsgenerallymoved lower.Broadequityprices,whichdeclinedsignificantlyinJulyandAugust,subsequentlyreturnedto sentimentthatremainsrelativelylowdespiterecent levelsnearthoseseeninearlyJuly.Creditconditions improvements,thelingeringeffectsof theearlier formostlargenonfinancialfirmswereaccommodadeclinesinhouseholdwealth,andtightaccessto tiveandcorporateprofitgrowthremainedstrong. creditformanypotentialborrowers.Withconsumer spendingsubdued,thesavingrate,althoughdown Inresponsetoapaceof economicgrowththatwas fromitsrecenthighpoint,remainedabovelevelsthat somewhatslowerthanexpected,theFederalReserve prevailedpriortotherecession. providedadditionalmonetarypolicyaccommodation duringthesecondhalf of 2011andearly2012.Partly Realincomegrowthiscurrentlyestimatedtohave asaresult,Treasuryyieldsmoveddownsignificantly, beenveryweakin2011.Afterrising2percentin andmarketparticipantspushedoutthedateatwhich 2010,aggregaterealdisposablepersonalincome theyexpectthefederalfundsratetomoveaboveits (DPI)—personalincomelesspersonaltaxes,adjusted currenttargetrangeof 0to¼percentandbuiltin forpricechanges—wasessentiallyflatin2011.The expectationsof amoregradualpaceof increasein wageandsalarycomponentof realDPI,which thefederalfundsrateafterliftoff. reflectsboththenumberof hoursworkedandaver- DomesticDevelopments agehourlywagesadjustedforinflation,roseatan annualrateof 1percentin2011.Theincreaseinreal TheHouseholdSector wageandsalaryincomereflectedthecontinued, thoughtepid,recoveriesinbothemploymentand ConsumerSpendingandHouseholdFinance hoursworked;incontrast,hourlypaywaslittle Realpersonalconsumptionexpenditures(PCE)rose changedinrealterms. atanannualrateof about2percentinthesecond half of 2011,followingariseof just1½percentin Theratioof householdnetworthtoDPIdropped thefirsthalf of theyear(figure2).Partof thespend- backalittleinthesecondhalf of 2011,reflectingfuringgainwasattributabletoafourth-quartersurgein therdeclinesinhousepricesandequityvalues.The purchasesof motorvehiclesfollowingveryweak wealth-to-incomeratiohashoveredcloseto5in spendinglastspringandsummerstemmingfromthe recentyears,roughlythelevelthatprevailedpriorto dampingeffectsof theearthquakeinJapanonmotor thelate1990s,butwellbelowthehighsrecordeddurvehiclesupply.Evenwiththestep-up,however,PCE ingtheboominhousepricesinthemid-2000s.Congrowthwasmodestcomparedwithpreviousbusiness sumersentiment,whichdroppedsharplylastsumcyclerecoveries.Thissubparperformancereflectsthe mer,hasreboundedsincethen;nevertheless,these continuedweaknessintheunderlyingdeterminants gainsonlymovedsentimentbacktonearthetopof of consumption,includingsluggishincomegrowth, therangethathasprevailedsincelate2009.

MonetaryPolicyandEconomicDevelopments 11 Householddebt—thesumof bothmortgageand Indicatorsof consumercreditqualitygenerally consumerdebt—continuedtomovelowerinthesec- improved.Delinquencyratesoncreditcardloans ondhalf of 2011.Sincepeakingin2008,household moveddowninthesecondhalf of 2011tothelow debthasfallenatotalof 5percent.Thedropindebt endof therangeobservedinrecentdecades.Delininthesecondhalf of 2011reflectedacontinuedcon- quenciesandcharge-offsonnonrevolvingconsumer tractioninmortgagedebtthatwasonlypartiallyoff- loansalsogenerallyimproved.Moreover,amajority setbyamodestexpansioninconsumercredit. of respondentstotheJanuarySLOOSreportedthat Largelyduetothereductioninoverallhousehold theyexpectfurtherimprovementinthequalityof debtlevelsin2011,thedebtserviceratio—theaggre- creditcardandotherconsumerloansthisyear. gaterequiredprincipalandinterestpaymentonexistingmortgagesandconsumerdebtrelativeto Interestratesonconsumerloansheldfairlysteady, income—alsodecreasedfurtherandnowisatalevel onnet,inthesecondhalf of 2011andinto2012. lastseenin1994and1995(figure3). Interestratesonnew-autoloanscontinuedtobe quitelow,whileratesoncreditcardloansremained Themoderateexpansioninconsumercreditinthe stubbornlyhigh.Indeed,spreadsof creditcardintersecondhalf of 2011,atanannualrateof about estratestothetwo-yearTreasuryyieldarevery 4½percent,hasbeendrivenprimarilybyanincrease elevated. innonrevolvingcredit,whichaccountsforabout two-thirdsof totalconsumercreditandiscomposed Consumerasset-backedsecurities(ABS)issuancein mainlyof autoandstudentloans.Revolvingcon- thesecondhalf of 2011wasinlinewiththatof the sumercredit(primarilycreditcardlending),while previous18months.Securitiesbackedbyautoloans continuingtolag,appearedtopickupsomewhat continuedtodominatethemarket,whileissuanceof towardtheendof theyear.Theincreaseinconsumer creditcardABSremainedweak,asgrowthof credit creditisconsistentwithrecentresponsestothe cardloanshasremainedsubduedandmostmajor SeniorLoanOfficerOpinionSurveyonBankLend- bankshavechosentofundsuchloansontheirbalingPractices(SLOOS).Indeed,modestnetfractions ancesheets.YieldsonABSandtheirspreadsover of banksinboththeOctoberandJanuarysurveys comparable-maturityswaprateswerelittlechanged, reportedthattheyhadeasedstandardsonallmajor onnet,overthesecondhalf of 2011andearly2012 categoriesof consumerloans,andthatdemandhad andremainedinthelowrangethathasprevailed strengthenedforautoandcreditcardsloansonbal- sinceearly2010. ance.However,dataoncreditcardsolicitationssuggestthatlendersinthatareaareprimarilyinterested HousingActivityandFinance inpursuinghigher-qualityborrowers. Activityinthehousingsectorremainsdepressedby historicalstandards(figure4).Althoughaffordability hasbeenboostedbydeclinesinhousepricesandhis- Figure3.Householddebtservice,1984–2011 Percent of disposable income Figure4.Privatehousingstarts,1998–2012 Millions of units, annual rate 14 13 Single-family 1.8 1.4 12 1.0 11 .6 Multifamily 1987 1991 1995 1999 2003 2007 2011 .2 Note:Thedataarequarterlyandextendthrough2011:Q3.Debtservicepayments consistofestimatedrequiredpaymentsonoutstandingmortgageandconsumer 1998 2000 2002 2004 2006 2008 2010 2012 debt. Source:FederalReserveBoard,“HouseholdDebtServiceandFinancialObliga- Note:ThedataaremonthlyandextendthroughJanuary2012. tionsRatios,”statisticalrelease. Source:DepartmentofCommerce,BureauoftheCensus.

12 98thAnnualReport|2011 toricallylowinterestratesforconventionalmort- Figure5.Mortgageinterestrates,1995–2012 gages,manypotentialbuyerseitherlackthedown paymentandcredithistorytoqualifyforloansorare Percent discouragedbyongoingconcernsaboutfuture income,employment,andthepotentialforfurther 9 declinesinhouseprices.Yetotherpotentialbuyers— 8 eventhosewithsufficientlygoodcreditrecordsto Fixed rate qualifyforamortgageinsuredbyoneof thehousing 7 government-sponsoredenterprises(GSEs)—continue 6 tofacedifficultyinobtainingmortgagefinancing. Moreover,muchof thedemandthatdoesexisthas 5 beenchanneledtotheabundantstockof relatively 4 inexpensive,vacantsingle-familyhouses,therebylim- Adjustable rate 3 itingtheneedfornewconstructionactivity.Given themagnitudeof thepipelineof delinquentandfore- 1997 2000 2003 2006 2009 2012 closedhomes,thisfactorseemslikelytocontinueto Note:Thedata,whichareweeklyandextendthroughFebruary22,2012,areconweighonactivityforsometime. tractrateson30-yearmortgages. Source:FederalHomeLoanMortgageCorporation. Nonetheless,recentindicatorsof housingconstructionactivityhavebeenslightlymoreencouraging.In ersconfrontingdepressedhomevaluesandhigh particular,fromJuly2011toJanuary2012,new unemployment.InDecember,seriousdelinquency single-familyhomeswerestartedatanaverage ratesonprimeandnear-primeloansstoodat5perannualrateof about455,000units,upabitfromthe centand13percentforfixed-andvariable-rateloans, paceinthefirsthalf of 2011.Inthemultifamilymarrespectively.Whiledelinquenciesonvariable-rate ket,demandforapartmentsappearstobeincreasing mortgagesforbothprimeandsubprimeborrowers andvacancyrateshavefallen,asfamilieswhoare havemoveddownoverthepasttwoyears,delinquenunableorunwillingtopurchasehomesarerenting ciesonfixed-ratemortgageshaveheldsteadyatlevels propertiesinstead.Asaresult,startsinthemultifam- neartheirpeaksinearly2010.5Meanwhile,delinilysectoraveragedabout200,000unitsatanannual quencyandcharge-off ratesonsecond-lienmortrateinthesecondhalf of 2011,stillbelowthe gagesheldbybanksalsoareatelevatedlevels,and 300,000-unitratethathadprevailedformuchof the theyhavedeclinedonlyslightlyfromtheirpeaks. previousdecadebutwellabovethelowsrecordedin 2009andearly2010. Thenumberof propertiesatsomestageof theforeclosureprocessremainedelevatedin2011.Thishigh Houseprices,asmeasuredbyseveralnational levelpartlyreflectedthedifficultiesthatmortgage indexes,fellfurtheroverthesecondhalf of 2011.One servicerscontinuedtohavewithresolvingdeficiensuchmeasurewithwidegeographiccoverage—the ciesintheirforeclosureprocedures.Resolutionof CoreLogicrepeat-salesindex—fellatanannualrate theseissuescouldeventuallybeassociatedwithasusof about6percentinthesecondhalf of theyear. tainedincreaseinthepaceof completedforeclosures Housepricesarebeinghelddownbythesamefacasservicersworkthroughthebacklogof severely torsthatarerestraininghousingconstruction:the delinquentloans. highnumberof distressedsales,thelargeinventory of unsoldhomes,tightmortgagecreditconditions, Interestratesonfixed-ratemortgagesfellsteadily andlacklusterdemand.Theinventoryof unsold duringthesecondhalf of 2011andinearly2012 homeslikelywillremainhighforsometime,given (figure5),thoughnotasmuchasTreasuryyields, thelargenumberof homesthatarealreadyinthe leavingspreadstoTreasurysecuritiesof comparable foreclosurepipelineorcouldbeenteringthepipeline maturitieswider.Theabilityof potentialborrowers inthecomingmonths.Asaresultof thecumulative toobtainmortgagecreditforpurchasetransactions declineinhousepricesoverthepastseveralyears, orrefinancingcontinuedtobelimited.Inpart,the roughlyoneinfivemortgageholdersowemoreon lowlevelof mortgageborrowingreflectedcharactertheirmortgagesthantheirhomesareworth. 5 Amortgageisdefinedasseriouslydelinquentiftheborroweris Indicatorsof creditqualityintheresidentialmort- 90daysormorebehindinpaymentsorthepropertyisin gagesectorcontinuedtoreflectstrainsonhomeown- foreclosure.

MonetaryPolicyandEconomicDevelopments 13 TheBusinessSector Figure6.Creditscoresonnewprimemortgages,2003–11 FixedInvestment FICO score Realspendingbybusinessesforequipmentandsoft- 800 ware(E&S)roseatanannualrateof about11per- 780 centoverthesecondhalf of 2011,apacethatwasa 90th percentile 760 bitfasterthaninthefirsthalf (figure7).Muchof this strengthwasrecordedinthethirdquarter.Spending 740 growthdroppedbackinthefourthquarter,to5per- Median 720 cent,likelyreflecting—amongotherinfluences— 700 heighteneduncertaintyof businessownersabout 680 globaleconomicandfinancialconditions.Although 10th percentile 660 spendingbybusinessesforhigh-techequipmenthas 640 heldupreasonablywell,outlaysforabroadrangeof otherE&Sslowedappreciably.Morerecently,how- 2003 2005 2007 2009 2011 ever,indicatorsof businesssentimentandcapital Note:Thedata,whichincludepurchasemortgagesonly,aremonthlyandextend spendingplansgenerallyhaveimproved,suggesting throughDecember2011. thatfirmsmaybeintheprocessof becomingmore Source:LPSAppliedAnalytics. willingtoundertakenewinvestments. Aftertumblingthroughoutmostof 2009and2010, realinvestmentinnonresidentialstructuresother isticsof thewould-beborrowers,mostprominently thandrillingandminingturneduplastspring,rising thewidespreadincidenceof negativeequityand unemployment.Inaddition,creditsupplyconditions Figure7.Changeinrealbusinessfixedinvestment, remainedtight.Indeed,itappearedthatsomelenders 2005–11 werereluctanttoextendmortgagestoborrowerswith less-than-pristinecreditevenwhentheresultingloans Percent, annual rate wouldbeeligibleforpurchaseorguaranteeby Structures GSEs.6Onemanifestationof thisconstrictionwas Equipment and software 30 thefactthatthedistributionof creditscoresamong 20 borrowerswhosucceedinobtainingmortgageshad HH22 HH11 shiftedupsignificantly(figure6).Asaresultof these 10 influences,thepaceof mortgageapplicationsfor + 0_ homepurchasedeclined,onnet,overthesecondhalf of 2011andremainsverysluggish.Thesamefactors 10 alsoappeartohavelimitedrefinancingactivity, 20 whichremainssubduedcomparedwiththelarge 30 numberof householdsthatwouldpotentiallybenefit fromthelowratesavailabletohigh-quality 2005 2006 2007 2008 2009 2010 2011 borrowers. Percent, annual rate Structures excluding mining and drilling Theoutstandingstockof mortgage-backedsecurities Mining and drilling 60 (MBS)guaranteedbytheGSEswaslittlechanged, 40 onnet,overthesecondhalf of 2011.Thesecuritiza- HH11 tionmarketformortgageloansnotguaranteedbya 20 HH22 housing-relatedGSEortheFederalHousingAdmin- + istrationcontinuedtobeessentiallyclosed. 0_ 20 40 6 Forexample,onlyabouthalfoflendersreportedtoLoanSifter dataservicesthattheywouldofferaconventionalfullydocu- 2005 2006 2007 2008 2009 2010 2011 mentedmortgagewitha90percentloan-to-valueratioforbor- Source:DepartmentofCommerce,BureauofEconomicAnalysis. rowerswithFICOscoresof620.

14 98thAnnualReport|2011 atasurprisinglybriskpaceinthesecondandthird Borrowingbynonfinancialcorporationscontinuedat quartersof 2011.However,investmentdroppedback areasonablyrobustpacethroughthesecondhalf of inthefourthquarter.Conditionsinthesectorremain 2011,particularlyforlarger,higher-credit-quality difficult:Vacancyratesarestillhigh,pricesof exist- firms.Issuanceof investment-gradebondsproingstructuresarelow,andfinancingconditionsfor gressedatastrongpace,similartothatobservedin buildersarestilltight.Spendingondrillingandmin- thefirsthalf of theyear,buoyedbygoodcorporate ingstructuresalsodroppedbackinthefourthquar- creditquality,attractivefinancingconditions,andan ter,butoutlaysinthiscategoryshouldcontinuetobe improvingeconomicoutlook.Incontrasttohighersupportedbyelevatedoilpricesandadvancesintech- gradebonds,issuanceof speculative-gradebonds nologyforhorizontaldrillingandhydraulic droppedinthesecondhalf of theyearasinvestors’ fracturing. appetiteforriskierassetswaned.Inthemarketfor syndicatedloans,investment-gradeissuancemoved InventoryInvestment upinthesecondhalf of 2011fromitsalreadystrong Realinventoryinvestmentsteppeddownabitinthe first-half pace,whileissuanceof higher-yieldingsynsecondhalf of 2011.Stockbuildingoutsideof motor dicatedleveragedloansweakened. vehiclesincreasedatamodestpace,andsurveyssuggestthatfirmsaregenerallycomfortablewiththeir C&Iloansonbanks’booksgrewsteadilyoverthe own,andtheircustomers’,currentinventoryposi- secondhalf of 2011.Banksreportedlycompeted tions.Inthemotorvehiclesector,inventorieswere aggressivelyforhigher-ratedcreditsinthesyndicated drawndowninthesecondhalf,astheriseinsales leveragedloanmarket,andsomenonfinancialfirms outpacedthereboundinproductionfollowingthe reportedlysubstitutedawayfrombondfinancing supplydisruptionsassociatedwiththeearthquakein becauseof volatilityinbondspreads.Inaddition, Japanlastspring. accordingtotheSLOOS,somedomesticbanks gainedbusinessfromcustomersthatshiftedaway CorporateProfitsandBusinessFinance fromEuropeanbanks.Althoughdomesticbanks OperatingearningspershareforS&P500firmscon- reportedlittlechange,onnet,inlendingstandards tinuedtoriseinthethirdquarterof 2011,increasing forC&Iloans,theyreducedthespreadsonthese ataquarterlyrateof nearly10percent.Fourth- loansaswellasthecostsof creditlines.Banksthat quarterearningsreportsbyfirmsintheS&P500 reportedhavingeasedtheircreditstandardsorterms publishedthroughlateFebruaryindicatethatthis forC&Iloansoverthesecondhalf of 2011unanimeasurehasremainedatornearitspre-crisispeaks mouslycitedincreasedcompetitionfromotherbanks throughoutthesecondhalf of 2011. ornonbanksourcesof fundsasafactor. Inthecorporatesectorasawhole,economicprofits, Borrowingconditionsforsmallerbusinessescontinwhichhadbeenrisingrapidlysince2008,increased uedtobetighterthanthoseforlargerfirms,andtheir furtherinthesecondhalf of 2011.Thisrelatively demandforcreditremainedrelativelyweak.Howstrongprofitgrowthcontributedtothecontinued ever,somesignsof easingbegantoemerge.Surveys robustcreditqualityof nonfinancialfirmsinthesec- conductedbytheNationalFederationof Indepenondhalf of 2011.Althoughtheratioof liquidassets dentBusinessshowedthatthenetfractionof small tototalassetsonthebalancesheetsof nonfinancial businessesreportingthatcredithadbecomemoredifcorporationsedgeddowninthethirdquarter,it ficulttoobtainrelativetothepreviousthreemonths remainedataveryhighlevel,andtheaggregateratio declined,onbalance,duringthesecondhalf of 2011. of debttoassets—ameasureof corporateleverage— Moreover,theJanuary2012SLOOSfoundthat stayedlow.Withcorporatebalancesheetsingener- termsforsmallerborrowershadcontinuedtoease, allyhealthyshape,creditratingupgradesonceagain andabout15percentof banks,onnet,reportedthat outpaceddowngrades,andthebonddefaultratefor demandforC&Iloansfromsmallerfirmshad nonfinancialfirmsremainedlow.Inaddition,the increased,thehighestreadingsince2005.Indeed, delinquencyrateoncommercialandindustrial(C&I) C&Iloansheldbyregionalandcommunitybanks— loansatcommercialbankscontinuedtodeclineand thosenotinthe25largestbanksandlikelytolend stoodataround1½percentatyear-end,alevelnear mostlytomiddle-marketandsmallfirms—advanced thelowendof itshistoricalrange.Mostbanks atabouta6percentannualrateinthesecondhalf of respondingtotheJanuarySLOOSreportedthatthey 2011,upfroma2½percentpaceinthefirsthalf. expectedfurtherimprovementsinthecreditquality of C&Iloansin2012.

MonetaryPolicyandEconomicDevelopments 15 Commercialmortgagedebthascontinuedtodecline, comparablewithdeficitsrecordedin2009and2010 albeitatamoremoderatepacethanduring2010. butsharplyhigherthanthedeficitsrecordedpriorto Commercialrealestate(CRE)loansheldonbanks’ theonsetof thefinancialcrisisandrecession.The bookscontractedfurtherinthesecondhalf of 2011 budgetdeficitcontinuedtobeboostedbyspending andearly2012,thoughtherunoff appearedtoebb thatwascommittedbytheAmericanRecoveryand somewhatin2011.Thatslowingismoreorlesscon- ReinvestmentActof 2009(ARRA)andotherstimusistentwithrecentSLOOSresponses,inwhichmod- luspolicyactionsaswellasbytheweaknessof the eratenetfractionsof domesticbanksreportedthat economy,whichhasreducedtaxrevenuesand demandforsuchloanshadstrengthened.Inthe increasedpaymentsforincomesupport. Januarysurvey,banksalsoreportedthat,forthefirst timesince2007,theyhadraisedthemaximumloan Taxreceiptsrose6½percentinfiscal2011.However, sizeandtrimmedspreadsof ratesonCREloansover thelevelof receiptsremainedverylow;indeed,at theircostof fundsduringthepast12months.By around15½percentof GDP,theratioof receiptsto contrast,lifeinsurancecompaniesreportedly nationalincomeisonlyslightlyabovethe60-year increasedtheirholdingsof CREloans,especiallyof lowsrecordedin2009and2010.Theriseinrevenues loansissuedtohigher-qualityborrowers.Although infiscal2011wastheresultof arobustincreaseof delinquencyratesonCREloansatcommercialbanks morethan20percentinindividualincometaxpayedgeddownfurtherinthefourthquarter,they mentsthatreflectedstrongfinalpaymentson2010 remainedathighlevels,especiallyonloansforcon- income.Socialinsurancetaxreceiptsfellabout5perstructionandlanddevelopment;delinquencieson centinfiscal2011,helddownbythetemporary loansheldbylifeinsurancecompaniesremained 2percentagepointreductioninpayrolltaxesenacted extraordinarilylow,astheyhavedoneformorethan in2010.Corporatetaxesalsofellaround5percentin adecade.Vacancyratesformosttypesof commercial 2011,withthedeclinelargelytheresultof legislation propertiesarestillelevated,exertingdownwardpres- providingmore-favorabletaxtreatmentforsome sureonpropertypricesandimpairingtheperfor- businessinvestment.Inthefirstfourmonthsof fiscal manceof CREloans. 2012,totaltaxreceiptsincreased4percentrelativeto thecomparableyear-earlierperiod. Conditionsinthemarketforcommercialmortgagebackedsecurities(CMBS)worsenedsomewhatinthe Totalfederaloutlaysrose4percentinfiscal2011. secondhalf of theyear.Riskspreadsonhighlyrated Muchof theincreaserelativetolastyearisattributtranchesof CMBSmovedup,onbalance,andabout abletotheearlierunwindingof theeffectsof finanhalf of therespondentstotheDecemberSenior cialtransactions,suchastherepaymentstotheTreas- CreditOfficerOpinionSurveyonDealerFinancing uryof obligationsfortheTroubledAssetRelief Pro- Terms(SCOOS)indicatedthatliquidityconditionsin gram,whichtemporarilyloweredmeasuredoutlays themarketsforsuchsecuritieshaddeteriorated infiscal2010.Excludingthesetransactions,outlays somewhat.Issuanceof CMBSslowedfurther,butdid wereupabout2percentin2011.Thissmallincrease nothaltcompletely.DelinquencyratesonCREloans reflectsreductionsinbothARRAspendingand inCMBSpoolsheldsteadyjustbelow10percent. unemploymentinsurancepaymentsaswellasasubduedpaceof defenseandMedicaidspending.By Inthecorporateequitymarket,grossissuance contrast,netinterestpaymentsrosesharply,reflectdroppedsignificantlyinthethirdquarteramidsub- ingtheincreaseinfederaldebt.Spendinghas stantialequitymarketvolatility,butitretracedapart remainedrestrainedinthecurrentfiscalyear,with of thatdeclineinthefourthquarterassomeprevi- outlays(adjustedtoexcludefinancialtransactions) ouslywithdrawnissueswerebroughtbacktothe downabout5percentinthefirstfourmonthsof fismarket.Netequityissuancecontinuedtodeclinein cal2012relativetothecomparableyear-earlier thethirdquarter,reflectingthecontinuedstrengthof period. cash-financedmergersandsharerepurchases. Asmeasuredinthenationalincomeandproduct TheGovernmentSector accounts(NIPA),realfederalexpendituresonconsumptionandgrossinvestment—thepartof federal FederalGovernment spendingthatisadirectcomponentof GDP—de- Thedeficitinthefederalunifiedbudgetremainsvery creasedatanannualrateof about3percentinthe wide.Thebudgetdeficitforfiscalyear2011was secondhalf of 2011,alittlelessrapidlythaninthe $1.3trillion,or8½percentof nominalGDP—alevel firsthalf of theyear(figure8).Defensespendingfell

16 98thAnnualReport|2011 recentlevels.Federaldebtheldbythepublic,as Figure8.Changeinrealgovernmentexpenditureson apercentageof GDP,continuedtoriseinthethird consumptionandinvestment,2005–11 quarter,reachingabout68percent. Percent, annual rate StateandLocalGovernment Federal State and local 9 Stateandlocalgovernmentsremainundersignificant fiscalstrain.SinceJuly,employmentinthesectorhas 6 declinedbyanaverageof 15,000jobspermonth,just slightlyunderthepaceof joblossesrecordedforthe 3 firsthalf of 2011.Meanwhile,reductionsinrealcon- H1 H2 + 0_ structionexpendituresabatedafteraprecipitous dropinthefirsthalf of 2011.Asmeasuredinthe 3 NIPA,realstateandlocalexpendituresonconsumptionandgrossinvestmentdecreasedatanannualrate 6 of about2percentinthesecondhalf of 2011,a somewhatslowerpaceof declinethaninthefirsthalf 2005 2006 2007 2008 2009 2010 2011 of theyear(figure8). Source:DepartmentofCommerce,BureauofEconomicAnalysis. Stateandlocalgovernmentrevenuesappeartohave atanannualrateof about4percentinthesecond increasedmodestlyin2011.Notably,atthestate half of theyear,asomewhatsharperpaceof decline level,third-quartertaxrevenuesrose5½percentover thaninthefirsthalf,whilenondefensepurchases theyear-earlierperiod,withthemajorityof thestates wereunchangedoverthisperiod. experiencinggains.However,thisincreaseintaxrevenueswaspartlyoffsetbyareductioninfederal Federaldebtsurgedinthesecondhalf of 2011,after stimulusgrants.Taxcollectionshavebeenlessrobust thedebtceilingwasraisedinearlyAugustbythe atthelocallevel.Propertytaxreceiptshavebeen BudgetControlActof 2011.7StandardandPoor’s roughlyflat,onnet,sincethestartof 2010(basedon (S&P),whichhadputtheU.S.long-termsovereign datathroughthethirdquarterof 2011),reflectingthe creditratingoncreditwatchnegativeinJune,downdownturninhomeprices.Furthermore,manylocaligradedthatratingfromAAAtoAA+followingthe tieshaveexperiencedadecreaseingrants-in-aidfrom passageof theact,citingtherisksof acontinuedrise theirstategovernment. infederalgovernmentdebtratiosoverthemedium termanddecliningconfidencethattimelyfiscal Issuanceof long-termsecuritiesbystateandlocal measuresnecessarytoplaceU.S.publicfinancesona governmentsmovedupinthesecondhalf of 2011to sustainablepathwouldbeforthcoming.Othercredit apacesimilartothatseenin2009and2010.Issuance ratingagenciessubsequentlypostedanegativeouthadbeensubduedduringthefirsthalf of theyear,in lookontheirratingof U.S.sovereigndebt,onsimilar partbecausetheexpirationof theBuildAmerica grounds,butdidnotchangetheircreditratings. Bondsprogramledtosomeshiftingof financing Theseactionsdonotappeartohaveaffectedparticifrom2011intolate2010. pationinTreasuryauctions,whichcontinuedtobe wellsubscribed.DemandforTreasurysecuritieswas Yieldsonstateandlocalgovernmentsecurities supportedbymarketparticipants’preferenceforthe declinedinthesecondhalf of 2011andinto2012, relativesafetyandliquidityof suchsecurities.Bid-toreachinglevelsnearthelowerendof theirrangeover coverratioswerewithinhistoricalranges,andindicathepastdecade,buttheyfelltoalesserdegreethan torsof foreignparticipationremainedneartheir yieldsoncomparable-maturityTreasurysecurities. Theincreaseintheratioof municipalbondyieldsto 7 OnMay16,thefederaldebtreachedthe$14.294trillionlimit, andtheSecretaryoftheTreasurydeclareda“debtissuancesus- Treasuryyieldslikelyreflected,inpart,continued pensionperiod”fortheCivilServiceRetirementandDisability concernregardingthefinancialhealthof stateand Fund,permittingtheTreasurytoredeemaportionofexisting localgovernments.Indeed,creditdefaultswap(CDS) TreasurysecuritiesheldbythatfundasinvestmentsandtosuspendissuanceofnewTreasurysecuritiestothatfundasinvest- indexesformunicipalbondsrose,onbalance,over ments.TheTreasuryalsobegansuspendingsomeofitsdaily thesecondhalf of 2011buthavenarrowedsomewhat reinvestmentofTreasurysecuritiesheldasinvestmentsbythe inearly2012.Creditratingdowngradesoutpaced GovernmentSecuritiesInvestmentFundoftheFederal Employees’RetirementSystemThriftSavingsPlan. upgradesinthesecondhalf of 2011,particularlyin

MonetaryPolicyandEconomicDevelopments 17 touchnarrowerthanthe$470billiondeficitrecorded Figure9.Changeinrealimportsandexportsofgoodsand in2010. services,2007–11 Percent, annual rate Oilpricesmoveddown,onnet,overthesecondhalf of lastyear.Thespotpriceof WestTexasIntermedi- Imports Exports ate(WTI)crudeoil,whichjumpedto$110perbarrel 15 lastAprilafteranear-completeshutdownof Libyan oilproduction,subsequentlyreversedcourseand 10 H1 declinedsharplytoanaverageof justunder$86per H2 barrelinSeptember.Thepricesof othermajor 5 benchmarkcrudeoilsalsofelloverthisperiod, + althoughbylessthanthespotpriceof WTI 0_ (figure10).ThedropinoilpricesthroughSeptember likelywaspromptedbythewindingdownof thecon- 5 flictinLibyaaswellasgrowingconcernaboutthe strengthof globalgrowthastheEuropeansovereign 2007 2008 2009 2010 2011 debtcrisisintensified,particularlytowardtheendof Source:DepartmentofCommerce,BureauofEconomicAnalysis. summer.FromSeptembertoJanuaryof thisyear,the priceof oilfromtheNorthSea(theBrentbench- December,followingthedowngradeof amunicipal mark)wasessentiallyflatasthepotentialimplicabondguarantor.8 tionsof increasedgeopoliticaltensions—mostnotablywithIran—haveoffsetongoingconcernoverthe TheExternalSector strengthof globaldemandandafaster-than- Realexportsof goodsandservicesroseatanannual expectedreboundinLibyanoilproduction.InFebrateof 4¾percentinthesecondhalf of 2011, ruary,thepriceof Brentmovedhigher,bothwith boostedbycontinuedgrowthinoverallforeigneco- increasingoptimismregardingtheoutlookforglobal nomicactivityandthelaggedeffectof declinesinthe growthaswellasafurtherheighteningof tensions foreignexchangevalueof thedollarearlierinthe withIran.Thespotpriceof WTIcrudeoilalso year(figure9).Exportsof aircraftandconsumer increasedinFebruary,thoughbylessthanBrent,folgoodsregisteredsomeof thelargestgains.The increaseinexportdemandwasconcentratedinthe emergingmarketeconomies(EMEs),whileexports totheeuroareadeclinedtowardtheendof theyear. Withgrowthof economicactivityintheUnited Figure10.Pricesofoilandnonfuelcommodities,2007–12 Statesmoderateduringthesecondhalf of 2011,real importsof goodsandservicesroseatonlyabouta December 2006 = 100 Dollars per barrel 3percentannualrate,downfromabout5percentin thefirsthalf.Importgrowthwasweakacrossmost 160 140 tradingpartnersinthesecondhalf of lastyear,with 120 thenotableexceptionof importsfromJapan,which 140 Nonfuel commodities grewsignificantlyafterdroppingsharplyinthewake 100 of theMarchearthquake. 120 80 Altogether,netexportscontributedabout¼percent- 100 Oil 60 agepointtorealGDPgrowthinthesecondhalf of 80 2011,asexportgrowthoutpacedimportgrowth.At 40 anannualrate,thecurrentaccountdeficitinthethird quarterof 2011(thelatestavailabledata)was 2007 2008 2009 2010 2011 2012 $441billion,orabout3percentof nominalGDP,a Note:Thedataaremonthly.TheoilpriceisthespotpriceofBrentcrudeoil,and thelastobservationistheaverageforFebruary1–24,2012.Thepriceofnonfuel commoditiesisanindexof45primary-commoditypricesandextendsthrough 8 Downgradestobondguarantorscanaffecttheratingsofall January2012. municipalsecuritiesguaranteedbythosefirms,astheratingof Source:Foroil,theCommodityResearchBureau;fornonfuelcommodities,InterasecurityisthehigherofeitherthepublishedunderlyingsecunationalMonetaryFund. rityratingortheratingoftheentityprovidingtheguarantee.

18 98thAnnualReport|2011 lowingarelativelyrapidriseoverthefinalthree rowingfromabroad,limitingtheriseinthestandard monthsof lastyear.9 of livingof U.S.residentsovertime. Afterpeakingearlyin2011,pricesof manynon-oil TheLaborMarket commoditiesalsomovedlowerduringtheremainder EmploymentandUnemployment of 2011.Despitemovinguprecently,copperprices remainwellbelowtheirearly2011level.Inagricul- Conditionsinthelabormarkethaveimprovedsome turalmarkets,cornandwheatpricesended2011 of late.Privatepayrollemploymentgainsaveraged downabout20percentfromtheirrelativelyhighlev- 165,000jobspermonthinthesecondhalf of 2011,a elsattheendof Augustasglobalproductionreached bitslowerthanthepaceinthefirsthalf of theyear, recordlevels.Inearly2012,however,cornprices butgainsinDecemberandJanuaryweremore edgeduponworriesaboutdrygrowingconditionsin robust,averagingalmost240,000permonth SouthAmerica. (figure11).Theunemploymentrate,whichhovered around9percentformuchof lastyear,isestimated tohavemoveddownnoticeablysinceSeptember, Afterincreasingatanannualrateof 6½percentin reaching8¼percentinJanuary,thelowestreadingin thefirsthalf of 2011,pricesof non-oilimported almostthreeyears(figure12). goodswereflatinthesecondhalf.Fluctuationsin pricesof importedfinishedgoods(suchasconsumer goodsandcapitalgoods)weremoderate. Althoughtherecentdeclineinthejoblessrateis encouraging,thelevelof unemploymentremains NationalSaving veryelevated.Inaddition,long-durationjoblessness TotalU.S.netnationalsaving—thatis,thesavingof continuestoaccountforanespeciallylargeshareof U.S.households,businesses,andgovernments,netof thetotal.Indeed,inJanuary,5½millionpersons depreciationcharges—remainsextremelylowbyhis- amongthosecountedasunemployed—about43pertoricalstandards.Afterhavingreached4percentof centof thetotal—hadbeenoutof workformore nominalGDPin2006,netnationalsavingdropped thansixmonths,figuresthatwereonlyalittlebelow overthesubsequentthreeyears,reachingalowof recordlevels(figure13).Moreover,thenumberof negative2½percentin2009.Sincethen,thenational individualswhoareworkingparttimeforeconomic savingratehasincreasedonbalance:Inthethird reasons—anotherindicatorof theunderutilizationof quarterof 2011(thelatestquarterforwhichdataare labor—remainedroughlytwiceitspre-recession available),netnationalsavingwasnegative½percent value. of nominalGDP.Therecentcontourof thesaving rateimportantlyreflectsthepatternof federalbudget deficits,whichwidenedsharplyin2008and2009,but haveedgeddownasashareof GDPsincethen. Nationalsavingwilllikelyremainrelativelylowthis Figure11.Netchangeinprivatepayrollemployment, yearinlightof thecontinuinglargefederalbudget 2005–12 deficit.If lowlevelsof nationalsavingpersistover thelongerrun,theywilllikelybeassociatedwith Thousands of jobs bothlowratesof capitalformationandheavybor- 400 Monthly change 200 9 ThemorerapidriseofWTIthanothergradesofcrudeoilat + theendof2011reflectsthenarrowingofadiscountthathad 0_ openedupbetweenWTIandothergradesearlierintheyear. 200 Throughoutmostof2011,continuedincreasesinthesupplyof oil,primarilyfromCanadaandNorthDakota,availabletoflow 400 intoCushing,Oklahoma(thedeliverypointfortheWTIcrude oil),andthelackoftransportationinfrastructuretopassthe 3-month 600 suppliesontoglobalmarkets,depressedthepriceofWTIrela- moving average tivetoothergradesofcrudeoil.Inmid-November,however, 800 planswereannouncedtoreversetheflowofakeypipelinethat currentlytransportscrudeoilfromtheGulfCoastintoCushing.Byraisingthepossibilityofalleviatingthesupplyglutof 2005 2006 2007 2008 2009 2010 2011 2012 crudeoilintheMidwest,theannouncementofthisflowrever- Note:ThedataaremonthlyandextendthroughJanuary2012. salhasledspotWTIpricestorisetoalevelthatismoreinline Source:DepartmentofLabor,BureauofLaborStatistics. withthepriceofothergradesofcrudeoil.

MonetaryPolicyandEconomicDevelopments 19 innominaltermsin2011.Nominalcompensationper Figure12.Civilianunemploymentrate,1978–2012 hourinthenonfarmbusinesssector—derivedfrom thelaborcompensationdataintheNIPA—isesti- Percent matedtohaveincreasedonly1¾percentin2011, wellbelowtheaveragegainof about4percentinthe 12 yearsbeforetherecession.Adjustedfortherisein consumerprices,hourlycompensationwasroughly 10 unchangedin2011.Unitlaborcostsrose1¼percent in2011,astheriseinnominalhourlycompensation 8 outpacedthatof laborproductivityinthenonfarm businesssector.In2010,unitlaborcostsfellalmost 6 1percent. 4 Prices Consumerpriceinflationsteppeddowninthesecond 1980 1988 1996 2004 2012 half of 2011.Afterrisingatanannualrateof Note:ThedataaremonthlyandextendthroughJanuary2012. 3½percentinthefirsthalf of theyear,theoverall Source:DepartmentofLabor,BureauofLaborStatistics. PCEchain-typepriceindexincreasedjust1½percent inthesecondhalf (figure14).PCEpricesexcluding ProductivityandLaborCompensation foodandenergyalsodeceleratedinthesecondhalf of Laborproductivitygrowthslowedlastyear.Produc- 2011,risingatanannualrateof about1½percent, tivityhadrisenrapidlyin2009and2010asfirms comparedwithroughly2percentinthefirsthalf.The strovetocutcostsinanenvironmentof severeeco- recentcontourof consumerpriceinflationhas nomicstress.In2011,however,withoperations reflectedmovementsinglobalcommodityprices, leanerandworkforcesstretchedthin,firmsneededto whichrosesharplyearlyin2011buthavemoved addlaborinputstoachievethedesiredoutputgains, lowerduringthesecondhalf of theyear.Information andoutputperhourinthenonfarmbusinesssector fromtheconsumerpriceindexandothersourcessugroseonly½percent. geststhatinflationremainedsubduedthroughJanuary2012,althoughenergypriceshaveturnedup Increasesinhourlycompensationremainedsubdued morerecently. in2011,restrainedbythewidemarginof labormarketslack.Theemploymentcostindex,whichmeas- Theindexof consumerenergyprices,whichsurged uresbothwagesandthecosttoemployersof provid- inthefirsthalf of 2011,fellbackinthesecondhalf ingbenefits,forprivateindustryrosejust2¼percent of theyear.Thecontourmainlyreflectedtheriseand subsequentreversalinthepriceof crudeoil;however, Figure13.Long-termunemployed,1978–2012 Figure14.Changeinthechain-typepriceindexfor Percent personalconsumptionexpenditures,2005–11 50 Percent, annual rate Total 40 Excluding food and energy 5 30 H1 4 3 20 H2 2 10 1 + 1980 1988 1996 2004 2012 0_ Note:ThedataaremonthlyandextendthroughJanuary2012.Theseriesshown isthepercentageoftotalunemployedpersonswhohavebeenunemployedfor 27weeksormore. 2005 2006 2007 2008 2009 2010 2011 Source:DepartmentofLabor,BureauofLaborStatistics. Source:DepartmentofCommerce,BureauofEconomicAnalysis.

20 98thAnnualReport|2011 gasolinepricesstartedtoriseagaininFebruaryfol- Measuresof inflationcompensationderivedfrom lowingarecentupturnincrudeoilprices.Consumer yieldsonnominalandinflation-indexedTreasury naturalgaspricesalsofellattheendof 2011,as securitiesdeclinedearlyinthesecondhalf of 2011at unseasonablymildtemperaturesandincreasesinsup- bothmedium-termandlonger-termhorizons,likely plyfromnewdomesticwellshelpedboostinventories reflectingaworseningintheeconomicoutlookand abovetypicallevels.Alltold,theoverallindexof theintensificationof theEuropeanfiscalcrisis.More consumerenergypricesedgedlowerduringthesec- recently,inflationcompensationestimatesoverthe ondhalf of 2011,comparedwithanincreaseof nextfiveyearshaveedgedbackup,apparently almost30percentinthefirsthalf of theyear. reflectinginvestors’moreoptimisticeconomicoutlook,andisaboutunchanged,onnet,fortheperiod. Consumerpricesforfoodandbeveragesexhibiteda However,theforwardmeasureof five-yearinflation similarpatternasthatof energyprices.Pricesfor compensationfiveyearsaheadremainsabout farmcommoditiesrosebrisklyearlylastyear,reflect- 55basispointsbelowitslevelinthemiddleof last ingthecombinationof poorharvestsinseveralcoun- year. triesthataremajorproducersalongwiththeemergingrecoveryintheglobaleconomy.Thesecommod- FinancialDevelopments itypriceincreasesfedthroughtohigherconsumer Inlightof thedisappointingpaceof progresstoward pricesformeatsandawiderangeof othermore- meetingitsstatutorymandatetopromotemaximum processedfoods.Withthedownturninfarmcom- employmentandpricestability,theFederalOpen moditypriceslateinthesummer,theindexof con- MarketCommittee(FOMC)tookanumberof steps sumerfoodpricesroseatanannualrateof just toprovideadditionalmonetarypolicyaccommoda- 3¾percentinthesecondhalf of 2011afterincreas- tionduringthesecondhalf of 2011andearly2012. ing6½percentinthefirsthalf. Thesestepsincludedincreasingtheaveragematurity of theFederalReserve’ssecuritiesholdings,shifting Pricesforconsumergoodsandservicesotherthan thereinvestmentof principalpaymentsonagency energyandfoodhavealsoslowed,onnet,inrecent securitiesfromTreasurysecuritiestoagencymonths.CorePCEpriceshadbeenboostedinthe guaranteedMBS,andstrengtheningtheforwardrate springandsummerof 2011byanumberof transi- guidanceincludedinpostmeetingstatements. toryfactors,includingthepass-throughof thefirsthalf surgeinpricesof rawcommoditiesandother Financialmarketswerebuffetedoverthesecondhalf importedgoodsandaboosttomotorvehicleprices of 2011andinearly2012bychangesininvestors’ thatstemmedfromsupplyshortagesfollowingthe assessmentsof theongoingEuropeancrisisaswellas earthquakeinJapan.Astheimpulsefromthesefac- intheirevaluationof theU.S.economicoutlook.As torsfaded,corePCEpriceinflationsteppeddownso aresult,developmentsinfinancialmarketconditions that,for2011asawhole,corePCEpriceinflation havebeenmixedsinceJuly.Unsecureddollarfunding wasjust1¾percent. markets,particularlyforEuropeaninstitutions, becamesignificantlystrained,thoughdomestic Survey-basedmeasuresof near-terminflationexpec- financialfirmsgenerallymaintainedreadyaccessto tationsaredownsincethemiddleof 2011.Median short-termunsecuredfunding.Corporatebond year-aheadinflationexpectationsasreportedinthe spreadsremainedelevated,onnet,whilebroadequity ThomsonReuters/Universityof MichiganSurveysof priceswerelittlechanged,althoughtheyexhibited Consumers(Michigansurvey),whichhadrisen unusuallyhighvolatility.Partiallyreflectingaddisharplyearlierintheyearreflectingtherun-upin tionalmonetarypolicyaccommodation,Treasury energyandfoodprices,subsequentlyfellbackas yieldsmoveddownsignificantly.Similarly,investors thosepricesdecelerated.Longer-termexpectations pushedoutthedateatwhichtheyexpectthefederal haveremainedgenerallystable.IntheMichigansur- fundsratetoriseaboveitscurrenttargetrange,and vey,theinflationrateexpectedoverthenext5to theyarecurrentlyanticipatingamoregradualpace 10yearswas2.9percentinFebruary,withinthe of increaseinthefundsratefollowingliftoff than rangethathasprevailedoverthepast10years;inthe theydidlastJuly. Surveyof ProfessionalForecasters,conductedbythe FederalReserveBankof Philadelphia,expectations MonetaryPolicyExpectationsand fortheincreaseinthepriceindexforPCEoverthe TreasuryRates next10yearsremainedat2¼percent,inthemiddle InresponsetothestepstakenbytheFOMCto of itsrecentrange. strengthenitsforwardguidanceandprovideaddi-

MonetaryPolicyandEconomicDevelopments 21 securitiesdeclinedfurther,whileyieldsonshorter- Figure15.InterestratesonTreasurysecuritiesatselected datedsecuritiesheldsteadyatverylowlevels.11On maturities,2004–12 net,yieldson2-,5-,and10-yearTreasurynoteshave Percent declinedroughly10,65,and110basispointsfrom theirlevelsinmid-2011,respectively.Theyieldonthe 10-year 30-year 5 30-yearbondhasdroppedabout120basispoints. Thoughliquidityandfunctioninginmoneymarkets 4 deterioratednotablyforseveraldaysattheheightof thedebtceilingdebatelastsummer,neitherthe 3 downgradeof theU.S.long-termsovereigncreditrat- 2-year 2 ingbyS&PinAugustnorthefailureof theJoint SelectCommitteeonDeficitReductiontoreachan 1 agreementinNovemberappearedtoleaveaperma- + nentimprintontheTreasurymarket.Uncertainty 0_ aboutlonger-terminterestrates,asmeasuredbythe impliedvolatilityon10-yearTreasurysecurities, 2004 2006 2008 2010 2012 movedsidewaysthroughmostof thesecondhalf of Note:ThedataaredailyandextendthroughFebruary24,2012. 2011andthendeclinedlateintheyearandinto2012, Source:DepartmentoftheTreasury. reflectingimprovedsentimentinfinancialmarkets followinganumberof policyactionsbycentral tionalsupporttotheeconomicrecovery,marketparbanksandsomesignsof strengtheninginthepaceof ticipantspushedoutfurtherthedatewhenthey economicrecovery. expectthefederalfundsratetofirstriseaboveitscurrenttargetrangeof 0to¼percentandscaledback Measuresof marketfunctioningsuggestthatthe theirexpectationsof thepaceatwhichmonetary Treasurymarkethascontinuedtooperatesmoothly policyaccommodationwillberemoved.Onbalance, sincemid-2011despitetheS&Pdowngradein quotesonovernightindexswap(OIS)contracts,asof August.Bid–askedspreadsformostTreasurysecurilateFebruary,implythatinvestorsanticipatethefedtieswereroughlyunchanged,thoughtheyhavewideralfundsratewillriseaboveitscurrenttargetrange enedabit,onnet,forthe30-yearbondsinceAugust. inthefourthquarterof 2013,aboutfourquarters Dealertransactionvolumeshaveremainedwithin laterthanthedateimpliedinJuly.Investorsexpect, historicallynormalranges. onaverage,thattheeffectivefederalfundsratewillbe about70basispointsbylate2014,roughly165basis Short-TermFundingMarkets pointslowerthananticipatedinmid-2011.10 Conditionsinunsecuredshort-termdollarfunding marketsdeteriorated,onnet,overthesecondhalf of YieldsonnominalTreasurysecuritiesdeclinedsig- 2011andinearly2012amidelevatedanxietyabout nificantlyoverthesecondhalf of 2011(figure15). thecrisisinEuropeanditsimplicationsforEuropean Thebulkof thisdeclineoccurredinlateJulyand firmsandtheircounterparties.Fundingcosts August,inpartreflectingweaker-than-anticipated increasedandtenorsshorteneddramaticallyfor U.S.economicdataandincreasedinvestordemand Europeaninstitutionsthroughoutthethirdandinto fortherelativesafetyandliquidityof Treasurysecuthefourthquarter.Fundingpressureseasedsomeritiesamidanintensificationof concernsaboutthe whatlateintheyearfollowingtheEuropeanCentral situationinEurope.FollowingtheFOMCannounce- Bank’s(ECB)firstinjectionof euroliquidityviaa mentof thematurityextensionprogram(MEP)atits three-yearrefinancingoperationandthereductionof Septembermeeting,yieldsonlonger-datedTreasury thepriceof U.S.dollarliquidityofferedbytheECB andothercentralbanks;theysubsequentlyeasedfur- 10 Wheninterestratesareclosetozero,determiningthepointat therfollowingthepassageof year-end.Onbalance, whichfinancialmarketquotesindicatethatthefederalfunds ratewillmoveaboveitscurrentrangecanbecomplicated.The spreadsof Londoninterbankofferedrates(LIBOR) pathdescribedinthetextisthemeanofadistributioncalcu- overcomparable-maturityOISrates—ameasureof latedfromOISrates.Alternatively,onecanusesimilarderivastressinshort-termbankfundingmarkets—have tivestocalculatethemostlikely,or“modal,”pathofthefederal fundsrate,ameasurethattendstobemorestable.Thisalternativemeasurehasalsomoveddown,onnet,sincethemiddleof 2011,butitsuggestsaflatteroveralltrajectoryforthetarget 11 AsofFebruary24,theOpenMarketDeskhadsold$223bilfederalfundsrate,accordingtowhichtheeffectiveratedoesnot lioninshorter-termTreasurysecuritiesandpurchased$211bilriseaboveitscurrenttargetrangethroughtheendof2015. lioninlonger-termTreasurysecurities.

22 98thAnnualReport|2011 widenedconsiderablysinceJuly,particularlyforten- bitforbothovernightand30-daytenors.AA-rated orsbeyondonemonth,thoughtheyhavemoved asset-backedCPspreadsincreasedmorenotablyover downsincelatelastyear.Indeed,throughoutmuch thesecondhalf of 2011butlargelyretracedfollowing of thethirdandfourthquarters,manyEuropean year-end. institutionswerereportedlyunabletoobtainunsecureddollarfundingattenorsbeyondoneweek. Incontrasttounsecureddollarfundingmarkets, Additionally,more-forward-lookingmeasuresof signsof stresswerelargelyabsentinsecuredshortinterbankfundingcosts—suchasthespreadbetween termdollarfundingmarkets.Forexample,inthe athree-monthforwardrateagreementandtherate marketforrepurchaseagreements(repos),bid–asked onanOIScontractthreetosixmonthsahead— spreadsformostcollateraltypeswerelittlechanged. movedupconsiderablyinthesecondhalf of 2011 Inaddition,despiteaseasonaldiparoundyear-end, andhaveonlypartiallyretracedin2012(figure16). volumesinthetripartyrepomarketwerelargely DespitethepressuresfacedbyEuropeanfinancial stableonbalance.Thatsaid,thecompositionof colinstitutions,U.S.firmsgenerallymaintainedready lateralpledgedintherepomarketmovedfurther accesstoshort-termunsecuredfundingmarkets. awayfromequitiesandfixed-incomecollateralthatis Againstabackdropof soliddepositgrowthand noteligibleforopenmarketoperations,shiftingeven modestexpansioninbankcreditacrosstheindustry, moreheavilytowardTreasuryandagencysecurities mostdomesticbanksreportedlyhadlimitedneedfor ascounterpartyconcernsbecamemoreevident. unsecuredfunding. RespondentstotheSCOOSinbothSeptemberand Decembernotedacontinuedincreaseindemandfor Pressureswerealsoevidentinthecommercialpaper fundingacrosscollateraltypesbutreportedageneral (CP)market.IssuanceintheUnitedStatesof unse- tighteningincredittermsunderwhichseveralsecuricuredfinancialCPandnegotiablecertificatesof tiestypesarefinanced.Inaddition,marketparticidepositbyentitieswithEuropeanparentsdeclined pantsreportedlybecamesomewhatlesswillingto significantlyinthesecondhalf of 2011.Bycontrast, fundriskiercollateraltypesatlongertenorsasyearthepaceof issuancebyU.S.firmsedgeddownonly endapproached.However,year-endpressures slightly,onnet,overtheperiod.Onbalance,spreads remainedmutedoverall,withfewsignsof dislocaof ratesonunsecuredA2/P2commercialpaperover tionsineithersecuredorunsecuredshort-termmarequivalentmaturityAA-ratednonfinancialCProsea kets,andconditionsintermfundingmarketshave improvedinearly2012. Figure16.LIBORminusovernightindexswaprate,2007–12 Moneymarketfunds,amajorproviderof fundsto short-termfundingmarketssuchasthoseforCPand Basis points forrepo,experiencedsignificantoutflowsacrossfund categoriesinJuly,asinvestors’focusturnedtothe 350 deterioratingsituationinEuropeandtothedebtceil- 300 ingdebateintheUnitedStates.Thoseoutflows 250 largelyshiftedtobankdeposits,resultinginsignifi- 200 cantpressureontheregulatoryleverageratiosof a Three-month fewlargebanks.However,investmentsinmoney One-month 150 marketfundsrose,onnet,overtheremainderof USD 3x6 FRA–OIS 100 2011,withthecompositionof thoseincreasesreflect- 50 ingthegeneraltoneof increasedriskaversion,as + 0_ government-onlyfundsfacednotableinflowswhile primefundsexperiencedsteadyoutflows. Jan. July Jan. July Jan. July Jan. July Jan. July Jan. 2007 2008 2009 2010 2011 2012 FinancialInstitutions Note:ThedataaredailyandextendthroughFebruary24,2012.Anovernight indexswap(OIS)isaninterestrateswapwiththefloatingratetiedtoanindexof Marketsentimenttowardthebankingindustry dailyovernightrates,inthiscasetheeffectivefederalfundsrate.Atmaturity,the declinedrapidlyearlyinthesecondhalf of 2011as twopartiestotheswapagreementexchange,onthebasisoftheagreednotional amount,thedifferencebetweeninterestaccruedatthefixedrateandinterest investorsturnedtheirfocusonexposurestoEuroaccruedbyaveragingthefloating,orindex,rate.TheU.S.dollar(USD)spreadis peansovereignsandfinancialinstitutionsandonthe calculatedfromaLondoninterbankofferedrate(LIBOR)forwardrateagreement (FRA)threetosixmonthsinthefutureandtheimpliedforwardOISrateforthe possiblespillovereffectsof theEuropeancrisis.Some sameperiod. largeU.S.institutionsalsoremainedsignificantly Source:Bloomberg. exposedtolegalrisksstemmingfromtheirmortgage

MonetaryPolicyandEconomicDevelopments 23 Indicatorsof creditqualityatcommercialbankscon- Figure17.Spreadsoncreditdefaultswapsforselected tinuedtoshowsignsof improvement.Aggregate U.S.bankingorganizations,2007–12 delinquencyandcharge-off ratesmoveddown, Basis points thoughtheyremainedquiteelevatedonresidential mortgagesandbothresidentialandcommercialcon- 400 structionloans.Lossprovisioninghasleveledoutin 350 recentquartersneartheupperendof itspre-crisis range.Nonetheless,intheJanuarySLOOS,alarge 300 fractionof therespondentsindicatedthattheyexpect Large bank 250 holding companies creditqualitytoimproveoverthenext12monthsfor 200 mostmajorloancategoriesif economicactivitypro- 150 gressesinlinewithconsensusforecasts. 100 Other banks Creditprovidedbydomesticbanks—thesumof 50 loansandsecurities—increasedmoderatelyinthe secondhalf of 2011,itsfirstsuchrisesincethefirst Jan. July Jan. July Jan. July Jan. July Jan. July Jan. 2007 2008 2009 2010 2011 2012 half of 2008.Bankcreditgrewasholdingsof agency Note:ThedataaredailyandextendthroughFebruary24,2012.Medianspreads MBSexpandedsteadilyandmostmajorloancategoforsixbankholdingcompaniesandnineotherbanks. riesexhibitedimprovementinthesecondhalf of the Source:Markit. year.Theexpansionwasconsistentwithrecent SLOOSresponsesindicatingthatlendingstandards bankingoperationsandforeclosurepractices.12More andloantermseasedsomewhatandthatdemandfor loansfrombusinessesandhouseholdsincreased,on recently,however,investorsentimenthasimproved net,inthesecondhalf of 2011.Inparticular,C&I somewhatfollowingtheactionsof centralbanksand loansshowedpersistentandconsiderablestrength incomingdatasuggestingasomewhatbetterecooverthesecondhalf of 2011andintoearly2012. nomicoutlookintheUnitedStates.Onbalance, Loanstononbankfinancialinstitutions,acategory equitypricesforbankingorganizationshavecomthattendstobevolatile,alsogrewrapidlyoverthat pletelyretracedtheirdeclinesfromlastsummer,while periodasdidholdingsof agencyMBS.Consumer CDSspreads(figure17)—whichreflectinvestors’ loansheldbybanksedgedupinthethirdandfourth assessmentsof andwillingnesstobeartheriskthat quarters.Thoseincreasesoffsetongoingdeclinesin theseinstitutionswilldefaultontheirdebtobligacommercialrealestateandhomeequityloans,both tions—havedeclinedfromtheirpeaksreachedinthe of whichremainedveryweak. fall,butnotallthewaybacktomid-2011levels. Regulatorscontinuedtotakestepstostrengthentheir Measuresof bankprofitabilityedgedup,onnet,in oversightof thefinancialindustry.Inparticular,a recentquartersbutremainedwellbelowthelevels varietyof measuresmandatedbytheDodd-Frank thatprevailedbeforethefinancialcrisisbegan. WallStreetReformandConsumerProtectionActof Althoughprofitsatthelargestinstitutionsweresup- 2010arebeing,oraresoontobe,implemented, portedoverthatperiodbyreductionsinnoninterest includingenhancedcapitalandliquidityrequireexpenses,netinterestmarginsremainedverylow, mentsforlargebankingorganizations,annualstress capitalmarketsrevenuesweresubdued,loanlossprotesting,additionalrisk-managementrequirements, visionsarestillsomewhatelevatedrelativetopreandthedevelopmentof earlyremediationplans(see crisisnorms,andafewbanksbookedlargereserves box1).Aspartof thoseefforts,theFederalReserve forlitigationrisksassociatedwiththeirmortgage beganannualreviewsof thecapitalplansforU.S. portfolios. bankholdingcompanieswithtotalconsolidated assetsof $50billionormoreunderitsComprehen- 12 OnFebruary9,itwasannouncedthatthefederalgovernment siveCapitalAnalysisandReviewprogram.Going and49stateattorneysgeneralhadreacheda$25billionagree- intothosereviews,reportedregulatorycapitalratios mentwiththenation’sfivelargestmortgageservicerstoaddress of U.S.bankinginstitutionsgenerallyremainedat mortgageloanservicingandforeclosureabuses.Theagreement doesnotpreventstateandfederalauthoritiesfrompursuing historicallyhighlevelsoverthesecondhalf of 2011. criminalenforcementactionsrelatedtothisorotherconductby theservicersorfrompunishingwrongfulsecuritizationconduct; Concernsabouttheconditionof Europeanfinancial italsodoesnotpreventanyactionbyindividualborrowerswho wishtobringtheirownlawsuits. institutions,coupledwithperiodsof heightened

24 98thAnnualReport|2011 Box 1. Financial Stability at the Federal Reserve TheFederalReserve’sresponsibilityforpromoting TheFederalReserveisoneof10votingmembers financialstabilitystemsfromitsroleinsupervising oftheFSOC. andregulatingbanks,operatingthenation’spay- Asignificantaspectofthemacroprudentialapproach mentssystem,andservingasthelenderoflast istheheightenedfocusonentitieswhosefailureor resort.Inthedecadespriortothefinancialcrisis, financialdistresscouldresultinoutsizeddestabilizfinancialstabilitypolicytendedtobeovershadowed ingeffectsontherestofthesystem.Underthe bymonetarypolicy,whichhadcometobeviewed Dodd-FrankAct,theFederalReserveisresponsible astheprincipalfunctionofcentralbanks.However, forthesupervisionofallsystemicallyimportant intheaftermathofthefinancialcrisis,financialstafinancialinstitutions(SIFIs),whichincludebothlarge bilitypolicyhastakenongreaterprominenceandis bankholdingcompaniesandnonbankfinancialfirms nowgenerallyconsideredanequallycriticalrespondesignatedbytheFSOCassystemicallyimportant. sibilityofcentralbanks.Assuch,theFederal EvenbeforetheDodd-FrankActwasenacted,the Reservehasmadesignificantorganizational FederalReservewasmakingorganizational changesandtakenotheractionstoimproveitsabilchangestofacilitatetheincorporationofsystemic itytounderstandandaddresssystemicrisk.Inaddiriskconsiderationsintothesupervisoryprocess. tion,itsstatutoryroleinmaintainingfinancialstability Notably,itcreatedtheLargeInstitutionSupervision hasbeenexpandedbytheDodd-FrankWallStreet CoordinatingCommittee(LISCC)tobringaninter- ReformandConsumerProtectionActof2010 disciplinaryandcross-firmperspectivetothesuper- (Dodd-FrankAct). visionoflarge,complexfinancialinstitutions;the LISCCactstoensurethatthefinancialpositionsof OnekeyfeatureoftheDodd-FrankActisitsmacrotheselargeinstitutionsarestrongenoughtowithprudentialorientation,asreflectedinmanyofthe standadverseshocks.Asimilarbodyhasbeenset provisionstobeimplementedbytheFederal uptohelpintheoversightofsystemicallyimportant Reserveandotherfinancialregulators.Themacrofinancialmarketutilities. prudentialapproachtoregulationandsupervision stillpayscloseattentiontothesafetyandsound- TheFederalReservehasalsoestablishedtheOffice nessofindividualfinancialinstitutions,butitalso ofFinancialStabilityPolicyandResearch(OFS)to takesintoaccountthelinkagesamongthoseentities helptheFederalReservemoreeffectivelymonitor andtheconditionofthefinancialsystemasawhole. thefinancialsystemanddeveloppoliciesformitigat- Toimplementthemacroprudentialapproach,the ingsystemicrisks.TheOFS’sfunctionistocoordi- Dodd-FrankActestablishedthemultiagencyFinan- nateandanalyzeinformationbearingonfinancial cialStabilityOversightCouncil(FSOC),whichis stabilityfromawiderangeofperspectivesandto taskedwithpromotingamorecomprehensive placethesupervisionofindividualinstitutionswithin approachtomonitoringandmitigatingsystemicrisk. abroadermacroeconomicandfinancialcontext.In (continuedonnextpage) attentionpaidtoU.S.securitiesdealers,raisedinves- RespondentstotheDecemberSCOOSreporteda toranxietyregardingcounterpartyexposuretodeal- broadbutmoderatetighteningof credittermsappliersduringthesecondhalf of 2011.Indeed,responses cabletoimportantclassesof counterpartiesoverthe totheDecemberSCOOSsuggestedthatdealers previousthreemonths.Thistighteningwasespecially devotedincreasedtimeandattentiontothemanage- evidentforhedgefundclientsandtradingrealestate mentof concentratedcreditexposurestodealersand investmenttrusts.14Theinstitutionsthatreported otherfinancialintermediariesoverthepreviousthree havingtightenedcredittermspointedtoaworsening months(figure18).13Inaddition,surveyrespondents ingeneralmarketliquidityandfunctioninganda reportedthattheyhadreducedaggregatecreditlimits reducedwillingnesstotakeonriskasthemost forcertainspecificinstitutions.Investorsappearedto importantreasonsfordoingso.Indeed,foreachtype beparticularlyconcernedaboutthestabilityof fund- of collateralcoveredinthesurvey,notablenetfracingintheeventof financialmarketstressbecause tionsof respondentsreportedthatliquidityandfuncmostdealerfirmsarehighlyreliantonshort-term tioningintheunderlyingassetmarkethaddeteriosecuredfunding. ratedoverthepreviousthreemonths.Dealers reportedthatthedemandforfundingmosttypesof securitiescontinuedtoincreaseovertheprevious 13 Followingthefailureofaprimarydealer,theFederalReserve BankofNewYorkimplementedarisk-managementprogram thatrequiredprimarydealerstopostmarginonforward-settling 14 Tradingrealestateinvestmenttrustsinvestinassetsbackedby agencyMBStransactions. realestateratherthandirectlyinrealestate.

MonetaryPolicyandEconomicDevelopments 25 Box 1. Financial Stability at the Federal Reserve—continued addition,theFederalReserveworkswithotherU.S. intendedtoreducethelikelihoodthatthefailureofa agenciesandinternationalbodiesonarangeof SIFI—shoulditoccur—wouldcauseseriousdamage issuestostrengthenthefinancialsystem. tothefinancialsystem.Inallofitsrulemaking responsibilities,theFederalReserveisattentiveto Systemicfinancialriskscantakeseveralforms. theinternationaldimensionoffinancialregulation.It Someriskscanbedescribedasstructuralinnature isalsoworkingwithitsregulatorycounterpartsto becausetheyareassociatedwithstructuralfeatures improvethequalityandtimelinessoffinancialdata. offinancialmarketsandthusarelargelyindependentofeconomicconditions;theseinclude,for TheFederalReserveislikewisemovingforwardto example,theriskposedbyaSIFIwhosefailurecan addresscyclicalsystemicrisks.Toidentifysuch haveoutsizedeffectsonthefinancialsystemorthe risks,itroutinelymonitorsanumberofitems—indegreetowhichmoneymarketmutualfundsare cluding,forexample,measuresofleverageand susceptibletoliquiditypressures.Otherriskscanbe maturitymismatchatfinancialintermediaries—and describedascyclicalinnatureandinclude,for looksforsignsofacredit-inducedbuildupofsysexample,elevatedassetvaluationsandexcessive temicrisk.Inaddition,itconductsregularstress creditgrowththatariseinbuoyanteconomictimes testsofthenation’slargestbankingfirms;these butcanunwindindestabilizingwaysshouldcondi- testsarebasedondetailedconfidentialdataabout tionschange.Attentivenesstobothtypesofriskis thebalancesheetsofthefirmsandprovideacomcritical in the monitoring of systemic risk and the for- prehensive,rigorousassessmentofhowthefirms’ mulationofappropriatemacroprudentialpolicyresponses. financialconditionswouldlikelyevolveoveramultiyearperiodunderadverseeconomicandfinancial TheFederalReservehastakenstepstoidentify scenarios.Meanwhile,effortsareunderwayto structuralvulnerabilitiesinthefinancialsystemand evaluateanddevelopnewmacroprudentialtools todevisepoliciestomitigatetheassociatedrisks. thatcouldhelplimitfuturebuildupsofcyclicalsys- Forexample,inDecember2011,theBoardreleased temicrisk. aproposaltostrengthentheregulationandsupervisionoflargebankholdingcompaniesandsystemi- Insummary,theFederalReservehastakenaseries callyimportantnonbankfinancialfirms.Theproposal ofactionstoimplementtherelevantprovisionsof comprisesawiderangeofmeasures,includingrisk- theDodd-FrankActandtomeetitsbroaderfinancial basedcapitalandleveragerequirements,liquidity stabilityresponsibilitiesinatimelyway.TheFederal requirements,stresstests,single-counterpartycredit Reservehasmadeimportantchangestoitsorganilimits,andearlyremediationrequirements.Inaddi- zationalstructuretosupportamacroprudential tion,inOctober2011,theBoardapprovedafinal approachtosupervisionandregulation,andithas ruletoimplementtheresolutionplan(livingwill) institutedprocessesforidentifyingandresponding requirementoftheDodd-FrankAct,whichis tosourcesofsystemicrisk. threemonths,particularlythedemandfortermfund- theentirerangeof transactionswithsuchclients,had ingwithamaturitygreaterthan30days,which decreasedsomewhat. increasedforallsecuritytypes. CorporateDebtandEquityMarkets Netinvestmentflowstohedgefundsinthethirdand OnnetsinceJulyof lastyear,yieldsoninvestmentfourthquarterswerereportedlysignificantlysmaller gradecorporatebondshavedeclinednotably,while thaninthefirsthalf of theyearashedgefunds thoseonspeculative-gradecorporatedebtposted markedlyunderperformedthebroadermarketin mixedchanges.However,reflectingadeclineininves- 2011.Informationfromavarietyof sourcessuggests torrisk-takingamidconcernsabouttheEuropean thattheuseof dealer-intermediatedleveragehas situationandheightenedvolatilityinfinancialmardeclined,onbalance,sincemid-2011.Indeed,while kets,spreadsof theseyieldstothoseoncomparabletheuseof dealer-intermediatedleveragewasroughly maturityTreasurysecuritieswidenednotablyinthe unchangedformosttypesof counterpartiesaccord- thirdquarterandhaveonlypartlyretracedsincethat ingtoSeptemberandDecemberSCOOSrespon- time(figure19).Inthesecondarymarketforleverdents,abouthalf of thosesurveyedindicatedthat agedloans,theaveragebidpricedroppedinlinewith hedgefunds’useof financialleverage,considering thepricesof otherriskassetsinAugustbuthas

26 98thAnnualReport|2011 hasrecoveredrecentlyafterasharpdeterioration Figure18.Netpercentageofdealersreportingincreased duringthesummer. attentiontoexposuretootherdealers,2010–11 Percent Broadequitypricesareaboutunchanged,onbalance,sincemid-2011butexhibitedanunusuallyhigh levelof volatility.Equitymarketsfellsharplyinlate 80 JulyandearlyAugustinresponsetoconcernsabout theEuropeancrisis,theU.S.debtceilingdebate,and 60 apossibleslowdowninglobalgrowth.Equityprices roughlyretracedtheselossesduringthefourthquarterof 2011andearly2012,reflectingsomewhat 40 better-than-expectedeconomicdataintheUnited Statesaswellasactionstakenbymajorcentralbanks 20 tomitigatethefinancialstrainsinEurope.Nonetheless,equitypriceshaveremainedhighlysensitiveto newsregardingdevelopmentsinEurope.Implied Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 volatilityfortheS&P500index,calculatedfrom optionprices,rampedupinthethirdquarterof 2011 Note:Thedataaredrawnfromasurveyconductedfourtimesperyear;thelast observationisfromtheDecember2011survey,whichcovers2011:Q4.Netper- buthassincereversedmuchof thatrise. centageequalsthepercentageofinstitutionsthatreportedincreasingattention (“increasedconsiderably”or“increasedsomewhat”)minusthepercentageof institutionsthatreporteddecreasingattention(“decreasedconsiderably”or Amidheightenedstockmarketvolatilityoverthe “decreasedsomewhat”). courseof thesecondhalf of 2011,equitymutual Source:FederalReserveBoard,SeniorCreditOfficerOpinionSurveyonDealer FinancingTerms. fundsexperiencedsizableoutflows.Loanfunds, whichinvestprimarilyinLIBOR-basedsyndicated leveragedloans,alsoexperiencedoutflowsasretail recoveredsincethen,asinstitutionalinvestors— investorsrespondedtoloanpricechangesfollowing whichincludecollateralizedloanobligations,pension indicationsthattheFederalReservewouldkeep funds,insurancecompaniesandotherfundsinvest- interestrateslowerforlongerthanpreviouslyanticiinginfixed-incomeinstruments—havereportedly pated.Withdecliningyieldsonfixed-incomesecuricontinuedtoexhibitstrongappetitesforhigher- tiesboostingtheperformanceof bondmutualfunds, yieldingleveragedloansagainstabackdropof little thesefunds,includingspeculative-gradeandmunicinewsupplyof suchloans.Liquidityinthatmarket palbondfunds,attractednetinflows. MonetaryAggregatesand Figure19.Spreadsofcorporatebondyieldsover theFederalReserve’sBalanceSheet comparableoff-the-runTreasuryyields,bysecurities TheM2monetaryaggregateexpandedatanannual rating,1997–2012 rateof about12percentoverthesecondhalf of Percentage points 2011.15TherapidgrowthinM2appearstobethe resultof increaseddemandforsafeandliquidassets 18 duetoconcernsabouttheEuropeansituation,com- 16 binedwithaverylowlevelof interestratesonalter- 14 12 15 M2consistsof(1)currencyoutsidetheU.S.Treasury,Federal 10 ReserveBanks,andthevaultsofdepositoryinstitutions; High-yield (2)traveler’schecksofnonbankissuers;(3)demanddepositsat 8 commercialbanks(excludingthoseamountsheldbydepository 6 institutions,theU.S.government,andforeignbanksandofficial 4 institutions)lesscashitemsintheprocessofcollectionandFed- BBB eralReservefloat;(4)othercheckabledeposits(negotiableorder 2 AA + ofwithdrawal,orNOW,accountsandautomatictransferser- 0_ viceaccountsatdepositoryinstitutions;creditunionsharedraft accounts;anddemanddepositsatthriftinstitutions);(5)savings 1998 2000 2002 2004 2006 2008 2010 2012 deposits(includingmoneymarketdepositaccounts);(6)smalldenominationtimedeposits(timedepositsissuedinamountsof Note:ThedataaredailyandextendthroughFebruary24,2012.Thespreads shownaretheyieldson10-yearbondslessthe10-yearTreasuryyield. lessthan$100,000)lessindividualretirementaccount(IRA) andKeoghbalancesatdepositoryinstitutions;and(7)balances Source:DerivedfromsmoothedcorporateyieldcurvesusingMerrillLynchbond inretailmoneymarketfundslessIRAandKeoghbalancesat data. moneymarketfunds.

MonetaryPolicyandEconomicDevelopments 27 nativeshort-terminvestments.Inaddition,anumber Asof February24,2012,theOpenMarketDeskat of regulatorychangeshavelikelyboostedM2of late. theFederalReserveBankof NewYork(FRBNY) Inparticular,unlimitedinsurancebytheFederal hadpurchased$211billioninTreasurysecurities DepositInsuranceCorporation(FDIC)of onshore withremainingmaturitiesof 6to30yearsandsold noninterest-bearingdepositshasmadethesedeposits $223billioninTreasurysecuritieswithmaturitiesof increasinglyattractiveattimesof heightenedvolatil- 3yearsorless. ityanduncertaintyinfinancialmarkets.Inaddition, thechangeintheFDICassessmentbasein Inthesecondhalf of 2011andearly2012,theFed- April2011addeddepositsindomesticbanks’off- eralReservereducedsomeof itsexposuretolending shoreoffices,eliminatingsomeof thebenefitsto facilitiesestablishedduringthefinancialcrisistosupbanksof bookingdepositsabroadandapparently portspecificinstitutions.Theportfolioholdingsof leading,insomecases,toadecisiontorebooksome MaidenLaneLLC,MaidenLaneIILLC,and of thesedepositsonshore.Indeed,liquiddeposits,the MaidenLaneIIILLC—entitiesthatwerecreated singlelargestcomponentof M2,grewatanannual duringthecrisistoacquirecertainassetsfromthe rateof 20percentinthesecondhalf of 2011.16The BearStearnsCompanies,Inc.,andAmericanIntercurrencycomponentof themoneystockgrewatan nationalGroup,Inc.,orAIG,toavoidthedisorderly annualrateof 7percentoverthesecondhalf of 2011, failuresof thoseinstitutions—declined,onnet,priabitfasterthanthehistoricalaveragebutaslower marilyasaresultof assetsalesandprincipalpaypacethaninthefirsthalf of theyear.Themonetary ments.Of note,theFRBNYsoldassetswithaface base—whichisequaltothesumof currencyincircu- amountof $13billionfromtheMaidenLaneIIportlationandthereservebalancesof depositoryinstitu- folioinearly2012throughtwocompetitiveprocesses tionsheldattheFederalReserve—expandedatan conductedbytheFRBNY’sinvestmentmanager.18 annualrateof 3¾percentinthesecondhalf of the year,astheriseincurrencymorethanoffsetaslight Useof regulardiscountwindowlendingfacilities, decreaseinreservebalances.17 suchastheprimarycreditfacility,continuedtobe minimal.LoansoutstandingundertheTermAsset- Thesizeof theFederalReserve’sbalancesheet BackedSecuritiesLoanFacilitydeclinedandstood remainedatahistoricallyhighlevelthroughoutthe justbelow$8billioninlateFebruary. secondhalf of 2011andintoearly2012andstoodat about$2.9trillionasof February22.Thesmallrise OnNovember30,2011,inordertoeasestrainsin of about$61billionsinceJulylargelyreflected globalfinancialmarketsandtherebymitigatethe increasesintemporaryU.S.dollarliquidityswapbal- effectsof suchstrainsonthesupplyof credittoU.S. anceswiththeECB,whichwerepartiallyoffsetbya householdsandbusinesses,theFederalReserve declineinsecuritiesholdings(table1).Holdingsof announcedcoordinatedactionswithothercentral U.S.Treasurysecuritiesgrew$32billionoverthesec- bankstoenhancetheircapacitytoprovideliquidity ondhalf of 2011,astheproceedsfrompaydownsof supporttotheglobalfinancialsystem.19TheFOMC agencydebtandagencyMBSwerereinvestedin authorizedanextensionof theexistingtemporary longer-termTreasurysecuritiesuntiltheFOMCdeci- U.S.dollarliquidityswaparrangementsthroughFebsioninSeptembertoswitchthereinvestmentof those ruary1,2013,andtherateontheseswaparrangeproceedstoagencyMBS;totalholdingsof MBS mentswasreducedfromtheU.S.dollarOISrateplus declinedintothefall.Thesubsequentsmallincrease 100basispointstotheOISrateplus50basispoints. inMBSholdingsreflectsthereinvestmentof maturingagencydebtintoMBS.Agencydebtdeclined 18 OnJanuary19,2012,theFRBNYannouncedthesaleofassets about$14billionovertheentireperiod.Thecompo- withafaceamountof$7.0billionfromtheMaidenLaneII sitionof Treasuryholdingsalsochangedoverthis LLCportfoliothroughacompetitiveprocess.OnFebruary8, 2012,theFRBNYannouncedthesaleofadditionalassetswith periodasaresultof theimplementationof theMEP. afaceamountof$6.2billionfromtheMaidenLaneIILLC portfolio,alsothroughacompetitiveprocess.Proceedsfrom thesetwotransactionswillenabletherepaymentoftheentire 16 RegulationQ,whichhadprohibitedthepaymentofintereston remainingoutstandingbalanceoftheseniorloanfromthe demanddeposits,wasrepealedbytheBoardonJuly14.This FRBNYtoMaidenLaneIILLC. repealmayhavealsocontributed,inasmallway,tothegrowth 19 TheBankofCanada,theBankofEngland,theBankofJapan, inM2. theEuropeanCentralBank,theFederalReserve,andtheSwiss 17 TheMEPthatwasannouncedattheSeptemberFOMCmeet- NationalBankcoordinatedthisaction.Inaddition,asacontiningwasdesignedtoincreasetheaveragematurityoftheFederal gencymeasure,theFOMCagreedtoestablishsimilartempo- Reserve’ssecuritiesholdingswhileleavingthequantityof raryswaparrangementswiththesefivecentralbankstoprovide reservebalancesroughlyunchanged. liquidityinanyoftheircurrenciesifnecessary.

28 98thAnnualReport|2011 Table1.SelectedcomponentsoftheFederalReservebalancesheet,2010–12 Millionsofdollars Balancesheetitem Dec.29,2010 July6,2011 Feb.22,2012 Totalassets 2,423,457 2,874,049 2,935,149 Selectedassets Creditextendedtodepositoryinstitutionsanddealers Primarycredit 58 5 3 Centralbankliquidityswaps 75 0 107,959 Creditextendedtoothermarketparticipants TermAsset-BackedSecuritiesLoanFacility(TALF) 24,704 12,488 7,629 NetportfolioholdingsofTALFLLC 665 757 825 Supportofcriticalinstitutions NetportfolioholdingsofMaidenLaneLLC,MaidenLaneIILLC,andMaidenLaneIII LLC1 66,312 59,637 30,822 CreditextendedtoAmericanInternationalGroup,Inc. 20,282 ... ... PreferredinterestsinAIAAuroraLLCandALICOHoldingsLLC 26,057 ... ... Securitiesheldoutright U.S.Treasurysecurities 1,016,102 1,624,515 1,656,581 Agencydebtsecurities 147,460 115,070 100,817 Agencymortgage-backedsecurities(MBS)2 992,141 908,853 853,045 Totalliabilities 2,366,855 2,822,382 2,880,556 Selectedliabilities FederalReservenotesincirculation 943,749 990,861 1,048,004 Reverserepurchaseagreements 59,246 67,527 89,824 Depositsheldbydepositoryinstitutions 1,025,839 1,663,022 1,622,800 Ofwhich:Termdeposits 5,113 0 0 U.S.Treasury,generalaccount 88,905 67,270 36,033 U.S.Treasury,SupplementaryFinancingAccount 199,963 5,000 0 Totalcapital 56,602 51,667 54,594 Note:LLCisalimitedliabilitycompany. 1 TheFederalReservehasextendedcredittoseveralLLCsinconjunctionwitheffortstosupportcriticalinstitutions.MaidenLaneLLCwasformedtoacquirecertainassetsof theBearStearnsCompanies,Inc.MaidenLaneIILLCwasformedtopurchaseresidentialmortgage-backedsecuritiesfromtheU.S.securitieslendingreinvestmentportfolio ofsubsidiariesofAmericanInternationalGroup,Inc.(AIG).MaidenLaneIIILLCwasformedtopurchasemultisectorcollateralizeddebtobligationsonwhichtheFinancial ProductsgroupofAIGhaswrittencreditdefaultswapcontracts. 2 IncludesonlyMBSpurchasesthathavealreadysettled. ... Notapplicable. Source:FederalReserveBoard,StatisticalReleaseH.4.1,“FactorsAffectingReserveBalancesofDepositoryInstitutionsandConditionStatementofFederalReserveBanks.” Thelowercostspurredincreaseduseof thoseswap InternationalDevelopments lines;theoutstandingamountof dollarsprovided Inthesecondhalf of theyear,financialmarketdevelthroughtheswaplinesrosefromzeroinJulyto opmentsabroadwereheavilyinfluencedbyconcerns roughly$108billioninlateFebruary. abouttheheightenedfiscalstressesinEuropeandthe resultantriskstotheglobaleconomicoutlook.For- Ontheliabilitysideof theFederalReserve’sbalance eignrealGDPgrowthsteppedupinthethirdquarsheet,reservebalancesheldbydepositoryinstitutions ter,asJapanreboundedfromtheeffectsof itsMarch declinedroughly$40billioninthesecondhalf of earthquakeandtsunami,leadingtoaneasingof sup- 2011andearly2012whileFederalReservenotesin plychaindisruptions.Incontrast,recentdataindicirculationincreasedroughly$57billion.TheFederal catethatforeigneconomicgrowthslowedinthe Reserveconductedaseriesof small-scalereverse fourthquarter,asactivityintheeuroareaappearsto repurchasetransactionsinvolvingalleligiblecollat- havecontractedandasfloodinginThailandweighed eraltypesanditsexpandedlistof counterparties.The ongrowthinseveraleconomiesinAsia. FederalReservealsocontinuedtooffersmall-value termdepositsthroughtheTermDepositFacility.In InternationalFinancialMarkets Julyof lastyear,theTreasuryreducedthebalanceof Theforeignexchangevalueof thedollarhasrisen itsSupplementaryFinancingAccountattheFederal sinceJulyabout3½percentonatrade-weighted Reservefrom$5billiontozero. basisagainstabroadsetof currencies(figure20).

MonetaryPolicyandEconomicDevelopments 29 indexesremainbelowtheirmidsummerlevels,they Figure20.U.S.dollarnominalexchangerate,broadindex, haverisenmarkedlyinthepasttwomonths.Emerg- 2007–12 ingmarketsequitypricesfollowedapathsimilarto December 31, 2007 = 100 thoseintheAFEs.Emergingmarketsbondand equityfundsexperiencedlargeoutflowsduringperiodsof heightenedconcernsabouttheEuropeancri- 120 sis,butinflowshaveresumedmorerecently. 115 Euro-areabankstockpricesunderperformedthe 110 broadermarket,asconcernsaboutthehealthof 105 Europeanbanksintensifiedoverthesecondhalf of 2011.TheCDSpremiumsonthedebtof manylarge 100 banksinEuroperosesubstantially,reflectingmarket viewsof increasedriskof default.Quarterlyearnings 95 formanybankswerereducedbywrite-downson Greekdebt.Althoughonlyeightbanksfailedthe 2007 2008 2009 2010 2011 2012 EuropeanBankingAuthority(EBA)European Note:Thedata,whichareinforeigncurrencyunitsperdollar,aredaily.Thelast observationfortheseriesisFebruary24,2012.Thebroadindexisaweighted Union–widestresstestinJuly,concernsaboutthe averageoftheforeignexchangevaluesoftheU.S.dollaragainstthecurrenciesof capitaladequacyof largeEuropeanbankspersisted. alargegroupofthemostimportantU.S.tradingpartners.Theindexweights, whichchangeovertime,arederivedfromU.S.exportsharesandfromU.S.and Partlyinresponsetotheseconcerns,theEBA foreignimportshares. announcedinOctoberthatbankswouldberequired Source:FederalReserveBoard,StatisticalReleaseH.10,“ForeignExchange toputinplaceatemporaryextraordinarycapital Rates.” bufferbyJune2012,boostingtheircoreTier1riskbasedcapitalratioto9percent.Asmarketsentiment Mostof theappreciationoccurredinSeptemberas aboutEuropeanbanksdeterioratedovertheperiod, marketparticipantsbecameincreasinglypessimistic theiraccesstounsecureddollarfundingdiminished, aboutthesituationinEurope.Safe-havenflows particularlyattenorsbeyondoneweek.(Seebox3.) buoyedtheyenandtheSwissfranc,andinresponse, Europeanbanksalsofacedpressureineurofunding theBankof JapanandtheSwissNationalBank markets.Asbanks’willingnesstolendexcessliquidseparatelyintervenedtocounterfurtherappreciation itytooneanotherdecreased,thecostof obtaining of theircurrencies. fundinginthemarketrose,andbanksreliedmore heavilyontheECBforfunding.Thefirstthree-year Onnetinthesecondhalf of theyear,government refinancingoperation,heldbytheECBonDecembondyieldsforCanada,Germany,andtheUnited ber21,ledtoasignificantinjectionof newliquidity, Kingdomfellover100basispointstorecordlows, andfundingconditionsinEuropeseemedtoimprove drivenbysafe-havenflowsaswellasadeteriorating graduallyintheweeksthatfollowed.Short-termeuro globaloutlook.Bycontrast,sovereignbondspreads interbankratesdeclined,euro-areashorter-duration forGreecerosesteeply,andSpanishandItaliansovsovereignbondyieldsfellsharply,andbothgovernereignspreadsoverGermanbundsalsoincreased. mentsandbankswereabletoraisefundsmoreeasily. Pricesof otherriskyassetswereveryvolatileoverthe periodasmarketparticipantsreactedtonewsabout thecrisis.(Seebox2.) TheFinancialAccount Financialflowsinthesecondhalf of 2011reflected AssovereignfundingpressuresspreadtoItalyand heightenedconcernsaboutriskandthepressuresin SpaininJulyandAugustandasconcernsalso currencymarketsresultingfromtheEuropeancrisis. mountedregardingU.S.fiscalpolicyandthedurabil- Basedondataforthethirdquarterandmonthly ityof theglobalrecovery,equitypricesinthe indicatorsforthefourthquarter(notshown),foreign advancedforeigneconomies(AFEs)generally privateinvestorsflockedtoU.S.Treasurysecurities plunged.Thoseequitymarketsremainedquitevola- asasafe-haveninvestmentwhilesellingU.S.corpotilebutlargelydepressedthroughearlyDecember, ratesecurities,especiallyinmonthswhenappetitefor whenmarketsentimentseemedtotakeamorecon- riskwasparticularlyweak.U.S.investorsalsopulled certedturnforthebetter.AlthoughmostAFEequity backfrominvestmentsinEurope,significantlyreduc-

30 98thAnnualReport|2011 Box 2. An Update on the European Fiscal Crisis TheEuropeanfiscalcrisisintensifiedinthesecond othereuro-areacountries,includingAustria,Belhalfof2011,asconcernsoverfiscalsustainability gium,andFrance. spreadtoadditionaleuro-areaeconomiesamid Europeanleadersrespondedtothesedevelopments weakeningeconomicgrowthprospectsandmissed withanumberofpolicymeasures.InJuly,amidthe fiscaltargets.Europeanfinancialinstitutionsalso growingrealizationthatGreecewouldneedfurther facedsharplyreducedaccesstofunds,giventheir financialassistance,EUandIMFofficials largeexposurestovulnerablesovereigns.In announcedplansforasecondrescuepackage, response,policymakerstookstepstoimprovefiscal includingacallforlimitedreductioninthevalueof balances,bolstertheregion’sfinancialbackstop, thedebtheldbyprivatecreditors.InFebruary2012, andaddressliquidityshortagesforbanks.OnbalinresponsetoGreece’sfalteringfiscalperformance ance,marketconditionshaveimprovedsomewhat andplungingoutput,theGreekgovernmentandits sinceDecember,butconcernsaboutapossible creditorsagreedonanenhancedrescuepackage, Greekdefaultandtheadequacyofthefinancial includingalargerreductioninprivatecreditors’ backstopforothervulnerableeconomieshavekept claims.TheGreekgovernmentanditscreditorsare yieldsonsovereigndebtelevatedandfundingfor nowworkingtoputinplacetheprivate-sectordebt Europeanfinancialinstitutionslimited. exchangeandthenewofficial-sectorsupportpro- Thecrisisbeganinsmallereuro-areacountrieswith grambeforealargedebtamortizationpayment highfiscaldeficitsordebtandvulnerablebanking comesdueinmid-March. systems.In2010andthefirsthalfof2011,govern- Inrecentmonths,Europeanauthoritieshavealso mentsinGreece,Ireland,andPortugalsuffered madeprogressonplanstoimprovefiscalgoverreducedaccesstomarketfundingandrequired nancewithintheregion.EUmembers(excludingthe financialassistancefromtheEuropeanUnion(EU) UnitedKingdomandCzechRepublic)haveagreed andtheInternationalMonetaryFund(IMF).Last onthetextofanewfiscalcompacttreatydesigned July,sovereignspreadsoverGermanbundsrose tostrengthenfiscalrules,surveillance,andenforcemarkedlyforItalyandSpain,aseconomicgrowth ment.Amongothermeasures,thistreatywillrequire disappointed,doubtsincreasedoverpoliticalcomcountriestolegislatenationalfiscalrules,which mitmenttofiscalconsolidation,andcallsforthe shouldgenerallylimitstructuralfiscaldeficitsto restructuringofGreeksovereigndebtrattledinvestor ½percentofgrossdomesticproduct.Thetreatyis confidence.Thedeteriorationoffinancialconditions expectedtobesignedinMarch,afterwhichnational ledtoheightenedpoliticaltensionsinvulnerable parliamentsmustratifyitandimplementtherequired economies,contributingtoleadershipchangesin legislation. Greece,Italy,andSpainlaterinthefall. Leadersalsotookanumberofstepstoincreasethe FinancialstressesspreadquicklytoEuropeanbanks sizeofthefinancialbackstopfortheeuroarea.The withlargeexposurestoItaly,Spain,andtheother flexibility,scope,andeffectivelendingcapacityof vulnerableeconomies,andaccesstofunding the€440billionEuropeanFinancialStabilityFacility becamelimitedforallbuttheshortestmaturitiesand (EFSF),designedtosupportvulnerablegovernstrongestinstitutions.Inturn,concernsoverthe ments,wereincreased.Authoritiesalsomovedup potentialfiscalburdensforgovernments,should theintroductionoftheEuropeanStabilityMechatheyneedtorecapitalizefinancialinstitutions, nism(ESM),apermanent€500billionlendingfacilcausedsovereignyieldstorisesharplyinthefallfor (continuedonnextpage) ingdepositswithEuropeanbanksandsellingsecuri- buildingreservebalancesinthefirsthalf of theyear tiesfromeuro-areacountries.Overall,U.S.purchases andcoveringpersistentdeclinesinU.S.funding of foreignsecuritiesedgeddowninthethirdquarter. sources.Incontrast,U.S.banks,subjecttoless-severe marketstress,sentfundsabroadtomeetstrongdol- Thelargepurchasesof Treasurysecuritiesdominated lardemand. totalprivatefinancialflowsinthethirdquarter,a patternthatlikelycontinuedinthefourthquarter. Inflowsfromforeignofficialinstitutionsslowednota- NetflowsbybankslocatedintheUnitedStateswere blyinthesecondhalf of 2011.Anumberof small,buttheseflowsmaskedlargeoffsettingmove- advancedcountriesacquiredsomeU.S.assets,seekmentsbyforeign-andU.S.-ownedbanks.U.S. ingtocounteractupwardpressureontheircurrencies branchesof Europeanbanksbroughtinsubstantial bypurchasingU.S.dollarsinforeignexchangemarfundsfromaffiliatesabroadoverthecourseof 2011, kets.However,inflowsfromofficialinstitutionsinthe

MonetaryPolicyandEconomicDevelopments 31 Box 2. An Update on the European Fiscal Crisis—continued ity,toJuly2012,aboutayearearlierthanoriginally lionoftheirbuffer.Theremainderofthebufferwill planned.ThisMarch,euro-arealeaderswillconsider begeneratedbymeasuresthatreducerisk-weighted liftingthe€500billionceilingonthecombinedlend- assets—primarilysellingassetsandswitchingfrom ingoftheEFSFandtheESM.Inaddition,European thestandardizedtotheadvancedapproachto officialscalledforanexpansionoftheIMF’slending measureriskweights.Thesemeasureswillbesubcapacityandpledgedajointcontributionof jecttosupervisoryagreement. €150billiontowardthatgoal.Finally,toimprovethe ToaddressspilloverstoU.S.dollarfundingmarkets functioningofsovereigndebtmarkets,theEuropean fromstressesinEurope,inlateNovembertheFed- CentralBank(ECB)resumedpurchasesofeuroeralReserve,theECB,andfourothermajorcentral areamarketabledebtinAugust,reportedlyincluding banksagreedtoreducethefeeondrawsontheir thedebtofItalyandSpain. dollarliquidityswaplinesandextendthedurationof Policymakersalsotookstepstosupportfinancial suchfacilities.InearlyDecember,theECB marketsandinstitutionsaffectedbythesovereign announcedareductioninitspolicyinterestrateand crisis.Toimprovetransparencyandbolstertheabil- itsreserverequirement,aneasingofrulesoncollatityofEuropeanbankstowithstandlossesonsover- eralforECBrefinancingoperations,andtheprovieignholdings,theEuropeanBankingAuthority sionofthree-yearrefinancingtobankstoimprove (EBA)conductedasecondstresstestoflargeEU theirfundingsituation.Banksborrowed€489billion financialinstitutions,theresultsofwhichwere atthenewfacilityinDecember,raisingthetotal releasedinmid-July,alongwithdetailedinformation amountofoutstandingECBrefinancingoperations aboutbanks’exposurestoborrowersinEUcoun- byroughly€200billion.Asecondthree-yearliquidtries.Marketconcernsaboutbankcapitalpersisted, ityoperationisscheduledfortheendofFebruary. however,andinOctober,theEBAannouncedthat Theimprovedavailabilityofdollarandeurofunds largebankswouldberequiredtobuildup“exceplateintheyear,againstthebackgroundoftheother tionalandtemporary”capitalbufferstomeetacore policiesbeingemployedtoaddressthecrisis, Tier1capitalratioof9percentandcoverthecostof appearstohavepartlyallayedmarketconcerns markingsovereignexposurestomarketbytheend aboutbanksaswellasgovernmentsinvulnerable ofJune2012.InDecember,theEBAdisclosedthat euro-areacountries.Overthepasttwomonths, theaggregaterequiredcapitalbufferforlargebanks wouldbe€115billionifrisk-weightedassetswereto Europeanbankshaveseenimprovementsintheir accesstofunding,andinvulnerableeconomies, remainatthelevelstheyhadreachedattheendof creditspreadsonthebanksandspreadsongovern- September2011.Thebankssubmittedtheircapital mentbondshavegenerallydeclined.Nevertheless, planstotheirnationalsupervisorsforapproval,and significantrisksremainasEuropeansstruggleto theEBAhasnowsummarizedtheseplans.ExcludimplementthenewGreekprogramanddebt ingtheGreekbanksandthreeotherinstitutionsthat exchange,meettargetsforbudgetsandbankcapiwillberecapitalizedseparatelybynationalauthorital,andexpandthefinancialbackstop.Overthelonties,theremaining62banksintendtocreatecapital buffersequivalentto€98billion,about25percent gerterm,theregionmustmeetthedifficultchallengesofachievingsustainedfiscalconsolidation, largerthantheirrequiredbuffers,andtheyplanto stimulatinggrowth,andimprovingcompetitiveness. usedirectcapitalmeasures(suchasretainingearnings,issuingnewshares,andconvertinghybrid instrumentstocommonequity)toachieve€75bil- EMEstrendeddownsignificantlyin2011,especially tothefourth-quarterGDPdeclineintheUnited inthethirdandfourthquarterswhenthestrengthof Kingdom.InJapan,economicactivityrebounded thedollarledtoreductionsintheirinterventionactivity. rapidlyfromthedisruptionsof theMarchearthquakeandtsunamibutdippedagaininthelastquar- AdvancedForeignEconomies terof 2011asexportsslumped.InCanada,elevated Theintensificationof theeuro-areasovereigndebt commoditypricesandaresilientlabormarkethave crisiswasaccompaniedbyawidespreadslowingof supportedeconomicactivity,buttheexportsectoris economicactivityintheAFEs.Intheeuroarea, showingsignsof weakening. financialtensionsincreaseddespitethevariousmeasuresannouncedbyEuropeanleaderstocombatthe Surveyindicatorssuggestthatconditionsimproved crisis.RealGDPcontractedintheeuroareaatthe somewhataroundtheturnof theyear,withwideendof lastyearaccordingtopreliminaryestimates, spreadupticksindifferentcountries’purchasing andspilloversfromtheeuroarealikelycontributed managersindexes.However,uncertaintyaboutthe

32 98thAnnualReport|2011 Box 3. U.S. Dollar Funding Pressures and Dollar Liquidity Swap Arrangements Astheeuro-areacrisisintensified,Europeanbanks Althoughtheeffectsofthesedollarfundingstrains facedgreaterdollarfundingpressures.ManyEuro- aredifficulttogauge,theyposesubstantialrisksfor peanbankswereespeciallyvulnerabletochanges theU.S.economy.LargeEuropeanbanksborrow ininvestorsentimentthroughtheirrelianceonshort- heavilyindollarspartlybecausetheyareactivein termdollar-denominatedfunding.Asmarketsenti- U.S.markets,purchasinggovernmentandcorporate mentdeteriorated,Europeanbanks’accessto securitiesaswellasmakingloanstoU.S.housemedium-andlong-termdollarfundingmarkets holdsandbusinesses.Apossibleresponsetodollar diminishedmarkedly,withmanyunabletoobtain fundingstrains,alongwithheightenedcapital unsecureddollarfundingatmaturitiesexceeding requirements,mightbeforEuropeanbankstosell oneweek.ThepullbackofU.S.moneymarketfunds theirdollarassetsorrefrainfromfurtherdollarlend- (MMFs)fromliabilitiesofeuro-areabanksbeginning ing,whichcouldinturnresultinareductionofthe inmid-2011wasanimportantpartoftherunoffof credittheysupplytoU.S.firmsandhouseholds short-termdollarfunds,althoughMMFswerenotthe whilealsoreducingcredittoEuropeanandotherforonlyinvestorstoreducetheirexposurestoEuro- eignfirmsinvolvedintradewiththeUnitedStates. peanbanks.Asaresult,manyEuropeanbanks Therefore,furtherstressesonEuropeanbanks facedhigherdollarfundingcosts.Forexample,the couldspillovertotheUnitedStatesbyweighingon costforeuro-areabankstoobtainthree-monthdol- businessandconsumeractivity,restrainingour larfundingthroughtheforeignexchange(FX)swap exports,andaddingtopressuresonU.S.financial marketroseasfinancialpressuresincreased.The marketsandinstitutions. costofdollarfundingthroughthismarket(theblack Toaddressstrainsindollarfundingmarkets,the lineinfigureA),asbanksborroweurosattheeuro FederalReserve,theEuropeanCentralBank(ECB), Londoninterbankofferedrate(LIBOR)andswap andthecentralbanksofCanada,Japan,SwitzerintodollarsintheFXswapmarket,rosefrom land,andtheUnitedKingdomannouncedanagree- 40basispointsearlylastsummertoabout mentonNovember30torevise,extend,and 200basispointsinlateNovember. expandtheU.S.dollarswaplines.Therevised agreementloweredthepriceofdollarfundingprovidedthroughtheswaps(theredlineinfigureA)to arateof50basispointsoverthedollarovernight FigureA.Costsofthree-monthdollarfundingthrough indexswaprate,areductionof50basispointsin theforeignexchangeswapmarket,thecentralbank therateatwhichtheforeigncentralbankshadbeen swapline,anddollarLIBOR,2011–12 providingdollarloanssinceMay2010. Basis points Thereductionindollarfundingcostsduetothe revisedpricingofthecentralbankswaplineshelped strengthentheliquiditypositionsofEuropeanand 200 otherforeignbanks,therebybenefitingtheUnited Statesbysupportingthecontinuedsupplyofcredit FX swap market toU.S.householdsandbusinesseswhilemitigating 160 otherchannelsofrisk.Drawsontheswaplines, especiallyfromtheECB,havebeensignificant.On 120 December7,atthefirstthree-monthdollartender underthenewpricingscheme,theECBallocated Central bank swap line 80 about$51billion,asubstantialincreaseoverpreviousoperations.AsofFebruary24,theECB,the BankofJapan,andtheSwissNationalBankhad 40 about$89billion,$18billion,and$0.5billionout- Dollar LIBOR standing,respectively,fromtheirdollarswapline allotments,foratotalofabout$108billion.Inan July Sept. Nov. Jan. indicationthattheswaplineshavebeeneffectiveat 2011 2012 reducingoveralldollarfundingpressure,thecostof Note:Thedataaredaily.ThelastobservationforeachseriesisFebru- obtainingdollarsintheFXswapmarkethas ary24,2012.Three-monthdollarfundingthroughtheforeignexchange(FX) droppedsubstantiallysinceNovember30.Dollar swapmarketassumesthatthebanksfirstpayeuroLIBOR(Londoninter- LIBOR,whichmeasuresdollarfundingcostsinthe bankofferedrate)toobtaineurofunding. interbankmarketforU.S.andforeigninstitutions, Source:Bloomberg. hasalsodeclinedoverthepasttwomonths. 49 444

MonetaryPolicyandEconomicDevelopments 33 resolutionof theeuro-areacrisiscontinuestoaffect cases—suchasBrazil,China,Indonesia,andThaiinvestors’sentiment,whiletradeandfinancialspill- land—toloosenmonetarypolicy. oversweighonactivityforallof theAFEs. InChina,realGDPgrowthsteppeddowntoan Twelve-monthheadlineinflationremainedelevatedin annualrateof about8percentinthefourthquarter. mostof theAFEsthroughtheendof 2011,largely Retailsalesandfixed-assetinvestmentsloweda reflectingtherun-upincommoditypricesearlierlast touchbutcontinuedtogrowbriskly,reflectingsolid yearand,insomecountries,currencydepreciation domesticdemand.Butnetexportsexertedasmall andincreasesintaxes.However,underlyinginflation dragongrowth,asweakexternaldemanddamped pressuresremainedcontainedand,inrecentmonths, exports.Twelve-monthheadlineinflationmoderated inflationrateshavebeguntoturndown,reflecting toabout4½percentinJanuary,asfoodprices weakereconomicactivityand,asintheUnited retreatedfromearliersharprises.Withgrowthslow- States,declinesincommoditypricessincelastspring. ingandinflationonthedecline,Chineseauthorities Aswithoutput,inflationperformancedifferssignifi- reversedthecourseof monetarypolicytowardeasing cantlyacrosscountries.Twelve-monthheadlineinfla- byloweringthereserverequirementforlargebanks tioncurrentlyrangesfrom3.6percentintheUnited 100basispointsto20.5percent.In2011,theChinese Kingdom,partlyduetohikesinutilityprices,to renminbiappreciated4½percentagainstthedollar slightlynegativeinJapan,wheredeflationresumed andabout6percentonarealtrade-weightedbasis; towardtheendof 2011asenergypriceinflation thelattermeasuregaugestherenminbi’svalue moderated. againstthecurrenciesof China’smajortradingpartnersandadjustsfordifferencesininflationrates. SeveralforeigncentralbanksintheAFEseasedmon- InMexico,economicactivityacceleratedinthesecetarypolicyinthesecondhalf of lastyear.TheECB ondandthirdquartersasdomesticdemand cutitspolicyrate50basispointsinthefourthquarexpandedrobustly.However,incomingindicators, ter,bringingthemainrefinancingratebackto1persuchastepidgrowthof exportstotheUnitedStates, cent,whereitwasatthebeginningof theyear.Atits pointtoaslowdowninthefourthquarter.Mexican Decembermeeting,theECBalsoexpandeditsproviconsumerpriceinflationrosesharplyinthesecond sionof liquiditytothebankingsectorbyintroducing half of theyear,drivenlargelybyrisingfoodprices twothree-yearlonger-termrefinancingoperations, andtheremovalof electricalenergysubsidies.InBrareducingitsreserveratiorequirementfrom2percent zil,incontrasttomostEMEs,GDPcontracted to1percent,andeasingitscollateralrequirements. slightlyinthethirdquarter,butincomingindicators TheBankof EnglandhasheldtheBankRateat pointtoareturntogrowthinthefourthquarter, 0.5percentbutannounceda£75billionexpansionof partlyasaresultof severalroundsof monetary itsassetpurchasefacilityinOctoberandafurther policyeasingthatbeganinAugust.Asthedirection £50billionincreaseinFebruarythatwillbringtotal of capitalflowsturnedtoanetoutflow,Brazilian assetholdingsto£325billionuponitscompletionin authoritiesloosenedcapitalcontrolsthathadbeen May2012.TheBankof Japanalsoexpandeditsasset introducedearlierinthefaceof massiveinflowsand purchaseprogram,raisingitfrom¥15trillionto¥20trilassociatedfearsof overheating. lioninOctoberandthento¥30trillioninFebruary. Part 3 EmergingMarketEconomies Monetary Policy: ManyEMEsexperiencedaslowdownineconomic Recent Developments and Outlook growthinthethirdquarterof lastyearrelativetothe paceseeninthefirsthalf.Bothearlierpolicytighten- MonetaryPolicyovertheSecondHalf ing,undertakenamidconcernsaboutoverheating, of2011andEarly2012 andweakeningexternaldemandweighedongrowth. TopromotetheFederalOpenMarketCommittee’s However,third-quartergrowthinChinaandMexico (FOMC)objectivesof maximumemploymentand remainedstrong,supportedbyrobustdomestic pricestability,theCommitteemaintainedatarget demand.Recentdataindicatethattheslowdownconrangeforthefederalfundsrateof 0to¼percent tinuedandbroadenedinthefourthquarter,asthe throughoutthesecondhalf of 2011andinto2012. financialcrisisinEuropesoftenedexternaldemand Withtheincomingdatasuggestingasomewhat andthefloodsinThailandimpededsupplychains.In slowerpaceof economicrecoverythantheCommitthesecondhalf of lastyear,concernsaboutthe teehadanticipated,andwithinflationseenassetglobaleconomypromptedEMEauthoritieseitherto tlingatlevelsatorbelowthoseconsistentwithits putmonetarypolicytighteningonholdor,inseveral statutorymandate,theCommitteetookstepsduring

34 98thAnnualReport|2011 thesecondhalf of 2011andinearly2012toprovide conditions,slowerhouseholdspending,adropin additionalmonetaryaccommodationinordertosup- consumerandbusinessconfidence,andcontinued portastrongereconomicrecoveryandtohelpensure weaknessinthehousingsector.Inflation,whichhad thatinflation,overtime,runsatlevelsconsistentwith pickedupearlierintheyearasaresultof higher itsmandate.Thesestepsincludedstrengtheningits pricesforsomecommoditiesandimportedgoodsas forwardrateguidanceregardingtheCommittee’s wellassupplychaindisruptionsresultingfromthe expectationsfortheperiodoverwhicheconomiccon- naturaldisasterinJapan,moderatedmorerecentlyas ditionswillwarrantexceptionallylowlevelsforthe pricesof energyandsomecommoditiesfellback federalfundsrate,increasingtheaveragematurityof fromtheirearlierpeaks.Longer-terminflationexpectheFederalReserve’ssecuritiesholdingsthrougha tationsremainedstable.U.S.financialmarketswere programof purchasesandsales,andreinvestingprin- stronglyinfluencedbydevelopmentsregardingthe cipalpaymentsonagencysecuritiesinagency- fiscalsituationsintheUnitedStatesandinEurope guaranteedmortgage-backedsecurities(MBS)rather andbygenerallyweaker-than-expectedreadingson thanTreasurysecurities. economicactivity,asforeigneconomicgrowth appearedtohaveslowedsignificantly.Yieldson OnAugust1,theCommitteemetbyvideoconference nominalTreasurysecuritiesfellnotably,onnet,while todiscussissuesassociatedwithcontingenciesinthe yieldsonbothinvestment-andspeculative-gradecoreventthattheTreasurywastemporarilyunableto poratebondsfellalittlelessthanthoseon meetitsobligationsbecausethestatutoryfederal comparable-maturityTreasurysecurities,leavingrisk debtlimitwasnotraisedorintheeventof adown- spreadswider.BroadU.S.stockpriceindexes gradeof theU.S.sovereigncreditrating.Participants declinedsignificantly. generallyanticipatedthattherewouldbenoneedto makechangestoexistingbankregulations,theopera- Mostmembersagreedthattheeconomicoutlook tionof thediscountwindow,ortheconductof open haddeterioratedbyenoughtowarrantaCommittee marketoperations.20Withrespecttopotentialpolicy responseattheAugustmeeting.Thoseviewinga actions,participantsagreedthattheappropriate shifttowardmoreaccommodativepolicyasapproresponsewoulddependimportantlyontheactual priategenerallyagreedthatastrengtheningof the conditionsinmarketsandshouldgenerallyconsistof Committee’sforwardguidanceregardingthefederal standardoperations. fundsrate,bybeingmoreexplicitabouttheperiod overwhichtheCommitteeexpectedthefederalfunds Theinformationreviewedattheregularlyscheduled ratetoremainexceptionallylow,wouldbeameas- FOMCmeetingonAugust9indicatedthatthepace uredresponsetothedeteriorationintheoutlook of theeconomicrecoveryhadremainedslowin overtheintermeetingperiod.TheCommitteeagreed recentmonthsandthatlabormarketconditionscon- tokeepthetargetrangeforthefederalfundsrateat tinuedtobeweak.Inaddition,reviseddatafor2008 0to¼percentandtostatethateconomiccondithrough2010fromtheBureauof EconomicAnalysis tions—includinglowratesof resourceutilizationand indicatedthattherecentrecessionhadbeendeeper asubduedoutlookforinflationoverthemedium thanpreviouslythoughtandthatthelevelof real run—arelikelytowarrantexceptionallylowlevelsfor grossdomesticproduct(GDP)hadnotyetregained thefederalfundsrateatleastthroughmid-2013.That itspre-recessionpeakbythesecondquarterof 2011. anticipatedpathforthefederalfundsratewasviewed Moreover,downwardrevisionstofirst-quarterGDP asappropriateinlightof mostmembers’outlookfor growthandtheslowgrowthreportedforthesecond theeconomy. quarterindicatedthattherecoveryhadbeenquite sluggishinthefirsthalf of 2011.Privatenonfarm ThedatainhandattheSeptember20–21FOMC payrollemploymentroseataconsiderablyslower meetingindicatedthateconomicactivitycontinued paceinJuneandJulythanearlierintheyear,and toexpandataslowpaceandthatlabormarketconparticipantsnotedadeteriorationinlabormarket ditionsremainedweak.Consumerpriceinflation appearedtohavemoderatedsinceearlierintheyear aspricesof energyandsomecommoditiesdeclined 20 MembersoftheFOMCconsistofthemembersoftheBoardof fromtheirpeaks,butithadnotyetcomedownas GovernorsoftheFederalReserveSystemplusthepresidentof theFederalReserveBankofNewYorkand4oftheremaining muchasparticipantshadexpectedatpreviousmeet- 11ReserveBankpresidents,whoserveone-yeartermsona ings.IndustrialproductionexpandedinJulyand rotatingbasis.ParticipantsatFOMCmeetingsconsistofthe August,realbusinessspendingonequipmentand membersoftheBoardofGovernorsoftheFederalReserve Systemandall12ReserveBankpresidents. softwareappearedtoexpandfurther,andrealcon-

MonetaryPolicyandEconomicDevelopments 35 sumerspendingpostedasolidgaininJuly.However, ditionsmoreaccommodative.Inaddition,tohelp privatenonfarmemploymentroseonlyslightlyin supportconditionsinmortgagemarkets,theCom- August,andtheunemploymentrateremainedhigh. mitteedecidedtoreinvestprincipalreceivedfromits Consumersentimentdeterioratedsignificantlyfur- holdingsof agencydebtandagencyMBSinagency therinAugustandstayeddownbeatinearlySeptem- MBSratherthancontinuingtoreinvestthosefunds ber.Activityinthehousingsectorcontinuedtobe inlonger-termTreasurysecuritiesashadbeenthe depressedbyweakdemand,uncertaintyaboutfuture Committee’spracticesincetheAugust2010FOMC homeprices,tightcreditconditionsformortgages meeting.Atthesametime,theCommitteedecidedto andconstructionloans,andasubstantialinventory maintainitsexistingpolicyof rollingovermaturing of foreclosedanddistressedproperties.Financial Treasurysecuritiesatauction.Initsstatement,the marketswerevolatileovertheintermeetingperiodas Committeenotedthatitwouldcontinuetoregularly investorsrespondedtosomewhatdisappointingnews, reviewthesizeandcompositionof itssecuritiesholdonbalance,regardingeconomicactivityintheUnited ingsandthatitwaspreparedtoadjustthoseholdings Statesandabroad.Weakeconomicdatacontributed asappropriate.TheCommitteealsodecidedtokeep torisingexpectationsamongmarketparticipantsof thetargetrangeforthefederalfundsrateat0to additionalmonetaryaccommodation;thoseexpecta- ¼percentandtoreaffirmitsanticipationthatecotionsandincreasingconcernsaboutthefinancial nomicconditionswerelikelytowarrantexceptionally situationinEuropeledtoanappreciabledeclinein lowlevelsforthefederalfundsrateatleastthrough intermediate-andlonger-termnominalTreasury mid-2013. yields.Fluctuationsininvestors’levelof concern aboutEuropeanfiscalandfinancialprospectsalso TheinformationreviewedattheNovember1–2meetcontributedtomarketvolatility,particularlyinequity ingindicatedthatthepaceof economicactivity markets,andspreadsof yieldsoninvestment-and strengthenedsomewhatinthethirdquarter,reflectspeculative-gradecorporatebondsoverthoseon inginpartareversalof thetemporaryfactorsthat comparable-maturityTreasurysecuritiesrosesignifi- weighedoneconomicgrowthinthefirsthalf of the cantlyovertheintermeetingperiod,reachinglevels year.Globalsupplychaindisruptionsassociatedwith lastregisteredinlate2009. thenaturaldisasterinJapanhaddiminished,andthe pricesof energyandsomecommoditieshadcome Inthediscussionof monetarypolicy,mostmembers downfromtheirrecentpeaks,easingstrainson agreedthattheoutlookhaddeterioratedsomewhat, householdbudgetsandlikelycontributingtoasomeandthatthereweresignificantdownsideriskstothe whatstrongerpaceof consumerspendinginrecent economicoutlook,includingstrainsinglobalfinan- months.Realequipmentandsoftwareinvestment cialmarkets.Asaresult,theCommitteedecidedthat expandedappreciably,andrealpersonalconsumpprovidingadditionalmonetaryaccommodation tionexpenditures(PCE)rosemoderatelyinthethird wouldbeappropriatetosupportastrongerrecovery quarter.However,realdisposableincomedeclinedin andtohelpensurethatinflation,overtime,wasata thethirdquarterandconsumersentimentcontinued levelconsistentwiththeCommittee’sdualmandate. tobedownbeatinOctober.Inaddition,labormarket Thoseviewinggreaterpolicyaccommodationas conditionsremainedweakasthepaceof privateappropriateatthismeetinggenerallysupporteda sectorjobgainsinthethirdquarterasawholewas maturityextensionprogramthatwouldcombine lessthanitwasinthefirsthalf of theyear.Overall assetpurchasesandsalestoextendtheaveragematu- consumerpriceinflationwasmoremoderatethan rityof securitiesheldintheSystemOpenMarket earlierintheyear,aspricesof energyandsomecom- Accountwithoutgeneratingasubstantialexpansion moditiesdeclinedfromtheirrecentpeaks,andmeasof theFederalReserve’sbalancesheetorreservebal- uresof longer-runinflationexpectationsremained ances.Specifically,thosememberssupportedapro- stable.Financialmarketswerequitevolatileand gramunderwhichtheCommitteewouldannounce investorsentimentwasstronglyinfluencedbyprositsintentiontopurchase,bytheendof June2012, pectsforEurope,asmarketparticipantsremained $400billionof Treasurysecuritieswithremaining highlyattunedtodevelopmentsregardingpossible maturitiesof 6yearsto30yearsandtosellanequal stepstocontainthefiscalandbankingproblems amountof Treasurysecuritieswithremaining there.Longer-termTreasuryyieldsdeclinedappreciamaturitiesof 3yearsorless.Theyexpectedthispro- bly,onnet,overtheperiod,andyieldsoninvestmentgramtoputdownwardpressureonlonger-term andspeculative-gradecorporatebondsmovedlower, interestratesandtohelpmakebroaderfinancialcon- leavingtheirspreadstoTreasurysecuritiesslightly

36 98thAnnualReport|2011 narrower.Althoughequitymarketswerevolatile, financialmarketsandtherebytomitigatetheeffects broadU.S.equitypriceindexesendedtheintermeet- of suchstrainsonthesupplyof credittoU.S.houseingperiodlittlechanged. holdsandbusinesses,thussupportingtheeconomic recovery.Mostparticipantsagreedthattheproposed MostFOMCmembersanticipatedthatthepaceof changestotheswaparrangementswouldrepresent economicgrowthwouldremainmoderateovercom- animportantdemonstrationof thecommitmentof ingquarters,withunemploymentdecliningonly theFederalReserveandtheothercentralbanksto graduallyandinflationsettlingatorbelowlevelscon- worktogethertosupporttheglobalfinancialsystem. sistentwiththedualmandate.Moreover,therecovery Attheconclusionof thediscussion,almostallmemwasstillseenassubjecttosignificantdownsiderisks, bersagreedtosupportthechangestotheexisting includingstrainsinglobalfinancialmarkets.Accord- swaplinearrangementsandtheestablishmentof the ingly,inthediscussionof monetarypolicy,allCom- newforeigncurrencyswapagreements. mitteemembersagreedtocontinuetheprogramof extendingtheaveragematurityof theFederal Asof theDecember13FOMCmeeting,thedata Reserve’sholdingsof securitiesasannouncedinSep- indicatedthatU.S.economicactivityhadexpanded tember.TheCommitteedecidedtomaintainitsexist- moderatelydespitesomeapparentslowinginthe ingpolicyof reinvestingprincipalpaymentsfromits growthof foreigneconomiesandstrainsinglobal holdingsof agencydebtandagencyMBSinagency financialmarkets.Conditionsinthelabormarket MBSandof rollingovermaturingTreasurysecurities seemedtohaveimprovedsomewhat,astheunematauction.Inaddition,theCommitteeagreedto ploymentratedroppedinNovemberandprivate keepthetargetrangeforthefederalfundsrateat0to nonfarmemploymentcontinuedtoincreasemoder- ¼percentandtoreiterateitsexpectationthateco- ately.InOctober,industrialproductionrose,and nomicconditionswerelikelytowarrantexceptionally overallrealPCEgrewmodestlyfollowingsignificant lowlevelsforthefederalfundsrateatleastthrough gainsinthepreviousmonth.However,revisedestimid-2013. matesindicatedthathouseholds’realdisposable incomedeclinedinthesecondandthirdquarters,the Oversubsequentweeks,financialmarketsappeared netwealthof householdsdecreased,andconsumer tobecomeincreasinglyconcernedthatatimelyreso- sentimentwasstillatasubduedlevelinearlyDecemlutionof theEuropeansovereigndebtsituation ber.Activityinthehousingmarketremained mightnotoccurdespitethemeasuresthatauthorities depressedbythesubstantialinventoryof foreclosed thereannouncedinOctober;pressuresonEuropean anddistressedpropertiesandbyweakdemandthat sovereigndebtmarketsincreased,andconditionsin reflectedtightcreditconditionsformortgageloans Europeanfundingmarketsdeterioratedappreciably. anduncertaintyaboutfuturehomeprices.Overall Thegreaterfinancialstressappearedlikelytodamp consumerpriceinflationcontinuedtobemoremodeconomicactivityintheeuroareaandpotentiallyto estthanearlierintheyear,andmeasuresof long-run posearisktotheeconomicrecoveryintheUnited inflationexpectationshadbeenstable.Therisksasso- States. ciatedwiththefiscalandfinancialdifficultiesin Europeremainedthefocusof attentioninfinancial OnNovember28,theCommitteemetbyvideocon- marketsovertheintermeetingperiodandcontribferencetodiscussaproposaltoamendandaugment utedtoheightenedvolatilityinawiderangeof asset theFederalReserve’stemporaryliquidityswap markets.However,stockpricesandlonger-term arrangementswithforeigncentralbanksinlightof interestrateshadchangedlittle,onbalance,sincethe theincreasedstrainsinglobalfinancialmarkets.The Novembermeeting. proposalincludedasix-monthextensionof thesunsetdateanda50basispointreductioninthepricing MembersviewedtheinformationonU.S.economic ontheexistingdollarliquidityswaparrangements activityreceivedovertheintermeetingperiodassugwiththeBankof Canada,theBankof England,the gestingthattheeconomywouldcontinuetoexpand Bankof Japan,theEuropeanCentralBank(ECB), moderately.StrainsinglobalfinancialmarketsconandtheSwissNationalBank.Inaddition,thepro- tinuedtoposesignificantdownsideriskstoeconomic posalincludedtheestablishment,asacontingency activity.Membersalsoanticipatedthatinflation measure,of swaparrangementsthatwouldallowthe wouldsettle,overcomingquarters,atlevelsator FederalReservetoprovideliquiditytoU.S.institu- belowthoseconsistentwiththeCommittee’sdual tionsinforeigncurrenciesshouldtheneedarise.The mandate.Inthediscussionof monetarypolicyfor proposalwasaimedathelpingtoeasestrainsin theperiodimmediatelyahead,Committeemembers

MonetaryPolicyandEconomicDevelopments 37 generallyagreedthattheiroverallassessmentsof the tee’sdualmandate.Againstthisbackdrop,members economicoutlookhadnotchangedgreatlysince agreedthatitwouldbeappropriatetomaintainthe theirpreviousmeeting.Asaresult,theCommittee existinghighlyaccommodativestanceof monetary decidedtocontinuetheprogramof extendingthe policy.Theyagreedtokeepthetargetrangeforthe averagematurityof theFederalReserve’sholdingsof federalfundsrateat0to¼percent,tocontinuethe securitiesasannouncedinSeptember,toretainthe programof extendingtheaveragematurityof the existingpoliciesregardingthereinvestmentof princi- FederalReserve’sholdingsof securitiesas palpaymentsfromFederalReserveholdingsof secu- announcedinSeptember,andtoretaintheexisting rities,andtokeepthetargetrangeforthefederal policiesregardingthereinvestmentof principalpayfundsrateat0to¼percent.Whileseveralmembers mentsfromFederalReserveholdingsof securities.In notedthatthereferencetomid-2013intheforward lightof theeconomicoutlook,mostmembersalso rateguidancemightneedtobeadjustedbeforelong, agreedtoindicatethattheCommitteeexpectsto andanumberof themlookedforwardtoconsidering maintainahighlyaccommodativestanceformonpossibleenhancementstotheCommittee’scommuni- etarypolicyandanticipatesthateconomicconditions cations,theCommitteeagreedtoreiterateitsantici- arelikelytowarrantexceptionallylowlevelsforthe pationthateconomicconditionswerelikelytowar- federalfundsrateatleastthroughlate2014,longer rantexceptionallylowlevelsforthefederalfundsrate thanhadbeenindicatedinrecentFOMCstatements. atleastthroughmid-2013. TheCommitteealsostatedthatitispreparedto adjustthesizeandcompositionof itssecuritieshold- TheinformationreviewedattheJanuary24–25meet- ingsasappropriatetopromoteastrongereconomic ingindicatedthatU.S.economicactivitycontinued recoveryinacontextof pricestability. toexpandmoderately,whileglobalgrowthappeared tobeslowing.Labormarketindicatorspointedto FOMCCommunications somefurtherimprovementinlabormarketcondi- Transparencyisanessentialprincipleof moderncentions,butprogresswasgradualandtheunemploy- tralbankingbecauseitappropriatelycontributesto mentrateremainedelevated.Householdspending theaccountabilityof centralbankstothegovernhadcontinuedtoadvanceatamoderatepacedespite mentandtothepublicandbecauseitcanenhance diminishedgrowthinrealdisposableincome,but theeffectivenessof centralbanksinachievingtheir growthinbusinessfixedinvestmenthadslowed.The macroeconomicobjectives.Tothisend,theFederal housingsectorremaineddepressed.Inflationhad Reserveprovidestothepublicaconsiderableamount beensubduedinrecentmonths,therewaslittleevi- of informationconcerningtheconductof monetary denceof wageorcostpressures,andlonger-term policy.Immediatelyfollowingeachmeetingof the inflationexpectationshadremainedstable.Meeting FOMC,theCommitteereleasesastatementthatlays participantsobservedthatfinancialconditionshad outtherationaleforitspolicydecision,anddetailed improvedandfinancialmarketstresseshadeased minutesof eachFOMCmeetingaremadepublic somewhatduringtheintermeetingperiod:Equity threeweeksfollowingthemeeting.Lightlyedited priceswerehigher,volatilityhaddeclined,andbank transcriptsof FOMCmeetingsarereleasedtothe lendingconditionsappearedtobeimproving.Partici- publicwithafive-yearlag.21Moreover,sincelast pantsnotedthattheECB’sthree-yearrefinancing April,theChairmanhasheldpressconferencesafter operationhadapparentlyresultedinimprovedcondi- regularlyscheduledtwo-dayFOMCmeetings.Atthe tionsinEuropeansovereigndebtmarkets.Nonethe- pressconferences,theChairmanpresentsthecurrent less,participantsexpectedthatglobalfinancialmar- economicprojectionsof FOMCparticipantsand ketswouldremainfocusedontheevolvingsituation providesadditionalcontextforitspolicydecisions. inEuropeandtheyanticipatedthatfurtherpolicy effortswouldberequiredtofullyaddressthefiscal TheCommitteecontinuedtoconsideradditional andfinancialproblemsthere. improvementsinitscommunicationsapproachinthe secondhalf of 2011andthefirstpartof 2012.Ina Withtheeconomyfacingcontinuingheadwindsand discussiononexternalcommunicationsattheSepgrowthslowinginanumberof U.S.exportmarkets, tember20–21FOMCmeeting,mostparticipants membersgenerallyexpectedamodestpaceof eco- indicatedthattheyfavoredtakingstepstoincrease nomicgrowthovercomingquarters,withtheunemploymentratedecliningonlygradually.Atthesame 21 FOMCstatements,minutes,andtranscripts,aswellasother relatedinformation,areavailableontheFederalReserve time,membersthoughtthatinflationwouldrunat Board’swebsiteatwww.federalreserve.gov/monetarypolicy/ levelsatorbelowthoseconsistentwiththeCommit- fomc.htm.

38 98thAnnualReport|2011 furtherthetransparencyof monetarypolicy,includ- aboutparticipants’assessmentsof appropriatemoningprovidingmoreinformationabouttheCommit- etarypolicyintotheSEP.22 tee’slonger-runpolicyobjectivesandthefactorsthat influencetheCommittee’spolicydecisions.Partici- AttheDecember13FOMCmeeting,participants pantsgenerallyagreedthataclearstatementof the furtherconsideredwaysinwhichtheCommittee Committee’slonger-runpolicyobjectivescouldbe mightenhancetheclarityandtransparencyof its helpful;somenotedthatitwouldalsobeusefulto publiccommunications.Thesubcommitteeoncomclarifythelinkagebetweentheselonger-runobjec- municationsrecommendedanapproachforincorpotivesandtheCommittee’sapproachtosettingthe ratinginformationaboutparticipants’projectionsof stanceof monetarypolicyintheshortandmedium appropriatefuturemonetarypolicyintotheSEP, runs.ParticipantsgenerallysawtheCommittee’s whichtheFOMCreleasesfourtimeseachyear.In postmeetingstatementsasnotwellsuitedtocommu- theSEP,participants’projectionsforeconomic nicatefullytheCommittee’sthinkingaboutitsobjec- growth,unemployment,andinflationareconditivesanditspolicyframework,andtheyagreedthat tionedontheirindividualassessmentsof thepathof theCommitteewouldneedtouseothermeansto monetarypolicythatismostlikelytobeconsistent communicatethatinformationortosupplement withtheFederalReserve’sstatutorymandatetoproinformationinthestatement.Anumberof partici- motemaximumemploymentandpricestability,but pantssuggestedthattheCommittee’speriodicSum- informationaboutthoseassessmentshasnotbeen maryof EconomicProjections(SEP)couldbeused includedintheSEP.Mostparticipantsagreedthat toprovidemoreinformationabouttheirviewsonthe addingtheirprojectionsof thetargetfederalfunds longer-runobjectivesandthelikelyevolutionof ratetotheeconomicprojectionsalreadyprovidedin monetarypolicy. theSEPwouldhelpthepublicbetterunderstandthe Committee’smonetarypolicydecisionsandtheways AttheNovember1–2FOMCmeeting,participants inwhichthosedecisionsdependonmembers’assessdiscussedalternativemonetarypolicystrategiesand mentsof economicandfinancialconditions.Atthe potentialapproachesforenhancingtheclarityof conclusionof thediscussion,participantsdecidedto theirpubliccommunications,thoughnodecisionwas incorporateinformationabouttheirprojectionsof madeatthatmeetingtochangetheCommittee’s appropriatemonetarypolicyintotheSEPbeginning policystrategyorcommunications.Itwasnotedthat inJanuary. manycentralbanksaroundtheworldpursuean explicitinflationobjective,maintaintheflexibilityto FollowingupontheCommittee’sdiscussionof stabilizeeconomicactivity,andseektocommunicate policyframeworksatitsNovembermeeting,thesubtheirforecastsandpolicyplansasclearlyaspossible. committeeoncommunicationspresentedadraft Manyparticipantspointedtothemeritsof specifying statementof theCommittee’slonger-rungoalsand anexplicitlonger-runinflationgoal,butitwasnoted policystrategy.Participantsgenerallyagreedthat thatsuchastepcouldbemisperceivedasplacing issuingsuchastatementcouldbehelpfulinenhancgreaterweightonpricestabilitythanonmaximum ingthetransparencyandaccountabilityof monetary employment;consequently,somesuggestedthata policyandinfacilitatingwell-informeddecisionmaknumericalinflationgoalwouldneedtobesetforth ingbyhouseholdsandbusinesses,andthusin withinacontextthatclearlyunderscoredtheCom- enhancingtheCommittee’sabilitytopromotethe mittee’scommitmenttofosteringbothpartsof its goalsspecifiedinitsstatutorymandateinthefaceof dualmandate.Mostof participantsagreedthatit significanteconomicdisturbances.However,acouple couldbebeneficialtoformulateandpublishastate- of participantsexpressedtheconcernthatastatementthatwouldelucidatetheCommittee’spolicy mentthatwassufficientlynuancedtocapturethe approach,andparticipantsgenerallyexpressedinter- diversityof viewsontheCommitteemightnot,in estinprovidingadditionalinformationtothepublic fact,enhancepublicunderstandingof theCommitaboutthelikelyfuturepathof thetargetfederal tee’sactionsandintentions.Participantscommented fundsrate.TheChairmanaskedthesubcommittee onthedraftstatement,andtheChairmanencouroncommunications,headedbyGovernorYellen,to agedthesubcommitteetomakeadjustmentstothe giveconsiderationtoapossiblestatementof the Committee’slonger-rungoalsandpolicystrategy, 22 ThesubcommitteeoncommunicationsischairedbyGovernor andhealsoencouragedthesubcommitteetoexplore YellenandincludesGovernorRaskinandPresidentsEvansand potentialapproachesforincorporatinginformation Plosser.

MonetaryPolicyandEconomicDevelopments 39 Box 4. FOMC Statement Regarding Longer-Run Goals and Monetary Policy Strategy Followingcarefuldeliberationsatitsrecentmeetings, therebyfosteringpricestabilityandmoderatelongtheFederalOpenMarketCommittee(FOMC)has terminterestratesandenhancingtheCommittee’s reachedbroadagreementonthefollowingprinciples abilitytopromotemaximumemploymentintheface regardingitslonger-rungoalsandmonetarypolicy ofsignificanteconomicdisturbances. strategy.TheCommitteeintendstoreaffirmthese Themaximumlevelofemploymentislargelydeterprinciplesandtomakeadjustmentsasappropriateat minedbynonmonetaryfactorsthataffectthestrucitsannualorganizationalmeetingeachJanuary. tureanddynamicsofthelabormarket.Thesefactors TheFOMCisfirmlycommittedtofulfillingitsstatu- maychangeovertimeandmaynotbedirectlymeatorymandatefromtheCongressofpromotingmaxi- surable.Consequently,itwouldnotbeappropriateto mumemployment,stableprices,andmoderatelong- specifyafixedgoalforemployment;rather,theComterminterestrates.TheCommitteeseekstoexplain mittee’spolicydecisionsmustbeinformedby itsmonetarypolicydecisionstothepublicasclearly assessmentsofthemaximumlevelofemployment, aspossible.Suchclarityfacilitateswell-informed recognizingthatsuchassessmentsarenecessarily decisionmakingbyhouseholdsandbusinesses, uncertainandsubjecttorevision.TheCommittee reduceseconomicandfinancialuncertainty, considersawiderangeofindicatorsinmakingthese increasestheeffectivenessofmonetarypolicy,and assessments.InformationaboutCommitteeparticienhancestransparencyandaccountability,whichare pants’estimatesofthelonger-runnormalratesof essentialinademocraticsociety. outputgrowthandunemploymentispublishedfour timesperyearintheFOMC’sSummaryofEconomic Inflation,employment,andlong-terminterestrates Projections.Forexample,inthemostrecentprojecfluctuateovertimeinresponsetoeconomicand tions,FOMCparticipants’estimatesofthelonger-run financialdisturbances.Moreover,monetarypolicy normalrateofunemploymenthadacentraltendency actionstendtoinfluenceeconomicactivityand of5.2percentto6.0percent,roughlyunchanged priceswithalag.Therefore,theCommittee’spolicy fromlastJanuarybutsubstantiallyhigherthanthe decisionsreflectitslonger-rungoals,itsmediumcorrespondingintervalseveralyearsearlier. termoutlook,anditsassessmentsofthebalanceof risks,includingriskstothefinancialsystemthat Insettingmonetarypolicy,theCommitteeseeksto couldimpedetheattainmentoftheCommittee’s mitigatedeviationsofinflationfromitslonger-run goals. goalanddeviationsofemploymentfromtheCommittee’sassessmentsofitsmaximumlevel.These Theinflationrateoverthelongerrunisprimarily objectivesaregenerallycomplementary.However, determinedbymonetarypolicy,andhencetheComundercircumstancesinwhichtheCommitteejudges mitteehastheabilitytospecifyalonger-rungoalfor thattheobjectivesarenotcomplementary,itfollows inflation.TheCommitteejudgesthatinflationatthe abalancedapproachinpromotingthem,takinginto rateof2percent,asmeasuredbytheannualchange accountthemagnitudeofthedeviationsandthe inthepriceindexforpersonalconsumptionexpendipotentiallydifferenttimehorizonsoverwhichemploytures,ismostconsistentoverthelongerrunwiththe mentandinflationareprojectedtoreturntolevels FederalReserve’sstatutorymandate.Communicatjudgedconsistentwithitsmandate. ingthisinflationgoalclearlytothepublichelpskeep longer-terminflationexpectationsfirmlyanchored, draftandtopresentarevisedversionfortheCom- Inaddition,inlightof thedecisionmadeatthe mittee’sfurtherconsiderationinJanuary. Decembermeeting,theCommitteeprovidedinthe JanuarySEPinformationabouteachparticipant’s AttheJanuary24–25meeting,thesubcommitteeon assessmentsof appropriatemonetarypolicy.Specificommunicationspresentedareviseddraftof astate- cally,theSEPincludedinformationaboutparticimentof principlesregardingtheFOMC’slonger-run pants’estimatesof theappropriatelevelof thetarget goalsandmonetarypolicystrategy.Almostallpar- federalfundsrateinthefourthquarterof thecurrent ticipantssupportedadoptingandreleasingthe yearandthenextfewcalendaryears,andoverthe revisedstatement(seebox4).Itwasnotedthatthe longerrun;theSEPalsoreportedparticipants’curproposedstatementdidnotrepresentachangeinthe rentprojectionsof thelikelytimingof theappropri- Committee’spolicyapproach.Instead,thestatement atefirstincreaseinthetargetrategiventheirprojecwasintendedtohelpenhancethetransparency, tionsof futureeconomicconditions.Theaccompaaccountability,andeffectivenessof monetarypolicy. nyingnarrativedescribedthekeyfactorsunderlying

40 98thAnnualReport|2011 thoseassessmentsandprovidedsomequalitative thattheycurrentlyviewasconsistentwiththe informationregardingparticipants’expectationsfor FOMC’sstatutorymandateforpromotingmaximum theFederalReserve’sbalancesheet.Anumberof employmentandpricestability.Participantsviewed participantssuggestedfurtherpossibleenhancements theupwardpressuresoninflationin2011fromfactotheSEP;theChairmanaskedthesubcommitteeto torssuchassupplychaindisruptionsandrisingcomexploresuchenhancementsovercomingmonths. moditypricesashavingwaned,andtheyanticipated thatinflationwouldfallbackin2012.Overthepro- Part 4 jectionperiod,mostparticipantsexpectedinflation, Summary of Economic Projections asmeasuredbytheannualchangeinthepriceindex forpersonalconsumptionexpenditures(PCE),tobe Thefollowingmaterialappearedasanaddendumto atorbelowtheFOMC’sobjectiveof 2percentthat theminutesof theJanuary24–25,2012,meetingof wasexpressedintheCommittee’sstatementof theFederalOpenMarketCommittee. longer-rungoalsandpolicystrategy.Coreinflation wasprojectedtorunataboutthesamerateasoverall InconjunctionwiththeJanuary24–25,2012,Federal inflation. OpenMarketCommittee(FOMC)meeting,the membersof theBoardof Governorsandthepresi- Asindicatedintable1,relativetotheirpreviousprodentsof theFederalReserveBanks,allof whompar- jectionsinNovember2011,participantsmadesmall ticipateinthedeliberationsof theFOMC,submitted downwardrevisionstotheirexpectationsfortherate projectionsforgrowthof realoutput,theunemploy- of increaseinrealGDPin2012and2013,butthey mentrate,andinflationfortheyears2012to2014 didnotmateriallyaltertheirprojectionsforanoticeandoverthelongerrun.Theeconomicprojections ablystrongerpaceof expansionby2014.Withthe werebasedoninformationavailableatthetimeof unemploymentratehavingdeclinedinrecentmonths themeetingandparticipants’individualassumptions bymorethanparticipantshadanticipatedinthepreaboutfactorslikelytoaffecteconomicoutcomes, viousSummaryof EconomicProjections(SEP),they includingtheirassessmentsof appropriatemonetary generallyloweredtheirforecastsforthelevelof the policy.StartingwiththeJanuarymeeting,partici- unemploymentrateoverthenexttwoyears.Participantsalsosubmittedtheirassessmentsof thepathfor pants’expectationsforboththelonger-runrateof thetargetfederalfundsratethattheyviewedas increaseinrealGDPandthelonger-rununemployappropriateandcompatiblewiththeirindividualeco- mentratewerelittlechangedfromNovember.They nomicprojections.Longer-runprojectionsrepresent didnotsignificantlyaltertheirforecastsfortherate eachparticipant’sassessmentof theratetowhich of inflationoverthenextthreeyears.However,in eachvariablewouldbeexpectedtoconvergeover lightof the2percentinflationthatistheobjective timeunderappropriatemonetarypolicyandinthe includedinthestatementof longer-rungoalsand absenceof furthershocks.“Appropriatemonetary policystrategyadoptedattheJanuarymeeting,the policy”isdefinedasthefuturepathof policythat rangeandcentraltendencyof theirprojectionsof participantsdeemmostlikelytofosteroutcomesfor longer-runinflationwereallequalto2percent. economicactivityandinflationthatbestsatisfytheir individualinterpretationof theFederalReserve’s Asshowninfigure2,mostparticipantsjudgedthat objectivesof maximumemploymentandstable highlyaccommodativemonetarypolicywaslikelyto prices. bewarrantedovercomingyearstopromotea strongereconomicexpansioninthecontextof price Asdepictedinfigure1,FOMCparticipantsprojected stability.Inparticular,withtheunemploymentrate continuedeconomicexpansionoverthe2012–14 projectedtoremainelevatedovertheprojection period,withrealgrossdomesticproduct(GDP)ris- periodandinflationexpectedtobesubdued,sixparingatamodestratethisyearandthenstrengthening ticipantsanticipatedthat,underappropriatemonfurtherthrough2014.Participantsgenerallyantici- etarypolicy,thefirstincreaseinthetargetfederal patedonlyasmalldeclineintheunemploymentrate fundsratewouldoccurafter2014,andfiveexpected thisyear.In2013and2014,thepaceof theexpan- policyfirmingtocommenceduring2014(theupper sionwasprojectedtoexceedparticipants’estimates panel).Theremainingsixparticipantsjudgedthat of thelonger-runsustainablerateof increaseinreal raisingthefederalfundsratesoonerwouldbe GDPbyenoughtoresultinagradualfurtherdecline requiredtoforestallinflationarypressuresoravoid intheunemploymentrate.However,attheendof distortionsinthefinancialsystem.Asindicatedin 2014,participantsgenerallyexpectedthattheunem- thelowerpanel,allof theindividualassessmentsof ploymentratewouldstillbewellabovetheiresti- theappropriatetargetfederalfundsrateoverthenext matesof thelonger-runnormalunemploymentrate severalyearswerebelowthelonger-runlevelof the

MonetaryPolicyandEconomicDevelopments 41 Figure1.Centraltendenciesandrangesofeconomicprojections,2012–14andoverthelongerrun Percent Change in real GDP 4 Central tendency of projections Range of projections 3 2 1 + Actual 0_ 1 2 3 2007 2008 2009 2010 2011 2012 2013 2014 Longer run Percent Unemployment rate 9 8 7 6 5 2007 2008 2009 2010 2011 2012 2013 2014 Longer run Percent PCE inflation 3 2 1 2007 2008 2009 2010 2011 2012 2013 2014 Longer run Percent Core PCE inflation 3 2 1 2007 2008 2009 2010 2011 2012 2013 2014 Note:Definitionsofvariablesareinthenotestotable1.Thedatafortheactualvaluesofthevariablesareannual.ThedataforthechangeinrealGDP,PCEinflation,andcore PCEinflationshownfor2011incorporatetheadvanceestimateofGDPforthefourthquarterof2011,whichtheBureauofEconomicAnalysisreleasedonJanuary27,2012. ThisinformationwasnotavailabletoFOMCmeetingparticipantsatthetimeoftheirmeeting.

42 98thAnnualReport|2011 Table1.EconomicprojectionsofFederalReserveBoardmembersandFederalReserveBankpresidents,January2012 Percent Centraltendency1 Range2 Variable 2012 2013 2014 Longerrun 2012 2013 2014 Longerrun ChangeinrealGDP 2.2to2.7 2.8to3.2 3.3to4.0 2.3to2.6 2.1to3.0 2.4to3.8 2.8to4.3 2.2to3.0 Novemberprojection 2.5to2.9 3.0to3.5 3.0to3.9 2.4to2.7 2.3to3.5 2.7to4.0 2.7to4.5 2.2to3.0 Unemploymentrate 8.2to8.5 7.4to8.1 6.7to7.6 5.2to6.0 7.8to8.6 7.0to8.2 6.3to7.7 5.0to6.0 Novemberprojection 8.5to8.7 7.8to8.2 6.8to7.7 5.2to6.0 8.1to8.9 7.5to8.4 6.5to8.0 5.0to6.0 PCEinflation 1.4to1.8 1.4to2.0 1.6to2.0 2.0 1.3to2.5 1.4to2.3 1.5to2.1 2.0 Novemberprojection 1.4to2.0 1.5to2.0 1.5to2.0 1.7to2.0 1.4to2.8 1.4to2.5 1.5to2.4 1.5to2.0 CorePCEinflation3 1.5to1.8 1.5to2.0 1.6to2.0 1.3to2.0 1.4to2.0 1.4to2.0 Novemberprojection 1.5to2.0 1.4to1.9 1.5to2.0 1.3to2.1 1.4to2.1 1.4to2.2 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andprojectionsforbothmeasuresofinflationarefromthefourthquarterofthepreviousyeartothefourth quarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures (PCE)andthepriceindexforPCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarterofthe yearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’s assessmentoftheratetowhicheachvariablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.The NovemberprojectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonNovember1–2,2011. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected. federalfundsrate,and11participantsplacedthetar- Thisforecastfor2012,whileslightlylowerthanthe getfederalfundsrateat1percentorlowerattheend projectionpreparedinNovember,wouldrepresenta of 2014.Mostparticipantsindicatedthatthey pickupinoutputgrowthfrom2011toaratecloseto expectedthatthenormalizationof theFederal itslonger-runtrend.Participantsstatedthattheeco- Reserve’sbalancesheetshouldoccurinawayconsis- nomicinformationreceivedsinceNovembershowed tentwiththeprinciplesagreedonattheJune2011 continuedgradualimprovementinthepaceof ecomeetingof theFOMC,withthetimingof adjust- nomicactivityduringthesecondhalf of 2011,asthe mentsdependentontheexpecteddateof thefirst influenceof thetemporaryfactorsthatdamped policytightening.Afewparticipantsjudgedthat, activityinthefirsthalf of theyearsubsided.Congiventheircurrentassessmentsof theeconomicout- sumerspendingincreasedatamoderaterate,exports look,appropriatepolicywouldincludeadditional expandedsolidly,andbusinessinvestmentrosefurassetpurchasesin2012,andoneassumedanearly ther.Recently,consumersandbusinessesappearedto endingof thematurityextensionprogram. becomesomewhatmoreoptimisticabouttheoutlook.Financialconditionsfordomesticnonfinancial Asizablemajorityof participantscontinuedtojudge businessesweregenerallyfavorable,andconditionsin thelevelof uncertaintyassociatedwiththeirprojec- consumercreditmarketsshowedsignsof tionsforrealactivityandtheunemploymentrateas improvement. unusuallyhighrelativetohistoricalnorms.Manyalso attachedagreater-than-normallevelof uncertainty However,anumberof factorssuggestedthatthe totheirforecastsforinflation,but,comparedwith paceof theexpansionwouldcontinuetobe theNovemberSEP,twoadditionalparticipants restrained.Althoughsomeindicatorsof activityin vieweduncertaintyasbroadlysimilartolonger-run thehousingsectorimprovedslightlyattheendof norms.AsinNovember,manyparticipantssaw 2011,newhomebuildingandsalesremainedat downsiderisksattendingtheirforecastsof realGDP depressedlevels,housepriceswerestillfalling,and growthandupsideriskstotheirforecastsof the mortgagecreditremainedtight.Households’realdisunemploymentrate;mostparticipantsviewedthe posableincomeroseonlymodestlythroughlate2011. riskstotheirinflationprojectionsasbroadly Inaddition,federalspendingcontractedtowardyearbalanced. end,andtherestrainingeffectsof fiscalconsolidation appearedlikelytobegreaterthisyearthanantici- TheOutlookforEconomicActivity patedatthetimeof theNovemberprojections.Par- Thecentraltendencyof participants’forecastsforthe ticipantsalsoreadtheinformationoneconomic changeinrealGDPin2012was2.2to2.7percent. activityabroad,particularlyinEurope,aspointingto

MonetaryPolicyandEconomicDevelopments 43 Figure2.OverviewofFOMCparticipants’assessmentsofappropriatemonetarypolicy Appropriate Timing of Policy Firming Number of Participants 10 9 8 7 6 5 5 4 4 3 3 3 2 2 1 0 2012 2013 2014 2015 2016 Appropriate Pace of Policy Firming Percent 6 Target Federal Funds Rate at Year-End 5 4 3 2 1 0 2012 2013 2014 Longer run Note:Intheupperpanel,theheightofeachbardenotesthenumberofFOMCparticipantswhojudgethat,underappropriatemonetarypolicyandintheabsenceoffurther shockstotheeconomy,thefirstincreaseinthetargetfederalfundsratefromitscurrentrangeof0to¼percentwilloccurinthespecifiedcalendaryear.Inthelowerpanel, eachshadedcircleindicatesthevalue(roundedtothenearest¼percent)ofanindividualparticipant'sjudgmentoftheappropriatelevelofthetargetfederalfundsrateatthe endofthespecifiedcalendaryearoroverthelongerrun. weakerdemandforU.S.exportsincomingquarters theirestimatesof thelonger-runratesof output thanhadseemedlikelywhentheypreparedtheir growth.Thecentraltendenciesof participants’foreforecastsinNovember. castsforthechangeinrealGDPwere2.8to3.2percentin2013and3.3to4.0percentin2014.Among Participantsanticipatedthatthepaceof theeco- theconsiderationssupportingtheirforecasts,particinomicexpansionwouldstrengthenoverthe2013–14 pantscitedtheirexpectationthattheexpansion period,reachingratesof increaseinrealGDPabove wouldbesupportedbymonetarypolicyaccommoda-

44 98thAnnualReport|2011 tion,ongoingimprovementsincreditconditions,ris- slightlylower,assomeparticipantsreassessedthe inghouseholdandbusinessconfidence,andstrength- outlookforglobaleconomicgrowthandforU.S.fiseninghouseholdbalancesheets.Manyparticipants calpolicy.Many,however,madenomaterialchange judgedthatU.S.fiscalpolicywouldstillbeadragon totheirforecastsforgrowthof realGDPthisyear. economicactivityin2013,butmanyanticipatedthat Thedispersionof participants’forecastsforoutput progresswouldbemadeinresolvingthefiscalsitua- growthin2013and2014remainedrelativelywide. tioninEuropeandthattheforeigneconomicout- Havingincorporatedthedatashowingalowerrateof lookwouldbemorepositive.Overtimeandinthe unemploymentattheendof 2011thanpreviously absenceof shocks,participantsexpectedthattherate expected,thedistributionof participants’projections of increaseof realGDPwouldconvergetotheiresti- fortheendof 2012shiftednoticeablydownrelative matesof itslonger-runrate,withacentraltendency totheNovemberforecasts.Therangesfortheunemof 2.3to2.6percent,littlechangedfromtheiresti- ploymentratein2013and2014showedlesspromatesinNovember. nouncedshiftstowardlowerratesand,aswasthe casewiththerangesforoutputgrowth,remained Theunemploymentrateimprovedmoreinlate2011 wide.Participantsmadeonlymodestadjustmentsto thanmostparticipantshadanticipatedwhenthey theirprojectionsof theratesof outputgrowthand preparedtheirNovemberprojections,fallingfrom unemploymentoverthelongerrun,and,onnet,the 9.1to8.7percentbetweenthethirdandfourthquar- dispersionsof theirprojectionsforbothwerelittle ters.Asaresult,mostparticipantsadjusteddown changedfromthosereportedinNovember.Thedistheirprojectionsfortheunemploymentratethisyear. persionof estimatesforthelonger-runrateof output Nonetheless,withrealGDPexpectedtoincreaseata growthisnarrow,withonlyoneparticipant’sestimodestratein2012,theunemploymentratewaspro- mateoutsideof arangeof 2.2to2.7percent.By jectedtodeclineonlyalittlethisyear,withthecen- comparison,participants’viewsaboutthelevelto traltendencyof participants’forecastsat8.2to whichtheunemploymentratewouldconvergeinthe 8.5percentatyear-end.Thereafter,participants longrunaremorediverse,reflecting,amongother expectedthatthepickupinthepaceof theexpansion things,differentviewsontheoutlookforlaborsupin2013and2014wouldbeaccompaniedbyafurther plyandontheextentof structuralimpedimentsin gradualimprovementinlabormarketconditions.The thelabormarket. centraltendencyof participants’forecastsforthe unemploymentrateattheendof 2013was7.4to TheOutlookforInflation 8.1percent,anditwas6.7to7.6percentattheendof Participantsgenerallyviewedtheoutlookforinfla- 2014.Thecentraltendencyof participants’estimates tionasverysimilartothatinNovember.Mostindiof thelonger-runnormalrateof unemploymentthat catedthat,astheyexpected,theeffectsof therun-up wouldprevailintheabsenceof furthershockswas inpricesof energyandothercommoditiesandthe 5.2to6.0percent.Mostparticipantsindicatedthat supplydisruptionsthatoccurredinthefirsthalf of theyanticipatedthatfiveorsixyearswouldbe 2011hadlargelywaned,andthatinflationhadbeen requiredtoclosethegapbetweenthecurrentunem- subduedinrecentmonths.Participantsalsonoted ploymentrateandtheirestimatesof thelonger-run thatinflationexpectationshadremainedstableover rate,althoughsomenotedthatmoretimewould thepastyeardespitethefluctuationsinheadline likelybeneeded. inflation.Assumingnofurthersupplyshocks,most participantsanticipatedthatbothheadlineandcore Figures3.Aand3.Bprovidedetailsonthediversityof inflationwouldremainsubduedoverthe2012–14 participants’viewsregardingthelikelyoutcomesfor periodatratesatorbelowtheFOMC’slonger-run realGDPgrowthandtheunemploymentrateover objectiveof 2percent.Specifically,thecentraltenthenextthreeyearsandoverthelongerrun.Thedis- dencyof participants’projectionsfortheincreasein persionintheseprojectionsreflecteddifferencesin inflation,asmeasuredbythePCEpriceindex,in participants’assessmentsof manyfactors,including 2012was1.4to1.8percent,anditedgeduptoacenappropriatemonetarypolicyanditseffectsoneco- traltendencyof 1.6to2.0percentin2014;thecentral nomicactivity,theunderlyingmomentumineco- tendenciesof theforecastsforcorePCEinflation nomicactivity,theeffectsof theEuropeansituation, werelargelythesameasthoseforthetotalmeasure. theprospectivepathforU.S.fiscalpolicy,thelikely evolutionof creditandfinancialmarketconditions, Figures3.Cand3.Dprovideinformationaboutthe andtheextentof structuraldislocationsinthelabor diversityof participants’viewsabouttheoutlookfor market.ComparedwiththeirNovemberprojections, inflation.ComparedwiththeirNovemberprojectherangeof participants’forecastsforthechangein tions,expectationsforinflationin2012shifteddown realGDPin2012narrowedsomewhatandshifted abit,withsomeparticipantsnotingthattheslowing

MonetaryPolicyandEconomicDevelopments 45 Figure3.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2012–14andoverthelongerrun Number of participants 2012 18 January projections 16 November projections 14 12 10 8 6 4 2 2.0- 2.2- 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0- 4.2- 4.4- 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 Percent range Number of participants 2013 18 16 14 12 10 8 6 4 2 2.0- 2.2- 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0- 4.2- 4.4- 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 Percent range Number of participants 2014 18 16 14 12 10 8 6 4 2 2.0- 2.2- 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0- 4.2- 4.4- 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 2.0- 2.2- 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0- 4.2- 4.4- 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

46 98thAnnualReport|2011 Figure3.B.Distributionofparticipants’projectionsfortheunemploymentrate,2012–14andoverthelongerrun Number of participants 2012 18 January projections 16 November projections 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- 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 Percent range Number of participants 2013 18 16 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- 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 Percent range Number of participants 2014 18 16 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- 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 Percent range Number of participants Longer run 18 16 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- 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 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

MonetaryPolicyandEconomicDevelopments 47 Figure3.C.Distributionofparticipants’projectionsforPCEinflation,2012–14andoverthelongerrun Number of participants 2012 18 January projections 16 November projections 14 12 10 8 6 4 2 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 Percent range Number of participants 2013 18 16 14 12 10 8 6 4 2 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 Percent range Number of participants 2014 18 16 14 12 10 8 6 4 2 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

48 98thAnnualReport|2011 Figure3.D.Distributionofparticipants’projectionsforcorePCEinflation,2012–14 Number of participants 2012 18 January projections 16 November projections 14 12 10 8 6 4 2 1.3- 1.5- 1.7- 1.9- 2.1- 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2013 18 16 14 12 10 8 6 4 2 1.3- 1.5- 1.7- 1.9- 2.1- 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2014 18 16 14 12 10 8 6 4 2 1.3- 1.5- 1.7- 1.9- 2.1- 1.4 1.6 1.8 2.0 2.2 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1. ininflationattheendof 2011hadbeengreaterthan towhichslackinfluencesinflationandinflation theyanticipated.Nonetheless,therangeof partici- expectations.Inaddition,participantsdifferedin pants’forecastsforinflationin2012remainedwide, theirestimatesof howthestanceof monetarypolicy andthedispersionwasonlyslightlynarrowerin wouldinfluenceinflationexpectations. 2013.By2014,therangeof inflationforecastsnarrowedmorenoticeably,asparticipantsexpectedthat, AppropriateMonetaryPolicy underappropriatemonetarypolicy,inflationwould Mostparticipantsjudgedthatthecurrentoutlook— begintoconvergetotheCommittee’slonger-run foramoderatepaceof economicrecoverywiththe objective.Ingeneral,thedispersionof viewsonthe unemploymentratedecliningonlygraduallyand outlookforinflationovertheprojectionperiodrep- inflationsubdued—warrantedexceptionallylowlevresenteddifferencesinjudgmentsregardingthe elsof thefederalfundsrateatleastuntillate2014.In degreeof slackinresourceutilizationandtheextent particular,fiveparticipantsviewedappropriatepolicy

MonetaryPolicyandEconomicDevelopments 49 firmingascommencingduring2014,whilesixothers assessmentsof appropriatemonetarypolicyincorpojudgedthatthefirstincreaseinthefederalfundsrate ratedadditionalpurchasesof securitiesin2012,and wouldnotbewarranteduntil2015or2016.Asa anumberof participantsindicatedthatthey result,those11participantsanticipatedthatthe remainedopentoaconsiderationof additionalasset appropriatefederalfundsrateattheendof 2014 purchasesif theeconomicoutlookdeteriorated.All wouldbe1percentorlower.Thosewhosawthefirst butoneof theparticipantscontinuedtoexpectthat increaseoccurringin2015reportedthattheyantici- theCommitteewouldcarryoutthenormalizationof patedthatthefederalfundsratewouldbe½percent thebalancesheetaccordingtotheprinciples attheendof thatyear.Forthetwoparticipantswho approvedattheJune2011FOMCmeeting.Thatis, putthefirstincreasein2016,theappropriatetarget priortothefirstincreaseinthefederalfundsrate,the federalfundsrateattheendof thatyearwas1½and Committeewouldlikelyceasereinvestingsomeorall 1¾percent.Incontrast,sixparticipantsexpected paymentsonthesecuritiesholdingsintheSystem thatanincreaseinthetargetfederalfundsratewould OpenMarketAccount(SOMA),anditwouldlikely beappropriatewithinthenexttwoyears,andthose beginsalesof agencysecuritiesfromtheSOMA participantsanticipatedthatthetargetratewould sometimeafterthefirstrateincrease,aimingtoelimineedtobeincreasedtoaround1½to2¾percentat natetheSOMA’sholdingsof agencysecuritiesovera theendof 2014. periodof threetofiveyears.Indeed,mostparticipantssawsalesof agencysecuritiesstartingnoearlier Participants’assessmentsof theappropriatepathfor than2015.However,thoseparticipantsanticipating thefederalfundsratereflectedtheirjudgmentsof the anearlierincreaseinthefederalfundsratealsocalled policythatwouldbestsupportprogressinachieving forearlieradjustmentstothebalancesheet,andone theFederalReserve’smandateforpromotingmaxi- participantassumedanearlyendof thematurity mumemploymentandstableprices.Amongthekey extensionprogram. factorsinformingparticipants’expectationsabout theappropriatesettingformonetarypolicyweretheir Figure3.Edetailsthedistributionof participants’ assessmentsof themaximumlevelof employment, judgmentsregardingtheappropriatelevelof thetartheCommittee’slonger-runinflationgoal,theextent getfederalfundsrateattheendof eachcalendaryear towhichcurrentconditionsdeviatefromthese from2012to2014andoverthelongerrun.Most mandate-consistentlevels,andtheirprojectionsof participantsanticipatedthateconomicconditions thelikelytimehorizonsrequiredtoreturnemploy- wouldwarrantmaintainingthecurrentlowlevelof mentandinflationtosuchlevels.Severalparticipants thefederalfundsrateoverthenexttwoyears.Howcommentedthattheirassessmentstookintoaccount ever,viewsontheappropriatelevelof thefederal theriskstotheoutlookforeconomicactivityand fundsrateattheendof 2014weremorewidelydisinflation,andafewpointedspecificallytotherel- persed,withtwo-thirdsof participantsseeingthe evanceof financialstabilityintheirpolicyjudgments. appropriatelevelof thefederalfundsrateas1per- Participantsalsonotedthatbecausetheappropriate centorbelowandfiveseeingtheappropriaterateas stanceof monetarypolicydependsimportantlyon 2percentorhigher.Thoseparticipantswhojudged theevolutionof realactivityandinflationovertime, thatalongerperiodof exceptionallylowlevelsof the theirassessmentsof theappropriatefuturepathof federalfundsratewouldbeappropriategenerallyalso thefederalfundsratecouldchangeif economiccon- anticipatedthatthepaceof theeconomicexpansion ditionsweretoevolveinanunexpectedmanner. wouldbemoderateandthattheunemploymentrate woulddeclineonlygradually,remainingwellabove Allparticipantsreportedlevelsfortheappropriate itslonger-runrateattheendof 2014.Almostallof targetfederalfundsrateattheendof 2014thatwere theseparticipantsexpectedthatinflationwouldbe wellbelowtheirestimatesof thelevelexpectedto relativelystableatorbelowtheFOMC’slonger-run prevailinthelongerrun.Thelonger-runnominallev- objectiveof 2percentuntilthetimeof thefirst elswereinarangefrom3¾to4½percent,reflecting increaseinthefederalfundsrate.Anumberof them participants’judgmentsaboutthelonger-runequilib- alsomentionedtheirassessmentthatalongerperiod riumlevelof therealfederalfundsrateandtheCom- of lowfederalfundsratesisappropriatewhenthe mittee’sinflationobjectiveof 2percent. federalfundsrateisconstrainedbyitseffectivelower bound.Incontrast,thesixparticipantswhojudged Participantsalsoprovidedqualitativeinformationon thatpolicyfirmingshouldbeginin2012or2013inditheirviewsregardingtheappropriatepathof the catedthattheCommitteewouldneedtoactdeci- FederalReserve’sbalancesheet.Afewparticipants’ sivelytokeepinflationatmandate-consistentlevels

50 98thAnnualReport|2011 Figure3.E.Distributionofparticipants’projectionsforthetargetfederalfundsrate,2012–14andoverthelongerrun Number of participants 2012 18 January projections 16 14 12 10 8 6 4 2 0.00- 0.38- 0.63- 0.88- 1.13- 1.38- 1.63- 1.88- 2.13- 2.38- 2.63- 2.88- 3.13- 3.38- 3.63- 3.88- 4.13- 4.38- 4.63- 0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 Percent range Number of participants 2013 18 16 14 12 10 8 6 4 2 0.00- 0.38- 0.63- 0.88- 1.13- 1.38- 1.63- 1.88- 2.13- 2.38- 2.63- 2.88- 3.13- 3.38- 3.63- 3.88- 4.13- 4.38- 4.63- 0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 Percent range Number of participants 2014 18 16 14 12 10 8 6 4 2 0.00- 0.38- 0.63- 0.88- 1.13- 1.38- 1.63- 1.88- 2.13- 2.38- 2.63- 2.88- 3.13- 3.38- 3.63- 3.88- 4.13- 4.38- 4.63- 0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 0.00- 0.38- 0.63- 0.88- 1.13- 1.38- 1.63- 1.88- 2.13- 2.38- 2.63- 2.88- 3.13- 3.38- 3.63- 3.88- 4.13- 4.38- 4.63- 0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 Percent range Note:Thetargetfundsrateismeasuredasthelevelofthetargetrateattheendofthecalendaryearorinthelongerrun.

MonetaryPolicyandEconomicDevelopments 51 sector.Inaddition,participantsgenerallysawthe Table2.Averagehistoricalprojectionerrorranges outlookforfiscalandregulatorypoliciesasstill Percentagepoints highlyuncertain.Regardingtheunemploymentrate, Variable 2012 2013 2014 severalexpresseduncertaintyabouthowlabor demandandsupplywouldevolveovertheforecast ChangeinrealGDP1 ±1.3 ±1.7 ±1.8 period.Amongthesourcesof uncertaintyaboutthe Unemploymentrate1 ±0.7 ±1.4 ±1.8 outlookforinflationwerethedifficultiesinassessing Totalconsumerprices2 ±0.9 ±1.0 ±1.0 thecurrentandprospectivemarginsof slackin Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared resourcemarketsandtheeffectof suchslackon errorofprojectionsfor1991through2010thatwerereleasedinthewinterby variousprivateandgovernmentforecasters.Asdescribedinbox5,undercertain prices. assumptions,thereisabouta70percentprobabilitythatactualoutcomesforreal GDP,unemployment,andconsumerpriceswillbeinrangesimpliedbythe averagesizeofprojectionerrorsmadeinthepast.FurtherinformationisinDavid Amajorityof participantscontinuedtoreportthat ReifschneiderandPeterTulip(2007),“GaugingtheUncertaintyoftheEconomic theysawtheriskstotheirforecastsof realGDP OutlookfromHistoricalForecastingErrors,”FinanceandEconomicsDiscussion Series2007-60(Washington:BoardofGovernorsoftheFederalReserveSystem, growthasweightedtothedownsideand,accordingly, November). theriskstotheirprojectionsfortheunemployment 1 Fordefinitions,refertogeneralnoteintable1. rateasskewedtotheupside.Allbutoneof the 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen mostwidelyusedingovernmentandprivateeconomicforecasts.Projection remainingparticipantsviewedtheriskstobothproispercentchange,fourthquarterofthepreviousyeartothefourthquarterof jectionsasbroadlybalanced,whileonenotedarisk theyearindicated. thattheunemploymentratemightcontinueto declinemorerapidlythanexpected.Themostfreandtolimittheriskof underminingFederalReserve quentlyciteddownsideriskstotheprojectedpaceof credibilityandcausingariseininflationexpecta- theeconomicexpansionwerethepossibilityof tions.Severalwereprojectingafasterpickupineco- financialmarketandeconomicspilloversfromthe nomicactivity,andafewstressedtheriskof distor- fiscalandfinancialissuesintheeuroareaandthe tionsinthefinancialsystemfromanextendedperiod chancethatsomeof thefactorsthathaverestrained of exceptionallylowinterestrates. therecoveryinrecentyearscouldpersistandweigh oneconomicactivitytoagreaterextentthan UncertaintyandRisks assumedinparticipants’baselineforecasts.Inpar- Figure4showsthatmostparticipantscontinuedto ticular,someparticipantsmentionedthedownside riskstoconsumerspendingfromstill-weakhousesharetheviewthattheirprojectionsforrealGDP holdbalancesheetsandonlymodestgainsinreal growthandtheunemploymentrateweresubjecttoa income,alongwiththepossibleeffectsof still-high higherlevelof uncertaintythanwasthenormduring theprevious20years.23Manyalsojudgedthelevelof levelsof uncertaintyregardingfiscalandregulatory policiesthatmightdampbusinesses’willingnessto uncertaintyassociatedwiththeirinflationforecasts investandhire.Anumberof participantsnotedthe tobehigherthanthelonger-runnorm,butthat riskof anotherdisruptioninglobaloilmarketsthat assessmentwassomewhatlessprevalentamongparcouldnotonlyboostinflationbutalsoreducereal ticipantsthanwasthecaseforuncertaintyaboutreal incomeandspending.Theparticipantswhojudged activity.Participantsidentifiedanumberof factors theriskstobebroadlybalancedalsorecognizeda thatcontributedtotheelevatedlevelof uncertainty numberof thesedownsideriskstotheoutlookbut abouttheoutlook.Inparticular,manyparticipants sawthemascounterbalancedbythepossibilitythat continuedtociterisksrelatedtoongoingdeveloptheresilienceof economicactivityinlate2011and mentsinEurope.Morebroadly,theyagainnoteddiftherecentdropintheunemploymentratemightsigficultiesinforecastingthepathof economicrecovery nalgreaterunderlyingmomentumineconomic fromadeeprecessionthatwastheresultof asevere activity. financialcrisisandthusdifferedimportantlyfrom theexperiencewithrecoveriesoverthepast60years. Incontrasttotheiroutlookforeconomicactivity, Inthatregard,participantscontinuedtobeuncertain mostparticipantsjudgedtheriskstotheirprojections aboutthepaceatwhichcreditconditionswouldease of inflationasbroadlybalanced.Participantsgenerandaboutprospectsforarecoveryinthehousing allyviewedtherecentdeclineininflationashaving beeninlinewiththeirearlierforecasts,andthey 23 Table2providesestimatesoftheforecastuncertaintyforthe notedthatinflationexpectationsremainstable.While changeinrealGDP,theunemploymentrate,andtotalconsumerpriceinflationovertheperiodfrom1991to2010.Atthe manyof theseparticipantssawthepersistenceof endofthissummary,box5discussesthesourcesandinterpreta- substantialslackinresourceutilizationaslikelyto tionofuncertaintyintheeconomicforecastsandexplainsthe keepinflationsubduedovertheprojectionperiod,a approachusedtoassesstheuncertaintyandrisksattendingthe participants’projections. fewothersnotedtheriskthatelevatedresourceslack

52 98thAnnualReport|2011 Figure4.Uncertaintyandrisksineconomicprojections Number of participants Number of participants Uncertainty about GDP growth Risks to GDP growth 18 18 January projections January projections November projections 16 November projections 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Number of participants Number of participants Uncertainty about the unemployment rate Risks to the unemployment rate 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Number of participants Number of participants Uncertainty about PCE inflation Risks to PCE inflation 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Number of participants Number of participants Uncertainty about core PCE inflation Risks to core PCE inflation 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Note:Fordefinitionsofuncertaintyandrisksineconomicprojections,seebox5.Definitionsofvariablesareinthegeneralnotetotable1.

MonetaryPolicyandEconomicDevelopments 53 Box 5. Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers thirdyear.Thecorresponding70percentconfidence oftheBoardofGovernorsandthepresidentsofthe intervalsforoverallinflationwouldbe1.1to2.9per- FederalReserveBanksinformdiscussionsofmon- centinthecurrentyearand1.0to3.0percentinthe etarypolicyamongpolicymakersandcanaidpublic secondandthirdyears. understandingofthebasisforpolicyactions.Con- Becausecurrentconditionsmaydifferfromthose siderableuncertaintyattendstheseprojections,howthatprevailed,onaverage,overhistory,participants ever.Theeconomicandstatisticalmodelsandrelaprovidejudgmentsastowhethertheuncertainty tionshipsusedtohelpproduceeconomicforecasts attachedtotheirprojectionsofeachvariableis arenecessarilyimperfectdescriptionsofthereal greaterthan,smallerthan,orbroadlysimilartotypiworld,andthefuturepathoftheeconomycanbe callevelsofforecastuncertaintyinthepast,as affectedbymyriadunforeseendevelopmentsand shownintable2.Participantsalsoprovidejudgments events.Thus,insettingthestanceofmonetary astowhethertheriskstotheirprojectionsare policy,participantsconsidernotonlywhatappearsto weightedtotheupside,areweightedtothedownbethemostlikelyeconomicoutcomeasembodiedin side,orarebroadlybalanced.Thatis,participants theirprojections,butalsotherangeofalternative judgewhethereachvariableismorelikelytobe possibilities,thelikelihoodoftheiroccurring,andthe aboveorbelowtheirprojectionsofthemostlikely potentialcoststotheeconomyshouldtheyoccur. outcome.Thesejudgmentsabouttheuncertainty Table2summarizestheaveragehistoricalaccuracy andtherisksattendingeachparticipant’sprojections ofarangeofforecasts,includingthosereportedin aredistinctfromthediversityofparticipants’views pastMonetaryPolicyReportsandthosepreparedby aboutthemostlikelyoutcomes.Forecastuncertainty theFederalReserveBoard’sstaffinadvanceof isconcernedwiththerisksassociatedwithaparticumeetingsoftheFederalOpenMarketCommittee. larprojectionratherthanwithdivergencesacrossa Theprojectionerrorrangesshowninthetableillus- numberofdifferentprojections. tratetheconsiderableuncertaintyassociatedwith Aswithrealactivityandinflation,theoutlookforthe economicforecasts.Forexample,supposeaparticifuturepathofthefederalfundsrateissubjecttoconpantprojectsthatrealgrossdomesticproduct(GDP) siderableuncertainty.Thisuncertaintyarisesprimarily andtotalconsumerpriceswillrisesteadilyatannual becauseeachparticipant’sassessmentoftheapproratesof,respectively,3percentand2percent.Ifthe priatestanceofmonetarypolicydependsimportantly uncertaintyattendingthoseprojectionsissimilarto ontheevolutionofrealactivityandinflationover thatexperiencedinthepastandtherisksaroundthe time.Ifeconomicconditionsevolveinanunexpected projectionsarebroadlybalanced,thenumbers manner,thenassessmentsoftheappropriatesetting reportedintable2wouldimplyaprobabilityofabout ofthefederalfundsratewouldchangefromthat 70percentthatactualGDPwouldexpandwithina pointforward. rangeof1.7to4.3percentinthecurrentyear,1.3to 4.7percentinthesecondyear,and1.2to4.8inthe mightputmoredownwardpressureoninflationthan currentlyinthefinancialsystemriskedapickupin expected.Incontrast,someparticipantsnotedthe inflationtoalevelabovetheCommittee’sobjective. upsideriskstoinflationfromdevelopmentsinglobal Afewalsopointedtotheriskthatuncertaintyabout oilandcommoditymarkets,andseveralindicated theCommittee’sabilitytoeffectivelyremovepolicy thatthecurrenthighlyaccommodativestanceof accommodationwhenappropriatecouldleadtoa monetarypolicyandthesubstantialliquidity riseininflationexpectations.

54 98thAnnualReport|2011 Abbreviations ABS asset-backedsecurities AFE advancedforeigneconomy AIG AmericanInternationalGroup,Inc. ARRA AmericanRecoveryandReinvestmentAct CDS creditdefaultswap C&I commercialandindustrial CMBS commercialmortgage-backedsecurities CP commercialpaper CRE commercialrealestate DPI disposablepersonalincome EBA EuropeanBankingAuthority ECB EuropeanCentralBank EME emergingmarketeconomy E&S equipmentandsoftware FDIC FederalDepositInsuranceCorporation FOMC FederalOpenMarketCommittee;also,theCommittee FRBNY FederalReserveBankof NewYork GDP grossdomesticproduct GSE government-sponsoredenterprise LIBOR Londoninterbankofferedrate MEP maturityextensionprogram MBS mortgage-backedsecurities NIPA nationalincomeandproductaccounts OIS overnightindexswap PCE personalconsumptionexpenditures repo repurchaseagreement SCOOS SeniorCreditOfficerOpinionSurveyonDealerFinancingTerms SEP Summaryof EconomicProjections SLOOS SeniorLoanOfficerOpinionSurveyonBankLendingPractices S&P StandardandPoor’s SOMA SystemOpenMarketAccount WTI WestTexasIntermediate

MonetaryPolicyandEconomicDevelopments 55 Monetary Policy Report of July 2011 fuelandfoodprices,andasconsumersremained downbeat.Meanwhile,thehousingmarketcontinued tobeweigheddownbythelargeinventoryof vacant Part 1 housesforsale,thesubstantialvolumeof distressed Overview: Monetary Policy sales,andbyhomebuyers’concernsaboutthe and the Economic Outlook strengthof therecoveryandfearsof futuredeclines inhouseprices.Inthegovernmentsector,stateand Economicactivitycontinuedtorecoveroverthefirst localgovernmentbudgetscontinuedtobeverytight, half of 2011,butthepaceof theexpansionhasbeen asareductioninfederalassistancetothosegovernmodest.Thesubduedrateof expansionreflectsin mentswasonlypartiallyoffsetbyanincreaseintax partfactorsthatarelikelytobetemporary,including collections;inaddition,federalspendingappearsto thedampingeffectof higherfoodandenergyprices havecontracted.Incontrast,exports—whichhave onconsumerspendingaswellassupplychaindisrupbeenabrightspotintherecovery—movedupbriskly, tionsassociatedwiththetragicearthquakeinJapan. andbusinessescontinuedtoincreasetheiroutlaysfor Nonetheless,evenaftersettingasidetemporaryinfluequipmentandsoftware. ences,thegrowthof economicactivityappearsto haveslowedoverthefirsthalf of thisyear.Conditionsinthelabormarketremainweak.Althoughthe Inthelabormarket,privatepayrollemployment averagepaceof jobcreationpickedupduringthe gainspickedupinthefirstfourmonthsof theyear, earlymonthsof theyear,employmentgrowthsoft- averagingabout200,000jobspermonth,animproveenedinMayandJuneandtheunemploymentrate mentfromtheaverageof 125,000jobspermonth edgedup.Meanwhile,consumerpriceinflation recordedinthesecondhalf of 2010.However,private increasednoticeablyinthefirstpartof theyear, employmentgainsslowedsharplyinMayandJune, reflectinginparthigherpricesforsomecommodities averagingonly65,000permonth,withthestep-down andimportedgoodsaswellasshortagesof several widespreadacrossindustries.Furthermore,the popularmodelsof automobiles.Therecentrisein unemploymentrate,whichleveledoff ataround inflationisexpectedtosubsideastheeffectsof past 9percentintheearlymonthsof theyear,hasedged increasesinthepricesof energyandothercommodi- upsincethen,reaching9.2percentinJune.Theshare tiesdissipateinanenvironmentof stablelonger-term of theunemployedwhohavebeenjoblessforsix inflationexpectations,andassupplychaindisrup- monthsorlongerremainedcloseto45percent,a tionsintheautomobileindustryareremediated. post–WorldWarIIhigh. Onnet,financialmarketconditionsbecamesome- Consumerpriceinflationpickedupnoticeablyinthe whatmoresupportiveof economicgrowthinthefirst firstpartof 2011.Pricesforpersonalconsumption half of 2011,partlyreflectingthecontinuedmon- expendituresroseatanannualrateof about4peretarypolicyaccommodationprovidedbytheFederal centoverthefirstfivemonthsof theyear,compared Reserve.YieldsonTreasurysecuritiesandcorporate withanannualrateof increaseof alittlelessthan debtaswellasratesonfixed-rateresidentialmort- 2percentduringthesecondhalf of 2010.Asignifigagesfelltoverylowlevels,onbalance,overthefirst cantportionof theriseininflationwasassociated half of theyear,andequitypricesrose.Borrowing withenergyandfoodprices,reflectingthepassconditionsforhouseholdsandbusinesseseased throughtoretailpricesof surgesinthecostsof crude somewhatfurther,althoughcreditconditions oilandawiderangeof agriculturalcommodities. remainedtightforsomeborrowers. Recently,however,thesecommoditypriceshave apparentlystabilized,adevelopmentthatshouldease Afterrisingatanannualrateof 2¾percentinthe pressureonconsumerenergyandfoodpricesincomsecondhalf of 2010,realgrossdomesticproduct ingmonths.Anotherimportantsourceof upward (GDP)increasedatabouta2percentrateinthefirst pressureoninflationduringthefirsthalf of theyear quarterof 2011.Availableinformationsuggeststhat wasasharpaccelerationinthepricesof other thepaceof economicgrowthremainedsoftinthe importeditems.Thisfactorcontributedtoapickup secondquarter.Realconsumerspending,whichhad inconsumerinflationforitemsotherthanfoodand brightenedneartheendof 2010,roseatanoticeably energy;overthefirstfivemonthsof thisyear,such slowerrateoverthefirstfivemonthsof 2011,as inflationranatanannualrateof morethan2perhouseholdpurchasingpowerwasconstrainedbythe cent,upfromanunusuallylow½percentannualrate weakpaceof nominalincomegrowthandbyrising of increaseoverthesecondhalf of 2010.Despitethe

56 98thAnnualReport|2011 increaseininflation,longer-terminflationexpecta- marketconditionstoissuedebtatarobustpacein tionsremainedstable. thefirsthalf of theyear,andissuanceof corporate bondsandsyndicatedleveragedloanssurged.The InU.S.financialmarkets,strongcorporateprofits portfoliosof commercialandindustrialloanson andinvestors’perceptionsthattheeconomicrecov- banks’booksexpandedasstandardsandtermsfor erywasfirmingsupportedariseinequitypricesand suchloanseasedfurtheranddemandincreased.In anarrowingof creditspreadsintheearlypartof the contrast,despitesomeimprovementoverthefirst year.ByMay,however,indicationsthattheeconomic half of theyear,creditconditionsforsmallbusinesses recoveryintheUnitedStateswasproceedingata appearedtoremaintightanddemandforcreditby slowerpacethanpreviouslyanticipated—aswellasa suchfirmswassubdued.Financingconditionsfor perceivedmoderationinglobaleconomicgrowthand commercialrealestateassetseasedsomewhat,butthe heightenedconcernsaboutthepersistingfiscalprob- fundamentalsincommercialrealestatemarkets lemsinEurope—weighedonmarketsentiment, stayedextremelyweak. promptingapullbackfromriskierfinancialassets. Onnetoverthefirsthalf of theyear,yieldson Householddebtcontinuedtocontractinthefirsthalf longer-termTreasurysecuritiesdeclined.Yieldson of 2011,drivenprimarilybytheongoingdeclinein corporatedebtandotherfixed-incomeproductsas mortgagedebt.Eventhoughmortgagerates wellasratesonfixed-rateresidentialmortgagesfell remainednearhistoricallylowlevels,demandfornew fromalreadylowlevels,andcreditspreadswerelittle mortgageloanswasweak,reflectingstill-depressed changed.Broadequitypriceindexesrosesignifi- conditionsinhousingmarketsandtheuncertainoutcantly,onbalance,overthefirsthalf of theyear; lookfortheeconomicrecoveryandlabormarkets. however,stockpricesof banksdeclined. Delinquencyratesonmostcategoriesof mortgages edgedlowerbutstayednearrecenthighs.Thenum- ByearlyJuly,investorshadmarkeddowntheir berof homesenteringtheforeclosureprocess expectationsforthepathof thefederalfundsrate declinedinthefirstquarterof 2011,butthenumber relativetothetrajectoryanticipatedatthestartof of propertiesatsomepointintheforeclosureprocess theyearinresponsetoeconomicandfinancialdevel- remainedelevated.Mortgageservicerscontinuedto opmentsandthereiterationbytheFederalOpen grapplewithdeficienciesintheirforeclosureproce- MarketCommittee(FOMC)thatitexpectedto dures;resolutionof theseissuescouldeventuallybe maintainexceptionallylowlevelsof thefederalfunds associatedwithanincreaseinthenumberof foreclorateforanextendedperiod.Thesesamefactors,as surestartsasservicersworkthroughthebacklogof wellassafe-havendemandsstemmingfrominvestor severelydelinquentloansmorequickly.Revolving concernsaboutglobaleconomicgrowthandabout consumercredit—mostlycreditcardborrowing— developmentsinEurope,contributedtothedeclinein alsocontinuedtocontract,onnet,althoughata nominalTreasuryyields.Thusfar,uncertaintiessur- slowerpacethanin2010.Incontrast,nonrevolving roundingtheoutcomeof discussionstoraisetheU.S. consumercredit,consistingpredominantlyof auto government’sstatutorydebtlimitdonotappearto andstudentloans,roseappreciablyin2011,asrates haveleftanappreciableimprintonTreasuryprices, onmosttypesof theseloansremainednearthebotbutinvestorshavenotedstatementsbymajorratings tomof theirhistoricalrangesandasbankseased agenciesregardingtheactionstheagenciesmaytake standardsandtermsforsuchloans.Issuanceof conif thefiscalsituationisnotadequatelyaddressed. sumerasset-backedsecurities,particularlysecurities Measuresof inflationcompensationderivedfrom backedbyautoloans,wasstrong. yieldsonnominalandinflation-indexedTreasury securitiesfluctuatedoverthefirsthalf of theyearin Conditionsinshort-termfundingmarketschanged responsetochangesincommoditypricesandthe littleoverthefirstseveralmonthsof 2011,although outlookforeconomicgrowth.Onbalance,medium- signsof stressforsomeEuropeanfinancialinstituterminflationcompensationedgedhigheroverthe tionsstartedtoemergeasmarketparticipants firsthalf of theyear,butcompensationfurtherout becamemoreconcernedaboutpotentialexposuresto waslittlechanged. thedebtsof peripheralEuropeancountries.Tocontinuetosupportliquidityconditionsinglobalmoney Largenonfinancialcorporationswithaccesstocapi- marketsandtohelpminimizetheriskthatstrains talmarketstookadvantageof favorablefinancial abroadcouldspreadtotheUnitedStates,theFOMC

MonetaryPolicyandEconomicDevelopments 57 inJuneapprovedanextensionof thetemporaryU.S. Thesizeandcompositionof theFederalReserve’s dollarliquidityswaparrangementswithanumberof balancesheetcontinuedtoevolveoverthefirsthalf foreigncentralbanksuntilAugust1,2012. of theyear.Asaresultof theFOMC’spoliciesof reinvestingprincipalpaymentsfromitssecurities ResponsestotheFederalReserve’sSeniorCredit holdingsandpurchasingadditionallonger-term OfficerOpinionSurveyonDealerFinancingTerms Treasurysecurities,holdingsof Treasurysecurities (SCOOS)indicatedthatdealerscontinuedtogradu- rosemorethan$600billionandholdingsof agency allyeasepriceandnonpricetermsapplicableto debtandagencyMBSdeclinedabout$115billion. majorclassesof counterpartiesoverthesixmonths EmergencycreditprovidedduringthecrisiscontinendinginMay,andthatdemandforfundingfora uedtodecline:Theclosingof arecapitalizationplan varietyof securitytypesincreasedoverthesame forAmericanInternationalGroup,Inc.(AIG),terperiod.Investorappetiteforriskyassetslikelysup- minatedtheFederalReserve’sdirectassistanceto portedissuanceof somedebtinstruments(including AIG;theFederalReserveBankof NewYorksold speculative-gradecorporatebondsandsyndicated someof thesecuritiesheldintheportfolioof Maiden leveragedloans)andcontributedtoanarrowingof LaneIILLC,aspecialpurposevehiclethatwas riskspreadsevidentinthefirstseveralmonthsof the establishedtoacquireresidentialmortgage-backed year.Inaddition,informationfromavarietyof securitiesfromAIG;andloansoutstandingunder sources,includingspecialquestionsintheSCOOS, theTermAsset-BackedSecuritiesLoanFacilityconsuggestedthattheuseof dealer-intermediatedlever- tinuedtodeclineasimprovedconditionsinsecuritiageincreasedmodestlyamongbothleveredinvestors zationmarketsallowedborrowerstorefinanceand andtraditionallyunleveredinvestors,althoughthe prepayloansmadeunderthefacility.Ontheliability overalluseof leverageappearedtoberoughlymid- sideof theFederalReserve’sbalancesheet,reserve waybetweenitspre-crisispeakandpost-crisis balancesheldbydepositoryinstitutionsroseto trough.Inrecentweeks,however,anecdotalinforma- $1.7trillion,largelyasaresultof theFederal tionhassuggestedthatinvestorshavepulledback Reserve’slonger-termsecuritypurchaseprogram. somewhatfromrisk-takingandthattheiruseof FederalReservenotesincirculationalsorose.The leveragehasdeclined. TreasuryDepartment’sSupplementaryFinancing AccountbalanceattheFederalReservedeclined Withtheunemploymentratestillelevatedandinfla- from$200billionearlyintheyearto$5billionas tionexpectedtosubsidetolevelsatorbelowthose partof theTreasury’seffortstomaximizeflexibility consistent,overthelongerrun,withtheFOMC’s initsdebtmanagementasthestatutorydebtlimit dualmandateof maximumemploymentandprice approached. stability,theCommitteemaintainedatargetrange forthefederalfundsrateof 0to¼percentthrough- Theeconomicprojectionspreparedinconjunction outthefirsthalf of 2011.TheCommitteereiterated withtheJuneFOMCmeetingarepresentedinPart4 thateconomicconditionswerelikelytowarrant of thisreport.1Inbroadterms,FOMCparticipants exceptionallylowlevelsforthefederalfundsratefor (themembersof theBoardof Governorsandthe anextendedperiod.Attheendof June,theFederal presidentsof the12FederalReserveBanks)marked Reservecompleteditsprogramof purchasing downtheirforecastsforeconomicgrowthin2011 $600billionof longer-termTreasurysecuritiesthat relativetotheirforecastsinJanuaryandApril, wasannouncedinNovember.Inaddition,theCom- largelyasaresultof unexpectedweaknessinthefirst mitteemaintaineditsexistingpolicyof reinvesting half of theyear.Nonetheless,participantsanticiprincipalpaymentsfromitsagencydebtandagency patedamodestaccelerationineconomicoutputin mortgage-backedsecurities(MBS)holdingsin both2012and2013basedontheeffectsof continued longer-termTreasurysecurities.TheFederalReserve monetarypolicyaccommodation,somefurthereascontinuedtodevelopandtesttoolstoeventually ingof creditconditions,awaninginthedragfrom drainorimmobilizelargevolumesof bankingsystem elevatedcommodityprices,andsomepickupin reservesinordertoensurethatitwillbeableto spendingfrompent-updemand.Participants smoothlyandeffectivelyexitfromthecurrentaccom- expectedtheunemploymentratetotrenddownover modativestanceof policyattheappropriatetime. thenearterm,thoughataslowerpacethanthey TheCommitteewillcontinuetomonitortheeco- anticipatedinJanuaryandApril.Theycontinuedto nomicoutlookandfinancialdevelopments,andit willactasneededtobestfostermaximumemploy- 1 TheseprojectionswerepreparedinlateJuneandthusdidnot mentandpricestability. incorporatemorerecenteconomicnews.

