annual reports · December 31, 2011

Annual Report of the Federal Reserve Board, 2012

99th Annual Report 2012 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

ThisandotherFederalReserveBoardreportsandpublicationsareavailableonlineat www.federalreserve.gov/publications/default.htm. Toordercopiesof FederalReserveBoardpublicationsofferedinprint, seetheBoard’sPublicationOrderForm(www.federalreserve.gov/pubs/orderform.pdf) orcontact: PublicationsFulfillment MailStopN-127 Boardof Governorsof theFederalReserveSystem Washington,DC20551 (ph)202-452-3245 (fax)202-728-5886 (e-mail)Publications-BOG@frb.gov

Letter of Transmittal Boardof Governorsof theFederalReserveSystem Washington,D.C. May2013 TheSpeakerof theHouseof Representatives: Pursuanttotherequirementsof section10of theFederalReserveAct,Iampleasedtosubmittheninety-ninth annualreportof theBoardof Governorsof theFederalReserveSystem. Thisreportcoversoperationsof theBoardduringcalendaryear2012. Sincerely, BenBernanke Chairman

i Contents Overview .....................................................................................................................................1 AboutthisReport .......................................................................................................................1 AbouttheFederalReserveSystem ..............................................................................................1 Monetary Policy and Economic Developments ............................................................5 MonetaryPolicyReportofFebruary2013 ....................................................................................5 MonetaryPolicyReportofJuly2012 ..........................................................................................27 Supervision and Regulation ................................................................................................49 2012Developments ..................................................................................................................49 Supervision ..............................................................................................................................51 Regulation ................................................................................................................................71 Consumer and Community Affairs .................................................................................75 SupervisionandExaminations ...................................................................................................75 ConsumerResearchandEmerging-IssuesandPolicyAnalysis ...................................................85 CommunityEconomicDevelopment ..........................................................................................86 ConsumerLawsandRegulations ...............................................................................................88 Federal Reserve Banks ..........................................................................................................91 FederalReservePricedServices ................................................................................................91 CurrencyandCoin ....................................................................................................................94 FiscalAgencyandGovernmentDepositoryServices...................................................................95 UseofFederalReserveIntradayCredit ......................................................................................97 FedLineAccesstoReserveBankServices .................................................................................98 InformationTechnology .............................................................................................................98 ExaminationsoftheFederalReserveBanks ...............................................................................99 IncomeandExpenses .............................................................................................................100 SOMAHoldingsandLoans ......................................................................................................100 FederalReserveBankPremises ...............................................................................................102 ProFormaFinancialStatementsforFederalReservePricedServices ......................................105 Other Federal Reserve Operations ..................................................................................111 RegulatoryDevelopments:Dodd-FrankActImplementation ......................................................111 TheBoardofGovernorsandtheGovernmentPerformanceandResultsAct ..............................115

ii Record of Policy Actions of the Board of Governors .............................................117 RulesandRegulations .............................................................................................................117 PolicyStatementsandOtherActions .......................................................................................120 DiscountRatesforDepositoryInstitutionsin2012 ....................................................................121 Minutes of Federal Open Market Committee Meetings .........................................123 MeetingHeldonJanuary24–25,2012......................................................................................124 MeetingHeldonMarch13,2012 .............................................................................................156 MeetingHeldonApril24–25,2012 ...........................................................................................166 MeetingHeldonJune19–20,2012 ..........................................................................................191 MeetingHeldonJuly31–August1,2012 ..................................................................................216 MeetingHeldonSeptember12–13,2012 .................................................................................227 MeetingHeldonOctober23–24,2012 .....................................................................................251 MeetingHeldonDecember11–12,2012 ..................................................................................261 Litigation .................................................................................................................................287 Statistical Tables ....................................................................................................................289 Federal Reserve System Audits ........................................................................................319 BoardofGovernorsFinancialStatements .................................................................................320 FederalReserveBanksCombinedFinancialStatements ...........................................................342 OfficeofInspectorGeneralActivities ........................................................................................344 GovernmentAccountabilityOfficeReviews...............................................................................409 Federal Reserve System Organization ...........................................................................411 BoardofGovernors .................................................................................................................411 FederalOpenMarketCommittee .............................................................................................416 BoardofGovernorsAdvisoryCouncils .....................................................................................417 FederalReserveBankBranches ..............................................................................................420 Index .........................................................................................................................................437

1 Overview TheFederalReserve,thecentralbankof theUnited For More Background on Board States,isafederalsystemcomposedof acentralgov- Operations ernmentalagency—theBoardof Governors—and 12regionalFederalReserveBanks. 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. 2,540-personstaff.Besidesconductingresearch, analysis,andpolicymakingrelatedtodomesticand internationalfinancialandeconomicmatters,the bytheBoardin2012,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-year2012.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 effortsin2012toimplementprovisionsof 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 99thAnnualReport|2012 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, chasescontinuedtomovelowerinanenvironmentof theFederalReserveBoardsubmitswrittenreportsto budgetrestraint,whileexportgrowthwasheldback theCongressthatcontaindiscussionsof “thecon- byslowforeigneconomicgrowth.Alltold,realgross ductof monetarypolicyandeconomicdevelopments domesticproduct(GDP)isestimatedtohave andprospectsforthefuture.”TheMonetaryPolicy increasedatanaverageannualrateof 1½percentin Report,submittedsemiannuallytotheSenateCom- thesecondhalf of theyear,similartothepaceinthe mitteeonBanking,Housing,andUrbanAffairsand firsthalf. totheHouseCommitteeonBankingandFinancial Services,isdeliveredconcurrentlywithtestimony Conditionsinthelabormarketgraduallyimproved. fromtheFederalReserveBoardChairman. Employmentincreasedatanaveragemonthlypaceof 175,000inthesecondhalf of theyear,aboutthe Thefollowingdiscussionisareviewof U.S.monetary sameasinthefirsthalf.Theunemploymentrate policyandeconomicdevelopmentsin2012,basedon moveddownfrom8¼percentlastsummertoalittle theMonetaryPolicyReportspublishedinFebru- below8percentinJanuary.Evenso,theunemployary2013andJuly2012.Thosecompletereports mentratewasstillwellabovelevelsobservedpriorto areavailableontheBoard’swebsiteatwww therecentrecession.Moreover,itremainedthecase .federalreserve.gov/monetarypolicy/files/20130226_ thatalargeshareof theunemployedhadbeenoutof mprfullreport.pdf(February2013)andwww workformorethansixmonths,andthatasignificant .federalreserve.gov/monetarypolicy/files/20120717_ portionof theemployedhadpart-timejobsbecause mprfullreport.pdf(July2012). theywereunabletofindfull-timeemployment. Meanwhile,consumerpriceinflationremainedsub- Othermaterialsinthisannualreportrelatedtothe duedamidstablelong-terminflationexpectations conductof monetarypolicyincludetheminutesof andpersistentslackinlabormarkets.Overthesecthe2012meetingsof theFederalOpenMarketCom- ondhalf of theyear,thepriceindexforpersonalconmittee(seethe“Minutes”sectiononpage123)and sumptionexpendituresincreasedatanannualrateof statisticaltables1–4(seethe“StatisticalTables” 1½percent. sectiononpage289). Duringthesummerandfall,theFederalOpenMarketCommittee(FOMC)judgedthattheeconomic Monetary Policy Report recoverywouldstrengthenonlygraduallyovertime, of February 2013 assomeof thefactorsrestrainingactivity—including restrictivecreditforsomeborrowers,continuingcon- Summary cernsaboutthedomesticandinternationaleconomic environments,andtheongoingshifttowardtighter TheU.S.economycontinuedtoexpandatamoder- federalfiscalpolicy—werethoughtlikelytorecede aterate,onaverage,overthesecondhalf of 2012. onlyslowly.Moreover,theCommitteejudgedthat Thehousingrecoveryappearedtogainadditional thepossibilityof anescalationof thefinancialcrisis traction,consumerspendingrosemoderately,and inEuropeanduncertaintyaboutthecourseof fiscal businessinvestmentadvancedfurther.Financialcon- policyintheUnitedStatesposedsignificantdownditionseasedovertheperiodbutcreditremained sideriskstotheoutlookforeconomicactivity.Howtightformanyhouseholdsandbusinesses,andcon- ever,theCommitteeexpectedthat,withappropriate cernsaboutthecourseof federalfiscalpolicyandthe monetaryaccommodation,economicgrowthwould ongoingEuropeansituationlikelyrestrainedprivate- proceedatamoderatepace,withtheunemployment sectordemand.Inaddition,totalgovernmentpur- rategraduallydecliningtowardlevelsconsistentwith

6 99thAnnualReport|2012 theFOMC’sdualmandateof maximumemployment thefederalfundsratewouldremainappropriateat andpricestability.Againstthisbackdrop,andwith leastaslongastheunemploymentrateremains long-runinflationexpectationswellanchored,the above6½percent,inflationbetweenoneandtwo FOMCprojectedthatinflationwouldremainator yearsaheadisprojectedtobenomorethan½perbelowtherateconsistentwiththeCommittee’sdual centagepointabovetheCommittee’s2percent mandate. longer-rungoal,andlonger-terminflationexpectationscontinuetobewellanchored. Accordingly,topromoteitsobjectives,theFOMC providedadditionalmonetaryaccommodationdur- Partlyinresponsetothisadditionalmonetary ingthesecondhalf of 2012bybothstrengtheningits accommodation,aswellastoimprovedsentiment forwardguidanceregardingthefederalfundsrate regardingthesituationinEurope,broadfinancial andinitiatingadditionalassetpurchases.InSeptem- conditionseasedoverthesecondhalf of 2012. ber,theCommitteeannouncedthatitwouldcontinue AlthoughyieldsonnominalTreasurysecuritiesrose, itsprogramtoextendtheaveragematurityof its onnet,yieldsoninflation-protectedTreasurysecuri- Treasuryholdingsandwouldbeginpurchasingaddi- tiesdeclined,andlonger-terminterestratespaidby tionalagency-guaranteedmortgage-backedsecurities householdsandfirmsgenerallyfell.Yieldsonagency (MBS)atapaceof $40billionpermonth.TheCom- MBSandinvestment-andspeculative-gradecorpomitteealsostateditsintentiontocontinueitspur- ratebondstouchedrecordlows,andbroadequity chasesof agencyMBS,undertakeadditionalasset priceindexesrose.Conditionsinshort-termdollar purchases,andemployitsotherpolicytoolsas fundingmarketseasedoverthesummerand appropriateuntiltheoutlookforthelabormarket remainedstablethereafter,andmarketsentiment improvessubstantiallyinacontextof pricestability. towardthebankingindustryimproved.Nonetheless, TheCommitteeagreedthatindeterminingthesize, creditremainedtightforborrowerswithlowercredit pace,andcompositionof itsassetpurchases,it scores,andborrowingconditionsforsmallbusinesses would,asalways,takeaccountof thelikelyefficacy continuedtoimprovemoregraduallythanforlarge andcostsof suchpurchases.TheCommitteealso firms. modifieditsforwardguidanceregardingthefederal fundsrateattheSeptembermeeting,notingthat Atthetimeof themostrecentFOMCmeetingin exceptionallylowlevelsforthefederalfundsratewere January,Committeeparticipantssawtheeconomic likelytobewarrantedatleastthroughmid-2015, outlookaslittlechangedormodestlyimprovedfrom longerthanhadbeenindicatedinpreviousFOMC thetimeof theirDecembermeeting,whenthemost statements.Moreover,theCommitteestatedits recentSummaryof EconomicProjections(SEP)was expectationthatahighlyaccommodativestanceof compiled.(TheDecemberSEPisincludedasPart3 monetarypolicywouldremainappropriateforacon- of theFebruary2013MonetaryPolicyReporton siderabletimeaftertheeconomicrecovery pages43–57;itisalsoincludedinthe“Minutes”secstrengthens. tionof thisannualreportonpage272.)Participants generallyjudgedthatstrainsinglobalfinancialmar- InDecember,theCommitteeannouncedthatin ketshadeasedsomewhat,andthatthedownside additiontocontinuingitspurchasesof agencyMBS, riskstotheeconomicoutlookhadlessened.Under itwouldpurchaselonger-termTreasurysecurities, theassumptionof appropriatemonetarypolicy— initiallyatapaceof $45billionpermonth,starting thatis,policyconsistentwiththeCommittee’sStateafterthecompletionattheendof theyearof itspro- mentonLonger-RunGoalsandMonetaryPolicy gramtoextendthematurityof itsTreasuryholdings. Strategy(seebox1)—FOMCparticipantsexpected Italsofurthermodifieditsforwardrateguidance, theeconomytoexpandatamoderatepace,withthe replacingtheearlierdate-basedguidancewith unemploymentrategraduallydecliningandinflation numericalthresholdsfortheunemploymentrateand remainingatorbelowtheCommittee’s2percent projectedinflation.Inparticular,theCommitteeindi- longer-rungoal. catedthatitexpectedtheexceptionallylowrangefor

MonetaryPolicyandEconomicDevelopments 7 Box 1. Statement on Longer-Run Goals and Monetary Policy Strategy AsamendedeffectiveonJanuary29,2013 TheFederalOpenMarketCommittee(FOMC)is Themaximumlevelofemploymentislargelydeterfirmlycommittedtofulfillingitsstatutorymandate minedbynonmonetaryfactorsthataffectthestrucfromtheCongressofpromotingmaximumemploy- tureanddynamicsofthelabormarket.Thesefactors ment,stableprices,andmoderatelong-terminterest maychangeovertimeandmaynotbedirectlymearates.TheCommitteeseekstoexplainitsmonetary surable.Consequently,itwouldnotbeappropriateto policydecisionstothepublicasclearlyaspossible. specifyafixedgoalforemployment;rather,theCom- Suchclarityfacilitateswell-informeddecisionmaking mittee’spolicydecisionsmustbeinformedby byhouseholdsandbusinesses,reduceseconomic assessmentsofthemaximumlevelofemployment, andfinancialuncertainty,increasestheeffectiveness recognizingthatsuchassessmentsarenecessarily ofmonetarypolicy,andenhancestransparencyand uncertainandsubjecttorevision.TheCommittee accountability,whichareessentialinademocratic considersawiderangeofindicatorsinmakingthese society. assessments.InformationaboutCommitteeparticipants’estimatesofthelonger-runnormalratesof Inflation,employment,andlong-terminterestrates outputgrowthandunemploymentispublishedfour fluctuateovertimeinresponsetoeconomicand timesperyearintheFOMC’sSummaryofEconomic financialdisturbances.Moreover,monetarypolicy Projections.Forexample,inthemostrecentprojecactionstendtoinfluenceeconomicactivityand tions,FOMCparticipants’estimatesofthelonger-run priceswithalag.Therefore,theCommittee’spolicy normalrateofunemploymenthadacentraltendency decisionsreflectitslonger-rungoals,itsmediumof5.2percentto6.0percent,unchangedfromone termoutlook,anditsassessmentsofthebalanceof yearagobutsubstantiallyhigherthanthecorrerisks,includingriskstothefinancialsystemthat spondingintervalseveralyearsearlier. couldimpedetheattainmentoftheCommittee’s goals. Insettingmonetarypolicy,theCommitteeseeksto mitigatedeviationsofinflationfromitslonger-run Theinflationrateoverthelongerrunisprimarily goalanddeviationsofemploymentfromtheCommitdeterminedbymonetarypolicy,andhencetheComtee’sassessmentsofitsmaximumlevel.These mitteehastheabilitytospecifyalonger-rungoalfor objectivesaregenerallycomplementary.However, inflation.TheCommitteejudgesthatinflationatthe undercircumstancesinwhichtheCommitteejudges rateof2percent,asmeasuredbytheannualchange thattheobjectivesarenotcomplementary,itfollows inthepriceindexforpersonalconsumptionexpendiabalancedapproachinpromotingthem,takinginto tures,ismostconsistentoverthelongerrunwiththe accountthemagnitudeofthedeviationsandthe FederalReserve’sstatutorymandate.Communicatpotentiallydifferenttimehorizonsoverwhichemployingthisinflationgoalclearlytothepublichelpskeep mentandinflationareprojectedtoreturntolevels longer-terminflationexpectationsfirmlyanchored, judgedconsistentwithitsmandate. therebyfosteringpricestabilityandmoderatelongterminterestratesandenhancingtheCommittee’s TheCommitteeintendstoreaffirmtheseprinciples abilitytopromotemaximumemploymentintheface andtomakeadjustmentsasappropriateatitsannual ofsignificanteconomicdisturbances. organizationalmeetingeachJanuary. Part 1 eigndemandrestrainedexports.Inthisenvironment, Recent Economic conditionsinthelabormarketcontinuedtoimprove and Financial Developments graduallybutremainedweak.Atalittleunder8percentinJanuary,theunemploymentratewasstillwell Realgrossdomesticproduct(GDP)increasedata abovelevelsprevailingpriortotherecentrecession. moderateannualrateof 1½percent,onaverage,in Inflationremainedsubduedattheendof lastyear, thesecondhalf of 2012—similartotherateof withconsumerpricesrisingatabouta1½percent increaseinthefirsthalf—asvariousheadwindscon- annualrateinthesecondhalf,andmeasuresof tinuedtorestraingrowth.Financialconditionseased longer-runinflationexpectationsremainedinthe overthesecondhalf inresponsetotheadditional narrowrangesseenoverthepastseveralyears. monetaryaccommodationprovidedbytheFederal OpenMarketCommittee(FOMC)andtoimproved DomesticDevelopments sentimentregardingthecrisisinEurope.However, creditavailabilityremainedtightformanyhouse- GDPincreasedmoderatelybutcontinuedtobe holdsandbusinesses.Inaddition,declinesinreal restrainedbyvariousheadwinds governmentpurchasescontinuedtoweighoneco- RealGDPisestimatedtohaveincreasedatanannual nomicactivity,asdidhouseholdandbusinesscon- rateof 3percentinthethirdquarterbuttohavebeen cernsabouttheeconomicoutlook,whileweakfor- essentiallyflatinthefourth,aseconomicactivitywas

8 99thAnnualReport|2012 Figure1.Changeinrealgrossdomesticproduct,2006–12 Figure2.Netchangeinpayrollemployment,2006–13 Percent, annual rate Thousands of jobs 400 4 Private 200 H2 + H1 H 1 H2 2 _0 200 + _0 400 Total nonfarm 600 2 800 2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012 2013 Note:Hereandinsubsequentfigures,exceptasnoted,changeforagivenperiod Note:Thedataarethree-monthmovingaveragesandextendthroughJanuismeasuredtoitsfinalquarterfromthefinalquarteroftheprecedingperiod. ary2013. Source:DepartmentofCommerce,BureauofEconomicAnalysis. Source:DepartmentofLabor,BureauofLaborStatistics. temporarilyrestrainedbyweather-relateddisruptions Figure3.Civilianunemploymentrate,1979–2013 anddeclinesinsomeerraticcategoriesof spending, includinginventoryinvestmentandfederaldefense Percent spending.1Onaverage,realGDPexpandedatan annualrateof 1½percentinthesecondhalf of 2012, 12 similartothepaceof increaseinthefirsthalf of the year(figure1).Thehousingrecoverygainedaddi- 10 tionaltraction,consumerspendingcontinuedto increasemoderately,andbusinessinvestmentrose 8 further.However,aseveredroughtinmuchof the countryhelddownfarmproduction,anddisruptions 6 fromHurricaneSandyalsolikelyheldbackeconomic activitysomewhatinthefourthquarter.Morefunda- 4 mentally,someof thesamefactorsthatrestrained growthinthefirsthalf of lastyearlikelycontinued 1981 1989 1997 2005 2013 toweighonactivity.Althoughfinancialconditions continuedtoimproveoverall,thefinancialsystem Note:ThedataaremonthlyandextendthroughJanuary2013. hasnotfullyrecoveredfromthefinancialcrisis,and Source:DepartmentofLabor,BureauofLaborStatistics. banksremainedcautiousintheirlendingtomany householdsandbusinesses.Inparticular,restricted theyearaswellasthestill-worrisomeEuropeansitufinancingforhomemortgagesandnew-homecon- ationandtheslowrecoverymoregenerally. structionprojects,alongwiththedepressingeffects Thelabormarketimprovedsomewhat,butthe onhousingdemandof anuncertainoutlookfor unemploymentrateremainedhigh housepricesandjobs,keptthelevelof activityinthe Inthiseconomicenvironment,firmsincreasedtheir housingsectorwellbelowlonger-runnorms.Budgetworkforcesmoderately.Overthesecondhalf of last arypressuresatalllevelsof governmentalsocontinyear,nonfarmpayrollemploymentroseanaverageof uedtoweighonGDPgrowth.Moreover,businesses about175,000permonth,similartotheaverage andhouseholdsremainedconcernedaboutmany increaseinthefirsthalf (figure2).Thesejobgains aspectsof theeconomicenvironment,includingthe helpedlowertheunemploymentratefrom8.2percent uncertaincourseof U.S.fiscalpolicyattheturnof inthesecondquarterof lastyearto7.9percentin January(figure3).Nevertheless,theunemployment 1 Dataforthefourthquarterof2012fromthenationalincome rateremainedmuchhigherthanitwaspriortothe andproductaccountsreflecttheadvanceestimatereleasedon January30,2013. recentrecession,andlong-termunemploymentcon-

MonetaryPolicyandEconomicDevelopments 9 tinuedtobewidespread.Inthefourthquarter,about Figure4.Changeinthechain-typepriceindexfor 40percentof theunemployedhadbeenoutof work personalconsumptionexpenditures,2006–12 formorethansixmonths.Moreover,theproportion of workersemployedparttimebecausetheywere Percent unabletofindfull-timeworkremainedelevated. Someof theincreaseintheunemploymentratesince 5 thebeginningof therecentrecessioncouldreflect structuralchangesinthelabormarket—suchasa 4 Total greatermismatchbetweenthetypesof jobsthatare 3 openandtheskillsof workersavailabletofillthem— thatwouldreducethemaximumsustainablelevelof 2 employment.However,mostof theeconomicanaly- Excluding food 1 and energy sisonthissubjectsuggeststhatthebulkof the + increaseinunemploymentprobablyreflectsadefi- _0 ciencyinlabordemand.2Asaresult,theunemploy- 1 mentratelikelyremainswellabovelevelsconsistent withmaximumsustainableemployment. 2006 2007 2008 2009 2010 2011 2012 Note:ThedataaremonthlyandextendthroughDecember2012;changesare Asdescribedinthebox“AssessingConditionsinthe fromoneyearearlier. Source:DepartmentofCommerce,BureauofEconomicAnalysis. LaborMarket”(seepages8–9of theFebruary2013 MonetaryPolicyReport),theunemploymentrate appearstobeaverygoodindicatorof labormarket conditions.Thatsaid,otherindicatorsalsoprovide (NIPA)—increased2½percentoverthefourquarters importantperspectivesonthehealthof thelabor of 2012,wellbelowaverageincreasesof closeto market,andthemostaccurateassessmentof labor 4percentintheyearspriortotherecentrecession.As marketconditionscanbeobtainedbycombiningthe aresultof thesemodestgains,nominalcompensation signalsfrommanysuchindicators.Asidefromthe hasincreasedonlyaboutasfastasconsumerprices declineintheunemploymentrate,probablythemost overtherecovery. importantotherpiecesof evidencecorroboratingthe Inflationremainedlow... gradualimprovementinlabormarketconditionsover thesecondhalf of lastyearwerethegainsinnon- Consumerpriceinflationwaslowoverthesecond farmpayrollsnotedearlierandtheslightnetreduc- half of 2012.Withconsiderableslackinlabormartionininitialclaimsforunemploymentinsurance. ketsandlimitedincreasesinlaborcosts,relatively stablepricesforcommoditiesandimports,andwellanchoredlonger-terminflationexpectations,prices Restrainedbytheongoingweakconditionsinthe forpersonalconsumptionexpenditures(PCE) labormarket,laborcompensationhasincreased increasedatanannualrateof 1½percentinthesecslowly.Theemploymentcostindexforprivateindusondhalf of theyear,similartotherateof increasein tryworkers,whichencompassesbothwagesandthe thefirsthalf (figure4).Excludingfoodandenergy costtoemployersof providingbenefits,increased prices,consumerpricesincreasedonly1percentin only2percentoverthe12monthsof 2012,similarto thesecondhalf of theyear,downfrom2percentin therateof gainsince2010.Similarly,nominalcomthefirsthalf.Adecelerationinpricesof imported pensationperhourinthenonfarmbusinesssecgoodslikelycontributedtothelowrateof inflation tor—ameasurederivedfromthelaborcompensation seeninthesecondhalf,thoughpriceincreasesfor datainthenationalincomeandproductaccounts non-energyserviceswerealsolow. 2 See,forexample,MaryC.Daly,BartHobijn,AyşegülŞahin, Asnoted,gainsinlaborcompensationhavebeen andRobertG.Valletta(2012),“ASearchandMatching ApproachtoLaborMarkets:DidtheNaturalRateofUnem- subduedgiventheweakconditionsinlabormarkets, ploymentRise?”JournalofEconomicPerspectives,vol.26 andunitlaborcosts—whichmeasuretheextentto (Summer),pp.3–26;MichaelW.L.Elsby,BartHobijn,Ayşegül whichcompensationrisesinexcessof productivity— Şahin,andRobertG.Valletta(2011),“TheLaborMarketinthe GreatRecession—AnUpdatetoSeptember2011,”Brookings haveincreasedverylittleovertherecovery.Thatsaid, PapersonEconomicActivity,Fall,pp.353–71;andJesseRoth- compensationperhourrosemorerapidlylastyear, stein(2012),“TheLaborMarketFourYearsintotheCrisis: andproductivitygrowth,whichhasaveraged1½per- AssessingStructuralExplanations,”ILRReview,vol.65(July), pp.467–500. centperyearovertherecovery,wasrelativelylow.As

10 99thAnnualReport|2012 Figure5.Pricesofoilandnonfuelcommodities,2008–13 Figure6.Medianinflationexpectations,2001–13 December 2006 = 100 Dollars per barrel 140 6 160 5 120 Michigan survey expectations 140 Nonfuel for next 5 to 10 commodities years 4 100 120 3 80 2 100 Oil SPF expectations 60 for next 10 years 1 80 + 40 _0 2008 2009 2010 2011 2012 2013 2001 2003 2005 2007 2009 2011 2013 Note:Thedataaremonthly.TheoilpriceisthespotpriceofBrentcrudeoil,and Note:TheMichigansurveydataaremonthlyandextendfromJanuary2001 thelastobservationistheaverageforFebruary1–21,2013.Thepriceofnonfuel throughapreliminaryestimateforFebruary2013.TheSPFdataarequarterlyand commoditiesisanindexof45primary-commoditypricesandextendsthrough extendfrom2007:Q1through2013:Q1. January2013. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumersand Source:Foroil,theCommodityResearchBureau;fornonfuelcommodities, SurveyofProfessionalForecasters(SPF). InternationalMonetaryFund. Inlinewiththeseflatoverallcommodityprices,as wellasearlierdollarappreciation,pricesfor aresult,unitlaborcostsrose2percentin2012,well importedgoodsexcludingoilwereaboutunchanged aboveaverageincreasesearlierintherecovery. onaverageoverthelastfivemonthsof 2012andthe earlypartof 2013. Globaloilpricesroseinearly2012butsubsequently gaveupthosegainsandremainedaboutflatthrough ...andlonger-terminflationexpectationsstayed thelaterpartof theyear(figure5).Developments intheirhistoricalrange relatedtoIran,includingatighteningembargoon Surveymeasuresof longer-terminflationexpecta- Iranianoilexports,likelyputupwardpressureon tionshavechangedlittle,onnet,sincelastsummer. prices,butthesepressureswereapparentlyoffsetby Medianexpectedinflationoverthenext5to10years, continuedconcernsaboutweakglobaldemand. asreportedintheThomsonReuters/Universityof However,inrecentweeks,globaloilpriceshave MichiganSurveysof Consumers,was3percentin increasedinresponsetogenerallypositivedemand earlyFebruary,withinthenarrowrangeof thepast indicatorsfromChinaandsomereductionsinSaudi 10years(figure6).IntheSurveyof Professional production.Partlyinresponsetothisrise,retailgaso- Forecasters,conductedbytheFederalReserveBank lineprices,whichchangedlittle,onnet,over2012, of Philadelphia,themedianexpectationforthe havemovedupappreciably. increaseinthepriceindexforPCEoverthenext 10yearswas2percentinthefirstquarterof this Nonfuelcommoditypriceshaveremainedrelatively year,similartoitslevelinrecentyears.Ameasureof flatoverthepastyeardespitesignificantmovements 5-yearinflationcompensationderivedfromnominal inthepricesof afewspecificcommodities.Of par- andinflation-protectedTreasurysecuritieshas ticularinterest,pricesforcornandsoybeanseased increased55basispointssincetheendof June,while someoverthefallafterhavingrisensharplyduring asimilarmeasureof inflationcompensationforthe thesummerasthescaleof thedroughtaffecting period5to10yearsaheadhasincreasedabout muchof theUnitedStatesbecameapparent.Given 30basispoints;bothmeasuresarewithintheir thiseasingandthesmallshareof graincostsinthe respectiverangesobservedintheseveralyearsbefore retailpriceof food,theeffectof thedroughtonU.S. therecentfinancialcrisis(figure7).Whilethe consumerfoodpricesislikelytobemodest:Con- increasesinthesemeasurescouldreflectchangesin sumerfoodpricesroseatanannualrateof 2percent marketparticipants’expectationsof futureinflation, inthefourthquarterfollowingincreasesof lessthan theymayalsohavebeenaffectedbyimprovedinves- 1percentinthemiddleof lastyear. torrisksentimentandanassociatedreductionin

MonetaryPolicyandEconomicDevelopments 11 Figure7.Inflationcompensation,2004–13 Figure8.Changeinrealpersonalconsumption expendituresanddisposablepersonalincome,2006–12 Percent Percent, annual rate 4 Change in real PCE 5 to 10 years ahead Change in real DPI 3 6 2 H2 4 H1 5-year (carry adjusted) 1 H1 H2 + 2 _0 + 1 _0 2 2 2005 2007 2009 2011 2013 2006 2007 2008 2009 2010 2011 2012 Note:ThedataareweeklyaveragesofdailydataandextendthroughFebruary15, 2013.InflationcompensationisthedifferencebetweenyieldsonnominalTreasury Note:Thedataarequarterlyandextendthrough2012:Q4. securitiesandTreasuryinflation-protectedsecurities(TIPS)ofcomparablematurities,basedonyieldcurvesfittedtooff-the-runnominalTreasurysecuritiesand Source:DepartmentofCommerce,BureauofEconomicAnalysis. on-andoff-the-runTIPS.The5-yearmeasureisadjustedfortheeffectofindexationlags. bonuses,asmanyfirmsapparentlyshiftedincome Source:FederalReserveBankofNewYork;Barclays;FederalReserveBoardstaff disbursementsinto2012inanticipationof an estimates. increaseinmarginaltaxratesforhigh-incomehousedemandfortherelativelygreaterliquidityof nominal holdsatthebeginningof thisyear.Excludingthese Treasurysecurities. specialpayments,realDPIisestimatedtohave increasedatamodestannualrateof 1¼percentover Consumerspendingcontinuedto thesecondhalf of theyear,similartotheaverage increasemoderately paceof increaseovertherecovery.Thesurgeindivi- Turningtosomeimportantcomponentsof final dendandbonuspaymentsalsoledthepersonalsavdemand,realPCEincreasedatamoderateannual ingratetojumpfrom3.8percentinthesecondquarrateof 2percentoverthesecondhalf of 2012,similar terto4.7percentinthefourthquarter.Intheir totherateof increaseinthefirsthalf (figure8). absence,thesavingratewouldhavelikelybeenlittle Householdwealth—buoyedbyincreasesinhouse changedoverthesecondhalf of theyear. pricesandequityvalues—movedupoverthesecond half of theyearandprovidedsomesupportforcon- Householdscontinuetopaydowndebt andgainaccesstocredit sumerspending.Inaddition,forthosehouseholds withaccesstocredit,lowinterestratesspurred Householddebt—thesumof mortgageandconspendingonmotorvehiclesandotherconsumer sumerdebt—edgeddownfurtherinthethirdquarter durables,whichincreasedatanannualrateof 11per- of 2012asacontinuedcontractioninmortgagedebt centoverthesecondhalf of lastyear.Butincreases morethanoffsetasolidexpansioninconsumer inrealwagesandsalariesweremodestoverthesec- credit.Withthereductioninhouseholddebt,lowlevondhalf of theyear,andoverallgrowthinconsumer elsof mostinterestrates,andmodestincomegrowth, spendingcontinuedtobeheldbackbyconcerns thehouseholddebtserviceratio—theratioof abouttheeconomicoutlookandlimitedaccessto requiredprincipalandinterestpaymentsonoutcreditforsomehouseholds.Afterrisingearlierinthe standinghouseholddebttoDPI—decreasedfurther year,consumersentiment—whichreflectshousehold and,attheendof thethirdquarter,stoodatalevel viewsontheirownfinancialsituationsaswellas lastseenin1983. broadereconomicconditions—fellbackattheendof theyearandstoodwellbelowlonger-runnorms. Consumercreditexpandedatanannualrateof about 5¼percentinthesecondhalf of 2012.Nonrevolving Realdisposablepersonalincome(DPI)roseatan credit(mostlyautoloansandstudentloans),which annualrateof 3½percentoverthesecondhalf of accountsforabouttwo-thirdsof totalconsumer 2012.However,muchof thisincreasewasaresultof creditoutstanding,drovetheincrease.Revolving unusuallylargeincreasesindividendsandemployee consumercredit(primarilycreditcardlending)was

12 99thAnnualReport|2012 Figure9.Privatehousingstarts,1999–2013 Figure10.Mortgageinterestrates,1995–2013 Millions of units, annual rate Percent 9 Single-family 1.8 8 Fixed rate 1.4 7 6 1.0 5 Multifamily .6 4 .2 Adjustable rate 3 1999 2001 2003 2005 2007 2009 2011 2013 1995 1998 2001 2004 2007 2010 2013 Note:ThedataaremonthlyandextendthroughJanuary2013. Note:Thedata,whichareweeklyandextendthroughFebruary20,2013,arecon- Source:DepartmentofCommerce,BureauoftheCensus. tractrateson30-yearmortgages. Source:FederalHomeLoanMortgageCorporation. aboutflatonnet.Overall,theincreaseinnonrevolvingconsumercreditisconsistentwithbanks’recent rentalunitsandawayfromlarger,typicallyownerresponsestotheSeniorLoanOfficerOpinionSurvey occupiedsingle-familyunits. onBankLendingPractices(SLOOS),whichindicatedthatdemandhadstrengthenedandstandards ...asmortgageinterestratesreachedrecord eased,onnet,forautoloans.3 lowsandhousepricesrose... Mortgageinterestratesdeclinedtohistoricallylow Changesininterestratesonconsumerloanswere levelstowardtheendof 2012—importantlyreflecting mixedoverthesecondhalf of 2012.Interestrateson FederalReservepolicyactions—makinghousing autoloansdeclinedabit,asdidmostmeasuresof quiteaffordableforhouseholdswithgoodcreditratthespreadsof ratesontheseloansoveryieldson ings(figure10).However,thespreadbetweenmort- Treasurysecuritiesof comparablematurity.Interest gageratesandyieldsonagency-guaranteed ratesoncreditcarddebtquotedbybanksgenerally mortgage-backedsecurities(MBS)remainedelevated declinedslightly,whileratesobservedincreditcard byhistoricalstandards.Thisunusuallywidespread offermailingscontinuedtoincrease. probablyreflectsstill-elevatedriskaversionandsome capacityconstraintsamongmortgageoriginators. Thehousingmarketrecoverygainedtraction... Overall,refinanceactivityincreasedbrisklyoverthe Thehousingmarkethascontinuedtorecover.Houssecondhalf of 2012—thoughitwasstilllessthan ingstarts,salesof newandexistinghomes,and mighthavebeenexpected,giventhelevelof interest builderandrealtorsentimentallincreasedoverthe rates—whilethepaceof mortgageapplicationsfor secondhalf of lastyear,andresidentialinvestment homepurchasesremainedsluggish.Recentresponses roseatanannualrateof nearly15percent.ComtotheSLOOSindicatethatbanks’lendingstandards bined,single-familyandmultifamilyhousingstarts forresidentialmortgageloanswerelittlechanged rosefromanaverageannualrateof 740,000inthe overthesecondhalf of 2012. secondquarterof lastyearto900,000inthefourth quarter(figure9).Activityincreasedmostnoticeably Houseprices,asmeasuredbyseveralnational inthesmallermultifamilysector—wherestartshave indexes,continuedtoincreaseinthesecondhalf of nearlyreachedpre-recessionlevels—asdemandfor 2012.Forexample,theCoreLogicrepeat-salesindex newhousinghasapparentlyshiftedtowardsmaller rose3½percent(notanannualrate)overthelastsix monthsof theyeartoreachitshighestlevelsincelate 3 TheSLOOSisavailableontheFederalReserveBoard’swebsite atwww.federalreserve.gov/boarddocs/SnLoanSurvey. 2008(figure11).Thisrecentimprovementnotwith-

MonetaryPolicyandEconomicDevelopments 13 Figure11.Pricesofexistingsingle-familyhouses,2002–12 Figure12.Changeinrealbusinessfixedinvestment, 2006–12 Index value Percent, annual rate 100 Structures FHFA Equipment and software 30 index 90 20 CoreLogic 80 H1 H2 10 price index + 70 _0 S&P/Case-Shiller 20-city index 60 10 20 50 30 2003 2006 2009 2012 2006 2007 2008 2009 2010 2011 2012 Note:Thedataaremonthlyandextendinto2012:Q4.Eachindexhasbeennormalizedsothatitspeakis100.BoththeCoreLogicpriceindexandtheFHFAindex Source:DepartmentofCommerce,BureauofEconomicAnalysis. includepurchasetransactionsonly.TheS&P/Case-Shillerindexreflectsallarm’slengthsalestransactionsinselectedmetropolitanareas. Source:ForCoreLogic,CoreLogic;forFHFA,FederalHousingFinanceAgency;for diminishedastherecoveryhasaged.Inaddition, S&P/Case-Shiller,Standard&Poor’s. concernsaboutpossiblethreatstoeconomicgrowth andstabilityfromU.S.fiscalpolicyandthesituation standing,thismeasureof housepricesremained inEuropemayhavecontributedtosoftinvestment 27percentbelowitspeakinearly2006. spendinginthemiddleof lastyear.Asaresult, despiteapickupinthepaceof gainstowardtheend ...butthelevelofnewconstructionremained of theyear,E&Sinvestmentincreasedatanannual low,andmortgagedelinquenciesremained rateof 5percentinthesecondhalf of theyear,simielevated lartothefirst-half pace.Asforbusinessinvestment Despitetheimprovementsseenoverthesecondhalf instructures,asustainedrecoveryhasyettotake of 2012,housingstartsremainedwellbelowthe hold,ashighvacancyrates,tightcreditfornewcon- 1960–2000averageof 1.5millionperyear,ascon- struction,andlowpricesforcommercialrealestate cernsaboutthejobmarketandtightmortgagecredit (CRE)arestillhamperinginvestmentinnewbuildforless-credit-worthyhouseholdscontinuedto ings.However,inthedrillingandminingsector, restraindemandforhousing.Inaddition,although elevatedoilpricesandnewdrillingtechnologieshave thenumberof vacanthomesforsalehasdeclinedsig- keptinvestmentinstructuresatarelativelyhighlevel. nificantly,thestockof vacanthomesheldoff the marketremainedquiteelevated.Onceputonthe Inventoryinvestmentremainedatamoderatelevelin market,this“shadow”inventory,whichlikely thesecondhalf of lastyear,aslimitedgrowthinfinal includesmanybank-ownedproperties,mayredirect salesandtheuncertaineconomicenvironmentconsomedemandawayfromnewhomesandtoward tinuedtolimitfirms’incentivestoaccumulateinvenattractivelypricedexistinghomes.Withhomevalues tories.CensusBureaumeasuresof book-value depressedandunemploymentstillhigh,measuresof inventory-to-salesratios,aswellassurveysof private late-stagemortgagedelinquency,suchastheinven- inventorysatisfactionandplans,generallysuggest toryof propertiesinforeclosure,remainedelevated, thatstockswerefairlywellalignedwithsalesatthe keepinghightheriskof homestransitioningto endof 2012. vacantbank-ownedproperties. Corporateearningsgrowthslowed,butfirms’ Growthofbusinessinvestmenthasslowedsince balancesheetsremainedstrong earlierintherecovery Afterhavingrisen6percentoverthefirsthalf of Afterincreasingatdouble-digitratesin2010and 2012,aggregateoperatingearningspershareforS&P 2011,businessexpendituresonequipmentandsoft- 500firmswereaboutflatonaseasonallyadjusted ware(E&S)deceleratedin2012(figure12).Pent-up basisinthesecondhalf of 2012,helddown,inpart, demandforcapitalgoods,animportantcontributor byweakdemandfromEuropeandsomeemerging toearlierincreasesinE&Sspending,haslikely marketeconomies(EMEs).However,theratioof

14 99thAnnualReport|2012 corporateprofitstogrossnationalproductinthesec- prevailedinthefirsthalf.Recentreadingsfromthe ondhalf of 2012hoveredarounditshistoricalhigh, Surveyof Termsof BusinessLendingindicatethat andcashflowremainedsolid.Inaddition,theratio thespreadschargedbycommercialbanksonnewly of liquidassetstototalassetsfornonfinancialcorpo- originatedC&Iloanswithoriginalamountslessthan rationswasclosetoitshighestlevelinmorethan $1million,whilestillquiteelevated,continuedto 20years,andtheaggregatedebt-to-assetratio decline.4 remainedlowbyhistoricalstandards. AccordingtosurveysconductedbytheNational Withcorporatecreditqualityremainingrobustand Federationof IndependentBusinessduringthesecinterestratesathistoricallylowlevels,nonfinancial ondhalf of 2012,thefractionof smallbusinesses firmscontinuedtoraisefundsatastrongpaceinthe withborrowingneedsstayedlow.Thenetpercentage secondhalf of 2012.Bondissuancebyboth of respondentsthatfoundcreditmoredifficultto investment-andspeculative-gradenonfinancialfirms obtainthanthreemonthsprioredgedup,onbalance, wasextraordinarilystrong,althoughmuchof the overthisperiod,asdidthenetpercentagethat proceedsfrombondissuanceappearedtobeear- expectedtightercreditconditionsoverthenextthree markedfortherefinancingof existingdebt.Mean- months;bothmeasuresremainedatrelativelyhigh while,nonfinancialcommercialpaper(CP)outstand- levelsintheJanuarysurvey. ingwasaboutunchanged.Issuanceintheinstitu- Financialconditionsinthecommercialreal tionalsegmentof thesyndicatedleveragedloan estatesectoreasedbutremainedrelativelytight marketacceleratedinthesecondhalf of theyear, boostedbyrapidgrowthof newlyestablishedcollat- FinancialconditionsintheCREsectorcontinuedto eralizedloanobligations.Commercialandindustrial easebutremainedrelativelytightamidweakfunda- (C&I)loansoutstandingatcommercialbanking mentals.AccordingtotheSLOOS,amodestnetfracorganizationsintheUnitedStatescontinuedto tionof banksreportedhavingeasedstandardson expandatabriskpaceinthesecondhalf of 2012. CREloansoverthesecondhalf of lastyear,anda Moreover,accordingtotheSLOOS,modestnetfrac- significantnetfractionof banksreportedincreased tionsof bankscontinuedtoreporthavingeasedtheir demandforsuchloans.ConsistentwiththesereadlendingstandardsonC&Iloansoverthesecondhalf ings,themultiyearcontractioninbanks’holdingsof of theyear,andlargenetfractionsof banksindi- CREloanscontinuedtoslowand,indeed,came catedhavingreducedthespreadof ratesonC&I roughlytoahaltasbanks’holdingsof CREloans loansovertheircostof funds,largelyinresponseto wereaboutflatoverthelastquarterof 2012.Issuincreasedcompetitionfromotherbanksornonbank anceof commercialmortgage-backedsecurities lenders. (CMBS)continuedtoincreaseoverthesecondhalf of 2012fromthelowlevelsobservedin2011.None- Grosspublicequityissuancebynonfinancialfirms theless,thedelinquencyrateonloansinCMBSpools slowedabitinthesecondhalf of 2012,helddownby remainedextremelyhigh,assomeborrowerswith amoderatepaceof initialpublicofferings.Mean- five-yearloansissuedin2007wereunabletorefiwhile,dataforthethirdquarterof 2012indicatethat nanceuponthematurityof thoseloansbecauseof netequityissuanceremaineddeeplynegative,as highloan-to-valueratios.Whiledelinquencyratesfor sharerepurchasesandcash-financedmergersbynon- CREloansatcommercialbankscontinuedto financialfirmsremainedrobust. decline,theyremainedsomewhatelevated,especially forconstructionandlanddevelopmentloans. Borrowingconditionsforsmallbusinesses continuedtoimprove,albeitmoregraduallythan Budgetstrainsforstateandlocalgovernments forlargefirms eased,butfederalpurchasescontinued todecline Borrowingconditionsforsmallbusinessescontinued Strainsonstateandlocalgovernmentbudgetsappear toimproveoverthesecondhalf of 2012,butashas tohavelessenedsomesinceearlierintherecovery. beenthecaseinrecentyears,theimprovementwas Althoughfederalgrantsprovidedtostategovernmoregradualthanforlargerfirms.Moreover,the mentsintheAmericanRecoveryandReinvestment demandforcreditfromsmallfirmsapparently Acthaveessentiallyphasedout,stateandlocaltax remainedsubdued.C&Iloanswithoriginalamounts of $1millionorless—alargeshareof whichlikely 4 DatareleasesfortheSurveyofTermsofBusinessLendingare consistof loanstosmallbusinesses—roseslightlyin availableontheFederalReserveBoard’swebsiteatwww thesecondhalf of 2012,ataboutthesameratethat .federalreserve.gov/releases/e2/default.htm.

MonetaryPolicyandEconomicDevelopments 15 Figure13.Changeinrealgovernmentexpenditureson Figure14.Changeinrealimportsandexportsofgoods consumptionandinvestment,2006–12 andservices,2007–12 Percent, annual rate Percent, annual rate Federal Imports State and 9 Exports local 15 6 10 3 H1 H1 H2 + 5 _0 H2 + _0 3 5 6 2006 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 Source:DepartmentofCommerce,BureauofEconomicAnalysis. Source:DepartmentofCommerce,BureauofEconomicAnalysis. receipts,whichhavebeenincreasingsince2010,rose eraloutlaystoGDPdeclinedbutwasstillhighby moderatelyfurtheroverthesecondhalf of lastyear. historicalstandards,at23percent.Withdeficitsstill Accordingly,afterdecliningatanannualrateof large,federaldebtheldbythepublicroseto73per- 1½percentinthefirsthalf of lastyear,realgovern- centof nominalGDPinthefourthquarterof 2012, mentpurchasesatthestateandlocallevelchanged 5percentagepointshigherthanattheendof 2011. littleinthesecondhalf (figure13).Similarly,employmentlevelsatstatesandmunicipalities,whichhad NetexportsaddedmodestlytorealGDPgrowth beendecliningsince2009,changedlittle,onbalance, Realimportsof goodsandservicescontractedatan overthesecondhalf of lastyear. annualrateof nearly2percentoverthesecondhalf of 2012,heldbackbythesluggishpaceof U.S. Federalpurchasescontinuedtodeclineoverthesec- demand(figure14).Thedeclineinimportswasfairly ondhalf of 2012,reflectingongoingeffortstoreduce broadbasedacrossmajortradingpartnersandcatthebudgetdeficitandthescalingbackof overseas egoriesof trade. militaryactivities.AsmeasuredintheNIPA,realfederalexpendituresonconsumptionandgrossinvest- Realexportsof goodsandservicesalsofellatan ment—thepartof federalspendingincludedinthe annualrateof about2percentinthesecondhalf calculationof GDP—fellatanannualrateof despitecontinuedexpansionindemandfromEMEs. 3½percentoverthesecondhalf of 2012.Real Exportsweredraggeddownbyasteepfalloff in defensespendingfellatanannualrateof alittleover demandfromtheeuroareaanddecliningexportsales 6percent,whilenondefensepurchasesincreasedatan toJapan,consistentwithweakeconomicconditions annualrateof 2percent. inthoseareas.Incontrast,exportstoCanada remainedessentiallyflat.Acrossthemajorcategories Thedeficitinthefederalunifiedbudgetremains of exports,industrialsupplies,automotiveproducts, high.Thebudgetdeficitforfiscalyear2012was andagriculturalgoodscontributedtotheoverall $1.1trillion,or7percentof nominalGDP,down decrease. fromthedeficitrecordedin2011butstillsharply higherthanthedeficitsrecordedpriortotheonsetof Overall,realnetexportsaddedanestimated0.1perthelastrecession.Thenarrowingof thebudgetdefi- centagepointtorealGDPgrowthinthesecondhalf citrelativetofiscal2011reflectedanincreaseintax of 2012,accordingtotheadvanceestimateof GDP revenuesthatlargelystemmedfromthegradual fromtheBureauof EconomicAnalysis,butdata increaseineconomicactivityaswellasadeclinein receivedsincethensuggestasomewhatlargerposispending.Despitetheriseintaxrevenues,theratioof tivecontribution. federalreceiptstonationalincome,at16percentin fiscal2012,remainednearthelowendof therange Thenominaltradedeficitshrank,onnet,overthe forthisratiooverthepast60years.Theratioof fed- secondhalf of 2012,contributingtothenarrowingof

16 99thAnnualReport|2012 thecurrentaccountdeficitto2¾percentof GDPin Figure15.InterestratesonTreasurysecuritiesat thethirdquarter.Thetradedeficitasashareof GDP selectedmaturities,2004–13 narrowedsubstantiallyinlate2008andearly2009 whenU.S.importsdroppedsharply,inpartreflecting Percent thesteepdeclineinoilprices.Sincethen,thetrade deficitasashareof GDPhasremainedclosetoits 5 2009level:Althoughimportsrecoveredfromtheir 10-year nominal earlierdrop,exportsstrengthenedaswell. 4 3 5-year nominal Thecurrentaccountdeficitinthethirdquarterwas 2 financedbystronginflowsfromforeignofficialinstitutionsandbyforeignprivatepurchasesof Treasury 5-year TIPS 1 securitiesandequities.More-recentdatasuggestcon- + _0 tinuedstrongforeignpurchasesof Treasurysecurities andequitiesinthefourthquarterof 2012.Consistent 1 withimprovedmarketsentimentoverthethirdquarter,U.S.investorsalsoincreasedtheirholdingsof 2005 2007 2009 2011 2013 foreignassets. Note:ThedataaredailyandextendthroughFebruary21,2013.Treasuryinflationprotectedsecurities(TIPS)arebasedonyieldcurvesfittedbyFederalReserve stafftoon-andoff-the-runTIPS. Nationalsavingisverylow Source:DepartmentoftheTreasury;Barclays;FederalReserveBoardstaff TotalU.S.netnationalsaving—thatis,thesavingof estimates. U.S.households,businesses,andgovernments,netof depreciationcharges—remainsextremelylowbyhis- willriseaboveitscurrenttargetrangearoundthe toricalstandards.Inthethirdquarterof lastyear,net fourthquarterof 2014,roughlyfourquarterslater nationalsavingasapercentof nominalGDPwas thantheyexpectedattheendof June2012.Meanclosetozero.Therelativeflatnessof thenationalsav- while,themodaltargetratepath—themostlikelyvalingrateoverthepastfewyearsreflectstheoffsetting uesforfuturefederalfundsratesderivedfromintereffectsof anarrowinginthefederalbudgetdeficitas estrateoptions—suggeststhatinvestorsthinkthe ashareof nominalGDPandadownwardmovement rateismostlikelytoremaininitscurrentrange intheprivatesavingrate.Nationalsavingwilllikely throughthefirstquarterof 2016.Inaddition,recent remainlowthisyear,inlightof thestill-largefederal readingsfromtheSurveyof PrimaryDealersconbudgetdeficit.Aportionof thedeclineinfederalsav- ductedbytheOpenMarketDeskattheFederal ingsrelativetopre-recessionlevelsiscyclicaland ReserveBankof NewYorksuggestthatmarketparwouldbeexpectedtoreverseastheeconomyrecov- ticipantsexpecttheFederalReservetoholdabout ers.If lowlevelsof nationalsavingpersistoverthe $3.75trillionof Treasuryandagencysecuritiesatthe longerrun,theywilllikelybeassociatedwithboth endof 2014,roughly$1trillionmorethanwas lowratesof capitalformationandheavyborrowing expectedinthemiddleof 2012.5 fromabroad,limitingtheriseinthestandardof livingforU.S.residentsovertime. ...andheldyieldsonlonger-termTreasury securitiesandagencymortgage-backed FinancialDevelopments securitiesnearhistoriclows Yieldsonnominalandinflation-protectedTreasury Expectationsregardingthefuturestance securitiesremainednearhistoriclowsoverthesecond ofmonetarypolicyreflectedtheadditional half of 2012andinto2013.Yieldsonlonger-term accommodationprovidedbythe nominalTreasurysecuritiesrose,onbalance,over FederalOpenMarketCommittee... thisperiod,whileyieldsoninflation-protectedsecuri- InresponsetothestepstakenbytheFOMCtoprotiesfell(figure15).Thesechangeslikelyreflectthe videadditionalmonetarypolicyaccommodation effectsof additionalmonetaryaccommodation,a overthesecondhalf of 2012,marketparticipants substantialimprovementinsentimentregardingthe pushedoutthedatewhentheyexpectthefederal crisisinEuropethatreduceddemandfortherelative fundsratetofirstriseaboveitscurrenttargetrange of 0to¼percent.Inparticular,interestrateson 5 TheSurveyofPrimaryDealersisavailableontheFederal overnightindexswapsindicatethatinvestorscur- ReserveBankofNewYork’swebsiteatwww.newyorkfed.org/ rentlyanticipatethattheeffectivefederalfundsrate markets/primarydealer_survey_questions.html.

MonetaryPolicyandEconomicDevelopments 17 safetyandliquidityof nominalTreasurysecurities, Figure16.Spreadsofcorporatebondyieldsover andincreasesinthepricesof keycommoditiessince comparableoff-the-runTreasuryyields, theendof June2012.Onbalance,yieldson5-,10-, bysecuritiesrating,1997–2013 and30-yearnominalTreasurysecuritiesincreased roughly15basispoints,30basispoints,and40basis Percentage points points,respectively,fromtheirlevelsattheendof June2012,whileyieldson5-and10-yearinflation- 18 protectedsecuritiesdecreasedroughly55basispoints 16 and15basispoints,respectively.Treasuryauctions 14 generallycontinuedtobewellreceivedbyinvestors, 12 andtheDesk’soutrightpurchasesandsalesof 10 High-yield Treasurysecuritiesdidnotappeartohaveamaterial 8 adverseeffectonliquidityormarketfunctioning. 6 4 BBB YieldsonagencyMBSwerelittlechanged,onnet, 2 overthesecondhalf of 2012andinto2013.Theyfell AA + _0 sharplyfollowingtheFOMC’sannouncementof 1997 1999 2001 2003 2005 2007 2009 2011 2013 additionalagencyMBSpurchasesinSeptemberbut retracedoversubsequentmonths.Spreadsof yields Note:ThedataaredailyandextendthroughFebruary21,2013.Thespreads shownaretheyieldson10-yearbondslessthe10-yearTreasuryyield. onagencyMBSoveryieldsonnominalTreasury Source:DerivedfromsmoothedcorporateyieldcurvesusingMerrillLynchbond securitiesnarrowed,largelyreflectingtheeffectsof data. theadditionalmonetaryaccommodation.TheDesk’s outrightpurchasesof agencyMBSdidnotappearto 12-monthforwardearnings–priceratiofortheS&P haveamaterialadverseeffectonliquidityormarket 500andalong-runrealTreasuryyield—arough functioning,althoughimpliedfinancingratesfor gaugeof theequityriskpremium—remainedatthe somesecuritiesintheMBSdollarrollmarket highendof itshistoricalrange.Impliedvolatilityfor declinedinthesecondhalf of 2012,andtheDesk theS&P500index,ascalculatedfromoptionprices, respondedbypostponingsettlementof somepur- spikedattimesbutiscurrentlynearthebottomend chasesusingdollarrolltransactions.6 of therangeithasoccupiedsincetheonsetof the financialcrisis. Yieldsoncorporatebondsreachedrecordlows, andequitypricesincreased Conditionsinshort-termdollarfundingmarkets Yieldsoninvestment-andspeculative-gradebonds improvedsomeinthethirdquarterandremained reachedrecordlowsinthesecondhalf of 2012and stablethereafter early2013,respectively,partlyreflectingtheeffectsof Measuresof stressinunsecureddollarfundingmartheFOMC’sadditionalmonetarypolicyaccommo- ketseasedsomewhatinthethirdquarterof 2012and dationandincreasedinvestorappetiteforbearing remainedstableatrelativelylowlevelsthereafter, risk.Spreadstocomparable-maturityTreasurysecu- reflectingimprovedsentimentregardingthecrisisin ritiesalsonarrowedsubstantiallybutremainedabove Europe.Forexample,theaveragematurityof unsethenarrowestlevelsthattheyreachedpriortothe curedfinancialCPissuedbyinstitutionswithEurofinancialcrisis(figure16).Pricesinthesecondary peanparentsincreased,onnet,toaroundthesame marketforsyndicatedleveragedloanshaveincreased, lengthassuchCPissuedbyinstitutionswithU.S. onbalance,sincethemiddleof 2012. parents. Broadequitypriceindexeshaveincreasedabout Signsof stresswerelargelyabsentinsecuredshort- 10percentsincetheendof June2012,boostedbythe termdollarfundingmarkets.Inthemarketforrepursamefactorsthatcontributedtothenarrowingin chaseagreements(repos),bid–askedspreadsand bondspreads.Nevertheless,thespreadbetweenthe haircutsformostcollateraltypeshavechangedlittle sincethemiddleof 2012.However,reporatescontinuedtoedgeupoverthesecondhalf of 2012,likely 6 Dollarrolltransactionsconsistofapurchaseorsaleofagency MBSwiththesimultaneousagreementtosellorpurchasesub- reflectinginpartthefinancingof theincreasein stantiallysimilarsecuritiesonaspecifiedfuturedate.TheCom- dealers’inventoriesof shorter-termTreasurysecurimitteedirectstheDesktoengageinthesetransactionsasnecestiesthatresultedfromthematurityextensionprosarytofacilitatesettlementoftheFederalReserve’sagency MBSpurchases. gram(MEP).Followingyear-end,reporatesfellback

18 99thAnnualReport|2012 wereflatataroundtheslightlyelevatedlevelsseen Figure17.Spreadsoncreditdefaultswapsforselected priortothecrisis,thoughtheycontinuedtobeout- U.S.bankingorganizations,2007–13 pacedbycharge-offs.Regulatorycapitalratios remainedathighlevelsbasedoncurrentstandards, Basis points buttheimplementationof generallymorestringent BaselIIIcapitalrequirementswilllikelyleadtosome 400 declineinreportedregulatorycapitalratiosatthe 350 largestbanks.Overall,banksremainwellfundedwith 300 deposits,andtheirrelianceonshort-termwholesale Large bank 250 fundingstayednearitslowlevelsseeninrecentquarholding companies ters.Theexpirationof theFederalDepositInsurance 200 Corporation’sTransactionAccountGuaranteepro- 150 gramonDecember31,2012,doesnotappeartohave 100 causedanysignificantchangeintheavailabilityof Other banks 50 depositfundingforbanks. 2007 2008 2009 2010 2011 2012 2013 Creditprovidedbycommercialbankingorganiza- Note:ThedataaredailyandextendthroughFebruary21,2013.Medianspreads tionsintheUnitedStatesincreasedinthesecondhalf forsixlargebankholdingcompaniesandnineotherbanks. of 2012ataboutthesamemoderatepaceasinthe Source:Markit. firsthalf of theyear.Coreloans—thesumof C&I loans,realestateloans,andconsumerloans—exastheMEPcametoanendandthelevelof reserve pandedmodestly,withstronggrowthinC&Iloans balancesbegantoincrease.Inasset-backedcommer- offsettingweaknessinrealestateandcreditcard cialpaper(ABCP)markets,volumesoutstanding loans.Banks’holdingsof securitiescontinuedtorise declinedabitforprogramswithEuropeanandU.S. moderatelyoverall,asstronggrowthinholdingsof sponsors,whilespreadsonABCPwithEuropean Treasuryandmunicipalsecuritiesmorethanoffset banksponsorsremainedslightlyabovethoseon modestdeclinesinholdingsof agencyMBS. ABCPwithU.S.banksponsors. Despitecontinuedimprovementsinmarket Year-endpressuresinshort-termfundingmarkets conditions,riskstothestabilityoffinancial weregenerallymodestandroughlyinlinewiththe marketsremain experiencesduringotheryearssincethefinancial Whileconditionsinshort-termdollarfundingmarcrisis. ketshaveimproved,thesemarketsremainvulnerable topotentialstresses.Moneymarketfunds(MMFs) Marketsentimenttowardthebankingindustry havesharplyreducedtheiroverallexposuresto improvedastheprofitabilityofbanksincreased Europesincethemiddleof 2011,butprimefund Marketsentimenttowardthebankingindustry exposurestoEuropecontinuetobesubstantial. improvedinthesecondhalf of 2012,reportedly MMFsalsoremainsusceptibletotheriskof investor driveninlargepartbyperceptionsof reduceddown- runsduetostructuralvulnerabilitiesposedbythe siderisksstemmingfromtheEuropeancrisis.Equity roundingof netassetvaluesandtheabsenceof losspricesforbankholdingcompanies(BHCs)increased, absorbingcapital.7 outpacingtheincreasesinbroadequitypriceindexes, andBHCcreditdefaultswap(CDS)spreadsdeclined Dealerfirmshavereducedtheirwholesaleshort-term (figure17). fundingratiosandhaveincreasedtheirliquiditybuffersinrecentyears,buttheystillheavilyrelyon Theprofitabilityof BHCsincreasedinthesecond wholesaleshort-termfunding.Asaresult,they half of 2012butcontinuedtorunwellbelowthelev- remainsusceptibletoswingsinmarketconfidence elsthatprevailedbeforethefinancialcrisis.Measures andapossibleresurgenceof anxietyregardingcounof assetqualitygenerallyimprovedfurther,asdelin- terpartycreditrisk.RespondentstotheSeniorCredit quencyandcharge-off ratesdecreasedforalmostall OfficerOpinionSurveyonDealerFinancingTerms majorloancategories,althoughtherecentimprovementindelinquencyratesforconsumercreditinpart 7 InNovember2012,theFinancialStabilityOversightCouncil proposedrecommendationsforstructuralreformsofU.S. reflectsacompositionalshiftof creditsupplytoward MMFstoreducetheirvulnerabilitytorunsandmitigateassocihigher-credit-qualityborrowers.Loanlossprovisions atedriskstothefinancialsystem.

MonetaryPolicyandEconomicDevelopments 19 indicatedthatcredittermsapplicabletoimportant sitionof Treasurysecuritiesholdingsalsochanged classesof counterpartieswerelittlechangedoverthe overthesecondhalf of 2012asaresultof theconsecondhalf of 2012.8Dealersreportedincreased tinuationof theMEP,whichwasannouncedatthe demandforfundingof securitizedproductsandindi- June2012FOMCmeeting.Underthisprogram, catedthattheuseof financialleverageamongtrad- betweenJulyandDecember,theDeskpurchased ingrealestateinvestmenttrusts,orREITs,had $267billioninTreasurysecuritieswithremaining increasedsomewhat.However,respondentscontin- maturitiesof 6to30yearsandsoldorredeemedan uedtonoteanincreaseintheamountof resources equalparvalueof Treasurysecuritieswithmaturities andattentiondevotedtothemanagementof concen- of 3yearsorless.Asaresult,theaveragematurityof tratedexposurestocentralcounterpartiesandother theFederalReserve’sTreasuryholdingsincreased financialutilitiesaswellas,toasmallerextent,deal- 1.7yearsoverthesecondhalf of 2012andinto2013 ersandotherfinancialintermediaries. and,asof February2013,stoodat10.5years. Withprospectivereturnsonsafeassetsremaining ...whileexposuretofacilitiesestablishedduring thecrisiscontinuedtowinddown low,somefinancialmarketparticipantsappeared willingtotakeonmoredurationandcreditriskto Inthesecondhalf of 2012,theFederalReserveconboostreturns.Thepaceof speculative-gradecorpo- tinuedtoreduceitsexposuretofacilitiesestablished ratebondissuancehasbeenrapidinrecentmonths, duringthefinancialcrisistosupportspecificinstituandwhilemostof thisissuanceappearstohavebeen tions.Theportfolioholdingsof MaidenLaneLLC earmarkedfortherefinancingof existingdebt,there andMaidenLaneIIILLC—entitiesthatwerecrehasalsobeenanincreaseindebttofacilitatetransac- atedduringthecrisistoacquirecertainassetsfrom tionsinvolvingsignificantrisks.Inparticular,in TheBearStearnsCompanies,Inc.,andAmerican bondsissuedtofinanceprivateequitytransactions, InternationalGroup,Inc.,toavoidthedisorderly therehasbeenareemergenceof payment-in-kind failuresof thoseinstitutions—declined$14billionto optionsthatpermittheissuertoincreasetheface approximately$1billion,primarilyreflectingthesale valueof debtinlieuof acashinterestpayment,and of theremainingsecuritiesinMaidenLaneIIILLC anecdotalreportsindicatethatbondcovenantsare thatwasannouncedinAugust2012.Thesesales becominglessrestrictive.Similarly,issuanceof bank resultedinanetgainof $6.6billionforthebenefitof loanstofinancedividendrecapitalizationdealsas theU.S.public.TheFederalReserve’sloansto wellascovenant-liteloanswasrobustoverthesecond MaidenLaneLLCandMaidenLaneIIILLChad half of theyear.(Foradiscussionof regulatorysteps beenfullyrepaid,withinterest,asof June2012. takenrelatedtofinancialstability,seethebox“The LoansoutstandingundertheTermAsset-Backed FederalReserve’sActionstoFosterFinancialStabil- SecuritiesLoanFacility(TALF)decreased$4billion ity”onpages30–31of theFebruary2013Monetary tounder$1billionbecauseof prepaymentsand PolicyReport.) maturitiesof TALFloans.Withaccumulatedfees collectedthroughTALFexceedingtheamountof FederalReserveassetsincreased,andthe TALFloansoutstanding,theFederalReserveand averagematurityofitsTreasuryholdings theTreasuryagreedinJanuarytoendthebackstop lengthened... forTALFprovidedbytheTroubledAssetRelief Totalassetsof theFederalReserveincreasedto Program. $3,097billionasof February20,2013,$231billion morethanattheendof June2012(table1).The TheimprovementinoffshoreU.S.dollarfunding increaseprimarilyreflectsgrowthinFederalReserve marketsoverthesecondhalf of 2012ledtoadecline holdingsof TreasurysecuritiesandagencyMBSasa intheoutstandingamountof dollarsprovided resultof thepurchaseprogramsinitiatedattheSep- throughthetemporaryU.S.dollarliquidityswap tember2012andDecember2012FOMCmeetings. arrangementswithothercentralbanks.Asof Febru- Asof February20,2013,theparvalueof Treasury ary20,2013,drawsontheliquidityswaplineswere securitiesandagencyMBSheldbytheFederal $5billion,downfrom$27billionattheendof Reservehadincreased$70billionand$178billion, June2012.OnDecember13,2012,theFederal respectively,sincetheendof June2012.Thecompo- Reserveannouncedtheextensionof thesearrangementsthroughFebruary1,2014. 8 TheSeniorCreditOfficerOpinionSurveyonDealerFinancing Ontheliabilitysideof theFederalReserve’sbalance TermsisavailableontheFederalReserveBoard’swebsiteat www.federalreserve.gov/econresdata/releases/scoos.htm. sheet,depositsheldbydepositoryinstitutions

20 99thAnnualReport|2012 Table1.SelectedcomponentsoftheFederalReservebalancesheet,2012–13 Millionsofdollars Balancesheetitem Feb.22,2012 June27,2012 Feb.20,2013 Totalassets 2,935,149 2,865,698 3,096,802 Selectedassets Creditextendedtodepositoryinstitutionsanddealers Primarycredit 3 18 8 Centralbankliquidityswaps 107,959 27,059 5,192 Creditextendedtoothermarketparticipants TermAsset-BackedSecuritiesLoanFacility(TALF) 7,629 4,773 439 NetportfolioholdingsofTALFLLC 825 845 507 Supportofcriticalinstitutions NetportfolioholdingsofMaidenLaneLLC,MaidenLaneIILLC,and MaidenLaneIIILLC1 30,822 15,031 1,483 Securitiesheldoutright U.S.Treasurysecurities 1,656,581 1,666,530 1,736,456 Agencydebtsecurities 100,817 91,484 74,613 Agencymortgage-backedsecurities(MBS)2 853,045 854,979 1,032,712 Totalliabilities 2,880,556 2,811,029 3,041,820 Selectedliabilities FederalReservenotesincirculation 1,048,004 1,067,917 1,127,723 Reverserepurchaseagreements 89,824 83,737 93,121 Depositsheldbydepositoryinstitutions 1,622,800 1,491,988 1,668,383 Ofwhich:Termdeposits 0 0 0 U.S.Treasury,generalaccount 36,033 117,923 40,703 U.S.Treasury,SupplementaryFinancingAccount 0 0 0 Totalcapital 54,594 54,669 54,982 Note:LLCisalimitedliabilitycompany. 1 TheFederalReservehasextendedcredittoseveralLLCsinconjunctionwitheffortstosupportcriticalinstitutions.MaidenLaneLLCwasformedtoacquirecertainassetsof TheBearStearnsCompanies,Inc.MaidenLaneIILLCwasformedtopurchaseresidentialmortgage-backedsecuritiesfromtheU.S.securitieslendingreinvestmentportfolio ofsubsidiariesofAmericanInternationalGroup,Inc.(AIG).MaidenLaneIIILLCwasformedtopurchasemultisectorcollateralizeddebtobligationsonwhichtheFinancial ProductsgroupofAIGhaswrittencreditdefaultswapcontracts. 2 IncludesonlyMBSpurchasesthathavealreadysettled. Source:FederalReserveBoard,StatisticalReleaseH.4.1,“FactorsAffectingReserveBalancesofDepositoryInstitutionsandConditionStatementofFederalReserveBanks.” increased$176billionsinceJune2012,whileFederal InternationalDevelopments Reservenotesincirculationrose$60billion,reflectingsoliddemandbothathomeandabroad.M2has Foreignfinancialmarketstressesabated... increasedatanannualrateof about8percentsince Sincemid-July,globalfinancialmarketconditions June2012.Holdingsof M2assets,includingitslarg- haveimproved,onbalance,inpartreflectingreduced estcomponent,liquiddeposits,remainelevatedrela- fearsof asignificantworseningof theEuropeanfistivetowhatwouldhavebeenexpectedbasedonhis- calandfinancialcrisis.Marketsentimentwasboltoricalrelationshipswithnominalincomeandinter- steredbyanewEuropeanCentralBank(ECB) estrates,likelyduetoinvestors’continuedpreference frameworkforpurchasesof sovereigndebtknownas toholdsafeandliquidassets. OutrightMonetaryTransactions(OMT),agreements oncontinuedofficial-sectorsupportforGreece,prog- Aspartof itsongoingprogramtoensurethereadi- ressbySpaininrecapitalizingitstroubledbanks,and nessof toolstomanagereserves,theFederalReserve somestepstowardfiscalandfinancialintegrationin conductedaseriesof small-valuereverserepurchase Europe.Nevertheless,financialmarketstressesin transactionsusingalleligiblecollateraltypeswithits Europeremainedelevated,andpolicymakersstill expandedlistof counterparties,aswellasafew facesignificantchallenges(seethebox“AnUpdate small-valuerepurchaseagreementswithprimary ontheEuropeanFiscalandBankingCrisis”onpage dealers.Inthesamevein,theFederalReservecontin- 32of theFebruary2013MonetaryPolicyReport). uedtooffersmall-valuetermdepositsthroughthe TermDepositFacilitytoprovideeligibleinstitutions ReducedconcernsabouttheEuropeancrisiscontribwithanopportunitytobecomefamiliarwithterm utedtoaneasingof fundingconditionsforEuropean depositoperations. banks.Euro-areabankshavereliedsomewhatlesson

MonetaryPolicyandEconomicDevelopments 21 Figure18.Governmentdebtspreadsforperipheral Figure19.U.S.dollarexchangerateagainstbroadindex Europeaneconomies,2009–13 andselectedmajorcurrencies,2010–13 Percent December 31, 2009 = 100 32 120 Greece 28 115 Euro 24 110 20 105 Broad 16 100 Ireland Portugal 12 95 8 90 Spain 4 Japanese yen 85 Italy + _0 80 2009 2010 2011 2012 2013 2010 2011 2012 2013 Note:Thedataareweekly.ThelastobservationforeachseriesisFebruary15, Note:Thedata,whichareinforeigncurrencyunitsperdollar,aredaily.Thelast 2013.Thespreadsshownaretheyieldson10-yearbondslessthe10-yearGer- observationforeachseriesisFebruary21,2013. manbondyield. Source:FederalReserveBoard,StatisticalReleaseH.10,“ForeignExchange Source:ForGreece,Italy,Portugal,andSpain,Bloomberg;forIreland,staffesti- Rates.” matesusingtradedbondpricesfromThomsonReutersandBloomberg. ECBfundinginrecentmonths,anduseof central electedprimeministerof Japan,calledfortheBank bankdollarliquidityswaplinesdeclinedsignificantly. of Japantoemploy“unlimitedeasing”of monetary Reflectingmarketviewsof thedecreasedriskof policytoovercomedeflation. default,CDSpremiumsonthedebtof manylarge ...buteconomicactivityintheadvancedforeign banksinEuropedroppedsignificantly,onnet,espeeconomiescontinuedtoweaken... ciallyforItalyandSpain,andeuro-areabankstocks increasedabout30percentsincemid-2012. Despitetheeasingof financialstressesintheeuro areaandsomeimprovementinglobalfinancialmar- Asrisksentimentimproved,foreignequityindexes kets,activityintheadvancedforeigneconomies rosesignificantly:Overthesecondhalf of 2012and (AFEs)continuedtolosesteaminthesecondhalf of intoearly2013,equityindexesincreasedabout 2012.Theeuroareafellfurtherintorecession,asfis- 10percentfortheUnitedKingdomandCanada, calausterity,risingunemployment,anddepressed about15percentintheeuroarea,andabout25per- confidencerestrainedspending,especiallyinthe centinJapan;equityindexesinEMEsalsomovedup countriesatthecenterof thecrisis.RealGDPalso acrosstheboard.Likewise,yieldson10-yeargovern- contractedinJapan,reflectingplummetingexports. mentbondsinmanycountriesincreasedmoderately, IntheUnitedKingdom,realGDPgrowthresumed thoughJapaneseyieldsremainedbelow1percent. inthethirdquarter,partlythankstoatemporary Spreadsof peripheralEuropeansovereignyieldsover boosttodemandfromtheLondonOlympics,but Germanbondyieldsof comparablematurity contractedagaininthefourthquarter.Canadianreal declinedsignificantlyasoveralleuro-areafinancial GDPgrowthremainedpositivebutalsoweakened, strainsabated(figure18).Corporatecreditspreads largelyowingtolowerexternaldemand.Surveyindialsodeclined,andbondissuancepickedup. catorssuggestthatconditionsintheAFEsimproved onlymarginallyaroundtheturnof theyear.Amid TheU.S.dollardepreciatednearly1percentagainsta thisweaknessineconomicactivityandlimitedpresbroadsetof currenciesoverthesecondhalf of 2012 suresfromcommodityprices,inflationreadingsfor andintoearly2013(figure19).Someof thisdepre- mostAFEsremainedcontained. ciationreflectedareversalof flight-to-safetyflows,in partstemmingfromthereductioninEuropeanfinan- Severalforeigncentralbanksexpandedtheirbalance cialstress.Indeed,thedollardepreciated4percent sheetsfurtherandtookotheractionstosupporttheir againsttheeuro.Incontrast,thedollarappreciated economies.Inadditiontoitsintroductionof the 17percentagainsttheJapaneseyen.Mostof thisrise OMT,theECBlowereditsmainpolicyrate.The cameinrecentmonths,asShinzoAbe,thenewly Bankof Englandcompleteditslatestroundof asset

22 99thAnnualReport|2012 purchases,bringingitsholdingsto£375billion,and Part 2 begantheimplementationof itsFundingforLend- Monetary Policy ingScheme,designedtoboostlendingtohouseholds andfirms.TheBankof Japantookanumberof TopromotetheobjectivesgiventoitbytheCongress, steps.ItintroducedanewStimulatingBankLending theFederalOpenMarketCommittee(FOMC)pro- FacilityinOctoberandraiseditsinflationtarget videdadditionalmonetaryaccommodationatits from1percentto2percentinJanuary.Inaddition,it September2012andDecember2012meetings,by increasedthesizeof itsAssetPurchaseProgramby bothstrengtheningitsforwardguidanceregarding ¥30trillion,to¥101trillion,bytheendof 2013and thefederalfundsrateandinitiatingadditionalasset announcedthatpurchaseswouldbeopenended purchases. beginningin2014. AsdiscussedinPart1,incomingeconomicdata ...evenaseconomicgrowthstabilizedin throughoutthesecondhalf of 2012andinto2013 emergingmarketeconomies indicatedthateconomicactivitywasexpandingata Afterslowingearlierintheyear,inpartbecauseof moderatepace.Employmentgainsweremodest,and headwindsassociatedwithEurope’stroubles,eco- althoughtheunemploymentratedeclinedsomewhat nomicgrowthinEMEsstabilizedinthethirdquarter overtheperiod,itremainedelevatedrelativetolevels andappearedtopickupinthefourth.Thismodest thatalmostallmembersof theFOMCviewedas pickupineconomicactivityinthefaceof continued consistentwiththeCommittee’sdualmandate.Inflaweaknessinexportstoadvancedeconomieswassup- tionremainedsubdued,apartfromsometemporary portedbymonetaryandfiscalpolicystimulus. variationsthatlargelyreflectedfluctuationsincommoditiesprices.Membersgenerallyattachedan InChina,followingslowergrowthinthefirsthalf of unusuallyhighlevelof uncertaintytotheirassess- 2012,stimulusmeasureshelpedboostthepaceof real mentsof theeconomicoutlook.Moreover,theycon- GDPgrowthinthesecondhalf of theyear. tinuedtojudgethattheriskstoeconomicgrowth ImprovedeconomicconditionsinChinaalsopro- weretiltedtothedownsidebecauseof strainsin videdalifttootheremergingAsianeconomies.GDP financialmarketsstemmingfromthesovereigndebt acceleratedinHongKongandTaiwaninthethird andbankingsituationinEurope,aswellasthe quarter;inthefourthquarter,exportsandpurchas- potentialforasignificantslowdowninglobalecoingmanagersindexesmovedhigherinmostof the nomicgrowthandforasharper-than-anticipatedfisregion,andGDPgrowthreboundedinanumberof calcontractionintheUnitedStates.Withlongereconomies. terminflationexpectationsstableandstillconsiderableslackinresourcemarkets,most Afterstagnatingforaboutayear,economicactivity membersanticipatedthatinflationoverthemedium inBrazilpickedupinthethirdquartertoastill- termwouldrunatorbelowtheCommittee’slongerlacklusterpaceof 2½percent.Indicatorsforthe rungoalof 2percent. fourthquartersuggestafurthermodestpickup,supportedbyaccommodativepolicies.Incontrast,GDP Accordingly,topromotetheFOMC’sobjectivesof growthinMexicocontinuedtofallinthethirdquarmaximumemploymentandpricestability,theComterasthegrowthof U.S.manufacturingproduction mitteemaintainedatargetrangeforthefederalfunds slowed;however,Mexicangrowthpickedupto3perrateof 0to¼percentthroughoutthesecondhalf of centinthefourthquarter,boostedbyservicesand 2012andprovidedadditionalmonetaryaccommodathevolatileagriculturalsector. tionatitsSeptemberandDecembermeetings,by bothstrengtheningitsforwardguidanceregarding Despiteoccasionalspikesinfoodprices,inflationin thefederalfundsrateandinitiatingadditionalpurmostemergingAsianeconomiesremainedwellconchasesof longer-termsecurities.TheCommitteealso tainedasmoderateoutputgrowthlimitedbroader completedatyear-endthecontinuationof thepropricepressures.Indiawasanotableexception,with gramtoextendtheaveragematurityof itsholdings 12-monthinflationaround10percentinrecent of Treasurysecuritiesthatwasannouncedin months.InsomeLatinAmericaneconomies, June2012andcontinueditspolicyof reinvesting increasesinfoodpriceshadagreatereffectoninflaprincipalpaymentsfromitsholdingsof agencydebt tionthaninAsia,leadingto12-monthpriceincreases andagency-guaranteedmortgage-backedsecurities of around5½percentinBrazilandaround4¼per- (MBS)intoagencyMBS. centinMexicooverthesecondhalf of lastyear.

MonetaryPolicyandEconomicDevelopments 23 Box 2. Efficacy and Costs of Large-Scale Asset Purchases Inordertoprovideadditionalmonetarystimulus ancetheirportfolios,overallfinancialconditions whenshort-terminterestratesarenearzero,the shouldeasemoregenerally,stimulatingeconomic FederalReservehasundertakenaseriesoflarge- activitythroughchannelssimilartothoseforconvenscaleassetpurchase(LSAP)programs.Between tionalmonetarypolicy.Inaddition,assetpurchases late2008andearly2010,theFederalReservepur- couldalsosignalthatthecentralbankintendsto chasedapproximately$1.7trillioninlonger-term pursueamoreaccommodativepolicystancethan Treasurysecurities,agencydebt,andagency previouslythought,therebyloweringinvestorexpecmortgage-backedsecurities(MBS).Fromlate tationsaboutthefuturepathofthefederalfunds 2010tomid-2011,asecondroundofLSAPswas rateandputtingadditionaldownwardpressureon implemented,consistingofpurchasesof$600billion longer-termyields. inlonger-termTreasurysecurities.BetweenSeptem- Asubstantialbodyofempiricalresearchfindsthat ber2011andtheendof2012,theFederalReserve theFederalReserve’sassetpurchaseprograms implementedthematurityextensionprogramandits havesignificantlyloweredlonger-termTreasury continuation,underwhichitpurchasedapproxiyields.1Moreimportant,theeffectsofLSAPsdonot mately$700billioninlonger-termTreasurysecuritiesandsoldorallowedtorunoffanequalamount ofshorter-termTreasurysecurities.AndinSeptem- 1 Foraselectivelistofreferencesregardingtheeffectofthefirst berandDecember2012,theFederalReserve LSAP,seethebox“TheEffectsofFederalReserveAssetPurannouncedflow-basedpurchasesofagencyMBS chases”inBoardofGovernorsoftheFederalReserveSystem andlonger-termTreasurysecuritiesatinitialpaces (2011),MonetaryPolicyReporttotheCongress(Washington: BoardofGovernors,March),www.federalreserve.gov/ of$40billionand$45billionpermonth,respectively. monetarypolicy/mpr_20110301_part2.htm.Foradditionalreferences,includingthosethatanalyzetheeffectofthesecond Thesepurchaseswereundertakeninordertoput LSAPaswellasthematurityextensionprogram,see,for downwardpressureonlonger-terminterestrates, example,StefaniaD’Amico,WilliamEnglish,DavidLópezsupportmortgagemarkets,andhelptomake Salido,andEdwardNelson(2012),“TheFederalReserve’s broaderfinancialconditionsmoreaccommodative, Large-ScaleAssetPurchaseProgrammes:Rationaleand Effects,”EconomicJournal,vol.122(November),pp.F415–45; therebysupportingtheeconomicrecovery.One ArvindKrishnamurthyandAnnetteVissing-Jorgensen(2011), mechanismthroughwhichassetpurchasescan “TheEffectsofQuantitativeEasingonInterestRates:Channels affectfinancialconditionsisthe“portfoliobalance andImplicationsforPolicy,”BrookingsPapersonEconomic channel,”whichisbasedonthepremisethatdiffer- Activity,Fall,pp.215–65;CanlinLiandMinWei(2012),“Term StructureModellingwithSupplyFactorsandtheFederal entfinancialassetsmaybereasonablyclosebut Reserve’sLargeScaleAssetPurchasePrograms,”Financeand imperfectsubstitutesininvestors’portfolios.This EconomicsDiscussionSeries2012-37(Washington:Boardof assumptionimpliesthatchangesinthesuppliesof GovernorsoftheFederalReserveSystem,May),www variousassetsavailabletoprivateinvestorsmay .federalreserve.gov/pubs/feds/2012/201237/201237pap.pdf,and referencesinthosestudies.Forworkthatspecificallyemphaaffectthepricesoryieldsofthoseassetsandthe sizesthesignalingchannelofLSAPs,see,forexample,Michael pricesofassetsthatmaybereasonablyclosesub- D.BauerandGlennD.Rudebusch(2012),“TheSignalingChanstitutes.Asaresult,theFederalReserve’sasset nelforFederalReserveBondPurchases,”WorkingPaperSeries purchasescanpushupthepricesandlowerthe 2011-21(SanFrancisco:FederalReserveBankofSanFrancisco,August),www.frbsf.org/publications/economics/papers/ yieldsonthesecuritiespurchasedandinfluence 2011/wp11-21bk.pdf.Forworkthatfocusesontheeffectson otherassetpricesaswell.Asinvestorsfurtherrebal- creditdefaultrisk,see,forexample,SimonGilchristandEgon Zakrajšek(2012),“TheImpactoftheFederalReserve’sLarge- (continuedonnextpage) AttheSeptember12–13meeting,theCommittee gagemarkets,andhelpmakebroaderfinancialcondiagreedthattheoutlookcalledforadditionalmon- tionsmoreaccommodative(seebox2,“Efficacyand etaryaccommodation,andthatsuchaccommodation Costsof Large-ScaleAssetPurchases”).TheComshouldbeprovidedbybothstrengtheningitsforward mitteeagreedthatitwouldcloselymonitorincoming guidanceregardingthefederalfundsrateandinitiat- informationoneconomicandfinancialdevelopments ingadditionalpurchasesof agencyMBSatapaceof incomingmonths,andthatif theoutlookforthe $40billionpermonth.Alongwiththeongoingpur- labormarketdidnotimprovesubstantially,itwould chasesof $45billionpermonthof longer-term continueitspurchasesof agencyMBS,undertake Treasurysecuritiesunderthematurityextensionpro- additionalassetpurchases,andemployitsother gramannouncedinJune,thesepurchasesincreased policytoolsasappropriateuntilsuchimprovementis theCommittee’sholdingsof longer-termsecurities achievedinacontextof pricestability.TheCommitbyabout$85billioneachmonththroughtheendof teealsoagreedthatindeterminingthesize,pace,and theyear.Theseactionsweretakentoputdownward compositionof itsassetpurchases,itwould,as pressureonlonger-terminterestrates,supportmort- always,takeappropriateaccountof thelikelyefficacy

24 99thAnnualReport|2012 Box 2. Efficacy and Costs of Large-Scale Asset Purchases—continued seemtoberestrictedtoTreasuryyields.Inparticu- about1.5percentagepoints,relativetowhatwould lar,LSAPshavebeenfoundtobeassociatedwith havebeenexpectedotherwise.Thesesimulations significantdeclinesinMBSyieldsandcorporate alsosuggestthattheprogrammateriallyreduced bondyieldsaswellaswithincreasesinequity theriskofdeflation.2 prices. Ofcourse,allmodel-basedestimatesofthemacro- Whilethereseemstobesubstantialevidencethat economiceffectsofLSAPsaresubjecttoconsider- LSAPshaveloweredlonger-termyieldsandeased ablestatisticalandmodelinguncertaintyandthus broaderfinancialconditions,obtainingaccurateesti- shouldbetreatedwithcaution.Indeed,whilesome matesoftheeffectsofLSAPsonthemacro- otherstudiesalsoreportsignificantmacroeconomic economyisinherentlydifficult,asthecounterfactual effectsfromassetpurchases,otherresearchfinds case—howtheeconomywouldhaveperformed smallereffects.3Nonetheless,abalancedreadingof withoutLSAPs—cannotbedirectlyobserved.How- theevidencesupportstheconclusionthatLSAPs ever,econometricmodelscanbeusedtoestimate haveprovidedmeaningfulsupporttotheeconomic theeffectsofLSAPsontheeconomyunderthe recoverywhilemitigatingdeflationaryrisks. assumptionthattheeconomiceffectsoftheeasier financialconditionsthatareinducedbyLSAPsare 2 TheseresultsarediscussedfurtherinHessChung,Jeansimilartothosethatareinducedbyconventional PhilippeLaforte,DavidReifschneider,andJohnC.Williams monetarypolicyeasing.Modelsimulationscon- (2012),“HaveWeUnderestimatedtheLikelihoodandSeverityof ductedattheFederalReservehavegenerallyfound ZeroLowerBoundEvents?”JournalofMoney,CreditandBanking,vol.44(Februarysupplement),pp.47–82. thatassetpurchasesprovideasignificantboostto 3 Forstudiesreportingsignificantmacroeconomiceffectsfrom theeconomy.Forexample,astudybasedonthe assetpurchases,see,forexample,JeffreyC.FuhrerandGio- FederalReserveBoard’sFRB/USmodelestimated vanniP.Olivei(2011),“TheEstimatedMacroeconomicEffectsof that,asof2012,thefirsttworoundsofLSAPshad theFederalReserve’sLarge-ScaleTreasuryPurchaseProraisedrealgrossdomesticproductalmost3percent gram,”PublicPolicyBriefs11-02(Boston:FederalReserve BankofBoston,April),www.bos.frb.org/economic/ppb/2011/ andincreasedprivatepayrollemploymentbyabout ppb112.pdf;andChristianeBaumeisterandLucaBenati(2012), 3millionjobs,whileloweringtheunemploymentrate “UnconventionalMonetaryPolicyandtheGreatRecession:EstimatingtheMacroeconomicEffectsofaSpreadCompressionat ScaleAssetPurchaseProgramsonDefaultRisk,”paperpre- theZeroLowerBound,”WorkingPapers2012-21(Ottawa:Bank sentedat“MacroeconomicsandFinancialIntermediation:Direc- ofCanada,July),www.bankofcanada.ca/wp-content/uploads/ tionssincetheCrisis,”aconferenceheldattheNationalBankof 2012/07/wp2012-21.pdf.Also,theBankofEnglandhasimple- Belgium,Brussels,December9–10,2011.Althoughthemajority mentedLSAPssimilartothoseundertakenbytheFederal ofresearchontheeffectsofLSAPsappearstosupportasignifi- Reserve,anditsstaffresearchfindsthattheeffectsappearto cantinfluenceonassetprices,theoverallresultofsuchpro- bequantitativelysimilartothoseintheUnitedStates. gramsisgenerallydifficulttoestimateprecisely:Eventstudies Forstudiesreportingsmallereffectsfromassetpurchases,see, canmakeonlysharppredictionsontheeffectswithinarelatively forexample,MichaelT.Kiley(2012),“TheAggregateDemand shorttimehorizon,whereasapproachesbasedontime-series EffectsofShort-andLong-TermInterestRates,”Financeand modelstendtofacechallengesinisolatingtheeffectsofthepro- EconomicsDiscussionSeries2012-54(Washington:Boardof gramsfromothereconomicdevelopments.Foramoreskeptical GovernorsoftheFederalReserveSystem,August),www viewontheeffectofLSAPs,see,forexample,DanielL.Thorn- .federalreserve.gov/pubs/feds/2012/201254/201254pap.pdf;and ton(2012),“EvidenceonthePortfolioBalanceChannelofQuan- HanChen,VascoCurdia,andAndreaFerrero(2012),“TheMactitativeEasing,”WorkingPaperSeries2012-015A(St.Louis: roeconomicEffectsofLarge-ScaleAssetPurchasePro- FederalReserveBankofSt.Louis,October),http://research grammes,”EconomicJournal,vol.122(November), .stlouisfed.org/wp/2012/2012-015.pdf. pp.F289–315. andcostsof suchpurchases.Thisflexibleapproach teestateditsexpectationthatahighlyaccommodawasseenasallowingtheCommitteetotailorits tivestanceof monetarypolicywouldremainappropolicyovertimeinresponsetoincominginformation priateforaconsiderabletimeaftertheeconomic whileclarifyingitsintentiontoimprovelabormarket recoverystrengthens.Thenewlanguagewasmeantto conditions,therebyenhancingtheeffectivenessof the clarifythattheCommittee’santicipationthatexcepactionbyhelpingtobolsterbusinessandconsumer tionallylowlevelsforthefederalfundsratewere confidence. likelytobewarrantedatleastthroughmid-2015did notreflectanexpectationthattheeconomywould TheCommitteealsomodifieditsforwardguidance remainweak,butratherreflectedtheCommittee’s regardingthefederalfundsrateattheSeptember determinationtosupportastrongereconomic meeting,notingthatexceptionallylowlevelsforthe recovery. federalfundsratewerelikelytobewarrantedatleast throughmid-2015,longerthanhadbeenindicatedin AttheDecember11–12meeting,membersjudged previousFOMCstatements.Moreover,theCommit- thatcontinuedprovisionof monetaryaccommoda-

MonetaryPolicyandEconomicDevelopments 25 Box 2. Efficacy and Costs of Large-Scale Asset Purchases—continued ThepotentialbenefitsofLSAPsmustbeconsidered takingisanecessaryelementofahealthyeconomic alongsidetheirpossiblecosts.Onepotentialcostof recovery,andaccommodativemonetarypoliciconductingadditionalLSAPsisthattheoperations escouldevenservetoreducetheriskinthesystem couldleadtoadeteriorationinmarketfunctioningor bystrengtheningtheoveralleconomy.Nonetheless, liquidityinmarketswheretheFederalReserveis theFederalReservehassubstantiallyexpandedits engagedinpurchasing.Morespecifically,iftheFed- monitoringofthefinancialsystemandmodifiedits eralReservebecomestoodominantabuyerina supervisoryapproachtotakeamoresystemic certainmarket,tradingamongprivateparticipants perspective. coulddecreaseenoughthatmarketliquidityand Therehasbeenlimitedevidencesofarofexcessive pricediscoverybecomeimpaired.Astheglobal buildupsofduration,creditrisk,orleverage,butthe financialsystemreliesondeepandliquidmarkets FederalReservewillcontinuebothitscarefuloverforU.S.Treasurysecurities,significantimpairment sightanditsimplementationoffinancialregulatory ofthismarketwouldbeespeciallycostly;impairment reformsdesignedtoreducesystemicrisk.4 ofthismarketcouldalsoimpedethetransmissionof monetarypolicy.Althoughthelargevolumeofthe TheFederalReservehasremittedsubstantial FederalReserve’spurchasesrelativetothesizeof incometotheTreasuryfromitsearningsonsecurithemarketsforTreasuryoragencysecuritiescould ties,totalingsome$290billionsince2009.However, ultimatelybecomeanissue,fewifanyproblems iftheeconomycontinuestostrengthenandpolicy havebeenobservedinthosemarketsthusfar. accommodationiswithdrawn,remittanceswilllikely declineincomingyears.Indeed,insomescenarios, AsecondpotentialcostofLSAPsisthattheymay particularlyifinterestratesweretorisequickly, underminepublicconfidenceintheFederal remittancestotheTreasurycouldbequitelowfora Reserve’sabilitytoexitsmoothlyfromitsaccommotime.5Eveninsuchscenarios,however,average dativepoliciesattheappropriatetime.Sucha annualremittancesovertheperiodaffectedbythe reductioninconfidencemightincreasetheriskthat FederalReserve’spurchasesarehighlylikelytobe long-terminflationexpectationsbecomeunangreaterthanthepre-crisisnorm,perhapssubstanchored.TheFederalReserveiscertainlyawareof tiallyso.Moreover,ifmonetarypolicypromotesa theseconcernsandaccordinglyhasplacedgreat strongerrecovery,theassociatedreductioninthe emphasisondevelopingthenecessarytoolsto federaldeficitwouldfarexceedanyvariationinthe ensurethatpolicyaccommodationcanberemoved FederalReserve’sremittancestotheTreasury.That whenappropriate.Forexample,theFederal said,theFederalReserveconductsmonetarypolicy Reservewillbeabletoputupwardpressureon tomeetitscongressionallymandatedobjectivesof short-terminterestratesattheappropriatetimeby maximumemploymentandpricestabilityandnot raisingtheinterestrateitpaysonreserves,using primarilyforthepurposeofturningaprofitforthe drainingtoolslikereverserepurchaseagreementsor U.S.DepartmentoftheTreasury. termdepositswithdepositoryinstitutions,orselling securitiesfromtheFederalReserve’sportfolio.To date,theexpansionofthebalancesheetdoesnot 4 Foradditionaldetails,seethebox“TheFederalReserve’s appeartohavemateriallyaffectedlong-terminflation ActionstoFosterFinancialStability”onpage30oftheFebruexpectations. ary2013MonetaryPolicyReport. 5 Foradditionaldetails,seeSethB.Carpenter,JaneE.Ihrig, Athirdcosttobeweighedisthatofriskstofinancial ElizabethC.Klee,DanielW.Quinn,andAlexanderH.Boote stability.Forexample,someobservershaveraised (2013),“TheFederalReserve’sBalanceSheetandEarnings:A concernsthat,bydrivinglonger-termyieldslower, primerandprojections,”FinanceandEconomicsDiscussion Series2013-01(Washington:BoardofGovernorsoftheFederal nontraditionalpoliciescouldinduceimprudentrisk- ReserveSystem,January),www.federalreserve.gov/pubs/feds/ takingbysomeinvestors.Ofcourse,somerisk- 2013/201301/201301abs.html. tionwaswarrantedinordertosupportfurtherprog- January,itwouldresumerollingovermaturingTreasresstowardtheCommittee’sgoalsof maximum urysecuritiesatauction. employmentandpricestability.TheCommittee judgedthat,followingthecompletionof thematurity Withregardtoitsforwardrateguidance,theComextensionprogramattheendof theyear,such mitteedecidedtoindicateinthestatementthatit accommodationshouldbeprovidedinpartbycon- expectsthehighlyaccommodativestanceof montinuingtopurchaseagencyMBSatapaceof $40bil- etarypolicytoremainappropriateforaconsiderable lionpermonthandbypurchasinglonger-termTreas- timeaftertheassetpurchaseprogramendsandthe urysecuritiesatapaceinitiallysetat$45billionper economicrecoverystrengthens.Inaddition,it month.TheCommitteealsodecidedthat,startingin replacedthedate-basedguidanceforthefederal 39 444

26 99thAnnualReport|2012 fundsratewithnumericalthresholdslinkedtothe thattheCommitteewouldalsoconsiderotherinforunemploymentrateandprojectedinflation.Inpar- mationwhendetermininghowlongtomaintainthe ticular,theCommitteeindicatedthatitexpectedthat highlyaccommodativestanceof monetarypolicy, theexceptionallylowrangeforthefederalfundsrate includingadditionalmeasuresof labormarketcondiwouldbeappropriateatleastaslongastheunem- tions,indicatorsof inflationpressuresandinflation ploymentrateremainsabove6½percent,inflation expectations,andreadingsonfinancial betweenoneandtwoyearsaheadisprojectedtobe developments. nomorethan½percentagepointabovetheCommittee’s2percentlonger-rungoal,andlonger-term Attheconclusionof itsJanuary29–30meeting,the inflationexpectationscontinuetobewellanchored. Committeemadenochangestoitstargetrangefor Thesethresholdswereseenashelpingthepublicto thefederalfundsrate,itsassetpurchaseprogram,or morereadilyunderstandhowthelikelytimingof an itsforwardguidanceforthefederalfundsrate.The eventualincreaseinthefederalfundsratewouldshift Committeestatedthat,withappropriatepolicy inresponsetounanticipatedchangesineconomic accommodation,itexpectedthateconomicgrowth conditionsandtheoutlook.Accordingly,thresholds wouldproceedatamoderatepaceandtheunemploycouldincreasetheprobabilitythatmarketreactions mentratewouldgraduallydeclinetowardlevelsthe toeconomicdevelopmentswouldmovelonger-term Committeejudgesconsistentwithitsdualmandate. interestratesinamannerconsistentwiththeCom- Itnotedthatstrainsinglobalfinancialmarketshad mittee’sassessmentof thelikelyfuturepathof short- easedsomewhat,butthatitcontinuedtoseedownterminterestrates.TheCommitteeindicatedinits sideriskstotheeconomicoutlook.TheCommittee Decemberstatementthatitviewedtheeconomic continuedtoanticipatethatinflationoverthe thresholds,atleastinitially,asconsistentwithitsear- mediumtermlikelywouldrunatorbelowits2perlier,date-basedguidance.Thenewlanguagenoted centobjective.

MonetaryPolicyandEconomicDevelopments 27 Monetary Policy Report of July 2012 withintheeuroareaincreasedagaininthespringas politicaluncertaintiesrekindledfearsof adisorderly Greekexitfromtheeuroareaandmountinglossesat Part 1 Spanishbanksrenewedquestionsaboutthesustain- Overview: Monetary Policy abilityof Spain’ssovereigndebtandtheresiliencyof and the Economic Outlook theeuro-areabankingsystem.Asyieldsonthegovernmentdebtof SpainandothervulnerableEuro- Thepaceof economicrecoveryappearstohave peancountriesrosetowardnewhighs,euro-area slowedduringthefirsthalf of thisyear,withreal leadersrespondedwithadditionalpolicymeasuresin grossdomesticproduct(GDP)likelyhavingrisenat lateJune,includingincreasingtheflexibilityof the onlyamodestpace.Inthelabormarket,therateof region’sfinancialbackstopsandmakingprogress jobgainshasdiminishedrecently,and,followinga towardgreatercooperationinthesupervisionand,as periodof improvement,theunemploymentratehas necessary,recapitalizationof Europe’sbanks.Many beenlittlechangedatanelevatedlevelsinceJanuary. criticaldetails,however,remaintobeworkedout Meanwhile,consumerpriceinflationoverthefirst againstabackdropof continuedeconomicweakness fivemonthsof 2012waslower,onnet,thanin2011, andpoliticalstrain. andlonger-terminflationexpectationshaveremained stable.Anumberof factorswilllikelyrestraineco- Financialmarketsweresomewhatvolatileoverthe nomicgrowthintheperiodahead,includingweak firsthalf of 2012mostlyduetofluctuatingviews economicgrowthabroadandafiscalenvironment regardingthecrisisintheeuroareaandthelikely thatlookssettobecomelessaccommodative.Uncer- paceof economicgrowthathomeandabroad.As taintyaboutthesefactorsmayalsorestrainhouse- investors’concernsaboutthesituationinEurope holdandbusinessspending.Inaddition,creditcon- easedearlyintheyearandwithdatareleasesgenerditionsarelikelytoimproveonlygradually,asare allycomingintotheupsideof marketexpectations, still-elevatedinventoriesof vacantandforeclosed broadequitypriceindexesroseandriskspreadsin homes.Moreover,thepossibilityof afurthermaterial severalmarketsnarrowed.Subsequently,however, deteriorationof conditionsinEurope,orof apar- marketparticipantspulledbackfromriskierassets ticularlyseverechangeinU.S.fiscalconditions,poses amidrenewedconcernsabouttheeuroareaandevisignificantdownsideriskstotheoutlook. denceof slowingglobaleconomicgrowth.Reflecting thesedevelopmentsbutalsoowingtothelengthening Againstthisbackdrop,theFederalOpenMarket of theforwardrateguidance,continuationof the Committee(FOMC)tookstepstoprovideadditional MEP,andincreasedexpectationsbymarketparticimonetarypolicyaccommodationduringthefirsthalf pantsof additionalbalancesheetactionsbytheFedof 2012.Inparticular,theCommitteechangedits eralReserve,yieldsonlonger-termTreasurysecuriforwardguidanceregardingtheperiodoverwhichit tiesandcorporatedebtaswellasratesonresidential anticipatesthefederalfundsratetoremainatexcep- mortgagesdeclined,onnet,andreachedhistorically tionallylowlevelsandannouncedacontinuationof lowlevelsattimesduringthefirsthalf of theyear. itsmaturityextensionprogram(MEP)throughthe Onbalancesincethebeginningof theyear,broad endof theyear.Thesepoliciesputdownwardpres- equitypricesroseascorporateearningsremained sureonlonger-terminterestratesandmadebroad fairlyresilientthroughthefirstquarter. financialconditionsmoreaccommodativethanthey wouldotherwisebe,therebysupportingtheeconomic Afterrisingatanannualrateof 2½percentinthe recovery. secondhalf of 2011,realGDPincreasedata2percentpaceinthefirstquarterof 2012,andavailable TheEuropeanfiscalandbankingcrisishasremained indicatorspointtoastillsmallergaininthesecond amajorsourceof strainonglobalfinancialmarkets. quarter.Privatespendingcontinuestobeweighed Earlyintheyear,financialstresseswithintheeuro downbyarangeof factors,includinguncertainty areamoderatedsomewhatinlightof anumberof aboutdevelopmentsinEuropeandthepathforU.S. policyactions:TheEuropeanCentralBank(ECB) fiscalpolicy,concernsaboutthestrengthandsustainprovidedampleliquiditytotheregion’sbanks,euro- abilityof therecovery,thestill-anemicstateof the arealeadersagreedtoincreasethelendingcapacity housingmarket,andthedifficultiesthatmany of theirrescuefacilities,andanewassistancepack- would-beborrowerscontinuetohaveinobtaining ageforGreecewasapprovedfollowingarestructur- credit.Suchconsiderationshavemadesomebusiingof Greeksovereigndebt.However,tensions nessesmorecautiousaboutincreasinginvestmentor

28 99thAnnualReport|2012 materiallyexpandingtheirpayrollsandhaveled Inthehouseholdsector,creditconditionshavegenerhouseholdstoremainquitepessimisticabouttheir allyremainedtightforallbuthighlyratedborrowers; incomeandemploymentprospects.Smoothing amongotherfactors,thistightnessreflectstheuncerthroughtheeffectsof unseasonablywarmweather taineconomicoutlookandthehighunemployment thispastwinter,activityinthehousingsectorappears rate.Totalmortgagedebtdecreasedfurtherasthe tohavebeenalittlestrongersofarthisyear.How- paceof mortgageapplicationstopurchaseanew ever,thelevelof housingactivityremainslowand homewassluggish.Refinancingactivityincreased continuestobehelddownbytightmortgagecredit. overthecourseof thesecondquarterbutremained Meanwhile,thedragonrealGDPgrowthfromgov- belowlevelsreachedinpreviousrefinancingbooms ernmentpurchasesislikelytopersist,asbudgetsfor despitehistoricallylowmortgageinterestrates.The stateandlocalgovernmentsremainstrainedandfed- increaseinrefinancingwaspartiallyattributableto eralfiscalpolicyislikelytobecomemorerestrictive recentenhancementsmadetotheHomeAffordable in2013. RefinanceProgramthatappearedtoboostrefinancingactivitysomewhatforborrowerswithunderwater Inthelabormarket,gainsinprivatepayrollemploy- mortgages—thatis,forthosewhoowedmoreon mentaveraged225,000jobspermonthinthefirst theirmortgagesthantheirhomeswereworth.Conquarter,upfrom165,000jobspermonthinthesec- sumercreditexpandedmoderatelymainlybecauseof ondhalf of lastyear,butfellbackinthesecond growthinfederalstudentloans. quartertojust90,000jobspermonth.Althoughthe slowinginthepaceof netjobcreationmayhavebeen Firmsinthenonfinancialcorporatesectorcontinued exaggeratedbyissuesrelatedtoswingsintheweather toraisefundsatagenerallymoderatepaceinthefirst andtoseasonaladjustmentdifficultiesassociated half of theyear.Thosewithaccesstocapitalmarkets withthetimingof thesharpestjoblossesduringthe tookadvantageof lowinterestratestorefinance recession,thosefactorsdonotappeartofully existingdebt.Asaresult,corporatedebtissuance accountfortheslowdown.Theunemploymentrate wassolidoverthefirstpartof theyear,although declinedfromabout9percentlastsummertoastill- issuanceof speculative-gradecorporatebondsweakelevated8¼percentinJanuary,andithasremained enednotablyinJuneasinvestorspulledbackfrom closetothatlevelsincethen.Likewise,long-termjob- riskierassets.Commercialandindustrialloansonthe lessnesshasshownlittlenetimprovementthisyear, booksof banksexpandedbriskly,butborrowing withtheshareof thoseunemployedpersonswho conditionsforsmallbusinesseshaveimprovedmore havebeenjoblessforsixmonthsorlongerremaining slowlythanhavethoseforlargerfirms.Financing around40percent.Furthermeaningfulreductionsin conditionsforcommercialrealestatestayedrelatively unemploymentarelikelytorequiresomepickupin restrictive,andfundamentalsinthatsectorshowed thepaceof economicactivity. fewsignsof improvement. Consumerpriceinflationmoveddown,onnet,dur- Marketsentimenttowardmajorglobalbanksfluctuingthefirsthalf of theyear.Thepriceindexforover- atedinthefirsthalf of 2012.InMarch,thereleaseof allpersonalconsumptionexpenditures(PCE)rose theresultsfromtheComprehensiveCapitalAnalysis rapidlyinthefirstthreemonthsof theyear,reflect- andReview,whichinvestorsinterpretedasindicating inglargeincreasesinoilprices,butinflationturned continuedimprovementsinthehealthof domestic downinthespringwhenoilpricesmorethan banks,providedasignificantboosttotheequity reversedtheirearlierrun-ups.Inall,thePCEprice pricesof U.S.financialinstitutions.Thosegainsparindexincreasedatanannualrateof about1½per- tiallyreversedwhenmarketsentimentworsenedin centoverthefirstfivemonthsof theyear,compared May,driveninlargepartbyconcernsaboutEurope withariseof 2½percentduring2011.Excluding andpotentialspilloverstotheUnitedStatesandits foodandenergy,consumerpricesroseatabouta financialinstitutions.Onbalance,however,equity 2percentrateoverthefirstfivemonthsof theyear, pricesof banksrosesignificantlyfromrelativelylow closetothepacerecordedover2011.Inadditionto levelsatthestartof theyear.Anindexof credit thenetdeclineincrudeoilpricesoverthefirsthalf of defaultswapspreadsforthelargebankholdingcomtheyear,factorscontributingtolowconsumerprice paniesdeclinedabout60basispoints,butthose inflationthisyearincludethedecelerationof non-oil spreadsremainedatahighlevel.Despitetheswings importpricesinthelatterpartof 2011,subdued inmarketsentimentaboutglobalbankingorganizalaborcostsassociatedwiththeweaklabormarket, tions,conditionsinunsecuredshort-termdollar andstableinflationexpectations. fundingmarketswerefairlystableinthefirsthalf of

MonetaryPolicyandEconomicDevelopments 29 2012.Europeanfinancialinstitutionshavereduced both2013and2014;theseprojectionsarelower,partheirdemandfordollarfundingoverrecentquarters, ticularlyin2012,thanparticipantsreportedinJanuandgeneralfundingpressuresapparentlywereallevi- aryandApril,inpartreflectingtheeffectsof the atedbytheECB’slonger-termrefinancing recentdropincrudeoilprices. operations. Withtheunemploymentrateexpectedtoremain WiththeCommitteeanticipatingonlyslowprogress elevatedovertheprojectionperiodandinflationgeninbringingunemploymentdowntowardlevelsthatit erallyexpectedtobeatorundertheCommittee’s judgestobeconsistentwithitsdualmandateand 2percentobjective,mostparticipantsexpectedthat, strainsinglobalfinancialmarketscontinuingtopose undertheirindividualassessmentsof appropriate significantdownsideriskstotheeconomicoutlook, monetarypolicy,thefederalfundsratewouldremain theFOMCtookadditionalstepstoaugmentthe extraordinarilylowforsometime.Inparticular,11of alreadyhighlyaccommodativestanceformonetary the19participantsplacedthetargetfederalfunds policyduringthefirsthalf of 2012.InJanuary,the rateat0.75percentorlowerattheendof 2014;only Committeemodifieditsforwardrateguidance,not- 4of themsawtheappropriaterateat2percentor ingthateconomicconditionswerelikelytowarrant higher.Allparticipantsreportedlevelsfortheapproexceptionallylowlevelsforthefederalfundsrateat priatetargetfederalfundsrateattheendof 2014that leastthroughlate2014.AndinJune,theFOMC werewellbelowtheirestimatesof thelevelexpected decidedtocontinuetheMEPuntiltheendof the toprevailinthelongerrun.Inadditiontoprojecting yearratherthancompletingtheprogramattheend onlyslowprogressinbringingdownunemployment, of Juneaspreviouslyscheduled. mostparticipantssawtheriskstotheoutlookas weightedmainlytowardslowergrowthandhigher TheJuneSummaryof EconomicProjectionsispre- unemployment.Inparticular,participantsnotedthat sentedinPart4of theJuly2012MonetaryPolicy strainsinglobalfinancialmarkets,theprospectof Reportonpages43–55(itisalsoincludedinthe reducedfiscalaccommodationintheUnitedStates, “Minutes”sectionof thisannualreportonpage203). andageneralslowdowninglobaleconomicgrowth Atthetimeof theCommittee’sJunemeeting, posedsignificantriskstotherecoveryandtoafur- FOMCparticipants(the7membersof theBoardof therimprovementinlabormarketconditions. Governorsandthepresidentsof the12Federal ReserveBanks)sawtheeconomyexpandingata Part 2 moderatepaceovercomingquartersandthenpick- Recent Economic ingupgraduallyundertheassumptionof appropri- and Financial Developments atemonetarypolicy.Mostparticipantsmarkeddown theirprojectionsforeconomicgrowthin2012and Economicactivityappearstohaveexpandedata 2013relativetowhattheyanticipatedinJanuaryand somewhatslowerpaceoverthefirsthalf of 2012than Aprillargelyasaresultof theadversedevelopments inthesecondhalf of 2011.Afterrisingatanannual inEuropeandtheassociatedeffectsonfinancialmar- rateof 2½percentinthesecondhalf of 2011,real kets.Moreover,headwindsfromthefiscalandfinan- grossdomesticproduct(GDP)increasedata2percialsituationinEurope,fromthestill-depressed centpaceinthefirstquarterof 2012,andavailable housingmarket,andfromtightcreditforsomebor- indicatorspointtoastillsmallergaininthesecond rowerswerecitedaslikelytoholdbackthepaceof quarter.Animportantfactorinfluencingeconomic economicexpansionovertheforecastperiod. andfinancialdevelopmentsthisyearistheunfolding fiscalandbankingcrisisinEurope.Indeed,theeco- FOMCparticipantsalsoprojectedslowerprogressin nomicoutlookforthesecondhalf of 2012depends reducingunemploymentthantheyhadanticipatedin cruciallyontheextenttowhichcurrentandpotential JanuaryandApril.Committeeparticipants’projec- disruptionsinEuropedirectlyreduceU.S.net tionsfortheunemploymentratehadacentralten- exportsandindirectlycurtailprivatedomesticspenddencyof 8.0to8.2percentinthefourthquarterof ingthroughadversespillovereffectsonU.S.financial thisyearandthendeclinedto7.0to7.7percentat marketsandinstitutionsandonhouseholdandbusitheendof 2014;thoselevelsarestillgenerallywell nessconfidence.Atthesametime,theeconomyconaboveparticipants’estimatesof thelonger-runnor- tinuestofaceotherheadwinds,includingrestricted malrateof unemployment.Meanwhile,participants’ accesstosometypesof householdandsmallbusiness projectionsforinflationhadacentraltendencyof credit,astillsizableinventoryof vacanthomes,and 1.2to1.7percentfor2012and1.5to2.0percentfor less-accommodativefiscalpolicy.

30 99thAnnualReport|2012 Thelabormarketremainsweak.Privatepayroll inconsumerspendingoverthefirsthalf of theyear employmentsteppedupearlyintheyearbutthen occurredagainstthebackdropof theconsiderable slowedinthesecondquarter(thoughthosemoves economicchallengesstillfacingmanyhouseholds, mayhavebeenexaggeratedbyissuesrelatedtoswings includinghighunemployment,sluggishgainsin intheweatherandtoseasonaladjustment),andthe employment,tepidgrowthinincome,still-stressed unemploymentratehoveredaround8¼percentafter balancedsheets,tightaccesstosometypesof credit, asignificantdecreaseoverthelattermonthsof 2011 andlingeringpessimismaboutjobandincomeprosandinJanuary.Meanwhile,consumerpriceinflation, pects.Withincreasesinspendingoutpacinggrowth inpartbuffetedbysharpswingsinthepriceof gaso- inincomesofarthisyear,thepersonalsavingrate line,steppedupearlyintheyearbutsubsequently continuedtodecline,onnet,thoughitremainedwell turneddown,andlonger-terminflationexpectations abovelevelsthatprevailedbeforetherecession. remainedstable. Aggregaterealdisposablepersonalincome(DPI)— Financialmarketsweresomewhatvolatileoverthe personalincomelesspersonaltaxes,adjustedfor firsthalf of 2012mostlyduetofluctuatingviews changesinprices—rosemorerapidlyoverthefirst regardingthecrisisintheeuroareaandthelikely fivemonthsof theyearthanitdidin2011,inpart paceof economicgrowthathomeandabroad.Yields becauseof decliningenergyprices.Thewageandsalonlonger-termTreasurysecuritieshavedeclinedsig- arycomponentof realDPI,whichreflectsboththe nificantly,reflectinggreatermonetarypolicyaccom- numberof hoursworkedandaveragehourlywages modation,theweakeroutlook,andsafe-havenflows. adjustedforinflation,roseatanannualrateof nearly Broadindexesof U.S.equitypricesrose,onnet,risk 1¼percentthroughMayof thisyearafterhaving spreadsoncorporatebondsweregenerally increasedatasimilarpacein2011.Theincreasein unchangedorslightlylower,andunsecuredshort- realwageandsalaryincomesofarin2012islargely termdollarfundingmarketswerefairlystable.Debt attributabletothemodestimprovementinemployissuancebyU.S.corporationswassolid,andbank mentandhoursworked;realaveragehourlyearnings lendingtolargerfirmswasbrisk.Inthehousehold arelittlechangedthusfarthisyear. sector,consumercreditexpandedandmortgagerefinancingactivityincreasedmodestly,reflectingthe Theratioof householdnetworthtoincome,inthe declineinmortgageratestohistoricallylowlevelsas aggregate,movedupslightlyfurtherinthefirstquarwellasrecentchangestotheHomeAffordableRefi- ter,reflectingincreasesinbothhousepricesand nanceProgram(HARP). equityprices.Takingalongerview,thisratiohas beenonaslowupwardtrendsince2009,andwhileit DomesticDevelopments remainsfarbelowlevelsseenintheyearsleadingup totherecession,itisaboutequaltoitsaverageover TheHouseholdSector thepast20years.Household-leveldatathrough2010 indicatethatwealthlosseswereproportionately ConsumerSpendingandHouseholdFinance largerforthemiddleportionof thewealthdistribu- Afterrisingatanannualrateof about2percentin tion—notasurprisingresult,giventherelative thesecondhalf of 2011,realpersonalconsumption importanceof housingamongtheassetsof those expenditures(PCE)increased2½percentinthefirst households.Meanwhile,indicatorsof consumersenquarter,butavailableinformationsuggeststhatreal timentareabovetheirlowsfromlastsummerbut PCEdeceleratedsomeinthesecondquarter.The haveyettoreturntopre-recessionlevels. first-quarterincreaseinspendingoccurredacrossa broadarrayof goodsandserviceswiththenotable Householddebt—thesumof mortgageandconexceptionof outlaysforenergyservices,whichwere sumerdebt—edgeddownagaininthefirstquarterof helddownbyreduceddemandforheatingbecauseof 2012asthecontinuedcontractioninmortgagedebt theunseasonablywarmwinter.Spendingonenergy wasalmostoffsetbysolidexpansioninconsumer servicesappearstohavereboundedinthesecond credit.Withthereductioninhouseholddebt,low quarterasthetemperatewintergavewaytoarela- levelof mostinterestrates,andmodestgrowthof tivelymoretypicalspring.Incontrast,thepaceof income,thedebt-serviceratio—theaggregate motorvehiclesalesedgeddowninthesecondquar- requiredprincipalandinterestpaymentsonexisting ter,andreportsonretailsalessuggestthatconsumer householddebtrelativetoincome—decreasedfuroutlaysonawiderangeof itemsroselessrapidly ther,and,attheendof thefirstquarter,itstoodata thantheydidinthefirstquarter.Themoderaterise levellastseenin1994.

MonetaryPolicyandEconomicDevelopments 31 Consumercreditexpandedatanannualrateof about Issuanceof consumerasset-backedsecurities(ABS) 6¼percentinthefirstfivemonthsof 2012,drivenby inthefirsthalf of 2012exceededissuanceforthe anincreaseinnonrevolvingcredit.Thiscomponent sameperiodin2011butwasstillbelowpre-crisislevaccountsforabouttwo-thirdsof totalconsumer els.Issuancesof securitiesbackedbyautoloans creditandprimarilyconsistsof autoandstudent dominatedthemarketformostof thefirsthalf,while loans.Theriseinnonrevolvingcreditsofarthisyear studentloanABSissuancewasaboutthesameasin wasprimarilyduetothestrengthinstudentloans, thepasttwoyears.Incontrast,issuanceof credit whichwerealmostentirelyoriginatedandfundedby cardABSremainedweakformostof thefirsthalf of thefederalgovernment.Meanwhile,autoloansmain- 2012asgrowthof creditcardloanscontinuedtobe tainedasteadypaceof increase.Revolvingconsumer somewhatsubduedandmostmajorbankshavechocredit(primarilycreditcardlending)remainedmuch sentofundsuchloansontheirbalancesheets.Yields moresubduedinthefirstfivemonthsof theyearin onABSandtheirspreadsovercomparable-maturity partbecausenonprimeborrowerscontinuedtoface swaprateswerelittlechanged,onnet,overthefirst tightunderwritingstandards.Overall,theincreasein half of 2012andheldsteadyinthelowrangesthat consumercreditisconsistentwithrecentresponsesto haveprevailedsinceearly2010. theSeniorLoanOfficerOpinionSurveyonBank LendingPractices(SLOOS)indicatingthatdemand HousingActivityandHousingFinance hadstrengthenedandstandardshadeased,onnet, Activityinthehousingsectorappearstobeona forallconsumerloancategories.1 gradualuptrend,albeitfromaverydepressedlevel. Salesof newandexistinghomeshaverisensofarthis Interestratesonconsumerloansgenerallyedged year,likelysupportedbythelowlevelof houseprices downinthefirsthalf of 2012,andspreadsonthese andbylowinterestratesforconventionalmortgages. loansrelativetoTreasurysecuritiesof comparable Nonetheless,thefactorsthathaverestraineddemand maturityheldfairlysteady.Inparticular,interest forowner-occupiedhousinginrecentyearshaveyet ratesonnewautoloanscontinuedtobequitelow. todissipate.Manypotentialbuyersarereluctantto However,thespreadof ratesoncreditcardloans purchasehomesbecauseof ongoingconcernsabout relativetothetwo-yearTreasuryyieldhasremained futureincome,employment,andthedirectionof widesincetheendof 2008inpartbecauseof pricing houseprices.Inaddition,tightmortgagefinance adjustmentsmadeinresponsetoprovisionsincluded conditionsprecludemanyborrowersfromobtaining intheCreditCardAccountabilityResponsibilityand mortgagecredit.Muchof thehomepurchase DisclosureActof 2009.2 demandthatdoesexisthasbeenchanneledtothe abundantstockof vacanthouses,therebylimiting Aggregateindicatorsof consumercreditquality theresponseof newconstructionactivitytosuch improvedfurtherinthefirstquarterof 2012.The expansionof demandashasoccurred.Giventhe delinquencyrateoncreditcardloansregisteredits largenumbersof propertiesstillin,oratriskof lowestlevelsincetheseriesbeganin1991.Therecent beingin,foreclosure,thisoverhangseemslikelyto improvementimportantlyreflectsanongoingcom- continuetoweighonnewconstructionactivityfor positionalshiftintotalcreditcardbalancestoward sometime. borrowerswithhighercreditscores,dueinpartto tighterlendingstandards.Charge-offsoncreditcard Despitethesefactors,housingstartshaverisen loansalsodeclined,reachinglevelslastseenatthe graduallysofarthisyear.FromJanuarytoMay, endof 2007.Delinquenciesandcharge-offsonnon- single-familyhouseswerestartedatanannualrateof revolvingconsumerloansatcommercialbanksalso about495,000units,upfrom450,000inthesecond edgedlower,tolevelsslightlybelowtheirhistorical half of 2011butlessthanhalf of theaveragepaceof averages.Inaddition,thedelinquencyrateonauto thepast50years.Althoughtheunseasonablywarm loansatfinancecompaniesdecreasedslightlytoa wintermayhavecontributedtotheincrease,the levelthatisnearthemiddleof itshistoricalrange. underlyingpaceof activitylikelyrosesomeaswell. Indeed,dataonsingle-familypermitissuance,which islesslikelytobeaffectedbyweather,alsomovedup alittlefromitslevellatelastyear.Inthemultifamily 1 TheSLOOSisavailableontheFederalReserveBoard’swebsite sector,demandhasremainedrobust,asmanyindiatwww.federalreserve.gov/boarddocs/SnLoanSurvey. vidualsandfamiliesthatareunableorunwillingto 2 Theactincludessomeprovisionsthatplacerestrictionsonissupurchasehomeshavesoughtoutrentalunits.Asa ers’abilitytoimposecertainfeesandtoengageinrisk-based pricing. result,thevacancyrateforrentalhousinghasfallen

32 99thAnnualReport|2012 toitslowestlevelsince2002,puttingupwardpressure of more-recentoriginations.Additionally,measures onrentsandspurringnewconstruction.Overthe of late-stagemortgagedelinquency,suchasthe firstfivemonthsof theyear,newmultifamilyproj- inventoryof propertiesinforeclosure,continuedto ectswerestartedatanaverageannualrateof about lingernearthepeakinthefirstquarterof 2012. 225,000units,upfromabout200,000inthesecond half of 2011butstillbelowthe300,000-unitratethat Grossissuanceof MBSguaranteedbyGSEs prevailedformuchof thepreviousdecade. remainedmoderateinthefirsthalf of 2012,consistentwiththeslowpaceof mortgageoriginations.In Houseprices,asmeasuredbyseveralnational contrast,thesecuritizationmarketformortgage indexes,turnedupinrecentmonthsafteredging loansnotguaranteedbyahousing-relatedGSEor downfurther,onbalance,in2011.Forexample,the theFederalHousingAdministration—animportant CoreLogicrepeat-salesindexrose4percent(notan sourceof fundingbeforethecrisisforprime-grade annualrate)overthefirstfivemonthsof theyear. mortgagesthatexceededtheconformingloansize Thisrecentimprovementnotwithstanding,thismeas- limit—continuedtobeessentiallyclosed. ureof housepricesremains30percentbelowitspeak in2006.Thesamefactorsthatarerestrainingsingle- TheBusinessSector familyhousingconstructionalsocontinuetoweigh FixedInvestment onhouseprices,includingthelargeinventoryof vacanthomes,tightmortgagecreditconditions,and Realbusinessspendingforequipmentandsoftware lacklusterdemand. (E&S)roseatanannualrateof 3½percentinthe firstquarterof 2012afterhavingrisenatadouble- Mortgageratesdeclinedtohistoricallylowlevelsdur- digitpace,onaverage,inthesecondhalf of 2011. ingthefirsthalf of 2012.Whilesignificant,thedrop TheslowdowninE&Sinvestmentgrowthinthefirst inmortgageratesgenerallydidnotkeeppacewith quarterwasfairlywidespreadacrosscategoriesof thedeclinesintheyieldsonTreasuryandmortgage- equipmentandsoftware.ThisdecelerationinE&S backedsecurities(MBS),probablyreflectingstill- spendingalongwiththerecentsofteninginindicators elevatedriskaversionandsomecapacityconstraints of investmentdemand,suchassurveysof business amongmortgageoriginators.Despitethedropin sentimentandcapitalspendingplans,maysignal mortgagerates,manypotentiallycreditworthybor- somerenewedcautiononthepartof businesses,perrowershavehaddifficultyobtainingmortgagesor hapsrelatedtothesituationinEurope. refinancingbecauseof tightstandardsandterms(see thebox“TheSupplyof MortgageCredit”on Afterpostingrobustgainsthroughoutmuchof 2011, pages10–11of theJuly2012MonetaryPolicy investmentinnonresidentialstructuresedgedupin Report).Anotherfactorimpedingtheabilityof many thefirstquarterof thisyear.Adropinoutlaysfor borrowerstorefinance,ortoselltheirhomeandpur- drillingandminingstructureswasprobablyrelatedto chaseanewone,hasbeentheprevalenceof under- thelowlevelof naturalgasprices.Outsideof the watermortgages.Overall,refinancingactivity drillingandminingsegments,investmentincreasedat increasedinthesecondquarterbutwasstilllessthan anannualrateof 7percentinthefirstquarter, mightbeexpected,giventhelevelof interestrates, broadlysimilartoitsgaininthefourthquarterof andthepaceof mortgageapplicationsforhomepur- 2011.Althoughfinancingconditionsforexisting chasesremainedsluggish.However,refinancing propertieshaveeasedsome,theyremaintight;moreactivityattributedtorecentchangestotheHARP— over,highvacancyrates,lowcommercialrealestate oneof whicheliminatedcapsonloan-to-valueratios prices,anddifficultfinancingconditionsfornewconforthosewhowererefinancingmortgagesalready structionwilllikelyweighonbuildingactivityforthe ownedbygovernment-sponsoredenterprises foreseeablefuture. (GSEs)—haspickedupoverthefirsthalf of theyear. InventoryInvestment Indicatorsof creditqualityintheresidentialmort- Firmsaccumulatedinventoriesinthefirstquarterat gagesectorcontinuedtoreflectstrainsonhomeown- aboutthesamepaceasinthefourthquarterof last ersconfrontingdepressedhomevaluesandhigh year.Motorvehicleinventoriessurgedinthefirst unemployment.Thefractionof currentprimemort- quarter,asautomakersrebuiltdealers’inventoriesto gagesbecomingdelinquentremainedatahighlevel comfortablelevelsafternaturaldisastersdisrupted butinchedlower,onnet,overthefirstfivemonthsof globalsupplychainsin2011.Stockbuildingoutside theyear,likelyreflectinginpartstricterunderwriting of motorvehiclesmoderatedsomewhatfromthe

MonetaryPolicyandEconomicDevelopments 33 fourth-quarterpaceof accumulation.Inventory-to- C&IloansoutstandingatcommercialbankingorgasalesratiosformostindustriescoveredbytheCensus nizationsintheUnitedStatesexpandedatabrisk Bureau’sbook-valuedata,aswellassurveysof pri- paceinthefirsthalf of 2012despitedeclinesinthe vateinventorysatisfactionandplans,generallysug- holdingsof suchloansbyU.S.branchesandagencies gestthatstocksarefairlywellalignedwiththepace of Europeaninstitutions.Thestrengthisconsistent of sales. witharelativelylargenumberof banks,onbalance, thathavereportedstrongerdemandforC&Iloansin CorporateProfitsandBusinessFinance therecentSLOOS.Moreover,intheAprilSLOOS, AggregateoperatingearningspershareforS&P500 bankscontinuedtoreporthavingeasedbothprice firmsroseabout7percentataseasonallyadjusted andnonpricetermsforC&Iloans,largelyinresponse quarterlyrateinthefirstquarterof 2012.Financial tostrongcompetitionfromotherbanksandnonfirmsaccountedformostof thegain,whileprofits banklenders.Theextentof easinggenerallyhasbeen forfirmsinthenonfinancialsectorwereabout greaterforlargeandmiddle-marketfirms.Thatsaid, unchangedfromthehighlevelseeninthefourth accordingtotheSurveyof Termsof BusinessLendquarterof lastyear.Asof theendof June,private- ing(STBL),spreadsonC&Iloansoverbanks’cost sectoranalystsprojectedmoderateearningsgrowth of funds,whilecontinuingtotrenddowngraduallyin throughtheendof theyear. theFebruaryandMaysurveys,arestillquitehighin historicalterms.Spreadsonnewlyissuedsyndicated Theratioof corporateprofitstogrossnationalprod- loanshavealsoremainedsomewhatwide. uctinthefirstquarterof 2012hoveredaroundits historicalhigh,andcashflowremainedsolid.In Borrowingconditionsforsmallbusinessesgenerally addition,theratioof liquidassetstototalassetscon- haveimprovedoverthepastfewyearsbuthavedone tinuedtobenearitshighestlevelinmorethan somuchmoregraduallythanhaveconditionsfor 20years,andtheshareof corporatecashflowneeded largerfirms;moreover,thedemandforcreditfrom tocoverinterestexpensesremainedlow.Againstthis smallfirmsapparentlyremainssubdued.C&Iloans backdropof generallystrongcorporateearningsand withoriginalamountsof $1millionorless—alarge balancesheets,creditratingupgradescontinuedto shareof whichlikelyconsistsof loanstosmallbusioutpacedowngradesfornonfinancialcorporations, nesses—wereaboutunchangedinthefirstquarter.3 andthebonddefaultratefornonfinancialfirms Accordingtoresultsfromsurveysconductedbythe remainedlowinthefirsthalf of theyear.Thedelin- NationalFederationof IndependentBusinessduring quencyrateoncommercialandindustrial(C&I) thefirsthalf of thisyear,thefractionof firmswith loansdecreasedfurtherinthefirstquarterand borrowingneedsstayedlow.Thenetpercentageof approachedthelowerendof itshistoricalrange. respondentsthatfoundcreditmoredifficulttoobtain thanthreemonthsearlierandthatexpectedtighter Withcorporatecreditqualityremainingrobust,non- creditconditionsoverthenextthreemonthshave financialfirmswereabletocontinuetoraisefundsat bothdeclined,buttheyremainedatrelativelyhigh agenerallystrongpaceinthefirsthalf of theyear.So levelsintheJunesurvey.Inaddition,recentreadings farthisyear,nonfinancialcommercialpaper(CP) fromtheSTBLindicatethatthespreadschargedby outstandingwasaboutunchanged.Bondissuanceby commercialbanksonnewlyoriginatedC&Iloans bothinvestment-andspeculative-gradenonfinancial withoriginalamountslessthan$1millionremained firmswasstrongoverthefirstfourmonthsof the quitehigh,evenonloanswiththestrongestcredit year,butspeculative-gradeissuanceweakenedsome ratings. inMayandnotablyfurtherinJune.Theinstitutional Financialconditionsinthecommercialrealestate segmentof thesyndicatedleveragedloanmarket (CRE)sectorhaveeasedsomebutstayedrelatively remainedsolidinthefirsthalf of theyear,reportedly tightamidweakfundamentals.Accordingtothe supportedbycontinueddemandforloansfromnon- AprilSLOOS,somedomesticbanksreportedhaving bankinvestors,suchaspensionplansandinsurance easedstandardsonCREloansand,onbalance,asigcompanies.Inaddition,thevolumeof newlyestabnificantnumberof domesticbanksreported lishedcollateralizedloanobligationssofarthisyear increaseddemandforsuchloans.Whilebanks’holdhasalreadysurpassed2011levels.Muchof thebond andloanissuancewasreportedlyusedtorefinance, 3 TheoriginalamountforaC&IloanisdefinedintheCall andlikelyalsotoextendthematurityof,existing Reportasthemaximumoftheamountoftheloanorthe debt,giventhelowlevelof long-terminterestrates. amountofthetotalcommitment.

34 99thAnnualReport|2012 ingsof CREloanscontinuedtocontractinthefirst Federalreceiptsincreased5percentinthefirstnine half of thisyear,theydidsoataslowerpacethanin monthsof fiscal2012comparedwiththesame thesecondhalf of lastyear.Theweakestsegmentof periodinfiscal2011.Receiptswerebolsteredthusfar CRElendinghasbeentheportionsupportingcon- thisfiscalyearbyarobustriseincorporatetaxrevstructionandlanddevelopment;someotherseg- enuesthatislargelyattributabletoascalingbackin mentshaverecentlyexpandedmodestly.Issuanceof thefavorabletaxtreatmentof somebusinessinvestcommercialmortgage-backedsecurities(CMBS)has ment.Inaddition,individualincomeandpayrolltax alsoincreasedrecentlyfromthelowlevelsobserved receiptshavemovedhigher,reflectingincreasesin lastyear.Nonetheless,thedelinquencyrateonloans nominalwageandsalaryincome.Nonetheless,at inCMBSpoolscontinuedtosetnewhighsinJune,as onlyabout15½percent,theratioof federalreceipts somefive-yearloansissuedin2007attheheightof tonationalincomeisnearthelowestreadingforthis themarketwereunabletorefinanceatmaturity ratiooverthepast60years. becauseof theirhighloan-to-valueratios.While delinquencyratesforCREloansatcommercial Totalfederaloutlaysmovedsidewaysinthefirstnine banksimprovedslightlyinthefirstquarter,they monthsof fiscal2012relativetothecomparable remainedelevated,especiallyforconstructionand year-earlierperiod.Outlayswerereducedbythe landdevelopmentloans. windingdownof stimulus-relatedprograms(includingtheAmericanRecoveryandReinvestmentActof Inthecorporateequitymarket,grosspublicequity 2009),lowerpaymentsforunemploymentinsurance, issuancebynonfinancialfirmswasstronginthefirst andfallingdefenseexpenditures.Inaddition,outlays fivemonthsof 2012,boostedbyasolidpaceof ini- forMedicaidsofarthisfiscalyearwereunusually tialpublicofferings(IPOs).4Dataforthefirstquar- weak,apparentlyreflectinginparttheimplementaterof 2012indicatethatsharerepurchasesandcash- tionof cost-containmentmeasuresbymanystate financedmergersbynonfinancialfirmsremained governmentstoreducespendinggrowthforthatprorobust,andnetequityissuanceremaineddeeply gram.Incontrast,SocialSecurityoutlaysroseinpart negative.However,fewermergersandnewshare becauseof thefirstcost-of-livingadjustmentssince repurchaseprogramswereannouncedinthesecond 2009,andoutlaysforfinancialtransactionswere quarter. boostedbytherevaluationof theexpectedcostof previousTroubledAssetRelief Programtransactions TheGovernmentSector andanincreaseinnetoutlaysfordepositinsurance.5 Netinterestpaymentsincreasedmoderately,reflect- FederalGovernment ingtherisinglevelof thefederaldebt. Thedeficitinthefederalunifiedbudgetremains elevated.TheCongressionalBudgetOfficeprojects Asmeasuredinthenationalincomeandproduct thatthedeficitforfiscalyear2012willbecloseto accounts(NIPA),realfederalexpendituresoncon- $1.2trillion,orabout7½percentof nominalGDP. sumptionandgrossinvestment—thepartof federal Suchadeficitwouldbeanarrowershareof GDP spendingincludedinthecalculationof GDP—fellat thanthoserecordedoverthepastseveralyears anannualrateof closeto6percentinthefirstquarthoughstillsharplyhigherthanthoserecordedinthe ter.Defensespending,whichtendstobeerraticfrom fewyearspriortotheonsetof thefinancialcrisisand quartertoquarter,contractedmorethan8percent, recession.Thenarrowingof thebudgetdeficit andnondefensepurchasesedgeddown. expectedtooccurinthecurrentfiscalyearmostly reflectsincreasesintaxrevenuesastheeconomycon- Federaldebtheldbythepublicrosetoabout72pertinuestorecover,althoughthegrowthinoutlaysis centof nominalGDPinthesecondquarterof 2012, beingheldbackbythewindingdownof expansion- 3½percentagepointshigherthanattheendof last aryfiscalpoliciesenactedinresponsetotherecesyear.Treasuryauctionsgenerallycontinuedtobewell sion,aswellassomebudgetaryrestraintindefense receivedbyinvestors.Indicatorsof demandatTreasandotherdiscretionaryspendingprograms. 5 ThesubsidycostsofoutstandingTroubledAssetReliefProgramassistancearereestimatedannuallybyupdatingcashflows 4 Indeed,thesecondlargestIPOonrecordbegantradinginmid- foractualexperienceandnewassumptionsaboutthefutureper- May.However,thepriceperformanceofthosesharesinthe formanceoftheprograms;anychangesintheseestimatedsubdaysfollowingthatofferingwassharplynegativeonnet,and sidycostsarerecordedinthefederalbudgetinthecurrentfiscal IPOactivitysubsequentlyweakenedsignificantly. year.

MonetaryPolicyandEconomicDevelopments 35 uryauctions,suchasbid-to-coverratiosandindirect TheExternalSector biddingratios,werewithintheirhistoricalranges. ExportsandImports StateandLocalGovernment Bothrealexportsandimportsgrewmoderatelyinthe Stateandlocalgovernmentbudgetsremainstrained, firstquarterof 2012.Realexportsof goodsandserbutoverallfiscalconditionsforthesegovernments vicesroseatanannualrateof 4¼percent,supported maybeslowlyimproving.Inparticular,stateand byrelativelystrongforeigneconomicgrowth. localtaxreceiptsappearedtoincreasemoderately Exportsof services,automobiles,computers,andairoverthefirsthalf of thisyear.CensusBureaudata craftexpandedrapidly,whilethoseof consumer indicatethatstaterevenuecollectionsrose4percent goodsdeclined.Theriseinexportswasparticularly inthefirstquarterrelativetoayearearlier,andanec- strongtoCanadaandMexico.DataforApriland dotalevidencesuggeststhatcollectionsduringApril MaysuggestthatexportscontinuedtoriseatamodandMaywerewellmaintained.Moreover,onlyafew eratepaceinthesecondquarter. statesreportedbudgetshortfallsduringfiscal2012 (whichendedonJune30inmoststates).The Realimportsof goodsandservicesrosearelatively improvementislessevidentatthelocallevel,where modest2¾percentinthefirstquarter,reflecting propertytaxreceipts—thelargestsourceof taxrev- slowergrowthinU.S.economicactivity.Importsof enueforthesegovernments—wereroughlyflatin services,automobiles,andcomputersrosesignifi- 2011andearly2012,reflectingthecrosscutting cantly,whilethoseof petroleum,aircraft,andconeffectsof theearlierdeclinesinhomepricesand sumergoodsfell.Theriseinimportswasbroadly increasesinpropertytaxrates.Moreover,federalaid basedacrossmajortradingpartners,withimports tobothstateandlocalgovernmentshasdeclinedas fromJapanandMexicoshowingparticularlystrong stimulus-relatedgrantshavebeenalmostcompletely growth.AprilandMaydatasuggestthatimport phasedout. growthpickedupinthesecondquarter. Oneof thewaysthatstateandlocalgovernments Altogether,netexportsmadeasmallpositivecontrihaveaddressedtheirtightbudgetsituationshasbeen butionof one-tenthof 1percentagepointtoreal throughcutsintheiremploymentandconstruction GDPgrowthinthefirstquarter. spending.Aftersheddingjobsatanaveragepaceof 19,000permonthin2011,thesegovernments CommodityandTradePrices reducedtheiremploymentoverthefirsthalf of the Afterincreasingearlierintheyear,oilpriceshave yearataslowerpacebytrimming3,000jobsper subsequentlyfallenback.Overmuchof thefirst monthonaverage.However,realconstructionexpen- quarter,animprovedoutlookfortheglobaleconomy dituresfellsharplyinthefirstquarterafterhaving andincreasedgeopoliticaltensions—mostnotably edgeddowninthelatterhalf of 2011,andavailable withIran—helpedspurarun-upinthespotpriceof informationonnominalconstructionspending oil,withtheBrentbenchmarkaveraging$125per throughMaypointstocontinueddeclinesinrecent barrelinMarch,about$15aboveitsJanuaryaverage. months.Thedecreasesinemploymentandconstruc- Sincemid-March,however,oilpriceshavemorethan tionareevidentintheBureauof EconomicAnalysis retracedtheirearliergainsamidanintensificationof (BEA)estimateforrealstateandlocalpurchases, thecrisisinEuropeandincreasedconcernsoverthe whichfellatanannualrateof 2¾percentinthefirst strengthof economicgrowthinChina.Aneasingof quarter,aboutthesamepaceasin2011. geopoliticaltensionsandincreasedcrudeoilsupply—productionbySaudiArabiahasbeenrunning Grossissuanceof bondsbystatesandmunicipalities atnear-recordhighlevels—havealsolikelycontribpickedupinthesecondquarterof 2012.Creditqual- utedtothedeclineinoilprices.Alltold,thepriceof ityinthesectorcontinuedtodeteriorateoverthefirst Brenthasplunged$25abarrelfromMarchtoabout half of theyear.Forinstance,creditratingdown- $100perbarrelinmid-July. gradesbyMoody’sInvestorsServicesubstantially outpacedupgrades,andcreditdefaultswap(CDS) Pricesof manynonfuelcommoditiesfollowedapath indexesformunicipalbondsroseonnet.Yieldson similartothatshownbyoilprices,albeitwithless long-termgeneralobligationmunicipalbondswere volatility.Earlyin2012,commoditypricesrallied,as aboutunchangedoverthefirsthalf of theyear. globaleconomicprospectsandfinancialconditions

36 99thAnnualReport|2012 improvedalongwithatemporaryabatementof currencies,resultinginincreasedaccumulationof stressesinEurope.However,aswithoilprices, dollar-denominatedreserves,whichwerethen broadercommoditypricesfellinthesecondquarter, investedinU.S.securities.Partialdataforthesecond reflectinggrowingpessimismregardingprospectsfor quartersuggestthatforeignofficialinflowsremained theglobaleconomy. strongdespitereneweddollarappreciationagainst emergingmarketcurrencies.U.S.officialassetsregis- Pricesfornon-oilimportedgoodsincreasedlessthan tereda$51billioninflowduringthefirstquarteras ¼percentinthefirstquarter,withthemodestpace drawingsontheFederalReserve’sdollarswaplines of increaselikelyreflectingthelaggedeffectsof both withtheEuropeanCentralBank(ECB)andthe theappreciationof thedollarandthedeclineincom- Bankof Japan(BOJ)werepartiallyrepaid. moditypricesthatoccurredlatelastyear.Moving intothesecondquarter,importpriceinflation NationalSaving appearstohaveremainedsubdued,consistentwitha TotalU.S.netnationalsaving—thatis,thesavingof furtherappreciationof thedollar. U.S.households,businesses,andgovernments,netof depreciationcharges—remainsextremelylowbyhis- TheCurrentandFinancialAccounts toricalstandards.Netnationalsavingfellfrom4per- Largelyreflectingtherun-upinoilpricesearlyinthe centof nominalGDPin2006tonegative2percentin year,thenominaltradedeficitwidenedslightlyinthe 2009,asthefederalbudgetdeficitwidened.The firstquarter.Inaddition,asthenetinvestment nationalsavingratesubsequentlyincreasedtonear incomebalancecontinuedtodecline,thecurrent zero,whereitremainedasof thefirstquarterof 2012 accountdeficitdeterioratedfromanannualaverage (thelatestquarterforwhichdataareavailable).The of $470billionin2011to$550billioninthefirst relativeflatnessof thesavingrateoverthepast quarter,or3½percentof GDP.6 coupleof yearsreflectstheoffsettingeffectsof anarrowinginthefederalbudgetdeficitasashareof Thefinancialflowsthatprovidethefinancingof the nominalGDPandadownwardmovementinthepricurrentaccountdeficitreflectedthegeneraltrendsin vatesavingrate.Nationalsavingwilllikelyremain financialmarketsentimentandinreserveaccumula- lowthisyearinlightof thecontinuinglargefederal tionbyemergingmarketeconomies(EMEs).Consis- budgetdeficit.Aportionof thedeclineinfederalsavtentwithatemporaryimprovementinthetoneof ingsrelativetopre-crisislevelsiscyclicalandwould financialmarketsinthefirstquarter,foreignprivate beexpectedtoreverseastheeconomyrecovers.Howinvestorsslowedtheirnetpurchasesof U.S.Treasury ever,if lowlevelsof nationalsavingpersistoverthe securitiesandresumednetpurchasesof U.S.equities, longerrun,theywilllikelybeassociatedwithboth althoughtheycontinuedtosellotherU.S.bonds. lowratesof capitalformationandheavyborrowing However,thetentativeincreaseinforeignriskappe- fromabroad,limitingtheriseinthestandardof livtiteabatedearlyinthesecondquarterandforeign ingforU.S.residentsovertime. privateinvestorsshowedreneweddemandforU.S. TheLaborMarket TreasurysecuritiesandlessdemandforotherU.S. securities. EmploymentandUnemployment Labormarketconditionsremainweak.Afteraverag- U.S.investors’demandforforeignsecuritieswasflat, ing165,000jobspermonthinthesecondhalf of onnet,inthefirstquarterandtheearlypartof the 2011,privatepayrollemploymentgainsincreasedto secondquarter,butthisoutcomenonethelessrepre- 225,000jobspermonthoverthefirstthreemonthsof sentsanincreaserelativetonetsalesof foreignsecutheyearandthenfellbackto90,000jobspermonth ritiesinthefourthquarterof 2011. overthepastthreemonths.Theapparentslowingin thepaceof netjobcreationmayhavebeenexagger- Inflowsfromforeignofficialinstitutionsstrengthened atedbyissuesrelatedtoswingsintheweatherandto inthefirstquarterasemergingmarketgovernments seasonaladjustmentdifficultiesassociatedwiththe boughtdollarstocounterupwardpressureontheir timingof thesharpestjoblossesduringtherecession. Moreover,employmentgainsduringthesecondhalf 6 In1999,theBEA—whilerevisitingitsmethodologyforthebalanceofpaymentsaccounts—redefinedthecurrentaccountto of lastyearandintotheearlypartof thisyearmay excludecapitaltransfers.Intheprocess,thecapitalaccountwas havereflectedsomecatch-upinhiringonthepartof renamedthefinancialaccount,andanewlydefinedcapital employersthataggressivelyparedtheirworkforces accountwascreatedtoincludecapitaltransfersaswellasthe acquisitionanddisposalofnonproducednonfinancialassets. duringandjustaftertherecession.Therecentdecel-

MonetaryPolicyandEconomicDevelopments 37 erationinemploymentmaysuggestthatmuchof this pastfewyears;thismeasurerosejust1¼percentover catch-uphasnowtakenplaceandthat,consequently, theyearendinginthefirstquarterof 2012,well more-rapidgainsineconomicactivitywillbe belowtheaverageincreaseof about4percentinthe requiredtoachievesignificantfurtherincreasesin yearsbeforetherecession.Similarly,averagehourly employmentanddeclinesintheunemploymentrate. earningsforallemployees—thetimeliestmeasureof wagedevelopments—roseabout2percentinnominal Theunemploymentrate,thoughdownfromaround termsoverthe12monthsendinginJune.According 9percentlastsummer,hasheldaboutflatat8¼per- toeachof thesemeasures,gainsinhourlycompensacentsinceearlythisyearandremainselevatedrelative tionfailedtokeepupwithincreasesinconsumer tolevelsobservedpriortotherecentrecession.More- pricesin2011andagaininthefirstquarterof this over,long-termunemploymentalsoremainselevated. year. InJune,around40percentof thoseunemployedhad beenoutof workformorethansixmonths.Mean- Thechangeinunitlaborcostsfacedbyfirms—which while,thelaborforceparticipationratehasfluctuated measurestheextenttowhichnominalhourlycomaroundalowlevelsofarthisyearafterhavingmoved pensationrisesinexcessof laborproductivity—redown2percentagepointssince2007. mainedsubdued.Unitlaborcostsinthenonfarm businesssectorrose1percentovertheyearendingin Otherlabormarketindicatorswereconsistentwith thefirstquarterof 2012.Overthepreceding littlechangeinoveralllabormarketconditionsdur- year,unitlaborcostsincreased1½percent. ingthefirsthalf of theyear.Initialclaimsforunemploymentinsurancewerenotmuchchanged,onnet, Prices althoughtheiraverageleveloverthefirsthalf of the Consumerpriceinflationmoveddown,onnet,duryearwaslowerthaninthesecondhalf of 2011. ingthefirstpartof 2012.OverallPCEpricesrose Measuresof jobvacanciesedgedup,onbalance,and rapidlyinthefirstthreemonthsof theyear,reflecthouseholds’labormarketexpectationslargely inglargeincreasesinoilprices,butinflationturned reversedthesteepdeteriorationfromlastsummer. downinthespringasoilpricesmorethanreversed However,indicatorsof hiringactivityremained theirearlierrun-ups.Theoverallchain-typePCE subdued. priceindexincreasedatanannualrateof about 1½percentbetweenDecember2011andMay2012, ProductivityandLaborCompensation comparedwithariseof 2½percentover2011. Gainsinlaborproductivityhavecontinuedtoslow Excludingfoodandenergy,consumerpricesroseata recentlyfollowinganoutsizedincreasein2009anda rateof about2percentoverthefirstfivemonthsof solidgainin2010.Accordingtothelatestpublished theyear,essentiallythesamepaceasin2011.Inaddidata,outputperhourinthenonfarmbusinesssector tiontothenetdeclineincrudeoilpricesoverthefirst rosejust½percentin2011anddeclinedinthefirst half of theyear,factorscontributingtolowconquarterof 2012.Althoughthesedatacanbevolatile sumerpriceinflationthisyearincludethedecelerafromquartertoquarter,themoderationinproductiv- tionof non-oilimportpricesinthelatterpartof itygrowthoverthepasttwoyearssuggeststhatfirms 2011,subduedlaborcostsassociatedwiththeweak havebeenaddingworkersnotonlytomeetrising labormarket,andstableinflationexpectations. productionneedsbutalsotorelievepressureson theirexistingworkforces,whichwerecutback Consumerenergypricessurgedatanannualrateof sharplyduringtherecession. over20percentinthefirstthreemonthsof 2012,as highercostsforcrudeoilwerepassedthroughto Increasesinhourlycompensationcontinuetobe gasolineprices.InApril,thenational-averageprice restrainedbytheveryweakconditionof thelabor forgasolineatthepumpapproached$4pergallon. market.The12-monthchangeintheemployment Sincethen,crudeoilpriceshavetumbled,andgasocostindexforprivateindustryworkers,whichmeas- linepriceshavedeclinedroughlyinlinewithcrude uresbothwagesandthecosttoemployersof provid- costs,morethanreversingtheearlierrun-up.Coningbenefits,hasbeenabout2percentorlesssince sumerpricesfornaturalgasplungedoverthefirst thestartof 2009afterseveralyearsof increasesin fivemonthsof theyearafterfallinglatelastyear;this theneighborhoodof 3percent.Nominalcompensa- dropisattributable,atleastinpart,totheunseasontionperhourinthenonfarmbusinesssector—a ablywarmwinter,whichreduceddemandfornatural measurederivedfromthelaborcompensationdatain gas.Morerecently,spotpricesfornaturalgashave theNIPA—alsodeceleratedsignificantlyoverthe turnedupasproductionhasbeencutback,butthey

38 99thAnnualReport|2012 stillremainsubstantiallylowerthantheywerelast improved.Thosegainspartiallyreversedwhenmarsummer. ketparticipantsbecamemorepessimisticaboutthe Europeansituationandglobalgrowthprospectsin Consumerfoodpriceinflationhasslowednoticeably MayandJune.Yieldsonlonger-termTreasurysecusofarthisyear,astheeffectonretailfoodprices ritiesdeclined,onbalance,overthefirsthalf of the fromlastyear’sjumpinfarmcommodityprices year.Conditionsinunsecuredshort-termdollar appearstohavelargelydissipated.Indeed,PCE fundingmarketsgenerallyremainedstableasEuropricesforfoodandbeveragesonlyedgedupslightly, peanfinancialinstitutionsreducedtheirdemandfor risingatanannualrateof about½percentfrom dollarfundingandgeneralfundingpressureswere DecembertoMayafterincreasingmorethan5per- alleviatedbythelonger-termrefinancingoperations centin2011.Althoughfarmcommoditypriceswere of theECB.Inthedomesticbankingsector,the temperedearlierthisyearbyexpectationsof asub- releaseof theresultsfromtheComprehensiveCapital stantialincreaseincropoutputthisgrowingseason, AnalysisandReview(CCAR)inMarchprovideda grainpricesroserapidlyinlateJuneandearlyJulyas significantboosttotheequitypricesof U.S.financial awideswathof theMidwestexperiencedaboutof institutions(seethebox“TheCapitalandLiquidity hot,dryweatherthatfarmanalystsbelievecutyield Positionof LargeU.S.Banks”onpages24–25of the prospectsconsiderably. July2012MonetaryPolicyReport). Survey-basedmeasuresof near-terminflationexpec- MonetaryPolicyExpectationsand tationshavechangedlittle,onnet,sofarthisyear. TreasuryRates Medianyear-aheadinflationexpectations,as InresponsetothestepstakenbytheFederalOpen reportedintheThomsonReuters/Universityof MarketCommittee(FOMC)toprovideadditional MichiganSurveysof Consumers(Michigansurvey), monetarypolicyaccommodation,andamidgrowing roseinMarchwhengasolinepriceswerehighbut anxietyabouttheEuropeancrisisandaworseningof thenfellbackasthosepricesreversedcourse. theeconomicoutlook,investorspushedoutfurther Longer-termexpectationsremainedmorestable.In thedatewhentheyexpectthefederalfundsrateto theMichigansurvey,medianexpectedinflationover firstriseaboveitscurrenttargetrangeof 0to¼perthenext5to10yearswas2.8percentinearlyJuly, cent.Inaddition,theyapparentlyscaledbackthe withinthenarrowrangeof thepast10years.Inthe paceatwhichtheyexpectthefederalfundsratesub- Surveyof ProfessionalForecasters,conductedbythe sequentlytobeincreased.Marketparticipantscur- FederalReserveBankof Philadelphia,expectations rentlyanticipatethattheeffectivefederalfundsrate fortheincreaseinthepriceindexforPCEoverthe willbeabout50basispointsbythemiddleof 2015, next10yearsremainedat2¼percent,inthemiddle roughly55basispointslowerthantheyexpectedat of itsrecentrange. thebeginningof 2012. Measuresof medium-andlonger-terminflation Yieldsonlonger-termnominalTreasurysecurities compensationderivedfromnominalandinflation- declined,onbalance,overthefirsthalf of 2012. protectedTreasurysecurities—whichnotonlyreflect Earlyintheyear,longer-termTreasuryyieldsrose, inflationexpectations,butalsocanbeaffectedby reflectinggenerallypositiveU.S.economicdata, changesininvestorriskaversionandbythedifferent improvedmarketsentimentregardingthecrisisin liquiditypropertiesof thetwotypesof securities— Europe,andhigherenergyprices.Morerecently, werelittlechanged,onnet,sofarthisyear.These however,longer-termyieldshavemorethanreversed measuresincreasedearlyintheperiodamidrising theirearlierincreases.Investorssoughttherelative pricesforoilandothercommodities,buttheysubse- safetyandliquidityof Treasurysecuritiesasthecrisis quentlydeclinedascommoditypricesfellbackand inEuropeintensifiedagainandasweaker-thanasworriesaboutdomesticandglobaleconomic expectedeconomicdatareleasesraisedconcerns growthincreased. aboutthepaceof economicrecoverybothinthe UnitedStatesandabroad.Inaddition,thosedevel- FinancialDevelopments opmentsfosteredexpectationsthattheFederal Financialmarketsweresomewhatvolatileoverthe Reservewouldprovideadditionalaccommodation. firsthalf of 2012.Earlyintheyear,broadequity AndtheTreasuryyieldcurveflattenedfurtherfollowpriceindexesroseandriskspreadsinseveralmarkets ingtheFOMC’sdecisionatitsJunemeetingtoconnarrowedasinvestorsentimentregardingshort-term tinuethematurityextensionprogram(MEP)through Europeanprospectsandtheeconomicoutlook theendof 2012.Onbalance,yieldson5-,10-,and

MonetaryPolicyandEconomicDevelopments 39 30-yearnominalTreasurysecuritiesdeclinedroughly spreadsonABCPwithEuropeanbanksponsors 20,40,and35basispoints,respectively,fromtheir remainedabitabovethoseonABCPwithU.S.bank levelsatthestartof thisyear.TheOpenMarket sponsors. Desk’soutrightpurchasesandsalesof TreasurysecuritiesundertheMEPdidnotappeartohaveany RespondentstotheSeniorCreditOfficerOpinion materialadverseeffectonTreasurymarket SurveyonDealerFinancingTerms(SCOOS)inboth functioning. MarchandJuneindicatedthatcredittermsapplicabletoimportantclassesof counterpartieshave Short-TermFundingMarkets beenrelativelystablesincethebeginningof theyear.7 Despitethereemergenceof strainsinEurope,condi- Inaddition,dealersreportedthattheuseof financial tionsinunsecuredshort-termdollarfundingmarkets leverageamonghedgefundshaddecreasedsomehaveremainedfairlystableinthefirsthalf of 2012. whatsincethebeginningof 2012.Moreover,respon- Measuresof stressinshort-termfundingmarkets dentstotheJuneSCOOSnotedanincreaseinthe haveeasedsomewhat,onbalance,sincethebeginning amountof resourcesandattentiondevotedtothe of theyear.Afewfactorsseemtohavecontributed managementof concentratedexposurestodealers totherelativestabilityof thosemarkets.European andotherfinancialintermediariesaswellascentral institutionsapparentlyreducedtheirdemandfor counterpartiesandotherfinancialutilities.In fundsinrecentquartersbysellingdollar- responsetoaspecialquestionintheJuneSCOOS, denominatedassetsandexitingfrombusinesslines dealersreportedthatdespitethepersistentlylowlevel requiringheavydollarfunding.Inaddition,Euro- of interestrates,onlymoderatefractionsof their peanbanksreportedlyswitchedtosecuredfunding unleveredinstitutionalclientshadshownan supportedbyvarioustypesof collateral.Further,the increasedappetiteforcreditriskordurationriskover availabilityof fundsfromtheECBthroughits thepastyear. longer-termrefinancingoperationslikelyhelped reducefundingstrainsandtheneedtoaccessinter- FinancialInstitutions bankmarketsmoregenerally.Reflectingthesedevel- Marketsentimenttowardthebankingindustryflucopments,theamountof dollarswapsoutstanding tuatedinthefirsthalf of 2012.Earlyintheyear, betweentheFederalReserveandtheECBhas aftertheactionsof theEuropeanauthoritiestoease declinedsubstantiallyfromitspeakearlierthisyear. theeuro-areacrisisandthereleaseof theresultsfrom theCCAR,equitypricesforbankholdingcompanies ConditionsintheCPmarketwerealsofairlystable. (BHCs)increasedandtheirCDSspreadsdeclined.In Onnet,30-dayspreadsof ratesonunsecuredA2/P2 latespring—asinvestorsreactedtoconcernsabout CPovercomparable-maturityAA-ratednonfinancial Europe—equitypricesreversedsomeof thosegains, CPdeclinedabit.Thevolumeoutstandingof unse- andCDSspreadsroseforlargeBHCs,especially curedfinancialCPissuedintheUnitedStatesby thosewithsubstantialinvestment-bankingoperainstitutionswithEuropeanparentsdecreasedslightly tions.Morerecently,Moody’sdowngradedthelonginthefirsthalf of theyear.Theaveragematurityof andshort-termcreditratingsof fiveof thesixlargest unsecuredfinancialCPissuedbyinstitutionswith U.S.banks,butnoneof thebankslosttheir bothU.S.andEuropeanparentsisabout50days,a investment-gradestatusonlong-termdebt.The levelthatisnearthemiddleof itshistoricalrange. short-termdebtratingsof somebanksweredowngradedtoPrime-2,whichmayaffecttheabilityof Signsof stresswerealsolargelyabsentinsecured sometoplacesignificantamountsof CPwithmoney short-termdollarfundingmarkets.Inthemarketfor marketfunds,butthemarketeffectappearstohave repurchaseagreements,bid-askedspreadsformost beenmutedsofar,asthosebankscurrentlyhavelimcollateraltypeswerelittlechanged.However,short- iteddemandforsuchfunding.Onbalance,equity terminterestratescontinuedtoedgeupfromthe pricesof banksrosesignificantlyfromrelativelylow levelobservedaroundtheturnof theyear,likely levelsatthestartof theyear;anindexof CDS reflectinginpartthefinancingof theincreasein spreadsforlargeBHCsdeclinedabout60basis dealers’inventoriesof shorter-termTreasurysecuri- pointsbutremainedatahighlevel. tiesthatresultedfromtheongoingMEPandhigherthan-expectedbillissuancebytheTreasuryDepartmentearlierintheyear.Inasset-backedcommercial paper(ABCP)markets,volumesoutstanding 7 TheSCOOSisavailableontheFederalReserveBoard’swebsite declinedforprogramswithEuropeansponsors,and atwww.federalreserve.gov/econresdata/releases/scoos.htm.