58 98thAnnualReport|2011 anticipatethattheunemploymentrateattheendof suggestthatthepaceof therecoveryremainedsoftin 2013wouldremainwellabovetheirestimatesof the thesecondquarter.Activityinthesecondquarter longer-runratethattheyseeasconsistentwiththe washelddownbyfactorsthatarelikelytobetempo- Committee’sdualmandate.Participants’forecasts rary,includingthedampingeffectof higherfoodand indicatedapickupininflationfor2011relativeto energypricesonconsumerspendingaswellasthe 2010andtheirexpectationsearlierthisyear.How- supplychaindisruptionsstemmingfromtheearthever,mostparticipantsexpectedthattheinfluenceon quakeinJapan.Butevenaftersettingasidethose inflationof highercommoditypricesandsupplydis- effects,thepaceof economicexpansioninthesecond ruptionsfromJapanwouldbetemporary,andthat quarterappearstohavebeensubdued. inflationpressureswouldremainsubduedagainsta backdropof stablecommodityprices,well-anchored Inthelabormarket,employmentgainspickedup inflationexpectations,andlargemarginsof slackin noticeablyatthebeginningof 2011butslowedmarklabormarkets.Asaresult,theyanticipatedthatover- edlyinMayandJune.Theunemploymentrate,which allinflationwouldstepdownin2012andremainat fellinlate2010,heldcloseto9percentduringthe thatlowerlevelin2013,movingbackinlinewith earlymonthsof theyearbutthenedgedup,reaching coreinflationatlevelsatorslightlybelowpartici- 9.2percentinJune.Furthermore,long-durationjobpants’estimatesof thelonger-run,mandate- lessnessremainedatnear-recordlevels.Meanwhile, consistentrateof inflation. consumerpriceinflationmovedupnoticeablyover thefirsthalf of theyear,largelyinresponsetorapid Participantsgenerallyreportedthatthelevelsof increasesinthepricesof somecommoditiesand uncertaintyattachedtotheirprojectionsforeco- importedgoodsaswellastherecentsupplychain nomicgrowthandinflationhadrisensinceApriland disruptions.However,longer-terminflationexpectawereabovehistoricalnorms.Mostparticipants tionsremainedstable. judgedthatthebalanceof riskstoeconomicgrowth wasweightedtothedownside,whereasinApril,a Onbalance,financialmarketconditionsbecame majorityhadseentheriskstogrowthasbalanced. somewhatmoresupportiveof economicgrowthover Mostparticipantssawtheriskssurroundingtheir thefirsthalf of 2011,reflectinginpartcontinued inflationexpectationsasbroadlybalanced,whilein monetarypolicyaccommodationprovidedbythe April,amajorityhadjudgedthoserisksasskewedto FederalReserve.Intheearlypartof theyear,strong theupside.Participantsalsoreportedtheirassess- corporateprofitsandinvestors’perceptionsthatthe mentsof theratestowhichmacroeconomicvariables economicrecoverywasfirmingsupportedarisein wouldbeexpectedtoconvergeoverthelongerrun equitypricesandanarrowingof creditspreads.Since underappropriatemonetarypolicyandinthe May,however,indicationsthattheU.S.economic absenceof furthershockstotheeconomy.Thecen- recoverywasproceedingataslowerpacethanprevitraltendenciesof theselonger-runprojections,which ouslyanticipated,aperceivedmoderationinglobal havenotchangedsinceApril,were2.5to2.8percent growth,andheightenedconcernsaboutthepersisting forrealGDPgrowth,5.2to5.6percentfortheunem- fiscalpressuresinEuropeweighedoninvestorsentiploymentrate,and1.7to2.0percentfortheinflation mentandpromptedapullbackfromriskierfinancial rate.Becauseinflationinthelongrunislargelydeter- assets.Onnetoverthefirsthalf of theyear,yieldson minedbymonetarypolicy,thelonger-runprojections Treasurysecuritiesandcorporatedebtandrateson forinflationcanbeviewedasthelevelsof inflation fixed-rateresidentialmortgagesdeclined,andequity thatFOMCparticipantsconsidertobemostconsis- pricesrosesignificantly.Borrowingconditionsfor tentwiththeCommittee’smandatetofostermaxi- householdsandbusinesseseasedsomewhatfurther, mumemploymentandpricestability. althoughcreditconditionscontinuedtobetightfor someborrowers. Part 2 Recent Economic DomesticDevelopments and Financial Developments TheHouseholdSector Afterincreasingatasolidpaceinthefourthquarter HousingActivityandFinance of 2010,economicactivityexpandedmoreslowly overthefirsthalf of 2011.Inthefirstquarterof this Thehousingmarketremainedexceptionallyweakin year,realgrossdomesticproduct(GDP)increasedat thefirsthalf of 2011.Housingdemandcontinuedto anannualrateof 1.9percent;preliminaryindicators berestrainedbyhouseholds’concernsaboutthe

MonetaryPolicyandEconomicDevelopments 59 strengthof therecoveryforincomesandjobsaswell ersconfrontingdepressedhomevaluesandhigh asthepotentialforfurtherdeclinesinhouseprices; unemployment.Althoughdelinquencyratesonmost still-tightcreditconditionsforpotentialmortgage categoriesof mortgagesedgedmodestlylowerinthe borrowerswithless-than-pristinecreditalsoappear firstpartof 2011,theystayedathistoricallyhighlevtobedampingdemand.Asaresult,salesof single- els.Asof May,seriousdelinquencyratesonloansto familyhomesshowednosignsof sustainedrecovery primeandnear-primeborrowersstoodatabout duringthefirsthalf of theyear.Withdemandweak, 5percentforfixed-rateloansand14percentfor theoverhangof vacantpropertiesforsalesubstan- variable-rateloans.2Forsubprimeloans,asof April tial,distressedsaleselevated,andconstruction (thelatestmonthforwhichdataareavailable),serifinancingtight,newunitswerestartedatanaverage ousdelinquencyratesremainednear20percentfor annualrateof about410,000unitsbetweenJanuary fixed-rateloansand40percentforvariable-rate andMay—abitbelowthelevelrecordedinthe loans.Thenumberof homesenteringtheforeclosure fourthquarterof 2010andjust50,000unitsabove processdeclinedinthefirstquarterof 2011,butthe thequarterlylowreachedinthefirstquarterof 2009. numberof propertiesatsomepointintheforeclosure processremainedelevated.Mortgageservicerscon- Activityinthemultifamilysectorhasbeenabitmore tinuedtograpplewithdeficienciesintheirforeclosure buoyant,astheongoingreluctanceof potential procedures;resolutionof theseissuescouldeventuhomebuyerstopurchaseahome,compoundedby allybeassociatedwithanincreaseinthenumberof tightmortgagecreditstandards,appearstohaveled propertiesenteringtheforeclosureprocessassertoanincreaseindemandforrentalhousing.Indeed, vicersworkthroughthebacklogof severelydelinvacancyratesformultifamilyrentalunitshave quentloansmorequickly.3 droppednoticeably,andrentsforapartmentsinmultifamilybuildingshavemovedup.However,construc- Interestratesonfixed-ratemortgagesfell,onnet, tionfinancingremainsdifficulttoobtainformany duringthefirsthalf of 2011,amovethatlargelyparpotentialborrowers.Startsinthemultifamilysector alleledthedeclineinTreasuryyieldsovertheperiod. averaged160,000unitsatanannualrateinthefirst Evenwithmortgageratesnearhistoricallylowlevels, fivemonthsof 2011,noticeablyabovethe accesstomortgagecreditcontinuedtoberestrained 100,000unitsstartedinthefourthquarterof 2010 bynegativeequityandtightlendingstandards.For butstillwellbelowthe300,000-unitratethathadpre- example,theApril2011SeniorLoanOfficerOpinion vailedformuchof thepreviousdecade. SurveyonBankLendingPractices(SLOOS)indicatedthatstandardsonprimeandnontraditional Housepricesfellfurtheroverthefirsthalf of 2011. Thelatestreadingsfromnationalindexesshowprice 2 Amortgageisdefinedasseriouslydelinquentiftheborroweris 90daysormorebehindinpaymentsorthepropertyisin declinesforexistinghomesoverthepast12months foreclosure. intherangeof 5to8percent.Onesuchmeasurewith 3 TheFederalReserve,theOfficeoftheComptrolleroftheCurwidegeographiccoverage—theCoreLogicrepeat- rency,theOfficeofThriftSupervision,andtheFederalDeposit salesindex—fell8percentoverthe12monthsending InsuranceCorporationconductedanin-depthinteragency reviewofpracticesatthelargestmortgageservicingoperations inMaytoalevelthatisabout4percentbelowthe toexamineforeclosurepracticesgenerally,butwithanemphasis previoustroughinAprilof 2009.Housepricesare onthebreakdownsthatledtoinaccurateaffidavitsandother beinghelddownbythesamefactorsrestraining questionablelegaldocumentsbeingusedintheforeclosureprocess.Thereviewfound,amongotherthings,criticalweaknesses housingconstruction—thelargeinventoryof unsold inforeclosure-governancepractices,foreclosure-documentation homes,thehighnumberof distressedsales,andlack- processes,andoversightandmonitoringofthird-partylaw lusterhouseholddemand.Theinventoryof unsold firmsandothervendors.Basedonthefindingsfromthereview, theagenciesissuedenforcementactionsbyconsentagainst homeswilllikelyputdownwardpressureonhouse 14mortgageservicersinApril2011toaddressthesignificant pricesforsometime,giventhelargenumberof seri- deficienciesinmortgage-servicingandforeclosurepractices.See ouslydelinquentmortgagesthatcouldstillenterthe BoardofGovernorsoftheFederalReserveSystem(2011), “FederalReserveIssuesEnforcementActionsRelatedtoDefiforeclosureinventory.Asaresultof thedeclinein cientPracticesinResidentialMortgageLoanServicingand houseprices,theshareof mortgageswithnegative ForeclosureProcessing,”pressrelease,April13,www equityhascontinuedtorise:InMarch2011,roughly .federalreserve.gov/newsevents/press/enforcement/20110413a .htm;andBoardofGovernorsoftheFederalReserveSystem oneinfourmortgageholdersowedmoreontheir (2011),“StatementfortheRecord:OnMortgageServicing,” mortgagesthantheirhomeswereworth. testimonysubmittedtotheSubcommitteesonFinancialInstitutionsandConsumerCreditandonOversightandInvestigations,CommitteeonFinancialServices,U.S.HouseofRepre- Indicatorsof creditqualityintheresidentialmortsentatives,Washington,July7,www.federalreserve.gov/ gagesectorcontinuedtoreflectstrainsonhomeown- newsevents/testimony/statement20110707a.htm.

60 98thAnnualReport|2011 residentialmortgagesandhomeequityloanswere fundamentally,however,continuedconsumerpessiaboutunchangedormoderatelytighterduringthe mismandaslowerpaceof increaseinrealhousehold firstquarter,andthatdemandfortheseloanscontin- income,onlypartlyduetotemporarilyhighenergy uedtodecline.4Thepaceof mortgageapplications andfoodprices,alsoappeartohaveweighedonconforhomepurchasesremainedverysluggishinthe sumption.Thesavingrate,althoughcontinuingto firsthalf of theyear,probablyreflectingthestrin- edgedown,remainswellabovelevelsthatprevailed gencyof lendingtermsandtheoverallweaknessof priortotherecession. housingdemand.Refinancingactivityincreased modestlyinthesecondquarterinresponsetothe Despiteatemporaryreductioninpayrolltaxrates downwarddriftininterestrates,butsuchactivity beginninginJanuary,aggregaterealdisposableperremainssubduedcomparedwiththatseenin2010.Over- sonalincome—personalincomelesspersonaltaxes, all,mortgagedebtoutstandingcontinuedtocontract. adjustedforpricechanges—wasunchanged,onnet, overthefirstfivemonthsof theyearafterrising Netissuanceof mortgage-backedsecurities(MBS) 2percentin2010.Beforetaxes,realwageandsalary guaranteedbygovernment-sponsoredenterprises income,whichreflectsboththenumberof hours (GSEs)expandedslightlyinthefirsthalf of theyear workedandaveragehourlywagesadjustedforinflabutremainedrelativelylow,consistentwiththeslow tion,wasalsoflatfromDecembertoMayafterhavpaceof mortgageoriginationstofinancehomepur- ingrisen1¾percentlastyear.Wagegainshavebeen chases.Netissuanceof GinnieMaesecurities restrainedbytheweaknessinthelabormarket. remainedconsiderablymorerobustthannetissuance Moreover,thepurchasingpowerof wagesandsalaof securitiesbyFannieMaeandFreddieMac, rieshasbeendrainedbythisyear’srun-upinprice reflectingthesubstantialshareof mortgagesinsured inflation.Onemeasureof realwages—averagehourly bytheFederalHousingAdministration(FHA).The earningsof allemployees,adjustedfortherisein securitizationmarketformortgageloansnotguaran- PCEprices—fellabout1½percentatanannualrate teedbyahousing-relatedGSEortheFHAremained overthefirstfivemonthsof 2011afterhaving essentiallyclosed.YieldsonagencyMBSfellroughly increased½percentoverthe12monthsof 2010. inlinewiththoseonTreasurysecurities.TheTreasuryDepartmentannouncedonMarch21thatit Twootherimportantdeterminantsof consumeroutwouldbegintosellits$142billionagencyMBSport- laysarealsoactingasarestraintonspending. folioatapaceof about$10billionpermonth;the Althoughthewealth-to-incomeratiohastrendedup announcementappearedtohavelittlelastingeffect sincethebeginningof 2009,itremainsnearthelow onspreadsof yieldsonMBSoverthoseon endof therangethathasprevailedsincethemidcomparable-maturityTreasurysecurities.Through 1990s.Inaddition,consumersentiment,whichhad theendof June,theTreasuryhadsoldMBSwitha movedupearlyin2011,retreatedagainwhengas currentfacevalueof about$34billion. pricesspikedinthespring.Morebroadly,consumer sentimentseemstohaveimprovedlittle,if any,from ConsumerSpendingandHouseholdFinance thereadingsthatweretypicalof 2009and2010. Therateof increaseinconsumerspendingslowed appreciablyduringthefirsthalf of theyear.Afterris- Totalhouseholddebtcontractedatanannualrateof ingatanannualrateof morethan3percentinthe about2percentinthefirstquarterof theyear, secondhalf of 2010,realpersonalconsumption roughlythesamepaceseenin2010,asthedeclinein expenditures(PCE)steppeddowntoabouta2per- mortgagedebtnotedearlierwasonlypartiallyoffset centrateof increaseinthefirstquarter,andavailable byamoderateincreaseinconsumercredit.Tight informationsuggeststhattheriseinspendinginthe creditconditionsprecludedsomehouseholdsfrom secondquarterwasquitemodestaswell.Consumer obtainingcredit,andcharge-offsremainedelevated outlaysinthesecondquarterwerehelddowninpart onmanycategoriesof loans.Theongoingreduction bythereducedavailabilityof motorvehicles,espe- inoverallhouseholddebtlevels,combinedwithlow ciallyforthosemodelsaffectedbythesupplychain interestratesandaslightincreaseinpersonalincome, disruptionsthatfollowedtheearthquakeinJapan; resultedinafurtherdeclineinthedebtservice purchasesof motorvehiclesshouldreboundincom- ratio—theaggregaterequiredprincipalandinterest ingmonthsasdealersuppliesarereplenished.More paymentonexistingmortgagesandconsumerdebt relativetoincome.Indeed,asof thefirstquarterof 2011,thedebtserviceratiowas11.5percent,thelow- 4 TheSLOOSisavailableontheFederalReserveBoard’swebsite atwww.federalreserve.gov/boarddocs/SnLoanSurvey. estlevelseensince1995.

MonetaryPolicyandEconomicDevelopments 61 Themodestexpansionof consumercredit,which autoloansmadeupalargeshareof thenewsupply. beganinlate2010,reflectsamixedpicture.Nonre- Issuanceof creditcardABS,however,remained volvingconsumercredit,whichconsistslargelyof weak,asthesharpcontractionincreditcardlending autoandstudentloansandaccountsforabouttwo- limitedtheneedfornewfundingandaslastyear’s thirdsof totalconsumercredit,roseatanannualrate accountingrulechangesreportedlydampedthe of almost5percentinthefirstfivemonthsof 2011. attractivenessof securitizingtheseloans,particularly Theincreaseisconsistentwithresponsestothe sincebanksremainedawashinothersourcesof April2011SLOOS,whichindicatedasharprisein cheapfunding.6YieldsonABSandthespreadsof banks’willingnesstomakeconsumerinstallment suchyieldsovercomparable-maturityinterestrate loansandanongoingeasingof termsandstandards swaprateswerelittlechanged,onnet,overthefirst onthem.However,revolvingconsumercredit— half of theyear,stabilizingatlevelsonlyslightly mostlycreditcardborrowing—declinedthrough higherthanthoseseenpriortothefinancialcrisis. April,albeitataslowerpacethanin2010;earlyestimatespointtoanincreaseinMay.Althoughanet TheBusinessSector fractionof about20percentof banksrespondingto FixedInvestment theApril2011SLOOSreportedaneasingof standardsforapprovalof creditcardapplications,access Realbusinessspendingforequipmentandsoftware tocreditcardloansforborrowerswithblemished (E&S)roseatanannualrateof about10percentin credithistoriesremainedlimited.Inaddition,the thefirstquarter,roughlythesamepaceasintheseccontractioninhomeequityloans,historicallya ondhalf of 2010.Businesspurchasesof motor sourceof fundingforconsumerdurablesandother vehiclesrosebriskly,andoutlaysoninformation largehouseholdexpenditures,appearstohaveinten- technology(IT)capitalandonequipmentotherthan sifiedduringthefirsthalf of 2011,inpartowingto transportationandITcontinuedtoriseatsolidrates. declinesinhomeequityandstill-stringentlendingstandards. More-recentdataonordersandshipmentsfora broadrangeof equipmentcategoriessuggestthat Indicatorsof consumercreditqualitygenerally E&Sspendingwilllikelypostanothersizablegainin improved.Thedelinquencyratesoncreditcardloans, thesecondquarter.Spendingisbeingboostedbythe bothatcommercialbanksandinsecuritizedpools, needtoreplaceolder,less-efficientequipmentand,in retreatedtolessthan4percentinthefirstquarter somecases,toexpandcapacity.Onesoftspotinthe andMay,respectively—atthelowendsof their secondquarterwilllikelybeinbusinesspurchasesof rangesoverrecentdecades.Delinquenciesonnonre- motorvehicles,which,likeconsumerpurchases,were volvingconsumerloansatcommercialbanksalso helddownbytheshortagesof Japanesenameplate edgedlower,whiledelinquenciesonautoloansat carsinthewakeof theearthquakeinJapan,butthis captivefinancecompanieswereflat,onnet,overthe effectshouldbereversedduringthesecondhalf of firstfourmonthsof theyear;bothof thesemeasures theyear. remainedaroundtheirhistoricalaverages. Bycontrast,investmentinnonresidentialstructures Interestratesonconsumerloansheldfairlysteady, remainsatalowlevel.Afterfalling17percentin onnet,inthefirsthalf of 2011.Interestratesonnew- 2010,realbusinessoutlaysonstructuresoutsideof autoloanscontinuedtolingerathistoricallylowlev- thedrillingandminingsectorfellatanannualrateof els.Ratesoncreditcardloansarearoundtheirhis- 25percentinthefirstquarter.Althoughtheincomtoricalaverages,butthespreadof theseratestothe ingdatapointtoasmallincreaseinoutlaysinthe two-yearTreasuryyieldisquitewide,inpartbecause secondquarter,highvacancyrates,continuingprice of pricingadjustmentsmadeinresponsetothe declinesinallbutafewmarkets,anddifficultfinanc- CreditCardAccountabilityResponsibilityandDis- ingconditionsforbuilderssuggestthatspendingwill closureAct,orCreditCardAct,of 2009.5 6 IssuedbytheFinancialAccountingStandardsBoard(FASB), Inthefirsthalf of 2011,issuanceof consumerasset- StatementsofFinancialAccountingStandardsNos.166 backedsecurities(ABS)remainedataboutthesame (AccountingforTransfersofFinancialAssets,anAmendmentof paceasin2010butstillwellbelowaverageissuance FASBStatementNo.140)and167(AmendmentstoFASBInterpretationNo.46(R))becameeffectiveatthestartofacomparatespriortothefinancialcrisis.Securitiesbackedby ny’sfirstfiscalyearbeginningafterNovember15,2009,or,for companiesreportingearningsonacalendar-yearbasis,after 5 TheCreditCardActincludessomeprovisionsthatplacerestric- January1,2010.Theamendmentsrequiredmanycreditcard tionsonissuers’abilitytoimposecertainfeesandtoengagein issuerstobringsecuritizationsontotheirbalancesheetsand risk-basedpricing. thereforetoholdmorecapitalagainstthem.

62 98thAnnualReport|2011 beweakforsometimetocome.However,spending investment-andspeculative-gradedebt.Firmssought ondrillingandminingstructureshascontinuedto torefinanceexistingdebt,lockinnewfundingatcurriseatarobustpaceinresponsetoelevatedoilprices rentlowyields,and,toalesserextent,financemerger andadvancesintechnologyforhorizontaldrilling andacquisitionactivity.Theamountof unsecured andhydraulicfracturing. nonfinancialcommercialpaperoutstandingalso pickedupabitinthefirsthalf of theyear.Issuance InventoryInvestment inthesyndicatedleveragedloanmarketreachedpre- Realinventoryinvestmentsteppedupinthefirst crisislevels,partlyowingtoheavyrefinancingactivquarter,asstockbuildingoutsideof motorvehicles ityandinresponsetostrongdemandforfloating-rate increasedsomewhatandmotorvehicleinventories assetsfrominstitutionalinvestors.Likelyreflectingin wereaboutunchangedfollowingasubstantialfourth- partanincreasedappetiteforhigher-yieldingdebt quarterrunoff.Outsideof themotorvehiclesector, instruments,themarketforcollateralizedloanoblitheinventory-to-salesratiosformostindustriescov- gations(CLOs)showedsignsof renewedactivity,and eredbytheCensusBureau’sbook-valuedataremain issuancepickedup. nearthelevelsobservedbeforetherecession,andsurveyssuggestthatinventorypositionsformostbusi- Afterdecliningsharplyin2009and2010,C&Iloans nessesgenerallyarenotperceivedasbeingexcessive. onbanks’booksroseatavigorouspaceinthefirst Inthemotorvehiclesector,theeffectsof theearth- half of 2011.TheSLOOSsof January2011and quakeinJapanandsupplyconstraintsontheproduc- April2011showedthatbankscontinuedtoeasestantionof someof themostfuel-efficientdomestic dardsandtermsforC&Iloans.InApril,morethan nameplatecarsledtoasharpdropininventoriesin half of thesurvey’srespondentsreportedhaving thesecondquarter,butsomesignificantrebuildingof trimmedspreadsovertheircostof fundsonloansto inventoriesislikelytooccurthisquarter. firmsof allsizes.Respondentsalsoindicatedthat nonpriceloantermshaveeased;theseresultswere CorporateProfitsandBusinessFinance corroboratedbytheMay2011Surveyof Termsof OperatingearningspershareforS&P500firmscon- BusinessLending(STBL),whichsuggestedthatthe tinuedtoriseinthefirstquarterof 2011,increasing averagesizeof loancommitmentsatdomesticbanks ataquarterlyrateof about6percent.Withthelatest andtheaveragematurityof loansdrawnonthose rise,aggregateearningspershareadvancedtotheir commitmentshavetrendedupinrecentquarters. pre-crisispeak.Duringmuchof thefirsthalf of the BanksrespondingtotheSLOOSalsonotedanongoyear,analystsmarkeduptheirforecastsof year- ingfirmingof demandforC&Iloans,particularlyby aheadearningsbyamodestamount;however,their largeandmedium-sizedfirms. forecastswereflatfromMaytoJune. Forsmallbusinesses,borrowingconditionsremained Thecreditqualityof nonfinancialcorporations tight.TheMaySTBLrevealedthattheweightedimprovedfurtherinthefirsthalf of 2011asfirms averagespreadonC&Iloancommitmentsof less continuedtostrengthentheirbalancesheets.Liquid than$1millionstayedstubbornlyhighinrecent assetsremainedatrecord-highlevelsinthefirstquar- quarters,incontrasttoamodestdeclineinthe ter,andtheaggregateratioof debttoassets—a spreadoncommitmentsof morethan$1million. measureof corporateleverage—edgedlower.Credit However,somesignsof improvementincreditavailratingupgradesof corporatedebtoutpaceddown- abilityforsmallbusinesseshaveemergedinrecent gradesthroughJune,andthesix-monthtrailingbond months.Inadditiontotheeasingof termsandstandefaultratefornonfinancialfirmsremainedcloseto dardsforC&IloansreportedintheAprilSLOOS, zero.Thedelinquencyrateoncommercialandindus- surveysconductedbytheNationalFederationof trial(C&I)loansatcommercialbanksdecreasedin IndependentBusinessshowedthatthenetfractionof thefirstquarterto2½percent,aboutthemiddleof smallbusinessesreportingthatcredithadbecome itsrangeoverthepasttwodecades. moredifficulttoobtainthanthreemonthsagohas declinedtoitslowestlevelsincethefinancialcrisis, Borrowingbynonfinancialcorporationsremained althoughitremainswellaboveitspre-crisisaverage. robustinthefirsthalf of theyear,reflectingboth Moreover,thenetpercentageof respondentsexpectstrongcorporatecreditqualityandfavorablefinanc- ingcreditconditionstobecometighteroverthenext ingconditionsincapitalmarkets.Grossissuanceof threemonthsremained,onaverage,lowerthanin nonfinancialcorporatebondsrosetoamonthly 2010.Demandforcreditbysmallbusinessesisstill recordhighinMayamidheavyissuanceof both weak,withahistoricallysmallfractionof suchbusi-

MonetaryPolicyandEconomicDevelopments 63 nessesindicatingthattheyhaveborrowingneeds.In TheGovernmentSector addition,thefractionof businessesthatcitedcredit availabilityasthemostimportantproblemthatthey FederalGovernment facedcontinuedtobesmall;manyfirmspointed Thedeficitinthefederalunifiedbudgetremains insteadtoweakdemandfromcustomersastheir elevated.TheCongressionalBudgetOffice(CBO) greatestconcern. projectsthatthedeficitforfiscalyear2011willbe closeto$1.4trillion,orroughly9percentof Thefundamentalsincommercialrealestate(CRE) GDP—alevelcomparabletodeficitsrecordedin marketsremainedextremelyweakinthefirsthalf of 2009and2010butsharplyhigherthanthedeficits 2011,althoughfinancingconditionsforcertainCRE recordedpriortotheonsetof therecessionand assetsdidseesomemodestimprovement.Banks’ financialcrisis.Thebudgetdeficitcontinuestobe holdingsof CREloanscontinuedtocontractinthe boostedbytheeffectsof thestimuluspolicies firsthalf of theyear,drivenbyreducedlendingfor enactedinrecentyears,includingtheprovisionsof constructionandlanddevelopmentandsizable theAmericanRecoveryandReinvestmentActof charge-offsonexistingloans.Althoughdelinquency 2009(ARRA)andtheTaxRelief,Unemployment ratesforCREloansatcommercialbanksreceded InsuranceReauthorization,andJobCreationActof slightlyfromrecentpeaks,theyremainedathistori- 2010.Inaddition,theweaknessintheeconomyconcallyhighlevels,whilethedelinquencyrateforloans tinuestodamprevenuesandboostpaymentsfor fundedbycommercialmortgage-backedsecurities incomesupport. (CMBS)alsocontinuedtobeelevated.Responsesto questionsonCRElendingintheApril2011SLOOS Federalreceiptshaverisenrapidlylately—theyareup showedthatmostdomesticbanksreportedno about10percentinthefirsteightmonthsof fiscal changeintheirlendingstandardsforapprovingCRE 2011comparedwiththesameperiodinfiscal2010. loans,althoughafewlargebanksandforeignbanks Nonetheless,thelevelof receiptsremainslow; reportedhavingeasedsuchstandards. indeed,theratioof receiptstonationalincomeisless than16percent,nearthelowestreadingforthisratio Onnet,financingconditionsforinvestment-quality in60years.Therobustriseinrevenuesthusfarthis properties—roughly,thosewithstablerentstreamsin fiscalyearislargelyaresultof stronggrowthinindilargecities—improvedinthefirsthalf of theyear, vidualincometaxreceipts,likelyreflectingsome althoughconditionsworsenedabitinJunewiththe step-upinthegrowthof nominalwageandsalary moregeneralpullbackfromriskyassets.Secondaryincomeandanincreaseincapitalgainsrealizations. marketspreadsforAAA-ratedCMBSdeclinedto Corporatetaxesinthefirsteightmonthsof thefiscal multiyearlowsthroughMaybeforeretracingsomeyearwereuponlyabout5percentfromlastyear,as whatinJune,andrespondentstotheFederal theeffectof strongprofitsgrowthonreceiptswas Reserve’sJune2011SeniorCreditOfficerOpinion partiallyoffsetbyrecentlegislationprovidingmore- SurveyonDealerFinancingTerms(SCOOS)indifavorabletaxtreatmentforsomebusinessinvestment. catedthatfundingforless-liquidlegacyCMBShad increased.7Newissuanceof CMBScontinuedtopick Totalfederaloutlayshaverisennearly6percentin up,withissuanceinthefirsthalf of 2011exceeding thefirsteightmonthsof fiscal2011relativetothe thatinallof 2010.Renewedinvestorinterestinhighcomparableyear-earlierperiod.Muchof theincrease qualitypropertieshasalsobeenevidentininvestment inoutlaysthisyearrelativetolasthasbeenrelatedto flowsinto,andthesharepricesfor,equityrealestate financialtransactions.Inparticular,repaymentsto investmenttrusts,orREITs. theTreasuryof obligationsfortheTroubledAsset Relief Programloweredmeasuredoutlayslastyear Inthecorporateequitymarket,combinedgrossissuandhencereducedthebasefigureforthisyear’s anceof seasonedandinitialofferingscontinuedin comparison.Excludingthesetransactions,outlays thefirstquarterof 2011atthesamesolidpaceseen wereuplessthan2percentthisyear.Thisrelatively throughout2010.Atthesametime,however,volsmallincreaseinoutlaysreflectsreductionsinboth umesof equityretirementsfromsharerepurchases ARRAspendingandunemploymentinsurancepayandcash-financedmergersandacquisitions mentsaswellasasubduedpaceof defensespending. remainedhighandcontinuedtorise. Bycontrast,netinterestpaymentshaveincreased sharply,whilemostotherspendinghasincreasedat 7 TheSCOOSisavailableontheFederalReserveBoard’swebsite atwww.federalreserve.gov/econresdata/releases/scoos.htm. ratescomparabletofiscal2010.

64 98thAnnualReport|2011 Asmeasuredinthenationalincomeandproduct foreignparticipationatauctionsfellwithinhistorical accounts(NIPA),realfederalexpendituresoncon- ranges.DemandforTreasurysecuritieslikelycontinsumptionandgrossinvestment—thepartof federal uedtobesupportedbyheightenedinvestordemand spendingthatentersdirectlyintothecalculationof forrelativelysafeandliquidassetsinlightof fiscal realGDP—fellatanannualrateof closeto8percent troublesinsomeEuropeancountries.However,forinthefirstquarter.Defensespending,whichtendsto eignnetpurchasesof Treasurysecuritiesandthe beerraticfromquartertoquarter,plungedalmost12per- paceof growthof foreigncustodyholdingsof Treascentandnondefensepurchaseswereunchanged. urysecuritiesattheFederalReserveBankof New Yorkmoderated,onnet,duringthefirsthalf of the FederalBorrowing year. Federaldebtexpandedatasomewhatslowerpacein thefirsthalf of thisyearthanin2010.OnMay16, StateandLocalGovernment thefederaldebtreachedthe$14.294trillionlimit, StateandlocalgovernmentsremainedundersignifiandtheTreasurybegantoimplementextraordinary cantfiscalpressureinthefirsthalf of 2011.Overthe measurestoextenditsabilitytofundgovernment firstsixmonthsof theyear,thesegovernmentscutan operations.8TheTreasuryestimatesthatif theCon- averageof 28,000jobspermonth,similartothepace gressdoesnotraisethedebtlimit,thecapacityof of joblossobservedin2010.Realconstruction theseextraordinarymeasureswillbeexhaustedon expenditureshavealsodeclined.Afterfallingmod- August2.Thusfar,financialmarketparticipantsdo estlyin2010,realstructuresinvestmentbystateand notseemtobepricinginsignificantoddsof a“tech- localgovernmentsplungedinthefirstquarterof nicaldefault.”However,theriskof suchadefault 2011,andavailableinformationonnominalconhasbeennotedbytheratingagencies.InJune, structionthroughMaysuggeststhatconstruction Moody’sInvestorsService,FitchRatings,andStan- spendingcontinuedtodeclineinrecentmonths. dard&Poor’seachindicatedthattheymaydown- Althoughfederalstimulusfundshaveboostedcongrade,tovaryingdegrees,thecreditratingof someor structionexpendituresonhighwaysandothertransallU.S.debtsecuritiesif principalorinterestpay- portationinfrastructure,othertypesof construction mentsaremissed.Moody’snotedthatevenif default spending—mostnotablyconstructionof schools— isavoided,itsratingoutlookwoulddependonthe havebeendeclining.Capitalexpendituresarenot achievementof acredibleagreementonsubstantial typicallysubjecttobalancedbudgetrequirements. deficitreduction.Inmid-April,Standard&Poor’s Nevertheless,thepaymentsof principalandinterest reviseditsoutlookforthefederalgovernment’sAAA onthebondsusedtofinancecapitalprojectsaregenlong-termandA-1+short-termsovereigncreditrat- erallymadeoutof operatingbudgets,whicharesubingstonegative,citing“materialrisks”thatpolicy- jecttobalancedbudgetconstraints.Asaresult,state makersmightfailtoreachanagreementwithinthe andlocalgovernmentshavehadtomakedifficult nexttwoyearsonhowtoaddressmedium-andlong- choicesevenaboutthisformof spending. termfiscalimbalances. Stateandlocalrevenuesappeartohaverisenmoder- Federaldebtheldbythepublicreachedabout65per- atelyoverthefirsthalf of thisyear.Manystates centof nominalGDPinthesecondquarterof 2011 reportedstrongrevenuecollectionsduringthe and,accordingtoCBOprojections,willsurpass incometaxfilingseason,butfederalstimulusgrants, 70percentof GDPin2012.Despitecontinuedhigh whilestillsizable,havebeguntophaseout.Atthe levelsof federalgovernmentfinancingneedsandthe locallevel,propertytaxcollectionsappeartobesoftconcernsraisedbythedebtlimit,Treasuryauctions eningasthesharpdeclinesinhousepricesincreashavebeengenerallywellreceivedsofarthisyear.For inglyshowthroughtoassessmentsandhencetocolthemostpart,bid-to-coverratiosandindicatorsof lections.Thus,despitetherecentgoodnewsonstate revenues,thestateandlocalsectorislikelytocon- 8 OnMay16,theSecretaryoftheTreasurydeclareda“debtissu- tinuetofaceconsiderablebudgetarystrainfora ancesuspensionperiod”fortheCivilServiceRetirementand while.Moreover,manystateandlocalgovernments DisabilityFund,permittingtheTreasurytoredeemaportionof willneedtosetasidemoneyincomingyearsto existingTreasurysecuritiesheldbythatfundasinvestmentsand tosuspendissuanceofnewTreasurysecuritiestothatfundas rebuildtheiremployeepensionfundsafterthefinaninvestments.TheTreasuryalsobegansuspendingsomeofits ciallossessustainedoverthepastcoupleof yearsand dailyreinvestmentofTreasurysecuritiesheldasinvestmentsby tofundhealth-carebenefitsfortheirretired theGovernmentSecuritiesInvestmentFundoftheFederal Employees’RetirementSystemThriftSavingsPlan. employees.

MonetaryPolicyandEconomicDevelopments 65 StateandLocalGovernmentBorrowing atanannualrateof almost5¼percent,reflectinga Whileconditionsinthemunicipalbondmarket returntoamorenormalpaceof expansion.Imports improvedsomewhatinthefirsthalf of theyear,those of allmajorcategoriesincreased,withthesegains conditionscontinuetoreflectongoingconcernsover fairlybroadbasedacrosstradingpartners.Datafor thefinancialhealthof stateandlocalgovernments. AprilandMayindicatethat,despitesomedragfrom Onbalancethisyear,yieldsonlong-termgeneral thedisruptionstoautomotiveimportsfromJapan obligationbondsfellsomewhatmorethanthoseon followingtheearthquake,importsof goodsandsercomparable-maturityTreasurysecurities;however, viceshavecontinuedtoriseatamoderatepace. theratioof municipalbondyieldstoTreasuryyields remainedhighbyhistoricalstandards.Creditdefault Alltold,netexportsmadeasmallpositivecontribuswap(CDS)spreadsformanystatesnarrowedto tionof almost¼percentagepointtorealGDP theirlowestlevelsinatleastayearbutremainwell growthinthefirstquarterof 2011.Thecurrent abovetheirpre-crisislevels,whiledowngradesof the accountdeficitwidenedslightlyfromanaverage creditratingsof stateandlocalgovernmentscontin- annualrateof $465billioninthesecondhalf of uedtooutpaceupgradesbyanotablemarginduring 2010to$477billion,orabout3¼percentof GDP,in thefirsthalf of theyear. thefirstquarterof thisyear;thewideningresulted primarilyfromtheincreaseinthepriceof Issuanceof long-termsecuritiesbystateandlocal importedoil. governmentsdroppedtomultiyearlowsinthefirst half of 2011.Inpart,thedeclineisaconsequenceof Thespotpriceof WestTexasIntermediate(WTI) theoutsizedissuanceseeninthefourthquarterof crudeoilcontinueditsascentintotheearlymonths 2010,whenstatesandmunicipalitiesrushedtoissue of 2011,risingsharplyfromaround$90perbarrelat long-termbondsbeforetheexpirationof theBuild thebeginningof theyeartopeakatalmost$115by AmericaBondprogramattheendof theyear.9How- lateApril.Theincreaseoverthefirstfourmonthsof ever,therecentweaknesslikelyalsoreflectedtepid theyearlikelyreflectedcontinuedrobustgrowthin investordemand.Mutualfundsthatinvestinlong- globaloildemand,particularlyintheEMEs,coupled termmunicipalbondsexperiencedheavynetout- withsupplydisruptionsandthepotentialforfurther flowslatelastyearandinJanuary2011.Netredemp- disruptionsduetothepoliticalunrestintheMiddle tionsslowedsubstantiallyinsubsequentmonths,and EastandNorthAfrica(MENA)region.Inrecent flowshavebeenroughlyflatsinceMay. weeks,thespotpriceof WTIhasfallenbacktounder $100perbarrelbecauseof increasingconcernsthat TheExternalSector globalactivitymightbedecelerating.OnJune23,the Bothrealexportsandimportsof goodsandservices InternationalEnergyAgencydecidedtorelease expandedatasolidpaceinthefirstquarterof 2011. 60millionbarrelsof oilfromstrategicreservesover Realexportsincreasedatanannualrateof 7½per- thefollowing30days.Thepriceof thefar-dated cent,supportedbycontinuedrobustforeigndemand futurescontractsforcrudeoil(thatis,thecontracts andthelowervalueof thedollar.Mostmajorcatego- expiringinDecember2019)mostlyfluctuatedinthe riesof exportsrose,withindustrialsupplies,capital neighborhoodof $100duringthefirsthalf of the goods,andautomotiveproductspostingthelargest year,implyingthatthemarketsviewedtherun-upin gains.Acrosstradingpartners,exportstoCanada, oilpricesseenearlierintheyearaspartlytransitory. Mexico,andotheremergingmarketeconomies (EMEs)wereparticularlystrong,whileexportstothe Overthefirstquarter,pricesforabroadvarietyof EuropeanUnion(EU)andChinawereaboutflat. nonfuelcommoditiesalsomovedupsignificantly.As DataforAprilandMaysuggestthatexportscontin- withoil,theseincreasesweresupportedprimarilyby uedtogrowatarobustpaceinthesecondquarter. continuedstrengthinglobaldemand,especiallyfrom theEMEs.Inaddition,tightsupplyconditions Aftermovinguponlymodestlyinthesecondhalf of playedasignificantroleinpushinguppricesfor 2010,realimportsof goodsandservicesaccelerated manyfoodcommodities.Attheonsetof thesecond noticeablyinthefirstquarterof thisyear,increasing quarter,pricesstabilizedandgenerallybeganto retreatamidgrowinguncertaintyabouttheoutlook 9 TheBuildAmericaBondprogram,authorizedunderthe fortheglobaleconomy,fallingbacktoaroundthe ARRA,allowedstateandlocalgovernmentstoissuetaxable elevatedlevelsregisteredatthestartof thisyear(see bondsforcapitalprojectsandreceiveasubsidypaymentfrom theTreasuryfor35percentofinterestcosts. box1).

66 98thAnnualReport|2011 Box 1. Commodity Price Developments Despiterecentdeclines,nominalpricesformany MexicoandtheNorthSea.Thesubstantialmissin commoditiesarenearrecordhighs.Theincreasein theforecastedproductionbytheOrganizationofthe commoditypricessince2002runscountertothe PetroleumExportingCountries(OPEC)inpartreflects trendoverthepriortwodecadesofdecliningreal asurprisingunresponsivenessofOPEC’ssupplyto prices.Theearliertrenddeclineinpartreflectedthe higherprices,suggestingthatanupwardshiftin aftermathofaspikeincommoditypricesinthe OPEC’sperceivedpricetargetalsoheldbacksupply 1970s,whicheventuallyboostedsupplyandcur- growth.Likewise,formetals,industrygroupswere taileddemandforcommodities.Therelativelylow repeatedlyoverlyoptimisticinregardtoprojected realcommoditypricesofthe1980sand1990s,in supplygrowth,mostnotablyforcopper.Foragriculturn,setthestageforthepickupinpricesoverthe turalproducts,althoughyieldsandacreage pastdecade,asunderinvestmentinnewsupply increasedoverthepast10years,unusuallyunfavorcapacityleftcommoditymarketsill-preparedtomeet ableweatherhasrestrainedsuppliesinrecentyears. asurgeindemandlinkedtorapidgrowthinglobal Thecurrenthighlevelofcommoditypricesislikelyto realgrossdomesticproduct(GDP).Thepickupin promptanexpansionofsupplyandamoderationin worldGDPgrowthwasledbytheemergingmarket demandthatcouldrelievesomeofthepressurescureconomies(EMEs).AsEMEgrowthisrelativelycomrentlyboostingprices.Forenergy,nonconventional modityintensive,theconcentrationofworldGDP oilproductioncontinuestoexpand,includingthe growthintheseeconomiesaddedtoupwardpres- Canadianoilsandsandtherecentdevelopmentsin suresondemandforcommoditiesandthustheirprices. NorthDakota’sBakkenShale.Similarly,fornatural EMEdemandhasbeenimportantforgrowthinglobal gas,newdrillingtechnologyhasunlockedpreviously consumptionofvariouscommoditiesoverthepast inaccessibledepositsofshalegas,resultinginmuch decade.Foroil,metals,andsoybeans,theentire higherU.S.naturalgasproductionandlowerprices. increaseinconsumptionovertheperiodisattribut- Foragriculture,althoughharvestedacresoverseas abletotheEMEs,particularlyChina.Forcorn, haveexpandedbrisklysince2000,yieldsforcorn increasedU.S.ethanolproductionalsohasbeenan andsomeothercropsarecurrentlymuchlowerthan importantfactorinboostingconsumption. in the United States, suggesting the potential for furthergainsabroad. Whiledemandforcommoditieshasbeenstrong, growthofsupplyhasbeenrelativelylimited.For Althoughtherearereasonsforoptimism,therelative example,oilproductionoverthepastdecade timingandmagnitudeofthesesupplyanddemand increasedbyonlyabouthalfasmuchaswaspro- adjustmentsareuncertain.Commoditypriceswill jectedbytheU.S.DepartmentofEnergyatthestart continuetobeaffectedbythegeneralevolutionof ofthedecade.ProductionintheOrganisationfor theglobaleconomyandbyevenlesspredictablefac- EconomicCo-operationandDevelopmentcountries tors,suchasweatherandpoliticalstrife. wasdepressedbylower-than-expectedproductionin Pricesof non-oilimportedgoodsacceleratedinthe Netnationalsavingwasnegative1.4percentof firstquarterof 2011,surgingatanannualrateof nominalGDPinthefirstquarterof 2011(thelatest 7¼percent,thefastestpacesincethefirsthalf of dataavailable).Theincreaseinthefederaldeficit 2008.Thispickupwasdrivenbyafewfactors, morethanaccountsforthedeclineinthenetnational includingtheriseincommodityprices,significant savingratesince2006,asprivatesavingroseconsiderincreasesinforeigninflation,andthedepreciationof ably,onbalance,overthisperiod.Nationalsaving thedollar.Inthesecondquarterof thisyear,with willlikelyremainrelativelylowthisyearinlightof commoditypricesapparentlystabilizing,import thecontinuinglargefederalbudgetdeficit.If lowlevpriceinflationlikelymoderated. elsof nationalsavingpersistoverthelongerrun,they willlikelybeassociatedwithbothlowratesof capital NationalSaving formationandheavyborrowingfromabroad,limit- TotalU.S.netnationalsaving—thatis,thesavingof ingtheriseinthestandardof livingof U.S.residents U.S.households,businesses,andgovernments, overtime. excludingdepreciationcharges—remainsextremely lowbyhistoricalstandards.Afterhavingreached TheLaborMarket nearly4percentof nominalGDPinearly2006,net nationalsavingdroppedoverthesubsequentthree EmploymentandUnemployment years,reachingalowof negative3percentinthe Conditionsinthelabormarkethaveimprovedonly thirdquarterof 2009.Sincethen,thenationalsaving graduallyandunevenly.Inthefirstfourmonthsof ratehasedgedup,onbalance,butremainsnegative: 2011,privatepayrollemploymentincreasedanaver-

MonetaryPolicyandEconomicDevelopments 67 ageof about200,000jobspermonth,upfromthe Box 2. Long-Term Unemployment averagepaceof 125,000jobspermonthrecordedin thesecondhalf of 2010.However,privateemploy- ThedeeprecessionandsubsequentslowimprovementgainsslowedinMayandJune,averagingonly mentinthelabormarkethaveresultedinasharp 65,000,withthestep-downswidespreadacrossindus- increaseintheincidenceoflong-termunemployment,definedhereasbeingoutofwork27weeks tries.Inaddition,cutbacksinjobscontinuedatstate orlonger.Inthefirstquarterofthisyear,about andlocalgovernments. 6millionpersons(4percentofthelaborforce)were long-termunemployed.Thelong-termunemploy- Theunemploymentrate,whichhadappearedtobe mentrateisalmosttwiceashighasitsprevious onadownwardtrajectoryattheturnof theyear,lev- peakofabout2½percentofthelaborforcefollowingtherecessionoftheearly1980s.Indeed,the eledoff ataround9percentintheearlymonthsof long-termunemployedcurrentlymakeup44pertheyear.Sincethen,ithasedgedup,anditreached centofallunemployed,upfromapreviouspeakof 9.2percentinJune.Long-termjoblessnesshasalso 25percentintheearly1980s. remainedelevated.InJune,44percentof those Althoughallunemployedpersonsexperiencealoss unemployedhadbeenoutof workformorethansix ofincome,thelong-termunemployedoftenface months(seebox2).Meanwhile,thelaborforcepar- particularlyseriouseconomichardships.Theyareat ticipationrate,whichhaddeclinedgraduallyover greaterriskofexhaustingunemploymentinsurance 2009and2010,hasremainedroughlyflatatalow benefitsanddrawingdownsavingsandother assets,andthustheylikelysufferagreaterdeteriolevelsincethebeginningof 2011. rationoflivingstandards. Otherlabormarketindicatorsalsocorroboratethe Eveningoodtimes,thelikelihoodoffindinganew jobisgenerallylowerforthosewhohaveremained viewthatthelabormarketremainsweak.Initial unemployedlonger.Duringthemostrecentrecesclaimsforunemploymentinsurance,whichhad sion,jobfindingratesfellforworkersatallunemtrendedsteadilydownwardoverthefirstpartof this ploymentdurations.Morerecently,jobfindingrates year,backedupsomeinthesecondquarter.Meas- haveinchedupsomefromtheirlowsattheendof uresof jobvacanciesedgedup,onbalance,overthe therecession,buttheyremainquitelowatall durations. firsthalf of theyear,buthiringhasremainedquite tepid. Inpart,lowjobfindingratesamongthelong-term unemployedreflectthefactthat,atanygiventime, ProductivityandLaborCompensation someattributes—includingcertainskills,locations, orothercharacteristics—areassociatedwith Laborproductivityhasrisenlessrapidlyrecently. greaterdifficultyinfindingemployment.Inaddition, Followinganoutsizedincreaseof 6percentin2009, long-termunemploymentmaycompoundthediffioutputperhourinthenonfarmbusinesssector cultythatsomeindividualshaveinfindingajobby increased2percentin2010andatanannualrateof degradingtheirskills,employmentnetworks,and reputations.Moreover,somewhohavebeenunsuc- 1¾percentinthefirstquarterof 2011.Available cessfulintheirjobsearchforalongperiodmayperinformationsuggeststhatlaborproductivitylikely manentlydropoutofthelaborforce,insomecases deceleratedfurtherinthesecondquarter. byretiringearlierthanplannedorapplyingfordisabilitybenefits,therebyreducingaggregateemploy- Increasesinhourlycompensationcontinuetobe mentforyearstocome. restrainedbytheweakconditionof thelabormarket. The12-monthchangeintheemploymentcostindex ments—rose1.9percentinnominaltermsoverthe forprivateindustryworkers,whichmeasuresboth 12monthsendinginJune. wagesandthecosttoemployersof providingbenefits,hasbeen2percentorlesssincethestartof 2009 Unitlaborcostsinthenonfarmbusinesssector afterseveralyearsof increasesintheneighborhood edgedup¾percentovertheyearendinginthefirst of 3percent.Nominalcompensationperhourinthe quarterof 2011,astherateof increaseof nominal nonfarmbusinesssector—ameasurederivedfrom hourlycompensationwasjustslightlyhigherthan thelaborcompensationdataintheNIPA—hasalso thatof laborproductivity.Overthepreceding deceleratednoticeablyoverthepastcoupleof years; year,unitlaborcostsfellnearly3percent. thismeasurerosejust2percentovertheyearending inthefirstquarterof 2011,wellbelowtheaverage Prices increaseof about4percentintheyearsbeforethe Inflationsteppedupconsiderablyinthefirsthalf of recession.Similarly,averagehourlyearningsforall 2011.Afterrisinglessthan1¼percentoverthe employees—thetimeliestmeasureof wagedevelop- 12monthsof 2010,theoverallPCEchain-typeprice

68 98thAnnualReport|2011 indexincreasedatanannualrateof morethan4per- Longer-terminflationexpectationsremainedstable centbetweenDecember2010andMay2011as duringthefirsthalf of theyear.IntheThomson energypricessoaredandfoodpricesaccelerated. Reuters/Universityof MichiganSurveysof Consum- PCEpricesexcludingfoodandenergyalsoacceler- ers,medianlonger-termexpectationswere3percent atedoverthefirstfivemonthsof theyear,risingat inJune,wellwithintherangeseenoverthepastsevanannualrateof 2¼percent,comparedwiththe eralyears.Moreover,thesecond-quarterreadingof extremelylowrateof about¾percentoverthe 10-year-aheadinflationexpectationsfromtheSurvey 12monthsof 2010.Therecentincreasesinboth of ProfessionalForecasters,conductedbytheFederal overallinflationandinflationexcludingfoodand ReserveBankof Philadelphia,stoodat2¼percentin energyappeartoreflectinfluencesthatarelikelyto thesecondquarter,onlyslightlyhigherthanthe waneincomingmonths. 2percentreadingrecordedinthefourthquarterof lastyear.Measuresof inflationcompensation Consumerenergyprices—particularlyformotorfuel derivedfromyieldsonnominalandinflation-indexed andhomeheatingoil—rosesharplyinthefirstfew Treasurysecuritiesfluctuatedoverthefirsthalf of monthsof 2011asthepriceof crudeoilsurged. theyearinresponsetochangesincommodityprices BetweenDecemberandApril,thePCEpriceindex andtheoutlookforeconomicgrowth.Onbalance, forconsumerenergyitemsclimbedalmost12percent medium-terminflationcompensationendedthefirst (notatanannualrate),andthenational-averageprice half of theyearslightlyhigher,butcompensationat of gasolineapproached$4pergallon.Butconsumer longer-termhorizonswaslittlechanged. energypricesbegantoturndowninMayinresponse todeclinesinthepricesof crudeoilandwholesale Survey-basedmeasuresof near-terminflationexpecrefinedproducts;whiletheJunereadingonthePCE tationsmovedupduringthefirsthalf of theyear, indexisnotyetavailable,survey-basedinformation likelyreflectingtherun-upinenergyandfoodprices. onretailgasolinepricessuggeststhatconsumer Medianyear-aheadinflationexpectationsinthe energypriceslikelydeclinedfurtherlastmonth. Michigansurvey,whichhadbeenrelativelystable throughoutmuchof 2010,steppedupmarkedly Afterrisingmodestlylastyear,consumerpricesfor throughAprilbutthenfellbackabitinMayand foodandbeveragesacceleratedthisyear,risingatan Juneaspricesforgasolineandfooddecreased. annualrateof morethan6percentfromDecember toMay.Farmcommoditypricesincreasedsharply FinancialDevelopments overthepastyearastheemergingrecoveryinthe Financialmarketconditionsbecamesomewhatmore globaleconomycoincidedwithpoorharvestsinsev- supportiveof economicgrowth,onbalance,inthe eralmajorproducingcountries,andthissharp firsthalf of 2011,reflectinginpartcontinuedmonincreasehasfedthroughtoconsumerpricesfor etarypolicyaccommodationprovidedbytheFederal meatsandawiderangeof othermore-processed Reserve.Intheearlypartof theyear,strongcorpofoods.Inaddition,afreeze-relatedupswingincon- rateprofitsandinvestors’perceptionsthattheecosumerpricesforfruitsandvegetablesboostedPCE nomicrecoverywasfirmingsupportedarisein foodpricesearlierthisyear;thesepricesbeganto equitypricesandanarrowingof creditspreads.Since retreatinthespring. May,however,indicationsthattheU.S.economic recoverywasproceedingataslowerpacethanprevi- Priceinflationforconsumergoodsandservicesother ouslyanticipated,aperceivedmoderationinglobal thanenergyandfoodappearstohavebeenboosted growth,andmountingconcernsaboutthepersisting duringthefirstfivemonthsof 2011byhigherprices fiscalpressuresinEuropeweighedoninvestorsentiof importeditemsaswellasbycostpressuresgener- ment,promptingsomepullbackfromriskierfinanatedbyincreasesinthepricesof oilandotherindus- cialassets. trialcommodities;giventheapparentstabilizationof commodityprices,thesepressuresshouldfadein MonetaryPolicyExpectationsand comingmonths.Inaddition,pricesof motorvehicles TreasuryRates increasedsharplywhensuppliesof newmodelswere Onnetoverthefirsthalf of theyear,amidindicacurtailedbypartsshortagesassociatedwiththe tionsof aslowinginthepaceof economicrecovery, earthquakeinJapan.Theseshortagesareexpectedto marketparticipantspushedoutthedatewhenthey diminishincomingmonthsassupplychainproblems expectthetargetfederalfundsratetofirstriseabove arealleviatedandmotorvehicleproductionincreases. itscurrentrangeof 0to¼percentandscaledback

MonetaryPolicyandEconomicDevelopments 69 theirexpectationsof thepaceatwhichmonetary rapidremovalof monetarypolicyaccommodation. policyaccommodationwillberemoved.Quoteson However,volatilityincreasedforatimeinmid-June moneymarketfuturescontractsimplythat,asof asconcernsescalatedabouttheeffectsof Europe’s earlyJuly2011,investorsexpectthefederalfunds fiscalproblemsonEuropeanbanks.Thusfar,the ratetoriseaboveitscurrenttargetrangeinthefourth issuessurroundingthestatutorydebtlimitseemnot quarterof 2012,aboutthreequarterslaterthanthe tohaveaffectedeitherTreasuryyieldsorimplied dateimpliedatthestartof theyear.10Investorsalso volatilitynoticeably,suggestingthatinvestorsgenerexpect,onaverage,thattheeffectivefederalfunds allybelievethatpolicymakerswillreachanagreement ratewillbeabout75basispointsbythemiddleof toraisethelimitbeforetheTreasuryexhaustsits 2013,about90basispointslowerthananticipatedat capacitytoborrowinearlyAugust. thebeginningof 2011.Overthefirsthalf of theyear, investorscoalescedaroundtheviewthattheFederal CorporateDebtandEquityMarkets Reservewouldcompletethe$600billionprogramof Yieldsoncorporatebondsacrossthecreditspectrum purchasesof longer-termTreasurysecurities generallydeclined,onnet,duringthefirsthalf of the announcedattheNovember2010meetingof the yearbyamountsbroadlysimilartothoseon FederalOpenMarketCommittee(FOMC);thepro- comparable-maturityTreasurysecurities,leavingrisk gramwascompletedattheendof June. spreadslittlechanged.Afternarrowinginthefirst fourmonthsof theyear,spreadssubsequently YieldsonnominalTreasurysecuritiesdeclined,on retraced,reflectingdisappointingnewsaboutthe balance,overthefirsthalf of 2011.Treasuryyields strengthof theeconomicrecoveryathomeaswellas initiallyroseinthefirstquarteramidsignsthatthe theongoingfiscalstressesinEurope.Nonetheless, U.S.economicrecoverywasonafirmerfootingand bondspreadsremainedatthelowerendsof theirhisthathigherpricesforenergyandothercommodities toricalranges.Thetermstructureof corporateyield wereboostinginflationandinvestoruncertainty spreadsindicatedthattherecentwideningwasconaboutfutureinflation.However,yieldssubsequently centratedinnear-termforwardspreadsratherthan morethanreversedtheirearlierincreases,asweaker- far-termforwardspreads.Thisinformationsuggests than-expectedeconomicdatapointedtoaslower thatwhileinvestorshavebecomeabitmoreconpaceof economicrecoveryintheUnitedStates,com- cernedaboutnear-termrisks,therehasbeenlittleif moditypriceseasedsomewhat,andinvestorssought anychangeintheirwillingnesstobearriskatlonger therelativesafetyandliquidityof Treasurysecurities horizons;infact,far-termforwardspreads,particuinthefaceof heightenedconcernsabouttheongoing larlyforhigh-yieldbonds,areclosetotheirhistorical fiscalstrainsinEurope.Asof earlyJuly,yieldson2-, lows.Inthesecondarymarketforsyndicatedlever- 5-,and10-yearTreasurynoteshaddroppedabout agedloans,theaveragebidpriceedgedupfurther, 20,40,and30basispoints,respectively,sincethe reflectingstrongdemandfrominstitutionalinvestors startof theyear,reachingverylowlevels.Uncer- fortheassetclassandafurtherimprovementin taintyaboutlonger-terminterestrates,asmeasured fundamentals. bytheimpliedvolatilityon10-yearTreasurysecurities,declined,onbalance,reflectinginpartthereso- Broadequitypriceindexespostedheftygainsinthe lutionof uncertaintyabouttheultimatesizeand firstquarterof 2011becauseof strongearnings durationof theFederalReserve’sassetpurchasepro- reportsandexpectationsthattheeconomicrecovery gramandtheloweroddsperceivedbyinvestorsof a wasfirming.Equitypricesfellbacksomewhatin MayandJuneasinvestorsdowngradedtheirexpec- 10 Wheninterestratesareclosetozero,determiningthepointat tationsforeconomicgrowthandreactedtothesituawhichfinancialmarketquotesindicatethatthefederalfunds tioninEurope,butthemarketsubsequently ratewillmoveaboveitscurrentrangecanbechallenging.The pathdescribedinthetextisthemeanofadistributioncalcu- reboundedasconcernsaboutthenear-termrisksin latedfromderivativescontractsonfederalfundsandEurodol- Europeappearedtoease.Onnet,stockpricesended lars.Theasymmetryinducedinthisdistributionbythezero thefirsthalf of theyearsignificantlyhigher.Implied lowerboundcausesthemeantobeinfluencedstronglyby changesinuncertaintyregardingthepolicypath,complicating volatilityof theS&P500stockpriceindex,ascalcutheinterpretationoftheexpectedpath.Alternatively,onecan latedfromoptionsprices,wasslightlylower,onnet, usesimilarderivativestocalculatethemostlikely,or“modal,” butfluctuatedinresponsetovariousriskeventsdurpathofthefederalfundsrate,whichtendstobemorestable. Thisalternativemeasurehasalsomoveddown,onnet,sincethe ingthefirsthalf of theyear. beginningoftheyear,butitsuggestsaflatteroveralltrajectory forthetargetfederalfundsrate,accordingtowhichtheeffective Withsomeinvestorsseekingtoboostnominal ratedoesnotriseaboveitscurrenttargetrangeuntilthesecond halfof2013. returnsinanenvironmentof verylowinterestrates,

70 98thAnnualReport|2011 moniescontinuedtoflow,onnet,intomutualfunds rates.11Moneymarketratessoftenedfurtherinlate thatinvestinhigher-yieldingdebtinstruments June,withratesinsecuredfundingmarketsnear (includingspeculative-gradecorporatebondsand zero;investorspointedtoashortageof collateraland leveragedloans)inthefirsthalf of 2011.These higherdemandforsafe,liquidassetsasfactorsconinflowslikelysupportedstrongissuanceandcontrib- tributingtothedecline. utedtotheeasingof conditionsincorporatebond markets.However,consistentwiththesubsequent InformationfromtheFederalReserve’squarterly downturninrisksentiment,equitymutualfunds SCOOSsuggestedacontinuedgradualeasingin experiencedlargenetoutflowsinMayandJune—the credittermsformosttypesof counterpartiesinsecufirstmonthlyoutflowsfromsuchfundssinceOcto- ritiesfinancingandover-the-counter(OTC)derivaber2010.Moneymarketmutualfundscontinuedto tivesmarketsinthefirsthalf of theyear.Dealers havemoderatenetoutflowsamidtheverylowyields indicatedthattheeasingcameprimarilyinresponse thatthesefundspay.Withintheuniverseof money tomore-aggressivecompetitionfromotherinstitumarketfunds,institutionalprimemoneymarket tionsandanimprovementingeneralmarketliquidity fundsexperiencedastepped-uppaceof outflowsin andfunctioning.Theeasingof termsoccurredpri- June,likelyreflectinginpartsomeconcernsabout marilyforsecuritiesfinancingtransactions,while suchfunds’exposurestoEuropeanfinancial nonpricetermsonOTCderivativestransactionswere institutions. littlechangedonbalance.Dealersalsoreporteda continuedincreaseindemandforfundingformost MarketFunctioningand typesof securities,excludingequities. Dealer-IntermediatedCredit Conditionsinshort-termfundingmarketsweregen- Theuseof dealer-intermediatedleverageappearsto erallystableinthefirsthalf of 2011.Spreadsof Lonhaveincreasedfromitsverylowlevelreachedduring doninterbankofferedrates,orLibor,over thefinancialcrisis.Responsestospecialquestions comparable-maturityovernightindexswaprates—a includedintheSCOOSinMarch2011andJune2011 measureof stressinshort-termbankfundingmaralsotendedtocorroboratetheviewthatdealerkets—remainedrelativelynarrow.However,forward intermediatedleveragehadincreasedsomewhatover agreementsforshort-termU.S.dollarfundingstartthepastsixmonthsamongbothhedgefundsandtraingthreemonthshencejumpedinmid-Juneasconditionallyunleveredinvestors.Nonetheless,responcernsincreasedregardingtheexposuresof some dentstotheJunesurveyreportedthattheoveralluse EuropeanbankstoperipheralEuropeansovereign of leverageremainedatlevelsroughlymidway debt.Inaddition,someEuropeanfinancialinstitubetweenthepre-crisispeakandthepost-crisis tionsfacedreducedaccesstoU.S.dollarfunding,as trough.Thattheusageof dealer-intermediatedleverevidencedbytheirdecliningissuanceof commercial ageisstillwellbelowthepeakappearsconsistent paperintheUnitedStatesandratesontheirpaper withotherevidence,includingcurrenttripartyand thatremainnoticeablyelevatedcomparedwithrates securitieslendingactivity,alackof anymeaningful paidbyotherissuers.Incommercialpapermarkets issuanceof structuredfinanceproductsotherthan morebroadly,spreadsof yieldsonlower-quality CLOs,andnosignof apickupinfinancinginstru- A2/P2-ratedpaperoverthoseonhigher-quality mentsthatembedsignificantleverage,suchastotal AA-ratednonfinancialpaperedgedslightlyhigher, returnswaps.Responsestoanotherspecialquestion bothatovernightand30-daytenors;spreadsof ontheJune2011SCOOSindicatedthattherewas yieldsonAA-ratedasset-backedcommercialpaper someunusedfundingcapacityunderexistingagreeoverthoseonAA-ratednonfinancialpaperremained mentsforalltypesof institutionalclients,andthat narrow. unusedcapacityhadgenerallyincreasedsincethe Inrepurchaseagreement(repo)transactions,haircuts onsecuritiesusedascollateralwere,onbalance,little 11 OnApril1,2011,theFederalDepositInsuranceCorporation implementedchangestoitsdepositinsuranceassessmentsystem changedoverthefirsthalf of theyear.TheFederal thatbroadenedthedefinitionoftheassessmentbaseandaltered DepositInsuranceCorporation’simplementationon assessmentrates,especiallyforlargebanks.Underthenew April1of achangeinitsdepositinsuranceassess- system,insurancepremiumsarebasedonaninsureddepository institution’stotalassetslesstangiblecapital—essentiallyall mentsystem—which,forthefirsttime,effectively liabilities—ratherthandomesticdeposits.Thenewassessment assessedpremiumsonthenondepositliabilitiesof rateschedulecontinuedtoassignhigherassessmentratesto largebanks—reducedbanks’demandforshort-term banksthatposegreaterriskstotheinsurancesystem.Inthe aggregate,thechangesintheassessmentsystemwereintended funding,puttingdownwardpressureonshort-term toberevenueneutral.

MonetaryPolicyandEconomicDevelopments 71 beginningof 2011.Thisfindingsuggeststhatlever- adeclineinbanks’incomefromdepositfeeswasoffageisconstrainedbycounterparties’riskappetites setbygainsinincomefromtradingactivities.About ratherthanfundingavailability.Withthepullback 50of theroughly6,500banksintheUnitedStates fromrisk-takingandturninmarketsentimentin failedinthefirsthalf of theyear,fewerthanthe June(afterresponsestotheJuneSCOOSwerefiled), approximately70failuresinthesecondhalf of 2010. leverageuseappearstohavedeclined.Hedgefunds sawanerosionof thereturnspostedduringthefirst Indicatorsof creditqualityatcommercialbanks fewmonthsof theyear,leavingtheirreturnsroughly improvedinthefirstquarterof 2011;theoverall flatfortheyeartodate. delinquencyrateonloansheldbysuchbanksfell somewhatandcharge-off ratesdeclined.Median Measuresof liquidityandfunctioninginmostfinan- spreadsonCDSwrittenonbankinginstitutions, cialmarketssuggestthatconditionsweregenerally whichreflectinvestors’assessmentsof andwillingstableduringthefirsthalf of 2011.IntheTreasury nesstobeartheriskthatthoseinstitutionswill market,variousindicators,suchasdifferencesinthe defaultontheirdebtobligations,wereabout pricesbetweenalternativesecuritieswithsimilar unchanged,onnet,foragroupof sixof thelargest remainingmaturitiesandspreadsbetweenyieldson banksandslightlynarrowerforagroupof nineother on-the-runandoff-the-runissues,suggestthatthe banks.CDSspreadsforforeignbankingorganizamarketcontinuedtooperatenormallyandthatthe tionswithapresenceinU.S.marketswidenedsome, implementationandsubsequentcompletionof the owingtoconcernsaboutdevelopmentsinEurope FederalReserve’sprogramof purchasesof longer- andtheorganizations’exposurestosovereignEurotermTreasurysecuritiesdidnothaveanadverse peandebt. effectonmarketfunctioning.Bid-askedspreadsand dealertransactionvolumeswerewithinhistorically CreditprovidedbydomesticbanksandtheU.S. normalranges.Estimatesof thebid-askedspreadsin branchesandagenciesof foreignbanksdecreased corporatebondmarketsweresteadyatlowlevels, slightlyfurtherinthefirsthalf of thisyear,asbanks’ andthedispersionof dealerquotesintheCDSmar- holdingsof securitieswereaboutflatandanincrease ketreachedthelowestlevelsincethefinancialcrisis. inC&Iloanstobusinesseswasmorethanoffsetby Inthesecondarymarketforleveragedloans,bid- declinesinrealestateloansandconsumerloans.C&I askedspreadsalsomovedmodestlylower,onnet, loanbalancesrosevigorouslyoverthefirsthalf of overthefirsthalf of theyear. theyear;mostof thisincreasewasconcentratedat largedomesticbanksandbranchesandagenciesof BankingInstitutions foreignbanks,consistentwiththeeasingof credit Afterarelativelypositivefirstquarter,marketsenti- conditionsforlargecorporateborrowersseenin menttowardthebankingindustrydimmedinthe othercreditmarkets.Incontrast,availableproxiesfor secondquarteragainstthebackdropof themore lendingtosmallbusinessescontinuedtosuggestconguardedeconomicoutlookandheighteneduncer- siderableweakness,likelyreflectingconstraintson taintyoverfutureregulatoryrequirementsforfinan- boththedemandfor,andthesupplyof,suchcredit. cialinstitutions.Asaresult,equitypricesof com- CREloanscontractedsharply,especiallythosefundmercialbanksfellmarkedly,significantlyunderper- ingconstructionandlanddevelopmentactivities.On formingthebroaderstockmarketoverthefirsthalf thehouseholdside,banks’holdingsof closed-end of theyear.Measuresof theprofitabilityof the residentialmortgagesdeclinedasbankssoldlarge bankingindustryinthefirstquarterremainedatlev- quantitiesof suchloanstotheGSEs.Moreover, elsnoticeablybelowthosethatprevailedbeforethe originationstrailedoff withtheendof therefinancfinancialcrisis.Adeclineinpre-provisionnetrevenue ingwavethatoccurredlastfall,wheninterestrates wasaboutoffsetbyafurtherreductioninloanloss declinedinanticipationof theFederalReserve’ssecprovisions,whichpresumablyreflectedtheimprove- ondroundof large-scaleassetpurchases.Banklendmentinmostmeasuresof thequalityof banks’ ingthroughhomeequitylinesalsoremainedextraorassets.12However,netcharge-offsexceededprovi- dinarilyweak,reflectinginparttightlendingstansionsforthefifthconsecutivequarter,andloanloss dardsamiddeclinesinhomepricesthatcutfurther reservesremainedlowrelativetodelinquentloans intohomeequity.Bothcreditcardandotherconandcharge-offs.Netinterestmarginsslidabit,while sumerloansfrombankscontracted,onbalance,over thefirsthalf of theyear,albeitatamuchslowerpace inthesecondquarterthaninthefirst.Banks’hold- 12 Pre-provisionnetrevenueisthesumofnetinterestincomeand noninterestincomelessnoninterestexpense. ingsof securitieswerelittlechangedoverthefirst

72 98thAnnualReport|2011 half of theyear,asanincreaseinholdingsof agency ticdemand.Themonetarybase—whichisroughly MBSwasaboutoffsetbydeclinesinholdingsof equaltothesumof currencyincirculationandthe Treasuryandothersecurities. reservebalancesof depositoryinstitutionsheldatthe FederalReserve—increasedrapidlyinthefirsthalf of Regulatorycapitalratiosof bankholdingcompanies theyear,reflectinganexpansionof reservebalances rosefurtheraslargeinstitutionspreparedtomeet thatresultedfromtheFederalReserve’slonger-term futurerequirementsthatareexpectedtobemore securitypurchaseprogramandareductioninthe stringentthanthosecurrentlyinplace.TheBaselIII TreasuryDepartment’sSupplementaryFinancing frameworkagreedtobythegovernorsandheadsof Accountaswellasthestrongincreaseincurrency. supervisionof countriesrepresentedontheBasel CommitteeonBankingSupervisionwillraise Thesizeof theFederalReserve’sbalancesheetrose requiredcapitalratios,tightenthedefinitionof regu- to$2.9trillionasof July6,2011,about$450billion latorycapital,andincreasetheriskweightsassigned morethanattheendof 2010(table1).Holdingsof tosomeassetsandoff-balance-sheetexposures.The Treasurysecuritiesrosemorethan$600billionfor BaselIIIframeworkwillalsostrengthenbanks’ theyeartodateasaresultof theFOMC’sdecisions liquidityrequirements.Inaddition,theBaselCom- toreinvesttheproceedsfrompaydownsof agency mitteeisexpectedtoreleaselaterthissummerapro- debtandagencyMBSinlonger-termTreasurysecuposaltorequirethatglobalsystemicallyimportant rities,announcedattheAugust2010FOMCmeetbanksholdadditionalcapitaltoreducethepotential ing,andtopurchaseanadditional$600billionof economicandfinancialeffectof thefailureof such longer-termTreasurysecuritiesbytheendof thesecbanks.Thisproposalwouldbeconsistentwiththe ondquarterof 2011,announcedattheNovemrequirementof theDodd-FrankWallStreetReform ber2010FOMCmeeting.Incontrast,holdingsof andConsumerProtectionActthatbankholding agencydebtandagencyMBSdeclinedabout companieswithmorethan$50billioninassetsbe $115billionassecuritieseithermaturedorexperisubjecttoadditionalcapitalandliquidity encedprincipalprepaymentsrelatedtomortgagerefirequirements. nancingactivity. MonetaryAggregatesand Useof regulardiscountwindowlendingfacilities, theFederalReserve’sBalanceSheet suchastheprimarycreditfacility,continuedtobe TheM2monetaryaggregateexpandedatamoderate minimal.LoansoutstandingundertheTermAssetannualrateof 5percentinthefirsthalf of 2011.13 BackedSecuritiesLoanFacility(TALF)declined Liquiddeposits,thelargestcomponentof M2,con- from$25billionattheendof 2010to$12billionin tinuedtoriseatasolidpace,whileinvestorsextended mid-2011asimprovedconditionsinsecuritization theirreallocationawayfromotherlower-yieldingM2 marketsresultedinprepaymentsof loansmade assets.Balancesheldinsmalltimedepositsandretail underthefacility.Thefacility,whichwasestablished moneymarketmutualfundscontractedtotheirlow- toassistfinancialmarketsinaccommodatingthe estlevelssince2005astheiryieldsremained creditneedsof consumersandbusinessesbyfacilitatextremelylow.Thecurrencycomponentof the ingtheissuanceof ABScollateralizedbyavarietyof moneystockincreasedatanannualrateof 10per- consumerandbusinessloans,wasclosedtonew centinthefirsthalf of theyear,likelydrivenbyboth lendinginJune2010.AllremainingTALFloansare furtherstrongdemandfromabroadandsoliddomes- currentontheirpaymentsandwillmaturenolater thanMarch30,2015. 13 M2consistsof(1)currencyoutsidetheU.S.Treasury,Federal ReserveBanks,andthevaultsofdepositoryinstitutions; Inthefirsthalf of thisyear,theFederalReserve (2)traveler’schecksofnonbankissuers;(3)demanddepositsat commercialbanks(excludingthoseamountsheldbydepository reducedsomeof itsexposuresfromlendingfacilities institutions,theU.S.government,andforeignbanksandofficial establishedduringthefinancialcrisistosupportspeinstitutions)lesscashitemsintheprocessofcollectionandFedcificinstitutions.OnJanuary14,2011,inconjunction eralReservefloat;(4)othercheckabledeposits(negotiableorder ofwithdrawal,orNOW,accountsandautomatictransferser- withtheclosingof arecapitalizationplanthattermiviceaccountsatdepositoryinstitutions;creditunionsharedraft natedtheFederalReserve’sassistancetoAmerican accounts;anddemanddepositsatthriftinstitutions);(5)savings InternationalGroup,Inc.(AIG),AIGrepaidthe deposits(includingmoneymarketdepositaccounts);(6)smalldenominationtimedeposits(timedepositsissuedinamountsof creditextendedbytheFederalReserveunderthe lessthan$100,000)lessindividualretirementaccount(IRA) revolvingcreditline,andtheFederalReservewas andKeoghbalancesatdepositoryinstitutions;and(7)balances paidinfullforitspreferredinterestsinthespecial inretailmoneymarketmutualfundslessIRAandKeoghbalancesatmoneymarketmutualfunds. purposevehiclesAIAAuroraLLCandALICO

MonetaryPolicyandEconomicDevelopments 73 currentfacevalueof residentialmortgage-backed Table1.SelectedcomponentsoftheFederalReserve securitiesoutof theMaidenLaneIIportfolio;combalancesheet,2010–11 petitivesalesof thesesecuritieswereconducted Millionsofdollars throughtheFRBNY’sinvestmentmanager.14The Balancesheetitem Dec.29,2010 July6,2011 estimatedfairvaluesof theportfoliosof thethree MaidenLaneLLCscontinuetoexceedthecorre- Totalassets 2,423,457 2,874,049 spondingloanbalancesoutstandingtoeachlimited Selectedassets Creditextendedtodepositoryinstitutionsanddealers liabilitycompanyfromtheFRBNY. Primarycredit 58 5 Centralbankliquidityswaps 75 0 OnlysmalldrawsonU.S.dollarliquidityswap Creditextendedtoothermarketparticipants arrangementsbetweentheFederalReserveandfor- TermAsset-BackedSecuritiesLoanFacility (TALF) 24,704 12,488 eigncentralbankshavebeenmadesincetheirrees- NetportfolioholdingsofTALFLLC 665 757 tablishmentinMay2010,andtherehavebeenno Supportofcriticalinstitutions drawsonthemsinceearlyMarchof thisyear. NetportfolioholdingsofMaidenLaneLLC, MaidenLaneIILLC,andMaidenLaneIIILLC1 66,312 59,637 Ontheliabilitysideof theFederalReserve’sbalance CreditextendedtoAmericanInternational Group,Inc. 20,282 … sheet,reservebalancesheldbydepositoryinstitutions PreferredinterestsinAIAAuroraLLCandALICO roseabout$640billionoverthefirsthalf of theyear HoldingsLLC 26,057 … to$1.7trillionasof July6.FederalReservenotesin Securitiesheldoutright U.S.Treasurysecurities 1,016,102 1,624,515 circulationrosefrom$944billionto$991billion.The Agencydebtsecurities 147,460 115,070 TreasuryreducedthebalanceinitsSupplementary Agencymortgage-backedsecurities(MBS)2 992,141 908,853 FinancingAccountattheFederalReserveto$5bil- Totalliabilities 2,366,855 2,822,382 lionearlyintheyearaspartof itseffortstomaxi- Selectedliabilities mizeflexibilityinitsdebtmanagementasthestatu- FederalReservenotesincirculation 943,749 990,861 Reverserepurchaseagreements 59,246 67,527 torydebtlimitapproached.BalancesintheTreas- Depositsheldbydepositoryinstitutions 1,025,839 1,663,022 ury’sgeneralaccountattheFederalReservealso Ofwhich:Termdeposits 5,113 0 declined.Reverserepurchaseagreementsexecuted U.S.Treasury,generalaccount 88,905 67,270 withforeignofficialandinternationalaccountswere U.S.Treasury,SupplementaryFinancingAccount 199,963 5,000 generallysteady.Aspartof itsongoingprogramto Totalcapital 56,602 51,667 expandtherangeof toolsavailabletodrainreserves, Note:LLCisalimitedliabilitycompany. theFederalReserveconductedthree28-day,$5bil- 1 TheFederalReservehasextendedcredittoseveralLLCsinconjunctionwith effortstosupportcriticalinstitutions.MaidenLaneLLCwasformedtoacquire lionauctionsof termdepositstodepositoryinstitucertainassetsoftheBearStearnsCompanies,Inc.MaidenLaneIILLCwas tionsaswellasaseriesof small-scale,real-valuetriformedtopurchaseresidentialmortgage-backedsecuritiesfromtheU.S. securitieslendingreinvestmentportfolioofsubsidiariesofAmerican partyreverserepurchaseoperationswitheligiblepri- InternationalGroup,Inc.(AIG).MaidenLaneIIILLCwasformedtopurchase marydealerandmoneymarketfundcounterparties. multisectorcollateralizeddebtobligationsonwhichtheFinancialProducts groupofAIGhaswrittencreditdefaultswapcontracts. 2 IncludesonlyMBSpurchasesthathavealreadysettled. OnMarch22,theFederalReserveSystemreleased …Notapplicable. auditedfinancialstatementsfor2010forthecom- Source:FederalReserveBoard,StatisticalReleaseH.4.1,“FactorsAffecting binedFederalReserveBanks,the12individual ReserveBalancesofDepositoryInstitutionsandConditionStatementofFederal ReserveBanks.” ReserveBanks,thelimitedliabilitycompaniesthat werecreatedtorespondtostrainsinfinancialmarkets,andtheBoardof Governors.TheReserve Banksreportedcomprehensiveincomeof closeto HoldingsLLC.Neithertherevolvingcreditfacility $82billionfortheyearendingDecember31,2010, northepreferredinterestsheldinconnectionwith anincreaseof $28billionfrom2009.Theincrease therevolvingcreditfacilitygeneratedanylosstothe wasattributableprimarilytointerestearningsonthe FederalReserveortaxpayers.Theportfolioholdings FederalReserve’sholdingsof agencydebtandMBS, of MaidenLaneLLC,MaidenLaneIILLC,and acquiredlargelyin2009.TheReserveBankstrans- MaidenLaneIIILLC—entitiesthatwerecreated ferred$79billionof the$82billionincomprehensive duringthecrisistoacquirecertainassetsfromthe incometotheU.S.Treasuryin2010,arecordhigh BearStearnsCompanies,Inc.,andAIGtoavoidthe and$32billionmorethanwastransferredin2009. disorderlyfailuresof thoseinstitutions—declined,on net,primarilyasaresultof principalpaymentsand 14 Currentfacevalueistheremainingprincipalbalanceofthe assetsales.Of note,theFederalReserveBankof mortgageassetsunderlyingthesecurities,afterprepayments NewYork(FRBNY)soldatotalof $10billionin andamortizations.

74 98thAnnualReport|2011 InternationalDevelopments meettheirfiscalobligationsdiminished.Followinga Inthefirsthalf of theyear,developmentsabroad €78billionrescuepackagebytheEUandtheInterhavelargelybeendominatedbyseveralshocks, nationalMonetaryFund(IMF)inearlyMay, includingthepoliticalturmoilintheMENAregion, spreadsforPortuguesebondsstabilizedbutsoonrose amajorearthquakeandtsunamiinJapan,height- againamidthehigh-profilediscussionsbyEuropean enedfiscalstressesinEurope,andswingsincom- officialsonapossiblerestructuringof Greekdebt.In modityprices.Inthefaceof theseshocks,global lateJune,Greeceapprovedanewausterityandprivafinancialmarketswerefairlyresilientandforeigneco- tizationpackage,openingthedoorforapprovalof a nomicactivityheldup.ForeignrealGDPaccelerated €12billionEU–IMFdisbursementneededtomeet inthefirstquarter,mostnotablyintheEMEs,where upcomingpayments.AlthoughspreadsforGreek, performancehascontinuedtooutpacethatinthe Portuguese,andIrishbondsdeclinedsomefollowing advancedforeigneconomies(AFEs).Recentdata thesedevelopments,theyhavesincerisenasMoody’s indicatethatforeigneconomicgrowthslowedinthe InvestorsServicedowngradedPortugal’ssovereign secondquarter,buttherecoveryfromtheglobal debtratingtojunkstatusandEUofficialscontinued recessioncontinued. toseekcommitmentsfromprivatecreditorstoroll overmaturingGreekdebt.Movementsinspreadsfor InternationalFinancialMarkets thesovereigndebtsof ItalyandSpainhavebeen Spurredinpartbymonetarypolicytightening moremuted,buttheyhavemovedupinrecent abroadandfearsthatthepaceof economicrecovery months. intheUnitedStateswasslowing,theforeign exchangevalueof thedollardeclinedovermuchof EquitypricesintheAFEsgenerallycontinuedtorise thefirsthalf of theyear.Thelowerlevelof thedollar throughthefirstfewmonthsof thisyear,falling isconsistentwithaweakeningof thesafe-haven sharplyafterJapan’searthquakeonMarch11but, demandsthathadboosteditduringtheglobalfinan- outsideof Japan,recoupingtheirlossesafterward. cialcrisis;however,thedollarhasmovedslightly ByearlyMay,increaseduncertaintiesaboutglobal highersinceMayonheightenedconcernsoverthe economicgrowthandheightenedconcernsoverthe fiscalproblemsinEuropeanduncertaintiesabout sovereigndebtproblemsinEuropepromptedapullglobaleconomicgrowth.Onnet,thedollarisabout backinequityprices.However,thepassageof 3¾percentloweronatrade-weightedbasisagainsta Greece’sausterityandprivatizationlegislationsin broadsetof currenciesoverthefirsthalf of theyear. lateJune,whichassuagedmarketconcernsaboutan FollowingJapan’searthquake,astradersanticipated imminentGreekdefault,promptedsomerenewed thatJapaneseinvestorswouldneedtorepatriate demandforriskyassets;equitypricesinmostof the funds,theyenappreciatedsharply,reachingarecord AFEswere,onnet,atabouttheirlevelsatthestartof highversusthedollar.Inresponse,theGroupof theyear.IntheEMEs,equitypriceshadalsorisen Seven(G-7)countriesconductedcoordinatedsalesof earlyintheyear,but,asintheAFEs,theybeganto yenintheforeignexchangemarketsonMarch18. pullbackbyearlyMay.Onnet,overthefirsthalf of Theyenmorethanreverseditssteepappreciation theyear,equitypricesaredowninLatinAmericabut immediatelyfollowingtheintervention. areupinemergingAsia. Ten-yearsovereignyieldsintheAFEsgenerallyrose BankstockpricesinEuropehavedeclinednearly earlyintheyearonexpectationsthatcontinuedeco- 9percentsincethestartof theyear.CDSpremiums nomicrecoveryandgreaterinflationarypressures forEuropeanbanksremainedsignificantlyhigher wouldpromptmonetarypolicytightening.However, thanthoseof nonfinancialfirmswithsimilarcredit sinceApril,yieldshavebeguntoretreat.Onnet, ratings.EuropeanbanksexperiencedlargelossesduryieldsforGermany,Canada,andtheUnitedKing- ingtheglobalfinancialcrisis,andtheirlendingexpodomaredownslightlyfromtheendof lastyear. suretoGreece,Ireland,andothervulnerableEuropeaneconomiesremainsaconcern.Inaddition, FiscalandfinancialstressesworsenedinGreece,Por- somebanksinthecoreEuropeancountries,suchas tugal,andIrelandoverthefirsthalf of theyear,with FranceandGermany,stillhaveconsiderabledollar themajorcreditratingagenciesdowngradingsignifi- fundingneeds.MostperipheralEuropeanbankshave cantlythesecountries’sovereigncreditratings.The onlylimitedaccesstomarketfundingandhaverelied spreadsof yieldsonGreek,Portuguese,andIrish onECBfundinginstead.InJapan,bankshavenot bondsoverthoseonGermanbondssoaredasmarket experiencedcrisis-relatedlossesnearlyaslargeas confidenceintheabilityof thesethreecountriesto thoseincurredbyEuropeaninstitutions,butJapa-

MonetaryPolicyandEconomicDevelopments 75 nesebankprofitshavebeenpersistentlyweaker, Intheeuroarea,economicactivitywasstrongin reflectingthefragilestateof Japan’seconomy. GermanyandFrancebutremainedgenerallyweakin theperipheralcountries,asconcernsaboutsovereign ThenewlycreatedEuropeanBankingAuthorityisin debtsustainabilitycontinuedtoweighoneconomic theprocessof completinganEU-widestresstestof growth.IntheUnitedKingdom,outputrebounded largeEuropeanbanks.Themethodologyusedinthis inthefirstquarterof thisyearfromacontractionin year’stestisbroadlysimilartothatof thestresstests thefourthquarterof 2010,butthepacewas conductedbytheCommitteeof EuropeanBanking restrainedbydeclinesinhouseholds’realincomesas Supervisorslastyear.Theresultsof thestresstestare inflationincreased.Japan’seconomicactivitywas expectedtobereleasedonJuly15of thisyear.In alsobouncingbackfromitsdipinthefourthquarter anticipationof thetest,someEuropeanbankstook of lastyearuntiltheearthquakeandensuingtsunami stepstoraiseadditionalcapitalinrecentmonths. andnucleardisastercausedfirst-quarterrealGDPto contractsharply. TheFinancialAccount Netpurchasesof U.S.securitiesbyforeignprivate ThedisasterinJapandamagedproductionfacilities, investorsslowedinthefirstquarterfromthepaceof disruptedsupplychains,andreducedelectricitygen- 2010,inpartbecauseof reducedsafe-havendemand erationcapacity.Inaddition,spendingonconsumer forU.S.Treasurysecurities.Foreigninvestors,onnet, durablesandcapitalinvestmentfellsharply,reflecting soldbothU.S.agencyandcorporatebondsinthe asubstantialslumpinconsumerandbusinessconfifirstquarter,incontrasttopurchasesof thesesecuri- dence.TheJapaneseauthoritiesrespondedswiftlyto tiesinthesecondhalf of lastyear,buttheycontinued supporttheeconomy.TheBankof Japaninjected tomakelargepurchasesof U.S.equities.U.S.inves- recordamountsof liquidityintomoneymarkets, torsincreasedthepaceof theirpurchasesof foreign doubledthesizeof itsassetpurchaseprogramto securities,especiallyforeignequities. ¥10trillion,setupa¥1trillionloanprogramfor firmsindisaster-hitareas,andexpandedby¥500bil- BankslocatedintheUnitedStatesregisteredstrong lionthefundsforanexistingprogramaimedatsupnetinflowsfromabroadinthefirstquarterfollowing portingeconomicgrowth.TheJapaneseDiet smallnetinflowsinthefourthquarterof lastyear. approveda¥4trillionsupplementarybudgettofund Theserecentnetinflowsprimarilyreflectincreased theconstructionof temporaryhousing,therestoranetborrowingfromaffiliatedbankingofficesabroad tionof damagedinfrastructure,andtheprovisionof andareinmarkedcontrasttosizablenetlending low-interestloanstosmallbusinesses.Japanalso abroadfromU.S.banksinthefirsthalf of 2010, requestedacoordinatedinterventionof G-7counwhendollarfundingpressuresinEuropeaninterbank tries’centralbanksinforeignexchangemarketsto marketshadcontributedtoincreasedrelianceon stemtheappreciationof theyen.Supportedbythe fundingfromU.S.counterparties. variousofficialactions,thefinancialsystemcontinuedtooperatesmoothlyandreconstructionactivity Inflowsfromforeignofficialinvestorseasedsome- hasbegun,settingthestageforaneconomicrecovery whatinlate2010andcontinuedatamoderatepace inthesecondhalf of theyear. inthefirstquarterthisyear.Suchinflowscontinued tocomeprimarilyfromcountriesseekingtocounter- SupplydisruptionsduetotheJapaneseearthquake actupwardpressureontheircurrenciesbypurchas- weighedoneconomicgrowthinotherAFEs,and ingU.S.dollarsinforeigncurrencymarkets.These otherincomingdatacorroboratethateconomic countriesthenusedtheproceedstoacquireU.S. activityintheAFEsslowedinthesecondquarter. assets,mainlyTreasuryandU.S.agencysecurities. Thecompositepurchasingmanagersindexeshave AvailabledatathroughMayindicatethatforeignoffi- movedlowerinrecentmonthsacrosstheAFEs.In cialinflowsslowedabitfurtherinthesecond addition,businessconfidencehasturneddown,and quarter. theunderlyingmomentuminconsumerspendinghas remainedweakintheeuroarea. AdvancedForeignEconomies Thepaceof economicrecoveryintheAFEspicked Asurgeinenergyandfoodpricesand,insomecases, upinearly2011followingasoftpatchinthesecond highervalue-addedtaxesliftedheadlineinflation half of 2010,butperformancewasunevenacross ratesinthemajorforeigneconomiesearlierinthe countries.RealGDProseatasolidpaceinthefirst year.Twelve-monthheadlineinflationroseto4½perquarterinCanada,boostedbyasurgeininvestment. centintheUnitedKingdomandtoabout3¾percent

76 98thAnnualReport|2011 and2¾percentinCanadaandtheeuroarea,respec- therenminbihasdepreciated.Nonetheless,strong tively.InJapan,theriseincommoditypricespushed domesticdemandledimportgrowthinthefirsthalf inflationabovezero.Excludingtheeffectsof com- of thisyeartoexceedexportgrowth,andconsemoditypricemovementsandtaxchanges,inflationin quently,China’stradesurplusnarrowed. theAFEshasremainedrelativelysubduedamidconsiderableeconomicresourceslack.Withtherecent ElsewhereinemergingAsia,thevigorousChinese pullbackincommodityprices,overallinflationalso economyprovidedimpetustoexportsforseveral appearstobestabilizing. countries,anddomesticdemandwasalsorobust. Accordingly,economicactivitywasupbeatinthe Monetarypolicyremainedaccommodativeinallthe firstquarter,withseveralcountries,includingHong majorAFEs,andmarketparticipantsappearto Kong,Singapore,andTaiwan,allpostingdoubleexpectonlygradualtightening.Afterhavingkeptits digitannualizedgrowthrates.Economicactivitywas benchmarkpolicyrateat1percentsinceMay2009, alsoupbeatinIndia.AvailableindicatorsforthesectheECBraisedittwice—by25basispointsinApril ondquartersuggestthatthepaceof expansion andbyanother25basispointsinearlyJuly—citing slowedbutremainedsolid. upsideriskstotheinflationoutlook.TheBankof Canada,whichbegantotightenlastyear,haspaused InMexico,acountrywithstrongereconomiclinksofarthisyear,maintainingitstargetfortheover- agestotheUnitedStatesthanmostEMEs,perfornightrateat1percent.TheBankof Englandkeptits mancecontinuedtolagthatof otherEMEs. policyrateat0.5percentandthesizeof itsAsset Reportedfirst-quarterrealGDProseatanannual PurchaseFacilityat£200billion. rateof only2percent.Bycontrast,first-quarterreal GDProserobustlyinBrazilandinotherSouth EmergingMarketEconomies Americancountries,supportedbygenerallyaccom- TheEMEscontinuedtoexpandatastrongpacein modativemacroeconomicpoliciesandthetailwind thefirstquarterof 2011,boostedbybothexports fromgainsincommodityprices. anddomesticdemand.Exportswereliftedbysustainedglobaldemand.Domesticdemandwassup- Higherfoodpricespushedupconsumerpriceinflaportedbymacroeconomicpoliciesthatremained tionintheEMEsearlierintheyear.Asfoodprice generallyaccommodativedespiterecenttightening pressuressubsequentlyeased,12-monthinflationstaandbyrobusthouseholdincomeamidstronglabor bilizedandbegantoretreatinseveralcountries.In marketconditions.Recentdataindicatethatgrowth themidstof elevatedinflationandstrongeconomic moderatedinthesecondquarter,buttoastill-solid growth,thestanceof macroeconomicpolicyinthe pace,reflectinggovernments’policiestocoolthe EMEshasbeentightenedfurthertomitigatethe economiesthatwererunningunsustainablyfast,a risksof overheating.Inthefirsthalf of theyear, decelerationinactivityintheadvancedeconomies, manyEMEstightenedmonetarypolicybyraising andspillovereffectsof theJapaneseearthquake. policyratesandreserverequirementratiosseveral times,andprogresswasalsomadeontheremovalof TheChineseeconomyexpandedatastrongpacein thefiscalsupportmeasuresenactedattheheightof thefirsthalf of 2011,althougheconomicgrowth theglobalfinancialcrisis. slowedabitcomparedwiththesecondhalf of last year,largelyduetomeasuresbyauthoritiestoreinin Part 3 theeconomy.Headlineconsumerpriceswereup Monetary Policy: 6.4percentinJunefromayearearlier,ledbyarisein Recent Developments and Outlook foodprices.Thisyear,Chineseauthoritieshaveraised requiredreserveratiosforallbanks300basis MonetaryPolicyovertheFirstHalfof2011 points—therequirementforlargebanksnowstands Topromotetheeconomicrecoveryandpricestabilat21.5percent.Authoritieshavealsoraisedthe ity,theFederalOpenMarketCommittee(FOMC) benchmarkone-yearbanklendingrate¾percentage maintainedatargetrangeforthefederalfundsrate point.Overthefirsthalf of theyear,theChineseren- of 0to¼percentthroughoutthefirsthalf of 2011. minbihasappreciated,onnet,about2½percent InthestatementaccompanyingeachFOMCmeeting againstthedollar.However,onarealmultilateral, overtheperiod,theCommitteenotedthateconomic trade-weightedbasis,whichgaugestherenminbi’s conditionswerelikelytowarrantexceptionallylow valueagainstthecurrenciesof China’smajortrading levelsforthefederalfundsrateforanextended partnersandadjustsfordifferencesininflationrates, period.Attheendof June,theFederalReservecon-

MonetaryPolicyandEconomicDevelopments 77 cludeditspurchasesof longer-termTreasurysecuri- tained,andthedownsideriskstobotheconomic tiesunderthe$600billionpurchaseprogram growthandinflationwereviewedashavingdiminannouncedinNovember2010;thatprogramwas ished.Nevertheless,membersnotedthatthepaceof undertakentosupporttheeconomicrecoveryandto therecoverywasinsufficienttobringaboutasignifihelpensurethatinflation,overtime,returnstolevels cantimprovementinlabormarketconditionsand consistentwiththeFOMC’smandateof maximum thatmeasuresof underlyinginflationweretrending employmentandpricestability.Inaddition,through- down.Moreover,theeconomicprojectionssubmitted outthefirsthalf of 2011,theCommitteemaintained forthismeetingindicatedthatunemploymentwas itsexistingpolicyof reinvestingprincipalpayments expectedtoremainabove,andinflationtoremain fromitsagencydebtandagencymortgage-backed somewhatbelow,levelsconsistentwiththeCommitsecuritiesinlonger-termTreasurysecurities.Inits tee’sobjectivesforsometime.Accordingly,theCom- Junestatement,theCommitteenotedthatitwould mitteedecidedtomaintainitsexistingpolicyof reinregularlyreviewthesizeandcompositionof itssecu- vestingprincipalpaymentsfromitssecuritiesholdritiesholdingsandwaspreparedtoadjustthose ingsandreaffirmeditsintentiontopurchase holdings,asappropriate,tofostermaximumemploy- $600billionof longer-termTreasurysecuritiesbythe mentandpricestability. endof thesecondquarterof 2011.MembersemphasizedthattheCommitteewouldcontinuetoregularly TheinformationreviewedattheJanuary25–26 reviewthepaceof itssecuritiespurchasesandthe FOMCmeetingindicatedthattheeconomicrecovery overallsizeof theassetpurchaseprograminlightof wasgainingafirmerfooting,thoughtheexpansion incominginformationandwouldadjusttheprogram hadnotyetbeensufficienttobringaboutasignifi- asneededtobestfostermaximumemploymentand cantimprovementinlabormarketconditions.Con- pricestability.Inaddition,theCommitteemainsumerspendinghadrisenstronglyinlate2010,and tainedthetargetrangeof 0to¼percentforthefedtheongoingexpansioninbusinessoutlaysforequip- eralfundsrateandreiterateditsexpectationthatecomentandsoftwareappearedtohavebeensustained nomicconditionswerelikelytowarrantexceptionally inrecentmonths.Industrialproductionhad lowlevelsof thefederalfundsrateforanextended increasedsolidlyinNovemberandDecember.How- period. ever,constructionactivityinboththeresidentialand nonresidentialsectorsremainedweak.Modestgains ThedatapresentedattheMarch15FOMCmeeting inemploymenthadcontinued,andtheunemploy- indicatedthattheeconomicrecoverycontinuedto mentrateremainedelevated.Conditionsinfinancial proceedatamoderatepace,withagradualimprovemarketswereviewedbyFOMCparticipantsashav- mentinlabormarketconditions.Lookingthrough ingimprovedsomewhatfurtherovertheintermeeting weather-relateddistortionsinvariousindicators, period,asequitypriceshadrisenandcreditspreads measuresof consumerspending,businessinvestonthedebtof nonfinancialcorporationshadcontin- ment,andemploymentcontinuedtoshowexpansion. uedtonarrow,whileyieldsonlonger-termnominal Housing,however,remaineddepressed,andcredit Treasurysecuritieswerelittlechanged.15Creditcon- conditionswerestilluneven.Largefirmswithaccess ditionswerestilltightforsmaller,bank-dependent tofinancialmarketscontinuedtofindcredit,includfirms,althoughbankloangrowthhadpickedupin ingbankloans,availableonrelativelyattractive somesectors.Despitefurtherincreasesincommodity terms;however,creditconditionsreportedly prices,measuresof underlyinginflationremained remainedtightforsmaller,bank-dependentfirms. subduedandlonger-runinflationexpectationswere Sizableincreasesinpricesof crudeoilandother stable. commoditiespushedupheadlineinflation,butmeasuresof underlyinginflationweresubdued,and Theinformationreceivedovertheintermeeting longer-runinflationexpectationsremainedstable.A periodhadincreasedCommitteemembers’confi- numberof participantsexpectedthatslackin dencethattheeconomicrecoverywouldbesus- resourceutilizationwouldcontinuetorestrain increasesinlaborcostsandprices.Nonetheless,participantsobservedthatrapidlyrisingcommodity 15 MembersoftheFOMCin2011consistofthemembersofthe pricesposedupsideriskstothestabilityof longer- BoardofGovernorsoftheFederalReserveSystemplusthe presidentsoftheFederalReserveBanksofChicago,Dallas, terminflationexpectations,andthustotheoutlook Minneapolis,NewYork,andPhiladelphia.Participantsat forinflation,evenastheyposeddownsideriskstothe FOMCmeetingsconsistofthemembersoftheBoardofGovoutlookforgrowthinconsumerspendingandbusiernorsoftheFederalReserveSystemandallReserveBank presidents. nessinvestment.Inaddition,participantsnotedthat

78 98thAnnualReport|2011 unfoldingeventsintheMiddleEastandNorth activitywasstillanemic,measuresof consumer Africa,alongwiththetragicdevelopmentsinJapan, spendingandbusinessinvestmentcontinuedto hadfurtherincreaseduncertaintyabouttheeco- expand,andoveralllabormarketconditionswere nomicoutlook. improving,albeitgradually.Nevertheless,theyagreed thatthepaceof economicgrowthinthefirstquarter IntheFOMC’sdiscussionof monetarypolicyforthe hadslowedunexpectedly.Participantsviewedthis periodahead,themembersagreedthatnochangesto weaknessaslikelytobelargelytransitory,influenced theCommittee’sassetpurchaseprogramortoitstar- byunusuallysevereweather,increasesinenergyand getrangeforthefederalfundsratewerewarranted. othercommodityprices,andlower-than-expected Theeconomicrecoveryappearedtobeonafirmer defensespending;asaresult,theysaweconomic footing,andoverallconditionsinthelabormarket growthpickinguplaterintheyear.Inaddition,they weregraduallyimproving.Althoughtheunemploy- notedthathighergasolineandfoodpriceshad mentratehaddeclinedinrecentmonths,itremained weighedonconsumersentimentaboutnear-term elevatedrelativetolevelsthattheCommitteejudged economicconditionsbutthatunderlyingfundamentobeconsistent,overthelongerrun,withitsstatu- talspointedtocontinuedmoderategrowthinspendtorymandatetofostermaximumemploymentand ing.Activityintheindustrialsectorhadexpanded pricestability.Similarly,measuresof underlying furtherandmanufacturersremainedupbeat, inflationcontinuedtobesomewhatlowrelativeto althoughautomakerswerereportingsomedifficulties levelsseenasconsistentwiththedualmandateover inobtainingpartsnormallyproducedinJapan, thelongerrun.Withlonger-terminflationexpecta- whichcoulddampmotorvehicleproductioninthe tionsremainingstableandmeasuresof underlying secondquarter.Participantsnotedthatfinancialconinflationsubdued,membersanticipatedthatrecent ditionscontinuedtoimprove.Equitypriceshadrisen increasesinthepricesof energyandothercommodi- significantlysincethebeginningof theyear,buoyed tieswouldresultinonlyatransitoryincreaseinhead- byanimprovedoutlookforearnings.Althoughloan lineinflation.Giventhiseconomicoutlook,the demandingeneralremainedweak,banksreportedan Committeeagreedtomaintaintheexistingpolicyof easingof theirlendingstandardsandtermsoncomreinvestingprincipalpaymentsfromitssecurities mercialandindustrialloans.Consumercreditcondiholdingsandreaffirmeditsintentiontopurchase tionsalsoeasedsomewhat,althoughthedemandfor $600billionof longer-termTreasurysecuritiesbythe consumercreditotherthanautoloansreportedly endof thesecondquarterof 2011topromotea changedlittle. strongerpaceof economicrecoveryandtohelp ensurethatinflation,overtime,wasatlevelsconsis- Meetingparticipantsjudgedtheinformationreceived tentwiththeCommittee’smandate.Members overtheintermeetingperiodasindicatingthatthe emphasizedthattheCommitteewouldcontinueto economicrecoverywasproceedingatamoderate regularlyreviewthepaceof itssecuritiespurchases pace,althoughsomewhatmoreslowlythanhadbeen andtheoverallsizeof theassetpurchaseprogramin anticipatedearlierintheyear.Overallconditionsin lightof incominginformationandwouldadjustthe thelabormarketweregraduallyimproving,butthe programasneededtobestfostermaximumemploy- unemploymentrateremainedelevatedrelativetolevmentandpricestability.TheCommitteemaintained elsthattheCommitteejudgedtobeconsistent,over thetargetrangeforthefederalfundsrateat0to thelongerrun,withitsstatutorymandateof maxi- ¼percentandcontinuedtoanticipatethateconomic mumemploymentandpricestability.Significant conditionswerelikelytowarrantexceptionallylow increasesinthepricesof energyandothercommodilevelsforthefederalfundsrateforanextended tieshadboostedoverallinflation,butmembers period. expectedthisrisetobetransitory.Indicatorsof medium-terminflationremainedsubduedandsome- TheinformationreviewedattheApril26–27FOMC whatbelowthelevelsseenasconsistentwiththedual meetingindicatedthat,onbalance,economicactivity mandateasindicatedbytheCommittee’slonger-run wasexpandingatamoderatepaceandthatlabor inflationprojections.Accordingly,theCommittee marketconditionswerecontinuingtoimprovegradu- agreedthatnochangestoitsassetpurchaseprogram ally.Headlineconsumerpriceinflationhadbeen ortoitstargetrangeforthefederalfundsratewere boostedbylargeincreasesinfoodandenergyprices, warrantedatthismeeting.Specifically,theCommitbutmeasuresof underlyinginflationwerestillsub- teeagreedtomaintainitspolicyof reinvestingprinciduedandlonger-runinflationexpectationsremained palpaymentsfromitssecuritiesholdingsand stable.Participantsobservedthatwhileconstruction affirmedthatitwouldcompletepurchasesof

MonetaryPolicyandEconomicDevelopments 79 $600billionof longer-termTreasurysecuritiesbythe Theinformationreceivedovertheintermeeting endof thesecondquarter.TheCommitteealso periodindicatedthattheeconomicrecoverywasconagreedtomaintainthetargetrangeof thefederal tinuingatamoderatepace,thoughsomewhatmore fundsrateat0to¼percentandanticipatedthateco- slowlythantheCommitteehadexpected,andthat nomicconditionswouldlikelywarrantexceptionally thelabormarkethadbeenweakerthananticipated. lowlevelsforthefederalfundsrateforanextended Inflationhadincreasedinrecentmonthsasaresult period.MembersagreedthattheCommitteewould of higherpricesforsomecommodities,aswellas regularlyreviewthesizeandcompositionof itssecu- supplychaindisruptionsrelatedtothetragicevents ritiesholdingsinlightof incominginformationand inJapan.Nonetheless,memberssawthepaceof the thattheywerepreparedtoadjustthoseholdingsas economicexpansionaspickingupoverthecoming neededtobestfostermaximumemploymentand quartersandtheunemploymentrateresumingits pricestability. gradualdeclinetowardlevelsconsistentwiththe Committee’sdualmandate.Moreover,withlonger- Theinformationreceivedaheadof theJune21–22 terminflationexpectationsstable,membersexpected FOMCmeetingindicatedthatthepaceof theeco- thatinflationwouldsubsidetolevelsatorbelow nomicrecoveryhadslowedinrecentmonthsandthat thoseconsistentwiththeCommittee’sdualmandate conditionsinthelabormarkethadsoftened.Meas- astheeffectsof pastenergyandothercommodity uresof inflationhadpickedupthisyear,reflectingin priceincreasesdissipate.However,manymembers parthigherpricesforsomecommoditiesand sawtheoutlookforbothemploymentandinflation importedgoods.Longer-runinflationexpectations, asunusuallyuncertain.Againstthisbackdrop,memhowever,remainedstable.Intheirdiscussionof the bersagreedthatitwasappropriatetomaintainthe economicsituationandoutlook,meetingpartici- Committee’scurrentpolicystanceandaccumulate pantsnotedanumberof transitoryfactorsthatwere furtherinformationregardingtheoutlookforgrowth restraininggrowth,includingtheglobalsupplychain andinflationbeforedecidingonthenextpolicystep. disruptionsinthewakeof theearthquakeinJapan, Afewmembersnotedthat,dependingonhowecotheunusuallysevereweatherinsomepartsof the nomicconditionsevolve,theCommitteemighthave UnitedStates,adropindefensespending,andthe toconsiderprovidingadditionalmonetarypolicy effectof increasesinoilandothercommodityprices stimulus,especiallyif economicgrowthremainedtoo onhouseholdpurchasingpowerandspending.Par- slowtomeaningfullyreducetheunemploymentrate ticipantsexpectedthattheexpansionwouldgain inthemediumrun.Afewothermembers,however, strengthastheeffectsof thesetemporaryfactors viewedtheincreaseininflationrisksassuggesting waned.Nonetheless,mostparticipantsjudgedthat thateconomicconditionsmightevolveinawaythat thepaceof economicrecoverywaslikelytobesome- wouldwarranttheCommitteetakingstepstobegin whatslowerovercomingquartersthantheyhadpro- removingpolicyaccommodationsoonerthancurjectedinApril,reflectingthepersistentweaknessin rentlyanticipated. thehousingmarket,theongoingeffortsbysome householdstoreducedebtburdens,therecentslug- AlsoatitsJunemeeting,inlightof ongoingstrains gishgrowthof incomeandconsumption,thefiscal insomeforeignfinancialmarkets,theCommittee contractionatalllevelsof government,andtheeffect approvedanextensionthroughAugust1,2012,of its of uncertaintyregardingtheeconomicoutlookand temporaryU.S.dollarliquidityswaparrangements futuretaxandregulatorypoliciesonthewillingness withtheBankof Canada,theBankof England,the of firmstohireandinvest.Changesinfinancialcon- EuropeanCentralBank,theBankof Japan,andthe ditionssincetheAprilmeetingsuggestedthatinves- SwissNationalBank.Theauthorizationof theswap torshadbecomemoreconcernedaboutrisk.Equity arrangementshadbeensettoexpireonAugust1, marketshadseenabroadselloff,andriskspreadsfor 2011. manycorporateborrowershadwidenednoticeably sinceApril.Nonetheless,largebusinessescontinued ToolsandStrategiesfortheWithdrawal toenjoyreadyaccesstocredit. ofMonetaryPolicyAccommodation AlthoughtheFOMCcontinuestoanticipatethat Intheirdiscussionof monetarypolicyfortheperiod economicconditionsarelikelytowarrantexceptionahead,membersagreedthattheCommitteeshould allylowlevelsof thefederalfundsrateforan completeits$600billionassetpurchaseprogramat extendedperiod,theFederalReservewilleventually theendof themonthandthatnochangestothetar- needtoremovepolicyaccommodationtomaintaina getrangeof thefederalfundsratewerewarranted. stanceof policythatisconsistentwithitsstatutory

80 98thAnnualReport|2011 mandatetofostermaximumemploymentandstable theirdiscussionsof thistopicwereundertakenas prices.TheFOMChasseveraltoolsforsmoothlyand partof prudentplanninganddidnotimplythata effectivelyexitingattheappropriatetimefromthe movetowardsuchnormalizationwouldnecessarily currentaccommodativepolicystance.Onetoolisthe beginsometimesoon.Almostallparticipantsagreed abilitytopayinterestonreservebalances;theFederal withthefollowingprinciplestoguidetheexitpro- Reservewillbeabletoputsignificantupwardpres- cess: sureonshort-termmarketinterestratesbyincreasing • TheCommitteewilldeterminethetimingandpace theratepaidonexcessreserves.Twoothertools—exof policynormalizationtopromoteitsstatutory ecutingtripartyreverserepurchaseagreements mandateof maximumemploymentandprice (RRPs)withprimarydealersandothercounterparstability. tiesandissuingtermdepositstodepositoryinstitutionsthroughtheTermDepositFacility(TDF)—will • Tobegintheprocessof policynormalization,the becapableof temporarilyreducingthequantityof Committeewilllikelyfirstceasereinvestingsome reservesheldbythebankingsystemandthereby orallpaymentsof principalonthesecuritiesholdtighteningtherelationshipbetweentheinterestrate ingsintheSystemOpenMarketAccount(SOMA). paidonreservesandshort-termmarketinterest • Atthesametimeorsometimethereafter,theComrates.16Finally,theFederalReservecouldparethe mitteewillmodifyitsforwardguidanceonthepath sizeof itsbalancesheetovertimebyceasingtoreinof thefederalfundsrateandwillinitiatetemporary vestprincipalpaymentsfromitssecuritiesholdings reserve-drainingoperationsaimedatsupporting orbysellingitssecuritiesholdings. theimplementationof increasesinthefederal fundsratewhenappropriate. Duringthefirsthalf of 2011,theFederalReserve continuedtorefineandtestitstemporaryreserve • Wheneconomicconditionswarrant,theCommitdrainingtools.TheFederalReserveBankof New tee’snextstepintheprocessof policynormaliza- York(FRBNY)tookfurtherstepstoexpandthe tionwillbetobeginraisingitstargetforthefederal rangeof counterpartiesforRRPstoincludeentities fundsrate,andfromthatpointon,changingthe otherthanprimarydealersinordertoenhancethe levelorrangeof thefederalfundsratetargetwill capacityof suchoperations.TheFRBNYcompleted betheprimarymeansof adjustingthestanceof itsthirdwaveof counterpartyexpansionsaimedat monetarypolicy.Duringthenormalizationprocess, domesticmoneymarketfundsinMay,bringingthe adjustmentstotheinterestrateonexcessreserves totalnumberof RRPcounterparties,includingthe andtothelevelof reservesinthebankingsystem primarydealers,to110.InMay,theFRBNYalsoset willbeusedtobringthefundsratetowardits forthcriteriafortheacceptanceof government- target. sponsoredenterprisesaseligiblecounterpartiesfor • Salesof agencysecuritiesfromtheSOMAportfothenextcounterpartyexpansionwave.Duringthe liowilllikelycommencesometimeafterthefirst firsthalf of theyear,theFRBNYconductedaseries increaseinthetargetforthefederalfundsrate.The of small-scaletripartyRRPtransactionswithitspritimingandpaceof saleswillbecommunicatedto marydealerandmoneymarketfundRRPcounterthepublicinadvance;thatpaceisanticipatedtobe parties.TheFederalReservealsoconductedthree relativelygradualandsteady,butitcouldbe 28-day,$5billionauctionsof termdeposits.Asa adjustedupordowninresponsetomaterial matterof prudentplanning,theseoperationsare changesintheeconomicoutlookorfinancial intendedtoensuretheoperationalreadinessof the conditions. TDFandRRPprogramsandtoincreasethefamiliarityof theparticipantswiththeauctionprocedures. • Oncesalesbegin,thepaceof salesisexpectedtobe aimedateliminatingtheSOMA’sholdingsof AtitsAprilandJunemeetings,theCommitteedis- agencysecuritiesoveraperiodof threetofive cussedstrategiesfornormalizingboththestanceand years,therebyminimizingtheextenttowhichthe conductof monetarypolicy.Participantsnotedthat SOMAportfoliomightaffecttheallocationof creditacrosssectorsof theeconomy.Salesatthis pacewouldbeexpectedtonormalizethesizeof the 16 Inatripartyrepurchaseagreement,bothpartiestotheagreementmusthavecashandcollateralaccountsatthesametri- SOMAsecuritiesportfoliooveraperiodof twoto partyagent,whichisbydefinitionalsoaclearingbank.Thetri- threeyears.Inparticular,thesizeof thesecurities partyagentwillensurethatcollateralpledgedissufficientand portfolioandtheassociatedquantityof bank meetseligibilityrequirements,andallpartiesagreetousecollateralpricessuppliedbythetripartyagent. reservesareexpectedtobereducedtothesmallest

MonetaryPolicyandEconomicDevelopments 81 levelsthatwouldbeconsistentwiththeefficient parentmanner,andthesubcommitteeoncommuniimplementationof monetarypolicy. cationswastoconsiderprovidingfurtherguidancein thisarea. • TheCommitteeispreparedtomakeadjustmentsto itsexitstrategyif necessaryinlightof economic AttheMarch15FOMCmeeting,theCommittee andfinancialdevelopments. endorsedthecommunicationssubcommittee’srec- FOMCCommunications ommendationthattheChairmanconductregular pressconferencesafterthefourFOMCmeetings Transparencyisanessentialprincipleof modernceneachyearforwhichparticipantsprovidenumerical tralbankingbecauseitappropriatelycontributesto projectionsof severalkeyeconomicvariables.While theaccountabilityof centralbankstothegovernthoseprojectionsarealreadymadepublicwiththe mentandtothepublicandbecauseitcanenhance minutesof therelevantFOMCmeetings,presscontheeffectivenessof centralbanksinachievingtheir ferenceswereviewedasbeinghelpfulinexplaining macroeconomicobjectives.Tothisend,theFederal howtheCommittee’smonetarypolicystrategyis Reserveprovidesaconsiderableamountof informainformedbyparticipants’projectionsof theratesof tionconcerningtheconductof monetarypolicy. outputgrowth,unemployment,andinflationlikelyto Immediatelyfollowingeachmeetingof theFOMC, prevailduringeachof thenextfewyears,andby theCommitteereleasesastatementthatlaysoutthe theirassessmentsof thevaluesof thosevariablesthat rationaleforitspolicydecision,anddetailedminutes wouldprovemostconsistent,overthelongerrun, of eachFOMCmeetingaremadepublicthreeweeks withtheCommittee’smandatetopromoteboth followingthemeeting.Lightlyeditedtranscriptsof maximumemploymentandstableprices.Itwas FOMCmeetingsarereleasedtothepublicwitha agreedthattheChairmanwouldbeginholdingpress five-yearlag.17 conferenceseffectivewiththeApril26–27,2011, FOMCmeeting;thesecondpressbriefingwasheld Inrecentyears,theFederalReservehastakenaddionJune22inconjunctionwiththeforecaststhat tionalstepstoenhanceitscommunicationsregarding policymakerssubmittedatthatFOMCmeeting. monetarypolicydecisionsanddeliberations.In November2010,theFOMCdirectedasubcommit- AtitsJune21–22meeting,theCommitteefollowed tee,headedbyGovernorYellen,toconductareview uponthediscussionsfromitsJanuarymeetingabout of theCommittee’scommunicationsguidelineswith policiestosupporteffectivecommunicationwiththe theaimof ensuringthatthepubliciswellinformed publicregardingtheoutlookfortheeconomyand aboutmonetarypolicyissueswhilepreservingthe monetarypolicy.TheCommitteeunanimously necessaryconfidentialityof policydiscussionsuntil approvedasetof principles,proposedbythesubtheirscheduledrelease.Inadiscussiononexternal committeeoncommunications,forCommitteeparcommunicationsattheJanuary25–26FOMCmeetticipantsandfortheFederalReserveSystemstaff to ing,participantsnotedtheimportanceof fairand followintheircommunicationswiththepublicin equalaccessbythepublictoinformationabout ordertoreinforcethepublic’sconfidenceinthe futurepolicydecisions.Severalparticipantsindicated transparencyandintegrityof themonetarypolicy thatincreasedclarityof communicationswasakey process.18 objective,andsomereferredtothecentralroleof communicationsinthemonetarypolicytransmission process.Discussionfocusedonhowtoencourage 18 TheFOMCpoliciesonexternalcommunicationsofCommittee dialoguewiththepublicinanappropriateandtransparticipantsandoftheFederalReserveSystemstaffareavailableontheFederalReserveBoard’swebsiteatwww 17 FOMCstatements,minutes,andtranscripts,aswellasother .federalreserve.gov/monetarypolicy/files/FOMC_ relatedinformation,areavailableontheFederalReserve ExtCommunicationParticipants.pdfandwww.federalreserve Board’swebsiteatwww.federalreserve.gov/monetarypolicy/ .gov/monetarypolicy/files/FOMC_ExtCommunicationStaff.pdf, fomc.htm. respectively.

83 Supervision and Regulation TheFederalReservehassupervisoryandregulatory althoughdownfrom28percentin2010,remainshigh authorityoveravarietyof financialinstitutionsand at18percent;unprofitableBHCsencompassroughly activitieswiththegoalof promotingasafe,sound, 15percentof bankingindustryassets.Nonperformandstablebankingandfinancialsystemthatsup- ingassetspresentasignificantchallengetoindustry portsthegrowthandstabilityof theU.S.economy. recovery,withthenonperformingassetratioremain- Asdescribedinthisreport,theFederalReservecar- inghighat4.1percentof loansandforeclosedassets, riesoutitssupervisoryandregulatoryresponsibilities thesamepercentasin2010.Weaknesseswerebroad andsupportingfunctionsprimarilyby based,encompassingresidentialmortgages(firstlien),commercialrealestate—especiallynon-owner • promotingthesafetyandsoundnessof individual nonfarmnonresidentialandconstructionotherthan financialinstitutionssupervisedbytheFederal single-family—andcommercialandindustrial(C&I) Reserve; loans.In2011,anadditional172BHCsthatreceived • developingsupervisorypolicy(rulemakings,super- fundsfromtheU.S.Departmentof theTreasury’s visionandregulationletters(SRletters),policy (Treasury)TroubledAssetRelief Program(TARP) statements,andguidance); repaidallfundsreceived—120of thesecompanies repaidwithfundsreceivedfromtheSmallBusiness • identifyingrequirementsandsettingprioritiesfor LendingFund(SBLF).Atyear-end2011,atotalof supervisoryinformationtechnologyinitiatives; 332BHCsandbanksthatreceivedfundsfromthe • ensuringongoingstaff developmenttomeetevolv- TARPhadrepaidallfundsreceived,andTreasury ingsupervisoryresponsibilities; reportsthatapproximately89percentof alldistrib- • regulatingtheU.S.bankingandfinancialstructure utedTARPfundshavebeenrepaid.Including incomefromdividends,interestandothersources, byactingonavarietyof proposals;and Treasuryhasreceived$258.44billionbackfrombank • enforcingotherlawsandregulations. supportprograms,exceedingthe$245.10billionin fundsdisbursed. 2011 Developments AlthoughTreasury’sSBLFProgram’sauthorizing legislationprovidedupto$30billionforinvesting, During2011,theU.S.bankingsystemandfinancial interestinSBLFwaslowerthananticipated,with marketsimprovedfurther,continuingtheirrecovery 935financialinstitutionsapplyingtotheprogramfor fromthefinancialcrisisthatstartedinmid-2007. acombinedfundingrequestof $11.7billion.About one-third(320)of thetotalnumberof applicants Performanceof bankholdingcompanies.Whilea wereseekingtorefinanceTARPCapitalPurchase turnaroundinbankholdingcompanies’(BHCs)per- Program(CPP)andCommunityDevelopmentCapiformancewasevidentduring2011,performance talInitiative(CDCI)funds.Thisgroupof institutions remainsweakbyhistoricalstandards,andtheindusrequested$6.7billioninfunds,whichwas57percent tryrecoverycouldfacechallengesduetoongoing of thetotaldollaramountrequested.Ultimately,332 andelevatednonperformingassetlevels.U.S.BHCs, institutionsreceived$4.03billioninSBLFinvestinaggregate,reportedearningsof $108billionfor ments.Treasuryapproved137of theapplicantsseek- 2011,upfrom$80billionfortheyearendingDecemingtorefinanceTARPCPPandCDCIfunds,investber31,2010.Muchof thisimprovementwasdueto ingatotalof $3.3billionintheseinstitutions.This lowerloanlossprovisioningandconsequentreserve representedabout82percentof allSBLFinvestreleases.Theproportionof unprofitableBHCs,

84 98thAnnualReport|2011 ments.1(Alsosee“BankHoldingCompanies”on cabilityof theenhancedstandardstoSLHCs.(See page89.) box1formoredetails.) Performanceof statememberbanks.Similarto Capitaladequacystandards.In2011,theBoard BHCs,theturnaroundatstatememberbanksin2011 issuedseveralrulemakingsandguidancedocuments wasmuted.Asagroup,statememberbanksreported relatedtocapitaladequacystandards,includingjoint aprofitof $11.5billionfor2011,upfrom6.1billion proposedrulemakingswiththeotherfederalbanking for2010.Whileearningswereupduelargelytolower agenciesthatwouldimplementcertainrevisionsto provisions($7.7billionversus17.7billionin2010), theBaselcapitalframeworkandthataddresscertain almost11percentof allstatememberbankscontin- provisionsof theDodd-FrankAct.Theserulemakuedtoreportlosses.MirroringtrendsatBHCs,the ingsincludedtwoNPRstorevisethemarket-risk nonperformingassetsratioremainedrelativelyhigh capitalrules,afinalrulethatamendstheadvanced at3.2percentof loansandforeclosedassets,reflect- approachescapitaladequacyframeworktosetminiingbothcontractingloanbalancesandongoing mumcapitalrequirementsconsistentwithsection171 weaknessesinassetquality.Growthinproblemloans of theDodd-FrankAct,rulesrelatedtothetreatcontinuedtoslowduring2011,butweaknessencom- mentof subordinateddebtforcertainsmallbanking passednonfarmnonresidentiallending,residential organizations,andafinalrulerequiringU.S.BHCs mortgages,andC&Iloans.Thenumberof foreclosed withtotalconsolidatedassetsof $50billionormore propertiescontinuedtoincrease,particularlythose tosubmitannualcapitalplanstotheFederalReserve associatedwithconstructionandlanddevelopment forreview.(See“SupervisoryPolicy”onpage96.) andone-tofour-familyresidentiallending.Theriskbasedcapitalratiosforstatememberbanksimproved Supervisionof savingsandloanholdingcompanies.On during2011intheaggregate,andthepercentof state July21,2011,responsibilityforsupervisionandregumemberbanksdeemedwellcapitalizedunderprompt lationof SLHCstransferredfromtheOfficeof correctiveactionstandardsremainedhighat98per- ThriftSupervision(OTS)totheFederalReserve,purcent.In2011,12statememberbankswith$8.4bil- suanttotheDodd-FrankAct.2(See“Savingsand lioninassetsfailed,withlossesof $1.7billion LoanHoldingCompanies”onpage90fordetails.) accordingtoFederalDepositInsuranceCorporation (FDIC)estimates.(Alsosee“StateMemberBanks” Recoveryandresolutionplanning.TheFederal onpage88.) Reserveisworkingwithotherregulatoryagenciesto reducetheprobabilityof failureof thelargest,most Implementationof enhancedprudentialstandardsof complexfinancialfirmsandtominimizethelossesto theDodd-FrankAct.InDecember,theBoardissued thefinancialsystemandtheeconomyif suchafirm anoticeof proposedrulemaking(NPR)toimple- shouldfail.(Seebox2fordetails.) menttheenhancedprudentialstandardsandearly remediationrequirementsinsections165and166of ActionsagainstmortgageservicersforfaultyforeclotheDodd-FrankWallStreetReformandConsumer sureproceedings.InApril2011,theFederalReserve ProtectionActof 2010(Dodd-FrankAct).Thepro- announcedformalenforcementactionsagainstcerposalgenerallyappliestoallU.S.BHCswithconsoli- tainlargemortgageservicerstoensurethatthoseserdatedassetsof $50billionormoreandanynonbank vicersaddresseddeficientpracticesinresidential financialcompanythatmaybedesignatedbythe mortgageloanservicingandforeclosureprocessing. FinancialStabilityOversightCouncil(FSOC)assys- (Seebox3fordetails.) temicallyimportant.Aproposalimplementing enhancedprudentialstandardsforforeignbanking Supervision organizationsthathave$50billionormoreinconsolidatedassetsandaU.S.bankingpresencewillbe issuedseparately.Ingeneral,savingsandloanhold- TheFederalReserveisthefederalsupervisorand ingcompanies(SLHCs)wouldnotbesubjecttothe regulatorof allU.S.BHCs,includingfinancialholdrequirementsof thisproposal,exceptcertainstress ingcompanies,andstate-charteredcommercialbanks testrequirements,althoughtheBoardplanstoissuea thataremembersof theFederalReserveSystem.The separateproposalinthefuturetoaddresstheappli- 2 PursuanttotheHomeOwners’LoanAct,12U.S.C.Section1461et.seq.,anSLHCisdefinedasanycompanythat 1 TheTARPstatisticsonlyincludethoseBHCsthatdidnotpar- directlyorindirectlycontrolseitherasavingsassociationorany ticipateintheSupervisoryCapitalAssessmentProgramin2009. othercompanythatisanSLHC.

SupervisionandRegulation 85 Box 1. Enhanced Prudential Standards and Early Remediation Requirements InDecember,theBoardissuedanNPRtoimplement Single-counterpartycreditlimits.Theproposal theenhancedprudentialstandardsandearlyreme- wouldlimitcreditexposureofacoveredcompanyto diationrequirementsinsections165and166ofthe asinglecounterpartyasapercentageofthecovered Dodd-FrankActforlargeBHCsandsystemically company’sregulatorycapital.Creditexposure importantnonbankfinancialcompanies. betweenthelargestcoveredcompanieswouldbe subjecttoatighterlimit. TheNPRwouldimplement Earlyremediationrequirements.Theproposal Risk-basedcapitalandleveragerequirementsin wouldimplementaframeworktoaddressfinancial twophases.Inthefirstphase,thecoveredcompaweaknessespromptly.TheBoardisproposinga nieswouldbesubjecttotheBoard’scapitalplanrule, numberoftriggersforremediation—suchascapital whichwasissuedinNovember2011.Inthesecond levels,stresstestresults,andrisk-management phase,theBoardwouldissueaproposaltoimpleweaknesses—calibratedtoidentifyproblemsatan mentarisk-basedcapitalsurchargebasedonthe earlystage.Requiredactionswouldvarybasedon frameworkandmethodologydevelopedbytheBasel theseverityofthesituation,butcouldincluderestric- CommitteeonBankingSupervision. tionsongrowth,capitaldistributions,andexecutivecom- Liquidityrequirementsinmultiplephases.First, pensation,aswellascapitalraisingorassetsales. coveredcompanieswouldbesubjecttoqualitative Otherrequirements.Theproposalwouldalsoimpleliquidityrisk-managementstandardsgenerallybased mentriskcommitteerequirementsandenhanced ontheinteragencyliquidityrisk-managementguidrisk-managementstandardsforcoveredcompanies anceissuedinMarch2010.Thesestandardswould anddebt-to-equityrequirementsforcompaniesthat requirecoveredcompaniestoconductinternalliquidtheFSOCdeterminesposeagravethreattofinancial itystresstestsandsetinternalquantitativelimitsto stabilityandshouldbesubjecttoadebt-to-equity manageliquidityrisk.Inlaterphases,theBoard limit. wouldissueoneormoresubsequentproposalsto implementquantitativeliquidityrequirementsbased AjointFDIC-BoardfinalruleimplementingtheresoluontheBaselIIIliquidityrules. tionplanrequirementscontainedinsection165of theDodd-FrankActwasissuedinOctober(www.gpo Supervisoryandcompany-runstresstestrequire- .gov/fdsys/pkg/FR-2011-11-01/pdf/2011-27377.pdf). ments.Supervisorystresstestssimilartothoseconductedinrecentyearswouldbeconductedannually ThecommentperiodfortheNPRendsonApril30, bytheBoard.Asummaryoftheresults,including 2012.Seepressreleaseandnoticeatwww company-specificinformation,wouldbemadepub- .federalreserve.gov/newsevents/press/bcreg/ lic.Inaddition,theproposalrequirescompaniesto 20111220a.htm. conductoneormorecompany-runstresstestseach yearandtomakeasummaryoftheirresultspublic. FederalReservealsohasresponsibilityforsupervis- Safety and Soundness ingtheoperationsof allEdgeActandagreement corporations,theinternationaloperationsof state Topromotethesafetyandsoundnessof financial memberbanksandU.S.BHCs,andtheU.S.opera- institutions,theFederalReserveconductson-site tionsof foreignbankingorganizations.Furthermore, examinationsandinspections,conductsoff-sitesurthroughtheDodd-FrankAct,theFederalReserve veillanceandmonitoring,andtakesenforcementand hasbeenassignedresponsibilitiesfornonbankfinan- othersupervisoryactionsasnecessary.TheFederal cialfirmsandfinancialmarketutilities(FMUs)des- ReservealsoprovidestrainingandtechnicalassisignatedbytheFSOCassystemicallyimportant.In tancetoforeignsupervisorsandminority-ownedand addition,theacttransferredauthorityforconsoli- denovodepositoryinstitutions. datedsupervisionof morethan400SLHCsandtheir non-depositorysubsidiariesfromtheOTStothe ExaminationsandInspections FederalReserve,effectiveJuly21,2011.Inoverseeing TheFederalReserveconductsexaminationsof state theinstitutionsundertheFederalReserve’sauthor- memberbanks,FMUs,theU.S.branchesandagenity,theFederalReserveseeksprimarilytopromote ciesof foreignbanks,andEdgeActandagreement safetyandsoundness,includingcompliancewithlaws corporations.Inaprocessdistinctfromexaminaandregulations. tions,itconductsinspectionsof holdingcompanies

86 98thAnnualReport|2011 Box 2. Recovery and Resolution Planning Recoveryandresolutionplanningaretwoseparate, plansbyJuly1,2012,withtwoadditionalgroups butrelated,effortstoensurethatthefailureofalarge submittingplansthroughDecember31,2013.The globalfinancialinstitutiondoesnothaveserious planswillidentify/describe adverseeffectsontheU.S.andtheglobalfinancial • criticaloperations(thoseoperationsthatare system.TheFederalReserve,inconjunctionwith importanttofinancialstability); otherU.S.supervisors,hascontinuedtoworkwith financialinstitutionstoensureabroadrangeof • corebusinesslines—thatis,businesslinesthat optionsforde-riskingandde-leveragingincrisis. supportthefirm’sfranchisevalue; Large,globallyactivefinancialinstitutionsarenow developingtherequisitegovernanceandinfrastruc- • materiallegalentities; turetocreateandmaintainrecoveryandresolutionplan- • interconnectionsandinterdependencies; ningprocessesandtoexecuterelevantstrategies. • thecompany’scorporategovernancestructurefor RecoveryPlanning resolution;and TheFederalReservehasrequiredthatthelargest • impedimentstoresolutionandtheactionsthe andmostgloballyactiveU.S.financialinstitutions financialinstitutionwilltaketoimproveits developrecoveryplansthatdescribeamenuof resolvability. optionsandactions,excludinganyextraordinaryoffi- Plansmustalsoprovideexplanationsastohowand cialsectorassistance,tobetakenbymanagementto towhatextentaffiliatedinsureddepositoryinstitumaintainthefinancialinstitutionasagoingconcern tionsareprotectedfromrisksassociatedwithactividuringsituationsofextremestress.Theseplanswere tiesofanyofthefinancialinstitutions’nonbanksubreviewedinseveraliterationsduring2010and2011by sidiaries.Theplansofforeignbankingoperationsin theFederalReserveandotherU.S.bankingsupervisors. theUnitedStatesmustfocusontheirU.S.operations ConsistentwithprinciplesdevelopedbytheFinancial alongwithexplanationsofhowoverallresolution StabilityBoard,thesesamefinancialinstitutionspar- planningforU.S.operationsisintegratedintotheir ticipatedinaseriesofcrisismanagementmeetings globalcontingencyplanningprocesses. withtheFederalReserve,FDIC,OfficeoftheComp- TheFederalReserveandtheFDICmustreviewplans trolleroftheCurrency,andinternationalsupervisors submittedbythefinancialinstitutionsandmaydeterthatwereintendedtoconsiderthespecificissues minethataplanisnotcredible,orthatitwouldnot andimpedimentstocoordinatedinternationalaction facilitateanorderlybankruptcyoftheinstitution. thatmayariseinhandlingseverestressatspecific Financialinstitutionssubmittingdeficientplanswill financialinstitutions. berequiredtoresubmitplanswithproposedchanges inbusinessoperationsandcorporatestructureto ResolutionPlanning facilitateimplementationoftheplan.Ifafinancial TheDodd-FrankActrequireslarge,complexfinancial institutionfailstoadoptanacceptableplan,theFDIC institutionstosubmitplansfortheirrapidandorderly andFederalReservemayimposeadditionalcapital, resolutionundertheBankruptcyCodeintheeventof leverage,orliquidityrequirementsonthefinancial materialfinancialdistressorfailure.OnNovember1, institution.Ifsuitableplansarenotresubmittedwithin 2011,theFederalReserveandFDICjointlyissued twoyears,theFederalReserveandtheFDICmay rulesimplementingtheresolutionplanrequirement placerestrictionsongrowth,activities,oroperations forfinancialinstitutionsthataresubjecttohigherpru- andmayrequirethefinancialinstitutionstodivest dentialstandards(www.gpo.gov/fdsys/pkg/FR-2011- assets.TheFederalReserve,inclosecooperation 11-01/html/2011-27377.htm). withtheFDIC,isworkingwiththefirstgroupoffinancialinstitutionstodeveloptheirplans. Inaphasedapproachbasedonnonbankassetsize, thefirstgroupoffinancialinstitutionswillsubmittheir andtheirnonbanksubsidiaries.Whetheranexami- 2. anassessmentof thequalityof therisknationoraninspectionisbeingconducted,the managementandinternalcontrolprocessesin reviewof operationsentails placetoidentify,measure,monitor,andcontrol risks; 1. anevaluationof theadequacyof governanceprovidedbytheboardandseniormanagement, 3. anassessmentof thekeyfinancialfactorsof includinganassessmentof internalpolicies,pro- capital,assetquality,earnings,andliquidity;and cedures,controls,andoperations;

SupervisionandRegulation 87 4. areviewforcompliancewithapplicablelawsand Box 3. Actions against Mortgage regulations. Servicers for Faulty Foreclosure Proceedings Table1providesinformationonexaminationsand inspectionsconductedbytheFederalReserveduring InApril2011,theFederalReserveissuedconsent cease-and-desistordersagainstcertainlargemort- thepastfiveyears. gageservicersrequiringthoseservicerstoimplementsignificantimprovementstotheirmortgage TheFederalReserveusesarisk-focusedapproachto loanservicingandforeclosureprocessingpractices. supervision,withactivitiesdirectedtowardidentify- Theseactionsweredesignedtocorrectpractices ingtheareasof greatestrisktofinancialinstitutions thatresultedinservicererrorsandtopreventfuture abusesintheloanmodificationandforeclosure andassessingtheabilityof institutions’management processes.Undertheconsentorders,eachservicer processestoidentify,measure,monitor,andcontrol must,amongotherthings,submitspecificplansaccept- thoserisks.Keyaspectsof therisk-focusedapproach abletotheFederalReservethat toconsolidatedsupervisionof thelargestinstitutions • ensurethereisadequatestafftocarryoutresi- supervisedbytheFederalReserveinclude dentialmortgageloanservicing,lossmitigation, andforeclosureactivities; 1. developinganunderstandingof eachorganization’slegalandoperatingstructure,anditspri- • strengthencoordinationofcommunicationswith marystrategies,businesslines,andriskborrowersthroughoutthelossmitigationand foreclosureprocessesbyprovidingborrowersa managementandinternalcontrolfunctions; primarypointofcontactwhohasaccesstocurrentinformationaboutlossmitigationandfore- 2. developingandexecutingatailoredsupervisory closureactivities; planthatoutlinestheworkrequiredtomaintaina comprehensiveunderstandingandassessmentof • ensurethatforeclosuresarenotpursuedoncea loanmodificationhasbeenapproved,unlessrepay- eachinstitution,incorporatingreliancetothefullmentsunderthemodifiedloanarenotmade; estextentpossibleonassessmentsandinformationdevelopedbyotherrelevantdomesticand • establishrobustcontrolsandoversightoverthe activitiesofthirdpartiesthatprovidevariousresi- foreignsupervisorsandfunctionalregulators; dentialmortgageloanservicing,lossmitigation, 3. maintainingcontinualsupervisionof theseorgaorforeclosure-relatedsupport,includinglocal counselinforeclosureorbankruptcyproceed- nizations—includingthroughmeetingswiththe ings;and organization’smanagementandanalysisof internalandexternalinformation—sothattheFederal • strengthenprogramstoensurecompliancewith stateandfederallawsregardingservicinggener- Reserve’sunderstandingandassessmentof each ally,andforeclosuresinparticular. organization’sconditionremainscurrent; Theordersalsorequiretheservicerstohireinde- 4. assigningtoeachorganizationasupervisoryteam pendentconsultantstoconductreviewstoidentify composedof ReserveBankstaff whohaveskills borrowerswhosufferedfinancialinjuryasaresultof appropriatefortheorganization’sriskprowrongfulforeclosureorotheridentifieddeficiencies. Theordersrequiretheservicertoprovideremedia- file;and tiontosuchborrowers. 5. promotingSystemwideandinteragency TheFederalReservealsoissuedconsentceaseinformation-sharingthroughautomatedsystems and-desistordersagainstsixparentBHCsof andothermechanisms. nationalbankservicerstoaddressdeficientpracticesintheparentcompanies’oversightofresidentialmortgageloanservicing,loanmodification,and Tostrengthenitssupervisionof thelargest,most foreclosureprocesses.Theordersrequirethepar- complexfinancialinstitutions,theFederalReserve entcompaniestoimplementpolicies,procedures, hascreatedacentralizedmultidisciplinarybody andpracticesdesignedtopreventfutureabuses. calledtheLargeInstitutionSupervisionCoordinat- Eachinstitutionunderanorderisrequiredtosubmit ingCommittee(LISCC)tooverseethesupervisionof quarterlyreportstotheFederalReservedetailing thesecompanies.Thecommitteeuseshorizontal themeasuresithastakentocomplywiththe evaluationstomonitorinterconnectednessandcomenforcementactionandtheresultsofthose measures. monpracticesamongcompaniesthatcouldleadto greatersystemicrisk.Thecommitteealsousesaddi- Seepressreleaseandnoticeatwww.federalreserve tionalandimprovedquantitativemethodsforevalu- .gov/newsevents/press/enforcement/20110413a .htm. atingthefinancialconditionof companiesandthe

88 98thAnnualReport|2011 Table1.Statememberbanksandbankholdingcompanies,2007–2011 Entity/item 2011 2010 2009 2008 2007 Statememberbanks Totalnumber 828 829 845 862 878 Totalassets(billionsofdollars) 1,891 1,697 1,690 1,854 1,519 Numberofexaminations 809 912 850 717 694 ByFederalReserveSystem 507 722 655 486 479 Bystatebankingagency 302 190 195 231 215 Top-tierbankholdingcompanies Large(assetsofmorethan$1billion) Totalnumber 491 482 488 485 459 Totalassets(billionsofdollars) 16,443 15,986 15,744 14,138 13,281 Numberofinspections 672 677 658 519 492 ByFederalReserveSystem1 642 654 640 500 476 Onsite 461 491 501 445 438 Offsite 181 163 139 55 38 Bystatebankingagency 30 23 18 19 16 Small(assetsof$1billionorless) Totalnumber 4,251 4,362 4,486 4,545 4,611 Totalassets(billionsofdollars) 982 991 1,018 1,008 974 Numberofinspections 3,306 3,340 3,264 3,192 3,186 ByFederalReserveSystem 3,160 3,199 3,109 3,048 3,007 Onsite 163 167 169 107 120 Offsite 2,997 3,032 2,940 2,941 2,887 Bystatebankingagency 146 141 155 144 179 Financialholdingcompanies Domestic 417 430 479 557 597 Foreign 40 43 46 45 43 1 Forlargebankholdingcompaniessubjecttocontinuous,risk-focusedsupervision,includesmultipletargetedreviews. riskstheymightposetoeachotherandtothe reportstailoredtothescopeandfindingsof the broaderfinancialsystem.Thesupervisoryframework examination. applicabletotheLISCCportfolio,otherBHCswith assetsof $50billionormore,andnonbankfinancial StateMemberBanks firmsdesignatedbytheFSOCforsupervisionbythe Attheendof 2011,2,120banks(excludingnonde- Boardwillcontinuetoevolveincomingyearsto positorytrustcompaniesandprivatebanks)were reflecttherecentlyissuedrulesforcapitalplanning membersof theFederalReserveSystem,of which andresolutionplans(seeboxes2and4).Inaddition, 828werestatechartered.FederalReserveSystem rulesandguidanceonenhancedprudentialstandards memberbanksoperated58,211branches,and toincreaseregulatoryrequirementsandexpectations accountedfor34percentof allcommercialbanksin foreachof thesecompaniesinlinewiththeirsys- theUnitedStatesandfor71percentof allcommertemicfootprintswillbeissued. cialbankingoffices.State-chartedcommercialbanks thataremembersof theFederalReserve,commonly Forothersizedfinancialinstitutions,therisk-focused referredtoasstatememberbanks,represented consolidatedsupervisionprogramprovidesthat approximately13percentof allinsuredU.S.commerexaminationandinspectionproceduresshouldbetai- cialbanksandheldapproximately15percentof all loredtoeachorganization’ssize,complexity,risk insuredcommercialbankassetsintheUnitedStates. profile,andcondition.Thesupervisoryprogramfor aninstitution,regardlessof itsassetsize,entailsboth Undersection10of theFederalDepositInsurance off-siteandon-sitework,includingdevelopmentof Act,asamendedbysection111of theFederal supervisoryplans,pre-examinationvisits,detailed DepositInsuranceCorporationImprovementActof documentation,andpreparationof examination 1991andbytheRiegleCommunityDevelopment

SupervisionandRegulation 89 Box 4. Capital Planning and Stress Testing Sincetheonsetofthefinancialcrisis,theBoardhas stockrepurchases.Inaddition,theBoard’sassessledaseriesofinitiativestostrengthenthecapital mentofthesepracticesandofthefirms’capital positionsoflarge,complexbankingorganizations, adequacyissupportedbysupervisorystresstesting includingworkingwiththefirmstobolstertheirinter- carriedoutbytheBoardinassociationwiththeCCAR. nalprocessesforassessingcapitalneedsand Theorganizationscoveredbythecapitalplanruleare enhancingtheBoard’ssupervisorypracticesfor requiredtomaketheirprojectionsusingscenarios assessingcapitaladequacy.Theseeffortsculminated providedbytheBoardandatleastonestresssceinasupervisoryreviewofcapitalplansof19banking nariodevelopedbythefirmitself,appropriatetoits organizationsinthefirstquarterof2011,including businessmodelandportfolios.Therulealsorequires anyplanstheyhadforincreasingdividendsorbuying afirmtosupportitsanalysisofsourcesandusesof backstock,aprocessofficiallyknownastheComcapitalovertheplanningperiod.IntheannualCCAR prehensiveCapitalAnalysisandReview(CCAR).The review,theBoardassessesafirm’sabilitytoeffec- CCARprocessisaformalpartoftheBoard’sannual tivelyidentify,measure,andassessitsrisks;itsmethassessmentofallbankingorganizationswithassets odologiesforestimatingfirm-widelossesandrevof$50billionormore,andtherequirementtosubmit enuesunderstressscenarios;anditsanalysisfor annualcapitalplanstotheBoardhasbeencodified determiningtheimpactofastressedoperatingenvibytheissuanceofthecapitalplanrule,asdiscussed ronmentoncapitaladequacy.And,consistentwith furtherbelow. CCAR,therulerequiresfirmstodevelopcomprehen- AkeyobjectiveoftheannualCCARexerciseisto sivecapitalpoliciestogoverntheircapitalplanning, ensurethatfirms’capitalplanningprocessesaresuf- capitalissuance,usage,anddistribution. ficientlycomprehensiveandforward-looking.Partof Thecapitalplanrulerelatestocertainrequirements thisprocessistheuseofinternalstresstestingto forlargeorganizationsintheDodd-FrankAct,parassesswhetherfirmswouldhavesufficientcapitalto ticularlythestresstestingstandards.AstheBoard withstandasignificantdeclineinrevenuesand implementsthesestresstestingrequirements,itis potentiallylargelossessothattheywouldbeableto expectedthatfirmssubjecttothecapitalplanrule continuefunctioningassourcesofcreditandprovidwouldusetheirDodd-FrankAct–requiredstresstest ersofotherfinancialservices,evenintheeventofa resultstohelpmeetthestresstestingrequirements worse-than-anticipatedweakeningoftheeconomy. ofthecapitalplansrule.Thus,resultsoffirms’stress Supervisoryevaluationsofindividualfirms’capital testingrequirementsintheDodd-FrankActwillbean plansandtheanalysissupportingthemareconintegralcomponentoffirms’capitalplansasthey ductedsimultaneouslyacrossallparticipatingfirms, evaluatepossiblecapitalneedsandresourcesunder allowingtheprocesstobeinformedbyacomparastressscenarios.Additionally,theDodd-FrankAct tiveanalysisacrossthefirmsandtocapturealarge requiressupervisorstoconductindependentsupervishareofdomesticU.S.bankingsystemassetsand sorystresstests.AspartofCCAR,theBoardhasfuractivities. therdevelopeditsabilitytomakeindependentsuper- Thissupervisoryreviewofcapitalplanningprocesses visoryestimatesoffirms’potentialfuturelossesand wasformalizedinNovember2011,astheBoard revenues,whichisakeytoolintheevaluationof issuedafinalrulerequiringtop-tierU.S.BHCswith stresstestingperformedbyfirmsaspartoftheir totalconsolidatedassetsof$50billionormoreto capitalplansandakeycomponentofoursupervisubmitannualcapitalplansforreview(thecapital soryassessmentsofcapitaladequacy.Itisexpected plansrule).Underthisrule,theFederalReservewill thatthesupervisorytestsrequiredunderDodd-Frank annuallyevaluateinstitutions’capitaladequacy,inter- willbeanintegralpartofsupervisorystresstesting nalcapitaladequacyprocesses,andplanstomake forCCAR.(Alsosee“CapitalAdequacyStandards” capitaldistributions,suchasdividendpaymentsor onpage96.) andRegulatoryImprovementActof 1994,theFed- eralReserveconducted507examsof statemember eralReservemustconductafull-scope,on-siteexami- banksin2011. nationof statememberbanksatleastonceayear,3 althoughcertainwell-capitalized,well-managedorga- BankHoldingCompanies nizationshavingtotalassetsof lessthan$500million Atyear-end2011,atotalof 5,341U.S.BHCswerein maybeexaminedonceevery18months.4TheFed- operation,of which4,742weretop-tierBHCs.These organizationscontrolled5,247insuredcommercial 3 TheOfficeoftheComptrolleroftheCurrencyexaminesnationallycharteredbanks,andtheFDICexaminesstate-chartered banksthatarenotmembersoftheFederalReserve. ingagenciestoraisethethresholdfrom$250millionto 4 TheFinancialServicesRegulatoryReliefActof2006,which $500million,andfinalrulesincorporatingthechangeintoexistbecameeffectiveinOctober2006,authorizedthefederalbank- ingregulationswereissuedonSeptember21,2007.

90 98thAnnualReport|2011 banksandheldapproximately99percentof all andsales.Asof year-end2011,417domesticBHCs insuredcommercialbankassetsintheUnitedStates. and40foreignbankingorganizationshadfinancial holdingcompanystatus.Of thedomesticfinancial FederalReserveguidelinescallforannualinspections holdingcompanies,36hadconsolidatedassetsof of largeBHCsandcomplexsmallercompanies.In $15billionormore;108,between$1billionand judgingthefinancialconditionof thesubsidiary $15billion;59,between$500millionand$1billion; banksownedbyholdingcompanies,FederalReserve and214,lessthan$500million. examinersconsultexaminationreportspreparedby thefederalandstatebankingauthoritiesthathave SavingsandLoanHoldingCompanies primaryresponsibilityforthesupervisionof those OnJuly21,2011,responsibilityforsupervisionand banks,therebyminimizingduplicationof effortand regulationof SLHCstransferredfromtheOTSto reducingthesupervisoryburdenonbanking theFederalReserve,pursuanttotheDodd-Frank organizations. Act.Asof thetransferdate,427toptierSLHCswith estimatedtotalconsolidatedassetsof $4.4trillion Inspectionsof BHCs,includingfinancialholding transferredtotheFederalReserve.TheseSLHCs companies,arebuiltaroundaratingsystemintro- includedmorethan50companiesengagedprimarily ducedin2005.Thesystemreflectstheshiftinsuper- innonbankingactivities,suchasinsuranceundervisorypracticesawayfromahistoricalanalysisof writing(approximately26SLHCs),commercial financialconditiontowardamoredynamic,forward- activities(approximately20SLHCs),andsecurities lookingassessmentof risk-managementpractices brokerage(10SLHCs).The25largestSLHCs andfinancialfactors.Underthesystem,knownas accountedformorethan$3.9trillionof totalcon- RFIbutmorefullytermedRFI/C(D),holdingcom- solidatedassets;however,thesavingsassociationsubpaniesareassignedacompositerating(C)thatis sidiariesof thesecompaniesaccountedforjust basedonassessmentsof threecomponents:Risk $384billionof totalconsolidatedassets.Onlythree Management(R),FinancialCondition(F),andthe institutionsinthetop25andapproximately86perpotentialImpact(I)of theparentcompanyandits centof thetotalSLHCs(370firms)wereengaged nondepositorysubsidiariesonthesubsidiarydeposi- primarilyindepositoryactivities.Thesefirms,howtoryinstitution.Thefourthcomponent,Depository ever,heldonly19percent($839billion)of thetotal Institution(D),isintendedtomirrortheprimary consolidatedassetsof allSLHCs.TheOfficeof the supervisor’sratingof thesubsidiarydepositoryinsti- Comptrollerof theCurrency(OCC)istheprimary tution.5NoncomplexBHCswithconsolidatedassets regulatorformostof thesubsidiarysavingsassociaof $1billionorlessaresubjecttoaspecialsupervi- tionsof thefirmsengagedprimarilyindepository soryprogramthatpermitsamoreflexibleapproach.6 activities. In2011,theFederalReserveconducted642inspectionsof largeBHCsand3,160inspectionsof small, Thetransferof SLHCsupervisiontotheFederal noncomplexBHCs. Reserveprecipitatedlegislative,supervisory,and policychanges.TheDodd-FrankActrequiresthe FinancialHoldingCompanies Boardtoissuespecificrulemakings—suchasrulesto UndertheGramm-Leach-BlileyAct,BHCsthat establishconsolidatedcapitalstandards,evaluatethe meetcertaincapital,managerial,andotherrequire- potentialforcreatingintermediateholdingcompamentsmayelecttobecomefinancialholdingcompa- niestofacilitatesupervisionof SLHCsthatarepriniesandtherebyengageinawiderrangeof financial marilyengagedincommercialactivities,andassess activities,includingfull-scopesecuritiesunderwrit- supervisoryfeesforthelargestcompanies.Other ing,merchantbanking,andinsuranceunderwriting rulemakingsarepromptedbyoperationalandpracticalconsiderations,suchasrulesregardingregulatory 5 Eachofthefirsttwocomponentshasfoursubcomponents:Risk reportsandguidanceregardingthesupervisory Management—(1)BoardandSeniorManagementOversight; approachforSLHCs.Guidanceandrulemakings (2)Policies,Procedures,andLimits;(3)RiskMonitoringand issuedincludethefollowing: ManagementInformationSystems;and(4)InternalControls. FinancialCondition—(1)Capital,(2)AssetQuality,(3)Earnings,and(4)Liquidity. • SRletter11-11,“Supervisionof SavingsandLoan 6 Thespecialsupervisoryprogramwasimplementedin1997and HoldingCompanies”(July21,2011),describesthe modifiedin2002.SeeSRletter02-01foradiscussionofthefac- supervisoryapproachtobeusedforthefirstcycle torsconsideredindeterminingwhetheraBHCiscomplexor of supervisionof SLHCs(www.federalreserve.gov/ noncomplex(www.federalreserve.gov/boarddocs/srletters/2002/ sr0201.htm). bankinforeg/srletters/sr1111.htm).

SupervisionandRegulation 91 • Twointerimfinalrules:(1)“SavingsandLoan supervisorstosuperviseFMUsorganizedasbank HoldingCompanies,”RegulationLL,setsforththe serviceprovidersundertheBankServiceCompany regulationsgoverningSLHCs;and(2)“Mutual Act.Initssupervisionof theseFMUs,theBoardis HoldingCompanies,”RegulationMM,setsforth alsoguidedbytherisk-managementstandardsand theregulationsgoverningSLHCsorganizedin expectationscontainedinits“PolicyonPayments mutualform.Seepressrelease(August12,2011)at SystemRisk.”8 www.federalreserve.gov/newsevents/press/bcreg/ 20110812a.htm. UndertitleVIIIof theDodd-FrankAct,theBoard hasanexpandedsetof responsibilitiesrelatedto • FinalnoticetorequiremostSLHCstofileFederal FMUsdesignatedbytheFSOCassystemically ReserveregulatoryreportswiththeBoard,along important,includingpromotinguniformriskwithanexemptionforsomeSLHCsfrominitially managementstandards,playinganenhancedrolein filingexistingregulatoryreports.Seepressrelease thesupervisionof FMUs,reducingsystemicrisk, (December23,2011)atwww.federalreserve.gov/ andsupportingthestabilityof thebroaderfinancial newsevents/press/bcreg/20111223a.htm. system. Inadditiontotheregulatoryandsupervisoryguid- TheBoard’srisk-basedsupervisionprogramfor anceissuedonSLHCs,7Boardstaff continuesto FMUsisadministeredbytheFMUSupervision workonoperational,technical,andpracticaltransi- Committee(FMU-SC).TheFMU-SCisamultitionissueswhileengagingtheindustry,Reserve disciplinarycommitteeof seniorsupervision,pay- Banks,andotherfinancialregulatoryagencies.Board mentpolicy,andlegalstaff attheBoardandReserve staff hasalsoissuedinternalpoliciesandprocedures, Bankswhoareresponsibleforandknowledgeable presentedtrainingsessions,conductedbi-weeklyconaboutsupervisoryissuesforFMUs.TheFMU-SC’s ferencecalls,anddevelopedjobaidstoenhancethe primaryobjectiveistoprovidesenior-leveloversight, understandingof theSLHCpopulationandto consistency,anddirectiontotheFederalReserve’s ensureconsistentsupervisorytreatmentof these supervisoryprocessforFMUs.TheFMU-SCcoordiinstitutionsthroughouttheFederalReserveSystem. nateswiththeLISCConissuesrelatedtolargefinan- AdedicatedSLHCsectionhasbeenstaffedandis cialinstitutions’rolesinFMUs;FMUs’activities workingtocontinuethesupervisoryandpolicyoverandimplicationsforlargefinancialinstitutions;and sightof theSLHCs. thepayment,clearing,andsettlementactivitiesof largefinancialinstitutionsmoregenerally. Althoughsignificantmilestoneshavebeenachieved, severalcomplexpolicyissuesstillneedtobe InanefforttopromotegreaterfinancialmarketstaaddressedbytheBoard,includingthoserelatedto bilityandmitigatesystemicrisk,theBoardalsois consolidatedcapitalrequirements,intermediateholdworkingwiththeU.S.SecuritiesandExchangeComingcompanies,andthedeterminationof theapplicamission(SEC)andtheU.S.CommodityFutures bilityof enhancedprudentialstandardstotheSLHC TradingCommission,whichalsohavesupervisory population. authorityforcertainFMUs.TheFederalReserve’s workwiththeseagencies,includingtheplannedshar- FinancialMarketUtilities ingof appropriateinformation,aimstoimprovecon- FMUsmanageoroperatemultilateralsystemsfor sistencyinFMUsupervision,promoterobustFMU thepurposeof transferring,clearing,orsettlingpayriskmanagement,andimprovetheregulators’ability ments,securities,orotherfinancialtransactions tomonitorandmitigatesystemicrisk. amongfinancialinstitutionsorbetweenfinancial institutionsandtheFMU.UndertheFederal InternationalActivities ReserveAct,theBoardsupervisesFMUsthatare TheFederalReservesupervisestheforeignbranches charteredasmemberbanksorEdgeActcorporaandoverseasinvestmentsof memberbanks,Edge tionsandcooperateswithotherfederalbanking Actandagreementcorporations,andBHCs(includingtheinvestmentsbyBHCsinexporttradingcom- 7 SeealsoSR-11-13(7-25-11)“GuidanceRegardingPriorNotices withrespecttoDividendDeclarationsbySavingsAssociation panies).Inaddition,itsupervisestheactivitiesthat SubsidiariesofSavingsandLoanHoldingCompanies”(www foreignbankingorganizationsconductthroughenti- .federalreserve.gov/bankinforeg/srletters/sr1113.htm)andSR 11-12(7-21-11)“DeregistrationProceduresforCertainSavings andLoanHoldingCompanies”(www.federalreserve.gov/ bankinforeg/srletters/sr1112.htm). 8 www.federalreserve.gov/paymentsystems/psr_about.htm.

92 98thAnnualReport|2011 tiesintheUnitedStates,includingbranches,agen- ingandrelatedactivitiesintheUnitedStatesthrough cies,representativeoffices,andsubsidiaries. branches,agencies,representativeoffices,commercial lendingcompanies,EdgeActcorporations,commer- Foreignoperationsof U.S.bankingorganizations.In cialbanks,BHCs,andcertainnonbanking supervisingtheinternationaloperationsof state companies. memberbanks,EdgeActandagreementcorporations,andBHCs,theFederalReservegenerallycon- Foreignbankscontinuetobesignificantparticipants ductsitsexaminationsorinspectionsattheU.S.head intheU.S.bankingsystem.Asof year-end2011,173 officesof theseorganizations,wheretheultimate foreignbanksfrom51countriesoperated205stateresponsibilityfortheforeignofficeslies.Examiners licensedbranchesandagencies,of whichsixwere alsovisittheoverseasofficesof U.S.bankstoobtain insuredbytheFDIC,and47OCC-licensedbranches financialandoperatinginformationand,insome andagencies,of whichfourwereinsuredbythe instances,totesttheiradherencetosafeandsound FDIC.TheseforeignbanksalsoownednineEdge bankingpracticesandcompliancewithrulesand Actandagreementcorporationsandonecommercial regulationsortoevaluateanorganization’seffortsto lendingcompany.Inaddition,theyheldacontrolling implementcorrectivemeasures.Examinationsabroad interestin53U.S.commercialbanks.Altogether,the areconductedwiththecooperationof thesupervi- U.S.officesof theseforeignbanksattheendof 2011 soryauthoritiesof thecountriesinwhichtheytake controlledapproximately20percentof U.S.commerplace;fornationalbanks,theexaminationsarecoor- cialbankingassets.These173foreignbanksalso dinatedwiththeOCC.Attheendof 2011,46mem- operated82representativeoffices;anadditional44 berbankswereoperating533branchesinforeign foreignbanksoperatedintheUnitedStatesthrough countriesandoverseasareasof theUnitedStates;25 arepresentativeofficeonly. nationalbankswereoperating475of thesebranches; and21statememberbankswereoperatingthe TheFederalReserve—incoordinationwithappropriremaining58.Inaddition,17nonmemberbanks atestateregulatoryauthorities—examinesstatewereoperating25branchesinforeigncountriesand licensed,non-FDICinsuredbranchesandagenciesof overseasareasof theUnitedStates. foreignbankson-siteatleastonceevery18months.9 Inmostcases,on-siteexaminationsareconductedat EdgeActandagreementcorporations.EdgeActcor- leastonceevery12months,buttheperiodmaybe porationsareinternationalbankingorganizations extendedto18monthsif thebranchoragencymeets charteredbytheBoardtoprovideallsegmentsof the certaincriteria.Aspartof thesupervisoryprocess,a U.S.economywithameansof financinginterna- reviewof thefinancialandoperationalprofileof tionalbusiness,especiallyexports.Agreementcorpo- eachorganizationisconductedtoassesstheorganirationsaresimilarorganizations,statecharteredor zation’sabilitytosupportitsU.S.operationsandto federallychartered,thatenterintoagreementswith determinewhatrisks,if any,theorganizationposes theBoardtorefrainfromexercisinganypowerthatis tothebankingsystemthroughitsU.S.operations. notpermissibleforanEdgeActcorporation.Sec- TheFederalReserveconductedorparticipatedwith tions25and25Aof theFederalReserveActgrant stateregulatoryauthoritiesin379examinationsin EdgeActandagreementcorporationspermissionto 2011. engageininternationalbankingandforeignfinancial transactions.Thesecorporations,mostof whichare CompliancewithRegulatoryRequirements subsidiariesof memberbanks,may(1)conducta TheFederalReserveexaminesinstitutionsforcomdepositandloanbusinessinstatesotherthanthatof pliancewithabroadrangeof legalrequirements, theparent,providedthatthebusinessisstrictly includinganti-money-laundering(AML)andconrelatedtointernationaltransactionsand(2)make sumerprotectionlawsandregulations,andother foreigninvestmentsthatarebroaderthanthoseper- lawspertainingtocertainbankingandfinancial missibleformemberbanks.Atyear-end2011,48 activities.Mostcompliancesupervisionisconducted bankingorganizations,operatingeightbranches, undertheoversightof theBoard’sDivisionof BankwerecharteredasEdgeActoragreementcorpora- ingSupervisionandRegulation,butconsumercomtions.Thesecorporationsareexaminedannually. pliancesupervisionisconductedundertheoversight U.S.activitiesof foreignbanks.TheFederalReserve 9 TheOCCexaminesfederallylicensedbranchesandagencies, hasbroadauthoritytosuperviseandregulatethe andtheFDICexaminesstate-licensedFDIC-insuredbranches U.S.activitiesof foreignbanksthatengageinbank- incoordinationwiththeappropriatestateregulatoryauthority.

SupervisionandRegulation 93 of theDivisionof ConsumerandCommunity technologyrisk-managementactivities.During2011, Affairs.Thetwodivisionscoordinatetheirefforts theFederalReservecontinuedastheleadsupervisory witheachotherandalsowiththeBoard’sLegalDivi- agencyforthreeof the16large,multiregionaldata siontoensureconsistentandcomprehensiveFederal processingservicersrecognizedonaninteragency Reservesupervisionforcompliancewithlegal basisandassumedleadershipof twomoreof the requirements. largeservicers. Anti-Money-LaunderingExaminations FiduciaryActivities TheTreasuryregulationsimplementingtheBank TheFederalReservehassupervisoryresponsibility SecrecyAct(BSA)generallyrequirebanksandother forstatememberbanksandstatemembernondetypesof financialinstitutionstofilecertainreports positorytrustcompaniesthatreported$53.9trillion andmaintaincertainrecordsthatareusefulincrimiand$39.5trillionof assets,respectively,asof yearnal,tax,orregulatoryproceedings.TheBSAand end2011.Theseassetswereheldinvariousfiduciary separateBoardregulationsrequirebankingorganizaandcustodialcapacities.On-siteexaminationsof tionssupervisedbytheBoardtofilereportsonsuspifiduciaryandcustodialactivitiesarerisk-focusedand ciousactivityrelatedtopossibleviolationsof federal entailthereviewof anorganization’scompliance law,includingmoneylaundering,terrorismfinancwithlaws,regulations,andgeneralfiduciaryprining,andotherfinancialcrimes.Inaddition,BSAand ciples,includingeffectivemanagementof conflictsof Boardregulationsrequirethatbanksdevelopwritten interest;managementof legal,operational,andrepu- BSAcomplianceprogramsandthattheprogramsbe tationalriskexposures;andauditandcontrolproceformallyapprovedbybankboardsof directors.The dures.In2011,FederalReserveexaminersconducted FederalReserveisresponsibleforexamininginstitu- 140on-sitefiduciaryexaminations,excludingtransfer tionsforcompliancewithapplicableAMLlawsand agentexaminations,of statememberbanks. regulationsandconductssuchexaminationsinaccordancewiththeFederalFinancialInstitutionsExami- TransferAgents nationCouncil(FFIEC)BankSecrecyAct/Anti- MoneyLaunderingExaminationManual.10 AsdirectedbytheSecuritiesExchangeActof 1934, theFederalReserveconductsspecializedexamina- SpecializedExaminations tionsof thosestatememberbanksandBHCsthat areregisteredwiththeBoardastransferagents. TheFederalReserveconductsspecializedexamina- Amongotherthings,transferagentscountersignand tionsof supervisedfinancialinstitutionsintheareas monitortheissuanceof securities,registerthetransof informationtechnology,fiduciaryactivities,transferof securities,andexchangeorconvertsecurities. feragentactivities,andgovernmentandmunicipal On-siteexaminationsfocusontheeffectivenessof an securitiesdealingandbrokering.TheFederalReserve organization’soperationsanditscompliancewith alsoconductsspecializedexaminationsof certain relevantsecuritiesregulations.During2011,theFednonbankentitiesthatextendcreditsubjecttothe eralReserveconductedon-sitetransferagentexami- Board’smarginregulations. nationsat11of the32statememberbanksand InformationTechnologyActivities BHCsthatwereregisteredastransferagents. Inrecognitionof theimportanceof information technologytosafeandsoundoperationsinthefinan- GovernmentandMunicipalSecurities cialindustry,theFederalReservereviewstheinfor- DealersandBrokers mationtechnologyactivitiesof supervisedfinancial TheFederalReserveisresponsibleforexamining institutions,aswellascertainindependentdatacen- statememberbanksandforeignbanksforcomplitersthatprovideinformationtechnologyservicesto ancewiththeGovernmentSecuritiesActof 1986 theseorganizations.Allsafety-and-soundnessexami- andwiththeTreasuryregulationsgoverningdealing nationsincludearisk-focusedreviewof information andbrokeringingovernmentsecurities.Thirteen statememberbanksandsixstatebranchesof foreign 10 TheFFIECisaninteragencybodyoffinancialregulatoryagen- bankshavenotifiedtheBoardthattheyaregovernciesestablishedtoprescribeuniformprinciples,standards,and mentsecuritiesdealersorbrokersnotexemptfrom reportformsandtopromoteuniformityinthesupervisionof financialinstitutions.TheCouncilhassixvotingmembers:the theTreasury’sregulations.During2011,theFederal BoardofGovernorsoftheFederalReserveSystem,theFDIC, Reserveconductedthreeexaminationsof broker– theNationalCreditUnionAdministration,theOCC,theCondealeractivitiesingovernmentsecuritiesatthese sumerFinancialProtectionBureau,andthechairoftheState LiaisonCommittee. organizations.Theseexaminationsaregenerallycon-

94 98thAnnualReport|2011 ductedconcurrentlywiththeFederalReserve’s uryortheFederalEmergencyManagementAgency. examinationof thestatememberbankorbranch. Enforcementordersandpromptcorrectiveaction directives,whichareissuedbytheBoard,andwritten TheFederalReserveisalsoresponsibleforensuring agreements,whichareexecutedbytheReserve thatstatememberbanksandBHCsthatactas Banks,aremadepublicandarepostedonthe municipalsecuritiesdealerscomplywiththeSecuri- Board’swebsite(www.federalreserve.gov/apps/ tiesActAmendmentsof 1975.Municipalsecurities enforcementactions/). dealersareexamined,pursuanttotheMunicipal SecuritiesRulemakingBoard’sruleG-16,atleast Inadditiontotakingtheseformalenforcement onceeverytwocalendaryears.Threeof the11enti- actions,theReserveBankscompleted353informal tiessupervisedbytheFederalReservethatdealtin enforcementactionsin2011.Informalenforcement municipalsecuritieswereexaminedduring2011. actionsincludememorandaof understanding (MOU)andboardof directorsresolutions.Informa- SecuritiesCreditLenders tionabouttheseactionsisnotavailabletothepublic. UndertheSecuritiesExchangeActof 1934,the Boardisresponsibleforregulatingcreditincertain SurveillanceandOff-SiteMonitoring transactionsinvolvingthepurchasingorcarryingof TheFederalReserveusesautomatedscreeningsyssecurities.Aspartof itsgeneralexaminationpro- temstomonitorthefinancialconditionandperforgram,theFederalReserveexaminesthebanksunder manceof statememberbanksandBHCsinthe itsjurisdictionforcompliancewithBoardRegula- periodbetweenon-siteexaminations.SuchmonitortionU(CreditbyBanksandPersonsotherthanBro- ingandanalysishelpsdirectexaminationresourcesto kersorDealersforthePurposeof Purchasingor institutionsthathavehigher-riskprofiles.Screening CarryingMarginStock).Inaddition,theFederal systemsalsoassistintheplanningof examinations Reservemaintainsaregistryof personsotherthan byidentifyingcompaniesthatareengaginginnewor banks,brokers,anddealerswhoextendcreditsubject complexactivities. toRegulationU.TheFederalReservemayconduct specializedexaminationsof theselendersif theyare Theprimaryoff-sitemonitoringtoolusedbythe notalreadysubjecttosupervisionbytheFarmCredit FederalReserveistheSupervisionandRegula- AdministrationortheNationalCreditUnion tionStatisticalAssessmentof BankRiskmodel(SR- Administration(NCUA). SABR).Drawingmainlyonthefinancialdatathat banksreportontheirReportsof Conditionand Attheendof 2011,533lendersotherthanbanks, Income(CallReports),SR-SABRuseseconometric brokers,ordealerswereregisteredwiththeFederal techniquestoidentifybanksthatreportfinancial Reserve.Otherfederalregulatorssupervised171of characteristicsweakerthanthoseof otherbanks theselenders,andtheremaining362weresubjectto assignedsimilarsupervisoryratings.Tosupplement limitedFederalReservesupervision.TheFederal theSR-SABRscreening,theFederalReservealso Reserveexempted151lendersfromitson-siteinspec- monitorsvariousmarketdata,includingequity tionprogramonthebasisof theirregulatorystatus prices,debtspreads,agencyratings,andmeasuresof andannualreports.Twenty-oneinspectionswere expecteddefaultfrequency,togaugemarketpercepconductedduringtheyear. tionsof theriskinbankingorganizations.Inaddition,theFederalReservepreparesquarterlyBank EnforcementActions HoldingCompanyPerformanceReports(BHCPRs) TheFederalReservehasenforcementauthorityover foruseinmonitoringandinspectingsupervised thefinancialinstitutionsitsupervisesandtheiraffili- bankingorganizations.TheBHCPRs,whichare atedparties.Enforcementactionsmaybetakento compiledfromdataprovidedbylargeBHCsinquaraddressunsafeandunsoundpracticesorviolations terlyregulatoryreports(FRY-9CandFRY-9LP), of anylaworregulation.Formalenforcementactions contain,forindividualcompanies,financialstatistics includecease-and-desistorders,writtenagreements, andcomparisonswithpeercompanies.BHCPRsare promptcorrectiveactiondirectives,removalandpro- madeavailabletothepublicontheNationalInforhibitionorders,andcivilmoneypenalties.In2011, mationCenter(NIC)website,whichcanbeaccessed theFederalReservecompleted143formalenforce- atwww.ffiec.gov. mentactions.Civilmoneypenaltiestotaling $85,279,700wereassessed.Asdirectedbystatute,all FederalReserveanalystsusePerformanceReport civilmoneypenaltiesareremittedtoeithertheTreas- InformationandSurveillanceMonitoring(PRISM),

SupervisionandRegulation 95 aqueryingtool,toaccessanddisplayfinancial,sur- visorsfromcountriesintheWesternHemisphere. veillance,andexaminationdata.Intheanalytical Thegroup,headquarteredinMexico, module,userscancustomizethepresentationof • promotescommunicationandcooperationamong institutionalfinancialinformationdrawnfromCall banksupervisorsintheregion; Reports,UniformBankPerformanceReports,FR Y-9statements,BHCPRs,andotherregulatory • coordinatestrainingprogramsthroughoutthe reports.Inthesurveillancemodule,userscangener- regionwiththehelpof nationalbankingsuperviatereportssummarizingtheresultsof surveillance sorsandinternationalagencies;and screeningforbanksandBHCs.During2011,four • aimstohelpmembersdevelopbankinglaws,regumajorupgradestotheweb-basedPRISMapplication lations,andsupervisorypracticesthatconformto werecompleted. internationalbestpractices. TheFederalReserveworksthroughtheFFIECTask ForceonSurveillanceSystemstocoordinatesurveil- TheFederalReservecontributessignificantlyto lanceactivitieswiththeotherfederalbanking ASBA’sorganizationalmanagementandtoitstrainagencies. ingandtechnicalassistanceactivities. TrainingandTechnicalAssistance InitiativesforMinority-Ownedand DeNovoDepositoryInstitutions TheFederalReserveprovidestrainingandtechnical ThePartnershipforProgressprogramisaFederal assistancetoforeignsupervisorsandminority-owned ReserveSystemprogramcreatedtopreserveandproanddenovodepositoryinstitutions. moteminority-owned,woman-owned,anddenovo InternationalTrainingandTechnicalAssistance depositoryinstitutions(MDIs).Launchedin2008, In2011,theFederalReservecontinuedtoprovide theprogramseekstohelptheseinstitutionscompete technicalassistanceonbanksupervisorymattersto effectivelyintoday’smarketplacebyofferingMDIsa foreigncentralbanksandsupervisoryauthorities. combinationof one-on-oneassistanceandtargeted TechnicalassistanceinvolvesvisitsbyFederal workshopsontopicsof particularrelevanceinterms Reservestaff memberstoforeignauthoritiesaswell of startingandgrowingabankinasafeandsound asconsultationswithforeignsupervisorswhovisit manner.Inaddition,trainingandinformationon theBoardortheReserveBanks.TheFederal resourcesareprovidedthroughanextensivepublic Reserve,alongwiththeOCC,theFDIC,andthe website(www.fedpartnership.gov). Treasury,wasanactiveparticipantintheMiddle EastandNorthAfricaFinancialRegulators’Train- DesignatedPartnershipforProgresscoordinators ingInitiative,whichispartof theU.S.government’s serveaslocalprogramcontactsineachof the12 MiddleEastPartnershipInitiative.TheFederal ReserveBankDistrictsandtheBoardof Governors Reservealsocontributestotheregionaltrainingpro- toanswerquestionsandcoordinateassistancefor visionundertheAsiaPacificEconomicCooperation institutionsrequestingguidance. FinancialRegulators’TrainingInitiative. During2011,thebankingindustrycontinuedtoface In2011,theFederalReserveofferedanumberof significantchallenges.MDIsfacedincreasingmarkettrainingcoursesexclusivelyforforeignsupervisory placechallenges,asmanyoperatedinsomeof the authorities,bothintheUnitedStatesandinanum- hardest-hitregionsandwereadverselyimpactedby berof foreignjurisdictions.FederalReservestaff also therecessionandsluggisheconomicrecovery.The tookpartintechnicalassistanceandtrainingmis- economiccrisishassignificantlyimpactedalarge sionsledbytheInternationalMonetaryFund,the numberof MDIsprimarilyduetohighunemploy- WorldBank,theAsianDevelopmentBank,theBasel ment,weakcreditdemand,capitaldeficiencies,and CommitteeonBankingSupervision,andtheFinan- increasingregulatorycosts. cialStabilityInstitute. InanefforttostrengthenthePartnershipforProg- TheFederalReserveisalsoanassociatememberof ressprogramandaddresstheprovisionsof sectheAssociationof Supervisorsof Banksof the tion367of theDodd-FrankAct,enhancementsto Americas(ASBA),anumbrellagroupof banksuper- theprogramweremade,including

96 98thAnnualReport|2011 • initiationof aninteragencytaskforcetofocuson BusinessContinuity challengesraisedbyminoritybankers; In2011,theFederalReservecontinueditseffortsto • areviewof theeffectivenessof themethodscur- strengthentheresilienceof theU.S.financialsystem intheeventof unexpecteddisruptions,including rentlyusedtopromoteandpreserveminority focusedsupervisoryeffortstoevaluatetheresiliency banks; of thebankinginstitutionsunderitsjurisdiction.The • informationalsessionsfordistrictcoordinatorsto FederalReserve,togetherwithotherfederalandstate discusstheconditionsof minoritybanks,ontopics financialregulators,isamemberof theFinancial suchascapitalinvestment,assetquality,troubled BankingInformationInfrastructureCommittee assetmanagement,andtheimpactof bank (FBIIC),whichwasformedtoimprovecoordination failures; andcommunicationamongfinancialregulators, enhancetheresiliencyof thefinancialsector,and • transitionof theprogrammanagementfunctionto promotethepublic/privatepartnership.TheFBIIC aseniorsupervisionstaff member;and hasestablishedemergencycommunicationprotocols • developmentof websiteenhancementsthatwill tomaintaineffectivecommunicationamongmemoperateasanelectronicresourcecenterforMDIs. bersintheeventof anemergency.Themembersof Thissiteisexpectedtobelaunchedin2012. theFBIICwillconvenebyconferencecallnolater than90minutesfollowingthefirstpublicreportof Throughouttheyear,theFederalReserveBanks aneventtosharesituationalandoperationalstatus hostedconferencecallsandmeetingswithkeyminor- reports.Asamemberof FBIIC,theFederalReserve itybankers,communityleaders,academialeaders, isthenresponsibleforestablishingandmaintaining theNationalBankersAssociation(NBA),the communicationwiththeinstitutionsforwhichithas NationalUrbanLeagueinPhiladelphia,theSmall primarysupervisoryauthorityandforensuringcoor- BusinessAdministrationinPhiladelphia,andother dinationbetweenpublicaffairsandmediarelations nationalpartnersinordertohelpcoordinatemeth- staff. odsandstrategiesforpreservingandpromoting MDIsandthecommunitiestheyserve. Supervisory Policy In2011,theFederalReserveBankshosted/ TheFederalReserve’ssupervisorypolicyfunction, participatedinavarietyof workshopsandseminars, carriedoutbytheBoard,isresponsiblefordevelopincluding ingregulationsandguidanceforfinancialinstitutions undertheFederalReserve’ssupervision,aswellas • aconferenceonSmallBusinessandEntrepreneurs guidanceforexaminers.TheBoard,oftenworking andtheImpactof theEconomicCrisis; togetherwiththeotherfederalbankingagencies, • apresentationonMDIconditionsattheNBA issuesrulemakings,publicSRletters,andother ConventioninDallas; policystatementsandguidanceinordertocarryout itssupervisorypolicyfunction.FederalReservestaff • anoutreacheffortwithinvestmentfirmsinterested alsotakepartinsupervisoryandregulatoryforums, inprovidingcapitaltoMDIs; providesupportfortheworkof theFFIEC,andpar- • aSupplierDiversityForumandareceptionfor ticipateininternationalpolicymakingforums,includsmallbusinessesandentrepreneurs—inpartner- ingtheBaselCommitteeonBankingSupervision, shipwiththeNationalUrbanLeague—focusingon theFinancialStabilityBoard,andtheJointForum. DoingBusinesswithLargeBusinesses;and CapitalAdequacyStandards • theFDICMDIRoundtableinLosAngeles,heldin In2011,theBoardissuedseveralrulemakingsand collaborationwiththeNationalAssociationof guidancedocumentsrelatedtocapitaladequacystan- ChineseAmericanBankers,onthetopicof “Risk dards,includingjointproposedrulemakingswiththe Management.” otherfederalbankingagenciesthatwouldimplement certainrevisionstotheBaselcapitalframeworkand Theresultsof theseeffortscollectivelyareexpected thataddresscertainprovisionsof theDodd-Frank tofurtherourinitiativetocomplywithsection367of Act. theDodd-FrankActinaverychallengingenvironmentforthebankingindustryingeneralandMDIs • InJanuary,thefederalbankingagenciesissuedfor inparticular. commentanNPRtorevisetheirmarket-riskcapi-

SupervisionandRegulation 97 talrules.Theseproposedrevisionswouldimple- CompanyPolicyStatement.”Thisrulemakesfinal mentanumberof changestotheBaselAccord aninterimfinalrulethattheBoardadoptedin intendedto(1)bettercapturepositionsforwhich June2009andisavailableatwww.gpo.gov/fdsys/ themarket-riskcapitalrulesareappropriate, pkg/FR-2011-06-21/pdf/2011-14983.pdf. (2)reduceprocyclicalityinmarket-riskcapital • InDecember,theBoardissuedafinalrulerequirrequirements,(3)enhancetherules’sensitivityto ingtop-tierU.S.BHCswithtotalconsolidated risksthatarenotadequatelycapturedbythecurassetsof $50billionormoretosubmitannualcapirentregulatorymeasurementmethodologies,and talplansforreview.Theaimof theannualcapital (4)increasemarketdisciplinethroughenhanced plansistoensurethatinstitutionshaverobust, disclosures.TheNPRisavailableatwww.gpo.gov/ forward-lookingcapitalplanningprocessesthat fdsys/pkg/FR-2011-01-11/pdf/2010-32189.pdf. accountfortheiruniquerisks,andtohelpensure • Thefederalbankingagenciesissuedasubsequent thatinstitutionshavesufficientcapitaltocontinue NPRinDecemberthatamendedtheJanuary operationsthroughouttimesof economicand market-riskNPRbyproposingtoreplacemethod- financialstress.Undertherule,theFederalReserve ologiesforcalculatingspecificrisk-capitalrequire- annuallywillevaluateinstitutions’capital mentsthatreliedoncreditratingswithalternative adequacy;internalcapitaladequacyassessment methodsforevaluatingcreditworthiness,as processes;andplanstomakecapitaldistributions, requiredbysection939Aof theDodd-FrankAct. suchasdividendpaymentsorstockrepurchases. TheNPRisavailableatwww.gpo.gov/fdsys/pkg/ Thecapitalplanruleisavailableatwww.gpo.gov/ FR-2011-12-21/pdf/2011-32073.pdf. fdsys/pkg/FR-2011-12-01/pdf/2011-30665.pdf. (Alsoseebox4.) • Thefederalbankingagenciespublishedafinalrule inJunethatamendstheadvancedapproachescapi- • Inaddition,theBoard,underaseparaterulemaktaladequacyframework,consistentwithsec- ing,proposedtousethecapitalplanningrequiretion171of theDodd-FrankAct.Therulerequires mentstomeettheBoard’sobligationstoimpose abankingorganizationoperatingunderthe enhancedcapitalstandardsonlargefinancialfirms advancedapproachesframeworktomeet,onan undersection165(b)(1)(A)(i)of theDodd-Frank ongoingbasis,thehigherof theminimumrisk- Act.TheNPRonenhancedprudentialstandards basedrequirementsunderthegeneralrisk-based andearlyremediationrequirementforcovered capitalrulesandtheminimumrequirementsunder companiesisavailableatwww.federalreserve.gov/ theadvancedapproachesrisk-basedcapitalrules. newsevents/press/bcreg/20111220a.htm.(Alsosee Theruleisavailableatwww.gpo.gov/fdsys/pkg/FR- box1.) 2011-06-28/pdf/2011-15669.pdf. In2011,BoardandReserveBankstaff conducted • InJune,theBoardsoughtcommentonand in-depthsupervisoryanalysesof anumberof comadoptedaninterimfinalrulethatallowssmall plexcapitalissuances,privatecapitalinvestments, BHCsthatareS-Corpsorthatareorganizedin andothertransactionstoevaluatetheirqualification mutualformtoexcludesubordinateddebtissuedto forinclusioninregulatorycapitalandconsistency TreasuryundertheSBLFfromtreatmentas“debt” withsafetyandsoundness.Forcertaintransactions, forpurposesof thedebt-to-equitystandardunder bankingorganizationswererequiredtomake theBoard’s“SmallBankHoldingCompanyPolicy changesnecessaryforinstrumentstosatisfyregula- Statement.”Theinterimfinalruleisavailableat torycapitalcriteriawhileothertransactionswerediswww.gpo.gov/fdsys/pkg/FR-2011-06-21/pdf/2011allowedfrominclusioninabankingorganization’s 14983.pdf. regulatorycapital.Withrespecttocertainsalesand • TheBoardalsoadoptedafinalruleinJunethat structuredfinancetransactions,bankingorganizaallowsBHCsthatareS-Corpsorthatareorga- tionswererequiredtomaintainadditionalcapitalfor nizedinmutualformtoincludeintier1capitalall theirexposuresthatweremorecommensuratewith subordinateddebtissuedtoTreasuryunderthe theriskof thearrangementsandtheorganization’s TARP,subjecttocertainlimits.Therulealso supportforthetransactions. allowssmallBHCsthatareS-Corpsorthatare organizedinmutualformtoexcludesubordinated InternationalGuidanceonSupervisoryPolicies debtissuedtoTreasuryunderTARPfromtreat- Asamemberof theBaselCommitteeonBanking mentas“debt”forpurposesof thedebt-to-equity Supervision,theFederalReserveactivelyparticipates standardundertheBoard’s“SmallBankHolding ineffortstoadvancesoundsupervisorypoliciesfor

98 98thAnnualReport|2011 internationallyactivebankingorganizationsand Consultativepapers: enhancethestrengthandstabilityof theinterna- • Capitalisationof bankexposurestocentralcountertionalbankingsystem. parties-secondconsultativedocument(issuedin BaselCapitalFramework Novemberandavailableatwww.bis.org/publ/ bcbs206.htm). During2011,theFederalReserveparticipatedin ongoinginternationalinitiativestoenhancetheBasel • Coreprinciplesforeffectivebankingsupervision capitalframeworkthroughthepublicationof the (publishedinDecemberandavailableatwww.bis revisedversionof BaselIII:Aglobalregulatory .org/publ/bcbs213.htm). frameworkformoreresilientbanksandbankingsystemsinJune2011andaseriesof “FrequentlyAsked JointForum Questions”onvariousBaselIII-relatedtopics, In2011,theFederalReservecontinueditsparticipaincludingthedefinitionof “regulatorycapital”and tionintheJointForum—aninternationalgroupof “counterpartycredit(CCR)risk.” supervisorsof thebanking,securities,andinsurance industriesestablishedtoaddressvariouscross-sector TheFederalReservecontributedtosupervisory issues,includingtheregulationof financialconglompolicyrecommendations,reports,andpapersissued erates.TheJointForumoperatesundertheaegisof forconsultativepurposesorfinalizedbytheBasel theBaselCommittee,theInternationalOrganization Committeethatweredesignedtoimprovethesuperof SecuritiesCommissions,andtheInternational visionof bankingorganizations’practicesandto Associationof InsuranceSupervisors. addressspecificissuesthatemergedduringthefinancialcrisis.Thelistingbelowincludeskeyfinaland TheJointForum,throughitsfoundingorganizations, consultativepapersfrom2011. issuedaReportonassetsecuritisationincentivesin July2011thatprovidesanupdateontheconditions Finalpapers: intheglobalsecuritizationmarket,aswellasan • RevisionstotheBaselIImarketriskframework- assessmentof regulatoryreformsimplementedfolupdatedasof 31December2010(issuedinFebru- lowingthefinancialcrisisanalyses.Thereportis aryandavailableatwww.bis.org/publ/bcbs193 availableatwww.bis.org/publ/joint26.htm. .htm). Inaddition,theJointForumissued,inDecem- • Rangeof methodologiesforriskandperformance ber2011,aconsultativedocument,Principlesforthe alignmentof remuneration(issuedinMayandavailsupervisionof financialconglomerates.Thedocument ableatwww.bis.org/publ/bcbs194.htm). isavailableatwww.bis.org/publ/joint27.htm. • BaselIII:Aglobalregulatoryframeworkformore resilientbanksandbankingsystems-revisedversion AccountingPolicy June2011(issuedinJuneandavailableatwww.bis TheFederalReservestronglyendorsessoundcorpo- .org/publ/bcbs189.htm).Therevisedversion rategovernanceandeffectiveaccountingandauditincludescapitaltreatmentforbilateralCCRrisk ingpracticesforallregulatedfinancialinstitutions. finalizedbytheBaselCommitteeinJune2011. Accordingly,theFederalReserve’ssupervisorypolicy • PrinciplesfortheSoundManagementof Opera- functionisresponsibleformonitoringmajordomestionalRisk(issuedinJuneandavailableatwww.bis ticandinternationalproposals,standards,andother .org/publ/bcbs195.htm). developmentsaffectingthebankingindustryinthe areasof accounting,auditing,internalcontrolsover • OperationalRisk-SupervisoryGuidelinesforthe financialreporting,financialdisclosure,andsupervi- AdvancedMeasurementApproaches(issuedinJune soryfinancialreporting. andavailableatwww.bis.org/publ/bcbs196.htm). • Treatmentof tradefinanceundertheBaselcapital During2011,FederalReservestaff addressednumerframework(issuedinOctoberandavailableatwww ousissuesrelatedtofinancialsectoraccountingand .bis.org/publ/bcbs205.htm). reporting,includingfairvalueaccounting,financial instrumentaccountingandreporting,balancesheet • Highcostcreditprotection(issuedinDecemberand offsetting,loanaccounting,businesscombinations, availableatwww.bis.org/publ/bcbs_nl16.htm). leaseaccounting,securitizations,securitiesfinancing transactions,consolidationof structuredentities,

SupervisionandRegulation 99 externalandinternalauditprocesses,andinterna- • issuedguidancetoaddresssupervisoryconsidertionalfinancialreportingstandards. ationsrelatedtothedisposalof nonperforming assetsandforeclosedrealestatethroughexchanges Toaddresstheseandotherissues,FederalReserve brokeredbymarketingagents; staff consultedwithkeyconstituentsintheaccount- • developedandparticipatedinanumberof domesingandauditingprofessions,includingstandardticandinternationaltrainingprogramstoeducate setters,accountingfirms,accountingandfinancial supervisorsaboutnewandemergingaccounting sectortradegroups,andotherfinancialsectorregulaandreportingtopicsaffectingfinancialinstitutors.TheFederalReservealsoparticipatedinmeettions;and ingsof theBaselCommittee’sAccountingTask Force,whichrepresentstheBaselCommitteeatinter- • supportedtheeffortsof theReserveBanksin nationalmeetingsonaccounting,auditing,anddis- financialinstitutionsupervisoryactivitiesrelatedto closureissuesaffectingglobalbankingorganizations. financialaccounting,auditing,reporting,and Theseeffortshelpedinformourunderstandingof disclosure. domesticandinternationalpractices—aswellasproposedaccounting,auditing,andregulatorystan- Credit-RiskManagement dards—andhelpedinourformulationof policyposi- TheFederalReserveworkswiththeotherfederal tionsusinginsightobtainedthroughtheseforums. bankingagenciestodevelopguidanceonthemanagementof creditrisk;tocoordinatetheassessment During2011,theFederalReserveshareditsviews of regulatedinstitutions’creditrisk;andtoensure withaccountingandauditingstandard-setters thatinstitutionsproperlyidentify,measure,andmanthroughinformaldiscussionsandpubliccomment agecreditrisk. letters.Commentlettersonthefollowingproposals wereissuedduringthepastyear: SupervisoryExpectationsforRiskManagement ofAgriculturalCreditRisk • PublicCompanyAccountingOversightBoard’s InOctober,theFederalReserveissuedsupervisory proposalrelatedtochangesintheauditor’sreportguidancetoserveasaremindertobankingorganizaingmodel. tionsandsupervisorystaff of thekeyriskfactorsin • FinancialAccountingStandardsBoard’sproposals agriculturallendingandsupervisoryexpectationsfor relatedtonettingof balancesheetamounts,hedge abankingorganization’srisk-managementpractices. accounting,impairmentof financialassets,and Theguidancewasissuedlargelyinresponsetorecent effectivedatesandtransitionmethods. marketdevelopments.Thepotentialforvolatilemarketconditionsandriskfactorsraisestheimportance Workingwithinternationalbanksupervisors,Federal of ensuringthatagriculturalbankshaveinplace Reservestaff contributedtothedevelopmentof appropriaterisk-managementprogramsandprudent numerousothercommentlettersrelatedtoaccount- lendingstandards.Akeycomponentof asoundriskingandauditingmattersthatweresubmittedtothe managementprogramisthelinkagebetweenan InternationalAccountingStandardsBoardandthe analysisof marketconditionsandanagricultural InternationalAuditingandAssuranceStandards bank’srisk-managementandcapitalplanningprac- BoardthroughtheBaselCommittee. tices.Therangeandextentof marketanalysismay varydependingonthecompositionof thebank’s FederalReservestaff alsoparticipatedinothersuper- portfolioandoverallriskexposure. visoryactivitiestoassessinteractionsbetween accountingstandardsandregulatoryreformefforts. SharedNationalCreditProgram TheseactivitiesincludedsupportingDodd-Frank InAugust,theFederalReserveandtheotherbank- Actinitiativesrelatedtostresstestingof banksand ingagenciesreleasedsummaryresultsof the2011 credit-riskretentionrequirementsforsecuritizations, annualreviewof theSharedNationalCredit(SNC) aswellasvariousBaselIIIactivities. Program.Theagenciesestablishedtheprogramin 1977topromoteanefficientandconsistentreview TheFederalReserveissuedsupervisoryguidanceto andclassificationof SNCs.ASNCisanyloanorforfinancialinstitutionsandsupervisorystaff on malloancommitment—andanyasset,suchasother accountingmatters,asappropriate,andparticipated realestate,stocks,notes,bonds,anddebenturestaken inanumberof supervisory-relatedactivities.For asdebtspreviouslycontracted—extendedtoborrowexample,FederalReservestaff ersbyasupervisedinstitution,itssubsidiaries,and

100 98thAnnualReport|2011 affiliatesthataggregatesto$20millionormoreand Theperformanceof theSNCportfolioremained either(1)issharedbythreeormoreunaffiliated heavilyinfluencedbysignificantexposureto2006supervisedinstitutionsunderaformallendingagree- and2007-vintagecreditswithweakunderwriting mentor(2)aportionof whichissoldtotwoormore standards.Theseloanscomprised40.1percentof unaffiliatedsupervisedinstitutions,withthepurchas- SNCcommitments,butaccountedfor58.4percentof inginstitutionsassumingtheirproratashareof the criticizedcommitments.Refinancingriskremains creditrisk. elevatedasnearly$2trillion,or78percent,of the SNCportfoliowillmaturebytheendof 2014.Of The2011SNCreviewwasbasedonanalysesof thisamount,$204billioniscriticized. creditdataasof December31,2010,providedby federallysupervisedinstitutions.The2011SNCport- ComplianceRiskManagement foliototaled$2.5trillion,with8,030creditfacilities TheFederalReserveworkswithinternationaland toapproximately5,400borrowers.Fromtheprevious domesticsupervisorstodevelopguidancethatproperiod,thedollarvolumeof theportfoliocommit- motescompliancewithBSA/AMLandcountertermentamountroseby$6billionor0.2percent,and rorismlaws. thenumberof creditsdeclinedby259,or3.1percent. BankSecrecyActand Anti-Money-LaunderingCompliance Althoughcreditqualityimprovedsignificantlyover thepasttwoyears,thepercentageof criticizedand In2011,theFederalReservecontinuedtoactively classifiedassetsremainselevatedat12.7and8.5per- promotethedevelopmentandmaintenanceof effeccent,respectively.11Criticizedassetsdeclinedby tiveBSA/AMLcompliancerisk-managementpro- $126billionto$321billion,a28.2percentdecrease grams.Forexample,theFederalReserveissuedguidfromthe2010results.Criticizedassetsrepresented anceinMarch2011,SRletter11-6,“Guidanceon 12.7percentof theportfolio,comparedwith AcceptingAccountsfromForeignEmbassies,Con- 17.8percentinthe2010review.Classifiedcredits sulatesandMissions(foreignmissions).”12Theinterdeclinedby$90billion,a29.5percentdecrease.Clas- agencyadvisory(attachedtoSRletter11-6)supplesifiedcreditsrepresented8.5percentof theportfolio, mentspriorguidanceandprovidesinformationto comparedwith12.1percentinthe2010review.Cred- financialinstitutionsregardingtheprovisionof itsratedspecialmentiondeclinedby$36billionto accountservicestoforeignmissionsinamannerthat $106billion,a25.4percentdecline.Specialmention fulfillstheneedsof thoseforeigngovernmentswhile creditsrepresented4.2percentof theportfolio,com- complyingwiththeprovisionsof theBSA.Also, paredwith5.7percentin2010.Asin2010,thereduc- FederalReservesupervisorystaff participatedin tioninthelevelof criticizedassetsisattributedto interagencyprojectsdesignedtoclarifyregulatory improvedborroweroperatingperformance,debt expectations,includingguidanceforfinancialinstiturestructurings,bankruptcyresolutions,andgreater tionsonthereorganizationof theFinancialCrimes borroweraccesstobondandequitymarkets. EnforcementNetwork’s(FinCEN)BSAregulations. Thenumberof creditsoriginatedin2010rosedra- TheFederalReserveisamemberof theTreasury-led maticallycomparedto2009and2008,andequaled BSAAdvisoryGroup,whichincludesrepresentatives approximately75percentof thelargevolumeof of regulatoryagencies,lawenforcement,andthe creditsoriginatedin2007.Whiletheoverallquality financialservicesindustryandcoversallaspectsof of underwritingin2010wassignificantlybetterthan theBSA.TheFederalReservealsoparticipatesinthe in2007,someeasingof standardswasnoted,specifi- FFIECBSA/AMLworkinggroup,whichisa callyinleveragedfinancecredits,comparedtothe monthlyforumforthediscussionof pendingBSA relativelytighterstandardspresentin2009andthe policyandregulatorymatters.Inadditiontothe latterhalf of 2008.Underwritingstandardsweregen- FFIECagencies,theBSA/AMLworkinggroup erallysatisfactoryoverallthoughtheobservedsoften- includesFinCENand,onaquarterlybasis,theSEC, ingmaybeduetoincreasingcompetitionandmarket theCommodityFuturesTradingCommission,the liquidity. InternalRevenueService,andtheOfficeof Foreign AssetsControl(OFAC)inordertoshareanddiscuss 11 Criticizedassetsarecomposedofspecialmentionandclassified informationonpolicyissuesandgeneraltrendsmore assets.Specialmentionassetsareloansandsecuritiesthat broadly. exhibitpotentialweaknessbutarenotclassified.Classified assetsareloansandsecuritiesthatexhibitwell-definedweaknessesoradistinctpossibilityofloss. 12 www.federalreserve.gov/bankinforeg/srletters/sr1106.htm.