40 99thAnnualReport|2012 Theprofitabilityof BHCsdecreasedslightlyinthe CorporateDebtandEquityMarkets firstquarterof 2012andremainedwellbelowthe Yieldsoninvestment-gradebondsreachedrecord levelsthatprevailedbeforethefinancialcrisis.Litiga- lowsinJune,partlyreflectingthesearchbyinvestors tionprovisionstakenbysomelargebanksinconnec- forrelativelysafeassetsinlightof risingconcerns tionwiththemortgagesettlementreachedearlierthis aboutEuropeaswellastheweaknessinthedomestic yearaccountedforsomeof thedownwardpressure andglobaleconomicdatareleases.However,yields onbankprofitability.Thevariabilityinearningsdue onspeculative-gradecorporatedebt,whichhad toaccountinggainsandlossesrelatedtochangesin reachedrecord-lowlevelsinFebruary,rosesomewhat themarketvalueof banks’owndebtamplifiedrecent inthesecondquarterreflectingthosesameconcerns. swingsof bankprofits.8Smoothingthroughthese Thespreadoninvestment-gradecorporatebondswas specialfactors,profitabilityhasbeenaboutflatin aboutunchanged,onnet,relativetothestartof the recentquarters.Netincomecontinuedtobesup- year.Despitethebackupinyieldsoverthesecond portedbythereleaseof loanlossreserves,albeittoa quarter,spreadsonspeculative-gradecorporate lesserextentthaninthepreviousyear,ascharge-off bondsdecreasedsome,onbalance,overthesame ratesdecreasedabitfurtheracrossmostmajorasset period.Pricesinthesecondarymarketforsyndicated classes.Still-subdueddividendpayoutsandshare leveragedloanshavechangedlittle,onbalance,since repurchasesaswellasreductionsinrisk-weighted thebeginningof theyear;demandfrominstitutional assetspushedregulatorycapitalratioshigherinthe investorsforthesemostlyfloating-rateloanshas firstquarterof 2012(seethebox“Implementingthe remainedstrongdespitethereemergenceof anxiety NewFinancialRegulatoryRegime”onpages28–29 aboutdevelopmentsinEurope. of theJuly2012MonetaryPolicyReport). Broadequitypriceindexeswereboostedearlyinthe Creditprovidedbycommercialbankingorganiza- yearbyimprovedsentimentstemminginpartfrom tionsintheUnitedStatesincreasedinthefirsthalf of relativelystrongjobgainsaswellasactionstakenby 2012ataboutthesamemoderatepaceasinthesec- majorcentralbankstomitigatethefinancialstrains ondhalf of 2011.Coreloans—thesumof C&Iloans, emanatingfromEurope.However,equityprice realestateloans,andconsumerloans—expanded indexessubsequentlyreversedaportionof theirearmodestly;asnotedearlier,theupturninlendingwas liergainsasconcernsabouttheEuropeanbanking particularlynoticeableforC&Iloans.Theexpansion andfiscalcrisisintensifiedagainandeconomic inC&Ilendinghasbeenbroadbasedoutsideof U.S. reportssuggestedslowergrowth,onbalance,athome branchesandagenciesof Europeanbanksandhas andabroad.Thespreadbetweenthe12-monthforbeenparticularlyevidentatlargedomesticbanks. wardearnings-priceratiofortheS&P500andareal ThispatternisconsistentwithSLOOSresultssug- long-runTreasuryyield—aroughgaugeof theequity gestingthataportionof theincreaseinC&Ilending riskpremium—widenedabitmoreinthefirsthalf of observedatlargedomesticbanksreflecteddecreased 2012,andisnowclosertotheveryhighlevelsit competitionfromEuropeanbanksandtheiraffiliates reachedin2008andagainlastfall.Impliedvolatility andsubsidiariesforeitherforeignordomesticcus- fortheS&P500index,ascalculatedfromoption tomers.Banks’holdingsof securitiesrosemoder- prices,spikedattimesthisyearbutiscurrently ately,withpurchasesconcentratedinTreasurysecuri- towardthebottomendof therangethatthisindicatiesandagency-guaranteedMBS.Giventhestill- torhasoccupiedsincetheonsetof thefinancial depressedhousingmarket,bankscontinuedtobe crisis. attractedbythegovernmentguaranteeonagency securities,andsomelargebanksmayalsohavebeen Inthecurrentenvironmentof verylowinterestrates, accumulatinggovernment-backedsecuritiesto mutualfundsthatinvestinhigher-yieldingdebt improvetheirliquiditypositions. instruments(includingspeculative-gradecorporate bondsandleveragedloans)continuedtohavesignificantinflowsformostof thefirsthalf of 2012,while 8 Underfairvalueaccountingrules,changesinthecreditworthi- moneymarketfundsexperiencedoutflows.Equity nessofaBHCgeneratechangesinthevalueofsomeofits mutualfundsalsorecordedmodestoutflowsearlyin liabilities.Thosechangesarethenreflectedasgainsorlosseson theincomestatement. theyearand,asmarketsentimentdeteriorated,both

MonetaryPolicyandEconomicDevelopments 41 equityandhigh-yieldmutualfundsregisteredout- Table1.SelectedcomponentsoftheFederalReserve flowsinMay. balancesheet,2011–12 Millionsofdollars MonetaryAggregatesand theFederalReserve’sBalanceSheet Balancesheetitem Dec.28,2011Feb.22,2012July11,2012 Thegrowthrateof M2slowedinthefirsthalf of Totalassets 2,928,485 2,935,149 2,868,387 2012toanannualrateof about7percent.9However, Selectedassets thelevelsof M2anditslargestcomponent,liquid Creditextendedtodepositoryinstitutionsanddealers deposits,remainelevatedrelativetowhatwouldhave Primarycredit 42 3 8 beenexpectedbasedonhistoricalrelationshipswith Centralbankliquidityswaps 99,823 107,959 29,708 Creditextendedtoothermarket nominalincomeandinterestrates,likelyreflecting participants investors’continuedpreferencetoholdsafeand TermAsset-BackedSecuritiesLoan liquidassets.Currencyincirculationincreased Facility(TALF) 9,013 7,629 4,504 NetportfolioholdingsofTALFLLC 811 825 845 robustly,reflectingsoliddemandbothathomeand Supportofcriticalinstitutions abroad.Retailmoneymarketfundsandsmalltime NetportfolioholdingsofMaidenLane depositscontinuedtocontract.Atthesametimeas LLC,MaidenLaneIILLC,andMaiden LaneIIILLC1 34,248 30,822 15,388 currencyincirculationwasincreasing,reservebal- CreditextendedtoAmerican ancesheldattheFederalReserveweredecreasing;as InternationalGroup,Inc. … … … aresult,themonetarybase—whichisequaltothe PreferredinterestsinAIAAuroraLLCand ALICOHoldingsLLC … … … sumof thesetwoitems—changedlittle,onaverage, Securitiesheldoutright overthefirsthalf of theyear. U.S.Treasurysecurities 1,672,092 1,656,581 1,663,949 Agencydebtsecurities 103,994 100,817 91,484 Totalassetsof theFederalReservedecreasedto Agencymortgage-backedsecurities (MBS)2 837,295 853,045 855,044 $2,868billionasof July11,2012,about$60billion Totalliabilities 2,874,686 2,880,556 2,813,713 lessthanattheendof 2011(table1).Thesmall Selectedliabilities decreasesinceDecemberlargelyreflectslowerusage FederalReservenotesincirculation 1,034,520 1,048,004 1,073,732 of foreigncentralbankliquidityswapsanddeclines Reverserepurchaseagreements 88,674 89,824 89,689 Depositsheldbydepositoryinstitutions 1,569,267 1,622,800 1,527,556 inthenetportfolioholdingsof theMaidenLane Ofwhich:termdeposits 0 0 0 LLCs.Thecompositionof Treasurysecurityhold- U.S.Treasury,generalaccount 91,418 36,033 75,287 ingschangedoverthecourseof thefirsthalf of this U.S.Treasury,SupplementaryFinancing Account 0 0 0 yearasaresultof theimplementationof theMEP. Totalcapital 53,799 54,594 54,674 Asof July13,2012,theOpenMarketDeskatthe FederalReserveBankof NewYork(FRBNY)had Note:LLCisalimitedliabilitycompany. purchased$283billioninTreasurysecuritieswith 1 TheFederalReservehasextendedcredittoseveralLLCsinconjunctionwith effortstosupportcriticalinstitutions.MaidenLaneLLCwasformedtoacquire remainingmaturitiesof 6to30yearsandsoldor certainassetsofTheBearStearnsCompanies,Inc.MaidenLaneIILLCwas redeemed$293billioninTreasurysecuritieswith formedtopurchaseresidentialmortgage-backedsecuritiesfromtheU.S. securitieslendingreinvestmentportfolioofsubsidiariesofAmerican maturitiesof 3yearsorlessundertheMEP.10Total InternationalGroup,Inc.(AIG).MaidenLaneIIILLCwasformedtopurchase multisectorcollateralizeddebtobligationsonwhichtheFinancialProducts groupofAIGhaswrittencreditdefaultswapcontracts. 2 IncludesonlyMBSpurchasesthathavealreadysettled. 9 M2consistsof(1)currencyoutsidetheU.S.Treasury,Federal …Notapplicable. ReserveBanks,andthevaultsofdepositoryinstitutions; (2)traveler’schecksofnonbankissuers;(3)demanddepositsat Source:FederalReserveBoard,StatisticalReleaseH.4.1,“FactorsAffecting ReserveBalancesofDepositoryInstitutionsandConditionStatementofFederal commercialbanks(excludingthoseamountsheldbydepository ReserveBanks.” institutions,theU.S.government,andforeignbanksandofficial institutions)lesscashitemsintheprocessofcollectionandFederalReservefloat;(4)othercheckabledeposits(negotiableorder ofwithdrawal,orNOW,accountsandautomatictransferser- FederalReserveholdingsof agencyMBSincreased viceaccountsatdepositoryinstitutions;creditunionsharedraft about$18billionasthepolicyof reinvestingprinciaccounts;anddemanddepositsatthriftinstitutions);(5)savings palpaymentsfromagencydebtandagencyMBSinto deposits(includingmoneymarketdepositaccounts);(6)smalldenominationtimedeposits(timedepositsissuedinamountsof agencyMBScontinued. lessthan$100,000)lessindividualretirementaccount(IRA) andKeoghbalancesatdepositoryinstitutions;and(7)balances inretailmoneymarketmutualfundslessIRAandKeoghbal- Inthefirsthalf of 2012,theFederalReservecontinancesatmoneymarketmutualfunds. uedtoreduceitsexposuretofacilitiesestablished 10 BetweentheMEP’sannouncementinSeptember2011andthe duringthefinancialcrisistosupportspecificinstituendofthatyear,theDeskhadpurchased$133billioninlongertions.Theportfolioholdingsof MaidenLaneLLC, termTreasurysecuritiesandhadsold$134billioninshortertermTreasurysecurities. MaidenLaneIILLC,andMaidenLaneIIILLC—

42 99thAnnualReport|2012 entitiesthatwerecreatedduringthecrisistoacquire thoughdownslightlyfrom2011,thetransfertothe certainassetsfromTheBearStearnsCompanies, U.S.Treasuryremainedhistoricallyverylarge. Inc.,andAmericanInternationalGroup,Inc.(AIG), toavoidthedisorderlyfailuresof thoseinstitutions— InternationalDevelopments declined,onnet,primarilyasaresultof assetsales TheEuropeanfiscalandbankingcrisiscontinuedto andprincipalpayments.Of note,proceedsfromthe affectinternationalfinancialmarketsandforeign salesof allof theremainingassetsintheMaiden economicactivityduringthefirsthalf of 2012.Early LaneIILLCportfolioinJanuaryandFebruary intheyear,aggressiveactionbytheECBandsome enabledtherepaymentof theentireremainingout- progressinaddressingthecrisisbytheregion’sleadstandingbalanceof theseniorloanfromthe erscontributedtoatemporaryeasingof financial FRBNYtoMaidenLaneIILLCinMarch,with stresses.(Seethebox“AnUpdateontheEuropean interestanda$2.8billionnetgain.Inaddition,pro- FiscalandBankingCrisis”onpages34–35of the ceedsfromthesalesof assetsfromMaidenLane July2012MonetaryPolicyReport.)However,amid LLCandMaidenLaneIIILLCinAprilandMay ongoingpoliticaluncertaintyinGreeceandincreased enabledtherepayment,withinterest,of theentire concernsaboutthehealthof Spanishbanks,financial remainingoutstandingbalancesof theseniorloans conditionsdeterioratedagaininthespring.Foreign fromtheFRBNYtoMaidenLaneLLCandMaiden economicgrowthpickedupinthefirstquarter,but LaneIIILLCinJune.Proceedsfromfurtherasset thisaccelerationlargelyreflectedtemporaryfactors, salesfromMaidenLaneIIIinJuneenabledrepay- andrecentdatapointtowidespreadslowinginthe mentof theequitypositionof AIGinJuly.Anet secondquarter. gainonthesaleof theremainingassetsinMaiden LaneIIILLCislikelyduringthenextfewmonths. InternationalFinancialMarkets Salesof mostof theremainingassetsinMaiden Foreignfinancialmarketshavebeenvolatile.Initially LaneLLCshouldbecompletedbytheendof the inthefirstquarter,encouragingmacroeconomicdata year,butafewlegacyassetsmaytakelongertodis- andsomeeasingof tensionswithintheeuroarealed poseof.LoansoutstandingundertheTermAsset- toanimprovementinglobalfinancialconditions. BackedSecuritiesLoanFacility(TALF)wereslightly Thisimprovementwasreversedinthespringasthe lower,reflecting,inpart,thefirstmaturityof a boostfrompreviouspolicymeasures,includingthe TALFloanwithathree-yearinitialterm. ECB’slonger-termrefinancingoperations,fadedand politicalandbankingstressesinvulnerableEuropean Ontheliabilitysideof theFederalReserve’sbalance countriesresurfaced.Euro-arealeadersrespondedto sheet,depositsheldbydepositoryinstitutions theworseningof thecrisisbyannouncingadditional declinedabout$42billioninthefirsthalf of 2012, measuresatasummitonJune28–29.Themarket whileFederalReservenotesincirculationincreased reactionwaspositivebutshort-lived. roughly$39billion.Aspartof itsongoingprogram toensurethereadinessof toolstodrainreserves Increaseduncertaintyandgreatervolatilityhave whendoingsobecomesappropriate,theFederal pusheduptheforeignexchangevalueof thedollar Reserveconductedaseriesof small-scalereverse about4¼percentonatrade-weightedbasisagainsta repurchasetransactionsinvolvingalleligiblecollat- broadsetof currenciessinceitslowinearlyFebrueraltypeswithitsexpandedlistof counterparties.In ary,withmostof theappreciationoccurringinMay. thesamevein,theFederalReservealsocontinuedto Typicalof periodsof flighttosafety,thedollarhas offersmall-valuetermdepositsthroughtheTerm appreciatedagainstmostcurrenciesbutdepreciated DepositFacility. againsttheJapaneseyenformostof theperiod.The Swissfranchasmovedverycloselywiththeeuroas OnMarch20,theFederalReserveSystemreleasedits theSwissNationalBankhasintervenedtomaintain 2011combinedannualcomparativeauditedfinancial aceilingforthefrancrelativetotheeuro. statements.TheFederalReservereportednetincome of about$77billionfortheyearendingDecem- Duringthesecondquarterof thisyear,flight-tober31,2011,derivedprimarilyfrominterestincome safetyflowsandthedeterioratingglobaleconomic onsecuritiesacquiredthroughopenmarketopera- outlookhelpedpushgovernmentbondyieldsfor tions(Treasurysecurities,federalagencyandGSE Canada,Germany,andtheUnitedKingdomto MBS,andGSEdebtsecurities).TheReserveBanks recordlows.Likewise,Japaneseyieldson10-year transferredabout$75billionof the$77billionin bondsfellwellbelow1percent.Bycontrast,Spanish comprehensiveincometotheU.S.Treasuryin2011; sovereignspreadsoverGermanbundsrosemore

MonetaryPolicyandEconomicDevelopments 43 than250basispointsbetweenFebruaryandJune financialtensionsandfiscalausteritymeasures duetoescalatingconcernsoverSpain’spublic appeartohavefurtherrestrainedtheeuro-area finances.Italiansovereignspreadsmovedupaswell economyinthesecondquarter,asevidencedby overthisperiod. decliningbusinessconfidenceandafurtherdriftof purchasingmanagersindexesintocontractionary Equitypricesabroaddeclinedsignificantlyinthesec- territory. ondquarter,moresothanintheUnitedStates. Indexestumbledinthenationsatthecenterof the EconomicperformanceintheotherAFEshasbeen euro-areafiscalandbankingcrisis,andthefallin uneven.IntheUnitedKingdom,realGDPcontinued valuefromtheirMarchpeakswasmorethan10per- tofallearlyintheyear,andindicatorspointtofurcentacrosstheadvancedforeigneconomies(AFEs). therweaknessfueledbytightfiscalpolicyandnega- Thisfallwasattenuatedtowardtheendof thesecond tivespillovereffectsfromtheeuroarea.InJapan, quarterbythepositivemarketreactiontotheJune outputroseatarobustpaceinthefirstquarter, summit.EquitymarketsintheEMEswerealso reflectingfiscalstimulusmeasuresaswellasarecovmarkedlydowninthesecondquarter. eryfromtheshortageof partssuppliescausedbythe floodsinThailandlastyear,butrecentdatasuggest Europeanbanksfacedrenewedstressesinrecent thatactivitydeceleratedinthesecondquarter.The months.InGreece,afterinconclusiveelectionsin Canadianeconomycontinuedtoexpandmoderately earlyMay,depositoutflowsfrombanksaccelerated, inthefirstthreemonthsof theyear,supportedby generatingconcernsthatdepositflightcouldspread soliddomesticdemandandaresilientlabormarket. tobankingsystemsintherestof theeuroarea.News thatSpainhadpartlynationalizedthetroubled InmostAFEs,headlineinflationrates—measuredon lenderBankiaandwouldneedtoinjectanadditional a12-monthchangebasis—continuedtodeclinein €19billionintothebankanditsholdingcompany thefirsthalf of theyearastheeffectsof thelarge addedtouneaseabouttheregion,eventuallyleading run-upincommoditypricesinearly2011waned.The toplansforanofficialaidpackageof upto€100bil- smallerrun-upinenergypricesthattookplaceearly liontorecapitalizeSpanishbanks.Apprehension thisyearexertedalessmarkedeffectonconsumer aboutbankhealthwaswidespread,withmajorinsti- prices,thoughithelpedkeep12-monthinflationrates tutionsinItaly,Germany,andseveralotherEuro- above2percentintheeuroareaandintheUnited peancountriesreceivingcreditratingsdowngrades. Kingdom.Japanappearstobeemergingfromseveral Asaresult,Europeanbankstockpriceshave yearsof deflation,butJapaneseinflationremains tumbledsincemid-March.Atthesametime,reflect- belowthe1percentinflationgoalintroducedbythe ingmarketviewsof increasedriskof default,the BOJinFebruary. CDSpremiumsonthedebtof manylargebanksin Europehaverisensubstantially,whileissuanceof Severalcentralbankseasedfurthertheirmonetary unsecuredbankdebt,whichhadpreviouslyrecov- policystances.TheBOJincreasedthesizeof itsasset ered,hasfallen.Notwithstandingthesedevelop- purchasesfrom¥30trillionto¥40trillioninApril, ments,fundingmarketstresseshaveremainedrela- andthento¥45trillioninJuly.TheECB,afterhavtivelymuted,asmanybanksaccessedfundsfromthe ingconductedthesecondof itsthree-yearlonger- Eurosystem—thesystemformedbytheECBandthe termrefinancingoperationsinlateFebruary,cutits nationalcentralbanksof theeuro-areamember policyinterestratestorecordlowsinearlyJuly.In states—ratherthaninterbankmarkets.Astandard lateJune,theBankof England(BOE)activatedits measureof thecostof thisinterbankfunding,the ExtendedCollateralTermRepofacility,offeringsiximpliedbasisspreadfromeuro–dollarswaps,was monthfundsagainstawidesetof collateral.Inaddilittlechangedatshortermaturities. tion,inJuly,theBOEincreasedthesizeof itsasset purchaseprogramfrom£325billionto£375billion, AdvancedForeignEconomies and,togetherwiththeU.K.Treasury,introduceda TheEuropeanfiscalandbankingcrisiswasatthe newFundingforLendingSchemedesignedtoboost centerof economicdevelopmentsintheAFEs.Euro- lendingtohouseholdsandfirms. arearealGDPwasflatinthefirstquarterof 2012 followingacontractioninlate2011.Withintheeuro EmergingMarketEconomies area,outputfellsharplyinmorevulnerablecountries, Followingadisappointingperformanceattheendof includingItalyandSpain,whereasothercountries, lastyear,realGDPgrowthreboundedinthefirst especiallyGermany,performedbetter.Mounting quarterinmostEMEs.Economicactivityexpanded

44 99thAnnualReport|2012 especiallybrisklyinemergingAsia,largelyreflecting InBrazil,realGDP—restrainedbyflagginginvestthereconnectionof supplychainsdamagedbythe mentandweather-relatedproblemsintheagriculfloodsinThailand.Economicgrowth,however,con- turalsector—increasedslightlyinthefirstquarter, tinuedtoslowinChinaandIndia.Moreover,recent makingitthefourthconsecutivequarterof belowindicatorssuggestthatthepaceof economicactivity trendgrowth.Industrialproduction,whichhasbeen deceleratedinmostEMEsgoingintothesecond onadownwardtrendsinceearly2011,continuedto quarteramidheadwindsassociatedwiththeEuro- fallthroughMay,suggestingthateconomicactivity peancrisisandrelativelysubduedgrowthinChina. inBrazilremainedweakinthesecondquarter. InChina,realGDPincreasedatabouta7percent HeadlineinflationgenerallymoderatedintheEMEs paceinthefirsthalf of theyear,downfroman reflectinglowerfoodpricepressuresandweakereco- 8½percentpaceinthesecondhalf of lastyear.The nomicgrowth.InadditiontoChina,severalother slowdownreflectedweakerdemandforChinese centralbanksintheEMEsalsoloosenedmonetary exportsaswellasdomesticfactors,includingmoder- policy,includingthoseinBrazil,Chile,India,Indoatingconsumerspendingandtherestrainingeffects nesia,thePhilippines,SouthKorea,andThailand. oninvestmentof previousgovernmentmeasuresto coolactivityinthepropertysector.Macroeconomic Part 3 dataforMayandJunesuggestthateconomicactivity Monetary Policy: waspickingupabittowardtheendof thesecond Recent Developments and Outlook quarter,withgrowthof investment,retailsales,and banklendingedginghigher.Headline12-month MonetaryPolicyovertheFirstHalfof2012 inflationfellto2.2percentinJune,ledbyadditional TopromotetheFederalOpenMarketCommittee’s moderationinfoodprices.Asinflationarypressures (FOMC)objectivesof maximumemploymentand easedandconcernsaboutgrowthmounted,thePeopricestability,theCommitteemaintainedatarget ple’sBankof Chinaloweredbanks’reserverequirerangeforthefederalfundsrateof 0to¼percent mentsby50basispointsinbothFebruaryandMay throughoutthefirsthalf of 2012.11Withtheincomandthenreducedthebenchmarkone-yearlending ingdatasuggestingasomewhatslowerpaceof ecorateby25basispointsinJuneand31basispointsin nomicrecoverythantheCommitteehadanticipated, July,thefirstchangesinthatratesinceanincreasein andwithinflationseenassettlingatlevelsator Julyof lastyear.Overthefirsthalf of theyear,the belowthoseconsistent,overthelongrun,withits renminbiwaslittlechanged,onnet,againstthedolstatutorymandate,theCommitteetookstepsduring lar,butitappreciatedabout1½percentonareal thefirsthalf of 2012toprovideadditionalmonetary trade-weightedbasis,astherenminbifollowedthe accommodationinordertosupportastrongerecodollarupwardagainstChina’sothermajortrading nomicrecoveryandtohelpensurethatinflation,over partners. time,runsatlevelsconsistentwithitsmandate.These stepsincludedlengtheningthehorizonof thefor- InIndia,economicgrowthhasalsomoderatedas wardrateguidanceregardingtheCommittee’sexpecslowprogressonfiscalandstructuralreformsand tationsfortheperiodoverwhicheconomiccondipreviousmonetarytighteningstalledinvestment. tionswillwarrantexceptionallylowlevelsforthefed- Notingrisingvulnerabilitiesfromthecountry’stwin eralfundsrate,continuingtheCommittee’smaturity fiscalandcurrentaccountdeficits,somecreditrating extensionprogram(MEP)throughtheendof this agencieswarnedthatIndia’ssovereigndebtriskslosyearratherthancompletingtheprograminJuneas ingitsinvestment-gradestatus. previouslyscheduled,retainingitsexistingpolicies regardingthereinvestmentof principalpaymentson InMexico,economicactivityreboundedbrisklyin agencysecuritiesinagency-guaranteedmortgagethefirstquarterastheagriculturalsectorrebounded backedsecurities(MBS),andcontinuingtoreinvest fromthefourth-quarterdrought,domesticdemand theproceedsof maturingTreasurysecurities. gainedmomentum,andexportstotheUnitedStates pickedup.Economicindicators,however,suggest 11 MembersoftheFOMCin2012consistofthemembersofthe thatgrowthmoderatedsomewhatinthesecondquar- BoardofGovernorsoftheFederalReserveSystemplusthe ter.OnJuly1,EnriquePeñaNietoof theInstitu- presidentsoftheFederalReserveBanksofAtlanta,Cleveland, tionalRevolutionaryParty,orPRI,wontheMexican NewYork,Richmond,andSanFrancisco.AsoftheJune FOMCmeeting,GovernorsJeromeH.PowellandJeremyC. presidentialelection,promisingtopursuemarket- SteinjoinedtheBoardofGovernorsincreasingthenumberof orientedreformstobolstereconomicgrowth. FOMCmembersto12.

MonetaryPolicyandEconomicDevelopments 45 TheinformationreviewedattheJanuary24–25meet- increased.Householdspendingandbusinessfixed ingindicatedthatU.S.economicactivityhad investmenthadadvanced.Signsof improvementor expandedmoderately,whileglobalgrowthappeared stabilizationemergedinsomelocalhousingmarkets, tobeslowing.Labormarketindicatorspointedto butoverallhousingactivitycontinuedtobe somefurtherimprovementinlabormarketcondi- restrainedbythesubstantialinventoryof foreclosed tions,butprogresswasgradualandtheunemploy- anddistressedproperties,tightcreditconditionsfor mentrateremainedelevated.Householdspending mortgageloans,anduncertaintyabouttheeconomic hadcontinuedtoadvanceatamoderatepacedespite outlookandfuturehomeprices.Inflationcontinued diminishedgrowthinrealdisposableincome,but tobesubdued,althoughpricesof crudeoilandgasogrowthinbusinessfixedinvestmenthadslowed.The linehadincreasedsubstantially.Longer-terminflahousingsectorremaineddepressed.Inflationhad tionexpectationshadremainedstable. beensubduedinrecentmonths,andlonger-term inflationexpectationshadremainedstable.Meeting Manyparticipantsbelievedthatpolicyactionsinthe participantsobservedthatfinancialconditionshad euroarea,notablytheGreekdebtswapandthe improvedandfinancialmarketstresseshadeased ECB’slonger-termrefinancingoperations,had somewhatduringtheintermeetingperiod,inpart helpedeasestrainsinfinancialmarketsandreduced becauseof theEuropeanCentralBank’s(ECB) thedownsideriskstotheU.S.andglobaleconomic three-yearrefinancingoperation.Nonetheless,par- outlook.Againstthatbackdrop,equitypriceshad ticipantsexpectedthatglobalfinancialmarkets risenandconditionsincreditmarketsimproved, wouldremainfocusedontheevolvingsituationin leadingmanymeetingparticipantstoseefinancial Europe,andtheyanticipatedthatfurtherpolicy conditionsasmoresupportiveof economicgrowth effortswouldberequiredtofullyaddressthefiscal thanatthetimeof theJanuarymeeting. andfinancialproblemsthere. MembersviewedtheinformationonU.S.economic Withtheeconomyfacingcontinuingheadwindsand activityassuggestingthattheeconomywouldcongrowthslowinginseveralU.S.exportmarkets,mem- tinuetoexpandmoderately.However,despitetheeasbersgenerallyexpectedamodestpaceof economic ingof strainsinglobalfinancialmarkets,members growthovercomingquarters,withtheunemploy- continuedtoperceivesignificantdownsiderisksto mentratedecliningonlygradually.Atthesametime, economicactivity.Membersgenerallyanticipated membersthoughtthatinflationwouldrunatlevelsat thattherecentincreaseinoilandgasolineprices orbelowthoseconsistentwiththeCommittee’sdual wouldpushupinflationtemporarily,butthatinflamandate.Againstthisbackdrop,membersagreedto tionsubsequentlywouldrunatorbelowtheratethat keepthetargetrangeforthefederalfundsrateat0to theCommitteejudgesmostconsistentwithitsman- ¼percent,tocontinuetheprogramof extendingthe date.Asaresult,theCommitteedecidedtokeepthe averagematurityof theFederalReserve’sholdingsof targetrangeforthefederalfundsrateat0to¼persecuritiesasannouncedinSeptember,andtoretain cent,toreiterateitsanticipationthateconomiccontheexistingpoliciesregardingthereinvestmentof ditionswerelikelytowarrantexceptionallylowlevels principalpaymentsfromFederalReserveholdingsof forthefederalfundsrateatleastthroughlate securities.Inlightof theeconomicoutlook,most 2014,tocontinuetheprogramof extendingtheavermembersalsoagreedtoindicatethattheCommittee agematurityof theFederalReserve’sholdingsof anticipatesthateconomicconditionsarelikelyto securitiesthatithadadoptedinSeptember,andto warrantexceptionallylowlevelsforthefederalfunds maintaintheexistingpoliciesregardingthereinvestrateatleastthroughlate2014,longerthanhadbeen mentof principalpaymentsfromFederalReserve indicatedinrecentFOMCstatements.TheCommit- holdingsof securities.TheCommitteeagainstated teealsostatedthatitispreparedtoadjustthesize thatitispreparedtoadjustthesizeandcomposition andcompositionof itssecuritiesholdingsasappro- of itssecuritiesholdingsasappropriatetopromotea priatetopromoteastrongereconomicrecoveryina strongereconomicrecoveryinacontextof price contextof pricestability. stability. ThedatainhandattheMarch13FOMCmeeting Bythetimeof theApril24–25FOMCmeeting,the indicatedthatU.S.economicactivityhadcontinued dataagainindicatedthateconomicactivitywas toexpandmoderately.Althoughtheunemployment expandingmoderately.Payrollemploymenthadconrateremainedelevated,ithaddeclinednotablyin tinuedtomoveup,andtheunemploymentrate,while recentmonthsandpayrollemploymenthad stillelevated,haddeclinedalittlefurther.Household

46 99thAnnualReport|2012 spendingandbusinessfixedinvestmenthadcontin- tinuedtoadvance.Despitesomeongoingsignsof uedtoexpand.Thehousingsectorshowedsignsof improvement,thehousingsectorremained improvementbutfromaverylowlevelof activity. depressed.Consumerpriceinflationhaddeclined, Mainlyreflectingtheincreaseinthepricesof crude mainlyreflectinglowerpricesof crudeoilandgasooilandgasolineearlierthisyear,inflationhadpicked line,andlonger-terminflationexpectationsremained upsomewhat;however,measuresof long-runinfla- wellanchored.Meetingparticipantsobservedthat tionexpectationsremainedstable.Meetingpartici- financialmarketswerevolatileovertheintermeeting pantsjudgedthat,ingeneral,conditionsindomestic periodandthatinvestorsentimentwasstronglyinflucreditmarketshadimprovedfurther,butnotedthat encedbythedevelopmentsinEuropeandevidenceof investors’concernsaboutthesovereigndebtand slowingeconomicgrowthathomeandabroad. bankingsituationintheeuroareaintensifiedduring theintermeetingperiod.ManyU.S.financialinstitu- Inthediscussionof monetarypolicy,mostmembers tionshadbeentakingstepstobolstertheirresilience, agreedthattheoutlookhaddeterioratedsomewhat includingexpandingtheircapitallevelsandliquidity relativetothetimeof theAprilmeeting,andthatsigbuffersandreducingtheirEuropeanexposures. nificantdownsideriskswerepresent,importantly includingthefinancialstressesintheeuroareaand Membersexpectedgrowthtobemoderateovercom- uncertaintyaboutthedegreeof fiscalrestraintinthe ingquartersandthentopickupovertime.Strainsin UnitedStates,anditseffectsoneconomicactivity globalfinancialmarketsstemmingfromthesovereign overthemediumterm.Asaresult,theCommittee debtandbankingsituationinEuropeaswellas decidedthatprovidingadditionalmonetarypolicy uncertaintyaboutU.S.fiscalpolicycontinuedtopose accommodationwouldbeappropriatetosupporta significantdownsideriskstoeconomicactivityboth strongereconomicrecoveryandtohelpensurethat hereandabroad.Mostmembersanticipatedthatthe inflation,overtime,wasatalevelconsistentwiththe increaseininflationwouldprovetemporaryandthat Committee’sdualmandate.Specifically,theCommitsubsequentlyinflationwouldrunatorbelowtherate teeagreedtocontinuetheMEPthroughtheendof thattheCommitteejudgestobemostconsistentwith theyear,insteadof endingtheprograminJuneas itsmandate.Againstthisbackdrop,theCommittee hadbeenplanned.Indoingso,theFederalReserve membersreachedthecollectivejudgmentthatit willpurchaseTreasurysecuritieswithremaining wouldbeappropriatetomaintaintheexistinghighly maturitiesof 6yearsto30yearsandsellorredeem accommodativestanceof monetarypolicy.Inpar- anequalparvalueof Treasurysecuritieswith ticular,theCommitteeagreedtokeepthetarget remainingmaturitiesof approximately3yearsorless. rangeforthefederalfundsrateat0to¼percent,to Thiscontinuationof theMEPwillproceedatabout continuetheprogramof extendingtheaveragematu- thesamepaceashadbeenexecutedthroughthefirst rityof theFederalReserve’sholdingsof securitiesas phaseof theprogram,increasingtheFederal announcedlastSeptember,andtoretaintheexisting Reserve’sholdingsof longer-termTreasurysecurities policiesregardingthereinvestmentof principalpay- byabout$267billionwhilereducingitsholdingsof mentsfromFederalReserveholdingsof securities. shorter-termTreasurysecuritiesbythesameamount. TheCommitteelefttheforwardguidanceforthetar- Forthedurationof thisprogram,theCommittee getfederalfundsrateunchangedatthismeeting. directedtheOpenMarketDesktosuspenditscur- Membersemphasizedthattheirforwardguidance rentpolicyof rollingovermaturingTreasurysecuriwasconditionalonexpectedeconomicdevelopments, tiesintonewissuesatauction(andinsteadpurchase buttheypreferredadjustingtheforwardguidance onlyadditionallonger-termsecuritieswiththeproonlyoncetheyweremoreconfidentthatthemedium- ceedsof maturingsecurities).TheCommittee termeconomicoutlookortheriskstothatoutlook expectedthecontinuationof theMEPtoputdownhadchangedsignificantly. wardpressureonlonger-terminterestratesandhelp makebroaderfinancialconditionsmoreaccommoda- Datareceivedovertheperiodleadinguptothe tive.Inaddition,theCommitteedecidedtocontinue June19–20FOMCmeetingindicatedthateconomic reinvestingprincipalpaymentsfromitsholdingsof activitywasexpandingatasomewhatmoremodest agencydebtandagencyMBSinagencyMBS.The pacethanearlierintheyear.Improvementsinlabor Committeealsodecidedtokeepthetargetrangefor marketconditionshadslowedinrecentmonths,and thefederalfundsrateat0to¼percentandtoreaftheunemploymentrateseemedtohaveflattenedout. firmitsanticipationthateconomicconditionswere Householdspendingappearedtoberisingatasome- likelytowarrantexceptionallylowlevelsforthefedwhatslowerrate,andbusinessinvestmenthadcon- eralfundsrateatleastthroughlate2014.Initsstate-

MonetaryPolicyandEconomicDevelopments 47 ment,theCommitteenotedthatitwaspreparedto forpersonalconsumptionexpenditures,ismostcontakefurtheractionasappropriatetopromote sistentoverthelongerrunwiththeFederalReserve’s strongereconomicrecoveryandsustainedimprove- statutorymandate.WhilenotingthattheCommitmentinlabormarketconditionsinacontextof price tee’sassessmentsof themaximumlevelof employstability. mentarenecessarilyuncertainandsubjecttorevision,thestatementindicatedthatthecentralten- FOMCCommunications dencyof FOMCparticipants’currentestimatesof Transparencyisanessentialprincipleof moderncen- thelonger-runnormalrateof unemploymentis tralbankingbecauseitcontributestotheaccount- between5.2and6.0percent.ItstressedthattheFedabilityof centralbankstothegovernmentandtothe eralReserve’sstatutoryobjectivesaregenerally publicandbecauseitcanenhancetheeffectivenessof complementary,butwhentheyarenot,theCommitcentralbanksinachievingtheirmacroeconomic teewillfollowabalancedapproachinitseffortsto objectives.Tothisend,theFederalReserveprovides returnbothinflationandemploymenttolevelscontothepublicaconsiderableamountof information sistentwithitsmandate. concerningtheconductof monetarypolicy.Followingeachmeetingof theFOMC,theCommittee Inaddition,inlightof adecisionmadeatthe immediatelyreleasesastatementthatlaysoutthe Decembermeeting,theCommitteeprovided,starting rationaleforitspolicydecisionandissuesdetailed intheJanuarySummaryof EconomicProjections minutesof themeetingaboutthreeweekslater. (SEP),informationabouteachparticipant’sassess- Lightlyeditedtranscriptsof FOMCmeetingsare mentof appropriatemonetarypolicy.Specifically, releasedtothepublicwithafive-yearlag.12More- theSEPincludedinformationaboutparticipants’ over,beginninginApril2011,theChairmanhasheld estimatesof theappropriatelevelof thetargetfederal pressconferencesonanapproximatelyquarterly fundsrateinthefourthquarterof thecurrentyear basis.Atthepressconferences,theChairman andthenextfewcalendaryears,andoverthelonger presentsthecurrenteconomicprojectionsof FOMC run;theSEPalsoreportedparticipants’currentproparticipantsandprovidesadditionalcontextforthe jectionsof thelikelytimingof theappropriatefirst Committee’spolicydecisions. increaseinthetargetfederalfundsrategiventheir assessmentsof theeconomicoutlook.Theaccompa- TheCommitteecontinuedtoconsiderfurther nyingnarrativedescribedthekeyfactorsunderlying improvementsinitscommunicationsapproachinthe thoseassessmentsandprovidedsomequalitative firsthalf of 2012.AttheJanuarymeeting,the informationregardingparticipants’expectationsfor FOMCreleasedastatementof itslonger-rungoals theFederalReserve’sbalancesheet. andpolicystrategyinanefforttoenhancethetransparency,accountability,andeffectivenessof mon- AttheMarchmeeting,participantsdiscussedarange etarypolicyandtofacilitatewell-informeddecision- of additionalstepsthattheCommitteemighttaketo makingbyhouseholdsandbusinesses.13Thestatehelpthepublicbetterunderstandthelinkages mentdidnotrepresentachangeintheCommittee’s betweentheevolvingeconomicoutlookandtheFedpolicyapproach,butratherwasintendedtohelp eralReserve’smonetarypolicydecisions,andthus enhancethetransparency,accountability,andeffec- theconditionalityintheCommittee’sforwardguidtivenessof monetarypolicy.Thestatementempha- ance.ParticipantsdiscussedwaysinwhichtheComsizestheFederalReserve’sfirmcommitmenttopur- mitteemightinclude,initspostmeetingstatements sueitscongressionalmandatetopromotemaximum andothercommunications,additionalqualitativeor employment,stableprices,andmoderatelong-term quantitativeinformationthatcouldconveyasenseof interestrates.Toclarifyitslonger-termobjectives,the howtheCommitteemightadjustpolicyinresponse FOMCstatedthatinflationattherateof 2percent, tochangesintheeconomicoutlook.However,parasmeasuredbytheannualchangeinthepriceindex ticipantsalsoobservedthattheCommitteehadintroducedseveralimportantenhancementstoitspolicy 12 FOMCstatements,minutes,andtranscripts,aswellasother communicationsoverthepastyearorso;these relatedinformation,areavailableontheFederalReserve includedtheChairman’spostmeetingpressconfer- Board’swebsiteatwww.federalreserve.gov/monetarypolicy/ fomc.htm. enceaswellaschangestotheFOMCstatementand 13 TheFOMCstatementoflonger-rungoalsandpolicystrategyis theSEP.Againstthisbackdrop,someparticipants availableontheFederalReserveBoard’swebsiteatwww notedthatadditionalexperiencewiththechanges .federalreserve.gov/monetarypolicy/fomccalendars.htm.

48 99thAnnualReport|2012 implementedtodatecouldbehelpfulinevaluating sionsandpolicycommunications.Manyparticipants potentialfurtherenhancements. indicatedthatif itwerepossibletoconstructaquantitativeeconomicprojectionandassociatedpathof AttheAprilmeeting,theCommitteediscussedthe appropriatepolicythatreflectedthecollectivejudgrelationshipbetweenthepostmeetingstatement, mentof theCommittee,suchaprojectioncould whichexpressesthecollectiveviewof theCommittee, potentiallybehelpfulinclarifyinghowtheoutlook andthepolicyprojectionsof individualparticipants, andpolicydecisionsarerelated.However,manyparwhichareincludedintheSEP.TheChairmanasked ticipantsnotedthatdevelopingaquantitativeforethesubcommitteeoncommunicationstoconsider castthatreflectstheCommittee’scollectivejudgment possibleenhancementsandrefinementstotheSEP couldbechallenging,giventherangeof theirviews thatmighthelpclarifythelinkbetweeneconomic abouttheeconomy’sstructureanddynamics.ParticidevelopmentsandtheCommittee’sviewof the pantsagreedtocontinuetoexplorewaystoincrease appropriatestanceof monetarypolicy.Followingup clarityandtransparencyintheCommittee’spolicy onthisissueattheJunemeeting,participantsdis- communications,butmanyemphasizedthatfurther cussedseveralpossibilitiesforenhancingtheclarity changesinthosecommunicationsshouldbeconsidandtransparencyof theCommittee’seconomicpro- eredcarefully. jectionsaswellastheroletheyplayinpolicydeci-

49 Supervision and Regulation TheFederalReservehassupervisoryandregulatory industryrecovery,withthenonperformingassetratio authorityoveravarietyof financialinstitutionsand remainingelevatedat3.4percentof loansandforeactivitieswiththegoalof promotingasafe,sound, closedassets,animprovementfrom4.1percentat andstablefinancialsystemthatsupportsthegrowth year-end2011.Weaknesseswerebroadbased, andstabilityof theU.S.economy.Asdescribedin encompassingresidentialmortgages(first-lien),comthisreport,theFederalReservecarriesoutitssuper- mercialrealestate—especiallynon-ownernonfarm visoryandregulatoryresponsibilitiesandsupporting nonresidentialandconstructionotherthansinglefunctionsprimarilyby family—commercialandindustrial(C&I)loans,and constructionandlanddevelopmentloans.(Alsosee • promotingthesafetyandsoundnessof individual “BankHoldingCompanies”onpage56.) financialinstitutionssupervisedbytheFederal Reserve; Performanceof statememberbanks.Theperfor- • developingsupervisorypolicy(rulemakings,super- manceatstatememberbanksin2012improvedcomvisionandregulationletters(SRletters),policy paredtothelastfewyears.Asagroup,statemember statements,andguidance); banksreportedaprofitof $17.8billionfor2012,up from$11.5billionfor2011butstillslightlybelow • identifyingrequirementsandsettingprioritiesfor pre-crisislevels.Provisions(asapercentof revenue) supervisoryinformationtechnologyinitiatives; havecontinuedtodecreaseandarenow5.0percent, • ensuringongoingstaff developmenttomeetevolv- downfromacrisishighof 32.4percentatyear-end ingsupervisoryresponsibilities; 2009.Further,6.4percentof allstatememberbanks continuedtoreportlosses,downfrom11percentfor • regulatingtheU.S.bankingandfinancialstructure year-end2011.MirroringtrendsatBHCs,thenonbyactingonavarietyof proposals;and performingassetsratioremainedelevatedat2.1per- • enforcingotherlawsandregulations. centof loansandforeclosedassets,reflectingboth contractingloanbalancesandongoingweaknessesin assetquality.Growthinproblemloanscontinuedto 2012 Developments slowduring2012;however,weaknessencompassed nonfarmnonresidentiallending,residentialmort- During2012,theU.S.bankingsystemandfinancial gages,andC&Iloans.Therisk-basedcapitalratios marketscontinuedtoimprove,ataslowpace,follow- forstatememberbankswerebasicallyunchanged ingtheirrecoveryfromthefinancialcrisisthat comparedtotheprioryearintheaggregate,and startedinmid-2007. thepercentof statememberbanksdeemedwellcapitalizedunderpromptcorrectiveactionstandards Performanceof bankholdingcompanies.Whilean remainedhighat99percent.In2012,fourstatememimprovementinbankholdingcompanies’(BHCs) berbankswith$1.3billioninassetsfailed.(Alsosee performancewasevidentduring2012,performance “StateMemberBanks”onpage55.) remainsweakbyhistoricalstandards.U.S.BHCs,in aggregate,reportedearningsof $137billionfor2012, Consolidatedsupervisionframeworkforlargefinancial upfrom$108billionfortheyearendingDecem- institutions.InDecember,theBoardissuedanew ber31,2011.Theproportionof unprofitableBHCs, frameworkforconsolidatedsupervisionof large althoughdownfrom18percentin2011,remains financialinstitutions.Buildingonlessonsfromthe elevatedat10percent;unprofitableBHCsencompass recentfinancialcrisis,thisframeworkstrengthenstraroughly5percentof bankingindustryassets.Non- ditionalmicroprudentialsupervisionandregulation performingassetscontinuetobeachallengeto toenhancethesafetyandsoundnessof individual

50 99thAnnualReport|2012 Box 1. Consolidated Supervision Framework for Large Financial Institutions Buildingonlessonsfromtherecentfinancialcrisis, Theframeworkisdesignedtosupportatailored theFederalReserveissuedanewframeworkforthe supervisoryapproachthataccountsfortheunique consolidatedsupervisionoflargefinancialinstitutions riskcharacteristicsofeachfirmandappliestothe inDecember2012.Thisframeworkstrengthenstradi- followinginstitutions: tionalmicroprudentialsupervisionandregulationto • LargeInstitutionSupervisionCoordinating enhancethesafetyandsoundnessofindividualfirms Committee(LISCC)firms:thelargest,mostcomandincorporatesmacroprudentialconsiderationsto plexU.S.andforeignfinancialorganizationssubreducepotentialthreatstothestabilityofthefinancial jecttoconsolidatedsupervisionbytheFederal system. Reserve.Nonbankfinancialcompaniesdesignated Thenewframeworkhastwoprimaryobjectives: bytheFinancialStabilityOversightCouncilfor supervisionbytheFederalReserveareincludedin 1. Enhancingresiliencyofafirmtolowerthe theLISCCportfolio.LISCCfirmsareconsideredto probabilityofitsfailureorinabilitytoserveas posethegreatestsystemicrisktotheU.S. afinancialintermediary.Eachfirmisexpected economy. toensurethattheconsolidatedorganization(or thecombinedU.S.operationsinthecaseoffor- • LargeBankingOrganizations:domesticbank eignbankingorganizations)anditscorebusiness andsavingsandloanholdingcompanieswith linescansurviveunderabroadrangeofinternal consolidatedassetsof$50billionormorethatare orexternalstresses.Thisrequiresfinancialresil- notincludedintheLISCCportfolio. iencebymaintainingsufficientcapitalandliquid- • LargeForeignBankingOrganizations:foreign ity,andoperationalresiliencebymaintaining bankingorganizationswithcombinedassetsof effectivecorporategovernance,riskmanage- U.S.operationsof$50billionormorethatarenot ment,andrecoveryplanning. includedintheLISCCportfolio. 2. Reducingtheimpactonthefinancialsystem Theconsolidatedsupervisionframeworkforlarge andthebroadereconomyintheeventofa financialinstitutionsisbeingimplementedinamultifirm’sfailureormaterialweakness.Eachfirm stageapproach.Additionalsupervisoryandoperaisexpectedtoensurethesustainabilityofits tionalguidancewillbedevelopedtosupportimplecriticaloperationsandbankingofficesundera mentationoftheframeworkandtoassesstheprogbroadrangeofinternalorexternalstresses.This ressoffirmsinmeetingtheseexpectations. requires,amongotherthings,effectiveresolution planningthataddressesthecomplexityandthe Formoreinformationaboutthesupervisoryframeinterconnectivityofthefirm’soperations. work,seetheBoard’spressreleaseandSRletter 12-17/CA12-14atwww.federalreserve.gov/ newsevents/press/bcreg/20121217a.htm. firms,andincorporatesmacroprudentialconsider- enablingthemtocontinuelendingtocreditworthy ationstoreducepotentialthreatstothestabilityof householdsandbusinessesevenafterunforeseen thefinancialsystem.Theconsolidatedsupervision lossesandduringsevereeconomicdownturns.(See frameworkforlargefinancialinstitutionsisbeing box3fordetails.) implementedinamulti-stageapproach.Additional supervisoryandoperationalguidancewillbedevel- Capitalplanningandstresstesting.Sincethefinancial opedtosupportimplementationof theframework crisis,theBoardhasledaseriesof initiativesto andtoassesstheprogressof firmsinmeetingexpec- strengthenthecapitalpositionsof thelargestbanktations.(Seebox1formoredetails.) ingorganizations.Tworelatedinitiativesarethe ComprehensiveCapitalAnalysisandReview Enhancedprudentialstandardsandearlyremediation (CCAR)andtheDodd-FrankActstresstests.(See requirementsforforeignbankingorganizations.In box4fordetails.) December,theBoardissuedanoticeof proposed rulemaking(NPR)tostrengthentheoversightof Recoveryandresolutionplanning.TheFederal U.S.operationsof foreignbanks.(Seebox2for Reservecontinuestoworkwithotherregulatory details.) agenciestoreducetheprobabilityof failureof the largest,mostcomplexfinancialfirmsandtomini- ProposedBaselIIIcapitalrules.InJune,thefederal mizethelossestothefinancialsystemandthe bankingagenciesjointlyissuedthreeNPRstohelp economyif suchafirmshouldfail.In2012,11finanensurebanksmaintainstrongcapitalpositions, cialinstitutionssubmittedtheirfirstplansforarapid

SupervisionandRegulation 51 Box 2. Enhanced Prudential Standards and Early Remediation Requirements for Foreign Banking Organizations InDecember2012,theBoardissuedanNPRto theconsolidatedcapitalpositionsoftheIHCsaswell implementtheenhancedprudentialstandardsand aspromotealevelplayingfieldamongallbanking earlyremediationrequirementsinsections165and firmsoperatingintheUnitedStates.IHCswith 166oftheDodd-FrankActforlargeforeignbanking $50billionormoreinconsolidatedassetsalsowould organizations.Theproposalgenerallyappliestofor- besubjecttotheFederalReserve’scapitalplanrule. eignbankingorganizationswithaU.S.bankingpres- Liquidityrequirements.TheU.S.operationsofforenceandtotalglobalconsolidatedassetsof$50bileignbankingorganizationswithcombinedU.S. lionormore.Morestringentstandardswereproassetsof$50billionormorewouldberequiredto posedforforeignbankingorganizationswith meetenhancedliquidityrisk-managementstandards, combinedU.S.assetsof$50billionormore. conductliquiditystresstests,andholda30-daybuf- TheNPRproposes ferofhigh-qualityliquidassets.TheliquidityrequirementswouldhelpmaketheU.S.operationsoffor- AU.S.intermediateholdingcompanyrequireeignbankingorganizationsmoreresilienttofunding ment.Aforeignbankingorganizationwithboth shocksduringtimesofstress. $50billionormoreinglobalconsolidatedassetsand U.S.subsidiarieswith$10billionormoreintotal Otherrequirements:Theproposalalsoincludes assetsgenerallywouldberequiredtoorganizeits measuresregardingcapitalstresstests,single- U.S.subsidiariesunderasingleU.S.intermediate counterpartycreditlimits,riskmanagement,and holdingcompany(IHC).Thisstructurewouldcreatea earlyremediation. platformfortheconsistentsupervisionandregulation Theproposalincludesasubstantialphase-inperiod oftheU.S.operationsofforeignbankingorganizatogiveforeignbankingorganizationstimetoadjust tionsandhelpfacilitatetheresolutionoffailingU.S. tothenewrules.Foreignbankingorganizationswith operationsofaforeignbankifneeded.DirectU.S. globalconsolidatedassetsof$50billionormoreon branchesandagenciesofforeignbankingorganiza- July1,2014,wouldberequiredtomeetthenew tionswouldremainoutsidetheU.S.IHC. standardsonJuly1,2015. Risk-basedcapitalandleveragerequirements. ThecommentperiodendsonMarch31,2013.See IHCsofforeignbankingorganizationswouldbesubpressreleaseandnoticeatwww.federalreserve.gov/ jecttothesamerisk-basedandleveragecapital newsevents/press/bcreg/20121214a.htm. standardsapplicabletoU.S.bankholdingcompanies.Thisproposedrequirementwouldhelpbolster andorderlyresolutionundertheBankruptcyCodein tothecoveredcompaniesthatsubmittedinitialresotheeventof theirmaterialfinancialdistressorfailure, lutionplansin2012.2 infulfillmentof aDodd-FrankActrequirement.The publicsectionof theseplans,whicharepostedonthe Supervision FederalReserve’sandFDIC’spublicwebsites,providesahigh-leveldescriptionof thefinancialinstitution’sresolutionstrategy,corebusinesslinesand TheFederalReserveisthefederalsupervisorand materialentities,corporategovernancestructureand regulatorof allU.S.BHCs,includingfinancialholdprocessesrelatedtoresolutionplanning,derivative ingcompanies,andstate-charteredcommercialbanks activitiesandhedgingactivities,andfinancialinfor- thataremembersof theFederalReserveSystem.The mation.1During2013,theFederalReserveand FederalReservealsohasresponsibilityforsupervis- FDICwillprovideguidancetotheremainingfirms ingtheoperationsof allEdgeActandagreement thatmustfileinitialplansthisyearundertheresolu- corporations,theinternationaloperationsof state tionplanrequirement.Additionally,fortheupcom- memberbanksandU.S.BHCs,andtheU.S.operaing2013submissions,theFederalReserveandFDIC tionsof foreignbankingorganizations.Furthermore, havepubliclyreleasedthedetailedguidanceprovided throughtheDodd-FrankAct,theFederalReserve hasbeenassignedresponsibilitiesfornonbankfinancialfirmsandfinancialmarketutilities(FMUs)des- 1 Thepublicsectionsoftheresolutionplansareavailableatwww 2 Theguidanceisavailableatwww.federalreserve.gov/newsevents/ .federalreserve.gov/bankinforeg/resolution-plans.htm. press/bcreg/20130415c.htm.

52 99thAnnualReport|2012 Box 3. Proposed Basel III Capital Rule InJune2012,thefederalbankingagenciesjointly StandardizedApproachNPR proposedthreeNPRsthatwouldrestructurethe Thisproposalwouldreviseandharmonizethefederal agencies’currentregulatorycapitalrulesintoaharbankingagencies’rulesforcalculatingrisk-weighted monized,comprehensiveframeworkthatwould assetstoenhancerisksensitivityandaddressweakimplementBaselIIIforinternationally-activeU.S. nessesthathavebeenidentifiedoverthepastsevbankingorganizationsandwouldmodernizeand eralyears.ThechangeswouldincluderevisedmethstrengthentheregulatorycapitalrulesforotherU.S. odologiesfordeterminingrisk-weightedassetsfor bankingorganizations.Takentogether,theNPRs residentialmortgages,securitizationexposures,and wouldaddressshortcomingsinregulatorycapital counterpartycreditrisk.Inaddition,theproposal requirementsthatbecameapparentduringtherecent wouldmodifytherecognitionofcreditriskmitigation financialcrisisby(1)increasingboththequantityand toincludegreaterrecognitionoffinancialcollateral qualityofregulatorycapitalbankingorganizationsare andawiderrangeofeligibleguarantors.Theprorequiredtohold,(2)betterreflectingbankingorganiposalwouldalsoeliminatereferencestoandreliance zations’riskprofiles,and(3)improvingtheresiliency oncreditratingsinthecalculationofrisk-weighted oftheU.S.bankingsystemduringtimesofstress. assets.TheStandardizedApproachNPRwould Theproposedrulemakingwasdividedintothreepro- applytothesamesetofinstitutionsastheBasel posalstominimizeburdenonsmallerandmid-sized IIINPR. bankingorganizationsandtoallowfirmstofocuson theaspectsoftheproposedrevisionsthatarerel- AdvancedApproachesandMarketRiskNPR evanttotheirorganizations. Thisproposalwouldenhancetherisksensitivityof theadvancedapproachesrisk-basedcapitalruleto BaselIIINPR betteraddresscounterpartycreditriskandintercon- ConsistentwiththeBaselframework,thisproposal nectednessamongfinancialinstitutions,andwould wouldintroduceanewcommonequitytier1capital extendapplicationoftheruletosavingsandloan ratioof4.5percentofrisk-weightedassets;increase holdingcompanies.Inaddition,theproposalwould theminimumtier1capitalratiofrom4percentto incorporatethemarketriskcapitalruleintoaninte- 6percentofrisk-weightedassets;revisethedefini- gratedcapitalframeworkandextendapplicationof tionofcapitaltoimprovethelossabsorbencyof theruletosavingsandloanholdingcompaniesand regulatorycapitalinstruments;establishlimitations savingsassociations.ThisNPRwouldapplyonlyto oncapitaldistributionsandcertaindiscretionary thoseinstitutionsthatmeettherelevantthresholds, bonuspaymentsifadditionalspecifiedamounts,or whicharegenerallythosethatareinternationally “buffers,”ofcommonequitytier1capitalarenot activeorthathavesignificanttradingactivities. met;introduceasupplementaryleverageratiofor Thefederalbankingagenciesreceivedthousandsof bankingorganizationssubjecttotheadvanced commentlettersontheNPRsandareworkingto approachesrisk-basedcapitalrule;andupdatethe finalizetherulemakingin2013. promptcorrectiveactionframeworkwiththenew regulatorycapitalminimumsandareviseddefinition Seepressreleaseandnoticesatwww.federalreserve oftangibleequity.TheBaselIIINPRwouldapplyto .gov/newsevents/press/bcreg/20120607a.htm. alldepositoryinstitutions,savingsandloanholding companies,andthosebankholdingcompaniesthat arenotsubjecttotheBoard’sSmallBankHolding CompanyPolicyStatement. ignatedbytheFinancialStabilityOversightCouncil andsoundness,includingcompliancewithlawsand assystemicallyimportant.Inaddition,theDodd- regulations. FrankActtransferredauthorityforconsolidated supervisionof morethan400savingsandloanhold- Safety and Soundness ingcompanies(SLHCs)andtheirnon-depository subsidiariesfromtheOfficeof ThriftSupervision TheFederalReserveusesarangeof supervisory (OTS)totheFederalReserve. activitiestopromotethesafetyandsoundnessof financialinstitutionsandmaintainacomprehensive Inoverseeingtheinstitutionsunderitsauthority,the understandingandassessmentof eachfirm.These FederalReserveseeksprimarilytopromotesafety activitiesincludehorizontalreviews,firm-specific

SupervisionandRegulation 53 Table1.Statememberbanksandbankholdingcompanies,2008–2012 Entity/item 2012 2011 2010 2009 2008 Statememberbanks Totalnumber 843 828 829 845 862 Totalassets(billionsofdollars) 2,005 1,891 1,697 1,690 1,854 Numberofexaminations 769 809 912 850 717 ByFederalReserveSystem 487 507 722 655 486 Bystatebankingagency 282 302 190 195 231 Top-tierbankholdingcompanies Large(assetsofmorethan$1billion) Totalnumber 508 491 482 488 485 Totalassets(billionsofdollars) 16,112 16,443 15,986 15,744 14,138 Numberofinspections 712 672 677 658 519 ByFederalReserveSystem1 691 642 654 640 500 Onsite 514 461 491 501 445 Offsite 177 181 163 139 55 Bystatebankingagency 21 30 23 18 19 Small(assetsof$1billionorless) Totalnumber 4,124 4,251 4,362 4,486 4,545 Totalassets(billionsofdollars) 983 982 991 1,018 1,008 Numberofinspections 3,329 3,306 3,340 3,264 3,192 ByFederalReserveSystem 3,150 3,160 3,199 3,109 3,048 Onsite 200 163 167 169 107 Offsite 2,950 2,997 3,032 2,940 2,941 Bystatebankingagency 179 146 141 155 144 Financialholdingcompanies Domestic 408 417 430 479 557 Foreign 38 40 43 46 45 1 Forlargebankholdingcompaniessubjecttocontinuous,risk-focusedsupervision,includesmultipletargetedreviews. examinationsandinspections,continuousmonitor- • anassessmentof thekeyfinancialfactorsof capiingandsurveillanceactivities,andimplementationof tal,assetquality,earnings,andliquidity;and enforcementorothersupervisoryactionsasneces- • areviewforcompliancewithapplicablelawsand sary.TheFederalReservealsoprovidestrainingand regulations. technicalassistancetoforeignsupervisorsand minority-ownedanddenovodepositoryinstitutions. Table1providesinformationonexaminationsand ExaminationsandInspections inspectionsconductedbytheFederalReserveduring thepastfiveyears. TheFederalReserveconductsexaminationsof state memberbanks,FMUs,theU.S.branchesandagen- ConsolidatedSupervision ciesof foreignbanks,andEdgeActandagreement Consolidatedsupervision,amethodof supervision corporations.Inaprocessdistinctfromexaminathatencompassestheparentcompanyanditssubsidtions,itconductsinspectionsof holdingcompanies iaries,allowstheFederalReservetounderstandthe andtheirnonbanksubsidiaries.Whetheranexamiorganization’sstructure,activities,resources,risks, nationoraninspectionisbeingconducted,the andfinancialandoperationalresilience.Working reviewof operationsentails withotherrelevantsupervisorsandregulators,the • anevaluationof theadequacyof governancepro- FederalReserveseekstoensurethatfinancial,operavidedbytheboardandseniormanagement, tional,orotherdeficienciesareaddressedbeforethey includinganassessmentof internalpolicies,proceposeadangertotheconsolidatedorganization,its dures,controls,andoperations; bankingoffices,orthebroadereconomy.3 • anassessmentof thequalityof theriskmanagementandinternalcontrolprocessesin 3 "Bankingoffices"aredefinedasU.S.depositoryinstitutionsubplacetoidentify,measure,monitor,andcontrol sidiaries,aswellastheU.S.branchesandagenciesofforeign risks; bankingorganizations.

54 99thAnnualReport|2012 Box 4. Capital Planning and Stress Testing Sincethefinancialcrisis,theBoardhasledaseries capitalplans,companiesarerequiredtoconduct ofinitiativestostrengthenthecapitalpositionsof company-runstresstestsunderscenariosprovided large,complexbankingorganizations,including bytheBoardandscenariosdesignedbythecompaworkingwiththeorganizationstobolstertheirinter- niesinordertoassesseachcompany’sviewofits nalprocessesforassessingcapitalneedsand idiosyncraticrisks.TheBoardassessesacompaenhancingtheBoard’ssupervisorypracticesfor ny’sabilitytoeffectivelyidentify,measure,and assessingcapitaladequacy.Theseeffortsculmi- assessitsrisks;itsmethodologiesforestimating natedintheComprehensiveCapitalAnalysisand company-widelossesandrevenuesunderstress Review(CCAR),theannualsupervisoryreviewof scenarios;anditsprocessfordeterminingthe capitalplansoflargebankingorganizations,includ- impactofastressedoperatingenvironmentoncapiinganyplanstheyhadforincreasingdividendsor taladequacy.Supervisoryevaluationsofindividual buyingbackstock.TheBoardfurtherstrengthened companies’capitalplans,includingaquantitative itssupervisoryapproachtoassessingcapital analysisthatincorporatesDodd-FrankActsuperviadequacyatthelargefinancialcompaniesbyfinaliz- sorystresstests,areconductedsimultaneously ingitsDodd-FrankActcapitalstresstestingrulesin acrossallparticipatingcompanies,allowingacom- Octoberof2012. parativeanalysisacrossthecompaniesandprovidingtheFederalReservewithabroadviewofU.S. DuringtheBoard’sannualCCARprocess,theFedbankingsystemassetsandactivities. eralReserveevaluatesthecapitaladequacy;internalcapitaladequacyprocesses;andplanstomake TheBoardfinalizedtwoDodd-Frankstresstesting capitaldistributions,suchasdividendpaymentsor rules: stockrepurchases,ofBHCswith$50billionormore inassets.Thecapitalplanrulerequirescompanies • coveredcompanyrule—providesdetailsonthe todevelopcomprehensivecapitalpoliciestogovern processforannualsupervisorystresstestsand theircapitalplanning,capitalissuance,usage,and requirementsforsemi-annualcompany-runstress distribution.CCARincludestheBoard’sevaluation testsforBHCswith$50billionormoreinassets ofeachcompany’scapitalplantoensurethatcom- andsystemicallyimportantnonbankfinancial panies’capitalplanningprocessesaresufficiently companies. comprehensiveandforward-looking.Aspartoftheir (continuedonnextpage) Largefinancialinstitutionsincreasinglyoperateand TheFederalReserveusesarangeof supervisory managetheirintegratedbusinessesacrosscorporate activitiestomaintainacomprehensiveunderstanding boundaries.Financialtroubleinonepartof afinan- andassessmentof eachlargefinancialinstitution: cialinstitutioncanspreadrapidlytootherpartsof • Coordinatedhorizontalreviews.Thesereviews theinstitution.Risksthatcrosslegalentitiesorthat involveexaminingseveralinstitutionssimultanearemanagedonaconsolidatedbasiscannotbe ouslyandencompassfirm-specificsupervisionand monitoredproperlythroughsupervisionthatis thedevelopmentof cross-firmperspectives.The directedatanyoneof thelegalentitysubsidiaries FederalReserverecognizesthepriorityof these withintheoverallorganization.Anewframeworkfor reviewsthroughthededicationof experiencedstaff theconsolidatedsupervisionof alllargefinancial withmultidisciplinaryskills.Examplesinclude institutionswasissuedinDecember2012(seebox1). analysisof capitaladequacyandplanningthrough theComprehensiveCapitalAnalysisandReview Tostrengthenitssupervisionof thelargest,most (CCAR),aswellashorizontalevaluationsof resocomplexfinancialinstitutions,theFederalReserve lutionplansandincentivecompensationpractices. createdacentralizedmultidisciplinarybodycalled theLargeInstitutionSupervisionCoordinating • Firm-specificexaminationsand/orinspectionsand Committee(LISCC)tooverseethesupervisionand continuousmonitoringactivities.Theseactivitiesare evaluateconditionsof supervisedfirms.Thecommit- designedtomaintainanunderstandingandassessteealsodevelopscross-firmperspectivesandmoni- mentacrossthecoreareasof supervisoryfocus. torsinterconnectednessandcommonpracticesthat Theseactivitiesincludereviewandassessmentof couldleadtosystemicrisk. changesinstrategy,inherentrisks,controlpro-

SupervisionandRegulation 55 Box 4. Capital Planning and Stress Testing—continued • otherfinancialcompaniesrule—requiresannual tiontomarketparticipantsaboutthecapital company-runstresstestsatcompaniessuper- adequacyoflargebankingorganizationsunder visedbytheBoard,withmorethan$10billionin hypotheticalstressfulcircumstances(www assets. .federalreserve.gov/bankinforeg/stress-tests-capitalplanning.htm).UndertheDodd-FrankActstresstest Formoreinformationonthestresstestrules,see rules,companiesmustalsopubliclyreleaseasumtheBoard’spressreleaseandFederalRegister maryoftheircompany-runstresstestsunderthe noticesatwww.federalreserve.gov/newsevents/ “severelyadverse”scenario,includingbothquantitapress/bcreg/20121009a.htm. tiveresultsandqualitativeinformationontherisks TheDodd-FrankActsupervisorystresstestsand capturedinthestresstestsandthestresstesting theannualcompany-runstresstestsareconducted methodologies—asacomplementtothepublication undercommonscenarios(baseline,adverse,and oftheresultsoftheFederalReserve’ssupervisory severelyadverse)providedbytheBoard,making stresstests. theresultsofthesupervisoryandcompany-run TogetherCCARandDodd-FrankActstresstests stresstestscomparable(the“mid-cycle”companyhelptheFederalReserveassesswhethercomparunstresstestforcoveredcompaniesusesscenieswouldhavesufficientcapitaltowithstandasignariosdesignedbythecompanies).InNovemnificantdeclineinrevenuesandpotentiallylarge ber2012,theBoardpublishedapolicydocumentfor lossesandtocontinuefunctioningassourcesof publiccommentonitsdevelopmentprocessfor creditandprovidersofotherfinancialservices,even supervisorystresstestscenarios.(Formoreinforintheeventofaworse-than-anticipatedweakening mationonthestresstestingscenariodevelopment, oftheeconomy.Theseprocessesalsoprovidea seetheBoard’spressreleaseandFederalRegister meanstoassesscapitaladequacyacrosscompanoticeatwww.federalreserve.gov/newsevents/press/ niesmorefullyandtosupporttheBoard’sfinancial bcreg/20121115a.htm.) stabilityefforts. InMarch2013,theBoardpubliclyreleasedasummaryoftheresultsofCCARanditsDodd-FrankAct supervisorystresstests,providingvaluableinformacesses,andkeypersonnel,andfollow-uponprevi- developingacomprehensiveunderstandingand ouslyidentifiedconcerns(forexample,areassub- assessment. jecttoenforcementactions),oremerging vulnerabilities. TheFederalReserveusesarisk-focusedapproachto supervision,withactivitiesdirectedtowardidentify- • Interagencyinformationsharingandcoordination. ingtheareasof greatestrisktofinancialinstitutions Indevelopingandexecutingadetailedsupervisory andassessingtheabilityof institutions’management planforeachfirm,theFederalReservegenerally processestoidentify,measure,monitor,andcontrol reliestothefullestextentpossibleontheinformathoserisks.Formediumandsmall-sizedfinancial tionandassessmentsprovidedbyotherrelevant institutions,therisk-focusedconsolidatedsupervisupervisorsandfunctionalregulators.TheFederal sionprogramprovidesthatexaminationandinspec- Reserveactivelyparticipatesininteragencyinfortionproceduresaretailoredtoeachorganization’s mationsharingandcoordination,consistentwith size,complexity,riskprofile,andcondition.The applicablelaws,topromotecomprehensiveand supervisoryprogramforaninstitution,regardlessof effectivesupervisionandlimitunnecessaryduplicaitsassetsize,entailsbothoff-siteandon-sitework, tionof informationrequests.Supervisoryagencies includingdevelopmentof supervisoryplans,precontinuetoenhanceformalandinformaldiscusexaminationvisits,detaileddocumentation,and sionstojointlyidentifyandaddresskeyvulnerpreparationof examinationreportstailoredtothe abilities,andtocoordinatesupervisorystrategies scopeandfindingsof theexamination. forlargefinancialinstitutions. • Internalauditandcontrolfunctions.Incertain StateMemberBanks instances,supervisorsmaybeabletorelyona Attheendof 2012,2,075banks(excludingnondefirm’sinternalauditorinternalcontrolfunctionsin positorytrustcompaniesandprivatebanks)were

56 99thAnnualReport|2012 membersof theFederalReserveSystem,of which financialconditiontowardamoredynamic,forward- 843werestatechartered.FederalReserveSystem lookingassessmentof risk-managementpractices memberbanksoperated58,714branches,and andfinancialfactors.Underthesystem,knownas accountedfor34percentof allcommercialbanksin RFIbutmorefullytermedRFI/C(D),holdingcomtheUnitedStatesandfor71percentof allcommer- paniesareassignedacompositerating(C)thatis cialbankingoffices.State-charteredcommercial basedonassessmentsof threecomponents:Risk banksthataremembersof theFederalReserve,com- Management(R),FinancialCondition(F),andthe monlyreferredtoasstatememberbanks,represented potentialImpact(I)of theparentcompanyandits approximately14percentof allinsuredU.S.commer- nondepositorysubsidiariesonthesubsidiarydeposicialbanksandheldapproximately15percentof all toryinstitution.Thefourthcomponent,Depository insuredcommercialbankassetsintheUnitedStates. Institution(D),isintendedtomirrortheprimary supervisor’sratingof thesubsidiarydepositoryinsti- Undersection10of theFederalDepositInsurance tution.6NoncomplexBHCswithconsolidatedassets Act,asamendedbysection111of theFederal of $1billionorlessaresubjecttoaspecialsupervi- DepositInsuranceCorporationImprovementActof soryprogramthatpermitsamoreflexibleapproach.7 1991andbytheRiegleCommunityDevelopment In2012,theFederalReserveconducted691inspecandRegulatoryImprovementActof 1994,theFed- tionsof largeBHCsand3,150inspectionsof small, eralReservemustconductafull-scope,on-siteexami- noncomplexBHCs. nationof statememberbanksatleastonceayear,4 althoughcertainwell-capitalized,well-managedorga- FinancialHoldingCompanies nizationswithtotalassetsof lessthan$500million UndertheGramm-Leach-BlileyAct,BHCsthat maybeexaminedonceevery18months.5TheFed- meetcertaincapital,managerial,andotherrequireeralReserveconducted487examsof statemember mentsmayelecttobecomefinancialholdingcompabanksin2012. niesandtherebyengageinawiderrangeof financial activities,includingfull-scopesecuritiesunderwrit- BankHoldingCompanies ing,merchantbanking,andinsuranceunderwriting Atyear-end2012,atotalof 5,210U.S.BHCswerein andsales.Asof year-end2012,408domesticBHCs operation,of which4,632weretop-tierBHCs.These and38foreignbankingorganizationshadfinancial organizationscontrolled5,088insuredcommercial holdingcompanystatus.Of thedomesticfinancial banksandheldapproximately99percentof all holdingcompanies,38hadconsolidatedassetsof insuredcommercialbankassetsintheUnitedStates. $15billionormore;118,between$1billionand $15billion;63,between$500millionand$1billion; FederalReserveguidelinescallforannualinspections and189,lessthan$500million. of largeBHCsandcomplexsmallercompanies.In judgingthefinancialconditionof thesubsidiary SavingsandLoanHoldingCompanies banksownedbyholdingcompanies,FederalReserve OnJuly21,2011,responsibilityforsupervisionand examinersconsultexaminationreportspreparedby regulationof SLHCstransferredfromtheOTSto thefederalandstatebankingauthoritiesthathave theFederalReserve,pursuanttotheDodd-Frank primaryresponsibilityforthesupervisionof those Act.Atyear-end2012,atotalof 689SLHCswerein banks,therebyminimizingduplicationof effortand operation,of which371weretop-tierSLHCs.These reducingthesupervisoryburdenonbanking SLHCscontrolled326thriftinstitutionsand organizations. included40companiesengagedprimarilyinnonbankingactivities,suchasinsuranceunderwriting(21 Inspectionsof BHCs,includingfinancialholding SLHCs),securitiesbrokerage(10SLHCs),andcomcompanies,arebuiltaroundaratingsystemintroducedin2005.Thesystemreflectstheshiftinsuper- 6 Eachofthefirsttwocomponentshasfoursubcomponents:Risk visorypracticesawayfromahistoricalanalysisof Management—(1)BoardandSeniorManagementOversight; (2)Policies,Procedures,andLimits;(3)RiskMonitoringand 4 TheOfficeoftheComptrolleroftheCurrencyexaminesnation- ManagementInformationSystems;and(4)InternalControls. allycharteredbanks,andtheFDICexaminesstate-chartered FinancialCondition—(1)Capital,(2)AssetQuality,(3)EarnbanksthatarenotmembersoftheFederalReserve. ings,and(4)Liquidity. 5 TheFinancialServicesRegulatoryReliefActof2006,which 7 Thespecialsupervisoryprogramwasimplementedin1997and becameeffectiveinOctober2006,authorizedthefederalbank- modifiedin2002.SeeSRletter02-01foradiscussionofthefacingagenciestoraisethethresholdfrom$250millionto torsconsideredindeterminingwhetheraBHCiscomplexor $500million,andfinalrulesincorporatingthechangeintoexist- noncomplex(www.federalreserve.gov/boarddocs/srletters/2002/ ingregulationswereissuedonSeptember21,2007. sr0201.htm).

SupervisionandRegulation 57 mercialactivities(9SLHCs).The25largestSLHCs totheseFMUsthatincludepromotinguniformriskaccountedformorethan$2.7trillionof totalcom- managementstandards,playinganenhancedrolein binedassets.Thesavingsassociationsubsidiariesof thesupervisionof FMUs,reducingsystemicrisk, alltop-tierSLHCsaccountedforjust$680billion andsupportingthestabilityof thebroaderfinancial (approximately22percent)of totalassets.Seven system.Toensureappropriatesupervisionof these institutionsinthetop25andapproximately90per- FMUs,theFederalReserveestablishedriskcentof allSLHCsareengagedprimarilyindeposi- managementstandardsandexpectationsthatare toryactivities.Thesefirmsholdapproximately articulatedinBoardRegulationHH(effectiveSep- 13percent($397billion)of thetotalcombinedassets tember2012).Inadditiontosettingminimumriskof allSLHCs.TheOfficeof theComptrollerof the managementstandards,RegulationHHalsoestab- Currency(OCC)istheprimaryregulatorformostof lishesrequirementsfortheadvancenoticeof prothesubsidiarysavingsassociationsof thefirms posedmaterialchangestotherules,procedures,or engagedprimarilyindepositoryactivities. operationsof adesignatedFMUforwhichtheFederalReserveisthesupervisoryagencyundertitleVIII Boardstaff continuestoworkonoperational,techni- of theDodd-FrankAct. cal,andpracticaltransitionissueswhileengagingthe industry,ReserveBanks,andotherfinancialregula- TheFederalReserve’srisk-basedsupervisionprotoryagencies.Boardstaff hasalsoissuedinternal gramforFMUsisadministeredbytheFMUSuperpoliciesandprocedures,presentedtrainingsessions, visionCommittee(FMU-SC).TheFMU-SCisa conductedbi-weeklyconferencecalls,anddeveloped multidisciplinarycommitteeof seniorsupervision, jobaidstoenhancetheunderstandingof theSLHC paymentpolicy,andlegalstaff attheBoardof Govpopulationandtoensureconsistentsupervisory ernorsandReserveBankswhoareresponsiblefor, treatmentof theseinstitutionsthroughouttheFed- andknowledgeableabout,supervisoryissuesfor eralReserveSystem. FMUs.TheFMU-SC’sprimaryobjectiveistoprovideseniorleveloversight,consistency,anddirection Althoughsignificantmilestoneshavebeenachieved, totheFederalReserve’ssupervisoryprocessfor severalcomplexpolicyissuesstillneedtobe FMUs.TheFMU-SCcoordinateswiththeLISCC addressedbytheBoard,includingthoserelatedto onissuesrelatedtolargefinancialinstitutions’roles consolidatedcapitalrequirements,intermediatehold- inFMUs;thepayment,clearing,andsettlement ingcompanies,applicationof aformalratingsystem, activitiesof largefinancialinstitutions;andtheFMU andthedeterminationof theapplicabilityof activitiesandimplicationsforlargefinancial enhancedprudentialstandardstotheSLHC institutions. population. Inanefforttopromotegreaterfinancialmarketsta- FinancialMarketUtilities bilityandmitigatesystemicrisk,theBoardalsois FMUsmanageoroperatemultilateralsystemsfor workingwiththeU.S.SecuritiesandExchangeComthepurposeof transferring,clearing,orsettlingpay- missionandtheU.S.CommodityFuturesTrading ments,securities,orotherfinancialtransactions Commission,bothof whichalsohavesupervisory amongfinancialinstitutionsorbetweenfinancial authorityforcertainFMUs.TheFederalReserve’s institutionsandtheFMU.UndertheFederal workwiththeseagencies,includingthesharingof ReserveAct,theFederalReservesupervisesFMUs appropriateinformationandparticipationincertain thatarecharteredasmemberbanksorEdgeActcor- FMUexaminations,aimstoimproveconsistencyin porationsandcooperateswithotherfederalbanking FMUsupervision,promoterobustFMUriskmansupervisorstosuperviseFMUsorganizedasbank agement,andimprovetheregulators’abilitytomoniserviceprovidersundertheBankServiceCom- torandmitigatesystemicrisk. panyAct. InternationalActivities InJuly2012,theFinancialStabilityOversightCoun- TheFederalReservesupervisestheforeignbranches cilvotedtodesignateeightFMUsassystemically andoverseasinvestmentsof memberbanks,Edge importantundertitleVIIIof theDodd-FrankAct. Actandagreementcorporations,andBHCs(includ- Asaresultof thesedesignations,theFederalReserve ingtheinvestmentsbyBHCsinexporttradingcomassumedanexpandedsetof responsibilitiesrelated panies).Inaddition,itsupervisestheactivitiesthat

58 99thAnnualReport|2012 foreignbankingorganizationsconductthroughenti- U.S.activitiesof foreignbanks.ForeignbankscontiesintheUnitedStates,includingbranches,agen- tinuetobesignificantparticipantsintheU.S.bankcies,representativeoffices,andsubsidiaries. ingsystem.Asof fourthquarter2012,168foreign banksfrom53countriesoperated195state-licensed Foreignoperationsof U.S.bankingorganizations.In branchesandagencies,of which6wereinsuredby supervisingtheinternationaloperationsof state theFDIC,and48OCC-licensedbranchesandagenmemberbanks,EdgeActandagreementcorpora- cies,of which4wereinsuredbytheFDIC.Thesefortions,andBHCs,theFederalReservegenerallycon- eignbanksalsoowned10EdgeActandagreement ductsitsexaminationsorinspectionsattheU.S.head corporationsand1commerciallendingcompany.In officesof theseorganizations,wheretheultimate addition,theyheldacontrollinginterestin49U.S. responsibilityfortheforeignofficesresides.Examin- commercialbanks.Altogether,theU.S.officesof ersalsovisittheoverseasofficesof U.S.banking theseforeignbankscontrolledapproximately21perorganizationstoobtainfinancialandoperatinginfor- centof U.S.commercialbankingassets.These168 mationand,insomeinstances,totesttheiradherence foreignbanksalsooperated88representativeoffices; tosafeandsoundbankingpracticesandcompliance anadditional40foreignbanksoperatedinthe withrulesandregulations.Examinationsabroadare UnitedStatesthrougharepresentativeoffice.The conductedwiththecooperationof thesupervisory FederalReserve—incoordinationwithappropriate authoritiesof thecountriesinwhichtheytakeplace; stateregulatoryauthorities—examinesstate-licensed, fornationalbanks,theexaminationsarecoordinated non-FDICinsuredbranchesandagenciesof foreign withtheOCC. bankson-siteatleastonceevery18months.8Inmost cases,on-siteexaminationsareconductedatleast Attheendof 2012,45memberbankswereoperating onceevery12months,buttheperiodmaybe 525branchesinforeigncountriesandoverseasareas extendedto18monthsif thebranchoragencymeets of theUnitedStates;25nationalbankswereoperat- certaincriteria.Aspartof thesupervisoryprocess,a ing469of thesebranches,and20statemember reviewof thefinancialandoperationalprofileof bankswereoperatingtheremaining56.Inaddition, eachorganizationisconductedtoassesstheorgani- 16nonmemberbankswereoperating24branchesin zation’sabilitytosupportitsU.S.operationsandto foreigncountriesandoverseasareasof theUnited determinewhatrisks,if any,theorganizationposes States. tothebankingsystemthroughitsU.S.operations. TheFederalReserveconductedorparticipatedwith EdgeActandagreementcorporations.EdgeActcor- stateandfederalregulatoryauthoritiesin447examiporationsareinternationalbankingorganizations nationsin2012. charteredbytheBoardtoprovideallsegmentsof the U.S.economywithameansof financinginterna- CompliancewithRegulatoryRequirements tionalbusiness,especiallyexports.Agreementcorpo- TheFederalReserveexaminesinstitutionsforcomrationsaresimilarorganizations,stateorfederally pliancewithabroadrangeof legalrequirements, chartered,thatenterintoagreementswiththeBoard includinganti-money-laundering(AML)andcontorefrainfromexercisinganypowerthatisnotper- sumerprotectionlawsandregulations,andother missibleforanEdgeActcorporation.Sections25 lawspertainingtocertainbankingandfinancial and25Aof theFederalReserveActgrantEdgeAct activities.Mostcompliancesupervisionisconducted andagreementcorporationspermissiontoengagein undertheoversightof theBoard’sDivisionof Bankinternationalbankingandforeignfinancialtransac- ingSupervisionandRegulation,butconsumercomtions.Thesecorporations,mostof whicharesubsid- pliancesupervisionisconductedundertheoversight iariesof memberbanks,may(1)conductadeposit of theDivisionof ConsumerandCommunity andloanbusinessinstatesotherthanthatof thepar- Affairs.Thetwodivisionscoordinatetheirefforts ent,providedthatthebusinessisstrictlyrelatedto witheachotherandalsowiththeBoard’sLegalDiviinternationaltransactionsand(2)makeforeign siontoensureconsistentandcomprehensiveFederal investmentsthatarebroaderthanthosepermissible Reservesupervisionforcompliancewithlegal formemberbanks. requirements. Atyear-end2012,50bankingorganizations,operating8branches,werecharteredasEdgeActoragree- 8 TheOCCexaminesfederallylicensedbranchesandagencies, mentcorporations.Thesecorporationsareexamined andtheFDICexaminesstate-licensedFDIC-insuredbranches annually. incoordinationwiththeappropriatestateregulatoryauthority.

SupervisionandRegulation 59 Anti-Money-LaunderingExaminations FiduciaryActivities TheTreasuryregulationsimplementingtheBank TheFederalReservehassupervisoryresponsibility SecrecyAct(BSA)generallyrequirebanksandother forstatememberbanksandstatemembernondetypesof financialinstitutionstofilecertainreports positorytrustcompanies,whichreported$53.9trilandmaintaincertainrecordsthatareusefulincrimi- lionand$39.5trillionof assets,respectively,asof nal,tax,orregulatoryproceedings.TheBSAand year-end2012.TheseassetswereheldinvariousfiduseparateBoardregulationsrequirebankingorganiza- ciaryandcustodialcapacities.On-siteexaminations tionssupervisedbytheBoardtofilereportsonsuspi- of fiduciaryandcustodialactivitiesarerisk-focused ciousactivityrelatedtopossibleviolationsof federal andentailthereviewof anorganization’scompliance law,includingmoneylaundering,terrorismfinanc- withlaws,regulations,andgeneralfiduciaryprining,andotherfinancialcrimes.Inaddition,BSAand ciples,includingeffectivemanagementof conflictsof Boardregulationsrequirethatbanksdevelopwritten interest;managementof legal,operational,andrepu- BSAcomplianceprogramsandthattheprogramsbe tationalriskexposures;andauditandcontrolproceformallyapprovedbybankboardsof directors.The dures.In2012,FederalReserveexaminersconducted FederalReserveisresponsibleforexamininginstitu- 113on-sitefiduciaryexaminations,excludingtransfer tionsforcompliancewithapplicableAMLlawsand agentexaminations,of statememberbanks. regulationsandconductssuchexaminationsinaccor- TransferAgents dancewiththeFederalFinancialInstitutionsExaminationCouncil’s(FFIEC)BankSecrecyAct/Anti- AsdirectedbytheSecuritiesExchangeActof 1934, MoneyLaunderingExaminationManual.9 theFederalReserveconductsspecializedexaminationsof thosestatememberbanksandBHCsthat SpecializedExaminations areregisteredwiththeBoardastransferagents. TheFederalReserveconductsspecializedexamina- Amongotherthings,transferagentscountersignand tionsof supervisedfinancialinstitutionsintheareas monitortheissuanceof securities,registerthetransof informationtechnology,fiduciaryactivities,trans- ferof securities,andexchangeorconvertsecurities. feragentactivities,andgovernmentandmunicipal On-siteexaminationsfocusontheeffectivenessof an securitiesdealingandbrokering.TheFederalReserve organization’soperationsanditscompliancewith alsoconductsspecializedexaminationsof certain relevantsecuritiesregulations.During2012,theFednonbankentitiesthatextendcreditsubjecttothe eralReserveconductedon-sitetransferagentexami- Board’smarginregulations. nationsat11of the30statememberbanksand BHCsthatwereregisteredastransferagents. InformationTechnologyActivities GovernmentandMunicipalSecurities Inrecognitionof theimportanceof information DealersandBrokers technologytosafeandsoundoperationsinthefinan- TheFederalReserveisresponsibleforexamining cialindustry,theFederalReservereviewstheinforstatememberbanksandforeignbanksforcomplimationtechnologyactivitiesof supervisedfinancial ancewiththeGovernmentSecuritiesActof 1986 institutions,aswellascertainindependentdatacenandwiththeTreasuryregulationsgoverningdealing tersthatprovideinformationtechnologyservicesto andbrokeringingovernmentsecurities.Fourteen theseorganizations.Allsafety-and-soundnessexamistatememberbanksandsixstatebranchesof foreign nationsincludearisk-focusedreviewof information bankshavenotifiedtheBoardthattheyaregoverntechnologyrisk-managementactivities.During2012, mentsecuritiesdealersorbrokersnotexemptfrom theFederalReservecontinuedastheleadsupervisory theTreasury’sregulations.During2012,theFederal agencyforfourof the16large,multiregionaldata Reserveconductedsevenexaminationsof broker– processingservicersrecognizedonaninteragency dealeractivitiesingovernmentsecuritiesatthese basisandassumedleadershipof threemoreof the organizations.Theseexaminationsaregenerallyconlargeservicers. ductedconcurrentlywiththeFederalReserve’s examinationof thestatememberbankorbranch. 9 TheFFIECisaninteragencybodyoffinancialregulatoryagenciesestablishedtoprescribeuniformprinciples,standards,and TheFederalReserveisalsoresponsibleforensuring reportformsandtopromoteuniformityinthesupervisionof financialinstitutions.TheCouncilhassixvotingmembers:the thatstatememberbanksandBHCsthatactas BoardofGovernorsoftheFederalReserveSystem,theFDIC, municipalsecuritiesdealerscomplywiththeSecuritheNationalCreditUnionAdministration,theOCC,theContiesActAmendmentsof 1975.Municipalsecurities sumerFinancialProtectionBureau(CFPB),andthechairofthe StateLiaisonCommittee. dealersareexamined,pursuanttotheMunicipal

60 99thAnnualReport|2012 SecuritiesRulemakingBoard’sruleG-16,atleast In2012,theReserveBankscompleted198informal onceeverytwocalendaryears.Eightof the12enti- enforcementactions.Informalenforcementactions tiessupervisedbytheFederalReservethatdealtin includememorandaof understanding(MOU),communicipalsecuritieswereexaminedduring2012. mitmentletters,andboardof directors’resolutions. SecuritiesCreditLenders SurveillanceandOff-SiteMonitoring UndertheSecuritiesExchangeActof 1934,the TheFederalReserveusesautomatedscreeningsys- Boardisresponsibleforregulatingcreditincertain temstomonitorthefinancialconditionandperfortransactionsinvolvingthepurchasingorcarryingof manceof statememberbanksandBHCsinthe securities.Aspartof itsgeneralexaminationpro- periodbetweenon-siteexaminations.Suchmonitorgram,theFederalReserveexaminesthebanksunder ingandanalysishelpsdirectexaminationresourcesto itsjurisdictionforcompliancewithBoardRegula- institutionsthathavehigherriskprofiles.Screening tionU(CreditbyBanksandPersonsotherthanBro- systemsalsoassistintheplanningof examinations kersorDealersforthePurposeof Purchasingor byidentifyingcompaniesthatareengaginginnewor CarryingMarginStock).Inaddition,theFederal complexactivities. Reservemaintainsaregistryof personsotherthan banks,brokers,anddealerswhoextendcreditsubject Theprimaryoff-sitemonitoringtoolusedbythe toRegulationU.TheFederalReservemayconduct FederalReserveistheSupervisionandRegulaspecializedexaminationsof theselendersif theyare tionStatisticalAssessmentof BankRiskmodel(SRnotalreadysubjecttosupervisionbytheFarmCredit SABR).Drawingmainlyonthefinancialdatathat AdministrationortheNationalCreditUnion banksreportontheirReportsof Conditionand Administration(NCUA). Income(CallReports),SR-SABRuseseconometric techniquestoidentifybanksthatreportfinancial Attheendof 2012,451lendersotherthanbanks, characteristicsweakerthanthoseof otherbanks brokers,ordealerswereregisteredwiththeFederal assignedsimilarsupervisoryratings.Tosupplement Reserve.Otherfederalregulatorssupervised116of theSR-SABRscreening,theFederalReservealso theselenders,andtheremaining335weresubjectto monitorsvariousmarketdata,includingequity limitedFederalReservesupervision.TheFederal prices,debtspreads,agencyratings,andmeasuresof Reserveexempted139lendersfromitson-siteinspec- expecteddefaultfrequency,togaugemarketperceptionprogramonthebasisof theirregulatorystatus tionsof theriskinbankingorganizations.Inaddiandannualreports.Forty-twoinspectionswerecon- tion,theFederalReservepreparesquarterlyBank ductedduringtheyear. HoldingCompanyPerformanceReports(BHCPRs) foruseinmonitoringandinspectingsupervised EnforcementActions bankingorganizations.TheBHCPRs,whichare TheFederalReservehasenforcementauthorityover compiledfromdataprovidedbylargeBHCsinquarthefinancialinstitutionsitsupervisesandtheiraffili- terlyregulatoryreports(FRY-9CandFRY-9LP), atedparties.Enforcementactionsmaybetakento contain,forindividualcompanies,financialstatistics addressunsafeandunsoundpracticesorviolations andcomparisonswithpeercompanies.BHCPRsare of anylaworregulation.Formalenforcementactions madeavailabletothepublicontheNationalInforincludecease-and-desistorders,writtenagreements, mationCenter(NIC)website,whichcanbeaccessed promptcorrectiveactiondirectives,removalandpro- atwww.ffiec.gov. hibitionorders,andcivilmoneypenalties.In2012, theFederalReservecompleted74formalenforce- FederalReserveanalystsusePerformanceReport mentactions.Civilmoneypenaltiestotaling InformationandSurveillanceMonitoring(PRISM), $1,043,700,000wereassessed.Asdirectedbystatute, aqueryingtool,toaccessanddisplayfinancial,surallcivilmoneypenaltiesareremittedtoeitherthe veillance,andexaminationdata.Intheanalytical TreasuryortheFederalEmergencyManagement module,userscancustomizethepresentationof Agency.Enforcementordersandpromptcorrective institutionalfinancialinformationdrawnfromCall actiondirectives,whichareissuedbytheBoard,and Reports,UniformBankPerformanceReports,FR writtenagreements,whichareexecutedbythe Y-9statements,BHCPRs,andotherregulatory ReserveBanks,aremadepublicandarepostedon reports.Inthesurveillancemodule,userscangenertheBoard’swebsite(www.federalreserve.gov/apps/ atereportssummarizingtheresultsof surveillance enforcementactions/). screeningforbanksandBHCs.During2012,two

SupervisionandRegulation 61 majorupgradestotheweb-basedPRISMapplication TheFederalReservecontributessignificantlyto werecompleted. ASBA’sorganizationalmanagementandtoitstrainingandtechnicalassistanceactivities. TheFederalReserveworksthroughtheFFIECTask ForceonSurveillanceSystemstocoordinatesurveil- InitiativesforMinority-Ownedand lanceactivitieswiththeotherfederalbanking DeNovoDepositoryInstitutions agencies. TheFederalReserveSystemimplementsitsresponsibilitiesundersection367of theDodd-FrankActpri- TrainingandTechnicalAssistance marilythroughitsPartnershipforProgress(PFP) TheFederalReserveprovidestrainingandtechnical program.Establishedin2008,thisprogrampromotes assistancetoforeignsupervisorsandminority-owned theviabilityof minority-ownedinstitutions(MOIs) anddenovodepositoryinstitutions. byfacilitatingactivitiesdesignedtostrengthentheir businessstrategies,maximizetheirresources,and InternationalTrainingandTechnicalAssistance increasetheirawarenessandunderstandingof regu- In2012,theFederalReservecontinuedtoprovide latorytopics.Inaddition,theFederalReservecontintechnicalassistanceonbanksupervisorymattersto uestomaintainthePFPwebsite,whichsupports foreigncentralbanksandsupervisoryauthorities. MOIsbyprovidingthemwithtechnicalinformation TechnicalassistanceinvolvesvisitsbyFederal andlinkstousefulresources(www.fedpartnership Reservestaff memberstoforeignauthoritiesaswell .gov).Representativesfromeachof the12Reserve asconsultationswithforeignsupervisorswhovisit Bankdistricts,alongwithstaff fromtheBoardof theBoardortheReserveBanks.TheFederal Governors,continuetoofferpersonalizedtechnical Reserve,alongwiththeOCC,theFDIC,andthe assistancetoMOIsbyprovidingtargetedsupervisory Treasury,wasanactiveparticipantintheMiddle guidance,identifyingadditionalresources,andfoster- EastandNorthAfricaFinancialRegulators’Train- ingmutuallybeneficialpartnershipsbetweenMOIs ingInitiative,whichispartof theU.S.government’s andcommunityorganizations.Currently,16state MiddleEastPartnershipInitiative.TheFederal memberbanksand120BHCssupervisedbytheFed- Reservealsocontributestotheregionaltrainingpro- eralReserveareMOIs. visionundertheAsiaPacificEconomicCooperation FinancialRegulators’TrainingInitiative. During2012,theFederalReserveSystemundertook severalspecificactionstostrengthenitsMOIsupport In2012,theFederalReserveofferedanumberof efforts.Forexample,theFederalReserve trainingcoursesexclusivelyforforeignsupervisory • reviseditsprocessingprocedurestoimplementpreauthorities,bothintheUnitedStatesandinanumscreeningof MOIapplications,resultinginearly berof foreignjurisdictions.FederalReservestaff also identificationandresolutionof factorsthatmay tookpartintechnicalassistanceandtrainingmiscauseprocessingdelays; sionsledbytheInternationalMonetaryFund,the WorldBank,theAsianDevelopmentBank,theBasel • increasedstaff resourcesforMOIoversight; CommitteeonBankingSupervision,andtheFinan- • partneredwiththeNationalBankersAssociation, cialStabilityInstitute. theNationalUrbanLeague,andtheMinority TheFederalReserveisalsoanassociatememberof Councilof theIndependentCommunityBankers theAssociationof Supervisorsof Banksof the Associationinoutreachevents; Americas(ASBA),anumbrellagroupof banksuper- • inconjunctionwiththeDivisionof Consumerand visorsfromcountriesintheWesternHemisphere. CommunityAffairs,conductedseveraljointout- Thegroup,headquarteredinMexico, reacheffortstoeducateMOIsonsupervisory • promotescommunicationandcooperationamong topics; banksupervisorsintheregion; • conductedtrainingataNationalBankersAssocia- • coordinatestrainingprogramsthroughoutthe tionconventiontorespondtoconcernsaboutthe regionwiththehelpof nationalbankingsupervi- potentialeffectof BaselIIIcapitalproposalson sorsandinternationalagencies;and communitybanks,includingMOIs; • aimstohelpmembersdevelopbankinglaws,regu- • educatedpotentialinvestorsinMOIsaboutbenlations,andsupervisorypracticesthatconformto efitsunderBoardRegulationBB(Community internationalbestpractices. Reinvestment,section228.21(f));and

62 99thAnnualReport|2012 • participatedinaninteragencytaskforcetoconsider makings,publicSRletters,andotherpolicystateandaddresssupervisorychallengesfacingMOIs. mentsandguidanceinordertocarryoutitssupervisorypolicyfunction.FederalReservestaff alsotake During2012,PFPrepresentativeshostedandpartici- partinsupervisoryandregulatoryforums,provide patedinnumerousbankingworkshopsandseminars supportfortheworkof theFFIEC,andparticipate aimedatpromotingandpreservingMOIs,including ininternationalpolicymakingforums,includingthe theNationalBankersAssociation’sLegislativeand BaselCommitteeonBankingSupervision,the RegulatoryConferenceandtheInteragencyMinority FinancialStabilityBoard,andtheJointForum. DepositoryInstitutionsNationalConference.Further,programrepresentativescollaboratedwithcom- CapitalAdequacyStandards munityleaders,tradegroups,theSmallBusiness In2012,theBoardissuedseveralrulemakingsand Administration,andotherorganizationstoseeksup- guidancedocumentsrelatedtocapitaladequacystanportforMOIs. dards,includingjointproposedrulemakingswiththe otherfederalbankingagenciesthatwouldimplement BusinessContinuity certainrevisionstotheBaselcapitalframeworkand In2012,theFederalReservecontinueditseffortsto thataddresscertainprovisionsof theDodd-Frank strengthentheresilienceof theU.S.financialsystem Act. intheeventof unexpecteddisruptions,including • Thefederalbankingagenciespublishedafinalrule focusedsupervisoryeffortstoevaluatetheresiliency inJunethatamendedthemarketriskcapitalruleto of thebankinginstitutionsunderitsjurisdiction.The implementcertainrevisionsmadebytheBasel Mid-AtlanticderechowindstorminJune,Hurricane CommitteeonBankingSupervisiontoitsmarket SandyinOctober,andthedistributeddenialof serriskframeworkbetween2005and2010.ThereviviceattacksagainstU.S.financialinstitutionsduring sionswillincreasecapitalrequirementsformarket thesecondhalf of theyearpresentedmajorchalriskbybettercapturingpositionsforwhichthe lengestothefinancialsystem.Theresiliencyof the marketriskcapitalruleisappropriate,reducing financialsystemintheaftermathof theseevents, pro-cyclicalityinmarketriskcapitalrequirements, however,provedtobeeffectiveinprotectingthe enhancingsensitivitytorisksthatwerenot safetyandsoundnessof criticalsystemsandcusadequatelycapturedbythepreviousregulatory tomerinformation.TheFederalReserve,together methodologies,andincreasingtransparency withotherfederalandstatefinancialregulators,isa throughenhanceddisclosures.Consistentwithsecmemberof theFinancialandBankingInformation tion939Aof theDodd-FrankAct,thefinalrule InfrastructureCommittee(FBIIC),whichwas doesnotincludethoseaspectsof theBaselComformedtoimprovecoordinationandcommunication mittee’smarketriskframeworkthatrelyoncredit amongfinancialregulators,enhancetheresiliencyof ratings.Instead,thefinalruleincludesalternative thefinancialsector,andpromotethepublic/private standardsof creditworthinessfordeterminingspepartnership.TheFBIIChasestablishedemergency cificriskcapitalrequirementsforcertaindebtand protocolstomaintaineffectivecommunication securitizationpositions.Theruleisavailableat amongmemberagenciesandconvenesbyconference www.gpo.gov/fdsys/pkg/FR-2012-08-30/pdf/2012callnolaterthan90minutesfollowingthefirstpublic 16759.pdf. reportof aneventtosharesituationalandoperationalstatusreports.Duringaforementionedevents • InJune,thefederalbankingagenciesissuedfor of 2012,theFederalReserveparticipatedinthe commentthreenoticesof proposedrulemaking FBIIC,theFFIEC,andinternalcommunicationsto (NPRs)toamendtheregulatorycapitalrules. promotetheresiliencyof thefinancialsector. Takentogether,theproposalswouldestablishan integratedregulatorycapitalframeworkthat Supervisory Policy addressesshortcomingsinregulatorycapital requirementsthatbecameapparentduringthe TheFederalReserve’ssupervisorypolicyfunction, recentfinancialcrisis.Forinternationallyactive carriedoutbytheBoard,isresponsiblefordevelop- bankingorganizations,theproposedrulewould ingregulationsandguidanceforfinancialinstitutions implementintheUnitedStatestheBaselIIIreguundertheFederalReserve’ssupervision,aswellas latorycapitalreformsadoptedbytheBaselComguidanceforexaminers.TheBoard,(ofteninconcert mitteeonBankingSupervision.Theproposedrule withtheotherfederalbankingagencies)issuesrule- wouldalsomakechangesrequiredbytheDodd-

SupervisionandRegulation 63 FrankAct,includingremovalof referencestoand BaselCommittee relianceoncreditratings.TheNPRsareavailable During2012,theFederalReserveparticipatedin at ongoinginternationalinitiativestotracktheprogress of implementationof theBaselframeworkinmem- • www.gpo.gov/fdsys/pkg/FR-2012-08-30/pdf/ bercountries.Participationinthisassessmentnot 2012-16757.pdf(RegulatoryCapitalRules:Reguonlyincludedexaminingtheprogressmadebyother latoryCapital,Implementationof BaselIII,Minicountries,butalsoanassessmentof progressmade mumRegulatoryCapitalRatios,Capital bytheUnitedStates.Thepreliminaryreportonthe Adequacy,TransitionProvisions,andPromptCor- UnitedStates’progressisavailableatwww.bis.org/ rectiveAction,“BaselIIINPR”); bcbs/implementation/l2_us.pdf. • www.gpo.gov/fdsys/pkg/FR-2012-08-30/pdf/ 2012-17010.pdf(RegulatoryCapitalRules:Stan- TheFederalReservecontributedtosupervisory dardizedApproachforRisk-weightedAssets;Mar- policyrecommendations,reports,andpapersissued ketDisciplineandDisclosureRequirements, forconsultativepurposesorfinalizedbytheBasel “StandardizedApproachNPR”);and Committeethatweredesignedtoimprovethesupervisionof bankingorganizations’practicesandto • www.gpo.gov/fdsys/pkg/FR-2012-08-30/pdf/ addressspecificissuesthatemergedduringthefinan- 2012-16761.pdf(RegulatoryCapitalRules: cialcrisis.Thelistingbelowincludeskeyfinaland AdvancedApproachesRisk-basedCapitalRule; consultativepapersfrom2012. MarketRiskCapitalRule,“Advanced ApproachesandMarketRiskNPR”).(Alsosee Finalpapers: box3.) • Compositionof capitaldisclosurerequirements • InSeptember,thefederalbankingagencies (issuedinJuneandavailableatwww.bis.org/publ/ announcedtheavailabilityof aregulatorycapital bcbs221.htm). estimationtooltohelpcommunitybankingorganizationsandotherinterestedpartiesevaluatethe • Capitalrequirementsforbankexposurestocentral regulatorycapitalproposalsissuedinJune.The counterparties(issuedinJulyandavailableatwww toolwasdevelopedtoassisttheseorganizationsin .bis.org/publ/bcbs227.htm). estimatingthepotentialeffectsontheircapital • Coreprinciplesforeffectivebankingsupervision ratiosof theagencies’BaselIIIandStandardized (issuedinSeptemberandavailableatwww.bis.org/ ApproachNPRs.Theannouncementandthecapipubl/bcbs230.htm). talestimationtoolareavailableatwww .federalreserve.gov/newsevents/press/bcreg/ • Aframeworkfordealingwithdomesticsystemically 20120924a.htm. importantbanks(issuedinOctoberandavailableat www.bis.org/publ/bcbs233.htm). In2012,BoardandReserveBankstaff conducted in-depthsupervisoryanalysesof anumberof com- Consultativepapers: plexcapitalissuancesandprivatecapitalinvestments • Fundamentalreviewof thetradingbook(issuedin toevaluatetheirqualificationforinclusioninregula- Mayandavailableatwww.bis.org/publ/bcbs219 torycapital.Forcertaintransactions,bankingorga- .htm). nizationswererequiredtomakechangesnecessary forinstrumentstosatisfyregulatorycapitalcriteria, • Marginrequirementsfornon-centrally-cleared whereasotherinstrumentsweredisallowedfrom derivatives(issuedjointlywiththeBoardof the inclusioninabankingorganization’sregulatory InternationalOrganizationof SecuritiesCommiscapital. sionsinJulyandavailableatwww.bis.org/publ/ bcbs226.htm). InternationalCoordinationon • Supervisoryguidanceformanagingrisksassociated SupervisoryPolicies withthesettlementof foreignexchangetransactions Asamemberof theBaselCommitteeonBanking (issuedinAugustandavailableatwww.bis.org/ Supervision,theFederalReserveactivelyparticipates publ/bcbs229.htm). ineffortstoadvancesoundsupervisorypoliciesfor internationallyactivebankingorganizationsand • RevisionstotheBaselSecuritisationFramework enhancethestrengthandstabilityof theinterna- (issuedinDecemberandavailableatwww.bis.org/ tionalbankingsystem. press/p121218.htm).

64 99thAnnualReport|2012 JointForum accounting,insuranceaccounting,businesscombina- In2012,theFederalReservecontinueditsparticipa- tions,securitizations,fairvalueaccounting,financial tionintheJointForum—aninternationalgroupof instrumentaccountingandreporting,balancesheet supervisorsof thebanking,securities,andinsurance offsetting,securitiesfinancingtransactions,consoliindustriesestablishedtoaddressvariouscross-sector dationof structuredentities,andexternalandinterissues,includingtheregulationof financialconglom- nalauditprocesses. erates.TheJointForumoperatesundertheaegisof theBaselCommittee,theInternationalOrganization Toaddresstheseandotherissues,FederalReserve of SecuritiesCommissions,andtheInternational staff consultedwithkeyconstituentsintheaccount- Associationof InsuranceSupervisors. ingandauditingprofessions,includingstandardsetters,accountingfirms,accountingandfinancial InSeptember,theJointForumissuedPrinciplesfor sectortradegroups,andotherfinancialsectorregulathesupervisionof financialconglomerates,which tors.TheFederalReservealsoparticipatedinmeetsupersedessimilarprinciplesdevelopedbytheJoint ingsof theBaselCommittee’sAccountingTask Forumin1999.Theprinciplesincludeguidancefor Force,whichrepresentstheBaselCommitteeatinterpolicymakersonthepowersandauthoritynecessary nationalmeetingsonaccounting,auditing,anddisforthesupervisionof financialconglomerates.The closureissuesaffectingglobalbankingorganizations. documentisavailableatwww.bis.org/publ/joint29 Theseeffortshelpedinformourunderstandingof .htm. domesticandinternationalpractices—aswellasproposedaccounting,auditing,andregulatorystan- FinancialStabilityBoard dards—andhelpedinourformulationof policyposi- In2012,theFederalReservecontinueditsactivepar- tionsusinginsightobtainedthroughtheseforums. ticipationintheFinancialStabilityBoard(FSB)—an internationalgroupthathelpscoordinatetheworkof During2012,theFederalReserveshareditsviews nationalfinancialauthoritiesandinternationalstan- withaccountingandauditingstandard-setters dardsettingbodies,anddevelopsandpromotesthe throughinformaldiscussionsandpubliccomment implementationof financialsectorpoliciesinthe letters.Commentlettersonthefollowingproposals interestof financialstability.ThroughtheFSB wereissuedduringthepastyear: StandingCommitteeonSupervisoryandRegulatory • FinancialAccountingStandardsBoard’sproposals Cooperation,theFSBisengagedinseveralissues, relatedtodisclosuresaboutliquidityriskandinterincludingtheregulationof shadowbanking,the estraterisk,revenuerecognition,andprincipalverregulationandsupervisionof globallysystemically susagentanalysisinconsolidationguidance. importantfinancialinstitutions,andthedevelopment of effectiveresolutionregimesforlargefinancial • FinancialAccountingFoundation’sproposalto institutions.ConsultativepapersissuedbytheFSBin establishthePrivateCompanyStandardsImprove- 2012canbefoundatwww.financialstabilityboard mentCounciltoaddresstheneedsof privatecom- .org/list/fsb_publications/tid_150/index.htm. paniesinthestandard-settingprocess. AccountingPolicy Workingwithinternationalbanksupervisors,Federal TheFederalReservestronglyendorsessoundcorpo- Reservestaff contributedtothedevelopmentof rategovernanceandeffectiveaccountingandaudit- numerousothercommentlettersrelatedtoaccountingpracticesforallregulatedfinancialinstitutions. ingandauditingmattersthatweresubmittedtostan- Accordingly,theFederalReserve’ssupervisorypolicy dardsettersthroughtheBaselCommittee. functionisresponsibleformonitoringmajordomesticandinternationalproposals,standards,andother FederalReservestaff alsoparticipatedinothersuperdevelopmentsaffectingthebankingindustryinthe visoryactivitiestoassessinteractionsbetween areasof accounting,auditing,internalcontrolsover accountingstandardsandregulatoryreformefforts. financialreporting,financialdisclosure,andsupervi- TheseactivitiesincludedsupportingDodd-Frank soryfinancialreporting. Actinitiativesrelatedtostresstestingof banksand credit-riskretentionrequirementsforsecuritizations, During2012,FederalReservestaff addressednumer- aswellasvariousBaselIIIactivities. ousissuesrelatedtofinancialsectoraccountingand reporting,includingloanaccounting,troubleddebt TheFederalReserveissuedsupervisoryguidanceto restructurings,deferredtaxes,otherrealestate financialinstitutionsandsupervisorystaff on

SupervisionandRegulation 65 accountingmatters,asappropriate,andparticipated isanyloanorformalloancommitment—andany inanumberof supervisory-relatedactivities.For asset,suchasotherrealestate,stocks,notes,bonds, example,FederalReservestaff anddebenturestakenasdebtspreviouslycontracted—extendedtoborrowersbyasupervisedinsti- • issuedguidancetoaddressallowanceestimation tution,itssubsidiaries,andaffiliates.ASNCmust practicesrelatedtojuniorlienloansandlinesof haveanoriginalloanamountthataggregatesto credit; $20millionormoreandeither(1)issharedbythree • developedandparticipatedinanumberof domes- ormoreunaffiliatedsupervisedinstitutionsundera ticandinternationalsupervisorytrainingprograms formallendingagreementor(2)aportionof whichis andexternaleducationsessionstoeducatesupervi- soldtotwoormoreunaffiliatedsupervisedinstitusorsandbankersaboutnewandemergingaccount- tions,withthepurchasinginstitutionsassumingtheir ingandreportingtopicsaffectingfinancialinstitu- proratashareof thecreditrisk. tions;and The2012SNCreviewwasbasedonanalysespre- • supportedtheeffortsof theReserveBanksin paredinthesecondquarterof 2012usingcreditfinancialinstitutionsupervisoryactivitiesrelatedto relateddataprovidedbyfederallysupervisedinstitufinancialaccounting,auditing,reporting,and tionsasof December31,2011,andMarch31,2012. disclosure. The2012SNCportfoliototaled$2.79trillion,with roughly8,700creditfacilitiestoapproximately5,600 Credit-RiskManagement borrowers.Fromthepreviousperiod,thedollarvol- TheFederalReserveworkswiththeotherfederal umeof theportfoliocommitmentamountroseby bankingagenciestodevelopguidanceontheman- $268billionor10.6percent,andthenumberof credagementof creditrisk;tocoordinatetheassessment itsincreasedbyover660,or8.2percent. of regulatedinstitutions’creditrisk;andtoensure thatinstitutionsproperlyidentify,measure,andman- Thenumberof SNCsoriginatedin2011roseby agecreditrisk. 61percentcomparedto2010loanoriginations,and equaledapproximately114percentof thelargevol- GuidanceonCreditRisk umeof creditsoriginatedin2007.Whiletheoverall In2012,theFederalReserveissuedfinalguidanceto qualityof underwritingin2011wassignificantlybetbanksonAllowanceforLoanLossEstimationPracterthanin2007,someeasingof standardswas ticesforJuniorLienLoansandLinesof Credit,on noted,specificallyinleveragedfinancecredits,comrentalof ResidentialOtherRealEstateOwned paredwiththerelativelytighterstandardspresentin (OREO)properties,andonstresstestingforbanks 2009andthelatterhalf of 2008.Theprimaryunderwithgreaterthan$10billioninassets.10Italsoissued writingdeficienciesidentifiedduringthe2012SNC forpubliccommentguidancerelatingtoLeveraged Reviewwereminimalornoloancovenants,liberal Lendingpractices.11 repaymentterms,repaymentdependentonrefinanc- SharedNationalCreditProgram ing,andinadequatecollateralvaluations.Theeasing instandardsmaybeduetoaggressivecompetition InAugust,theFederalReserveandtheotherbankandmarketliquidityandwasmorepronouncedin ingagenciesreleasedsummaryresultsof the2012 leveragedfinancetransactions. annualreviewof theSharedNationalCredit(SNC) Program.Theagenciesestablishedtheprogramin RefinancingriskhasdeclinedintheSNCportfolioas 1977topromoteanefficientandconsistentreview only37.1percentof SNCswillmatureoverthenext andclassificationof sharednationalcredits.ASNC threeyearscomparedwith63.4percentforthesame 10 Finalguidancedocumentsareavailableatwww.federalreserve timeframeinthe2011SNCReview.Poorlyunder- .gov/newsevents/press/bcreg/bcreg20120131a1.pdf;andwww writtencreditsoriginatedin2006and2007continued .federalreserve.gov/newsevents/press/bcreg/bcreg20120405a1 toadverselyaffecttheSNCportfolio.During2011 .pdf.Formoreinformationonstresstesting,seebox4. andinto2012,syndicationscontinuedtomodifyloan 11 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2012- 03-30/html/2012-7620.htm agreementstoextendmaturities.Thesetransactions

66 99thAnnualReport|2012 hadtheeffectof relievingnear-termrefinancingrisk, Service,andtheOfficeof ForeignAssetsControl butmaynotimproveborrowers’abilitytorepaytheir (OFAC). debtsinthelongerterm. TheFFIECBSA/AMLworkinggroupisresponsible Formoreinformationonthe2012SNCreview,visit forupdatingtheFFIECBankSecrecyAct/AntitheBoard’swebsiteatwww.federalreserve.gov/ MoneyLaunderingExaminationManual).The newsevents/press/bcreg/20120827a.htm FFIECdevelopedthismanualaspartof itsongoing commitmenttoprovidecurrentandconsistentinter- ComplianceRiskManagement agencyguidanceonrisk-basedpolicies,procedures, TheFederalReserveworkswithinternationaland andprocessesforfinancialinstitutionstocomply domesticsupervisorstodevelopguidancethatpro- withtheBSAandsafeguardtheiroperationsfrom motescompliancewithBankSecrecyActandAnti- moneylaunderingandterroristfinancing. Money-LaunderingCompliance(BSA/AML)and counterterrorismlaws. Throughout2012,theFederalReserveandotherfederalbankingagenciescontinuedtoregularlyshare BankSecrecyActand examinationfindingsandenforcementproceedings Anti-Money-LaunderingCompliance withFinCENundertheinteragencyMOUthatwas In2012,theFederalReservecontinuedtoactively finalizedin2004. promotethedevelopmentandmaintenanceof effectiveBSA/AMLcompliancerisk-managementpro- In2012,theFederalReservecontinuedtoregularly grams.Forexample,theFederalReserveofferedan shareexaminationfindingsandenforcementpro- “AsktheFed”sessioninNovember2012devoted ceedingswithOFACunderthe2006interagency entirelytoBSA/AML.12Supervisorytrendssuchas MOU.TheFederalReservealsoprovidedaspeaker examinationfindings,bulkcurrencytransactions, forandparticipatedinOFAC’sday-longFinancial outsourcingof BSA/AMLresponsibilities,andthird- InstitutionSymposium. partypaymentprocessorswerediscussed,alongwith updatesoncustomerduediligence,electronicfiling In2012,theFederalReservejoinedtheU.S.Treaof reports,Iraniansanctions,andotherinternational sury’sInteragencyTaskForceonStrengtheningand concerns.Also,FederalReservesupervisorystaff ClarifyingtheBSA/AMLFramework(TaskForce), participatedinanumberof industryconferencesto whichincludesrepresentativesfromtheDepartment continuetocommunicateregulatoryexpectations. of Justice,OFAC,FinCEN,thefederalbanking agencies,theSecuritiesandExchangeCommission, TheFederalReserveisamemberof theTreasury-led andtheCommodityFuturesTradingCommission. BSAAdvisoryGroup,whichincludesrepresentatives Theprimaryfocusof theTaskForceistoreviewthe of regulatoryagencies,lawenforcement,andthe BSA,itsimplementation,anditsenforcementwith financialservicesindustryandcoversallaspectsof respecttoU.S.financialinstitutionsthataresubject theBSA.Inaddition,theFederalReservealsopartotheserequirements,andtodeveloprecommendaticipatedinseveralTreasury-ledprivate/publicsector tionsforensuringthecontinuedeffectivenessof the dialogueswithLatinAmericanandMexicanfinan- BSAandefficiencyinagencyeffortstomonitor cialinstitutions,regulators,andsupervisors.The compliance. objectiveof thesedialoguesistooptimizecorrespondentrelationsbetweenU.S.andcountry-specific InternationalCoordinationon financialsectors.TheFederalReservealsopartici- Sanctions,Anti-Money-Laundering,and patesintheFFIECBSA/AMLworkinggroup,a Counter-TerrorismFinancing monthlyforumforthediscussionof pendingBSA TheFederalReserveparticipatesinanumberof policyandregulatorymatters.Inadditiontothe internationalcoordinationinitiativesrelatedtosanc- FFIECagencies,theBSA/AMLworkinggroup tions,moneylaundering,andterrorismfinancing. includestheFinancialCrimesEnforcementNetwork Forexample,theFederalReservehasalong-standing (FinCEN)and,onaquarterlybasis,theU.S.SecuriroleintheU.S.delegationtotheintergovernmental tiesandExchangeCommission,theCommodity FinancialActionTaskForce(FATF)anditsworking FuturesTradingCommission,theInternalRevenue groups,contributingabankingsupervisoryperspectivetoformulationof internationalstandards.In 12 “AsktheFed”isafreeprogramthatcoversthelatestfinancial addition,theFederalReservehasprovidedinputand andregulatorydevelopmentsforseniorbankingofficialsand boardsofdirectors. reviewof ongoingworktorevisetheFATFRecom-

SupervisionandRegulation 67 mendationstoensurethattheycontinuetoprovidea andforeignfinancialinstitutionssubjecttoFederal comprehensiveandcurrentframeworkforcombating Reservesupervision.FederalReservestaff members moneylaunderingandterroristfinancing.Finally, interactwithotherfederalagenciesandrelevantstate theFederalReservecontinuestoparticipateinasub- supervisors,includingforeignbanksupervisorsas committeeof theBaselCommitteethatfocuseson needed,torecommendandimplementappropriate AML/counter-terrorismfinancingissues. andtimelyrevisionstothereportingformsandthe attendantinstructions. OtherPolicymakingInitiatives BankHoldingCompanyRegulatoryReports • InMay,thefederalbankingagenciesissuedfinal TheFederalReserverequiresthatU.S.BHCsperisupervisoryguidanceregardingstress-testingpracodicallysubmitreportsthatprovideinformation ticesatbankingorganizationswithtotalconsoliabouttheirfinancialconditionandstructure.This datedassetsof morethan$10billion.Theguidinformationisessentialtoformulatingandconductancehighlightstheimportanceof stresstestingat ingbankregulationandsupervision.Itisalsousedin bankingorganizationsasanongoingriskrespondingtorequestsbyCongressandthepublic managementpracticethatsupportsabanking forinformationaboutBHCsandtheirnonbanksuborganization’sforward-lookingassessmentof its sidiaries.Foreignbankingorganizationsalsoare risksandbetterequipsittoaddressarangeof requiredtoperiodicallysubmitreportstotheFederal adverseoutcomes.Thisguidancebuildsuponpre- Reserve. viouslyissuedsupervisoryguidanceandoutlines generalprinciplesforasatisfactorystresstesting • FRY-9seriesreports—theFRY-9C,FRY-9LP, frameworkanddescribesvariousstresstesting FRY-9SPandFRY-9ES—providestandardized approachesandhowstresstestingshouldbeused financialstatementsforBHCsonbothaconsoliatvariouslevelswithinanorganization.Theguiddatedandaparent-onlybasis.Thereportsareused ancealsodiscussestheimportanceof stresstesting todetectemergingfinancialproblems,toreview incapitalandliquidityplanningandtheimporperformanceandconductpre-inspectionanalysis, tanceof stronginternalgovernanceandcontrolsas tomonitorandevaluateriskprofilesandcapital partof aneffectivestress-testingframework.The adequacy,toevaluateproposalsforBHCmergers guidanceisavailableatwww.gpo.gov/fdsys/pkg/ andacquisitions,andtoanalyzeaholdingcompa- FR-2012-05-17/pdf/2012-11989.pdf.(Alsosee ny’soverallfinancialcondition. box4.) • Nonbanksubsidiaryreports—theFRY-11,FR • InMay,theBoardannouncedtheapprovalof a 2314,FRY-7N,andFR2886b—helptheFederal finalruleoutliningtheproceduresforsecurities Reservedeterminetheconditionof BHCsthatare holdingcompanies(SHCs)toelecttobesupervised engagedinnonbankactivitiesandalsoaidinmonibytheFederalReserve.AnSHCisanonbank toringthenumber,nature,andconditionof the companythatownsatleastoneregisteredbroker companies’nonbanksubsidiaries. ordealer.Therulespecifiestheinformationthatan SHCwillneedtoprovidetotheBoardaspartof • TheFRY-8reportprovidesinformationontransregistrationforsupervision,includinginformation actionsbetweenaninsureddepositoryinstitution relatedtoorganizationalstructure,capital,and anditsaffiliatesthataresubjecttosection23Aof financialcondition.Inaddition,theruleprovides theFederalReserveAct;itisusedtomonitorbank thatuponaneffectiveregistration,anSHCwould exposurestoaffiliatesandtoensurebanks’complibesupervisedandregulatedasif itwereabank ancewithsection23Aof theFederalReserveAct. holdingcompanywiththeexceptionthatthe • TheFRY-10reportprovidesdataonchangesin restrictionsonnonbankingactivitiesintheBank organizationstructureatdomesticandforeign HoldingCompanyActwouldnotapplytoasuperbankingorganizations. visedSHC.Theruleisavailableatwww.gpo.gov/ fdsys/pkg/FR-2012-06-04/pdf/2012-13311.pdf. • TheFRY-6andFRY-7reportsgatheradditional informationonorganizationstructureandshare- RegulatoryReports holdersfromdomesticbankingorganizationsand TheFederalReserve’ssupervisorypolicyfunctionis foreignbankingorganizations,respectively;the alsoresponsiblefordeveloping,coordinating,and informationisusedtomonitorstructuresoasto implementingregulatoryreportingrequirementsfor determinecompliancewithprovisionsof theBank variousfinancialreportingformsfiledbydomestic HoldingCompanyAct(BHCAct)andRegula-

68 99thAnnualReport|2012 tionYandtoassesstheabilityof aforeignbank- of December1,2012,wasretained;however,theoneingorganizationtocontinueasasourceof strength timeverificationwasscaledbacktoincludeonly toitsU.S.operations. selectinformationonnonbanksthatwouldbe requiredtofilefinancialreports(FRY-11orFR During2012,theFederalReserveimplementedthe 2314)beginninginMarch31,2013.Additionally,a followingrevisionstotheFRY-9Ctobetterunder- phased-inapproachforreportingnonbanksubsidiarstandBHCs’riskexposuresandtocollectcertain iesontheFRY-10basedonthefrequencyof finaninformationprescribedbychangesinaccounting cialreportingbythenonbanksubsidiarieswas standards:(1)addedtwodataitemstoSched- approved. uleHC-P,1–4FamilyResidentialMortgageBanking Activities,tocollecttheamountof representation CommercialBankRegulatoryReports andwarrantyreservesforone-tofour-familyresiden- Asthefederalsupervisorof statememberbanks,the tialmortgageloanssold;(2)addedadataitemto FederalReserve,alongwiththeotherbankingagen- ScheduleHC-N,PastDueandNonaccrualLoans, cies(throughtheFFIEC),requiresbankstosubmit Leases,andOtherAssets,tocollecttheoutstanding quarterlyCallReports.CallReportsaretheprimary balanceof purchasedcreditimpairedloansbypast sourceof dataforthesupervisionandregulationof dueandnonaccrualstatus;and(3)modifiedthe banksandtheongoingassessmentof theoverall reportinginstructionstoclarifythereportingand soundnessof thenation’sbankingsystem.Call accountingtreatmentof specificvaluation Reportdataprovidethemostcurrentstatisticaldata allowances. availableforevaluatinginstitutions’corporateapplications,foridentifyingareasof focusforbothon-site SavingsandLoanHoldingCompany andoff-siteexaminations,andforconsideringmon- RegulatoryReports etaryandotherpublicpolicyissues.CallReport During2012,thefirstphaseof FederalReserve data,whichalsoserveasbenchmarksforthefinanreportingbeganforthenon-exemptSLHCs.These cialinformationrequiredbymanyotherFederal SLHCsbeganreportingtheFRY-9seriesof reports Reserveregulatoryfinancialreports,arewidelyused andtheFRY-6orFRY-7.TheexemptSLHCsalso bystateandlocalgovernments,statebankingsuperbeganfilingtheFRY-6andFRY-7reports.13Sev- visors,thebankingindustry,securitiesanalysts,and eraltrainingsessionsonthevariousFederalReserve theacademiccommunity. reportswereprovidedtotheSLHCs. During2012,theFFIECimplementedthefollowing OnJune11,2012,theBoardissuedaproposalto revisionstotheCallReporttobetterunderstand expandtheentitiesthatmustfiletheFRY-10report banks’riskexposuresandtocollectcertaininformatoincludeSLHCsandsecurityholdingcompanies, tionprescribedbychangesinaccountingstandards: effectiveDecember1,2012.Inaddition,aone-time (1)addednewScheduleRI-C–DisaggregatedData verificationof anSLHC’sorganizationstructurewas ontheAllowanceforLoanandLeaseLossestocolproposed.Afterconsiderationof thecomments lectinformationontheallowanceforloanandlease receivedontheproposal,theBoardissuedintheFed- lossesbymajorloancategory(effectiveMarch2013); eralRegisteronSeptember14,2012,(77Fed.Reg. (2)addedtwodataitemstoScheduleRC-P,1–4Fam- 86842)thefinalrequirementswithmodifications.The ilyResidentialMortgageBankingActivities,tocolrequirementthattheFRY-10befiledbyallSLHCs, lecttheamountof representationandwarranty includingtheirsavingsassociationsandbranches,as reservesforone-tofour-familyresidentialmortgage loanssold;(3)addedadataitemtoScheduleRC-N, PastDueandNonaccrualLoans,Leases,andOther 13 AfinalnoticewaspublishedintheFederalRegisteronDecember29,2011,(76Fed.Reg.81933)inwhichtheBoardretained Assets,tocollecttheoutstandingbalanceof purthetwo-yearphase-inapproachformostSLHCsandmodified chasedcreditimpairedloansbypastdueandnonactheexemptioncriteriaforcommercialSLHCsandcertaininsurcrualstatus;(4)addednewitemsinScheduleRC-M, anceSLHCs.TheexemptionforcommercialSLHCswillbe reviewedperiodicallyandmayberescindediftheBoarddeter- Memoranda,inwhichsavingsassociationsandcerminesthatFRY–9financialinformationandotherregulatory tainstatesavingsandcooperativebankswould reportsareneededtoeffectivelyandconsistentlyassesscomplireportontheteststheyusetodeterminecompliance ancewithcapitalandotherregulatoryrequirements.Insurance SLHCswillbeexemptonlyuntilconsolidatedregulatorycapital withtheQualifiedThriftLenderrequirementand rulesarefinalizedforSLHCs,atwhichtimetheymaybe whethertheyhaveremainedincompliancewiththis requiredtofileconsolidatedfinancialstatements—todemonrequirement;(5)revisedtwoexistingitemsinSchedstratetheircompliancewiththecapitalrules—andotherFederal Reservereports. uleRC-R,RegulatoryCapital,usedtocalculatethe

SupervisionandRegulation 69 leverageratiodenominatortoaccommodatecertain throughouttheUnitedStatesaswellasforeignbankdifferencesbetweentheregulatorycapitalstandards ingconcerns;(2)theNationalExaminationData thatapplytotheleveragecapitalratiosof banksver- (NED),anapplicationthatenablessupervisorypersussavingsassociations;and(6)modifiedthereport- sonnelaswellasfederalandstatebankingauthorities inginstructionstoclarifythereportingandaccount- toaccessNICdata;(3)theBankingOrganization ingtreatmentof specificvaluationallowances. NationalDesktop,anapplicationthatfacilitates secure,real-timeelectronicinformationsharingand Supervisory Information Technology collaborationamongfederalandstatebankingregulatorsforthesupervisionof bankingorganizations; TheFederalReserve’ssupervisoryinformationtech- and(4)theCentralDocumentandTextRepository nologyfunction,carriedoutbytheBoard’sDivision (CDTR),anapplicationthatcontainsdocuments of BankingSupervisionandRegulationandthe supportingthesupervisoryprocesses. ReserveBanksundertheguidanceof theSubcommitteeonSupervisoryAdministrationandTechnol- WithintheNIC,thesupportingsystemscontinueto ogy,workstoidentifyandsetprioritiesforinforma- bemodifiedovertimetoextendtheirusefulnessand tiontechnologyinitiativeswithinthesupervisionand improvebusinessworkflowefficiency,especiallyfor regulationbusinessline. thesourcingtransactionaldatasystems.Throughout 2012,theNICsupervisoryandstructuredatabases In2012,thesupervisoryinformationtechnology continuedtobemodifiedtosupportDodd-Frank functionfocusedon Actchangesandtofacilitatethesupervisionof • LargeBankSupervision.Improvedthesupervision SLHCs.Businesschangeswereimplementedtothe NEDapplicationforinspectionsof SLHCsand of largeandregionalfinancialinstitutionswith CFPB-ledexaminations.Asignificantamountof newprocessesandlinkedworkflowstoenableconprogressoccurredtosuccessfullycaptureandintetinuousupdatesof informationprovidedthrough gratetheformerOTSdataanddocumentsintosevexaminationsandongoingmonitoringactivities. eralNICdatabases,makingsubstantiallymore • CommunityandRegionalBankSupervision. SLHCexaminationandenforcementactiondata Workedwithcommunityandregionalbankexam- available.Also,SLHCswereaddedtothereporting inersandotherregulatorstoimplementenhanced panelforthestructurereportingforms,withan toolstosupportcommunityandregionalbank emphasisontheReportof ChangesinOrganizaexaminations. tionalStructure(FRY-10),anddatachangestothe • Collaboration.(1)Enhancedinformationsharing structurereportingformsresultedinadditional modificationstotheNICstructuredatabases.Other amongstaff attheBoardandReserveBanks significantdatabaseenhancementsincludedageocthroughnewandenhancedcollaborationtools; odingwebserviceandanewLegalEntityIdentifier (2)implementedanelectronicsolutiontosupport field,beingdevelopedforusebytheinternational examteams’abilitytosharedocuments,and community. (3)leveragedanInteragencySteeringGroupto improvemethodsforsharingworkamongstate andfederalregulators. TheNICalsosupportstheinteragencyShared NationalCredit(SNC)ProgramandtheSNCMod- • Modernization.Acquiredproductstomodernize ernizationinitiative(SNCMod).TheSNCProgram businesscapabilitiesintheareasof documentmanistheannualreviewof largesyndicatedloanswhile agement,resourceprioritization,andscheduling. theSNCModinitiativeisamultiyear,interagency • InformationSecurity.Commencedseveralinitia- informationtechnologydevelopmenteffortto tivestoimproveoverallinformationsecurityand improvetheefficiencyandeffectivenessof thesystheefficiencyof ourinformationsecuritypractices. temsthatsupporttheSNCProgram.SNCMod focusesonacompleteredesignof thecurrentlegacy NationalInformationCenter systemstotakeadvantageof moderntechnologyto TheNationalInformationCenter(NIC)istheFed- enhanceandextendthesystem’scapabilities,includeralReserve’scomprehensiverepositoryforsupervi- ingautomatingtasksandprovidingtoolsforthe sory,financial,andbankingstructuredata.Itisalso examinationandanalysisof loandatafortheagenthemainrepositoryformanysupervisorydocuments. cies’staff.During2012,theagenciesfinalized TheNICincludes(1)dataonbankingstructure requirementsforautomatingtheappealsprocess,

70 99thAnnualReport|2012 loanmatching,andconcordance,andforcreating collection(FRY-14).TheNICstaff alsomanaged additionalanalyticalandreportingcapabilitieswith thethird-partydataaggregatorcontractualrelationtheSNCdata. shipsfortheFRY-14monthlycreditcardandmortgagedatacollections. In2012,theNICteamcontinuedtoimplement changestotheNICpublicwebsiteinresponsetothe Finally,supervisorystaff participatedinanumberof Dodd-FrankAct.Thesechangesincludedaddingthe interagencytechnology-relatedinitiativesaspartof QuarterlySavingsandLoanHoldingCompany FFIECtaskforcesandinteragencycommittees. Report(FR2320)datatothewebsiteandadding Theseeffortssupportstandardizeddatacollections SLHCstothelistingof holdingcompanies(basedon andcross-agencyinformationsharing.Workinthis consolidatedassets).TheNICteamalsoworked areawillcontinuetobeimportantastheagencies extensivelytowardaddingtheRisk-BasedCapital workthroughtheimplementationof theremaining ReportingforInstitutionsSubjecttotheAdvanced Dodd-FrankActinitiatives.Onesuchtechnology- CapitalAdequacyFramework(FFIEC101)datato relatedinitiativerequiredBoardstaff tocollaborate thewebsite;thisisexpectedtobeplacedintoproduc- withtheFDICandOCCtodevelopandreleasea tionbymid-year2013. RequestforProposalfortheCentralDataRepository,thedatacollectionandvalidationsystemforthe Inmid-2012,theNICstaff,inpartnershipwith FFIECcommercialbankConsolidatedReportsof Systemandothersupervisorystaff,issuedinternal ConditionandIncome(CallReports:FFIEC031 guidancetoSystemstaff regardingtheacquisition andFFIEC041)andtheUniformBankPerformance anduseof purchaseddataacrosstheSystemto Report.Anothertechnology-relatedinitiative,started achievecosteffectiveness,reduceduplicativepur- in2012,requiredBoardstaff tocollaboratewiththe chases,andachievegreatercoordinationof contract CFPBonadocumentexchangeinitiativethatwould services. requireimplementingchangestotheCDTRin2013. Begunin2011,theSupervisionandRegula- Staff Development tionNationalDataInventoryProject,aFederal ReserveSystemstrategicinitiative,isbeingimple- TheFederalReserve’sstaff developmentprogram mentedintwophasesoverseveralyears.Overall,this hasoversightof theongoingdevelopmentof about initiativefocusesonprovidingtransparencyand 3,100professionalsupervisorystaff toensurethat awarenessof datacollectionsthatsupportbroadrisk theyhavetheskillsnecessarytomeettheirevolving monitoringandemergingmacro-prudentialsupervi- supervisoryresponsibilities.TheFederalReservealso sionanalysisinLISCCandothersupervisorybusi- providescourseofferingstostaff atstatebanking nessportfolios.PhaseI,whichproducedadata agencies.Trainingactivitiesin2012aresummarized inventoryproof of concept,broughtvisibilityto intable2. supervisionandregulationadhocdatacollections forlargecomplexbankingorganizationsandwas ExaminerCommissioningProgram placedintoproductioninNovember2011.Develop- TheExaminerCommissioningProgram(ECP) mentforPhaseIIwascompletedinDecember2012 involvesapproximately22weeksof instruction.Indiandisexpectedtobeplacedintoproductionin vidualsmovethroughacombinationof classroom March2013.OnceinproductionthePhaseII offerings,self-pacedassignments,andon-the-job changes,whichbuiltuponthePhaseIproof of con- trainingoveraperiodof twotofouryears.Achievecept,wouldallowotherbusinesslinestoutilizevari- mentismeasuredbytwoprofessionallyvalidated ousfunctionalities,suchasautomatedfeedsfrom proficiencyexaminations:thefirstexamisrequired otherdatainventories,extensibilityandsegregation of allECPparticipants,andthesecondexamis of theinventoryandinstitutionsbybusinesslines, offeredintwospecialtyareas—(1)safetyandsoundreportingservices,andenhancedworkflows. nessand(2)consumercompliance.Athirdspecialty, informationtechnology,requiresthatindividuals Throughout2012,inanefforttobestservesupervi- earntheCertifiedInformationSystemsAuditorcertisorybusinesssponsors,NICstaff providedproject ficationofferedbytheInformationSystemsAudit managementforthematurationof theCCAR,Capi- ControlAssociation.In2012,291examinerspassed talPlanReview,andDodd-FrankActStressTesting thefirstproficiencyexamand135passedthesecond programinitiativesandfortheautomationof the proficiencyexam(106insafetyandsoundnessand CapitalAssessmentandStressTestinginformation 29inconsumercompliance).

SupervisionandRegulation 71 Table2.Trainingforbankingsupervisionandregulation,2012 Numberofenrollments Instructionaltime Numberofcourse Coursesponsorortype FederalReserve S b t a a n te ki a n n g d a f g e e d n e c r y al (approxi d m ay a s te )1 training offerings personnel personnel FederalReserveSystem 1,689 262 525 105 FFIEC 822 267 394 91 TheOptionsInstitute2 12 3 3 1 RapidResponseTM 12,913 1,170 11 86 1 Trainingdaysareapproximate.Systemcourseswerecalculatedusingfivedaysasanaverage,withFFIECcoursescalculatedusingfourdaysasanaverage. 2 TheOptionsInstitute,aneducationalarmoftheChicagoBoardOptionsExchange,providesathree-dayseminarontheuseofoptionsinriskmanagement. ContinuingProfessionalDevelopment rectlyaffectthestructureof theU.S.bankingsystem Otherformalandinformallearningopportunitiesare atthelocal,regional,andnationallevels;theinternaavailabletoexaminers,includingotherschoolsand tionaloperationsof domesticbankingorganizations; programsofferedwithintheSystemandFFIEC- ortheU.S.bankingoperationsof foreignbanks.The sponsoredschools.Systemprogramsarealsoavail- applicationsconcernBHCandSLHCformations abletostateandfederalbankingagencypersonnel. andacquisitions,bankmergers,andothertransac- TheRapidResponse®program,introducedin2008, tionsinvolvingbanksandsavingsassociationsor offersSystemandstatepersonnel60–90minutetele- nonbankfirms.In2012,theFederalReserveactedon conferencepresentationsonemergingissuesor 1,029applicationsfiledunderthesixstatutes.Many urgenttrainingneedsassociatedwithimplementation of theseapplicationsinvolvedtargetbankingorganiorissuanceof newlaws,regulations,orguidance. zationsinlessthansatisfactoryfinancialcondition. BankHoldingCompanyActApplications Regulation UndertheBHCAct,acorporationorsimilarlegal entitymustobtaintheFederalReserve’sapproval TheFederalReserveexercisesimportantregulatory beforeformingaBHCthroughtheacquisitionof influenceoverentryintotheU.S.bankingsystem oneormorebanksintheUnitedStates.Once andthesystemstructurethroughitsadministration formed,aBHCmustreceiveFederalReserve of severalfederalstatutes.TheFederalReserveisalso approvalbeforeacquiringorestablishingadditional responsibleforimposingmarginrequirementson banks.Also,BHCsgenerallymayengageinonly securitiestransactions.Incarryingoutitsresponsi- thosenonbankingactivitiesthattheBoardhasprevibilities,theFederalReservecoordinatessupervisory ouslydeterminedtobecloselyrelatedtobanking activitieswiththeotherfederalbankingagencies, undersection4(c)(8)of theBHCAct.14Depending stateagencies,functionalregulators(thatis,regula- onthecircumstances,theseactivitiesmayormaynot torsforinsurance,securities,andcommodities requireFederalReserveapprovalinadvanceof their firms),andforeignbankregulatoryagencies. commencement. Regulation of the U.S. Banking Structure WhenreviewingaBHCapplicationornoticethat requirespriorapproval,theFederalReservemaycon- TheFederalReserveadministerssixfederalstatutes siderthefinancialandmanagerialresourcesof the thatapplytoBHCs,financialholdingcompanies, applicant,thefutureprospectsof boththeapplicant memberbanks,SLHCs,andforeignbankingorgani- andthefirmtobeacquired,financialstabilityfaczations:theBHCAct,theBankMergerAct,the tors,theconvenienceandneedsof thecommunityto ChangeinBankControlAct,theFederalReserve beserved,thepotentialpublicbenefits,thecompeti- Act,section10of theHomeOwners’LoanAct (HOLA(appliestoSLHCs)),andtheInternational 14 Since1996,theacthasprovidedanexpeditedpriornoticeproce- BankingAct. dureforcertainpermissiblenonbankactivitiesandforacquisitionsofsmallbanksandnonbankentities.Sincethattime,the acthasalsopermittedwell-runBHCsthatsatisfycertaincriteria Inadministeringthesestatutes,theFederalReserve tocommencecertainothernonbankactivitiesonadenovo actsonavarietyof applicationsthatdirectlyorindi- basiswithoutfirstobtainingFederalReserveapproval.

72 99thAnnualReport|2012 tiveeffectsof theapplication,andtheapplicant’s bank,BHC,orSLHCtoobtainapprovalfromthe abilitytomakeavailabletotheFederalReserveinfor- relevantfederalbankingagencybeforecompleting mationdeemednecessarytoensurecompliancewith thetransaction.TheFederalReserveisresponsible applicablelaw.Inthecaseof aforeignbankingorga- forreviewingchangesinthecontrolof statemember nizationseekingtoacquirecontrolof aU.S.bank, banks,BHCs,andSLHCs.Initsreview,theFederal theFederalReservealsoconsiderswhetherthefor- Reserveconsidersthefinancialposition,competence, eignbankissubjecttocomprehensivesupervisionor experience,andintegrityof theacquiringperson;the regulationonaconsolidatedbasisbyitshome- effectof theproposedchangeonthefinancialcondicountrysupervisor.In2012,theFederalReserve tionof thebank,BHC,orSLHCbeingacquired;the actedon288applicationsandnoticesfiledbyBHCs futureprospectsof theinstitutiontobeacquired;the toacquireabankoranonbankfirm,ortootherwise effectof theproposedchangeoncompetitioninany expandtheiractivities,includingapplicationsinvolv- relevantmarket;thecompletenessof theinformation ingprivateequityfirms. submittedbytheacquiringperson;andwhetherthe proposedchangewouldhaveanadverseeffectonthe ABHCmayrepurchaseitsownsharesfromits DepositInsuranceFund.Aproposedtransaction shareholders.Whenthecompanyborrowsmoneyto shouldnotjeopardizethestabilityof theinstitution buytheshares,thetransactionincreasesthecompa- ortheinterestsof depositors.Duringitsreviewof a ny’sdebtanddecreasesitsequity.TheFederal proposedtransaction,theFederalReservemaycon- Reservemayobjecttostockrepurchasesbyholding tactotherregulatoryorlawenforcementagenciesfor companiesthatfailtomeetcertainstandards,includ- informationaboutrelevantindividuals.In2012,the ingtheBoard’scapitaladequacyguidelines.In2012, FederalReserveapproved140changeincontrol theFederalReserveactedonsixstockrepurchase noticesrelatedtostatememberbanks,BHCs,and applicationsbyBHCs. SLHCs,includingapplicationsinvolvingprivate equityfirms. TheFederalReservealsoreviewselectionssubmitted byBHCsseekingfinancialholdingcompanystatus FederalReserveActApplications undertheauthoritygrantedbytheGramm-Leach- UndertheFederalReserveAct,abankmustseek BlileyAct.BHCsseekingfinancialholdingcompany FederalReserveapprovaltobecomeamemberbank. statusmustfileawrittendeclarationwiththeFederal AmemberbankmayberequiredtoseekFederal Reserve.In2012,32domesticfinancialholdingcom- Reserveapprovalbeforeexpandingitsoperations panydeclarationswereapproved. domesticallyorinternationally.Statememberbanks mustobtainFederalReserveapprovaltoestablish BankMergerActApplications domesticbranches,andallmemberbanks(including TheBankMergerActrequiresthatallapplications nationalbanks)mustobtainFederalReserve involvingthemergerof insureddepositoryinstitu- approvaltoestablishforeignbranches.Whenreviewtionsbeactedonbytherelevantfederalbanking ingapplicationsformembership,theFederalReserve agency.TheFederalReservehasprimaryjurisdiction considers,amongotherthings,thebank’sfinancial if theinstitutionsurvivingthemergerisastatemem- conditionanditsrecordof compliancewithbanking berbank.Beforeactingonamergerapplication,the lawsandregulations.Whenreviewingapplicationsto FederalReserveconsidersthefinancialandmanage- establishdomesticbranches,theFederalReserveconrialresourcesof theapplicant,thefutureprospectsof siders,amongotherthings,thescopeandnatureof theexistingandcombinedorganizations,theconve- thebankingactivitiestobeconducted.Whenreviewnienceandneedsof thecommunitiestobeserved, ingapplicationsforforeignbranches,theFederal andthecompetitiveeffectsof theproposedmerger. Reserveconsiders,amongotherthings,thecondition TheFederalReservealsomustconsidertheviewsof of thebankandthebank’sexperienceininternatheU.S.Departmentof Justiceregardingthecom- tionalbanking.In2012,theFederalReserveactedon petitiveaspectsof anyproposedbankmergerinvolv- membershipapplicationsfor48banks,andnewand ingunaffiliatedinsureddepositoryinstitutions.In merger-relatedbranchapplicationsfor382domestic 2012,theFederalReserveapproved60mergerappli- branchesandtwoforeignbranches. cationsundertheact. StatememberbanksmustalsoobtainFederal ChangeinBankControlActApplications Reserveapprovaltoestablishfinancialsubsidiaries. TheChangeinBankControlActrequiresindividuals Thesesubsidiariesmayengageinactivitiesthatare andcertainotherpartiesthatseekcontrolof aU.S. financialinnatureorincidentaltofinancialactivities,

SupervisionandRegulation 73 includingsecurities-relatedandinsuranceagency- OverseasInvestmentApplicationsby relatedactivities.In2012,nofinancialsubsidiary U.S.BankingOrganizations applicationsweresubmitted. U.S.bankingorganizationsmayengageinabroad rangeof activitiesoverseas.Manyof theactivitiesare HomeOwners’LoanActApplications conductedindirectlythroughEdgeActandagree- UnderHOLA,acorporationorsimilarlegalentity mentcorporationsubsidiaries.AlthoughmostformustobtaintheFederalReserve’sapprovalbefore eigninvestmentsaremadeundergeneralconsentproforminganSLHCthroughtheacquisitionof oneor ceduresthatinvolveonlyafter-the-factnotificationto moresavingsassociationsintheUnitedStates.Once theFederalReserve,largeandothersignificant formed,anSLHCmustreceiveFederalReserve investmentsrequirepriorapproval.In2012,theFedapprovalbeforeacquiringorestablishingadditional eralReserveapproved31applicationsandnoticesfor savingsassociations.Also,SLHCsgenerallymay overseasinvestmentsbyU.S.bankingorganizations, engageinonlythosenonbankingactivitiesthatare manyof whichrepresentedinvestmentsthroughan specificallyenumeratedinHOLAorwhichtheBoard EdgeActoragreementcorporation. haspreviouslydeterminedtobecloselyrelatedto bankingundersection4(c)(8)of theBHCAct. InternationalBankingActApplications Dependingonthecircumstances,theseactivitiesmay TheInternationalBankingAct,asamendedbythe ormaynotrequireFederalReserveapprovalin ForeignBankSupervisionEnhancementActof advanceof theircommencement.In2012,theFed- 1991,requiresforeignbankstoobtainFederal eralReserveactedon17applicationsandnotices Reserveapprovalbeforeestablishingbranches,agenfiledbySLHCstoacquireabankoranonbankfirm, cies,commerciallendingcompanysubsidiaries,or ortootherwiseexpandtheiractivities. representativeofficesintheUnitedStates. UnderHOLA,asavingsassociationreorganizingto Inreviewingapplications,theFederalReservegeneramutualholdingcompany(MHC)structuremust allyconsiderswhethertheforeignbankissubjectto receiveFederalReserveapprovalpriortoitsreorganicomprehensivesupervisionorregulationonaconzation.Inaddition,anMHCmustreceiveFederal solidatedbasisbyitshome-countrysupervisor.It Reserveapprovalbeforeconvertingtostockform, alsoconsiderswhetherthehome-countrysupervisor andMHCsmustreceiveFederalReserveapproval hasconsentedtotheestablishmentof theU.S.office; beforewaivingdividendsdeclaredbytheMHC’s thefinancialconditionandresourcesof theforeign subsidiary.In2012,theFederalReserveactedonno bankanditsexistingU.S.operations;themanagerial applicationsforMHCreorganizations.In2012,the resourcesof theforeignbank;whetherthehome- FederalReserveactedoneightapplicationsfiledby countrysupervisorsharesinformationregardingthe MHCstoconverttostockform,andnineapplicaoperationsof theforeignbankwithothersupervitionstowaivedividends. soryauthorities;whethertheforeignbankhasprovidedadequateassurancesthatinformationconcern- WhenreviewinganSLHCapplicationornoticethat ingitsoperationsandactivitieswillbemadeavailable requirespriorapproval,theFederalReservemaycontotheFederalReserve,if deemednecessarytodetersiderthefinancialandmanagerialresourcesof the mineandenforcecompliancewithapplicablelaw; applicant,thefutureprospectsof boththeapplicant whethertheforeignbankhasadoptedandimpleandthefirmtobeacquired,theconvenienceand mentedprocedurestocombatmoneylaunderingand needsof thecommunitytobeserved,thepotential whetherthehomecountryof theforeignbankis publicbenefits,thecompetitiveeffectsof theapplicadevelopingalegalregimetoaddressmoneylaundertion,andtheapplicant’sabilitytomakeavailableto ingorisparticipatinginmultilateraleffortstocomtheFederalReserveinformationdeemednecessaryto batmoneylaundering;andtherecordof theforeign ensurecompliancewithapplicablelaw. bankwithrespecttocompliancewithU.S.law.In 2012,theFederalReserveapprovedtwoapplications TheFederalReservealsoreviewselectionssubmitted byforeignbankstoestablishbranches,agencies,or bySLHCsseekingtreatmentasfinancialholding representativeofficesintheUnitedStates. companiesundertheauthoritygrantedbytheDodd- FrankAct.SLHCsseekingfinancialholdingcom- PublicNoticeofFederalReserveDecisions panytreatmentmustfileawrittendeclarationwith theFederalReserve.In2012,fourSLHCfinancial CertaindecisionsbytheFederalReservethatinvolve holdingcompanydeclarationswereapproved. anacquisitionbyaBHC,abankmerger,achangein

74 99thAnnualReport|2012 control,ortheestablishmentof anewU.S.banking changedtheregistrationthresholdundertheSecuripresencebyaforeignbankaremadeknowntothe tiesExchangeActandresultedinasignificant publicbyanorderoranannouncement.Ordersstate declineinthenumberof statememberbanks thedecision,theessentialfactsof theapplicationor requiredtoregisterwiththeBoard.Attheendof notice,andthebasisforthedecision;announcements 2012,fourstatememberbankswereregisteredwith stateonlythedecision.Allordersandannounce- theBoardundertheSecuritiesExchangeAct. mentsaremadepublicimmediately;theyaresubsequentlyreportedintheBoard’sweeklyH.2statistical SecuritiesCredit release.TheH.2releasealsocontainsannouncements UndertheSecuritiesExchangeActof 1934,the of applicationsandnoticesreceivedbytheFederal Boardisresponsibleforregulatingcreditincertain Reserveuponwhichactionhasnotyetbeentaken. transactionsinvolvingthepurchasingorcarryingof Foreachpendingapplicationandnotice,therelated securities.TheBoard’sRegulationTlimitsthe H.2Areleasegivesthedeadlineforcomments.The amountof creditthatmaybeprovidedbysecurities Board’swebsiteprovidesinformationonordersand brokersanddealerswhenthecreditisusedtopurannouncements(www.federalreserve.gov/newsevents/ chasedebtandequitysecurities.TheBoard’sRegulapress/orders/2013orders.htm)aswellasaguidefor tionUlimitstheamountof creditthatmaybepro- U.S.andforeignbankingorganizationsthatwishto videdbylendersotherthanbrokersanddealerswhen submitapplications(www.federalreserve.gov/ thecreditisusedtopurchaseorcarrypubliclyheld bankinforeg/afi/afi.htm). equitysecuritiesif theloanissecuredbythoseor otherpubliclyheldequitysecurities.TheBoard’s Enforcement of Other Laws and RegulationXappliesthesecreditlimitations,ormar- Regulations ginrequirements,tocertainborrowersandtocertain creditextensions,suchascreditobtainedfromfor- TheFederalReserve’senforcementresponsibilities eignlendersbyU.S.citizens. alsoextendtothedisclosureof financialinformation bystatememberbanksandtheuseof credittopur- SeveralregulatoryagenciesenforcetheBoard’ssecuchaseandcarrysecurities. ritiescreditregulations.TheSEC,theFinancial FinancialDisclosuresbyStateMemberBanks IndustryRegulatoryAuthority,andtheChicago BoardOptionsExchangeexaminebrokersanddeal- Statememberbanksthatissuesecuritiesregistered ersforcompliancewithRegulationT.Withrespectto undertheSecuritiesExchangeActof 1934mustdiscompliancewithRegulationU,thefederalbanking closecertaininformationof interesttoinvestors, agenciesexaminebanksundertheirrespectivejurisincludingannualandquarterlyfinancialreportsand dictions;theFarmCreditAdministrationandthe proxystatements.Bystatute,theBoard’sfinancial NCUAexaminelendersundertheirrespectivejurisdisclosurerulesmustbesubstantiallysimilartothose dictions;andtheFederalReserveexaminesother of theSEC.Theenactmentof theJumpstartOur RegulationUlenders. BusinessStartupsAct(JOBSAct)inApril2012

75 Consumer and Community Affairs TheDivisionof ConsumerandCommunityAffairs • Consumerlawsandregulations.Thedivisioncon- (DCCA)hasprimaryresponsibilityforcarryingout tinuedtoadministertheBoard’sregulatoryrespontheBoard’sconsumerfinancialprotectionandcom- sibilitieswithrespecttocertainentitiesandspecific munitydevelopmentprograms.DCCAconducts statutoryprovisionsof theconsumerfinancialserconsumer-focusedsupervision,research,andpolicy vicesandfairlendinglaws.DCCAalsodraftsreguanalysis,aswellasimplementsstatutoryrequirements lationsandofficialinterpretationsandissuesreguandfacilitatescommunitydevelopment.Theseactivi- latoryinterpretationsandcomplianceguidancefor tiespromoteafairandtransparentconsumerfinan- theindustry,theReserveBanks,otherfederalagencialservicesmarket,includingfortraditionallyunder- cies,andcongressionalstaff. servedhouseholdsandneighborhoods. Supervision and Examinations Throughout2012,thedivisionengagedinnumerous consumerandcommunity-relatedfunctionsand TheBoard’sDivisionof ConsumerandCommunity policyactivitiesinthefollowingareas: Affairsdevelopsandsupportssupervisorypolicyand examinationproceduresforconsumerprotection • Consumer-focusedsupervisionandexaminations. lawsandregulations,aswellastheCommunityRein- ThedivisionprovidedleadershipfortheReserve vestmentAct(CRA),aspartof itssupervisionof the Bankconsumercompliancesupervisionandexamiorganizationsforwhichithasauthority,including nationprogramsinstatememberbanksandbank holdingcompanies,statememberbanks,andforeign holdingcompaniesthrough:policydevelopment, bankingorganizations.Thedivisionalsoadministers examinertraining,supervisionoversight,fairlendtheFederalReserveSystem’srisk-focusedprogram ing,UnfairorDeceptiveActsorPractices(UDAP) forassessingconsumercomplianceriskatthelargest andfloodenforcement,analysisof bankandbank bankandfinancialholdingcompaniesintheSystem, holdingcompanyapplicationsinregardtoconwithdivisionstaff ensuringthatconsumercomplisumerprotection,andprocessingconsumer anceriskiseffectivelyintegratedintotheconsolicomplaints. datedsupervisionoversightof theholdingcompany. • Consumerresearchandemerging-issuesandpolicy Thedivisionoverseestheeffortsof the12Reserve analysis.Thedivisionanalyzedemergingissuesin Bankstoensurethatcompliancewithconsumerproconsumerfinancialservicespoliciesandpractices tectionlawsandregulationsisfullyevaluatedand inordertounderstandtheirimplicationsforthe fairlyenforced.Divisionstaff providesguidanceand economicandsupervisorypoliciesthatarecoreto expertisetotheReserveBanksonconsumerprotecthecentralbank’sfunctions,aswellastogain tionlawsandregulations,bankandbankholding insightintoconsumerdecisionmaking. companyapplicationanalysisandprocessing,examinationandenforcementtechniquesandpolicymat- • Communitydevelopmentactivities.Thedivision ters,examinertraining,andemergingissues.Staff continuedtopromotefairandinformedaccessto reviewReserveBanksupervisoryreports,examinafinancialmarketsforallconsumers,recognizingthe tionworkproducts,andconsumercomplaintanalyparticularneedsof underservedpopulationsby sesandresponses.Finally,staff membersparticipate engaginglenders,governmentofficials,andcom- ininteragencyactivitiesthatpromoteuniformityin munityleaders.Throughouttheyear,DCCAcon- examinationprinciples,standards,andprocesses. venedprogramstoshareinformationandresearch oneffectivecommunitydevelopmentpoliciesand ExaminationsaretheFederalReserve’sprimary strategies. methodof enforcingcompliancewithconsumerpro-

76 99thAnnualReport|2012 tectionlawsandassessingtheadequacyof consumer 1. enhancetheresiliencyof firmstolowertheprobcompliancerisk-managementsystemswithinregu- abilityof failureorinabilitytoserveasafinancial latedentities.Duringthe2012reportingperiod intermediary (July1,2011,throughJune30,2012),theReserve 2. reducetheimpactonthefinancialsystemandthe Banksconducted282consumercomplianceexamibroadereconomyintheeventof afirm’sfailure nationsof statememberbanksand11examinations ormaterialweakness of foreignbankingorganizations. BHCConsolidatedSupervisionProgramstaff also Bank Holding Company Consolidated participatedjointlywithstaff of theBoard’sDivision Supervision Program of BankingSupervisionandRegulationonnumerous Dodd-FrankAct-relatedimplementationprojects During2012,staff intheBankHoldingCompany regardingsupervisoryassessmentfees,consolidated (BHC)ConsolidatedSupervisionProgramhad supervision,andthriftholdingcompanyintegration. responsibilityforreviewingmorethan110bankand Also,aspartof theconsolidatedsupervisionof financialholdingcompaniestoensureconsumer BHCs,staff continuedtomonitorcompliancewith complianceriskwasappropriatelyincorporatedinto theprovisionsintheconsentordersthatwereimpletheconsolidatedriskassessmentfortheorganization. mentedin2011atthefourmortgageservicersand10 Throughacombinationof risk-focused,on-/off-site BHCsforwhichtheFederalReservehassupervisory examinationandmonitoringactivities,supervisory authority.Staff’soversightisdesignedtodetermineif staff wereabletoassesstheimpactenterprise-wide theservicersandBHCshavecorrectedthenoted consumerissueshadontheoverallriskprofilesof deficiencies,thatfutureabusesintheloanmodificatheconsolidatedentity.Inaddition,asaresultof tionandforeclosureprocessareprevented,andthat changesbroughtaboutbytheDodd-FrankWall borrowersarecompensatedforfinancialinjurythey StreetReformandConsumerProtectionAct(the sufferedasaresultof errors,misrepresentations,or Dodd-FrankAct),supervisoryfunctionsrelatedto otherdeficienciesintheforeclosureprocess. savingsandloanholdingcompanies(SLHCs)were transferredtotheBoard,andSLHCswereaddedto OnJuly11,2012,theFederalReserveissued“Guidtheportfolioof entitiescoveredbytheConsolidated anceonaLender’sDecisiontoDiscontinueForeclo- SupervisionProgram. sureProceedings,”2whichemphasizestheimportance of appropriateriskmanagementpracticesandcon- OnDecember17,2012,theFederalReserveissued trolsinconnectionwithadecisionnottocomplete guidanceentitled“ConsolidatedSupervisionFrame- foreclosureproceedingsaftertheyhavebeeninitiated. workforLargeFinancialInstitutions,”1whichsets Theobjectiveof thesupervisoryprocessrelatedto forthanewframeworkfortheconsolidatedsupervi- abandonedforeclosuresistoconfirmthataninstitusionof largefinancialinstitutions.Theframework tionmanagesitsdecisiontoinitiateand/ordisconstrengthenstraditionalmicroprudentialsupervision tinueforeclosureproceedingsinaprudentmanner. andregulationtoenhancethesafetyandsoundness Thepolicyletternotesfourkeyconceptsthatbankof individualfirms.Italsoincorporatesmacropru- ingorganizationswithresidentialmortgageservicing dentialconsiderationstoreducepotentialthreatsto operationsshouldensurearecoveredintheirpolicies thestabilityof thefinancialsystemandtoprovide andprocedures: insightsintofinancialmarkettrends.Theconsoli- 1. notificationtoborrowers datedsupervisionframeworkhastwoprimary objectives: 2. communicationmethods 3. notificationtolocalauthorities 1 BoardofGovernorsoftheFederalReserveSystem,Divisionof 2 BoardofGovernorsoftheFederalReserveSystem,Divisionof BankingSupervisionandRegulationandDivisionofConsumer BankingSupervisionandRegulationandDivisionofConsumer andCommunityAffairs(2012),“ConsolidatedSupervision andCommunityAffairs(2012),“GuidanceonaLender’sDeci- FrameworkforLargeFinancialInstitutions,”Supervisionand siontoDiscontinueForeclosureProceedings,”Supervisionand RegulationLetterSR12-17andCA12-14(December17),www RegulationLetterSR12-11andCA12-10(July11),www .federalreserve.gov/bankinforeg/srletters/sr1217.htm. .federalreserve.gov/bankinforeg/srletters/sr1211.htm.