SupervisionandRegulation 101 TheFFIECBSA/AMLworkinggroupalsois continuetoprovideacomprehensiveandcurrent responsibleforupdatingtheFFIECBankSecrecy frameworkforcombatingmoneylaunderingandter- Act/Anti-MoneyLaunderingExaminationManual roristfinancing.Also,theFederalReservecontinues (Manual).TheFFIECdevelopedtheManualaspart toparticipateinasubcommitteeof theBaselComof itsongoingcommitmenttoprovidecurrentand mitteethatfocusesonAML/counter-terrorism consistentinteragencyguidanceonrisk-basedpoli- financingissues. cies,procedures,andprocessesforfinancialinstitutionstocomplywiththeBSAandsafeguardtheir OtherPolicymakingInitiatives operationsfrommoneylaunderingandterrorist In2011,theBoardissuedorproposedguidanceina financing. numberof areasincludingthefollowing: In2011,theFederalReserve,togetherwiththeFDIC • InJanuary,theBoardissuedguidanceonthe andtheOCC,issuedaSpanish-languagetranslation potentialimpactof high-costcreditprotection of theManual.Thisinitiativewaslargelyinresponse transactionsontheassessmentof abankingorgatorequestsfromindustryandtradegroupsandfur- nization’soverallcapitaladequacy.Theguidance thersthecollectivegoalof makingregulatoryexpec- statesthatwhilecredit-riskmitigationtechniques tationsregardingBSA/AMLcomplianceprograms cansignificantlyreduceabankingorganization’s asaccessibleandusefulaspossible. levelof risk,insomecasesthehighpremiumsor feespaidforcertaincreditprotection,combined TheFederalReserveandotherfederalbankingagen- withothertermsandconditions,callintoquestion ciescontinuedduring2011toregularlyshareexami- thedegreeof risktransferof thetransaction.The nationfindingsandenforcementproceedingswith guidanceprovidesasetof criteriaforevaluating FinCENundertheinteragencyMOUthatwasfinal- thedegreeof risktransferof atransactionand izedin2004. describesactionsthattheBoardmaytakeinorder toaccountforhigh-costcreditprotectiontransactionswhenassessingabankingorganization’sover- In2011,theFederalReservecoordinatedextensively allcapitaladequacy.Theguidanceisavailableat withOFAContheireffortsundertheComprehensive www.federalreserve.gov/bankinforeg/srletters/ IranSanctions,Accountability,andDivestmentAct sr1101.htm. of 2010.ThislawbuildsupontheU.S.government’s roleinprotectingitsdomesticfinancialsystemfrom • TheBoardandtheOCCjointlyissuedguidancein exposuretoIran’sillicitanddeceptivefinancialprac- Aprilthatexpandsonpreviousguidanceontheuse ticesbystrengtheningexistingU.S.sanctions.The of modelsandsetsforththeagencies’expectations FederalReservecontinuedduring2011toregularly regardingarobustapproachtotheassessmentand shareexaminationfindingsandenforcementpromanagementof modelrisk.TheguidancesummaceedingswithOFACunderthe2006interrizestheprinciplesof amodelrisk-management agencyMOU. framework,includingrobustmodeldevelopment, implementation,anduse;effectivevalidation;and InternationalCoordinationon soundgovernance,policies,andcontrols.Theguid- Sanctions,Anti-Money-Laundering,and anceisavailableatwww.federalreserve.gov/ Counter-TerrorismFinancing bankinforeg/srletters/sr1107.htm. TheFederalReserveparticipatesinanumberof internationalcoordinationinitiativesrelatedtosanc- • InApril,thefederalbankingagencies,Federal tions,moneylaundering,andterrorismfinancing. HousingandFinanceAgency,HousingandUrban Forexample,theFederalReservehasalong-standing Development,andtheSECjointlysoughtcomroleintheU.S.delegationtotheintergovernmental mentonanNPRthatwouldimplementthe FinancialActionTaskForce(FATF)anditsworking requirementsof section941(b)of theDodd-Frank groups,contributingabankingsupervisoryperspec- Act.Morespecifically,theNPRwould(1)requirea tivetoformulationof internationalstandardson securitizertoretainnotlessthan5percentof the thesematters.In2011,theFederalReserveactively creditriskof anyassetthatthesecuritizer,through contributedtothedevelopmentof aFATFtypolo- theissuanceof anasset-backedsecurity,transfers, giesreportthataddressedlaunderingtheproceedsof sells,orconveystoathirdparty;and(2)prohibita corruption.Inaddition,theFederalReservehaspro- securitizerfromdirectlyorindirectlyhedgingor videdinputandreviewof ongoingworktorevisethe transferringthecreditriskthesecuritizeris FATFRecommendationsinordertoensurethatthey requiredtoretain.TheNPRwouldexemptfrom

102 98thAnnualReport|2011 riskretentionanyasset-backedsecuritycollateral- isavailableatwww.federalreserve.gov/newsevents/ izedsolelybyqualifiedresidentialmortgagesas press/bcreg/20110330a.htm.(Alsoseebox5.) definedintheproposedrule.TheNPRisavailable athttp://edocket.access.gpo.gov/2011/pdf/2011- RegulatoryReports 8364.pdf. TheFederalReserve’ssupervisorypolicyfunctionis alsoresponsiblefordeveloping,coordinating,and • InJune,thefederalbankingagenciesjointly implementingregulatoryreportingrequirementsfor requestedcommentonproposedstresstesting variousfinancialreportingformsfiledbydomestic guidancethatoutlineshigh-levelprinciplesfor andforeignfinancialinstitutionssubjecttoFederal stresstestingpractices,whichareapplicabletoall Reservesupervision.FederalReservestaff members bankingorganizationswithmorethan$10billion interactwithotherfederalagenciesandrelevantstate intotalconsolidatedassets(seebox4).Theprosupervisors,includingforeignbanksupervisorsas posedguidancehighlightstheimportanceof stress needed,torecommendandimplementappropriate testingasanongoingrisk-managementpractice andtimelyrevisionstothereportingformsandthe thatsupportsabankingorganization’sforwardattendantinstructions. lookingassessmentof itsrisks.Theproposedguidanceisavailableatwww.federalreserve.gov/ BankHoldingCompanyRegulatoryReports newsevents/press/bcreg/20110609a.htm. TheFederalReserverequiresthatU.S.BHCsperi- • Thefederalbankingagenciesissuedguidancein odicallysubmitreportsthatprovideinformation JulyontheirexpectationsforsoundCCRrisk- abouttheirfinancialconditionandstructure.This managementpractices.Thisguidancereinforces informationisessentialtoformulatingandconductsoundgovernanceof CCRrisk-managementprac- ingbankregulationandsupervision.Itisalsousedin ticesthroughprudentboardandseniormanage- respondingtorequestsbyCongressandthepublic mentoversight,managementreporting,andrisk- forinformationaboutBHCsandtheirnonbanksubmanagementfunctions.Inaddition,theguidance sidiaries.Foreignbankingorganizationsalsoare alsosummarizesthesoundpracticesnecessaryfor requiredtoperiodicallysubmitreportstotheFederal aneffectiveCCRmanagementframeworkandthe Reserve. characteristicsof anappropriatesystemsinfra- • FRY-9seriesreports—theFRY-9C,FRY-9LP, structure.Theguidanceisavailableatwww andFRY-9SP—providestandardizedfinancial .federalreserve.gov/newsevents/press/bcreg/ statementsforBHCsonbothaconsolidatedanda 20110705a.htm. parent-onlybasis.Thereportsareusedtodetect • TheFederalReserve,alongwiththeotherFFIEC emergingfinancialproblems,toreviewperforagencies,issuedthe“SupplementtoAuthentication manceandconductpre-inspectionanalysis,to inanInternetBankingEnvironment”(supple- monitorandevaluateriskprofilesandcapital ment),whichsupplementsthesimilarlytitledguid- adequacy,toevaluateproposalsforBHCmergers anceissuedin2005.Thesupplementisintendedto andacquisitions,andtoanalyzeaholdingcompaenhancesupervisedorganizations’Internetbank- ny’soverallfinancialcondition. ingcontrolenvironments.Accordingly,thesupple- • Nonbanksubsidiaryreports—theFRY-11,FR mentclarifiesandincreasessupervisoryexpecta- 2314,FRY-7N,andFR2886b—helptheFederal tionsintheareasof riskassessments,customer Reservedeterminetheconditionof BHCsthatare authentication,layeredsecuritycontrols,and engagedinnonbankactivitiesandalsoaidinmoniawarenessandeducationprograms.Theguidance toringthenumber,nature,andconditionof the isavailableatwww.federalreserve.gov/bankinforeg/ companies’nonbanksubsidiaries. srletters/sr1109.htm. • TheFRY-8reportprovidesinformationontrans- • InMarch,thefederalbankingagenciesrequested actionsbetweenaninsureddepositoryinstitution commentonajointproposedruletoensurethat anditsaffiliatesthataresubjecttosection23Aof regulatedfinancialinstitutionsdesigntheirincentheFederalReserveAct;itisusedtomonitorbank tivecompensationarrangementstotakeaccountof exposurestoaffiliatesandtoensurebanks’complirisk.Theproposedrule,whichisbeingissuedpurancewithsection23Aof theFederalReserveAct. suanttotheDodd-FrankAct,wouldapplytocertainfinancialinstitutionswithmorethan$1billion • TheFRY-10reportprovidesdataonchangesin inassets.Italsocontainsheightenedstandardsfor organizationstructureatdomesticandforeign thelargestof theseinstitutions.Theproposedrule bankingorganizations.

SupervisionandRegulation 103 • TheFRY-6andFRY-7reportsgatheradditional Box 5. Incentive Compensation informationonorganizationstructureandshare- Flawedincentivecompensationpracticesinthe holdersfromdomesticbankingorganizationsand financialindustry—providingexecutivesandother foreignbankingorganizations,respectively;the employeeswithincentivestotakeimprudentrisks informationisusedtomonitorstructuresoasto inconsistentwiththelong-termhealthoftheirfinandeterminecompliancewithprovisionsof theBank cialorganizations—wereamongthemanyfactors contributingtothefinancialcrisis.Tohelpaddress HoldingCompanyAct(BHCAct)andRegulatheseproblems,theFederalReserveissueddraft tionYandtoassesstheabilityof aforeignbanksupervisoryguidanceonincentivecompensation ingorganizationtocontinueasasourceof strength practicesforpubliccommentinOctober2009.After toitsU.S.operations. modestrevisions,itwasadoptedbythefederal bankingagencies(FederalReserve,OCC,FDIC, OTS)inJune2010(www.federalreserve.gov/ During2011,theFederalReserveimplementeda newsevents/press/bcreg/20100621a.htm). numberof changestotheFRY-9Creporting requirementstobetterunderstandBHCs’riskexpo- In2009,theFederalReserveundertookasupervisory initiative—a“horizontalreview”ofincentivecompen- sures,primarilywithrespecttolendingandsecuritisationpracticesatthe25largestbankingorganiza- zations;tobettersupportmacroeconomicanalysis tions.Thehorizontalreviewwasdesignedtoassess andmonetarypolicypurposes;andtocollectcertain • thepotentialforincentivecompensationarrange- informationprescribedbychangesinaccounting mentstoencourageimprudentrisk-taking; standards.Theserevisionsincluded(1)breakoutby loancategoryof otherloansandleasesthatare • theactionsthatthelargecomplexbankingorganizationshavetakentocorrectdeficienciesinincen- troubleddebtrestructuringsforthosethat(a)are tivecompensationdesign;and pastdue30daysormoreorinnonaccrualstatusor (b)areincompliancewiththeirmodifiedtermsand • theadequacyoftheorganizations’compensationrelatedriskmanagement,controls,andcorporate clarifyreportingof restructuredtroubleddebtcongovernance. sumerloans;(2)breakoutof otherconsumerloans intoautomobileloansandallotherconsumerloans Theseorganizationshavemadesignificantchanges totheirpracticesandareapproachingsubstantial inseveralschedules;(3)breakoutof commercial conformancewiththeguidance.ArecentFinancial mortgage-backedsecuritiesissuedorguaranteedby StabilityBoardreportshowsthatU.S.banksareator U.S.governmentagenciesandsponsoredagencies; neartheleadingedgeofpracticeinternationally. (4)creationof anewScheduleHC-V,VariableInter- MoredetailsaboutthehorizontalreviewarepreestEntities(VIEs),forreportingmajorcategoriesof sentedinanOctober2011whitepaper(www .federalreserve.gov/publications/other-reports/files/ assetsandliabilitiesof consolidatedVIEs;(5)break incentive-compensation-practices-report-201110 outof loansandotherrealestateowned(OREO) .pdf). informationcoveredbyFDICloss-sharingagree- TheDodd-FrankActrequiresthereportingtoregula- mentsbyloanandOREOcategory;(6)breakoutof torsofincentivecompensationarrangementsand lifeinsuranceassetsintodataitemsforgeneral prohibitsincentivecompensationarrangementsthat accountandseparateaccountlifeinsuranceassets; provideexcessivecompensationorthatcould (7)additionof newdataitemsforthetotalassetsof exposethefirmtoinappropriaterisks.Bankingorgacaptiveinsuranceandreinsurancesubsidiaries; nizations,broker–dealers,investmentadvisers,and certainotherfirmsarecoveredundertheactifthey (8)additionof newincomestatementitemsforcredit have$1billionormoreintotalassets.Toimplement valuationadjustmentsanddebitvaluationadjusttheact,sevenfinancialregulatoryagencies(Federal mentsincludedintradingrevenues(forBHCswith Reserve,OCC,FDIC,OTS,NCUA,SEC,andthe totalassetsof $100billionormore);(9)revisionof FederalHousingandFinanceAgency)issuedajoint thereportinginstructionsintheareasof construcproposedruleinApril2011(www.gpo.gov/fdsys/pkg/ FR-2011-04-14/pdf/2011-7937.pdf).Thebanking tionlending,one-tofour-familyresidentialmortgage agencies’existingreviewshavebeendoneusing bankingactivities,andmaturityandrepricingdata; theirsafety-and-soundnessauthority;theproposed and(10)collectionof expandedinformationonthe rulewouldaddtothatauthorityandprovideregulaquarterly-averagesschedule. toryauthoritytosomeotheragencies,suchasthe SEC.Thecoreprinciplesoftheproposedruleare similartothoseinthebankingagencies’guidance.A In2011,theFederalReserveproposedthefollowing verylargenumberofcommentswerereceivedfrom revisionstotheFRY-9Cforimplementationin thepublic,andthesecommentsarebeingcarefully 2012tobetterunderstandBHCs’riskexposures,to consideredinthedraftingofthefinalrule.Thefinal bettersupportmacroeconomicanalysisandmonruleisforthcomingin2012. etarypolicypurposes,andtocollectcertaininforma-

104 98thAnnualReport|2011 tionprescribedbychangesinaccountingstandards: phase-inapproachformostSLHCsandmodifiedthe (1)addasectiontoScheduleHC-C,Loansand exemptioncriteriaforcommercialSLHCsandcer- LeaseFinancingReceivables,tocollectinformation taininsuranceSLHCs.15Theexemptionforcommerontheallowanceforloanandleaselossesbyloan cialSLHCswillbereviewedperiodicallyandmaybe category;(2)addtwodataitemstoScheduleHC-P, rescindedif theBoarddeterminesthatFRY–9 1–4FamilyResidentialMortgageBankingActivities, financialinformationandotherregulatoryreports tocollecttheamountof representationandwarranty areneededtoeffectivelyandconsistentlyassesscomreservesforone-tofour-familyresidentialmortgage pliancewithcapitalandotherregulatoryrequireloanssold;(3)addadataitemtoScheduleHC-N, ments.InsuranceSLHCswillbeexemptonlyuntil PastDueandNonaccrualLoans,Leases,andOther consolidatedregulatorycapitalrulesarefinalizedfor Assets,tocollecttheoutstandingbalanceof pur- SLHCs,atwhichtimetheymayberequiredtofile chasedcreditimpairedloansbypastdueandnonac- consolidatedfinancialstatements—todemonstrate crualstatus;(4)addanewScheduleHC-U,Loan theircompliancewiththecapitalrules—andother OriginationActivityinDomesticOffices,tocollect FederalReservereports. informationonloanoriginations;and(5)modifythe reportinginstructionstoclarifythereportingand CommercialBankRegulatoryReports accountingtreatmentof specificvaluation Asthefederalsupervisorof statememberbanks,the allowances. FederalReserve,alongwiththeotherbankingagencies(throughtheFFIEC),requiresbankstosubmit SavingsandLoanHoldingCompanyRegulatory quarterlyCallReports.CallReportsaretheprimary Reports sourceof dataforthesupervisionandregulationof OnJuly21,2011,theresponsibilityforsupervision banksandtheongoingassessmentof theoverall andregulationof SLHCstransferredfromtheOTS soundnessof thenation’sbankingsystem.Call totheBoard,pursuanttosection312of theDodd- Reportdataprovidethemostcurrentstatisticaldata FrankAct.Inpreparationof thisevent,theFederal availableforevaluatinginstitutions’corporateappli- Reserve,onFebruary8,2011,publishedintheFed- cations,foridentifyingareasof focusforbothon-site eralRegisteranoticeof intent(76Fed.Reg.7091)to andoff-siteexaminations,andforconsideringmonrequireSLHCstosubmitthesamereportsasBHCs etaryandotherpublicpolicyissues.CallReport (FRY–6,FRY–7,FRY–9reports,FRY–11/11S, data,whichalsoserveasbenchmarksforthefinan- FR2314/2314S,FRY–8,FRY–12/12A,FRY–7Q, cialinformationrequiredbymanyotherFederal orFRY–7N/NS)beginningwiththeMarch31, Reserveregulatoryfinancialreports,arewidelyused 2012,reportingperiod.13Thenoticeof intentstated bystateandlocalgovernments,statebankingsuperthattheBoardwouldissueaformalproposednotice visors,thebankingindustry,securitiesanalysts,and oninformationcollectionactivitiesforSLHCsafter theacademiccommunity. thetransferdate.OnAugust25,2011,theBoard issuedaproposaltoexemptalimitednumberof During2011,theFFIECimplementedrevisionsto SLHCsfrominitiallysubmittingFederalReserve theCallReporttobetterunderstandbanks’risk regulatoryreportsandallowatwo-yearphased-in exposures,primarilywithrespecttolendingand reportingformostSLHCsbeginningwiththe securitizations,tobettersupportmacroeconomic March31,2012,reportingperiod(76Fed.Reg. analysisandmonetarypolicypurposes,andtocollect 53129).14 certaininformationprescribedbychangesin accountingstandards.Therevisionsincluded Afterconsiderationof thecommentsreceivedonthe (1)breakoutbyloancategoryof otherloansand proposal,theBoardissuedapressrelease,onDecem- leasesthataretroubleddebtrestructuringsforthose ber23,2011,announcingthattheproposedcollec- that(a)arepastdue30daysormoreorinnonactionsof informationfromSLHCshadbeenfinalized crualstatusor(b)areincompliancewiththeirmodiwithmodifications.Thefinalnoticewaspublishedin fiedtermsandclarifyreportingof restructured theFederalRegisteronDecember29,2011,(76Fed. troubleddebtconsumerloans;(2)breakoutother Reg.81933)inwhichtheBoardretainedthetwo-year consumerloansintoautomobileloansandallother consumerloansinseveralschedules;(3)breakoutof commercialmortgage-backedsecuritiesissuedor 13 Seenoticeofintentatwww.gpo.gov/fdsys/pkg/FR-2011-02-08/ html/2011-2782.htm. 14 Seeproposalatwww.gpo.gov/fdsys/pkg/FR-2011-08-25/html/ 15 Seepressreleaseandnoticeatwww.federalreserve.gov/ 2011-21736.htm. newsevents/press/bcreg/20111223a.htm.

SupervisionandRegulation 105 guaranteedbyU.S.governmentagenciesandspon- collecttheoutstandingbalanceof purchasedcredit soredagencies;(4)additionof anewmemorandum impairedloansbypastdueandnonaccrualstatus; itemfortheestimatedamountof nonbrokered (4)addanewScheduleRC-U,LoanOrigination depositsobtainedthroughtheuseof deposit-listing ActivityinDomesticOffices,tocollectinformation servicecompanies;(5)breakoutof existingitemsfor onloanoriginations;(5)addnewitemsinScheddepositsof individuals,partnerships,andcorpora- uleRC-M,Memoranda,inwhichsavingsassociationsintodepositsof individualsanddepositsof tionsandcertainstatesavingsandcooperativebanks partnershipsandcorporations;(6)creationof anew wouldreportonthetesttheyusetodeterminecom- ScheduleRC-V,VIEs,forreportingmajorcategories pliancewiththeQualifiedThriftLenderrequirement of assetsandliabilitiesof consolidatedVIEs; andwhethertheyhaveremainedincompliancewith (7)breakoutof loansandOREOinformationcov- thisrequirement;(6)revisetwoexistingitemsin eredbyFDICloss-sharingagreementsbyloanand ScheduleRC-R,RegulatoryCapital,usedtocalculate OREOcategory;(8)breakoutof lifeinsuranceassets theleverageratiodenominatortoaccommodatecerintodataitemsforgeneralaccountandseparate taindifferencesbetweentheregulatorycapitalstanaccountlifeinsuranceassets;(9)additionof new dardsthatapplytotheleveragecapitalratiosof dataitemsforthetotalassetsof captiveinsurance banksversussavingsassociations;and(7)modifythe andreinsurancesubsidiaries;(10)additionof new reportinginstructionstoclarifythereportingand incomestatementitemsforcreditvaluationadjust- accountingtreatmentof specificvaluation mentsanddebitvaluationadjustmentsincludedin allowances. tradingrevenues(forbankswithtotalassetsof $100billionormore);(11)changeof thereporting Supervisory Information Technology frequencyfromannuallytoquarterlyforthedata reportedinScheduleRC-T,FiduciaryandRelated TheFederalReserve’ssupervisoryinformationtech- Services,oncollectiveinvestmentfundsandcommon nologyfunction,carriedoutbytheBoard’sDivision trustfunds;and(12)revisionof thereporting of BankingSupervisionandRegulationandthe instructionsintheareasof constructionlending, ReserveBanksundertheguidanceof theSubcomone-tofour-familyresidentialmortgagebanking mitteeonSupervisoryAdministrationandTechnolactivities,andmaturityandrepricingdata. ogy,workstoidentifyandsetprioritiesforinformationtechnologyinitiativeswithinthesupervisionand Inaddition,during2011,theFFIECimplemented regulationbusinessline. severalrevisionstotheReportof AssetsandLiabilitiesof U.S.BranchesandAgenciesof ForeignBanks In2011,thesupervisoryinformationtechnology (FFIEC002)to(1)collectadditionaldetailontrad- functionfocusedon ingassets,(2)revisethereportinginstructionsin • LargeBankSupervision.Improvedthesupervision ScheduleEforreportingof timedepositsof of largeandregionalfinancialinstitutionswith $100,000ormore,and(3)expandthedatacollected newprocessesandlinkedworkflowstoenablecononScheduleQ,FinancialAssetsandLiabilities tinuousupdatesof informationprovidedthrough MeasuredatFairValue. examinationsandongoingmonitoringactivities. In2011,theFFIECproposedthefollowingrevisions • CommunityBankSupervision.WorkedwithcomtotheCallReportforimplementationin2012tobet- munitybankexaminersandotherregulatorsto terunderstandbanks’riskexposures,tobettersup- implementenhancedtoolstosupportcommunity portmacroeconomicanalysisandmonetarypolicy bankexaminations. purposes,andtocollectcertaininformationpre- • DataManagement.(1)Improvedthedatamanagescribedbychangesinaccountingstandards:(1)adda mentinfrastructureandinventoryingof supervisectiontoScheduleRC-C,LoansandLeaseFinancsoryinformationand(2)enhanceddataanalytics ingReceivables,tocollectinformationontheallowtosupportcorebusinessneeds.Theseimproveanceforloanandleaselossesbyloancategory; mentsweretheresultof stresstesting,capital (2)addtwodataitemstoScheduleRC-P,1–4Family assessments,andadditionalriskmonitoringthat ResidentialMortgageBankingActivities,tocollect createdadditionaldemandsforinvestmentindata theamountof representationandwarrantyreserves collections. forone-tofour-familyresidentialmortgageloans sold;(3)addadataitemtoScheduleRC-N,PastDue • Collaboration.(1)Enhancedinformationsharing andNonaccrualLoans,Leases,andOtherAssets,to amongstaff attheBoardandReserveBanks

106 98thAnnualReport|2011 throughtoolstosupportcommunitiesof practice, documentsintotheNICdatabaseconstructs.Data (2)developedandpilotedanelectronicsolutionto comparisonsandvalidationanalyseswereperformed supportexamteams’abilitytosharedocuments, todeterminewhichSLHCsandnon-depositoryinstiand(3)createdanInteragencySteeringGroupto tutionsubsidiariesof SLHCsweremissingorincomimprovemethodsforsharingworkamongstate pleteonNIC.Newdataelementswereaddedtothe andfederalregulators. repositories.Integrationof datarelatedtoSLHC organizationswillcontinuein2012asregulatory • Modernization.Initiatedsignificantprojectsto reportsaremodifiedtocollectstructure,financial, modernizesoftwareproductsandbusinesscapabiliandsupervisoryinformationdirectlyfromthese tiesintheareasof documentmanagement, entities. resourceprioritization,andscheduling. NationalInformationCenter TheNICalsosupportstheSharedNationalCredit Modernizationproject(SNCMod),amultiyear, TheNICistheFederalReserve’scomprehensive interagency,informationtechnologydevelopment repositoryforsupervisory,financial,andbankingefforttoimprovetheefficiencyandeffectivenessof structuredata.Itisalsothemainrepositoryformany thesystemsthatsupporttheSNCProgram.SNC supervisorydocuments.NICincludes(1)dataon Modfocusesonacompleterewriteof thecurrent bankingstructurethroughouttheUnitedStatesas legacysystemstotakeadvantageof moderntechnolwellasforeignbankingconcerns;(2)theNational ogytoenhanceandextendthesystem’scapabilities. ExaminationDesktop,whichenablessupervisory During2011,theSNCnetapplicationwasimplepersonnelaswellasfederalandstatebanking mentedinthreephasesinsupportof the2011SNC authoritiestoaccessNICdata;(3)theBankingOrgaexaminationprocess.Thecreationof thisautomated nizationNationalDesktop,anapplicationthatfacilitoolisaninteragencyinitiativeledbytheFederal tatessecure,real-timeelectronicinformationsharing ReserveSystem.Timelydeliveryof theSNCnettool andcollaborationamongfederalandstatebanking enabledsignificantprocessefficienciesfortheexamiregulatorsforthesupervisionof bankingorganizanationteamsandultimatelyresultedintheabilityto tions;and(4)theCentralDocumentandText publishthesummaryof findingsapproximatelysixto Repository,whichcontainsdocumentssupporting eightweeksaheadof thepreviousschedule.During thesupervisoryprocesses. 2012,additionalenhancementsareexpectedforboth thecollectionrepositoryandtotheexamtoolappli- WithintheNIC,thesupportingsystemshavebeen cationthatwillprovidefurtherbenefitstotheexamimodifiedovertimetoextendtheirusefulnessand nationteams. improvebusinessworkflowefficiency.During2011, workwascompletedonupgradingtheentireNIC infrastructuretoprovideeasieraccesstoinformation, During2011,insupportof theComprehensiveCapiaconsistentFederalReserve-enterpriseinformation talAnalysisandReviewinitiativeandinplanningfor datarepository,acomprehensivemetadatareposi- theDodd-FrankActstresstestingprogram,NIC tory,anduniformsecurityacrosstheFederalReserve staff wereengagedwiththeteamsresponsiblefor System.ThetransitionbeganinMay2010andeffec- planningthenewdatacollections(FRY-14).The tivelywassubstantiallycompletebyyear-end2011 SupervisionRiskprogramisalsoundergoingsignifiwithonlyalimitednumberof applicationsrequiring cantchangeswithsubstantialincreasesinthedata transitioninearly2012.Businesschangeswere requirementsaswellasmodelingtoolstousewith implementedtothesystemsof recordforboth thosedata.NICstaff areresponsibleforproviding examinationandinspectionmandates,andimprove- projectmanagementforthoseinitiativestobestserve mentsweremadetothecollectionandreportingof thebusinesssponsors. keyexaminationandinspectionfindingstotrack consistentlyonanationallevelacrosstheFederal Finally,theFederalReserveparticipatedinanumber ReserveSystem. of technology-relatedinitiativessupportingthe supervisionfunctionaspartof FFIECtaskforces ThestructureandsupervisorydatabasesintheNIC andinteragencycommittees.Theseeffortssupport weremodifiedtosupportDodd-Frankchangesand standardizeddatacollectionsandcross-agencyinfortofacilitatethesupervisionof SLHCs.Asignificant mationsharing.Workinthisareawillcontinuetobe amountof progressoccurredduring2011tosuccess- importantastheagenciesworkthroughtheimplefullycaptureandintegratetheformerOTSdataand mentationof theDodd-FrankAct.

SupervisionandRegulation 107 Staff Development urgenttrainingneedsassociatedwithimplementation orissuanceof newlaws,regulations,orguidance. TheFederalReserve’sstaff developmentprogramis responsiblefortheongoingdevelopmentof nearly Regulation 3,109professionalsupervisorystaff toensurethat theyhavetheskillsnecessarytomeettheirevolving supervisoryresponsibilities.TheFederalReservealso TheFederalReserveexercisesimportantregulatory providescourseofferingstostaff atstatebanking influenceoverentryintotheU.S.bankingsystem, agencies.Trainingactivitiesin2011aresummarized andthestructureof thesystem,throughitsadminisintable2. trationof severalfederalstatutes.TheFederal Reserveisalsoresponsibleforimposingmargin ExaminerCommissioningProgram requirementsonsecuritiestransactions.Incarrying TheExaminerCommissioningProgram(ECP) outitsresponsibilities,theFederalReservecoordiinvolvesapproximately22weeksof instruction.Indi- natessupervisoryactivitieswiththeotherfederal vidualsmovethroughacombinationof classroom bankingagencies,stateagencies,functionalregulaofferings,self-pacedassignments,andon-the-job tors(thatis,regulatorsforinsurance,securities,and trainingoveraperiodof twotofiveyears.Achieve- commoditiesfirms),andforeignbankregulatory mentismeasuredbytwoprofessionallyvalidated agencies. proficiencyexaminations:thefirstproficiencyexam isrequiredof allECPparticipants,andthesecond Regulation of the U.S. Banking Structure proficiencyexamisofferedintwospecialtyareas— (1)safetyandsoundnessand(2)consumercompli- TheFederalReserveadministersfivefederalstatutes ance.Athirdspecialty,ininformationtechnology, thatapplytoBHCs,financialholdingcompanies, requiresthatindividualsearntheCertifiedInforma- memberbanks,andforeignbankingorganizations— tionSystemsAuditorcertificationofferedbythe theBHCAct,theBankMergerAct,theChangein InformationSystemsAuditControlAssociation.In BankControlAct,theFederalReserveAct,andthe 2011,252examinerspassedthefirstproficiencyexam InternationalBankingAct.OnJuly21,2011,asa and69passedthesecondproficiencyexam(55in resultof theDodd-FrankAct,theFederalReserve safetyandsoundnessand14inconsumer alsobecameresponsibleforadministeringsection10 compliance). of theHomeOwners’LoanActthatappliesto SLHCs.TheFederalReserveisnowalsoresponsible ContinuingProfessionalDevelopment foradministeringtheChangeinBankControlAct Otherformalandinformallearningopportunitiesare withrespecttoSLHCs. availabletoexaminers,includingotherschoolsand programsofferedwithintheSystemandFFIEC- Inadministeringthesestatutes,theFederalReserve sponsoredschools.Systemprogramsarealsoavail- actsonavarietyof proposalsthatdirectlyorindiabletostateandfederalbankingagencypersonnel. rectlyaffectthestructureof theU.S.bankingsystem TheRapidResponse®program,introducedin2008, atthelocal,regional,andnationallevels;theinternaoffersSystemandstatepersonnel60–90minutetele- tionaloperationsof domesticbankingorganizations; conferencepresentationsonemergingissuesor ortheU.S.bankingoperationsof foreignbanks.The Table2.Trainingforbankingsupervisionandregulation,2011 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 2,273 495 910 182 FFIEC 394 217 360 90 TheOptionsInstitute2 4 7 3 1 RapidResponseTM 11,406 1,045 10 78 1 Trainingdaysareapproximate.Systemcourseswerecalculatedusingfivedaysasanaverage,withFFIECcoursescalculatedusingfourdaysasanaverage. 2 TheOptionsInstitute,aneducationalarmoftheChicagoBoardOptionsExchange,providesathree-dayseminarontheuseofoptionsinriskmanagement.

108 98thAnnualReport|2011 proposalsconcernBHCandSLHCformationsand Reservemayobjecttostockrepurchasesbyholding acquisitions,bankmergers,andothertransactions companiesthatfailtomeetcertainstandards,includinvolvingbanksandsavingsassociationsornonbank ingtheBoard’scapitaladequacyguidelines.In2011, firms.In2011,theFederalReserveactedon414pro- theFederalReserveactedonsevenstockrepurchase posalsrepresenting1,035individualapplicationsfiled proposalsbyaBHC. underthesixstatutes.Manyof theseproposals involvedbankingorganizationsinlessthansatisfac- TheFederalReservealsoreviewselectionssubmitted toryfinancialcondition. byBHCsseekingfinancialholdingcompanystatus undertheauthoritygrantedbytheGramm-Leach- BankHoldingCompanyActProposals BlileyAct.BHCsseekingfinancialholdingcompany UndertheBHCAct,acorporationorsimilarlegal statusmustfileawrittendeclarationwiththeFederal entitymustobtaintheFederalReserve’sapproval Reserve.In2011,14domesticfinancialholdingcombeforeformingaBHCthroughtheacquisitionof panydeclarationswereapproved. oneormorebanksintheUnitedStates.Once BankMergerActProposals formed,aBHCmustreceiveFederalReserve approvalbeforeacquiringorestablishingadditional TheBankMergerActrequiresthatallproposals banks.Also,BHCsgenerallymayengageinonly involvingthemergerof insureddepositoryinstituthosenonbankingactivitiesthattheBoardhasprevi- tionsbeactedonbytherelevantfederalbanking ouslydeterminedtobecloselyrelatedtobanking agency.TheFederalReservehasprimaryjurisdiction undersection4(c)(8)of theBHCAct.Dependingon if theinstitutionsurvivingthemergerisastatememthecircumstances,theseactivitiesmayormaynot berbank.Beforeactingonamergerproposal,the requireFederalReserveapprovalinadvanceof their FederalReserveconsidersthefinancialandmanagecommencement.16 rialresourcesof theapplicant,thefutureprospectsof theexistingandcombinedorganizations,theconve- WhenreviewingaBHCapplicationornoticethat nienceandneedsof thecommunity(ies)tobeserved, requirespriorapproval,theFederalReservemaycon- andthecompetitiveeffectsof theproposedmerger. siderthefinancialandmanagerialresourcesof the TheFederalReservealsomustconsidertheviewsof applicant,thefutureprospectsof boththeapplicant theU.S.Departmentof Justiceregardingthecomandthefirmtobeacquired,theconvenienceand petitiveaspectsof anyproposedbankmergerinvolvneedsof thecommunitytobeserved,thepotential ingunaffiliatedinsureddepositoryinstitutions.In publicbenefits,thecompetitiveeffectsof thepro- 2011,theFederalReserveapproved67mergerappliposal,andtheapplicant’sabilitytomakeavailableto cationsundertheact. theFederalReserveinformationdeemednecessaryto ChangeinBankControlActProposals ensurecompliancewithapplicablelaw.Inthecaseof aforeignbankingorganizationseekingtoacquire TheChangeinBankControlActrequiresindividuals controlof aU.S.bank,theFederalReservealsocon- andcertainotherpartiesthatseekcontrolof aU.S. siderswhethertheforeignbankissubjecttocompre- bank,BHC,orSLHCtoobtainapprovalfromthe hensivesupervisionorregulationonaconsolidated relevantfederalbankingagencybeforecompleting basisbyitshome-countrysupervisor.In2011,the thetransaction.TheFederalReserveisresponsible FederalReserveactedon307applicationsand forreviewingchangesinthecontrolof statemember noticesfiledbyBHCstoacquireabankoranon- banks,BHCs,andSLHCs.Initsreview,theFederal bankfirm,ortootherwiseexpandtheiractivities, Reserveconsidersthefinancialposition,competence, includingproposalsinvolvingprivateequityfirms. experience,andintegrityof theacquiringperson;the effectof theproposedchangeonthefinancialcondi- ABHCmayrepurchaseitsownsharesfromits tionof thebank,BHC,orSLHCbeingacquired;the shareholders.Whenthecompanyborrowsmoneyto futureprospectsof theinstitutiontobeacquired;the buytheshares,thetransactionincreasesthecompa- effectof theproposedchangeoncompetitioninany ny’sdebtanddecreasesitsequity.TheFederal relevantmarket;thecompletenessof theinformation submittedbytheacquiringperson;andwhetherthe proposedchangewouldhaveanadverseeffectonthe 16 Since1996,theacthasprovidedanexpeditedpriornoticeprocedureforcertainpermissiblenonbankactivitiesandforacquisi- DepositInsuranceFund.Aproposedtransaction tionsofsmallbanksandnonbankentities.Sincethattime,the shouldnotjeopardizethestabilityof theinstitution acthasalsopermittedwell-runBHCsthatsatisfycertaincriteria ortheinterestsof depositors.Duringitsreviewof a tocommencecertainothernonbankactivitiesonadenovo basiswithoutfirstobtainingFederalReserveapproval. proposedtransaction,theFederalReservemaycon-

SupervisionandRegulation 109 tactotherregulatoryorlawenforcementagenciesfor InternationalBankingActProposals informationaboutrelevantindividuals.In2011,the TheInternationalBankingAct,asamendedbythe FederalReserveapproved115changeincontrol ForeignBankSupervisionEnhancementActof noticesrelatedtostatememberbanks,BHCs,and 1991,requiresforeignbankstoobtainFederal SLHCs,includingproposalsinvolvingprivateequity Reserveapprovalbeforeestablishingbranches,agenfirms. cies,commerciallendingcompanysubsidiaries,or representativeofficesintheUnitedStates. FederalReserveActProposals UndertheFederalReserveAct,abankmustseek Inreviewingproposals,theFederalReservegenerally FederalReserveapprovaltobecomeamemberbank. considerswhethertheforeignbankissubjecttocom- AmemberbankmayberequiredtoseekFederal prehensivesupervisionorregulationonaconsoli- Reserveapprovalbeforeexpandingitsoperations datedbasisbyitshome-countrysupervisor.Italso domesticallyorinternationally.Statememberbanks considerswhetherthehome-countrysupervisorhas mustobtainFederalReserveapprovaltoestablish consentedtotheestablishmentof theU.S.office;the domesticbranches,andallmemberbanks(including financialconditionandresourcesof theforeignbank nationalbanks)mustobtainFederalReserve anditsexistingU.S.operations;themanagerial approvaltoestablishforeignbranches.Whenreviewresourcesof theforeignbank;whetherthehomeingproposalsformembership,theFederalReserve countrysupervisorsharesinformationregardingthe considers,amongotherthings,thebank’sfinancial operationsof theforeignbankwithothersuperviconditionanditsrecordof compliancewithbanking soryauthorities;whethertheforeignbankhasprolawsandregulations.Whenreviewingproposalsto videdadequateassurancesthatinformationconcernestablishdomesticbranches,theFederalReserveconingitsoperationsandactivitieswillbemadeavailable siders,amongotherthings,thescopeandnatureof totheFederalReserve,if deemednecessarytodeterthebankingactivitiestobeconducted.Whenreviewmineandenforcecompliancewithapplicablelaw; ingproposalsforforeignbranches,theFederal whethertheforeignbankhasadoptedandimple- Reserveconsiders,amongotherthings,thecondition mentedprocedurestocombatmoneylaunderingand of thebankandthebank’sexperienceininternawhetherthehomecountryof theforeignbankis tionalbanking.In2011,theFederalReserveactedon developingalegalregimetoaddressmoneylaundermembershipproposalsfor44banks,andnewand ingorisparticipatinginmultilateraleffortstocommerger-relatedbranchproposalsfor427domestic batmoneylaundering;andtherecordof theforeign branchesandeightforeignbranches. bankwithrespecttocompliancewithU.S.law.In 2011,theFederalReserveapprovedsevenapplica- StatememberbanksmustalsoobtainFederal tionsbyforeignbankstoestablishbranches,agencies, Reserveapprovaltoestablishfinancialsubsidiaries. orrepresentativeofficesintheUnitedStates. Thesesubsidiariesmayengageinactivitiesthatare financialinnatureorincidentaltofinancialactivities, HomeOwners’LoanActProposals includingsecurities-relatedandinsuranceagencyrelatedactivities.In2011,nofinancialsubsidiary UndertheHomeOwners’LoanAct,acorporation applicationsweresubmitted. orsimilarlegalentitymustobtaintheFederal Reserve’sapprovalbeforeforminganSLHCthrough OverseasInvestmentProposalsby theacquisitionof oneormoresavingsassociationsin U.S.BankingOrganizations theUnitedStates.Onceformed,anSLHCmust U.S.bankingorganizationsmayengageinabroad receiveFederalReserveapprovalbeforeacquiringor rangeof activitiesoverseas.Manyof theactivitiesare establishingadditionalsavingsassociations.Also, conductedindirectlythroughEdgeActandagree- SLHCsgenerallymayengageinonlythosenonbankmentcorporationsubsidiaries.Althoughmostfor- ingactivitiesthatarespecificallyenumeratedinthe eigninvestmentsaremadeundergeneralconsentpro- HomeOwners’LoanActorwhichtheBoardhas ceduresthatinvolveonlyafter-the-factnotificationto previouslydeterminedtobecloselyrelatedtobanktheFederalReserve,largeandothersignificant ingundersection4(c)(8)of theBHCAct.Depending investmentsrequirepriorapproval.In2011,theFed- onthecircumstances,theseactivitiesmayormaynot eralReserveapproved20applicationsandnoticesfor requireFederalReserveapprovalinadvanceof their overseasinvestmentsbyU.S.bankingorganizations, commencement.In2011,theFederalReserveacted manyof whichrepresentedinvestmentsthroughan onfiveapplicationsandnoticesfiledbySLHCsto EdgeActoragreementcorporation.

110 98thAnnualReport|2011 acquireabankoranonbankfirm,ortootherwise informationonordersandannouncementsaswellas expandtheiractivities. aguideforU.S.andforeignbankingorganizations thatwishtosubmitapplications. UndertheHomeOwners’LoanAct,asavingsassociationreorganizingtoamutualholdingcompany Enforcement of (MHC)structuremustreceiveFederalReserve Other Laws and Regulations approvalpriortoitsreorganization.Inaddition,an MHCmustreceiveFederalReserveapprovalbefore TheFederalReserve’senforcementresponsibilities convertingtostockform,andMHCsmustreceive alsoextendtothedisclosureof financialinformation FederalReserveapprovalbeforewaivingdividends bystatememberbanksandtheuseof credittopurdeclaredbytheMHC’ssubsidiary.In2011,theFed- chaseandcarrysecurities. eralReservereceivednoapplicationsforMHCreorganizations.In2011,theFederalReserveactedonno FinancialDisclosuresbyStateMemberBanks applicationsfiledbyMHCstoconverttostockform Statememberbanksthatissuesecuritiesregistered and14applicationstowaivedividends. undertheSecuritiesExchangeActof 1934mustdisclosecertaininformationof interesttoinvestors, WhenreviewinganSLHCapplicationornoticethat includingannualandquarterlyfinancialreportsand requirespriorapproval,theFederalReservemaycon- proxystatements.Bystatute,theBoard’sfinancial siderthefinancialandmanagerialresourcesof the disclosurerulesmustbesubstantiallysimilartothose applicant,thefutureprospectsof boththeapplicant of theSEC.Attheendof 2011,12statemember andthefirmtobeacquired,theconvenienceand bankswereregisteredwiththeBoardundertheSecuneedsof thecommunitytobeserved,thepotential ritiesExchangeAct. publicbenefits,thecompetitiveeffectsof theproposal,andtheapplicant’sabilitytomakeavailableto SecuritiesCredit theFederalReserveinformationdeemednecessaryto UndertheSecuritiesExchangeActof 1934,the ensurecompliancewithapplicablelaw. Boardisresponsibleforregulatingcreditincertain transactionsinvolvingthepurchasingorcarryingof TheFederalReservealsoreviewselectionssubmitted securities.TheBoard’sRegulationTlimitsthe bySLHCsseekingtreatmentasfinancialholding amountof creditthatmaybeprovidedbysecurities companiesundertheauthoritygrantedbytheDodd- brokersanddealerswhenthecreditisusedtopur- FrankAct.SLHCsseekingfinancialholdingcom- chasedebtandequitysecurities.TheBoard’sRegulapanytreatmentmustfileawrittendeclarationwith tionUlimitstheamountof creditthatmaybeprotheFederalReserve.In2011,noSLHCfinancial videdbylendersotherthanbrokersanddealerswhen holdingcompanydeclarationswereapproved. thecreditisusedtopurchaseorcarrypubliclyheld equitysecuritiesif theloanissecuredbythoseor PublicNoticeofFederalReserveDecisions otherpubliclyheldequitysecurities.TheBoard’s CertaindecisionsbytheFederalReservethatinvolve RegulationXappliesthesecreditlimitations,ormaranacquisitionbyaBHC,abankmerger,achangein ginrequirements,tocertainborrowersandtocertain control,ortheestablishmentof anewU.S.banking creditextensions,suchascreditobtainedfromforpresencebyaforeignbankaremadeknowntothe eignlendersbyU.S.citizens. publicbyanorderoranannouncement.Ordersstate thedecision,theessentialfactsof theapplicationor SeveralregulatoryagenciesenforcetheBoard’ssecunotice,andthebasisforthedecision;announcements ritiescreditregulations.TheSEC,theFinancial stateonlythedecision.Allordersandannounce- IndustryRegulatoryAuthority,andtheChicago mentsaremadepublicimmediately;theyaresubse- BoardOptionsExchangeexaminebrokersanddealquentlyreportedintheBoard’sweeklyH.2statistical ersforcompliancewithRegulationT.Withrespectto release.TheH.2releasealsocontainsannouncements compliancewithRegulationU,thefederalbanking of applicationsandnoticesreceivedbytheFederal agenciesexaminebanksundertheirrespectivejuris- Reserveuponwhichactionhasnotyetbeentaken. dictions;theFarmCreditAdministrationandthe Foreachpendingapplicationandnotice,therelated NCUAexaminelendersundertheirrespectivejuris- H.2Areleasegivesthedeadlineforcomments.The dictions;andtheFederalReserveexaminesother Board’swebsite(www.federalreserve.gov)provides RegulationUlenders.

111 Consumer and Community Affairs TheDivisionof ConsumerandCommunityAffairs • supportingnationalandlocalagenciesandorgani- (DCCA)hasprimaryresponsibilityforcarryingout zationsthatworktoprotectandpromotecommutheBoard’sconsumerprotection,supervision,and nitydevelopmentandeconomicempowermentfor communitydevelopmentprograms.DCCAaugments historicallyunderservedcommunities itsexpertiseinconsumerprotectionlaw,regulation, andpolicywithresourcesfromotherfunctionsof the OnJuly21,2011,muchof theBoard’srulewriting BoardandtheFederalReserveSystemtowriteand andsomeof itssupervisoryauthorityregardingconinterpretregulations,educateandinformconsumers, sumerprotectiontransferredtotheCFPB,whichwas andenforcelawsandregulationsforconsumerfinan- establishedundertheDodd-FrankWallStreet cialproductsandservices. ReformandConsumerFinancialProtectionAct(the Dodd-FrankAct)toconductrulemaking,supervise Throughout2011,thedivisionengagedinsignificant largeinsureddepositoryinstitutionsandcredit activitiestofurtherconsumerprotectionandcommu- unions(andtheiraffiliates)forcompliancewithfednitydevelopment,whilealsosupportingthetransfer eralconsumerfinanciallaws,andtoenforcethose of certainrulesandsupervisoryresponsibilitiestothe laws.1 recentlyformedConsumerFinancialProtection Bureau(CFPB).Keyelementsof thedivision’spro- TheBoardretainssupervisoryauthorityforstate gram,include memberbankswithassetsof $10billionorless,as wellasresponsibilityforexaminationsof allstate • draftingandproposingregulationstoimplement memberbanks,regardlessof assetsize,forcomplilegislation,updatingregulations,designingdiscloancewiththeCommunityReinvestmentAct,Fair surestoprovideconsumersconsistentandvital HousingAct,Servicemembers’CivilRelief Act,and informationonfinancialproducts,andprohibiting otherlaws.Inaddition,DCCAcontinuestopromote unfairanddeceptiveactsandpractices communitydevelopmentandneighborhoodrevital- • supervisingstatememberbanksandbankholding ization,advisetheBoardontheimplicationsof ecocompaniesandtheirnonbankaffiliatestoenforce nomicandsupervisorypoliciesonconsumerprotecconsumerprotectionlawsandregulations tion,andconductresearchonconsumerfinancial behaviorsandpolicies. • processingconsumercomplaintsandinquiriesto helpconsumersresolvegrievanceswiththeirfinancialinstitutionsandtoanswertheirquestions Rulemaking and Regulations • conductingresearchonconsumerdecisionmaking Mortgage Transactions regardingfinancialservicestobetterunderstand consumers’choices In2011,theFederalReserveissuedproposedand • researchingtheimplicationsof policyonconsumer finalrulestoimplementvariousaspectsof theDoddfinancialmarkets 1 Foradditionalinformation,seetheConsumerFinancialProtec- • reachingouttonationalandlocalgovernment tionBureau’swebsiteatwww.consumerfinance.govand“Superagencies,consumerandcommunitygroups,aca- visoryStatement:DeterminationofDepositoryInstitutionand demia,andindustrytogainabroadrangeof per- CreditUnionAssetSizeforPurposesofSection1025and1026 oftheDodd-FrankWallStreetReformandConsumerProtecspectives,andtoinformpolicydecisionsandhightionAct”atwww.federalreserve.gov/newsevents/press/bcreg/ lighteffectivepractices bcreg20111117a1.pdf.

112 98thAnnualReport|2011 FrankActasitrelatestocertainhomemortgages. andinsuranceassociatedwithamortgageloanaffect Manyof theproposedrulemakingstransferredtothe theoverallcostsof thetransaction.2 CFPBtobefinalized. AbilitytoRepay EscrowAccounts InApril,theFederalReserveBoardissuedapro- InlateFebruary,theFederalReserveissuedafinal posedrulethatwouldrequirecreditorstodetermine ruleunderRegulationZ(TruthinLending)pursuant aconsumer’sabilitytorepayamortgagebeforemaktotheDodd-FrankActthatincreasestheannualper- ingtheloanandwouldestablishminimummortgage centagerate(APR)thresholdusedtodetermine underwritingstandards.3 whetheramortgagelenderisrequiredtoestablishan escrowaccountforpropertytaxesandinsurancefor Theproposedruleappliedtoallconsumermortfirst-lien,“jumbo”mortgageloans.Loanssubjectto gages,excepthomeequitylinesof credit,timeshare thisrulearedefinedasloansexceedingtheconform- plans,reversemortgages,ortemporaryloans. ingloan-sizelimitforpurchasebytheFederalHome LoanMortgageCorporation(FreddieMac),as Theproposalprovidedfouroptionsforacreditorin specifiedbythelegislation.Underthisrule,the complyingwiththeability-to-repayrequirement: escrowrequirementappliestofirst-lienjumboloans 1. Considerandverifyspecifiedunderwritingfaconlyif theloan’sAPRishigherthantheaverage tors,suchastheconsumer’sincomeorassets. primeofferrateby2.5percentagepointsormore. 2. Makea“qualifiedmortgage,”whichprovidesthe AsecondrulewasproposedundertheDodd-Frank creditorwithspecialprotectionfromliabilityif Actthatwouldexpandtheminimumperiodforman- theloandoesnothavecertainfeatures,suchas datoryescrowaccountsforfirst-lien,higher-priced negativeamortization;thefeesarewithinspecimortgageloansfromoneyeartofiveyears.Under fiedlimits;andthecreditorunderwritesthemortcertaincircumstances,suchaswhentheloanisdelin- gagepaymentusingthemaximuminterestratein quentorindefault,theminimumperiodformandathefirstfiveyears.4 toryescrowcouldbeevenlonger.Theproposedrule 3. Forlendersoperatingpredominantlyinruralor wouldprovideanexemptionfromtheescrowrequireunderservedareas,makeaballoon-payment mentforcertaincreditorsthatoperatein“ruralor qualifiedmortgage.Thisoptionwasmeantto underserved”counties,asauthorizedbythelegislapreserveaccesstocreditforconsumerslocatedin tion.TheproposalwouldalsoimplementtheDoddruralorunderservedareaswherebanksoriginate FrankActrequirementthatconsumersreceivedisballoonloanstohedgeagainstinterestraterisk closuresatleastthreebusinessdaysbeforeconsumforloansheldinportfolio. mationof amortgageloantoexplain,asapplicable, howtheescrowaccountworksortheeffectsof not 4. Refinancea“non-standardmortgage”withrisky havinganescrowaccountif oneisnotbeingestab- featuresintoamorestable“standardmortgage” lished.UndertheDodd-FrankAct,consumersmust withalowermonthlypayment.Thisoptionwas alsoreceivedisclosuresthreedaysbeforeanescrow meanttopreserveaccesstostreamlined accountisclosed. refinancings. Oneconcernthatemergedfromthemortgagecrisis Provisionsof theproposalweredesignedtoalso wasthatsomesubprimeloansdidnotrequirean implementDodd-FrankActlimitsonprepayment escrowaccountfortaxesandinsuranceand,asa penalties.Theproposedrevisionstotheregulation, result,borrowersexperiencedpaymentshockwhen whichimplementtheTruthinLendingAct(TILA), theywererequiredtopaythesecostsoutsideof their weremadepursuanttotheDodd-FrankAct,which monthlymortgagepayment. alsotransferredgeneralrulemakingauthorityfor 2 FormoreinformationabouttheFederalReserve’sfinalandpro- Theaimof thefinalandproposedrulesistoensure posedregulationsrelatingtoescrowaccounts,gotowww moremortgageborrowersareawareof howtaxes .federalreserve.gov/newsevents/press/bcreg/20110223b.htm. 3 FormoreinformationabouttheFederalReserve’sability-torepayproposal,gotowww.federalreserve.gov/newsevents/press/ bcreg/20110419a.htm. 4 TheBoardissolicitingcommentontwoalternativeapproaches fordefininga“qualifiedmortgage.”

ConsumerandCommunityAffairs 113 TILAtotheCFPB.Thus,theproposedruleswere areasof uncertaintysothatcardissuersfullyundertransferredtotheCFPBtobefinalized. standtheircomplianceobligations. Credit Cards and Open-End Credit Plans Inordertoprotectconsumersfromincurringunaffordablelevelsof creditcarddebt,theCreditCard InMarch,theBoardamendedRegulationZto Actrequiresthat,beforeopeninganewcreditcard clarifyaspectsof rulespreviouslyissuedbythe accountorincreasingthecreditlimitonanexisting BoardimplementingtheCreditCardAccountability account,cardissuersconsideraconsumer’sabilityto ResponsibilityandDisclosureActof 2009(the maketherequiredpaymentsontheaccount.As CreditCardAct).5Theamendmentsenhanceprotec- directedbytheCreditCardAct,theBoard’srule tionsforconsumerswhousecreditcardsandresolve addressespracticesthatcanresultinextensionsof credittoconsumerswholacktheabilitytopay.Spe- 5 FormoreinformationabouttheFederalReserve’sruletopro- cifically,therulestatesthatcreditcardapplications tectconsumersfromincurringunaffordablelevelsofcreditcard generallycannotrequestaconsumer’s“household debt,gotowww.federalreserve.gov/newsevents/press/bcreg/ 20110318b.htm. income”becausethattermistoovaguetoallowissu- Box 1. The Impact of the Dodd-Frank Act on DCCA ImplementationoftheDodd-FrankWallStreet programs,implementsexaminertrainingandcom- ReformandConsumerProtectionActof2010(the missioningprograms,andreviewsandanalyzes Dodd-FrankAct)haduniqueimplicationsforthe bankingapplications. Board’sDivisionofConsumerandCommunityAffairs TheDodd-FrankActmandatesnewcoordinationand (DCCA).ThestatutecreatedtheConsumerFinancial cooperationamongfederalbankingagencieswith ProtectionBureau(CFPB),andtransferredtothe respecttotheCFPB.TheCFPBisrequiredtocoordi- CFPBmuchoftheBoard’srulewritingauthority natesupervisoryactivitiesandconductsimultaneous regardingconsumerfinancialservicesandfairlendexaminationswithprudentialregulators,aswellas inglawsasofJuly21,2011. sharedraftreports,andtoconsultthefederalbank- However,theBoardretainsrulewritingauthorityfor ingagenciesinexercisingitsrulemakingfunctions. theCommunityReinvestmentAct(CRA)andforcer- DCCAstaffservesastheCFPB’sprimarypointof tainentitiesunderspecificstatutoryprovisions.For contactforthesecoordinatingactivities,andconsults example,undertheEqualCreditOpportunityAct,the withotherBoarddivisionstoprovidecommentsto Boardmustissuerulesfordatacollectionbymotor theCFPBasnecessary.BoardandReserveBank vehicledealersontheirlendingtowomen-and staffmonitorCFPBregulatoryactionsandassess minority-ownedbusinessesandsmallbusinesses. potentialimplicationsforconsumers,financialinstitu- TheBoardwillalsoissueinteragencyrulestoimple- tions,andtherelevantmarketstohelpsupportthe mentprovisionsoftheTruthinLendingActconcern- ChairmaninhispositionontheFinancialStability ingrealestateappraisals. OversightCouncil. TheBoardalsoretainssupervisoryandexamination Inadditiontothesesupervisoryresponsibilities, oversightauthorityformorethan800statemember DCCAhasexpandeditsworkincommunitydevelopbankswithassetsof$10billionorlessfortheircom- ment,policyanalysis,andconsumerresearch. pliancewithconsumerprotectionlawsandregula- Becauseunderstandingconsumerfinancialservices tions.Asaresult,DCCAwillcontinuetodevelopand issuesandmeetingthefinancialneedsofunderimplementexaminationpolicyandprogramsfor servedmarketsremaintopprioritiesfortheBoard, theseinstitutions.TheBoardalsocontinuestoover- staffanalyzeissuesandmonitornewdevelopments. seeallstatememberbanks,regardlessofsize,for Thisprocessincludesoutreachtoabroadrangeof theircompliancewiththeCRA,theFairHousingAct, leadersfromindustry,government,academic,think theFederalTradeCommissionAct,theServicemem- tank,andcommunityorganizations.Suchoutreach bers’CivilReliefAct,andotherlaws.DCCAstaffwill andresearchinformsDCCA’sworkonissuessuchas continuetoconductconsolidatedsupervisoryactivi- housing,smallbusiness,neighborhoodstabilization, tiesforbankholdingcompanies,assessingcon- underservedmarkets,andcommunityeconomic sumercomplianceriskattheenterprise-widelevel development.Withtheseroles,DCCAwillcontinueto andincorporatingtheseanalysesintotheinstitution’s bringforthconsumerprotectionandcommunity overallsupervisorystanding.Withtheseongoing developmentperspectiveswithinbroaderfederal supervisoryresponsibilities,DCCAoverseesthe effortstosupporttheAmericaneconomy. system’sconsumercompliancesupervision

114 98thAnnualReport|2011 erstoproperlyevaluatetheconsumer’sabilitytopay. Credit Score Disclosure Instead,issuersmustconsidertheconsumer’sindividualincomeorsalary. InconjunctionwiththeFederalTradeCommission (FTC),theBoardissuedfinalrulesinJulytoimple- Inaddition,theBoard’sruleclarifiesthatpromo- mentrequirementsof theDodd-FrankActstipulattionalprogramsthatwaiveinterestchargesfora ingthatif acreditscoreisusedinsettingmaterial specifiedperiodof timearesubjecttothesame termsof creditorintakingadverseaction,creditors CreditCardActprotectionsaspromotionalpro- mustdisclosecreditscoresandrelatedinformationto gramsthatapplyareducedrateforaspecified consumersinnoticesundertheFairCreditReporting period.Forexample,acardissuerthatofferstowaive Act(FCRA).8 interestchargesforsixmonthsisprohibitedfrom revokingthewaiverandcharginginterestduringthe ThefinalrulesamendedRegulationV(FairCredit six-monthperiod,unlesstheaccountbecomesmore Reporting)torevisethecontentrequirementsfor than60daysdelinquent.UndertheBoard’sfinal risk-basedpricingnotices,andtoaddrelatedmodel rule,applicationandsimilarfeesthataconsumeris formsthatreflectthenewcreditscoredisclosure requiredtopaybeforeacreditcardaccountis requirements.Thefinalrulesalsoamendedcertain openedwouldbecoveredbythesameCreditCard modelnoticesinRegulationB(EqualCreditOppor- Actlimitationsasfeeschargedduringthefirstyear tunity),whichcombinetheadverseactionnotice aftertheaccountisopened. requirementsforRegulationBandtheFCRA,to reflectthenewcreditscoredisclosurerequirements. Alawsuitchallengingtheprovisionsof thefinalrule wasfiledinJuly2011andwasstillpendingat Consumer Protection for Credit and year-end. Leases CollegeCreditCardAgreements InMarch,theBoardadoptedtworulestoexpandthe InJuly,theBoardreleasedareportcontainingpay- coverageof consumerprotectionregulationstocredit mentandaccountinformationformorethan1,000 transactionsandleasesof higherdollaramounts.9 agreementsbetweencreditcardissuersandinstitu- TheserulesamendRegulationZ(TILA)andRegulationsof highereducationoraffiliatedorganizations tionM(ConsumerLeasing)toimplementaproviin2010.6TheBoardalsoupdateditsonlinedatabase sionof theDodd-FrankAct,whichrequiresthatthe toincludethefulltextof eachagreementthatwasin protectionsof TILAandtheConsumerLeasingAct effectduring2010andthepaymentandaccounts (CLA)applytoconsumercredittransactionsand informationsubmittedbyissuers.7Usersmayalso consumerleasesupto$50,000.Previously,thelaw searchforagreementsbycardissuer,educational requiredtheseprotectionsfortransactionsandleases institutionororganization,orthecityorstatein upto$25,000.(Privateeducationloansandloans whichtheinstitutionororganizationislocated. securedbyrealproperty(suchasmortgages)aresubjecttoTILAregardlessof theamountof theloan.) TheDodd-FrankActrequiresthatthisamountbe ThereportwasissuedpursuanttotheCreditCard adjustedannuallytoreflectanyincreaseinthecon- Act,whichrequiredissuerstosubmittotheBoard sumerpriceindex;theBoardpublishedthefirst annuallytheiragreementswitheducationalinstituannualadjustmentinJune. tionsoraffiliatedorganizations,suchasalumniassociations.Foreachagreement,issuersarealsorequired Remittances tosubmitinformationregardingpaymentsmadeto theinstitutionororganizationandthenumberof InMay,theBoardproposedaruletocreatenewproaccountsopenedundertheagreement. tectionsforconsumerswhosendremittancetransfers 6 Thereport,FederalReserveBoardofGovernorsReporttothe 8 Formoreinformationonthecreditscoredisclosurerequire- CongressonCollegeCreditCardAgreements,July2011,isavail- ments,gotowww.federalreserve.gov/newsevents/press/bcreg/ ableatwww.federalreserve.gov/boarddocs/rptcongress/ 20110706a.htm. creditcard/2011/downloads/ccap_2011.pdf. 9 Formoreinformationaboutthenewrulesregardinghigh-dollar 7 Theonlinedatabasecanbeaccessedatwww.federalreserve.gov/ amountcredittransactionsandleases,gotowww.federalreserve CollegeCreditCardAgreements. .gov/newsevents/press/bcreg/20110325a.htm.

ConsumerandCommunityAffairs 115 torecipientslocatedinaforeigncountry.10Thepro- forassessingconsumercomplianceriskatthelargest posalwasmadeunderRegulationE(ElectronicFund bankandfinancialholdingcompaniesinthesystem. Transfers)pursuanttotheDodd-FrankAct. Divisionstaff ensureconsumercomplianceriskis effectivelyintegratedintotheconsolidatedsupervi- Theproposedrulerequiredremittancetransferpro- sionof theholdingcompany.Thedivisionalsooverviderstomakecertaindisclosurestosendersof seestheeffortsof the12ReserveBankstoensure remittancetransfers,includinginformationabout thatconsumerprotectionlawsandregulationsare feesandtheexchangerate,asapplicable,andthe fullyandfairlyenforced.Divisionstaff provideguidamountof currencytobereceivedbytherecipient. anceandexpertisetotheReserveBanksonconsumer Inaddition,theproposedruleprovidederrorresolu- protectionregulations,bankandbankholdingcomtionandcancellationrightsforsendersof remittance panyapplicationanalysisandprocessing,examinatransfers.Theauthorityforissuingfinalruleswas tionandenforcementtechniquesandpolicymatters, transferredtotheCFPBinJuly2011. examinertraining,andemergingissues.Staff also reviewReserveBanksupervisoryreports,examina- Data Collection by Motor Vehicle Dealers tionworkproducts,andconsumercomplaintanalysesandresponses.Finally,staff membersparticipate InSeptember,theBoardissuedafinalruleamending ininteragencyactivitiesthatpromoteuniformityin RegulationBtoprovidethatmotorvehicledealers examinationprinciples,standards,andprocesses. arenotrequiredtocomplywiththenewdatacollectionrequirementsintheDodd-FrankActuntilthe Inaddition,throughout2011,thesystemcontinued Boardissuesfinalregulationstoimplementthestatuitspolicyforconductingrisk-focusedconsumercomtoryrequirements.11 pliancesupervisionof,andtheinvestigationof consumercomplaintsagainst,nonbanksubsidiariesof TheDodd-FrankActamendedtheEqualCredit bankholdingcompanies(BHCs)andforeignbank- OpportunityActtorequirecreditorstocollectinforingorganizations(FBOs)withactivitiescoveredby mationaboutcreditapplicationsmadebywomen-or theconsumerprotectionlawsandregulationsthe minority-ownedbusinessesandsmallbusinesses.The FederalReservehastheauthoritytoenforce.This CFPBmustimplementthisprovisionforallcreditors policyisdesignedtoenhanceunderstandingof the exceptcertainmotorvehicledealerswhoaresubject consumercomplianceriskprofileof nonbanksubtotheBoard’sjurisdiction.TheCFPBpreviously sidiariesandtoguidesupervisoryactivitiesforthese announcedthatcreditorsarenotobligatedtocomply entities.Initialsupervisoryactivitiesfirsttargeted withthedatacollectionrequirementsuntiltheCFPB thosenonbanksubsidiariesconsideredtobeof highissuesdetailedrulestoimplementthelaw.TheBoard estrisktotheFederalReserveSystem.12 amendedRegulationBtoapplythesameapproach tomotorvehicledealers. ExaminationsaretheFederalReserve’sprimary methodof enforcingcompliancewithconsumerpro- Oversight and Enforcement tectionlawsandassessingtheadequacyof consumer compliancerisk-managementsystemswithinregulatedentities.Duringthe2011reportingperiod TheBoard’sDivisionof ConsumerandCommunity (July1,2010,throughJune30,2011),theReserve Affairsdevelopsandsupportssupervisorypolicyand Banksconducted279consumercomplianceexamiexaminationproceduresforconsumerprotection nationsof thesystem’s835statememberbanksand lawsandregulations,aswellastheCommunityReintwoexaminationsof foreignbankingorganizations.13 vestmentAct(CRA),aspartof itssupervisionof state-chartered,depositoryinstitutions,andforeign bankingorganizationsthataremembersof theFed- 12 FederalReserveBoardofGovernors,2009ConsumerAffairs eralReserveSystem.Thedivisionalsoadministers Letters,ConsumerComplianceSupervisionPolicyforNonbank SubsidiariesofBankHoldingCompaniesandForeignBanking theFederalReserveSystem’srisk-focusedprogram Organizations,CA-09-8,September14,2009,www .federalreserve.gov/boarddocs/caletters/2009/0908/caltr0908.htm. 10 FormoreinformationabouttheFederalReserve’sproposal regardingprotectionsforconsumerswhosendremittancetrans- 13 TheforeignbankingorganizationsexaminedbytheFederal ferstorecipientsinforeigncountries,gotowww.federalreserve Reserveareorganizationsthatoperateundersection25or25A .gov/newsevents/press/bcreg/20110512a.htm. oftheFederalReserveAct(EdgeActandagreementcorpora- 11 FormoreinformationabouttheFederalReserve’sruleregard- tions)andstate-charteredcommerciallendingcompaniesowned ingdatacollectionbymotorvehicledealers,gotowww orcontrolledbyforeignbanks.Theseinstitutionsarenotsubject .federalreserve.gov/newsevents/press/bcreg/20110920a.htm. totheCommunityReinvestmentActandtypicallyengagein

116 98thAnnualReport|2011 Bank Holding Company Consolidated Throughout2011,theFederalReserveSystemcon- Supervision Program tinuedtoconductrisk-focusedconsumercompliance supervisionof nonbanksubsidiariesof BHCsand During2011,staff intheBHCConsolidatedSupervi- FBOswithregardtoactivitiescoveredbyconsumer sionProgramhadresponsibilityforreviewingmore protectionlawsandregulationstheFederalReserve than90bankandfinancialholdingcompaniesto hastheauthoritytoenforce,andtoinvestigatecerensureconsumercomplianceriskwasappropriately tainconsumercomplaintsagainstnonbanksubsidincorporatedintotheconsolidatedriskassessment iariesof BHCsandFBOs.Thispolicywasdesigned fortheorganization.Throughacombinationof risk- toenhancethesystem’sunderstandingof theconfocused,on-/off-siteexaminationandmonitoring sumercomplianceriskprofileof nonbanksubsidiaractivities,supervisorystaff wereabletoassessthe iesandtoguidesupervisoryactivitiesfortheseentiimpactenterprise-wideconsumerissueshadonthe ties.Initialsupervisoryactivitiesfirsttargetedthose overallriskprofilesof theconsolidatedentity.In nonbanksubsidiariesconsideredtobeof highestrisk addition,perchangesbroughtaboutbytheDodd- totheFederalReserveSystem. FrankAct,supervisoryfunctionsrelatedtosavings andloanholdingcompanies(SLHCs)weretrans- SupervisoryMatters ferredtotheBoard,andSLHCswereaddedtothe InJuly2011,theBoardissuedaconsentceaseand portfolioof entitiescoveredbytheConsolidated desistorderagainstWellsFargo&Companyandits SupervisionProgram. subsidiary,WellsFargoFinancial,Inc.,forlackof sufficientcontrolsintherefinancingof existinghome BHCConsolidatedSupervisionProgramstaff also mortgages.14Theorderassesseda$85millioncivil participatedjointlywithstaff of theBoard’sDivision moneypenalty,thelargestpenaltyinaconsumerof BankingSupervisionandRegulationonnumerous protectionaction,andisthefirstenforcementaction Dodd-FrankActrelatedimplementationprojects takenbyafederalbankingregulatoraddressing regardingsupervisoryassessmentfees,consolidated allegedsteeringof borrowerstohigher-costloans. supervision,andthriftholdingcompanyintegration. TheorderallegesthatWellsFargoFinancialsteered Also,aspartof theconsolidatedsupervisionof borrowerswhopotentiallywereeligibleforprimerate BHCs,staff participatedinthereviewsof mortgage loanstosubprimeloans.Additionally,theorder servicingandforeclosureprocessingatfourof the14 addressesallegationsthatWellsFargoFinancial federallyregulatedmortgageservicersthattookplace employeesfalsifiedborrowers’incomeinaneffortto betweenNovember2010andJanuary2011,andthat qualifytheborrowersforloanstheyotherwisewould resultedinenforcementactionsinApril2011.Pro- havenotqualifiedforbasedontheiractualincome. gramstaff monitorcompliancewiththeprovisionsin theconsentordersfortheservicersandBHCsto Thedeficienciesnotedintheorderallegeunsafeand ensurethatnoteddeficienciesarecorrected,future unsoundbankingpracticesandunfairordeceptive abusesintheloanmodificationandforeclosurepro- actsandpractices.TheorderrequiresWellsFargo cessareprevented,andborrowersarecompensated Financialtocompensateborrowersaffectedbythe forfinancialinjurytheysufferedasaresultof errors, practicesbetweenJanuary2006andJune2008,and misrepresentations,orotherdeficienciesinthefore- todevelopspecificplanstoidentifyandcompensate closureprocess(seebox2). theaffectedborrowers.TheBoardisrequiredto approvethecompensationplansandwillmonitor ongoingcompliancewiththeapprovedplans. relativelyfewactivitiescoveredbyconsumerprotectionlaws. Thereare197suchinstitutionsthroughouttheFederalReserve 14 SeePressRelease(July20,2011),availableatwww.federalreserve System. .gov/newsevents/press/enforcement/20110720a.htm.

ConsumerandCommunityAffairs 117 Community Reinvestment Act Compliance encouraginginstitutionstomeetcommunitycredit needs.16 TheCRArequiresthattheFederalReserveandother federalbankingandthriftagenciesencouragefinan- MergersandAcquisitions cialinstitutionstohelpmeetthecreditneedsof the inRelationtotheCRA localcommunitiesinwhichtheydobusiness,consis- During2011,theBoardconsideredandapproved10 tentwithsafeandsoundoperations.Tocarryoutthis bankingmergerapplicationsthatwereprotestedon mandate,theFederalReserve CRAorfairlendinggroundsorthatraisedissues involvingconsumercomplianceortheCRA.17 • examinesstatememberbankstoassesstheircompliancewiththeCRA • AnapplicationbyTheGoldmanSachsGroup, Inc.,NewYork,NewYork,toretain9.8percentof • analyzesapplicationsformergersandacquisitions theoutstandingcommonstockof AvenueFinanbystatememberbanksandbankholdingcompacialHoldings,Inc.,of Nashville,Tennessee,was niesinpartwithinthecontextof CRA approvedinMarch.18 performance • AnapplicationbyFirstNiagaraFinancialGroup, • disseminatesinformationaboutcommunitydevel- Inc.andFNFGMergerSub,Inc.,bothof Buffalo, opmenttechniquestobankersandthepublic NewYork,toacquireNewAllianceBancshares, throughCommunityDevelopmentofficesatthe Inc.,NewHaven,Connecticut,wasapprovedin ReserveBanks March. TheFederalReserveassessesandratestheCRAper- • AnapplicationbyM&TBankCorporation,Bufformanceof statememberbanksinthecourseof falo,NewYork,toacquireWilmingtonTrustCorexaminationsconductedbystaff atthe12Reserve poration,Wilmington,Delaware,wasapprovedin Banks.Duringthe2011reportingperiod,theReserve April. Banksconducted250CRAexaminationsof state • AnapplicationbyHancockHoldingCompany, memberbanks.Of thosebanksexamined,28were Gulfport,Mississippi,toacquireWhitneyHolding rated“Outstanding,”215wererated“Satisfactory,” Corporation,NewOrleans,Louisiana,was sevenwererated“NeedstoImprove,”andnonewere approvedinMay. rated“SubstantialNon-Compliance.” • AnapplicationbyBankof Montreal,Toronto, Duringthesummerof 2010,theFederalReserveand Canada,toacquireMarshall&IlsleyCorporation, theotherfederalbankingandthriftregulatoryagen- Milwaukee,Wisconsin,wasapprovedinJune. ciesheldpublichearingsinfourcities(Arlington, • AnapplicationbyComerica,Incorporated,Dallas, Virginia;Atlanta,Georgia;Chicago,Illinois;andLos Texas,toacquireSterlingBancshares,Houston, Angeles,California),andinvitedpubliccommenton Texas,wasapprovedinJuly. waysthattheregulationsimplementingtheCRA couldberevisedtobetterreflectcurrentbanking • AnapplicationbyCentennialBank,Conway, practices.Inadditiontopublichearings,theagencies Arkansas,toestablishamobilebranchtoserve invitedwrittencomments,andtheFederalReserve Bay,Calhoun,Franklin,Gulf,Lake,Leon,Liberty, receivednearly1,200commentletters.15Inputfrom Orange,andSeminoleCountiesinFloridawas thehearingsandthecommentletterscontinuetobe approvedunderdelegatedauthorityinJuly. consideredaspartof theprocessforupdatingCRA regulationsthathasbeenunderwaythroughout2011. Theagenciesarealsoconsideringupdatestothe 16 ForadditionalinformationontheroleoftheCommunityReinvestmentAct,seewww.federalreserve.gov/newsevents/speech/ regulationsandexaminationpoliciestoreflect yellen20110609a.htm. changesinthefinancialservicesindustry,including 17 Anotherprotestedapplicationwaswithdrawnbytheapplicant. howbankingservicesaredeliveredtoconsumers,to FormoreinformationonOrdersonBankingApplicationsin ensurethattheCRAcontinuestobeeffectivein 2011,gotowww.federalreserve.gov/newsevents/press/orders/ 2011orders.htm. 18 TwootherapplicationsbyTheGoldmanSachsGroup,Inc., wereapprovedunderdelegatedauthority.Thesewereapplicationstoretain9.0percentoftheoutstandingcommonstockof AtlanticCapitalBancshares,Inc.,Atlanta,Georgia,andto 15 ForadditionalinformationonCRArules,seewww retainitsinterestinTheFirstMarbleheadCorporation,Boston, .federalreserve.gov/newsevents/press/bcreg/20101215a.htm. Massachusetts.

118 98thAnnualReport|2011 Box 2. The Foreclosure Crisis: Federal Reserve Enforcement Action Thefinancialcrisisandmeltdownofthemortgage toestablishservicingandforeclosureprocessesthat marketthatbeganin2008markedthebeginningof treatcustomersfairly,arefullycompliantwithall asharpriseinforeclosuresthathasnotbeenseen applicablelaw,andaresafeandsound.2ThebanksincetheGreatDepression.Bythefourthquarterof ingorganizationsthathaveservicingentitiesregu- 2010,2.4millionmortgageloanswereatsomepoint latedbytheBoardwerealsoassessedmonetary intheforeclosureprocessandanothertwomillion sanctionstotalingabout$767million.3Consent loanswere90ormoredayspastdueandatriskof ordersrequiredthesemortgageservicerstohire foreclosure. independentconsultantstodevelopactionplansfor remedyingborrowerswhohadbeenharmedbythe Inthemidstofthiswaveofforeclosures,concerns firms’deficientpractices.4Mortgageservicerswere surfacedaboutimproperforeclosureprocessing alsorequiredtoconductbroadoutreachtoalertconpracticesbysomemortgageservicers;alleged sumersoftheopportunitytoapplyforconsideration improperpracticesrangedfromfaultypaperwork forremedy.Toassistinthiseffort,theBoard processestowrongfulforeclosure.Togaininsight launchedaconsumereducationcampaignonits intothesematters,theFederalReserveSystem, websiteandconductedwebinartrainingstoeducate alongwiththeOfficeoftheComptrolleroftheCur- housingcounselorsontheprocess.5 rency,theOfficeofThriftSupervision,andtheFederalDepositInsuranceCorporation,conducted Theseenforcementactionsarejustoneelementof on-sitereviewsof14federallyregulatedmortgage theFederalReserve’songoingeffortstoassistconservicersthatcollectivelyrepresentmorethantwo- sumersandcommunitiesdealingwiththeaftermath thirdsoftheservicingindustry,ornearly36.7million ofthemortgageandforeclosurecrisis.Themortmortgages.1ThisprocessbeganinNovember2010 gageservicingremediationprocesscontinues andwasconcludedinJanuary2011. through2012,andtheBoardwillcontinuetoworkto ensurethatafairandimpartialprocessforredress Thereviewfoundcriticalweaknessesinthefirms’ isavailabletoborrowerswhowereharmedbyserforeclosuregovernanceprocesses,foreclosure vicererrors,misrepresentations,orotherforeclosure documentationprocesses,staffingandtraining,and deficiencies. oversightandmonitoringofthird-partylawfirmsand othervendors,aswellasundueemphasisonquantitativeproductionandtimeliness.Theseweak- 2 SeePressRelease(April13,2011),availableatwww nessesinvolvedunsafeandunsoundpractices,vio- .federalreserve.gov/newsevents/press/enforcement/20110413a lationsoffederalandstatelaws,andapatternof .htm. misconductandnegligencebythemortgage 3 SeePressRelease(February9,2012),availableatwww servicers. .federalreserve.gov/newsevents/press/enforcement/20120209a .htm. InApril2011,theBoardissuedformalenforcement 4 SeePressRelease(February27,2012),availableatwww actionsagainsttenbankingorganizationsunderits .federalreserve.gov/newsevents/press/enforcement/20120227a .htm. jurisdiction,requiringthemtopromptlyinitiatesteps 5 SeeWhatYouNeedtoKnow:IndependentForeclosureReview (www.federalreserve.gov/consumerinfo/independent-foreclosure- 1 SeeInteragencyReviewofForeclosurePoliciesandPracticesat review.htm)and“IndependentForeclosureReviewprocess www.federalreserve.gov/boarddocs/rptcongress/interagency_ webinartrainingforhousingcounselors”(www.federalreserve review_foreclosures_20110413.pdf. .gov/consumerinfo/housing-counselors-webinar.htm). • AnapplicationbyGreenDotCorporation,Mon- Membersof thepublichadtheopportunitytosubrovia,California,toacquireBonnevilleBancorp, mitcommentsontheseapplications;theircomments Provo,Utah,wasapprovedinNovember. raisedvariousissues.Severalcommenterscitedfailuretomakecreditavailabletocertainminority • AnapplicationbyBrooklineBancorp,Inc., groupsandtolow-andmoderate-incomeindividuals Brookline,Massachusetts,toacquireBancorp andinlow-andmoderate-incomegeographies.Com- RhodeIsland,Inc.,Providence,RhodeIsland,was mentersalsocitedpredatoryanddiscriminatorylendapprovedinDecember. ingpracticeswithrespecttoresidentialmortgages • AnapplicationbyBancodeBrasil,S.A.,Brasilia andsmallbusinessloansaswellasfailuretoprovide andCaixadePrevidenciadosFuncionariosdo reversemortgagecandidateswithcounselinginviola- BancodoBrasil,RiodeJaneiro,Brazil,toacquire tionof statelaw.Othercommentersallegedpreda- EuroBank,CoralGables,Florida,wasapprovedin toryservicingandunethicalbusinesspractices.Sev- December. eralcommentswarnedof inadequateplanstomeet 35 444

ConsumerandCommunityAffairs 119 communities’creditneedsandareductioninaccess involvedunfairanddeceptivepracticesaswellas tocreditforaffectedcommunities.Additionally,com- concernsaboutstoredvaluecards.Eighty-oneof mentersexpressedgeneralconcernsaboutCRA, thoseapplicationswereapprovedandeightwere includingconcernsthatbranchesinpredominantly withdrawn. minoritycensustractswerenotproportionateto thepercentageof thepopulationresidinginthose Fair Lending Enforcement tracts. TheFederalReserveiscommittedtoensuringthat InapprovingtheapplicationbyGreenDotCorpora- theinstitutionsitsupervisescomplyfullywiththe tiontobecomeabankholdingcompany,byconvert- federalfairlendinglaws—theEqualCreditOpportuingBonnevilleBankfromaretailbanktoa“mono- nityAct(ECOA)andtheFairHousingAct.The line”prepaiddebitcardbank,theBoardconsidered ECOAprohibitscreditorsfromdiscriminating theinherentrisksof abankwithoneprimaryprod- againstanyapplicant,inanyaspectof acredittransuct,thesafeguardsestablishedtoreducethoserisks, action,onthebasisof race,color,religion,national andwaysinwhichthebankwouldmeetitsCRA origin,sex,maritalstatus,orage.Inaddition,crediobligations. torsmaynotdiscriminateagainstanapplicant becausetheapplicantreceivesincomefromapublic assistanceprogramorhasexercised,ingoodfaith, Inaddition,anapplicationbyCapitalOneFinancial anyrightundertheConsumerCreditProtectionAct. Corporation,McLean,Virginia,toacquireING, TheFairHousingActprohibitsdiscriminationin FSB,Wilmington,Delaware(ING),wasfiledinJuly, residentialrealestate-relatedtransactions,including andmorethan900commentsweresubmittedby themakingandpurchasingof mortgageloans,on individualsandcommunitygroups,almosttwo-thirds thebasisof race,color,religion,sex,handicap,familof whichopposedthemerger.Theproposalwasone ialstatus,ornationalorigin. of thefirstof itskindtobesubjecttothefinancial stabilityfactormandatedbytheDodd-FrankAct. SupervisoryMatters TheBoardheldthreepublicmeetingsregardingthis proposal:inWashington,D.C.,onSeptember20, TheFederalReservesupervisesapproximately825 2011;inChicago,Illinois,onSeptember27,2011; statememberbanks.Pursuanttoprovisionsof the andinSanFrancisco,California,onOctober5,2011. Dodd-FrankAct,effectiveonJuly21,2011,the TheBoardalsoextendedthecommentperiodfrom CFPBsupervisesstatememberbankswithassetsof August22,2011,toOctober12,2011,toallowmem- morethan$10billionforcompliancewiththe bersof thepublicadditionaltimetosubmitcom- ECOA,whiletheBoardretainssupervisoryauthority mentsontheproposal.Commentersexpressedcon- forcompliancewiththeFairHousingAct.Forthe cernsaboutCapitalOne’sundueconcentrationin approximately800statememberbankswithassetsof creditcardsandinadequateaffordablemortgageand $10billionorless,theBoardretainstheauthorityto smallbusinesslendinggivenitsnationwidecredit enforceboththeECOAandtheFairHousingAct. cardlendinganddeposit-takingactivities.CommentersurgedtheBoardtodelayordenytheproposal Fairlendingreviewsareconductedregularlywithin untiltheCRAregulationhasbeenreformedto thesupervisorycycle.Additionally,examinersmay accommodatesuchnationwidelendersaswellas conductfairlendingreviewsoutsideof theusual internetbanks,suchasING.Commenterscontended supervisorycycle,if warrantedbyfairlendingrisk. thatanypublicbenefitswouldbeinadequatetooffset Whenexaminersfindevidenceof potentialdiscrimitheincreaseinriskposedtothefinancialsystem nation,theyworkcloselywiththedivision’sFair givenprojectedincreasesinCapitalOne’ssizeand LendingEnforcementSection,whichbringsaddicomplexity.Theproposalultimatelywasapprovedin tionallegalandstatisticalexpertisetotheexamina- February2012.19 tionandensuresthatfairlendinglawsareenforced consistentlyandrigorouslythroughouttheFederal ReserveSystem. TheBoardalsoconsidered89applicationswithoutstandingissuesinvolvingcompliancewithconsumer protectionstatutesandregulations,includingfair PursuanttotheECOA,if theBoardhasreasonto lendinglawsandtheCRA.Someof thoseissues believethatacreditorhasengagedinapatternor practiceof discriminationinviolationof theECOA, thematterwillbereferredtotheU.S.Departmentof 19 SeePressRelease(February14,2012),availableatwww .federalreserve.gov/newsevents/press/orders/20120214a.htm. Justice(DOJ).TheDOJreviewsthereferraland

120 98thAnnualReport|2011 determineswhetherfurtherinvestigationiswar- soonastheybecomeawareof aproblem.Thus,the ranted.ADOJinvestigationmayresultinapublic FederalReservegenerallyusesinformalsupervisory civilenforcementactionorsettlement.Alternatively, tools(suchasmemorandaof understandingbetween theDOJmaydecidetoreturnthemattertothe thebank’sboardof directorsandtheReserveBank, Boardforadministrativeenforcement.Whenamat- orboardresolutions)toensurethatviolationsare terisreturnedtotheBoard,staff ensuresthatthe corrected.If necessarytoprotectconsumers,howinstitutiontakesallappropriatecorrectiveaction. ever,theBoardcanbringpublicenforcementactions. During2011,theBoardreferredthefollowingfive FinancialFraudEnforcementTaskForceand matterstotheDOJ: OtherOutreach Asanactivememberof theFinancialFraud • Onereferralinvolveddiscriminationonthebasisof EnforcementTaskForce(FFETF),theBoardcoornationalorigin,inviolationof theECOAandthe dinateswithotheragenciestofacilitateconsistent FairHousingAct.Thelenderchargedborrowers andeffectiveenforcementof thefairlendinglaws. feesthatwereidentifiedasdiscountpoints,butthat TheDirectorof theBoard’sDivisionof Consumer didnotactuallyresultinaproportionaldecreasein andCommunityAffairsco-chairstheFFETF’sNontheinterestrate(unearneddiscountpoints).The DiscriminationWorkingGroupwiththeAssistant practiceviolatedSection5of theFederalTrade AttorneyGeneralforDOJ’sCivilRightsDivision, CommissionAct,andhadadisparateimpacton theDeputyGeneralCounselof theU.S.Department Hispanicborrowers. of HousingandUrbanDevelopment,theAssistant • Onereferralinvolveddiscriminationonthebasisof Directorof theCFPB’sOfficeof FairLendingand sex,inviolationof theECOAandtheFairHous- EqualOpportunity,andtheNationalAssociationof ingAct,andonthebasisof familialstatus,invio- AttorneysGeneral,representedbytheAttorneyGenlationof theFairHousingAct.Thelenderfailedto eralfortheStateof Illinois.Theworkinggroup considerawoman’semploymentstatusandreason- monitorsnewpracticesandtrendstoproactively ablyexpectedincomewhileshewasonunpaid addressfairlendingissues.TheBoardhastakena maternityleaveundertheFamilyandMedical leadroleintheworkinggroup’sefforttoanalyzedata LeaveAct. onTreasury’sHomeAffordableModificationProgramforanyevidenceof potentialdiscriminationby • Onereferralinvolveddiscriminationonthebasisof participatingservicers.TheBoardandtheNonmaritalstatusandage,inviolationof theECOA. DiscriminationWorkingGrouphavealsosponsored Thelendertreatedunmarriedjointapplicantsdifoutreacheventsforlocalhousingorganizations,comferentlythanmarriedjointapplicantsandapplimunitygroups,andfinancialinstitutions.These cants21yearsoldoryoungerdifferentlythanolder eventshaveincludedlisteningsessionsaswellasa applicantsinunderwritingforconsumercredit. freeinteragencywebinarthathadover6,000regis- • Onereferralinvolveddiscriminationonthebasisof trants,mostof whichwerecommunitybanks. sexandmaritalstatusincreditreporting,inviolationof theECOA.Thelenderfailedtoprovide Inaddition,theFederalReserveparticipatesin informationtoconsumerreportingagenciesabout numerousmeetings,conferences,andtrainingssponthepaymenthistoryof spouses(almostallof soredbyconsumeradvocates,industryrepresentawhomwerewomen)thatwerecontractuallyobli- tives,andinteragencygroups.FairLendingEnforcegatedonthenote. mentstaff meetsregularlywithconsumeradvocates, supervisedinstitutions,andindustryrepresentatives • Onereferralinvolveddiscriminationonthebasisof todiscussfairlendingmattersandreceivefeedback. maritalstatus,inviolationof theECOA.Thebank Throughthisoutreach,theBoardisabletoaddress improperlyrequiredspousalguaranteesandsigna- emergingfairlendingissuesandpromotesoundfair turesoncommercialoragriculturalloans,inviola- lendingcompliance. tionof RegulationB. Flood Insurance If afairlendingviolationdoesnotconstituteapatternorpractice,theFederalReserveactsonitsown TheNationalFloodInsuranceActimposescertain toensurethattheviolationisremediedbythebank. requirementsonloanssecuredbybuildingsormobile Mostlendersreadilyagreetocorrectfairlendingvio- homeslocatedin,ortobelocatedin,areasdeterlations.Infact,lendersoftentakecorrectiveactionas minedtohavespecialfloodhazards.UndertheFed-

ConsumerandCommunityAffairs 121 eralReserve’sRegulationH,whichimplementsthe forapplicationstheyreceiveonorafterJanuary30, act,statememberbanksaregenerallyprohibited 2011. frommaking,extending,increasing,orrenewingany • RevisedInteragencyExaminationProceduresfor suchloanunlessthebuildingormobilehome,aswell RegulationZ:LoanOriginatorCompensation.Proasanypersonalpropertysecuringtheloan,arecovcedureswererevisedtoincorporatefinalRegulaeredbyfloodinsuranceforthetermof theloan.The tionZruleswithanApril1,2011,effectivedate. lawrequirestheBoardandotherfederalfinancial Specifically,therulesprohibitloanoriginators institutionregulatoryagenciestoimposecivilmoney fromreceivingcompensationthatisbasedonthe penaltieswhentheyfindapatternorpracticeof viointerestrateorotherloanterms,excepttheamount lationsof theregulation.Thecivilmoneypenalties of creditextended.TheyalsoprohibitaloanorigiarepayabletotheFederalEmergencyManagement natorwhoreceivescompensationdirectlyfromthe Agency(FEMA)fordepositintotheNationalFlood consumerfromalsoreceivingcompensationfrom MitigationFund. thelenderoranotherparty.Additionally,loan originatorsareprohibitedfromdirectingor“steer- During2011,theBoardimposedcivilmoneypenaling”aconsumertoacceptamortgageloanthatis tiesagainst10statememberbanksrelatedtoviolanotintheconsumer’sinterestinordertoincrease tionsof RegulationH.Thedollaramountof the theoriginator’scompensation. penalties,whichwereassessedviaconsentorders, totaled$199,700. Theexaminationproceduresalsoincorporated amendmentstoRegulationZthatimplementedthe Coordination with Other appraisalindependenceprovisionof theDodd- Federal Banking Agencies FrankAct.Theseamendmentsrequirethatfee appraisersreceivecustomaryandreasonablecom- Thememberagenciesof theFederalFinancialInsti- pensationfortheirservices.Finally,therevisedprotutionsExaminationCouncil(FFIEC)developuni- ceduresalsoimplementedregulatoryamendments formexaminationprinciples,standards,procedures, thatincreasetheAPRthresholdusedtodetermine andreportformats.20In2011,theFFIECmember whetheramortgagelenderisrequiredtoestablish organizationsissuedtheexaminationproceduresand anescrowaccountforfirstlien,“jumbo”mortgage guidanceregardinganumberof regulations. loans. • InteragencyExaminationProceduresforRegula- • RevisedInteragencyExaminationProceduresfor tionZ:MortgageDisclosure.Procedureswere RegulationZ:ExemptTransactionThresholds.ProrevisedtoincorporatetwoseparateRegulationZ cedureswererevisedtoincorporateDodd-Frank rulemakingchangesthathadJanuary2011effective ActrevisionstoRegulationZthatincreasethe dates.ThefirstrulemakingimplementedtheHelp- thresholdsforexemptconsumercredittransactions ingFamiliesSaveTheirHomesActof 2009,which from$25,000to$50,000,effectiveJuly21,2011.In amendedtheTruthinLendingActandrequires addition,theDodd-FrankActprovidesthat,onor thatconsumersreceivenoticewhentheirmortgage afterDecember31,2011,thethresholdmustbe loansaresold,assigned,orotherwisetransferred. adjustedannuallybyanyannualpercentage Thesecondrulemakingimplementedprovisionsof increaseintheconsumerpriceindex.Accordingly, theMortgageDisclosureImprovementAct theexemptionthresholdincreasedfrom$50,000to (MDIA),whichrequireslenderstodisclosehow $51,800effectiveJanuary1,2012. borrowers’regularmortgagepaymentscanchange • InteragencyExaminationProceduresforRegulaovertime.Specifically,theMDIA,whichamended tionZ:CreditCardProtections.TheFederal theTruthinLendingAct,seekstoensurethat ReserveapprovedaruleamendingRegulationZto mortgageborrowersarealertedtotherisksof payclarifypreviousrulesimplementingtheCredit mentincreasesbeforetheytakeoutmortgageloans CardAct.Thisruleisintendedtoenhanceprotecwithvariableratesorpayments.Lenderswere tionsforconsumerswhousecreditcardsandto requiredtocomplywiththeseMDIAprovisions resolveareasof uncertaintysothatcardissuers fullyunderstandtheircomplianceobligations.21 20 FFIECmemberagenciesincludetheBoardofGovernorsofthe FederalReserveSystem,theFederalDepositInsuranceCorporation,theNationalCreditUnionAdministration,theOfficeof 21 FederalReserveBoard,BankingInformationandRegulation, theComptrolleroftheCurrency,andtheCFPB,whichreplaced Supervision,ConsumerAffairsLetters,www.federalreserve.gov/ theformerOfficeofThriftSupervisionontheFFIEC. bankinforeg/caletters/caltr1108.htm.

122 98thAnnualReport|2011 • RevisedInteragencyExaminationProceduresfor jectmatterandaddingnewelementsasappropriate. RegulationP:VoluntaryModelPrivacyNotice.Pro- During2011,staff initiatedonecurriculumreview. cedureswererevisedtoincorporateRegulationP The“IntroductiontoConsumerComplianceExamirulemakingthroughwhichseveralfederalregula- nations”coursewasreviewedinordertoincorporate toryagenciesadoptedavoluntarymodelprivacy technicalchangesinpolicyandlaws,alongwith noticeformdesignedtomakeiteasierforconsum- changesininstructionaldeliverytechniques.This erstounderstandhowfinancialinstitutionscollect courseisdesignedtoequipassistant-levelexaminers andsharenonpublicpersonalinformation.A withtheskillsandknowledgeof consumerlawsand financialinstitutioncanusethemodelformto regulationsthatgoverndepositoperationsandnonobtaina“safeharbor”forcompliancewiththe realestatelending.Thecourseemphasizestheknowlrequirementstonotifyconsumersof its edgeandpracticalapplicationof consumercompliinformation-sharingpracticesandtheirrighttoopt ancelaws,examinationtechniques,andexamination outof certainsharingpractices.22 procedures.Inaddition,acurriculumreviewof the “FairLendingExaminationTechniques”coursewas Training for Bank Examiners completedandtherevisedcoursewassuccessfully pilotedinJune.Thiscourseisdesignedtoequip Ensuringthatfinancialinstitutionscomplywithlaws assistant-levelexaminerswiththeskillsandknowlthatprotectconsumersandencouragecommunity edgetoplanandconductarisk-focusedfairlending reinvestmentisanimportantpartof thebankexami- examination,andincorporatestheFFIECfairlendnationandsupervisionprocess.Asthenumberand ingexaminationprocedures. complexityof consumerfinancialtransactionsgrow, trainingforexaminersof theorganizationsunderthe LifelongLearning FederalReserve’ssupervisoryresponsibilitybecomes Inadditiontoprovidingcoreexaminertraining,the evenmoreimportant.Thestaff developmentfuncexaminerstaff developmentfunctionemphasizesthe tionisresponsiblefortheongoingdevelopmentof importanceof continuinglifelonglearning.Opportutheprofessionalconsumercompliancesupervisory nitiesforcontinuinglearningincludespecialprojects staff,andensuringthatthesestaff membershavethe andassignments,self-studyprograms,rotational skillsnecessarytomeettheirsupervisoryresponsiassignments,theopportunitytoinstructatsystem bilitiesnowandinthefuture. schools,mentoringprograms,andanannualconsumercomplianceexaminerforum,whereseniorcon- ConsumerCompliance sumercomplianceexaminersreceiveinformationon ExaminerTrainingCurriculum emergingcomplianceissuesandareabletosharebest Theconsumercomplianceexaminertrainingcurricupracticesfromacrossthesystem. lumconsistsof sixcoursesfocusedonvariousconsumerprotectionlaws,regulations,andexamining In2011,thesystemcontinuedtooffer“Rapid concepts.In2011,thesecourseswereofferedin10 Response”sessions,whichareapowerfultraining sessions,andtrainingwasdeliveredtoatotalof 197 deliverymethodforjust-in-timetraining.Debutedin systemconsumercomplianceexaminersandstaff 2008,RapidResponsesessionsofferexaminerstelemembers,and12statebankingagencyexaminers. conferencepresentationsonemergingissuesor urgenttrainingneedsthatresultfromtheimplemen- Whenappropriate,coursesaredeliveredviaalternatationof newlaws,regulations,orsupervisoryguidtivemethods,suchastheInternetorotherdistanceance.Atotalof fiveconsumercomplianceRapid learningtechnologies.Forinstance,severalcourses Responsesessionsweredesigned,developed,andpreuseacombinationof instructionalmethods: sentedtosystemstaff during2011. (1)classroominstructionfocusedoncasestudiesand (2)speciallydevelopedcomputer-basedinstruction thatincludesinteractiveself-checkexercises. Agency Reports on Compliance with Consumer Protection Laws BoardandReserveBankstaff regularlyreviewthe corecurriculumforexaminertraining,updatingsub- TheBoardreportsannuallyoncompliancewithconsumerprotectionlawsbyentitiessupervisedbyfed- 22 FederalReserveBoard,BankingInformationandRegulation, eralagencies.Thissectionsummarizesdatacollected Supervision,ConsumerAffairsLetters,www.federalreserve.gov/ boarddocs/caletters/2011/1104/caltr1104.htm. fromthe12FederalReserveBanks,theFFIECmem-

ConsumerandCommunityAffairs 123 beragencies,andotherfederalenforcementagen- RegulationE(ElectronicFundTransfers) cies.23 TheFFIECagenciesreportedthatapproximately 94percentof theinstitutionsexaminedduringthe RegulationB(EqualCreditOpportunity) 2011reportingperiodwereincompliancewithRegu- TheFFIECagenciesreportedthatapproximately lationE,comparedwith93percentforthe2010 89percentof theinstitutionsexaminedduringthe reportingperiod.Themostfrequentlycitedviola- 2011reportingperiodwereincompliancewithRegu- tionsinvolvedfailureto lationB,comparedwith82percentforthe2010 • investigateaccounterrorswithin10businessdays reportingperiod.Themostfrequentlycitedviolaof receivinganoticethatanerrorhasoccurred, tionsinvolvedfailureto reportingtheresultsof theinvestigationtothecon- • provideatimelyand/oraccuratenoticeof sumerwithinthreebusinessdays,andcorrecting approval,counteroffer,oradverseactionwithin30 anyerrorwithinonebusinessday daysafterreceivingacompletedcreditapplication • followprocedureswhenthefinancialinstitution • includetherequiredinformationinthecredit determinesthatnoaccounterrororadifferent actionnotificationletter,includingECOA- erroroccurred,suchasprovidingawrittenexplaprohibitedbases,thenameof thefederalagency nationtotheconsumer responsibleforoverseeingcompliancewiththe • provideinitialdisclosurestoconsumersthatconregulation,andthespecificreasonsforanyadverse tainrequiredinformation,includingtheconsumaction er’sliabilityforunauthorizedtransfers,contact • collectinformationaboutapplicantsseekingcredit informationforreportingunauthorizedtransfers, primarilyforthepurchaseorrefinancingof aprin- feesforelectronicfundtransfers,etc. cipalresidence,includingapplicantrace,ethnicity, sex,maritalstatus,andage,forgovernmentmoni- TheFDICinitiatednineformalRegulationE-related toringpurposes enforcementactionsduringthereportingperiod, whiletheOCCinitiatedfour,andtheOTSinitiated TheOfficeof theComptrollerof theCurrency two.Therewerenootherenforcementactionsby (OCC)initiatedoneformalRegulationB-related FFIECagencies.However,theFTCinitiatedactions publicenforcementactionduringthereporting againsttwoinstitutions,continuedlitigationagainst period,whiletheOfficeof ThriftSupervision(OTS) twoinstitutions,andsettledonecaseinvolvingReguinitiatedsixandtheFederalDepositInsuranceCor- lationEviolations. poration(FDIC)initiated20.24Therewerenoother enforcementactionsbyFFIECagencies. RegulationM(ConsumerLeasing) TheFFIECagenciesreportedthatnearly100percent TheotheragenciesthatenforcetheECOA—theFed- of theinstitutionsexaminedduringthe2011reporteralTradeCommission(FTC),theFarmCredit ingperiodwereincompliancewithRegulationM, Administration(FCA),theDepartmentof Transpor- downslightlyfromfull100percentcompliancedurtation(DOT),theSecuritiesandExchangeCommis- ingthe2010reportingperiod.TheFDICreported sion(SEC),theSmallBusinessAdministration,and oneviolationof RegulationMregardingthefailure theGrainInspection,PackersandStockyards toproviderequiredleasedisclosures. Administrationof theDepartmentof Agriculture— reportedsubstantialcomplianceamongtheentities TheFFIECagenciesdidnotissueanypublic theysupervise. enforcementactionsspecifictoRegulationMduring theperiod. RegulationP(PrivacyofConsumer 23 Becausetheagenciesusedifferentmethodstocompilethedata, theinformationpresentedheresupportsonlygeneralconclu- FinancialInformation) sions.The2011reportingperiodwasJuly1,2010,through TheFFIECagenciesreportedthatapproximately June30,2011. 98percentof theinstitutionsexaminedduringthe 24 Consumercompliancepublicenforcementactionsarecategorizedbyregulationthroughoutthereport.Becausesome 2011reportingperiodwereincompliancewithReguenforcementactionsincludeviolationsofmorethanoneregula- lationP,whichisthesamerateof complianceasthe tion,theoverallsumofactionsderivedfromeachregulation 2010reportingperiod.Themostfrequentlycitedviowillbegreaterthantheactualtotalnumberofenforcement actionsinitiated,whichwas107. lationsinvolvedfailuretoprovideconsumerswith

124 98thAnnualReport|2011 • clearandconspicuousinitialprivacynotices RegulationAA(UnfairorDeceptive ActsorPractices) • aclearandconspicuousannualnoticereflecting TheFFIECagenciesreportedthatapproximately theinstitution’sprivacypoliciesandpractices 99percentof theinstitutionsexaminedduringthe • therequiredinformationininitial,annual,and 2011reportingperiodwereincompliancewithRegurevisedprivacynotices lationAA,whichisthesamerateof complianceas forthe2010reportingperiod.Themostfrequently TheFDICinitiatedsevenformalRegulationP- citedviolationsinvolved relatedenforcementactionsduringthereporting • providinginaccurateadvertisingormisrepresenting period.25Therewerenootherenforcementactionsby services,contracts,investments,orfinancial FFIECagencies. conditions RegulationZ(TruthinLending) • failuretoprovideclearandconspicuouswritten TheFFIECagenciesreportedthatapproximately noticeof creditobligationtoeachco-signerprior 82percentof theinstitutionsexaminedduringthe totheirbecomingobligatedonaloan 2011reportingperiodwereincompliancewithRegu- • participatinginunfairordeceptiveactsorpractices lationZ,comparedwith85percentforthe2010 reportingperiod.Themostfrequentlycitedviola- TheOCCinitiatedfiveformalRegulationAA-related tionsinvolvedfailureto enforcementactionsduringthereportingperiod. • provideagoodfaithestimateof therequireddis- TherewerenootherenforcementactionsbyFFIEC closuresbeforeconsummation,ornotlaterthan agencies. threebusinessdaysafterreceiptof awrittenloan application,forcertainresidentialmortgagetrans- RegulationCC(AvailabilityofFunds actions andCollectionofChecks) TheFFIECagenciesreportedthatapproximately • accuratelydisclosethefinancechargesinclosed- 94percentof institutionsexaminedduringthe2011 endcredittransactions reportingperiodwereincompliancewithRegula- • accuratelydisclosetheannualpercentagerate tionCC,comparedwith90percentforthe2010 (APR) reportingperiod.Themostfrequentlycitedviolationsinvolvedfailureto Inaddition,111bankssupervisedbytheFederal • makefundsdepositedfromlocalandcertainother Reserve,FDIC,OCC,andOTSwererequired,under checksavailableforwithdrawalwithinthetimes theInteragencyEnforcementPolicyinRegulationZ, prescribedbytheregulation toreimburseatotalof approximately$350,000to consumersforunderstatingAPRsand/orfinance • ensurethataccountdepositslipscontainrequired chargesintheirconsumerloandisclosures. disclosures • providewrittennoticetoaconsumerwhenplacing TheFDICinitiated17formalRegulationZ-related anexceptionholdonanaccount enforcementactionsduringthereportingperiod,the OTSinitiatedfive,andtheOCCinitiatedone.The TheFDICinitiatedfiveformalRegulationCC- DOTcontinuedtoprosecuteoneaircarrierforits relatedenforcementactionsduringthereporting allegedimproperhandlingof creditcardrefund period,whiletheOTSandOCCeachinitiatedthree requestsandotherFederalAviationActviolations. actions.Therewerenootherenforcementactionsby TheFTCcontinueditslawenforcementactivities FFIECagencies. againstinstitutionsallegedtohaveviolatedRegulationZ,whichincludedsettlingtwocasesandcon- RegulationDD(TruthinSavings) tinuinglitigationagainstanotherinstitution. TheFFIECagenciesreportedthatapproximately 89percentof institutionsexaminedduringthe2011 reportingperiodwereincompliancewithRegulationDD,comparedwith86percentforthe2010 25 TheFDIC’sreportedinformationinthisarearelatestopart reportingperiod.Themostfrequentlycitedviola- 332—PrivacyofConsumerFinancialInformation—ofthe agency’sregulationsandnotRegulationP. tionsinvolved

ConsumerandCommunityAffairs 125 • incorrectuseof thephrase“annualpercentage Table1.Complaintsagainststatememberbanksand yield”inanadvertisementwithoutproviding selectednonbanksubsidiariesofbankholdingcompanies requiredadditionaltermsandconditions aboutregulatedpractices,byRegulation/Act,2011 • providingmisleadingorinaccurateadvertisements Regulation/Act Number • failuretoprovideaccurateandcompleteaccount RegulationAA(UnfairorDeceptiveActsorPractices) 12 disclosures RegulationB(EqualCreditOpportunity) 57 RegulationBB(CommunityReinvestment) 2 TheFDICinitiated16formalRegulationDD-related RegulationC(HomeMortgageDisclosure) 0 enforcementactionsduringthereportingperiod, RegulationCC(ExpeditedFundsAvailability) 82 RegulationD(ReserveRequirements) 5 whiletheOTSinitiatedtwoandtheOCCinitiated RegulationDD(TruthinSavings) 206 one.Therewerenootherenforcementactionsby RegulationE(ElectronicFundsTransfers) 116 FFIECagencies. RegulationG(Disclosure/ReportingofCRA-Related Agreements) 0 RegulationH(NationalFloodInsuranceAct/InsuranceSales) 26 Responding to Consumer Complaints RegulationM(ConsumerLending) 8 RegulationP(PrivacyofConsumerFinancialInformation) 25 and Inquiries RegulationQ(PaymentofInterest) 1 RegulationV(FairandAccurateCreditTransactions) 5 RegulationZ(TruthinLending) 198 TheFederalReserveinvestigatescomplaintsagainst FairCreditReportingAct 67 statememberbanksandselectednonbanksubsidiar- FairDebtCollectionPracticesAct 63 iesof bankholdingcompanies(FederalReserve- FairHousingAct 15 regulatedentities),andforwardscomplaintsagainst HomeOwnershipCounseling 0 othercreditorsandbusinessestotheappropriate HOPA(HomeownersProtectionAct) 8 RealEstateSettlementProceduresAct 44 enforcementagency.EachReserveBankinvestigates RighttoFinancialPrivacyAct 3 complaintsagainststatememberbanksandselected ProtectingTenantsatForeclosureAct 1 nonbanksubsidiariesinitsdistrict.TheFederal ServicemembersCivilReliefAct 2 Reservealsorespondstoconsumerinquiriesona Total 946 broadrangeof bankingtopics,includingconsumer protectionquestions. of thesecomplaintswereclosedwithoutinvestigation pendingthereceiptof additionalinformationfrom In2011,Systemcomplaintanalystsprocessed41,631 consumers.Approximately2percentof thetotal casesthroughFederalReserveConsumerHelp complaintsarestillunderinvestigation.Of the (FRCH),whichwascreatedin2007tocentralizethe remainingcomplaints(2,912),68percent(1,966) processingof consumercomplaintsandinquiries.Of involvedunregulatedpracticesand32percent(946) thesecases,morethanhalf (26,097)wereinquiries involvedregulatedpractices. andtheremainder(15,534)werecomplaints,with mostcasesreceiveddirectlyfromconsumers. ComplaintsaboutRegulatedPractices Approximately4percentof caseswerereferredtothe Themajorityof regulatedpracticecomplaintscon- FederalReservefromotheragencies. cernedcheckingaccounts(34percent),realestate loans(23percent),andcreditcards(15percent).26 WhileconsumerscancontactFRCHbytelephone, Themostcommoncheckingaccountcomplaints fax,mail,e-mail,oronline(atwww relatedtoinsufficientfundsoroverdraftchargesand .federalreserveconsumerhelp.gov),mostFRCHconprocedures(38percent);disputedwithdrawalof sumercontactsoccurredbytelephone(58percent). funds(13percent);disputedrates,terms,orfees Nevertheless,38percent(15,675)of complaintand (10percent);andfundsavailabilitynotasexpected inquirysubmissionsweremadeelectronically(includ- (9percent).Themostcommonrealestateloancominge-mail,onlinesubmissions,andfax)andthe plaintsbyproblemcoderelatedtocreditdenied onlineformpagereceivedmorethan350,380visits (11percent);disputedrates,terms,andfees(10perduringtheyear. cent);paymenterrorsordelays(9percent);flood Consumer Complaints 26 Realestateloansincludeadjustable-ratemortgages,residential constructionloans,open-endhomeequitylinesofcredit,home ComplaintsagainstFederalReserve-regulatedentiimprovementloans,homepurchaseloans,homerefinance/ tiestotaled4,840in2011.Approximately38percent closed-endloans,andreversemortgages.

126 98thAnnualReport|2011 Table2.Complaintsagainststatememberbanksandselectednonbanksubsidiariesofbankholdingcompaniesabout regulatedpractices,byproducttype,2011 Subjectofcomplaint/producttype Allcomplaints Complaintsinvolvingviolations Number Percent Number Percent Total 946 100 38 4.0 Discriminationalleged Realestateloans 17 1.8 2 0.2 Creditcards 1 0.1 0 0 Otherloans 11 1.1 1 0.1 Nondiscriminationcomplaints Checkingaccounts 317 34.0 14 1.4 Realestateloans 221 23.0 11 1.2 Creditcards 146 15.0 1 0.1 Other 233 25.0 9 1.0 insurance(9percent);andescrowaccountproblems ComplaintsaboutUnregulatedPractices (9percent).Themostcommoncreditcardcom- TheBoardcontinuedtomonitorcomplaintsabout plaintsrelatedtointerestrates,terms,andfees bankingpracticesnotsubjecttoexistingregulations, (20percent);inaccuratecreditreporting(15percent); withafocusoninstancesof potentialunfairor bankdebtcollectiontactics(15percent);billingerror deceptivepractices.In2011,theBoardreceived1,966 resolutions(10percent);andpaymenterrorsand complaintsagainstFederalReserve-regulatedentities delays(8percent). thatinvolvedtheseunregulatedpractices.Mostcomplaintswererelatedtorealestateconcerns(41per- FRCHreceived17complaintsallegingdiscrimination cent),checkingaccountactivity(26percent),and underregulatedpractices;discriminationwasalleged creditcards(4percent).Morespecifically,consumers onthebasisof prohibitedborrowertraitsorrights.27 mostfrequentlycomplainedaboutissuesinvolving Thirty-fourpercentof thesediscriminationcom- debtcollection/foreclosures;insufficientfundsor plaintswererelatedtotherace,color,nationalorigin, overdraftcharges;interestrates,terms,andfees; orethnicityof theapplicantorborrower.Four- policyandprocedureconcerns;paymenterrors/ teenpercentof discriminationcomplaintswere delays;andopeningandclosingdepositaccounts. relatedtoeithertheageorhandicapof theapplicant orborrower.Oneviolation,involvingarealestate ComplaintsaboutLoanModifications loan,wasidentifiedbasedonthesecomplaints. andForeclosures In2011,theFederalReservereceived669complaints In85percentof investigatedcomplaintsagainstFedrelatedtoloanmodificationsandforeclosures.Of eralReserve-regulatedentities,evidencerevealedthat these,consumerscomplainedprimarilyabouthome institutionscorrectlyhandledthesituation.Of the purchaseloans(78percent),homerefinance/closed remaining15percentof investigatedcomplaints, endloans(9percent),andadjustableratemortgage 2percentweredeemedviolationsof law,2percent loans(7percent).Thetopconsumerprotectionissues wereidentifiederrorswhichwerecorrectedbythe documentedwithspecificcodeswere:debtcollection/ bank,1percentwasreferredtootheragencies,and foreclosure(50percent)andinterestrates,terms,and theremainderweremattersinvolvinglitigationor fees(22percent). factualdisputes,withdrawncomplaints,internally referredcomplaints,orinformationwasprovidedto theconsumer.Themostcommonviolationsinvolved ComplaintReferrals realestateloansandcheckingaccounts. In2011,theFederalReserveforwarded10,918complaintsagainstotherbanksandcreditorstothe 27 Prohibitedbasesincluderace,color,religion,nationalorigin, appropriateregulatoryagenciesandgovernment sex,maritalstatus,age,applicantincomederivedfrompublic officesforinvestigation,includingtheCFPBafter assistanceprograms,orapplicantrelianceonprovisionsofthe ConsumerCreditProtectionAct. July21,2011.Tominimizethetimerequiredto

ConsumerandCommunityAffairs 127 re-routecomplaintstotheseagencies,referralswere torscontributingtothecrisisandstepsforre-starting transmittedelectronically. thehousingmarket. TheFederalReserveforwarded14complaintstothe PolicyAnalysisstaff alsocontributedtothedivision’s Departmentof HousingandUrbanDevelopment activitiesinsupportof theBoard’smortgageservic- (HUD)thatallegedviolationsof theFairHousing ingreviewsandthepublicationof InteragencyReview Act.28TheFederalReserve’sinvestigationof these of ForeclosurePoliciesandPractices.30Thispublic complaintsrevealedoneinstanceof illegalcredit reportdocumentedthefindingsof theforeclosure discrimination. reviewsandwasfollowedbyenforcementactions againstmortgageservicersfordeficientpracticesin Consumer Inquiries residentialmortgageloanservicingandforeclosure processing,andbyfurtherpubliccommunicationto TheFederalReservereceived26,097consumerinqui- increaseawarenessandtransparencyabouttheforeriesin2011,coveringawiderangeof topics.Con- closurereviewprocess. sumersweretypicallydirectedtootherresources, includingotherfederalagenciesorwrittenmaterials, Supporting Community toaddresstheirinquiries. Economic Development Consumer Policy and Emerging TheFederalReserveSystem’sCommunityDevelop- Issues Analysis mentfunctionpromoteseconomicgrowthandfinancialstabilitytounderservedpopulationsbyinforming ThePolicyAnalysisfunctionof DCCAprovideskey andimprovingtheresearch,policy,andpracticeof insights,information,andanalysisonemerging communitydevelopment.Asadecentralizedfuncfinancialservicesissuesthataffectthewell-beingof tion,theCommunityAffairsOfficers(CAOs)ateach consumersandcommunities.Throughout2011,as of the12ReserveBanksdesignactivitiestorespond financialmarketscontinuedtoexperiencedynamic tothespecificneedsof thecommunitiestheyserve, changeinresponsetotheeconomicdownturn,moni- withoversightfromBoardstaff.Theyprovideinfortoringthefinancialserviceslandscapefornewand mationandpromoteawarenessof investmentopporunintendedriskstohouseholdsremainedatopprior- tunitiestofinancialinstitutions,governmentagenity.Tothisend,PolicyAnalysisstaff followtrends cies,andorganizationsthatservelow-andmoderateandconductinquiriesthathelpdefinetheissues, incomecommunitiesandpopulations.Similarly,the identifyemergingrisks,andinformpolicyrecom- Board’scommunitydevelopmentstaff promoteand mendations.Thesectionalsomanagesacross- coordinateSystem-widepriorities;inparticular,comfunctionalteamchargedwithcoordinatingthedivi- munitydevelopmentstaff focusonfivekeyareas: sion’sactivitiesandresponsesonkeyconsumerand • researchandcommunity-leveldatacompilation communitydevelopmentmatters. • economicandsmallbusinessdevelopmentand Throughout2011,PolicyAnalysisstaff facilitatedthe entrepreneurship division’sactivitiesinresponsetotheforeclosurecri- • housingmarketsandneighborhoodrevitalization sisandrecoveryof thehousingmarket.Theseactivitiesincludedcontributingtotheeffortsof the • communitydevelopmentfinance Board’sinternalworkinggroupforanalyzinghous- • workforceandhumancapitaldevelopment ingissues,andorganizingapolicyforumentitled, “TheHousingMarketGoingForward:Lessons Community Development Research LearnedfromtheRecentCrisis.”29Theforum exploredconsumerandindustryperspectivesonfac- Havinglearnedfromthesubprimecrisisthatmicroeconomicissuescanhaveamagnifiedimpactonthe 28 AmemorandumofunderstandingbetweenHUDandthefed- 30 SeeTheFederalReserveSystem,theOfficeoftheComptroller eralbankregulatoryagenciesrequiresthatcomplaintsalleginga oftheCurrency,andtheOfficeofThriftSupervision(2011), violationoftheFairHousingActbeforwardedtoHUD. InteragencyReviewofForeclosurePoliciesandPractices(Wash- 29 Materialsfromthepolicyforumareavailableonlineatwww ington:BoardofGovernorsoftheFederalReserveSystem, .federalreserve.gov/newsevents/conferences/housingconf2011 April),www.federalreserve.gov/boarddocs/rptcongress/ .htm. interagency_review_foreclosures_20110413.pdf.

128 98thAnnualReport|2011 macroeconomy,theCommunityDevelopmentfunc- staff continuetogatherthroughregionalconvenings tionacrosstheFederalReserveSystemisengagedin andappliedresearchefforts. avarietyof researchinitiativesthataugmentthe Board’ssystemicriskresponsibilities.Theseeffortsto Supporting Small Business gather,analyze,anddisseminatedataonunderserved Development, Entrepreneurship, communitiesarealsousefultopolicymakersand and Indian Country communitydevelopmentpractitioners. Overthepastfewyears,smallbusinesseshavefaced In2011,ReserveBankscontinuedtoexpandtheuse weaksales,diminishedassetvalues,elevateduncerof appliedresearchandanalysistoinformcommu- tainty,andtightcreditmarketconditions.Likeownnitydevelopmentpolicyandpractice.Thisexpanded ersof largefirms,manysmallbusinessownershave capacitywashighlightedatthebiennial“Community hadtolayoff employeesordeferhiring.Evenas AffairsResearchConference:TheChangingLand- creditconditionsease,perceptionsof tightcreditcan scapeof CommunityDevelopment,”whichdrew discouragesomeentrepreneursfromeventryingto morethan350participantsandincludedanumberof obtainfinancing.Thesedisruptionsonthesupply recognizedexpertsacrossarangeof disciplines.31 anddemandsidesof thesmallbusinesscreditmarket CommunityDevelopmentstaff membersfromacross haveresultedinnotablecreditgapsinlinesof credit, thesystemplayedkeyrolesinthisconferenceaspre- patientcapital,small-dollarloans,andcommercial senters,moderators,andorganizers.Inaddition,the realestate. conferencewasprecededbyaninternalsystem researchers’symposiumwhereFederalReservestaff Inresponsetothesepersistentconditions,theComdiscussedresearchefforts,sharedresults,and munityDevelopmentfunctionconvenedseveral exchangedideasonemergingresearchandpolicy regionalforumstobetterunderstandthecharacterisissues. ticsof andchallengesfacingsmallbusinesses.The discussionsinformedtheframeworkof anational Community Data Initiative conveninghostedattheBoardinpartnershipwith theFederalReserveBankof AtlantaandtheEwing Byleveraginginformation-sharingandpartnership MarionKauffmanFoundationentitled,“SmallBusiroleswitharigorousanalyticalcapacity,Community nessandEntrepreneurshipduringanEconomic Developmentprovidesreliablemarketintelligence Recovery.”32Researchpaperspresentedattheconthathashelpedtoidentifyandclosedatagapsfor veningnotedtheimportanceof newandsmallfirms low-andmoderate-incomecommunities.In2011,the tothevitalityof theeconomy,theuniquechallenges BoardcoordinatedtheCommunityDataInitiative experiencedbyfemaleandminorityentrepreneurs, (CDI),aCAOcollaborativeresearchproject.The andtheneedformoretimelyandrelevantsmallbusigoalof theCDIprojectistoprovideBoardand nessdata. ReserveBankleadershipwithsystematicandrelevant communityconditionsandtrendinformationona Giventheacutechallengesthatconfrontunderserved consistentbasis.Thequarterlyorbiannuale-polling communities,particularlyinruralAmerica,theFedof selecteddistrictcommunitystakeholderscaptures eralReservepartneredwithninefederalagenciesto currentandemergingcommunitydevelopment identifybarrierstoandopportunitiesforeconomic issues.In2011,11ReserveBankswereadministering growthinIndianCountry.33Morethan750tribal web-basedpollsandsurveys.Toprovideanational stakeholdersparticipatedinsixregionalworkshops contextfortheregionalresultsof ReserveBankpolls, theBoardcontinuedtosurveyNeighborWorks® 32 “SmallBusinessandEntrepreneurshipduringanEconomic Americaaffiliatesandgrantees. Recovery”washeldNovember9-10,2011,inWashington,D.C. Materialsfromtheconferenceareavailableatwww .federalreserve.gov/newsevents/conferences/small-business- Whilestillinanearlystageof development,theCDI entrepreneurship-conference.htm. hasthepotentialtoserveasavaluablecomplement 33 IndianCountryisdefinedasalllandwithinthelimitsofan totheinformationthatCommunityDevelopment IndianreservationunderthejurisdictionoftheUnitedStates government;alldependentIndiancommunities,suchastheNew MexicoPueblos;andallIndianallotmentsstillintrust,whether 31 “CommunityAffairsResearchConference:TheChanging theyarelocatedwithinreservationsornot.Thetermincludes LandscapeofCommunityDevelopment”washeldApril28-29, landownedbynon-Indians,aswellastownsincorporatedby 2011,inArlington,Virginia.Materialsfromtheconferenceare non-IndiansiftheyarewithintheboundariesofanIndianresavailableatwww.frbsf.org/community/conferences/ ervation.Itisgenerallywithintheseareasthattribalsovereignty 2011ResearchConference. appliesandstatepowerislimited.

ConsumerandCommunityAffairs 129 thataddressedspecificgapsincapitalandtechnical borhoods”conferenceco-hostedbytheBoardand assistance.Anationalsummitthatwillserveasa theFederalReserveBankof Richmond.36 springboardforintegratedresearch,policy,andeconomicdevelopmentstrategiesisbeingplannedfor Participantsattheconferenceexploredcreativeuses 2012. of dataandtechnologytopromotepublicandprivateinvestmentintransitionalcommunities. Housing Markets and Neighborhood Revitalization Other Community Development Initiatives Falloutfromtheeconomiccrisishasincludedlarge Ashouseholdsandcommunitiesgrapplewithlimited inventoriesof foreclosedpropertiesthatstandvacant resourcesandpersistentchallenges,itisimperative andabandonedandcanhavesignificantdestabilizing thattheFederalReservecontinuetoconnectwith effectsoncommunities,includingincreasedcrime andrespondtoMainStreet.Tothatend,theComanddecreasedpropertyvalues.Thelongerthese munityDevelopmentfunctionworkstoengagecomhomesremainunoccupied,theworsetheeffecton munitiesinnewwaysandthroughnewtechnologies. thecommunityandtheharderitistoreversetheir ManyReserveBanksproducewebinarsandpodconditionandputthembackonthemarket.The casts.Severalutilizevisualanalyticsandblogsto challengeof disposingof theserealestateowned sharequantitativeandqualitativeinformationwith (REO)propertiesoftenoutstripsresources,particu- theirstakeholders. larlyinlow-incomecommunities.Throughout2011, theFederalReserve’sCommunityDevelopment Inthefallof 2011,theBoardpartneredwiththeFedfunctionfocusedonsupportingregionaleffortsto eralReserveBankof St.Louistolaunch“Connectstabilizeandstimulatetheseneighborhoods,provid- ingCommunities,”acommunicationsplatform inghousingmarketdataand/orconveninglocal designedtosharebestpracticesrelatingtocommustakeholderstodiscusswaystouseexistingdatato nitydevelopment.37In2011,theplatformoffereda makestrategicinvestmentdecisions,suchasthedis- webinarthatfocusedonthechallengesof helping positionof REOproperties. peoplefacingforeclosureandtheimpactitwillhave ontheircreditscore;anotherwebinarsharedstrate- CommunityDevelopmentprovidedawealthof giesonhowmicrofinancecanserveasacatalystto resourcestocommunitiesincrisis,includingavideo increasingeconomicopportunityinlow-to series,publication,andnationalforum.Videosdocu- moderate-incomecommunities.Thewebinarseries mentingsuccessfulneighborhoodstabilizationstrate- willcontinuetobeameansforsharingsystemcomgiesinCleveland,Ohio;Detroit,Michigan;and munitydevelopmentinformationin2012. Phoenix,Arizona,debutedatthe2011Community AffairsResearchConferenceduringGovernorEliza- Consumer Advisory Council bethA.Duke’skeynoteremarks.34Thepublication, PuttingDatatoWork:Data-DrivenApproachesto StrengtheningNeighborhoods,comprisescasestudies OnJuly21,2011,theBoard’sConsumerAdvisory thatdemonstratehowcommunitiescanusedatato Council(CAC)wasdissolvedpursuanttotheDoddmakestrategicinvestmentdecisions.35Case-study FrankAct.Nevertheless,theCouncil—whichwas authorsweredrawnfromnationalnonprofits,com- establishedin1976tobringtogetherrepresentatives munitydevelopmentorganizations,localunitsof of consumerandcommunityorganizations,the government,andacademia.Thereportwasdistrib- financialservicesindustry,academicinstitutions,and utedatthe“StrategicData-UsetoStabilizeNeigh- stateagencies—advisedtheBoardof Governorson severalmattersof Board-administeredlawsandregulationsaswellasotherconsumer-relatedfinancial 34 Thevideoreportsandothercommunitystabilizationresources 36 “StrategicData-UsetoStabilizeNeighborhoods”washeld areavailableonlineatwww.federalreserve.gov/communitydev/ December6-7,2011,inBaltimore,Maryland.Materialsfrom stablecommunities.htm. theconferenceareavailableatwww.richmondfed.org/ 35 SeeBoardofGovernorsoftheFederalReserveSystem(2011), conferences_and_events/community_development/2011/ PuttingDatatoWork:Data-DrivenApproachestoStrengthening strategic_data_use_20111206.cfm. Neighborhoods(Washington:BoardofGovernorsoftheFederal 37 Moreinformationabout“ConnectingCommunities”isavail- ReserveSystem,December),www.federalreserve.gov/ ableatwww.stlouisfed.org/bsr/connectingcommunities/index communitydev/files/data-driven-publication-20111212.pdf. .cfm.

130 98thAnnualReport|2011 servicesissuesthroughthefirsthalf of 2011.38Coun- HAMPorbymakingerrorsregardingpaymentsor cilmeetings,opentothepublic,wereheldinMarch fees. andJune. Someconsumerrepresentativesalsocalledattention Amongthesignificanttopicsof discussionforthe tofairhousingissuesrelatedtolossmitigation, Councilin2011were expressingtheviewthatloan-modificationoutcomes aregenerallyworseforborrowersof color.They • issuesrelatedtoforeclosuresandneighborhood urgedtheBoardandotherregulatorstoensurethat stabilization fairhousingconcernsareincludedintheirreviewof • proposedrulesregardingdebitcardinterchange servicers,andemphasizedtheneedforHMDA-like feesandrouting datareportingintheloan-modificationcontext. • nationalmortgageservicingstandards IndiscussingHAMPspecifically,severalconsumer • proposedrulesregardingabilitytopayformort- representativesurgedmoreenforcementtoensure gageloans servicers’compliancewiththeprogram’sguidelines. Theyalsoexpressedconcernaboutthelackof infor- • theproposedruleregardingriskretentionand mationprovidedtoborrowerswhoaredenieda “qualifiedresidentialmortgages” HAMPmodificationandemphasizedtheneedfor moretransparencyandmoredatacollectionand Foreclosure Assistance reportingaboutHAMPactivities. In2011,theCouncildiscussedloss-mitigationefforts, MemberscommendedtheBoardandotherregulaincludingtheAdministration’sHomeAffordable torsforconductingtheinteragencyreviewof servic- ModificationProgram(HAMP),andotherissues ingissues,butseveralconsumerrepresentatives relatedtoforeclosures.Consumerrepresentatives expressedconcernaboutwhatconstitutesa“wrongurgedthatmorefundingbeprovidedforhousing fulforeclosure”inthecontextof thereview.39The counselingandlegalservicesprogramsthatassist consumerrepresentativesstatedthattheconceptof borrowersfacingforeclosure.Someconsumerrepre- “wrongfulforeclosures”shouldbedefinedmore sentativesendorsedafocusonprincipalreductions broadly,sothatitcoversforeclosuresthatarebased andtheimplementationof third-partymediationor onservicererrorsorthosethatarefiledbyaparty settlementprograms.Oneconsumerrepresentative withoutanownershipinterestinthemortgage. alsourgedcontinuedfundingforprogramsthatassist temporarilyunemployedborrowersinmakingtheir Neighborhood Stabilization mortgagepayments. In2011,theCouncilalsodiscussedtheeffectsof Consumerrepresentativesgenerallyexpressedthe foreclosuresthatextendbeyondhouseholdstothe viewthatservicingproblemsremainnumerousand surroundingcommunityandeffortssuchasthefedsystemic,notingcontinuingissueswithservicers’ eralNeighborhoodStabilizationProgram(NSP)to capacityandtheneedforimprovementsintraining. addressthechallengesof stabilizingcommunities. Theypointedtoissuessuchaslostormisplaced Severalmemberspraisedthepositiveeffectsof NSP documentation,delaysinmakingadecisionabout effortsbutstatedthatsignificantlymorefunding whethertograntaloanmodification,steeringof wouldberequiredtoeffectivelyaddressthescopeof borrowersfromHAMPtoin-housemodification theproblem.Theyalsocommendedrecentregulatory programswithlessfavorableterms,thelackof a changesthatallowfinancialinstitutionstoreceive singlepointof contact,andthelackof responseto CRAconsiderationforcertainneighborhoodstabiliborrowercommunications.Theyalsostatedthatforezationactivities. closurescontinuetobefiledwhileloanmodifications arebeingconsidered.Someconsumerrepresentatives Consumerrepresentativesdescribedthenegative expressedconcernthatservicersarecontributingto effectsof REOandvacantpropertiesonneighborborrowersbecomingdelinquent,suchasbyinaccuratelyrepresentingwhatconstituteseligibilityfor 39 SeeTheFederalReserveSystem,theOfficeoftheComptroller oftheCurrency,andtheOfficeofThriftSupervision(2011), 38 ForalistofmembersoftheCouncil,seethe“FederalReserve InteragencyReviewofForeclosurePoliciesandPractices(Wash- SystemOrganization”sectioninthisreport.Transcriptsof ington:BoardofGovernorsoftheFederalReserveSystem, Councilmeetingsareavailableatwww.federalreserve.gov/ April),www.federalreserve.gov/boarddocs/rptcongress/ aboutthefed/cac.htm. interagency_review_foreclosures_20110413.pdf.

ConsumerandCommunityAffairs 131 hoods,suchasincreasedblight,vandalism,and sistenceof lowerhomeownershipratesamong crime;theburdenstheyimposeonmunicipalities; minorities. andtheimpactonthedecisionmakingprocessof otherhomeownerswhoarestrugglingtostaycurrent Debit Card Interchange Fees and Routing ontheirmortgage.Theyexpressedconcernabout banksandservicersnotmaintainingREOproperties AttheMarchmeeting,theCouncildiscussedthe andnotcomplyingwithprotectionsfortenants.They Board’sproposedrulethatwould(1)establishdebit alsoexpressedconcernaboutlendersandservicers cardinterchangefeestandardsand(2)prohibitnetwalkingawayfromandnotcompletingforeclosure workexclusivityarrangementsandroutingrestricsales,leadingto“toxictitles”andadditionalvacant tions.Someindustryrepresentativesexpressedconproperties,andurgedfederalregulatorstoincrease cernsabouttheproposal,urgingtheBoardtocontheoversightof regulatedinstitutionsregardingthese sidercertainadditionalcostsinvolvedininterchange issues.Severalconsumerrepresentativesstatedthat transactionsandtostudythepotentialimpacton thepracticesof servicerwalkawaysandlackof propconsumers,thepaymentsystem,andsmallerfinancial ertyupkeeparedisproportionatelyconcentratedin institutions.Theypointedtothebenefitsof debit neighborhoodsof color.Oneconsumerrepresentacardsintermsof connectingconsumerswithmaintivedescribedthephenomenonwherebynewowners streamfinancialservicesandexpressedtheviewthat of REOpropertiesdelayrecordingtheirownershipin thosebenefitscouldbejeopardizedif,duetotheloss whatmaybeanattempttoavoidresponsibilityand of interchangerevenue,banksweretoaddfeesto liabilityforthemaintenanceof theproperties. bankaccountstocovertheircosts.Oneindustryrepresentativecommentedthattheproposedexemption Bothindustryandconsumerrepresentatives forsmallissuerswouldbedifficulttoimplement expressedconcernaboutincreasinginvestorpureffectivelyandthatthelossof interchangerevenue chasesof REOsandurgedconsiderationof waysto wouldhaveasevereimpactonsmallerbanksand givepotentialowner-occupantsabetterchanceto creditunions. acquireproperties.Aconsumerrepresentativealso encouragedlendersandservicerstocontinuerenting totenantslivinginREOpropertieswheneverpos- Oneindustryrepresentativeexpressedsupportforthe sible,tohelppreventadditionalvacantproperties. proposal,statingthatitrepresentsareturntofairer pricingandamorecompetitivemarketplaceafterdis- Anindustryrepresentativecommentedthatthe tortionsduetoconsolidationandconcentration. BoardandtheFederalReserveBankscouldhelpto Anothermembercommentedthatsomelargeretailfacilitateconversationsaboutthefutureof neighbor- ershaveengagedininnovativeandeffectiveeffortsto hoodsincitiesthathavebeenhithardbytheforeclo- reachunbankedindividuals. surecrisis. Regardingtheprohibitiononnetworkexclusivity Finally,membersdiscussedthefutureof housing arrangements,anindustryrepresentativeendorsed financeandrecentproposalsrelatingtothisissue.An theproposal’sfirstalternative,statingthatthesecond industryrepresentativeexpressedconcernthatsome alternativewouldimpedeinnovationsinpayments. proposedpolicieswouldblockmanypeople,particularlylower-incomeandminorityindividuals,fromthe Severalconsumerrepresentativesexpressedconcern opportunityof homeownership.Someconsumer abouttheproposal’spotentialimpactonconsumers, representativesemphasizedtheimportanceof ensur- particularlyif newfeesareimposedonbank ingthathomeownershipisachievedinasafe,sus- accounts.Theystatedthatbankaccountfeesshould tainablewayandprovidingcounselingsothatbor- bereasonablyrelatedtotheservicesprovidedand rowersrecognizethetruecostsof homeownership; thatthereshouldbesomeaccommodationforlowtheyalsonotedthatrentingisappropriateformany tomoderate-incomecustomersthroughlowerfees. people.Severalmembersstatedthatfurtherattention Theyencouragedregulatorstoholdfinancialinstitushouldbegiventoexplainingandaddressingtheper- tionsaccountableunderCRAforhowtheyrespond

132 98thAnnualReport|2011 tothesechangesandensurethatharmfuleffectson Consumerrepresentativesalsostatedthatnational low-incomeconsumersareminimized. standardsshouldaddressissuesrelatedtoservicer compensation.Onememberexpressedtheviewthat National Mortgage Servicing Standards thecompensationshouldprovidegreaterincentives forservicerstodoaffordable,sustainableloanmodi- AttheJunemeeting,theCouncildiscussedthecre- fications.Anothermembernotedthatthecompensaationof nationalstandardsforresidentialmortgage tionshouldbestructuredtoensurethatservicers loanservicing,providingviewsaboutwhatprinciples, havesufficientfundingtobeabletooperateeffecpolicies,andproceduressuchstandardsshould tivelyduringtimesof increaseddelinquenciesand include.Severalconsumerrepresentativesgenerally foreclosures. commendedtheworkof theBoardandotherregulatorsinreviewingandreportingonservicingandfore- Membersalsopointedtosecuritization-relatedissues closurepracticesandtheimpositionof formal thatshouldbeaddressedinnationalservicingstanenforcementactionsinconnectionwiththeinter- dards.Aconsumerrepresentativesupportedthecreagencyreview.Membersdisagreedabouthow ationof standardizedpoolingandservicingagreenationalservicingstandardsshouldinteractwith mentsthatincludegreaterflexibilityforservicersto standardspromulgatedbystates.Consumerrepresen- offerloanmodificationswithouthavingtoseek tativesstatedthatnationalstandardsshouldoperate investorapproval.Anindustryrepresentativerecomasafloorandstatesshouldbeabletoprovideaddi- mendedtheadoption,forallsecuritizations,of the tionalprotectionsthataddressuniquecircumstances setof standardrepresentationsandwarrantiescreintheirparticularjurisdiction.Industryrepresenta- atedbytheAmericanSecuritizationForum.Acontivesstatedthatnationalstandardsshouldsetahigh sumerrepresentativesuggestedthattrusteesshould barthatoperatesasbothafloorandaceiling,pro- berequiredtocollectandkeepup-to-datedetailed vidingconsistentprotectionsacrossstates. informationaboutservicers,andthatservicingtransfersshouldberegisteredwithtrustees.Anindustry Consumerrepresentativesrecommendedavarietyof representativerecommendedtheimplementationof requirementsfornationalservicingstandards, consistentdatafieldsonaloan-levelbasisforall including securitizationstoassistintrackingtheperformance • ageneralobligationof goodfaithandfairdealing of theunderlyingcollateral. • robustdatacollectionandreporting,especially Ability-to-Pay Requirement for Mortgage regardingfairhousingissues Loans • recordkeepingaboutcommunicationswith borrowers AttheJunemeeting,theCouncildiscussedaproposedruleunderRegulationZthatwouldrequire • asinglepointof contact creditorstodetermineaconsumer’sabilitytorepaya • greatertransparencyaboutcalculationsof bor- mortgagebeforemakingtheloanandwouldestablish rowerincomeandnetpresentvalue minimummortgageunderwritingstandards.There wasstrongsupportforability-to-paystandards • streamlinedsystemsfordocumentsubmission amongCouncilmembersandgeneralagreementthat • monitoringof lawfirmsandotherexternal manyof thecriteriaintheproposalrepresented vendors. sound,common-senseunderwritingprinciples. Consumerrepresentativesalsoexpressedtheview Inconsideringthedefinitionof “qualifiedmortthatthestandardsshouldprohibitthedual-track gage,”bothconsumerandindustryrepresentatives systemof proceedingsimultaneouslywithaforeclo- expressedsupportforincludingtheadditionalundersureandaloanmodificationandshouldaddress writingrequirementscontainedintheproposal’s post-foreclosureissues,suchaspropertymaintenance Alternative2.TheyencouragedtheBoardtoadopta obligationsandcompliancewithtenantprotections. rulethatsetshigh,robuststandardsapplyingtoall Otherrecommendationsincludedmandatinganaffir- mortgagelenders.Anindustryrepresentativecommativedutyof lossmitigationthatcouldbeenforced mentedthattherule’sapproachtothedefinitionof byaprivaterightof actionandallowingborrowers “qualifiedmortgage”shouldoperateasalegalsafe toraiseviolationsof theservicingstandardsasa harborratherthanasarebuttablepresumptionof defensetoforeclosure. compliance.Industryrepresentativesalsourgedthe

ConsumerandCommunityAffairs 133 Boardtoprovideadditionalclarityaboutthestan- costsand/orlessfavorabletermsfornon-QRMloans, dardsthatlenderswouldhavetomeettofallwithin regulatoryscrutinyof andlimitsonnon-QRMloans, thesafeharbor;aconsumerrepresentativerecom- reputationalriskforofferingnon-QRMloans,and mendedthatthestandardsnotspecifyparticular lowerratingsfornon-QRMsecurities.Severalconnumbers,suchasfordebt-to-incomeratiosorcredit sumerrepresentativesexpressedconcernthatlowerscores.Severalmembersexpressedconcernthat5/1 incomeindividualsandpeopleof colorwouldbe adjustable-ratemortgages(ARMs)wouldbeconsid- lockedoutof homeownershipopportunitiesor eredasqualifiedmortgagesundertheproposal;they forcedtoobtaincreditatamuchhighercost. statedthatsuchARMsshouldbesubjectedto greaterregulation.Aconsumerrepresentativepraised Membersemphasizedtheneedforahealthy,liquid theinclusionof adutyforlenderstomakeareason- non-QRMmarketandforfurtherconsiderationof ableandgoodfaithdeterminationthattheconsumer howtoachievesafe,productivelendingtoemerging willhaveareasonableabilitytorepaytheloan. markets.TheyurgedtheBoardandotherregulators toinvestigatehowthemarketsandinvestorswould Aconsumerrepresentativeandanindustryrepresen- likelytoreacttotheproposedQRMstandardand tativeexpressedsupportfortheproposal’sapproach whatthepricedifferencelikelywouldbebetween toballoon-paymentqualifiedmortgagesofferedby QRMandnon-QRMloans. smallcreditorsoperatingpredominantlyinruralor underservedareas.Anotherconsumerrepresentative Other Discussion Topics emphasizedtheneedtoensurethatruralborrowers haveadequateprotectionandurgedregulatorstouse AttheMarchmeeting,theCouncildiscussedthe CRAexamstoincreasetheirscrutinyof financial Board’sproposedruletoexpandandreviseRegulainstitutions’performanceinruralcommunities. tionZ’sexistingescrowaccountrequirementsforcertainmortgageloans.Membersgenerallycommended Risk Retention and “Qualified Residential theefforttoimprovedisclosuresconcerningescrow Mortgages” accountsandpraisedtheclear,“plainEnglish” natureof theproposedmodelforms.Concernswere AttheJunemeeting,theCouncildiscussedtheinter- expressedabouttheproposedexemptionforloans agencyproposedrulethatwouldrequireriskreten- madein“ruralorunderservedareas”if certaincontionforasset-backedsecuritiesandwouldexempt ditionsaresatisfied.Aconsumerrepresentativecomqualifiedresidentialmortgages(QRMs)fromthose mentedthatthe100-loanannualoriginationstest requirements.Bothindustryandconsumerrepresen- couldundulylimitlenders’abilitytoworkwith tativesexpressedconcernsabouttheproposeddefini- higher-riskborrowersandcommunities.Another tionof aQRM,particularlytherequirementof a consumerrepresentativeexpressedconcernthatsome 20percentdownpaymentforQRMeligibility.Some moneylendersengaginginrisky,higher-costlending membersquestionedtheeffectivenessof the20per- wouldfallundertheexemption. centrequirement:theycommentedthatprograms, suchasGinnieMae,demonstratethatno-andlow- AttheJunemeeting,theCouncildiscussedthe downpaymentloanscanbesoundandsustainable Board’sproposedrulethatwouldcreatenewprotecandthatmanyloansthatarecurrentlyperforming tionsforconsumerswhosendremittancetransfersto wellwouldnotqualifyasaQRM. recipientslocatedinaforeigncountry.Membersgenerallysupportedtheproposal,particularlythe Membersgenerallyexpressedconcernaboutthecon- requirementsrelatingtofeedisclosures.Industryrepsequencesacrossthemortgagemarketif QRMwere resentativesnoted,however,therecanbechallenges tobeseenasthe“goldstandard”andtobecomethe indeterminingfeeswhendealingwithanunaffiliated primarymortgageproduct,ratherthanthenarrow internationalremittanceprovider.Anindustryrepreexceptionasintended.Possibleconsequencesthat sentativeexpressedtheviewthatthestatutorilymanwerementionedincludedrestrictedaccesstocredit dated90-daytimeframeforremittancetransferproforconsumerswhodonotqualifyforQRMs,higher viderstoprovideerrorresolutionistoolong.

135 Federal Reserve Banks TheFederalReserveBanksprovidepaymentservices TheMonetaryControlActof 1980requiresthatthe todepositoryandcertainotherinstitutions,distribute FederalReserveestablishfeesforpricedservicesprothenation’scurrencyandcointodepositoryinstitu- videdtodepositoryinstitutionssoastorecover,over tions,andserveasfiscalagentsanddepositoriesfor thelongrun,alldirectandindirectcostsactually theU.S.governmentandotherentities.TheReserve incurredaswellastheimputedcoststhatwouldhave Banksalsocontributetosettingnationalmonetary beenincurred—includingfinancingcosts,taxes,and policyandsupervisionof banksandotherfinancial certainotherexpenses—andthereturnonequity entitiesoperatingintheUnitedStates(discussedin (profit)thatwouldhavebeenearnedif aprivatebusitheprecedingsectionsof thisreport). nessfirmhadprovidedtheservices.1Theimputed costsandimputedprofitarecollectivelyreferredto astheprivate-sectoradjustmentfactor(PSAF).2Over Federal Reserve Priced Services 1 Financialdatareportedthroughoutthischapter—includingrev- FederalReserveBanksprovidearangeof payment enue,otherincome,costs,incomebeforetaxes,andnet income—willreferencetothe“ProFormaFinancialStatements andrelatedservicestodepositoryinstitutions,includforFederalReservePricedServices”attheendofthischapter. ingcollectingchecks,operatinganautomatedclear- 2 Inadditiontoincometaxesandthereturnonequity,thePSAF inghouse(ACH)service,transferringfundsandsecu- includesthreeotherimputedcosts:interestondebt,salestaxes, rities,andprovidingamultilateralsettlementservice. andanassessmentfordepositinsurancebytheFederalDeposit InsuranceCorporation(FDIC).BoardofGovernorsassetsand TheReserveBankschargefeesforprovidingthese coststhatarerelatedtopricedservicesarealsoallocatedto “pricedservices.” pricedservices;intheproformafinancialstatementsattheend Table1.PricedServicesCostRecovery Millionsofdollars,exceptasnoted Operatingexpensesand Year Revenuefromservices1 Targetedreturnonequity3 Totalcosts Costrecovery(percent)4,5 imputedcosts2 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 2011 478.6 444.4 16.8 461.2 103.8 2002–2011 8,352.8 7,792.9 681.3 8,474.2 98.6 Note:Hereandelsewhereinthischapter,componentsmaynotsumtototalsoryieldpercentagesshownbecauseofrounding. 1 Forthe10-yearperiod,includesrevenuefromservicesof$7,837.0millionandotherincomeandexpense(net)of$515.7million. 2 Forthe10-yearperiod,includesoperatingexpensesof$7,506.9million,imputedcostsof$42.1million,andimputedincometaxesof$243.8million. 3 Beginningin2009,thePSAFhasbeenadjustedtoreflecttheactualclearingbalancelevelsmaintained;previously,thePSAFwascalculatedbasedonaprojectionofclearing balancelevels. 4 Revenuefromservicesdividedbytotalcosts. 5 Forthe10-yearperiod,costrecoveryis95.3percent,includingthereductioninequityrelatedtoASC715reportedbythepricedservices.

136 98thAnnualReport|2011 thepast10years,ReserveBankshaverecovered in2011,adecreaseof 12.1percentfrom2010(see 98.6percentof theirpricedservicescosts,including table2).ThedeclineinReserveBankcheckvolume thePSAF(seetable1).3 continuestobeinfluencedbynationwidetrendsaway fromtheuseof checks.7 In2011,ReserveBanksrecovered103.8percentof totalpricedservicescosts,includingthePSAF.4The Byyear-end2011,99.9percentof checkdeposits Banks’operatingcostsandimputedexpensestotaled processedbytheReserveBanksand99.7percentof $444.4million.Revenuefromoperationstotaled checkspresentedbytheReserveBankstopaying $477.4millionandotherincomewas$1.2million, bankswereprocessedelectronically.Byyear-end resultinginnetincomefrompricedservicesof 2011,98percentof unpaidcheckswerereturnedtoa $34.1million.5 ReserveBankelectronicallyand90percentwere deliveredbytheReserveBanktothebankof first TheReserveBanksareengagedinanumberof tech- depositelectronically.Theincreasedacceptanceof nologyinitiativesthatwillmodernizetheirpricedser- electronicreturnsinthepastcoupleof yearsispartly vicesprocessingplatformsoverthenextseveralyears. duetoexpandedproductoptionsofferedbythe TheBanksareintheprocessof implementinganew ReserveBanks,suchasaPDFdeliveryoptionthat end-to-endelectroniccheck-processingsystemto smallerdepositoryinstitutionsusetoreceivereturns. improvetheefficiencyandreliabilityof theircurrent check-processingoperations.Theyalsocontinued Commercial Automated effortstomigratetheFedACH,FedwireFunds,and Clearinghouse Services FedwireSecuritiesservicesoff amainframesystem andtoadistributedcomputingenvironment. In2011,theReserveBanksrecovered100.8percent of thetotalcostsof theircommercialACHservices, Commercial Check-Collection Service includingtherelatedPSAF.ReserveBankoperating expensesandimputedcoststotaled$106.9million. In2011,ReserveBanksrecovered105.4percentof thetotalcostsof theircommercialcheck-collection RevenuefromACHoperationstotaled$111.7million service,includingtherelatedPSAF.TheBanks’oper- andotherincometotaled$0.3million,resultingin atingexpensesandimputedcoststotaled$237.8mil- netincomeof $5.1million.TheReserveBanksprolion.Revenuefromoperationstotaled$259.2million cessed10.4billioncommercialACHtransactions,an andotherincometotaled$0.7million,resultingin increaseof 1.1percentfrom2010. netincomeof $22.2million.In2011,check-service revenuefromoperationsdecreased$94.4million In2010,theReserveBanksintroducedanopt-in, from2010.6ReserveBankshandled6.8billionchecks same-dayACHproductthatclearsandsettles selectedconsumerdebitpaymentsonthesameday ofthischapter,Boardassetsarepartoflong-termassets,and ratherthanovernight.Theservicehashadlimited Boardexpensesareincludedinoperatingexpenses. adoptionoverthepasttwoyears,butitsavailability 3 EffectiveDecember31,2006,theReserveBanksimplemented hasspurredbroaderindustrydiscussionsabout theFinancialAccountingStandardsBoard’sStatementof FinancialAccountingStandards(SFAS)No.158,Employers’ whethertoestablishasame-dayserviceinvolving AccountingforDefinedBenefitPensionandOtherPostretirement bothU.S.ACHoperatorsandallACHparticipants. Plans[AccountingStandardsCodification(ASC)Topic715 (ASC715),Compensation–RetirementBenefits],whichhas resultedintherecognitionofa$288.9millionreductionin Fedwire Funds and National equityrelatedtothepricedservices’benefitplansthrough2011. Settlement Services Includingthisreductioninequity,whichrepresentsadeclinein economicvalue,resultsincostrecoveryof95.3percentforthe 10-yearperiod.FordetailsonhowimplementingASC715 In2011,ReserveBanksrecovered103.0percentof affectedtheproformafinancialstatements,refertonotes3and thecostsof theirFedwireFundsandNationalSettle- 5tothe“ProFormaFinancialStatementsforFederalReserve PricedServices”attheendofthischapter. result,in2011,therewerenocostsorimputedrevenuesassoci- 4 Totalcostisthesumofoperatingexpenses,imputedcosts atedwiththetransportationofcommercialchecksbetween (incometaxes,interestondebt,interestonfloat,salestaxes,and ReserveBankcheck-processingoffices. theFDICassessment),andthetargetedreturnonequity. 7 FederalReserveSystemretailpaymentsresearchsuggeststhat 5 Otherincomeisinvestmentincomeearnedonclearingbalances thenumberofcheckswrittenintheUnitedStateshasbeen netofthecostofearningscredits,anamounttermednet decliningsincethemid-1990s.Fordetails,see“The2010Federal incomeonclearingbalances. ReservePaymentsStudy:NoncashPaymentTrendsinthe 6 In2008,theReserveBanksdiscontinuedthetransportationof UnitedStates,2006–2009”(December2010),www.frbservices commercialchecksbetweentheircheck-processingoffices.Asa .org/files/communications/pdf/press/2010_payments_study.pdf.

FederalReserveBanks 137 Table2.ActivityinFederalReservePricedServices,2009–2011 Thousandsofitems Percentchange Service 2011 2010 2009 2010to2011 2009to2010 Commercialcheck 6,779,607 7,711,833 8,584,929 -12.1 -10.2 CommercialACH 10,348,802 10,232,757 9,966,260 1.1 2.7 Fedwirefundstransfer 129,734 127,762 127,357 1.5 0.3 Nationalsettlement 571 522 464 9.4 12.5 Fedwiresecuritiestransfer 7,271 7,913 10,519 -8.3 -24.6 Note:Activityincommercialcheckisthetotalnumberofcommercialcheckscollected,includingprocessedandfine-sortitems;incommercialACH,thetotalnumberof commercialitemsprocessed;inFedwirefundstransferandsecuritiestransfer,thenumberoftransactionsoriginatedonlineandoffline;andinnationalsettlement,thenumber ofsettlemententriesprocessed. mentServices,includingtherelatedPSAF.Reserve fromthe522,000settlemententriesprocessedin Bankoperatingexpensesandimputedcostsforthese 2010. operationstotaled$78.8millionin2011.Revenue fromtheseservicestotaled$84.0million,andother Fedwire Securities Service incomeamountedto$0.2million,resultinginanet incomeof $5.4million. In2011,theReserveBanksrecovered103.1percent of thetotalcostsof thepriced-servicecomponentof FedwireFundsService theirFedwireSecuritiesService,includingtherelated TheFedwireFundsServiceallowsitsparticipantsto PSAF.TheBanks’operatingexpensesandimputed usetheirbalancesatReserveBankstotransferfunds costsforprovidingthisservicetotaled$21.0million tootherparticipantsintheservice.In2011,thenum- in2011.Revenuefromtheservicetotaled$22.5milberof Fedwirefundstransfersoriginatedbydeposi- lionandtherewasnootherincome,resultinginanet toryinstitutionsincreased1.5percentfrom2010,to incomeof $1.5million. approximately129.7million.Theaveragedailyvalue of Fedwirefundstransfersin2011was$2.6trillion, TheFedwireSecuritiesServiceallowsitsparticipants anincreaseof 9.6percentfromthepreviousyear. totransferelectronicallytootherserviceparticipants certainsecuritiesissuedbytheU.S.Treasury,federal InNovember2011,theFederalReserveBanksintro- governmentagencies,government-sponsoredenterducedanewmessageformatfortheFedwireFunds prises,andcertaininternationalorganizations.8In Service,theculminationof yearsof planningand 2011,thenumberof non-Treasurysecuritiestransfers engagementwithdepositoryinstitutionsandtheir processedviatheservicedecreased8.3percentfrom corporatecustomers.Thenewformatwasimple- 2010,toapproximately7.3million. mentedtosupportextendedcharacterbusiness remittanceinformation,animprovedcoverpayments Float solution,anewfieldtosupportpaymentnotification andtracking,andbetteralignmentwithSWIFTmes- In2011,theFederalReservehaddailyaveragecredit sageformats. floatof $1,151.8million,comparedwithdailyaveragecreditfloatof $1,795.7millionin2010.9 NationalSettlementService TheNationalSettlementServiceisamultilateral 8 Theexpenses,revenues,volumes,andfeesreportedherearefor settlementsystemthatallowsparticipantsinprivatetransfersofsecuritiesissuedbyfederalgovernmentagencies, sectorclearingarrangementstosettletransactions government-sponsoredenterprises,andcertaininternational usingFederalReservebalances.In2011,theservice organizations.ReserveBanksprovideTreasurysecuritiesservicesintheirroleastheU.S.Treasury’sfiscalagent.Theseserprocessedsettlementfilesfor16localandnational vicesarenotconsideredpricedservices.Fordetails,see“Treasprivate-sectorarrangements,adecreasefromthe19 urySecuritiesServices”onpage139. arrangementsactivein2010.TheReserveBankspro- 9 CreditfloatoccurswhentheReserveBankspresentchecksand cessedslightlymorethan6,900filesthatcontained otheritemstothepayingbankpriortoprovidingcredittothe depositingbank(debitfloatoccurswhentheReserveBanks around571,000settlemententriesforthesearrangecreditthedepositingbankbeforepresentingchecksandother mentsin2011.Activityin2011representsanincrease itemstothepayingbank).

138 98thAnnualReport|2011 Provision of Federal Reserve Accounts businesscosteffectively.Theapplicationswillalso and Services to Financial Market Utilities facilitatebusinesscontinuityandcontingencyplanningandenhancethesupportprovidedtoReserve Financialmarketutilities(FMUs)manageandoper- Bankcustomers. atemultilateralsystemsforthepurposeof transferring,clearing,orsettlingpayments,securities,or During2011,theFederalReserveeliminatedthecurotherfinancialtransactionsamongfinancialinstitu- rencypaying,receiving,andprocessingoperationsat tions,orbetweenfinancialinstitutionsandanFMU. theSanAntonioandNashvilleBranchesand TheReserveBankscurrentlyprovideaccountsand replacedthemwithoutsourceddepotoperations. servicesonlytoFMUswithbankingchartersina Armoredcarriersoperatethedepots,whichserveas similarmannertootherdepositoryinstitutions.Title collectionpointsfordepositoryinstitutions'currency VIIIof theDodd-FrankActallowstheBoardto depositsanddistributionpointsfortheirorders.The authorizeaFederalReserveBanktoprovide armoredcarriertransportsthedepositstothenearest accountsandservicestoFMUs,irrespectiveof char- ReserveBankcashoperationforprocessing,andthe tertype,thataredesignatedassystemicallyimpor- ReserveBankpreparescurrencyordersforthedepot tantbytheFinancialStabilityOversightCouncil, operatortodistributetodepositoryinstitutions.The subjecttoanyapplicablerules,orders,standards,or PittsburghBranchfunctionedasaFederalReserve guidelinesasprescribedbytheBoard. operateddepotfrom1997to2011.During2011,the FederalReserveoutsourcedthePittsburghdepot operationtoanarmoredcarrier.TheFederalReserve Currency and Coin nowhas10cashdepots,allof whichareoutsourced toarmoredcarriers. TheFederalReserveBoardistheissuingauthority forthenation’scurrency(intheformof Federal Newfunctionalityof high-speedsortingsensors Reservenotes).In2011,theBoardpaidtheU.S. allowedtheBankstoimplementapolicyinApril TreasuryDepartment’sBureauof Engravingand thatreducedtheprematuredestructionof notesused Printing(BEP)approximately$623.3milliontopro- extensivelyfortransactionalpurposes($1,$5,$10, duce6.2billionFederalReservenotes.TheFederal and$20notes)byallowingReserveBankstoaccept ReserveBanksdistributeandreceivecurrencyand fromandreturntodepositoryinstitutionsbank cointhroughdepositoryinstitutionsinresponseto noteseitherportrait-side-uporportrait-side-down. publicdemand.In2011,theReserveBanksdistrib- Thismisfacednotespolicydecreasedthedestruction uted36.9billionFederalReservenotesintocircula- rateof $1notes5percentagepoints,from21percent tion(payments),a1.6percentincreasefrom2010, to16percent,anddecreasedtheaveragedestruction andreceived35.1billionFederalReservenotesfrom rateof $5through$20notes4percentagepoints, circulation,a0.7percentdecreasefrom2010.The from22percentto18percent,betweenApriland valueof FederalReservenotesincirculation December.Asaresultof thispolicy,averagenotelife increasedapproximately9.6percentin2011,to forthesedenominationswillincreasebyanestimated $1,034.5billionatyear-end,largelybecauseof inter- 10months.Alsoasaresultof thepolicy,the2012 nationaldemandfor$100notes.In2011,theReserve budgetfornewcurrencydecreasedby$14million. Banksalsodistributed68.1billioncoinsintocirculation,a1.5percentdecreasefrom2010,andreceived TheBoardcontinuestoworkwiththeBEPandthe 59.8billioncoinsfromcirculation,a4.2percent U.S.SecretServicetoproduceamore-secure,newdecreasefrom2010. design$100note.During2011,theBoardcollaboratedwiththeBEPanditspapersuppliertoresolve During2011,theReserveBanksachievedanearly thecreasingproblemidentifiedbytheBEPin2010. 10percentincreaseincurrency-processingefficiency, TheBEPresumedproductionof thenew-design$100 whichwasassociatedwithaprogramcompletedin noteinlate2011andtheresultsof productiontesting 2010toimprovethehardwareandupgradethe indicatethatthesemitigationstepshavereducedthe ReserveBanks’high-speedcurrency-processing incidenceof creasing. machines’software.ReserveBankscontinueto developanewcashautomationplatformthatwill TheBoardanditsconsultingfirmcontinuetopartreplacelegacysoftwareapplications,automatebusi- nerwiththeBEPindevelopinganewqualitynessconceptsandprocesses,andemploytechnolo- assuranceprogramforcurrencyattheBEP.Thisnew giestomeetcurrentandfutureneedsforthecash programwillenabletheBEPtomeettheBoard’s

FederalReserveBanks 139 increasingprintorderproductionquantityrequire- Treasury Securities Services mentsandtheproductionof more-complexbank notesintothefuture. TheReserveBanksworkcloselywithTreasury’s Bureauof thePublicDebtinsupportof theborrowingneedsof thefederalgovernment.TheBanksauc- Fiscal Agency and Government tion,issue,maintain,andredeemsecurities;provide Depository Services customerservice;andoperatetheautomatedsystems supportingU.S.savingsbondsandmarketableTreasurysecurities(bills,notes,andbonds).Treasurysecu- Asfiscalagentsanddepositoriesforthefederalgovritiesservicesconsistof retailsecuritiesprograms ernment,theFederalReserveBanksauctionTreasury (whichprimarilyserveindividualinvestors)and securities,processelectronicandcheckpaymentsfor wholesalesecuritiesprograms(whichserveinstitu- Treasury,collectfundsowedtothefederalgoverntionalcustomers). ment,maintainTreasury’sbankaccount,and develop,operate,andmaintainanumberof automatedsystemstosupportTreasury’smission.The Retail Securities Programs ReserveBanksalsoprovidecertainfiscalagencyand depositoryservicestootherentities;theseservicesare ReserveBankoperatingexpensesfortheretailsecuriprimarilyrelatedtobook-entrysecurities.Treasury tiesprogramswere$79.3millionin2011,reflecting andotherentitiesfullyreimbursedtheReserveBanks an8.5percentincreasecomparedwith$73.1million forthecostsof providingfiscalagencyanddeposi- in2010.Thiscostincreaseislargelyexplainedbythe toryservices. transitionandimplementationcostsassociatedwith theBureauof thePublicDebt’smandatetoconsoli- In2011,fiscalagencyexpensesamountedto datetheReserveBanks’savingsbondoperations, $484.2million,a6.1percentincreaseover2010(see implementimageprocessingforsavingsbond table3).Thesecostsincreasedasaresultof requests redemptions,andcontinueimplementingtheTreasfromTreasury’sBureauof thePublicDebtand uryRetailE-Servicesinitiative. FinancialManagementService.SupportforTreasury programsaccountedfor94.2percentof thecost,and In2011,Treasurydecidedtoconsolidatethesavings supportforotherentitiesaccountedfor5.8percent. bondoperationsintoasinglelocation.TheReserve Table3.ExpensesoftheFederalReserveBanksforFiscalAgencyandDepositoryServices,2009–2011 Thousandsofdollars Agencyandservice 2011 2010 2009 DepartmentoftheTreasury BureauofthePublicDebt Treasuryretailsecurities 79,346 73,104 73,679 Treasurysecuritiessafekeepingandtransfer 11,187 10,136 8,815 Treasuryauction 29,258 30,750 30,216 Computerinfrastructuredevelopmentandsupport 1,969 1,980 2,333 Otherservices 4,036 1,646 1,375 Total 125,796 117,615 116,417 FinancialManagementService Paymentservices 125,196 112,224 104,355 Collectionservices 38,707 37,611 37,967 Cash-managementservices 53,832 48,226 49,046 Computerinfrastructuredevelopmentandsupport 67,014 66,461 66,958 Otherservices 9,536 8,815 7,393 Total 294,285 273,337 265,719 OtherTreasury Total 36,233 37,793 40,390 Total,Treasury 456,314 428,744 422,527 OtherFederalAgencies Total,otheragencies 27,893 27,700 27,758 Totalreimbursableexpenses 484,207 456,445 450,285

140 98thAnnualReport|2011 Bankscompletedtheconsolidationwithinbudget, GoDirectisanongoingeffortfocusedonconverting aheadof schedule,andwithnodegradationof cus- checkbenefitpaymentstodirectdepositordebit tomerservice.Inaddition,theReserveBanksbegan cards.In2011,expensesforGoDirectincreased aprojecttotakeadvantageof developmentsinimage 69.0percent,tomorethan$25million,largelyasa processingtohandlesavingsbondredemptions, resultof theconstructionof anewGoDirectcall whichwillallowtheReserveBankstoretiresoftware center.GOVerifyisaninitiativebegunin2011and thatwasbuiltsolelytosupportTreasurysavings- currentlyprovidesasinglepointof entry,orportal, bondprocessing.Finally,theReserveBankscontin- wherefederalagencieswillcomplywithanOMB uedworkingwiththeBureauof thePublicDebton mandatetoqueryfivedatasourcesbeforemaking theTreasuryRetailE-Servicesinitiative,whichwill federalpayments.Thesedatasourcesarecollectively createavirtualcustomerserviceandsupportenvi- knownasthe“DoNotPayList.”In2011,expenses ronmentacrosstheBureauandReserveBankssites. forGOVerifywere$2.2million. Eachof theseinitiativesinvolvesup-frontcostsbutis expectedtoyieldsignificantsavingsinthefuture. TheReserveBanksalsomanagetheStoredValue Card(SVC)programandtheInternetPaymentPlat- Wholesale Securities Programs form(IPP).TheSVCprogramprovidesstoredvalue cardsforusebymilitarypersonnelonmilitarybases. TheReserveBankssupportwholesalesecuritiespro- In2011,theSVCprogram’sexpensesincreased gramsthroughthesale,issuance,safekeeping,and 6.6percent,to$18.1million,primarilybecauseof a transferof marketableTreasurysecuritiesforinstitu- requestfromthemilitarytopurchaseadditional tionalinvestors.ReserveBankoperatingexpensesin EagleCash(SVC)cardsandnewlaptops.These 2011insupportof Treasurysecuritiesauctionswere expenseswereslightlyoffsetbythecancellationof a $29.2million,comparedwith$30.7millionin2010. majorSVCdeployment. In2011,theBanksconducted269Treasurysecurities auctions,comparedwith301in2010.Thedecreasein TheInternetPaymentPlatform(IPP)ispartof thenumberof auctionswasattributableprimarilyto Treasury’sall-electronicinitiativeandisanelectronic thediscontinuationof specialcash-managementbill invoicingandpaymentinformationsystemthat auctionsthatfundedtheSupplementaryFinancing allowsvendorstoenterinvoicedataelectronically, Program(SFP).TheSFPwasintroducedbyTreasury eitherthroughaweb-basedportalorelectronicsubin2008toassisttheFederalReserveSystemwith mission.TheIPPaccepts,processes,andpresents operationsrelatedtothefinancialcrisis. datafromagenciesandsuppliersystemsrelatedtoall stagesof thetransactions.During2011,theFederal OperatingexpensesassociatedwithTreasurysecuri- ReserveBanks’IPPexpensesincreased25.8percent, tiessafekeepingandtransferactivitieswere$11.2mil- to$9.1million.Thisincreaseisprimarilydrivenby lionin2011,comparedwith$10.1millionin2010. IPP’sincreasedeffortstoexpandagencyoutreach Thecostincreasereflectedloweragencyvolumein andsupportinresponsetoTreasury’sinitiative. 2011,whichshiftedmorecosttoTreasury. Collection Services Payments Services TheReserveBanksalsoworkcloselywithTreasury’s TheReserveBanksworkcloselywithTreasury’s FinancialManagementServicetocollectfundsowed FinancialManagementServiceandothergovern- thefederalgovernment,includingvarioustaxes,fees mentagenciestoprocesspaymentstoindividualsand forgoodsandservices,anddelinquentdebts.In2011, companies.Forexample,theBanksprocessfederal ReserveBankoperatingexpensesrelatedtocollection payrollpayments,SocialSecurityandveterans’ben- servicesincreasedby2.9percentlargelyasaresultof efits,incometaxrefunds,vendorpayments,and ongoingsupportforTreasury’sCollectionsandCash othertypesof payments. ManagementModernizationinitiative. ReserveBankoperatingexpensesforpayments- TheReserveBanksalsocontinuedtooperate relatedactivitytotaled$125.2millionin2011,com- Pay.gov,anapplicationsupportingTreasury’sproparedwith$112.2millionin2010.Thesignificant gramthatallowsthepublictousetheInternetto increaseinexpensesislargelyduetoexpanded authorizeandinitiatepaymentstofederalagencies. requirementsforseveralTreasuryprograms,notably Duringtheyear,thePay.govprogramwasexpanded GoDirectandGOVerify. toinclude103newagencyprograms,whichalmost

FederalReserveBanks 141 doubledthenumberof onlinepaymentsprocessedby tion,andtheGovernmentNationalMortgage Pay.gov.Thisexpansionresultedinexpensesincreas- Association. ing25.0percent,to$10.5million. Postalmoneyordersalsoaccountforasignificant TheReserveBankscontinuedtosupportthegovern- portionof theamountof workperformedforother ment’scentralizeddelinquentdebt-collectionpro- entities;theyareprocessedprimarilyinimageform, gram.Specifically,theBanksdevelopedandmain- resultinginoperationalimprovements,lowerstaffing tainedsoftwarethatfacilitatesthecollectionof delin- levels,andlowercoststotheU.S.PostalService. quentdebtsowedtofederalagenciesandstatesby Postalmoneyordersaccountedfor14.9percent,or matchingfederalpaymentsagainstdelinquentdebts, $4.1million,of ReserveBankoperatingexpensesfor includingpast-duechildsupportpaymentsowedto servicesprovidedtootherentities. custodialparents. Use of Federal Reserve Treasury Cash-Management Services Intraday Credit TheReserveBanksmaintainTreasury’soperating cashaccountandprovidecollateral-managementand TheBoard’sPaymentSystemRisk(PSR)policygovcollateral-monitoringservicesforthoseTreasuryproernstheuseof FederalReserveBankintradaycredit, gramsthathavecollateralrequirements.TheReserve alsoknownasdaylightoverdrafts.Adaylightover- BanksalsosupportTreasury’seffortstomodernize draftoccurswhenaninstitution’saccountactivity itsfinancialmanagementprocessesbydeveloping createsanegativebalanceintheinstitution’sFederal software,operatinghelpdesks,andmanagingproj- Reserveaccountatanytimeintheoperatingday. ectsonbehalf of theFinancialManagementService. Daylightoverdraftsenableaninstitutiontosendpay- In2011,ReserveBankoperatingexpensesrelatedto mentsmorefreelythroughoutthedaythanif itwere Treasurycash-managementservicestotaled limitedstrictlybyitsavailablefundsbalance.In2011, $53.8million,comparedwith$48.2millionin2010. theBoardimplementedsignificantrevisionstothe PSRpolicytorecognizeexplicitlytheroleof thecen- During2011,theReserveBankscontinuedtosuptralbankinprovidingintradaybalancesandcreditto portTreasury’sefforttoimprovecentralizedgovernhealthydepositoryinstitutionsandtoprovidecollatmentaccountingandreportingfunctions.Inparticueralizedintradaycreditatazerofee.Thesechanges lar,theReserveBankscollaboratedwiththeFinanbetteralignedtheFederalReserve’sintradaycredit cialManagementServiceonseveralongoingsoftware policywiththatof othercentralbanks. developmentefforts,suchastheGovernmentwide AccountingandReportingModernizationinitiative, Institutionsheldhistoricallyhighlevelsof overnight whichisintendedtoprovideTreasurywithamodernbalances(onaverageabout$1.5trillion)atthe izedsystemforthecollectionanddisseminationof ReserveBanksin2011,whiledemandfordaylight financialmanagementandaccountinginformation overdraftsonaverageremainedhistoricallylow.In transmittedfromandtofederalprogramagencies. 2011,averagedaylightoverdraftsacrosstheSystem decreasedtojustunder$2billionfrommorethan Services Provided to Other Entities $6billionin2010,adecreaseof about70percent(see figure1).Similarly,theaveragelevelof peakdaylight Whenpermittedbyfederalstatuteorwhenrequired overdraftsdecreasedtoalmost$30billionin2011 bytheSecretaryof theTreasury,theReserveBanks from$60billionin2010,adecreaseof about50perprovidefiscalagencyanddepositoryservicestoother cent.Beforethefinancialcrisis,overnightbalances domesticandinternationalentities.ReserveBank weremuchloweranddaylightoverdraftssignificantly operatingexpensesforservicesprovidedtoother higher.In2007,institutionsheldonaveragelessthan entitieswere$27.9millionin2011,comparedwith $20billioninovernightbalancesandtotalaverage $27.7millionin2010,achangeof lessthan1percent. daylightoverdraftswere$60billion.In2011,institu- Book-entrysecuritiesissuanceandmaintenance tionspaidlessthan$1millionindaylightoverdraft activitiesaccountforasignificantamountof the fees,downfrom$6millionin2010.Thedecreasein workperformedforotherentities,withthemajority feesislargelyattributabletothe2011policyrevision performedfortheFederalHomeLoanMortgage thateliminatedfeesforcollateralizeddaylight Association,theFederalNationalMortgageAssocia- overdrafts.

142 98thAnnualReport|2011 Figure1.AggregateDaylightOverdrafts,2007–2011 $ Billions 200 180 160 140 120 100 Peak daylight overdrafts 80 60 Average daylight overdrafts 40 20 0 2007 2008 2009 2010 2011 Electronic Access to analysisof paymenttransactionsandtohelpautomateriskandcompliance-reportingrequirements. Reserve Bank Services TheReserveBanksprovidedepositoryinstitutions withavarietyof alternativesforelectronicallyaccess- Information Technology ingtheBanks’financialservicespaymentandinformationservices.Theseelectronic-accesssolutionsare In2011,theFederalReserveBankscontinuedto designedtomeettheindividualconnectivityandconimprovetheefficiency,effectiveness,andsecurityof tingencyrequirementsof depositoryinstitution informationtechnology(IT)servicesandoperations. customers. Toimprovetheefficiencyandoverallqualityof Forthepastfewyears,asaresultof thedeclining operations,majormultiyearinitiativesareunderway numberof depositoryinstitutions,ReserveBank toconsolidatethemanagementandfunctionof the electronic-accessconnectionshavedecreased.Atthe FederalReserve’shelpdesk,server,andnetwork sametime,thenumberof employeeswithindeposioperations.Theconsolidationof thehelpdeskfunctoryinstitutionswhohavecredentialsthatestablish tionwassuccessfullycompleted,andprogresscontinthemastrustedusersincreased,reflectinginpartthe uestowardthecentralizationof theremainingenterexpansionof electronicvalue-addedservicespropriseITfunctions. vided.Between2007and2011,thetotalnumberof depositoryinstitutionsintheU.S.declined12.8per- Inaddition,FederalReserveInformationTechnology cent.Thenumberof depositoryinstitutionswith (FRIT)continuedtoleadtheReserveBanks'transielectronic-accessconnectionsdeclined1.3percent, tiontoamorerobustinformationsecuritypostureby whilethenumberof trustedusersincreased13.0perappointingachief informationsecurityofficer centoverthesameperiod. (CISO),whoisresponsibleformaintainingSystem awarenessof informationsecurity(IS)riskandcoor- In2011,theReserveBanksexpandedtheirservice dinatingISactivitiesamongtheFederalReserve packageoptions,addingasimplified,bundledpaymentservicespackage,FedComplete,andimplementinganewproduct,FedTransactionAnalyzer, whichisarisk-managementtooltofacilitatethe

FederalReserveBanks 143 Banks.10TheCISOwillberesponsible,additionally, statementsof theReserveBanksandthoseof the foroverseeingtheongoingtransitiontotheFederal consolidatedLLCentities.14 ReserveSystem’sISframework,whichisbasedon guidancefromtheNationalInstituteof Scienceand In2011,D&Talsoconductedauditsof internalcon- TechnologyandadaptedtotheFederalReserve's trolsoverfinancialreportingforeachof theReserve environment.11 BanksandtheconsolidatedLLCentities.Feesfor D&T’sservicestotaled$8million,of which$2millionwasfortheauditsof theconsolidatedLLCenti- Examinations of the ties.Toensureauditorindependence,theBoard Federal Reserve Banks requiresthatD&Tbeindependentinallmatters relatingtotheaudits.Specifically,D&TmaynotperformservicesfortheReserveBanksorothersthat TheReserveBanksandtheconsolidatedlimited wouldplaceitinapositionof auditingitsownwork, liabilitycompany(LLC)entitiesaresubjecttoseveral levelsof auditandreview.12Thecombinedfinancial makingmanagementdecisionsonbehalf of the ReserveBanks,orinanyotherwayimpairingits statementsof theReserveBanks(see“Federal auditindependence. ReserveBanksCombinedFinancialStatements”in the“FederalReserveSystemAudits”sectionof this TheBoard’sreviewsof theReserveBanksincludea report)aswellasthefinancialstatementsof eachof widerangeof off-siteandon-siteoversightactivities, the12Banksandthoseof theconsolidatedLLC conductedprimarilybyitsDivisionof ReserveBank entitiesareauditedannuallybyanindependentpub- OperationsandPaymentSystems.Divisionpersonnel licaccountantretainedbytheBoardof Governors.13 monitoronanongoingbasistheactivitiesof each Inaddition,theReserveBanks,includingthecon- ReserveBankandconsolidatedLLCentity,FRIT, solidatedLLCentities,aresubjecttooversightbythe andtheOfficeof EmployeeBenefitsof theFederal Boardof Governors,whichperformsitsownreviews. ReserveSystem(OEB),andtheyconductacomprehensiveon-sitereviewof eachReserveBank,FRIT, TheReserveBanksusetheframeworkestablishedby andOEBatleastonceeverythreeyears. theCommitteeof SponsoringOrganizationsof the TreadwayCommission(COSO)toassesstheirinter- Thecomprehensiveon-sitereviewstypicallyinclude nalcontrolsoverfinancialreporting,includingthe anassessmentof theinternalauditfunction’seffecsafeguardingof assets.Withinthisframework,the tivenessanditsconformancetotheInstituteof managementof eachReserveBankannuallyprovides InternalAuditors’(IIA)InternationalStandardsfor anassertionlettertoitsboardof directorsthatcontheProfessionalPracticeof InternalAuditing,applifirmsadherencetoCOSOstandards.Similarly,each cablepoliciesandguidance,andtheIIA’scodeof consolidatedLLCentityannuallyprovidesanasserethics. tionlettertotheboardof directorsof theFederal ReserveBankof NewYork(theNewYorkReserve ThedivisionalsoreviewstheSystemOpenMarket Bank). Account(SOMA)andforeigncurrencyholdingsto determinewhethertheNewYorkReserveBank, TheBoardengagedDeloitte&ToucheLLP(D&T) whileconductingtherelatedtransactions,complies toauditthe2011combinedandindividualfinancial withthepoliciesestablishedbytheFederalOpen MarketCommittee(FOMC)andtoassessSOMA- 10 FRITsuppliesnationalinfrastructureandbusinesslinetechnolrelatedITprojectmanagementandapplicationdevelogyservicestotheFederalReserveBanksandprovidesthought leadershipregardingtheSystem’sinformationtechnologyarchi- opment,vendormanagement,andsystemresiliency tectureandbusinessuseoftechnology. andcontingencyplans.Inaddition,D&Tauditsthe 11 TheNationalInstituteofScienceandTechnologyisanonregu- year-endscheduleof participatedassetandliability latoryfederalagencywithintheU.S.DepartmentofCommerce. accountsandtherelatedscheduleof participated 12 TheconsolidatedLLCentitieswerefundedbytheFederal incomeaccounts.TheFOMCisprovidedwiththe ReserveBankofNewYork(theNewYorkReserveBank),and acquiredfinancialassetsandfinancialliabilitiespursuanttothe policyobjectives.TheconsolidatedLLCentitiesweredeter- 14 Inaddition,D&TauditedtheOfficeofEmployeeBenefitsof minedtobevariableinterestentities,andtheNewYorkReserve theFederalReserveSystem(OEB),theRetirementPlanfor Bankisconsideredtobethecontrollingfinancialinterestholder EmployeesoftheFederalReserveSystem(SystemPlan),and ofeach. theThriftPlanforEmployeesoftheFederalReserveSystem 13 EachconsolidatedLLCentityreimbursestheBoardofGover- (ThriftPlan).TheSystemPlanandtheThriftPlanprovide nors—fromtheentity’savailablenetassets—forthefeesrelated retirementbenefitstoemployeesoftheBoard,theFederal totheauditofitsfinancialstatements. ReserveBanks,andtheOEB.

144 98thAnnualReport|2011 externalauditreportsandareportonthedivision’s and$40millionforOfficeof FinancialResearch review. costs.Netadditionstoanddeductionsfromcurrent netincometotaled$2,016million,whichincludes $2,268millioninrealizedgainsonTreasurysecurities Income and Expenses andfederalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities(GSEMBS), Table4summarizestheincome,expenses,anddistri- $356millioninnetlossassociatedwithconsolidated butionsof netearningsof theReserveBanksfor LLCs,$48millioninotherdeductions,and$152mil- 2011and2010.Incomein2011was$85,241million, lioninunrealizedgainsoninvestmentsdenominated comparedwith$79,301millionin2010. inforeigncurrenciesrevaluedtoreflectcurrentmarketexchangerates.Dividendspaidtomemberbanks, Expensestotaled$8,719million:$3,499millionin setat6percentof paid-incapitalbysection7(1)of operatingexpenses,$3,773millionininterestpaidto theFederalReserveAct,totaled$1,577million. depositoryinstitutionsonreservebalancesandterm deposits,andearningscreditsgrantedtodepository DistributionstotheU.S.Treasuryintheformof institutions,$44millionininterestexpenseonsecuri- interestonFederalReservenotestotaled$75,424miltiessoldunderagreementstorepurchase,$472mil- lionin2011.Thedistributionsequalcomprehensive lioninassessmentsforBoardof Governorsexpendi- incomeafterthedeductionof dividendspaidandthe tures,$649millionfornewcurrencycosts,$242mil- amountnecessarytoequatetheReserveBanks’surlionforConsumerFinancialProtectionBureaucosts, plustopaid-incapital. Table4.Income,Expenses,andDistributionofNetEarningsoftheFederalReserveBanks,2011and2010 Millionsofdollars Item 2011 2010 Currentincome 85,241 79,301 SOMAinterestincome 83,874 74,957 Loaninterestincome 674 3,528 Othercurrentincome1 693 816 Currentexpenses 7,316 6,270 Operatingexpenses2 3,499 3,489 Interestpaidtodepositoryinstitutionsandearningscreditsgranted 3,773 2,687 Interestexpenseonsecuritiessoldunderagreementstorepurchase 44 94 Currentnetincome 77,925 73,031 Netadditionsto(deductionsfrom)currentnetincome 2,016 9,746 ProfitonsalesofTreasurysecurities 2,258 0 Profitonsalesoffederalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities 10 782 Profitonforeignexchangetransactions 152 554 Netincome(loss)fromconsolidatedLLCs -356 7,560 Otheradditions3 -48 850 AssessmentsbytheBoardofGovernors 1,403 1,088 ForBoardexpenditures 472 422 Forcurrencycosts 649 623 ForConsumerFinancialProtectionBureaucosts4 242 33 ForOfficeofFinancialResearchcosts4 40 10 Changeinfundedstatusofbenefitplans -1,162 46 ComprehensiveincomebeforedistributionstoTreasury 77,376 81,735 Dividendspaid 1,577 1,583 Transferredtosurplusandchangeinaccumulatedothercomprehensiveincome 375 884 DistributionstoU.S.Treasury5 75,424 79,268 1 Includesincomefrompricedservices,compensationreceivedforservicesprovided,andsecuritieslendingfees. 2 Includesanetperiodicpensionexpenseof$525millionin2011and$529millionin2010. 3 IncludesdividendsonpreferredinterestsandunrealizedlossonTermAsset-BackedSecuritiesLoanFacilityloans. 4 TheBoardofGovernorsassessestheReserveBankstofundtheoperationsoftheConsumerFinancialProtectionBureauand,foratwo-yearperiodbeginningJuly21,2010, theOfficeofFinancialResearch. 5 InterestonFederalReservenotes.

FederalReserveBanks 145 The“StatisticalTables”sectionof thisreportpro- SOMA Holdings and Loans videsmoredetailedinformationontheReserve BanksandtheLLCs.Table9isastatementof condi- TheReserveBanks’averagenetdailyholdingsof tionforeachReserveBank;table10detailsthe securitiesandloansduring2011amountedto incomeandexpensesof eachReserveBankfor2011; $2,576,882million,anincreaseof $453,109million table11showsacondensedstatementforeach from2010(seetable5). ReserveBankfortheyears1914through2011;and table13givesthenumberandannualsalariesof offi- SOMA Securities Holdings cersandemployeesforeachReserveBank.A detailedaccountof theassessmentsandexpenditures Theaveragedailyholdingsof Treasurysecurities of theBoardof GovernorsappearsintheBoardof increasedby$720,800million,toanaveragedaily GovernorsFinancialStatements(see“Federal amountof $1,557,878million.Theaveragedaily ReserveSystemAudits”). holdingsof GSEdebtsecuritiesdecreasedby Table5.SystemOpenMarketAccount(SOMA)HoldingsandLoansoftheFederalReserveBanks,2011and2010 Millionsofdollars,exceptasnoted Averagedailyassets(+)/liabilities(–) Currentincome(+)/expense(–) Averageinterestrate(percent) Item 2011 2010 2011 2010 2011 2010 U.S.Treasurysecurities1 1,557,878 837,078 42,257 26,373 2.71 3.15 Government-sponsoredenterprisedebtsecurities1 125,698 166,810 3,053 3,510 2.43 2.10 Federalagencyandgovernment-sponsoredenterprise mortgage-backedsecurities2 918,007 1,079,230 38,281 44,839 4.17 4.15 Foreigncurrencydenominatedassets3 26,566 24,936 249 223 0.94 0.89 Securitiespurchasedunderagreementstoresell 0 0 0 0 0.00 0.00 Centralbankliquidityswaps4 5,368 989 34 12 0.63 1.21 OtherSOMAassets5 8 288 * * … … TotalSOMAassets 2,633,525 2,109,331 83,874 74,957 3.18 3.55 Securitiessoldunderagreementstorepurchase -72,159 -58,476 -44 -94 0.06 0.16 OtherSOMAliabilities6 -56 -799 * … 0.00 0.00 TotalSOMAliabilities -72,215 -59,275 -44 -94 0.06 0.16 TotalSOMAholdings 2,561,310 2,050,056 83,830 74,863 3.27 3.65 Primary,secondary.andseasonalcredit 62 4,709 * 32 0.43 0.68 Termauctioncredit 0 7,105 0 18 … 0.25 Totalloanstodepositoryinstitutions 62 11,814 * 50 0.43 0.42 CreditextendedtoAmericanInternationalGroup,Inc. (AIG),net7,8 711 22,874 409 2,728 3.94 11.93 TermAsset-BackedSecuritiesLoanFacility(TALF)9 14,799 39,029 265 750 1.79 1.92 Totalloanstoothers 15,510 61,903 674 3,478 4.35 5.62 Totalloans 15,572 73,717 674 3,528 4.33 1.35 TotalSOMAholdingandloans 2,576,882 2,123,773 84,504 78,391 3.28 3.69 1 Facevalue,netofunamortizedpremiumsanddiscounts. 2 Facevalueofthesecurities,whichistheremainingprincipalbalanceoftheunderlyingmortgages,netofunamortizedpremiumsanddiscounts.Doesnotincludeunsettled transactions. 3 Includesaccruedinterest.Foreigncurrencydenominatedassetsarerevalueddailyatmarketexchangerates. 4 Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. 5 Cashandshort-terminvestmentsrelatedtothefederalagencyandgovernment-sponsoredenterprisemortgage-backedsecuritiesportfolio. 6 RepresentstheobligationtoreturncashmarginpostedbycounterpartiesascollateralundercommitmentstopurchaseandsellfederalagencyandGSEMBS,aswellas obligationsthatarisefromthefailureofasellertodeliversecuritiesonthesettlementdate. 7 Averagedailybalanceincludesoutstandingprincipalandcapitalizedinterestnetofunamortizeddeferredcommitmentfeesandallowanceforloanrestructuring,and excludesundrawnamountsandcreditextendedtoconsolidatedlimitedliabilitycompanies. 8 AsaresultoftheclosingoftheAIGrecapitalizationplan,$381millionofdeferredcommitmentfeesandallowanceswererecognizedasinterestincome.Theaverageinterest ratecalculationfor2011excludestheseitems. 9 Representstheremainingprincipalbalance.ExcludesamountnecessarytoadjustTALFloanstofairvalueatDecember31,whichisreportedin“Otherassets”inthe StatementofConditionoftheFederalReserveBanksinTable9Ainthe“StatisticalTables”sectionofthisreport. * Lessthan$500thousand. …Notapplicable.

146 98thAnnualReport|2011 $41,112million,toanaveragedailyamountof Therewerenoextensionsof creditoutstandingunder $125,698million.Theaveragedailyholdingsof fed- theTermAuctionFacilityin2011;thelastauction eralagencyandGSEMBSdecreasedby undertheprogramwasconductedinMarch2010, $161,223million,toanaveragedailyamountof andtherelatedloansmaturedinApril2010. $918,007million. OnJanuary14,2011,alloutstandingdrawsunderthe Theincreaseinaveragedailyholdingsof Treasury AmericanInternationalGroup,Inc.(AIG)revolving securitiesisduetothepurchasesthroughalarge- lineof creditandtherelatedaccruedinterest,capitalscaleassetpurchaseprogramandreinvestmentof izedinterest,andcapitalizedcommitmentfeeswere principalpaymentsfromotherSOMAholdingsin paidinfullasaresultof theclosingof theAIG Treasurysecurities.Theaveragedailyholdingsof recapitalizationplan.AIG’soutstandingdrawsunder GSEdebtsecuritiesandfederalagencyandGSE therevolvinglineof credithadanaveragedailybal- MBSdecreasedasaresultof principalpayments anceof $711millionin2011,whichearnedinterestat received. anaveragerateof 3.94percent. BeginninginAugust2010,principalpayments Theaveragedailybalanceof TermAsset-Backed receivedfromTreasurysecurities,GSEdebtsecuri- SecuritiesLoanFacility(TALF)loansin2011was ties,andfederalagencyandGSEMBSwererein- $14,799million,whichearnedinterestatanaverage vestedinTreasurysecurities.BeginninginSeptem- rateof 1.79percent.TheBoardof Governors’ ber2011,principalpaymentsfromGSEdebtsecuri- authorizationfortheextensionof newTALFloans tiesandfederalagencyandGSEMBSwere expiredin2010.TheauthorizationforTALFloans reinvestedinfederalagencyandGSEMBS.There collateralizedbynewlyissuedasset-backedsecurities werenoholdingsof securitiespurchasedunder andlegacycommercialmortgage-backedsecurities agreementstoresellin2011or2010.Averagedaily (CMBS)expiredMarch31,2010,andTALFloans holdingsof foreigncurrencydenominatedassetsin collateralizedbynewlyissuedCMBSexpiredJune30, 2011were$26,566million,comparedwith 2010. $24,936millionin2010.Theaveragedailybalanceof centralbankliquidityswapdrawingswas$5,368mil- Investments of the Consolidated LLCs lionin2011and$989millionin2010.Theaverage dailybalanceof securitiessoldunderagreementsto Additionallendingfacilitiesestablishedduring2008 repurchasewas$72,159million,anincreaseof and2009,underauthorityof section13(3)of the $13,683millionfrom2010. FederalReserveAct,involvedcreatingandlendingto theconsolidatedLLCentities(seetable6).Consis- Theaverageratesof interestearnedontheReserve tentwithgenerallyacceptedaccountingprinciples, Banks’holdingsof Treasurysecuritiesdecreasedto theassetsandliabilitiesof theseLLCshavebeen 2.71percentandtheaverageratesonGSEdebtsecu- consolidatedwiththeassetsandliabilitiesof theNew ritiesincreasedto2.43percentin2011.Theaverage YorkReserveBankinthepreparationof thestaterateof interestearnedonfederalagencyandGSE mentsof conditionincludedinthisreport.Thepro- MBSincreasedto4.17percentin2011.Theaverage ceedsatthematurityortheliquidationof theconinterestratesforsecuritiessoldunderagreementsto solidatedLLCs’assetsareusedtorepaytheloans repurchasedecreasedto0.06percentin2011.The extendedbytheNewYorkReserveBank. averagerateof interestearnedonforeigncurrency denominatedassetsincreasedto0.94percentwhile Federal Reserve Bank Premises theaveragerateof interestearnedoncentralbank liquidityswapsdecreasedto0.63percentin2011. SeveralReserveBankstookactionin2011tomain- Lending tainandrenovatetheirfacilities.ThemultiyearrenovationprogramsattheNewYork,St.Louis,andSan In2011,theaveragedailyprimary,secondary,and FranciscoReserveBanks’headquartersbuildings seasonalcreditextendedbytheReserveBanksto continued.Security-enhancementprogramscontindepositoryinstitutionsdecreasedby$4,647millionto uedatseveralfacilities,includingtheconstructionof $62million.Theaveragerateof interestearnedon aremotevehicle-screeningfacilityandmainentrance primary,secondary,andseasonalcreditdecreasedto lobbysecurityimprovementsfortheDallasReserve 0.43percentin2011,from0.68percentin2010. Bank’sheadquartersbuildings.

FederalReserveBanks 147 Table6.KeyFinancialDataforConsolidatedLimitedLiabilityCompanies,2011and2010 Millionsofdollars CommercialPaper FundingFacilityLLC TALFLLC MaidenLaneLLC MaidenLaneIILLC MaidenLaneIIILLC TotalLLCs Item (CPFF) 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 NetportfolioassetsoftheconsolidatedLLCsandthenetpositionoftheNewYorkReserveBank(FRBNY)andsubordinatedinterestholders Netportfolioassets1 … … 811 665 7,805 27,961 9,257 16,457 17,820 23,583 35,693 68,666 LiabilitiesofconsolidatedLLCs … … 0 0 -684 -915 -3 -2 -3 -4 -690 -921 Netportfolioassetsavailable2 … … 811 665 7,121 27,046 9,254 16,455 17,817 23,579 35,003 67,745 Loansextendedtothe consolidatedLLCsbythe FRBNY3 … … 0 0 4,859 25,845 6,792 13,485 9,826 14,071 21,477 53,401 Otherbeneficialinterests3,4 … … 109 106 1,385 1,315 1,106 1,071 5,542 5,366 8,142 7,858 Totalloansandotherbeneficial interests … … 109 106 6,244 27,160 7,898 14,556 15,368 19,437 29,619 61,259 Cumulativechangeinnetassetssincetheinceptionoftheprogram5 AllocatedtoFRBNY … … 32 -65 877 0 1,130 1,582 1,641 2,775 3,680 4,292 Allocatedtootherbeneficial interests … … 669 624 0 -114 226 317 808 1,367 1,703 2,194 Cumulativechangeinnetassets … … 701 559 877 -114 1,356 1,899 2,449 4,142 5,383 6,486 SummaryofconsolidatedLLCnetincome,includingareconciliationoftotalconsolidatedLLCnetincometotheconsolidatedLLCnetincomerecordedbyFRBNY Portfoliointerestincome6 … 213 0 1 808 1,133 609 794 2,012 2,299 3,429 4,440 Interestexpenseonloans extendedbyFRBNY7 … -4 0 0 -138 -205 -117 -186 -146 -204 -401 -599 Interestexpense–other … 0 -4 -4 -70 -66 -36 -34 -175 -173 -285 -277 Portfolioholdingsgains(losses) … 1 0 0 434 2,571 -991 2,467 -3,363 3,141 -3,920 8,180 Professionalfees … -2 0 -1 -43 -69 -8 -10 -20 -22 -71 -104 Netincome(loss)of consolidatedLLCs … 208 -4 -4 991 3,364 -543 3,031 -1,692 5,041 -1,248 11,640 Less:Netincome(loss)allocated tootherbeneficialinterests … … 44 -75 114 1,135 -91 1,353 -558 2,266 -491 4,679 Netincome(loss)allocatedto FRBNY … 208 -48 71 877 2,229 -452 1,678 -1,134 2,775 -757 6,961 Add:Interestexpenseonloans extendedbyFRBNY,eliminated inconsolidation7 … 4 0 0 138 205 117 186 146 204 401 599 Netincome(loss)recordedby FRBNY … 212 -488 718 1,015 2,434 -335 1,864 -988 2,979 -356 7,560 BalancesofloansextendedtotheconsolidatedLLCsbytheFRBNY Balanceatbeginningoftheyear … 9,378 0 0 25,845 29,233 13,485 16,004 14,071 18,500 53,401 73,115 Accruedandcapitalizedinterest … 4 0 0 138 204 117 186 146 204 401 598 Repayments … -9,382 0 0 -21,124 -3,592 -6,810 -2,705 -4,391 -4,633 -32,325 -20,312 Balanceatendoftheyear … 0 0 0 4,859 25,845 6,792 13,485 9,826 14,071 21,477 53,401 Note:CPFFLLCwasformedtoprovideliquiditytothecommercialpapermarket.ThelastcommercialpaperpurchasesbytheCPFFmaturedonApril26,2010,andtheCPFF wasdissolvedonAugust30,2010.TALFLLCwasformedin2009topurchaseassetsoftheTermAsset-BackedSecuritiesLoanFacility,whichwasformedtoimprovemarket conditionsforasset-backedsecurities.MaidenLaneLLCwasformedtoacquirecertainassetsofBearStearns;MaidenLaneIILLCandMaidenLaneIIILLCwereformedto acquirecertainassetsofAIGanditssubsidiaries. 1 TALF,MaidenLane,MaidenLaneII,andMaidenLaneIIIholdingsarerecordedatfairvalue.Fairvaluereflectsanestimateofthepricethatwouldbereceiveduponsellingan assetifthetransactionweretobeconductedinanorderlymarketonthemeasurementdate. 2 RepresentsthenetassetsavailableforrepaymentofloansextendedbyFRBNYand“otherbeneficiaries”oftheconsolidatedLLCs. 3 Bookvalue.Includesaccruedinterest. 4 TheotherbeneficialinterestholdersaretheU.S.TreasuryforTALFLLC,JPMorganChaseforMaidenLaneLLC,andAIGforMaidenLaneIILLCandMaidenLaneIIILLC. 5 RepresentstheallocationofthechangeinnetassetsandliabilitiesoftheconsolidatedLLCsthatareavailableforrepaymentoftheloansextendedbyFRBNYandtheother beneficiariesoftheconsolidatedLLCs.Thedifferencesbetweenthefairvalueofthenetassetsavailableandthebookvalueoftheloans(includingaccruedinterest)are indicativeofgainsorlossesthatwouldbeincurredbythebeneficiariesiftheassetshadbeenfullyliquidatedatpricesequaltothefairvalue. 6 Interestincomeisrecordedwhenearnedandincludesamortizationofpremiums,accretionofdiscounts,andpaydowngainsandlosses. 7 InterestexpenserecordedbyeachconsolidatedLLContheloansextendedbyFRBNYiseliminatedwhentheLLCsareconsolidatedinFRBNY'sfinancialstatementsand,asa result,theconsolidatedLLCs’netincome(loss)recordedbyFRBNYisincreasedbythisamount. 8 InadditiontothenetincomeattributabletoTALFLLC,FRBNYearned$181milliononTALFloansduringtheyearendedDecember31,2011(interestincomeof$265million andalossonthevaluationofloansof$84million).FRBNYearned$327milliononTALFloansduringtheyearendedDecember31,2010(interestincomeof$750million, lossonthevaluationofloansof$436million,andadministrativefeesof$13million). …Notapplicable.

148 98thAnnualReport|2011 TheNewYorkReserveBankevaluatedthepurchase BankswillmaintainsmallerBranchstaffs.TheCleveof the33MaidenLaneproperty;thepurchasewas landReserveBankispreparingtosellthePittsburgh completedinFebruary2012.TheSanFrancisco Branchbuilding,andtheDallasReserveBankis ReserveBankcontinueditseffortstosellthebuilding evaluatingoptionsfortheSanAntonioBranch formerlyusedtohouseitsSeattleBranchoperations, building. andtheAtlantaReserveBankinitiatedeffortstosell itsNashvilleBranchbuilding.Additionally,the Formoreinformationontheacquisitioncostsand ClevelandandDallasReserveBanksconsolidated netbookvalueof theFederalReserveBanksand certainoperationsperformedattheirPittsburghand Branches,seetable14inthe“StatisticalTables”sec- SanAntonioBranches,respectively,intoother tionof thisreport. ReserveBankoffices.Asaresult,theseReserve

FederalReserveBanks 149 Pro Forma Financial Statements for Federal Reserve Priced Services Table7:ProFormaBalanceSheetforFederalReservePricedServices,December31,2011and2010 Millionsofdollars Item 2011 2010 Short-termassets(Note1) Imputedreserverequirementsonclearingbalances 262.3 248.8 Imputedinvestments 2,805.3 3,463.4 Receivables 38.7 45.6 Materialsandsupplies 1.4 1.2 Prepaidexpenses 7.7 17.2 Itemsinprocessofcollection 275.4 374.5 Totalshort-termassets 3,390.9 4,150.6 Long-termassets(Note2) Premises 180.8 245.3 Furnitureandequipment 38.2 57.3 Leases,leaseholdimprovements,andlong-termprepayments 74.6 65.6 Prepaidpensioncosts 321.9 354.7 PrepaidFDICasset 21.7 25.0 Deferredtaxasset 138.5 132.4 Totallong-termassets 775.7 880.2 Totalassets 4,166.6 5,030.8 Short-termliabilities Clearingbalances 2,622.5 2,487.6 Deferred-availabilityitems 910.3 1,814.7 Short-termdebt 0.0 0.0 Short-termpayables 44.1 43.6 Totalshort-termliabilities 3,576.9 4,345.9 Long-termliabilities Long-termdebt 0.0 0.0 Accruedbenefitcosts 381.3 392.3 Totallong-termliabilities 381.3 392.3 Totalliabilities 3,958.2 4,738.2 Equity(includingaccumulatedothercomprehensivelossof$288.9million and$267.6millionatDecember31,2011and2010,respectively) 208.3 292.6 Totalliabilitiesandequity(Note3) 4,166.6 5,030.8 Note:Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements.

150 98thAnnualReport|2011 Table8:ProFormaIncomeStatementforFederalReservePricedServices,2011and2010 Millionsofdollars Item 2011 2010 Revenuefromservicesprovidedtodepositoryinstitutions(Note4) 477.4 566.7 Operatingexpenses(Note5) 421.3 503.9 Incomefromoperations 56.1 62.9 Imputedcosts(Note6) Interestonfloat -1.3 -3.2 Interestondebt 0.0 0.0 Salestaxes 4.8 5.1 FDICInsurance 3.2 6.8 6.3 8.2 Incomefromoperationsafterimputedcosts 49.3 54.6 Otherincomeandexpenses(Note7) Investmentincome 2.5 10.7 Earningscredits -1.4 1.2 -2.7 7.9 Incomebeforeincometaxes 50.5 62.5 Imputedincometaxes(Note6) 16.3 20.7 Netincome 34.1 41.8 Memo:Targetedreturnonequity(Note6) 16.8 13.1 Note:Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements. Table9:ProFormaIncomeStatementforFederalReservePricedServices,byService,2011 Millionsofdollars Commercialcheck Item Total CommercialACH Fedwirefunds Fedwiresecurities collection Revenuefromservices(Note4) 477.4 259.2 111.7 84.0 22.5 Operatingexpenses(Note5) 421.3 224.0 102.7 74.7 20.0 Incomefromoperations 56.1 35.3 9.0 9.3 2.5 Imputedcosts(Note6) 6.8 3.2 1.8 1.4 0.4 Incomefromoperationsafterimputedcosts 49.3 32.1 7.2 7.8 2.1 Otherincomeandexpenses,net(Note7) 1.2 0.7 0.3 0.2 0.0 Incomebeforeincometaxes 50.5 32.8 7.5 8.0 2.2 Imputedincometaxes(Note6) 16.3 10.6 2.4 2.6 0.7 Netincome 34.1 22.2 5.1 5.4 1.5 Memo:Targetedreturnonequity(Note6) 16.8 8.8 4.1 3.0 0.8 Costrecovery(percent)(Note8) 103.8 105.4 100.8 103.0 103.1 Note:Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements.

FederalReserveBanks 151 Notes to Pro Forma Financial Statements for Priced Services (1)Short-TermAssets TheimputedreserverequirementonclearingbalancesheldatReserveBanksby depositoryinstitutionsreflectsatreatmentcomparabletothatof compensating balancesheldatcorrespondentbanksbyrespondentinstitutions.Thereserve requirementimposedonrespondentbalancesmustbeheldasvaultcashorasbalancesmaintained;thus,aportionof pricedservicesclearingbalancesheldwiththe FederalReserveisshownasrequiredreservesontheassetsideof thebalance sheet.Anotherportionof theclearingbalancesisusedtofinanceshort-termand long-termassets.Theremainderof clearingbalancesanddepositbalancesarising fromfloatareassumedtobeinvestedinaportfolioof investments,shownas imputedinvestments. Receivablesarecomposedof feesduetheReserveBanksforprovidingpricedservicesandtheshareof suspense-accountanddifference-accountbalancesrelatedto pricedservices. Materialsandsuppliesaretheinventoryvalueof short-termassets. Prepaidexpensesincludesalaryadvancesandtraveladvancesforpriced-service personnel. Itemsinprocessof collectionaregrossFederalReservecashitemsinprocessof collection(CIPC),statedonabasiscomparabletothatof acommercialbank. Theyreflectadjustmentsforintra-SystemitemsthatwouldotherwisebedoublecountedonacombinedFederalReservebalancesheet;adjustmentsforitemsassociatedwithnonpriceditems(suchasthosecollectedforgovernmentagencies);and adjustmentsforitemsassociatedwithprovidingfixedavailabilityorcreditbefore itemsarereceivedandprocessed.AmongthecoststoberecoveredundertheMonetaryControlActisthecostof float,ornetCIPCduringtheperiod(thedifference betweengrossCIPCanddeferred-availabilityitems,whichistheportionof gross CIPCthatinvolvesafinancingcost),valuedatthefederalfundsrate. (2)Long-TermAssets Long-termassetsconsistof long-termassetsusedsolelyinpricedservices,the priced-serviceportionof long-termassetssharedwithnonpricedservices,anestimateof theassetsof theBoardof Governorsusedinthedevelopmentof priced services,animputedprepaidFederalDepositInsuranceCorporation(FDIC)asset (seenote6),andadeferredtaxassetrelatedtothepricedservicespensionand postretirementbenefitsobligation(seenote3). (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 FinancialAccountingStan-

152 98thAnnualReport|2011 dards(SFAS)No.158,Employers’AccountingforDefinedBenefitPensionand 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 ReserveBankpricedservicesrecognizedanetpensionassetin2011and2010.The changeinthefundedstatusresultedinacorrespondingincreaseinaccumulated othercomprehensivelossof $21.3millionin2011. TosatisfytheFDICrequirementsforawell-capitalizedinstitution,equityis imputedat5percentof totalassets. (4)Revenue Revenuerepresentsfeeschargedtodepositoryinstitutionsforpricedservices,and isrealizedfromeachinstitutionthroughoneof twomethods:directchargestoan institution’saccountorchargesagainstitsaccumulatedearningscredits(see note7). (5)OperatingExpenses Operatingexpensesconsistof thedirect,indirect,andothergeneraladministrative expensesof theReserveBanksforpricedservicesplustheexpensesof theBoard of Governorsrelatedtothedevelopmentof pricedservices.Boardexpenseswere $5.2millionin2011and$7.2millionin2010. EffectiveJanuary1,1987,theReserveBanksimplementedSFASNo.87,Employers’AccountingforPensions(codifiedinASC715).Accordingly,theReserve Bankpricedservicesrecognizedqualifiedpension-planoperatingexpensesof $45.2millionin2011and$53.8millionin2010.Operatingexpensesalsoinclude thenonqualifiedpensionexpenseof $3.1millionin2011and$4.4millionin2010. Theimplementationof SFASNo.158(ASC715)doesnotchangethesystematic approachrequiredbygenerallyacceptedaccountingprinciplestorecognizethe expensesassociatedwiththeReserveBanks’benefitplansintheincomestatement. Asaresult,theseexpensesdonotincludeamountsrelatedtochangesinthe fundedstatusof theReserveBanks’benefitplans,whicharereflectedinAOCI (seenote3). Theincomestatementbyservicereflectsrevenue,operatingexpenses,imputed costs,otherincomeandexpenses,andcostrecovery. (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.InOctober2008,theFederal

FederalReserveBanks 153 Reservebeganpayinginterestonrequiredreserveandexcessbalancesheldby depositoryinstitutionsatReserveBanks,asauthorizedbytheEmergencyEconomicStabilizationActof 2008.Beginningin2009,giventheuncertainlong-term effectthatpaymentof interestonreservebalanceswouldhaveonthelevelof clearingbalances,theequityusedtodeterminetheimputedprofithasbeen adjustedtoreflecttheactualclearingbalancelevelsmaintained;previously,projectionsof clearingbalancelevelswereused. Interestisimputedonthedebtassumednecessarytofinancepriced-serviceassets; therewasnoneedtoimputedebtin2011or2010.TheimputedFDICassessment reflectsrateandassessmentmethodologychangesin2011. Interestonfloatisderivedfromthevalueof floattoberecovered,eitherexplicitly orthroughper-itemfees,duringtheperiod.Floatcostsincludecostsforthecheck, FedwireFunds,ACH,andFedwireSecuritiesservices. Floatcostorincomeisbasedontheactualfloatincurredforeachpricedservice. Otherimputedcostsareallocatedamongpricedservicesaccordingtotheratioof operatingexpenses,lessshippingexpenses,foreachservicetothetotalexpenses, lessthetotalshippingexpenses,forallservices. Thefollowingshowsthedailyaveragerecoveryof actualfloatbytheReserve Banksfor2011,inmillionsof dollars: Totalfloat -1,151.8 Unrecoveredfloat 4.1 Floatsubjecttorecovery -1,156.0 Sourcesofrecoveryoffloat Directcharges 1.6 Per-itemfees -1,157.5 Unrecoveredfloatincludesfloatgeneratedbyservicestogovernmentagenciesand byothercentralbankservices.Floatthatiscreatedbyaccountadjustmentsdueto transactionerrorsandtheobservanceof nonstandardholidaysbysomedepositoryinstitutionswasrecoveredfromthedepositoryinstitutionsthroughcharging institutionsdirectly.Floatrecoveredthroughdirectchargesandper-itemfeesis valuedatthefederalfundsrate;creditfloatrecoveredthroughper-itemfeeshas beensubtractedfromthecostbasesubjecttorecoveryin2011and2010. (7)OtherIncomeandExpenses Otherincomeandexpensesconsistof investmentandinterestincomeonclearing balancesandthecostof earningscredits.Investmentincomeonclearingbalances for2011and2010representstheaveragecoupon-equivalentyieldonthree-month Treasurybills.Theinvestmentreturnisappliedtotherequiredportionof the clearingbalance.Otherincomealsoincludesimputedinterestontheportionof clearingbalancessetasideasrequiredreserves.Expensesforearningscredits grantedtodepositoryinstitutionsontheirclearingbalancesarebasedonadiscountedaveragecoupon-equivalentyieldonthree-monthTreasurybills. (8)CostRecovery Annualcostrecoveryistheratioof revenue,includingotherincome,tothesumof operatingexpenses,imputedcosts,imputedincometaxes,andtargetedreturnon equity.

155 Other Federal Reserve Operations Regulatory Developments: imposedbytherule.TheBoarddoesthisinavariety of ways,andatseveraldifferentstagesintheregula- Dodd-Frank Act Implementation toryprocess.Forexample,beforedevelopingaregulatoryproposal,theBoardoftencollectsinformation TheFederalReservecontinuedtoworkdiligently throughsurveysandmeetingsdirectlyfromtheparthroughout2011toimplementthemanyregulatory tiesthatmightbeaffectedbytherulemaking.These changesrequiredundertheDodd-FrankWallStreet effortshelptheBoardbecomemoreinformedabout ReformandConsumerProtectionAct(theDoddthebenefitsandcostsof theproposedruleand FrankActortheact)(Pub.L.No.111–203). enableittocraftaproposalthatisbotheffectiveand thatminimizesregulatoryburden. EnactedonJuly21,2010,theDodd-FrankActseeks toaddresscriticalgapsandweaknessesintheU.S. Duringtherulemakingprocess,theBoardalsosperegulatoryframeworkthatwererevealedbythefinancificallyseekscommentfromthepubliconthebencialcrisis.TheactgivestheFederalReserveimporefitsandcostsof theproposedapproachaswellas tantresponsibilitiestoissuerulestoenhancefinancial onavarietyof alternativeapproachestothe stabilityandpreservethesafetyandsoundnessof the proposal. bankingsystem. InadditiontomembershipontheFinancialStability Box 1. Dodd-Frank Implementation OversightCouncil(FSOC),theFederalReserve’snew Progresses in 2011 responsibilitiesincludethesupervisionof savingsand loanholdingcompanies(SLHCs)aswellasoversight TheDodd-FrankWallStreetReformandConsumer of nonbankfinancialfirmsandcertainpayment, ProtectionAct(Dodd-FrankAct)givestheFederal Reserveimportantresponsibilitiestoenhancefinanclearing,andsettlementutilitiesthattheFSOCdesigcialstabilityandpreservethesafetyandsoundness natesassystemicallyimportant.Inconsultationwith ofthebankingsystem.In2011,staffthroughoutthe otheragencies,theFederalReservealsoisresponsible FederalReserveSystemparticipatedinawide fordevelopingmorestringentprudentialstandards rangeofrulemakingsandotherprojectsdesigned foralllargebankingorganizationsandfornonbank toimplementthesenewresponsibilities.Whilea sizablenumberofprojectshavealreadybeencomfirmsdesignatedbytheFSOCassystemically pleted,additionalworkisneededtoensurethe important. Board’sobligationsundertheDodd-FrankActare metquickly,carefully,andresponsibly. Asof December31,2011,theBoardhadissuedsev- AsofDecember31,2011,theBoardhadissued enteenfinalrules,fourpublicnotices,andnine seventeenfinalrules,fourpublicnotices,andnine reportsrequiredbytheact.TheBoardhadalsopro- reportsrequiredbytheact.TheBoardalsohasproposedanadditional15rulesforpubliccomment.1 videdassistancetotheFinancialStabilityOversight (Seebox1foradditionalinformation.) Council,facilitatedthetransitionofcertainauthority fromtheOfficeofThriftSupervisiontotheBoard, helpedwiththeestablishmentoftheConsumer The Rulemaking Process FinancialProtectionBureauandtheOfficeofFinancialResearch,andparticipatedinseveraljointrule- Witheachregulation,theBoardseekstoidentify— makingsandconsultationswithotheragencies. and,totheextentpossibleconsistentwithstatutory Forafulllistofinitiativescompletedin2011(andto requirements,minimize—theregulatoryburden preview2012initiatives),visittheBoard’sRegulatoryReformwebsiteatwww.federalreserve.gov 1 ThesefiguresincludeBoardactionssincetheenactmentofthe /newsevents/reform_milestones.htm. actonJuly21,2010.

156 98thAnnualReport|2011 Inadoptingthefinalrule,theBoardaimsforaregu- (collectively,coveredcompanies)toperiodicallysublatoryapproachthatfaithfullyreflectsthestatutory mittotheBoard,theFDIC,andtheFSOCaplan provisionsandtheintentof Congresswhileminimiz- forsuchcompany’srapidandorderlyresolution, ingregulatoryburden.TheBoardalsoprovidesan underthebankruptcycode,intheeventof material analysisof thecoststosmallorganizationsof the financialdistressorfailure.Theseresolutionplans,or rulemaking,consistentwiththeRegulatoryFlexibil- “livingwills,”willassistcoveredcompaniesandreguityAct,andcomputestheanticipatedcostsof paper- latorsinconductingadvanceresolutionplanningfor work,consistentwiththePaperworkReductionAct. acoveredcompany. Changes to Banking Supervision OnOctober17,2011,theBoardandtheFDIC and Regulation issuedafinalrulerequiringcoveredcompaniesto annuallysubmitresolutionplans.Large,complex TheBoardhasissuedavarietyof finalrulesto coveredcompaniesarerequiredtosubmitaresoluimplementtheprovisionsof theDodd-FrankAct tionplanthatcoverstheentireorganization.Smaller, thataredesignedtopromotethesafetyandsound- lesscomplexcompaniescanfileastreamlinedresolunessof thebankingsystem.Followingisasummary tionplan. of thekeyregulatoryinitiativesthatwerecompleted during2011undertheact. TheBoard’sresolutionplanruleiscodifiedasRegulationQQ(12CFRpart243).Acompany’sresolu- RegulatoryCapital tionplanmustdescribethecompany’sstrategyfor TheDodd-FrankActestablishesfloorsforregula- rapidandorderlyresolutioninbankruptcyduringa torycapitalrequirementsappliedtodomesticbank timeof financialdistressorfailureof thecompany, holdingcompanies(BHCs)anddesignatednonbank andtheplanmustincludeinformationconcerning financialcompaniessupervisedbytheBoard.Specifi- thecompany’soperationsandfunding. cally,section171of theactrequirestheBoardto establishminimumrisk-basedcapitalandleverage UnderRegulationQQ,acompany’sresolutionplan requirementsforBHCsthatarenotlessthanthe mustalsoincludeinformationregardingthemanner “generallyapplicable”capitalrequirementsfor andextenttowhichanyinsureddepositoryinstituinsureddepositoryinstitutions. tionaffiliatedwiththecompanyisadequatelyprotectedfromrisksarisingfromtheactivitiesof non- Consistentwiththisprovision,onJune14,2011,the banksubsidiariesof thecompany;detaileddescrip- Boardadoptedafinalruleamendingitscapital tionsof theownershipstructure,assets,liabilities, frameworktorequireabankingorganizationoperatandcontractualobligationsof thecompany;identifiingundertheadvancedapproachesrisk-basedcapital cationof thecross-guaranteestiedtodifferentsecurirulestomeetthehigherof theminimumrequireties;andadescriptionof thegovernanceandovermentsunderthegenerallyapplicablecapitalrequiresightprocessrelatedtoresolutionplanning. mentsandtheminimumrequirementsunderthe advancedapproachesrisk-basedcapitalrules. TheactalsoinstructedtheBoardtoconducttwo studiesinconsultationwiththeAdministrativeOffice ThisrulewaspromulgatedjointlywiththeFederal of theU.S.Courtsregardingtheresolutionof finan- DepositInsuranceCorporation(FDIC)andthe cialcompanies:oneregardingtheresolutionof Officeof theComptrollerof theCurrency(OCC).In domesticfinancialcompaniesundertheBankruptcy thecomingmonths,thefederalbankingagencies Code,andoneregardinginternationalcoordination expecttojointlyproposerevisionstotheirregulatory relatingtotheresolutionof systemicfinancialcomcapitalrulesconsistentwithchangestointernational paniesundertheBankruptcyCodeandapplicable capitalstandardsissuedbytheBaselCommitteeon foreignlaws.TheBoardissuedbothstudiesin BankingSupervision.Theproposedruleswouldbe July2011.2 consistentwiththecapitalrequirementsestablished undersection171of theact. SupervisionofSLHCs Theacttransferredallsupervisoryandregulatory ResolutionPlanning authorityoverSLHCsfromtheOfficeof Thrift TheDodd-FrankActrequiresBHCswithtotalconsolidatedassetsof $50billionormoreandanynon- 2 ThestudiesareavailableontheBoard’swebsiteatwww bankfinancialcompanysupervisedbytheBoard .federalreserve.gov/publications/other-reports/default.htm.

OtherFederalReserveOperations 157 Supervision(OTS)totheBoard,effectiveJuly21, OnJune29,2011,theBoardissuedafinalruleto 2011(thetransferdate).ItalsograntstheBoardthe establishstandardsfordebitcardinterchangefees. authoritytoexamine,obtainreportsfrom,andestab- Underthefinalrule,themaximumpermissibleinterlishconsolidatedcapitalstandardsforSLHCs. changefeethatanissuermayreceiveforanelectronic debittransactionisthesumof 21centspertransac- TheBoardundertookseveralinitiativestoprovide tionand5basispointsmultipliedbythevalueof the SLHCswithadvancenoticeof howtheBoardwould transaction.Thisprovisionregardingdebitcard superviseandregulateSLHCsafterthetransferdate. interchangefeesbecameeffectiveonOctober1,2011. AlsoonJune29,theBoardissuedaninterimfinal • TheBoard,OTS,OCC,andFDICissuedajoint rulethatallowsforanupwardadjustmentof no reportonJanuary25,2011,regardingtheagencies’ morethanonecenttoanissuer’sdebitcardinterplanstoimplementthetransferof OTSauthorities changefee,providedtheissuersatisfiesthefraudonJanuary25,2011. preventionstandardssetforthintheinterimfinal • TheBoardissuedapublicnoticeonFebruary3, rule.TheinterimfinalrulebecameeffectiveonOcto- 2011,of itsintentiontorequireSLHCstosubmit ber1,2011. thesameregulatoryreportsasBHCs.3 Inaccordancewiththestatute,thefinalruleexempts • TheBoardissuedapublicnoticeonApril15,2011, issuersthat,togetherwiththeiraffiliates,haveassets thatdescribedhowtheBoardwouldapplycertain of lessthan$10billionfromthedebitcardinterpartsof itsconsolidatedsupervisoryprogramfor changefeestandards.Tofacilitateimplementationof BHCstoSLHCsafterthetransferdate.Onthe thesmallissuerexemption,theBoardhaspublished transferdate,theBoardissuedapublicnoticeof all listsof institutionswithconsolidatedassetsabove theOTSregulationsthattheBoardwouldcontinue andbelowthe$10billionexemptionthresholdand toenforce. planstosurveynetworksandpublishannuallythe • TheBoardissuedaninterimfinalruleon averageinterchangefeeseachnetworkprovidestoits August12,2011,establishingregulationsfor exemptandnonexemptissuers. SLHCs.NewRegulationLL,governingSLHCs generally,andnewRegulationMM,governing Inaddition,theruleprohibitsallissuersandnet- SLHCsinmutualform,transferfromtheOTSto worksfromrestrictingthenumberof networksover theBoardtheregulationsnecessaryfortheBoard whichelectronicdebittransactionsmaybeprocessed toadministerthestatutesgoverningSLHCs. tolessthantwounaffiliatednetworks.Therulealso prohibitsissuersandnetworksfrominhibitingamer- DebitInterchange chant’sabilitytodirecttheroutingof theelectronic Section1075of theactrestrictstheinterchangefees debittransactionoveranynetworkthattheissuerhas thatdebitcardissuersmayreceiveforelectronicdebit enabledtoprocessthem. cardtransactions.Specifically,undertheact,the interchangefeeanissuerreceivesforaparticular TheBoardalsohasissuedseveralreportsregarding transactionmustbereasonableandproportionalto interchangefees,asrequiredbytheact.OnJune29, thecostincurredbytheissuerwithrespecttothe 2011,theBoardissuedareportdisclosingcertain transaction.TheactrequirestheBoardtosetstan- aggregateandsummaryinformationconcerning dardsfordeterminingwhetheraninterchangefeeis transactionprocessingcostsandinterchangetransacreasonableandproportionaltotheissuer’scostand tionfeeschargedorreceivedinconnectionwithelecpermitstheBoardtoadjusttheinterchangefeeto tronicdebittransactions.4OnJuly21,2011,the accountforanissuer’sfraud-preventioncosts.In Boardissuedareportontheuseof prepaidcardsby addition,itrequirestheBoardtoprescriberulespro- government-administeredpaymentprogramsaswell hibitingnetworkexclusivityarrangementsandrout- astheinterchangeandcardholderfeeschargedwith ingrestrictionsinconnectionwithelectronicdebit respecttosuchprepaidcards.5 cardtransactions. 4 See2009InterchangeRevenue,CoveredIssuerCost,andCovered IssuerandMerchantFraudLossRelatedtoDebitCardTransac- 3 OnDecember23,2011,theBoardissuedafinalnoticepermit- tions,www.federalreserve.gov/paymentsystems/files/debitfees_ tingatwo-yearphase-inperiodformostSLHCstofileFederal costs.pdf. ReserveregulatoryreportsandanexemptionforsomeSLHCs 5 SeeReporttotheCongressonGovernment-Administered, frominitiallyfilingsuchreports. General-UsePrepaidCards,www.federalreserve.gov/

158 98thAnnualReport|2011 InterestonDemandDeposits wouldnotobjecttoproposeddividendincreasesor Section627of theactrepealedtheprovisionof the othercapitaldistributionsonlyif companiesareable FederalReserveActthatprohibitedmemberbanks todemonstratesufficientfinancialstrengthtooperfrompayinginterestondemanddeposits.Thisprohi- ateassuccessfulfinancialintermediariesunder bitionhadbeenimplementedthroughtheBoard’s stressedmacroeconomicandfinancialmarketsce- RegulationQ.OnJuly14,2011,theBoardissueda narios,evenaftermakingthedesiredcapital finalrulerepealingRegulationQandtherebyallow- distributions. ingmemberbankstopayinterestondemand deposits. Theenhancedprudentialstandardswouldalsoapply anetlimitforcreditexposureof aU.S.coveredcom- Key Regulatory Initiatives Still panytoanysinglecounterpartyasapercentageof in Development thecompany’sregulatorycapital.Inaddition,the standardswouldsetatwo-tiersingle-counterparty Anumberof importantregulatorydevelopments creditlimit,withamorestringentcreditlimitapplied remainintheproposalstage.Followingisasummary tocreditexposuresbetweenthelargestU.S.covered of additionalregulatoryinitiativesthattheBoard companiesandlargecounterparties. proposedin2011. Further,theproposedstandardswouldestablisha EnhancedPrudentialStandardsfor generallimitthatprohibitsaU.S.coveredcompany FinancialFirms fromhavingaggregatenetcreditexposurestoany TheactrequirestheBoardtoestablishheightened singleunaffiliatedcounterpartyinexcessof 25perprudentialstandardsforcoveredcompanies.6The centof theenhancedstandardcompany’scapital heightenedstandardsmustbemorestringentthan stockandsurplus.Theproposalalsowouldseta thestandardsthatapplytoothernonbankfinancial morestringent10percentaggregatenetcreditexpocompaniesandBHCsthatdonotposesimilarrisks surelimitbetweennonbankcoveredcompaniesand tothefinancialsystem. BHCswithtotalconsolidatedassetsof $500billion ormore(collectively,“majorcoveredcompanies”)on OnDecember20,2011,theBoardproposed theonehand,andcounterpartiesthataremajorcovenhancedprudentialstandardsrelatedtocapital,lim- eredcompaniesorFBOswithtotalconsolidated itsoncreditexposuretosinglecounterparties,liquid- assetsof $500billionormoreontheotherhand. ity,stresstesting,andriskmanagement.The enhancedprudentialstandardsareintendedto Alsoundertheproposedstandards,U.S.covered strengthenthefinancialresilienceof coveredcompa- companieswouldberequiredtocomplywithqualitaniesandlimittheexposureof suchcompaniesto tiveliquidityrisk-managementstandardsgenerally individualcounterparties.Theproposedstandards basedoninteragencyliquidityrisk-management generallyapplytocoveredcompaniesotherthancov- guidance.Specifically,theproposalwouldrequire eredcompaniesthatareforeignbankingorganiza- U.S.coveredcompaniestoconductinternalliquidity tions(U.S.coveredcompanies).TheBoardexpectsto stresstestsandsetinternalquantitativelimitsto issueaseparateproposalthatwouldapplythe manageliquidityrisk. enhancedprudentialstandardstoforeignbanking organizations(FBOs). Inaddition,theBoardwouldconductannualstress testsof U.S.coveredcompaniesusingthreeeconomic TheproposedstandardswouldsubjectU.S.covered andfinancialmarketscenariosandpublishasumcompaniestotheBoard’scapitalplanrule,whichthe maryof theresults,includingcompany-specificinfor- BoardapprovedonNovember22,2011.Underthe mation.Theproposedstandardsalsowouldrequire capitalplanrule,theFederalReserveannuallywould U.S.coveredcompaniesandstatememberbanks, evaluateinstitutions’capitaladequacy;theirinternal BHCs,and—subjecttoadelayedeffectivedate— capitaladequacyassessmentprocesses;andtheir SLHCswithassetsabove$10billiontoconductone planstomakecapitaldistributions,suchasdividend ormorecompany-runstresstestseachyearandmake paymentsorstockrepurchases.TheFederalReserve asummaryof theresultspublic. publications/other-reports/files/government-prepaid-report- Moreover,thestandardswouldrequireU.S.covered 201107.pdf. companiesandpubliclytradedBHCswithtotalcon- 6 See“ResolutionPlanning”onpage156formoreinformation oncoveredcompanies. solidatedassetsof $10billionormoretoestablish

OtherFederalReserveOperations 159 riskcommitteesof theirboardsof directorsandto prohibitionsandrestrictionsof theVolckerrule.The instituteenterprise-widerisk-managementprograms finalruleincludesageneraltwo-yearconformance thatwouldbeoverseenbytheriskcommittees.The period,anditallowstheBoardtoextend,byruleor proposalalsowouldrequirethateachU.S.covered order,thistwo-yearperiodbyuptothreeone-year companyretainachief riskofficer,andmaintainits periods.Inaddition,thefinalruleimplementsasperiskcommitteeasaseparatelycharteredcommittee cialfive-yearextendedtransitionperiodavailablefor of theboardof directors. certainqualifyinginvestmentsinhedgefundsand certainprivateequityfunds.Theconformanceperiod Finally,theproposedstandardswouldestablishearly isintendedtogivemarketsandfirmsanopportunity remediationtriggers—suchascapitallevels,stresstest toadjusttotheVolckerrule. results,andrisk-managementweaknesses—sothat financialweaknessesareaddressedbyU.S.covered RegulationofDerivativeMarkets companiesatanearlystage. Theactmakesanumberof significantchangestothe regulationof derivatives,whichitreferstoas ProhibitionsagainstProprietaryTradingand “swaps”and“security-basedswaps,”aswellastothe OtherActivities regulationof participantsinthederivativesmarkets. Section619of theDodd-FrankActgenerallyprohibitsbankingentitiesfromengaginginshort-termpro- Ingeneral,theactrequires(1)allstandardized prietarytradingforabankingentity’sownaccount, derivativestobecentrallyclearedandtradedonan subjecttocertainexemptions.Thatsectionalsopro- exchangeorregisteredexecutionfacility;(2)all hibitsabankingentityfromowning,sponsoring,or derivativestobereportedtoregistereddatarepositohavingcertainrelationshipswithahedgefundorpri- ries;(3)allderivativesdealers(“swapdealers”)and vateequityfund,subjecttocertainexemptions.These majormarketparticipants(“majorswapparticiprohibitionsarecommonlyknownasthe“Volcker pants”)toregisterwiththeSECand/ortheCFTC; rule.”Theprohibitionsandrestrictionscontainedin and(4)theestablishmentof new,regulatedorganizatheVolckerruleapplytoallinsureddepositoryinsti- tionstosupportthederivativesmarket,including tutions;BHCs;SLHCs;companiesthatcontrolan exchanges,clearingorganizations,anddatarepositoindustrialloancompany;foreignbankswitha ries.Inaddition,theactamendssections23Aand branch,agency,orsubsidiarybankintheUnited 23Bof theFederalReserveActby,amongother States;andaffiliatesandsubsidiariesof theseentities. things,expandingthedefinitionof “coveredtransaction”toincludecreditexposureof abankoritssub- TheBoard,OCC,FDIC,CommodityFuturesTrad- sidiariestoanaffiliateresultingfromaderivative ingCommission(CFTC),andSecuritiesand transaction. ExchangeCommission(SEC)areresponsiblefor developingandadoptingregulationstoimplement OnApril12,2011,theBoardissuedajointproposed theprohibitionsandrestrictionsof theVolckerrule. rulewiththeFarmCreditAdministration,FDIC, OnOctober11,2011,theBoardrequestedcomment FederalHousingFinanceAgency,andOCCtoestabonaproposedrule,developedjointlywiththeother lishmarginandcapitalrequirementsforswapdealers, agencies,toimplementtheVolckerrule.Theproposal majorswapparticipants,security-basedswapdealers, wouldimplementtheVolckerrule’sprohibitionsand, andsecurity-basedswapparticipants(collectively, consistentwithstatutoryauthority,wouldprovide “swapentities”).Theproposedrulewouldrequire certainkeystatutoryexemptions,includingmarket certainswapentitiesregulatedbythefiveagenciesto making,underwriting,andrisk-mitigatinghedging. collectminimumamountsof initialmarginand OnDecember23,2011,theBoard,FDIC,OCC,and variationmarginfromcounterpartiestonon-cleared SECextendedthecommentperiodontheproposal swapsandnon-cleared,security-basedswaps. toimplementtheVolckerrulethroughFebruary13, 2012. Theamountof marginthatwouldberequiredunder theproposedrulewouldvarybasedontherelative TheBoardaloneisresponsibleforadoptingrulesto riskof thecounterpartyandof theswaporsecurityimplementtheconformanceperiodprovisionsof the basedswap.Aswapentitywouldnotberequiredto Volckerrule.OnFebruary9,2011,theBoardissued collectmarginfromacommercialenduseraslongas afinalruletogivebankingentitiesaperiodof time itsmarginexposureisbelowanappropriatecredit toconformtheiractivitiesandinvestmentstothe exposurelimitestablishedbytheswapentity.

160 98thAnnualReport|2011 OnJuly28,2011,theBoardissuedaproposedrule proposeadditionalamendmentstoremovereferences thatwouldsetstandardsforbankingorganizations tocreditratingsfromitsregulationsinthenear regulatedbytheFederalReservethatengageincer- future. taintypesof foreignexchangetransactionswith retailcustomers.Theproposaloutlinesrequirements Credit-RiskRetention fordisclosure,recordkeeping,businessconduct,and Section941(b)of theactimposescertaincredit-risk documentationforretailforeignexchangetransac- retentionobligationsonsecuritizersororiginatorsof tions.Institutionsengaginginsuchtransactions assetssecuritizedthroughtheissuanceof assetwouldberequiredtoidentifythemselvestotheir backedsecurities(ABS).OnMarch29,2011,the regulatorandtobewellcapitalized.Theywouldalso Boardissuedajointproposedrulewithfiveother berequiredtocollectmarginforretailforeign federalagenciesthatwouldrequiresecuritizersto exchangetransactions. retainriskthroughoneof severaloptions,which weredesignedtotakeintoaccountmarketpractices RemovalofReferencestoCreditRatingsfrom andsecuritizationstructuresacrossdifferentasset CapitalGuidelines classes.Undertheproposedrule,sponsorsof ABS Section939Aof theactrequiresallfederalagencies wouldberequiredtoretainatleast5percentof the toreviewtheirregulationswithinoneyearafterpas- creditriskof theassetsunderlyingthesecurities. sageof theacttoidentifyanyreferencetoorrequirementsregardingcreditratings,andissueareportto Asrequiredbytheact,theproposedruleincludesa Congressuponconclusionof thereview.TheBoard varietyof exemptionsfromtherequirementthat completedtherequiredreviewof itsregulationsand sponsorsof ABSretaincreditriskof theassets issuedareporttoCongressonJuly25,2011.7 underlyingthesecurities,includinganexemptionfor U.S.government-guaranteedABSandformortgage- Section939Aalsorequirestheagenciestoremove backedsecuritiesthatarecollateralizedexclusivelyby anyreferenceto,orrequirementsof relianceon, residentialmortgagesthatqualifyasqualifiedresicreditratingsinregulationsthatrequiretheuseof an dentialmortgages(QRMs).Inaddition,theproposal assessmentof creditworthinessof asecurityor wouldestablishadefinitionforQRMs—incorporatmoney-marketinstrument.OnAugust10,2010,the ingsuchcriteriaasborrowercredithistory,payment Board,FDIC,andOCCissuedanadvancednotice terms,downpaymentforpurchasedmortgages,and of proposedrulemakingregardingalternativestothe loan-to-valueratio—designedtoensuretheyareof useof creditratingsintheirrisk-basedcapitalrules. veryhighcreditquality. TheBoard,withtheFDICandOCC,alsohelda roundtablediscussionwithindustry,academic,and Ultimately,theproposedruleaimstoensurethatthe otherparticipantsinNovember2010tohearviews amountof creditriskretainedbysponsorsismeanonhowtodevelopalternativestocreditratings.The ingful,whiletakingintoaccountmarketpractices staffsof theagenciesconsideredcommentsreceived andreducingthepotentialfortheruletoaffectnegaontheadvancednoticeof proposedrulemakingas tivelytheavailabilityandcostof credittoconsumers wellasattheroundtablediscussionastheyworkedto andbusinesses. developalternatives. Theagenciesreceivedmorethan13,000comments OnDecember7,2011,theBoard,FDIC,andOCC (includingmorethan300non-formsubstantivecomissuedasecondnoticeof proposedrulemakingthat ments)ontheproposedrule.Thestaffsof therulewouldmodifytheagencies’marketriskcapitalrules makingagencieshavebeenmeetingregularlytodisforbankingorganizationswithsignificanttrading cussthecommentsandoptionsformovingforward activities.Themodifiednoticeof proposedrulemak- ontherulemaking. ingincludedalternativestandardsof creditworthi- Payment,Settlement,andClearingActivities nessthatwouldbeusedinplaceof creditratingsto andUtilities determinethecapitalrequirementsforcertaindebt andsecuritizationpositionscoveredbythemarket TheactgivestheFSOCtheauthoritytoidentifyand riskcapitalrules.TheBoardanticipatesthatitwill designateassystemicallyimportantafinancialmarketutility(FMU)if theFSOCdeterminesthatfailureof oradisruptiontotheFMUcouldcreateor 7 SeeReporttotheCongressonCreditRatings,www increasetheriskof significantliquidityorcredit .federalreserve.gov/publications/other-reports/files/creditratings-report-201107.pdf. problemsspreadingamongfinancialinstitutionsor

OtherFederalReserveOperations 161 marketsandtherebythreatenthestabilityof theU.S. registeredsecuritiesbroker-dealers,creditunions, financialsystem. investmentadvisors,andcertaingovernmentsponsoredenterprises(collectively,“coveredfinancial OnJuly18,2011,theFSOCissuedafinalrule institutions”)withatleast$1billioninassets. describingthecriteriathatwillinformitsprocesses andproceduresfordesignatinganFMUassystemi- OnApril14,2011,theBoardandotherfederalregucallyimportant.Undertherule,whichincorporates latorsrequestedcommentonaproposaltoimpletheact’scriteria,theFSOCwillconsidertheaggre- menttheact’sprohibitiononincentive-basedcomgatemonetaryvalueof transactionsprocessedbyan pensationarrangements.Theproposalissignificantly FMU;theaggregateexposureof anFMUtoits similartotheinteragencyguidancepublishedin counterparties;therelationship,interdependencies, June2010onwhichtheFederalReserveleddeveloporotherinteractionsof anFMUwithotherFMUs; ment.Inparticular,theproposalrequiresthatincenandtheeffectthatthefailureof ordisruptiontoan tivecompensationpracticesatcoveredfinancialinsti- FMUwouldhaveoncriticalmarkets,financialinsti- tutionsbeconsistentwiththreekeyprinciples: tutions,orthebroaderfinancialsystem.TheFSOC (1)theyshouldappropriatelybalanceriskandfinanalsowillperformamorein-depthreviewandanalysis cialrewards,(2)theyshouldbecompatiblewitheffecof specificFMUsfrombothaquantitativeand tivecontrolsandriskmanagement,and(3)they qualitativeperspectivebeforemakingadesignation. shouldbesupportedbystrongcorporategovernance. Inaddition,theactauthorizestheBoardtoprescribe Further,theagenciesproposedthatcoveredfinancial risk-managementstandardsgoverningtheoperations institutionswithatleast$1billioninassetsbe of designatedFMUs(exceptfordesignatedFMUs requiredtohavepoliciesandprocedurestoensure thatareregisteredwiththeCFTCasderivativeclear- compliancewiththerequirementsof therule,and ingorganizationsorregisteredwiththeSECasclear- submitanannualreporttotheirfederalregulator ingagencies).OnMarch30,2011,theBoardpro- describingthestructureof theirincentivecompensaposedaruleestablishingrisk-managementstandards tionarrangements.Theagenciesalsoproposedthat governingtheoperationsrelatedtopayment,clear- largercoveredfinancialinstitutions—generallythose ing,andsettlementactivitiesof designatedFMUs with$50billionormoreinassets—deferatleast thatarenotregisteredwiththeCFTCorSEC.The 50percentof theincentivecompensationof certain proposedrisk-managementstandardsarebasedon executiveofficersforatleastthreeyears,andthatthe theexistinginternationalstandardsthattheBoard amountsultimatelypaidreflectlossesorother hasincorporatedpreviouslyintoitsPolicyonPay- aspectsof performanceovertime.TheBoardand mentSystemRisk.Theproposedrulewouldalso otheragenciesareintheprocessof addressingpublic establishrequirementsandproceduresforadvance commentsontheproposal. noticeof materialchangestotherules,procedures,or operationsof adesignatedFMUforwhichtheBoard RegistrationofSecuritiesHoldingCompanies istheprimarysupervisor. (SHCs) TheDodd-FrankActeliminatedtheSHCsupervi- Inaddition,asrequiredbytheact,inJuly2011the sionframeworkpursuanttowhichtheSECsuper- Board,CFTC,andSECissuedajointreporttoConvisedSHCs.Initsplace,theactpermitsanSHCto gresscontainingrecommendationsforpromoting electtoregisterwithandbesupervisedbytheBoard robustrisk-managementstandardsandconsistency inordertosatisfytherequirementsof aforeignreguinthesupervisoryprogramsof theCFTCandSEC latororaprovisionof foreignlawthatthecompany fordesignatedclearingentities.8 besubjecttocomprehensive,consolidatedsupervision.OnSeptember2,2011,theBoardinvitedpublic ExecutiveCompensation commentonaproposedruleoutliningtheregistra- Section956of theactrequiresapplicablefederal tionrequirementsandproceduresforSHCs. regulatorstodevelopjointlyregulationsorguidelines implementingdisclosuresandprohibitionsconcern- ConsumerFinancialProtection ingincentive-basedcompensationatdepositoryinsti- TheDodd-FrankActmademanyenhancementsto tutions,depositoryinstitutionholdingcompanies, consumerfinancialprotection,andtheBoardbegan implementingseveralof theseenhancementspriorto 8 SeeRisk-ManagementSupervisionofDesignatedClearingEntithetransferof rulemakingauthorityformostfederal ties,www.federalreserve.gov/publications/other-reports/files/ risk-management-supervision-report-201107.pdf. consumerprotectionstatutestotheConsumer

162 98thAnnualReport|2011 FinancialProtectionBureau(CFPB)onJuly21, mortgageintoamorestablestandardmortgage.The 2011.Forinstance,theactamendstheTruthin proposedrulealsowouldimplementtheDodd-Frank LendingAct(TILA)andConsumerLeasingAct Act’slimitsonprepaymentpenalties.Thisproposed (CLA)toextendtheprotectionsof thoselawstocon- rulealsowastransferredtotheCFPBonthetransfer sumercredittransactionsandconsumerleasesof date. higherdollaramounts.BeforetheDodd-FrankAct, TILAandCLAappliedtoconsumercredittransac- Further,theDodd-FrankActamendstheFairCredit tionsandconsumerleases,respectively,of $25,000or ReportingActtorequireacreditortodisclosecredit less.TheDodd-FrankActincreasedthislimitto scoresandrelatedinformationtoaconsumerwhen $50,000foreachstatute.OnMarch25,2011,the thecreditorusestheconsumer’screditscoreinset- BoardissuedafinalruleamendingRegulationZ tingmaterialtermsof creditorintakingadverse (TruthinLending)andRegulationM(Consumer action.OnJuly6,2011,theBoardandtheFederal Leasing)toreflectthesehigherthresholds. TradeCommissionissuedfinalrulestoimplement thisprovision.Thefinalrulesrevisethecontent TheDodd-FrankActfurtheramendsTILAwith requirementsforrisk-basedpricingnoticesandadd respecttohomemortgagelending.OnFebruary23, relatedmodelformsthatreflectthenewcreditscore 2011,theBoardissuedafinalruletoincreasethe disclosurerequirements.Thefinalrulesweretransannualpercentageratethresholdusedtodetermine ferredtotheCFPBonthetransferdate. whetheramortgagelenderisrequiredtoestablishan escrowaccountforpropertytaxesandinsurancefor OnMay12,2011,theBoardissuedaproposedrule first-lienjumbomortgages.AlsoonFebruary23,the tocreateprotectionsforconsumerswhosendremit- Boardproposedarulethatwouldexpandthemini- tancetransferstorecipientslocatedinaforeign mumperiodformandatoryescrowaccountsforfirst- country.Consistentwithsection1073of theDoddlien,higher-pricedmortgageloansfromonetofive FrankAct,theBoardproposedtoamendRegulayears,andlongerundercertaincircumstances.The tionEtorequiredisclosureof informationabout proposedrulewouldprovideanexemptionfromthe fees,exchangerates,andamountof currencytobe escrowrequirementforcertaincreditorsthatoperate receivedbytherecipientof aremittancetransfer.The inruralorunderservedcommunities.Italsocontains proposedrule,whichwastransferredtotheCFPBon newdisclosurerequirementsmandatedbytheDodd- thetransferdate,wouldalsoprovideerrorresolution FrankAct.Theproposedrulewastransferredtothe andcancellationrightsforsendersof remittance CFPBonthetransferdate. transfers.Inaddition,onJuly19,2011,theBoard issuedareporttoCongressonthestatusof auto- Inaddition,theDodd-FrankActgenerallyprohibits matedclearinghouseexpansionforremittancetranslendersfrommakingresidentialmortgageloans ferstoforeigncountries.9 unlesstheconsumerhasareasonableabilitytorepay theloan.OnApril19,2011,theBoardproposeda ruletoimplementthisprovision.UndertheBoard’s proposal,alendercouldcomplywiththeability-torepayrequirementbyconsideringandverifyingspeci- 9 SeeReporttotheCongressontheUseoftheAutomatedClearinghouseSystemforRemittanceTransferstoForeignCountries, fiedunderwritingfactors,makingcertaintypesof www.federalreserve.gov/boarddocs/rptcongress/ACH_report_ qualifiedmortgages,orrefinancinganon-standard 201107.pdf.

OtherFederalReserveOperations 163 The Board of Governors and the achievingthosegoals,anddiscussestheenvironment andotherfactorsthatcouldaffecttheirachievement. Government Performance and Italsoaddressesissuesthatcrossagencyjurisdic- Results Act tionallines,identifieskeyquantitativemeasuresof performance,anddiscussestheevaluationof perfor- Overview mance.TheBoardiscurrentlyrevisingits2012–15 StrategicPlan,withBoardapprovalanticipatedin TheGovernmentPerformanceandResultsAct 2012. (GPRA)of 1993requiresthatfederalagencies,in consultationwithCongressandoutsidestakeholders, Theperformanceplanincludesspecifictargetsfor prepareastrategicplancoveringamultiyearperiod someof theperformancemeasuresidentifiedinthe andanannualperformanceplan.TheGPRAModstrategicplananddescribestheoperationalprocesses ernizationActof 2010refinesthoserequirementsto andresourcesneededtomeetthosetargets.Italso includequarterlyperformancereporting.Although discussesvalidationof dataandverificationof theFederalReserveisnotcoveredbytheGPRA,the results.TheperformancereportdiscussestheBoard’s Boardof Governorsvoluntarilycomplieswiththe performanceinrelationtoitsgoals. spiritof theact. Thestrategicplan,performanceplan,andperfor- Strategic Plan, Performance Plan, and mancereportareavailableontheBoard’swebsiteat Performance Report www.federalreserve.gov/publications/gpra/default .htm. TheBoard’sstrategicplanarticulatestheBoard’s mission,setsforthmajorgoals,outlinesstrategiesfor

165 Record of Policy Actions of the Board of Governors Policyactionsof theBoardof Governorsarepre- wereissued.Therefore,theBoardamendedRegulasentedpursuanttosection10of theFederalReserve tionBtoapplythesameapproachtomotorvehicle Act.ThatsectionprovidesthattheBoardshallkeep dealers.ThefinalruleiseffectiveSeptember26,2011. arecordof allquestionsof policydeterminedbythe BoardandshallincludeinitsannualreporttoCon- Votingforthisaction:ChairmanBernanke,Vice gressafullaccountof suchactions.Thischapterpro- ChairYellen,andGovernorsDuke,Tarullo,and videsasummaryof policyactionsin2011,asimple- Raskin. mentedthrough(1)rulesandregulations,(2)policy statementsandotheractions,and(3)discountrates Regulation B (Equal Credit Opportunity) fordepositoryinstitutions.Policyactionswere and Regulation V (Fair Credit Reporting) approvedbyallBoardmembersinoffice,unlessindicatedotherwise.1Moreinformationontheactionsis OnJuly1,2011,theBoard,actingwiththeFederal availablefromthe“ReadingRooms”ontheBoard’s TradeCommission,approvedfinalrules(Docket Freedomof Information(FOI)Actwebpageoron Nos.R-1408andR-1407)toimplementthecredit requestfromtheBoard’sFOIOffice. scoredisclosurerequirementsof theDodd-Frank Act.3Undertheact,creditorsarerequiredtodisclose ForinformationonFederalOpenMarketCommittee creditscoresandrelatedinformationtoconsumersif policyactionsrelatingtoopenmarketoperations,see theircreditscoresareusedinsettingcredittermsor “Minutesof FederalOpenMarketCommittee takinganadverseaction.RegulationVisamendedto Meetings”onpage173. revisethecontentrequirementsforrisk-basedpricing notices,andRegulationsVandBareamendedto addorreviserelatedmodelformsornoticesthat Rules and Regulations reflectthenewdisclosurerequirements.Thefinal rulesareeffectiveAugust15,2011. Regulation B (Equal Credit Opportunity) Votingforthisaction:ChairmanBernanke,Vice OnSeptember14,2011,theBoardapprovedafinal ChairYellen,andGovernorsDuke,Tarullo,and rule(DocketNo.R-1426)tospecifythatmotor Raskin. vehicledealerstemporarilyarenotrequiredtocomplywithnewrequirementsfordatacollectioninthe Regulation H (Membership of State Dodd-FrankWallStreetReformandConsumerPro- Banking Institutions in the Federal tectionAct(theDodd-FrankAct).2Undertheact, Reserve System) and Regulation Y creditorsarerequiredtocollectinformationabout (Bank Holding Companies and creditapplicationsmadebywomen-orminority- Change in Bank Control) ownedbusinessesandbysmallbusinesses.TheConsumerFinancialProtectionBureau(CFPB)will OnJune9,2011,theBoard,actingwiththeFederal implementthisprovisionforallcreditorsexceptcer- DepositInsuranceCorporation(FDIC)andOffice tainmotorvehicledealerssubjecttotheBoard’s of theComptrollerof theCurrency(OCC),approved jurisdiction.TheCFPBhadpreviouslyannounced afinalrule(DocketNo.R-1402)amendingtheir thatcreditorswerenotobligatedtocomplywiththe (1)advancedapproachesrisk-basedcapitalrulesto datacollectionrequirementsuntilimplementingrules 1 GovernorWarshresignedfromtheBoardonApril2,2011. 3 SeeFederalRegisternoticesatwww.gpo.gov/fdsys/pkg/FR- 2 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2011- 2011-07-15/html/2011-17585.htmandwww.gpo.gov/fdsys/pkg/ 09-26/html/2011-24300.htm FR-2011-07-15/html/2011-17649.htm.

166 98thAnnualReport|2011 establishafloorforthecapitalrequirementsappli- Votingforthisaction:ChairmanBernanke,Vice cabletothelargestandinternationallyactivebanking ChairYellen,andGovernorsDuke,Tarullo,and organizationsand(2)generalrisk-basedcapitalrules Raskin. toprovidelimitedflexibilitytoestablishcapital requirementsforcertainlow-riskassetsgenerallynot Regulation Q (Prohibition Against the heldbyinsureddepositoryinstitutions.4Thefinal Payment of Interest on Demand Deposits) ruleisconsistentwithprovisionsof theDodd-Frank ActandiseffectiveJuly28,2011. OnJuly12,2011,theBoardapprovedafinalrule (DocketNo.R-1413)torepealRegulationQ.7Regu- Votingforthisaction:ChairmanBernanke,Vice lationQimplementedsection19(i)of theFederal ChairYellen,andGovernorsDuke,Tarullo,and ReserveAct,whichprohibitedthepaymentof inter- Raskin. estondemanddepositsbyinstitutionsthataremembersof theFederalReserveSystem.TheDodd-Frank Regulation M (Consumer Leasing) and Actrepealedsection19(i)of theFederalReserveAct, Regulation Z (Truth in Lending) effectiveJuly21,2011.Accordingly,theBoard’sfinal ruleimplementstherepealof section19(i).Thefinal OnMarch22,2011,theBoardapprovedfinalrules rulealsorescindstheBoard’spublishedinterpreta- (DocketNos.R-1400andR-1399)thatincreasethe tionsof RegulationQandremovesreferencesto coverageof consumerprotectionregulationstocredit RegulationQinotherregulations,suchasinRegulatransactionsandleasesof higherdollaramounts.5 tionD(ReserveRequirementsof DepositoryInstitu- Specifically,therulesincreasethethresholdsfor tions)andRegulationDD(TruthinSavings).The exemptconsumercredittransactionsandconsumer finalruleiseffectiveJuly21,2011. leases(includingautomobileleases)from$25,000to $50,000,inaccordancewiththeDodd-FrankAct. Votingforthisaction:ChairmanBernanke,Vice Thisamountwillbeadjustedannuallytoreflect ChairYellen,andGovernorsDuke,Tarullo,and increasesintheconsumerpriceindex.Privateeduca- Raskin. tionloansandloanssecuredbyrealproperty(suchas mortgages)remainsubjecttocertaindisclosure Regulation Y (Bank Holding Companies requirementsandprohibitionsregardlessof theloan and Change in Bank Control) amount.ThefinalrulesareeffectiveJuly21,2011. OnFebruary7,2011,theBoardapprovedafinalrule Votingforthisaction:ChairmanBernanke,Vice (DocketNo.R-1397)toimplementtheprovisionsof ChairYellen,andGovernorsDuke,Tarullo,and section619of theDodd-FrankActthatgrantbank- Raskin.Absentandnotvoting:GovernorWarsh. ingentitiesaperiodof timetoconformtheiractivitiesandinvestmentswiththeprohibitionsand restrictionsonproprietarytradingorhedgefundor OnJune11,2011,theBoardapprovedfinalrules privateequityfundactivitiesimposedbythesection (DocketNos.R-1423andR-1424)toincreasethe (theso-calledVolckerRule).8Theactgenerallyprodollarthresholdforexemptconsumercreditand leasetransactionsfrom$50,000to$51,800.6Thenew videstheseinstitutionswithatwo-yearconformance period,whichtheBoardmayextendundercertain thresholdreflectstheannualpercentageincreasein conditions.TheruleiseffectiveApril1,2011. theconsumerpriceindex,inaccordancewiththe Dodd-FrankAct.ThefinalrulesareeffectiveJanu- Votingforthisaction:ChairmanBernanke,Vice ary1,2012. ChairYellen,andGovernorsWarsh,Duke, Tarullo,andRaskin. OnJune11,2011,theBoardapprovedthefollowing amendments(DocketNo.R-1356)toitscapital 4 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2011- adequacyguidelinesforbankholdingcompanies: 06-28/html/2011-15669.htm. (1)afinalruletopermitbankholdingcompanies 5 SeeFederalRegisternoticesatwww.gpo.gov/fdsys/pkg/FR- 2011-04-04/html/2011-7377.htmandwww.gpo.gov/fdsys/pkg/ FR-2011-04-04/html/2011-7376.htm. 7 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2011- 6 SeeFederalRegisternoticesatwww.gpo.gov/fdsys/pkg/FR- 07-18/html/2011-17886.htm. 2011-06-20/html/2011-15180.htmandwww.gpo.gov/fdsys/pkg/ 8 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2011- FR-2011-06-20/html/2011-15178.htm. 02-14/html/2011-3199.htm.

Recordof PolicyActionsof theBoardof Governors 167 thatareorganizedasS-corporationsorinmutual rulemakingauthoritytotheCFPBinJuly2011.11 formtoincludeintier1capitalsubordinateddebt Theproposalshadbeenissuedin2009and2010as issuedtotheDepartmentof theTreasury(Treasury) partof theBoard’scomprehensivereviewof its undertheTroubledAssetRelief Programandto mortgageregulationsundertheTruthinLendallowthosecompaniestoexcludesuchdebtforpur- ingAct. posesof certainprovisionsof theBoard’sSmall BankHoldingCompanyPolicyStatementand(2)an Votingforthisaction:ChairmanBernanke,Vice interimfinalrulewithrequestforcommenttoallow ChairYellen,andGovernorsWarsh,Duke, smallbankholdingcompaniesthatareorganizedas Tarullo,andRaskin. S-corporationsorinmutualformtoexcludesubordinateddebtissuedtoTreasuryundertheSmallBusi- OnFebruary22,2011,theBoardapprovedafinal nessLendingFundfromtreatmentas“debt”forpur- rule(DocketNo.R-1392)toincreasefrom1.5perposesof certainprovisionsof thepolicystatement.9 centto2.5percenttheannualpercentageratethresh- Thefinalruleandinterimfinalruleareeffective oldusedtodeterminewhetheramortgagelenderis June21,2011. requiredtoestablishanescrowaccountforproperty taxesandinsuranceforfirst-lien,“jumbo”mortgage Votingforthisaction:ChairmanBernanke,Vice loans,inaccordancewiththeDodd-FrankAct.12 ChairYellen,andGovernorsDuke,Tarullo,and Jumboloansareloansexceedingtheconforming- Raskin. loansizelimitforpurchasebyFreddieMac.Therule iseffectiveforcoveredloansforwhichthecreditor OnNovember17,2011,theBoardapprovedafinal receivesanapplicationonorafterApril1,2011. rule(DocketNo.R-1425)torequirelargebankholdingcompanies(thosewith$50billionormoreof Votingforthisaction:ChairmanBernanke,Vice totalconsolidatedassets)tosubmitcapitalplansto ChairYellen,andGovernorsWarsh,Duke, theFederalReserveannuallyandtorequirethese Tarullo,andRaskin. companiestoobtainapprovalundercertaincircumstancesbeforemakingacapitaldistribution.10Under OnMarch16,2011,theBoardapprovedafinalrule thefinalrule,theFederalReserveevaluatesinstitu- (DocketNo.R-1393)toclarifyaspectsof Board tions’capitaladequacy,internalcapitaladequacy rulesforopen-end(nothome-secured)creditplans processes,andplanstomakecapitaldistributions, thatwereissuedin2010toimplementtheCredit includingdividendpaymentsorstockrepurchases. CardAccountabilityResponsibilityandDisclosure TheFederalReserveapprovescapitaldistributions Act.13Amongotherprovisions,therulestatesthat onlywhenacompany’scapitalplanissatisfactory creditcardapplicationscannotrequestaconsumer’s andthecompanycandemonstratesufficientfinancial “householdincome”becausethattermistoovague strengthtooperatesuccessfullyasafinancialinter- toallowcreditcardissuerstoproperlyevaluatea mediaryunderstressscenarios,evenaftermakingthe consumer’sabilitytomakepaymentsontheaccount, desireddistribution.ThefinalruleiseffectiveDecem- whichissuersarerequiredtodoundertheact. ber30,2011,andinstitutionsarerequiredtosubmit Instead,issuersmustconsideraconsumer’sinditheirinitialcapitalplansbyJanuary9,2012. vidualincomeorsalary.Thefinalruleiseffective October1,2011. Votingforthisaction:ChairmanBernanke,Vice ChairYellen,andGovernorsDuke,Tarullo,and Votingforthisaction:ChairmanBernanke,Vice Raskin. ChairYellen,andGovernorsDukeandRaskin. Absentandnotvoting:GovernorsWarshand Regulation Z (Truth in Lending) Tarullo. OnJanuary28,2011,theBoardapprovedan announcementthatitdoesnotexpecttofinalize threependingmortgagerulemakings(DocketNos. 11 Seepressreleaseatwww.federalreserve.gov/newsevents/press/ R-1366,R-1367,andR-1390)beforethetransferof bcreg/20110201a.htm. 12 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2011- 9 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2011- 03-02/html/2011-4384.htm. 06-21/html/2011-14983.htm. 13 SeeFederalRegisternoticesatwww.gpo.gov/fdsys/pkg/FR- 10 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2011- 2011-04-25/html/2011-8843.htmandwww.gpo.gov/fdsys/pkg/FR- 12-01/html/2011-30665.htm. 2011-05-31/html/2011-12795.htm(correction).

168 98thAnnualReport|2011 Regulation II (Debit Card Interchange Fees OnSeptember12,2011,theBoardapprovedtheissuand Routing) anceof asmall-entitycomplianceguideforRegulationII.15 OnJune29,2011,theBoardapprovedafinalrule (DocketNo.R-1404)toimplementprovisionsof the Votingforthisaction:ChairmanBernanke,Vice Dodd-FrankActthatrequiretheBoardtoestablish ChairYellen,andGovernorsDuke,Tarullo,and standardsforassessingwhetheradebitcardinter- Raskin. changefeeisreasonableandproportionaltoanissuer’scostsandtoprohibitnetwork-exclusivity Regulation LL (Savings and Loan Holding arrangementsandroutingrestrictions.Underthe Companies) and Regulation MM (Mutual finalrule,themaximumpermissibleinterchangefee Holding Companies) thatanissuermayreceiveforanelectronicdebit transactionisthesumof 21centspertransaction OnAugust8,2011,theBoardapprovedaninterim and5basispointsmultipliedbythevalueof the finalrulewithrequestforcomment(DocketNo. transaction.TheBoardalsoapprovedaninterim R-1429)establishingregulationsforsavingsandloan finalrule(DocketNo.R-1404)withrequestforcom- holdingcompanies(SLHCs).16OnJuly21,2011,the mentthatpermitsanupwardadjustmentof nomore responsibilityforsupervisionandregulationof than1centtoanissuer’sdebitcardinterchangefeeif SLHCstransferredfromtheOfficeof ThriftSupervitheissuermeetstherule’sfraud-preventionstan- sion(OTS)totheBoard,inaccordancewiththe dards.14TheBoardwillreevaluatethisadjustmentin Dodd-FrankAct.Theinterimfinalruleprovidesfor lightof commentsreceived. thecorrespondingtransferof theOTSregulations necessaryfortheBoardtoadministerthestatutes Inaccordancewiththeact,theinterchangefeestan- governingSLHCs.Theinterimfinalrule,whichalso dardsinthefinalruledonotapplytoissuersthat madetechnicalamendmentstootherBoardregulahavetotalconsolidatedassetsof lessthan$10billion, tionstoreflectthenewauthorityoverSLHCs,is debitcardsissuedpursuanttogovernment- effectiveSeptember13,2011.TheBoardapproved administeredpaymentprograms,andgeneral-use additionaltechnicalamendmentstoitsregulations reloadableprepaidcards.Inaddition,thefinalrule delegatingcertainactionsregardingSLHCsbyorder prohibitsissuersandnetworksfrom(1)directlyor datedAugust12,2011.17 indirectlyrestrictingthenumberof paymentcard networksoverwhichanelectronicdebittransaction Votingforthisaction:ChairmanBernanke,Vice maybeprocessedtofewerthantwounaffiliatednet- ChairYellen,andGovernorsDuke,Tarullo,and worksand(2)inhibitingamerchant’sabilitytoroute Raskin. transactionsoveranynetworkthatanissuerhas enabledtoprocessthem.Thefinalruleandinterim Regulation QQ (Resolution Plans) finalruleareeffectiveOctober1,2011.Formost debitcards,issuersmustcomplywiththenetwork- OnOctober13,2011,theBoardapprovedafinalrule exclusivityprovisionsbyApril1,2012.However, (DocketNo.R-1414)toimplementtheresolutionissuersof certainhealth-relatedandotherbenefit planrequirementof theDodd-FrankAct.Therule, cardsandgeneral-useprepaidcardshaveadelayed whichwaspromulgatedjointlywiththeFDIC, effectivedateof April1,2013,orlaterincertain requiresbankholdingcompanieswithtotalconsolicircumstances. datedassetsof $50billionormoreandnonbank financialfirmsdesignatedbytheFinancialStability Votingforthisaction:ChairmanBernanke,Vice OversightCouncilforsupervisionbytheFederal ChairYellen,andGovernorsTarulloand Reservetoannuallysubmitresolutionplans(“living Raskin.Votingagainstthisaction:Governor wills”)totheBoardandFDIC.18Theplansmust Duke. 15 Seethecomplianceguideatwww.federalreserve.gov/ bankinforeg/regiicg.htm. 16 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2011- 09-13/html/2011-22854.htm. 14 SeeFederalRegisternoticesatwww.gpo.gov/fdsys/pkg/FR- 17 SeetheBoard’sorderatwww.federalreserve.gov/newsevents/ 2011-07-20/html/2011-16861.htm(finalrule)andwww.gpo.gov/ press/bcreg/bcreg20110812a1.pdf. fdsys/pkg/FR-2011-07-20/html/2011-16860.htm(interimfinal 18 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2011rule). 11-01/html/2011-27377.htm.

Recordof PolicyActionsof theBoardof Governors 169 describeacompany’sstrategyforrapidandorderly tionalGroup,Inc.(AIG)duringthefinancialcrisis.20 resolutioninbankruptcyduringtimesof financial MaidenLaneIIhadusedtheproceedsof aloan distress.Amongothercomponents,theplansmust fromtheFederalReserveBankof NewYorkandthe includeadescriptionof therangeof specificactions acquisitionof asubordinatedinterestbyAIGtopuracompanyproposestotakeinresolutionanda chaseresidentialmortgage-backedsecuritiesfrom descriptionof thecompany’sorganizationalstruc- severalof AIG’sregulatedU.S.insurancesubsidiarture,materialentities,interconnectionsandinterde- ies.Undertheapproveddispositionprocess,the pendencies,andmanagementinformationsystems. ReserveBanksubsequentlydisposedof allthesecuri- ThefinalruleiseffectiveNovember30,2011.Com- tiesintheMaidenLaneIIportfolioindividuallyand paniesmustsubmittheirinitialresolutionplansona insegmentsovertimeaswarrantedbymarketcondistaggeredbasisfromJuly1,2012,throughDecem- tionsthroughacompetitivesalesprocess.(Note:The ber31,2013,startingwithcompaniesthatgenerally dispositionof theassetsin2011and2012resultedin have$250billionormoreintotalnonbankassets. fullrepaymentof theReserveBank’sloantoMaiden LaneIIandgeneratedanetgainforthebenefitof Votingforthisaction:ChairmanBernanke,Vice thepublicof approximately$2.8billion.) ChairYellen,andGovernorsDuke,Tarullo,and Raskin. Votingforthisaction:ChairmanBernanke,Vice ChairYellen,andGovernorsDuke,Tarullo,and Raskin.Absentandnotvoting:GovernorWarsh. Policy Statements and Other Actions Guidance on Authentication in an Internet S.A.F.E. Act Initial Registration Period Banking Environment OnJanuary28,2011,theBoard,actingwiththe OnJune11,2011,theBoardapprovedinteragency FDIC,OCC,OTS,NationalCreditUnionAdminisguidance,issuedthroughtheFederalFinancialInstitration(NCUA),andFarmCreditAdministration tutionsExaminationCouncil(FFIEC),addressing (FCA),approvedanotice(DocketNo.R-1357) customerauthenticationandsecurityinInternet announcingtheinitialregistrationperiodunderthe banking.21TheguidancesupplementsFFIECguid- SecureandFairEnforcementforMortgageLicensing anceissuedin2005,inlightof theheightenedand Act(S.A.F.E.Act).19Duringthisinitialregistration evolvingthreatsfacingonlinebankingandother period(fromJanuary31throughJuly29,2011),resiactivities.Theguidancereinforcestheoriginalriskdentialmortgageloanoriginatorsemployedby managementframeworkforInternetandelectronic agency-regulatedinstitutionswererequiredtoregisbankingandupdatestheagencies’expectationsfor terwiththeNationwideMortgageLicensingSystem supervisedfinancialorganizationsregardingcusandRegistry,inaccordancewiththeS.A.F.E.Act. tomerauthentication,layeredsecurity,andother TheBoard,alongwiththeotheragencies,hadissued controls. finalrulesimplementingtheactonJuly28,2010. Pursuanttothoserules,agency-regulatedmortgage Votingforthisaction:ChairmanBernanke,Vice loanoriginatorsmustregisterwiththeregistry, ChairYellen,andGovernorsDuke,Tarullo,and obtainauniqueidentifierfromtheregistry,and Raskin. maintaintheirregistrations. Interagency Questions and Answers Votingforthisaction:ChairmanBernanke,Vice Regarding Flood Insurance ChairYellen,andGovernorsWarsh,Duke, Tarullo,andRaskin. OnSeptember29,2011,theBoard,actingwiththe FDIC,OCC,NCUA,andFCA,approvedrevisions American International Group, Inc. (DocketNo.OP-1431)totheInteragencyQuestions andAnswersRegardingFloodInsurancethatwere OnMarch29,2011,theBoardapprovedaprocess forthedispositionof assetsheldbyMaidenLaneII, LLC,aspecial-purposevehicleestablishedtoalleviate fundingandliquiditypressuresonAmericanInterna- 20 SeeFederalReserveBankofNewYorkpressreleaseatwww .newyorkfed.org/newsevents/news/markets/2011/an110330.html. 19 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2011- 02-03/html/2011-2378.htm. 21 SeeFFIECpressreleaseatwww.ffiec.gov/press/pr062811.htm.

170 98thAnnualReport|2011 mostrecentlyissuedinJuly2009.22Therevisedguid- Reserve.TheBoardalsoformalizedtheexistingproance,whichwaspublishedonOctober14,2011, hibitionondirectors’accesstoconfidentialsupervifinalizedtwoquestionsandanswersthatrelatedto soryinformationandlimitedtheinvolvementof insurablevalueandtheforceplacementof flood ClassAandsomeClassBdirectorsinselectingand insurance.Anadditionalproposedquestiononinsur- compensatingReserveBankofficerswhoseprimary ablevaluewaswithdrawn.(Note:Theguidancealso responsibilitiesinvolvesupervisorymatters. requestedcommentonthreeadditionalproposed updatestoquestionsandanswersrelatingtoflood Votingforthisaction:ChairmanBernanke,Vice insurance.) ChairYellen,andGovernorsDuke,Tarullo,and Raskin. Votingforthisaction:ChairmanBernanke,Vice ChairYellen,andGovernorsDuke,Tarullo,and Regulatory Reports for Savings and Loan Raskin. Holding Companies Policies for Directors of Federal Reserve OnDecember22,2011,theBoardapprovedatwo- Banks and Branches yearphase-inperiodformostSLHCstofileFederal Reserveregulatoryreportsandanexemptionfor OnDecember1,2011,theBoardapprovedrevisions someSLHCsfrominitiallyfilingreports.24Underthe toitsEligibility,Qualifications,andRotationPolicy Dodd-FrankAct,supervisoryandregulatoryauthorforReserveBankandBranchdirectors.23Therevi- ityforSLHCsandtheirnondepositorysubsidiaries sionsextenddirectorstockholdingandaffiliation transferredfromtheOTStotheBoardonJuly21, restrictionstoinstitutionsthatwerebroughtunder 2011.Thephase-inapproachisintendedtoallow theFederalReserveSystem’ssupervisoryauthority SLHCstodevelopreportingsystemsoveraperiodof bytheDodd-FrankAct.Otherrevisionsaddresseli- timeandwillbeginwiththeMarch31,2012,reportgibilityrequirementsforBoard-appointedBranch ingperiod. directorsandprescribeastandardannualcertificationforClassBandClassCdirectors. Votingforthisaction:ChairmanBernanke,Vice ChairYellen,andGovernorsDuke,Tarullo,and TheBoardalsoreviseditsGuidetoConductfor Raskin. ReserveBankandBranchdirectorstoformalize standardsfordirectorconductregardingaccessto Discount Rates for Depository BoardandReserveBankofficialsandstaff andto prescribeastandardcertificationformtoimplement Institutions in 2011 anexistingrequirementthatdirectorscertifytheir lackof financialinterestinReserveBankprocure- UndertheFederalReserveAct,theboardsof direcments.Inaddition,theGuidetoConductwasrevised torsof theFederalReserveBanksmustestablish toimplementrecommendationsfromtheOctoratesondiscountwindowloanstodepositoryinstituber2011GovernmentAccountabilityOfficeReport tionsatleastevery14days,subjecttoreviewand onFederalReserveBankGovernance,includingrecdeterminationbytheBoardof Governors. ommendationstodirecteachReserveBanktoclearly document,initsbylaws,therolesandresponsibilities Primary, Secondary, and Seasonal Credit of directorsandtoadoptaprocessforrequesting waiverstotheGuidetoConduct. Primarycredit,theFederalReserve’smainlending programfordepositoryinstitutions,isextendedata TheBoardalsoadoptedanewpolicytoimplement rateabovethefederalfundsratetargetsetbythe theDodd-FrankActprovisionthatexcludesClassA FederalOpenMarketCommittee.ItismadeavaildirectorsfromtheappointmentprocessforReserve able,withminimaladministrationandforveryshort Bankpresidentsandfirstvicepresidents.Thenew terms,asabackupsourceof liquiditytodepository policyextendsthisexclusiontoClassBdirectors institutionsthat,inthejudgmentof thelendingFedaffiliatedwithfirmssupervisedbytheFederal eralReserveBank,areingenerallysoundfinancial 22 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2011- 10-17/html/2011-26749.htm. 23 SeeReserveBankdirectorpoliciesatwww.federalreserve.gov/ 24 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2011generalinfo/listdirectors/policies-directors.htm. 12-29/html/2011-33432.htm.

Recordof PolicyActionsof theBoardof Governors 171 condition.Throughout2011,theprimarycreditrate resultinginarateclosetothefederalfundsratetarwas¾percent. get.Atyear-end,theseasonalcreditratewas 0.30percent.25 Secondarycreditisavailableinappropriatecircumstancestodepositoryinstitutionsthatdonotqualify Votes on Changes to Discount Rates for forprimarycredit.Thesecondarycreditrateissetat Depository Institutions aspreadabovetheprimarycreditrate.Throughout 2011,thespreadwassetat50basispoints;therefore, Abouteverytwoweeksduring2011,theBoard thesecondarycreditratewas1¼percent. approvedproposalsbythe12ReserveBanksto maintaintheformulasforcomputingthesecondary Seasonalcreditisavailabletosmallerdepository andseasonalcreditrates.In2011,theBoarddidnot institutionstomeetliquidityneedsthatarisefrom approveanychangesintheprimarycreditrate. regularswingsintheirloansanddeposits.Therate onseasonalcreditiscalculatedeverytwoweeksasan 25 Forcurrentandhistoricaldiscountrates,seewww averageof selectedmoney-marketyields,typically .frbdiscountwindow.org/.

173 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 AsofJanuary1,2011,theFederalReserveBankofNewYork teeatthetimeof themeetings. wasoperatingundertheDomesticPolicyDirectiveapprovedat theDecember14,2010,CommitteemeetingandtheAuthorizationforDomesticOpenMarketOperationsasamendedJanu- Membersof theCommitteevotingforaparticular ary26,2010.Theotherpolicyinstruments(theAuthorization actionmaydifferamongthemselvesastothereasons forForeignCurrencyOperations,theForeignCurrencyDirective,andProceduralInstructionswithRespecttoForeignCurfortheirvotes;insuchcases,therangeof theirviews rencyOperations)ineffectasofJanuary1,2011,wereapproved isnotedintheminutes.Whenmembersdissentfrom attheJanuary26–27,2010,meeting.

174 98thAnnualReport|2011 Meeting Held on January 25–26, 2011 NathanSheets Economist Ameetingof theFederalOpenMarketCommittee DavidJ.Stockton washeldintheofficesof theBoardof Governorsin Economist Washington,D.C.,onTuesday,January25,2011,at JamesA.Clouse,ThomasA.Connors, 1:00p.m.andcontinuedonWednesday,January26, StevenB.Kamin,LorettaJ.Mester,SimonPotter, 2011,at9:00a.m. DavidReifschneider,HarveyRosenblum, DanielG.Sullivan,DavidW.Wilcox,andKei-MuYi Present AssociateEconomists BenBernanke BrianSack Chairman Manager,SystemOpenMarketAccount WilliamC.Dudley PatrickM.Parkinson ViceChairman Director,Divisionof BankingSupervisionand ElizabethDuke Regulation,Boardof Governors CharlesL.Evans NellieLiang Director,Officeof FinancialStabilityPolicyand RichardW.Fisher Research,Boardof Governors NarayanaKocherlakota WilliamNelson CharlesI.Plosser DeputyDirector,Divisionof MonetaryAffairs, Boardof Governors SarahBloomRaskin LindaRobertson DanielK.Tarullo AssistanttotheBoard,Officeof BoardMembers, KevinWarsh Boardof Governors JanetL.Yellen CharlesS.Struckmeyer1 DeputyStaff Director,Officeof theStaff Director, JeffreyM.Lacker,DennisP.Lockhart, Boardof Governors JohnF.Moore,andSandraPianalto AlternateMembers of theFederalOpenMarket LawrenceSlifmanandWilliamWascher Committee SeniorAssociateDirectors,Divisionof Researchand Statistics,Boardof Governors JamesBullard,ThomasM.Hoenig,and EricRosengren AndrewT.Levin Presidentsof theFederalReserveBanksof St.Louis, SeniorAdviser,Officeof BoardMembers, KansasCity,andBoston,respectively Boardof Governors WilliamB.English JoyceK.Zickler SecretaryandEconomist VisitingSeniorAdviser,Divisionof Monetary Affairs,Boardof Governors DeborahJ.Danker DeputySecretary DanielM.Covitz AssociateDirector,Divisionof Researchand MatthewM.Luecke Statistics,Boardof Governors AssistantSecretary GretchenC.Weinbach DavidW.Skidmore DeputyAssociateDirector,Divisionof Monetary AssistantSecretary Affairs,Boardof Governors MichelleA.Smith BethAnneWilson2 AssistantSecretary AssistantDirector,Divisionof InternationalFinance, ScottG.Alvarez Boardof Governors GeneralCounsel ThomasC.Baxter 1 AttendedWednesday’ssessiononly. DeputyGeneralCounsel 2 AttendedTuesday’ssessiononly.

Minutesof FederalOpenMarketCommitteeMeetings|January 175 BruceFallick2 beenreceivedandthattheseindividualshadexecuted GroupManager,Divisionof ResearchandStatistics, theiroathsof office. Boardof Governors Theelectedmembersandalternatememberswereas DavidH.Small follows: ProjectManager,Divisionof MonetaryAffairs, Boardof Governors WilliamC.Dudley Presidentof theFederalReserveBankof NewYork, DavidM.Arseneau with SeniorEconomist,Divisionof InternationalFinance, Boardof Governors ChristineCumming FirstVicePresidentof theFederalReserveBankof StefaniaD’AmicoandEdwardM.Nelson NewYork,asalternate. SeniorEconomists,Divisionof MonetaryAffairs, CharlesI.Plosser Boardof Governors Presidentof theFederalReserveBankof NormanJ.Morin Philadelphia,with SeniorEconomist,Divisionof Researchand JeffreyM.Lacker Statistics,Boardof Governors Presidentof theFederalReserveBankof Richmond, MarkA.Carlson asalternate. Economist,Divisionof MonetaryAffairs, CharlesL.Evans Boardof Governors Presidentof theFederalReserveBankof Chicago, RandallA.Williams with RecordsManagementAnalyst,Divisionof Monetary SandraPianalto Affairs,Boardof Governors Presidentof theFederalReserveBankof Cleveland, PatrickK.Barron asalternate. FirstVicePresident,FederalReserveBankof Atlanta RichardW.Fisher Presidentof theFederalReserveBankof Dallas, MarkS.Sniderman with ExecutiveVicePresident,FederalReserveBankof Cleveland DennisP.Lockhart Presidentof theFederalReserveBankof Atlanta,as DavidAltig,AlanD.Barkema,GlennD.Rudebusch, alternate. GeoffreyTootell,andChristopherJ.Waller SeniorVicePresidents,FederalReserveBanksof NarayanaKocherlakota Atlanta,KansasCity,SanFrancisco,Boston,and Presidentof theFederalReserveBankof St.Louis,respectively Minneapolis,with JulieAnnRemache JohnF.Moore AssistantVicePresident,FederalReserveBankof FirstVicePresidentof theFederalReserveBankof NewYork SanFrancisco,asalternate. AyşegülŞahin2 Byunanimousvote,thefollowingofficersof theFed- Officer,FederalReserveBankof NewYork eralOpenMarketCommitteewereselectedtoserve R.JasonFaberman2andRobertL.Hetzel untiltheselectionof theirsuccessorsatthefirstregularlyscheduledmeetingof theCommitteein2012: SeniorEconomists,FederalReserveBanksof PhiladelphiaandRichmond,respectively BenBernanke Chairman Annual Organizational Matters WilliamC.Dudley Intheagendaforthismeeting,itwasreportedthat ViceChairman advicesof theelectionof thefollowingmembersand WilliamB.English alternatemembersof theFederalOpenMarketCom- SecretaryandEconomist mitteeforatermbeginningJanuary25,2011,had DeborahJ.Danker 2 AttendedTuesday’ssessiononly. DeputySecretary

176 98thAnnualReport|2011 MatthewM.Luecke Byunanimousvote,theAuthorizationforDomestic AssistantSecretary OpenMarketOperationswasreaffirmedintheform shownbelow.TheGuidelinesfortheConductof DavidW.Skidmore SystemOpenMarketOperationsinFederal-Agency AssistantSecretary Issuesremainedsuspended. MichelleA.Smith AssistantSecretary Authorization for Domestic Open Market ScottG.Alvarez Operations (Reaffirmed January 25, 2011) GeneralCounsel ThomasBaxter 1. TheFederalOpenMarketCommitteeauthorizes DeputyGeneralCounsel anddirectstheFederalReserveBankof New York,totheextentnecessarytocarryoutthe RichardM.Ashton mostrecentdomesticpolicydirectiveadoptedat AssistantGeneralCounsel ameetingof theCommittee: NathanSheets Economist A. TobuyorsellU.S.governmentsecurities, includingsecuritiesof theFederalFinancing DavidJ.Stockton Bank,andsecuritiesthataredirectobliga- Economist tionsof,orfullyguaranteedastoprincipal JamesA.Clouse andinterestby,anyagencyof theUnited ThomasA.Connors Statesintheopenmarket,fromortosecuritiesdealersandforeignandinternational StevenB.Kamin accountsmaintainedattheFederalReserve LorettaJ.Mester Bankof NewYork,onacash,regular,or SimonPotter deferreddeliverybasis,fortheSystemOpen MarketAccountatmarketprices,and,for DavidReifschneider suchAccount,toexchangematuringU.S. HarveyRosenblum governmentandfederalagencysecurities DanielG.Sullivan withtheTreasuryortheindividualagencies DavidW.Wilcox ortoallowthemtomaturewithoutreplacement;and Kei-MuYi AssociateEconomists B. TobuyorsellintheopenmarketU.S.governmentsecurities,andsecuritiesthatare Byunanimousvote,theFederalReserveBankof directobligationsof,orfullyguaranteedasto NewYorkwasselectedtoexecutetransactionsfor principalandinterestby,anyagencyof the theSystemOpenMarketAccount. UnitedStates,fortheSystemOpenMarket Byunanimousvote,BrianSackwasselectedtoserve Accountunderagreementstoresellorrepuratthepleasureof theCommitteeasManager,System chasesuchsecuritiesorobligations(including OpenMarketAccount,ontheunderstandingthathis suchtransactionsasarecommonlyreferred selectionwassubjecttobeingsatisfactorytotheFed- toasrepoandreverserepotransactions)in eralReserveBankof NewYork. 65businessdaysorless,atratesthat,unless otherwiseexpresslyauthorizedbytheCom- Secretary’snote:Advicesubsequentlywas mittee,shallbedeterminedbycompetitive receivedthattheselectionof Mr.SackasManager bidding,afterapplyingreasonablelimitations wassatisfactorytotheBoardof Directorsof the onthevolumeof agreementswithindividual FederalReserveBankof NewYork. counterparties. Byunanimousvote,theCommitteeadopteditsPro- 2. Inordertoensuretheeffectiveconductof open gramforSecurityof FOMCInformationwith marketoperations,theFederalOpenMarket amendmentstothesectiononongoingresponsibility CommitteeauthorizestheFederalReserveBank formaintainingconfidentialityandwithanumberof of NewYorktouseagentsinagencyMBS-related technicalupdates. transactions.

Minutesof FederalOpenMarketCommitteeMeetings|January 177 3. Inordertoensuretheeffectiveconductof open accountandsuchforeign,international,and marketoperations,theFederalOpenMarket fiscalagencyaccountsmaintainedatthe CommitteeauthorizestheFederalReserveBank Bank. of NewYorktolendonanovernightbasisU.S. Transactionsundertakenwithsuchaccounts governmentsecuritiesandsecuritiesthatare undertheprovisionsof thisparagraphmay directobligationsof anyagencyof theUnited provideforaservicefeewhenappropriate. States,heldintheSystemOpenMarketAccount, todealersatratesthatshallbedeterminedby 5. Intheexecutionof theCommittee’sdecision competitivebidding.TheFederalReserveBank regardingpolicyduringanyintermeetingperiod, of NewYorkshallsetaminimumlendingfee theCommitteeauthorizesanddirectstheFederal consistentwiththeobjectivesof theprogramand ReserveBankof NewYork,upontheinstruction applyreasonablelimitationsonthetotalamount of theChairmanof theCommittee,toadjust of aspecificissuethatmaybeauctionedandon somewhatinexceptionalcircumstancesthedegree theamountof securitiesthateachdealermay of pressureonreservepositionsandhencethe borrow.TheFederalReserveBankof NewYork intendedfederalfundsrateandtotakeactions mayrejectbidsthatcouldfacilitateadealer’sabilthatresultinmaterialchangesinthecomposition itytocontrolasingleissueasdeterminedsolely andsizeof theassetsintheSystemOpenMarket bytheFederalReserveBankof NewYork. Accountotherthanthoseanticipatedbythe Committeeatitsmostrecentmeeting.Anysuch 4. Inordertoensuretheeffectiveconductof open adjustmentshallbemadeinthecontextof the marketoperations,whileassistingintheprovision Committee’sdiscussionanddecisionatitsmost of short-terminvestmentsforforeignandinterrecentmeetingandtheCommittee’slong-run nationalaccountsmaintainedattheFederal objectivesforpricestabilityandsustainableeco- ReserveBankof NewYorkandaccountsmainnomicgrowth,andshallbebasedoneconomic, tainedattheFederalReserveBankof NewYork financial,andmonetarydevelopmentsduringthe asfiscalagentof theUnitedStatespursuantto intermeetingperiod.ConsistentwithCommittee section15of theFederalReserveAct,theFederal practice,theChairman,if feasible,willconsult OpenMarketCommitteeauthorizesanddirects withtheCommitteebeforemakingany theFederalReserveBankof NewYork: adjustment. A. FortheSystemOpenMarketAccount,tosell Byunanimousvote,theAuthorizationforFor- U.S.governmentsecurities,andsecurities eignCurrencyOperations,theForeignCurrency thataredirectobligationsof,orfullyguaran- Directive,andtheProceduralInstructionswith teedastoprincipalandinterestby,any RespecttoForeignCurrencyOperationswere agencyof theUnitedStates,tosuchaccounts reaffirmedintheformshownbelow.Thevoteto onthebasessetforthinparagraph1.Aunder reaffirmthesedocumentsincludedapprovalof agreementsprovidingfortheresalebysuch theSystem’swarehousingagreementwiththe accountsof thosesecuritiesin65business U.S.Treasury. daysorlessontermscomparabletothose availableonsuchtransactionsinthemarket;and Authorization for Foreign Currency B. FortheNewYorkBankaccount,when Operations (Reaffirmed January 25, 2011) appropriate,toundertakewithdealers,subjecttotheconditionsimposedonpurchases 1. TheFederalOpenMarketCommitteeauthorizes andsalesof securitiesinparagraphl.B, anddirectstheFederalReserveBankof New repurchaseagreementsinU.S.government York,fortheSystemOpenMarketAccount,to securities,andsecuritiesthataredirectobli- theextentnecessarytocarryouttheCommittee’s gationsof,orfullyguaranteedastoprincipal foreigncurrencydirectiveandexpressauthorizaandinterestby,anyagencyof theUnited tionsbytheCommitteepursuantthereto,andin States,andtoarrangecorrespondingsaleand conformitywithsuchproceduralinstructionsas repurchaseagreementsbetweenitsown theCommitteemayissuefromtimetotime:

178 98thAnnualReport|2011 A. Topurchaseandsellthefollowingforeign eryof thatcurrency,i.e.,asthesumof these currenciesintheformof cabletransfers elementswithdueregardtosign. throughspotorforwardtransactionsonthe openmarketathomeandabroad,including 2. TheFederalOpenMarketCommitteedirectsthe transactionswiththeU.S.Treasury,withthe FederalReserveBankof NewYorktomaintain U.S.ExchangeStabilizationFundestablished reciprocalcurrencyarrangements(“swap” bysection10of theGoldReserveActof arrangements)fortheSystemOpenMarket 1934,withforeignmonetaryauthorities,with Accountforperiodsuptoamaximumof theBankforInternationalSettlements,and 12monthswiththefollowingforeignbanks, withotherinternationalfinancialinstitutions: whichareamongthosedesignatedbytheBoard of Governorsof theFederalReserveSystem Australiandollars undersection214.5of RegulationN,Relations Brazilianreais withForeignBanksandBankers,andwiththe Canadiandollars approvalof theCommitteetorenewsuch Danishkroner arrangementsonmaturity: euro Japaneseyen Amountofarrangement Koreanwon Foreignbank (millionsofdollarsequivalent) Mexicanpesos BankofCanada 2,000 NewZealanddollars BankofMexico 3,000 Norwegiankroner Poundssterling Singaporedollars Anychangesinthetermsof existingswap Swedishkronor arrangements,andtheproposedtermsof any Swissfrancs newarrangementsthatmaybeauthorized,shall bereferredforreviewandapprovaltothe B. Toholdbalancesof,andtohaveoutstanding Committee. forwardcontractstoreceiveortodeliver,the foreigncurrencieslistedinparagraphA 3. Alltransactionsinforeigncurrenciesundertaken above. underparagraph1.Aaboveshall,unlessotherwiseexpresslyauthorizedbytheCommittee,beat C. Todrawforeigncurrenciesandtopermitfor- prevailingmarketrates.Forthepurposeof proeignbankstodrawdollarsundertherecipro- vidinganinvestmentreturnonSystemholdings calcurrencyarrangementslistedinparagraph of foreigncurrenciesorforthepurposeof adjust- 2below,providedthatdrawingsbyeither inginterestratespaidorreceivedinconnection partytoanysucharrangementshallbefully withswapdrawings,transactionswithforeign liquidatedwithin12monthsafterany centralbanksmaybeundertakenatnonmarket amountoutstandingatthattimewasfirst exchangerates. drawn,unlesstheCommittee,becauseof exceptionalcircumstances,specificallyautho- 4. Itshallbethenormalpracticetoarrangewith rizesadelay. foreigncentralbanksforthecoordinationof foreigncurrencytransactions.Inmakingoperating D. Tomaintainanoverallopenpositioninall arrangementswithforeigncentralbankson foreigncurrenciesnotexceeding$25.0billion. Systemholdingsof foreigncurrencies,theFederal Forthispurpose,theoverallopenpositionin ReserveBankof NewYorkshallnotcommit allforeigncurrenciesisdefinedasthesum itself tomaintainanyspecificbalance,unless (disregardingsigns)of netpositionsinindi- authorizedbytheFederalOpenMarketCommitvidualcurrencies,excludingchangesindollar tee.Anyagreementsorunderstandingsconcernvalueduetoforeignexchangeratemove- ingtheadministrationof theaccountsmainmentsandinterestaccruals.Thenetposition tainedbytheFederalReserveBankof NewYork inasingleforeigncurrencyisdefinedas withtheforeignbanksdesignatedbytheBoardof holdingsof balancesinthatcurrency,plus Governorsundersection214.5of RegulationN outstandingcontractsforfuturereceipt, shallbereferredforreviewandapprovaltothe minusoutstandingcontractsforfuturedeliv- Committee.

Minutesof FederalOpenMarketCommitteeMeetings|January 179 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 atforeigninstitutions.Inaddition,whenappro- currencyoperationstoappropriateofficialsof the priateinconnectionwitharrangementstopro- TreasuryDepartment. videinvestmentfacilitiesforforeigncurrency holdings,U.S.governmentsecuritiesmaybepur- 9. AllFederalReserveBanksshallparticipateinthe chasedfromforeigncentralbanksunderagreeforeigncurrencyoperationsforSystemAccount mentsforrepurchaseof suchsecuritieswithin30 inaccordancewithparagraph3G(1)of theBoard calendardays. of Governors’Statementof Procedurewith RespecttoForeignRelationshipsof Federal 6. Alloperationsundertakenpursuanttothepre- ReserveBanksdatedJanuary1,1944. cedingparagraphsshallbereportedpromptlyto theForeignCurrencySubcommitteeandthe Foreign Currency Directive (Reaffirmed Committee.TheForeignCurrencySubcommittee January 25, 2011) consistsof theChairmanandViceChairmanof theCommittee,theViceChairmanof theBoard 1. Systemoperationsinforeigncurrenciesshallgenof Governors,andsuchothermemberof the erallybedirectedatcounteringdisorderlymarket BoardastheChairmanmaydesignate(orinthe conditions,providedthatmarketexchangerates absenceof membersof theBoardservingonthe fortheU.S.dollarreflectactionsandbehavior Subcommittee,otherBoardmembersdesignated consistentwithIMFArticleIV,Section1. bytheChairmanasalternates,andintheabsence of theViceChairmanof theCommittee,theVice 2. ToachievethisendtheSystemshall: Chairman’salternate).Meetingsof theSubcommitteeshallbecalledattherequestof anymem- A. Undertakespotandforwardpurchasesand ber,orattherequestof theManager,System salesof foreignexchange. OpenMarketAccount(“Manager”),forthepurposesof reviewingrecentorcontemplatedopera- B. Maintainreciprocalcurrency(“swap”) tionsandof consultingwiththeManageron arrangementswithselectedforeigncentral othermattersrelatingtotheManager’sresponsibanks. bilities.Attherequestof anymemberof theSubcommittee,questionsarisingfromsuchreviews andconsultationsshallbereferredfordetermina- C. Cooperateinotherrespectswithcentral tiontotheFederalOpenMarketCommittee. banksof othercountriesandwithinternationalmonetaryinstitutions. 7. TheChairmanisauthorized: 3. Transactionsmayalsobeundertaken: A. Withtheapprovalof theCommittee,toenter intoanyneededagreementorunderstanding A. ToadjustSystembalancesinlightof probwiththeSecretaryof theTreasuryaboutthe ablefutureneedsforcurrencies. divisionof responsibilityforforeigncurrency operationsbetweentheSystemandthe B. ToprovidemeansformeetingSystemand Treasury; Treasurycommitmentsinparticularcurren-

180 98thAnnualReport|2011 cies,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 isnotfeasibleinthetimeavailable,orwiththe C. Inamannerconsistentwiththeobligations Chairman,if theChairmanbelievesthatconsulof theUnitedStatesintheInternational tationwiththeSubcommitteeisnotfeasiblein MonetaryFundregardingexchangearrange- thetimeavailable): mentsunderIMFArticleIV. A. Anyoperationthatwouldresultinachange Procedural Instructions with Respect to intheSystem’soverallopenpositioninfor- Foreign Currency Operations (Reaffirmed eigncurrenciesexceeding$1.5billionsince January 25, 2011) themostrecentregularmeetingof the Committee. Inconductingoperationspursuanttotheauthorizationanddirectionof theFederalOpenMarketCom- B. Anyswapdrawingproposedbyaforeign mitteeassetforthintheAuthorizationforForeign bankexceedingthelargerof (i)$200million CurrencyOperationsandtheForeignCurrency or(ii)15percentof thesizeof theswap Directive,theFederalReserveBankof NewYork, arrangement. throughtheManager,SystemOpenMarketAccount (“Manager”),shallbeguidedbythefollowingproce- 3. TheManagershallalsoconsultwiththeSubcomduralunderstandingswithrespecttoconsultations mitteeortheChairmanaboutproposedswap andclearanceswiththeCommittee,theForeignCur- drawingsbytheSystemandaboutanyoperations rencySubcommittee,andtheChairmanof theCom- thatarenotof aroutinecharacter. mittee,unlessotherwisedirectedbytheCommittee. Alloperationsundertakenpursuanttosuchclear- DevelopmentsinFinancialMarketsandthe ancesshallbereportedpromptlytotheCommittee. FederalReserve’sBalanceSheet TheManagerof theSystemOpenMarketAccount 1. TheManagershallclearwiththeSubcommittee (SOMA)reportedondevelopmentsindomesticand (orwiththeChairman,if theChairmanbelieves foreignfinancialmarketsduringtheperiodsincethe thatconsultationwiththeSubcommitteeisnot FederalOpenMarketCommittee(FOMC)meton feasibleinthetimeavailable): December14,2010.HealsoreportedonSystem openmarketoperations,includingthecontinuing A. Anyoperationthatwouldresultinachange reinvestmentintolonger-termTreasurysecuritiesof intheSystem’soverallopenpositioninfor- principalpaymentsreceivedontheSOMA’sholdings eigncurrenciesexceeding$300milliononany of agencydebtandagency-guaranteedmortgagedayor$600millionsincethemostrecent backedsecurities(MBS)aswellastheongoingpurregularmeetingof theCommittee. chasesof additionalTreasurysecuritiesauthorizedat theNovember2–3,2010,FOMCmeeting.Sincethe B. Anyoperationthatwouldresultinachange firstpurchaseschedulewasreleasedaftertheNovemonanydayintheSystem’snetpositionina berFOMCmeeting,theOpenMarketDeskatthe singleforeigncurrencyexceeding$150mil- FederalReserveBankof NewYorkpurchasedatotal lion,or$300millionwhentheoperationis of $236billionof Treasurysecurities.Thesepurassociatedwithrepaymentof swapdrawings. chasesincluded$69billionassociatedwiththerein-

Minutesof FederalOpenMarketCommitteeMeetings|January 181 vestmentof principalpaymentsonagencydebtand thoughtheexpansionhadnotyetbeensufficientto MBSand$167billionassociatedwiththeexpansion bringaboutasignificantimprovementinlabormarof theFederalReserve’ssecuritiesholdings.The ketconditions.Consumerspendingrosestronglylate maturitydistributionof theDesk’spurchases lastyear,andtheongoingexpansioninbusinessoutresultedinanaveragedurationof about5½yearsfor laysforequipmentandsoftwareappearedtohave thesecuritiesobtained.TheManagerreportedthat beensustainedinrecentmonths.However,construcgiventhepurchasescompletedthusfar,achievinga tionactivityinboththeresidentialandnonresiden- $600billionexpansionof theSOMAportfoliobythe tialsectorsremainedweak.Industrialproduction endof June2011wouldrequirepurchasingtheaddi- increasedsolidlyinNovemberandDecember.Modtionalsecuritiesatapaceof about$80billionper estgainsinemploymentcontinued,andtheunemmonth.Inaddition,theManagerprovidedprojec- ploymentrateremainedelevated.Despitefurther tionsof theFederalReserve’sbalancesheetand increasesincommodityprices,measuresof underlyincomeunderalternativeassumptions.Therewereno inginflationremainedsubduedandlonger-runinflaopenmarketoperationsinforeigncurrenciesforthe tionexpectationswerestable. System’saccountovertheintermeetingperiod.By unanimousvote,theCommitteeratifiedtheDesk’s Thelabormarketsituationcontinuedtoimprove transactionsovertheintermeetingperiod. gradually.Privatenonfarmpayrollemployment increasedinDecemberatapaceroughlythesameas StructuralUnemployment itsaveragefor2010asawhole,andtheaveragework- Astaff presentationonstructuralunemployment weekforallemployeeswasunchanged.Services summarizedabroadrangeof economicresearchon industriescontinuedtoaddmostof thenewjobsin thetopicconductedacrosstheFederalReserve theprivatesector.Initialclaimsforunemployment System.Amongthefactorscitedthatcouldaffectthe insurancetrendedlowerinDecemberandearlyJanulevelof structuralunemploymentweredemographics, ary,andsomeindicatorsof jobopeningsandfirms’ changesintheintensityof jobsearchandworker hiringplansimproved.Theunemploymentrate screening,differencesinthegeographiclocationsof decreasedto9.4percentinDecember,butthisdecline potentialworkersandvacantjobs,andmismatchesin inpartreflectedafurtherdropinthelaborforceparcharacteristicsbetweenpotentialworkersandavail- ticipationrate.Long-durationunemployment ablejobs.Mostof theresearchreviewedsuggested remainedelevated,andtheemployment-tothatstructuralunemploymenthadlikelyrisenin populationratiowasstillataverylowlevelatthe recentyears,butbylessthanactualunemployment endof theyear. hadincreased. Totalindustrialproductionpostedsolidincreasesin Indiscussingthestaff presentation,meetingpartici- NovemberandDecember,inpartbecausecolder pantsmentionedvariousfactorsthatwereseenas weatherboostedtheoutputof utilities.Although influencingthepathof theunemploymentrate.Sev- motorvehicleassembliesdroppedbackinthose eralparticipantsnotedthatestimatesof thecontribu- months,productioninthemanufacturingsectorouttionsof theindividualfactorsdependedimportantly sideof motorvehiclespostedsolidgainsthatwere ontheapproachtakenbyresearchers,includingthe fairlywidespreadacrossindustries;asaresult,capacmodelsusedandtheassumptionsmade.Participants ityutilizationinmanufacturingincreasedfurther, notedthatmanyof thefactorsthatcontributedto althoughitremainedbelowitslong-runaverage. therecentapparentriseinstructuralunemployment Mostindicatorsof near-termindustrialactivity,such werelikelytorecedeovertime.Someparticipants asthenewordersdiffusionindexesinthenational stressedthatcertaindeterminantsof theunemploy- andregionalmanufacturingsurveys,wereatlevels mentrate,suchasmismatchesinthelabormarket consistentwithfurtherincreasesinindustrialproducandfirms’hiringpractices,werebothdifficultto tioninthenearterm;inaddition,motorvehiclepromeasureinrealtimeandnotdirectlyaffectedby ductionwasscheduledtomoveupagaininearly monetarypolicy.Othersemphasizedthatinthecur- 2011. rentsituation,monetarypolicycouldstillplayan importantroleinreducingunemployment. Growthinconsumerspendingappearedtohave pickedupinthefourthquarterfromthemoremod- StaffReviewoftheEconomicSituation estpaceseenearlierintheyear.Nominalretailsales, TheinformationreviewedattheJanuary25–26meet- excludingpurchasesof motorvehiclesandparts,rose ingindicatedthattheeconomicrecoverywasfirming, againinDecember,followingsubstantialincreasesin

182 98thAnnualReport|2011 thepreviousfourmonths.Inaddition,salesof new outlaysfornonresidentialstructuresstayedweak, lightmotorvehiclesclimbedfurtherinDecember reflectinghighvacancyratesandlowpropertyvalues aftersteppinguptoahigherlevelduringthepreced- forofficeandcommercialproperties,aswellastight ingtwomonths.Theavailabledatasuggestedthat creditconditionsforcommercialrealestate.Inconconsumerspendingwassupportedbygainsinper- trast,investmentindrillingandminingstructures sonalincomeinthefourthquarterof 2010.More- increased,buoyedbyrisingenergyprices. over,householdnetworthappearedtohaverisenin thefourthquarter,asthelargeincreaseinequity Realnonfarminventoryinvestmentappearedtohave pricesmorethanoffsetfurtherdeclinesinhouseval- slowedsubstantiallyinthefourthquarterafterasizues.Consumercreditstartedtoincreaseagainin ableincreaseinthepreviousquarter.Muchof the OctoberandNovemberafterhavinggenerally fourth-quarterdownswingwaslikelyassociatedwith declinedsincethefallof 2008.However,consumer adrawdownof motorvehiclestocksafteranaccusentimentonlyedgedup,onnet,inDecemberand mulationinthethirdquarter.Book-valuedatafor earlyJanuary,anditwasstillatarelativelysubdued OctoberandNovembersuggestedthatthepaceof level. inventoryaccumulationalsowasslowingoutsideof themotorvehiclesector.Inventory-to-salesratios Activityinthehousingmarketremainedweakinan towardtheendof 2010wereclosetotheirpreenvironmentcharacterizedbysoftdemand,alarge recessionnorms,andmostpurchasingmanagerssurinventoryof foreclosedordistressedpropertieson veyedinDecemberreportedthattheircustomers’ themarket,andtightcreditconditionsforconstruc- inventorieswerenottoohigh. tionloansandmortgages.Startsandpermitsfornew single-familyhomesinNovemberandDecember Measuresof underlyingconsumerpriceinflation werestillneartheverylowlevelsrecordedsincemid- remainedlow.InDecember,thecoreconsumerprice year.Salesof newhomesroseinDecemberbut index(CPI)edgedup,asgoodspriceswere remainedhistoricallylow.Salesof existinghomes unchangedandpricesof non-energyservicesrose increasedinNovemberandDecemberfromthemore slightly.The12-monthchangeinthecoreCPI depressedlevelsseenduringthesummerandearly remainedneartheverylowreadingsof theprevious autumn,butthesesalesstayedrelativelyweakaswell. twomonths.Othermeasuresof underlyinginflation, Moreover,measuresof housepricesdeclinedfurther suchasthetrimmed-meanandmedianCPIs,also inrecentmonths,andsurveyresponsesindicatedthat remainedsubdued.Despitethesteeprun-upinagrihouseholdsremainedconcernedthathomevalues culturalcommoditypricesoverthesecondhalf of mightcontinuetofall. lastyear,increasesinretailfoodpricesremained modest.However,consumerenergypricesmovedup Realbusinessinvestmentinequipmentandsoftware sharplyinDecember,andpricesof mosttypesof appearedtohaveincreasedfurtherinthefourth crudeoilincreasedduringDecemberandintoJanuquarter,althoughlikelyatamoremoderateratethan ary.Thepricesof nonfuelindustrialcommodities inthefirstthreequartersof 2010.Afterdecliningin alsocontinuedtoriseovertheintermeetingperiod. October,nominalordersandshipmentsof nonde- InDecemberandearlyJanuary,surveymeasuresof fensecapitalgoodsexcludingaircraftroseinNovem- households’long-terminflationexpectationsstayed ber,andthelevelof newordersremainedabovethe intherangethathasprevailedforsometime. levelof shipments,indicatingthatthebacklogof unfilledorderswasstillrising.Availableindicators Availablemeasuresof laborcompensationshowed suggestedthatbusinesspurchasesof softwarestayed thatlaborcostpressureswerestillrestrained,aswage onasoliduptrend,andoutlaysforcomputingand increasesslowedalongwithinflationandproductivcommunicationsequipmentappearedtohaverisen itygainsappearedtoremainsubstantial.The briskly.However,businessspendingfortransporta- 12-monthchangeinaveragehourlyearningsforall tionequipment,includingaircraftandmotor employeescontinuedtobelowinDecember. vehicles,likelydeclinedinthefourthquarterof 2010 afterexpandingrapidlyearlierintheyear.Surveysof TheU.S.internationaltradedeficitnarrowedslightly purchasingmanagersreportedthatfirmsplannedto inNovember,asbothnominalexportsandimports increasetheircapitalspendingthisyear.Reportson movedupbyalmostthesameamount.Theincrease plannedcapitalexpendituresbysmallbusinesses inexportswasdrivenbyagriculturalgoods,inpart showedsomesignsof improvementinrecentmonths, reflectinghigherprices,aswellasbyconsumer althoughtheyremainedrelativelysubdued.Business goods.Incontrast,exportsof machineryandauto-

Minutesof FederalOpenMarketCommitteeMeetings|January 183 motiveproductsfell,reversingtheirOctobergains. theintermeetingperiod.Yieldsroseinresponseto Theriseinimportsreflectedanincreaseinthevalue datareleasesthatgenerallypointedtosomefirming of importedpetroleumproducts,mostlyexplainedby of theeconomicrecovery,buttheupwardpressure higherprices,andof capitalgoods,whichwassup- onyieldsapparentlywastemperedbyexpectationsof portedimportantlybyajumpincomputers.Atthe onlyagradualpaceof improvementinthelabor sametime,noticeabledecreaseswereregisteredfor market,thebelief thattheFederalReservewaslikely importsof automotiveproducts,services,andcon- tomaintainanaccommodativepolicystance,and sumergoods,whichwereprimarilyduetopharma- ongoingconcernsaboutfiscalandbankingpressures ceuticals.Thesedevelopments,combinedwiththe intheeuroarea.Futuresquotesindicatedthatthe substantialnarrowinginthetradedeficitinOctober, expectedpathforthefederalfundsratedidnot impliedthatthetradedeficitlikelyshrankconsider- changeappreciablyovertheintermeetingperiod. ablyinthefourthquarterof 2010. Market-basedmeasuresof uncertaintyaboutlongertermTreasuryyields,whichhadrisenaheadof year- Recentindicatorsof foreigneconomicactivitysug- end,declinedonbalance,likelyinpartreflecting gestedthattheglobalrecoverywasstrengthening. solidifyingmarketexpectationsregardingtheulti- Muchof thisstrengthwascenteredintheemerging matesizeof theFOMC’sassetpurchaseprogram. marketeconomies(EMEs),wherewidespread Thepurchasesof longer-termTreasurysecuritiesby increasesinexportsandinmanufacturingpurchasing theDeskduringtheintermeetingperiodreportedly managersindexes(PMIs)pointedtoaresurgencein hadnosignificanteffectsonmeasuresof day-to-day economicgrowthfollowingaslowdowninthethird Treasurymarketfunctioning. quarterof 2010.ForChinaandSingapore,realgross domesticproduct(GDP)dataforthefourthquarter Inflationcompensationoverthenext5yearsbased confirmedareboundineconomicgrowth.Incon- onTreasuryinflation-protectedsecurities(TIPS) trast,theriseineconomicactivityintheadvanced movedup,likelypushedhigherbyrisingpricesforoil foreigneconomies(AFEs)remainedatasubdued andothercommoditiesandbythefirmingof the pace.Intheeuroarea,theincomingeconomicdata economicoutlook.Furtherout,TIPS-basedinflation weremixed:Industrialproduction,manufacturing compensation5to10yearsaheadedgeddown PMIs,andindustrialconfidencefirmed,butretail slightlyonnet.Yieldsoninvestment-gradecorporate salesandconsumerconfidencesoftened.Thedata bondswerelittlechangedovertheintermeeting alsopointedtoanunevenexpansionacrosstheeuro period,whilethoseonspeculative-gradecorporate area,suggestingthateconomicgrowthinGermany bondsdeclinedalittle,leavingbothinvestment-and continuedtooutpacethatintheeuro-areaperiphery. speculative-gradespreadsoveryieldsoncomparable- InJapan,exportsandhouseholdspendingweresoft, maturityTreasurysecuritiessomewhatnarrower.In althoughindustrialproductionfirmed.Foreigninfla- thesecondarymarketforleveragedloans,theaverage tionpickedupnoticeablyinthefourthquarterof bidpricemovedupfurtherovertheintermeeting 2010,mostlybecauseof anaccelerationof energy period.Themunicipalbondmarketappearedtoconandfoodprices.Measuresof coreinflationremained tinuetopriceinanatypicallyhighlevelof default muchmoresubdued,althoughtheyalsomovedupin risk.Theratiosof yieldsonlong-termgeneralobligasomecountries.IntheEMEs,concernsaboutinfla- tionbondstothoseoncomparable-maturityTreastionpromptedanumberof centralbankstotighten urysecuritiesmoveduptoaveryhighlevel.Despite policy.SomeEMEsreportedlytookstepstolimitthe thesestrains,grossissuanceof long-termmunicipal appreciationof theircurrenciesbyinterveninginfor- bondsremainedstronginDecember. eignexchangemarkets,andsomeactedtodiscourage capitalinflows. Conditionsinshort-termfundingmarketsremained stableovertheintermeetingperiod.Spreadsof dollar StaffReviewoftheFinancialSituation Londoninterbankofferedrates,orLibor,overover- ThedecisionbytheFOMCatitsDecembermeeting nightindexswapratesheldfairlysteadyacrossthe tomaintainthe0to¼percenttargetrangeforthe termstructure,astheyear-endpassedwithoutincifederalfundsratewaswidelyanticipated.Boththe dent.Somemodestyear-endpressureswereobserved accompanyingstatementandtheminutesof the inrepurchaseagreementmarkets,buttheydissipated meetingwerebroadlyinlinewithmarketexpecta- byearlyJanuary.Onnet,spreadsonunsecurednontionsandelicitedlimitedpriceactioninfinancial financialcommercialpaperremainedlow,and markets.Yieldsonmedium-andlonger-termnomi- spreadsonasset-backedcommercialpaperappeared nalTreasurysecuritiesincreasedslightly,onnet,over tohavestabilizedafterhavingbeensomewhatvolatile

184 98thAnnualReport|2011 acrossyear-end.Anecdotalreportssuggestedthatthe whichhadfalleninresponsetotheincreaseinmortmodestlyrisingtrendintheuseof dealer- gageratesinNovember,remainedatalowleveldurintermediatedleverageevidentin2010hadcontinued ingtheperiod.Outstandingresidentialmortgage into2011,butinformationfromavarietyof sources debtdeclinedfurtherinthethirdquarterof 2010, indicatedthatleverageremainedwellbelowthelevels reflectingweakhousingactivityandtightlending reachedbeforethecrisis. standards.Seriousdelinquencyratesonprimeand subprimemortgagesflattenedoutinOctoberand BroadU.S.stockpriceindexesrose,onnet,overthe Novemberafterhavingmoveddownearlierinthe intermeetingperiod,extendingtheirrecentstrong year.Signsof improvementwereevidentintheconperformance;bankstockpricesmodestlyoutper- sumercreditmarket,whereissuanceof consumer formedthebroadermarket.Theincreaseinequity asset-backedsecuritieswasstrongearlyinthefourth pricesreflectedtheapparentfirmingof theeconomic quarter.Inaddition,delinquencyratesonconsumer recoveryandfavorableearlyreportsonfourth- loanscontinuedtotrenddowntowardtheirlongerquartercorporateearnings.Option-impliedvolatility runnorms. ontheS&P500indexremainedatarelativelylow level.Thespreadbetweenthestaff’sestimateof the Banksmadeasizablereductionintheirholdingsof expectedrealequityreturnforS&P500firmsandthe securitiesinDecember.Coreloansonbanks’ real10-yearTreasuryyield—aroughmeasureof the books—thesumof commercialandindustrial(C&I), equityriskpremium—narrowedfurtheroverthe realestate,andconsumerloans—edgeddownagain, periodbutremainedelevatedrelativetolonger-run buttherateof contractionappearedtobeabating. norms. C&IloansexpandedatarobustpaceinDecember. Despitecontinuedweaknessinmanyresidentialreal Overall,netdebtfinancingbyU.S.nonfinancialcor- estateindicators,closed-endresidentialmortgage porationswasrobustinthefourthquarterof 2010. loansheldbylargebanksrosenoticeablyforthefifth Netissuanceof bondswasparticularlystrong,sup- consecutivemonthinDecember.Bycontrast,comportedbyheavyissuanceinboththespeculative-and mercialrealestateloans,homeequityloans,andconinvestment-gradesectors.Meanwhile,nonfinancial sumerloansdecreasedduringthatmonth.The commercialpaperoutstandingdecreasedslightlyover behaviorof thecomponentsof coreloansinrecent thequarter.Issuanceof syndicatedleveragedloans, monthswasbroadlyconsistentwiththeresultsof the especiallythosefundedbyinstitutionalinvestors, SeniorLoanOfficerOpinionSurveyonBankLendstayedstrong.Measuresof thecreditqualityof non- ingPracticesconductedinJanuary.Thesurvey financialcorporationscontinuedtoimprove.Gross responsesindicatedthat,duringthefourthquarterof publicequityissuancebynonfinancialfirmsdropped 2010,modestnetfractionsof bankscontinuedto backinDecembertoitsaveragepacein2010. easestandardsforC&Iloansandthatlargernetfractionseasedsometermsonsuchloans.Changesin Financingconditionsformosttypesof commercial banks’lendingpoliciesforothercategoriesof loans realestateremainedtightovertheintermeeting werereportedlymixedandgenerallysmall.Meanperiod,anddelinquencyratesforbroadcategoriesof while,moderatenetfractionsof respondentsindicommercialrealestateloansstayedelevated.How- catedthatdemandforC&Iloanshadstrengthened ever,forlargernonresidentialpropertiesinstrong overtheprecedingthreemonths,andthatinquiries markets,creditappearedtohavebecomesomewhat frombusinessborrowersforneworincreasedcredit lessrestricted,andpricesmovedup,onnet,from lineshadpickedup.Incontrast,demandreportedly theirlowsatthebeginningof 2010;atthesametime, weakenedsomewhat,onbalance,forresidentialreal pricesof othernonresidentialpropertiescontinuedto estateloansandwaslittlechangedforconsumer trenddown.Issuanceof commercialmortgage- loans.Respondentsindicatedthattherecentincrease backedsecuritiesincreasedinthefourthquarterof intheirholdingsof closed-endresidentialmortgage 2010butwasstillonlyafractionof itspre-crisis loansreflectedtherelativeattractivenessof such level. loanscomparedwithotherassetsand,forsome,a desiretoexpandtheirbalancesheetsbyaddingto Ratesonconformingfixed-rateresidentialmortgages thisloancategory. edgeddownabitduringtheintermeetingperiod afterhavingrisenappreciablyinNovemberandearly InDecember,M2expandedatarateabitbelowits December,leavingtheirspreadsoverthe10-year paceinNovember.Liquiddeposits,thelargestcom- Treasuryyielddownslightly.Refinancingactivity, ponentof M2,continuedtoincreaserapidly,while

Minutesof FederalOpenMarketCommitteeMeetings|January 185 thecontractioninsmalltimedepositsandretail StaffEconomicOutlook moneymarketmutualfundspersisted.Theongoing BecausetheincomingdataonproductionandspendcompositionalshiftwithinM2towardliquiddeposits ingwerestronger,onbalance,thanthestaff’sexpeclikelyreflectedtherelativelyhighyieldsonliquid tationsatthetimeof theDecemberFOMCmeeting, depositscomparedwithyieldsonmanyothercom- thenear-termforecastfortheincreaseinrealGDP ponentsof M2.CurrencygrowthslowedinDecem- wasrevisedup.However,thestaff’soutlookforthe ber,dueinparttoweather-relatedtransportationdif- paceof economicgrowthoverthemediumtermwas ficultiesthatdelayedflowsof U.S.banknotesto adjustedonlyslightlyrelativetotheprojectionpreinternationaldestinations. paredfortheDecembermeeting.Comparedwiththe Decemberforecast,theconditioningassumptions Thebroadnominalindexof theU.S.dollardeclined underlyingtheforecastwerelittlechangedand morethan1percentovertheintermeetingperiod, roughlyoffsetting:Althoughhigherequitypricesand depreciatingbyroughlysimilaramounts,onaverage, alowerforeignexchangevalueof thedollarwere againstthecurrenciesof theAFEsandtheEMEs. expectedtobeslightlymoresupportiveof economic Thedollar’sdeclineappearedtoreflectavarietyof growth,thestaff anticipatedthattheseinfluences factors:signsof strongereconomicactivityabroad, wouldbeaboutoffsetbylowerhousepricesand particularlyintheEMEs;actualandprospective higheroilprices.Inaddition,thestaff’sassumptions monetarypolicytighteninginforeigneconomies;and aboutfiscalpolicychangedlittle—thefiscalpackage increasesinthepricesof oilandothercommodities, enactedinDecemberwasclosetowhatthestaff had whichlentsupporttothecurrenciesof commodity- alreadyincorporatedintheirpreviousprojection.In exportingcountries.Benchmark10-yearsovereign themediumterm,therecoveryineconomicactivity yieldsmovedhigherinthecoreeuro-areaeconomies wasexpectedtoreceivesupportfromaccommodative andtheUnitedKingdombutwerelittlechangedin monetarypolicy,furtherimprovementsinfinancial JapanandCanada.Equitypricesincreasedinthe conditions,andgreaterhouseholdandbusinesscon- AFEsandinmanyEMEsasmarketparticipants fidence.Overtheprojectionperiod,theriseinreal appearedtoreviseupwardtheiroutlookforthe GDPwasexpectedtobesufficienttoslowlyreduce globaleconomy. therateof unemployment,butthejoblessratewas anticipatedtoremainelevatedattheendof 2012. Financialmarketstrainsintheeuroareacontinued duringtheintermeetingperiod.Greek,Irish,and Theunderlyingrateof consumerpriceinflationin PortuguesesovereigndebtspreadsoverGerman recentmonthswasinlinewithwhatthestaff anticibundsroseinDecemberandearlyJanuaryascredit patedatthetimeof theDecembermeeting,andthe ratingagenciesdowngradedthesovereigndebtof staff continuedtoprojectthatincreasesincorePCE IrelandandPortugal.Subsequently,though,spreads priceswouldremainsubduedin2011and2012.Asin narrowedfollowingsomerelativelysuccessfulsover- previousprojections,thepersistentwidemarginof eigndebtauctionsbycountriesintheeuro-area economicslackintheforecastwasexpectedtomainperiphery,evidenceof stepped-uppurchasesof taindownwardpressureoninflation,butthisinfluperipheralsovereignbondsbytheEuropeanCentral encewasanticipatedtobecounterbalancedbythe Bank(ECB),andreportsthattheEuropeanUnion continuedstabilityof inflationexpectationsandby wasconsideringexpandingthebackstopcapacityof increasesinthepricesof importedgoods.Thestaff theEuropeanFinancialStabilityFacility.Somemod- anticipatedthatbriskincreasesinenergyprices estdollarfundingpressuresdevelopedasyear-end wouldraisetotalconsumerpriceinflationabovecore approached,buttheydidnotpersistintoJanuary.To inflationthisyear,butthatupwardpressurefrom continuetosupportliquidityconditionsinglobal energypriceswouldwanebynextyear. moneymarkets,onDecember21,theFederal ReserveannouncedanextensionthroughAugust1, Participants’ViewsonCurrentConditionsand 2011,of itsswaplinearrangementswiththeECB theEconomicOutlook andthecentralbanksof Japan,Canada,Switzer- InconjunctionwiththisFOMCmeeting,allmeeting land,andtheUnitedKingdom.Inaddition,the participants—thesixmembersof theBoardof Gov- Bankof Englandestablishedatemporaryliquidity ernorsandthepresidentsof the12FederalReserve swapfacilitywiththeECBdesignedtoprovideIre- Banks—providedprojectionsof outputgrowth,the land’scentralbankwithsterlingtohelpmeetthe unemploymentrate,andinflationforeachyearfrom potentialneedsof theIrishbankingsystem. 2011through2013andoverthelongerrun.Longer-

186 98thAnnualReport|2011 runprojectionsrepresenteachparticipant’sassess- aboutthefuture,inwhichcaseitmightbeexpected mentof theratetowhicheachvariablewouldbe tocontinue.Ontheotherhand,theadditionalspendexpectedtoconverge,overtime,underappropriate ingcouldproveshortlivedgiventhatagoodportion monetarypolicyandintheabsenceof further of itappearedtohaveoccurredinrelativelyvolatile shocks.Participants’forecastsaredescribedinthe categoriessuchasautos. Summaryof EconomicProjections,whichis attachedasanaddendumtotheseminutes. Activityinthebusinesssectoralsoindicatedthatthe economicrecoveryremainedontrack.Forinstance, Inthediscussionof intermeetingdevelopmentsand indicatorsof businessinvestmentinequipmentand theirimplicationsfortheoutlook,theparticipants softwarecontinuedtorise.Industrialproduction generallyexpressedgreaterconfidencethattheeco- postedsolidgains,supportedinpartbyU.S.exports nomicrecoverywouldbesustainedandwouldgradu- thatappearedtohavebeennoticeablystrongerinthe allystrengthenovercomingquarters.Theirmore fourthquarter.Awiderangeof businesscontacts positiveassessmentreflectedboththetenorof the expressedcautiousoptimismaboutthedurability incomingeconomicdataandinformationreceived andstrengthof therecovery,andsomewereplanning frombusinesscontactssincethepreviousmeeting. foranexpansioninproductioninordertomeetan Spendingbyhouseholdspickedupnoticeablyinthe anticipatedriseinsales.Inaddition,althoughresifourthquarter,businessoutlayscontinuedtogrowat dentialconstructionspendingremainedweak,spendamoderatepace,andconditionsinlaborandfinan- ingoncommercialconstructionprojectsshowed cialmarketsimprovedsomewhatovertheintermeet- sometentativesignsof bottomingout. ingperiod.Althoughbusinesscontactsremained somewhatcautiousabouttheeconomicoutlook,they Participantsnotedthatconditionsinlabormarkets generallyindicatedgreateroptimismregardingtheir continuedtoimprovegradually.Payrollemployment ownprospectsforsalesandhiringthanatthetimeof increasedatamodestpace,and,althoughthedata thepreviousmeeting.Whileparticipantsviewedthe hadbeensomewhaterratic,aslightdownwardtrend downsideriskstotheirforecastsof economicactivity wasapparentintherecentpatternof weeklyinitial overtheprojectionperiodashavingdiminished,their claimsforunemploymentinsurance.Inaddition, assessmentof themostlikelyoutcomesforeconomic somesurveysof employerssuggestedasomewhat activityandinflationovertheprojectionperiodwas moreupbeatoutlookforemployment.Businessconnotgreatlychanged.Mostparticipantsraisedtheir tactsprovidedarangeof informationregardinghirforecastof realGDPgrowthin2011somewhatand ingintentions,withsomeindicatingthatworkersat continuedtoanticipatestrongergrowththisyear allskilllevelswerereadilyobtainable,whileothers thanin2010,withafurthergradualaccelerationdur- reportedthattheyhadupgradedskillrequirements ing2012and2013.Theunemploymentratewasstill andthatsomeof thecurrentlyunemployeddidnot projectedtodeclinegraduallyovertheforecast meetthosenewrequirements.Somebusinesses periodbuttoremainelevated.Totalinflationwasstill remainedreluctanttoaddpermanentpositionsand expectedtoremainsubdued,andcoreinflationwas wereplanningtomeettheirlaborrequirementswith projectedtotrendupslowlyoverthenextfewyears temporaryworkers.Overall,meetingparticipants aseconomicactivitypicksupbutinflationexpecta- continuedtoexpressdisappointmentinboththepace tionsremainwellanchored. andtheunevennessof theimprovementsinlabor marketsandnotedthattheywouldmonitorlabor Participants’judgmentthattheeconomicrecovery marketdevelopmentsclosely. wasonafirmerfootingwassupportedbythe strengthinhouseholdspendinginthefourthquarter. Conditionsinfinancialmarketsimprovedsomewhat Theincomingdataindicatedthathouseholdsstepped furtherovertheintermeetingperiod.Broadequity upsharplytheirpurchasesof durablegoods,particu- pricesrose,addingtotheirsubstantialgainssincethe larlyautomobiles,lastquarter.Spendingonluxury middleof 2010.Yieldsonlonger-termnominal goodsalsoincreased,andthepaceof holidaysales Treasurysecuritieswerelittlechanged,onbalance, wasbetterthaninrecentyears.However,somepar- overtheperiod,buttheyhadincreasedquiteabitin ticipantsnotedthatitwasnotclearwhetherthe recentmonths,leavingtheTreasuryyieldcurve recentpaceof consumerspendingwouldbesus- noticeablysteeper.Someparticipantsnotedthata tained.Ontheonehand,theadditionalspending steepyieldcurveisatypicalfeatureof aneconomyin couldreflectpent-updemandfollowingthedown- recovery,andthatmuchof thesteepeningappeared turnorgreaterconfidenceonthepartof households tohaveoccurredinresponsetostronger-than-

Minutesof FederalOpenMarketCommitteeMeetings|January 187 expectedeconomicdata.Market-basedmeasuresof nificantlychangetheiroutlooksforthemostlikely inflationcompensationoverthenextfewyears ratesof economicgrowthandinflationincoming increasedfurtherovertheintermeetingperiod, quarters.Participantsnotedthatsomeof the extendingtherisethatoccurredoverrecentmonths. strengthintherecentdatareflectedfactorsthatcould Someparticipantssuggestedthattheincreaselikely provetemporary,suchasthelargecontributionfrom reflected,inpart,adeclineininvestors’perceptions netexports,avolatilecategory,andthesharpstep-up of thenear-termriskof furtherdisinflation.Atthe inautosales.Mostparticipantscontinuedtoanticisametime,longer-terminflationexpectationshad patethattherecoveryineconomicactivitywaslikely remainedstable.Creditspreadsonthedebtof nonfi- toberestrainedbyavarietyof economicfactors, nancialcorporationscontinuedtonarrowoverthe includingstill-highunemployment,modestincome period,reachinglevelsnoticeablylowerthanthose growth,lowerhousingwealth,highratesof mortgage postedseveralmonthsago,withthelargestdeclines foreclosure,elevatedinventoriesof unsoldhomes, comingonspeculative-gradebonds.However,credit andtightcreditconditionsinanumberof sectors.In conditionsremainedtightforsmaller,bank- addition,althoughmanybusinesscontactsexpressed dependentfirms,althoughbankloangrowthhad moreoptimismabouttheeconomicrecovery,anumclearlypickedupinsomesectors.Someparticipants berhadaimedtheirrecentinvestmentsprimarilyat notedthat,takentogether,thesefinancialdevelop- enhancingproductivityratherthanexpanding mentswereconsistentwithamoreaccommodative employment,andhiringforsomebusinessesreportstanceof monetarypolicysincelastsummerora edlywasfocusedontemporaryworkers.Someparreductioninriskaversiononthepartof market ticipantsnotedthatincomingdataonproduction, participants. spending,andemploymentwouldneedtobesolid forawhilelongertojustifyasignificantupwardrevi- Meetingparticipantsnotedthatheadlineinflation siontotheiroutlookforthelikelypaceof the hadbeenboostedbyhigherpricesforenergyand recovery. othercommodities,aswellasbyincreasesinthe pricesof importedgoods.Someparticipantsindi- Participantsgenerallysawtheriskstotheiroutlook catedthatwhileunitlaborcostsgenerallyhad foreconomicgrowthandemploymentashaving declinedandprofitmarginswerewide,thehigher becomebroadlybalanced,buttheycontinuedtosee commoditypriceswereboostingcostsof production significantriskstobothsidesof theoutlook.Onthe formanyfirms.Somebusinesscontactsindicated downside,participantsremainedworriedaboutthe thattheyweregoingtotrytopassaportionof these possibleeffectsof spilloversfromthebankingand highercoststhroughtotheircustomersbutwere fiscalstrainsinperipheralEurope,theongoingfiscal uncertainaboutwhetherthatwouldbepossiblegiven adjustmentsbyU.S.stateandlocalgovernments,and currentmarketconditions.Manyparticipants thecontinuedweaknessinthehousingmarket.On expectedthat,withsignificantslackinresourcemar- theupside,therecentstrengthinhouseholdspending ketsandlonger-terminflationexpectationsstable, raisedthepossibilitythatdomesticfinaldemand measuresof coreinflationwouldremainclosetocur- couldsnapbackmorerapidlythananticipated.If so, rentlevelsincomingquarters.However,theimpor- aconsiderablystrongerrecoverycouldtakehold, tanceof resourceslackasafactorinfluencinginfla- moreinlinewiththesortsof recoveriesseenfollowtionwasdebated,andsomeparticipantssuggested ingdeepeconomicrecessionsinthepast. thatothervariables,suchascurrentandexpected ratesof economicgrowth,couldbeusefulindicators Regardingriskstotheinflationoutlook,someparof inflationpressures. ticipantsnotedthatincreasesinenergyandother commoditypricesaswellasinthepricesof imported Overall,mostparticipantsindicatedthatthesome- goodsfromEMEsposedupsiderisks.Others,howwhatbetter-than-expectedeconomicdataandanec- ever,notedthatthepass-throughfromincreasesin dotalinformationfrombusinesscontactshadimpor- commoditypricestobroadmeasuresof consumer tantlyincreasedtheirconfidenceinthecontinuation priceinflationintheUnitedStateshadgenerally of amoderaterecoveryinactivitythisyear.Accord- beenfairlysmall.Someparticipantsexpressedconingly,participantsgenerallyagreedthatthedownside cernthatinasituationinwhichbusinesseshadbeen riskstotheirforecastsof botheconomicgrowthand unabletoraisepricesinresponsetohighercostsfor inflation—aswellastheoddsof aperiodof defla- sometime,firmsmightincreasethemsubstantially tion—haddiminished.Participantsalsogenerally oncetheyfoundthemselveswithsufficientpricing agreedthattherecentdatahadnotledthemtosig- power.Inanycase,thefactorsaffectingtheabilityof

188 98thAnnualReport|2011 businessestopassthroughhigherpricestoconsum- foreconomicactivity,developmentsinfinancialmarerswereviewedascomplexandhardtomonitorin kets,andtheefficacyof thepurchaseprogramand realtime.Mostparticipantssawthelargedegreeof anyunintendedconsequencesthatmightarise—and resourceslackintheeconomyaslikelytoremaina wouldadjusttheprogramasneededtobestfoster forcerestraininginflation,andwhiletheriskof fur- maximumemploymentandpricestability.Afew therdisinflationhaddeclined,anumberof partici- membersnotedthatadditionaldatapointingtoa pantscitedconcernsthatinflationwasbelowits sufficientlystrongrecoverycouldmakeitappropriate mandate-consistentlevelandwasexpectedtoremain toconsiderreducingthepaceoroverallsizeof the soforsometime.Finally,someparticipantsnoted purchaseprogram.However,otherspointedoutthat thatif theverylargesizeof theFederalReserve’sbal- itwasunlikelythattheoutlookwouldchangeby ancesheetledthepublictodoubttheCommittee’s enoughtosubstantiateanyadjustmentstotheproabilitytowithdrawmonetaryaccommodationwhen grambeforeitscompletion.Inaddition,theCommitdoingsobecomesappropriate,theresultcouldbe teereiterateditsexpectationthateconomiccondiupwardpressureoninflationexpectationsandsoon tionswerelikelytowarrantexceptionallylowlevels actualinflation.Tomitigatesuchrisks,itwasnoted forthefederalfundsrateforanextendedperiod. thattheCommitteeshouldcontinueitsplanningfor Withrespecttothestatementtobereleasedfollowing theeventualexitfromthecurrentexceptionally themeeting,membersagreedthatonlysmallchanges accommodativestanceof policy. werenecessarytoreflecttheimprovementinthe near-termeconomicoutlookandtomakeclearthat Committee Policy Action thepolicydecisionreflectedacontinuationof the assetpurchaseprogramannouncedinNovember. Intheirdiscussionof monetarypolicyfortheperiod ahead,membersagreedthatnochangestotheCom- Attheconclusionof thediscussion,theCommittee mittee’sassetpurchaseprogramortoitstargetrange votedtoauthorizeanddirecttheFederalReserve forthefederalfundsratewerewarrantedatthis Bankof NewYork,untilitwasinstructedotherwise, meeting.Whiletheinformationreceivedoverthe toexecutetransactionsintheSystemAccountin intermeetingperiodincreasedmembers’confidence accordancewiththefollowingdomesticpolicy inthesustainabilityof theeconomicrecovery,the directive: paceof therecoverywasinsufficienttobringabouta significantimprovementinlabormarketconditions, “TheFederalOpenMarketCommitteeseeks andmeasuresof underlyinginflationhadtrended monetaryandfinancialconditionsthatwillfosdownward.Moreover,theeconomicprojectionssub- terpricestabilityandpromotesustainable mittedforthismeetingindicatedthatunemployment growthinoutput.Tofurtheritslong-runobjecwasexpectedtoremainabove,andinflationto tives,theCommitteeseeksconditionsinreserve remainsomewhatbelow,levelsconsistentwiththe marketsconsistentwithfederalfundstradingin Committee’sobjectivesforsometime.Accordingly, arangefrom0to¼percent.TheCommittee theCommitteeagreedtocontinuetoexpanditshold- directstheDesktoexecutepurchasesof longeringsof longer-termTreasurysecuritiesasannounced termTreasurysecuritiesinordertoincreasethe inNovemberinordertopromoteastrongerpaceof totalfacevalueof domesticsecuritiesheldinthe economicrecoveryandtohelpensurethatinflation, SystemOpenMarketAccounttoapproximately overtime,isatlevelsconsistentwiththeCommittee’s $2.6trillionbytheendof June2011.TheCommandate.TheCommitteedecidedtomaintainits mitteealsodirectstheDesktoreinvestprincipal existingpolicyof reinvestingprincipalpayments paymentsfromagencydebtandagency fromitssecuritiesholdingsandreaffirmeditsinten- mortgage-backedsecuritiesinlonger-term tiontopurchase$600billionof longer-termTreasury Treasurysecurities.TheSystemOpenMarket securitiesbytheendof thesecondquarterof 2011. AccountManagerandtheSecretarywillkeep Afewmembersremainedunsureof thelikelyeffects theCommitteeinformedof ongoingdevelopof theassetpurchaseprogramontheeconomy,but mentsregardingtheSystem’sbalancesheetthat feltthatmakingchangestotheprogramatthistime couldaffecttheattainmentovertimeof the wasnotappropriate.Membersemphasizedthatthe Committee’sobjectivesof maximumemploy- Committeewouldcontinuetoregularlyreviewthe mentandpricestability.” paceof itssecuritiespurchasesandtheoverallsizeof theassetpurchaseprograminlightof incoming Thevoteencompassedapprovalof thestatement information—includinginformationontheoutlook belowtobereleasedat2:15p.m.:

Minutesof FederalOpenMarketCommitteeMeetings|January 189 “InformationreceivedsincetheFederalOpen lowlevelsforthefederalfundsrateforan MarketCommitteemetinDecemberconfirms extendedperiod. thattheeconomicrecoveryiscontinuing, thoughataratethathasbeeninsufficientto TheCommitteewillcontinuetomonitorthe bringaboutasignificantimprovementinlabor economicoutlookandfinancialdevelopments marketconditions.Growthinhouseholdspend- andwillemployitspolicytoolsasnecessaryto ingpickeduplatelastyear,butremainscon- supporttheeconomicrecoveryandtohelp strainedbyhighunemployment,modestincome ensurethatinflation,overtime,isatlevelscongrowth,lowerhousingwealth,andtightcredit. sistentwithitsmandate.” Businessspendingonequipmentandsoftwareis rising,whileinvestmentinnonresidentialstruc- Votingforthisaction:BenBernanke,WilliamC. turesisstillweak.Employersremainreluctantto Dudley,ElizabethDuke,CharlesL.Evans,Richard addtopayrolls.Thehousingsectorcontinuesto W.Fisher,NarayanaKocherlakota,CharlesI. bedepressed.Althoughcommoditypriceshave Plosser,SarahBloomRaskin,DanielK.Tarullo, risen,longer-terminflationexpectationshave KevinWarsh,andJanetL.Yellen. remainedstable,andmeasuresof underlying inflationhavebeentrendingdownward. Votingagainstthisaction:None. Next,theCommitteeturnedtoadiscussionof its Consistentwithitsstatutorymandate,theComexternalcommunications,specificallytheimportance mitteeseekstofostermaximumemployment of communicatingbothbroadlyandeffectively. andpricestability.Currently,theunemployment FOMCparticipantsnotedtheimportanceof fairand rateiselevated,andmeasuresof underlying equalaccessbythepublictoinformationthatcould inflationaresomewhatlow,relativetolevelsthat beinformativeaboutfuturepolicydecisions,and theCommitteejudgestobeconsistent,overthe theyconsideredapproachestoaddressthisissue.Sevlongerrun,withitsdualmandate.Althoughthe eralparticipantsnotedthatincreasedclarityof com- Committeeanticipatesagradualreturnto municationswasakeyobjective,andsomereferred higherlevelsof resourceutilizationinacontext tothecentralroleof communicationsinthemonof pricestability,progresstowarditsobjectives etarypolicytransmissionprocess.Afocusof thedishasbeendisappointinglyslow. cussionwasonhowtoencouragedialoguewiththe publicinanappropriateandtransparentmanner. Topromoteastrongerpaceof economicrecov- Thesubcommitteeoncommunicationsagreedto eryandtohelpensurethatinflation,overtime, considerwhetherfurtherguidanceinthisareawould isatlevelsconsistentwithitsmandate,theCombeuseful. mitteedecidedtodaytocontinueexpandingits holdingsof securitiesasannouncedinNovem- Itwasagreedthatthenextmeetingof theCommittee ber.Inparticular,theCommitteeismaintaining wouldbeheldonTuesday,March15,2011.The itsexistingpolicyof reinvestingprincipalpaymeetingadjournedat2:40p.m.onJanuary26,2011. mentsfromitssecuritiesholdingsandintendsto purchase$600billionof longer-termTreasury Notation Vote securitiesbytheendof thesecondquarterof 2011.TheCommitteewillregularlyreviewthe BynotationvotecompletedonJanuary3,2011,the paceof itssecuritiespurchasesandtheoverall Committeeunanimouslyapprovedtheminutesof the sizeof theasset-purchaseprograminlightof FOMCmeetingheldonDecember14,2010. incominginformationandwilladjusttheprogramasneededtobestfostermaximumemploy- WilliamB.English mentandpricestability. Secretary TheCommitteewillmaintainthetargetrange Addendum: forthefederalfundsrateat0to¼percentand Summary of Economic Projections continuestoanticipatethateconomicconditions,includinglowratesof resourceutilization, InconjunctionwiththeJanuary25–26,2011,Federal subduedinflationtrends,andstableinflation OpenMarketCommittee(FOMC)meeting,the expectations,arelikelytowarrantexceptionally membersof theBoardof Governorsandthepresi-

190 98thAnnualReport|2011 dentsof theFederalReserveBanks,allof whompar- estimatesof thelonger-rununemploymentrate.Most ticipateinthedeliberationsof theFOMC,submitted participantsexpectedthatinflationwouldlikely projectionsforgrowthof realoutput,theunemploy- moveupsomewhatovertheforecastperiodbut mentrate,andinflationfortheyears2011to2013 wouldremainatratesbelowthosetheyseeasconsisandoverthelongerrun.Theprojectionswerebased tent,overthelongerrun,withtheCommittee’sdual oninformationavailablethroughtheendof the mandateof maximumemploymentandprice meetingandoneachparticipant’sassumptionsabout stability. factorslikelytoaffecteconomicoutcomes,including hisorherassessmentof appropriatemonetarypolicy. Asindicatedintable1,relativetotheirpreviouspro- “Appropriatemonetarypolicy”isdefinedasthe jectionsinNovember2010,participantsanticipated futurepathof policythateachparticipantdeems somewhatmorerapidgrowthinrealGDPthisyear, mostlikelytofosteroutcomesforeconomicactivity buttheydidnotsignificantlyaltertheirexpectations andinflationthatbestsatisfyhisorherinterpreta- forthepaceof theexpansionin2012and2013orfor tionof theFederalReserve’sdualobjectivesof maxi- thelongerrun.Participantsmadeonlyminor mumemploymentandstableprices.Longer-runpro- changestotheirforecastsforthepathof theunemjectionsrepresenteachparticipant’sassessmentof ploymentrateandfortherateof inflationoverthe theratetowhicheachvariablewouldbeexpectedto nextthreeyears.Althoughmostparticipantsanticiconvergeovertimeunderappropriatemonetary patedthattheeconomywouldlikelyconvergetosuspolicyandintheabsenceof furthershocks. tainableratesof increaseinrealGDPandpricesover fiveorsixyears,anumberof participantsindicated Asdepictedinfigure1,FOMCparticipants’projec- thattheyexpectedthattheconvergenceof theunemtionsforthenextthreeyearsindicatedthatthey ploymentratetoitslonger-runlevelwouldrequire expectasustainedrecoveryinrealeconomicactivity, additionaltime. markedbyastep-upintherateof increaseinreal grossdomesticproduct(GDP)in2011followedby AstheydidinNovember,participantsjudgedthe furthermodestaccelerationin2012and2013.They levelof uncertaintyassociatedwiththeirprojections anticipatedthat,overthisperiod,thepaceof the forrealeconomicactivityandinflationasunusually recoverywouldexceedtheirestimatesof thelonger- highrelativetohistoricalnorms.Mostcontinuedto runsustainablerateof increaseinrealGDPby seetheriskssurroundingtheirforecastsof GDP enoughtograduallylowertheunemploymentrate. growth,theunemploymentrate,andinflationover However,bytheendof 2013,participantsprojected thenextthreeyearstobegenerallybalanced.Howthattheunemploymentratewouldstillexceedtheir ever,fewernoteddownsideriskstothelikelypaceof 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.

Minutesof FederalOpenMarketCommitteeMeetings|January 191 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.

192 98thAnnualReport|2011 theexpansionand,accordingly,upsideriskstothe cited,asamongthelikelycontributorstoasustained unemploymentratethaninNovember;feweralso pickupinthepaceof theexpansion,acontinued sawdownsideriskstoinflation. improvementinfinancialmarketconditions,further expansionof creditavailabilitytohouseholdsand TheOutlook businesses,increasinghouseholdandbusinessconfi- Thecentraltendencyof participants’forecastsforthe dence,andafavorableoutlookforU.S.exports.SevchangeinrealGDPin2011was3.4to3.9percent, eralparticipantsnotedthat,insuchanenvironment, somewhathigherthanintheNovemberprojections. andwithlabormarketconditionsanticipatedto Participantsstatedthattheeconomicinformation improvegradually,therestraintsonhousehold receivedsinceNovemberindicatedthatconsumer spendingfrompastdeclinesinwealthandthedesire spending,businessinvestment,andnetexports torebuildsavingsshouldabate.Anumberof particiincreasedmorestronglyattheendof 2010than pantssawsuchconditionsfosteringabroaderand expectedearlier;industrialproductionalsoexpanded strongerrecoveryinbusinessinvestment,withafew morerapidlythantheypreviouslyanticipated.In notingthatthemarketforcommercialrealestatehad addition,aftertheNovemberprojectionswerepre- recentlyshownsignsof stabilizing.Nonetheless,parpared,theCongressapprovedfiscalstimulusmeas- ticipantssawanumberof factorsthatwouldlikely uresthatwereexpectedtoprovidefurtherimpetusto continuetomoderatethepaceof theexpansion. householdandbusinessspendingin2011.Moreover, Mostparticipantsexpectedthattherecoveryinthe participantsnotedthatfinancialconditionshad housingmarketwouldremainslow,restrainedbythe improvedsinceNovember,includingariseinequity overhangof vacantproperties,prospectsforweak prices,apickupinactivityincapitalmarkets,reports houseprices,andthedifficultiesinresolvingforecloof easingof creditconditionsinsomemarkets,and sures.Inaddition,someparticipantsexpectedthat anupturninbanklendinginsomesectors.Many thefiscalstrainsonthebudgetsof stateandlocal participantsviewedthestrongertenorof therecent governmentswoulddamptheirspendingforatime information,alongwiththeadditionalfiscalstimulus, andthatthefederalgovernmentsectorwouldlikely assuggestingthattherecoveryhadgainedsome beadragoneconomicactivityafter2011. strength—adevelopmentseenaslikelytocarryinto 2011—andthattheexpansionwasonfirmerfooting. Participantsanticipatedthatagradualbutsteady Participantsexpectedthattheexpansioninrealeco- reductionintheunemploymentratewouldaccomnomicactivitythisyearwouldcontinuetobesup- panythepickupinthepaceof theeconomicexpanportedbyaccommodativemonetarypolicyandby sionoverthenextthreeyears.Thecentraltendency ongoingimprovementincreditandfinancialmarket of theirforecastsfortheunemploymentrateatthe conditions.Thestrengtheninginprivatedemandwas endof 2011was8.8to9.0percent—adeclineof less anticipatedtobeledbyincreasesinconsumerand than1percentagepointfromtheactualrateinthe businessspending;overtime,improvementsinhouse- fourthquarterof 2010.Althoughparticipantsgenerholdandbusinessconfidenceandinlabormarket allyexpectedfurtherdeclinesintheunemployment conditionswouldlikelyreinforcetheriseindomestic rateoverthesubsequenttwoyears—toacentraltendemand.Nonetheless,participantsrecognizedthat dencyof 6.8to7.2percentattheendof 2013—they theinformationavailablesinceNovemberalsoindi- anticipatedthat,attheendof thatperiod,unemploycatedthattheexpansionremainedunevenacrosssec- mentwouldremainnoticeablyhigherthantheirestitorsof theeconomy,andtheyexpectedthatthepace matesof thelonger-runrate.Manyparticipants of economicactivitywouldcontinuetobemoderated thoughtthat,withappropriatemonetarypolicyand bytheweaknessinresidentialandnonresidentialcon- intheabsenceof furthershocks,theunemployment struction,thestillrelativelytightcreditconditionsin ratewouldcontinuetoconvergegraduallytowardits somesectors,anongoingdesirebyhouseholdsto longer-runratewithinfivetosixyears,butanumber repairtheirbalancesheets,businesscautionabout of participantsindicatedthattheconvergenceprohiring,andthebudgetdifficultiesfacedbystateand cesswouldlikelybemoreextended. localgovernments. Whileparticipantsviewedtheprojectedpaceof the Participantsexpectedthattheeconomicexpansion expansionineconomicactivityastheprincipalfactor wouldstrengthenfurtherin2012and2013,withthe underlyingtheirforecastsforthepathof theunemcentraltendenciesof theirprojectionsforthegrowth ploymentrate,theyalsoindicatedthattheirprojecinrealGDPmovingupto3.5to4.4percentin2012 tionswereinfluencedbyanumberof otherfactors andthento3.7to4.6percentin2013.Participants thatwerelikelytocontributetoarelativelygradual

Minutesof FederalOpenMarketCommitteeMeetings|January 193 recoveryinthelabormarket.Inthatregard,several Table2.Averagehistoricalprojectionerrorranges participantsnotedthatdislocationsassociatedwith Percentagepoints theunevenrecoveryacrosssectorsof theeconomy mightretardthematchingof workersandjobs.In Variable 2011 2012 2013 addition,anumberof participantsviewedthemod- ChangeinrealGDP1 ±1.3 ±1.7 ±1.8 estpaceof hiringin2010as,inpart,theresultof Unemploymentrate1 ±0.7 ±1.3 ±1.5 businesscautionaboutthedurabilityof therecovery Totalconsumerprices2 ±1.0 ±1.0 ±1.1 andof employers’effortstoachieveadditional Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared increasesinproductivity;severalparticipantsalso errorofprojectionsfor1990through2009thatwerereleasedinthewinterby citedtheparticularlyslowrecoveryindemandexperi- variousprivateandgovernmentforecasters.Asdescribedinthebox “ForecastUncertainty,”undercertainassumptions,thereisabouta70percent encedbysmallbusinessesasafactorrestrainingnew probabilitythatactualoutcomesforrealGDP,unemployment,andconsumer jobcreation.Withdemandexpectedtostrengthen priceswillbeinrangesimpliedbytheaveragesizeofprojectionerrorsmadein thepast.FurtherinformationisinDavidReifschneiderandPeterTulip(2007), acrossarangeof businessesandwithbusinessconfi- “GaugingtheUncertaintyoftheEconomicOutlookfromHistoricalForecasting denceexpectedtoimprove,participantsanticipated Errors,”FinanceandEconomicsDiscussionSeries2007-60(Washington:Boardof GovernorsoftheFederalReserveSystem,November). thathiringwouldpickupovertheforecastperiod. 1 Fordefinitions,refertogeneralnoteintable1. 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen Participantscontinuedtoexpectthatinflationwould mostwidelyusedingovernmentandprivateeconomicforecasts.Projection ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof berelativelysubduedoverthenextthreeyearsand theyearindicated. kepttheirlonger-runprojectionsof inflation unchanged.Manyparticipantsindicatedthatthepersistenceof largemarginsof slackinresourceutiliza- thenormduringtheprevious20years.3Theyidentitionshouldcontributetorelativelylowratesof inflafiedanumberof uncertaintiesthatcompoundedthe tionovertheforecasthorizon.Inaddition,particiinherentdifficultiesinforecastingoutputgrowth, pantsnotedthatappropriatemonetarypolicy, unemployment,andinflation.Amongthemwere combinedwithstablelonger-runinflationexpectauncertaintiesaboutthenatureof economicrecoveries tions,shouldhelpkeepinflationincheck.Thecentral fromrecessionsassociatedwithfinancialcrises,the tendencyof theirprojectionsforoverallpersonal effectsof unconventionalmonetarypolicies,theperconsumptionexpenditures(PCE)inflationin2011 sistenceof structuraldislocationsinthelabormarwas1.3to1.7percent,whilethecentraltendencyof ket,thefuturecourseof federalfiscalpolicy,andthe theirforecastsforcorePCEinflationwaslower—1.0 globaleconomicoutlook. to1.3percent.Increasesinthepricesof energyand othercommodities,whichwereveryrapidin2010, AlmostallparticipantsviewedtheriskstotheirforewereanticipatedtocontinuetopushheadlinePCE castsforthestrengthof therecoveryinrealGDPas inflationabovethecoreratethisyear.Thecentral broadlybalanced.Bycontrast,inNovember,thedistendencyof participants’forecastsforinflationin tributionof viewshadbeensomewhatskewedtothe 2012and2013widenedsomewhatrelativeto2011 downside.Inweighingtheriskstotheprojected andshowedthatinflationwasexpectedtodriftup growthrateof realeconomicactivity,someparticimodestly.In2013,thecentraltendencyof forecasts pantsnotedtheupsideriskthattherecentstrengthforboththetotalandcoreinflationrateswas1.2to eningof aggregatespendingmightmarkthebegin- 2.0percent.Formostparticipants,inflationin2013 ningof amorenormalcyclicalreboundineconomic wasnotexpectedtohaveconvergedtothelonger-run activityinwhichconsumerspendingmightbe rateof inflationthattheyindividuallyconsidered spurredbypent-updemandforhouseholddurables mostconsistentwiththeFederalReserve’sdualmanandinwhichbusinessinvestmentmightbeaccelerdateformaximumemploymentandstableprices. atedbythedesiretorebuildstocksof fixedcapital.A However,anumberof participantsanticipatedthat more-rapid-than-expectedeasingof creditavailabilinflationwouldreachitslonger-runratewithinthe nextthreeyears. 3 Table2providesestimatesofforecastuncertaintyforthechange inrealGDP,theunemploymentrate,andtotalconsumerprice UncertaintyandRisks inflationovertheperiodfrom1990to2009.Attheendofthis Mostparticipantscontinuedtosharetheviewthat summary,thebox“ForecastUncertainty”discussesthesources andinterpretationofuncertaintyintheeconomicforecastsand theirprojectionsforeconomicactivityandinflation explainstheapproachusedtoassesstheuncertaintyandrisks weresubjecttoahigherlevelof uncertaintythanwas attendingtheparticipants’projections.

194 98thAnnualReport|2011 itywasalsoseenasafactorthatmightboostthe natively,severalparticipantsnotedthatupsiderisks pickupinprivatedemand.Astothedownsiderisks, toinflationcouldarisefrompersistentlyrapid manyparticipantspointedtotherecentdeclinesin increasesinthecostsof energyandother housepricesandthepotentialforaslowerresolution commodities. of existingproblemsinmortgageandrealestatemarketsasfactorsthatcouldhavemore-adverse-than- DiversityofViews expectedconsequencesforhouseholdspendingand Figures2.Aand2.Bdetailthediversityof particibankbalancesheets.Inaddition,severalparticipants pants’viewsregardingthelikelyoutcomesforreal expressedconcernsthat,inanenvironmentof only GDPgrowthandtheunemploymentratein2011, gradualimprovementinlabormarketandcreditcon- 2012,2013,andoverthelongerrun.Thedispersion ditions,householdsmightbeunusuallyfocusedon intheseprojectionsreflecteddifferencesinparticireducingdebtandboostingsaving.Anumberof par- pants’assessmentsof manyfactors,includingthe ticipantsalsosawadownsideriskinthepossibility likelyevolutionof conditionsincreditandfinancial thatthefiscalproblemsof somestateandlocalgov- markets,thetimingandthedegreetowhichvarious ernmentsmightleadtoagreaterretrenchmentin sectorsof theeconomyandthelabormarketwill theirspendingthancurrentlyanticipated.Finally, recoverfromthedislocationsassociatedwiththe severalparticipantsexpressedconcernsthatthe deeprecession,theoutlookforeconomicandfinanfinancialandfiscalstrainsintheeuroareamightspill cialdevelopmentsabroad,andappropriatefuture overtoU.S.financialmarkets. monetarypolicyanditseffectsoneconomicactivity. For2011and2012,thedispersionsof participants’ Theriskssurroundingparticipants’forecastsof the forecastsforthestrengthintheexpansionof real unemploymentratewerealsobroadlybalancedand GDPandfortheunemploymentrateweresomewhat generallyreflectedtherisksattendingparticipants’ narrowerthantheywerelastNovember,whilethe viewsof thelikelystrengthof theexpansioninreal rangesof viewsfor2013andforthelongerrunwere activity.However,anumberof participantsnoted littlechanged. thattheunemploymentratemightdeclinelessthan theyprojectedif businessesweretoremainhesitant Figures2.Cand2.Dprovidethecorrespondinginfortoexpandtheirworkforcesbecauseof uncertainty mationaboutthediversityof participants’views aboutthedurabilityof theexpansionorabout regardingtheoutlookfortotalandcorePCEinflaemploymentcostsorif mismatchesof workersand tion.Thesedistributionsweresomewhatmoretightly jobsweremorepersistentthananticipated. concentratedfor2011,butfor2012and2013,they weremuchthesameastheywereinNovember.In Mostparticipantsjudgedtheriskstotheirinflation general,thedispersionintheparticipants’inflation outlookovertheperiodfrom2011to2013tobe forecastsforthenextthreeyearsrepresenteddifferbroadlybalancedaswell.Comparedwiththeirviews encesinjudgmentsregardingthefundamentaldeterinNovember,severalparticipantsnolongersawthe minantsof inflation,includingestimatesof the risksastiltedtothedownside,andanadditionalpar- degreeof resourceslackandtheextenttowhichsuch ticipantviewedtherisksasweightedtotheupside.In slackinfluencesinflationoutcomesandexpectations assessingtherisks,anumberof participantsindi- aswellasestimatesof howthestanceof monetary catedthattheysawtherisksof deflationorfurther policymayinfluenceinflationexpectations.Although unwanteddisinflationtohavediminished.Manypar- thedistributionsof participants’inflationforecasts ticipantsidentifiedthepersistentgapbetweentheir for2011through2013continuedtoberelatively projectedunemploymentrateanditslonger-runrate wide,thedistributionof projectionsof thelongerasariskthatinflationcouldbelowerthantheypro- runrateof overallinflationremainedtightlyconcenjected.Afewof thosewhoindicatedthatinflation trated.Thenarrowrangeillustratesthebroadsimiriskswereskewedtotheupsideexpressedconcerns larityinparticipants’assessmentsof theapproximate thattheexpansionof theFederalReserve’sbalance levelof inflationthatisconsistentwiththeFederal sheet,if leftinplacefortoolong,mighterodethe Reserve’sdualobjectivesof maximumemployment stabilityof longer-runinflationexpectations.Alter- andpricestability.

Minutesof FederalOpenMarketCommitteeMeetings|January 195 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.

196 98thAnnualReport|2011 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.

Minutesof FederalOpenMarketCommitteeMeetings|January 197 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.

198 98thAnnualReport|2011 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.

Minutesof FederalOpenMarketCommitteeMeetings|January 199 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers experiencedinthepastandtherisksaroundtheprooftheBoardofGovernorsandthepresidentsofthe jectionsarebroadlybalanced,thenumbersreported FederalReserveBanksinformdiscussionsofmon- intable2wouldimplyaprobabilityofabout70peretarypolicyamongpolicymakersandcanaidpublic centthatactualGDPwouldexpandwithinarangeof understandingofthebasisforpolicyactions.Con- 1.7to4.3percentinthecurrentyear,1.3to4.7persiderableuncertaintyattendstheseprojections,how- centinthesecondyear,and1.2to4.8percentinthe ever.Theeconomicandstatisticalmodelsandrela- thirdyear.Thecorresponding70percentconfidence tionshipsusedtohelpproduceeconomicforecasts intervalsforoverallinflationwouldbe1.0to3.0perarenecessarilyimperfectdescriptionsofthereal centinthecurrentandsecondyears,and0.9to world.Andthefuturepathoftheeconomycanbe 3.1percentinthethirdyear. 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.

200 98thAnnualReport|2011 Meeting Held on March 15, 2011 DavidReifschneider,HarveyRosenblum, DanielG.Sullivan,andDavidW.Wilcox AssociateEconomists Ameetingof theFederalOpenMarketCommittee washeldintheofficesof theBoardof Governorsin BrianSack Washington,D.C.,onTuesday,March15,2011,at Manager,SystemOpenMarketAccount 8:30a.m. NellieLiang Director,Officeof FinancialStabilityPolicyand Present Research,Boardof Governors BenBernanke MaryannF.Hunter Chairman DeputyDirector,Divisionof BankingSupervision WilliamC.Dudley andRegulation,Boardof Governors ViceChairman WilliamNelson ElizabethDuke DeputyDirector,Divisionof MonetaryAffairs, Boardof Governors CharlesL.Evans LindaRobertson RichardW.Fisher AssistanttotheBoard,Officeof BoardMembers, NarayanaKocherlakota Boardof Governors CharlesI.Plosser CharlesS.Struckmeyer DeputyStaff Director,Officeof theStaff Director, SarahBloomRaskin Boardof Governors DanielK.Tarullo LawrenceSlifmanandWilliamWascher JanetL.Yellen SeniorAssociateDirectors,Divisionof Researchand Statistics,Boardof Governors JeffreyM.Lacker,DennisP.Lockhart, SandraPianalto,andJohnC.Williams AndrewT.Levin AlternateMembersof theFederalOpenMarket SeniorAdviser,Officeof BoardMembers, Committee Boardof Governors JamesBullard,ThomasM.Hoenig,and StephenA.Meyer EricRosengren SeniorAdviser,Divisionof MonetaryAffairs, Presidentsof theFederalReserveBanksof St.Louis, Boardof Governors KansasCity,andBoston,respectively JoyceK.Zickler WilliamB.English VisitingSeniorAdviser,Divisionof Monetary SecretaryandEconomist Affairs,Boardof Governors MatthewM.Luecke MichaelG.Palumbo AssistantSecretary AssociateDirector,Divisionof Researchand Statistics,Boardof Governors DavidW.Skidmore AssistantSecretary DavidH.Small ProjectManager,Divisionof MonetaryAffairs, MichelleA.Smith Boardof Governors AssistantSecretary AndreaL.Kusko ScottG.Alvarez SeniorEconomist,Divisionof Researchand GeneralCounsel Statistics,Boardof Governors NathanSheets RandallA.Williams Economist RecordsManagementAnalyst,Divisionof Monetary DavidJ.Stockton Affairs,Boardof Governors Economist BlakePrichard JamesA.Clouse,ThomasA.Connors, FirstVicePresident,FederalReserveBankof StevenB.Kamin,LorettaJ.Mester, Philadelphia

Minutesof FederalOpenMarketCommitteeMeetings|March 201 Jeff FuhrerandRobertH.Rasche close,theFederalReservetapereditspurchasesdur- ExecutiveVicePresidents,FederalReserveBanksof ingthefirstquarterof 2010inordertoavoiddisrup- BostonandSt.Louis,respectively tionsinthemarketforthosesecurities.However,the Managerindicatedthatthegreaterdepthandliquid- DavidAltig,RichardP.Dzina,RonFeldman, ityof theTreasurysecuritiesmarketsuggestedthatit CraigS.Hakkio,RichardPeach, wouldnotbenecessarytotaperpurchasesinthis GlennD.Rudebusch,MarkE.Schweitzer, market.TheManagernotedthatmarketparticipants andJohnA.Weinberg appearedtohavereachedthesameconclusion,as SeniorVicePresidents,FederalReserveBanksof theygenerallydidnotseemtoexpecttheFederal Atlanta,NewYork,Minneapolis,KansasCity, Reservetotaperitspurchasesof Treasurysecurities. NewYork,SanFrancisco,Cleveland,and Inlightof theManager’sreport,almostallmeeting Richmond,respectively participantsindicatedthattheysawnoneedtotaper thepaceof theCommittee’spurchasesof Treasury Intheagendaforthismeeting,itwasreportedthat securitieswhenitscurrentprogramof assetpuradvicesof theelectionof JohnC.Williamsasan chasesapproachesitsend. alternatememberof theFederalOpenMarketCommitteehadbeenreceivedbytheSecretariat,andthat Staff Review of the Economic Situation hehadexecutedhisoathof office. TheinformationreviewedattheMarch15meeting Developments in Financial Markets and indicatedthattheeconomicrecoverycontinuedto the Federal Reserve’s Balance Sheet proceedatamoderatepace,withafurthergradual improvementinlabormarketconditions.Sizable TheManagerof theSystemOpenMarketAccount increasesinpricesof crudeoilandothercommodi- (SOMA)reportedondevelopmentsindomesticand tiespushedupheadlineinflation,butmeasuresof foreignfinancialmarketsduringtheperiodsincethe underlyinginflationweresubduedandlonger-run FederalOpenMarketCommittee(FOMC)meton inflationexpectationsremainedstable. January25–26,2011.HealsoreportedonSystem openmarketoperations,includingtheongoingrein- Thelabormarketcontinuedtoshowsignsof firming. vestmentintolonger-termTreasurysecuritiesof Privatenonfarmpayrollemploymentrosenoticeably principalpaymentsreceivedontheSOMA’sholdings inFebruaryafterasmallincreaseinJanuary,withthe of agencydebtandagency-guaranteedmortgage- swinginhiringlikelymagnifiedbywidespreadsnowbackedsecurities(MBS)thattheCommitteeauthor- storms,whichmayhavehelddowntheemployment izedinAugust2010,aswellasthepurchaseof addi- figureforJanuary.Initialclaimsforunemployment tionallonger-termTreasurysecuritiestoincreasethe insurancetrendedlowerthroughearlyMarch,and facevalueof suchsecuritiesheldintheSOMAthat surveysof hiringplanshadimprovedthisyear.The theFOMCfirstauthorizedinNovember2010.Since unemploymentratedroppedmarkedlyinJanuary November,purchasesbytheOpenMarketDeskof afterasimilardecreaseintheprecedingmonth,then theFederalReserveBankof NewYorkhadincreased tickeddownto8.9percentinFebruary;thelabor theSOMA’sholdingsby$310billion.TheManager forceparticipationratewasroughlyflatinJanuary reportedthatachievinganincreaseof $600billionin andFebruary.Theshareof workersemployedpart SOMAholdingsbytheendof June2011would timeforeconomicreasonsdeclinedfurtheroverthe requirecontinuingtopurchaseadditionalsecurities pasttwomonths,butlong-durationunemployment atanunchangedpaceof about$80billionper wasstillelevated. month.TherewerenoopenmarketoperationsinforeigncurrenciesfortheSystem’saccountoverthe Totalindustrialproductionwaslittlechangedin intermeetingperiod.Byunanimousvote,theCom- JanuaryafterastrongriseinDecember.ManufacturmitteeratifiedtheDesk’stransactionsovertheinter- ingoutputpostedarelativelysubduedgaininJanumeetingperiod. ary,likelyhelddownsomewhatbytheextensive snowfallsduringthatmonth;inaddition,ascheduled TheManageralsodiscussedthepossiblebenefitsof step-upinassembliesof motorvehiclesreportedly graduallyreducingthepaceof theFederalReserve’s wasrestrainedinpartbysometemporarybottlepurchasesof Treasurysecuritieswhenthecurrent necksinthesupplychain.Asaresult,therateof assetpurchaseprogramnearscompletion.Asitsear- capacityutilizationinmanufacturingwasessentially lierprogramof agencyMBSpurchasesdrewtoa unchangedinJanuary,anditremainedwellbelowits

202 98thAnnualReport|2011 1972–2010average.InFebruary,indicatorsof near- Realnonfarminventoryinvestmentappearedtohave termindustrialproduction,suchastheneworders pickedupinearly2011afterslowingmarkedlyinthe diffusionindexesinthenationalandregionalmanu- fourthquarter.Inthemotorvehiclessector,inventofacturingsurveys,wereatlevelsconsistentwithsolid riesroseslightly,onnet,inJanuaryandFebruary increasesinfactoryoutputinthecomingmonths. afterhavingbeendrawndowninthefourthquarter. Moreover,motorvehicleassembliespickedupin Outsideof motorvehicles,theriseinthebookvalue Februaryandwerescheduledtorisefurtherthrough of businessinventorieswassomewhatlargerinJanuthesecondquarterof thisyear. arythantheaveragemonthlyincreaseinthefourth quarter,whileinventory-to-salesratiosformost Consumerspendingappearedtohaveincreasedata industriescoveredbythesedataweresimilartotheir modestpaceinearly2011afterrisingbrisklyinthe pre-recessionnorms.Surveydataalsosuggestedthat fourthquarterof 2010.InJanuary,totalrealpersonal inventorypositionsweregenerallyinacomfortable consumptionexpenditures(realPCE)wereessentially range. flat.InFebruary,nominalretailsales,excludingpurchasesof motorvehiclesandparts,rosemoderately; Inthegovernmentsector,theavailableinformation salesof lightmotorvehiclespostedarobustgain. suggestedthatrealdefensespendinginJanuaryand Consumerspendingwassupportedbyasolid Februarywasbelowitsaveragelevelinthefourth increaseinrealdisposableincomeinJanuary,reflect- quarter.Atthestateandlocallevel,ongoingfiscal inginpartthetemporarycutinpayrolltaxes.House- pressureswerereflectedinfurtherjobcutsinJanuary holdnetworthroseinthefourthquarter,asthe andFebruary.Constructionoutlaysbythesegovernincreaseinequityvaluesduringthatperiodmore mentsfellagaininJanuary. thanoffsetthefurtherfallinhouseprices.However, consumersentimentdroppedbackinearlyMarch, TheU.S.internationaltradedeficitwidenedin retracingitsincreaseovertheprecedingfourmonths. DecemberandagaininJanuary,withrapidgainsin bothexportsandimports.Thelargestincreasesin Activityinthehousingmarketcontinuedtobe exportswereincapitalgoods,industrialsupplies,and depressed,helddownbythelargeinventoryof fore- automotiveproducts.Nominalimportsof petroleum closedordistressedpropertiesonthemarketandby productsrosesharply,reflectingbothhigherprices weakdemand.InJanuary,startsandpermitsfornew andgreatervolumes;importsinothermajorcategosingle-familyhomesremainednearthelowlevelsthat riesrosesolidlyonnet. hadprevailedsincethemiddleof 2010.Newhome salesmoveddowninJanuary;existinghomesales OverallconsumerpricesintheUnitedStatesrose steppedupsomewhatbutstillwerequitelowbyhis- somewhatfasterinDecemberandJanuarythanin toricalstandards.Measuresof housepricessoftened earliermonths,asconsumerenergypricespostedfuragaininDecemberandJanuary. thersizableincreasesandconsumerfoodprices respondedtotherecentupturninfarmcommodity Realbusinessinvestmentinequipmentandsoftware prices.ThepriceindexforPCEexcludingfoodand (E&S)appearedtorisefurtherinrecentmonths. energy(thecorePCEpriceindex)roseslightlyin Nominalshipmentsof nondefensecapitalgoods January,boostedbyanuptickinpricesof coregoods excludingaircraftincreased,onnet,inDecemberand afterfourmonthsof declines;the12-monthchange January,andtheexpandingbacklogof unfilled inthiscorepriceindexstayedneartheverylowlevels orderspointedtofurthergainsinshipmentsinsubse- seeninlate2010.Recentsurveysshowedfurther quentmonths.Inaddition,readingsonbusinesscon- heftyincreasesinretailgasolinepricesinFebruary ditionsandsentimentremainedconsistentwithsolid andearlyMarch,andpricesof nonfuelindustrial near-termadvancesinoutlaysforE&S.Creditcondi- commoditiesalsorosesharplyonnet.Accordingto tionscontinuedtoimproveformanyfirms,though theThomsonReuters/Universityof MichiganSurtheyreportedlywerestilltightforsmallbusinesses.In veysof Consumers,households’near-terminflation contrasttotheapparentincreaseinE&Soutlays, expectationsincreasedsubstantiallyinearlyMarch, nonresidentialconstructionexpendituresdropped likelybecauseof therun-upingasolineprices; furtherinDecemberandJanuary,constrainedby longer-terminflationexpectationsmovedupsomehighvacancyrates,lowpricesforcommercialreal whatintheearlyMarchsurveybutwerestillwithin estate,andpersistentlytightborrowingconditionsfor therangethatprevailedovertheprecedingfewyears. constructionloansforcommercialproperties.