ConsumerandCommunityAffairs 77 4. obtainingandmonitoringcollateralvalues Duringthefirsthalf of theyear,theagenciesworked todeveloparemediationframeworktoprovide Mortgage Servicing and Foreclosure: examplesof situationswherecompensationorother Implementing and Overseeing the remediationwouldberequiredforthoseborrowers Independent Foreclosure Review whohadbeendeemedtobefinanciallyharmedasa resultof errors,misrepresentations,andotherdefi- Throughout2012,theFederalReservecontinuedto cienciesintheforeclosureprocess.InJune,theFedworkwiththeOfficeof theComptrollerof theCur- eralReserveandtheOCCissuedguidancetohelp rency(OCC)andtheOfficeof ThriftSupervision ensurethatsimilarly-situatedborrowerswouldbe (OTS)toprovideremediationtoconsumerswho treatedinthesamemanner,withremediationfor wereharmedbycertainbankingorganizationsin injuries,includinglump-sumpayments(from$500to theirresidentialmortgageloanservicingandforeclo- $125,000plusequity),suspensionorrescissionof a sureprocessingoperations.3(Seebox1.) foreclosure,loanmodificationorotherlossmitigationassistance,correctionof creditreports,orcor- 3 FormoreinformationontheIndependentForeclosureReview, gotowww.federalreserve.gov/consumerinfo/independentforeclosure-review.htmandwww.independentforeclosurereview .com. Box 1. Independent Foreclosure Review: Developing the Program, Reaching Borrowers In2010,thefederalbankingagencies(theFederal theconsentorders.Theresultingprogram,known ReserveBoardofGovernors,theOfficeofthe astheIndependentForeclosureReview(IFR), ComptrolleroftheCurrency(OCC),andtheOffice requiredtheorganizationstoretainindependent ofThriftSupervision(OTS))launchedacoordinated consultantstoreviewforeclosuresthatwereinitiandtargetedreviewof14ofthenation’slargest ated,pending,orcompletedduring2009or2010to mortgageservicingorganizations,whichhandled determineifborrowerssufferedfinancialharm morethantwo-thirdsofallmortgageservicingfrom resultingfromerrors,misrepresentations,orother November2010toJanuary2011.Thereviews deficienciesthatmayhaveoccurredduringtheforerevealedarangeofmisconductandnegligenceby closureprocess.Inaddition,theBoardissuedmoncertainbankingorganizationsintheirresidential etarypenaltiesof$766.5millionagainstfivebanking mortgageloanservicingandforeclosureprocessing organizations,inconjunctionwiththeDepartmentof operations.InApril2011,theBoardissuedconsent JusticeandtheStateAttorneysGeneral. ordersagainst10parentbankholdingcompanies,1 Outreachtomorethanfourmillionborrowersthat includingfourservicingentitiesregulatedbythe wereeligiblefortheIFRprogram,tomakethem Board,fordeficient,unsafe,andunsoundpractices awareoftheopportunitytosubmitarequestfora inmortgageloanservicingandforeclosure processing.2 review,presentedchallengestotheservicersand theagencies.Thegoalwastocastthewidestnet Theseenforcementactionsrequiredeachofthe possible,sotheFederalReserveandtheOCC organizationstocorrectdeficientpracticesandpro- directedmortgageservicerstoconductanextensive videremediationtoborrowerswhosufferedfinancial outreachcampaignabouttheIFR.Print,radio,teleinjury.Overthecourseofseveralmonths,thefed- vision,andonlineadvertisingcampaignstargeted eralbankingagenciesworkedwiththe14organiza- thecommunitieshardesthitbymortgageforeclotionstodevelopaprogramtoimplementtheactions sures,withmaterialsavailableinEnglish,Spanish, mandatedundertheforeclosurereviewprovisionin Mandarin,Korean,Vietnamese,Hmong,Russian, Creole,andTagalog.Additionaloutreachefforts includeddirectcontactwitheligibleborrowersby 1 The10institutionsare:BankofAmericaCorporation;Citigroup mail,e-mail,andtelephone,aswellascoordinated Inc.;AllyFinancialInc.;HSBCNorthAmericaHoldings,Inc.; effortsbycommunity,housing,andfaith-based JPMorganChase&Co.;MetLife,Inc.;ThePNCFinancialServicesGroup,Inc.;SunTrustBanks,Inc.;U.S.Bancorp;and groups.Overthecourseoftheprogram,inorderto WellsFargo&Company. provideadequatetimeforborrowerstosubmita 2 BoardofGovernorsoftheFederalReserveSystem(2011), requestforreview,theagenciesextendedthedead- “FederalReserveissuesenforcementactionsrelatedtodeficient linethreetimes,ultimatelytoDecember31,2012.In practicesinresidentialmortgageloanservicingandforeclosure theend,morethan500,000borrowerssubmitteda processing,”pressrelease,April13,www.federalreserve.gov/ newsevents/press/enforcement/20110413a.htm. requestforreview.

78 99thAnnualReport|2012 rectionof deficiencyamountsandrecords.4The allowingeligibleborrowerstoreceivecompensation resultsof theindependentconsultants’filereview significantlymorequickly.TheOCCandtheFederal wereoriginallyintendedtodeterminewhetherabor- Reserveacceptedthisagreementbecauseitprovides rowerwaseligibleforremediation,withregularover- thegreatestbenefittoconsumerssubjecttounsafe sightandreviewof theprocess,includingtestingof andunsoundmortgageservicingandforeclosure filesbyFederalReserveandOCCexaminers. practicesduringtherelevantperiodinamoretimely mannerthanwouldhaveoccurredunderthereview Throughoutthesecondhalf of 2012,theagencies process.Theagreementalsoincludesadditional andconsultantsworkeddiligentlytoexpandout- incentivesforservicerstoprovidemoreforeclosure reachtopotentiallyaffectedborrowersandtocon- assistancetoborrowers.Borrowerscoveredunderthe ductcase-by-casereviewsof mortgagefiles.The agreementwillreceivecompensationwhetherornot reviewsof themortgagefileswasnecessarilydetail- theyfiledarequest-for-reviewform,andborrowers orientedandtimeconsuming,andtheagencies,ser- donotneedtotakefurtheractiontobeeligiblefor vicers,communityorganizations,andfinancialinsti- compensation.Forthoseservicersthatarenotpartutionssharedgreatconcernaboutthedelayincom- ticipatingintheagreement,theIFRprocesswill pensatingborrowers.Thisconcernreachedacritical continue. levelbytheendof 2012,andtheagenciesandthe majorityof thefinancialinstitutionsinvolvedagreed Theresolutionof theIFRmarksanimportantmiletorenegotiatethetermsof theconsentordersto stoneand,combinedwiththeothercorrectivemeasexpeditepaymentstoallborrowersinthe2009–10 uresintheconsentorders,amajorstepforward period.InearlyJanuary2013,13mortgageservicing towardimprovingmortgageservicing.Inaddition,all companiessubjecttotheconsentordersfordeficient remainingarticlesintheoriginalconsentorders practicesinmortgageloanservicingandforeclosure remaininfullforceandeffecttocorrecttheservicers’ processingagreedtopaymorethan$9.3billionin deficientforeclosurepractices.OCCandFederal cashpaymentsandotherassistancetohelpborrow- Reserveexaminerscontinuetomonitortheservicers’ ers.5Thesumincludes$3.6billionincashpayments implementationof correctiveactionsrequiredbythe toeligibleborrowersand$5.7billioninotherassis- originalconsentorderstoaddressunsafeand tance,suchasloanmodificationsandforgivenessof unsoundmortgageservicingandforeclosure deficiencyjudgments.6 practices. Asaresultof thisagreement,participatingservicers Supervisory Matters ceasedtheIndependentForeclosureReview(IFR) program,replacingitwithabroaderframework InOctober2012,theBoardissuedaformalenforcementaction,includinga$9millioncivilmoneypen- 4 BoardofGovernorsoftheFederalReserveSystem(2012), alty,againstAmericanExpressCompany(Amex) “Agenciesreleasefinancialremediationguidance,extenddead- andAmericanExpressTravelRelatedServicesComlineforrequestingafreeindependentforeclosurereviewtoSeppany(TRS)toaddressdeceptivemarketinganddebt tember30,2012,”pressrelease,June21,www.federalreserve.gov/ newsevents/press/bcreg/20120621a.htm. collectionpracticesandassociateddeficienciesin 5 BoardofGovernorsoftheFederalReserveSystem(2013), complianceriskmanagementandinternalauditpro- “Independentforeclosurereviewtoprovide$3.3billioninpay- grams.AmexandTRSarebothbankholdingcomments,$5.2billioninmortgageassistance,”pressrelease,JanupanieslocatedinNewYork. ary7,www.federalreserve.gov/newsevents/press/bcreg/20130107a .htm. 6 AlthoughnotpartoftheIndependentForeclosureReview,on TRS,whichprovidesdebtcollectionandmarketing January16,2013,GoldmanSachsandMorganStanleyreached servicestosubsidiarybanks(AmericanExpressCensimilaragreementsinprinciplewiththeFederalReserverelated toenforcementactionsfordeficientpracticesinmortgageloan turionBankandAmericanExpressBank,FSB), servicingandforeclosureprocessing.SeeBoardofGovernorsof allegedlyledcustomerstobelievethattheirdefaulted theFederalReserveSystem(2013),“FederalReserveBoard debtwouldbe“waived”or“forgiven”byactingon reachesagreementsinprinciplewithGoldmanSachsandMorganStanleytoprovide$557millioninpaymentsandother settlementofferswithoutdisclosingtheeffectthat mortgageassistancetoborrowers,”pressrelease,January16, settlingforlessthanthefulldebtwouldhaveonthe www.federalreserve.gov/newsevents/press/bcreg/20130116a.htm customers’futureabilitiestoobtaincredit.TRSalso andBoardofGovernorsoftheFederalReserveSystemand OfficeoftheComptrolleroftheCurrency(2013),“OCCand allegedlymadedeceptiverepresentationsincredit FederalReservereachagreementwithHSBCtoprovide cardsolicitationsconcerningthebenefitscustomers $249millioninpaymentsandassistance,”pressrelease,Januwouldreceivebyactingontheoffer.Finally,theFedary18,www.federalreserve.gov/newsevents/press/bcreg/ 20130118b.htm. eralReservefounddeficienciesincompliancerisk

ConsumerandCommunityAffairs 79 managementandinternalaudit,whicharefirm-wide • AnapplicationbyAdamBankGroup,Inc., functionsatAmex.TheBoard’sactionwastakenin Tampa,Florida,toacquireBrazosValleyBank, coordinationwithformalactionstakenbytheCon- N.A.,CollegeStation,Texas,wasapprovedin sumerFinancialProtectionBureau(CFPB),theFed- March. eralDepositInsuranceCorporation(FDIC),the • ApplicationsbyIndustrialandCommercialBank Officeof theComptrollerof theCurrency(OCC), of ChinaLimited,ChinaInvestmentCorporation, andtheUtahDepartmentof FinancialInstitutions andCentralHuijinInvestmentLtd.,allof Beijing, againsttheentitiesthattheysupervise. People’sRepublicof China,tobecomebankholdingcompaniesbyacquiringupto80percentof the Community Reinvestment Act votingsharesof TheBankof EastAsia(U.S.A.) NationalAssociation,NewYork,NewYork,were TheCRArequiresthattheFederalReserveandother approvedinMay. federalbankingandthriftagenciesencouragefinancialinstitutionstohelpmeetthecreditneedsof the • AnapplicationbyBB&TCorporation,Winstonlocalcommunitiesinwhichtheydobusiness,consis- Salem,NorthCarolina,toacquireBankAtlantic,a tentwithsafeandsoundoperations.Tocarryoutthis subsidiaryfederalsavingsassociationof BankAtmandate,theFederalReserve lanticBancorp,Inc.,bothof Ft.Lauderdale, Florida,wasapprovedinJuly. • examinesstatememberbankstoassesstheircompliancewiththeCRA • AnapplicationbySumitomoMitsuiFinancial Group,Inc.andSumitomoMitsuiBankingCorpo- • analyzesapplicationsformergersandacquisitions ration,bothof Tokyo,Japan,toincreasetheir bystatememberbanksandbankholdingcompaownershipinteresttoupto9.9percentof theoutniesinpartwithinthecontextof CRA standingsharesof TheBankof EastAsia,Limperformance ited,HongKongSAR,People’sRepublicof China • disseminatesinformationaboutcommunitydevel- andtherebyincreasetheirinterestinTheBankof opmenttechniquestobankersandthepublic EastAsia(U.S.A.)NationalAssociation,New throughCommunityDevelopmentofficesatthe York,NewYork,wasapprovedinOctober. ReserveBanks • AnapplicationbyMitsubishiUFJFinancial Group,Inc.,TheBankof Tokyo-MitsubishiUFJ, TheFederalReserveassessesandratestheCRAper- Ltd.,bothof Tokyo,Japan,andUnionBanCal formanceof statememberbanksinthecourseof Corporation,SanFrancisco,California,toacquire examinationsconductedbystaff atthe12Reserve PacificCapitalBancorpand,indirectly,itssubsid- Banks.Duringthe2012reportingperiod,theReserve iary,SantaBarbaraBankTrust,N.A.,bothof Banksconducted256CRAexaminationsof state SantaBarbara,California,wasapprovedin memberbanks.Of thosebanksexamined,28were November. rated“Outstanding,”228wererated“Satisfactory,” nonewererated“NeedstoImprove,”andnonewere Membersof thepublicsubmittedcommentsoneach rated“SubstantialNon-Compliance.” of theaboveapplications.Publiccommentsraised variousissuesforstaff toconsiderintheiranalysesof MergersandAcquisitions thesupervisoryandlendingrecordsof theappli- During2012,theBoardconsideredandapproved cants.Severalcommentersallegedthatvariousinstisevenbankingmergerapplicationsthatwerepro- tutionsfailedtomakecreditavailabletocertain testedonCRAorfairlendinggroundsorthatraised minoritygroupsandtolow-andmoderate-income issuesinvolvingconsumercomplianceortheCRA.7 (LMI)individualsandinLMIgeographiesorinadequatemarketingthroughminorityoutlets.Com- • AnapplicationbyCapitalOneFinancialCorporamentersalsoallegedpredatoryanddiscriminatory tion,McLean,Virginia,toacquireINGBank, lendingpracticeswithrespecttotaxrefundanticipa- FSB,Wilmington,Delaware,wasapprovedin tionloans,residentialmortgages,checkingaccounts, February. andsmallbusinessloans.Severalcommentersraised CRA-relatedconcernsaboutapplicantswithweak 7 Anotherprotestedapplicationwaswithdrawnbytheapplicant. CRArecordsfollowingrecentacquisitionsorinad- FormoreinformationonOrdersonBankingApplicationsin equateplanstomeetcommunities’creditneeds, 2012,gotowww.federalreserve.gov/newsevents/press/orders/ 2012orders.htm. potentialbranchclosuresthatwoulddisproportion-

80 99thAnnualReport|2012 atelyexcludeLMIconsumers,inadequatebranches planwastospecifyareasinwhichtransactiontesting inpredominantlyminoritytracts,andinaccuraciesin wouldbeconducted,addressthescopeandfreaCRApublicdisclosure. quencyof testing,provideforperiodicreporting, provideforimprovedemployeetraining,andinclude Inevaluatingthemeritsof thesecomments,the arequirementforanannualreviewof internalaudit Boardconsideredinformationprovidedbyapplicants of thetestingimplementationforatleastthenext andanalyzedrelevantlendingdatainmarketsof threeyears.Compliancewiththisconditionwastobe interesttothecommenters.TheBoardalsoincorpo- monitoredaspartof thesupervisoryprocess. ratedotherinformation,includingexamination reportswithon-siteevaluationsof compliancewith TheapplicationbyMitsubishiUFJFinancialGroup, fairlendingandotherconsumerprotectionlawsand Inc.,TheBankof Tokyo-MitsubishiUFJ,Ltd.,both regulationsandconferredwithotherregulatorsfor of Tokyo,Japan,andUnionBanCalCorporation, theirsupervisoryviews. SanFrancisco,California,toacquirePacificCapital Bancorp,SantaBarbara,California,wasof particu- TheapplicationbyCapitalOneFinancialCorpora- larinterestbecauseitrepresentedthefirstapplication tion(CapitalOne),toacquireINGBank,FSB of thefinancialstabilitystatutoryfactortoapro- (ING)wasoneof thefirstof itskindtobesubjectto posalbyagloballysystemicallyimportantbanking thefinancialstabilityfactormandatedbytheDodd- organizationtoacquireabankintheUnitedStates. FrankAct.TheapplicationwasfiledinJuly2011, andmorethan900commentsweresubmittedby TheBoardalsoconsidered90applicationswithoutindividualsandcommunitygroups,almosttwo-thirds standingissuesinvolvingcompliancewithconsumer of whichopposedthemerger.Inaddition,theBoard protectionstatutesandregulations,includingfair heldthreepublicmeetings—inWashington,D.C., lendinglawsandtheCRA.Someof thoseissues Chicago,andSanFrancisco—relatedtothiscase.8 involvedtheexistenceof aconsentorderdueto CommentersexpressedconcernsaboutCapitalOne’s weaknessesinforeclosureprocesses,aswellasconlendingactivities,includingitsconcentrationincredit cernsaboutunfairanddeceptivepractices.Eightycardlending,andurgedtheBoardtodelayordeny oneof thoseapplicationswereapprovedand10were theproposaluntiltheCRAregulationhasbeen withdrawn. reformedtoaccommodatesuchnationwidelenders. Commentersalsocontendedthatanypublicbenefits wouldbeinadequatetooffsettheincreaseinrisk Fair Lending Enforcement posedtothefinancialsystemgivenprojected increasesinCapitalOne’ssizeandcomplexity. TheFederalReservesupervises836statemember banks.Pursuanttoprovisionsof theDodd-Frank InitsFebruary14,2012,orderapprovingthepro- Act,effectiveonJuly21,2011,theCFPBsupervises posal,theBoardreferencedvariousconsumercom- statememberbankswithassetsof morethan$10bilplaintsandlegalactionsagainstCapitalOnewhich lionforcompliancewiththeEqualCreditOpportusuggestedthatCapitalOne’sprocessesandproce- nityAct(ECOA),andtheBoardhassupervisory duresforenterprise-widecompliancetransaction authorityforcompliancewiththeFairHousingAct. testingcouldbeimproved.9TheBoardconditioned Fortheapproximately815statememberbankswith itsapprovalonCapitalOneadopting,within90days assetsof $10billionorless,theBoardretainsthe of thedateof approval,aplanacceptabletotheFed- authoritytoenforceboththeECOAandtheFair eralReserveBankof Richmond,toaugmentits HousingAct. enterprise-widecompliancetransactiontesting.The Fairlendingreviewsareconductedregularlywithin 8 MinutesfortheWashington,D.C.,meetingareavailableatwww thesupervisorycycle.Additionally,examinersmay .federalreserve.gov/foia/files/Capital_One-ING_Meeting_ Transcript_09-20-2011.pdf;forChicagoatwww.federalreserve conductfairlendingreviewsoutsideof theusual .gov/foia/files/Capital-One-ING-Chicago-Meeting-Transcript_ supervisorycycle,if warrantedbyfairlendingrisk. 09-27-2011.pdf;andforSanFranciscoatwww.federalreserve Whenexaminersfindevidenceof potentialdiscrimi- .gov/foia/files/Capital-One-ING-Hearing-Transcript-San- Francisco-20111005.pdf. nation,theyworkcloselywithDCCA’sFairLending 9 FederalReserveSystem(2012),“CapitalOneFinancialCorpo- EnforcementSection,whichprovidesadditionallegal ration,McLean,Virginia:OrderApprovingtheAcquisitionofa andstatisticalexpertiseandensuresthatfairlending SavingsAssociationandNonbankingSubsidiaries,”FRBOrder lawsareenforcedconsistentlyandrigorously No.2012-2(February14),www.federalreserve.gov/newsevents/ press/orders/order20120214.pdf. throughouttheFederalReserveSystem.

ConsumerandCommunityAffairs 81 PursuanttotheECOA,if theBoardhasreasonto theDeputyGeneralCounselof theU.S.Department believethatacreditorhasengagedinapatternor of HousingandUrbanDevelopment,theAssistant practiceof discriminationinviolationof theECOA, Directorof theCFPB’sOfficeof FairLendingand thematterwillbereferredtotheU.S.Departmentof EqualOpportunity,andtheNationalAssociationof Justice(DOJ).TheDOJreviewsthereferraland AttorneysGeneral,representedbytheAttorneyGendetermineswhetherfurtherinvestigationiswar- eralfortheStateof Illinois.In2012,theBoardand ranted.ADOJinvestigationmayresultinapublic theNon-DiscriminationWorkingGroupsponsoreda civilenforcementactionorsettlement.Alternatively, freeinteragencywebinarthathadmorethan5,000 theDOJmaydecidetoreturnthemattertothe registrants,mostof whichwerecommunitybanks. Boardforadministrativeenforcement.WhenamatterisreturnedtotheBoard,staff ensuresthatthe Inaddition,theFederalReserveparticipatesin institutiontakesallappropriatecorrectiveaction. numerousmeetings,conferences,andtrainingssponsoredbyconsumeradvocates,industryrepresenta- During2012,theBoardreferredthefollowingtwo tives,andinteragencygroups.FairLendingEnforcematterstotheDOJ: mentstaff meetsregularlywithconsumeradvocates, supervisedinstitutions,andindustryrepresentatives • Onereferralinvolveddiscriminationonthebasisof todiscussfairlendingmattersandreceivefeedback. nationalorigin,inviolationof theECOA.The Throughthisoutreach,theBoardisabletoaddress lenderchargedHispanicborrowershigherinterest emergingfairlendingissuesandpromotesoundfair ratesthannon-Hispanicborrowersforunsecured lendingcompliance. consumerloans.Legitimatepricingfactorsfailedto explainthepricingdisparities. Flood Insurance • Onereferralinvolveddiscriminationonthebasisof TheNationalFloodInsuranceActimposescertain maritalstatus,inviolationof theECOA.Thebank requirementsonloanssecuredbybuildingsormobile improperlyrequiredspousalsignaturesonhome homeslocatedin,ortobelocatedin,areasdeterequityloans,inviolationof RegulationB. minedtohavespecialfloodhazards.UndertheFederalReserve’sRegulationH,whichimplementsthe If afairlendingviolationdoesnotconstituteapatact,statememberbanksaregenerallyprohibited ternorpractice,theFederalReserveactsonitsown frommaking,extending,increasing,orrenewingany toensurethattheviolationisremediedbythebank. suchloanunlessthebuildingormobilehome,aswell Mostlendersreadilyagreetocorrectfairlendingvioasanypersonalpropertysecuringtheloan,arecovlations.Infact,lendersoftentakecorrectiveactionas eredbyfloodinsuranceforthetermof theloan.The soonastheybecomeawareof aproblem.Thus,the lawrequirestheBoardandotherfederalfinancial FederalReservegenerallyusesinformalsupervisory institutionregulatoryagenciestoimposecivilmoney tools(suchasmemorandaof understandingbetween penaltieswhentheyfindapatternorpracticeof viobanks’boardsof directorsandtheReserveBanks,or lationsof theregulation.Thecivilmoneypenalties boardresolutions)toensurethatviolationsarecorarepayabletotheFederalEmergencyManagement rected.If necessarytoprotectconsumers,however, Agency(FEMA)fordepositintotheNationalFlood theBoardcanbringpublicenforcementactions. MitigationFund. Financial Fraud Enforcement Task OnJuly6,2012,theBiggert-WatersFloodInsurance Force and Other Outreach ReformActof 2012wassignedintolaw.Among otherthings,theactraisedthecivilmoneypenalty Asanactivememberof theFinancialFraud capwhenapatternorpracticeof floodviolations EnforcementTaskForce(FFETF),theBoardcoorexists.Specifically,thecapwasraisedfrom$385per dinateswithotheragenciestofacilitateconsistent andeffectiveenforcementof thefairlendinglaws.10 violationto$2,000perviolation.Inaddition,the overallcalendaryearcaponpenaltieswasremoved. TheDirectorof theBoard’sDivisionof Consumer andCommunityAffairsco-chairstheFFETF’sNon- Coordination with Other Federal DiscriminationWorkingGroupwiththeAssistant Banking Agencies AttorneyGeneralforDOJ’sCivilRightsDivision, Thememberagenciesof theFederalFinancialInsti- 10 FormoreinformationabouttheFFETF,gotowww.stopfraud .gov. tutionsExaminationCouncil(FFIEC)developuni-

82 99thAnnualReport|2012 formexaminationprinciples,standards,procedures, theirmortgageloansif theyareunabletoselltheir andreportformats.11In2012,theFFIECmember homestopayoff themortgagedebt. organizationsissuedexaminationproceduresfor threeregulations.12 Theguidanceremindsmortgageloanservicersthat theiremployeesshouldbeadequatelytrainedabout InteragencyExaminationProcedures theoptionsavailableforassistingmilitaryhomeownforRegulationZ erswithPCSorders.Italsodirectsservicerstopro- Procedureswererevisedtoreflectaninterimfinal videaccurate,clear,andreadilyunderstandableinforrulepublishedbytheCFPBonDecember22,2011, mationaboutavailableoptionsforwhichhomeownwhichrestatedRegulationZtoreflectthetransferof ersmayqualifybasedontheinformationknown authorityandcertainotherchangesmadebythe whenthehomeownersnotifytheirservicersthatthey Dodd-FrankActonJuly21,2011.Theinterimfinal havereceivedPCSorders.Theguidancealsoreminds ruledidnotimposeanynewsubstantiveobligations servicerstocommunicatedecisionsonassistance onpersonssubjecttotheexistingRegulationZprevi- requestsinatimelymanner. ouslypublishedbytheBoard. Examiner Training InteragencyExaminationProceduresfor theFairCreditReportingAct(FCRA) Ensuringthatfinancialinstitutionscomplywithlaws thatprotectconsumersandencouragecommunity Procedureswererevisedtoreflectamendmentstothe reinvestmentisanimportantpartof thebankexami- FCRApursuanttotheDodd-FrankActandrelated nationandsupervisionprocess.Asthenumberand amendmentstoRegulationV,whichimplementsporcomplexityof consumerfinancialtransactionsgrow, tionsof theFCRA.TheDodd-FrankActamended trainingexaminersbecomesevenmoreimportant. sections615(a)and615(h)of theFCRAtorequire Theexaminerstaff developmentfunctionisresponthedisclosureof creditscoresandinformationrelatsiblefortheongoingdevelopmentof theprofessional ingtocreditscoresin(1)adverseactionnoticesif a consumercompliancesupervisorystaff,andensuring consumer’screditscoreisusedintakingadverse thatthesestaff membershavetheskillsnecessaryto actionand(2)risk-basedpricingnoticesif aconsummeettheirsupervisoryresponsibilitiesnowandinthe er’screditscoreisusedinsettingthematerialterms future. of credit.ThesenewcreditscoredisclosurerequirementsbecameeffectiveonAugust15,2011. ConsumerComplianceExaminer TrainingCurriculum InteragencyGuidanceonMortgageServicing forMilitaryHomeowners Theconsumercomplianceexaminertrainingcurriculumconsistsof fivecoursesfocusedonvariouscon- InJune,theFFIECmemberagenciesjointly sumerprotectionlaws,regulations,andexamining announcedguidanceconcerningmortgageservicing concepts.In2012,thesecourseswereofferedin13 practicesthatmightposeriskstohomeownersservinginthemilitary.13Theguidanceaddressesrisks sessions,andtrainingwasdeliveredtoatotalof 277 Systemconsumercomplianceexaminersandstaff relatedtomilitaryhomeownerswhohaveinformed membersandfivestatebankingagencyexaminers. theirloanservicerthattheyhavereceivedPermanent Changeof Station(PCS)orderstorelocatetoanew Whenappropriate,coursesaredeliveredviaalternadutystationandwhomightneedassistancewith tivemethods,suchastheInternetorotherdistancelearningtechnologies.Forinstance,severalcourses 11 FFIECmemberagenciesincludetheBoardofGovernorsofthe FederalReserveSystem,theFDIC,theNationalCreditUnion useacombinationof instructionalmethods: Administration(NCUA),theOCC,theStateLiaisonCommit- (1)classroominstructionfocusedoncasestudiesand tee(SLC),andtheCFPB. (2)speciallydevelopedcomputer-basedinstruction 12 Inprioryears,theBoardincludedinthissectionthefindings andrateofcompliancewiththeconsumerprotectionrulesfor thatincludesinteractiveself-checkexercises. whichithadrulemakingauthorityasreportedbythevarious federalagencieswithsupervisoryauthorityforthoseregulations. BoardandReserveBankstaff regularlyreviewthe ThisreportingresponsibilitytransferredtotheCFPBin July2011.Formoreinformationseewww.consumerfinance.gov/ corecurriculumforexaminertraining,updatingsubreports. jectmatterandaddingnewelementsasappropriate. 13 BoardofGovernorsoftheFederalReserveSystem(2012), During2012,staff initiatedoneinterimcurriculum “Agenciesissueguidanceconcerningmortgageservicingpracreview.TheFairLendingExaminationTechniques ticesthatimpactservicemembers,”pressrelease,June21,www .federalreserve.gov/newsevents/press/bcreg/20120620a.htm. coursewasreviewedinordertoincorporatelessons

ConsumerandCommunityAffairs 83 learnedfrompreviouscourses.Thiscourseis Table1.Complaintsagainststatememberbanksand designedtoequipassistantlevelexaminerswiththe selectednonbanksubsidiariesofbankholdingcompanies skillsandknowledgetoplanandconductarisk- aboutregulatedpractices,byRegulation/Act,2012 focusedfairlendingexamination,andincorporates theFFIECfairlendingexaminationprocedures. Regulation/Act Number RegulationAA(UnfairorDeceptiveActsorPractices) 7 Life-longLearning RegulationB(EqualCreditOpportunity) 26 Inadditiontoprovidingcoreexaminertraining,the RegulationBB(CommunityReinvestment) 2 examinerstaff developmentfunctionemphasizesthe RegulationC(HomeMortgageDisclosure) 0 importanceof continuinglife-longlearning.Oppor- RegulationCC(ExpeditedFundsAvailability) 65 RegulationD(ReserveRequirements) 3 tunitiesforcontinuinglearningincludespecialproj- RegulationDD(TruthinSavings) 55 ectsandassignments,self-studyprograms,rotational RegulationE(ElectronicFundsTransfers) 67 assignments,theopportunitytoinstructatSystem RegulationG(Disclosure/ReportingofCRA-Related Agreements) 0 schools,mentoringprograms,andanannualcon- RegulationH(NationalFloodInsuranceAct/InsuranceSales) 20 sumercomplianceexaminerforum,whereseniorcon- RegulationM(ConsumerLending) 0 sumercomplianceexaminersreceiveinformationon RegulationP(PrivacyofConsumerFinancialInformation) 17 emergingcomplianceissuesandareabletosharebest RegulationQ(PaymentofInterest) 1 practicesfromacrosstheSystem. RegulationV(FairandAccurateCreditTransactions) 14 RegulationZ(TruthinLending) 51 FairCreditReportingAct 49 In2012,theSystemcontinuedtooffer“Rapid FairDebtCollectionPracticesAct 15 Response”sessions,whichprovideapowerfuldeliv- FairHousingAct 14 erymethodforjust-in-timetraining.Debutedin HomeOwnershipCounseling 0 2008,RapidResponsesessionsofferexaminersone- HOPA(HomeownersProtectionAct) 2 hourteleconferencepresentationsonemergingissues RealEstateSettlementProceduresAct 31 RighttoFinancialPrivacyAct 3 orurgenttrainingneedsthatresultfromtheimple- ProtectingTenantsatForeclosureAct 2 mentationof newlaws,regulations,orsupervisory ServicemembersCivilReliefAct 3 guidance.Atotalof nineconsumercompliance Total 447 RapidResponsesessionsweredesigned,developed, andpresentedtoSystemstaff during2012. receiveddirectlyfromconsumers.Approximately Responding to Consumer 6percentof caseswerereferredtotheFederal Complaints and Inquiries Reservefromotheragencies. TheFederalReserveinvestigatescomplaintsagainst statememberbanksandselectednonbanksubsidiar- WhileconsumerscancontactFRCHbytelephone, iesof bankholdingcompanies(FederalReserve- fax,mail,e-mail,oronline(atwww regulatedentities),andforwardscomplaintsagainst .federalreserveconsumerhelp.gov),mostFRCHconothercreditorsandbusinessestotheappropriate sumercontactsoccurredbytelephone(56percent). enforcementagency.EachReserveBankinvestigates Forty-onepercent(15,947)of complaintandinquiry complaintsagainststatememberbanksandselected submissionsweremadeelectronically(viae-mail, nonbanksubsidiariesinitsDistrict.TheFederal onlinesubmissions,andfax),andtheonlineform Reservealsorespondstoconsumerinquiriesona pagereceived333,281visitsduringtheyear. broadrangeof bankingtopics,includingconsumer ConsumerComplaints protectionquestions. ComplaintsagainstFederalReserve-regulatedenti- Inlate2007,theFederalReserveestablishedFederal tiestotaled2,194in2012.Approximately43percent ReserveConsumerHelp(FRCH)tocentralizethe of thesecomplaintswereclosedwithoutinvestigation processingof consumercomplaintsandinquiries.In pendingthereceiptof additionalinformationfrom 2012,FRCHprocessed39,246cases.Of thesecases, consumers.Nearly7percentof thetotalcomplaints morethanhalf (25,841)wereinquiriesandthe arestillunderinvestigation.Of theremainingcomremainder(13,405)werecomplaints,withmostcases plaints(1,109),60percent(662)involvedunregulated

84 99thAnnualReport|2012 Table2.Complaintsagainststatememberbanksandselectednonbanksubsidiariesofbankholdingcompaniesabout regulatedpractices,byproducttype,2012 Subjectofcomplaint/producttype Allcomplaints Complaintsinvolvingviolations Number Percent Number Percent Total 447 100 6 1.3 Discriminationalleged Realestateloans 15 3.4 0 0 Creditcards 4 0.8 0 0 Otherloans 6 1.3 0 0 Nondiscriminationcomplaints Checkingaccounts 119 27.0 3 0.07 Realestateloans 87 19.5 1 0.02 Creditcards 77 17.0 0 0 Other 139 31.0 2 0.04 practicesand40percent(447)involvedregulated rower.Eightpercentof discriminationcomplaints practices. wasrelatedtoeithertheageorhandicapof theapplicantorborrower.Of thecomplaintsallegingdis- ComplaintsaboutRegulatedPractices criminationbasedonaprohibitedbasis,therewere Themajorityof regulatedpracticescomplaintscon- noviolations. cernedcheckingaccounts(27percent),realestate14 (23percent),andcreditcards(18percent).Themost In96percentof investigatedcomplaintsagainstFedcommoncheckingaccountcomplaintsrelatedto eralReserve-regulatedentities,evidencerevealedthat fundsavailabilitynotasexpected(37percent),insuf- institutionscorrectlyhandledthesituation.Of the ficientfundsoroverdraftchargesandprocedures remaining4percentof investigatedcomplaints, (18percent),forgery/fraud/embezzlement(9percent), 1percentwasdeemedviolationsof law,3percent anddisputedrates,terms,orfees(8percent).The wasidentifiederrorswhichwerecorrectedbythe mostcommonrealestatecomplaintsbyproblem bank,andtheremainderincludedmattersinvolving coderelatedtofloodinsurance(18percent),debt litigationorfactualdisputes,withdrawncomplaints, collection/foreclosureconcerns(15percent),disputed internallyreferredcomplaints,orinformationwas rates,terms,andfees(14percent),andpayment providedtotheconsumer. errorsordelays(5percent).Themostcommoncredit cardcomplaintsrelatedtoinaccuratecreditreporting ComplaintsaboutUnregulatedPractices (32percent),paymenterrorsanddelays(10percent), TheBoardcontinuedtomonitorcomplaintsabout bankdebtcollectiontactics(9percent),billingerror bankingpracticesnotsubjecttoexistingregulations. resolutions(9percent),andinterestrates,terms,and In2012,theBoardreceived662complaintsagainst fees(8percent). FederalReserve-regulatedentitiesthatinvolvedthese unregulatedpractices.Thecomplaintswererelatedto Twenty-fiveregulatedpracticescomplaintsalleging creditcards(24percent),checkingaccountactivity discriminationwerereceived.Of these,12complaints (24percent),andrealestateconcerns(18percent). (3percentof totalregulatedcomplaints)allegeddiscriminationonthebasisof prohibitedborrower ComplaintReferrals traitsorrights.15Twenty-eightpercentof discrimina- In2012,theFederalReserveforwarded11,230comtioncomplaintswasrelatedtotherace,color, plaintsagainstotherbanksandcreditorstothe nationalorigin,orethnicityof theapplicantorborappropriateregulatoryagenciesandgovernment officesforinvestigation.Tominimizethetime 14 Realestateloansincludeadjustable-ratemortgages,residential requiredtore-routecomplaintstotheseagencies, constructionloans,open-endhomeequitylinesofcredit,home referralsweretransmittedelectronically. improvementloans,homepurchaseloans,homerefinance/ closed-endloans,andreversemortgages. 15 Thisincludesallegeddiscriminationonthebasisofrace,color, TheFederalReserveforwarded11complaintstothe religion,nationalorigin,sex,maritalstatus,age,applicant Departmentof HousingandUrbanDevelopment incomederivedfrompublicassistanceprograms,orapplicant relianceonprovisionsoftheConsumerCreditProtectionAct. (HUD)thatallegedviolationsof theFairHousing

ConsumerandCommunityAffairs 85 Act.16TheFederalReserve’sinvestigationof these survey,withthefindingscompiledandpublishedin complaintsrevealednoinstancesof illegalcredit early2013. discrimination. Emerging-Issues Analysis ConsumerInquiries TheFederalReservereceived25,841consumerinqui- ThePolicyAnalysisfunctionof DCCAprovideskey riesin2012,coveringawiderangeof topics.Con- insights,information,andanalysisonemerging sumersweretypicallydirectedtootherresources, financialservicesissuesthataffectthewell-beingof includingotherfederalagenciesorwrittenmaterials, consumersandcommunities.Tothisend,Policy toaddresstheirinquiries. Analysisstaff followandanalyzetrends,lead Division-wideworkinggroups,andorganizeexpert roundtablestoidentifyemergingrisksandinform Consumer Research and policyrecommendations. Emerging-Issues and Policy Analysis In2012,thePolicyAnalysisteamwasactively Throughout2012,DCCAanalyzedemergingissues engagedinabroadsetof issuesandactivitiestoproinconsumerfinancialservicespoliciesandpractices motehouseholdfinancialsecurityandsustainable inordertounderstandtheirimplicationsfortheeco- recoveryfromthefinancialcrisis.Staff contributedto nomicandsupervisorypoliciesthatarecoretothe broadanalysisof policyconsiderationsforhousing FederalReserve’sfunctions,aswellastogaininsight marketrecovery.Inconjunctionwithotherdivisions intoconsumerdecisionmaking. of theBoard,theteamwasinvolvedinproposalsfor re-usestrategiesforbank-ownedforeclosureproper- Consumer Financial Services Research ties(alsoreferredtoas“realestateowned,”orREO) anddevelopingguidancetoaddresssomebanks’ Consumers’UseofMobileFinancialServices practiceof abandoningaforeclosureprocesswithout notificationtoborrowersorlocalauthorities.18 Theevolutionof technologiesthatenableconsumers toconductfinancialtransactionsusingmobile deviceshasdramaticallyaffectedhowconsumers PolicyAnalysiscontinueditsworkonresidential conducttheirfinanciallives;however,littleresearch mortgageforeclosureissuesbyassistingwiththe hasexploredthistopic.Thedivisionhasbeenmoni- implementationof theIndependentForeclosure toringtrendsanddevelopmentsinmobilefinancial Review(IFR).Aspartof the2011enforcement servicesforseveralyearsandundertookeffortsto actionsagainst14mortgageservicersfordeficient delvemoreformallyintothetopicin2012.(See practicesinmortgageloanservicingandforeclosure box2.) processing,theIFRprocesswascreatedtoremediate borrowersfinanciallyharmedfromimproperforeclo- Tofurtherunderstandconsumers’useof,andopin- sureactionsin2009and2010.19Policystaff ledthe ionsabout,mobilefinancialservices,thedivision efforttomakepublicdatathatcouldbeusedto commissionedanonlinesurvey,pollingnearly2,300 informamoretargetedapproachtoreachingborrespondentstolearnwhetherandhowtheyuse rowerspotentiallyeligibleforanIFRreview,andalso mobiledevicesforbankingandpayments.Thissur- developedweb-basedcommunicationmaterialsto veywasamongthefirsttointegratequestionsabout broadenIFRoutreachefforts. usingmobiledevicesforshoppingandcomparing productsalongwithquestionsaboutusingmobile devicesforbankingandpayments.Thefindingsof ate,March29,www.federalreserve.gov/newsevents/testimony/ thesurveywerepublishedandreleasedinthereport, braunstein20120329a.htm. ConsumersandMobileFinancialServices,andwas 18 BoardofGovernorsoftheFederalReserveSystem,Divisionof thetopicof Congressionaltestimony.17Asecondsur- BankingSupervisionandRegulationandDivisionofConsumer andCommunityAffairs(2012),“GuidanceonaLender’sDeciveywasconductedinNovembertoupdatethefirst siontoDiscontinueForeclosureProceedings,”Supervisionand RegulationLetterSR12-11andCA12-10(July11)www 16 AmemorandumofunderstandingbetweenHUDandthefed- .federalreserve.gov/bankinforeg/srletters/sr1211.htm. eralbankregulatoryagenciesrequiresthatcomplaintsalleginga 19 BoardofGovernorsoftheFederalReserveSystem(2011), violationoftheFairHousingActbeforwardedtoHUD. “FederalReserveissuesenforcementactionsrelatedtodeficient 17 SeeSandraF.Braunstein,Director,DivisionofConsumerand practicesinresidentialmortgageloanservicingandforeclosure CommunityAffairs(2012),“Mobilepayments,”Beforethe processing,”pressrelease,April13,www.federalreserve.gov/ CommitteeonBanking,Housing,andUrbanAffairs,U.S.Sen- newsevents/press/enforcement/20110413a.htm.

86 99thAnnualReport|2012 Box 2. Consumers’ Evolving Use of Mobile Financial Services Inrecentyears,anincreasingarrayoffinancialser- Fewerconsumersreportedthattheyhadusedtheir vices—includingbankingservices,shoppingtools, mobiledevicestomakesomeformofpaymentin andpaymentoptions—havebecomeavailablefor theprior12months—just12percentofallmobile consumersusingcellphonesandothermobile phoneusersand23percentofsmartphoneusers. devices.Collectively,thesedevelopmentsmayulti- Forbothmobilebankingandmobilepayments,the matelyhavesignificanteffectsonthewaysinwhich twoprimaryreasonswhypeoplechosenottoadopt consumersconducttheirfinanciallives.Several theservicewere:(1)concernsaboutthesecurityof functionsoftheFederalReserveBoard—including thetechnologyand(2)thebeliefthatthesenewsertheDivisionofConsumerandCommunityAffairs vicesdidnotprovidesufficientbenefitsoverexisting (DCCA)—havebeenmonitoringthesenewdevelop- servicestojustifytheirusage. mentsinrecentyears.Asmobilefinancialservices Thesurveyfurthershowedthattheincreasingavailarebecomingincreasinglycommon,DCCAsetout abilityofjust-in-timefinancialinformationmay toconductasurveytoassess:theextentofconchangethewaythatconsumersmakefinancialdecisumers’adoptionoftheseservices,howthesesersions.Forexample,amongtherespondentswho vicesarebeingused,howtheycouldhelpconsumindicatedthattheyreceivetextmessagealertstellersintheirfinancialdecisionmaking,howtheycould ingthemthattheyhavealowbalance,86percent expandaccesstofinancialservicesforunderserved reportedtakingaction—suchastransferringfunds populations,andwheretheremaybeareasof intotheaccount,makingadeposit,orreducingtheir concern. spending—inresponsetothosemessages.Con- Throughanationallyrepresentativesurveycon- sumersarealsomakinguseoftheirmobilephones ductedbyDCCAinearly2012,theBoardlearned toinformtheirdecisionswhenshopping.For that21percentofallmobilephoneusers,and instance,amongsmartphoneusers,41percent 42percentofsmartphoneusers,hadusedmobile reportedusingtheirphonestocomparisonshop bankingservicesinthepreceding12months.1 overtheInternetwhileatastore.Ofthesepeople, 68percentindicatedthatthepricecomparison resultedinthempurchasingtheproductsomewhere 1 SeeBoardofGovernorsoftheFederalReserveSystem(2012), otherthanthestoretheywerein. ConsumersandMobileFinancialServices,(Washington:Board ofGovernors,March),www.federalreserve.gov/econresdata/ Asthemobilefinancialservicesmarketisquickly mobile-devices/files/mobile-device-report-201203.pdf.Seealso MatthewB.Gross,JeanneM.Hogarth,andMaximilianD. evolving,DCCAplanstoconductafollow-upsurvey Schmeiser(2012),“UseofFinancialServicesbytheUnbanked totracktrendsandrecentdevelopmentsinconsumandUnderbankedandthePotentialforMobileFinancialSer- ers’useofmobileservices.Itwillreporttheresulting vicesAdoption,”FederalReserveBulletin,vol.94,no.4,www informationin2013. .federalreserve.gov/pubs/bulletin/2012/articles/ MobileFinancialServices/mobile-financial-services.htm. Aspartof anongoingefforttounderstandvarious cialstabilityforlow-andmoderate-income(LMI) aspectsof consumers’financiallives,PolicyAnalysis communitiesandindividualsthrougharangeof conductedinquiriesintospecificissues.Forexample, activities:conveningstakeholders,conductingand togetherwiththeConsumerResearchgroup,Policy sharingresearch,andidentifyingemergingissues.As Analysishostedexpertroundtablestodiscuss adecentralizedfunction,theCommunityAffairs changesinpost-secondaryeducationfinancingand Officers(CAOs)ateachof the12ReserveBanks thepossibleimplicationsof thetrendsinstudent designactivitiestorespondtothespecificneedsof indebtednessforindividuals,households,andforthe thecommunitiestheyserve,withoversightfrom broadereconomy.Thegroupalsofacilitatedexpert Boardstaff.TheBoard’sCommunityDevelopment dialoguesandinitiatedresearchintothefinancial staff promoteandcoordinateSystemwidepriorities; livesandneedsof olderadults,agrowingdemo- inparticular,CommunityDevelopmenthasfivestragraphicintheU.S.populationwithpotentiallydis- tegicgoals: tinctpatternsof useof financialservices. 1. supportprogramsandpromotepoliciesthat improvethefinancialstabilityof LMIhouseholds Community Economic Development 2. strengthenLMIcommunitiesbyadvancingcomprehensiveneighborhoodrevitalizationandstabi- TheFederalReserveSystem’sCommunityDeveloplizationstrategies mentfunctionpromoteseconomicgrowthandfinan- 30 444

ConsumerandCommunityAffairs 87 3. fosterinnovativestrategiesthatassistLMIcom- Theworkinggroupcontinuestomeetandshare munitiesandindividualsinlaunching,growing, resourcesasitlookstoincreaseitscollaborative andsustainingsmallbusinesses effortsandformnewpartnerships.Thehopeisthat theGEICserieswillserveasamodelandlaunching 4. advanceinnovationandefficiencyincommunity padforfutureinteragencyeffortsinIndianCountry. developmentprograms,funding,andinfrastructuretopromotescale,sustainability,andimpact Stabilizing Communities through 5. strategicallycommunicatekeyfindingsof the Strategic Use of Resources CommunityDevelopmentfunctionandshare emergingcommunitydevelopmentissuesand Falloutfromtheeconomiccrisishasincludedlarge trendsthathavenationalimplications inventoriesof foreclosedpropertiesthatstandvacant andabandonedandcanhavesignificantdestabilizing Growing Economies in Indian Country effectsoncommunities,includingincreasedcrime anddecreasedpropertyvalues.Thechallengeof dis- Evenasthenationaleconomyshowssignsof posingof theserealestateowned(REO)properties improvement,communitiesinruralareasof the oftenoutstripsresources,particularlyinlow-income UnitedStates—particularlyontriballands—stillface communities.Throughout2012,theFederal considerableobstaclesinattractinginvestment, Reserve’sCommunityDevelopmentfunctionandits accessingfinancialservices,andsupportingentrepre- nationalpartnerorganizationssupportedeffortsto neurship.TheGrowingEconomiesinIndianCountry transformhowcommunityinvestmentsaremadeto (GEIC)initiativewasaninnovativeinteragencyand stabilizecommunities.Manycommunitieshavea Systemwideendeavorfocusedonasingularcause: mismatchbetweendevelopmentneedsandavailable IndianCountry.The2011GEICworkshopseries resourcestomeettheseneeds.Strategicuseof data wasaninteragencyefforttoaddresseconomicdevel- andotheravailabletoolstotargetlimitedresourcesis opmentissues,raiseawarenessof federalassistance onemethodincreasinglyusedtomoreeffectivelystaprograms,andhighlightbestpracticesof economic bilizedistressedneighborhoods.TheFederalReserve developmentstrategiesforIndianCountry.Themost isprovidinginformationoninnovativepracticesin importantobjectiveof GEICwastohearfrommem- communitiesacrossthenationandontoolsavailable bersof thecommunityaboutthebarrierstoeco- topractitionersandpolicymakerstoaidlocalefforts. nomicdevelopmentinNativeAmericancommunities andstrategiesbeingemployedtoovercomethosebar- Labor Markets and Human Capital riers.NinefederalagenciesandfourFederalReserve Banksparticipatedinthisefforttohostworkshopsat Giventheattenuatingeffectsof long-termunemploysixlocationsacrossthecountry. mentonthebroadereconomicrecoveryandtheparticularissuesfacingLMIcommunities,inthefallof InMay2012,theworkinggroupreleasedareport 2011,theCommunityDevelopmentfunction andhostedanationalsummitinWashington,D.C., designedaninitiativetoexploreregionalperspectives tosharethewiderangeof viewsandideasthatsur- onthisissuethroughaseriesof forumsheldthroughfacedintheGEICseries.20Thesummitprovideda outthecountry.Someof theseregionalforumsconvenuefortriballeaders,policymakers,financial sistedof smallfocusgroupsorlisteningsessions;othindustryprofessionals,andcommunitydevelopment erswerelargerinscope,withmoreformalagendas serviceproviderstodiscusschallengestoeconomic focusingonaparticulardemographicoremployment developmentinIndiancountry,opportunitiesto sector.Inmostcases,forumparticipantsrepresented strengthenTribalenterprisedevelopment,opportuni- eitherintermediaryorganizationsthatareinvolvedin tiestoexpandNativeAmericanentrepreneurship thedeliveryof workforcedevelopmentservices,local andaccesstosmallbusinesscapital,andopportuni- employers,orboth.Theobjectiveof thisinitiative tiestostrengthengovernanceandlegalstructures. wastobetterunderstandthecomplexfactorscreatinglong-termunemploymentconditionsparticularly 20 BoardofGovernorsoftheFederalReserveSystem(2012), inLMIcommunitiesandtoidentifypromisingwork- “GrowingEconomiesinIndianCountry:TakingStockofProg- forcedevelopmentstrategies.InDecember2012,the ressandPartnerships,”(BoardofGovernorsoftheFederal Boardreleased“APerspectivefromMainStreet: ReserveSystem:Washington,D.C.,April),www.federalreserve .gov/newsevents/conferences/GEIC-white-paper-20120501.pdf. Long-TermUnemploymentandWorkforceDevelop-

88 99thAnnualReport|2012 ment,”21apaperthatprovidesasummaryof thekey communications,includingspeechesandpress topicsthatemergedfromtheforumsandexamplesof releases. howthoseissueswerereflectedindifferentpartsof thecountryandfordifferentpopulations. TheCDIstaff alsocontinuestoexplorevarious graphicalandtrendanalysis,aswellasvisualcapture, Community Data Initiative of LMIcommunityconditions’variabilityacross ReserveBankdistricts.TheBoardteamiscollaborat- In2011,theCommunityDataInitiative(CDI)was ingwithReserveBankCDIworkinggroupsonthe launchedwiththegoalof leveraginginformationfollowingtopics:newstatisticalmethodologies, sharingandpartnershiproleswitharigorousanalytireportingcomparativeandaggregateinformation, calcapacitytoprovidereliablemarketintelligence anddeep-dive/drill-downsector-specificsurveyson thathelpsidentifyandclosedatagapsforLMIcomissuesthatcontinuetodisplayfragileornorecovery munities.TheBoardandeachof theReserveBanks capacity. participateinthiscollaborativeresearchprojectto providesystematicandrelevantcommunitycondi- NeighborWorks-BoardNationalSurveyfor2012:Q4 tionsandtrendinformationonaconsistentbasis. closedonJanuary11,2013,with396respondents acrossall12ReserveBankdistricts.Thesurveypro- Throughtheuseof quarterlyorbiannuale-pollingof videsnationalinformationonhousingcounselors selecteddistrictcommunitystakeholders,theCDI experiencewithTreasury’sHomeAffordableModificapturescurrentandemergingcommunitydevelopcationProgram,workforcedevelopmentissues, mentissues.In2012,all12of theReserveBanks affordablerentalhousingissues,andanationalrankwereadministeringweb-basedpollsandsurveys.To ingof thetopthreecurrentissuesimpactingLMI provideanationalcontextfortheregionalresultsof communitiescurrently,aswellasthetopthreeemerg- ReserveBankpolls,theBoardcontinuedtosurvey ingissues(expectedwithinthenextsixmonths).The NeighborWorks®Americaaffiliatesandgrantees. surveyfindingsserveasabaselinecomparisonforthe Boardstaff managethisSysteminitiative,working ReserveBankdistrictweb-basedsurveyfindings. withReserveBanks,toaggregatethedatawiththe missionof: AstheCDIdatasetcontinuestobuildovertime,it • implementingamoresystematicapproachtogath- hasthepotentialtoserveasarobustsourceof inforeringanddisseminatingmarketintelligenceoncur- mationtoaugmentotherFederalReservedatacollecrentandemergingchallengesfacingLMI tioneffortsandtobringinsightintotheeconomic communities andfinancialissuesof LMIcommunities. • enablingstaff todifferentiatebetweenanecdotes andtrendsovertime • capturingregionaldispersionof issuesandvari- Consumer Laws and Regulations abilityof conditionsoverReserveBankdistricts • providingspecializeddataof interesttoaparticu- Throughout2012,DCCAcontinuedtoadminister lardistrictandBoardleadership,suchascommu- theBoard’sregulatoryresponsibilitieswithrespectto nityindicatorsonaffordablehousing,workforce certainentitiesandspecificstatutoryprovisionsof development,andsmallbusinessescredit theconsumerfinancialservicesandfairlendinglaws. DCCAalsodraftsregulationsandofficialinterpreta- In2012,Boardstaff begantoutilizetextanalytics tionsandissuesregulatoryinterpretationsandcomsoftwaretoanalyzeopen-endedtextfromsomecom- plianceguidancefortheindustry,theReserveBanks, munitystakeholderrespondents,includingtheBoard otherfederalagencies,andcongressionalstaff. surveyadministeredbyNeighborWorks.Currentand emergingtrendsfromsuchanalysiswillinformsur- Appraisal Requirements for veyquestiondesignandlanguageusedinBoard “Higher-Risk Mortgage Loans” 21 BoardofGovernorsoftheFederalReserveSystem(2012),“A PerspectivefromMainStreet:Long-TermUnemploymentand InAugust,theBoardandfiveotherfederalfinancial WorkforceDevelopment(BoardofGovernorsoftheFederal regulatoryagenciesjointlyannouncedproposedrules ReserveSystem:Washington,D.C.,December),www toimplementamendmentstotheTruthinLending .federalreserve.gov/communitydev/pdfs/Workforce_errata_final2 .pdf. Actthatwouldestablishnewappraisalrequirements

ConsumerandCommunityAffairs 89 for“higher-riskmortgageloans.”22Theproposal andprovideconsumerswithafreecopyof any wouldimplementprovisionsof theDodd-FrankAct, appraisalreport.Undertheproposal,creditorsalso andwouldapplytoloanssecuredbyaconsumer’s wouldhavetoobtainanadditionalappraisalatno homethathaveinterestratesaboveacertainthresh- costtotheconsumerif theconsumerisbuyinga old.Forsuchloans,theproposedrulewouldrequire homethattheselleracquiredforalowerpriceduring creditorstousealicensedorcertifiedappraiserto thepriorsixmonths. prepareawrittenreportbasedonaphysicalinspectionof theinteriorof theproperty.Theproposed ThepubliccommentperiodclosedinOctober.Conrulealsowouldrequirecreditorstodisclosetoappli- sistentwiththerequirementsof theDodd-Frank cantsinformationaboutthepurposeof theappraisal Act,finalregulationstoimplementtheseprovisions wereissuedonJanuary18,2013.23 22 TheproposalwasissuedjointlywiththeCFPB,FDIC,NCUA, OCC,andtheFederalHousingFinanceAgency(FHFA).See BoardofGovernorsoftheFederalReserveSystem,CFPB, 23 BoardofGovernorsoftheFederalReserveSystem,CFPB, FDIC,FHFA,NCUA,andOCC(2012),“Agenciesissuepro- FDIC,FHFA,NCUA,andOCC(2013),“Agenciesissuefinal posedruleonappraisalsforhigher-riskmortgages,”jointpress ruleonappraisalsforhigher-pricedmortgageloans,”jointpress release,August15,www.federalreserve.gov/newsevents/press/ release,January18,www.federalreserve.gov/newsevents/press/ bcreg/20120815a.htm. bcreg/20130118a.htm.

91 Federal Reserve Banks TheFederalReserveBanksprovidepaymentservices Further,theReserveBanksannouncedinOctotodepositoryandcertainotherinstitutions,distribute ber2012theirintentiontoexpandeffortstoimprove thenation’scurrencyandcointodepositoryinstitu- thespeedandsecurityof paymentnetworksandsertions,andserveasfiscalagentsanddepositoriesfor vicesandtoworkmorewiththeindustryonstantheU.S.governmentandotherentities.TheReserve dardsandprocessestofurtherimproveoveralleffi- Banksalsocontributetosettingnationalmonetary ciency.Aspartof thiseffort,theReserveBanks policyandsupervisionof banksandotherfinancial intendtoengageonadeeperlevelwithvariousend entitiesoperatingintheUnitedStates(discussedin usersinpaymenttransactionstounderstandboth theprecedingsectionsof thisreport). needsandchallenges. Recovery of Direct and Indirect Costs Federal Reserve Priced Services TheMonetaryControlActof 1980requiresthatthe FederalReserveBanksprovidearangeof payment FederalReserveestablishfeesforpricedservicesproandrelatedservicestodepositoryinstitutions, videdtodepositoryinstitutionssoastorecover,over “pricedservices”thatincludecollectingchecks,oper- thelongrun,alldirectandindirectcostsactually atinganautomatedclearinghouse(ACH)service, incurredaswellastheimputedcoststhatwouldhave transferringfundsandsecurities,andprovidinga beenincurred—includingfinancingcosts,taxes,and multilateralsettlementservice. certainotherexpenses—andthereturnonequity (profit)thatwouldhavebeenearnedif aprivatebusi- TheFederalReserveBanks,workingwiththefinan- nessfirmhadprovidedtheservices.1Theimputed cialindustry,havemadesubstantialprogressintheir costsandimputedprofitarecollectivelyreferredto efforttomigratetoamoreefficientelectronicpay- astheprivate-sectoradjustmentfactor(PSAF).2Over mentsystembyexpandingtheuseof ACHpayments thepast10years,ReserveBankshaverecovered andbyconvertingfromapaper-basedcheckclearing 99.5percentof theirpricedservicescosts,including processtoanelectronicone.Overthepastseveral thePSAF(seetable1).3 years,theReserveBankshavecapitalizedonefficienciesgainedfromincreasedelectronicprocessingby 1 Financialdatareportedthroughoutthischapter—includingrevbundlingpaymentservicesandofferinginformation enue,otherincome,costs,incomebeforetaxes,andnet andriskmanagementservices,whichhelpdepository income—willreferencetothe“ProFormaFinancialStatements forFederalReservePricedServices”attheendofthischapter. institutionsmanageeffectivelyboththeirpayment 2 Inadditiontoincometaxesandthereturnonequity,thePSAF operationsandassociatedoperationalandcreditrisk. includesthreeotherimputedcosts:interestondebt,salestaxes, andanassessmentfordepositinsurancebytheFederalDeposit InsuranceCorporation(FDIC).BoardofGovernorsassetsand TheReserveBankshavealsobeenengagedinanumcoststhatarerelatedtopricedservicesarealsoallocatedto berof multiyeartechnologyinitiativesthatwillmod- pricedservices;intheproformafinancialstatementsforpriced ernizetheirpricedservicesprocessingplatformsover servicesattheendofthischapter,Boardassetsarepartoflongtermassets,andBoardexpensesareincludedinoperating thenextseveralyears.In2012,theBankssuccessfully expenses.Thediscontinuationoftheclearingbalanceprogram implementedanewelectroniccheck-processing inJuly2012hadasignificanteffectonthePSAF,asdescribedin system;theyalsocontinuedeffortstomigratethe theproformafinancialstatements. FedACH,FedwireFunds,andFedwireSecuritiesser- 3 EffectiveDecember31,2006,theReserveBanksimplemented theFinancialAccountingStandardsBoard’sStatementof vicesoff amainframesystemandtoadistributed FinancialAccountingStandards(SFAS)No.158,Employers’ computingenvironment. AccountingforDefinedBenefitPensionandOtherPostretirement

92 99thAnnualReport|2012 Table1.PricedServicesCostRecovery,2003–2012 Millionsofdollars,exceptasnoted Operatingexpensesand Year Revenuefromservices1 Targetedreturnonequity3 Totalcosts Costrecovery(percent)4,5 imputedcosts2 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 2012 449.8 423.0 8.9 432.0 104.1 2003–2012 7,884.3 7,324.2 597.7 7,921.9 99.5 Note:Hereandelsewhereinthischapter,componentsmaynotsumtototalsoryieldpercentagesshownbecauseofrounding. 1 Forthe10-yearperiod,includesrevenuefromservicesof$7,370.1millionandotherincomeandexpense(net)of$514.2million. 2 Forthe10-yearperiod,includesoperatingexpensesof$7,037.0million,imputedcostsof$42.4million,andimputedincometaxesof$244.8million. 3 Beginningin2009,thePSAFhasbeenadjustedtoreflecttheactualclearingbalancelevelsmaintained;previously,thePSAFwascalculatedbasedonaprojectionofclearing balancelevels. 4 Revenuefromservicesdividedbytotalcosts. 5 Forthe10-yearperiod,costrecoveryis92.1percent,includingtheeffectofaccumulatedothercomprehensiveincome(AOCI)reportedbythepricedservicesunderASC 715.Fordetailsonchangestotheestimationofpricedservicesaccumulatedothercomprehensiveincomeandtheireffectontheproformafinancialstatements,referto note4tothe"ProFormaFinancialStatementsforFederalReservePricedServices"attheendofthischapter. In2012,ReserveBanksrecovered104.1percentof netincomeof $21.9million.In2012,check-service totalpricedservicescosts,includingthePSAF.4The revenuefromoperationsdecreased$39.2million Banks’operatingcostsandimputedexpensestotaled from2011.6ReserveBankshandled6.6billionchecks $423.0million.Revenuefromoperationstotaled in2012,adecreaseof 2.3percentfrom2011(see $449.3millionandotherincomewas$0.5million, table2).ThedeclineinReserveBankcheckvolume resultinginnetincomefrompricedservicesof continuestobeinfluencedbynationwidetrendsaway $26.8million.5 fromtheuseof checks. Commercial Check-Collection Service Byyear-end2012,99.9percentof checkdeposits processedbytheReserveBanksand99.9percentof In2012,ReserveBanksrecovered108.8percentof checkspresentedbytheReserveBankstopaying thetotalcostsof theircommercialcheck-collection bankswereprocessedelectronically.Inaddition, service,includingtherelatedPSAF.TheBanks’oper- 99.2percentof unpaidcheckswerereturnedelecatingexpensesandimputedcoststotaled$198.4mil- tronicallytoaReserveBankand95.0percentwere lion.Revenuefromoperationstotaled$220.0million deliveredelectronicallybytheReserveBanktothe andotherincometotaled$0.3million,resultingin bankof firstdeposit.TheReserveBanksin2012 continuedtoreducecheck-serviceoperatingcostsby Plans[AccountingStandardsCodification(ASC)Topic715 consolidatingfurthertheircheck-processingoffices (ASC715),Compensation–RetirementBenefits],whichhas intoonesitethatsupportsbothpaperandelectronic resultedintherecognitionofa$643.0millionreductionin checkprocessing.7 equityrelatedtothepricedservices’benefitplansthrough2012. Includingthisreductioninequity,whichrepresentsadeclinein economicvalue,resultsincostrecoveryof92.1percentforthe 6 Section17oftheCheck-Clearingforthe21stCenturyAct 10-yearperiod.FordetailsonhowimplementingASC715 requirestheFederalReserveBoard’sAnnualReporttoinclude affectedtheproformafinancialstatements,refertonote4tothe costsofandrevenuefrominter-Districtcommercialchecktransproformafinancialstatementsattheendofthischapter. portation.In2008,theReserveBanksdiscontinuedthetrans- 4 Totalcostisthesumofoperatingexpenses,imputedcosts portationofcommercialchecksbetweentheircheck-processing (incometaxes,interestondebt,interestonfloat,salestaxes,and offices.Asaresult,in2012,therewerenocostsorimputedrevtheFDICassessment),andthetargetedreturnonequity. enuesassociatedwiththetransportationofcommercialchecks 5 Otherincomeisinvestmentincomeearnedonclearingbalances betweenReserveBankcheck-processingoffices. netofthecostofearningscredits,anamounttermednet 7 TheReserveBankscompletedin2010amultiyearinitiative, incomeonclearingbalances,andincomefromexpiredearning whichbeganin2003,thatreducedthenumberofofficesat credits. whichtheyprocesspaperchecksfrom45toone.Since

FederalReserveBanks 93 Table2.ActivityinFederalReservePricedServices,2010–2012 Thousandsofitems Percentchange Service 2012 2011 2010 2011to2012 2010to2011 Commercialcheck 6,622,265 6,779,607 7,711,833 -2.3 -12.1 CommercialACH 10,664,613 10,348,802 10,232,757 3.1 1.1 Fedwirefundstransfer 134,409 129,734 127,762 3.6 1.5 Nationalsettlement 663 571 522 16.0 9.4 Fedwiresecurities 6,441 7,271 7,913 -11.4 -8.3 Note:Activityincommercialcheckisthetotalnumberofcommercialcheckscollected,includingprocessedandfine-sortitems;incommercialACH,thetotalnumberof commercialitemsprocessed;inFedwirefundstransferandsecuritiestransfer,thenumberoftransactionsoriginatedonlineandoffline;andinnationalsettlement,thenumber ofsettlemententriesprocessed. Commercial Automated berof Fedwirefundstransfersoriginatedbydeposi- Clearinghouse Services toryinstitutionsincreased3.6percentfrom2011,to approximately134.4million.Theaveragedailyvalue TheAutomatedClearinghouseServiceenables of Fedwirefundstransfersin2012was$2.4trillion,a depositoryinstitutionsandtheircustomerstopro- decreaseof 9.7percentfromthepreviousyear. cesslargevolumesof paymentseffectivelythrough electronic,batchprocesses.In2012,theReserve TheReserveBanksin2012introducedpaymentnoti- Banksrecovered101.0percentof thetotalcostsof ficationfunctionality,whichallowsasendingbank theircommercialACHservices,includingtherelated thatisaFedwireFundsServiceparticipanttorequest PSAF.ReserveBankoperatingexpensesandimputed ane-mailnotificationfromabeneficiary’sbank coststotaled$111.4million. whenthebeneficiary’sbankcreditsorotherwisepays thebeneficiaryof aparticularfundstransfer.This RevenuefromACHoperationstotaled$114.8million functionalityfacilitatestransparencyandrespondsto andotherincometotaled$0.1million,resultingin needsexpressedbybothdepositoryinstitutionsand netincomeof $3.6million.TheReserveBankspro- theircorporatecustomers. cessed10.7billioncommercialACHtransactions,an increaseof 3.1percentfrom2011. NationalSettlementService TheNationalSettlementServiceisamultilateral Fedwire Funds and National settlementsystemthatallowsparticipantsinprivate- Settlement Services sectorclearingarrangementstosettletransactions usingFederalReservebalances.In2012,theservice In2012,ReserveBanksrecovered98.8percentof the processedsettlementfilesfor16localandnational costsof theirFedwireFundsandNationalSettle- private-sectorarrangements,thesamenumberof mentServices,includingtherelatedPSAF.Reserve arrangementsaswereactivein2011.TheReserve Bankoperatingexpensesandimputedcostsforthese Banksprocessedslightlymorethan8,500filesthat operationstotaled$89.8millionin2012.Revenue containedaround663,000settlemententriesforthese fromtheseservicestotaled$90.5million,andother arrangementsin2012.Activityin2012representsan incomeamountedto$0.1million,resultinginanet increasefromthe571,000settlemententriesproincomeof $0.8million. cessedin2011. FedwireFundsService Fedwire Securities Service TheFedwireFundsServiceallowsitsparticipantsto usetheirbalancesatReserveBankstotransferfunds In2012,theReserveBanksrecovered100.3percent tootherparticipantsintheservice.In2012,thenumof thetotalcostsof thepriced-servicecomponentof February2010,theClevelandReserveBankoperatedtheonly theirFedwireSecuritiesService,includingtherelated papercheck-processingsitefortheSystem,whiletheAtlanta PSAF.TheBanks’operatingexpensesandimputed ReserveBankservedastheSystem’selectroniccheck-processing costsforprovidingthisservicetotaled$23.5million site.AsofDecember31,2012,theAtlantaReserveBankalone processesbothpaperandelectronicchecksfortheSystem. in2012.Revenuefromtheservicetotaled$24.1mil-

94 99thAnnualReport|2012 lionandtherewasnootherincome,resultinginanet coinsfromcirculation,a1.5percentdecreasefrom incomeof $0.6million. 2011. TheFedwireSecuritiesServiceallowsitsparticipants Improvements to Efficiency and totransferelectronicallytootherserviceparticipants Risk Management certainsecuritiesissuedbytheU.S.Treasury,federal governmentagencies,government-sponsoredenter- TheReserveBankshaveincreasedoperationaleffiprises,andcertaininternationalorganizations.8In ciencyandimprovedriskmanagement.Advancesin 2012,thenumberof non-Treasurysecuritiestransfers currency-processingequipmentandsensortechnolprocessedviatheservicedecreased11.4percentfrom ogyhaveincreasedproductivityandimprovednote 2011,toapproximately6.4million. authenticationandfitnessmeasurement,thereby reducingtheprematuredestructionof fitcurrency Float whilemaintainingthequalityandintegrityof currencyincirculation. In2012,theReserveBankshaddailyaveragecredit floatof $767.1million,comparedwithdailyaverage Since2009,policychangesandimprovementstothe creditfloatof $1,151.8millionin2011.9 ReserveBanks’high-speedcurrency-processing equipmenthaveincreasedproductivityalmost20percentandReserveBankshavereducedstaffinglevels Currency and Coin incashservicesapproximately8percent.Adoptionof arisk{basedapproachtobusinessprocesseshas TheFederalReserveBoardistheissuingauthority increasedefficiencybyusingtechnologymoreextenforthenation’scurrency(intheformof Federal sivelyandcalibratingriskcontrolstothelevelof Reservenotes).In2012,theBoardpaidtheU.S. inherentrisk.Asaresultof thesechanges,theFed- TreasuryDepartment’sBureauof Engravingand eralReservehasincreaseditsabilitytoadaptopera- Printing(BEP)approximately$687.7milliontopro- tionsandimplementnewpoliciesthatimproveits duce7.8billionFederalReservenotes.TheFederal abilitytomeetcurrencydemandefficiently.The ReserveBanksdistributeandreceivecurrencyand ReserveBanksareinvestigatingadditionalopportucointhroughdepositoryinstitutionsinresponseto nitiestoimproveprocessingtechnologytofurther publicdemand. increaseproductivity,reduceunitcosts,andenhance riskmanagement. In2012,theReserveBanksdistributed37.4billion FederalReservenotesintocirculation(payments),a Other Improvements and Efforts 1.2percentincreasefrom2011,andreceived35.6billionFederalReservenotesfromcirculation,a ReserveBankscontinuetodevelopanewcashauto- 1.3percentincreasefrom2011. mationplatformthatwillreplacelegacysoftware applications,automatebusinessconceptsandpro- Thevalueof FederalReservenotesincirculation cesses,andemploytechnologiestomeetthecash increasednearly9percentin2012,to$1,126.7billion business’scurrentandfutureneedscosteffectively. atyear-end,largelybecauseof internationaldemand Thenewplatformwillalsofacilitatebusinesscontifor$100notes.In2012,theReserveBanksalsodis- nuityandcontingencyplanningandenhancethesuptributed69.1billioncoinsintocirculation,a1.7per- portprovidedtoReserveBankcustomers.In2012, centincreasefrom2011,andreceived58.7billion theReserveBanksimplementedoneof thefirst majorcomponentsof thenewplatform,theNational CashDataWarehouse,acentralrepositoryforthe 8 Theexpenses,revenues,volumes,andfeesreportedherearefor ReserveBanks’cashdata.Thefullautomationplattransfersofsecuritiesissuedbyfederalgovernmentagencies, formisscheduledtobecompletein2017. government-sponsoredenterprises,andcertaininternational organizations.ReserveBanksprovideTreasurysecuritiesservicesintheirroleastheU.S.Treasury’sfiscalagent.Theseser- TheBoardcontinuestoworkwiththeTreasury vicesarenotconsideredpricedservices.Fordetails,see“TreasurySecuritiesServices”onpage95. DepartmentanditsBEPandtheU.S.SecretService 9 CreditfloatoccurswhentheReserveBankspresentchecksand inpreparingforissuingthenew-design$100note. otheritemstothepayingbankpriortoprovidingcredittothe During2012,theBEPmettheBoard’sorderof depositingbank(debitfloatoccurswhentheReserveBanks nearly1.6billionnew-design$100notesandthe creditthedepositingbankbeforepresentingchecksandother itemstothepayingbank). Boardorderedanadditional2.0billionof these

FederalReserveBanks 95 Table3.ExpensesoftheFederalReserveBanksforFiscalAgencyandDepositoryServices,2010–2012 Thousandsofdollars Agencyandservice 2012 2011 2010 DepartmentoftheTreasury TreasurySecuritiesServices Treasuryretailsecurities 60,208 79,346 73,104 Treasurysecuritiessafekeepingandtransfer 14,131 11,187 10,136 Treasuryauction 30,648 29,258 30,750 Computerinfrastructuredevelopmentandsupport 4,990 1,969 1,980 Otherservices 3,340 4,036 1,646 Total 113,317 125,796 117,615 Payment,Collection,andCash-ManagementServices Paymentservices 141,534 125,196 112,224 Collectionservices 41,456 38,707 37,611 Cash-managementservices 58,975 53,832 48,226 Computerinfrastructuredevelopmentandsupport 70,075 67,014 66,461 Otherservices 9,075 9,536 8,815 Total 321,115 294,285 273,337 OtherTreasury Total 37,011 36,233 37,793 Total,Treasury 471,443 456,314 428,744 OtherFederalAgencies Total,otheragencies 34,569 27,893 27,700 Totalreimbursableexpenses 506,012 484,207 456,445 notesfor2013tobuildinventoriesinpreparationfor depositoryservicestootherentities;theseservicesare issuance. primarilyrelatedtobook-entrysecurities.Treasury andotherentitiesfullyreimbursedtheReserveBanks TheBoardanditsconsultingfirmcontinuetopart- forthecostsof providingfiscalagencyanddeposinerwiththeBEPindevelopinganew,comprehensive toryservices. quality-assuranceprogramattheBEP.During2012, theBoard,theBEP,andtheconsultantsformed In2012,fiscalagencyexpensesamountedto cross-functionalteamstoimproveproductandtech- $506.0million,a4.5percentincreasefrom2011(see nologydevelopment,quality-systemmanagement, table3).Thesecostsincreasedasaresultof requests standardoperatingprocedures,processchanges, fromTreasury’sBureauof theFiscalService.10Suptrainingprograms,inspectionof incomingrawmate- portforTreasuryprogramsaccountedfor93.2perrials,suppliermanagement,andequipmentcalibra- centof thecost,andsupportforotherentities tionandmaintenance.Thisprogramwillenablethe accountedfor6.8percent. BEPtomoreefficientlyandeffectivelymeetthe Board’sprintorderrequirementsandtheproduction Treasury Securities Services of more-technologicallycomplexbanknotesintothe future. TheReserveBanksworkcloselywithTreasury’sFiscalServiceinsupportof theborrowingneedsof the federalgovernment.TheBanksauction,issue,main- Fiscal Agency and Government tain,andredeemsecurities;providecustomerservice; Depository Services andoperatetheautomatedsystemssupportingU.S. savingsbondsandmarketableTreasurysecurities Asfiscalagentsanddepositoriesforthefederalgov- (bills,notes,andbonds).Treasurysecuritiesservices ernment,theFederalReserveBanksauctionTreasury consistof retailsecuritiesprograms(whichprimarily securities,processelectronicandcheckpaymentsfor serveindividualinvestors)andwholesalesecurities Treasury,collectfundsowedtothefederalgovern- programs(whichserveinstitutionalcustomers). ment,maintainTreasury’sbankaccount,and develop,operate,andmaintainanumberof auto- 10 TreasuryconsolidatedtheFinancialManagementServiceand matedsystemstosupportTreasury’smission.The BureauofPublicDebtintothenewBureauoftheFiscal ReserveBanksalsoprovidecertainfiscalagencyand Service,effectiveOctober7,2012.

96 99thAnnualReport|2012 Retail Securities Programs merlyknownastheGoVerifyprogram),andthe InvoiceProcessingPlatform(IPP)programs. ReserveBankoperatingexpensesfortheretailsecuritiesprogramswere$60.2millionin2012,a24percent TheGoDirectinitiativeincurredadditionalcostsas decreasecomparedwith$79.3millionin2011.This ReserveBanksexpandedoperationstomeetTreacostdecreaseislargelyexplainedbytheFiscalSer- sury’s2013deadlinetoconvertfederalbenefitcheck vice’sdecisiontoconsolidateReserveBanksavings paymentstoelectronicchannels.In2012,expenses bondoperations,andtoeffectotheroperational forGoDirectincreased17.2percent,tomorethan changes.Treasuryreliedonarecentlycompleted $29.3million,becauseof staff increasestosupport ReserveBankinitiativethattakesadvantageof higherGoDirectcall-centervolumes. developmentsinimageprocessingtohandlesavings bondredemptionsandhasallowedtheReserve Insupportof Treasury’sDoNotPayinitiative,the Bankstoretiresomesavings-bonduniquesoftware ReserveBankshavebuiltasinglepointof access,or thatwasbuiltsolelytosupportTreasury.Inaddition, portal,throughwhichfederalagenciescanquery theReserveBankscontinuetosupportTreasury’s multipledatasourcesbeforemakingfederalpay- RetailE-Servicesinitiative,whichwillcreateanew ments.TheReserveBanksimplementedanumberof customerserviceandsupportenvironmentforthe softwarereleases,automatedmanualprocesses,and TreasuryandtheReserveBanks. addedanumberof newagencyparticipants.In2012, expensesforDoNotPaywere$8.0million,com- Wholesale Securities Programs paredwith$2.2millionin2011. TheReserveBankssupportwholesalesecuritiespro- TheIPPispartof Treasury’sall-electronicinitiative gramsthroughthesale,issuance,safekeeping,and andisanelectronicinvoicingandpaymentinformatransferof marketableTreasurysecuritiesforinstitutionsystemthatallowsvendorstoenterinvoicedata tionalinvestors.In2012,ReserveBankoperating electronically,eitherthroughaweb-basedportalor expensesinsupportof Treasurysecuritiesauctions electronicsubmission.TheIPPaccepts,processes, were$30.6million,comparedwith$29.2millionin andpresentsdatafromagenciesandsuppliersystems 2011.TheBanksconducted264Treasurysecurities relatedtoallstagesof transactions.During2012,the auctions,comparedwith269in2011. ReserveBanks’IPPexpensesincreased30.8percent, to$11.9million.Thisincreaseisprimarilydrivenby OperatingexpensesassociatedwithTreasurysecuri- IPP’ssupportof expandedagencyoutreachandsuptiessafekeepingandtransferactivitieswere$14.1milportinresponsetoTreasury’sinitiative. lionin2012,comparedwith$11.2millionin2011. ThecostincreaseisattributabletotheReserve Treasury’spayments-relatedexpenseswereoffset Banks’ongoingtechnologicalefforttomigratesecusomewhatbydecreasesintheStoredValueCard ritiesservicesfromamainframesystemtoadistrib- (SVC)program.Theprogramprovidesstoredvalue utedcomputingenvironmentaswellaslowergoverncardsthatmilitarypersonnelcanusetopurchase mentagencyvolumein2012,whichshiftedmore goodsandservicesonmilitarybases.In2012,the coststoTreasury. SVCprogram’sexpensesdecreased20.2percent,to $14.5million,becausethemilitarydeferredreplacing Payment Services SVCmobilekiosksandimplementingsoftware projects. TheReserveBanksworkcloselywithTreasury’sFiscalServiceandothergovernmentagenciestoprocess paymentstoindividualsandcompanies.Forexample, Collection Services theBanksprocessfederalpayrollpayments,Social Securityandveterans’benefits,incometaxrefunds, TheReserveBanksalsoworkcloselywithTreasury’s vendorpayments,andothertypesof payments. FiscalServicetocollectfundsowedthefederalgovernment,includingvarioustaxes,feesforgoodsand ReserveBankoperatingexpensesforpayments- services,anddelinquentdebts.In2012,ReserveBank relatedactivitytotaled$141.5millionin2012,com- operatingexpensesrelatedtocollectionsservices paredwith$125.2millionin2011.Thesignificant increased7.1percent,largelyasaresultof ongoing increaseinexpensesislargelyduetoexpandedTreas- supportforTreasury’sCollectionsandCashManuryrequirementsfortheGoDirect,DoNotPay(for- agementModernizationinitiative.

FederalReserveBanks 97 TheReserveBanksalsocontinuedtooperate ReserveBankoperatingexpensesforservicespro- Pay.gov,anapplicationsupportingTreasury’spro- videdtootherentitieswere$34.6millionin2012, gramthatallowsthepublictousetheInternetto comparedwith$27.9millionin2011,anincreaseof authorizeandinitiatepaymentstofederalagencies. 23.9percent.Theexpenseincreasein2012isattribut- Duringtheyear,thePay.govprogramexpandedto abletotheReserveBanks’ongoingefforttomigrate include75newagencyprograms,anditprocessed securitiesservicesfromamainframesystemtoadismorethan94milliononlinepayments,a22percent tributedcomputingenvironment. increasefrom2011.Thisexpansionresultedin expenses’increasing11percent,to$11.7million. Book-entrysecuritiesissuanceandmaintenance activitiesaccountforasignificantamountof the TheReserveBankscontinuedtosupportthegovern- workperformedforotherentities,withthemajority ment’scentralizeddelinquentdebt-collectionpro- performedfortheFederalHomeLoanMortgage gram.Specifically,theBanksdevelopedandmain- Association,theFederalNationalMortgageAssociatainedsoftwarethatfacilitatesthecollectionof delin- tion,andtheGovernmentNationalMortgage quentdebtsowedtofederalagenciesandstatesby Association. matchingfederalpaymentsagainstdelinquentdebts, includingpast-duechildsupportpaymentsowedto TheReserveBankscontinuetoprocesspostalmoney custodialparents. ordersprimarilyinimageform,resultinginoperationalimprovements,lowerstaffinglevels,andlower coststotheU.S.PostalService.In2012,expensesfor Treasury Cash-Management Services postalmoneyorderswere$4.0million,compared with$4.1millionin2011. TheReserveBanksmaintainTreasury’soperating cashaccountandprovidecollateral-managementand collateral-monitoringservicesforthoseTreasuryprogramsthathavecollateralrequirements.TheReserve Use of Federal Reserve BanksalsosupportTreasury’seffortstomodernize itsfinancialmanagementprocessesbydeveloping Intraday Credit software,operatinghelpdesks,andmanagingprojectsonbehalf of theFiscalService. TheFederalReserveBoard’sPaymentSystemRisk (PSR)policygovernstheuseof FederalReserve In2012,ReserveBankoperatingexpensesrelatedto Bankintradaycredit,alsoknownasdaylightover- Treasurycash-managementservicestotaled drafts.Adaylightoverdraftoccurswhenaninstitu- $59.0million,comparedwith$53.8millionin2011. tion’saccountactivitycreatesanegativebalancein theinstitution’sFederalReserveaccountatanytime During2012,theReserveBankscontinuedtosupintheoperatingday.Daylightoverdraftsenablean portTreasury’seffortstoimprovecentralizedgoverninstitutiontosendpaymentsmorefreelythroughout mentaccountingandreportingfunctions.Inparticuthedaythanif itwerelimitedstrictlybyitsavailable lar,theReserveBankscollaboratedwiththeFiscal intradayfundsbalance.ThePSRpolicyrecognizes Serviceonseveralongoingsoftwaredevelopment explicitlytheroleof thecentralbankinproviding efforts,suchastheCentralAccountingReporting intradaybalancesandcredittohealthyinstitutions; System(CARS),whichisintendedtoprovideTreasunderthepolicytheReserveBanksprovidecollaterurywithamodernizedsystemforthecollectionand alizedintradaycreditatnocost. disseminationof financialmanagementandaccountinginformationtransmittedfromandtofederalpro- Beforelate2008,overnightbalancesweremuchlower gramagencies.In2012,expensesforCARSwere anddaylightoverdraftssignificantlyhigherthanlev- $22.1million,comparedwith$16.5millionin2011. elsobservedsincelate2008.In2007,forexample, institutionsheldonaveragelessthan$20billionin Services Provided to Other Entities overnightbalances,andtotalaveragedaylightoverdraftswere$60billion.Incontrast,institutionsheld Whenpermittedbyfederalstatuteorwhenrequired historicallyhighlevelsof overnightbalances(onaverbytheSecretaryof theTreasury,theReserveBanks ageabout$1.5trillion)attheReserveBanksin2012, providefiscalagencyanddepositoryservicestoother whiledemandfordaylightoverdraftsonaverage domesticandinternationalentities. remainedhistoricallylow.

98 99thAnnualReport|2012 Figure1.AggregateDaylightOverdrafts,2007–2012 $ Billions Peak daylight overdrafts Average daylight overdrafts AveragedaylightoverdraftsacrosstheSystem time,thenumberof employeeswithindepository increasedto$2.1billionin2012from$1.7billionin institutionswhohavecredentialsthatestablishthem 2011,anincreaseof about20percent(seefigure1). astrustedusersincreased,reflectinginpartthe Conversely,theaveragelevelof peakdaylightover- expansionof electronicvalue-addedservicesprodraftsdecreasedtoalmost$20billionin2012from vided.Between2007and2012,thetotalnumberof $30billionin2011,adecreaseof about35percent. depositoryinstitutionsintheU.S.declined15.4percent.Thenumberof depositoryinstitutionswith Daylightoverdraftfeesarealsoathistoricallylow FedLineconnectionsdeclined5.9percent,whilethe levels.In2012,institutionspaidlessthan$50,000in numberof trustedusersincreased11.0percentover daylightoverdraftfees,downfromalmost$1million thesameperiod. in2011.Thedecreaseinfeesislargelyattributableto theMarch2011PSRpolicyrevisionthateliminated In2012,theReserveBankscontinuedtoexpand feesforcollateralizeddaylightoverdrafts. usageof newservicepackageoptionslaunchedin 2011.Thenumberof depositoryinstitutionsusing theFedCompletebundledpaymentservicespackage FedLine Access increasedfrom60to146atyear-end2012.Fed to Reserve Bank Services TransactionAnalyzer,arisk-managementtoolto facilitatetheanalysisof paymenttransactionsandto helpautomateriskandcompliance-reporting TheReserveBanksprovidedepositoryinstitutions requirements,wasusedby816depositoryinstitutions withavarietyof alternativesforelectronicallyaccesswith2,020credentialedemployees,increasesof 571 ingtheBanks’paymentandinformationservices and1,457,respectively. throughtheirFedLineAccessSolutions.TheseFed- Linechannelsaredesignedtomeettheindividual connectivityandcontingencyrequirementsof Information Technology depositoryinstitutioncustomers. Forthepastfewyears,asaresultof thedeclining TheFederalReserveBankscontinuedtoimprovethe numberof depositoryinstitutions,ReserveBank efficiency,effectiveness,andsecurityof information FedLineconnectionshavedecreased.Atthesame technology(IT)servicesandoperationsin2012.

FederalReserveBanks 99 Toimprovetheefficiencyandoverallqualityof TheReserveBanksusetheframeworkestablishedby operations,majormultiyearinitiativescontinueto theCommitteeof SponsoringOrganizationsof the consolidatethemanagementandfunctionof the TreadwayCommission(COSO)toassesstheirinter- FederalReserve’sIToperationsandnetworkingser- nalcontrolsoverfinancialreporting,includingthe vices.Substantialprogresshasbeenmade,andthe safeguardingof assets.Withinthisframework,the centralizationof theremainingenterpriseITfunc- managementof eachReserveBankannuallyprovides tionswillbecompletedwithinthenexttwoyears. anassertionlettertoitsboardof directorsthatconfirmsadherencetoCOSOstandards.Similarly,each Inaddition,FederalReserveInformationTechnology consolidatedVIEannuallyprovidesanassertionlet- (FRIT)continuedtoleadtheReserveBanks’transi- tertotheboardof directorsof theNewYork tiontoamorerobustinformationsecurityposture, ReserveBank. andFRIT’schief informationsecurityofficer(CISO) continuedinhisrolemaintainingSystemawareness TheFederalReserveBoardengagedDeloitte&Touof informationsecurity(IS)riskandcoordinatingIS cheLLP(D&T)toauditthe2012combinedand activitiesamongtheFederalReserveBanks.11Under individualfinancialstatementsof theReserveBanks thedirectionof theCISO,managementof theFed- andthoseof theconsolidatedVIEs.15 eralReserve’sinformationsecurityriskhasmatured. Inadditiontotheimplementationof thefirstphase In2012,D&Talsoconductedauditsof internalconof aprogramtoimplementanumberof robustsecu- trolsoverfinancialreportingforeachof theReserve ritymeasuresacrosstheSystem,theongoingtransi- Banks,MaidenLaneLLC,MaidenLaneIIILLC, tiontotheFederalReserveSystem’sISframework, andTALFLLC.FeesforD&T’sservicestotaled whichisbasedonguidancefromtheNationalInsti- $7million,of which$1millionwasfortheauditsof tuteof ScienceandTechnologyandadaptedtothe theconsolidatedVIEs.Toensureauditorindepen- FederalReserve'senvironment,continuesto dence,theBoardrequiresthatD&Tbeindependent progress.12 inallmattersrelatingtotheaudits.Specifically,D&T maynotperformservicesfortheReserveBanksor othersthatwouldplaceitinapositionof auditingits Examinations of the ownwork,makingmanagementdecisionsonbehalf Federal Reserve Banks of theReserveBanks,orinanyotherwayimpairing itsauditindependence.In2012,theBanksdidnot engageD&Tforanynon-auditservices.OneBank TheReserveBanksandtheconsolidatedvariable leasesofficespacetoD&T. interestentities(VIEs)aresubjecttoseverallevelsof auditandreview.13Thecombinedfinancialstate- TheBoard’sreviewsof theReserveBanksincludea mentsof theReserveBanks(see“FederalReserve widerangeof off-siteandon-siteoversightactivities, BanksCombinedFinancialStatements”inthe“FedconductedprimarilybyitsDivisionof ReserveBank eralReserveSystemAudits”sectionof thisreport)as OperationsandPaymentSystems.Divisionpersonnel wellasthefinancialstatementsof eachof the12 monitoronanongoingbasistheactivitiesof each Banksandthoseof theconsolidatedVIEsare ReserveBankandconsolidatedVIE,FRIT,andthe auditedannuallybyanindependentpublicaccoun- Officeof EmployeeBenefitsof theFederalReserve tantretainedbytheBoardof Governors.14Inaddi- System(OEB),andtheyconductacomprehensive tion,theReserveBanks,includingtheconsolidated on-sitereviewof eachReserveBank,FRIT,and VIEs,aresubjecttooversightbytheBoardof Gov- OEBatleastonceeverythreeyears. ernors,whichperformsitsownreviews. Thecomprehensiveon-sitereviewstypicallyinclude anassessmentof theinternalauditfunction’seffec- 11 FRITsuppliesnationalinfrastructureandbusinesslinetechnologyservicestotheFederalReserveBanksandprovidesthought tivenessanditsconformancetotheInstituteof leadershipregardingtheSystem’sinformationtechnologyarchi- InternalAuditors’(IIA)InternationalStandardsfor tectureandbusinessuseoftechnology. 12 TheNationalInstituteofScienceandTechnologyisanonregu- 15 Inaddition,D&TauditedtheOfficeofEmployeeBenefitsof latoryfederalagencywithintheU.S.DepartmentofCommerce. theFederalReserveSystem(OEB),theRetirementPlanfor 13 TheNewYorkReserveBankisconsideredtobethecontrolling EmployeesoftheFederalReserveSystem(SystemPlan),and financialinterestholderofeachoftheconsolidatedVIEs. theThriftPlanforEmployeesoftheFederalReserveSystem 14 EachVIEreimbursestheBoardofGovernors—fromtheenti- (ThriftPlan).TheSystemPlanandtheThriftPlanprovide ty’savailablenetassets—forthefeesrelatedtotheauditofits retirementbenefitstoemployeesoftheBoard,theFederal financialstatements. ReserveBanks,andtheOEB.

100 99thAnnualReport|2012 theProfessionalPracticeof InternalAuditing,appli- interestonFederalReservenotestotaled$88,418milcablepoliciesandguidance,andtheIIA’scodeof lionin2012.Thedistributionequalscomprehensive ethics. incomeafterthedeductionof dividendspaidandthe amountnecessarytoequatetheReserveBanks’sur- ThedivisionalsoreviewstheSystemOpenMarket plustopaid-incapital. Account(SOMA)andforeigncurrencyholdingsto determinewhethertheNewYorkReserveBank, The“StatisticalTables”sectionof thisreportprowhileconductingtherelatedtransactions,complies videsmoredetailedinformationontheReserve withthepoliciesestablishedbytheFederalOpen BanksandtheVIEs.Table9isastatementof condi- MarketCommittee(FOMC)andtoassessSOMA- tionforeachReserveBank;table10detailsthe relatedITprojectmanagementandapplicationdevel- incomeandexpensesof eachReserveBankfor2012; opment,vendormanagement,andsystemresiliency table11showsacondensedstatementforeach andcontingencyplans.Inaddition,D&Tauditsthe ReserveBankfortheyears1914through2012;and year-endscheduleof participatedassetandliability table13givesthenumberandannualsalariesof offiaccountsandtherelatedscheduleof participated cersandemployeesforeachReserveBank.A incomeaccounts.TheFOMCisprovidedwiththe detailedaccountof theassessmentsandexpenditures externalauditreportsandareportonthedivision’s of theBoardof GovernorsappearsintheBoardof review. GovernorsFinancialStatements(see“Federal ReserveSystemAudits”). Income and Expenses SOMA Holdings and Loans Table4summarizestheincome,expenses,anddistributionsof netearningsof theReserveBanksfor TheReserveBanks’averagenetdailyholdingsof 2012and2011.Incomein2012was$81,586million, securitiesandloansduring2012amountedto comparedwith$85,241millionin2011. $2,715,976million,anincreaseof $139,094million from2011(seetable5). Expensestotaled$9,397million:$3,781millionin operatingexpenses;$3,875millionininterestpaidto SOMA Securities Holdings depositoryinstitutionsonreservebalancesandterm deposits;$142millionininterestexpenseonsecuri- Theaveragedailyholdingsof Treasurysecurities tiessoldunderagreementstorepurchase;$490mil- increasedby$216,165million,toanaveragedaily lioninassessmentsforBoardof Governorsexpendi- amountof $1,774,043million.Theaveragedaily ture;$722millionfornewcurrencycosts;$387mil- holdingsof GSEdebtsecuritiesdecreasedby lionforConsumerFinancialProtectionBureaucosts $31,450million,toanaveragedailyamountof andOfficeof FinancialResearchcosts.Netadditions $94,248million.Theaveragedailyholdingsof fedtocurrentnetincometotaled$18,380million,which eralagencyandGSEMBSdecreasedby$45,188milincludes$13,496millioninrealizedgainsonTreasury lion,toanaveragedailyamountof $872,819million. securitiesandfederalagencyandgovernmentsponsoredenterprisemortgage-backedsecurities Theincreasesinaveragedailyholdingsof Treasury (GSEMBS);$6,038millioninnetincomeassociated securitiesandfederalagencyandGSEMBSaredue withconsolidatedVIEs;$38millioninotherdeduc- tothepurchasesthroughalarge-scaleassetpurchase tions;and$1,116millioninunrealizedlossesonfor- programandreinvestmentof principalpayments eigncurrencydenominatedassetsrevaluedtoreflect fromotherSOMAholdingsinfederalagencyand currentmarketexchangerates.Dividendspaidto GSEMBS.Theaveragedailyholdingsof GSEdebt memberbanks,setat6percentof paid-incapitalby securitiesdecreasedasaresultof principalpayments section7(1)of theFederalReserveAct,totaled received. $1,637million. Therewerenosignificantholdingsof securitiespur- ComprehensivenetincomebeforeinterestonFederal chasedunderagreementstoresellin2012or2011. ReservenotesexpenseremittedtoTreasurytotaled Averagedailyholdingsof foreigncurrencydenomi- $90,516millionin2012(netincomeof $90,569mil- natedassetsin2012were$25,488million,compared lion,reducedbyothercomprehensivelossof with$26,566millionin2011.Theaveragedailybal- $53million).DistributionstoTreasuryintheformof anceof centralbankliquidityswapdrawingswas

FederalReserveBanks 101 Table4.Income,Expenses,andDistributionofNetEarningsoftheFederalReserveBanks,2012and2011 Millionsofdollars Item 2012 2011 Currentincome 81,586 85,241 SOMAinterestincome 80,860 83,874 Loaninterestincome 81 674 Othercurrentincome1 645 693 Currentexpenses 7,798 7,316 Operatingexpenses2 3,781 3,499 Interestpaidondepositoryinstitutionsdepositsandtermdeposits 3,875 3,773 Interestexpenseonsecuritiessoldunderagreementstorepurchase 142 44 Currentnetincome 73,788 77,925 Netadditionsto(deductionsfrom)currentnetincome 18,380 2,016 ProfitonsalesofTreasurysecurities 13,255 2,258 Profitonsalesoffederalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities 241 10 Profit(loss)onforeignexchangetransactions -1,116 152 Netincome(loss)fromconsolidatedVIEs 6,038 -356 Otheradditions3 -38 -48 AssessmentsbytheBoardofGovernors 1,599 1,403 ForBoardexpenditures 490 472 Forcurrencycosts 722 649 ForConsumerFinancialProtectionBureaucosts4 385 242 ForOfficeofFinancialResearchcosts4 2 40 NetincomebeforeinterestonFederalReservenotesexpenseremittedtoTreasury 90,569 78,538 InterestonFederalReservenotesexpenseremittedtoTreasury 88,418 75,424 Netincome 2,151 3,114 Othercomprehensiveloss -53 -1,162 Comprehensiveincome 2,098 1,952 Totaldistributionofnetincome 90,516 77,376 Dividendsoncapitalstock 1,637 1,577 Transfertosurplusandchangeinaccumulatedothercomprehensiveincome 461 375 InterestonFederalReservenotesexpenseremittedtoTreasury 88,418 75,424 1 Includesincomefrompricedservices,compensationreceivedforservicesprovided,andsecuritieslendingfees. 2 Includesanetperiodicpensionexpenseof$641millionin2012and$525millionin2011. 3 IncludesdividendsonpreferredinterestsandunrealizedlossonTermAsset-BackedSecuritiesLoanFacilityloans. 4 TheBoardofGovernorsassessestheReserveBankstofundtheoperationsoftheConsumerFinancialProtectionBureauand,foratwo-yearperiodbeginningJuly21,2010, theOfficeofFinancialResearch. $38,737millionin2012and$5,368millionin2011. Lending Theaveragedailybalanceof securitiessoldunder agreementstorepurchasewas$91,785million,an In2012,theaveragedailyprimary,secondary,and increaseof $19,626millionfrom2011. seasonalcreditextendedbytheReserveBanksto depositoryinstitutionsincreasedby$10million,to Theaverageratesof interestearnedontheReserve $72million.Theaveragerateof interestearnedon Banks’holdingsof Treasurysecuritiesdecreasedto primary,secondary,andseasonalcreditdecreasedto 2.62percentandtheaverageratesonGSEdebtsecu- 0.38percentin2012,from0.43percentin2011.The ritiesincreasedto2.79percentin2012.Theaverage averagedailybalanceof TermAsset-BackedSecurirateof interestearnedonfederalagencyandGSE tiesLoanFacility(TALF)loansin2012was MBSdecreasedto3.60percentin2012.Theaverage $4,497million,whichearnedinterestatanaverage interestratesforsecuritiessoldunderagreementsto rateof 1.78percent. repurchaseincreasedto0.15percentin2012.The averagerateof interestearnedonforeigncurrency OnJanuary14,2011,alloutstandingdrawsunderthe denominatedassetsdecreasedto0.55percentwhile AmericanInternationalGroup,Inc.(AIG)revolving theaveragerateof interestearnedoncentralbank lineof creditandtherelatedaccruedinterest,capitalliquidityswapsdecreasedto0.62percentin2012. izedinterest,andcapitalizedcommitmentfeeswere

102 99thAnnualReport|2012 Table5.SystemOpenMarketAccount(SOMA)HoldingsandLoansoftheFederalReserveBanks,2012and2011 Millionsofdollars,exceptasnoted Averagedailyassets(+)/liabilities(–) Currentincome(+)/expense(–) Averageinterestrate(percent) Item 2012 2011 2012 2011 2012 2011 U.S.Treasurysecurities1 1,774,043 1,557,878 46,416 42,257 2.62 2.71 Government-sponsoredenterprisedebtsecurities1 94,248 125,698 2,626 3,053 2.79 2.43 Federalagencyandgovernment-sponsoredenterprise mortgage-backedsecurities2 872,819 918,007 31,429 38,281 3.60 4.17 Foreigncurrencydenominatedassets3 25,488 26,566 139 249 0.55 0.94 Centralbankliquidityswaps4 38,737 5,368 241 34 0.62 0.63 OtherSOMAassets5 66 8 9 * … … TotalSOMAassets 2,805,401 2,633,525 80,860 83,874 2.88 3.18 Securitiessoldunderagreementstorepurchase -91,785 -72,159 -142 -44 0.15 0.06 OtherSOMAliabilities6 -2,209 -56 … … … … TotalSOMAliabilities -93,994 -72,215 -142 -44 0.15 0.06 TotalSOMAholdings 2,711,407 2,561,310 80,718 83,830 2.98 3.27 Primary,secondary.andseasonalcredit 72 62 * * 0.38 0.43 Totalloanstodepositoryinstitutions 72 62 * * 0.38 0.43 CreditextendedtoAmericanInternationalGroup,Inc. (AIG),net7,8 … 711 … 409 … 3.94 TermAsset-BackedSecuritiesLoanFacility(TALF)9 4,497 14,799 80 265 1.78 1.79 Totalloanstoothers 4,497 15,510 80 674 1.78 4.35 Totalloans 4,569 15,572 80 674 1.75 4.33 TotalSOMAholdingandloans 2,715,976 2,576,882 80,798 84,504 2.97 3.28 1 Facevalue,netofunamortizedpremiumsanddiscounts. 2 Facevalue,whichistheremainingprincipalbalanceofthesecurities,netofunamortizedpremiumsanddiscounts.Doesnotincludeunsettledtransactions. 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. * Lessthan$500thousand. …Notapplicable. repaidinfullasaresultof theclosingof theAIG Netportfolioassetsof theconsolidatedVIEs recapitalizationplan. decreasedfrom$35,693millionto$2,750million. Thesaleof portfolioassetsheldbyMaidenLane Investments of the Consolidated VIEs LLC,MaidenLaneIILLC,andMaidenLaneIII LLCduring2012enabledtherepaymentinfull, Additionallendingfacilitiesestablishedduring2008 includingaccruedinterest,of loansextendedtothose and2009,underauthorityof section13(3)of the VIEsbytheFRBNY.FundsadvancedtothoseVIEs FederalReserveAct,involvedcreatingandlendingto byotherbeneficialinterestswerealsorepaidinfull. theconsolidatedVIEs(seetable6).Consistentwith generallyacceptedaccountingprinciples,theassets Federal Reserve Bank Premises andliabilitiesof theseVIEshavebeenconsolidated withtheassetsandliabilitiesof theNewYork ReserveBankinthepreparationof thestatementsof SeveralReserveBankstookactionin2012tomainconditionincludedinthisreport.Theproceedsatthe tainandrenovatetheirfacilities.Themultiyearrenomaturityortheliquidationof theconsolidatedVIEs’ vationprogramsattheNewYork,St.Louis,andSan assetsareusedtorepaytheloansextendedbythe FranciscoReserveBanks’headquartersbuildings NewYorkReserveBank. continued.TheDallasReserveBankcompleted

FederalReserveBanks 103 Table6.KeyFinancialDataforConsolidatedVariableInterestEntities(VIEs),2012and2011 Millionsofdollars TALFLLC MaidenLaneLLC MaidenLaneIILLC MaidenLaneIIILLC TotalVIEs Item 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 NetportfolioassetsoftheconsolidatedVIEsandthenetpositionoftheNewYorkReserveBank(FRBNY)andsubordinatedinterestholders Netportfolioassets1 856 811 1,811 7,805 61 9,257 22 17,820 2,750 35,693 LiabilitiesofconsolidatedVIEs 0 0 -415 -684 0 -3 0 -3 -415 -690 Netportfolioassetsavailable2 856 811 1,396 7,121 61 9,254 22 17,817 2,335 35,003 Loansextendedtotheconsolidated VIEsbytheFRBNY3 0 0 0 4,859 0 6,792 0 9,826 0 21,477 Otherbeneficialinterests3,4 113 109 0 1,385 0 1,106 0 5,542 113 8,142 Totalloansandotherbeneficial interests 113 109 0 6,244 0 7,898 0 15,368 113 29,619 Cumulativechangeinnetassetssincetheinceptionoftheprogram5 AllocatedtoFRBNY 71 32 1,396 877 51 1,130 15 1,641 1,533 3,680 Allocatedtootherbeneficialinterests 672 669 0 0 10 226 7 808 689 1,703 Cumulativechangeinnetassets 743 701 1,396 877 61 1,356 22 2,449 2,222 5,383 SummaryofconsolidatedVIEnetincome,includingareconciliationoftotalconsolidatedVIEnetincometotheconsolidatedVIEnetincome Portfoliointerestincome6 1 0 34 808 52 609 1,023 2,012 1,110 3,429 Interestexpenseonloansextendedby FRBNY7 0 0 -10 -138 -11 -117 -46 -146 -67 -401 Interestexpense–other -3 -4 -45 -70 -7 -36 -98 -175 -153 -285 Portfolioholdingsgains(losses) 0 0 552 434 1,393 -991 5,506 -3,363 7,451 -3,920 Professionalfees -1 0 -12 -43 -1 -8 -11 -20 -25 -71 Netincome(loss)ofconsolidatedVIEs -3 -4 519 991 1,426 -543 6,374 -1,692 8,316 -1,248 Less:Netincome(loss)allocatedto otherbeneficialinterests 4 44 0 114 238 -91 2,103 -558 2,345 -491 Netincome(loss)allocatedtoFRBNY -7 -48 519 877 1,188 -452 4,271 -1,134 5,971 -757 Add:Interestexpenseonloans extendedbyFRBNY,eliminatedin consolidation7 0 0 10 138 11 117 46 146 67 401 Netincome(loss)recordedbyFRBNY -78 -488 529 1,015 1,199 -335 4,317 -988 6,038 -356 BalancesofloansextendedtotheconsolidatedVIEsbytheFRBNY Balanceatbeginningoftheyear 0 0 4,859 25,845 6,792 13,485 9,826 14,071 21,477 53,401 Accruedandcapitalizedinterest 0 0 10 138 11 117 46 146 67 401 Repayments 0 0 -4,869 -21,124 -6,803 -6,810 -9,872 -4,391 -21,544 -32,325 Balanceatendoftheyear 0 0 0 4,859 0 6,792 0 9,826 0 21,477 1 TALF,MaidenLane,MaidenLaneII,andMaidenLaneIIIholdingsarerecordedatfairvalue.Fairvaluereflectsanestimateofthepricethatwouldbereceiveduponsellingan assetifthetransactionweretobeconductedinanorderlymarketonthemeasurementdate. 2 RepresentsthenetassetsavailablefordistributiontoFRBNYand“otherbeneficiaries”oftheconsolidatedVIEs. 3 Bookvalue.Includesaccruedinterest. 4 TheotherbeneficialinterestholdersaretheU.S.TreasuryforTALFLLC,JPMorganChaseforMaidenLaneLLC,andAIGforMaidenLaneIILLCandMaidenLaneIIILLC. 5 RepresentstheallocationofthechangeinnetassetsandliabilitiesoftheconsolidatedVIEsthatareavailablefordistributiontoFRBNYandtheotherbeneficiariesofthe consolidatedVIEs.Thedifferencesbetweenthefairvalueofthenetassetsavailableandthebookvalueoftheloans(includingaccruedinterest)areindicativeofgainsor lossesthatwouldbeincurredbythebeneficiariesiftheassetshadbeenfullyliquidatedatpricesequaltothefairvalue. 6 Interestincomeisrecordedwhenearnedandincludesamortizationofpremiums,accretionofdiscounts,andpaydowngainsandlosses. 7 InterestexpenserecordedbyeachconsolidatedVIEontheloansextendedbyFRBNYiseliminatedwhentheVIEsareconsolidatedinFRBNY'sfinancialstatementsand,asa result,theconsolidatedVIEs’netincome(loss)recordedbyFRBNYisincreasedbythisamount. 8 InadditiontothenetincomeattributabletoTALFLLC,FRBNYearned$46milliononTALFloansduringtheyearendedDecember31,2012(interestincomeof$80million andalossonthevaluationofloansof$34million).FRBNYearned$181milliononTALFloansduringtheyearendedDecember31,2011(interestincomeof$265million andlossonthevaluationofloansof$84million). security-enhancementprojectsatitsheadquarters tohouseitsSeattleBranchoperations,andthe buildingthatincludedimprovementstoitsmain- AtlantaReserveBankinitiatedeffortstosellits entrancelobbyandconstructionof aremotevehicle- NashvilleBranchbuilding.Additionally,theClevescreeningfacility. landandDallasReserveBanksconsolidatedcertain operationsperformedattheirPittsburghandSan TheNewYorkReserveBankcompletedthepurchase AntonioBranches,respectively,intootherReserve of the33MaidenLaneproperty.TheSanFrancisco Bankoffices.Asaresult,theseReserveBankswill ReserveBankdisposedof thebuildingformerlyused maintainsmallerBranchstaffs.TheCleveland

104 99thAnnualReport|2012 ReserveBanksecuredleasedofficespaceforitsPitts- Formoreinformationontheacquisitioncostsand burghBranchandismovingforwardwithplansto netbookvalueof theFederalReserveBanksand selltheformerbuilding,andtheDallasReserveBank Branches,seetable14inthe“StatisticalTables”secisintheprocessof obtainingleasedofficespacefor tionof thisreport. itsSanAntonioBranchandwillpursuethesaleof theformerbuildingduring2013.TheChicagoand ClevelandReserveBankssecuredleasedspacefor theircontingencyrequirements.

FederalReserveBanks 105 Pro Forma Financial Statements for Federal Reserve Priced Services Table7:ProFormaBalanceSheetforFederalReservePricedServices,December31,2012and2011 Millionsofdollars Item 2012 2011 Short-termassets(Note2) Imputedreserverequirementsonclearingbalances - 262.3 Imputedinvestments 510.9 2,805.3 Receivables 35.6 38.7 Materialsandsupplies 0.9 1.4 Prepaidexpenses 9.4 7.7 Itemsinprocessofcollection 216.0 275.4 Totalshort-termassets 772.8 3,390.9 Long-termassets(Note3) Premises 171.2 180.8 Furnitureandequipment 33.8 38.2 Leases,leaseholdimprovements,andlong-termprepayments 78.6 74.6 Prepaidpensioncosts - 321.9 PrepaidFDICasset 20.3 21.7 Deferredtaxasset 287.5 138.5 Totallong-termassets 591.4 775.7 Totalassets 1,364.1 4,166.6 Short-termliabilities Clearingbalances - 2,622.5 Deferred-availabilityitems 703.6 910.3 Short-termdebt - - Short-termpayables 35.4 44.1 Totalshort-termliabilities 738.9 3,576.9 Long-termliabilities Long-termdebt - - Accruedbenefitcosts 549.8 381.3 Totallong-termliabilities 549.8 381.3 Totalliabilities 1,288.7 3,958.2 Equity(includingaccumulatedothercomprehensivelossof$643.0million and$288.9millionatDecember31,2012and2011,respectively) 75.4 208.3 Totalliabilitiesandequity(Note4) 1,364.1 4,166.6 Note:Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements.

106 99thAnnualReport|2012 Table8:ProFormaIncomeStatementforFederalReservePricedServices,2012and2011 Millionsofdollars Item 2012 2011 Revenuefromservicesprovidedtodepositoryinstitutions(Note5) 449.3 477.4 Operatingexpenses(Note6) 406.1 421.3 Incomefromoperations 43.2 56.1 Imputedcosts(Note7) Interestonfloat (1.1) -1.3 Interestondebt - - Salestaxes 4.6 4.8 FDICInsurance 1.4 4.9 3.2 6.8 Incomefromoperationsafterimputedcosts 38.3 49.3 Otherincomeandexpenses(Note8) Investmentincome 1.0 2.5 Earningscredits -0.5 0.5 -1.4 1.2 Incomebeforeincometaxes 38.8 50.5 Imputedincometaxes(Note7) 12.0 16.3 Netincome 26.8 34.1 Memo:Targetedreturnonequity(Note7) 8.9 16.8 Note:Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements. Table9:ProFormaIncomeStatementforFederalReservePricedServices,byService,2012 Millionsofdollars Commercialcheck Item Total CommercialACH Fedwirefunds Fedwiresecurities collection Revenuefromservices(Note5) 449.3 220.0 114.8 90.5 24.1 Operatingexpenses(Note6) 406.1 186.7 108.4 88.1 22.9 Incomefromoperations 43.2 33.3 6.4 2.4 1.1 Imputedcosts(Note7) 4.9 1.9 1.4 1.3 0.3 Incomefromoperationsafterimputedcosts 38.3 31.4 5.0 1.1 0.8 Otherincomeandexpenses,net(Note8) 0.5 0.3 0.1 0.1 0.0 Incomebeforeincometaxes 38.8 31.7 5.2 1.2 0.8 Imputedincometaxes(Note7) 12.0 9.8 1.6 0.4 0.3 Netincome 26.8 21.9 3.6 0.8 0.6 Memo:Targetedreturnonequity(Note7) 8.9 4.1 2.4 1.9 0.5 Costrecovery(percent)(Note9) 104.1 108.8 101.0 98.8 100.3 Note:Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements.

FederalReserveBanks 107 Notes to Pro Forma Financial Statements for Priced Services (1)DiscontinuationofClearingBalanceProgram EffectiveJuly2012,theBoarddiscontinuedthecontractualclearingbalanceprograminconnectionwithitssimplificationof reserverequirements.Clearingbalanceswereaprimarycomponentof theproformabalancesheetusedtocompute theimputedcostsintheprivatesectoradjustmentfactor(PSAF).Theelimination of clearingbalancesreducedthesizeof theproformabalancesheetsubstantially aswellastheassociatedimputedexpensesandinvestmentincome. (2)Short-TermAssets TheimputedreserverequirementonclearingbalancesheldatReserveBanksby depositoryinstitutionsreflectsatreatmentcomparabletothatof compensating balancesheldatcorrespondentbanksbyrespondentinstitutions.Thereserve requirementimposedonrespondentbalancesmustbeheldasvaultcashorasbalancesmaintained;thus,aportionof pricedservicesclearingbalancesheldwiththe FederalReserveisshownasrequiredreservesontheassetsideof thebalance sheet.Anotherportionof theclearingbalancesisusedtofinanceshort-andlongtermassets.Theremainderof clearingbalancesanddepositbalancesarisingfrom floatareassumedtobeinvestedinaportfolioof investments,shownasimputed investments.Asaresultof thediscontinuationof theclearingbalanceprogramin July2012therewerenoclearingbalancesorrelatedreserverequirementbalances onDecember31,2012.(Seenote1) Receivablesarecomposedof feesduetheReserveBanksforprovidingpricedservicesandtheshareof suspense-anddifference-accountbalancesrelatedtopriced services. Itemsinprocessof collectionaregrossFederalReservecashitemsinprocessof collection(CIPC),statedonabasiscomparabletothatof acommercialbank. Theyreflectadjustmentsforintra-ReserveBankitemsthatwouldotherwisebe double-countedonthecombinedFederalReservebalancesheetandadjustments foritemsassociatedwithnonpriceditems(suchasthosecollectedforgovernment agencies).AmongthecoststoberecoveredundertheMonetaryControlActisthe costof float,ornetCIPCduringtheperiod(thedifferencebetweengrossCIPC anddeferred-availabilityitems,whichistheportionof grossCIPCthatinvolvesa financingcost),valuedatthefederalfundsrate. (3)Long-TermAssets Long-termassetsconsistof long-termassetsusedsolelyinpricedservicesandthe priced-serviceportionof long-termassetssharedwithnonpricedservices,includingthenetpensionassetanddeferredtaxassetrelatedtothepricedservicespensionandpostretirementbenefitsobligation. Long-termassetsalsoconsistof anestimateof theassetsof theBoardof Governorsusedinthedevelopmentof pricedservicesandanimputedprepaidFederal DepositInsuranceCorporation(FDIC)asset. (4)LiabilitiesandEquity Underthematched-bookcapitalstructureforassets,short-termassetsare financedwithshort-termpayables,clearingbalances,andimputedshort-term debt,if needed.Long-termassetsarefinancedwithlong-termliabilities,core clearingbalances,imputedequity,andimputedlong-termdebt,if needed.Equity

108 99thAnnualReport|2012 isimputedat10percentof totalrisk-weightedassetstosatisfytheFDICrequirementsforawell-capitalizedinstitution.Noshort-orlong-termdebtwasimputed for2012or2011. EffectiveDecember31,2006,theReserveBanksimplementedtheFinancial AccountingStandardBoard’s(FASB)Statementof FinancialAccountingStandards(SFAS)No.158,Employers’AccountingforDefinedBenefitPensionand OtherPostretirementPlans(codifiedinFASBAccountingStandardsCodification (ASC)Topic715(ASC715),Compensation–RetirementBenefits),whichrequires anemployertorecordthefundedstatusof itspensionandotherbenefitplanson itsbalancesheet.Inordertoreflectthefundedstatusof itsbenefitplans,the ReserveBanksrecognizedthedeferreditemsrelatedtotheseplans,whichinclude priorservicecostsandactuarialgainsorlosses,onthebalancesheet.Thisresulted inanadjustmenttothepensionandotherbenefitplansrelatedtopricedservices andtherecognitionof anassociateddeferredtaxassetwithanoffsettingadjustment,netof tax,toaccumulatedothercomprehensiveincome(AOCI),whichis includedinequity. TheReserveBankpricedservicesrecognizedapensionliabilityinaccruedbenefit costsin2012andanetpensionassetin2011.Thepensionliabilityandnetpension assetwere$103.6millionand$321.9millionin2012and2011,respectively.The changeinthefundedstatusof thepensionandotherbenefitplansresultedina correspondingincreaseinaccumulatedothercomprehensivelossof $354.1million in2012. Themethodforestimatingthepricedservicesportionof theSFAS158/ASC715 adjustmentstothepensionandotherbenefitliabilities,AOCI,anddeferredtax assetwasrefinedin2012andincorporatesAOCIcomponentchangesfromyearto-yearsincetheadoptionof SFAS158in2006.Thisestimationchangedoesnot directlyaffecttheincomestatementorcostrecovery. (5)Revenue Revenuerepresentsfeeschargedtodepositoryinstitutionsforpricedservices,and isrealizedfromeachinstitutionthroughoneof twomethods:directchargestoan institution’saccountorchargesagainstitsaccumulatedearningscredits(see note7). (6)OperatingExpenses Operatingexpensesconsistof thedirect,indirect,andothergeneraladministrative expensesof theReserveBanksforpricedservicesplustheexpensesof theBoard of Governorsrelatedtothedevelopmentof pricedservices.Boardexpenseswere $4.1millionin2012and$5.2millionin2011. InaccordancewithSFASNo.87,Employers’AccountingforPensions(codifiedin ASC715),theReserveBankpricedservicesrecognizedqualifiedpension-plan operatingexpensesof $49.1millionin2012and$45.2millionin2011.Operating expensesalsoincludethenonqualifiedpensionexpenseof $0.3millionin2012and $3.1millionin2011.Theimplementationof SFASNo.158(ASC715)doesnot changethesystematicapproachrequiredbygenerallyacceptedaccountingprinciplestorecognizetheexpensesassociatedwiththeReserveBanks’benefitplansin theincomestatement.Asaresult,theseexpensesdonotincludeamountsrelated tochangesinthefundedstatusof theReserveBanks’benefitplans,whichare reflectedinAOCI(seenote4).

FederalReserveBanks 109 Theincomestatementbyservicereflectsrevenue,operatingexpenses,imputed costs,otherincomeandexpenses,andcostrecovery. (7)ImputedCosts Imputedcostsconsistof incometaxes,returnonequity,interestondebt,sales taxes,anFDICassessment,andinterestonfloat.Manyimputedcostsarederived fromthePSAFmodel.Thecostof debtandtheeffectivetaxratearederivedfrom bankholdingcompanydata,whichserveastheproxyforthefinancialdataof a representativeprivate-sectorfirm,andareusedtoimputedebtandincometaxesin thePSAFmodel.Theafter-taxrateof returnonequityisbasedonthereturnsof theequitymarketasawholeandisappliedtotheequityonthebalancesheetto imputetheprofitthatwouldhavebeenearnedhadtheservicesbeenprovidedbya private-sectorfirm.Beginningin2009,giventheuncertainlong-termeffectthat paymentof interestonreservebalanceswouldhaveonthelevelof clearingbalances,theequityusedtodeterminetheimputedprofithasbeenadjustedtoreflect theactualclearingbalancelevelsmaintained;previously,projectionsof clearing balancelevelswereused. Interestisimputedonthedebtassumednecessarytofinancepriced-serviceassets; therewasnoneedtoimputedebtin2012or2011.TheimputedFDICassessment reflectsrateandassessmentmethodologychangesin2011. Interestonfloatisderivedfromthevalueof floattoberecovered,eitherexplicitly orthroughper-itemfees,duringtheperiod.Floatcostsincludecostsforthecheck, FedwireFunds,ACH,andFedwireSecuritiesservices. Floatcostorincomeisbasedontheactualfloatincurredforeachpricedservice. Otherimputedcostsareallocatedamongpricedservicesaccordingtotheratioof operatingexpenses,lessshippingexpenses,foreachservicetothetotalexpenses, lessthetotalshippingexpenses,forallservices. Thefollowingshowsthedailyaveragerecoveryof actualfloatbytheReserve Banksfor2012,inmillionsof dollars: Totalfloat (767.1) Unrecoveredfloat 10.8 Floatsubjecttorecovery (777.9) Sourcesofrecoveryoffloat Directcharges 1.1 Per-itemfees (779.0) Unrecoveredfloatincludesfloatgeneratedbyservicestogovernmentagenciesand byothercentralbankservices.Floatthatiscreatedbyaccountadjustmentsdueto transactionerrorsandtheobservanceof nonstandardholidaysbysomedepositoryinstitutionswasrecoveredfromthedepositoryinstitutionsthroughcharging institutionsdirectly.Floatsubjecttorecoveryisvaluedatthefederalfundsrate. Certaincheckproductsaredesignedtogeneratecreditfloatandthereforehave lowerper-itemfees;thisfloathasbeensubtractedfromthecostbasesubjectto recoveryin2012and2011. (8)OtherIncomeandExpenses Otherincomeandexpensesconsistof investmentandinterestincomeonthe imputedinvestmentof clearingbalancesandthecostof earningscreditsorincome fromexpiredearningscredits.Investmentincomeonclearingbalancesfor2012

110 99thAnnualReport|2012 and2011representstheaveragecoupon-equivalentyieldonthree-monthTreasury bills.Theinvestmentreturnisappliedtotherequiredportionof theclearingbalance.Otherincomealsoincludesimputedinterestontheportionof clearingbalancessetasideasrequiredreserves.Expensesforearningscreditsgrantedto depositoryinstitutionsontheirclearingbalancesarebasedonadiscountedaveragecoupon-equivalentyieldonthree-monthTreasurybills.Earningscreditsexpire 52weeksaftertheyaregranted. (9)CostRecovery Annualcostrecoveryistheratioof revenue,includingotherincome,tothesumof operatingexpenses,imputedcosts,imputedincometaxes,andtargetedreturnon equity.

111 Other Federal Reserve Operations Regulatory Developments: companies(BHCs)withtotalconsolidatedassetsof $50billionormore(collectively,coveredcompanies). Dodd-Frank Act Implementation Thesestandardsmustbemorestringentthanthe standardsthatapplytoothernonbankfinancial TheDodd-FrankWallStreetReformandConsumer companiesandBHCsthatdonotposesimilarrisks ProtectionAct(Dodd-FrankAct)(Pub.L.No.111tothefinancialsystem.Foreignbankingorganiza- 203)isoneof themostsignificantpiecesof legislationsthatareoraretreatedasBHCsforpurposesof tionaffectingtheU.S.financialregulatoryframework theBankHoldingCompanyActandthatmeetthe inmanyyears.EnactedonJuly21,2010,theDodd- $50billionassetthresholdarealsosubjecttothe FrankActseekstoaddresscriticalgapsandweakheightenedprudentialstandards. nessesintheU.S.regulatoryframeworkthatwere revealedbythefinancialcrisis.TheactgivestheFed- OnDecember14,2012,theBoardinvitedcomment eralReserveimportantresponsibilitiestoissuerules onaproposaltoestablishenhancedprudentialstanandsupervisefinancialcompaniestoenhancefinandardsforforeignbankingorganizationswithglobal cialstabilityandpreservethesafetyandsoundnessof consolidatedassetsof $50billionormoreandwitha thebankingsystem. U.S.bankingpresence(foreignproposal).Theproposedstandardsforforeignbankingorganizations Throughout2012,theFederalReservecontinuedto arebroadlyconsistentwiththestandardsthatthe workdiligentlytoimplementthemanyregulatory BoardproposedforU.S.coveredcompaniesin changesrequiredundertheDodd-FrankAct.Asof December2011.Differencesbetweenthestandards December31,2012,theBoardhadissued27final proposedforforeignbankingorganizationsandU.S. rulesrequiredbytheactandhadproposedanaddi- coveredcompaniesreflectthedifferentregulatory tional15rulesforpubliccomment.1TheBoardalso frameworkandstructureunderwhichforeignbankcontinuedtoimplementvariousinternationalframe- ingorganizationsoperate. worksdevelopedundertheauspicesof theBasel CommitteeonBankingSupervision(BCBS). Theforeignproposalwouldrequireaforeignbanking organizationwith$50billionormoreinglobalcon- Thefollowingisasummaryof keyregulatorydevel- solidatedassetsand$10billionormoreintotalnonopmentsannouncedbytheFederalReserveduring branchU.S.assetstoorganizeitsU.S.subsidiaries 2012inconnectionwiththeimplementationof the underasingleU.S.intermediateholdingcompany Dodd-FrankActandBCBSinternational (IHC).IHCsof foreignbankingorganizationswould frameworks. besubjecttothesamerisk-basedandleveragecapital standardsapplicabletoU.S.BHCs,andIHCswith Enhanced Prudential Standards for $50billionormoreinconsolidatedassetswouldbe Financial Firms subjecttotheBoard’scapitalplanrule.Inaddition, theU.S.operationsof aforeignbankingorganization EnhancedPrudentialStandardsforForeign withcombinedU.S.assetsof $50billionormore BankingOrganizations wouldberequiredtomeetenhancedliquidityrisk- TheactrequirestheBoardtoestablishheightened managementstandards,conductliquiditystresstests, prudentialstandardsfornonbankfinancialcompa- andholda30-daybufferof highlyliquidassets.The niessupervisedbytheBoardandforbankholding proposalalsoimposescapitalstresstest,singlecounterpartycreditlimit,overallrisk-management, andearlyremediationrequirementsonU.S.opera- 1 ThesefiguresincludeBoardactionssincetheenactmentofthe actonJuly21,2010. tionsof foreignbankingorganizations.

112 99thAnnualReport|2012 AnnualStressTests tradingactivities,reduceprocyclicalityinthemarket TheactrequirestheBoardtoconductsupervisory riskcapitalrequirements,andincreasetransparency stresstestsof coveredcompaniesandrequiresfinan- throughenhanceddisclosures.Consistentwithseccialcompanieswithmorethan$10billionintotal tion939Aof theDodd-FrankAct,whichrequiresall consolidatedassetstoconductannualstresstests. federalagenciestoremovefromtheirregulationsref- Coveredcompaniesarealsorequiredtoconduct erencestoandrequirementsof relianceoncreditratsemiannualcompany-runstresstests. ings,thefinalruledoesnotincludethoseaspectsof theBCBSmarketriskframeworkthatrelyoncredit OnOctober9,2012,theBoardpublishedtwofinal ratings.Instead,thefinalruleincludesalternative rulesimplementingthesestresstestingregimes.One standardsof creditworthinessfordeterminingsperuleimplementedthesupervisorystresstestand cificriskcapitalrequirementsforcertaindebtand semiannualcompany-runstresstestrequirementsfor securitizationpositions. coveredcompanies,whileoneruleimplementedthe annualcompany-runstresstestrequirementsfor AlsoonJune12,2012,theBoardandotherfederal BHCswithtotalconsolidatedassetsof morethan bankingagenciesinvitedcommentonthreenotices $10billionbutlessthan$50billion,andforstate of proposedrulemakingsthatwouldimplementin memberbanksandsavingsandloanholdingcompa- theUnitedStatestheBaselIIIregulatorycapital nies(SLHCs)withtotalconsolidatedassetsof more reformsadoptedbytheBCBSandmakeotherrevithan$10billion. sionstotheagencies’regulatorycapitalrequirements. Theproposalswouldestablishanintegratedregula- TheBoardbeganconductingsupervisorystresstests torycapitalframeworktoaddressshortcomingsin inthefallof 2012for18BHCsthatparticipatedin regulatorycapitalrequirementsthatbecameapparent the2009SupervisoryCapitalAssessmentProgram duringthefinancialcrisis.Theproposedruleswould andsubsequentComprehensiveCapitalAnalysisand beconsistentwithsection171of theDodd-Frank Reviews.Thesecompaniesandtheirstate-member Act,whichdirectstheBoardtoestablishminimum banksubsidiariesalsoconductedtheirown risk-basedandleveragecapitalrequirementsfor company-runstresstestsinthefallof 2012.Other BHCsandSLHCsthatarenotlessthanthe“genercompaniessubjecttotheBoard’sfinalrulesfor allyapplicable”capitalrequirementsforinsured Dodd-FrankActstresstestingwillberequiredto depositoryinstitutionsandnot“quantitativelylower complywiththefinalrulebeginninginOctober2013. than”the“generallyapplicable”capitalrequirements Companieswithbetween$10billionand$50billion ineffectforinsureddepositoryinstitutionswhenthe intotalassetsthatbeginconductingtheirfirst Dodd-FrankActwasenacted. company-runstresstestininthefallof 2013willnot havetopubliclydisclosetheresultsof thatfirststress Thefirstnoticeof proposedrulemaking(BaselIII test. NPR)isfocusedprimarilyonreformsthatwould improvetheoverallqualityandquantityof capital Changes to Banking Regulation heldbyalldepositoryinstitutions,BHCswithtotal and Supervision consolidatedassetsof $500millionormore,andall SLHCs(collectively,bankingorganizations).Consis- RegulatoryCapitalFramework tentwiththeinternationalBaselframework,the OnJune12,2012,theBoardandotherfederalbank- BaselIIINPRwouldestablishanewminimumcomingagenciesapprovedafinalruletoimplement monequitytier1ratioandcommonequitytier1 changestothemarketriskcapitalrule,which capitalconservationbuffer;raisetheminimumtier1 requiresinstitutionswithsignificanttradingactivities capitalratio;revisethedefinitionof capitaltoensure toadjusttheircapitalratiostobetteraccountforthe thatregulatorycapitalinstrumentscanabsorblosses; marketrisksof thoseactivities.2Thefinalmarketrisk establishlimitationsoncapitaldistributionsandcercapitalruleimplementscertainrevisionsmadebythe taindiscretionarybonuspaymentsif commonequity BCBStoitsmarketriskframework.Thefinalruleis tier1capitalbuffersarenotmet;andintroducea intendedtoenhancesensitivitytorisksarisingfrom supplementaryleverageratioforbankingorganizationsthataresubjecttotheadvancedapproaches 2 ThemarketriskcapitalruleappliestoaBHCorbankwith risk-basedcapitalrules.Theproposalincludestransiaggregatetradingassetsandliabilitiesequalto10percentof tionprovisionsdesignedtoprovidesufficienttimefor totalassets,or$1billionormore.Separately,theBoardprobankingorganizationstomeetthenewcapitalstanposedtoapplythemarketriskcapitalruletoSLHCsthatmeet thethresholdsdescribedintherule. dardswhilesupportinglendingtotheeconomy.

OtherFederalReserveOperations 113 Thesecondnoticeof proposedrulemaking(Stan- condition.Underthefinalrule,anSHC’sregistration dardizedApproachNPR)wouldrevisetheBoard’s becomeseffectivenolaterthan45daysfromthedate rulesforcalculatingrisk-weightedassetstoenhance theBoardreceivesallrequiredinformation.Consistheirrisksensitivityandaddressweaknessesidenti- tentwiththeact,therestrictionsonnonbanking fiedoverrecentyears.Specifically,itwouldincorpo- activitiesinsection4of theBankHoldingCompany rateaspectsof theBCBS’sBaselIIstandardized ActwouldnotapplytoasupervisedSHC. framework(knownastheInternationalConvergence of CapitalMeasurementandCapitalStandards), BankSecrecyAct(BSA)Regulations BaselIII,andalternativestocreditratingsforthe OnNovember29,2012,theBoardandtheFinancial treatmentof certainexposures,consistentwithsec- CrimesEnforcementNetwork,abureauof theU.S. tion939Aof theDodd-FrankAct.TheStandardized Departmentof Treasury,proposedaruletoamend ApproachNPRwouldapplytoallbanking thedefinitionsof “fundstransfer”and“transmittal organizations. of funds”underregulationsimplementingtheBSA. Theproposedamendmentswouldmaintainthecur- Thethirdnoticeof proposedrulemaking(Advanced rentscopeof fundstransfersandtransmittalssubject ApproachesandMarketRiskNPR)wouldrevisethe totheBSAinlightof anambiguitycausedby advancedapproachesrisk-basedcapitalruleina amendmentstotheElectronicFundTransferAct mannerconsistentwithsections171and939Aof the madebytheDodd-FrankAct. Dodd-FrankActandincorporatecertainaspectsof BaselIIIthattheBoardwouldapplyonlyto Financial Market Utilities (FMUs) advancedapproachesbankingorganizations(gener- and Payment, Clearing, and Settlement ally,thelargest,mostcomplexbankingorganiza- Activities tions).Inparticular,theAdvancedApproachesand MarketRiskNPRwouldenhancetherisksensitivity TitleVIIIof theactestablishesanewsupervisory of thecurrentrulestobetteraddresscounterparty frameworkforsystemicallyimportantFMUsand creditriskandinterconnectednessamongfinancial systemicallyimportantpayment,clearing,andsettleinstitutions.Theproposalalsowouldcodifythe mentactivitiesconductedbetweenfinancialinstitu- Board’smarketriskcapitalruleand,asdescribed tions.Undertheframework,theBoardisauthorized above,wouldapplyconsolidatedcapitalrequirements toprescriberisk-managementstandardsgoverning toSLHCs. theoperationsof FMUsthataredesignatedassystemicallyimportantbytheFinancialStabilityOver- RegistrationofSecuritiesHoldingCompanies sightCouncil(FSOC)(otherthanadesignatedFMU (SHCs) thatisregisteredwiththeCommodityFuturesTrad- Section618of theDodd-FrankActpermitsacom- ingCommissionasaderivativesclearingorganizapanythatoneormoresecuritiesbrokerordealerreg- tion(DCO)orregisteredwiththeSECasaclearing isteredwiththeSecuritiesandExchangeCommission agency)aswellastheconductof payment,clearing, (SEC),andthatisrequiredbyaforeignregulatoror andsettlementactivitiesbyfinancialinstitutionsif provisionof foreignlawtobesubjecttocomprehen- suchactivitieshavebeendesignatedassystemically siveconsolidatedsupervision,toregisterwiththe importantbytheFSOC.OnJuly18,2012,theFSOC BoardasanSHCandbecomesubjecttosupervision votedunanimouslytodesignateeightFMUsassysandregulationbytheBoard.AnSHCthatregisters temicallyimportantundertheact. withtheBoardundersection618issubjecttothefull examination,supervision,andenforcementregime OnJuly30,2012,theFederalReserveannouncedthe applicabletoaregisteredBHC,includingcapital approvalof afinalrule(RegulationHH)toimplerequirements(althoughthestatuteallowstheBoard mentcertainprovisionsof titleVIIIof theact.The tomodifyitscapitalrulestoaccountfordifferences finalrulecreatesrisk-managementstandardsgoverninactivitiesandstructureof SHCs). ingtheoperationsrelatedtothepayment,clearing, andsettlementactivitiesof FMUsdesignatedassys- OnMay30,2012,theBoardadoptedafinalruleto temicallyimportantbytheFSOC(otherthanregisimplementsection618of theact.Thefinalrule, teredDCOsorclearingagencies).TheriskwhichbecameeffectiveJuly20,2012,specifiesthe managementstandardsarebasedontherecognized informationthatanSHCmustprovidetotheBoard internationalstandardsdevelopedbytheCommittee aspartof registration,includinginformationrelating onPaymentandSettlementSystemsandtheTechnitoorganizationalstructure,capital,andfinancial calCommitteeof theInternationalOrganizationof

114 99thAnnualReport|2012 SecuritiesCommissionsthatwereincorporatedprevi- required,inlightof changesinthetypesof fraud ouslyintotheBoard’sPolicyonPaymentSystem andavailablemethodsof fraudprevention. Risk. Thefinalruleretainsandclarifiestherequirement RegulationHHalsoestablishesrequirementsfor thatanissuerthatmeetsthesestandardsandwishes advancenoticeof proposedmaterialchangestothe toreceivetheadjustmentmustannuallynotifythe rules,procedures,oroperationsof adesignated paymentcardnetworksinwhichitparticipatesof its FMUforwhichtheBoardisthesupervisoryagency eligibilitytoreceivetheadjustment.Inaddition,the asspecifiedintitleVIIIof theact.Theadvance finalruleexplicitlyprohibitsanissuerfromreceiving noticerequirementssetthethresholdabovewhicha orchargingafraud-preventionadjustmentif the proposedchangewouldbeconsideredmaterialand issuerissubstantiallynoncompliantwiththeBoard’s thusrequireanadvancenoticetotheBoard,andalso fraud-preventionstandardsandsetsforthatimeincludeprovisionsonthelengthof thereviewperiod. framewithinwhichsuchanissuermuststopreceivingorchargingafraud-preventionadjustment. Debit Interchange Consumer Financial Protection Section1075of theactrestrictstheinterchangefees thatissuersmayreceiveforelectronicdebitcard OnAugust15,2012,theBoard—jointlywiththe transactions.Specifically,theinterchangefeean ConsumerFinancialProtectionBureau,theFederal issuerreceivesforaparticulartransactionmustbe DepositInsuranceCorporation,theFederalHousing reasonableandproportionaltothecostincurredby FinanceAgency,theNationalCreditUnionAdmintheissuerwithrespecttothetransaction.The istration,andtheOfficeof theComptrollerof the Board’sRegulationII,adoptedin2011,setsstan- Currency—proposedaruletoimplementsecdardsfordeterminingwhetheraninterchangefeeis tion129Hof theTruthinLendingAct(TILA), reasonableandproportionaltotheissuer’scost.In addedbytheDodd-FrankAct,whichrequiresa addition,theBoardconcurrentlypromulgatedan creditortoobtainanappraisalbeforeissuinga interimfinalruletopermitanissuertoreceivea “higher-riskmortgage.”Undertheact,mortgage fraud-preventionadjustmenttotheissuer’sinter- loansarehigher-riskif theyaresecuredbyaconsumchangefee. er’shomeandhaveinterestratesaboveacertain threshold. OnJuly27,2012,theBoardannouncedtheapproval of afinalrulethatpermitsadebitcardissuersubject Forhigher-riskmortgageloans,theproposedrule totheinterchangefeestandardsof RegulationIIto wouldrequirecreditorstousealicensedorcertified receiveafraud-preventionadjustment.Underthe appraiserwhopreparesawrittenappraisalreport fraud-preventionadjustmentfinalrule,anissueris basedonaphysicalinspectionof theinteriorof the eligibleforanadjustmentof nomorethan1centper property.Theproposedrulealsowouldrequirecreditransaction(unchangedfromthepreviousinterim torstodisclosetoapplicantsinformationaboutthe finalrule)if itdevelopsandimplementspoliciesand purposeof theappraisalandprovideconsumerswith proceduresthatarereasonablydesignedtotakeeffec- afreecopyof anyappraisalreport.Creditorswould tivestepstoreducetheoccurrenceof,andcoststoall havetoobtainanadditionalappraisalatnocostto partiesfrom,fraudulentdebitcardtransactions.The theconsumerforahome-purchasehigher-riskmortfinalrulesimplifiestheelementsrequiredtobe gageloanif theselleracquiredthepropertyfora includedinanissuer’sfraud-preventionpoliciesand lowerpriceduringthepastsixmonths.Thisrequireprocedures.Toreceiveanadjustment,anissueris mentwouldaddressfraudulentpropertyflippingby requiredtoreviewitsfraud-preventionpoliciesand seekingtoensurethatthevalueof thepropertybeing procedures,andtheirimplementation,atleastannu- usedascollateralfortheloanlegitimatelyincreased. ally.Anissueralsoisrequiredtoupdateitspolicies andproceduresasnecessaryinlightof theireffectivenessandcost-effectivenessand,aspreviously

OtherFederalReserveOperations 115 The Board of Governors and the tomeetDodd-FrankActmandates,closeanycrossdisciplinaryknowledgegaps,developappropriate Government Performance and policy,andcontinueeffectivelyaddressingtherecov- Results Act eryof afragileglobaleconomy.Theplansetsforth majorgoals,outlinesstrategiesforachievingthose Overview goals,identifieskeyquantitativemeasuresof performanceanddiscussestheevaluationof performance. TheGovernmentPerformanceandResultsAct (GPRA)of 1993requiresthatfederalagencies,in Theperformanceplanincludesspecifictargetsfor consultationwithCongressandoutsidestakeholders, someof theperformancemeasuresidentifiedinthe prepareastrategicplancoveringamultiyearperiod strategicplananddescribestheoperationalprocesses andsubmitanannualperformanceplanandperforandresourcesneededtomeetthosetargets.Thepermancereport.TheGPRAModernizationActof formancereportdiscussestheBoard’sperformance 2010refinesthoserequirementstoincludequarterly againstthestrategicgoals. performancereporting.AlthoughtheBoardisnot coveredbyGPRA,theBoardfollowsthespiritof the Thestrategicplan,performanceplan,andperforactand,likefederalagencies,preparesaperformance mancereportareavailableontheBoard’swebsiteat planandperformancereport. www.federalreserve.gov/publications/gpra/ default.htm. Strategic Plan, Performance Plan, and Performance Report TheBoard’s2012–2015strategicplanarticulatesthe Board’smissioninthecontextof whatitwouldtake

117 Record of Policy Actions of the Board of Governors Policyactionsof theBoardof Governorsarepre- Banks.2TheamendmentstoRegulationDcreatea sentedpursuanttosection10of theFederalReserve commontwo-weekmaintenanceperiodforall Act.ThatsectionprovidesthattheBoardshallkeep depositoryinstitutions,establishapenalty-freeband arecordof allquestionsof policydeterminedbythe aroundreservebalancerequirementsinplaceof car- BoardandshallincludeinitsannualreporttoCon- ryoverandroutinepenaltywaivers,discontinuecergressafullaccountof suchactions.Thischapterpro- tainas-of adjustmentsandreplaceothers,andelimividesasummaryof policyactionsin2012,asimple- natethecontractualclearingbalanceprogram.Regumentedthrough(1)rulesandregulations,(2)policy lationJwasamendedtoremovereferencestoas-of statementsandotheractions,and(3)discountrates adjustmentsandclarifyothermatters,includingthe fordepositoryinstitutions.Policyactionswere handlingof checkssenttoFederalReserveBanks. approvedonthedatestatedbyallBoardmembersin TheRegulationDamendmentsrelatedtotheelimioffice,unlessindicatedotherwise.1Moreinformation nationof contractualclearingbalancesandas-of ontheactionsisavailablefromthe“Reading adjustmentsareeffectiveJuly12,2012;theother Rooms”ontheBoard’sFreedomof Information RegulationDamendmentsareeffectiveJanuary24, (FOI)ActwebpageoronrequestfromtheBoard’s 2013.TheRegulationJamendmentsareeffective FOIOffice. July12,2012. ForinformationonFederalOpenMarketCommittee Votingforthisaction:ChairmanBernanke,Vice policyactionsrelatingtoopenmarketoperations,see ChairYellen,andGovernorsDuke,Tarullo,and “Minutesof FederalOpenMarketCommittee Raskin. Meetings”onpage123. OnOctober25,2012,theBoardapprovedafinalrule (DocketNo.R-1433)todelaytheeffectivedateof Rules and Regulations certainRegulationDamendmentstosimplifythe administrationof reserverequirements,whichwere Regulation D (Reserve Requirements of totakeeffectonJanuary24,2013(specifically,the Depository Institutions) and Regulation J creationof acommontwo-weekmaintenanceperiod (Collection of Checks and Other Items by andtheestablishmentof apenalty-freebandaround Federal Reserve Banks and Funds reservebalancerequirements).3Thedelaywillallow Transfers through Fedwire) timeforfurtherdevelopmentandtestingof automatedsystemstoensureasmoothtransitionfor OnApril4,2012,theBoardapprovedfinalrules affectedinstitutions.Theneweffectivedateis (DocketNos.R-1433andR-1434)tosimplifythe June27,2013. administrationof reserverequirements;reduce administrativeandoperationalcostsfordepository institutions,theBoard,andFederalReserveBanks; andclarifycertainmattersrelatedtotheReserve 2 SeeFederalRegisternoticesatwww.gpo.gov/fdsys/pkg/FR- 2012-04-12/html/2012-8562.htmandwww.gpo.gov/fdsys/pkg/ FR-2012-04-12/html/2012-8563.htm. 1 GovernorPowelljoinedtheBoardonMay25,andGovernor 3 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2012- SteinjoinedtheBoardonMay30,2012. 11-05/html/2012-26731.htm.

118 99thAnnualReport|2012 Votingforthisaction:ChairmanBernanke,Vice ProtectionBureau(CFPB).Thedollarthresholdis ChairYellen,andGovernorsDuke,Tarullo, adjustedannuallytoreflecttheannualpercentage Stein,andPowell.Abstaining:GovernorRaskin. increaseintheconsumerpriceindex.Transactionsat orbelowthethresholdaresubjecttotheprotections Regulation H (Membership of State of theregulations.AlthoughtheDodd-FrankAct Banking Institutions in the Federal generallytransferredrulemakingauthorityunderthe Reserve System) and Regulation Y ConsumerLeasingActandtheTruthinLendingAct (Bank Holding Companies and totheCFPB,theBoardretainsauthoritytoissue rulesforcertainmotorvehicledealers.Thefinalrules Change in Bank Control) areeffectiveJanuary1,2013. OnJune7,2012,theBoardapprovedafinalrule (DocketNo.R-1401)toreviseitsmarketriskcapital Votingforthisaction:ChairmanBernanke,Vice rule,whichrequiresbankingorganizationswithsig- ChairYellen,andGovernorsDuke,Tarullo, nificanttradingactivitiestoadjusttheircapital Raskin,Stein,andPowell. requirementstoreflectthemarketriskof those activities.4TheFederalDepositInsuranceCorpora- Regulation HH (Designated Financial tionandtheOfficeof theComptrollerof theCur- Market Utilities) rencyalsoimplementedtherevisedrulefortheinsti- OnJuly26,2012,theBoardapprovedafinalrule tutionstheysupervise. (DocketNo.R-1412)toestablishrisk-management TheruleimplementscertainrevisionstheBaselCom- standardsforcertainfinancialmarketutilities mitteeonBankingSupervisionmadetotheinterna- (FMUs)designatedassystemicallyimportantbythe tionalframeworkformarketriskcapitalstandards FinancialStabilityOversightCouncil.6Thefinalrule between2005and2010.Amongotherprovisions,the implementsprovisionsof theDodd-FrankActthat finalrulebettercapturespositionsforwhichthemar- requiretheBoardtoestablishsuchstandards,aswell ketriskcapitalruleisappropriate,reducesprocycli- asstandardsfordeterminingwhenanFMUsupercalityinmarketriskcapitalrequirements,enhances visedbytheBoardmustprovideadvancenoticeto themarketriskrule’ssensitivitytorisksthatwerenot theBoardof proposedmaterialchangestoitsrules, adequatelycapturedinthepreviousversionof the procedures,oroperations.FMUs,suchaspayment rule,andincreasestransparencythroughenhanced systems,centralsecuritiesdepositories,andcentral disclosures.Thefinalrulealsoreplacescreditratings counterparties,providetheinfrastructuretoclear withalternativestandardsof creditworthiness,as andsettlepaymentsandotherfinancialtransactions. requiredbytheDodd-FrankActWallStreetReform ThefinalruleiseffectiveSeptember14,2012. andConsumerProtectionAct(theDodd-Frank Act).ThefinalruleiseffectiveJanuary1,2013. Votingforthisaction:ChairmanBernanke,Vice ChairYellen,andGovernorsDuke,Tarullo, Votingforthisaction:ChairmanBernanke,Vice Raskin,Stein,andPowell. ChairYellen,andGovernorsDuke,Tarullo, Regulation II (Debit Card Interchange Fees Raskin,Stein,andPowell. and Routing) Regulation M (Consumer Leasing) and OnJuly26,2012,theBoardapprovedafinalrule Regulation Z (Truth in Lending) (DocketNo.R-1404)amendingtheprovisionsin OnOctober25,2012,theBoardapprovedfinalrules RegulationIIthatgovernadjustmentstothedebit (DocketNos.R-1449andR-1450)toincreasethe cardinterchangefeestandardstomakeanallowance dollarthresholdforexemptconsumercreditand forfraud-preventioncostsincurredbydebitcard leasetransactionsfrom$51,800to$53,000,inaccorissuerssubjecttothosestandards.7UndertheamenddancewiththeDodd-FrankAct.5Thefinalrules ments,anissueriseligibleforanadjustmentof no werepublishedjointlywiththeConsumerFinancial morethan1centpertransaction(unchangedfrom theinterimfinalrule),inadditiontotheinterchange 4 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2012- 08-30/html/2012-16759.htm. 6 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2012- 5 SeeFederalRegisternoticesatwww.gpo.gov/fdsys/pkg/FR- 08-02/html/2012-18762.htm. 2012-11-21/html/2012-27996.htmandwww.gpo.gov/fdsys/pkg/ 7 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2012- FR-2012-11-21/html/2012-27993.htm. 08-03/html/2012-18726.htm

Recordof PolicyActionsof theBoardof Governors 119 transactionfeepermittedbyRegulationII,if that Votingforthisaction:ChairmanBernanke,Vice issuerdevelopsandimplementspoliciesandproce- ChairYellen,andGovernorsDuke,Tarullo,and duresthatarereasonablydesignedtotakeeffective Raskin. stepstoreducetheoccurrenceof,andcoststoallpartiesfrom,fraudulentdebitcardtransactions.The Regulation YY (Enhanced Prudential finalrulesimplifiestheelementsrequiredtobe Standards) includedinanissuer’sfraud-preventionpoliciesand procedures.Theamendmentsalsorequireanissuer OnOctober4,2012,theBoardapprovedfinalrules thatreceivesafraud-preventionallowanceto (DocketNo.R-1438)toimplementtheDodd-Frank (1)reviewitsfraud-preventionpoliciesandproce- Act’sstresstestingrequirementsforbankholding duresandtheirimplementationatleastannuallyand companies,statememberbanks,savingsandloan (2)updatethemasnecessaryinlightof theireffec- holdingcompanies(SLHCs),andnonbankfinancial tiveness,theircost-effectiveness,andchangesinthe companiesdesignatedforBoardsupervisionbythe typesof fraudandavailablemethodsof fraudpre- FinancialStabilityOversightCouncil.9 vention.Thefinalrulealsoincludesprovisionsrelatingtoanissuer’snotificationof itseligibilityfora TheactrequiresthattheBoardconductsupervisory fraud-preventionadjustmentandprohibitingadjust- stresstestsof bankholdingcompanieswithtotal mentsforissuersthatareinsubstantialnoncompli- consolidatedassetsof $50billionormoreandnonancewiththeBoard’sfraud-preventionstandards. bankfinancialcompaniessupervisedbytheBoard Thefinalrule,whichrevisesprovisionsalreadyin andalsorequiresthatthesecompaniesconductsemieffectunderaninterimfinalrule,iseffectiveOcto- annualcompany-runstresstests.Inaddition,theact ber1,2012. requiresthatotherfinancialcompaniesthatareregulatedbyaprimaryfederalfinancialregulatoryagency Votingforthisaction:ChairmanBernanke,Vice andhavetotalconsolidatedassetsof morethan ChairYellen,andGovernorsDuke,Tarullo, $10billionconductannualcompany-runstresstests. Raskin,Stein,andPowell. ThefinalrulesareeffectiveNovember15,2012. Regulation OO (Securities Holding TheBoardbeganconductingsupervisorystresstests Companies) underthefinalrulesinthefallof 2012for18bank holdingcompaniesthatparticipatedinthe2009 OnMay25,2012,theBoardapprovedafinalrule SupervisoryCapitalAssessmentProgramandsubse- (DocketNo.R-1430)toimplementaprovisionof the quentComprehensiveCapitalAnalysisandReviews. Dodd-FrankActthatpermitsnonbankcompanies Also,thesecompaniesandtheirstatememberbank thatownatleastoneregisteredsecuritiesbrokeror subsidiariesbeganconductingtheirownDodddealer(securitiesholdingcompanies,orSHCs)and FrankActcompany-runstresstestsinthefallof thatarerequiredbyaforeignregulatororprovision 2012.OtherBHCs,statememberbanks,andSLHCs of foreignlawtobesubjecttocomprehensivecon- subjecttothestresstestingrulesarerequiredtocomsolidatedsupervision,butarenotcurrentlysubjectto plywiththerulesbeginninginOctober2013.Comsuchsupervision,toregisterwiththeBoardandsub- panieswithtotalconsolidatedassetsbetween$10biljectthemselvestosupervisionbytheBoard(covered lionand$50billionthatbeginconductingtheirfirst SHCs).8Thefinalruleoutlinestherequirementsthat company-runstresstestinthefallof 2013willnot coveredSHCsmustsatisfytomakeaneffectiveelec- havetopubliclydisclosetheresultsof thatfirststress tionforBoardsupervision.Uponregistration,these test. companieswouldbesupervisedasif theywerebank holdingcompanies;however,therestrictionsonnon- Votingforthisaction:ChairmanBernanke,Vice bankingactivitiesinsection4of theBankHolding ChairYellen,andGovernorsDuke,Tarullo, CompanyActwouldnotapplytothem.Thefinal Raskin,Stein,andPowell. ruleiseffectiveJuly20,2012. 9 SeeFederalRegisternoticesatwww.gpo.gov/fdsys/pkg/FR- 8 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2012- 2012-10-12/html/2012-24987.htmandwww.gpo.gov/fdsys/pkg/ 06-04/html/2012-13311.htm FR-2012-10-12/html/2012-24988.htm.

120 99thAnnualReport|2012 Rules of Practice for Hearings program.Thepolicyrevisionsconcerningseparately sortedsavingsbondredemptionsareeffective OnNovember5,2012,theBoardapprovedan April11,2012,andthoserelatedtotheeliminationof amendment(DocketNo.R-1451)toadjustthemaxi- thecontractualclearingbalanceprogramareeffective mumamountof eachstatutorycivilmoneypenalty July12,2012. withinitsjurisdictiontoaccountforinflation,as requiredundertheFederalCivilPenaltiesInflation Votingforthisaction:ChairmanBernanke,Vice AdjustmentActasamendedbytheDebtCollection ChairYellen,andGovernorsDuke,Tarullo,and ImprovementAct.10Theamendmentiseffective Raskin. November16,2012. Clarification of Volcker Rule Votingforthisaction:ChairmanBernanke,Vice Conformance Period ChairYellen,andGovernorsDuke,Tarullo, Raskin,Stein,andPowell. OnApril16,2012,theBoardapprovedguidance (DocketNo.OP-1441)clarifyingthatanentitycoveredbysection619of theDodd-FrankAct(the Policy Statements and Other Actions so-calledVolckerRule)hasthefulltwo-yearperiod providedbystatute,untilJuly21,2014,tofullycon- Joint Guidance on the Effective Date formitsactivitiesandinvestmentstotherequireof Section 716 of the Dodd-Frank Act mentsof section619andanyfinalimplementing regulations,unlessthatperiodisextendedbythe OnMarch28,2012,theBoard,actingwiththeFed- Board.13Theconformanceperiodisintendedtogive eralDepositInsuranceCorporationandtheOfficeof marketsandfirmsanopportunitytoadjusttothe theComptrollerof theCurrency,approvedjoint prohibitionsandrestrictionsonproprietarytrading guidancetoclarifythattheeffectivedateof sec- andonhedgefundandprivateequityfundactivities tion716of theDodd-FrankActisJuly16,2013.11 imposedundersection619.(TheBoard,Officeof the Section716,theso-calledswapspushoutprovision, Comptrollerof theCurrency,FederalDepositInsurgenerallyprohibitscertaintypesof federalassistance anceCorporation,SecuritiesandExchangeCommistoanyentitydefinedtobeaswapsentitywithrespect sion,andCommodityFuturesTradingCommission toanyswap,security-basedswap,orotheractivityof hadpreviouslyinvitedpubliccommentsontheirprotheswapsentity.Undersection716,“federalassis- posaltoimplementtheVolckerRule.) tance”includesdiscountwindowlendingordeposit insurance. Votingforthisaction:ChairmanBernanke,Vice ChairYellen,andGovernorsDuke,Tarullo,and Votingforthisaction:ChairmanBernanke,Vice Raskin. ChairYellen,andGovernorsDuke,Tarullo,and Raskin. Guidance on Stress Testing for Banking Organizations with Assets over $10 Billion Policy on Payment System Risk OnMay9,2012,theBoardapprovedsupervisory OnApril9,2012,theBoardapprovedtechnical guidance(DocketNo.OP-1421)outlininggeneral changestoitsPolicyonPaymentSystemRisk principlesforstresstestingpracticesof bankingorga- (DocketNo.OP-1440)toconformwithprocedural nizationswithtotalconsolidatedassetsof morethan changesmadebytheDepartmentof theTreasury $10billion.14Theguidancewasissuedjointlywith (Treasury)totheredemptionof separatelysorted theFederalDepositInsuranceCorporationandthe savingsbondsandtoeliminateareferencetothecon- Officeof theComptrollerof theCurrency. tractualclearingbalanceprogram.12TheBoard’s recentamendmentstoRegulationDeliminatedthis Theguidancehighlightstheimportanceof stress testingatbankingorganizationsasanongoingrisk- 10 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2012- managementpracticethatsupportsabankingorga- 11-16/html/2012-27857.htm. 11 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2012- 13 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2012- 05-10/html/2012-11326.htm. 06-08/html/2012-13937.htm. 12 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2012- 14 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2012- 04-17/html/2012-9211.htm. 05-17/html/2012-11989.htm.

Recordof PolicyActionsof theBoardof Governors 121 nization’sforward-lookingassessmentof itsrisks Revised Methodology for the andbetterequipsittoaddressarangeof adverse Private Sector Adjustment Factor outcomes.Theguidanceoutlinesgeneralprinciples forasatisfactorystresstestingframeworkand OnOctober25,2012,theBoardapprovedmodificadescribesvariousstresstestingapproachesandhow tions(DocketNo.OP-1447)tothemethodologyfor stresstestingshouldbeusedatvariouslevelswithin calculatingtheprivatesectoradjustmentfactor anorganization.Theguidancealsodiscussesthe (PSAF),whichisusedinsettingfeesforcertainpayimportanceof stresstestingincapitalandliquidity mentservicesprovidedtodepositoryinstitutions.17 planningandtheimportanceof stronginternalgov- ThePSAFisanallowanceforincometaxesand ernanceandcontrolsaspartof aneffectivestress otherimputedexpensesthatwouldhavebeenpaid testingframework. andprofitsthatwouldhavebeenearnedif the ReserveBanks’pricedserviceswereprovidedbya TheBoardapprovedfinalrulesinOctober2012to privatebusiness.TheMonetaryControlActrequires implementtheDodd-FrankAct’sstresstesting thattheFederalReserveestablishfeestorecoverthe requirements.(SeeRegulationYYonpage119.) costsof providingpaymentservices,includingthe Bankingorganizationsareexpectedtofollowthe PSAF,overthelongrun,topromotecompetition principlessetforthintheguidancewhenconducting betweentheReserveBanksandprivate-sectorprostresstestingpursuanttotheDodd-FrankActrules vidersof paymentservices. orotherstatutoryorregulatoryrequirements.The guidanceiseffectiveJuly23,2012. Beginningin2013,theBoardwillestimateincome taxandotherimputedcostsfromtheU.S.publicly Votingforthisaction:ChairmanBernanke,Vice tradedfirmmarket.Previously,theestimatedincome ChairYellen,andGovernorsDuke,Tarullo,and taxandotherimputedcostswerederivedfromtop Raskin. bankholdingcompaniesunderthecorrespondent bankmodel,whichreliedonclearingbalancesheldat Term Asset-Backed Securities ReserveBanksasaprimarycomponent.TheBoard Loan Facility eliminatedthecontractualclearingbalanceprogram earlierin2012.(SeeRegulationDonpage117). OnJune27,2012,theBoardapprovedareduction from$4.3billionto$1.4billioninthecreditprotec- Votingforthisaction:ChairmanBernanke,Vice tionprovidedbyTreasury,throughitsTroubledAsset ChairYellen,andGovernorsDuke,Tarullo, Relief Program,fortheTermAsset-BackedSecurities Raskin,Stein,andPowell. LoanFacility(TALF).15TheTALFprogramclosed onJune30,2010,with$43billioninloansoutstand- Discount Rates for Depository ing.MostTALFloanshavebeenrepaidorhave matured,andtheprogramhasexperiencednolosses Institutions in 2012 todate. UndertheFederalReserveAct,theboardsof direc- Votingforthisaction:ChairmanBernanke,Vice torsof theFederalReserveBanksmustestablish ChairYellen,andGovernorsDuke,Tarullo, ratesondiscountwindowloanstodepositoryinstitu- Raskin,Stein,andPowell. tionsatleastevery14days,subjecttoreviewand determinationbytheBoardof Governors. Note:OnJanuary15,2013,theBoardapproved eliminatingTreasury’screditprotectionfortheTALF Primary, Secondary, and Seasonal Credit program.TheBoardandTreasuryagreedthatthe creditprotectionwasunnecessarybecausetheaccu- Primarycredit,theFederalReserve’smainlending mulatedfeescollectedthroughtheprogramexceeded programfordepositoryinstitutions,isextendedat theamountof TALFloansoutstanding,whichhad theprimarycreditrate,whichissetabovetheusual declinedbythento$556million.16 levelof short-termmarketinterestrates.Itismade available,withminimaladministrationandforvery shortterms,asabackupsourceof liquidityto 15 Seepressreleaseatwww.federalreserve.gov/newsevents/press/ monetary/20120628a.htm. 16 Seepressreleaseatwww.federalreserve.gov/newsevents/press/ 17 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2012monetary/20130115b.htm. 11-08/html/2012-26918.htm.

122 99thAnnualReport|2012 depositoryinstitutionsthat,inthejudgmentof the selectedmoney-marketyields,typicallyresultingina lendingFederalReserveBank,areingenerallysound rateclosetothefederalfundsratetarget.Atyearfinancialcondition.Throughout2012,theprimary end,theseasonalcreditratewas0.20percent.18 creditratewas¾percent. Votes on Changes to Discount Rates for Secondarycreditisavailableinappropriatecircum- Depository Institutions stancestodepositoryinstitutionsthatdonotqualify forprimarycredit.Thesecondarycreditrateissetat Abouteverytwoweeksduring2012,theBoard aspreadabovetheprimarycreditrate.Throughout approvedproposalsbythe12ReserveBanksto 2012,thespreadwassetat50basispoints;therefore, maintaintheformulasforcomputingthesecondary thesecondarycreditratewas1¼percent.Seasonal andseasonalcreditrates.In2012,theBoarddidnot creditisavailabletosmallerdepositoryinstitutionsto approveanychangesintheprimarycreditrate. meetliquidityneedsthatarisefromregularswingsin theirloansanddeposits.Therateonseasonalcredit 18 Forcurrentandhistoricaldiscountrates,seewww iscalculatedeverytwoweeksasanaverageof .frbdiscountwindow.org/.

123 Minutes of Federal Open Market Committee Meetings Thepolicyactionsof theFederalOpenMarketCom- isnotedintheminutes.Whenmembersdissentfrom mittee,containedintheminutesof itsmeetings,are adecision,theyareidentifiedintheminutesanda presentedintheAnnualReportof theBoardof Gov- summaryof thereasonsfortheirdissentisprovided. ernorspursuanttotherequirementsof section10of theFederalReserveAct.Thatsectionprovidesthat Policydirectivesof theFederalOpenMarketComtheBoardshallkeepacompleterecordof theactions mitteeareissuedtotheFederalReserveBankof New takenbytheBoardandbytheFederalOpenMarket YorkastheBankselectedbytheCommitteeto Committeeonallquestionsof policyrelatingtoopen executetransactionsfortheSystemOpenMarket marketoperations,thatitshallrecordthereinthe Account.Intheareaof domesticopenmarketoperavotestakeninconnectionwiththedeterminationof tions,theFederalReserveBankof NewYorkoperopenmarketpoliciesandthereasonsunderlyingeach atesunderinstructionsfromtheFederalOpenMarpolicyaction,andthatitshallincludeinitsannual ketCommitteethattaketheformof anAuthorizareporttoCongressafullaccountof suchactions. tionforDomesticOpenMarketOperationsanda DomesticPolicyDirective.(AnewDomesticPolicy Theminutesof themeetingscontainthevotesonthe Directiveisadoptedateachregularlyscheduled policydecisionsmadeatthosemeetings,aswellasa meeting.)Intheforeigncurrencyarea,theFederal summaryof theinformationanddiscussionsthatled ReserveBankof NewYorkoperatesunderanAuthotothedecisions.Inaddition,fourtimesayear,start- rizationforForeignCurrencyOperations,aForeign ingwiththeOctober2007Committeemeeting,a CurrencyDirective,andProceduralInstructionswith Summaryof EconomicProjections(SEP)ispub- RespecttoForeignCurrencyOperations.Changesin lishedasanaddendumtotheminutes.1Thedescriptheinstrumentsduringtheyeararereportedinthe tionsof economicandfinancialconditionsinthe minutesfortheindividualmeetings.2 minutesandtheSummaryof EconomicProjections arebasedsolelyontheinformationthatwasavailable totheCommitteeatthetimeof themeetings. 2 AsofJanuary1,2012,theFederalReserveBankofNewYork wasoperatingundertheDomesticPolicyDirectiveapprovedat theDecember13,2011,Committeemeeting.Theotherpolicy Membersof theCommitteevotingforaparticular instruments(theAuthorizationforDomesticOpenMarket actionmaydifferamongthemselvesastothereasons Operations,theAuthorizationforForeignCurrencyOperations, theForeignCurrencyDirective,andProceduralInstructions fortheirvotes;insuchcases,therangeof theirviews withRespecttoForeignCurrencyOperations)ineffectasof January1,2012,wereapprovedattheJanuary25–26,2011, 1 In2012,therewerefiveSEPsduetoatransitionintheschedule. meeting.

124 99thAnnualReport|2012 Meeting Held on January 24–25, 2012 StevenB.Kamin Economist Ameetingof theFederalOpenMarketCommittee DavidW.Wilcox washeldintheofficesof theBoardof Governorsin Economist Washington,D.C.,onTuesday,January24,2012,at DavidAltig,ThomasA.Connors, 10:00a.m.,andcontinuedonWednesday,January25, MichaelP.Leahy,WilliamNelson, 2012,at8:30a.m. SimonPotter,DavidReifschneider, GlennD.Rudebusch,andWilliamWascher Present AssociateEconomists BenBernanke BrianSack Chairman Manager,SystemOpenMarketAccount WilliamC.Dudley MichaelS.Gibson ViceChairman Director,Divisionof BankingSupervisionand ElizabethDuke Regulation,Boardof Governors JeffreyM.Lacker NellieLiang Director,Officeof FinancialStabilityPolicyand DennisP.Lockhart Research,Boardof Governors SandraPianalto JonW.FaustandAndrewT.Levin SarahBloomRaskin SpecialAdvisorstotheBoard,Officeof Board Members,Boardof Governors DanielK.Tarullo JamesA.Clouse JohnC.Williams DeputyDirector,Divisionof MonetaryAffairs, JanetL.Yellen Boardof Governors JamesBullard,ChristineCumming, LindaRobertson CharlesL.Evans,EstherL.George,and AssistanttotheBoard,Officeof BoardMembers, EricRosengren Boardof Governors AlternateMembersof theFederalOpenMarket DanielE.Sichel Committee SeniorAssociateDirector,Divisionof Researchand RichardW.Fisher,NarayanaKocherlakota,and Statistics,Boardof Governors CharlesI.Plosser EllenE.Meade,StephenA.Meyer,and Presidentsof theFederalReserveBanksof Dallas, JoyceK.Zickler Minneapolis,andPhiladelphia,respectively SeniorAdvisers,Divisionof MonetaryAffairs, WilliamB.English Boardof Governors SecretaryandEconomist LawrenceSlifman DeborahJ.Danker SeniorAdviser,Divisionof ResearchandStatistics, DeputySecretary Boardof Governors MatthewM.Luecke EricM.Engen1andDanielM.Covitz AssistantSecretary AssociateDirectors,Divisionof Researchand Statistics,Boardof Governors DavidW.Skidmore AssistantSecretary TrevorA.Reeve AssociateDirector,Divisionof InternationalFinance, MichelleA.Smith Boardof Governors AssistantSecretary JoshuaGallin1 ScottG.Alvarez DeputyAssociateDirector,Divisionof Researchand GeneralCounsel Statistics,Boardof Governors ThomasC.Baxter DeputyGeneralCounsel 1 AttendedTuesday’ssessiononly.

Minutesof FederalOpenMarketCommitteeMeetings|January 125 DavidH.Small Role of Financial Conditions in Economic ProjectManager,Divisionof MonetaryAffairs, Recovery: Lending and Leverage Boardof Governors Staff summarizedresearchprojectsbeingconducted ChiaraScotti acrosstheFederalReserveSystemontheeffectsof SeniorEconomist,Divisionof InternationalFinance, changesinlendingpracticesandhouseholdleverage Boardof Governors onconsumerspendinginrecentyears.Theseprojects LouiseSheiner providedarangeof viewsregardingthesizeand SeniorEconomist,Divisionof Researchand importanceof sucheffects.Ananalysisemploying Statistics,Boardof Governors aggregatetime-seriesdataindicatedthatchangesin income,householdassetsandliabilities,andcredit LyleKumasaka availabilitycanlargelyaccountforthemovementsin SeniorFinancialAnalyst,Divisionof Monetary aggregateconsumptionseensincethemid-1990s;this Affairs,Boardof Governors findingsuggeststhatchangesincreditconditions mayhavebeenanimportantfactordrivingchanges KurtF.Lewis inthesavingrateinrecentyears.Asecondanalysis Economist,Divisionof MonetaryAffairs, useddataonborrowing,debtrepayments,andother Boardof Governors creditfactorsforindividualborrowers;thisstudy RandallA.Williams foundthatmovementsinleverage—resultingfrom RecordsManagementAnalyst,Divisionof Monetary voluntaryloanrepaymentsandfromloancharge- Affairs,Boardof Governors offs—havehadasubstantialeffectonthecashflow of manyhouseholdsovertime,andthuspresumably KennethC.Montgomery ontheirspending.However,athirdstudy,which FirstVicePresident,FederalReserveBankof Boston employedhousehold-leveldata,suggestedthatmove- Jeff Fuhrer,LorettaJ.Mester, mentsinconsumptionbefore,during,andafterthe HarveyRosenblum,andDanielG.Sullivan recessionweredrivenprimarilybyemployment, ExecutiveVicePresidents,FederalReserveBanksof income,andnetworth,leavinglittlevariationtobe Boston,Philadelphia,Dallas,andChicago, explainedbychangesinleverageandcredit respectively availability. CraigS.Hakkio,MarkE.Schweitzer, Intheirdiscussionfollowingthestaff presentation, ChristopherJ.Waller,andKei-MuYi severalmeetingparticipantsconsideredpossiblerea- SeniorVicePresidents,FederalReserveBanksof sonsforthedifferingresultsof thevariousanalyses; KansasCity,Cleveland,St.Louis,andMinneapolis, participantsalsonotedcontrastsbetweenthesefindrespectively ingsandthosereportedinsomeacademicresearch. JohnDuca2andAndrewHaughwout2 Severalpossibleexplanationsforthevaryingconclu- VicePresidents,FederalReserveBanksof Dallasand sionswerediscussed,includingdifferencesacross NewYork,respectively studiesinmodelspecificationanddata,aswellasdifferencesinthedefinitionof deleveraging.Inaddi- JulieAnnRemache tion,itwasnotedthatdatalimitationsmakeitdiffi- AssistantVicePresident,FederalReserveBankof culttoreachfirmconclusionsonthisissue,atleastat NewYork thistime.Participantsalsoconsideredthepossible influenceonaggregateconsumerspendingof RobertL.Hetzel changesinrealinterestratesandthedistributionof SeniorEconomist,FederalReserveBankof income,thepotentialforpolicyactionstoaffectthe Richmond fundamentalfactorsdrivinghouseholdsaving,and DanielCooper2 whetherhouseholds’spendingbehaviorisbeing Economist,FederalReserveBankof Boston affectedbyconcernsaboutthefutureof Social Security. Annual Organizational Matters 2 Attendedthediscussionof theroleof financial Intheagendaforthismeeting,itwasreportedthat conditionsineconomicrecovery. advicesof theelectionof thefollowingmembersand

126 99thAnnualReport|2012 alternatemembersof theFederalOpenMarketCom- DeborahJ.Danker mitteeforatermbeginningJanuary24,2012,had DeputySecretary beenreceivedandthattheseindividualshadexecuted MatthewM.Luecke theiroathsof office. AssistantSecretary Theelectedmembersandalternatememberswereas DavidW.Skidmore follows: AssistantSecretary WilliamC.Dudley MichelleA.Smith Presidentof theFederalReserveBankof NewYork, AssistantSecretary with ScottG.Alvarez ChristineCumming GeneralCounsel FirstVicePresidentof theFederalReserveBankof ThomasBaxter NewYork,asalternate. DeputyGeneralCounsel JeffreyM.Lacker RichardM.Ashton Presidentof theFederalReserveBankof Richmond, AssistantGeneralCounsel with StevenB.Kamin EricRosengren Economist Presidentof theFederalReserveBankof Boston,as alternate. DavidW.Wilcox Economist SandraPianalto Presidentof theFederalReserveBankof Cleveland, DavidAltig with ThomasA.Connors CharlesL.Evans MichaelP.Leahy Presidentof theFederalReserveBankof Chicago,as WilliamNelson alternate. SimonPotter DennisP.Lockhart DavidReifschneider Presidentof theFederalReserveBankof Atlanta, with GlennD.Rudebusch JamesBullard MarkS.Sniderman Presidentof theFederalReserveBankof St.Louis, WilliamWascher asalternate. JohnA.Weinberg JohnC.Williams AssociateEconomists Presidentof theFederalReserveBankof SanFrancisco,with Byunanimousvote,theFederalReserveBankof NewYorkwasselectedtoexecutetransactionsfor EstherL.George theSystemOpenMarketAccount. Presidentof theFederalReserveBankof Kansas City,asalternate. Byunanimousvote,BrianSackwasselectedtoserve atthepleasureof theCommitteeasManager,System Byunanimousvote,thefollowingofficersof theFed- OpenMarketAccount,ontheunderstandingthathis eralOpenMarketCommitteewereselectedtoserve selectionwassubjecttobeingsatisfactorytotheFeduntiltheselectionof theirsuccessorsatthefirstregueralReserveBankof NewYork. larlyscheduledmeetingof theCommitteein2013: BenBernanke Secretary’snote:Advicesubsequentlywas Chairman receivedthattheselectionof Mr.SackasManager wassatisfactorytotheBoardof Directorsof the WilliamC.Dudley FederalReserveBankof NewYork. ViceChairman WilliamB.English Byunanimousvote,theAuthorizationforDomestic SecretaryandEconomist OpenMarketOperationswasamendedtoallowlend-

Minutesof FederalOpenMarketCommitteeMeetings|January 127 ingof securitiesonlongerthananovernightbasisto 3. Inordertoensuretheeffectiveconductof open accommodateweekend,holiday,andsimilartrading marketoperations,theFederalOpenMarket conventions.TheGuidelinesfortheConductof CommitteeauthorizestheFederalReserveBank SystemOpenMarketOperationsinFederal-Agency of NewYorktolendonanovernightbasisU.S. Issuesremainedsuspended. Governmentsecuritiesandsecuritiesthatare directobligationsof anyagencyof theUnited States,heldintheSystemOpenMarketAccount, Authorization for Domestic Open Market todealersatratesthatshallbedeterminedby Operations (Amended January 24, 2012) competitivebidding.TheFederalReserveBank of NewYorkshallsetaminimumlendingfee 1. TheFederalOpenMarketCommitteeauthorizes consistentwiththeobjectivesof theprogramand anddirectstheFederalReserveBankof New applyreasonablelimitationsonthetotalamount York,totheextentnecessarytocarryoutthe of aspecificissuethatmaybeauctionedandon mostrecentdomesticpolicydirectiveadoptedat theamountof securitiesthateachdealermay ameetingof theCommittee: borrow.TheFederalReserveBankof NewYork mayrejectbidswhichcouldfacilitateadealer’s A. TobuyorsellU.S.Governmentsecurities, abilitytocontrolasingleissueasdetermined includingsecuritiesof theFederalFinancing solelybytheFederalReserveBankof NewYork. Bank,andsecuritiesthataredirectobliga- TheFederalReserveBankof NewYorkmaylend tionsof,orfullyguaranteedastoprincipal securitiesonlongerthananovernightbasisto andinterestby,anyagencyof theUnited accommodateweekend,holiday,andsimilartrad- Statesintheopenmarket,fromortosecuri- ingconventions. tiesdealersandforeignandinternational accountsmaintainedattheFederalReserve 4. Inordertoensuretheeffectiveconductof open Bankof NewYork,onacash,regular,or marketoperations,whileassistingintheprovision deferreddeliverybasis,fortheSystemOpen of short-terminvestmentsforforeignandinter- MarketAccountatmarketprices,and,for nationalaccountsmaintainedattheFederal suchAccount,toexchangematuringU.S. ReserveBankof NewYorkandaccountsmain- GovernmentandFederalagencysecurities tainedattheFederalReserveBankof NewYork withtheTreasuryortheindividualagencies asfiscalagentof theUnitedStatespursuantto ortoallowthemtomaturewithout Section15of theFederalReserveAct,theFedreplacement; eralOpenMarketCommitteeauthorizesand directstheFederalReserveBankof NewYork: B. TobuyorsellintheopenmarketU.S.Governmentsecurities,andsecuritiesthatare A. forSystemOpenMarketAccount,tosell directobligationsof,orfullyguaranteedasto U.S.Governmentsecurities,andsecurities principalandinterestby,anyagencyof the thataredirectobligationsof,orfullyguaran- UnitedStates,fortheSystemOpenMarket teedastoprincipalandinterestby,any Accountunderagreementstoresellorrepur- agencyof theUnitedStates,tosuchaccounts chasesuchsecuritiesorobligations(including onthebasessetforthinparagraph1.Aunder suchtransactionsasarecommonlyreferred agreementsprovidingfortheresalebysuch toasrepoandreverserepotransactions)in accountsof thosesecuritiesin65business 65businessdaysorless,atratesthat,unless daysorlessontermscomparabletothose otherwiseexpresslyauthorizedbytheCom- availableonsuchtransactionsinthemarmittee,shallbedeterminedbycompetitive ket;and bidding,afterapplyingreasonablelimitations onthevolumeof agreementswithindividual B. forNewYorkBankaccount,whenappropricounterparties. ate,toundertakewithdealers,subjecttothe conditionsimposedonpurchasesandsalesof 2. Inordertoensuretheeffectiveconductof open securitiesinparagraphl.B,repurchaseagreemarketoperations,theFederalOpenMarket mentsinU.S.Governmentsecurities,and CommitteeauthorizestheFederalReserveBank securitiesthataredirectobligationsof,or of NewYorktouseagentsinagencyMBS-related fullyguaranteedastoprincipalandinterest transactions. by,anyagencyof theUnitedStates,andto

128 99thAnnualReport|2012 arrangecorrespondingsaleandrepurchase Authorization for Foreign Currency agreementsbetweenitsownaccountand Operations (Reaffirmed January 24, 2012) suchforeign,international,andfiscalagency accountsmaintainedattheBank. 1. TheFederalOpenMarketCommitteeauthorizes anddirectstheFederalReserveBankof New Transactionsundertakenwithsuchaccounts York,forSystemOpenMarketAccount,tothe undertheprovisionsof thisparagraphmayproextentnecessarytocarryouttheCommittee’sforvideforaservicefeewhenappropriate. eigncurrencydirectiveandexpressauthorizations bytheCommitteepursuantthereto,andincon- 5. Intheexecutionof theCommittee’sdecision formitywithsuchproceduralinstructionsasthe regardingpolicyduringanyintermeetingperiod, Committeemayissuefromtimetotime: theCommitteeauthorizesanddirectstheFederal ReserveBankof NewYork,upontheinstruction A. Topurchaseandsellthefollowingforeign of theChairmanof theCommittee,toadjust currenciesintheformof cabletransfers somewhatinexceptionalcircumstancesthedegree throughspotorforwardtransactionsonthe of pressureonreservepositionsandhencethe openmarketathomeandabroad,including intendedfederalfundsrateandtotakeactions transactionswiththeU.S.Treasury,withthe thatresultinmaterialchangesinthecomposition U.S.ExchangeStabilizationFundestablished andsizeof theassetsintheSystemOpenMarket bySection10of theGoldReserveActof Accountotherthanthoseanticipatedbythe 1934,withforeignmonetaryauthorities,with Committeeatitsmostrecentmeeting.Anysuch theBankforInternationalSettlements,and adjustmentshallbemadeinthecontextof the withotherinternationalfinancialinstitutions: Committee’sdiscussionanddecisionatitsmost recentmeetingandtheCommittee’slong-run Australiandollars objectivesforpricestabilityandsustainableeco- Brazilianreais nomicgrowth,andshallbebasedoneconomic, Canadiandollars financial,andmonetarydevelopmentsduringthe Danishkroner intermeetingperiod.ConsistentwithCommittee euro practice,theChairman,if feasible,willconsult Japaneseyen withtheCommitteebeforemakingany Koreanwon adjustment. Mexicanpesos TheCommitteevotedtoreaffirmtheAuthoriza- NewZealanddollars tionforForeignCurrencyOperations,theFor- Norwegiankroner eignCurrencyDirective,andtheProcedural Poundssterling InstructionswithRespecttoForeignCurrency Singaporedollars Operationsasshownbelow.Thevotestoreaf- Swedishkronor firmthesedocumentsincludedapprovalof the Swissfrancs System’swarehousingagreementwiththeU.S. Treasury.Mr.Lackerdissentedinthevoteson B. Toholdbalancesof,andtohaveoutstanding theAuthorizationforForeignCurrencyOpera- forwardcontractstoreceiveortodeliver,the tionsandtheForeignCurrencyDirectiveto foreigncurrencieslistedinparagraphA indicatehisoppositiontoforeigncurrencyinter- above. ventionbytheFederalReserve.Inhisview,such interventionwouldbeineffectiveif itdidnot C. Todrawforeigncurrenciesandtopermitforalsosignalashiftindomesticmonetarypolicy; eignbankstodrawdollarsunderthereciproandif itdidsignalsuchashift,itcouldpoten- calcurrencyarrangementslistedinparagraph tiallycompromisetheFederalReserve’smon- 2below,providedthatdrawingsbyeither etarypolicyindependence. partytoanysucharrangementshallbefully

Minutesof FederalOpenMarketCommitteeMeetings|January 129 liquidatedwithin12monthsafterany centralbanksmaybeundertakenatnon-market 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. eryof thatcurrency,i.e.,asthesumof these elementswithdueregardtosign. 5. Foreigncurrencyholdingsshallbeinvestedto ensurethatadequateliquidityismaintainedto 2. TheFederalOpenMarketCommitteedirectsthe meetanticipatedneedsandsothateachcurrency FederalReserveBankof NewYorktomaintain portfolioshallgenerallyhaveanaverageduration reciprocalcurrencyarrangements(“swap” of nomorethan18months(calculatedas arrangements)fortheSystemOpenMarket Macaulayduration).Suchinvestmentsmay Accountforperiodsuptoamaximumof includebuyingorsellingoutrightobligationsof, 12monthswiththefollowingforeignbanks, orfullyguaranteedastoprincipalandinterestby, whichareamongthosedesignatedbytheBoard aforeigngovernmentoragencythereof;buying of Governorsof theFederalReserveSystem suchsecuritiesunderagreementsforrepurchase underSection214.5of RegulationN,Relations of suchsecurities;sellingsuchsecuritiesunder withForeignBanksandBankers,andwiththe agreementsfortheresaleof suchsecurities;and approvalof theCommitteetorenewsuch holdingvarioustimeandotherdepositaccounts arrangementsonmaturity: atforeigninstitutions.Inaddition,whenappropriateinconnectionwitharrangementstoprovideinvestmentfacilitiesforforeigncurrency Amountofarrangement Foreignbank holdings,U.S.Governmentsecuritiesmaybepur- (millionsofdollarsequivalent) chasedfromforeigncentralbanksunderagree- BankofCanada 2,000 mentsforrepurchaseof suchsecuritieswithin30 BankofMexico 3,000 calendardays. Anychangesinthetermsof existingswap 6. Alloperationsundertakenpursuanttotheprearrangements,andtheproposedtermsof any cedingparagraphsshallbereportedpromptlyto newarrangementsthatmaybeauthorized,shall theForeignCurrencySubcommitteeandthe bereferredforreviewandapprovaltothe Committee.TheForeignCurrencySubcommittee Committee. consistsof theChairmanandViceChairmanof theCommittee,theViceChairmanof theBoard 3. Alltransactionsinforeigncurrenciesundertaken of Governors,andsuchothermemberof the underparagraph1.A.aboveshall,unlessother- BoardastheChairmanmaydesignate(orinthe wiseexpresslyauthorizedbytheCommittee,beat absenceof membersof theBoardservingonthe prevailingmarketrates.Forthepurposeof pro- Subcommittee,otherBoardmembersdesignated vidinganinvestmentreturnonSystemholdings bytheChairmanasalternates,andintheabsence of foreigncurrenciesorforthepurposeof adjust- of theViceChairmanof theCommittee,theVice inginterestratespaidorreceivedinconnection Chairman’salternate).Meetingsof theSubcomwithswapdrawings,transactionswithforeign mitteeshallbecalledattherequestof anymem-

130 99thAnnualReport|2012 ber,orattherequestof theManager,System A. Undertakespotandforwardpurchasesand OpenMarketAccount(“Manager”),forthepur- salesof foreignexchange. posesof reviewingrecentorcontemplatedoperationsandof consultingwiththeManageron B. Maintainreciprocalcurrency(“swap”) othermattersrelatingtotheManager’sresponsi- arrangementswithselectedforeigncentral bilities.Attherequestof anymemberof theSub- banks. committee,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; Treasurycommitmentsinparticularcurrencies,andtofacilitateoperationsof the B. TokeeptheSecretaryof theTreasuryfully ExchangeStabilizationFund. advisedconcerningSystemforeigncurrency operations,andtoconsultwiththeSecretary C. Forsuchotherpurposesasmaybeexpressly onpolicymattersrelatingtoforeigncurrency authorizedbytheCommittee. operations; 4. Systemforeigncurrencyoperationsshallbe C. Fromtimetotime,totransmitappropriate conducted: reportsandinformationtotheNational AdvisoryCouncilonInternationalMonetary A. Incloseandcontinuousconsultationand andFinancialPolicies. cooperationwiththeUnitedStatesTreasury; 8. Staff officersof theCommitteeareauthorizedto B. Incooperation,asappropriate,withforeign transmitpertinentinformationonSystemforeign monetaryauthorities;and currencyoperationstoappropriateofficialsof the TreasuryDepartment. C. Inamannerconsistentwiththeobligations of theUnitedStatesintheInternational 9. AllFederalReserveBanksshallparticipateinthe MonetaryFundregardingexchangearrangeforeigncurrencyoperationsforSystemAccount mentsunderIMFArticleIV. inaccordancewithparagraph3G(1)of theBoard of Governors’Statementof Procedurewith Procedural Instructions with Respect to RespecttoForeignRelationshipsof Federal Foreign Currency Operations (Reaffirmed ReserveBanksdatedJanuary1,1944. January 24, 2012) Inconductingoperationspursuanttotheauthoriza- Foreign Currency Directive (Reaffirmed tionanddirectionof theFederalOpenMarketCom- January 24, 2012) mitteeassetforthintheAuthorizationforForeign CurrencyOperationsandtheForeignCurrency 1. Systemoperationsinforeigncurrenciesshallgen- Directive,theFederalReserveBankof NewYork, erallybedirectedatcounteringdisorderlymarket throughtheManager,SystemOpenMarketAccount conditions,providedthatmarketexchangerates (“Manager”),shallbeguidedbythefollowingprocefortheU.S.dollarreflectactionsandbehavior duralunderstandingswithrespecttoconsultations consistentwithIMFArticleIV,Section1. andclearanceswiththeCommittee,theForeignCurrencySubcommittee,andtheChairmanof theCom- 2. ToachievethisendtheSystemshall: mittee,unlessotherwisedirectedbytheCommittee.

Minutesof FederalOpenMarketCommitteeMeetings|January 131 Alloperationsundertakenpursuanttosuchclear- Byunanimousvote,theCommitteereaffirmedits ancesshallbereportedpromptlytotheCommittee. ProgramforSecurityof FOMCInformation. 1. TheManagershallclearwiththeSubcommittee StatementonLonger-RunGoalsandMonetary (orwiththeChairman,if theChairmanbelieves PolicyStrategy thatconsultationwiththeSubcommitteeisnot FollowingtheCommittee’sdispositionof organizafeasibleinthetimeavailable): tionalmatters,participantsconsideredareviseddraft of astatementof principlesregardingtheFOMC’s A. Anyoperationthatwouldresultinachange longer-rungoalsandmonetarypolicystrategy.The intheSystem’soverallopenpositioninfor- revisionsreflecteddiscussionof anearlierdraftdureigncurrenciesexceeding$300milliononany ingtheCommittee’sDecembermeetingaswellas dayor$600millionsincethemostrecent commentsreceivedovertheintermeetingperiod.The regularmeetingof theCommittee. Chairmannotedthattheproposedstatementdidnot representachangeintheCommittee’spolicy B. Anyoperationthatwouldresultinachange approach.Instead,thestatementwasintendedto onanydayintheSystem’snetpositionina helpenhancethetransparency,accountability,and singleforeigncurrencyexceeding$150mil- effectivenessof monetarypolicy. lion,or$300millionwhentheoperationis associatedwithrepaymentof swapdrawings. Inpresentingthedraftstatementonbehalf of the subcommitteeoncommunications,GovernorYellen C. Anyoperationthatmightgenerateasubstan- pointedoutseveralkeyelements.First,thestatement tialvolumeof tradinginaparticularcur- expressestheFOMC’scommitmenttoexplainits rencybytheSystem,eventhoughthechange policydecisionsasclearlyaspossible.Second,the intheSystem’snetpositioninthatcurrency statementspecifiesanumericalinflationgoalina mightbelessthanthelimitsspecifiedin1.B. contextthatfirmlyunderscorestheFederalReserve’s commitmenttofosteringbothpartsof itsdualman- D. Anyswapdrawingproposedbyaforeign date.Third,thestatementisintendedtoserveasan banknotexceedingthelargerof (i)$200mil- overarchingsetof principlesthatwouldbereaflionor(ii)15percentof thesizeof theswap firmedduringtheCommittee’sorganizationalmeetarrangement. ingeachyear,andthebarforamendingthestatementwouldbehigh. 2. TheManagershallclearwiththeCommittee(or withtheSubcommittee,if theSubcommittee Allparticipantsbutonesupportedadoptingthe believesthatconsultationwiththefullCommittee revisedstatementof principlesregardinglonger-run isnotfeasibleinthetimeavailable,orwiththe goalsandmonetarypolicystrategy,whichisrepro- Chairman,if theChairmanbelievesthatconsul- ducedbelow. tationwiththeSubcommitteeisnotfeasiblein thetimeavailable): “Followingcarefuldeliberationsatitsrecent meetings,theFederalOpenMarketCommittee A. Anyoperationthatwouldresultinachange (FOMC)hasreachedbroadagreementonthe intheSystem’soverallopenpositioninfor- followingprinciplesregardingitslonger-run eigncurrenciesexceeding$1.5billionsince goalsandmonetarypolicystrategy.TheComthemostrecentregularmeetingof the mitteeintendstoreaffirmtheseprinciplesandto Committee. makeadjustmentsasappropriateatitsannual organizationalmeetingeachJanuary. B. Anyswapdrawingproposedbyaforeign bankexceedingthelargerof (i)$200million TheFOMCisfirmlycommittedtofulfillingits or(ii)15percentof thesizeof theswap statutorymandatefromtheCongressof proarrangement. motingmaximumemployment,stableprices, andmoderatelong-terminterestrates.The 3. TheManagershallalsoconsultwiththeSubcom- Committeeseekstoexplainitsmonetarypolicy mitteeortheChairmanaboutproposedswap decisionstothepublicasclearlyaspossible. drawingsbytheSystemandaboutanyoperations Suchclarityfacilitateswell-informeddecisionthatarenotof aroutinecharacter. makingbyhouseholdsandbusinesses,reduces

132 99thAnnualReport|2012 economicandfinancialuncertainty,increases 5.2percentto6.0percent,roughlyunchanged theeffectivenessof monetarypolicy,and fromlastJanuarybutsubstantiallyhigherthan enhancestransparencyandaccountability, thecorrespondingintervalseveralyearsearlier. whichareessentialinademocraticsociety. Insettingmonetarypolicy,theCommitteeseeks Inflation,employment,andlong-terminterest tomitigatedeviationsof inflationfromits ratesfluctuateovertimeinresponsetoeconomic longer-rungoalanddeviationsof employment andfinancialdisturbances.Moreover,monetary fromtheCommittee’sassessmentsof itsmaxipolicyactionstendtoinfluenceeconomicactiv- mumlevel.Theseobjectivesaregenerally ityandpriceswithalag. complementary.However,undercircumstances inwhichtheCommitteejudgesthattheobjec- Therefore,theCommittee’spolicydecisions tivesarenotcomplementary,itfollowsabalreflectitslonger-rungoals,itsmedium-termout- ancedapproachinpromotingthem,takinginto look,anditsassessmentsof thebalanceof risks, accountthemagnitudeof thedeviationsandthe includingriskstothefinancialsystemthatcould potentiallydifferenttimehorizonsoverwhich impedetheattainmentof theCommittee’sgoals. employmentandinflationareprojectedto returntolevelsjudgedconsistentwithits Theinflationrateoverthelongerrunisprimar- mandate.” ilydeterminedbymonetarypolicy,andhence theCommitteehastheabilitytospecifya AllFOMCmembersvotedtoadoptthisstatement longer-rungoalforinflation.TheCommittee exceptMr.Tarullo,whoabstainedbecausehequesjudgesthatinflationattherateof 2percent,as tionedtheultimateusefulnessof thestatementin measuredbytheannualchangeintheprice promotingbettercommunicationof theCommittee’s indexforpersonalconsumptionexpenditures,is policystrategy. mostconsistentoverthelongerrunwiththe FederalReserve’sstatutorymandate.Communi- DevelopmentsinFinancialMarketsandthe catingthisinflationgoalclearlytothepublic FederalReserve’sBalanceSheet helpskeeplonger-terminflationexpectations TheManagerof theSystemOpenMarketAccount firmlyanchored,therebyfosteringpricestability (SOMA)reportedondevelopmentsindomesticand andmoderatelong-terminterestratesand foreignfinancialmarketsduringtheperiodsincethe enhancingtheCommittee’sabilitytopromote FederalOpenMarketCommittee(FOMC)meton maximumemploymentinthefaceof significant December13,2011.HealsoreportedonSystem economicdisturbances. openmarketoperations,includingtheongoingreinvestmentintoagency-guaranteedmortgage-backed Themaximumlevelof employmentislargely securities(MBS)of principalpaymentsreceivedon determinedbynonmonetaryfactorsthataffect SOMAholdingsof agencydebtandagencythestructureanddynamicsof thelabormarket. guaranteedMBSaswellastheoperationsrelatedto Thesefactorsmaychangeovertimeandmay thematurityextensionprogramauthorizedatthe notbedirectlymeasurable.Consequently,it September20–21FOMCmeeting.Byunanimous wouldnotbeappropriatetospecifyafixedgoal vote,theCommitteeratifiedtheDesk’sdomestic foremployment;rather,theCommittee’spolicy transactionsovertheintermeetingperiod.Therewere decisionsmustbeinformedbyassessmentsof nointerventionoperationsinforeigncurrenciesfor themaximumlevelof employment,recognizing theSystem’saccountovertheintermeetingperiod. thatsuchassessmentsarenecessarilyuncertain andsubjecttorevision.TheCommitteeconsid- StaffReviewoftheEconomicSituation ersawiderangeof indicatorsinmakingthese assessments.InformationaboutCommitteepar- TheinformationreviewedattheJanuary24–25meetticipants’estimatesof thelonger-runnormal ingindicatedthatU.S.economicactivitycontinued ratesof outputgrowthandunemploymentis toexpandmoderately,whileglobalgrowthappeared publishedfourtimesperyearintheFOMC’s tobeslowing.Overallconditionsinthelabormarket Summaryof EconomicProjections.For improvedfurther,althoughtheunemploymentrate example,inthemostrecentprojections,FOMC remainedelevated.Consumerpriceinflationwassubparticipants’estimatesof thelonger-runnormal dued,andmeasuresof long-runinflationexpectarateof unemploymenthadacentraltendencyof tionsremainedstable.

Minutesof FederalOpenMarketCommitteeMeetings|January 133 Theunemploymentratedeclinedto8.5percentin ingsexpectationsforproducersof capitalgoods December;however,bothlong-durationunemploy- remainedmuted.Nominalbusinessspendingfor mentandtheshareof workersemployedparttime nonresidentialconstructionwasunchangedin foreconomicreasonswerestillquitehigh.Private Novemberandcontinuedtobeheldbackbyhigh nonfarmemploymentcontinuedtoexpandmoder- vacancyratesandtightcreditconditionsforconately,whilestateandlocalgovernmentemployment structionloans.Inventoriesinmostindustrieslooked decreasedataslowerpacethanearlierin2011.Some tobewellalignedwithsales,thoughmotorvehicle indicatorsof firms’hiringplansimproved.Initial stocksremainedlean. claimsforunemploymentinsuranceedgedlower,on balance,sincethemiddleof Decemberbutremained Monthlydataforfederalgovernmentspending atalevelconsistentwithonlymodestemployment pointedtoasignificantdeclineinrealdefensepurgrowth. chasesinthefourthquarter.Realstateandlocalgovernmentpurchasesseemedtobedecreasingata IndustrialproductionexpandedinNovemberand slowerratethanduringearlierquarters,asthepace December,onnet,andtherateof manufacturing of reductionsinpayrollseasedandconstruction capacityutilizationmovedup.Motorvehicleassem- spendingleveledoff inrecentmonths. blieswerescheduledtoincrease,onbalance,inthe firstquarterof 2012,andbroaderindicatorsof TheU.S.internationaltradedeficitwidenedin manufacturingactivity,suchasthediffusionindexes Novemberasexportsfellandimportsrose.Exports of newordersfromthenationalandregionalmanu- declinedinmostmajorcategories,withtheexception facturingsurveys,wereatlevelsthatsuggestedmod- of consumergoods.Exportsof industrialsupplies erategrowthinproductioninthenearterm. andmaterialswereespeciallyweak,thoughtheweaknesswasconcentratedinafewparticularlyvolatile Realpersonalconsumptionexpenditurescontinued categoriesandreflected,inpart,declinesinprices. torisemoderatelyinNovember,boostedbyspending Theriseinimportslargelyreflectedhigherimportsof formotorvehiclesandotherdurables,although petroleumproductsandautomotiveproducts,which households’realdisposableincomeedgeddown.In morethanoffsetdecreasesinmostotherbroadcat- December,however,nominalretailsalesexcluding egoriesof imports. purchasesatmotorvehicleandpartsoutlets declined,andsalesof motorvehiclesalsodropped OverallU.S.consumerpricesasmeasuredbythe slightly.Consumersentimentimprovedfurtherin priceindexforpersonalconsumptionexpenditures earlyJanuarybutwasstillatalowlevel. wereunchangedinNovember;asmeasuredbythe consumerpriceindex,theywereflatinDecemberas Activityinthehousingmarketimprovedabitin well.Consumerenergypricesdecreasedinrecent recentmonthsbutcontinuedtobehelddownbythe months,whileincreasesinconsumerfoodprices largeoverhangof foreclosedanddistressedproper- slowed.Consumerpricesexcludingfoodandenergy ties,uncertaintyaboutfuturehomeprices,andtight rosemodestlyinthepasttwomonths.Near-term underwritingstandardsformortgageloans.Starts inflationexpectationsfromtheThomsonReuters/ andpermitsfornewsingle-familyhomesrosein Universityof MichiganSurveysof Consumerswere NovemberandDecemberbutremainedonlyalittle essentiallyunchangedinearlyJanuary,andlongerabovethedepressedlevelsseenearlierin2011.Sales terminflationexpectationsremainedstable. of newandexistinghomesalsofirmedsomewhatin recentmonths,buthomepricescontinuedtotrend Availablemeasuresof laborcompensationindicated lower. thatwagegainscontinuedtobemodest.Average hourlyearningsforallemployeespostedamoderate Realbusinessexpendituresonequipmentandsoft- gaininDecember,andtheirrateof increasefrom wareappearedtohavedeceleratedinthefourthquar- 12monthsearlierremainedslow. ter.Nominalordersandshipmentsof nondefense capitalgoodsexcludingaircraftdeclinedinNovem- Recentindicatorsof foreigneconomicactivity berforasecondmonth.Forward-lookingindicators pointedtoasubstantialdecelerationinthefourth of firms’equipmentspendingweremixed:Somesur- quarterof 2011.Intheeuroarea,retailsalesand veymeasuresof businessconditionsandcapital industrialproductionwerebelowtheirthird-quarter spendingplansimproved,butcorporatebond averagesinbothOctoberandNovember.Economic spreadscontinuedtobeelevatedandanalysts’earn- activityinmuchof Asiawasdisruptedbytheeffects

134 99thAnnualReport|2012 of severefloodinginThailand,whichaffectedsupply weremixedrelativetomarketexpectations,withpoor chainsintheregion.Twelve-monthinflationrates capitalmarketrevenuesweighingontheprofitsof recededinseveraladvancedandemergingmarket institutionswithsignificanttradingoperations. economies,andmostcentralbanksmaintained Althoughcreditdefaultswap(CDS)spreadsof most policyratesoreasedfurtherwhilecontinuingtopro- largedomesticbankholdingcompaniesremained videsignificantliquiditysupport. elevated,theymovedlowerovertheintermeeting period,andsomeinstitutionstookadvantageof eas- StaffReviewoftheFinancialSituation ingcreditconditionsbyissuingsignificantquantities DevelopmentsinEuropecontinuedtobeacentral of newlong-termdebt.Equitypricesof mostlarge focusforinvestorsovertheintermeetingperiodas domesticfinancialinstitutionsoutperformedthe concernspersistedabouttheprospectsforadurable broadermarket,onnet,overtheintermeetingperiod. solutiontotheEuropeanfiscalandfinancialdifficul- Nonetheless,theratioof themarketvalueof bank ties.Nevertheless,marketsentimenttowardEurope equitytoitsbookvalueremainedlowforsomelarge appearedtobrightenabit,andU.S.economicdata financialfirms.ResponsestotheDecemberSenior releasesweresomewhatbetterthaninvestors CreditOfficerOpinionSurveyonDealerFinancing expected,leadingtosomeimprovementinconditions Termsindicatethat,sinceAugust,securitiesdealers infinancialmarkets. havedevotedincreasedtimeandattentiontothe managementof concentratedcreditexposuresto Onbalanceovertheperiod,theexpectedpathforthe otherfinancialintermediaries,pointingtoincreased federalfundsrateimpliedbymoneymarketfutures concernovercounterpartyrisk. quoteswasessentiallyunchanged.Yieldsonnominal Treasurysecuritiesroseslightlyatintermediateand Broadequitypriceindexesincreasedmorethan longermaturities.Indicatorsof inflationcompensa- 6percent,onnet,overtheintermeetingperiod,and tionderivedfromnominalandinflation-protected option-impliedequityvolatilitydeclinednotably. Treasurysecuritiesedgedup. Yieldsoninvestment-gradecorporatebondsdeclined abitrelativetothoseoncomparable-maturityTreas- U.S.financialinstitutionsreportedlyretainedready urysecurities,whilespreadsof speculative-gradecoraccesstoshort-termfundingmarkets;therewereno poratebondyieldsoveryieldsonTreasurysecurities significantdislocationsinthosemarketsoveryear- decreasednoticeably.Indicatorsof thecreditquality end.DollarfundingpressuresforEuropeanbanks of nonfinancialcorporationscontinuedtobesolid. easedslightly.Whilespreadsof theLondoninter- Conditionsinthesecondarymarketforleveraged bankofferedrate(Libor)overovernightindexswap loanswerestable,withmedianbidpricesabout (OIS)ratesof thesamematurityremainedelevated, unchanged.Financingconditionsforlargenonfinanratesforunsecuredovernightcommercialpaper(CP) cialbusinessesgenerallyremainedfavorable.Bond issuedbysomeentitieswithEuropeanparents issuancebyinvestment-gradenonfinancialcorporadeclinedsubstantiallyfollowingtheloweringof tionswasrobust,thoughbelowitselevatedNovemchargesonthecentralbankliquidityswaplineswith berpace,whileissuancebylower-ratedfirmsslowed, theFederalReserve,theimplementationbytheEuro- likelyowinginparttoseasonalfactors.Issuanceof peanCentralBank(ECB)of itsfirstthree-year leveragedloanswasrelativelymodestinthefourth longer-termrefinancingoperation(LTRO),andthe quartercomparedwithitsrapidpaceearlierinthe passageof year-end.Insecuredfundingmarkets, year.Sharerepurchasesandcash-financedmergers spreadsof overnightasset-backedCPratesoverover- bynonfinancialfirmsmaintainedtheirrecent nightunsecuredCPratesalsodeclined,andthegen- strengthinthethirdquarter,leavingnetequityissueralcollateralrepurchaseagreement,orrepo,market ancedeeplynegative. continuedtofunctionnormally. Financingconditionsforcommercialrealestate Indicatorsof financialstresseasedsomewhatover (CRE)remainedstrained,andissuanceof commertheintermeetingperiod,althoughtheygenerallycon- cialmortgage-backedsecuritieswasverylightinthe tinuedtobeelevated.Market-basedmeasuresof pos- fourthquarter.ResponsestotheJanuarySenior siblespilloversfromtroublesatparticularfinancial LoanOfficerOpinionSurveyonBankLendingPracfirmstothebroaderfinancialsystemwerebelow tices(SLOOS)indicatedthatbankCRElending theirlevelsinthefallbutremainedabovetheirlevels standardscontinuedtobeextraordinarilytight,but priortothefinancialcrisis.Initialfourth-quarter somebanksreportedhavingreducedthespreadsof earningsreportsforlargebankholdingcompanies loanratesovertheircostof funds(comparedwitha

Minutesof FederalOpenMarketCommitteeMeetings|January 135 yearago)forthefirsttimesince2007.Delinquency strengthenedslightlyandlendingstandardseaseda ratesoncommercialmortgagesremainedelevated, bitfurtherinthefourthquarter. andCREpriceindexescontinuedtofluctuatearound levelssubstantiallylowerthantheir2007peaks. M2increasedatanannualrateof 5¼percentin December,likelyreflectingcontinueddemandfor Conditionsinresidentialmortgagemarketsremained safeandliquidassetsgiveninvestorconcernsover extremelytight.Althoughmortgageinterestratesand developmentsinEurope.Inaddition,demanddeposyieldsoncurrent-couponagencyMBSedgeddown itsroserapidlyaroundyear-end,reportedlybecause toneartheirhistoricallows,mortgagerefinancing lendersinshort-termfundingmarketschosetoleave activitycontinuedtobesubduedamidtightunder- substantialbalanceswithbanksovertheturnof the writingstandardsandlowlevelsof homeequity. year.ThemonetarybaseincreasedinDecember, Mortgagedelinquencyrates,whileimprovinggradu- largelyreflectinggrowthincurrency.Reservebalally,remainedelevatedrelativetopre-crisisnorms, anceswereroughlyunchangedovertheintermeeting andhousepricescontinuedtomovelower.Theprice period. of subprimeresidentialmortgage-backedsecurities (RMBS),asmeasuredbytheABXindex,roseover Internationalfinancialmarketsseemedsomewhat theintermeetingperiod,consistentwithsimilar calmerovertheintermeetingperiodthantheyhad changesforotherhigher-riskfixed-incomesecurities. beeninpreviousmonths,andthefundingconditions RMBSpricesweresupportedbyreportsof thesale facedbymostEuropeanfinancialinstitutionsand of asignificantportionof theRMBSheldinthe sovereignseasedsomewhatinthewakeof theECB’s MaidenLaneIIportfolio. firstthree-yearLTRO.Short-termeurointerestrates movedloweraseuro-areainstitutionsdrewasub- Onthewhole,conditionsinconsumercreditmarkets stantialamountof three-yearfundsfromtheECB, showedsignsof improvement.Consumercredit anddollarfundingcostsforEuropeanbanksalso increasedinNovember,whiledelinquencyrateson appearedtodecline.Spreadsof yieldsonItalianand creditcardloansinsecuritizedpoolsheldsteadyin SpanishgovernmentdebtoverthoseonGerman Novemberathistoricallylowlevels.Dataoncredit bundsnarrowedovertheintermeetingperiod,with cardsolicitationsandfromresponsestotheJanuary spreadsonshorter-termdebtfallingparticularly SLOOSsuggestedthatlendingstandardsoncon- noticeably.Theapparentimprovementinmarketsensumerloanscontinuedtoeasemodestly. timentwasnotdiminishedbynewslateintheperiod thatStandard&Poor’slowereditslong-termsover- Financingconditionsforstateandlocalgovernments eignbondratingsof nineeuro-areacountriesandthe weremixed.Grosslong-termissuanceof municipal EuropeanFinancialStabilityFacilityorbynewsthat bondsremainedrobustinDecember,withcontinued negotiationsoverthetermsof avoluntaryprivatestrengthinnewissuanceforcapitalprojects.CDS sectordebtexchangeforGreecehadnotyetreached spreadsforstatesincheddownfurtherovertheinter- aconclusion. meetingperiod,andyieldsonlong-termgeneralobligationmunicipalbondsfellnotably.However,down- Thestaff’sbroadindexof theforeignexchangevalue gradesof municipalbondscontinuedtosubstantially of thedollardeclinedslightlyovertheintermeeting outpaceupgradesinthethirdquarter. period.Whilethedollarfellagainstmostothercurrencies,itappreciatedagainsttheeuro.Foreignstock Inthefourthquarter,bankcreditcontinuedto marketsgenerallyendedtheperiodhigher,withheadincreaseasbanksaccumulatedagencyMBSand lineequityindexesinEuropeandtheemergingmargrowthof totalloanspickedup.Coreloans—the keteconomiesupsubstantially,althoughemerging sumof commercialandindustrial(C&I)loans,real marketequityandbondfundscontinuedtoexperiestateloans,andconsumerloans—expandedmod- enceoutflowsonnetduringtheperiod. estly.Growthof C&Iloansatdomesticbankswas robustbutwaspartlyoffsetbyweaknessatU.S. StaffEconomicOutlook branchesandagenciesof Europeanbanks.Noncore IntheeconomicforecastpreparedfortheJanuary loansrosesharply,onnet,reflectinginpartasurgein FOMCmeeting,thestaff’sprojectionforthegrowth suchloansattheU.S.branchesandagenciesof inrealgrossdomesticproduct(GDP)inthenear Europeaninstitutions.ResponsestotheJanuary termwasreviseddownabit.Therevisionreflected SLOOSindicatedthat,intheaggregate,loandemand theapparentdeclineinfederaldefensepurchasesand

136 99thAnnualReport|2012 thesomewhatshallowertrajectoryforconsumer abroad.Ingeneral,labormarketindicatorspointed spendinginrecentmonths;therecentdataonthe tosomefurtherimprovementinlabormarketcondilabormarket,production,andotherspendingcat- tions,butprogresswasgradualandtheunemployegorieswere,onbalance,roughlyinlinewiththe mentrateremainedelevated.Householdspending staff’sexpectationsatthetimeof thepreviousfore- hadcontinuedtoadvanceatamoderatepacedespite cast.Themedium-termprojectionforrealGDP still-sluggishgrowthinrealdisposableincome,but growthintheJanuaryforecastwaslittlechanged growthinbusinessfixedinvestmenthadslowed.The fromtheonepresentedinDecember.Althoughthe housingsectorremaineddepressed,withverylow developmentsinEuropewereexpectedtocontinueto levelsof activity;therewere,however,signsof weighontheU.S.economyduringthefirsthalf of improvementinsomelocalhousingmarkets.Many thisyear,thestaff stillprojectedthatrealGDP participantsobservedthatsomeindicatorsbearing growthwouldaccelerategraduallyin2012and2013, ontheeconomy’srecentperformancehadshown supportedbyaccommodativemonetarypolicy,fur- greater-than-expectedimprovement,butanumber therimprovementsincreditavailability,andrising alsonotedlessfavorabledata;onenotedthatgrowth consumerandbusinesssentiment.Theincreasein infinalsalesappearedtohaveslowedinthefourth realGDPwasexpectedtobesufficienttoreducethe quarterof lastyearevenasoutputgrowthpickedup. slackinproductandlabormarketsonlyslowlyover Inflationhadbeensubduedinrecentmonths,there theprojectionperiod,andtheunemploymentrate waslittleevidenceof wageorcostpressures,and wasanticipatedtostillbehighattheendof 2013. longer-terminflationexpectationshadremained stable. Thestaff’sforecastforinflationwasessentially unchangedfromtheprojectionpreparedforthe Withrespecttotheeconomicoutlook,participants DecemberFOMCmeeting.Withstablelong-run generallyanticipatedthateconomicgrowthover inflationexpectationsandsubstantialslackinlabor comingquarterswouldbemodestand,consequently, andproductmarketsanticipatedtopersistoverthe expectedthattheunemploymentratewoulddecline forecastperiod,thestaff continuedtoprojectthat onlygradually.Anumberof factorswereseenas inflationwouldremainsubduedin2012and2013. likelytorestrainthepaceof economicexpansion, includingtheslowdownineconomicactivityabroad, Participants’ViewsonCurrentConditionsand fiscaltighteningintheUnitedStates,theweakhoustheEconomicOutlook ingmarket,furtherhouseholddeleveraging,highlev- InconjunctionwiththisFOMCmeeting,allpartici- elsof uncertaintyamonghouseholdsandbusinesses, pants—thefivemembersof theBoardof Governors andthepossibilityof increasedvolatilityinfinancial andthepresidentsof the12FederalReserveBanks— marketsuntilthefiscalandbankingissuesintheeuro providedprojectionsof outputgrowth,theunem- areaaremorefullyaddressed.Participantscontinued ploymentrate,andinflationforeachyearfrom2011 toexpecttheseheadwindstoeaseovertimeandso through2014andoverthelongerrun.Longer-run anticipatedthattherecoverywouldgraduallygain projectionsrepresenteachparticipant’sassessmentof strength.However,participantsagreedthatstrainsin theratetowhicheachvariablewouldbeexpectedto globalfinancialmarketscontinuedtoposesignificant converge,overtime,underappropriatemonetary downsideriskstotheeconomicoutlook.Withunempolicyandintheabsenceof furthershockstothe ploymentexpectedtoremainelevated,andwith economy.Startingwiththismeeting,participants longer-terminflationexpectationsstable,almostall alsoprovidedassessmentsof thepathforthetarget participantsexpectedinflationtoremainsubduedin federalfundsratethattheyviewasappropriateand comingquarters—thatis,torunatorbelowthe compatiblewiththeirindividualeconomicprojec- 2percentlevelthattheCommitteejudgesmostcontions.Participants’economicprojectionsandpolicy sistentwithitsstatutorymandateoverthelonassessmentsaredescribedinmoredetailintheSum- gerrun. maryof EconomicProjections,whichisattachedas anaddendumtotheseminutes. Indiscussingthehouseholdsector,meetingparticipantsnotedthatconsumerspendinghadgrownmod- Intheirdiscussionof theeconomicsituationand eratelyinrecentmonths.Consumersentimenthad outlook,meetingparticipantsagreedthattheinfor- improvedsincelastsummer,thoughitslevelwasstill mationreceivedsincetheCommitteemetinDecem- quitelow.Businesscontactsintheretailsector bersuggestedthattheeconomyhadbeenexpanding reportedgenerallysatisfactoryholidaysales,but moderately,notwithstandingsomeslowingingrowth high-endretailerssawstronggainswhilelower-end

Minutesof FederalOpenMarketCommitteeMeetings|January 137 retailerssawmixedresults.Contactsalsoreported Participantsgenerallyexpectedthatgrowthof U.S. widespreaddiscounting.Majorexpressdeliverycom- exportswaslikelytobeheldbackinthecomingyear paniesindicatedveryhighvolumesatyear-endand byslowerglobaleconomicgrowth.Inparticular,fisintoJanuary.Severalparticipantsobservedthatcon- calausterityprogramsinEuropeandstressesinthe sumerspendinghadoutpacedgrowthinpersonaldis- Europeanbankingsystemseemedlikelytorestrain posableincomelastyear,andafewnotedthathouse- economicgrowththere,perhapswithsomespillover holdsremainedpessimisticabouttheirincomepros- togrowthinAsia.Oneparticipantnotedthatshippectsanduncertainabouttheeconomicoutlook. pingrateshaddeclinedof late,suggestingthata Theseobservationssuggestedthatgrowthof con- slowdownininternationaltrademightbeunderway. sumerspendingmightslow.However,afewother participantspointedtoincreasingjobgainsinrecent Participantsagreedthatrecentindicatorsshowed monthsascontributingtoanimprovingtrendinreal somefurthergradualimprovementinoveralllabor incomesandthussupportingcontinuedmoderate marketconditions:Payrollemploymenthad growthinconsumerspending. increasedsomewhatmorerapidlyinrecentmonths, newclaimsforunemploymentinsurancehadtrended Reportsfrombusinesscontactsindicatedthatactivity lower,andtheunemploymentratehaddeclined. inthemanufacturing,energy,andagriculturalsectors Somebusinesscontactsindicatedthattheyplanned continuedtoadvanceinrecentmonths.Businesses todomorehiringthisyearthanlast.However, generallyreportedthattheyremainedcautious unemployment—includinglonger-termunemployregardingcapitalspendingandhiring;somecontacts ment—remainedelevated,andthenumbersof disciteduncertaintyabouttheeconomicoutlookand couragedworkersandpeopleworkingparttime aboutfiscalandregulatorypolicy.Nonetheless,busi- becausetheycouldnotfindfull-timeworkwerealso nesscontactshadbecomesomewhatmoreoptimistic, stillquitehigh.Participantsexpressedarangeof withmorecontactsreportingplanstoexpandcapac- viewsonthecurrentextentof slackinthelabormarityandpayrolls.Somecompaniesindicatedthatthey ket.Veryhighlong-durationunemploymentmight plannedtorelocatesomeproductionfromabroadto indicateamismatchbetweenunemployedworkers’ theUnitedStates.Afewparticipantsnotedthat skillsandemployers’needs,suggestingthatasubnationalandDistrictsurveysof firms’capitalspend- stantialpartof theincreaseinunemploymentsince ingplanssuggestedthattherecentslowinginbusi- thebeginningof therecessionreflectedfactorsother nessfixedinvestmentwaspartlytemporary.The thanashortfallinaggregatedemand.Incontrast,the combinationof highenergypricesandavailabilityof quitemodestincreasesinlaborcompensationof late, newdrillingtechnologieswaspromotingstrong andthelargenumberof workersreportingthatthey growthininvestmentoutlaysintheenergysector. areworkingparttimebecausetheiremployershave cuttheirhours,suggestedthatunderutilizationof Participantsgenerallysawthehousingsectorasstill laborwasstillsubstantial.Afewparticipantsnoted depressed.Thelevelof activityremainedquiteweak, thattherecentdeclineintheunemploymentrate housepriceswerecontinuingtodeclineinmostareas, reflecteddeclininglaborforceparticipationinlarge andtheoverhangof foreclosedanddistressedprop- part,andjudgedthatthedeclineintheparticipation ertieswasstillsubstantial.Nonetheless,therewere ratewaslikelytobereversed,atleasttosomeextent, somesmallsignsof improvement.Theinventoryof astherecoverycontinuesandlabordemandpicksup. unsoldhomeshaddeclined,thoughinpartbecause theforeclosureprocesshadslowed,andissuanceof Meetingparticipantsobservedthatfinancialcondipermitsfornewsingle-familyhomeshadrisenfrom tionsimprovedandfinancialmarketstresseseased itslows.Oneparticipantagainnotedreportsfrom somewhatduringtheintermeetingperiod:Equity somehomebuilderssuggestingthatlandpriceswere pricesrose,volatilitydeclined,andbanklendingconedgingupandthatfinancingwasavailablefromnon- ditionsappearedtoimprove.Participantsnotedthat banksources.Anotherparticipantcitedreportsfrom theECB’sthree-yearrefinancingoperationhad businesscontactsindicatingthatcreditstandardsin apparentlycontributedtoimprovedconditionsin mortgagelendingwerebecomingsomewhatless Europeansovereigndebtmarkets.Nonetheless,parstringent.Yetanothernotedthatrecentchangesto ticipantsexpectedthatglobalfinancialmarkets theHomeAffordableRefinanceProgram,which wouldremainfocusedontheevolvingsituationin wereintendedtostreamlinetherefinancingof per- Europeandanticipatedthatcontinuedpolicyefforts forminghigh-loan-to-valuemortgages,wereshowing wouldbenecessaryinEuropetofullyaddressthe somesuccess. area’sfiscalandfinancialproblems.U.S.banks

138 99thAnnualReport|2012 reportedincreasesincommerciallendingassome eralfundsrate,perhapsbyprovidingnumerical Europeanlenderspulledback,andsomebanking thresholdsfortheunemploymentandinflationrates. contactsindicatedthatcreditworthycompanies’ Differentopinionswereexpressedregardingthe demandforcredithadincreased.Anumberof par- appropriatevaluesof suchthresholds,reflectingdifticipantsnotedfurtherimprovementintheavailabil- ferentassessmentsof thepathforthefederalfunds ityof loanstobusinesses,withacoupleof themindi- ratethatwouldlikelybeappropriatetofosterthe catingthatsmallbusinesscontactshadreported Committee’slonger-rungoals.However,someparincreasedavailabilityof bankcredit.However,afew ticipantsworriedthatsuchthresholdswouldnot otherparticipantscommentedthatsmallbusinesses accuratelyoreffectivelyconveytheCommittee’s intheirDistrictscontinuedtofacedifficultyin forward-lookingapproachtomonetarypolicyand obtainingbankloans. thuswouldposedifficultcommunicationsissues,or thatmovementsintheunemploymentrate,bythem- Participantsobservedthatlonger-runinflationexpec- selves,wouldbeanunreliablemeasureof progress tationswerestillwellanchoredandalsonotedthat towardmaximumemployment.Severalparticipants inflationhadbeensubduedinrecentmonths,partly proposedeitherdroppingorgreatlysimplifyingthe reflectingadeclineincommoditypricesandaneas- forwardguidanceintheCommittee’sstatement, ingof supplychaindisruptionssincemid-2011.In arguingthatinformationaboutparticipants’assessaddition,laborcompensationhadrisenonlyslowly mentsof theappropriatefuturelevelof thefederal andproductivitycontinuedtoincrease.Onepartici- fundsrate,whichwouldhenceforthbecontainedin pantreportedthatasurveyof businessinflation theSummaryof EconomicProjections(SEP),made expectationsindicatedfirmswereanticipating itunnecessarytoincludeforwardguidanceinthe increasesinunitcostsontheorderof 1¾percentthis post-meetingstatement.However,severalotherparyear,justabithigherthanlastyear.Lookingfarther ticipantsemphasizedthattheinformationregarding ahead,participantsgenerallyjudgedthatthemodest thefederalfundsrateintheSEPcouldnotsubstitute expansionineconomicactivitythattheywerepro- foraformaldecisionof themembersof theFOMC. jectingwouldbeconsistentwithagradualreduction Participantsagreedtocontinueexploringapproaches inthecurrentwidemarginsof slackinlaborand forprovidingthepublicwithgreaterclarityaboutthe productmarketsandwithsubduedinflationgoing linkagesbetweentheeconomicoutlookandthe forward.Someremainedconcernedthat,withthe Committee’smonetarypolicydecisions. persistenceof considerableresourceslack,inflation mightcontinuetodriftdownandrunbelow Committee Policy Action mandate-consistentlevelsforsometime.However,a coupleof participantswereconcernedthatinflation MembersviewedtheinformationonU.S.economic couldriseastherecoverycontinuedandarguedthat activityreceivedovertheintermeetingperiodassugprovidingadditionalmonetaryaccommodation,or gestingthattheeconomyhadbeenexpandingmoderevenmaintainingthecurrenthighlyaccommodative atelyandgenerallyagreedthattheeconomicoutlook stanceof monetarypolicyoverthemediumrun, hadnotchangedgreatlysincetheymetinDecember. woulderodethestabilityof inflationexpectations Whileoveralllabormarketconditionshadimproved andriskhigherinflation. somewhatfurtherandunemploymenthaddeclinedin recentmonths,almostallmembersviewedtheunem- Committeeparticipantsdiscussedpossiblechanges ploymentrateasstillelevatedrelativetolevelsthat totheforwardguidancethathasbeenincludedinthe theysawasconsistentwiththeCommittee’smandate Committee’srecentpost-meetingstatements.Many overthelongerrun.Availabledataindicatedsome participantsthoughtitimportanttoexploremeans slowinginthepaceof economicgrowthinEurope forbettercommunicatingpolicymakers’thinking andinsomeemergingmarketeconomies,pointingto aboutfuturemonetarypolicyanditsrelationshipto reducedgrowthof U.S.exportsgoingforward.With evolvingeconomicconditions.Acoupleof partici- theeconomyfacingcontinuingheadwindsfromthe pantsexpressedconcernthatsomepressreportshad recentfinancialcrisisandwithgrowthslowingina misinterpretedtheCommittee’suseof adateinits numberof U.S.exportmarkets,membersgenerally forwardguidanceasacommitmentaboutitsfuture expectedamodestpaceof economicgrowthover policydecisions.Severalparticipantsthoughtit comingquarters,withtheunemploymentratedeclinwouldbehelpfultoprovidemoreinformationabout ingonlygradually.Strainsinglobalfinancialmarkets theeconomicconditionsthatwouldbelikelytowar- continuedtoposesignificantdownsideriskstoecorantmaintainingthecurrenttargetrangeforthefed- nomicactivity.Inflationhadbeensubduedinrecent

Minutesof FederalOpenMarketCommitteeMeetings|January 139 months,andlonger-terminflationexpectations mittee’sobjective—couldwarranttheinitiationof remainedstable.Membersgenerallyanticipatedthat additionalsecuritiespurchasesbeforelong.Other inflationovercomingquarterswouldrunatorbelow membersindicatedthatsuchpolicyactioncould the2percentlevelthattheCommitteejudgesmost becomenecessaryif theeconomylostmomentumor consistentwithitsmandate. if inflationseemedlikelytoremainbelowits mandate-consistentrateof 2percentoverthe Intheirdiscussionof monetarypolicyfortheperiod mediumrun.Incontrast,onememberjudgedthat ahead,membersagreedthatitwouldbeappropriate maintainingthecurrentdegreeof policyaccommotomaintaintheexistinghighlyaccommodative dationbeyondtheneartermwouldlikelybeinapprostanceof monetarypolicy.Inparticular,theyagreed priate;thatmemberanticipatedthatapreemptive tokeepthetargetrangeforthefederalfundsrateat tighteningof monetarypolicywouldbenecessary 0to¼percent,tocontinuetheprogramof extending beforetheendof 2014tokeepinflationcloseto theaveragematurityof theFederalReserve’shold- 2percent. ingsof securitiesasannouncedinSeptember,andto retaintheexistingpoliciesregardingthereinvestment Attheconclusionof thediscussion,theCommittee of principalpaymentsfromFederalReserveholdings votedtoauthorizeanddirecttheFederalReserve of securities. Bankof NewYork,untilitwasinstructedotherwise, toexecutetransactionsintheSystemAccountin Withrespecttothestatementtobereleasedfollowing accordancewiththefollowingdomesticpolicy themeeting,membersagreedthatonlyrelatively directive: smallmodificationstothefirsttwoparagraphswere neededtoreflecttheincominginformationandthe “TheFederalOpenMarketCommitteeseeks modestchangestotheeconomicoutlookimpliedby monetaryandfinancialconditionsthatwillfostherecentdata.Inlightof theeconomicoutlook, terpricestabilityandpromotesustainable almostallmembersagreedtoindicatethattheCom- growthinoutput.Tofurtheritslong-runobjecmitteeexpectstomaintainahighlyaccommodative tives,theCommitteeseeksconditionsinreserve stanceformonetarypolicyandcurrentlyanticipates marketsconsistentwithfederalfundstradingin thateconomicconditions—includinglowratesof arangefrom0to¼percent.TheCommittee resourceutilizationandasubduedoutlookforinfla- directstheDesktocontinuethematurityextentionoverthemediumrun—arelikelytowarrant sionprogramitbeganinSeptembertopurchase, exceptionallylowlevelsforthefederalfundsrateat bytheendof June2012,Treasurysecuritieswith leastthroughlate2014,longerthanhadbeenindi- remainingmaturitiesof approximately6yearsto catedinrecentFOMCstatements.Inparticular,sev- 30yearswithatotalfacevalueof $400billion, eralmemberssaidtheyanticipatedthatunemploy- andtosellTreasurysecuritieswithremaining mentwouldstillbewellabovetheirestimatesof its maturitiesof 3yearsorlesswithatotalface longer-termnormalrate,andinflationwouldbeator valueof $400billion.TheCommitteealso belowtheCommittee’slonger-runobjective,inlate directstheDesktomaintainitsexistingpolicies 2014.Itwasnotedthatextendingthehorizonof the of rollingovermaturingTreasurysecuritiesinto Committee’sforwardguidancewouldhelpprovide newissuesandof reinvestingprincipalpayments moreaccommodativefinancialconditionsbyshifting onallagencydebtandagencymortgage-backed downwardinvestors’expectationsregardingthe securitiesintheSystemOpenMarketAccount futurepathof thetargetfederalfundsrate.Some inagencymortgage-backedsecuritiesinorderto membersunderscoredtheconditionalnatureof the maintainthetotalfacevalueof domesticsecuri- Committee’sforwardguidanceandnotedthatit tiesatapproximately$2.6trillion.TheCommitwouldbesubjecttorevisioninresponsetosignificant teedirectstheDesktoengageindollarroll changesintheeconomicoutlook. transactionsasnecessarytofacilitatesettlement of theFederalReserve’sagencyMBStransac- TheCommitteealsostatedthatitispreparedto tions.TheSystemOpenMarketAccountManadjustthesizeandcompositionof itssecuritieshold- agerandtheSecretarywillkeeptheCommittee ingsasappropriatetopromoteastrongereconomic informedof ongoingdevelopmentsregarding recoveryinacontextof pricestability.Afewmem- theSystem’sbalancesheetthatcouldaffectthe bersobservedthat,intheirjudgment,currentand attainmentovertimeof theCommittee’sobjecprospectiveeconomicconditions—includingelevated tivesof maximumemploymentandprice unemploymentandinflationatorbelowtheCom- stability.”

140 99thAnnualReport|2012 Thevoteencompassedapprovalof thestatement larlyreviewthesizeandcompositionof itssecubelowtobereleasedat12:30p.m.: ritiesholdingsandispreparedtoadjustthose holdingsasappropriatetopromoteastronger “InformationreceivedsincetheFederalOpen economicrecoveryinacontextof price MarketCommitteemetinDecembersuggests stability.” thattheeconomyhasbeenexpandingmoderately,notwithstandingsomeslowinginglobal Votingforthisaction:BenBernanke,WilliamC. growth.Whileindicatorspointtosomefurther Dudley,ElizabethDuke,DennisP.Lockhart,Sandra improvementinoveralllabormarketconditions, Pianalto,SarahBloomRaskin,DanielK.Tarullo, theunemploymentrateremainselevated.House- JohnC.Williams,andJanetL.Yellen. holdspendinghascontinuedtoadvance,but growthinbusinessfixedinvestmenthasslowed, Votingagainstthisaction:JeffreyM.Lacker. andthehousingsectorremainsdepressed.Inflationhasbeensubduedinrecentmonths,and Mr.Lackerdissentedbecausehepreferredtoomit longer-terminflationexpectationshave thedescriptionof thetimeperiodoverwhichecoremainedstable. nomicconditionswerelikelytowarrantexceptionally lowlevelsof thefederalfundsrate.Heexpectedthat Consistentwithitsstatutorymandate,theCom- apreemptivetighteningof monetarypolicywouldbe mitteeseekstofostermaximumemployment necessarytopreventanincreaseininflationprojecandpricestability.TheCommitteeexpectseco- tionsorinflationexpectationspriortotheendof nomicgrowthovercomingquarterstobemod- 2014.Morebroadly,giventheinclusionof FOMC estandconsequentlyanticipatesthattheunem- participants’projectionsforthefederalfundsrate ploymentratewilldeclineonlygraduallytoward targetintheSummaryof EconomicProjections,he levelsthattheCommitteejudgestobeconsistent sawnoneedtoprovideadditionalforwardguidance withitsdualmandate.Strainsinglobalfinancial intheCommitteestatement. marketscontinuetoposesignificantdownside riskstotheeconomicoutlook.TheCommittee Itwasagreedthatthenextmeetingof theCommittee alsoanticipatesthatovercomingquarters,infla- wouldbeheldonTuesday,March13,2012.The tionwillrunatlevelsatorbelowthoseconsis- meetingadjournedat11:30a.m.onJanuary25,2012. tentwiththeCommittee’sdualmandate. Notation Vote Tosupportastrongereconomicrecoveryandto helpensurethatinflation,overtime,isatlevels BynotationvotecompletedonDecember30,2011, consistentwiththedualmandate,theCommit- theCommitteeunanimouslyapprovedtheminutesof teeexpectstomaintainahighlyaccommodative theFOMCmeetingheldonDecember13,2011. stanceformonetarypolicy.Inparticular,the Committeedecidedtodaytokeepthetarget WilliamB.English rangeforthefederalfundsrateat0to¼percent Secretary andcurrentlyanticipatesthateconomicconditions—includinglowratesof resourceutiliza- Addendum: tionandasubduedoutlookforinflationover Summary of Economic Projections themediumrun—arelikelytowarrantexceptionallylowlevelsforthefederalfundsrateat InconjunctionwiththeJanuary24–25,2012,Federal leastthroughlate2014. OpenMarketCommittee(FOMC)meeting,the membersof theBoardof Governorsandthepresi- TheCommitteealsodecidedtocontinueitspro- dentsof theFederalReserveBanks,allof whompargramtoextendtheaveragematurityof itshold- ticipateinthedeliberationsof theFOMC,submitted ingsof securitiesasannouncedinSeptember. projectionsforgrowthof realoutput,theunemploy- TheCommitteeismaintainingitsexistingpoli- mentrate,andinflationfortheyears2012to2014 ciesof reinvestingprincipalpaymentsfromits andoverthelongerrun.Theeconomicprojections holdingsof agencydebtandagencymortgage- werebasedoninformationavailableatthetimeof backedsecuritiesinagencymortgage-backed themeetingandparticipants’individualassumptions securitiesandof rollingovermaturingTreasury aboutfactorslikelytoaffecteconomicoutcomes, securitiesatauction.TheCommitteewillregu- includingtheirassessmentsof appropriatemonetary

Minutesof FederalOpenMarketCommitteeMeetings|January 141 policy.StartingwiththeJanuarymeeting,partici- mumemploymentandpricestability.Participants pantsalsosubmittedtheirassessmentsof thepathfor viewedtheupwardpressuresoninflationin2011 thetargetfederalfundsratethattheyviewedas fromfactorssuchassupplychaindisruptionsand appropriateandcompatiblewiththeirindividualeco- risingcommoditypricesashavingwaned,andthey nomicprojections.Longer-runprojectionsrepresent anticipatedthatinflationwouldfallbackin2012. eachparticipant’sassessmentof theratetowhich Overtheprojectionperiod,mostparticipants eachvariablewouldbeexpectedtoconvergeover expectedinflation,asmeasuredbytheannualchange timeunderappropriatemonetarypolicyandinthe inthepriceindexforpersonalconsumptionexpendiabsenceof furthershocks.“Appropriatemonetary tures(PCE),tobeatorbelowtheFOMC’sobjective policy”isdefinedasthefuturepathof policythat of 2percentthatwasexpressedintheCommittee’s participantsdeemmostlikelytofosteroutcomesfor statementof longer-rungoalsandpolicystrategy. economicactivityandinflationthatbestsatisfytheir Coreinflationwasprojectedtorunataboutthesame individualinterpretationof theFederalReserve’s rateasoverallinflation. objectivesof maximumemploymentandstable prices. Asindicatedintable1,relativetotheirpreviousprojectionsinNovember2011,participantsmadesmall Asdepictedinfigure1,FOMCparticipantspro- downwardrevisionstotheirexpectationsfortherate jectedcontinuedeconomicexpansionoverthe of increaseinrealGDPin2012and2013,butthey 2012–14period,withrealgrossdomesticproduct didnotmateriallyaltertheirprojectionsforanotice- (GDP)risingatamodestratethisyearandthen ablystrongerpaceof expansionby2014.Withthe strengtheningfurtherthrough2014.Participantsgen- unemploymentratehavingdeclinedinrecentmonths erallyanticipatedonlyasmalldeclineintheunem- bymorethanparticipantshadanticipatedinthepreploymentratethisyear.In2013and2014,thepaceof viousSummaryof EconomicProjections(SEP),they theexpansionwasprojectedtoexceedparticipants’ generallyloweredtheirforecastsforthelevelof the estimatesof thelonger-runsustainablerateof unemploymentrateoverthenexttwoyears.ParticiincreaseinrealGDPbyenoughtoresultinagradual pants’expectationsforboththelonger-runrateof furtherdeclineintheunemploymentrate.However, increaseinrealGDPandthelonger-rununemployattheendof 2014,participantsgenerallyexpected mentratewerelittlechangedfromNovember.They thattheunemploymentratewouldstillbewellabove didnotsignificantlyaltertheirforecastsfortherate theirestimatesof thelonger-runnormalunemploy- of inflationoverthenextthreeyears.However,in mentratethattheycurrentlyviewasconsistentwith lightof the2percentinflationthatistheobjective theFOMC’sstatutorymandateforpromotingmaxi- includedinthestatementof longer-rungoalsand 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.

142 99thAnnualReport|2012 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.

Minutesof FederalOpenMarketCommitteeMeetings|January 143 policystrategyadoptedattheJanuarymeeting,the pickupinoutputgrowthfrom2011toaratecloseto rangeandcentraltendencyof theirprojectionsof itslonger-runtrend.Participantsstatedthattheecolonger-runinflationwereallequalto2percent. nomicinformationreceivedsinceNovembershowed continuedgradualimprovementinthepaceof eco- Asshowninfigure2,mostparticipantsjudgedthat nomicactivityduringthesecondhalf of 2011,asthe highlyaccommodativemonetarypolicywaslikelyto influenceof thetemporaryfactorsthatdamped bewarrantedovercomingyearstopromotea activityinthefirsthalf of theyearsubsided.Constrongereconomicexpansioninthecontextof price sumerspendingincreasedatamoderaterate,exports stability.Inparticular,withtheunemploymentrate expandedsolidly,andbusinessinvestmentrosefurprojectedtoremainelevatedovertheprojection ther.Recently,consumersandbusinessesappearedto periodandinflationexpectedtobesubdued,sixpar- becomesomewhatmoreoptimisticabouttheoutticipantsanticipatedthat,underappropriatemon- look.Financialconditionsfordomesticnonfinancial etarypolicy,thefirstincreaseinthetargetfederal businessesweregenerallyfavorable,andconditionsin fundsratewouldoccurafter2014,andfiveexpected consumercreditmarketsshowedsignsof policyfirmingtocommenceduring2014(theupper improvement. panel).Theremainingsixparticipantsjudgedthat raisingthefederalfundsratesoonerwouldbe However,anumberof factorssuggestedthatthe requiredtoforestallinflationarypressuresoravoid paceof theexpansionwouldcontinuetobe distortionsinthefinancialsystem.Asindicatedin restrained.Althoughsomeindicatorsof activityin thelowerpanel,allof theindividualassessmentsof thehousingsectorimprovedslightlyattheendof theappropriatetargetfederalfundsrateoverthenext 2011,newhomebuildingandsalesremainedat severalyearswerebelowthelonger-runlevelof the depressedlevels,housepriceswerestillfalling,and federalfundsrate,and11participantsplacedthetar- mortgagecreditremainedtight.Households’realdisgetfederalfundsrateat1percentorlowerattheend posableincomeroseonlymodestlythroughlate2011. of 2014.Mostparticipantsindicatedthatthey Inaddition,federalspendingcontractedtowardyearexpectedthatthenormalizationof theFederal end,andtherestrainingeffectsof fiscalconsolidation Reserve’sbalancesheetshouldoccurinawayconsis- appearedlikelytobegreaterthisyearthananticitentwiththeprinciplesagreedonattheJune2011 patedatthetimeof theNovemberprojections.Parmeetingof theFOMC,withthetimingof adjust- ticipantsalsoreadtheinformationoneconomic mentsdependentontheexpecteddateof thefirst activityabroad,particularlyinEurope,aspointingto policytightening.Afewparticipantsjudgedthat, weakerdemandforU.S.exportsincomingquarters giventheircurrentassessmentsof theeconomicout- thanhadseemedlikelywhentheypreparedtheir look,appropriatepolicywouldincludeadditional forecastsinNovember. assetpurchasesin2012,andoneassumedanearly endingof thematurityextensionprogram. Participantsanticipatedthatthepaceof theeconomicexpansionwouldstrengthenoverthe2013–14 Asizablemajorityof participantscontinuedtojudge period,reachingratesof increaseinrealGDPabove thelevelof uncertaintyassociatedwiththeirprojec- theirestimatesof thelonger-runratesof output tionsforrealactivityandtheunemploymentrateas growth.Thecentraltendenciesof participants’foreunusuallyhighrelativetohistoricalnorms.Manyalso castsforthechangeinrealGDPwere2.8to3.2perattachedagreater-than-normallevelof uncertainty centin2013and3.3to4.0percentin2014.Among totheirforecastsforinflation,but,comparedwith theconsiderationssupportingtheirforecasts,particitheNovemberSEP,twoadditionalparticipants pantscitedtheirexpectationthattheexpansion vieweduncertaintyasbroadlysimilartolonger-run wouldbesupportedbymonetarypolicyaccommodanorms.AsinNovember,manyparticipantssaw tion,ongoingimprovementsincreditconditions,risdownsiderisksattendingtheirforecastsof realGDP inghouseholdandbusinessconfidence,andstrengthgrowthandupsideriskstotheirforecastsof the eninghouseholdbalancesheets.Manyparticipants unemploymentrate;mostparticipantsviewedthe judgedthatU.S.fiscalpolicywouldstillbeadragon riskstotheirinflationprojectionsasbroadly economicactivityin2013,butmanyanticipatedthat balanced. progresswouldbemadeinresolvingthefiscalsituationinEuropeandthattheforeigneconomicout- TheOutlookforEconomicActivity lookwouldbemorepositive.Overtimeandinthe Thecentraltendencyof participants’forecastsforthe absenceof shocks,participantsexpectedthattherate changeinrealGDPin2012was2.2to2.7percent. of increaseof realGDPwouldconvergetotheiresti- Thisforecastfor2012,whileslightlylowerthanthe matesof itslonger-runrate,withacentraltendency projectionpreparedinNovember,wouldrepresenta

144 99thAnnualReport|2012 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.

Minutesof FederalOpenMarketCommitteeMeetings|January 145 of 2.3to2.6percent,littlechangedfromtheiresti- unemploymentratein2013and2014showedless matesinNovember. pronouncedshiftstowardlowerratesand,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.Bprovidedetailsonthediversity inflationwouldremainsubduedoverthe2012–14 of participants’viewsregardingthelikelyoutcomes periodatratesatorbelowtheFOMC’slonger-run forrealGDPgrowthandtheunemploymentrate objectiveof 2percent.Specifically,thecentraltenoverthenextthreeyearsandoverthelongerrun. dencyof participants’projectionsfortheincreasein Thedispersionintheseprojectionsreflecteddiffer- inflation,asmeasuredbythePCEpriceindex,in encesinparticipants’assessmentsof manyfactors, 2012was1.4to1.8percent,anditedgeduptoacenincludingappropriatemonetarypolicyanditseffects traltendencyof 1.6to2.0percentin2014;thecentral oneconomicactivity,theunderlyingmomentumin tendenciesof theforecastsforcorePCEinflation economicactivity,theeffectsof theEuropeansitua- werelargelythesameasthoseforthetotalmeasure. tion,theprospectivepathforU.S.fiscalpolicy,the likelyevolutionof creditandfinancialmarketcondi- Figures3.Cand3.Dprovideinformationaboutthe tions,andtheextentof structuraldislocationsinthe diversityof participants’viewsabouttheoutlookfor labormarket.ComparedwiththeirNovemberpro- inflation.ComparedwiththeirNovemberprojecjections,therangeof participants’forecastsforthe tions,expectationsforinflationin2012shifteddown changeinrealGDPin2012narrowedsomewhatand abit,withsomeparticipantsnotingthattheslowing shiftedslightlylower,assomeparticipantsreassessed ininflationattheendof 2011hadbeengreaterthan theoutlookforglobaleconomicgrowthandforU.S. theyanticipated.Nonetheless,therangeof particifiscalpolicy.Many,however,madenomaterial pants’forecastsforinflationin2012remainedwide, changetotheirforecastsforgrowthof realGDPthis andthedispersionwasonlyslightlynarrowerin year.Thedispersionof participants’forecastsfor 2013.By2014,therangeof inflationforecastsnaroutputgrowthin2013and2014remainedrelatively rowedmorenoticeably,asparticipantsexpectedthat, wide.Havingincorporatedthedatashowingalower underappropriatemonetarypolicy,inflationwould rateof unemploymentattheendof 2011thanprevi- begintoconvergetotheCommittee’slonger-run ouslyexpected,thedistributionof participants’pro- objective.Ingeneral,thedispersionof viewsonthe jectionsfortheendof 2012shiftednoticeablydown outlookforinflationovertheprojectionperiodreprelativetotheNovemberforecasts.Therangesforthe resenteddifferencesinjudgmentsregardingthe

146 99thAnnualReport|2012 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.

Minutesof FederalOpenMarketCommitteeMeetings|January 147 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.

148 99thAnnualReport|2012 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.

Minutesof FederalOpenMarketCommitteeMeetings|January 149 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.

150 99thAnnualReport|2012 degreeof slackinresourceutilizationandtheextent Allparticipantsreportedlevelsfortheappropriate towhichslackinfluencesinflationandinflation targetfederalfundsrateattheendof 2014thatwere expectations.Inaddition,participantsdifferedin wellbelowtheirestimatesof thelevelexpectedto theirestimatesof howthestanceof monetarypolicy prevailinthelongerrun.Thelonger-runnominallevwouldinfluenceinflationexpectations. elswereinarangefrom3¾to4½percent,reflecting participants’judgmentsaboutthelonger-runequilib- AppropriateMonetaryPolicy riumlevelof therealfederalfundsrateandtheCommittee’sinflationobjectiveof 2percent. Mostparticipantsjudgedthatthecurrentoutlook— foramoderatepaceof economicrecoverywiththe Participantsalsoprovidedqualitativeinformationon unemploymentratedecliningonlygraduallyand theirviewsregardingtheappropriatepathof the inflationsubdued—warrantedexceptionallylowlev- FederalReserve’sbalancesheet.Afewparticipants’ elsof thefederalfundsrateatleastuntillate2014.In assessmentsof appropriatemonetarypolicyincorpoparticular,fiveparticipantsviewedappropriatepolicy ratedadditionalpurchasesof longer-termsecurities firmingascommencingduring2014,whilesixothers in2012,andanumberof participantsindicatedthat judgedthatthefirstincreaseinthefederalfundsrate theyremainedopentoaconsiderationof additional wouldnotbewarranteduntil2015or2016.Asa assetpurchasesif theeconomicoutlookdeteriorated. result,those11participantsanticipatedthatthe Allbutoneof theparticipantscontinuedtoexpect appropriatefederalfundsrateattheendof 2014 thattheCommitteewouldcarryoutthenormalizawouldbe1percentorlower.Thosewhosawthefirst tionof thebalancesheetaccordingtotheprinciples increaseoccurringin2015reportedthattheyanticiapprovedattheJune2011FOMCmeeting.Thatis, patedthatthefederalfundsratewouldbe½percent priortothefirstincreaseinthefederalfundsrate,the attheendof thatyear.Forthetwoparticipantswho Committeewouldlikelyceasereinvestingsomeorall putthefirstincreasein2016,theappropriatetarget paymentsonthesecuritiesholdingsintheSystem federalfundsrateattheendof thatyearwas1½and OpenMarketAccount(SOMA),anditwouldlikely 1¾percent.Incontrast,sixparticipantsexpected beginsalesof agencysecuritiesfromtheSOMA thatanincreaseinthetargetfederalfundsratewould sometimeafterthefirstrateincrease,aimingtoelimibeappropriatewithinthenexttwoyears,andthose natetheSOMA’sholdingsof agencysecuritiesovera participantsanticipatedthatthetargetratewould periodof threetofiveyears.Indeed,mostparticineedtobeincreasedtoaround1½to2¾percentat pantssawsalesof agencysecuritiesstartingnoearlier theendof 2014. than2015.However,thoseparticipantsanticipating anearlierincreaseinthefederalfundsratealsocalled Participants’assessmentsof theappropriatepathfor forearlieradjustmentstothebalancesheet,andone thefederalfundsratereflectedtheirjudgmentsof the participantassumedanearlyendof thematurity policythatwouldbestsupportprogressinachieving extensionprogram. theFederalReserve’smandateforpromotingmaximumemploymentandstableprices.Amongthekey Figure3.Edetailsthedistributionof participants’ factorsinformingparticipants’expectationsabout judgmentsregardingtheappropriatelevelof thetartheappropriatesettingformonetarypolicyweretheir getfederalfundsrateattheendof eachcalendaryear assessmentsof themaximumlevelof employment, from2012to2014andoverthelongerrun.Most theCommittee’slonger-runinflationgoal,theextent participantsanticipatedthateconomicconditions towhichcurrentconditionsdeviatefromthese wouldwarrantmaintainingthecurrentlowlevelof mandate-consistentlevels,andtheirprojectionsof thefederalfundsrateoverthenexttwoyears.Howthelikelytimehorizonsrequiredtoreturnemployever,viewsontheappropriatelevelof thefederal mentandinflationtosuchlevels.Severalparticipants fundsrateattheendof 2014weremorewidelydiscommentedthattheirassessmentstookintoaccount persed,withtwo-thirdsof participantsseeingthe theriskstotheoutlookforeconomicactivityand appropriatelevelof thefederalfundsrateas1perinflation,andafewpointedspecificallytotherelcentorbelowandfiveseeingtheappropriaterateas evanceof financialstabilityintheirpolicyjudgments. 2percentorhigher.Thoseparticipantswhojudged Participantsalsonotedthatbecausetheappropriate thatalongerperiodof exceptionallylowlevelsof the stanceof monetarypolicydependsimportantlyon federalfundsratewouldbeappropriategenerallyalso theevolutionof realactivityandinflationovertime, anticipatedthatthepaceof theeconomicexpansion theirassessmentsof theappropriatefuturepathof wouldbemoderateandthattheunemploymentrate thefederalfundsratecouldchangeif economicconwoulddeclineonlygradually,remainingwellabove ditionsweretoevolveinanunexpectedmanner. itslonger-runrateattheendof 2014.Almostallof theseparticipantsexpectedthatinflationwouldbe

Minutesof FederalOpenMarketCommitteeMeetings|January 151 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.

152 99thAnnualReport|2012 relativelystableatorbelowtheFOMC’slonger-run Table2.Averagehistoricalprojectionerrorranges objectiveof 2percentuntilthetimeof thefirst Percentagepoints increaseinthefederalfundsrate.Anumberof them alsomentionedtheirassessmentthatalongerperiod Variable 2012 2013 2014 of lowfederalfundsratesisappropriatewhenthe ChangeinrealGDP1 ±1.3 ±1.7 ±1.8 federalfundsrateisconstrainedbyitseffectivelower Unemploymentrate1 ±0.7 ±1.4 ±1.8 bound.Incontrast,thesixparticipantswhojudged Totalconsumerprices2 ±0.9 ±1.0 ±1.0 thatpolicyfirmingshouldbeginin2012or2013indi- Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared catedthattheCommitteewouldneedtoactdecierrorofprojectionsfor1991through2010thatwerereleasedinthewinterby sivelytokeepinflationatmandate-consistentlevels variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast Uncertainty,”undercertainassumptions,thereisabouta70percentprobability andtolimittheriskof underminingFederalReserve thatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein credibilityandcausingariseininflationexpecta- rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Further informationisinDavidReifschneiderandPeterTulip(2007),“Gaugingthe tions.Severalwereprojectingafasterpickupineco- UncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,”Finance nomicactivity,andafewstressedtheriskof distor- andEconomicsDiscussionSeries2007-60(Washington:BoardofGovernorsof theFederalReserveSystem,November). tionsinthefinancialsystemfromanextendedperiod 1 Fordefinitions,refertogeneralnoteintable1. of exceptionallylowinterestrates. 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen mostwidelyusedingovernmentandprivateeconomicforecasts.Projection UncertaintyandRisks ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof theyearindicated. Figure4showsthatmostparticipantscontinuedto sharetheviewthattheirprojectionsforrealGDP growthandtheunemploymentrateweresubjecttoa higherlevelof uncertaintythanwasthenormduring theprevious20years.3Manyalsojudgedthelevelof Amajorityof participantscontinuedtoreportthat uncertaintyassociatedwiththeirinflationforecasts theysawtheriskstotheirforecastsof realGDP tobehigherthanthelonger-runnorm,butthat growthasweightedtothedownsideand,accordingly, assessmentwassomewhatlessprevalentamongpar- theriskstotheirprojectionsfortheunemployment ticipantsthanwasthecaseforuncertaintyaboutreal rateasskewedtotheupside.Allbutoneof the activity.Participantsidentifiedanumberof factors remainingparticipantsviewedtheriskstobothprothatcontributedtotheelevatedlevelof uncertainty jectionsasbroadlybalanced,whileonenotedarisk abouttheoutlook.Inparticular,manyparticipants thattheunemploymentratemightcontinueto continuedtociterisksrelatedtoongoingdevelop- declinemorerapidlythanexpected.ThemostfrementsinEurope.Morebroadly,theyagainnoteddif- quentlyciteddownsideriskstotheprojectedpaceof ficultiesinforecastingthepathof economicrecovery theeconomicexpansionwerethepossibilityof fromadeeprecessionthatwastheresultof asevere financialmarketandeconomicspilloversfromthe financialcrisisandthusdifferedimportantlyfrom fiscalandfinancialissuesintheeuroareaandthe theexperiencewithrecoveriesoverthepast60years. chancethatsomeof thefactorsthathaverestrained Inthatregard,participantscontinuedtobeuncertain therecoveryinrecentyearscouldpersistandweigh aboutthepaceatwhichcreditconditionswouldease oneconomicactivitytoagreaterextentthan andaboutprospectsforarecoveryinthehousing assumedinparticipants’baselineforecasts.Inparsector.Inaddition,participantsgenerallysawthe ticular,someparticipantsmentionedthedownside outlookforfiscalandregulatorypoliciesasstill riskstoconsumerspendingfromstill-weakhousehighlyuncertain.Regardingtheunemploymentrate, holdbalancesheetsandonlymodestgainsinreal severalexpresseduncertaintyabouthowlabor income,alongwiththepossibleeffectsof still-high demandandsupplywouldevolveovertheforecast levelsof uncertaintyregardingfiscalandregulatory period.Amongthesourcesof uncertaintyaboutthe policiesthatmightdampbusinesses’willingnessto outlookforinflationwerethedifficultiesinassessing investandhire.Anumberof participantsnotedthe thecurrentandprospectivemarginsof slackin riskof anotherdisruptioninglobaloilmarketsthat resourcemarketsandtheeffectof suchslackon couldnotonlyboostinflationbutalsoreducereal prices. incomeandspending.Theparticipantswhojudged theriskstobebroadlybalancedalsorecognizeda numberof thesedownsideriskstotheoutlookbut 3 Table2providesestimatesoftheforecastuncertaintyforthe sawthemascounterbalancedbythepossibilitythat changeinrealGDP,theunemploymentrate,andtotalconsumerpriceinflationovertheperiodfrom1991to2010.Atthe theresilienceof economicactivityinlate2011and endofthissummary,thebox“ForecastUncertainty”discusses therecentdropintheunemploymentratemightsigthesourcesandinterpretationofuncertaintyintheeconomic nalgreaterunderlyingmomentumineconomic forecastsandexplainstheapproachusedtoassesstheuncertaintyandrisksattendingtheparticipants’projections. activity.

Minutesof FederalOpenMarketCommitteeMeetings|January 153 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,seethebox“ForecastUncertainty.”Definitionsofvariablesareinthegeneralnotetotable1.

154 99thAnnualReport|2012 Incontrasttotheiroutlookforeconomicactivity, expected.Incontrast,someparticipantsnotedthe mostparticipantsjudgedtheriskstotheirprojections upsideriskstoinflationfromdevelopmentsinglobal of inflationasbroadlybalanced.Participantsgener- oilandcommoditymarkets,andseveralindicated allyviewedtherecentdeclineininflationashaving thatthecurrenthighlyaccommodativestanceof beeninlinewiththeirearlierforecasts,andthey monetarypolicyandthesubstantialliquiditycurnotedthatinflationexpectationsremainstable.While rentlyinthefinancialsystemriskedapickupininflamanyof theseparticipantssawthepersistenceof tiontoalevelabovetheCommittee’sobjective.Afew substantialslackinresourceutilizationaslikelyto alsopointedtotheriskthatuncertaintyaboutthe keepinflationsubduedovertheprojectionperiod,a Committee’sabilitytoeffectivelyremovepolicy fewothersnotedtheriskthatelevatedresourceslack accommodationwhenappropriatecouldleadtoa mightputmoredownwardpressureoninflationthan riseininflationexpectations.

Minutesof FederalOpenMarketCommitteeMeetings|January 155 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

156 99thAnnualReport|2012 Meeting Held on March 13, 2012 StevenB.Kamin Economist Ameetingof theFederalOpenMarketCommittee DavidW.Wilcox washeldintheofficesof theBoardof Governorsof Economist theFederalReserveSysteminWashington,D.C.,on Tuesday,March13,2012,at8:30a.m. DavidAltig,ThomasA.Connors,MichaelP.Leahy, DavidReifschneider,GlennD.Rudebusch, Present WilliamWascher,andJohnA.Weinberg AssociateEconomists BenBernanke BrianSack Chairman Manager,SystemOpenMarketAccount WilliamC.Dudley ViceChairman MichaelS.Gibson Director,Divisionof BankingSupervisionand ElizabethDuke Regulation,Boardof Governors JeffreyM.Lacker NellieLiang DennisP.Lockhart Director,Officeof FinancialStabilityPolicyand Research,Boardof Governors SandraPianalto JonW.FaustandAndrewT.Levin SarahBloomRaskin SpecialAdvisorstotheBoard,Officeof Board DanielK.Tarullo Members,Boardof Governors JohnC.Williams JamesA.Clouse DeputyDirector,Divisionof MonetaryAffairs, JanetL.Yellen Boardof Governors JamesBullard,ChristineCumming, LindaRobertson CharlesL.Evans,EstherL.George,and AssistanttotheBoard,Officeof BoardMembers, EricRosengren Boardof Governors AlternateMembersof theFederalOpenMarket Committee SethB.Carpenter SeniorAssociateDirector,Divisionof Monetary RichardW.Fisher,NarayanaKocherlakota,and Affairs,Boardof Governors CharlesI.Plosser Presidentsof theFederalReserveBanksof Dallas, ThomasLaubach Minneapolis,andPhiladelphia,respectively SeniorAdviser,Divisionof ResearchandStatistics, Boardof Governors WilliamB.English SecretaryandEconomist EllenE.Meade,StephenA.Meyer,and DeborahJ.Danker JoyceK.Zickler DeputySecretary SeniorAdvisers,Divisionof MonetaryAffairs, Boardof Governors MatthewM.Luecke AssistantSecretary EricM.Engen,MichaelT.Kiley,and MichaelG.Palumbo DavidW.Skidmore AssociateDirectors,Divisionof Researchand AssistantSecretary Statistics,Boardof Governors MichelleA.Smith EdwardNelson AssistantSecretary SectionChief,Divisionof MonetaryAffairs,Board ScottG.Alvarez of Governors GeneralCounsel HarveyRosenblumandDanielG.Sullivan ThomasC.Baxter ExecutiveVicePresidents,FederalReserveBanksof DeputyGeneralCounsel DallasandChicago,respectively

Minutesof FederalOpenMarketCommitteeMeetings|March 157 CraigS.Hakkio,GeoffreyTootell,and workersemployedparttimeforeconomicreasons Kei-MuYi continuedtobehigh.Initialclaimsforunemploy- SeniorVicePresidents,FederalReserveBanksof mentinsurancetrendedlowerovertheintermeeting KansasCity,Boston,andMinneapolis,respectively periodandwereatalevelconsistentwithfurther moderatejobgains. MichaelDotsey,JosephG.Haubrich, LorieK.Logan,andDavidC.Wheelock Manufacturingproductionincreasedconsiderablyin VicePresidents,FederalReserveBanksof January,andtherateof manufacturingcapacityutili- Philadelphia,Cleveland,NewYork,andSt.Louis, zationsteppedup.Factoryoutputwasboostedbya respectively sizableexpansionintheproductionof motor MarcGiannoni vehicles,buttherealsoweresolidandwidespread SeniorEconomist,FederalReserveBankof gainsinotherindustries.InFebruary,motorvehicle NewYork assembliesremainednearthestrongpacerecordedin January;theywerescheduledtoedgeup,onnet, Developments in Financial Markets and throughthesecondquarter.Broaderindicatorsof the Federal Reserve’s Balance Sheet manufacturingactivity,suchasthediffusionindexes of newordersfromthenationalandregionalmanu- TheManagerof theSystemOpenMarketAccount facturingsurveys,wereatlevelssuggestingmoderate (SOMA)reportedondevelopmentsindomesticand increasesinfactoryproductioninthecoming foreignfinancialmarketsduringtheperiodsincethe months. FederalOpenMarketCommittee(FOMC)meton January24–25,2012.HealsoreportedonSystem Households’realdisposableincomeincreased,on openmarketoperations,includingtheongoingrein- balance,inDecemberandJanuaryaslaborearnings vestmentintoagency-guaranteedmortgage-backed rosesolidly.Moreover,households’networthgrewin securities(MBS)of principalpaymentsreceivedon thefourthquarterof lastyearandlikelywasboosted SOMAholdingsof agencydebtandagency- furtherbygainsinequityvaluesthusfarthisyear. guaranteedMBSaswellastheoperationsrelatedto Nevertheless,realpersonalconsumptionexpenditures thematurityextensionprogramauthorizedatthe (PCE)werereportedtohavebeenflatinDecember September20–21,2011,FOMCmeeting.Byunani- andJanuary.Althoughhouseholds’purchasesof mousvote,theCommitteeratifiedtheDesk’sdomes- motorvehiclesrosebriskly,spendingforothercontictransactionsovertheintermeetingperiod.There sumergoodsandserviceswasweak.InFebruary, werenointerventionoperationsinforeigncurrencies nominalretailsalesexcludingpurchasesatmotor fortheSystem’saccountovertheintermeeting vehicleandpartsoutletsincreasedmoderately,while period. motorvehiclesalescontinuedtoclimb.Consumer sentimentwaslittlechangedinFebruary,andhouse- Staff Review of the Economic Situation holdsremaineddownbeataboutboththeeconomic outlookandtheirownincomeandfinances. TheinformationreviewedattheMarch13meeting suggestedthateconomicactivitywasexpanding Housingmarketactivityimprovedsomewhatin moderately.Labormarketconditionscontinuedto recentmonthsbutcontinuedtoberestrainedbythe improveandtheunemploymentratedeclinedfurther, substantialinventoryof foreclosedanddistressed althoughitremainedelevated.Overallconsumer properties,tightcreditconditionsformortgageloans, priceinflationwasrelativelysubduedinrecent anduncertaintyabouttheeconomicoutlookand months.Morerecently,pricesof crudeoilandgaso- futurehomeprices.AfterincreasinginDecember, lineincreasedsubstantially.Measuresof long-run startsof newsingle-familyhomesremainedatthat inflationexpectationsremainedstable. higherlevelinJanuary,likelyboostedinpartby unseasonablywarmweather;inbothmonths,starts Privatenonfarmemploymentroseatanappreciably ranabovepermitissuance.Salesof newandexisting fasteraveragepaceinJanuaryandFebruarythanin homessteppedupfurtherinrecentmonths,though thefourthquarterof lastyear,anddeclinesintotal theystillremainedatquitelowlevels.Homeprices governmentemploymentslowedinrecentmonths. wereflat,onbalance,inDecemberandJanuary. Theunemploymentratedecreasedto8.3percentin JanuaryandstayedatthatlevelinFebruary.Boththe Realbusinessexpendituresonequipmentandsoftrateof long-durationunemploymentandtheshareof wareroseatanotablyslowerpaceinthefourthquar-

158 99thAnnualReport|2012 terof lastyearthanearlierintheyear.Moreover, Increasesincompensationperhourinthenonfarm nominalordersandshipmentsof nondefensecapital businesssectorpickedupsomewhatoverthefour goodsdeclinedinJanuary.However,anumberof quartersof 2011.However,theemploymentcost forward-lookingindicatorsof firms’equipment indexincreasedatamoremodestpacethanthecomspendingimproved,includingsomesurveymeasures pensationperhourmeasureoverthepastyear,and of businessconditionsandcapitalspendingplans. the12-monthchangeinaveragehourlyearningsfor Nominalbusinessspendingfornonresidentialcon- allemployeesremainedmutedinJanuaryand structionfirmed,onnet,inDecemberandJanuary, February. butthelevelof spendingwasstillsubdued,inpart reflectinghighvacancyratesandtightcreditcondi- Recentindicatorssuggestedsomeimprovementin tionsforconstructionloans.Inventoriesinmost foreigneconomicactivityearlythisyearafterasigindustrieslookedtobereasonablywellalignedwith nificantslowinginthefourthquarterof lastyear. salesinrecentmonths,althoughstocksof motor Aggregateoutputintheeuroareacontractedinthe vehiclescontinuedtobelean. fourthquarter,butmanufacturingpurchasingmanagersindexes(PMIs)improvedinJanuaryandFeb- DataforfederalgovernmentspendinginJanuaryand ruaryrelativetotheirlowfourth-quarterreadings, Februaryindicatedthatrealdefenseexpenditures andconsumerandbusinessconfidenceedgedup. continuedtostepdownafterdecreasingsignificantly Floodscausedsteepproductiondeclinesinthefourth inthefourthquarter.Realstateandlocalgovernment quarterinThailandandalsohadnegativeeffectson purchaseslookedtobedecliningataslowerpace outputinothercountrieslinkedthroughThaisupply thanlastyear,asthosegovernments’payrollsedged chains.However,economicactivityinThailand upinJanuaryandFebruaryandtheirnominalcon- recoveredsharplyaroundyear-end,andmanufacturstructionspendingrosealittleinJanuary. ingPMIsmovedupacrossAsiathroughFebruary. Higherpricesforenergyandfoodputupwardpres- TheU.S.internationaltradedeficitwidenedin sureonheadlineinflationinforeigneconomies,but DecemberandJanuary,asimportsincreasedmore measuresof coreinflationremainedsubdued. thanexports.Theexpansionof importswasspread acrossmostcategories,withpetroleumproductsand Staff Review of the Financial Situation automotiveproductspostingstronggainsinJanuary. Theriseinexportswassupportedbyshipmentsof Onbalance,U.S.financialconditionsbecamesomecapitalgoodsandautomotiveproducts,whileexports whatmoresupportiveof growthovertheintermeetof consumergoodsandindustrialsuppliesdeclined ingperiod,andstrainsinglobalfinancialmarkets onaverage.DatathroughDecemberindicatedthat eased,asdomesticandforeigneconomicdatawere netexportsmadeamoderatenegativecontribution generallybetterthanmarketparticipantshad totherateof growthinrealgrossdomesticproduct expectedandinvestorsappearedtoseediminished (GDP)inthefourthquarterof lastyear. downsiderisksassociatedwiththesituationin Europe. OverallU.S.consumerprices,asmeasuredbythe PCEpriceindex,increasedatamodestratein Measuresof theexpectedpathforthefederalfunds DecemberandJanuary.Consumerenergypricesrose ratederivedfromovernightindexswap(OIS)rates inJanuaryafterdecreasingmarkedlyinDecember, suggestedthatthenear-termportionof theexpected andsurveydataindicatedthatgasolinepricesmoved policyratepathwasaboutunchanged,onbalance, upconsiderablyinFebruaryandearlyMarch.Mean- sincetheJanuaryFOMCmeeting,butthepath while,increasesinconsumerfoodpricesslowedin beyondthemiddleof 2014shifteddownabit, recentmonths.Consumerpricesexcludingfoodand reportedlyreflectinginpartthechangeintheforenergyalsorosemodestlyinDecemberandJanuary. wardrateguidanceintheCommittee’sJanuarystate- Near-terminflationexpectationsfromtheThomson ment.Onbalance,yieldsonTreasurysecuritieswere Reuters/Universityof MichiganSurveysof Consum- littlechangedovertheintermeetingperiod.IndicaerswereunchangedinFebruary,andlonger-term torsof inflationcompensationoverthenextfive inflationexpectationsinthesurveyremainedintheir yearsedgedup,whilechangesinmeasuresof longerrecentrange. terminflationcompensationweremixed. Measuresof laborcompensationgenerallyindicated Conditionsinunsecuredshort-termdollarfunding thatnominalwagegainscontinuedtobesubdued. marketsimprovedovertheperiod,especiallyfor

Minutesof FederalOpenMarketCommitteeMeetings|March 159 financialinstitutionswithEuropeanparents.The commercialmortgage-backedsecuritiesremainedlow spreadof thethree-monthLondoninterbankoffered inthefourthquarterof lastyear.Grosspublicequity rate(LIBOR)overtheOISratenarrowed.Inaddi- issuancebynonfinancialfirmswasstillsolidinJanution,spreadsof ratesonasset-backedcommercial aryandFebruary,boostedbycontinuedstrengthin paperoverthoseonAA-ratednonfinancialpaper initialpublicofferings.Sharerepurchasesandcashdecreasedsignificantly,andtheamountsoutstanding financedmergersbynonfinancialfirmsmaintained fromprogramswithEuropeansponsorsremained theirstrengthinthefourthquarter,leadingtoa stable.Moreover,theaveragematurityof unsecured sharpdeclineinnetequityissuance. U.S.commercialpaperissuedbyEuropeanbanks lengthenedsomewhatovertheintermeetingperiod. Althoughmortgageratesremainedneartheirhistoricallows,conditionsinresidentialmortgagemarkets ResponsestotheMarch2012SeniorCreditOfficer generallyremaineddepressed.Consumercreditrose OpinionSurveyonDealerFinancingTermsindi- inrecentmonths,withthegrowthinnonrevolving catedlittlechange,onbalance,overthepastthree creditledbycontinuedrapidexpansionof monthsincredittermsforimportantclassesof coun- government-originatedstudentloans.Issuanceof terparties.Demandforsecuritiesfinancingwas consumercreditasset-backedsecuritiesremainedat reportedtohaverisensomewhatacrossassettypes, moderatelevelsinthefourthquarterof 2011andin butdealersindicatedthattheriskappetiteof most early2012. clientshadchangedrelativelylittleovertheprevious threemonths. Grosslong-termissuanceof municipalbondswas subduedinthefirsttwomonthsof thisyear.Mean- BroadU.S.equitypriceindexesrosesignificantly while,spreadsoncreditdefaultswapsfordebtissued overtheintermeetingperiod;equitypricesof large bystateswereroughlyflatovertheintermeeting bankingorganizationsincreasedaboutinlinewith period. thebroadermarket.Aggregateearningspersharefor firmsintheStandard&Poor’s500indexdeclinedin Bankcreditroseatamodestpace,onaverage,in thefourthquarter,butprofitmarginsforlargecorpo- JanuaryandFebruary,mainlyreflectingstrong rationsremainedwidebyhistoricalstandards. increasesinsecuritiesholdingsandC&Iloans.Com- Reflectinganarrowingof spreadsoveryieldson mercialrealestateloansheldbybankscontinuedto comparable-maturityTreasurysecurities,yieldson decline,whilenoncoreloans—acategorythat investment-andspeculative-gradecorporatebonds includeslendingtononbankfinancialinstitutions— continuedtodeclineovertheperiod,movingtoward grewataslowerpacethaninpreviousmonths.The thelowendof theirhistoricalranges.Pricesinthe aggregatecreditqualityof loansonbanks’books secondarymarketforsyndicatedleveragedloans continuedtoimproveacrossmostassetclassesinthe movedupfurther,supportedbycontinuedstrong fourthquarter. demandfrominstitutionalinvestors.Thespreadsof yieldsonA2/P2-ratedunsecuredcommercialpaper M2advancedatarapidpaceinJanuary,apparently issuedbynonfinancialfirmsoveryieldsonA1/P1reflectingyear-endeffects,butitsgrowthslowedin ratedissuesnarrowedslightlyonbalance. February.TheriseinM2wasmainlyattributableto continuedstrengthinliquiddeposits,reflectinginves- BondissuancebyfinancialfirmswasstronginJanutors’preferencesforsafeandliquidassetsaswellas aryandFebruary,likelyreflectinginparttherefiverylowyieldsonshort-terminstrumentsoutside nancingof maturingdebtthathadbeenissueddur- M2.Currencyexpandedrobustly,andthemonetary ingthefinancialcrisisundertheFederalDeposit basealsogrewsignificantlyoverJanuaryand InsuranceCorporation’sTemporaryLiquidityGuar- February. anteeProgram.Theissuanceof bondsbydomestic nonfinancialfirmswassolidinrecentmonths,and Foreignequitymarketsendedtheperiodhigher,parindicatorsof creditqualityremainedfirm.Growthof ticularlyinJapan,andbenchmarksovereignbond commercialandindustrial(C&I)loanscontinuedto yieldsdeclined.Spreadsof yieldsoneuro-area besubstantialandwaswidespreadacrossdomestic peripheralsovereigndebtoverthoseonGerman banks,thoughholdingsof suchloansatU.S. bundsgenerallycontinuedtonarrow,andforeign branchesandagenciesof Europeanbanksdecreased corporatecreditspreadsalsodeclinedfurther.The further.Financingconditionsinthecommercialreal staff’sbroadnominalindexof theforeignexchange estatesectorcontinuedtobetight,andissuanceof

160 99thAnnualReport|2012 valueof thedollarmoveddownmodestlyoverthe Thewidemarginof slackinproductandlabormarintermeetingperiod. ketswasexpectedtodecreasegraduallyovertheprojectionperiod,buttheunemploymentratewas Fundingconditionsforeuro-areabankseasedover expectedtoremainelevatedattheendof 2013. theperiod,astheEuropeanCentralBank(ECB) conducteditssecondthree-yearrefinancingopera- Thestaff alsorevisedupitsforecastforinflationabit tionandwidenedthepoolof eligiblecollateralfor comparedwiththeprojectionpreparedfortheJanurefinancingoperations.Spreadsof three-montheuro aryFOMCmeeting,reflectingrecentdataindicating LIBORovertheOISratenarrowed,onbalance,and higherpathsforthepricesof oil,othercommodities, Europeanbanks’issuanceof unsecuredseniordebt andimports,alongwithasomewhatnarrowermarandcoveredbondsincreased.Dollarfundingpres- ginof economicslackintheMarchforecast.Howsurescontinuedtodiminish,andtheimpliedcostof ever,withenergypricesexpectedtoleveloutinthe dollarfundingthroughtheforeignexchangeswap secondhalf of thisyear,substantialresourceslack marketfellmoderatelyfurther.Reflectingthe persistingovertheforecastperiod,andstablelongimprovedconditionsinfundingmarkets,demandfor runinflationexpectations,thestaff continuedto dollarsatECBlendingoperationsdeclinedandthe projectthatinflationwouldbesubduedin2012and outstandingamountsdrawnundertheFederal 2013. Reserve’sdollarliquidityswaplineswithotherforeigncentralbanksremainedsmall.Severalothercen- Participants’ Views on Current Conditions tralbanksinadvancedandemergingmarketecono- and the Economic Outlook mieseasedpolicyfurther.Inparticular,theBankof Englandincreasedthesizeof itsexistinggiltpur- Intheirdiscussionof theeconomicsituationand chaseprograminFebruary,andtheBankof Japan outlook,meetingparticipantsagreedthattheinforscaledupitsAssetPurchaseProgram.TheBankof mationreceivedsincetheCommittee’sprevious Japanalsointroduceda1percentinflationgoal. meeting,whilemixed,hadbeenpositive,onbalance, andsuggestedthattheeconomyhadbeenexpanding Staff Economic Outlook moderately.Labormarketconditionshadimproved further:Payrollemploymenthadcontinuedto IntheeconomicprojectionpreparedfortheMarch expand,andtheunemploymentratehaddeclined FOMCmeeting,thestaff revisedupitsnear-term notablyinrecentmonths.Still,unemployment forecastforrealGDPgrowthalittle.Althoughthe remainedelevated.Householdspendingandbusiness recentdataonaggregatespendingwere,onbalance, fixedinvestmenthadcontinuedtoadvance.Despite aboutinlinewiththestaff’sexpectationsatthetime signsof improvementorstabilizationinsomelocal of thepreviousforecast,indicatorsof labormarket housingmarkets,mostparticipantsagreedthatthe conditionsandproductionimprovedsomewhatmore housingsectorremaineddepressed.Inflationhad thanthestaff hadanticipated.Inaddition,the beensubduedinrecentmonths,althoughpricesof declineintheunemploymentrateoverthepastyear crudeoilandgasolinehadincreasedof late.Longerwaslargerthanwhatseemedconsistentwiththe terminflationexpectationshadremainedstable,and modestreportedrateof realGDPgrowth.Against mostmeetingparticipantssawlittleevidenceof cost thisbackdrop,thestaff reduceditsestimateof the pressures. levelof potentialoutput,yieldingameasureof the currentoutputgapthatwasalittlenarrowerandbet- Withrespecttotheeconomicoutlook,participants teralignedwiththestaff’sestimateof labormarket generallysawtheintermeetingnewsassuggesting slack.InitsMarchforecast,thestaff’sprojectionfor thateconomicgrowthovercomingquarterswould realGDPgrowthoverthemediumtermwassome- continuetobemoderateandthattheunemployment whathigherthantheonepresentedinJanuary, ratewoulddeclinegraduallytowardlevelsthatthe mostlyreflectinganimprovedoutlookforeconomic Committeejudgestobeconsistentwithitsdualmanactivityabroad,alowerforeignexchangevaluefor date.Whileafewparticipantsindicatedthattheir thedollar,andahigherprojectedpathof equity expectationsforrealGDPgrowthfor2012hadrisen prices.Nevertheless,thestaff continuedtoforecast somewhat,mostparticipantsdidnotinterpretthe thatrealGDPgrowthwouldpickuponlygradually recenteconomicandfinancialinformationaspointin2012and2013,supportedbyaccommodative ingtoamaterialrevisiontotheoutlookfor2013and monetarypolicy,easingcreditconditions,and 2014.Financialconditionshadimprovednotably improvementsinconsumerandbusinesssentiment. sincetheJanuarymeeting:Equitypriceswerehigher

Minutesof FederalOpenMarketCommitteeMeetings|March 161 andriskspreadshaddeclined.Nonetheless,anum- of reducedinventoryoverhangandstrongerdemand berof factorscontinuedtobeseenaslikelyto insomeregions. restrainthepaceof economicexpansion;these includedslowergrowthinsomeforeigneconomies, Reportsfrombusinesscontactsindicatedthatactivity prospectivefiscaltighteningintheUnitedStates,the inthemanufacturing,energy,andagriculturesectors weakhousingmarket,furtherhouseholddeleverag- continuedtoadvanceinrecentmonths.Intheretail ing,andhighlevelsof uncertaintyamonghouseholds sector,salesof newautoshadstrengthened,but andbusinesses.Participantscontinuedtoexpectmost reportsfromotherretailersweremixed.Anumberof of thefactorsrestrainingeconomicexpansiontoease businesseshadindicatedthattheywereseeingsome overtimeandsoanticipatedthattherecoverywould improvementindemandandthattheyhadbecome graduallygainstrength.Inaddition,participants somewhatmoreoptimisticof late,withsomereportnotedthatrecentpolicyactionsintheeuroareahad ingthattheywereaddingtocapacity.Butmostfirms helpedreducefinancialstressesandlowerdownside reportedlyremainedfairlycautious—particularlyon risksintheshortterm;however,increasedvolatility hiringdecisions—andcontinuedtobeuncertain infinancialmarketsremainedapossibilityif meas- aboutthestrengthof therecovery. urestoaddressthelonger-termfiscalandbanking issuesintheeuroareawerenotputinplaceina Participantstouchedontheoutlookforfiscalpolicy timelyfashion.Inflationhadbeensubduedof late, andtheexportsector.Assessmentsof theoutlookfor althoughtherecentincreaseincrudeoilandgasoline governmentrevenuesandexpendituresweremixed. priceswouldpushupinflationtemporarily.With Stateandlocalgovernmentspendinghadrecently unemploymentexpectedtoremainelevated,andwith shownmodestgrowth,followingalengthyperiodof longer-terminflationexpectationsstable,mostpar- contraction,anddeclinesinpublic-sectoremployticipantsexpectedthatinflationsubsequentlywould mentappearedtohaveabatedof late.However,it runatorbelowthe2percentratethattheCommittee wasnotedthatif agreementwasnotreachedona judgesmostconsistentwithitsstatutorymandate longer-termplanforthefederalbudget,anabrupt overthelongerrun. andsharpfiscaltighteningwouldoccuratthestartof 2013.Anumberof participantsobservedthat Indiscussingthehouseholdsector,meetingpartici- exportscontinuedtobeapositivefactorforU.S. pantsgenerallycommentedthatconsumerspending growth,whilenotingriskstotheexportpicturefrom hadincreasedmoderatelyof late.Whileafewpartici- economicweaknessinEuropeoragreater-thanpantssuggestedthatrecentimprovementsinlabor expectedslowdowninChinaandemergingAsia. marketconditionsandtheeasinginfinancialconditionscouldhelplaythegroundworkforastrengthen- Participantsgenerallyobservedthecontinued inginthepaceof householdspending,severalother improvementinlabormarketconditionssincethe participantspointedtofactorsthatwouldlikely Januarymeeting.Acoupleof participantsstatedthat restrainconsumption:Growthinrealdisposable theprogresssuggestedbythepayrollnumberswas incomewasstillsluggish,andconsumersentiment, alsoapparentinabroadarrayof labormarketindidespitesomeimprovementsincelastsummer, cators,andothersnotedsurveymeasuressuggesting remainedweak.Anumberof participantsviewedthe furthersolidgainsinemploymentgoingforward. recentrun-upinpetroleumpricesaslikelytolimit Oneparticipantpointedtoinflationreadingsanda gainsinconsumerspendingonnon-energyitemsfor highrateof long-durationunemploymentassigns atime;acoupleof participantsnoted,however,that thatthecurrentlevelof outputmaybemuchcloser theunseasonablywarmweatherandthedeclining topotentialthanhadbeenthought,andafewothers priceof naturalgashadhelpedcushiontheeffectof citedaweakerpathof potentialoutputasacharachigheroilandgasolinepricesonconsumers’overall teristicof thepresentexpansion.However,anumber energybills.Mostparticipantsagreedthat,while of participantsjudgedthatthelabormarketcurrecenthousing-sectordatahadshownsometentative rentlyfeaturedsubstantialslack.Insupportof that indicationsof upwardmovement,thelevelof activity view,variousindicatorswerecited,includingaggreinthatsectorremaineddepressedandwaslikelyto gatehours,whichduringtherecessionhadexhibited recoveronlyslowlyovertime.Oneparticipant,while adeclinethatwasparticularlyseverebyhistorical agreeingthatthehousingmarkethadnotyetturned standardsandremainedwellbelowtheseries’prethecorner,wasmoreoptimisticaboutthepotential recessionpeak;thehighnumberof personsworking forastrongerrecoveryinthemarketinlightof signs parttimeforeconomicreasons;andlowratiosof job

162 99thAnnualReport|2012 openingstounemploymentandof employmentto energycommoditypriceshadbeenmorestableof population. late,whichsuggestedthattherecentupwardpressure onoilpriceswasprincipallyduetogeopoliticalcon- Mostparticipantsnotedthattheincominginforma- cernsratherthanglobaleconomicgrowth.Acouple tiononcomponentsof finalspendinghadexhibited of participantsnotedthatrecentreadingsonunit lessstrengththantheindicatorsof employmentand laborcostshadshownalargerincreasethanearlier, production.Someparticipantsexpressedtheview butotherparticipantspointedtoothermeasuresof thattherecentincreasesinpayrollslikelyreflected,in laborcompensationthatcontinuedtoshowmodest part,areversalof thesharpcutsinemploymentdur- increases.Withlonger-runinflationexpectationsstill ingtherecession,ascenarioconsistentwiththeweak wellanchored,mostparticipantsanticipatedthat readingsonproductivitygrowthof late.Inthisview, afterthetemporaryeffectof theriseinoilandgasotherecentpaceof employmentgainsmightnotbe linepriceshadrunitscourse,inflationwouldbeator sustainedif thegrowthrateof spendingdidnotpick belowthe2percentratethattheyjudgemostconsisup.Severalparticipantsnotedthattheunseasonably tentwiththeCommittee’sdualmandate.Indeed,a warmweatherof recentmonthsaddedonemoreele- fewparticipantswereconcernedthat,withthepersismentof uncertaintytotheinterpretationof incom- tenceof considerableresourceslack,inflationmight ingdata,andthatthisfactormightaccountfora bebelowthemandate-consistentrateforsometime. portionof therecentimprovementinindicatorsof Otherparticipants,however,wereworriedthatinflaemploymentandhousing.Inacontrastingview,the tionpressurescouldincreaseastheexpansioncontinimprovementsregisteredinlabormarketindicators ued;theseparticipantsarguedthat,particularlyin couldbeseenasraisingthelikelihoodthatGDPdata lightof therecentriseinoilandgasolineprices, fortherecentperiodwouldundergoasignificant maintainingthecurrenthighlyaccommodative upwardrevision. stanceof monetarypolicyoverthemediumrun coulderodethestabilityof inflationexpectationsand Manyparticipantsnotedthatstrainsinglobalfinan- riskhigherinflation. cialmarketshadeasedsomewhat,andthatfinancial conditionsweremoresupportiveof economicgrowth Committee Policy Action thanatthetimeof theJanuarymeeting.Amongthe evidencecitedwerehigherequitypricesandbetter MembersviewedtheinformationonU.S.economic conditionsincorporatecreditmarkets,especiallythe activityreceivedovertheintermeetingperiodassugmarketsforhigh-yieldbondsandleveragedloans. gestingthattheeconomyhadbeenexpandingmoder- Bankingcontactswerereportingsteady,though atelyandgenerallyagreedthattheeconomicoutlook, modest,growthinC&Iloans.Manymeetingpartici- whileabitstrongeroverall,wasbroadlysimilarto pantsbelievedthatpolicyactionsintheeuroarea, thatatthetimeof theirJanuarymeeting.LabormarnotablytheGreekdebtswapandtheECB’slonger- ketconditionshadcontinuedtoimproveandunemtermrefinancingoperations,hadhelpedtoease ploymenthaddeclinedinrecentmonths,butalmost strainsinfinancialmarketsandreducedthedown- allmemberssawtheunemploymentrateasstill sideriskstotheU.S.andglobaleconomicoutlook. elevatedrelativetolevelsthattheyviewedasconsis- Nonetheless,anumberof participantsnotedthata tentwiththeCommittee’smandateoverthelonger longer-termsolutiontothebankingandfiscalprob- run.Withtheeconomyfacingcontinuingheadwinds, lemsintheeuroareawouldrequiresubstantialfur- membersgenerallyexpectedamoderatepaceof ecotheradjustmentinthebankingandpublicsectors. nomicgrowthovercomingquarters,withgradual Participantssawthepossibilityof disruptionsin furtherdeclinesintheunemploymentrate.Strainsin globalfinancialmarketsascontinuingtoposearisk globalfinancialmarkets,whilehavingeasedsince togrowth. January,continuedtoposesignificantdownsiderisks toeconomicactivity.Recentmonthlyreadingson Whiletherecentreadingsonconsumerpriceinflation inflationhadbeensubdued,andlonger-terminflahadbeensubdued,participantsagreedthatinflation tionexpectationsremainedstable.Againstthatbackintheneartermwouldbepushedupbyrisingoiland drop,membersgenerallyanticipatedthattherecent gasolineprices.Afewparticipantsnotedthatthe increaseinoilandgasolinepriceswouldpushup crudeoilpriceincreasesinthelatterhalf of 2010and inflationtemporarily,butthatsubsequentlyinflation theearlypartof 2011hadbeenpartof abroad- wouldrunatorbelowtheratethattheCommittee basedriseincommodityprices;incontrast,non- judgesmostconsistentwithitsmandate.

Minutesof FederalOpenMarketCommitteeMeetings|March 163 Intheirdiscussionof monetarypolicyfortheperiod membersindicatedthattheinitiationof additional ahead,membersagreedthatitwouldbeappropriate stimuluscouldbecomenecessaryif theeconomylost tomaintaintheexistinghighlyaccommodative momentumorif inflationseemedlikelytoremain stanceof monetarypolicy.Inparticular,theyagreed belowitsmandate-consistentrateof 2percentover tokeepthetargetrangeforthefederalfundsrateat themediumrun. 0to¼percent,tocontinuetheprogramof extending theaveragematurityof theFederalReserve’shold- Attheconclusionof thediscussion,theCommittee ingsof securitiesasannouncedinSeptember,andto votedtoauthorizeanddirecttheFederalReserve retaintheexistingpoliciesregardingthereinvestment Bankof NewYork,untilitwasinstructedotherwise, of principalpaymentsfromFederalReserveholdings toexecutetransactionsintheSystemAccountin of securities. accordancewiththefollowingdomesticpolicy directive: Withrespecttothestatementtobereleasedfollowing themeeting,membersagreedthatonlyrelatively “TheFederalOpenMarketCommitteeseeks smallmodificationstothefirsttwoparagraphswere monetaryandfinancialconditionsthatwillfosneededtoreflecttheincomingeconomicdata,the terpricestabilityandpromotesustainable improvementinfinancialconditions,andthemodest growthinoutput.Tofurtheritslong-runobjecchangestotheeconomicoutlook.Withtheeconomic tives,theCommitteeseeksconditionsinreserve outlookoverthemediumtermnotgreatlychanged, marketsconsistentwithfederalfundstradingin almostallmembersagainagreedtoindicatethatthe arangefrom0to¼percent.TheCommittee Committeeexpectstomaintainahighlyaccommoda- directstheDesktocontinuethematurityextentivestanceformonetarypolicyandcurrentlyantici- sionprogramitbeganinSeptembertopurchase, patesthateconomicconditions—includinglowrates bytheendof June2012,Treasurysecuritieswith of resourceutilizationandasubduedoutlookfor remainingmaturitiesof approximately6yearsto inflationoverthemediumrun—arelikelytowarrant 30yearswithatotalfacevalueof $400billion, exceptionallylowlevelsforthefederalfundsrateat andtosellTreasurysecuritieswithremaining leastthroughlate2014.Severalmemberscontinued maturitiesof 3yearsorlesswithatotalface toanticipate,asinJanuary,thattheunemployment valueof $400billion.TheCommitteealso ratewouldstillbewellabovetheirestimatesof its directstheDesktomaintainitsexistingpolicies longer-termnormallevel,andinflationwouldbeat of rollingovermaturingTreasurysecuritiesinto orbelowtheCommittee’slonger-runobjective,in newissuesandof reinvestingprincipalpayments late2014.ItwasnotedthattheCommittee’sforward onallagencydebtandagencymortgage-backed guidanceisconditionaloneconomicdevelopments, securitiesintheSystemOpenMarketAccount andmembersconcurredthatthedategiveninthe inagencymortgage-backedsecuritiesinorderto statementwouldbesubjecttorevisioninresponseto maintainthetotalfacevalueof domesticsecurisignificantchangesintheeconomicoutlook.While tiesatapproximately$2.6trillion.TheCommitrecentemploymentdatahadbeenencouraging,a teedirectstheDesktoengageindollarroll numberof membersperceivedanonnegligiblerisk transactionsasnecessarytofacilitatesettlement thatimprovementsinemploymentcoulddiminishas of theFederalReserve’sagencyMBStransactheyearprogressed,ashadoccurredin2010and tions.TheSystemOpenMarketAccountMan- 2011,andsawthisriskasreinforcingthecasefor agerandtheSecretarywillkeeptheCommittee leavingtheforwardguidanceunchangedatthismeet- informedof ongoingdevelopmentsregarding ing.Incontrast,onememberjudgedthatmaintain- theSystem’sbalancesheetthatcouldaffectthe ingthecurrentdegreeof policyaccommodation attainmentovertimeof theCommittee’sobjecmuchbeyondthisyearwouldlikelybeinappropriate; tivesof maximumemploymentandprice thatmemberanticipatedthatatighteningof mon- stability.” etarypolicywouldbenecessarywellbeforetheend of 2014inordertokeepinflationclosetotheCom- Thevoteencompassedapprovalof thestatement mittee’s2percentobjective. belowtobereleasedat2:15p.m.: TheCommitteealsostatedthatitispreparedto “InformationreceivedsincetheFederalOpen adjustthesizeandcompositionof itssecuritieshold- MarketCommitteemetinJanuarysuggeststhat ingsasappropriatetopromoteastrongereconomic theeconomyhasbeenexpandingmoderately. recoveryinacontextof pricestability.Acoupleof Labormarketconditionshaveimprovedfurther;

164 99thAnnualReport|2012 theunemploymentratehasdeclinednotablyin Votingforthisaction:BenBernanke,WilliamC. recentmonthsbutremainselevated.Household Dudley,ElizabethDuke,DennisP.Lockhart,Sandra spendingandbusinessfixedinvestmenthave Pianalto,SarahBloomRaskin,DanielK.Tarullo, continuedtoadvance.Thehousingsector JohnC.Williams,andJanetL.Yellen. remainsdepressed.Inflationhasbeensubdued inrecentmonths,althoughpricesof crudeoil Votingagainstthisaction:JeffreyM.Lacker. andgasolinehaveincreasedlately.Longer-term inflationexpectationshaveremainedstable. Mr.Lackerdissentedbecausehedidnotagreethat economicconditionswerelikelytowarrantexcep- Consistentwithitsstatutorymandate,theCom- tionallylowlevelsof thefederalfundsrateatleast mitteeseekstofostermaximumemployment throughlate2014.Inhisview,withinflationcloseto andpricestability.TheCommitteeexpectsmod- theCommittee’sobjectiveof 2percent,theeconomy erateeconomicgrowthovercomingquarters expandingatamoderatepace,anddownsiderisks andconsequentlyanticipatesthattheunemploy- somewhatdiminished,thefederalfundsratewill mentratewilldeclinegraduallytowardlevels mostlikelyneedtoriseconsiderablysoonertoprethattheCommitteejudgestobeconsistentwith venttheemergenceof inflationarypressures.Mr. itsdualmandate.Strainsinglobalfinancialmar- Lackercontinuestoprefertoprovideforwardguidketshaveeased,thoughtheycontinuetopose anceregardingfutureCommitteepolicyactions significantdownsideriskstotheeconomicout- throughtheinclusionof FOMCparticipants’projeclook.Therecentincreaseinoilandgasoline tionsof thefederalfundsrateintheSummaryof priceswillpushupinflationtemporarily,butthe EconomicProjections(SEP). Committeeanticipatesthatsubsequentlyinflationwillrunatorbelowtheratethatitjudges Monetary Policy Communications mostconsistentwithitsdualmandate. Asitnotedinitsstatementof principlesregarding Tosupportastrongereconomicrecoveryandto longer-rungoalsandmonetarypolicystrategy helpensurethatinflation,overtime,isatthe releasedinJanuary,theCommitteeseekstoexplain ratemostconsistentwithitsdualmandate,the itsmonetarypolicydecisionstothepublicasclearly Committeeexpectstomaintainahighlyaccom- aspossible.Withthatgoalinmind,participantsdismodativestanceformonetarypolicy.Inparticu- cussedarangeof additionalstepsthattheCommitlar,theCommitteedecidedtodaytokeepthe teemighttaketohelpthepublicbetterunderstand targetrangeforthefederalfundsrateat0to thelinkagesbetweentheevolvingeconomicoutlook ¼percentandcurrentlyanticipatesthateco- andtheFederalReserve’smonetarypolicydecisions, nomicconditions—includinglowratesof andthustheconditionalityintheCommittee’sforresourceutilizationandasubduedoutlookfor wardguidance.Thepurposeof thediscussionwasto inflationoverthemediumrun—arelikelyto explorepotentiallypromisingapproachesforfurther warrantexceptionallylowlevelsforthefederal enhancingFOMCcommunications;nodecisionson fundsrateatleastthroughlate2014. thistopicwereplannedforthismeetingandnone weretaken. TheCommitteealsodecidedtocontinueitsprogramtoextendtheaveragematurityof itshold- ParticipantsdiscussedwaysinwhichtheCommittee ingsof securitiesasannouncedinSeptember. mightinclude,initspostmeetingstatements,addi- TheCommitteeismaintainingitsexistingpoli- tionalqualitativeorquantitativeinformationthat ciesof reinvestingprincipalpaymentsfromits couldconveyasenseof howtheCommitteemight holdingsof agencydebtandagencymortgage- adjustpolicyinresponsetochangesintheeconomic backedsecuritiesinagencymortgage-backed outlook.Participantsalsodiscussedwhethermodifisecuritiesandof rollingovermaturingTreasury cationstotheSEPthattheCommitteereleasesfour securitiesatauction.TheCommitteewillregu- timesperyearcouldbehelpfulinclarifyingthelinklarlyreviewthesizeandcompositionof itssecu- agesbetweentheeconomicoutlookandtheCommitritiesholdingsandispreparedtoadjustthose tee’smonetarypolicydecisions.Inaddition,several holdingsasappropriatetopromoteastronger participantssuggestedthatitcouldbehelpfultodiseconomicrecoveryinacontextof price cussatafuturemeetingsomealternativeeconomic stability.” scenariosandthemonetarypolicyresponsesthat

Minutesof FederalOpenMarketCommitteeMeetings|March 165 mightbeseenasappropriateundereachone,inorder 2012.Themeetingadjournedat4:10p.m.on toclarifytheCommittee’slikelybehaviorindifferent March13,2012. contingencies.Finally,participantsobservedthatthe Committeeintroducedseveralimportantenhancementstoitspolicycommunicationsoverthepast Notation Vote yearorso;theseincludedtheChairman’spostmeetingpressconferencesaswellaschangestothe BynotationvotecompletedonFebruary14,2012, FOMCstatementandtheSEP.Againstthisback- theCommitteeunanimouslyapprovedtheminutesof drop,someparticipantsnotedthatadditionalexperi- theFOMCmeetingheldonJanuary24–25,2012. encewiththechangesimplementedtodatecouldbe helpfulinevaluatingpotentialfurtherenhancements. WilliamB.English Secretary Itwasagreedthatthenextmeetingof theCommittee wouldbeheldonTuesday–Wednesday,April24–25,

166 99thAnnualReport|2012 Meeting Held on April 24–25, 2012 StevenB.Kamin Economist Ameetingof theFederalOpenMarketCommittee DavidW.Wilcox washeldintheofficesof theBoardof Governorsof Economist theFederalReserveSysteminWashington,D.C.,on DavidAltig,ThomasA.Connors,MichaelP.Leahy, Tuesday,April24,2012,at1:00p.m.,andcontinued WilliamNelson,SimonPotter,DavidReifschneider, onWednesday,April25,2012,at8:30a.m. andWilliamWascher Present AssociateEconomists BrianSack BenBernanke Manager,SystemOpenMarketAccount Chairman WilliamC.Dudley MichaelS.Gibson ViceChairman Director,Divisionof BankingSupervisionand Regulation,Boardof Governors ElizabethDuke NellieLiang JeffreyM.Lacker Director,Officeof FinancialStabilityPolicyand DennisP.Lockhart Research,Boardof Governors SandraPianalto JonW.FaustandAndrewT.Levin SpecialAdvisorstotheBoard,Officeof Board SarahBloomRaskin Members,Boardof Governors DanielK.Tarullo JamesA.Clouse JohnC.Williams DeputyDirector,Divisionof MonetaryAffairs, Boardof Governors JanetL.Yellen MatthewJ.Eichner JamesBullard,ChristineCumming, DeputyDirector,Divisionof ResearchandStatistics, CharlesL.Evans,EstherL.George,and Boardof Governors EricRosengren AlternateMembersof theFederalOpenMarket LindaRobertson Committee AssistanttotheBoard,Officeof BoardMembers, Boardof Governors RichardW.Fisher,NarayanaKocherlakota,and CharlesI.Plosser ThomasLaubach Presidentsof theFederalReserveBanksof Dallas, SeniorAdviser,Divisionof ResearchandStatistics, Minneapolis,andPhiladelphia,respectively Boardof Governors WilliamB.English EllenE.Meade SecretaryandEconomist SeniorAdviser,Divisionof MonetaryAffairs, Boardof Governors DeborahJ.Danker DeputySecretary DanielM.CovitzandDavidE.Lebow AssociateDirectors,Divisionof Researchand MatthewM.Luecke Statistics,Boardof Governors AssistantSecretary DavidBowman DavidW.Skidmore DeputyAssociateDirector,Divisionof International AssistantSecretary Finance,Boardof Governors MichelleA.Smith GretchenC.Weinbach AssistantSecretary DeputyAssociateDirector,Divisionof Monetary ScottG.Alvarez Affairs,Boardof Governors GeneralCounsel JaneE.Ihrig ThomasC.Baxter AssistantDirector,Divisionof MonetaryAffairs, DeputyGeneralCounsel Boardof Governors

Minutesof FederalOpenMarketCommitteeMeetings|April 167 DavidH.Small Developments in Financial Markets and ProjectManager,Divisionof MonetaryAffairs, the Federal Reserve’s Balance Sheet Boardof Governors TheManagerof theSystemOpenMarketAccount GregoryL.Stefani (SOMA)reportedondevelopmentsindomesticand FirstVicePresident,FederalReserveBankof foreignfinancialmarketsduringtheperiodsincethe Cleveland FederalOpenMarketCommittee(FOMC)meton Jeff Fuhrer,LorettaJ.Mester, March13,2012.HealsoreportedonSystemopen HarveyRosenblum,andDanielG.Sullivan marketoperations,includingtheongoingreinvest- ExecutiveVicePresidents,FederalReserveBanksof mentintoagency-guaranteedmortgage-backedsecu- Boston,Philadelphia,Dallas,andChicago, rities(MBS)of principalpaymentsreceivedon respectively SOMAholdingsof agencydebtandagencyguaranteedMBSaswellastheoperationsrelatedto TroyDavig,RonFeldman, thematurityextensionprogramauthorizedatthe MarkE.Schweitzer,andChristopherJ.Waller September20–21,2011,FOMCmeeting.Byunani- SeniorVicePresidents,FederalReserveBanksof mousvote,theCommitteeratifiedtheDesk’sdomes- KansasCity,Minneapolis,Cleveland,andSt.Louis, tictransactionsovertheintermeetingperiod.There respectively werenointerventionoperationsinforeigncurrencies JohnFernald fortheSystem’saccountovertheintermeetingperiod. GroupVicePresident,FederalReserveBankof WithMr.Lackerdissenting,theCommitteeagreedto SanFrancisco extendthereciprocalcurrency(swap)arrangements AndreasL.HornsteinandLorieK.Logan withtheBankof CanadaandtheBancodeMéxico VicePresidents,FederalReserveBanksof Richmond foranadditionalyearbeginninginmidandNewYork,respectively December2012;thesearrangementsareassociated withtheFederalReserve’sparticipationintheNorth Monetary Policy under Alternative AmericanFrameworkAgreementof 1994.The Scenarios arrangementwiththeBankof Canadaallowsfor cumulativedrawingsof upto$2billionequivalent, Astaff presentationprovidedanoverviewof anexer- andthearrangementwiththeBancodeMéxico cisethatexploredindividualparticipants’viewson allowsforcumulativedrawingsof upto$3billion appropriatemonetarypolicyresponsesunderalter- equivalent.ThevotetorenewtheSystem’sparticipanativeeconomicscenarios.Committeeparticipants tionintheseswaparrangementswastakenatthis discussedthepotentialvalueanddrawbacksof this meetingbecauseaprovisionintheFramework typeof exerciseforbothinternaldeliberationsand Agreementrequireseachpartytoprovidesix externalcommunicationsaboutmonetarypolicy. months’priornoticeof anintentiontoterminateits Possiblebenefitsincludehelpingtoclarifythefactors participation.Mr.Lackerdissentedbecauseof his thatindividualparticipantsjudgemostimportantin opposition,asindicatedattheJanuarymeeting,to formingtheirviewsabouttheeconomicoutlookand foreignexchangemarketinterventionbytheFederal theirassessmentsof appropriatemonetarypolicy. Reserve,whichsuchswaparrangementsmightfacili- Twopotentiallimitationsof thisapproacharethat tate,andbecauseof hisoppositiontodirectlending thescenariodescriptionsmustbynecessitybeincom- toforeigncentralbanks. plete,andthepracticalrangeof scenariosthatcanbe examinedmaybeinsufficienttobeinformative,given Staff Review of the Economic Situation thedegreeof uncertaintysurroundingpossibleoutcomes.Someparticipantsstatedthatexercisesusing TheinformationreviewedattheApril24–25meeting alternativescenarios,withappropriateadjustments, suggestedthateconomicactivitywasexpanding couldpotentiallybehelpfulforinternaldeliberations moderately.Payrollemploymentcontinuedtomove and,thus,shouldbeexploredfurther.However,no up,andtheunemploymentrate,whilestillelevated, decisionwasmadeatthismeetingregardingfuture declinedalittlefurther.Overallconsumerpriceinflaexercisesalongtheselines. tionincreasedsomewhat,primarilyreflectinghigher

168 99thAnnualReport|2012 pricesof crudeoilandgasoline,butmeasuresof Realbusinessexpendituresonequipmentandsoftlong-runinflationexpectationsremainedstable. wareappearedtorisemodestlyinthefirstquarter. Nominalshipmentsof nondefensecapitalgoods Theunemploymentratedeclinedto8.2percentin excludingaircraftincreasedinFebruaryandMarch March.Theshareof workersemployedparttimefor afterdeclininginJanuary;newordersforthesecapieconomicreasonsalsomoveddown,buttherateof talgoodsincreased,onbalance,inFebruaryand long-durationunemploymentremainedelevated.Pri- March,andtheycontinuedtorunabovethelevelof vatenonfarmemploymentroseataslowerpacein shipments.Thebuildupof unfilledordersinrecent Marchthanintheprecedingthreemonths,while months,alongwithimprovementsinsurveymeasures totalgovernmentemploymentwaslittlechangedin of capitalspendingplansandsomeotherforwardrecentmonthsafterdeclininglastyear.Someindica- lookingindicators,pointedtowardapickupinthe torsof jobopeningsandfirms’hiringplans paceof expendituresforbusinessequipment.Inconimproved.Afterbeingroughlyflatovermostof the trast,nominalbusinessspendingfornonresidential intermeetingperiod,initialclaimsforunemployment constructiondeclinedinJanuaryandFebruary. insurancerosemoderatelytowardtheendof the Inventoriesinmostindustrieslookedtobefairlywell periodbutremainedatalevelconsistentwithfurther alignedwithsalesinrecentmonths,althoughmotor moderatejobgainsinthecomingmonths. vehiclestockswerestillrelativelylean. Manufacturingproductionexpanded,onnet,inFeb- Dataforfederalgovernmentspendinginrecent ruaryandMarch,whiletherateof manufacturing monthsindicatedthatrealdefenseexpendituresrose capacityutilizationwasessentiallyunchanged.In modestlyinthefirstquarter.Realstateandlocalgovrecentmonths,theproductionof motorvehiclescon- ernmentpurchasesappearedtobeaboutflatlast tinuedtoriseappreciablyinresponsetobothhigher quarter,asthepayrollsof thesegovernmentsedged vehiclesalesanddealers’additionstorelativelylow upinthefirstquarterandtheirnominalconstruction levelsof inventories;outputgainsinotherindustries spendingdeclinedslightly,onnet,inJanuaryand alsoweresolidandwidespread.Motorvehicleassem- February. blieswerescheduledtostepupfurtherinthesecond quarter,andbroaderindicatorsof manufacturing TheU.S.internationaltradedeficitnarrowedinFebactivity,suchasthediffusionindexesof neworders ruaryasexportsroseandimportsfell.Theexport fromthenationalandregionalmanufacturingsur- gainswereconcentratedinservices.Exportsof goods veys,wereatlevelsconsistentwithmoderate declinedlargelybecauseof adecreaseinexportsof increasesinfactoryoutputinthesecondquarter. automotiveproducts.Thedropinimportsreflected significantdeclinesinimportsof petroleumproducts, Realpersonalconsumptionexpenditures(PCE)rose automotiveproducts,capitalgoods,andconsumer brisklyinFebruary,eventhoughhouseholds’realdis- goods.ImportsfromChinawereespeciallyweak, posableincomesdeclined.InMarch,nominalretail whichmayinpartreflectseasonaladjustmentissues salesexcludingpurchasesof motorvehiclesincreased relatedtothetimingof theChineseNewYear. solidly,whilemotorvehiclesalesfelloff alittlefrom theirbriskpaceinthepreviousmonth.Consumer OverallU.S.consumerprices,asmeasuredbythe sentimentwaslittlechanged,onbalance,inMarch PCEpriceindex,roseatasomewhatfasterratein andearlyAprilandremainedsubdued. Februarythanintheprecedingsixmonths.In March,pricesmeasuredbytheconsumerpriceindex Somemeasuresof homepricesroseinJanuaryand increasedatthatsamefasterpace.Consumerenergy February,butactivityinthehousingmarketcontin- pricesclimbedmarkedlyinFebruaryandMarch, uedtobehelddownbythelargeinventoryof fore- althoughsurveydataindicatedthatgasolineprices closedanddistressedpropertiesandbytightunder- steppeddowninthefirsthalf of April.Meanwhile, writingstandardsformortgageloans.Startsof new increasesinconsumerfoodpriceswererelativelysubsingle-familyhomesfellbackinFebruaryandMarch duedinrecentmonths.Consumerpricesexcluding toalevelmoreinlinewithpermitissuance;starts foodandenergyrosemoderatelyinFebruaryand wereapparentlyboostedbyunseasonablywarm March.Near-terminflationexpectationsfromthe weatherinDecemberandJanuary.Moreover,salesof ThomsonReuters/Universityof MichiganSurveysof newandexistinghomesedgeddown,onnet,in ConsumersincreasedinMarchbutthenfellbackin recentmonths.