Minutesof FederalOpenMarketCommitteeMeetings|March 203 Laborcostpressuresremainedmutedinthefourth endof thecurve,likelyreflectingthejumpinoil quarter,ashourlycompensationcontinuedtobe prices.Incontrast,measuresof forwardinflation restrainedbythewidemarginof slackinthelabor compensation5to10yearsaheadwerelittle marketandasproductivityrosefurther.Average changed,suggestingthatlonger-terminflationexpechourlyearningspostedamodestincrease,onnet,in tationsremainedstable. JanuaryandFebruary. Overtheintermeetingperiod,yieldsoninvestment- Growthinrealactivityintheadvancedforeign andspeculative-gradecorporatebondsedgeddown economiesappearedtopickupafteralacklusterper- relativetothoseoncomparable-maturityTreasury formanceinthefourthquarter.Intheeuro securities.Thesecondary-marketpricesof syndicated area,monthlyindicatorsof activity,suchasretail loanscontinuedtomoveup.Strainsinthemunicipal salesandpurchasingmanagersindexes,weregener- bondmarketeasedasconcernsaboutthebudgetary allypositiveinJanuaryandFebruary.Butthediver- problemsof stateandlocalgovernmentsseemedto genceineconomicperformanceacrosseuro-area diminishsomewhat.Conditionsinshort-termfundcountriesremainedlarge,aseconomicactivity ingmarketswerelittlechanged. appearedtohaveexpandedstronglyinGermanybut tohavecontractedinGreeceandPortugal.Priorto BroadU.S.stockpriceindexeswereabout theearthquakeandtsunamiinmid-March,economic unchanged,onnet,overtheintermeetingperiod. activityinJapanhadshownsignsof firming.The Option-impliedvolatilityontheS&P500indexrose upbeattenorof theincomingdatafortheemerging sharplyinmid-Februaryinresponsetoeventsinthe marketeconomiessuggestedthattheeconomic MENAregionandremainedsomewhatelevated expansioninthesecountriescontinuedtooutpace thereafter.Thestaff’sestimateof thespreadbetween thatintheadvancedeconomies.Foreignconsumer theexpectedrealequityreturnforS&P500firmsand priceinflation,whichsteppedupnoticeablyinthe thereal10-yearTreasuryyield—ameasureof the fourthquarter,remainedelevatedinearly2011, equityriskpremium—narrowedabitmoreoverthe largelybecauseof higherfoodandenergyprices. intermeetingperiodbutcontinuedtobequite elevatedrelativetolonger-termnorms. Staff Review of the Financial Situation IntheMarch2011SeniorCreditOfficerOpinion ThedecisionsbytheFOMCatitsJanuarymeetingto SurveyonDealerFinancingTerms,dealersreported continueitsassetpurchaseprogramandtomaintain afurthereasing,overthepreviousthreemonths,in the0to¼percenttargetrangeforthefederalfunds thepriceandnonpricetermstheyofferedtodifferent ratewerelargelyinlinewithmarketexpectations,as typesof counterpartiesforallof thecategoriesof wastheaccompanyingstatement;theyelicitedonlya transactionscoveredinthesurvey.Dealersnotedthat modestmarketreaction.Overtheweeksfollowing thedemandforfundinghadincreasedforabroad theFOMCmeeting,nominalTreasuryyieldsandthe rangeof securitiesoverthesameperiod.Inresponse expectedpathof thefederalfundsrateincoming tospecialquestions,dealersreportedsomeincreasein quartersmovedhigher,asmarketparticipantsappar- theuseof leverageoverthepriorsixmonthsbytradientlyreadtheincomingeconomicdataas,onbal- tionallyunleveredinvestors—inparticular,asset ance,somewhatbetterthanexpected.Aftermid- managers,insurancecompanies,andpensionfunds. February,however,Treasuryyieldsandpolicyexpec- Inaddition,dealersreportedanincreaseinleverage tationsretracedtheirearlierriseamidconcernsabout overthepastsixmonthsbyhedgefundsthatpursue thepossibleeconomicfalloutfromeventsinthe avarietyof investmentstrategies.Morebroadly, MiddleEastandNorthAfrica(MENA)region.In whiletheavailabilityanduseof dealer-intermediated thedaysleadinguptotheMarchFOMCmeeting, leveragehadincreasedsinceitspost-crisisnadirin thetragicdevelopmentsinJapanspurredafurther mid-2009,areviewof informationfromavarietyof declineinTreasuryyields.Onnet,expectationsfor sourcessuggestedthatleveragegenerallyremained thefederalfundsrate,alongwithyieldsonnominal wellbelowthelevelsreachedpriortotherecent Treasurysecurities,werelittlechangedovertheinter- financialcrisis. meetingperiod. Netdebtfinancingbynonfinancialcorporationswas Measuresof inflationcompensationoverthenext solidinJanuaryandFebruary,althoughitdidnot 5yearsrose,onnet,overtheintermeetingperiod, matchthesizableamountseeninthefourthquarter. withmostof theincreaseconcentratedatthefront Netissuanceof investment-andspeculative-grade

204 98thAnnualReport|2011 bondswasrobustinthefirsttwomonthsof thisyear. theirhigheryieldsrelativetootherM2components. Commercialandindustrial(C&I)loansoutstanding Currencycontinuedtoadvanceatarelativelyfast alsoincreased,onbalance,whiletheamountof non- rateinJanuaryandFebruary,likelyboostedbya financialcommercialpaperoutstandingwaslittle strongexpansioninforeignholdingsof U.S.bank changed.Grosspublicequityissuancebynonfinan- notes. cialfirmswasrelativelysubduedinJanuaryandFebruary.Measuresof thecreditqualityof nonfinancial Infinancialmarketsabroad,equitypricesinthe firmscontinuedtoimprove. advancedeconomiesroseearlyintheintermeeting period,buttheyturneddowninmid-Februaryasoil Financingconditionsforcommercialrealestategen- pricesincreasedandthenfellsharplyinmid-March erallyremainedtight.Sofarthisyear,issuanceof intheaftermathof theearthquakeandtsunamiin commercialmortgage-backedsecurities(CMBS) Japan.Onnetovertheintermeetingperiod,stock appearedtohavemaintaineditsmodestfourth- pricesweredowninmostof theadvancedeconoquarterpace.Dataondelinquencyratesforcommer- mies,withJapan’sindexhavingfallenmostsignificialrealestateloansweremixed. cantly.Emergingmarketequitypriceindexes,which hadbeenunderperforminginpreviousmonths,gen- Ratesonconformingfixed-rateresidentialmort- erallyendedtheperiodloweraswell,andemerging gages,andtheirspreadsrelativetothe10-yearTreas- marketequityfundsexperiencedoutflows.Moveuryyield,wereaboutunchangedovertheintermeet- mentsin10-yearsovereignbondyieldsinEuropeand ingperiod.Withmortgageratesremainingabovethe Canadamirroredthoseinequityprices,climbing lowlevelsseenlastfall,refinancingactivitywastepid. earlyintheintermeetingperiodbutfallinglater. Outstandingresidentialmortgagedebtwasestimated tohavecontractedagaininthefourthquarter.Rates Inpartbecauseof downgradesbycreditratingagenof seriousdelinquencyforsubprimeandprimemort- cies,yieldsonthe10-yearsovereignbondsof Greece, gageswerelittlechangedinDecemberandJanuary. Ireland,andPortugalrosesharply,relativetothose onGermanbonds,throughearlyMarch.These Consumercreditmarketsshowedfurthersignsof spreadssubsequentlydeclinedsomewhatinresponse improvement.Totalconsumercreditexpandedmod- toageneralagreementamongeuro-arealeadersto eratelyinJanuary.Aswasthecaseinthefourthquar- expandthecapacityof thearea’sbackstopfunding ter,nonrevolvingcreditexpandedwhilerevolving facility,toextendthematurityof thefacility’sloans creditranoff.Delinquencyratesoncreditcardloans toGreece,andtolowertheinterestratesonthose insecuritizedpoolsandonautoloansatfinance loans. companiescontinuedtodeclinethroughJanuary, nearlyreturningtotheirlonger-runaverages.The TheEuropeanCentralBank(ECB)leftitsbenchissuanceof consumerasset-backedsecurities,which markpolicyrateunchangedatitsMarchmeeting, hadweakenedaroundtheturnof theyear,posteda buttheemphasisonupsideriskstoinflationatthe moderategaininFebruary. postmeetingpressconferenceledmarketparticipants toinferthattheECBmightwelltightenpolicyatits Bankcreditdeclined,onaverage,inJanuaryandFeb- meetinginApril.IntheUnitedKingdom,marketruaryasaresultof acontractionincoreloans—the basedreadingsonexpectedpolicyratesindicated sumof C&I,realestate,andconsumerloans;hold- thatinvestorsanticipatedsometighteningof policy ingsof securitieswereaboutflatonnet.TheSurvey beforetheendof thisyear.Inaddition,authoritiesin of Termsof BusinessLendingconductedinthefirst severalemergingmarketeconomiestookstepsto weekof Februaryshowedthatspreadsof interest tightenpolicy.Thebroadnominalindexof theU.S. ratesonC&Iloansovercomparable-maturityEuro- dollardeclinedabout1percent,onbalance,overthe dollarandswapratesdecreasedsomewhatbut intermeetingperiod. remainedelevated. Staff Economic Outlook M2increasedatamoderaterate,onaverage,over JanuaryandFebruary.Liquiddeposits,thelargest Thepaceof economicactivityappearedtohavebeen componentof M2,expandedsomewhatlessrapidly alittlesloweraroundtheturnof theyearthanthe thaninthefourthquarterof 2010.Nonetheless,as staff hadanticipatedatthetimeof theJanuary hasbeenthecaseforsometime,thecompositionof FOMCmeeting,andthenear-termforecastfor M2shiftedtowardliquiddeposits,likelyreflecting growthof realgrossdomesticproduct(GDP)was

Minutesof FederalOpenMarketCommitteeMeetings|March 205 reviseddownmodestly.However,theoutlookfor pantsnotedthatrecentincreasesinthepricesof oil economicactivityoverthemediumtermwasbroadly andothercommoditieswereputtingupwardpressure similartotheprojectionpreparedfortheJanuary onheadlineinflation,butthatmeasuresof underly- FOMCmeeting.Changestotheconditioning inginflationremainedsubdued.Theyanticipated assumptionsunderlyingthestaff projectionwere thattheeffectsoninflationof therecentrun-upin mostlysmallandoffsetting:Crudeoilpriceshad commoditypriceswouldprovetransitory,inpart risensharplyandfederalfiscalpolicyseemedlikelyto becausetheysawlonger-terminflationexpectations bemarginallymorerestrictivethanthestaff had remainingstable.Moreover,anumberof participants judgedinJanuary,butthesenegativefactorswere expectedthatslackinresourceutilizationwouldconcounterbalancedbyhigherhouseholdnetworthand tinuetorestrainincreasesinlaborcostsandprices. aslightlylowerforeignexchangevalueof thedollar. Nonetheless,participantsobservedthatrapidlyrising Asaresult,asintheJanuaryforecast,realGDPwas commoditypricesposedupsideriskstothestability expectedtoriseatamoderatepaceover2011and of longer-terminflationexpectations,andthustothe 2012,supportedbyaccommodativemonetarypolicy, outlookforinflation,evenastheyposeddownside increasingcreditavailability,andgreaterhousehold riskstotheoutlookforgrowthinconsumerspending andbusinessconfidence.Reflectingtherecentlabor andbusinessinvestment.Inaddition,participants marketdata,theprojectionfortheunemployment notedthatunfoldingeventsintheMiddleEastand ratewaslowerthroughouttheforecastperiodthanin NorthAfrica,alongwiththerecentearthquake,tsuthestaff’sJanuaryforecast,butthejoblessratewas nami,andsubsequentdevelopmentsinJapan,had stillexpectedtodeclineslowlyandtoremainelevated furtherincreaseduncertaintyabouttheeconomic attheendof 2012. outlook. Thestaff revisedupitsprojectionforconsumerprice Participants’judgmentthattherecoverywasgaining inflationinthenearterm,largelybecauseof the tractionreflectedboththeincomingeconomicindirecentincreasesinthepricesof energyandfood. catorsandinformationreceivedfrombusinesscon- However,inlightof theprojectedpersistenceof tacts.Spendingbyhouseholds,whichhadpickedup slackinlaborandproductmarketsandtheantici- noticeablyinthefourthquarter,rosefurtherduring patedstabilityinlong-terminflationexpectations,the theearlypartof 2011,withautosalesshowingparincreaseininflationwasexpectedtobemostlytransi- ticularstrength.Althoughsomeparticipantsnoted toryif oilandothercommoditypricesdidnotrise thatgrowthinconsumerspendingsofarthisyear significantlyfurther.Asaresult,theforecastforcon- hadnotbeenasvigorousastheyhadanticipated, sumerpriceinflationoverthemediumrunwaslittle theyattributedtheshortfallinparttounusuallybad changedrelativetothatpreparedfortheJanuary weather.Whileparticipantsexpectedthathousehold meeting. spendingwouldcontinuetoexpand,thepaceof expansionwasuncertain.Ontheonehand,labor Participants’ Views on Current Conditions marketconditionswereimproving,thoughgradually, and the Economic Outlook andthetemporarycutinpayrolltaxeswascontributingtorisingafter-taxincomes.Someeasingof credit Indiscussingintermeetingdevelopmentsandtheir conditionsforhouseholds,particularlyforauto implicationsfortheeconomicoutlook,participants loans,alsoappearedtobesupportinggrowthinconagreedthattheinformationreceivedsincetheirprevi- sumerspending.Ontheotherhand,declininghouse ousmeetingwasbroadlyconsistentwiththeirexpec- pricesremainedadragonhouseholdwealthandthus tationsandsuggestedthattheeconomicrecoverywas onconsumerspending.Inaddition,sizablerecent onafirmerfooting.Lookingthroughweather-related increasesinoilandgasolinepriceshadreducedreal distortionsinvariousindicators,measuresof con- incomesandweighedonconsumerconfidence.Busisumerspending,businessinvestment,andemploy- nesscontactsinavarietyof industrieshadexpressed mentshowedcontinuedexpansion.Housing,how- concernthatconsumersmightpullbackif gasoline ever,remaineddepressed.Meetingparticipantstook pricesrosesignificantlyfurtherandpersistedatthose noteof thesignificantdeclineintheunemployment elevatedlevels. rateoverthepastfewmonthsbutobservedthatother indicatorspointedtoamoregradualimprovementin Afurtherincreaseinbusinessactivityalsoindicated overalllabormarketconditions.Theycontinuedto thattheeconomicrecoveryremainedontrack. expectthateconomicgrowthwouldstrengthenover Industrialproductionpostedsolidgains,supported comingquarterswhileremainingmoderate.Partici- inpartbycontinuinggrowthinU.S.exports.Busi-

206 98thAnnualReport|2011 nesscontactsinanumberof regionsreportedthey ever,creditconditionsreportedlyremainedtightfor weremoreconfidentabouttherecovery;agrowing smaller,bank-dependentfirms.Participantsnoted numberof contactsindicatedtheywereplanningfor evidencethattheavailabilityof studentloansandof anexpansioninhiringandproductiontomeetan consumerloans—particularlyautoloans—was anticipatedriseinsales.Manufacturingfirmswere increasing.Indeed,bankandnonbanklenders particularlyupbeat.Somecontactsreportedthey reportedthattermsandconditionsforautoloans wereincreasingcapitalbudgetstoundertakeinvest- hadreturnedtohistoricalnorms.Incontrast,terms mentthathadbeenpostponedduringtherecession forcommercialandresidentialrealestateloans andearlystagesof therecovery;insomecases,firms remainedtightandthevolumeof outstandingloans wereplanningtoexpandcapacity.Consistentwith continuedtodecline,thoughtherewassomeissuance theanecdotalevidence,indicatorsof currentand of CMBSbackedbyloansonhigh-qualityproperties plannedbusinessinvestmentinequipmentandsoft- inselectedlargemetropolitanareas.Afewparticiwarecontinuedtoriseandsurveysshowedafurther pantsexpressedconcernthattheeasingof creditconimprovementinbusinesssentiment.Inaddition, ditionsinsomesectorswasbecomingormight althoughresidentialconstructionremainedweak, becomeexcessiveasinvestorstookonmoreriskin investmentinenergyextractionwasgrowingand ordertoobtainhigheryields. spendingoncommercialconstructionprojects appearedtobebottomingout. Participantsobservedthatheadlineinflationwas beingboostedbyhigherpricesforenergyandother Meetingparticipantsjudgedthatoverallconditions commodities,andthatpricesof otherimported inlabormarketshadcontinuedtoimprovegradually. goodsalsohadrisenbyasubstantial,thoughsmaller, Theunemploymentratehaddecreasedsignificantly amount.Anumberof businesscontactsindicated inrecentmonths;otherlabormarketindicators, thattheywerepassingonatleastaportionof these includingmeasuresof jobgrowthandhoursworked, highercoststotheircustomersorthattheyplanned showedmore-modestimprovements.Severalpartici- totrytodosolaterthisyear;however,contactswere pantsnotedthatthedropinunemploymentwas uncertainabouttheextenttowhichtheycouldraise attributablemoretopeoplewithdrawingfromthe prices,givencurrentmarketconditionsandthecaulaborforceandtofewerlayoffsthantoincreasedhir- tiousattitudestowardspendingstillheldbyhouseing.Evenso,participantsagreedthatgainsin holdsandbusinesses.Otherparticipantsnotedthat employmentseemedtobeonagraduallyrisingtra- commodityandenergycostsaccountedforarelajectory,althoughtherecentdatahadbeensomewhat tivelysmallshareof productioncostsformostfirms erraticanddistortedbyworse-than-usualweatherin andthatlaborcostsaccountedforthebulkof such manypartsof thecountry.Inaddition,surveysof costs;moreover,theyobservedthatunitlaborcosts employersshowedthatanincreasingnumberof generallyhaddeclinedinrecentyearsasproductivity firmswereplanningtohire.Participantsnoted growthoutpacedwagegains.Severalparticipants regionaldifferencesinthespeedof improvementin notedthatevenlargecommoditypriceincreaseshave labormarkets;scatteredreportsindicatedthatfirms hadonlylimitedeffectsonunderlyinginflationin insomeregionswerehavingdifficultyhiringsome recentdecades. typesof highlyskilledworkers.Participantsgenerally judgedthattherewasstillsubstantialslackinthe Incontrasttoheadlineinflation,coreinflationand labormarket,thoughestimatesof thedegreeof slack othermeasuresof underlyinginflationremainedsubwereadmittedlyimpreciseanddependedinparton dued,thoughtheyappearedtohavebottomedout.A judgmentsaboutanumberof factors,includingthe numberof participantsnotedthat,withsignificant extenttowhichlaborforceparticipationwould slackinresourceutilizationandwithlonger-term increaseastherecoveryprogressesandemployment inflationexpectationsstable,underlyinginflation expands. likelywouldremainsubduedforsometime.However, theimportanceof resourceslackasafactorinfluenc- Creditconditionsremaineduneven.Bankersagain inginflationwasdebated.Someparticipantspointed reportedimprovingcreditqualityandgenerallyweak toresearchindicatingthatmeasuresof slackwere loandemand.Largefirmsthathaveaccesstofinan- usefulinpredictinginflation.Othersarguedthat,hiscialmarketscontinuedtofindcredit,includingbank torically,suchmeasureswereonlymodestlyhelpfulin loans,availableonrelativelyattractiveterms;how- explaininglargemovementsininflation;onenoted

Minutesof FederalOpenMarketCommitteeMeetings|March 207 the2003–04episodeinwhichcoreinflationroserap- thelargesizeof theFederalReserve’sbalancesheet idlyoverafewquarterseventhoughthereappeared weretoleadthepublictodoubttheCommittee’s tobesubstantialresourceslack. abilitytowithdrawmonetaryaccommodationwhen appropriate,theresultcouldbeupwardpressureon Participantsexpectedthattheboosttoheadlineinfla- inflationexpectationsandsoonactualinflation.To tionfromrecentincreasesinenergyandothercom- mitigatesuchrisks,participantsagreedthattheCommoditypriceswouldbetransitoryandthatunderly- mitteewouldcontinueitsplanningfortheeventual inginflationtrendswouldbelittleaffectedaslongas exitfromthecurrent,exceptionallyaccommodative commoditypricesdidnotcontinuetoriserapidly stanceof monetarypolicy.Inlightof uncertainty andlonger-terminflationexpectationsremained abouttheeconomicoutlook,itwasseenasprudent stable.However,asignificantincreaseinlonger-term toconsiderpossibleexitstrategiesforarangeof inflationexpectationscouldcontributetoexcessive potentialeconomicoutcomes.Afewparticipants wageandpriceinflation,whichwouldbecostlyto indicatedthateconomicconditionsmightwarranta eradicate.Accordingly,participantsconsideredit movetowardless-accommodativemonetarypolicy importanttopaycloseattentiontotheevolutionnot thisyear;afewothersnotedthatexceptionalpolicy onlyof headlineandcoreinflationbutalsoof infla- accommodationcouldbeappropriatebeyond2011. tionexpectations.Inthisregard,participants observedthatmeasuresof longer-terminflationcom- Committee Policy Action pensationderivedfromfinancialinstrumentshad remainedstableof late,suggestingthatlonger-term Intheirdiscussionof monetarypolicyfortheperiod inflationexpectationshadnotchangedappreciably, ahead,Committeemembersagreedthatnochanges althoughmeasuresof one-yearinflationcompensa- totheCommittee’sassetpurchaseprogramortoits tionhadrisennotably.Survey-basedmeasuresof targetrangeforthefederalfundsratewerewarranted inflationexpectationsalsoindicatedthatlonger-term atthismeeting.Theinformationreceivedoverthe expectedinflationhadrisenmuchlessthannear-term intermeetingperiodindicatedthattheeconomic inflationexpectations.Afewparticipantsnotedthat recoverywasonafirmerfootingandthatoverall theadoptionbytheCommitteeof anexplicit conditionsinthelabormarketweregradually numericalinflationobjectivecouldhelpkeeplonger- improving.Althoughtheunemploymentratehad terminflationexpectationswellanchored. declinedinrecentmonths,itremainedelevatedrelativetolevelsthattheCommitteejudgedtobeconsis- Participantsgenerallyjudgedtheriskstotheirfore- tent,overthelongerrun,withitsstatutorymandate castsof growthineconomicactivitytoberoughly tofostermaximumemploymentandpricestability. balanced.Theycontinuedtoseesomedownsiderisks Similarly,measuresof underlyinginflationcontinued fromthebankingandfiscalstrainsintheEuropean tobesomewhatlowrelativetolevelsseenasconsisperiphery,thecontinuingfiscaladjustmentsbyU.S. tentwiththedualmandateoverthelongerrun.With stateandlocalgovernments,andtheongoingweak- longer-terminflationexpectationsremainingstable nessinthehousingmarket.Severalalsonotedthe andmeasuresof underlyinginflationsubdued,mempossibilityof larger-than-anticipatednear-termcuts bersanticipatedthatrecentincreasesinthepricesof infederalgovernmentspending.Moreover,theeco- energyandothercommoditieswouldresultinonlya nomicimplicationsof thetragedyinJapan—for transitoryincreaseinheadlineinflation.Giventhis example,withrespecttoglobalsupplychains—were economicoutlook,theCommitteeagreedtocontinue notyetclear.Ontheupside,theimprovementin toexpanditsholdingsof longer-termTreasuryseculabormarketconditionsinrecentmonthsraisedthe ritiesasannouncedinNovemberinordertopromote possibilitythathouseholdspending—andsubse- astrongerpaceof economicrecoveryandtohelp quentlybusinessinvestment—mightexpandmore ensurethatinflation,overtime,isatlevelsconsistent rapidlythananticipated;if so,therecoverycouldbe withtheCommittee’smandate.Specifically,the strongerthancurrentlyprojected.Participants Committeemaintaineditsexistingpolicyof reinvestjudgedthatthepotentialformore-widespreaddis- ingprincipalpaymentsfromitssecuritiesholdings ruptionsinoilproduction,andthusforalargerjump andreaffirmeditsintentiontopurchase$600billion inenergyprices,posedbothdownsideriskstogrowth of longer-termTreasurysecuritiesbytheendof the andupsideriskstoinflation.Severalof themindi- secondquarterof 2011.Afewmembersremained cated,inlightof recentdevelopments,thattherisks uncertainaboutthebenefitsof theassetpurchase totheirforecastsof inflationhadshiftedsomewhat programbutjudgedthatmakingchangestotheprototheupside.Finally,afewparticipantsnotedthatif gramatthistimewasnotappropriate.TheCommit-

208 98thAnnualReport|2011 teecontinuedtoanticipatethateconomicconditions, AccountManagerandtheSecretarywillkeep includinglowratesof resourceutilization,subdued theCommitteeinformedof ongoingdevelopinflationtrends,andstableinflationexpectations, mentsregardingtheSystem’sbalancesheetthat werelikelytowarrantexceptionallylowlevelsforthe couldaffecttheattainmentovertimeof the federalfundsrateforanextendedperiod. Committee’sobjectivesof maximumemploymentandpricestability.” MembersemphasizedthattheCommitteewould continuetoregularlyreviewthepaceof itssecurities Thevoteencompassedapprovalof thestatement purchasesandtheoverallsizeof theassetpurchase belowtobereleasedat2:15p.m.: programinlightof incominginformation—including informationontheoutlookforeconomicactivity, “InformationreceivedsincetheFederalOpen developmentsinfinancialmarkets,andtheefficacy MarketCommitteemetinJanuarysuggeststhat of thepurchaseprogramandanyunintendedconse- theeconomicrecoveryisonafirmerfooting, quencesthatmightarise—andwouldadjustthepro- andoverallconditionsinthelabormarket gramasneededtobestfostermaximumemployment appeartobeimprovinggradually.Household andpricestability.Afewmembersnotedthatevi- spendingandbusinessinvestmentinequipment denceof astrongerrecovery,orof higherinflationor andsoftwarecontinuetoexpand.However, risinginflationexpectations,couldmakeitappropri- investmentinnonresidentialstructuresisstill atetoreducethepaceoroverallsizeof thepurchase weak,andthehousingsectorcontinuestobe program.Severalothersindicatedthattheydidnot depressed.Commoditypriceshaverisensignifianticipatemakingadjustmentstotheprogrambefore cantlysincethesummer,andconcernsabout itsintendedcompletion. globalsuppliesof crudeoilhavecontributedto asharprun-upinoilpricesinrecentweeks. Withrespecttothestatementtobereleasedfollowing Nonetheless,longer-terminflationexpectations themeeting,membersdecidedtonotethefurther haveremainedstable,andmeasuresof underlyimprovementineconomicactivityandinlabormar- inginflationhavebeensubdued. kets.TheCommitteealsodecidedtosummarizeits currentthinkingaboutinflationpressuresandto Consistentwithitsstatutorymandate,theComemphasizethatitwillcloselymonitortheevolution mitteeseekstofostermaximumemployment of overallinflationandinflationexpectations. andpricestability.Currently,theunemployment rateremainselevated,andmeasuresof underly- Attheconclusionof thediscussion,theCommittee inginflationcontinuetobesomewhatlow,relavotedtoauthorizeanddirecttheFederalReserve tivetolevelsthattheCommitteejudgestobe Bankof NewYork,untilitwasinstructedotherwise, consistent,overthelongerrun,withitsdual toexecutetransactionsintheSystemOpenMarket mandate.Therecentincreasesinthepricesof Accountinaccordancewiththefollowingdomestic energyandothercommoditiesarecurrentlyputpolicydirective: tingupwardpressureoninflation.TheCommitteeexpectstheseeffectstobetransitory,butit “TheFederalOpenMarketCommitteeseeks willpaycloseattentiontotheevolutionof inflamonetaryandfinancialconditionsthatwillfos- tionandinflationexpectations.TheCommittee terpricestabilityandpromotesustainable continuestoanticipateagradualreturnto growthinoutput.Tofurtheritslong-runobjec- higherlevelsof resourceutilizationinacontext tives,theCommitteeseeksconditionsinreserve of pricestability. marketsconsistentwithfederalfundstradingin arangefrom0to¼percent.TheCommittee Topromoteastrongerpaceof economicrecovdirectstheDesktoexecutepurchasesof longer- eryandtohelpensurethatinflation,overtime, termTreasurysecuritiesinordertoincreasethe isatlevelsconsistentwithitsmandate,theComtotalfacevalueof domesticsecuritiesheldinthe mitteedecidedtodaytocontinueexpandingits SystemOpenMarketAccounttoapproximately holdingsof securitiesasannouncedinNovem- $2.6trillionbytheendof June2011.TheCom- ber.Inparticular,theCommitteeismaintaining mitteealsodirectstheDesktoreinvestprincipal itsexistingpolicyof reinvestingprincipalpaypaymentsfromagencydebtandagency mentsfromitssecuritiesholdingsandintendsto mortgage-backedsecuritiesinlonger-term purchase$600billionof longer-termTreasury Treasurysecurities.TheSystemOpenMarket securitiesbytheendof thesecondquarterof

Minutesof FederalOpenMarketCommitteeMeetings|March 209 2011.TheCommitteewillregularlyreviewthe strengthentheCommittee’spolicycommunications. paceof itssecuritiespurchasesandtheoverall Theydiscussedvariousimplicationsof,andalternasizeof theasset-purchaseprograminlightof tivearrangementsfor,suchpressconferences.They incominginformationandwilladjustthepro- generallyendorsedholdingpressconferencesafter gramasneededtobestfostermaximumemploy- thefourFOMCmeetingseachyearforwhichparticimentandpricestability. pantsprovidenumericalprojectionsof severalkey economicvariables,conditionalonappropriatemon- TheCommitteewillmaintainthetargetrange etarypolicy.Whilethoseprojectionsalreadyare forthefederalfundsrateat0to¼percentand madepublicintheminutesof therelevantFOMC continuestoanticipatethateconomiccondi- meetings,pressconferencescouldbehelpfulin tions,includinglowratesof resourceutilization, explaininghowtheCommittee’smonetarypolicy subduedinflationtrends,andstableinflation strategyisinformedbyparticipants’projectionsof expectations,arelikelytowarrantexceptionally theratesof outputgrowth,unemployment,and lowlevelsforthefederalfundsrateforan inflationlikelytoprevailduringeachof thenextfew extendedperiod. years,andbytheirassessmentsof thevaluesof those variablesthatwillprovemostconsistent,overthe TheCommitteewillcontinuetomonitorthe longerrun,withtheCommittee’smandatetoproeconomicoutlookandfinancialdevelopments motebothmaximumemploymentandstableprices. andwillemployitspolicytoolsasnecessaryto Theoutcomeof thediscussionwasadecisionthat supporttheeconomicrecoveryandtohelp theChairmanwouldbeginholdingpressconferences ensurethatinflation,overtime,isatlevelscon- effectivewiththeApril26–27,2011,meeting. sistentwithitsmandate.” Itwasagreedthatthenextmeetingof theCommittee Votingforthisaction:BenBernanke,WilliamC. wouldbeheldonTuesday–Wednesday,April26–27, Dudley,ElizabethDuke,CharlesL.Evans,Richard 2011.Themeetingadjournedat2:35p.m.on W.Fisher,NarayanaKocherlakota,CharlesI. March15,2011. Plosser,SarahBloomRaskin,DanielK.Tarullo,and JanetL.Yellen. Notation Vote Votingagainstthisaction:None. BynotationvotecompletedonFebruary15,2011, theCommitteeunanimouslyapprovedtheminutesof TheCommitteethendiscussedarecommendation, theFOMCmeetingheldonJanuary25–26,2011. fromitssubcommitteeoncommunications,thatthe Chairmanconductregularpressconferences.Partici- WilliamB.English pantsgenerallysawsuchpressconferencesasa Secretary potentiallyusefulwaytoenhancetransparencyand

210 98thAnnualReport|2011 Meeting Held on April 26–27, 2011 ScottG.Alvarez GeneralCounsel Ajointmeetingof theFederalOpenMarketCom- ThomasC.Baxter mitteeandtheBoardof Governorsof theFederal DeputyGeneralCounsel ReserveSystemwasheldintheofficesof theBoard of GovernorsinWashington,D.C.,onTuesday, NathanSheets April26,2011,at10:30a.m.andcontinuedon Economist Wednesday,April27,2011,at8:30a.m. DavidJ.Stockton Economist Present JamesA.Clouse,ThomasA.Connors, BenBernanke StevenB.Kamin,LorettaJ.Mester, Chairman DavidReifschneider,HarveyRosenblum, WilliamC.Dudley DavidW.Wilcox,andKei-MuYi ViceChairman AssociateEconomists ElizabethDuke BrianSack Manager,SystemOpenMarketAccount CharlesL.Evans JenniferJ.Johnson RichardW.Fisher Secretaryof theBoard,Officeof theSecretary, NarayanaKocherlakota Boardof Governors CharlesI.Plosser PatrickM.Parkinson Director,Divisionof BankingSupervisionand SarahBloomRaskin Regulation,Boardof Governors DanielK.Tarullo NellieLiang JanetL.Yellen Director,Officeof FinancialStabilityPolicyand Research,Boardof Governors ChristineCumming,JeffreyM.Lacker, DennisP.Lockhart,SandraPianalto, RobertdeV.Frierson andJohnC.Williams DeputySecretary,Officeof theSecretary, AlternateMembersof theFederalOpenMarket Boardof Governors Committee WilliamNelson JamesBullard,ThomasM.Hoenig,and DeputyDirector,Divisionof MonetaryAffairs, EricRosengren Boardof Governors Presidentsof theFederalReserveBanksof St.Louis, KansasCity,andBoston,respectively LindaRobertson AssistanttotheBoard,Officeof BoardMembers, WilliamB.English Boardof Governors SecretaryandEconomist CharlesS.Struckmeyer DeborahJ.Danker DeputyStaff Director,Officeof theStaff Director, DeputySecretary Boardof Governors MatthewM.Luecke LawrenceSlifmanandWilliamWascher AssistantSecretary SeniorAssociateDirectors,Divisionof Researchand DavidW.Skidmore Statistics,Boardof Governors AssistantSecretary AndrewT.Levin MichelleA.Smith SeniorAdviser,Officeof BoardMembers, AssistantSecretary Boardof Governors

Minutesof FederalOpenMarketCommitteeMeetings|April 211 JoyceK.Zickler izedinNovember2010.SinceNovember,purchases VisitingSeniorAdviser,Divisionof Monetary bytheOpenMarketDeskof theFederalReserve Affairs,Boardof Governors Bankof NewYorkhadincreasedtheSOMA’sholdingsby$422billion.TheManagerreportedonthe MichaelG.Palumbo U.S.authorities’participationinthecoordinatedfor- AssociateDirector,Divisionof Researchand eignexchangeinterventionannouncedbytheGroup Statistics,Boardof Governors of Seven(G-7)financeministersandcentralbank TrevorA.Reeve1 governorsonMarch17,2011.Byunanimousvotes, AssociateDirector,Divisionof InternationalFinance, theCommitteeratifiedtheDesk’sdomesticandfor- Boardof Governors eignexchangemarkettransactionsovertheintermeetingperiod. FabioM.Natalucci AssistantDirector,Divisionof MonetaryAffairs, Byunanimousvote,theCommitteeagreedtoextend Boardof Governors thereciprocalcurrency(swap)arrangementswiththe DavidH.Small Bankof CanadaandtheBancodeMéxicoforan ProjectManager,Divisionof MonetaryAffairs, additionalyearbeginninginmid-December2011; Boardof Governors thesearrangementsareassociatedwiththeFederal Reserve’sparticipationintheNorthAmerican JeremyB.Rudd FrameworkAgreementof 1994.Thearrangement SeniorEconomist,Divisionof Researchand withtheBankof Canadaisintheamountof $2bil- Statistics,Boardof Governors lionequivalent,andthearrangementwiththeBanco JamesM.Lyon deMéxicoisintheamountof $3billionequivalent. FirstVicePresident,FederalReserveBankof ThevotetorenewtheSystem’sparticipationinthese Minneapolis swaparrangementswastakenatthismeetingbecause of aprovisioninthearrangementsthatrequireseach JamieJ.McAndrewsandMarkS.Sniderman partytoprovidesixmonths’priornoticeof aninten- ExecutiveVicePresidents,FederalReserveBanksof tiontoterminateitsparticipation. NewYorkandCleveland,respectively DavidAltig,AlanD.Barkema,RichardP.Dzina, Thestaff nextgaveapresentationonstrategiesfor DavidMarshall,ChristopherJ.Waller,and normalizingthestanceandconductof monetary JohnA.Weinberg policyovertimeastheeconomystrengthens.Nor- SeniorVicePresidents,FederalReserveBanksof malizingthestanceof policywouldentailthewith- Atlanta,KansasCity,NewYork,Chicago,St.Louis, drawalof thecurrentextraordinarydegreeof accomandRichmond,respectively modationattheappropriatetime,whilenormalizing theconductof policywouldinvolvedrainingthe JohnFernaldandGiovanniOlivei largevolumeof reservebalancesinthebanking VicePresidents,FederalReserveBanksof systemandshrinkingtheoverallsizeof thebalance SanFranciscoandBoston,respectively sheet,aswellasreturningtheSOMAtoitshistorical compositionof essentiallyonlyTreasurysecurities. Developments in Financial Markets and Thepresentationnotedafewkeyissuesthatthe the Federal Reserve’s Balance Sheet Committeewouldneedtoaddressindecidingonits TheManagerof theSystemOpenMarketAccount approachtonormalization.Thefirstkeyissuewas (SOMA)reportedondevelopmentsindomesticand theextenttowhichtheCommitteewouldwantto foreignfinancialmarketsduringtheperiodsincethe tightenpolicy,attheappropriatetime,byincreasing FederalOpenMarketCommittee(FOMC)meton short-terminterestrates,bydecreasingitsholdingsof March15,2011.HealsoreportedonSystemopen longer-termsecurities,orboth.Becausethetwopolimarketoperations,includingthecontinuingreinvest- cieswouldrestraineconomicactivitybytightening mentintolonger-termTreasurysecuritiesof princi- financialconditions,theycouldbecombinedinvaripalpaymentsreceivedontheSOMA’sholdingsof ouswaystoachievesimilaroutcomes.Forexample, agencydebtandagency-guaranteedmortgage- inprinciple,theCommitteecouldaccomplishessenbackedsecurities(MBS)aswellastheongoingpur- tiallythesamedegreeof monetarytighteningbysellchasesof additionalTreasurysecuritiesfirstauthor- ingassetssoonerandfasterbutraisingthetargetfor thefederalfundsratelaterandmoreslowly,orby 1 AttendedTuesday’ssessiononly. sellingassetslaterandmoreslowlybutincreasingthe

212 98thAnnualReport|2011 federalfundsratetargetsoonerandfaster.The implementedwithinaframeworkthathadbeencom- SOMAportfoliocouldbereducedbysellingsecuri- municatedtothepublicinadvance,andatapace tiesoutright,byceasingthereinvestmentof principal thatpotentiallycouldbeadjustedinresponseto paymentsonitssecuritiesholdings,orboth.Asec- changesineconomicorfinancialconditions. ondkeyissuewastheextenttowhichtheCommittee mightchoosetovarythepaceof anyassetsalesit Inaddition,nearlyallparticipantsindicatedthatthe undertakesinresponsetoeconomicandfinancial firststeptowardnormalizationshouldbeceasingto conditions.If itchosetomakethepaceof salesquite reinvestpaymentsof principalonagencysecurities responsivetoconditions,theFOMCwouldbeableto and,simultaneouslyorsoonafter,ceasingtoreinvest activelyusetwopolicyinstruments—assetsalesand principalpaymentsonTreasurysecurities.Mostparthefederalfundsratetarget—topursueitseconomic ticipantsviewedhaltingreinvestmentsasawayto objectives,whichcouldincreasethescopeandflex- begintograduallyreducethesizeof thebalance ibilityforadjustingfinancialconditions.Incontrast, sheet.Itwasnoted,however,thatendingreinvestsalesatapacethatvariedlesswithchangesineco- mentswouldconstituteamodeststeptowardpolicy nomicandfinancialconditionsandwasprean- tightening,implyingthatthatdecisionshouldbe nouncedandlargelypredeterminedwouldleavethe madeinthecontextof theeconomicoutlookandthe federalfundsratetargetastheCommittee’sprimary Committee’spolicyobjectives.Inaddition,changes activepolicyinstrument,whichcouldresultinpolicy inthestatementlanguageregardingforwardpolicy thatismorestraightforwardfortheCommitteeto guidancewouldneedtoaccompanythenormalizacalibrateandtocommunicate.Finally,thestaff pre- tionprocess. sentationnotedthattheCommitteewouldneedto decideif andwhentousethetoolsthatithasdevel- Participantsexpressedarangeof viewsonsome opedtotemporarilyreducereservebalances—reverse aspectsof anormalizationstrategy.Mostparticirepurchaseagreementsandtermdeposits—inorder pantsindicatedthatonceassetsalesbecameapprototightenthecorrespondencebetweenanychanges priate,suchsalesshouldbeputonalargelypredeterintheinterestratetheFederalReservepaysonexcess minedandpreannouncedpath;however,manyof reservesandthechangesinthefederalfundsrate. thoseparticipantsnotedthatthepaceof salescould nonethelessbeadjustedinresponsetomaterial Meetingparticipantsagreedonseveralprinciplesthat changesintheeconomicoutlook.SeveralotherparwouldguidetheCommittee’sstrategyfornormaliz- ticipantspreferredinsteadthatthepaceof salesbea ingmonetarypolicy.First,withregardtothenor- keypolicytoolandbevariedactivelyinresponseto malizationof thestanceof monetarypolicy,thepace changesintheoutlook.Amajorityof participants andsequencingof thepolicystepswouldbedriven preferredthatsalesof agencysecuritiescomeafter bytheCommittee’smonetarypolicyobjectivesfor thefirstincreaseintheFOMC’stargetforshort-term maximumemploymentandpricestability.Partici- interestrates,andmanyof thoseparticipantsalso pantsnotedthattheCommittee’sdecisiontodiscuss expressedapreferencethatthesalesproceedrelatheappropriatestrategyfornormalizingthestanceof tivelygradually,returningtheSOMA’scomposition policyatthecurrentmeetingdidnotmeanthatthe toallTreasurysecuritiesoverperhapsfiveyears.Parmovetowardsuchnormalizationwouldnecessarily ticipantsnotedthat,foranygivendegreeof policy beginsoon.Second,tonormalizetheconductof tightening,more-gradualsalesthatcommencedlater monetarypolicy,itwasagreedthatthesizeof the inthenormalizationprocesswouldallowforanear- SOMA’ssecuritiesportfoliowouldbereducedover lierincreaseof thefederalfundsratetargetfromits theintermediatetermtoalevelconsistentwiththe effectivelowerboundthanwouldbethecaseif asset implementationof monetarypolicythroughthe salescommencedearlierandatamorerapidpace.As managementof thefederalfundsrateratherthan aresult,theCommitteewouldlaterhavetheoption throughvariationinthesizeorcompositionof the of easingpolicywithaninterestratecutif economic FederalReserve’sbalancesheet.Third,overtheinter- conditionsthenwarranted.Anearlierincreaseinthe mediateterm,theexitstrategywouldinvolvereturn- federalfundsratewasalsomentionedashelpfulto ingtheSOMAtoholdingessentiallyonlyTreasury limitthepotentialfortheverylowlevelof thatrate securitiesinordertominimizetheextenttowhich toencouragefinancialimbalances.Afewparticipants theFederalReserveportfoliomightaffectthealloca- expressedapreferencethatsalesbeginbeforeany tionof creditacrosssectorsof theeconomy.Sucha increaseinthefederalfundsratetarget,andafew shiftwasseenasrequiringsalesof agencysecurities otherparticipantsindicatedthatsalesandincreases atsomepoint.Andfourth,assetsaleswouldbe inthefederalfundsratetargetshouldcommenceat

Minutesof FederalOpenMarketCommitteeMeetings|April 213 thesametime.Theparticipantswhofavoredearlier Committee’sstrategyfornormalizingpolicywere salesalsogenerallyindicatedapreferenceforrela- madeatthismeeting. tivelyrapidsales,withsomesuggestingthatagency securitiesintheSOMAbereducedtozerooveras Staff Review of the Economic Situation littleasoneortwoyears.Suchanapproachwas viewedasallowingforafasterreturntoanormal TheinformationreviewedattheApril26–27meeting policyenvironment,potentiallyreducinganyupside indicated,onbalance,thateconomicactivity riskstoinflationstemmingfromoutsizedreservebal- expandedatamoderatepaceinrecentmonths,and ances,andmorequicklyeliminatinganyeffectsof labormarketconditionscontinuedtoimprovegradu- SOMAholdingsof agencysecuritiesonthealloca- ally.Headlineconsumerpriceinflationwasboosted tionof credit. bylargeincreasesinfoodandenergyprices,but measuresof underlyinginflationwerestillsubdued Mostparticipantssawchangesinthetargetforthe andlonger-runinflationexpectationsremained federalfundsrateasthepreferredactivetoolfor stable. tighteningmonetarypolicywhenappropriate.A numberof participantsnotedthatitwouldbeadvis- Privatenonfarmpayrollemploymentincreasedagain abletobeginusingthetemporaryreserves-draining inMarch,andthegainsinhiringforthefirstquarter toolsinadvanceof anincreaseintheCommittee’s asawholeweresomewhatabovethepaceseeninthe federalfundsratetarget,inpartbecausedoingso fourthquarter.Anumberof indicatorsof jobopenwouldputtheFederalReserveinabetterpositionto ingsandhiringplansimprovedinFebruaryand assesstheeffectivenessof thedrainingtoolsand March.Althoughinitialclaimsforunemployment judgethesizeof drainingoperationsthatmightbe insurancewereflat,onnet,fromearlyMarch requiredtosupportchangesintheinterestonexcess throughthemiddleof April,theyremainedlower reserves(IOER)rateinimplementingadesired thanearlierintheyear.Theunemploymentrate increaseinshort-termrates.Anumberof partici- edgeddownfurtherto8.8percentinMarch,while pantsalsonotedthattheywouldbepreparedtosell thelaborforceparticipationratewasunchanged. securitiessoonerif thetemporaryreserves-draining However,bothlong-durationunemploymentandthe operationsandtheendof thereinvestmentof princi- shareof workersemployedparttimeforeconomic palpaymentswerenotsufficienttosupportafairly reasonswerestillveryhigh. tightlinkbetweenincreasesintheIOERrateand increasesinshort-termmarketinterestrates. Industrialproductioninthemanufacturingsector expandedatarobustpaceinFebruaryandMarch. Inthediscussionof normalization,someparticipants Themanufacturingcapacityutilizationratemoved alsonotedtheirpreferencesaboutthelonger-run upfurther,thoughitcontinuedtobeagoodbitlower frameworkformonetarypolicyimplementation. thanitslonger-runaverage.Mostforward-looking Mostof theseparticipantsindicatedthattheypre- indicatorsof industrialactivity,suchasthenew ferredthatmonetarypolicyeventuallyoperate ordersindexesinthenationalandregionalmanufacthroughacorridor-typesysteminwhichthefederal turingsurveys,remainedatlevelsconsistentwith fundsratetradesinthemiddleof arange,withthe solidgainsinproductioninthenearterm.However, IOERrateasthefloorandthediscountrateasthe motorvehicleassemblieswereexpectedtostepdown ceilingof therange,asopposedtoafloor-type inthesecondquarterfromtheirlevelinMarch, systeminwhicharelativelyhighlevelof reservebal- reflectingemergingshortagesof specializedcompoanceskeepsthefederalfundsrateneartheIOER nentsimportedfromJapan. rate.Acoupleof participantsnotedthatanynormalizationstrategywouldlikelyinvolveanelevatedbal- Theriseinconsumerspendingappearedtohave ancesheetwiththefederalfundsratetargetnearthe slowedtoamoderaterateinthefirstquarterfrom IOERrate—asinfloor-typesystems—forsometime, thestrongerpacepostedinthefourthquarterof last andthereforetheCommitteewouldaccumulateexpe- year.Totalrealpersonalconsumptionexpenditures rienceduringtheprocessof normalizingpolicythat pickedupinFebruaryafterbeingaboutunchanged wouldallowittomakeamoreinformedchoice inJanuary.Nominalretailsales,excludingpurchases regardingthelonger-termframeworkatalaterdate. atmotorvehiclesandpartsoutlets,postedasizable gaininMarch,butsalesof newlightmotorvehicles TheCommitteeagreedthatmorediscussionof these declinedsomewhat.Realdisposableincomeedged issueswasneeded,andnodecisionsregardingthe downinFebruaryfollowinganincreaseinJanuary

214 98thAnnualReport|2011 thatreflectedthetemporaryreductioninpayroll thatinthefourthquarter,andstateandlocal taxes.Inaddition,consumersentimentdeclined employmentcontinuedtocontractinMarch. noticeablyinMarchandremainedrelativelydownbeatinearlyApril. TheU.S.internationaltradedeficitnarrowedslightly inFebruaryafterwideningsharplyinJanuary.Fol- Activityinthehousingmarketremainedveryweak, lowingasolidincreaseinJanuary,exportsfellback asthelargeoverhangof foreclosedanddistressed someinFebruary,withdeclineswidespreadacross propertiescontinuedtorestrainnewconstruction. categories.ImportsalsodeclinedinFebruaryafter Startsandpermitsof newsingle-familyhomes postinglargegainsinJanuary.Onaverage,thetrade incheddown,onnet,inFebruaryandMarch,and deficitinJanuaryandFebruarywaswiderthaninthe theyhavebeenessentiallyflatsincearoundthe fourthquarter. middleof lastyear.Demandforhousingalsocontinuedtobedepressed.Salesof newandexistinghomes OverallU.S.consumerpriceinflationmovedupfurmovedlower,onnet,inFebruaryandMarch,while therinFebruaryandMarch,asincreasesinthe measuresof homepricesslidfurtherinFebruary. pricesof energyandfoodcommoditiescontinuedto bepassedthroughtotheretaillevel.Morerecently, Realbusinessinvestmentinequipmentandsoftware surveydatathroughthemiddleof Aprilpointedto (E&S)appearedtohaveincreasedmorerobustlyin additionalincreasesinretailgasolineprices,while thefirstquarterthaninthefourthquarterof last increasesinthepricesof foodcommoditiesappeared year.Nominalshipmentsof nondefensecapital tohavemoderatedsomewhat.Excludingfoodand goodsroseinFebruaryandMarch,andbusinesses’ energy,coreconsumerpriceinflationremainedrelapurchasesof newvehiclestrendedhigher.New tivelysubdued.Althoughcoreconsumerpriceinflaordersof nondefensecapitalgoodscontinuedtorun tionoverthefirstthreemonthsof theyearstepped aheadof shipmentsinFebruaryandMarch,andthis upsomewhat,the12-monthchangeinthecoreconexpandingbacklogof unfilledorderspointedtofur- sumerpriceindexthroughMarchwasessentiallythe therincreasesinshipmentsinsubsequentmonths.In sameasitwasayearearlier.Near-terminflation addition,surveymeasuresof businessconditionsand expectationsfromtheThomsonReuters/University sentimentinrecentmonthswereconsistentwithcon- of MichiganSurveysof Consumersremained tinuedrobustgainsinE&Sspending.Incontrast, elevatedinearlyApril.Butlonger-terminflation businessoutlaysfornonresidentialconstruction expectationsmoveddowninearlyApril—reversing remainedextremelyweakinFebruary,restrainedby theiruptickinMarch—andstayedwithintherange highvacancyrates,lowpricesforofficeandcommer- thathasprevailedoverthepastseveralyears. cialproperties,andtightcreditconditionsforcommercialrealestatelending. Availablemeasuresof laborcompensationsuggested thatwageincreasescontinuedtoberestrainedbythe Realnonfarminventoryinvestmentappearedtohave presenceof alargemarginof slackinthelabormarmoveduptoamoderatepaceinthefirstquarter ket.Averagehourlyearningsforallemployeeswere afterslowingsharplyintheprecedingquarter.Motor flatinMarch,andtheiraveragerateof increaseover vehicleinventoriesweredrawndownmoreslowlyin thepreceding12monthsremainedlow. thefirstquarterthaninthefourthquarter,whiledata throughFebruarysuggestedthatthepaceof stock- Thepaceof recoveryabroadappearedtohave buildingoutsideof motorvehicleshadpickedupa strengthenedearlierthisyear,butthedisasterin bit.Book-valueinventory-to-salesratiosinFebruary Japanraiseduncertaintiesaboutforeignactivityin wereinlinewiththeirpre-recessionnorms,andsur- thenearterm.Intheeuroarea,productionexpanded veydatainMarchprovidedlittleevidencethatbusi- atasolidpace,thoughindicatorsof consumerspendnessesperceivedthattheirinventoriesweretoohigh. ingweakened.Whilemeasuresof economicactivity inGermanypostedstronggains,economiccondi- Theavailabledataongovernmentspendingindicated tionsinGreeceandPortugaldeterioratedfurther. thatrealfederalpurchasesfellinthefirstquarter,led Thedamagecausedbytheearthquakeandtsunami byareductionindefenseoutlays.Realexpenditures inJapanappearedtobesharplycurtailingJapanese bystateandlocalgovernmentsalsoappearedtohave economicactivityandposedconcernsaboutdisrupdeclined,asoutlaysforconstructionprojects tionstosupplychainsandproductioninother decreasedfurtherinFebruarytoalevelwellbelow economies.Emergingmarketeconomies(EMEs)

Minutesof FederalOpenMarketCommitteeMeetings|April 215 continuedtoexpandrapidly.Risingpricesof oiland Netdebtfinancingbynonfinancialcorporations othercommoditiesboostedinflationinforeign remainedrobustinMarch.Netissuanceof economies.However,coreinflationremainedsub- investment-andspeculative-gradebondsbynonfiduedinmostof theadvancedforeigneconomies,and nancialcorporationscontinuedtobestrong,andoutinflationintheEMEsseemedtohavedeclinedas standingamountsof commercialandindustrial foodpriceinflationslowed. (C&I)loansandnonfinancialcommercialpaper increasednoticeably.Grosspublicequityissuanceby Staff Review of the Financial Situation nonfinancialfirmswasrobustinMarch,andindicatorsof thecreditqualityof nonfinancialfirms ThedecisionsbytheFOMCatitsMarchmeetingto improvedfurther. continueitsassetpurchaseprogramandtomaintain the0to¼percenttargetrangeforthefederalfunds Commercialmortgagemarketsshowedsomesignsof ratewereinlinewithmarketexpectations;nonethe- stabilization.Delinquencyratesforcommercialreal less,theaccompanyingstatementpromptedamodest estateloansappearedtohaveleveledoff inrecent riseinnominalyields,asmarketparticipantsreport- months.Issuanceof commercialmortgage-backed edlyperceivedasomewhatmoreoptimistictonein securitiespickedupinthefirstquarter,although theCommittee’seconomicoutlook,aswellasheight- commercialrealestateloansatbankscontinuedto enedconcernaboutinflationrisks.Overtheinter- runoff.Incommercialrealestatemarkets,property meetingperiod,yieldsonnominalTreasurysecurities salesremainedtepid,andpricesstayedatdepressed changedlittle,onnet,amidswingsininvestors’ levels. assessmentsof globalrisks.Short-termfundingrates, includingtheeffectivefederalfundsrate,shifted Ratesonconformingfixed-rateresidentialmortgages downseveralbasispointsinearlyAprilfollowinga rosemodestlyduringtheintermeetingperiod,and changeintheFederalDepositInsuranceCorpora- theirspreadsrelativeto10-yearTreasuryyieldsnartion’sdepositinsuranceassessmentsystem.Onnet, rowedslightly.Mortgagerefinancingactivity theexpectedpathof thefederalfundsrateoverthe remainednearitslowestlevelinmorethantwoyears. nexttwoyearswaslittlechangedovertheintermeet- TheTreasuryDepartment’sannouncementinlate ingperiod. Marchthatitwouldbeginsellingitsholdingsof agencyMBSatagradualpacehadlittlelastingeffect Measuresof inflationcompensationoverthenext onMBSspreads.TheFederalReservebegancom- 5yearsbasedonnominalandinflation-protected petitivesalesof thenon-agencyresidentialMBSheld Treasurysecuritiesincreasedslightly,onnet,overthe byMaidenLaneIILLC;initialsalesmetwithstrong intermeetingperiod,partlyreflectingtheongoingrise demand,butmarketpricesof non-agencyresidential incommodityprices.Staff modelssuggestedthatthe MBSwerereportedlylittlechangedoverall.Therates modestincreaseininflationcompensation5to of seriousdelinquenciesforsubprimeandprime 10yearsaheadwasmostlyattributabletoincreasesin mortgageswerenearlyunchangedbutremainedat liquidityandinflation-riskpremiumsratherthan elevatedlevels.However,therateof newdelinquenhigherexpectedinflation. ciesonprimemortgagesdeclinedfurther. Overtheintermeetingperiod,yieldsoncorporate Conditionsinconsumercreditmarketscontinuedto bondsweregenerallylittlechanged,onnet,and improvegradually.Totalconsumercreditgrowth spreadsof investment-andspeculative-gradecorpo- pickedupinFebruary,asagaininnonrevolving ratebondsrelativetocomparable-maturityTreasury creditmorethanoffsetafurthercontractionin securitiesnarrowedslightly.Averagesecondary- revolvingcredit.Delinquencyandcharge-off rates marketpricesforsyndicatedleveragedloansmoved forcreditcarddebtmoveddowninrecentmonths upfurther.However,conditionsinthemunicipal andapproachedpre-crisislevels.Issuanceof conbondmarketremainedsomewhatstrained. sumerasset-backedsecuritiesremainedsteadyinthe firstquarterof theyear. BroadU.S.stockpriceindexesrose,onnet,overthe intermeetingperiod,asinitialreportsof better-than- BankcreditwasaboutunchangedinMarchafter expectedfirst-quarterearningsliftedstockpricesin declining,onaverage,inJanuaryandFebruary.Core lateApril.Option-impliedvolatilityontheS&P500 loans—thesumof C&I,realestate,andconsumer indexwasmoderatelylower,onnet,endingtheinter- loans—continuedtocontract,whileholdingsof meetingperiodatthelowendof itsrecentrange. securitiesincreasedmoderately.TheSeniorLoan

216 98thAnnualReport|2011 OfficerOpinionSurveyonBankLendingPractices Staff Economic Outlook conductedinAprilindicatedthat,onnet,banklendingstandardsandtermshadeasedsomewhatfurther Withtherecentdataonspendingsomewhatweaker, duringthefirstquarterof theyearanddemandfor onbalance,thanthestaff hadexpectedatthetimeof C&Iloans,commercialmortgages,andautoloans theMarchFOMCmeeting,thestaff reviseddownits hadincreased,whiledemandforresidentialmort- projectionfortherateof increaseinrealgross gagescontinuedtodecline. domesticproduct(GDP)overthefirsthalf of 2011. TheeffectsfromthedisasterinJapanwerealso M2expandedatamoderatepaceinMarch.Liquid anticipatedtotemporarilyholddownrealGDP deposits,thelargestcomponentof M2,advancedata growthinthenearterm.Overthemediumterm,the solidpacelikelyreflectingverylowopportunitycosts staff’soutlookforthepaceof economicgrowthwas of holdingsuchdeposits.Currencyadvancedsignifi- broadlysimilartoitspreviousforecast:Asinthe cantly,supportedbyrobustforeigndemandforU.S. Marchprojection,thestaff expectedrealGDPto banknotes. increaseatamoderateratethrough2012,withthe ongoingrecoveryinactivityreceivingcontinuedsup- Foreignsovereignbondyieldsgenerallywerelittle portfromaccommodativemonetarypolicy,increaschangedandequitypricesrose,onnet,overtheinter- ingcreditavailability,andfurtherimprovementsin meetingperiod,althoughequitypricesinJapan householdandbusinessconfidence.Theaveragepace remainedbelowtheirpre-earthquakelevelsdespite of GDPgrowthwasexpectedtobesufficientto therecordamountsof liquidityinjectedbytheBank graduallyreducetheunemploymentrateoverthe of Japanandtheexpansionof itsassetpurchasepro- projectionperiod,thoughthejoblessratewasanticigram.TheEuropeanCentralBankraiseditsmain patedtoremainelevatedattheendof 2012. policyrate25basispointsto1¼percentduringthe intermeetingperiod,andmarketsappearedtohave Recentincreasesinconsumerfoodandenergyprices, pricedinadditionalrateincreasesovertherestof the togetherwiththesmalluptickincoreconsumerprice year.TheBankof EnglandandtheBankof Canada inflation,ledthestaff toraiseitsnear-termprojeclefttheirpolicyratesunchanged,butquotesfrom tionforconsumerpriceinflation.However,inflation futuresmarketscontinuedtosuggestthatbothcen- wasexpectedtorecedeoverthemediumterm,as tralbankswouldraiserateslaterthisyear.China’s foodandenergypriceswereanticipatedtodecelerate. monetaryauthorityfurtherincreasedbanks’lending Asinpreviousforecasts,thestaff expectedcoreconratesanddepositratesandcontinuedtotighten sumerpriceinflationtoremainsubduedovertheproreserverequirements;monetarypolicyinanumberof jectionperiod,reflectingstablelonger-terminflation otherEMEswasalsotightenedovertheintermeeting expectationsandpersistentslackinlaborandprodperiod. uctmarkets. Thebroadnominalindexof theU.S.dollardeclined morethan2percentovertheintermeetingperiod, Participants’ Views on Current Conditions thoughthedollarappreciated,onnet,againstthe and the Economic Outlook Japaneseyen.Theyenstrengthenedtoanall-time highagainstthedollaraftertheearthquakeinJapan, InconjunctionwiththisFOMCmeeting,allmeeting butthismovewasmorethanreversedwhentheG-7 participants—thefivemembersof theBoardof countriesintervenedtosellyen. Governorsandthepresidentsof the12Federal ReserveBanks—providedprojectionsof output InearlyApril,thePortuguesegovernmentrequested growth,theunemploymentrate,andinflationfor financialsupportfromtheEuropeanUnionandthe eachyearfrom2011through2013andoverthelon- InternationalMonetaryFund,butmarketparticigerrun.Longer-runprojectionsrepresenteachparpantsreportedlyremainedconcernedaboutwhether ticipant’sassessmentof theratetowhicheachvarithePortuguesegovernmentwouldreachagreement ablewouldbeexpectedtoconverge,overtime,under onanassociatedfiscalconsolidationplan.Laterin appropriatemonetarypolicyandintheabsenceof theintermeetingperiod,yieldsonGreece’sandother furthershocks.Participants’forecastsaredescribed peripheralEuropeancountries’sovereigndebt intheSummaryof EconomicProjections,whichis jumped,reflectingheightenedmarketfocusonaposattachedasanaddendumtotheseminutes. siblerestructuringof Greeksovereigndebt.

Minutesof FederalOpenMarketCommitteeMeetings|April 217 Indiscussingintermeetingdevelopmentsandtheir Activityintheindustrialsectoralsoexpandedfurimplicationsfortheeconomicoutlook,participants ther.Industrialproductionpostedsolidgains,and, agreedthattheinformationreceivedsincetheirprevi- whilethemostrecentreadingsfromsomeof the ousmeetingwasbroadlyconsistentwithcontinua- regionalmanufacturingsurveysshowedsmall tionof amoderateeconomicrecovery,despitean declines,insomecasesthesewerefromnear-record unexpectedslowinginthepaceof economicgrowth highs.Manufacturersremainedupbeat,although inthefirstquarter.Whileconstructionactivity automakerswerereportingsomedifficultiesin remainedanemic,measuresof consumerspending obtainingpartsnormallyproducedinJapan,which andbusinessinvestmentcontinuedtoexpandand mightweighonmotorvehicleproductioninthecurlabormarketconditionscontinuedtoimprovegradu- rentquarter.Investmentinequipmentandsoftware ally.Participantsviewedtheweaknessinfirst-quarter wasfairlyrobust.Incontrast,thehousingsector economicgrowthaslikelytobelargelytransitory, remaineddistressed,withhousepricesflattodown influencedbyunusuallysevereweather,increasesin andalargeoverhangof vacantpropertiesrestraining energyandothercommodityprices,andlower-than- newconstruction,althoughreportsindicatedthat expecteddefensespending.Asaresult,theysaweco- salesvolumesandtrafficwerehigherinafewareas. nomicgrowthpickinguplaterthisyear. Activityinthecommercialrealestatesectorcontinuedtobeweak. Participants’forecastsforeconomicgrowthfor2012 and2013werelargelyunchangedfromtheirJanuary Severalparticipantsindicatedthat,incontrasttothe projectionsandcontinuedtoindicateexpectations somewhatweakerrecenteconomicdata,theirbusithattherecoverywillstrengthensomewhatovertime. nesscontactsweremorepositiveabouttheecono- Nonetheless,thepickupinthepaceof theeconomic my’sprospects,whichsupportedtheparticipants’ expansionwasexpectedtobelimited,reflectingthe viewthattherecentweaknesswaslikelytoprovetemeffectsof highenergyprices,modestchangesinhous- porary.Theyacknowledged,however,thatsentiment ingwealth,subduedrealincomegains,andfiscalcon- canchangequickly;indeed,oneparticipantnoted tractionatthefederal,state,andlocallevels.Partici- thathiscontactshadrecentlyturnedmorepessimispantscontinuedtoprojecttheunemploymentrateto tic,andseveralparticipantsindicatedthattheirbusideclinegraduallyovertheforecastperiodbutto nesscontactsexpressedconcernabouttheeffectsof remainelevatedcomparedwiththeirassessmentsof highercommoditypricesontheirowncostsandon itslonger-runlevel.Participantsreviseduptheirpro- thepurchasingpowerof households. jectionsfortotalinflationin2011,reflectingrecent increasesinenergyandothercommodityprices,but Participantsjudgedthatoverallconditionsinlabor theygenerallyanticipatedthattherecentincreasein marketshadcontinuedtoimprove,albeitgradually. inflationwouldbetransitoryascommodityprices Theunemploymentratehaddecreasedfurtherand stabilizeandinflationexpectationsremainanchored. payrollemploymenthadrisenagaininMarch.Some However,theyallagreedontheimportanceof closely participantsreportedthatmoreof theirbusinessconmonitoringdevelopmentsregardinginflationand tactshaveplanstoincreasetheirpayrollslaterthis inflationexpectations. year.Afewparticipantsnotedthatfirmsmaybe poisedtoacceleratetheirpaceof hiringbecausethey Participants’judgmentthattherecoverywascontinu- haveexhaustedpotentialproductivitygains,butothingatamoderatepacereflectedboththeincoming ersindicatedthatsomefirmsmaybeputtinghiring economicindicatorsandinformationreceivedfrom plansonholduntiltheyaremorecertainof the businesscontacts.Growthinconsumerspending futuretrendinmaterialsandotherinputcosts.Signs remainedmoderatedespitetheeffectsof highergaso- of risingwagepressureswerereportedlylimitedtoa lineandfoodprices,whichappearedtohavelargely fewskilledjobcategoriesforwhichworkersarein offsettheincreaseindisposableincomefromthepay- shortsupply,while,ingeneral,increasesinwages rolltaxcut.Participantsnotedthatthesehigher havebeensubdued.Participantsdiscussedwhether priceshadweighedonconsumersentimentabout thesignificantdropintheunemploymentratemight near-termeconomicconditionsbutthatunderlying beoverstatingthedegreeof improvementinlabor fundamentalsforcontinuedmoderategrowthin marketsbecausemanyof theunemployedhave spendingremainedinplace.Theseunderlyingfactors droppedoutof thelaborforceorhaveacceptedjobs includedcontinuedimprovementinhouseholdbal- thatarelessdesirablethantheirformerjobs. ancesheets,easingcreditconditions,andstrengtheninglabormarkets.

218 98thAnnualReport|2011 Financialmarketconditionscontinuedtoimprove tinuedtobemuted;if suchcircumstancescontinued, overtheintermeetingperiod.Equitypriceshadrisen, alarge,persistentriseininflationwouldbeunusual. onbalance,sincethepreviousmeeting,reflectingan Measuresof near-terminflationexpectationshad improvedoutlookforearnings,andwereupmore risenalongwiththerecentriseinoverallinflation. substantiallysincethestartof theyear.Bankers Whilesomeindicatorsof longer-termexpectations againreportedimprovementsincreditquality,with hadincreased,otherswerelittlechangedordown,on thevolumeof nonperformingassetsdecliningat net,sinceMarch.Manyparticipantshadbecome largerbanksandlevelingoff atsmallerbanks.In moreconcernedabouttheupsideriskstotheinflageneral,loandemandremainedweak.However,bank tionoutlook,includingthepossibilitiesthatoilprices lendingtomedium-sizedandlargercompanies mightcontinuetorise,thattheremightbegreater increased,andlendingtosmallbusinessespickedup pass-throughof highercommoditycostsinto slightly.Banksreportedaneasingof lendingterms broaderpricemeasures,andthatelevatedoverall onC&Iloans,usuallypromptedbyincreasedcompe- inflationcausedbyhigherenergyandothercomtitioninthefaceof still-weakloandemand.Con- moditypricescouldleadtoariseinlonger-term sumercreditconditionsalsoeasedsomewhatfrom inflationexpectations.Participantsagreedthatmonithetightconditionsseenduringtherecession.How- toringinflationtrendsandinflationexpectations ever,demandforconsumercreditotherthanauto closelywasimportantindeterminingwhetheraction loansreportedlychangedlittle.Afewparticipants wouldbeneededtopreventamorelastingpickupin expressedconcernthattheeasingof creditconditions therateof generalpriceinflation,whichwouldbe wascreatingincentivesforincreasedleverageand costlytoreverse.Maintainingwell-anchoredinflation risk-takinginsomeareas,suchasleveragedsyndi- expectationswoulddependonthecredibilityof the catedloansandloanstofinancelandacquisition, Committee’scommitmenttodeliveronthepricestaandthatthistrend,if itbecamewidespreadand bilitypartof itsmandate.Afewparticipantssugexcessive,couldposearisktofinancialstability. gestedthatclearercommunicationabouttheCommittee’sinflationoutlook,suchasexplainingthe Participantsdiscussedtherecentriseininflation, measuresitusestogaugemedium-termtrendsin whichhadbeendrivenlargelybysignificantincreases generalpriceinflationandannouncinganexplicit inenergyand,toasomewhatlesserextent,other numericalinflationobjective,wouldbehelpfulinthis commodityprices.Thesecommoditypriceincreases, regard. inturn,reflectedrobustglobaldemandandgeopoliticaldevelopmentsthathadreducedsupply.One Whilerisingenergypricesposedanupsiderisktothe participantsuggestedthatexcessliquiditymightbe inflationforecast,theyalsoposedadownsideriskto leadingtospeculationincommoditymarkets,possi- economicgrowth.Althoughmostparticipantsconblyputtingupwardpressureonprices.Manypartici- tinuedtoseetheriskstotheiroutlooksforeconomic pantsreportedthatanincreasingnumberof business growthasbeingbroadlybalanced,anumbernow contactsexpressedconcernsaboutrisingcostpres- judgedthoseriskstobetiltedtothedownside.These suresandwereintending,oralreadyattempting,to downsiderisksincludedalarger-than-expecteddrag passonatleastaportionof thesehighercoststo onhouseholdandbusinessspendingfromhigher theircustomersinordertoprotectprofitmargins. energyprices,continuedfiscalstrainsinEurope, Thisdevelopmentwasalsoreflectedintherising larger-than-anticipatedeffectsfromsupplydisrupindexesof pricespaidandreceivedinseveralregional tionsintheaftermathof thedisasterinJapan,conmanufacturingsurveys.Someparticipantsnotedthat tinuingfiscaladjustmentsatalllevelsof government highercommoditypriceswerenegativelyaffecting intheUnitedStates,financialdisruptionsthatwould bothbusinessandconsumersentiment.Coreinfla- beassociatedwithafailuretoincreasethefederal tionandotherindicatorsof underlyinginflationover debtlimit,andthepossibilitythattheeconomic themediumtermhadincreasedmodestlyinrecent weaknessinthefirstquarterwassignalinglessundermonths,buttheirlevelsremainedsubdued. lyingmomentumgoingforward.However,participantsalsonotedthattherapiddeclineintheunem- Participantsgenerallyanticipatedthatthehigher ploymentrateoverthepastseveralmonthssuggested levelof overallinflationwouldbetransitory.This thepossibilityof stronger-than-anticipatedeconomic outlookwasbasedpartlyonaprojectedleveling-off growthovercomingquarters. of commoditypricesandthebelief thatlonger-run inflationexpectationswouldremainstable.Some Intheirdiscussionof monetarypolicy,someparticiparticipantsnotedthatpressuresonlaborcostscon- pantsexpressedtheviewthatinthecontextof

Minutesof FederalOpenMarketCommitteeMeetings|April 219 increasedinflationrisksandroughlybalancedrisks Committeemaintaineditsexistingpolicyof reinvesttoeconomicgrowth,theCommitteewouldneedto ingprincipalpaymentsfromitssecuritiesholdings bepreparedtobegintakingstepstowardless- andaffirmedthatitwillcompletepurchasesof accommodativepolicy.Afewof theseparticipants $600billionof longer-termTreasurysecuritiesbythe thoughtthateconomicconditionsmightwarrant endof thecurrentquarter.Afewmembersremained actiontoraisethefederalfundsratetargetortosell uncertainaboutthebenefitsof theassetpurchase assetsintheSOMAportfoliolaterthisyear,but programbut,withtheprogramnearlycompleted, notedthatevenwithsuchsteps,monetarypolicy judgedthatmakingchangestotheprogramatthis wouldremainaccommodativeforsometimetocome. timewasnotappropriate.TheCommitteecontinued However,someparticipantsindicatedthatunderlying toanticipatethateconomicconditions,includinglow inflationremainedsubdued;thatlonger-terminfla- ratesof resourceutilization,subduedinflation tionexpectationswerelikelytoremainanchored, trends,andstableinflationexpectations,werelikely partlybecausemodestchangesinlaborcostswould towarrantexceptionallylowlevelsforthefederal constraininflationtrends;andthatgiventhedown- fundsrateforanextendedperiod.Thatsaid,afew sideriskstoeconomicgrowth,anearlyexitcould membersviewedtheincreaseininflationrisksassugunnecessarilydamptheongoingeconomicrecovery. gestingthateconomicconditionsmightwellevolvein awaythatwouldwarranttheCommitteetakingsteps Committee Policy Action towardless-accommodativepolicysoonerthancurrentlyanticipated. Committeemembersagreedthatnochangestothe Committee’sassetpurchaseprogramortoitstarget MembersagreedthattheCommitteewillregularly rangeforthefederalfundsratewerewarrantedat reviewthesizeandcompositionof itssecuritiesholdthismeeting.Theinformationreceivedovertheinter- ingsinlightof incominginformationandthatthey meetingperiodindicatedthattheeconomicrecovery arepreparedtoadjustthoseholdingsasneededto wasproceedingatamoderatepace,albeitsomewhat bestfostermaximumemploymentandpricestability. slowerthanhadbeenanticipatedearlierintheyear. Somememberspointedoutthattherewouldneedto Overallconditionsinthelabormarketweregradually beasignificantchangeintheeconomicoutlook,or improving,andtheunemploymentratecontinuedto theriskstothatoutlook,beforeanotherprogramof decline,althoughitremainedelevatedrelativetolev- assetpurchaseswouldbewarranted;intheirview, elsthattheCommitteejudgedtobeconsistent,over absentsuchchanges,thebenefitsof additionalpurthelongerrun,withitsstatutorymandateof maxi- chaseswouldbeunlikelytooutweighthecosts. mumemploymentandpricestability.Significant increasesinenergyandothercommoditypriceshad Inthestatementtobereleasedfollowingthemeeting, boostedoverallinflation,butmembersexpectedthis membersdecidedtoindicatethattheeconomic increasetobetransitoryandtounwindwhencom- recoverywasproceedingatamoderatepaceandthat moditypriceincreasesabated.Notwithstanding overallconditionsinthelabormarketweregradually recentmodestincreases,indicatorsof medium-term improving.TheCommitteealsodecidedtosummainflationremainedsubduedandsomewhatbelowthe rizeitscurrentthinkingaboutinflationpressuresand levelsseenasconsistentwiththedualmandateas toemphasizethatitwillcloselymonitortheevoluindicatedbytheCommittee’slonger-runinflation tionof inflationandinflationexpectations.Members projections.Near-terminflationexpectationshad anticipatedthattheChairman,whowoulddeliverhis increasedwithenergypricesandoverallinflation. firstpost-meetingpressbriefinglaterthatafternoon, Recentmovementsinmeasuresof longer-terminfla- wouldprovideadditionalcontextfortheCommittionexpectationswerediscussed.Whilesomemeas- tee’spolicydecisions. uresof longer-terminflationexpectationshadrisen, otherswerelittlechangedordown,onnet,since Attheconclusionof thediscussion,theCommittee March,andmembersagreedthatlonger-terminfla- votedtoauthorizeanddirecttheFederalReserve tionexpectationshadremainedstable.Giventhis Bankof NewYork,untilitwasinstructedotherwise, economicoutlook,theCommitteeagreedtocontinue toexecutetransactionsintheSystemAccountin toexpanditsholdingsof longer-termTreasurysecu- accordancewiththefollowingdomesticpolicy ritiesasannouncedinNovemberinordertopromote directive: astrongerpaceof economicrecoveryandtohelp ensurethatinflation,overtime,isatlevelsconsistent “TheFederalOpenMarketCommitteeseeks withtheCommittee’smandate.Specifically,the monetaryandfinancialconditionsthatwillfos-

220 98thAnnualReport|2011 terpricestabilityandpromotesustainable months.TheCommitteeexpectstheseeffectsto growthinoutput.Tofurtheritslong-runobjec- betransitory,butitwillpaycloseattentionto tives,theCommitteeseeksconditionsinreserve theevolutionof inflationandinflationexpectamarketsconsistentwithfederalfundstradingin tions.TheCommitteecontinuestoanticipatea arangefrom0to¼percent.TheCommittee gradualreturntohigherlevelsof resourceutilidirectstheDesktoexecutepurchasesof longer- zationinacontextof pricestability. termTreasurysecuritiesinordertoincreasethe totalfacevalueof domesticsecuritiesheldinthe Topromoteastrongerpaceof economicrecov- SystemOpenMarketAccounttoapproximately eryandtohelpensurethatinflation,overtime, $2.6trillionbytheendof June2011.TheCom- isatlevelsconsistentwithitsmandate,theCommitteealsodirectstheDesktoreinvestprincipal mitteedecidedtodaytocontinueexpandingits paymentsfromagencydebtandagency holdingsof securitiesasannouncedinNovemmortgage-backedsecuritiesinlonger-term ber.Inparticular,theCommitteeismaintaining Treasurysecurities.TheSystemOpenMarket itsexistingpolicyof reinvestingprincipalpay- AccountManagerandtheSecretarywillkeep mentsfromitssecuritiesholdingsandwillcomtheCommitteeinformedof ongoingdevelop- pletepurchasesof $600billionof longer-term mentsregardingtheSystem’sbalancesheetthat Treasurysecuritiesbytheendof thecurrent couldaffecttheattainmentovertimeof the quarter.TheCommitteewillregularlyreviewthe Committee’sobjectivesof maximumemploy- sizeandcompositionof itssecuritiesholdingsin mentandpricestability.” lightof incominginformationandispreparedto adjustthoseholdingsasneededtobestfoster Thevoteencompassedapprovalof thestatement maximumemploymentandpricestability. belowtobereleasedat12:30p.m.: TheCommitteewillmaintainthetargetrange “InformationreceivedsincetheFederalOpen forthefederalfundsrateat0to¼percentand MarketCommitteemetinMarchindicatesthat continuestoanticipatethateconomicconditheeconomicrecoveryisproceedingatamoder- tions,includinglowratesof resourceutilization, atepaceandoverallconditionsinthelabormar- subduedinflationtrends,andstableinflation ketareimprovinggradually.Householdspend- expectations,arelikelytowarrantexceptionally ingandbusinessinvestmentinequipmentand lowlevelsforthefederalfundsrateforan softwarecontinuetoexpand.However,invest- extendedperiod. mentinnonresidentialstructuresisstillweak, andthehousingsectorcontinuestobe TheCommitteewillcontinuetomonitorthe depressed.Commoditypriceshaverisensignifi- economicoutlookandfinancialdevelopments cantlysincelastsummer,andconcernsabout andwillemployitspolicytoolsasnecessaryto globalsuppliesof crudeoilhavecontributedto supporttheeconomicrecoveryandtohelp afurtherincreaseinoilpricessincetheCommit- ensurethatinflation,overtime,isatlevelsconteemetinMarch.Inflationhaspickedupin sistentwithitsmandate.” recentmonths,butlonger-terminflationexpectationshaveremainedstableandmeasuresof Votingforthisaction:BenBernanke,WilliamC. underlyinginflationarestillsubdued. Dudley,ElizabethDuke,CharlesL.Evans,Richard W.Fisher,NarayanaKocherlakota,CharlesI. Consistentwithitsstatutorymandate,theCom- Plosser,SarahBloomRaskin,DanielK.Tarullo,and mitteeseekstofostermaximumemployment JanetL.Yellen. andpricestability.Theunemploymentrate remainselevated,andmeasuresof underlying Votingagainstthisaction:None. inflationcontinuetobesomewhatlow,relative tolevelsthattheCommitteejudgestobeconsis- Itwasagreedthatthenextmeetingof theCommittee tent,overthelongerrun,withitsdualmandate. wouldbeheldonTuesday–Wednesday,June21–22, Increasesinthepricesof energyandothercom- 2011.Themeetingadjournedat10:15a.m.on moditieshavepushedupinflationinrecent April27,2011.

Minutesof FederalOpenMarketCommitteeMeetings|April 221 Notation Vote convergeovertimeunderappropriatemonetary policyandintheabsenceof furthershocks. BynotationvotecompletedonApril4,2011,the Committeeunanimouslyapprovedtheminutesof the Asdepictedinfigure1,FOMCparticipantsexpected FOMCmeetingheldonMarch15,2011. theeconomicrecoverytocontinueatamoderate pace,withgrowthof realgrossdomesticproduct WilliamB.English (GDP)pickingupmodestlythisyear(relativeto Secretary 2010)andstrengtheningfurtherin2012andabit morein2013.Withthepaceof economicgrowth Addendum: exceedingtheirestimatesof thelonger-runsustain- Summary of Economic Projections ablerateof increasesinrealGDP,theunemployment rateisprojectedtograduallytrendloweroverthis InconjunctionwiththeApril26–27,2011,Federal projectionperiod.However,participantsanticipated OpenMarketCommittee(FOMC)meeting,the that,attheendof 2013,theunemploymentrate membersof theBoardof Governorsandthepresi- wouldstillbewellabovetheirestimatesof the dentsof theFederalReserveBanks,allof whompar- longer-rununemploymentrate.Mostparticipants ticipateinthedeliberationsof theFOMC,submitted expectedthatoverallinflationwouldmoveupthis projectionsforgrowthof realoutput,theunemploy- year,buttheyprojectedthisincreasetobetemporary, mentrate,andinflationfortheyears2011to2013 withoverallinflationmovingbackinlinewithcore andoverthelongerrun.Theprojectionswerebased inflationin2012and2013andremainingatorbelow oninformationavailablethroughtheendof the ratestheyseeasconsistent,overthelongerrun,with meetingandoneachparticipant’sassumptionsabout theCommittee’sdualmandateof maximumemployfactorslikelytoaffecteconomicoutcomes,including mentandpricestability.Participantsgenerallysaw hisorherassessmentof appropriatemonetarypolicy. coreinflationgraduallyedginghigheroverthenext “Appropriatemonetarypolicy”isdefinedasthe twoyearsfromitscurrentrelativelylowlevel. futurepathof policythateachparticipantdeems mostlikelytofosteroutcomesforeconomicactivity Onbalance,asindicatedintable1,participants andinflationthatbestsatisfyhisorherinterpreta- anticipatedsomewhatlowerGDPgrowthand tionof theFederalReserve’sdualobjectivesof maxi- slightlyhigherinflationovertheforecastperiodthan mumemploymentandstableprices.Longer-runpro- theyprojectedinJanuary.Participantsmarkeddown jectionsrepresenteachparticipant’sassessmentof theirforecastsforrealGDPgrowththisyear,revised theratetowhicheachvariablewouldbeexpectedto themdownbylessfor2012and2013,anddidnot Table1.EconomicprojectionsofFederalReserveGovernorsandReserveBankpresidents,April2011 Percent Centraltendency1 Range2 Variable 2011 2012 2013 Longerrun 2011 2012 2013 Longerrun ChangeinrealGDP 3.1to3.3 3.5to4.2 3.5to4.3 2.5to2.8 2.9to3.7 2.9to4.4 3.0to5.0 2.4to3.0 Januaryprojection 3.4to3.9 3.5to4.4 3.7to4.6 2.5to2.8 3.2to4.2 3.4to4.5 3.0to5.0 2.4to3.0 Unemploymentrate 8.4to8.7 7.6to7.9 6.8to7.2 5.2to5.6 8.1to8.9 7.1to8.4 6.0to8.4 5.0to6.0 Januaryprojection 8.8to9.0 7.6to8.1 6.8to7.2 5.0to6.0 8.4to9.0 7.2to8.4 6.0to7.9 5.0to6.2 PCEinflation 2.1to2.8 1.2to2.0 1.4to2.0 1.7to2.0 2.0to3.6 1.0to2.8 1.2to2.5 1.5to2.0 Januaryprojection 1.3to1.7 1.0to1.9 1.2to2.0 1.6to2.0 1.0to2.0 0.7to2.2 0.6to2.0 1.5to2.0 CorePCEinflation3 1.3to1.6 1.3to1.8 1.4to2.0 1.1to2.0 1.1to2.0 1.2to2.0 Januaryprojection 1.0to1.3 1.0to1.5 1.2to2.0 0.7to1.8 0.6to2.0 0.6to2.0 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andininflationarefromthefourthquarterofthepreviousyeartothefourthquarteroftheyearindicated.PCE inflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures(PCE)andthepriceindexforPCE excludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarteroftheyearindicated.Eachparticipant’s projectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’sassessmentoftheratetowhicheach variablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.TheJanuaryprojectionsweremadein conjunctionwiththemeetingoftheFederalOpenMarketCommitteeonJanuary25–26,2011. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearconsistsofallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

222 98thAnnualReport|2011 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.

Minutesof FederalOpenMarketCommitteeMeetings|April 223 altertheirexpectationsforeconomicgrowthinthe dation,furtherimprovementsinbankingandfinanlongerrun.Mostparticipantsalsoloweredtheirfore- cialmarketconditions,risingconsumerconfidenceas castsfortheaverageunemploymentrateattheendof labormarketconditionsstrengthengradually, thisyear,buttheycontinuedtoseetheunemploy- improvedhouseholdbalancesheets,stabilizingcommentratemovingdownslowlyin2012and2013to modityprices,continuedexpansioninbusiness levelsthatwerelittlechangedfromthepreviouspro- investmentinequipmentandsoftware,andgainsin jections.Participantsraisedtheirforecastsforoverall U.S.exportsasbeingamongthelikelycontributors inflationthisyear;however,mostexpectedthatthe toasustainedpickupinthepaceof expansion.Howincreasewouldbetransitoryandmadeonlyminor ever,participantsalsosawanumberof factorsthat changestotheirforecastsfortherateof inflationin wouldlikelycontinuetohinderthepaceof expansion 2012and2013orforthelongerrun.Mostpartici- overthenexttwoyears.Mostparticipantsanticipantsanticipatedthatfiveorsixyearswouldlikelybe patedthattherecoveryinthehousingmarketwould requiredfortheeconomytoconvergefullytoits remainslow,restrainedbytheoverhangof vacant longer-runpathcharacterizedbyratesof output propertiesanddepressedhomevalues;mostalso growth,unemployment,andinflationconsistentwith expectedincreasingfiscaldragatthefederal,state, theirinterpretationof theFederalReserve’sdual andlocallevels.Inaddition,someparticipantsnoted objectives. thenegativeimpactonhouseholdpurchasingpower of theelevatedlevelsof energyandfoodprices.In Asizablemajorityof participantscontinuedtojudge theabsenceof furthershocks,participantsgenerally thelevelof uncertaintyassociatedwiththeirprojec- expectedthat,overtime,realGDPgrowthwould tionsforrealeconomicactivityandinflationas eventuallysettledownatanannualrateof 2.5to unusuallyhighrelativetohistoricalnorms.About 2.8percent,apacethatappearedtobesustainablein one-half of theparticipantsviewedtheriskstoout- viewof expectedlong-runtrendsinlaborsupplyand putgrowthasbalanced,butanumbernowjudged laborproductivity. thoseriskstobetiltedtothedownside.Meanwhile,a majorityof participantsviewedtheriskstooverall Reflectingthedeclineintheunemploymentratein inflationasweightedtotheupside. recentmonths,participantsloweredtheirforecasts fortheaverageunemploymentrateinthefourth TheOutlook quarterof thisyear,withthecentraltendencyof Participantsmarkeddowntheirforecastsforreal theirprojectionsat8.4to8.7percent,downfrom GDPgrowthin2011,withthecentraltendencyof 8.8to9.0percentinJanuary.Participants’projectheirprojectionsmovingdownto3.1to3.3percent tionsforthejoblessrateattheendof 2012and2013 from3.4to3.9percentinJanuary.Participantsstated werelittlechangedfromtheirpreviousforecasts. thatthechangereflectedimportantlythesomewhat Consistentwiththeirexpectationsof amoderateecoslower-than-expectedpaceof expansioninthefirst nomicrecovery,mostparticipantsprojectedthatthe quarter.Participantsgenerallythoughtthatmuchof unemploymentratewouldbe6.8to7.2percenteven theunexpectedweaknessinthefirstquarterwould inlate2013—stillwellabovethe5.2to5.6percent provetemporary,buttheyviewedanumberof recent centraltendencyof theirestimatesof theunemploydevelopmentsaspotentialrestraintsonthepaceof mentratethatwouldprevailoverthelongerrunin economicrecoveryinthenearterm.Thosedevelop- theabsenceof furthershocks.Thecentraltendency mentsincludedtheeffectsof theriseinenergyprices fortheparticipants’projectionsof theunemployonrealincomeandconsumersentiment,indications mentrateinthelongerrunwassomewhatnarrower thattherecoveryinthehousingmarketwasfurther thanthe5to6percentintervalreportedinJanuary. off,andconstraintsonstateandlocalgovernment budgets. Participantsnotedthatthepricesof oilandother commoditieshadrisensignificantlysincethetimeof Lookingfurtherahead,participants’revisionsto theirJanuaryprojections,largelyreflectinggeopolititheirforecastsforeconomicgrowthweremodest,and caldevelopmentsandrobustglobaldemand.Those theycontinuedtoseetheeconomicrecovery increaseshadledtoasharpriseinconsumerenergy strengtheningovertheforecastperiod,withthecen- pricesand,toalesserextent,foodprices,whichhad traltendencyof theirprojectionsforgrowthinreal boostedoverallinflation.Asaresult,participants GDPsteppingupto3.5to4.2percentin2012and raisedtheirforecastsfortotalpersonalconsumption remainingnearthoseratesin2013.Participantscited expenditures(PCE)inflationin2011,withthecentral theeffectsof continuedmonetarypolicyaccommo- tendencyof theirestimatessignificantlyhigher.With

224 98thAnnualReport|2011 theoutlookforoilandothercommodityprices Table2.Averagehistoricalprojectionerrorranges uncertain,thedispersionof theprojectionswas Percentagepoints noticeablywiderthaninJanuary.Mostparticipants expectedthatoverallinflationwouldrun2.1to Variable 2011 2012 2013 2.8percentthisyear,comparedwith1.3to1.7per- ChangeinrealGDP1 ±1.0 ±1.6 ±1.8 centintheirJanuaryprojections.However,manypar- Unemploymentrate1 ±0.5 ±1.2 ±1.8 ticipantsanticipatedthatthepass-throughof higher Totalconsumerprices2 ±0.8 ±1.0 ±1.0 commoditypricesintocoreinflationwouldbecon- Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared tainedbydownwardpressuresoninflationfromlarge errorofprojectionsfor1991through2010thatwerereleasedinthespringby marginsof slackinresourceutilizationandconse- variousprivateandgovernmentforecasters.Asdescribedinthebox “ForecastUncertainty,”undercertainassumptions,thereisabouta70percent quentsubduedlaborcosts.Participantsindicated probabilitythatactualoutcomesforrealGDP,unemployment,andconsumer thatwell-anchoredinflationexpectations,combined priceswillbeinrangesimpliedbytheaveragesizeofprojectionerrorsmadein thepast.FurtherinformationisinDavidReifschneiderandPeterTulip(2007), withtheappropriatestanceof monetarypolicy, “GaugingtheUncertaintyoftheEconomicOutlookfromHistoricalForecasting shouldhelpkeepinflationincheck.Asaresult,par- Errors,”FinanceandEconomicsDiscussionSeries2007-60(Washington:Boardof GovernorsoftheFederalReserveSystem,November). ticipantsanticipatedthattheincreaseintotalPCE 1 Fordefinitions,refertogeneralnoteintable1. inflationwouldbetemporary,withthecentralten- 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen dencyof theirestimatesmovingdownto1.2to mostwidelyusedingovernmentandprivateeconomicforecasts.Projection ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof 2.0percentin2012and1.4to2.0percentin2013—at theyearindicated. orbelowthe1.7to2.0percentcentraltendencyfor theirestimatesof thelonger-run,mandate-consistent rateof inflation.Nonetheless,thecentraltendencies of participants’projectionsforcorePCEinflationfor GDPgrowthincludedthepossibilityof further thisyearandnextyearshiftedupabitto1.3to increasesinenergyandothercommodityprices,a 1.6percentin2011and1.3to1.8percentin2012. tighter-than-anticipatedstanceof fiscalpolicyinthe Thecentraltendencyof thecorePCEinflationpro- UnitedStates,anevenweaker-than-expectedhousing jectionsin2013was1.4to2.0percent,littlechanged sectoradverselyaffectingconsumerspendingandthe fromtheJanuarySEP. healthof financialinstitutions,andpossiblespilloversfromthefiscalstrainsinEurope.Afewpartici- UncertaintyandRisks pantssawtheriskstogrowthastiltedtotheupside; Asizablemajorityof participantscontinuedtojudge itwasnotedthatthecyclicalreboundineconomic thatthelevelsof uncertaintyassociatedwiththeir activitymightprovestrongerthananticipated.The projectionsforeconomicactivityandinflationwere riskssurroundingparticipants’forecastsof the greaterthantheaveragelevelsthathadprevailedover unemploymentrateremainedbroadlybalancedand thepast20years.2Theypointedtoanumberof fac- continuedtoreflectinlargeparttherisksattending torscontributingtotheirassessmentsof theuncer- participants’viewsof thelikelystrengthof the taintythattheyattachedtotheirprojections,includ- expansioninrealactivity. ingstructuraldislocationsinthelabormarket,the outlookforfiscalpolicy,thefuturepathof energy Whereasmostparticipants’assessmentsof therisks andothercommodityprices,theglobaleconomic associatedwiththeiroverallinflationprojectionsover outlook,andtheeffectsof unconventionalmonetary theperiodfrom2011to2013werebroadlybalanced policy. inJanuary,amajorityof participantsnowjudgedthe risksasweightedtotheupside.Althoughpartici- Aboutone-half of theparticipantscontinuedtoview pantsgenerallyindicatedthattheamountof passtheriskstotheiroutlooksforeconomicgrowthas throughof higheroilandothercommodityprices balanced,butanumberof participantsnowjudged intocoreinflationhadsofarremainedlimitedand thatthoseriskshadbecometiltedtothedownside. thatinflationexpectationscontinuedtobestable, Themostfrequentlymentioneddownsiderisksto someparticipantsnotedtheriskthattheextentof pass-throughmightincreaseandthattheresulting riseininflationcouldunmoorlonger-terminflation 2 Table2providesestimatesofforecastuncertaintyforthechange expectations.Afewparticipantsnotedthepossibility inrealGDP,theunemploymentrate,andtotalconsumerprice inflationovertheperiodfrom1991to2010.Attheendofthis thatthecurrenthighlyaccommodativestanceof summary,thebox“ForecastUncertainty”discussesthesources monetarypolicycouldbemaintainedfortoolong, andinterpretationofuncertaintyintheeconomicforecastsand leadingtohigherinflationexpectationsandactual explainstheapproachusedtoassesstheuncertaintyandrisks attendingtheparticipants’projections. inflation.

Minutesof FederalOpenMarketCommitteeMeetings|April 225 DiversityofViews Correspondinginformationaboutthediversityof Figures2.Aand2.Bprovidefurtherdetailsonthe participants’viewsregardingtheinflationoutlookis diversityof participants’viewsregardingthelikely providedinfigures2.Cand2.D.Ingeneral,thedisperoutcomesforrealGDPgrowthandtheunemploy- sionintheparticipants’inflationforecastsforthe mentratein2011,2012,2013,andoverthelonger nextfewyearsrepresenteddifferencesinjudgments run.Thedispersionintheseprojectionsgenerally regardingthefundamentaldeterminantsof inflation, continuedtoreflectdifferencesinparticipants’ includingestimatesof thedegreeof resourceslack assessmentsof manyfactors,includingthelikelyevo- andtheextenttowhichsuchslackinfluencesinflalutionof conditionsincreditandfinancialmarkets, tionoutcomesandexpectations,aswellasestimates thecurrentdegreeof underlyingmomentumineco- of howthestanceof monetarypolicymayinfluence nomicactivity,thetimingandthedegreetowhich inflationexpectations.RegardingoverallPCEinflathelabormarketwillrecoverfromthedislocations tion,thedistributionof participants’projectionsfor associatedwiththedeeprecession,theoutlookfor 2011shiftednoticeablyhigherrelativetothedistribueconomicandfinancialdevelopmentsabroad,and tioninJanuary,reflectingtherecentincreasesin appropriatefuturemonetarypolicyanditseffectson energyandothercommodityprices,butthedispereconomicactivity.Regardingparticipants’projec- sioninforecastswaslittlechanged.Thedistributions tionsforrealGDPgrowth,thedistributionforthis for2012and2013weregenerallylittlechangedand yearshiftednoticeablylowerandwassignificantly remainedfairlywide.RegardingcorePCEinflation, moretightlyconcentratedthanthedistributionin thedistributionof participants’projectionsfor2011 January,withmorethanone-half of participants shiftednoticeablytotheright,butitremainedabout expectingthechangeinrealGDPin2011tobeinthe aswideasinJanuary.Thedistributionsof coreinfla- 3.2to3.3percentinterval.Bycontrast,thedistribu- tionfor2012and2013alsoshiftedsomewhathigher tionsforrealGDPgrowthin2012and2013were butwereotherwiselittlechanged.Althoughthedislittlechanged.Regardingparticipants’projectionsfor tributionsof participants’inflationforecastsfor2011 theunemploymentrate,thedistributionforthisyear through2013continuedtoberelativelywide,thedisshifteddownrelativetothedistributioninJanuary, tributionof projectionsof thelonger-runrateof withaboutone-half of participantsanticipatingthe overallPCEinflationremainedtightlyconcentrated. unemploymentrateinthefinalquarterof 2011tobe Thenarrowrangeillustratesthebroadsimilarityin 8.4to8.5percent;thisshiftlikelyreflectstherecent participants’assessmentsof theapproximatelevelof improvementsinlabormarketconditions.Thedistri- inflationthatisconsistentwiththeFederalReserve’s butionsof theunemploymentratefor2012and2013 dualobjectivesof maximumemploymentandprice werelittlechanged.Thedistributionof participants’ stability. estimatesof thelonger-rununemploymentratewas somewhatmoretightlyconcentratedthaninJanuary, whilethatfortheirestimatesof longer-runGDP growthwasaboutunchanged.

226 98thAnnualReport|2011 Figure2.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2011–13andoverthelongerrun Number of participants 2011 16 April projections January projections 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 2012 16 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 16 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 16 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.

Minutesof FederalOpenMarketCommitteeMeetings|April 227 Figure2.B.Distributionofparticipants’projectionsfortheunemploymentrate,2011–13andoverthelongerrun Number of participants 2011 16 April projections January projections 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- 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 Percent range Number of participants 2012 16 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- 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 Percent range Number of participants 2013 16 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- 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 Percent range Number of participants Longer run 16 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- 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 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

228 98thAnnualReport|2011 Figure2.C.Distributionofparticipants’projectionsforPCEinflation,2011–13andoverthelongerrun Number of participants 2011 16 April projections January projections 14 12 10 8 6 4 2 0.5- 0.7- 0.9- 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 2.9- 3.1- 3.3- 3.5- 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 Percent range Number of participants 2012 16 14 12 10 8 6 4 2 0.5- 0.7- 0.9- 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 2.9- 3.1- 3.3- 3.5- 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 Percent range Number of participants 2013 16 14 12 10 8 6 4 2 0.5- 0.7- 0.9- 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 2.9- 3.1- 3.3- 3.5- 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 Percent range Number of participants Longer run 16 14 12 10 8 6 4 2 0.5- 0.7- 0.9- 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 2.9- 3.1- 3.3- 3.5- 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|April 229 Figure2.D.Distributionofparticipants’projectionsforcorePCEinflation,2011–13 Number of participants 2011 16 April projections January projections 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 2012 16 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 16 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.

230 98thAnnualReport|2011 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers thatexperiencedinthepastandtherisksaroundthe oftheBoardofGovernorsandthepresidentsofthe projectionsarebroadlybalanced,thenumbers FederalReserveBanksinformdiscussionsofmon- reportedintable2wouldimplyaprobabilityofabout etarypolicyamongpolicymakersandcanaidpublic 70percentthatactualGDPwouldexpandwithina understandingofthebasisforpolicyactions.Con- rangeof2.0to4.0percentinthecurrentyear,1.4to siderableuncertaintyattendstheseprojections,how- 4.6percentinthesecondyear,and1.2to4.8percent ever.Theeconomicandstatisticalmodelsandrela- inthethirdyear.Thecorresponding70percentconfitionshipsusedtohelpproduceeconomicforecasts denceintervalsforoverallinflationwouldbe1.2to arenecessarilyimperfectdescriptionsofthereal 2.8percentinthecurrentyear,and1.0to3.0percent world.Andthefuturepathoftheeconomycanbe inthesecondandthirdyears. 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 MonetaryPolicyReportsandthosepreparedbythe broadlybalanced.Thatis,participantsjudgewhether FederalReserveBoard’sstaffinadvanceofmeetings eachvariableismorelikelytobeaboveorbelow oftheFederalOpenMarketCommittee.Theprojec- theirprojectionsofthemostlikelyoutcome.These tionerrorrangesshowninthetableillustratethecon- judgmentsabouttheuncertaintyandtherisks siderableuncertaintyassociatedwitheconomicfore- attendingeachparticipant’sprojectionsaredistinct casts.Forexample,supposeaparticipantprojects fromthediversityofparticipants’viewsaboutthe thatrealgrossdomesticproduct(GDP)andtotal mostlikelyoutcomes.Forecastuncertaintyisconconsumerpriceswillrisesteadilyatannualratesof, cernedwiththerisksassociatedwithaparticular respectively,3percentand2percent.Iftheuncer- projectionratherthanwithdivergencesacrossa taintyattendingthoseprojectionsissimilarto numberofdifferentprojections.

Minutesof FederalOpenMarketCommitteeMeetings|June 231 Meeting Held on June 21–22, 2011 JamesA.Clouse,ThomasA.Connors, StevenB.Kamin,LorettaJ.Mester, DavidReifschneider,HarveyRosenblum, Ajointmeetingof theFederalOpenMarketCom- DanielG.Sullivan,DavidW.Wilcox,andKei-MuYi mitteeandtheBoardof Governorsof theFederal AssociateEconomists ReserveSystemwasheldintheofficesof theBoard of GovernorsinWashington,D.C.,onTuesday, BrianSack June21,2011,at10:30a.m.andcontinuedon Manager,SystemOpenMarketAccount Wednesday,June22,2011,at9:00a.m. JenniferJ.Johnson Secretaryof theBoard,Officeof theSecretary, Present Boardof Governors BenBernanke NellieLiang Chairman Director,Officeof FinancialStabilityPolicyand WilliamC.Dudley Research,Boardof Governors ViceChairman RobertdeV.Frierson ElizabethDuke DeputySecretary,Officeof theSecretary, Boardof Governors CharlesL.Evans WilliamNelson RichardW.Fisher DeputyDirector,Divisionof MonetaryAffairs, NarayanaKocherlakota Boardof Governors CharlesI.Plosser LindaRobertson AssistanttotheBoard,Officeof BoardMembers, SarahBloomRaskin Boardof Governors DanielK.Tarullo CharlesS.Struckmeyer JanetL.Yellen DeputyStaff Director,Officeof theStaff Director, Boardof Governors JeffreyM.Lacker,DennisP.Lockhart, SandraPianalto,andJohnC.Williams SethB.Carpenter AlternateMembersof theFederalOpenMarket SeniorAssociateDirector,Divisionof Monetary Committee Affairs,Boardof Governors JamesBullard,ThomasM.Hoenig,and MichaelFoley EricRosengren SeniorAssociateDirector,Divisionof Banking Presidentsof theFederalReserveBanksof St.Louis, SupervisionandRegulation,Boardof Governors KansasCity,andBoston,respectively LawrenceSlifmanandWilliamWascher WilliamB.English SeniorAssociateDirectors,Divisionof Researchand SecretaryandEconomist Statistics,Boardof Governors DeborahJ.Danker AndrewT.Levin DeputySecretary SeniorAdviser,Officeof BoardMembers, Boardof Governors MatthewM.Luecke AssistantSecretary JoyceK.Zickler VisitingSeniorAdviser,Divisionof Monetary DavidW.Skidmore Affairs,Boardof Governors AssistantSecretary DanielM.CovitzandEricM.Engen MichelleA.Smith AssociateDirectors,Divisionof Researchand AssistantSecretary Statistics,Boardof Governors ScottG.Alvarez TrevorA.Reeve GeneralCounsel AssociateDirector,Divisionof InternationalFinance, DavidJ.Stockton Boardof Governors Economist

232 98thAnnualReport|2011 EgonZakrajšek Developments in Financial Markets and DeputyAssociateDirector,Divisionof Monetary the Federal Reserve’s Balance Sheet Affairs,Boardof Governors Themanagerof theSystemOpenMarketAccount BethAnneWilson (SOMA)reportedondevelopmentsindomesticand AssistantDirector,Divisionof InternationalFinance, foreignfinancialmarketsduringtheperiodsincethe Boardof Governors FederalOpenMarketCommittee(FOMC)meton DavidH.Small April26–27,2011.HealsoreportedonSystemopen ProjectManager,Divisionof MonetaryAffairs, marketoperations,includingthecontinuingreinvest- Boardof Governors mentintolonger-termTreasurysecuritiesof principalpaymentsreceivedontheSOMA’sholdingsof BrahimaCoulibaly agencydebtandagency-guaranteedmortgage- SeniorEconomist,Divisionof InternationalFinance, backedsecurities,aswellastheongoingpurchasesof Boardof Governors additionalTreasurysecuritiesauthorizedatthe November2–3,2010,FOMCmeeting.SinceNovem- LouiseSheiner ber,purchasesbytheOpenMarketDeskof theFed- SeniorEconomist,Divisionof Researchand eralReserveBankof NewYorkhadincreasedthe Statistics,Boardof Governors SOMA’sholdingsbynearlythefull$600billion Jean-PhilippeLaforte1 authorized. Economist,Divisionof ResearchandStatistics, Boardof Governors Inlightof ongoingstrainsinsomeforeignfinancial markets,theCommitteeconsideredaproposalto PenelopeA.Beattie extenditsdollarliquidityswaparrangementswith AssistanttotheSecretary,Officeof theSecretary, foreigncentralbankspastAugust1,2011.Following Boardof Governors theirdiscussion,membersunanimouslyapprovedthe RandallA.Williams followingresolution: RecordsManagementAnalyst,Divisionof Monetary Affairs,Boardof Governors TheFederalOpenMarketCommitteedirectsthe FederalReserveBankof NewYorktoextend Jeff Fuhrer theexistingtemporaryreciprocalcurrency ExecutiveVicePresident,FederalReserveBankof arrangements(“swaparrangements”)forthe Boston SystemOpenMarketAccountwiththeBankof DavidAltig,GlennD.Rudebusch,and Canada,theBankof England,theEuropean MarkE.Schweitzer CentralBank,theBankof Japan,andtheSwiss SeniorVicePresidents,FederalReserveBanksof NationalBank.Theswaparrangementsshall Atlanta,SanFrancisco,andCleveland,respectively nowterminateonAugust1,2012,unlessfurther extendedbytheCommittee. MichaelDotsey,1WilliamGavin, AndreasL.Hornstein,andEdwardS.KnotekII Dynamic Stochastic General Equilibrium VicePresidents,FederalReserveBanksof Models Philadelphia,St.Louis,Richmond,andKansasCity, respectively Astaff presentationprovidedanoverviewof ongoingFederalReserveresearchondynamicstochastic MarcoDelNegro,1JoshuaL.Frost, generalequilibrium(DSGE)models.DSGEmodels DeborahL.Leonard,andJonathanP.McCarthy attempttocapturethedynamicsof theoverall AssistantVicePresidents,FederalReserveBankof economyinawaythatisconsistentbothwiththehis- NewYork toricaldataandwithoptimizingbehaviorby Jeff Campbell1 forward-lookinghouseholdsandfirms.Thepresenta- SeniorEconomist,FederalReserveBankof Chicago tionbeganbydiscussingthegeneralfeaturesof DSGEmodelsandconsideringtheiradvantagesand limitationsrelativetootherapproachesof analyzing macroeconomicdynamics;withregardtothelatter, thepresentationnotedthatwhilethecurrentgenera- 1 Attendedtheportionofthemeetingrelatingtodynamicstochasticgeneralequilibriummodels. tionof DSGEmodelsisstillsomewhatlimitedinthe

Minutesof FederalOpenMarketCommitteeMeetings|June 233 rangeof policyissuesthesemodelscanaddress,fur- beginnormalizingthestanceandconductof montheradvancesinmodelingshouldincreasetheuseful- etarypolicy: nessof DSGEmodelsforforecastingandpolicy • TheCommitteewilldeterminethetimingandpace analysis.Thepresentationthenreviewedsomespeof policynormalizationtopromoteitsstatutory cificfeaturesof DSGEmodelsthatarecurrently mandateof maximumemploymentandprice beingstudiedattheFederalReserveBoardandthe stability. FederalReserveBanksof NewYork,Philadelphia, andChicago.Thisreviewincludedthefourmodels’ • Tobegintheprocessof policynormalization,the characterizationsof theforcesaffectingtheeconomy Committeewilllikelyfirstceasereinvestingsome inrecentyearsandthemodels’currentforecastsfor orallpaymentsof principalonthesecuritiesholdrealeconomicactivity,inflation,andshort-term ingsintheSOMA. interestrates.Indiscussingthestaff presentation, • Atthesametimeorsometimethereafter,theCommeetingparticipantsexpressedtheviewthatDSGE mitteewillmodifyitsforwardguidanceonthepath modelsareausefuladditiontothewiderangeof of thefederalfundsrateandwillinitiatetemporary analyticalapproachestraditionallyusedattheFedreserve-drainingoperationsaimedatsupporting eralReserve,inpartbecausetheyprovideanintertheimplementationof increasesinthefederal nallyconsistentwayof exploringhowthebehaviorof fundsratewhenappropriate. economicagentsmightchangeinresponsetosystematicadjustmentstopolicy.Someparticipantsalso • Wheneconomicconditionswarrant,theCommitexpressedinterestinseeingonaregularbasisprojec- tee’snextstepintheprocessof policynormalizationsof keymacroeconomicvariablesandother tionwillbetobeginraisingitstargetforthefederal productsfromtheDSGEmodelsdevelopedinthe fundsrate,andfromthatpointon,changingthe System.Finally,participantsencouragedfurtherstaff levelorrangeof thefederalfundsratetargetwill worktoimprovethesemodelsby,forexample, betheprimarymeansof adjustingthestanceof expandingtherangeof questionstheycanbeusedto monetarypolicy.Duringthenormalizationprocess, address. adjustmentstotheinterestrateonexcessreserves andtothelevelof reservesinthebankingsystem Exit Strategy Principles willbeusedtobringthefundsratetowardits target. TheCommitteediscussedstrategiesfornormalizing • Salesof agencysecuritiesfromtheSOMAwill thestanceandconductof monetarypolicy,following likelycommencesometimeafterthefirstincrease uponitsdiscussionof thistopicattheAprilmeetinthetargetforthefederalfundsrate.Thetiming ing.ParticipantsstressedthattheCommittee’sdisandpaceof saleswillbecommunicatedtothepubcussionsof thistopicwereundertakenaspartof licinadvance;thatpaceisanticipatedtoberelaprudentplanninganddidnotimplythatamove tivelygradualandsteady,butitcouldbeadjusted towardsuchnormalizationwouldnecessarilybegin upordowninresponsetomaterialchangesinthe sometimesoon.Forconcreteness,theCommittee economicoutlookorfinancialconditions. consideredasetof specificprinciplesthatwould guideitsstrategyof normalizingthestanceandcon- • Oncesalesbegin,thepaceof salesisexpectedtobe ductof monetarypolicy.Participantsdiscussedsev- aimedateliminatingtheSOMA’sholdingsof eralspecificelementsof theprinciples,includinghow agencysecuritiesoveraperiodof threetofive theyshouldcharacterizethemonetarypolicyframe- years,therebyminimizingtheextenttowhichthe workthattheCommitteewouldadoptafterthecon- SOMAportfoliomightaffecttheallocationof ductof policyreturnedtonormalandwhetherthe creditacrosssectorsof theeconomy.Salesatthis principlesshouldencompassthepossibletiming pacewouldbeexpectedtonormalizethesizeof the betweenthenormalizationsteps.Attheconclusionof SOMAsecuritiesportfoliooveraperiodof twoto thediscussion,allbutoneof theparticipantsagreed threeyears.Inparticular,thesizeof thesecurities onthefollowingkeyelementsof thestrategythat portfolioandtheassociatedquantityof bank theyexpecttofollowwhenitbecomesappropriateto reservesareexpectedtobereducedtothesmallest

234 98thAnnualReport|2011 levelsthatwouldbeconsistentwiththeefficient excludingpurchasesatmotorvehiclesandpartsoutimplementationof monetarypolicy. lets,increasedsomewhatinMay,butsalesof new lightmotorvehiclesdeclinedmarkedly.Laborincome • TheCommitteeispreparedtomakeadjustmentsto rosemoderately,asaggregatehoursworkedtrended itsexitstrategyif necessaryinlightof economic up,buttotalrealdisposableincomeremainedflatin andfinancialdevelopments. MarchandApril,asincreasesinconsumerpricesoffsetgainsinnominalincome.Inaddition,consumer Staff Review of the Economic Situation sentimentstayedrelativelylowthroughearlyJune. TheinformationreviewedattheJune21–22meeting indicatedthatthepaceof theeconomicrecovery Activityinthehousingmarketremaineddepressed, slowedinrecentmonthsandthatconditionsinthe asbothweakdemandandthesizableinventoryof labormarkethadsoftened.Measuresof inflation foreclosedordistressedpropertiescontinuedtohold backnewconstruction.Startsandpermitsof new pickedupthisyear,reflectinginparthigherpricesfor single-familyhomeswereessentiallyunchangedin somecommoditiesandimportedgoods.Longer-run AprilandMay,andtheystayedneartheverylowlevinflationexpectations,however,remainedstable. elsseensincethemiddleof lastyear.Salesof new andexistinghomesremainedatsubduedlevelsin Theexpansionof privatenonfarmpayrollemployrecentmonths,whilemeasuresof homepricesfell mentinMaywasmarkedlybelowtheaveragepaceof further. jobgainsinthepreviousmonthsof thisyear.Initial claimsforunemploymentinsurancerose,onnet, betweenthefirsthalf of Aprilandthefirsthalf of Theavailableindicatorssuggestedthatrealbusiness June.TheunemploymentratemovedupinApriland investmentinequipmentandsoftwarewasrisinga thenrosefurtherto9.1percentinMay,whilethe bitmoreslowlyinthesecondquarterthanthesolid laborforceparticipationrateremainedunchanged. paceseeninthefirstquarter.Nominalordersand Bothlong-durationunemploymentandtheshareof shipmentsof nondefensecapitalgoodsdeclinedin workersemployedparttimeforeconomicreasons April.Businesspurchasesof lightmotorvehicles continuedtobeelevated. edgedupinAprilbutdroppedinMay,whilespendingformediumandheavytruckscontinuedto Totalindustrialproductionexpandedonlyabitdur- increaseinrecentmonths.Surveymeasuresof busiingAprilandMayafterrisingatasolidpaceinthe nessconditionsandsentimentweakenedduringthe firstquarter.Shortagesof specializedcomponents intermeetingperiod.Businessexpendituresforoffice importedfromJapancontributedtoadeclineinthe andcommercialbuildingsremaineddepressedby outputof motorvehiclesandparts.Manufacturing elevatedvacancyrates,lowpricesforcommercialreal productionoutsideof themotorvehiclessector estate,andtightcreditconditionsforconstruction increasedmoderately,onbalance,duringthepasttwo loans.Incontrast,outlaysfordrillingandmining months.Themanufacturingcapacityutilizationrate structurescontinuedtobeliftedbyhighenergy remainedclosetoitsfirst-quarterlevel,butitwasstill prices. wellbelowitslonger-runaverage.Forward-looking indicatorsof industrialactivity,suchasthenew Realnonfarminventoryinvestmentrosemoderately ordersdiffusionindexesinthenationalandregional inthefirstquarter,butdataforAprilsuggestedthat manufacturingsurveys,weakenednoticeablyduring thepaceof inventoryaccumulationhadslowed. theintermeetingperiodtolevelsconsistentwithonly Book-valueinventory-to-salesratiosinAprilwere tepidgainsinfactoryoutputincomingmonths. similartotheirpre-recessionnorms,andsurveydata However,motorvehicleassemblieswerescheduledto alsosuggestedthatinventorypositionsgenerally risenotablyinthethirdquarterfromtheirlevelsin remainedinacomfortablerange. recentmonths,asbottlenecksinpartssupplieswere anticipatedtoease. Theavailabledataongovernmentspendingindicated thatrealfederalpurchasesincreasedinrecent Growthinconsumerspendingdeclinedinrecent months,ledbyareboundinoutlaysfordefensein monthsfromthealreadymodestpaceinthefirst AprilandMayfromunusuallylowlevelsinthefirst quarter.Totalrealpersonalconsumptionexpendi- quarter.Incontrast,realexpendituresbystateand turesonlyedgedupinApril.Nominalretailsales, localgovernmentsappearedtohavedeclinedfurther,

Minutesof FederalOpenMarketCommitteeMeetings|June 235 asoutlaysforconstructionprojectsfellinMarchand Globaleconomicactivityappearedtohaveincreased April,andstateandlocalemploymentcontinuedto moreslowlyinthesecondquarterthaninthefirst contractinAprilandMay. quarter.Therateof growthintheemergingmarket economiessteppeddownfromitsrapidpaceinthe TheU.S.internationaltradedeficitwidenedslightly firstquarter,althoughitremainedgenerallysolid. inMarchandthennarrowedinApriltoalevelbelow TheJapaneseeconomycontractedsharplyfollowing itsaverageinthefirstquarter.Exportsrosestrongly theearthquakeinMarch,andtheassociatedsupply inbothmonths,withincreaseswidespreadacross chaindisruptionsweighedontheeconomiesof many majorcategoriesinMarch,whilethegainsinApril of Japan’stradingpartners.Thepaceof economic wereconcentratedinindustrialsuppliesandcapital growthintheeuroarearemaineduneven,withGergoods.ImportsgrewrobustlyinMarch,buttheyfell manyandFrancepostingmoderategainsinecoslightlyinApril,asthedropinautomotiveimports nomicactivity,whiletheperipheralEuropeaneconofromJapantogetherwiththedeclineinimportsof miescontinuedtostruggle.Recentdeclinesinthe petroleumproductsmorethanoffsetincreasesin pricesof oilandothercommoditiescontributedto otherimportedproducts. someeasingof inflationarypressuresabroad. Headlineconsumerpriceinflation,whichhadrisen Staff Review of the Financial Situation inthefirstquarter,edgeddownabitinApriland May,asthepricesof consumerfoodandenergy Investorsappearedtoadoptamorecautiousattitude deceleratedfromthepaceseeninpreviousmonths. towardrisk,particularlylaterintheintermeeting Morerecently,surveydatathroughthemiddleof period.Theshiftininvestors’sentimentlikely Junepointedtodeclinesinretailgasolineprices,and reflectedtheweaktoneof incomingeconomicdatain pricesof foodcommoditiesappearedtohave theUnitedStatesalongwithconcernsabouttheoutdecreasedsomewhat.Excludingfoodandenergy, lookforglobaleconomicgrowthandaboutpotential coreconsumerpriceinflationpickedupinApriland spilloversfromapossiblefurtherdeteriorationof the May,pushingthe12-monthchangeinthecorecon- situationinperipheralEurope. sumerpriceindexthroughMayaboveitslevelof a yearearlier.Upwardpressuresoncoreconsumer ThedecisionsbytheFOMCatitsAprilmeetingto pricesappearedtoreflecttheelevatedpricesof com- continueitsassetpurchaseprogramandtomaintain moditiesandotherimports,alongwithnotable the0to¼percenttargetrangeforthefederalfunds increasesinmotorvehiclepriceslikelyarisingfrom rateweregenerallyinlinewithmarketexpectations. theeffectsof recentsupplychaindisruptionsandthe Theaccompanyingstatementandsubsequentpress resultingextremelylowlevelof automobileinvento- briefingbytheChairmanpromptedamodestdecline ries.However,near-terminflationexpectationsfrom innominalyields,asmarketparticipantsreportedly theThomsonReuters/Universityof MichiganSur- perceivedasomewhatlessoptimistictoneinthe veysof ConsumersmoveddownalittleinMayand Committee’seconomicoutlook.Overtheremainder earlyJunefromthehighlevelseeninApril,and of theintermeetingperiod,theexpectedpathforthe longer-terminflationexpectationsremainedwithin federalfundsrate,alongwithyieldsonnominal therangethathasgenerallyprevailedoverthepre- Treasurysecurities,moveddownappreciablyfurther, cedingfewyears. asthebulkof theincomingeconomicdatawasmore downbeatthanmarketparticipantshadapparently Availablemeasuresof laborcompensationshowed anticipated.Consistentwiththeweaker-thanthatlaborcostpressureswerestillsubdued,aswage expectedeconomicdataandtherecentdeclineinthe increasescontinuedtoberestrainedbythelarge pricesof oilandothercommodities,measuresof amountof slackinthelabormarket.Inthefirst inflationcompensationoverthenext5yearsand5to quarter,unitlaborcostsonlyedgedup,asthemodest 10yearsaheadbasedonnominalandinflationriseinhourlycompensationinthenonfarmbusiness protectedTreasurysecuritiesdecreasedconsiderably sectorwasmostlyoffsetbyfurthergainsinproduc- overtheintermeetingperiod. tivity.Morerecently,averagehourlyearningsforall employeesroseinAprilandMay,buttheaveragerate Marketquotesdidnotsuggestexpectationsof sigof increaseoverthepreceding12monthsremained nificantmovementsinnominalTreasuryyieldsfolquitelow. lowingtheanticipatedcompletionof theassetpur-

236 98thAnnualReport|2011 chaseprogrambytheFederalReserveattheendof Commercialmortgagemarketscontinuedtoshow June.Althoughdiscussionsaboutthefederaldebt tentativesignsof stabilization.Inrecentmonths, ceilingattractedattentioninfinancialmarkets,judg- delinquencyratesforcommercialrealestateloans ingfromTreasuryyieldsandotherassetprices,inves- edgeddownfromtheirpreviouspeaks.However, torsseemedtoanticipatethatthedebtceilingwould commercialrealestatemarketsremainedweak.Propbeincreasedintimetoavoidanysignificantmarket ertysalesweretepid,andpricesremainedat disruptions. depressedlevels.Issuanceof commercialmortgagebackedsecuritiesslowedsomewhatinthesecond Yieldsoncorporatebondssteppeddownmodestly, quarter. onnet,overtheintermeetingperiod,butbylessthan thedeclineinyieldsoncomparable-maturityTreas- Conditionsinresidentialmortgagemarketswerelittle urysecurities,leavingcreditriskspreadsalittle changedoverallbutremainedstrained.Ratesonconwider.Inthesecondarymarketforsyndicatedloans, formingfixed-rateresidentialmortgagesdeclined conditionswerelittlechanged,withaveragebid aboutinlinewith10-yearTreasuryyieldsoverthe pricesforleveragedloansholdingsteady. intermeetingperiod.Mortgagerefinancingactivity pickedup,onnet,overtheintermeetingperiodbut BroadU.S.stockpriceindexesdeclined,onnet,over wasstillrelativelysubdued.Outstandingresidential theintermeetingperiod,apparentlyinresponseto mortgagedebtcontractedfurtherinthefirstquarter. thedownbeateconomicdata.Stockpricesof finan- Ratesof seriousdelinquencyforsubprimeandprime cialfirmsunderperformedthebroadermarket, mortgageswerelittlechangedatelevatedlevels.The reflectingtheweakereconomicoutlook,potential rateof newdelinquenciesonprimemortgagesticked creditratingdowngrades,andheightenedconcerns upinAprilbutremainedwellbelowthelevelof afew abouttheanticipatedcapitalsurchargeforsystemi- monthsago.InMarchandApril,delinquencieson callyimportantfinancialinstitutions.Option- mortgagesbackedbytheFederalHousingAdminisadjustedvolatilityontheS&P500indexrosesome- trationdeclinednoticeably. whatonnet. TheFederalReservecontinueditscompetitivesales IntheJune2011SeniorCreditOfficerOpinionSur- of non-agencyresidentialmortgage-backedsecurities veyonDealerFinancingTerms,dealerspointedtoa heldbyMaidenLaneIILLCovertheintermeeting continuedgradualeasingoverthepreviousthree period.Althoughtheinitialofferingsof thesesecurimonthsincredittermsapplicabletomajorclassesof tieswerewellreceived,investordemandatthemost counterpartiesacrossalltypesof transactionscov- recentsaleswasnotasstrong,adevelopmentconsiseredinthesurvey.Dealersalsoreportedthatthe tentwiththedeclinesinthepricesof non-agency demandforfundinghadincreasedoverthesame residentialmortgage-backedsecuritiesovertheinterperiodforabroadrangeof securities,withtheexcep- meetingperiod. tionof equities.Morerecently,however,againsta backdropof disappointingeconomicdata,height- Conditionsinconsumercreditmarketscontinuedto eneduncertaintyaboutthesituationinEurope,and, improve.Growthintotalconsumercreditpickedup possibly,concernsabouttheU.S.federaldebtceiling, inApril,asthegaininnonrevolvingcreditmorethan marketparticipantsreportedageneralpullbackfrom offsetafurthercontractioninrevolvingcredit.Delinrisk-takingandadeclineinliquidityinarangeof quencyratesforconsumerdebtedgeddownfurther financialmarkets. inrecentmonths,withdelinquencyratesonsome categoriesmovingbacktopre-crisislevels.Issuance Netdebtfinancingbynonfinancialcorporationswas of consumerasset-backedsecuritiesremainedrobust stronginAprilandMay.Grossissuanceof both overtheintermeetingperiod. investment-andspeculative-gradebondsbynonfinancialcorporationshitarecordhighinMaybefore Bankcreditwasflat,onbalance,inAprilandMay. slowingsomewhatinJune,andoutstandingamounts Coreloans—thesumof C&I,realestate,andconof commercialandindustrial(C&I)loansandnonfi- sumerloans—continuedtocontractmodestly,pulled nancialcommercialpaperincreased.Grosspublic downbytheongoingdeclineincommercialandresiequityissuancebynonfinancialfirmsmaintaineda dentialrealestateloans.Incontrast,C&Iloans solidpaceovertheintermeetingperiod,andmost increasedatabriskpaceinAprilandMay.Themost indicatorsof businesscreditqualityimproved recentSurveyof Termsof BusinessLendingconfurther. ductedinMayindicatedthatbankshadeasedsome

Minutesof FederalOpenMarketCommitteeMeetings|June 237 lendingtermsonC&Iloans.Thesurveyresponses overthemediumterm.Nevertheless,thestaff still alsosuggestedthattheaveragesizeof loancommit- projectedrealGDPtoincreaseatamoderateratein mentsandtheiraveragematurityhadtrendedupin thesecondhalf of 2011andin2012,withtheongorecentquarters. ingrecoveryinactivityreceivingcontinuedsupport fromaccommodativemonetarypolicy,further M2expandedatarobustpaceinAprilandMay.Liq- increasesincreditavailability,andanticipated uiddeposits,thelargestcomponentof M2,main- improvementsinhouseholdandbusinessconfidence. tainedasolidrateof expansion,likelyreflectingthe Theaveragepaceof realGDPgrowthwasexpected verylowopportunitycostsof holdingsuchdeposits. tobesufficienttobringtheunemploymentratedown Currencycontinuedtoadvance,supportedbystrong veryslowlyovertheprojectionperiod,andthejobdemandforU.S.banknotesfromabroad. lessratewasanticipatedtoremainelevatedattheend of 2012. Thebroadnominalindexof theU.S.dollarfluctuatedovertheintermeetingperiodinresponseto Althoughincreasesinconsumerfoodandenergy changesininvestors’assessmentof theoutlookfor pricesslowedabitinrecentmonths,thecontinued theU.S.economyandthesituationintheperipheral step-upincoreconsumerpriceinflationledthestaff Europeaneconomies.SincetheAprilFOMCmeet- toraiseslightlyitsprojectionforcoreinflationover ing,thedollarrosemodestly,onnet,afterdepreciat- thecomingquarters.However,headlineinflationwas ingovertheprecedingseveralmonths.Headline stillexpectedtorecedeoverthemediumterm,as equityindexesabroadandforeignbenchmarksover- increasesinfoodandenergypricesandinnon-oil eignyieldsdeclinedovertheintermeetingperiodin importpriceswereanticipatedtoeasefurther.Asin apparentresponsetosignsof aslowdowninthepace previousforecasts,thestaff continuedtoprojectthat of globaleconomicactivityandreduceddemandfor coreconsumerpriceinflationwouldremainrelatively riskyassets.Concernsaboutthepossibilityof a subduedovertheprojectionperiod,reflectingboth restructuringof Greekgovernmentdebtdrove stablelong-terminflationexpectationsandpersistent spreadsof yieldsonthesovereigndebtsof Greece, slackinlaborandproductmarkets. Ireland,andPortugaltorecordhighsrelativeto yieldsonGermanbunds. Participants’ Views on Current Conditions and the Economic Outlook Intheadvancedforeigneconomies,mostcentral bankslefttheirpolicyratesunchanged,andthe InconjunctionwiththisFOMCmeeting,allmeeting anticipatedpaceof monetarypolicytighteningindi- participants—thefivemembersof theBoardof catedbymoneymarketfuturesquoteswaspared Governorsandthepresidentsof the12Federal back.However,centralbanksinseveralemerging ReserveBanks—providedprojectionsof output marketeconomiescontinuedtotightenpolicy,and growth,theunemploymentrate,andinflationfor themonetaryauthoritiesinChinaincreasedrequired eachyearfrom2011through2013andoverthelonreserveratiosfurther. gerrun.Longer-runprojectionsrepresenteachparticipant’sassessmentof theratetowhicheachvari- Staff Economic Outlook ablewouldbeexpectedtoconverge,overtime,under appropriatemonetarypolicyandintheabsenceof Withtherecentdataonspending,income,produc- furthershockstotheeconomy.Participants’forecasts tion,andlabormarketconditionsmostlyweaker aredescribedintheSummaryof EconomicProjecthanthestaff hadanticipatedatthetimeof theApril tions,whichisattachedasanaddendumtothese FOMCmeeting,thenear-termprojectionfortherate minutes. of increaseinrealgrossdomesticproduct(GDP)was reviseddown.Theeffectsof thedisasterinJapanand Intheirdiscussionof theeconomicsituationand of highercommoditypricesontherateof increasein outlook,meetingparticipantsagreedthattheecorealconsumerspendingwereexpectedtoholddown nomicinformationreceivedduringtheintermeeting U.S.realGDPgrowthinthenearterm,butthose periodindicatedthattheeconomicrecoverywasconeffectswereanticipatedtobetransitory.However,the tinuingatamoderatepace,thoughsomewhatmore staff alsoreadtheincomingeconomicdataassug- slowlythantheyhadanticipatedatthetimeof the gestingthattheunderlyingpaceof therecoverywas Aprilmeeting.Participantsnotedseveraltransitory softerthantheyhadpreviouslyanticipated,andthey factorsthatwererestraininggrowth,includingthe markeddowntheiroutlookforeconomicgrowth globalsupplychaindisruptionsinthewakeof the

238 98thAnnualReport|2011 Japaneseearthquake,theunusuallysevereweatherin comingmonths,somealsonotedthatindicatorsof somepartsof theUnitedStates,adropindefense currentandplannedbusinessinvestmentinequipspending,andtheeffectsof increasesinoilandother mentandsoftwarehadweakenedsomewhat,andsurcommoditypricesthisyearonhouseholdpurchasing veysshowedsomedeteriorationinbusinesssentipowerandspending.Participantsexpectedthatthe ment.Businesscontactsinsomeregionsreported expansionwouldgainstrengthastheinfluenceof thattheywerereducingcapitalbudgetsinresponseto thesetemporaryfactorswaned. thelesscertaineconomicoutlook,butinotherparts of thecountry,contactsnotedthatbusinesssenti- Nonetheless,mostparticipantsjudgedthatthepace mentremainedonafirmfooting,supportedinpart of theeconomicrecoverywaslikelytobesomewhat bystrongexportdemand.Comparedwiththerelaslowerovercomingquartersthantheyhadprojected tivelyrobustoutlookforthebusinesssector,meeting inApril.Thisjudgmentreflectedthepersistentweak- participantsnotedthatthehousingsector,including nessinthehousingmarket,theongoingeffortsby residentialconstructionandhomesales,remained somehouseholdstoreducedebtburdens,therecent depressed.Despiteeffortsaimedatmitigation,foresluggishgrowthof incomeandconsumption,thefis- closurescontinuedtoaddtothealreadyverylarge calcontractionatalllevelsof government,andthe inventoryof vacanthomes,puttingdownwardpreseffectsof uncertaintyregardingtheeconomicout- sureonhomepricesandhousingconstruction. lookandfuturetaxandregulatorypoliciesonthe willingnessof firmstohireandinvest.Moreover,the Meetingparticipantsgenerallynotedthatthemost recoveryremainedsubjecttosomedownsiderisks, recentdataonemploymenthadbeendisappointing, suchasthepossibilityof amoreextendedperiodof andnewclaimsforunemploymentinsurance weakactivityanddecliningpricesinthehousingsec- remainedelevated.Therecentdeteriorationinlabor tor,thechanceof alarger-than-expectednear-term marketconditionswasaparticularconcernfor fiscaltightening,andpotentialfinancialandeco- FOMCparticipantsbecausetheprospectsforjob nomicspilloversif thesituationinperipheralEurope growthwereseenasanimportantsourceof uncerweretodeterioratefurther.Participantsstillpro- taintyintheeconomicoutlook,particularlyinthe jectedthattheunemploymentratewoulddecline outlookforconsumerspending.Severalparticipants graduallytowardlevelstheysawasconsistentwith reportedfeedbackfrombusinesscontactswhowere theCommittee’sdualmandate,butatamoregradual delayinghiringuntiltheeconomicandregulatory pacethantheyhadforecastinApril.Whilehigher outlookbecamemorecertainandwhoindicatedthat pricesforenergyandothercommoditieshadboosted theyexpectedtomeetanynear-termincreaseinthe inflationthisyear,withcommoditypricesexpectedto demandfortheirproductswithoutboostingemploychangelittlegoingforwardandlonger-terminflation ment;theseparticipantsnotedtheriskthatsuchcauexpectationsstable,mostparticipantsanticipated tiousattitudestowardhiringcouldslowthepaceat thatinflationwouldsubsidetolevelsatorbelow whichtheunemploymentratenormalized.Wage thoseconsistentwiththeCommittee’sdualmandate. gainsweregenerallyreportedtobesubdued, althoughwagesforafewskilledjobcategoriesin Activityinthebusinesssectorappearedtohave whichworkerswereinshortsupplyweresaidtobe slowedsomewhatovertheintermeetingperiod. increasingrelativelymorerapidly. Althoughtheeffectsof theJapanesedisasteronU.S. motorvehicleproductionaccountedformuchof the Changesinfinancialmarketconditionssincethe decelerationinindustrialproductionsinceMarch, Aprilmeetingsuggestedthatinvestorshadbecome themostrecentreadingsfromvariousregionalmanu- moreconcernedaboutrisk.Equitymarketshadseen facturingsurveyssuggestedaslowinginthepaceof abroadselloff,andriskspreadsformanycorporate manufacturingactivitymorebroadly.However,busi- borrowershadwidenednoticeably.Largebusinesses nesscontactsinsomesectors—mostnotablyenergy thathaveaccesstocapitalmarketscontinuedtoenjoy andhightech—reportedthatactivityandbusiness readyaccesstocredit—includingsyndicated sentimenthadstrengthenedfurtherinrecentmonths. loans—onrelativelyattractiveterms;however,credit Businessinvestmentinequipmentandsoftwaregen- conditionsremainedtightforsmaller,bankerallyremainedrobust,butgrowthinnewordersfor dependentfirms.Bankersagainreportedgradual nondefensecapitalgoods—thoughvolatilefrom improvementsincreditqualityandgenerallyweak monthtomonth—appearedtohaveslowed.While loandemand.Inidentifyingpossibleriskstofinan- FOMCparticipantsexpectedareboundininvest- cialstability,afewparticipantsexpressedconcern mentinmotorvehiclestoboostcapitaloutlaysin thatcreditconditionsinsomesectors—mostnotably

Minutesof FederalOpenMarketCommitteeMeetings|June 239 theagriculturesector—mighthaveeasedtoomuch Mostparticipantsexpectedthatmuchof therisein amidsignsthatinvestorsinthesemarketswere headlineinflationthisyearwouldprovetransitory aggressivelytakingonmoreleverageandriskin andthatinflationoverthemediumtermwouldbe ordertoobtainhigherreturns.Meetingparticipants subduedaslongascommoditypricesdidnotconalsonotedthatanescalationof thefiscaldifficulties tinuetoriserapidlyandlonger-terminflationexpecinGreeceandspreadingconcernsaboutother tationsremainedstable.Nevertheless,anumberof peripheralEuropeancountriescouldcausesignifi- participantsjudgedtheriskstotheoutlookforinflacantfinancialstrainsintheUnitedStates.Itwas tionastiltedtotheupside.Moreover,afewparticipointedoutthatsomeU.S.moneymarketmutual pantssawacontinuationof thecurrentstanceof fundshavesignificantexposurestofinancialinstitu- monetarypolicyasposingsomeupsiderisktoinflationsfromcoreEuropeancountries,which,inturn, tionexpectationsandactualinflationovertime. havesubstantialexposurestoGreeksovereigndebt. However,otherparticipantsobservedthatmeasures Participantswerealsoconcernedaboutthepossible of longer-terminflationcompensationderivedfrom effectonfinancialmarketsof afailuretoraisethe financialinstrumentshadremainedstableof late, statutoryfederaldebtceilinginatimelymanner. andthatsurvey-basedmeasuresof longer-terminfla- Whileadmittingthatitwasdifficulttoknowwhat tionexpectationsalsohadnotchangedappreciably, thepreciseeffectsof suchadevelopmentwouldbe, onnet,inrecentmonths.Theseparticipantsnoted participantsemphasizedthatevenashortdelayin thatlaborcostswererisingonlyslowly,andthatperthepaymentof principalorinterestontheTreasury sistentslackinlaborandproductmarketswould Department’sdebtobligationswouldlikelycause likelylimitupwardpressuresonpricesincoming severemarketdisruptionsandcouldalsohavealast- quarters.ParticipantsagreedthatitwouldbeimporingeffectonU.S.borrowingcosts. tanttopaycloseattentiontotheevolutionof both inflationandinflationexpectations.Afewpartici- Participantsnotedseveralfactorsthathadcontrib- pantsnotedthattheadoptionbytheCommitteeof utedtotheincreaseininflationthisyear.Therun-up anexplicitnumericalinflationobjectivecouldhelp inenergyprices,aswellasanincreaseinpricesof keeplonger-terminflationexpectationswell othercommoditiesandimportedgoods,hadboosted anchored.Anotherparticipant,however,expressed bothheadlineandcoreinflation.Atsametime, concernthattheadoptionof suchanobjectivecould, extremelylowmotorvehicleinventoriesresulting ineffect,altertherelativeimportanceof thetwo fromglobalsupplydisruptionsinthewakeof the componentsof theCommittee’sdualmandate. Japaneseearthquake—bycontributingtohigher motorvehicleprices—hadsignificantlyraisedinfla- Participantsalsodiscussedthemedium-termoutlook tion,althoughparticipantsanticipatedthatthese formonetarypolicy.Someparticipantsnotedthatif temporarypressureswouldlessenasmotorvehicle economicgrowthremainedtooslowtomakesatisinventorieswererebuilt.Participantsalsoobserved factoryprogresstowardreducingtheunemployment thatcrudeoilpricesfellovertheintermeetingperiod rateandif inflationreturnedtorelativelylowlevels andothercommoditypricesalsomoderated,devel- aftertheeffectsof recenttransitoryshocksdissiopmentsthatwerelikelytodampheadlineinflation pated,itwouldbeappropriatetoprovideadditional attheconsumerlevelgoingforward.However,a monetarypolicyaccommodation.Others,however, numberof participantspointedoutthattherecent sawtherecentconfigurationof slowergrowthand fasterpaceof priceincreaseswaswidespreadacross higherinflationassuggestingthattheremightbeless manycategoriesof spendingandwasevidentin slackinlaborandproductmarketsthanhadbeen inflationmeasuressuchastrimmedmeansormedi- thought.Severalparticipantsobservedthatthenecesans,whichexcludethemostextremepricemove- sityof reallocatinglaboracrosssectorsastherecovmentsineachperiod.Thediscussionof coreinfla- eryproceeds,aswellasthelossof skillscausedby tionandsimilarindicatorsreflectedtheview highlevelsof long-termunemploymentandpermaexpressedbysomeparticipantsthatsuchmeasures nentseparations,mayhavetemporarilyreducedthe areusefulforforecastingthepathof inflationover economy’slevelof potentialoutput.Inthatcase,the themediumrun.Inaddition,reportsfrombusiness withdrawalof monetaryaccommodationmayneed contactsindicatedthatsomealreadyhadpassedon, tobeginsoonerthancurrentlyanticipatedinfinanorwereintendingtotrytopasson,atleastaportion cialmarkets.Afewparticipantsexpresseduncerof theirhighercoststocustomersinordertomain- taintyabouttheefficacyof monetarypolicyincurtainprofitmargins.

240 98thAnnualReport|2011 rentcircumstancesbutdisagreedontheimplications mentandinflationrelativetothelevelsof thosevariforfuturepolicy. ablesthatmembersseeasconsistentwiththeCommittee’sdualmandate.Inthediscussionof inflation Committee Policy Action inthestatement,membersdecidedtoreferenceinflation—meaningoverallinflation—ratherthanunderly- Inthediscussionof monetarypolicyfortheperiod inginflationorinflationtrends,inordertobeclear ahead,membersagreedthattheCommitteeshould thattheCommittee’sobjectiveisthelevelof overall completeits$600billionassetpurchaseprogramat inflationinthemediumterm.TheCommitteealso theendof themonthandthatnochangestothetar- decidedtoreiteratethateconomicconditionswere getrangeforthefederalfundsratewerewarrantedat likelytowarrantexceptionallylowlevelsforthefedthismeeting.Theinformationreceivedovertheinter- eralfundsrateforanextendedperiod;inaddition, meetingperiodindicatedthattheeconomicrecovery theCommitteenotedthatitwouldreviewregularly wascontinuingatamoderatepace,thoughsomewhat thesizeandcompositionof itssecuritiesholdings, moreslowlythantheCommitteehadexpected,and andthatitispreparedtoadjustthoseholdingsas thatthelabormarketwasweakerthananticipated. appropriate. Inflationhadincreasedinrecentmonthsasaresult of higherpricesforsomecommodities,aswellas Attheconclusionof thediscussion,theCommittee supplychaindisruptionsrelatedtothetragicevents votedtoauthorizeanddirecttheFederalReserve inJapan.Nonetheless,memberssawthepaceof the Bankof NewYork,untilitwasinstructedotherwise, economicexpansionaspickingupoverthecoming toexecutetransactionsintheSystemAccountin quartersandtheunemploymentrateresumingits accordancewiththefollowingdomesticpolicy gradualdeclinetowardlevelsconsistentwiththe directive: Committee’sdualmandate.Moreover,withlongerterminflationexpectationsstable,membersexpected “TheFederalOpenMarketCommitteeseeks thatinflationwouldsubsidetolevelsatorbelow monetaryandfinancialconditionsthatwillfosthoseconsistentwiththeCommittee’sdualmandate terpricestabilityandpromotesustainable astheeffectsof pastenergyandothercommodity growthinoutput.Tofurtheritslong-runobjecpriceincreasesdissipate.However,manymembers tives,theCommitteeseeksconditionsinreserve sawtheoutlookforbothemploymentandinflation marketsconsistentwithfederalfundstradingin asunusuallyuncertain.Againstthisbackdrop,mem- arangefrom0to¼percent.TheCommittee bersagreedthatitwasappropriatetomaintainthe directstheDesktocompletepurchasesof Committee’scurrentpolicystanceandaccumulate $600billionof longer-termTreasurysecurities furtherinformationregardingtheoutlookforgrowth bytheendof thismonth.TheCommitteealso andinflationbeforedecidingonthenextpolicystep. directstheDesktomaintainitsexistingpolicy Ontheonehand,afewmembersnotedthat,depend- of reinvestingprincipalpaymentsonalldomesingonhoweconomicconditionsevolve,theCommit- ticsecuritiesintheSystemOpenMarket teemighthavetoconsiderprovidingadditionalmon- AccountinTreasurysecuritiesinordertomainetarypolicystimulus,especiallyif economicgrowth tainthetotalfacevalueof domesticsecuritiesat remainedtooslowtomeaningfullyreducetheunem- approximately$2.6trillion.TheSystemOpen ploymentrateinthemediumrun.Ontheotherhand, MarketAccountManagerandtheSecretarywill afewmembersviewedtheincreaseininflationrisks keeptheCommitteeinformedof ongoingdevelassuggestingthateconomicconditionsmightwell opmentsregardingtheSystem’sbalancesheet evolveinawaythatwouldwarranttheCommittee thatcouldaffecttheattainmentovertimeof the takingstepstobeginremovingpolicyaccommoda- Committee’sobjectivesof maximumemploytionsoonerthancurrentlyanticipated. mentandpricestability.” Inthestatementtobereleasedfollowingthemeeting, Thevoteencompassedapprovalof thestatement allmembersagreedthatitwasappropriateto belowtobereleasedat12:30p.m.: acknowledgethattherecoveryhadbeenslowerthan theCommitteehadexpectedatthetimeof theApril “InformationreceivedsincetheFederalOpen meetingandtonotethefactorsthatwerecurrently MarketCommitteemetinAprilindicatesthat weighingoneconomicgrowthandboostinginflation. theeconomicrecoveryiscontinuingatamoder- TheCommitteeagreedthatthestatementshould atepace,thoughsomewhatmoreslowlythanthe brieflydescribeitscurrentprojectionsforunemploy- Committeehadexpected.Also,recentlabor

Minutesof FederalOpenMarketCommitteeMeetings|June 241 marketindicatorshavebeenweakerthanantici- TheCommitteewillmonitortheeconomicoutpated.Theslowerpaceof therecoveryreflectsin lookandfinancialdevelopmentsandwillactas partfactorsthatarelikelytobetemporary, neededtobestfostermaximumemploymentand includingthedampingeffectof higherfoodand pricestability.” energypricesonconsumerpurchasingpower andspendingaswellassupplychaindisruptions Votingforthisaction:BenBernanke,WilliamC. associatedwiththetragiceventsinJapan. Dudley,ElizabethDuke,CharlesL.Evans,Richard Householdspendingandbusinessinvestmentin W.Fisher,NarayanaKocherlakota,CharlesI. equipmentandsoftwarecontinuetoexpand. Plosser,SarahBloomRaskin,DanielK.Tarullo,and However,investmentinnonresidentialstructures JanetL.Yellen. isstillweak,andthehousingsectorcontinuesto bedepressed.Inflationhaspickedupinrecent Votingagainstthisaction:None. months,mainlyreflectinghigherpricesforsome commoditiesandimportedgoods,aswellasthe External Communications recentsupplychaindisruptions.However, longer-terminflationexpectationshave Infollow-uptodiscussionsattheJanuarymeeting, remainedstable. theCommitteeturnedtoconsiderationof policies aimedatsupportingeffectivecommunicationwith Consistentwithitsstatutorymandate,theCom- thepublicregardingtheoutlookfortheeconomy mitteeseekstofostermaximumemployment andmonetarypolicy.Thesubcommitteeoncommuandpricestability.Theunemploymentrate nication,chairedbyGovernorYellenandcomposed remainselevated;however,theCommittee of GovernorDukeandPresidentsFisherandRosenexpectsthepaceof recoverytopickupover gren,proposedpoliciesforCommitteeparticipants comingquartersandtheunemploymentrateto andforFederalReserveSystemstaff tofollowin resumeitsgradualdeclinetowardlevelsthatthe theircommunicationswiththepublicinorderto Committeejudgestobeconsistentwithitsdual reinforcethepublic’sconfidenceinthetransparency mandate.Inflationhasmoveduprecently,but andintegrityof themonetarypolicyprocess.By theCommitteeanticipatesthatinflationwill unanimousvote,theCommitteeapprovedthepolisubsidetolevelsatorbelowthoseconsistent cies.2Participantsallsupportedthepolicies,butsevwiththeCommittee’sdualmandateasthe eralof thememphasizedthatthepolicyforstaff,in effectsof pastenergyandothercommodity particular,shouldbeappliedwithjudgmentand priceincreasesdissipate.However,theCommit- commonsensesoastoavoidinterferingwithlegititeewillcontinuetopaycloseattentiontothe materesearch. evolutionof inflationandinflationexpectations. Itwasagreedthatthenextmeetingof theCommittee Topromotetheongoingeconomicrecoveryand wouldbeheldonTuesday,August9,2011.Themeettohelpensurethatinflation,overtime,isatlev- ingadjournedat12:10p.m.onJune22,2011. elsconsistentwithitsmandate,theCommittee decidedtodaytokeepthetargetrangeforthe Notation Vote federalfundsrateat0to¼percent.TheCommitteecontinuestoanticipatethateconomic BynotationvotecompletedonMay17,2011,the conditions—includinglowratesof resourceuti- Committeeunanimouslyapprovedtheminutesof the lizationandasubduedoutlookforinflationover FOMCmeetingheldonApril26–27,2011. themediumrun—arelikelytowarrantexceptionallylowlevelsforthefederalfundsratefor WilliamB.English anextendedperiod.TheCommitteewillcom- Secretary pleteitspurchasesof $600billionof longertermTreasurysecuritiesbytheendof this monthandwillmaintainitsexistingpolicyof reinvestingprincipalpaymentsfromitssecurities holdings.TheCommitteewillregularlyreview thesizeandcompositionof itssecuritieshold- 2 Thepoliciesareavailableathttp://www.federalreserve.gov/ monetarypolicy/files/FOMC_ExtCommunicationParticipants ingsandispreparedtoadjustthoseholdingsas .pdfandhttp://www.federalreserve.gov/monetarypolicy/files/ appropriate. FOMC_ExtCommunicationStaff.pdf.

242 98thAnnualReport|2011 Addendum: of thelonger-runsustainablerateof increaseinreal Summary of Economic Projections GDP,theunemploymentrateisprojectedtotrend graduallyloweroverthisprojectionperiod.However, InconjunctionwiththeJune21–22,2011,Federal participantsanticipatedthat,attheendof 2013,the OpenMarketCommittee(FOMC)meeting,the unemploymentratewouldstillbewellabovetheir membersof theBoardof Governorsandthepresi- estimatesof theunemploymentratethattheyseeas dentsof theFederalReserveBanks,allof whompar- consistent,overthelongerrun,withtheCommittee’s ticipateinthedeliberationsof theFOMC,submitted dualmandateof maximumemploymentandprice projectionsforgrowthof realoutput,theunemploy- stability.Mostparticipantsmarkeduptheirprojecmentrate,andinflationfortheyears2011to2013 tionsof inflationfor2011inlightof theincreasein andoverthelongerrun.Theprojectionswerebased inflationinthefirsthalf of theyear,buttheyprooninformationavailableatthetimeof themeeting jectedthisincreasetobetransitory,withoverallinflaandoneachparticipant’sassumptionsaboutfactors tionmovingbackinlinewithcoreinflationin2012 likelytoaffecteconomicoutcomes,includinghisor and2013andremainingatorabitbelowratesthat herassessmentof appropriatemonetarypolicy. theyseeasconsistent,overthelongerrun,withthe “Appropriatemonetarypolicy”isdefinedasthe Committee’sdualmandate.Participantsgenerally futurepathof policythateachparticipantdeems sawtherateof coreinflationaslikelytostayroughly mostlikelytofosteroutcomesforeconomicactivity thesameoverthenexttwoyearsasthisyear. andinflationthatbestsatisfyhisorherinterpretationof theFederalReserve’sdualobjectivesof maxi- Onbalance,asindicatedintable1,participants mumemploymentandstableprices.Longer-runpro- anticipatedsomewhatlowerrealGDPgrowthover jectionsrepresenteachparticipant’sassessmentof theneartermrelativetotheirprojectionsinAprilbut theratetowhicheachvariablewouldbeexpectedto lefttheirprojectionsforinflationmostlyunchanged convergeovertimeunderappropriatemonetary sincetheAprilmeeting.Participantsmadenoticeable policyandintheabsenceof furthershocks. downwardrevisionstotheirprojectionsforGDP growththisyearandnext,buttheymadelittle Asdepictedinfigure1,FOMCparticipantsexpected changetotheirprojectionfor2013andnochangeto theeconomicrecoverytocontinueatamoderate theirlonger-runprojections.Meetingparticipants pace,withgrowthof realgrossdomesticproduct reviseduptheirprojectionsfortheunemployment (GDP)aboutthesamethisyearasin2010andthen rateovertheforecastperiod,althoughtheycontinue strengtheningover2012and2013.Withthepaceof toexpectagradualdeclineintheunemploymentrate economicgrowthmodestlyexceedingtheirestimates overtime.Participants’projectionsforoverallinfla- Table1.EconomicprojectionsofFederalReserveBoardmembersandFederalReserveBankpresidents,June2011 Percent Centraltendency1 Range2 Variable 2011 2012 2013 Longerrun 2011 2012 2013 Longerrun ChangeinrealGDP 2.7to2.9 3.3to3.7 3.5to4.2 2.5to2.8 2.5to3.0 2.2to4.0 3.0to4.5 2.4to3.0 Aprilprojection 3.1to3.3 3.5to4.2 3.5to4.3 2.5to2.8 2.9to3.7 2.9to4.4 3.0to5.0 2.4to3.0 Unemploymentrate 8.6to8.9 7.8to8.2 7.0to7.5 5.2to5.6 8.4to9.1 7.5to8.7 6.5to8.3 5.0to6.0 Aprilprojection 8.4to8.7 7.6to7.9 6.8to7.2 5.2to5.6 8.1to8.9 7.1to8.4 6.0to8.4 5.0to6.0 PCEinflation 2.3to2.5 1.5to2.0 1.5to2.0 1.7to2.0 2.1to3.5 1.2to2.8 1.3to2.5 1.5to2.0 Aprilprojection 2.1to2.8 1.2to2.0 1.4to2.0 1.7to2.0 2.0to3.6 1.0to2.8 1.2to2.5 1.5to2.0 CorePCEinflation3 1.5to1.8 1.4to2.0 1.4to2.0 1.5to2.3 1.2to2.5 1.3to2.5 Aprilprojection 1.3to1.6 1.3to1.8 1.4to2.0 1.1to2.0 1.1to2.0 1.2to2.0 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andprojectionsforbothmeasuresofinflationarefromthefourthquarterofthepreviousyeartothefourth quarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures (PCE)andthepriceindexforPCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarterofthe yearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’s assessmentoftheratetowhicheachvariablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.TheApril projectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonApril26–27,2011. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearconsistsofallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

Minutesof FederalOpenMarketCommitteeMeetings|June 243 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.

244 98thAnnualReport|2011 tionthisyearweresomewhatmorenarrowlydistrib- consumerspending.Inaddition,someparticipants utedthaninApril,andtheirprojectionsfor2012and notedthatalthoughenergyandcommodityprices 2013weresimilartotheprojectionsmadeinApril. wereexpectedtostabilize,theywoulddosoat elevatedlevelsandwouldlikelycontinuetodamp Asizablemajorityof participantscontinuedtojudge spendinggrowthforatime.Finally,severalparticithelevelof uncertaintyassociatedwiththeirprojec- pantspointedtoalikelydragfromtighterfiscal tionsforeconomicgrowthandinflationasunusually policyatalllevelsof government.Intheabsenceof highrelativetohistoricalnorms.Mostparticipants furthershocks,participantsgenerallyexpectedthat, viewedtheriskstooutputgrowthasbeingweighted overtime,realGDPgrowthwouldeventuallysettle tothedownside,andnonesawthoserisksas downatanannualrateof 2.5to2.8percentinthe weightedtotheupside.Meanwhile,amajorityof longerrun. participantssawtheriskstooverallinflationas balanced. Partlyinresponsetotherecentweakindicatorsof labordemandandparticipants’downwardlyrevised TheOutlook viewsof theeconomicoutlook,participantsmarked Participantsmarkeddowntheirforecastsforreal uptheirforecastsfortheunemploymentrateoverthe GDPgrowthin2011toreflecttheunexpectedweak- entireforecastperiod.Forthefourthquarterof this nesswitnessedinthefirsthalf of theyear,withthe year,thecentraltendencyof theirprojectionsroseto centraltendencyof theirprojectionsmovingdownto 8.6to8.9percentfrom8.4to8.7percentinApril. 2.7to2.9percentfrom3.1to3.3percentinApril. Similarupwardrevisionsweremadefor2012and Participantsattributedthedownwardrevisionin 2013,withthecentraltendenciesof theprojections theirgrowthoutlooktothelikelyeffectsof elevated forthoseyearsat7.8to8.2percentand7.0to commoditypricesonrealincomeandconsumersen- 7.5percent,respectively.Consistentwiththeirexpectiment,aswellasindicationsof renewedweaknessin tationsof amoderaterecovery,withgrowthonly thelabormarket,surprisinglysluggishconsumer modestlyabovetrend,thecentraltendencyof the spending,acontinuedlackof recoveryinthehousing projectionsof theunemploymentrateattheendof market,supplydisruptionsfromtheeventsinJapan, 2013waswellabovethe5.2to5.6percentcentraltenandconstraintsongovernmentspendingatalllevels. dencyof theirestimatesof theunemploymentrate thatwouldprevailoverthelongerrunintheabsence Lookingfurtherahead,participants’forecastsfor of furthershocks.Thecentraltendencyforthepareconomicgrowthwerealsomarkeddownin2012,as ticipants’projectionsof theunemploymentratein participantssawsomeof theweaknessineconomic thelongerrunwasunchangedfromtheinterval activitythisyearaslikelytopersist.Nevertheless, reportedinApril. participantsstillanticipatedamodestaccelerationin economicoutputnextyear,andtheyexpectedafur- Participantsnotedthatmeasuresof consumerprice thermodestaccelerationin2013togrowthratesthat inflationhadincreasedthisyear,reflectinginpart werelargelyunchangedfromtheirpreviousprojec- higherpricesof oilandothercommodities.However, tion.Thecentraltendencyof theircurrentprojec- participants’forecastsfortotalpersonalconsumption tionsforrealGDPgrowthin2012was3.3to3.7per- expenditures(PCE)inflationin2011werelittle cent,comparedwith3.5to4.2percentinApril,and changedfromApril,withthecentraltendencyof in2013thecentraltendencyof theprojectionsfor theirestimatesnarrowingtoarangeof 2.3to2.5perrealGDPgrowthwas3.5to4.2percent.Participants cent,comparedwith2.1to2.8percentinApril.Most citedtheeffectsof continuedmonetarypolicy participantsanticipatedthattheinfluenceof higher accommodation,somefurthereasingincreditmar- commoditypricesandsupplydisruptionsfromJapan ketconditions,awaninginthedragfromelevated oninflationwouldbetemporary,andthatinflation commoditiesprices,andanincreaseinspendingfrom pressuresinthefuturewouldbesubduedascompent-updemandasfactorslikelytocontributetoa moditypricesstabilized,inflationexpectations pickupinthepaceof theexpansion.Participantsdid, remainedwellanchored,andlargemarginsof slack however,seeanumberof factorsthatwouldlikely inlabormarketskeptlaborcostsincheck.Asa continuetoweighonGDPgrowthoverthenexttwo result,participantsanticipatedthattotalPCEinflayears.Mostparticipantspointedtostrainsinthe tionwouldstepdownin2012and2013,withthecenhouseholdsector,notingimpairedbalancesheets, traltendencyof theirprojectionsinthoseyearsat continueddeclinesinhouseprices,andpersistently 1.5to2.0percent.Thelowerendof thesecentraltenhighunemploymentasrestrainingthegrowthof dencieswasrevisedupsomewhatfromApril,sug-

Minutesof FederalOpenMarketCommitteeMeetings|June 245 gestingthatfewerparticipantssawalikelihoodof Table2.Averagehistoricalprojectionerrorranges verylowinflationinthoseyears.Theprojectionsfor Percentagepoints thesetwoyearswereatorslightlybelowthe1.7to 2.0percentcentraltendencyof participants’esti- Variable 2011 2012 2013 matesof thelonger-run,mandate-consistentrateof ChangeinrealGDP1 ±0.9 ±1.6 ±1.8 inflation.Thecentraltendenciesof participants’pro- Unemploymentrate1 ±0.4 ±1.2 ±1.7 jectionsof corePCEinflationthisyearshiftedupa Totalconsumerprices2 ±0.8 ±1.0 ±1.0 bitto1.5to1.8percent,asparticipantssawsomeof Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared therun-upincommoditypricespassingthroughto errorofprojectionsfor1991through2010thatwerereleasedinthesummerby coreprices.For2012and2013,participantssawcom- variousprivateandgovernmentforecasters.Asdescribedinthebox “ForecastUncertainty,”undercertainassumptions,thereisabouta70percent moditypricesaslikelytostabilizenearcurrentlevels, probabilitythatactualoutcomesforrealGDP,unemployment,andconsumer andthecentraltendenciesfortheirforecastsof core priceswillbeinrangesimpliedbytheaveragesizeofprojectionerrorsmadein thepast.FurtherinformationisinDavidReifschneiderandPeterTulip(2007), inflationwere1.4to2.0percent,essentially “GaugingtheUncertaintyoftheEconomicOutlookfromHistoricalForecasting unchangedfromtheirAprilprojections. Errors,”FinanceandEconomicsDiscussionSeries2007-60(Washington:Boardof GovernorsoftheFederalReserveSystem,November). 1 Fordefinitions,refertogeneralnoteintable1. UncertaintyandRisks 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen Asubstantialmajorityof participantscontinuedto mostwidelyusedingovernmentandprivateeconomicforecasts.Projection ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof judgethatthelevelsof uncertaintyassociatedwith theyearindicated. theirprojectionsforeconomicgrowthandinflation weregreaterthantheaveragelevelsthathadprevailedoverthepast20years.3Theypointedtoa numberof factorsthatcontributedtotheirassess- Althoughamajorityof participantsjudgedtherisks mentsof theuncertaintythattheyattachedtotheir totheirinflationprojectionsovertheperiodfrom projections,includingtheseverityof therecentreces- 2011to2013tobeweightedtotheupsideinApril, sion,theuncertaineffectsof thecurrentstanceof mostparticipantsnowviewedtheserisksasbroadly monetarypolicy,uncertaintyaboutthedirectionof balanced.Ontheonehand,participantsnotedthat fiscalpolicy,andstructuraldislocationsinthelabor theeffectonheadlineinflationof theriseincommarket. moditypricesearlierthisyearwaslikelytosubsideas thosepricesstabilized,buttheycouldnotruleout thepossibilityof thoseeffectsbeingmorepersistent Mostparticipantsnowjudgedthatthebalanceof thananticipated.Ontheotherhand,withtheoutriskstoeconomicgrowthwasweightedtothedownlookfortheeconomysomewhatweakerthanpreviside,andtherestviewedtheserisksasbalanced.The ouslyexpected,someparticipantssawariskthat mostfrequentlyciteddownsiderisksincludeda greaterresourceslackcouldproducemoredownward potentialforalargenegativeeffectonconsumer pressureoninflationthanprojected.Afewparticispendingfromhigherfoodandenergyprices,a pantsnotedthepossibilitythatthecurrenthighly weakerlabormarket,fallinghouseprices,uncertainty accommodativestanceof monetarypolicy,if itwere fromthedebateoverthestatutorydebtlimitandits tobemaintainedlongerthanisappropriate,could potentialimplicationsfornear-termfiscalpolicy,and leadtohigherinflationexpectationsandactual possiblenegativefinancialmarketspilloversfrom inflation. Europeansovereigndebtproblems.Theriskssurroundingparticipants’forecastsof theunemploy- DiversityofViews mentrateshiftedhigher,withaslightmajorityof participantsnowviewingtheriskstotheprojection Figures2.Aand2.Bprovidefurtherdetailsonthe asweightedtotheupside,andtherestof thepartici- diversityof participants’viewsregardingthelikely pantsseeingtherisksasbroadlybalanced. outcomesforrealGDPgrowthandtheunemploymentratein2011,2012,2013,andoverthelonger run.Thedispersionintheseprojectionscontinuedto reflectdifferencesinparticipants’assessmentsof manyfactors,includingthecurrentdegreeof under- 3 Table2providesestimatesofforecastuncertaintyforthechange lyingmomentumineconomicactivity,theoutlook inrealGDP,theunemploymentrate,andtotalconsumerprice inflationovertheperiodfrom1991to2010.Attheendofthis forfiscalpolicy,thetiminganddegreeof therecovsummary,thebox“ForecastUncertainty”discussesthesources eryof labormarketsfollowingtheverydeeprecesandinterpretationofuncertaintyintheeconomicforecastsand sion,andappropriatefuturemonetarypolicyandits explainstheapproachusedtoassesstheuncertaintyandrisks attendingtheparticipants’projections. effectsoneconomicactivity.Regardingparticipants’

246 98thAnnualReport|2011 projectionsforrealGDPgrowth,thedistributionfor regardingthefundamentaldeterminantsof inflation, thisyearshiftednoticeablylowerbutremainedabout includingthedegreeof resourceslackandtheextent asconcentratedasthedistributioninApril.Thedis- towhichsuchslackinfluencesinflationoutcomes tributionfor2012alsoshifteddownsomewhatand andexpectations,aswellasestimatesof howthe becameabitmoreconcentrated,whilethedistribu- stanceof monetarypolicymayinfluenceinflation tionfor2013didnotchangeappreciably.Regarding expectations.RegardingoverallPCEinflation,the participants’projectionsfortheunemploymentrate, distributionsfor2011,2012,and2013allnarrowed thedistributionforthisyearandfor2012shiftedup somewhat,withthetopof thedistributionsremainrelativetothecorrespondingdistributionsinApril, ingunchangedbutthelowerendof thedistributions andmorethanone-half of participantsexpectedthe movingupsomewhat.Althoughparticipantscontinunemploymentratein2012tobeinthe8.0to uedtoexpectthatthesomewhatelevatedrateof 8.1percentinterval.Theseshiftsreflecttherecent inflationthisyearwouldsubsideinsubsequentyears, softeninginlabormarketconditionsalongwiththe fewerparticipantsanticipatedverylowlevelsof markingdownof expectedeconomicgrowththis inflation.Thedistributionof participants’projecyearandnext.Thedistributionof theunemployment tionsforcoreinflationforthisyearshiftednoticeably ratein2013alsoshiftedupwardsomewhatbutwas higher,reflectingincomingdataandaviewthatthe narrowerthanthedistributioninApril.Thedistribu- pass-throughof commoditypricestocorepricesmay tionsof participants’estimatesof thelonger-run begreaterthanpreviouslythought;however,thedisgrowthrateof realGDPandof theunemployment tributionsfor2012and2013werelittlechanged.The ratewerebothlittlechangedfromtheApril distributionof participants’projectionsforoverall projections. inflationoverthelongerrunwasessentially unchangedfromitsfairlynarrowdistributionin Correspondinginformationaboutthediversityof April,reflectingthebroadsimilarityinparticipants’ participants’viewsregardingtheinflationoutlookis assessmentsof theapproximatelevelof inflationthat providedinfigures2.Cand2.D.Ingeneral,thedisper- isconsistentwiththeFederalReserve’sdualobjecsionof participants’inflationforecastsforthenext tivesof maximumemploymentandpricestability. fewyearsrepresenteddifferencesinjudgments

Minutesof FederalOpenMarketCommitteeMeetings|June 247 Figure2.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2011–13andoverthelongerrun Number of participants 2011 16 June projections April projections 14 12 10 8 6 4 2 2.2- 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- 2.3 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 16 14 12 10 8 6 4 2 2.2- 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- 2.3 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 16 14 12 10 8 6 4 2 2.2- 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- 2.3 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 16 14 12 10 8 6 4 2 2.2- 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- 2.3 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.

248 98thAnnualReport|2011 Figure2.B.Distributionofparticipants’projectionsfortheunemploymentrate,2011–13andoverthelongerrun Number of participants 2011 16 June projections April projections 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- 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 Percent range Number of participants 2012 16 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- 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 Percent range Number of participants 2013 16 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- 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 Percent range Number of participants Longer run 16 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- 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 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|June 249 Figure2.C.Distributionofparticipants’projectionsforPCEinflation,2011–13andoverthelongerrun Number of participants 2011 16 June projections April projections 14 12 10 8 6 4 2 0.9- 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 2.9- 3.1- 3.3- 3.5- 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 Percent range Number of participants 2012 16 14 12 10 8 6 4 2 0.9- 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 2.9- 3.1- 3.3- 3.5- 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 Percent range Number of participants 2013 16 14 12 10 8 6 4 2 0.9- 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 2.9- 3.1- 3.3- 3.5- 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 Percent range Number of participants Longer run 16 14 12 10 8 6 4 2 0.9- 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 2.9- 3.1- 3.3- 3.5- 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

250 98thAnnualReport|2011 Figure2.D.Distributionofparticipants’projectionsforcorePCEinflation,2011–13 Number of participants 2011 16 June projections April projections 14 12 10 8 6 4 2 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Number of participants 2012 16 14 12 10 8 6 4 2 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Number of participants 2013 16 14 12 10 8 6 4 2 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|June 251 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers thatexperiencedinthepastandtherisksaroundthe oftheBoardofGovernorsandthepresidentsofthe projectionsarebroadlybalanced,thenumbers FederalReserveBanksinformdiscussionsofmon- reportedintable2wouldimplyaprobabilityofabout etarypolicyamongpolicymakersandcanaidpublic 70percentthatactualGDPwouldexpandwithina understandingofthebasisforpolicyactions.Con- rangeof2.1to3.9percentinthecurrentyear,1.4to siderableuncertaintyattendstheseprojections,how- 4.6percentinthesecondyear,and1.2to4.8percent ever.Theeconomicandstatisticalmodelsandrela- inthethirdyear.Thecorresponding70percentconfitionshipsusedtohelpproduceeconomicforecasts denceintervalsforoverallinflationwouldbe1.2to arenecessarilyimperfectdescriptionsofthereal 2.8percentinthecurrentyear,and1.0to3.0percent world,andthefuturepathoftheeconomycanbe inthesecondandthirdyears. affectedbymyriadunforeseendevelopmentsand Becausecurrentconditionsmaydifferfromthose events.Thus,insettingthestanceofmonetary thatprevailed,onaverage,overhistory,participants policy,participantsconsidernotonlywhatappearsto providejudgmentsastowhethertheuncertainty bethemostlikelyeconomicoutcomeasembodiedin attachedtotheirprojectionsofeachvariableis theirprojections,butalsotherangeofalternative greaterthan,smallerthan,orbroadlysimilartotypipossibilities,thelikelihoodoftheiroccurring,andthe callevelsofforecastuncertaintyinthepast,as potentialcoststotheeconomyshouldtheyoccur. shownintable2.Participantsalsoprovidejudgments Table2summarizestheaveragehistoricalaccuracyof astowhethertheriskstotheirprojectionsare arangeofforecasts,includingthosereportedinpast weightedtotheupside,areweightedtothedown- MonetaryPolicyReportsandthosepreparedbythe side,orarebroadlybalanced.Thatis,participants FederalReserveBoard’sstaffinadvanceofmeetings judgewhethereachvariableismorelikelytobe oftheFederalOpenMarketCommittee.Theprojec- aboveorbelowtheirprojectionsofthemostlikely tionerrorrangesshowninthetableillustratethecon- outcome.Thesejudgmentsabouttheuncertainty siderableuncertaintyassociatedwitheconomicfore- andtherisksattendingeachparticipant’sprojections casts.Forexample,supposeaparticipantprojects aredistinctfromthediversityofparticipants’views thatrealgrossdomesticproduct(GDP)andtotal aboutthemostlikelyoutcomes.Forecastuncertainty consumerpriceswillrisesteadilyatannualratesof, isconcernedwiththerisksassociatedwithaparticurespectively,3percentand2percent.Iftheuncer- larprojectionratherthanwithdivergencesacrossa taintyattendingthoseprojectionsissimilarto numberofdifferentprojections.

252 98thAnnualReport|2011 Meeting Held on August 9, 2011 BrianSack Manager,SystemOpenMarketAccount Ajointmeetingof theFederalOpenMarketCom- JenniferJ.Johnson mitteeandtheBoardof Governorsof theFederal Secretaryof theBoard,Officeof theSecretary, ReserveSystemwasheldintheofficesof theBoard Boardof Governors of GovernorsinWashington,D.C.,onTuesday, August9,2011,at8:00a.m. PatrickM.Parkinson Director,Divisionof BankingSupervisionand Present Regulation,Boardof Governors BenBernanke RobertdeV.Frierson Chairman DeputySecretary,Officeof theSecretary, Boardof Governors WilliamC.Dudley ViceChairman AndreasLehnert DeputyDirector,Officeof FinancialStabilityPolicy ElizabethDuke andResearch,Boardof Governors CharlesL.Evans LindaRobertson RichardW.Fisher AssistanttotheBoard,Officeof BoardMembers, Boardof Governors NarayanaKocherlakota SethB.Carpenter CharlesI.Plosser SeniorAssociateDirector,Divisionof Monetary SarahBloomRaskin Affairs,Boardof Governors DanielK.Tarullo MichaelLeahy SeniorAssociateDirector,Divisionof International JanetL.Yellen Finance,Boardof Governors ChristineCumming,JeffreyM.Lacker, LawrenceSlifmanandWilliamWascher DennisP.Lockhart,SandraPianalto,and SeniorAssociateDirectors,Divisionof Researchand JohnC.Williams Statistics,Boardof Governors AlternateMembersof theFederalOpenMarket Committee AndrewT.Levin SeniorAdviser,Officeof BoardMembers, JamesBullard,ThomasM.Hoenig,and Boardof Governors EricRosengren Presidentsof theFederalReserveBanksof St.Louis, StephenA.Meyer KansasCity,andBoston,respectively SeniorAdviser,Divisionof MonetaryAffairs, Boardof Governors WilliamB.English SecretaryandEconomist JoyceK.Zickler VisitingSeniorAdviser,Divisionof Monetary MatthewM.Luecke Affairs,Boardof Governors AssistantSecretary DavidE.Lebow DavidW.Skidmore AssociateDirector,Divisionof Researchand AssistantSecretary Statistics,Boardof Governors MichelleA.Smith JoshuaGallin AssistantSecretary DeputyAssociateDirector,Divisionof Researchand ThomasC.Baxter Statistics,Boardof Governors DeputyGeneralCounsel FabioM.Natalucci RichardM.Ashton DeputyAssociateDirector,Divisionof Monetary AssistantGeneralCounsel Affairs,Boardof Governors ThomasA.Connors,DavidReifschneider, BethAnneWilson DanielG.Sullivan,DavidW.Wilcox,andKei-MuYi AssistantDirector,Divisionof InternationalFinance, AssociateEconomists Boardof Governors

Minutesof FederalOpenMarketCommitteeMeetings|August 253 PenelopeA.Beattie Staff Review of the Economic Situation AssistanttotheSecretary,Officeof theSecretary, Boardof Governors TheinformationreviewedattheAugust9meeting indicatedthatthepaceof theeconomicrecovery JohnC.Driscoll remainedslowinrecentmonthsandthatlabormar- SeniorEconomist,Divisionof MonetaryAffairs, ketconditionscontinuedtobeweak.Inaddition, Boardof Governors reviseddatafor2008through2010fromtheBureau CarolLow of EconomicAnalysisindicatedthattherecentreces- OpenMarketSecretariatSpecialist,Divisionof sionwasdeeperthanpreviouslythoughtandthatthe MonetaryAffairs,Boardof Governors levelof realgrossdomesticproduct(GDP)hadnot yetattaineditspre-recessionpeakbythesecond RandallA.Williams quarterof 2011.Moreover,thedownwardrevisionto RecordsManagementAnalyst,Divisionof Monetary first-quarterGDPgrowthandtheslowgrowth Affairs,Boardof Governors reportedforthesecondquarterindicatedthatthe recoverywasquitesluggishinthefirsthalf of this DavidSapenaro year.Overallconsumerpriceinflationmoderatedin FirstVicePresident,FederalReserveBankof recentmonths,andsurveymeasuresof long-run St.Louis inflationexpectationsremainedstable. MarkS.Sniderman ExecutiveVicePresident,FederalReserveBankof Privatenonfarmemploymentroseataconsiderably Cleveland slowerpaceinJuneandJulythanearlierintheyear, andemploymentinstateandlocalgovernmentscon- DavidAltig,AlanD.Barkema,andGeoffreyTootell tinuedtotrendlower.Theunemploymentrateedged SeniorVicePresidents,FederalReserveBanksof up,onnet,sincethebeginningof theyear,andlong- Atlanta,KansasCity,andBoston,respectively durationunemploymentremainedveryhigh.Mean- ChrisBurke,FredFurlong,TomKlitgaard, while,thelaborforceparticipationratemoveddown EvanF.Koenig,andDanielL.Thornton furtherthroughJuly.Initialclaimsforunemployment VicePresidents,FederalReserveBanksof NewYork, insurancesteppeddownsomeinrecentweeksbut SanFrancisco,NewYork,Dallas,andSt.Louis, remainedelevated,andindicatorsof hiringshowed respectively noimprovement. KeithSill ManufacturingproductionwasunchangedinJune. AssistantVicePresident,FederalReserveBankof Supplychaindisruptionsassociatedwiththeearth- Philadelphia quakeinJapancontinuedtohinderproductionat RobertL.Hetzel motorvehiclemanufacturersandthefirmsthatsup- SeniorEconomist,FederalReserveBankof plythem.Excludingmotorvehiclesandparts,fac- Richmond toryoutputpostedonlyamodestincrease.The manufacturingcapacityutilizationrateheldabout Developments in Financial Markets and flatinrecentmonths.Withautomanufacturers the Federal Reserve’s Balance Sheet expectingsupplychaindisruptionstoease,motor vehicleassemblyschedulescalledforasubstantial TheManagerof theSystemOpenMarketAccount step-upinproductioninthethirdquarter,andinitial (SOMA)reportedondevelopmentsindomesticand estimatesof productioninJunewereconsistentwith foreignfinancialmarketsduringtheperiodsincethe suchastep-up.Butbroaderindicatorsof near-term FederalOpenMarketCommittee(FOMC)meton manufacturingactivity,suchasthediffusionindexes June21–22,2011.HealsoreportedonSystemopen of newordersfromthenationalandregionalmanumarketoperations,includingthecontinuingreinvest- facturingsurveys,softenedtolevelsconsistentwith mentintolonger-termTreasurysecuritiesof princi- onlysmallgainsinproductioninthecomingmonths. palpaymentsreceivedontheSOMA’sholdingsof agencydebtandagency-guaranteedmortgage- Realconsumerspendingwasnearlyunchangedinthe backedsecurities.Byunanimousvote,theCommittee secondquarter.Motorvehiclepurchasesdeclined ratifiedthetransactionsbytheOpenMarketDeskof duringthespringwhentheavailabilityof somemodtheFederalReserveBankof NewYorkoverthe elswaslimited,butreboundedsomewhatinJulyas intermeetingperiod. suppliesimproved.Consumerspendingongoodsand

254 98thAnnualReport|2011 servicesotherthanmotorvehiclesalsoappearedsoft categoriessuchasindustrialsuppliesandagricultural throughJune.Laborearningsroseinthesecond goods;salesof capitalgoodsandautomotiveprodquarter,butincreasesinconsumerpricesoffsetmuch uctsincreased.Theriseinimportsimportantly of thegaininnominalincome.Consumersentiment reflectedincreasesinspendingonpetroleumprodweakenedmarkedlyinJuly,andtheThomson ucts(mainlytheresultof higherpricesratherthan Reuters/Universityof Michigansentimentindexfell increasedvolumes)andoncapitalgoods,especially tolevelslastseeninearly2009. computers.Forthesecondquarterasawhole,the advancereleaseof theNationalIncomeandProduct Thehousingmarketremaineddepressed.Although Accounts(NIPA)indicatedthatrealexportsof single-familyhousingstartsmovedupsomeinJune, goodsandservicesincreasedmorethanrealimports, permitissuancestayedlow.Similarly,salesof new withtheresultthatnetexportsaddedsignificantlyto andexistingsingle-familyhomesweresubduedin realGDPgrowth. recentmonths,andhomepricescontinuedtotrend lower.Newconstructionremainedconstrainedbythe Afterdeceleratingintheprecedingtwomonths, overhangof foreclosedordistressedpropertiesas indexesof U.S.consumerpricesdeclinedinJune, wellasbyweakdemandinanenvironmentof uncer- reflectingasubstantialdropinconsumerenergy taintyaboutfuturehomepricesandtightunderwrit- prices.However,surveydataindicatedsomebackup ingstandardsformortgageloans. ingasolinepricesinJuly.Thepriceindexforpersonal consumptionexpenditures(PCE)excludingfoodand Realbusinessspendingonequipmentandsoftware energypostedasmallincreaseinJune,andthePCE roseatamodestpaceinthesecondquarter,reflecting priceindexfornon-energyserviceswasessentially strongincreasesinoutlaysforhigh-techequipment unchanged.Incontrast,pricesof nonfood,nonthatmorethanoffsetdeclinesinspendinginmany energygoodswereapparentlyboostedbyupward otherequipmentcategories.Nominalnewordersfor pressurefromearlierincreasesincommodityand nondefensecapitalgoodsexcludingaircraftcontin- importprices,andmotorvehiclepricesrosefurther, uedtorisethroughJune,andordersremainedwell reflectingtheextremelylowlevelsof vehicleinventoaboveshipments,suggestingfurthergainsinoutlays ries.Near-termexpectedinflationfromtheThomson forequipmentandsoftwareinthenearterm.How- Reuters/Universityof MichiganSurveysof Consumever,indicatorsof businessconditionsandsentiment ersmoveddownagaininJulyfromitselevatedlevel weakenedinJuneandJuly.Businessinvestmentin inthespring,andlonger-terminflationexpectations nonresidentialstructuresappearedtohavestabilized remainedstable. atalowlevelinrecentmonths,withvacancyrates elevatedandconstructionfinancingconditionsstill Nominalhourlylaborcompensation,asmeasured tight.Outlaysfordrillingandminingequipmentcon- bothbycompensationperhourinthenonfarmbusitinuedtoincrease.Inthesecondquarter,businesses nesssectorandbytheemploymentcostindex, appearedtoaddtoinventoriesatamoderaterate,as increasedatamoderaterateovertheyearendingin adrawdowninmotorvehicleinventoriesassociated thesecondquarter.Similarly,the12-monthchangein withproductiondisruptionswasoffsetbyhigher averagehourlyearningsof allemployeesremained accumulationelsewhere.Inmostindustriesoutsideof moderateinJuly.Productivityinthenonfarmbusithemotorvehiclesector,inventoriesseemedtobe nesssectorroseonlyslightlyoverthepastfourreasonablywellalignedwithsales. quarterperiod,sounitlaborcostspostedamodest increase. Realfederalpurchasesturnedupinthesecondquarter,asdefenseexpendituresreboundedafterdeclining Foreigneconomicgrowthappearedtohaveslowed noticeablyintheprecedingquarter.Atthestateand significantlyinrecentmonths.RealGDPgrowth locallevel,realpurchasescontinuedtodeclinein declinedsharplyintheUnitedKingdominthesecresponsetobudgetarypressures;thesegovernments ondquarter,andindustrialproductiondataandpurcontinuedtoreducepayrolls,andtheirrealconstruc- chasingmanagerssurveyspointedtoasimilarslowtionoutlaysfellsharply. downinCanada.Retailsalesandbusinesssentiment fortheeuroareaalsoweakenedinrecentmonths TheU.S.internationaltradedeficitwidenedsignifi- amidintensifiedconcernsoverthefiscalsituationof cantlyinMayinnominalterms,asexportsedged theperipheraleuro-areacountries.Economicperfordownandimportsmovedupstrongly.Declinesin manceintheemergingmarketeconomieswassomeexportswereconcentratedincommodity-intensive whatbetter,butindicatorsforthoseeconomiesalso

Minutesof FederalOpenMarketCommitteeMeetings|August 255 suggestedsomecoolingfromtheveryrapidgrowth ingperiod.TheFederalReserve’sTreasurypurchase earlierthisyear.Bycontrast,theJapaneseeconomy programwascompletedonscheduleonJune30. hasbeguntorecoverfromtheMarchdisaster,with exportsandproductionbothretracingmuchof their BroadU.S.stockpriceindexesfellsharply,onnet, substantiallosses.Foreigninflationdippedinthesec- overtheintermeetingperiod,asincreasedconcerns ondquarterastheeffectsof previousincreasesin abouteconomicgrowthappearedtoovershadow foodandenergypricesbegantodissipate. generallystrongsecond-quartercorporateearnings reports.Option-impliedvolatilityontheS&P500 Staff Review of the Financial Situation indexjumpedlateintheperiod.Yieldsonboth investment-andspeculative-gradecorporatebonds Overtheintermeetingperiod,U.S.financialmarkets fellalittlelessthanthoseoncomparable-maturity werestronglyinfluencedbydevelopmentsregarding Treasurysecurities,leavingriskspreadswider.FinanthefiscalsituationsintheUnitedStatesandin cialmarketindicatorsof inflationexpectationswere Europeandbygenerallyweaker-than-expectedread- mixedovertheintermeetingperiod. ingsoneconomicactivity.Throughouttheperiod, waxingandwaningconcernsaboutthesovereign Netdebtfinancingbynonfinancialcorporationswas debtof peripheraleuro-areacountriesappearedto solidinJuly,althoughbelowtheelevatedpaceposted haveaneffectoninvestorappetiteforrisk,leadingto inthesecondquarter.Grossbondissuancefell,and volatilityinmanyassetmarkets.Lateintheperiod, theoutstandingamountof commercialandindusinvestorfocusappearedtoturntotheU.S.debtceil- trial(C&I)loansonbanks’bookswasaboutflat. ingandthepotentialfordelayeddebtservicepay- Nonfinancialcommercialpaper(CP)postedasizable mentsbytheTreasuryDepartment,thepossibilityof gain.ThemarketforCPissuedbyfinancialfirms adowngradeof U.S.sovereigndebt,andthepros- experiencedsomestrainslateintheperiodasinstitupectsforsignificantlong-termfiscalconsolidation. tionalmoneymarketmutualfundsreportedly Liquidityandfundinginmoneymarketsdeteriorated increasedtheircashpositionsandsoughttodecrease inthelastweekof July,andinterestratesonanum- exposuretoCPissuedbysomeentitiesperceivedto berof short-termfundinginstrumentsincreased belesscreditworthy.Issuanceof syndicatedleveraged markedly.Thestrainsinthesemarketseasedafter loansremainedstronginthesecondquarter.The legislationtoraisethedebtceilingandtocutthefed- paceof grosspublicequityissuancebynonfinancial eralbudgetdeficitwassignedintolawonAugust2. firmsfellsomewhatinJulyfromitssolidpaceinthe U.S.equitypricesfellconsiderablyinthelastweekof secondquarter.Mostindicatorsof businesscredit Julyandthefirstweekof August,reportedlyreflect- qualitycontinuedtoimprove. ingrecentweaker-than-expectedeconomicdata releases,andtheydeclinedfurtheraftertheAugust5 Commercialrealestatemarketsremainedweak. announcementbyStandard&Poor’sof itsdown- Availabledataforthesecondquarterindicatedthat gradeof long-termU.S.sovereigndebt. commercialmortgagedebtcontracted,pricesof commercialpropertiesweregenerallydepressed,and ThedecisionsbytheFOMCatitsJunemeetingto issuanceof commercialmortgage-backedsecurities completeitsassetpurchaseprogramandtomaintain (CMBS)slowed.However,thedelinquencyratein the0to¼percenttargetrangeforthefederalfunds JuneforloansthatbackexistingCMBSstayedbelow ratewereaboutinlinewithmarketexpectationsand itsrecentpeak,andvacancyratesforcommercial elicitedlittlemarketreaction;thesamewastrueof properties,whilestillhigh,generallycontinuedto theaccompanyingstatementandthesubsequent edgelower. pressbriefingbytheChairman.Overtheintermeetingperiod,investorsmarkeddowntheexpectedpath Ratesonconformingfixed-rateresidentialmortgages forthefederalfundsratesubstantially,reflecting declined,onnet,overtheintermeetingperiod.Mortincomingeconomicdatathatwereweakerthan gagerefinancingactivitypickedupbutremained expectedandconcomitantconcernsaboutthepros- relativelysubdued.Outstandingresidentialmortgage pectsforglobalgrowth.YieldsonnominalTreasury debtisestimatedtohavecontractedfurtherinthe securitiesalsofellnotably,onnet,overtheintermeet- secondquarter.Ratesof seriousmortgagedelin-

256 98thAnnualReport|2011 quencycontinuedtomoderatebutremainedhigh, towardtheendof theintermeetingperiod.The whiletherateof newdelinquenciesonprimemort- broadnominalindexof theU.S.dollarfluctuated gagesflattenedoutinrecentmonthsatanelevated overtheperiodinresponsetochangesininvestors’ level. assessmentof theoutlookfortheU.S.economy, prospectsfortheliftingof theU.S.debtceiling,and Conditionsinconsumercreditmarketsgenerallycon- thesituationintheEuropeaneconomies.Onnetover tinuedtoimprove.Totalconsumercreditexpandedat theintermeetingperiod,thedollarrosemodestly amoderaterateinMayasbothnonrevolvingand afterhavingdepreciatedearlierthisyear. revolvingcreditpostedgains.Issuanceof consumer asset-backedsecuritiesremainedsolidinJuly, TheEuropeanCentralBank(ECB)boostedits althoughsomedealslaterinthemonthwerereport- policyrateinJuly,amovethatwaswidelyanticiedlypostponedafewdayswhileissuersawaitedthe pated.Asindicatedbymoneymarketfuturesquotes, outcomeof thedebtceilingdeliberations.Delin- however,theexpectedpaceof monetarypolicytightquencyratesformosttypesof consumerloans eningdeclinedsubstantiallyfortheECBaswellas moveddowninrecentmonths. forothercentralbanksinadvancedforeigneconomies.FollowingitsAugustmeeting,theECB Corecommercialbankloans—thesumof C&I,real expandedandextendeditsofferingsof termliquidity estate,andconsumerloans—wereaboutflatoverthe andresumedpurchasesof sovereigndebtinthesecmonthsof JuneandJuly,asaslowdowninlendingto ondarymarket.Centralbanksinseveralemerging businesseswasoffsetbyapickupinloanstohouse- marketeconomies,includingChina,continuedto holds.TheJulySeniorLoanOfficerOpinionSurvey tightenpolicyinresponsetoinflationarypressures. onBankLendingPracticesshowedthatrespondents Authoritiesinsomeemergingmarketeconomiesalso againeasedlendingstandardstosomedegreeonall tookmeasurestolimitcapitalinflowsandcredit majorloantypesotherthanresidentialrealestate growth. loans.Nonetheless,banksalsoindicatedthatthecurrentlevelsof theirlendingstandardsforallloan Staff Economic Outlook typeswerebetweenmoderateandrelativelytight whencomparedwiththerangeof standardsthathad Theinformationoneconomicactivityreceivedsince prevailedsince2005.Nearlyallsecond-quarterearn- theJuneFOMCmeetingwasweakerthanthestaff ingsreportsfromlargebankingcompaniesexceeded hadanticipated,andtheprojectionforrealGDP expectations. growthinthesecondhalf of 2011andin2012was markeddownnotably.Moreover,thelowerestimates M2expandedrapidlyinJuneandJuly.Liquiddepos- of realGDPinrecentyearsthatwerecontainedin its,thelargestcomponentof M2,increasedrobustly, theannualrevisionstotheNIPAledthestaff to likelyreflectingsafe-havenflowsfromriskierassets loweritsestimateof potentialGDPgrowth,both alongwithtemporaryincreasesintheamountof duringrecentyearsandovertheforecastperiod,and depositsthatmoneymarketmutualfundsheldat tomarkdownfurtherthestaff forecast.Thestaff theircustodianbanks.Theriseincurrencymoder- continuedtoexpectsomereboundineconomicactivatedoverthosetwomonthsbutremainedrobust. ityintheneartermastheJapan-relatedsupplychain disruptionsinthemotorvehiclesectoreased.More Headlineequityindexesabroadandforeignbench- generally,thestaff stillprojectedrealGDPtoaccelermarksovereignyieldsdeclinedovertheintermeeting ategraduallyoverthenextyearandahalf,supported periodinapparentresponsetosignsof aslowdown byaccommodativemonetarypolicy,improvedcredit inthepaceof globaleconomicactivityandreduced availability,andapickupinconsumerandbusiness demandforriskyassets.Atthesametime,concerns sentiment.However,theincreaseinrealGDPwas aboutfiscaldeficitsanddebtsustainabilitydrove projectedtobesufficienttoreduceslackinthelabor yieldsonthesovereigndebtof Greece,Ireland,Por- marketonlyslowly,andtheunemploymentratewas tugal,Spain,andItalytorecordhighsrelativeto expectedtoremainelevatedattheendof 2012. yieldsonGermanbunds,althoughlaterinthe period,spreadsfellbacksomewhat.Stockpricesof Thestaff raisedslightlyitsprojectionforinflation Europeanbanks,whicharesignificantinvestorsin duringthesecondhalf of thisyear,astheupward sovereignbondsissuedbytheperipheraleuro-area pressureonconsumerpricesfromearlierincreasesin countries,declinedappreciably,andsomeof these importandcommoditypriceswasexpectedtopersist banksreportedlyfacedtighterfundingconditions alittlelongerthanpreviouslyanticipated.Butthese

Minutesof FederalOpenMarketCommitteeMeetings|August 257 influenceswerestillexpectedtodissipateincoming themeasuredunemploymentratebyencouraging quarters,aswasthetemporaryupwardpressureon someworkerstoremaininthelaborforcelonger motorvehiclepricesfromlowinventories.Moreover, thantheyotherwisewouldhave.Otherparticipants thelargeincreasesinconsumerenergyandfood remarkedthatthedeclinesintheunemploymentrate pricesseenearlierthisyearwerenotexpectedtobe thathaveoccurredoverthepastyearappearedto repeated.Withlong-runinflationexpectationsstable reflectprimarilydeclinesinlaborforceparticipation andsubstantialslackexpectedtopersistinlaborand ratherthansignificantgainsinemployment.Reports productmarkets,thestaff continuedtoexpectprices frombusinesscontactssuggestedthatdepressedbusitoriseatasubduedpacein2012. nessconfidenceaswellasuncertaintyregardingthe economicoutlook,regulatorypolicy,andfiscal Participants’ Views on Current Conditions policycontinuedtorestrainhiringandalsocapital and the Economic Outlook investment. Intheirdiscussionof theeconomicsituationand Inflationhadmoderatedinrecentmonthsafterhavoutlook,meetingparticipantsregardedtheinforma- ingbeensomewhatelevatedearlierthisyear.Transitionreceivedduringtheintermeetingperiodasindi- toryfactors,includingsupplychaindisruptionsfrom catingthateconomicgrowthsofarthisyearwascon- theearthquakeinJapanandasurgeinenergyand siderablyslowerthantheyhadexpected.Participants othercommodityprices,hadpushedupbothheadnotedadeteriorationinlabormarketconditions, lineandcoremeasuresof inflationforatime.More slowerhouseholdspending,adropinconsumerand recently,however,aspricesof energyandsomecombusinessconfidence,andcontinuedweaknessinthe moditieshavedeclinedfromtheirearlierpeaks,headhousingsector.Manufacturingactivitywasreported lineinflationhasmoderated.Participantsgenerally tobemixed.Participantsjudgedthattemporaryfac- notedthat,withapparentlysignificantslackinlabor torsaffectingdemandandproduction,includingthe andproductmarkets,slowwagegrowth,andlittle dampingeffectof higherenergyandothercommod- evidenceof pricingpoweramongfirms,inflationwas itypricesandthesupplydisruptionsfromtheJapa- likelytodeclinesomewhatovertime.Measuresof neseearthquake,couldaccountforonlysomeof the inflationexpectationshadremainedstable.Nevertheweaknessineconomicgrowthoverthefirsthalf of less,anumberof participantsnotedthatcoreinflatheyear.Whiletheseeffectsappearedtobewaning, tionhadmovedup,onbalance,sincelastfall.Some theunderlyingstrengthof theeconomicrecovery indicatedthattheriseininflationfromverylowlevremaineduncertain.Inaddition,manyparticipants elsreflectedtheCommittee’saccommodativestance pointedtotherecentdownwardrevisiontoestimates of monetarypolicy,whichhadhelpedaddressthe of economicactivityoverthepastthreeyears,and deflationrisksof ayearago.Acoupleof others, sometothefinancialmarketstrainsseenduringthe however,suggestedthatthejuxtapositionof higher intermeetingperiod,ascontributingtoadowngrade coreinflationandsomewhatlowerunemployment of theoutlookfortheeconomy.Moreover,many couldimplythatthelevelof potentialoutputwas participantssawincreaseddownsideriskstotheout- lowerthanhadbeenthought. lookforeconomicgrowth. Mostmeetingparticipantsindicatedthattheweak- Meetingparticipantsgenerallynotedthatoverall nessinconsumerspendinginrecentmonthswas labormarketconditionshaddeterioratedinrecent unexpected.Theflatteningoutof consumerspending months.WhiletheemploymentreportforJuly wasseenasreflecting,inpart,themodestpaceof showedthathiringwassomewhatbetterthaninpre- gainsinemploymentandlaborincome.Inaddition, viousmonths,thereleasewasstillseenasindicating householdspendingonautoshadbeenheldbackby relativelyweakconditions.Acoupleof participants lowinventories,andparticipantsgenerallyexpecteda commentedthattheexceptionallyhighlevelof long- pickupinsalesof motorvehiclesincomingmonths termunemploymentcouldleadtopermanentnega- asproductionrebounded.Nonetheless,lowcontiveeffectsontheskillsandemploymentprospectsof sumerconfidence,effortstorebuildbalancesheets, thoseaffected.Anotherparticipant,however,noted andheightenedcautiononthepartof households thatitcouldinsteadreflectamismatchbetweenthe facinganuncertaineconomicenvironmentwereseen characteristicsof theunemployedandthejobscur- asfactorslikelytocontinuetoweighonhousehold rentlyavailable.Participantsalsodiscussedthelabor spendinggoingforward.Severalparticipantsalso forceparticipationrate,anditwasnotedthat pointedtofinancialconstraints,particularly extendedunemploymentbenefitscouldbeincreasing depressedhomepricesandstill-tightcreditcondi-

258 98thAnnualReport|2011 tions,asfurtherrestrainingconsumerspendingfora conditionof U.S.bankshadstrengthenedinrecent time. quartersandthatthecreditqualityof bothbusinessesandhouseholdshadcontinuedtoimprove. Businessoutlaysonequipmentandsoftwarecontinuedtoadvance,althoughataslowerpacethanear- Participantsdiscussedtherangeof policytoolsavaillierintheyear.Businesscontactsinmanypartsof abletopromoteastrongereconomicrecoveryshould thecountryreportedthatuncertaintyaboutthepace theCommitteejudgethatprovidingadditionalmonof growthincomingquartersandageneralslumpin etaryaccommodationwaswarranted.Reinforcing businessconfidencehadmadesomefirmsreluctant theCommittee’sforwardguidanceaboutthelikely toexpandcapacity.Withhomepricesdepressed, pathof monetarypolicywasseenasapossibleway housingconstructionwasquitesubduedandseenas toreduceinterestratesandprovidegreatersupport likelytoremainso,whileinvestmentinnonresidential totheeconomicexpansion;afewparticipants structuresremainedlow. emphasizedthatguidancefocusingsolelyonthestate of theeconomywouldbepreferabletoguidancethat Theweaknessinhouseholdandbusinessspending namedspecificspansof timeorcalendardates.Some wasaccompaniedbyfiscalconsolidationatthestate participantsnotedthatadditionalassetpurchases andlocallevel.Thesheddingof stateandlocalgov- couldbeusedtoprovidemoreaccommodationby ernmentjobscontributedtothedeteriorationin loweringlonger-terminterestrates.Otherssuggested overalllabormarketconditions.Somepolicymakers thatincreasingtheaveragematurityof theSystem’s notedthattheiroutlooksforeconomicactivitywere portfolio—perhapsbysellingsecuritieswithrelatively shapedinpartbyanexpectationof fiscalrestraintat shortremainingmaturitiesandpurchasingsecurities alllevelsof government. withrelativelylongremainingmaturities—couldhave asimilareffectonlonger-terminterestrates.Suchan Participantsgenerallysawthedegreeof uncertainty approachwouldnotboostthesizeof theFederal surroundingtheoutlookforeconomicgrowthashav- Reserve’sbalancesheetandthequantityof reserve ingrisenappreciably.Acouplenotedthatthecyclical balances.Afewparticipantsnotedthatareductionin impetustoeconomicexpansionappearedtobe theinterestratepaidonexcessreservebalancescould weakerthanithadbeeninpastrecoveries,butthat alsobehelpfulineasingfinancialconditions.Inconthereasonsfortheweaknesswereunclear,contribut- trast,someparticipantsjudgedthatnoneof thetools ingtogreateruncertaintyabouttheeconomicout- availabletotheCommitteewouldlikelydomuchto look.Manyparticipantsalsosawanincreaseinthe promoteafastereconomicrecovery,eitherbecause downsideriskstoeconomicgrowth.Whilepartici- theheadwindsthattheeconomyfacedwouldunwind pantsdidnotanticipateadownturnineconomic onlygraduallyandthatprocesscouldnotbeacceleractivity,severalnotedthat,withtherecoverystill atedwithmonetarypolicyorbecauserecentevents somewhattentative,theeconomywasvulnerableto hadsignificantlyloweredthepathof potentialoutadverseshocks.Potentialshocksincludedthepossi- put.Consequently,theseparticipantsthoughtthat bilityof amoreprotractedperiodof weaknessin providingadditionalstimulusatthistimewouldrisk householdfinancialconditions,thechanceof a boostinginflationwithoutprovidingasignificant larger-than-expectednear-termfiscaltightening,and gaininoutputoremployment.Participantsnoted potentialfinancialandeconomicspilloversif the thatdevotingadditionaltimetodiscussionof the situationinEuropeweretodeteriorate. possiblecostsandbenefitsof variouspotentialtools wouldbeuseful,andtheyagreedthattheSeptember Participantsnotedthatfinancialmarketswerevola- meetingshouldbeextendedtotwodaysinorderto tileovertheintermeetingperiod,asinvestors providemoretime. respondedtonewsontheEuropeanfiscalsituation andthenegotiationsregardingthedebtceilinginthe Committee Policy Action UnitedStates.However,thebroaddeclinesinstock pricesandinterestratesovertheintermeetingperiod Inthediscussionof monetarypolicyfortheperiod wereseenasmostlyreflectingtheincomingdata ahead,mostmembersagreedthattheeconomicoutpointingtoaweakeroutlookforgrowthbothinthe lookhaddeterioratedbyenoughtowarrantaCom- UnitedStatesandgloballyaswellasareducedwill- mitteeresponseatthismeeting.Whileallfeltthat ingnessof investorstobearriskinlightof thegreater monetarypolicycouldnotcompletelyaddressthe uncertaintyabouttheoutlook.Whileconditionsin variousstrainsontheeconomy,mostmembers fundingmarketshadtightened,itwasnotedthatthe thoughtthatitcouldcontributeimportantlytobetter

Minutesof FederalOpenMarketCommitteeMeetings|August 259 outcomesintermsof theCommittee’sdualmandate policyrateearlierorlaterif economicconditionsdo of maximumemploymentandpricestability.Inpar- notevolveastheCommitteecurrentlyexpects. ticular,somemembersexpressedtheviewthatadditionalaccommodationwaswarrantedbecausethey Inthestatementtobereleasedfollowingthemeeting, expectedtheunemploymentratetoremainwell membersgenerallyagreedthatitwasimportantto above,andinflationtobeatorbelow,levelsconsis- acknowledgethattherecoveryhadbeenconsiderably tentwiththeCommittee’smandate.Thoseviewinga slowerthantheCommitteehadexpected.Although shifttowardmoreaccommodativepolicyasappro- someof theslowdowninthefirsthalf of theyear priategenerallyagreedthatastrengtheningof the reflectedtransitoryfactors,mostmembersnow Committee’sforwardguidanceregardingthefederal judgedthatonlypartof thatweaknesscouldbe fundsrate,bybeingmoreexplicitabouttheperiod attributedtothosefactors.TheCommitteedecided overwhichtheCommitteeexpectedthefederalfunds tonotethatthedeclinesinenergyandcommodity ratetoremainexceptionallylow,wouldbeameas- pricesfromtheirrecentpeakshadledtoamoderauredresponsetothedeteriorationintheoutlook tionof inflationandthatlonger-terminflationexpecovertheintermeetingperiod.Afewmembersfelt tationsremainedstable.TheCommitteealsocharacthatrecenteconomicdevelopmentsjustifiedamore terizedtheeconomicoutlookintermsof itsstatutory substantialmoveatthismeeting,buttheywerewill- mandateandindicatedthatitexpectedtheslower ingtoacceptthestrongerforwardguidanceasastep paceof economicexpansiontoresultinanuneminthedirectionof additionalaccommodation.Three ploymentratethatwoulddeclineonlygradually membersdissentedbecausetheypreferredtoretain towardlevelsconsistentwithitsdualmandateand theforwardguidancelanguageemployedintheJune thatitsawthedownsideriskstotheeconomicoutstatement. lookashavingincreased.Mostmembersalsoanticipatedthatinflationwouldsettle,overcomingquar- TheCommitteeagreedtokeepthetargetrangefor ters,atlevelsatorbelowthoseconsistentwiththe thefederalfundsrateat0to¼percentandtostate Committee’smandate.TheCommitteenotedthatit thateconomicconditionsarelikelytowarrantexcep- haddiscussedtherangeof policytoolsthatwere tionallylowlevelsforthefederalfundsrateatleast availabletopromoteastrongereconomicrecoveryin throughmid-2013.Thatanticipatedpathforthefed- acontextof pricestability,andtoindicatethatthose eralfundsratewasviewedbothasappropriatein tools,includingadjustmentstotheCommittee’sseculightof mostmembers’outlookfortheeconomyand ritiesholdings,wouldbeemployedasappropriate. asgenerallyconsistentwithsomeprescriptionsfor monetarypolicybasedonhistoricalandmodel-based Attheconclusionof thediscussion,theCommittee analysis.Inchoosingtophrasetheoutlookforpolicy votedtoauthorizeanddirecttheFederalReserve intermsof atimehorizon,membersalsoconsidered Bankof NewYork,untilitwasinstructedotherwise, conditioningtheoutlookforthelevelof thefederal toexecutetransactionsintheSystemAccountin fundsrateonexplicitnumericalvaluesfortheunem- accordancewiththefollowingdomesticpolicy ploymentrateortheinflationrate.Somemembers directive: arguedthatdoingsowouldestablishgreaterclarity regardingtheCommittee’sintentionsanditslikely “TheFederalOpenMarketCommitteeseeks reactiontofutureeconomicdevelopments,whileoth- monetaryandfinancialconditionsthatwillfosersraisedquestionsabouthowanappropriate terpricestabilityandpromotesustainable numericalvaluemightbechosen.Nosuchreferences growthinoutput.Tofurtheritslong-runobjecwereincludedinthestatementforthismeeting.One tives,theCommitteeseeksconditionsinreserve memberexpressedconcernthattheuseof aspecific marketsconsistentwithfederalfundstradingin dateintheforwardguidancewouldbeseenbythe arangefrom0to¼percent.TheCommittee publicasanunconditionalcommitment,anditcould alsodirectstheDesktomaintainitsexisting undermineCommitteecredibilityif achangeintim- policyof reinvestingprincipalpaymentsonall ingsubsequentlybecameappropriate.Mostmem- domesticsecuritiesintheSystemOpenMarket bers,however,agreedthatstatingaconditional AccountinTreasurysecuritiesinordertomainexpectationforthelevelof thefederalfundsrate tainthetotalfacevalueof domesticsecuritiesat throughmid-2013providedusefulguidancetothe approximately$2.6trillion.TheSystemOpen public,withsomenotingthatsuchanindicationdid MarketAccountManagerandtheSecretarywill notremovetheCommittee’sflexibilitytoadjustthe keeptheCommitteeinformedof ongoingdevel-

260 98thAnnualReport|2011 opmentsregardingtheSystem’sbalancesheet Topromotetheongoingeconomicrecoveryand thatcouldaffecttheattainmentovertimeof the tohelpensurethatinflation,overtime,isatlev- Committee’sobjectivesof maximumemploy- elsconsistentwithitsmandate,theCommittee mentandpricestability.” decidedtodaytokeepthetargetrangeforthe federalfundsrateat0to¼percent.TheCom- Thevoteencompassedapprovalof thestatement mitteecurrentlyanticipatesthateconomicconbelowtobereleasedat2:15p.m.: ditions—includinglowratesof resourceutilizationandasubduedoutlookforinflationover “InformationreceivedsincetheFederalOpen themediumrun—arelikelytowarrantexcep- MarketCommitteemetinJuneindicatesthat tionallylowlevelsforthefederalfundsrateat economicgrowthsofarthisyearhasbeencon- leastthroughmid-2013.TheCommitteealso siderablyslowerthantheCommitteehad willmaintainitsexistingpolicyof reinvesting expected.Indicatorssuggestadeteriorationin principalpaymentsfromitssecuritiesholdings. overalllabormarketconditionsinrecent TheCommitteewillregularlyreviewthesizeand months,andtheunemploymentratehasmoved compositionof itssecuritiesholdingsandispreup.Householdspendinghasflattenedout, paredtoadjustthoseholdingsasappropriate. investmentinnonresidentialstructuresisstill weak,andthehousingsectorremainsdepressed. TheCommitteediscussedtherangeof policy However,businessinvestmentinequipmentand toolsavailabletopromoteastrongereconomic softwarecontinuestoexpand.Temporaryfac- recoveryinacontextof pricestability.Itwill tors,includingthedampingeffectof higherfood continuetoassesstheeconomicoutlookinlight andenergypricesonconsumerpurchasing of incominginformationandispreparedto powerandspendingaswellassupplychaindis- employthesetoolsasappropriate.” ruptionsassociatedwiththetragiceventsin Japan,appeartoaccountforonlysomeof the Votingforthisaction:BenBernanke,WilliamC. recentweaknessineconomicactivity.Inflation Dudley,ElizabethDuke,CharlesL.Evans,Sarah pickedupearlierintheyear,mainlyreflecting BloomRaskin,DanielK.Tarullo,andJanetL. higherpricesforsomecommoditiesand Yellen. importedgoods,aswellasthesupplychaindisruptions.Morerecently,inflationhasmoderated Votingagainstthisaction:RichardW.Fisher,Narayaspricesof energyandsomecommoditieshave anaKocherlakota,andCharlesI.Plosser. declinedfromtheirearlierpeaks.Longer-term inflationexpectationshaveremainedstable. Messrs.Fisher,Kocherlakota,andPlosserdissented becausetheywouldhavepreferredtocontinueto Consistentwithitsstatutorymandate,theCom- describeeconomicconditionsaslikelytowarrant mitteeseekstofostermaximumemployment exceptionallylowlevelsforthefederalfundsratefor andpricestability.TheCommitteenowexpects an“extendedperiod,”ratherthancharacterizingthat asomewhatslowerpaceof recoveryovercom- periodas“atleastthroughmid-2013.”Mr.Fisher ingquartersthanitdidatthetimeof theprevi- discussedthefragilityof theU.S.economybutfelt ousmeetingandanticipatesthattheunemploy- thatitwaschieflynonmonetaryfactors,suchas mentratewilldeclineonlygraduallytowardlev- uncertaintyaboutfiscalandregulatoryinitiatives, elsthattheCommitteejudgestobeconsistent thatwererestrainingdomesticcapitalexpenditures, withitsdualmandate.Moreover,downsiderisks jobcreation,andeconomicgrowth.Hewascontotheeconomicoutlookhaveincreased.The cernedboththattheCommitteedidnothaveenough Committeealsoanticipatesthatinflationwill informationtobespecificonthetimeintervalover settle,overcomingquarters,atlevelsatorbelow whichitexpectedlowratestobemaintained,and thoseconsistentwiththeCommittee’sdualman- that,wereittodoso,theCommitteeriskedappeardateastheeffectsof pastenergyandothercom- ingoverlyresponsivetotherecentfinancialmarket moditypriceincreasesdissipatefurther.How- volatility.Mr.Kocherlakota’sperspectiveonthe ever,theCommitteewillcontinuetopayclose policydecisionwasshapedbyhisviewthatin attentiontotheevolutionof inflationandinfla- November2010,theCommitteehadchosenalevelof tionexpectations. accommodationthatwaswellcalibratedforthecon-

Minutesof FederalOpenMarketCommitteeMeetings|August 261 ditionof theeconomy.SinceNovember,inflation staff providedanupdateonthedebtlimitstatus, hadrisenandunemploymenthadfallen,andhedid conditionsinfinancialmarkets,plansthattheFednotbelievethatprovidingmoremonetaryaccommo- eralReserveandtheTreasuryhaddevelopedregarddationwastheappropriateresponsetothosechanges ingtheprocessingof federalpayments,potential intheeconomy.Mr.Plosserfeltthatthereferenceto implicationsforbanksupervisionandregulatory 2013mightwellbemisinterpretedassuggestingthat policies,andpossibleactionsthattheFederalReserve monetarypolicywasnolongercontingentonhow couldtakeif disruptionstomarketfunctioningposed theeconomicoutlookevolved.Althoughfinancial athreattotheFederalReserve’seconomicobjectives. marketshadbeenvolatileandincominginformation Participantsgenerallyanticipatedthattherewouldbe ongrowthandemploymenthadbeenweakerthan noneedtomakechangestoexistingbankregulaanticipated,hebelievedthestatementconveyedan tions,theoperationof thediscountwindow,orthe excessivelynegativeassessmentof theeconomyand conductof openmarketoperations.Anumberof thatitwasprematuretoundertake,orbeperceivedto participantsemphasizedthattheFederalReserve signal,furtherpolicyaccommodation.Healso wouldcontinuetoemploymarketvaluesof securities judgedthatthepolicystepwoulddolittletoimprove initstransactions.Withrespecttopotentialpolicy near-termgrowthprospects,giventheongoingstruc- actions,participantsagreedthattheappropriate turaladjustmentsandexternalchallengesfacedby responsewoulddependimportantlyontheactual theU.S.economy. conditionsinmarketsandshouldgenerallyconsistof standardoperations.Someparticipantsnotedthat Itwasagreedthatthenextmeetingof theCommittee suchanapproachwouldmaintainthetraditional wouldbeheldonTuesday–Wednesday,Septem- separationof theFederalReserve’sactionsfromthe ber20–21,2011.Themeetingadjournedat1:40p.m. Treasury’sdebtmanagementdecisions. onAugust9,2011. Notation Vote Videoconference Meeting of August 1 BynotationvotecompletedonAugust29,2011,the OnAugust1,2011,theCommitteemetbyvideocon- Committeeunanimouslyapprovedtheminutesof the ferencetodiscussissuesassociatedwithcontingen- FOMCmeetingheldonAugust9,2011. ciesintheeventthattheTreasurywastemporarily unabletomeetitsobligationsbecausethestatutory WilliamB.English federaldebtlimitwasnotraisedorintheeventof a Secretary downgradeof theU.S.sovereigncreditrating.The

262 98thAnnualReport|2011 Meeting Held ScottG.Alvarez GeneralCounsel on September 20–21, 2011 ThomasC.Baxter Ajointmeetingof theFederalOpenMarketCom- DeputyGeneralCounsel mitteeandtheBoardof Governorsof theFederal JamesA.Clouse,ThomasA.Connors, ReserveSystemwasheldintheofficesof theBoard StevenB.Kamin,LorettaJ.Mester, of GovernorsinWashington,D.C.,onTuesday,Sep- SimonPotter,DavidReifschneider, tember20,2011,at10:30a.m.,andcontinuedon HarveyRosenblum,andDavidW.Wilcox Wednesday,September21,2011,at9:00a.m. AssociateEconomists Present BrianSack Manager,SystemOpenMarketAccount BenBernanke Chairman JenniferJ.Johnson Secretaryof theBoard,Officeof theSecretary, WilliamC.Dudley Boardof Governors ViceChairman PatrickM.Parkinson ElizabethDuke Director,Divisionof BankingSupervisionand Regulation,Boardof Governors CharlesL.Evans NellieLiang RichardW.Fisher Director,Officeof FinancialStabilityPolicyand NarayanaKocherlakota Research,Boardof Governors CharlesI.Plosser RobertdeV.Frierson DeputySecretary,Officeof theSecretary, SarahBloomRaskin Boardof Governors DanielK.Tarullo WilliamNelson JanetL.Yellen DeputyDirector,Divisionof MonetaryAffairs, Boardof Governors ChristineCumming,JeffreyM.Lacker, DennisP.Lockhart,SandraPianalto,and LindaRobertson JohnC.Williams AssistanttotheBoard,Officeof BoardMembers, AlternateMembersof theFederalOpenMarket Boardof Governors Committee CharlesS.Struckmeyer JamesBullardandEricRosengren DeputyStaff Director,Officeof theStaff Director, Presidentsof theFederalReserveBanksof St.Louis Boardof Governors andBoston,respectively SethB.Carpenter EstherL.George SeniorAssociateDirector,Divisionof Monetary FirstVicePresident,FederalReserveBankof Affairs,Boardof Governors KansasCity MichaelP.Leahy WilliamB.English SeniorAssociateDirector,Divisionof International SecretaryandEconomist Finance,Boardof Governors LawrenceSlifmanandWilliamWascher DeborahJ.Danker SeniorAssociateDirectors,Divisionof Researchand DeputySecretary Statistics,Boardof Governors MatthewM.Luecke AndrewT.Levin AssistantSecretary SeniorAdviser,Officeof BoardMembers, DavidW.Skidmore Boardof Governors AssistantSecretary StephenA.MeyerandJoyceK.Zickler MichelleA.Smith SeniorAdvisers,Divisionof MonetaryAffairs, AssistantSecretary Boardof Governors

Minutesof FederalOpenMarketCommitteeMeetings|September 263 DanielM.CovitzandDavidE.Lebow Staff Presentation on Policy Tools AssociateDirectors,Divisionof Researchand Statistics,Boardof Governors Thestaff gaveapresentationonseveraltoolsthat couldbeused,withintheCommittee’scurrentpolicy DavidH.Small framework,toprovideadditionalmonetarypolicy ProjectManager,Divisionof MonetaryAffairs, accommodationtosupporttheeconomicrecovery. Boardof Governors Thepresentationfirstreviewedthreeoptionsfor managingthesizeandcompositionof theSOMA PenelopeA.Beattie portfolio:areinvestmentmaturityextensionpro- AssistanttotheSecretary,Officeof theSecretary, gram,aSOMAportfoliomaturityextensionpro- Boardof Governors gram,andalarge-scaleassetpurchaseprogram. JamesM.Lyon Underthefirstof theseoptions,theFederalReserve FirstVicePresident,FederalReserveBankof wouldreinvesttheprincipalpaymentsitreceiveson Minneapolis itsholdingsof agencysecuritiesexclusivelyinlongtermTreasurysecurities.Underthesecondoption, Jeff Fuhrer theCommitteewouldpurchaselong-termTreasury ExecutiveVicePresident,FederalReserveBankof securitiesandsellthesameamountof shorter-term Boston Treasurysecurities;thesetransactionswouldsignifi- DavidAltig,AlanD.Barkema,SpencerKrane, cantlyincreasetheaveragematurityof theSOMA MarkE.Schweitzer,ChristopherJ.Waller,and portfolio,butthesizeof theFederalReserve’sbal- JohnA.Weinberg ancesheetandthelevelof reservebalanceswouldbe SeniorVicePresidents,FederalReserveBanksof largelyunaffectedinthenearterm.Underthethird Atlanta,KansasCity,Chicago,Cleveland,St.Louis, option,theCommitteewouldpurchaselonger-term andRichmond,respectively Treasurysecurities,increasingthesizeof itsbalance sheetandthesupplyof reservebalances.Thestaff JulieAnnRemache alsosummarizedasetof optionsforclarifying,for AssistantVicePresident,FederalReserveBankof thepublic,theCommittee’slonger-runobjectives NewYork underitsdualmandateaswellastheCommittee’s EricT.Swanson forwardguidanceaboutthelikelyfuturestanceof SeniorResearchAdvisor,FederalReserveBankof monetarypolicy.Theoptionsfocusedonwaystoelu- SanFrancisco cidatetheeconomicconditionsthatcouldwarrant raisingthelevelof short-terminterestrates.Finally, JonathanHeathcote thestaff presentationsummarizedthepotential SeniorEconomist,FederalReserveBankof implicationsof reducingtheinterestratethatthe Minneapolis FederalReservepaysonreservebalancesthatdepositoryinstitutionsholdinaccountsattheFederal Developments in Financial Markets and ReserveBanks(theIORrate). the Federal Reserve’s Balance Sheet Meetingparticipantsexpressedarangeof viewson TheManagerof theSystemOpenMarketAccount thepotentialefficacyof policytoolstiedtothesize (SOMA)reportedondevelopmentsindomesticand andcompositionof theFederalReserve’sbalance foreignfinancialmarketsduringtheperiodsincethe sheet.Manyjudgedthatthesepoliciescouldprovide FederalOpenMarketCommittee(FOMC)meton additionalmonetarypolicyaccommodationbylow- August9,2011.HealsoreportedonSystemopen eringlonger-terminterestratesandeasingfinancial marketoperations,includingthecontinuingreinvest- conditionsatatimewhenfurtherreductionsinthe mentintolonger-termTreasurysecuritiesof princi- federalfundsrateareinfeasible.However,anumber palpaymentsreceivedonSOMAholdingsof agency sawthepotentialeffectsonrealeconomicactivityas debtandagency-guaranteedmortgage-backedsecuri- limitedoronlytransitory,particularlyinthecurrent ties(MBS).Byunanimousvote,theCommitteerati- environmentof balancesheetdeleveraging,credit fiedtheDesk’sdomestictransactionsovertheinter- constraints,andhouseholdandbusinessuncertainty meetingperiod. abouttheeconomicoutlook.Participantsnotedthat

264 98thAnnualReport|2011 aSOMAmaturityextensionprogramwouldnot explanationtothepublicof howthoseobjectives expandtheFederalReserve’sbalancesheetorthe weredeterminedandhowtheyfitintothepolicylevelof reservebalances,andthatthescaleof sucha makingframework.Participantsgenerallysawthe programwasnecessarilylimitedbythesizeof the Committee’spost-meetingstatementsasnotwell FederalReserve’sholdingsof shorter-termsecurities suitedtocommunicatefullytheCommittee’sthinksothatitcouldnotberepeatedtoprovidefurther ingaboutitsobjectivesanditspolicyframework,and stimulus.Anumberof participantssawlarge-scale agreedthattheCommitteewouldneedtouseother assetpurchasesaspotentiallyamorepotenttoolthat meanstocommunicatethatinformationorto shouldberetainedasanoptionintheeventthatfur- supplementinformationinthestatement. therpolicyactiontosupportastrongereconomic recoverywaswarranted.Somejudgedthatlarge-scale Mostparticipantsalsoindicatedthattheysawadvanassetpurchasesandtheresultingexpansionof the tagesinbeingmoretransparentaboutthecondition- FederalReserve’sbalancesheetwouldbemorelikely alityintheCommittee’sforwardguidancebyprovidtoraiseinflationandinflationexpectationsthanto ingmoreinformationabouttheeconomicconditions stimulateeconomicactivityandarguedthatsuch towhichtheguidancerefers.Theyjudgedthatsucha toolsshouldbereservedforcircumstancesinwhich stepcouldmaketheCommittee’sforwardguidance theriskof deflationwaselevated.Incommentingon moreeffectiveandincreasethelikelihoodthatfinantheimplicationsof amaturityextensionprogramor cialmarketswouldrespondtoincomingeconomic anotherlarge-scaleassetpurchaseprogram,several informationinwaysthatwouldhelpmonetarypolicy participantsnotedthattheSystemshouldavoid achieveitsgoals.However,severalparticipantssawa holdingaverylargeproportionof theoutstanding riskthatanyexplicitstatementof economiccondistockof longer-termTreasurysecuritiesinitsportfo- tionsspecifiedintheCommittee’sforwardguidance liobecausetheresultcouldbeadeteriorationinmar- couldbemistakenforastatementof itslonger-run ketfunctioning.Anumberof participantssuggested objectives.Othersthoughtthisriskof misinterpretadirectingsomepurchasesorreinvestmentsinto tioncouldbemanagedthroughcarefulcommunicaagencyMBS;however,acoupleof participantssaw tions.Anumberof participantssuggestedthatthe suchactionsasunlikelytohavebenefits,orasaform Committee’speriodicSummaryof EconomicProjecof creditallocation. tionscouldbeusedtoprovidemoreinformation abouttheirviewsonthelonger-runobjectivesand Mostparticipantsindicatedthattheyfavoredtaking thelikelyevolutionof monetarypolicy. stepstoincreasefurtherthetransparencyof monetarypolicy,includingprovidingmoreinformation ParticipantsdiscussedwhethertoreducetheIOR abouttheCommittee’slonger-runpolicyobjectives rate,weighingpotentialbenefitsandcosts.Anumber andaboutthefactorsthatinfluencetheCommittee’s of participantsjudgedthatareductionwouldresult policydecisions.Participantsgenerallyagreedthata inatleastmarginallylowermoneymarketratesand clearstatementof theCommittee’slonger-runpolicy couldhelpstimulatebanklending.Severalnotedthat objectivescouldbehelpful;somenotedthatitwould reducingtheIORratecouldhelpsignaltheCommitalsobeusefultoclarifythelinkagebetweenthese tee’sintentiontokeepthefederalfundsratelow. longer-runobjectivesandtheCommittee’sapproach SomeparticipantsobservedthatkeepingtheIOR tosettingthestanceof monetarypolicyintheshort ratenoticeablyabovethemarketrateonothersafe, andmediumrun.Thatsaid,anumberof participants short-terminstrumentscouldbeperceivedassubsiexpressedconcernsabouttheconceptualissuesasso- dizingsomebankinginstitutions.However,some ciatedwithestablishingandcommunicatingexplicit othersnotedthatarecentchangeindepositinsurlonger-runobjectivesfortheunemploymentrateor anceassessmentshadtheeffectof significantly othermeasuresof labormarketconditions,inasmuch reducingthenetreturnthatmanybanksreceivefrom asthelong-runequilibriumlevelsof suchmeasures holdingreservebalances.Moreover,manyparticiareinfluencedimportantlybynonmonetaryfactors, pantsvoicedconcernsthatreducingtheIORrate aresubjecttochangeovertime,andareestimated riskedcostlydisruptionstomoneymarketsandto withconsiderableuncertainty.Incontrast,partici- theintermediationof credit,andthatthemagnitude pantsnotedthatthelong-runlevelof inflationis of sucheffectswouldbedifficulttopredictin determinedprimarilybymonetarypolicy.Accord- advance.Inaddition,thefederalfundsmarketcould ingly,manyfeltthatif theCommitteeweretoreacha contractasaresultandtheeffectivefederalfunds consensusonmoreexplicitstatementsof itslonger- ratecouldbecomelessreliablylinkedtoothershortrunobjectives,itwouldneedtoprovideanin-depth terminterestrates.Participantsgenerallyagreedthat

Minutesof FederalOpenMarketCommitteeMeetings|September 265 theyneededmoreinformationonthelikelyeffectsof sumerprices.ConsumersentimentdeterioratedsigareductionintheIORrateinordertojudgeitsuse- nificantlyfurtherinAugustandstayeddownbeatin fulnessasapolicytoolinthecurrentenvironment. earlySeptember. Staff Review of the Economic Situation Activityinthehousingmarketcontinuedtobe depressedbyweakdemand,uncertaintyaboutfuture TheinformationreviewedattheSeptember20–21 homeprices,tightcreditconditionsformortgages meetingindicatedthateconomicactivitycontinued andconstructionloans,andasubstantialinventory toexpandataslowpaceandthatlabormarketcon- of foreclosedanddistressedproperties.Startsand ditionsremainedweak.Consumerpriceinflation permitsfornewsingle-familyhomesinJulyand appearedtohavemoderatedsinceearlierintheyear, Auguststayedneartheverylowlevelsseensincethe andmeasuresof long-runinflationexpectations middleof lastyear.Salesof newandexistinghomes remainedstable. remainedsubduedinrecentmonths,andhomeprices edgeddownfurther. Privatenonfarmemploymentroseonlyslightlyin August,andjobgainswereweakevenafteradjusting Realbusinessspendingonequipmentandsoftware fortheeffectsof astrikebycommunicationsworkers appearedtoexpandfurther.Nominalshipmentsof duringthemonth.Meanwhile,employmentatstate nondefensecapitalgoodsincreasedinJuly,andbusiandlocalgovernmentsdeclinedfurther,reflecting nesspurchasesof newmotorvehiclestrendedhigher. theirtightbudgetconditions.Theunemployment Newordersof nondefensecapitalgoodscontinuedto rateremainedat9.1percentinAugust,andboth runaheadof shipmentsinJuly,andtheexpanding long-durationunemploymentandtheshareof work- backlogof unfilledorderspointedtowardfurther ersemployedparttimeforeconomicreasonswere gainsinoutlaysforbusinessequipmentinsubsequent stillelevated.Initialclaimsforunemploymentinsur- months.Incontrast,surveymeasuresof business anceedgedup,onnet,overthepreviousfewweeks, conditionsandsentimentremainedatmutedlevelsin andmanyindicatorsof firms’hiringplansdeterio- AugustandSeptember.Realbusinessexpenditures ratedsomewhatinrecentmonths. forofficeandcommercialbuildingsmovedupin recentmonths,butoutlayswerestillataverylow Industrialproductionexpandedsolidlybutunevenly levelandcontinuedtoberestrainedbyhighvacancy inJulyandAugust,andthemanufacturingcapacity ratesandtightcreditconditionsforconstruction utilizationratemovedup.Outputincreasedmarkedly loans.Meanwhile,spendingfordrillingandmining atbothmotorvehiclemanufacturersandtheir structuresincreasedfurther.Businessesseemedtobe upstreamsuppliersasthesupplychaindisruptions addingtoinventoriesatamoremodestpaceinJuly, associatedwiththeearthquakeinJapaneased.In astherestockingof motorvehicleinventories contrast,thepaceof factoryproductionsoftened depletedbytheearlierproductiondisruptionswas amongindustriesunlikelytohavebeenaffectedby offsetbyslowingaccumulationinothersectors.In thesupplydisruptions.Motorvehicleassemblies mostindustries,inventorieslookedtobereasonably werescheduledtorisenoticeablyinSeptemberand wellalignedwithsales. thenincreasefurtherinthefourthquarter,but broaderindicatorsof near-termmanufacturingactiv- Realfederalgovernmentpurchasesappearedto ity,suchasthediffusionindexesof newordersfrom increaseinrecentmonthsasdefenseexpenditures thenationalandregionalmanufacturingsurveys, continuedtorisefromunusuallylowlevelsearlyin remainedatlevelsconsistentwithonlymeagergains theyear.Atthestateandlocallevel,realgovernment inoutputinthecomingmonths. purchasesseemedsettodeclinefurtheraspayrolls werereducedandconstructionspendingdecreased. RealconsumerspendingpostedasolidgaininJuly, inpartreflectingareboundinmotorvehiclepur- ThenominalU.S.internationaltradedeficitwidened chasesfromtheirlowlevelinthespringwhenthe inJunebutnarrowedsignificantlyinJuly.Exports availabilityof somemodelswaslimited.However, rosebrisklyinJuly,particularlyinindustrialsupplies nominalretailsales,excludingpurchasesatmotor andcapitalgoods,afterhavingdecreasedinJune. vehiclesandpartsoutlets,onlyinchedupinAugust, Importsmoveddowninbothmonths,asdeclinesin andsalesof newlightmotorvehiclestickeddown. petroleumproducts—reflectingbothlowerpricesand RealdisposableincomeedgedlowerinJuly,asgains decreasedvolumes—morethanoffsetlargegainsin innominalincomewereoffsetbytheriseincon- automotiveproductsfollowingtheeasingof supply

266 98thAnnualReport|2011 chaindisruptionsinJapan.TradedataforJulysug- Staff Review of the Financial Situation gestedthatnetexportscontinuedtoboostU.S.real grossdomesticproduct(GDP)growthinthethird Financialmarketswerevolatileovertheintermeeting quarter. periodasinvestorsrespondedtomostlydownbeat newsoneconomicactivityintheUnitedStatesand MonthlyU.S.consumerpriceinflationpickedupin abroad.Fluctuationsininvestors’levelof concern JulyandAugustafterslowinginMayandJune,but aboutEuropeanfiscalandfinancialprospectsalso remainedabitlowerthanearlierintheyear.Con- contributedtomarketvolatility. sumerenergypricessteppedupinJulyandAugust butonlypartiallyretracedtheirdeclineoverthepre- Theexpectedpathof thefederalfundsratemoved vioustwomonths,andtheincreasesinfoodprices downappreciablyovertheintermeetingperiod. weresomewhatbelowthepaceseenearlyintheyear. Investorsinitiallyfocusedonthefirmerforward Theconsumerpriceindexexcludingfoodandenergy guidanceintheAugustFOMCstatementindicating roseataboutthesameaveragemonthlyrateinJuly thattheCommitteeanticipatedthateconomiccondiandAugustasinthesecondquarter.Near-term tionswerelikelytowarrantexceptionallylowlevels inflationexpectationsfromtheThomsonReuters/ of thefederalfundsrateatleastthroughmid-2013. Universityof MichiganSurveysof Consumersin Oversubsequentweeks,weakeconomicdatacontrib- AugustandSeptemberstayedwellbelowtheelevated utedtorisingexpectationsof additionalmonetary levelseeninthespring,andlonger-terminflation accommodation;thoseexpectationsandincreasing expectationsremainedstable. concernsaboutthefinancialsituationinEuropeled toanappreciabledeclineinintermediate-andlonger- Availablemeasuresof laborcompensationindicated termnominalTreasuryyields.Partlyinreactionto thatwageincreasescontinuedtoberestrainedbythe thesoftereconomicoutlook,measuresof inflation largemarginof slackinthelabormarket.Average compensationforthenext5yearsaswellas5to hourlyearningsforallemployeespostedasmallgain, 10yearsaheadderivedfromnominalandinflationonnet,overJulyandAugust,andtheirrateof protectedTreasurysecuritieseachfelltothelowend increasefrom12monthsearlierremainedsubdued. of theirrangesforthisyear. Foreigneconomicgrowthdeclinedinthesecond quarter.GrowthslowednotablyinEurope;economic SinceearlyAugust,theequitypricesof largeU.S. activityalsodeceleratedintheemergingmarket financialinstitutionsfellandtheircreditdefaultswap economies.RealGDPcontractedinCanadaduetoa (CDS)spreadswidened.More-pronounceddeclines largedeclineinexports.OutputalsofellinJapan, inequitypricesandlargerincreasesinCDSspreads reflectingthedislocationscausedbytheMarch occurredforsomeEuropeanfinancialinstitutions. earthquake.Partof thedownshiftinglobaleconomic ThoughmanylargeEuropeanbanksfounditincreasgrowthappearedtohavebeendrivenbytemporary inglydifficult,inrecentweeks,togetunsecureddolsupplychaindisruptionscausedbyJapan’searth- larfundingbeyondtheveryshortterm,thecondiquake.Althoughthewaningof thesedisruptions tionsfacedbyU.S.financialinstitutionsinthesemarseemedtobesupportingareboundinforeignGDP ketswerelittlechanged.Insecuredfundingmarkets, growthinthethirdquarter,recentindicatorssug- termfinancingreportedlyremainedreadilyavailable gestedonlysluggishgainsinunderlyingeconomic forbothdomesticandEuropeanfinancialinstituactivity.Withtheintensificationof fiscalandfinan- tionsthroughrepurchaseagreementsbackedby cialstressintheeuroarea,measuresof consumer Treasuryandagencycollateral.However,some andbusinessconfidencedeclinedinAugust,and strainsemergedlateintheintermeetingperiodinthe indicatorsof manufacturingactivityintheregion marketforrepurchaseagreementsbackedbylowerdeteriorated.Formanyemergingmarketeconomies, quality,nontraditionalcollateral.Inresponsetodoltherecentslowingingrowthof economicactivity larfundingpressuresabroad,theBankof England, wasmostevidentinexports,industrialproduction, theEuropeanCentralBank(ECB),andtheSwiss andotherindicatorsof manufacturingactivity.Infla- NationalBankannouncedthattheywouldoffer tionabroadeasedinthesecondquarterastheeffects banksintheirjurisdictionsdollarloansforperiodsof of earlierincreasesinfoodandenergypricesbegan approximatelythreemonthsaswellascontinueto tofade.Morerecently,however,increasesindomestic offerdollarloansforone-weekperiods;theBankof foodpricesappearedtobepushingupconsumer Japanaddedtoitspreviouslyannouncedprogramof priceinflationinsomeeconomies. three-monthandseven-daydollarloans.