Minutesof FederalOpenMarketCommitteeMeetings|April 169 earlyApril,whilelonger-terminflationexpectations reductioninTreasurybillissuanceinApril,but inthesurveyremainedstable. endedtheperiodroughlyunchanged. Availablemeasuresof laborcompensationindicated BroadU.S.stockpriceindexesfollowedthegeneral thatnominalwagegainscontinuedtobemuted. patternobservedacrossassetmarkets,risingearlyin Averagehourlyearningsforallemployeesrosemod- theperiodonincreasedinvestoroptimismandthen estlyinMarch,andtheirrateof increasefrom fallinglateron,toendtheperiodlittlechangedon 12monthsearlierremainedlow. net.Equitypricesof financialinstitutionsincreased, reportedlyasinvestorsinterpretedthefirst-quarter Recentindicatorssuggestedthatforeigneconomic earningsof severallargebankingorganizationsand activityimprovedonbalanceinthefirstquarter,but theresultsof theCCARasbetterthanexpected. therewereimportantdifferencesacrosseconomies.In Yieldsandspreadsoninvestment-gradecorporate theeuroarea,economicindicatorspointedtoweak- bondswereaboutunchanged,butyieldsandspreads eningactivityasfinancialstressesworsened,whereas onspeculative-gradecorporatebondsincreased intheemergingmarketeconomies,recentdatawere somewhat. consistentwithcontinuedexpansion.Readingson foreigninflationeased,althoughtheywerestillrela- Businessescontinuedtoraisesubstantialamountsof tivelyhighinsomeLatinAmericancountries. fundsincreditandcapitalmarketsoverrecent months.Bondissuancebyfinancialfirmspickedup Staff Review of the Financial Situation furtherinMarchfromthestrongpacerecordedin theprevioustwomonths.Domesticnonfinancial Broadfinancialmarketconditionschangedlittle,on firms’bondissuanceandgrowthincommercialand balance,sincetheMarchFOMCmeeting.However, industrial(C&I)loanswererobustinthefirstquarassetpricesfluctuatedsubstantiallyovertheperiod, ter.Leveragedloanissuancewasbriskoverthis apparentlyinresponsetotheevolvingviewsonthe periodaswell,reportedlysupportedbyinvestor U.S.andglobaleconomicoutlookandchanging demandfornewlyissuedcollateralizedloanobligaexpectationsregardingthefuturecourseof monetary tionsaswellasbyinterestfrompensionfundsand policy. otherinstitutionalinvestors.GrosspublicequityissuancebynonfinancialfirmsstayedstronginMarch. YieldsonnominalTreasurysecuritiesmovedupearly Incontrast,financialconditionsinthecommercial intheperiod,reportedlyasinvestorsreadincoming realestate(CRE)sectorremainedstrainedamid information,includingtheMarchFOMCstatement weakfundamentalsandtightunderwritingcondiandminutesalongwiththeresultsof theCompre- tions,andissuanceof commercialmortgage-backed hensiveCapitalAnalysisandReview(CCAR),as securitiesinthefirstquarterof 2012wasbelowthat suggestingasomewhatstrongereconomicoutlook of ayearago. thanpreviouslyexpected.Oversubsequentweeks, however,yieldsdriftedlowerinresponsetodisap- Withrespecttocredittohouseholds,developments pointingeconomicnewsandincreasedconcerns overtheintermeetingperiodweremixed.Although aboutthestrainsinEurope.Onnet,nominalTreas- mortgageratesremainedneartheirhistoricallows, uryyieldsfinishedtheperiodslightlylowerand mortgagerefinancingactivitywassubdued,andconmeasuresof theexpectedpathforthefederalfunds ditionsinresidentialmortgagemarketscontinuedto ratederivedfromovernightindexswap(OIS)rates beweak.Bycontrast,consumercreditroseatasolid moveddown. pace,onbalance,inrecentmonths;nonrevolving credit,particularlystudentloans,expanded.Issuance Conditionsinunsecuredshort-termdollarfunding of consumerasset-backedsecurities(ABS)edgedup marketswerestableovermostof theintermeeting in recent months, supported by auto-loan ABS issuperioddespitetheincreaseinconcernsaboutEurope ance. inthelatterpartof theperiod.Insecuredfunding markets,theovernightgeneralcollateralTreasury Grossissuanceof long-termmunicipalbondswas repurchaseagreementratedeclinedforatimelatein subduedinthefirstquarter.Theratioof general theperiod,reportedlyinresponsetotheseasonal obligationmunicipalbondyieldstoyieldson

170 99thAnnualReport|2012 comparable-maturityTreasurysecuritieswaslittle ThetotaloutstandingamountontheFederal changedovertheintermeetingperiod,andtheaver- Reserve’sdollarliquidityswaplinesdeclinedto agespreadsoncreditdefaultswapsfordebtissuedby $32billion,downfrom$65billionatthetimeof the statesdeclinedonnet. MarchFOMCmeeting;demandfordollarsfellatthe lendingoperationsof theEuropeanCentralBank, BankcreditslowedinMarchbutexpandedatasolid theBankof Japan,andtheSwissNationalBank. paceinthefirstquarterasawhole.TheSeniorLoan OfficerOpinionSurveyonBankLendingPractices Staff Economic Outlook conductedinAprilindicatedthat,intheaggregate, domesticbankseasedslightlytheirlendingstandards IntheeconomicforecastpreparedfortheApril oncoreloans—C&I,realestate,andconsumer FOMCmeeting,thestaff revisedupslightlyitsnearloans—andexperiencedsomewhatstrongerdemand termprojectionforrealgrossdomesticproduct forsuchloansinthefirstquarterof 2012.C&Iloans (GDP)growth,reflectingthattheunemploymentrate atdomesticbankscontinuedtoexpandinMarch, wasalittlelower,thelevelof overallpayrollemploywithgrowthconcentratedatlargedomesticbanks. mentabithigher,andconsumerspendingnoticeably Banks’holdingsof closed-endresidentialmortgage strongerthanthestaff hadexpectedatthetimeof loansexpanded,whilehomeequityloansandCRE thepreviousforecast.However,thestaff’smediumloanscontinuedtodecline.Consumerloanson termprojectionforrealGDPgrowthintheApril banks’booksrosemodestlyinMarch. forecastwaslittlechangedfromtheonepresentedin March.Thestaff continuedtoprojectthatrealGDP M2expandedatamoderatepaceinMarch,reflect- wouldaccelerategraduallythrough2014,supported inggrowthinliquiddepositsandcurrencythatwas byaccommodativemonetarypolicy,furtherimproveonlypartiallyoffsetbydeclinesinsmalltimedeposits mentsincreditavailability,andrisingconsumerand andinbalancesinretailmoneymarketfunds. businesssentiment.Increasesineconomicactivity wereexpectedtobesufficienttodecreasethewide Financialstrainswithintheeuroareaincreasedover marginof slackinthelabormarketslowlyoverthe theintermeetingperiod.Spreadsof yieldsonsover- projectionperiod,buttheunemploymentratewas eignItalianandSpanishdebtoverthoseon anticipatedtostillbeelevatedattheendof 2014. comparable-maturityGermanbondsrose,amidofficialwarningsthatSpainwouldmissitsfiscaltarget Thestaff’sforecastforinflationovertheprojection forthisyearandwouldneedtomakefurtherbudget periodwasjustabitabovetheforecastpreparedfor cuts,aswellasrenewedconcernsinthemarketabout theMarchFOMCmeeting,reflectingsomewhat theprospectsforSpanishbanks.Althoughthespread higher-than-expecteddataoncoreconsumerprices of thethree-montheuroLondoninterbankoffered andaslightlynarrowermarginof economicslack rateoverthecomparableOISratenarrowedonbal- thanintheMarchforecast.However,withthepassanceovertheperiod,euro-areabankequityindexes throughof therecentrun-upincrudeoilpricesinto droppedsharply,drivenbydeclinesintheshare consumerenergypricesseenasnearlycomplete,oil pricesof SpanishandItalianbanks.Five-yearcredit pricesexpectedtoedgelowerfromcurrentlevels, defaultswappremiumsroseforabroadrangeof substantialresourceslackpersistingovertheprojeceuro-areabanks,especiallySpanishbanks. tionperiod,andstablelong-runinflationexpectations,thestaff continuedtoforecastthatinflation Againstthebackgroundof theseincreasedstresses wouldbesubduedthrough2014. withintheeuroarea,foreignequityindexesdeclined andcorporatecreditspreadswidened.Thestaff’s Participants’ Views on Current Conditions broadnominalindexof theforeignexchangevalueof and the Economic Outlook thedollarwasaboutunchangedovertheintermeetingperiodasthedollarappreciatedagainstmost InconjunctionwiththisFOMCmeeting,meeting emergingmarketcurrenciesbutdepreciatedmoder- participants—thefivemembersof theBoardof atelyagainsttheyenandsterling.Amidsomevolatil- Governorsandthepresidentsof the12Federal ity,yieldsonbenchmarksovereignbondsforGer- ReserveBanks,allof whomparticipateinthedelibmanyandJapanendedtheperiodsomewhatlower. erationsof theFOMC—submittedtheirassessments Monetarypolicyabroadremainedgenerally of realoutputgrowth,theunemploymentrate,inflaaccommodative. tion,andthetargetfederalfundsrateforeachyear

Minutesof FederalOpenMarketCommitteeMeetings|April 171 from2012through2014andoverthelongerrun, toeaseovertimeandsoanticipatedthattherecovery undereachparticipant’sjudgmentof appropriate wouldgraduallygainstrength.Thestrainsinglobal monetarypolicy.Thelonger-runprojectionsrepre- financialmarkets,thoughgenerallylesspronounced senteachparticipant’sassessmentof therateto thanlastfall,continuedtoposeasignificantriskto whicheachvariablewouldbeexpectedtoconverge, theoutlook,andthepossibilityof asharpfiscal overtime,underappropriatemonetarypolicyandin tighteningintheUnitedStateswasalsoconsidereda theabsenceof furthershockstotheeconomy.These sizablerisk.Mostparticipantsanticipatedthatinflaeconomicprojectionsandpolicyassessmentsare tionwouldfallbackfromrecentelevatedlevelsasthe describedinmoredetailintheSummaryof Eco- effectsof higherenergypriceswaned,andstill nomicProjections(SEP),whichisattachedasan expectedthatinflationsubsequentlywouldrunator addendumtotheseminutes. belowthe2percentratethattheCommitteejudgesto bemostconsistentwithitsstatutorymandate.How- Intheirdiscussionof theeconomicsituationand ever,otherparticipantssawupsideriskstotheinflaoutlook,meetingparticipantsagreedthattheinfor- tionoutlookgiventherecentpickupininflationand mationreceivedsincetheCommittee’sprevious thehighlyaccommodativestanceof monetarypolicy. meetingsuggestedthattheeconomycontinuedto expandmoderately.Labormarketconditions Indiscussingthehouseholdsector,meetingparticiimprovedinrecentmonths.Sofarthisyear,payroll pantsgenerallynotedthatconsumerspendingconemploymenthadexpandedatafasterpacethanlast tinuedtoexpandmoderately,notwithstandinghigh yearandtheunemploymentratehaddeclinedfur- gasolineprices.Therecentstrengtheninginthepace ther,althoughitremainedelevated.Household of lightmotorvehiclesaleswasattributedtoboth spendingandbusinessfixedinvestmentcontinuedto pent-updemandandthedesireforincreasedfueleffiexpand.Thereweresignsof improvementinthe ciencyinthewakeof highergasolineprices.Looking housingsector,butfromaverylowlevelof activity. forward,increasesinhouseholdwealthfromtherise Despitesomevolatilityinfinancialmarketsoverthe inequityprices,improvingconsumersentiment,and intermeetingperiod,financialconditionsinU.S.mar- adiminishingdragfromhouseholddeleveragingwere ketscontinuedtoimprove;bankcreditqualityand seenashelpingtosupportcontinuedincreasesin loandemandbothincreased.Mainlyreflectingthe householdexpenditures,notwithstandingsluggish increaseinthepricesof crudeoilandgasolineearlier growthinrealdisposableincomeandrestrictivefiscal thisyear,inflationhadpickedupsomewhat.How- policies. ever,longer-terminflationexpectationsremainedstable. Recenthousing-sectorindicators,includingsalesand Participants’assessmentsof theeconomicoutlook starts,suggestedsomeupwardmovement,butsome werelittlechanged,withtheintermeetinginforma- participantssawtheimprovementaslikelyrelatedto tiongenerallyseenassuggestingthateconomic unusuallywarmwinterweatherinmuchof thecoungrowthwouldremainmoderateovercomingquarters try.Overall,thelevelof activityinthesector andthenpickupgradually.Reflectingthemoderate remaineddepressed.Housepricesappearedtobestapaceof economicgrowth,mostanticipatedagradual bilizingbuthadnotyetbeguntoriseinmostmardeclineintheunemploymentrate.Theincoming kets.Mostparticipantsanticipatedthatthehousing informationledsomeparticipantstobecomemore sectorwaslikelytorecoveronlyslowlyovertime,but confidentaboutthedurabilityof therecovery.How- afewweremoreoptimisticaboutthepotentialfora ever,othersthoughtitwasprematuretoinfera morerapidhousingrecoverygivenreportsof strongerunderlyingtrendfromtherecentpositive strongerdemandinsomeregionsandof improved indicators,sincethosereadingsmaypartiallyreflect sentimentamongbuilders,aswellassignsthatrecent theeffectsof themildwinterweatherorothertem- changestotheHomeAffordableRefinanceProgram poraryinfluences.Anumberof factorscontinuedto werecontributingtotherefinancingof performing beseenaslikelylimitingtheeconomicexpansiontoa highloan-to-valuemortgages. moderatepaceinthenearterm;theseincludedslow growthinsomeforeigneconomies,prospectivefiscal Reportsfrombusinesscontactsindicatedthatactivity tighteningintheUnitedStates,slowhousehold inthemanufacturing,energy,andagriculturesectors incomegrowth,and—notwithstandingsomerecent continuedtoadvanceinrecentmonths.Autoproducsignsof improvement—ongoingweaknessinthe tionhadpickedupinlightof strengtheningdemand. housingmarket.Participantscontinuedtoexpect Businesscontactssuggestedthatsentimentwas mostof thefactorsrestrainingeconomicexpansion improving,butmanyfirmsremainedsomewhatcau-

172 99thAnnualReport|2012 tiousintheirhiringandinvestmentdecisions,with jobgainsmaybesomewhatweakerunlessthepaceof mostcapitalinvestmentbeingundertakentoimprove economicgrowthincreases.Participantsexpresseda productivityorgainmarketshareratherthanto rangeof viewsontheextenttowhichtheunemployexpandcapacity.Reportedly,thiscautionreflectedin mentratewasbeingboostedbystructuralfactors partcontinueduncertaintyaboutthestrengthand suchasmismatchesbetweentheskillsof unemployed durabilityof theeconomicrecovery,aswellasabout workersandthosebeingdemandedbyhiringfirms. governmentpolicies. Afewparticipantsacknowledgedtherecouldbe structuralfactorsatwork,butsaidthatintheirview, Participantsexpectedthatthegovernmentsector slackremainedhighandweakaggregatedemandwas wouldbeadragoneconomicgrowthovercoming themajorreasonthatunemploymentwasstill quarters.TheygenerallysawtheU.S.fiscalsituation elevated.Twonotedthepossibilitythatsustained alsoasarisktotheeconomicoutlook;if agreement highlevelsof long-termunemploymentcouldresult isnotreachedonaplanforthefederalbudget,a inhigherstructuralunemployment,anoutcomethat sharpfiscaltighteningcouldoccuratthestartof mightbeforestalledbyincreasedaggregatedemand. 2013.Severalparticipantsindicatedthatuncertainty Afewparticipantsnotedthatcurrentmeasuresof aboutthetrajectoryof futurefiscalpolicycouldlead labormarketslackwouldbeoverstatedif structural businessestodeferhiringandinvestment.Itwas factorsaccountedforalargeportionof thecurrent notedthatagreementonalonger-termplanto highlevelsof unemployment.Asaresult,suchmeasaddressthecountry’sfiscalchallengeswouldhelpto uresmightbeanunreliableguideastohowclosethe alleviateuncertaintyandconsequentnegativeeffects economywastomaximumemployment.Theseparonconsumerandbusinesssentiment. ticipantspointedoutthat,overtime,estimatesof the potentiallevelof outputhavedeclined,reducing,asa ExportshavesupportedU.S.growthsofarthisyear; consequence,estimatesof thelevelof economic however,someparticipantsnotedriskstotheexport slack.SomeparticipantscitedtherecentriseininflapicturefromeconomicweaknessinEuropeorfroma tion,abstractingfromthedirecteffectof therisein moresignificantslowdowninthepaceof expansion energyprices,assupportiveof theviewthatthelevel inChinaandemergingAsia. of slackwaslowerthansomebelieve. Labormarketconditionscontinuedtoimprove, Participantsjudgedthat,ingeneral,conditionsin althoughunusuallywarmweathermayhaveinflated domesticcreditmarketshadcontinuedtoimprove payrolljobfiguressomewhatearlierthisyear.Con- sincetheMarchFOMCmeeting.Bankcreditquality tactsinsomepartsof thecountrysaidthathighly andconsumerandbusinessloandemandwere qualifiedworkerswereinshortsupply;overall,how- increasing,althoughcommercialandresidentialreal ever,wagepressureshadbeenlimitedsofar.The estatelendingremainedrelativelyweak.U.S.equity declineinlaborforceparticipation,whichhasbeen priceshadrisenearlyintheintermeetingperiodbut sharpestforyoungerworkers,hasbeenafactorinthe subsequentlydeclined,endingtheperiodlittle nearly1percentagepointdeclineintheunemploy- changedonnet;investment-gradecorporatebond mentratesincelastAugust,adropthatwaslarger yieldswereflattodownslightlyandremainedatvery thanwouldhavebeenpredictedfromthehistorical lowlevels.ManyU.S.financialinstitutionshadbeen relationshipbetweenrealGDPgrowthandchanges takingstepstobolstertheirresiliency,including intheunemploymentrate.Assessingtheextentto increasingcapitallevelsandliquiditybuffers,and whichthechangesinlaborforceparticipationreflect reducingtheirEuropeanexposures.Afewparticicyclicalfactorsthatwillbereversedoncetherecovery pantsindicatedthattheywereseeingsignsthatvery picksup,asopposedtochangesinthetrendrateof lowinterestratesmightbeinducingsomeinvestorsto participation,wasseenasimportantforunderstand- takeonimprudentrisksinthesearchforhigher ingunemploymentdynamicsgoingforward.One nominalreturns.Incontrasttoimprovedconditions participantcitedresearchsuggestingthatabouthalf indomesticcreditmarkets,investors’concernsabout of thedeclineinlaborforceparticipationhad thesovereigndebtandbankingsituationintheeuro reflectedcyclicalfactors,andthus,asparticipation areaintensifiedduringtheintermeetingperiod.Some picksup,unemploymentmaydeclinemoreslowlyin participantssaidtheythoughtthepolicyactions comingquarterscomparedwiththerecentpace. takeninEuropewouldmostlikelyeasestressin Anotherpositedthatthestrengthinpayrolljob financialmarkets,butsomeexpressedtheviewthata growthinrecentmonthsmaybeaone-timereaction longer-termsolutiontothebankingandfiscalprobtothesharplayoffsin2008and2009andthatfuture lemsintheeuroareawouldrequiresubstantialfur-

Minutesof FederalOpenMarketCommitteeMeetings|April 173 theradjustmentinthebankingandpublicsectors. that,whileprescriptionsfromrulesmightprovide Participantsexpectedthatglobalfinancialmarkets usefulbenchmarks,applyingtherulesmechanically wouldremainfocusedontheevolvingsituationinEurope. andwithlittlethoughtabouttheembeddedassumptionswouldbecounterproductive.Anotherpartici- Readingsonconsumerpriceinflationhadpickedup pantquestionedthevalueof interestrateruleswhen somewhatmainlybecauseof increasesinoiland thepolicyrateisconstrainedbythezerolowerbound gasolinepricesearlierintheyear.Inrecentweeks,oil onnominalinterestratesandunconventionalpolicy priceshadbeguntofallandreadingsfromtheoil optionsarebeingused,butothersindicatedthey futuresmarketsuggestedthismaycontinue;non- believedtherulescouldbeappropriatelyadjustedto energycommoditypriceshadremainedrelatively accountforthesefactors.Interestwasexpressedin stable.Severalparticipantsnotedthatincreasesin examiningtheusefulnessof simplepolicyrulesina laborcostscontinuedtobesubdued.Withlonger-run morenormalenvironment,aswellasinthecurrent inflationexpectationswellanchoredandtheunem- environmentinwhichthepolicyrateisatthezero ploymentrateelevated,mostparticipantsanticipated lowerboundandlarge-scaleassetpurchasesandthe thatafterthetemporaryeffectof theriseinoiland maturityextensionprogramhavebeenimplemented. gasolinepriceshadrunitscourse,inflationwouldbe Participantsplannedtodiscussfurther,atafuture atorbelowthe2percentratethattheCommittee meeting,thepotentialmeritsanddrawbacksof using judgestobemostconsistentwithitsmandate.Over- simplerulesasguidestomonetarypolicydecisionall,mostparticipantsviewedtheriskstotheirinfla- makingandforcommunications. tionoutlookasbeingroughlybalanced.However, someparticipantssawariskthatinflationpressures couldincreaseastheexpansioncontinued;they Committee Policy Action pointedtothefactthatinflationwascurrentlyabove targetandwereskepticalof modelsthatrelyoneco- MembersviewedtheinformationonU.S.economic nomicslacktoforecastinflationpartlybecauseof activityreceivedovertheintermeetingperiodassugthedifficultyinmeasuringslack,especiallyinreal gestingthattheeconomyhadbeenexpandingmodertime.Theseparticipantswereconcernedthatmain- atelyandgenerallyagreedthattheeconomicoutlook tainingthecurrenthighlyaccommodativestanceof wasbroadlysimilartothatatthetimeof theirMarch monetarypolicyoverthemediumruncoulderode meeting.Labormarketconditionshadimprovedin thestabilityof inflationexpectationsandriskhigher recentmonths,andtheunemploymentratehad inflation.Inthisregard,oneparticipantnotedthe fallen,butalmostallof thememberssawtheunempotentialrisksandcostsassociatedwithadditional ploymentrateasstillelevatedrelativetolevelsthat balancesheetactions. theyviewedasconsistentwiththeCommittee’smandate.Growthwasexpectedtobemoderateovercom- Intheirdiscussionof theeconomicoutlookand ingquartersandthentopickupovertime.Members policy,someparticipantsnotedthepotentialuseful- expectedtheunemploymentratetodeclinegradually. nessof simplemonetarypolicyrules,of thetypethe Strainsinglobalfinancialmarketsstemmingfrom Committeeregularlyreviews,asguidesformonetary thesovereigndebtandbankingsituationinEurope policydecisionmakingandforexternalcommunica- continuedtoposesignificantdownsideriskstoecotionsaboutpolicy.Theseparticipantssuggestedthat nomicactivitybothhereandabroad.Thepossibilibecausesuchrulesgiveanindicationof howpolicy tiesthatU.S.fiscalpolicywouldbemorecontracshouldsystematicallyrespondtochangesineco- tionarythananticipatedandthatuncertaintyabout nomicconditionstheymighthelpclarifytherelation- fiscalpolicycouldleadtoadeferralof hiringand shipbetweenappropriatemonetarypolicyandthe investmentwereotherdownsiderisks.Recentreadevolutionof theeconomicoutlook.Whileacknowl- ingsindicatedthatinflationremainedabovethe edgingthattherecouldbedifferencesacrosspartici- Committee’s2percentlonger-runtarget,primarily pantsinthetypeof rulestheymightfavor—for reflectingtheincreaseinoilandgasolinepricesseen example,oneparticipantexpressedapreferencefor earlierintheyear.Withlonger-terminflationexpecrulesbasedongrowthratesratherthanoutputgaps tationsstable,mostmembersanticipatedthatthe becauseof measurementissues—afewparticipants increaseininflationwouldprovetemporaryandthat indicatedthatthelikelydegreeof commonality subsequentlyinflationwouldrunatorbelowtherate acrossparticipantswassuggestivethatthismightbe thattheCommitteejudgestobemostconsistentwith apromisingapproachtoexplore.However,afew itsmandate.However,onememberthoughtthat otherparticipantsweremoreskeptical.Onethought therewereupsideriskstoinflation,especiallyif the

174 99thAnnualReport|2012 currentdegreeof highlyaccommodativemonetary statementwouldbesubjecttorevisionshouldthere policyweremaintainedmuchbeyondthisyear. beasignificantchangeintheeconomicoutlook. Somemembersrecalledthatgainsinemployment Intheirdiscussionof monetarypolicyfortheperiod strengthenedinearly2010andagaininearly2011 ahead,theCommitteemembersreachedthecollec- onlytodiminishasthoseyearsprogressed;moreover, tivejudgmentthatitwouldbeappropriatetomain- theuncertaineffectsof theunusuallymildwinter taintheexistinghighlyaccommodativestanceof weatherwerecitedasmakingithardertodiscernthe monetarypolicy.Inparticular,theCommitteeagreed underlyingtrendintheeconomicdata.Theyviewed tokeepthetargetrangeforthefederalfundsrateat thesefactorsasreinforcingthecaseforleavingthe 0to¼percent,tocontinuetheprogramof extending forwardguidanceunchangedatthismeetingandpretheaveragematurityof theFederalReserve’shold- ferredadjustingtheforwardguidanceonlyoncethey ingsof securitiesasannouncedlastSeptember,and weremoreconfidentthatthemedium-termeconomic toretaintheexistingpoliciesregardingthereinvest- outlookorriskstotheoutlookhadchangedsignifimentof principalpaymentsfromFederalReserve cantly.Incontrast,anothermemberthoughtthatthe holdingsof securities. forwardguidanceshouldbemoreresponsiveto changesineconomicdevelopments;thatmember Withrespecttothestatementtobereleasedfollowing suggestedthattheCommitteewouldneedtodeterthemeeting,membersagreedthatonlyrelatively mine the appropriate threshold for altering the guidsmallmodificationstothefirsttwoparagraphswere ance. neededtoreflecttheincomingeconomicdataandthe modestchangestotheeconomicoutlook.Withthe TheCommitteealsostatedthatitwillregularly economicoutlookoverthemediumtermnotgreatly reviewthesizeandcompositionof itssecuritiesholdchanged,almostallof themembersagainagreedto ingsandispreparedtoadjustthoseholdingsas indicatethattheCommitteeexpectstomaintaina appropriatetopromoteastrongereconomicrecovery highlyaccommodativestanceformonetarypolicy inacontextof pricestability.Severalmembersindiandcurrentlyanticipatesthateconomicconditions— catedthatadditionalmonetarypolicyaccommodaincludinglowratesof resourceutilizationandasub- tioncouldbenecessaryif theeconomicrecoverylost duedoutlookforinflationoverthemediumrun—are momentumorthedownsideriskstotheforecast likelytowarrantexceptionallylowlevelsforthefed- becamegreatenough. eralfundsrateatleastthroughlate2014.Mostmemberscontinuedtoanticipatethattheunemployment Committeemembersdiscussedthedesirabilityof ratewouldstillbewellabovetheirestimatesof its providingmoreclarityabouttheeconomiccondilonger-runlevel,andinflationwouldbeatorbelow tionsthatwouldlikelywarrantmaintainingthecurtheCommittee’slonger-runobjective,inlate2014. renttargetrangeforthefederalfundsrateandthose SomeCommitteemembersindicatedthattheirpolicy thatwouldindicatethatachangeinmonetarypolicy judgmentreflectedinparttheirperceptionof down- wasappropriate.Doingsomighthelpthepublicbetsideriskstogrowth,especiallysincetheCommittee’s terunderstandtheconditionalityintheCommittee’s abilitytorespondtoweaker-than-expectedeconomic forwardguidance.TheCommitteealsodiscussedthe conditionswouldbesomewhatlimitedbythecon- relationshipbetweentheCommittee’sstatement, straintimposedonmonetarypolicywhenthepolicy whichexpressesthecollectiveviewof theCommittee, rateisnearthezerolowerbound.Theneedtocom- andthepolicyprojectionsof individualparticipants, pensateforasubstantialperiodduringwhichthe whichareincludedintheSEP.TheChairmanasked policyratewasconstrainedbythezeroboundwas thesubcommitteeoncommunicationstoconsider alsocitedbyafewmembersasapossiblereasonto possibleenhancementsandrefinementstotheSEP maintainaverylowlevelof thefederalfundsratefor thatmighthelpbetterclarifythelinkbetweenecoalongerperiodthanwouldotherwisebethecase. nomicdevelopmentsandtheCommittee’sviewof theappropriatestanceof monetarypolicy. Whilealmostallof themembersagreedthatthe changeintheoutlookovertheintermeetingperiod Attheconclusionof thediscussion,theCommittee wasinsufficienttowarrantanadjustmenttothe votedtoauthorizeanddirecttheFederalReserve Committee’sforwardguidance,particularlygiventhe Bankof NewYork,untilitwasinstructedotherwise, uncertaintysurroundingeconomicforecasts,itwas toexecutetransactionsintheSystemAccountin notedthattheforwardguidanceisconditionalon accordancewiththefollowingdomesticpolicy economicdevelopmentsandthatthedategiveninthe directive:

Minutesof FederalOpenMarketCommitteeMeetings|April 175 “TheFederalOpenMarketCommitteeseeks nomicgrowthtoremainmoderateovercoming monetaryandfinancialconditionsthatwillfos- quartersthentopickupgradually.Conseterpricestabilityandpromotesustainable quently,theCommitteeanticipatesthatthe growthinoutput.Tofurtheritslong-runobjec- unemploymentratewilldeclinegradually tives,theCommitteeseeksconditionsinreserve towardlevelsthatitjudgestobeconsistentwith marketsconsistentwithfederalfundstradingin itsdualmandate.Strainsinglobalfinancialmararangefrom0to¼percent.TheCommittee ketscontinuetoposesignificantdownsiderisks directstheDesktocontinuethematurityexten- totheeconomicoutlook.Theincreaseinoiland sionprogramitbeganinSeptembertopurchase, gasolinepricesearlierthisyearisexpectedto bytheendof June2012,Treasurysecuritieswith affectinflationonlytemporarily,andtheComremainingmaturitiesof approximately6yearsto mitteeanticipatesthatsubsequentlyinflation 30yearswithatotalfacevalueof $400billion, willrunatorbelowtheratethatitjudgesmost andtosellTreasurysecuritieswithremaining consistentwithitsdualmandate. maturitiesof 3yearsorlesswithatotalface valueof $400billion.TheCommitteealso Tosupportastrongereconomicrecoveryandto directstheDesktomaintainitsexistingpolicies helpensurethatinflation,overtime,isatthe of rollingovermaturingTreasurysecuritiesinto ratemostconsistentwithitsdualmandate,the newissuesandof reinvestingprincipalpayments Committeeexpectstomaintainahighlyaccomonallagencydebtandagencymortgage-backed modativestanceformonetarypolicy.InparticusecuritiesintheSystemOpenMarketAccount lar,theCommitteedecidedtodaytokeepthe inagencymortgage-backedsecuritiesinorderto targetrangeforthefederalfundsrateat0to maintainthetotalfacevalueof domesticsecuri- ¼percentandcurrentlyanticipatesthatecotiesatapproximately$2.6trillion.TheCommit- nomicconditions—includinglowratesof teedirectstheDesktoengageindollarroll resourceutilizationandasubduedoutlookfor transactionsasnecessarytofacilitatesettlement inflationoverthemediumrun—arelikelyto of theFederalReserve’sagencyMBStransac- warrantexceptionallylowlevelsforthefederal tions.TheSystemOpenMarketAccountMan- fundsrateatleastthroughlate2014. agerandtheSecretarywillkeeptheCommittee informedof ongoingdevelopmentsregarding TheCommitteealsodecidedtocontinueitsprotheSystem’sbalancesheetthatcouldaffectthe gramtoextendtheaveragematurityof itsholdattainmentovertimeof theCommittee’sobjec- ingsof securitiesasannouncedinSeptember. tivesof maximumemploymentandprice TheCommitteeismaintainingitsexistingpolistability.” ciesof reinvestingprincipalpaymentsfromits holdingsof agencydebtandagencymortgage- Thevoteencompassedapprovalof thestatement backedsecuritiesinagencymortgage-backed belowtobereleasedat12:30p.m.: securitiesandof rollingovermaturingTreasury securitiesatauction.TheCommitteewillregu- “InformationreceivedsincetheFederalOpen larlyreviewthesizeandcompositionof itssecu- MarketCommitteemetinMarchsuggeststhat ritiesholdingsandispreparedtoadjustthose theeconomyhasbeenexpandingmoderately. holdingsasappropriatetopromoteastronger Labormarketconditionshaveimprovedin economicrecoveryinacontextof price recentmonths;theunemploymentratehas stability.” declinedbutremainselevated.Household spendingandbusinessfixedinvestmenthave Votingforthisaction:BenBernanke,WilliamC. continuedtoadvance.Despitesomesignsof Dudley,ElizabethDuke,DennisP.Lockhart,Sandra improvement,thehousingsectorremains Pianalto,SarahBloomRaskin,DanielK.Tarullo, depressed.Inflationhaspickedupsomewhat, JohnC.Williams,andJanetL.Yellen. mainlyreflectinghigherpricesof crudeoiland gasoline.However,longer-terminflationexpec- Votingagainstthisaction:JeffreyM.Lacker. tationshaveremainedstable. Mr.Lackerdissentedbecausehedidnotbelievethat Consistentwithitsstatutorymandate,theCom- economicconditionswerelikelytowarrantexcepmitteeseekstofostermaximumemployment tionallylowlevelsof thefederalfundsratethrough andpricestability.TheCommitteeexpectseco- late2014.Inhisview,anincreaseinthefederalfunds

176 99thAnnualReport|2012 ratewaslikelytobenecessarybymid-2013toprevent Notation Vote theemergenceof inflationarypressures. BynotationvotecompletedonApril2,2012,the Itwasagreedthatthenextmeetingof theCommittee Committeeunanimouslyapprovedtheminutesof the wouldbeheldonTuesday–Wednesday,June19–20, FOMCmeetingheldonMarch13,2012. 2012.Becausesomeparticipantshadexpresseda preferenceforthetwo-dayformatovertheone-day WilliamB.English formatforFOMCmeetings,theChairmanraisedthe Secretary possibilityof revisingtheFOMCmeetingschedule toincorporatemoretwo-daymeetingstoallowadditionaltimefordiscussion.Themeetingadjournedat 11:10a.m.onApril25,2012.

Minutesof FederalOpenMarketCommitteeMeetings|April 177 Addendum: erate.Asdepictedinfigure1,participantsjudged Summary of Economic Projections thatrealgrossdomesticproduct(GDP)wouldrise thisyearataratethatslightlyexceedstheirestimates InconjunctionwiththeApril24–25,2012,Federal of itslonger-runsustainablerateof increase,and OpenMarketCommittee(FOMC)meeting,meeting thenaccelerategraduallythrough2014.Takinginto participants—themembersof theBoardof Gover- accountthedeclineintheunemploymentratesince norsandthepresidentsof theFederalReserve thetimeof thepreviousSummaryof EconomicPro- Banks,allof whomparticipateinthedeliberationsof jections(SEP)inJanuary,participantsgenerally theFOMC—submittedtheirassessmentsof realout- anticipatedonlyasmallfurtherreductioninthe putgrowth,theunemploymentrate,inflation,and unemploymentratethisyear.Theyjudgedthatthe thetargetfederalfundsrateforeachyearfrom2012 unemploymentratewouldthengraduallymovelower through2014andoverthelongerrun,undereach aseconomicgrowthpicksup.Evenso,participants participant’sjudgmentof appropriatemonetary generallyprojectedthattheunemploymentrateatthe policy.Theseassessmentswerebasedoninformation endof 2014wouldstillbewellabovetheirestimates availableatthetimeof themeetingandparticipants’ of thelonger-runrateof unemploymentthatthey individualassumptionsaboutfactorslikelytoaffect currentlyviewasbeingconsistentwiththeFOMC’s economicoutcomes.Thelonger-runprojectionsrep- statutorymandateforpromotingmaximumemployresenteachparticipant’sassessmentof therateto mentandpricestability.Mostparticipantsjudged whicheachvariablewouldbeexpectedtoconverge, thatinflation,asmeasuredbytheannualchangein overtime,underappropriatemonetarypolicyandin thepriceindexforpersonalconsumptionexpenditheabsenceof furthershockstotheeconomy. tures(PCE),wouldbeatorbelowtheFOMC’slong- “Appropriatemonetarypolicy”isdefinedasthe runinflationobjectiveof 2percentunderthe futurepathof policythatparticipantsdeemmost assumptionof appropriatemonetarypolicy.Core likelytofosteroutcomesforeconomicactivityand inflationwasgenerallyprojectedtorunatratessimiinflationthatbestsatisfytheirindividualinterpreta- lartothoseof overallinflation. tionsof theFederalReserve’sobjectivesof maximum employmentandstableprices. RelativetotheirpreviousprojectionsinJanuary, shownintable1,participantsreviseduptheirpro- Overall,theassessmentsthatFOMCparticipants jectedrateof increaseinrealGDPin2012while submittedinAprilindicatedthat,withappropriate markingdownthepaceof realgrowthoverthenext monetarypolicy,thepaceof economicrecoveryover twoyears.Withtheunemploymentratehaving the2012–14periodwouldlikelycontinuetobemod- declinedinrecentmonthsbymorethanparticipants Table1.EconomicprojectionsofFederalReserveBoardmembersandFederalReserveBankpresidents,April2012 Percent Centraltendency1 Range2 Variable 2012 2013 2014 Longerrun 2012 2013 2014 Longerrun ChangeinrealGDP 2.4to2.9 2.7to3.1 3.1to3.6 2.3to2.6 2.1to3.0 2.4to3.8 2.9to4.3 2.2to3.0 Januaryprojection 2.2to2.7 2.8to3.2 3.3to4.0 2.3to2.6 2.1to3.0 2.4to3.8 2.8to4.3 2.2to3.0 Unemploymentrate 7.8to8.0 7.3to7.7 6.7to7.4 5.2to6.0 7.8to8.2 7.0to8.1 6.3to7.7 4.9to6.0 Januaryprojection 8.2to8.5 7.4to8.1 6.7to7.6 5.2to6.0 7.8to8.6 7.0to8.2 6.3to7.7 5.0to6.0 PCEinflation 1.9to2.0 1.6to2.0 1.7to2.0 2.0 1.8to2.3 1.5to2.1 1.5to2.2 2.0 Januaryprojection 1.4to1.8 1.4to2.0 1.6to2.0 2.0 1.3to2.5 1.4to2.3 1.5to2.1 2.0 CorePCEinflation3 1.8to2.0 1.7to2.0 1.8to2.0 1.7to2.0 1.6to2.1 1.7to2.2 Januaryprojection 1.5to1.8 1.5to2.0 1.6to2.0 1.3to2.0 1.4to2.0 1.4to2.0 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andprojectionsforbothmeasuresofinflationarefromthefourthquarterofthepreviousyeartothefourth quarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures (PCE)andthepriceindexforPCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarterofthe yearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’s assessmentoftheratetowhicheachvariablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.The JanuaryprojectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonJanuary24–25,2012. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

178 99thAnnualReport|2012 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.

Minutesof FederalOpenMarketCommitteeMeetings|April 179 hadanticipatedinthepreviousSEP,theygenerally seetheriskstorealGDPgrowthasweightedtothe loweredtheirprojectionsforthelevelof theunem- downsideandthosetotheunemploymentrateas ploymentrateovercomingyears.Participants’expec- weightedtotheupside,alsodownsomewhatfromthe tationsforboththelonger-runrateof increaseinreal previousSEP.AsinJanuary,amajorityof partici- GDPandthelonger-rununemploymentratewere pantsviewedtheriskstotheirinflationprojectionsas littlechangedfromJanuary.Theirprojectionforthe broadlybalanced. rateof inflationin2012movedupsinceJanuary, reportedlyinlightof therecentincreasesintheprices TheOutlookforEconomicActivity of crudeoilandgasoline,withmuchsmaller Underappropriatemonetarypolicy,participants increasesintheirprojectionsfor2013and2014.The continuedtojudgethattheeconomywouldexpand rangeandcentraltendencyof theprojectionsof atamoderatepaceovertheprojectionperiod.The longer-runinflationremainedequalto2percent. centraltendencyof participants’projectionsforthe changeinrealGDPgrowthin2012was2.4to Asshowninfigure2,mostparticipantsjudgedthat 2.9percent,abithigherthaninJanuary.Growthat highlyaccommodativemonetarypolicywaslikelyto thisratewouldbeanoticeablepickupfromthepace bewarrantedovercomingyearstopromotea of expansionin2011andalittleabovemostparticistrongereconomicrecoveryinthecontextof price pants’assessmentsof trendgrowthoverthelonger stability.Inparticular,withinflationgenerallyprorun.Mostparticipantscharacterizedtheincoming jectedtobesubduedovertheprojectionperiodand dataonconsumerspending—especiallyformotor theunemploymentrateelevated,11participants vehicles—asbeingatleastsomewhatstrongerthan thoughtthatitwouldbeappropriateforthefirst hadbeenanticipatedinJanuary,andseveralalso increaseinthetargetfederalfundsratetooccurdurpointedtosomeencouragingsignsinrecentreadings ing2014orlater,thesamenumberasintheJanuary onhousingactivity.Afewparticipantsindicatedthey SEP(upperpanel).However,incontrasttotheir hadseensomeimprovementsinhouseholdandbusiassessmentsinJanuary,noneof theparticipantsindinessconfidence.ParticipantsprojectedthatrealGDP catedthat2016wastheappropriateyeartofirst growthwouldpickupgraduallyoverthe2013–14 increasethetargetfederalfundsrate.Theremaining period.Economicgrowthwouldbesupportedby 6participantsjudgedthatitwouldbeappropriateto monetarypolicyaccommodationaswellassome raisethefederalfundsratein2012or2013inorder gradualimprovementsincreditconditions,thehoustoavoidabuildupof inflationarypressuresorthe ingsector,andhouseholdbalancesheets.Thecentral creationof imbalancesinthefinancialsystem.Each tendenciesof participants’projectionsof realgrowth participant’sindividualassessmentof theappropriin2013and2014were2.7to3.1percentand3.1to ateyear-endlevelof thetargetfederalfundsrateover 3.6percent,respectively,downsomewhatfromthe theprojectionperiodwassubstantiallybelowhisor centraltendenciesof theJanuaryprojections.The herprojectionof thelonger-runlevelof thefederal centraltendencyof participants’projectionsforthe fundsrate(lowerpanel).Inaddition,9participants longer-runrateof increaseof realGDPwas2.3to placedthetargetfederalfundsrateat1percentor 2.6percent,unchangedfromJanuary. lowerattheendof 2014. Participantscitedseveralfactorsthatwouldlikely AllparticipantsindicatedthattheyexpectedtheFedcontinuetorestrainthepaceof economicexpansion eralReserve’sbalancesheetwouldbenormalizedina overtheprojectionperiod.Inparticular,tighterfiscal mannerconsistentwiththeprinciplesthatthe policyseemedlikelytoimpartasignificantdragon FOMCagreedonatitsJune2011meeting,withthe economicactivityforatime.Moreover,uncertainty datethatparticipantsgavefortheonsetof thenoraboutthefiscalenvironmentcouldholdbackboth malizationprocessdependentontheirexpectedtimhouseholdspendingondurablegoodsandbusiness ingof thefirstincreaseinthetargetfederalfunds capitalexpenditures.Inaddition,someparticipants rate.Oneparticipantreportedthatappropriatepolicy notedthattherecentstrongerdatamightreflecttemwouldincludeadditionalbalancesheetactionsinthe poraryfactors.Forexample,thepaceof consumer neartermtomitigatedownsideriskstoeconomicgrowth. spendingwasseenaslikelytofallbacksomeandbe moreinlinewiththatof disposablepersonalincome, Mostparticipantsjudgedthelevelof uncertainty andfederaloutlayswerenotexpectedtocontinueat associatedwiththeirprojectionsforrealactivity,the theirrecentpace.Moreover,acoupleof participants unemploymentrate,andinflationtobeunusually alsopointedtotheunseasonablywarmwinter highrelativetohistoricalnorms,althoughthenumweatherasapossiblecontributortothemorefavorberof participantsdoingsodeclinedsomewhatsince abletonetotherecentincomingdata. theJanuarySEP.Abouthalf of theparticipantsnow

180 99thAnnualReport|2012 Figure2.OverviewofFOMCparticipants’assessmentsofappropriatemonetarypolicy,April2012 Appropriate timing of policy firming Number of participants 10 9 8 7 7 6 5 4 4 3 3 3 2 1 0 2012 2013 2014 2015 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,underappropriatemonetarypolicy,thefirstincreaseinthetargetfederalfundsratefromitscurrentrangeof0to¼percentwilloccurinthespecifiedcalendaryear.InJanuary2012,thenumbersofFOMCparticipantswhojudgedthatthefirst increaseinthetargetfederalfundsratewouldoccurin2012,2013,2014,2015,and2016were,respectively,3,3,5,4,and2.Inthelowerpanel,eachshadedcircleindicates thevalue(roundedtothenearest¼percent)ofanindividualparticipant’sjudgmentoftheappropriatelevelofthetargetfederalfundsrateattheendofthespecifiedcalendar yearoroverthelongerrun.

Minutesof FederalOpenMarketCommitteeMeetings|April 181 Mostparticipantsmarkeddowntheirprojectionsfor unemploymentratewouldconvergeinthelongerrun therateof unemploymentovertheprojectionperiod. aremorediverse,reflecting,amongotherthings,dif- Theunemploymentratehaddeclinedfrom8.7per- ferentviewsontheoutlookforlaborsupplyandthe cent,onaverage,inthefinalquarterof lastyearto structureof thelabormarket. 8.2percentattheendof thefirstquarterof 2012, morethanmostparticipantsanticipatedwhenthey TheOutlookforInflation preparedtheirJanuaryprojections.WithrealGDP Participants’viewsabouttheoutlookforinflation expectedtoincreaseatamoderatepace,theunem- generallyfirmedalittlesinceJanuary.Inparticular,a ploymentratewasprojectedtodeclineonlyabitfur- majorityof participantsindicatedthattheincoming therthisyear,withthecentraltendencyof partici- readingsoninflation,especiallyforthepricesof pants’forecastsat7.8to8.0percentatyear-end.Par- crudeoilandgasoline,werealittlehigherthanhad ticipantsprojectedthatin2013and2014,thepickup beenanticipated.Nonetheless,assumingnofurther inthepaceof theexpansionwouldbeaccompanied shocks,mostparticipantsjudgedthatbothheadline byafurthergradualimprovementinlabormarket andcoreinflationwouldremainsubduedoverthe conditions.Thecentraltendencyof participants’ 2012–14period,runningatratesatorbelowthe forecastsfortheunemploymentratewas7.3to FOMC’slonger-runobjectiveof 2percentunderthe 7.7percentattheendof 2013and6.7to7.4percent assumptionof appropriatemonetarypolicy.Particiattheendof 2014.Thecentraltendencyof partici- pantspointedtoseveralfactorsthatwouldhelp pants’estimatesof thelonger-runnormalrateof restraininflationpressuresovertheprojection unemploymentthatwouldprevailintheabsenceof period,includingexpecteddeclinesincommodity furthershockstotheeconomywas5.2to6.0percent, prices,modestincreasesinbusinesscosts,andthe unchangedfromJanuary.Mostparticipantsantici- ongoingstabilityof inflationexpectations.Specifipatedthatfiveorsixyearswouldberequiredtoclose cally,thecentraltendencyof participants’projections thegapbetweenthecurrentunemploymentrateand forinflation,asmeasuredbythePCEpriceindex, theirestimatesof thelonger-runrate,althoughafew movedupin2012to1.9to2.0percent,anditedged anticipatedthatlesstimewouldbeneeded. upin2013and2014to1.6to2.0percentand1.7to 2.0percent,respectively;thecentraltendenciesof the Thediversityof participants’projectionsforreal forecastsforcorePCEinflationwereverycloseto GDPgrowthandtheunemploymentrateoverthe thoseforthetotalmeasure.Participantsindicated nextthreeyearsandoverthelongerrunisdepictedin thatitwouldtakeaboutfiveorsixyears,orless,for figures3.Aand3.B.Thedispersionintheseprojec- inflationtoconvergetoitslonger-runlevel. tionsreflectsdifferencesinparticipants’assessments of manyfactors,includingappropriatemonetary Informationaboutthediversityof participants’ policyanditseffectsontheeconomy,theunderlying viewsregardingtheoutlookforinflationisprovided momentumineconomicactivity,thelikelyevolution infigures3.Cand3.D.Relativetotheassessments of creditandfinancialmarketconditions,thepro- thatwerecompiledinJanuaryandreflectingthe spectivepathforU.S.fiscalpolicy,theeffectsof the recentincomingdata,theprojectionsforinflation Europeansituation,andtheextenttowhichcurrent shiftedhigherin2012andexhibitedanoticeablynardislocationsinthelabormarketwerestructuralver- rowerrange.Thedispersionof inflationprojections suscyclical.Giventhedeclineintherateof unem- alsonarrowedin2013,althoughtoalesserdegree, ploymentinthefirstquarter,thedistributionof par- andwaslittlechangedin2014.Ingeneral,thedisperticipants’projectionsof thisvariableforthefourth sionof viewsontheoutlookforinflationoverthe quarterof 2012shiftednoticeablylower,andthe projectionperiodrepresenteddifferencesinjudgrangeof theseprojectionsbecameconsiderablynar- mentsregardingarangeof issues,includingthecurrower,relativetotheJanuaryassessments.Thedistri- rentdegreeof slackinresourceutilizationandthe butionsof theunemploymentrateprojectionsfor extenttowhichsuchslackinfluencesinflationand 2013and2014exhibitedlesspronouncedshifts inflationexpectations.Inaddition,participantsdiftowardlowerrates.Participantsmadeonlyminor feredintheirestimatesof howthestanceof monadjustmentstotheirprojectionsof theratesof out- etarypolicywouldinfluenceinflationexpectations. putgrowthandunemploymentoverthelongerrun, leavingthedispersionsof theirprojectionsforboth AppropriateMonetaryPolicy littlechanged.AsinJanuary,thedispersionof esti- Abouthalf of theparticipantsjudgedthatexceptionmatesforthelonger-runrateof outputgrowthis allylowlevelsof thefederalfundsratewouldremain fairlynarrow,withonlyoneparticipant’sestimate appropriateatleastuntillate2014.Inparticular, outsideof arangeof 2.2to2.7percent.Bycompari- sevenparticipantsviewedappropriatepolicyfirming son,participants’viewsabouttheleveltowhichthe ascommencingduring2014,whilefourothersjudged

182 99thAnnualReport|2012 Figure3.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2012–14andoverthelongerrun Number of participants 2012 18 April projections 16 January 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- 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 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- 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 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- 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 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- 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|April 183 Figure3.B.Distributionofparticipants’projectionsfortheunemploymentrate,2012–14andoverthelongerrun Number of participants 2012 18 April projections 16 January projections 14 12 10 8 6 4 2 4.8- 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- 4.9 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 Percent range Number of participants 2013 18 16 14 12 10 8 6 4 2 4.8- 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- 4.9 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 Percent range Number of participants 2014 18 16 14 12 10 8 6 4 2 4.8- 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- 4.9 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 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 4.8- 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- 4.9 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 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

184 99thAnnualReport|2012 Figure3.C.Distributionofparticipants’projectionsforPCEinflation,2012–14andoverthelongerrun Number of participants 2012 18 April projections 16 January projections 14 12 10 8 6 4 2 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 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 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 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 1.3- 1.5- 1.7- 1.9- 2.1- 2.3- 2.5- 1.4 1.6 1.8 2.0 2.2 2.4 2.6 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- 1.4 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|April 185 Figure3.D.Distributionofparticipants’projectionsforcorePCEinflation,2012–14 Number of participants 2012 18 April projections 16 January 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.

186 99thAnnualReport|2012 thatthefirstincreaseinthetargetfederalfundsrate SOMAsometimeafterthefirstrateincrease,aiming wouldnotbewarranteduntil2015.Nineparticipants toeliminatetheSOMA’sholdingsof agencysecurianticipatedthattheappropriatefederalfundsrateat tiesoveraperiodof threetofiveyears.Ingeneral, theendof 2014wouldbe1percentorlower.Those theparticipantslinkedtheirpreferredstartdatesfor whosawthefirstincreaseoccurringin2015antici- thenormalizationprocesstotheirviewsforthe patedthatthefederalfundsratewouldbeeither appropriatetimingforthefirstincreaseinthetarget 1percentor1½percentattheendof thatyear.In federalfundsrate.Twoparticipantsjudgedthatonce contrast,sixparticipantsjudgedthatanincreasein begun,assetsalesshouldproceedrelativelyquickly, thetargetfederalfundsratewouldbeappropriatein whileoneparticipant’sassessmentof appropriate 2012or2013,andthoseparticipantsanticipatedthat monetarypolicyincorporatedanexpansionof the thetargetratewouldneedtobeincreasedtoaround maturityextensionprograminthenearterm.In 2to2¾percentbytheendof 2014.Allparticipants addition,someparticipantsindicatedthatthey reportedlevelsfortheappropriatetargetfederal remainedopentoconsideringadditionalpolicyfundsrateattheendof 2014thatwerewellbelow relatedadjustmentstothebalancesheetif theecotheirestimatesof thelevelexpectedtoprevailinthe nomicoutlookdeteriorated. longerrun.Participants’estimatesof thelonger-run targetfederalfundsraterangedfrom3½to4½per- Thedistributionof participants’judgmentsregardcent,reflectingtheCommittee’sinflationobjectiveof ingtheappropriatelevelof thetargetfederalfunds 2percentandparticipants’individualjudgments rateattheendof eachcalendaryearfrom2012to aboutthelonger-runequilibriumlevelof therealfed- 2014andoverthelongerrunispresentedinfigeralfundsrate. ure3.E.Participants’viewsontheappropriatelevel of thefederalfundsrateattheendof 2014continued Severalkeyfactorsinformedparticipants’individual toberelativelywidelydispersed,withsevenparticiexpectationsabouttheappropriatesettingformon- pantsseeingtheappropriatelevelof thefederalfunds etarypolicy,includingtheirassessmentsof themaxi- rateatthattimeasmostlikelytobe50basispoints mumlevelof employment,theCommittee’slonger- orlessandsevenseeingtheappropriaterateas2perruninflationobjective,theextenttowhichcurrent centorhigher.Relativetotheotherparticipants,the conditionshaddeviatedfromthesemandate- groupof participantswhojudgedthatalonger consistentlevelsandwhythedeviationshadarisen, periodof exceptionallylowlevelsof thefederalfunds andtheirprojectionsof thelikelytimeperiods ratewouldbeappropriatetendedtoincludethose requiredtoreturnemploymentandinflationtolevels whoanticipatedasomewhatmoregradualincreasein theyjudgetobemostconsistentwiththeCommit- thepaceof theeconomicexpansionandaslower tee’smandate.Severalparticipantscommentedthat declineintheunemploymentrateovertheprojection theirassessmentstookintoaccounttherisksand period.Someof theseparticipantsalsomentioned uncertaintiesassociatedwiththeiroutlooksforeco- theirassessmentthatalongerperiodof exceptionally nomicactivityandinflation,andonepointedspecifi- lowfederalfundsratesisappropriatewhenthefedcallytothepotentialeffectsof aprotractedperiodof eralfundsratehaspreviouslybeenconstrainedbyits verylowinterestratesonfinancialstability.Partici- effectivelowerbound.Incontrast,thesixparticipantsalsonotedthatbecausetheappropriatestance pantswhojudgedthatpolicyfirmingshouldbeginin of monetarypolicydependsimportantlyontheevo- 2012or2013includedsomewhoprojectedasomelutionof realactivityandinflationovertime,their whatfasterpickupineconomicactivityoverthenear assessmentsof theappropriatefuturepathof the term.Participantsseeinganearlierincreaseinthe federalfundsratewouldchangeif economiccondi- targetfederalfundsratetendedtoindicatethatthe tionsweretoevolveinanunexpectedmanner. Committeewouldneedtobeginremovingpolicy accommodationrelativelysooninordertokeep Participantsalsoprovidedqualitativeinformationon inflationatmandate-consistentlevelsandtolimitthe theirviewsregardingtheappropriatepathof the riskof underminingtheFederalReserve’scredibility FederalReserve’sbalancesheet.Allparticipants andcausingariseininflationexpectations.Oneof expectthattheCommitteewouldcarryoutthenor- theseparticipantsalsostressedtheriskof distortions malizationof thebalancesheetaccordingtotheprin- inthefinancialsystemfromanextendedperiodof ciplesapprovedattheJune2011FOMCmeeting. exceptionallylowinterestrates. Thatis,priortothefirstincreaseinthefederalfunds rate,theCommitteewouldlikelyceasereinvesting UncertaintyandRisks someorallprincipalpaymentsonsecuritiesinthe Mostparticipantsjudgedthattheirprojectionsfor SystemOpenMarketAccount(SOMA),andit realGDPgrowthandtheunemploymentratewere wouldlikelybeginsalesof agencysecuritiesfromthe subjecttoahigherlevelof uncertaintythanwasthe

Minutesof FederalOpenMarketCommitteeMeetings|April 187 Figure3.E.Distributionofparticipants’projectionsforthetargetfederalfundsrate,2012–14andoverthelongerrun Number of participants 2012 18 April projections 16 January projections 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- 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 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- 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 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- 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 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- 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 Percent range Note:Thetargetfederalfundsrateismeasuredasthelevelofthetargetrateattheendofthecalendaryearorinthelongerrun.

188 99thAnnualReport|2012 normduringtheprevious20years(figure4).1How- Table2.Averagehistoricalprojectionerrorranges ever,thenumberreportingelevateduncertainty Percentagepoints moveddownsomewhatrelativetotheJanuarySEP. Manyparticipantsalsojudgedthelevelsof uncer- Variable 2012 2013 2014 taintyassociatedwiththeirinflationforecaststobe ChangeinrealGDP1 ±1.1 ±1.6 ±1.7 higherthanthelonger-runhistoricalnorm,butsuch Unemploymentrate1 ±0.5 ±1.2 ±1.7 anassessmentcontinuedtobesomewhatlesspreva- Totalconsumerprices2 ±0.8 ±1.0 ±1.0 lentamongparticipantsthanwasthecaseforuncer- Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared taintyaboutrealactivity.Severalfactorsweresaidto errorofprojectionsfor1992through2011thatwerereleasedinthespringby becontributingtotheelevatedlevelof uncertainty variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast Uncertainty,”undercertainassumptions,thereisabouta70percentprobability abouttheeconomicoutlook,includingongoing thatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein developmentsregardingthefiscalandfinancialsitua- rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Further informationisinDavidReifschneiderandPeterTulip(2007),“Gaugingthe tioninEurope.Manyparticipantsalsocitedconsid- UncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,”Finance erableuncertaintyaboutU.S.fiscalpolicyovercom- andEconomicsDiscussionSeries2007-60(Washington:BoardofGovernorsof theFederalReserveSystem,November). ingquartersanditspotentialimplicationsforeco- 1 Fordefinitions,refertogeneralnoteintable1. nomicactivity.Morebroadly,participantsagain 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen noteddifficultiesinprojectingthepathof theeco- mostwidelyusedingovernmentandprivateeconomicforecasts.Projection ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof nomicrecoverybecausedeeprecessionsbroughton theyearindicated. byseverefinancialcrisesdifferedimportantlyfrom mosthistoricalexperience.Inthatregard,participantscontinuedtobeuncertainaboutthepaceat of thefactorsthathadrestrainedtheU.S.recoveryin whichcreditconditionswouldimproveandaboutthe recentyearscouldpersistforlongerthancurrently prospectsforrecoveryinthehousingsector.Inaddi- expectedandthusweighoneconomicactivitytoa tion,participantsgenerallysawthelonger-termout- greaterextentgoingforwardthanparticipantshad lookforfiscalandregulatorypoliciesasstillhighly assumedintheirbaselineforecasts.Inparticular,some uncertain.Someparticipantsalsoexpresseduncer- participantsmentionedthedownsideriskstocontaintyabouttheextenttowhichthelabormarketwas sumerspendinginlightof meagergainsindisposable undergoingstructuralchanges.Amongthesourcesof personalincomeandhouseholds’still-weakbalance uncertaintyabouttheoutlookforinflationwerethe sheets.Otherscitedthepossibledampingeffectsof difficultiesinassessingthecurrentandprospective highlevelsof uncertaintyregardingregulatorypolicies marginsof slackinresourcemarketsandtheeffectof onbusinesses’willingnesstoinvestandhire.Afewparsuchslackonprices.Participantsalsociteduncer- ticipantsnotedtheriskof anotherdisruptioninglobal taintyaboutthefuturepathof globalcommodity oilmarketsorgreatertensionsintheMiddleEastthat prices,whichwereseenasdependingonidiosyncratic couldnotonlyboostinflationbutalsoreducereal supplyanddemandfactorsaswellasonglobalgrowth. incomes,consumerconfidence,andspending.Someof theparticipantswhojudgedtheriskstobebroadly balancedrecognizedsomeof thesedownsiderisksto Turningtothebalanceof risksthatparticipants theoutlook,buttheysawthemasaboutcounterbalattachedtotheireconomicprojections,abouthalf ancedbythechancethattherecentsignsof improvereportedthattheyjudgedtheriskstotheirforecastsof mentinlabormarketsandconsumerspendingcould bothrealGDPgrowthandtheunemploymentrateas signaltheemergenceof amorevigorousrecovery. broadlybalanced,afewmorethanwasthecasein January.Nearlyallof theremainingparticipants Mostparticipantsjudgedtheriskstotheirprojections viewedtheriskstorealGDPgrowthasweightedtothe of inflationasbroadlybalanced,includingafewmore downsideandtheriskstotheunemploymentrateas thanheldthatviewinJanuary.However,afewsawthe skewedtotheupside.Participantsidentifiedseveral risksastiltedtotheupside,pointingtothepossibility downsideriskstotheprojectedpaceof economic of disruptionsinglobaloilandcommoditymarketsor expansion,includingthefiscalandfinancialstrainsin toeffectsfromthecurrentstanceof monetarypolicy. theeuroareaandthepossibilityof anabruptfiscal Twoof theseparticipantsindicatedthatthecurrent consolidationintheUnitedStates.Inaddition,some highlyaccommodativestanceof monetarypolicyand thesubstantialliquiditycurrentlyinthefinancial 1 Table2providesestimatesoftheforecastuncertaintyforthe systemriskedapickupininflationtoalevelabovethe changeinrealGDP,theunemploymentrate,andtotalcon- Committee’slonger-runobjective,orcitedtheriskthat sumerpriceinflationovertheperiodfrom1992to2011.Atthe endofthissummary,thebox“ForecastUncertainty”discusses uncertaintyabouttheCommittee’sabilitytoeffectively thesourcesandinterpretationofuncertaintyintheeconomic removepolicyaccommodationwhenappropriate forecastsandexplainstheapproachusedtoassesstheuncercouldleadtoariseininflationexpectations. taintyandrisksattendingtheparticipants’projections.

Minutesof FederalOpenMarketCommitteeMeetings|April 189 Figure4.Uncertaintyandrisksineconomicprojections Number of participants Number of participants Uncertainty about GDP growth Risks to GDP growth 18 18 April projections April projections January projections 16 January 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.

190 99thAnnualReport|2012 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers inthethirdyear.Thecorresponding70percentconfioftheBoardofGovernorsandthepresidentsofthe denceintervalsforoverallinflationwouldbe1.2to FederalReserveBanksinformdiscussionsofmon- 2.8percentinthecurrentyearand1.0to3.0percent etarypolicyamongpolicymakersandcanaidpublic inthesecondandthirdyears. 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. rangeof1.9to4.1percentinthecurrentyear,1.4to 4.6percentinthesecondyear,and1.3to4.7percent

Minutesof FederalOpenMarketCommitteeMeetings|June 191 Meeting Held on June 19–20, 2012 RichardM.Ashton1 AssistantGeneralCounsel Ameetingof theFederalOpenMarketCommittee StevenB.Kamin washeldintheofficesof theBoardof Governorsof Economist theFederalReserveSysteminWashington,D.C.,on Tuesday,June19,2012,at11:00a.m.andcontinued DavidW.Wilcox onWednesday,June20,2012,at8:30a.m. Economist DavidAltig,ThomasA.Connors,MichaelP.Leahy, WilliamNelson,SimonPotter,DavidReifschneider, Present MarkS.Sniderman,WilliamWascher, BenBernanke JohnA.Weinberg,andKei-MuYi Chairman AssociateEconomists WilliamC.Dudley BrianSack ViceChairman Manager,SystemOpenMarketAccount ElizabethDuke NellieLiang Director,Officeof FinancialStabilityPolicyand JeffreyM.Lacker Research,Boardof Governors DennisP.Lockhart JonW.FaustandAndrewT.Levin SpecialAdvisorstotheBoard,Officeof Board SandraPianalto Members,Boardof Governors JeromeH.Powell LindaRobertson SarahBloomRaskin AssistanttotheBoard,Officeof BoardMembers, Boardof Governors JeremyC.Stein SethB.Carpenter DanielK.Tarullo SeniorAssociateDirector,Divisionof Monetary JohnC.Williams Affairs,Boardof Governors JanetL.Yellen TimothyP.Clark SeniorAssociateDirector,Divisionof Banking JamesBullard,ChristineCumming,CharlesL.Evans, SupervisionandRegulation,Boardof Governors EstherL.George,andEricRosengren AlternateMembersof theFederalOpenMarket ThomasLaubach Committee SeniorAdviser,Divisionof ResearchandStatistics, Boardof Governors RichardW.Fisher,NarayanaKocherlakota,and CharlesI.Plosser EllenE.Meade,StephenA.Meyer,and Presidentsof theFederalReserveBanksof Dallas, JoyceK.Zickler Minneapolis,andPhiladelphia,respectively SeniorAdvisers,Divisionof MonetaryAffairs, Boardof Governors WilliamB.English SecretaryandEconomist DanielM.Covitz,EricM.Engen,MichaelT.Kiley,2 DavidE.Lebow,andMichaelG.Palumbo DeborahJ.Danker AssociateDirectors,Divisionof Researchand DeputySecretary Statistics,Boardof Governors MatthewM.Luecke DavidBowman AssistantSecretary DeputyAssociateDirector,Divisionof International DavidW.Skidmore Finance,Boardof Governors AssistantSecretary StevenA.SharpeandJohnJ.Stevens MichelleA.Smith AssistantDirectors,Divisionof Researchand Statistics,Boardof Governors AssistantSecretary ScottG.Alvarez 1 AttendedTuesday’smorningsessiononly. GeneralCounsel 2 AttendedTuesday’ssessiononly.

192 99thAnnualReport|2012 DavidH.Small eralReserveSystemStaff toclarifysomespecific ProjectManager,Divisionof MonetaryAffairs, aspectsof thepolicy.3 Boardof Governors Discussion of Communications regarding FranciscoCovasandJenniferE.Roush Economic Projections SeniorEconomists,Divisionof MonetaryAffairs, Boardof Governors Meetingparticipantsdiscussedseveralpossibilities forenhancingtheclarityandtransparencyof the AndreaDeMichelis Committee’seconomicprojectionsandtheirrolein SeniorEconomist,Divisionof InternationalFinance, policydecisionsandpolicycommunications.Inpar- Boardof Governors ticular,participantsnotedthatwhiletheSummaryof SarahG.Green EconomicProjections(SEP)providesinformation FirstVicePresident,FederalReserveBankof abouttheirindividualprojectionsof keymacroeco- Richmond nomicvariablesandaboutthepathof monetary policythateachseesasappropriateandconsistent LorettaJ.MesterandHarveyRosenblum withhisorherprojections,theSEPdoesnotprovide ExecutiveVicePresidents,FederalReserveBanksof guidanceabouthowthosediverseviewscome PhiladelphiaandDallas,respectively togetherintheCommittee’scollectivejudgment TroyDavig,GeoffreyTootell,and abouttheoutlookandappropriatepolicyas ChristopherJ.Waller expressedinitspostmeetingstatement.Manypartici- SeniorVicePresidents,FederalReserveBanksof pantsindicatedthatif itwerepossibletoconstructa KansasCity,Boston,andSt.Louis,respectively quantitativeeconomicprojectionandassociatedpath of appropriatepolicythatreflectedthecollective JohnFernald judgmentof theCommittee,suchaprojectioncould GroupVicePresident,FederalReserveBankof potentiallybehelpfulinclarifyinghowtheoutlook SanFrancisco andpolicydecisionsarerelated.Participantsdis- LorieK.LoganandAnnaPaulson cussedexamplesof theeconomicandpolicyprojec- VicePresidents,FederalReserveBanksof NewYork tionspublishedbyanumberof foreigncentralbanks. andChicago,respectively Participantsgenerallyindicatedawillingnessto exploreadjustmentstotheSEP,whilehighlighting theimportanceof communicatingnotonlytheCom- Organizational Matters mittee’scollectivejudgmentbutalsothediversityof theirviewsregardingtheeconomicoutlookand Byunanimousvote,SimonPotterwasselectedto monetarypolicy.Manyparticipantsnotedthatdevelserveatthepleasureof theCommitteeasManager, opingaquantitativeforecastthatreflectstheCom- SystemOpenMarketAccount,effectiveJune30, mittee’scollectivejudgmentcouldbechallenging, 2012,ontheunderstandingthathisselectionwas giventherangeof theirviewsabouttheeconomy’s subjecttobeingsatisfactorytotheFederalReserve structureanddynamics.Severalparticipantsjudged Bankof NewYork. thattheincrementalgainsintransparencythatwould resultfromdevelopingandpresentingsuchaconsen- Secretary’snote:Advicesubsequentlywas susprojectionwouldbemodest,giventhebreadthof receivedthattheselectionof Mr.PotterasManinformationalreadyprovidedintheCommittee’s agerwassatisfactorytotheFederalReserve policystatements,theminutesof FederalOpenMar- Bankof NewYork. ketCommittee(FOMC)meetings,andtheChairman’spressbriefings.Participantsagreedtocontinue Byunanimousvote,theCommitteeselectedJamesJ. toexplorewaystoincreaseclarityandtransparency McAndrewstoserveasAssociateEconomist,effecintheCommittee’spolicycommunications;many tiveJune30,2012,untiltheselectionof hissuccessor notedthattheCommitteehadintroducedanumber atthefirstregularlyscheduledmeetingof theComof changesinitscommunicationsoverthepastyear mitteein2013. orso,andemphasizedthatfurtherchangesshouldbe Byunanimousvote,theCommitteeamendedthe 3 Thepolicyisavailableatwww.federalreserve.gov/ FOMCPolicyonExternalCommunicationsof Fed- monetarypolicy/files/FOMC_ExtCommunicationStaff.pdf.

Minutesof FederalOpenMarketCommitteeMeetings|June 193 consideredcarefully.Attheendof thediscussion,the centinMay,essentiallythesameasitsaverageinthe Chairmanaskedthesubcommitteeoncommunica- firstquarter.Therateof long-durationunemploytionstoexplorethefeasibilityandworkabilityof mentremainedveryhigh,andtheshareof workers potentialapproachestodevelopinganFOMCcon- employedparttimeforeconomicreasonswaslittle sensusforecast. changedinrecentmonths.Indicatorsof jobopenings andfirms’hiringplansweremixed,whileinitial Developments in Financial Markets and claimsforunemploymentinsurancewereessentially the Federal Reserve’s Balance Sheet unchangedovertheintermeetingperiodatalevel consistentwithmodestnetjobgainsinthecoming TheManagerof theSystemOpenMarketAccount months. (SOMA)reportedondevelopmentsindomesticand foreignfinancialmarketsduringtheperiodsincethe Manufacturingproductionedgedup,onnet,inApril FOMCmetonApril24–25,2012.Healsoreported andMayafterrisingatarobustpaceinthefirst onSystemopenmarketoperations,includingthe quarter.Meanwhile,therateof manufacturing ongoingreinvestmentintoagency-guaranteed capacityutilizationremainedaboutthesameasearmortgage-backedsecurities(MBS)of principalpay- lierintheyear.Inrecentmonths,theoutputof mentsreceivedonSOMAholdingsof agencydebt motorvehiclesandpartsincreasedfurther,onbalandagency-guaranteedMBSaswellastheopera- ance,althoughataslowerratethaninthefirstquartionsrelatedtothematurityextensionprogram ter,whilefactoryoutputoutsideof themotorvehicle authorizedattheSeptember20–21,2011,FOMC sectoronlyinchedup.Motorvehicleassemblieswere meeting.Byunanimousvote,theCommitteeratified scheduledtoholdsteadyinthecomingmonths,and theDesk’sdomestictransactionsovertheintermeet- broaderindicatorsof manufacturingproduction, ingperiod.Therewerenointerventionoperationsin suchasthediffusionindexesof newordersfromthe foreigncurrenciesfortheSystem’saccountoverthe nationalandregionalmanufacturingsurveys,were intermeetingperiod. generallyatlevelsconsistentwithmodestincreasesin outputinthenearterm. Byunanimousvote,theAuthorizationforDomestic OpenMarketOperationswasamendedtoincludethe Realpersonalconsumptionexpendituresincreased authoritytoconductsmall-valueoperationsforthe solidlyinthefirstquarter.InAprilandMay,howpurposesof routinetestingof operationalreadiness. ever,nominalretailsalesexcludingpurchasesof Inaddition,theAuthorizationwasamendedto motorvehiclesdeclinedwhilesalesof motorvehicles includetheauthoritytoconductintradayrepurchase slowedfromtheirbriskpaceinthefirstquarter.Facagreement(repo)transactionswithforeignandinter- torsthattendtosupporthouseholds’expenditures nationalaccountstopreventdaylightoverdraftsin were,onbalance,alittlesofterinrecentmonths.The thoseaccounts.4 estimatedlevelof households’realdisposableincome wasreviseddownforthefourthquarterof lastyear. Staff Review of the Economic Situation Moreover,realdisposableincomeroseatasubdued paceinthefirstquarterof thisyear,thoughit TheinformationreviewedattheJune19–20meeting receivedsomeboostfromlowerenergypricesin suggestedthateconomicactivitywasexpandingata April.Households’networthincreasedinthefirst somewhatmoremodestpacethanearlierintheyear. quarter,butthedeclineinequitypricesduringthe Improvementsinlabormarketconditionsslowedin intermeetingperiodsuggestedthatnetworthmay recentmonths,andtheunemploymentrateremained havefallenmorerecently.Consumersentimentwas elevated.Consumerpriceinflationdeclined,primarlowerinearlyJunethanearlierintheyear,andit ilyreflectingreductionsinthepricesof crudeoiland continuedtobesubdued. gasoline,andmeasuresof long-runinflationexpectationscontinuedtobestable. Activityinthehousingsectorgenerallyimprovedin recentmonths,butitwasstillrestrainedbytight Privatenonfarmemploymentroseataslowerpacein creditstandardsformortgageloansandthesubstan- AprilandMaythaninthefirstquarterof theyear, tialinventoryof foreclosedanddistressedproperties. whiletotalgovernmentemploymentcontinuedto Bothstartsandpermitsof newsingle-familyhomes trenddown.Theunemploymentratestoodat8.2perroseinAprilandMaybutremainedatlowlevels. Althoughstartsof newmultifamilyunitsranata 4 Theauthorizationisavailableatwww.federalreserve.gov/ monetarypolicy/files/FOMC_DomesticAuthorization.pdf. somewhatlowerpace,onaverage,inAprilandMay

194 99thAnnualReport|2012 thaninthefirstquarter,permitsincreasedinrecent whilelonger-terminflationexpectationsinthesurvey months,likelypointingtofurthergainsinmultifam- remainedstable. ilyconstruction.HomepricesroseforthefourthconsecutivemonthinApril.Salesof existinghomeswere Measuresof laborcompensationindicatedthat alittlehigherinAprilthantheirmonthlyaveragein increasesinnominalwagescontinuedtobesubdued. thefirstquarter,butthepaceof newhomesaleswas Gainsincompensationperhourinthenonfarmbusiroughlyunchanged. nesssectorwerequitemutedovertheyearendingin thefirstquarter,andwithsmallgainsinproductiv- Realbusinessexpendituresonequipmentandsoft- ity,unitlaborcostsroseonlyslightly.Theemploywareincreasedmoderatelyinthefirstquarter.In mentcostindexincreasedonlyalittlefasterthanthe April,nominalshipmentsandordersof nondefense compensationperhourmeasureoverthesame capitalgoodsexcludingaircraftdecreased.Recent period.Morerecently,averagehourlyearningsforall forward-lookingindicators,suchassurveysof busi- employeesedgedupinAprilandMay,andtheirrate nessconditionsandcapitalspendingplans,pointed of increasefrom12monthsearliercontinuedtobe towardcontinuedmoderateincreasesinoutlaysfor slow. businessequipmentinsubsequentmonths.Nominal businessspendingfornonresidentialconstruction RecentindicatorssuggestedthatoverallforeignecowasessentiallyflatinAprilrelativetothefirstquar- nomicactivitywasexpandingatabelow-trendpace ter.Meanwhile,inventoriesinmostindustrieslooked inthesecondquarter.Euro-areaeconomiesappeared toberoughlyalignedwithsalesinrecentmonths. tobeslowing:Industrialproductiondeclinedinthe euroareainApril,andthecompositepurchasing Realfederalgovernmentpurchasesfellmarkedlyin managersindexandindicatorsof businessconfithefirstquarter,ledbyasharpdecreaseindefense dencefellinMaytotheirlowestlevelsinmorethan spending.Dataforfederalgovernmentspendingin twoyears.InChina,dataonproductionandsalesin AprilandMaypointedtoaslowerpaceof declinein AprilandMaysuggestedthateconomicactivitywas defenseoutlaysinthesecondquarter.Realstateand increasingatalessrapidpacethanlastyear.Inboth localgovernmentpurchasesalsodecreasedinthefirst advancedandemergingmarketeconomies,declining quarter.Moreover,thepayrollsof stateandlocal pricesforenergyandothercommoditiescontributed governmentscontractedinAprilandMayafteredg- todecreasesin12-monthmeasuresof inflationsince ingupinthefirstquarter,andnominalconstruction latelastyear. spendingbythesegovernmentscontinuedtodecline inApril. Staff Review of the Financial Situation TheU.S.internationaltradedeficitwidenedin Growingconcernsaboutdevelopmentsintheeuro MarchandthennarrowedinApriltoalevelnearits areaandweaker-than-expectedeconomicdatainthe averageinthefirstquarter.Bothimportsandexports UnitedStatesandabroadbothweighedonfinancial rosestronglyinMarchbeforerecedingabitinApril. marketssincethetimeof theAprilFOMCmeeting. Inparticular,exportstotheeuroarea,whichhad Thedeteriorationininvestorsentimentwastempered increasedstronglyinthefirstquarteronaseasonally toanextentbymarketparticipants’expectationsfor adjustedbasisdespitetheweaknessineconomic furtherpolicyaccommodationbycentralbanksas activityintheregion,fellbackinApril. wellasbytheanticipationof additionalmeasuresto addressEuropeanfiscalandbankingissues. OverallU.S.consumerpriceswereflatinApriland thenfellinMayasconsumerenergypricesdeclined Yieldsonlonger-datednominalandinflationconsiderablyinbothmonths.Surveydataindicated protectedTreasurysecuritiesmoveddownsubstanthatgasolinepricesfellfurtherinthefirsthalf of tially,onnet,overtheintermeetingperiod.Theyield June,inlinewithcontinueddecreasesincrudeoil onnominal10-yearTreasurysecuritiesreachedahisprices.Meanwhile,consumerfoodpricesonlyedged toricallylowlevelimmediatelyfollowingtherelease upinrecentmonths.Consumerpricesexcludingfood of theMayemploymentreport.Asizableportionof andenergyincreasedmoderatelyinAprilandMay. thedeclineinlonger-termTreasuryratesoverthe Near-terminflationexpectationsfromtheThomson periodappearedtoreflectgreatersafe-haven Reuters/Universityof MichiganSurveysof Consum- demandsbyinvestors,alongwithsomeincreasein ersdeclinedinMayandheldsteadyinearlyJune, marketparticipants’expectationsof furtherFederal

Minutesof FederalOpenMarketCommitteeMeetings|June 195 Reservebalancesheetactions.Indicatorsof inflation remainedstronginAprilandintoMaybutthen expectationsderivedfromnominalandinflation- slowedafterthepoorperformanceof aprominent protectedTreasurysecuritiesalsofell,apparently initialpublicoffering. respondingatleastinparttothedeclineincommodityprices.Theexpectedpathforthefederalfunds Financingconditionsforthecommercialrealestate ratederivedfrommoneymarketfuturesquotes sectorremainedstrainedovertheintermeeting shifteddownin2014andbeyond. period.Evenso,issuanceof commercialmortgagebackedsecuritiesinAprilandMayoutpacedissu- Therewaslimitedevidenceof increasedstrainsin anceduringthefirstquarter. unsecured,short-termdollarfundingmarketsover theintermeetingperioddespiteheightenedconcerns Creditconditionsinresidentialmortgagemarkets aboutthesituationinEurope.Insecuredfunding continuedtobetight.Mortgagerefinancingactivity markets,theovernightgeneralcollateralTreasury roseinAprilandMaybutremainedsubdueddespite reporateedgedhigher.Marketparticipantsattrib- furtherdeclinesinmortgageratestohistoricallylow utedsomeportionof thefirminginshort-termrates levels.Consumercreditexpandedatasolidpacein overthepastseveralmonthstoatemporaryincrease recentmonths,asincreasesinstudentloansboosted inshort-datedTreasurysecuritiesheldbydealersasa nonrevolvingcreditwhilerevolvingcreditwasabout resultof cumulativenetTreasuryissuanceof such flat.Delinquencyratesforconsumercreditremained securitiesandsalesof thesesecuritiesbytheFederal low,partlyreflectingashiftinthecompositionof Reserveunderitsmaturityextensionprogram. borrowerstowardthosewithhighercreditscores. BroadU.S.stockpriceindexesdeclined,andoption- Grossissuanceof long-termmunicipalbondspicked impliedvolatilityontheS&P500indexrose.Equity upinAprilandMay,withnetissuanceturningposipricesforlargedomesticbankssignificantlyunder- tiveforthefirsttimesincethebeginningof 2011. performedthebroadindexesamiduncertaintyabout However,creditdefaultswapspreadsforstategovthesituationinEuropeandtheoutlookforthe ernmentsgenerallymovedhigher,andspreadson globaleconomy.Disclosureof alargetradinglossat long-termgeneralobligationmunicipalbondsover amajorU.S.bankalsocontributedtotheunderper- comparable-maturityTreasurysecuritiesroseaswell. formance.Investors’expectationthatfivelargeU.S. bankswouldhavetheircreditratingsdowngradedat BankcreditexpandedinAprilandMay.Banks’ theendof June,aspartof ratingagencies’reviewof holdingsof securitiescontinuedtorise,andcore majorfinancialinstitutions,mayalsohaveweighed loans—C&I,realestate,andconsumerloans—also ontheequitypricesof thosebanks. increasedmodestly.TheMaySurveyof Termsof BusinessLendingindicatedthatlendingconditions IntheJune2012SeniorCreditOfficerOpinionSur- againeasedslightly,althoughperhapslesssofor veyonDealerFinancingTerms(SCOOS),respon- smallbusinesses. dentsreportedthattermsinavarietyof dealerintermediatedmarketswerelittlechangedoverthe M2increasedatasomewhatslowerpaceinApriland pastthreemonths.Somerespondentsreporteda Maythaninthefirstquarterof theyear.Thelevelof declineintheuseof leveragebyhedgefundsacross M2anditslargestcomponent—liquiddeposits—revarioustransactiontypes. mainedelevated,apparentlyreflectinginvestors’continueddesiretoholdsafeandliquidassets. Yieldsoninvestment-andspeculative-gradecorporatedebtremainedlowbyhistoricalstandards,but Heightenedfinancialstrainsintheeuroareaand theirspreadsovercomparable-maturityTreasury indicationsof aweakerpaceof globaleconomic securitieswidenedabit.Nonfinancialfirmscontin- activityweighedonforeignfinancialmarketsduring uedtoraisefundsatasolidpaceovertheperiod, theintermeetingperiod.Yieldsonmosteuro-area withtheproceedsprimarilyusedtorefinanceexisting peripheralcountries’sovereigndebtrose,particularly debt.Bothcommercialandindustrial(C&I)loans aftertheMay6electionsinGreecefailedtoproduce andnonfinancialcommercialpaperoutstanding anewgovernment.Inaddition,indicatorsof the increased,onnet,duringAprilandMay.Newsyndi- conditionsof Europeanbankscontinuedtodeteriocatedloanissuancealsoappearedtoremainsolid, rate:Ratingagenciesdowngradedmajorbanksin althoughthereweresomereportsof tighterterms. Germany,Italy,Spain,andseveralotherEuropean Grosspublicequityissuancebynonfinancialfirms countries;pricesof euro-areabankstocksfell

196 99thAnnualReport|2012 sharply;andcreditdefaultswappremiumsformany subduedretailsales,alowertrajectoryforpersonal euro-areabanksincreased.PressuresonSpanish income,greaterrestraintingovernmentpurchases, banksledeuro-areaauthoritiestoagreetoprovide andweakernetexportsthanthestaff anticipatedat officialaidtotheSpanishgovernmentforthepur- thetimeof thepreviousprojection.Moreover,recent poseof recapitalizingthecountry’stroubledbanks. adversedevelopmentsinEuropeandtighterdomestic Indicatorsof fundingmarketstressesremained financialconditionsledthestaff torevisedown muted,asmanybanksobtainedfundsfromthe somewhatthemedium-termforecastforrealGDP EuropeanCentralBank(ECB)ratherthaninterbank growth.Withthedragfromfiscalpolicyanticipated markets.Thespreadsof euroLondoninterbank toincreasenextyear,thestaff projectedthatthe offeredrates(oreuroLIBOR)overcomparableover- growthrateof realGDPwouldnotmateriallyexceed nightindexswaprates,alongwithimpliedbasis thatof potentialoutputuntil2014wheneconomic spreadsfromeuro–dollarswaps,werelittlechanged activitywasexpectedtoaccelerategradually,supatshortmaturities,andtheamountof dollarswaps portedbyaccommodativemonetarypolicy,further outstandingwiththeECBdeclinedonbalance.The improvementsincreditavailability,andrisingcontotaloutstandingamountdrawnontheFederal sumerandbusinesssentiment.Increasesineconomic Reserve’sdollarliquidityswaplineswithforeigncen- activitywereanticipatedtonarrowthewidemargin tralbanksdroppedto$24.2billionovertheinter- of slackinlaborandproductmarketsonlyslowly meetingperiod. overtheprojectionperiod,andtheunemployment ratewasexpectedtostillbeelevatedattheendof Althoughequitypricesinmanycountriesrallied 2014. modestlylateintheintermeetingperiod,global equitypricesdeclined,onbalance,overtheperiod, Thestaff’snear-termprojectionforinflationwas withespeciallylargenetdecreasesinJapanandmany reviseddownfromtheforecastpreparedfortheApril emergingmarketeconomies.Flight-to-safetyflows FOMCmeeting,reflectingagreater-than-expected helpedpushyieldsonbothU.K.andGerman dropinconsumerenergyprices.However,thestaff’s 10-yearsovereigndebttorecordlowsbeforethese projectionforinflationoverthemediumtermwas ratespartlyretracedtheirdeclines.Thestaff’sbroad essentiallyunchanged.Withtheupwardpressure nominaldollarindexendedtheintermeetingperiod fromtheearlierrun-upincrudeoilpricesonconupmoderately.Signsof aslowdowninglobaleco- sumerenergypricesunwindingandoilprices nomicgrowthpromptedpolicyeasingbycentral expectedtodeclinefurther,long-runinflationexpecbanksinBrazil,China,andAustralia,andtheBank tationsanticipatedtoremainstable,andsubstantial of Englandannouncednewlendinginitiatives. resourceslackpersistingovertheforecastperiod,the staff continuedtoprojectthatinflationwouldbe TheriskstotheU.S.financialsystememanating subduedthrough2014. fromstrainsinEuropeappearedtoincreaseoverthe intermeetingperiod.Althoughsignsof strainsin short-termfundingmarketsweremuted,thereliance Participants’ Views on Current Conditions of somefinancialfirmsonthesemarketsremaineda and the Economic Outlook potentialvulnerability,giventhatinvestorscould withdrawrapidlyinaperiodof financialstress. InconjunctionwiththisFOMCmeeting,meeting RespondentstotheJune2012SCOOSreportedthat participants—the7membersof theBoardof Goverfinancialinstitutionsandmarketparticipantshad norsandthepresidentsof the12FederalReserve increasedtheamountof resourcesandattention Banks,allof whomparticipateinthedeliberationsof devotedtothemanagementof concentratedexpo- theFOMC—submittedtheirassessmentsof realoutsurestocentralcounterpartiesandotherfinancial putgrowth,theunemploymentrate,inflation,and utilities. thetargetfederalfundsrateforeachyearfrom2012 through2014andoverthelongerrun,undereach Staff Economic Outlook participant’sjudgmentof appropriatemonetary policy.Thelonger-runprojectionsrepresenteach Intheeconomicprojectionpreparedbythestaff for participant’sassessmentof theratetowhicheach theJuneFOMCmeeting,theforecastforrealgross variablewouldbeexpectedtoconverge,overtime, domesticproduct(GDP)growthintheneartermwas underappropriatemonetarypolicyandinthe reviseddown.Therevisionreflecteddataindicatinga absenceof furthershockstotheeconomy.Theseecoslowerpaceof private-sectorjobgains,more- nomicprojectionsandpolicyassessmentsare

Minutesof FederalOpenMarketCommitteeMeetings|June 197 describedintheSummaryof EconomicProjections, easeovertime,andsoanticipatedthattherecovery whichisattachedasanaddendumtotheseminutes. eventuallywouldgainstrength.However,strainsin globalfinancialmarkets,whichstemmedprimarily Intheirdiscussionof theeconomicsituationand fromfiscalandbankingconcernsinEurope,had outlook,participantsagreedthattheinformation becomemorepronouncedovertheintermeeting receivedsincetheCommittee’spreviousmeetingsug- periodandcontinuedtoposesignificantdownside gestedthattheeconomyhadcontinuedtoexpand riskstotheeconomicoutlook;thepossibilityof a moderately,thoughmanynotedthatavarietyof sharper-than-anticipatedfiscaltighteninginthe indicatorsshowedsmallergainsthanhadbeenantici- UnitedStatesalsoposedadownsiderisk.Looking pated.Growthinemployment,inparticular, beyondthetemporaryeffectsoninflationof this appearedtohaveslowedinrecentmonths,andthe year’sfluctuationsinoilandothercommodityprices, unemploymentrateremainedelevated.Businessfixed almostallparticipantscontinuedtoanticipatethat investmenthadcontinuedtoadvance,andhousehold inflationoverthemedium-termwouldrunator spendingappearedtoberisingatasomewhatslower belowthe2percentratethattheCommitteejudgesto pacethanearlierintheyear.Therewerefurthersigns bemostconsistentwithitsstatutorymandate.Inone of improvementinthehousingsector,butthelevelof participant’sjudgment,appropriatemonetarypolicy activityremainedverylow.Volatilityinfinancial wouldleadtoinflationmodestlygreaterthan2permarketsincreasedovertheintermeetingperiod,and centforatimeinordertobringunemploymentdown investors’appetiteforriskierassetsdeclined,likelyin somewhatfaster.Someparticipantsindicatedthat responsetoheightenedfiscalandfinancialstrainsin theysawpersistentslackinresourceutilizationas Europeaswellassomeweaker-than-expectedincom- posingdownsideriskstotheoutlookforinflation;a ingdataabouttheU.S.economyandforeignecono- fewparticipantsjudgedthatthehighlyaccommodamies.Inflationhadslowedsomewhat,mainlyreflect- tivestanceof monetarypolicyposedupsiderisksto ingthedeclineinthepricesof crudeoilandgasoline themedium-terminflationoutlook. inrecentmonths,andlonger-terminflationexpectationsremainedstable. Indiscussingthehouseholdsector,meetingparticipantsnotedthatrealpersonalconsumptionexpendi- Participantsgenerallyinterpretedtheinformation tureshadcontinuedtoexpanddespiteweakgrowth thatbecameavailableduringtheintermeetingperiod inrealdisposableincome,butthatthepaceof expanassuggestingthateconomicgrowthwouldmost sionappearedtohaveslowedsinceearlierthisyear.A likelyremainmoderateovercomingquartersand fewparticipantsexpressedconcernthatslowgrowth thenpickupverygradually.Mostparticipantssaw inemploymentandlowlevelsof consumerconfitheincominginformationasindicatingsomewhat dencewouldfurtherrestrainconsumerspending. slowergrowthintotaldemand,output,andemploy- Manyparticipants,however,saidthatbusinessconmentovercomingquartersthantheyhadprojected tactshadreportedthatconsumerspendingwasholdinApril,andmostcarriedforwardsomeof that ingup.Severalobservedthatrecentdeclinesingasodownwardrevisiontotheirprojectionsof medium- linepriceswouldincreasehouseholds’realincomes termgrowth.However,someparticipantsjudgedthat andcouldboostconsumerspendingincomingquartherecentweaknessinavarietyof economicindica- ters.Morebroadly,improvinghouseholdbalance torswasmorelikelytoprovetransitory,andthought sheetsandadiminishingdragfromhousehold thattheoutlookbeyondthisyearwasessentially deleveragingwereseenaslikelytohelpsupportrising unchanged.Reflectingtheprojectedmoderatepace householdexpendituresovertime. of growthinproductionandemployment,mostparticipantsanticipatedthattheunemploymentrate Indicatorsof homesales,construction,andprices woulddeclineonlyslowly.Anumberof factorscon- suggestedsomeimprovementinthehousingsector. tinuedtobeseenaslikelytolimittheeconomic However,notallregionssharedinthegains,andthe expansiontoamoderatepaceinthenearterm;these sectorremaineddepressedoverall.Mostparticipants includedslowgrowthorevencontractioninsome anticipatedthathousingmarketswerelikelyto majorforeigneconomies,ongoingandprospective recoveronlyslowlyovertime,inpartbecausetight fiscaltighteningintheUnitedStates,modestgrowth creditstandardsinmortgagelendingmeantthatlow inhouseholdincome,and—despitesomerecentsigns mortgagerateswerenowgeneratinglessof apickup of improvement—continuedweaknessinthehousing inhomesalesandconstructionthanhadbeenthe sector.AsinApril,participantsexpectedthatmostof caseduringtherecoveriesfromearlierrecessions.A thefactorsrestrainingeconomicexpansionwould fewparticipantsweremoresanguineaboutthe

198 99thAnnualReport|2012 potentialforasizableupturninhousingactivity.Still, fectsthatwouldbemanifestedthroughdecliningU.S. withresidentialinvestmentcurrentlyamuchsmaller exports—wouldbenoticeablebutnotlarge.However, shareof realGDPthanduringpastrecoveries,the anotherparticipantnotedthatrecentappreciationof housingsectorseemedunlikelytocontributesub- thedollarinforeignexchangemarketswouldalso stantiallytoastrongereconomicrecovery. contributetoreducedexports. Anecdotalevidencefrombusinesscontactsindicated Thepaceof improvementinlabormarketconditions thatactivityintheenergyandagriculturesectors diminishedinrecentmonths;inparticular,growthin continuedtoadvanceinrecentmonths.Information employmentslowed.Jobgrowthlatelastyearand frommanufacturingandtransportationfirmswas earlythisyearwasboostedbyunusuallymildwinter generallylessoptimisticthanearlierintheyear. weather;someslowinghadbeenexpectedasweather Therewereanumberof reportsof slowingsalesto becamemorenormalduringthespring,butthe EuropeandAsia.Contactsinsomepartsof the reportedslowingwasmoresubstantialthanmany countryalsoindicatedthatfirmshadbecomemore participantshadanticipated.Oneparticipantnoted cautiousintheirhiringandinvestmentdecisions, thattheapparenttensionbetweenstrongemploywithmostcapitalinvestmentbeingundertakento mentgrowthandmoderateoutputgrowthseenearimproveproductivityandreducecostsratherthanto lierintheyearhadbeenresolvedmorerecentlyby expandcapacity.Someparticipantscitedexamplesof slowerjobgrowthratherthanfasteroutputgrowth. businesscontactssayingthatheighteneduncertainty Evenso,averagemonthlygrowthinpayrollsfrom aboutfuturetaxandregulatorypolicieshadledthem JanuarythroughMaywasinlinewithlastyear’s toputpotentialinvestmentprojectsonholduntilthe pace. uncertaintyisresolved. Meetingparticipantsagaindiscussedtheextentof Participantsexpectedthatfiscalpolicywouldcon- slackinlabormarkets.Someparticipantsjudgedthat tinuetobeadragoneconomicgrowthovercoming theunemploymentratewasbeingsubstantially quarters.Theygenerallyalsosawthefederalbudget boostedbystructuralfactorssuchasmismatches situationasadownsiderisktotheeconomicoutlook: betweentheskillsof unemployedworkersandthose If anagreementwasnotreachedtoaddresstheexpir- requiredforavailablejobs,aviewthatwouldimply ingtaxcutsandscheduledspendingreductionsin lessslackinlabormarketsthansuggestedbyasimple currentlaw,asharptighteningof fiscalpolicywould comparisonof thecurrentunemploymentrateto occuratthestartof 2013.Afewparticipants participants’estimatesof itslonger-runnormallevel. reportedhearingthatdefensecontractorsweremak- Acoupleof participantssaidtheywouldhave ingcontingencyplanstoreducetheirworkforcesif expectedinflationtoslownoticeablyif therewere potentialspendingcutsgointoeffect;onereported substantialandpersistentslack.Oneimplicationof thatsomefirmsalreadyhadbeguntomakesuch theviewthatthereisrelativelylittleslackisthatproreductions.Incontrast,itwasnotedthatanagree- vidingmoremonetarystimuluswouldbelikelyto mentonacrediblelonger-termplanthatputthefed- raiseinflationabovetheCommittee’sobjective.Some eralbudgetonasustainablepathoverthemedium otherparticipantsacknowledgedthatstructuralfacruninawaythatremovesthenear-termfiscalrisks torswerecontributingtounemployment,butsaid totherecoverywouldhelpalleviateuncertainty,likely that,intheirview,slackremainedhighandweak wouldhavepositiveeffectsonconsumerandbusiness aggregatedemandwasthemajorreasonthatthe sentiment,andsocouldspuranincreaseinbusiness unemploymentratewasstillelevated.Theseparticiinvestmentandhiring. pantscitedarangeof evidencetosupporttheirjudgment:thestill-highfractionof workerswhoreport ExportshelpedsupportU.S.economicgrowthduring workingpart-timejobsbecausetheycannotfindfulltheearlymonthsof thisyear.However,recent timework;researchshowingthatjob-findingrates reportsfromsomebusinesscontactspointedtoslow- amongthelong-termunemployedweresomewhat ingexportstoEuropeandChina,andseveralpartici- higherintherecentpastthanayearearlier;anecpantsnotedtheriskthateconomicweaknessin dotalevidencetotheeffectthatemployersdonotsee Europeoramoresignificantslowinginthepaceof longspellsof unemploymentasmakingapplicants expansioninemergingmarketsinAsiacoulddamp lessattractiveformostjobs;andreportsthatemployexportsfurther.Acoupleof participantsexpressed erswerereceivinglargenumbersof applicationsfor theviewthatthedirecteffectsontheU.S.economy eachopeningandwerebeingespeciallydiscriminatstemmingfromslowereconomicgrowthabroad—ef- ingwhenfillingvacantpositions.Anotherpartici-

Minutesof FederalOpenMarketCommitteeMeetings|June 199 pantpointedtoresearchshowingthat,inmanycoun- loansgenerallyhadcontinuedtoimprove,thatbank tries,inflationislessresponsivetodownwardpres- capitallevelswerequitehigh,andthatbankshad surefromlabormarketslackwheninflationis ampleliquidity.Consumerandbusinessloanswere alreadylowthanwheninflationiselevated,andto increasing,althoughcreditstandardsremainedtight evidencethatfirmsintheUnitedStateshavebeen andcommercialandresidentialrealestatelending reluctanttocutnominalwagesinrecentyears,as wererelativelyweak.Afewparticipantsindicated indicationsthatsizableslackmightnotcauseinfla- thattheywereseeingsignsthatverylowinterestrates tiontodeclinefromitsalreadylowlevel.Theseargu- mightbeinducingsomeinvestorstotakeonimprumentsimplythatslackinlabormarketsremainscon- dentrisksinthesearchforhighernominalreturns. siderableandthereforethatareductionintheunem- Participantsdiscussedtheriskthatstrainsinglobal ploymentratetowarditslonger-runnormallevel financialmarketsandpressuresonEuropeanfinanwouldnothavemucheffectoninflation. cialinstitutionscouldworsenandspillovertoparts of thedomesticfinancialsector,andsomenotedthe Measuresof consumerpriceinflationdeclinedover importanceof undertakingadequatepreparationsto theintermeetingperiod,mainlyreflectingreductions addresssuchspilloversif theyweretooccur;italso inoilandgasolinepricessinceearlierintheyear. wasrecognizedthatinvestorsentimentcouldimprove Severalparticipantsnotedthattheysawlittleif any andstrainsinglobalmarketsmightease.Severalparevidenceof pricepressures,commentingthat ticipantscommentedthatitwouldbedesirableto increasesinlaborcostscontinuedtobesubduedand explorethepossibilityof developingnewtoolsto thatnon-energycommoditypriceshaddeclinedof promotemore-accommodativefinancialconditions late.Withlonger-runinflationexpectationswell andtherebysupportastrongereconomicrecovery. anchoredandtheunemploymentrateelevated, almostallparticipantsanticipatedthatinflationin Committee Policy Action comingquartersandoverthemediumrunwouldbe atorbelowthe2percentratethattheCommittee Committeememberssawtheinformationreceived judgestobemostconsistentwithitsmandate;several overtheintermeetingperiodassuggestingthatthe hadreviseddowntheirinflationforecasts.Mostpar- economyhadbeenexpandingmoderately.However, ticipantsviewedtheriskstotheirinflationoutlookas growthinemploymenthadslowedinrecentmonths, beingroughlybalanced.Someparticipants,however, andalmostallmemberssawtheunemploymentrate sawpersistentslackinresourceutilizationasweight- asstillelevatedrelativetolevelsthattheyviewedas ingtheriskstotheoutlookforinflationtothedown- consistentwiththeCommittee’smandate.Members side.Incontrast,afewsawinflationrisksastiltedto generallyexpectedgrowthtobemoderateovercomtheupside;theygenerallywereskepticalof models ingquartersandthentopickupverygradually,with thatrelyoneconomicslacktoforecastinflationand theunemploymentratedecliningonlyslowly.Most wereconcernedthatmaintainingthecurrenthighly projectedsomewhatslowergrowththroughnextyear, accommodativestanceof monetarypolicyoverthe andasmallerreductioninunemployment,thanthey mediumrunriskederodingthestabilityof inflation hadprojectedinApril.Furthermore,strainsinglobal expectations,withacouplenotingthatlargelong-run financialmarkets,whichlargelystemmedfromthe fiscalimbalancesalsoposedarisk. sovereigndebtandbankingsituationinEurope,had increasedduringtheintermeetingperiodandcontin- ManyFOMCparticipantsjudgedthatoverallfinan- uedtoposesignificantdownsideriskstoeconomic cialconditionshadbecomesomewhatlesssupportive activitybothhereandabroad,makingtheoutlook of growthindemandforgoodsandservices.Inves- quiteuncertain.ThepossibilitythatU.S.fiscalpolicy tors’concernsaboutthesovereigndebtandbanking wouldbemorecontractionarythananticipatedwas situationintheeuroareareportedlyintensifieddur- alsocitedasadownsiderisk.Inflationhadslowed, ingtheintermeetingperiod,leadingtohigherrisk mainlyreflectingthedeclineinthepricesof crudeoil spreadsandlowerpricesforriskierassetsincluding andgasolineinrecentmonths.Averagingthroughits equitiesandtobroad-basedappreciationof theU.S. recentfluctuations,inflationappearedtoberunning dollaronforeignexchangemarkets.Incontrast,a neartheCommittee’s2percentlonger-runobjective; fewparticipantsobservedthatthemarkeddropin withlonger-terminflationexpectationsstable,memyieldsonlonger-termU.S.Treasurysecuritiescould bersanticipatedthatinflationoverthemediumrun providesomeimpetustogrowth.Focusingmorenar- wouldbeatorbelowthatrate.Somemembers rowlyonthebankingsectorintheUnitedStates,it judgedthatpersistentslackinresourceutilization wasnotedthatmeasuresof creditqualityforbank poseddownsideriskstotheoutlookforinflation.In

200 99thAnnualReport|2012 contrast,onememberthoughtthatmaintainingthe assessmentof theeconomicsituation,almostall currenthighlyaccommodativestanceof monetary membersagainagreedtoindicatethattheCommittee policywellinto2014wouldposeupsiderisksto expectstomaintainahighlyaccommodativestance inflation. formonetarypolicyandcurrentlyanticipatesthat economicconditions—includinglowratesof Intheirdiscussionof monetarypolicyfortheperiod resourceutilizationandasubduedoutlookforinflaahead,membersagreedthatitwouldbeappropriate tionoverthemediumrun—arelikelytowarrant tokeepthetargetrangeforthefederalfundsrateat exceptionallylowlevelsforthefederalfundsrateat 0to¼percentinordertosupportastrongereco- leastthroughlate2014.SomeCommitteemembers nomicrecoveryandtohelpensurethatinflation,over indicatedthattheirpolicyjudgmentreflectedinpart time,isatthe2percentratethattheCommittee theirperceptionof significantdownsiderisksto judgesmostconsistentwithitsmandate.Inaddition, growth,especiallysincetheCommittee’sabilityto allmembersbutoneagreedthatitwouldbeappro- respondtoweaker-than-expectedeconomiccondipriatetocontinuethroughtheendof thisyearthe tionswouldbesomewhatlimitedbytheconstraint Committee’sprogramtoextendtheaveragematurity imposedonmonetarypolicywhenthepolicyrateis of theFederalReserve’sholdingsof securities;spe- atornearitseffectivelowerbound.Membersagain cifically,theyagreedtocontinuepurchasingTreasury notedthattheforwardguidanceisconditionalon securitieswithremainingmaturitiesof 6yearsto economicdevelopmentsandthatthedategiveninthe 30yearsatthecurrentpaceof about$44billionper statementwouldbesubjecttorevisionshouldthere monthwhilesellingorredeeminganequalamountof beasignificantchangeintheeconomicoutlook. Treasurysecuritieswithremainingmaturitiesof approximately3yearsorless.Thesestepswould Afewmembersexpressedtheviewthatfurtherpolicy increasetheFederalReserve’sholdingsof longer- stimuluslikelywouldbenecessarytopromotesatistermTreasurysecuritiesbyabout$267billionwhile factorygrowthinemploymentandtoensurethatthe reducingitsholdingsof shorter-termTreasurysecuri- inflationratewouldbeattheCommittee’sgoal.Sevtiesbythesameamount.Membersalsoagreedto eralothersnotedthatadditionalpolicyactioncould maintaintheCommittee’sexistingpolicyregarding bewarrantedif theeconomicrecoveryweretolose thereinvestmentof principalpaymentsfromFederal momentum,if thedownsideriskstotheforecast Reserveholdingsof agencysecuritiesintoagency becamesufficientlypronounced,orif inflation MBS.Membersgenerallyjudgedthatcontinuingthe seemedlikelytorunpersistentlybelowtheCommitmaturityextensionprogramwouldputsomedown- tee’slonger-runobjective.TheCommitteeagreed wardpressureonlonger-terminterestratesandhelp thatitwaspreparedtotakefurtheractionasappromakebroaderfinancialconditionsmoreaccommoda- priatetopromoteastrongereconomicrecoveryand tive.Somemembersnotedtheriskthatcontinued sustainedimprovementinlabormarketconditionsin purchasesof longer-termTreasurysecuritiescould, acontextof pricestability.Afewmembersobserved atsomepoint,leadtodeteriorationinthefunction- thatitwouldbehelpfultohaveabetterunderstandingof theTreasurysecuritiesmarketthatcould ingof howlargetheFederalReserve’sassetpurunderminetheintendedeffectsof thepolicy.How- chaseswouldhavetobetocauseameaningfuldeteever,membersgenerallyagreedthatsuchrisks riorationinsecuritiesmarketfunctioning,andof the seemedlowatpresent,andwereoutweighedbythe potentialcostsof suchdeteriorationfortheeconomy expectedbenefitsof theaction.Severalmembers asawhole. notedthatthedownwardpressureonlonger-term ratesfromcontinuingtheCommittee’smaturity Attheconclusionof thediscussion,theCommittee extensionprogramwaslikelytobemodest.One votedtoauthorizeanddirecttheFederalReserve memberanticipatedlittleif anyeffectoneconomic Bankof NewYork,untilitwasinstructedotherwise, growthandunemploymentanddidnotagreethatthe toexecutetransactionsintheSystemAccountin outlookforeconomicactivityandinflationcalledfor accordancewiththefollowingdomesticpolicy furtherpolicyaccommodation. directive: Withrespecttothestatementtobereleasedfollowing “TheFederalOpenMarketCommitteeseeks themeeting,membersagreedthatonlyrelatively monetaryandfinancialconditionsthatwillfossmallmodificationstothefirsttwoparagraphswere terpricestabilityandpromotesustainable neededtoreflecttheincomingeconomicdataandthe growthinoutput.Tofurtheritslong-runobjecchangestotheeconomicoutlook.Inlightof their tives,theCommitteeseeksconditionsinreserve

Minutesof FederalOpenMarketCommitteeMeetings|June 201 marketsconsistentwithfederalfundstradingin depressed.Inflationhasdeclined,mainlyreflectarangefrom0to¼percent.TheCommittee inglowerpricesof crudeoilandgasoline,and directstheDesktocontinuethematurityexten- longer-terminflationexpectationshave sionprogramitbeganinSeptembertopurchase, remainedstable. bytheendof June2012,Treasurysecuritieswith remainingmaturitiesof 6yearsto30yearswith Consistentwithitsstatutorymandate,theComatotalfacevalueof $400billion,andtosell mitteeseekstofostermaximumemployment Treasurysecuritieswithremainingmaturitiesof andpricestability.TheCommitteeexpectseco- 3yearsorlesswithatotalfacevalueof $400bil- nomicgrowthtoremainmoderateovercoming lion.Followingtheconclusionof thesepur- quartersandthentopickupverygradually. chases,theCommitteedirectstheDesktopur- Consequently,theCommitteeanticipatesthat chaseTreasurysecuritieswithremainingmaturi- theunemploymentratewilldeclineonlyslowly tiesof 6yearsto30yearswithatotalfacevalue towardlevelsthatitjudgestobeconsistentwith of about$267billionbytheendof Decem- itsdualmandate.Furthermore,strainsinglobal ber2012,andtosellorredeemTreasurysecuri- financialmarketscontinuetoposesignificant tieswithremainingmaturitiesof approximately downsideriskstotheeconomicoutlook.The 3yearsorlesswithatotalfacevalueof about Committeeanticipatesthatinflationoverthe $267billion.Forthedurationof thisprogram, mediumtermwillrunatorbelowtheratethatit theCommitteedirectstheDesktosuspendits judgesmostconsistentwithitsdualmandate. currentpolicyof rollingovermaturingTreasury securitiesintonewissues.TheCommitteedirects Tosupportastrongereconomicrecoveryandto theDesktomaintainitsexistingpolicyof rein- helpensurethatinflation,overtime,isatthe vestingprincipalpaymentsonallagencydebt ratemostconsistentwithitsdualmandate,the andagencymortgage-backedsecuritiesinthe Committeeexpectstomaintainahighlyaccom- SystemOpenMarketAccountinagency modativestanceformonetarypolicy.Inparticumortgage-backedsecurities.Theseactions lar,theCommitteedecidedtodaytokeepthe shouldmaintainthetotalfacevalueof domestic targetrangeforthefederalfundsrateat0to securitiesatapproximately$2.6trillion.The ¼percentandcurrentlyanticipatesthateco- CommitteedirectstheDesktoengageindollar nomicconditions—includinglowratesof rolltransactionsasnecessarytofacilitatesettle- resourceutilizationandasubduedoutlookfor mentof theFederalReserve’sagencyMBS inflationoverthemediumrun—arelikelyto transactions.TheSystemOpenMarketAccount warrantexceptionallylowlevelsforthefederal ManagerandtheSecretarywillkeeptheCom- fundsrateatleastthroughlate2014. mitteeinformedof ongoingdevelopments regardingtheSystem’sbalancesheetthatcould TheCommitteealsodecidedtocontinue affecttheattainmentovertimeof theCommit- throughtheendof theyearitsprogramto tee’sobjectivesof maximumemploymentand extendtheaveragematurityof itsholdingsof pricestability.” securities.Specifically,theCommitteeintendsto purchaseTreasurysecuritieswithremaining Thevoteencompassedapprovalof thestatement maturitiesof 6yearsto30yearsatthecurrent belowtobereleasedat12:30p.m.: paceandtosellorredeemanequalamountof Treasurysecuritieswithremainingmaturitiesof “InformationreceivedsincetheFederalOpen approximately3yearsorless.Thiscontinuation MarketCommitteemetinAprilsuggeststhat of thematurityextensionprogramshouldput theeconomyhasbeenexpandingmoderately downwardpressureonlonger-terminterestrates thisyear.However,growthinemploymenthas andhelptomakebroaderfinancialconditions slowedinrecentmonths,andtheunemployment moreaccommodative.TheCommitteeismainrateremainselevated.Businessfixedinvestment tainingitsexistingpolicyof reinvestingprincipal hascontinuedtoadvance.Householdspending paymentsfromitsholdingsof agencydebtand appearstoberisingatasomewhatslowerpace agencymortgage-backedsecuritiesinagency thanearlierintheyear.Despitesomesignsof mortgage-backedsecurities.TheCommitteeis improvement,thehousingsectorremains preparedtotakefurtheractionasappropriateto

202 99thAnnualReport|2012 promoteastrongereconomicrecoveryandsus- effectincurrentcircumstances.Shouldinflationfall tainedimprovementinlabormarketconditions substantiallyandpersistentlybelowtheCommittee’s inacontextof pricestability.” 2percentgoal,however,hefeltthatmonetarystimulusmightthenbeappropriatetoensurethereturnof Votingforthisaction:BenBernanke,WilliamC. inflationtowardtarget. Dudley,ElizabethDuke,DennisP.Lockhart,Sandra Pianalto,JeromeH.Powell,SarahBloomRaskin, Itwasagreedthatthenextmeetingof theCommittee JeremyC.Stein,DanielK.Tarullo,JohnC.Williams, wouldbeheldonTuesday–Wednesday,July31– andJanetL.Yellen. August1,2012.Themeetingadjournedat11:05a.m. onJune20,2012. Votingagainstthisaction:JeffreyM.Lacker. Mr.Lackerdissentedbecauseheopposedcontinua- Notation Vote tionof thematurityextensionprogram.Hedidnot believethatfurthermonetarystimulusatthistime BynotationvotecompletedonMay15,2012,the wouldmakeasubstantialdifferenceforeconomic Committeeunanimouslyapprovedtheminutesof the growthandemploymentwithoutalsoincreasing FOMCmeetingheldonApril24–25,2012. inflationbymorethanwouldbedesirable.InMr. Lacker’sview,theoutlookforeconomicgrowthhad WilliamB.English clearlyweakenedof late,buthequestionedwhether Secretary thematurityextensionprogramwouldhavemuch

Minutesof FederalOpenMarketCommitteeMeetings|June 203 Addendum: Overall,theassessmentsthatFOMCparticipants Summary of Economic Projections submittedinJuneindicatedthat,underappropriate monetarypolicy,thepaceof economicexpansion InconjunctionwiththeJune19–20,2012,Federal overthe2012−14periodwouldlikelycontinuetobe OpenMarketCommittee(FOMC)meeting,meeting moderateandinflationwouldremainsubdued(see participants—the7membersof theBoardof Gover- table1andfigure1).Participantsjudgedthatthe norsandthe12presidentsof theFederalReserve growthrateof realgrossdomesticproduct(GDP) Banks,allof whomparticipateinthedeliberationsof wouldpickupgraduallyandthattheunemployment theFOMC—submittedtheirassessments,undereach ratewouldedgedownveryslowly.Participantsproparticipant’sjudgmentof appropriatemonetary jectedthatinflation,asmeasuredbytheannual policy,of realoutputgrowth,theunemployment changeinthepriceindexforpersonalconsumption rate,inflation,andthetargetfederalfundsratefor expenditures(PCE),wouldrunclosetoorbelowthe eachyearfrom2012through2014andoverthelon- FOMC’slonger-runinflationobjectiveof 2percent. gerrun.Theseassessmentswerebasedoninformationavailableatthetimeof themeetingandpartici- Asshowninfigure2,mostparticipantsjudgedthat pants’individualassumptionsaboutthefactorslikely highlyaccommodativemonetarypolicywaslikelyto toaffecteconomicoutcomes.Thelonger-runprojec- bewarrantedovertheforecastperiod.Inparticular, tionsrepresenteachparticipant’sjudgmentof the 13participantsthoughtthatitwouldbeappropriate ratetowhicheachvariablewouldbeexpectedtocon- forthefirstincreaseinthetargetfederalfundsrateto verge,overtime,underappropriatemonetarypolicy occurduring2014orlater.Amajorityof particiandintheabsenceof furthershockstotheeconomy. pantsjudgedthatappropriatemonetarypolicywould “Appropriatemonetarypolicy”isdefinedasthe involveanextensionof thematurityextensionprofuturepathof policythatparticipantsdeemmost gram(MEP)throughtheendof 2012. likelytofosteroutcomesforeconomicactivityand inflationthatbestsatisfytheirindividualinterpreta- Overall,participantsjudgedtheuncertaintyassocitionsof theFederalReserve’sobjectivesof maximum atedwiththeoutlookforrealactivityandtheunememploymentandstableprices. ploymentratetobeunusuallyhighrelativetohistori- Table1.EconomicprojectionsofFederalReserveBoardmembersandFederalReserveBankpresidents,June2012 Percent Centraltendency1 Range2 Variable 2012 2013 2014 Longerrun 2012 2013 2014 Longerrun ChangeinrealGDP 1.9to2.4 2.2to2.8 3.0to3.5 2.3to2.5 1.6to2.5 2.2to3.5 2.8to4.0 2.2to3.0 Aprilprojection 2.4to2.9 2.7to3.1 3.1to3.6 2.3to2.6 2.1to3.0 2.4to3.8 2.9to4.3 2.2to3.0 Unemploymentrate 8.0to8.2 7.5to8.0 7.0to7.7 5.2to6.0 7.8to8.4 7.0to8.1 6.3to7.7 4.9to6.3 Aprilprojection 7.8to8.0 7.3to7.7 6.7to7.4 5.2to6.0 7.8to8.2 7.0to8.1 6.3to7.7 4.9to6.0 PCEinflation 1.2to1.7 1.5to2.0 1.5to2.0 2.0 1.2to2.0 1.5to2.1 1.5to2.2 2.0 Aprilprojection 1.9to2.0 1.6to2.0 1.7to2.0 2.0 1.8to2.3 1.5to2.1 1.5to2.2 2.0 CorePCEinflation3 1.7to2.0 1.6to2.0 1.6to2.0 1.7to2.0 1.4to2.1 1.5to2.2 Aprilprojection 1.8to2.0 1.7to2.0 1.8to2.0 1.7to2.0 1.6to2.1 1.7to2.2 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andprojectionsforbothmeasuresofinflationarefromthefourthquarterofthepreviousyeartothefourth quarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures (PCE)andthepriceindexforPCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarterofthe yearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’s assessmentoftheratetowhicheachvariablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.TheApril projectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonApril24–25,2012. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

204 99thAnnualReport|2012 Figure1.Centraltendenciesandrangesofeconomicprojections,2012–14andoverthelongerrun Percent Change in real GDP 5 Central tendency of projections 4 Range of projections 3 2 1 + Actual 0 - 1 2 3 2007 2008 2009 2010 2011 2012 2013 2014 Longer run Percent Unemployment rate 10 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 Longer run Note:Definitionsofvariablesareinthegeneralnotetotable1.Thedatafortheactualvaluesofthevariablesareannual.

Minutesof FederalOpenMarketCommitteeMeetings|June 205 Figure2.OverviewofFOMCparticipants’assessmentsofappropriatemonetarypolicy,June2012 Number of participants Appropriate timing of policy firming 9 8 7 7 6 6 5 4 3 3 3 2 1 2012 2013 2014 2015 Appropriate pace of policy firming Percent Target federal funds rate at year-end 6 5 4 3 2 1 0 2012 2013 2014 Longer run Note:Intheupperpanel,theheightofeachbardenotesthenumberofFOMCparticipantswhojudgethat,underappropriatemonetarypolicy,thefirstincreaseinthetargetfederalfundsratefromitscurrentrangeof0to¼percentwilloccurinthespecifiedcalendaryear.InApril2012,thenumbersofFOMCparticipantswhojudgedthatthefirst increaseinthetargetfederalfundsratewouldoccurin2012,2013,2014,and2015were,respectively,3,3,7,and4.Inthelowerpanel,eachshadedcircleindicatesthevalue (roundedtothenearest¼percentagepoint)ofanindividualparticipant’sjudgmentoftheappropriatelevelofthetargetfederalfundsrateattheendofthespecifiedcalendar yearoroverthelongerrun.

206 99thAnnualReport|2012 calnorms,withtherisksweightedmainlytoward assumptionof appropriatemonetarypolicyandin slowereconomicgrowthandahigherunemployment theabsenceof furthershockstotheeconomywas rate.Manyparticipantsalsoviewedtheuncertainty 5.2to6.0percent,unchangedfromApril.Mostparsurroundingtheirprojectionsforinflationtobe ticipantsprojectedthatthegapbetweenthecurrent greaterthannormal,butmostsawtheriskstoinfla- unemploymentrateandtheirestimatesof itslongertiontobebroadlybalanced. runnormalratewouldbeclosedinfiveorsixyears,a couplejudgedthatlesstimewouldbeneeded,and TheOutlookforEconomicActivity onethoughtmoretimewouldbenecessarybecause Conditionalupontheirindividualassumptionsabout of thepersistentheadwindsimpedingtheeconomic appropriatemonetarypolicy,participantsjudged expansion. thattheeconomywouldcontinuetoexpandata moderatepacein2012and2013beforepickingupin Figures3.Aand3.Bprovidedetailsonthediversity 2014toapacesomewhatabovewhatparticipants of participants’viewsregardingthelikelyoutcomes viewasthelonger-runrateof outputgrowth.The forrealGDPgrowthandtheunemploymentrate centraltendencyof theirprojectionsforthechange overthenextthreeyearsandoverthelongerrun. inrealGDPin2012was1.9to2.4percent,lower ThedispersionintheseprojectionsreflectsdifferthaninApril.Manyparticipantscharacterizedthe encesinparticipants’assessmentsof manyfactors, incomingdata—especiallyforhouseholdspending includingappropriatemonetarypolicyanditseffects andthelabormarket—ashavingbeenweakerthan ontheeconomy,theunderlyingmomentuminecotheyhadanticipatedinApril.Inaddition,most nomicactivity,thespillovereffectsof thefiscaland notedthattheworseningsituationinEuropewas financialsituationinEurope,theprospectivepathfor leadingtoaslowdowninglobaleconomicgrowth U.S.fiscalpolicy,theextentof structuraldislocations andgreatervolatilityinfinancialmarkets.Compared inthelabormarket,andthelikelyevolutionof credit withtheirAprilsubmissions,mostparticipantslow- andfinancialmarketconditions.Comparedwith eredtheirmedium-runprojectionsof economic theirAprilassessments,therangeof participants’ activitysomewhat.Thecentraltendenciesof partici- forecastsforthechangeinrealGDPin2012and pants’projectionsof realeconomicgrowthin2013 2013shiftedlower,whilethedispersionof individual and2014were2.2to2.8percentand3.0to3.5per- forecastsforgrowthin2014wasaboutunchanged. cent,respectively.Thecentraltendencyforthe Consistentwiththedownwardshiftinthedistribulonger-runrateof increaseof realGDPwas2.3to tionof forecastsforeconomicgrowth,thedistribu- 2.5percent,littlechangedfromApril.Participants tionof projectionsfortheunemploymentrateshifted citedseveralheadwindsthatwerelikelytoholdback upin2012and2013and,toalesserextent,in2014. thepaceof economicexpansionovertheforecast AsinApril,thedispersionof estimatesforthe period,includingthedifficultfiscalandfinancial longer-runrateof outputgrowthwasfairlynarrow, situationinEurope,astill-depressedhousingmarket, generallyinarangeof 2.2to2.7percent.Incontrast, tightcreditforsomeborrowers,andfiscalrestraintin participants’viewsabouttheleveltowhichthe theUnitedStates. unemploymentratewouldconvergeinthelongerrun weremorediverse,reflecting,amongotherthings, Consistentwiththedownwardrevisionstotheirpro- differentviewsontheoutlookforlaborsupplyand jectionsforrealGDPgrowthin2012and2013, thestructureof thelabormarket. nearlyallparticipantsmarkeduptheirassessments fortherateof unemployment.Participantsprojected TheOutlookforInflation theunemploymentrateattheendof 2012toremain Participants’viewsaboutthemedium-runoutlook atorslightlybelowrecentlevels,withacentralten- forinflationundertheassumptionof appropriate dencyof 8.0to8.2percent,somewhathigherthan monetarypolicywerelittlechangedfromApril. theirAprilsubmissions.Participantsanticipated However,nearlyallof themmarkeddowntheir gradualimprovementinlabormarketconditionsby assessmentof headlineinflationinthenearterm, 2014,butevenso,theygenerallythoughtthatthe pointingtorecentdeclinesinthepricesof crudeoil unemploymentrateattheendof thatyearwouldstill andgasolinethatweresharperthanpreviouslyproliewellabovetheirindividualestimatesof itslonger- jected.Almostallparticipantsjudgedthatbothheadrunnormallevel.Thecentraltendenciesof partici- lineandcoreinflationwouldremainsubduedover pants’forecastsfortheunemploymentratewere the2012−14period,runningatratesatorbelowthe 7.5to8.0percentattheendof 2013and7.0to FOMC’slonger-runobjectiveof 2percent.Some 7.7percentattheendof 2014.Thecentraltendency participantsnotedthatinflationexpectationshad of participants’estimatesof thelonger-runnormal remainedstable,andseveralpointedtoresourceslack rateof unemploymentthatwouldprevailunderthe andmoderateincreasesinlaborcompensationas

Minutesof FederalOpenMarketCommitteeMeetings|June 207 Figure3.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2012–14andoverthelongerrun Number of participants 2012 20 June projections 18 April projections 16 14 12 10 8 6 4 2 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 - 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 Percent range Number of participants 2013 20 18 16 14 12 10 8 6 4 2 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 - 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 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 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 - 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 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 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 - 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 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

208 99thAnnualReport|2012 Figure3.B.Distributionofparticipants’projectionsfortheunemploymentrate,2012–14andoverthelongerrun Number of participants 2012 20 June projections 18 April projections 16 14 12 10 8 6 4 2 4.8 - 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 - 4.9 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 Percent range Number of participants 2013 20 18 16 14 12 10 8 6 4 2 4.8 - 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 - 4.9 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 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 4.8 - 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 - 4.9 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 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 4.8 - 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 - 4.9 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 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|June 209 sourcesof restraintonprices.Specifically,thecentral extensionthroughtheendof 2012of theMEP,and2 tendencyof participants’projectionsforinflation,as participantsconditionedtheireconomicforecastson measuredbythePCEpriceindex,moveddownin anewprogramof securitiespurchases.Twoindicated 2012to1.2to1.7percentandwaslittlechangedin thattheywouldconsidersuchpurchasesintheevent 2013and2014at1.5to2.0percent.Thecentralten- thattheeconomydidnotmakesatisfactoryprogress denciesof theforecastsforcoreinflationwere inimprovinglabormarketconditionsorintheevent broadlythesameasthosefortheheadlinemeasurein of asignificantdeteriorationintheeconomicout- 2013and2014. lookorafurtherincreaseindownsideriskstothat outlook.Almostallparticipantsassumedthatthe Figures3.Cand3.Dprovideinformationaboutthe Committeewouldcarryoutthenormalizationof the diversityof participants’viewsabouttheoutlookfor balancesheetaccordingtotheprinciplesapprovedat inflation.Relativetotheassessmentscompiledin theJune2011FOMCmeeting.Thatis,priortothe April,theprojectionsforheadlineinflationshifted firstincreaseinthefederalfundsrate,theCommittee downin2012,reflectingthedeclinesinenergyprices. wouldlikelyceasereinvestingsomeorallprincipal Thedistributionsof participants’projectionsfor paymentsonsecuritiesintheSystemOpenMarket headlineandcoreinflationin2013and2014were Account(SOMA),anditwouldlikelybeginsalesof slightlylowerthanthosereportedinApril. agencysecuritiesfromtheSOMAsometimeafterthe firstrateincrease,aimingtoeliminatetheSOMA’s AppropriateMonetaryPolicy holdingsof agencysecuritiesoveraperiodof three Asindicatedinfigure2,mostparticipantsjudged tofiveyears.Ingeneral,participantslinkedtheirprethatexceptionallylowlevelsof thefederalfundsrate ferredstartdatesforthenormalizationprocessto wouldremainappropriateatleastuntillate2014.In theirviewsfortheappropriatetimingforthefirst particular,sevenparticipantsthoughtthatitwould increaseinthetargetfederalfundsrate.Oneparticibeappropriatetocommencepolicyfirmingin2014, pantwhothoughtthattheliftoff of thefederalfunds whileanothersixparticipantsthoughtthatthefirst rateshouldoccurrelativelysoonindicatedthatthe increaseinthetargetfederalfundsratewouldnotbe reinvestmentof maturingsecuritiesshouldcontinue warranteduntil2015(upperpanel).Elevenpartici- foratimeafterliftoff. pantsindicatedthattheappropriatefederalfunds rateattheendof 2014wouldbe75basispointsor Thekeyfactorsinformingparticipants’individual lower(lowerpanel),andthosewhojudgedthat assessmentsof theappropriatesettingformonetary policyliftoff wouldnotoccuruntil2015thoughtthe policyincludedtheirjudgmentsregardingthemaxifederalfundsratewouldbe1½percentorlowerat mumlevelof employment,theextenttowhichcurtheendof thatyear.AsinApril,sixparticipants rentconditionshaddeviatedfrommandatejudgedthateconomicconditionswouldwarrantan consistentlevels,andparticipants’projectionsof the increaseinthetargetfederalfundsrateineither2012 likelytimehorizonnecessarytoreturnemployment or2013inordertoachievetheCommittee’sstatutory andinflationtosuchlevels.Severalparticipants mandate.Thoseparticipantsjudgedthattheappro- notedthattheirassessmentsof appropriatemonetary priatevalueforthefederalfundsratewouldrange policyreflectedthesubparpaceof theeconomic from1½to3percentattheendof 2014. expansionandthepersistentshortfallinaggregate demandsincethe2007–09recession,andtwocom- Allparticipantsreportedlevelsfortheappropriate mentedthattheneutrallevelof thefederalfundsrate targetfederalfundsrateattheendof 2014thatwere waslikelysomewhatbelowitshistoricalnorm.One wellbelowtheirestimatesof thelevelexpectedto participantexpressedconcernthataprotracted prevailinthelongerrun.Estimatesof thelonger-run periodof veryaccommodativemonetarypolicy targetfederalfundsraterangedfrom3to4½per- couldleadtoabuildupof risksinthefinancial cent,reflectingtheCommittee’sinflationobjectiveof system.Participantsalsonotedthatbecausethe 2percentandparticipants’judgmentsaboutthe appropriatestanceof monetarypolicydepends longer-runequilibriumlevelof therealfederalfunds importantlyontheevolutionof realactivityand rate. inflationovertime,theirassessmentsof theappropriatefuturepathof thefederalfundsrateandthebal- Participantsalsoprovidedqualitativeinformationon ancesheetcouldchangeif economicconditionswere theirviewsregardingtheappropriatepathof the toevolveinanunexpectedmanner. FederalReserve’sbalancesheet.Of the12participantswhoseassessmentsof appropriatemonetary Figure3.Edetailsthedistributionof participants’ policyincludedadditionalbalancesheetpolicies,11 judgmentsregardingtheappropriatelevelof thetarindicatedthattheirassumptionsincorporatedan getfederalfundsrateattheendof eachcalendaryear

210 99thAnnualReport|2012 Figure3.C.Distributionofparticipants’projectionsforPCEinflation,2012–14andoverthelongerrun Number of participants 2012 20 June projections 18 April projections 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2013 20 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|June 211 Figure3.D.Distributionofparticipants’projectionsforcorePCEinflation,2012–14 Number of participants 2012 20 June projections April projections 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 2013 20 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 20 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.

212 99thAnnualReport|2012 Figure3.E.Distributionofparticipants’projectionsforthetargetfederalfundsrate,2012–14andoverthelongerrun Number of participants 2012 June projections 20 April projections 18 16 14 12 10 8 6 4 2 0.0 0 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 4.3 8 - 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 Percent range Number of participants 2013 20 18 16 14 12 10 8 6 4 2 0.0 0 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 4.3 8 - 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 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 0.0 0 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 4.3 8 - 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 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 0.0 0 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 4.3 8 - 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 Percent range Note:Thetargetfederalfundsrateismeasuredasthelevelofthetargetrateattheendofthecalendaryearorinthelongerrun.

Minutesof FederalOpenMarketCommitteeMeetings|June 213 from2012to2014andoverthelongerrun.Most Table2.Averagehistoricalprojectionerrorranges participantsjudgedthateconomicconditionswould Percentagepoints warrantmaintainingthecurrentlowlevelof thefederalfundsratethroughtheendof 2013.Viewsonthe Variable 2012 2013 2014 appropriatelevelof thefederalfundsrateattheend ChangeinrealGDP1 ±1.0 ±1.6 ±1.7 of 2014weremorewidelydispersed,with11partici- Unemploymentrate1 ±0.4 ±1.2 ±1.7 pantsseeingtheappropriatelevelof thefederalfunds Totalconsumerprices2 ±0.8 ±1.0 ±1.1 rateas¾percentagepointorlowerand4of them Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared seeingtheappropriaterateas2percentorhigher. errorofprojectionsfor1992through2011thatwerereleasedinthesummerby Thosewhojudgedthatalongerperiodof very variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast Uncertainty,”undercertainassumptions,thereisabouta70percentprobability accommodativemonetarypolicywouldbeapproprithatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein ategenerallyprojectedthattheunemploymentrate rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Further informationisinDavidReifschneiderandPeterTulip(2007),“Gaugingthe wouldremainfurtheraboveitslonger-runnormal UncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,”Finance levelattheendof 2014.Incontrast,the6partici- andEconomicsDiscussionSeries2007-60(Washington:BoardofGovernorsof theFederalReserveSystem,November). pantswhojudgedthatpolicyfirmingshouldbeginin 1 Definitionsofvariablesareinthegeneralnotetotable1. 2012or2013indicatedthattheCommitteewould 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen needtoactsoontokeepinflationneartheFOMC’s mostwidelyusedingovernmentandprivateeconomicforecasts.Projection ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof longer-runobjectiveof 2percentandtopreventa theyearindicated. riseininflationexpectations. UncertaintyandRisks crisis,theyweremoreuncertainaboutthelevelof potentialoutputanditstrendrateof growth. Nearlyallparticipantsjudgedthattheircurrentlevel of uncertaintyaboutGDPgrowthandunemploy- Amajorityof participantsreportedthattheysawthe mentwashigherthanwasthenormduringthepreviriskstotheirforecastsof realGDPgrowthas ous20years(figure4).5Abouthalf of allparticiweightedtowardthedownsideand,accordingly,the pantsjudgedthelevelof uncertaintyassociatedwith riskstotheirprojectionsof theunemploymentrate theirinflationforecaststobehigheraswell,while astiltedtotheupside.Themostfrequentlyidentified anothereightparticipantsvieweduncertaintyabout sourcesof riskwerethesituationinEurope,which inflationasbroadlysimilartohistoricalnorms.The manyparticipantsthoughthadthepotentialtoslow mainfactorscitedasunderlyingtheelevateduncerglobaleconomicactivity,particularlyoverthenear taintyabouteconomicoutcomesweretheongoing term,andthefiscalsituationintheUnitedStates. fiscalandfinancialsituationinEurope,theoutlook forfiscalpolicyintheUnitedStates,andageneral Mostparticipantscontinuedtojudgetherisksto slowdowninglobaleconomicgrowth,includingthe theirprojectionsforinflationasbroadlybalanced, possibilityof asignificantslowdowninChina.Asin withseveralhighlightingtherecentstabilityof infla- April,participantsnotedthedifficultiesassociated tionexpectations.However,fiveparticipantssawthe withforecastingthepathof theU.S.economicrecovriskstoinflationastiltedtothedownside,alarger eryfollowingafinancialcrisisandrecessionthatdifnumberthaninApril;acoupleof themnotedthat feredmarkedlyfromrecenthistoricalexperience.Sevslackinresourcemarketscouldturnouttobegreater eralcommentedthatintheaftermathof thefinancial orcouldputmoredownwardpressureoninflation thantheywereanticipating.Twoparticipantssawthe riskstoinflationasweightedtotheupside,inlightof 5 Table2providesestimatesoftheforecastuncertaintyforthe concernsaboutU.S.fiscalimbalances,thecurrent changeinrealGDP,theunemploymentrate,andtotalconsumerpriceinflationovertheperiodfrom1992to2011.Atthe highlyaccommodativestanceof monetarypolicy,or endofthissummary,thebox“ForecastUncertainty”discusses theCommittee’sabilitytoeffectivelyremovepolicy thesourcesandinterpretationofuncertaintyintheeconomic accommodationwhenitbecomesappropriateto forecastsandexplainstheapproachusedtoassesstheuncertaintyandrisksattendingtheparticipants’projections. doso.

214 99thAnnualReport|2012 Figure4.Uncertaintyandrisksineconomicprojections Number of participants Number of participants Uncertainty about GDP growth 20 Risks to GDP growth 20 June projections 18 June projections 18 April projections 16 April 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 20 Risks to the unemployment rate 20 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 20 Risks to PCE inflation 20 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 20 Risks to core PCE inflation 20 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|June 215 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers inthethirdyear.Thecorresponding70percentconfioftheBoardofGovernorsandthepresidentsofthe denceintervalsforoverallinflationwouldbe1.2to FederalReserveBanksinformdiscussionsofmon- 2.8percentinthecurrentyear,1.0to3.0percentin etarypolicyamongpolicymakersandcanaidpublic thesecondyear,and0.9to3.1percentinthethird understandingofthebasisforpolicyactions.Con- year. siderableuncertaintyattendstheseprojections,how- Becausecurrentconditionsmaydifferfromthose ever.Theeconomicandstatisticalmodelsandrelathatprevailed,onaverage,overhistory,participants tionshipsusedtohelpproduceeconomicforecasts providejudgmentsastowhethertheuncertainty arenecessarilyimperfectdescriptionsofthereal attachedtotheirprojectionsofeachvariableis world,andthefuturepathoftheeconomycanbe greaterthan,smallerthan,orbroadlysimilartotypiaffectedbymyriadunforeseendevelopmentsand callevelsofforecastuncertaintyinthepast,as events.Thus,insettingthestanceofmonetary shownintable2.Participantsalsoprovidejudgments policy,participantsconsidernotonlywhatappearsto astowhethertheriskstotheirprojectionsare bethemostlikelyeconomicoutcomeasembodiedin weightedtotheupside,areweightedtothedowntheirprojections,butalsotherangeofalternative side,orarebroadlybalanced.Thatis,participants possibilities,thelikelihoodoftheiroccurring,andthe judgewhethereachvariableismorelikelytobe potentialcoststotheeconomyshouldtheyoccur. aboveorbelowtheirprojectionsofthemostlikely Table2summarizestheaveragehistoricalaccuracy outcome.Thesejudgmentsabouttheuncertainty ofarangeofforecasts,includingthosereportedin andtherisksattendingeachparticipant’sprojections pastMonetaryPolicyReportsandthosepreparedby aredistinctfromthediversityofparticipants’views theFederalReserveBoard’sstaffinadvanceof aboutthemostlikelyoutcomes.Forecastuncertainty meetingsoftheFederalOpenMarketCommittee. isconcernedwiththerisksassociatedwithaparticu- Theprojectionerrorrangesshowninthetableillus- larprojectionratherthanwithdivergencesacrossa tratetheconsiderableuncertaintyassociatedwith numberofdifferentprojections. economicforecasts.Forexample,supposeapartici- Aswithrealactivityandinflation,theoutlookforthe pantprojectsthatrealgrossdomesticproduct(GDP) futurepathofthefederalfundsrateissubjecttoconandtotalconsumerpriceswillrisesteadilyatannual siderableuncertainty.Thisuncertaintyarisesprimarily ratesof,respectively,3percentand2percent.Ifthe becauseeachparticipant’sassessmentoftheapprouncertaintyattendingthoseprojectionsissimilarto priatestanceofmonetarypolicydependsimportantly thatexperiencedinthepastandtherisksaroundthe ontheevolutionofrealactivityandinflationover projectionsarebroadlybalanced,thenumbers time.Ifeconomicconditionsevolveinanunexpected reportedintable2wouldimplyaprobabilityofabout manner,thenassessmentsoftheappropriatesetting 70percentthatactualGDPwouldexpandwithina ofthefederalfundsratewouldchangefromthat rangeof2.0to4.0percentinthecurrentyear,1.4to pointforward. 4.6percentinthesecondyear,and1.3to4.7percent

216 99thAnnualReport|2012 Meeting Held ScottG.Alvarez GeneralCounsel on July 31–August 1, 2012 ThomasC.Baxter Ameetingof theFederalOpenMarketCommittee DeputyGeneralCounsel washeldintheofficesof theBoardof Governorsof StevenB.Kamin theFederalReserveSysteminWashington,D.C.,on Economist Tuesday,July31,2012,at1:00p.m.andcontinuedon Wednesday,August1,2012,at9:00a.m. DavidW.Wilcox Economist Present DavidAltig,ThomasA.Connors,MichaelP.Leahy, BenBernanke JamesJ.McAndrews,WilliamNelson, Chairman DavidReifschneider,andWilliamWascher AssociateEconomists WilliamC.Dudley ViceChairman SimonPotter ElizabethDuke Manager,SystemOpenMarketAccount JeffreyM.Lacker MichaelS.Gibson Director,Divisionof BankingSupervisionand DennisP.Lockhart Regulation,Boardof Governors SandraPianalto NellieLiang JeromeH.Powell Director,Officeof FinancialStabilityPolicyand Research,Boardof Governors SarahBloomRaskin JonW.FaustandAndrewT.Levin JeremyC.Stein SpecialAdvisorstotheBoard,Officeof Board DanielK.Tarullo Members,Boardof Governors JohnC.Williams JamesA.Clouse JanetL.Yellen DeputyDirector,Divisionof MonetaryAffairs, Boardof Governors JamesBullard,ChristineCumming, CharlesL.Evans,EstherL.George,and LindaRobertson EricRosengren AssistanttotheBoard,Officeof BoardMembers, AlternateMembersof theFederalOpenMarket Boardof Governors Committee SethB.Carpenter RichardW.Fisher,NarayanaKocherlakota,and SeniorAssociateDirector,Divisionof Monetary CharlesI.Plosser Affairs,Boardof Governors Presidentsof theFederalReserveBanksof Dallas, ThomasLaubach Minneapolis,andPhiladelphia,respectively SeniorAdviser,Divisionof ResearchandStatistics, WilliamB.English Boardof Governors SecretaryandEconomist JoyceK.Zickler DeborahJ.Danker SeniorAdviser,Divisionof MonetaryAffairs, DeputySecretary Boardof Governors MatthewM.Luecke MichaelT.KileyandDavidE.Lebow AssistantSecretary AssociateDirectors,Divisionof Researchand DavidW.Skidmore Statistics,Boardof Governors AssistantSecretary KarenM.Pence MichelleA.Smith AssistantDirector,Divisionof Researchand AssistantSecretary Statistics,Boardof Governors

Minutesof FederalOpenMarketCommitteeMeetings|July–August 217 DavidH.Small etarypolicydecisionmaking.Anumberof partici- ProjectManager,Divisionof MonetaryAffairs, pantsindicatedthatsuchruleshaveplayedauseful Boardof Governors roleininformingtheCommittee’smonetarypolicy deliberations.However,severalparticipantspointed ElizabethKlee tospecificconsiderations—includingthepossible SeniorEconomist,Divisionof MonetaryAffairs, mismeasurementof unobservablevariables,suchas Boardof Governors potentialoutput,anduncertaintyabouttheappro- RobertJ.Tetlow priateeconomicmodelstouseinestimatingthemag- SeniorEconomist,Divisionof Researchand nitudeof thosevariables—thatmightlimittheuse- Statistics,Boardof Governors fulnessof simplerulesbothinternallyandinpublic communications.Severalparticipantssawvaluein DavidA.Sapenaro examiningtheperformanceof rulesacrossarangeof FirstVicePresident,FederalReserveBankof economicmodels.Participantsdiscussedthecasefor St.Louis makingadjustmentstotheprescriptionsof simple Jeff FuhrerandDanielG.Sullivan policyrulesinthecurrentcircumstancestotakeinto ExecutiveVicePresidents,FederalReserveBanksof accountvariousconsiderationssuchastheeffective BostonandChicago,respectively lowerboundforthefederalfundsrate,theeffectsof theCommittee’sbalancesheetpolicies,andpotential TroyDavigandChristopherJ.Waller shiftsinthedynamicsof theeconomy.Somepartici- SeniorVicePresidents,FederalReserveBanksof pantsnotedthatadjustmentof standardpolicyrules KansasCityandSt.Louis,respectively forbalancesheetpolicieswouldtendtopushupthe ReuvenGlick federalfundsrateprescription,whileanumberof GroupVicePresident,FederalReserveBankof participantsindicatedthatotherfactorsrelatedto SanFrancisco currentcircumstancesmaywarrantmaintainingan accommodativestanceof policyforlongerthan ToddE.Clark,LorieK.Logan, wouldbeprescribedbystandardrules.Withregard KeithSill,andMarkA.Wynne tothelatter,someparticipantssuggestedthatinertial VicePresidents,FederalReserveBanksof Cleveland, policyrules—thatis,rulesunderwhichanymove- NewYork,Philadelphia,andDallas,respectively mentsinthestanceof policytendtobefairlypersis- RobertL.HetzelandSamuelSchulhofer-Wohl tent—wouldbemostappropriateinthecurrent SeniorEconomists,FederalReserveBanksof context. RichmondandMinneapolis,respectively Developments in Financial Markets and Simple Rules for Monetary Policy the Federal Reserve’s Balance Sheet Astaff presentationsummarizedresearchontheeffi- TheManagerof theSystemOpenMarketAccount cacyof alternativesimplemonetarypolicyrulesin (SOMA)reportedondevelopmentsindomesticand fosteringtheFederalReserve’smonetarypolicy foreignfinancialmarketsduringtheperiodsincethe objectivesof maximumemploymentandpricestabil- FOMCmetonJune19–20,2012.Healsoreported ity.Thepresentationreviewedthecharacteristicsof a onSystemopenmarketoperations,includingthe varietyof rulesandnotedanumberof reasonswhy ongoingreinvestmentintoagency-guaranteed currentconditionsmightwarrantdeviatingfromthe mortgage-backedsecurities(MBS)of principalpayprescriptionsof simplerulesdesignedformorenor- mentsreceivedonSOMAholdingsof agencydebt maltimes.Thepresentationalsodiscussedhow andagency-guaranteedMBSaswellastheoperasimplerulesmightbeusedaspartof acomprehen- tionsrelatedtothecontinuationof thematurity sivepolicyframeworktoprovideclearandtranspar- extensionprogramauthorizedattheJune19–20, entbenchmarksformonetarypolicydecisionmaking 2012,FOMCmeeting.Hisreportincludedasumandthepossibilitythatsuchrulescouldbehelpfulin maryof analysispreparedbythestaff onthepotencommunicatingtheconnectionbetweenpolicy tialimplicationsof thesizeandcompositionof the choicesandtheFederalOpenMarketCommittee’s FederalReserve’ssecuritiesportfolioforprivate- (FOMC)objectives. sectorholdingsof Treasurysecuritiesandagency MBSandfortradingconditionsinmarketsrelatedto Meetingparticipantsexpressedarangeof views thesesecurities.TheManageralsoreportedonrecent regardingtheappropriateroleof policyrulesinmon- developmentsinEuropeanmoneymarketsandimpli-

218 99thAnnualReport|2012 cationsfortheyieldsontheeuro-denominatedassets fusionindexesof newordersfromthenationaland thattheFederalReserveholdsinitsforeignexchange regionalmanufacturingsurveys,declinedinrecent reserves.Byunanimousvote,theCommitteeratified monthsandwereatlevelsconsistentwithonlymuted theDesk’sdomestictransactionsovertheintermeet- increasesinproductioninthenearterm. ingperiod.Therewerenointerventionoperationsin foreigncurrenciesfortheSystem’saccountoverthe Realpersonalconsumptionexpendituresincreasedat intermeetingperiod. aslowerrateinthesecondquarterthaninthefirst quarter,primarilyreflectingadecreaseinspending Staff Review of the Economic Situation formotorvehicles.Meanwhile,realdisposablepersonalincomeroseatafasterpacethanconsumer TheinformationreviewedattheJuly31–August1 spendinginboththefirstandsecondquarters, meetingindicatedthateconomicactivityincreasedat boostedinpartinrecentmonthsbylowerenergy aslowerpaceinthesecondquarterthanearlierinthe prices.Consumersentimentasmeasuredbythe yearandthatlabormarketconditionshadimproved ThomsonReuters/Universityof MichiganSurveysof littleinrecentmonths.Inaddition,reviseddatafor Consumers(MichiganSurvey)wasmoredownbeat 2009through2011fromtheBureauof Economic inJuneandJulythanearlierintheyear. Analysisindicatedthattherecessionhadbeen slightlylessdeepandtheearlypartof thesubsequent Conditionsinthehousingmarketgenerallyimproved recoveryhadbeenabitmoregradualthanpreviously furtherinrecentmonths,butactivityremainedata thought,leavingthelevelof realgrossdomesticprod- lowlevelagainstthebackdropof thelargeinventory uct(GDP)attheendof lastyearessentiallythesame of foreclosedanddistressedpropertiesandtight asestimatedearlier.Inthesecondquarter,consumer underwritingstandardsformortgageloans.Both priceinflationwasmarkedlylowerthaninthefirst startsandpermitsof newsingle-familyhomes quarter,mostlyreflectingsubstantialdeclinesincon- increasedinthesecondquarter.Startsof newmultisumerenergyprices,whilemeasuresof longer-run familyunitswereaboutthesamelastquarterasin inflationexpectationsremainedstable. thepreviousquarter,butpermitsrose,whichpointed tohighermultifamilyconstructioninthecoming PrivatenonfarmemploymentexpandedinJuneat months.HomepricesincreasedinMayforthefifth aboutthesamemodestpaceasinthesecondquarter consecutivemonth.Salesof newhomesinthesecond asawhole,andgovernmentemploymentdecreased quarterweremoderatelyhigherthaninthefirstquarslightly.Theunemploymentratewas8.2percentin ter,butexistinghomesalesdecreasedslightly. June,thesameasitsaverageduringthefirsthalf of theyear.Therateof long-durationunemployment Realbusinessexpendituresonequipmentandsoftstayedelevated,andtheshareof workersemployed wareroseinthesecondquarteratafasterpacethan parttimeforeconomicreasonswasstillhigh.Indica- inthefirstquarter.However,newordersfornondetorsof jobopeningsandfirms’hiringplanswere fensecapitalgoodsexcludingaircraftdecreasedlast generallysubdued.Whileinitialclaimsforunemploy- quarter,andthebacklogof unfilledordersdecelermentinsurancetrendeddownabitovertheinter- atedsharply.Otherrecentforward-lookingindicameetingperiod,theyremainedatalevelconsistent tors,suchassurveysof businessconditionsandcapiwithcontinuedmodestincreasesinemploymentin talspendingplans,alsosuggestedthatincreasesin thecomingmonths. outlaysforbusinessequipmentwouldslowincoming months.Realbusinessspendingfornonresidential Manufacturingproductiondeceleratedsignificantly constructionincreasedsomewhatinthesecondquarinthesecondquarterfollowingalargegaininthe terbutremainedatarelativelylowlevel.Meanwhile, firstquarter,whiletherateof manufacturingcapac- businessinventoriesgenerallyappearedtoberelaityutilizationwasunchangedonbalance.Thepro- tivelywellalignedwithsales. ductionof motorvehiclesandpartsincreasedconsiderablylastquarter,butfactoryoutputoutsideof Realfederalgovernmentpurchasesdecreasedalittle themotorvehiclesectorwasessentiallyflat.Auto- inthesecondquarter,followingamuchsharper makers’schedulesindicatedthatthepaceof motor declineinthepreviousthreequarters,asthecontinvehicleassembliesinthethirdquarterwouldbe uedcontractionindefensespendingeased.Realstate aboutthesameasinthesecondquarter.Broader andlocalgovernmentpurchasescontinuedtoconindicatorsof manufacturingoutput,suchasthedif- tractatamoderateratelastquarter.

Minutesof FederalOpenMarketCommitteeMeetings|July–August 219 TheU.S.internationaltradedeficitnarrowedinMay, remainswellcontained,asearlierdeclinesinthe asexportsedgedupandimportsdeclined.The pricesof energyandothercommoditiespassed increaseinexportsprimarilyreflectedhigherexports throughtotheretaillevel. of servicesandagriculturalproducts.Thedecreasein importswastheresultof adeclineinoilimports,as Staff Review of the Financial Situation boththepriceandthequantityof oilimportsfell. Importsof consumergoodsandindustrialsupplies Severalfactorsinfluenceddevelopmentsinfinancial alsomoveddown,butimportsof capitalgoodsand marketssincethetimeof theJuneFOMCmeeting. automotiveproductsincreased.Basedonanestimate Generallyweaker-than-expectedeconomicdatainthe of thetradedataforJune,theadvancereleaseof the UnitedStates,concernsaboutthefiscalandbanking nationalincomeandproductaccountsshowedthat situationintheeuroarea,andtheoutlookforglobal realnetexportsof goodsandservicesmadeasmall economicgrowthweighedoninvestorsentiment. negativearithmeticcontributiontotheincreasein However,theeffectsof thesefactorswereoffsetto U.S.realGDPinthesecondquarter. someextentbyactualandexpectedeasingof monetarypolicyintheUnitedStatesandabroadandby OverallU.S.consumerpricesincreasedataslower better-than-anticipatedprofitsatsomeS&P500 paceinthesecondquarterthaninthefirst.Con- firms. sumerenergypricesdeclinedsignificantlylastquarter,andsurveydataindicatedthatgasolinepricesfell Interestratesgenerallymoveddown,onnet,overthe somewhatfurtherinthefirstfewweeksof July. intermeetingperiod.Theyieldonnominal10-year Meanwhile,consumerfoodpricespostedonlyasmall Treasurysecuritiesdeclinedtoahistoricallylowlevel, increaselastquarter,buttherecentsizablerun-upin partlyduetoalowerexpectedpathof thefederal spotandfuturespricesof farmcommodities,reflect- fundsrate,thecontinuationof thematurityexteningtheeffectsof thedroughtandhotweatherinthe sionprogramannouncedattheJuneFOMCmeetmidwesternpartof theUnitedStates,pointedto ing,andperceptionsof anincreasedlikelihoodthat sometemporaryupwardpressuresonretailfood theFederalReservewilleasemonetarypolicyfurpriceslaterthisyear.Consumerpricesexcludingfood ther.Inaddition,persistentconcernsabouteuro-area andenergyincreasedmoremoderatelyinthesecond developmentswerereportedlyassociatedwith quarterthaninthefirst.Near-terminflationexpecta- increasedsafe-havendemandsthatcontributedtothe tionsfromtheMichiganSurveyrosealittleinJune declineinTreasuryyields.AnecdotalreportssugandJuly,whilelonger-terminflationexpectationsin gestedthatthedecreaseinshorter-termyieldsmay thesurveycontinuedtobestable. alsohavereflectedsomewhatincreasedexpectations thattheFederalReservewouldreducetheinterest Availablemeasuresof laborcompensationindicated ratepaidonreservebalancesincomingmonths. thatnominalwagegainsremainedrestrained.The Near-termindicatorsof inflationexpectations employmentcostindexroseatamodestpaceagain derivedfromnominalandinflation-protectedTreasinthesecondquarter.Averagehourlyearningsforall urysecuritiesfellmodestlydespiteanincreasein employeesalsoincreasedatarelativelyslowratelast somecommodityprices;suchindicatorschanged quarter. littleatlongerhorizons.Theexpectedpathforthe federalfundsratederivedfrommoneymarketfutures Foreigneconomicgrowthcontinuedtobesubdued, quotesshifteddown. asfiscalretrenchmentandfinancialstressesinthe euroareacontinuedtoweighoneconomicactivityin Conditionsinshort-termunsecureddollarfunding Europeandelsewhere.Recentindicatorsof produc- marketsremainedstableovertheintermeeting tionandconfidenceintheeuroarearemainedweak, period,althoughmostperipheraleuro-areainstituandthepreliminarysecond-quarterestimateof real tionscontinuedtohavelittle,if any,accesstosuch GDPintheUnitedKingdomshowedacontraction. markets.Insecuredfundingmarkets,Treasurygen- RealGDPinChinaacceleratedsomewhatinthesec- eralcollateralrepurchaseagreementratesrose ondquarterfollowingarelativelyweakexpansionin slightlyonbalance. thefirstquarter,andrecentmonthlydatasuggested somefurtherimprovement.However,dataforother Broadindexesof U.S.equitypricesrosesomewhat, emergingmarketeconomiesgenerallypointedtoa onnet,overtheintermeetingperiod,withsignificant decelerationineconomicactivitylastquarter.For- gainspromptedinpartbycommentsfromEuropean eigninflationeasedinthesecondquarterand officialsthatapparentlyraisedinvestorexpectations

220 99thAnnualReport|2012 fornear-termEuropeanpolicyactions.Option- whiledefaultratesremainedverylowandCDS impliedvolatilityontheS&P500indexroseslightly. spreadsforstateswereroughlyunchangedonnet. Stockpricesforthelargedomesticbankholding companiespostedmixedchangesovertheperiod, Bankcreditandtotalloanscontinuedtoexpand andcreditdefaultswap(CDS)spreadsforthose modestlyinthesecondquarter,largelybecauseof the firmsgenerallymovedloweronnet. furtherrobustincreaseinC&Iloans.Thegradual expansionintotalloanswasbroadlyconsistentwith Yieldsoninvestment-andspeculative-gradecorpo- theJulySLOOS,inwhichdomesticbanksgenerally ratebondsfellfurtherovertheintermeetingperiod, indicatedthatdemandstrengthenedformanytypes approachingrecordlows.Theirspreadsrelativeto of loansinthesecondquarterandthatlendingstancomparable-maturityTreasurysecuritiesnarrowed dardseasedsomewhat,onbalance,acrossmost butwerestillabovetheiraveragelevelspriortothe majorloancategories. financialcrisis.Nonfinancialfirmscontinuedtoissue debtatastrongpaceovertheperiod.Gross Thestaff’sbroadnominalindexfortheforeign investment-gradecorporatebondissuanceremained exchangevalueof thedollarchangedlittle,onnet, robustinJuneandJuly,whilethevolumeof nonfi- overtheintermeetingperiod,althoughthedollar nancialcommercialpaperoutstandingroseearlyin appreciatedagainsttheeuro.Financialmarketsinthe thesecondquarterbutdecreasedslightlyinJune. euroareawerevolatile,asadeteriorationinmarket Commercialandindustrial(C&I)loansadvanced sentimentgavewaytoperiodsof optimismfollowing furtherovertheintermeetingperiod.Issuanceinthe theeuro-areasummitinlateJune,thedecisionbythe syndicatedleveragedloanmarketremainedsolidin EuropeanCentralBank(ECB)toeasepolicyinearly thesecondquarter;termsandstructuresof newlev- July,andindicationsfromtheECBlaterinJulythat eragedloandealsreportedlyloosenedmodestlyon thecentralbankmighttakefurtherstepstosupport themargin.Grosspublicequityissuancebynonfi- themonetaryunion.Onnet,Europeanstockmarkets nancialfirmswasanemicinJuneandJuly. finishedtheperiodhigher.YieldspreadsonSpanish andItalian10-yearbondsovertheirGermanequiva- Financialconditionsinthecommercialrealestate lents,whichrosesharplyovermostof July,fellback marketremainedsomewhatstrainedagainstaback- fromtheirintermeetingpeaksbutremainedelevated. dropof weakfundamentalsandstill-tightunderwriting.Thatsaid,issuanceof commercialmortgage- Severalforeigncentralbankseasedmonetarypolicy backedsecuritiespickedupinthesecondquarter. overtheintermeetingperiod.TheECBcutitsbenchmarkpolicyrateby25basispointsandreducedthe Despitenewhistoricallowsforresidentialmortgage rateonitsovernightdepositfacilitytozero.The ratesovertheintermeetingperiod,refinancingactiv- Bankof Englandincreasedthesizeof itsassetpurityremainedrelativelymuted.Evidencefromthe chaseprogramandannounceddetailsonitsnewpro- SeniorLoanOfficerOpinionSurveyonBankLend- gramdesignedtoboostbanklendingtothenonfiingPractices(SLOOS)conductedinJulyindicated nancialsector.Thecentralbanksof Brazil,China, thatmortgageunderwritingstandardsatbanksgen- andSouthKoreaallreducedofficialratesaswell. erallyhavenoteasedmuchfromtheirtightestpost- AmidpolicyeasingintheeuroareaandUnited crisislevels.Consumercreditexpandedfurtherin Kingdom,yieldsonGermanandU.K.sovereign Mayasaresultof rapidincreasesinstudentloans bondsdeclined,withtwo-yearGermansovereign and,toalesserextent,autoloans.Delinquencyrates bondstradingatyieldsbelowzero. forconsumercreditremainedlow,likelyinpart becauseof acompositionalshiftof creditsupply Staff Economic Outlook overthepastfewyearstowardtheleast-risky borrowers. Intheeconomicforecastpreparedbythestaff forthe July31–August1FOMCmeeting,thenear-termpro- Grossissuanceof long-termmunicipalbondswas jectionforrealGDPgrowthwasreviseddownsomerobustinJuneandJuly.Netissuanceof long-term what.Therevisionprimarilyreflectedaslowerpace bondsturnedpositiveinthesecondquarterafter of consumerspendingthanthestaff expectedatthe stayinginnegativeterritoryformuchof thepast timeof thepreviousprojection,alongwithadeterioyear.Yieldsonlong-termgeneralobligationmunici- rationinsomeforward-lookingindicators.However, palbondsgenerallyfollowedTreasuryyieldslower, thestaff’smedium-termforecastforrealGDP

Minutesof FederalOpenMarketCommitteeMeetings|July–August 221 growthwaslittlechanged,astheslightlyweaker Regardingtheeconomicoutlook,mostparticipants underlyingpaceof economicactivitysuggestedby agreedthateconomicgrowthwaslikelytoremain therecentdatawasroughlyoffsetbytheanticipated moderateovercomingquartersandthenpickup effectsof thecontinuationof thematurityextension gradually.However,someparticipantsindicatedthat programannouncedfollowingtheJuneFOMCmeet- theyhadloweredtheirnear-termforecastsforecoing,whichhadnotbeenincorporatedintheprevious nomicgrowthinlightof theweaker-than-expected projection.Withtherestraintfromfiscalpolicy increasesinconsumerspendingandemploymentin assumedtoincreasenextyear,thestaff projectedthat recentmonths.Inaddition,someparticipants increasesinrealGDPwouldnotsignificantlyexceed expressedconcernaboutthepersistentheadwinds thegrowthrateof potentialoutputin2013.Thereaf- restrainingthepaceof therecovery,includingthe ter,economicactivitywasexpectedtoaccelerate weakhousingsector,still-tightborrowingconditions gradually,supportedbyaneventualeasinginfiscal forsomehouseholdsandfirms,andfiscalrestraintat policyrestraint,gainsinconsumerandbusinesssen- alllevelsof government.Manyparticipantsjudged timent,furtherimprovementsincreditconditions, thatahighlevelof uncertaintyaboutpossiblespillandcontinuedaccommodativemonetarypolicy.The oversfromthefiscalandbankingstrainsintheeuro expansionineconomicactivitywasanticipatedto areaandabouttheoutlookforU.S.fiscalorregulareducethesubstantialmarginof slackinlaborand torypolicieswasholdingbackhouseholdandbusiproductmarketsonlyslowlyovertheprojection nessspending.Andtheysawthepossibilitiesof an period,andtheunemploymentratewasexpectedto intensificationof strainsintheeuroareaandof a remainelevatedattheendof 2014. sharper-than-anticipatedU.S.fiscalconsolidationas significantdownsideriskstotheeconomicoutlook. Thestaff’sforecastforinflationwaslittlechanged AlthoughparticipantsgenerallyagreedthatimprovefromtheprojectionpreparedfortheJuneFOMC mentsinrecentyearsinthecapitalandliquidityof meeting.Withcrudeoilpricesexpectedtodeclinea financialinstitutionsandinthestrengthof housebitfromtheircurrentlevels,theboosttoretailfood holdandbusinessbalancesheetshaveincreasedthe pricesfromthecurrentdroughtintheMidwest resilienceof theeconomy,somewereconcernedthat anticipatedtobeonlytemporaryandrelativelysmall, atitscurrentpace,therecoverywasstillvulnerableto longer-runinflationexpectationsremainingstable, adverseshocks.Givenparticipants’forecastsof ecoandsubstantialresourceslackpersistingoverthe nomicactivity,theygenerallyanticipatedthatthe forecastperiod,thestaff continuedtoprojectthat unemploymentratewoulddeclineonlyslowlytoward inflationwouldbesubduedthrough2014. levelsthatparticipantsjudgetobeconsistentwiththe Committee’smandate.Participants’assessmentsof Participants’ Views on Current Conditions theoutlookforinflationwerelargelyunchanged and the Economic Outlook fromthosereportedinJune.Smoothingthroughthe effectsof fluctuationsinfoodandenergyprices,par- Intheirdiscussionof theeconomicsituationandthe ticipantsanticipatedthatinflationoverthemedium outlook,meetingparticipantsagreedthattheinfor- termwouldremainatorbelowtheCommittee’s mationreceivedsincetheCommitteemetinJune 2percentlonger-runobjective. suggestedthateconomicactivityhaddeceleratedin recentmonthstoaslowerpacethantheyhadantici- Meetingparticipantsagainexchangedviewsonthe pated.Althoughbusinessinvestmenthadcontinued extentof slackinlaborandproductmarkets.Anumtoadvance,consumerspendinghadslowedconsider- berof participantsexpressedtheviewthatstructural ablysinceearlierintheyear.Conditionsinthehous- changesinthelabormarketwerenotsufficientto ingsectorappearedtohaveimprovedsomewhat,but explainthehighlevelof unemployment.Thoseparfromaverylowlevel.Indicatorsof manufacturing ticipantssawsubstantialslackinresourceutilization activityhadsoftened.Recentmonthlygainsinpay- andhencecontinuedtojudgethatinflationwaslikely rollemploymenthadcontinuedtobesmall,andthe toremainsubduedoverthemediumtermasthe unemploymentrateinJuneremainedatanelevated economycontinuedtorecover.However,several level.Consumerpriceinflationhadbeenlowin otherparticipantsinterpretedthemoderatepaceof recentmonths,asdeclinesinthecostsof crudeoil therecoveryaspointingtoamoresubstantialmarkwerepassedthroughtoretailenergyprices.Longer- downinthetrajectoryof potentialoutput.Inparterminflationexpectationshadremainedstable. ticular,acoupleof participantsnotedthatthey

222 99thAnnualReport|2012 wouldhaveexpectedinflationtohavefallenmorein tounresolvedfiscalandregulatorymatters.Although recentyearsif theoutputgaphadbeenassubstantial severalparticipantsnotedthattheuncertaintyhad assomemeasuressuggested.Oneparticipantposited notledbusinessesintheirDistrictstoreducepayrolls thatthesharpdeclineinnetworthandreducedcredit orcutbackspending,otherscitedreportsof shortavailabilityinrecentyearsnotonlyweighedon fallsfrombusinessplansthatcouldleadtocostaggregatedemand,butalsoreducedaggregatesupply cutting,of restructuringtopositionfirmsforleaner byhamperingnewbusinessformationandproduct operations,orevenof postponedinvestmentandhirinnovation;anotherparticipantcitedevidencethat ing.Twoparticipantsprovidedanupdateonthesitustructuralunemploymentwaselevatedasaresultof ationintheagriculturalsectorinlightof thedrought mismatchesbetweentheskillsdemandedbyemploy- intheMidwest:Withcropyieldsprojectedtobe ersandthoseof thelong-durationunemployed. downmarkedlyandpricesrising,livestockproducers appearedlikelytosufferlossesasaresultof higher Indiscussingdevelopmentsinthehouseholdsector, inputcostswhilecropproducerswouldneedtorely manyparticipantsnotedtherecentdecelerationin onhigherpricesandcropinsurancetostabilizetheir overallconsumerspending,althoughacouplecited income. newautosandtourismasareasof relativestrength. Participantssawseveralfactorsaslikelycontributing Theincominginformationoninflationovertheintertoslowerconsumerspending,includingtheweakness meetingperiodwaslargelyinlinewithparticipants’ inearnedincomeandahighlevelof uncertainty expectations.Consumerpriceshaddeceleratedasa amonghouseholdsabouttheeconomicoutlook.Sev- resultof thepass-throughof lowercrudeoilcoststo eralpointedoutthatwhilehouseholdshadmade retailpricesof gasolineandfueloil.Crudeoilprices considerableprogressinreducingtheirdebtand hadturnedupagainmorerecently,butoneparticirebuildingtheirsavings,thedeleveragingprocesswas pantnotedthatglobalinventoriesof oilwere stillongoing,thelevelof housingdebtremained elevatedand,withworlddemandeasing,prices high,andasignificantnumberof mortgageborrow- shouldberestrainedgoingforward.Participants erscontinuedtobeunderwaterontheirloans.Home acknowledgedthatthedroughtwouldlikelyresultin salesandconstructionweregenerallyviewedas atemporaryrun-upinconsumerfoodpriceslater graduallyimproving,supportedinpartbyhistori- thisyear.Nonetheless,inflationwasexpectedto callylowmortgageinterestrates.Manyparticipants remainsubdued,onbalance,overcomingquarters. reportedthathousepricesintheirDistrictswereris- Inexplainingthatoutlook,participantscitedthelack ingorhadbottomedout,andseveralnotedthattheir of upwardpressurefromlaborcostsandpricesof contactssawsignsof progressinreducingtheover- importedcommoditiesaswellasthestabilityof hangof unsoldproperties.However,itwasnoted inflationexpectations.Acoupleof participants thatthereductionininventoriesshouldbeviewed referredtoinformationfrombusinesscontactssugcautiouslybecauseownerswhoareunderwateron gestingthatinflationwasunlikelytodeclinefurther, theirmortgagesmaybewithholdingtheirhomes andafewexpressedconcernsthatmaintaininga fromthemarket,implyingasubstantial“shadow” highlyaccommodativestanceof monetarypolicyfor inventory. anextendedperiodcoulderodethestabilityof inflationexpectationsovertimeandhenceposedupside Regardingthebusinesssector,manyparticipants riskstotheinflationoutlook. reportedthat,withtheexceptionof motorvehicle production,manufacturingactivityintheirDistricts Financialmarketsremainedsensitivetoongoing wassloworhaddeclinedinrecentmonths.Nonethe- developmentsrelatedtothesovereigndebtandbankless,forward-lookingsurveysof ordersandmanufac- ingsituationintheeuroarea,andparticipantsconturingproductioninacoupleof Districtsweremore tinuedtoviewthepossibilityof anintensificationof positive.Energy-relatedactivitycontinuedtoexpand, strainsinglobalfinancialmarketsasasignificant andinvestmentprojectsinthatsectorwerereported downsiderisktothedomesticeconomicoutlook. tobemovingforward.However,contactsinseveral Severalparticipantsindicatedthatrecenttrendsin Districtsindicatedthatexportdemandhadweakened euro-areaequityindexesandsovereigndebtyields asaresultof theslowdownineconomicactivityin hadnotbeenencouraging,andsomenotedthatthe Europe;Asia;andsomeemergingmarketcountries, uncertaintyprevailinginglobalfinancialmarketswas includingChina.Moregenerally,someparticipants showingthroughinacautiouspostureof investors. reportedthattheirbusinesscontactsregardedthe Nonetheless,participantsgenerallyagreedthatcondieconomicoutlooktobehighlyuncertain,inpartdue tionsindomesticcreditmarketsremainedmore

Minutesof FederalOpenMarketCommitteeMeetings|July–August 223 favorablethantheywereayearago.Oneparticipant thestaff’sanalysisshowingsubstantialcapacityfor pointedoutthatcreditriskspreads—whilestillabove additionalpurchaseswithoutdisruptingmarketfuncpre-recessionnorms—mayhavebeenboostedby tioning.Severalworriedthatadditionalpurchases safe-havendemandsforTreasurysecuritiesandindi- mightaltertheprocessof normalizingtheFederal catedthatbroaderfinancialmarketconditions Reserve’sbalancesheetwhenthetimecametobegin seemedreasonablyaccommodative.Bankswere removingaccommodation.Afewparticipantswere reportedtobeseeinganincreaseintheirresidential concernedthatanextendedperiodof accommodamortgagebusinessalongwithacontinuedriseinC&I tionoranadditionallarge-scaleassetpurchaseprolending,especiallytolargefirms;consumercredit gramcouldincreasetheriskstofinancialstabilityor wasalsoincreasing. leadtoariseinlonger-terminflationexpectations. Manyparticipantsindicatedthatanynewpurchase Participantsdiscussedanumberof policytoolsthat programshouldbesufficientlyflexibletoallow theCommitteemightemployif itdecidedtoprovide adjustments,asneeded,inresponsetoeconomic additionalmonetaryaccommodationtosupporta developmentsortochangesintheCommittee’s strongereconomicrecoveryinacontextof pricesta- assessmentof theefficacyandcostsof theprogram. bility.Oneof thepolicyoptionsdiscussedwasan extensionof theperiodoverwhichtheCommittee Someparticipantscommentedonotherpossible expectedtomaintainitstargetrangeforthefederal toolsforaddingpolicyaccommodation,includinga fundsrateat0to¼percent.Itwasnotedthatsuch reductionintheinterestratepaidonrequiredand anextensionmightbeparticularlyeffectiveif donein excessreservebalances.Whileacoupleof particiconjunctionwithastatementindicatingthatahighly pantsfavoredsuchareduction,severalothersraised accommodativestanceof monetarypolicywaslikely concernsaboutpossibleadverseeffectsonmoney tobemaintainedevenastherecoveryprogressed. markets.ItwasnotedthattheECB’srecentcutinits Giventheuncertaintyattendingtheeconomicout- depositratetozeroprovidedanopportunitytolearn look,afewparticipantsquestionedwhetherthecon- moreaboutthepossibleconsequencesformarket ditionalityof theforwardguidancewassufficiently functioningof suchamove.Inlightof theBankof clear,andtheysuggestedthattheCommitteeshould England’sFundingforLendingScheme,acoupleof considerreplacingthecalendardatewithguidance participantsexpressedinterestinexploringpossible thatwaslinkedmoredirectlytotheeconomicfactors programsaimedatencouragingbanklendingto thattheCommitteewouldconsiderindecidingto householdsandfirms,althoughtheimportanceof raiseitstargetforthefederalfundsrate,oromitthe institutionaldifferencesbetweenthetwocountries forwardguidancelanguageentirely. wasnoted. Participantsalsoexchangedviewsonthelikelyben- Committee Policy Action efitsandcostsof anewlarge-scaleassetpurchase program.Manyparticipantsexpectedthatsucha Theinformationreceivedovertheintermeeting programcouldprovideadditionalsupportforthe periodindicatedthateconomicactivityhaddecelereconomicrecoverybothbyputtingdownwardpres- atedinrecentmonths,withanotableslowinginconsureonlonger-terminterestratesandbycontributing sumerspending.Employmentgainscontinuedtobe toeasierfinancialconditionsmorebroadly.Inaddi- modest,andtheunemploymentratewasunchanged tion,someparticipantsnotedthatanewprogram atalevelthatalmostallmemberssawaselevated mightboostbusinessandconsumerconfidenceand relativetolevelsconsistentwiththeCommittee’s reinforcetheCommittee’scommitmenttomaking mandate.Inflationhaddeclinedfromitsrateearlier sustainedprogresstowarditsmandatedobjectives. intheyear,mainlyreflectinglowerpricesof crudeoil Participantsalsodiscussedthemeritsof purchasesof andgasoline,andinflationexpectationshadbeen TreasurysecuritiesrelativetoagencyMBS.However, stable.Membersgenerallyexpectedthateconomic othersquestionedthepossibleefficacyof suchapro- growthwouldbemoderateovercomingquartersand gramunderpresentcircumstances,andacouplesug- thenwouldpickupverygradually.Whilemostmemgestedthattheeffectsoneconomicactivitymightbe bersdidnotviewthemedium-runeconomicoutlook transitory.Inreviewingthecoststhatsuchaprogram ashavingchangedsignificantlysincetheJunemeetmightentail,someparticipantsexpressedconcerns ing,severalnotedthattheyhadloweredtheirexpecabouttheeffectsof additionalassetpurchaseson tationsforeconomicgrowthovercomingquarters. tradingconditionsinmarketsrelatedtoTreasury Furthermore,membersgenerallyattachedanunususecuritiesandagencyMBS,butothersagreedwith allyhighlevelof uncertaintytotheirassessmentsof

224 99thAnnualReport|2012 theeconomicoutlookandcontinuedtojudgethat Withrespecttothestatementtobereleasedfollowing theriskstoeconomicgrowthweretiltedtothedown- themeeting,membersagreedthatitshouldacknowlsidebecauseof strainsinfinancialmarketsstemming edgethedecelerationineconomicactivity,thesmall fromthesovereigndebtandbankingsituationin gainsinemployment,andtheslowingininflation Europeaswellasthepotentialforasignificantslow- reflectedintheeconomicdataovertheintermeeting downinglobaleconomicgrowthandforasharper- period.Becausemostsawnosignificantchangesin than-anticipatedfiscalcontractionintheUnited themedium-runoutlook,theyagreedtocontinueto States.Anumberof membersnotedthatif therecent indicatethattheCommitteeanticipatesavery modestrateof economicgrowthweretopersist,the gradualpickupineconomicactivityovertimeanda economywouldbelessabletoweatheramaterial slowdeclineinunemployment,withinflationator adverseshockwithoutslippingbackintorecession. belowtheratethatitjudgesmostconsistentwithits Mostmemberscontinuedtoanticipatethat,with dualmandate.Manymembersexpressedsupportfor longer-terminflationexpectationsstableandthe extendingtheCommittee’sforwardguidance,but existingslackinresourceutilizationbeingtakenup theyagreedtodeferadecisiononthismatteruntil verygradually,inflationwouldrunoverthemedium theSeptembermeetinginordertoconsidersuchan termatarateatorbelowtheCommittee’sobjective adjustmentinthecontextof updatestoparticipants’ of 2percent.Incontrast,onememberthoughtthat individualeconomicprojectionsandtheCommittee’s theeconomymaybeoperatingnearitscurrent furtherconsiderationof itspolicyoptions.Thestatepotentialand,thus,thatmaintainingtheCommit- mentalsoreiteratedtheCommittee’sintentionto tee’scurrenthighlyaccommodativepolicystancewell extendtheaveragematurityof itssecuritiesholdings into2014wouldposeupsideriskstotheinflation asannouncedinJune.Consistentwiththeconcerns outlook. expressedbymanymembersabouttheslowpaceof theeconomicrecovery,thedownsideriskstoeco- TheCommitteehadprovidedadditionalaccommo- nomicgrowth,andtheconsiderableslackinresource dationatitspreviousmeetingbyannouncingthe utilization,theCommitteedecidedthatthestatement continuationof thematurityextensionprogram shouldconcludebyindicatingthatitwillprovide throughtheendof theyear,andmoretimewasseen additionalaccommodationasneededtopromotea asnecessarytoevaluatetheeffectsof thatdecision. strongereconomicrecoveryandsustainedimprove- Nonetheless,manymembersexpectedthatattheend mentinlabormarketconditionsinacontextof price of 2014,theunemploymentratewouldstillbewell stability. abovetheirestimatesof itslonger-termnormalrate andthatinflationwouldbeatorbelowtheCommit- Attheconclusionof thediscussion,theCommittee tee’slonger-runobjectiveof 2percent.Anumberof votedtoauthorizeanddirecttheFederalReserve themindicatedthatadditionalaccommodationcould Bankof NewYork,untilitwasinstructedotherwise, helpfosteramorerapidimprovementinlabormar- toexecutetransactionsintheSystemAccountin ketconditionsinanenvironmentinwhichpricepres- accordancewiththefollowingdomesticpolicy sureswerelikelytobesubdued.Manymembers directive: judgedthatadditionalmonetaryaccommodation wouldlikelybewarrantedfairlysoonunlessincom- “TheFederalOpenMarketCommitteeseeks inginformationpointedtoasubstantialandsustain- monetaryandfinancialconditionsthatwillfosablestrengtheninginthepaceof theeconomicrecov- terpricestabilityandpromotesustainable ery.Severalmembersnotedthebenefitsof accumu- growthinoutput.Tofurtheritslong-runobjeclatingfurtherinformationthatcouldhelpclarifythe tives,theCommitteeseeksconditionsinreserve contoursof theoutlookforeconomicactivityand marketsconsistentwithfederalfundstradingin inflationaswellastheneedforfurtherpolicyaction. arangefrom0to¼percent.TheCommittee Onememberjudgedthatadditionalaccommodation directstheDesktocontinuethematurityextenwouldlikelynotbeeffectiveinimprovingtheeco- sionprogramitannouncedinJunetopurchase nomicoutlookandviewedthepotentialcostsassoci- Treasurysecuritieswithremainingmaturitiesof atedwithsuchactionasunacceptablyhigh.Atthe 6yearsto30yearswithatotalfacevalueof conclusionof thediscussion,membersagreedthat about$267billionbytheendof Decemtheywouldcloselymonitoreconomicandfinancial ber2012,andtosellorredeemTreasurysecuridevelopmentsandcarefullyweighthepotentialben- tieswithremainingmaturitiesof approximately efitsandcostsof varioustoolsinassessingwhether 3yearsorlesswithatotalfacevalueof about additionalpolicyactionwouldbewarranted. $267billion.Forthedurationof thisprogram,

Minutesof FederalOpenMarketCommitteeMeetings|July–August 225 theCommitteedirectstheDesktosuspendits Tosupportastrongereconomicrecoveryandto currentpolicyof rollingovermaturingTreasury helpensurethatinflation,overtime,isatthe securitiesintonewissues.TheCommitteedirects ratemostconsistentwithitsdualmandate,the theDesktomaintainitsexistingpolicyof rein- Committeeexpectstomaintainahighlyaccomvestingprincipalpaymentsonallagencydebt modativestanceformonetarypolicy.Inparticuandagencymortgage-backedsecuritiesinthe lar,theCommitteedecidedtodaytokeepthe SystemOpenMarketAccountinagency targetrangeforthefederalfundsrateat0to mortgage-backedsecurities.Theseactions ¼percentandcurrentlyanticipatesthatecoshouldmaintainthetotalfacevalueof domestic nomicconditions—includinglowratesof securitiesatapproximately$2.6trillion.The resourceutilizationandasubduedoutlookfor CommitteedirectstheDesktoengageindollar inflationoverthemediumrun—arelikelyto rolltransactionsasnecessarytofacilitatesettle- warrantexceptionallylowlevelsforthefederal mentof theFederalReserve’sagencyMBS fundsrateatleastthroughlate2014. transactions.TheSystemOpenMarketAccount ManagerandtheSecretarywillkeeptheCom- TheCommitteealsodecidedtocontinue mitteeinformedof ongoingdevelopments throughtheendof theyearitsprogramto regardingtheSystem’sbalancesheetthatcould extendtheaveragematurityof itsholdingsof affecttheattainmentovertimeof theCommit- securitiesasannouncedinJune,anditismaintee’sobjectivesof maximumemploymentand tainingitsexistingpolicyof reinvestingprincipal pricestability.” paymentsfromitsholdingsof agencydebtand agencymortgage-backedsecuritiesinagency Thevoteencompassedapprovalof thestatement mortgage-backedsecurities.TheCommitteewill belowtobereleasedat2:15p.m.: closelymonitorincominginformationoneconomicandfinancialdevelopmentsandwillpro- “InformationreceivedsincetheFederalOpen videadditionalaccommodationasneededto MarketCommitteemetinJunesuggeststhat promoteastrongereconomicrecoveryandsuseconomicactivitydeceleratedsomewhatoverthe tainedimprovementinlabormarketconditions firsthalf of thisyear.Growthinemployment inacontextof pricestability.” hasbeenslowinrecentmonths,andtheunemploymentrateremainselevated.Businessfixed Votingforthisaction:BenBernanke,WilliamC. investmenthascontinuedtoadvance.House- Dudley,ElizabethDuke,DennisP.Lockhart,Sandra holdspendinghasbeenrisingatasomewhat Pianalto,JeromeH.Powell,SarahBloomRaskin, slowerpacethanearlierintheyear.Despite JeremyC.Stein,DanielK.Tarullo,JohnC.Williams, somefurthersignsof improvement,thehousing andJanetL.Yellen. sectorremainsdepressed.Inflationhasdeclined sinceearlierthisyear,mainlyreflectinglower Votingagainstthisaction:JeffreyM.Lacker. pricesof crudeoilandgasoline,andlonger-term inflationexpectationshaveremainedstable. Mr.Lackerdissentedbecausehedidnotbelievethat exceptionallylowlevelsforthefederalfundsratewere Consistentwithitsstatutorymandate,theCom- likelytobewarrantedforthelengthof timespecified mitteeseekstofostermaximumemployment intheCommittee’sstatement.Inhisview,significant andpricestability.TheCommitteeexpectseco- uncertaintyregardingtheevolutionof economicconnomicgrowthtoremainmoderateovercoming ditionsoverthenextfewyearsmadethefuturepath quartersandthentopickupverygradually. of interestratesdifficulttoforecast,andtheCom- Consequently,theCommitteeanticipatesthat mittee’sstatementimpliedmoreconfidenceonthis theunemploymentratewilldeclineonlyslowly scorethanjustifiedbythecurrentoutlook. towardlevelsthatitjudgestobeconsistentwith itsdualmandate.Furthermore,strainsinglobal Consensus Forecast Experiment financialmarketscontinuetoposesignificant downsideriskstotheeconomicoutlook.The Inlightof thediscussionatthepreviousFOMC Committeeanticipatesthatinflationoverthe meeting,thesubcommitteeoncommunications mediumtermwillrunatorbelowtheratethatit developedaninitialexperimentalexerciseintendedto judgesmostconsistentwithitsdualmandate. shedlightonthefeasibilityanddesirabilityof con-

226 99thAnnualReport|2012 structinganFOMCconsensusforecast.Atthismeet- ber12–13,2012.Themeetingadjournedat2:15p.m. ing,participantsdiscussedvariousaspectsof the onAugust1,2012. exercise,suchasthepossiblemonetarypolicy assumptionsonwhichtoconditionanFOMCconsensusforecast,themeasurementof thedegreeof Notation Vote uncertaintysurroundingeachof theprojectedvariablesintheforecast,andthepotentialforcommuni- BynotationvotecompletedonJuly10,2012,the cationsbenefits.Inconclusion,participantsgenerally Committeeunanimouslyapprovedtheminutesof the expressedsupportforasecondexercisetobeunder- FOMCmeetingheldonJune19–20,2012. takeninconjunctionwiththeSeptemberFOMC meeting. WilliamB.English Secretary Itwasagreedthatthenextmeetingof theCommittee wouldbeheldonWednesday–Thursday,Septem-

Minutesof FederalOpenMarketCommitteeMeetings|September 227 Meeting Held ScottG.Alvarez GeneralCounsel on September 12–13, 2012 ThomasC.Baxter Ameetingof theFederalOpenMarketCommittee DeputyGeneralCounsel washeldintheofficesof theBoardof Governorsof StevenB.Kamin theFederalReserveSysteminWashington,D.C.,on Economist Wednesday,September12,2012,at10:30a.m.and continuedonThursday,September13,2012,at DavidW.Wilcox 8:30a.m. Economist DavidAltig,ThomasA.Connors,MichaelP.Leahy, Present WilliamNelson,DavidReifschneider, BenBernanke GlennD.Rudebusch,WilliamWascher,and Chairman JohnA.Weinberg AssociateEconomists WilliamC.Dudley ViceChairman SimonPotter Manager,SystemOpenMarketAccount ElizabethDuke NellieLiang JeffreyM.Lacker Director,Officeof FinancialStabilityPolicyand DennisP.Lockhart Research,Boardof Governors SandraPianalto JonW.Faust SpecialAdvisertotheBoard,Officeof Board JeromeH.Powell Members,Boardof Governors SarahBloomRaskin JamesA.Clouse JeremyC.Stein DeputyDirector,Divisionof MonetaryAffairs, Boardof Governors DanielK.Tarullo MaryannF.Hunter JohnC.Williams DeputyDirector,Divisionof BankingSupervision JanetL.Yellen andRegulation,Boardof Governors JamesBullard,ChristineCumming,CharlesL.Evans, AndreasLehnert1 EstherL.George,andEricRosengren DeputyDirector,Officeof FinancialStabilityPolicy AlternateMembersof theFederalOpenMarket andResearch,Boardof Governors Committee LindaRobertson RichardW.Fisher,NarayanaKocherlakota,and AssistanttotheBoard,Officeof BoardMembers, CharlesI.Plosser Boardof Governors Presidentsof theFederalReserveBanksof Dallas, SethB.Carpenter Minneapolis,andPhiladelphia,respectively SeniorAssociateDirector,Divisionof Monetary WilliamB.English Affairs,Boardof Governors SecretaryandEconomist ThomasLaubach DeborahJ.Danker SeniorAdviser,Divisionof ResearchandStatistics, DeputySecretary Boardof Governors MatthewM.Luecke EllenE.MeadeandJoyceK.Zickler AssistantSecretary SeniorAdvisers,Divisionof MonetaryAffairs, Boardof Governors DavidW.Skidmore AssistantSecretary MichelleA.Smith AssistantSecretary 1 AttendedWednesday’ssessiononly.

228 99thAnnualReport|2012 BrianJ.Gross2 purchases.Whilesignificantuncertaintysurrounds SpecialAssistanttotheBoard,Officeof suchestimates,thepresentationindicatedthatasset BoardMembers,Boardof Governors purchasescouldbeeffectiveinfosteringmorerapid progresstowardtheCommittee’sobjectives.Thestaff EricM.Engen,MichaelG.Palumbo,and notedthat,foraflow-basedprogram,thepublic’s WaynePassmore understandingof theconditionsunderwhichthe AssociateDirectors,Divisionof Researchand Committeewouldendpurchaseswouldshapeexpec- Statistics,Boardof Governors tationsof themagnitudeof theFederalReserve’s FabioM.Natalucci holdingsof longer-termsecurities,andthusalso DeputyAssociateDirector,Divisionof Monetary influencethefinancialandeconomiceffectsof sucha Affairs,Boardof Governors program.Thestaff alsodiscussedthepotentialimplicationsof additionalassetpurchasesfortheevolu- EdwardNelson tionof theFederalReserve’sbalancesheetand SectionChief,Divisionof MonetaryAffairs, income.Thepresentationnotedthatsignificantaddi- Boardof Governors tionalassetpurchasesshouldnotadverselyaffectthe JeremyB.Rudd abilityof theCommitteetotightenthestanceof SeniorEconomist,Divisionof Researchand policywhendoingsobecomesappropriate.Intheir Statistics,Boardof Governors discussionof thestaff presentation,afewparticipantsnotedtheuncertaintysurroundingestimatesof KellyJ.Dubbert theeffectsof large-scaleassetpurchasesortheneed FirstVicePresident,FederalReserveBankof foradditionalworkregardingtheimplicationsof KansasCity suchpurchasesforthenormalizationof policy. LorettaJ.Mester,HarveyRosenblum,and DanielG.Sullivan Developments in Financial Markets and ExecutiveVicePresidents,FederalReserveBanksof Philadelphia,Dallas,andChicago,respectively the Federal Reserve’s Balance Sheet CletusC.Coughlin,TroyDavig, TheManagerof theSystemOpenMarketAccount MarkE.Schweitzer,andKei-MuYi (SOMA)reportedondevelopmentsindomesticand SeniorVicePresidents,FederalReserveBanksof foreignfinancialmarketsduringtheperiodsincethe St.Louis,KansasCity,Cleveland,andMinneapolis, FederalOpenMarketCommittee(FOMC)meton respectively July31–August1,2012.HealsoreportedonSystem openmarketoperations,includingtheongoingrein- LorieK.Logan,JonathanP.McCarthy, GiovanniOlivei,andNathanielWuerffel3 vestmentintoagency-guaranteedmortgage-backed securities(MBS)of principalpaymentsreceivedon VicePresidents,FederalReserveBanksof NewYork, SOMAholdingsof agencydebtandagency- NewYork,Boston,andNewYork,respectively guaranteedMBSaswellastheoperationsrelatedto MichelleEzer4 thematurityextensionprogramauthorizedatthe MarketsOfficer,FederalReserveBankof NewYork June19–20,2012,FOMCmeeting.Byunanimous vote,theCommitteeratifiedtheDesk’sdomestic Potential Effects of a Large-Scale Asset transactionsovertheintermeetingperiod.Therewere Purchase Program nointerventionoperationsinforeigncurrenciesfor theSystem’saccountovertheintermeetingperiod. Thestaff presentedananalysisof variousaspectsof possiblelarge-scaleassetpurchaseprograms,includingacomparisonof flow-basedpurchaseprograms Staff Review of the Economic Situation toprogramsof fixedsize.Thepresentationreviewed themodelingapproachusedbythestaff inestimat- TheinformationreviewedattheSeptember12–13 ingthefinancialandmacroeconomiceffectsof such meetingsuggestedthateconomicactivitycontinued toincreaseatamoderatepaceinrecentmonths. 2 AttendedThursday’ssessiononly. Employmentroseslowly,andtheunemploymentrate 3 Attendedafterthediscussiononpotentialeffectsofalargewasstillhigh.Consumerpriceinflationstayedsubscaleassetpurchaseprogram. dued,whilemeasuresof long-runinflationexpecta- 4 Attendedthediscussiononpotentialeffectsofalarge-scale assetpurchaseprogram. tionsremainedstable.

Minutesof FederalOpenMarketCommitteeMeetings|September 229 PrivatenonfarmemploymentincreasedinJulyand monthinJuly,andsalesof bothnewandexisting Augustatonlyaslightlyfasterpacethaninthesec- homesalsorose. ondquarter,andtherateof declineingovernment employmenteasedsomewhat.Theunemployment Realbusinessexpendituresonequipmentandsoftratewas8.1percentinAugust,justabitlowerthan wareappearedtobedecelerating.Bothnominalshipitsaverageduringthefirsthalf of theyear,andthe mentsandnewordersfornondefensecapitalgoods laborforceparticipationrateedgeddownfurther. excludingaircraftdeclinedinJuly,andthebacklogof Theshareof workersemployedparttimeforeco- unfilledordersdecreased.Otherforward-looking nomicreasonsremainedlarge,andtherateof long- indicators,suchasdownbeatreadingsfromsurveys durationunemploymentcontinuedtobehigh.Indi- of businessconditionsandcapitalspendingplans, catorsof jobopeningsandfirms’hiringplanswere alsopointedtowardonlymutedincreasesinreal littlechanged,onbalance,andinitialclaimsfor expendituresforbusinessequipmentinthenearterm. unemploymentinsurancewereessentiallyflatover Nominalbusinessspendingfornewnonresidential theintermeetingperiod. constructiondeclinedinJulyafteronlyedgingupin thesecondquarter.Inventoriesinmostindustries Manufacturingproductionincreasedatafasterpace lookedtoberoughlyalignedwithsalesinrecent inJulythaninthesecondquarter,andtherateof months. manufacturingcapacityutilizationroseslightly. However,automakers’schedulesindicatedthatthe Realfederalgovernmentpurchasesappearedto paceof motorvehicleassemblieswouldbesomewhat decreasefurther,asdatafornominalfederalspending lowerinthecomingmonthsthanitwasinJuly,and inJulypointedtocontinueddeclinesinrealdefense broaderindicatorsof manufacturingactivity,suchas expenditures.Realstateandlocalgovernmentpurthediffusionindexesof newordersfromthenational chasesalsoappearedtostillbetrendingdown.State andregionalmanufacturingsurveys,generally andlocalgovernmentpayrollscontractedinJulyand remainedquitemutedinrecentmonthsatlevelscon- August,althoughatasomewhatslowerratethanin sistentwithonlymeagergainsinfactoryoutputin thesecondquarter,andnominalconstructionspendthenearterm. ingbythesegovernmentsdecreasedslightlyinJuly. Followingacoupleof monthswhenrealpersonal TheU.S.internationaltradedeficitwasabout consumptionexpenditures(PCE)wereroughlyflat, unchangedinJulyafternarrowingsignificantlyin spendingincreasedinJuly,andthegainswerefairly June.ExportsdeclinedinJuly,asdecreasesinthe widespreadacrosscategoriesof consumergoodsand exportsof industrialsupplies,automotiveproducts, services.Incomingdataonfactorsthattendtosup- andconsumergoodswereonlypartiallyoffsetby porthouseholdspendingweresomewhatmixed.Real greaterexportsof agriculturalproducts.Importsalso disposableincomesincreasedsolidlyinJuly,boosted declinedinJuly,reflectinglowerimportsof capital inpartbylowerenergyprices.Thecontinuedrisein goodsandpetroleumproductsandsomewhathigher housevaluesthroughJuly,andtheincreaseinequity importsof automotiveproducts.Thetradedatafor pricesduringtheintermeetingperiod,suggestedthat Julypointedtowardrealnetexportshavingaroughly households’networthmayhaveimprovedalittlein neutraleffectonthegrowthof U.S.realgrossdomesrecentmonths.However,consumersentiment ticproduct(GDP)inthethirdquarterafterthey remainedmoredownbeatinAugustthanearlierin madeapositivecontributiontotheincreaseinreal theyear. GDPinthesecondquarter. Housingmarketconditionscontinuedtoimprove, OverallU.S.consumerprices,asmeasuredbythe butconstructionactivitywasstillatalowlevel, PCEpriceindex,wereflatinJuly.Consumerfood reflectingtherestraintimposedbythesubstantial priceswereessentiallyunchanged,butthesubstantial inventoryof foreclosedanddistressedpropertiesand increasesinspotandfuturespricesof farmcombytightcreditstandardsformortgageloans.Startsof moditiesinrecentmonths,reflectingtheeffectsof newsingle-familyhomesdeclinedinJuly,butpermits thedroughtintheMidwest,pointedtowardsome increased,whichpointedtofurthergainsinsingle- temporaryupwardpressuresonretailfoodprices familyconstructioninthecomingmonths.Both laterthisyear.Consumerenergypricesdeclined startsandpermitsfornewmultifamilyunitsrosein slightlyinJuly,butsurveydataindicatedthatretail July.Homepricesincreasedforthesixthconsecutive gasolinepricesroseinAugust.Consumerprices

230 99thAnnualReport|2012 excludingfoodandenergyalsowereflatinJuly. factoredinsomeprobabilitythattheanticipatedlift- Near-terminflationexpectationsfromtheThomson off dateforthefederalfundsrateintheforward- Reuters/Universityof MichiganSurveysof Consum- guidancelanguagewouldbemovedbackatthat ersincreasedsomewhatinAugust,whilelonger-term meeting.Treasuryyieldssubsequentlyrosefurtheras inflationexpectationsinthesurveyedgedupbut concernsaboutthesituationintheeuroareamoderremainedwithinthenarrowrangethattheyhave ated.Laterintheperiod,Treasuryyieldsretraced occupiedformanyyears.Long-runinflationexpecta- someof theirearliergainsasmarketparticipants’ tionsfromtheFederalReserveBankof Philadelphia expectationsof additionalpolicyactionincreasedfol- Surveyof ProfessionalForecasterscontinuedtobe lowingthereleaseof theminutesof theAugust stableinthethirdquarter. FOMCmeeting,theChairman’sspeechattheeconomicsymposiuminJacksonHole,andtheweaker- Measuresof laborcompensationindicatedthat than-expectedAugustemploymentreport.Onnet, increasesinnominalwagesremainedmodest.The theexpectedpathof thefederalfundsratederived riseincompensationperhourinthenonfarmbusi- fromovernightindexswaprateswaslittlechanged. nesssectorwasmutedovertheyearendinginthesec- Indicatorsof inflationexpectationsderivedfrom ondquarter,andwithsmallgainsinproductiv- nominalandinflation-protectedTreasurysecurities ity,unitlaborcostsroseonlyslightly.Theemploy- edgedupovertheperiodbutstayedintheranges mentcostindexincreasedalittlemoreslowlythan observedoverrecentquarters. themeasureof compensationperhouroverthesame period.Morerecently,thegainsinaveragehourly Conditionsinunsecuredshort-termdollarfunding earningsforallemployeesinJulyandAugustwere marketsremainedstableovertheintermeeting small. period.Insecuredfundingmarkets,conditionswere alsolittlechanged. Overallforeigneconomicgrowthappearedtobesubduedinthethirdquarterafterslowinginthesecond IntheSeptemberSeniorCreditOfficerOpinionSurquarter.Intheeuroarea,policydevelopmentscon- veyonDealerFinancingTerms,respondents tributedtoanimprovementinfinancialconditions; reportednosignificantchangesincredittermsfor recentindicatorspointedtofurtherdecreasesinpro- importantclassesof counterpartiesoverthepast duction,however,andbothbusinessandconsumer threemonths,althoughafewnotedaslighteasingin confidencecontinuedtodecline.Indicatorsof activ- termsforsomeclients.Theuseof leveragebyhedge ityintheemergingmarketeconomiesgenerallyweak- fundswasreportedtohaveremainedbasically ened.InChina,exportgrowthslowed,whileretail unchanged.However,respondentsnotedgreater salesandinvestmentspendingchangedlittle.Therate demandforfundingof agencyandnon-agencyresiof economicgrowthroseinBrazilbutwasstillslug- dentialMBS. gish,andincreasesineconomicactivityinMexico werebelowthefasterpaceseenearlierintheyear. BroadpriceindexesforU.S.equitiesrosemoderately, Consistentwiththeslowinginforeigneconomic onnet,overtheintermeetingperiod,promptedby growth,readingsonforeigninflationcontinuedto generallybetter-than-expectedreadingsoneconomic moderate. activityreleasedearlyintheperiod,somewhat reducedconcernsaboutthesituationinEurope,and Staff Review of the Financial Situation someadditionalanticipationof monetarypolicyeasinglaterintheperiod.Option-impliedvolatilityon Sentimentinfinancialmarketsimprovedsomewhat theS&P500indexfellinearlyAugusttolevelsnot sincethetimeof theAugustFOMCmeeting.Inves- seensincethemiddleof 2007;itsubsequentlypartors’concernsaboutthesituationinEuropeseemed tiallyretraced.Equitypricesforlargedomesticbanks toeasesomewhat,andmarketparticipantsalso roseaboutinlinewiththebroadequitypriceindexes, appearedtohaveincreasedtheirexpectationsof andcreditdefaultswap(CDS)spreadsforthelargest additionalmonetarypolicyaccommodation. bankholdingcompaniescontinuedtomovedown. Onbalance,thenominalTreasuryyieldcurvesteep- Yieldsoninvestment-gradecorporatebondswere enedovertheintermeetingperiod,withyieldson littlechangedatnear-recordlowlevelsovertheinterlonger-datedTreasurysecuritiesrisingnotably.Fol- meetingperiod,whileyieldsonspeculative-gradecorlowingtheAugustFOMCstatement,Treasuryyields poratebondsedgeddown.Thespreadof yieldson movedup,reportedlyinpartbecauseinvestorshad corporatebondsoverthoseoncomparable-maturity

Minutesof FederalOpenMarketCommitteeMeetings|September 231 Treasurysecuritiesnarrowed.Netdebtissuanceby amidconcernsaboutthesituationinEurope,butit nonfinancialfirmscontinuedtobestrongoverthe slowedtoamoderatepaceinAugustasthoseconperiod.Investment-andspeculative-gradebondissu- cernseasedsomewhat.Themonetarybaserosein anceincreasedinAugustfromanalreadyrobustpace JulyandAugustasreservebalancesandcurrency inprecedingmonths,andcommercialandindustrial expanded. (C&I)loansrosefurther.Inthesyndicatedleveraged loanmarket,grossissuanceof institutionalloans Sentimentimprovedinforeignfinancialmarketsas continuedtobesolidinJulyandAugust.Issuanceof theEuropeanCentralBank(ECB)outlinedaplanto collateralizedloanobligationsremainedonpaceto makeadditionalsovereignbondpurchasesinconpostitsstrongestyearsince2007.Therateof gross junctionwiththeEuropeanFinancialStabilityFacilpublicequityissuancebynonfinancialfirms ityandtheEuropeanStabilityMechanism.Spreads increasedslightlyinAugustbutwasstillatasubdued of shorter-termyieldsonperipheraleuro-areasoverlevel. eignbondsoverthoseoncomparable-maturityGermanbundsdeclinedsubstantiallyovertheperiod. Financialconditionsinthecommercialrealestate Thestaff’sbroadnominalindexof theforeign (CRE)marketwerestillsomewhatstrainedagainsta exchangevalueof thedollardeclinedandbenchmark backdropof weakfundamentalsandtightunderwrit- sovereignyieldsinthemajoradvancedforeigneconoingstandards.Nevertheless,issuanceof commercial miesincreasedassafe-havendemandseasedwiththe mortgage-backedsecuritiescontinuedatasolidpace lesseningof concernsabouttheEuropeansituation. overtheintermeetingperiod. Mostglobalbenchmarkindexesforequityprices movedup,andtheequitypricesof Europeanbanks Mortgageratesremainedatverylowlevelsoverthe rosesharply.Fundingconditionsforeuro-areabanks intermeetingperiod.Refinancingactivityincreased improved,althoughtheseconditionsremainedfragbutwasstillrestrainedbytightunderwritingcondi- ile,anddrawsontheFederalReserve’sliquidityswap tions,capacityconstraintsatmortgageoriginators, facilitywiththeECBfell. andlowlevelsof homeequity.NonrevolvingconsumercreditcontinuedtoexpandbrisklyinJune, Thestaff alsoreportedonpotentialriskstofinancial largelyduetorobustgrowthinstudentloansorigi- stability,includingthoseowingtothedevelopments natedbythefederalgovernment,whilerevolving inEuropeandtothecurrentenvironmentof low creditremainedsubdued.Delinquencyratesforcon- interestrates.Althoughthesupportforeconomic sumercreditwerestilllow,mostlyreflectingashiftin activityprovidedbylowinterestratesenhances lendingtowardhigher-credit-qualityborrowers. financialstability,lowinterestratesalsocouldeventuallycontributetoexcessiveborrowingorrisk- Grossissuanceof long-termmunicipalbondspicked takingandpossiblyleavesomeaspectsof thefinanupinAugustfromthesubduedpaceinJuly,butnet cialsystemvulnerabletoafutureriseininterestrates. issuancecontinuedtodecline.CDSspreadsfordebt Thestaff surveyedawiderangeof assetmarketsand issuedbystategovernmentsmovedloweroverthe financialinstitutionsforsignsof excessivevaluations, intermeetingperiod,andtheratioof yieldsonlong- leverage,orrisk-takingthatcouldposesystemicrisks. termgeneralobligationmunicipalbondstoyieldson Valuationsforbroadassetclassesdidnotappear comparable-maturityTreasurysecuritiesdecreased, stretched,orsupportedbyexcessiveleverage.The onbalance. staff alsodidnotfindevidencethatexcessiverisktakingwaswidespread,althoughsuchbehaviorhad Bankcreditcontinuedtoexpandatamoderatepace appearedinafewsmallerandlessliquidmarkets. overtheintermeetingperiod,asgrowthinC&Iloans remainedbriskwhileCREandhomeequityloans Staff Economic Outlook bothtrendeddownfurther.TheAugustSurveyof Termsof BusinessLendingindicatedthatoverall Intheeconomicprojectionpreparedbythestaff for interest-ratespreadsonC&Iloanswerelittle theSeptemberFOMCmeeting,theforecastforreal changed;spreadsonloansdrawnonrecentlyestab- GDPgrowthintheneartermwasbroadlysimilar,on lishedcommitmentsnarrowedmaterially,although balance,tothepreviousprojection.Thenear-term theyremainedwide. forecastincorporatedalargernegativeeffectof the droughtonfarmoutputinthesecondhalf of this M2growthwasrapidinJuly,likelyreflectinginves- yearthanthestaff previouslyanticipated,butthis tors’heighteneddemandforsafeandliquidassets effectwasmostlyoffsetbythestaff’sexpectationof a

232 99thAnnualReport|2012 smallerdragfromnetexports.Thestaff’smedium- thetargetfederalfundsrateforeachyearfrom2012 termprojectionforrealGDPgrowth,whichwascon- through2015andoverthelongerrun,undereach ditionedontheassumptionof nochangesinmon- participants’judgmentof appropriatemonetary etarypolicy,wasrevisedupalittle,mostlyreflecting policy.Thelonger-runprojectionsrepresenteach aslightimprovementintheoutlookfortheEuropean participant’sassessmentof theratetowhicheach situationandasomewhathigherprojectedpathfor variablewouldbeexpectedtoconverge,overtime, equityprices.Nevertheless,withfiscalpolicyassumed underappropriatemonetarypolicyandinthe tobetighternextyearthanthisyear,thestaff absenceof furthershockstotheeconomy.TheseecoexpectedthatincreasesinrealGDPwouldnotmate- nomicprojectionsandpolicyassessmentsare riallyexceedthegrowthof potentialoutputin2013. describedintheSummaryof EconomicProjections, In2014,economicactivitywasprojectedtoacceler- whichisattachedasanaddendumtotheseminutes. ategradually,supportedbyaneasinginfiscalpolicy restraint,increasesinconsumerandbusinessconfi- Intheirdiscussionof theeconomicsituationand dence,furtherimprovementsinfinancialconditions outlook,meetingparticipantsregardedtheinformaandcreditavailability,andaccommodativemonetary tionreceivedduringtheintermeetingperiodasindipolicy.Theexpansionineconomicactivitywas catingthateconomicactivityhadcontinuedto expectedtonarrowthesignificantmarginof slackin expandatamoderatepaceinrecentmonths.Howlaborandproductmarketsonlyslowlyoverthepro- ever,recentgainsinemploymentweresmallandthe jectionperiod,andtheunemploymentratewas unemploymentrateremainedhigh.Althoughconanticipatedtostillbeelevatedattheendof 2014. sumerspendinghadcontinuedtoadvance,growthin businessfixedinvestmentappearedtohaveslowed. Thestaff’snear-termforecastforinflationwas Thehousingsectorshowedsomefurthersignsof revisedupfromtheprojectionpreparedforthe improvement,albeitfromadepressedlevel.Con- AugustFOMCmeeting,reflectingincreasesincon- sumerpriceinflationhadbeensubdueddespite sumerenergypricesthatweregreaterthanantici- recentincreasesinthepricesof somekeycommodipated.However,thestaff’sprojectionforinflation ties,andlonger-terminflationexpectationshad overthemediumtermwaslittlechanged.Withcrude remainedstable. oilpricesexpectedtograduallydeclinefromtheir currentlevels,theboosttoretailfoodpricesfromthe Regardingtheeconomicoutlook,participantsgenerdroughtanticipatedtobeonlytemporaryandcom- allyagreedthatthepaceof theeconomicrecovery parativelysmall,long-runinflationexpectations wouldlikelyremainmoderateovercomingquarters assumedtoremainstable,andsubstantialresource butwouldpickupoverthe2013–15period.Inthe slackpersistingovertheprojectionperiod,thestaff nearterm,thedroughtintheMidwestwasexpected continuedtoforecastthatinflationwouldbesubdued toweighoneconomicgrowth.Moreover,particithrough2014. pantsobservedthatthepaceof economicrecovery wouldlikelycontinuetobehelddownforsometime Thestaff viewedtheuncertaintyaroundtheforecast bypersistentheadwinds,includingcontinuedweakforeconomicactivityaselevatedandtherisksskewed nessinthehousingmarket,ongoinghouseholdsectothedownside,largelyreflectingconcernsaboutthe tordeleveraging,still-tightcreditconditionsforsome situationinEuropeandthepossibilityof amore householdsandbusinesses,andfiscalconsolidation severetighteninginU.S.fiscalpolicythanantici- atalllevelsof government.Manyparticipantsalso pated.Althoughthestaff sawtheoutlookforinfla- notedthatahighlevelof uncertaintyregardingthe tionasuncertain,theriskswereviewedasbalanced Europeanfiscalandbankingcrisisandtheoutlook andnotunusuallyhigh. forU.S.fiscalandregulatorypolicieswasweighing onconfidence,therebyrestraininghouseholdand Participants’ Views on Current Conditions businessspending.However,othersquestionedthe and the Economic Outlook roleof uncertaintyaboutpolicyasafactorconstrainingaggregatedemand.Inaddition,participants InconjunctionwiththisFOMCmeeting,meeting stillsawsignificantdownsideriskstotheoutlookfor participants—the7membersof theBoardof Gover- economicgrowth.Prominentamongtheseriskswere norsandthepresidentsof the12FederalReserve apossibleintensificationof strainsintheeurozone, Banks,allof whomparticipateinthedeliberationsof withpotentialspilloverstoU.S.financialmarkets theFOMC—submittedtheirassessmentsof realout- andinstitutionsandthustothebroaderU.S. putgrowth,theunemploymentrate,inflation,and economy;alarger-than-expectedU.S.fiscaltighten-

Minutesof FederalOpenMarketCommitteeMeetings|September 233 ing;andthepossibilityof afurtherslowdownin productionandreducedprofitsonlivestock.The globaleconomicgrowth.Afewparticipants,however, droughtwasexpectedtoreducefarminventoriesand mentionedthepossibilitythateconomicgrowth haveatransitoryimpactonbroadermeasuresof couldbemorerapidthancurrentlyanticipated,par- economicgrowth. ticularlyif majorsourcesof uncertaintywere resolvedfavorablyorif faster-than-expected Participantsgenerallyexpectedthatfiscalpolicy advancesinthehousingsectorledtoimprovements wouldcontinuetobeadragoneconomicactivity inhouseholdbalancesheets,increasedconfidence, overcomingquarters.Inadditiontoongoingweakandeasiercreditconditions.Participants’forecasts nessinspendingatthefederal,state,andlocalgovforeconomicactivity,whichinmostcaseswerecon- ernmentlevels,uncertaintiesabouttaxandspending ditionedonanassumptionof additional,near-term policiesreportedlywererestrainingbusinessdecisionmonetarypolicyaccommodation,werealsoassoci- making.Participantsalsonotedthatif anagreement atedwithanoutlookfortheunemploymentrateto wasnotreachedtotackletheexpiringtaxcutsand remainclosetorecentlevelsthrough2012andthen scheduledspendingreductions,asharpconsolidation todeclinegraduallytowardlevelsjudgedtobecon- of fiscalpolicywouldtakeplaceatthebeginningof sistentwiththeCommittee’smandate. 2013. Inthehouseholdsector,incomingdataonretailsales Theavailableindicatorspointedtocontinuedweakweresomewhatstrongerthanexpected.Participants nessinoveralllabormarketconditions.Growthin noted,however,thathouseholdswerestillinthepro- employmenthadbeendisappointing,withtheavercessof deleveraging,confidencewaslow,andcon- agemonthlyincreasesinpayrollssofarthisyear sumersappearedtoremainparticularlypessimistic belowlastyear’spaceandbelowthepacethatwould abouttheprospectsforthefuture,raisingdoubtsthat berequiredtomakesignificantprogressinreducing thesomewhatstrongerpaceof spendingwouldper- theunemploymentrate.Theunemploymentrate sist.Althoughthelevelof activityinthehousingsec- declinedaroundtheturnof theyearbuthadnot torremainedlow,thesomewhatfasterpaceof home fallensignificantlysincethen.Inaddition,thelabor salesandconstructionprovidedsomeencouraging forceparticipationrateandemployment-tosignsof improvement.Anumberof participantsalso populationratioswereatornearpost-recessionlows. observedthathousepriceswererising.Itwasnoted thatsuchincreases,coupledwithhistoricallylow Meetingparticipantsagaindiscussedtheextentof mortgagerates,couldleadtoastrongerupturnin slackinlabormarkets.Afewparticipantsreiterated housingactivity,althoughconstraintsonthecapacity theirviewthatthepersistentlyhighlevelof unemforloanoriginationandstill-tightcredittermsfor ploymentreflectedtheeffectof structuralfactors, someborrowerscontinuedtoweighonmortgage includingmismatchesacrossandwithinsectors lending. betweentheskillsof theunemployedandthose demandedinsectorsinwhichjobswerecurrently Businesscontactsinmanypartsof thecountrywere available.Itwasalsosuggestedthattherewasan reportedtobehighlyuncertainabouttheoutlookfor ongoingprocessof polarizationinthelabormarket, theeconomyandforfiscalandregulatorypolicies. withtheshareof jobopportunitiesinmiddle-skill Althoughfirms’balancesheetsweregenerallystrong, occupationscontinuingtodeclinewhilethesharesof theseuncertaintieshadledthemtobeparticularly lowandhighskilloccupationsincreased.Bothof cautiousandtoremainreluctanttohireorexpand theseviewswouldsuggestalowerlevelof potential capacity.Reportsonmanufacturingactivitywere outputandthusreducedscopeforcombatingunemmixed,withproductionrelatedtoautosandhousing ploymentwithadditionalmonetarypolicystimulus. themostnotableareasof relativestrength.Inone Severalparticipants,whileacknowledgingsomeevi- District,businesssurveyspointedtofurthergrowth; denceof structuralchangesinthelabormarket, however,readingsonforward-lookingindicatorsof statedagainthatweakaggregatedemandwasthe ordersaroundthecountrywerelesspositive.Inaddi- principalreasonforthehighunemploymentrate. tion,businesscontactsnotedthatexportdemandwas Theysawslackinresourceutilizationasremaining showingsignsof weaknessasaresultof theslow- wide,indicatinganimportantroleforadditional downineconomicactivityinEurope.Theenergysec- policyaccommodation.Severalparticipantsnoted torcontinuedtoexpand.Intheagriculturalsector, theriskthatcontinuedhighlevelsof unemployment, highgrainpricesandcropinsurancepaymentswere evenif initiallycyclical,mightultimatelyinduce supportingfarmincomes,helpingoffsetdeclinesin adversestructuralchanges.Inparticular,they

234 99thAnnualReport|2012 expressedconcernsabouttheriskthattheexception- tivefinancialconditions.Anumberof participants allyhighlevelof long-termunemploymentandthe alsoindicatedthatitcouldliftconsumerandbusiness depressedlevelof laborparticipationcouldulti- confidencebyemphasizingtheCommittee’scommitmatelyleadtopermanentnegativeeffectsonthe menttocontinuedprogresstowarditsdualmandate. skillsandprospectsof thosewithoutjobs,thereby Inaddition,itwasnotedthatadditionalpurchases reducingthelonger-runnormallevelof employment couldreinforcetheCommittee’sforwardguidance andpotentialoutput. regardingthefederalfundsrate.Participantsdiscussedtheeffectivenessof purchasesof Treasury Sentimentinfinancialmarketsimprovednotablydur- securitiesrelativetopurchasesof agencyMBSineasingtheintermeetingperiod.Participantsindicated ingfinancialconditions.Someparticipantssuggested thatrecentdecisionsbytheECBhelpedeaseinves- that,allelsebeingequal,MBSpurchasescouldbe tors’anxietyaboutthenear-termprospectsforthe preferablebecausetheywouldmoredirectlysupport euro.However,participantsalsoobservedthatsig- thehousingsector,whichremainsweakbuthas nificantrisksrelatedtotheeuro-areabankingand shownsomesignsof improvementof late.Oneparfiscalcrisisremained,andthatanumberof impor- ticipant,however,objectedthatpurchasesof MBS, tantissueswouldhavetoberesolvedinorderto whencomparedtopurchasesof longer-termTreasachievefurtherprogresstowardacomprehensive urysecurities,wouldlikelyresultinhigherinterest solutiontothecrisis.Participantsnotedthatindica- ratesformanyborrowersinothersectors.Anumber torsof financialstressintheUnitedStateswerenot of participantshighlightedtheuncertaintyaboutthe especiallyhighandoverallconditionsinU.S.finan- overalleffectsof additionalpurchasesonfinancial cialmarketsremainedfavorable.Longer-terminterest marketsandtherealeconomy.Someparticipants rateswerelowandsupportiveof economicgrowth, thoughtpastpurchaseswereusefulbecausetheywere whileequitypriceshadrisen.Oneparticipantnoted conductedduringperiodsof marketstressorheightthat,whiletherewerefewcurrentsignsof excessive eneddeflationriskandwerelessconfidentof the risk-taking,lowinterestratescouldultimatelyleadto efficacyof additionalpurchasesunderpresentcirfinancialimbalancesthatwouldbechallengingto cumstances.Afewexpressedskepticismthataddidetectbeforetheybecameseriousproblems. tionalpolicyaccommodationcouldhelpspuran economythattheysawasheldbackbyuncertainties Theincominginformationoninflationovertheinter- andarangeof structuralissues.Indiscussingthe meetingperiodwaslargelyinlinewithparticipants’ costsandrisksthatsuchaprogrammightentail,sevexpectations.Despiterecentincreasesinthepricesof eralparticipantsreiteratedtheirconcernthataddisomekeycommodities,consumerpriceinflation tionalpurchasesmightcomplicatetheCommittee’s remainedsubdued.Withlonger-terminflationexpec- effortstowithdrawmonetarypolicyaccommodation tationsstableandtheunemploymentrateelevated, wheniteventuallybecameappropriatetodoso,raisparticipantsgenerallyanticipatedthatinflationover ingtheriskof undesirablyhighinflationinthefuture themediumrunwouldlikelyrunatorbelowthe andpotentiallyunmooringinflationexpectations. 2percentratethattheCommitteejudgestobemost Oneparticipantnotedthatanextendedperiodof consistentwithitsmandate.Mostparticipantssaw accommodationresultingfromadditionalassetpurtheriskstotheoutlookforinflationasroughlybal- chasescouldleadtoexcessiverisk-takingonthepart anced.Afewparticipantsfeltthatmaintaininga of someinvestorsandsounderminefinancialstabilhighlyaccommodativestanceof monetarypolicy ityovertime.Thepossibleadverseeffectsof large overanextendedperiodcouldunmoorlonger-term purchasesonmarketfunctioningwerealsonoted. inflationexpectationsand,againstabackdropof However,mostparticipantsthoughttheseriskscould higherenergyandcommodityprices,posedupside bemanagedsincetheCommitteecouldmakeadjustriskstoinflation.Otherparticipants,bycontrast,saw mentstoitspurchases,asneeded,inresponsetoecoinflationrisksastiltedtothedownside,giventheir nomicdevelopmentsortochangesinitsassessment expectationsforsizableandpersistentresourceslack. of theirefficacyandcosts. Participantsagainexchangedviewsonthelikelyben- Participantsalsodiscussedissuesrelatedtotheproviefitsandcostsof anewlarge-scaleassetpurchase sionof forwardguidanceregardingthefuturepathof program.Manyparticipantsanticipatedthatsucha thefederalfundsrate.Itwasnotedthatclearcommuprogramwouldprovidesupporttotheeconomic nicationandcredibilityallowthecentralbanktohelp recoverybyputtingdownwardpressureonlonger- shapethepublic’sexpectationsaboutpolicy,whichis terminterestratesandpromotingmoreaccommoda- crucialtomanagingmonetarypolicywhenthefed-

Minutesof FederalOpenMarketCommitteeMeetings|September 235 eralfundsrateisatitseffectivelowerbound.Anum- levelsthattheyviewedasconsistentwiththeComberof participantsquestionedtheeffectivenessof mittee’smandate.Membersgenerallyjudgedthat continuingtouseacalendardatetoprovideforward withoutadditionalpolicyaccommodation,economic guidance,notingthatachangeinthecalendardate growthmightnotbestrongenoughtogeneratesusmightbeinterpretedpessimisticallyasadowngrade tainedimprovementinlabormarketconditions. of theCommittee’seconomicoutlookratherthanas Moreover,whilethesovereignandbankingcrisisin conveyingtheCommittee’sdeterminationtosupport Europehadeasedsomerecently,membersstillsaw theeconomicrecovery.If thepublicinterpretedthe strainsinglobalfinancialconditionsasposingsigstatementpessimistically,consumerandbusiness nificantdownsideriskstotheeconomicoutlook.The confidencecouldfallratherthanrise.Manypartici- possibilityof alarger-than-expectedfiscaltightening pantsindicatedapreferenceforreplacingthecalen- intheUnitedStatesandslowerglobalgrowthwere dardatewithlanguagedescribingtheeconomicfac- alsoseenasdownsiderisks.InflationhadbeensubtorsthattheCommitteewouldconsiderindeciding dued,eventhoughthepricesof somekeycommoditoraiseitstargetforthefederalfundsrate.Partici- tieshadincreasedrecently.Membersgenerallyconpantsdiscussedthebenefitsof suchanapproach, tinuedtoanticipatethat,withlonger-terminflation includingthepotentialforenhancedeffectivenessof expectationsstableandgiventheexistingslackin policythroughgreaterclarityregardingtheCommit- resourceutilization,inflationoverthemediumterm tee’sfuturebehavior.Thatapproachcouldalsobol- wouldrunatorbelowtheCommittee’slonger-run sterthestimulusprovidedbytheSystem’sholdings objectiveof 2percent. of longer-termsecurities.Itwasnotedthatforward guidancealongtheselineswouldallowmarketexpec- Intheirdiscussionof monetarypolicyfortheperiod tationsregardingthefederalfundsratetoadjust ahead,membersgenerallyexpressedconcernsabout automaticallyinresponsetoincomingdataonthe theslowpaceof improvementinlabormarketcondieconomy.Manyparticipantsthoughtthatmore- tionsandallmembersbutoneagreedthattheouteffectiveforwardguidancecouldbeprovidedby lookforeconomicactivityandinflationcalledfor specifyingnumericalthresholdsforlabormarketand additionalmonetaryaccommodation.Members inflationindicatorsthatwouldbeconsistentwith agreedthatsuchaccommodationshouldbeprovided maintainingthefederalfundsrateatexceptionally throughbothastrengtheningof theforwardguidlowlevels.However,reachingagreementonspecific anceregardingthefederalfundsrateandpurchases thresholdscouldbechallenginggiventhediversityof of additionalagencyMBSatapaceof $40billion participants’views,andsomewerereluctantto permonth.Alongwiththeongoingpurchasesof specifyexplicitnumericalthresholdsoutof concern $45billionpermonthof longer-termTreasurysecuthatsuchthresholdswouldnecessarilybetoosimple ritiesunderthematurityextensionprogram tofullycapturethecomplexitiesof theeconomyand announcedinJune,thesepurchaseswillincreasethe thepolicyprocessorcouldbeincorrectlyinterpreted Committee’sholdingsof longer-termsecuritiesby astriggerspromptinganautomaticpolicyresponse. about$85billioneachmonththroughtheendof the Inaddition,numericalthresholdscouldbeconfused year,andshouldputdownwardpressureonlongerwiththeCommittee’slonger-termobjectives,andso terminterestrates,supportmortgagemarkets,and underminetheCommittee’scredibility.Atthecon- helpmakebroaderfinancialconditionsmoreaccomclusionof thediscussion,mostparticipantsagreed modative.Membersalsoagreedtomaintainthe thattheuseof numericalthresholdscouldbeuseful Committee’sexistingpolicyof reinvestingprincipal toprovidemoreclarityabouttheconditionalityof paymentsfromitsholdingsof agencydebtand theforwardguidancebutthoughtthatfurtherwork agencyMBSintoagencyMBS.TheCommittee wouldbeneededtoaddresstherelatedcommunica- agreedthatitwouldcloselymonitorincominginfortionschallenges. mationoneconomicandfinancialdevelopmentsin comingmonths,andthatif theoutlookforthelabor Committee Policy Action marketdidnotimprovesubstantially,itwouldcontinueitspurchasesof agencyMBS,undertakeaddi- Committeememberssawtheinformationreceived tionalassetpurchases,andemployitsotherpolicy overtheintermeetingperiodassuggestingthateco- toolsasappropriateuntilsuchimprovementis nomicactivityhadcontinuedtoexpandatamoder- achievedinacontextof pricestability.Thisflexible atepaceinrecentmonths.However,growthin approachwasseenasallowingtheCommitteetotaiemploymenthadbeenslow,andalmostallmembers loritspolicyresponseovertimetoincominginforsawtheunemploymentrateasstillelevatedrelativeto mationwhileincorporatingconditionalfeaturesthat

236 99thAnnualReport|2012 clarifiedtheCommittee’sintentiontoimprovelabor tiesintonewissues.TheCommitteedirectsthe marketconditions,therebyenhancingtheeffective- Desktomaintainitsexistingpolicyof reinvestnessof theactionbyhelpingtobolsterbusinessand ingprincipalpaymentsonallagencydebtand consumerconfidence.Whilemembersgenerally agencymortgage-backedsecuritiesintheSystem viewedthepotentialrisksassociatedwiththesepur- OpenMarketAccountinagencymortgagechasesasmanageable,theCommitteeagreedthatin backedsecurities.TheDeskisalsodirectedto determiningthesize,pace,andcompositionof its beginpurchasingagencymortgage-backedsecuassetpurchases,itwould,asalways,takeappropriate ritiesatapaceof about$40billionpermonth. accountof thelikelyefficacyandcostsof suchpur- TheCommitteedirectstheDesktoengagein chases.Withregardtotheforwardguidance,the dollarrollandcouponswaptransactionsasnec- Committeeagreedonanextensionthroughmid- essarytofacilitatesettlementof theFederal 2015,inconjunctionwithlanguageinthestatement Reserve’sagencyMBStransactions.TheSystem indicatingthatitexpectsthatahighlyaccommoda- OpenMarketAccountManagerandtheSecretivestanceof policywillremainappropriatefora tarywillkeeptheCommitteeinformedof ongoconsiderabletimeaftertheeconomicrecovery ingdevelopmentsregardingtheSystem’sbalstrengthens.Thatnewlanguagewasmeanttoclarify ancesheetthatcouldaffecttheattainmentover thatthemaintenanceof averylowfederalfundsrate timeof theCommittee’sobjectivesof maximum overthatperioddidnotreflectanexpectationthat employmentandpricestability.” theeconomywouldremainweak,butratherreflected theCommittee’sintentiontosupportastrongereco- Thevoteencompassedapprovalof thestatement nomicrecovery.Onememberdissentedfromthe belowtobereleasedat12:30p.m.: policydecision,onthegroundsthatheopposedadditionalassetpurchasesandpreferredtoomitthecal- “InformationreceivedsincetheFederalOpen endardatefromtheforwardguidance;inhisview,it MarketCommitteemetinAugustsuggeststhat wouldbebettertousequalitativelanguageto economicactivityhascontinuedtoexpandata describethefactorsthatwouldinfluencetheCom- moderatepaceinrecentmonths.Growthin mittee’sdecisiontoincreasethetargetfederalfunds employmenthasbeenslow,andtheunemployrate. mentrateremainselevated.Householdspending hascontinuedtoadvance,butgrowthinbusi- Attheconclusionof thediscussion,theCommittee nessfixedinvestmentappearstohaveslowed. votedtoauthorizeanddirecttheFederalReserve Thehousingsectorhasshownsomefurther Bankof NewYork,untilitwasinstructedotherwise, signsof improvement,albeitfromadepressed toexecutetransactionsintheSystemAccountin level.Inflationhasbeensubdued,althoughthe accordancewiththefollowingdomesticpolicy pricesof somekeycommoditieshaveincreased directive: recently.Longer-terminflationexpectations haveremainedstable. “TheFederalOpenMarketCommitteeseeks monetaryandfinancialconditionsthatwillfos- Consistentwithitsstatutorymandate,theComterpricestabilityandpromotesustainable mitteeseekstofostermaximumemployment growthinoutput.Tofurtheritslong-runobjec- andpricestability.TheCommitteeisconcerned tives,theCommitteeseeksconditionsinreserve that,withoutfurtherpolicyaccommodation, marketsconsistentwithfederalfundstradingin economicgrowthmightnotbestrongenoughto arangefrom0to¼percent.TheCommittee generatesustainedimprovementinlabormarket directstheDesktocontinuethematurityexten- conditions.Furthermore,strainsinglobalfinansionprogramitannouncedinJunetopurchase cialmarketscontinuetoposesignificantdown- Treasurysecuritieswithremainingmaturitiesof sideriskstotheeconomicoutlook.TheCom- 6yearsto30yearswithatotalfacevalueof mitteealsoanticipatesthatinflationoverthe about$267billionbytheendof Decem- mediumtermlikelywouldrunatorbelowits ber2012,andtosellorredeemTreasurysecuri- 2percentobjective. tieswithremainingmaturitiesof approximately 3yearsorlesswithatotalfacevalueof about Tosupportastrongereconomicrecoveryandto $267billion.Forthedurationof thisprogram, helpensurethatinflation,overtime,isatthe theCommitteedirectstheDesktosuspendits ratemostconsistentwithitsdualmandate,the policyof rollingovermaturingTreasurysecuri- Committeeagreedtodaytoincreasepolicy

Minutesof FederalOpenMarketCommitteeMeetings|September 237 accommodationbypurchasingadditional resultinadiscernibleimprovementineconomic agencymortgage-backedsecuritiesatapaceof growthwithoutalsocausinganunwantedincreasein $40billionpermonth.TheCommitteealsowill inflation.Moreover,heexpressedhisoppositionto continuethroughtheendof theyearitspro- thepurchaseof moreMBS,becausehevieweditas gramtoextendtheaveragematurityof itshold- inappropriatefortheCommitteetochooseaparticuingsof securitiesasannouncedinJune,anditis larsectorof theeconomytosupport;purchasesof maintainingitsexistingpolicyof reinvesting Treasurysecuritiesinsteadwouldhaveavoidedthis principalpaymentsfromitsholdingsof agency effect.Finally,hepreferredtoomitthedescriptionof debtandagencymortgage-backedsecuritiesin thetimeperiodoverwhichexceptionallylowlevels agencymortgage-backedsecurities.These forthefederalfundsratewerelikelytobewarranted. actions,whichtogetherwillincreasetheCommittee’sholdingsof longer-termsecuritiesby Consensus Forecast Experiment about$85billioneachmonththroughtheendof theyear,shouldputdownwardpressureon Inlightof thediscussionatthepreviousFOMC longer-terminterestrates,supportmortgage meeting,thesubcommitteeoncommunications markets,andhelptomakebroaderfinancial developedasecondexperimentalexerciseintendedto conditionsmoreaccommodative. shedlightonthefeasibilityanddesirabilityof constructinganFOMCconsensusforecast.Atthismeet- TheCommitteewillcloselymonitorincoming ing,participantsdiscussedpossibleformulationsof informationoneconomicandfinancialdevelop- themonetarypolicyassumptionsonwhichtocondimentsincomingmonths.If theoutlookforthe tionanFOMCconsensusforecastandalternative labormarketdoesnotimprovesubstantially,the approachesforparticipantstoexpresstheirendorse- Committeewillcontinueitspurchasesof agency mentof theconsensusforecast.Inconclusion,parmortgage-backedsecurities,undertakeaddi- ticipantsagreedtohaveabroaddiscussionof the tionalassetpurchases,andemployitsother experiencesgatheredfromthetwoexperimentalexerpolicytoolsasappropriateuntilsuchimprove- cisesinconjunctionwiththeOctoberFOMC mentisachievedinacontextof pricestability. meeting. Indeterminingthesize,pace,andcomposition of itsassetpurchases,theCommitteewill,as Itwasagreedthatthenextmeetingof theCommittee always,takeappropriateaccountof thelikely wouldbeheldonTuesday–Wednesday,October23– efficacyandcostsof suchpurchases. 24,2012.Themeetingadjournedat12:10p.m.on September13,2012. Tosupportcontinuedprogresstowardmaximumemploymentandpricestability,theCom- Notation Vote mitteeexpectsthatahighlyaccommodative stanceof monetarypolicywillremainappropri- BynotationvotecompletedonAugust21,2012,the ateforaconsiderabletimeaftertheeconomic Committeeunanimouslyapprovedtheminutesof the recoverystrengthens.Inparticular,theCommit- FOMCmeetingheldonJuly31–August1,2012. teealsodecidedtodaytokeepthetargetrange forthefederalfundsrateat0to¼percentand WilliamB.English currentlyanticipatesthatexceptionallylowlevels Secretary forthefederalfundsratearelikelytobewarrantedatleastthroughmid-2015.” Addendum: Summary of Economic Projections Votingforthisaction:BenBernanke,WilliamC. Dudley,ElizabethDuke,DennisP.Lockhart,Sandra InconjunctionwiththeSeptember12−13,2012,Fed- Pianalto,JeromeH.Powell,SarahBloomRaskin, eralOpenMarketCommittee(FOMC)meeting, JeremyC.Stein,DanielK.Tarullo,JohnC.Williams, meetingparticipants—the7membersof theBoard andJanetL.Yellen. of Governorsandthe12presidentsof theFederal ReserveBanks,allof whomparticipateinthedelib- Votingagainstthisaction:JeffreyM.Lacker. erationsof theFOMC—submittedtheirassessments, undereachparticipant’sjudgmentof appropriate Mr.Lackerdissentedbecausehebelievedthataddi- monetarypolicy,of realoutputgrowth,theunemtionalmonetarystimulusatthistimewasunlikelyto ploymentrate,inflation,andthetargetfederalfunds

238 99thAnnualReport|2012 rateforeachyearfrom2012through2015andover Asshowninfigure2,mostparticipantsjudgedthat thelongerrun.Theseassessmentswerebasedon highlyaccommodativemonetarypolicywaslikelyto informationavailableatthetimeof themeetingand bewarrantedoverthenextfewyears.Inparticular, participants’individualassumptionsaboutthefac- 13participantsthoughtthatitwouldbeappropriate torslikelytoaffecteconomicoutcomes.Thelonger- forthefirstincreaseinthetargetfederalfundsrateto runprojectionsrepresenteachparticipant’sjudgment occurduring2015orlater.Themajorityof particiof theratetowhicheachvariablewouldbeexpected pantsjudgedthatappropriatemonetarypolicywould toconverge,overtime,underappropriatemonetary involveadecisionbytheCommittee,attheSeptempolicyandintheabsenceof furthershockstothe bermeetingorbeforelong,toundertakesignificant economy.“Appropriatemonetarypolicy”isdefined additionalassetpurchases. asthefuturepathof policythatparticipantsdeem mostlikelytofosteroutcomesforeconomicactivity AsinJune,participantsinSeptemberjudgedthe andinflationthatbestsatisfytheirindividualinter- uncertaintyassociatedwiththeoutlookforrealactivpretationsof theFederalReserve’sobjectivesof ityandtheunemploymentratetobeunusuallyhigh maximumemploymentandstableprices. comparedwithhistoricalnorms,withtherisks weightedmainlytowardslowereconomicgrowthand Overall,theassessmentsthatFOMCparticipants ahigherunemploymentrate.Whileanumberof parsubmittedinSeptemberindicatedthat,underappro- ticipantsviewedtheuncertaintysurroundingtheir priatemonetarypolicy,thepaceof economicrecov- projectionsforinflationtobeunusuallyhighincomeryoverthe2012−15periodwouldgraduallypickup parisonwithhistoricalnorms,manyjudgedittobe andinflationwouldremainsubdued(table1andfig- broadlysimilartohistoricalnorms,andmostconsidure1).Participantsjudgedthatthegrowthrateof eredtheriskstoinflationtoberoughlybalanced. realgrossdomesticproduct(GDP)wouldincrease somewhatin2013andthateconomicgrowthin2014 TheOutlookforEconomicActivity and2015wouldmodestlyexceedparticipants’esti- Conditionalontheirindividualassumptionsabout matesof thelonger-runsustainablerateof growth, appropriatemonetarypolicy,participantsjudged whiletheunemploymentratewoulddeclinegradually thattheeconomywouldgrowatamoderatepace through2015.Participantsprojectedthatinflation, overcomingquartersandthenpickupsomewhatin asmeasuredbytheannualchangeinthepriceindex 2013beforeexpandingin2014and2015atarate forpersonalconsumptionexpenditures(PCE),would modestlyabovewhatparticipantssawasthelongerrunclosetoorbelowtheFOMC’slonger-runinfla- runrateof outputgrowth.Thecentraltendencyof tionobjectiveof 2percent. theirprojectionsforthechangeinrealGDPin2012 Table1.EconomicprojectionsofFederalReserveBoardmembersandFederalReserveBankpresidents,September2012 Percent Centraltendency1 Range2 Variable 2012 2013 2014 2015 Longerrun 2012 2013 2014 2015 Longerrun ChangeinrealGDP 1.7to2.0 2.5to3.0 3.0to3.8 3.0to3.8 2.3to2.5 1.6to2.0 2.3to3.5 2.7to4.1 2.5to4.2 2.2to3.0 Juneprojection 1.9to2.4 2.2to2.8 3.0to3.5 n.a. 2.3to2.5 1.6to2.5 2.2to3.5 2.8to4.0 n.a. 2.2to3.0 Unemploymentrate 8.0to8.2 7.6to7.9 6.7to7.3 6.0to6.8 5.2to6.0 8.0to8.3 7.0to8.0 6.3to7.5 5.7to6.9 5.0to6.3 Juneprojection 8.0to8.2 7.5to8.0 7.0to7.7 n.a. 5.2to6.0 7.8to8.4 7.0to8.1 6.3to7.7 n.a. 4.9to6.3 PCEinflation 1.7to1.8 1.6to2.0 1.6to2.0 1.8to2.0 2.0 1.5to1.9 1.5to2.1 1.6to2.2 1.8to2.3 2.0 Juneprojection 1.2to1.7 1.5to2.0 1.5to2.0 n.a. 2.0 1.2to2.0 1.5to2.1 1.5to2.2 n.a. 2.0 CorePCEinflation3 1.7to1.9 1.7to2.0 1.8to2.0 1.9to2.0 1.6to2.0 1.6to2.0 1.6to2.2 1.8to2.3 Juneprojection 1.7to2.0 1.6to2.0 1.6to2.0 n.a. 1.7to2.0 1.4to2.1 1.5to2.2 n.a. Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andprojectionsforbothmeasuresofinflationarefromthefourthquarterofthepreviousyeartothefourth quarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures (PCE)andthepriceindexforPCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarterofthe yearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’s assessmentoftheratetowhicheachvariablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.TheJune projectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonJune19–20,2012. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

Minutesof FederalOpenMarketCommitteeMeetings|September 239 Figure1.Centraltendenciesandrangesofeconomicprojections,2012–15andoverthelongerrun Percent Change in real GDP 5 Central tendency of projections 4 Range of projections 3 2 1 + Actual 0 - 1 2 3 2007 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Percent Unemployment rate 10 9 8 7 6 5 2007 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Percent PCE inflation 3 2 1 2007 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Percent Core PCE inflation 3 2 1 2007 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Note:Definitionsofvariablesareinthegeneralnotetotable1.Thedatafortheactualvaluesofthevariablesareannual.

240 99thAnnualReport|2012 Figure2.OverviewofFOMCparticipants’assessmentsofappropriatemonetarypolicy,September2012 Number of participants Appropriate timing of policy firming 13 12 12 11 10 9 8 7 6 5 4 3 3 2 2 1 1 1 2012 2013 2014 2015 2016 Appropriate pace of policy firming Percent Target federal funds rate at year-end 6 5 4 3 2 1 0 2012 2013 2014 2015 Longer run Note:Intheupperpanel,theheightofeachbardenotesthenumberofFOMCparticipantswhojudgethat,underappropriatemonetarypolicy,thefirstincreaseinthetargetfederalfundsratefromitscurrentrangeof0to¼percentwilloccurinthespecifiedcalendaryear.InJune2012,thenumbersofFOMCparticipantswhojudgedthatthefirst increaseinthetargetfederalfundsratewouldoccurin2012,2013,2014,and2015were,respectively,3,3,7,and6.Inthelowerpanel,eachshadedcircleindicatesthevalue (roundedtothenearest¼percentagepoint)ofanindividualparticipant’sjudgmentoftheappropriatelevelofthetargetfederalfundsrateattheendofthespecifiedcalendar yearoroverthelongerrun.

Minutesof FederalOpenMarketCommitteeMeetings|September 241 was1.7to2.0percent,somewhatlowerthaninJune. encesinparticipants’assessmentsof manyfactors, Manyparticipantscharacterizedtheincomingdata includingappropriatemonetarypolicyanditseffects ashavingbeentotheweaksideof theirexpectations ontheeconomy,therateof improvementinthe atthetimeof theJunemeeting;severalparticipants housingsector,thespillovereffectsof thefiscaland alsocitedtheseveredroughtasafactorcausingthem financialsituationinEurope,theprospectivepathfor tomarkdowntheirprojectionsforeconomicgrowth U.S.fiscalpolicy,theextentof structuraldislocations in2012.However,participants’projectionsfor2013 inthelabormarket,thelikelyevolutionof creditand and2014weregenerallyslightlyhigherthaninJune; financialmarketconditions,andlonger-termtrends thisreflected,inpart,agreaterassumedamountof inproductivityandthelaborforce.Withmuchof the monetarypolicyaccommodationthanintheirJune dataforthefirsteightmonthsof 2012nowinhand, submissionsaswellassomeimprovementsincethen thedispersionof participants’projectionsof real intheoutlookforeconomicactivityinEurope.The GDPgrowthandtheunemploymentratethisyear centraltendencyof participants’projectionsforreal narrowedinSeptembercomparedwithJune.The GDPgrowthin2013was2.5to3.0percent,followed rangeof participants’forecastsforthechangeinreal bycentraltendenciesforboth2014and2015of GDPin2013and2014,however,waslittlechanged 3.0to3.8percent.Thecentraltendencyforthe fromJune,onbalance.Thedistributionof projeclonger-runrateof increaseof realGDPremainedat tionsfortheunemploymentratewasnotmuch 2.3to2.5percent,unchangedfromJune.Whilemost alteredfor2013,whilefor2014itnarrowedabitand participantsnotedthattheincreaseddegreeof mon- shifteddownslightly.Therangefortheunemployetarypolicyaccommodationassumedintheirprojec- mentratefor2015was5.7to6.9percent.AsinJune, tionswouldhelppromoteafasterrecovery,partici- thedispersionof estimatesforthelonger-runrateof pantscitedseveralheadwindsthatwouldbelikelyto outputgrowthwasfairlynarrow,withthevalues holdbackthepaceof economicexpansionoverthe beingmostlyfrom2.2to2.7percent.Therangeof forecastperiod,includingslowergrowthabroad,a participants’estimatesof thelonger-runrateof still-weakhousingmarket,thedifficultfiscaland unemploymentwas5.0to6.3percent,asimilarrange financialsituationinEurope,andfiscalrestraintin tothatinJune;thisrangereflecteddifferentjudgtheUnitedStates. mentsamongparticipantsaboutseveralfactors, includingtheoutlookforlaborforceparticipation Participantsprojectedtheunemploymentrateatthe andthestructureof thelabormarket. endof 2012toremainclosetorecentlevels,witha centraltendencyof 8.0to8.2percent,thesameasin TheOutlookforInflation theirJunesubmissions.Participantsanticipated Participants’viewsonthebroadoutlookforinflation gradualimprovementfrom2013through2015;even undertheassumptionof appropriatemonetary so,theygenerallythoughtthattheunemployment policywerelittlechangedfromJune.For2012asa rateattheendof 2015wouldstillliewellabovetheir whole,mostanticipatedthatoverallinflationwould individualestimatesof itslonger-runnormallevel. beonlyslightlyaboveitsaverageannualrateof Thecentraltendenciesof participants’forecastsfor 1.6percentoverthefirsthalf of theyear;anumber theunemploymentratewere7.6to7.9percentatthe of participantspointedtohigherfoodpricesin endof 2013,6.7to7.3percentattheendof 2014, responsetothedrought,alongwithrecentincreases and6.0to6.8percentattheendof 2015.Thecentral inoilprices,astemporarysourcesof upwardprestendencyof participants’estimatesof thelonger-run sureontheheadlinerate.Almostallparticipants normalrateof unemploymentthatwouldprevail judgedthatbothheadlineandcoreinflationwould undertheassumptionof appropriatemonetary remainsubduedoverthe2013–15period,runningat policyandintheabsenceof furthershockstothe ratesatorbelowtheFOMC’slonger-runobjectiveof economywas5.2to6.0percent,unchangedfrom 2percent.Inpointingtofactorslikelytorestrain June.Mostparticipantsprojectedthatthegap pricepressures,severalparticipantscitedsizable betweenthecurrentunemploymentrateandtheir resourceslackandstableinflationexpectations,while estimatesof itslonger-runnormalratewouldbe afewnotedthesubduedbehaviorof laborcompenclosedinfiveorsixyears,whileafewjudgedthatless sation.Specifically,thecentraltendencyof particitimewouldbeneeded. pants’projectionsforinflation,asmeasuredbythe PCEpriceindex,movedupandtightenedto1.7to Figures3.Aand3.Bprovidedetailsonthediversity 1.8percentfor2012andwaslittlechangedfor2013 of participants’viewsregardingthelikelyoutcomes and2014at1.6to2.0percent.For2015,thecentral forrealGDPgrowthandtheunemploymentrate tendencywas1.8to2.0percent.Thecentraltendenoverthenextthreeyearsandoverthelongerrun. ciesof theforecastsforcoreinflationwerebroadly Thedispersionintheseprojectionsreflectsdiffer-

242 99thAnnualReport|2012 Figure3.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2012–15andoverthelongerrun Number of participants 2012 20 September projections 18 16 June projections 14 12 10 8 6 4 2 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 - 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 Percent range Number of participants 2013 20 18 16 14 12 10 8 6 4 2 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 - 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 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 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 - 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 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 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 - 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 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 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 - 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 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|September 243 Figure3.B.Distributionofparticipants’projectionsfortheunemploymentrate,2012–15andoverthelongerrun Number of participants 2012 20 September projections 18 16 June projections 14 12 10 8 6 4 2 4.8 - 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 - 4.9 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 Percent range Number of participants 2013 20 18 16 14 12 10 8 6 4 2 4.8 - 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 - 4.9 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 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 4.8 - 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 - 4.9 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 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 4.8 - 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 - 4.9 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 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 4.8 - 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 - 4.9 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 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

244 99thAnnualReport|2012 similartothosefortheheadlinemeasurefor2013 aboutthelonger-runequilibriumlevelof therealfedthrough2015. eralfundsrate. Figures3.Cand3.Dprovideinformationaboutthe Participantsalsoprovidedqualitativeinformationon diversityof participants’viewsabouttheoutlookfor theirviewsregardingtheappropriatepathof the inflation.Participants’projectionsforheadlineinfla- FederalReserve’sbalancesheet.Elevenparticipants tionfor2012,whichinJunehadrangedfrom1.2to indicatedthatappropriatepolicywouldinvolvea 2percent,narrowedinSeptembertotherangeof decisionbytheCommittee,attheSeptembermeeting 1.5to1.9percent;aboutthree-fourthsof partici- orsoonthereafter,toundertakesignificantadditional pants’projectionstookvaluesof 1.7to1.8percent, assetpurchases.Severalparticipantsenvisionedthis broadlyinlinewithrecentinflationreadings.Thedis- programasentailingpurchasesof agencymortgagetributionsof participants’projectionsforheadline backedsecurities.Almostallparticipantsassumed inflationin2013and2014wereverysimilartothose that,attheappropriatetime,theCommitteewould forJune,whiletherangeof projectionsforcoreinfla- carryoutthenormalizationof thebalancesheet tionnarrowedslightlyforbothyears.Thedistribu- accordingtotheprinciplesapprovedattheJune2011 tionsforcoreandoverallinflationin2015werecon- FOMCmeeting.Ingeneral,participantslinkedtheir centratedneartheCommittee’slonger-runinflation preferredstartdatesforthenormalizationprocessto objectiveof 2percent. theirviewsfortheappropriatetimingof thefirst increaseinthetargetfederalfundsrate. AppropriateMonetaryPolicy Asindicatedinfigure2,mostparticipantsjudged Thekeyfactorsinformingparticipants’individual thatexceptionallylowlevelsof thefederalfundsrate assessmentsof theappropriatesettingformonetary wouldremainappropriateforseveralmoreyears.In policyincludedtheirjudgmentsregardinglabormarparticular,12participantsthoughtthatthefirst ketconditionsthatwouldbeconsistentwiththe increaseinthetargetfederalfundsratewouldnotbe maximumlevelof employment,theextenttowhich warranteduntil2015,and1viewedastarttofirming employmentcurrentlydeviatedfromthemaximum in2016asappropriate(upperpanel).The12partici- levelof employment,theextenttowhichinflation pantswhoexpectedthatthetargetfederalfundsrate deviatedfromtheCommittee’slonger-termobjective wouldnotmoveaboveitseffectivelowerbounduntil of 2percent,andparticipants’projectionsof the 2015thoughtthefederalfundsratewouldbe1.6per- likelytimehorizonnecessarytoreturnemployment centorlowerattheendof thatyear,whiletheone andinflationtomandate-consistentlevels.Several participantwhoexpectedthatpolicyfirmingwould participantsnotedthattheirassessmentsof approcommencein2016sawthefundsratetargetat priatemonetarypolicyreflectedthesubparpaceof 75basispointsattheendof thatyear.Sixpartici- labormarketimprovementandthepersistentshortpantsjudgedthatpolicyfirmingin2012,2013,or fallof outputfrompotentialsincethe2007–09reces- 2014wouldbeconsistentwiththeCommittee’sstatu- sion.Afewparticipantsnotedthattheirsettingsof torymandate.Thoseparticipantsjudgedthatthe appropriatefederalfundsratepolicytookinto appropriatevalueforthefederalfundsratewould accountunusualfactorsprevailinginrecentyears, rangefrom1½to3percentattheendof 2014and suchasthelikelihoodthattheneutrallevelof the from2½to4½percentattheendof 2015.Intotal, federalfundsratewassomewhatbelowitshistorical 14participantsjudgedthatappropriatemonetary normandthefactthatpolicyratesettinghadbeen policycalledforamore-accommodativepathforthe constrainedbytheeffectivelowerboundonnominal federalfundsratethanintheirJunesubmissions, interestrates.Twoparticipantsexpressedconcern involvingeitheralowertargetforthefederalfunds thataprotractedperiodof veryaccommodative rateattheendof theinitialyearof policyfirming,or monetarypolicycouldleadtoimbalancesinthe ashiftoutinthefirstyearof firming. financialsystem.Participantsalsonotedthatbecause theappropriatestanceof monetarypolicyiscondi- Allparticipantsreportedlevelsfortheappropriate tionalontheevolutionof realactivityandinflation targetfederalfundsrateattheendof 2014thatwere overtime,theirassessmentsof theappropriatefuture wellbelowtheirestimatesof thelevelexpectedto pathof thefederalfundsrateandthebalancesheet prevailinthelongerrun,andmostsawtheappropri- couldchangeif economicconditionsweretoevolve atetargetfederalfundsrateasstillwellbelowits inanunexpectedmanner. longer-runvalueattheendof 2015.Estimatesof the longer-runtargetfederalfundsraterangedfrom3to Figure3.Edetailsthedistributionof participants’ 4½percent,reflectingtheCommittee’sinflation judgmentsregardingtheappropriatelevelof thetarobjectiveof 2percentandparticipants’judgments getfederalfundsrateattheendof eachcalendaryear

Minutesof FederalOpenMarketCommitteeMeetings|September 245 Figure3.C.Distributionofparticipants’projectionsforPCEinflation,2012–15andoverthelongerrun Number of participants 2012 20 September projections 18 16 June projections 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2013 20 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

246 99thAnnualReport|2012 Figure3.D.Distributionofparticipants’projectionsforcorePCEinflation,2012–15 Number of participants 2012 20 September projections 18 June projections 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2013 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|September 247 Figure3.E.Distributionofparticipants’projectionsforthetargetfederalfundsrate,2012–15andoverthelongerrun Number of participants 2012 September projections June projections 1 2 8 0 16 14 12 10 8 6 4 2 0.0 0 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 4.3 8 - 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 Percent range Number of participants 2013 20 18 16 14 12 10 8 6 4 2 0.0 0 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 4.3 8 - 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 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 0.0 0 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 4.3 8 - 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 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 0.0 0 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 4.3 8 - 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 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 0.0 0 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 4.3 8 - 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 Percent range Note:Thetargetfederalfundsrateismeasuredasthelevelofthetargetrateattheendofthecalendaryearorinthelongerrun.

248 99thAnnualReport|2012 from2012to2015andoverthelongerrun.Asprevi- Table2.Averagehistoricalprojectionerrorranges ouslynoted,mostparticipantsjudgedthateconomic Percentagepoints conditionswouldwarrantmaintainingthecurrent lowlevelof thefederalfundsratethroughtheendof Variable 2012 2013 2014 2015 2014.Viewsontheappropriatelevelof thefederal ChangeinrealGDP1 ±0.6 ±1.4 ±1.7 ±1.7 fundsrateattheendof 2015weremorewidelydis- Unemploymentrate1 ±0.2 ±0.9 ±1.5 ±1.9 persed,with10participantsseeingtheappropriate Totalconsumerprices2 ±0.5 ±0.9 ±1.1 ±1.0 levelof thefederalfundsrateas1percentorlower Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared and6of themseeingtheappropriaterateas2½pererrorofprojectionsfor1992through2011thatwerereleasedinthefallby centorhigher.Thosewhojudgedthatalonger variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast Uncertainty,”undercertainassumptions,thereisabouta70percentprobability periodof veryaccommodativemonetarypolicy thatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein wouldbeappropriategenerallywereparticipants rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Further informationmaybefoundinDavidReifschneiderandPeterTulip(2007),“Gauging whoprojectedasizablegapbetweentheunemploytheUncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,” mentrateandthelonger-runnormallevelof the FinanceandEconomicsDiscussionSeries2007-60(Washington:Boardof GovernorsoftheFederalReserveSystem,November). unemploymentrateuntil2015orlater.Incontrast, 1 Definitionsofvariablesareinthegeneralnotetotable1. the6participantswhojudgedthatpolicyfirming 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen shouldbeginin2012,2013,or2014indicatedthatthe mostwidelyusedingovernmentandprivateeconomicforecasts.Projection ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof Committeewouldneedtoactrelativelysooninorder theyearindicated. tokeepinflationneartheFOMC’slonger-runobjectiveof 2percentandtopreventariseininflation expectations. outputarosefromtheriskthatcontinuationof long- UncertaintyandRisks termunemploymentmightimpairtheskilllevelof Nearlyallparticipantsjudgedthattheircurrentlevel thelaborforceorcausesomeworkerstoretireearlier of uncertaintyaboutrealGDPgrowthandunem- thanwouldotherwisehavebeenthecase,thereby ploymentwashigherthanwasthenormduringthe reducingpotentialoutputinthemediumterm. previous20years(figure4).5Eightparticipants judgedthelevelof uncertaintyassociatedwiththeir Amajorityof participantsreportedthattheysawthe forecastsof totalPCEinflationtobehigheraswell, riskstotheirforecastsof realGDPgrowthas whileanother10participantsvieweduncertainty weightedtowardthedownsideand,accordingly,the aboutinflationasbroadlysimilartohistoricalnorms. riskstotheirprojectionsof theunemploymentrate Themainfactorscitedascontributingtotheelevated astiltedtotheupside.Themostfrequentlyidentified uncertaintyabouteconomicoutcomeswerethe sourcesof riskwerethesituationinEurope,which ongoingfiscalandfinancialsituationinEurope,the manyparticipantsthoughthadthepotentialtoslow outlookforfiscalpolicyintheUnitedStates,anda globaleconomicactivityfurther,particularlyoverthe generalslowdowninglobaleconomicgrowth,includ- nearterm,andissuesassociatedwithfiscalpolicyin ingthepossibilityof asignificantslowdownin theUnitedStates. China.AsinJune,participantsnotedthedifficulties associatedwithforecastingthepathof theU.S.eco- Mostparticipantscontinuedtojudgetherisksto nomicrecoveryfollowingafinancialcrisisandrecestheirprojectionsforinflationasbroadlybalanced, sionthatdifferedmarkedlyfromrecenthistorical withseveralhighlightingtherecentstabilityof inflaexperience.Anumberof participantscommented tionexpectations.However,fourparticipantssawthe thatintheaftermathof thefinancialcrisis,theywere riskstoinflationastiltedtothedownside,witha moreuncertainaboutthelevelof potentialoutput coupleof themnotingthatslackinresourcemarkets anditsrateof growth.Acoupleof participants couldturnouttobegreaterthantheywereanticipatnotedthatsomeof theuncertaintyaboutpotential ing.Threeparticipantssawtheriskstoinflationas weightedtotheupsideinlightof concernsabout 5 Table2providesestimatesoftheforecastuncertaintyforthe U.S.fiscalimbalances,thecurrenthighlyaccommochangeinrealGDP,theunemploymentrate,andtotalconsumerpriceinflationovertheperiodfrom1991to2011.Atthe dativestanceof monetarypolicy,anduncertainty endofthissummary,thebox“ForecastUncertainty”discusses abouttheCommittee’sabilitytoshifttoaless thesourcesandinterpretationofuncertaintyintheeconomic accommodativepolicystancewhenitbecomes forecastsandexplainstheapproachusedtoassesstheuncertaintyandrisksattendingtheparticipants’projections. appropriatetodoso.

Minutesof FederalOpenMarketCommitteeMeetings|September 249 Figure4.Uncertaintyandrisksineconomicprojections Number of participants Number of participants Uncertainty about GDP growth 20 Risks to GDP growth 20 September projections 18 September projections 18 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 20 Risks to the unemployment rate 20 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 20 Risks to PCE inflation 20 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 20 Risks to core PCE inflation 20 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.

250 99thAnnualReport|2012 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers 70percentconfidenceintervalsforoverallinflation oftheBoardofGovernorsandthepresidentsofthe wouldbe1.5to2.5percentinthecurrentyear,1.1to FederalReserveBanksinformdiscussionsofmon- 2.9percentinthesecondyear,0.9to3.1percentin etarypolicyamongpolicymakersandcanaidpublic thethirdyear,and1.0to3.0percentinthefourth understandingofthebasisforpolicyactions.Con- year. siderableuncertaintyattendstheseprojections,how- Becausecurrentconditionsmaydifferfromthose ever.Theeconomicandstatisticalmodelsandrelathatprevailed,onaverage,overhistory,participants tionshipsusedtohelpproduceeconomicforecasts providejudgmentsastowhethertheuncertainty arenecessarilyimperfectdescriptionsofthereal attachedtotheirprojectionsofeachvariableis world,andthefuturepathoftheeconomycanbe greaterthan,smallerthan,orbroadlysimilartotypiaffectedbymyriadunforeseendevelopmentsand callevelsofforecastuncertaintyinthepast,as events.Thus,insettingthestanceofmonetary shownintable2.Participantsalsoprovidejudgments policy,participantsconsidernotonlywhatappearsto astowhethertheriskstotheirprojectionsare bethemostlikelyeconomicoutcomeasembodiedin weightedtotheupside,areweightedtothedowntheirprojections,butalsotherangeofalternative side,orarebroadlybalanced.Thatis,participants possibilities,thelikelihoodoftheiroccurring,andthe judgewhethereachvariableismorelikelytobe potentialcoststotheeconomyshouldtheyoccur. aboveorbelowtheirprojectionsofthemostlikely Table2summarizestheaveragehistoricalaccuracy outcome.Thesejudgmentsabouttheuncertainty ofarangeofforecasts,includingthosereportedin andtherisksattendingeachparticipant’sprojections pastMonetaryPolicyReportsandthosepreparedby aredistinctfromthediversityofparticipants’views theFederalReserveBoard’sstaffinadvanceof aboutthemostlikelyoutcomes.Forecastuncertainty meetingsoftheFederalOpenMarketCommittee. isconcernedwiththerisksassociatedwithaparticu- Theprojectionerrorrangesshowninthetableillus- larprojectionratherthanwithdivergencesacrossa tratetheconsiderableuncertaintyassociatedwith numberofdifferentprojections. economicforecasts.Forexample,supposeapartici- Aswithrealactivityandinflation,theoutlookforthe pantprojectsthatrealgrossdomesticproduct(GDP) futurepathofthefederalfundsrateissubjecttoconandtotalconsumerpriceswillrisesteadilyatannual siderableuncertainty.Thisuncertaintyarisesprimarily ratesof,respectively,3percentand2percent.Ifthe becauseeachparticipant’sassessmentoftheapprouncertaintyattendingthoseprojectionsissimilarto priatestanceofmonetarypolicydependsimportantly thatexperiencedinthepastandtherisksaroundthe ontheevolutionofrealactivityandinflationover projectionsarebroadlybalanced,thenumbers time.Ifeconomicconditionsevolveinanunexpected reportedintable2wouldimplyaprobabilityofabout manner,thenassessmentsoftheappropriatesetting 70percentthatactualGDPwouldexpandwithina ofthefederalfundsratewouldchangefromthat rangeof2.4to3.6percentinthecurrentyear,1.6to pointforward. 4.4percentinthesecondyear,and1.3to4.7percent inthethirdandfourthyears.Thecorresponding

Minutesof FederalOpenMarketCommitteeMeetings|October 251 Meeting Held ThomasC.Baxter DeputyGeneralCounsel on October 23–24, 2012 StevenB.Kamin Ameetingof theFederalOpenMarketCommittee Economist washeldintheofficesof theBoardof Governorsof DavidW.Wilcox theFederalReserveSysteminWashington,D.C.,on Economist Tuesday,October23,2012,at1:00p.m.andcontinuedonWednesday,October24,2012,at9:00a.m. DavidAltig,ThomasA.Connors,MichaelP.Leahy, WilliamNelson,DavidReifschneider, Present MarkS.Sniderman,andWilliamWascher AssociateEconomists BenBernanke Chairman SimonPotter Manager,SystemOpenMarketAccount WilliamC.Dudley ViceChairman MichaelS.Gibson Director,Divisionof BankingSupervisionand ElizabethDuke Regulation,Boardof Governors JeffreyM.Lacker JamesA.Clouse DennisP.Lockhart DeputyDirector,Divisionof MonetaryAffairs, Boardof Governors SandraPianalto AndreasLehnert JeromeH.Powell DeputyDirector,Officeof FinancialStabilityPolicy SarahBloomRaskin andResearch,Boardof Governors JeremyC.Stein LindaRobertson AssistanttotheBoard,Officeof BoardMembers, DanielK.Tarullo Boardof Governors JohnC.Williams ThomasLaubach JanetL.Yellen SeniorAdviser,Divisionof ResearchandStatistics, Boardof Governors JamesBullard,CharlesL.Evans, EstherL.George,andEricRosengren EllenE.Meade,StephenA.Meyer,and AlternateMembersof theFederalOpenMarket JoyceK.Zickler Committee SeniorAdvisers,Divisionof MonetaryAffairs, Boardof Governors RichardW.Fisher,NarayanaKocherlakota,and CharlesI.Plosser EricM.Engen,MichaelT.Kiley,and Presidentsof theFederalReserveBanksof Dallas, MichaelG.Palumbo Minneapolis,andPhiladelphia,respectively AssociateDirectors,Divisionof Researchand Statistics,Boardof Governors WilliamB.English SecretaryandEconomist JoshuaGallin DeputyAssociateDirector,Divisionof Researchand DeborahJ.Danker Statistics,Boardof Governors DeputySecretary MarnieGillisDeBoer MatthewM.Luecke AssistantDirector,Divisionof MonetaryAffairs, AssistantSecretary Boardof Governors DavidW.Skidmore DavidH.Small AssistantSecretary ProjectManager,Divisionof MonetaryAffairs, Boardof Governors MichelleA.Smith AssistantSecretary JeremyB.Rudd ScottG.Alvarez SeniorEconomist,Divisionof Researchand Statistics,Boardof Governors GeneralCounsel

252 99thAnnualReport|2012 HelenE.Holcomb economicconditionsandtheoutlook.Accordingly, FirstVicePresident,FederalReserveBankof Dallas thresholdscouldincreasetheprobabilitythatmarket reactionstoeconomicdevelopmentswouldmove Jeff FuhrerandLorettaJ.Mester longer-terminterestratesinamannerconsistentwith ExecutiveVicePresidents,FederalReserveBanksof theCommittee’sviewregardingthelikelyfuturepath BostonandPhiladelphia,respectively of short-termrates.Anumberof otherparticipants TroyDavig,SpencerKrane,andKevinStiroh judgedthatcommunicatingacarefulqualitative SeniorVicePresidents,FederalReserveBanksof descriptionof theindicatorsinfluencingtheCom- KansasCity,Chicago,andNewYork,respectively mittee’sthinkingaboutcurrentandfuturemonetary policy,orprovidingmoreinformationaboutthe WilliamGavin,EvanF.Koenig, Committee’spolicyreactionfunction,wouldbemore LorieK.Logan,andPaoloA.Pesenti informativethaneitherquantitativethresholdsor VicePresidents,FederalReserveBanksof St.Louis, date-basedforwardguidance.Severalparticipants Dallas,NewYork,andNewYork,respectively wereconcernedthatquantitativethresholdscould ThomasD.Tallarini,Jr. confusethepublicbygivingtheimpressionthatthe AssistantVicePresident,FederalReserveBankof FOMCfocusesonasmallnumberof economicvari- Minneapolis ablesinsettingmonetarypolicy,whentheCommittee infactusesawiderangeof information.Someother AndreasL.Hornstein participantsworriedthatthepublicmightmistakenly SeniorAdvisor,FederalReserveBankof Richmond interpretquantitativethresholdsasequivalenttothe EricT.Swanson Committee’slonger-runobjectivesorastriggersthat, SeniorResearchAdvisor,FederalReserveBankof whenreached,wouldpromptanimmediaterate SanFrancisco increase;butitwasnotedthattheChairman’spostmeetingpressconferenceandothervenuescouldbe Thresholds and Forward Guidance usedtoexplainthedistinctionbetweenthresholds andtheseotherconcepts. Astaff presentationfocusedonthepotentialeffects of usingspecificthresholdvaluesof inflationandthe ParticipantsgenerallyagreedthattheCommittee unemploymentratetoprovideforwardguidance wouldneedtoresolveanumberof practicalissues regardingthetimingof theinitialincreaseinthefed- beforedecidingwhethertoadoptquantitativethresheralfundsrate.Thepresentationreviewedsimula- oldstocommunicateitsthinkingaboutthetimingof tionsfromastaff macroeconomicmodeltoillustrate theinitialincreaseinthefederalfundsrate.These theimplicationsforpolicyandtheeconomyof issuesincludedwhethertospecifysuchthresholdsin announcingvariousthresholdvaluesthatwouldneed termsof realizedorprojectedvaluesof inflationand tobeattainedbeforetheFederalOpenMarketCom- theunemploymentrateand,ineithercase,whatvalmittee(FOMC)wouldconsiderincreasingitstarget uesforthosethresholdswouldbestbalancetheComforthefederalfundsrate.Meetingparticipantsdis- mittee’sobjectivesof promotingmaximumemploycussedwhethersuchthresholdsmightusefully mentandpricestability.Anotheropenquestionwas replaceorperhapsaugmentthedate-basedguidance whethertosupplementthresholdsexpressedinterms thathadbeenprovidedinthepolicystatementssince of theunemploymentrateandinflationwithaddi- August2011.Participantsgenerallyfavoredtheuse tionalindicatorsof economicandfinancialcondiof economicvariables,inplaceof orinconjunction tionsthatmightsignalaneedeithertoraisethefedwithacalendardate,intheCommittee’sforward eralfundsratebeforeathresholdiscrossedorto guidance,buttheyoffereddifferentviewsonwhether delayuntilwellafterward.Afinalquestionwas quantitativeorqualitativethresholdswouldbemost whetherthestatementshouldalsoprovideforward effective.Manyparticipantswereof theviewthat guidanceaboutthelikelypathof thefederalfunds adoptingquantitativethresholdscould,underthe rateaftertheinitialincrease.Itwasnotedthatsuch rightconditions,helptheCommitteemoreclearly guidancecouldhavesignificanteffectsonfinancial communicateitsthinkingabouthowthelikelytiming conditionsandtheeconomy.Attheconclusionof of aneventualincreaseinthefederalfundsrate thediscussion,theChairmanaskedthestaff toprowouldshiftinresponsetounanticipatedchangesin

Minutesof FederalOpenMarketCommitteeMeetings|October 253 videadditionalbackgroundmaterial,takinginto manufacturingsurveys,remainedsubduedinrecent accounttherangeof participants’views. monthsatlevelsconsistentwithonlytepidincreases inmanufacturingoutputinthenearterm. Developments in Financial Markets and the Federal Reserve’s Balance Sheet Realpersonalconsumptionexpendituresroseata solidpaceinAugust.InSeptember,nominalretail TheManagerof theSystemOpenMarketAccount sales,excludingpurchasesatmotorvehicleandparts (SOMA)reportedondevelopmentsindomesticand outlets,increasedconsiderably.Lightmotorvehicle foreignfinancialmarketsduringtheperiodsincethe salesalsoexpanded.Recentdataonfactorsthattend FOMCmetonSeptember12–13,2012.TheMan- tosupporthouseholdspendingweremixed.RealdisageralsoreportedonSystemopenmarketoperations posableincomedeclinedinAugust,largelyreflecting overtheintermeetingperiod,focusingontheongo- theeffectof higherconsumerenergyprices.Inconingreinvestmentintoagency-guaranteedmortgage- trast,consumersentimentroseinSeptemberand backedsecurities(MBS)of principalpayments earlyOctober,andcontinuedmodestincreasesin receivedonSOMAholdingsof agencydebtand housepricesaddedtohouseholds’networth. agency-guaranteedMBSandthepurchasesof MBS authorizedattheSeptemberFOMCmeeting.By Housingmarketconditionsimprovedmoregenerally unanimousvote,theCommitteeratifiedtheDesk’s inrecentmonths.Startsandpermitsof bothnew domestictransactionsovertheintermeetingperiod. single-familyhomesandmultifamilyunitspickedup Therewerenointerventionoperationsinforeigncur- inAugustandSeptember.However,construction renciesfortheSystem’saccountovertheintermeet- activityremainedatarelativelylowlevel,reflecting ingperiod. therestraintimposedbytightcreditstandardsfor mortgageborrowingandbythelargeinventoryof Staff Review of the Economic Situation foreclosedanddistressedproperties.Salesof existing homescontinuedtoexpand,onbalance,inrecent TheinformationreviewedattheOctober23–24meet- months,butnewhomesaleswereflat. ingsuggestedthateconomicactivitycontinuedto increaseatamoderatepaceinrecentmonths.The Realbusinessexpendituresonequipmentandsoftunemploymentratedeclinedbutwasstillelevated. wareappearedtoedgedowninthethirdquarter. Consumerpriceinflationpickedup,reflectinghigher Nominalshipmentsfornondefensecapitalgoods consumerenergycosts,butlonger-runinflation excludingaircraftcontinuedtodecreaseinAugust; expectationsremainedstable. thebacklogof unfilledordersforthesecapitalgoods alsodeclined.Otherforward-lookingindicators,such Privatenonfarmemploymentexpandedmodestlyin assubduedreadingsfromsurveysof businesscondi- September,andgovernmentemploymentincreased. tionsandcapitalspendingplans,alsopointedtoward Theunemploymentratefellto7.8percent,andthe roughlyflatrealexpendituresforbusinessequipment laborforceparticipationrateroseslightly.Theshare inthenearterm.Nominalbusinessspendingfornew of workersemployedparttimeforeconomicreasons nonresidentialconstructiondecreasedfurtherin increasedsomewhatandcontinuedtobeelevated, August.Meanwhile,inventoriesinmostindustries whiletherateof long-durationunemploymentedged wereaboutinlinewithsales.Inthefarmsector,howdownfurtherbutremainedhigh.Otherindicatorsof ever,droughtconditionslikelyreducedinventory labormarketconditions,suchassurveysof firms’ accumulationlastquarterandsubtractedfromoverjobopeningsandhiringplansandinitialclaimsfor alleconomicgrowth. unemploymentinsurance,didnotshowdecided improvementovertheintermeetingperiod. Realfederalgovernmentpurchasesappearedtoedge upinthethirdquarter,asdatafornominalfederal Manufacturingproductiondeclinedinthethird spendinginAugustandSeptemberpointedtoa quarter,andtherateof manufacturingcapacityutili- slightincreaseinrealdefenseexpenditures.Realstate zationedgeddown.Automakers’schedulespointed andlocalgovernmentpurchaseslikelymovedessentoasimilarrateof motorvehicleassembliesinthe tiallysidewaysinthethirdquarter.Stateandlocal fourthquarterasinthethirdquarter.Broaderindica- governmentpayrollsexpanded,butnominalcontorsof factoryproduction,suchasthediffusion structionspendingcontinuedtodeclineinrecent indexesof newordersfromthenationalandregional months.

254 99thAnnualReport|2012 TheU.S.internationaltradedeficitwidenedin Staff Review of the Financial Situation August,asimportsfelllessthanexports.Imports edgeddown,onnet,withhigherpurchasesof ser- MarketparticipantsreportedlyreadtheSeptember vicesandpetroleumproductsmorethanoffsetby FOMCstatementaspointingtoasignificant declinesinallof theothermajorcategories.Across increaseinmonetarypolicyaccommodation.Asa exportcategories,exportsof industrialsupplies result,financialconditionsgenerallyeasedappreciapostedaparticularlylargedecline,asthevolumeof blyearlyintheintermeetingperiod.However,toward petroleumproductexportsdroppedsharply. theendof theperiodinvestorsentimentdeteriorated somewhat,inpartbecauseof concernsaboutcorpo- ConsumerpricespickedupinAugustandSeptem- rateprofitability. ber,primarilyreflectingsharpincreasesinretailgasolineprices.However,surveydataindicatedthatretail Short-andmedium-termnominalTreasuryyields gasolinepriceswereaboutflatinearlyOctober.Con- endedtheintermeetingperiodupslightly,andlongsumerfoodpricesrosemodestlyinrecentmonths. termyieldswereaboutunchangedonnet.Atthe Thesomewhatbetter-than-expectedcropharvest sametime,realyieldsonTreasuryinflation-protected causedspotandfuturespricesof farmcommodities securities(TIPS)decreasedsomewhat,leavinginflatoretracesomeof theirriseduringthesummer;how- tioncompensationhigher.Inpart,theriseininflaever,farmcommoditypricesremainedelevatedand tioncompensationmayhavereflectedupwardprescontinuedtopointtowardsometemporaryupward sureonnominalTreasuryyieldsassociatedwithsome pressuresonretailfoodpriceslaterthisyear. unwindingof safe-havendemands. Increasesinconsumerpricesexcludingfoodand energyweresubduedinAugustandSeptember. Theexpectedpathof thefederalfundsratebasedon Near-terminflationexpectationsfromtheThomson moneymarketfutureswaslittlechangedbetweenthe Reuters/Universityof MichiganSurveysof Consum- SeptemberandOctoberFOMCmeetings.MarketersdeclinedinSeptemberandearlyOctober,while basedmeasuresof uncertaintyaboutthepathof the longer-terminflationexpectationsinthesurvey federalfundsrateovermedium-to-longhorizons moveddowntonearthelowerendof thenarrow declinedovertheperiod.Thesurveyof primarydealrangewheretheyhaveremainedforsometime. ersconductedpriortotheOctobermeetingshowed thattheexpectedsizeof theSOMAattheendof Availablemeasuresof laborcompensationindicated 2013hadrisensignificantly. thatincreasesinnominalwagesstayedrelatively modest.Thegainsinaveragehourlyearningsforall Indicatorsof theconditionof domesticfinancial employeesinthethirdquarterweresubdued. institutionsweremixedovertheintermeetingperiod. Indexesof equitypricesforthoseinstitutionswere Foreigneconomicgrowthremainedsluggish, modestlylower.Butspreadsoncreditdefaultswaps restrainedbyweakactivityinEuropeandtheassoci- forlargefinancialinstitutionsdeclinedinrecent atedspillovers—includingthroughtrade—totherest months,andthird-quarterearningsof largebank of theworld.Euro-areaproductionindicatorssig- holdingcompaniesthathadreportedbythetimeof naledcontinuedcontraction,andthearea’sunem- theFOMCmeetingweregenerallyinlinewith ploymentrateinAuguststayedatahistoricalhigh. expectations. InJapan,exportsandoutputdeclinedinthesummer months,andgrowthof realgrossdomesticproduct Conditionsinunsecureddollarfundingmarkets (GDP)forthefirsthalf of theyearwasreviseddown appearedtoimprovesome.Insecuredfundingmarsignificantly.Dataforexportsfromemergingmarket kets,ratesonrepurchaseagreementsspikedaround economies,especiallyinAsia,showedadrop, quarter-endbutsubsequentlymorethanretraced althoughrecentlyreleaseddataforChinaindicateda thatmove,endingtheintermeetingperioddown pickupineconomicactivityinthethirdquarter.For- slightly. eigninflationroseslightlyinsomeemergingmarket economiesinresponsetohigherfoodpricesbutwas Broadequitypriceindexeswerealittlelower,onbalstillgenerallywellcontained.Monetarypolicy ance,asgainsfollowingtheSeptemberFOMCmeetremainedaccommodativeinmostadvancedand ingandgenerallybetter-than-expectedeconomicdata emergingmarketeconomies. releasesweremorethanoffsetbyconcernsaboutcor-

Minutesof FederalOpenMarketCommitteeMeetings|October 255 porateprofitability.Option-impliedvolatilityforthe mentedbylargergainsinsecuritiesholdings.Results S&P500indexfellnoticeablyfollowingtheSeptem- fromtheOctoberSeniorLoanOfficerOpinionSurberFOMCmeetingbutincreased,onnet,overthe veyonBankLendingPracticesindicatedthatmodest intermeetingperiod. fractionsof domesticbanks,onnet,continuedto reporthavingeasedtheirlendingstandardsonsome Yieldsoninvestment-gradecorporatebondsreached categoriesof businessandhouseholdloans.Inaddiarecordlowlevel,andtheirspreadstoyieldson tion,forthesecondstraightquarter,reportsof comparable-maturityTreasurysecuritiesnarrowed strongerdemandwererelativelywidespreadformany onnet.Yieldsandspreadsonspeculative-gradecor- typesof loans. poratebondsalsodecreased. M2growthpickedupsomewhatinSeptember,as Thepaceof investment-andspeculative-gradebond stronggrowthinliquiddepositsandcurrencyoffset issuancebynonfinancialfirmspickedupsignifi- ongoingdeclinesinsmalltimedepositsandretail cantlyinSeptemberfromthealreadyrobustpacein moneymarketfunds. previousmonths.Inthesyndicatedleveragedloan market,issuancethroughthefirstthreequartersof Thestaff’sbroadnominalindexof theforeign 2012laggedthatof thesameperiodin2011but exchangevalueof thedollarwaslittlechanged,on nonethelessremainedsolid.Thepaceof grosspublic net,overtheintermeetingperiod.Thedollarrose equityissuancebynonfinancialfirmsmovedupsome againstthecurrenciesof mostadvancedeconomies inSeptemberfromthesubduedlevelsobservedin butdeclinedagainsttheeuroandmostAsianemergpriormonths,butoverallissuanceinthethirdquar- ingmarketcurrencies.Of note,theChineserenminbi terstayedlowcomparedwiththefirsthalf of 2012. appreciatedfurtheragainstthedollar.Anumberof centralbankseasedmonetarypolicyduringthe Financialconditionsinthecommercialrealestate period,includingthoseof Australia,Brazil,Japan, sectorremainedweakamidelevatedvacancyand Korea,andThailand.Foreignequityindexes,which delinquencyrates.However,someindicatorspointed generallyrosefollowingtheSeptemberFOMCstatetomodestimprovementinthissector,andissuanceof ment,endedtheintermeetingperiodhigherinmost commercialmortgage-backedsecuritieswassolidin markets,althoughstockpricesintheeuroareawere thethirdquarter. downonnet.Ten-yearsovereignyieldsinGermany andtheUnitedKingdommoveddownjustafew Residentialmortgageratesdeclinedovertheinter- basispoints.Afterdecliningsignificantlybetween meetingperiod.Thedeclineinmortgagerates lateJulyandearlySeptember,theyieldspreadof reflectedasizabledropinMBSyieldsfollowingthe 10-yearsovereigndebtinItalyovercomparableGer- SeptemberFOMCstatement.Refinancingactivity manbundsdeclinedonlyslightlyfurtheroverthe increasedfurtherinSeptemberandearlyOctober. intermeetingperiod,andtheSpanishsovereign Housepricescontinuedtorise,andsomeindicators spreadedgedup. of creditqualityonresidentialrealestateloans improved.Thefractionof seriouslydelinquentexist- Staff Economic Outlook ingmortgagesremainedelevated,buttherateat whichmortgagesentereddelinquencycontinuedto Intheeconomicforecastpreparedbythestaff forthe trenddowninJuly. OctoberFOMCmeeting,realGDPgrowthinthe neartermwasreviseduprelativetothepreviouspro- ConsumercreditexpandedbrisklyinAugust.Nonre- jection.Theupwardrevisiontothenear-termforevolvingcreditcontinuedtoincreaseatarobustpace, castprimarilyreflectedbetter-than-expectedincommainlyreflectinggrowthinstudentandautoloans. inginformationforconsumerspending,residential RevolvingcreditalsoroseinAugustbutwaslittle construction,andlabormarketconditionsthatmore changed,onbalance,overthepastfewmonths. thanoffsettherecentdataforbusinessfixedinvest- Delinquencyratesforconsumercreditremainedlow, mentandindustrialproductionthatwereweaker andissuanceof consumerasset-backedsecuritieswas thananticipated.Thestaff’smedium-termprojection stronginthethirdquarter,closetothepaceseenear- forrealGDPgrowthalsowasrevisedup,mostly lierthisyear. reflectingthemonetarypolicyactionsannouncedby theFOMCaftertheSeptembermeetingandthe Bankcreditcontinuedtoexpandatamoderaterate resultingimprovedoutlookforfinancialconditions. inthethirdquarter,withfurthergrowthinloansaug- Nonetheless,withfiscalpolicyassumedtobetighter

256 99thAnnualReport|2012 nextyearthanthisyear,thestaff anticipatedthatreal providesupportfortherecoveryintheperiodahead. GDPgrowthwouldnotmateriallyexceedincreasesin However,manyparticipantssawtheuncertainty potentialoutputin2013.In2014,economicactivity attendingtheunresolvedU.S.fiscalsituationandthe wasprojectedtoaccelerategradually,supportedbya ongoingfiscalandfinancialstrainsintheeuroarea lesseninginfiscalpolicyrestraint,gainsinconsumer asfactorslikelytorestrainthepaceof economic andbusinessconfidence,furtherimprovementsin growthincomingmonths.Moreover,manyparticifinancialconditionsandcreditavailability,and pantscitedsignificantdownsideriskstotheoutlook accommodativemonetarypolicy.Progressinreduc- thatmightarisefrommorewidespreadweaknessin ingunemploymentovertheprojectionperiodwas globaleconomicactivityoranintensificationof expectedtoberelativelyslow. strainsinglobalfinancialmarkets.Regardinginflation,therecentrun-upinconsumerenergypriceswas Thestaff’snear-termforecastforinflationwaslittle expectedtosubsideoverthenextfewmonths,while changed,onbalance,fromtheprojectionprepared theeffectsof thedroughtwerelikelytoshowthrough fortheSeptemberFOMCmeeting,notwithstanding toretailfoodprices.Overthemediumterm,most recentincreasesinconsumerenergyprices.The participantsanticipatedthatinflationwouldrunat staff’sprojectionforinflationoverthemediumterm orbelowtheCommittee’s2percentobjective. wasalsoessentiallyunchanged.Crudeoilpriceswere anticipatedtodeclineslowlyfromtheircurrentlevels, Concerningdevelopmentsinthehouseholdsector, theboosttoretailfoodpricesfromthedroughtwas participantsobservedthattherecentnewsonconexpectedtobeonlytemporaryandrelativelysmall, sumerspendingandconfidencehadbeenpositive, long-runinflationexpectationswereassumedto withsurveysreportingthathouseholdshadbecome remainstable,andsignificantresourceslackwaspro- noticeablymoreoptimisticabouttheoutlookfor jectedtopersistovertheprojectionperiod.Asa unemploymentandincome.Salesof motorvehicles result,thestaff continuedtoforecastthatinflation remainedanareaof strength,inpartduetofavorwouldbesubduedthrough2014. ablecreditconditions.Theincreaseinconsumer spendingappearedtoberelativelybroadlybased Participants’ Views on Current Conditions acrossthecountry,althoughretailersinafewareas and the Economic Outlook reportedthattheyhadseenslowersalesrecentlyand expressedconcernsaboutthenear-termoutlook. Intheirdiscussionof theeconomicsituationandthe Amongthefactorsmentionedthatmightsupport outlook,meetingparticipantsviewedtheinformation consumerconfidenceandacontinuationof the receivedsincetheCommitteemetinSeptemberas somewhatstrongerpaceof spendingwerean indicatingthateconomicactivitycontinuedto expecteddeclineinretailenergypricesandcontinued expandatamoderatepace.Employmentwasstillris- gradualimprovementinlabormarketconditions.In ingslowly,andtheunemploymentrateremained addition,lowermortgagerateshadspurredarisein elevated.Householdspendingadvancedmore refinancingactivity,which,alongwiththeincreases quicklyinrecentmonthsthanduringthespring,and inhouseholdwealthattributabletohigherhomevalhousingactivityshowedfurthersignsof improve- uesandequityprices,wouldprovidesupportforconment.However,businessfixedinvestmentslowed sumerspendinggoingforward. noticeably.Inflationrecentlypickedupsomewhat, reflectinghigherenergyprices,whilelonger-runinfla- Participantsgenerallyagreedthatarecoveryinhoustionexpectationsremainedstable. ingactivitynowappearedtobeunderway,citing increasesinhouseprices,sales,andconstructionin Participantsgenerallysawtheeconomicoutlookas manyareas.Mostsawthelowlevelsof mortgage littlechanged,onbalance,fromtheirprojectionspre- interestratesasanimportantfactorcontributingto paredfortheSeptemberSummaryof EconomicPro- increasedhousingdemand.Althoughtherecoveryin jections(SEP),agreeingthatthepaceof theeco- thehousingsectorappearedtobetakinghold,sevnomicrecoverywaslikelytostaymoderateovercom- eralparticipantscitedobstaclestomorerapid ingquarters.Therecentnewsonhousehold improvement.Forexample,severalparticipants spending,consumersentiment,andthehousingmar- reportedthatlenders’capacityforprocessinghomeketwasencouraging,andmostparticipantsexpected purchasemortgageswastightandbacklogswere thathighlyaccommodativemonetarypolicywould long,inpartduetothecurrentheavypaceof refi-

Minutesof FederalOpenMarketCommitteeMeetings|October 257 nancings.Theseparticipantsalsonotedthatunder- joblessness.Severalpointedtoasteepdropinthe writingstandardsremainedquitetight,particularly indexof hiringplansbysmallbusinesses.Acoupleof forborrowerswithlowercreditquality. participantsmentionedthatsomefirmsplannedto increasetheiruseof part-timeortemporaryworkers Incontrasttothemorefavorablenewsonconsumer ratherthanfull-timepermanentemployees,atleast spendingandhousing,contactsgenerallyreported partlyinordertolimithealthinsurancecosts. sloweractivityinthebusinesssector.Someparticipantsexpressedconcernaboutweakermanufacturing Participantssawrecentpricedevelopmentsasconsisoutputandnewordersinrecentmonths,particularly tentwithinflationremainingatorbelowtheComincapitalgoodsindustries,althoughseveralpointed mittee’s2percentobjectiveoverthemediumrun. outthatmanufacturers’expectationsforfuture Althoughenergypriceshadrisensharplyinrecent ordersandproductionweremorepositive.Afewpar- months,reflectingearlierincreasesincrudeoilcosts ticipantsnotedthatshippingactivitywasdown,and andsupplydisruptions,gasolinepriceswereanticioneparticipantaddedthatenergyproductionhad patedtomovebackdownincomingmonthsasthose decelerated.Incontrast,afewparticipantshad pressureseased.Similarly,effectsof thedroughtwere receivedreportsof apickupinnonresidentialcon- expectedtoshowthroughtoretailfoodpricesover struction,andoneindicatedthathigh-techfirms thenextfewquartersbutthensubside.Byvarious wereexpectinggainsinbusinessgoingforward.In estimates,underlyinginflationtrendsremainedsubmanyinstances,participants’businesscontactsstated dued,andindicatorsof longer-terminflationexpecthattheyweredelayingorcuttingbackonhiringand tationsweregenerallyviewedasstable. capitalspendingbecauseof theuncertainoutlookfor governmentspending,taxes,orregulatorypolicies. Intheirdiscussionof financialdevelopmentsoverthe Oneparticipant,however,reportedthatcontactssaid intermeetingperiod,participantscommentedonthe thatinsufficientdemandremainedtheirprincipal effectsof thepolicyactionstakenattheSeptember concern.Severalparticipantsmentionedthatthecau- meetingtostrengthentheCommittee’sforwardguidtiouspostureof businesseswasapparentinnational anceandtopurchaseadditionalMBS.Theinitial andregionalsurveysof plansof bothlargeandsmall effectsweregenerallyviewedasconsistentwitha firms.Someparticipantsnotedthattheoutlookfor markedeasinginfinancialconditions.Forexample, businessspendingwouldlikelybedifficulttoassess yieldsonMBSdroppednoticeably,leadingtoa untilthedirectionof U.S.fiscalpolicybecomes declineinmortgageinterestrates,andcorporate clearer.Afewsuggestedthepossibilitythatanear- bondyieldsgenerallymovedlower.Yieldsonnomitermresolutionof thefiscalsituationmightleadtoa nalTreasurysecuritieswerelittlechanged.Someparsignificantincreaseinspendingasprojectsnowbeing ticipantssuggestedthatmoretimewouldberequired deferredwereundertaken;anotherworriedthatthe toassesstheultimateeffectsof theadditionalMBS uncertaintyattendingtheoutlookforfiscalpolicy purchasesonprimarymortgageratesandonfinanmightweighonbusinessplanningforsometime.In cialconditionsmorebroadly.Thestabilityinnominal additiontotheuncertaintyaboutthefiscaloutlook, Treasuryyields,pairedwithadeclineinTIPSyields, manufacturingcontactsattributedtheweaknessin impliedamodestincreaseininflationcompensation, ordersandproductiontosofterexportdemand;one onnet,overtheintermeetingperiod.Acoupleof participantaddedthatagriculturalexportshadalso participantssawthisincreaseasasignthattheopensoftened.Severalparticipantsnotedthattheircon- endedassetpurchasesposedarisktothestabilityof tactswereconcernednotonlyabouttheeconomic longer-terminflationexpectations.However,others slowdowninEurope,butalsoaboutwhetherthe sawtheeffectonexpectedinflationasrelatively recentslowingineconomicactivityinAsiamight mutedorlikelytheresultof reducedrisksof undesirpersist. ablylowinflation.Participantsremainedconcerned aboutriskstofinancialmarketsassociatedwiththe Intheircommentsonlabormarketdevelopments, situationintheeuroareaanduncertainU.S.fiscal participantsgenerallyviewedtherecentdeclineinthe prospects,butacouplenotedthatmeasuresof finanunemploymentrateandcontinuedmodestgainsin cialmarketuncertaintywerestillrelativelylow.Sevpayrollemployment,takentogether,asconsistent eralparticipantspointedoutthatrecentpolicy withagraduallyimprovingjobmarket.However, announcementsbytheEuropeanCentralBankwere witheconomicgrowthanticipatedtostaymoderate, receivedfavorablyinmarkets.Anumberof particisomeparticipantsexpressedconcernthatthepaceof pantsmentionedothersignsof greateroptimismin jobcreationwouldgenerateonlyaslowdeclinein financialmarkets,includingariseinmergerand

258 99thAnnualReport|2012 acquisitionactivityandamoderationinpressureson extendedperiodof policyaccommodationposedan largeU.S.financialinstitutions.Afewparticipants upsiderisktoinflation. observedthatlowinterestrateshadincreased demandforriskierfinancialproducts,andacouple Committee Policy Action of participantssawariskthatholdinginterestrates lowforaprolongedperiodcouldleadtofinancial MembersviewedtheinformationonU.S.economic imbalancesandimprudentrisk-taking.Onepartici- activityreceivedovertheintermeetingperiodassugpant,however,commentedthatriskaversionstill gestingthattheeconomywas,onbalance,expanding seemedquitehigh,citingtheverylowyieldson moderately,withapickupinhouseholdspendingand longer-termTIPSandalargeestimatedriskpremium furtherimprovementinhousingmarketsoffsetto inequitymarkets. someextentbyaslowdowninthebusinesssector. Althoughtheunemploymentratedeclinedinrecent Participantsalsodiscussedtheefficacyandpotential months,monthlygainsinnonfarmpayrolljobs costsof theCommittee’sassetpurchases.Anumber remainedmodest,andmanymembersnotedthat, of participantsofferedtheassessmentthattheCom- withoutsufficientpolicyaccommodation,economic mittee’spolicyactions,todate,hadbeeneffectivein growthmightnotbestrongenoughtogeneratesusmakingfinancialconditionsmoreaccommodative tainedimprovementinthelabormarket.Inflation andthatlowerinterestrateswereprovidingsupport roserecentlybecauseof atemporaryrun-upin toaggregatespending,mostnotablyinareassuchas energyprices.However,longer-terminflationexpechousing,autos,andotherconsumerdurables.Inpar- tationswerestable,andoverthemediumrun,inflaticular,somepointedoutthatthefavorabledevelop- tionwasanticipatedtorunatorbelowtheCommitmentsinmortgagemarketsovertheintermeeting tee’s2percentobjective. periodsuggestedthattheMBSpurchaseswerelikely toreinforcethenascentrecoveryinthehousingmar- Intheirdiscussionof monetarypolicyfortheperiod ket.Severaladdedthat,basedontheexperiencewith ahead,Committeemembersgenerallyagreedthat earlierassetpurchases,thebroadereffectsoneco- theiroverallassessmentsof theeconomicoutlook nomicactivityfrommore-accommodativefinancial werelittlechangedsincetheirpreviousmeeting. conditionswerelikelytoaccrueovertime.Looking Accordingly,allbutonememberjudgedthatmainahead,anumberof participantsindicatedthataddi- tainingthecurrent,highlyaccommodativestanceof tionalassetpurchaseswouldlikelybeappropriate monetarypolicywaswarrantedinordertofostera nextyearaftertheconclusionof thematurityexten- strongereconomicrecoveryinacontextof pricestasionprograminordertoachieveasubstantial bility.TheCommitteejudgedthatcontinuingboth improvementinthelabormarket.Inthatregard,a thepurchasesof MBSatapaceof $40billionper coupleof participantsnotedthelikelyusefulnessof monthandtheexistingprogramtoextendtheaverclarifyingtherangeof indicatorsthatwouldbe agematurityof itsTreasurysecuritiesholdings evaluatedinassessingtheoutlookforthelabormar- remainedappropriate.TheCommitteealsoagreedto ket.Participantsgenerallyagreedthatindetermining maintainitspolicyof reinvestingprincipalpayments theappropriatesize,pace,andcompositionof fur- fromitsholdingsof agencydebtandagencyMBS therpurchases,theywouldneedtocarefullyassess intoagencyMBS.Onememberopposedfurtherasset theefficacyof assetpurchasesinfosteringstronger purchasesbecauseheviewedthemasunlikelytohelp economicactivityandconsiderthepotentialrisks theCommitteeachieveitsgoalsandbecausehe andcostsof suchpurchases.Severalparticipants thoughtthatpurchasesof MBSrepresentedinapproquestionedtheeffectivenessof thecurrentpurchases priatecreditallocation.Manymemberssawthe orwhetheracontinuationof themwouldbewar- adjustmentsintheCommittee’sforwardguidanceat rantedif therecentmoderatepaceof economic theSeptembermeetingashavingbeeneffectivein recoveryweresustained.Inaddition,severalpartici- communicatingitsintentiontomaintainahighly pantsexpressedconcernsthatsizableassetpurchases accommodativestanceof monetarypolicyforaconmighteventuallyhaveadverseconsequencesforthe siderabletimeaftertheeconomicrecoverystrengthfunctioningof assetmarketsorthattheymightcom- ensandjudgedthattheguidanceremainedappropriplicatetheCommittee’sabilitytoremovepolicy ateatthismeeting.However,onemembercontinued accommodationattheappropriatetimeandnormal- toobjecttothecalendar-date-basedforwardguidizethesizeandcompositionof theFederalReserve’s anceforthefederalfundsrate.Withrespecttothe balancesheet.Acoupleof participantsnotedthatan statementtobereleasedfollowingthemeeting,mem-

Minutesof FederalOpenMarketCommitteeMeetings|October 259 bersmadeonlyrelativelysmallmodificationsto “InformationreceivedsincetheFederalOpen updatethedescriptionof recentdevelopmentsin MarketCommitteemetinSeptembersuggests consumerandbusinessspendingandininflation. thateconomicactivityhascontinuedtoexpand Withtheeconomicoutlooklittlechanged,they atamoderatepaceinrecentmonths.Growthin agreedthattheremainderof thestatementwould employmenthasbeenslow,andtheunemployreiteratethepolicyactionsandintentionsadoptedat mentrateremainselevated.Householdspending theSeptembermeeting. hasadvancedabitmorequickly,butgrowthin businessfixedinvestmenthasslowed.Thehous- Attheconclusionof thediscussion,theCommittee ingsectorhasshownsomefurthersignsof votedtoauthorizeanddirecttheFederalReserve improvement,albeitfromadepressedlevel. Bankof NewYork,untilitwasinstructedotherwise, Inflationrecentlypickedupsomewhat,reflecting toexecutetransactionsintheSystemAccountin higherenergyprices.Longer-terminflation accordancewiththefollowingdomesticpolicy expectationshaveremainedstable. directive: Consistentwithitsstatutorymandate,theCom- “TheFederalOpenMarketCommitteeseeks mitteeseekstofostermaximumemployment monetaryandfinancialconditionsthatwillfos- andpricestability.TheCommitteeremainsconterpricestabilityandpromotesustainable cernedthat,withoutsufficientpolicyaccommogrowthinoutput.Tofurtheritslong-runobjec- dation,economicgrowthmightnotbestrong tives,theCommitteeseeksconditionsinreserve enoughtogeneratesustainedimprovementin marketsconsistentwithfederalfundstradingin labormarketconditions.Furthermore,strainsin arangefrom0to¼percent.TheCommittee globalfinancialmarketscontinuetoposesignifidirectstheDesktocontinuethematurityexten- cantdownsideriskstotheeconomicoutlook. sionprogramitannouncedinJunetopurchase TheCommitteealsoanticipatesthatinflation Treasurysecuritieswithremainingmaturitiesof overthemediumtermlikelywouldrunator 6yearsto30yearswithatotalfacevalueof belowits2percentobjective. about$267billionbytheendof December2012,andtosellorredeemTreasurysecuri- Tosupportastrongereconomicrecoveryandto tieswithremainingmaturitiesof approximately helpensurethatinflation,overtime,isatthe 3yearsorlesswithatotalfacevalueof about ratemostconsistentwithitsdualmandate,the $267billion.Forthedurationof thisprogram, Committeewillcontinuepurchasingadditional theCommitteedirectstheDesktosuspendits agencymortgage-backedsecuritiesatapaceof policyof rollingovermaturingTreasurysecuri- $40billionpermonth.TheCommitteealsowill tiesintonewissues.TheCommitteedirectsthe continuethroughtheendof theyearitspro- Desktomaintainitsexistingpolicyof reinvest- gramtoextendtheaveragematurityof itsholdingprincipalpaymentsonallagencydebtand ingsof Treasurysecurities,anditismaintaining agencymortgage-backedsecuritiesintheSystem itsexistingpolicyof reinvestingprincipalpay- OpenMarketAccountinagencymortgage- mentsfromitsholdingsof agencydebtand backedsecurities.TheDeskisalsodirectedto agencymortgage-backedsecuritiesinagency continuepurchasingagencymortgage-backed mortgage-backedsecurities.Theseactions, securitiesatapaceof about$40billionper whichtogetherwillincreasetheCommittee’s month.TheCommitteedirectstheDeskto holdingsof longer-termsecuritiesbyabout engageindollarrollandcouponswaptransac- $85billioneachmonththroughtheendof the tionsasnecessarytofacilitatesettlementof the year,shouldputdownwardpressureonlonger- FederalReserve’sagencyMBStransactions.The terminterestrates,supportmortgagemarkets, SystemOpenMarketAccountManagerandthe andhelptomakebroaderfinancialconditions SecretarywillkeeptheCommitteeinformedof moreaccommodative. ongoingdevelopmentsregardingtheSystem’s balancesheetthatcouldaffecttheattainment TheCommitteewillcloselymonitorincoming overtimeof theCommittee’sobjectivesof informationoneconomicandfinancialdevelopmaximumemploymentandpricestability.” mentsincomingmonths.If theoutlookforthe labormarketdoesnotimprovesubstantially,the Thevoteencompassedapprovalof thestatement Committeewillcontinueitspurchasesof agency belowtobereleasedat2:15p.m.: mortgage-backedsecurities,undertakeaddi-

260 99thAnnualReport|2012 tionalassetpurchases,andemployitsother ductedinconjunctionwithitsAugustandSeptember policytoolsasappropriateuntilsuchimprove- meetings.Thebriefinghighlightedtheimportantrole mentisachievedinacontextof pricestability. of theassumedpathformonetarypolicyincon- Indeterminingthesize,pace,andcomposition structingaconsensusforecastandreviewedseveral of itsassetpurchases,theCommitteewill,as alternativeapproachesforsettingsuchapath.Asa always,takeappropriateaccountof thelikely possiblealternativetoaconsensusforecast,thestaff efficacyandcostsof suchpurchases. presentationalsodiscussedpotentialenhancements totheSEP.Intheirdiscussion,participantsagreed Tosupportcontinuedprogresstowardmaxi- thatFOMCcommunicationscouldbeenhancedby mumemploymentandpricestability,theCom- clarifyingthelinkagebetweenparticipants’economic mitteeexpectsthatahighlyaccommodative forecasts,includingtheunderlyingpolicyassumpstanceof monetarypolicywillremainappropri- tions,andtheCommittee’spolicydecisionas ateforaconsiderabletimeaftertheeconomic expressedinthepostmeetingstatement.However, recoverystrengthens.Inparticular,theCommit- mostparticipantsjudgedthat,giventhediversityof teealsodecidedtodaytokeepthetargetrange theirviewsabouttheeconomy’sstructureand forthefederalfundsrateat0to¼percentand dynamics,itwouldbedifficultfortheCommitteeto currentlyanticipatesthatexceptionallylowlevels agreeonafullyspecifiedlonger-termpathformonforthefederalfundsratearelikelytobewar- etarypolicytoincorporateintoaquantitativeconrantedatleastthroughmid-2015.” sensusforecastinatimelymanner,especiallyunder presentconditionsinwhichthepolicydecisioncom- Votingforthisaction:BenBernanke,WilliamC. prisesseveralelements.Participantsagreedtocon- Dudley,ElizabethDuke,DennisP.Lockhart,Sandra tinuetoexplorewaystoincreasetransparencyand Pianalto,JeromeH.Powell,SarahBloomRaskin, clarityintheCommittee’spolicycommunications, JeremyC.Stein,DanielK.Tarullo,JohnC.Williams, andtheyindicatedawillingnesstolookintomodifiandJanetL.Yellen. cationstotheSEP.Attheendof thediscussion,the Chairmanaskedthesubcommitteeoncommunica- Votingagainstthisaction:JeffreyM.Lacker. tionstoexplorepotentialapproachestoproviding moreinformationabouttheCommittee’scollective Mr.Lackerdissentedforthesamereasonshehad judgmentregardingtheeconomicoutlookand citedattheSeptemberFOMCmeeting,includinghis appropriatemonetarypolicythroughtheSEP. viewof thelikelyineffectivenessof assetpurchases andtheirpotentialinflationaryeffects,aswellasthe Itwasagreedthatthenextmeetingof theCommittee inappropriatenessof creditallocationinherentin wouldbeheldonTuesday–Wednesday,DecempurchasingMBS.Healsocontinuedtodisagreewith ber11–12,2012.Themeetingadjournedat12:50 thedescriptionof thetimeperiodoverwhicha p.m.onOctober24,2012. highlyaccommodativestanceof monetarypolicy wouldremainappropriateandexceptionallylowlev- Notation Vote elsforthefederalfundsratewerelikelytobe warranted. BynotationvotecompletedonOctober3,2012,the Committeeunanimouslyapprovedtheminutesof the Discussion of Communications regarding FOMCmeetingheldonSeptember12–13,2012. Economic Projections WilliamB.English Astaff presentationreviewedtheresultsof thecon- Secretary sensusforecastexperimentsthattheCommitteecon-

Minutesof FederalOpenMarketCommitteeMeetings|December 261 Meeting Held StevenB.Kamin Economist on December 11–12, 2012 DavidW.Wilcox Ameetingof theFederalOpenMarketCommittee Economist washeldintheofficesof theBoardof Governorsof DavidAltig,ThomasA.Connors, theFederalReserveSysteminWashington,D.C.,on MichaelP.Leahy,WilliamNelson, Tuesday,December11,2012,at11:00a.m.andcon- DavidReifschneider,andWilliamWascher tinuedonWednesday,December12,2012,at AssociateEconomists 8:30a.m. SimonPotter Present Manager,SystemOpenMarketAccount BenBernanke NellieLiang Chairman Director,Officeof FinancialStabilityPolicyand Research,Boardof Governors WilliamC.Dudley ViceChairman JonW.Faust SpecialAdvisortotheBoard,Officeof Board ElizabethDuke Members,Boardof Governors JeffreyM.Lacker JamesA.ClouseandStephenA.Meyer DennisP.Lockhart DeputyDirectors,Divisionof MonetaryAffairs, Boardof Governors SandraPianalto MaryannF.Hunter JeromeH.Powell DeputyDirector,Divisionof BankingSupervision SarahBloomRaskin andRegulation,Boardof Governors JeremyC.Stein LindaRobertson AssistanttotheBoard,Officeof BoardMembers, DanielK.Tarullo Boardof Governors JohnC.Williams EllenE.MeadeandJoyceK.Zickler JanetL.Yellen SeniorAdvisers,Divisionof MonetaryAffairs, Boardof Governors JamesBullard,ChristineCumming,CharlesL.Evans, EstherL.George,andEricRosengren EricM.Engen,ThomasLaubach,and AlternateMembersof theFederalOpenMarket DavidE.Lebow Committee AssociateDirectors,Divisionof Researchand Statistics,Boardof Governors RichardW.Fisher,NarayanaKocherlakota,and CharlesI.Plosser MichaelT.Kiley1 Presidentsof theFederalReserveBanksof Dallas, AssociateDirector,Officeof FinancialStability Minneapolis,andPhiladelphia,respectively PolicyandResearch,Boardof Governors WilliamB.English JoshuaGallin SecretaryandEconomist DeputyAssociateDirector,Divisionof Researchand Statistics,Boardof Governors DeborahJ.Danker DeputySecretary JaneE.Ihrig DeputyAssociateDirector,Divisionof Monetary MatthewM.Luecke Affairs,Boardof Governors AssistantSecretary BethAnneWilson MichelleA.Smith DeputyAssociateDirector,Divisionof International AssistantSecretary Finance,Boardof Governors ScottG.Alvarez GeneralCounsel 1 AttendedTuesday’ssessiononly.