Minutesof FederalOpenMarketCommitteeMeetings|September 267 Broadstockpriceindexeswerevolatilebutincreased, households.Residentialmortgagedebtcontracted onnet,sincetheAugustFOMCmeeting,following furtherinthesecondquarter,andthevolumeof sharpdeclinesinthedaysjustprecedingthatmeet- mortgageapplicationstopurchasehomesmoved ing.Grosspublicequityissuancebynonfinancial downsofarinthethirdquarter.Ratesof serious firmsweakenedsubstantiallyinrecentweeks,anda mortgagedelinquencycontinuedtomoderatebut largenumberof plannedinitialpublicofferingswere remainedhigh,whiletherateatwhichprimemortshelvedamidtheheightenedmarketvolatility. gagesmovedintodelinquencysteppedup,onbalance,inrecentmonths. Spreadsof yieldsoninvestment-andspeculativegradecorporatebondsoverthoseoncomparable- ConsumercreditincreasedatasolidpaceinJuly,asa maturityTreasurysecuritiesrosesignificantlyover sizableincreaseinnonrevolvingcredit—drivenbya theintermeetingperiod,reachinglevelslastregis- surgeinfederallyfundedstudentloans—morethan teredinlate2009,andaveragebidpricesinthesec- offsetadecreaseinrevolvingcredit.Issuanceof conondarymarketforsyndicatedleveragedloans sumerasset-backedsecuritiesmoveddownin declined.CreditflowsinAugustofferedadditional August,butspreadsonthesesecuritiesremainedlow. evidencethatdebtmarketshadbecomelesshospi- Delinquencyratesforseveralcategoriesof consumer tabletolower-ratednonfinancialfirms.Bondissu- loansmoveddownfurtherinrecentmonths,with ancebyspeculative-gradefirmsnearlycametoahalt, somereachinglevelsnotseensincethe2008–09recesandthevolumeof newleveragedloansfinancedby sionbegan. institutionalinvestorsappearedtodropsharplyafter havingmoveddowninJuly.However,netbondissu- Corecommercialbankloans—thesumof commerancebyinvestment-gradecompaniesremainedrobust cialandindustrial(C&I),realestate,andconsumer inAugustdespitewiderspreads,andnonfinancial loans—expandedslightlyinJulyandAugust.C&I commercialpaperoutstandingincreasedslightly. loansgrewstrongly,consumerloansshowedtepid growth,andrealestateloanscontinuedtodecline. IntheSeptember2011SeniorCreditOfficerOpinion Theupturninlendingwasconcentratedatlarge SurveyonDealerFinancingTerms,dealersreported domesticandforeigninstitutions;atsmallerbanks, onlysmallchangesincredittermsacrossmajor coreloansdeclinedinJulyandAugustataboutthe classesof counterpartiesoverthepastthreemonths. samepaceasinrecentquarters. Respondentsnotedthattheuseof financialleverage byhedgefundsdecreasedsomewhatoverthesame M2surgedinJulyandAugust,asinvestorsandasset period.Dealersalsoindicatedthattheirclients’will- managerssoughttherelativesafetyandliquidityof ingnesstobearriskgenerallyhaddeclinedsomewhat; bankdepositsandotherassetsthatmakeuptheM2 thatwasparticularlytrueof hedgefunds. aggregate.Notably,institutionalinvestors,concerned aboutexposuresof moneyfundstoEuropeanfinan- Financingconditionsforcommercialrealestate cialinstitutions,shiftedfromprimemoneyfundsto remainedweak.Issuanceof commercialmortgage- bankdeposits,andmoneyfundmanagersaccumubackedsecurities(CMBS)slowedfurtherinJulyand latedsizablebankdepositsinanticipationof poten- August,andinvestorsappearedtodemandgreater tiallylargeredemptionsbyinvestors.Inaddition, compensationforrisk.Pricesof mosttypesof com- retailinvestorsevidentlyplacedredemptionsfrom mercialpropertiesremaineddepresseddespitea equityandbondmutualfundsintobankdeposits slightdeclineinvacancyratesinthesecondquarter. andretailmoneymarketfunds. DelinquencyratesonloansthatbackexistingCMBS hoveredatanelevatedlevelinAugust,butdelin- Theforeignexchangevalueof thedollarincreased quencyratesoncommercialrealestateloansheldby overtheintermeetingperiod,reflectingaflightto banksdecreasedinthesecondquarter. safetythatalsocontributedtolowerbenchmarksovereignyieldsinGermany,theUnitedKingdom,and ResidentialMBSyieldsandresidentialmortgage Canada.Incontrast,theyieldontwo-yearGreek interestratesdeclined,onnet,overtheintermeeting sovereignbondsrosesharplyasmarketparticipants periodtohistoricallylowlevels,buttheirspreadsto becameincreasinglyconcernedthatGreecemight yieldsonlong-termTreasurysecuritiesincreased. defaultonitssovereigndebt.Equitypricesinthe However,lowmortgageratesspurredlittlerefinanc- euroareadecreasedovertheintermeetingperiod,folingactivity,inpartbecauseof tightunderwriting lowingsharpdeclinesinearlyAugust.Afterfalling standardsandlowlevelsof homeequityformany steeplybeforetheAugustFOMCmeeting,emerging

268 98thAnnualReport|2011 marketequitypriceswerelittlechanged,onnet,over Thestaff’sprojectionforinflationwaslittlechanged theperiod. fromitsforecastatthetimeof theAugustFOMC meeting.Theupwardpressureonconsumerprices TheEuropeanCentralBankcontinuedtopurchase, fromincreasesinimportandcommoditypricesearinthesecondarymarket,sovereigndebtof euro-area lierintheyear,alongwiththetemporaryboostto countries.YieldsonItalianandSpanishdebt,which motorvehiclepricesfromlowinventories,were declinedfollowingreportedECBpurchasesinearly expectedtorecedefurtherinthecomingquarters. August,driftedhigherduringtheintermeeting Withstablelong-runinflationexpectationsandconperiod.Pricesof moneymarketfuturescontracts siderableslackinlaborandproductmarketsanticiindicatedthatmonetarypolicywasexpectedto patedtopersistovertheforecastperiod,thestaff becomemoreaccommodativeinboththeeuroarea continuedtoprojectthatinflationwouldbesubdued andtheUnitedKingdom.TheSwissNationalBank in2012and2013. tookseveralstepstoeasemonetarypolicy,including interveningintheforeignexchangemarkettocoun- Participants’ Views on Current Conditions terfurtherappreciationof itscurrencyandeventu- and the Economic Outlook allyannouncingthatitispreparedtobuyunlimited quantitiesof foreigncurrencytopreventtheSwiss Intheirdiscussionof theeconomicsituationand francfromtradingintheforeignexchangemarketat outlook,meetingparticipantsagreedthattheinforaratebelow1.2Swissfrancspereuro.Citingcon- mationreceivedduringtheintermeetingperiodindicernsovertheglobaleconomicoutlook,thecentral catedthateconomicgrowthremainedslowbutdid bankof Brazilreduceditspolicyrateafterhaving notsuggestacontractioninactivity.Temporaryfacraiseditseveraltimesearlierthisyear.Incontrast, torsthathadcontributedtoslowergrowthduringthe Chinacontinuedtotightenitsmonetarypolicy, firsthalf of theyearhadpartlyreversed,contributextendingreserverequirementstoawiderrangeof ingtosomereboundinfinalsalesandproduction, bankliabilitiesasitattemptedtoreininoff-balance- particularlyinthemanufacturingsectorwhereprogsheetlendingbyitsbanks. resshadbeenmadeinresolvingsupplychaindisruptions.Butstressesinglobalfinancialmarkets,sluggishgrowthinhouseholds’realincomes,andheight- Staff Economic Outlook eneduncertaintyabouteconomicprospectsseemed tohavecontributedtolowerconsumerandbusiness IntheeconomicforecastpreparedfortheSeptember sentimentandtobeweighingoneconomicgrowth. FOMCmeeting,thestaff lowereditsprojectionfor Recentindicatorspointedtocontinuingweaknessin theincreaseinrealGDPinthesecondhalf of 2011 overalllabormarketconditions,andtheunemployandinthemediumterm.Theincomingdataon mentrateremainedelevated.Inflationappearedto householdandbusinessspendingwereaboutas havemoderatedsinceearlierintheyearaspricesof expected,onbalance,butlabormarketconditions energyandsomecommoditiesdeclinedfromtheir andindicatorsof near-termeconomicactivity,such peaks,butinflationhadnotyetcomedownasmuch asconsumerandbusinesssentiment,wereweaker asparticipantshadexpectedearlierthisyear.Labor thananticipated.Inaddition,financialconditions costsremainedsubdued. deterioratedsincethetimeof thepreviousforecastas investorspulledbackfromriskierassets.Neverthe- Lookingahead,participantscontinuedtoexpect less,thestaff continuedtoforecastthateconomic somepickupinthepaceof recoveryovercoming activitywouldincreasemorerapidlyinthesecond quartersbutanticipatedthattheunemploymentrate half of thisyearthanoverthefirsthalf,assupply woulddeclineonlygradually.Theygenerallyjudged chaindisruptionsinthemotorvehiclesectoreased. thatriskstothegrowthoutlook,includingstrainsin Inthemediumterm,thestaff stillprojectedreal globalfinancialmarkets,weresignificantandtilted GDPtoaccelerategradually,supportedbyaccom- tothedownside;moreover,slowgrowthleftthe modativemonetarypolicy,furtherincreasesincredit recoverymorevulnerabletonegativeshocks.With availability,andimprovementsinconsumerandbusi- longer-terminflationexpectationsremainingstable nessconfidencefromtheircurrentlowlevels.The andtheeffectsof pastincreasesinenergyandcomincreaseinrealGDPwasexpectedtobesufficientto moditypricescontinuingtodissipate,mostparticireducetheunemploymentrateonlyslowlyoverthe pantssawbothcoreandheadlineinflationaslikely projectionperiod,andthejoblessratewasantici- tosettle,overcomingquarters,atorbelowthelevels patedtoremainelevatedattheendof 2013. theyseeasmostconsistentwiththeirdualmandate.

Minutesof FederalOpenMarketCommitteeMeetings|September 269 Participantscontinuedtoseetheoutlookforgrowth Nonresidentialconstructiongenerallyremained andinflationasmoreuncertainthanusual. weak,apartfrominvestmentinextractiveindustries, andforward-lookingindicatorsof nonresidential Participantsnotedmodestgrowthinconsumer constructionhaddropped. spendingonaverageinrecentmonths,withsome reboundinpurchasesof newmotorvehiclesas Meetingparticipantsgenerallynotedthatoverall manufacturersmadeprogressinresolvingsupply labormarketconditionshadshownnoimprovement chaindisruptionsandincreasedtheavailabilityof orhaddeterioratedinrecentmonthsandtheunempopularmodels.Surveyssuggestedthathouseholds ploymentrateremainedelevated.Evenafteradjustwerepessimisticabouttheirfutureincomes,andcon- ingfortheeffectsof strikesonreportedpayrolls,the sumerconfidencehaddroppedtohistoricallylow employmentreportforAugustshowedweakjob levels.Lowconfidence,continuingeffortstorepair gains.Moreover,boththeaverageworkweekand balancesheets,andheightenedcautioninthefaceof aggregatehoursworkeddeclined.Contactsreported anuncertaineconomicenvironmentwereseenasfac- thatslowergrowth,depressedbusinessconfidence, torslikelytoweighonhouseholdspending.Several anduncertaintyabouttheeconomicoutlookwere participantspointedtodepressedhomepricesand restraininghiringaswellascapitalinvestment;many financialconstraints,includingstill-tightcreditcon- alsociteduncertaintyaboutregulatoryandtaxpoliditionsformanyhouseholds,asalsolikelytorestrain ciesascontributingtobusinesses’reluctanceto consumerspendingforatime.However,household spend.Somebusinesscontactsreportedthattheir debt-serviceburdenshaddeclined,indicatingthat firmshadmadecontingencyplanstoreduceoutput therehadbeenfurtherprogressinrepairinghouse- andemploymentif demandfortheirproductswere holdbalancesheets. toturndown.Participantsgenerallyagreedthatsluggishjobgrowthandtheelevatedunemploymentrate Businesssentimenthadworsened,seeminglyin reflectedbothweakdemandforgoodsandservices responsetoweakereconomicprospectsandincreased andamismatchbetweenthecharacteristicsof the downsideriskstotheoutlookforU.S.andglobal unemployedandtheneedsof theemployersthatcurgrowth.Contactsatcommunications,technology, rentlyhavejobsavailable,buttheyhadvaryingviews andtransportationfirmsindicatedthatgrowthhad abouttherelativeimportanceof thesetwofactors. slowedinthosesectors;surveysalsoindicatedthat Manyparticipantsjudgedthatweakdemandwasof growthinthemanufacturingsectorhadweakened mostimportance,whileafewarguedthatstructural duringthesummer.Oneparticipantsuggestedthat andgeographicmismatcheswerekey.Afewcomhurricanesandsubsequentfloodinghadcontributed mentedthatbusinesscontactsreportedreceiving totheslowinginsomepartsof thecountry.Incon- largenumbersof applicationsforrelativelylowtrast,businesscontactsreportedthatcommodity- skilledpositionsbuthavingdifficultyfindingandhirrelatedsectorssuchasenergy,agriculture,andmin- ingcandidatesforsomehighlyskilledpositions.Sevingcontinuedtoshowstronggains;tourismalso eralparticipantsagainnotedthattheexceptionally appearedtobedoingwell.Exportsremainedabright highlevelof long-durationunemploymentcouldlead spotforU.S.manufacturersandcommodityproduc- topermanentnegativeeffectsontheskillsand ers.Businessinvestmentinequipmentandsoftware employmentprospectsof thoseaffectedandso hadcontinuedtoexpandinrecentmonths,butsome reducetheeconomy’slonger-runproductive contactsexpressedconcernthatfirmswouldcutcapi- potential. talspendingif theirsalesslowedfurther. Participantsnotedthatfinancialmarketswerevola- Thehousingsectorremaineddepressed,withcon- tileovertheintermeetingperiodandthatfinancial structionatverylowlevelsandseenaslikelyto conditionswerestrainedattimes,asinvestorsreacted remainsogiventheweaknessinnewhomesalesand totheincomingeconomicdataandtonewsabout thecontinuingflowof foreclosedpropertiesintothe Europeanfiscalandfinancialdevelopments.Several market.Thoughmortgagerateswereverylow, participantsarguedthatbroaderfinancialconditions spreadsbetweenmortgageratesandyieldsonTreas- hadbecomelessaccommodativeovertheintermeeturysecuritieswereunusuallywide.Moreover,still- ingperiod:Riskspreadshadwidenedappreciably, tightcreditstandardsmeantthatmanyhouseholds likelyreflectingareducedwillingnessof investorsto wereunabletoqualifyforloanstobuyahome,and bearrisk,aweakeroutlookforgrowthintheUnited thedropinhousepricesinrecentyearsleftothers Statesandglobally,andgreateruncertaintyabout unabletorefinanceanexistinghigher-ratemortgage. economicprospects.Onthepositiveside,somepar-

270 98thAnnualReport|2011 ticipantsnotedthatthereductioninleverageand theaccommodativestanceof monetarypolicyand increaseinfinancialfirms’liquiditycushionssince theupwardtrendinmeasuresof coreinflationthis theheightof thefinancialcrisislikelyhadattenuated yearsuggestedinflationrisksweretiltedtothe theadverseeffectsof heightenedriskaversion.Con- upside.Participantsgenerallyjudgedthattherewas tactsinthebankingsectorreportedthatU.S.banks relativelylittleriskof deflation.Onecommentedthat remainedwillingtolendtoqualifiedcustomers,but surveysshowedthatforecasterssawalowlikelihood thatloandemandwasweak.Whilenotingthatcondi- of deflation;asecond,however,notedthatameasure tionsinbankfundingmarketshadtightened,par- of theprobabilityof deflationcalculatedfromprices ticularlyforEuropeanbanks,participantsobserved of Treasuryinflation-protectedsecurities(TIPS)had thatthecapitalandliquiditypositionsof U.S.banks declinedastheFederalReserveconducteditssecond hadstrengthenedinrecentquartersandthatthe large-scaleassetpurchaseprogrambutmorerecently creditqualityof bothbusinessandhouseholdloans hadbeenrising. hadcontinuedtoimprove.Nonetheless,somelarge U.S.bankshadseenfurtherpressureontheirstock ParticipantssawconsiderableuncertaintysurroundpricesandCDSspreads.Participantsagreedthat,if ingtheoutlookforagradualpickupineconomic Europeanpolicymakersdidnotrespondeffectively, growth.Itwasagainnotedthatthecyclicalimpetus Europeansovereigndebtandbankingproblems toeconomicexpansionappearedtobeweakerthan couldintensify,withpotentiallyseriousspilloversto inpastrecoveries,butthatthereasonsfortheweaktheU.S.economy.However,itwasnotedthatthe nesswereunclear,contributingtogreateruncertainty ECBwasprovidingampleliquiditytoEuropean abouttheeconomicoutlook.Severalcommented banks,andthatithadsubstantialcapacitytoprovide that,withhouseholdsandbusinessesseekingto additionalliquiditythroughitslendingfacilitiesif reduceleverageratherthantoborrowandwithhousnecessary. ingmarketsindistress,someof thenormalmechanismsthroughwhichmonetarypolicyactionsare Mostparticipantsagreedthatinflationappearedto transmittedtotherealeconomyappearedtobe havemoderatedinrecentmonthscomparedwithear- attenuated.Manyparticipantssawsignificantdownlierintheyearaspricesof energyandsomecom- sideriskstoeconomicgrowth.Whiletheydidnot moditiesdeclinedfromtheirpeaks,thoughthemod- anticipateadownturnineconomicactivity,several erationwasnotassubstantialasmanyparticipants remarkedthat,withgrowthslow,therecoverywas hadexpected.Longer-terminflationexpectations morevulnerabletoadverseshocks.Risksincluded hadremainedstable.Mostparticipantsanticipated thepossibilityof morepronouncedormoreprothat,withstableinflationexpectations,significant tracteddeleveragingbyhouseholds,thechanceof a slackinlaborandproductmarkets,slowwage larger-than-expectednear-termfiscaltightening,and growth,andlittleevidenceof pricingpoweramong potentialspilloverstotheUnitedStatesif thefinanfirms,inflationwaslikelytodeclinemoderatelyover cialsituationinEuropeweretoworsenappreciably. time.Severalsuggestedthatslowinggrowthinthe Participantsagreedtoconsiderfurtherhowbestto UnitedStatesandabroadmadeanewsurgeincom- usetheirmonetarypolicyandliquiditytoolstodeal moditypricesunlikely.However,somenotedthat withsuchshocksif theyweretooccur. coreaswellasheadlineinflationhadmovedup,on balance,sincelastfall.Afewsuggestedthatthejux- Committee Policy Action tapositionof highercoreinflationandsomewhat lowerunemploymentcouldmeanthatthedegreeof Inthediscussionof monetarypolicyfortheperiod slackinlabormarketsandthelevelof potentialout- ahead,mostmembersagreedthattherevisionstothe putwerelowerthantheCommitteehadthought. economicoutlookwarrantedsomeadditionalmon- Somearguedthattheriseincoreinflationfromvery etarypolicyaccommodationtosupportastronger lowlevelsreflectedtheaccommodativestanceof recoveryandtohelpensurethatinflation,overtime, monetarypolicyandindicatedthatthelarge-scale wasatalevelconsistentwiththeCommittee’sdual assetpurchasestheCommitteeundertookfrom mandate.Whiletheyrecognizedthatmonetarypolicy NovemberthroughJunehadbeenasuccessful alonecouldnotcompletelyaddresstheeconomy’s responsetothedeflationrisksof ayearago.Many ills,mostmembersjudgedthatadditionalaccommoparticipantsjudgedthattheriskstotheoutlookfor dationcouldcontributeimportantlytobetteroutinflationwereroughlybalanced.Somesawmedium- comesintermsof theCommittee’sdualmandateof runinflationrisksastiltedtothedownside,inlight maximumemploymentandpricestability.Those of persistentresourceslack;someothersarguedthat viewinggreaterpolicyaccommodationasappropri-

Minutesof FederalOpenMarketCommitteeMeetings|September 271 ateatthismeetinggenerallysupportedamaturity expectedtohelpreducethespreadbetweenyieldson extensionprogramthatwouldcombineassetpur- mortgage-backedsecuritiesandthoseon chasesandsalestoextendtheaveragematurityof comparable-maturityTreasurysecuritiesseenthis securitiesheldintheSOMAwithoutgeneratinga yearandsocontributetolowermortgagerates. substantialexpansionof theFederalReserve’sbal- Membersalsonotedthatthechangeinreinvestment ancesheetorreservebalances.Specifically,those policycouldhelppreventthesharesof outstanding memberssupportedaprogramunderwhichthe longer-termTreasurysecuritiesheldbytheFederal Committeewouldannounceitsintentiontopur- Reservefromreachinglevelshighenoughtoresultin chase,bytheendof June2012,$400billionof Treas- adeteriorationinTreasurymarketfunctioning.One urysecuritieswithremainingmaturitiesof 6yearsto memberwhoopposedthematurityextensionpro- 30yearsandtosellanequalamountof Treasury gramalsoopposedthechangeinreinvestmentpolicy securitieswithremainingmaturitiesof 3yearsorless. becausehejudgedthatitwouldnotbenefithousing Theyexpectedthisprogramtoputdownwardpres- markets.Atthesametime,theCommitteedecidedto sureonlonger-terminterestratesandtohelpmake maintainitsexistingpolicyof rollingovermaturing broaderfinancialconditionsmoreaccommodative. Treasurysecuritiesatauction. Whilethescaleof suchamaturityextensionprogram wasnecessarilylimitedbytheamountof shorter- TheCommitteealsodecidedtokeepthetargetrange termsecuritiesintheSOMAportfolio,mostmem- forthefederalfundsrateat0to¼percentandto bersjudgedtheactionasappropriate,giveneco- reaffirmitsanticipationthateconomicconditions— nomicconditionsandtheoutlook.Twomembers includinglowratesof resourceutilizationandasubsaidthatcurrentconditionsandtheoutlookcould duedoutlookforinflationoverthemediumrun—are justifystrongerpolicyaction,buttheysupported likelytowarrantexceptionallylowlevelsforthefedundertakingthematurityextensionprogramatthis eralfundsrateatleastthroughmid-2013.Acoupleof meetingasitdidnotruleoutadditionalstepsat membersnotedthattheywouldprefertochangethe futuremeetings.Threemembersconcludedthataddi- Committee’sforwardguidancetoprovidegreater tionalaccommodationwasnotappropriateatthis clarityabouttheeconomicconditionsthatwouldbe time.TheCommitteediscussedwhethertospecify likelytowarrantmaintainingexceptionallylowlevels theparametersof thematurityextensionprogramby of thetargetfederalfundsrate,butnodecisionwas statingitsintentiontocompletethefullsetof trans- takenonthispoint. actionsbyJune2012orbystatingthatitwould undertakethesetransactionsataspecifiedmonthly TheCommitteeagreedthatitwasimportantto pace.Memberssawbenefitstobothapproaches:The acknowledge,inthestatementtobereleasedfollowformerwouldprovidethepublicgreaterclarityabout ingthemeeting,thateconomicgrowthremainedslow thelikelyscaleof theprogramandthelattermight andthatindicatorspointedtocontinuingweakness allowtheCommitteegreaterflexibilitytoadjustthe inoveralllabormarketconditions.Italsoagreedto scaleof theprograminresponsetounexpectedeco- notethatinflationappearedtohavemoderatedsince nomicdevelopments.Amajorityfavoredthefirst earlierintheyearaspricesof energyandsomecomapproach.Membersnoted,however,thattheCom- moditieshaddeclinedfromtheirrecentpeaks,and mitteewillcontinuetoregularlyreviewthesizeand thatlonger-terminflationexpectationsremained compositionof itssecuritiesholdingsandthatitis stable.Membersgenerallycontinuedtoexpectsome preparedtoadjustthoseholdingsasappropriate. pickupinthepaceof theeconomicrecoveryover comingquartersbutanticipatedthattheunemploy- MostmembersalsosupportedachangeintheCom- mentratewoulddeclineonlygraduallyandagreed mittee’sreinvestmentpolicy.Tohelpsupportcondi- thatthereweresignificantdownsideriskstotheecotionsinmortgagemarkets,theCommitteedecidedto nomicoutlook,includingstrainsinglobalfinancial reinvestprincipalreceivedfromitsholdingsof markets.TheCommitteeagainanticipatedthatinflaagencydebtandagencyMBSinagencyMBSrather tionwouldsettle,overcomingquarters,atlevelsator thancontinuingtoreinvestinlonger-termTreasury belowthoseconsistentwiththeCommittee’smansecuritiesashadbeentheCommittee’spracticefor dateastheeffectsof pastenergyandcommodity morethanayear.Theeffectof thischangewillbeto priceincreasesdissipatefurther. keeptheSOMA’sholdingsof agencysecuritiesatan approximatelyconstantlevel;undertheprevious Attheconclusionof thediscussion,theCommittee practice,thoseholdingsweredecliningonanongoing votedtoauthorizeanddirecttheFederalReserve basis.Thischangeinreinvestmentpolicywas Bankof NewYork,untilitwasinstructedotherwise,

272 98thAnnualReport|2011 toexecutetransactionsintheSystemAccountin declinedfromtheirpeaks.Longer-terminflation accordancewiththefollowingdomesticpolicy expectationshaveremainedstable. directive: Consistentwithitsstatutorymandate,theCom- “TheFederalOpenMarketCommitteeseeks mitteeseekstofostermaximumemployment monetaryandfinancialconditionsthatwillfos- andpricestability.TheCommitteecontinuesto terpricestabilityandpromotesustainable expectsomepickupinthepaceof recoveryover growthinoutput.Tofurtheritslong-runobjec- comingquartersbutanticipatesthattheunemtives,theCommitteeseeksconditionsinreserve ploymentratewilldeclineonlygraduallytoward marketsconsistentwithfederalfundstradingin levelsthattheCommitteejudgestobeconsistent arangefrom0to¼percent.TheCommittee withitsdualmandate.Moreover,therearesigdirectstheDesktopurchase,bytheendof nificantdownsideriskstotheeconomicout- June2012,Treasurysecuritieswithremaining look,includingstrainsinglobalfinancialmarmaturitiesof approximately6yearsto30years kets.TheCommitteealsoanticipatesthatinflawithatotalfacevalueof $400billion,andtosell tionwillsettle,overcomingquarters,atlevelsat Treasurysecuritieswithremainingmaturitiesof orbelowthoseconsistentwiththeCommittee’s 3yearsorlesswithatotalfacevalueof $400bil- dualmandateastheeffectsof pastenergyand lion.TheCommitteealsodirectstheDeskto othercommoditypriceincreasesdissipatefurmaintainitsexistingpolicyof rollingover ther.However,theCommitteewillcontinueto maturingTreasurysecuritiesintonewissuesand paycloseattentiontotheevolutionof inflation toreinvestprincipalpaymentsonallagencydebt andinflationexpectations. andagencymortgage-backedsecuritiesinthe SystemOpenMarketAccountinagency Tosupportastrongereconomicrecoveryandto mortgage-backedsecuritiesinordertomaintain helpensurethatinflation,overtime,isatlevels thetotalfacevalueof domesticsecuritiesat consistentwiththedualmandate,theCommitapproximately$2.6trillion.TheCommittee teedecidedtodaytoextendtheaveragematurity directstheDesktoengageindollarrolltransac- of itsholdingsof securities.TheCommittee tionsasnecessarytofacilitatesettlementof the intendstopurchase,bytheendof June2012, FederalReserve’sagencyMBStransactions.The $400billionof Treasurysecuritieswithremain- SystemOpenMarketAccountManagerandthe ingmaturitiesof 6yearsto30yearsandtosell SecretarywillkeeptheCommitteeinformedof anequalamountof Treasurysecuritieswith ongoingdevelopmentsregardingtheSystem’s remainingmaturitiesof 3yearsorless.Thisprobalancesheetthatcouldaffecttheattainment gramshouldputdownwardpressureonlongerovertimeof theCommittee’sobjectivesof terminterestratesandhelpmakebroaderfinanmaximumemploymentandpricestability.” cialconditionsmoreaccommodative.TheCommitteewillregularlyreviewthesizeand Thevoteencompassedapprovalof thestatement compositionof itssecuritiesholdingsandisprebelowtobereleasedat2:15p.m.: paredtoadjustthoseholdingsasappropriate. “InformationreceivedsincetheFederalOpen Tohelpsupportconditionsinmortgagemarkets, MarketCommitteemetinAugustindicatesthat theCommitteewillnowreinvestprincipalpayeconomicgrowthremainsslow.Recentindica- mentsfromitsholdingsof agencydebtand torspointtocontinuingweaknessinoverall agencymortgage-backedsecuritiesinagency labormarketconditions,andtheunemployment mortgage-backedsecurities.Inaddition,the rateremainselevated.Householdspendinghas Committeewillmaintainitsexistingpolicyof beenincreasingatonlyamodestpaceinrecent rollingovermaturingTreasurysecuritiesat monthsdespitesomerecoveryinsalesof motor auction. vehiclesassupply-chaindisruptionseased. Investmentinnonresidentialstructuresisstill TheCommitteealsodecidedtokeepthetarget weak,andthehousingsectorremainsdepressed. rangeforthefederalfundsrateat0to¼percent However,businessinvestmentinequipmentand andcurrentlyanticipatesthateconomiccondisoftwarecontinuestoexpand.Inflationappears tions—includinglowratesof resourceutilizatohavemoderatedsinceearlierintheyearas tionandasubduedoutlookforinflationover pricesof energyandsomecommoditieshave themediumrun—arelikelytowarrantexcep-

Minutesof FederalOpenMarketCommitteeMeetings|September 273 tionallylowlevelsforthefederalfundsrateat andfiscalchallengesbothintheUnitedStatesand leastthroughmid-2013. abroad.Moreover,inhisview,withinflationcontinuingtorunaboveearlierforecasts,suchaprogram TheCommitteediscussedtherangeof policy couldriskaddingunwantedinflationarypressures toolsavailabletopromoteastrongereconomic andcomplicatetheeventualexitfromtheperiodof recoveryinacontextof pricestability.Itwill extraordinarilyaccommodativemonetarypolicy. continuetoassesstheeconomicoutlookinlight of incominginformationandispreparedto Followingthepolicyvote,theManagerof the employitstoolsasappropriate.” SystemOpenMarketAccountsummarizedhowthe DeskwouldimplementtheCommittee’sdecisions. Votingforthisaction:BenBernanke,WilliamC. Toimplementthematurityextensionprogram,the Dudley,ElizabethDuke,CharlesL.Evans,Sarah Deskwoulddistributepurchasesaboutevenlyacross BloomRaskin,DanielK.Tarullo,andJanetL. nominalTreasurysecuritieswith6to8yearsto Yellen. maturity,with8to10yearstomaturity,andwith 10to30yearstomaturity;theDeskwouldalsobuya Votingagainstthisaction:RichardW.Fisher,Naraysmallamountof TIPSwithremainingmaturitiesof anaKocherlakota,andCharlesI.Plosser. 6to30years.Thisdistributionwouldallocateamuch largershareof purchasestolongermaturitiesthan Messrs.Fisher,Kocherlakota,andPlosserdissented wasthecaseintheCommittee’spreviousassetpurbecausetheydidnotsupportadditionalpolicy chaseprograms.Atthesametime,theDeskwould accommodationatthistime.Mr.Fishersawamatusell,fromtheSOMAportfolio,Treasurysecurities rityextensionprogramasprovidingfew,if any,benwithremainingmaturitiesof 3monthsto3years.All efitsinsupportof jobcreationoreconomicgrowth, Treasurypurchasesandsaleswouldbeconducted whileitcouldpotentiallyconstrainorcomplicatethe usingcompetitiveauctions.WithrespecttotheMBS timelyremovalof policyaccommodation.Inhisview, reinvestmentprogram,theDeskwouldconcentrate anyreductioninlong-termTreasuryratesresulting purchasesinnewlyissuedagency-backedMBSand fromthispolicyactionwouldlikelyleadtofurther wouldconductpurchasesthroughacompetitivebidhoardingbysavers,withcounterproductiveresultson dingprocess. businessandconsumerconfidenceandspending behaviors.Hefeltthatpolicymakersshouldinstead Itwasagreedthatthenextmeetingof theCommittee focustheirattentiononimprovingthemonetary wouldbeheldonTuesday–Wednesday,Novempolicytransmissionmechanism,particularlywith ber1–2,2011.Themeetingadjournedat12:30p.m. regardtotheactivityof communitybanks,whichare onSeptember21,2011. vitaltosmallbusinesslendingandjobcreation.Mr. Kocherlakota’sperspectiveonthepolicydecisionwas Secretary’sNote:Thefollowinginformation againshapedbyhisviewthatinNovember2010,the regardingtheJune21–22,2011FOMCmeeting Committeehadchosenalevelof accommodation wasinadvertentlyomittedfrompreviousminthatwaswellcalibratedfortheconditionof the utes.Byunanimousvoteatthatmeeting,the economy.SinceNovember,inflation,andtheone- CommitteeratifiedtheDesk’sdomestictransacyear-aheadforecastforinflation,hadrisen,while tionssincetheApril26–27,2011meeting,and unemployment,andtheone-year-aheadforecastfor bynotationvotecompletedonJuly11,2011,the unemployment,hadfallen.Hedidnotbelievethat Committeeunanimouslyapprovedtheminutes providingmoremonetaryaccommodationwasthe of theJune21–22FOMCmeeting. appropriateresponsetothosechangesinthe economy,giventhecurrentpolicyframework.Mr. WilliamB.English Plosserfeltthatamaturityextensionprogramwould dolittletoimprovenear-termgrowthoremploy- Secretary ment,inlightof theongoingstructuraladjustments

274 98thAnnualReport|2011 Meeting Held ScottG.Alvarez GeneralCounsel on November 1–2, 2011 DavidW.Wilcox Ajointmeetingof theFederalOpenMarketCom- Economist mitteeandtheBoardof Governorsof theFederal JamesA.Clouse,ThomasA.Connors, ReserveSystemwasheldintheofficesof theBoard StevenB.Kamin,LorettaJ.Mester, of GovernorsinWashington,D.C.,onTuesday, SimonPotter,DavidReifschneider, November1,2011,at10:30a.m.andcontinuedon HarveyRosenblum,LawrenceSlifman, Wednesday,November2,2011,at8:30a.m. DanielG.Sullivan,andKei-MuYi AssociateEconomists Present BrianSack BenBernanke Manager,SystemOpenMarketAccount Chairman JenniferJ.Johnson WilliamC.Dudley Secretaryof theBoard,Officeof theSecretary, ViceChairman Boardof Governors ElizabethDuke PatrickM.Parkinson Director,Divisionof BankingSupervisionand CharlesL.Evans Regulation,Boardof Governors RichardW.Fisher NellieLiang NarayanaKocherlakota Director,Officeof FinancialStabilityPolicyand Research,Boardof Governors CharlesI.Plosser RobertdeV.Frierson SarahBloomRaskin DeputySecretary,Officeof theSecretary, DanielK.Tarullo Boardof Governors JanetL.Yellen WilliamNelson DeputyDirector,Divisionof MonetaryAffairs, ChristineCumming,JeffreyM.Lacker, Boardof Governors DennisP.Lockhart,SandraPianalto,and JohnC.Williams AndrewT.Levin AlternateMembersof theFederalOpenMarket SpecialAdvisertotheBoard,Officeof Board Committee Members,Boardof Governors JamesBullard,EstherL.George,and LindaRobertson EricRosengren AssistanttotheBoard,Officeof BoardMembers, Presidentsof theFederalReserveBanksof St.Louis, Boardof Governors KansasCity,andBoston,respectively CharlesS.Struckmeyer DeputyStaff Director,Officeof theStaff Director, WilliamB.English Boardof Governors SecretaryandEconomist MichaelP.Leahy DeborahJ.Danker SeniorAssociateDirector,Divisionof International DeputySecretary Finance,Boardof Governors MatthewM.Luecke WilliamWascher AssistantSecretary SeniorAssociateDirector,Divisionof Researchand DavidW.Skidmore Statistics,Boardof Governors AssistantSecretary EllenE.Meade MichelleA.Smith SeniorAdviser,Divisionof MonetaryAffairs, AssistantSecretary Boardof Governors

Minutesof FederalOpenMarketCommitteeMeetings|November 275 DanielM.CovitzandMichaelT.Kiley1 Byunanimousvote,theCommitteeselectedDavid AssociateDirectors,Divisionof Researchand W.WilcoxtoserveasEconomist,andLawrenceSlif- Statistics,Boardof Governors mantoserveasAssociateEconomist,effective November1,2011,untiltheselectionof theirsucces- ChristopherJ.Erceg1 sorsatthefirstregularlyscheduledmeetingof the DeputyAssociateDirector,Divisionof International Committeein2012. Finance,Boardof Governors FabioM.Natalucci Developments in Financial Markets and DeputyAssociateDirector,Divisionof Monetary the Federal Reserve’s Balance Sheet Affairs,Boardof Governors TheManagerof theSystemOpenMarketAccount BrianJ.Gross1 (SOMA)reportedondevelopmentsindomesticand SpecialAssistanttotheBoard,Officeof Board foreignmarketsduringtheperiodsincetheFederal Members,Boardof Governors OpenMarketCommittee(FOMC)metonSeptem- DavidLopez-Salido1 ber20–21,2011.Healsodiscussedthedevelopments inconnectionwiththebankruptcyfilingof MF AssistantDirector,Divisionof MonetaryAffairs, GlobalHoldingsLtd.anditsfinancesubsidiary,MF Boardof Governors GlobalFinanceUSAInc.,andwiththetermination DavidH.Small of MFGlobalInc.asaprimarydealer.TheManager ProjectManager,Divisionof MonetaryAffairs, reportedonSystemopenmarketoperations,includ- Boardof Governors ingtheongoingreinvestmentintoagency-guaranteed mortgage-backedsecurities(MBS)of principalpay- MarkA.Carlson mentsreceivedonSOMAholdingsof agencydebt SeniorEconomist,Divisionof MonetaryAffairs, andagency-guaranteedMBSaswellastheopera- Boardof Governors tionsrelatedtothematurityextensionprogram PenelopeA.Beattie authorizedattheSeptember20–21FOMCmeeting. AssistanttotheSecretary,Officeof theSecretary, Byunanimousvote,theCommitteeratifiedthe Boardof Governors Desk’sdomestictransactionsovertheintermeeting period.Therewerenointerventionoperationsinfor- SarahG.Green eigncurrenciesfortheSystem’saccountoverthe FirstVicePresident,FederalReserveBankof intermeetingperiod. Richmond GlennD.Rudebusch Monetary Policy Strategies and ExecutiveVicePresident,FederalReserveBankof Communication SanFrancisco Thestaff gaveapresentationonalternativemonetary DavidAltig,GeoffreyTootell,and policystrategies,andmeetingparticipantsdiscussed ChristopherJ.Waller thosealternativesaswellaspotentialapproachesfor SeniorVicePresidents,FederalReserveBanksof enhancingtheclarityof theirpubliccommunica- Atlanta,Boston,andSt.Louis,respectively tions.Nodecisionwasmadeatthismeetingto changetheCommittee’spolicystrategyorcommuni- ToddE.Clark,EdwardS.KnotekII,and cations.Itwasnotedthatmanycentralbanksaround NathanielWuerffel theworldpursueanexplicitinflationobjective,main- VicePresidents,FederalReserveBanksof Cleveland, tainflexibilitytostabilizeeconomicactivity,andseek KansasCity,andNewYork,respectively tocommunicatetheirforecastsandpolicyplansas DeborahL.Leonard clearlyaspossible.Manyparticipantspointedtothe AssistantVicePresident,FederalReserveBankof meritsof specifyinganexplicitlonger-runinflation NewYork goal,butitwasnotedthatsuchastepcouldbemisperceivedasplacinggreaterweightonpricestability RobertL.Hetzel thanonmaximumemployment;consequently,some SeniorEconomist,FederalReserveBankof suggestedthatanumericalinflationgoalwouldneed Richmond tobesetforthwithinacontextthatclearlyunderscoredtheCommittee’scommitmenttofostering 1 Attendedtheportionofthemeetingrelatingtomonetarypolicy strategiesandcommunication. bothpartsof itsdualmandate.Morebroadly,a

276 98thAnnualReport|2011 majorityof participantsagreedthatitcouldbeben- wouldwarrantexceptionallylowlevelsforthepolicy eficialtoformulateandpublishastatementthat rate.However,severalparticipantsnotedthatsuch wouldelucidatetheCommittee’spolicyapproach, thresholdscouldbeconfusingintheabsenceof a andparticipantsgenerallyexpressedinterestinpro- clearexpressionof theCommittee’slonger-term vidingadditionalinformationtothepublicaboutthe goals.Moreover,otherssuggestedthatsuchan likelyfuturepathof thetargetfederalfundsrate.The approachcouldbeproblematicinlightof significant Chairmanaskedthesubcommitteeoncommunica- uncertaintiesaboutthelonger-runnormalrateof tionstogiveconsiderationtoapossiblestatementof unemployment.Oneparticipantpointedtothose theCommittee’slonger-rungoalsandpolicystrategy, uncertaintiesasinsteadsupportingtheuseof threshandhealsoencouragedthesubcommitteetoexplore oldsasawayof managingpotentialinflationrisks potentialapproachesforincorporatinginformation associatedwithadditionalaccommodation. aboutparticipants’assessmentsof appropriatemonetarypolicyintotheSummaryof Economic TheCommitteealsoconsideredpolicystrategiesthat Projections. wouldinvolvetheuseof anintermediatetargetsuch asnominalgrossdomesticproduct(GDP)orthe Committeeparticipantssharedtheirviewsregarding pricelevel.Thestaff presentedmodelsimulations thepotentialmeritsandpitfallsof makingcondi- thatsuggestedthatnominalGDPtargetingcould,in tionalcommitmentsregardingthefuturecourseof principle,behelpfulinpromotingastrongerecomonetarypolicy.Asnotedinthestaff briefing,eco- nomicrecoveryinacontextof longer-runpricestanomictheoryandmodelsimulationssuggestedthata bility.Othersimulationssuggestedthatthesinglepolicystrategyinvolvingsuchcommitmentscould mindedpursuitof aprice-leveltargetwouldnotbe fosterbettermacroeconomicoutcomesthanadiscre- veryeffectiveinfosteringmaximumsustainable tionaryapproachof reoptimizingpolicyatevery employment;itwasnoted,however,thatprice-level meeting,solongasthepublicunderstoodthecentral targetingwherethecentralbankmaintainedflexibilbank’sstrategyandbelievedthatpolicymakerswould itytostabilizeeconomicactivityovertheshortterm followthroughonthosecommitments.Somepartici- couldgenerateeconomicoutcomesthatwouldbe pantsnotedthatconditionalcommitmentsmightbe moreconsistentwiththedualmandate.More particularlyhelpfulinprovidingadditionalaccom- broadly,anumberof participantsexpressedconcern modationandmitigatingdownsideriskswhenthe thatswitchingtoanewpolicyframeworkcould policyrateisclosetoitseffectivelowerbound, heightenuncertaintyaboutfuturemonetarypolicy, becauseacentralbankcancommittoashallower riskunmooringlonger-terminflationexpectations,or interestratetrajectorythaninvestorswouldexpectif failtoaddressriskstofinancialstability.Severalparpolicymakersfollowedapurelydiscretionary ticipantsobservedthattheefficacyof nominalGDP approach.However,manypointedoutthatthe targetingdependedcruciallyonsomestrongassumpimplementationof suchastrategycouldposesub- tions,includingthepremisethattheCommittee stantialcommunicationchallengesandthattheben- couldmakeacrediblecommitmenttomaintaining efitswouldbediminishedif thestrategywasnotfully suchastrategyoveralongtimehorizonandthat credible.Indeed,oneparticipantsuggestedthataddi- policymakerswouldcontinueadheringtothatstrattionalpurchasesof longer-termsecuritieswouldbea egyeveninthefaceof asignificantincreaseininflaclearerandmoreeffectivewaytoprovideadditional tion.Inaddition,someparticipantsnotedthatsuch monetaryaccommodationwhenthefederalfunds anapproachwouldinvolvesubstantialoperational ratewasnearitslowerbound. hurdles,includingthedifficultyof specifyingan appropriatetargetlevel.Inlightof thesignificant Giventhepotentialpitfallsof pursuingcommitment challengesassociatedwiththeadoptionof such strategiesextendingfaroutintothefuture,manypar- frameworks,participantsagreedthatitwouldnotbe ticipantsthoughtthattheCommitteeshouldcon- advisabletomakesuchachangeunderpresent siderpoliciesintendedtoaccruesomeof thegains circumstances. fromconditionalcommitmentsandtoperformwell inawiderangeof alternativescenarios.Inthisvein, Staff Review of the Economic Situation anumberof participantsexpressedsupportforthe possibilityof clarifyingtheconditionalityof the TheinformationreviewedattheNovember1–2meet- Committee’sforwardguidanceaboutthetrajectory ingindicatedthatthepaceof economicactivity of thefederalfundsratethroughsettingnumerical strengthenedsomewhatinthethirdquarter,reflectthresholdsforunemploymentandinflationthat inginpartareversalof thetemporaryfactorsthat

Minutesof FederalOpenMarketCommitteeMeetings|November 277 weighedoneconomicgrowthinthefirsthalf of the Housingmarketactivityremainedveryweak,held year.However,labormarketconditionscontinuedto downbythelargeoverhangof foreclosedanddisbeweak.Overallconsumerpriceinflationwasmore tressedpropertiesalongwithlimiteddemandinan moderatethanearlierintheyear,aspricesof energy environmentof uncertaintyaboutfuturehomeprices andsomecommoditiesdeclinedfromtheirrecent andtightunderwritingstandardsformortgageloans. peaks.Inflationforothergoodsandservicesalso Althoughstartsandpermitsfornewsingle-family appearedtohavemoderated,andmeasuresof homesedgedupinSeptember,theystayednearthe longer-runinflationexpectationsremainedstable. depressedlevelsseensincethemiddleof lastyear. Salesof newandexistinghomescontinuedtobesoft PrivatenonfarmemploymentrosemodestlyinSep- inrecentmonths,andhomepricestrendedlower. tember,boostedinpartbythereturnof communicationsworkerswhowereonstrikeinAugust.None- Realbusinesspurchasesof equipmentandsoftware theless,thepaceof private-sectorjobgainsinthe expandedappreciablyinthethirdquarter.Moreover, thirdquarterasawholewaslessthanitwasinthe newordersfornondefensecapitalgoodscontinuedto firsthalf of theyear.Meanwhile,employmentinthe runaheadof shipmentsinAugustandSeptember; stateandlocalgovernmentsectorcontinuedtotrend thebuildupof unfilledorderspointedtowardfurther lower.Theunemploymentrateheldat9.1percentin increasesinspendingforbusinessequipmentinsub- September,andbothlong-durationunemployment sequentmonths.Nevertheless,surveymeasuresof andtheshareof workersemployedparttimeforeco- businessconditionsandsentimentinOctobersugnomicreasonswerestillhigh.Initialclaimsforunem- gestedthatfirmsremainedcautious.Realbusiness ploymentinsurancehaveedgeddownsincethe expendituresfornonresidentialconstructionalsorose middleof Septemberbuthaveremainedatalevel appreciablyinthethirdquarter,butspendingwas consistentwithonlymodestemploymentgrowth, stillatarelativelylowlevelandcontinuedtobeheld andmostindicatorsof businesses’hiringplanshave backbyelevatedvacancyratesandtightcreditcondishowednoimprovement. tionsforconstructionloans.Inthethirdquarter, businessesincreasedtheirinventoriesatamuch IndustrialproductionrosemodestlyinSeptember, slowerpacethaninthesecondquarter,and andthemanufacturingcapacityutilizationrateedged inventory-to-salesratiosinmostindustriesappeared up.Outputinthemotorvehicle–relatedsectorscon- tobeinacomfortablerange. tinuedtostepupfollowingthedisruptionsassociated withtheearthquakeinJapanearlierintheyear,but Realfederalpurchasesincreasedinthethirdquarter, thepaceof factoryproductionoutsideof thosesec- asdefenseexpenditurescontinuedtorisefrom torswassluggish.Motorvehicleassemblieswere unusuallylowlevelsearlyintheyear,morethanoffscheduledtorisefurtherinthefourthquarter,but settingadecreaseinnondefensespending.Atthe broaderindicatorsof near-termmanufacturingactiv- stateandlocallevel,realpurchasesdeclinedinthe ity,suchasthediffusionindexesof newordersfrom thirdquarteratanoticeablyslowerratethaninthe thenationalandregionalmanufacturingsurveys, firsthalf of theyearasthepaceof reductionsinpayremainedatlevelsconsistentwithonlymodest rollseasedandconstructionspendingroseslightly. increasesinproductioninthecomingmonths. TheU.S.internationaltradedeficitwasvirtuallythe Realpersonalconsumptionexpenditures(PCE)rose sameinAugustasitwasinJuly,asbothexportsand brisklyinSeptemberbutpostedamoremoderate importsmoveddownonlybysmallamounts.The gainforthethirdquarterasawhole.Motorvehicle decreaseinexportsreflectedlowersalesof automopurchasesincreasedsignificantlyinSeptembertoa tiveproductsandcapitalgoods,whichmorethanofflevelwellabovethatinthespring(whenavailability setincreasesinexportsof industrialsuppliesand of somemodelswaslimitedbysupplychaindisrup- consumergoods.Thedipinimportswastheresultof tions),andsalesof newlightmotorvehiclesstepped lowerpurchasesof capitalgoods,automotiveprodupfurtherinOctober.However,realdisposable ucts,andconsumergoods,whichoutweighedan incomedeclinedinthethirdquarter,asincreasesin increaseinpetroleumimports.Theadvancereleaseof consumerpricesmorethanoffsetsmallgainsin thethird-quarterdataforthenationalincomeand nominalincome.Moreover,consumersentimentcon- productaccountsshowedrealexportsof goodsand tinuedtobedownbeatinOctober. servicesexpandingfasterthanrealimports.Asa

278 98thAnnualReport|2011 result,netexportswereestimatedtohavemadea Longer-termTreasuryyieldsdeclinedappreciablyfolsmallpositivecontributiontorealGDPgrowthinthe lowingthereleaseof theSeptemberFOMCstatethirdquarter,acontributionof aboutthesamesize ment.InvestorsreportedlyviewedtheCommittee’s asinthesecondquarter. assessmentof theeconomicoutlookasmoredownbeatthananticipated.Inaddition,theannouncement OverallU.S.consumerpriceinflation,asmeasured thattheFederalReservewouldlengthentheaverage bythePCEpriceindex,wasmoremoderateinthe maturityof itsportfoliobypurchasinglonger-term thirdquarterthaninthefirsthalf of theyear.Con- Treasurysecuritiesandsellinganequivalentamount sumerpricesforfoodandenergyincreasedlastquar- of shorter-termTreasurysecuritiesreportedlyconterataslowerpacethanearlierintheyear,andcon- tributedtothedeclineinlonger-termyieldsonthe sumerpricesexcludingfoodandenergyroseabitless day.Yieldsoncurrent-couponagencyMBSalso thanintheprecedingquarter.Near-terminflation movedlowerontheannouncementthattheFederal expectationsfromtheThomsonReuters/University Reservewouldbegintoreinvestprincipalpayments of MichiganSurveysof ConsumersinOctobercon- onagencysecuritiesinagencyMBS.Overthefollowtinuedtobewellbelowtheelevatedlevelseeninthe ingweeks,movementsinyieldsweredrivenbyshifts spring,andlonger-terminflationexpectationsinthe ininvestors’assessmentsof theongoingeffortsto surveyremainedstable. addresstheEuropeanfiscalandbankingsituation andbysomewhatstronger-than-expectedU.S.eco- Measuresof laborcompensationshowedthatwage nomicdata.OnbalancesincetheSeptemberFOMC increasescontinuedtobesubdued.Theemployment meeting,Treasuryyieldsonshorter-datedsecurities costindexincreasedatamodestrateovertheyear andtheexpectedpathof thefederalfundsrate endinginthethirdquarter,andcompensationper impliedbymoneymarketfuturesquoteswerenot hourinthenonfarmbusinesssectorappearedtohave muchchanged.YieldsonTreasurysecuritieswith decaleratedsomewhatlastquarter.Similarly,the maturitiesbeyond10yearsmoveddown.Measures 12-monthchangeinaveragehourlyearningsforall of near-terminflationcompensationderivedfrom employeesremainedsubduedinSeptember. nominalandinflation-protectedTreasurysecurities roseslightlyovertheintermeetingperiod,whilesimi- Foreigneconomicactivityappearedtohavelargely larmeasuresof longer-terminflationcompensation recoveredfromtheeffectsof theJapanesedisasterin wereaboutunchanged. March,asproductioninJapanreboundedandsupplydisruptionswaned.However,recentdatapointed Creditdefaultswap(CDS)spreadsandequityprices toconsiderableweaknessintheeuro-areaeconomy. of largeU.S.bankingorganizationswereagainvola- Elsewhere,indicatorsweresomewhatmoreupbeat, tileovertheperiod.Investorsentimenttowardthese withemploymentinCanadacontinuingtorise financialinstitutionswasstronglyinfluencedby throughSeptember,whileGDPgrowthinChinaover changesininvestors’assessmentsof therisksassocitheyearendinginthethirdquarterwasalittleless atedwiththeEuropeanfiscalandbankingproblems thaninthefirsthalf of theyearbutstillquiterobust. andtheexposureof variousfinancialinstitutionsto Foreigninflationremainedcontained,althoughthe Europe.Third-quarterU.S.bankearningsreports reversalof earlierincreasesinenergypricesappeared generallymetinvestors’expectations.Onnet,equity tobepassingthroughtoconsumerpriceinflation pricesforU.S.bankingfirmswerenotmuchchanged relativelyslowlyinsomecountries. overtheperiodsincethelastFOMCmeeting,while theirCDSspreadswereabithigher.Europeanbank CDSspreadsremainedelevated,andtheseinstitu- Staff Review of the Financial Situation tionscontinuedtofacesomewhatstrainedconditions inshort-termbankfundingmarkets. Financialmarketswerequitevolatileovertheperiod sincetheSeptemberFOMCmeeting.Investorsenti- Althoughequitymarketswerevolatile,broadU.S. mentwasstronglyinfluencedbyprospectsfor equitypriceindexesendedtheintermeetingperiod Europe,asmarketparticipantsremainedhighly littlechanged.Earningsreportsfornonfinancial attunedtodevelopmentsregardingpossiblestepsto firmsgenerallycameinsomewhatbetterthaninvescontainthefiscalandbankingproblemsthere.Eco- torsexpectedandaboutinlinewithsecond-quarter nomicdatareleasesthatwere,onbalance,somewhat levels.Grosspublicequityissuancebynonfinancial betterthanmarketparticipantsexpectedprovided firmscontinuedtobeveryweakinSeptemberand somesupporttofinancialmarkets. October,withalargenumberof firmsshelving

Minutesof FederalOpenMarketCommitteeMeetings|November 279 plannedinitialpublicofferingsamidthevolatilityin writingstandardsthatshiftedthecompositionof equitymarkets. borrowerstowardthosewithstrongercredithistories. Yieldsoninvestment-andspeculative-gradecorpo- Corecommercialbankloansexpandedslightlyinthe ratebondsedgedlower,onnet,overtheperiod,leav- thirdquarter.Commercialandindustrial(C&I)loans ingtheirspreadstoTreasurysecuritiesslightlynar- acceleratedfollowingthealreadystrongincreases rower.Creditflowsfornonfinancialfirmsweremixed seenoverthefirsthalf of theyear.Thatgrowthwas inSeptemberandOctober.Thepaceof bondfinanc- concentratedamonglargedomesticbanksandnoningbyinvestment-gradenonfinancialcorporations Europeanforeigninstitutions.Consumerloanson slowedsomeinOctoberfromitsrobustSeptember banks’booksadvancedmodestlyinthethirdquarter, pace,whilebondissuancebyspeculative-gradefirms endingatwo-yearstringof quarterlydeclines. waslimited.Nonfinancialcommercialpaperout- Closed-endresidentialmortgageloansheldbybanks standingpostedsolidgrowthinOctober.Inthelever- alsoincreasedamidthemodestpickupinrefinancing agedloanmarket,issuancefinancedbyinstitutional activity,whileCREloanscontracted.TheOctober investorsslowedsignificantlyinthethirdquarter. SeniorLoanOfficerOpinionSurveyonBankLendingPracticesshowedlessneteasingof lendingstan- Financingconditionsforcommercialrealestate dardsbydomesticbanksthaninthepastfewsurveys. (CRE)marketsappearedtohavedeterioratedin Inparticular,domesticbanksreportedlittlechange somerespects.Issuanceof commercialmortgage- intheirstandardsonC&Iloansoverthethirdquarbackedsecurities(CMBS)slowedfurtherinthethird ter,onnet,comparedwithmorewidespreadreports quarteramidwideningCMBSspreads,andonlya of easinginthepreviousseveralquarters.Demand smallnumberof dealswereinthepipelinefortherest forloansreportedlywaslittlechanged,onbalance, of theyear.Pricesof mosttypesof commercialprop- overthethirdquarter. ertiesremaineddepressed,andaggregatevacancy anddelinquencyratesforcommercialpropertieswere M2grewatamodestpaceinSeptemberandOctoclosetotheirrecenthighs. ber,wellbelowtherapidrateseeninJulyandAugust. Someof thefactorsthatcontributedtoM2growth Interestratesonresidentialmortgageschangedlittle, overthesummer,suchasconcernsaboutEuropean onnet,overtheintermeetingperiodbutremainedat financialdevelopmentsandequitymarketvolatility, historicallylowlevels.Therecentlowratesappeared persistedandsupportedelevatedlevelsof M2depostohaveonlyamodesteffectonthepaceof mortgage itsbutdidnottriggeradditionalsizableinflows.The refinancing,astightunderwritingstandardsandlow monetarybasealsogrewmoderatelyasitsmajor homeequitycontinuedtolimittheaccessof many components—reservebalancesandcurrency—inhouseholdstothemortgagemarket.However,in creasedovertheperiod. October,theFederalHousingFinanceAgency announcedchangestotheHomeAffordableRefi- Foreignfinancialmarketsremainedvolatileoverthe nanceProgramtoexpandeligibilityandtake-up intermeetingperiod,andfundingpressuresformany amongborrowerswithmortgagesbackedbyFannie Europeanfinancialinstitutionscontinued.Afterfall- MaeandFreddieMac.Indicatorsof homeprices ingsharplyinAugustandearlySeptember,foreign remainedweak,reflectingalargeinventoryof unsold equitypricesrose,withstocksintheeuroareaoutpropertiesandmodestdemandforhomes.Thepace performingthoseinmostothereconomies.Formost atwhichperformingprimemortgagesbecamenewly of theperiod,marketparticipantsseemedheartened delinquentroseoverthesummerbutremainedbelow byEuropeanleaders’effortstoaddressthefiscaland lastyear’slevels. financialchallengespresentintheeuroarea, althoughthenewslateintheperiodonapossible ConsumercreditdecreasedinAugust.Growthin Greekreferendumsentstockpricesdownsharply. nonrevolvingcredit,whichhadbeenvolatileduetoa Benchmarksovereignyieldsincreasedoverthe shiftinthetimingof studentloanoriginations, period,butspreadsof yieldson10-yearsovereign steppeddownfromthepaceseenearlierintheyear bondsof themostvulnerableeuro-areacountries butremainedsolidinrecentmonths.Issuanceof overyieldsonGermanbundswerelittlechangedon consumercreditasset-backedsecuritiescontinuedat net.Somereversalof safe-havenflowsinOctober amoderatepacethroughmid-October.Delinquency reportedlyledthedollartogivebackmostof the ratesforseveralcategoriesof consumerloans gainsitregisteredinlateSeptember,leavingthe remainedlow,areflectioninpartof tighterunder- broadnominalforeignexchangevalueof thedollar

280 98thAnnualReport|2011 littlechanged,onbalance,relativetoitslevelatthe fromtheircurrentlowlevels.Overtheforecast timeof theSeptemberFOMCmeeting.Attheendof period,theincreaseinrealGDPwasprojectedtobe October,Japaneseofficialsintervenedinforeign sufficienttoreducetheslackinproductandlabor exchangemarketsthroughsalesof yen. marketsonlyslowly,andtheunemploymentratewas expectedtoremainelevatedattheendof 2013. Thefirstroundof thethree-monthU.S.dollarauctionsthatmajorforeigncentralbanksannouncedon Thestaff’sforecastforinflationwasessentially September15washeldinOctober;demandwasquite unchangedfromtheprojectionpreparedfortheSeplimited,andonlytheEuropeanCentralBank(ECB) temberFOMCmeeting.Theupwardpressureon drewonitsswaplinewiththeFederalReserve.Korea consumerpricesfromtheriseincommodityand andJapanannouncedthattheywouldincreasethe importpricesearlyintheyearwasanticipatedtoease sizeandscopeof theirbilateralcurrencyswap furtherinthecurrentquarter.Withlonger-runinflaarrangements,expandingthesizeof theirexisting tionexpectationsstableandsignificantslackanticiwon–yenswaparrangementandestablishinga patedtopersistinlaborandproductmarkets,the $30billionfacilityinwhichdollarscouldbeswapped staff continuedtoexpectpricestoriseatasubdued foreitherwonoryen. pacein2012and2013. Anumberof centralbanksannouncedadditional Participants’ Views on Current Conditions measurestostimulateeconomicactivity.TheBankof and the Economic Outlook EnglandandBankof Japaneachannouncedexpansionsof theirrespectiveassetpurchaseprograms, InconjunctionwiththisFOMCmeeting,allparticiandtheECBannouncedthatitwouldconducttwo pants—thefivemembersof theBoardof Governors refinancingoperationswithmaturitiesof slightly andthepresidentsof the12FederalReserveBanks— morethanayearandlaunchedanewcoveredbond providedprojectionsof outputgrowth,theunempurchaseprogram.Thecentralbanksof Brazil, ploymentrate,andinflationforeachyearfrom2011 Indonesia,andIsraelloweredtheirpolicyrates,citing through2014andoverthelongerrun.Longer-run apotentialslowdowninglobalgrowth. projectionsrepresenteachparticipant’sassessmentof theratetowhicheachvariablewouldbeexpectedto Staff Economic Outlook converge,overtime,underappropriatemonetary policyandintheabsenceof furthershockstothe Withtherecentdataonspending,particularlyfor economy.Althoughparticipantshadreviseddownconsumerexpendituresandbusinessoutlaysforcapi- wardtheirprojectionsforgrowthsincetheirprevious talgoodsandnonresidentialconstruction,stronger forecastsinJune,theycontinuedtoanticipatethat thanthestaff anticipatedatthetimeof theSeptem- economicgrowthwouldpickupandtheunemployberFOMCmeeting,thestaff’snear-termprojection mentratewoulddeclinegraduallythrough2014. fortherateof increaseinrealGDPwasrevisedup. Theyalsocontinuedtoprojectthatinflationwould However,otherimportantnear-termindicatorsof settleatorbelowlevelsconsistentwiththeCommiteconomicactivityremaineddownbeat:Measuresof tee’sdualmandate.Participants’forecastsare consumersentimentwerestillverylow,businesssur- describedinmoredetailintheSummaryof Ecoveyspointedtocontinuedcautionbyfirms,condi- nomicProjections,whichisattachedasanaddendum tionsinthelabormarketremainedweak,andgains totheseminutes. inmanufacturingproductionoutsideof themotor vehicle–relatedsectorsweresluggish.Moreover, Intheirdiscussionof theeconomicsituationand manyof thefactorsthathavebeenrestrainingthe outlook,meetingparticipantsregardedtheinformarecovery,suchasthelargeoverhangof vacant tionreceivedduringtheintermeetingperiodasindihouses,tightcreditconditions,andelevatedriskpre- catingthateconomicgrowthhadstrengthenedsomemiums,remainedinplace.Consequently,thestaff’s whatinthethirdquarter,reflectinginpartareversal outlookforeconomicactivityoverthemediumterm of temporaryfactorsthathadweighedontheecowassimilartotheprojectionpreparedfortheSep- nomicrecoveryinthefirsthalf of theyear.ParticitemberFOMCmeeting.Thestaff continuedtoproj- pantsnotedthatglobalsupplychaindisruptions ectthatrealGDPwouldaccelerategraduallyin2012 associatedwiththenaturaldisasterinJapanhad and2013,supportedbyaccommodativemonetary diminished,andthatthepricesof energyandsome policy,furtherimprovementsincreditconditions, commoditieshadcomedownfromtheirrecentpeaks, andapickupinconsumerandbusinesssentiment easingstrainsonhouseholdbudgetsandlikelycon-

Minutesof FederalOpenMarketCommitteeMeetings|November 281 tributingtoasomewhatstrongerpaceof consumer nancecouldbeusefulstepstowardstabilizingthe spendinginrecentmonths.Morebroadly,final housingmarket. demandfromconsumersandbusinesseswasstronger thanhadbeenexpectedatthetimeof theSeptember Businesscontactsinmanypartsof thecountrywere FOMCmeeting.Nonetheless,mostparticipants reportedtobecautiousanduncertainabouttheecoanticipatedthatthepaceof economicgrowthwould nomicandpoliticaloutlookandsoremainedrelucremainmoderateovercomingquarters.Whilethey tanttohireorexpandcapacity.However,production believedthattheeconomicrecoverywouldcontinue inthemanufacturing,agriculture,andenergysectors tobesupportedbyaccommodativemonetarypolicy, continuedtoincrease,andtheautosectorwas ongoingimprovementsinhouseholds’andbusi- reboundingfromearliersupplychaindisruptions.In nesses’financialpositions,andpent-updemandfor addition,businessesinanumberof regionsreported goodsandservices,anumberof factorswereseenas ongoingcapitalinvestmenttoincreaseproductivity. likelytocontinuetorestrainthepaceof economic Inputcostpressuresweresaidtohaveabatedsomegrowth.Thoseincludedpersistentweaknessinthe what,whilelaborcostsremainedsubdued.Overall, laborandhousingmarkets,still-tightcreditcondi- creditcostswerelow,andprofitsandbalancesheets tionsformanyhouseholdsandsmallbusinesses,low atnonfinancialcorporationswerehealthy,withmany consumerandbusinessconfidence,fiscalconsolida- firmscontinuingtoholdveryhighlevelsof cash. tionatalllevelsof government,andelevatedvolatilityinfinancialmarkets.Moreover,therecoverywas Despitesomesignsof improvementof late,theavailstillsubjecttosignificantdownsiderisks,including ableindicatorspointedtocontinuedweaknessin strainsinglobalfinancialmarkets.Withlonger-term overalllabormarketconditions,andtheunemployinflationexpectationsremainingstable,theeffectsof mentrateremainedelevated.Someparticipantssugearlierincreasesinthepricesof energyandother gestedthatthepersistentlyhighlevelof unemploycommoditiescontinuingtowane,andlowlevelsof mentreflectedtheimpactof structuralfactors, resourceutilizationrestrainingincreasesinpricesand includingmismatchesbetweentheskillsof theunemwages,mostparticipantsanticipatedthatinflation ployedandtheskillsdemandedinsectorsinwhich wouldsettle,overcomingquarters,atorbelowlevels jobswerecurrentlyavailable.Consistentwiththis theyjudgedtobemostconsistentwiththeirdual view,somebusinesscontactsreportedlywereconmandate. cernedaboutthelowqualityof manyjobapplicants, whileothercontactsnotedthatworkerswithsome Inthehouseholdsector,incomingdataonretailsales specializedskillscontinuedtobeinshortsupply. weresomewhatstrongerthanexpected,andpartici- However,otherparticipantsindicatedthatsuchconpantsreportedscatteredoptimismamongtheircon- cernswerenotnewandthatmuchof thecurrent tactsregardingtheprospectsforholidayspending. elevatedlevelof unemploymentreflectedcyclicalfac- Someparticipantsthoughtthattheeffectsof balance tors,withonepointingtothelackof wagepressures sheetdeleveragingmightberunningtheircourseor asevidence.Asaresult,theyexpectedthatunemthatsucheffectscouldbelesspowerfulthanhadbeen ploymentwouldfallbackastheeconomyrecovered. thought.Othersnotedthattherecentpickupincon- Someparticipantsagainwarnedthattheexceptionsumerspendingoutpacedgrowthinafter-tax allyhighlevelof long-termunemploymentcouldultiincomesandwasaccompaniedbyadeclineinthe matelyleadtopermanentnegativeeffectsonthe savingrate,raisingdoubtsaboutitssustainability skillsandemploymentprospectsof theunemployed. unlessincomegrowthpickedup.Inaddition,householdsappearedtoremainpessimisticaboutthepros- Meetingparticipantsobservedthatfinancialmarkets pectsfortheirfutureincome,thejobmarketwasstill continuedtobeparticularlyvolatileduringtheinterweak,consumerconfidencewashistoricallyverylow, meetingperiodasinvestorsrespondedtoincoming andcreditconditionsformanyhouseholdswerestill economicdataandtonewsregardingfiscaland tight.Thehousingsectorcontinuedtobedepressed, financialdevelopmentsinEurope.Liquidityinmany andsomemeetingparticipantsindicatedthatthe marketsworsened,inpartbecausefinancialinstituelevatedsupplyof availablehomesandtheoverhang tionsmorereliantonshort-termfundingmarkets of foreclosures,togetherwithlimitedaccesstomort- reportedlypulledbackfromrisk-takingandbecame gagecredit,werecontinuingtoputdownwardpres- somewhatlesswillingtomakemarkets.Participants sureonhousepricesandhousingconstruction.Afew notedtheannouncementbyEuropeanpolicymakers participantsnotedthatrecentgovernmentinitiatives of anewpackageof measurestoaddressGreece’s aimedathelpinghigh-loan-to-valueborrowersrefi- fiscalsituationaswellasthevulnerabilitiesof Euro-

282 98thAnnualReport|2011 peanbanksandsovereigns.However,participants lowlevelsof consumerandbusinessconfidence,furindicatedthatmanydetailsof thenewplanhadnot thereffortsbyhouseholdstodeleverage,cutbacksat yetbeenworkedoutandthatanumberof important alllevelsof government,elevatedfinancialmarket issuesremainedunresolved.Participantstooknoteof volatility,still-tightcreditconditionsforsomehousethepossibleadverseeffectsonU.S.financialmarkets holdsandsmallbusinesses,andtheongoingweakandthebroaderU.S.economyif Europeansovereign nessinthelaborandhousingmarkets.Whilerecent debtandbankingproblemsintensified.Participants incomingdatasuggestedreducedoddsthatthe observed,however,thatthecapitalandliquidityposi- economywouldslidebackintorecession,particitionsof U.S.bankshadstrengthenedinrecentquar- pantsstillsawsignificantdownsideriskstotheouttersandthatthecreditqualityof loanstobusinesses lookforeconomicgrowth.Risksincludedpotential andhouseholdshadimprovedfurther.Contactsin spilloverstoU.S.financialmarketsandinstitutions, thebankingsectorreportedthatU.S.bankscontin- andsotothebroaderU.S.economy,if theEuropean uedtobewillingtoextendloanstocreditworthybor- debtandbankingcrisisweretoworsensignificantly. rowers,butloandemandremainedweakandcompe- Inaddition,participantsnotedtheriskof alargertitionforsuchborrowerswasputtingpressureonnet than-expectedfiscaltighteningandthepossibility interestmargins.Itwasnotedthatverylowinterest thatstructuralproblemsinthehousingmarkethad rateswerenegativelyaffectingpensionfundsandthe attenuatedthetransmissionof monetarypolicy profitabilityof thelifeinsuranceindustry.Partici- actionstotherealeconomy.Itwasalsonotedthat pantsalsodiscussedtheeventssurroundingthe theextendedperiodof highlyaccommodativemonbankruptcyfilingof MFGlobalHoldingsLtd.and etarypolicycouldeventuallyleadtoabuildupof sawthefinancialstabilityimplicationsof thisdevel- financialimbalances.Afewparticipants,however, opmentaslimitedtodate. mentionedthepossibilitythateconomicgrowth couldbemorerapidthancurrentlyexpected,particu- Participantsgenerallyagreedthatmeasuresof total larlyif gainsinoutputandemploymentledtoavirinflationappearedtohavemoderatedsinceearlierin tuouscycleof improvementsinhouseholdbalance theyearaspricesof energyandsomecommodities sheets,increasedconfidence,andeasiercredit declinedfromtheirpeaks.Measuresof coreinflation conditions. alsoseemedtohavedeclinedinrecentmonths,and longer-terminflationexpectationsremainedwell Withrespecttotheoutlookforinflation,participants anchored.Nonetheless,someparticipantsnotedthat generallyanticipatedthatinflationwouldrecedefurcoreinflationhadnotcomedownasquicklyorbyas therovercomingquartersandwouldsettleoverthe muchastheyhadexpectedinlightof thereduction mediumrunatlevelsatorbelowthosejudgedtobe incommodityprices,perhapssuggestingthatthe mostconsistentwiththeCommittee’sdualmandate. levelof potentialoutputwaslowerthanhadbeen Theypointedtothefurtherdissipationof theeffects thought.However,otherparticipantspointedtothe of earlierincreasesinthepricesof energyandsome subduedpaceof gainsinlaborcostsasafactor commodities,thesignificantslackinresourceutilizadampinginflation,andreportsfromcontactssug- tion,thecontinuedsubduedgrowthinlaborcompengestedthatupwardpressureonwagesremained sation,andwell-anchoredinflationexpectationsas limited. factorslikelytocontributetothemoderationininflationovertime.Anumberof participantssawthe Regardingtheiroveralloutlookforeconomicactiv- riskstotheoutlookforinflationasroughlybalanced. ity,participantsgenerallyagreedthat,evenwiththe Afewparticipantsfeltthatthecontinuationof the positivenewsreceivedovertheintermeetingperiod, currentstanceof monetarypolicy,coupledwiththe themostprobableoutcomewasamoderatepaceof possibilityof areboundinenergyandcommodity economicgrowthoverthemediumrunwithonlya prices,posedsomeupsideriskstoinflation.Other gradualdeclineintheunemploymentrate.While participantsinsteadsawinflationrisksastiltedtothe somefactorswereseenaslikelytosupportgrowth downside,inlightof theirexpectationsforpersistent goingforward—suchaspent-updemand,improve- resourceslack.ItwasnotedthatU.S.inflationhad mentsinhouseholdandbusinessbalancesheets,and beeninfluencedrelativelymorebycommodityprice accommodativemonetarypolicy—participants fluctuationsinrecentyears;becausecommodity observedthatthepaceof economicrecoverywould pricesreflectglobaleconomicconditions,U.S.inflalikelycontinuetobehelddownforsometimebyper- tionmightbelessaffectedbydomesticfactorsand sistentheadwinds.Inparticular,theypointedtovery morelinkedtotheglobaloutlookthaninthepast.

Minutesof FederalOpenMarketCommitteeMeetings|November 283 Committee Policy Action regularlyreviewthesizeandcompositionof itssecuritiesholdingsandthatitispreparedtoadjustthose Membersnotedthatinformationreceivedoverthe holdingsasappropriatetopromoteastrongerecointermeetingperiodpointedtosomewhatstronger nomicrecoveryinthecontextof pricestability.With economicgrowthinthethirdquarter,partlyreflect- respecttothestatementtobereleasedfollowingthe ingareversalof temporaryfactorsthathad meeting,membersagreedthatonlyrelativelysmall depressedeconomicgrowthinthefirsthalf of the changeswereneededtoreflectthemodestimproveyear.However,overalllabormarketconditions mentintheeconomicoutlookandtonotethatthe remainedweak.Membersgenerallyanticipatedthat Committeewouldcontinuetoimplementitspolicy unemploymentwoulddeclineonlygraduallyfrom stepsfromrecentmeetings. levelssignificantlyabovethosethattheCommittee wouldexpecttoprevailinthelongerrun,withinfla- Attheconclusionof thediscussion,theCommittee tionlikelytosettleatlevelsatorbelowthoseconsis- votedtoauthorizeanddirecttheFederalReserve tentwiththeCommittee’sdualmandate.Accord- Bankof NewYork,untilitwasinstructedotherwise, ingly,inthediscussionof monetarypolicyforthe toexecutetransactionsintheSystemAccountin periodahead,allCommitteemembersagreedtocon- accordancewiththefollowingdomesticpolicy tinuetheprogramof extendingtheaveragematurity directive: of theFederalReserve’sholdingsof securitiesas announcedinSeptember.TheCommitteedecidedto “TheFederalOpenMarketCommitteeseeks maintainitsexistingpolicyof reinvestingprincipal monetaryandfinancialconditionsthatwillfospaymentsfromitsholdingsof agencydebtand terpricestabilityandpromotesustainable agencyMBSinagencyMBSandof rollingover growthinoutput.Tofurtheritslong-runobjecmaturingTreasurysecuritiesatauction.Inaddition, tives,theCommitteeseeksconditionsinreserve theCommitteeagreedtokeepthetargetrangeforthe marketsconsistentwithfederalfundstradingin federalfundsrateat0to¼percentandtoreiterate arangefrom0to¼percent.TheCommittee itsexpectationthateconomicconditions—including directstheDesktocontinuethematurityextenlowratesof resourceutilizationandasubduedout- sionprogramitbeganinSeptembertopurchase, lookforinflationoverthemediumrun—arelikelyto bytheendof June2012,Treasurysecuritieswith warrantexceptionallylowlevelsforthefederalfunds remainingmaturitiesof approximately6yearsto rateatleastthroughmid-2013.Afewmembers 30yearswithatotalfacevalueof $400billion, expressedinterestinusinglanguagespecifyinga andtosellTreasurysecuritieswithremaining periodof timeduringwhichthefederalfundsrate maturitiesof 3yearsorlesswithatotalface wasexpectedtoremainexceptionallylow,ratherthan valueof $400billion.TheCommitteealso acalendardate,arguingthatsuchlanguagemightbe directstheDesktomaintainitsexistingpolicies bettertoindicateaconstantstanceof monetary of rollingovermaturingTreasurysecuritiesinto policyovertime.However,membersgenerallypre- newissuesandof reinvestingprincipalpayments ferredtoretaintheexistingforwardguidance,atleast onallagencydebtandagencymortgage-backed fornow.Afewmembersindicatedthattheybelieved securitiesintheSystemOpenMarketAccount theeconomicoutlookmightwarrantadditional inagencymortgage-backedsecuritiesinorderto policyaccommodation.However,itwasnotedthat maintainthetotalfacevalueof domesticsecurianysuchaccommodationwouldlikelybemoreeffec- tiesatapproximately$2.6trillion.TheCommittiveif itwereprovidedinthecontextof afuture teedirectstheDesktoengageindollarroll communicationsinitiative,andmostof thesemem- transactionsasnecessarytofacilitatesettlement bersagreedthattheycouldsupportretentionof the of theFederalReserve’sagencyMBStransaccurrentpolicystanceatthismeeting.Onemember tions.TheSystemOpenMarketAccountMandissentedfromthepolicydecisiononthegrounds agerandtheSecretarywillkeeptheCommittee thatadditionalmonetarypolicyaccommodationwas informedof ongoingdevelopmentsregarding warrantedatthistime.WiththeCommitteeinthe theSystem’sbalancesheetthatcouldaffectthe processof reviewingitsmonetarypolicystrategies attainmentovertimeof theCommittee’sobjecandcommunication,andnoadditionalaccommoda- tivesof maximumemploymentandprice tionbeingprovidedatthismeeting,afewmembers stability.” indicatedthattheycouldsupporttheCommittee’s decisioneventhoughtheyhadnotfavoredrecent Thevoteencompassedapprovalof thestatement policyactions.TheCommitteereiteratedthatitwill belowtobereleasedat12:30p.m.:

284 98thAnnualReport|2011 “InformationreceivedsincetheFederalOpen TheCommitteealsodecidedtokeepthetarget MarketCommitteemetinSeptemberindicates rangeforthefederalfundsrateat0to¼percent thateconomicgrowthstrengthenedsomewhatin andcurrentlyanticipatesthateconomiccondithethirdquarter,reflectinginpartareversalof tions—includinglowratesof resourceutilizathetemporaryfactorsthathadweighedon tionandasubduedoutlookforinflationover growthearlierintheyear.Nonetheless,recent themediumrun—arelikelytowarrantexcepindicatorspointtocontinuingweaknessinover- tionallylowlevelsforthefederalfundsrateat alllabormarketconditions,andtheunemploy- leastthroughmid-2013. mentrateremainselevated.Householdspending hasincreasedatasomewhatfasterpaceinrecent TheCommitteewillcontinuetoassesstheecomonths.Businessinvestmentinequipmentand nomicoutlookinlightof incominginformation softwarehascontinuedtoexpand,butinvest- andispreparedtoemployitstoolstopromotea mentinnonresidentialstructuresisstillweak, strongereconomicrecoveryinacontextof price andthehousingsectorremainsdepressed.Infla- stability.” tionappearstohavemoderatedsinceearlierin theyearaspricesof energyandsomecommodi- Votingforthisaction:BenBernanke,WilliamC. tieshavedeclinedfromtheirpeaks.Longer-term Dudley,ElizabethDuke,RichardW.Fisher,Narayinflationexpectationshaveremainedstable. anaKocherlakota,CharlesI.Plosser,SarahBloom Raskin,DanielK.Tarullo,andJanetL.Yellen. Consistentwithitsstatutorymandate,theCommitteeseekstofostermaximumemployment Votingagainstthisaction:CharlesL.Evans. andpricestability.TheCommitteecontinuesto expectamoderatepaceof economicgrowth Mr.Evansdissentedbecausehesawthehighunemovercomingquartersandconsequentlyanticiploymentrateandtheoutlookforonlyweakecopatesthattheunemploymentratewilldecline nomicgrowthascallingforadditionalpolicyaccomonlygraduallytowardlevelsthattheCommittee modationatthismeeting.Moreover,thelongerthe judgestobeconsistentwithitsdualmandate. currentsituationof lowresourceutilizationlasted, Moreover,therearesignificantdownsiderisksto themoretheeconomy’slonger-termgrowthpotential theeconomicoutlook,includingstrainsin couldbeimpaired.Furthermore,givencurrent globalfinancialmarkets.TheCommitteealso policy,hisoutlookwasforinflationtocomeinbelow anticipatesthatinflationwillsettle,overcoming levelsconsistentwiththeCommittee’sdualmandate, quarters,atlevelsatorbelowthoseconsistent bolsteringthecaseforadditionalmonetaryeasingat withtheCommittee’sdualmandateasthe thistime.Healsobelievedpolicieswithmore-explicit effectsof pastenergyandothercommodity forwardguidanceabouttheeconomicconditions priceincreasesdissipatefurther.However,the underwhichexceptionallylowlevelsof thefundsrate Committeewillcontinuetopaycloseattention couldbemaintainedwouldimprovetheprospectsfor totheevolutionof inflationandinflation growthandemploymentand,whilepossiblyadmitexpectations. tingsomewhathigherinflationforatime,wouldstill safeguardpricestability. Tosupportastrongereconomicrecoveryandto helpensurethatinflation,overtime,isatlevels Itwasagreedthatthenextmeetingof theCommittee consistentwiththedualmandate,theCommitwouldbeheldonTuesday,December13,2011.The teedecidedtodaytocontinueitsprogramto meetingadjournedat10:30a.m.onNovember2, extendtheaveragematurityof itsholdingsof 2011. securitiesasannouncedinSeptember.TheCommitteeismaintainingitsexistingpoliciesof reinvestingprincipalpaymentsfromitsholdingsof Notation Vote agencydebtandagencymortgage-backedsecuritiesinagencymortgage-backedsecuritiesand BynotationvotecompletedonOctober11,2011,the of rollingovermaturingTreasurysecuritiesat Committeeunanimouslyapprovedtheminutesof the auction.TheCommitteewillregularlyreview FOMCmeetingheldonSeptember20–21,2011. thesizeandcompositionof itssecuritiesholdingsandispreparedtoadjustthoseholdingsas WilliamB.English appropriate. Secretary

Minutesof FederalOpenMarketCommitteeMeetings|November 285 Addendum: willmodestlyexceedparticipants’estimatesof the Summary of Economic Projections longer-runsustainablerateof increaseinrealGDP, theunemploymentrateisprojectedtodeclineonly InconjunctionwiththeNovember1–2,2011,Federal graduallyoverthisprojectionperiod.Asaresult, OpenMarketCommittee(FOMC)meeting,the participantsanticipatedthat,attheendof 2014,the membersof theBoardof Governorsandthepresi- unemploymentratewouldremainwellabovetheir dentsof theFederalReserveBanks,allof whompar- estimatesof theunemploymentratethattheyseeas ticipateinthedeliberationsof theFOMC,submitted consistent,overthelongerrun,withtheCommittee’s projectionsforgrowthof realoutput,theunemploy- dualmandateof maximumemploymentandprice mentrate,andinflationfortheyears2011to2014 stability.Mostparticipantsanticipatedthatthefacandoverthelongerrun.Theprojectionswerebased torsunderlyingthenoticeableriseinoverallinflation oninformationavailableatthetimeof themeeting in2011wouldbelargelytransitoryandthatinflation andoneachparticipant’sassumptionsaboutfactors wouldmovelowerin2012;thereafter,inflationwas likelytoaffecteconomicoutcomes,includinghisor expectedtoremainatlevelsroughlyconsistentwith herassessmentof appropriatemonetarypolicy. orbelowratesthattheyseeasconsistentwiththe “Appropriatemonetarypolicy”isdefinedasthe Committee’sdualmandate.Participantsgenerally futurepathof policythateachparticipantdeems viewedtherateof coreinflationaslikelytoremainat mostlikelytofosteroutcomesforeconomicactivity orsomewhatbelowits2011levelthroughouttheproandinflationthatbestsatisfyhisorherinterpreta- jectionperiod. tionof theFederalReserve’sdualobjectivesof maximumemploymentandstableprices.Longer-runpro- Onbalance,asindicatedintable1,participants jectionsrepresenteachparticipant’sassessmentof anticipatedsomewhatslowereconomicgrowthand theratetowhicheachvariablewouldbeexpectedto somewhathigherunemploymentrelativetotheirproconvergeovertimeunderappropriatemonetary jectionsinJune;theyraisedtheirprojectionsfor policyandintheabsenceof furthershocks. inflationin2011butlefttheirprojectionsforinflationfrom2012onwardaboutunchangedsincethe Asdepictedinfigure1,FOMCparticipantsexpected Junemeeting.Allof theparticipantsmadesubstantheeconomicrecoverytocontinueatamoderate tialdownwardrevisionstotheirprojectionsforGDP pace,withthegrowthof realgrossdomesticproduct growthin2011,andmostmarkeddowntheirprojec- (GDP)slowingthisyearcomparedwithitspacein tionsforeconomicgrowthin2012and2013;how- 2010butthenpickingupgraduallythrough2014. ever,participantsdidnotmateriallyaltertheirexpec- Withexpectationsthatthepaceof economicgrowth tationsforthenormalrateof economicgrowththat Table1.EconomicprojectionsofFederalReserveBoardmembersandFederalReserveBankpresidents,November2011 Percent Centraltendency1 Range2 Variable 2011 2012 2013 2014 Longerrun 2011 2012 2013 2014 Longerrun ChangeinrealGDP 1.6to1.7 2.5to2.9 3.0to3.5 3.0to3.9 2.4to2.7 1.6to1.8 2.3to3.5 2.7to4.0 2.7to4.5 2.2to3.0 Juneprojection 2.7to2.9 3.3to3.7 3.5to4.2 n.a. 2.5to2.8 2.5to3.0 2.2to4.0 3.0to4.5 n.a. 2.4to3.0 Unemploymentrate 9.0to9.1 8.5to8.7 7.8to8.2 6.8to7.7 5.2to6.0 8.9to9.1 8.1to8.9 7.5to8.4 6.5to8.0 5.0to6.0 Juneprojection 8.6to8.9 7.8to8.2 7.0to7.5 n.a. 5.2to5.6 8.4to9.1 7.5to8.7 6.5to8.3 n.a. 5.0to6.0 PCEinflation 2.7to2.9 1.4to2.0 1.5to2.0 1.5to2.0 1.7to2.0 2.5to3.3 1.4to2.8 1.4to2.5 1.5to2.4 1.5to2.0 Juneprojection 2.3to2.5 1.5to2.0 1.5to2.0 n.a. 1.7to2.0 2.1to3.5 1.2to2.8 1.3to2.5 n.a. 1.5to2.0 CorePCEinflation3 1.8to1.9 1.5to2.0 1.4to1.9 1.5to2.0 1.7to2.0 1.3to2.1 1.4to2.1 1.4to2.2 Juneprojection 1.5to1.8 1.4to2.0 1.4to2.0 n.a. 1.5to2.3 1.2to2.5 1.3to2.5 n.a. Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andprojectionsforbothmeasuresofinflationarefromthefourthquarterofthepreviousyeartothefourth quarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures (PCE)andthepriceindexforPCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarterofthe yearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’s assessmentoftheratetowhicheachvariablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.TheJune projectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonJune21–22,2011. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

286 98thAnnualReport|2011 Figure1.Centraltendenciesandrangesofeconomicprojections,2011–14andoverthelongerrun Percent Change in real GDP 4 Central tendency of projections Range of projections 3 2 1 + Actual 0_ 1 2 3 2006 2007 2008 2009 2010 2011 2012 2013 2014 Longer run Percent Unemployment rate 10 9 8 7 6 5 2006 2007 2008 2009 2010 2011 2012 2013 2014 Longer run Percent PCE inflation 3 2 1 2006 2007 2008 2009 2010 2011 2012 2013 2014 Longer run Percent Core PCE inflation 3 2 1 2006 2007 2008 2009 2010 2011 2012 2013 2014 Note:Definitionsofvariablesareinthenotestotable1.Thedatafortheactualvaluesofthevariablesareannual.

Minutesof FederalOpenMarketCommitteeMeetings|November 287 wouldprevailinthelongerrun.Althoughpartici- Lookingfurtherahead,participantscontinuedto pantscontinuetoexpectagradualdeclineinthe expectamoderatepickupinthepaceof theecounemploymentrateovertime,mostparticipants nomicrecoveryoverthenextcoupleof years,albeit reviseduptheirprojectionsforthepathof theunem- togrowthratessomewhatbelowthosepreviously ploymentrateovertheforecastperiod,andsomepar- projected.Thecentraltendencyof participants’proticipantsalsoraisedtheirprojectionsof thelonger- jectionsforoutputgrowthin2012was2.5to2.9perrunrateof unemploymentcomparedwithJune.Par- cent,followedbycentraltendenciesof 3.0to3.5perticipants’projectionsforoverallandcoreinflation centin2013and3.0to3.9percentin2014.ParticithisyearwereslightlyhigherthaninJune,buttheir pantsanticipatedthattheeconomicexpansionwould projectionsfor2012,2013,andoverthelongerrun besupportedbycontinuedmonetarypolicyaccomwerebroadlysimilartothosemadeinJune. modation,reducedcommoditycostpressures, strengtheninghouseholdbalancesheets,andimprov- Asindicatedinfigure2,asizablemajorityof partici- ingfinancialconditions.However,indowngrading pantscontinuedtoattachanunusuallyhighlevelof thetrajectoryof theirprojectionscomparedwith uncertaintytotheirprojectionsforeconomicgrowth, thoseinJune,participantscitedanumberof forces theunemploymentrate,andinflationrelativetohis- thatwerelikelytorestrainthepaceof outputgrowth toricalnorms.Mostparticipantsviewedtherisksto overthenextfewyears,includingtighterfiscalpolicy outputgrowthasbeingweightedtothedownside atalllevelsof government,ongoingdragfromthe andtheriskstotheunemploymentrateasbeing troubledhousingsector,volatilityinfinancialmarweightedtotheupside.Mostparticipantssawthe kets,andpossiblyreducedexternaldemand.Many riskstooverallandcoreinflationasbroadly alsopointedtotheadditionalheadwindsof still-tight balanced. creditconditionsforsomehouseholdsandsmaller businesses,weakconsumerandbusinesssentiment, TheOutlook persistentlyhighunemployment,andslowincome Participantsmarkedtheirforecastsdownsignifi- growth.Inaddition,someparticipantsnotedthat cantlyforrealGDPgrowthin2011,withthecentral althoughenergyandcommoditypriceshadfallen tendencyof theirprojectionsforminganarrowband back,theyremainatelevatedlevelsthatmightweigh from1.6to1.7percent,downfrom2.7to2.9percent onspendingforatime.Thecentraltendencyof parinJune.Participantsstatedthatthedownwardrevi- ticipants’projectionsforthelonger-runrateof real sionreflectedthebodyof economicdatareceived GDPgrowth,intheabsenceof furthershocks,was sinceJune,particularlythecomprehensiveannual 2.4to2.7percent,abitslowerthanprojectedinJune. revisionsandtheestimateof second-quarterGDP publishedbytheBureauof EconomicAnalysis, Inresponsetotheongoingweaknessinlabormarket whichshowedthattheexpansioninrealGDPinthe conditionsandthedownwardrevisionstotheir firsthalf of theyearhadbeenconsiderablyslower assessmentsof theeconomicoutlook,participants thantheparticipantshadexpectedatthetimeof markeduptheirforecastsfortheunemploymentrate theirJuneprojections.More-recentdataindicated overtheforecastperiod.Forthefourthquarterof thatoutputgrowthstrengthenedduringthethird thisyear,thecentraltendencyof participants’projecquarter,reflectinginpartareversalof thetemporary tionsroseto9.0to9.1percentfrom8.6to8.9percent factorsthathadweighedonrealactivityearlierinthe reportedinJune.Similarupwardrevisionsweremade year,includingthedampingeffectof higherfoodand for2012and2013,withthecentraltendenciesof the energypricesonconsumerpurchasingpowerand unemploymentrateprojectionsforthoseyearsnow spendingaswellassupplychaindisruptionsassoci- at8.5to8.7percentand7.8to8.2percent,respecatedwiththedisasterinJapan.However,severalpar- tively.Thecentraltendencyof theirunemployment ticipantsindicatedthatsomeof thefactorscontribut- rateprojectionsfortheendof 2014was6.8to ingtotheslowdowninGDPgrowthearlierinthe 7.7percent,indicatingexpectationsforanongoing, year,includingreducedspendingbystateandlocal gradualimprovementintheemploymentsituation, governments,werelikelytobemorepersistent.Par- butonethatcontinuedtoleavetheunemployment ticipantsalsonotedthatheighteneduncertainty ratewellabovethe5.2to6.0percentcentraltendency regardingeconomicandfinancialdevelopments,as of participants’estimatesof theunemploymentrate wellaslowconfidenceamongbusinessesandcon- thatwouldprevailoverthelongerrunintheabsence sumers,continuedtorestraineconomicactivity. of furthershocks.Theupperboundof thecentral

288 98thAnnualReport|2011 Figure2.Uncertaintyandrisksineconomicprojections Number of participants Number of participants Uncertainty about GDP growth Risks to GDP growth 18 18 November projections November projections June projections 16 June projections 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Number of participants Number of participants Uncertainty about the unemployment rate Risks to the unemployment rate 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Number of participants Number of participants Uncertainty about PCE inflation Risks to PCE inflation 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Number of participants Number of participants Uncertainty about core PCE inflation Risks to core PCE inflation 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Note:Fordefinitionsofuncertaintyandrisksineconomicprojections,seethebox“ForecastUncertainty.”Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|November 289 tendencyof participants’longer-runprojectionswas Table2.Averagehistoricalprojectionerrorranges higherthaninJune,althoughtherangeof partici- Percentagepoints pants’estimateswasunchanged. Variable 2011 2012 2013 2014 Participantsnotedthatmeasuresof consumerprice ChangeinrealGDP1 ±0.6 ±1.4 ±1.7 ±1.8 inflationhadincreasedthisyearrelativetoboththeir Unemploymentrate1 ±0.2 ±0.9 ±1.5 ±1.8 levelsin2010andtheprojectionsmadeinJune, Totalconsumerprices2 ±0.5 ±0.9 ±1.0 ±1.0 reflectinginparthigherpricesof oilandothercom- Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared moditiesthathadlargereffectsthanpreviously errorofprojectionsfor1991through2010thatwerereleasedinthefallby expected.Thecentraltendencyof theirestimatesfor variousprivateandgovernmentforecasters.Asdescribedinthebox “ForecastUncertainty,”undercertainassumptions,thereisabouta70percent totalpersonalconsumptionexpenditures(PCE)inflaprobabilitythatactualoutcomesforrealGDP,unemployment,andconsumer tionin2011roseto2.7to2.9percentcomparedwith priceswillbeinrangesimpliedbytheaveragesizeofprojectionerrorsmadein thepast.FurtherinformationisinDavidReifschneiderandPeterTulip(2007), 2.3to2.5percentinJune.Mostparticipantsantici- “GaugingtheUncertaintyoftheEconomicOutlookfromHistoricalForecasting patedthattheinfluenceof highercommodityprices Errors,”FinanceandEconomicsDiscussionSeries2007-60(Washington:Boardof GovernorsoftheFederalReserveSystem,November). andsupplychaindisruptionsfromJapanwouldbe 1 Fordefinitions,refertogeneralnoteintable1. temporaryandthatinflationpressuresinthenext 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen severalyearswouldbesubduedascommodityprices mostwidelyusedingovernmentandprivateeconomicforecasts.Projection ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof stabilized,inflationexpectationsremainedwell theyearindicated. anchored,andlargemarginsof slackinlabormarketskeptlaborcostsincheck.Asaresult,thecentral tendencyof participants’projectionsof totalPCE inflationwasabout1.5to2.0percentin2012,2013, mentsinEurope,theseverityof therecentrecession, and2014,similartotheirforecastsinJuneandator andthepaceatwhichthenumerousfinancialand slightlybelowthe1.7to2.0percentcentraltendency economicheadwindsbuffetingtheeconomywill of theirestimatesof thelonger-run,mandate- recede.However,slightlyfewerparticipantsreported consistentrateof inflation.Thecentraltendencyof ahigher-than-averagedegreeof uncertaintyaround participants’projectionsof corePCEinflationin theirinflationprojectionsthaninJune.Participants 2011shiftedupto1.8to1.9percent,comparedwith notedthatuncertaintiesaboutthepaceof economic 1.5to1.8percentinJune,assomeof thisyear’s recoveryandtheeffectsof theFederalReserve’s run-upincommoditypricespassedthroughtocore extraordinarymonetarypolicyaccommodation,as prices.However,thecentraltendenciesof theprojec- wellasthetimingof exitfromit,weresignificant tionsof coreinflationforthenextthreeyearswere sourcesof uncertaintyintheoutlookforinflation. approximately1.5to2.0percent,essentially However,anumberof participantshighlightedthat unchangedfromtheirJunelevelsandroughlysimilar inflationcurrentlyremainsanchoredbystable toparticipants’projectionsforheadlineinflation. longer-terminflationexpectations. UncertaintyandRisks Althoughseveralparticipantsnotedthattherisksof Intheirassessmentsof theuncertaintyandrisks anear-termrecessionhadlikelydiminished,most associatedwiththeirprojections,asubstantialmajor- participantscontinuedtojudgethatthebalanceof ityof participantscontinuedtojudgethatthelevels riskstoeconomicgrowthwasweightedtothedownof uncertaintyassociatedwiththeirprojectionsfor side(thatis,theyjudgedthateconomicgrowthwas economicgrowth,theunemploymentrate,andinfla- morelikelytobebelowtheirprojectionof itsmost tionweregreaterthantheaveragelevelsthathadpre- likelyoutcomethanaboveit).Theremainingparticivailedoverthepast20years.2Theypointedtoa pantssawtherisksasbalanced.Themostfrequently numberof factorsthatraisedtheirassessmentsof citeddownsideriskstogrowthincludedpossible uncertaintyregardingoutputgrowthandunemploy- financialmarketandeconomicspilloversfroman ment,includingconcernsabouttheongoingdevelop- intensificationof thefinancialstrainsinEurope,vulnerabilitiesrelatedtoweakconsumerandbusiness confidence,thepossibleeffectsonspendingof uncer- 2 Table2providesestimatesofforecastuncertaintyforthechange taintiesaboutregulatorypolicy,andthepotential inrealGDP,theunemploymentrate,andtotalconsumerprice inflationovertheperiodfrom1991to2010.Attheendofthis consequencesof larger-than-expectednear-termfissummary,thebox“ForecastUncertainty”discussesthesources calconsolidation.Theriskssurroundingparticipants’ andinterpretationofuncertaintyintheeconomicforecastsand forecastsof theunemploymentrateshiftedhigher, explainstheapproachusedtoassesstheuncertaintyandrisks attendingtheparticipants’projections. withalargernumberof participantsrelativetoJune

290 98thAnnualReport|2011 viewingtheriskstotheirprojectionsasweightedto atedwithparticipants’longer-runprojectionsof outtheupside,andtheremainingparticipantsseeingthe putgrowthandtheunemploymentratechangedvery risksasbroadlybalanced. little,althoughthedispersionof theirprojectionsin 2014exceededthedispersionof theirlonger-run Amajorityof theparticipantscontinuedtojudgethe ranges,suggestinggreateragreementamongpolicyriskstotheirprojectionsof overallandcoreinflation makersabouttheeconomy’slonger-runperformance tobebroadlybalanced.Comparedwiththeirassess- thanthepathof convergencetowardit.Asizable mentsinJune,asmallernumberof participants majorityof theparticipantsjudgedthat,inthe viewedtheriskstoinflationasbeingweightedtothe absenceof anyadditionalshocks,theeconomy upside,andmoreparticipantsindicatedthattherisks wouldconvergefullytoitslonger-runratesof GDP wereweightedtothedownside;thechangesleftthe growth,unemployment,andinflationwithinabout numberof participantswhosawaskewineither fiveorsixyears;afewparticipantsindicatedthat directionmoreevenlydistributed.Someparticipants convergencemighttakealongerperiodof time,and sawariskthatelevatedresourceslackcouldputmore oneparticipantbelievedconvergencecouldoccur downwardpressureoninflationthanexpected.Nev- morerapidly. ertheless,someparticipantsnotedtheriskthatcommoditypricescouldexperiencerenewedvolatilityor Figures3.Cand3.Dprovidecorrespondinginformahavealonger-lastinginfluencethanexpected.Afew tionaboutthediversityof participants’outlooksfor participantspointedtothepossibilitythatthecur- inflation.Thecenterof massof thedistributionsof renthighlyaccommodativestanceof monetary participants’projectionsforoverallandcorePCE policy,if itweremaintainedforlongerthanisappro- inflationin2011shiftedtotherightrelativetothe priate,couldleadtohigherinflationexpectationsand rangesof theseprojectionsprovidedinJune.Thedisactualinflation;somealsothoughtthatfiscalimbal- persionof projectionsfortotalPCEinflationin2012 ancescouldhaveasimilareffect. and2013changedlittle,althoughthetopendof the rangeof participants’projectionswassomewhat DiversityofViews higherthanthatof theirprojectionsforcoreinfla- Figures3.Aand3.Bprovidefurtherdetailsonthe tion,suggestingthatafewparticipantsareconcerned diversityof participants’viewsregardingthelikely thatelevatedpriceincreasesforfoodandenergywill outcomesforrealGDPgrowthandtheunemploy- persistforatime.Thedispersionof projectionsfor mentrateoverthenextfewyearsandoverthelonger coreinflationnarrowedsomewhat,drivenpredomirun.Thedispersionintheseprojectionscontinuedto nantlybyadeclineintheupperendof theranges. reflectdifferencesinparticipants’assessmentsof Therangesof inflationprojectionsfor2014were manyfactors,includingtheunderlyingmomentumin similartothosefor2012and2013.Ingeneral,the economicactivity,appropriatefuturemonetary dispersionof participants’inflationforecastsforthe policyanditseffectsoneconomicactivity,theeffects nextfewyearsrepresenteddifferencesinjudgments of theEuropeansituation,andthefuturepathof regardingthefundamentaldeterminantsof inflation, U.S.fiscalpolicy.Withmuchof thedatafor2011 includingthedegreeof resourceslackandtheextent nowinhand,thedispersionof participants’projec- towhichresourceslackinfluencesinflationoutcomes tionsof outputgrowthandtheunemploymentrate andexpectations,aswellasestimatesof howthe thisyearnarrowedsubstantiallyrelativetoJune.The stanceof monetarypolicymayinfluenceinflation rangeof participants’projectionsforthesevariables expectations.Bycontrast,theunchangedandrelain2012and2013alsonarrowedsomewhat;however, tivelyconcentrateddistributionof participants’protherangeof projectionsforrealGDPgrowthineach jectionsforoverallinflationoverthelongerrunconof thoseyearsshiftedtothelowerendof therange tinuedtoreflectbroadsimilarityinparticipants’ of theirJuneprojections,andtherangeof projec- assessmentsof theapproximatelevelof inflationthat tionsfortheunemploymentrateshiftedtothehigher isconsistentwiththeFederalReserve’sdualobjecendof theJunedistribution.Thedispersionassoci- tivesof maximumemploymentandpricestability.

Minutesof FederalOpenMarketCommitteeMeetings|November 291 Figure3.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2011–14andoverthelongerrun Number of participants 2011 18 November projections 16 June projections 14 12 10 8 6 4 2 0.8- 1.0- 1.2- 1.4- 1.6- 1.8- 2.0- 2.2- 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0- 4.2- 4.4- 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 Percent range Number of participants 2012 18 16 14 12 10 8 6 4 2 0.8- 1.0- 1.2- 1.4- 1.6- 1.8- 2.0- 2.2- 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0- 4.2- 4.4- 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 Percent range Number of participants 2013 18 16 14 12 10 8 6 4 2 0.8- 1.0- 1.2- 1.4- 1.6- 1.8- 2.0- 2.2- 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0- 4.2- 4.4- 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 Percent range Number of participants 2014 18 16 14 12 10 8 6 4 2 0.8- 1.0- 1.2- 1.4- 1.6- 1.8- 2.0- 2.2- 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0- 4.2- 4.4- 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 0.8- 1.0- 1.2- 1.4- 1.6- 1.8- 2.0- 2.2- 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0- 4.2- 4.4- 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

292 98thAnnualReport|2011 Figure3.B.Distributionofparticipants’projectionsfortheunemploymentrate,2011–14andoverthelongerrun Number of participants 2011 18 November projections 16 June projections 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- 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 Percent range Number of participants 2012 18 16 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- 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 Percent range Number of participants 2013 18 16 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- 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 Percent range Number of participants 2014 18 16 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- 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 Percent range Number of participants Longer run 18 16 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- 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 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|November 293 Figure3.C.Distributionofparticipants’projectionsforPCEinflation,2011–14andoverthelongerrun Number of participants 2011 18 November projections 16 June projections 14 12 10 8 6 4 2 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 2.9- 3.1- 3.3- 3.5- 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 Percent range Number of participants 2012 18 16 14 12 10 8 6 4 2 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 2.9- 3.1- 3.3- 3.5- 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 Percent range Number of participants 2013 18 16 14 12 10 8 6 4 2 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 2.9- 3.1- 3.3- 3.5- 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 Percent range Number of participants 2014 18 16 14 12 10 8 6 4 2 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 2.9- 3.1- 3.3- 3.5- 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 2.7- 2.9- 3.1- 3.3- 3.5- 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

294 98thAnnualReport|2011 Figure3.D.Distributionofparticipants’projectionsforcorePCEinflation,2011–14 Number of participants 2011 18 November projections 16 June projections 14 12 10 8 6 4 2 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Number of participants 2012 18 16 14 12 10 8 6 4 2 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Number of participants 2013 18 16 14 12 10 8 6 4 2 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Number of participants 2014 18 16 14 12 10 8 6 4 2 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|November 295 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers theprojectionsarebroadlybalanced,thenumbers oftheBoardofGovernorsandthepresidentsofthe reportedintable2wouldimplyaprobabilityofabout FederalReserveBanksinformdiscussionsofmon- 70percentthatactualGDPwouldexpandwithina etarypolicyamongpolicymakersandcanaidpublic rangeof2.4to3.6percentinthecurrentyear,1.6to understandingofthebasisforpolicyactions.Con- 4.4percentinthesecondyear,1.3to4.7percentin siderableuncertaintyattendstheseprojections,how- thethirdyear,and1.2to4.8percentinthefourth ever.Theeconomicandstatisticalmodelsandrela- year.Thecorresponding70percentconfidenceintertionshipsusedtohelpproduceeconomicforecasts valsforoverallinflationwouldbe1.5to2.5percentin arenecessarilyimperfectdescriptionsofthereal thecurrentyear,1.1to2.9percentinthesecond world,andthefuturepathoftheeconomycanbe year,and1.0to3.0percentinthethirdandfourth affectedbymyriadunforeseendevelopmentsand years. events.Thus,insettingthestanceofmonetary Becausecurrentconditionsmaydifferfromthose policy,participantsconsidernotonlywhatappearsto thatprevailed,onaverage,overhistory,participants bethemostlikelyeconomicoutcomeasembodiedin providejudgmentsastowhethertheuncertainty theirprojections,butalsotherangeofalternative attachedtotheirprojectionsofeachvariableis possibilities,thelikelihoodoftheiroccurring,andthe greaterthan,smallerthan,orbroadlysimilartotypipotentialcoststotheeconomyshouldtheyoccur. callevelsofforecastuncertaintyinthepast,as Table2summarizestheaveragehistoricalaccuracyof shownintable2.Participantsalsoprovidejudgments arangeofforecasts,includingthosereportedinpast astowhethertheriskstotheirprojectionsare MonetaryPolicyReportsandthosepreparedbythe weightedtotheupside,areweightedtothedown- FederalReserveBoard’sstaffinadvanceofmeetings side,orarebroadlybalanced.Thatis,participants oftheFederalOpenMarketCommittee.Theprojec- judgewhethereachvariableismorelikelytobe tionerrorrangesshowninthetableillustratethecon- aboveorbelowtheirprojectionsofthemostlikely siderableuncertaintyassociatedwitheconomicfore- outcome.Thesejudgmentsabouttheuncertainty casts.Forexample,supposeaparticipantprojects andtherisksattendingeachparticipant’sprojections thatrealgrossdomesticproduct(GDP)andtotal aredistinctfromthediversityofparticipants’views consumerpriceswillrisesteadilyatannualratesof, aboutthemostlikelyoutcomes.Forecastuncertainty respectively,3percentand2percent.Iftheuncer- isconcernedwiththerisksassociatedwithaparticutaintyattendingthoseprojectionsissimilartothat larprojectionratherthanwithdivergencesacrossa experiencedinthepastandtherisksaround numberofdifferentprojections.

296 98thAnnualReport|2011 Meeting Held on December 13, 2011 StevenB.Kamin Economist Ajointmeetingof theFederalOpenMarketCom- DavidW.Wilcox mitteeandtheBoardof Governorsof theFederal Economist ReserveSystemwasheldintheofficesof theBoard of GovernorsinWashington,D.C.,onTuesday, ThomasA.Connors,LorettaJ.Mester, December13,2011,at8:30a.m. SimonPotter,DavidReifschneider, HarveyRosenblum,andLawrenceSlifman Present AssociateEconomists BenBernanke BrianSack Chairman Manager,SystemOpenMarketAccount WilliamC.Dudley JenniferJ.Johnson ViceChairman Secretaryof theBoard,Officeof theSecretary, Boardof Governors ElizabethDuke RobertdeV.Frierson CharlesL.Evans DeputySecretary,Officeof theSecretary, RichardW.Fisher Boardof Governors NarayanaKocherlakota MaryannF.Hunter CharlesI.Plosser DeputyDirector,Divisionof BankingSupervision andRegulation,Boardof Governors SarahBloomRaskin WilliamWascher DanielK.Tarullo DeputyDirector,Divisionof ResearchandStatistics, JanetL.Yellen Boardof Governors ChristineCumming,JeffreyM.Lacker, AndreasLehnert DennisP.Lockhart,SandraPianalto,and DeputyDirector,Officeof FinancialStabilityPolicy JohnC.Williams andResearch,Boardof Governors AlternateMembersof theFederalOpenMarket Committee AndrewT.Levin SpecialAdvisertotheBoard,Officeof Board JamesBullard,EstherL.George,and Members,Boardof Governors EricRosengren Presidentsof theFederalReserveBanksof St.Louis, LindaRobertson KansasCity,andBoston,respectively AssistanttotheBoard,Officeof BoardMembers, Boardof Governors WilliamB.English SecretaryandEconomist SethB.Carpenter SeniorAssociateDirector,Divisionof Monetary DeborahJ.Danker Affairs,Boardof Governors DeputySecretary MichaelP.Leahy MatthewM.Luecke SeniorAssociateDirector,Divisionof International AssistantSecretary Finance,Boardof Governors DavidW.Skidmore AssistantSecretary EllenE.Meade,StephenA.Meyer,and JoyceK.Zickler MichelleA.Smith SeniorAdvisers,Divisionof MonetaryAffairs, AssistantSecretary Boardof Governors ScottG.Alvarez EricM.Engen,MichaelT.Kiley,and GeneralCounsel MichaelG.Palumbo ThomasC.Baxter AssociateDirectors,Divisionof Researchand DeputyGeneralCounsel Statistics,Boardof Governors

Minutesof FederalOpenMarketCommitteeMeetings|December 297 DavidH.Small nointerventionoperationsinforeigncurrenciesfor ProjectManager,Divisionof MonetaryAffairs, theSystem’saccountovertheintermeetingperiod. Boardof Governors Staff Review of the Economic Situation PenelopeA.Beattie AssistanttotheSecretary,Officeof theSecretary, TheinformationreviewedattheDecember13meet- Boardof Governors ingindicatedthatU.S.economicactivityexpanded GordonWerkema moderatelydespitesomeapparentslowinginthe FirstVicePresident,FederalReserveBankof growthof foreigneconomiesandstrainsinglobal Chicago financialmarkets.Conditionsinthelabormarket seemedtohaveimprovedsomewhat,whileoverall Jeff FuhrerandMarkS.Sniderman consumerpriceinflationcontinuedtobemoremod- ExecutiveVicePresidents,FederalReserveBanksof estthanearlierintheyearandmeasuresof long-run BostonandCleveland,respectively inflationexpectationsremainedstable. DavidAltig,AlanD.Barkema, Theunemploymentratedroppedto8.6percentin RichardP.Dzina,SpencerKrane,and November,andprivatenonfarmemploymentcontin- ChristopherJ.Waller uedtoincreasemoderatelyduringthepasttwo SeniorVicePresidents,FederalReserveBanksof months.Nevertheless,employmentatstateandlocal Atlanta,KansasCity,NewYork,Chicago,and governmentsdeclinedfurther,andbothlong- St.Louis,respectively durationunemploymentandtheshareof workers MaryC.Daly employedparttimeforeconomicreasonsremained GroupVicePresident,FederalReserveBankof elevated.Initialclaimsforunemploymentinsurance SanFrancisco moveddown,onnet,sinceearlyNovemberbutwere stillatalevelconsistentwithonlymodestemploy- AlexanderL.Wolman mentgains,andindicatorsof jobopeningsandbusi- SeniorEconomistandResearchAdvisor,Federal nesses’hiringplanswerelittlechanged. ReserveBankof Richmond SamuelSchulhofer-Wohl IndustrialproductionroseinOctober,reflectingin SeniorEconomist,FederalReserveBankof partareboundinmotorvehicleproductionfromthe Minneapolis effectsof supplychaindisruptionsearlierintheyear. Factoryoutputoutsideof themotorvehiclesector Byunanimousvote,theCommitteeselectedSteven alsocontinuedtorise,andtherateof manufacturing B.KamintoserveasEconomistuntiltheselectionof capacityutilizationmovedup.However,motor asuccessoratthefirstregularlyscheduledmeetingof vehicleassemblieswerescheduledtoonlyedge theCommitteein2012. higher,onbalance,inthecomingmonths,and broaderindicatorsof manufacturingactivity,suchas Developments in Financial Markets and thediffusionindexesof newordersfromthenational the Federal Reserve’s Balance Sheet andregionalmanufacturingsurveys,wereatlevels thatsuggestedonlymodestincreasesinproductionin TheManagerof theSystemOpenMarketAccount thenearterm. (SOMA)reportedondevelopmentsindomesticand foreignfinancialmarketsduringtheperiodsincethe Revisedestimatesindicatedthathouseholds’realdis- FederalOpenMarketCommittee(FOMC)meton posableincomedeclinedinthesecondandthird November1–2,2011.HealsoreportedonSystem quarters,andthenetwealthof householdsdecreased openmarketoperations,includingtheongoingrein- inthethirdquarter.Nonetheless,overallrealpersonal vestmentintoagency-guaranteedmortgage-backed consumptionexpenditures(PCE)rosemodestlyin securities(MBS)of principalpaymentsreceivedon Octoberfollowingsignificantgainsintheprevious SOMAholdingsof agencydebtandagency- month,asspendingforconsumergoodscontinuedto guaranteedMBSaswellastheoperationsrelatedto increaseatastrongpacewhileoutlaysforconsumer thematurityextensionprogramauthorizedatthe serviceswereroughlyflat.InNovember,nominal September20–21FOMCmeeting.Byunanimous retailsales,excludingpurchasesatmotorvehicleand vote,theCommitteeratifiedtheDesk’sdomestic partsoutlets,expandedfurther,andsalesof light transactionsovertheintermeetingperiod.Therewere motorvehiclessteppedup.Butconsumersentiment

298 98thAnnualReport|2011 wasstillatasubduedlevelinearlyDecemberdespite Consumerpricesexcludingfoodandenergyalsoconsomeimprovementinrecentmonths. tinuedtoriseatamoremodestpaceinOctoberthan earlierintheyear.Near-terminflationexpectations Activityinthehousingmarketcontinuedtobe fromtheThomsonReuters/Universityof Michigan depressedbythesubstantialinventoryof foreclosed Surveysof ConsumersdeclinedinearlyDecember, anddistressedpropertiesandbyweakdemandthat andlonger-terminflationexpectationsremained reflectedtightcreditconditionsformortgageloans stable. anduncertaintyaboutfuturehomeprices.Startsand permitsfornewsingle-familyhomesinOctober Measuresof laborcompensationindicatedthat stayedaroundthelowlevelsthatprevailedsincethe nominalwagegainscontinuedtobesubdued.Commiddleof lastyear.Salesof newandexistinghomes pensationperhourinthenonfarmbusinesssector remainedslowinrecentmonths,andhomeprices increasedmoderatelyovertheyearendinginthe moveddownfurther. thirdquarter,whilethe12-monthchangeinaverage hourlyearningsforallemployeesremainedlowin Realbusinessspendingonequipmentandsoftware OctoberandNovember.Unitlaborcostsedgedup seemedtobedecelerating.Nominalordersandship- overthepastfourquarters. mentsof nondefensecapitalgoodsexcludingaircraft edgeddowninOctober,andtheslowingaccumula- Foreigneconomicgrowth,especiallyintheeuroarea, tionof unfilledorderssuggestedthatincreasesin appearedtoweakeninrecentmonths.Realgross outlaysforbusinessequipmentwouldbemutedin domesticproduct(GDP)intheeuroareabarely subsequentmonths.Also,surveymeasuresof busi- edgedupinthethirdquarter.Moreover,industrial nessconditionsandsentimentremainedatrelatively productionintheregionfellsharplyinSeptember, downbeatlevelsinNovember.Realbusinessspending andindicatorsof manufacturingactivityinOctober fornonresidentialconstructionmovedupinOctober andNovemberpointedtoloweroutput.Measuresof butwasstillatalowlevel,reflectinghighvacancy businessandconsumerconfidenceintheeuroarea ratesandrestrictedcreditconditionsforconstruction continuedtodeclineinrecentmonths.Inother loans.Inventoriesinmostindustrieslookedtoberea- advancedforeigneconomies,realGDPinJapan sonablywellalignedwithsales,althoughmotor reboundedinthethirdquarterfromtheeffectsof the vehiclestockscontinuedtobelean. earthquakeinMarch,andrealGDPrecoveredin Canadaasoilproductionpickedupafterseveral Inthegovernmentsector,realfederaldefensepur- monthsof shutdowns;however,availableindicators chasesappearedtohavesteppeddowninOctober of manufacturingactivityinbothof theseeconomies andNovemberfromtheirlevelinthethirdquarter. pointedtodeclinesduringthefourthquarter.Among Atthestateandlocallevel,realpurchasesseemedto emergingmarketeconomies,realGDPinBrazilwas bedecreasingataslowerpaceinrecentmonthsthan flatinthethirdquarter,whileexportsfromChina earlierintheyear. slowedinrecentmonths,althoughChinesedomestic demandappearedtoremainstrong. TheU.S.internationaltradedeficitnarrowedin October,asimportsdecreasedmorethanexports. Staff Review of the Financial Situation Declinesinimportsof petroleumproducts(reflecting lowerpricesandlesservolumes),non-oilindustrial Therisksassociatedwiththefiscalandfinancialdifsupplies,andautomotiveproductsmorethanoffset ficultiesinEuroperemainedthefocusof attentionin increasesincapitalgoods,consumergoods,andfood. financialmarketsovertheintermeetingperiodand Reductionsinexportsof industrialsuppliesandcon- contributedtoheightenedvolatilityinawiderange sumergoods,ledbyafewparticularlyvolatilecom- of assetmarkets.Investorconcernsaboutdevelopponents,outweighedthegainsincapitalgoods. mentsinEuropeintensifiedearlyintheperiodbut subsequentlyeasedabitamidsignsthatEuropean Inflationcontinuedtodecreaserelativetoearlierin authoritiesweremovingtowardagreementonacomtheyear.Indeed,thePCEpriceindexedgeddownin prehensiveframeworktoaddressfiscalandfinancial October.Consumerpricesforenergydecreased,and vulnerabilitiesandaftertheFederalReserveandfive surveydataindicatedthatgasolinepricesdeclined othermajorcentralbanksannouncedenhancedcurfurtherinNovember.Increasesinconsumerfood rencyswaparrangements,includinglowerchargeson pricesinOctoberweresubstantiallyslowerthanthe existingdollarliquidityswaplines.Nevertheless, averagepaceintheprecedingmonthsof thisyear. investorsappearedtoremaincautious.

Minutesof FederalOpenMarketCommitteeMeetings|December 299 YieldsonnominalTreasurysecuritieswerelittle termfundingmarkets.Inthewakeof thebankruptcy changedfollowingthereleaseof theNovember of MFGlobal,marketparticipantsalsoexpressed FOMCstatement.Overthefollowingweeks,move- renewedconcernsaboutsecuritiesdealersthatrely mentsinyieldswerereportedlydrivenbyshiftsin heavilyonshort-termwholesalefundingmarkets, investors’assessmentsof theEuropeansituationand particularlythoseinstitutionsnotaffiliatedwith byU.S.economicdatathatweresomewhatstronger commercialbankinginstitutions. thantheyexpected.Bothshort-termnominalTreasuryyieldsandtheexpectedpathof thefederalfunds Yieldsoninvestment-gradeandspeculative-grade rateimpliedbymoneymarketfuturesquoteswere corporatebondsrose,onbalance,overtheperiod, essentiallyunchanged,onbalance,overtheinter- andtheirspreadsoveryieldsoncomparable-maturity meetingperiod,whilelonger-datedTreasuryyields Treasurysecuritiesweresomewhatwider.Thedebtof endedtheperiodslightlyhigher.Yieldsoncurrent- nonfinancialfirmsincreasedinNovember,withcorcouponagencyMBSalsoendedtheperiodabout poratebondissuanceparticularlyrobust,assome unchanged.Indicatorsof inflationexpectations firmsreportedlywereeagertoissuebondsbefore derivedfromnominalandinflation-protectedTreas- year-end.Nonfinancialcommercialpaperoutstandurysecuritiespostedmixedchanges,onnet,overthe ingandcommercialandindustrialloanscontinuedto periodandremainedatthelowendof theirrecent expandatamoderatepace.Intheleveragedloan ranges. market,theextensionof loanssteppedupsomewhat inNovemberbutremainedsluggishrelativetoits Earlyintheintermeetingperiod,conditionsinshort- averagepaceearlierintheyear. termwholesalefundingmarketsappearedtodeterioratesomewhat.Followingthesixmajorcentral Financingconditionsforcommercialrealestate banks’currencyswapannouncement,somemeasures appearedtoremainstrainedovertheintermeeting of short-termfundingcostsmoderated,butthey period.Issuanceof commercialmortgage-backed remainedelevated.Indollarfundingmarkets,the securities(CMBS)waslightamiddeteriorating spreadof thethree-monthLondoninterbankoffered liquidityconditionsintheCMBSmarket.Pricesof rate(Libor)overtheovernightindexswap(OIS)rate mosttypesof commercialpropertiescontinuedtobe of thesamematuritywidenednoticeablyduringthe depressed,whilebothvacancyratesanddelinquency intermeetingperiod.SomeEuropeanfinancialinsti- ratesforcommercialpropertiesstayedclosetotheir tutionsreportedlyfacedsignificantpressuresinunse- recenthighs. cureddollarfundingmarkets.Bycontrast,insecured fundingmarkets,spreadsonasset-backedcommer- Interestratesonresidentialmortgageswerelittle cialpaperwererelativelysteadyforU.S.andmost changed,onnet,overtheintermeetingperiodand European-basedissuers,andratesonrepurchase remainedathistoricallylowlevels.Butlowmortgage agreementsacrossvarioustypesof collateralwere ratesappearedtohaveonlymodesteffectsontherate stable. of mortgagerefinancing,likelybecauseof tight underwritingstandardsandlowlevelsof home IntheDecember2011SeniorCreditOfficerOpinion equity.Indicatorsof homepricesandthecreditqual- SurveyonDealerFinancingTerms,dealersreported ityof oldermortgageloansremainedweak.Therate amoderatetighteningof credittermsoverthepre- of newlydelinquentprimemortgages—thepaceat cedingthreemonthsonsecuritiesfinancingtransac- whichmortgagestransitionfrom“current”todelintionsandover-the-counterderivativesmarkets quent—seemedtohaveslowed,butoveralldelintrades,particularlyforfinancialcounterparties.Deal- quencyratesonresidentialmortgagesremained ersalsonotedthatdemandforfundingalltypesof elevated.Marketreactiontotheannouncementsby securitiesdecreasedoverthesamereferenceperiod. FannieMaeandFreddieMaconNovember15 regardingtheexpansionof theHomeAffordable Creditdefaultswap(CDS)spreadsandequityprices RefinanceProgramwaslimited. of largeU.S.bankingorganizationsremainedvolatile overtheintermeetingperiod.WhiletheS&P500 Consumercreditroseslightlyinthethirdquarter. indexendedtheperiodslightlyhigher,onnet,equity Theaggregatevolumeof creditcardsolicitationsin pricesformostmajorU.S.bankingfirmswerelower recentmonthsremainedatlevelscomparabletothose andtheirCDSspreadswidened.CDSspreadsfor beforethefinancialcrisisin2008,thoughthevolume Europeanbanksremainedelevatedastheseinstitu- senttolow-incomehouseholdswasstillwellbelow tionsfacedincreasinglystrainedconditionsinshort- thelevelsatthattime.Meanwhile,consumercredit

300 98thAnnualReport|2011 qualityimprovedfurtherinrecentmonths,with areacountriesotherthanGermanyreportedlyshortdelinquencyratesoncreditcardloansdeclining ened.SeveralEuropeanbanksannouncedlarge nearlytohistoricallowsanddelinquencyrateson declinesinthird-quarterprofits,inpartreflecting nonrevolvingcreditatcommercialbanksretreating write-downsof theirholdingsof Greeksovereign topre-crisislevels.Issuanceof consumercreditasset- debt.Equitypricesinbothadvancedandemerging backedsecuritiesincreasedsubstantiallyin marketeconomiesfluctuatedwidely,withadvanced November. countryequitieslittlechanged,onnet,andemerging marketequitiesendingtheperiodlower.Theforeign M2expandedatasolidpaceinNovember,likely exchangevalueof thedollarappreciated,onbalance, reflectingincreaseddemandforsafeandliquid overtheintermeetingperiod. assets,givenconcernsoverEuropeanfinancialdevelopments.Inpart,offshoredeposits,whicharenolon- Withinflationarypressureswaningandthedownside gerexcludedfromtheFederalDepositInsurance riskstotheglobaleconomicoutlookincreasing, Corporationassessmentbase,appearedtobeshifting somecentralbankseasedpolicy.China’scentral toonshoreoffices.Incontrast,themonetarybase bankcutitsreserverequirementsby50basispoints, declinedinNovember.Althoughcurrencyincreased andthecentralbankof Brazillowereditspolicyrate atarobustpace,reservebalancesdeclinedbymore, bythesameamount.TheECBreduceditsminimum reflectingatemporarydecreaseinthesizeof the bidrateby25basispointsatbothitsNovemberand SOMAasaresultof lagsinthesettlementof MBS Decembermeetings,relaxeditscollateralandreserve reinvestmenttransactions. requirements,andstatedthatitwouldbegintooffer three-yearfundsatfixedrates.Asaprecautionary Overmostof November,yieldsonmanyeuro-area measure,theBankof Englandannouncedanew sovereignbonds—includingthoseof Italy,Spain, liquidityfacilitythatwillauctiontermsterlingfunds Belgium,andFrance—alongwithyieldsondebt againstawiderangeof collateral. issuedbytheEuropeanFinancialStabilityFacility, rosesharplyrelativetotheyieldonGermangovern- Staff Economic Outlook mentbonds.Butthesespreadssubsequentlynarrowedinanticipationof theEuropeanUnion(EU) IntheeconomicforecastpreparedfortheDecember summitmeetingonDecember9andinreactionto FOMCmeeting,thestaff’sprojectionforthe theswapannouncementbytheFederalReserveand increaseinrealGDPintheneartermwaslittle theothercentralbanksonNovember30.Nearthe changed,astherecentdataonspending,production, endof theperiod,sovereignspreadswidenedagain andthelabormarketwere,onbalance,inlinewith amidmarketparticipants’apparentconcernsthatthe thestaff’sexpectationsatthetimeof theprevious actionsannouncedattheEUsummitwouldproveto forecast.However,themedium-termprojectionfor belesseffectivethantheypreviouslyhadanticipated. realGDPgrowthintheDecemberforecastwaslower Spreadsof yieldsonmostperipheraleuro-areacoun- thantheonepresentedinNovember,primarily tries’debtoveryieldsonGermandebtendedthe reflectingrevisionstothestaff’sviewregarding periodhigheronnet.Germansovereignyields developmentsinEuropeandtheirimplicationsfor increasedaswell. theU.S.economy.Nonetheless,thestaff continuedto projectthatthepaceof economicactivitywouldpick Impliedbasisspreadsfromtheforeignexchangeswap upgraduallyin2012and2013,supportedbyaccommarketrosesubstantiallyoverNovember,but modativemonetarypolicy,furtherincreasesincredit reversedaportionof thatincreaseimmediatelyfol- availability,andimprovementsinconsumerandbusilowingthecentralbanks’swapannouncement. nesssentiment.Overtheforecastperiod,thegainsin Againstthebackgroundof higherdollarfunding realGDPwereanticipatedtobesufficienttoreduce costsinthemarketandthereductioninthecharge theslackinproductandlabormarketsonlyslowly, ondollarliquidityswaps,demandatthetenderby andtheunemploymentratewasexpectedtoremain theEuropeanCentralBank(ECB)of three-month elevatedattheendof 2013. dollarliquidityinDecemberjumpedtomorethan $50billionfromlessthan$500millionattheNovem- Thestaff’sprojectionforinflationwaslittlechanged berauction.Eurofundingpressuresalsomoved fromtheforecastpreparedfortheNovemberFOMC higherovertheperiod,witheuroLibor–OISspreads meeting.Theupwardpressureonconsumerprices continuingtorise.Inaddition,maturitiesforrepur- fromtheincreasesincommodityandimportprices chaseagreementsinvolvingsovereignbondsof euro- earlierintheyearwasexpectedtocontinuetosub-

Minutesof FederalOpenMarketCommitteeMeetings|December 301 sideinthecurrentquarter.Withlong-runinflation otherconsumerspendingcouldreflectpent-up expectationsstableandsubstantialslackinlaborand demandfromhouseholdsforgoodsandservices,and productmarketsanticipatedtopersistoverthefore- sothoughtthatitmightpersistforatime.However, castperiod,thestaff continuedtoprojectthatinfla- othersnotedthatrealdisposablepersonalincome tionwouldbesubduedin2012and2013. hadweakenedandthathouseholdsremainedpessimisticabouttheirincomeprospectsanduncertain Participants’ Views on Current Conditions abouttheeconomicoutlook.Asaresult,anumberof and the Economic Outlook thoseparticipantssuggestedthattherecentstronger paceof consumerspendingmightnotbesustained. Intheirdiscussionof theeconomicsituationand Moreover,someparticipantsmentionedthathouseoutlook,meetingparticipantsagreedthattheinfor- holdswerelikelystilladjustingtothelossof wealth mationreceivedsincetheirpreviousmeetingindi- overthepastfewyears,whichwouldweighonconcatedthateconomicactivitywasexpandingata sumerspendinggoingforward.Participantsgenerally moderaterate,notwithstandingsomeapparentslow- sawfewsignsof recoveryinthehousingmarket,with inginglobaleconomicgrowth.Consumerspending housepricescontinuingtodeclineinmostareasand continuedtoadvance,butbusinessfixedinvestment theoverhangof foreclosedanddistressedproperties appearedtobedecelerating,andhomesalesandcon- stillsubstantial.Severalparticipantsobservedthat structionremainedatverylowlevels.Labormarket theongoingweaknessinthehousingmarketcame conditionsimprovedsomeinrecentmonths,butthe despitelowborrowingratesandgovernmentinitiaunemploymentrateremainedelevateddespitea tivestoresolveproblemsintheforeclosureprocess. noticeabledropinNovember.Inflationmoderated However,oneparticipantnotedthatsomehomefromtheratesearlierintheyear,andlonger-term builderswerereportingthatlandpriceswereedging inflationexpectationsremainedstable. upandthatfinancingwasavailablefromnontraditionalsources,suggestingthatconditionsinthehous- Regardingtheeconomicoutlook,participantscon- ingmarketcouldbeimproving. tinuedtoanticipatethateconomicactivitywould expandatamoderaterateinthecomingquarters Reportsfrombusinesscontactsindicatedthat,in andthat,consequently,theunemploymentrate additiontotheriseinconsumerspending,activityin woulddeclineonlygradually.Thefactorsthatpartici- themanufacturing,energy,andagriculturesectors pantscitedaslikelytorestrainthepaceof theeco- continuedtoadvanceinrecentmonths.Nonetheless, nomicexpansionincludedanexpectationthatfinan- businessesgenerallyreportedthattheyremainedcaucialmarketswouldremainunsettleduntilthefiscal tiousregardingcapitalspendingandhiringbecause andbankingissuesintheeuroareaweremorefully of ahighlevelof uncertaintyabouttheeconomic addressed.Otherfactorsthatwereexpectedtoweigh outlookandthepoliticalenvironment.Inparticular, onthepaceof economicactivityweretheslowdown somecontactsraisedconcernsabouttheuncertain of economicactivityabroad,fiscaltighteninginthe fiscaloutlookintheUnitedStatesorthepossible UnitedStates,highlevelsof uncertaintyamong dragonsalesandproductionfromaneconomic householdsandbusinesses,theweakhousingmarket, slowdownabroad,whileothersciteduncertainty andhouseholddeleveraging.Inassessingtheeco- aboutthecostimplicationsof potentialchangesin nomicoutlook,participantsjudgedthatstrainsin regulatorypolicies.Severalparticipantsnotedthat globalfinancialmarketscontinuedtoposesignificant theircontactshadreadyaccesstocreditatattractive downsiderisks.Withtherateof increaseineconomic rates.However,someparticipantscontinuedtoview activityanticipatedtoremainmoderate,mostpartici- creditastight,particularlyinmortgagemarketsor pantsexpectedthatinflationwouldsettleovercom- amongsmallbusinessesintheirDistrictsthatwere ingquartersatorbelowlevelsconsistentwiththeir facingdifficultiesmeetingcollateralrequirementsand estimatesof itslonger-runmandate-consistentrate. obtainingbankloans. Indiscussingthehouseholdsector,meetingpartici- Anumberof recentindicatorsshowedsome pantsgenerallycommentedthatconsumerspending improvementinlabormarketconditions:Payroll inrecentmonthshadbeenstrongerthanexpected, employmenthadpostedmoderategainsforfive andseveralreportedcautiousoptimismamongsome months,newclaimsforunemploymentinsurancehad of theirbusinesscontactsaboutprospectsforthe driftedlower,andtheunemploymentratehadturned holidayshoppingseason.Afewparticipantsthought down.Oneparticipantnotedthattheseriesof thattherecentstrengthinmotorvehiclesalesand upwardrevisionstotheinitialestimatesof payroll

302 98thAnnualReport|2011 employmentinrecentmonthswasanencouraging affectingsomecommunitybanks,whichreportedly signof sustainedhiring,althoughseveralparticipants hadledtotightercreditconditionsfortheirsmall remarkedthattheysawthelabormarketasstill businessclients. improvingonlyslowly.Othersindicatedthatbecause partof therecentdeclineinthejoblessratewasasso- Participantsobservedthatinflationhadmoderated ciatedwithareductioninlaborforceparticipation, inrecentmonthsastheeffectsof theearlierrun-up thedropintheunemploymentratelikelyoverstated incommoditypricessubsided.Retailpricesof gasotheoverallimprovementinthelabormarket.More- linehaddeclined,andpricesof non-oilimported over,unemployment,particularlylonger-termunem- goodshadsoftened.Inaddition,laborcompensation ployment,remainedhigh,andthenumberof invol- hadrisenonlyslowly,andproductivitycontinuedto untarypart-timeworkerswasstillelevated.Some rise.Somebusinesscontactssuggestedthatpricing participantsagainexpressedconcernthatthepersis- pressureshaddiminished.Longer-runinflation tenceof highlevelsof long-durationunemployment expectationswerestillwellanchored.Mostparticiandtheunderutilizationof theworkforcecouldeven- pantsanticipatedthatinflationwouldcontinueto tuallyleadtoalossof skillsandanerosionof poten- moderate.Althoughsomeenergypriceshadrecently tialoutput.Anotherparticipantsuggestedthatthe increased,manyparticipantsjudgedthatthefavorunemploymentratewasamoreusefulindicatorof abletrendsincommoditypricesmightpersistinthe cyclicallabormarketdevelopmentsthanthelevelof nearterm,particularlyinlightof softerglobalactivemploymentrelativetothesizeof thepopulation, ity,andonenotedthatexpandedcropproduction,if whichwasmorelikelytobeinfluencedbystructural realized,wouldholddownagriculturalprices.More changesinlabordemandandsupply.Participants broadly,manyparticipantsjudgedthatthemoderate expressedarangeof viewsonthecurrentextentof expansionineconomicactivitythattheywereproslackinthelabormarket.Itwasnotedthatbecause jectingandtheassociatedgradualreductioninthe of factorsincludingongoingchangesinthecomposi- currentwidemarginsof slackinlaborandproduct tionof availablejobsandworkers’skills,somepart marketswouldbeconsistentwithsubduedinflation of theincreaseinunemploymentsincethebeginning goingforward.Indeed,someexpressedtheconcern of therecessionhadbeenstructuralratherthancycli- that,withthepersistenceof considerableresource cal.Otherspointedoutthattheverymodest slack,inflationmightrunbelowmandate-consistent increasesinlaborcompensationof latesuggested levelsforsometime.However,acoupleof particithatunderutilizationof laborwasstillsignificant. pantsnotedthattherateof inflationoverthepast yearhadnotfallenasmuchaswouldbeexpectedif Meetingparticipantsobservedthatfinancialmarkets thegapinresourceutilizationwerelarge,suggesting remainedvolatileovertheintermeetingperiodin thatthelevelof potentialoutputwaslowerthan largepartbecauseof developmentsinEurope.Par- somecurrentestimates.SomeparticipantswereconticipantsnotedtherecentmovesbytheEuropean cernedthatinflationcouldriseastherecoveryconauthoritiestostrengthentheircommitmenttofiscal tinued,andsomebusinesscontactshadreportedthat disciplineandtoprovidegreaterresourcestoback- producersexpectedtoseeanincreaseinpricing stopsovereigndebtissuance.Butmanyanticipated powerovertime.Afewparticipantsarguedthat thatfurthereffortstoimplementandperhapstoaug- maintainingahighlyaccommodativestanceof monmentthesepolicieswouldbenecessarytofully etarypolicyoverthemediumrunwoulderodethe resolvethearea’sfiscalandfinancialproblemsand stabilityof inflationexpectations. commentedthatfinancialmarketswouldremain focusedonthesituationinEuropeasitevolves.It Committee Policy Action wasnotedthatthechangestothecentralbankcurrencyswaplinesannouncedinlateNovemberhelped MembersviewedtheinformationonU.S.economic toeasedollarfundingconditionsfacingEuropean activityreceivedovertheintermeetingperiodassuginstitutions,butsuchconditionswerestillstrained. gestingthattheeconomywasexpandingmoderately. However,participantsgenerallysawlittleevidenceof Whileoveralllabormarketconditionshadimproved significantnewconstraintsoncreditavailabilityfor someinrecentmonths,theunemploymentrate domesticborrowers.Thebalancesheetsof mostU.S. remainedelevatedrelativetolevelsthattheCommitbanksappearedtohaveimprovedsomewhat,and teeanticipatedwouldprevailinthelongerrun.Infladomesticbanksreportedincreasesincommercial tionhadmoderated,andlonger-terminflationexpeclending,evenassomeEuropeanlenderswerepulling tationsremainedstable.However,availableindicators back.Severalparticipantscommentedonstrains pointedtosomeslowinginthepaceof economic

Minutesof FederalOpenMarketCommitteeMeetings|December 303 growthinEuropeandinsomeemergingmarket almostallmemberswerewillingtosupportmaintaineconomies.Memberscontinuedtoexpectamoderate ingtheexistingpolicystancewhileemphasizingthe paceof economicgrowthovercomingquarters,with importanceof carefullymonitoringeconomicdeveltheunemploymentratedecliningonlygradually opmentsgiventheuncertaintiesandrisksattending towardlevelsconsistentwiththeCommittee’sdual theoutlook.Onememberpreferredtoundertake mandate.Strainsinglobalfinancialmarketscontin- additionalaccommodationatthismeetinganddisuedtoposesignificantdownsideriskstoeconomic sentedfromthepolicydecision. activity.Membersalsoanticipatedthatinflation wouldsettle,overcomingquarters,atlevelsator Withrespecttothestatement,membersagreedthat belowthoseconsistentwiththedualmandate. onlyrelativelysmallmodificationswereneededto reflectthemodestchangestoeconomicconditions Intheirdiscussionof monetarypolicyfortheperiod seenintherecentdataandtonotethattheCommitahead,Committeemembersgenerallyagreedthat teewouldcontinuetoimplementitspolicystepsfrom theiroverallassessmentsof theeconomicoutlook recentmeetings. hadnotchangedgreatlysincetheirpreviousmeeting. Asaresult,almostallmembersagreedtomaintain Attheconclusionof thediscussion,theCommittee theexistingstanceof monetarypolicyatthismeet- votedtoauthorizeanddirecttheFederalReserve ing.Inparticular,theyagreedtocontinuethepro- Bankof NewYork,untilitwasinstructedotherwise, gramof extendingtheaveragematurityof theFed- toexecutetransactionsintheSystemAccountin eralReserve’sholdingsof securitiesasannouncedin accordancewiththefollowingdomesticpolicy September,toretaintheexistingpoliciesregarding directive: thereinvestmentof principalpaymentsfromFederal Reserveholdingsof securities,andtokeepthetarget “TheFederalOpenMarketCommitteeseeks rangeforthefederalfundsrateat0to¼percent. monetaryandfinancialconditionsthatwillfos- Withregardtotheforwardguidancetobeincluded terpricestabilityandpromotesustainable inthestatementtobereleasedfollowingthemeeting, growthinoutput.Tofurtheritslong-runobjecseveralmembersnotedthatthereferencetomid-2013 tives,theCommitteeseeksconditionsinreserve mightneedtobeadjustedbeforelong.Anumberof marketsconsistentwithfederalfundstradingin membersnotedtheirdissatisfactionwiththeCom- arangefrom0to¼percent.TheCommittee mittee’scurrentapproachforcommunicatingits directstheDesktocontinuethematurityextenviewsregardingtheappropriatepathformonetary sionprogramitbeganinSeptembertopurchase, policy,andlookedforwardtoconsideringpossible bytheendof June2012,Treasurysecuritieswith enhancementstotheCommittee’scommunications. remainingmaturitiesof approximately6yearsto Fornow,however,theCommitteeagreedtoreiterate 30yearswithatotalfacevalueof $400billion, itsanticipationthateconomicconditions—including andtosellTreasurysecuritieswithremaining lowratesof resourceutilizationandasubduedout- maturitiesof 3yearsorlesswithatotalface lookforinflationoverthemediumrun—arelikelyto valueof $400billion.TheCommitteealso warrantexceptionallylowlevelsforthefederalfunds directstheDesktomaintainitsexistingpolicies rateatleastthroughmid-2013.Anumberof mem- of rollingovermaturingTreasurysecuritiesinto bersindicatedthatcurrentandprospectiveeconomic newissuesandof reinvestingprincipalpayments conditionscouldwellwarrantadditionalpolicy onallagencydebtandagencymortgage-backed accommodation,buttheybelievedthatanyaddi- securitiesintheSystemOpenMarketAccount tionalactionswouldbemoreeffectiveif accompa- inagencymortgage-backedsecuritiesinorderto niedbyenhancedcommunicationabouttheCommit- maintainthetotalfacevalueof domesticsecuritee’slonger-runeconomicgoalsandpolicyframe- tiesatapproximately$2.6trillion.TheCommitwork.Afewotherscontinuedtojudgethat teedirectstheDesktoengageindollarroll maintainingthecurrentdegreeof policyaccommo- transactionsasnecessarytofacilitatesettlement dationbeyondtheneartermwouldlikelybeinappro- of theFederalReserve’sagencyMBStransacpriategiventheiroutlookforeconomicactivityand tions.TheSystemOpenMarketAccountManinflation,orquestionedtheefficacyof additional agerandtheSecretarywillkeeptheCommittee monetarypolicyactionsinlightof thenonmonetary informedof ongoingdevelopmentsregarding headwindsrestrainingtherecovery.Forthismeeting, theSystem’sbalancesheetthatcouldaffectthe

304 98thAnnualReport|2011 attainmentovertimeof theCommittee’sobjec- TheCommitteealsodecidedtokeepthetarget tivesof maximumemploymentandprice rangeforthefederalfundsrateat0to¼percent stability.” andcurrentlyanticipatesthateconomicconditions—includinglowratesof resourceutiliza- Thevoteencompassedapprovalof thestatement tionandasubduedoutlookforinflationover belowtobereleasedat2:15p.m.: themediumrun—arelikelytowarrantexceptionallylowlevelsforthefederalfundsrateat “InformationreceivedsincetheFederalOpen leastthroughmid-2013. MarketCommitteemetinNovembersuggests thattheeconomyhasbeenexpandingmoder- TheCommitteewillcontinuetoassesstheecoately,notwithstandingsomeapparentslowingin nomicoutlookinlightof incominginformation globalgrowth.Whileindicatorspointtosome andispreparedtoemployitstoolstopromotea improvementinoveralllabormarketconditions, strongereconomicrecoveryinacontextof price theunemploymentrateremainselevated.House- stability.” holdspendinghascontinuedtoadvance,but businessfixedinvestmentappearstobeincreas- Votingforthisaction:BenBernanke,WilliamC. inglessrapidlyandthehousingsectorremains Dudley,ElizabethDuke,RichardW.Fisher,Naraydepressed.Inflationhasmoderatedsinceearlier anaKocherlakota,CharlesI.Plosser,SarahBloom intheyear,andlonger-terminflationexpecta- Raskin,DanielK.Tarullo,andJanetL.Yellen. tionshaveremainedstable. Votingagainstthisaction:CharlesL.Evans. Consistentwithitsstatutorymandate,theCommitteeseekstofostermaximumemployment Mr.Evansdissentedbecausehecontinuedtoview andpricestability.TheCommitteecontinuesto additionalpolicyaccommodationasappropriatein expectamoderatepaceof economicgrowth circumstanceswherehisoutlookwasforgrowthto overcomingquartersandconsequentlyanticibetooslowtomakesufficientprogressinreducing patesthattheunemploymentratewilldecline theunemploymentrateandforinflationtodrop onlygraduallytowardlevelsthattheCommittee belowlevelsconsistentwiththeCommittee’sdual judgestobeconsistentwithitsdualmandate. mandate.Hecontinuedtosupporttheuseof more- Strainsinglobalfinancialmarketscontinueto explicitforwardguidanceabouttheeconomiccondiposesignificantdownsideriskstotheeconomic tionsunderwhichthefederalfundsratecouldbe outlook.TheCommitteealsoanticipatesthat maintainedinitscurrentrange,andhesuggestedthat inflationwillsettle,overcomingquarters,atlevtheCommitteealsoconsideradditionalasset elsatorbelowthoseconsistentwiththeCompurchases. mittee’sdualmandate.However,theCommittee willcontinuetopaycloseattentiontotheevolutionof inflationandinflationexpectations. Monetary Policy Communications Tosupportastrongereconomicrecoveryandto AftertheCommittee’svote,participantsturnedtoa helpensurethatinflation,overtime,isatlevels furtherconsiderationof waysinwhichtheCommitconsistentwiththedualmandate,theCommit- teemightenhancetheclarityandtransparencyof its teedecidedtodaytocontinueitsprogramto publiccommunications.Thesubcommitteeoncomextendtheaveragematurityof itsholdingsof municationsrecommendedanapproachforincorposecuritiesasannouncedinSeptember.TheCom- ratinginformationaboutparticipants’projectionsof mitteeismaintainingitsexistingpoliciesof rein- appropriatefuturemonetarypolicyintotheSumvestingprincipalpaymentsfromitsholdingsof maryof EconomicProjections(SEP),whichthe agencydebtandagencymortgage-backedsecu- FOMCreleasesfourtimeseachyear.IntheSEP,parritiesinagencymortgage-backedsecuritiesand ticipants’projectionsforeconomicgrowth,unemof rollingovermaturingTreasurysecuritiesat ployment,andinflationareconditionedontheir auction.TheCommitteewillregularlyreview individualassessmentsof thepathof monetary thesizeandcompositionof itssecuritieshold- policythatismostlikelytobeconsistentwiththe ingsandispreparedtoadjustthoseholdingsas FederalReserve’sstatutorymandatetopromote appropriate. maximumemploymentandpricestability,butinfor-

Minutesof FederalOpenMarketCommitteeMeetings|December 305 mationaboutthoseassessmentshasnotbeen FollowingupontheCommittee’sdiscussionof includedintheSEP. policyframeworksatitsNovembermeeting,thesubcommitteeoncommunicationspresentedadraft Astaff briefingdescribedthedetailsof thesubcom- statementof theCommittee’slonger-rungoalsand mittee’srecommendedapproachandcomparedit policystrategy.Participantsgenerallyagreedthat withthosetakenbyseveralothercentralbanks.Most issuingsuchastatementcouldbehelpfulinenhancparticipantsagreedthataddingtheirprojectionsof ingthetransparencyandaccountabilityof monetary thetargetfederalfundsratetotheeconomicprojec- policyandinfacilitatingwell-informeddecisionmaktionsalreadyprovidedintheSEPwouldhelpthe ingbyhouseholdsandbusinesses,andthusin publicbetterunderstandtheCommittee’smonetary enhancingtheCommittee’sabilitytopromotethe policydecisionsandthewaysinwhichthosedeci- goalsspecifiedinitsstatutorymandateinthefaceof sionsdependonmembers’assessmentsof economic significanteconomicdisturbances.However,acouple andfinancialconditions.Oneparticipantsuggested of participantsexpressedtheconcernthatastatethattheeconomicprojectionswouldbemoreunder- mentthatwassufficientlynuancedtocapturethe standableif theywerebasedonacommoninterest diversityof viewsontheCommitteemightnot,in ratepath.Anothersuggestedthatitwouldbeprefer- fact,enhancepublicunderstandingof theCommitabletopublishaconsensuspolicyprojectionof the tee’sactionsandintentions.Participantscommented entireCommittee.Someparticipantsexpressedcon- onthedraftstatement,andtheChairmanencourcernthatpublishinginformationaboutparticipants’ agedthesubcommitteetomakeadjustmentstothe individualpolicyprojectionscouldconfusethepub- draftandtopresentarevisedversionfortheComlic;forexample,theysawanappreciableriskthatthe mittee’sfurtherconsiderationinJanuary. publiccouldmistakenlyinterpretparticipants’projectionsof thetargetfederalfundsrateassignaling Itwasagreedthatthenextmeetingof theCommittee theCommittee’sintentiontofollowaspecificpolicy wouldbeheldonTuesday–Wednesday,January24– pathratherthanasindicatingmembers’conditional 25,2012.Themeetingadjournedat4:00p.m.on projectionsforthefederalfundsrategiventheir December13,2011. expectationsregardingfutureeconomicdevelopments.Mostparticipantsviewedtheseconcernsas Videoconference Meeting of November 28 manageable;severalnotedthatparticipantswould haveopportunitiestoexplaintheirprojectionsand OnNovember28,2011,theCommitteemetbyvidpolicyviewsinspeechesandotherformsof commu- eoconferencetodiscussaproposaltoamendand nication.Nonetheless,someparticipantsdidnotsee augmenttheFederalReserve’stemporaryliquidity providingpolicyprojectionsasausefulstepatthis swaparrangementswithforeigncentralbanksinlight time. of strainsinglobalfinancialmarkets.Theproposal includedasix-monthextensionof thesunsetdate Attheconclusionof theirdiscussion,participants anda50basispointreductioninthepricingonthe decidedtoincorporateinformationabouttheirpro- existingliquidityswaparrangementswiththeBank jectionsof appropriatemonetarypolicyintotheSEP of Canada,theBankof England,theBankof Japan, beginninginJanuary.Specifically,theSEPwill theECB,andtheSwissNationalBank,aswellasthe includeinformationaboutparticipants’projections establishment,asacontingencymeasure,of swap of theappropriatelevelof thetargetfederalfunds arrangementsthatwouldallowtheFederalReserve rateinthefourthquarterof thecurrentyearandthe toprovideliquidityinthecurrenciesof theforeign nextfewcalendaryears,andoverthelongerrun;the centralbanksshouldtheneedarise.Theproposal SEPalsowillreportparticipants’currentprojections wasaimedathelpingtoeasestrainsinfinancialmarof thelikelytimingof thefirstincreaseinthetarget ketsandtherebytomitigatetheeffectsof such rategiventheirprojectionsof futureeconomiccondi- strainsonthesupplyof credittoU.S.households tions.Anaccompanyingnarrativewilldescribethe andbusinesses,insupportof theeconomicrecovery. keyfactorsunderlyingthoseassessmentsaswellas qualitativeinformationregardingparticipants’expec- Thestaff providedbriefingsonfinancialandecotationsfortheFederalReserve’sbalancesheet.A nomicdevelopmentsinEurope.Inrecentweeks, numberof participantssuggestedfurtherenhance- financialmarketsappearedtohavebecomeincreasmentstotheSEP;theChairmanaskedthesubcom- inglyconcernedthatatimelyresolutionof theEuromitteetoexploresuchenhancementsovercoming peansovereigndebtsituationmightnotoccurdespite months. themeasuresthatauthoritiesthereannouncedin

306 98thAnnualReport|2011 October;pressuresonEuropeansovereigndebtmar- “TheFederalOpenMarketCommitteedirects ketshadincreased,andconditionsinEuropeanfund- theFederalReserveBankof NewYorkto ingmarketshaddeterioratedappreciably.Thegreater extendtheexistingtemporaryreciprocalcurfinancialstressappearedlikelytodampeconomic rencyarrangements(“swaparrangements”)for activityintheeuroareaandcouldposearisktothe theSystemOpenMarketAccountwiththe economicrecoveryintheUnitedStates. Bankof Canada,theBankof England,the Bankof Japan,theEuropeanCentralBank,and Meetingparticipantsdiscussedarangeof consider- theSwissNationalBankthroughFebruary1, ationssurroundingtheproposedchangestotheswap 2013. arrangements.Mostparticipantsagreedthatsuch changeswouldrepresentanimportantdemonstra- Inaddition,theFederalOpenMarketCommittionof thecommitmentof theFederalReserveand teeauthorizestheFederalReserveBankof New theothercentralbankstoworktogethertosupport Yorktoenterintoadditionalswaparrangements theglobalfinancialsystem.Someparticipantsindi- fortheSystemOpenMarketAccountwiththe catedthat,althoughtheydidnotanticipatethat Bankof Canada,Bankof England,theBankof usagewouldnecessarilybeheavy,theyfeltthatlower Japan,theEuropeanCentralBank,andthe pricingontheexistingswaplinescouldreducethe SwissNationalBanktosupporttheprovisionby possiblestigmaassociatedwiththeuseof thelinesby theFederalReserveof liquidityinCanadian financialinstitutionsborrowingdollarsfromthefor- dollars,Britishpounds,Japaneseyen,euros,and eigncentralbanks,andsowouldcontributeto Swissfrancs.Theswaparrangementsforproviimprovedfunctioningindollarfundingmarketsin sionof liquidityineachof thosecurrenciesshall Europeandelsewhere.Afewnotedthattherisks besubjecttothesamesizelimits,if any,curassociatedwiththeswaplineswerelowbecausethe rentlyinforcefortheswaparrangementsfor FederalReserve’scounterpartieswouldbetheforeign provisionof liquidityinU.S.dollarstothatforcentralbanksthemselves,andtheforeigncentral eigncentralbank.Thesearrangementsshallterbankswouldberesponsiblefortheloanstobanksin minateonFebruary1,2013.Requestsfordrawtheirjurisdictions.However,someparticipantscom- ingsontheforeigncurrencyswaplinesanddismentedthattheproposedchangestotheswaplines tributionof theproceedstoU.S.financial wouldnotbythemselvesaddresstheneedforaddi- institutionsshallbeinitiatedbytheappropriate tionalpolicyactionbyEuropeanauthorities.Several ReserveBankandapprovedbytheChairmanin participantsquestionedwhetherthechangestothe consultationwiththeForeignCurrencySubswaplineswerenecessaryatthistimeandworried committee.TheForeignCurrencySubcommitthatsuchchangescouldbeseenassuggestinggreater teewillconsultwiththeFederalOpenMarket concernaboutfinancialstrainsthanwaswarranted. Committeepriortotheinitialdrawingonthe Itwasalsonotedthattheproposedreductioninpric- foreigncurrencyswaplinesif possibleunderthe ingof theexistingswaparrangementscouldputthe circumstancesthenprevailing. costof dollarborrowingfromforeigncentralbanks belowtheFederalReserve’sprimarycreditrateand TheChairmanshallestablishtheratesonthe thatnon-U.S.banksmightbeperceivedtohavean swaparrangementsbymutualagreementwith advantageinmeetingtheirshort-termfundingneeds theforeigncentralbanksandinconsultation asaresult.However,U.S.banksdidnotfacedifficul- withtheForeignCurrencySubcommittee.He tiesobtainingliquidityinshort-termfundingmar- shallkeeptheFederalOpenMarketCommittee kets,andsomeparticipantsfeltthatacutinthepri- informed,andtheratesshallbeconsistentwith marycreditrateatthepresenttimemightincorrectly principlesdiscussedwithandguidanceprovided beseenassuggestingconcernaboutU.S.financial bytheCommittee.” conditions. Votingforthisaction:BenBernanke,WilliamC. Attheconclusionof thediscussion,allbutonemem- Dudley,ElizabethDuke,CharlesL.Evans,Richard beragreedtosupportthechangestotheexisting W.Fisher,NarayanaKocherlakota,SarahBloom swaplinearrangementsandtheestablishmentof the Raskin,DanielK.Tarullo,andJanetL.Yellen. newforeigncurrencyswapagreementsandapproved thefollowingresolution: Votingagainstthisaction:JeffreyM.Lacker.

Minutesof FederalOpenMarketCommitteeMeetings|December 307 Mr.LackervotedasalternatememberforMr. Notation Vote Plosseratthismeeting.Mr.Lackerdissentedbecause of hisoppositiontoarrangementsthatsupportFed- BynotationvotecompletedonNovember21,2011, eralReservelendinginforeigncurrencies,whichhe theCommitteeunanimouslyapprovedtheminutesof viewedasamountingtofiscalpolicy.Healso theFOMCmeetingheldonNovember1–2,2011. opposedloweringtheinterestrateonswaparrange- WilliamB.English mentstobelowtheprimarycreditrate. Secretary

309 Litigation During2011,theBoardof Governorswasapartyin August5,2011;noticeof removalfiledOctober24, 12lawsuitsorappealsfiledthatyearandwasaparty 2011),isathird-partycomplaintagainsttheBoard in10othercasespendingfrompreviousyears,fora andtheUnitedStatesDepartmentof theTreasuryby totalof 22cases.In2010,theBoardhadbeenaparty thedefendantinamortgageforeclosureaction. inatotalof 15cases.Asof December31,2011,11 caseswerepending. Perryv.Bernanke,No.11-cv-1246(RWR)(D.District of Columbia,filedJuly7,2011),isanemployment Estateof Deleonv.Boardof Governors,No.11-cv- discriminationaction. 1538(N.D.NewYork,filedDecember30,2011),isa complaintinvolvingfailuretoaddressaconsumer Barraganv.Boardof Governors,No.11-cv-0696CAScomplaintataregulatedbank. (JCx)(C.D.California,filedMay3,2011),isaFreedomof InformationActcase. Hallerv.U.S.Departmentof HousingandUrban Developmentetal.,No11-cv-881MRB-KLL(S.D. NationalAssociationof MortgageBrokersv.Boardof Ohio,filedDecember16,2011),isanactionarising Governors,No.11-cv-506(BEH)(D.Districtof outof amortgageforeclosure. Columbia,filedMarch8,2011),wasachallengetoa provisionof RegulationZaffectingmortgageloan Farrellv.Geithneretal.,No.12-cv-0026(M.D. originators.OnMarch30,2011,thedistrictcourt Florida,filedinstatecourtDecember15,2011; deniedtheplaintiff’smotionsforatemporary noticeof removalfiledJanuary19,2012),isanaction restrainingorderandpreliminaryinjunction(773F. relatingtoataxlien. Supp.2d151).OnApril5,2011,theUnitedStates Courtof AppealsfortheDistrictof ColumbiaCir- NACSetal.v.Boardof Governors,No.11-cv- cuitdeniedtheplaintiff’smotionforanemergency 2075(RJL)(D.Districtof Columbia,filedNovem- stayof theeffectivedateof theregulation.On ber22,2011),isachallengetoregulationsissuedpur- May20,2011,thecasewasdismissedbystipulation suanttosection1075of theDodd-FrankWallStreet of theparties. ReformandConsumerProtectionActrelatingto debitcardfees. NationalAssociationof IndependentHousingProfessionals,Inc.v.Boardof Governors,No11-cv- Handyv.Bernanke,No.12-1207(FourthCircuit, 489(BEH)(D.Districtof Columbia,filedMarch7, filedFebruary3,2012),isanappealof anorderof 2011),wasachallengetoaprovisionof RegulationZ thedistrictcourtfortheEasternDistrictof Virginia affectingmortgageloanoriginators.OnMarch30, dismissinganactionrelatingtoemploymentatthe 2011,thedistrictcourtdeniedtheplaintiff’smotions FederalReserveBankof Richmond. foratemporaryrestrainingorderandpreliminary injunction(773F.Supp.2d151).OnApril5,2011, CitiMortgage,Inc.v.Kokolis,No.11-cv-2933-RBH theUnitedStatesCourtof AppealsfortheDistrictof (D.SouthCarolina,filedinstatecourtAugust5, ColumbiaCircuitdeniedtheplaintiff’smotionforan 2011;noticeof removalfiledOctober27,2011),isa emergencystayof theeffectivedateof theregulation. third-partycomplaintagainsttheBoardandthe OnApril21,2011,theplaintiff voluntarilydismissed UnitedStatesDepartmentof theTreasurybythe theaction. defendantinamortgageforeclosureaction. Murrayv.Boardof Governors,No.11-1063(Sixth FirstCitizensBanksandTrustCo.v.Spirakis,No.11- Circuit,filedJanuary14,2011),isanappealof adiscv-2895-RBH(D.SouthCarolina,filedinstatecourt trictcourtorder(763F.Supp.2d860)grantingsum-

310 98thAnnualReport|2011 maryjudgmenttotheBoardonachallengetothe filedDecember30,2009),wasaFreedomof Inforconstitutionalityof federalexpendituresrelatingto mationActcase.OnFebruary3,2011,thedistrict AmericanInternationalGroup(AIG). courtgrantedinpartanddeniedinparttheBoard’s motionforsummaryjudgment,andonFebruary18, McKinleyv.Boardof Governors,No.10-5353(Dis- 2011,thecourtenteredjudgmentfortheBoard. trictof ColumbiaCircuit,filedOctober22,2010), wasanappealfromanorderof thedistrictcourt JudicialWatch,Inc.v.Boardof Governors,No.09grantingtheBoard’smotionforsummaryjudgment 2138(D.Districtof Columbia,filedNovember13, inaFreedomof InformationActcase(744F.Supp. 2009),wasaFreedomof InformationActcase.On 2d128).OnJune3,2011,thecourtof appeals March29,2011,thedistrictcourtgrantedthe affirmedthedistrictcourt’sorder(647F.3d331).On Board’smotionforsummaryjudgment. January12,2012,theSupremeCourtdenied certiorari. Bloomberg,L.P.v.Boardof Governors,09-4083(Sec- TCFNationalBankv.Bernanke,No.10-4149(D. ondCircuit,filedOctober1,2009),wasanappealof SouthDakota,filedOctober12,2010),wasachal- ajudgmentforBloomberg,L.P.inaFreedomof lengetotheconstitutionalityof section1075of the InformationActcase(649F.Supp.2d262).On Dodd-FrankWallStreetReformandConsumerPro- March19,2010,thecourtof appealsaffirmedthe tectionAct.OnApril25,2011,thedistrictcourt districtcourt’sjudgment(601F.3d143).OnOctodeniedtheplaintiff’smotionforapreliminaryinjunc- ber26,2010,TheClearingHouse,whichhadintertion,andonJune29,2011,theEighthCircuitCourt venedinthecase,filedapetitionforawritof certioof Appealsaffirmedthedenial(643F.3d1158).On rariwiththeUnitedStatesSupremeCourt(No.10- June30,2011,theplaintiff voluntarilydismissedthe 543).OnMarch21,2011,theSupremeCourtdenied action. certiorari. Qaderv.FederalReserveBoard,No.10-3696(Second FoxNewsNetworkv.Boardof Governors,No.09- Circuit,filedAugust18,2010),wasanappealof the 3795(SecondCircuit,filedSeptember9,2009),was districtcourt’sdismissalof anactionarisingoutof anappealof ajudgmentfortheBoardinaFreedom theappellant’sdisputewithabank.OnMarch3, of InformationActcase(639F.Supp.2d384).On 2011,thecourtof appealsdismissedtheappeal. March19,2010,thecourtof appealsvacatedthedistrictcourt’sjudgmentandremandedthematterto McKinleyv.Boardof Governors,No.10-00751(D. thedistrictcourt(601F.3d158).OnNovember18, Districtof Columbia,filedMay11,2010),isaFree- 2010,TheClearingHouse,whichhadintervenedin domof InformationActcase. thecase,filedapetitionforawritof certiorariwith theUnitedStatesSupremeCourt(No.10-660).On FoxNewsNetworkv.Boardof Governors,No.10- March21,2011,theSupremeCourtdenied 3320(S.D.NewYork,filedApril20,2010),wasa certiorari. Freedomof InformationActcase.OnAugust4, 2011,thecasewasdismissedontheparties’motion. Artisv.Greenspan,No.01-cv-0400(D.Districtof GoldAnti-TrustActionCommittee,Inc.v.Boardof Columbia,filedFebruary22,2001),isanemploy- Governors,No.09-2436(D.Districtof Columbia, mentdiscriminationaction.

311 Statistical Tables Table1.FederalReserveopenmarkettransactions,2011 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 13,931 18,423 20,841 18,423 18,423 24,361 18,423 18,423 22,204 18,423 18,423 39,349 249,647 Fornewbills 13,931 18,423 20,841 18,423 18,423 24,361 18,423 18,423 22,204 18,423 18,423 39,349 249,647 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 9,227 13,241 12,284 34,752 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 40,763 39,888 64,230 31,007 49,593 35,548 8,286 4,779 7,168 0 0 0 281,262 Grosssales 0 0 0 0 0 0 0 0 0 36,493 22,510 40,304 99,307 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 61,090 49,120 42,568 38,675 51,728 46,137 9,163 8,143 3,946 28,155 28,911 28,598 396,234 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 5,099 9,687 5,586 9,568 7,735 6,586 869 860 1,260 15,586 16,019 15,629 94,484 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 106,952 98,695 112,384 79,250 109,056 88,271 18,318 13,782 12,374 43,741 44,930 44,227 771,980 Grosssales 0 0 0 0 0 0 0 0 0 45,720 35,751 52,588 134,059 Redemptions 0 0 0 0 0 0 0 0 0 0 0 0 0 NetchangeinU.S. Treasury securities 106,952 98,695 112,384 79,250 109,056 88,271 18,318 13,782 12,374 -1,979 9,179 -8,361 637,921 Federalagencyobligations Outrighttransactions2 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 Redemptions 2,836 1,375 10,754 7,377 6,025 2,389 4,269 2,659 1,508 600 1,759 1,915 43,466 Netchangeinfederal agencyobligations -2,836 -1,375 -10,754 -7,377 -6,025 -2,389 -4,269 -2,659 -1,508 -600 -1,759 -1,915 -43,466 Mortgage-backedsecurities3 Netsettlements2 Netchangein mortgage-backed securities -27,064 -16,145 -11,777 -10,134 -9,166 -9,002 -11,569 -12,340 -14,062 -21,622 -22,209 10,632 -154,458 (continuedonnextpage)

312 98thAnnualReport|2011 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 Reverserepurchaseagreements4 Grosspurchases 1,149,923 1,121,253 1,375,612 1,199,626 1,184,367 1,393,194 1,331,469 2,050,172 1,992,384 1,600,224 1,849,913 1,841,898 18,090,035 Grosssales 1,151,355 1,119,280 1,380,281 1,201,149 1,185,025 1,406,222 1,330,845 2,085,031 1,971,962 1,598,526 1,860,456 1,848,830 18,138,962 Netchangein temporary transactions -1,431 1,973 -4,670 -1,523 -657 -13,029 624 -34,859 20,422 1,697 -10,543 -6,932 -48,928 Totalnetchangein SystemOpenMarket Account 75,621 83,148 85,183 60,216 93,208 63,851 3,104 -36,076 17,226 -22,504 -25,332 -6,576 391,069 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.

StatisticalTables 313 Table2.FederalReserveBankholdingsofU.S.Treasuryandfederalagencysecurities,December31,2009–11 Millionsofdollars December31 Change Description 2011 2010 2009 2010to2011 2009to2010 U.S.Treasurysecurities Heldoutright1 1,663,446 1,021,493 776,588 641,953 244,905 Byremainingmaturity Bills 1–90days 18,423 18,423 18,423 0 0 91daysto1year 0 0 0 0 0 Notesandbonds 1yearorless2 114,829 70,449 72,818 44,380 -2,369 Morethan1yearthrough5years 649,698 439,594 326,874 210,104 112,720 Morethan5yearsthrough10years 649,913 333,955 213,720 315,958 120,235 Morethan10years 230,583 159,072 144,753 71,511 14,319 Bytype Bills 18,423 18,423 18,423 0 0 Notes 1,286,344 773,285 568,323 513,059 204,962 Bonds 358,679 229,786 189,843 128,893 39,943 Federalagencysecurities Heldoutright1 103,994 147,460 159,879 -43,466 -12,419 Byremainingmaturity Discountnotes 1–90days 0 0 0 0 0 91daysto1year 0 0 0 0 0 Coupons 1yearorless 27,211 43,466 24,642 -16,255 18,824 Morethan1yearthrough5years 60,603 71,050 99,402 -10,447 -28,352 Morethan5yearsthough10years 13,833 30,597 33,788 -16,764 -3,191 Morethan10years 2,347 2,347 2,047 0 300 Bytype Discountnotes 0 0 0 0 0 Coupons 103,994 147,460 159,879 -43,466 -12,419 Byissuer FederalHomeLoanMortgageCorporation 45,126 57,515 61,769 -12,389 -4,254 FederalNationalMortgageAssociation 39,707 58,568 63,662 -18,861 -5,094 FederalHomeLoanBanks 19,161 31,377 34,448 -12,216 -3,071 Mortgage-backedsecurities3 Heldoutright1 837,683 992,141 908,371 -154,458 83,770 Byremainingmaturity 1yearorless 0 0 0 0 0 Morethan1yearthrough5years 13 24 12 -11 12 Morethan5yearsthough10years 34 20 20 14 0 Morethan10years 837,636 992,097 908,340 -154,461 83,757 Byissuer FederalHomeLoanMortgageCorporation 289,537 346,959 304,964 -57,422 41,995 FederalNationalMortgageAssociation 460,910 547,545 513,398 -86,635 34,147 GovernmentNationalMortgageAssociation 87,237 97,637 90,010 -10,400 7,627 Temporarytransactions Repurchaseagreements4 0 0 0 0 0 Reverserepurchaseagreements4 99,900 59,703 77,732 40,197 -18,029 Foreignofficialandinternationalaccounts 99,900 59,703 77,732 40,197 -18,029 Dealers 0 0 0 0 0 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Excludestheeffectoftemporarytransactions—repurchaseagreementsandreverserepurchaseagreements. 2 Amountsinboldarerestatementsduetochangesinpreviouslyreporteddata. 3 GuaranteedbyFannieMae,FreddieMac,andGinnieMae. 4 Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities,andmortgage-backedsecurities.

314 98thAnnualReport|2011 Table3.FederalReserveBankinterestratesonloansto Table4.Reserverequirementsofdepositoryinstitutions, depositoryinstitutions,December31,2011 December31,2011 Percent Requirements ReserveBank P c ri r m ed a i r t y Se c c r o e n d d it ary Se c a re so d n it al Typeofdeposit Percentage Effective ofdeposits date Allbanks 0.75 1.25 0.30 Nettransactionaccounts1 Note:Fordetailsonratechangesoverthecourseof2011,seethesectionon $0million–$11.5million2 0 12/29/2011 discountratesinthechapter“RecordofPolicyActionsoftheBoardofGovernors” Morethan$11.5million–$71.0million3 3 12/29/2011 onpage165.Primarycreditisavailableforveryshorttermsasabackupsource Morethan$71.0million 10 12/29/2011 ofliquiditytodepositoryinstitutionsthatareingenerallysoundfinancialcondition inthejudgmentofthelendingFederalReserveBank.Secondarycreditisavailable Nonpersonaltimedeposits 0 12/27/1990 inappropriatecircumstancestodepositoryinstitutionsthatdonotqualifyfor Eurocurrencyliabilities 0 12/27/1990 primarycredit.Seasonalcreditisavailabletohelprelativelysmalldepository institutionsmeetregularseasonalneedsforfundsthatarisefromaclearpattern Note:Requiredreservesmustbeheldintheformofvaultcashand,ifvaultcash ofintra-yearlymovementsintheirdepositsandloans.Thediscountrateon isinsufficient,alsointheformofadepositwithaFederalReserveBank.An seasonalcredittakesintoaccountrateschargedbymarketsourcesoffundsand institutionmustholdthatdepositdirectlywithaReserveBankorwithanother isreestablishedonthefirstbusinessdayofeachtwo-weekreservemaintenance institutioninapass-throughrelationship.Reserverequirementsareimposedon period. commercialbanks,savingsbanks,savingsandloanassociations,creditunions, U.S.branchesandagenciesofforeignbanks,Edgecorporations,andagreement corporations. 1 Totaltransactionaccountsconsistofdemanddeposits,automatictransfer service(ATS)accounts,NOWaccounts,sharedraftaccounts,telephoneor preauthorizedtransferaccounts,ineligibleacceptances,andaffiliate-issued obligationsmaturinginsevendaysorless.Nettransactionaccountsaretotal 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 315 Table5.BankingofficesandbanksaffiliatedwithbankholdingcompaniesintheUnitedStates,December31,2010and2011 Commercialbanks1 Statechartered Typeofoffice Total Member savings Total Nonmember banks Total National State Allbankingoffices Banks Number,Dec.31,2010 6,821 6,505 2,193 1,368 825 4,312 316 Changesduring2011 Newbanks 19 15 6 3 3 9 4 Banksconvertedintobranches -152 -149 -58 -37 -21 -91 -3 Ceasedbankingoperations2 -125 -107 -29 -16 -13 -78 -18 Other3 0 0 8 -19 27 -8 0 Netchange -258 -241 -73 -69 -4 -168 -17 Number,Dec.31,2011 6,563 6,264 2,120 1,299 821 4,144 299 Branchesandadditionaloffices Number,Dec.31,2010 83,676 80,970 57,520 43,161 14,359 23,450 2,706 Changesduring2011 Newbranches 1,843 1,791 1,328 1,066 262 463 52 Banksconvertedtobranches 152 150 70 37 33 80 2 Discontinued2 -1,592 -1,433 -980 -743 -237 -453 -159 Other3 0 77 273 152 121 -196 -77 Netchange 403 585 691 512 179 -106 -182 Number,Dec.31,2011 84,079 81,555 58,211 43,673 14,538 23,344 2,524 Banksaffiliatedwithbankholdingcompanies Banks Number,Dec.31,2010 5,518 5,396 1,929 1,199 730 3,467 122 Changesduring2011 BHC-affiliatednewbanks 42 36 10 5 5 26 6 Banksconvertedintobranches -136 -135 -56 -36 -20 -79 -1 Ceasedbankingoperations2 -96 -95 -26 -15 -11 -69 -1 Other3 0 0 3 -17 20 -3 0 Netchange -190 -194 -69 -63 -6 -125 4 Number,Dec.31,2011 5,328 5,202 1,860 1,136 724 3,342 126 Note:Includesbanks,bankingoffices,andbankholdingcompaniesinU.S.territoriesandpossessions(affiliatedinsularareas). 1 Forpurposesofthistable,banksareentitiesthataredefinedasbanksintheBankHoldingCompanyAct,asamended,whichisimplementedbyFederalReserve RegulationY.Generally,abankisanyinstitutionthatacceptsdemanddepositsandisengagedinthebusinessofmakingcommercialloansoranyinstitutionthatisdefined asaninsuredbankinsection3(h)oftheFDICAct. 2 InstitutionsthatnolongermeettheRegulationYdefinitionofabank. 3 Interclasschangesandsalesofbranches.

316 98thAnnualReport|2011 Table6A.Reservesofdepositoryinstitutions,FederalReserveBankcredit,andrelateditems,year-end1984–2011and month-end2011 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 2003 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 2007 740,611 46,500 72,636 -19 41,799 901,528 11,041 2,200 38,681 2008 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 92,811 2,216,647 11,041 5,200 42,691 2010r 2,161,094 0 138,311 -1,421 110,267 2,408,252 11,041 5,200 43,542 2011 2,605,124 0 144,098 -631 152,647 2,901,238 11,041 5,200 44,264 Jan 2,238,303 0 88,584 -1,408 116,138 2,441,616 11,041 5,200 43,697 Feb 2,319,840 0 86,310 -1,412 115,392 2,520,130 11,041 5,200 43,738 Mar 2,410,096 0 84,433 -1,380 120,020 2,613,169 11,041 5,200 43,790 Apr 2,472,316 0 83,351 -911 127,670 2,682,426 11,041 5,200 43,854 May 2,567,251 0 78,812 -1,232 125,999 2,770,829 11,041 5,200 43,888 Jun 2,645,095 0 74,267 -917 132,605 2,851,051 11,041 5,200 43,953 Jul 2,647,926 0 65,239 -855 136,675 2,848,986 11,041 5,200 43,995 Aug 2,646,834 0 62,147 -1,158 129,652 2,837,475 11,041 5,200 44,034 Sep 2,643,811 0 59,352 -769 131,340 2,833,735 11,041 5,200 44,082 Oct 2,619,746 0 54,009 -674 140,451 2,813,532 11,041 5,200 44,138 Nov 2,604,999 0 50,879 -1,004 142,221 2,797,095 11,041 5,200 44,194 Dec 2,605,124 0 144,098 -631 152,647 2,901,238 11,041 5,200 44,264 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 Referto“Table6B.Loansandothercreditextensions,bytype,year-end1984–2011andmonth-end2011”onpage318fordetail. 4 Includescurrencyandcoin(otherthangold)issueddirectlybytheU.S.Treasury.Thelargestcomponentsarefractionalanddollarcoins.Fordetailsreferto“U.S.Currency andCoinOutstandingandinCirculation,”TreasuryBulletin.

StatisticalTables 317 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 f T i p n r l e a e a n m s c u e in r n y g 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 account 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 2003 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 2007 828,938 43,985 259 … 16,120 … 96 1,830 6,614 41,622 13,986 2008 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 63,219 973,814 2010r 982,750 59,703 177 0 140,773 199,964 3,337 13,631 2,374 99,602 965,724 2011 1,075,886 99,900 128 0 85,737 0 125 64,909 2,485 72,766 1,559,805 Jan 977,661 61,134 176 0 147,189 199,963 117 481 2,352 71,365 1,041,116 Feb 997,006 59,161 185 5,070 88,632 99,980 125 473 2,320 73,761 1,253,396 Mar 1,005,315 62,171 209 0 111,203 5,000 123 10,329 2,511 71,870 1,404,470 Apr 1,013,395 59,533 163 5,081 99,447 5,000 134 2,510 2,546 76,114 1,478,598 May 1,025,110 60,191 144 0 112,645 5,000 646 335 2,544 74,836 1,549,509 Jun 1,028,953 70,309 147 0 130,130 5,000 360 7,431 2,533 72,976 1,593,405 Jul 1,030,498 69,685 113 5,088 65,172 0 138 54,657 2,490 69,421 1,611,959 Aug 1,037,767 104,544 126 0 42,481 0 2,675 47,654 2,475 70,570 1,589,458 Sep 1,037,564 84,123 124 5,077 56,284 0 2,627 44,953 2,514 70,799 1,589,993 Oct 1,046,036 82,425 124 0 97,285 0 126 40,026 2,507 68,493 1,536,888 Nov 1,062,291 92,968 108 5,055 85,605 0 165 52,831 2,503 71,214 1,484,789 Dec 1,075,886 99,900 128 0 85,737 0 125 64,909 2,485 72,766 1,559,805 5 Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities,andagencymortgage-backedsecurities. 6 CoinandpapercurrencyheldbytheTreasury. 7 In2010,includesfundsfromAmericanInternationalGroup,Inc.assetdispositions,heldasagent. …Notapplicable. r Revised.

318 98thAnnualReport|2011 Table6B.Loansandothercreditextensions,bytype,year-end1984–2011andmonth-end2011 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 in I L A t L e / C A i 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 2011 144,098 0 196 … … 9,013 … … … 7,232 9,280 17,744 811 … 99,823 Jan 88,584 0 50 … … 22,898 … … … 26,431 16,004 22,444 686 … 70 Feb 86,310 0 81 … … 20,488 … … … 26,056 16,086 22,826 703 … 70 Mar 84,433 0 58 … … 19,208 … … … 25,579 15,941 22,928 718 … 0 Apr 83,351 0 27 … … 16,713 … … … 24,767 16,543 24,568 733 … 0 May 78,812 0 117 … … 14,033 … … … 24,519 15,011 24,386 746 … 0 Jun 74,267 0 120 … … 12,755 … … … 23,852 12,538 24,245 757 … 0 Jul 65,239 0 80 … … 11,881 … … … 20,823 10,226 21,462 767 … 0 Aug 62,147 0 111 … … 11,595 … … … 18,230 10,109 21,327 775 … 0 Sep 59,352 0 110 … … 11,303 … … … 15,482 9,999 21,173 785 … 500 Oct 54,009 0 67 … … 10,856 … … … 12,944 9,474 18,020 794 … 1,853 Nov 50,879 0 130 … … 9,691 … … … 10,629 9,379 17,845 803 … 2,401 Dec 144,098 0 196 … … 9,013 … … … 7,232 9,280 17,744 811 … 99,823 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.(AIG)includesoutstandingprincipalandcapitalizedinterestnetofunamortizeddeferredcommitmentfeesand allowanceforloanrestructuring.ExcludescreditextendedtoconsolidatedLLCs.UpontheclosingoftheAIGrecapitalizationplaninJanuary2011,thecreditextendedtoAIG bytheFRBNYundertherevolvingcreditfacilitywasrepaidinfull. 6 NetportfolioholdingsofCommercialPaperFundingFacility(CPFF)LLC.TheCPFFwasdiscontinuedinFebruary2010. 7 NetportfolioholdingsofMoneyMarketInvestorFundingFacility(MMIFF)LLC.TheMMIFFwasdiscontinuedinOctober2009. 8 Netportfolioholdingsatfairvalue. 9 NetportfolioholdingsofTALFLLC,alimitedliabilitycompanyformedtopurchaseandmanageanyasset-backedsecuritiesthatmightbesurrenderedbyaTALFborroweror otherwiseclaimedbytheFRBNYinconnectionwithitsenforcementrightstotheTALFcollateral. 10PreferredinterestsinAIAAuroraLLCandALICOHoldingsLLCatbookvalue.AftertheclosingoftheAIGrecapitalizationplan,theFederalReservewaspaidinfullforits preferredinterestsinthespecialpurposevehiclesAIAAuroraLLCandALICOHoldingsLLC. 11Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. …Notapplicable.

StatisticalTables 319 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 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 (continuedonnextpage)

320 98thAnnualReport|2011 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 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.

StatisticalTables 321 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 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 (continuedonnextpage)

322 98thAnnualReport|2011 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 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 323 Table7.Principalassetsandliabilitiesofinsuredcommercialbanks,byclassofbank,June30,2011and2010 Millionsofdollars,exceptasnoted Memberbanks Item Total Nonmemberbanks Total National State 2011 Assets Loansandinvestments 8,431,588 6,805,939 5,573,006 1,232,932 1,625,649 Loans,gross 6,038,565 4,786,100 3,957,080 829,020 1,252,465 Net 6,036,503 4,785,022 3,956,264 828,759 1,251,481 Investments 2,393,023 2,019,839 1,615,926 403,913 373,184 U.S.Treasuryand federalagency securities 379,648 288,725 220,571 68,153 90,923 Other 2,013,375 1,731,114 1,395,355 335,759 282,261 Cashassets,total 972,635 831,788 624,444 207,344 140,847 Liabilities Deposits,total 7,259,832 5,799,843 4,704,505 1,095,338 1,459,989 Interbank 126,612 103,494 83,765 19,729 23,118 Othertransactions 1,022,402 805,413 598,686 206,728 216,989 Othernontransactions 6,110,817 4,890,936 4,022,054 868,882 1,219,881 Equitycapital 1,382,502 1,156,734 947,848 208,887 225,768 Numberofbanks 6,384 2,155 1,347 808 4,229 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.Treasuryand federalagency securities 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 Note:IncludesU.S.-insuredcommercialbankslocatedintheUnitedStatesbutnotU.S.-insuredcommercialbanksoperatinginU.S.territoriesorpossessions.Dataare domesticassetsandliabilities(exceptforthosecomponentsreportedonaconsolidatedbasisonly).Componentsmaynotsumtototalsbecauseofrounding.Datafor2010 havebeenrevised.

324 98thAnnualReport|2011 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 325 Table9A.StatementofConditionoftheFederalReserveBanks,byBank,December31,2011and2010 Millionsofdollars Total Boston NewYork Philadelphia Cleveland Richmond Item 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 Assets Goldcertificate account 11,037 11,037 390 369 3,866 4,038 432 404 450 463 872 846 Specialdrawingrights certificateaccount 5,200 5,200 196 196 1,818 1,818 210 210 237 237 412 412 Coin 2,306 2,180 53 47 80 71 160 172 174 164 409 354 Loansandsecurities Primary,secondary, andseasonalloans 196 221 2 1 9 36 0 0 0 0 5 61 TermAsset-Backed SecuritiesLoan Facility1 9,022 24,732 … … 9,022 24,732 … … … … … … Creditextended toAmerican InternationalGroup, Inc.,net2 … 20,603 … … … 20,603 … … … … … … Treasurysecurities, boughtoutright3 1,663,446 1,021,493 40,898 25,851 773,574 416,823 56,983 23,855 44,933 34,706 192,111 116,337 Government-sponsored enterprisedebt securities,bought outright3 103,994 147,460 2,557 3,732 48,362 60,171 3,562 3,444 2,809 5,010 12,010 16,794 Federalagencyand governmentsponsored enterprise mortgage-backed securities,bought outright 837,683 992,141 20,596 25,108 389,559 404,846 28,696 23,169 22,628 33,709 96,744 112,994 Totalloansand securities 2,614,341 2,206,650 64,053 54,691 1,220,525 927,212 89,241 50,468 70,370 73,425 300,870 246,186 Netportfolioholdings ofconsolidated variableinterest entities4 35,693 68,666 … … 35,693 68,666 … … … … … … Preferredinterests5 … 26,385 … … … 26,385 … … … … … … Foreigncurrency denominated assets6 25,950 26,049 897 959 7,516 7,560 2,514 2,847 1,925 1,941 5,321 7,253 Centralbankliquidity swaps7 99,823 75 3,450 3 28,912 22 9,669 8 7,405 6 20,469 21 Otherassets Itemsinprocessof collection 363 510 11 10 0 0 53 74 59 89 4 8 Bankpremises 2,185 2,228 122 126 261 258 67 69 125 140 233 240 Allotherassets8 124,440 81,910 3,085 2,096 57,681 33,400 4,276 1,933 3,372 2,784 14,437 9,372 Interdistrictsettlement account 0 0 35,147 4,414 274,474 225,756 -28,084 12,749 -4,966 -15,854 -123,650 -62,496 Totalassets 2,921,337 2,430,890 107,403 62,912 1,630,826 1,295,186 78,539 68,932 79,150 63,395 219,377 202,195 Liabilities FederalReservenotes outstanding 1,205,888 1,121,643 44,207 41,012 427,406 383,595 45,940 45,360 54,131 45,905 94,381 89,693 Less:Notesheldby Federal ReserveBank 171,836 180,082 4,275 4,714 50,541 64,698 6,177 4,826 9,085 7,304 10,670 12,999 FederalReservenotes outstanding,net 1,034,052 941,561 39,932 36,297 376,865 318,897 39,763 40,533 45,046 38,601 83,711 76,694 Securitiessoldunder agreementsto repurchase9 99,900 59,703 2,456 1,511 46,458 24,362 3,422 1,394 2,699 2,028 11,537 6,800 Deposits Depositoryinstitutions 1,562,253 968,052 62,799 22,935 1,024,868 536,589 30,250 21,083 26,962 18,152 111,913 105,026 Treasury,general account 85,737 140,773 … … 85,737 140,773 … … … … … … (continuedonnextpage)

326 98thAnnualReport|2011 Table9A.—continued Total Boston NewYork Philadelphia Cleveland Richmond Item 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 Treasury, supplementary financingaccount10 0 199,964 … … 0 199,964 … … … … … … Foreign,official accounts 125 3,337 1 1 97 3,308 4 4 3 3 8 11 Other11 64,909 13,630 27 5 64,754 13,461 4 1 0 1 81 63 Totaldeposits 1,713,023 1,325,756 62,827 22,942 1,175,456 894,095 30,257 21,088 26,965 18,156 112,002 105,101 Otherliabilities FundsfromAmerican InternationalGroup, Inc.asset disposition,heldas agent12 … 26,896 … … … 26,896 … … … … … … InterestonFederal Reservenotesdue toU.S.Treasury13 900 5,124 51 90 -378 1,877 78 334 81 26 240 2,041 Deferredcredititems 994 1,931 58 71 3 10 109 271 142 410 19 74 Consolidatedvariable interestentities14 10,535 10,972 … … 10,535 10,972 … … … … … … Allotherliabilities15 8,134 5,899 193 168 4,533 2,712 243 173 240 239 739 608 Totalliabilities 2,867,539 2,377,842 105,517 61,079 1,613,472 1,279,822 73,872 63,794 75,173 59,460 208,249 191,318 Capitalaccounts Capitalpaidin 26,899 26,524 943 917 8,677 7,682 2,333 2,569 1,989 1,968 5,564 5,439 Surplus(including accumulatedother comprehensiveloss) 26,899 26,524 943 917 8,677 7,682 2,333 2,569 1,989 1,968 5,564 5,439 Totalliabilitiesand capitalaccounts 2,921,337 2,430,890 107,403 62,912 1,630,826 1,295,186 78,539 68,932 79,150 63,395 219,377 202,195 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Includesremainingprincipalbalance.TermAsset-BackedSecuritiesLoanFacility(TALF)loansarerecordedatfairvalue,andthefairvalueadjustmentasofDecember31is reportedin“Allotherassets.” 2 Includesoutstandingprincipalandcapitalizedinterestnetofunamortizeddeferredcommitmentfeesandallowanceforloanrestructuring.Excludescreditextendedto MaidenLaneIILLCandMaidenLaneIIILLC.OnSeptember30,2010,AmericanInternationalGroup,Inc.(AIG)announcedanagreementwiththeU.S.Departmentofthe Treasury,theFederalReserveBankofNewYork(FRBNY),andthetrusteesoftheAIGCreditFacilityTrustonarecapitalizationplandesignedtoacceleraterepaymentofits obligationstoAmericantaxpayers.TheplanresultedinthefullrepaymentandterminationoftheReserveBank’sAIGcreditfacility. 3 Includessecuritiesloaned—fullycollateralizedbyU.S.Treasurysecurities,otherinvestment-gradesecurities,andcollateraleligiblefortri-partyrepurchaseagreements pledgedwithFederalReserveBanks. 4 TheFRBNYistheprimarybeneficiaryofTALFLLC,MaidenLaneLLC,MaidenLaneIILLC,andMaidenLaneIIILLCand,asaresult,theaccountsandresultsofoperationsof theseentitiesareincludedinthecombinedfinancialstatementsoftheFederalReserveBanks.Foradditionaldetails,see“Table6.Keyfinancialdataforconsolidatedlimited liabilitycompanies”onpage147. 5 InMarch2009,theFRBNYreceivedpreferredinterestsintwospecialpurposevehicles,AIAAuroraLLCandALICOHoldingsLLC,inexchangeforthereductionofthe outstandingbalanceofrevolvingcreditprovidedtoAIG.Thepreferredinterestsarerecordedatcost.AsaresultoftheclosingoftheAIGrecapitalizationplanonJanuary14, 2011,AIGpaidtheFRBNYinfullforitspreferredinterestsinAIALLCandALICOLLC,includingaccrueddividends. 6 Valueddailyatmarketexchangerates. 7 Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. 8 Includespremiumsonsecurities,accruedinterest,thefairvalueadjustmentforTALFloans,anddepositoryinstitutionoverdrafts. 9 Contractamountofagreements. 10RepresentsamountsdepositedbytheU.S.Treasurythatresultfromatemporarysupplementaryprogramthatoffsets,inpart,thereserveimpactoftheReserveBanks’ lendingandliquidityinitiatives. 11Includesdepositsofgovernment-sponsoredenterprises,theConsumerFinancialProtectionBureau,andinternationalorganizations.Thesedepositsareprimarilyheldbythe FRBNY. 12PendingtheclosingoftherecapitalizationplanannouncedbyAIGonSeptember30,2010,thecashproceedsfromthedispositionofcertainAIGassetswereheldbythe FRBNYasagent.Attheclosingoftherecapitalizationplan,whichoccurredJanuary14,2011,theproceedswereusedfirsttorepayinfullthecreditextendedtoAIGbythe FRBNYundertherevolvingcreditfacilityandthentoredeemaportionoftheFRBNY’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 327 Table9A.StatementofConditionoftheFederalReserveBanks,byBank,December31,2011and2010—continued Millionsofdollars Atlanta Chicago St.Louis Minneapolis KansasCity Dallas SanFrancisco Item 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 Assets Goldcertificate account 1,394 1,385 854 887 319 324 197 203 318 296 728 652 1,217 1,170 Specialdrawingrights certificateaccount 654 654 424 424 150 150 90 90 153 153 282 282 574 574 Coin 205 188 332 336 35 35 60 60 176 161 241 239 381 353 Loansandsecurities Primary,secondary, andseasonalloans 0 14 17 79 0 2 5 8 11 7 132 0 15 14 TermAsset-Backed SecuritiesLoan Facility1 … … … … … … … … … … … … … … Creditextended toAmerican InternationalGroup, Inc.,net2 … … … … … … … … … … … … … … Treasurysecurities, boughtoutright3 123,665 96,661 98,785 77,007 31,484 26,312 25,565 13,984 44,249 35,041 65,789 42,893 165,411 112,023 Government-sponsored enterprisedebt securities,bought outright3 7,731 13,954 6,176 11,116 1,968 3,798 1,598 2,019 2,766 5,058 4,113 6,192 10,341 16,171 Federalagencyand governmentsponsored enterprise mortgage-backed securities,bought outright 62,276 93,884 49,746 74,794 15,855 25,556 12,874 13,582 22,283 34,034 33,130 41,660 83,298 108,804 Totalloansand securities 193,672 204,513 154,723 162,996 49,307 55,668 40,041 29,593 69,309 74,141 103,165 90,745 259,065 237,013 Netportfolioholdings ofconsolidated variableinterest entities4 … … … … … … … … … … … … … … Preferredinterests5 … … … … … … … … … … … … … … Foreigncurrency denominated assets6 1,487 1,606 657 629 211 244 802 723 234 213 393 358 3,993 1,714 Centralbankliquidity swaps7 5,720 5 2,529 2 814 1 3,083 2 899 1 1,512 1 15,361 5 Otherassets Itemsinprocessof collection 31 149 19 40 5 12 15 69 6 16 17 21 143 22 Bankpremises 214 218 206 209 134 136 105 107 259 265 245 247 213 214 Allotherassets8 9,275 7,741 7,376 6,134 2,385 2,126 1,945 1,143 3,318 2,805 4,939 3,447 12,350 8,930 Interdistrictsettlement account -44,538 -48,131 -5,416 -31,780 -8,856 -18,011 -19,268 -8,382 -17,589 -14,671 1,679 -3,007 -58,932 -40,587 Totalassets 168,114 168,328 161,706 139,878 44,504 40,685 27,070 23,607 57,081 63,379 113,201 92,985 234,366 209,407 Liabilities FederalReservenotes outstanding 145,803 142,659 88,894 86,072 33,916 32,240 20,976 19,855 34,479 33,041 80,188 76,154 135,566 126,059 Less:Notesheldby Federal ReserveBank 29,109 20,851 11,962 12,147 4,018 4,381 5,087 5,781 3,418 3,560 11,931 11,980 25,563 26,839 FederalReservenotes outstanding,net 116,694 121,807 76,932 73,925 29,899 27,858 15,889 14,074 31,061 29,481 68,258 64,174 110,003 99,219 Securitiessoldunder agreementsto repurchase9 7,427 5,650 5,933 4,501 1,891 1,538 1,535 817 2,657 2,048 3,951 2,507 9,934 6,547 Deposits Depositoryinstitutions 40,223 37,040 76,732 59,416 12,012 10,492 9,046 6,657 22,542 31,063 39,705 25,112 105,201 94,486 Treasury,general account … … … … … … … … … … … … … … (continuedonnextpage)

328 98thAnnualReport|2011 Table9A.—continued Atlanta Chicago St.Louis Minneapolis KansasCity Dallas SanFrancisco Item 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 Treasury, supplementary financingaccount10 … … … … … … … … … … … … … … Foreign,official accounts 2 2 1 1 0 0 1 1 0 0 1 1 6 3 Other11 2 2 35 26 0 56 0 3 4 4 1 0 1 8 Totaldeposits 40,227 37,044 76,767 59,443 12,013 10,548 9,048 6,662 22,546 31,067 39,707 25,113 105,208 94,497 Otherliabilities FundsfromAmerican InternationalGroup, Inc.asset disposition,heldas agent12 … … … … … … … … … … … … … … InterestonFederal Reservenotesdue toU.S.Treasury13 171 248 170 118 53 69 34 37 63 56 88 69 248 158 Deferredcredititems 57 98 56 151 36 67 194 263 38 81 45 73 237 361 Consolidatedvariable interestentities14 … … … … … … … … … … … … … … Allotherliabilities15 462 440 413 395 173 173 149 116 182 169 290 245 516 461 Totalliabilities 165,037 165,288 160,271 138,534 44,064 40,253 26,851 21,969 56,546 62,902 112,339 92,181 226,147 201,244 Capitalaccounts Capitalpaidin 1,538 1,520 718 672 220 216 110 819 268 239 431 402 4,109 4,082 Surplus(including accumulatedother comprehensiveloss) 1,538 1,520 718 672 220 216 110 819 268 239 431 402 4,109 4,082 Totalliabilitiesand capitalaccounts 168,114 168,328 161,706 139,878 44,504 40,685 27,070 23,607 57,081 63,379 113,201 92,985 234,366 209,407 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Includesremainingprincipalbalance.TermAsset-BackedSecuritiesLoanFacility(TALF)loansarerecordedatfairvalue,andthefairvalueadjustmentasofDecember31is reportedin“Allotherassets.” 2 Includesoutstandingprincipalandcapitalizedinterestnetofunamortizeddeferredcommitmentfeesandallowanceforloanrestructuring.Excludescreditextendedto MaidenLaneIILLCandMaidenLaneIIILLC.OnSeptember30,2010,AmericanInternationalGroup,Inc.(AIG)announcedanagreementwiththeU.S.Departmentofthe Treasury,theFederalReserveBankofNewYork(FRBNY),andthetrusteesoftheAIGCreditFacilityTrustonarecapitalizationplandesignedtoacceleraterepaymentofits obligationstoAmericantaxpayers.TheplanresultedinthefullrepaymentandterminationoftheReserveBank’sAIGcreditfacility. 3 Includessecuritiesloaned—fullycollateralizedbyU.S.Treasurysecurities,otherinvestment-gradesecurities,andcollateraleligiblefortri-partyrepurchaseagreements pledgedwithFederalReserveBanks. 4 TheFRBNYistheprimarybeneficiaryofTALFLLC,MaidenLaneLLC,MaidenLaneIILLC,andMaidenLaneIIILLCand,asaresult,theaccountsandresultsofoperationsof theseentitiesareincludedinthecombinedfinancialstatementsoftheFederalReserveBanks.Foradditionaldetails,see“Table6.Keyfinancialdataforconsolidatedlimited liabilitycompanies”onpage147. 5 InMarch2009,theFRBNYreceivedpreferredinterestsintwospecialpurposevehicles,AIAAuroraLLCandALICOHoldingsLLC,inexchangeforthereductionofthe outstandingbalanceofrevolvingcreditprovidedtoAIG.Thepreferredinterestsarerecordedatcost.AsaresultoftheclosingoftheAIGrecapitalizationplanonJanuary14, 2011,AIGpaidtheFRBNYinfullforitspreferredinterestsinAIALLCandALICOLLC,includingaccrueddividends. 6 Valueddailyatmarketexchangerates. 7 Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. 8 Includespremiumsonsecurities,accruedinterest,thefairvalueadjustmentforTALFloans,anddepositoryinstitutionoverdrafts. 9 Contractamountofagreements. 10RepresentsamountsdepositedbytheU.S.Treasurythatresultfromatemporarysupplementaryprogramthatoffsets,inpart,thereserveimpactoftheReserveBanks’ lendingandliquidityinitiatives. 11Includesdepositsofgovernment-sponsoredenterprises,theConsumerFinancialProtectionBureau,andinternationalorganizations.Thesedepositsareprimarilyheldbythe FRBNY. 12PendingtheclosingoftherecapitalizationplanannouncedbyAIGonSeptember30,2010,thecashproceedsfromthedispositionofcertainAIGassetswereheldbythe FRBNYasagent.Attheclosingoftherecapitalizationplan,whichoccurredJanuary14,2011,theproceedswereusedfirsttorepayinfullthecreditextendedtoAIGbythe FRBNYundertherevolvingcreditfacilityandthentoredeemaportionoftheFRBNY’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 329 Table9B.StatementofConditionoftheFederalReserve Banks,December31,2011and2010 Supplementalinformation—collateralheldagainst FederalReservenotes:FederalReserveagents’accounts Millionsofdollars Item 2011 2010 FederalReservenotesoutstanding 1,205,888 1,121,643 Less:NotesheldbyFederalReserve Banksnotsubjectto collateralization 171,836 180,082 CollateralizedFederalReservenotes 1,034,052 941,561 CollateralforFederalReservenotes Goldcertificateaccount 11,037 11,037 Specialdrawingrightscertificateaccount 5,200 5,200 U.S.Treasurysecurities1 1,017,815 925,324 Totalcollateral 1,034,052 941,561 1 Facevalue.Includescompensationtoadjustfortheeffectofinflationonthe originalfacevalueofinflation-indexedsecurities.

330 98thAnnualReport|2011 Table10.IncomeandexpensesoftheFederalReserveBanks,byBank,2011 Thousandsofdollars Kansas San Item Total Boston NewYork Philadelphia Cleveland Richmond Atlanta Chicago St.Louis Minneapolis Dallas City Francisco Currentincome Interestincome Primary,secondary, andseasonalloans 266 8 73 14 2 9 13 47 16 32 22 11 19 TermAsset-Backed SecuritiesLoan Facility 264,683 … 264,683 … … … … … … … … … … AmericanInternational Group,Inc.,net 408,716 … 408,716 … … … … … … … … … … Totalloaninterest income 673,665 8 673,472 14 2 9 13 47 16 32 22 11 19 Treasurysecurities 42,256,6921,046,31819,067,611 1,335,902 1,212,7474,863,8283,349,1862,673,278 869,743 632,232 1,202,9321,696,2454,306,670 Government-sponsored enterprisedebt securities 3,053,680 75,771 1,365,356 94,135 89,174 351,132 246,501 196,712 64,358 45,318 88,628 123,117 313,476 Federalagencyand government-sponsored enterprise mortgage-backed securities 38,281,682 949,61517,137,660 1,184,160 1,115,3204,402,4693,082,6472,460,075 804,265 568,744 1,108,1981,542,5193,926,010 Foreigncurrency denominatedassets 248,871 8,638 72,092 24,311 18,466 52,239 14,333 6,286 2,048 7,636 2,227 3,747 36,848 Centralbankliquidity swaps1 34,521 1,193 9,998 3,345 2,561 7,083 1,979 875 281 1,066 311 523 5,307 TotalSOMAinterest income 83,875,4462,081,53537,652,717 2,641,853 2,438,2689,676,7516,694,6465,337,2261,740,695 1,254,996 2,402,2963,366,1518,588,311 Totalinterestincome 84,549,1102,081,54338,326,188 2,641,867 2,438,2709,676,7606,694,6595,337,2731,740,711 1,255,028 2,402,3183,366,1628,588,330 Pricedservices 477,371 … 74,543 … … … 327,082 75,746 … … … … … Compensation receivedfor servicesprovided2 198,931 15,629 2,816 1,248 24,877 18,900 457 21,352 3,277 51,884 38,780 9,344 10,368 Securitieslendingfees 13,194 327 5,889 405 386 1,517 1,068 853 279 196 384 532 1,356 Otherincome 2,760 6 2,569 18 3 20 31 38 8 5 9 26 26 Totalotherincome 692,256 15,962 85,817 1,671 25,266 20,437 328,638 97,989 3,564 52,085 39,173 9,902 11,750 Totalcurrentincome 85,241,3662,097,50538,412,008 2,643,537 2,463,5379,697,1977,023,2975,435,2601,744,276 1,307,114 2,441,4913,376,0648,600,081 Currentexpenses Interestexpenseon securitiessold underagreements torepurchase 44,000 1,096 19,362 1,297 1,323 5,051 3,663 2,922 965 644 1,319 1,787 4,573 Interestonreserves3 3,764,908 57,356 2,491,731 122,441 54,503 267,780 109,420 174,634 30,103 23,108 58,209 83,625 292,000 Interestonterm deposits4 6,266 20 2,747 939 5 1,251 2 534 47 51 36 13 620 Earningscreditscosts 1,351 91 153 74 52 101 81 128 30 37 102 99 404 Personnel Salariesandother personnelexpenses 1,757,419 90,640 425,187 78,549 96,887 257,125 144,237 130,131 86,157 85,685 109,225 95,611 157,984 Retirementandother benefits 576,690 26,901 127,326 26,908 47,166 80,627 48,659 44,691 28,287 28,019 34,345 34,378 49,382 Netperiodicpension expense5 525,284 764 513,248 1,061 429 1,404 1,563 1,726 15 1,146 1,463 798 1,667 Administrative Fees 174,405 3,129 44,144 7,559 3,878 64,880 18,539 8,096 12,663 2,563 2,048 2,817 4,090 Travel 85,138 2,898 12,506 3,156 4,975 14,004 9,093 9,551 5,265 3,496 5,883 4,801 9,511 Postageandother shippingcosts 18,445 369 961 310 2,121 712 5,788 368 767 752 949 2,154 3,193 Communications 45,753 984 5,537 736 810 26,736 1,785 1,787 1,179 1,574 1,300 1,746 1,579 Materialsandsupplies 64,626 4,741 22,509 5,862 2,300 5,884 5,158 3,742 2,515 1,620 2,601 4,046 3,648 Building Taxesonrealestate 42,015 5,843 7,903 1,746 1,564 2,728 3,332 3,376 688 3,445 3,489 3,476 4,425 Propertydepreciation 126,221 10,574 20,653 5,612 9,337 14,310 9,808 15,091 7,629 4,090 7,802 10,916 10,401 Utilities 39,936 4,030 8,345 2,356 2,100 4,379 3,733 2,109 1,715 1,833 2,105 4,056 3,175 Rent 48,625 302 22,793 856 21 21,144 172 967 989 264 662 191 264 Otherbuilding 55,851 4,996 7,724 3,696 3,286 5,329 4,387 7,443 2,090 2,361 1,895 9,024 3,619 (continuedonnextpage)

StatisticalTables 331 Table10.—continued Kansas San Item Total Boston NewYork Philadelphia Cleveland Richmond Atlanta Chicago St.Louis Minneapolis Dallas City Francisco Equipment/software Purchases 35,214 3,711 6,709 1,461 1,077 6,900 2,593 2,857 1,428 1,452 2,223 1,982 2,822 Rentals 3,849 287 1,708 238 338 134 495 459 22 10 15 41 102 Depreciation 87,677 5,280 10,140 4,863 3,019 36,157 4,835 5,164 3,006 1,827 4,095 3,873 5,419 Repairsand maintenance 61,297 4,372 6,190 3,041 2,696 19,626 6,822 3,821 1,688 1,519 2,388 3,333 5,802 Software 155,393 5,171 31,660 9,251 4,447 58,809 12,729 3,913 2,633 4,734 5,793 9,811 6,443 Otherexpenses Compensationpaidfor servicecosts incurred2 198,931 … 32,537 … … … 158,247 8,146 … … … … … Otherexpenses 72,534 12,805 69,539 10,969 5,613 -251,970 40,109 52,884 67,922 19,646 6,541 20,720 17,755 Recoveries -141,710 -17,833 -18,509 -4,720 -5,064 -40,939 -11,407 -10,603 -4,430 -1,930 -6,478 -13,617 -6,179 Expensescapitalized6 -48,127 -4,445 -17,344 -2,733 -2,651 3,712 -2,154 -1,482 -2,982 -6,168 -4,284 -549 -7,047 Totalcurrent expenses 7,801,991 224,082 3,855,459 285,528 240,231 605,874 581,689 472,456 250,390 181,778 243,725 285,132 575,651 Reimbursements -485,348 -32,563 -114,677 -35,424 -51,670 -46,013 -15,914 -4,665 -105,413 -28,435 -15,808 -22,903 -11,861 Netexpenses 7,316,643 191,519 3,740,782 250,104 188,561 559,861 565,775 467,791 144,977 153,343 227,917 262,228 563,791 Profitandloss Currentnetincome 77,924,7231,905,98634,671,225 2,393,433 2,274,9769,137,3366,457,5224,967,4691,599,299 1,153,771 2,213,5743,113,8368,036,290 Additionsto(+)anddeductionsfrom(-)currentnetincome Profitonsalesof Treasurysecurities 2,258,051 55,517 1,050,091 77,351 60,995 260,782 167,869 134,095 42,738 34,703 60,066 89,306 224,538 Profitonsalesof federalagencyand government-sponsored enterprise mortgage-backed securities 9,709 239 4,515 333 262 1,121 722 577 184 149 258 384 965 Foreigncurrencygains (losses) 151,969 5,338 43,984 15,181 11,291 33,861 8,872 3,809 1,284 4,582 1,338 2,252 20,177 Dividendsonpreferred interests 46,987 … 46,987 … … … … … … … … … … TermAsset-Backed SecuritiesLoan Facilityunrealized losses7 -83,835 … -83,835 … … … … … … … … … … Netincomefrom consolidated variableinterest entities8 -356,570 … -356,570 … … … … … … … … … … Otheradditions 61,670 9 61,333 120 1 6 73 32 2 3 29 27 35 Totaladditions 2,087,981 61,103 766,504 92,986 72,549 295,770 177,536 138,513 44,208 39,437 61,691 91,970 245,715 Otherdeductions -71,983 -1 -61,301 0 -10,270 0 0 0 0 0 0 0 -411 Totaldeductions -71,983 -1 -61,301 0 -10,270 0 0 0 0 0 0 0 -411 Netadditionto(+) currentnetincome 2,015,998 61,102 705,203 92,986 62,279 295,770 177,536 138,513 44,208 39,437 61,691 91,970 245,304 Costof unreimbursed Treasuryservices 8 … 8 … … … … … … … … … … AssessmentsbyBoard Boardexpenditures9 472,300 16,376 137,231 44,028 35,128 98,054 26,627 11,924 3,897 14,606 4,453 7,047 72,929 Costofcurrency 648,798 31,741 129,494 34,543 34,468 54,337 95,116 61,114 19,591 12,526 22,845 60,551 92,471 ConsumerFinancial ProtectionBureau10 241,712 8,547 71,301 22,013 18,189 50,738 13,724 6,428 2,046 5,010 2,361 3,608 37,747 OfficeofFinancial Research10 40,000 1,435 11,917 3,650 3,034 8,475 2,279 1,108 344 471 396 600 6,292 Netincomebefore distributions 78,537,9041,908,98935,026,478 2,382,185 2,246,4369,221,5026,497,3135,025,4081,617,629 1,160,595 2,245,2093,133,9998,072,155 Changeinfunded statusofbenefit plans -1,161,848 621 -1,129,118 -1,490 25,406 -17,256 -11,612 -5,715 -1,210 -7,471 -6,834 -8,303 1,131 Comprehensive incomebefore distributions 77,376,0561,909,61033,897,360 2,380,695 2,271,8429,204,2466,485,7015,019,6931,616,419 1,153,124 2,238,3753,125,6968,073,286 Dividendspaid 1,577,284 55,639 470,489 143,799 118,576 330,244 89,753 42,456 13,266 27,962 15,562 23,656 245,884 (continuedonnextpage)

332 98thAnnualReport|2011 Table10.—continued Kansas San Item Total Boston NewYork Philadelphia Cleveland Richmond Atlanta Chicago St.Louis Minneapolis Dallas City Francisco PaymentstoU.S. Treasury(intereston FederalReserve notes) 75,423,5971,827,61732,432,120 2,472,979 2,132,1318,748,6356,377,8384,931,5721,599,321 1,834,696 2,194,0323,073,0087,799,648 Transferredto/from surplusandchange inaccumulated other comprehensive income 375,175 26,354 994,754 -236,082 21,135 125,368 18,109 45,666 3,834 -709,531 28,782 29,029 27,755 Surplus,January1 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 Surplus,December31 26,899,231 942,973 8,677,037 2,333,126 1,988,6545,564,2241,538,076 717,658 219,999 109,736 267,550 430,8784,109,320 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Representsinterestincomerecognizedonswapagreementswithforeigncentralbanks. 2 TheFederalReserveBankofAtlanta(FRBA)hasoverallresponsibilityformanagingtheReserveBanks’provisionofcheckandautomatedclearinghouse(ACH)servicesand recognizestotalSystemrevenuefortheseservices.TheFederalReserveBankofNewYork(FRBNY)hasoverallresponsibilityformanagingtheReserveBanks’provisionof Fedwirefundstransferandsecuritiestransferservices,andrecognizesthetotalSystemrevenuefortheseservices.TheFederalReserveBankofChicago(FRBC)hasoverall responsibilityformanagingtheReserveBanks’provisionofelectronicaccessservicestodepositoryinstitutions,andrecognizesthetotalSystemrevenuefortheseservices. TheFRBA,theFRBNY,andtheFRBCcompensatetheotherReserveBanksforthecostsincurredinprovidingtheseservices. 3 InOctober2008,theReserveBanksbegantopayinteresttodepositoryinstitutionsonqualifyingbalancesheldattheFederalReserveBanks. 4 InApril2010,theReserveBanksbegantopayinterestontermdepositsundertheTermDepositFacility. 5 ReflectstheeffectoftheFinancialAccountingStandardsBoard’sCodificationTopic(ASC715)Compensation-RetirementBenefits.TheSystemRetirementPlanfor employeesisrecordedonbehalfoftheSystemonthebooksoftheFRBNY.NetpensionexpensefortheSystem,whichwas$495,447thousand,isrecordedinthebooksof theFRBNY.TheRetirementBenefitEqualizationPlanandtheSupplementalEmployeeRetirementPlanarerecordedbyeachFederalReserveBank. 6 Includesexpensesforlaborandmaterialscapitalizedanddepreciatedoramortizedaschargestoactivitiesintheperiodsbenefited. 7 RepresentsthevaluationadjustmentforTermAsset-BackedSecuritiesLoanFacility(TALF)loans,whicharerecordedatfairvalue.Inadditiontothevaluationadjustment, earningsonTALFloansincludeinterestincomeof$265million,andtheFRBNY’sallocatedshareofTALFLLC’snetincome. 8 Representstheportionoftheconsolidatedvariableinterestentities’netincomerecordedbytheFRBNY.Theamountincludesinterestincome,interestexpenses,realizedand unrealizedgainsandlosses,andprofessionalfees. 9 Foradditionaldetails,seethe“BoardofGovernorsFinancialStatements”onpage340inthe“FederalReserveSystemAudits”sectionofthisreport. 10TheBoardofGovernorsassessestheReserveBankstofundtheoperationsoftheConsumerFinancialProtectionBureauandOfficeofFinancialResearch.These assessmentsareallocatedtoeachReserveBankbasedoneachReserveBank’scapitalandsurplusbalancesasofthemostrecentquarter. …Notapplicable.

StatisticalTables 333 Table11.IncomeandexpensesoftheFederalReserveBanks,1914–2011 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)

334 98thAnnualReport|2011 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 … … 299,65220,658,972 0 … 831,705 1998 28,149,477 1,833,436 1,906,037 178,009 408,544 … … 343,01417,785,942 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 2011 85,241,366 7,316,643 2,015,991 472,300 648,798 281,712 -1,161,848 1,577,284 … 75,423,597 … 375,175 Total, 1914–20111,013,516,673 81,293,694 24,162,598 6,634,116 11,682,378 323,998 -2,943,48115,509,02744,113,958 842,337,007 -4 32,841,6206 (continuedonnextpage)

StatisticalTables 335 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,1914–2011 Boston 46,947,974 4,359,466 248,233 280,175 665,947 11,482 -3,537 665,682 2,579,504 37,493,178 135 1,137,099 NewYork 377,118,874 19,363,714714,383,390 1,697,136 3,382,271 95,523 -2,975,497 4,069,78817,307,161 331,503,863 -433 11,107,744 Philadelphia 35,486,633 3,696,388 784,512 401,143 532,806 30,193 -1,657 1,109,090 1,312,118 26,688,434 291 2,499,030 Cleveland 53,160,100 4,205,309 781,601 482,260 656,025 24,305 10,638 1,133,016 2,827,043 42,327,277 -10 2,297,115 Richmond 82,127,076 7,194,566 2,340,583 1,156,055 982,680 69,344 23,749 3,060,219 3,083,928 62,299,820 -72 6,644,868 Atlanta 69,902,828 10,268,228 1,180,568 483,346 1,070,915 18,524 889 1,068,158 2,713,230 53,603,143 5 1,858,735 Chicago 108,619,877 8,361,554 1,275,368 594,311 1,272,716 8,552 -5,831 1,160,316 4,593,811 92,761,812 12 1,136,328 St.Louis 32,370,085 3,262,984 257,816 133,317 417,332 2,764 9,645 270,564 1,833,837 26,373,031 -27 343,746 Minneapolis 17,192,213 3,286,608 306,445 185,929 222,590 6,703 -3,031 405,489 416,227 12,704,193 65 267,829 KansasCity 35,347,013 4,451,567 353,783 165,416 432,612 3,098 -10,542 312,367 1,249,703 28,685,531 -9 389,969 Dallas 44,520,056 4,556,382 651,328 246,880 617,417 4,813 6,074 449,440 1,510,802 37,192,789 55 598,874 SanFrancisco 110,723,944 8,286,933 1,598,974 808,149 1,429,065 48,697 5,617 1,804,899 4,686,594 90,703,935 -17 4,560,284 Total 1,013,516,673 81,293,694 24,162,598 6,634,116 11,682,378 323,998 -2,943,48115,509,02744,113,958 842,337,007 -4 32,841,620 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$32,841,620thousandtransferredtosurpluswasreducedbydirectchargesof$500thousandforcharge-offonBankpremises(1927);$139,300thousandfor contributionstocapitaloftheFederalDepositInsuranceCorporation(1934);$4thousandnetuponeliminationofsection13bsurplus(1958);and$106,000thousand(1996), $107,000thousand(1997),and$3,752,000thousand(2000)transferredtotheTreasuryasstatutorilyrequired;and$1,848,716thousandrelatedtotheimplementationof SFASNo.158(2006)andwasincreasedbyatransferof$11,131thousandfromreservesforcontingencies(1955),leavingabalanceof$26,899,231thousandon December31,2011. 7 Thisamountisreducedby$4,593,077thousandforexpensesoftheSystemRetirementPlan.Seenote5,“Table10.IncomeandexpensesoftheFederalReserveBanks,by Bank,2011”onpage330. …Notapplicable.

336 98thAnnualReport|2011 Table12.OperationsinprincipaldepartmentsoftheFederalReserveBanks,2008–11 Operation 2011 2010 2009 2008 Millionsofpieces Currencyprocessed 32,249 32,143 31,891 33,256 Currencydestroyed 4,813 5,948 6,049 6,517 Coinreceived 59,756 62,345 65,349 64,438 Checkshandled U.S.governmentchecks1 159 185 202 269 Postalmoneyorders 113 121 131 146 Commercial 6,780 7,712 8,585 9,545 Securitiestransfers2 19 20 21 25 Fundstransfers3 127 125 125 131 Automatedclearinghousetransactions Commercial 10,349 10,233 9,966 10,040 Government 1,305 1,222 1,195 1,132 Millionsofdollars Currencyprocessed 576,442 569,249 561,013 604,882 Currencydestroyed 81,943 120,049 92,708 148,460 Coinreceived 5,929 6,014 6,288 6,286 Checkshandled U.S.governmentchecks1 241,817 292,261 311,667 316,713 Postalmoneyorders 22,220 23,210 23,675 25,544 Commercial 9,899,770 11,066,409 13,758,963 15,216,147 Securitiestransfers2 291,823,993 320,123,901 295,741,666 419,347,256 Fundstransfers3 663,837,575 608,325,851 631,127,108 754,974,633 Automatedclearinghousetransactions Commercial 17,801,549 16,941,077 15,418,718 15,662,805 Government 4,534,707 4,426,808 4,297,071 4,008,022 1 Includesgovernmentcheckshandledelectronically(electronicchecks). 2 Dataonsecuritiestransfersdonotincludereversals. 3 Dataonfundstransfersdonotincludenon-valuetransfers.

StatisticalTables 337 Table13.NumberandannualsalariesofofficersandemployeesoftheFederalReserveBanks,December31,2011 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 12,787,567 809 30 71,319,707 903 84,457,674 NewYork 410,780 435 99,572,258 2,573 37 269,269,544 3,046 369,252,582 Philadelphia 350,400 58 10,232,763 759 23 57,859,212 841 68,442,374 Cleveland 347,400 54 9,771,600 982 20 66,340,988 1,057 76,459,988 Richmond 347,400 79 13,697,600 1,340 26 102,685,209 1,446 116,730,209 Atlanta 314,400 83 16,139,830 1,434 19 109,786,315 1,537 126,240,545 Chicago 350,400 98 18,094,760 1,223 45 103,988,873 1,367 122,434,033 St.Louis 281,300 75 13,795,540 843 29 62,525,370 948 76,602,210 Minneapolis 313,500 51 8,972,725 949 44 67,721,083 1,045 77,007,308 KansasCity 323,200 73 13,204,700 1,135 16 76,035,677 1,225 89,563,577 Dallas 350,400 59 10,295,104 1,044 10 71,807,913 1,114 82,453,417 SanFrancisco 367,500 77 16,335,031 1,435 23 128,903,369 1,536 145,605,900 FederalReserve Information Technology … 47 8,541,725 953 7 93,864,052 1,007 102,405,777 OfficeofEmployee Benefits … 12 2,801,400 35 1 3,598,355 48 6,399,755 Total 4,107,080 1,264 254,242,603 15,514 330 1,285,705,666 17,120 1,544,055,349 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Appointmentsalariesofpresidentsarenormally85percentofthesalary-rangemidpoint(an85compa-ratio),withtheexceptionoftheNewYorkReserveBankpresident, whoseappointmentsalarynormallyissetata95compa-ratio.TheBoardhasdiscretiontoapproveahigherstartingsalaryifrequestedbyaReserveBank’sboardof directors. Noincumbentpresidentreceivedasalaryincreasein2011.UndertheBoard’snormalpolicy,duringyearsinwhichthereisnopayfreeze,onJanuary1eachyear,all presidentsreceivesalaryincreasesequaltothepercentageincreaseinthemidpointoftheirrespectivesalaryranges.Inaddition,oneverythird-yearanniversaryofhisor herinitialappointment(throughyear9),eachpresidentreceivesasalaryincreasethatresultsinacompa-ratioasfollows:year3:95(fortheNewYorkBank:105);year6: 105(NewYork:115);year9:115(NewYork:125). TherearetieredsalaryrangesforReserveBankofficers,includingpresidents,reflectingdifferencesinthecostsoflaborinthehead-officecities.TheBoardreviewsReserve BankofficersalaryrangesandReserveBankplacementinthesalarytiersannually.SalariesforReserveBankofficers,includingpresidents,arelimitedbycompensation capsestablishedforeachtier.Thecurrentcaps,whichhaveremainedunchangedfrom2010,are$431,300fortier1;$419,600fortier2;and$400,000fortier3.In2011, NewYorkandSanFranciscowereintier1,whichhadarangemidpointforpresidents’salariesof$432,400.Boston,Philadelphia,Chicago,Minneapolis,andDallaswerein tier2,whichhadamidpointforpresidents’salariesof$368,800.Cleveland,Richmond,Atlanta,St.Louis,andKansasCitywereintier3,whichhadamidpointforpresidents' salariesof$330,900.Asnotedabove,salarymidpointsareusedtocalculatepresidents’compa-ratios. 2 Annualizedsalaryliability(excludingoutsideagencycosts)basedonsalariesineffectonDecember31,2011. …Notapplicable.

338 98thAnnualReport|2011 Table14.AcquisitioncostsandnetbookvalueofthepremisesoftheFederalReserveBanksandBranches,December31,2011 Thousandsofdollars Acquisitioncosts FederalReserveBank Net Other orBranch Buildings Buildingmachinery bookvalue realestate3 Land Total2 (includingvaults)1 andequipment Boston 27,293 167,607 30,506 225,406 122,304 … NewYork 21,412 352,825 79,383 453,620 260,908 … Philadelphia 8,146 105,496 17,892 131,533 67,295 … Cleveland 4,219 126,971 25,783 156,973 99,629 … Cincinnati 3,100 28,105 16,857 48,063 20,126 … Pittsburgh 2,548 19,638 16,830 39,017 5,767 … Richmond 31,631 152,749 49,610 233,990 152,694 … Baltimore 7,917 39,863 12,845 60,624 36,517 … Charlotte 7,884 43,543 13,506 64,933 43,366 … Atlanta 22,995 152,920 18,219 194,135 150,805 … Birmingham 5,347 13,056 1,465 19,868 10,773 … Jacksonville 1,779 23,293 4,658 29,730 16,830 … Nashville 0 0 0 0 0 3,718 NewOrleans 3,785 12,571 5,499 21,854 11,115 … Miami 4,254 28,815 6,490 39,559 24,401 … Chicago 4,512 203,887 24,369 232,768 121,723 … Detroit 12,329 74,023 11,292 97,643 84,532 … St.Louis 9,377 139,216 15,230 163,823 122,832 … Memphis 2,472 15,000 5,160 22,632 11,211 … Minneapolis 15,522 108,679 16,082 140,283 95,785 … Helena 2,890 10,335 1,571 14,795 9,328 … KansasCity 38,320 198,804 27,459 264,583 242,690 … Denver 3,694 9,900 6,306 19,899 9,562 … Omaha 3,559 7,692 1,985 13,236 6,322 … Dallas 37,085 121,794 31,758 190,637 122,502 … ElPaso 262 3,683 1,843 5,788 835 … Houston 25,119 104,023 9,020 138,162 117,816 7,204 SanAntonio 826 8,043 2,969 11,838 4,064 … SanFrancisco 20,988 114,579 28,230 163,797 91,259 … LosAngeles 6,306 74,852 20,149 101,307 56,169 … SaltLakeCity 1,294 5,180 1,401 7,875 2,677 … Seattle 13,101 49,970 6,744 69,815 63,138 3,400 Total 349,971 2,521,162 513,823 3,384,956 2,184,975 14,322 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Includesexpendituresforconstructionatsomeoffices,pendingallocationtoappropriateaccounts. 2 Excludescharge-offsof$17,699thousandbefore1952. 3 Includesrealestateheldpendingsale. …Notapplicable.

339 Federal Reserve System Audits TheBoardof Governors,theFederalReserveBanks,andtheFederalReserve Systemasawholeareallsubjecttoseverallevelsof auditandreview. TheBoard’sfinancialstatements,anditscompliancewithlawsandregulations affectingthosestatements,areauditedannuallybyanoutsideauditorretainedby theBoard’sOfficeof InspectorGeneral. TheReserveBanks’financialstatementsareauditedannuallybyanindependent outsideauditorretainedbytheBoardof Governors.Inaddition,theReserve BanksaresubjecttoannualexaminationbytheBoard.Asdiscussedinthechapter “FederalReserveBanks,”theBoard’sexaminationincludesawiderangeof ongoingoversightactivitiesconductedonsiteandoff sitebystaff of theBoard’sDivisionof ReserveBankOperationsandPaymentSystems. TheOIGalsoconductsaudits,reviews,andinvestigationsrelatingtotheBoard’s programsandoperationsaswellastoBoardfunctionsdelegatedtotheReserve Banks,andFederalReserveoperationsarealsosubjecttoreviewbythe GovernmentAccountabilityOffice.

340 98thAnnualReport|2011 Board of Governors Financial Statements Thefinancialstatementsof theBoardof Governorsfor2011and2010were auditedbyDeloitte&ToucheLLP,independentauditors. March8,2012 MANAGEMENT’SASSERTION TotheCommitteeonBoardAffairs: ThemanagementoftheBoardofGovernorsoftheFederalReserveSystem(“theBoard”)isresponsibleforthe preparationandfairpresentationofthebalancesheetasofDecember31,2011,andfortherelatedstatementofrevenuesandexpensesandchangesincumulativeresultsofoperations,andcashflowsfortheyearthenended(the “FinancialStatements”).TheFinancialStatementshavebeenpreparedinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericaand,assuch,includesomeamountswhicharebasedonmanagement judgmentsandestimates.Toourknowledge,theFinancialStatementsare,inallmaterialrespects,fairlypresentedin conformitywithgenerallyacceptedaccountingprinciplesandincludealldisclosuresnecessaryforsuchpresentation. BoardmanagementisalsoresponsibleforestablishingandmaintainingeffectiveinternalcontroloverfinancialreportingasitrelatestotheFinancialStatements.SuchinternalcontrolisdesignedtoprovidereasonableassurancetomanagementandtotheCommitteeonBoardAffairsregardingthepreparationoftheFinancialStatementsinaccordance withaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.TheBoard’sinternalcontrolover financialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsoftheBoard;(2)provide reasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationofFinancialStatementsin accordancewithgenerallyacceptedaccountingprinciples,andthattheBoard’sreceiptsandexpendituresarebeing madeonlyinaccordancewithauthorizationsofitsmanagement;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionoftheBoard’sassetsthatcouldhavea materialeffectontheFinancialStatements. Eveneffectiveinternalcontrol—nomatterhowwelldesigned—hasinherentlimitations,includingthepossibilityof humanerror.Internalcontrol,therefore,canprovideonlyreasonableassurancewithrespecttothepreparationof reliableFinancialStatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttothe riskthatspecificcontrolsmaybecomeinadequatebecauseofchangesinconditionsorthatthedegreeofcompliance withpoliciesorproceduresmaydeteriorate. BoardmanagementassesseditsinternalcontroloverfinancialreportingreflectedintheFinancialStatementsbased uponthecriteriaestablishedintheInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoring OrganizationsoftheTreadwayCommission. Basedonthisassessment,webelievethattheBoardhasmaintainedeffectiveinternalcontroloverfinancialreporting asitrelatestoitsFinancialStatements. RichardA.Anderson WilliamL.Mitchell ChiefOperatingOfficer ChiefFinancialOfficer

FederalReserveSystemAudits 341 INDEPENDENTAUDITORS’REPORT TotheBoardofGovernorsoftheFederalReserveSystem: Washington,D.C. WehaveauditedtheaccompanyingbalancesheetsoftheBoardofGovernorsoftheFederalReserveSystem(the “Board”)asofDecember31,2011and2010,andtherelatedstatementsofrevenuesandexpensesandchangesin cumulativeresultsofoperations,andcashflowsfortheyearsthenended.ThesefinancialstatementsaretheresponsibilityoftheBoard’smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedon ouraudits. WeconductedourauditsinaccordancewithgenerallyacceptedauditingstandardsasestablishedbytheAuditing StandardsBoard(UnitedStates),auditingstandardsofthePublicCompanyAccountingOversightBoard(United States),andthestandardsapplicabletofinancialauditscontainedinGovernmentAuditingStandardsissuedbythe ComptrollerGeneraloftheUnitedStates.Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalso includesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluating theoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion. Inouropinion,suchfinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionoftheBoardof GovernorsoftheFederalReserveSystemasofDecember31,2011and2010,andtheresultsofitsoperationsandits cashflowsfortheyearsthenended,inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStates ofAmerica. Wehavealsoaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(United States),theBoard’sinternalcontroloverfinancialreportingasofDecember31,2011,basedonthecriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommissionandourreportdatedMarch8,2012expressedanunqualifiedopinionontheBoard’sinternalcontroloverfinancialreporting. InaccordancewithGovernmentAuditingStandards,wehavealsoissuedourreportdatedMarch8,2012,onourtests oftheBoard’scompliancewithcertainprovisionsoflaws,regulations,contracts,andgrantagreementsandother matters.Thepurposeofthatreportistodescribethescopeofourtestingofcomplianceandtheresultsofthattesting,andnottoprovideanopiniononcompliance.Thatreportisanintegralpartofanauditperformedinaccordance withGovernmentAuditingStandardsandshouldbeconsideredinassessingtheresultsofouraudit. March8,2012 McLean,VA

342 98thAnnualReport|2011 INDEPENDENTAUDITORS’REPORTONINTERNALCONTROLOVERFINANCIALREPORTING TotheBoardofGovernorsoftheFederalReserveSystem: Washington,D.C. WehaveauditedtheinternalcontroloverfinancialreportingoftheBoardofGovernorsoftheFederalReserve System(the“Board”)asofDecember31,2011,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 withgenerallyacceptedaccountingprinciples.Internalcontroloverfinancialreportingincludesthosepoliciesand proceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthe transactionsanddispositionsoftheassetsoftheBoard;(2)providereasonableassurancethattransactionsare recordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccounting principles,andthatreceiptsandexpendituresoftheBoardarebeingmadeonlyinaccordancewithauthorizationsof managementandgovernorsoftheBoard;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionoftheBoard’sassetsthatcouldhaveamaterialeffectonthe financialstatements. Becauseoftheinherentlimitationsofinternalcontroloverfinancialreporting,includingthepossibilityofcollusion orimpropermanagementoverrideofcontrols,materialmisstatementsduetoerrororfraudmaynotbepreventedor detectedonatimelybasis.Also,projectionsofanyevaluationoftheeffectivenessoftheinternalcontroloverfinancial reportingtofutureperiodsaresubjecttotheriskthatthecontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate. Inouropinion,theBoardmaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasof December31,2011,basedonthecriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission. Wehavealsoaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(United States),generallyacceptedauditingstandardsasestablishedbytheAuditingStandardsBoard(UnitedStates),andthe standardsapplicabletofinancialauditscontainedinGovernmentAuditingStandardsissuedbytheComptrollerGeneraloftheUnitedStates,theaccompanyingbalancesheet,statementsofrevenuesandexpensesandchangesincumulativeresultsofoperations,andcashflowsasofandfortheyearendedDecember31,2011oftheBoardandour reportdatedMarch8,2012expressedanunqualifiedopiniononthosefinancialstatements. March8,2012 McLean,VA

FederalReserveSystemAudits 343 BoardofGovernorsoftheFederalReserveSystemBalanceSheets AsofDecember31, 2011 2010 Assets CurrentAssets: Cash $ 73,592,126 $ 55,142,632 Accountsreceivable–net 5,433,087 3,234,076 Prepaidexpensesandotherassets 3,338,770 2,657,914 Totalcurrentassets 82,363,983 61,034,622 NoncurrentAssets: Property,equipment,andsoftware–net 181,903,601 156,767,186 Otherassets 476,795 576,659 Totalnoncurrentassets 182,380,396 157,343,845 Total $264,744,379 $218,378,467 LiabilitiesandCumulativeResultsofOperations CurrentLiabilities: Accountspayableandaccruedliabilities $ 25,686,787 $ 15,403,521 Accruedpayrollandrelatedtaxes 18,616,534 21,894,036 Accruedannualleave 27,281,750 26,337,190 Capitalleasepayable 237,479 544,878 Unearnedrevenuesandotherliabilities 872,868 556,846 Totalcurrentliabilities 72,695,418 64,736,471 Long-TermLiabilities: Capitalleasepayable – 237,479 Accumulatedretirementbenefitobligation 27,485,712 21,979,219 Accumulatedpostretirementbenefitobligation 11,799,079 10,219,672 Accumulatedpostemploymentbenefitobligation 11,145,144 13,813,254 Otherlong-termliabilities 20,261,325 3,545,936 Totallong-termliabilities 70,691,260 49,795,560 Totalliabilities 143,386,678 114,532,031 CumulativeResultsofOperations: Fundbalance 138,451,243 118,473,958 Accumulatedothercomprehensiveincome(loss) (17,093,542) (14,627,522) Totalcumulativeresultsofoperations 121,357,701 103,846,436 Total $264,744,379 $218,378,467 Seenotestofinancialstatements.

344 98thAnnualReport|2011 BoardofGovernorsoftheFederalReserveSystemStatementsofRevenuesandExpensesandChangesinCumulativeResults ofOperations FortheyearsendedDecember31, 2011 2010 BoardOperatingRevenues: AssessmentsleviedonFederalReserveBanksforBoardoperatingexpensesandcapitalexpenditures $472,300,000 $422,200,000 Otherrevenues 6,555,903 8,693,489 Totaloperatingrevenues 478,855,903 430,893,489 BoardOperatingExpenses: Salaries 274,866,723 268,168,023 Retirementandinsurance 58,186,546 56,788,740 Contractualservicesandprofessionalfees 37,486,707 48,698,913 Depreciation,amortization,andnetgainsorlossesondisposals 19,496,451 15,865,704 Utilities 8,736,997 8,628,394 Travel 14,583,555 10,847,795 Software 9,399,273 8,057,580 Postageandsupplies 10,760,230 7,100,302 Repairsandmaintenance 4,774,395 3,384,994 Printingandbinding 2,345,881 2,240,489 Otherexpenses 18,241,860 16,316,499 Totaloperatingexpenses 458,878,618 446,097,433 Resultsofoperations 19,977,285 (15,203,944) CurrencyCosts: AssessmentsleviedortobeleviedonFederalReserveBanksforcurrencycosts 650,010,597 622,858,648 Expensesforcostsrelatedtocurrency 650,010,597 622,858,648 Currencyassessmentsover(under)expenses – – BureauofConsumerFinancialProtection(Bureau): AssessmentsleviedontheFederalReserveBanksfortheBureau 241,711,564 32,770,000 TransferstotheBureau 241,711,564 32,770,000 Bureauassessmentsover(under)transfers – – OfficeofFinancialResearch(Office): AssessmentsleviedontheFederalReserveBanksfortheOffice 40,000,000 9,515,944 TransferstotheOffice 40,000,000 9,515,944 Officeassessmentsover(under)transfers – – Totalresultsofoperations $ 19,977,285 $(15,203,944) Cumulativeresultsofoperations–Beginningofyear $103,846,436 $124,510,797 OtherComprehensiveIncome: Amortizationofpriorservice(credit)cost 507,786 518,195 Amortizationofnetactuarial(gain)loss 653,874 576,736 Netactuarialgain(loss)arisingduringtheyear (3,627,680) (6,555,348) Totalothercomprehensiveincome(loss) (2,466,020) (5,460,417) Cumulativeresultsofoperations–Endofyear $121,357,701 $103,846,436 Seenotestofinancialstatements.

FederalReserveSystemAudits 345 BoardofGovernorsoftheFederalReserveSystemStatementsofCashFlows FortheyearsendedDecember31, 2011 2010 CashFlowsfromOperatingActivities: Resultsofoperations $19,977,285 $(15,203,944) Adjustmentstoreconcileresultsofoperationstonetcashprovidedby(usedin)operating activities: Depreciationandamortization 19,015,100 15,877,105 Netloss(gain)ondisposalofpropertyandequipment 481,351 (11,401) Otheradditionalnon-cashadjustmentstoresultsofoperations 351,867 658,587 (Increase)decreaseinassets: Accountsreceivable,prepaidexpensesandotherassets (2,780,003) 730,143 Increase(decrease)inliabilities: Accountspayableandaccruedliabilities 5,340,020 (822,981) Accruedpayrollandrelatedtaxes (3,277,502) 10,953,052 Accruedannualleave 944,560 1,516,146 Unearnedrevenuesandotherliabilities 316,022 (2,425,783) Netretirementbenefitobligation 4,128,953 3,911,348 Netpostretirementbenefitobligation 490,927 501,415 Netpostemploymentbenefitobligation (2,668,110) (650,711) Otherlong-termliabilities 298,191 3,130,612 Netcashprovidedby(usedin)operatingactivities 42,618,661 18,163,588 CashFlowsfromInvestingActivities: Capitalexpenditures (23,585,868) (17,296,078) Netcashprovidedby(usedin)investingactivities (23,585,868) (17,296,078) CashFlowsfromFinancingActivities: Capitalleasepayments (583,299) (517,709) Netcashprovidedby(usedin)financingactivities (583,299) (517,709) NetIncrease(Decrease)inCash 18,449,494 349,801 Cashbalance–Beginningofyear 55,142,632 54,792,831 Cashbalance–Endofyear $73,592,126 $55,142,632 Seenotestofinancialstatements.

346 98thAnnualReport|2011 Board of Governors of the Federal Reserve System Notes to Financial Statements as of and for the Years ended December 31, 2011 and 2010 (1)Structure TheFederalReserveSystem(theSystem)wasestablishedbyCongressin1913and consistsof theBoardof Governors(theBoard),theFederalOpenMarketCommittee,thetwelveregionalFederalReserveBanks,theFederalAdvisoryCouncil, andtheprivatecommercialbanksthataremembersof theSystem.TheBoard, unliketheFederalReserveBanks,wasestablishedasafederalgovernmentagency andissupportedbyprimarilyWashington,D.C.basedstaff numberingapproximately2,300,asitcarriesoutitsresponsibilitiesinconjunctionwithothercomponentsof theFederalReserveSystem. TheBoardisrequiredbytheFederalReserveAct(theAct)toreportitsoperations totheSpeakerof theHouseof Representatives.TheActalsorequirestheBoard, eachyear,toorderafinancialauditof eachFederalReserveBankandtopublish eachweekastatementof thefinancialconditionof eachsuchFederalReserve Bankandaconsolidatedstatementforallof theFederalReserveBanks.Accordingly,theBoardbelievesthatthebestfinancialdisclosureconsistentwithlawis achievedbyissuingseparatefinancialstatementsfortheBoardandfortheFederal ReserveBanks.Therefore,theaccompanyingfinancialstatementsincludeonlythe resultsof operationsandactivitiesof theBoard.Combinedfinancialstatements fortheFederalReserveBanksareincludedintheBoard’sannualreporttothe Speakerof theHouseof Representatives. TheDodd-FrankWallStreetReformandConsumerFinancialProtectionActof 2010(Dodd-FrankAct)establishedtheBureauof ConsumerFinancialProtection (Bureau)asanindependentbureauwithintheSystemanddesignatedtheBoard’s Officeof InspectorGeneral(OIG)astheOIGfortheBureau.Asrequiredbythe Dodd-FrankAct,theBoardtransferredcertainresponsibilitiestotheBureauin July2011.TheDodd-FrankActalsocreatedtheFinancialStabilityOversight Council(FSOC)of whichtheChairmanof theBoardisamember,aswellasthe Officeof FinancialResearch(Office)withintheU.S.Departmentof theTreasury toprovidesupporttotheFSOCandthememberagencies.TheDodd-FrankAct requiresthattheBoardprovidefundingfortheFSOCandtheOfficeuntil July2012.Section1017of theDodd-FrankActprovidesthatthefinancialstatementsof theBureauarenottobeconsolidatedwiththoseof theBoardorthe System;theBoardhasalsodeterminedthatneithertheFSOCnortheOffice shouldbeconsolidatedintheBoard’sfinancialstatements.Accordingly,the Board'sfinancialstatementsdonotincludefinancialdataof theBureau,the FSOC,ortheOfficeotherthanthefundingthattheBoardisrequiredbythe Dodd-FrankActtoprovide. (2)OperationsandServices TheBoard’sresponsibilitiesrequirethoroughanalysisof domesticandinternationalfinancialandeconomicdevelopments.TheBoardcarriesoutthoseresponsibilitiesinconjunctionwiththeFederalReserveBanksandtheFederalOpenMarketCommittee.TheBoardalsosupervisesandregulatestheoperationsof theFederalReserveBanksandexercisesbroadresponsibilityinthenation’spayments system.PolicyregardingopenmarketoperationsisestablishedbytheFederal OpenMarketCommittee.However,theBoardhassoleauthorityoverchangesin reserverequirements,anditmustapproveanychangeinthediscountrateinitiated

FederalReserveSystemAudits 347 byaFederalReserveBank.TheBoardalsoplaysamajorroleinthesupervision andregulationof theU.S.bankingsystem.Ithassupervisoryresponsibilitiesfor state-charteredbanksthataremembersof theFederalReserveSystem,bankholdingcompanies,savingsandloanholdingcompanies,foreignactivitiesof member banks,U.S.activitiesof foreignbanks,andanysystemicallyimportantnonbank financialcompaniesthataredesignatedbytheFSOC.AlthoughtheDodd-Frank ActgavetheBureaugeneralrule-writingresponsibilityforFederalconsumer financiallaws,theBoardretainsrule-writingresponsibilityundertheCommunity ReinvestmentActandotherspecificstatutoryprovisions.TheBoardalsoenforces therequirementsof Federalconsumerfinanciallawsforstatememberbankswith assetsof $10billionorless.Inaddition,theBoardenforcescertainotherconsumer lawsatallstatememberbanks,regardlessof size. (3)SignificantAccountingPolicies Basisof Accounting—TheBoardpreparesitsfinancialstatementsinaccordance withaccountingprinciplesgenerallyacceptedintheUnitedStates(GAAP). Revenues—TheFederalReserveActauthorizestheBoardtolevyanassessment ontheFederalReserveBankstofunditsoperations.TheBoardleviestheassessmentbasedoneachFederalReserveBank’scapitalandsurplusbalancesasof December31of theprioryear. AssessmentstoFundtheBureauandtheOffice—TheBoardassessestheFederal ReserveBanksforthefundstransferredtotheBureauandtheOfficebasedon eachFederalReserveBank’scapitalandsurplusbalances.Theseassessmentsand transfersarereportedseparatelyfromtheBoard’soperatingactivitiesinthe Board’sStatementsof RevenuesandExpensesandChangesinCumulativeResults of Operations. AssessmentsforSupervisoryandRegulatoryResponsibilities—Section318(c)of theDodd-FrankActrequiresthat“theBoardshallcollectatotalamountof assessments,fees,orotherchargesfromthecompaniesdescribedinparagraph (2)thatisequaltothetotalexpensestheBoardestimatesarenecessaryorappropriatetocarryoutthesupervisoryandregulatoryresponsibilitiesof theBoard withrespecttosuchcompanies.”Thecompaniesdescribedinparagraph(2)are thosebankholdingcompaniesandsavingsandloanholdingcompanieswithtotal consolidatedassetsof $50billionormore,andanysystemicallyimportantnonbankfinancialcompaniesthataredesignatedbytheFSOC. Asof December31,2011,theBoardhasnotissuedrulemakingregardingthisnew responsibility,anddoesnotcurrentlyanticipatefinalizinganysuchrulemaking untillaterin2012.Assuch,sufficientinformationisnotavailabletodeterminea reasonableestimateof thefeesthatitmayeventuallycollectunderthissectionof theDodd-FrankAct.Therefore,theBoardhasnotaccruedreceivablesorrecognizedrevenuesinthe2011financialstatementsrelatedtothisnewresponsibility. CurrencyCosts—TheBoardissuesthenation’scurrency(intheformof Federal Reservenotes),andtheFederalReserveBanksdistributecurrencyandcoin throughdepositoryinstitutions.TheBoardincursexpensesandassessestheFederalReserveBanksfortheexpensesrelatedtoproducing,issuing,andretiringFederalReservenotesaswellasprovidingeducationalservices.TheassessmentisallocatedbasedoneachFederalReserveBank’sshareof thenumberof notescomprisingtheSystem’snetliabilityforFederalReservenotesonDecember31of the prioryear.Theseexpensesandassessmentsarereportedseparatelyfromthe

348 98thAnnualReport|2011 Board’soperatingactivitiesintheBoard’sStatementsof RevenuesandExpenses andChangesinCumulativeResultsof 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.Constructioninprocessincludecostsincurredfor short-termandlong-termprojectsthathavenotbeenplacedintoservice.The majorityof thebalancerepresentslong-termbuildingenhancementprojects. TheBoard’sinternallydevelopedsoftwareprojectsareeachrecordedatcostand capitalizedandamortizedovertheproject’susefullifeasrequiredbytheFinancial AccountingStandardsBoard(FASB)AccountingStandardsCodification(ASC) Subtopic350-40Intangibles-GoodwillandOther–InternalUseSoftware. ArtCollections—TheBoardhascollectionsof worksof art,historicaltreasures, andsimilarassets.Thesecollectionsaremaintainedandheldforpublicexhibition infurtheranceof publicservice.Proceedsfromanysalesof collectionsareusedto acquireotheritemsforcollections.AspermittedbyFASBASCTopic605Revenue Recognition,thecostof collectionspurchasedbytheBoardischargedtoexpense intheyearpurchasedanddonatedcollectionitemsarenotrecorded.Thevalueof theBoard’scollectionshasnotbeendetermined. DeferredRent—Theleasescontainscheduledrentincreasesoverthetermof the lease.AsrequiredbyFASBASCTopic840Leases,rentabatements,leaseincentives,andscheduledrentincreasesmustbeconsideredindeterminingtheannual rentexpensetoberecognized.Thedeferredrentrepresentsthedifferencebetween theactualleasepaymentsandtherentexpenserecognized. Leaseincentivesimpactdeferredrent,arereflectedasnon-cashtransactionsinthe CashFlowfromOperatingActivitiessectionwithintheCashFlowStatement,and arediscussedintheleasesfootnote.Theothernon-cashtransactionwithinthis sectionof theCashFlowStatementrelatestoadonatedassetdiscussedinthecurrencyfootnote. Estimates—Thepreparationof financialstatementsinconformitywithGAAP requiresmanagementtomakeestimatesandassumptionsthataffectthereported amountsof assetsandliabilitiesatthedateof thefinancialstatementsandthe reportedamountsof revenuesandexpensesduringthereportingperiod.Actual resultscoulddifferfromthoseestimates.

FederalReserveSystemAudits 349 (4)Property,Equipment,andSoftware Thefollowingisasummaryof thecomponentsof theBoard’sproperty,equipment,andsoftware,atcost,netof accumulateddepreciationandamortizationas of December31,2011and2010: AsofDecember31, 2011 2010 Land $ 18,640,314 $ 18,640,314 BuildingsandImprovements 195,869,546 163,868,033 Constructioninprocess 13,952,693 4,810,307 FurnitureandEquipment 66,604,104 68,037,574 SoftwareinUse 27,091,292 24,244,811 SoftwareinProcess 1,384,526 1,985,544 Vehicles 521,419 255,159 OtherIntangibleassets 496,675 496,675 Subtotal 324,560,569 282,338,417 Lessaccumulateddepreciationandamortization (142,656,968) (125,571,231) Property,equipment,andsoftware–net $181,903,601 $156,767,186 (5)Leases CapitalLeases—TheBoardenteredintocapitalleasesin2008and2009.Furnitureandequipmentincludes$2,086,000undercapitalleasesinboth2011and 2010.Accumulateddepreciationincludes$1,852,000and$1,319,000undercapital leasesasof 2011and2010,respectively. Thefutureminimumleasepaymentsrequiredunderthecapitalleasesandthepresentvalueof thenetminimumleasepaymentsasof December31,2011,areas follows: Amount Totalminimumleasepaymentsfor2012 $421,924 Lessamountrepresentingmaintenance (183,112) Netminimumleasepayments 238,812 Lessamountrepresentinginterest (1,333) Presentvalueofnetminimumleasepayments 237,479 Lesscurrentmaturitiesofcapitalleasepayments (237,479) Long-termcapitalleaseobligations $ – OperatingLeases—TheBoardhasenteredintoseveraloperatingleasestosecure office,trainingandwarehousespace.Minimumannualpaymentsundertheoperatingleaseshavinganinitialorremainingnon-cancelableleaseterminexcessof oneyearatDecember31,2011,areasfollows: YearsEndingDecember31, 2012 $ 12,459,159 2013 14,572,539 2014 14,950,511 2015 15,393,532 After2015 86,694,634 $144,070,375 Rentalexpensesundertheoperatingleaseswere$6,093,000and$6,882,000forthe yearsendedDecember31,2011and2010,respectively.

350 98thAnnualReport|2011 TheBoardleasesandsubleasesspace,primarilytoothergovernmentalagencies. Therevenuescollectedfortheseleasesfromthegovernmentalagencieswere $480,000and$1,937,000in2011and2010,respectively. DeferredRent—Otherlong-termliabilitiesincludedeferredrentof $19,733,000 and3,051,000fortheyearsendedDecember31,2011and2010,respectively.The 2011endingbalanceincludesnon-cashleaseincentivesof $16,417,000. (6)AccumulatedRetirementBenefits Substantiallyallof theBoard’semployeesparticipateintheRetirementPlanfor Employeesof theFederalReserveSystem(theSystemPlan).TheSystemPlanprovidesretirementbenefitstoemployeesof theBoard,theFederalReserveBanks, theOfficeof EmployeeBenefitsof theFederalReserveSystem(OEB),andcertain employeesof theBureau.UndertheDodd-FrankAct,newlyhiredemployeesof theBureauareeligibletoparticipateintheSystemPlanandtransfereesfromother governmentalorganizationscanelecttoparticipateintheSystemPlan.TheFederalReserveBankof NewYork(FRBNY),onbehalf of theSystem,recognizes thenetassetsandcostsassociatedwiththeSystemPlaninitsfinancialstatements. DuringtheyearendedDecember31,2011,certaincostsassociatedwiththe SystemPlanwerereimbursedbytheBureau.CostsassociatedwiththeSystem Planwerenotredistributedtoparticipatingemployersduringtheyearended December31,2010. Employeesof theBoardwhobecameemployedpriorto1984arecoveredbya contributorydefinedbenefitsprogramundertheSystemPlan.Employeesof the Boardwhobecameemployedafter1983arecoveredbyanon-contributory definedbenefitsprogramundertheSystemPlan.ContributionstotheSystem Planareactuariallydeterminedandfundedbyparticipatingemployers.In2011, theSystemmade$420millionincontributionstotheSystemPlan;thecontributionsmaybeadjusteduponcompletionof the2012actuarialvaluation.TheBoard wasnotassessedacontributionfor2011. EffectiveJanuary1,1996,BoardemployeescoveredundertheSystemPlanare alsocoveredunderaBenefitsEqualizationPlan(BEP).Benefitspaidunderthe BEParelimitedtothosebenefitsthatcannotbepaidfromtheSystemPlandueto limitationsimposedbySections401(a)(17),415(b)and415(e)of theInternalRevenueCodeof 1986.ActivityfortheBEPasof December31,2011and2010,is summarizedinthefollowingtables: 2011 2010 Changeinprojectedbenefitobligation: Benefitobligation–beginningofyear $11,933,435 $ 5,900,567 Servicecost 1,456,457 1,359,828 Interestcost 602,381 545,688 Planparticipants’contributions – – Actuarial(gain)loss 567,091 4,155,013 Grossbenefitspaid (35,438) (27,661) TransferstoCFPB (376,740) – Benefitobligation–endofyear $14,147,186 $11,933,435 Accumulatedbenefitobligation–endofyear $ 2,351,832 $ 1,686,998 (continuedonnextpage)

FederalReserveSystemAudits 351 Table—continued 2011 2010 Weighted-averageassumptionsusedtodeterminebenefitobligationasofDecember31: Discountrate 4.50% 5.50% Rateofcompensationincrease 5.00% 5.00% Changeinplanassets: Fairvalueofplanassets–beginningofyear $ – $ – Employercontributions 35,438 27,661 Planparticipants’contributions – – Grossbenefitspaid (35,438) (27,661) Fairvalueofplanassets–endofyear $ – $ – Fundedstatus: Reconciliationoffundedstatus–endofyear: Fairvalueofplanassets $ – $ – Benefitobligations 14,147,186 11,933,435 Fundedstatus (14,147,186) (11,933,435) Amountrecognized–endofyear $(14,147,186) $(11,933,435) Amountsrecognizedinthestatementsoffinancialpositionconsistof: Asset $ – $ – Liability (14,147,186) (11,933,435) Netamountrecognized $(14,147,186) $(11,933,435) Amountsrecognizedinaccumulatedothercomprehensiveincomeconsistof: Netactuarialloss(gain) $ 5,535,793 $ 5,575,910 Priorservicecost(credit) 699,952 701,833 Netamountrecognized $ 6,235,745 $ 6,277,743 Expectedcashflows: Expectedemployercontributions–2012 $ 67,738 Expectedbenefitpayments:* 2012 $ 67,738 2013 78,622 2014 88,824 2015 99,039 2016 114,703 2017–2021 776,755 * ExpectedbenefitpaymentstobemadefromSystemassets. 2011 2010 Componentsofnetperiodicbenefitcost: Servicecost $1,456,457 $1,359,828 Interestcost 602,381 545,688 Expectedreturnonplanassets – – Amortization: Actuarial(gain)loss 230,468 287,957 Priorservice(credit)cost 1,881 12,290 Netperiodicbenefitcost(credit) $2,291,187 $2,205,763 Weighted-averageassumptionsusedtodeterminenetperiodicbenefitcost: Discountrate 5.50% 6.00% Rateofcompensationincrease 5.00% 5.00% Otherchangesinplanassetsandbenefitobligationsrecognizedinothercomprehensiveincome: Currentyearactuarial(gain)loss $ 190,351 $4,155,013 Amortizationofpriorservicecredit(cost) (1,881) (12,290) Amortizationofactuarialgain(loss) (230,468) (287,957) Totalrecognizedinothercomprehensive(income)loss $ (41,998) $3,854,766 Totalrecognizedinnetperiodicbenefitcostandothercomprehensiveincome $2,249,189 $6,060,529

352 98thAnnualReport|2011 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive incomeintonetperiodicbenefitcost(credit)in2012areshownbelow: Netactuarial(gain)loss $424,241 Priorservice(credit)cost 78,985 Total $503,226 OnOctober30,2008,theBoardapprovedanon-qualifiedplanforOfficersof the Board.TheretirementbenefitscoveredunderthePensionEnhancementPlan (PEP)(formerlytheBoardOfficerPensionEnhancement)increasesthepension benefitcalculationfrom1.8%abovetheSocialSecurityintegrationlevelto2.0%. ActivityforthePEPasof December31,2011and2010,issummarizedinthefollowingtables: 2011 2010 Changeinprojectedbenefitobligation: Benefitobligation–beginningofyear $ 9,949,637 $7,120,820 Servicecost 489,236 409,007 Interestcost 589,888 493,780 Planparticipants’contributions – – Actuarial(gain)loss 2,401,971 1,935,668 Grossbenefitspaid (57,124) (9,638) TransferstoCFPB (123,399) – Benefitobligation–endofyear $13,250,209 $9,949,637 Accumulatedbenefitobligation–endofyear $10,000,174 $7,063,653 Weighted-averageassumptionsusedtodeterminebenefitobligationasofDecember31: Discountrate 4.50% 5.50% Rateofcompensationincrease 5.00% 5.00% Changeinplanassets: Fairvalueofplanassets–beginningofyear $ – $ – Employercontributions 57,124 9,638 Planparticipants’contributions – – Grossbenefitspaid (57,124) (9,638) Fairvalueofplanassets–endofyear $ – $ – Fundedstatus: Reconciliationoffundedstatus–endofyear: Fairvalueofplanassets $ – $ – Benefitobligations 13,250,209 9,949,637 Fundedstatus (13,250,209) (9,949,637) Amountrecognized–endofyear $(13,250,209) $(9,949,637) Amountsrecognizedinthestatementsoffinancialpositionconsistof: Asset $ – $ – Liability (13,250,209) (9,949,637) Netamountrecognized $(13,250,209) $(9,949,637) Amountsrecognizedinaccumulatedothercomprehensiveincomeconsistof: Netactuarialloss(gain) $ 5,416,792 $3,465,859 Priorservicecost(credit) 2,711,883 3,243,278 Netamountrecognized $ 8,128,675 $6,709,137

FederalReserveSystemAudits 353 Expectedcashflows: Expectedemployercontributions–2012 $ 97,485 Expectedbenefitpayments:* 2012 $ 97,485 2013 151,288 2014 213,417 2015 279,210 2016 344,635 2017–2021 2,877,198 * ExpectedbenefitpaymentstobemadefromSystemassets. 2011 2010 Componentsofnetperiodicbenefitcost: Servicecost $ 489,236 $ 409,007 Interestcost 589,888 493,780 Expectedreturnonplanassets – – Amortization: Actuarial(gain)loss 327,639 212,555 Priorservice(credit)cost 531,395 531,395 Netperiodicbenefitcost(credit) $1,938,158 $1,646,737 Weighted-averageassumptionsusedtodeterminenetperiodicbenefitcost: Discountrate 5.50% 6.00% Rateofcompensationincrease 5.00% 5.00% Otherchangesinplanassetsandbenefitobligationsrecognizedinothercomprehensiveincome: Currentyearactuarial(gain)loss $2,278,572 $1,935,668 Amortizationofpriorservicecredit(cost) (531,395) (531,395) Amortizationofactuarialgain(loss) (327,639) (212,555) Totalrecognizedinothercomprehensive(income)loss $1,419,538 $1,191,718 Totalrecognizedinnetperiodicbenefitcostandothercomprehensiveincome $3,357,696 $2,838,455 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive incomeintonetperiodicbenefitcost(credit)in2012areshownbelow: Netactuarial(gain)loss $ 486,710 Priorservice(credit)cost 531,395 Total $1,018,105 Thetotalaccumulatedretirementbenefitobligationincludesaliabilityfora supplementalretirementagreementandabenefitsequalizationplanunderthe FederalReserveSystem’sThriftPlan.Thetotalobligationasof December31, 2011and2010issummarizedinthefollowingtable: 2011 2010 Accumulatedretirementbenefitobligation: Benefitobligation–BEP $14,147,186 $11,933,435 Benefitobligation–PEP 13,250,209 9,949,637 Additionalbenefitobligations 88,317 96,147 Totalaccumulatedretirementbenefitobligation $27,485,712 $21,979,219 Arelativelysmallnumberof BoardemployeesparticipateintheCivilService RetirementSystem(CSRS)ortheFederalEmployees’RetirementSystem(FERS). ThesedefinedbenefitplansareadministeredbytheU.S.Officeof PersonnelManagement,whichdeterminestherequiredemployercontributionlevels.TheBoard’s contributionstotheseplanstotaled$523,000and$452,000in2011and2010,

354 98thAnnualReport|2011 respectively.TheBoardhasnoliabilityforfuturepaymentstoretireesunderthese programsandisnotaccountablefortheassetsof theplans. Employeesof theBoardmayalsoparticipateintheFederalReserveSystem’s ThriftPlanorRoth401(k).Boardcontributionstomembers’accountswere $17,699,000and$16,695,000in2011and2010,respectively. (7)AccumulatedPostretirementBenefits TheBoardprovidescertainlifeinsuranceprogramsforitsactiveemployeesand retirees.Activityasof December31,2011and2010,issummarizedinthefollowingtables: 2011 2010 Changeinprojectedbenefitobligation: Benefitobligation–beginningofyear $10,219,672 $ 9,304,324 Servicecost 186,268 188,357 Interestcost 529,161 532,592 Planparticipants’contributions – – Actuarial(gain)loss 1,158,757 464,667 Grossbenefitspaid (294,779) (270,268) Benefitobligation–endofyear $11,799,079 $10,219,672 Weighted-averageassumptionsusedtodeterminebenefitobligationasof December31–discountrate 4.50% 5.25% Changeinplanassets: Fairvalueofplanassets–beginningofyear $ – $ – Employercontributions 294,779 270,268 Grossbenefitspaid (294,779) (270,268) Fairvalueofplanassets–endofyear $ – $ – Fundedstatus: Reconciliationoffundedstatus–endofyear: Fairvalueofplanassets $ – $ – Benefitobligations 11,799,079 10,219,672 Fundedstatus (11,799,079) (10,219,672) Amountrecognized–endofyear $(11,799,079) $(10,219,672) Amountsrecognizedinthestatementsoffinancialpositionconsistof: Asset $ – $ – Liability (11,799,079) (10,219,672) Netamountrecognized $(11,799,079) $(10,219,672) Amountsrecognizedinaccumulatedothercomprehensiveincomeconsistof: Netactuarialloss(gain) $ 2,980,166 $ 1,917,176 Priorservicecost(credit) (251,044) (276,534) Netamountrecognized $ 2,729,122 $ 1,640,642

FederalReserveSystemAudits 355 Expectedcashflows: Expectedemployercontributions–2012 $ 349,523 Expectedbenefitpayments:* 2012 $ 349,523 2013 375,715 2014 404,358 2015 431,631 2016 462,469 2017–2021 2,714,234 * ExpectedbenefitpaymentstobemadefromSystemassets. 2011 2010 Componentsofnetperiodicbenefitcost: Servicecost $ 186,268 $ 188,357 Interestcost 529,161 532,592 Expectedreturnonplanassets – – Amortization: Actuarial(gain)loss 95,767 76,224 Priorservice(credit)cost (25,490) (25,490) Netperiodicbenefitcost(credit) $ 785,706 $ 771,683 Weighted-averageassumptionsusedtodeterminenetperiodicbenefitcost– discountrate 5.25% 5.75% Otherchangesinplanassetsandbenefitobligationsrecognizedinothercomprehensiveincome: Currentyearactuarial(gain)loss $1,158,757 $ 464,667 Amortizationofpriorservicecredit(cost) 25,490 25,490 Amortizationofactuarialgain(loss) (95,767) $ (76,224) Totalrecognizedinothercomprehensive(income)loss $1,088,480 $ 413,933 Totalrecognizedinnetperiodicbenefitcostandothercomprehensiveincome $1,874,186 $1,185,616 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive incomeintonetperiodicbenefitcost(credit)in2012areshownbelow: Netactuarial(gain)loss $221,302 Priorservice(credit)cost (25,490) Total $195,812 (8)AccumulatedPostemploymentBenefits TheBoardprovidescertainpostemploymentbenefitstoeligibleformerorinactive employeesandtheirdependentsduringtheperiodsubsequenttoemploymentbut priortoretirement.Postemploymentcostswereactuariallydeterminedusinga December31measurementdateanddiscountratesof 2.25%and3.50%asof December31,2011and2010,respectively.Thenetperiodicpostemploymentbenefitcost(credit)recognizedbytheBoardasof December31,2011and2010,were ($1,606,000)and$701,000,respectively.

356 98thAnnualReport|2011 (9)AccumulatedOtherComprehensiveIncome(Loss) Areconciliationof beginningandendingbalancesof accumulatedothercomprehensiveincome(loss)fortheyearsendedDecember31,2011and2010,isas follows: AmountRelatedto TotalAccumulated AmountRelatedto Postretirement Other DefinedBenefit BenefitsOther Comprehensive RetirementPlans ThanPensions Income(Loss) Balance–January1,2010 $ (7,940,396) $(1,226,709) $ (9,167,105) Changeinfundedstatusofbenefitplans: Amortizationofpriorservice(credit)costs 543,685 (25,490) 518,195 Amortizationofnetactuarial(gain)loss 500,512 76,224 576,736 Netactuarialgain(loss)arisingduringtheyear (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) Changeinfundedstatusofbenefitplans: Amortizationofpriorservice(credit)costs 533,276 (25,490) 507,786 Amortizationofnetactuarial(gain)loss 558,107 95,767 653,874 Netactuarialgain(loss)arisingduringtheyear (2,468,923) (1,158,757) (3,627,680) Changeinfundedstatusofbenefitplans–other comprehensiveincome(loss) (1,377,540) (1,088,480) (2,466,020) Balance–December31,2011 $(14,364,420) $(2,729,122) $(17,093,542) Additionaldetailregardingtheclassificationof accumulatedothercomprehensive income(loss)isincludedinNotes6and7. (10)FederalReserveBanks TheBoardperformscertainfunctionsfortheFederalReserveBanksinconjunctionwithitsresponsibilitiesfortheSystem,andtheFederalReserveBanksprovide certainadministrativefunctionsfortheBoard.TheBoardassessestheFederal ReserveBanksforitsoperatingexpenses,toincludeexpensesrelatedtoitscurrencyresponsibilities,aswellasforthefundingtheBoardisrequiredtoprovideto

FederalReserveSystemAudits 357 theBureauandtheOffice.ActivityrelatedtotheBoardandFederalReserve Banksasof December31,2011and2010,issummarizedinthefollowingtable: 2011 2010 AssessmentsleviedortobeleviedonFederalReserveBanksfor: Currencyexpenses $ 650,010,597 $ 622,858,648 OperatingexpensesoftheBoard 472,300,000 422,200,000 OperatingexpensesoftheBureau 241,711,564 32,770,000 OperatingexpensesoftheOffice 40,000,000 9,515,944 TotalAssessmentsleviedortobeleviedonFederalReserveBanks $1,404,022,161 $1,087,344,592 BoardexpenseschargedtotheFederalReserveBanksfordataprocessing $ 406,421 $ 483,512 FederalReserveBankexpenseschargedtotheBoard: Dataprocessingandcommunication $ 788,910 $ 919,889 Contingencysite 1,211,362 1,254,331 TotalFederalReserveBankexpenseschargedtotheBoard $ 2,000,272 $ 2,174,220 NettransactionswithFederalReserveBanks $1,402,428,310 $1,085,653,884 AccountsreceivableduefromtheFederalReserveBanks $ 2,501,565 $ 856,685 AccountspayableduetotheFederalReserveBanks $ 16,358 $ – TheBoardalsocontractedforauditservicesonbehalf of entitiesthatareincluded inthecombinedfinancialstatementsof theFederalReserveBanks.Theentities reimbursetheBoardforthecostof theauditservices.TheBoardaccruedliabilities of $293,000and$322,000inauditservicesandrecordedreceivablesof $500,000 and$322,000fromtheentitiesasof December31,2011and2010,respectively. (11)FederalFinancialInstitutionsExaminationCouncil TheBoardisoneof thefivememberagenciesof theFederalFinancialInstitutions ExaminationCouncil(theCouncil),andcurrentlyperformscertainmanagement functionsfortheCouncil.ThefiveagenciesthatarerepresentedontheCouncil aretheBoard,FederalDepositInsuranceCorporation,NationalCreditUnion Administration,Officeof theComptrollerof theCurrency,andtheBureauof ConsumerFinancialProtection.

358 98thAnnualReport|2011 TheBoard’sfinancialstatementsdonotincludefinancialdatafortheCouncil. ActivityrelatedtotheBoardandCouncil,asof December31,2011and2010,is summarizedinthefollowingtable: 2011 2010 CouncilexpenseschargedtotheBoard: Assessmentsforoperatingexpenses $ 137,421 $ 126,469 Assessmentsforexaminereducation 810,459 672,153 CentralDataRepository 1,113,255 1,202,704 UniformBankPerformanceReport 117,215 154,877 TotalCouncilexpenseschargedtotheBoard $2,178,350 $2,156,203 BoardexpenseschargedtotheCouncil: Dataprocessingrelatedservices $4,164,479 $4,897,107 Administrativeservices 281,000 245,000 TotalBoardexpenseschargedtotheCouncil $4,445,479 $5,142,107 AccountsreceivableduefromtheCouncil $ 494,234 $ 579,792 AccountspayableduetotheCouncil $ 132,539 290,047 (12)TheOfficeofEmployeeBenefitsoftheFederalReserveSystem TheOfficeof EmployeeBenefitsof theFederalReserveSystem(OEB)administerscertainSystembenefitprogramsonbehalf of theBoardandtheFederal ReserveBanks,andcostsassociatedwiththeOEB’sactivitiesareassessedtothe BoardandFederalReserveBanks.TheBoardwasassessed$2,596,000and $2,371,000asof December31,2011and2010,respectively. (13)TheBureauofConsumerFinancialProtection Sec.1017of theDodd-FrankActrequirestheBoardtofundtheBureaufromthe combinedearningsof theFederalReserveSystem,theamountof whichisdeterminedbytheDirectorof theBureautobereasonablynecessarytocarryoutthe authoritiesof theBureauunderFederalconsumerfinanciallaw,takinginto accountsuchothersumsmadeavailabletotheBureaufromtheprecedingyear(or quarterof suchyear). BeginningJuly2011,theDodd-FrankActlimitstheamounttobetransferredeach fiscalyeartoafixedpercentageof theSystem’stotaloperatingexpenses.The BoardreceivedandprocessedfundingrequestsfortheBureautotaling $241,711,564and$32,770,000duringcalendaryears2011and2010,respectively. Theserequestsdonotincludefundingrelatedtotheoperationsof theOIG.The BoardandtheBureauareintheprocessof evaluatingtheimpactof theOIG’s dualresponsibilitiesonfuturefundingrequests. Aspartof thetransferof responsibilitiesfromtheBoardtotheBureau,certain Boardstaff weretransferredtotheBureauduring2011.TheBoardwillcontinue toadministercertainnon-retirementbenefitsforalltransferredBoardemployees throughJuly20,2012. (14)TheOfficeofFinancialResearch Sec.155(c)of theDodd-FrankActrequirestheBoardtoprovideanamountsufficienttocovertheexpensesof theOfficeforthe2-yearperiodfollowingthedateof theenactment(July21,2010).Theexpensesof theFSOCareincludedinthe expensesof theOffice.TheBoardreceivedandprocessedfundingrequestsforthe Officetotaling$40,000,000and$9,515,944during2011and2010,respectively.

FederalReserveSystemAudits 359 (15)Currency TheBureauof EngravingandPrinting(BEP)isthesolesupplierforcurrency printingandalsoprovidescurrencyretirementservices.During2011,theBoard assumedgreaterresponsibilityforeducationandqualityassuranceservicesassociatedwithcurrency.ThecurrencycostsincurredbytheBoardasof December31, 2011and2010,arereflectedinthefollowingtable: 2011 2010 ExpensesrelatedtoBEPservices: Printing $623,214,300 $598,238,821 Retirement 3,475,244 3,513,538 SubtotalrelatedtoBEPservices $626,689,544 $601,752,359 Othercurrencyexpenses: Shipping $ 15,728,046 $ 16,900,584 Researchanddevelopment 4,486,525 4,205,705 Qualityassuranceservices 2,992,053 – Educationservices 114,429 – Subtotalothercurrencyexpenses $ 23,321,053 $ 21,106,289 Totalcurrencyexpenses $650,010,597 $622,858,648 InOctober2011,theBoardreceivedwebsoftwarefromtheBEPfortheeducation servicestheBoardismanagingaspartof itscurrencyresponsibilities.Thefair marketvalueof thedonatedassetasof December31,2011was$50,000. (16)CommitmentsandContingencies Commitments—TheBoardhasenteredintoanagreementwiththeFederal DepositInsuranceCorporationandtheOfficeof theComptrollerof theCurrency,throughtheCouncil,tofundaportionof theenhancementsandmaintenancefeesforacentraldatarepositoryprojectthatrequiresmaintenancethrough 2013.TheestimatedBoardexpensetosupportthiseffortis$2millionforthe remainingoptionperiod. LitigationandContingentLiabilities—TheBoardissubjecttocontingentliabilitieswhicharisefromlitigationcasesandvariousbusinesscontracts.Thesecontingentliabilitiesariseinthenormalcourseof operationsandtheirultimatedispositionisunknown.Basedoninformationcurrentlyavailabletomanagement,itis management’sopinionthattheexpectedoutcomeof thesematters,intheaggregate,willnothaveamateriallyadverseeffectonthefinancialstatements. (17)SubsequentEvents Therewerenosubsequenteventsthatrequireadjustmentstoordisclosuresinthe financialstatementsasof December31,2011.Subsequenteventswereevaluated throughMarch8,2012,whichisthedatethefinancialstatementswereavailableto beissued.

360 98thAnnualReport|2011 INDEPENDENTAUDITORS’REPORTONINTERNALCONTROLOVERFINANCIALREPORTINGAND ONCOMPLIANCEANDOTHERMATTERSBASEDONANAUDITOFFINANCIALSTATEMENTS PERFORMEDINACCORDANCEWITHGOVERNMENTAUDITINGSTANDARDS TotheBoardofGovernorsoftheFederalReserveSystem: Washington,D.C. WehaveauditedthefinancialstatementsoftheBoardofGovernorsoftheFederalReserveSystem(the“Board”)as ofandfortheyearendedDecember31,2011,andhaveissuedourreportthereondatedMarch8,2012.Weconducted ourauditinaccordancegenerallyacceptedauditingstandardsasestablishedbytheAuditingStandardsBoard (UnitedStates),auditingstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),andthe standardsapplicabletofinancialauditscontainedinGovernmentAuditingStandards,issuedbytheComptrollerGeneraloftheUnitedStates. InternalControloverFinancialReporting InaccordancewithstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates)andGovernment AuditingStandards,wehavealsoissuedourreportdatedMarch8,2012,onourtestsoftheBoard’sinternalcontrol overfinancialreporting.Thepurposeofthatreportistodescribethescopeandtheresultsofthattesting.Thatreport isanintegralpartofanauditperformedinaccordancewithstandardsofthePublicCompanyAccountingOversight Board(UnitedStates)andGovernmentAuditingStandardsandshouldbeconsideredinassessingtheresultsofour audit. ComplianceandOtherMatters AspartofobtainingreasonableassuranceaboutwhethertheBoard’sfinancialstatementsarefreeofmaterialmisstatement,weperformedtestsofitscompliancewithcertainprovisionsoflaws,regulations,contracts,andgrant agreements,noncompliancewithwhichcouldhaveadirectandmaterialeffectonthedeterminationoffinancialstatementamounts.However,providinganopiniononcompliancewiththoseprovisionswasnotanobjectiveofouraudit, andaccordingly,wedonotexpresssuchanopinion.Theresultsofourtestsdisclosednoinstancesofnoncompliance orothermattersthatarerequiredtobereportedunderGovernmentAuditingStandards. March8,2012 McLean,VA

FederalReserveSystemAudits 361 Federal Reserve Banks Combined Financial Statements Thecombinedfinancialstatementof theFederalReserveBankswereauditedby Deloitte&ToucheLLP,independentauditors,fortheyearsendedDecember31, 2011and2010. INDEPENDENTAUDITOR’SREPORT TotheBoardofGovernorsoftheFederalReserveSystemandtheBoardsofDirectorsoftheFederalReserveBanks: WehaveauditedtheaccompanyingCombinedStatementsofConditionoftheFederalReserveBanks(the“Reserve Banks”)asofDecember31,2011and2010,andtherelatedCombinedStatementsofIncomeandComprehensive 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,theseCombinedFinancialStatementswereprepared inconformitywithaccountingprinciplesestablishedbytheBoardofGovernorsoftheFederalReserveSystem,asset forthintheFinancialAccountingManualforFederalReserveBanks,whichisacomprehensivebasisofaccounting otherthanaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.TheeffectsonsuchCombined FinancialStatementsofthedifferencesbetweentheaccountingprinciplesestablishedbytheBoardofGovernorsof theFederalReserveSystemandaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericaarealso describedinNote4. Inouropinion,suchCombinedFinancialStatementspresentfairly,inallmaterialrespects,thecombinedfinancial positionoftheReserveBanksasofDecember31,2011and2010,andthecombinedresultsoftheiroperationsfor theyearsthenended,onthebasisofaccountingdescribedinNote4. March20,2012 Washington,DC

362 98thAnnualReport|2011 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 ASC AccountingStandardsCodification ASU AccountingStandardsUpdate BEP BenefitEqualizationRetirementPlan Bureau Bureauof ConsumerFinancialProtection CDO Collateralizeddebtobligation CDS Creditdefaultswaps CIP CommitteeonInvestmentPerformance(relatedtoSystemRetirementPlan) CMBS Commercialmortgage-backedsecurities CPFF CommercialPaperFundingFacility FAM FinancialAccountingManualforFederalReserveBanks FASB FinancialAccountingStandardsBoard FannieMae FederalNationalMortgageAssociation FreddieMac FederalHomeLoanMortgageCorporation FOMC FederalOpenMarketCommittee FRBA FederalReserveBankof Atlanta FRBC FederalReserveBankof Cleveland FRBNY FederalReserveBankof NewYork FRBSF FederalReserveBankof SanFrancisco GAAP AccountingprinciplesgenerallyacceptedintheUnitedStatesof America GSE Government-sponsoredenterprise IMF InternationalMonetaryFund IRS Interestrateswaps JPMC JPMorganChase&Co. Libor Londoninterbankofferedrate LLC Limitedliabilitycompany MBS Mortgage-backedsecurities ML MaidenLaneLLC MLII MaidenLaneIILLC MLIII MaidenLaneIIILLC

FederalReserveSystemAudits 363 MTM Mark-to-market OEB Officeof EmployeeBenefitsof theFederalReserveSystem OFR Officeof FinancialResearch PDCF PrimaryDealerCreditFacility RMBS Residentialmortgage-backedsecurities SBA SmallBusinessAdministration SDR Specialdrawingrights SERP SupplementalRetirementPlanforSelectOfficersof theFederalReserveBanks SOMA SystemOpenMarketAccount STRIP SeparateTradingof RegisteredInterestandPrincipalof Securities TAF TermAuctionFacility TALF TermAsset-BackedSecuritiesLoanFacility TARP TroubledAssetRelief Program TBA Tobeannounced TCE TransitionalCreditExtension TDF TermDepositFacility TRS Totalreturnswapagreement TOP TermSecuritiesLendingFacilityOptionsProgram TSLF TermSecuritiesLendingFacility VIE Variableinterestentity

364 98thAnnualReport|2011 FederalReserveBanksCombinedStatementsofCondition asofDecember31,2011andDecember31,2010 (inmillions) 2011 2010 Assets Goldcertificates $ 11,037 $ 11,037 Specialdrawingrightscertificates 5,200 5,200 Coin 2,306 2,180 Loans: Depositoryinstitutions 196 221 TermAsset-BackedSecuritiesLoanFacility(measuredatfairvalue) 9,059 24,853 AmericanInternationalGroup,Inc.,net – 20,603 SystemOpenMarketAccount: Treasurysecurities,net 1,750,277 1,066,952 Government-sponsoredenterprisedebtsecurities,net 107,828 152,972 Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities,net 848,258 1,004,695 Foreigncurrencydenominatedassets,net 25,950 26,049 Centralbankliquidityswaps 99,823 75 Investmentsheldbyconsolidatedvariableinterestentities(ofwhich$35,593and$68,469ismeasuredat fairvalueasofDecember31,2011and2010,respectively) 35,693 68,666 Preferredinterests – 26,385 Accruedinterestreceivable 19,710 14,231 Bankpremisesandequipment,net 2,549 2,613 Itemsinprocessofcollection 273 374 Otherassets 711 738 Totalassets $2,918,870 $2,427,844 LiabilitiesandCapital FederalReservenotesoutstanding,net $1,034,052 $ 941,561 SystemOpenMarketAccount: Securitiessoldunderagreementstorepurchase 99,900 59,703 Otherliabilities 1,368 – Consolidatedvariableinterestentities: Beneficialinterestinconsolidatedvariableinterestentities(measuredatfairvalue) 9,845 10,051 Otherliabilities(ofwhich$106and$203ismeasuredatfairvalueasofDecember31,2011and2010, respectively) 690 921 Deposits: Depositoryinstitutions 1,562,253 968,052 Treasury,generalaccount 85,737 140,773 Treasury,supplementaryfinancingaccount – 199,964 Otherdeposits 65,034 16,967 FundsfromAmericanInternationalGroup,Inc.assetdispositions,heldasagent – 26,896 Interestpayabletodepositoryinstitutions 178 113 Accruedbenefitcosts 3,952 2,597 Deferredcredititems 904 1,794 AccruedinterestonFederalReservenotes 900 5,124 Otherliabilities 259 280 Totalliabilities 2,865,072 2,374,796 Capitalpaid-in 26,899 26,524 Surplus(includingaccumulatedothercomprehensivelossof$4,792and$3,630atDecember31,2011 and2010,respectively) 26,899 26,524 Totalcapital 53,798 53,048 Totalliabilitiesandcapital $2,918,870 $2,427,844 Theaccompanyingnotesareanintegralpartof thesecombinedfinancialstatements.

FederalReserveSystemAudits 365 FederalReserveBanksCombinedStatementsofIncomeandComprehensiveIncome fortheyearsendedDecember31,2011andDecember31,2010 (inmillions) 2011 2010 InterestIncome Loans: Depositoryinstitutions $ – $ 50 TermAsset-BackedSecuritiesLoanFacility 265 750 AmericanInternationalGroup,Inc.,net 409 2,728 SystemOpenMarketAccount: Treasurysecurities,net 42,257 26,373 Government-sponsoredenterprisedebtsecurities,net 3,053 3,510 Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities,net 38,281 44,839 Foreigncurrencydenominatedassets,net 249 223 Centralbankliquidityswaps 34 12 Investmentsheldbyconsolidatedvariableinterestentities 3,429 4,440 Totalinterestincome 87,977 82,925 InterestExpense SystemOpenMarketAccount: Securitiessoldunderagreementstorepurchase 44 94 Beneficialinterestinconsolidatedvariableinterestentities 285 277 Deposits: Depositoryinstitutions 3,765 2,680 TermDepositFacility 6 4 Totalinterestexpense 4,100 3,055 Netinterestincome 83,877 79,870 Non-InterestIncome TermAsset-BackedSecuritiesLoanFacility,unrealizedlosses (84) (436) SystemOpenMarketAccount: Treasurysecuritiesgains,net 2,258 – Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecuritiesgains,net 10 782 Foreigncurrencygains,net 152 554 Consolidatedvariableinterestentities: Investmentsheldbyconsolidatedvariableinterestentities(losses)gains,net (3,920) 8,180 Beneficialinterestinconsolidatedvariableinterestentitiesgains(losses),net 491 (4,679) Dividendsonpreferredinterests 47 1,279 Incomefromservices 477 567 Reimbursableservicestogovernmentagencies 485 457 Other 134 187 Totalnon-interestincome 50 6,891 OperatingExpenses Salariesandbenefits 2,811 2,722 Occupancy 312 297 Equipment 188 180 Assessments: BoardofGovernorsoperatingexpensesandcurrencycosts 1,121 1,045 BureauofConsumerFinancialProtection 242 33 OfficeofFinancialResearch 40 10 Professionalfeesrelatedtoconsolidatedvariableinterestentities 71 104 Other 604 681 Totaloperatingexpenses 5,389 5,072 Netincomepriortodistribution 78,538 81,689 Changeinpriorservicecostsrelatedtobenefitplans 46 110 Changeinactuariallossesrelatedbenefitplans (1,208) (64) Comprehensiveincomepriortodistribution $77,376 $81,735 Distributionofcomprehensiveincome: Dividendspaidtomemberbanks $ 1,577 $ 1,583 Transferredtosurplusandchangeinaccumulatedothercomprehensiveloss 375 884 PaymentstoTreasuryasinterestonFederalReservenotes 75,424 79,268 Totaldistribution $77,376 $81,735 Theaccompanyingnotesareanintegralpartof thesecombinedfinancialstatements.

366 98thAnnualReport|2011 FederalReserveBanksCombinedStatementsofChangesinCapital fortheyearsendedDecember31,2011andDecember31,2010 (inmillions,exceptsharedata) Surplus Capital Accumulated Total paid-in Netincome other Total capital retained comprehensive surplus loss BalanceatJanuary1,2010(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 Netchangeincapitalstockissued(7,503,485shares) 375 – – – 375 Transferredtosurplusandchangeinaccumulatedother comprehensiveloss – 1,537 (1,162) 375 375 BalanceatDecember31,2011(537,984,621shares) $26,899 $31,691 $(4,792) $26,899 $53,798 Theaccompanyingnotesareanintegralpartof thesecombinedfinancialstatements.

FederalReserveSystemAudits 367 (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 loanstoparticipantsinprogramsorfacilitieswithbroad-basedeligibilityin unusualandexigentcircumstances;servingconsumersandcommunitiesbyprovidingeducationalmaterialsandinformationregardingfinancialconsumerprotection rightsandlawsandinformationoncommunitydevelopmentprogramsandactivities;andsupervisingbankholdingcompanies,statememberbanks,savingsand loanholdingcompanies,andU.S.officesof foreignbankingorganizationspursuanttoauthoritydelegatedbytheBoardof Governors.Certainservicesareprovidedtoforeignandinternationalmonetaryauthorities,primarilybytheFRBNY. TheDodd-FrankWallStreetReformandConsumerProtectionActof 2010 (Dodd-FrankAct),whichwassignedintolawandbecameeffectiveonJuly21, 2010,changedthescopeof someservicesperformedbytheReserveBanks. Amongotherthings,theDodd-FrankActestablishedaBureauof Consumer FinancialProtection(Bureau)asanindependentbureauwithintheSystemthat hassupervisoryauthorityoversomeinstitutionspreviouslysupervisedbythe ReserveBanksunderdelegatedauthorityfromtheBoardof Governorsinconnec-

368 98thAnnualReport|2011 tionwiththoseinstitutions’compliancewithconsumerprotectionstatutes;limited theReserveBanks’authoritytoprovideloansinunusualandexigentcircumstancestolendingprogramsorfacilitieswithbroad-basedeligibilityortodesignatedfinancialmarketutilities;andvestedtheBoardof Governorswithallsupervisoryandrule-writingauthorityforsavingsandloanholdingcompanies. TheFOMC,inconductingmonetarypolicy,establishespolicyregardingdomestic openmarketoperations,overseestheseoperations,andissuesauthorizationsand directivestotheFRBNYtoexecutetransactions.TheFOMCauthorizesand directstheFRBNYtoconductoperationsindomesticmarkets,includingthe directpurchaseandsaleof Treasurysecurities,government-sponsoredenterprise (GSE)debtsecurities,federalagencyandGSEmortgage-backedsecurities(MBS), thepurchaseof thesesecuritiesunderagreementstoresell,andthesaleof these securitiesunderagreementstorepurchase.TheFRBNYholdstheresultingsecuritiesandagreementsinaportfolioknownastheSystemOpenMarketAccount (SOMA).TheFRBNYisauthorizedtolendtheTreasurysecuritiesandfederal agencyandGSEdebtsecuritiesthatareheldintheSOMA. Inadditiontoauthorizinganddirectingoperationsinthedomesticsecuritiesmarket,theFOMCauthorizestheFRBNYtoconductoperationsinforeignmarkets inordertocounterdisorderlyconditionsinexchangemarketsortomeetother needsspecifiedbytheFOMCtocarryouttheSystem’scentralbankresponsibilities.Specifically,theFOMCauthorizesanddirectstheFRBNYtoholdbalances of,andtoexecutespotandforwardforeignexchangeandsecuritiescontractsfor, 14foreigncurrenciesandtoinvestsuchforeigncurrencyholdings,whilemaintainingadequateliquidity.TheFRBNYisauthorizedanddirectedbytheFOMCto maintainreciprocalcurrencyarrangementswiththeBankof Canadaandthe Bankof Mexicointhemaximumamountsof $2billionand$3billion,respectively,andtowarehouseforeigncurrenciesfortheTreasuryandtheExchangeStabilizationFund. AlthoughtheReserveBanksareseparatelegalentities,theycollaborateonthe deliveryof certainservicestoachievegreaterefficiencyandeffectiveness.Thiscollaborationtakestheformof centralizedoperationsandproductorfunctionoffices thathaveresponsibilityforthedeliveryof certainservicesonbehalf of theReserve Banks.Variousoperationalandmanagementmodelsareusedandaresupported byserviceagreementsbetweentheReserveBanks.Insomecases,costsincurredby aReserveBankforservicesprovidedtootherReserveBanksarenotshared;in othercases,theReserveBanksarereimbursedforcostsincurredinprovidingservicestootherReserveBanks. (3)FinancialStabilityActivities TheReserveBankshaveimplementedthefollowingprogramsthatsupportthe liquidityof financialinstitutionsandfosterimprovedconditionsinfinancial markets. Large-ScaleAssetPurchaseProgramsandReinvestmentofPrincipal Payments OnMarch18,2009,theFOMCauthorizedanddirectedtheFRBNYtopurchase $300billionof longer-termTreasurysecuritiestohelpimproveconditionsinprivatecreditmarkets.TheFRBNYbeganthepurchasesof theseTreasurysecurities inMarch2009andcompletedtheminOctober2009.OnAugust10,2010,the FOMCannouncedthattheFederalReservewouldmaintainthelevelof domestic securitiesholdingsintheSOMAportfoliobyreinvestingprincipalpaymentsfrom

FederalReserveSystemAudits 369 GSEdebtsecuritiesandfederalagencyandGSEMBSinlonger-termTreasury securities.OnNovember3,2010,theFOMCannounceditsintentiontoexpand theSOMAportfolioholdingsof longer-termTreasurysecuritiesbyanadditional $600billionandcompletedthesepurchasesinJune2011.OnJune22,2011,the FOMCannouncedthattheFederalReservewouldmaintainitsexistingpolicyof reinvestingprincipalpaymentsfromalldomesticsecuritiesinTreasurysecurities. OnSeptember21,2011,theFOMCannouncedthattheFederalReserveintendsto purchase,bytheendof June2012,$400billionparvalueof Treasurysecurities withremainingmaturitiesof 6yearsto30yearsandtosellanequalamountof Treasurysecuritieswithremainingmaturitiesof 3yearsorless,of which$133billionhasbeenpurchasedand$134billionsoldasof December31,2011.Inaddition,theFOMCannouncedthatitwillmaintainitsexistingpolicyof rollingover maturingTreasurysecuritiesatauctionand,ratherthanreinvestingprincipalpaymentsfromGSEdebtsecuritiesandfederalagencyandGSEMBSinTreasury securities,suchpaymentswillbereinvestedinfederalagencyandGSEMBS. TheFOMCauthorizedanddirectedtheFRBNYtopurchaseGSEdebtsecurities andfederalagencyandGSEMBS,withagoaltoprovidesupporttomortgageand housingmarketsandtofosterimprovedconditionsinfinancialmarketsmoregenerally.TheFRBNYwasauthorizedtopurchaseupto$175billioninfixed-rate, non-callableGSEdebtsecuritiesand$1.25trillioninfixed-ratefederalagencyand GSEMBS.Purchasesof GSEdebtsecuritiesbeganinNovember2008,andpurchasesof federalagencyandGSEMBSbeganinJanuary2009.TheFRBNY completedthepurchasesof GSEdebtsecuritiesandfederalagencyandGSEMBS inMarch2010.Thesettlementof allfederalagencyandGSEMBStransactions wascompletedbyAugust2010.Asdiscussedabove,onSeptember21,2011,the FOMCannouncedthattheFederalReservewillbegintoreinvestprincipalpaymentsfromitsholdingsof GSEdebtsecuritiesandfederalagencyandGSEMBS infederalagencyandGSEMBS. CentralBankLiquiditySwaps TheFOMCauthorizedanddirectedtheFRBNYtoestablishcentralbankliquidityswaparrangements,whichcouldbestructuredaseitherU.S.dollarliquidityor foreigncurrencyliquidityswaparrangements. InMay2010,U.S.dollarliquidityswaparrangementswerere-authorizedwiththe Bankof Canada,theBankof England,theEuropeanCentralBank,theBankof Japan,andtheSwissNationalBankthroughJanuary2011.Subsequently,these arrangementswereextendedthroughFebruary1,2013.Thereisnospecifiedlimit totheamountthatmaybedrawnbytheBankof England,theEuropeanCentral Bank,theBankof Japan,andtheSwissNationalBankundertheseswaparrangements;theBankof Canadamaydrawupto$30billionundertheswaparrangementwiththeFRBNY.Inadditiontothecentralbankliquidityswaparrangements,theFOMChasauthorizedreciprocalcurrencyarrangementswiththeBank of CanadaandtheBankof Mexico,asdiscussedinNote2. Foreigncurrencyliquidityswaparrangementswereauthorizedwith4foreigncentralbanksandprovidedtheReserveBankswiththecapacitytoofferforeigncurrencyliquiditytoU.S.depositoryinstitutions.Theauthorizationfortheseswap arrangementsexpiredonFebruary1,2010.InNovember2011,asacontingency measure,theFOMCagreedtoestablishtemporarybilateralliquidityswap arrangementswiththeBankof Canada,theBankof England,theEuropeanCentralBank,theBankof Japan,andtheSwissNationalBanksothatliquiditycanbe

370 98thAnnualReport|2011 providedinanyof theircurrenciesif necessary.Theswaplinesareauthorizeduntil February1,2013. 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 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 thecommercialpapermarketintheUnitedStatesbyincreasingtheavailability of termcommercialpaperfundingtoissuersandbyprovidinggreaterassuranceto bothissuersandinvestorsthatissuerswouldbeabletorollovertheirmaturing commercialpaper.Theauthorizationtopurchasehigh-qualitycommercialpaper throughtheCPFFprogramexpiredonFebruary1,2010.TheCommercialPaper FundingFacilityLLC(CPFF)wasaDelawarelimitedliabilitycompanyformed onOctober14,2008,inconnectionwiththeimplementationof theCPFFprogram,topurchaseeligiblethree-monthunsecuredcommercialpaperandABCP directlyfromeligibleissuersusingtheproceedsof loansmadetoCPFFbythe FRBNY.TheFRBNY’sloanstoCPFFwereeliminatedinconsolidationof CPFF intothecombinedfinancialstatements.Thelastcommercialpaperpurchasedby

FederalReserveSystemAudits 371 theCPFFmaturedonApril26,2010,andtheCPFFwasdissolvedonAugust30, 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. TALFloanshavematuritiesof uptofiveyearsandaresecuredbyeligiblecollateral,withtheFRBNYhavinglentanamountequaltothevalueof thecollateral, asdeterminedbytheFRBNY,lessamargin.Loanproceedsweredisbursedtothe borrowercontingentonreceiptbytheFRBNY’scustodianof theeligiblecollateral,anadministrativefee,and,if applicable,amargin. TheTALFloanswereextendedonanonrecoursebasis.If theborrowerdoesnot repaytheloan,theFRBNYwillenforceitsrightsinthecollateralandmaysellthe collateraltoTALFLLC,aDelawarelimitedliabilitycompany,establishedonFebruary4,2009,forthepurposeof purchasingsuchassets.Asof December31, 2011,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. AnyTreasuryloantoTALFLLCbearsinterestatarateof theone-monthLondoninterbankofferedrate(Libor)plus300basispoints.InadditiontotheTreasury’scommitment,theFRBNYcommitted,asaseniorlender,tolendupto $180billiontoTALFLLCif itneededthefundingtopurchaseassetspursuantto theputagreement.TheFRBNY’smaximumexposurewassubsequentlyreduced to$38.7billionwhentheprogramclosedtonewlending.Anyloanthatthe FRBNYmakestoTALFLLCwouldbeseniortoanyTreasuryloanandwould bearinterestatarateof theone-monthLiborplus100basispoints.Totheextent thatTreasuryandtheFRBNYhaveextendedcredittoTALFLLC,theirloansare securedbyallof theassetsof TALFLLC.TheFRBNYisthemanagingmember andthecontrollingpartyof TALFLLCandwillremainthecontrollingpartyas longasitretainsaneconomicinterestinTALFLLC.AfterTALFLLChaspaid alloperatingexpensesandprincipalduetotheFRBNY,theremainingproceedsof theportfolioholdingswillbedistributedinthefollowingorder:principaldueto theTreasury,interestduetotheFRBNY,andinterestduetotheTreasury.Any residualcashflowswillbesharedbetweentheFRBNY,whichwillreceive10percent,andtheTreasury,whichwillreceive90percent.

372 98thAnnualReport|2011 SupportforSpecificInstitutions TheBearStearnsCompanies,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 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, 2009,andthepreferredshareswereissuedtotheAIGTrustonMarch4,2009. TheAIGTrusthadthreeindependenttrusteeswhocontrolledtheAIGTrust’s votingandconsentrights.TheFRBNYcouldnotexercisevotingorconsent rights. TheBoardandtheTreasuryannouncedarestructuringof thegovernment’sfinancialsupporttoAIGinNovember2008.Aspartof therestructuring,theTreasury purchased$40billionof newly-issuedAIGpreferredsharesundertheTroubled AssetRelief Program(TARP).Themajorityof theTARPfundswereusedtopay downAIG’sdebttotheFRBNY.Inaddition,thetermsof theoriginalcredit agreementweremodifiedtoreducetherevolvinglineof creditto$60billion;

FederalReserveSystemAudits 373 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 October31,2008,fromAIG’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, andthenthefixeddeferredpurchasepriceinfull,includingaccruedandunpaid interest,anynetproceedswillbedividedbetweentheFRBNY,whichisentitledto receivefive-sixths,andtheAIGsubsidiaries,whichareentitledtoreceiveonesixth.TheFRBNY’sloanandthefixeddeferredpurchasepricepayabletothe AIGsubsidiariesarecollateralizedbyallof theassetsof MLIIthroughapledge tothecollateralagent. OnMarch30,2011,theFederalReserveannouncedthattheFRBNY,throughits investmentmanager,BlackRockSolutions,woulddisposeof thesecuritiesinthe MLIIportfolioindividuallyandinsegmentsthroughacompetitivesalesprocess overtimeasmarketconditionswarrant.DuringtheyearendedDecember31, 2011,atotalof ninebidlistauctionswereconductedandassetswithatotalcurrentfaceamountof $9.96billionweresold.SubsequenttoDecember31,2011,the FederalReservesoldtheremainingsecuritiesintheMLIIportfoliothrougha competitivebiddingprocess,asdiscussedinNote17. 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.AftertheFRBNYis paidinfull,theequityinvestorisentitledtoreceiveitsproratashareof theequity

374 98thAnnualReport|2011 contributionplusinterestattheone-monthLiborplus300basispoints.AfterML IIIhaspaidtheFRBNY’sseniorloanandtheequitycontributioninfull,the FRBNYwillbeentitledtoreceive67percentof anyadditionalnetproceeds receivedbyMLIIIasacontingentinterestontheseniorloanandtheequityinvestorwillbeentitledtoreceiveitsproratashareof 33percentof anynetproceeds receivedbyMLIIIascontingentdistributionsonitsequityinterest.TheFRB- NY’sseniorloaniscollateralizedbyallof theassetsof MLIIIthroughapledgeto thecollateralagent. OnApril17,2009,theFRBNY,aspartof theU.S.government’scommitmentto theorderlyrestructuringof AIGovertime,inthefaceof continuingmarketdislocations,furtherrestructuredtheAIGloanbyeliminatingthe350basis-pointfloor ontheLiborusedtocalculatetheinterestrateontheloan.Afterthisrestructuring, theinterestrateonthemodifiedloanwasequaltothethree-monthLiborplus 300basispoints. OnDecember1,2009,theFRBNY’scommitmenttolendtoAIGwasreducedto $35billionfrom$60billionwhentheoutstandingbalanceof theFRBNY’sloan toAIGwasreducedby$25billioninexchangeforaliquidationpreferenceof nonvotingperpetualpreferredinterestsintwoLLCs.AIGcreatedtwoLLCsto hold,directlyorindirectly,allof theoutstandingcommonstockof AmericanLife InsuranceCompany(ALICO)andAmericanInternationalAssuranceCompany Ltd.(AIA),twolifeinsuranceholdingcompanysubsidiariesof AIG.TheFRBNY wastobepaida5percentcumulativedividendonitsnonvotingpreferredinterests throughSeptember22,2013,anda9percentcumulativedividendthereafter. AlthoughtheFRBNYhadcertaingovernancerightstoprotectitsinterests,AIG retainedcontrolof theLLCsandtheunderlyingoperatingcompanies.Theinitial valueof theFRBNY’spreferredinterestsasof December1,2009,was$16billion fortheAIAAuroraLLC(AIALLC)and$9billionfortheALICOHoldingsLLC (ALICOLLC),whichrepresentedapercentageof thefairmarketvalueof AIA andALICO,respectively. OnSeptember30,2010,AIGannouncedanagreementwiththeTreasury, FRBNY,andthetrusteesof theAIGTrustonacomprehensiverecapitalization plandesignedtorepayallitsobligationstoAmericantaxpayers.Theagreement includedanacceleratedrepaymentof theoutstandingbalanceof theFRBNY revolvinglineof creditincludingallaccruedinterestandfees,terminationof that facility,therepaymentof theFRBNY’spreferredinterestsinAIALLCand ALICOLLC,andtheconversionof theAIGpreferredstockthenownedbythe TreasuryandtheAIGTrustintocommonequityof AIG. Priortotheclosingof therecapitalizationplan,thecashproceedsfromcertain AIGassetdispositionswereheldbytheFRBNYasagent.OnOctober29,2010, AIGcompletedtheinitialpublicofferingof AIA,successfullyobtainingalisting ontheHongKongStockExchangeandraisingtotalgrossproceedsof $20.5billion.OnNovember1,2010,AIGcompletedthesaleof ALICOtoMetLife,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

FederalReserveSystemAudits 375 redeemaportionof theFRBNY’spreferredinterestsinALICOLLCtakenearlier bytheFRBNYinsatisfactionof aportionof therevolvinglineof credit.The remainingFRBNYpreferredinterestsinALICOLLCandAIALLC,valuedat approximately$20billion,werepurchasedbyAIGthroughadrawontheTreasury’sSeriesFpreferredstockcommitmentandthentransferredbyAIGtothe TreasuryaspartialconsiderationforthetransfertoAIGof alloutstandingSeries Fshares.Inaddition,theFRBNY’scommitmenttolendanyfundsunderthe revolvinglineof creditwasterminated. (4)SignificantAccountingPolicies Accountingprinciplesforentitieswiththeuniquepowersandresponsibilitiesof a nation’scentralbankhavenotbeenformulatedbyaccountingstandard-setting bodies.TheBoardof Governorshasdevelopedspecializedaccountingprinciples andpracticesthatitconsiderstobeappropriateforthenatureandfunctionof a centralbank.Theseaccountingprinciplesandpracticesaredocumentedinthe FinancialAccountingManualforFederalReserveBanks(FAM),whichisissuedby theBoardof Governors.TheReserveBanksarerequiredtoadoptandapply accountingpoliciesandpracticesthatareconsistentwiththeFAMandthecombinedfinancialstatementshavebeenpreparedinaccordancewiththeFAM. Limiteddifferencesexistbetweentheaccountingprinciplesandpracticesinthe FAMandaccountingprinciplesgenerallyacceptedintheUnitedStatesof America(GAAP),duetotheuniquenatureof theReserveBanks’powersand responsibilitiesaspartof thenation’scentralbankandgiventheSystem’sunique responsibilitytoconductmonetarypolicy.Theprimarydifferencesarethepresentationof allSOMAsecuritiesholdingsatamortizedcostandtherecordingof SOMAsecuritiesonasettlement-datebasis.Amortizedcost,ratherthanthefair valuepresentation,moreappropriatelyreflectstheReserveBanks’securitiesholdingsgiventheSystem’suniqueresponsibilitytoconductmonetarypolicy. Althoughtheapplicationof fairvaluemeasurementstothesecuritiesholdings mayresultinvaluessubstantiallygreaterorlessthantheircarryingvalues,these unrealizedchangesinvaluehavenodirecteffectonthequantityof reservesavailabletothebankingsystemorontheprospectsforfutureBankearningsorcapital. Boththedomesticandforeigncomponentsof theSOMAportfoliomayinvolve transactionsthatresultingainsorlosseswhenholdingsaresoldbeforematurity. Decisionsregardingsecuritiesandforeigncurrencytransactions,includingtheir purchaseandsale,aremotivatedbymonetarypolicyobjectivesratherthanprofit. Accordingly,fairvalues,earnings,andgainsorlossesresultingfromthesaleof suchsecuritiesandcurrenciesareincidentaltoopenmarketoperationsanddonot motivatedecisionsrelatedtopolicyoropenmarketactivities.Accountingforthese securitiesonasettlement-datebasis,ratherthanthetrade-datebasisrequiredby GAAP,betterreflectsthetimingof thetransaction’seffectonthequantityof reservesinthebankingsystem.Thecostbasesof Treasurysecurities,GSEdebt securities,andforeigngovernmentdebtinstrumentsareadjustedforamortization of premiumsoraccretionof discountsonastraight-linebasis,ratherthanusing theinterestmethodrequiredbyGAAP. Inaddition,theReserveBanksdonotpresentaCombinedStatementof Cash FlowsasrequiredbyGAAPbecausetheliquidityandcashpositionof theReserve BanksarenotaprimaryconcerngiventheReserveBanks’uniquepowersand responsibilitiesasacentralbank.OtherinformationregardingtheReserveBanks’ activitiesisprovidedin,ormaybederivedfrom,theCombinedStatementsof Condition,IncomeandComprehensiveIncome,andChangesinCapital,andthe accompanyingnotestothefinancialstatements.Therearenoothersignificantdif-

376 98thAnnualReport|2011 ferences,otherthanthosedescribedabove,betweenthepoliciesoutlinedinthe FAMandGAAP. 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,whichrequiresaVIEtobeconsolidatedbyitscontrollingfinancialinterest holder.Intercompanybalancesandtransactionshavebeeneliminatedin consolidation. AReserveBankconsolidatesaVIEif ithasacontrollingfinancialinterest,which isdefinedasthepowertodirectthesignificanteconomicactivitiesof theentity andtheobligationtoabsorblossesortherighttoreceivebenefitsof theentitythat couldpotentiallybesignificanttotheVIE.Todeterminewhetheritisthecontrollingfinancialinterestholderof aVIE,theReserveBankevaluatestheVIE’s design,capitalstructure,andrelationshipswiththevariableinterestholders.The ReserveBankreconsiderswhetherithasacontrollingfinancialinterestinaVIE, asrequiredbyASC810,ateachreportingdate. TheDodd-FrankActestablishedtheBureauasanindependentbureauwithinthe System,andsection1017of theDodd-FrankActprovidesthatthefinancialstatementsof theBureauarenottobeconsolidatedwiththoseof theBoardof GovernorsortheSystem.Section152of theDodd-FrankActestablishedtheOfficeof FinancialResearch(OFR)withintheTreasury.TheBoardof Governorsfundsthe BureauandOFRthroughassessmentsontheReserveBanksasrequiredbythe Dodd-FrankAct.TheReserveBanksreviewedthelawandevaluatedthedesignof andtheirrelationshipstotheBureauandtheOFRanddeterminedthatneither shouldbeconsolidatedintheReserveBanks’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$422/9perfinetroyounce. TheBoardof GovernorsallocatesthegoldcertificatesamongtheReserveBanks onceayearbasedontheaverageFederalReservenotesoutstandingateach ReserveBank.

FederalReserveSystemAudits 377 SDRcertificatesareissuedbytheInternationalMonetaryFund(IMF)toits membersinproportiontoeachmember’squotaintheIMFatthetimeof issuance.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 theBankatoriginalcost.TherewerenoSDRtransactionsduringtheyearsended December31,2011and2010. 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:TermAsset-BackedSecuritiesLoanFacility, unrealizedlosses”intheCombinedStatementsof IncomeandComprehensive Income.TheinterestincomeonTALFloansisrecognizedbasedonthecontracted rateandisreportedasacomponentof “InterestIncome:TermAsset-Backed SecuritiesLoanFacility”intheCombinedStatementsof IncomeandComprehensiveIncome.Administrativefeespaidbyborrowersattheinitiationof eachTALF loan,whicharerecognizedasincurredandnotdeferred,arereportedasacomponentof “Non-interestincome:Other”intheCombinedStatementsof Incomeand ComprehensiveIncome. TheloantoAIGisreportedattheoutstandingprincipalbalancenetof unamortizedadministrativeandcommitmentfees,andinterestincomeisrecognizedonan accrualbasis.Loanadministrativeandcommitmentfeesaredeferredandamortizedonastraight-linebasis,ratherthanusingtheinterestmethodrequiredby GAAP,overthetermof theloanorcommitmentperiod.Thismethodresultsin aninterestamountthatapproximatestheamountdeterminedusingtheinterest method. Loans,otherthanthoserecordedatfairvalue,areimpairedwhencurrentinformationandeventsindicatethatitisprobablethattheReserveBankswillnotreceive theprincipalandinterestthatisdueinaccordancewiththecontractualtermsof theloanagreement.Impairedloansareevaluatedtodeterminewhetheranallowanceforloanlossisrequired.TheReserveBankshavedevelopedproceduresfor assessingtheadequacyof anyallowanceforloanlossesusingallavailableinforma-

378 98thAnnualReport|2011 tiontoidentifyincurredlosses.Thisassessmentincludesmonitoringinformation obtainedfrombankingsupervisors,borrowers,andothersourcestoassessthe creditconditionof theborrowersand,asappropriate,evaluatingcollateralvalues. Generally,theReserveBankswoulddiscontinuerecognizinginterestincomeon impairedloansuntiltheborrower’srepaymentperformancedemonstratesprincipalandinterestwouldbereceivedinaccordancewiththetermsof theloanagreement.If theReserveBanksdiscontinuerecordinginterestonanimpairedloan, cashpaymentsarefirstappliedtoprincipaluntiltheloanbalanceisreducedto zero;subsequentpaymentsareappliedasrecoveriesof amountspreviously deemeduncollectible,if any,andthenasinterestincome. Impairedloansincludeloansthathavebeenmodifiedindebtrestructurings involvingborrowersexperiencingfinancialdifficulties.Theallowanceforloan restructuringisdeterminedbydiscountingtherestructuredcashflowsusingthe originaleffectiveinterestratefortheloan.Unlesstheborrowercandemonstrate thatitcanmeettherestructuredterms,theReserveBanksdiscontinuerecognizing interestincome.Performancepriortotherestructuring,orsignificanteventsthat coincidewiththerestructuring,areconsideredinassessingwhethertheborrower canmeetthenewterms. e.SecuritiesPurchasedUnderAgreementstoResell,SecuritiesSoldunder AgreementstoRepurchase,andSecuritiesLending TheFRBNYmayengageinpurchasesof securitieswithprimarydealersunder agreementstoresell(repurchasetransactions).Theserepurchasetransactionsare settledthroughatripartyarrangement.Inatripartyarrangement,twocommercial custodialbanksmanagethecollateralclearing,settlement,pricing,andpledging, andprovidecashandsecuritiescustodialservicesforandonbehalf of the FRBNYandcounterparty.Thecollateralpledgedmustexceedtheprincipal amountof thetransactionbyamargindeterminedbytheFRBNYforeachclass andmaturityof acceptablecollateral.CollateraldesignatedbytheFRBNYas acceptableunderrepurchasetransactionsprimarilyincludesTreasurysecurities (includingTreasuryInflation-ProtectedSecuritiesandSeparateTradingof RegisteredInterestandPrincipalof Securities(STRIP)Treasurysecurities);directobligationsof severalfederalandGSE-relatedagencies,includingFederalNational MortgageAssociation(FannieMae)andFederalHomeLoanMortgageCorporation(FreddieMac);andpass-throughMBSof FannieMae,FreddieMac,and GovernmentNationalMortgageAssociation.Therepurchasetransactionsare accountedforasfinancingtransactionswiththeassociatedinterestincomerecognizedoverthelifeof thetransaction. TheFRBNYmayengageinsalesof securitiesunderagreementstorepurchase (reverserepurchasetransactions)withprimarydealersand,beginning August2010,withselectedmoneymarketfunds.Thelistof eligiblecounterparties wassubsequentlyexpandedtoincludeGSEs,effectiveinMay2011,andbankand savingsinstitutions,effectiveinJuly2011.Thesereverserepurchasetransactions maybeexecutedthroughatripartyarrangementasanopenmarketoperation, similartorepurchasetransactions.Reverserepurchasetransactionsmayalsobe executedwithforeignofficialandinternationalaccountholdersaspartof aservice offering.Reverserepurchaseagreementsarecollateralizedbyapledgeof an amountof Treasurysecurities,GSEdebtsecurities,andfederalagencyandGSE MBSthatareheldintheSOMA.Reverserepurchasetransactionsareaccounted forasfinancingtransactions,andtheassociatedinterestexpenseisrecognizedover thelifeof thetransaction.Thesetransactionsarereportedattheircontractual amountsas“SystemOpenMarketAccount:Securitiessoldunderagreementsto

FederalReserveSystemAudits 379 repurchase”andtherelatedaccruedinterestpayableisreportedasacomponentof “Otherliabilities”intheCombinedStatementsof Condition. TreasurysecuritiesandGSEdebtsecuritiesheldintheSOMAmaybelenttoprimarydealerstofacilitatetheeffectivefunctioningof thedomesticsecuritiesmarkets.Theamortizedcostbasisof securitieslentcontinuetobereportedin“Treasurysecurities,net”or“Government-sponsoredenterprisedebtsecurities,net,”as appropriate,intheCombinedStatementsof Condition.OvernightsecuritieslendingtransactionsarefullycollateralizedbyTreasurysecuritiesthathavefairvalues inexcessof thesecuritieslent.TheFRBNYchargestheprimarydealerafeefor borrowingsecurities,andthesefeesarereportedasacomponentof “Non-interest income:Other”intheCombinedStatementsof IncomeandComprehensive Income. Activityrelatedtosecuritiespurchasedunderagreementstoresell,securitiessold underagreementstorepurchase,andsecuritieslendingisallocatedtoeachof the ReserveBanksonapercentagebasisderivedfromanannualsettlementof the interdistrictsettlementaccountthatoccursinthesecondquarterof eachyear. 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 thesecuritytostated maturity,andtheamortizationof premiumsandaccretionof discountsareacceleratedwhenprincipalpaymentsarereceived.Gainsandlossesresultingfromsales of securitiesaredeterminedbyspecificissuebasedonaveragecost.Treasurysecurities,GSEdebtsecurities,andfederalagencyandGSEMBSarereportednetof premiumsanddiscountsintheCombinedStatementsof Conditionandinterest incomeonthosesecuritiesisreportednetof theamortizationof premiumsand accretionof discountsintheCombinedStatementsof IncomeandComprehensive Income. Inadditiontooutrightpurchasesof federalagencyandGSEMBSthatareheldin theSOMA,theFRBNYentersintodollarrolltransactions(dollarrolls),which primarilyinvolveaninitialtransactiontopurchaseorsell“tobeannounced” (TBA)MBSfordeliveryinthecurrentmonthcombinedwithasimultaneous agreementtosellorpurchaseTBAMBSonaspecifiedfuturedate.In2010,the FRBNYalsoexecutedalimitednumberof TBAMBScouponswaptransactions, whichinvolveasimultaneoussaleof aTBAMBSandpurchaseof anotherTBA MBSof adifferentcouponrate.Duringtheyear-endedDecember31,2010,the FRBNY’sparticipationinthedollarrollandcouponswapmarketsfurtheredthe MBSpurchaseprogramgoalsof providingsupporttothemortgageandhousing marketsandof fosteringimprovedconditionsinfinancialmarketsmoregenerally. Duringtheyear-endedDecember31,2011,theFRBNYexecuteddollarrollsprimarilytofacilitatesettlement.TheFRBNYaccountsforoutstandingcommitmentsunderdollarrollandcouponswapsaspurchasesorsalesonasettlementdatebasis.Netgainsresultingfromdollarrollandcouponswaptransactionsare reportedas“Non-interestincome:SystemOpenMarketAccount:Federalagency

380 98thAnnualReport|2011 andgovernment-sponsoredenterprisemortgage-backedsecuritiesgains,net”in theCombinedStatementsof IncomeandComprehensiveIncome. Foreigncurrencydenominatedassets,whichcanincludeforeigncurrencydeposits, securitiespurchasedunderagreementstoresell,andgovernmentdebtinstruments, arerevalueddailyatcurrentforeigncurrencymarketexchangeratesinorderto reporttheseassetsinU.S.dollars.Realizedandunrealizedgainsandlossesonforeigncurrencydenominatedassetsarereportedas“Non-interestincome:System OpenMarketAccount:Foreigncurrencygains,net”intheCombinedStatements of IncomeandComprehensiveIncome. ActivityrelatedtoTreasurysecurities,GSEdebtsecurities,andfederalagencyand GSEMBS,includingthepremiums,discounts,andrealizedgainsandlosses,is allocatedtoeachReserveBankonapercentagebasisderivedfromanannual settlementof theinterdistrictsettlementaccountthatoccursinthesecondquarter of eachyear.Activityrelatedtoforeigncurrencydenominatedassets,includingthe premiums,discounts,andrealizedandunrealizedgainsandlosses,isallocatedto eachReserveBankbasedontheratioof eachReserveBank’scapitalandsurplus totheReserveBanks’aggregatecapitalandsurplusattheprecedingDecember31. WarehousingisanarrangementunderwhichtheFOMChasapprovedthe exchange,attherequestof theTreasury,of U.S.dollarsforforeigncurrenciesheld bytheTreasuryoveralimitedperiod.Thepurposeof thewarehousingfacilityis tosupplementtheU.S.dollarresourcesof theTreasuryforfinancingpurchasesof foreigncurrenciesandrelatedinternationaloperations.Warehousingagreements aredesignatedasheld-for-tradingpurposesandarevalueddailyatcurrentmarket exchangerates.ActivityrelatedtotheseagreementsisallocatedtoeachReserve Bankbasedontheratioof eachReserveBank’scapitalandsurplustotheReserve Banks’aggregatecapitalandsurplusattheprecedingDecember31. TheFRBNYisauthorizedtoholdforeigncurrencyworkingbalancesandexecute foreignexchangecontractstofacilitateinternationalpaymentsandcurrencytransactionsitmakesonbehalf of foreigncentralbankandU.S.officialinstitutioncustomers.Theseforeigncurrencyworkingbalancesandcontractsarenotrelatedto theFRBNY’smonetarypolicyoperations.Foreigncurrencyworkingbalancesare reportedasacomponentof “Otherassets”intheCombinedStatementsof Conditionandtherelatedforeigncurrencyvaluationgainsandlossesthatresultfromthe dailyrevaluationof theforeigncurrencyworkingbalancesandcontractsare reportedasacomponentof “Non-interestincome:Other”intheCombinedStatementsof IncomeandComprehensiveIncome. g.CentralBankLiquiditySwaps Centralbankliquidityswaps,whicharetransactedbetweentheFRBNYandaforeigncentralbank,canbestructuredaseitherU.S.dollarliquidityorforeigncurrencyliquidityswaparrangements. Centralbankliquidityswapsactivity,includingtherelatedincomeandexpense,is allocatedtoeachReserveBankbasedontheratioof eachReserveBank’scapital andsurplustoaggregatecapitalandsurplusattheprecedingDecember31.The foreigncurrencyamountsassociatedwiththesecentralbankliquidityswap arrangementsarerevalueddailyatcurrentforeigncurrencymarketexchangerates.

FederalReserveSystemAudits 381 U.S.dollarliquidityswaps Attheinitiationof eachU.S.dollarliquidityswaptransaction,theforeigncentral banktransfersaspecifiedamountof itscurrencytoarestrictedaccountforthe FRBNYinexchangeforU.S.dollarsattheprevailingmarketexchangerate.Concurrentwiththistransaction,theFRBNYandtheforeigncentralbankagreetoa secondtransactionthatobligatestheforeigncentralbanktoreturntheU.S.dollars andtheFRBNYtoreturntheforeigncurrencyonaspecifiedfuturedateatthe sameexchangerateastheinitialtransaction.Theforeigncurrencyamountsthat theFRBNYacquiresarereportedas“SystemOpenMarketAccount:Central bankliquidityswaps”intheCombinedStatementsof Condition.Becausethe swaptransactionwillbeunwoundatthesameU.S.dollaramountandexchange ratethatwereusedintheinitialtransaction,therecordedvalueof theforeigncurrencyamountsisnotaffectedbychangesinthemarketexchangerate. TheforeigncentralbankcompensatestheFRBNYbasedontheforeigncurrency amountsitholdsfortheFRBNY.TheFRBNYrecognizescompensationduring thetermof theswaptransaction,whichisreportedas“Interestincome:System OpenMarketAccount:Centralbankliquidityswaps”intheCombinedStatements of IncomeandComprehensiveIncome. 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“Investmentsheldbyconsolidatedvariableinterestentities”intheCombinedStatements of Condition.Theseinvestmentsareaccountedforandclassifiedasfollows: • ML’sinvestmentsindebtsecuritiesareaccountedforinaccordancewithFASB ASCTopic320(ASC320)Investments–DebtandEquitySecuritiesandML electedthefairvalueoptionforalleligibleassetsandliabilitiesinaccordance withASC825.Otherfinancialinstruments,includingswapcontractsandother derivativesinstrumentsinML,arerecordedatfairvalueinaccordancewith FASBASCTopic815(ASC815)DerivativesandHedging. • MLIIandMLIIIqualifyasnonregisteredinvestmentcompaniesundertheprovisionsof FASBASCTopic946(ASC946)FinancialServices–InvestmentCompaniesand,therefore,allinvestmentsarerecordedatfairvalueinaccordance withASC946. • TALFLLCfollowstheguidanceinASC320whenaccountingforanyacquired ABSinvestments,andhaselectedthefairvalueoptionforalleligibleassetsin accordancewithASC825. i.PreferredInterests TheFRBNYpresentsitspreferredinterestsinAIALLCandALICOLLCatcost consistentwithASC320.The5percentcumulativedividendsaccruedbythe FRBNYonthepreferredinterestsarereportedas“Non-interestincome:Divi-

382 98thAnnualReport|2011 dendsonpreferredinterests”intheCombinedStatementsof IncomeandComprehensiveIncome.Onaquarterlybasis,theaccrueddividendswerecapitalized andincreasedtherecordedcostof theFRBNY’spreferredinterestsinAIALLC andALICOLLC. 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 softwarearechargedtooperatingexpenseintheyearincurred. Capitalizedassets,includingsoftware,buildings,leaseholdimprovements,furniture,andequipment,areimpairedandanadjustmentisrecordedwheneventsor changesincircumstancesindicatethatthecarryingamountof assetsorasset groupsisnotrecoverableandsignificantlyexceedstheassets’fairvalue. 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 ConditionrepresentstheBank’sFederalReservenotesoutstanding,reducedbythe ReserveBanks’currencyholdingsof $172billionand$180billionatDecember31, 2011and2010,respectively. AtDecember31,2011and2010,allFederalReservenotesissuedtotheReserve Bankswerefullycollateralized.AtDecember31,2011,allgoldcertificates,allspe-

FederalReserveSystemAudits 383 cialdrawingrightcertificates,and$1,018billionof domesticsecuritiesheldinthe SOMAwerepledgedascollateral.AtDecember31,2011,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:Beneficialinterestinconsolidatedvariableinterestentitiesgains(losses),net,”respectively,intheCombinedStatementsof IncomeandComprehensiveIncome. m.Deposits DepositoryInstitutions Depositoryinstitutions’depositsrepresentthereserveandservice-relatedbalances, suchasrequiredclearingbalances,intheaccountsthatdepositoryinstitutions holdattheReserveBanks.Theinterestratespaidonrequiredreservebalancesand excessbalancesaredeterminedbytheBoardof Governors,basedonanFOMCestablishedtargetrangeforthefederalfundsrate.Interestpayableisreportedas “Interestpayabletodepositoryinstitutions”intheCombinedStatementsof Condition. TheTermDepositFacility(TDF)consistsof depositswithspecificmaturitiesheld byeligibleinstitutionsattheReserveBanks.TheReserveBankspayintereston thesedepositsatinterestratesdeterminedbyauction.Interestpayableisreported as“Interestpayabletodepositoryinstitutions”intheCombinedStatementsof Condition.TherewerenodepositsheldbytheReserveBanksundertheTDFat December31,2011and2010. 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.OtherdepositsalsoincludeGSEdepositsheldbytheReserve Banks.

384 98thAnnualReport|2011 n.FundsfromAmericanInternationalGroup,Inc.assetdispositions,heldas agent Priortotheclosingof theAIGrecapitalizationplandiscussedinNote3,thecash proceedsfromcertainAIGassetdispositionswereheldbytheFRBNYasagent. o.ItemsinProcessofCollectionandDeferredCreditItems “Itemsinprocessof collection”primarilyrepresentsamountsattributableto checksthathavebeendepositedforcollectionandthat,asof thebalancesheet date,havenotyetbeenpresentedtothepayingbank.“Deferredcredititems”isthe counterpartliabilitytoitemsinprocessof collection.Theamountsinthisaccount arisefromdeferringcreditfordepositeditemsuntiltheamountsarecollected.The balancesinbothaccountscanvarysignificantly. p.CapitalPaid-in TheFederalReserveActrequiresthateachmemberbanksubscribetothecapital stockof theReserveBankinanamountequalto6percentof thecapitalandsurplusof thememberbank.Thesesharesarenonvoting,withaparvalueof $100, andmaynotbetransferredorhypothecated.Asamemberbank’scapitalandsurpluschanges,itsholdingsof ReserveBankstockmustbeadjusted.Currently,only one-half of thesubscriptionispaidinandtheremainderissubjecttocall.AmemberbankisliableforReserveBankliabilitiesuptotwicetheparvalueof stock subscribedbyit. Bylaw,eachReserveBankisrequiredtopayeachmemberbankanannualdividendof 6percentonthepaid-incapitalstock.Thiscumulativedividendispaid semiannually.TomeettheFederalReserveActrequirementthatannualdividends bedeductedfromnetearnings,dividendsarepresentedasadistributionof comprehensiveincomeintheCombinedStatementsof IncomeandComprehensive Income. q.Surplus TheBoardof GovernorsrequirestheReserveBankstomaintainasurplusequal totheamountof capitalpaid-in.Onadailybasis,surplusisadjustedtoequatethe balancetocapitalpaid-in.Accumulatedothercomprehensiveincomeisreported asacomponentof “Surplus”intheCombinedStatementsof Conditionandthe CombinedStatementsof ChangesinCapital.Additionalinformationregarding theclassificationsof accumulatedothercomprehensiveincomeisprovidedin Notes13,14,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 netearningsaReserveBankwillneedtorealizebeforeremittancestotheTreasury resume.Thisdeferredassetisperiodicallyreviewedforimpairment.

FederalReserveSystemAudits 385 s.IncomeandCostsRelatedtoTreasuryServices WhendirectedbytheSecretaryof theTreasury,theReserveBanksarerequiredby theFederalReserveActtoserveasfiscalagentanddepositaryof theUnited StatesGovernment.Bystatute,theTreasuryhasappropriationstopayforthese services.DuringtheyearsendedDecember31,2011and2010,theReserveBanks werereimbursedforallservicesprovidedtotheTreasuryasitsfiscalagent. t.Assessments TheBoardof GovernorsassessestheReserveBankstofunditsoperations,the operationsof theBureauand,foratwo-yearperiodfollowingtheJuly21,2010 effectivedateof theDodd-FrankAct,theOFR.Theseassessmentsareallocated toeachReserveBankbasedoneachReserveBank’scapitalandsurplusbalances asof December31of theprioryearfortheBoardof Governors’operationsand asof themostrecentquarterfortheBureauandOFRoperations.TheBoardof GovernorsalsoassesseseachReserveBankfortheexpensesincurredbytheTreasurytoproduceandretireFederalReservenotesbasedoneachReserveBank’s shareof thenumberof notescomprisingtheSystem’snetliabilityforFederal ReservenotesonDecember31of theprioryear. DuringtheperiodpriortotheBureautransferdateof July21,2011,therewasno limitonthefundingprovidedtotheBureauandassessedtotheReserveBanks; theBoardof GovernorswasrequiredtoprovidetheamountestimatedbytheSecretaryof theTreasuryneededtocarryouttheauthoritiesgrantedtotheBureau undertheDodd-FrankActandotherfederallaw.TheDodd-FrankActrequires that,afterthetransferdate,theBoardof GovernorsfundtheBureauinan amountnottoexceedafixedpercentageof thetotaloperatingexpensesof the SystemasreportedintheBoardof Governors’2009annualreport,whichtotaled $4.98billion.Thefixedpercentageof total2009operatingexpensesof theSystem is10percent($498.0million)for2011,11percent($547.8million)for2012,and 12percent($597.6million)for2013.After2013,theamountwillbeadjustedin accordancewiththeprovisionsof theDodd-FrankAct.TheReserveBanks’ assessmentforBureaufundingisreportedas“Assessments:Bureauof Consumer FinancialProtection”intheCombinedStatementsof IncomeandComprehensive Income. TheBoardof GovernorsassessestheReserveBankstofundtheoperationsof the OFRforthetwo-yearperiodfollowingenactmentof theDodd-FrankAct;thereafter,theOFRwillbefundedbyfeesassessedonbankholdingcompaniesand nonbankfinancialcompaniesthatmeetthecriteriaspecifiedintheDodd- FrankAct. u.FairValue CertainassetsandliabilitiesreportedontheReserveBanks’CombinedStatements of ConditionaremeasuredatfairvalueinaccordancewithASC820,including TALFloans,investmentsandbeneficialinterestsof theconsolidatedVIEs,and assetsof theRetirementPlanforEmployeesof theSystem.ASC820definesfair valueasthepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate. ASC820establishesathree-levelfairvaluehierarchythatdistinguishesbetween assumptionsdevelopedusingmarketdataobtainedfromindependentsources (observableinputs)andtheReserveBank’sassumptionsdevelopedusingthebest informationavailableinthecircumstances(unobservableinputs).Thethreelevels establishedbyASC820aredescribedasfollows:

386 98thAnnualReport|2011 • Level1–Valuationisbasedonquotedpricesforidenticalinstrumentstradedin activemarkets. • Level2–Valuationisbasedonquotedpricesforsimilarinstrumentsinactive markets,quotedpricesforidenticalorsimilarinstrumentsinmarketsthatare notactive,andmodel-basedvaluationtechniquesforwhichallsignificant assumptionsareobservableinthemarket. • Level3–Valuationisbasedonmodel-basedtechniquesthatusesignificant inputsandassumptionsnotobservableinthemarket.Theseunobservableinputs andassumptionsreflecttheReserveBank’sestimatesof inputsandassumptions thatmarketparticipantswoulduseinpricingtheassetsandliabilities.Valuation techniquesincludetheuseof optionpricingmodels,discountedcashflowmodels,andsimilartechniques. Theinputsormethodologyusedforvaluingassetsandliabilitiesarenotnecessarilyanindicationof theriskassociatedwiththoseassetsandliabilities. v.Taxes TheReserveBanksareexemptfromfederal,state,andlocaltaxes,exceptfortaxes onrealproperty.TheReserveBanks’realpropertytaxeswere$42millionand $41millionfortheyearsendedDecember31,2011and2010,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 Bankscommittoaformalizedrestructuringplanorexecutethespecificactions contemplatedintheplanandallcriteriaforfinancialstatementrecognitionhave beenmet. Note16describestheReserveBanks’restructuringinitiativesandprovidesinformationaboutthecostsandliabilitiesassociatedwithemployeeseparationsand contractterminations.Thecostsassociatedwiththeimpairmentof certain ReserveBanks’assetsarediscussedinNote11.Costsandliabilitiesassociated withenhancedpensionbenefitsinconnectionwiththerestructuringactivitiesfor allof theReserveBanksarerecordedonthebooksof theFRBNYanddiscussed inNote13.Costsandliabilitiesassociatedwithenhancedpostretirementbenefits arediscussedinNote14. x.RecentlyIssuedAccountingStandards InJanuary2010,theFASBissuedAccountingStandardsUpdate(ASU)2010-06, FairValueMeasurementsandDisclosures(Topic820):ImprovingDisclosuresabout FairValueMeasurements.Newrequirementsfordisclosureof informationabout transfersamongthehierarchy’sclassificationsandthelevelof disaggregationof classesof assetswereeffectivefortheReserveBanksfortheyearbeginningon January1,2010,andtherequireddisclosuresareincludedwhereapplicablein Note5,Note9,andNote13.Otherrequireddisclosuresincludethegrosspresentationof purchases,sales,issuances,andsettlementsinthereconciliationforLevel

FederalReserveSystemAudits 387 3fairvaluemeasurements,whichwereeffectivefortheReserveBanksfortheyear beginningonJanuary1,2011andareincludedinNote9. InJuly2010,theFASBissuedASU2010–20,Receivables(Topic310):Disclosures abouttheCreditQualityof FinancingReceivablesandtheAllowanceforCredit Losses,whichrequiresadditionaldisclosuresabouttheallowanceforcreditlosses andthecreditqualityof loanportfolios.Theadditionaldisclosuresincludearollforwardof theallowanceforcreditlossesonadisaggregatedbasisandmoreinformation,bytypeof receivable,oncreditqualityindicators,includingtheamountof certainpast-duereceivablesandtroubleddebtrestructuringsandsignificantpurchasesandsales.Theadoptionof thisupdateiseffectivefortheReserveBanksfor theyearendedDecember31,2011,anddidnothaveamaterialeffectonthe ReserveBanks’combinedfinancialstatements. InApril2011,theFASBissuedASU2011–02,Receivables(Topic310):ACreditor’sDeterminationof WhetheraRestructuringIsaTroubledDebtRestructuring, whichclarifiesaccountingfortroubleddebtrestructurings,specificallyclarifying creditorconcessionsandfinancialdifficultiesexperiencedbyborrowers.This updateiseffectivefortheReserveBanksfortheyearendingDecember31,2012, andisnotexpectedtohaveamaterialeffectontheReserveBanks’combined financialstatements. InApril2011,theFASBissuedASU2011–03,TransfersandServicing(Topic860): Reconsiderationof EffectiveControlforRepurchaseAgreements,whichreconsideredtheeffectivecontrolforrepurchaseagreements.Thisupdateprescribeswhen theReserveBanksmayormaynotrecognizeasaleuponthetransferof financial assetssubjecttorepurchaseagreements.Thisdeterminationisbased,inpart,on whethertheReserveBankshavemaintainedeffectivecontroloverthetransferred financialassets.ThisupdateiseffectivefortheReserveBanksfortheyearending December31,2012,andisnotexpectedtohaveamaterialeffectontheReserve Banks’combinedfinancialstatements. InMay2011,theFASBissuedASU2011–04,FairValueMeasurement(Topic 820):AmendmentstoAchieveCommonFairValueMeasurementandDisclosure RequirementsinU.S.GAAPandIFRS.Thisupdatewillresultincommonfair valuemeasurementanddisclosurerequirementsforGAAPandInternational FinancialReportingStandards.Inaddition,thisupdaterequiresadditionaldisclosuresforfairvaluemeasurementscategorizedasLevel3,includingquantitative informationabouttheunobservableinputsandassumptionsusedinthefairvalue measurement,adescriptionof thevaluationpoliciesandprocedures,andanarrativedescriptionof thesensitivityof thefairvaluemeasurementtochangesin unobservableinputsandtheinterrelationshipsbetweenthoseunobservableinputs. Inaddition,disclosureof theamountsandreasonsforalltransfersinandoutof Level1andLevel2willberequired.ThisupdateiseffectivefortheBankforthe yearendingDecember31,2012,andisnotexpectedtohaveamaterialeffecton theReserveBanks’combinedfinancialstatements. InJune2011,theFASBissuedASU2011–05,ComprehensiveIncome(Topic220): Presentationof ComprehensiveIncome,whichrequiresareportingentitytopresent thetotalof comprehensiveincome,thecomponentsof netincomeandthecomponentsof othercomprehensiveincomeeitherinasinglecontinuousstatementof comprehensiveincomeorintwoseparatebutconsecutivestatements.Thisupdate eliminatestheoptiontopresentthecomponentsof othercomprehensiveincome aspartof thestatementof shareholders’equity.Theupdateisintendedtoimprove

388 98thAnnualReport|2011 thecomparability,consistency,andtransparencyof financialreportingandto increasetheprominenceof itemsbypresentingthecomponentsreportedinother comprehensiveincome.TheReserveBankshaveadoptedtheupdateinthisASU effectivefortheyearendedDecember31,2011,andtherequiredpresentationis reflectedintheReserveBanks’combinedfinancialstatements. InDecember2011,theFASBissuedASU2011–11,BalanceSheet(Topic210): DisclosuresaboutOffsettingAssetsandLiabilities.Thisupdatewillrequirea reportingentitytopresentenhanceddisclosuresforfinancialinstrumentsand derivativeinstrumentsthatareoffsetorsubjecttomasternettingagreementsor similarsuchagreements.ThisupdateiseffectivefortheReserveBanksfortheyear endingDecember31,2013,andisnotexpectedtohaveamaterialeffectonthe ReserveBanks’combinedfinancialstatements. InDecember2011,theFASBissuedASU2011–12,ComprehensiveIncome(Topic 220):Deferralof theEffectiveDateforAmendmentstothePresentationof Reclassificationsof Itemsoutof AccumulatedOtherComprehensiveIncomeinAccounting StandardsUpdateNo.2011–05.Thisupdateindefinitelydeferstherequirementsof ASU2011–05relatedtopresentationof reclassificationadjustments. (5)Loans Theremainingmaturitydistributionof loansoutstandingatDecember31,2011, andtotalloansoutstandingatDecember31,2010,wasasfollows(inmillions): 2011 2010 Over Within 16days 91days 1year Total Total 15days to90days to1year to5years Loanstodepositoryinstitutions $189 $7 $ – $ – $ 196 $ 221 TALFloans,fairvalue – 1 4,373 4,685 9,059 24,853 AIGloan,net – – – – – 20,603 LoanstoDepositoryInstitutions TheReserveBanksofferprimary,secondary,andseasonalloanstoeligibleborrowers,andeachprogramhasitsowninterestrate.Interestisaccruedusingthe applicableinterestrateestablishedatleastevery14daysbytheReserveBanks’ boardsof directors,subjecttoreviewanddeterminationbytheBoardof Governors.Primaryandsecondaryloansareextendedonashort-termbasis,typically overnight,whereasseasonalloansmaybeextendedforaperiodof uptonine months. Primary,secondary,andseasonalloansarecollateralizedtothesatisfactionof eachReserveBanktoreducecreditrisk.Assetseligibletocollateralizetheseloans includeconsumer,business,andrealestateloans;Treasurysecurities;GSEdebt securities;foreignsovereigndebt;municipal,corporate,andstateandlocalgovernmentobligations;asset-backedsecurities(ABS);corporatebonds;commercial paper;andbank-issuedassets,suchascertificatesof deposit,banknotes,and depositnotes.Collateralisassignedalendingvaluethatisdeemedappropriateby eachReserveBank,whichistypicallyfairvaluereducedbyamargin.Loansto depositoryinstitutionsaremonitoreddailytoensurethatborrowerscontinueto meeteligibilityrequirementsfortheseprograms.Thefinancialconditionof borrowersismonitoredbyeachReserveBankand,if aborrowernolongerqualifies fortheseprograms,theReserveBankwillgenerallyrequestfullrepaymentof the outstandingloanor,forprimaryorseasonalloans,mayconverttheloantoasec-

FederalReserveSystemAudits 389 ondarycreditloan.Collaterallevelsarerevieweddailyagainstoutstandingobligationsandborrowersthatnolongerhavesufficientcollateraltosupportoutstandingloansarerequiredtoprovideadditionalcollateralortomakepartialorfull repayment. TALF TALFloansarenonrecourseloanssecuredbyeligiblecollateral.EachTALFloan hasathree-yearmaturity,exceptloanssecuredbySmallBusinessAdministration (SBA)PoolCertificates,loanssecuredbySBADevelopmentCompanyParticipationCertificates,orABSbackedbystudentloansorcommercialmortgageloans, whichhaveafive-yearmaturityif theborrowersoelects. TheFRBNYhaselectedthefairvalueoptionforallTALFloansinaccordance withASC825.RecordingallTALFloansatfairvalue,ratherthanattheremainingprincipalamountoutstanding,improvesaccountingconsistencyandprovides themostappropriatepresentationonthefinancialstatementsbymatchingthe changeinfairvalueof TALFloans,therelatedputagreementwithTALFLLC, andthevaluationof thebeneficialinterestsinTALFLLC.Informationregarding theTALFLLC’sassetsandliabilitiesispresentedinNote9. Incertaincasesinwhichthereislimitedactivityaroundinputstothevaluation, loansareclassifiedwithinLevel3of thevaluationhierarchy.Becauseexternal priceinformationwasnotavailable,market-basedmodelswereusedtodetermine thefairvalueof theTALFloans.Thefairvalueof theTALFloanswasdeterminedbyvaluingthefuturecashflowsfromloaninterestincomeandtheestimatedfairvaluelossesassociatedwithcollateralthatmaybeputtotheFRBNY. Thevaluationmodeltakesintoaccountarangeof outcomesonTALFloanrepayments,marketpricesof thecollateral,riskpremiumsestimatedusingmarket prices,andthevolatilitiesof market-riskfactors.Othermethodologiesemployed orassumptionsmadeindeterminingfairvaluecouldresultinanamountthatdifferssignificantlyfromtheamountreported. ThefollowingtablepresentstheTALFloansatfairvalueasof December31by ASC820hierarchy(inmillions): 2011 2010 Level3totalfairvalue $9,059 $24,853 Thefollowingtablepresentsareconciliationof TALFloansmeasuredatfairvalue usingsignificantunobservableinputs(Level3)duringtheyearsendedDecember31,2011and2010(inmillions): TALFloans FairvalueatJanuary1,2010 $48,183 Netloansoriginated 9,484 Loanrepaymentsandprepayments (32,378) Totalrealizedandunrealizedlosses (436) FairvalueatDecember31,2010 $24,853 Loanrepaymentsandprepayments (15,710) Totalrealizedandunrealizedgains(losses) (84) FairvalueatDecember31,2011 $ 9,059 Thefairvalueof TALFloansreportedintheCombinedStatementsof Condition asof December31,2011and2010,includes$37millionand$121millioninunre-

390 98thAnnualReport|2011 alizedgains,respectively.FRBNYattributessubstantiallyallchangesinfairvalue of nonrecourseloanstochangesininstrument-specificcreditspreads. EligiblecollateralincludesU.S.dollar-denominatedABSthatarebackedbyauto loans,studentloans,creditcardloans,equipmentloans,floorplanloans,insurance premiumfinancialloans,loansguaranteedbytheSBA,residentialmortgageservicingadvances,orcommercialmortgageloans.Thefollowingtablepresentsthe collateralconcentrationandmaturitydistributionfortheremainingoutstanding TALFloans,measuredatfairvalue,asof December31,2011(inmillions): Timetomaturity Collateraltype1 16–90days 91daysto1year Over1yearto4years Total Studentloan $– $ 23 $1,937 $1,960 Creditcard – 2,326 80 2,406 CMBS – 578 1,454 2,032 Floorplan – 533 430 963 Auto 1 374 36 411 SBAs – 113 221 334 Other2 – 426 527 953 Total $1 $4,373 $4,685 $9,059 1 AllcreditratingsareAAAunlessotherwiseindicated. 2 Includesequipmentloans,insurancepremiumfinancialloans,andresidentialmortgageservicingadvances. TheaggregateremainingprincipalamountoutstandingonTALFloansasof December31,2011and2010,was$9,013millionand$24,703million,respectively. AtDecember31,2011and2010,noTALFloanswereover90dayspastdueoron nonaccrualstatus. EarningsreportedbytheFRBNYrelatedtotheTALFincludeinterestincome andunrealizedgainsandlossesonTALFloansaswellastheFRBNY’sallocated shareof theTALFLLC’snetincome.Additionalinformationregardingthe incomeof theTALFLLCispresentedinNote9.Thefollowingtablepresentsthe componentsof TALFearningsrecordedbytheFRBNYfortheyearsended December31(inmillions): 2011 2010 Interestincome $265 $750 Administrativefeeincome – 13 Unrealizedlosses (84) (436) TotalincomeonTALFloans $181 $327 AllocatedshareofTALFLLC (48) 71 EarningsofTALF $133 $398 AIGLoan,Net Asaresultof theclosingof theAIGrecapitalizationplanonJanuary14,2011, AIGrepaidtheFRBNYinfullforalloutstandingdrawsundertherevolvingline of creditandtherelatedaccruedinterest,capitalizedinterest,andcapitalizedcommitmentfees.Theremainingamountof theunamortizeddeferredcommitment feeswererecognizedandtheallowanceforloanrestructuringasof theclosingof therecapitalizationwasfullyaccretedintointerestincomeatthatdate.

FederalReserveSystemAudits 391 Thefollowingtablepresentsthecomponentsof theAIGloanatDecember31(in millions): Loancomponents 2011 2010 Lineofcreditdrawn $– $14,621 Capitalizedinterest – 4,663 Capitalizedcommitmentfees – 1,700 AIGloan,gross $– $20,984 Unamortizeddeferredcommitmentfees – (335) Allowanceforloanrestructuring,net – (46) AIGloan,net $– $20,603 Thefairvalueof theAIGrevolvinglineof creditprovidedbytheFRBNY,based onestimatedandactualdrawsandrepayments,wasnotmateriallydifferentfrom thenetamountreportedintheCombinedStatementsof Conditionasof December31,2010. TheactivityrelatedtotheallowanceforAIGloanrestructuringfortheyearsendedDecember31wasasfollows(inmillions): 2011 2010 AllowanceforloanrestructuringJanuary1 $(46) $(1,488) Adjustmentstotheallowance 46 1,442 AllowanceforloanrestructuringDecember31 $ – $ (46) Theallowanceforloanrestructuringrepresentedtheeconomiceffectof thereductionof theinterestrateonloanstheFRBNYmadetoAIGpriortoApril17, 2009,aspartof theloanrestructuringthatoccurredonthatdate.Therestructuringchargeswererecoveredovertheremainingtermof therelatedloanasadjustmentstotheallowance,whichresultedfromperiodicevaluationsandarereported asacomponentof “Interestincome:AmericanInternationalGroup,Inc.,net”in theCombinedStatementsof IncomeandComprehensiveIncome.Theaverage balanceof theloanstoAIGundertherevolvinglineof credit,netof theallowanceforrestructuring,duringtheyearsendedDecember31,2011and2010,was $711millionand$22,874million,respectively. AllowanceforLoanLoss AtDecember31,2011and2010,theReserveBanksdidnothaveanyimpaired loansandnoallowanceforloanlosseswasrequired.Therewerenoimpairedloans duringtheyearsendedDecember31,2011and2010. (6)TreasurySecurities;Government-SponsoredEnterpriseDebt Securities;FederalAgencyandGovernment-SponsoredEnterprise Mortgage-BackedSecurities;SecuritiesPurchasedUnderAgreements toResell;SecuritiesSoldUnderAgreementstoRepurchase;and SecuritiesLending TheFRBNY,onbehalf of theReserveBanks,holdssecuritiesboughtoutrightin theSOMA.

392 98thAnnualReport|2011 Thetotalof Treasurysecurities,GSEdebtsecurities,andfederalagencyandGSE MBS,net,excludingaccruedinterest,heldintheSOMAatDecember31wasas follows(inmillions): 2011 Total Unamortized Unaccreted Par amortized Fairvalue premiums discounts cost Bills $ 18,423 $ – $ – $ 18,423 $ 18,423 Notes 1,286,344 26,806 (1,233) 1,311,917 1,389,429 Bonds 358,679 61,347 (89) 419,937 508,694 TotalTreasurysecurities $1,663,446 $88,153 $(1,322) $1,750,277 $1,916,546 GSEdebtsecurities $ 103,994 $ 3,847 $ (13) $ 107,828 $ 114,238 FederalagencyandGSEMBS $ 837,683 $11,617 $(1,042) $ 848,258 $ 895,495 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 Thefairvalueamountsintheabovetablesarepresentedsolelyforinformational purposes.Althoughthefairvalueof securityholdingscanbesubstantiallygreater thanorlessthantherecordedvalueatanypointintime,theseunrealizedgainsor losseshavenoeffectontheabilityof theReserveBanks,asthecentralbank,to meettheirfinancialobligationsandresponsibilities.Thefairvalueof federal agencyandGSEMBSwasdeterminedusingamodel-basedapproachthatconsidersobservableinputsforsimilarsecurities;fairvalueforallotherSOMAsecurity holdingswasdeterminedbyreferencetoquotedpricesforidenticalsecurities. Thefairvalueof thefixed-rateTreasurysecurities,GSEdebtsecurities,andfederal agencyandGSEMBSintheSOMA’sholdingsissubjecttomarketrisk,arising frommovementsinmarketvariables,suchasinterestratesandsecuritiesprices. Thefairvalueof federalagencyandGSEMBSisalsoaffectedbytheexpectedrate of prepaymentsof mortgageloansunderlyingthesecurities. Thefollowingtableprovidesadditionalinformationontheamortizedcostandfair valuesof thefederalagencyandGSEMBSportfolioatDecember31(inmillions): 2011 2010 Distribution ofMBSholdings bycouponrate Amortized Fairvalue Amortized Fairvalue cost cost 3.0% $ 1,313 $ 1,336 $ – $ – 3.5% 19,415 19,660 341 352 4.0% 161,481 169,763 167,675 168,403 4.5% 406,465 431,171 497,672 508,798 5.0% 182,497 192,664 231,420 237,545 5.5% 66,795 70,064 93,119 95,873 6.0% 9,152 9,616 12,910 13,376 6.5% 1,140 1,221 1,558 1,656 Total $848,258 $895,495 $1,004,695 $1,026,003

FederalReserveSystemAudits 393 Therewerenotransactionsrelatedtosecuritiespurchasedunderagreementsto resellduringtheyearsendedDecember31,2011and2010.Financialinformation relatedtosecuritiessoldunderagreementstorepurchasefortheyearsended December31wasasfollows(inmillions): 2011 2010 Contractamountoutstanding,endofyear $ 99,900 $59,703 Averagedailyamountoutstanding,duringtheyear 72,227 58,476 Maximumbalanceoutstanding,duringtheyear 124,512 77,732 Treasurysecuritiespledged(parvalue),endofyear 86,089 43,642 Treasurysecuritiespledged(marketvalue),endofyear 99,900 59,703 Thecontractamountsforsecuritiessoldunderagreementstorepurchaseapproximatefairvalue.FRBNYexecutestransactionsforthepurchaseof securitiesunder agreementstoresellprimarilytotemporarilyaddreservebalancestothebanking system.Conversely,transactionstosellsecuritiesunderagreementstorepurchase areexecutedtotemporarilydrainreservebalancesfromthebankingsystemandas partof aserviceofferingtoforeignofficialandinternationalaccountholders. Theremainingmaturitydistributionof Treasurysecurities,GSEdebtsecurities, federalagencyandGSEMBSboughtoutright,andsecuritiessoldunderagreementstorepurchaseatDecember31,2011,wasasfollows(inmillions): Over Over Within 16days 91days Over 1year 5years Total 15days to90days to1year 10years to5years to10years Treasurysecurities (parvalue) $16,246 $27,107 $89,899 $649,698 $649,913 $230,583 $1,663,446 GSEdebtsecurities (parvalue) 2,496 5,020 19,695 60,603 13,833 2,347 103,994 FederalagencyandGSE MBS(parvalue)1 – – – 13 34 837,636 837,683 Securitiessoldunder agreementsto repurchase (contractamount) 99,900 – – – – – 99,900 1 TheparamountshownforFederalagencyandGSEMBSistheremainingprincipalbalanceoftheunderlyingmortgages. FederalagencyandGSEMBSarereportedatstatedmaturityinthetableabove. Theestimatedweightedaveragelifeof thesesecuritiesatDecember31,2011, whichdiffersfromthestatedmaturityprimarilybecauseitfactorsinscheduled paymentsandprepaymentassumptions,isapproximately2.4years. Theamortizedcostandparvalueof TreasurysecuritiesandGSEdebtsecurities thatwereloanedfromtheSOMAatDecember31wasasfollows(inmillions): Amortizedcost Parvalue 2011 2010 2011 2010 Treasurysecurities $15,121 $22,627 $13,978 $22,081 GSEdebtsecurities 1,276 1,686 1,216 1,610 TheFRBNYentersintocommitmentstobuyTreasuryandGSEdebtsecurities andrecordstherelatedsecuritiesonasettlement-datebasis.Asof December31, 2011,thetotalpurchasepriceof Treasurysecuritiesunderoutstandingcommitmentswas$3,200million.Thesecommitmentshadcontractualsettlementdates

394 98thAnnualReport|2011 extendingthroughJanuary3,2012.Asof December31,2011,thefairvalueof Treasurysecuritiesunderoutstandingpurchasecommitmentswas$3,208million. TheFRBNYentersintocommitmentstobuyandsellfederalagencyandGSE MBSandrecordstherelatedsecuritiesonasettlement-datebasis.Asof December31,2011,thetotalpurchasepriceof thefederalagencyandGSEMBSunder outstandingpurchasecommitmentswas$41,503million,of which$513million wasrelatedtodollarrolltransactions.Asof December31,2011,thetotalsales priceof thefederalagencyandGSEMBSunderoutstandingsalescommitments was$4,430million,allof whichwasrelatedtodollarrolltransactions.Thesecommitments,whichhadcontractualsettlementdatesextendingthroughFebruary2012,areforthepurchaseandsaleof TBAMBSforwhichthenumberand identityof thepoolsthatwillbedeliveredtofulfillthecommitmentareunknown atthetimeof thetrade.Asof December31,2011,thefairvalueof federalagency andGSEMBSpurchasesandsales,netunderoutstandingcommitmentswas $41,873millionand$4,473million,respectively.Thesecommitmentsaresubjectto varyingdegreesof off-balance-sheetmarketriskandcounterpartycreditriskthat resultfromtheirfuturesettlement.TheFRBNYrequiresthepostingof cashcollateralforcommitmentsaspartof theriskmanagementpracticesusedtomitigate thecounterpartycreditrisk. Otherliabilities,whicharerelatedtofederalagencyandGSEMBSpurchasesand sales,includestheFRBNY’sobligationtoreturncashmarginpostedbycounterpartiesascollateralundercommitmentstopurchaseandsellfederalagencyand GSEMBS.Inaddition,otherliabilitiesincludesobligationsthatarisefromthe failureof asellertodeliversecuritiestotheFRBNYonthesettlementdate. AlthoughtheFRBNYhasownershipof andrecordsitsinvestmentsintheMBS asof thecontractualsettlementdate,itisnotobligatedtomakepaymentuntilthe securitiesaredelivered,andtheamountincludedinotherliabilitiesrepresentsthe FRBNY’sobligationtopayforthesecuritieswhendelivered.Theamountof other liabilitiesheldintheSOMAatDecember31wasasfollows(inmillions): 2011 2010 Cashmargin $1,271 $– ObligationsfromMBStransactionfails 97 – Total $1,368 $– DuringtheyearsendedDecember31,2011and2010,theReserveBanksrecorded netgainsfromfederalagencyandGSEMBStransactionsof $10millionand $782million,respectively.Thesenetgainsarereportedas“Non-interestincome: Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities gains,net”intheCombinedStatementsof IncomeandComprehensiveIncome.