262 99thAnnualReport|2012 DavidH.Small TheCommitteeconsideredaproposaltoextendits ProjectManager,Divisionof MonetaryAffairs, liquidityswaparrangementswithforeigncentral Boardof Governors bankspastFebruary1,2013.Allbutonemember approvedthefollowingresolution: JenniferE.Roush SeniorEconomist,Divisionof MonetaryAffairs, “TheFederalOpenMarketCommitteedirects Boardof Governors theFederalReserveBankof NewYorkto MarieGooding extendtheexistingtemporarydollarliquidity FirstVicePresident,FederalReserveBankof Atlanta swaparrangementswiththeBankof Canada, theBankof England,theBankof Japan,the LorettaJ.MesterandDanielG.Sullivan EuropeanCentralBank,andtheSwissNational ExecutiveVicePresidents,FederalReserveBanksof BankthroughFebruary1,2014.Inaddition,the PhiladelphiaandChicago,respectively FederalOpenMarketCommitteedirectsthe FederalReserveBankof NewYorktoextend TroyDavig,MarkE.Schweitzer,GeoffreyTootell, theexistingtemporaryforeigncurrencyliquidity ChristopherJ.Waller,andKei-MuYi swaparrangementswiththeBankof Canada, SeniorVicePresidents,FederalReserveBanksof theBankof England,theBankof Japan,the KansasCity,Cleveland,Boston,St.Louis,and EuropeanCentralBank,andtheSwissNational Minneapolis,respectively BankthroughFebruary1,2014.” MaryDaly GroupVicePresident,FederalReserveBankof Mr.Lackerdissentedbecauseof hisoppositionto SanFrancisco arrangementsthatsupportFederalReservelending inforeigncurrencies,whichheviewedasamounting EvanF.Koenig,LorieK.Logan,JulieAnnRemache, tofiscalpolicy. AlexanderL.Wolman,andNathanielWuerffel VicePresidents,FederalReserveBanksof Dallas, Options for the Continuation of Asset NewYork,NewYork,Richmond,andNewYork, Purchases respectively ArgiaM.Sbordone Thestaff reviewedseveraloptionsforpurchasing AssistantVicePresident,FederalReserveBankof longer-termsecuritiesaftertheplannedcompletion NewYork attheendof themonthof thematurityextension program.Thepresentationfocusedonthepotential Developments in Financial Markets and effectsfortheU.S.economy,basedinpartonsimulathe Federal Reserve’s Balance Sheet tionsof astaff macroeconomicmodel,andforthe FederalReserve’sbalancesheetandincomeof con- TheManagerof theSystemOpenMarketAccount tinuingtobuyMBSandlonger-termTreasurysecuri- (SOMA)reportedondevelopmentsindomesticand tiesovervarioustimeframes.Intheirdiscussionof foreignfinancialmarketsduringtheperiodsincethe thestaff presentation,someparticipantsaskedabout FederalOpenMarketCommittee(FOMC)meton thepossibleconsequencesof thealternativepurchase October23–24,2012.HealsoreportedonSystem programsfortheexpectedpathof FederalReserve openmarketoperationsovertheintermeetingperiod, remittancestotheTreasuryDepartment,andafew includingtheongoingreinvestmentintoagency- indicatedtheneedforadditionalconsiderationof the guaranteedmortgage-backedsecurities(MBS)of implicationsof suchpurchasesfortheeventualnorprincipalpaymentsreceivedonSOMAholdingsof malizationof thestanceof monetarypolicyandthe agencydebtandagency-guaranteedMBS;theopera- sizeandcompositionof theFederalReserve’sbaltionsrelatedtothematurityextensionprogram ancesheet. authorizedattheJune19–20,2012,FOMCmeeting; andthepurchasesof MBSauthorizedattheSeptem- Staff Review of the Economic Situation ber12–13,2012,FOMCmeeting.Byunanimous vote,theCommitteeratifiedtheOpenMarketDesk’s TheinformationreviewedattheDecember11–12 domestictransactionsovertheintermeetingperiod. meetingindicatedthateconomicactivitycontinued Therewerenointerventionoperationsinforeigncur- toincreaseatamoderatepaceinrecentmonths. renciesfortheSystem’saccountovertheintermeet- Employmentexpandedfurther,andtheunemployingperiod. mentratedeclinedslightly,onbalance,fromSeptem-

Minutesof FederalOpenMarketCommitteeMeetings|December 263 bertoNovemberbutwasstillelevated.Consumer newsingle-familyhomeswereessentiallyflatinOctopriceinflationslowedasconsumerenergycostsfell, berafterrisingsignificantlyintheprecedingmonth. whilemeasuresof longer-runinflationexpectations Startsof newmultifamilyunitsroseinOctober, remainedstable. althoughpermitsdeclinedsomewhatfollowingtheir briskincreaseinthepreviousmonth.Meanwhile, Privatenonfarmemploymentincreasedataslightly homepricesadvancedfurtherandsalesof existing fasterrateinOctoberandNovemberthaninthe homescontinuedtoexpand,butnewhomesaleswere thirdquarter,butgovernmentemploymentdecreased littlechanged. somewhat.Theunemploymentratedeclinedto 7.7percentinNovember,andthelaborforcepartici- Realbusinessexpendituresonequipmentandsoftpationrateinthatmonthwasatthesamelevelasin waredecreasedinthethirdquarter.InOctober, thethirdquarter.Therelativelylargeshareof work- nominalnewordersfornondefensecapitalgoods ersemployedparttimeforeconomicreasonstrended excludingaircraftmovedupalittle,butshipmentsof upabit,onnet,whiletheshareof long-duration thesecapitalgoodsedgeddownandthelevelof unemploymentintotalunemploymentwasessentially ordersremainedbelowthatof shipments.Inaddiflatandremainedelevated.Indicatorsof firms’job tion,otherforward-lookingindicatorsof equipment openingsandhiringplanswerelittlechangedonbal- investmentbyfirms,suchassurveysof businessconance.Initialclaimsforunemploymentinsurancewere ditionsandcapitalspendingplans,werestillsubboostedinearlyNovemberbytheeffectsof Hurri- dued.Realbusinessexpendituresfornonresidential caneSandybutreturnedwithinweekstoalevelthat structuresalsodecreasedinthethirdquarter, wasaboutthesameasbeforethehurricane. althoughnominalconstructionspendingbyfirms increasedinOctober.Inventoriesinmostindustries ManufacturingproductiondeclinedinOctober,as appearedtoberoughlyalignedwithsalesinrecent outputwashelddownattheendof themonthbythe months. disruptionsanddamagecausedbyHurricaneSandy; therateof manufacturingcapacityutilizationalso Realfederalgovernmentpurchasesincreasedmarkdeclined.Automakers’schedulesindicatedthatthe edlyinthethirdquarter,ledbyasharpriseindefense paceof motorvehicleassemblieswouldrisesome- spending.However,datafornominalfederalspendwhatinthecomingmonths.Broaderindicatorsof inginOctoberpointedtowardadeclineinreal factoryoutput,suchasthediffusionindexesof new defenseexpendituresinthefourthquarter.Realstate ordersfromthenationalandregionalmanufacturing andlocalgovernmentpurchaseswerelittlechanged surveys,continuedtobesubduedatlevelsconsistent inthethirdquarter.Stateandlocalgovernmentpaywithonlysmallgainsinproductioninthenearterm. rollsdecreasedonnetoverOctoberandNovember, andnominalconstructionspendingbythesegovern- Realpersonalconsumptionexpendituresroseata mentsedgedlowerinOctober. modestpaceinthethirdquarter,butspending declinedinOctober,likelyinresponseinparttosome TheU.S.internationaltradedeficitwidenedinOctodisruptionscausedbythehurricane.Probablyreflect- ber,andbothexportsandimportsfellsharplyfrom ingthosedisruptions,salesof lightmotorvehiclesfell thepreviousmonth.Thedecreaseinexportswas inOctoberbutthenincreasednotablyinNovember. widespreadacrosscategories,whilethereductionin Somefactorsthattendtoinfluencehouseholdspend- importsimportantlyreflectedlowerpurchasesof ingbecamelesssupportive:Realdisposablepersonal consumergoodsandnon-oilindustrialsupplies, incomemoveduponlyslightlyinthethirdquarter althoughpetroleumimportsincreased. anddeclinedinOctober.Moreover,consumersentimentfellbackinearlyDecembertoaboutitslevel ConsumerpricesmovedupmoreslowlyinOctober duringthesummer.Incontrast,householdnetworth thanintheprecedingfewmonths,primarilybecause increasedinthethirdquarter,partiallyaresultof of asmalldeclineinenergypricesafterseveral higherequityandhomevalues. monthsof largegains.Moreover,surveydataindicatedthatretailgasolinepricesdecreasedfurtherin Conditionsinthehousingmarketcontinuedto November.Consumerfoodpricesrosealittlefaster improvegradually,butconstructionactivitywasstill inOctober,astheeffectsof lastsummer’sdrought atalowlevel,restrainedbytheconsiderableinven- startedtoshowthroughattheretaillevel.Increases toryof foreclosedanddistressedhomesandthetight inconsumerpricesexcludingfoodandenergy creditstandardsformortgages.Startsandpermitsof remainedsubdued.Near-terminflationexpectations

264 99thAnnualReport|2012 fromtheThomsonReuters/Universityof Michigan uncertaintyaboutthepathof thefederalfundsrate Surveysof Consumersedgedup,onbalance,in beyondtheneartermalsodeclined.Thesurveyof NovemberandearlyDecember,whilelonger-term primarydealersconductedpriortotheDecember inflationexpectationsinthesurveywerelittle meetingshowedthattheyexpectedtheFOMCto changedandcontinuedtorunwithintherelatively maintainpurchasesof longer-termsecuritiesafter narrowrangethathasprevailedforsometime. year-endataboutthecurrentpaceof $85billionper month. Measuresof laborcompensationindicatedthatgains innominalwagesremainedslow.Compensationper Conditionsinunsecuredandsecuredshort-termdolhourinthenonfarmbusinesssectorincreased larfundingmarketsremainedstable,onnet,overthe slightlyovertheyearendinginthethirdquarter,and intermeetingperiod,withreportsof onlylimiteddiswithamoderateriseinproductivity,unitlaborcosts ruptionstotradingoroperationsfollowingHurriwereessentiallyunchanged.Theemploymentcost caneSandy.YieldsonTreasurybillsmaturingbeyond indexroseonlyabitfasterthanthemeasureof com- theyear-endwerenoticeablylowerthanthoseon pensationperhouroverthesameperiod.InOctober shorter-termbills;marketparticipantspointedtothe andNovember,increasesinaveragehourlyearnings anticipatedendingof theFederalReserve’smaturity forallemployeesweresmall. extensionprogramandtheexpirationof theFederal DepositInsuranceCorporation’sunlimitedinsurance Economicactivityabroadremainedsubdued,espe- of noninterest-bearingtransactiondepositsatthe ciallyintheadvancedforeigneconomies.Theeuro- endof theyearasfactorscontributingtothispattern areaeconomycontractedfurtherinthethirdquarter, of yields. andconsumerandbusinessconfidenceremainedlow. EconomicactivityinJapanalsodeclinedinthethird IntheDecemberSeniorCreditOfficerOpinionSurquarter,andasharpdropinexportsrestrainedeco- veyonDealerFinancingTerms,respondents nomicgrowthinCanada.Inemergingmarketecono- reportedlittlechangeincredittermsoverthepast mies,bycontrast,recentdataonexportsandmanu- threemonthsforimportantclassesof dealercounterfacturingimprovedsomewhat.Inmostcountries, parties.Whilerespondentsreportedthattheuseof inflationwasstillwellcontained,andmonetary leveragebycounterpartieshadremainedbasically policyabroadgenerallyremainedaccommodative. unchanged,theynotedgreaterdemandforfunding of varioustypesof securitizationproducts. Staff Review of the Financial Situation BroadU.S.equitypriceindexesedgedup,onnet, U.S.financialconditionswerelittlechanged,onbal- overtheintermeetingperiod,whileequitypricesof ance,overtheintermeetingperiod.InearlyNovem- largedomesticbanksdecreasedalittle.Nevertheless, ber,marketconcernsaboutthefiscaloutlookand thecreditdefaultswapspreadsof mostlargedomesongoingfederalbudgetnegotiationsseemedtointen- ticbankholdingcompaniescontinuedtomovelower. sify,promptinganotablereductioninequityprices Option-impliedvolatilityfortheS&P500indexover andyieldsonTreasurysecurities.Buttheseconcerns thenextmonthdeclinedmoderately,onbalance, reportedlyeasedsomewhatoversubsequentweeks, whilemeasuresof equitymarketvolatilityforlonger andtheinitialmoveinequitypriceswasreversed.In maturitiesremainedabovetheirhistoricalaverages, contrast,yieldsonintermediate-andlong-term excludingthefinancialcrisisperiod. nominalTreasurysecuritiesdeclined,onnet,perhaps reflectingsomeincreaseinsafe-havendemandassoci- Yieldsoninvestment-gradecorporatebondswere atedwithconcernsaboutthepotentialeconomic littlechangedovertheintermeetingperiod,andtheir effectsof asubstantialtighteninginfiscalpolicy. spreadsoveryieldsoncomparable-maturityTreasury Indicatorsof inflationcompensationderivedfrom securitieswidenedmodestly.Yieldsonspeculativenominalandinflation-protectedTreasurysecurities gradecorporatebondsfelltohistoricallows,and showedmixedchangesandremainedwithinthe theirspreadsdecreasedslightly. rangesobservedoverrecentyears. Thepaceof bondissuancebynonfinancialfirms Theexpectedpathof thefederalfundsratederived increasedfurtherinOctoberandNovemberafterrisfromovernightindexswapratesflattenedsomewhat, ingrobustlyinthethirdquarter,assomefirms onbalance,overtheintermeetingperiod,aslonger- reportedlysoughttoissuenewdebtbeforetheendof datedratesdeclined.Market-basedmeasuresof theyear.Commercialandindustrial(C&I)loansout-

Minutesof FederalOpenMarketCommitteeMeetings|December 265 standingalsoexpandednotablyinOctoberand SpreadsonGreeksovereignbondsovercomparable November.Nonfinancialcommercialpaperout- Germanbundsfell,onbalance,reflectinginpartthe standingincreasedsomewhatinNovemberfollowing agreementbyEuropeanofficialsandtheInternaasmalldeclineinOctober.Inthesyndicatedlever- tionalMonetaryFundtograntfurtheraidtoGreece. agedloanmarket,institutionalissuancesurgedin However,spreadsonItalianandSpanishbondswere OctoberbeforesubsidingsomewhatinNovember, littlechangedonbalanceovertheperiod.Onnet,foralthoughitremainedatastill-robustlevel. eignequitypricesroseslightly.Theforeignexchange valueof thedollaredgedloweronbalance.However, Financialconditionsinthecommercialrealestate thedollarappreciatedagainsttheBrazilianrealand (CRE)sectorwerestillgenerallystrainedamid theJapaneseyen,whichwerehelddownbyweakecoelevatedvacancyanddelinquencyrates.However, nomicdataand,inthecaseof theyen,bymarket pricesforCREpropertiescontinuedtoincreasein reactiontostatementssuggestingthatthecountry’s thethirdquarter,andissuanceof commercial likelynextgovernmentwouldurgetheBankof Japan mortgage-backedsecuritiesremainedatasolidpace toseekahigherrateof inflation.Yieldsonforeign inthecurrentquarter. benchmarksovereignbondsdeclined,ascentral banksmaintainedorextendedmonetaryaccommo- Residentialmortgageratesdeclinedmodestlyover dation.TheBankof Japanexpandeditsassetpurtheintermeetingperiod,largelyinlinewiththe chaseprogramandannouncedanewlendingscheme. declineinMBSyields.Refinancingexpandedabit TheBankof EnglandannouncedthatitwouldtransfurtherinOctoberandNovember.Housepricescon- fercashholdingsfromitsassetpurchasefundtothe tinuedtoincreasedespiteariseintheproportionof U.K.Treasury,ameasurethatmayexertsomefurpropertiessoldthroughforeclosuresorshortsales. therdownwardpressureongiltyieldstotheextent Theshareof existingmortgagesthatwereseriously thatgiltissuancebythegovernmentisreduced.The delinquentfellinthethirdquarterbutremained ReserveBankof Australiaandseveralemergingmarelevated. ketcentralbanksalsoeasedmonetarypolicy. ConsumercreditcontinuedtoexpandbrisklyinSep- Thestaff alsoreportedonpotentialriskstofinancial tember,ledbysizableincreasesinautoandstudent stability,includingthoseassociatedwithadisorderly loans.RevolvingcreditdecreasedinSeptemberbut resolutionof theso-calledfiscalcliff,adelayed waslittlechanged,onnet,overthepreviousfew increaseinthefederaldebtceiling,orafuturedetemonths.Issuanceof consumerasset-backedsecuri- riorationof financialconditionsinEurope.Inadditiescontinuedtoriseatastrongpace.Delinquency tion,inmonitoringforpossibleadverseeffectsof the ratesonconsumercreditgenerallyremainedlow, currentenvironmentof lowinterestrates,thestaff withthenotableexceptionof studentloans. surveyedawiderangeof assetmarketsandfinancial institutionsforsignsof excessivevaluations,leverage, Bankcreditwasaboutflat,onbalance,overOctober orrisk-takingthatcouldposesystemicrisks.ValuaandNovember.GrowthinC&Iloansandconsumer tionsforbroadassetclassesdidnotappearstretched, loanswasoffsetbyadeclineinbanks’residentialreal orsupportedbyexcessiveleverage.Indicatorsof estateloans.TheNovemberSurveyof Termsof risk-takingandleveragehadmoderatelyincreased, BusinessLendingindicatedsomeeasinginloanpric- onbalance,overthepastcoupleof yearsbut ingandterms. remainednotablybelowtheirlevelsbeforethefinancialcrisis. M2growthwasrapidinOctoberbutslowedin November.Liquiddepositscontinuedtogrowata Staff Economic Outlook strongpace,asyieldsavailableonalternativemoney marketinstrumentsremainedlow.Reservesincreased Intheeconomicprojectionpreparedbythestaff for overtheintermeetingperiod,inpartbecauseof the theDecemberFOMCmeeting,realgrossdomestic settlementof theongoingMBSpurchases product(GDP)growthintheneartermwasrevised announcedattheSeptemberFOMCmeeting. downslightlyrelativetothepreviousforecast.This downwardrevisionprimarilyreflectedweaker-than- Inmanyforeignfinancialmarkets,assetpricesfluctu- expecteddataforconsumerspendingandhousehold atedassentimentregardingnegotiationsoverboth incomethatmorethanoffsetthesomewhatbettertheU.S.fiscalsituationandofficialsupportforvul- than-anticipatednewsregardingemploymentand nerableeuro-areacountriesshiftedduringtheperiod. businessequipmentinvestment.Thestaff’smedium-

266 99thAnnualReport|2012 termforecastforrealGDPgrowthalsowasrevised policy.Thelonger-runprojectionsrepresenteach downalittle,assomeof therecentweaknessin participant’sassessmentof theratetowhicheach householdspendingandincomewascarriedforward variablewouldbeexpectedtoconverge,overtime, intheprojection.Inaddition,financialconditions underappropriatemonetarypolicyandinthe wereanticipatedtobealittlelesssupportivethan absenceof furthershockstotheeconomy.Theseecoexpectedinthestaff’spreviousforecast.Withfederal nomicprojectionsandpolicyassessmentsare fiscalpolicyassumedtobetighternextyearthanthis describedintheSummaryof EconomicProjections, year,thestaff expectedthattheincreaseinrealGDP whichisattachedasanaddendumtotheseminutes. wouldnotmateriallyexceedthegrowthrateof potentialoutputin2013.In2014and2015,economic Intheirdiscussionof theeconomicsituation,particiactivitywasprojectedtoaccelerateslowly,supported pantsregardedtheinformationreceivedduringthe byalesseninginfiscalpolicyrestraint,gainsincon- intermeetingperiodasindicatingthateconomic sumerandbusinessconfidence,furtherimprove- activityandemploymentcontinuedtoexpandata mentsinfinancialconditionsandcreditavailability, moderatepace,apartfromweather-relateddisrupandaccommodativemonetarypolicy.Theexpansion tions.Theunemploymentratehaddeclinedsomeineconomicactivitywasanticipatedtoresultinonly whatsincethesummerbutremainedelevated. agradualdeclineinslackinlaborandproductmar- Althoughhouseholdspendinghadcontinuedto ketsovertheforecastperiod,andprogressinreduc- advance,growthinbusinessfixedinvestmenthad ingunemploymentwasexpectedtoberelativelyslow. slowed.Thehousingsectorhadshownfurthersigns of improvement.Consumerpriceinflationhadbeen Thestaff’sprojectionforinflationinboththenear runningsomewhatbelowtheCommittee’slonger-run termandthemediumtermwasessentiallyunchanged objectiveof 2percent,apartfromtemporaryvariafromtheforecastpreparedforthepreviousFOMC tionsthatlargelyreflectedfluctuationsinenergy meeting.Withcrudeoilpricesexpectedtocontinue prices,andlonger-terminflationexpectationshad todecreaseslowly,theboosttoretailfoodprices remainedstable. fromlastsummer’sdroughtanticipatedtobeonly temporaryandfairlysmall,long-runinflationexpec- Intheirassessmentsof theeconomicoutlook,many tationsassumedtoremainstable,andconsiderable participantsthoughtthatthepaceof economic resourceslackpersistingovertheforecastperiod,the expansionwouldremainmoderatein2013before staff projectedthatinflationwouldbesubdued pickingupgraduallyin2014and2015.Thisoutlook through2015. waslittlechangedfromtheirprojectionsatrecent meetings.HurricaneSandywasexpectedtoweighon Thestaff viewedtheuncertaintyaroundtheprojec- economicgrowthinthecurrentquarter,butrebuildtionforeconomicactivityassomewhatelevatedand ingcouldprovidesometemporaryimpetusearlyin therisksasskewedtothedownside,largelyreflecting 2013.Participants’forecasts,whichgenerallywere thepossibilityof amoreseveretighteninginU.S.fis- conditionedontheviewthatitwouldbeappropriate calpolicythanexpected,alongwithcontinuedcon- tomaintainahighlyaccommodativemonetarypolicy cernsabouttheeconomicandfinancialsituationin foraconsiderabletime,includedanoutlookfora Europe.Althoughthestaff sawtheoutlookforinfla- continuedgradualdeclineintheunemploymentrate tionasuncertain,theriskswereviewedasbalanced towardlevelsjudgedtobeconsistentwiththeComandnotunusuallyhigh. mittee’smandateoverthelongerrun,withinflation runningneartheCommittee’s2percentlonger-run Participants’ Views on Current Conditions goal. and the Economic Outlook Participantsobservedthatgrowthineconomicactiv- InconjunctionwiththisFOMCmeeting,meeting itycontinuedtoberestrainedbyseveralpersistent participants—the7membersof theBoardof Gover- headwinds,includingongoingdeleveragingonthe norsandthepresidentsof the12FederalReserve partof householdsandstill-tightcreditconditions Banks,allof whomparticipateinthedeliberationsof forsomeborrowers,andthatamajorheadwindfactheFOMC—submittedtheirassessmentsof realout- ingtheeconomyatpresentappearedtobeuncerputgrowth,theunemploymentrate,inflation,and taintyaboutU.S.fiscalpolicyandtheoutcomeof the thetargetfederalfundsrateforeachyearfrom2012 ongoingnegotiationsonfederalspendingandtaxes. through2015andoverthelongerrun,undereach Whileparticipantsgenerallysawitaslikelythatthe participant’sjudgmentof appropriatemonetary CongressandtheAdministrationwouldavertthefull

Minutesof FederalOpenMarketCommitteeMeetings|December 267 forceof thetaxincreasesandspendingcutssched- Northeastintheaftermathof HurricaneSandy,and uledtooccurin2013,almostallindicatedthat aslackeningineconomicactivityintheSouthwest heighteneduncertaintyaboutfiscalpolicyprobably relatedinparttocutbacksindefensespending. wasaffectingeconomicactivityadversely.For Exportordershadsoftened,reflectingtheslowdown example,itlikelyhadreducedhouseholdandbusi- inglobalgrowth.Theenergysectorcontinuedto nessconfidenceandledfirmstodeferhiringand expand.Intheagriculturalsector,farmincomeswere investmentspending.Someparticipantsnotedthat high,notwithstandingthedrought,althoughelevated anearlyandconstructiveresolutiontofiscalpolicy grainpriceswerecuttingintoprofitsonlivestock. negotiationshadthepotentialtoreleasepent-up demandandthereforebefollowedbyaboostto Meetingparticipantsgenerallyagreedthattherecovspending,investment,andemployment;however,a eryinthehousingsectorhadcontinued.Manycomfewpointedoutthatanextendedbreakdownof mentedthattheheadwindsfacingthehousingmarket negotiationscouldhavesignificantadverseeffectson appearedtohavedissipatedsomewhat.Thecapacity economicgrowth.Otherfactorsweighingontheeco- constraintsontheprocessingof newhome-mortgage nomicoutlookincludedtheslowdowninglobaleco- applicationsappearedtobeeasing,andgraduallyrisnomicgrowthandcontinueduncertaintyregarding inghomepriceshadreducedtheproportionof theEuropeanfiscalandbankingsituation. householdswithunderwatermortgages.Itwasnoted thatthemixof newhomesalesseemedtohave Intheirdiscussionof thehouseholdsector,many shiftedfromhomesalreadycompletedtohomesnot participantsnotedarecentdropinconsumersenti- yetbuilt. mentandasofteninginconsumerspending.Some participantsthoughtthisreflecteduncertaintyabout Indiscussinglabormarketdevelopments,particifiscalpolicy,includingtheprospectof highertaxes, pantsgenerallyviewedtherecentdataashavingbeen andseveralnotedthatgrowthof households’realdis- somewhatbetterthanexpected,withmoderategains posableincomeremainedweakdespiterecentgains inpayrollemploymentandadeclineintheuneminemployment.Whileindicatorsof spendingwere ploymentrate.However,theunemploymentrate mixed,purchasesof autosandotherdurables remainedelevated,andpartof thedeclineinunemremainedrelativelystrong.Acoupleof participants ploymentinNovemberwasattributabletoadropin observedthatbusinessesinafewareashadreported laborforceparticipation.Afewparticipantsnoted strongholiday-relatedactivity.Manypointedout thatsomeexitsfromthelaborforcemayhavebeen thatreductionsinhouseholds’debt,togetherwithris- relatedtothelossorprospectivelossof eligibilityfor inghomeprices,hadledtoanimprovementin emergencyunemploymentinsurancebenefits.Several householdbalancesheets;itwasnotedthathouse- pointedtoindicatorssuggestingthatratesof hiring holdnetworthwasapproachinglevelsseenbefore remaineddepressedrelativetothoseobservedbefore thefinancialcrisis. thefinancialcrisis.Acoupleof participantsnoted thatvacanciesremainedatahighlevelintermsof Businesscontactsinmanypartsof thecountrywere theirhistoricalrelationshiptotherateof unemployalsosaidtobehighlyuncertainabouttheoutlookfor ment,suggestingthatatleastsomefirmswerehaving U.S.fiscalpolicy,andparticipantsnotedthatthis ahardtimefindingsuitableworkers;indeed,business uncertaintyappearedtohaveweighedoninvestment contactsinacoupleof regionshadreporteddiffiandhiringdecisions.Althoughfirms’balancesheets cultyinlocatingandretainingworkerswithrequisite weregenerallystrongandliquiditywasample,some skills.However,oneparticipantsuggestedthat businesscontactsreportedthattheyhadshifted employer–workermismatchlikelyreflectedlongertowardahigherproportionof part-timeemployees termproblemsandhadprobablynotworsenedmateandpostponedplanstoexpandcapacity.Anumber riallyasaresultof therecentdeeprecessionandslow of participantssuggestedthatthebusinesssectorwas recovery. wellpositionedtoexpandspendingandhiring quicklyuponapositiveresolutionof thefiscalcliff Incominginformationpointedtostable,lowinflation negotiations.Inafewregions,contactsreportedcon- thatwasrunningalittlebelowtheCommittee’s cernsabouttheexpenseassociatedwithnewregula- longer-rungoalof 2percent.Crudeoilpriceshad tions,includingthoserelatedtohealthcare,andin moveddownsincetheOctobermeetingamidaccusomecasesindicatedashifttothehiringof part-time mulatinginventoriesandmarketconcernsabouta workersinordertoavoidthesecosts.Therewere weakerglobaloutlook.Despitesomereportsof labor reportsof weakermanufacturing,particularlyinthe shortagesincertainindustries,compensationpres-

268 99thAnnualReport|2012 sureshadremainedsubdued,andunitlaborcosts bepreferredbecausetheywouldprovidemoresupwerelittlechangedoverthepreviousfourquarters. porttorealactivitythroughthehousingsector.One Mostparticipantssawtheriskstotheinflationout- participantcommentedthatthebestapproachwould lookasbroadlybalanced,andmanynotedthat betocontinuepurchasesinboththeTreasuryand longer-terminflationexpectationswerewell MBSmarkets,giventheuncertaintyabouttheprecise anchored.Oneparticipant,however,expressedcon- channelsthroughwhichassetpurchasesoperated. cernthatconsiderableuncertaintysurroundedthe Othersemphasizedtheadvantagesof MBSpurrelationshipbetweenunemploymentandinflation, chases,includingbynotingtheapparenteffectiveness raisingquestionsabouttheextenttowhichresource of recentMBSpurchasesonthehousingmarket, slackwouldkeepinflationrestrainedoverthe whileanotherparticipantobjectedandthoughtthat mediumterm. FederalReservepurchasesshouldnotdirectcreditto aspecificsector.Withregardtothepossiblecosts Intheirdiscussionof financialdevelopments,afew andrisksof purchases,anumberof participants participantscommentedthatrecentstepstakenby expressedtheconcernthatadditionalpurchases Europeanauthoritieshadreducedvolatilityinsover- couldcomplicatetheCommittee’seffortstoeventueigndebtmarketsovertheintermeetingperiod;how- allywithdrawmonetarypolicyaccommodation,for ever,concernsremainedaboutthefiscalandeco- example,bypotentiallycausinginflationexpectations nomicoutlookinEurope.Manynotedtheongoing toriseorbyimpairingthefutureimplementationof deleveragingintheprivatenonfinancialsectorof the monetarypolicy.Participantsalsodiscussedthe U.S.economyandindicatedthatitwasdifficultto implicationsof continuedassetpurchasesforthesize judgewhenthatprocesswouldbecomplete.Afew of theFederalReserve’sbalancesheet.Dependingon participants,observingthatlowinterestrateshad thepathforthebalancesheetandinterestrates,the increasedthedemandforriskierfinancialproducts, FederalReserve’snetincomeanditsremittancesto pointedtothepossibilitythatholdinginterestrates theTreasurycouldbesignificantlyaffectedduring lowforaprolongedperiodcouldleadtofinancial theperiodof policynormalization.Participants imbalancesandimprudentrisk-taking.Onepartici- notedthattheCommitteewouldneedtocontinueto pantsuggestedthattherewereseveralhistoricalepi- assesswhetherlargepurchaseswerehavingadverse sodesintheUnitedStatesandothercountriesthat effectsonmarketfunctioningandfinancialstability. mightbeusedtobuildabetterunderstandingof the Theyexpressedarangeof viewsontheappropriate financialstrainsthatcoulddevelopfromalong paceof purchases,bothnowandastheoutlook periodof verylowlong-terminterestrates.Pointing evolved.Itwasagreedthatboththeefficacyandthe toarecentdecisionof theFinancialStabilityOver- costswouldneedtobecarefullymonitoredandtaken sightCouncil,oneparticipantcommentedthatfur- intoaccountindeterminingthesize,pace,andcomthermoneymarketmutualfundreformwouldhelp positionof assetpurchases. reduceriskinthefinancialsystem. Meetingparticipantsdiscussedthepossibilityof Participantsexchangedviewsonthelikelybenefits replacingthecalendardateintheforwardguidance andcostsof additionalassetpurchasesinthecontext forthefederalfundsratewithspecificquantitative of anassessmentof theongoingpurchasesof MBS thresholdsof 6½percentfortheunemploymentrate andpossibleadditionalpurchasesof longer-term and2½percentforprojectedinflationbetweenone Treasurysecuritiestofollowtheconclusionof the andtwoyearsahead.Mostparticipantsfavored maturityextensionprogram.Regardingthebenefits, replacingthecalendar-dateforwardguidancewith itwasnotedthatassetpurchasesprovidesupportto economicthresholds,andseveralnotedthatthecontheeconomicrecoverybyputtingdownwardpressure sistencybetweenthe“mid-2015”referenceinthe onlonger-terminterestratesandpromotingmore- Committee’sOctoberstatementandthespecific accommodativefinancialconditions.Participantsdis- quantitativethresholdsbeingconsideredatthecurcussedtheeffectivenessof purchasingdifferenttypes rentmeetingprovidedanopportunityforasmooth of assetsandthepotentialfortheeffectsonyields transition.However,possibleadvantagesof waitinga frompurchasesinthemarketforoneclassof securi- whiletointroducethechangetotheCommittee’sfortiestospillovertoothermarkets.If thesespillovers wardguidancewerealsomentioned,includingthata aresignificant,thenpurchasesof longer-termTreas- delaymightsimplifycommunicationsbykeepingthe urysecuritiesmightbepreferred,inlightof the introductionof thresholdsseparatefromthe depthandliquidityof thatmarket.However,if mar- announcementof additionalassetpurchases.Among ketsaremoresegmented,purchasesof MBSmight thebenefitsof quantitativethresholdsthatwerecited

Minutesof FederalOpenMarketCommitteeMeetings|December 269 wasthattheycouldhelpthepublicmorereadily notbestrongenoughtogeneratesustainedimproveunderstandhowthelikelytimingof aneventual mentinlabormarketconditions.Furthermore, increaseinthefederalfundsratewouldshiftin strainsinglobalfinancialmarketscontinuedtopose responsetounanticipatedchangesineconomiccon- significantdownsideriskstotheeconomicoutlook. ditionsandtheoutlook.Accordingly,thresholds Inflationhadbeensubdued,apartfromsometempocouldincreasetheprobabilitythatmarketreactions raryvariationsthatlargelyreflectedfluctuationsin toeconomicdevelopmentswouldmovelonger-term energyprices.Withlonger-terminflationexpectainterestratesinamannerconsistentwiththeCom- tionsstable,inflationoverthemediumtermwas mittee’sviewregardingthelikelyfuturepathof anticipatedtorunatorbelowtheCommittee’s short-terminterestrates.Afewparticipants longer-runobjectiveof 2percent. expressedapreferenceforusingaqualitativedescriptionof theeconomicindicatorsinfluencingtheCom- Intheirdiscussionof monetarypolicyfortheperiod mittee’sthinkingaboutcurrentandfuturemonetary ahead,allmembersbutonejudgedthatcontinued policyratherthanquantitativeguidancebecausethey provisionof monetaryaccommodationwaswarfeltthatqualitativeguidancewouldbeatleastas rantedinordertosupportfurtherprogresstoward effectiveasnumericalthresholdswhileavoidingsome theCommittee’sgoalsof maximumemploymentand potentialdisadvantages,includingthepossibilitythat pricestability.TheCommitteejudgedthatsuch thenumericalthresholdswouldbemistakenlyinter- accommodationshouldbeprovidedinpartbyconpretedastheCommittee’slonger-runobjectives.A tinuingtopurchaseMBSatapaceof $40billionper fewparticipantscommentedthatthequantitative monthandbypurchasinglonger-termTreasurysecuthresholdsmightbeinterpretedastriggersthat,when rities,initiallyatapaceof $45billionpermonth,folreached,wouldpromptanimmediateincreasein lowingthecompletionof thematurityextensionproshort-termrates.However,anumberof participants gramattheendof theyear.TheCommitteealso indicatedthattheChairman’spressconferenceand maintaineditsexistingpolicyof reinvestingprincipal otheravenuesof communicationcouldbeusedto paymentsfromitsholdingsof agencydebtand emphasize,forexample,thedistinctionbetween agencyMBSintoagencyMBSanddecidedthat, thresholdsandthelonger-runobjectivesaswellas startinginJanuary,itwillresumerollingovermaturbetweenthresholdsandtriggers.Participantsalso ingTreasurysecuritiesatauction.Whilealmostall discussedtheimportanceof clarifyingthatthe membersthoughtthattheassetpurchaseprogram thresholdswouldnotbefollowedmechanicallyand beguninSeptemberhadbeeneffectiveandsupportthatavarietyof indicatorsof labormarketcondi- iveof growth,theyalsogenerallysawthatthebentionsandinflationpressures,aswellasfinancial efitsof ongoingpurchaseswereuncertainandthat developments,wouldbetakenintoaccountinsetting thepotentialcostscouldriseasthesizeof thebalpolicy. ancesheetincreased.Variousmembersstressedthe importanceof acontinuingassessmentof labormar- Committee Policy Action ketdevelopmentsandreviewsof theprogram’sefficacyandcostsatupcomingFOMCmeetings.Incon- Committeemembersviewedtheinformationreceived sideringtheoutlookforthelabormarketandthe overtheintermeetingperiodassuggestingthateco- broadereconomy,afewmembersexpressedtheview nomicactivityandemploymentcontinuedtoexpand thatongoingassetpurchaseswouldlikelybewaratamoderatepaceinrecentmonths,abstracting ranteduntilabouttheendof 2013,whileafewothers fromweather-relateddisruptions.Householdspend- emphasizedtheneedforconsiderablepolicyaccominghadcontinuedtoadvanceandthehousingsector modationbutdidnotstateaspecifictimeframeor hadshownfurthersignsof improvement,butgrowth totalforpurchases.Severalothersthoughtthatit inthebusinesssectorhadslowed.Anecdotalevidence wouldprobablybeappropriatetoslowortostop indicatedthatuncertaintyaboutU.S.fiscalpolicy purchaseswellbeforetheendof 2013,citingconweighedheavilyonsentimentinthehouseholdand cernsaboutfinancialstabilityorthesizeof thebalbusinesssectors.Althoughtheunemploymentrate ancesheet.Onememberviewedanyadditionalpurhaddeclinedsomewhatsincethesummer,itwasstill chasesasunwarranted. elevatedrelativetolevelsthatmembersviewedas normalinthelongerrun.Membersgenerallyagreed Withregardtoitsforwardguidanceaboutthefederal thattheeconomicoutlookwaslittlechangedsince fundsrate,theCommitteedecidedtoindicateinthe thepreviousmeetingandjudgedthat,withoutsuffi- statementlanguagethatitexpectsthehighlyaccomcientpolicyaccommodation,economicgrowthmight modativestanceof monetarypolicytoremainappro-

270 99thAnnualReport|2012 priateforaconsiderabletimeaftertheassetpurchase urysecuritiesintonewissues.Fromthebeginprogramendsandtheeconomicrecoverystrength- ningof January,theDeskisdirectedtopurchase ens.Inaddition,allbutonememberagreedto longer-termTreasurysecuritiesatapaceof replacethedate-basedguidancewitheconomic about$45billionpermonth.TheCommittee thresholdsindicatingthattheexceptionallylowrange directstheDesktomaintainitsexistingpolicy forthefederalfundsratewouldremainappropriate of reinvestingprincipalpaymentsonallagency atleastaslongastheunemploymentrateremains debtandagencymortgage-backedsecuritiesin above6½percent,inflationbetweenoneandtwo theSystemOpenMarketAccountinagency yearsaheadisprojectedtobenomorethana mortgage-backedsecurities.TheDeskisalso half percentagepointabovetheCommittee’slonger- directedtocontinuepurchasingagency rungoal,andlonger-terminflationexpectationscon- mortgage-backedsecuritiesatapaceof about tinuetobewellanchored.TheCommitteethoughtit $40billionpermonth.TheCommitteedirects wouldbehelpfultoindicateinthestatementthatit theDesktoengageindollarrollandcoupon viewedtheeconomicthresholdsasconsistentwithits swaptransactionsasnecessarytofacilitate earlier,date-basedguidance.Thenewlanguagenoted settlementof theFederalReserve’sagencyMBS thattheCommitteewouldalsoconsiderotherinfor- transactions.TheSystemOpenMarketAccount mationwhendetermininghowlongtomaintainthe ManagerandtheSecretarywillkeeptheComhighlyaccommodativestanceof monetarypolicy, mitteeinformedof ongoingdevelopments includingadditionalmeasuresof labormarketcondi- regardingtheSystem’sbalancesheetthatcould tions,indicatorsof inflationpressuresandinflation affecttheattainmentovertimeof theCommitexpectations,andreadingsonfinancialdevelop- tee’sobjectivesof maximumemploymentand ments.Onememberdissentedfromthepolicydeci- pricestability.” sion,opposingtheneweconomicthresholdlanguage intheforwardguidance,aswellastheadditional Thevoteencompassedapprovalof thestatement assetpurchasesandcontinuedinterventioninthe belowtobereleasedat12:30p.m.: MBSmarket. “InformationreceivedsincetheFederalOpen Attheconclusionof thediscussion,theCommittee MarketCommitteemetinOctobersuggeststhat votedtoauthorizeanddirecttheFederalReserve economicactivityandemploymenthavecontin- Bankof NewYork,untilitwasinstructedotherwise, uedtoexpandatamoderatepaceinrecent toexecutetransactionsintheSystemAccountin months,apartfromweather-relateddisruptions. accordancewiththefollowingdomesticpolicy Althoughtheunemploymentratehasdeclined directive: somewhatsincethesummer,itremainselevated. Householdspendinghascontinuedtoadvance, “TheFederalOpenMarketCommitteeseeks andthehousingsectorhasshownfurthersigns monetaryandfinancialconditionsthatwillfos- of improvement,butgrowthinbusinessfixed terpricestabilityandpromotesustainable investmenthasslowed.Inflationhasbeenrungrowthinoutput.Tofurtheritslong-runobjec- ningsomewhatbelowtheCommittee’slongertives,theCommitteeseeksconditionsinreserve runobjective,apartfromtemporaryvariations marketsconsistentwithfederalfundstradingin thatlargelyreflectfluctuationsinenergyprices. arangefrom0to¼percent.TheCommittee Longer-terminflationexpectationshave directstheDesktocompletethematurityexten- remainedstable. sionprogramitannouncedinJunetopurchase Treasurysecuritieswithremainingmaturitiesof Consistentwithitsstatutorymandate,theCom- 6yearsto30yearswithatotalfacevalueof mitteeseekstofostermaximumemployment about$267billionbytheendof Decem- andpricestability.TheCommitteeremainsconber2012,andtosellorredeemTreasurysecuri- cernedthat,withoutsufficientpolicyaccommotieswithremainingmaturitiesof approximately dation,economicgrowthmightnotbestrong 3yearsorlesswithatotalfacevalueof about enoughtogeneratesustainedimprovementin $267billion.Followingthecompletionof this labormarketconditions.Furthermore,strainsin program,theCommitteedirectstheDeskto globalfinancialmarketscontinuetoposesignifiresumeitspolicyof rollingovermaturingTreas- cantdownsideriskstotheeconomicoutlook.

Minutesof FederalOpenMarketCommitteeMeetings|December 271 TheCommitteealsoanticipatesthatinflation centagepointabovetheCommittee’s2percent overthemediumtermlikelywillrunatorbelow longer-rungoal,andlonger-terminflation its2percentobjective. expectationscontinuetobewellanchored.The Committeeviewsthesethresholdsasconsistent Tosupportastrongereconomicrecoveryandto withitsearlierdate-basedguidance.Indeterhelpensurethatinflation,overtime,isatthe mininghowlongtomaintainahighlyaccomratemostconsistentwithitsdualmandate,the modativestanceof monetarypolicy,theCom- Committeewillcontinuepurchasingadditional mitteewillalsoconsiderotherinformation, agencymortgage-backedsecuritiesatapaceof includingadditionalmeasuresof labormarket $40billionpermonth.TheCommitteealsowill conditions,indicatorsof inflationpressuresand purchaselonger-termTreasurysecuritiesafterits inflationexpectations,andreadingsonfinancial programtoextendtheaveragematurityof its developments.WhentheCommitteedecidesto holdingsof Treasurysecuritiesiscompletedat begintoremovepolicyaccommodation,itwill theendof theyear,initiallyatapaceof $45bil- takeabalancedapproachconsistentwithits lionpermonth.TheCommitteeismaintaining longer-rungoalsof maximumemploymentand itsexistingpolicyof reinvestingprincipalpay- inflationof 2percent.” mentsfromitsholdingsof agencydebtand agencymortgage-backedsecuritiesinagency Votingforthisaction:BenBernanke,WilliamC. mortgage-backedsecuritiesand,inJanuary,will Dudley,ElizabethDuke,DennisP.Lockhart,Sandra resumerollingovermaturingTreasurysecurities Pianalto,JeromeH.Powell,SarahBloomRaskin, atauction.Takentogether,theseactionsshould JeremyC.Stein,DanielK.Tarullo,JohnC.Williams, maintaindownwardpressureonlonger-term andJanetL.Yellen. interestrates,supportmortgagemarkets,and helptomakebroaderfinancialconditionsmore Votingagainstthisaction:JeffreyM.Lacker. accommodative. Mr.Lackerdissentedbecauseheobjectedtotheasset TheCommitteewillcloselymonitorincoming purchasesandtothecharacterizationof thecondiinformationoneconomicandfinancialdevelop- tionsunderwhichanexceptionallylowrangeforthe mentsincomingmonths.If theoutlookforthe federalfundsratewouldremainappropriate.Heconlabormarketdoesnotimprovesubstantially,the tinuedtoviewassetpurchasesasunlikelytoaddto Committeewillcontinueitspurchasesof Treas- economicgrowthwithoutunacceptablyincreasing uryandagencymortgage-backedsecurities,and theriskof futureinflation,andtoseepurchasesof employitsotherpolicytoolsasappropriate, MBSasinappropriatecreditallocation.Withregard untilsuchimprovementisachievedinacontext tothefundsrate,Mr.Lackerwasconcernedthat of pricestability.Indeterminingthesize,pace, linkingtheforwardguidancetoaspecificnumerical andcompositionof itsassetpurchases,the levelof theunemploymentratewouldinhibitthe Committeewill,asalways,takeappropriate effectivenessof theCommittee’scommunications accountof thelikelyefficacyandcostsof such andincreasethepotentialforinflationarypolicy purchases. errors;hepreferredqualitativeguidanceinstead. Tosupportcontinuedprogresstowardmaxi- Itwasagreedthatthenextmeetingof theCommittee mumemploymentandpricestability,theComwouldbeheldonTuesday–Wednesday,January29– mitteeexpectsthatahighlyaccommodative 30,2013.Themeetingadjournedat11:25a.m.on stanceof monetarypolicywillremainappropri- December12,2012. ateforaconsiderabletimeaftertheassetpurchaseprogramendsandtheeconomicrecovery strengthens.Inparticular,theCommittee Notation Vote decidedtokeepthetargetrangeforthefederal fundsrateat0to¼percentandcurrentlyantici- BynotationvotecompletedonNovember9,2012, patesthatthisexceptionallylowrangeforthe theCommitteeunanimouslyapprovedtheminutesof federalfundsratewillbeappropriateatleastas theFOMCmeetingheldonOctober23–24,2012. longastheunemploymentrateremainsabove 6½percent,inflationbetweenoneandtwoyears WilliamB.English aheadisprojectedtobenomorethanahalf per- Secretary

272 99thAnnualReport|2012 Addendum: growthrateof realgrossdomesticproduct(GDP) Summary of Economic Projections wouldincreasesomewhatin2013andagainin2014, andthateconomicgrowthin2014and2015would InconjunctionwiththeDecember11–12,2012,Fed- exceedtheirestimatesof thelonger-runsustainable eralOpenMarketCommittee(FOMC)meeting, rateof growth,whiletheunemploymentratewould meetingparticipants—the7membersof theBoard declinegraduallythrough2015.Participantsproof Governorsandthe12presidentsof theFederal jectedthateachyear’sinflation,asmeasuredbythe ReserveBanks,allof whomparticipateinthedelib- annualchangeinthepriceindexforpersonalconerationsof theFOMC—submittedtheirassessments sumptionexpenditures(PCE),wouldrunclosetoor of realoutputgrowth,theunemploymentrate,infla- belowtheFOMC’slonger-runinflationobjectiveof tion,andthetargetfederalfundsrateforeachyear 2percent. from2012through2015andoverthelongerrun. Eachparticipant’sassessmentwasbasedoninforma- Asshowninfigure2,mostparticipantsjudgedthat tionavailableatthetimeof themeetingplushisor highlyaccommodativemonetarypolicywaslikelyto herjudgmentof appropriatemonetarypolicyand bewarrantedoverthenextfewyears.Inparticular, assumptionsaboutthefactorslikelytoaffecteco- 14participantsthoughtthatitwouldbeappropriate nomicoutcomes.Thelonger-runprojectionsrepre- forthefirstincreaseinthetargetfederalfundsrateto senteachparticipant’sjudgmentof thevalueto occurduring2015orlater.Mostparticipantsjudged whicheachvariablewouldbeexpectedtoconverge, thatappropriatemonetarypolicywouldincludepurovertime,underappropriatemonetarypolicyandin chasingagencymortgage-backedsecurities(MBS) theabsenceof furthershockstotheeconomy. andlonger-termTreasurysecuritiesafterthecomple- “Appropriatemonetarypolicy”isdefinedasthe tionof thematurityextensionprogramattheendof futurepathof policythateachparticipantdeems 2012. mostlikelytofosteroutcomesforeconomicactivity andinflationthatbestsatisfyhisorherindividual AsinSeptember,participantsjudgedtheuncertainty interpretationof theFederalReserve’sobjectivesof associatedwiththeoutlookforrealactivityandthe maximumemploymentandstableprices. unemploymentratetobeunusuallyhighcompared withhistoricalnorms,withtherisksweightedmainly Overall,theassessmentssubmittedinDecemberindi- towardslowereconomicgrowthandahigherunemcatedthatFOMCparticipantsprojectedthat,under ploymentrate.Whileanumberof participants appropriatemonetarypolicy,thepaceof economic viewedtheuncertaintysurroundingtheirprojections recoverywouldgraduallypickupoverthe2012–15 forinflationtobeunusuallyhigh,moresawthelevel periodandinflationwouldremainsubdued(table1 of uncertaintytobebroadlysimilartohistorical andfigure1).Participantsanticipatedthatthe Table1.EconomicprojectionsofFederalReserveBoardmembersandFederalReserveBankpresidents,December2012 Percent Centraltendency1 Range2 Variable 2012 2013 2014 2015 Longerrun 2012 2013 2014 2015 Longerrun ChangeinrealGDP 1.7to1.8 2.3to3.0 3.0to3.5 3.0to3.7 2.3to2.5 1.6to2.0 2.0to3.2 2.8to4.0 2.5to4.2 2.2to3.0 Septemberprojection 1.7to2.0 2.5to3.0 3.0to3.8 3.0to3.8 2.3to2.5 1.6to2.0 2.3to3.5 2.7to4.1 2.5to4.2 2.2to3.0 Unemploymentrate 7.8to7.9 7.4to7.7 6.8to7.3 6.0to6.6 5.2to6.0 7.7to8.0 6.9to7.8 6.1to7.4 5.7to6.8 5.0to6.0 Septemberprojection 8.0to8.2 7.6to7.9 6.7to7.3 6.0to6.8 5.2to6.0 8.0to8.3 7.0to8.0 6.3to7.5 5.7to6.9 5.0to6.3 PCEinflation 1.6to1.7 1.3to2.0 1.5to2.0 1.7to2.0 2.0 1.6to1.8 1.3to2.0 1.4to2.2 1.5to2.2 2.0 Septemberprojection 1.7to1.8 1.6to2.0 1.6to2.0 1.8to2.0 2.0 1.5to1.9 1.5to2.1 1.6to2.2 1.8to2.3 2.0 CorePCEinflation3 1.6to1.7 1.6to1.9 1.6to2.0 1.8to2.0 1.6to1.8 1.5to2.0 1.5to2.0 1.7to2.2 Septemberprojection 1.7to1.9 1.7to2.0 1.8to2.0 1.9to2.0 1.6to2.0 1.6to2.0 1.6to2.2 1.8to2.3 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andprojectionsforbothmeasuresofinflationarefromthefourthquarterofthepreviousyeartothefourth quarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures (PCE)andthepriceindexforPCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarterofthe yearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’s assessmentoftheratetowhicheachvariablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.The SeptemberprojectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonSeptember12–13,2012. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

Minutesof FederalOpenMarketCommitteeMeetings|December 273 Figure1.Centraltendenciesandrangesofeconomicprojections,2012–15andoverthelongerrun Percent Change in real GDP 5 Central tendency of projections 4 Range of projections 3 2 1 + Actual 0 - 1 2 3 2007 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Percent Unemployment rate 10 9 8 7 6 5 2007 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Percent PCE inflation 3 2 1 2007 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Percent Core PCE inflation 3 2 1 2007 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Note:Definitionsofvariablesareinthegeneralnotetotable1.Thedatafortheactualvaluesofthevariablesareannual.

274 99thAnnualReport|2012 Figure2.OverviewofFOMCparticipants’assessmentsofappropriatemonetarypolicy,December2012 Number of participants Appropriate timing of policy firming 13 13 12 11 10 9 8 7 6 5 4 3 3 2 2 1 1 2013 2014 2015 2016 Appropriate pace of policy firming Percent Target federal funds rate at year-end 6 5 4 3 2 1 0 2012 2013 2014 2015 Longer run Note:Intheupperpanel,theheightofeachbardenotesthenumberofFOMCparticipantswhojudgethat,underappropriatemonetarypolicy,thefirstincreaseinthetargetfederalfundsratefromitscurrentrangeof0to¼percentwilloccurinthespecifiedcalendaryear.InSeptember2012,thenumbersofFOMCparticipantswhojudgedthatthefirst increaseinthetargetfederalfundsratewouldoccurin2012,2013,2014,2015,and2016were,respectively,1,3,2,12,and1.Inthelowerpanel,eachshadedcircleindicates thevalue(roundedtothenearest¼percentagepoint)ofanindividualparticipant’sjudgmentoftheappropriatelevelofthetargetfederalfundsrateattheendofthespecified calendaryearoroverthelongerrun.

Minutesof FederalOpenMarketCommitteeMeetings|December 275 norms;mostconsideredtheriskstoinflationtobe furthershockstotheeconomywas5.2to6.0percent, roughlybalanced. unchangedfromSeptember.Mostparticipantsprojectedthattheunemploymentratewouldconvergeto TheOutlookforEconomicActivity theirestimatesof itslonger-runnormalrateinfiveor Participantsjudgedthattheeconomygrewatamod- sixyears,whileafewjudgedthatlesstimewouldbe eratepaceoverthesecondhalf of 2012andprojected needed. that,conditionalontheirindividualassumptions aboutappropriatemonetarypolicy,theeconomy Figures3.Aand3.Bprovidedetailsonthediversity wouldgrowatasomewhatfasterpacein2013before of participants’viewsregardingthelikelyoutcomes expandingin2014and2015atarateabovewhatpar- forrealGDPgrowthandtheunemploymentrate ticipantssawasthelonger-runrateof outputgrowth. overthenextthreeyearsandoverthelongerrun. Thecentraltendencyof theirprojectionsforthe ThedispersionintheseprojectionsreflectsdifferchangeinrealGDPin2012was1.7to1.8percent, encesinparticipants’assessmentsof manyfactors, slightlylowerthaninSeptember.Anumberof par- includingappropriatemonetarypolicyanditseffects ticipantsmentionedthatlastsummer’sdroughtand ontheeconomy,therateof improvementinthe theeffectsof HurricaneSandylikelyhadhelddown housingsector,thespillovereffectsof thefiscaland economicactivityinthesecondhalf of thisyear. financialsituationinEurope,theprospectivepathfor Manyparticipantsalsonotedthat,whileconditions U.S.fiscalpolicy,theextentof structuraldislocations inthehousingandlabormarketsappearedtohave inthelabormarket,thelikelyevolutionof creditand improvedrecently,uncertaintyaboutfiscalpolicy financialmarketconditions,andlonger-termtrends appearedtobeholdingbackbusinessandhousehold inproductivityandthelaborforce.Withthedatafor spending.Participants’projectionsfor2013through muchof 2012nowinhand,thedispersionof partici- 2015weregenerallylittlechangedrelativetotheir pants’projectionsof realGDPgrowthandthe Septemberprojections.Thecentraltendencyof par- unemploymentratethisyearnarrowedcompared ticipants’projectionsforrealGDPgrowthin2013 withtheirSeptembersubmissions.Meanwhile,the was2.3to3.0percent,followedbyacentraltendency distributionof participants’forecastsforthechange of 3.0to3.5percentfor2014andoneof 3.0to inrealGDPin2013shifteddownabit,andthatfor 3.7percentfor2015.Thecentraltendencyforthe 2014narrowedslightly.However,therangeof projeclonger-runrateof increaseof realGDPremained tionsforrealGDPgrowthin2015waslittlechanged 2.3to2.5percent,unchangedfromSeptember.Most fromSeptember.Thedistributionsof theunemployparticipantsnotedthatthehighdegreeof monetary mentrateprojectionsattheendof 2012,2013,and policyaccommodationassumedintheirprojections 2014allshiftedlower,whiletherangeof projections wouldhelppromotetheeconomicrecoveryoverthe fortheunemploymentratefor2015,at5.7to6.8perforecastperiod;however,theyalsojudgedthatseveral cent,remainedclosetoitsSeptemberlevel.Thedisfactorswouldlikelyholdbackthepaceof economic persionof estimatesforthelonger-runrateof output expansion,includingslowergrowthabroad,astill- growthstayedfairlynarrow,withallbutonebetween weakhousingmarket,thedifficultfiscalandfinancial 2.2and2.5percent.Therangeof participants’estisituationinEurope,andfiscalrestraintintheUnited matesof thelonger-runrateof unemployment,at States. 5.0to6.0percent,narrowedrelativetoSeptember. Thisrangereflecteddifferentjudgmentsamongpar- Participantsprojectedtheunemploymentrateforthe ticipantsaboutseveralfactors,includingtheoutlook finalquarterof 2012tobeclosetoitsaveragelevelin forlaborforceparticipationandthestructureof the OctoberandNovember,implyingaratesomewhat labormarket. belowthatprojectedinSeptember.Participants anticipatedagradualdeclineintheunemployment TheOutlookforInflation rateovertheforecastperiod;evenso,theygenerally Participants’viewsonthebroadoutlookforinflation thoughtthattheunemploymentrateattheendof underappropriatemonetarypolicywerelittle 2015wouldstillbewellabovetheirindividualesti- changedfromSeptember.Mostanticipatedthat matesof itslonger-runnormallevel.Thecentralten- inflationfor2012asawholewouldbecloseto denciesof participants’forecastsfortheunemploy- 1.6percent,somewhatlowerthanprojectedinSepmentratewere7.4to7.7percentattheendof 2013, tember.Anumberof participantsremarkedthat 6.8to7.3percentattheendof 2014,and6.0to recentinflationreadingshadcomeinbelowtheir 6.6percentattheendof 2015.Thecentraltendency expectations.Almostallof theparticipantsjudged of participants’estimatesof thelonger-runnormal thatbothheadlineandcoreinflationwouldremain rateof unemploymentthatwouldprevailunder subduedoverthe2013–15period,runningatrates appropriatemonetarypolicyandintheabsenceof equaltoorbelowtheFOMC’slonger-runobjective

276 99thAnnualReport|2012 Figure3.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2012–15andoverthelongerrun Number of participants 2012 20 December projections 18 16 September projections 14 12 10 8 6 4 2 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 - 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 Percent range Number of participants 2013 20 18 16 14 12 10 8 6 4 2 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 - 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 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 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 - 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 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 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 - 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 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 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 - 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 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|December 277 Figure3.B.Distributionofparticipants’projectionsfortheunemploymentrate,2012–15andoverthelongerrun Number of participants 2012 20 December projections 18 16 September 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 - 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 Percent range Number of participants 2013 20 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 - 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 Percent range Number of participants 2014 20 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 - 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 Percent range Number of participants 2015 20 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 - 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 Percent range Number of participants Longer run 20 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 - 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 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

278 99thAnnualReport|2012 of 2percent.Specifically,thecentraltendencyof thanorequalto6½percent.Incontrast,amajority participants’projectionsforinflation,asmeasuredby of thosewhofavoredanearliertighteningof policy thePCEpriceindex,moveddownto1.3to2.0per- pointedtoconcernsaboutinflationasaprimaryreacentfor2013andwaslittlechangedfor2014and sonforexpectingthatitwouldbeappropriateto 2015at1.5to2.0percentand1.7to2.0percent, tightenpolicysooner.Participantswereaboutevenly respectively.Thecentraltendenciesof theforecasts splitbetweenthosewhojudgedtheappropriatepath forcoreinflationwerebroadlysimilartothosefor forthefederalfundsratetobeunchangedrelativeto theheadlinemeasurefor2013through2015.Indis- Septemberandthosewhosawtheappropriatepath cussingfactorslikelytosustainlowinflation,several aslower. participantscitedstableinflationexpectationsand expectationsforcontinuedsizableresourceslack. Nearlyallparticipantssawtheappropriatetargetfor thefederalfundsrateattheendof 2015asstillwell Figures3.Cand3.Dprovideinformationaboutthe belowitsexpectedlonger-runvalue.Estimatesof the diversityof participants’viewsabouttheoutlookfor longer-runtargetfederalfundsraterangedfrom3to inflation.Therangeof participants’projectionsfor 4½percent,reflectingtheCommittee’sinflation headlineinflationfor2012narrowedfrom1.5to objectiveof 2percentandparticipants’judgments 1.9percentinSeptemberto1.6to1.8percentin aboutthelonger-runequilibriumlevelof therealfed- December;nearlyallparticipants’projectionsin eralfundsrate. Decemberwereat1.6percentor1.7percent,broadly inlinewithrecentinflationreadings.Thedistribu- Participantsalsoprovidedinformationontheirviews tionsof participants’projectionsforheadlineinfla- regardingtheappropriatepathof theFederal tionin2013and2014shiftedlowercomparedwith Reserve’sbalancesheet.Mostparticipantsthoughtit thecorrespondingdistributionsforSeptember,while wasappropriatefortheCommitteetocontinuepurtherangeof projectionsforcoreinflationnarrowed chasingMBSandlonger-termTreasurysecurities slightlyforbothyears.Thedistributionsforcoreand aftercompletingthematurityextensionprogramat overallinflationin2015wereconcentratednearthe theendof thisyear.Intheirprojections,takinginto Committee’slonger-runinflationobjectiveof 2per- accountthelikelybenefitsandcostsof purchasesas cent,althoughsomewhatlesssothaninSeptember. wellastheexpectedevolutionof theoutlook,these participantswereapproximatelyevenlydivided AppropriateMonetaryPolicy betweenthosewhojudgedthatitwouldlikelybe Asindicatedinfigure2,mostparticipantsjudged appropriatefortheCommitteetocompleteitsasset thatexceptionallylowlevelsof thefederalfundsrate purchasessometimearoundthemiddleof 2013and wouldremainappropriateforseveralmoreyears.In thosewhojudgedthatitwouldlikelybeappropriate particular,13participantsthoughtthatthefirst fortheassetpurchasestocontinuebeyondthatdate. increaseinthetargetfederalfundsratewouldnotbe Incontrast,severalparticipantsbelievedtheComwarranteduntil2015,and1judgedthatpolicyfirm- mitteewouldbestfosteritsdualobjectivesbyending ingwouldlikelynotbeappropriateuntil2016(upper itspurchasesof Treasurysecuritiesorallof itsasset panel).The13participantswhoexpectedthatthe purchasesattheendof thisyearwhenthematurity targetfederalfundsratewouldnotmoveaboveits extensionprogramwascompleted. effectivelowerbounduntil2015thoughtthefederal fundsratewouldbe1¼percentorlowerattheendof Keyfactorsinformingparticipants’viewsof theecothatyear,whilethe1participantwhoexpectedthat nomicoutlookandtheappropriatesettingformonpolicyfirmingwouldcommencein2016sawthefed- etarypolicyincludetheirjudgmentsregardinglabor eralfundsratetargetat50basispointsattheendof marketconditionsthatwouldbeconsistentwith thatyear.Fiveparticipantsjudgedthatanearlier maximumemployment,theextenttowhichemployincreaseinthefederalfundsrate,in2013or2014, mentcurrentlydeviatedfrommaximumemployment, wouldbemostconsistentwiththeCommittee’s theextenttowhichprojectedinflationoverthe statutorymandate.Thoseparticipantsjudgedthat mediumtermdeviatedfromtheCommittee’slongertheappropriatevalueforthefederalfundsratewould termobjectiveof 2percent,andparticipants’projecrangefrom½to2¾percentattheendof 2014and tionsof thelikelytimehorizonnecessarytoreturn from2to4½percentattheendof 2015. employmentandinflationtomandate-consistentlevels.Manyparticipantsmentionedeconomicthresh- Amongtheparticipantswhosawalatertighteningof oldsbasedontheunemploymentrateandtheinflapolicy,amajorityindicatedthattheybelieveditwas tionoutlookthatwereconsistentwiththeirjudgappropriatetomaintainthecurrentlevelof thefed- mentsof whenitwouldbeappropriatetoconsider eralfundsrateuntiltheunemploymentrateisless beginningtoraisethefederalfundsrate.Acoupleof

Minutesof FederalOpenMarketCommitteeMeetings|December 279 Figure3.C.Distributionofparticipants’projectionsforPCEinflation,2012–15andoverthelongerrun Number of participants 2012 20 December projections 18 16 September projections 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2013 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

280 99thAnnualReport|2012 Figure3.D.Distributionofparticipants’projectionsforcorePCEinflation,2012–15 Number of participants 2012 20 December projections 18 September projections 16 14 12 10 8 6 4 2 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2013 20 18 16 14 12 10 8 6 4 2 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.6 1.8 2.0 2.2 2.4 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|December 281 participantsnotedthattheirassessmentsof the Table2.Averagehistoricalprojectionerrorranges appropriatepathforthefederalfundsratetookinto Percentagepoints accountthelikelihoodthattheneutrallevelof the federalfundsratewassomewhatbelowitshistorical Variable 2012 2013 2014 2015 norm.Therewassomeconcernexpressedthatapro- ChangeinrealGDP1 ±0.6 ±1.4 ±1.7 ±1.7 tractedperiodof veryaccommodativemonetary Unemploymentrate1 ±0.2 ±0.9 ±1.5 ±1.9 policycouldleadtoimbalancesinthefinancial Totalconsumerprices2 ±0.5 ±0.9 ±1.1 ±1.0 system.Itwasalsonotedthatbecausetheappropri- Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared atestanceof monetarypolicyisconditionalonthe errorofprojectionsfor1992through2011thatwerereleasedinthefallby evolutionof realactivityandinflationovertime, variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast Uncertainty,”undercertainassumptions,thereisabouta70percentprobability assessmentsof theappropriatefuturepathof the thatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein federalfundsrateandthebalancesheetcouldchange rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Further informationmaybefoundinDavidReifschneiderandPeterTulip(2007),“Gauging if economicconditionsweretoevolveinanunextheUncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,” pectedmanner. FinanceandEconomicsDiscussionSeries2007-60(Washington:Boardof GovernorsoftheFederalReserveSystem,November). 1 Definitionsofvariablesareinthegeneralnotetotable1. Figure3.Edetailsthedistributionof participants’ 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen judgmentsregardingtheappropriatelevelof thetar- mostwidelyusedingovernmentandprivateeconomicforecasts.Projection ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof getfederalfundsrateattheendof eachcalendaryear theyearindicated. from2012to2015andoverthelongerrun.Aspreviouslynoted,mostparticipantsjudgedthateconomic conditionswouldwarrantmaintainingthecurrent toricalnorms.Themainfactorscitedascontributing lowlevelof thefederalfundsrateuntil2015.Views totheelevateduncertaintyabouteconomicoutcomes ontheappropriatelevelof thefederalfundsrateby werethedifficultiesinvolvedinpredictingfiscal theendof 2015varied,with12participantsseeing policyintheUnitedStates,thecontinuingpotential theappropriatelevelof thefederalfundsrateas forEuropeandevelopmentstothreatenfinancialsta- 1percentorlowerand4of themseeingtheappropri- bility,andthepossibilityof ageneralslowdownin atelevelas2½percentorhigher.Generally,thepar- globaleconomicgrowth.AsinSeptember,particiticipantswhojudgedthatalongerperiodof very pantsnotedthechallengesassociatedwithforecastaccommodativemonetarypolicywouldbeappropri- ingthepathof theU.S.economicrecoveryfollowing atewerethosewhoprojectedthatasizablegap afinancialcrisisandrecessionthatdifferedmarkedly betweentheunemploymentrateandthelonger-run fromrecenthistoricalexperience.Anumberof parnormallevelof theunemploymentratewouldpersist ticipantsalsocommentedthatintheaftermathof the until2015orlater.Incontrast,themajorityof the5 financialcrisis,theyweremoreuncertainaboutthe participantswhojudgedthatpolicyfirmingshould levelof potentialoutputanditsrateof growth.It beginin2013or2014indicatedthattheCommittee wasnotedthatsomeof theuncertaintyaboutpotenwouldneedtoactrelativelysooninordertokeep tialoutputarosefromtheriskthatacontinuationof inflationneartheFOMC’slonger-runobjectiveof elevatedlevelsof long-termunemploymentmight 2percentandtopreventariseininflation impairtheskillsof theaffectedindividualsorcause expectations. someof themtodropoutof thelaborforce,thereby reducingpotentialoutputinthemediumterm. UncertaintyandRisks Nearlyallof theparticipantsjudgedtheircurrent Amajorityof participantsreportedthattheysawthe levelsof uncertaintyaboutrealGDPgrowthand riskstotheirforecastsof realGDPgrowthas unemploymenttobehigherthanwasthenormdur- weightedtowardthedownsideand,accordingly,the ingtheprevious20years(figure4).2Sevenpartici- riskstotheirprojectionsof theunemploymentrate astiltedtotheupside.Themostfrequentlyidentified pantsjudgedthatthelevelsof uncertaintyassociated sourcesof riskwereU.S.fiscalpolicy,whichmany withtheirforecastsof totalPCEinflationwere participantsthoughthadthepotentialtoslowecohigheraswell,whileanother10participantsviewed nomicactivitysignificantlyoverthenearterm,and uncertaintyaboutinflationasbroadlysimilartohisthesituationinEurope. 2 Table2providesestimatesoftheforecastuncertaintyforthe Mostparticipantscontinuedtojudgetherisksto changeinrealGDP,theunemploymentrate,andtotalconsumerpriceinflationovertheperiodfrom1992through2011. theirprojectionsforinflationasbroadlybalanced, Attheendofthissummary,thebox“ForecastUncertainty” withseveralhighlightingtherecentstabilityof discussesthesourcesandinterpretationofuncertaintyinthe longer-terminflationexpectations.However,three economicforecastsandexplainstheapproachusedtoassessthe uncertaintyandrisksattendingtheparticipants’projections. participantssawtheriskstoinflationastiltedtothe

282 99thAnnualReport|2012 Figure3.E.Distributionofparticipants’projectionsforthetargetfederalfundsrate,2012–15andoverthelongerrun Number of participants 2012 December projections September projections 1 2 8 0 16 14 12 10 8 6 4 2 0.00 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 4.3 8 - 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 Percent range Number of participants 2013 20 18 16 14 12 10 8 6 4 2 0.00 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 4.3 8 - 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 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 0.00 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 4.3 8 - 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 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 0.00 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 4.3 8 - 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 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 0.00 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 4.3 8 - 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 Percent range Note:Thetargetfederalfundsrateismeasuredasthelevelofthetargetrateattheendofthecalendaryearorinthelongerrun.

Minutesof FederalOpenMarketCommitteeMeetings|December 283 Figure4.Uncertaintyandrisksineconomicprojections Number of participants Number of participants Uncertainty about GDP growth 20 Risks to GDP growth 20 December projections 18 December projections 18 September projections 16 September 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 20 Risks to the unemployment rate 20 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 20 Risks to PCE inflation 20 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 20 Risks to core PCE inflation 20 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.

284 99thAnnualReport|2012 downside,reflecting,forexample,risksof disinfla- U.S.fiscalimbalances,thecurrenthighlyaccommotionthatcouldarisefromadverseshockstothe dativestanceof monetarypolicy,anduncertainty economythatpolicywouldhavelimitedscopetooff- abouttheCommittee’sabilitytoshifttoaless set.Acoupleof participantssawtheriskstoinflation accommodativepolicystancewhenitbecomes asweightedtotheupsideinlightof concernsabout appropriatetodoso.

Minutesof FederalOpenMarketCommitteeMeetings|December 285 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers 70percentconfidenceintervalsforoverallinflation oftheBoardofGovernorsandthepresidentsofthe wouldbe1.5to2.5percentinthecurrentyear,1.1to FederalReserveBanksinformdiscussionsofmon- 2.9percentinthesecondyear,0.9to3.1percentin etarypolicyamongpolicymakersandcanaidpublic thethirdyear,and1.0to3.0percentinthefourth understandingofthebasisforpolicyactions.Con- year. siderableuncertaintyattendstheseprojections,how- Becausecurrentconditionsmaydifferfromthose ever.Theeconomicandstatisticalmodelsandrelathatprevailed,onaverage,overhistory,participants tionshipsusedtohelpproduceeconomicforecasts providejudgmentsastowhethertheuncertainty arenecessarilyimperfectdescriptionsofthereal attachedtotheirprojectionsofeachvariableis world,andthefuturepathoftheeconomycanbe greaterthan,smallerthan,orbroadlysimilartotypiaffectedbymyriadunforeseendevelopmentsand callevelsofforecastuncertaintyinthepast,as events.Thus,insettingthestanceofmonetary shownintable2.Participantsalsoprovidejudgments policy,participantsconsidernotonlywhatappearsto astowhethertheriskstotheirprojectionsare bethemostlikelyeconomicoutcomeasembodiedin weightedtotheupside,areweightedtothedowntheirprojections,butalsotherangeofalternative side,orarebroadlybalanced.Thatis,participants possibilities,thelikelihoodoftheiroccurring,andthe judgewhethereachvariableismorelikelytobe potentialcoststotheeconomyshouldtheyoccur. aboveorbelowtheirprojectionsofthemostlikely Table2summarizestheaveragehistoricalaccuracy outcome.Thesejudgmentsabouttheuncertainty ofarangeofforecasts,includingthosereportedin andtherisksattendingeachparticipant’sprojections pastMonetaryPolicyReportsandthosepreparedby aredistinctfromthediversityofparticipants’views theFederalReserveBoard’sstaffinadvanceof aboutthemostlikelyoutcomes.Forecastuncertainty meetingsoftheFederalOpenMarketCommittee. isconcernedwiththerisksassociatedwithaparticu- Theprojectionerrorrangesshowninthetableillus- larprojectionratherthanwithdivergencesacrossa tratetheconsiderableuncertaintyassociatedwith numberofdifferentprojections. economicforecasts.Forexample,supposeapartici- Aswithrealactivityandinflation,theoutlookforthe pantprojectsthatrealgrossdomesticproduct(GDP) futurepathofthefederalfundsrateissubjecttoconandtotalconsumerpriceswillrisesteadilyatannual siderableuncertainty.Thisuncertaintyarisesprimarily ratesof,respectively,3percentand2percent.Ifthe becauseeachparticipant’sassessmentoftheapprouncertaintyattendingthoseprojectionsissimilarto priatestanceofmonetarypolicydependsimportantly thatexperiencedinthepastandtherisksaroundthe ontheevolutionofrealactivityandinflationover projectionsarebroadlybalanced,thenumbers time.Ifeconomicconditionsevolveinanunexpected reportedintable2wouldimplyaprobabilityofabout manner,thenassessmentsoftheappropriatesetting 70percentthatactualGDPwouldexpandwithina ofthefederalfundsratewouldchangefromthat rangeof2.4to3.6percentinthecurrentyear,1.6to pointforward. 4.4percentinthesecondyear,and1.3to4.7percent inthethirdandfourthyears.Thecorresponding

287 Litigation During2012,theBoardof Governorswasapartyin Gelbv.Boardof Governors,No.12-cv-4880(S.D.New 13lawsuitsorappealsfiledthatyearandwasaparty York,filedJune21,2012),isaFreedomof Informain13othercasespendingfrompreviousyears,fora tionActcase. totalof 26cases.In2011,theBoardhadbeenaparty inatotalof 22cases.Asof December31,2012, StateNationalBankof BigSpringv.Bernanke, 17caseswerepending. No.12-cv-1032(D.Districtof Columbia,filed June21,2012),isachallengetotheconstitutionality Conoverv.Boardof Governors,No.12-cv-6480(N.D. of theConsumerFinancialProtectionBureauand California,filedDecember20,2012),isaFreedomof theFinancialStabilityOversightCouncil. InformationActcase. Mashakv.FederalReserveBankSystem,etal., Crismanv.Boardof Governorsetal.,No.12-cv-1871 No.12-cv-1333(D.Minnesota,filedJune1,2012), (D.Districtof Columbia,filedNovember19,2012), wasachallengeregardingmortgageforeclosure.On isaFreedomof InformationActcase. February14,2013,thedistrictcourtdismissedthe action. Wisev.FederalReserveBoard,No.12-cv-1636(D. FirstPryorityBankv.Boardof Governors,No.12-cv- Districtof Columbia,filedOctober2,2012),isa 415-D(W.D.Oklahoma,filedApril17,2012),wasa claimundertheFederalTortClaimsAct. challengetoanagencydecisionregardingreleaseof confidentialsupervisoryinformation.OnOctober18, McKinleyv.Boardof Governors,No12-cv-1175(D. 2012,thecasewasdismissedbyconsentof the Districtof Columbia,filedJuly18,2012),wasaFreeparties. domof InformationActcase.OnMarch7,2013,the plaintiff voluntarilydismissedtheactionwith DeNaplesv.Boardof Governorsetal.,No.12-1198 prejudice. (D.C.Circuit,filedApril19,2012),wasapetitionfor reviewof cease-and-desistordersissuedbytheBoard JudicialWatchv.Boardof GovernorsandFederal andtheOfficeof theComptrollerof theCurrency. OpenMarketCommittee,No.12-cv-1114(D.District OnJanuary29,2013,theCourtof Appealsvacated of Columbia,filedJuly6,2012),wasaFreedomof theordersandremandedtotheagenciesforaddi- InformationActcase.OnFebruary12,2013,the tionalaction. plaintiff voluntarilydismissedtheactionwith prejudice. FreedomWatchv.Boardof Governors,No.12-cv-314 (D.Districtof Columbia,filedFebruary27,2012), VonBrinckenv.Boardof Governors,No.78503(Supe- wasaFreedomof InformationActcase.OnFebruriorCourtof California,NevadaCounty,filed ary27,2013,thedistrictcourtgrantedthegovern- June26,2012),wasasuitinvolvingamortgage.On ment’smotiontodismiss. August3,2012,theplaintiff voluntarilydismissedthe Boardof Governorsasaparty. Estateof Deleonv.Boardof Governors,No.11-cv- 1538(N.D.NewYork,filedDecember30,2011),was Marcussev.UnitedStatesDepartmentof Justice,et acomplaintinvolvingfailuretoaddressaconsumer al.,No.12-cv-1025(D.Districtof Columbia,filed complaintataregulatedbank.OnFebruary14,2013, June22,2012),isaFreedomof InformationActcase. thedistrictcourtdismissedthecase.

288 99thAnnualReport|2012 Hallerv.U.S.Departmentof HousingandUrban andtheFourthCircuitaffirmedthedismissal Developmentetal.,No11-cv-881MRB-KLL(S.D. (No.12-1914)onMarch15,2013. Ohio,filedDecember16,2011),wasanactionarising outof amortgageforeclosure.OnMarch4,2013,the Perryv.Bernanke,No.11-cv-1246(RWR)(D.District districtcourtgrantedtheBoard’smotiontodismiss. of Columbia,filedJuly7,2011),wasanemployment discriminationaction.OnMay22,2012,theplaintiff Farrellv.Geithneretal.,No.12-cv-0026(M.D. voluntarilydismissedtheaction. Florida,filedinstatecourtDecember15,2011; noticeof removalfiledJanuary19,2012),wasan Barraganv.Boardof Governors,No.11-cv-0696CASactionrelatingtoataxlien.OnFebruary29,2012, (JCx)(C.D.California,filedMay3,2011),wasa thedistrictcourtsubstitutedtheUnitedStatesas Freedomof InformationActcase.OnApril30,2012, defendantandterminatedallclaimsagainstthe thedistrictcourtgrantedtheBoard’smotiontodis- Board. misstheaction. NACSetal.v.Boardof Governors,No.11-cv- Murrayv.Boardof Governors,No.11-1063(Sixth 2075(RJL)(D.Districtof Columbia,filedNovem- Circuit,filedJanuary14,2011),wasanappealof a ber22,2011),isachallengetoregulationsissuedpurdistrictcourtorder(763F.Supp.2d860)granting suanttosection1075of theDodd-FrankWallStreet summaryjudgmenttotheBoardonachallengeto ReformandConsumerProtectionActrelatingto theconstitutionalityof federalexpendituresrelating debitcardfees. toAmericanInternationalGroup(AIG).OnJune1, 2012,thecourtof appealsaffirmedthedistrict Handyv.Bernanke,No.12-1207(FourthCircuit, court’sjudgment(681F.3d744),andonDecemfiledFebruary3,2012),wasanappealof anorderof ber10,2012,theSupremeCourtdeniedfurther thedistrictcourtfortheEasternDistrictof Virginia review. dismissinganactionrelatingtoemploymentatthe FederalReserveBankof Richmond.OnJune8, McKinleyv.Boardof Governors,No.10-5353(Dis- 2012,thecourtof appealsaffirmedthedistrict trictof ColumbiaCircuit,filedOctober22,2010), court’sdismissalof theaction. wasanappealfromanorderof thedistrictcourt grantingtheBoard’smotionforsummaryjudgment CitiMortgage,Inc.v.Kokolis,No.11-cv-2933-RBH inaFreedomof InformationActcase(744F.Supp. (D.SouthCarolina,filedinstatecourtAugust5, 2d128(D.Districtof Columbia,September29, 2011;noticeof removalfiledOctober27,2011),isa 2010)).OnJune3,2011,thecourtof appeals third-partycomplaintagainsttheBoardandthe affirmedthedistrictcourt’sorder(647F.3d331).On UnitedStatesDepartmentof theTreasurybythe January12,2012,theSupremeCourtdeniedfurther defendantinamortgageforeclosureaction.Thedisreview. trictcourtdismissedtheactiononMay30,2012,and theplaintiff’sappealtotheFourthCircuitCourtof Appeals(No.12-1917)ispending. McKinleyv.Boardof Governors,No.10-00751(D. Districtof Columbia,filedMay11,2010),wasa FirstCitizensBankandTrustCo.v.Spirakis,No.11- Freedomof InformationActcase.OnMarch29, cv-2895-RBH(D.SouthCarolina,filedinstatecourt 2012,thedistrictcourtgrantedtheBoard’smotion August5,2011;noticeof removalfiledOctober24, forsummaryjudgment. 2011),isathird-partycomplaintagainsttheBoard andtheUnitedStatesDepartmentof theTreasuryby Artisv.Greenspan,No.01-cv-0400(D.Districtof thedefendantinamortgageforeclosureaction.The Columbia,filedFebruary22,2001),isanemploydistrictcourtdismissedtheactiononMay30,2012, mentdiscriminationaction.

289 Statistical Tables Table1.FederalReserveopenmarkettransactions,2012 Millionsofdollars Typeofsecurity Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total andtransaction U.S.Treasurysecurities1 Outrighttransactions2 Treasurybills Grosspurchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 18,423 18,423 20,841 18,423 24,361 18,423 0 0 0 0 0 0 118,894 Fornewbills 18,423 18,423 20,841 18,423 24,361 18,423 0 0 0 0 0 0 118,894 Redemptions 0 0 0 0 0 0 18,423 0 0 0 0 0 18,423 Otherswithin1year Grosspurchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Grosssales 11,659 12,643 10,609 12,220 12,942 14,788 7,927 8,928 3,721 594 1 26 96,058 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 1,791 11,762 0 827 102 382 14,864 1to5years Grosspurchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Grosssales 33,391 31,723 33,828 32,176 31,587 28,869 31,720 30,062 35,275 39,064 37,899 38,002 403,596 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 28,734 29,723 27,101 28,311 29,405 24,478 29,022 32,403 28,193 23,997 33,678 28,871 343,916 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 12,952 16,672 16,744 15,748 15,097 17,469 15,433 16,179 13,668 16,112 16,221 17,891 190,186 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 41,686 46,395 43,845 44,059 44,502 41,947 44,455 48,582 41,861 40,109 49,899 46,762 534,102 Grosssales 45,050 44,366 44,437 44,396 44,529 43,657 39,647 38,990 38,996 39,658 37,900 38,028 499,654 Redemptions 0 0 0 0 0 0 20,214 11,762 0 827 102 382 33,287 NetchangeinU.S. Treasury securities -3,364 2,029 -592 -337 -27 -1,710 -15,406 -2,170 2,865 -376 11,897 8,352 1,161 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 2,496 681 4,339 1,907 1,319 1,768 455 3,819 3,805 1,503 2,619 2,500 27,211 Netchangeinfederal agencyobligations -2,496 -681 -4,339 -1,907 -1,319 -1,768 -455 -3,819 -3,805 -1,503 -2,619 -2,500 -27,211 Mortgage-backedsecurities3 Netsettlements2 Netchangein mortgage-backed securities -1,672 4,784 -4,004 11,013 3,945 3,255 -1,549 -9,761 -8,707 17,051 31,581 43,042 88,978 (continuedonnextpage)

290 99thAnnualReport|2012 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 0 810 0 0 0 0 810 Grosssales 0 0 0 0 0 0 0 810 0 0 0 0 810 Reverserepurchaseagreements4 Grosspurchases 1,791,992 1,769,570 1,933,414 1,899,934 2,040,796 1,817,642 1,853,469 2,126,434 1,730,865 2,064,996 1,904,159 2,018,199 22,951,470 Grosssales 1,777,081 1,772,134 1,951,112 1,898,867 2,043,323 1,804,989 1,859,107 2,129,510 1,734,986 2,072,000 1,899,633 2,034,666 22,977,408 Netchangein temporary transactions 14,911 -2,564 -17,698 1,067 -2,527 12,653 -5,638 -3,076 -4,121 -7,005 4,526 -16,467 -25,939 Totalnetchangein SystemOpenMarket Account 9,051 -1,216 -22,629 -1,177 -3,873 9,175 -21,499 -9,065 -5,061 -8,884 13,805 -10,615 -51,988 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 291 Table2.FederalReserveBankholdingsofU.S.Treasuryandfederalagencysecurities,December31,2010–2012 Millionsofdollars December31 Change Description 2012 2011 2010 2011to2012 2010to2011 U.S.Treasurysecurities Heldoutright1 1,666,145 1,663,446 1,021,493 2,699 641,953 Byremainingmaturity Bills 1–90days 0 18,423 18,423 -18,423 0 91daysto1year 0 0 0 0 0 Notesandbonds 1yearorless 21 114,829 70,449 -114,808 44,380 Morethan1yearthrough5years 378,476 649,698 439,594 -271,222 210,104 Morethan5yearsthrough10years 862,410 649,913 333,955 212,497 315,958 Morethan10years 425,238 230,583 159,072 194,655 71,511 Bytype Bills 0 18,423 18,423 -18,423 0 Notes 1,110,398 1,286,344 773,285 -175,946 513,059 Bonds 555,747 358,679 229,786 197,068 128,893 Federalagencysecurities Heldoutright1 76,783 103,994 147,460 -27,211 -43,466 Byremainingmaturity Discountnotes 1–90days 0 0 0 0 0 91daysto1year 0 0 0 0 0 Coupons 1yearorless 19,562 27,211 43,466 -7,649 -16,255 Morethan1yearthrough5years 52,830 60,603 71,050 -7,773 -10,447 Morethan5yearsthough10years 2,044 13,833 30,597 -11,789 -16,764 Morethan10years 2,347 2,347 2,347 0 0 Bytype Discountnotes 0 0 0 0 0 Coupons 76,783 103,994 147,460 -27,211 -43,466 Byissuer FederalHomeLoanMortgageCorporation 32,261 45,126 57,515 -12,865 -12,389 FederalNationalMortgageAssociation 31,906 39,707 58,568 -7,801 -18,861 FederalHomeLoanBanks 12,616 19,161 31,377 -6,545 -12,216 Mortgage-backedsecurities2 Heldoutright1 926,662 837,683 992,141 88,979 -154,458 Byremainingmaturity 1yearorless 2 0 0 2 0 Morethan1yearthrough5years 1 13 24 -12 -11 Morethan5yearsthough10years 2,365 34 20 2,331 14 Morethan10years 924,294 837,636 992,097 86,658 -154,461 Byissuer FederalHomeLoanMortgageCorporation 292,155 289,537 346,959 2,618 -57,422 FederalNationalMortgageAssociation 503,696 460,910 547,545 42,786 -86,635 GovernmentNationalMortgageAssociation 130,811 87,237 97,637 43,574 -10,400 Temporarytransactions Repurchaseagreements3 0 0 0 0 0 Reverserepurchaseagreements3 107,188 99,900 59,703 7,288 40,197 Foreignofficialandinternationalaccounts 107,188 99,900 59,703 7,288 40,197 Dealers 0 0 0 0 0 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Excludestheeffectoftemporarytransactions—repurchaseagreementsandreverserepurchaseagreements. 2 GuaranteedbyFannieMae,FreddieMac,andGinnieMae. 3 Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities,andmortgage-backedsecurities.

292 99thAnnualReport|2012 Table3.FederalReserveBankinterestratesonloans Table4.Reserverequirementsofdepositoryinstitutions, todepositoryinstitutions,December31,2012 December31,2012 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 0.20 Nettransactionaccounts1 Note:Fordetailsonratechangesoverthecourseof2012,seethesectionon $0million–$12.4million2 0 12/27/2012 discountratesinthechapter“RecordofPolicyActionsoftheBoardofGovernors” Morethan$12.4million–$79.5million3 3 12/27/2012 onpage117.Primarycreditisavailableforveryshorttermsasabackupsource Morethan$79.5million 10 12/27/2012 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 293 Table5.BankingofficesandbanksaffiliatedwithbankholdingcompaniesintheUnitedStates,December31,2011and2012 Commercialbanks1 Statechartered Typeofoffice Total Member savings Total Nonmember banks Total National State Allbankingoffices Banks Number,Dec.31,2011 6,564 6,265 2,120 1,299 821 4,145 299 Changesduring2012 Newbanks 31 23 7 4 3 16 8 Banksconvertedintobranches -169 -166 -61 -43 -18 -105 -3 Ceasedbankingoperations2 -68 -58 -15 -5 -10 -43 -10 Other3 0 -1 0 -33 33 -1 1 Netchange -206 -202 -69 -77 8 -133 -4 Number,Dec.31,2012 6,358 6,063 2,051 1,222 829 4,012 295 Branchesandadditionaloffices Number,Dec.31,2011 84,252 81,666 58,255 43,706 14,549 23,411 2,586 Changesduring2012 Newbranches 2,344 2,261 1,714 1,472 242 547 83 Banksconvertedtobranches 169 162 75 46 29 87 7 Discontinued2 -1,962 -1,903 -1,395 -1,045 -350 -508 -59 Other3 0 -9 65 104 -39 -74 9 Netchange 551 511 459 577 -118 52 40 Number,Dec.31,2012 84,803 82,177 58,714 44,283 14,431 23,463 2,626 Banksaffiliatedwithbankholdingcompanies Banks Number,Dec.31,2011 5,328 5,203 1,860 1,136 724 3,343 125 Changesduring2012 BHC-affiliatednewbanks 55 48 12 8 4 36 7 Banksconvertedintobranches -147 -144 -54 -38 -16 -90 -3 Ceasedbankingoperations2 -56 -53 -15 -8 -7 -38 -3 Other3 0 -1 -3 -32 29 2 1 Netchange -148 -150 -60 -70 10 -90 2 Number,Dec.31,2012 5,180 5,053 1,800 1,066 734 3,253 127 Note:Includesbanks,bankingoffices,andbankholdingcompaniesinU.S.territoriesandpossessions(affiliatedinsularareas). 1 Forpurposesofthistable,banksareentitiesthataredefinedasbanksintheBankHoldingCompanyAct,asamended,whichisimplementedbyFederalReserve RegulationY.Generally,abankisanyinstitutionthatacceptsdemanddepositsandisengagedinthebusinessofmakingcommercialloansoranyinstitutionthatisdefined asaninsuredbankinsection3(h)oftheFDICAct. 2 InstitutionsthatnolongermeettheRegulationYdefinitionofabank. 3 Interclasschangesandsalesofbranches.

294 99thAnnualReport|2012 Table6A.Reservesofdepositoryinstitutions,FederalReserveBankcredit,andrelateditems,year-end1984–2012and month-end2012 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 2009 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 -1,421 110,255 2,408,240 11,041 5,200 43,542 2011r 2,605,124 0 144,098 -631 152,568 2,901,159 11,041 5,200 44,198 2012 2,669,589 0 11,867 -486 218,296 2,899,266 11,041 5,200 44,797 Jan 2,597,453 0 147,629 -1,333 159,611 2,903,361 11,041 5,200 44,233 Feb 2,603,213 0 147,520 -909 158,519 2,908,342 11,041 5,200 44,259 Mar 2,594,403 0 77,299 -720 168,319 2,839,301 11,041 5,200 44,389 Apr 2,603,402 0 59,988 -814 176,788 2,839,364 11,041 5,200 44,427 May 2,606,435 0 47,860 -647 175,980 2,829,628 11,041 5,200 44,480 Jun 2,606,397 0 48,787 -709 187,339 2,841,814 11,041 5,200 44,517 Jul 2,589,004 0 45,079 -901 195,290 2,828,471 11,041 5,200 44,563 Aug 2,573,335 0 30,260 -594 193,473 2,796,475 11,041 5,200 44,592 Sep 2,563,678 0 16,800 -607 202,531 2,782,401 11,041 5,200 44,635 Oct 2,579,274 0 16,674 -930 210,282 2,805,301 11,041 5,200 44,692 Nov 2,620,638 0 15,524 -559 209,214 2,844,817 11,041 5,200 44,741 Dec 2,669,589 0 11,867 -486 218,296 2,899,266 11,041 5,200 44,797 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-end1984–2012andmonth-end2012”onpage296fordetail. 4 Includescurrencyandcoin(otherthangold)issueddirectlybytheU.S.Treasury.Thelargestcomponentsarefractionalanddollarcoins.Fordetailsreferto“U.S.Currency andCoinOutstandingandinCirculation,”TreasuryBulletin.

StatisticalTables 295 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 ba cl l e a a n r c i e n s g 7 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 l8 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 2009 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 99,602 965,712 2011r 1,075,820 99,900 128 0 85,737 0 125 64,909 2,480 72,766 1,559,731 2012 1,169,205 107,188 150 0 92,720 0 6,427 27,476 … 66,093 1,491,044 Jan 1,069,057 84,989 143 3,079 158,596 0 122 41,113 1,976 74,537 1,530,222 Feb 1,091,596 87,553 161 0 62,542 0 127 44,702 1,955 75,070 1,605,136 Mar 1,098,581 96,671 150 3,057 43,480 0 127 37,160 1,937 74,037 1,544,730 Apr 1,100,681 95,604 140 0 166,619 0 129 18,198 1,927 78,203 1,438,531 May 1,109,807 98,131 147 3,053 112,369 0 138 25,025 1,902 74,672 1,465,106 Jun 1,111,924 85,478 117 0 91,419 0 1,579 30,236 1,892 74,852 1,505,075 Jul 1,113,842 91,117 121 3,040 90,485 0 4,288 18,780 … 70,062 1,497,541 Aug 1,127,975 94,192 118 0 30,121 0 5,169 18,516 … 66,435 1,514,783 Sep 1,128,414 92,743 122 3,040 85,446 0 5,625 22,907 … 67,660 1,437,320 Oct 1,141,971 99,748 146 0 99,966 0 5,991 17,660 … 66,353 1,434,399 Nov 1,150,225 95,222 147 3,043 48,947 0 6,633 17,442 … 67,272 1,516,868 Dec 1,169,205 107,188 150 0 92,720 0 6,427 27,476 … 66,093 1,491,044 5 Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities,andagencymortgage-backedsecurities. 6 CoinandpapercurrencyheldbytheTreasury. 7 RequiredclearingbalanceswerediscontinuedinJuly2012. 8 In2010,includesfundsfromAmericanInternationalGroup,Inc.assetdispositions,heldasagent. …Notapplicable. r Revised.

296 99thAnnualReport|2012 Table6B.Loansandothercreditextensions,bytype,year-end1984–2012andmonth-end2012 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 2012 11,867 0 70 … … 556 … … … 1,413 61 22 856 … 8,889 (continuedonnextpage)

StatisticalTables 297 Table6B.—continued 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 2012,month-end Jan 147,629 0 16 … … 8,141 … … … 6,966 9,508 17,725 819 … 104,454 Feb 147,520 0 15 … … 7,564 … … … 6,439 7,301 17,611 825 … 107,763 Mar 77,299 0 6 … … 7,056 … … … 5,446 19 17,460 831 … 46,482 Apr 59,988 0 133 … … 6,553 … … … 4,182 19 20,199 836 … 28,066 May 47,860 0 71 … … 5,425 … … … 3,878 19 15,257 841 … 22,368 Jun 48,787 0 77 … … 4,526 … … … 2,416 18 12,936 845 … 27,969 Jul 45,079 0 168 … … 3,517 … … … 2,084 61 7,377 848 … 31,022 Aug 30,260 0 262 … … 2,149 … … … 1,910 61 1,585 851 … 23,442 Sep 16,800 0 126 … … 1,467 … … … 1,719 61 23 853 … 12,551 Oct 16,674 0 85 … … 1,177 … … … 1,572 61 23 855 … 12,903 Nov 15,524 0 36 … … 937 … … … 1,431 61 22 856 … 12,181 Dec 11,867 0 70 … … 556 … … … 1,413 61 22 856 … 8,889 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.

298 99thAnnualReport|2012 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)

StatisticalTables 299 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.

300 99thAnnualReport|2012 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)

StatisticalTables 301 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-ownedbankinginstitutionsheldwithmemberbanksandredeposited infullwithFederalReserveBanksinconnectionwithvoluntaryparticipationbynonmemberinstitutionsintheFederalReserveSystemprogramofcreditrestraint.Asof December12,1974,theamountofvoluntarynonmemberbankandforeign-agencyandbranchdepositsatFederalReserveBanksthatareassociatedwithmarginal reservesisnolongerreported.However,twoamountsarereported:(1)depositsvoluntarilyheldasreservesbyagenciesandbranchesofforeignbanksoperatinginthe UnitedStatesand(2)Eurodollarliabilities. 14Adjustedtoincludewaiversofpenaltiesforreservedeficiencies,inaccordancewithchangeinBoardpolicy,effectiveNovember19,1975. …Notapplicable.

302 99thAnnualReport|2012 Table7.Principalassetsandliabilitiesofinsuredcommercialbanks,byclassofbank,June30,2012and2011 Millionsofdollars,exceptasnoted Memberbanks Item Total Nonmemberbanks Total National State 2012 Assets Loansandinvestments 8,942,607 7,239,403 5,926,681 1,312,722 1,703,204 Loans,gross 6,290,902 4,994,722 4,137,456 857,266 1,296,180 Net 6,289,482 4,994,032 4,137,004 857,028 1,295,450 Investments 2,651,705 2,244,681 1,789,225 455,456 407,024 U.S.Treasuryand federalagency securities 379,994 299,720 234,048 65,672 80,274 Other 2,271,711 1,944,961 1,555,178 389,784 326,750 Cashassets,total 917,457 758,044 572,540 185,503 159,413 Liabilities Deposits,total 7,979,069 6,433,980 5,241,978 1,192,001 1,545,089 Interbank 165,317 142,602 122,121 20,481 22,715 Othertransactions 1,189,781 950,797 687,646 263,151 238,983 Othernontransactions 6,623,971 5,340,581 4,432,211 908,369 1,283,391 Equitycapital 1,445,279 1,207,868 994,963 212,905 237,411 Numberofbanks 6,187 2,097 1,284 813 4,090 2011 Assets Loansandinvestments 8,434,335 6,808,930 5,576,020 1,232,910 1,625,405 Loans,gross 6,041,199 4,788,631 3,959,630 829,000 1,252,569 Net 6,039,137 4,787,552 3,958,813 828,739 1,251,585 Investments 2,393,136 2,020,300 1,616,390 403,910 372,837 U.S.Treasuryand federalagency securities 379,737 288,730 220,572 68,158 91,007 Other 2,013,399 1,731,570 1,395,818 335,752 281,830 Cashassets,total 972,319 831,390 624,046 207,344 140,929 Liabilities Deposits,total 7,259,837 5,799,846 4,704,506 1,095,339 1,459,991 Interbank 126,687 103,515 83,779 19,737 23,172 Othertransactions 1,021,851 805,409 598,682 206,727 216,442 Othernontransactions 6,111,298 4,890,921 4,022,045 868,876 1,220,377 Equitycapital 1,381,748 1,156,633 947,815 208,818 225,114 Numberofbanks 6,384 2,155 1,347 808 4,229 Note:IncludesU.S.-insuredcommercialbankslocatedintheUnitedStatesbutnotU.S.-insuredcommercialbanksoperatinginU.S.territoriesorpossessions.Dataare domesticassetsandliabilities(exceptforthosecomponentsreportedonaconsolidatedbasisonly).Componentsmaynotsumtototalsbecauseofrounding.Datafor2011 havebeenrevised.

StatisticalTables 303 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.

304 99thAnnualReport|2012 Table9A.StatementofConditionoftheFederalReserveBanks,byBank,December31,2012and2011 Millionsofdollars Total Boston NewYork Philadelphia Cleveland Richmond Item 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 Assets Goldcertificate account 11,037 11,037 408 390 3,824 3,866 437 432 515 450 890 872 Specialdrawingrights certificateaccount 5,200 5,200 196 196 1,818 1,818 210 210 237 237 412 412 Coin 2,108 2,306 38 53 90 80 141 160 145 174 373 409 Loansandsecurities Primary,secondary, andseasonalloans 70 196 2 2 18 9 2 0 0 0 0 5 TermAsset-Backed SecuritiesLoan Facility1 560 9,059r … … 560 9,059r … … … … … … Treasurysecurities, boughtoutright2 1,666,145 1,663,446 40,467 40,898 934,131 773,574 55,079 56,983 42,361 44,933 118,582 192,111 Government-sponsored enterprisedebt securities,bought outright2 76,783 103,994 1,865 2,557 43,048 48,362 2,538 3,562 1,952 2,809 5,465 12,010 Federalagencyand governmentsponsored enterprise mortgage-backed securities,bought outright3 926,662 837,683 22,507 20,596 519,536 389,559 30,633 28,696 23,560 22,628 65,952 96,744 Totalloansand securities 2,670,220 2,614,378r 64,842 64,053 1,497,295 1,220,562r 88,252 89,241 67,873 70,370 189,999 300,870 Netportfolioholdings ofconsolidated variableinterest entities4 2,750 35,693 … … 2,750 35,693 … … … … … … Foreigncurrency denominated assets5 24,972 25,950 875 897 8,056 7,516 2,166 2,514 1,846 1,925 5,166 5,321 Centralbankliquidity swaps6 8,889 99,823 312 3,450 2,867 28,912 771 9,669 657 7,405 1,839 20,469 Otherassets Itemsinprocessof collection 216 363 0 11 0 0 0 53 8 59 0 4 Bankpremises 2,318 2,185 119 122 431 261 71 67 115 125 230 233 Allotherassets7 190,990 124,403r 4,669 3,085 106,715 57,644r 6,322 4,276 4,875 3,372 13,742 14,437 Interdistrictsettlement account 0 0 31,984 35,147 -110,116 274,474 -16,451 -28,084 3,671 -4,966 -28,388 -123,650 Totalassets 2,918,700 2,921,337 103,443 107,403 1,513,730 1,630,826 81,919 78,539 79,942 79,150 184,263 219,377 Liabilities FederalReservenotes outstanding 1,354,878 1,205,888 47,464 44,207 478,110 427,406 47,566 45,940 60,564 54,131 103,121 94,381 Less:Notesheldby Federal ReserveBank 228,217 171,836 6,244 4,275 93,101 50,541 4,304 6,177 8,060 9,085 11,462 10,670 FederalReservenotes outstanding,net 1,126,661 1,034,052 41,220 39,932 385,008 376,865 43,262 39,763 52,504 45,046 91,659 83,711 Securitiessoldunder agreementsto repurchase8 107,188 99,900 2,603 2,456 60,096 46,458 3,543 3,422 2,725 2,699 7,629 11,537 Deposits Depositoryinstitutions 1,491,045 1,562,253 56,666 62,799 917,383 1,024,868 30,547 30,250 20,154 26,962 72,657 111,913 Treasury,general account 92,720 85,737 … … 92,720 85,737 … … … … … … Foreign,official accounts 6,427 125 1 1 6,399 97 3 4 3 3 8 8 Other9 27,476 64,909 8 27 27,345 64,754 14 4 0 0 68 81 Totaldeposits 1,617,668 1,713,023 56,675 62,827 1,043,847 1,175,456 30,564 30,257 20,157 26,965 72,733 112,002 (continuedonnextpage)

StatisticalTables 305 Table9A.—continued Total Boston NewYork Philadelphia Cleveland Richmond Item 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 Otherliabilities InterestonFederal Reservenotesdue toU.S.Treasury10 1,407 900 31 51 831 -378 29 78 17 81 51 240 Deferredcredititems 702 994 0 58 0 3 0 109 3 142 0 19 Consolidatedvariable interestentities11 1,218 10,535 … … 1,218 10,535 … … … … … … Allotherliabilities12 9,134 8,134 224 193 5,239 4,533 289 243 268 240 699 739 Totalliabilities 2,863,980 2,867,539 100,752 105,517 1,496,240 1,613,472 77,686 73,872 75,674 75,173 172,771 208,249 Capitalaccounts Capitalpaidin 27,360 26,899 1,345 943 8,745 8,677 2,116 2,333 2,134 1,989 5,746 5,564 Surplus(including accumulatedother comprehensiveloss) 27,360 26,899 1,345 943 8,745 8,677 2,116 2,333 2,134 1,989 5,746 5,564 Totalliabilitiesand capitalaccounts 2,918,700 2,921,337 103,443 107,403 1,513,730 1,630,826 81,919 78,539 79,942 79,150 184,263 219,377 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Measuredatfairvalue.Amountsinclude$4millionand$37millioninunrealizedgainsasofDecember31,2012and2011,respectively. 2 Parvalue.Includessecuritiesloaned—fullycollateralizedbyU.S.Treasurysecurities,otherinvestment-gradesecurities,andcollateraleligiblefortri-partyrepurchase agreementspledgedwithFederalReserveBanks. 3 Theparamountshownistheremainingprincipalbalanceofthesecurities. 4 TheFRBNYistheprimarybeneficiaryofTALFLLC,MaidenLaneLLC,MaidenLaneIILLC,andMaidenLaneIIILLCand,asaresult,theaccountsandresultsofoperationsof theseentitiesareincludedinthecombinedfinancialstatementsoftheFederalReserveBanks.Foradditionaldetails,see“Table6.Keyfinancialdataforconsolidated variableinterestentities”onpage103. 5 Valueddailyatmarketexchangerates. 6 Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. 7 Includespremiumsonsecurities,accruedinterest,anddepositoryinstitutionoverdrafts. 8 Contractamountofagreements. 9 Includesdepositsofgovernment-sponsoredenterprises,theConsumerFinancialProtectionBureau,andinternationalorganizations.Thesedepositsareprimarilyheldbythe FRBNY. 10RepresentstheestimatedweeklyremittancestoU.S.TreasuryasinterestonFederalReservenotesor,inthosecaseswheretheReserveBank’snetearningsarenot sufficienttoequatesurplustocapitalpaid-in,thedeferredassetforinterestonFederalReservenotes.TheamountsonthislinearecalculatedinaccordancewithBoardof Governorspolicy,whichrequirestheFederalReserveBankstoremitresidualearningstotheU.S.TreasuryasinterestonFederalReservenotesafterprovidingforthecosts ofoperations,paymentofdividends,andtheamountnecessarytoequatesurpluswithcapitalpaid-in. 11TheotherbeneficialinterestholderrelatedtotheTALFLLCistheU.S.Treasury;toMaidenLaneLLC,itisJPMorganChase;andtoMaidenLaneIIandMaidenLaneIIILLCs,it isAIG. 12Includesdiscountsonsecurities,accruedbenefitcosts,andcashcollateralpostedbycounterpartiesundercommitmentstopurchaseandsellfederalagencyandGSEMBS. r Revised. …Notapplicable.

306 99thAnnualReport|2012 Table9A.StatementofConditionoftheFederalReserveBanks,byBank,December31,2012and2011—continued Millionsofdollars Atlanta Chicago St.Louis Minneapolis KansasCity Dallas SanFrancisco Item 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 Assets Goldcertificate account 1,337 1,394 839 854 313 319 192 197 315 318 725 728 1,242 1,217 Specialdrawingrights certificateaccount 654 654 424 424 150 150 90 90 153 153 282 282 574 574 Coin 209 205 311 332 35 35 51 60 165 176 196 241 354 381 Loansandsecurities Primary,secondary, andseasonalloans 4 0 9 17 0 0 32 5 3 11 0 132 0 15 TermAsset-Backed SecuritiesLoan Facility1 … … … … … … … … … … … … … … Treasurysecurities, boughtoutright2 100,457 123,665 92,430 98,785 26,048 31,484 15,147 25,565 33,473 44,249 64,738 65,789 143,229 165,411 Government-sponsored enterprisedebt securities,bought outright2 4,629 7,731 4,260 6,176 1,201 1,968 698 1,598 1,543 2,766 2,983 4,113 6,601 10,341 Federalagencyand governmentsponsored enterprise mortgage-backed securities,bought outright3 55,871 62,276 51,407 49,746 14,487 15,855 8,424 12,874 18,617 22,283 36,006 33,130 79,660 83,298 Totalloansand securities 160,961 193,672 148,106 154,723 41,736 49,307 24,301 40,041 53,637 69,309 103,727 103,165 229,490 259,065 Netportfolioholdings ofconsolidated variableinterest entities4 … … … … … … … … … … … … … … Foreigncurrency denominated assets5 1,428 1,487 666 657 204 211 102 802 248 234 400 393 3,815 3,993 Centralbankliquidity swaps6 508 5,720 237 2,529 73 814 36 3,083 89 899 142 1,512 1,358 15,361 Otherassets Itemsinprocessof collection 208 31 0 19 1 5 0 15 0 6 0 17 0 143 Bankpremises 215 214 203 206 131 134 103 105 252 259 239 245 209 213 Allotherassets7 11,557 9,275 10,593 7,376 3,025 2,385 1,786 1,945 3,852 3,318 7,441 4,939 16,414 12,350 Interdistrictsettlement account 36,287 -44,538 -856 -5,416 958 -8,856 2,869 -19,268 -4,827 -17,589 5,662 1,679 79,207 -58,932 Totalassets 213,364 168,114 160,523 161,706 46,625 44,504 29,530 27,070 53,883 57,081 118,814 113,201 332,663 234,366 Liabilities FederalReservenotes outstanding 175,865 145,803 95,089 88,894 37,318 33,916 22,352 20,976 36,361 34,479 95,624 80,188 155,444 135,566 Less:Notesheldby Federal ReserveBank 26,016 29,109 12,410 11,962 3,780 4,018 3,123 5,087 6,603 3,418 28,068 11,931 25,047 25,563 FederalReservenotes outstanding,net 149,849 116,694 82,679 76,932 33,538 29,899 19,229 15,889 29,758 31,061 67,556 68,258 130,397 110,003 Securitiessoldunder agreementsto repurchase8 6,463 7,427 5,946 5,933 1,676 1,891 974 1,535 2,153 2,657 4,165 3,951 9,214 9,934 Deposits Depositoryinstitutions 52,776 40,223 69,746 76,732 10,739 12,012 8,790 9,046 21,194 22,542 45,805 39,705 184,588 105,201 Treasury,general account … … … … … … … … … … … … … … Foreign,official accounts 2 2 1 1 0 0 0 1 0 0 1 1 6 6 Other9 8 2 26 35 0 0 0 0 2 4 6 1 1 1 Totaldeposits 52,786 40,227 69,773 76,767 10,739 12,013 8,790 9,048 21,196 22,546 45,812 39,707 184,595 105,208 (continuedonnextpage)

StatisticalTables 307 Table9A.—continued Atlanta Chicago St.Louis Minneapolis KansasCity Dallas SanFrancisco Item 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 Otherliabilities InterestonFederal Reservenotesdue toU.S.Treasury10 90 171 89 170 27 53 11 34 39 63 75 88 118 248 Deferredcredititems 553 57 0 56 0 36 147 194 0 38 0 45 0 237 Consolidatedvariable interestentities11 … … … … … … … … … … … … … … Allotherliabilities12 505 462 477 413 189 173 149 149 183 182 337 290 576 516 Totalliabilities 210,246 165,037 158,963 160,271 46,169 44,064 29,300 26,851 53,329 56,546 117,946 112,339 324,901 226,147 Capitalaccounts Capitalpaidin 1,559 1,538 780 718 228 220 115 110 277 268 434 431 3,881 4,109 Surplus(including accumulatedother comprehensiveloss) 1,559 1,538 780 718 228 220 115 110 277 268 434 431 3,881 4,109 Totalliabilitiesand capitalaccounts 213,364 168,114 160,523 161,706 46,625 44,504 29,530 27,070 53,883 57,081 118,814 113,201 332,663 234,366 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Measuredatfairvalue.Amountsinclude$4millionand$37millioninunrealizedgainsasofDecember31,2012and2011,respectively. 2 Parvalue.Includessecuritiesloaned—fullycollateralizedbyU.S.Treasurysecurities,otherinvestment-gradesecurities,andcollateraleligiblefortri-partyrepurchase agreementspledgedwithFederalReserveBanks. 3 Theparamountshownistheremainingprincipalbalanceofthesecurities. 4 TheFRBNYistheprimarybeneficiaryofTALFLLC,MaidenLaneLLC,MaidenLaneIILLC,andMaidenLaneIIILLCand,asaresult,theaccountsandresultsofoperationsof theseentitiesareincludedinthecombinedfinancialstatementsoftheFederalReserveBanks.Foradditionaldetails,see“Table6.Keyfinancialdataforconsolidated variableinterestentities”onpage103. 5 Valueddailyatmarketexchangerates. 6 Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. 7 Includespremiumsonsecurities,accruedinterest,anddepositoryinstitutionoverdrafts. 8 Contractamountofagreements. 9 Includesdepositsofgovernment-sponsoredenterprises,theConsumerFinancialProtectionBureau,andinternationalorganizations.Thesedepositsareprimarilyheldbythe FRBNY. 10RepresentstheestimatedweeklyremittancestoU.S.TreasuryasinterestonFederalReservenotesor,inthosecaseswheretheReserveBank’snetearningsarenot sufficienttoequatesurplustocapitalpaid-in,thedeferredassetforinterestonFederalReservenotes.TheamountsonthislinearecalculatedinaccordancewithBoardof Governorspolicy,whichrequirestheFederalReserveBankstoremitresidualearningstotheU.S.TreasuryasinterestonFederalReservenotesafterprovidingforthecosts ofoperations,paymentofdividends,andtheamountnecessarytoequatesurpluswithcapitalpaid-in. 11TheotherbeneficialinterestholderrelatedtotheTALFLLCistheU.S.Treasury;toMaidenLaneLLC,itisJPMorganChase;andtoMaidenLaneIIandMaidenLaneIIILLCs,it isAIG. 12Includesdiscountsonsecurities,accruedbenefitcosts,andcashcollateralpostedbycounterpartiesundercommitmentstopurchaseandsellfederalagencyandGSEMBS. r Revised. …Notapplicable.

308 99thAnnualReport|2012 Table9B.StatementofConditionoftheFederalReserve Banks,December31,2012and2011 Supplementalinformation—collateralheldagainst FederalReservenotes:FederalReserveagents’accounts Millionsofdollars Item 2012 2011 FederalReservenotesoutstanding 1,354,877 1,205,888 Less:NotesheldbyFederalReserve Banksnotsubjectto collateralization 228,216 171,836 CollateralizedFederalReservenotes 1,126,661 1,034,052 CollateralforFederalReservenotes Goldcertificateaccount 11,037 11,037 Specialdrawingrightscertificateaccount 5,200 5,200 U.S.Treasurysecurities1 1,110,424 1,017,815 Totalcollateral 1,126,661 1,034,052 1 Facevalue.Includescompensationtoadjustfortheeffectofinflationonthe originalfacevalueofinflation-indexedsecurities.

StatisticalTables 309 Table10.IncomeandexpensesoftheFederalReserveBanks,byBank,2012 Thousandsofdollars Kansas San Item Total Boston NewYork Philadelphia Cleveland Richmond Atlanta Chicago St.Louis Minneapolis Dallas City Francisco Currentincome Interestincome Primary,secondary, andseasonalloans 278 4 14 2 3 9 25 21 23 60 17 74 26 TermAsset-Backed SecuritiesLoan Facility 80,338 … 80,338 … … … … … … … … … … Totalloaninterest income 80,616 4 80,352 2 3 9 25 21 23 60 17 74 26 Treasurysecurities 46,415,6001,131,24724,773,580 1,550,058 1,200,8363,882,6552,982,1512,626,033 768,699 504,001 1,017,5891,812,5694,166,182 Government-sponsored enterprisedebt securities 2,626,052 64,024 1,394,644 87,785 68,055 222,899 169,745 148,858 43,731 28,972 58,047 102,600 236,692 Federalagencyand government-sponsored enterprise mortgage-backed securities 31,429,248 766,32216,670,745 1,050,891 814,8472,677,3082,034,5931,782,415 524,092 348,108 696,1251,228,0962,835,706 Foreigncurrency denominatedassets 138,969 4,866 44,433 12,175 10,277 28,725 7,948 3,691 1,136 888 1,371 2,216 21,243 Centralbankliquidity swaps1 241,171 8,433 76,395 21,349 17,840 49,811 13,795 6,377 1,971 2,124 2,359 3,826 36,891 Otherinvestments 8,966 218 4,963 297 229 668 550 500 142 86 184 349 780 TotalSOMAinterest income 80,860,0061,975,11042,964,760 2,722,555 2,112,0846,862,0665,208,7824,567,8741,339,771 884,179 1,775,6753,149,6567,297,494 Totalinterestincome 80,940,6221,975,11443,045,112 2,722,557 2,112,0876,862,0755,208,8074,567,8951,339,794 884,239 1,775,6923,149,7307,297,520 Pricedservices 449,319 … 81,662 … … … 290,282 77,375 … … … … … Compensation receivedfor servicesprovided2 184,417 14,737 3,058 1,672 15,099 19,199 574 20,013 3,192 53,332 36,762 7,893 8,886 Securitieslendingfees 9,329 228 4,810 314 244 859 624 535 160 112 216 366 861 Otherincome 2,415 6 2,175 95 48 19 7 15 5 8 8 22 7 Totalotherincome 645,480 14,971 91,705 2,081 15,391 20,077 291,487 97,938 3,357 53,452 36,986 8,281 9,754 Totalcurrentincome 81,586,1021,990,08543,136,817 2,724,638 2,127,4786,882,1525,500,2944,665,8331,343,151 937,691 1,812,6783,158,0117,307,274 Currentexpenses Interestexpenseon securitiessold underagreements torepurchase 141,943 3,456 76,873 4,726 3,654 11,358 8,956 7,985 2,312 1,468 3,036 5,535 12,584 Interestonreserves3 3,871,302 72,887 2,574,852 91,296 44,527 227,019 114,308 173,377 32,489 19,790 51,439 103,573 365,745 Interestonterm deposits4 3,653 12 2,195 598 9 264 48 90 1 81 196 6 153 Personnel Salariesandother personnelexpenses 1,888,219 102,753 468,094 83,378 82,928 281,119 142,255 144,110 94,546 97,089 122,568 99,622 169,757 Retirementandother benefits 617,285 31,086 148,026 28,627 30,293 89,971 55,205 48,517 29,674 31,619 30,462 37,796 56,009 Netperiodicpension expense5 640,919 791 637,198 878 -75 321 1,884 104 131 404 -188 -63 -466 Administrative Fees 183,179 3,938 46,915 8,941 5,183 67,168 17,160 8,922 11,940 3,092 1,918 2,433 5,569 Travel 99,296 3,795 14,367 3,684 5,807 16,600 9,338 11,777 5,987 4,261 7,156 5,493 11,031 Postageandother shippingcosts 14,721 362 825 302 1,513 742 2,651 435 773 450 1,036 2,517 3,115 Communications 47,561 906 6,040 726 740 28,481 1,828 1,929 1,183 1,558 1,265 1,449 1,456 Materialsandsupplies 69,413 3,436 25,676 7,202 2,465 6,149 5,009 4,728 2,385 1,602 2,582 3,936 4,243 Building Taxesonrealestate 46,772 5,944 12,862 1,814 2,067 3,028 3,328 2,822 718 3,484 3,355 3,510 3,840 Propertydepreciation 133,873 11,652 28,849 5,622 7,036 14,153 8,465 15,329 8,214 4,199 7,984 11,380 10,990 Utilities 38,604 3,743 9,213 1,906 1,692 4,161 3,400 2,097 1,711 1,789 2,006 3,682 3,204 Rent 34,983 180 7,382 911 317 22,797 159 1,079 972 275 493 170 248 Otherbuilding 61,001 4,703 10,551 3,708 3,328 5,971 5,623 7,469 2,294 2,442 1,692 9,303 3,917 (continuedonnextpage)

310 99thAnnualReport|2012 Table10.—continued Kansas San Item Total Boston NewYork Philadelphia Cleveland Richmond Atlanta Chicago St.Louis Minneapolis Dallas City Francisco Equipment/software Purchases 40,665 3,088 6,677 2,009 1,914 7,854 2,764 4,162 2,096 2,166 3,014 2,779 2,142 Rentals 3,686 285 1,300 201 279 230 497 688 21 72 13 50 50 Depreciation 85,433 4,066 8,655 3,801 2,062 44,262 3,561 3,336 2,663 1,583 3,219 3,011 5,214 Repairsand maintenance 62,846 4,553 5,871 3,093 2,039 23,362 5,777 3,651 1,628 1,294 2,296 3,250 6,032 Software 171,773 5,061 35,699 10,455 4,922 66,972 12,343 3,889 3,224 5,694 5,167 10,648 7,699 Otherexpenses Compensationpaidfor servicecosts incurred2 184,428 … 32,287 … … … 140,430 11,711 … … … … … Otherexpenses 77,954 14,266 84,159 16,744 4,856 -280,691 38,945 53,774 74,770 22,009 7,135 21,935 20,052 Recoveries -151,914 -17,525 -22,077 -4,406 -4,658 -41,459 -11,908 -10,110 -7,101 -2,317 -8,969 -14,270 -7,114 Expensescapitalized6 -62,801 -5,715 -23,933 -738 -2,530 -5,159 -346 -2,181 -3,675 -9,298 -702 -902 -7,622 Totalcurrent expenses 8,304,794 257,723 4,198,556 275,478 200,368 594,673 571,680 499,690 268,956 194,806 248,173 316,843 677,848 Reimbursements -506,441 -32,295 -124,159 -38,826 -25,260 -49,460 -19,207 -5,624 -110,800 -35,343 -25,656 -26,364 -13,447 Netexpenses 7,798,353 225,428 4,074,397 236,652 175,108 545,213 552,473 494,066 158,156 159,463 222,517 290,479 664,401 Currentnetincome 73,787,7491,764,65739,062,420 2,487,986 1,952,3706,336,9394,947,8214,171,7671,184,995 778,228 1,590,1612,867,5326,642,873 Additionsto(+)anddeductionsfrom(-)currentnetincome Profitonsalesof Treasurysecurities 13,254,934 322,811 7,151,353 441,689 341,6491,073,199 840,338 746,780 216,875 138,889 285,368 517,0591,178,924 Profitonsalesof Federalagencyand government-sponsored enterprise mortgage-backed securities 241,382 5,899 123,752 8,125 6,329 22,547 16,255 13,864 4,173 2,955 5,638 9,463 22,382 Foreigncurrency translationgains (losses) -1,116,381 -39,194 -363,902 -95,664 -82,507 -231,140 -63,820 -29,940 -9,134 -1,463 -11,213 -17,983 -170,421 TermAsset-Backed SecuritiesLoan Facilityunrealized losses7 -33,637 … -33,637 … … … … … … … … … … Netincomefrom consolidated variableinterest entities8 6,037,978 … 6,037,978 … … … … … … … … … … Otheradditions 372 27 100 5 0 2 0 12 0 0 0 0 226 Otherdeductions -3,807 -1 0 0 0 0 0 0 0 -76 0 0 -3,730 Netadditionto(+) currentnetincome 18,380,841 289,54212,915,644 354,155 265,471 864,608 792,773 730,716 211,914 140,305 279,793 508,5391,027,381 Costof unreimbursed Treasuryservices 6 … 6 … … … … … … … … … … AssessmentsbyBoard Boardexpenditures9 490,001 20,302 157,276 40,754 37,062 99,838 27,910 13,685 4,004 2,016 4,877 7,901 74,376 Costofcurrency 722,301 35,047 148,871 34,908 39,555 67,053 102,907 65,879 23,604 15,202 24,599 57,729 106,947 ConsumerFinancial ProtectionBureau10 385,200 17,906 123,098 30,835 29,681 78,105 21,744 10,890 3,145 1,585 3,842 6,166 58,203 OfficeofFinancial Research10 2,079 87 656 333 161 277 116 58 11 2 13 30 335 Netincomebefore interestonFederal Reservenotes expenseremittedto Treasury 90,569,0061,980,85751,548,162 2,735,306 2,111,3836,956,2775,587,9184,811,9711,366,146 899,730 1,836,6203,304,2447,430,392 InterestonFederal Reservenotes expenseremittedto Treasury 88,417,9361,497,67051,022,917 2,812,450 1,830,5836,413,9205,452,8104,690,3881,336,831 881,740 1,807,4013,266,7647,404,462 Netincome 2,151,071 483,187 525,245 -77,144 280,800 542,357 135,108 121,583 29,316 17,990 29,219 37,480 25,930 Othercomprehensive income(loss) -52,611 -3,349 65,845 -8,149 -9,135 -28,302 -22,192 -12,866 -7,832 -6,375 -3,568 -8,068 -8,620 Comprehensive income 2,098,460 479,838 591,091 -85,293 271,665 514,055 112,916 108,716 21,483 11,615 25,652 29,412 17,310 (continuedonnextpage)

StatisticalTables 311 Table10.—continued Kansas San Item Total Boston NewYork Philadelphia Cleveland Richmond Atlanta Chicago St.Louis Minneapolis Dallas City Francisco Distributionofcomprehensiveincome Dividendsoncapital stock 1,637,934 78,087 522,719 131,613 126,080 332,329 92,388 46,147 13,383 6,766 16,365 26,220 245,837 Transferredto/from surplusandchange inaccumulated other comprehensive income 460,528 401,751 68,372 -216,906 145,586 181,726 20,528 62,570 8,101 4,849 9,287 3,192 -228,528 InterestonFederal Reservenotes expenseremittedto Treasury 88,417,9361,497,67051,022,917 2,812,450 1,830,5836,413,9205,452,8104,690,3881,336,831 881,740 1,807,4013,266,7647,404,462 Totaldistributionof comprehensive income 90,516,3981,977,50851,614,008 2,727,157 2,102,2496,927,9755,565,7264,799,1051,358,315 893,355 1,833,0533,296,1767,421,771 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.NetpensionexpensefortheSystem RetirementPlanof$638,091thousandisrecordedonbehalfoftheSysteminthebooksoftheFRBNY.TheRetirementBenefitEqualizationPlanandtheSupplemental EmployeeRetirementPlanarerecordedbyeachFederalReserveBank. 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”onpage320inthe“FederalReserveSystemAudits”sectionofthisreport. 10TheBoardofGovernorsassessestheReserveBankstofundtheoperationsoftheConsumerFinancialProtectionBureauandOfficeofFinancialResearch.These assessmentsareallocatedtoeachReserveBankbasedoneachReserveBank’scapitalandsurplusbalancesasofthemostrecentquarter. …Notapplicable.

312 99thAnnualReport|2012 Table11.IncomeandexpensesoftheFederalReserveBanks,1914–2012 Thousandsofdollars Distributions AssessmentsbytheBoard tothe ofGovernors U.S.Treasury Transferred to/from Federal Net Other surplus Reserve additions Consumer compre- Transferred and B a a n n d k C in u c r o r m en e t exp N e e n t ses dedu o c r tions P F r i o n t a e n c c ti i o a n l h in e c n o s m iv e e Div p id a e id nds Inte o r n est s t u o r / p fr l o u m s4 ac c c h u a m ng u e la i t n ed period (-)1 Board Costsof Bureau (loss) Statutory Federal other expenditures currency and transfers3 Reserve comprehensive Officeof notes income5 Financial 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 (continuedonnextpage)

StatisticalTables 313 Table11.—continued Distributions AssessmentsbytheBoard tothe ofGovernors U.S.Treasury Transferred to/from Federal Net Other surplus Reserve additions Consumer compre- Transferred and B a a n n d k C in u c r o r m en e t exp N e e n t ses dedu o c r tions P F r i o n t a e n c c ti i o a n l h in e c n o s m iv e e Div p id a e id nds Inte o r n est s t u o r / p fr l o u m s4 ac c c h u a m ng u e la i t n ed period (-)1 Board Costsof Bureau (loss) Statutory Federal other expenditures currency and transfers3 Reserve comprehensive Officeof notes income5 Financial Research2 1964 1,343,747 171,511 726 8,655 17,230 … … 30,782 … 1,582,119 … -465,823 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 2012 81,586,102 7,798,353 18,380,835 490,001 722,301 387,279 -52,611 1,637,934 … 88,417,936 … 460,528 Total, 1914–20121,095,102,775 89,092,047 42,543,433 7,124,117 12,404,679 711,277 -2,996,09217,146,96144,113,958 930,754,943 -4 33,302,1486 (continuedonnextpage)

314 99thAnnualReport|2012 Table11.—continued Distributions AssessmentsbytheBoard tothe ofGovernors U.S.Treasury Transferred to/from Federal Net Other surplus Reserve additions Consumer compre- Transferred and B a a n n d k C in u c r o r m en e t exp N e e n t ses dedu o c r tions P F r i o n t a e n c c ti i o a n l h in e c n o s m iv e e Div p id a e id nds Inte o r n est s t u o r / p fr l o u m s4 ac c c h u a m ng u e la i t n ed period (-)1 Board Costsof Bureau (loss) Statutory Federal other expenditures currency and transfers3 Reserve comprehensive Officeof notes income5 Financial Research2 AggregateforeachBank,1914–2012 Boston 48,938,059 4,584,895 537,775 300,477 700,994 29,475 -6,886 743,769 2,579,504 38,990,848 135 1,538,850 NewYork 420,255,691 23,438,102727,299,034 1,854,412 3,531,142 219,277 -2,909,652 4,592,50717,307,161 382,526,780 -433 11,176,116 Philadelphia 38,211,271 3,933,041 1,138,667 441,897 567,714 61,361 -9,806 1,240,703 1,312,118 29,500,884 291 2,282,124 Cleveland 55,287,578 4,380,418 1,047,072 519,322 695,580 54,147 1,503 1,259,096 2,827,043 44,157,860 -10 2,442,701 Richmond 89,009,228 7,739,780 3,205,191 1,255,893 1,049,733 147,726 -4,553 3,392,548 3,083,928 68,713,740 -72 6,826,594 Atlanta 75,403,122 10,820,700 1,973,341 511,256 1,173,822 40,384 -21,303 1,160,546 2,713,230 59,055,953 5 1,879,263 Chicago 113,285,710 8,855,619 2,006,084 607,996 1,338,595 19,500 -18,697 1,206,463 4,593,811 97,452,200 12 1,198,898 St.Louis 33,713,236 3,421,141 469,730 137,321 440,936 5,920 1,813 283,947 1,833,837 27,709,862 -27 351,847 Minneapolis 18,129,904 3,446,070 446,750 187,945 237,792 8,290 -9,406 412,255 416,227 13,585,933 65 272,678 KansasCity 37,159,691 4,674,083 633,576 170,293 457,211 6,953 -14,110 328,732 1,249,703 30,492,932 -9 399,256 Dallas 47,678,067 4,846,862 1,159,867 254,781 675,146 11,009 -1,994 475,660 1,510,802 40,459,553 55 602,066 SanFrancisco 118,031,218 8,951,335 2,626,355 882,525 1,536,012 107,235 -3,003 2,050,736 4,686,594 98,108,397 -17 4,331,756 Total 1,095,102,775 89,092,047 42,543,433 7,124,117 12,404,679 711,277 -2,996,09217,146,96144,113,958 930,754,943 -4 33,302,148 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$33,302,148thousandtransferredtosurpluswasreducedbydirectchargesof$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$27,359,757thousandon December31,2012. 7 Thisamountisreducedby$5,231,168thousandforexpensesoftheSystemRetirementPlan.Seenote5,“Table10.IncomeandexpensesoftheFederalReserveBanks,by Bank,2012,”onpage309. …Notapplicable.

StatisticalTables 315 Table12.OperationsinprincipaldepartmentsoftheFederalReserveBanks,2009–2012 Operation 2012 2011 2010 2009 Millionsofpieces Currencyprocessed 31,703 32,249 32,143 31,891 Currencydestroyed 4,614 4,813 5,948 6,049 Coinreceived 58,669 59,550r 62,345 65,349 Checkshandled U.S.governmentchecks1 121 159 185 202 Postalmoneyorders 108 113 121 131 Commercial 6,622 6,780 7,712 8,585 Securitiestransfers2 18 19 20 21 Fundstransfers3 132 127 125 125 Automatedclearinghousetransactions Commercial 10,665 10,349 10,233 9,966 Government 1,382 1,305 1,222 1,195 Millionsofdollars Currencyprocessed 581,382 576,442 569,249 561,013 Currencydestroyed 105,464 81,943 120,049 92,708 Coinreceived 5,700 5,907r 6,014 6,288 Checkshandled U.S.governmentchecks1 199,251 241,817 292,261 311,667 Postalmoneyorders 21,927 22,220 23,210 23,675 Commercial 8,125,424 7,943,524r 8,811,010r 10,365,669r Securitiestransfers2 284,401,670 291,823,993 320,123,901 295,741,666 Fundstransfers3 599,200,625 663,837,575 608,325,851 631,127,108 Automatedclearinghousetransactions Commercial 19,293,857 17,801,549 16,941,077 15,418,718 Government 4,609,914 4,534,707 4,426,808 4,297,071 1 Includesgovernmentcheckshandledelectronically(electronicchecks). 2 Dataonsecuritiestransfersdonotincludereversals. 3 Dataonfundstransfersdonotincludenon-valuetransfers. r Revised.

316 99thAnnualReport|2012 Table13.NumberandannualsalariesofofficersandemployeesoftheFederalReserveBanks,December31,2012 President1 Otherofficers1 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 67 13,912,585 892 28 80,422,556 988 94,685,542 NewYork 410,780 490 111,587,993 2,593 40 278,533,606 3,124 390,532,379 Philadelphia 350,400 60 10,704,050 778 22 60,910,199 861 71,964,649 Cleveland 347,400 51 9,259,600 857 22 64,701,501 931 74,308,501 Richmond 347,400 85 14,875,400 1,357 24 106,867,456 1,467 122,090,256 Atlanta 314,400 81 15,775,680 1,465 16 113,383,004 1,563 129,473,084 Chicago 350,400 103 19,166,990 1,289 44 113,138,925 1,437 132,656,315 St.Louis 281,300 86 15,356,300 863 34 65,296,509 984 80,934,109 Minneapolis 313,500 55 9,816,225 976 50 71,098,934 1,082 81,228,659 KansasCity 323,200 77 13,721,900 1,248 17 84,836,210 1,343 98,881,310 Dallas 350,400 65 10,993,953 1,057 8 74,524,752 1,131 85,869,105 SanFrancisco 367,500 81 17,002,551 1,508 24 137,529,608 1,614 154,899,659 FederalReserve Information Technology … 61 10,976,636 1,085 4 110,128,691 1,150 121,105,327 OfficeofEmployee Benefits … 13 2,958,750 36 0 3,580,740 49 6,539,490 Total 4,107,080 1,375 276,108,613 16,004 333 1,364,952,691 17,724 1,645,168,384 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Noincumbentpresidentandnootherofficers,exceptforthosewhoreceivedapromotionwithasignificantincreaseinresponsibility,receivedasalaryincreasein2011or 2012,duetotheBoard’sapplicationofthepayfreezetoReserveBankofficers. 2 Annualizedsalaryliability(excludingoutsideagencycosts)basedonsalariesineffectonDecember31,2012. …Notapplicable.

StatisticalTables 317 Table14.AcquisitioncostsandnetbookvalueofthepremisesoftheFederalReserveBanksandBranches,December31,2012 Thousandsofdollars Acquisitioncosts FederalReserveBank Net Other orBranch Buildings Buildingmachinery bookvalue realestate3 Land Total2 (includingvaults)1 andequipment Boston 27,293 169,775 31,815 228,883 118,664 … NewYork 67,627 506,825 87,531 661,983 431,260 … Philadelphia 8,146 108,649 23,447 140,242 71,338 … Cleveland 4,219 127,778 25,785 157,782 96,097 … Cincinnati 3,075 28,159 17,408 48,642 19,046 … Pittsburgh 0 0 0 0 0 5,426 Richmond 31,747 157,865 51,510 241,122 152,031 … Baltimore 7,917 39,853 13,383 61,153 35,245 … Charlotte 7,884 44,740 13,683 66,307 42,708 … Atlanta 22,995 158,572 18,198 199,765 152,120 … Birmingham 5,347 13,056 1,493 19,896 10,583 … Jacksonville 1,779 23,383 4,659 29,821 16,217 … Nashville 0 0 0 0 0 3,718 NewOrleans 3,785 12,641 6,113 22,539 11,021 … Miami 4,254 30,039 6,951 41,244 24,770 … Chicago 4,619 209,782 27,558 241,959 120,979 … Detroit 12,329 74,129 11,457 97,915 82,505 … St.Louis 9,377 140,558 15,615 165,550 120,555 … Memphis 2,472 15,027 5,160 22,659 10,275 … Minneapolis 15,522 109,373 17,074 141,969 93,919 … Helena 2,890 10,335 1,571 14,796 8,989 … KansasCity 38,585 199,249 26,986 264,820 237,176 … Denver 3,694 9,873 6,344 19,911 9,023 … Omaha 3,559 7,692 1,925 13,176 6,157 … Dallas 37,450 123,687 32,207 193,344 119,396 … ElPaso 262 3,683 1,989 5,934 851 … Houston 25,119 104,059 9,209 138,387 114,624 7,204 SanAntonio 826 8,035 2,969 11,830 3,661 … SanFrancisco 20,988 118,031 29,496 168,515 90,578 … LosAngeles 6,306 75,264 20,160 101,730 53,951 … SaltLakeCity 1,294 5,407 1,529 8,230 2,910 … Seattle 13,101 49,970 6,744 69,815 61,464 Total 394,461 2,685,489 519,969 3,599,919 2,318,113 16,348 1 Includesexpendituresforconstructionatsomeoffices,pendingallocationtoappropriateaccounts. 2 Excludescharge-offsof$17,699thousandbefore1952. 3 Includesrealestateheldpendingsale. …Notapplicable.

319 Federal Reserve System Audits TheBoardof Governors,theFederalReserveBanks,andtheFederalReserve Systemasawholeareallsubjecttoseverallevelsof auditandreview. TheBoard’sfinancialstatementsareauditedannuallybyanoutsideauditor retainedbytheBoard’sOfficeof InspectorGeneral.Theoutsideauditoralsotests theBoard’scompliancewithcertainlawsandregulationsaffectingthose statements. TheReserveBanks’financialstatementsareauditedannuallybyanindependent outsideauditorretainedbytheBoardof Governors.Inaddition,theReserve BanksaresubjecttoannualexaminationbytheBoard.Asdiscussedinthechapter “FederalReserveBanks,”theBoard’sexaminationincludesawiderangeof ongoingoversightactivitiesconductedonsiteandoff sitebystaff of theBoard’sDivisionof ReserveBankOperationsandPaymentSystems. TheOIGalsoconductsaudits,reviews,andinvestigationsrelatingtotheBoard’s programsandoperationsaswellastoBoardfunctionsdelegatedtotheReserve Banks,andFederalReserveoperationsarealsosubjecttoreviewbytheGovernmentAccountabilityOffice.

320 99thAnnualReport|2012 Board of Governors Financial Statements Thefinancialstatementsof theBoardof Governorsfor2012and2011were auditedbyDeloitte&ToucheLLP,independentauditors. March5,2013 MANAGEMENT’SASSERTION TotheCommitteeonBoardAffairs: ThemanagementoftheBoardofGovernorsoftheFederalReserveSystem(“theBoard”)isresponsibleforthe preparationandfairpresentationofthebalancesheetasofDecember31,2012,andfortherelatedstatementof operationsandstatementofcashflowsfortheyearthenended(the“FinancialStatements”).TheFinancialStatementshavebeenpreparedinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesof Americaand,assuch,includesomeamountswhicharebasedonmanagementjudgmentsandestimates.Toour knowledge,theFinancialStatementsare,inallmaterialrespects,fairlypresentedinconformitywithgenerally acceptedaccountingprinciplesandincludealldisclosuresnecessaryforsuchpresentation. TheBoard’smanagementisalsoresponsibleforestablishingandmaintainingeffectiveinternalcontroloverfinancial reportingasitrelatestotheFinancialStatements.Suchinternalcontrolisdesignedtoprovidereasonableassuranceto managementandtotheCommitteeonBoardAffairsregardingthepreparationoftheFinancialStatementsinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.TheBoard’sinternalcontrol overfinancialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,in reasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsoftheBoard;(2)provide reasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationofFinancialStatementsin accordancewithgenerallyacceptedaccountingprinciples,andthattheBoard’sreceiptsandexpendituresarebeing madeonlyinaccordancewithauthorizationsofitsmanagement;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionoftheBoard’sassetsthatcouldhavea materialeffectontheFinancialStatements. Internalcontrol,nomatterhowwelldesignedandoperated,canonlyprovidereasonableassuranceofachievingthe Board’scontrolobjectiveswithrespecttothepreparationofreliableFinancialStatements.Thelikelihoodofachievementofsuchobjectivesisaffectedbylimitationsinherenttointernalcontrol,includingthepossibilityofhuman error.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatspecificcontrols maybecomeinadequatebecauseofchangesinconditionsorthatthedegreeofcompliancewithpoliciesorproceduresmaydeteriorate. TheBoard’smanagementassesseditsinternalcontroloverfinancialreportingwithregardstotheFinancialStatementsbaseduponthecriteriaestablishedintheInternalControl—IntegratedFrameworkissuedbytheCommitteeof SponsoringOrganizationsoftheTreadwayCommission. Basedonthisassessment,webelievethattheBoardhasmaintainedeffectiveinternalcontroloverfinancialreporting asitrelatestoitsFinancialStatements. DonaldV.Hammond WilliamL.Mitchell ChiefOperatingOfficer ChiefFinancialOfficer

FederalReserveSystemAudits 321 INDEPENDENTAUDITORS’REPORT TotheBoardofGovernorsoftheFederalReserveSystem: WehaveauditedtheaccompanyingfinancialstatementsoftheBoardofGovernorsoftheFederalReserveSystem (the“Board”),whicharecomprisedofthebalancesheetsasofDecember31,2012and2011,andtherelatedstatementsofoperations,andcashflowsfortheyearsthenended,andtherelatednotestothefinancialstatements.We alsohaveauditedtheBoard’sinternalcontroloverfinancialreportingasofDecember31,2012,basedoncriteria establishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsofthe TreadwayCommission. Management’sResponsibility TheBoard’smanagementisresponsibleforthepreparationandfairpresentationofthesefinancialstatementsin accordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica;thisincludesthedesign, implementation,andmaintenanceofinternalcontrolrelevanttothepreparationandfairpresentationoffinancial statementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.TheBoard’smanagementisalso responsibleforitsassertionoftheeffectivenessofinternalcontroloverfinancialreporting,includedintheaccompanyingManagement’sAssertion. Auditors’Responsibility OurresponsibilityistoexpressanopiniononthesefinancialstatementsandanopinionontheBoard'sinternalcontroloverfinancialreportingbasedonouraudits.Weconductedourauditsofthefinancialstatementsinaccordance withauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica,auditingstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),andthestandardsapplicabletofinancialauditscontainedinGovernmentAuditingStandardsissuedbytheComptrollerGeneraloftheUnitedStatesandweconductedourauditof internalcontroloverfinancialreportinginaccordancewithattestationstandardsestablishedbytheAmericanInstituteofCertifiedPublicAccountantsandinaccordancewiththeauditingstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreefrommaterialmisstatementandwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects. Anauditofthefinancialstatementsinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsand disclosuresinthefinancialstatements.Theproceduresselecteddependontheauditor’sjudgment,includingthe assessmentoftherisksofmaterialmisstatementofthefinancialstatements,whetherduetofraudorerror.Inmaking thoseriskassessments,theauditorconsidersinternalcontrolrelevanttotheBoard’spreparationandfairpresentation ofthefinancialstatementsinordertodesignauditproceduresthatareappropriateinthecircumstances.Anauditof thefinancialstatementsalsoincludesevaluatingtheappropriatenessofaccountingpoliciesusedandthereasonablenessofsignificantaccountingestimatesmadebymanagement,aswellasevaluatingtheoverallpresentationofthe financialstatements.Anauditofinternalcontroloverfinancialreportinginvolvesobtaininganunderstandingof internalcontroloverfinancialreporting,assessingtheriskthatamaterialweaknessexists,testingandevaluatingthe designandoperatingeffectivenessofinternalcontrolbasedontheassessedrisk,andperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances. Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforouraudit opinions. DefinitionofInternalControlOverFinancialReporting TheBoard’sinternalcontroloverfinancialreportingisaprocessdesignedby,orunderthesupervisionof,theBoard’s principalexecutiveandprincipalfinancialofficers,orpersonsperformingsimilarfunctions,andeffectedbythe Board’sCommitteeonBoardAffairs,management,andotherpersonneltoprovidereasonableassuranceregarding thereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordance withaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.TheBoard’sinternalcontrolover financialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsoftheBoard;(2)provide

322 99thAnnualReport|2012 reasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsin accordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica,andthatreceiptsand expendituresoftheBoardarebeingmadeonlyinaccordancewithauthorizationsofmanagementandgovernorsof theBoard;and(3)providereasonableassuranceregardingpreventionortimelydetectionandcorrectionofunauthorizedacquisition,use,ordispositionoftheBoard’sassetsthatcouldhaveamaterialeffectonthefinancial statements. InherentLimitationsofInternalControlOverFinancialReporting Becauseoftheinherentlimitationsofinternalcontroloverfinancialreporting,includingthepossibilityofcollusion orimpropermanagementoverrideofcontrols,materialmisstatementsduetoerrororfraudmaynotbepreventedor detectedandcorrectedonatimelybasis.Also,projectionsofanyevaluationoftheeffectivenessoftheinternalcontroloverfinancialreportingtofutureperiodsaresubjecttotheriskthatthecontrolsmaybecomeinadequatebecause ofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate. Opinions Inouropinion,thefinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancialposition oftheBoardasofDecember31,2012and2011,andtheresultsofitsoperationsanditscashflowsfortheyearsthen endedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.Also,inouropinion,theBoardmaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofDecember31,2012,basedonthecriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeof SponsoringOrganizationsoftheTreadwayCommission. ReportonComplianceandOtherMattersBasedonanAuditofFinancialStatementsPerformedinAccordancewith GovernmentAuditingStandards InaccordancewithGovernmentAuditingStandards,wehavealsoissuedareportdatedMarch5,2013,onourtestsof theBoard’scompliancewithcertainprovisionsoflaws,regulations,contracts,andgrantagreementsandothermatters.Thepurposeofthatreportistodescribethescopeofourtestingofcomplianceandtheresultsofthattesting, andnottoprovideanopiniononcompliance.Thatreportisanintegralpartofanauditperformedinaccordance withGovernmentAuditingStandardsandshouldbereadinconjunctionwiththisreportinconsideringtheresultsof ouraudits. March5,2013 Washington,DC

FederalReserveSystemAudits 323 BoardofGovernorsoftheFederalReserveSystemBalanceSheets AsofDecember31, 2012 2011 Assets Currentassets: Cash $ 53,965,151 $ 73,592,126 Accountsreceivable–net 2,437,241 5,433,087 Prepaidexpensesandotherassets 4,518,080 3,338,770 Totalcurrentassets 60,920,472 82,363,983 Noncurrentassets: Property,equipment,andsoftware–net 186,703,851 181,903,601 Otherassets 1,081,446 476,795 Totalnoncurrentassets 187,785,297 182,380,396 Total $248,705,769 $264,744,379 Liabilitiesandcumulativeresultsofoperations Currentliabilities: Accountspayableandaccruedliabilities $ 16,181,003 $ 25,686,787 Accruedpayrollandrelatedtaxes 20,907,437 18,616,534 Accruedannualleave 29,218,663 27,281,750 Capitalleasepayable 456,896 237,479 Unearnedrevenuesandotherliabilities 617,787 872,868 Totalcurrentliabilities 67,381,786 72,695,418 Long-termliabilities: Capitalleasepayable 1,069,116 – Retirementbenefitobligation 33,740,310 27,485,712 Postretirementbenefitobligation 13,249,648 11,799,079 Postemploymentbenefitobligation 10,695,165 11,145,144 Otherlong-termliabilities 21,261,795 20,261,325 Totallong-termliabilities 80,016,034 70,691,260 Totalliabilities 147,397,820 143,386,678 Cumulativeresultsofoperations: Fundbalance 119,140,439 138,451,243 Accumulatedothercomprehensiveincome(loss) (17,832,490) (17,093,542) Totalcumulativeresultsofoperations 101,307,949 121,357,701 Total $248,705,769 $264,744,379 Seenotestofinancialstatements.

324 99thAnnualReport|2012 BoardofGovernorsoftheFederalReserveSystemStatementsofOperations FortheyearsendedDecember31, 2012 2011 Boardoperatingrevenues: AssessmentsleviedonFederalReserveBanksforBoardoperatingexpensesandcapitalexpenditures $490,000,000 $472,300,000 Otherrevenues 9,793,604 6,555,903 Totaloperatingrevenues 499,793,604 478,855,903 Boardoperatingexpenses: Salaries 299,889,043 274,866,723 Retirement,insurance,andbenefits 70,232,938 61,516,094 Contractualservicesandprofessionalfees 50,873,548 37,486,707 Depreciation,amortization,andnetgainsorlossesondisposals 21,969,729 19,496,451 Travel 15,068,161 14,583,555 Postage,supplies,andnon-capitalfurnitureandequipment 11,256,753 10,760,230 Utilities 9,016,693 8,736,997 Software 10,967,296 9,399,273 Rentalsofspace 14,120,215 6,401,350 Repairsandmaintenance 5,696,326 4,774,395 Printingandbinding 2,126,056 2,345,881 Otherexpenses 7,887,650 8,510,962 Totaloperatingexpenses 519,104,408 458,878,618 Netincome(loss) (19,310,804) 19,977,285 Currencycosts: AssessmentsleviedortobeleviedonFederalReserveBanksforcurrencycosts 721,074,064 650,010,597 Expensesforcostsrelatedtocurrency 721,074,064 650,010,597 Currencyassessmentsover(under)expenses – – BureauofConsumerFinancialProtection(Bureau): AssessmentsleviedontheFederalReserveBanksfortheBureau 385,200,000 241,711,564 TransferstotheBureau 385,200,000 241,711,564 Bureauassessmentsover(under)transfers – – OfficeofFinancialResearch(Office): AssessmentsleviedontheFederalReserveBanksfortheOffice 2,078,298 40,000,000 TransferstotheOffice 2,078,298 40,000,000 Officeassessmentsover(under)transfers – – Totalnetincome(loss) (19,310,804) 19,977,285 Othercomprehensiveincome: Amortizationofpriorservice(credit)cost 584,890 507,786 Amortizationofnetactuarial(gain)loss 1,659,956 653,874 Netactuarialgain(loss)arisingduringtheyear (2,983,794) (3,627,680) Totalothercomprehensiveincome(loss) (738,948) (2,466,020) Comprehensiveincome(loss) (20,049,752) 17,511,265 Cumulativeresultsofoperations–beginningofyear 121,357,701 103,846,436 Cumulativeresultsofoperations–endofyear $101,307,949 $121,357,701 Seenotestofinancialstatements.

FederalReserveSystemAudits 325 BoardofGovernorsoftheFederalReserveSystemStatementsofCashFlows FortheyearsendedDecember31, 2012 2011 Cashflowsfromoperatingactivities: Netincome(loss) $(19,310,804) $19,977,285 Adjustmentstoreconcileresultsofoperationstonetcashprovidedby(usedin)operating activities: Depreciationandamortization 21,901,984 19,015,100 Netloss(gain)ondisposalofpropertyandequipment 67,745 481,351 Otheradditionalnon-cashadjustmentstoresultsofoperations 492,739 351,867 (Increase)decreaseinassets: Accountsreceivable,prepaidexpensesandotherassets 1,211,886 (2,780,003) Increase(decrease)inliabilities: Accountspayableandaccruedliabilities (6,317,712) 5,340,020 Accruedpayrollandrelatedtaxes 2,290,903 (3,277,502) Accruedannualleave 1,936,913 944,560 Unearnedrevenuesandotherliabilities (255,081) 316,022 Netretirementbenefitobligation 6,363,414 4,128,953 Netpostretirementbenefitobligation 602,805 490,927 Netpostemploymentbenefitobligation (449,979) (2,668,110) Otherlong-termliabilities 437,509 298,191 Netcashprovidedby(usedin)operatingactivities 8,972,322 42,618,661 Cashflowsfrominvestingactivities: Capitalexpenditures (28,057,137) (23,585,868) Netcashprovidedby(usedin)investingactivities (28,057,137) (23,585,868) Cashflowsfromfinancingactivities: Capitalleasepayments (542,160) (583,299) Netcashprovidedby(usedin)financingactivities (542,160) (583,299) Netincrease(decrease)incash (19,626,975) 18,449,494 Cashbalance–beginningofyear 73,592,126 55,142,632 Cashbalance–endofyear $53,965,151 $73,592,126 Seenotestofinancialstatements.

326 99thAnnualReport|2012 Board of Governors of the Federal Reserve System Notes to Financial Statements as of and for the Years ended December 31, 2012 and 2011 (1)Structure TheFederalReserveSystem(theSystem)wasestablishedbyCongressin1913and consistsof theBoardof Governors(theBoard),theFederalOpenMarketCommittee,thetwelveregionalFederalReserveBanks(ReserveBanks),theFederal AdvisoryCouncil,andtheprivatecommercialbanksthataremembersof the System.TheBoard,unliketheReserveBanks,wasestablishedasafederalgovernmentagencyandislocatedinWashington,D.C. TheBoardisrequiredbytheFederalReserveAct(theAct)toreportitsoperations totheSpeakerof theHouseof Representatives.TheActalsorequirestheBoard, eachyear,toorderafinancialauditof eachReserveBankandtopublisheach weekastatementof thefinancialconditionof eachReserveBankandacombined statementforallof theReserveBanks.Accordingly,theBoardbelievesthatthe bestfinancialdisclosureconsistentwithlawisachievedbyissuingseparatefinancialstatementsfortheBoardandfortheReserveBanks.Therefore,theaccompanyingfinancialstatementsincludeonlytheresultsof operationsandactivitiesof theBoard.CombinedfinancialstatementsfortheReserveBanksareincludedin theBoard’sannualreporttotheSpeakerof theHouseof Representativesand weeklystatementsareavailableontheBoard’swebsite. TheDodd-FrankWallStreetReformandConsumerFinancialProtectionActof 2010(Dodd-FrankAct)establishedtheBureauof ConsumerFinancialProtection (Bureau)asanindependentbureauwithintheSystemanddesignatedtheBoard’s Officeof InspectorGeneral(OIG)astheOIGfortheBureau.Asrequiredbythe Dodd-FrankAct,theBoardtransferredcertainresponsibilitiestotheBureauin July2011.TheDodd-FrankActrequirestheBoardtofundtheBureaufromthe combinedearningsof theSystem.TheDodd-FrankActalsocreatedtheFinancial StabilityOversightCouncil(FSOC)of whichtheChairmanof theBoardisa member,aswellastheOfficeof FinancialResearch(Office)withintheU.S. Departmentof TreasurytoprovidesupporttotheFSOCandthememberagencies.TheDodd-FrankActrequiredthattheBoardprovidefundingfortheFSOC andtheOfficeuntilJuly2012.Section1017of theDodd-FrankActprovidesthat thefinancialstatementsof theBureauarenottobeconsolidatedwiththoseof the BoardortheSystem;theBoardhasalsodeterminedthatneithertheFSOCnor theOfficeshouldbeconsolidatedintheBoard’sfinancialstatements.Accordingly, theBoard’sfinancialstatementsdonotincludefinancialdataof theBureau,the FSOC,ortheOfficeotherthanthefundingthattheBoardisrequiredbythe Dodd-FrankActtoprovide. (2)OperationsandServices TheBoard’sresponsibilitiesrequirethoroughanalysisof domesticandinternationalfinancialandeconomicdevelopments.TheBoardcarriesoutthoseresponsibilitiesinconjunctionwiththeReserveBanksandtheFederalOpenMarketCommittee.TheBoardalsosupervisestheoperationsof theReserveBanksandexercisesbroadresponsibilityinthenation’spaymentssystem.Policyregardingopen marketoperationsisestablishedbytheFederalOpenMarketCommittee.However,theBoardhassoleauthorityoverchangesinreserverequirements,andit mustapproveanychangeinthediscountrateinitiatedbyaReserveBank.The Boardalsoplaysamajorroleinthesupervisionandregulationof theU.S.bank-

FederalReserveSystemAudits 327 ingsystem.Ithassupervisoryresponsibilitiesforstate-charteredbanksthatare membersof theSystem,bankholdingcompanies,savingsandloanholdingcompanies,foreignactivitiesof memberbanks,U.S.activitiesof foreignbanks,and anysystemicallyimportantnonbankfinancialcompanythataredesignatedbythe FSOC.AlthoughtheDodd-FrankActgavetheBureaugeneralrule-writing responsibilityforFederalconsumerfinanciallaws,theBoardretainsrule-writing responsibilityundertheCommunityReinvestmentActandotherspecificstatutory provisions.TheBoardalsoenforcestherequirementsof Federalconsumerfinanciallawsforstatememberbankswithassetsof $10billionorless.Inaddition,the Boardenforcescertainotherconsumerlawsatallstatememberbanks,regardless of size. Section318(c)of theDodd-FrankActrequiresthattheBoardshallcollectatotal amountof assessments,fees,orothercharges,fromcertaincompanies(largebank holdingcompaniesandsavingsandloanholdingcompanieswithtotalconsolidatedassetsof $50billionormoreandsystemicallyimportantnonbankfinancial companiesdesignatedbytheFSOC)thatisequaltothetotalexpensestheBoard estimatesarenecessaryorappropriatetocarryoutthesupervisoryandregulatory responsibilitiesof theBoardwithrespecttosuchcompanies.Asof December31, 2012,theBoardhasnotissuedrulemakingregardingthisnewresponsibility,and currentlydoesnotanticipatefinalizinganysuchrulemakinguntillaterin2013.As such,sufficientinformationisnotavailabletodetermineareasonableestimateof thefeesthatitmayeventuallycollectandtransfertotheU.S.Treasury. (3)SignificantAccountingPolicies Basisof Accounting—TheBoardpreparesitsfinancialstatementsinaccordance withaccountingprinciplesgenerallyacceptedintheUnitedStates(GAAP). Revenues—TheFederalReserveActauthorizestheBoardtolevyanassessment ontheReserveBankstofunditsoperations.TheBoardallocatestheassessmentto eachReserveBankbasedontheReserveBank’scapitalandsurplusbalances. AssessmentstoFundtheBureauandtheOffice—TheBoardassessestheReserve BanksforthefundstransferredtotheBureauandtheOfficebasedoneach ReserveBank’scapitalandsurplusbalances.Theseassessmentsandtransfersare reportedseparatelyfromtheBoard’soperatingactivitiesintheBoard’sStatements of Operations. CivilMoneyPenalties—TheBoardhasenforcementauthorityoverthefinancial institutionsitsupervisesandtheiraffiliatedparties,includingtheauthorityto assesscivilmoneypenalties.Asdirectedbystatute,allcivilmoneypenaltiesthat areassessedandcollectedbytheBoardareremittedtoeithertheDepartmentof Treasury(Treasury)ortheFederalEmergencyManagementAgency(FEMA).As acollectingentity,theBoarddoesnotrecognizecivilmoneypenaltiesasrevenue nordoestheBoardusethecivilmoneypenaltytofundBoardexpenses.Civil moneypenaltieswhosecollectioniscontingentuponfulfillmentof certainconditionsintheenforcementactionarenotrecordedintheBoard’sfinancialrecords. ChecksforcivilmoneypenaltiesmadepayabletotheNationalFloodInsurance ProgramareforwardedtoFEMAandarenotrecordedintheBoard’sfinancial records. CurrencyCosts—TheBoardissuesthenation’scurrency(intheformof Federal Reservenotes),andtheReserveBanksdistributecurrencyandcointhrough depositoryinstitutions.TheBoardincursexpensesandassessestheReserveBanks

328 99thAnnualReport|2012 fortheexpensesrelatedtoproducing,issuing,andretiringFederalReservenotes aswellasprovidingeducationalservices.Theassessmentisallocatedbasedoneach ReserveBank’sshareof thenumberof notescomprisingtheSystem’snetliability forFederalReservenotesonDecember31of theprioryear.Theseexpensesand assessmentsarereportedseparatelyfromtheBoard’soperatingactivitiesinthe Board’sStatementsof Operations. AllowanceforDoubtfulAccounts—Accountsreceivableareshownnetof the allowancefordoubtfulaccounts.Accountsreceivableconsidereduncollectibleare chargedagainsttheallowanceaccountintheyeartheyaredeemeduncollectible. Theallowancefordoubtfulaccountsisadjustedmonthly,baseduponareviewof outstandingreceivables.Theallowancefordoubtfulaccountsis$30,000and $112,000for2012and2011,respectively. Property,Equipment,andSoftware—TheBoard’sproperty,equipment,andsoftwarearestatedatcostlessaccumulateddepreciationandamortization.Depreciationandamortizationarecalculatedonastraight-linebasisovertheestimatedusefullivesof theassets,whichrangefromthreetotenyearsforfurnitureandequipment,tentofiftyyearsforbuildingequipmentandstructures,andtwototenyears forsoftware.Uponthesaleorotherdispositionof adepreciableasset,thecostand relatedaccumulateddepreciationoramortizationareremovedandanygainorloss isrecognized.Constructioninprocessincludescostsincurredforshort-termand long-termprojectsthathavenotbeenplacedintoservice.Themajorityof thebalancerepresentslong-termbuildingenhancementprojects. ArtCollections—TheBoardhascollectionsof worksof art,historicaltreasures, andsimilarassets.Thesecollectionsaremaintainedandheldforpublicexhibition infurtheranceof publicservice.Proceedsfromanysalesof collectionsareusedto acquireotheritemsforcollections.Thecostof collectionspurchasedbytheBoard ischargedtoexpenseintheyearpurchasedanddonatedcollectionitemsarenot recorded.Thevalueof theBoard’scollectionshasnotbeendetermined. DeferredRent—Leasesforcertainspacecontainscheduledrentincreasesoverthe termof thelease.Rentabatements,leaseincentives,andscheduledrentincreases mustbeconsideredindeterminingtheannualrentexpensetoberecognized.The deferredrentrepresentsthedifferencebetweentheactualleasepaymentsandthe rentexpenserecognized.Leaseincentivesimpactdeferredrent,andarenon-cash transactions,anddiscussedintheleasesfootnote. Estimates—Thepreparationof financialstatementsinconformitywithGAAP requiresmanagementtomakeestimatesandassumptionsthataffectthereported amountsof assetsandliabilitiesandthedisclosureof contingentassetsandliabilitiesatthedateof thefinancialstatementsandthereportedamountsof revenues andexpensesduringthereportingperiod.Actualresultscoulddifferfromthose estimates. RecentlyIssuedAccountingStandards—InJune2011,theFinancialAccounting StandardsBoard(FASB)issuedAccountingStandardsUpdate(ASU)2011–05, ComprehensiveIncome(Topic220):Presentationof ComprehensiveIncome,which requiresareportingentitytopresentthetotalof comprehensiveincome,thecomponentsof netincomeandthecomponentsof othercomprehensiveincomeeither inasinglecontinuousstatementof comprehensiveincomeorintwoseparatebut consecutivestatements.Thisupdateeliminatestheoptiontopresentthecomponentsof othercomprehensiveincomeaspartof thestatementof shareholders’

FederalReserveSystemAudits 329 equity.Theupdateisintendedtoimprovethecomparability,consistency,and transparencyof financialreportingandtoincreasetheprominenceof itemsby presentingthecomponentsreportedinothercomprehensiveincome.TheBoard hasadoptedtheupdateinthisASUeffectivefortheyearendedDecember31, 2012,andtherequiredpresentationisreflectedintheBoard’sfinancialstatements. InDecember2011,theFASBissuedASU2011–12,ComprehensiveIncome(Topic 220):Deferralof theEffectiveDateforAmendmentstothePresentationof Reclassificationsof Itemsoutof AccumulatedOtherComprehensiveIncomeinAccounting StandardsUpdateNo.2011–05.Thisupdateindefinitelydeferstherequirementsof ASU2011–05relatedtopresentationof reclassificationadjustmentsfromaccumulatedothercomprehensiveincome.Wheneffective,thisupdatewillaffecttheclassificationof theseadjustmentsintheStatementsof Operations. InFebruary2013,theFASBissuedASU2013–02,ComprehensiveIncome(Topic 220):Reportingof AmountsReclassifiedOutof AccumulatedOtherComprehensive Income.Thisupdaterequiresanentitytoreporttheeffectof significantreclassificationsoutof accumulatedothercomprehensiveincomeontherespectivenet incomelineitems.ThisupdateiseffectivefortheBoardfortheyearending December31,2013,andwillbereflectedintheBoard’s2013financialstatements. (4)Property,Equipment,andSoftware Thefollowingisasummaryof thecomponentsof theBoard’sproperty,equipment,andsoftware,atcost,netof accumulateddepreciationandamortizationas of December31,2012and2011: AsofDecember31, 2012 2011 Land $ 18,640,314 $ 18,640,314 Buildingsandimprovements 205,006,985 195,869,546 Constructioninprocess 14,362,523 13,952,693 Furnitureandequipment 74,519,266 66,604,104 Softwareinuse 29,147,933 27,091,292 Softwareinprocess 2,422,381 1,384,526 Vehicles 960,745 521,419 Otherintangibleassets 496,675 496,675 Subtotal 345,556,822 324,560,569 Lessaccumulateddepreciationandamortization (158,852,971) (142,656,968) Property,equipment,andsoftware–net $186,703,851 $181,903,601 (5)Leases CapitalLeases—TheBoardenteredintocapitalleasesforcopierequipmentin 2008and2009thatterminatedinMarch2012.TheBoardsubsequentlyentered intonewcapitalleasesin2012.Underthenewcommitments,thecapitalleaseterm extendsthrough2016.Furnitureandequipmentincludescapitalizedleasesof $1,853,000and$2,086,000in2012and2011,respectively.Accumulateddepreciationincludes$337,000and$1,852,000relatedtoassetsundercapitalleasesasof 2012and2011,respectively.Thedepreciationexpensefortheleasedequipmentis $471,000and$533,000for2012and2011,respectively.