FederalReserveSystemAudits 395 InformationabouttransactionsrelatedtoTreasurysecurities,GSEdebtsecurities, andfederalagencyandGSEMBSduringtheyearendedDecember31,2011,is summarizedasfollows(inmillions): Federal TotalTreasury GSEdebt Bills Notes Bonds agencyand securities securities GSEMBS BalanceatDecember31,2010 $ 18,422 $ 786,575 $261,955 $1,066,952 $152,972 $1,004,695 Purchases1 239,487 731,252 161,876 1,132,615 – 42,145 Sales1 – (137,733) – (137,733) – – Realizedgains,net2 – 2,258 – 2,258 – – Principalpaymentsandmaturities (239,494) (67,273) – (306,767) (43,466) (195,413) Amortizationofpremiumsanddiscounts 8 (4,445) (4,985) (9,422) (1,678) (3,169) Inflationadjustmentofinflationon inflation-indexedsecurities – 1,283 1,091 2,374 – – BalanceatDecember31,2011 $ 18,423 $1,311,917 $419,937 $1,750,277 $107,828 $ 848,258 Supplementalinformation–parvalueof transactions: Purchases $239,494 $ 713,878 $127,802 $1,081,174 $ – $ 40,955 Sales – (134,829) – (134,829) – – 1 Purchasesandsalesarereportedonasettlement-datebasisandincludepaymentsandreceiptsrelatedtoprincipal, premiums,discounts,andinflationcompensationincludedinthebasisofinflation-indexedsecurities.Theamountreportedas salesalsoincludesrealizedgains,net. 2 Adjustmentforrealizedgains,netisrequiredbecausetheseamountsdonotaffectthereportedamountoftherelated securities.ExcludesrealizedgainsandlossesthatresultfromnetsettledMBSTBAtransactions. (7)ForeignCurrencyDenominatedAssets TheFRBNYholdsforeigncurrencydepositswithforeigncentralbanksandthe BankforInternationalSettlementsandinvestsinforeigngovernmentdebtinstrumentsof Germany,France,andJapan.Theseforeigngovernmentdebtinstrumentsareguaranteedastoprincipalandinterestbytheissuingforeigngovernments.Inaddition,theFRBNYentersintotransactionstopurchaseEurodenominatedgovernmentdebtsecuritiesunderagreementstoresellforwhichthe acceptedcollateralisthedebtinstrumentsissuedbythegovernmentsof Belgium, France,Germany,Italy,theNetherlands,andSpain. TheReserveBanks’foreigncurrencydenominatedassets,includingaccruedinterest,valuedatamortizedcostandforeigncurrencymarketexchangeratesat December31wasasfollows(inmillions): 2011 2010 Euro: Foreigncurrencydeposits $ 9,367 $ 7,057 Securitiespurchasedunderagreementstoresell – 2,467 Germangovernmentdebtinstruments 1,885 1,849 Frenchgovernmentdebtinstruments 2,635 2,754 Japaneseyen: Foreigncurrencydeposits 3,985 3,883 Japanesegovernmentdebtinstruments 8,078 8,039 Total $25,950 $26,049 AtDecember31,2011and2010,thefairvalueof foreigncurrencydenominated assets,includingaccruedinterest,was$26,116millionand$26,213million,respectively.Thefairvalueof governmentdebtinstrumentswasdeterminedbyreference toquotedpricesforidenticalsecurities.Thecostbasisof foreigncurrencydeposits andsecuritiespurchasedunderagreementstoresell,adjustedforaccruedinterest, approximatesfairvalue.SimilartoTreasurysecurities,GSEdebtsecurities,and

396 98thAnnualReport|2011 federalagencyandGSEMBSdiscussedinNote6,unrealizedgainsorlosseshave noeffectontheabilityof theReserveBanks,asthecentralbank,tomeettheir financialobligationsandresponsibilities.Thefairvalueispresentedsolelyfor informationalpurposes. Theremainingmaturitydistributionof foreigncurrencydenominatedassetsat December31,2011,wasasfollows(inmillions): Within 16days 91days Over1year Total 15days to90days to1year to5years Euro $5,352 $2,933 $2,115 $3,487 $13,887 Japaneseyen 4,180 662 3,143 4,078 12,063 Total $9,532 $3,595 $5,258 $7,565 $25,950 AtDecember31,2011and2010,theauthorizedwarehousingfacilitywas$5billion,withnobalanceoutstanding. TherewerenotransactionsrelatedtotheauthorizedreciprocalcurrencyarrangementswiththeBankof CanadaandtheBankof Mexicoduringtheyearsended December31,2011and2010. Therewerenoforeignexchangecontractsrelatedtoopenmarketoperationsoutstandingasof December31,2011. TheFRBNYentersintocommitmentstobuyforeigngovernmentdebtinstrumentsandrecordstherelatedsecuritiesonasettlement-datebasis.Asof December31,2011,therewere$216millionof outstandingcommitmentstopurchase Euro-denominatedgovernmentdebtinstruments.ThesesecuritiessettledonJanuary4,2012,andreplacedEuro-denominatedgovernmentdebtinstrumentsheldin theSOMAthatmaturedonthatdate.Asof December31,2011,thefairvalueof Euro-denominatedgovernmentdebtinstrumentsunderoutstandingcommitments was$216million. Inconnectionwithitsforeigncurrencyactivities,theFRBNYmayenterinto transactionsthataresubjecttovaryingdegreesof off-balance-sheetmarketrisk andcounterpartycreditriskthatresultfromtheirfuturesettlement.TheFRBNY controlstheserisksbyobtainingcreditapprovals,establishingtransactionlimits, receivingcollateralinsomecases,andperformingdailymonitoringprocedures. Foreigncurrencyworkingbalancesheldandforeignexchangecontractsexecuted bytheFRBNYtofacilitateitsinternationalpaymentsandcurrencytransactionsit madeonbehalf of foreigncentralbanksandU.S.officialinstitutioncustomers werenotmaterialasof December31,2011and2010. (8)CentralBankLiquiditySwaps U.S.DollarLiquiditySwaps ThetotalforeigncurrencyheldunderU.S.dollarliquidityswapsintheSOMAat December31,2011and2010,was$99,823millionand$75million,respectively.

FederalReserveSystemAudits 397 Theremainingmaturitydistributionof U.S.dollarliquidityswapsatDecember31,2011,andtotalU.S.dollarliquidityswapsoutstandingatDecember31, 2010,wasasfollows(inmillions): 2011 2010 16daysto Within15days Total Total 90days Euro $34,357 $51,080 $85,437 $75 Japaneseyen 9,035 4,956 13,991 – Swissfranc 320 75 395 – Total $43,712 $56,111 $99,823 $75 ForeignCurrencyLiquiditySwaps Therewerenotransactionsrelatedtotheforeigncurrencyliquidityswapsduring theyearsendedDecember31,2011and2010. (9)InvestmentsHeldByConsolidatedVariableInterestEntities a.SummaryInformationforConsolidatedVariableInterestEntities Thetotalassetsof consolidatedVIEs,includingcash,cashequivalents,and accruedinterest,atDecember31wereasfollows(inmillions): 2011 2010 ML $ 7,805 $27,961 MLII 9,257 16,457 MLIII 17,820 23,583 TALFLLC 811 665 Total $35,693 $68,666 TheFRBNY’sapproximatemaximumexposuretolossatDecember31,2011and 2010,was$24,606millionand$55,434million,respectively.TheseestimatesincorporatepotentiallossesassociatedwithassetsrecordedontheFRBNY’sStatement of Condition,netof thefairvalueof subordinatedinterests(beneficialinterestin consolidatedVIEs). Theclassificationof significantassetsandliabilitiesof theconsolidatedVIEsat December31wasasfollows(inmillions): 2011 2010 Assets: CDOs $17,854 $23,112 Non-agencyRMBS 10,903 18,360 FederalagencyandGSEMBS 440 16,842 Commercialmortgageloans 2,861 5,130 Swapcontracts 657 851 Residentialmortgageloans 378 603 Otherinvestments 1,358 587 Subtotal $34,451 $65,485 Cash,cashequivalents,andaccruedinterestreceivable 1,242 3,181 TotalinvestmentsheldbyconsolidatedVIEs $35,693 $68,666 Liabilities: BeneficialinterestinconsolidatedVIEs $ 9,845 $10,051 Otherliabilities1 $ 690 $ 921 1 Theamountreportedas“Consolidatedvariableinterestentities:Otherliabilities”intheCombinedStatementsofCondition includes$554millionand$695millionrelatedtocashcollateralreceivedonswapcontractsatDecember31,2011and2010, respectively.Theamountalsoincludesaccruedinterestandaccruedotherexpenses.

398 98thAnnualReport|2011 Totalrealizedandunrealizedgains(losses),netfortheyearendedDecember31, 2011,wereasfollows(inmillions): Totalportfolio Fairvalue Totalportfolio holdingsrealized changesunrealized holdingsrealized/ gains(losses) gains(losses) unrealizedgains(losses) CDOs $ (60) $(3,278) $(3,338) Non-agencyRMBS 227 (1,084) (857) FederalagencyandGSEMBS 1,221 (895) 326 Commercialmortgageloans1 (368) 407 39 Residentialmortgageloans1 (312) 263 (49) Swapcontracts (258) 225 (33) Otherinvestments 29 3 32 Otherassets (51) 11 (40) Total $ 428 $(4,348) $(3,920) 1 Substantiallyallunrealizedgains(losses)onthecommercialandresidentialmortgageloansareattributabletochangesin instrument-specificcreditrisk. Totalrealizedandunrealizedgains(losses),netfortheyearendedDecember31, 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. Thenetincome(loss)attributabletoML,MLII,MLIII,andTALFLLCforthe yearendedDecember31,2011,wasasfollows(inmillions): ML MLII MLIII TALFLLC Total Interestincome: Portfoliointerestincome $ 808 $609 $2,012 $ – $3,429 Less:Interestexpense 70 36 175 4 285 Netinterestincome 738 573 1,837 (4) 3,144 Non-interestincome: Portfolioholdingsgains(losses) 434 (991) (3,363) – (3,920) Less:Unrealizedgains(losses)onbeneficial interestinconsolidatedVIEs (114) 91 558 (44)1 491 Netnon-interestincome(loss) 320 (900) (2,805) (44) (3,429) Totalnetinterestincomeandnon-interest income 1,058 (327) (968) (48) (285) Less:Professionalfees 43 8 20 – 71 Netincome(loss)attributableto consolidatedVIEs $1,015 $(335) $ (988) $(48)2 $ (356) 1 TheTALFLLC’sunrealizedlossonbeneficialinterestrepresentsTreasury’sfinancialinterestinthenetincomeofTALFLLCfor theyearendedDecember31,2011. 2 AdditionalinformationregardingTALF-relatedincomerecordedbytheBankispresentedinNote5.

FederalReserveSystemAudits 399 Thenetincome(loss)attributabletoML,MLII,MLIII,CPFF,andTALFLLC fortheyearendedDecember31,2010,wasasfollows(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 Unrealizedgains(losses)on beneficialinterestin consolidatedVIEs (1,135) (1,353) (2,266) – 751 (4,679) Netnon-interestincome 1,436 1,114 875 1 75 3,501 Totalnetinterestincomeand non-interestincome 2,503 1,874 3,001 214 72 7,664 Less:Professionalfees 69 10 22 2 1 104 Netincome(loss)attributableto consolidatedVIEs $2,434 $1,864 $2,979 $212 $712 $7,560 1 TheTALFLLC’sunrealizedgainonbeneficialinterestrepresentsTreasury’sfinancialinterestinthenetincomeofTALFLLCfor theyearendedDecember31,2010. 2 AdditionalinformationregardingTALF-relatedincomerecordedbytheBankispresentedinNote5. Followingisasummaryof theconsolidatedVIEs’subordinatedfinancialinterest fortheyearsendedDecember31,2011and2010(inmillions): MLII ML MLIII TALF deferred subordinated equity financial Total purchase loan contribution interest price Fairvalue,January31,2010 $ – $ – $4,294 $801 $ 5,095 Interestaccruedandcapitalized 66 34 173 4 277 Unrealized(gain)/loss 1,135 1,353 2,266 (75) 4,679 Fairvalue,December31,2010 $1,201 $1,387 $6,733 $730 $10,051 Interestaccruedandcapitalized 70 36 175 4 285 Unrealized(gain)/loss 114 (91) (558) 44 (491) Fairvalue,atDecember31,2011 $1,385 $1,332 $6,350 $778 $ 9,845 b.MaidenLaneLLC ML’sinvestmentportfolioconsistsprimarilyof federalagencyandGSEMBS, non-agencyRMBS,commercialandresidentialmortgageloans,andderivatives andassociatedhedges.Followingisadescriptionof thesignificantholdingsat December31,2011,andtheassociatedcreditriskforeachholding: i.DebtSecurities FederalagencyandGSEMBSrepresentfractionalownershipinterestsinRMBS guaranteedbyfederalagenciesandGSEs.Therateof delinquenciesanddefaults 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

400 98thAnnualReport|2011 ontheunderlyingmortgageloansandbreachesbyoriginatorsandservicersof theirobligationsundertheunderlyingdocumentationpursuanttowhichthenonagencyRMBSwereissued.Therateof delinquenciesanddefaultsonresidential mortgageloansandtheaggregateamountof theresultinglosseswillbeaffected byanumberof factors,includinggeneraleconomicconditions,particularlythose intheareawheretherelatedmortgagedpropertyislocated;thelevelof theborrower’sequityinthemortgagedproperty;andtheindividualfinancialcircumstancesof theborrower.Changesineconomicconditions,includingdelinquencies anddefaultsontheunderlyingmortgages,canaffectthevalue,income,and liquidity. Therateof interestpayableoncertainnon-agencyRMBSmaybesetoreffectively cappedattheweightedaveragenetcouponof theunderlyingmortgageloans themselves,oftenreferredtoasan“availablefundscap.”Asaresultof thiscap, thereturntoMLonsuchnon-agencyRMBSisdependentontherelativetiming andrateof delinquenciesandprepaymentsof mortgageloansbearingahigher interestrate. Asof December31,2011,approximately37.9percentand12.5percentof the propertiescollateralizingthenon-agencyRMBSheldbyMLwerelocatedinCaliforniaandFlorida,respectively,basedonthetotalunpaidprincipalbalanceof the underlyingloans. Thefairvalueof anyparticularnon-agencyRMBSassetmaybesubjecttosubstantialvariation.Theentiremarketorparticularinstrumentstradedonamarket maydeclineinvalue,evenif projectedcashfloworotherfactorsimprove,because thepricesof suchinstrumentsaresubjecttonumerousotherfactorsthathavelittle ornocorrelationtotheperformanceof aparticularinstrument.Adversedevelopmentsinthenon-agencyRMBSmarketcouldhaveaconsiderableeffectonML becauseof itsinvestmentconcentrationinnon-agencyRMBS. AtDecember31,2011,theratingsbreakdownof the$3,313millionof debtsecurities,whicharerecordedatfairvalueintheMLportfolioasapercentageof aggregatefairvalueof allsecuritiesintheportfoliowasasfollows: Ratings1,4 SecurityType:2 AA+ BBB+ BB+and Government/ AAA A+toA- Total toAA- toBBB- lower5 agency Federalagencyand GSEMBS – – – – – 13.3% 13.3% Non-agencyRMBS 0.3% 0.6% 0.7% 0.6% 44.2% – 46.4% Other3 2.6% 1.9% 1.2% 6.1% 6.8% 21.8% 40.3% Total 2.9% 2.4% 1.9% 6.7% 51.0% 35.1% 100.0% 1 Lowestofallratingsisusedforthepurposesofthistableifratedbytwoormorenationallyrecognizedstatisticalrating organizations. 2 ThistableexcludesML’scommercialandresidentialmortgageloans,swaps,andotherderivativecontracts. 3 Includes$702millionofshort-terminvestmentsand$380millionofCDOs. 4 Rowsandcolumnsmaynottotalduetorounding. 5 BB+andlowerincludesdebtsecuritiesthatwerenotratedbyanationallyrecognizedstatisticalratingorganizationasof December31,2011. ii.CommercialandResidentialMortgageLoans Commercialandresidentialmortgageloansaresubjecttoahighdegreeof credit riskbecauseof exposuretolossfromloandefaults.Defaultratesaresubjecttoa

FederalReserveSystemAudits 401 widevarietyof factors,including,butnotlimitedto,propertyperformance,propertymanagement,supplyanddemand,constructiontrends,consumerbehavior, regionaleconomicconditions,interestrates,andotherfactors. Theperformanceprofileforthecommercialandresidentialmortgageloansat December31,2011,wasasfollows(inmillions): Fairvalueasa Unpaidprincipal percentageof Fairvalue balance unpaidprincipal balance Performingloans: Commercial $3,705 $2,790 75.3% Residential 618 335 54.2% Subtotal 4,323 3,125 72.3% Non-performing/Non-accrualloans:1 Commercial 126 71 56.3% Residential 119 43 36.1% Subtotal 245 114 46.5% Total: Commercial 3,831 2,861 74.7% Residential 737 378 51.3% Totalloans $4,568 $3,239 70.9% 1 Non-performing/non-accrualloansincludeloanswithpaymentspastduegreaterthan90days. Thefollowingtablesummarizesthestateinwhichresidentialmortgageloansare collateralizedandthepropertytypesof thecommercialmortgageloansheldinthe MLportfolioatDecember31,2011: Concentrationofunpaidprincipalbalances Residential Commercial2 Bystate: California 37.6% Florida 7.5% Other1 54.9% Total 100.0% Byproperty: Hospitality 74.7% Office 18.0% Other2 7.3% Total 100.0% 1 Nootherindividualstateorpropertytypecomprisesmorethan5percentofthetotal. 2 Oneborrowerrepresentsapproximately43percentoftotalunpaidprincipalbalanceofthecommercialmortgageloanportfolio. CommercialmortgageloansheldbyMLarecomposedof differentlevelsof subordinationwithrespecttotheunderlyingproperties,andrelativetoeachother. Seniormortgageloansaresecuredpropertyloansevidencedbyafirstmortgage thatisseniortoanysubordinateormezzaninefinancing.Subordinatemortgage interests,sometimesknownasBNotes,areloansevidencedbyajuniornoteora juniorparticipationinamortgageloan.Mezzanineloansareloansmadetothe directorindirectownerof theproperty-owningentity.Mezzanineloansarenot securedbyamortgageonthepropertybutratherbyapledgeof themezzanine borrower’sdirectorindirectownershipinterestintheproperty-owningentity.

402 98thAnnualReport|2011 ThefollowingtablesummarizescommercialmortgageloansheldbyMLat December31,2011(inmillions): Concentrationofunpaid Loantype Unpaidprincipalbalances principalbalances Seniormortgageloan $2,695 70.3% Subordinatemortgageinterests 74 2.0% Mezzanineloans 1,062 27.7% Total $3,831 100.0% AsdiscussedinNote17,subsequenttoDecember31,2011,thetotalunpaidprincipalbalancewasreducedby$1.6billionduetothesaleof commercialmortgage loansheldbyML. iii.DerivativeInstruments Derivativecontractsareinstruments,suchasfuturesandoptionsorswapcontracts,thatderivetheirvaluefromunderlyingassets,indexes,referencerates,ora combinationof thesefactors.TheMLportfolioincludesvariousderivativefinancialinstruments,primarilyconsistingof atotalreturnswapagreementwithJPMC (TRS).MLandJPMCenteredintotheTRSwithreferenceobligationsrepresentingsingle-nameCDSprimarilyonRMBSandCMBS,andinterestrateswaps (IRS)withvariousmarketparticipants,includingJPMC.ML,throughitsinvestmentmanager,currentlymanagestheCDScontractswithintheTRSasarunoff portfolioandmayunwind,amend,ornovatereferenceobligationsonanongoing basis. MLentersintoadditionalderivativecontractsconsistingof futuresandIRSto economicallyhedgeitsexposuretointerestrates.For2011,therewere144trades executedasIRS.AllderivativesarerecordedatfairvalueinaccordancewithASC 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’scashequivalents,purchasedbythere-hypothecationof cashcollateralassociatedwiththeTRS,was$0.8billionforeachof theyears endedDecember31,2011andDecember31,2010.Inaddition,MLhaspledged $0.6billionand$1.0billionof federalagencyandGSEMBSandU.S.Treasury notestoJPMCasof December31,2011and2010,respectively. ThefollowingrisksareassociatedwiththederivativeinstrumentsheldbyMLas partof theTRSagreementwithJPMCaswellasanyderivativesoutsideof theTRS: MarketRisk CDSareagreementsthatprovideprotectionforthebuyeragainstthelossof principaland,insomecases,interestonabondorloanincaseof adefaultbythe

FederalReserveSystemAudits 403 issuer.Thenatureof acrediteventisestablishedbytheprotectionbuyerandprotectionsellerattheinceptionof atransaction,andsucheventsincludebankruptcy, insolvency,orfailuretomeetpaymentobligationswhendue.Thebuyerof the CDSpaysapremiuminreturnforpaymentprotectionupontheoccurrence,if any,of acreditevent.Upontheoccurrenceof atriggeringcreditevent,themaximumpotentialamountof futurepaymentsthesellercouldberequiredtomake underaCDSisequaltothenotionalamountof thecontract.Suchfuturepaymentscouldbereducedoroffsetbyamountsrecoveredunderrecourseorbycollateralprovisionsoutlinedinthecontract,includingseizureandliquidationof collateralpledgedbythebuyer.ML’sderivativesportfolioconsistsof purchased creditprotectionandsoldcreditprotectionwithdifferingunderlyingreferenced namesthatdonotnecessarilyoffset. 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 proceedsfrom(orcostof)theclosingtransactionandML’scostbasisinthecontract.Theuseof futurestransactionsinvolvestheriskof imperfectcorrelationin movementsinthepriceof futurescontracts,interestrates,andtheunderlying hedgedassets.MLisalsoatriskof notbeingabletoenterintoaclosingtransactionforthefuturescontractbecauseof anilliquidsecondarymarket.MLhadno pledgedcashcollateralrelatedtofuturecontractsasof December31,2011,and $18millionof cashcollateralasof December31,2010. CreditRisk Creditriskistheriskof financiallossresultingfromfailurebyacounterpartyto meetitscontractualobligationstoML.Thiscanbecausedbyfactorsdirectly relatedtothecounterparty,suchasbusinessormanagement.Takingcollateralis themostcommonwaytomitigatecreditrisk.MLtakesfinancialcollateralinthe formof cashandmarketablesecuritiestocoverJPMCcounterpartyriskaspartof theTRSagreementwithJPMCaswellastheover-the-counterderivativesactivitiesoutsideof theTRS.

404 98thAnnualReport|2011 Thefollowingtablesummarizesthenotionalamountsof derivativecontractsoutstandingasof December31,2011and2010(inmillions): Notionalamounts1 2011 2010 Interestratecontracts: IRS2 $ – $4,130 Futuresandoptionsonfutures3 – – Creditderivatives: CDS4 3,940 5,856 Total $3,940 $9,986 1 Theseamountsrepresentthesumofgrosslongandgrossshortnotionalderivativecontracts.Thechangeinnotionalamounts isrepresentativeofthevolumeofactivityfortheyearendedDecember31,2011. 2 TherewerenoIRScontractsoutstandingasofDecember31,2011,and39IRScontractsoutstandingasofDecember31, 2010. 3 Futuresandoptionsrelatetocontractequivalentsandnotgrossnotionalamounts.Thereportednotionalamountoffuturesand optionsasofDecember31,2010hasbeencorrected.Thepreviouslyreported2010futuresandoptionswerereportedat $18million.Therevised2010futuresandoptionsarereportedat$18thousand. 4 Therewere979and1,361CDScontractsoutstandingasofDecember2011and2010,respectively. Thefollowingtablesummarizesthefairvalueof derivativeinstrumentsbycontracttypeonagrossbasisasof December31,2011and2010,whichisreportedas acomponentof “Investmentsheldbyconsolidatedvariableinterestentities”inthe CombinedStatementsof Condition(inmillions): 2011 2010 Gross Gross Gross Gross derivative derivative derivative derivative assets liabilities assets liabilities Interestratecontracts: IRS $ – $ – $ 9 $ 229 Futuresandoptionsonfutures – – 4 2 Creditderivatives: CDS1 1,630 791 2,317 1,347 Counterpartynetting (685) (685) (1,375) (1,374) Cashcollateral (288) – (100) – Total $ 657 $106 $ 855 $ 204 1 CDSfairvaluesasofDecember31,2011forassetsandliabilitiesincludeinterestreceivablesof$22millionandpayablesof $13million.CDSfairvaluesasofDecember31,2010forassetsandliabilitiesincludesinterestreceivablesof$39millionand payablesof$28million. Thetablebelowsummarizescertaininformationregardingprotectionsoldthrough CDSasof December31(inmillions): Maximumpotentialpayout/notional 2011 2010 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-) $ – $ – $– $ 92 $ 92 $ (14) $ 120 $ (23) Non-investmentgrade 150 100 – 904 1,154 (763) 1,824 (1,284) Totalcreditprotectionsold $150 $100 $– $996 $1,246 $(777) $1,944 $(1,307)

FederalReserveSystemAudits 405 Thetablebelowsummarizescertaininformationregardingprotectionbought throughCDSasof December31(inmillions): Maximumpotentialrecovery/notional 2011 2010 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-) $ 5 $ – $ 7 $ 158 $ 170 $ 46 $ 263 $ 76 Non-investmentgrade 351 100 22 2,052 2,525 1,562 3,648 2,190 Totalcreditprotectionbought $356 $100 $29 $2,210 $2,695 $1,608 $3,911 $2,266 OtherAssets Otherassetsareprimarilycomposedof otherrealestateownedof approximately $12million. c.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. Thefairvalueof anyparticularnon-agencyRMBSassetmaybesubjecttosubstantialvariation.Theentiremarketorparticularinstrumentstradedonamarket maydeclineinvalue,evenif projectedcashfloworotherfactorsimprove,because thepricesof suchinstrumentsaresubjecttonumerousotherfactorsthathavelittle ornocorrelationtotheperformanceof aparticularinstrument.Adversedevelopmentsinthenon-agencyRMBSmarketcouldhaveaconsiderableeffectonMLII becauseof itsinvestmentconcentrationinnon-agencyRMBS.

406 98thAnnualReport|2011 AtDecember31,2011,thetypeandratingcompositionof theMLII’s$9,105millionnon-agencyRMBSportfolio,recordedatfairvalue,asapercentageof aggregatefairvalue,wereasfollows: Rating1,3 AssetType: AAA AA+toAA- A+toA- BBB+toBBB- BB+andlower Total Alt-AARM – 1.1% 1.1% 0.2% 21.6% 23.9% Subprime 3.9% 3.2% 1.6% 1.0% 49.5% 59.2% OptionARM – – – – 5.9% 5.9% Other2 – 0.8% 1.6% – 8.7% 11.0% Total 3.9% 5.0% 4.3% 1.2% 85.7% 100.0% 1 Lowestofallratingsisusedforthepurposeofthistableifratedbytwoormorenationallyrecognizedstatisticalrating organizations. 2 Includesallassettypesthat,individually,representlessthan5%ofaggregateportfoliofairvalue. 3 Rowsandcolumnsmaynottotalduetorounding. AtDecember31,2011,approximately29percentand13percentof theproperties collateralizingthenon-agencyRMBSheldbyMLIIwerelocatedinCalifornia andFlorida,respectively,basedonthegeographicallocationdataavailableforthe underlyingloansbyaggregateunpaidprincipalbalance. d.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. 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.

FederalReserveSystemAudits 407 AtDecember31,2011,theinvestmenttype/vintageandratingcompositionof ML III’s$17,735millionportfolio,recordedatfairvalue,asapercentageof aggregate fairvalueof allsecuritiesintheportfoliowasasfollows: Rating1,2,3 AA+ BBB+ BB+and Not AAA A+toA- Total toAA- toBBB- lower rated4 ABSCDOs: High-gradeABSCDOs – – – – 60.7% 2.7% 63.4% Pre-2005 – – – – 20.5% 0.8% 21.3% 2005 – – – – 28.3% 1.9% 30.2% 2006 – – – – 5.4% – 5.4% 2007 – – – – 6.4% – 6.4% MezzanineABSCDOs – – – – 8.0% 0.2% 8.2% Pre-2005 – – – – 4.5% 0.2% 4.7% 2005 – – – – 3.0% – 3.0% 2006 – – – – – – – 2007 – – – – 0.6% – 0.6% CommercialReal-EstateCDOs – – – – 27.0% – 27.0% Pre-2005 – – – – 3.5% – 3.5% 2005 – – – – – – – 2006 – – – – – – – 2007 – – – – 23.4% – 23.4% RMBS,CMBS,&Other: 0.1% 0.1% 0.1% 0.1% 1.0% – 1.5% Pre-2005 – – – – 0.1% – 0.2% 2005 0.1% 0.1% 0.1% 0.1% 0.8% – 1.2% 2006 – – – – 0.1% – 0.1% 2007 – – – – – – – Totalinvestments 0.1% 0.1% 0.1% 0.1% 96.7% 2.9% 100.0% 1 Lowestofallratingswasusedforthepurposeofthistableifratedbytwoormorenationallyrecognizedstatisticalrating organizations. 2 Theyearofissuancewiththehighestconcentrationofunderlyingassetsasmeasuredbyoutstandingprincipalbalance determinesthevintageoftheCDO. 3 Rowsandcolumnsmaynottotalduetorounding. 4 NotratedbyanationallyrecognizedstatisticalratingorganizationasofDecember31,2011. e.TALFLLC CashreceiptsresultingfromtheputoptionfeespaidtoTALFLLCandproceeds fromtheTreasury’sloanareinvestedinthefollowingtypesof U.S.dollardenominatedshort-terminvestmentsandcashequivalentseligibleforpurchaseby theLLC:(1)U.S.Treasurysecurities,(2)federalagencysecuritiesthataresenior, negotiabledebtobligationsof FannieMae,FreddieMac,FederalHomeLoan Banks,andFederalFarmCreditBanks,whichhaveafixedrateof interest, (3)repurchaseagreementsthatarecollateralizedbyTreasuryandfederalagency securitiesandfixed-rateagencymortgage-backedsecurities,and(4)moneymarket mutualfundsregisteredwiththeSecuritiesandExchangeCommissionandregulatedunderRule2a-7of theInvestmentCompanyActthatinvestexclusivelyin U.S.Treasuryandfederalagencysecurities.Cashmayalsobeinvestedinademand interest-bearingaccountheldattheBankof NewYorkMellon. f.FairValueMeasurement TheconsolidatedVIEshaveadoptedASC820andASC825andhaveelectedthe fairvalueoptionforallsecuritiesandcommercialandresidentialmortgagesheld byMLandTALFLLC.MLIIandMLIIIqualifyasnonregisteredinvestment companiesundertheprovisionsof ASC946and,therefore,allinvestmentsare recordedatfairvalueinaccordancewithASC820.Inaddition,theFRBNYhas

408 98thAnnualReport|2011 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. ii.ValuationMethodologiesforLevel3AssetsandLiabilities Incertaincasesinwhichthereislimitedactivityaroundinputstothevaluation, securitiesareclassifiedwithinLevel3of thevaluationhierarchy.Forexample,in valuingCDOs,certaincollateralizedmortgageobligations,andcommercialand residentialmortgageloans,thedeterminationof fairvalueisbasedoncollateral performancescenarios.Thesevaluationsalsoincorporatepricingmetricsderived fromthereportedperformanceof theuniverseof bondsandfromobservations andestimatesof marketdata.Becauseexternalpriceinformationisnotavailable, market-basedmodelsareusedtovaluethesesecurities.Keyinputstothemodel mayincludemarketspreadsoryieldestimatesforcomparableinstruments,data foreachcreditrating,valuationestimatesforunderlyingpropertycollateral,projectedcashflows,andotherrelevantcontractualfeatures.Becausethereislackof observablepricing,securitiesandinvestmentloansthatarecarriedatfairvalueare classifiedwithinLevel3.

FederalReserveSystemAudits 409 ThefollowingtablespresentthefinancialinstrumentsrecordedinVIEsatfair valueasof December31byASC820hierarchy(inmillions): 2011 Total Level1 Level2 Level3 Netting1 fairvalue Assets: CDOs $ – $ 167 $17,687 $ – $17,854 Non-agencyRMBS – 5,493 5,410 – 10,903 FederalagencyandGSEMBS – 440 – – 440 Commercialmortgageloans – 1,464 1,397 – 2,861 Cashequivalents 1,171 – – – 1,171 Swapcontracts – – 1,630 (973) 657 Residentialmortgageloans – – 378 – 378 Otherinvestments 1,095 126 108 – 1,329 Totalassets $2,266 $7,690 $26,610 $(973) $35,593 Liabilities: BeneficialinterestinconsolidatedVIEs $ – $ – $ 9,845 $ – $ 9,845 Swapcontracts – – 791 (685) 106 Totalliabilities $ – $ – $10,636 $(685) $ 9,951 1 Derivativereceivablesandpayablesandtherelatedcashcollateralreceivedandpaidareshownnetwhenamasternetting agreementexists. 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 Derivativereceivablesandpayablesandtherelatedcashcollateralreceivedandpaidareshownnetwhenamasternetting agreementexists.

410 98thAnnualReport|2011 Thetablebelowpresentsareconciliationof allassetsandliabilitiesmeasuredat fairvalueonarecurringbasisusingsignificantunobservableinputs(Level3)asof December31,2011(inmillions).Unrealizedgainsandlossesrelatedtothose assetsstillheldatDecember31,2011,arereportedasacomponentof “Investmentsheldbyconsolidatedvariableinterestentitiesgains/(losses),net”inthe CombinedStatementsof IncomeandComprehensiveIncome. 2011 Changein unrealized Purchases, Net gains/(losses) Fairvalue sales, realized/ Gross Gross Fairvalue relatedto December31, and unrealized transfers transfers December31, financial 2010 settlements, gains in1,2,3 out1,2,3 2011 instruments net (losses) heldat December31, 2011 Assets: CDOs $22,811 $(1,889) $(3,351) $ 116 $ – $17,687 $(3,297) Non-agencyRMBS 6,809 (2,891) (483) 4,066 (2,091) 5,410 (725) Commercialmortgage loans 1,931 (626) 92 – – 1,397 65 Residentialmortgage loans 603 (175) (50) – – 378 263 Federalagencyand GSEMBS 30 (28) (2) – – – – Otherinvestments 79 (29) (2) 94 (34) 108 (9) Totalassets $32,263 $(5,638) $(3,796) $4,276 $(2,125) $24,980 $(3,703) Netswapcontracts4 $ 970 $ (235) $ 104 $ – $ – $ 839 $ 83 Liabilities: Beneficialinterestin consolidatedVIEs $10,051 2855 $ (491) $ – $ – $ 9,845 $ 491 1 Theamountoftransfersisbasedonthefairvaluesofthetransferredassetsatthebeginningofthereportingperiod. 2 TherewerenosignificanttransfersbetweenLevel1andLevel2duringtheyearendedDecember31,2011. 3 Non-agencyRMBS,withaDecember31,2010,fairvalueof$2,091million,weretransferredfromLevel3toLevel2because theyarevaluedatDecember31,2011,basedonquotedpricesinnon-activemarkets(Level2).Theseinvestmentswere valuedintheprioryearonnon-observablemodelbasedinputs(Level3).Therewerealsonon-agencyRMBS,CDOs,andother investmentsforwhichvaluationinputsbecamelessobservableduringtheyearendedDecember31,2011,whichresultedin $4,066million,$116million,and$94million,respectively,intransfersfromLevel2toLevel3.Therewerenoothersignificant transfersbetweenLevel2andLevel3duringthecurrentyear. 4 Level3derivativeassetsandliabilitiesarepresentednetforpurposesofthistable. 5 Includes$285millionincapitalizedinterest.

FederalReserveSystemAudits 411 Thetablebelowpresentsareconciliationof allassetsandliabilitiesmeasuredat fairvalueonarecurringbasisusingsignificantunobservableinputs(Level3)asof December31,2010(inmillions).Unrealizedgainsandlossesrelatedtothose assetsstillheldatDecember31,2010,arereportedasacomponentof “Investmentsheldbyconsolidatedvariableinterestentitiesgains/(losses),net”inthe CombinedStatementsof IncomeandComprehensiveIncome. 2010 Changein unrealized Net gains(losses) Purchases, Fairvalue realized/ Gross Gross Fairvalue relatedto sales,and December31, unrealized transfers transfers December31, financial settlements, 2009 gains in1,2,3,4 out1,2,3,4 2010 instruments net (losses) heldat December31, 2010 Assets: CDOs7 $22,200 $(2,474) $3,096 $ – $ (11) $22,811 $3,043 Non-agencyRMBS7 8,300 (1,046) 1,144 2,791 (4,380) 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 62 (24) 30 2 Otherinvestments 23 (39) 65 30 – 79 11 Totalassets $35,155 $(4,019) $5,099 $2,883 $(6,855) $32,263 $4,839 Netswapcontracts5 $ 1,456 $ (325) $ (161) $ – $ – $ 970 $ (137) Liabilities: Beneficialinterestin consolidatedVIEs $ 5,095 $ 2776 $4,679 $ – $ – $10,051 $4,679 1 Theamountoftransfersisbasedonthefairvaluesofthetransferredassetsatthebeginningofthereportingperiod. 2 TherewerenosignificanttransfersbetweenLevel1andLevel2duringtheyearendedDecember31,2010. 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 Level3derivativeassetsandliabilitiesarepresentednetforpurposesofthistable. 6 Includes$277millionincapitalizedinterest. 7 Investmentswithafairvalueof$209millionasofDecember31,2009werereclassifiedfromCDOstoNon-agencyRMBS.

412 98thAnnualReport|2011 Thefollowingtablespresentthegrosscomponentsof purchases,sales,andsettlements,net,shownabovefortheyearsendedDecember31,2011and2010(in millions): 2011 Purchases, sales,and Purchases Sales Settlements2 settlements, net Assets: CDOs $ – $ (6) $(1,883) $(1,889) Non-agencyRMBS – (1,978) (913) (2,891) Commercialmortgageloans – (557) (69) (626) Residentialmortgageloans – (97) (78) (175) FederalagencyandGSEMBS – (17) (11) (28) Otherinvestments 2 (21) (10) (29) Totalassets $ 2 $(2,676) $(2,964) $(5,638) Netswapcontracts $ – $ (48) $ (187) $ (235) Liabilities: BeneficialinterestinconsolidatedVIEs $285 $ – $ – $ 285 20101 Purchases, sales,and Purchases Sales Settlements2 settlements, net Assets: CDOs $ – $(184) $(2,290) $(2,474) Non-agencyRMBS – (8) (1,038) (1,046) Commercialmortgageloans – (269) (66) (335) Residentialmortgageloans – – (91) (91) FederalagencyandGSEMBS – – (34) (34) Otherinvestments 16 (1) (54) (39) Totalassets $ 16 $(462) $(3,573) $(4,019) Netswapcontracts $ – $ (19) $ (306) $ (325) Liabilities: BeneficialinterestinconsolidatedVIEs $277 $ – $ – $ 277 1 TheBankchosetoincludethegrosspresentationofpurchases,sales,andsettlementsinthereconciliationforLevel3fair valuemeasurementsasofDecember31,2010,thoughnotspecificallyrequired,soastoprovideamoreconsistent presentationtotheformatseenfortheLevel3fairvaluemeasurementsasofDecember31,2011. 2 Includespaydowns. g.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.Asaresultof theclosingof theAIGrecapitalizationplan onJanuary14,2011,AIGpaidFRBNYinfullforitspreferredinterestsinAIA LLCandALICOLLC,includingaccrueddividends.TheFRBNYdidnotpreviouslyconsolidatetheseVIEsbecauseitdidnothaveacontrollingfinancialinterest.Therecordedvalueof theFRBNY’spreferredinterests,includingcapitalized

FederalReserveSystemAudits 413 dividends,was$16,866millionforAIALLCand$9,499millionforALICOLLC atDecember31,2010.TheFRBNY’spreferredinterestsandcapitalizeddividends arereportedas“Preferredinterests”anddividendsreceivablearereportedasa componentof “OtherAssets”intheCombinedStatementsof Condition. (11)BankPremises,Equipment,andSoftware BankpremisesandequipmentatDecember31wereasfollows(inmillions): 2011 2010 Bankpremisesandequipment: Landandlandimprovements $ 350 $ 350 Buildings 2,494 2,436 Buildingmachineryandequipment 514 511 Constructioninprogress 27 31 Furnitureandequipment 1,042 1,034 Subtotal 4,427 4,362 Accumulateddepreciation (1,878) (1,749) Bankpremisesandequipment,net $2,549 $2,613 Depreciationexpense,fortheyearsendedDecember31 $ 213 $ 204 BankpremisesandequipmentatDecember31includedthefollowingamountsfor capitalizedleases(inmillions): 2011 2010 Leasedpremisesandequipmentundercapitalleases $24 $18 Accumulateddepreciation (13) (8) Leasedpremisesandequipmentundercapitalleases,net $11 $10 Depreciationexpenserelatedtoleasedpremises andequipmentundercapitalleases $ 5 $ 3 TheReserveBanksleasespacetooutsidetenantswithremainingleasetermsrangingfrom1to13years.Rentalincomefromsuchleaseswas$32millionand $34millionfortheyearsendedDecember31,2011and2010,respectively,andis reportedasacomponentof “Non-interestincome:Other”intheCombinedStatementsof IncomeandComprehensiveIncome.Futureminimumleasepayments thattheReserveBankswillreceiveundernoncancelableleaseagreementsinexistenceatDecember31,2011,areasfollows(inmillions): 2012 $ 26 2013 23 2014 25 2015 21 2016 16 Thereafter 31 Total $142 TheReserveBankshadcapitalizedsoftwareassets,netof amortization,of $165millionand$146millionatDecember31,2011and2010,respectively.Amortizationexpensewas$54millionforeachof theyearsendedDecember31,2011 and2010.Capitalizedsoftwareassetsarereportedasacomponentof “Other assets”intheCombinedStatementsof Conditionandtherelatedamortizationis reportedasacomponentof “Operatingexpenses:Other”intheCombinedStatementsof IncomeandComprehensiveIncome. TheFederalReserveBankof Clevelandrecordedassetimpairmentlossesof $12millionfortheyearendedDecember31,2011.Lossesweredeterminedusing

414 98thAnnualReport|2011 fairvaluesbasedonquotedfairvaluesorothervaluationtechniques.A$10million loss,relatedtobuildingandland,andbuildingmachineryandequipment,is reportedasacomponentof “Operatingexpenses:Other”anda$2millionloss, relatedtobuildingandlandimprovements,isreportedasacomponentof “Operatingexpenses:Occupancy”intheCombinedStatementsof IncomeandComprehensiveIncome. TheFederalReserveBankof Atlanta(FRBA)recordedassetimpairmentlossesof $1millionfortheyearendedDecember31,2011.Lossesweredeterminedusing fairvaluesbasedonquotedfairvaluesorothervaluationtechniquesandare reportedasacomponentof “Operatingexpenses:Equipment”intheCombined Statementsof IncomeandComprehensiveIncome. In2008,afterrelocatingoperationstoanewfacility,theFederalReserveBankof SanFrancisco(FRBSF)classifieditsformerSeattlebranchofficebuildingasheld forsale,andthebuildingisreportedatfairvalueasacomponentof “Otherassets” intheCombinedStatementsof Condition.DuringtheyearendedDecember31, 2010,theFRBSFrecordedanadjustmentof $6.7million,basedonanappraised valuation,tothefairvalueof thebuildingandreportedthechargeasacomponent of “Operatingexpenses:Other”intheCombinedStatementsof IncomeandComprehensiveIncome. (12)CommitmentsandContingencies Conductingitsoperations,theReserveBanksenterintocontractualcommitments, normallywithfixedexpirationdatesorterminationprovisions,atspecificrates andforspecificpurposes. AtDecember31,2011,theReserveBankswereobligatedundernoncancelable leasesforpremisesandequipmentwithremainingtermsrangingfrom1to approximately12years.Theseleasesprovideforincreasedrentalpaymentsbased uponincreasesinrealestatetaxes,operatingcosts,orselectedpriceindexes. Rentalexpenseunderoperatingleasesforcertainoperatingfacilities,warehouses, anddataprocessingandofficeequipment(includingtaxes,insurance,andmaintenancewhenincludedinrent),netof subleaserentals,was$29millionand$30millionfortheyearsendedDecember31,2011and2010,respectively. Futureminimumrentalpaymentsundernoncancelableoperatingleases,netof subleaserentals,withremainingtermsof oneyearormore,atDecember31,2011, areasfollows(inmillions): 2012 $ 13 2013 13 2014 12 2015 11 2016 11 Thereafter 74 Futureminimumrentalpayments1 $134 1 OnFebruary28,2012,theFRBNYcompletedthepurchaseofthebuildinglocatedat 33MaidenLane,NewYork,NYfor$207.5million.TheFRBNYwaspreviouslyleasing spaceinthebuilding,andfutureminimumrentalpaymentsfortheleasedspace reportedinthetableabovewere$108million.

FederalReserveSystemAudits 415 AtDecember31,2011,theReserveBankshadunrecordedunconditionalpurchase commitmentsandlong-termobligationsextendingthroughtheyear2022witha remainingfixedcommitmentof $298million.Purchasesof $25millionand $54millionweremadeagainstthesecommitmentsduring2011and2010,respectively.Thesecommitmentsareformaintenanceof currencyprocessingmachines andhavevariableand/orfixedcomponents.Thevariableportionof thecommitmentsisforadditionalservicesabovethefixedcontractualservicelimits.Thefixed paymentsforthenextfiveyearsunderthesecommitmentsareasfollows(in millions): 2012 $ 3 2013 56 2014 28 2015 25 2016 25 AtDecember31,2011,theFederalReserveBankof Richmondhadcommitments of approximately$8millionfortheconstructionandacquisitionof anairhandlingunitatitsRichmondbuilding.Expectedfixedpaymentswere$4millionfor eachof theyearsendedDecember31,2012and2013. TheReserveBanksareinvolvedincertainlegalactionsandclaimsarisinginthe ordinarycourseof business.Althoughitisdifficulttopredicttheultimateoutcomeof theseactions,inmanagement’sopinion,basedondiscussionswithcounsel,thelegalactionsandclaimswillberesolvedwithoutmaterialadverseeffecton thefinancialpositionorresultsof operationsof theReserveBanks. OtherCommitments Insupportof financialmarketstabilityactivities,theReserveBankenteredinto commitmentstoprovidefinancialassistancetofinancialinstitutions.ThecontractualamountsshownbelowaretheReserveBanks’maximumexposurestolossin theeventthatthecommitmentsarefullyfundedandthereisadefaultbytheborrowerortotallossinvalueof pledgedcollateral.TotalcommitmentsatDecember31,2011and2010,wereasfollows(inmillions): 2011 2010 Contractual Unfunded Contractual Unfunded amount amount amount amount Securedrevolvinglineofcredit(AIG) $ – $ – $24,512 $9,891 Commercialloancommitments(ML) 61 61 72 72 Additionalloancommitments(ML)1 18 18 9 9 Total $79 $79 $24,593 $9,972 1 In2011,thereisadditionalrestrictedcashtotaling$18millionthatmayberequiredtobeadvancedbyMLforpropertylevel expensesorimprovements. Thecontractualamountof thecommitmentrelatedtotheAIGsecuredrevolving lineof creditrepresentsthemaximumcommitmentatDecember31,2010,tolend toAIGandtheunfundedamountrepresentsthemaximumcommitmentreduced bydrawsoutstanding.Asaresultof theclosingof theAIGrecapitalizationplan onJanuary14,2011,therevolvinglineof creditwaspaidinfull,includinginterest andfees,andFRBNY’scommitmenttolendanyfurtherfundswasterminated. Theundrawnportionof theFRBNY’scommercialloancommitmentsrelatesto commercialmortgageloancommitmentsacquiredbyML.

416 98thAnnualReport|2011 (13)RetirementandThriftPlans RetirementPlans TheReserveBankscurrentlyofferthreedefinedbenefitretirementplanstoits employees,basedonlengthof serviceandlevelof compensation.Substantiallyall of theemployeesof theReserveBanks,Boardof Governors,andOfficeof EmployeeBenefitsof theFederalReserveSystem(OEB)participateintheRetirementPlanforEmployeesof theFederalReserveSystem(SystemPlan).Underthe Dodd-FrankAct,newlyhiredBureauemployeesareeligibletoparticipateinthe SystemPlanandtransfereesfromothergovernmentalorganizationscanelectto participateintheSystemPlan.Inaddition,employeesatcertaincompensationlevelsparticipateintheBenefitEqualizationRetirementPlan(BEP)andcertain ReserveBankofficersparticipateintheSupplementalRetirementPlanforSelect Officersof theFederalReserveBanks(SERP). TheSystemPlanprovidesretirementbenefitstoemployeesof theReserveBanks, Boardof Governors,OEB,andcertainemployeesof theBureau.TheFRBNY,on behalf of theSystem,recognizesthenetassetornetliabilityandcostsassociated withtheSystemPlaninitscombinedfinancialstatements.Duringtheyearended December31,2011,certaincostsassociatedwiththeSystemPlanwerereimbursed bytheBureau.DuringtheyearendedDecember31,2010,costsassociatedwith theSystemPlanwerenotreimbursedbyotherparticipatingemployers. Followingisareconciliationof thebeginningandendingbalancesof theSystem Planbenefitobligation(inmillions): 2011 2010 EstimatedactuarialpresentvalueofprojectedbenefitobligationatJanuary1 $ 8,258 $7,364 Servicecost-benefitsearnedduringtheperiod 258 223 Interestcostonprojectedbenefitobligation 461 450 Actuarialloss 1,427 508 Contributionsbyplanparticipants 6 9 Specialterminationbenefits 10 11 Benefitspaid (315) (307) Planamendments 93 – Estimatedactuarialpresentvalueofprojectedbenefitobligationat December31 $10,198 $8,258

FederalReserveSystemAudits 417 Followingisareconciliationshowingthebeginningandendingbalanceof the SystemPlanassets,thefundedstatus,andtheprepaid(accrued)pensionbenefit costs(inmillions): 2011 2010 EstimatedplanassetsatJanuary1(ofwhich$6,998and$6,252ismeasured atfairvalueasofJanuary1,2011and2010,respectively) $7,273 $6,281 Actualreturnonplanassets 649 710 Contributionsbytheemployer 435 580 Contributionsbyplanparticipants 6 9 Benefitspaid (315) (307) EstimatedplanassetsatDecember31(ofwhich$7,977and$6,998is measuredatfairvalueasofJanuary1,2011and2010,respectively) $8,048 $7,273 Fundedstatusandaccruedpensionbenefitcosts $(2,150) $ (985) Amountsincludedinaccumulatedothercomprehensivelossareshown below: Priorservicecost $ (739) $ (771) Netactuarialloss (3,710) (2,589) Totalaccumulatedothercomprehensiveloss $(4,449) $(3,360) DuringtheyearendedDecember31,2011,theBureaufunded$14.4millionforits employeeswhotransferredintotheSystemPlan.Allotheremployercontributions duringtheyearsendedDecember31,2011and2010werefundedbyFRBNYon behalf of theSystem. Accruedpensionbenefitcostsarereportedasacomponentof “Accruedbenefit costs,”intheCombinedStatementsof Condition. TheaccumulatedbenefitobligationfortheSystemPlan,whichdiffersfromthe estimatedactuarialpresentvalueof projectedbenefitobligationbecauseitisbased oncurrentratherthanfuturecompensationlevels,was$8,803millionand $7,136millionatDecember31,2011and2010,respectively. Theweighted-averageassumptionsusedindevelopingtheaccumulatedpension benefitobligationfortheSystemPlanasof December31wereasfollows: 2011 2010 Discountrate 4.50% 5.50% Rateofcompensationincrease 5.00% 5.00% NetperiodicbenefitexpensesfortheyearsendedDecember31,2011and2010, wereactuariallydeterminedusingaJanuary1measurementdate.Theweightedaverageassumptionsusedindevelopingnetperiodicbenefitexpensesforthe SystemPlanfortheyearswereasfollows: 2011 2010 Discountrate 5.50% 6.00% Expectedassetreturn 7.25% 7.75% Rateofcompensationincrease 5.00% 5.00% Discountratesreflectyieldsavailableonhigh-qualitycorporatebondsthatwould generatethecashflowsnecessarytopaytheSystemPlan’sbenefitswhendue.The expectedlong-termrateof returnonassetsisanestimatethatisbasedonacombinationof factors,includingtheSystemPlan’sassetallocationstrategyandhistoricalreturns;surveysof expectedratesof returnforotherentities’plans;aprojected

418 98thAnnualReport|2011 returnforequitiesandfixedincomeinvestmentsbasedonrealinterestrates,inflationexpectations,andequityriskpremiums;andsurveysof expectedreturnsin equityandfixedincomemarkets. Thecomponentsof netperiodicpensionbenefitexpense(credit)fortheSystem PlanfortheyearsendedDecember31areshownbelow(inmillions): 2011 2010 Servicecost-benefitsearnedduringtheperiod $258 $223 Interestcostonaccumulatedbenefitobligation 461 450 Amortizationofpriorservicecost 110 112 Amortizationofnetloss 187 188 Expectedreturnonplanassets (531) (491) Netperiodicpensionbenefitexpense 485 482 Specialterminationbenefits 10 11 Totalperiodicpensionbenefitexpense $495 $493 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive lossintonetperiodicpensionbenefitexpensein2012areshownbelow: Priorservicecost $116 Netactuarialloss 287 Total $403 Therecognitionof specialterminationlossesisprimarilytheresultof enhanced retirementbenefitsprovidedtoemployeesduringtherestructuringdescribedin Note16. Followingisasummaryof expectedbenefitpayments,excludingenhancedretirementbenefits(inmillions): Expectedbenefitpayments 2012 $ 351 2013 375 2014 398 2015 422 2016 446 2017–2021 2,616 Total $4,608 TheSystem’sCommitteeonInvestmentPerformance(CIP)isresponsiblefor establishinginvestmentpolicies,selectinginvestmentmanagers,andmonitoring theinvestmentmanagers’compliancewithitspolicies.TheCIPissupportedby staff intheOEBincarryingouttheseresponsibilities.AtDecember31,2011,the SystemPlan’sassetswereheldinfiveinvestmentvehicles:twoactivelymanaged long-durationfixedincomeportfolios,anindexedU.S.equityfund,anindexed non-U.S.developed-marketsequityfund,andamoneymarketfund. Thediversificationof thePlan’sinvestmentsisdesignedtolimitconcentrationof riskandtheriskof lossrelatedtoanindividualassetclass.Thetwolong-duration fixedincomeportfoliosareseparateaccountsbenchmarkedtoacustombenchmarkof 55percentBarclaysLongCreditIndexand45percentCitigroup15+ yearsTreasurySTRIPIndex,whichwasselectedasaproxyfortheliabilitiesof the Plan.Althoughtheseportfoliosarebothactivelymanaged,theguidelinesare designedtolimitportfoliodeviationsfromthebenchmark.TheindexedU.S.

FederalReserveSystemAudits 419 equityfundisintendedtotracktheoverallU.S.equitymarketacrossmarketcapitalizations.Theindexednon-U.S.developedmarketsequityfundisintendedto tracktheMorganStanleyCapitalInternational(MSCI)EmergingMarketsIndex, Europe,Australia,FarEastplusCanadaIndex,whichincludesstocksfrom23 marketsdeemedbyMSCItobe“developedmarkets.”Finally,themoneymarket fund,whichinvestsinhigh-qualitymoneymarketsecurities,istherepositoryfor cashbalancesandadherestoaconstantdollarmethodology. Permittedandprohibitedinvestments,includingtheuseof derivatives,aredefined ineitherthetrustagreement(forcommingledindexvehicles)ortheinvestment guidelines(forthethreeseparateaccounts).TheCIPreviewsthetrustagreement andapprovesallinvestmentguidelinesaspartof theselectionof eachinvestment toensurethatthetrustagreementisconsistentwiththeCIP’sinvestmentobjectivesfortheSystemPlan’sassets. TheSystemPlan’spolicyweightandactualassetallocationsatDecember31,by assetcategory,areasfollows: ActualAssetAllocations Policyweight 2011 2010 U.S.equities 40.0% 39.0% 45.4% Internationalequities 15.0% 13.8% 12.6% Fixedincome 45.0% 46.6% 41.7% Cash 0.0% 0.6% 0.3% Total 100.0% 100.0% 100.0% EmployercontributionstotheSystemPlanmaybedeterminedusingdifferent assumptionsthanthoserequiredforfinancialreporting.TheSystemPlan’sactuarialfundingmethodisexpectedtoproducearecommendedannualfundingrange between$750and$800million.In2012,theSystemplanstomakemonthlycontributionsof $65millionandwillreevaluatethemonthlycontributionsuponcompletionof the2012actuarialvaluation.TheReserveBanks’projectedbenefitobligation,fundedstatus,andnetpensionexpensesfortheBEPandtheSERPat December31,2011and2010,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;relationshipsobservedinthemarketbetweeninvestments;andcalculatedyieldmeasuresbasedonvaluationmethodologiescommonlyemployedinthemarketforsuchinvestments. Becauseof theuncertaintyinherentindeterminingthefairvalueof investments thatdonothaveareadilyavailablefairvalue,thefairvalueof theseinvestments

420 98thAnnualReport|2011 maydiffersignificantlyfromthevaluesthatwouldhavebeenreportedif areadily availablefairvaluehadexistedfortheseinvestmentsandmaydiffermaterially fromthevaluesthatmayultimatelyberealized. Thefollowingtablespresentthefinancialinstrumentsrecordedatfairvalueasof December31byASC820hierarchy(inmillions): 2011 Description Level1 Level2 Level3 Total Short-terminvestments $ 31 $ 29 $– $ 60 TreasuryandFederalagencysecurities 1,685 14 – 1,699 Otherfixedincomesecurities – 1,962 – 1,962 Commingledfunds – 4,256 – 4,256 Total $1,716 $6,261 $– $7,977 TherewerenotransfersbetweenLevel1andLevel2duringtheyear. 2010 Description Level1 Level2 Level3 Total Short-terminvestments $ – $ 30 $– $ 30 TreasuryandFederalagencysecurities 1,065 39 – 1,104 Otherfixedincomesecurities – 644 – 644 Commingledfunds – 5,220 – 5,220 Total $1,065 $5,933 $– $6,998 TherewerenotransfersbetweenLevel1andLevel2duringtheyear. TheSystemPlanentersintofuturescontracts,tradedonregulatedexchanges,to managecertainrisksandtomaintainappropriatemarketexposureinmeetingthe investmentobjectivesof theSystemPlan.TheSystemPlanbearsthemarketrisk thatarisesfromanyunfavorablechangesinthevalueof thesecuritiesorindexes underlyingthesefuturescontracts.Theuseof futurescontractsinvolves,tovaryingdegrees,elementsof marketriskinexcessof theamountrecordedintheCombinedStatementsof Condition.TheguidelinesestablishedbytheCIPfurther reduceriskbylimitingthenetfuturespositions,formostfundmanagers,to 15percentof themarketvalueof theadvisor’sportfolio.Nolimithasbeenestablishedonthefuturespositionsof theliability-driveninvestmentsbecausethefund manageronlyexecutesTreasuryfutures. AtDecember31,2011and2010,aportionof short-terminvestmentswasavailable forfuturestrading.Therewere$6millionand$1millionof Treasurysecurities pledgedascollateralfortheyearsendedDecember31,2011and2010,respectively. ThriftPlan Employeesof theReserveBanksparticipateinthedefinedcontributionThrift PlanforEmployeesof theFederalReserveSystem(ThriftPlan).TheReserve Banksmatch100percentof thefirst6percentof employeecontributionsfromthe dateof hireandprovideanautomaticemployercontributionof 1percentof eligiblepay.TheReserveBanks’ThriftPlancontributionstotaled$96millionand $94millionfortheyearsendedDecember31,2011and2010,respectively,andare reportedasacomponentof “Operatingexpenses:Salariesandbenefits”inthe CombinedStatementsof IncomeandComprehensiveIncome.

FederalReserveSystemAudits 421 (14)PostretirementBenefitsOtherThanRetirementPlansand PostemploymentBenefits PostretirementBenefitsOtherThanRetirementPlans InadditiontotheReserveBanks’retirementplans,employeeswhohavemetcertainageandlength-of-servicerequirementsareeligibleforbothmedicalbenefits andlifeinsurancecoverageduringretirement. TheReserveBanksfundbenefitspayableunderthemedicalandlifeinsurance plansasdueand,accordingly,havenoplanassets. Followingisareconciliationof thebeginningandendingbalancesof thebenefit obligation(inmillions): 2011 2010 AccumulatedpostretirementbenefitobligationatJanuary1 $1,358 $1,324 Servicecostbenefitsearnedduringtheperiod 49 47 Interestcostonaccumulatedbenefitobligation 72 76 Netactuarialloss(gain) 114 (9) Curtailmentgain (7) – Specialterminationbenefitsloss 1 1 Contributionsbyplanparticipants 21 18 Benefitspaid (86) (88) MedicarePartDsubsidies 5 5 Planamendments (21) (16) AccumulatedpostretirementbenefitobligationatDecember31 $1,506 $1,358 AtDecember31,2011and2010,theweighted-averagediscountrateassumptions usedindevelopingthepostretirementbenefitobligationwere4.50percentand 5.25percent,respectively. Discountratesreflectyieldsavailableonhigh-qualitycorporatebondsthatwould generatethecashflowsnecessarytopaytheplan’sbenefitswhendue. Followingisareconciliationof thebeginningandendingbalanceof theplan assets,theunfundedpostretirementbenefitobligation,andtheaccruedpostretirementbenefitcosts(inmillions): 2011 2010 FairvalueofplanassetsatJanuary1 $ – $ – Contributionsbytheemployer 60 65 Contributionsbyplanparticipants 21 18 Benefitspaid (86) (88) MedicarePartDsubsidies 5 5 FairvalueofplanassetsatDecember31 $ – $ – Unfundedobligationandaccruedpostretirementbenefitcost $1,506 $1,358 Amountsincludedinaccumulatedothercomprehensivelossareshownbelow: Priorservicecost $ 45 $ 31 Netactuarial(loss) (388) (301) Totalaccumulatedothercomprehensiveloss $ (343) $ (270) Accruedpostretirementbenefitcostsarereportedasacomponentof “Accrued benefitcosts”intheCombinedStatementsof Condition.

422 98thAnnualReport|2011 Formeasurementpurposes,theassumedhealth-carecosttrendratesatDecember31areasfollows: 2011 2010 Health-carecosttrendrateassumedfornextyear 7.50% 8.00% Ratetowhichthecosttrendrateisassumedtodecline(theultimatetrendrate) 5.00% 5.00% Yearthattheratereachestheultimatetrendrate 2017 2017 Assumedhealth-carecosttrendrateshaveasignificanteffectontheamounts reportedforhealth-careplans.A1percentagepointchangeinassumedhealth-care costtrendrateswouldhavethefollowingeffectsfortheyearendedDecember31,2011 (inmillions): 1percentage 1percentage pointincrease pointdecrease Effectonaggregateofserviceandinterestcostcomponentsofnetperiodic postretirementbenefitcosts $ 19 $ (15) Effectonaccumulatedpostretirementbenefitobligation 182 (154) Thefollowingisasummaryof thecomponentsof netperiodicpostretirement benefitexpensefortheyearsendedDecember31(inmillions): 2011 2010 Servicecost-benefitsearnedduringtheperiod $ 49 $ 47 Interestcostonaccumulatedbenefitobligation 72 76 Amortizationofpriorservicecost (7) (18) Amortizationofnetactuarialloss 21 28 Totalperiodicexpense 135 133 Specialterminationbenefitsloss 1 1 Netperiodicpostretirementbenefitexpense $136 $134 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive lossintonetperiodicpostretirementbenefitexpensein2012areshownbelow: Priorservicecost $(10) Netactuarialloss 30 Total $20 NetpostretirementbenefitcostsareactuariallydeterminedusingaJanuary1measurementdate.AtJanuary1,2011and2010,theweighted-averagediscountrate assumptionsusedtodeterminenetperiodicpostretirementbenefitcostswere 5.25percentand5.75percent,respectively. Netperiodicpostretirementbenefitexpenseisreportedasacomponentof “Operatingexpenses:Salariesandbenefits”intheCombinedStatementsof Incomeand ComprehensiveIncome. Therecognitionof specialterminationbenefitlossesisprimarilytheresultof enhancedretirementbenefitsprovidedtoemployeesduringtherestructuring describedinNote16. TheMedicarePrescriptionDrug,ImprovementandModernizationActof 2003 establishedaprescriptiondrugbenefitunderMedicare(MedicarePartD)anda federalsubsidytosponsorsof retireehealth-carebenefitplansthatprovidebenefitsthatareatleastactuariallyequivalenttoMedicarePartD.Thebenefitspro-

FederalReserveSystemAudits 423 videdundertheReserveBanks’plantocertainparticipantsareatleastactuarially equivalenttotheMedicarePartDprescriptiondrugbenefit.Theestimatedeffects of thesubsidyarereflectedinactuariallossintheaccumulatedpostretirement benefitobligationandnetperiodicpostretirementbenefitexpense. FederalMedicarePartDsubsidyreceiptswere$4.2millionand$4.3millioninthe yearsendedDecember31,2011and2010,respectively.Expectedreceiptsin2012, relatedtobenefitspaidintheyearsendedDecember31,2011and2010,were $2.5millionand$1.0million,respectively. Followingisasummaryof expectedpostretirementbenefitpayments(inmillions): Withoutsubsidy Withsubsidy 2012 $ 77 $ 72 2013 81 75 2014 84 78 2015 88 81 2016 92 84 2017–2021 522 470 Total $944 $860 PostemploymentBenefits TheReserveBanksofferbenefitstoformerorinactiveemployees.PostemploymentbenefitcostsareactuariallydeterminedusingaDecember31measurement dateandincludethecostof medicalanddentalinsurance,survivorincome,and disabilitybenefits.Theaccruedpostemploymentbenefitcostsrecognizedbythe BankatDecember31,2011and2010,were$157millionand$146million,respectively.Thiscostisincludedasacomponentof “Accruedbenefitcosts”inthe CombinedStatementsof Condition.Netperiodicpostemploymentbenefit expenseincludedinoperatingexpenseswas$27millionand$11millionfor2011 and2010,respectively,andisrecordedasacomponentof “Operatingexpenses: Salariesandbenefits”intheCombinedStatementsof IncomeandComprehensive Income.

424 98thAnnualReport|2011 (15)AccumulatedOtherComprehensiveIncomeandOther ComprehensiveIncome Followingisareconciliationof beginningandendingbalancesof accumulated othercomprehensive(loss)(inmillions): Total Amountrelatedto Amountrelatedto accumulated postretirement definedbenefit other benefitsotherthan retirementplan comprehensive retirementplans income(loss) BalanceatJanuary1,2010 $(3,371) $(305) $(3,676) Changeinfundedstatusofbenefitplans: Priorservicecostsarisingduringtheyear – 16 16 Amortizationofpriorservicecost 112 (18) 94 Changeinpriorservicecostsrelatedtobenefitplans 112 (2) 110 Netactuarial(loss)gainarisingduringtheyear (289) 9 (280) Amortizationofnetactuarialloss 188 28 216 Changeinactuarial(loss)gainrelatedtobenefitplans (101) 37 (64) Changeinfundedstatusofbenefitplans–othercomprehensive income 11 35 46 BalanceatDecember31,2010 $(3,360) $(270) $(3,630) Changeinfundedstatusofbenefitplans: Priorservicecostsarisingduringtheyear (78) 22 (56) Amortizationofpriorservicecost 110 (8) 102 Changeinpriorservicecostsrelatedtobenefitplans 32 14 46 Netactuarial(loss)arisingduringtheyear (1,308) (108) (1,416) Amortizationofnetactuarialloss 187 21 208 Changeinactuarial(losses)relatedtobenefitplans (1,121) (87) (1,208) Changeinfundedstatusofbenefitplans–othercomprehensive (loss) (1,089) (73) (1,162) BalanceatDecember31,2011 $(4,449) $(343) $(4,792) Additionaldetailregardingtheclassificationof accumulatedothercomprehensive lossisincludedinNotes13and14. (16)BusinessRestructuringCharges Before2010,theReserveBanksannouncedtheaccelerationof theircheckrestructuringinitiativestoalignthecheckprocessinginfrastructureandoperationswith decliningcheckprocessingvolumes.ThenewinfrastructureconsolidatedoperationsintotworegionalReserveBankprocessingsites;oneinCleveland,forpaper checkprocessing,andoneinAtlanta,forelectroniccheckprocessing. In2010,theReserveBanksannouncedtheconsolidationof someof theircurrencyprocessingoperations.Asaresultof thisinitiative,currencyprocessing operationsperformedbytwoReserveBankBranchofficeswereconsolidatedinto otheroffices. In2011,theU.S.Treasuryannouncedarestructuringinitiativetoconsolidatethe TreasuryRetailSecurities(TRS)operations.Asaresultof thisinitiative,TRS operationsperformedbytheFederalReserveBankof Cleveland(FRBC)were consolidatedintotheFederalReserveBankof Minneapolis.Additionalannouncementsin2011includedtheconsolidationof papercheckprocessing,performedby theFRBC,intotheFRBA.

FederalReserveSystemAudits 425 Followingisasummaryof financialinformationrelatedtotherestructuringplans (inmillions): 2009 2011 2010 andprior restructuring restructuring Total restructuring plans plans plans Informationrelatedtorestructuringplansasof December31,2011: Totalexpectedcostsrelatedtorestructuringactivity $ 11 $ 3 $ 47 $61 Expectedcompletiondate 2012 2011 2012 Reconciliationofliabilitybalances: BalanceatJanuary1,2010 $ – $ – $ 19 $19 Employeeseparationcosts – 3 – 3 Contractterminationcosts – – 1 1 Adjustments – – (2) (2) Payments – – (11) (11) BalanceatDecember31,2010 $ – $ 3 $ 7 $10 Employeeseparationcosts 11 1 – 12 Adjustments (1) – (2) (3) Payments (4) (2) (2) (8) BalanceatDecember31,2011 $ 6 $ 2 $ 3 $11 Employeeseparationcostsareprimarilyseverancecostsforidentifiedstaff reductionsassociatedwiththeannouncedrestructuringplans.Separationcoststhatare providedundertermsof ongoingbenefitarrangementsarerecordedbasedonthe accumulatedbenefitearnedbytheemployee.Separationcoststhatareprovided underthetermsof one-timebenefitarrangementsaregenerallymeasuredbased ontheexpectedbenefitasof theterminationdateandrecordedratablyoverthe periodtotermination.Restructuringcostsrelatedtoemployeeseparationsare reportedasacomponentof “Operatingexpenses:Salariesandbenefits”inthe CombinedStatementsof IncomeandComprehensiveIncome. Contractterminationcostsincludethechargesresultingfromterminatingexisting leaseandothercontractsandareshownasacomponentof “Operatingexpenses: Other”intheCombinedStatementsof IncomeandComprehensiveIncome. Adjustmentstotheaccruedliabilityareprimarilyduetochangesintheestimated restructuringcostsandareshownasacomponentof theappropriateexpensecategoryintheCombinedStatementsof IncomeandComprehensiveIncome. Restructuringcostsassociatedwiththeimpairmentof certainReserveBankassets, includingsoftware,buildings,leaseholdimprovements,furniture,andequipment, arediscussedinNote11. (17)SubsequentEvents SubsequenttoDecember31,2011,theFRBNY,throughaseriesof threecompetitivebiddingprocesses,soldtheremainingMLIIportfolioassetswithatotal unpaidprincipalbalanceof $19.2billion.Thesalesproceedsreceivedexceededthe fairvalueof theassetsasof December31,2011by$1.2billion.Proceedsfrom thesesaleswereusedtofullyrepaytheFRBNY’sseniorloanplusaccruedinterest andthefixeddeferredpurchasepriceplusaccruedinterest,andwillprovide residualincomethatwillbedistributedinaccordancewiththeMLIIagreements. AlsosubsequenttoDecember31,2011,theFRBNY,throughaseriesof competitivebiddingprocesses,soldorenteredintoanagreementtosellML’sinterestina seniorcommercialmortgageloanandhassoldthemajorityof ML’smezzanine

426 98thAnnualReport|2011 loanparticipationinterests,withanaggregatedunpaidprincipalbalanceof $1.6billionasof December31,2011. OnFebruary28,2012,theFRBNYcompletedthepurchaseof thebuilding locatedat33MaidenLane,NewYork,NYfor$207.5million.TheFRBNYwas previouslyleasingspaceinthebuilding,asdiscussedinNote12. Therewerenoothersubsequenteventsthatrequireadjustmentstoordisclosures inthecombinedfinancialstatementsasof December31,2011.Subsequentevents wereevaluatedthroughMarch20,2012,whichisthedatethatthecombinedfinancialstatementswereissued.

FederalReserveSystemAudits 427 Office of Inspector General Activities gressandtheBoardof Governorsfullyinformed aboutseriousabusesanddeficiencies. TheOfficeof InspectorGeneral(OIG)fortheFed- During2011,theOIGcompleted19audits,inspeceralReserveBoard,whichisalsotheOIGforthe tions,andevaluations(table1)andconductedanum- ConsumerFinancialProtectionBureau,operatesin berof follow-upreviewstoevaluateactiontakenon accordancewiththeInspectorGeneralActof 1978, priorrecommendations.Duetothesensitivenature asamended.TheOIGconductsactivitiesandmakes of someof thematerial,certainreportswereonly recommendationstopromoteeconomyandeffi- issuedinternallytotheBoard,asindicated.OIG ciency;enhancepoliciesandprocedures;andprevent investigativeworkresultedinthreeindictments,five anddetectwaste,fraud,andabuseinBoardpro- convictions,andtwoterminations,aswellas gramsandoperations,includingfunctionsthatthe $103,365,895incriminalfinesandrestitution.Nine- BoardhasdelegatedtotheFederalReserveBanks. teeninvestigationswereclosedduringtheyear.The Accordingly,theOIGplansandconductsaudits, OIGalsoissuedtwosemiannualreportstoCongress inspections,evaluations,investigations,andother andperformedapproximately80reviewsof legislareviewsrelatingtoBoardandBoard-delegatedpro- tionandregulationsrelatedtotheoperationsof the gramsandoperations.Italsoretainsanindependent Boardand/ortheOIG. auditortoannuallyaudittheBoard’sandtheFederal FinancialInstitutionsExaminationCouncil’sfinan- Formoreinformation,visittheOIGwebsiteat cialstatements.Inaddition,theOIGkeepstheCon- www.federalreserve.gov/oig/. Table1.OIGaudit,inspection,andevaluationreportsissuedin2011 Reporttitle Monthissued JointResponsebytheInspectorsGeneraloftheDepartmentoftheTreasuryandtheBoardofGovernorsoftheFederalReserve SystemtoaRequestforInformationConcerningtheBureauofConsumerFinancialProtection January BoardFinancialStatementsandIndependentAuditors’Report,December31,2010and2009 February FederalFinancialInstitutionsExaminationCouncilFinancialStatementsandIndependentAuditors’Report,December31,2010 and2009 February ReviewoftheJointImplementationPlanfortheTransferofOfficeofThriftSupervisionFunctions March ReviewoftheFailureofIndependentBankers’Bank March AuditoftheBoard’sTransportationSubsidyProgram March ResponsetoaCongressionalRequestRegardingtheEconomicAnalysisAssociatedwithSpecifiedRulemakings June ReviewofCFPBImplementationPlanningActivities July MaterialLossReviewofFirstCommunityBank August StatusoftheTransferofOfficeofThriftSupervisionFunctions September ReviewoftheFailureofPierceCommercialBank September SecurityControlReviewoftheVisitorRegistrationSystem(InternalReport) September EvaluationofPromptRegulatoryActionImplementation September SummaryAnalysisofFailedBankReviews September AuditoftheBoard’sImplementationoftheDodd-FrankWallStreetReformandConsumerProtectionAct September AuditoftheBoard’sInformationSecurityProgram November AuditoftheBureauofConsumerFinancialProtection’sInformationSecurityProgram November MaterialLossReviewofParkAvenueBank November ReviewoftheFailureofLegacyBank December

428 98thAnnualReport|2011 Government Accountability Office In2011,theGAOcompleted27projectsthat involvedtheFederalReserve(table1).Theseincluded Reviews severaldetailedandextensiveauditsof Federal Reserveoperationssuchasareviewof theFederal TheFederalBankingAgencyAuditAct(Pub.L. Reserve’sactivitieswithrespecttoprovidingassis- No.95–320)authorizestheGovernmentAccounttancetoAIG,areviewof theFederalReserve’s abilityOffice(GAO)toauditcertainaspectsof Fedactivitieswithrespecttothecreationof variousemereralReserveSystemoperations.TheDodd-Frank gencylendingfacilitiesduringthefinancialcrisis,and WallStreetReformandConsumerProtectionActof areviewof ReserveBankgovernance.Attheendof 2010(Dodd-FrankAct)directsGAOtoconduct 2011,18projectsbegunineither2010or2011 additionalauditswithrespecttotheseoperations.For remainedactiveandhadnotreachedcompletion example,undertheDodd-FrankAct,GAOcom- (table2). pletedaone-timeauditof theexistingcreditfacilities establishedbytheFederalReserveundersection13(3)of theFederalReserveActbetween December1,2007,andJuly21,2010. Table1.Reportscompletedduring2011 Reporttitle Reportnumber Monthissued(2011) TroubledAssetReliefProgram:ThirdQuarter2010UpdateofGovernmentAssistanceProvidedtoAIGand DescriptionofRecentExecutionofRecapitalizationPlan GAO-11-46 January TroubledAssetReliefProgram:StatusofProgramsandImplementationofGAORecommendations GAO-11-74 January PaydayLending:FederalLawEnforcementUsesaMultilayeredApproachtoIdentifyEmployeesin FinancialDistress GAO-11-147 January CreditCards:ConsumerCostsforDebtProtectionProductsCanBeSubstantialRelativetoBenefitsbutAre NotaFocusofRegulatoryOversight GAO-11-311 March 401(K)Plans:CertainInvestmentsOptionsandPracticesThatMayRestrictWithdrawalsNotWidely Understood GAO-11-291 March U.S.Coins:Replacingthe$1Notewitha$1CoinWouldProvideaFinancialBenefittotheGovernment GAO-11-281 March FederalReserveBanks:AreasforImprovementinInformationSystemsControls GAO-11-447R March FederalReserveSystem:TruthinLending GAO-11-620R May MortgageForeclosures:DocumentationProblemsRevealNeedforOngoingRegulatoryOversight GAO-11-433 May BankingRegulation:EnhancedGuidanceonCommercialRealEstateRisksNeeded GAO-11-489 May BankRegulation:ModifiedPromptCorrectiveActionFrameworkWouldImproveEffectiveness GAO-11-612 June Person-to-PersonLending:NewRegulatoryChallengesCouldEmergeastheIndustryGrows GAO-11-613 July SecuritiesandExchangeCommission:ExistingPost-EmploymentControlsCouldBeFurtherStrengthened GAO-11-654 July ResidentialAppraisals:OpportunitiestoEnhanceOversightofanEvolvingIndustry GAO-11-653 July ProprietaryTrading:RegulatorsWillNeedMoreComprehensiveInformationtoFullyMonitorCompliance withNewRestrictionsWhenImplemented GAO-11-529 July Bankruptcy:ComplexfinancialInstitutionsandInternationalCoordinationPoseChallenges GAO-11-707 July MortgageReform:PotentialImpactsofProvisionsintheDodd-FrankActonHomebuyersandthe MortgageMarket GAO-11-656 July TroubledAssetReliefProgram:TheGovernment’sExposuretoAIGFollowingtheCompany’s Recapitalization GAO-11-716 July FederalReserveSystem:OpportunitiesExisttoStrengthenPoliciesandProcessesforManaging EmergencyAssistance GAO-11-696 July FederalReserveSystem:DebitCardInterchangeFeesandRouting GAO-11-895R August FederalReserveSystem:DebitCardInterchangeFeesandRouting GAO-11-896R August FinancialCrisis:ReviewofFederalReserveSystemFinancialAssistancetoAmericanInternational Group,Inc. GAO-11-616 October FederalReserveBankGovernance:OpportunitiesExisttoBroadenDirectorRecruitmentEffortsand IncreaseTransparency GAO-12-18 October FinancialAudit:BureauofthePublicDebt’sFiscalYears2011and2010SchedulesofFederalDebt GAO-12-164 November Dodd-FrankRegulations:ImplementationCouldBenefitfromAdditionalAnalysesandCoordination GAO-12-151 November VacantProperties:GrowingNumberIncreasesCommunities’CostsandChallenges GAO-12-34 November SmallBusinessLendingFund:AdditionalActionsNeededtoImproveTransparencyandAccountability GAO-12-183 December

FederalReserveSystemAudits 429 Table2.Projectsactiveatyear-end2011 Subjectofproject Monthinitiated BankHoldingCompanyAct:Characteristicsandregulationofexemptinstitutionsandtheimplicationsofremovingexemptions October2010 Realestateappraisals:Appraisalsubcommitteeneedstoimprovemonitoringprocedure December2010 CapitalrequirementsapplicabletoU.S.banksandsavingsandloanintermediateholdingcompaniesofforeignbanks December2010 Municipalsecurities:Overviewofmarketstructure,pricing,andregulation March2011 Mortgageforeclosure March2011 401(k)serviceprovidersabroad April2011 Dodd-FrankAct:Hybridcapitalinstrumentsandsmallinstitutionaccesstocapital May2011 Capitalpurchaseprogram(TARP) May2011 Federalfinancialliteracyprograms June2011 Debtbuybacks August2011 Duplicationsandoverlapsinfederalhousingprograms August2011 EnforcementoftheServicemembersCivilReliefAct August2011 UpdateofAIGindicators August2011 Financialcompanybankruptcies September2011 Automatedtellermachineindustry November2011 U.S.coins:Alternativescenariossuggestdifferentbenefitsandlossesfromreplacingthe$1notewitha$1coin November2011 BenefitsandcostsoftheDodd-FrankAct November2011 FinancialStabilityOversightCouncilandOfficeofFinancialResearchoperations December2011

431 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 (resignedApril2,2011) SarahBloomRaskin JanetL.Yellen ElizabethA.Duke ViceChair DivisionsandOfficers Thirteendivisionssupportandcarryoutthemissionof theBoardof Governors,whichisbasedin Washington,D.C. OfficeofBoardMembers MichelleA.Smith DavidW.Skidmore WinthropP.Hambley Director AssistanttotheBoard SeniorAdviser LindaL.Robertson BrianJ.Gross AndrewT.Levin AssistanttotheBoard SpecialAssistanttotheBoardfor SpecialAdvisertotheBoard CongressionalLiaison RosannaPianalto-Cameron LucretiaM.Boyer AssistanttotheBoard SpecialAssistanttotheBoardfor PublicInformation

432 98thAnnualReport|2011 LegalDivision ScottG.Alvarez AnnMisback StephenH.Meyer GeneralCounsel AssociateGeneralCounsel AssistantGeneralCounsel RichardM.Ashton LaurieS.Schaffer AlisonM.Thro DeputyGeneralCounsel AssociateGeneralCounsel AssistantGeneralCounsel KathleenM.O’Day KatherineH.Wheatley CaryK.Williams DeputyGeneralCounsel AssociateGeneralCounsel AssistantGeneralCounsel StephanieMartin JeanC.Anderson AssociateGeneralCounsel AssistantGeneralCounsel OfficeoftheSecretary JenniferJ.Johnson MargaretM.Shanks Secretary AssociateSecretary RobertdeV.Frierson MichaelJ.Lewandowski DeputySecretary AssistantSecretary DivisionofInternationalFinance StevenB.Kamin ChristopherJ.Erceg JaneHaltmaier Director DeputyAssociateDirector SeniorAdviser ThomasA.Connors DavidH.Bowman JohnH.Rogers DeputyDirector AssistantDirector SeniorAdviser MichaelP.Leahy CharlesP.Thomas SallyM.Davies SeniorAssociateDirector AssistantDirector Adviser TrevorA.Reeve BethAnnWilson AssociateDirector AssistantDirector RalphW.Tryon MarkS.Carey AssociateDirector SeniorAdviser OfficeofFinancialStabilityPolicyandResearch J.NellieLiang AndreasW.Lehnert SethF.Wheeler Director DeputyDirector Chief of Staff DivisionofMonetaryAffairs WilliamB.English GretchenC.Weinbach MatthewM.Luecke Director DeputyAssociateDirector AssistantDirector JamesA.Clouse EgonZakrajsek StephenA.Meyer DeputyDirector DeputyAssociateDirector SeniorAdviser DeborahJ.Danker WilliamF.Bassett JoyceK.Zickler DeputyDirector AssistantDirector SeniorAdviser WilliamNelson MargaretG.DeBoer MaryT.Hoffman DeputyDirector AssistantDirector Adviser SethB.Carpenter JaneE.Ihrig SeniorAssociateDirector AssistantDirector FabioM.Natalucci J.DavidLopez-Salido DeputyAssociateDirector AssistantDirector

FederalReserveSystemOrganization 433 DivisionofResearchandStatistics DavidW.Wilcox MichaelT.Kiley ArthurB.Kennickell Director AssociateDirector AssistantDirector MichaelS.Gibson DavidE.Lebow ElizabethK.Kiser DeputyDirector AssociateDirector AssistantDirector DavidL.Reifschneider MichaelG.Palumbo KarenM.Pence DeputyDirector AssociateDirector AssistantDirector JaniceShack-Marquez S.WaynePassmore JohnM.Roberts DeputyDirector AssociateDirector AssistantDirector WilliamL.WascherIII SeanD.Campbell StevenA.Sharpe DeputyDirector DeputyAssociateDirector AssistantDirector DanielE.Sichel JeffreyC.Campione JohnJ.Stevens SeniorAssociateDirector DeputyAssociateDirector AssistantDirector DanielM.Covitz SandraA.Cannon StaceyM.Tevlin AssociateDirector DeputyAssociateDirector AssistantDirector MichaelS.Cringoli JoshuaGallin MaryM.West AssociateDirector DeputyAssociateDirector AssistantDirector MatthewJ.Eichner DianaHancock GlennB.Canner AssociateDirector DeputyAssociateDirector SeniorAdviser EricM.Engen RobinA.Prager LawrenceSilfman AssociateDirector DeputyAssociateDirector SeniorAdviser DivisionofBankingSupervisionandRegulation PatrickM.Parkinson GeraldA.EdwardsJr. ThomasK.Odegard Director AssociateDirector AssistantDirector MaryannF.Hunter DavidS.Jones DanaE.Payne DeputyDirector AssociateDirector AssistantDirector BarbaraJ.Bouchard MichaelD.Solomon NancyJ.Perkins SeniorAssociateDirector AssociateDirector AssistantDirector MichaelR.Foley LisaM.DeFerrari LisaH.Ryu SeniorAssociateDirector DeputyAssociateDirector AssistantDirector JackP.JenningsII RichardA.NaylorII MichaelJ.Sexton SeniorAssociateDirector DeputyAssociateDirector AssistantDirector ArthurW.Lindo RobertT.Ashman SeniorAssociateDirector AssistantDirector RichardC.Watkins AssistantDirector PeterJ.Purcell KevinJ.Clarke SeniorAssociateDirector AssistantDirector SarkisYoghourtdjian WilliamG.Spaniel AdrienneT.Haden AssistantDirector SeniorAssociateDirector AssistantDirector NorahM.Barger MarkE.VanDerWeide AnnaL.Hewko SeniorAdviser SeniorAssociateDirector AssistantDirector TimothyP.Clark KevinM.Bertsch MichaelJ.Kraemer SeniorAdviser AssociateDirector AssistantDirector WilliamF.Treacy BetsyCross RobertT.Maahs Adviser AssociateDirector AssistantDirector NidaDavis StephenP.Merriett AssociateDirector AssistantDirector

434 98thAnnualReport|2011 DivisionofConsumerandCommunityAffairs SandraF.Braunstein SuzanneG.Killian CarolA.Evans Director AssociateDirector AssistantDirector TondaE.Price JamesA.Michaels MarisaA.Reid DeputyDirector AssociateDirector AssistantDirector AnnaAlvarezBoyd JosephA.Firschein SeniorAssociateDirector DeputyAssociateDirector AllenJ.Fishbein DavidE.Buchholz AssociateDirector DeputyAssociateDirector DivisionofReserveBankOperationsandPaymentSystems LouiseL.Roseman DorothyLaChapelle JenniferA.Lucier Director AssociateDirector AssistantDirector DonaldV.Hammond SusanV.Foley StuartE.Sperry DeputyDirector AssociateDirector AssistantDirector JeffreyC.Marquardt GregoryL.Evans MichaelJ.Stan DeputyDirector DeputyAssociateDirector AssistantDirector Jeff J.Stehm LisaK.Hoskins PaulW.Bettge SeniorAssociateDirector DeputyAssociateDirector SeniorAdviser KennethD.Buckley MichaelJ.Lambert AssociateDirector DeputyAssociateDirector OfficeofStaffDirector StephenR.Malphrus SheilaClark AdrienneD.Hurt Staff Director DiversityandInclusionPrograms Adviser Director CharlesS.Struckmeyer DeputyStaff Director LynnS.Fox SeniorAdviser ManagementDivision RichardA.Anderson CharlesF.O’Malley TheresaA.Trimble Chief OperatingOfficerand AssociateDirector AssistantDirector Director JamesR.Riesz KarenL.Vassallo MichellC.Clark AssociateDirector AssistantDirector DeputyDirector MarieS.Savoy ToddA.Glissman AssociateDirector DonaldA.Spicer SeniorAdviser DeputyDirector TaraC.Tinsley-Pelitere CarolA.Sanders AssociateDirector WilliamL.Mitchell SpecialAdviser KeithF.Bates DeputyDirector ChristopherJ.Suma AssistantDirector ChristineM.Fields SpecialAdviser JeffreyR.Peirce AssociateDirector AssistantDirector

FederalReserveSystemOrganization 435 DivisionofInformationTechnology MaureenT.Hannan RaymondRomero SherylLynnWarren Director DeputyAssociateDirector AssistantDirector GearyL.Cunningham KofiA.Sapong RajasekharR.Yelisetty DeputyDirector DeputyAssociateDirector AssistantDirector WayneA.Edmondson WilliamDennison PoKyungKim DeputyDirector AssistantDirector SeniorAdviser SharonL.Mowry GlennS.Eskow TillenaG.Clark DeputyDirector AssistantDirector Adviser LisaM.Bell MariettaMurphy DeputyAssociateDirector AssistantDirector SusanF.Marycz KassandraAranaQuimby DeputyAssociateDirector AssistantDirector OfficeofInspectorGeneral MarkBialek AnthonyJ.Castaldo AndrewPatchanJr. InspectorGeneral AssociateInspectorGeneral AssociateInspectorGeneral JacquelineM.Becker EliseM.Ennis HarveyWitherspoon AssociateInspectorGeneral AssociateInspectorGeneral AssociateInspectorGeneral

436 98thAnnualReport|2011 FEDERAL OPEN MARKET COMMITTEE TheFederalOpenMarketCommitteeismadeupof thesevenmembersof theBoardof Governors;thepresidentof theFederalReserveBankof NewYork;andfourof theremaining11ReserveBankpresidents,who serveone-yeartermsonarotatingbasis.During2011,theFederalOpenMarketCommitteeheldeightregularly scheduledmeetingsandtwoconferencecalls(see“Minutesof FederalOpenMarketCommitteeMeetings”). Members BenS.Bernanke RichardW.Fisher DanielK.Tarullo Chairman,Boardof Governors President,FederalReserveBank Member,Boardof Governors of Dallas WilliamC.Dudley KevinM.Warsh ViceChairman,President,Federal NarayanaKocherlakota Member,Boardof Governors ReserveBankof NewYork President,FederalReserveBank (throughMarch2011) of Minneapolis ElizabethA.Duke JanetL.Yellen CharlesI.Plosser Member,Boardof Governors Member,Boardof Governors President,FederalReserveBank CharlesL.Evans of Philadelphia President,FederalReserveBank SarahBloomRaskin of Chicago Member,Boardof Governors AlternateMembers ChristineM.Cumming DennisP.Lockhart JohnC.Williams FirstVicePresident,Federal President,FederalReserveBank President,FederalReserveBank ReserveBankof NewYork of Atlanta of SanFrancisco JeffreyM.Lacker SandraPianalto President,FederalReserveBank President,FederalReserveBank of Richmond of Cleveland Officers WilliamB.English StevenB.Kamin SimonPotter SecretaryandEconomist Economist(asof December2011; AssociateEconomist previously,AssociateEconomist) DeborahJ.Danker DavidReifschneider DeputySecretary NathanSheets AssociateEconomist Economist(throughAugust2011) MatthewM.Luecke HarveyRosenblum AssistantSecretary DavidJ.Stockton AssociateEconomist DavidW.Skidmore Economist(throughJune2011) LawrenceSlifman AssistantSecretary DavidW.Wilcox AssociateEconomist MichelleA.Smith Economist(asof November2011; (asof November2011) AssistantSecretary previously,AssociateEconomist) DanielG.Sullivan ScottG.Alvarez JamesA.Clouse AssociateEconomist GeneralCounsel AssociateEconomist Kei-MuYi ThomasC.Baxter ThomasA.Connors AssociateEconomist DeputyGeneralCounsel AssociateEconomist BrianSack RichardM.Ashton LorettaJ.Mester Manager, AssistantGeneralCounsel AssociateEconomist SystemOpenMarketAccount

FederalReserveSystemOrganization 437 BOARD OF GOVERNORS ADVISORY COUNCILS TheFederalReserveSystemusesadvisorycommitteesincarryingoutitsvariedresponsibilities.Threeof these committeesadvisetheBoardof Governorsdirectly:theFederalAdvisoryCouncil,theConsumerAdvisory Council,andtheCommunityDepositoryInstitutionsAdvisoryCouncil.Thesecouncils,whosemembersare drawnfromeachof the12FederalReserveDistricts,meettwotofourtimesayear.TheindividualReserve Bankshaveadvisorycommitteesaswell,includingthriftinstitutionsadvisorycommittees,smallbusinesscommittees,andagriculturaladvisorycommittees.Moreover,officialsfromallReserveBanksmeetperiodicallyin variouscommittees.Tolearnmore,visitwww.federalreserve.gov/aboutthefed/advisorydefault.htm. FederalAdvisoryCouncil TheFederalAdvisoryCouncil—astatutorybodyestablishedundertheFederalReserveAct—consultswithand advisestheBoardof GovernorsonallmatterswithintheBoard’sjurisdiction.Itiscomposedof onerepresentativefromeachFederalReserveDistrict,chosenbytheReserveBankinthatDistrict.TheFederalReserveAct requiresthecounciltomeetinWashington,D.C.,atleastfourtimesayear.Threemembersof thecouncilserve asitspresident,vicepresident,andsecretary.In2011,itmetonFebruary3–4,May12–13,September1–2,and December1–2.ThecouncilmetwiththeBoardonFebruary4,May13,September2,andDecember2,2011. Members District1 District5 District9 JosephL.Hooley RichardD.Fairbank RichardK.Davis Chairman,President,andChief ChairmanandChief Executive Chairman,President,andChief ExecutiveOfficer,StateStreet Officer,CapitalOneFinancial ExecutiveOfficer,U.S.Bancorp, Corporation,Boston,MA Corporation,McLean,VA Minneapolis,MN District2 District6 District10 DarylG.Byrd VikramPandit StanleyA.Lybarger PresidentandChief Executive Chief ExecutiveOfficer, PresidentandChief Executive Officer,IBERIABANK Citigroup,Inc.,NewYork,NY Officer,Bankof Oklahoma, Corporation,Lafayette,LA NationalAssociation,Tulsa,OK District3 District7 BharatB.Masrani District11 DavidW.Nelms PresidentandChief Executive RichardW.EvansJr. ChairmanandChief Executive Officer,TDBank, ChairmanandChief Executive Officer,DiscoverFinancial CherryHill,NJ Officer,Cullen/FrostBankers Services,Riverwoods,IL Inc.,SanAntonio,TX District4 District8 JamesE.Rohr District12 BryanJordan ChairmanandChief Executive RussellGoldsmith Chairman,President,andChief Officer,ThePNCFinancial ChairmanandChief Executive ExecutiveOfficer,FirstHorizon ServicesGroup,Inc., Officer,CityNationalBank, NationalCorporation, Pittsburgh,PA BeverlyHills,CA Memphis,TN Officers RobertP.Kelly RussellGoldsmith JamesE.Annable President VicePresident Secretary (resignedSeptember2011)

438 98thAnnualReport|2011 ConsumerAdvisoryCouncil TheConsumerAdvisoryCouncil—astatutorybodyestablishedpursuanttothe1976amendmentstotheEqual CreditOpportunityAct—advisestheBoardof Governorsonconsumerfinancialservices.Itsmembers,whoare appointedbytheBoard,areacademics,stateandlocalgovernmentofficials,andrepresentativesof thefinancial servicesindustryandof consumerandcommunityinterests.In2011,theCouncilmetwiththeBoardon March10andJune16. Members NancyAndrews SusanEhrlich KirstenKeefe PresidentandChief Executive President,SearsFinancial SeniorStaff Attorney,Empire Officer,LowIncomeInvestment Services,SearsHolding JusticeCenter,Albany,NY Fund,SanFrancisco,CA Corporation, LarryB.LittonJr. HoffmanEstates,IL MaeveEliseBrown PresidentandChief Executive ExecutiveDirector,Housingand BetsyFlynn Officer,LittonLoan EconomicRightsAdvocates, Chief ExecutiveOfficer,President, ServicingLP,Houston,TX Oakland,CA andChairman,Community MikeLong FinancialServicesBank, PaulaBryant-Ellis ExecutiveVicePresidentand Benton,KY SeniorVicePresident, Chief CreditOfficer,UWCredit CommunityDevelopment JoshFuhrman Union,Madison,WI SeniorVicePresidentof Programs BankingGroup,BOKFinancial AndyNavarrete andPolicy,Homeownership Corporation,Tulsa,OK SeniorVicePresident,Chief PreservationFoundation, JoanneBudde Counsel–NationalLending, Minneapolis,MN PresidentandChief Executive CapitalOneFinancial PatriciaGarciaDuarte Officer,ConsumerCredit Corporation,McLean,VA PresidentandChief Executive CounselingServiceof San DoryRand Officer,NeighborhoodHousing Francisco,SanFrancisco,CA President,WoodstockInstitute, Servicesof Phoenix,Phoenix,AZ BarrettBurns Chicago,IL IraGoldstein PresidentandChief Executive Director,PolicySolutions, RashmiRangan Officer,VantageScoreSolutions, TheReinvestmentFund, ExecutiveDirector,Delaware LLC,Stamford,CT Philadelphia,PA CommunityReinvestmentAction JohnP.Carey MikeGriffin Council,Newark,DE Chief AdministrativeOfficer, SeniorVicePresident,KeyBank, PhyllisSalowe-Kaye ConsumerBanking,North N.A.,Cleveland,OH ExecutiveDirector,NewJersey America,Citigroup, JamesGutierrez CitizenAction,Newark,NJ NewYork,NY Chief ExecutiveOfficer,Progreso MarkWiseman TinoDiaz Financiero,MountainView,CA FormerPrincipalAssistant ManagingDirectorandChief ClintonGwin AttorneyGeneral,Consumer ExecutiveOfficer,CharisPros– President,PathwayLending, ProtectionSection,Ohio MortgageCenter,Miami,FL Nashville,TN AttorneyGeneral’sOffice, Cleveland,OH KerryDoi BrianHudsonSr. PresidentandChief Executive ExecutiveDirectorandChief JonathanZinman Officer,PacificAsianConsortium ExecutiveOfficer,Pennsylvania AssociateProfessorof Economics, inEmployment,LosAngeles,CA HousingFinanceAgency, DartmouthCollege, Harrisburg,PA Hanover,NH

FederalReserveSystemOrganization 439 Officers JimPark MaryTingerthal CouncilChair,Chief Executive CouncilViceChair,Commissioner, Officer,NewVistaAsset MinnesotaHousingFinance Management,SanDiego,CA Agency,St.Paul,MH CommunityDepositoryInstitutionsAdvisoryCouncil TheCommunityDepositoryAdvisoryCounciladvisestheBoardof Governorsontheeconomy,leadingconditions,andotherissues.Membersareselectedfromrepresentativesof banks,thriftinstitutions,andcreditunions servingonlocaladvisorycouncilsatthe12FederalReserveBanks.Onememberof eachof theReserveBank councilsservesontheCommunityDepositoryInstitutionsAdvisoryCouncil,whichmeetstwiceayearwiththe FederalReserveBoardinWashington. Members HowardT.Boyle PeterJ.Johnson DennisM.Terry PresidentandChief Executive PresidentandChief Executive PresidentandChief Executive Officer,HomeSavingsBank, Officer,AmericanFederalSavings Officer,FirstCloverLeaf Bank, Kent,OH Bank,Helena,MT Edwardsville,IL BarrieG.Christman MichaelKloiber ClaireW.Tucker Chairman,PrincipalBank, PresidentandChief Executive PresidentandChief Executive DesMoines,IA Officer,TinkerFederalCredit Officer,CapStarBank, JohnV.Evans,Jr. Union,TinkerAirForce Nashville,TN Chief ExecutiveOfficer,CapStar Base,OK RandyM.Smith Bank,Nashville,TN CharlesH.Majors Chief ExecutiveOfficerand RichardJ.Green ChairmanandChief Executive President,Randolph-Brooks Chief ExecutiveOfficer,Firstrust Officer,AmericanNationalBank, FederalCreditUnion,Universal Bank,Conshohocken,PA Danville,VA City,TX KayM.Hoveland RandyM.Smith PresidentandChief Executive Chief ExecutiveOfficerand Officer,KaiserFederalBankand President,Randolph-Brooks K-FedBancorp,Covina,CA FederalCreditUnion, (resignedJune2011) UniversalCity,TX PeterG.Humphrey WilliamT.Stapleton PresidentandChief Executive PresidentandChief Executive Officer,FiveStarBankand Officer,Northampton FinancialInstitutions,Inc., CooperativeBank, Warsaw,NY Northampton,MA Officer BarrieG.Christman President

440 98thAnnualReport|2011 FEDERAL RESERVE BANK BRANCHES Tocarryouttheday-to-dayoperationsof theFederalReserveSystem,thenationhasbeendividedinto12FederalReserveDistricts,eachwithaReserveBank.AsrequiredbytheFederalReserveActof 1913,eachof the ReserveBanksissupervisedbyaboardof directorswhoarefamiliarwitheconomicandcreditconditionsinthe District.Similarly,eachof the24ReserveBankBrancheshasaboardof directorswhoarefamiliarwithconditionsintheareaencompassedbytheBranch. ReserveBankandBranchDirectors EachFederalReserveBankhasanine-memberboardwiththreedifferentclassesof directors:threeClassA directors,whoarenominatedandelectedbythememberbanksinthatDistricttorepresentthestockholding banks;threeClassBdirectors,whoarenominatedandelectedbythememberbankstorepresentthepublic; andthreeClassCdirectors,whoareappointedbytheBoardof Governorstorepresentthepublic.ClassBand ClassCdirectorsareselectedwithdue,butnotexclusive,considerationtotheinterestsof agriculture,commerce,industry,services,labor,andconsumers.Fortheelectionof ClassAandClassBdirectors,themember banksof eachFederalReserveDistrictareclassifiedintothreegroups.Eachgroup,whichiscomprisedof bankswithsimilarcapitalization,electsoneClassAdirectorandoneClassBdirector.Directorsareelectedor appointedtothree-yeartermsonarotatingbasisso,barringanyunexpectedresignations,onepositionbecomes availableforeachclassof directoreachyear.Annually,theBoardof GovernorsdesignatesoneClassCdirector toserveaschair,andanotherClassCdirectortoserveasdeputychair,of eachReserveBankboard. PursuanttotheFederalReserveAct,ClassBandClassCdirectorsmaynotbeofficers,directors,oremployees of anybank,andClassCdirectorsmaynotholdstockinanybank.Inordertogivefullandmeaningfuleffect totheserestrictions,aswellastherequirementthatClassBandClassCdirectorsbeselectedwithconsideration forsectorsof theeconomybeyondbanking,itistheBoard’spolicythatClassBandClassCdirectorsmaynot beaffiliatedwith,andClassCdirectorsmaynotholdstockin,certainotherinstitutionsthatarealsosubjectto theSystem’ssupervision. EachFederalReserveBankBranchalsohasaboardwitheitherfiveorsevendirectors.Amajorityof the BranchdirectorsareappointedbytheFederalReserveBank,withtheremainingdirectorsappointedbythe Boardof Governors.BranchdirectorsappointedbytheReserveBankaresubjecttothesameeligibilityrequirementsasClassAorClassBdirectors.Board-appointedBranchdirectorsmustmeetthesamerequirementsas ClassBdirectors. FormoreinformationonReserveBankandBranchdirectors,seewww.federalreserve.gov/generalinfo/ listdirectors. Thedirectorsof theBanksandBranchesarelistedbelow.Foreachdirector,theclassof directorship,thedirector’sprincipalbusiness,andtheexpirationdateof thedirector’stermareshown. District1–Boston ClassA ClassB KathrynG.Underwood,2011 RichardE.Holbrook,2013 Vacancy,2011 PresidentandChief Executive ChairmanandChief Executive WilliamD.Nordhaus,2012 Officer,LedyardNationalBank, Officer,EasternBank, SterlingProfessorof Economics, Hanover,NH Boston,MA YaleUniversity,NewHaven,CT DavidA.Lentini,2012 JohnF.Fish,2013 ChairmanandChief Executive Chief ExecutiveOfficer,Suffolk Officer,TheConnecticutBank ConstructionCompany,Inc., andTrustCompany, Boston,MA Hartford,CT

FederalReserveSystemOrganization 441 ClassC HenriA.Termeer,2011 CatherineD’Amato,2012 KirkA.Sykes,2013 FormerChairman,President,and PresidentandChief Executive President,UrbanStrategy Chief ExecutiveOfficer,Genzyme Officer,TheGreaterBoston AmericaFund,L.P.,Boston,MA Corporation,Cambridge,MA FoodBank,Boston,MA District2–NewYork ClassA ClassB ClassC CharlesV.Wait,2011 TerryJ.Lundgren,2011 EmilyK.Rafferty,2011 President,Chief ExecutiveOfficer, Chairman,President,andChief President,TheMetropolitan andChairman,TheAdirondack ExecutiveOfficer,Macy’s,Inc., Museumof Art,NewYork,NY TrustCompany,Saratoga NewYork,NY LeeC.Bollinger,2012 Springs,NY GlennH.Hutchins,2012 President,ColumbiaUniversity, JamesDimon,2012 Co-FounderandCo-Chief NewYork,NY ChairmanandChief Executive Executive,SilverLake, Officer,JPMorganChase&Co., KathrynS.Wylde,2013 NewYork,NY NewYork,NY PresidentandChief Executive JamesS.Tisch,2013 Officer,PartnershipforNewYork RichardL.Carrión,2013 PresidentandChief Executive City,NewYork,NY Chairman,President,andChief Officer,LoewsCorporation, ExecutiveOfficer,Popular,Inc., NewYork,NY SanJuan,PR District3–Philadelphia ClassA ClassB ClassC FrederickC.Peters,2011 MichaelF.Camardo,2011 CharlesP.Pizzi,2011 ChairmanandChief Executive RetiredExecutiveVicePresident, RetiredPresidentandChief Officer,BrynMawrTrust LockheedMartinITS, ExecutiveOfficer,TastyBaking Company,BrynMawr,PA CherryHill,NJ Company,Philadelphia,PA AaronL.Groff,Jr.,2012 DeborahM.Fretz,2012 JamesE.Nevels,2012 Chairman,President,andChief RetiredPresidentandChief Chairman,TheSwarthmore ExecutiveOfficer,Ephrata ExecutiveOfficer,Sunoco Group,Philadelphia,PA NationalBank,Ephrata,PA LogisticsPartners, Philadelphia,PA JeremyNowak,2013 R.ScottSmith,2013 President,WilliamPenn ChairmanandChief Executive KeithS.Campbell,2013 Foundation,Philadelphia,PA Officer,FultonFinancial Chairman,Mannington Corporation,Lancaster,PA Mills,Inc.,Salem,NJ

442 98thAnnualReport|2011 District4–Cleveland ClassA CincinnatiBranch PittsburghBranch CharlotteW.Martin,2011 AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank PresidentandChief Executive GregoryB.Kenny,2011 HowardW.HannaIII,2011 Officer,GreatLakesBankers PresidentandChief Executive ChairmanandChief Executive Bank,Worthington,OH Officer,GeneralCable Officer,HowardHannaReal C.DanielDeLawder,2012 Corporation, EstateServices,Pittsburgh,PA ChairmanandChief Executive HighlandHeights,KY PetraMitchell,2011 Officer,ParkNationalBank, JanetB.Reid,2011 President,CatalystConnection, Newark,OH ManagingPartnerandDirector, Pittsburgh,PA PaulG.Greig,2013 GlobalNovations,LLC, Chairman,President,andChief GrantOliphant,2012 Cincinnati,OH ExecutiveOfficer,FirstMerit PresidentandChief Executive Corp.,Akron,OH DonaldE.Bloomer,2012 Officer,ThePittsburgh PresidentandChief Executive Foundation,Pittsburgh,PA ClassB Officer,CitizensNationalBank, ToddD.Brice,2013 Somerset,KY TilmonF.Brown,2011 PresidentandChief Executive PresidentandChief Executive AustinW.Keyser,2013 Officer,S&TBancorp,Inc., Officer,NewHorizonsBaking MidwestSeniorField Indiana,PA Company,Norwalk,OH Representative,AFL-CIO, AppointedbytheBoardofGovernors McDermott,OH SusanTomasky,2012 SunilT.Wadhwani,2011 RetiredPresident,AEP AppointedbytheBoardofGovernors ChairmanandCo-Founder, Transmission,Columbus,OH JamesM.Anderson,2011 iGATECorporation, HaroldKeller,2013 AdvisortothePresident, Pittsburgh,PA President,OhioCapital CincinnatiChildren’sHospital RobertA.Paul,2012 CorporationforHousing, MedicalCenter,Cincinnati,OH ChairmanandChief Executive Columbus,OH DanielB.Cunningham,2012 Officer,Ampco-Pittsburgh PresidentandChief Executive Corporation,Pittsburgh,PA ClassC Officer,Long-StantonGroup, AlfredM.Rankin,Jr.,2011 GlennR.Mahone,2013 Cincinnati,OH Chairman,President,andChief PartnerandAttorneyatLaw, ExecutiveOfficer,NACCO PeterS.Strange,2013 ReedSmithLLP,Pittsburgh,PA Industries,Inc.,Cleveland,OH Chairman,Messer,Inc., Cincinnati,OH RichardK.Smucker,2012 Chief ExecutiveOfficer,TheJ.M. SmuckerCompany,Orrville,OH ChristopherM.Connor,2013 ChairmanandChief Executive Officer,TheSherwin-Williams Company,Cleveland,OH

FederalReserveSystemOrganization 443 District5–Richmond ClassA BaltimoreBranch CharlotteBranch KellyS.King,2011 AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank Chief ExecutiveOfficer,BB&T BianaJ.Arentz,2011 JamesH.Speed,Jr.,2011 Corporation,Winston-Salem,NC PresidentandChief Executive PresidentandChief Executive RichardJ.Morgan,2012 Officer,Hemingway’sInc., Officer,NorthCarolinaMutual PresidentandChief Executive Stevensville,MD LifeInsuranceCompany, Officer,CommerceFirstBank, Durham,NC JamesT.Brady,2012 Annapolis,MD ManagingDirector–Mid-Atlantic, LuciaZ.Griffith,2012 AlanL.Brill,2013 BallantraeInternational,Ltd., Chief ExecutiveOfficerand PresidentandChief Executive Ijamsville,MD Principal,METROLandmarks, Officer,CaponValleyBank, Charlotte,NC Wardensville,WV AnitaG.Newcomb,2012 PresidentandManagingDirector, JohnS.Kreighbaum,2012 ClassB A.G.Newcomb&Co., PresidentandChief Executive Columbia,MD Officer,CarolinaPremierBank DanaS.Boole,2011 andPremaraFinancial,Inc., PresidentandChief Executive WilliamB.Grant,2013 Charlotte,NC Officer,CommunityAffordable Chairman,President,andChief HousingEquityCorporation, ExecutiveOfficer,FirstUnited RobertR.Hill,Jr.,2013 Raleigh,NC Corp.andFirstUnitedBank& PresidentandChief Executive Trust,Oakland,MD Officer,SCBTFinancial WilburE.Johnson,2012 Corporation,Columbia,SC ManagingPartner,Young AppointedbytheBoardofGovernors ClementRivers,LLP, JennyG.Morgan,2011 AppointedbytheBoardofGovernors Charleston,SC PresidentandChief Executive LindaL.Dolny,2011 PatrickC.GraneyIII,2013 Officer,basys,inc., FormerPresident,PML MaxumEastRegionalPresident, Linthicum,MD Associates,Inc.,Greenwood,SC MaxumPetroleum,Belle,WV RonaldBlackwell,2012 DavidJ.Zimmerman,2012 Chief Economist,AFL-CIO, President,SouthernShows,Inc., ClassC Washington,DC Charlotte,NC LindaD.Rabbitt,2011 ChairmanandChief Executive SamuelL.Ross,2013 ClaudeC.Lilly,2013 Officer,RandConstruction Chief ExecutiveOfficer,Bon Dean,ClemsonUniversity, Corporation,Washington,DC SecoursBaltimoreHealthSystem, Collegeof Businessand Baltimore,MD BehavioralScience,Clemson,SC RussellC.Lindner,2012 ChairmanandChief Executive Officer,TheForgeCompany, Washington,DC MargaretE.McDermid,2013 SeniorVicePresidentandChief InformationOfficer,Dominion Resources,Inc.,Richmond,VA

444 98thAnnualReport|2011 District6–Atlanta ClassA JohnA.Langloh,2012 AppointedbytheBoardofGovernors JamesM.WellsIII,2011 PresidentandChief Executive LyndaL.Weatherman,2011 ExecutiveChairman,SunTrust Officer,UnitedWayof Central PresidentandChief Executive Banks,Inc.,Atlanta,GA Alabama,Birmingham,AL Officer,EconomicDevelopment RudyE.Schupp,2012 JamesK.Lyons,2012 Commissionof Florida’sSpace PresidentandChief Executive DirectorandChief Executive Coast,Rockledge,FL Officer,1stUnitedBank, Officer,AlabamaStatePort LeerieT.Jenkins,Jr.,2012 WestPalmBeach,FL Authority,Mobile,AL ChairmanandChief Executive T.AnthonyHumphries,2013 C.RichardMoore,Jr.,2013 Officer,Reynolds,Smithand PresidentandChief Executive Chairman,President,andChief Hills,Inc.,Jacksonville,FL Officer,NobleBank&Trust, ExecutiveOfficer,Peoples Vacancy,2013 N.A.,Anniston,AL SouthernBank,Clanton,AL AppointedbytheBoardofGovernors MiamiBranch ClassB ThomasR.Stanton,2011 AppointedbytheFederalReserveBank RenéeLewisGlover,2011 ChairmanandChief Executive WalterBanks,2011 PresidentandChief Executive Officer,ADTRAN,Inc., Officer,AtlantaHousing Huntsville,AL President,LagoMarResortand Authority,Atlanta,GA Club,FortLauderdale,FL F.MichaelReilly,2012 ClarenceOtis,Jr.,2012 ThomasH.Shea,2011 Chairman,President,andChief ChairmanandChief Executive Chief ExecutiveOfficer, ExecutiveOfficer,Randall-Reilly Officer,DardenRestaurants,Inc., Florida/CaribbeanRegion, PublishingCo.,LLC, Orlando,FL RightManagement, Tuscaloosa,AL FortLauderdale,FL JoséS.Suguet,2013 HowardLeroyNicholson,2013 Chairman,President,andChief LeonardL.Abess,2012 Director,AlabamaAFL-CIO ExecutiveOfficer,Pan-American ChairmanandChief Executive LIFT,Montgomery,AL LifeInsuranceGroup, Officer,ThinkLABVentures, NewOrleans,LA LLC,Miami,FL JacksonvilleBranch GaryL.Tice,2013 ClassC AppointedbytheFederalReserveBank ChairmanandChief Executive ThomasI.Barkin,2011 HughF.Dailey,2011 Officer,FirstNationalBankof Director,McKinsey&Company, PresidentandChief Executive theGulf Coast,Naples,FL Atlanta,GA Officer,CommunityBank& Trustof Florida,Ocala,FL AppointedbytheBoardofGovernors RichardH.Anderson,2012 Chief ExecutiveOfficer,DeltaAir OscarJ.Horton,2012 W.CodyEstes,Sr.,2011 Lines,Inc.,Atlanta,GA President,SunStateInternational PresidentandOwner,EstesCitrus, Trucks,LLC,Tampa,FL Inc.,VeroBeach,FL CarolB.Tomé,2013 Chief FinancialOfficerand D.KevinJones,2012 EduardoJ.Padrón,2012 ExecutiveVicePresident,The PresidentandChief Executive President,MiamiDadeCollege, HomeDepot,Atlanta,GA Officer,MIDFLORIDACredit Miami,FL Union,Lakeland,FL MichaelJ.Jackson,2013 BirminghamBranch CarolynM.Fennell,2013 ChairmanandChief Executive AppointedbytheFederalReserveBank Directorof PublicAffairs,Greater Officer,AutoNation,Inc., MackeB.Mauldin,2011 OrlandoAviationAuthority, FortLauderdale,FL President,BankIndependent, OrlandoInternationalAirport, Sheffield,AL Orlando,FL

FederalReserveSystemOrganization 445 NashvilleBranch AppointedbytheFederalReserveBank WilliamJ.Krueger,2012 GerardR.Host,2013 ViceChairman,NissanAmericas, PresidentandChief Executive DanW.Hogan,2011 NissanNorthAmerica,Inc., Officer,TrustmarkNational Chairman,FifthThirdBank, Franklin,TN Bank,Jackson,MS Tennessee,Nashville,TN KathleenCalligan,2013 CordiaW.Harrington,2012 AppointedbytheBoardofGovernors Chief ExecutiveOfficer,Better Chief ExecutiveOfficer, T.LeeRobinson,Jr.,2011 BusinessBureauMiddle TennesseeBunCompany, President,OHC,Inc.,Mobile,AL Tennessee,Nashville,TN Nashville,TN RobertS.Boh,2012 JenniferS.Banner,2012 NewOrleansBranch PresidentandChief Executive Chief ExecutiveOfficer,Schaad Officer,BohBros.Construction AppointedbytheFederalReserveBank Companies,LLC,Knoxville,TN Co.,LLC,NewOrleans,LA R.KingMilling,2011 WilliamY.Carroll,Jr.,2013 Member,Boardof Directors, TerrieP.Sterling,2013 PresidentandChief Executive HancockHoldingCompanyand ExecutiveVicePresidentand Officer,SmartBank, WhitneyBank,NewOrleans,LA Chief OperatingOfficer,Our PigeonForge,TN Ladyof theLakeRegional MatthewG.StullerSr.,2012 MedicalCenter,BatonRouge,LA AppointedbytheBoardofGovernors ChairmanandChief Executive Officer,Stuller,Inc., RichardQ.Ford,2011 Lafayette,LA ChairmanandChief Executive Officer,TheSageGroup, E.RenaeConley,2012 Nashville,TN ExecutiveVicePresident,Human ResourcesandAdministration, EntergyCorporation, NewOrleans,LA District7–Chicago ClassA ClassB ClassC FrederickH.Waddell,2011 NeldaJ.Connors,2011 JeffreyA.Joerres,2011 ChairmanandChief Executive ChairwomanandChief Executive ChairmanandChief Executive Officer,NorthernTrust Officer,PineGroveHoldings, Officer,ManpowerGroup, CorporationandTheNorthern LLC,Chicago,IL Milwaukee,WI TrustCompany,Chicago,IL TerryMazany,2012 WilliamC.Foote,2012 StephenJ.Goodenow,2012 PresidentandChief Executive RetiredChairman,USG ChairmanandChief Executive Officer,TheChicagoCommunity Corporation,Chicago,IL Officer,BankMidwest, Trust,Chicago,IL Vacancy,2013 SpiritLake,IA AnnD.Murtlow,2013 MarkC.Hewitt,2013 FormerPresidentandChief PresidentandChief Executive ExecutiveOfficer,Indianapolis Officer,ClearLakeBank&Trust Power&LightCompany, Company,ClearLake,IA Indianapolis,IN

446 98thAnnualReport|2011 DetroitBranch AppointedbytheFederalReserveBank SheilahP.Clay,2012 LouAnnaK.Simon,2012 PresidentandChief Executive President,MichiganState MarkT.Gaffney,2011 Officer,NeighborhoodService University,EastLansing,MI FormerPresident,Michigan Organization,Detroit,MI AFL-CIO,Lansing,MI CarlT.Camden,2013 NancyM.Schlichting,2013 PresidentandChief Executive BrianC.Walker,2011 Chief ExecutiveOfficer,Henry Officer,KellyServices,Inc., PresidentandChief Executive FordHealthSystem,Detroit,MI Troy,MI Officer,HermanMiller,Inc., Zeeland,MI AppointedbytheBoardofGovernors TimothyM.Manganello,2011 ChairmanandChief Executive Officer,BorgWarnerInc., AuburnHills,MI District8–St.Louis ClassA ClassC AppointedbytheBoardofGovernors J.ThomasMay,2011 WardM.Klein,2011 RayC.Dillon,2011 ChairmanandChief Executive Chief ExecutiveOfficer,Energizer PresidentandChief Executive Officer,SimmonsFirstNational Holdings,Inc.,St.Louis,MO Officer,DelticTimber Corporation,PineBluff,AR Corporation,ElDorado,AR StevenH.Lipstein,2012 WilliamE.Chappel,2012 C.SamWalls,2012 PresidentandChief Executive PresidentandChief Executive Chief ExecutiveOfficer,Arkansas Officer,BJCHealthCare, Officer,TheFirstNationalBank, CapitalCorporation, St.Louis,MO Vandalia,IL LittleRock,AR RobertG.Jones,2013 SharonD.Fiehler,2013 KaleybraMitchellMorehead,2013, PresidentandChief Executive ExecutiveVicePresidentand Vice President for College Affairs/ Officer,OldNationalBancorp, Chief AdministrativeOfficer, Advancement,SoutheastArkansas Evansville,IN PeabodyEnergy, College,PineBluff,AR St.Louis,MO ClassB LittleRockBranch GregoryM.Duckett,2011 SeniorVicePresidentand AppointedbytheFederalReserveBank CorporateCounsel,Baptist PhillipN.Baldwin,2011 MemorialHealthCare PresidentandChief Executive Corporation,Memphis,TN Officer,SouthernBancorp, Arkadelphia,AR SonjaYatesHubbard,2012 Chief ExecutiveOfficer,E-ZMart RobertA.YoungIII,2011 Stores,Inc.,Texarkana,TX Chairman,ArkansasBest CalMcCastlain,2013 Corporation,FortSmith,AR Partner,DoverDixonHorne WilliamC.Scholl,2012 PLLC,LittleRock,AR President,FirstSecurityBancorp, Searcy,AR MichaelA.Cook,2013 VicePresidentandAssistant Treasurer,Wal-MartStores,Inc., Bentonville,AR

FederalReserveSystemOrganization 447 LouisvilleBranch MemphisBranch AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank AppointedbytheBoardofGovernors JohnC.Schroeder,2011 ClydeWarrenNunn,2011 LawrenceC.Long,2011 President,WabashPlastics,Inc., ChairmanandPresident,Security Partner,St.RestPlantingCo., Evansville,IN Bancorpof TN,Inc.,Halls,TN Indianola,MS KevinShurn,2011 SusanS.Stephenson,2011 CharlieE.Thomas,III,2012 PresidentandOwner, Co-ChairmanandPresident, RegionalDirectorof External& SuperiorMaintenanceCo., IndependentBank,Memphis,TN LegislativeAffairs, Elizabethtown,KY AT&TTennessee, AllegraC.Brigham,2012 JonA.Lawson,2012 Memphis,TN InterimPresident,Mississippi President,Chief ExecutiveOfficer UniversityforWomen, CharlesS.Blatteis,2013 andChairman,Bankof Ohio Columbus,MS ManagingMember,BlatteisLaw County,BeaverDam,KY Firm,PLLC,Memphis,TN DavidP.Heintzman,2013, MarkP.Fowler,2013 ChairmanandChief Executive ViceChairman,LibertyBankof Officer,StockYardsBank& Arkansas,Jonesboro,AR TrustCompany,Louisville,KY AppointedbytheBoardofGovernors GeraldR.Martin,2011 ManagingMember,RiverHill Capital,LLC,Louisville,KY BarbaraAnnPopp,2012 Chief ExecutiveOfficer,Schuler BauerRealEstateServices, NewAlbany,IN GaryA.Ransdell,2013 President,WesternKentucky University,BowlingGreen,KY District9–Minneapolis ClassA ClassB ClassC MichaelJ.O’Meara,2011 HowardA.Dahl,2011 JohnW.Marvin,2011 Chairman,PeoplesBankof PresidentandChief Executive ChairmanandChief Executive Wisconsin,EauClaire,WI Officer,AGCO-Amity,AGCO Officer,MarvinWindowsand J.V.L.L.C.,Fargo,ND Doors,Warroad,MN RichardL.Westra,2012 PresidentandChief Executive WilliamJ.Shorma,2012 RandallJ.Hogan,2012 Officer,DacotahBankand President,RushCo/StrategicRail ChairmanandChief Executive DacotahBanks,Inc., SystemsSRS,Springfield,SD Officer,Pentair,Incorporated, Aberdeen,SD Minneapolis,MN LawrenceR.Simkins,2013 JulieCausey,2013 President,TheWashington MaryK.Brainerd,2013 Chairman,WesternBank, Corporations,Missoula,MT PresidentandChief Executive St.Paul,MN Officer,HealthPartners, Minneapolis,MN

448 98thAnnualReport|2011 HelenaBranch AppointedbytheFederalReserveBank ThomasR.Swenson,2013 JosephF.McDonald,2012 PresidentandChief Executive PresidentEmeritus,Salish JohnL.Franklin,2011 Officer,Bankof Montanaand KootenaiCollege,Pablo,MT PresidentandChief Executive Bancorpof MontanaHolding Officer,1stBank,Sidney,MT Company,Missoula,MT TimothyJ.Bartz,2012 AppointedbytheBoardofGovernors Chairman,Anderson ZurMuehlen&Company,P.C., DavidB.Solberg,2011 Helena,MT Owner,SevenBlackfootRanch Company,Billings,MT District10–KansasCity ClassA TerryL.Moore,2013 OklahomaCityBranch President,OmahaFederationof JohnA.Ikard,2011 AppointedbytheFederalReserveBank Labor,AFL-CIO,Omaha,NE PresidentandChief Executive K.Vasudevan,2011 Officer,FirstBankHolding ChairmanandFounder,Service& DenverBranch Company,Lakewood,CO TechnologyCorporation, AppointedbytheFederalReserveBank Bartlesville,OK DavidW.Brownback,2012 BruceK.Alexander,2011 PresidentandChief Executive RoseM.Washington,2012 PresidentandChief Executive Officer,CitizensStateBank& ExecutiveDirector,Tulsa Officer,VectraBankColorado, TrustCompany,Ellsworth,KS EconomicDevelopment Denver,CO Corporation,Tulsa,OK MaxT.Wake,2013 CharlesH.BrownIII,2012 President,JonesNationalBank& JacquelineR.Fiegel,2013 President,C.H.BrownCo., TrustCo.,Seward,NE SeniorExecutiveVicePresident Wheatland,WY andChief OperatingOfficer, ClassB AnneHainesYatskowitz,2012 CoppermarkBank, PresidentandChief Executive OklahomaCity,OK RichardK.Ratcliffe,2011 Officer,ACCIONNew DouglasE.Tippens,2013 Chairman,Ratcliffe’sInc., Mexico–Arizona–Colorado, PresidentandChief Executive Weatherford,OK Albuquerque,NM Officer,Bankof Commerce, JohnT.Stout,Jr.,2012 MarkA.Zaback,2013 Yukon,OK Chief ExecutiveOfficer,Plaza PresidentandChief Executive AppointedbytheBoardofGovernors BelmontManagementGroup Officer,JonahBankof Wyoming, JamesD.Dunn,2011 LLC,ShawneeMission,KS Casper,WY Chair,MillCreekLumber& MarkGordon,2013 AppointedbytheBoardofGovernors SupplyCo.,Tulsa,OK Owner,MerlinRanch, LarissaL.Herda,2011 Vacancy,2012 Buffalo,WY Chair,Chief ExecutiveOfficer, StevenC.Agee,2013 andPresident,twtelecominc., ClassC Littleton,CO DeanandProfessorof Economics, MeindersSchoolof Business, LuM.Córdova,2011 BarbaraMowry,2012 OklahomaCityUniversity, Chief ExecutiveOfficer,Corlund Chief ExecutiveOfficer, OklahomaCity,OK Industries,LLC.;Presidentand GoreCreekAdvisors, GeneralManager,Almacen GreenwoodVillage,CO StorageGroup,Boulder,CO MargaretM.Kelly,2013 PaulDeBruce,2012 Chief ExecutiveOfficer, Chief ExecutiveOfficerand RE/MAX,LLC,Denver,CO Founder,DeBruceGrain,Inc., KansasCity,MO

FederalReserveSystemOrganization 449 OmahaBranch AppointedbytheFederalReserveBank JoAnnM.Martin,2013 G.RichardRussell,2012 MarkA.Sutko,2011 Chair,President,andChief PresidentandChief Executive PresidentandChief Executive ExecutiveOfficer,AmeritasLife Officer,MillardLumberInc., Officer,PlatteValleyStateBank, InsuranceCorp.,Lincoln,NE Omaha,NE Kearney,NE AppointedbytheBoardofGovernors NataliaJ.Peart,2013 ToddS.Adams,2012 Chief ExecutiveOfficer,Women’s JamesC.Farrell,2011 Chief ExecutiveOfficer,Adams CenterforAdvancement, PresidentandChief Executive Bank&Trust,Ogallala,NE Omaha,NE Officer,FarmersNational JamesL.Thom,2012 Company,Omaha,NE VicePresident,T-LIrrigationCo., Hastings,NE District11–Dallas ClassA MyronE.UllmanIII,2012 D.KirkEdwards,2012 ExecutiveChairman,J.C.Penney President,MacLondonRoyalty GeorgeF.Jones,Jr.,2011 Company,Inc.,Plano,TX Company,Odessa,TX Chief ExecutiveOfficer,Texas CapitalBank,Dallas,TX HerbertD.Kelleher,2013 CindyJ.Ramos-Davidson,2013 PeteCook,2012 FounderandChairmanEmeritus, PresidentandChief Executive Chief ExecutiveOfficer,First SouthwestAirlines,Dallas,TX Officer,ElPasoHispanic NationalBankinAlamogordo, Chamberof Commerce, Alamogordo,NM ElPasoBranch ElPaso,TX JoeKimKing,2013 AppointedbytheFederalReserveBank HoustonBranch Chief ExecutiveOfficerand LauraM.Conniff,2011 Chairmanof theBoard,Texas QualifyingBroker,Mathers AppointedbytheFederalReserveBank CountryBancshares,Inc., Realty,Inc.,LasCruces,NM KirkS.Hachigian,2011 Brady,TX ChairmanandChief Executive MarthaI.Dickason,2011 Officer,CooperIndustries,Ltd., ClassB President,dmDickasonPersonnel Houston,TX Services,ElPaso,TX JamesB.Bexley,2011 AnnB.Stern,2011 Professor,Finance,SamHouston RobertNachtmann,2012 ExecutiveVicePresident,Texas StateUniversity,Huntsville,TX DeanandProfessorof Finance, Children’sHospital,Houston,TX Universityof TexasatElPaso, MargaretH.Jordan,2012 ElPaso,TX PaulB.Murphy,Jr.,2012 PresidentandChief Executive PresidentandChief Executive Officer,DallasMedicalResource, LarryL.Patton,2013 Officer,CadenceBank, Dallas,TX PresidentandChief Executive Houston,TX EltonM.Hyder,2013 Officer,Bankof theWest, President,TheEMH ElPaso,TX Corporation,FortWorth,TX AppointedbytheBoardofGovernors RobertE.McKnight,Jr.,2011 ClassC Owner,McKnightRanch RenuKhator,2011 Company,FortDavis,TX Chancellor/President,University of Houston,Houston,TX

450 98thAnnualReport|2011 GeraldB.Smith,2013 SanAntonioBranch ChairmanandChief Executive AppointedbytheFederalReserveBank AppointedbytheBoardofGovernors Officer,Smith,Graham& CompanyInvestmentAdvisors, YgnacioD.Garza,2011 StevenR.Vandegrift,2011 L.P.,Houston,TX CPA,LongChiltonLLP, FounderandPresident,SRV Brownsville,TX Holdings,Austin,TX AppointedbytheBoardofGovernors GuillermoF.Trevino,2011 CatherineM.Burzik,2012 PaulW.Hobby,2011 President,SouthernDistributing, PresidentandChief Executive ChairmanandManagingPartner, Laredo,TX Officer,KineticConcepts,Inc., GenesisPark,LP,Houston,TX SanAntonio,TX JorgeA.Bermudez,2012 ThomasE.Dobson,2012 PresidentandChief Executive ChairmanandChief Executive CurtisV.Anastasio,2013 Officer,ByebrookGroup, Officer,Whataburger PresidentandChief Executive CollegeStation,TX Restaurants,LP, Officer,NuStarEnergyL.P., SanAntonio,TX SanAntonio,TX GregL.Armstrong,2013 ChairmanandChief Executive JosueRobles,2013 Officer,PlainsAllAmerican PresidentandChief Executive Pipeline,L.P.,Houston,TX Officer,USAA,SanAntonio,TX District12–SanFrancisco ClassA WilliamD.Jones,2012 AppointedbytheBoardofGovernors DannH.Bowman,2011 PresidentandChief Executive AnnE.Sewill,2011 PresidentandChief Executive Officer,CitySceneManagement President,CommunityFoundation Officer,ChinoCommercialBank, Company,SanDiego,CA LandTrust,California N.A.,Chino,CA PatriciaE.Yarrington,2013 CommunityFoundation, LosAngeles,CA KennethP.Wilcox,2012 VicePresidentandChief Financial Chairman,SiliconValleyBank, Officer,ChevronCorporation, AndrewJ.Sale,2012 SantaClara,CA SanRamon,CA Partner,Retail,Consumer BetsyLawer,2013 ProductsandMedia& LosAngelesBranch ViceChair,FirstNationalBank EntertainmentLeader–West Alaska,Anchorage,AK AppointedbytheFederalReserveBank Region,Ernst&YoungLLP, LosAngeles,CA KeithE.Smith,2011 ClassB PresidentandChief Executive GraceEvansCherashore,2013 KarlaS.Chambers,2011 Officer,BoydGaming PresidentandChief Executive VicePresidentandCo-Owner, Corporation,LasVegas,NV Officer,EvansHotels, StahlbushIslandFarms,Inc., SanDiego,CA JohnC.Molina,2012 Corvallis,OR Chief FinancialOfficer,Molina PortlandBranch BlakeW.Nordstrom,2012 Healthcare,Inc.,LongBeach,CA President,Nordstrom,Inc., AppointedbytheFederalReserveBank JosephC.Berenato,2012 Seattle,WA Chairmanof theBoard, RobertC.Hale,2011 NicoleC.Taylor,2013 DucommunIncorporated, Chief ExecutiveOfficer,Hale PresidentandChief Executive Carson,CA Companies,Hermiston,OR Officer,EastBayCommunity Foundation,Oakland,CA DavidI.Rainer,2013 Chairman,President,andChief ClassC ExecutiveOfficer,California UnitedBank,Encino,CA DouglasW.Shorenstein,2011 ChairmanandChief Executive Officer,ShorensteinProperties LLC,SanFrancisco,CA

FederalReserveSystemOrganization 451 PeggyY.Fowler,2011 SaltLakeCityBranch SeattleBranch RetiredChief ExecutiveOfficer AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank andPresident,PortlandGeneral DamonG.Miller,2011 ScottL.Morris,2011 Electric,Portland,OR UtahMarketPresident,U.S. Chairman,President,andChief MeganF.Clubb,2012 Bank,SaltLakeCity,UT ExecutiveOfficer,Avista PresidentandChief Executive Corporation,Spokane,WA RobertA.Hatch,2011 Officer,BakerBoyerNational President,RegenceBlueCross PatrickG.Yalung,2011 Bank,WallaWalla,WA BlueShieldof Utah, RegionalPresident,Washington, RogerW.Hinshaw,2013 SaltLakeCity,UT WellsFargoBank,N.A., President,OregonandSW Seattle,WA CarolCarter,2012 Washington,Bankof America PresidentandChief Executive HenryL.(Skip)Kotkins,Jr.,2012 Oregon,N.A.,Portland,OR Officer,IndustrialCompressor ChairmanandChief Executive AppointedbytheBoardofGovernors Products,Inc.,ParkCity,UT Officer,SkywayLuggage Company,Seattle,WA RoderickC.Wendt,2011 AlbertT.Wada,2013 Chief ExecutiveOfficer, ChairmanandChief Executive RichardGalanti,2013 JELD-WEN,inc., Officer,WadaFarms,Inc., ExecutiveVicePresidentand KlamathFalls,OR Pingree,ID Chief FinancialOfficer,Costco WholesaleCorporation, DavidY.Chen,2012 AppointedbytheBoardofGovernors Issaquah,WA Chief ExecutiveOfficer, ClarkD.Ivory,2011 EquilibriumCapitalGroupLLC, Chief ExecutiveOfficer,Ivory AppointedbytheBoardofGovernors Portland,OR Homes,Ltd.,SaltLakeCity,UT AdaM.Healey,2011 JosephE.Robertson,Jr.,M.D., BradleyJ.Wiskirchen,2012 VicePresident,RealEstate, 2013 Chief ExecutiveOfficer, VulcanInc.,Seattle,WA President,OregonHealth& Keynetics,Inc.,Boise,ID MaryO.McWilliams,2012 ScienceUniversity,Portland,OR ExecutiveDirector,PugetSound ScottL.Hymas,2013 HealthAlliance,Seattle,WA Chief ExecutiveOfficer,RC Willey,SaltLakeCity,UT Vacancy,2013

452 98thAnnualReport|2011 ReserveBankandBranchOfficers Asmentioned,eachFederalReserveBankanditsbrancheshasaboardof directors.Theofficersof eachBank andBrancharedrawnfromthispoolof directors.Specifically,twodirectorsof eachReserveBankaredesignatedbytheBoardof Governorsaschair1anddeputychair,respectively,of theirnine-memberboard.Each ReserveBankalsohasapresidentandfirstvicepresident,whoareappointedbytheboardof directorsof the Bank,subjecttoapprovalbytheBoardof Governors.Additionally,eachDistrictBranchalsohasachair,who isselectedfromamongthoseBranchdirectorsappointedbytheBoardof Governors. Cincinnati Jacksonville Boston JamesM.Anderson,Chair LyndaL.Weatherman,Chair HenriA.Termeer,Chair ChristopherL.Oakley,Vice LaVaughnM.Henry, KirkA.Sykes,DeputyChair PresidentandRegionalExecutive SeniorRegionalOfficer EricS.Rosengren,President Miami KennethC.Montgomery, Pittsburgh FirstVicePresident W.CodyEstesSr.,Chair SunilT.Wadhwani,Chair JuandelBusto,VicePresidentand RobertB.Schaub, NewYork RegionalExecutive SeniorRegionalOfficer LeeC.Bollinger,Chair Nashville KathrynS.Wylde,DeputyChair Richmond RichardQ.Ford,Chair WilliamC.Dudley,President MargaretE.McDermid,Chair LeeC.Jones,VicePresidentand ChristineM.Cumming, LindaD.Rabbitt,DeputyChair RegionalExecutive FirstVicePresident JeffreyM.Lacker,President AdditionalofficeatEastRutherford,NJ SarahG.Green, NewOrleans FirstVicePresident RobertS.Boh,Chair Philadelphia RobertJ.Musso,SeniorVice Baltimore CharlesP.Pizzi,Chair PresidentandRegionalExecutive RonaldBlackwell,Chair JeremyNowak,DeputyChair CharlesI.Plosser,President DavidE.Beck,OfficerinCharge Chicago D.BlakePrichard, WilliamC.Foote,Chair Charlotte FirstVicePresident Vacancy,DeputyChair ClaudeC.Lilly,Chair CharlesL.Evans,President Cleveland MatthewA.Martin, GordonWerkema, OfficerinCharge AlfredM.Rankin,Jr.,Chair FirstVicePresident RichardK.Smucker, AdditionalofficeatDesMoines,IA,and Atlanta DeputyChair atMidwayatBedfordPark,IL. SandraPianalto,President CarolB.Tomé,Chair GregoryStefani, ThomasI.Barkin,DeputyChair FirstVicePresident DennisP.Lockhart,President MarieC.Gooding, FirstVicePresident Birmingham ThomasR.Stanton,Chair LesleyMcClure,VicePresident andRegionalExecutive 1 ThechairofaFederalReserveBankserves,bystatute,asFederalReserveagent.

FederalReserveSystemOrganization 453 Detroit SanAntonio KansasCity TimothyM.Manganello,Chair StevenR.Vandegrift,Chair PaulDeBruce,Chair RobertWiley,OfficerinCharge BlakeHastings,OfficerinCharge LuM.Córdova,DeputyChair EstherL.George,President St.Louis SanFrancisco Vacancy,FirstVicePresident StevenH.Lipstein,Chair DouglasW.Shorenstein,Chair WardM.Klein,DeputyChair Denver PatriciaE.Yarrington, JamesBullard,President BarbaraMowry,Chair DeputyChair DavidA.Sapenaro, MarkC.Snead,OfficerinCharge JohnC.Williams,President FirstVicePresident JohnF.Moore, OklahomaCity LittleRock FirstVicePresident StevenC.Agee,Chair KaleybraMitchellMorehead, AdditionalofficeatPhoenix,AZ. Chair ChadR.Wilkerson, RobertA.Hopkins, OfficerinCharge LosAngeles OfficerinCharge GraceEvansCherashore,Chair Omaha Louisville JamesC.Farrell,Chair MarkL.Mullinix, OfficerinCharge GaryA.Ransdell,Chair JasonR.Henderson, MariaGerwingHampton, OfficerinCharge Portland OfficerinCharge DavidY.Chen,Chair Dallas Memphis StevenH.Walker, LawrenceC.Long,Chair HerbertD.Kelleher,Chair OfficerinCharge MarthaPerineBeard, MyronE.UllmanIII, SaltLakeCity OfficerinCharge DeputyChair RichardW.Fisher,President ScottL.Hymas,Chair Minneapolis HelenE.Holcomb, RobinA.Rockwood, FirstVicePresident OfficerinCharge JohnW.Marvin,Chair MaryK.Brainerd,DeputyChair ElPaso Seattle NarayanaR.Kocherlakota, D.KirkEdwards,Chair MaryO.McWilliams,Chair President JamesM.Lyon, RobertW.Gilmer, MarkA.Gould,OfficerinCharge FirstVicePresident OfficerinCharge Helena Houston JosephF.McDonald,Chair PaulW.Hobby,Chair R.PaulDrake,OfficerinCharge DaronD.Peschel, OfficerinCharge

454 98thAnnualReport|2011 OfficerConferences Anumberof theofficersof eachBankalsoserveoncouncilsthatexamineissuesof importancetotheir districts. ConferenceofChairs Thechairsof theFederalReserveBanksareorganizedintotheConferenceof Chairs,whichmeetstoconsider mattersof commoninterestandtoconsultwithandadvisetheBoardof Governors.Suchmeetings,also attendedbythedeputychairs,wereheldinWashington,D.C.,onMay24and25andNovember15and16, 2011.Theconference’sexecutivecommitteemembersfor2011and2012arelistedbelow. ConferenceofChairs ConferenceofChairs ExecutiveCommittee–2011 ExecutiveCommittee–2012 CharlesP.Pizzi,Chair, AlfredM.Rankin,Jr.,Chair, FederalReserveBankof FederalReserveBankof Philadelphia Cleveland AlfredM.Rankin,Jr.,ViceChair HerbertD.Kelleher,ViceChair, FederalReserveBankof FederalReserveBankof Dallas Cleveland MaryK.Brainerd,Member, HerbertD.Kelleher,Member, FederalReserveBankof FederalReserveBankof Dallas Minneapolis ConferenceofPresidents Thepresidentsof theFederalReserveBanksareorganizedintotheConferenceof Presidents,whichmeetsperiodicallytoidentify,define,anddeliberateissuesof strategicsignificancetotheFederalReserveSystem;toconsidermattersof commoninterest;andtoconsultwithandadvisetheBoardof Governors.Conferenceofficers for2011arelistedbelow. ConferenceofPresidents–2011 RichardW.Fisher,Chair, FederalReserveBankof Dallas CharlesI.Plosser,ViceChair, FederalReserveBankof Philadelphia HarveyR.Mitchell,Secretary, FederalReserveBankof Dallas FrankJ.Doto, AssistantSecretary, FederalReserveBankof Philadelphia

FederalReserveSystemOrganization 455 ConferenceofFirstVicePresidents TheConferenceof FirstVicePresidentsof theFederalReserveBankswasorganizedin1969tomeetperiodicallyfortheconsiderationof operationsandothermatters.Conferenceofficersfor2011arelistedbelow.2 ConferenceofFirstVice Presidents–2011 SallyGreen,Chair, FederalReserveBankof Richmond EstherL.George,3ViceChair, FederalReserveBankof KansasCity AnneC.Gossweiler,Secretary, FederalReserveBankof Richmond W.ToddMackey,4 AssistantSecretary, FederalReserveBankof KansasCity 2 OnDecember1,2011,theconferenceelectedBlakePrichard,FederalReserveBankofPhiladelphia,aschairfor2012–13,andKenneth Montgomery,FederalReserveBankofBoston,asvicechair.TheconferencealsoelectedThomasLombardo,FederalReserveBankof Philadelphia,assecretary,andJeanneMacNevin,FederalReserveBankofBoston,asassistantsecretary. 3 Ms.GeorgebecamepresidentandchiefexecutiveofficeroftheFederalReserveBankofKansasCityonOctober1,2011.TheconferenceelectedBlakePrichardasvicechaironNovember4,2011. 4 TheconferenceelectedThomasLombardoasassistantsecretaryonNovember4,2011.

457 Index A Assetsandliabilities Bankholdingcompanies,88 Abbreviations,54 Boardof Governors,343 ABCP.SeeAsset-backedcommercialpaper Commercialbanks,323 Ability-to-payrequirements,112–113,132–133 FederalReserveBanks,149–153,316,319–320 ABSs.SeeAsset-backedsecurities Statememberbanks,88 Accountingpolicy,98–99 Associationof Supervisorsof Banksof theAmericas AccountingStandardsCodification(ASC),152 (ASBA),95 AccountingStandardsUpdate(ASU),386–388 Audits Accumulatedothercomprehensiveincome,152 Boardof Governors,340–360 ACH.SeeAutomatedclearinghouseservices FederalReserveBanks,143–144,361–426 Adjustable-ratemortgages,132 FederalReserveSystem,339–429 Advancedforeigneconomies(AFEs),29,31,33,74–76, byGovernmentAccountabilityOffice,428–429 183,185,203 byOfficeof theInspectorGeneral,427 Advisorycouncils Automatedclearinghouse(ACH)services,135,136 CommunityDepositoryInstitutionsAdvisory Availabilityof FundsandCollectionof Checks Council,439 (RegulationCC),124 ConsumerAdvisoryCouncil,129–133,438–439 FederalAdvisoryCouncil,437 AFEs.SeeAdvancedforeigneconomies B Agreementcorporations,85,91,92,109 Balancesheets Agriculturalcreditrisk,99 Boardof Governors,343 Agriculture,U.S.Departmentof,123 FederalReserveSystem,26–28,57,72–73,201,211–213, AIAAuroraLLC,72 253,263,275,297 AIG.SeeAmericanInternationalGroup,Inc. Bankexaminertraining,122 ALICOHoldingsLLC,72–73 BankHoldingCompaniesandChangeinBankControl AmericanInternationalGroup,Inc.(AIG),27,57,72–73, (RegulationY),103,166–167 146,169,372–375,384,390–391 Bankholdingcompanies(BHCs) AmericanLifeInsuranceCompany,374 Assets,88 AmericanRecoveryandReinvestmentAct(ARRA),15,63 Banksaffiliatedwith,315 AML.SeeAnti-money-laundering Capitaladequacystandards,97 Annualpercentagerate(APR),112 Capitalplanning,89 Anti-money-laundering(AML) Complaintsagainst,125–126 Compliancewithregulatoryrequirements,92–93, ConsolidatedSupervisionProgram,116 100–101 Examinationsandinspections,89–90 Examinations,93 Financialholdingcompanies,90 Internationalcoordination,101 Internationalactivities,91–92 APR.SeeAnnualpercentagerate(APR) Numberof,89 ARRA.SeeAmericanRecoveryandReinvestmentAct Performanceof,83–84 ASBA.SeeAssociationof Supervisorsof Banksof the Prudentialstandards,84–85,158–159 Americas Ratingsystem,90 AsiaPacificEconomicCooperationFinancialRegulators’ Regulationof,107–110 TrainingInitiative,95 Regulatorycapitalratios,72 AsianDevelopmentBank,95 Regulatoryreports,102–104 Asset-backedcommercialpaper(ABCP),22,370 Riskmanagement,90 Asset-backedsecurities(ABSs),11,61,72,160 Stresstesting,89

458 98thAnnualReport|2011 Supervisionof,84–107,156–158 Cashflows,345 Surveillanceandoff-sitemonitoring,94–95 CommunityDepositoryInstitutionsAdvisory BankHoldingCompanyAct,103,108 Council,439 BankHoldingCompanyPerformanceReports ConsumerAdvisoryCouncil,129–133,438–439 (BHCPRs),94 Consumercompliancesupervision,92–93 BankMergerAct,107,108 Discountratesfordepositoryinstitutions,170–171 Bankof Canada Divisionof BankingSupervisionandRegulation,116 Monetarypolicyrate,33,76 Divisionof ConsumerandCommunityAffairs,111–133 Swaparrangementwith,36 Divisionof ReserveBankOperationsandPayment Bankof England Systems,143 Monetarypolicyrate,76 Economicprojections,40–53 Swaparrangementwith,36 FederalAdvisoryCouncil,437 Bankof Japan FFIECactivities,95,100–101,102,104,105 Loanprograms,76 Financialstatements,73,340–360 Monetarypolicyrate,33 Forecastuncertainty,53 Swaparrangementwith,32,36 GovernmentPerformanceandResultsAct requirements,163 BankSecrecyAct/Anti-MoneyLaunderingExamination H.2statisticalreleases,110 Manual,101 Incentivecompensation,103 BankSecrecyAct(BSA),93,100–101 Incomeandexpenses,344 BankServiceCompanyAct,91 LegalDivision,93 BankingOrganizationNationalDesktop,106 Litigation,309–310 Bankingorganizations,U.S.SeealsoBankholding Members,431–435 companies;Commercialbanks Officers,431–435 Capitalplanning,89 PartnershipforProgress,95 Creditavailability,14,23,71–72 PaymentSystemRisk,141 Creditdefaultswaps,6,16,23,29,65,71 Performanceplan,163 Denovodepositoryinstitutions,95–96 Performancereport,163 Developmentsin2011,83–84 Policyactions,165–169 Equityinvestments,71 Policystatements,169–170 Examinationsandinspections,89–90 Publicnoticeof decisions,110 Foreignoperations,92,109 Strategicplan,163 Minority-ownedinstitutions,95–96 Website,5,110 Overseasinvestmentsby,109 Borrowersof SecuritiesCredit(RegulationX),324 Regulationof,107–110 Branches.SeeFederalReserveBanks Stresstesting,89 Brazil,economyof,33,76 Supervisionof,84–107,156–158 Brentbenchmark,17 BaselAccord,97 BSA.SeeBankSecrecyAct Baselcapitalframework,98 BudgetControlActof 2011,16 BaselCommitteeonBankingSupervision BuildAmericaBondsprogram,16 AccountingTaskForce,99 Bureauof EconomicAnalysis,9,34 Bankholdingcompanyregulations,72 Bureauof EngravingandPrinting(BEP),138 JointForum,96,98 Bureauof thePublicDebt,139 Supervisorypolicies,97–98 Businesscontinuity,96 Trainingandtechnicalassistance,95 Businessinvestment,profits,andfinance,14–15 BaselIII,72,98–99 Businessrestructuringcharges,424–425 BCPs.SeeBaselCorePrinciplesforEffectiveBanking Businesssector,13–15,61–63,182 Supervision BearStearnsCompanies,Inc.,27,73,372 BenefitEqualizationRetirementPlan,416 C BEP.SeeBureauof EngravingandPrinting BHCPRs.SeeBankHoldingCompanyPerformance CallReports,94,95,104 Reports Canada BHCs.SeeBankholdingcompanies Economicrecovery,31,75 Boardof Governors Exportdemand,65 Assetsandliabilities,343 Inflation,76 Audits,340–360 Yieldsof sovereignbonds,74 Balancesheets,343 CAOs.SeeCommunityAffairsOffices Capitaladequacystandards,84 Capitaladequacystandards,84,96–97

Index 459 CapitalAnalysisandReview,89 CommitteeonInvestmentPerformance,418–419 CapitalPurchaseProgram,83 CommoditiesFuturesTradingCommission(CFTC),100,161 Cashflows,Boardof Governors,345 Communityaffairs.SeeConsumerandcommunityaffairs Cashitemsinprocessof collection,151 CommunityAffairsOfficers(CAOs),127 Cash-managementservices,FederalReserveBanks,141 CommunityDataInitiative(CDI),128 CBO.SeeCongressionalBudgetOffice CommunityDepositoryInstitutionsAdvisoryCouncil,439 CCR.SeeCounterpartycreditrisk CommunityDevelopmentCapitalInitiative,83 CDFIs.SeeCommunityDevelopmentFinancial Communityeconomicdevelopment,127–129 Institutions CommunityReinvestmentAct(CRA) CDI.SeeCommunityDataInitiative Compliance,113,117–119 CDIAC.SeeCommunityDepositoryInstitutionsAdvisory Mergersandacquisitionsinrelationto,117–119 Council Regulationoversightandenforcement,115 CDI.SeeCommunityDataInitiative Complaintreferrals,126–127 CDOs.SeeCollateralizeddebtobligations Complianceriskmanagement,100–101 CentralDocumentandTextRepository,106 ComprehensiveCapitalAnalysisandReviewprogram, CertifiedInformationSystemAuditorcertification,107 23,106 CFPB.SeeConsumerFinancialProtectionBureau ComprehensiveIranSanctions,Accountability,and CFTC.SeeCommoditiesFuturesTradingCommission DivestmentAct,101 Chairs,Conferenceof,FederalReserveBanks,454 Comptrollerof theCurrency,Officeof the(OCC),90,101, ChangeinBankControlAct,107,108–109 123,156 Checkcollectionservice,136 Conditionstatements ChicagoBoardOptionsExchange,110 FederalReserveBanks,325–329,364–366 Chief informationsecurityofficer,142–143 Conferences,FederalReserveBanksOfficers,454–455 China Congress.SeeMonetarypolicyreportstoCongress; Economyof,33,76 specificlegislationbyname Exportdemand,65–66 CongressionalBudgetOffice(CBO),63,64 C&Iloans.SeeCommercialandindustrialloans ConsolidatedSupervisionProgram,116 Civilmoneypenalties(CMPs) ConsumerAdvisoryCouncil FederalReserveauthority,94,121 Consumer-relatedfinancialissues,129–133 CLOs.SeeCollateralizedloanobligations Dissolutionof,129 CMBSs.SeeCommercialmortgage-backedsecurities Members,438–439 CMPs.SeeCivilmoneypenalties Officers,438–439 Coin.SeeCurrencyandcoin Consumerandcommunityaffairs Collateralizeddebtobligations(CDOs),28,73,373 Ability-to-paymortgageloanrequirement,112–113, Collateralizedloanobligations(CLOs),62 132–133 Collectionservices,FederalReserveBanks,140–141 Bankexaminerstraining,122 CollectionsandCashManagementModernization CommunityDataInitiative,128 initiative,140 Communitydevelopmentinitiatives,128 Collegecreditcardagreements,114 Communityeconomicdevelopmentsupport,127–129 Commercialandindustrial(C&I)loans,7,14,23,56,62, ConsumerAdvisoryCouncil,129–133 71,83–84,184,204 Consumercomplaintsandinquiries,125–127 Commercialautomatedclearinghouse(ACH)services, Consumerprotectionlawscompliancereports,122–125 135,136 Coordinationwithfederalbankingagencies,121–122 Commercialbanks Creditcardreform,113–115 Assetsandliabilities,323 Debitcardinterchangefeesandrouting,131 Equityprices,71 Entrepreneurshipsupport,128–129 Profitabilityof,23 Floodinsurance,120–121 Regulatoryreports,104–105 Foreclosureassistance,130 Supervisionof,84–107 Housingmarketrevitalization,129 Commercialcheckcollectionservice,136 IndianCountrygrowthsupport,128–129 Commercialmortgage-backedsecurities(CMBS),15,63, Mortgagereform,111–113 146,406 Nationalmortgageservicingstandards,131–132 Commercialpaper(CP)market,22,70 Neighborhoodrevitalization,129 CommercialPaperFundingFacility,370–371 Neighborhoodstabilization,130–131 Commercialrealestate(CRE)loans,15,56,63,184 Open-endcreditplans,113–115 Committeeof EuropeanBankingSupervisors,75 Oversightandenforcement,115–125 Committeeof SponsoringOrganizationsof theTreadway Policyandemergingissuesanalysis,127 Commission(COSO),143 Qualifiedresidentialmortgages,133

460 98thAnnualReport|2011 Riskretentionmortgages,133 DCCA.SeeDivisionofConsumerandCommunityAffairs Rulemakingandregulations,111–115 Denovodepositoryinstitutions Smallbusinesssupport,128–129 Trainingandtechnicalassistance,95–96 Consumercomplaints,125–127 Debitcardfees,131,157 Consumercomplianceexaminertraining,122 DebitCardInterchangeFeesandRouting(RegulationII),168 ConsumerFinancialProtectionBureau(CFPB),111,113, Debt 115,144,161–162,165,427 Corporate,15,25–26,55,56,69–70 Consumerinquiries,127 Domesticnonfinancialsector,7,62,184 ConsumerLeasingAct,114,162 Government,15–16,64 ConsumerLeasing(RegulationM),114,123,162,166 Household,6,7,11,56,60–61 Consumerprices,6,9–10,19–20,34,55,182,202 Stateandlocalgovernments,65 Consumerprotectionlaws.SeealsoCreditCard Debtsecurities,379–380,391–395 AccountabilityResponsibilityandDisclosure Defensespending,15–16,64 Agencycompliancereports,122–125 Delinquenciesandforeclosures,7,11,56,59,61,84,87, Consumerspending,6,10–11,34–35,55,60–61,181,202 118,126,130 Continuingprofessionaldevelopment,107 Deloitte&ToucheLLP,143,341–342,360,361 Coreconsumerpriceindex,182 Demanddepositsinterest,158 CoreLogic,59 Depositoryinstitutions Corporatedebt,15,25–26,55,56,69–70 Deposits,383 Corporateprofits,14–15,56,62–63 Discountrates,170–171 COSO.SeeCommitteeof SponsoringOrganizationsof the InterestratesonFederalReserveBankloansto,314 TreadwayCommission Loansto,388–389 Costrecovery,153 Reservebalances,57,319 Counterpartycreditrisk(CCR),98,102 Reserverequirements,314,321–322 Counterterrorismactivities,101 Reservesof,316–317 CP.SeeCommercialpaper(CP)market Deposits CPH.SeeCompensationperhour FederalReserveBanks,317 CRA.SeeCommunityReinvestmentAct Foreignentities,383 CRE.SeeCommercialrealestateloans Treasury,383 Credit Derivativemarkets,159–160 Availability,7,11,14,44,55,56,61,62,71–72 Directors,FederalReserveBanks Consumerprotection,114 Listof,440–451 Creditscoredisclosure,114 Policiesfor,170 Open-endplans,113–114 Disclosures,financial Primary,170–171,314 Statememberbanks,110 Seasonal,171,314 Discrimination Secondary,171,314 Complaints,126 CreditbyBanksandPersonsotherthanBrokersorDealers Disposablepersonalincome(DPI),10 forthePurposeof PurchasingorCarryingMargin Divisionof BankingSupervisionandRegulation,116 Stock(RegulationU),94,110,324 Divisionof ConsumerandCommunityAffairs(DCCA), CreditbyBrokersandDealers(RegulationT),110,324 111,113,120,127 CreditCardAccountabilityResponsibilityandDisclosure Divisionof ReserveBankOperationsandPayment Act(CreditCardAct),61,113–114,121 Systems,143 Creditcards DoNotPayList,140 Collegecreditcardagreements,114 Dodd-FrankWallStreetReformandConsumer Consumerprotectionregulations,113–114,121 ProtectionAct Creditdefaultswaps(CDS),6,16,23,29,65,71,373 Auditregulations,428 Creditrisk Bankholdingcompanyregulations,72 Management,99–100,403–405 Bankingregulationandsupervisionchanges,23,24,107 Retention,160 Capitaladequacystandards,96–97 Currencyandcoin,operationsanddevelopments,138–139 Capitalguidelinesreferences,160 Clearingactivitiesandutilities,160–161 Consumerfinancialprotection,161–162 D Creditriskretention,160 Datamanagement,105 Debitinterchange,157 Daylightoverdrafts,141–142 Demanddepositsinterest,158

Index 461 Derivativemarketsregulation,159–160 Recenteconomicandfinancialdevelopments,9–33, Divisionof ConsumerandCommunityAffairs 58–81 impact,113 Recoveryof,33–37,40–41,55–58,68,201–204,213–216, Enhancedprudentialstandardsimplementation,84–85, 233–237,253–256,265–268,276–282,297–300 158–159 Stateandlocalgovernments,16–17,64–65 Executivecompensation,161 Tradedeficit,202 FederalReserveimplementation,155–162 ECP.SeeExaminerCommissioningProgram Financialmarketutilitiesregulations,91 EdgeActcorporations,85,91,92,109 FinancialStabilityOversightCouncil,24,84,155, EFSF.SeeEuropeanFinancialStabilityFacility 160–161 Electronicaccess,FederalReserveBankservices,142 Incentivecompensationregulations,103 ElectronicFundTransfers(RegulationE),115,123 Mortgageregulations,111–112 EmergencyEconomicStabilizationAct,153 Payments,160–161 Emergingmarketeconomies(EMEs),17,29,31,33,65–66, Proprietarytradingprohibition,159 76,183,185,419 Recoveryandresolutionplanning,25,86 EMEs.SeeEmergingmarketeconomies Regulatorycapital,156 EmployeeBenefits,Officeof,143 Resolutionplanning,156 Employment,16,18–19,34–35,36,39,55,57,58,66–67. Savingsandloanholdingcompaniesauthority,90, SeealsoUnemployment 156–157 Energyprices,14,17,19–20,55,58,65–66,68,75 Securitiesholdingcompaniesregistration,161 Enforcementactions Settlements,160–161 Divisionof ConsumerandCommunityAffairs,115–125 Stresstestingstandards,89 FederalReserveSystem,94,110 Volckerrule,159 Entrepreneurshipsupport,128–129 DOJ.SeeJustice,U.S.Departmentof EqualCreditOpportunityAct(ECOA),113,115,119–120 Dollarexchangerate,28–29,74 EqualCreditOpportunity(RegulationB),114,123,165 DOT.SeeTransportation,U.S.Departmentof Equipmentandsoftware,13–14,34,55,61,182,202,382, DPI.SeeDisposablepersonalincome 413–414 Drillingandmining,14,61–62 Equitymarketsandprices,6,25–26,36,55,56,63,69–71,74 Dynamicstochasticgeneralequilibriummodels,232–233 Escrowaccounts,112,133 ESM.SeeEuropeanStabilityMechanism EU.SeeEuropeanUnion Europe.Seealsospecificcountriesbyname E Fiscalcrises,6,7,10,29–31,36,56,69,74 EBA.SeeEuropeanBankingAuthority EuropeanBankingAuthority(EBA),29,31,75 ECB.SeeEuropeanCentralBank EuropeanCentralBank(ECB) ECI.SeeEmploymentcostindex Debtpurchases,6,31 ECOA.SeeEqualCreditOpportunityAct Greekeconomiccrisisand,74 Economy,U.S. Refinancingoperations,6,21,33,37 Businesssector,13–15,61–63 Swaparrangementwith,27,32,36 Debt,domesticnonfinancialsector,7,62,184 EuropeanFinancialStabilityFacility(EFSF),30–31 Externalsector,17–20,65–66 EuropeanStabilityMechanism(CESM),30–31 Federalborrowing,64 EuropeanUnion(EU),29,30,65,75 Financialmarkets,5–6,7–8,20–28,35,55,56,58,68–75 Examinationsandinspections Governmentsector,15–17,63–65 Anti-money-laundering,93 Householdsector,6,7,10–13,58–61 Bankholdingcompanies,89–90 Interestrates,11,12,21,59,61,69 FederalReserveBanks,143–144 Labormarket,6,8,9,18–19,35–37,39,55,58,66–67,181 Fiduciaryactivities,93 M2monetaryaggregates,26–28,72–73,184 Financialholdingcompanies,90 Nationalsaving,18,66 Financialmarketutilities,91 Outlookandprojections,5–9,33–40,42–44,51–53, Foreignbanks,91–92 55–58,76–81,185–188,190–193,204–207,216–219, Informationtechnologyactivities,93 221–224,237–239,242–245,256–258,268–270, Internationalactivities,91–92 287–290,300–302 LargeInstitutionSupervisionCoordinatingCommittee, Policyactions,33–37,76–81,188–189,207–209, 87–88 219–220,239–241,258–261,270–273,283–284, Reviewof operations,85–87 302–304 RFIratingsystem,90 Prices,6,9–10,14,17–18,19–20,34,55,58,67–68 Risk-focusedapproach,87,93 Productivityandlaborcompensation,19,67 Savingsandloanholdingcompanies,90–91

462 98thAnnualReport|2011 Securitiescreditlenders,94 Creditrating,16,64 Securitiesdealersandbrokers,governmentand Spending,receipts,andborrowing,15,64 municipal,93–94 FederalHomeLoanMortgageAssociation.SeeFreddieMac Specialized,93 FederalHousingAdministration(FHA),13,60 Statememberbanks,88–89 FederalHousingFinanceAgency(FHFA),101 Transferagents,93 FederalNationalMortgageAssociation.SeeFannieMae ExaminerCommissioningProgram(ECP),107 FederalOpenMarketCommittee(FOMC).SeealsoOpen Expenses.SeeIncomeandexpenses marketoperations Exports,8,17,43,55,65 Annualorganizationalmatters,175–176 Externalsector,17–20,65–66 Authorizations,176–179 Diversityof participants'views,42–50,194–198, 245–250,290–294 F Domesticpolicydirectives,5,8,27,33–40,76–81, 176–177 FairCreditReportingAct(FCRA),114,162 Forecastuncertainty,51–53,199,230,251,295 FairCreditReporting(RegulationV),114,165 Foreigncurrencyoperationsanddirectives,177–189 FairHousingAct,113,119–120 Meetingminutes,173–307 FairLendingExaminationTechniques,122 Members,436 Fairlendinglaws,compliancewith,119–120 Monetarypolicystrategiesandcommunications, FannieMae 275–276,304–305 Debtsecurities,379–380,391–395 Notationvotes,189,209,221,241,261,284,307 FederalReserveBankservicesto,141 Officers,436 Mortgage-backedsecurities,13,60,379–380,391–395 Summaryof EconomicProjections,8,38,39–54, SystemOpenMarketAccountholdings,146 189–194,221––229,241–250,285–294 FarmCreditAdministration(FCA),110,123 SystemOpenMarketAccount,35,49,80,143,145–147, FASB.SeeFinancialAccountingStandardsBoard 180–181,201,211–213,233,253,263–264 FATF.SeeFinancialActionTaskForce Transparencyinitiatives,37–40,81 FBIIC.SeeFinancialBankingInformationInfrastructure Videoconferencemeetingminutes,261,305–307 Committee FederalRegister,104 FCA.SeeFarmCreditAdministration FederalReserveAct,91,107,109,144,146,170,384, FCRA.SeeFairCreditReportingAct 428,440 FDIC.SeeFederalDepositInsuranceCorporation FederalReserveBankof Cleveland,424 FedComplete,142 FederalReserveBankof Minneapolis,424 FedTransactionAnalyzer,142 FederalReserveBankof NewYork,27,57,64,73,80, FedACHservice,136 371–375,378–381,389–397,425–426 FederalAdvisoryCouncil,membersandofficers,437 FederalReserveBankof Philadelphia,68 Federalagencysecuritiesandobligations FederalReserveBankof St.Louis,129 FederalReserveBankholdings,313 FederalReserveBanks Openmarkettransactions,311–312 Assetsandliabilities,316,319–320 FederalBankingAgencyAuditAct,428 Audits,361–426 FederalDepositInsuranceAct,88 Automatedclearinghouse(ACH)services,135,136 FederalDepositInsuranceCorporation(FDIC),27,70,84, Balancesheets,26–28,57,72–73,201,211–213,253,263, 86,92,101,123,151,156 275,297 FederalDepositInsuranceCorporationImprovement Branches,148,315,440–453 Act,88 Cash-managementservices,141 FederalEmergencyManagementAgency(FEMA),94,121 Checkcollectionservice,136 FederalFinancialInstitutionsExaminationCouncil Collectionservices,140–141 (FFIEC) Conditionstatements,325–329,364–366 BankSecrecyAct/Anti-MoneyLaunderingExamination Conferences,454–455 Manual,101 Creditoutstanding,316–317,319,321–322 BSA/AMLworkinggroup,100–101 Currencyandcoinoperationsanddevelopments, Commercialbankregulatoryreportregulations,104,105 138–139 Examinationproceduresandguidance,121–122 Deposits,317 Internetbankingcontrol,102,169 Directors,440–451 TaskForceonSurveillanceSystems,95 Economicgrowthprojections,40–53 Federalfundsrate,8,9,21,33–34,35,37,42,49–50,56,57, Electronicaccesstoservices,141 68–69,76 Employees,numberandsalariesof,337 Federalgovernment Examinations,143–144 Budgetdeficit,15–16,63–64

Index 463 FedwireFundsService,136–137 Overview,1–2 FedwireSecuritiesService,137 Policymakinginitiatives,101–102 Financialmarketutilities,138 Publicnoticeof decisions,110 Financialstatements,73,149–153,361–426 Regulatoryreports,102–105 Fiscalagencyservices,139–141 Regulatoryresponsibilities,107–110 Float,137 Safetyandsoundnessresponsibilities,85–96 Governmentdepositoryservices,139–141 Staff development,107 Incomeandexpenses,139,144–145,330–335 Supervisionresponsibilities,84–107 Informationtechnology,142–143 Supervisoryinformationtechnology,105–106 Interestratesondepositoryinstitutionsloans,314 Supervisorypolicy,96–98 Intradaycredit,141 Surveillanceandoff-sitemonitoring,94–95 Investmentsof consolidatedLLCs,146–147 Technicalassistance,95–96 Lendingauthorization,146 Trainingassistance,95–96 Loansandothercreditextensions,316,318,319–320, FederalTradeCommissionAct,113 388–391 FederalTradeCommission(FTC),114,123 NationalSettlementService,136–137 FedwireFundsService,136–137 Notesoutstanding,382–383,384 FedwireSecuritiesService,137 Officers,337,452–453 FEMA.SeeFederalEmergencyManagementAgency Openmarkettransactions,311–312 FFETF.SeeFinancialFraudEnforcementTaskForce Operations,volumeof,336 FFIEC.SeeFederalFinancialInstitutionsExamination Paymentservices,140 Council PoliciesforDirectors,170 FHA.SeeFederalHousingAdministration Postretirementbenefits,421–423 FHFA.SeeFederalHousingFinanceAgency Premises,148,338,382,413 Finance Pricedservices,135–138 Business,14–15,62–63 Privatesectoradjustmentfactor,135–136,137,152 Household,10–13,58–60 Repurchaseandreverserepurchaseagreements,22,70 Financialaccount,U.S.,29–31,75 Retailsecuritiesprograms,139–140 FinancialAccountingManualforFederalReserve Retirementplans,416–423 Banks,375 Salariesof officersandemployees,337 FinancialAccountingStandardsBoard(FASB),151 Securitiesholdings,5,8,27,34,37,57,69,71,76,139, FinancialActionTaskForce(FATF),101 146,313 FinancialBankingInformationInfrastructureCommittee SystemOpenMarketAccountholdingsandloans, (FBIIC),96 145–147 FinancialCrimesEnforcementNetwork,100,101 Thriftplans,420–421 FinancialFraudEnforcementTaskForce(FFETF),120 Treasurysecuritiesservices,139 Financialholdingcompanies,84,90 Wholesalesecuritiesprograms,140 FinancialIndustryRegulatoryAuthority,110 FederalReserveConsumerHelp(FRCH),125 FinancialManagementServices,139,140,141 FederalReserveInformationTechnology,142 Financialmarketutilities,85,91,138,160–161 FederalReserveSystem.SeealsoBoardof Governors; FinancialMarketUtilitiesSupervisionCommittee,91 FederalReserveBanks Financialmarkets,5–6,7–8,20–28,35,55,56,58,68–75, Accountingpolicy,98–99 201,211–213,253,263,275,297 Audits,339–429 FinancialResearch,Officeof (OFR),144 BaselCommitteeactivities,98 FinancialStabilityBoard,86,103 CommitteeonInvestmentPerformance,418–419 FinancialStabilityInstitute,95 Complianceriskmanagement,100–101 FinancialStabilityOversightCouncil(FSOC),24,84,155, Credit-riskmanagement,99–100 160–161 Enforcementactions,94,110 FinancialStabilityPolicyandResearch,Officeof,24 Examinationsandinspections,85–92 Financialstatements FinancialActionTaskForce,101 Boardof Governors,340–360 Financialstabilitypromotion,24–25 FederalReserveBanks,73,149–153,361–426 Foreclosureprocessenforcement,118 FederalReservepricedservices,149–153 Incentivecompensation,103 FirstVice-Presidents,Conferenceof,FederalReserve Internationalactivities,91–92 Banks,455 Internationalguidanceonsupervisorypolicies,84–86, Fiscalagencyservices,FederalReserveBanks,139–141 97–98 FitchRatings,64 JointForumparticipation,98 FLETs.SeeFairLendingExaminationTechniques Maps,2–3 Float,FederalReserveBanks,137,153,316,319–320

464 98thAnnualReport|2011 Floodinsurance,120–121,169–170 GovernmentSecuritiesAct,93–94 FOMC.SeeFederalOpenMarketCommittee Governmentsecuritiesdealersandbrokers,FederalReserve Foodprices,20,55,58,68,75 examination,93–94 Foreclosures.SeeDelinquenciesandforeclosures Government-sponsoredenterprises(GSEs).SeeFannie ForeignAssetsControl,Officeof (OFAC),100 Mae,FreddieMac;GinnieMae ForeignBankSupervisionEnhancementAct,109 GovernmentwideAccountingandReporting Foreignbanks.Seealsospecificbanksbyname Modernizationinitiative,141 Deposits,383 GPRA.SeeGovernmentPerformanceandResultsAct Examinationsandinspections,92 GPRAModernizationAct,163 Financialholdingcompanystatus,90 GrainInspection,Packers&StockyardsAdministration,123 Prudentialstandards,158–159 Gramm-Leach-BlileyAct,90 U.S.activities,92,109 Greece,fiscalcrisis,29,30,74 Foreigncurrencyoperations Grossdomesticproduct,6,8–9,15,17,18,34,40–45, Authorization,177–179 51–53,55,58,64,65–66,226,247,291 Denominatedassets,379–380,395–396 Groupof Seven(G-7),84 Directives,179–180 Proceduralinstructions,180–189 H Foreigneconomies,28–33.SeealsoAdvancedforeign economies;Emergingmarketeconomies;specific H.2statisticalreleases,110 countriesbyname HAMP.SeeHomeAffordableModificationProgram Foreigntrade,17 Hedgefunds,71 France HEOA.SeeHigherEducationOpportunityAct economyof,75 HERA.SeeHousingandEconomicRecoveryAct FRBNY.SeeFederalReserveBankof NewYork HMDA.SeeHomeMortgageDisclosureAct FRCH.SeeFederalReserveConsumerHelp HOLA.SeeHomeOwners’LoanAct FreddieMac HomeAffordableModificationProgram(HAMP),120,130 Debtsecurities,379–380,391–395 HomeOwners’LoanAct(HOLA),107,109–110 FederalReserveBankservicesto,141 Householdsector,6,7,10–13,37,56,58–61 Jumbomortgageloans,112 Housingactivity,11–13,34–35,36,55,56,58–60,182 Mortgage-backedsecurities,13,60,379–380,391–395 HousingandUrbanDevelopment,U.S.Departmentof(HUD) SystemOpenMarketAccountholdings,146 Consumercomplaintreferrals,127 Freedomof InformationAct,165 Creditriskregulations,101–102 FSOC.SeeFinancialStabilityOversightCouncil HUD.SeeHousingandUrbanDevelopment,U.S. FTC.SeeFederalTradeCommission Departmentof I G IASB.SeeInternationalAccountingStandardsBoard G-7.SeeGroupof Seven IFRA.SeeInternationalFinancialReportingStandards GAO.SeeGovernmentAccountabilityOffice IMF.SeeInternationalMonetaryFund GDP.SeeGrossdomesticproduct Imports,17–18,55,65–66 Germany Incentivecompensation,103 Bonds,sovereignyieldsof,74 Incomeandexpenses Economyof,75 Boardof Governors,344 GinnieMae FederalReserveBanks,144–145,330–335 Debtsecurities,379–380,391–395 FederalReservepricedservices,135–138,149–153 FederalReserveBankservicesto,141 India,economyof,76 Mortgage-backedsecurities,13,60,379–380,391–395 IndianCountrygrowthsupport,128–129 SystemOpenMarketAccountholdings,146 Indonesia,economyof,33 GoDirectprogram,140 Inflation,8,9–10,19,20,33–34,35,39,40–42,44,47–48, Goldstock,316,319–320,376–377 51–52,55–56,57,58,67–68,76,182,198,229,250,294 GOVerifyprogram,140 InformationSystemsAuditControlAssociation,107 GovernmentAccountabilityOffice(GAO),428–429 Informationtechnology(IT) Governmentdepositoryservices,FederalReserveBanks, FederalReserveBankdevelopments,142–143 139–141 FederalReserveexaminationof activities,93 GovernmentNationalMortgageAssociation.SeeGinnieMae Supervisoryactivities,105–106 GovernmentPerformanceandResultsAct(GPRA),163 Inspections.SeeExaminationsandinspections Governmentsector,6,15–17,55,63–65.SeealsoFederal InspectorGeneral,Officeof (OIG),427 government;Stateandlocalgovernments InspectorGeneralAct,427

Index 465 Instituteof InternalAuditors,143 LISCC.SeeLargeInstitutionSupervisionCoordinating Insuredcommercialbanks.SeeCommercialbanks Committee InteragencyReviewofForeclosurePoliciesandPractices,127 LitigationinvolvingBoardof Governors Interest Artis,310 Demanddeposits,158 Barragan,309 Rates,11,12,21,59,61,69,314 Bloomberg,L.P.,310 InternalRevenueService(IRS),100 CitiMortgage,Inc.,309 InternationalBankingAct,107,109 Deleon,309 InternationalEnergyAgency,65 Farrell,309 Internationalfinancialmarkets,28–29,74–75 FirstCitizensBanksandTrustCo.,309 InternationalMonetaryFund(IMF),30–31,74,95 FoxNewsNetwork,310 InternationalStandardsfortheProfessionalPracticeof GoldAnti-TrustActionCommittee,Inc.,310 InternalAuditing,143 Haller,309 Internationaltrade,17 Handy,309 Internationaltraining,95 JudicialWatch,Inc.,310 Internetbankingcontrol,102,169 McKinley,310 InternetPaymentPlatform,140 Murray,309–310 Intradaycredit,141 NACS,309 Inventoryinvestment,14,62,182,202 NationalAssociationof IndependentHousing Investments Professionals,Inc.,309 Businesssector,13–14,61–62,182 NationalAssociationof MortgageBrokers,309 ConsolidatedLLCs,146–147 Perry,309 Inventory,14,62,182,202 Qader,310 Nonresidentialstructures,61 TCFNationalBank,310 OverseasinvestmentproposalsbyU.S.banking Livingwills,156 organizations,92,109 Loanoriginatorcompensation,121 Residential,11–13 Loans.Seealsospecifictypesof loans Variableinterestentities,381,397–412 Collateralizedloanobligations,62 IOER.SeeInterestonexcessreservesrate Consumercomplaints,126 Ireland,fiscalcrisis,74 FederalReserveBankholdings,316,318,319–320, IRS.SeeInternalRevenueService 388–391 IT.SeeInformationtechnology InterestratesonFederalReserveBankloansto Italy,economyof,6,29,30,74 depositoryinstitutions,314 Localgovernments.SeeStateandlocalgovernments Londoninterbankofferedrates(Libor),21–22,26,32,70,183 J Japan Earthquake,5,6,9,10,17,20,55,58,61,74–75 M Economyof,31,74–75 M2monetaryaggregates.SeeMonetaryaggregates Importsfrom,65 MaidenLaneIILLC,27,57,73,169,373,405–406, Inflation,76 425–426 Yenvaluation,74 MaidenLaneIIILLC,27,73,373–374,406–407 Joblosses.SeeUnemployment MaidenLaneLLC,27,73,399–405 JointForum,96,98 Maps,FederalReserveSystem,2–3 JointSelectCommitteeonDeficitReduction,21 Marginrequirements,324 Jumbomortgageloans,112 Maturityextensionprogram(MEP),21,27 Justice,U.S.Departmentof (DOJ) MBS.SeeMortgage-backedsecurities Fairlendinglawsenforcement,119–120 MDIA.SeeMortgageDisclosureImprovementAct MDIs.SeeMinority-ownedinstitutions Medicaid,15 L MedicarePrescriptionDrug,Improvementand Labormarket,6,8,9,18–19,35–37,39,55,58,66–67,181 ModernizationAct,422 Largebanksupervision,105 Members LargeInstitutionSupervisionCoordinatingCommittee SeeBoardof Governors (LISCC),24,87–88,91 SeeConsumerAdvisoryCouncil Leases.SeeConsumerleasing SeeFederalAdvisoryCouncil Liabilities.SeeAssetsandliabilities SeeFederalOpenMarketCommittee Libor.SeeLondoninterbankofferedrates SeeFederalReserveBanks

466 98thAnnualReport|2011 Membershipof StateBankingInstitutionsintheFederal NationalExaminationDesktop,106 ReserveSystem(RegulationH),165–166 NationalFederationofIndependentBusiness(NFIB),14,62 Memorandaof understanding,94,101 NationalFloodInsuranceAct,120–121 MENA.SeeMiddleEastandNorthAfrica Nationalincomeandproductaccounts(NIPAs),15,16, MEP.SeeMaturityextensionprogram 64,67 Mexico NationalInformationCenter(NIC),94,106 Economyof,33,76 NationalInstituteof ScienceandTechnology,143 Exportdemand,65 Nationalsaving,18,66 Mezzanineloans,401 NationalSettlementService,136–137 MichiganSurvey.SeeThomsonReuters/Universityof NationalUrbanLeague,96 MichiganSurveysof Consumers NBA.SeeNationalBankersAssociation MiddleEastandNorthAfrica NCUA.SeeNationalCreditUnionAdministration FinancialRegulators’TrainingInitiative,95 Neighborhoodrevitalization,129 Politicalunrest,65,74 NeighborhoodStabilizationProgram,130–131 MiddleEastPartnershipInitiative,95 NeighborWorksAmerica®(NWA),128 Mining.SeeDrillingandmining NFIB.SeeNationalFederationof IndependentBusiness Minority-owneddepositoryinstitutions(MDIs) NIC.SeeNationalInformationCenter Trainingandtechnicalassistance,95–96 NIPAs.SeeNationalincomeandproductaccounts Monetaryaggregates(M2),26–28,72–73,184 Nonresidentialinvestments,61 MonetaryControlAct,135 NorthAmericanFrameworkAgreement,211 Monetarypolicy Noticeof proposedrulemaking(NPR),84,85,96–97 Developmentsandoutlook,33–40,43,48–51,55–58,76–81 NPR.SeeNoticeof proposedrulemaking Expectations,20–21,68–69 NSP.SeeNeighborhoodStabilizationProgram Overview,5–9 NWA.SeeNeighborWorksAmerica® MonetarypolicyreportstoCongress February2012,5–54 July2011,55–81 O Moneylaunderingprevention.SeeAnti-money-laundering OCC.SeeComptrollerof theCurrency,Officeof the Moneymarketfunds,22,32,70 OFAC.SeeForeignAssetsControl,Officeof Moneyorders,141 Off-sitemonitoring,94–95 Moody’sInvestorsService,64,74 Officers MORE.SeeMortgageOutreachandResearchEfforts Boardof Governors,431–435 Initiative Conferencesof,454–455 MorganStanleyCapitalInternationalEmergingMarkets ConsumerAdvisoryCouncil,438–439 Index,419 FederalAdvisoryCouncil,437 Mortgage-backedsecurities(MBS),5,8,13,23,27,34,35, FederalOpenMarketCommittee,436 57,60,72–73,379–380,391–395 FederalReserveBanks,337,452–453 MortgageDisclosureImprovementAct(MDIA),121 OFR.SeeFinancialResearch,Officeof Mortgageregulations OIG.SeeInspectorGeneral,Officeof Ability-to-payrequirement,112–113,132–133 Oilprices.SeeEnergyprices Adjustable-ratemortgages,132 OIS.SeeOvernightindexswaps Dodd-FrankActimplementation,111–112 OPEC.SeeOrganizationof thePetroleumExporting Escrowaccounts,112 Countries Foreclosureassistance,130 Open-endcreditplans,113–114 Nationalservicingstandards,131–132 Openmarketoperations.SeealsoFederalOpenMarket Qualifiedresidentialmortgages,133,160 Committee Riskretention,133 Volumeof transactions,311–312 Transactions,111–113 OREO.SeeOtherrealestateownedinformation Motorvehicledealers OrganisationforEconomicCo-operationand Datacollection,115 Development,66 Municipalsecuritiesdealersandbrokers,FederalReserve Organizationof thePetroleumExportingCountries examination,93–94 (OPEC),66 Mutualholdingcompanies,110 OTC.SeeOver-the-counterderivativetransactions Otherrealestateowned(OREO)information,103,105 OTS.SeeThriftSupervision,Officeof N Over-the-counter(OTC)derivativetransactions,70 NationalBankersAssociation(NBA),96 Overdraftservices,141–142 NationalCreditUnionAdministration(NCUA),94,110 Overnightindexswaps(OIS),21–22,27

Index 467 P Realestateowned(REO)properties,129,131 Regulatedpractices,consumercomplaints,125–126 PartnershipforProgress,95 Regulations Pay.gov,140–141 AA,UnfairorDeceptiveActsorPractices,124 PaymentSystemRisk,141 B,EqualCreditOpportunity,114,123,165 Paymentservices,FederalReserveBanks,140 CC,Availabilityof FundsandCollectionof Checks,124 PCE,Personalconsumptionexpenditures DD,TruthinSavings,124–125 Penalties.SeeCivilmoneypenalties E,ElectronicFundTransfers,115,123 PerformanceReportInformationandSurveillance H,Membershipof StateBankingInstitutionsinthe Monitoring(PRISM),94–95 FederalReserveSystem,165–166 Personalconsumptionexpenditures(PCE),6,8,10,19,20, II,DebitCardInterchangeFeesandRouting,168 35,36,40–42,44,47–48,51–52,60,67–68,197–198, LL,SavingsandLoanHoldingCompanies,168 202,228–229,249–250,293–294 M,ConsumerLeasing,114,123,162,166 PMIs.SeePurchasingmanagersindexes P,Privacyof ConsumerFinancialInformation,122, Policyactions 123–124 Boardof Governors,165–169 Q,ProhibitionAgainstthePaymentof Intereston FederalOpenMarketCommittee,33–37,76–81, DemandDeposits,166 188–189,207–209,219–220,239–241,258–261, QQ,ResolutionPlans,168–169 270–273,283–284,302–304 T,CreditbyBrokersandDealers,110,324 Policystatements,Boardof Governors,169–170 U,CreditbyBanksandPersonsotherthanBrokersor Portugal,fiscalcrisis,74 DealersforthePurposeof PurchasingorCarrying Postalmoneyorders,141 MarginStock,94,110,324 Postretirementbenefits,421–423 V,FairCreditReporting,114,165 Preferredinterests,381–382 X,Borrowersof SecuritiesCredit,110,324 Premises,FederalReserveBanks,148,338,382,413 Y,BankHoldingCompaniesandChangeinBank Presidents,Conferenceof,FederalReserveBanks,454 Control,103,166–167 Pricedservices,FederalReserveBanks,135–138,149–153 Z,TruthinLending,114,121,124,133,162,166,167 Prices Regulatoryreports,102–105,170 Consumer,6,9–10,19–20,34,55,58,67–68,202 REITs.SeeRealestateinvestmenttrusts Energy,14,17,19–20,55,58,65–66,68,75 Remittancetransfers,114–115 Exportsandimports,17–18,65–66 REO.SeeRealestateownedproperties Food,20,55,58,68,75 ReportsofConditionandIncome(CallReports),94,95,104 Primarycredit,170–171,314 Repurchaseagreements,22,70,316,319–320 PrimaryDealerCreditFacility,370 Residentialinvestment,11–13 PRISM.SeePerformanceReportInformationand Residentialmortgage-backedsecurities(RMBS),399–400, SurveillanceMonitoring 405–406 Privacyof ConsumerFinancialInformation Resolutionplanning,156 (RegulationP),122,123–124 ResolutionPlans(RegulationQQ),168–169 Privatesectoradjustmentfactor(PSAF),135–136,137,152 Retirementplans,416–423 Productivityandlaborcompensation,19,67 Revenue.SeeIncomeandexpenses Professionaldevelopment,107 Reverserepurchaseagreements,80,317 ProhibitionAgainstthePaymentof InterestonDemand RiegleCommunityDevelopmentandRegulatory Deposits(RegulationQ),166 ImprovementAct,88–89 Proprietarytrading,159 Risk-focusedsupervision,87,93 PSAF.SeePrivatesectoradjustmentfactor Riskmanagement,90 Publicnotice,FederalReservedecisions,110 Purchasingmanagersindexes(PMIs),183 S Q S.A.F.E.Act.SeeSecureandFairEnforcementfor QRMs.SeeQualifiedresidentialmortgages MortgageLicensingAct Qualifiedresidentialmortgages(QRMs),133,160 Savingrate.SeeNationalsaving SavingsandLoanHoldingCompanies(RegulationLL),168 Savingsandloanholdingcompanies(SLHCs) R Numberof,90 RALs.SeeTaxrefundanticipationloans Regulatoryreports,104,170 RapidResponse®program,107,122 Supervisionandregulationof,84–85,90–91,107–110, Realestateinvestmenttrusts,63 156–157 Realestateloans.SeeCommercialrealestate(CRE)loans SBA.SeeSmallBusinessAdministration

468 98thAnnualReport|2011 SBLF.SeeSmallBusinessLendingFund Complaintsagainst,125–126 ScheduleHC-V,VariableInterestEntities,103 Examinationsandinspectionsof,88–89 SCOOS.SeeSeniorCreditOfficerOpinionSurveyon Financialdisclosures,110 DealerFinancingTerms Numberof,88 Seasonalcredit,171,314 Performanceof,84 SEC.SeeSecuritiesandExchangeCommission Supervisionof,88–107 Secondarycredit,171,314 Statementof FinancialAccountingStandards,151–152 SecretService,U.S.,138 Statementsof Condition SecureandFairEnforcementforMortgageLicensingAct FederalReserveBanks,325–329,364–366 (S.A.F.E.Act),169 STBL.SeeSurveyof Termsof BusinessLending Securities.SeealsoFederalagencysecurities;Treasury StoredValueCard(SVC)program,140 securities;specifictypesofsecurities Stresstesting,89,102 Creditlenders,examinationof,94 Structuralunemployment,181 Governmentandmunicipal,examinationof dealersand Summaryof EconomicProjections(SEP),8,38,39–54, brokers,93–94 189–194,221–229,241–250,285–294 Transferagents,93 SupervisionandRegulationStatisticalAssessmentof Bank SecuritiesandExchangeCommission(SEC),91,100,101, Risk(SR-SABR),94 123,161 SupervisionRiskprogram,106 Securitiescredit,110 Supervisorypolicy Securitiescreditlenders,94 Accountingpolicy,98–99 SecuritiesExchangeAct,94,110 Capitaladequacystandards,96–97 Securitiesholdingcompanies Complianceriskmanagement,100–101 Registrationof,161 Credit-riskmanagement,99–100 SeniorCreditOfficerOpinionSurveyonDealerFinancing Internationalguidance,97–98 Terms(SCOOS),7,15,22,24,25,57,63,70–71,203 Policymakinginitiatives,101–102 SeniorLoanOfficerOpinionSurveyonBankLending Regulatoryreports,102–105 Practices(SLOOS),7,11,14,23,59,61,62 SupplementalRetirementPlanforSelectOfficersof the SEP.SeeSummaryof EconomicProjections FederalReserveBanks,416 Servicemembers’CivilRelief Act,113 SupplementaryFinancingAccount,28,57,72 SharedNationalCreditModernization(SNCMod) SupplementaryFinancingProgram,140 project,106 Surveillance,94–95 SharedNationalCredit(SNC)Program,99–100 Surveyof ProfessionalForecasters,20 Short-termfundingmarkets,21–22,56,183 Surveyof Termsof BusinessLending(STBL),62 SIFIs.SeeSystemicallyimportantfinancialinstitutions SVC.SeeStoredValueCardprogram Swaparrangements,6,27–28,32,36,57,70,73,159,211, SLHCs.SeeSavingsandloanholdingcompanies 380–381,396–397 SLOOS.SeeSeniorLoanOfficerOpinionSurveyonBank SwissNationalBank LendingPractices Swaparrangementwith,32,36 SmallBusinessAdministration(SBA),U.S.,96,123 SystemOpenMarketAccount(SOMA),35,49,80,143, SmallBusinessLendingFund(SBLF),83,97 145–147,180–181,201,233,253,263–264 Smallbusinesses Systemicallyimportantfinancialinstitutions(SIFIs),24,25 Developmentsupport,128–129 SNC.SeeSharedNationalCreditProgram SNCMod.SeeSharedNationalCreditModernization project T SNCnetsystem,106 Software.SeeEquipmentandsoftware TAF.SeeTermAuctionFacility SOMA.SeeSystemOpenMarketAccount TALF.SeeTermAsset-BackedSecuritiesLoanFacility S&P.SeeStandardandPoor's500 TARP.SeeTroubledAssetRelief Program Spain,economyof,6,29,30,74 TaxRelief,UnemploymentInsuranceReauthorization,and Specialdrawingrightscertificateaccount,316,319–320, JobCreationAct,63 376–377 TDF.SeeTermDepositFacility Specializedexaminations,93 Technicalassistance,95–96 Staff development,107 TermAsset-BackedSecuritiesLoanFacility(TALF),27, StandardandPoor’s500,14,16,21,26,62,64,69,184 57,72,146,371,389–390,407 Stateandlocalgovernments,16–17,55,64–65 TermAuctionFacility(TAF),146,370 Statememberbanks TermDepositFacility(TDF),28,80 Assetsandliabilities,88 TermSecuritiesLendingFacility,370 Capitaladequacystandards,84 Thailand,economyof,33

Index 469 ThomsonReuters/Universityof MichiganSurveysof TruthinLendingAct(TILA),112–113,162 Consumers,20,68 TruthinLending(RegulationZ),114,121,124,133,162, Thriftplans,420–421 166,167 ThriftSupervision,Officeof (OTS),84,123,156–157 TruthinSavings(RegulationDD),124–125 TILA.SeeTruthinLendingAct TIPS.SeeTreasuryinflation-protectedsecurities U Trade,international,17 Tradedeficit,202 Unemployment,6,8,9,18–19,34–37,39,40–42,44,46, Trainingactivities,107,122 51–52,55,57–58,66–67,181,196,227,248,292 Trainingassistance,95–96 UnfairorDeceptiveActsorPractices(RegulationAA),124 TransitionalCreditExtensionprogram,370 UnitedKingdom Transparencyinitiatives,37–40,81 Economyof,31,75 Transportation,U.S.Departmentof (DOT),123 Inflation,75–76 Treasury,U.S.Departmentof the.SeealsoTroubledAsset Yieldsof sovereignbonds,74 Relief Program Unregulatedpractices,consumercomplaints,126 Cashholdings,317 U.S.Congress.SeeMonetarypolicyreportstoCongress; Cashmanagementservices,141 specificlegislationbyname Collectionservices,140–141 U.S.SecretService,138 CollectionsandCashManagementModernization initiative,140 V Currencyincirculationandoutstanding,316–317, 319–320 VA.SeeDepartmentof VeteransAffairs Deposits,383 Variableinterestentities(VIEs),381,383,397–412, FinancialManagementService,139,140,141 407–409,412–413 Paymentsservices,140 Variableinterestentities(VIEs)(ScheduleHC-V),103 Providedservices,141 Vice-Presidents,Conferenceof,FederalReserveBanks,455 SmallBusinessLendingFundProgram,83,97 VIEs.SeeVariableinterestentities SupplementaryFinancingAccount,28,57,72 Volckerrule,159 SupplementaryFinancingProgram,140 Treasuryinflation-protectedsecurities(TIPS),183 W TreasuryRetailE-Servicesinitiative(TRES),139–140 TreasuryRetailSecurities,424 Warehousingagreements,379–380 Treasurysecurities WellsFargo&Company,116 Demandfor,15,64 WestTexasIntermediate(WTI),crudeoilprices,17–18,65 FederalReserveBankholdings,5,8,27,34,37,57,69, Wholesecuritiesprograms,140 71,76,139,146,313,316,319–320,379–380,391–395 Women-ownedinstitutions FOMCpurchases,35,57 Lendingto,113,115,120,165 Foreignpurchasesof,30,64,75 Trainingandtechnicalassistance,95–96 Openmarkettransactions,311–312 WorldBank,95 Retailsecuritiesprogram,139–140 WTI.SeeWestTexasIntermediatecrudeoilprices Wholesalesecuritiesprogram,140 Yields,20–21,34,35,55,56,69,183 TroubledAssetRelief Program(TARP),15,63,83,97,372

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Cite this document

APA

Federal Reserve (2010, December 31). Annual Report of the Federal Reserve Board, 2011. Annual Reports, Federal Reserve. https://whenthefedspeaks.com/doc/annual_report_2011

BibTeX

@misc{wtfs_annual_report_2011,
  author = {Federal Reserve},
  title = {Annual Report of the Federal Reserve Board, 2011},
  year = {2010},
  month = {Dec},
  howpublished = {Annual Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/annual_report_2011},
  note = {Retrieved via When the Fed Speaks corpus}
}