330 99thAnnualReport|2012 Thefutureminimumleasepaymentsrequiredunderthecapitalleasesandthepresentvalueof thenetminimumleasepaymentsasof December31,2012,areas follows: YearsEndedDecember31, Amount 2013 $ 711,659 2014 711,659 2015 711,659 2016 192,799 Totalminimumleasepayments 2,327,776 Lessamountrepresentingmaintenance (754,555) Netminimumleasepayments 1,573,221 Lessamountrepresentinginterest (47,209) Presentvalueofnetminimumleasepayments 1,526,012 Lesscurrentmaturitiesofcapitalleasepayments (456,896) Long-termcapitalleaseobligations $1,069,116 OperatingLeases—TheBoardhasenteredintoseveraloperatingleasestosecure office,training,andwarehousespace.Minimumannualpaymentsunderthemultiyearoperatingleaseshavinganinitialorremainingnon-cancelableleasetermin excessof oneyearatDecember31,2012,areasfollows: YearsEndingDecember31, 2013 $ 14,555,834 2014 14,918,629 2015 15,360,855 2016 15,744,650 After2016 71,438,299 $132,018,267 Rentalexpensesunderthemulti-yearoperatingleaseswere$13,553,000and $6,093,000fortheyearsendedDecember31,2012and2011,respectively.The Boardenteredintotwonewoperatingleasesinearly2013.Theestimatedfuture minimumleasepaymentsassociatedwiththenewleasestotal$109,337,000overa tenyearperiod,whichisnotreflectedinthescheduleabove. TheBoardleasesandsubleasesspace,primarilytoothergovernmentalagencies. Therevenuescollectedfortheseleasesfromgovernmentalagencieswere$480,000 inboth2012and2011. DeferredRent—Otherlong-termliabilitiesincludedeferredrentof $20,924,000 and$19,733,000asof theyearsendedDecember31,2012and2011,respectively. The2012endingbalanceincludesnon-cashleaseincentivesof $563,000. (6)RetirementBenefits Substantiallyallof theBoard’semployeesparticipateintheRetirementPlanfor Employeesof theFederalReserveSystem(theSystemPlan).TheSystemPlanprovidesretirementbenefitstoemployeesof theBoard,theReserveBanks,theOffice of EmployeeBenefitsof theFederalReserveSystem(OEB),andcertainemployeesof theBureau.TheReserveBankof NewYork(FRBNY),onbehalf of the System,recognizesthenetassetsandcostsassociatedwiththeSystemPlaninits financialstatements.CostsassociatedwiththeSystemPlanwerenotredistributed totheBoardduringtheyearendedDecember31,2012and2011.

FederalReserveSystemAudits 331 Employeesof theBoardwhobecameemployedpriorto1984arecoveredbya contributorydefinedbenefitsprogramundertheSystemPlan.Employeesof the Boardwhobecameemployedafter1983arecoveredbyanon-contributory definedbenefitsprogramundertheSystemPlan.FRBNY,onbehalf of the System,funded$780millionand$420millionduringtheyearsendedDecember31,2012and2011,respectively.TheBoardwasnotassessedacontributionfor 2012and2011. BoardemployeescoveredundertheSystemPlanarealsocoveredunderaBenefits EqualizationPlan(BEP).BenefitspaidundertheBEParelimitedtothosebenefits thatcannotbepaidfromtheSystemPlanduetolimitationsimposedbytheInternalRevenueCode.ActivityfortheBEPasof December31,2012and2011,is summarizedinthefollowingtables: 2012 2011 Changeinprojectedbenefitobligation: Benefitobligation–beginningofyear $14,147,186 $11,933,435 Servicecost 2,100,366 1,456,457 Interestcost 867,002 602,381 Planparticipants’contributions – – Actuarial(gain)loss (1,928,409) 567,091 Grossbenefitspaid (33,312) (35,438) TransferstotheBureau – (376,740) Benefitobligation–endofyear $15,152,833 $14,147,186 Accumulatedbenefitobligation–endofyear $ 3,149,276 $ 2,351,832 Weighted-averageassumptionsusedtodeterminebenefitobligationasofDecember31: Discountrate 4.25% 4.50% Rateofcompensationincrease 4.50% 5.00% Changeinplanassets: Fairvalueofplanassets–beginningofyear $ – $ – Employercontributions 33,312 35,438 Planparticipants’contributions – – Grossbenefitspaid (33,312) (35,438) Fairvalueofplanassets–endofyear $ – $ – Fundedstatus: Reconciliationoffundedstatus–endofyear: Fairvalueofplanassets $ – $ – Benefitobligation 15,152,833 14,147,186 Fundedstatus (15,152,833) (14,147,186) Amountrecognized–endofyear $(15,152,833) $(14,147,186) Amountsrecognizedinthestatementsoffinancialpositionconsistof: Asset $ – $ – Liability (15,152,833) (14,147,186) Netamountrecognized $(15,152,833) $(14,147,186) Amountsrecognizedinaccumulatedothercomprehensiveincomeconsistof: Netactuarialloss(gain) $ 2,939,609 $ 5,535,793 Priorservicecost(credit) 620,967 699,952 Netamountrecognized $ 3,560,576 $ 6,235,745

332 99thAnnualReport|2012 Expectedcashflows: $ 137,203 Expectedemployercontributions–2013 Expectedbenefitpayments:* $ 137,203 2013 2014 164,275 2015 186,654 2016 212,730 2017 225,868 1,623,583 2018–2022 * ExpectedbenefitpaymentstobemadebytheBoard. 2012 2011 Componentsofnetperiodicbenefitcost: Servicecost $2,100,366 $1,456,457 Interestcost 867,002 602,381 Expectedreturnonplanassets – – Amortization: Actuarial(gain)loss $ 667,775 $ 230,468 Priorservice(credit)cost 78,985 1,881 Netperiodicbenefitcost(credit) $3,714,128 $2,291,187 Weighted-averageassumptionsusedtodeterminenetperiodicbenefitcost: Discountrate 4.50% 5.50% Rateofcompensationincrease 5.00% 5.00% Otherchangesinplanassetsandbenefitobligationsrecognizedinothercomprehensiveincome: Currentyearactuarial(gain)loss $(1,928,409) $ 190,351 Amortizationofpriorservicecredit(cost) (78,985) (1,881) Amortizationofactuarialgain(loss) (667,775) (230,468) Totalrecognizedinothercomprehensive(income)loss $(2,675,169) $ (41,998) Totalrecognizedinnetperiodicbenefitcostandothercomprehensiveincome $1,038,959 $2,249,189 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive incomeintonetperiodicbenefitcost(credit)in2013areshownbelow: Netactuarial(gain)loss $ 36,979 Priorservice(credit)cost 99,779 Total $136,758 TheBoardalsoprovidesanothernon-qualifiedplanforOfficersof theBoard.The retirementbenefitscoveredunderthePensionEnhancementPlan(PEP)increase thepensionbenefitcalculationfrom1.8%abovetheSocialSecurityintegration

FederalReserveSystemAudits 333 levelto2.0%.ActivityforthePEPasof December31,2012and2011,issummarizedinthefollowingtables: 2012 2011 Changeinprojectedbenefitobligation: Benefitobligation–beginningofyear $13,250,209 $ 9,949,637 Servicecost 684,473 489,236 Interestcost 750,474 589,888 Planparticipants’contributions – – Actuarial(gain)loss 3,856,673 2,401,971 Grossbenefitspaid (101,099) (57,124) TransferstotheBureau – (123,399) Benefitobligation–endofyear $18,440,730 $13,250,209 Accumulatedbenefitobligation–endofyear $14,766,590 $10,000,174 Weighted-averageassumptionsusedtodeterminebenefitobligationasofDecember31: Discountrate 4.00% 4.50% Rateofcompensationincrease 4.50% 5.00% Changeinplanassets: Fairvalueofplanassets–beginningofyear $ – $ – Employercontributions 101,099 57,124 Planparticipants’contributions – – Grossbenefitspaid (101,099) (57,124) Fairvalueofplanassets–endofyear $ – $ – Fundedstatus: Reconciliationoffundedstatus–endofyear: Fairvalueofplanassets $ – $ – Benefitobligation 18,440,730 13,250,209 Fundedstatus (18,440,730) (13,250,209) Amountrecognized–endofyear $(18,440,730) $(13,250,209) Amountsrecognizedinthestatementsoffinancialpositionconsistof: Asset $ – $ – Liability (18,440,730) (13,250,209) Netamountrecognized $(18,440,730) $(13,250,209) Amountsrecognizedinaccumulatedothercomprehensiveincomeconsistof: Netactuarialloss(gain) $ 8,514,540 $ 5,416,792 Priorservicecost(credit) 2,180,488 2,711,883 Netamountrecognized $10,695,028 $ 8,128,675 Expectedcashflows: $ 162,055 Expectedemployercontributions–2013 Expectedbenefitpayments:* $ 162,055 2013 $ 234,218 2014 $ 311,695 2015 $ 392,185 2016 $ 478,316 2017 $3,813,305 2018–2022 * ExpectedbenefitpaymentstobemadebytheBoard.

334 99thAnnualReport|2012 2012 2011 Componentsofnetperiodicbenefitcost: Servicecost $ 684,473 $ 489,236 Interestcost 750,474 589,888 Expectedreturnonplanassets – – Amortization: Actuarial(gain)loss 758,925 327,639 Priorservice(credit)cost 531,395 531,395 Netperiodicbenefitcost(credit) $2,725,267 $1,938,158 Weighted-averageassumptionsusedtodeterminenetperiodicbenefitcost: Discountrate 4.50% 5.50% Rateofcompensationincrease 5.00% 5.00% Otherchangesinplanassetsandbenefitobligationsrecognizedinothercomprehensiveincome: Currentyearactuarial(gain)loss $3,856,673 $2,278,572 Amortizationofpriorservicecredit(cost) (531,395) (531,395) Amortizationofactuarialgain(loss) (758,925) (327,639) Totalrecognizedinothercomprehensive(income)loss $2,566,353 $1,419,538 Totalrecognizedinnetperiodicbenefitcostandothercomprehensiveincome $5,291,620 $3,357,696 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive incomeintonetperiodicbenefitcost(credit)in2013areshownbelow: $ 757,959 Netactuarial(gain)loss Priorservice(credit)cost 531,395 Total $1,289,354 Thetotalaccumulatedretirementbenefitobligationincludesaliabilityfora supplementalretirementagreementandabenefitsequalizationplanunderthe FederalReserveSystem’sThriftPlan.Thetotalobligationasof December31, 2012and2011,issummarizedinthefollowingtable: 2012 2011 Retirementbenefitobligation: Benefitobligation–BEP $15,152,833 $14,147,186 Benefitobligation–PEP 18,440,730 13,250,209 Additionalbenefitobligations 146,747 88,317 Totalaccumulatedretirementbenefitobligation $33,740,310 $27,485,712 Arelativelysmallnumberof BoardemployeesparticipateintheCivilService RetirementSystem(CSRS)ortheFederalEmployees’RetirementSystem(FERS). ThesedefinedbenefitplansareadministeredbytheU.S.Officeof PersonnelManagement,whichdeterminestherequiredemployercontributionlevels.TheBoard’s contributionstotheseplanstotaled$586,000and$523,000in2012and2011, respectively.TheBoardhasnoliabilityforfuturepaymentstoretireesunderthese programsandisnotaccountablefortheassetsof theplans. Employeesof theBoardmayalsoparticipateintheFederalReserveSystem’s ThriftPlanorRoth401(k).Boardcontributionstomembers’accountswere $19,211,000and$17,699,000in2012and2011,respectively.

FederalReserveSystemAudits 335 (7)PostretirementBenefits TheBoardprovidescertainlifeinsuranceprogramsforitsactiveemployeesand retirees.Activityasof December31,2012and2011,issummarizedinthefollowingtables: 2012 2011 Changeinbenefitobligation: Benefitobligation–beginningofyear $11,799,079 $10,219,672 Servicecost 210,030 186,268 Interestcost 534,224 529,161 Planparticipants’contributions – – Actuarial(gain)loss 1,055,530 1,158,757 Grossbenefitspaid (349,215) (294,779) Benefitobligation–endofyear $13,249,648 $11,799,079 Weighted-averageassumptionsusedtodeterminebenefitobligationas ofDecember31–discountrate 4.00% 4.50% Changeinplanassets: Fairvalueofplanassets–beginningofyear $ – $ – Employercontributions 349,215 294,779 Grossbenefitspaid (349,215) (294,779) Fairvalueofplanassets–endofyear $ – $ – Fundedstatus: Reconciliationoffundedstatus–endofyear: Fairvalueofplanassets $ – $ – Benefitobligation 13,249,648 11,799,079 Fundedstatus (13,249,648) (11,799,079) Amountrecognized–endofyear $(13,249,648) $(11,799,079) Amountsrecognizedinthestatementsoffinancialpositionconsistof: Asset $ – $ – Liability (13,249,648) (11,799,079) Netamountrecognized $(13,249,648) $(11,799,079) Amountsrecognizedinaccumulatedothercomprehensiveincomeconsistof: Netactuarialloss(gain) $ 3,802,439 $ 2,980,166 Priorservicecost(credit) (225,554) (251,044) Netamountrecognized $ 3,576,885 $ 2,729,122 Expectedcashflows: $ 372,355 Expectedemployercontributions–2013 Expectedbenefitpayments:* $ 372,355 2013 2014 402,603 2015 430,068 2016 460,866 2017 491,282 2,837,643 2018–2022 * ExpectedbenefitpaymentstobemadebytheBoard.

336 99thAnnualReport|2012 2012 2011 Componentsofnetperiodicbenefitcost: Servicecost $ 210,030 $ 186,268 Interestcost 534,224 529,161 Expectedreturnonplanassets – – Amortization: Actuarial(gain)loss 233,256 95,767 Priorservice(credit)cost (25,490) (25,490) Netperiodicbenefitcost(credit) $ 952,020 $ 785,706 Weighted-averageassumptionsusedtodeterminenetperiodicbenefit cost–discountrate 4.50% 5.25% Otherchangesinplanassetsandbenefitobligationsrecognizedinothercomprehensiveincome: Currentyearactuarial(gain)loss $1,055,530 $1,158,757 Amortizationofpriorservicecredit(cost) 25,490 25,490 Amortizationofactuarialgain(loss) (233,256) (95,767) Totalrecognizedinothercomprehensive(income)loss $ 847,764 $1,088,480 Totalrecognizedinnetperiodicbenefitcostandothercomprehensiveincome $1,799,784 $1,874,186 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive incomeintonetperiodicbenefitcost(credit)in2013areshownbelow: $313,301 Netactuarial(gain)loss Priorservice(credit)cost (25,490) Total $287,811 (8)PostemploymentBenefits TheBoardprovidescertainpostemploymentbenefitstoeligibleformerorinactive employeesandtheirdependentsduringtheperiodsubsequenttoemploymentbut priortoretirement.Postemploymentcostswereactuariallydeterminedusinga December31measurementdateanddiscountratesof 2.50%and2.25%asof December31,2012and2011,respectively.Thenetperiodicpostemploymentbenefitcost(credit)recognizedbytheBoardasof December31,2012and2011,were $518,000and($1,606,000),respectively.

FederalReserveSystemAudits 337 (9)AccumulatedOtherComprehensiveIncome(Loss) Areconciliationof beginningandendingbalancesof accumulatedothercomprehensiveincome(loss)fortheyearsendedDecember31,2012and2011,isas follows: AmountRelatedto TotalAccumulated AmountRelatedto Postretirement Other DefinedBenefit BenefitsOther Comprehensive RetirementPlans ThanPensions Income(Loss) Balance–January1,2011 $(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) Changeinfundedstatusofbenefitplans: Amortizationofpriorservice(credit)costs 610,380 (25,490) 584,890 Amortizationofnetactuarial(gain)loss 1,426,700 233,256 1,659,956 Netactuarialgain(loss)arisingduringtheyear (1,928,264) (1,055,530) (2,983,794) Changeinfundedstatusofbenefitplans–other comprehensiveincome(loss) 108,816 (847,764) (738,948) Balance–December31,2012 $(14,255,604) $(3,576,886) $(17,832,490) Additionaldetailregardingtheclassificationof accumulatedothercomprehensive income(loss)isincludedinNotes6and7. (10)ReserveBanks TheBoardperformscertainfunctionsfortheReserveBanksinconjunctionwith itsresponsibilitiesfortheSystem,andtheReserveBanksprovidecertainadministrativefunctionsfortheBoard.TheBoardassessestheReserveBanksforitsoperatingexpenses,toincludeexpensesrelatedtoitscurrencyresponsibilities,aswellas forthefundingtheBoardisrequiredtoprovidetotheBureauandtheOffice.

338 99thAnnualReport|2012 ActivityrelatedtotheBoardandReserveBanksissummarizedinthefollowing table: 2012 2011 FortheyearsendedDecember31: AssessmentsleviedortobeleviedonFederalReserveBanksfor: Currencyexpenses $ 721,074,064 $ 650,010,597 Boardoperations 490,000,000 472,300,000 TransfersoffundstotheBureau 385,200,000 241,711,564 TransfersoffundstotheOffice 2,078,298 40,000,000 TotalassessmentsleviedortobeleviedonFederalReserveBanks $1,598,352,362 $1,404,022,161 BoardexpenseschargedtotheFederalReserveBanksfordata processing $ 423,209 $ 406,421 FederalReserveBankexpenseschargedtotheBoard: Dataprocessingandcommunication $ 1,313,902 $ 788,910 Contingencysite 1,191,220 1,211,362 TotalFederalReserveBankexpenseschargedtotheBoard $ 2,505,122 $ 2,000,272 NettransactionswithFederalReserveBanks $1,596,270,449 $1,402,428,310 AsoftheyearsendedDecember31: AccountsreceivableduefromtheFederalReserveBanks $ 751,614 $ 2,501,565 AccountspayableduetotheFederalReserveBanks $ 334,665 $ 16,358 TheBoardcontractedforauditservicesonbehalf of entitiesthatareincludedin thecombinedfinancialstatementsof theReserveBanks.Theentitiesreimburse theBoardforthecostof theauditservices.TheBoardaccruedliabilitiesof $185,000and$293,000inauditservicesandrecordednetreceivablesof $170,000 and$500,000fromtheentitiesasof December31,2012and2011,respectively.In 2013,theBoardalsoenteredintoleasearrangementswiththeReserveBanks relatedtospaceneedsfortheOIGandtheBoard’sdatacenter. TheOEBadministerscertainSystembenefitprogramsonbehalf of theBoardand theReserveBanks,andcostsassociatedwiththeOEB’sactivitiesareassessedto theBoardandReserveBanks.TheBoardwasassessed$2,530,000and$2,596,000 fortheyearsendedDecember31,2012and2011,respectively. (11)FederalFinancialInstitutionsExaminationCouncil TheBoardisoneof thefivememberagenciesof theFederalFinancialInstitutions ExaminationCouncil(theCouncil),andcurrentlyperformscertainmanagement functionsfortheCouncil.ThefiveagenciesthatarerepresentedontheCouncil aretheBoard,FederalDepositInsuranceCorporation,NationalCreditUnion Administration,Officeof theComptrollerof theCurrency,andtheBureau.

FederalReserveSystemAudits 339 TheBoard’sfinancialstatementsdonotincludefinancialdatafortheCouncil. ActivityrelatedtotheBoardandCouncil,issummarizedinthefollowingtable: 2012 2011 FortheyearsendedDecember31: CouncilexpenseschargedtotheBoard: Assessmentsforoperatingexpenses $ 137,466 $ 137,421 Assessmentsforexaminereducation 1,043,917 810,459 CentralDataRepository 1,111,793 1,113,255 HomeMortgageDisclosureAct/CommunityReinvestmentAct 753,464 702,482 UniformBankPerformanceReport 132,294 117,215 TotalCouncilexpenseschargedtotheBoard $3,178,934 $2,880,832 BoardexpenseschargedtotheCouncil: Dataprocessingrelatedservices $4,392,625 $4,164,479 Administrativeservices 261,000 281,000 TotalBoardexpenseschargedtotheCouncil $4,653,625 $4,445,479 AsoftheyearsendedDecember31: AccountsreceivableduefromtheCouncil $ 545,770 $ 494,234 AccountspayableduetotheCouncil $ 211,061 $ 132,539 (12)TheBureauofConsumerFinancialProtection BeginningJuly2011,section1017of theDodd-FrankActrequirestheBoardto fundtheBureaufromthecombinedearningsof theSystem,inanamountdeterminedbytheDirectorof theBureautobereasonablynecessarytocarryoutthe authoritiesof theBureauunderFederalconsumerfinanciallaw,takinginto accountsuchothersumsmadeavailabletotheBureaufromtheprecedingyear(or quarterof suchyear).TheDodd-FrankActlimitstheamounttobetransferred eachfiscalyeartoafixedpercentageof theSystem’stotaloperatingexpenses.The BoardreceivedandprocessedfundingrequestsfortheBureautotaling $385,200,000and$241,711,564duringcalendaryears2012and2011,respectively. During2012,theBureautransferred$3milliontotheBoardrelatedtofundingthe operationsof theOIG. Aspartof thetransferof responsibilitiesfromtheBoardtotheBureau,certain Boardstaff weretransferredtotheBureauduring2011.TheBoardcontinuedto administercertainnon-retirementbenefitsforalltransferredBoardemployees throughJuly20,2012. (13)TheOfficeofFinancialResearch Section155(c)of theDodd-FrankActrequirestheBoardtoprovideanamount sufficienttocovertheexpensesof theOfficeforthetwo-yearperiodfollowingthe dateof theenactment(July21,2010).Theexpensesof theFSOCareincludedin theexpensesof theOffice.TheBoardreceivedandprocessedfundingrequestsfor theOfficetotaling$42,000,000and$40,000,000during2012and2011,respectively.Attheendof thetwo-yearperiodin2012,theOfficereturned $39,921,702totheBoardwhichwasreturnedtotheReserveBanks.

340 99thAnnualReport|2012 (14)Currency TheBureauof EngravingandPrinting(BEP)isthesolesupplierforcurrency printingandalsoprovidescurrencyretirementservices.TheBoardprovidesor contractsforotherservicesassociatedwithcurrency,suchasshipping,education, andqualityassurance.ThecurrencycostsincurredbytheBoardfortheyears endedDecember31,2012and2011,arereflectedinthefollowingtable: 2012 2011 ExpensesrelatedtoBEPservices: Printing $687,704,624 $623,214,300 Retirement 3,132,105 3,475,244 SubtotalrelatedtoBEPservices $690,836,729 $626,689,544 Othercurrencyexpenses: Shipping $ 17,179,610 $ 15,728,046 Researchanddevelopment 5,316,005 4,486,525 Qualityassuranceservices 7,259,900 2,992,053 Educationservices 481,820 114,429 Subtotalothercurrencyexpenses $ 30,237,335 $ 23,321,053 Totalcurrencyexpenses $721,074,064 $650,010,597 (15)CommitmentsandContingencies Commitments—TheBoardhasenteredintoanagreementwiththeFederal DepositInsuranceCorporationandtheOfficeof theComptrollerof theCurrency,throughtheCouncil,tofundaportionof theenhancementsandmaintenancefeesforacentraldatarepositoryprojectthatrequiresmaintenancethrough 2013.TheestimatedBoardexpensetosupportthiseffortis$845,000forthe remainingoptionperiod. LitigationandContingentLiabilities—TheBoardissubjecttocontingentliabilitieswhicharisefromlitigationcasesandvariousbusinesscontracts.Thesecontingentliabilitiesariseinthenormalcourseof operationsandtheirultimatedispositionisunknown.Basedoninformationcurrentlyavailabletomanagement,itis management’sopinionthattheexpectedoutcomeof thesematters,intheaggregate,willnothaveamaterialadverseeffectonthefinancialstatements. (16)SubsequentEvents Therewerenosubsequenteventsthatrequireadjustmentstoordisclosuresinthe financialstatementsasof December31,2012.Subsequenteventswereevaluated throughMarch5,2013,whichisthedatethefinancialstatementswereavailableto beissued.

FederalReserveSystemAudits 341 INDEPENDENTAUDITORS’REPORTONCOMPLIANCEANDOTHERMATTERSBASEDONANAUDIT OFFINANCIALSTATEMENTSPERFORMEDINACCORDANCEWITHGOVERNMENTAUDITING STANDARDS TotheBoardofGovernorsoftheFederalReserveSystem: Wehaveaudited,inaccordancewiththeauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica, auditingstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),andthestandardsapplicable tofinancialauditscontainedinGovernmentAuditingStandardsissuedbytheComptrollerGeneraloftheUnited States,thefinancialstatementsoftheBoardofGovernorsoftheFederalReserveSystem(the"Board")asofandfor theyearsendedDecember31,2012and2011,andtherelatednotestothefinancialstatements.Wehavealsoaudited, inaccordancewithattestationstandardsestablishedbytheAmericanInstituteofCertifiedPublicAccountantsandin accordancewiththeauditingstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),the Board'sinternalcontroloverfinancialreportingasofDecember31,2012,basedonthecriteriaestablishedinInternal Control—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission. WehaveissuedourreportontheaforementionedauditsdatedMarch5,2013. ComplianceandOtherMatters AspartofobtainingreasonableassuranceaboutwhethertheBoard’sfinancialstatementsarefreeofmaterialmisstatement,weperformedtestsofitscompliancewithcertainprovisionsoflaws,regulations,contracts,andgrant agreements,noncompliancewithwhichcouldhaveadirectandmaterialeffectonthedeterminationoffinancialstatementamounts.However,providinganopiniononcompliancewiththoseprovisionswasnotanobjectiveofouraudit, andaccordingly,wedonotexpresssuchanopinion.Theresultsofourtestsdisclosednoinstancesofnoncompliance orothermattersthatarerequiredtobereportedunderGovernmentAuditingStandards. PurposeofthisReport Thepurposeofthisreportissolelytodescribethescopeofourtestingofcomplianceandtheresultsofthattesting, andnottoprovideanopiniononcompliance.Thisreportisanintegralpartofanauditperformedinaccordance withGovernmentAuditingStandardsinconsideringtheBoard’scompliance.Accordingly,thiscommunicationisnot suitableforanyotherpurpose. March5,2013 Washington,DC

342 99thAnnualReport|2012 Federal Reserve Banks Combined Financial Statements Thecombinedfinancialstatementsof theFederalReserveBankswereauditedby Deloitte&ToucheLLP,independentauditors,fortheyearsendedDecember31, 2012and2011. INDEPENDENTAUDITORS’REPORT TotheBoardofGovernorsoftheFederalReserveSystemandtheBoardsofDirectorsoftheFederalReserveBanks: WehaveauditedtheaccompanyingcombinedfinancialstatementsoftheFederalReserveBanks(the“Reserve Banks”),whicharecomprisedofthecombinedstatementsofconditionasofDecember31,2012and2011,andthe relatedcombinedstatementsofincomeandcomprehensiveincome,andchangesincapitalfortheyearsthenended, andtherelatednotestothecombinedfinancialstatements. Management’sResponsibilityfortheCombinedFinancialStatements ManagementisresponsibleforthepreparationandfairpresentationofthesecombinedfinancialstatementsinaccordancewithaccountingprinciplesestablishedbytheBoardofGovernorsoftheFederalReserveSystem(the“Board”) asdescribedinNote3tothecombinedfinancialstatements;thisincludesdeterminingthatthebasisofaccounting establishedbytheBoardisanacceptablebasisforthepreparationofthefinancialstatementsinthecircumstances. Managementisalsoresponsibleforthedesign,implementation,andmaintenanceofinternalcontrolrelevanttothe preparationandfairpresentationofthecombinedfinancialstatementsthatarefreefrommaterialmisstatement, whetherduetofraudorerror. Auditors’Responsibility Ourresponsibilityistoexpressanopiniononthesecombinedfinancialstatementsbasedonouraudits.Weconducted ourauditsinaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmericaandinaccordancewiththeauditingstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthecombinedfinancialstatementsarefreefrommaterialmisstatement. Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresinthecombinedfinancialstatements.Theproceduresselecteddependontheauditor’sjudgment,includingtheassessmentof therisksofmaterialmisstatementofthecombinedfinancialstatements,whetherduetofraudorerror.Inmaking thoseriskassessments,theauditorconsidersinternalcontrolrelevanttothepreparationandfairpresentationofthe combinedfinancialstatementsoftheFederalReserveBanks’inordertodesignauditproceduresthatareappropriate inthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheFederalReserve Banks’internalcontrol.Accordingly,weexpressnosuchopinion.Anauditalsoincludesevaluatingtheappropriatenessofaccountingpoliciesusedandthereasonablenessofsignificantaccountingestimatesmadebymanagement,as wellasevaluatingtheoverallpresentationofthecombinedfinancialstatements. Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforouraudit opinion.

FederalReserveSystemAudits 343 Opinion Inouropinion,thecombinedfinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancial positionoftheReserveBanksasofDecember31,2012and2011,andtheresultsoftheiroperationsfortheyears thenendedinaccordancewiththebasisofaccountingdescribedinNote3tothefinancialstatements. BasisofAccounting WedrawattentiontoNote3tothecombinedfinancialstatements,whichdescribesthebasisofaccounting.TheDivisionofReserveBankOperationsandPaymentSystemshaspreparedthesefinancialstatementsinconformitywith accountingprinciplesestablishedbytheBoard,assetforthintheFinancialAccountingManualforFederalReserve Banks,whichisabasisofaccountingotherthanaccountingprinciplesgenerallyacceptedintheUnitedStatesof America.TheeffectsonthecombinedfinancialstatementsofthedifferencesbetweentheaccountingprinciplesestablishedbytheBoardandaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericaarealsodescribedin Note3tothecombinedfinancialstatements.Ouropinionisnotmodifiedwithrespecttothismatter. March14,2013 Washington,DC

344 99thAnnualReport|2012 Federal Reserve Banks Abbreviations ABS Asset-backedsecurities ACH Automatedclearinghouse AIA AmericanInternationalAssuranceCompanyLtd. AIG AmericanInternationalGroup,Inc. ALICO AmericanLifeInsuranceCompany ASC AccountingStandardsCodification ASU AccountingStandardsUpdate BEP BenefitEqualizationRetirementPlan Bureau Bureauof ConsumerFinancialProtection CDO Collateralizeddebtobligation CDS Creditdefaultswaps CIP CommitteeonInvestmentPerformance(relatedtoSystemRetirementPlan) CMBS Commercialmortgage-backedsecurities 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 JPMC JPMorganChase&Co. Libor Londoninterbankofferedrate LLC Limitedliabilitycompany MBS Mortgage-backedsecurities ML MaidenLaneLLC MLII MaidenLaneIILLC MLIII MaidenLaneIIILLC MTM Mark-to-market OEB Officeof EmployeeBenefitsof theFederalReserveSystem OFR Officeof FinancialResearch RMBS Residentialmortgage-backedsecurities SBA SmallBusinessAdministration SDR Specialdrawingrights SERP SupplementalRetirementPlanforSelectOfficersof theFederalReserveBanks

FederalReserveSystemAudits 345 SOMA SystemOpenMarketAccount STRIPS SeparateTradingof RegisteredInterestandPrincipalof Securities TALF TermAsset-BackedSecuritiesLoanFacility TARP TroubledAssetRelief Program TBA Tobeannounced TDF TermDepositFacility TRS Totalreturnswapagreement VIE Variableinterestentity

346 99thAnnualReport|2012 FederalReserveBanksCombinedStatementsofCondition asofDecember31,2012andDecember31,2011 (inmillions) 2012 2011 Assets Goldcertificates $ 11,037 $ 11,037 Specialdrawingrightscertificates 5,200 5,200 Coin 2,108 2,306 Loans: Depositoryinstitutions 70 196 TermAsset-BackedSecuritiesLoanFacility(measuredatfairvalue) 560 9,059 SystemOpenMarketAccount: Treasurysecurities,net(ofwhich$9,139and$15,121islentasofDecember31,2012and2011, respectively) 1,809,188 1,750,277 Government-sponsoredenterprisedebtsecurities,net(ofwhich$697and$1,276islentasof December31,2012and2011,respectively) 79,479 107,828 Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities,net 950,321 848,258 Foreigncurrencydenominatedassets,net 24,972 25,950 Centralbankliquidityswaps 8,889 99,823 Otherinvestments 23 – Investmentsheldbyconsolidatedvariableinterestentities(ofwhich$2,266and$35,593ismeasuredat fairvalueasofDecember31,2012and2011,respectively) 2,750 35,693 Accruedinterestreceivable 18,932 19,710 Bankpremisesandequipment,net 2,676 2,549 Itemsinprocessofcollection 216 273 Otherassets 713 711 Totalassets $2,917,134 $2,918,870 Liabilitiesandcapital FederalReservenotesoutstanding,net $1,126,661 $1,034,052 SystemOpenMarketAccount: Securitiessoldunderagreementstorepurchase 107,188 99,900 Otherliabilities 3,177 1,368 Consolidatedvariableinterestentities: Beneficialinterestinconsolidatedvariableinterestentities(measuredatfairvalue) 803 9,845 Otherliabilities(ofwhich$71and$106ismeasuredatfairvalueasofDecember31,2012and2011, respectively) 415 690 Deposits: Depositoryinstitutions 1,491,045 1,562,253 Treasury,generalaccount 92,720 85,737 Otherdeposits 33,903 65,034 Interestpayabletodepositoryinstitutions 199 178 Accruedbenefitcosts 3,964 3,952 Deferredcredititems 702 904 AccruedinterestonFederalReservenotes 1,407 900 Otherliabilities 230 259 Totalliabilities 2,862,414 2,865,072 Capitalpaid-in 27,360 26,899 Surplus(includingaccumulatedothercomprehensivelossof$4,845and$4,792atDecember31,2012 and2011,respectively) 27,360 26,899 Totalcapital 54,720 53,798 Totalliabilitiesandcapital $2,917,134 $2,918,870 Theaccompanyingnotesareanintegralpartof thesecombinedfinancialstatements.

FederalReserveSystemAudits 347 FederalReserveBanksCombinedStatementsofIncomeandComprehensiveIncome fortheyearsendedDecember31,2012andDecember31,2011 (inmillions) 2012 2011 Interestincome Loans: TermAsset-BackedSecuritiesLoanFacility $ 80 $ 265 AmericanInternationalGroup,Inc.,net – 409 SystemOpenMarketAccount: Treasurysecurities,net 46,416 42,257 Government-sponsoredenterprisedebtsecurities,net 2,626 3,053 Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities,net 31,429 38,281 Foreigncurrencydenominatedassets,net 139 249 Centralbankliquidityswaps 241 34 Otherinvestments 9 – Investmentsheldbyconsolidatedvariableinterestentities 1,110 3,429 Totalinterestincome 82,050 87,977 Interestexpense SystemOpenMarketAccount: Securitiessoldunderagreementstorepurchase 142 44 Beneficialinterestinconsolidatedvariableinterestentities 153 285 Deposits: Depositoryinstitutions 3,871 3,765 TermDepositFacility 4 6 Totalinterestexpense 4,170 4,100 Netinterestincome 77,880 83,877 Non-interestincome TermAsset-BackedSecuritiesLoanFacility,unrealizedlosses (34) (84) SystemOpenMarketAccount: Treasurysecuritiesgains,net 13,255 2,258 Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecuritiesgains,net 241 10 Foreigncurrencytranslation(losses)gains,net (1,116) 152 Consolidatedvariableinterestentities: Investmentsheldbyconsolidatedvariableinterestentitiesgains(losses),net 7,451 (3,920) Beneficialinterestinconsolidatedvariableinterestentities(losses)gains,net (2,345) 491 Dividendsonpreferredinterests – 47 Incomefromservices 449 477 Reimbursableservicestogovernmentagencies 506 485 Other 69 134 Totalnon-interestincome 18,476 50 Operatingexpenses Salariesandbenefits 3,084 2,811 Occupancy 314 312 Equipment 193 188 Assessments: BoardofGovernorsoperatingexpensesandcurrencycosts 1,212 1,121 BureauofConsumerFinancialProtection 385 242 OfficeofFinancialResearch 2 40 Professionalfeesrelatedtoconsolidatedvariableinterestentities 25 71 Other 572 604 Totaloperatingexpenses 5,787 5,389 NetincomebeforeinterestonFederalReservenotesexpenseremittedtoTreasury 90,569 78,538 InterestonFederalReservenotesexpenseremittedtoTreasury 88,418 75,424 Netincome 2,151 3,114 Changeinpriorservicecostsrelatedtobenefitplans 171 46 Changeinactuariallossesrelatedtobenefitplans (224) (1,208) Totalothercomprehensiveloss (53) (1,162) Comprehensiveincome $ 2,098 $ 1,952 Theaccompanyingnotesareanintegralpartof thesecombinedfinancialstatements.

348 99thAnnualReport|2012 FederalReserveBanksCombinedStatementsofChangesinCapital fortheyearsendedDecember31,2012andDecember31,2011 (inmillions,exceptsharedata) Surplus Capital Accumulated Total paid-in Netincome other Total capital retained comprehensive surplus loss BalanceatDecember31,2010 (530,481,136shares) $26,524 $30,154 $(3,630) $26,524 $53,048 Netchangeincapitalstockissued (7,503,485shares) 375 – – – 375 Comprehensiveincome: Netincome – 3,114 – 3,114 3,114 Othercomprehensiveloss – – (1,162) (1,162) (1,162) Dividendsoncapitalstock – (1,577) – (1,577) (1,577) Netchangeincapital 375 1,537 (1,162) 375 750 BalanceatDecember31,2011 (537,984,621shares) $26,899 $31,691 $(4,792) $26,899 $53,798 Netchangeincapitalstockissued (9,210,524shares) 461 – – – 461 Comprehensiveincome: Netincome – 2,151 – 2,151 2,151 Othercomprehensiveloss – – (53) (53) (53) Dividendsoncapitalstock – (1,637) – (1,637) (1,637) Netchangeincapital 461 514 (53) 461 922 BalanceatDecember31,2012 (547,195,145shares) $27,360 $32,205 $(4,845) $27,360 $54,720 Theaccompanyingnotesareanintegralpartof thesecombinedfinancialstatements.

FederalReserveSystemAudits 349 (1)Structure TheFederalReserveBanks(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,U.S.officesof foreignbankingorganizations,anddesignatedfinancialmarketutilitiespursuanttoauthoritydelegatedbytheBoardof Governors.Certainservicesareprovidedtoforeignandinternationalmonetary authorities,primarilybytheFRBNY. TheFOMC,inconductingmonetarypolicy,establishespolicyregardingdomestic openmarketoperations,overseestheseoperations,andissuesauthorizationsand directivestotheFRBNYtoexecutetransactions.TheFOMCauthorizesand directstheFRBNYtoconductoperationsindomesticmarkets,includingthe directpurchaseandsaleof Treasurysecurities,government-sponsoredenterprise (GSE)debtsecurities,federalagencyandGSEmortgage-backedsecurities(MBS),

350 99thAnnualReport|2012 thepurchaseof thesesecuritiesunderagreementstoresell,andthesaleof these securitiesunderagreementstorepurchase.TheFRBNYholdstheresultingsecuritiesandagreementsinaportfolioknownastheSystemOpenMarketAccount (SOMA).TheFRBNYisauthorizedanddirectedtolendtheTreasurysecurities andfederalagencyandGSEdebtsecuritiesthatareheldintheSOMA. Tocounterdisorderlyconditionsinforeignexchangemarketsortomeetother needsspecifiedbytheFOMCtocarryouttheSystem’scentralbankresponsibilities,theFOMChasauthorizedanddirectedtheFRBNYtoexecutespotandforwardforeignexchangetransactionsin14foreigncurrencies,toholdbalancesin thosecurrencies,andtoinvestsuchforeigncurrencyholdings,whilemaintaining adequateliquidity.TheFOMChasalsoauthorizedtheFRBNYtomaintainreciprocalcurrencyarrangementswiththeBankof CanadaandtheBankof Mexicoin themaximumamountsof $2billionand$3billion,respectively,andtowarehouse foreigncurrenciesfortheTreasuryandtheExchangeStabilizationFund. Becauseof theglobalcharacterof fundingmarkets,theSystemhasattimescoordinatedwithothercentralbankstoprovidetemporaryliquidity.InMay2010,the FOMCauthorizedanddirectedtheFRBNYtoestablishtemporaryU.S.dollar liquidityswaparrangementswiththeBankof Canada,theBankof England,the EuropeanCentralBank,theBankof Japan,andtheSwissNationalBankthrough January2011.Subsequently,theFOMCauthorizedanddirectedtheFRBNYto extendthesearrangementsthroughFebruary1,2013.InDecember2012,the FOMCauthorizedanddirectedtheFRBNYtoextendthesearrangements throughFebruary1,2014.Inaddition,inNovember2011,asacontingencymeasure,theFOMCauthorizedtheFRBNYtoestablishtemporarybilateralforeign currencyliquidityswaparrangements,withtheBankof Canada,theBankof England,theEuropeanCentralBank,theBankof Japan,andtheSwissNational BanksothatliquiditycanbeprovidedtoU.S.institutionsinanyof theircurrenciesif necessary.InDecember2012,theFOMCauthorizedtheFRBNYtoextend thesetemporarybilateralforeigncurrencyliquidityswaparrangementsthrough February1,2014. AlthoughtheReserveBanksareseparatelegalentities,theycollaborateonthe deliveryof certainservicestoachievegreaterefficiencyandeffectiveness.Thiscollaborationtakestheformof centralizedoperationsandproductorfunctionoffices thathaveresponsibilityforthedeliveryof certainservicesonbehalf of theReserve Banks.Variousoperationalandmanagementmodelsareusedandaresupported byserviceagreementsbetweentheReserveBanks.Insomecases,costsincurredby aReserveBankforservicesprovidedtootherReserveBanksarenotshared;in othercases,theReserveBanksarereimbursedforcostsincurredinprovidingservicestootherReserveBanks. (3)SignificantAccountingPolicies Accountingprinciplesforentitieswiththeuniquepowersandresponsibilitiesof thenation’scentralbankhavenotbeenformulatedbyaccountingstandard-setting bodies.TheBoardof Governorshasdevelopedspecializedaccountingprinciples andpracticesthatitconsiderstobeappropriateforthenatureandfunctionof a centralbank.Theseaccountingprinciplesandpracticesaredocumentedinthe FinancialAccountingManualforFederalReserveBanks(FAM),whichisissuedby theBoardof Governors.TheReserveBanksarerequiredtoadoptandapply accountingpoliciesandpracticesthatareconsistentwiththeFAMandthecombinedfinancialstatementshavebeenpreparedinaccordancewiththeFAM.

FederalReserveSystemAudits 351 Limiteddifferencesexistbetweentheaccountingprinciplesandpracticesinthe FAMandaccountingprinciplesgenerallyacceptedintheUnitedStatesof America(GAAP),duetotheuniquenatureof theReserveBanks’powersand responsibilitiesaspartof thenation’scentralbankandgiventheSystem’sunique responsibilitytoconductmonetarypolicy.Theprimarydifferencesarethepresentationof allSOMAsecuritiesholdingsatamortizedcostandtherecordingof all SOMAsecuritiesonasettlement-datebasis.Amortizedcost,ratherthanthefair valuepresentation,moreappropriatelyreflectstheReserveBanks’securitiesholdingsgiventheSystem’suniqueresponsibilitytoconductmonetarypolicy. Althoughtheapplicationof fairvaluemeasurementstothesecuritiesholdings mayresultinvaluessubstantiallygreaterorlessthantheircarryingvalues,these unrealizedchangesinvaluehavenodirecteffectonthequantityof reservesavailabletothebankingsystemorontheabilityof theReserveBanks,asthecentral bank,tomeettheirfinancialobligationsandresponsibilities.Boththedomestic andforeigncomponentsof theSOMAportfoliomayinvolvetransactionsthat resultingainsorlosseswhenholdingsaresoldbeforematurity.Decisionsregardingsecuritiesandforeigncurrencytransactions,includingtheirpurchaseandsale, aremotivatedbymonetarypolicyobjectivesratherthanprofit.Accordingly,fair values,earnings,andgainsorlossesresultingfromthesaleof suchsecuritiesand currenciesareincidentaltoopenmarketoperationsanddonotmotivatedecisions relatedtopolicyoropenmarketactivities.Accountingforthesesecuritiesona settlement-datebasis,ratherthanthetrade-datebasisrequiredbyGAAP,better reflectsthetimingof thetransaction’seffectonthequantityof reservesinthe bankingsystem.Thecostbasesof Treasurysecurities,GSEdebtsecurities,and foreigngovernmentdebtinstrumentsareadjustedforamortizationof premiums oraccretionof discountsonastraight-linebasis,ratherthanusingtheinterest methodrequiredbyGAAP.SOMAsecuritiesholdingsareevaluatedforcredit impairmentperiodically. Inaddition,theReserveBanksdonotpresentaCombinedStatementof Cash FlowsasrequiredbyGAAPbecausetheliquidityandcashpositionof theReserve BanksarenotaprimaryconcerngiventheReserveBanks’uniquepowersand responsibilitiesasacentralbank.OtherinformationregardingtheReserveBanks’ activitiesisprovidedin,ormaybederivedfrom,theCombinedStatementsof Condition,IncomeandComprehensiveIncome,andChangesinCapital,andthe accompanyingnotestothecombinedfinancialstatements.Otherthanthose describedabove,therearenosignificantdifferencesbetweenthepoliciesoutlined intheFAMandGAAP. PreparingthecombinedfinancialstatementsinconformitywiththeFAMrequires managementtomakecertainestimatesandassumptionsthataffectthereported amountsof assetsandliabilities,thedisclosureof contingentassetsandliabilities atthedateof thecombinedfinancialstatements,andthereportedamountsof incomeandexpensesduringthereportingperiod.Actualresultscoulddifferfrom thoseestimates. Thepresentationof “Dividendsoncapitalstock”and“InterestonFederalReserve notesexpenseremittedtoTreasury”intheCombinedStatementsof Incomeand ComprehensiveIncomefortheyearendedDecember31,2011hasbeenrevisedto conformtothecurrentyearpresentationformat.Inaddition,thepresentationof “Comprehensiveincome”and“Dividendsoncapitalstock”intheCombined Statementsof ChangesinCapitalfortheyearendedDecember31,2011havebeen revisedtoconformtothecurrentyearpresentationformat.Therevisedpresentationof “Dividendsoncapitalstock”and“InterestonFederalReservenotes

352 99thAnnualReport|2012 expenseremittedtoTreasury”betterreflectsthenatureof theseitemsandresults inamoreconsistenttreatmentof theamountspresentedintheCombinedStatementsof IncomeandComprehensiveIncomeandtherelatedbalancespresented intheCombinedStatementsof Condition.Asaresultof thechangetoreport “InterestonFederalReservenotesexpenseremittedtoTreasury”asanexpense, theamountreportedas“Comprehensiveincome”fortheyearendedDecember31,2011hasbeenrevised.Significantaccountsandaccountingpoliciesare explainedbelow. a.Consolidation Thecombinedfinancialstatementsincludetheaccountsandresultsof operations of theReserveBanksaswellasseveralvariableinterestentities(VIEs),which includeMaidenLaneLLC(ML),MaidenLaneIILLC(MLII),MaidenLaneIII LLC(MLIII),andTALFLLC.Theconsolidationof theVIEswasassessedin accordancewithFinancialAccountingStandardsBoard(FASB)AccountingStandardsCodification(ASC)Topic810(ASC810)Consolidation,whichrequiresa VIEtobeconsolidatedbyitscontrollingfinancialinterestholder.Intercompany balancesandtransactionshavebeeneliminatedinconsolidation.SeeNote6for additionalinformationontheVIEs.Thecombinedfinancialstatementsof the ReserveBanksalsoincludeaccountsandresultsof operationsof Maidenand NassauLLC,aDelawarelimitedliabilitycompany(LLC)wholly-ownedbythe FRBNY,whichwasformedtoownandoperatethe33MaidenLanebuilding, whichwaspurchasedonFebruary28,2012.TheFRBNYhadbeentheprimary occupantof thebuildingsince1998,accountingforapproximately74percentof theleasedspace. AReserveBankconsolidatesaVIEif ithasacontrollingfinancialinterest,which isdefinedasthepowertodirectthesignificanteconomicactivitiesof theentity andtheobligationtoabsorblossesortherighttoreceivebenefitsof theentitythat couldpotentiallybesignificanttotheVIE.Todeterminewhetheritisthecontrollingfinancialinterestholderof aVIE,theReserveBankevaluatestheVIE’s design,capitalstructure,andrelationshipswiththevariableinterestholders.The ReserveBankreconsiderswhetherithasacontrollingfinancialinterestinaVIE, asrequiredbyASC810,ateachreportingdateorif thereisaneventthatrequires consideration. TheDodd-FrankWallStreetReformandConsumerProtectionActof 2010 (Dodd-FrankAct)establishedtheBureauof ConsumerFinancialProtection (Bureau)asanindependentbureauwithintheSystemthathassupervisoryauthorityoversomeinstitutionspreviouslysupervisedbytheReserveBanksinconnectionwiththoseinstitutions’compliancewithconsumerprotectionstatutes.Section1017of theDodd-FrankActprovidesthatthefinancialstatementsof the Bureauarenottobeconsolidatedwiththoseof theBoardof Governorsorthe System.Section152of theDodd-FrankActestablishedtheOfficeof Financial Research(OFR)withintheTreasury.TheBoardof GovernorsfundstheBureau andOFRthroughassessmentsontheReserveBanksasrequiredbytheDodd- FrankAct.TheReserveBanksreviewedthelawandevaluatedthedesignof and theirrelationshipstotheBureauandtheOFRanddeterminedthatneithershould beconsolidatedintheReserveBanks’combinedfinancialstatements. b.GoldandSpecialDrawingRightsCertificates TheSecretaryof theTreasuryisauthorizedtoissuegoldandspecialdrawing rights(SDR)certificatestotheReserveBanks.Uponauthorization,theReserve Banksacquiregoldcertificatesbycreditingequivalentamountsindollarstothe

FederalReserveSystemAudits 353 accountestablishedfortheTreasury.ThegoldcertificatesheldbytheReserve BanksarerequiredtobebackedbythegoldownedbytheTreasury.TheTreasury mayreacquirethegoldcertificatesatanytimeandtheReserveBanksmustdeliver themtotheTreasury.Atsuchtime,theTreasury’saccountischarged,andthe ReserveBanks’goldcertificateaccountsarereduced.Thevalueof goldforpurposesof backingthegoldcertificatesissetbylawat$422/9perfinetroyounce. GoldcertificatesarerecordedbytheBanksatoriginalcost.TheBoardof GovernorsallocatesthegoldcertificatesamongtheReserveBanksonceayearbasedon eachReserveBank’saverageFederalReservenotesoutstandingduringtheprecedingcalendaryear. SDRsareissuedbytheInternationalMonetaryFund(IMF)toitsmembersin proportiontoeachmember’squotaintheIMFatthetimeof issuance.SDRs serveasasupplementtointernationalmonetaryreservesandmaybetransferred fromonenationalmonetaryauthoritytoanother.Underthelawprovidingfor U.S.participationintheSDRsystem,theSecretaryof theTreasuryisauthorized toissueSDRcertificatestotheReserveBanks.WhenSDRcertificatesareissued totheReserveBanks,equivalentamountsinU.S.dollarsarecreditedtothe accountestablishedfortheTreasuryandtheReserveBanks’SDRcertificate accountsareincreased.TheReserveBanksarerequiredtopurchaseSDRcertificates,atthedirectionof theTreasury,forthepurposeof financingSDRacquisitionsorforfinancingexchangestabilizationoperations.AtthetimeSDRcertificatetransactionsoccur,theBoardof GovernorsallocatestheSDRcertificates amongtheReserveBanksbaseduponeachReserveBank’sFederalReservenotes outstandingattheendof theprecedingcalendaryear.SDRcertificatesare recordedbytheBanksatoriginalcost.TherewerenoSDRcertificatetransactions duringtheyearsendedDecember31,2012and2011. c.Coin TheamountreportedascoinintheCombinedStatementsof Conditionrepresents thefacevalueof allUnitedStatescoinheldbytheReserveBanks.TheReserve BanksbuycoinatfacevaluefromtheU.S.Mintinordertofilldepositoryinstitutionorders. d.Loans Loanstodepositoryinstitutionsarereportedattheiroutstandingprincipalbalances,andinterestincomeisrecognizedonanaccrualbasis. TheFRBNYrecordstheTermAsset-BackedSecuritiesLoanFacility(TALF) loansatfairvalueinaccordancewiththefairvalueoptionprovisionsof FASB ASCTopic825(ASC825)FinancialInstruments.Unrealizedgains(losses)on TALFloansthatarerecordedatfairvaluearereportedas“Non-interestincome: TermAsset-BackedSecuritiesLoanFacility,unrealizedlosses”intheCombined Statementsof IncomeandComprehensiveIncome.TheinterestincomeonTALF loansisrecognizedbasedonthecontractedrateandisreportedasacomponentof “Interestincome:TermAsset-BackedSecuritiesLoanFacility”intheCombined Statementsof IncomeandComprehensiveIncome. InterestincomeontheFRBNY’sloantoAmericanInternationalGroup,Inc. (AIG)wasrecognizedonanaccrualbasis.SeeNote4foradditionalinformation onAIGloan.Loanadministrativeandcommitmentfeesweredeferredandamortizedonastraight-linebasis,ratherthanusingtheinterestmethodrequiredby GAAP,overthetermof theloanorcommitmentperiod.Thismethodresultedin

354 99thAnnualReport|2012 aninterestamountthatapproximatedtheamountdeterminedusingtheinterest method. Loans,otherthanthoserecordedatfairvalue,areimpairedwhencurrentinformationandeventsindicatethatitisprobablethattheReserveBankswillnotreceive theprincipalandinterestthatisdueinaccordancewiththecontractualtermsof theloanagreement.Impairedloansareevaluatedtodeterminewhetheranallowanceforloanlossisrequired.TheReserveBankshavedevelopedproceduresfor assessingtheadequacyof anyallowanceforloanlossesusingallavailableinformationtoidentifyincurredlosses.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(STRIPS)Treasurysecurities);direct obligationsof severalfederalandGSE-relatedagencies,includingFederal NationalMortgageAssociation(FannieMae)andFederalHomeLoanMortgage Corporation(FreddieMac);andpass-throughMBSof FannieMae,FreddieMac, andGovernmentNationalMortgageAssociation.Therepurchasetransactionsare accountedforasfinancingtransactionswiththeassociatedinterestincomerecognizedoverthelifeof thetransaction. TheFRBNYmayengageinsalesof securitiesunderagreementstorepurchase (reverserepurchasetransactions)withprimarydealersandselectedmoneymarket funds.Thelistof eligiblecounterpartieswasexpandedtoincludeGSEs,effective inJuly2011,andbankandsavingsinstitutions,effectiveinDecember2011.These reverserepurchasetransactionsmaybeexecutedthroughatripartyarrangement

FederalReserveSystemAudits 355 asanopenmarketoperation,similartorepurchasetransactions.Reverserepurchasetransactionsmayalsobeexecutedwithforeignofficialandinternational accountholdersaspartof aserviceoffering.Reverserepurchaseagreementsare collateralizedbyapledgeof anamountof Treasurysecurities,GSEdebtsecurities,andfederalagencyandGSEMBSthatareheldintheSOMA.Reverserepurchasetransactionsareaccountedforasfinancingtransactions,andtheassociated interestexpenseisrecognizedoverthelifeof thetransaction.Thesetransactions arereportedattheircontractualamountsas“SystemOpenMarketAccount: Securitiessoldunderagreementstorepurchase”andtherelatedaccruedinterest payableisreportedasacomponentof “Otherliabilities”intheCombinedStatementsof Condition. TreasurysecuritiesandGSEdebtsecuritiesheldintheSOMAmaybelenttoprimarydealerstofacilitatetheeffectivefunctioningof thedomesticsecuritiesmarkets.Theamortizedcostbasisof securitieslentcontinuestobereportedas“Treasurysecurities,net”and“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 federalagencyandGSEMBSareamortizedoraccretedoverthetermof thesecuritytostatedmaturity,andtheamortizationof premiumsandaccretionof discountsareacceleratedwhenprincipalpaymentsarereceived.Gainsandlosses resultingfromsalesof securitiesaredeterminedbyspecificissuebasedonaverage cost.Treasurysecurities,GSEdebtsecurities,andfederalagencyandGSEMBS arereportednetof premiumsanddiscountsintheCombinedStatementsof Condition,andinterestincomeonthosesecuritiesisreportednetof theamortization of premiumsandaccretionof discountsintheCombinedStatementsof Income andComprehensiveIncome. Inadditiontooutrightpurchasesof federalagencyandGSEMBSthatareheldin theSOMA,theFRBNYentersintodollarrolltransactions(dollarrolls),which primarilyinvolveaninitialtransactiontopurchaseorsell“tobeannounced” (TBA)MBSfordeliveryinthecurrentmonthcombinedwithasimultaneous agreementtosellorpurchaseTBAMBSonaspecifiedfuturedate.Duringthe yearsendedDecember31,2012and2011,theFRBNYexecuteddollarrollsprimarilytofacilitatesettlementof outstandingpurchasesof federalagencyandGSE

356 99thAnnualReport|2012 MBS.TheFRBNYaccountsfordollarrolltransactionsaspurchasesorsalesona settlement-datebasis.Inaddition,TBAMBStransactionsmaybepairedoff or assignedpriortosettlement.Netgainsresultingfromdollarrolltransactionsare reportedas“Non-interestincome:SystemOpenMarketAccount:Federalagency andgovernment-sponsoredenterprisemortgage-backedsecuritiesgains,net”in theCombinedStatementsof IncomeandComprehensiveIncome. Foreigncurrencydenominatedassets,whichcanincludeforeigncurrencydeposits, securitiespurchasedunderagreementstoresell,andgovernmentdebtinstruments, arerevalueddailyatcurrentforeigncurrencymarketexchangeratesinorderto reporttheseassetsinU.S.dollars.Foreigncurrencytranslationgainsandlosses thatresultfromthedailyrevaluationof foreigncurrencydenominatedassetsare reportedas“Non-interestincome:SystemOpenMarketAccount:Foreigncurrencytranslation(losses)gains,net”intheCombinedStatementsof Incomeand ComprehensiveIncome. 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 Conditionandtherelatedforeigncurrencytranslationgainsandlossesthatresultfrom thedailyrevaluationof theforeigncurrencyworkingbalancesandcontractsare reportedasacomponentof “Non-interestincome:Other”intheCombinedStatementsof IncomeandComprehensiveIncome. g.CentralBankLiquiditySwaps Centralbankliquidityswaps,whicharetransactedbetweentheFRBNYandaforeigncentralbank,canbestructuredaseitherU.S.dollarliquidityorforeigncurrencyliquidityswaparrangements. Centralbankliquidityswapsactivity,includingtherelatedincomeandexpense,is allocatedtoeachReserveBankbasedontheratioof eachReserveBank’scapital andsurplustoaggregatecapitalandsurplusattheprecedingDecember31.The

FederalReserveSystemAudits 357 foreigncurrencyamountsassociatedwiththesecentralbankliquidityswap arrangementsarerevalueddailyatcurrentforeigncurrencymarketexchangerates. 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 TheinvestmentsheldbyconsolidatedVIEsmayincludeinvestmentsinfederal agencyandGSEMBS,non-agencyresidentialmortgage-backedsecurities (RMBS),commercialandresidentialrealestatemortgageloans,collateralizeddebt obligation(CDOs),short-terminvestmentswithmaturitiesof greaterthanthree monthsandlessthanoneyear,otherinvestmentsecurities,andswapcontracts. Investmentsarereportedas“Investmentsheldbyconsolidatedvariableinterest entities”intheCombinedStatementsof Condition.Theseinvestmentsare accountedforandclassifiedasfollows: • ML’sinvestmentsindebtsecuritiesareaccountedforinaccordancewithFASB ASCTopic320(ASC320)Investments–DebtandEquitySecuritiesandML electedthefairvalueoptionforalleligibleassetsandliabilitiesinaccordance withASC825.Otherfinancialinstruments,includingswapcontractsinML,are recordedatfairvalueinaccordancewithFASBASCTopic815(ASC815) DerivativesandHedging. • MLIIandMLIIIqualifyasnonregisteredinvestmentcompaniesundertheprovisionsof FASBASCTopic946(ASC946)FinancialServices–InvestmentCompaniesand,therefore,allinvestmentsarerecordedatfairvalueinaccordance withASC946. • TALFLLCfollowstheguidanceinASC320whenaccountingforanyacquired ABSinvestments,andhaselectedthefairvalueoptionforalleligibleassetsin accordancewithASC825.

358 99thAnnualReport|2012 i.PreferredInterests TheFRBNY’spreferredinterestsinAmericanInternationalAssuranceCompany Ltd.LLC(AIA)andAmericanLifeInsuranceCompanyLLC(ALICO)werepaid infullonJanuary14,2011.Thefivepercentcumulativedividendsaccruedbythe FRBNYonthepreferredinterestsarereportedas“Non-interestincome:Dividendsonpreferredinterests”intheCombinedStatementsof IncomeandComprehensiveIncome. 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 ConditionrepresentstheReserveBanks’FederalReservenotesoutstanding,reducedby

FederalReserveSystemAudits 359 theReserveBanks’currencyholdingsof $228billionand$172billionatDecember31,2012and2011,respectively. AtDecember31,2012and2011,allFederalReservenotesissuedtotheReserve Bankswerefullycollateralized.AtDecember31,2012,allgoldcertificates,allspecialdrawingrightscertificates,and$1,110billionof domesticsecuritiesheldinthe SOMAwerepledgedascollateral.AtDecember31,2012,noinvestmentsdenominatedinforeigncurrencieswerepledgedascollateral. l.BeneficialInterestinConsolidatedVariableInterestEntities ML,MLII,andMLIIIhaveoutstandingseniorandsubordinatedfinancialinterests,andTALFLLChasanoutstandingfinancialinterest.Thesubordinated financialinterestsof MLIIandMLIIIincludetheinterest-holder’sallocated shareof anyresidualnetproceeds.Uponissuanceof thefinancialinterests,ML, MLII,MLIII,andTALFLLCeachelectedtomeasuretheseobligationsatfair valueinaccordancewithASC825.Principal,interest,andchangesinfairvalueon theseniorfinancialinterest,whichwereextendedbytheFRBNY,areeliminatedin consolidation.Thefinancialinterestsarerecordedatfairvalueas“Beneficialinterestinconsolidatedvariableinterestentities”intheCombinedStatementsof Condition.Interestexpenseandchangesinfairvalueof thefinancialinterestare recordedin“Interestexpense:Beneficialinterestinconsolidatedvariableinterest entities”and“Non-interestincome:Beneficialinterestinconsolidatedvariable interestentities(losses)gains,net,”respectively,intheCombinedStatementsof IncomeandComprehensiveIncome. m.Deposits DepositoryInstitutions Depositoryinstitutions’depositsrepresentthereserveandservice-relatedbalances, suchasrequiredclearingbalances,intheaccountsthatdepositoryinstitutions holdattheReserveBanks.Theinterestratespaidonrequiredreservebalancesand excessbalancesaredeterminedbytheBoardof Governors,basedonanFOMCestablishedtargetrangeforthefederalfundsrate.Interestpayableisreportedasa componentof “Interestpayabletodepositoryinstitutions”intheCombinedStatementsof Condition. TheTermDepositFacility(TDF)consistsof depositswithspecificmaturitiesheld byeligibleinstitutionsattheReserveBanks.TheReserveBankspayintereston thesedepositsatinterestratesdeterminedbyauction.Interestpayableisreported asacomponentof “Interestpayabletodepositoryinstitutions”intheCombined Statementsof Condition.TherewerenodepositsheldbytheReserveBanksunder theTDFatDecember31,2012and2011. Treasury TheTreasurygeneralaccountistheprimaryoperationalaccountof theTreasury andisheldattheFRBNY. Other Otherdepositsincludeforeigncentralbankandforeigngovernmentdepositsheld attheFRBNY.OtherdepositsalsoincludeGSEdepositsheldbytheReserve Banks.

360 99thAnnualReport|2012 n.ItemsinProcessofCollectionandDeferredCreditItems “Itemsinprocessof collection”primarilyrepresentsamountsattributableto checksthathavebeendepositedforcollectionandthat,asof thebalancesheet date,havenotyetbeenpresentedtothepayingbank.“Deferredcredititems”isthe counterpartliabilitytoitemsinprocessof collection.Theamountsinthisaccount arisefromdeferringcreditfordepositeditemsuntiltheamountsarecollected.The balancesinbothaccountscanvarysignificantly. o.CapitalPaid-in TheFederalReserveActrequiresthateachmemberbanksubscribetothecapital stockof theReserveBankinanamountequaltosixpercentof thecapitaland surplusof thememberbank.Thesesharesarenonvoting,withaparvalueof $100, andmaynotbetransferredorhypothecated.Asamemberbank’scapitalandsurpluschanges,itsholdingsof ReserveBankstockmustbeadjusted.Currently,only one-half of thesubscriptionispaidinandtheremainderissubjecttocall.AmemberbankisliableforReserveBankliabilitiesuptotwicetheparvalueof stock subscribedbyit. Bylaw,eachReserveBankisrequiredtopayeachmemberbankanannualdividendof sixpercentonthepaid-incapitalstock.Thiscumulativedividendispaid semiannually. p.Surplus TheBoardof GovernorsrequirestheReserveBankstomaintainasurplusequal totheamountof capitalpaid-in.Onadailybasis,surplusisadjustedtoequatethe balancetocapitalpaid-in.Accumulatedothercomprehensiveincomeisreported asacomponentof “Surplus”intheCombinedStatementsof Conditionandthe CombinedStatementsof ChangesinCapital.Additionalinformationregarding theclassificationsof accumulatedothercomprehensiveincomeisprovidedin Notes9,10,and11. q.InterestonFederalReserveNotes TheBoardof GovernorsrequirestheReserveBankstotransferexcessearningsto theTreasuryasinterestonFederalReservenotesafterprovidingforthecostsof operations,paymentof dividends,andreservationof anamountnecessaryto equatesurpluswithcapitalpaid-in.Thisamountisreportedas“InterestonFederalReservenotesexpenseremittedtoTreasury”intheCombinedStatementsof IncomeandComprehensiveIncome.TheamountduetotheTreasuryisreported as“AccruedinterestonFederalReservenotes”intheCombinedStatementsof Condition.SeeNote13foradditionalinformationoninterestonFederalReserve notes. If earningsduringtheyeararenotsufficienttoprovideforthecostsof operations, paymentof dividends,andequatingsurplusandcapitalpaid-in,remittancestothe Treasuryaresuspended.Adeferredassetisrecordedthatrepresentstheamountof netearningsaReserveBankwillneedtorealizebeforeremittancestotheTreasury resume.Thisdeferredassetisperiodicallyreviewedforimpairment. r.IncomeandCostsRelatedtoTreasuryServices WhendirectedbytheSecretaryof theTreasury,theReserveBanksarerequiredby theFederalReserveActtoserveasfiscalagentanddepositaryof theUnited StatesGovernment.Bystatute,theTreasuryhasappropriationstopayforthese services.DuringtheyearsendedDecember31,2012and2011,theReserveBanks werereimbursedforallservicesprovidedtotheTreasuryasitsfiscalagent.

FederalReserveSystemAudits 361 s.Assessments TheBoardof GovernorsassessestheReserveBankstofunditsoperations,the operationsof theBureauand,foratwo-yearperiodfollowingtheJuly21,2010 effectivedateof theDodd-FrankAct,theOFR.Theseassessmentsareallocated toeachReserveBankbasedoneachReserveBank’scapitalandsurplusbalances. TheBoardof GovernorsalsoassesseseachReserveBankforexpensesrelatedto producing,issuing,andretiringFederalReservenotesbasedoneachReserve Bank’sshareof thenumberof notescomprisingtheSystem’snetliabilityforFederalReservenotesonDecember31of theprioryear. DuringtheperiodbeforetheBureautransferdateof 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 GovernorsassessedtheReserveBankstofundtheoperationsof the OFRforthetwo-yearperiodendedJuly21,2012,followingenactmentof the Dodd-FrankAct;thereafter,theOFRisfundedbyfeesassessedonbankholding companiesandnonbankfinancialcompaniesthatmeetthecriteriaspecifiedinthe Dodd-FrankAct. t.FairValue CertainassetsandliabilitiesreportedontheReserveBanks’CombinedStatements of ConditionaremeasuredatfairvalueinaccordancewithASC820,including TALFloans,investmentsandbeneficialinterestsof theconsolidatedVIE’s,and assetsof theRetirementPlanforEmployeesof theSystem.ASC820definesfair valueasthepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate. ASC820establishesathree-levelfairvaluehierarchythatdistinguishesbetween assumptionsdevelopedusingmarketdataobtainedfromindependentsources (observableinputs)andtheReserveBank’sassumptionsdevelopedusingthebest informationavailableinthecircumstances(unobservableinputs).Thethreelevels establishedbyASC820aredescribedasfollows: • Level1–Valuationisbasedonquotedpricesforidenticalinstrumentstradedin activemarkets. • Level2–Valuationisbasedonquotedpricesforsimilarinstrumentsinactive markets,quotedpricesforidenticalorsimilarinstrumentsinmarketsthatare notactive,andmodel-basedvaluationtechniquesforwhichallsignificant assumptionsareobservableinthemarket. • Level3–Valuationisbasedonmodel-basedtechniquesthatusesignificant inputsandassumptionsnotobservableinthemarket.Theseunobservableinputs

362 99thAnnualReport|2012 andassumptionsreflecttheReserveBanks’estimatesof inputsandassumptions thatmarketparticipantswoulduseinpricingtheassetsandliabilities.Valuation techniquesincludetheuseof optionpricingmodels,discountedcashflowmodels,andsimilartechniques. Theinputsormethodologyusedforvaluingassetsandliabilitiesarenotnecessarilyanindicationof theriskassociatedwiththoseassetsandliabilities. u.Taxes TheReserveBanksareexemptfromfederal,state,andlocaltaxes,exceptfortaxes onrealproperty.TheReserveBanks’realpropertytaxeswere$47millionand $42millionfortheyearsendedDecember31,2012and2011,respectively,andare reportedasacomponentof “Operatingexpenses:Occupancy”intheCombined Statementsof IncomeandComprehensiveIncome. v.RestructuringCharges TheReserveBanksrecognizerestructuringchargesforexitordisposalcosts incurredaspartof theclosureof businessactivitiesinaparticularlocation,the relocationof businessactivitiesfromonelocationtoanother,orafundamental reorganizationthataffectsthenatureof operations.Restructuringchargesmay includecostsassociatedwithemployeeseparations,contractterminations,and assetimpairments.ExpensesarerecognizedintheperiodinwhichtheReserve Bankscommittoaformalizedrestructuringplanorexecutethespecificactions contemplatedintheplanandallcriteriaforfinancialstatementrecognitionhave beenmet. Note12describestheReserveBanks’restructuringinitiativesandprovidesinformationaboutthecostsandliabilitiesassociatedwithemployeeseparationsand contractterminations.Thecostsassociatedwiththeimpairmentof certain ReserveBanks’assetsarediscussedinNote7.Costsandliabilitiesassociatedwith enhancedpensionbenefitsinconnectionwiththerestructuringactivitiesforallof theReserveBanksarerecordedonthebooksof theFRBNYanddiscussedin Note9.Costsandliabilitiesassociatedwithenhancedpostretirementbenefitsare discussedinNote10. w.RecentlyIssuedAccountingStandards InApril2011,theFASBissuedAccountingStandardsUpdate(ASU)2011–02, Receivables(Topic310):ACreditor’sDeterminationof WhetheraRestructuringIs aTroubledDebtRestructuring,whichclarifiesaccountingfortroubleddebt restructurings,specificallyclarifyingcreditorconcessionsandfinancialdifficulties experiencedbyborrowers.ThisupdateiseffectivefortheReserveBanksforthe yearendedDecember31,2012,anddidnothaveamaterialeffectontheReserve Banks’combinedfinancialstatements. InApril2011,theFASBissuedASU2011–03,TransfersandServicing(Topic860): Reconsiderationof EffectiveControlforRepurchaseAgreements,whichreconsideredtheeffectivecontrolforrepurchaseagreements.Thisupdateprescribeswhen theReserveBanksmayormaynotrecognizeasaleuponthetransferof financial assetssubjecttorepurchaseagreements.Thisdeterminationisbased,inpart,on whethertheReserveBankshavemaintainedeffectivecontroloverthetransferred financialassets.ThisupdateiseffectivefortheReserveBanksfortheyearended December31,2012,anddidnothaveamaterialeffectontheReserveBanks’combinedfinancialstatements.

FederalReserveSystemAudits 363 InMay2011,theFASBissuedASU2011–04,FairValueMeasurement(Topic 820):AmendmentstoAchieveCommonFairValueMeasurementandDisclosure RequirementsinU.S.GAAPandIFRS.Thisupdaterequiresadditionaldisclosures forfairvaluemeasurementscategorizedasLevel3,includingquantitativeinformationabouttheunobservableinputsandassumptionsusedinthefairvaluemeasurement,adescriptionof thevaluationpoliciesandprocedures,andanarrative descriptionof thesensitivityof thefairvaluemeasurementtochangesinunobservableinputsandtheinterrelationshipsbetweenthoseunobservableinputs.In addition,disclosureof theamountsandreasonsforalltransfersinandoutof Level1andLevel2isrequired.ThisupdateiseffectivefortheReserveBanksfor theyearendedDecember31,2012,andtherequireddisclosuresareincludedin Note6. 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.Thisupdateindefinitelydeferredtherequirements of ASU2011–05,whichrequiredanentitytoreporttheeffectof significantreclassificationsoutof accumulatedothercomprehensiveincomeontherespectivenet incomelineitems.Subsequently,inFebruary2013,theFASBissuedASU2013– 02,ComprehensiveIncome(Topic220):Reportingof AmountsReclassifiedOutof AccumulatedOtherComprehensiveIncome,whichestablishedaneffectivedatefor therequirementsof ASU2011–05relatedtoreportingof significantreclassificationadjustmentsfromaccumulatedothercomprehensiveincome.Thesepresentationrequirementsof ASU2011–05areeffectivefortheBankfortheyearending December31,2013,andwillbereflectedintheReserveBanks’2013combined financialstatements. InJanuary2013,theFASBissuedASU2013–01,BalanceSheet(Topic210):ClarifyingtheScopeof DisclosuresaboutOffsettingAssetsandLiabilities.Thisupdate clarifiesthatthescopeof Update2011–11appliestoderivativesaccountedforin accordancewithTopic815.ThisupdateiseffectivefortheReserveBanksforthe yearendingDecember31,2013,andisnotexpectedtohaveamaterialeffecton theReserveBanks’combinedfinancialstatements. (4)Loans LoanstoDepositoryInstitutions TheReserveBanksofferprimary,secondary,andseasonalloanstoeligibleborrowers,andeachprogramhasitsowninterestrate.Interestisaccruedusingthe applicableinterestrateestablishedatleastevery14daysbytheReserveBanks’ boardof directors,subjecttoreviewanddeterminationbytheBoardof Governors.Primaryandsecondaryloansareextendedonashort-termbasis,typically overnight,whereasseasonalloansmaybeextendedforaperiodof uptonine months.

364 99thAnnualReport|2012 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,mayconverttheloantoasecondarycreditloan.Collaterallevelsarerevieweddailyagainstoutstandingobligationsandborrowersthatnolongerhavesufficientcollateraltosupportoutstandingloansarerequiredtoprovideadditionalcollateralortomakepartialorfull repayment. Theremainingmaturitydistributionof loanstodepositoryinstitutionsoutstandingasof December31,2012and2011,wasasfollows(inmillions): Within 16days Total 15days to90days December31,2012 $ 67 $3 $ 70 December31,2011 $189 $7 $196 AtDecember31,2012and2011,theReserveBanksdidnothaveanyloansthat wereimpaired,pastdue,oronnon-accrualstatus,andnoallowanceforloanlosses wasrequired.TherewerenoimpairedloansduringtheyearsendedDecember31, 2012and2011. TALF TheTALFassistedfinancialmarketsinaccommodatingthecreditneedsof consumersandbusinessesof allsizesbyfacilitatingtheissuanceof ABScollateralized byavarietyof consumerandbusinessloans.EachTALFloanhadanoriginal maturityof three-years,exceptloanssecuredbySmallBusinessAdministration (SBA)PoolCertificates,loanssecuredbySBADevelopmentCompanyParticipationCertificates,orABSbackedbystudentloansorcommercialmortgageloans, whichhadanoriginalmaturityof five-yearsif theborrowersoelected.Theloans aresecuredbyeligiblecollateral,withtheFRBNYhavinglentanamountequalto thevalueof thecollateral,asdeterminedbytheFRBNY,lessamargin.LoanproceedsweredisbursedtotheborrowercontingentonreceiptbytheFRBNY’scustodianof theeligiblecollateral,anadministrativefee,and,if applicable,amargin. TheTALFloanswereextendedonanonrecoursebasis.If theborrowerdoesnot repaytheloan,theFRBNYwillenforceitsrightsinthecollateralandmaysellthe collateraltoTALFLLC,aDelawarelimitedliabilitycompany,establishedonFebruary4,2009,forthepurposeof purchasingsuchassets.Asof December31, 2012,theFRBNYhasnotenforceditsrightstothecollateralbecausetherehave beennodefaults. PursuanttoaputagreementwiththeFRBNY,TALFLLChascommittedtopurchaseassetsthatsecureaTALFloanatapriceequaltotheprincipalamountoutstandingplusaccruedbutunpaidinterest,regardlessof thefairvalueof thecollat-

FederalReserveSystemAudits 365 eral.FundingfortheTALFLLC’spurchasesof thesesecuritiesisderivedfirst throughthefeesreceivedbyTALFLLCfromtheFRBNYforthiscommitment andanyinterestearnedonitsinvestments.Intheeventthatsuchfundingproves insufficientfortheassetpurchasesthatTALFLLChascommittedtomakeunder theputagreement,theTreasuryoriginallycommittedtolendupto$20billion, andonMarch25,2009,theTreasuryfunded$100million.InadditiontotheTreasury’scommitment,theFRBNYoriginallycommitted,asaseniorlender,tolend upto$180billiontoTALFLLCif itneededthefundingtopurchaseassetspursuanttotheputagreement.Subsequently,theTreasuryandFRBNYcommitments tolendtoTALFLLCwerereducedto$1.4billionand$2.6billion,respectively. Theterminationdateof thefundingcommitmentswasoriginallyJuly31,2015. InformationregardingfurtherreductionincommitmentsispresentedinNote14. AnyTreasuryloantoTALFLLCbearsinterestatarateof theone-monthLondoninterbankofferedrate(Libor)plus300basispoints.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. TheFRBNYhaselectedthefairvalueoptionforallTALFloansinaccordance withASC825.RecordingallTALFloansatfairvalue,ratherthanattheremainingprincipalamountoutstanding,improvesaccountingconsistencyandprovides themostappropriatepresentationonthefinancialstatementsbymatchingthe changeinfairvalueof TALFloans,therelatedputagreementwithTALFLLC, andthevaluationof thebeneficialinterestsinTALFLLC.Informationregarding theTALFLLC’sassetsandliabilitiesispresentedinNote6. TALFloansareclassifiedwithinLevel3of thevaluationhierarchy.Becauseexternalpriceinformationwasnotavailable,market-basedmodelswereusedtodeterminethefairvalueof theTALFloans.Thefairvalueof theTALFloanswas determinedbyvaluingthefuturecashflowsfromloaninterestincomeandtheestimatedfairvalueof thecollateralthatmaybeputtotheFRBNY.Thevaluation modeltakesintoaccountarangeof outcomesonTALFloanrepayments,market pricesof thecollateral,riskpremiumsestimatedusingmarketprices,andthevolatilitiesof market-riskfactors.Othermethodologiesemployedorassumptions madeindeterminingfairvaluecouldresultinanamountthatdifferssignificantly fromtheamountreported. ThefollowingtablepresentstheTALFloansatfairvalueasof December31by ASC820hierarchy(inmillions): 2012 2011 Level3fairvalue $560 $9,059

366 99thAnnualReport|2012 Thefollowingtablepresentsareconciliationof TALFloansmeasuredatfairvalue usingsignificantunobservableinputs(Level3)duringtheyearsendedDecember31,2012and2011(inmillions): TALFloans FairvalueatDecember31,2010 $24,853 Loanrepaymentsandprepayments (15,710) Totalrealizedandunrealizedlosses (84) FairvalueatDecember31,2011 $ 9,059 Loanrepaymentsandprepayments (8,465) Totalrealizedandunrealizedlosses (34) FairvalueatDecember31,2012 $ 560 Thefairvalueof TALFloansreportedintheCombinedStatementsof Condition asof December31,2012and2011,includes$3millionand$37millioninunrealizedgains,respectively.TheFRBNYattributessubstantiallyallchangesinfair valueof loanstochangesininstrument-specificcreditspreads. EligiblecollateralincludesU.S.dollar-denominatedABSthatarebackedbyauto loans,studentloans,creditcardloans,equipmentloans,floorplanloans,insurance premiumfinancialloans,loansguaranteedbytheSBA,residentialmortgageservicingadvances,orcommercialmortgageloans.Thefollowingtablepresentsthe collateralconcentrationandremainingmaturitydistributionmeasuredatfair valueasof December31,2012and2011(inmillions): Timetomaturity Collateraltype1 Within90days 91daysto1year Over1yearto5years Total December31,2012: Studentloan $ – $ – $ 382 $ 382 Creditcard – – – – CMBS 3 – 129 132 Floorplan – – – – Auto – – – – SBAs – – – – Other2 46 – – 46 Total $49 $ – $ 511 $ 560 December31,2011: 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 December31,2012and2011,was$556millionand$9,013million,respectively. AtDecember31,2012and2011,noTALFloanswereover90dayspastdueoron nonaccrualstatus.

FederalReserveSystemAudits 367 EarningsreportedbytheFRBNYrelatedtotheTALFincludeinterestincome andunrealizedgainsandlossesonTALFloansaswellastheFRBNY’sallocated shareof theTALFLLC’snetincome.Additionalinformationregardingthe incomeof theTALFLLCispresentedinNote6.Thefollowingtablepresentsthe componentsof TALFearningsrecordedbytheFRBNYfortheyearsended December31(inmillions): 2012 2011 Interestincome $80 $265 Unrealizedlosses (34) (84) Subtotal–TALFloans $46 $181 AllocatedshareofTALFLLC (7) (48) TotalTALF $39 $133 AIGLoan,Net InSeptember2008,theBoardof GovernorsauthorizedtheFRBNYtolendto AIG.Undertheprovisionsof theoriginalagreement,theFRBNYwasauthorized tolendupto$85billiontoAIGfortwoyearsatthethree-monthLibor,witha floorof 350basispoints,plus850basispoints.Inaddition,theFRBNYassessed AIGaone-timecommitmentfeeof 200basispointsonthefullamountof the commitmentandafeeof 850basispointsperannumontheundrawncreditline. TheBoardandtheTreasuryannouncedarestructuringof thegovernment’sfinancialsupporttoAIGinNovember2008.Aspartof therestructuring,theTreasury purchased$40billionof newly-issuedAIGpreferredsharesundertheTroubled AssetRelief Program(TARP).Themajorityof theTARPfundswereusedtopay downAIG’sdebttotheFRBNY.Inaddition,thetermsof theoriginalcredit agreementweremodifiedtoreducetherevolvinglineof creditto$60billion; reducetheinterestratetothethree-monthLiborwithafloorof 350basispoints, plus300basispoints;reducethefeeonundrawnfundsto75basispoints;and extendthetermof theagreementtofiveyears.ConcurrentwiththeNovember2008restructuringof itsfinancialsupporttoAIG,theFRBNYestablished twoLLCs,MLIIandMLIII,whicharediscussedfurtherinNote6. 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 nonvotingperpetualpreferredinterestsinALICOLLCandAIALLC.AIGcreatedthesetwoLLCstohold,directlyorindirectly,allof theoutstandingcommon stockof ALICOandAIA,twolifeinsuranceholdingcompanysubsidiariesof AIG.TheFRBNYwastobepaidafivepercentcumulativedividendonitsnonvotingpreferredintereststhroughSeptember22,2013,andaninepercentcumulativedividendthereafter.AlthoughtheFRBNYhadcertaingovernancerightsto protectitsinterests,AIGretainedcontrolof theLLCsandtheunderlyingoperatingcompanies.

368 99thAnnualReport|2012 OnSeptember30,2010,AIGannouncedanagreementwiththeTreasury,the FRBNY,andthetrusteesof theAIGCreditFacilityTrustonacomprehensive recapitalizationplandesignedtorepayallitsobligationstoAmericantaxpayers. OnJanuary14,2011,uponclosingof therecapitalizationplan,thecashproceeds fromcertainassetdispositions,specificallytheinitialpublicofferingof AIAand thesaleof ALICO,wereusedfirsttorepayinfulltherevolvinglineof credit extendedtoAIGbytheFRBNY,includingaccruedinterestandfees,andthento redeemaportionof theFRBNY’spreferredinterestsinALICOLLCtakenearlier bytheFRBNYinsatisfactionof aportionof therevolvinglineof credit.The FRBNY’sremainingpreferredinterestsinALICOLLCandAIALLC,valuedat approximately$20billion,werepurchasedbyAIGthroughadrawontheTreasury’sSeriesFpreferredstockcommitmentandthentransferredbyAIGtothe TreasuryaspartialconsiderationforthetransfertoAIGof alloutstandingSeries Fshares.Inaddition,theFRBNY’scommitmenttolendanyfundsunderthe revolvinglineof creditwasterminated. (5)SystemOpenMarketAccount a.DomesticSecuritiesHoldings TheFRBNYconductsdomesticopenmarketoperationsand,onbehalf of the ReserveBanks,holdstheresultingsecuritiesintheSOMA. DuringtheyearsendedDecember31,2012and2011,theFRBNYcontinuedthe purchaseof TreasurysecuritiesandfederalagencyandGSEMBSunderthelargescaleassetpurchaseprogramsauthorizedbytheFOMC.InAugust2010,the FOMCannouncedthattheFederalReservewouldmaintainthelevelof domestic securitiesholdingsintheSOMAportfoliobyreinvestingprincipalpaymentsfrom GSEdebtsecuritiesandfederalagencyandGSEMBSinlonger-termTreasury securities.InNovember2010,theFOMCannounceditsintentiontoexpandthe SOMAportfolioholdingsof longer-termTreasurysecuritiesbyanadditional $600billionandcompletedthesepurchasesinJune2011.InSeptember2011,the FOMCannouncedthattheFederalReservewouldreinvestprincipalpayments fromtheSOMAportfolioholdingsof GSEdebtsecuritiesandfederalagencyand GSEMBSinfederalagencyandGSEMBS.InJune2012,theFOMCannounced thatitwouldcontinuetheexistingpolicyof reinvestingprincipalpaymentsfrom theSOMAportfolioholdingsof GSEdebtsecuritiesandfederalagencyandGSE MBSinfederalagencyandGSEMBS,andsuspendedthepolicyof rollingover maturingTreasurysecuritiesintonewissuesatauction.InSeptember2012,the FOMCannouncedthattheFederalReservewouldpurchaseadditionalfederal agencyandGSEMBSatapaceof $40billionpermonthandmaintainitsexisting policyof reinvestingprincipalpaymentsfromitsholdingsof GSEdebtsecurities andfederalagencyandGSEMBSinfederalagencyandGSEMBS.InDecember2012,theFOMCannouncedthattheFederalReservewouldpurchaselongertermTreasurysecuritiesatapaceof $45billionpermonthafteritsprogramto extendtheaveragematurityof itsholdingsof Treasurysecuritiesiscompletedat theendof 2012. DuringtheyearsendedDecember31,2012and2011,theFRBNYalsocontinued thepurchaseandsaleof SOMAportfolioholdingsunderthematurityextension programsauthorizedbytheFOMC.InSeptember2011,theFOMCannounced thattheFederalReservewouldextendtheaveragematurityof theSOMAportfolioholdingsof securitiesbypurchasing$400billionparvalueof Treasurysecuritieswithmaturitiesof sixtothirtyyearsandsellingorredeeminganequalpar amountof Treasurysecuritieswithremainingmaturitiesof threeyearsorlessby

FederalReserveSystemAudits 369 theendof June2012.InJune2012,theFOMCannouncedthattheFederal Reservewouldcontinuethroughtheendof 2012itsprogramtoextendtheaverage maturityof securitiesbypurchasing$267billionparvalueof Treasurysecurities withmaturitiesof sixtothirtyyearsandsellingorredeeminganequalparamount of Treasurysecuritieswithmaturitiesof threeandaquarteryearsorlessbythe endof 2012.InSeptember2012,theFOMCannounceditwouldcontinueitsprogramtoextendtheaveragematurityof itsholdingsof securitiesasannouncedin June2012. Thetotalof Treasurysecurities,GSEdebtsecurities,andfederalagencyandGSE MBS,net,excludingaccruedinterest,heldintheSOMAatDecember31wasas follows(inmillions): 2012 Total Unamortized Unaccreted Par amortized premiums discounts cost Bills $ – $ – $ – $ – Notes 1,110,398 32,532 (711) 1,142,219 Bonds 555,747 111,360 (138) 666,969 TotalTreasurysecurities $1,666,145 $143,892 $(849) $1,809,188 GSEdebtsecurities $ 76,783 $ 2,703 $ (7) $ 79,479 FederalagencyandGSEMBS $ 926,662 $ 24,367 $(708) $ 950,321 2011 Total Unamortized Unaccreted Par amortized premiums discounts cost Bills $ 18,423 $ – $ – $ 18,423 Notes 1,286,344 26,806 (1,233) 1,311,917 Bonds 358,679 61,347 (89) 419,937 TotalTreasurysecurities $1,663,446 $88,153 $(1,322) $1,750,277 GSEdebtsecurities $ 103,994 $ 3,847 $ (13) $ 107,828 FederalagencyandGSEMBS $ 837,683 $11,617 $(1,042) $ 848,258 TheFRBNYexecutestransactionsforthepurchaseof securitiesunderagreements toresellprimarilytotemporarilyaddreservebalancestothebankingsystem.Conversely,transactionstosellsecuritiesunderagreementstorepurchaseareexecuted totemporarilydrainreservebalancesfromthebankingsystemandaspartof a serviceofferingtoforeignofficialandinternationalaccountholders. TherewerenomaterialtransactionsrelatedtosecuritiespurchasedunderagreementstoresellduringtheyearsendedDecember31,2012and2011.Financial informationrelatedtosecuritiessoldunderagreementstorepurchasefortheyears endedDecember31wasasfollows(inmillions): 2012 2011 Contractamountoutstanding,endofyear $107,188 $ 99,900 Averagedailyamountoutstanding,duringtheyear 91,898 72,227 Maximumbalanceoutstanding,duringtheyear 122,541 124,512 Securitiespledged(parvalue),endofyear 93,547 86,089 Securitiespledged(marketvalue),endofyear 107,188 99,900

370 99thAnnualReport|2012 Theremainingmaturitydistributionof Treasurysecurities,GSEdebtsecurities, federalagencyandGSEMBSboughtoutright,andsecuritiessoldunderagreementstorepurchaseatDecember31,2012and2011,wasasfollows(inmillions): Over Over Within 16days 91days Over 1year 5years Total 15days to90days to1year 10years to5years to10years December31,2012: Treasurysecurities (parvalue) $ – $ 5 $ 16 $378,476 $862,410 $425,238 $1,666,145 GSEdebtsecurities (parvalue) 1,565 2,795 15,202 52,830 2,044 2,347 76,783 FederalagencyandGSE MBS(parvalue)1 – – 2 1 2,365 924,294 926,662 Securitiessoldunder agreementsto repurchase (contractamount) 107,188 – – – – – 107,188 December31,2011: 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 TheparamountshownforfederalagencyandGSEMBSistheremainingprincipalbalanceofthesecurities. FederalagencyandGSEMBSarereportedatstatedmaturityinthetableabove. Theestimatedweightedaveragelifeof thesesecurities,whichdiffersfromthe statedmaturityprimarilybecauseitfactorsinscheduledpaymentsandprepaymentassumptions,wasapproximately3.3and2.4yearsasof December31,2012 and2011,respectively. Theamortizedcostandparvalueof TreasurysecuritiesandGSEdebtsecurities thatwereloanedfromtheSOMAatDecember31wasasfollows(inmillions): 2012 2011 Treasurysecurities(amortizedcosts) $9,139 $15,121 Treasurysecurities(parvalue) 8,460 13,978 GSEdebtsecurities(amortizedcost) 697 1,276 GSEdebtsecurities(parvalue) 676 1,216 TheFRBNYentersintocommitmentstobuyandsellTreasurysecuritiesand recordstherelatedsecuritiesonasettlement-datebasis.Asof December31,2012, therewerenooutstandingcommitments. TheFRBNYentersintocommitmentstobuyandsellfederalagencyandGSE MBSandrecordstherelatedsecuritiesonasettlement-datebasis.Asof December31,2012,thetotalpurchasepriceof thefederalagencyandGSEMBSunder outstandingpurchasecommitmentswas$118,215million,of which$10,164millionwasrelatedtodollarrolltransactions.Asof December31,2012,therewereno outstandingsalescommitmentsforfederalagencyandGSEMBS.Thesecommitments,whichhadcontractualsettlementdatesextendingthroughFebruary2013, areforthepurchaseof TBAMBSforwhichthenumberandidentityof thepools thatwillbedeliveredtofulfillthecommitmentareunknownatthetimeof the

FederalReserveSystemAudits 371 trade.Thesecommitmentsaresubjecttovaryingdegreesof off-balance-sheetmarketriskandcounterpartycreditriskthatresultfromtheirfuturesettlement.The FRBNYrequiresthepostingof cashcollateralforcommitmentsaspartof the riskmanagementpracticesusedtomitigatethecounterpartycreditrisk. Otherinvestmentsconsistof cashandshort-terminvestmentsrelatedtothefederal agencyandGSEMBSportfolio.Otherliabilities,whicharerelatedtofederal agencyandGSEMBSpurchasesandsales,includestheFRBNY’sobligationto returncashmarginpostedbycounterpartiesascollateralundercommitmentsto purchaseandsellfederalagencyandGSEMBS.Inaddition,otherliabilities includesobligationsthatarisefromthefailureof asellertodeliversecuritiestothe FRBNYonthesettlementdate.AlthoughtheFRBNYhasownershipof and recordsitsinvestmentsintheMBSasof thecontractualsettlementdate,itisnot obligatedtomakepaymentuntilthesecuritiesaredelivered,andtheamount includedinotherliabilitiesrepresentstheFRBNY’sobligationtopayforthesecuritieswhendelivered.Theamountof otherinvestmentsandotherliabilitiesheldin theSOMAatDecember31wasasfollows(inmillions): 2012 2011 Otherinvestments $ 23 $ – Otherliabilities: Cashmargin $3,092 $1,271 ObligationsfromMBStransactionfails 85 97 Totalotherliabilities $3,177 $1,368

372 99thAnnualReport|2012 InformationabouttransactionsrelatedtoTreasurysecurities,GSEdebtsecurities, andfederalagencyandGSEMBSduringtheyearsendedDecember31,2012and 2011,issummarizedasfollows(inmillions): Total Federal GSEdebt Bills Notes Bonds Treasury agencyand securities securities GSEMBS BalanceDecember31,2010 $ 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) Amortizationofpremiumsand accretionofdiscounts,net 8 (4,445) (4,985) (9,422) (1,678) (3,169) Inflationadjustmenton inflation-indexedsecurities – 1,283 1,091 2,374 – – BalanceDecember31,2011 $ 18,423 $1,311,917 $419,937 $1,750,277 $107,828 $ 848,258 Purchases1 118,886 397,999 263,991 780,876 – 431,487 Sales1 – (507,420) (11,727) (519,147) – – Realizedgains,net2 – 12,003 1,252 13,255 – – Principalpaymentsandmaturities (137,314) (67,462) – (204,776) (27,211) (324,181) Amortizationofpremiumsand accretionofdiscounts,net 5 (5,461) (7,531) (12,987) (1,138) (5,243) Inflationadjustmenton inflation-indexedsecurities – 643 1,047 1,690 – – BalanceDecember31,2012 $ – $1,142,219 $666,969 $1,809,188 $ 79,479 $ 950,321 YearendedDecember31,2011 Supplementalinformation– parvalueoftransactions: Purchases3 $239,494 $ 713,878 $127,802 $1,081,174 $ – $ 40,955 Sales3 – (134,829) – (134,829) – – YearendedDecember31,2012 Supplementalinformation– parvalueoftransactions: Purchases3 $118,892 $ 383,106 $205,115 $ 707,113 $ – $ 413,160 Sales3 – (492,234) (9,094) (501,328) – – 1 Purchasesandsalesarereportedonasettlement-datebasisandmayincludepaymentsandreceiptsrelatedtoprincipal, premiums,discounts,andinflationcompensationadjustmentstothebasisofinflation-indexedsecurities.Theamountreported assalesincludestherealizedgainsandlossesonsuchtransactions.PurchasesandsalesexcludeMBSTBAtransactionsthat aresettledonanetbasis. 2 Realizedgains,netoffsettheamountofrealizedgainsandlossesincludedinthereportedsalesamount. 3 Includesinflationcompensation. b.ForeignCurrencyDenominatedAssets TheFRBNYconductsforeigncurrencyoperationsand,onbehalf of theReserve Banks,holdstheresultingforeigncurrencydenominatedassetsintheSOMA. TheFRBNYholdsforeigncurrencydepositswithforeigncentralbanksandthe BankforInternationalSettlementsandinvestsinforeigngovernmentdebtinstrumentsof Germany,France,andJapan.Theseforeigngovernmentdebtinstrumentsareguaranteedastoprincipalandinterestbytheissuingforeigngovernments.Inaddition,theFRBNYentersintotransactionstopurchaseEurodenominatedgovernmentdebtsecuritiesunderagreementstoresellforwhichthe acceptedcollateralisthedebtinstrumentsissuedbythegovernmentsof Belgium, France,Germany,Italy,theNetherlands,andSpain.

FederalReserveSystemAudits 373 Informationaboutforeigncurrencydenominatedassets,includingaccruedinterest,valuedatamortizedcostandforeigncurrencymarketexchangeratesat December31wasasfollows(inmillions): 2012 2011 Euro: Foreigncurrencydeposits $ 8,925 $ 9,367 Securitiespurchasedunder agreementstoresell 659 – Germangovernmentdebtinstruments 2,178 1,885 Frenchgovernmentdebtinstruments 2,470 2,635 Japaneseyen: Foreigncurrencydeposits 3,553 3,985 Japanesegovernmentdebt instruments 7,187 8,078 TotalallocatedtotheBank $24,972 $25,950 Theremainingmaturitydistributionof foreigncurrencydenominatedassetsat December31,2012and2011,wasasfollows(inmillions): Within 16days 91days Over1year Total 15days to90days to1year to5years December31,2012: Euro $ 6,602 $1,726 $2,165 $3,739 $14,232 Japaneseyen 3,801 491 2,139 4,309 10,740 Total $10,403 $2,217 $4,304 $8,048 $24,972 December31,2011: 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 Therewerenoforeignexchangecontractsrelatedtoopenmarketoperationsoutstandingasof December31,2012. TheFRBNYentersintocommitmentstobuyforeigngovernmentdebtinstrumentsandrecordstherelatedsecuritiesonasettlement-datebasis.Asof December31,2012,therewerenooutstandingcommitmentstopurchaseforeigngovernmentdebtinstruments.During2012,therewerepurchases,sales,andmaturitiesof foreigngovernmentdebtinstrumentsof $4,959million,$0,and$4,840million, respectively. Inconnectionwithitsforeigncurrencyactivities,theFRBNYmayenterinto transactionsthataresubjecttovaryingdegreesof off-balance-sheetmarketrisk andcounterpartycreditriskthatresultfromtheirfuturesettlement.TheFRBNY controlstheserisksbyobtainingcreditapprovals,establishingtransactionlimits, receivingcollateralinsomecases,andperformingdailymonitoringprocedures. AtDecember31,2012and2011,theauthorizedwarehousingfacilitywas$5billion,withnobalanceoutstanding. TherewerenotransactionsrelatedtotheauthorizedreciprocalcurrencyarrangementswiththeBankof CanadaandtheBankof Mexicoduringtheyearsended December31,2012and2011. Foreigncurrencyworkingbalancesheldandforeignexchangecontractsexecuted bytheFRBNYtofacilitateitsinternationalpaymentsandcurrencytransactionsit

374 99thAnnualReport|2012 madeonbehalf of foreigncentralbanksandU.S.officialinstitutioncustomers werenotmaterialasof December31,2012and2011. c.CentralBankLiquiditySwaps U.S.DollarLiquiditySwaps ThetotalforeigncurrencyheldunderU.S.dollarliquidityswapsintheSOMAat December31,2012and2011,was$8,889millionand$99,823million,respectively. Theremainingmaturitydistributionof U.S.dollarliquidityswapsatDecember31 wasasfollows(inmillions): 2012 2011 Within 16days Within 16days Total Total 15days to90days 15days to90days Euro $1,741 $7,147 $8,888 $34,357 $51,080 $85,437 Japaneseyen 1 – 1 9,035 4,956 13,991 Swissfranc – – – 320 75 395 Total $1,742 $7,147 $8,889 $43,712 $56,111 $99,823 ForeignCurrencyLiquiditySwaps Therewerenotransactionsrelatedtotheforeigncurrencyliquidityswapsduring theyearsendedDecember31,2012and2011. d.FairValueofSOMAAssets Thefairvalueamountspresentedbelowaresolelyforinformationalpurposes. Althoughthefairvalueof SOMAsecurityholdingscanbesubstantiallygreater thanorlessthantherecordedvalueatanypointintime,theseunrealizedgainsor losseshavenoeffectontheabilityof theReserveBanks,asthecentralbank,to meettheirfinancialobligationsandresponsibilities. Thefairvalueof thefixed-rateTreasurysecurities,GSEdebtsecurities,federal agencyandGSEMBS,andforeigngovernmentdebtinstrumentsintheSOMA’s holdingsissubjecttomarketrisk,arisingfrommovementsinmarketvariables suchasinterestratesandcreditrisk.Thefairvalueof federalagencyandGSE MBSisalsoaffectedbytheexpectedrateof prepaymentsof mortgageloans underlyingthesecurities.Thefairvalueof foreigngovernmentdebtinstrumentsis affectedbycurrencyrisk.Basedonevaluationsperformedasof December31, 2012,therearenocreditimpairmentsof SOMAsecuritiesholdingsasof thatdate.

FederalReserveSystemAudits 375 Thefollowingtablepresentstheamortizedcostandfairvalueof theTreasury securities,GSEdebtsecurities,federalagencyandGSEMBS,andforeigncurrency denominatedassets,net,heldintheSOMAatDecember31(inmillions): 2012 2011 Fairvalue Fairvalue greater greater Amortized Amortized Fairvalue (less)than Fairvalue (less)than cost cost amortized amortized cost cost Treasurysecurities: Bills $ – $ – $ – $ 18,423 $ 18,423 $ – Notes 1,142,219 1,213,177 70,958 1,311,917 1,389,429 77,512 Bonds 666,969 761,138 94,169 419,937 508,694 88,757 GSEdebtsecurities 79,479 85,004 5,525 107,828 114,238 6,410 FederalagencyandGSEMBS 950,321 993,990 43,669 848,258 895,495 47,237 Foreigncurrencydenominated assets 24,972 25,141 169 25,950 26,116 166 TotalSOMAportfolio securitiesholdings $2,863,960 $3,078,450 $214,490 $2,732,313 $2,952,395 $220,082 Memorandum–Commitmentsfor: PurchasesofTreasurysecurities $ – $ – $ – $ 3,200 $ 3,208 $ 8 PurchasesofFederalagencyand GSEMBS 118,215 118,397 182 41,503 41,873 370 SalesofFederalagencyand GSEMBS – – – 4,430 4,473 43 Purchasesofforeigngovernment debtinstruments – – – 216 216 – Thefairvalueof Treasurysecurities,GSEdebtsecurities,andforeigngovernment debtinstrumentswasdeterminedusingpricingservicesthatprovidemarketconsensuspricesbasedonindicativequotesfromvariousmarketparticipants.Thefair valueof federalagencyandGSEMBSwasdeterminedusingapricingservicethat utilizesamodel-basedapproachthatconsidersobservableinputsforsimilarsecurities.Thecostbasisof foreigncurrencydepositsadjustedforaccruedinterest approximatesfairvalue.Thecontractamountforeuro-denominatedsecuritiessold underagreementstorepurchaseapproximatesfairvalue. Thecostbasisof securitiespurchasedunderagreementstoresell,securitiessold underagreementstorepurchase,andotherinvestmentsheldintheSOMA approximatefairvalue. BecausetheFRBNYentersintocommitmentstobuyTreasurysecurities,federal agencyandGSEMBS,andforeigngovernmentdebtinstrumentsandrecordsthe relatedsecuritiesonasettlement-datebasisinaccordancewiththeFAM,the relatedoutstandingcommitmentsarenotreflectedintheCombinedStatementsof Condition.

376 99thAnnualReport|2012 Thefollowingtableprovidesadditionalinformationontheamortizedcostandfair valuesof thefederalagencyandGSEMBSportfolioatDecember31(inmillions): 2012 2011 Distribution ofMBSholdings bycouponrate Amortized Fairvalue Amortized Fairvalue cost cost 2.0% $ 845 $ 846 $ – $ – 2.5% 37,562 37,766 – – 3.0% 160,613 161,757 1,313 1,336 3.5% 179,587 184,752 19,415 19,660 4.0% 137,758 145,955 161,481 169,763 4.5% 262,485 282,182 406,465 431,171 5.0% 125,107 132,213 182,497 192,664 5.5% 39,970 41,819 66,795 70,064 6.0% 5,642 5,888 9,152 9,616 6.5% 752 812 1,140 1,221 Total $950,321 $993,990 $848,258 $895,495 Thefollowingtablepresentstherealizedgainsandthechangeintheunrealized gainpositionof thedomesticsecuritiesholdingsduringtheyearendedDecember31,2012(inmillions): TotalSOMA Totalportfolio Fairvalue holdingsrealized changesinunrealized gains(losses)1 gains(losses)2 Treasurysecurities $13,255 $(1,142) GSEdebtsecurities – (885) FederalagencyandGSEMBS 241 (3,568) Total $13,496 $(5,595) 1 Totalportfolioholdingsrealizedgains(losses)arereportedin“Non-interestincome:SystemOpenMarketAccount”inthe ConsolidatedStatementsofIncomeandComprehensiveIncome. 2 BecauseSOMAsecuritiesarerecordedatamortizedcost,unrealizedgains(losses)arenotreportedintheConsolidated StatementsofIncomeandComprehensiveIncome. Theamountof changeinunrealizedgainpositionrelatedtoforeigncurrency denominatedassetswasanincreaseof $3millionfortheyearendedDecember31, 2012. Thefollowingtablespresenttheclassificationof SOMAfinancialassetsatfair valueasof December31byASC820hierarchy(inmillions): 2012 2011 Level2 Level2 Assets: Treasurysecurities $1,974,315 $1,916,546 GSEdebtsecurities 85,004 114,238 FederalagencyandGSEMBS 993,990 895,495 Foreigngovernmentdebtinstruments 12,003 12,762 Totalassets $3,065,312 $2,939,041 TheSOMAfinancialassetsareclassifiedasLevel2inthetableabovebecausethe fairvaluesarebasedonindicativequotesandotherobservableinputsobtained fromindependentpricingservicesthat,inaccordancewithASC820,areconsistentwiththecriteriaforLevel2inputs.Althoughinformationconsistentwiththe

FederalReserveSystemAudits 377 criteriaforLevel1classificationmayexistforsomeportionof theSOMAassets, allsecuritiesineachassetclasswerevaluedusingtheinputsthataremostapplicabletoof thesecuritiesintheassetclass.TheinputsusedforvaluingtheSOMA financialassetsarenotnecessarilyanindicationof theriskassociatedwiththose assets. (6)InvestmentsHeldByConsolidatedVariableInterestEntities a.SummaryInformationforConsolidatedVariableInterestEntities Thetotalassetsof consolidatedVIEs,includingcash,cashequivalents,accrued interest,andotherreceivablesatDecember31wereasfollows(inmillions): 2012 2011 ML $1,811 $ 7,805 MLII 61 9,257 MLIII 22 17,820 TALFLLC 856 811 Total $2,750 $35,693 TheFRBNY’sapproximatemaximumexposuretolossatDecember31,2012and 2011,was$829millionand$24,606million,respectively.TheseestimatesincorporatepotentiallossesassociatedwithassetsrecordedontheFRBNY’sbalance sheet,netof thefairvalueof subordinatedinterests(beneficialinterestinconsolidatedVIEs). Theclassificationof significantassetsandliabilitiesof theconsolidatedVIEsat December31wasasfollows(inmillions): 2012 2011 Assets: CDOs $ – $17,854 Non-agencyRMBS 2 10,903 FederalagencyandGSEMBS 1 440 Commercialmortgageloans 466 2,861 Swapcontracts 408 657 Residentialmortgageloans – 378 Short-terminvestments 690 1,076 Otherinvestments 65 282 Subtotal $1,632 $34,451 Cash,cashequivalents,accruedinterestreceivable,and otherreceivables 1,118 1,242 TotalinvestmentsheldbyconsolidatedVIEs $2,750 $35,693 Liabilities: BeneficialinterestinconsolidatedVIEs $ 803 $ 9,845 Otherliabilities1 $ 415 $ 690 1 Theamountreportedas“Consolidatedvariableinterestentities:Otherliabilities”intheCombinedStatementsofCondition includes$341millionand$554millionrelatedtocashcollateralreceivedonswapcontractsatDecember31,2012and2011, respectively.Theamountalsoincludesaccruedinterestandaccruedotherexpenses.

378 99thAnnualReport|2012 Totalrealizedandunrealizedgains(losses)fortheyearendedDecember31,2012, wereasfollows(inmillions): Totalportfolio Fairvalue Totalportfolio holdingsrealized changesunrealized holdingsrealized/ gains(losses) gains(losses) unrealizedgains(losses) CDOs $1,110 $4,439 $5,549 Non-agencyRMBS (334) 2,038 1,704 FederalagencyandGSEMBS 12 (13) (1) Commercialmortgageloans1 (101) 394 293 Swapcontracts 75 (165) (90) Residentialmortgageloans1 (326) 322 (4) Short-terminvestments – 2 2 Otherinvestments (1) (1) (2) Total $ 435 $7,016 $7,451 1 Substantiallyallunrealizedgains(losses)onthecommercialandresidentialmortgageloansareattributabletochangesin instrument-specificcreditrisk. Totalrealizedandunrealizedgains(losses)fortheyearendedDecember31,2011, 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 Swapcontracts (258) 225 (33) Residentialmortgageloans1 (312) 263 (49) Otherinvestments 29 3 32 Otherassets (51) 11 (40) Total $ 428 $(4,348) $(3,920) 1 Substantiallyallunrealizedgains(losses)onthecommercialandresidentialmortgageloansareattributabletochangesin instrument-specificcreditrisk.

FederalReserveSystemAudits 379 Thenetincome(loss)attributabletoML,MLII,MLIII,andTALFLLCforthe yearendedDecember31,2012,wasasfollows(inmillions): ML MLII MLIII TALFLLC Total Interestincome: Portfoliointerestincome $ 34 $ 52 $1,023 $ 1 $1,110 Less:Interestexpense 45 7 97 4 153 Netinterestincome(loss) (11) 45 926 (3) 957 Non-interestincome: Portfolioholdingsgains,net 553 1,392 5,506 – 7,451 Realizedlossesonbeneficialinterestin consolidatedVIEs – (453) (2,905) – (3,358) Unrealizedgains(losses)onbeneficial interestinconsolidatedVIEs – 216 801 (4)1 1,013 Netnon-interestincome(loss) 553 1,155 3,402 (4) 5,106 Totalnetinterestincomeandnon-interest income(loss) 542 1,200 4,328 (7) 6,063 Less:Professionalfees 13 1 11 – 25 Netincome(loss)attributableto consolidatedVIEs $529 $1,199 $4,317 $(7)2 $6,038 1 TheTALFLLC’sunrealizedlossonbeneficialinterestrepresentsTreasury’sfinancialinterestinthenetincomeofTALFLLCfor theyearendedDecember31,2012. 2 AdditionalinformationregardingTALF-relatedincomerecordedbytheFRBNYispresentedinNote4. Thenetincome(loss)attributabletoML,MLII,MLIII,andTALFfortheyear endedDecember31,2011,wasasfollows(inmillions): ML MLII MLIII TALFLLC Total Interestincome: Portfoliointerestincome $ 808 $609 $2,012 $ – $3,429 Less:Interestexpense 70 36 175 4 285 Netinterestincome(loss) 738 573 1,837 (4) 3,144 Non-interestincome: Portfolioholdingsgains(losses),net 434 (991) (3,363) – (3,920) Unrealizedgains(losses)on beneficialinterestinconsolidatedVIEs (114) 91 558 (44)1 491 Netnon-interestincome(loss) 320 (900) (2,805) (44) (3,429) Totalnetinterestincomeand non-interestincome(loss) 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-relatedincomerecordedbytheFRBNYispresentedinNote4.

380 99thAnnualReport|2012 Followingisasummaryof theconsolidatedVIEs’subordinatedfinancialinterest fortheyearsendedDecember31,2012and2011(inmillions): MLII ML MLIII TALF deferred subordinated equity financial Total purchase loan contribution interest price 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,December31,2011 $1,385 $1,332 $6,350 $778 $ 9,845 Interestaccruedandcapitalized $ 45 $ 7 $ 97 $ 4 $ 153 Realized(gain)/loss – 453 2,905 – 3,358 Unrealized(gain)/loss – (216) (801) 4 (1,013) Repayments1 (1,430) (1,566) (8,544) – (11,540) Fairvalue,atDecember31,2012 $ – $ 10 $ 7 $786 $ 803 1 ForMLincludespaymentsof$1,150millionofprincipaland$280millionofinterest.ForMLIIincludespaymentsof $1,000millionofprincipal,$113millionofinterest,and$453millionofvariabledeferredpurchaseprice.ForMLIIIincludes paymentsof$5,000millionofprincipal,$639millionofinterest,and$2,905millionofexcessamounts. b.MaidenLaneLLC Tofacilitatethemergerof TheBearStearnsCompanies,Inc.(BearStearns)and JPMorganChase&Co.(JPMC),theFRBNYextendedcredittoMLin June2008.MLisaDelawarelimitedliabilitycompanyformedbytheFRBNYto acquirecertainassetsof BearStearnsandtomanagethoseassetsovertime,in ordertomaximizethepotentialfortherepaymentof thecreditextendedtoML andtominimizedisruptiontothefinancialmarkets.TheassetsacquiredbyML werevaluedat$29.9billionasof March14,2008,thedatethattheFRBNYcommittedtothetransaction,andlargelyconsistedof federalagencyandGSEMBS, non-agencyRMBS,commercialandresidentialmortgageloans,andderivatives andassociatedhedges. TheFRBNYextendedaseniorloanof approximately$28.8billionandJPMC extendedasubordinatedloanof $1.15billiontofinancetheacquisitionof the assets.Thetwo-yearaccumulationperiodthatfollowedtheclosingdateforML endedonJune26,2010.Consistentwiththetermsof theMLtransaction,thedistributionsof theproceedsrealizedontheassetportfolioheldbyML,afterpaymentof certainfeesandexpenses,nowoccuronamonthlybasisunlessotherwise directedbytheFederalReserve.OnJune14,2012,theremainingoutstandingbalanceof theseniorloanfromtheFRBNYtoMLwasrepaidinfull,withinterest. OnNovember15,2012,theremainingoutstandingbalanceof thesubordinated loanfromJPMCwasrepaidinfull,withinterest.TheinterestrateontheJPMC subordinatedloanwastheprimarycreditrateplus450basispoints.TheFRBNY willcontinuetoselltheremainingassetsfromtheMLportfolioasmarketconditionswarrantandif thesalesrepresentgoodvalueforthepublic.Inaccordance withtheMLagreements,proceedsfromfutureassetsaleswillbedistributedtothe FRBNYascontingentinterestafterallderivativeinstrumentsinMLhavebeen terminatedandpaidorsoldfromtheportfolio. Asof December31,2012,ML’sinvestmentsconsistedprimarilyof commercial mortgageloans,creditdefaultswaps(CDS),andshort-terminvestmentswith maturitiesof greaterthanthreemonthsandlessthanoneyearwhenacquired(primarilyconsistingof U.S.Treasurybills).Followingisadescriptionof thesignificantholdingsatDecember31,2012,andtheassociatedriskforeachholding:

FederalReserveSystemAudits 381 i.DebtSecurities MLhasinvestmentsinshort-terminstrumentswithmaturitiesof greaterthan threemonthsandlessthanoneyearwhenacquired.Asof December31,2012ML hadapproximately$251millioninU.S.Treasurybills.Otherinvestmentsareprimarilycomprisedof commercialmortgage-backedsecurities(CMBS)andvarious otherstructureddebtinstruments. AtDecember31,2012,theratingsbreakdownof the$320millionof debtsecurities,whicharerecordedatfairvalueintheMLportfolioasapercentageof aggregatefairvalueof allsecuritiesintheportfoliowasasfollows: Ratings1,3 Securitytype:2 AA+ BBB+ BB+and Government/ AAA A+toA- Notrated4 Total toAA- toBBB- lower agency Short-terminvestments 0.0% 0.0% 0.0% 0.0% 0.0% 78.4% 0.0% 78.4% Non-agencyRMBS 0.0% 0.0% 0.0% 0.0% 0.5% 0.0% 0.0% 0.5% Federalagencyand GSEMBS 0.0% 0.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.2% Other 0.0% 0.0% 0.0% 2.6% 6.9% 0.0% 11.4% 21.0% Total 0.0% 0.0% 0.0% 2.6% 7.4% 78.5% 11.4% 100.0% 1 Lowestofallratingsisusedforthepurposesofthistableifratedbytwoormorenationallyrecognizedstatisticalrating organizations. 2 ThistabledoesnotincludeMLcommercialmortgageloansandswapcontracts. 3 Rowsandcolumnsmaynottotalduetorounding. 4 NotratedbyanationallyrecognizedstatisticalratingorganizationasofDecember31,2012. ii.CommercialMortgageLoans Commercialmortgageloansaresubjecttoahighdegreeof creditriskbecauseof exposuretofinanciallossresultingfromfailurebyacounterpartytomeetitscontractualobligations.Defaultratesaresubjecttoawidevarietyof factors,including,butnotlimitedto,propertyperformance,propertymanagement,supplyand demand,constructiontrends,consumerbehavior,regionaleconomicconditions, interestrates,andotherfactors. TheperformanceprofileforthecommercialmortgageloansatDecember31,2012, wasasfollows(inmillions): Fairvalueasa Unpaidprincipal percentageof Fairvalue balance unpaidprincipal balance Commercialmortgageloans: Performingloans $176 $144 81.8% Non-performing/non-accrualloans1 519 322 62.0% Total $695 $466 67.1% 1 Non-performing/non-accrualloansincludeloanswithpaymentspastduegreaterthan90days.

382 99thAnnualReport|2012 Thefollowingtablesummarizesthepropertytypesof thecommercialmortgage loansheldintheMLportfolioatDecember31,2012(inmillions): Concentrationof Unpaidprincipal PropertyType unpaidprincipal balances balances Office1 $601 86.4% Hospitality 86 12.4% Other2 8 1.2% Total $695 100.0% 1 Onesponsorrepresentedintheofficepropertytypeamountaccountsforapproximately86%oftotalunpaidprincipalbalance ofthecommercialmortgageloanportfolio. 2 Nootherindividualpropertytypecomprisesmorethan5percentofthetotal. CommercialmortgageloansheldbyMLarecomposedof differentlevelsof subordinationwithrespecttotheunderlyingproperties,andrelativetoeachother. Seniormortgageloansaresecuredpropertyloansevidencedbyafirstmortgage thatisseniortoanysubordinateormezzaninefinancing.Subordinatemortgage interests,sometimesknownasBNotes,areloansevidencedbyajuniornoteora juniorparticipationinamortgageloan.Mezzanineloansareloansmadetothe directorindirectownerof theproperty-owningentity.Mezzanineloansarenot securedbyamortgageonthepropertybutratherbyapledgeof themezzanine borrower’sdirectorindirectownershipinterestintheproperty-owningentity. ThefollowingtablesummarizescommercialmortgageloansheldbyMLat December31,2012(inmillions): Concentrationof Unpaidprincipal Loantype unpaidprincipal balances balances Seniormortgageloan $ 91 13.1% Subordinatemortgageinterests 38 5.5% Mezzanineloans 566 81.4% Total $695 100.0% iii.DerivativeInstruments Derivativecontractsareinstruments,suchasswapcontracts,thatderivetheirvalue fromunderlyingassets,indexes,referencerates,oracombinationof thesefactors. TheMLportfolioiscomposedof derivativefinancialinstrumentsincludedina totalreturnswap(TRS)agreementwithJPMC.MLandJPMCenteredintothe TRSwithreferenceobligationsrepresentingsingle-nameCDSprimarilyonRMBS andCMBS,withvariousmarketparticipants,includingJPMC.ML,throughits investmentmanager,currentlymanagestheCDScontractswithintheTRSasa runoff portfolioandmayunwind,amend,ornovatereferenceobligationsonan ongoingbasis. Onanongoingbasis,MLpledgescollateralforcreditorliquidityrelatedshortfalls basedon20percentof thenotionalamountof soldCDSprotectionand10percentof thepresentvalueof futurepremiumsonpurchasedCDSprotection.FailuretopostthiscollateralconstitutesaTRSeventof default.Separately,MLand JPMCengageinbilateralpostingof collateraltocoverthenetmark-to-market (MTM)variationsintheswapportfolio.MLonlynetsthecollateralreceivedfrom JPMCfromthebilateralMTMpostingforthereferenceobligationsforwhich JPMCisthecounterparty.

FederalReserveSystemAudits 383 Thevaluesof ML’scashequivalents,purchasedbythere-hypothecationof cash collateralassociatedwiththeTRS,were$0.5billionand$0.8billion,fortheyears endedDecember312012and2011,respectively.Inaddition,MLhaspledged $0.2billionand$0.6billionof federalagencyandGSEMBStoJPMCasof December31,2012and2011,respectively. ThefollowingrisksareassociatedwiththederivativeinstrumentsheldbyMLas partof theTRSagreementwithJPMC: MarketRisk CDSareagreementsthatprovideprotectionforthebuyeragainstthelossof principaland,insomecases,interestonabondorloanincaseof adefaultbythe 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 purchasedand soldcreditprotectionwithdifferingunderlyingreferencednamesthatdonotnecessarilyoffset. CreditRisk Creditriskistheriskof financiallossresultingfromfailurebyacounterpartyto meetitscontractualobligationstoML.Thiscanbecausedbyfactorsdirectly relatedtothecounterparty,suchasbusinessormanagement.Takingcollateralis themostcommonwaytomitigatecreditrisk.MLtakesfinancialcollateralinthe formof cashandmarketablesecuritiestocoverJPMCcounterpartyriskaspartof theTRSagreementwithJPMC.MLremainsexposedtocreditriskforcounterpartiesotherthanJPMCrelatedtotheswapsthatunderlietheTRS. Thefollowingtablesummarizesthenotionalamountsof derivativecontractsoutstandingasof December31(inmillions,exceptcontractdata): Notionalamounts1 2012 2011 Creditderivatives: CDS2 $1,755 $3,940 Total $1,755 $3,940 1 Theseamountsrepresentthesumofgrosslongandgrossshortnotionalderivativecontracts.Thechangeinnotionalamounts isrepresentativeofthevolumeofactivityfortheyearendedDecember31,2012. 2 Therewere470and979CDScontractsoutstandingasofDecember2012and2011,respectively.

384 99thAnnualReport|2012 Thefollowingtablesummarizesthefairvalueof derivativeinstrumentsbycontracttypeonagrossbasisasof December31,2012and2011,whichisreportedas acomponentof “Investmentsheldbyconsolidatedvariableinterestentities”inthe CombinedStatementsof Condition(inmillions): 2012 2011 Gross Gross Gross Gross derivative derivative derivative derivative assets liabilities assets liabilities Creditderivatives: CDS1 $816 $(343) $1,630 $(791) Counterpartynetting (272) 272 (685) 685 Cashcollateral (136) – (288) – Total $408 $ (71) $ 657 $(106) 1 CDSfairvaluesasofDecember31,2012forassetsandliabilitiesincludeinterestreceivablesof$15millionandpayablesof $9million.CDSfairvaluesasofDecember31,2011forassetsandliabilitiesincludesinterestreceivablesof$22millionand payablesof$13million. Thetablebelowsummarizescertaininformationregardingprotectionsoldthrough CDSasof December31(inmillions): Maximumpotentialpayout/notional 2012 2011 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-) $ – $ – $ – $ 52 $ 52 $ (5) $ 92 $ (14) Non-investmentgrade(BB+or lower) – – – 438 438 (329) 1,154 (763) Totalcreditprotectionsold $ – $ – $ – $490 $490 $(334) $1,246 $(777) Thetablebelowsummarizescertaininformationregardingprotectionbought throughCDSasof December31(inmillions): Maximumpotentialrecovery/notional 2012 2011 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-) $ – $ – $25 $ 125 $ 150 $ 27 $ 170 $ 46 Non-investmentgrade(BB+or lower) – – 9 1,106 1,115 774 2,525 1,562 Totalcreditprotectionbought $ – $ – $34 $1,231 $1,265 $801 $2,695 $1,608 CurrencyRisk Currencyriskistheriskof financiallossresultingfromexposuretochangesin exchangeratesbetweentwocurrencies.Underthetermsof theTRS,JPMCmay postcashcollateralintheformof eitherU.S.dollarorEurodenominatedcurren-

FederalReserveSystemAudits 385 ciestocoverthenetMTMvariationintheswapportfolio.StartinginDecember2012,JPMCbeganpostingaportionof itscollateralinEurocurrency.This riskismitigatedbydailyvariationmarginupdatesthatcapturethemovementin thevalueof theswapportfolioinadditiontoanymovementinexchangerateson theswapcollateral. Swapcollateralreceivedthatisdenominatedinaforeigncurrencyistranslatedinto U.S.dollaramountsusingtheprevailingexchangerateasof thedateof thecombinedfinancialstatements.Thereisnogainorlossassociatedwiththisforeign denominatedcollateralastheassetandliabilitypositionsassociatedwithitare offsetting. c.MaidenLaneIILLC ConcurrentwiththeNovember2008restructuringof itsfinancialsupporttoAIG, theFRBNYextendedcredittoMLII,aDelawarelimitedliabilitycompany formedtopurchasenon-agencyRMBSfromthereinvestmentpoolof thesecuritieslendingportfoliosof severalregulatedU.S.insurancesubsidiariesof AIG.ML IIborrowed$19.5billionfromtheFRBNYandusedtheproceedstopurchase non-agencyRMBSthathadanapproximatefairvalueof $20.8billionasof October31,2008,fromAIG’sdomesticinsurancesubsidiaries.TheFRBNYisthesole andmanagingmemberandthecontrollingpartyof MLIIandwillremainasthe controllingpartyaslongastheFRBNYretainsaneconomicinterestinMLII.As partof theagreement,theAIGsubsidiariesalsoreceivedfromMLIIafixed deferredpurchasepriceof upto$1.0billion,plusinterestonanysuchfixed deferredpurchasepriceoutstanding.Afterrepaymentinfullof theFRBNY’sloan andthefixeddeferredpurchaseprice(eachincludingaccruedinterest),anynet proceedswillbedistributedascontingentinteresttotheFRBNY,whichisentitled toreceivefive-sixths,andasvariabledeferredpurchasepricetotheAIGsubsidiaries,whichareentitledtoreceiveone-sixth,inaccordancewiththeagreement. OnMarch30,2011,theFederalReserveannouncedthattheFRBNY,throughits investmentmanager,BlackRockFinancialManagement,Inc.,woulddisposeof thesecuritiesintheMLIIportfolioindividuallyandinsegmentsthroughacompetitivesalesprocessovertimeasmarketconditionswarrant.Duringtheyear endedDecember31,2011,atotalof ninebidlistauctionswereconductedand assetswithatotalcurrentfaceamountof $9.96billionweresold.OnFebruary28, 2012,theFRBNYannouncedthesaleof theremainingsecuritiesintheMLII portfolio.OnMarch1,2012,theloanfromtheFRBNYtoMLIIwasrepaidin fullwithinterest,inaccordancewiththetermsof thefacility.OnMarch15,2012, theremainingportionof thefixeddeferredpurchasepriceplusinterestowedto theAIGsubsidiarieswasrepaidinfull.Concurrently,distributionsweremadeto theFRBNYandtheAIGsubsidiariesintheformof contingentinterestandvariabledeferredpurchasepricefortheamountsof $2.3billionand$0.5billion, respectively. OnMarch19,2012,MLIIwasdissolvedandtheFRBNYbeganthewindupprocessinaccordancewithandasrequiredbyDelawarelawandtheagreementsgoverningMLII.WindinguprequiresMLIItopayormakereasonableprovisionto payallclaimsandobligationsof MLIIbeforedistributingitsremainingassets. Whileitsaffairsarebeingwoundup,theMLIIisretainingcertainassetstomeet trailingexpensesandotherobligationsasrequiredbylaw.Dissolutioncostsare notexpectedtobematerial.

386 99thAnnualReport|2012 d.MaidenLaneIIILLC TheFRBNYextendedcredittoMLIII,aDelawarelimitedliabilitycompany formedtopurchaseABSCDOsfromcertainthird-partycounterpartiesof AIG FinancialProductsCorp.MLIIIborrowedapproximately$24.3billionfromthe FRBNY,andAIGprovidedanequitycontributionof $5billiontoMLIII.The proceedswereusedtopurchaseABSCDOswithafairvalueof $29.6billion.On April3,2012,theFRBNYrevisedMLIII’sinvestmentobjectivetoallowforasset sales,andbeganconductingsuchsalesshortlythereafter.OnJune14,2012,the FRBNYannouncedthatitsloantoMLIIIhadbeenrepaidinfull,withinterest. OnJuly16,2012,theFRBNYannouncedthatnetproceedsfromadditionalsales of securitiesinMLIIIenabledthefullrepaymentof AIG’sequitycontribution plusaccruedinterestandprovidedresidualprofitstotheFRBNYandAIG.Concurrently,distributionsweremadetotheFRBNYandAIGintheformof contingentinterestandexcessamountsintheamountsof $5.9billionand$2.9billion, respectively.OnAugust23,2012,theFRBNYannouncedthatallremainingsecuritiesinMLIIIweresold.Anyremainingproceedswillbedividedbetweenthe FRBNY,whichisentitledtoreceivetwo-thirds,andAIG(oritsassignee),whichis entitledtoreceiveone-third,inaccordancewiththeagreement. OnSeptember10,2012,MLIIIwasdissolvedandtheFRBNYbeganthewindup processinaccordancewithandasrequiredbyDelawarelawandtheagreements governingMLIII.MLIIIexpectsthewindupprocesstobeconcludedduring 2013.WindinguprequiresMLIIItopayormakereasonableprovisiontopayall claimsandobligationsof MLIIIbeforedistributingitsremainingassets.Whileits affairsarebeingwoundup,theMLIIIisretainingcertainassetstomeettrailing expensesandotherobligationsasrequiredbylaw.Dissolutioncostsarenot expectedtobematerial. 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 electedtorecordthebeneficialinterestsinML,MLII,MLIII,andTALFLLCat fairvalue. Theaccountingandclassificationof theseinvestmentsappropriatelyreflectthe VIEs’andtheFRBNY’sintentwithrespecttothepurposeof theinvestmentsand

FederalReserveSystemAudits 387 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,orthemarketforaparticularsecurityresultinthecurrentmarketquotationsreflectinganinaccuratemeasureof fairvalue.Insuchcasesor whenmarketquotationsareunavailable,theinvestmentmanagerdeterminesfair valuebyapplyingproprietaryvaluationmodelsthatusecollateralperformance scenariosandpricingmetricsderivedfromthereportedperformanceof theuniverseof investmentswithsimilarcharacteristicsaswellastheobservablemarket. Becauseof theuncertaintyinherentindeterminingthefairvalueof investments thatdonothaveareadilyavailablefairvalue,thefairvalueof theseinvestments maydiffersignificantlyfromthevaluesthatwouldhavebeenreportedif areadily availablefairvaluehadexistedfortheseinvestmentsandmaydiffermaterially fromthevaluesthatmayultimatelyberealized. Thefairvalueof theliabilityforthebeneficialinterestsof consolidatedVIEsis estimatedbaseduponthefairvalueof theunderlyingassetsheldbytheVIEs.The holdersof thesebeneficialinterestsdonothaverecoursetothegeneralcreditof theFRBNY. ii.ValuationMethodologiesforLevel3AssetsandLiabilities Incertaincasesinwhichthereislimitedactivityaroundinputstothevaluation, investmentsareclassifiedwithinLevel3of thevaluationhierarchy.Forexample,in valuingCDOs,certaincollateralizedmortgageobligations,andcommercialand residentialmortgageloans,thedeterminationof fairvalueisbasedoncollateral performancescenarios.Thesevaluationsalsoincorporatepricingmetricsderived fromthereportedperformanceof theuniverseof similarinvestmentsandfrom observationsandestimatesof marketdata.Becauseexternalpriceinformationis notavailable,market-basedmodelsareusedtovaluethesesecurities.Keyinputsto themodelmayincludemarketspreadsoryieldestimatesforcomparableinstruments,performancedata(i.e.,prepaymentrates,defaultrates,andlossseverity), valuationestimatesforunderlyingpropertycollateral,projectedcashflows,and otherrelevantcontractualfeatures.Becausethereislackof observablepricing, securitiesandinvestmentloansthatarecarriedatfairvalueareclassifiedwithin Level3. Fortheswapagreements,allof whicharecategorizedasLevel3assetsandliabilities,therearevariousvaluationmethodologies.Ineachcase,thefairvalueof the instrumentunderlyingtheswapisasignificantinputusedtoderivethefairvalue of theswap.Whentherearebrokerordealerpricesavailablefortheunderlying instruments,thefairvalueof theswapisderivedbasedonthoseprices.Whenthe

388 99thAnnualReport|2012 instrumentunderlyingtheswapisamarketindex(i.e.,CMBSindex),theclosing marketindexprice,whichcanalsobeexpressedasacreditspread,isusedtodeterminethefairvalueof theswap.Intheremainingcases,thefairvalueof theunderlyinginstrumentisprincipallybasedoninputsandassumptionsnotobservablein themarket(i.e.,discountrates,prepaymentrates,defaultrates,andrecoveryrates). ForMLII,thefairvalueof theseniorloanandthedeferredpurchasepriceis determinedbasedonthefairvalueof theunderlyingassetsheldbyMLIIandthe allocationof MLII’snetinvestmentincomeorlossandrealizedgainsorlosseson investments.ForMLIII,thefairvalueof theseniorloanandtheequitycontributionisdeterminedbasedonthefairvalueof theunderlyingassetsheldbyMLIII andtheallocationof MLIII’snetinvestmentincomeorlossandrealizedgainsor lossesoninvestments.ForTALFLLC,thefairvaluesof thesubordinatedloan (includingtheTreasurycontingentinterest)andtheFRBNY’scontingentinterest aredeterminedbasedonthefairvalueof theunderlyingassetsheldbyTALFLLC andtheallocationof TALFLLC’sgainsandlosses. MLInputsforLevel3AssetsandLiabilities Thefollowingtablepresentsthevaluationtechniquesandrangesof significant unobservableinputsgenerallyusedtodeterminethefairvaluesof ML’sLevel3 assetsandliabilitiesasof December31,2012(inmillions,exceptforinputvalues): Principal Unobservable Rangeof Investment Fairvalue valuation inputs inputvalues technique Commercialmortgage $466 Discountedcashflows Discountrate 6%–20% loans Propertycapitalization rate 6%–10% Netoperatingincome growthrate 3%–7% CDS1 $473 Discountedcashflows Creditspreads2 100bps–6,451bps Discountrate 0%–47% Constantprepaymentrate 0%–20% Constantdefaultrate 0%–34% Lossseverity 40%–80% 1 Swapassetsandliabilitiesarepresentednetforthepurposesofthistable. 2 Impliedspreadonclosingmarketpricesforindexpositions. Sensitivityof MLLevel3FairValueMeasurementstoChangesinUnobservable Inputs Thefollowingprovidesageneraldescriptionof theimpactof achangeinanunobservableinputonthefairvaluemeasurementandtheinterrelationshipof unobservableinputs. I. Loans Ingeneral,anincreaseinisolationineitherthediscountrateortheproperty capitalizationrate,whichistheratiobetweenthenetoperatingincomeproducedbyanassetanditscurrentfairvalue,wouldresultinadecreaseinthe fairvaluemeasurement;whileanincreaseinnetoperatingincomegrowthrate, inisolationwouldresultinanincreaseinthefairvaluemeasurement.Foreach of therelationshipsdescribedabove,theinversewouldalsogenerallyapply.

FederalReserveSystemAudits 389 II. Derivatives ForCDSwithreferenceobligationsonCMBS,anincreaseincreditspreads wouldgenerallyresultinahigherfairvaluemeasurementforprotectionbuyers andalowerfairvaluemeasurementforprotectionsellers.Theinversewould alsogenerallyapplytothisrelationshipgivenadecreaseincreditspreads. ForCDSwithreferenceobligationsonRMBSorotherABSassets,changesin thediscountrate,constantprepaymentrate,constantdefaultrate,andloss severitywouldhaveanuncertaineffectontheoverallfairvaluemeasurement. Thisisbecause,ingeneral,changesintheseinputscouldpotentiallyaffect otherinputsusedindeterminingthefairvaluemeasurement.Forexample,a changeintheassumptionsusedfortheconstantdefaultratewillgenerallybe accompaniedbyacorrespondingchangeintheassumptionusedfortheloss severityandaninversechangeintheassumptionusedforconstantprepayment rates.Additionally,changesinthefairvaluemeasurementbasedonvariations intheinputsusedgenerallycannotbeextrapolatedbecausetherelationship betweeneachinputisnotperfectlycorrelated.

390 99thAnnualReport|2012 ThefollowingtablespresentthefinancialinstrumentsrecordedinVIEsatfair valueasof December31byASC820hierarchy(inmillions): 2012 Total Level12 Level22 Level3 Netting1 fairvalue Assets: CDOs $ – $ – $ – $ – $ – Non-agencyRMBS – 2 – – 2 FederalagencyandGSEMBS – 1 – – 1 Commercialmortgageloans – – 466 – 466 Cashequivalents 634 – – – 634 Swapcontracts – – 816 (408) 408 Residentialmortgageloans – – – – – Short-terminvestments 454 236 – – 690 Otherinvestments – 10 55 – 65 Totalassets $1,088 $249 $1,337 $(408) $2,266 Liabilities: BeneficialinterestinconsolidatedVIEs $ – $803 $ – $ – $ 803 Swapcontracts – – 343 (272) 71 Totalliabilities $ – $803 $ 343 $(272) $ 874 1 Derivativereceivablesandpayablesandtherelatedcashcollateralreceivedandpaidareshownnetwhenamasternetting agreementexists. 2 TherewerenotransfersbetweenLevel1andLevel2duringtheyearendedDecember31,2012. 2011 Total Level13 Level23 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 Short-terminvestments2 1,076 – – – 1,076 Otherinvestments2 19 126 108 – 253 Totalassets $2,266 $7,690 $26,610 $(973) $35,593 Liabilities: Beneficialinterestin consolidatedVIEs $ – $ – $ 9,845 $ – $ 9,845 Swapcontracts – – 791 (685) 106 Totalliabilities $ – $ – $10,636 $(685) $ 9,951 1 Derivativereceivablesandpayablesandtherelatedcashcollateralreceivedandpaidareshownnettedwhenamasternetting agreementexists. 2 Investmentswithafairvalueof$1,076asofDecember31,2011wererecategorizedfrom“Otherinvestments”toanewline itemlabeled“Short-terminvestments”toconformtothecurrentyearpresentation. 3 TherewerenosignificanttransfersbetweenLevel1andLevel2duringtheyearendedDecember31,2011.

FederalReserveSystemAudits 391 Thetablebelowpresentsareconciliationof allassetsandliabilitiesmeasuredat fairvalueonarecurringbasisusingsignificantunobservableinputs(Level3)asof December31,2012(inmillions).Unrealizedgainsandlossesrelatedtothose assetsstillheldatDecember31,2012arereportedasacomponentof “Investmentsheldbyconsolidatedvariableinterestentities,net”intheCombinedStatementsof Condition. 2012 Changein unrealized gains(losses) Purchases, Net relatedto Fairvalue sales, realized/ Gross Gross Fairvalue financial December31, issuances, unrealized transfers transfers December31, instruments 2011 and gains in1,2 out1,2 2012 heldat settlements, (losses) December31, net 2012 Assets: CDOs $17,687 $(23,196) $5,509 $ – $ – $ – $ (2) Non-agencyRMBS 5,410 (6,347) 937 – – – – Commercialmortgage loans 1,397 (1,187) 256 – – 466 135 Residentialmortgage loans 378 (374) (4) – – – (1) Otherinvestments 108 (65) 2 10 – 55 – Totalassets $24,980 $(31,169) $6,700 $10 $ – $521 $132 Netswapcontracts3 $ 839 $ (276) $ (90) $ – $ – $473 $(93) Liabilities: Beneficialinterestin consolidatedVIEs $ 9,845 $ (1,385) $ – $ – $(8,460) $ – $ – 1 Theamountoftransfersisbasedonthefairvaluesofthetransferredassetsatthebeginningofthereportingperiod. 2 BeneficialinterestinconsolidatedVIEs,withaDecember31,2011,fairvalueof$8,460million,weretransferredfromLevel 2toLevel3becausetheyarevaluedatDecember31,2012,basedonmodel-basedtechniquesforwhichallsignificantinputs areobservable(Level2).Theseinvestmentswerevaluedintheprioryearonnon-observablemodelbasedinputs(Level3). Therewerealsocertainotherinvestmentsforwhichvaluationinputsbecamelessobservableduringtheyearended December31,2012,whichresultedin$10millionintransfersfromLevel2toLevel3.Therewerenoothertransfersbetween Level2andLevel3duringthecurrentyear. 3 Level3derivativeassetsandliabilitiesarepresentednetforpurposesofthistable. Thefollowingtablepresentsthegrosscomponentsof purchases,sales,issuances, andsettlements,net,shownfortheyearendedDecember31,2012(inmillions): 2012 Purchases, sales, issuances, Purchases Sales Issuances Settlements3 and settlements, net Assets: CDOs $ – $(22,206) $ – $ (990) $(23,196) Non-agencyRMBS – (6,221) – (126) (6,347) Commercialmortgageloans – (1,119) – (68) (1,187) Residentialmortgageloans – (370) – (4) (374) Otherinvestments – (66) – 1 (65) Totalassets $ – $(29,982) $ – $(1,187) $(31,169) Netswapcontracts1 $ – $ (147) $ – $ (129) $ (276) Liabilities: BeneficialinterestinconsolidatedVIEs $452 $ – $ – $(1,430) $ (1,385) 1 Level3swapassetsandliabilitiesarepresentednetforthepurposeofthistable. 2 Representsaccruedandcapitalizedinterest. 3 Includespaydowns.

392 99thAnnualReport|2012 Thetablebelowpresentsareconciliationof allassetsandliabilitiesmeasuredat fairvalueonarecurringbasisusingsignificantunobservableinputs(Level3)asof December31,2011(inmillions).Unrealizedgainsandlossesrelatedtothose assetsstillheldatDecember31,2011arereportedasacomponentof “Investmentsheldbyconsolidatedvariableinterestentities,net”intheCombinedStatementsof Condition. Changein 2011 unrealized gains(losses) relatedto Net Purchases, financial Fairvalue realized/ Gross Gross Fairvalue sales,and instruments December31, unrealized transfers transfers December31, settlements, heldat 2010 gains in1,2 out1,2 2011 net December31, (losses) 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) Netswapcontracts3 $ 970 $ (235) $ 104 $ – $ – $ 839 $ 83 Liabilities: Beneficialinterestin consolidatedVIEs $10,051 $ 285 $ (491) $ – $ – $ 9,845 $ 491 1 Theamountoftransfersisbasedonthefairvaluesofthetransferredassetsatthebeginningofthereportingperiod. 2 Non-agencyRMBS,withaDecember31,2010,fairvalueof$2,091million,weretransferredfromLevel3toLevel2because theyarevaluedatDecember31,2011,basedonquotedpricesinnon-activemarkets(Level2).Theseinvestmentswere valuedintheprioryearonnon-observablemodelbasedinputs(Level3).Therewerealsocertainnon-agencyRMBS,CDOs, andotherinvestmentsforwhichvaluationinputsbecamelessobservableduringtheyearendedDecember31,2011,which resultedin$4,066million,$116million,and$94million,respectively,intransfersfromLevel2toLevel3.Therewerenoother significanttransfersbetweenLevel2andLevel3duringthecurrentyear. 3 Level3derivativeassetsandliabilitiesarepresentednetforpurposesofthistable.

FederalReserveSystemAudits 393 Thefollowingtablepresentsthegrosscomponentsof purchases,sales,issuances, andsettlements,net,shownfortheyearendedDecember31,2011(inmillions): 2011 Purchases, sales, issuances, Purchases Sales Issuances Settlements3 and 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) Netswapcontracts1 $ – $ (48) $ – $ (187) $ (235) Liabilities: BeneficialinterestinconsolidatedVIEs $2852 $ – $ – $ – $ 285 1 Level3swapassetsandliabilitiesarepresentednetforthepurposeofthistable. 2 Representsaccruedandcapitalizedinterest. 3 Includespaydowns. g.ProfessionalFees TheconsolidatedVIEshaverecordedcostsforprofessionalservicesprovided, amongothers,byseveralnationallyrecognizedinstitutionsthatserveasinvestment managers,administrators,andcustodiansfortheVIEs’assets.Thefeeschargedby theinvestmentmanagers,custodians,administrators,auditors,attorneys,and otherserviceproviders,arerecordedin“Professionalfeesrelatedtoconsolidated variableinterestentities”intheCombinedStatementsof IncomeandComprehensiveIncome. (7)BankPremises,Equipment,andSoftware BankpremisesandequipmentatDecember31wereasfollows(inmillions): 2012 2011 Bankpremisesandequipment: Landandlandimprovements $ 394 $ 350 Buildings1 2,659 2,494 Buildingmachineryandequipment 520 514 Constructioninprogress 27 27 Furnitureandequipment 1,024 1,042 Subtotal 4,624 4,427 Accumulateddepreciation (1,948) (1,878) Bankpremisesandequipment,net $2,676 $2,549 Depreciationexpense,fortheyearsendedDecember31 $ 218 $ 213 1 FRBNYacquiredthe33MaidenLanebuildingonFebruary28,2012.FRBNYhadbeentheprimaryoccupantofthebuilding since1998,accountingforapproximately74percentoftheleasedspace.

394 99thAnnualReport|2012 BankpremisesandequipmentatDecember31includedthefollowingamountsfor capitalizedleases(inmillions): 2012 2011 Leasedpremisesandequipmentundercapitalleases $33 $24 Accumulateddepreciation (20) (13) Leasedpremisesandequipmentundercapitalleases,net $13 $11 Depreciationexpenserelatedtoleasedpremises andequipmentundercapitalleases $ 7 $ 5 TheReserveBanksleasespacetooutsidetenantswithremainingleasetermsrangingfrom1to12years.Rentalincomefromsuchleaseswas$37millionand $32millionfortheyearsendedDecember31,2012and2011,respectively,andis reportedasacomponentof “Non-interestincome:Other”intheCombinedStatementsof IncomeandComprehensiveIncome.Futureminimumleasepayments thattheReserveBankswillreceiveundernoncancelableleaseagreementsinexistenceatDecember31,2012,areasfollows(inmillions): 2013 $ 29 2014 27 2015 23 2016 19 2017 13 Thereafter 30 Total $141 TheReserveBankshadcapitalizedsoftwareassets,netof amortization,of $213millionand$165millionatDecember31,2012and2011,respectively.Amortizationexpensewas$64millionand$54millionfortheyearsendedDecember31, 2012and2011,respectively.Capitalizedsoftwareassetsarereportedasacomponentof “Otherassets”intheCombinedStatementsof Conditionandtherelated amortizationisreportedasacomponentof “Operatingexpenses:Other”inthe CombinedStatementsof IncomeandComprehensiveIncome. TheFederalReserveBankof Cleveland’s(FRBC)recordedassetimpairment lossesof $12millionfortheyearendedDecember31,2011,toadjusttherecorded amountof relatedbuildingandland,buildingmachineryandequipment,andland improvementstofairvalue.Fairvalueswerebasedonappraisalsandothervaluationtechniques.Asaresultof thisrestructure,theFRBCvacatedthePittsburgh branchfacilityin2012,reclassifying$5.4millionfrom“Bankpremisesandequipment,net”to“Otherassets”intheCombinedStatementsof Condition.Aportion of the2011impairmentlossintheamountof $10millionisreportedasacomponentof “Operatingexpenses:Other”andtheremainingamountof $2millionis reportedasacomponentof “Operatingexpenses:Occupancy”intheCombined Statementsof IncomeandComprehensiveIncome.TheFRBChadnoimpairmentlossesin2012. TheFederalReserveBankof Atlanta(FRBA)recordedassetimpairmentlossesof $1millionfortheyearendedDecember31,2011.Lossesweredeterminedusing fairvaluesbasedonquotedfairvaluesorothervaluationtechniquesandare reportedasacomponentof “Operatingexpenses:Equipment”intheCombined Statementsof IncomeandComprehensiveIncome. In2008,afterrelocatingoperationstoanewfacility,theFederalReserveBankof SanFrancisco(FRBSF)classifieditsformerSeattlebranchofficebuildingasheld

FederalReserveSystemAudits 395 forsale,andthebuildingwasreportedatfairvalueasacomponentof “Other assets”intheStatementsof Condition.InApril2012,theFRBSFcompletedthe donationof thebuildingtotheUnitedStatesGeneralServicesAdministration (GSA).Underthedonationagreement,theFRBSFmustcontinuetomaintainthe buildingforupto15monthsfromthetimeGSAtakesownership.TheFRBSF recordedanadditionalimpairmentof $3.4milliontoreflectthefinaldisposition of thebuilding,whichisrecordedasacomponentof “Operatingexpenses:Other” intheCombinedStatementsof IncomeandComprehensiveIncome. (8)CommitmentsandContingencies Inconductingitsoperations,theReserveBanksenterintocontractualcommitments,normallywithfixedexpirationdatesorterminationprovisions,atspecific ratesandforspecificpurposes. AtDecember31,2012,theReserveBankswereobligatedundernoncancelable leasesforpremisesandequipmentwithremainingtermsrangingfrom1to approximately10years.Theseleasesprovideforincreasedrentalpaymentsbased uponincreasesinrealestatetaxes,operatingcosts,orselectedpriceindexes. Rentalexpenseunderoperatingleasesforcertainoperatingfacilities,warehouses, anddataprocessingandofficeequipment(includingtaxes,insurance,andmaintenancewhenincludedinrent),netof subleaserentals,was$16millionand$29millionfortheyearsendedDecember31,2012and2011,respectively. Futureminimumrentalpaymentsundernoncancelableoperatingleases,netof subleaserentals,withremainingtermsof oneyearormore,atDecember31,2012, areasfollows(inmillions): 2013 $ 5 2014 5 2015 4 2016 4 2017 4 Thereafter 12 Futureminimumrentalpayments $34 AtDecember31,2012,theReserveBankshadunrecordedunconditionalpurchase commitmentsandlong-termobligationsextendingthroughtheyear2022witha remainingfixedcommitmentof $267million.Purchasesof $28millionand $25millionweremadeagainstthesecommitmentsduring2012and2011,respectively.Thesecommitmentsareformaintenanceof currencyprocessingmachines andhavevariableand/orfixedcomponents.Thevariableportionof thecommitmentsisforadditionalservicesabovethefixedcontractualservicelimits.Thefixed paymentsforthenextfiveyearsunderthesecommitmentsareasfollows(in millions): 2013 $25 2014 35 2015 25 2016 25 2017 26 TheReserveBanksareinvolvedincertainlegalactionsandclaimsarisinginthe ordinarycourseof business.Althoughitisdifficulttopredicttheultimateoutcomeof theseactions,inmanagement’sopinion,basedondiscussionswithcoun-

396 99thAnnualReport|2012 sel,thelegalactionsandclaimswillberesolvedwithoutmaterialadverseeffecton thefinancialpositionorresultsof operationsof theReserveBanks. OtherCommitments Insupportof financialmarketstabilityactivities,theFRBNYenteredintocommitmentstoprovidefinancialassistancetofinancialinstitutions.Thecontractual amountsshownbelowaretheFRBNY’smaximumexposurestolossintheevent thatthecommitmentsarefullyfundedandthereisadefaultbytheborroweror totallossinvalueof pledgedcollateral.TotalcommitmentsatDecember31,2012 and2011,wereasfollows(inmillions): 2012 2011 Contractual Unfunded Contractual Unfunded amount amount amount amount Commercialloancommitments(ML) $55 $55 $61 $61 Additionalloancommitments(ML)1 – – 18 18 Total $55 $55 $79 $79 1 RepresentsadditionalrestrictedcashthatmayberequiredtobeadvancedbyMLforpropertylevelexpensesor improvements. Theundrawnportionof theFRBNY’scommercialloancommitmentsrelatesto commercialmortgageloancommitmentsacquiredbyML. (9)RetirementandThriftPlans RetirementPlans TheReserveBankscurrentlyofferthreedefinedbenefitretirementplansto 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 December31,2012and2011,certaincostsassociatedwiththeSystemPlanwere reimbursedbytheBureau.

FederalReserveSystemAudits 397 Followingisareconciliationof thebeginningandendingbalancesof theSystem Planbenefitobligation(inmillions): 2012 2011 EstimatedactuarialpresentvalueofprojectedbenefitobligationatJanuary1 $10,198 $ 8,258 Servicecost-benefitsearnedduringtheperiod 349 258 Interestcostonprojectedbenefitobligation 473 461 Actuarialloss 833 1,427 Contributionsbyplanparticipants 4 6 Specialterminationbenefits 9 10 Benefitspaid (334) (315) Planamendments (64) 93 Estimatedactuarialpresentvalueofprojectedbenefitobligationat December31 $11,468 $10,198 Followingisareconciliationshowingthebeginningandendingbalanceof the SystemPlanassets,thefundedstatus,andtheaccruedpensionbenefitcosts(in millions): 2012 2011 EstimatedplanassetsatJanuary1(ofwhich$7,977and$6,998is measuredatfairvalueasofJanuary1,2012and2011,respectively) $8,048 $7,273 Actualreturnonplanassets 1,066 649 Contributionsbytheemployer 782 435 Contributionsbyplanparticipants 4 6 Benefitspaid (334) (315) EstimatedplanassetsatDecember31(ofwhich$9,440and$7,977is measuredatfairvalueasofDecember31,2012and2011,respectively) $9,566 $8,048 Fundedstatusandaccruedpensionbenefitcosts $(1,902) $(2,150) Amountsincludedinaccumulatedothercomprehensivelossareshown below: Priorservicecost $ (559) $ (739) Netactuarialloss (3,784) (3,710) Totalaccumulatedothercomprehensiveloss $(4,343) $(4,449) TheFRBNY,onbehalf of theSystem,funded$780.0millionand$420.1million duringtheyearsendedDecember31,2012and2011,respectively.TheBureauis requiredbytheDodd-FrankActtofundtheSystemplanforeachBureau employeebasedonanestablishedformula.DuringtheyearsendedDecember2012and2011,theBureaufundedcontributionsof $1.6millionand$14.4million,respectively. Accruedpensionbenefitcostsarereportedasacomponentof “Accruedbenefit costs,”intheCombinedStatementsof Condition. TheaccumulatedbenefitobligationfortheSystemPlan,whichdiffersfromthe estimatedactuarialpresentvalueof projectedbenefitobligationbecauseitisbased oncurrentratherthanfuturecompensationlevels,was$10,035millionand $8,803millionatDecember31,2012and2011,respectively. Theweighted-averageassumptionsusedindevelopingtheaccumulatedpension benefitobligationfortheSystemPlanasof December31wereasfollows: 2012 2011 Discountrate 4.00% 4.50% Rateofcompensationincrease 4.50% 5.00%

398 99thAnnualReport|2012 NetperiodicbenefitexpensesfortheyearsendedDecember31,2012and2011, wereactuariallydeterminedusingaJanuary1measurementdate.Theweightedaverageassumptionsusedindevelopingnetperiodicbenefitexpensesforthe SystemPlanfortheyearswereasfollows: 2012 2011 Discountrate 4.50% 5.50% Expectedassetreturn 7.25% 7.25% Rateofcompensationincrease 5.00% 5.00% Discountratesreflectyieldsavailableonhigh-qualitycorporatebondsthatwould generatethecashflowsnecessarytopaytheSystemPlan’sbenefitswhendue.The expectedlong-termrateof returnonassetsisanestimatethatisbasedonacombinationof factors,includingtheSystemPlan’sassetallocationstrategyandhistoricalreturns;surveysof expectedratesof returnforotherentities’plans;aprojected returnforequitiesandfixedincomeinvestmentsbasedonrealinterestrates,inflationexpectations,andequityriskpremiums;andsurveysof expectedreturnsin equityandfixedincomemarkets. Thecomponentsof netperiodicpensionbenefitexpensefortheSystemPlanfor theyearsendedDecember31areshownbelow(inmillions): 2012 2011 Servicecost-benefitsearnedduringtheperiod $349 $258 Interestcostonprojectedbenefitobligation 473 461 Amortizationofpriorservicecost 116 110 Amortizationofnetloss 292 187 Expectedreturnonplanassets (599) (531) Netperiodicpensionbenefitexpense 631 485 Specialterminationbenefits 9 10 BureauofConsumerFinancialProtectioncontributions (2) – Totalperiodicpensionbenefitexpense $638 $495 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive lossintonetperiodicpensionbenefitexpensein2013areshownbelow: Priorservicecost $103 Netactuarialloss 275 Total $378 Therecognitionof specialterminationlossesisprimarilytheresultof enhanced retirementbenefitsprovidedtoemployeesduringtherestructuringdescribedin Note12.

FederalReserveSystemAudits 399 Followingisasummaryof expectedbenefitpayments,excludingenhancedretirementbenefits(inmillions): 2013 $ 379 2014 401 2015 425 2016 450 2017 476 2018–2022 2,777 Total $4,908 TheSystem’sCommitteeonInvestmentPerformance(CIP)isresponsiblefor establishinginvestmentpolicies,selectinginvestmentmanagers,andmonitoring theinvestmentmanagers’compliancewithitspolicies.TheCIPissupportedby staff intheOEBincarryingouttheseresponsibilities.AtDecember31,2012,the SystemPlan’sassetswereheldinsixinvestmentvehicles:twoactivelymanaged long-durationfixedincomeportfolios,anindexedU.S.equityfund,anindexed non-U.S.developed-marketsequityfund,anindexedlong-durationfixedincome portfolio,andamoneymarketfund. Thediversificationof thePlan’sinvestmentsisdesignedtolimitconcentrationof riskandtheriskof lossrelatedtoanindividualassetclass.Thetwolong-duration fixedincomeportfoliosareseparateaccountsbenchmarkedtoacustombenchmarkof 55percentBarclaysLongCreditIndexand45percentCitigroup15+ yearsU.S.TreasurySTRIPSIndex,whichwasselectedasaproxyfortheliabilities of thePlan.Theseportfoliosareactivelymanagedandtheguidelinesaredesigned tolimitportfoliodeviationsfromthebenchmark.Theindexedlong-durationfixed incomeportfolioisinvestedintwocommingledfundsandisbenchmarkedto 55percentBarclaysLongCreditIndexand45percentBarclays20+STRIPS Index.TheindexedU.S.equityfundisintendedtotracktheoverallU.S.equity marketacrossmarketcapitalizationsandisbenchmarkedtotheDowJonesU.S. TotalStockMarketIndex.Theindexednon-U.S.developedmarketsequityfundis intendedtotracktheMorganStanleyCapitalInternational(MSCI),Europe,Australia,FarEastplusCanadaIndex,whichincludesstocksfrom23marketsdeemed byMSCItobe“developedmarkets.”Finally,themoneymarketfund,which investsinhigh-qualitymoneymarketsecurities,istherepositoryforcashbalances andadherestoaconstantdollarmethodology. Permittedandprohibitedinvestments,includingtheuseof derivatives,aredefined ineitherthetrustagreement(forcommingledindexvehicles)ortheinvestment guidelines(forthethreeseparateaccounts).TheCIPreviewsthetrustagreement andapprovesallinvestmentguidelinesaspartof theselectionof eachinvestment toensurethatthetrustagreementisconsistentwiththeCIP’sinvestmentobjectivesfortheSystemPlan’sassets.

400 99thAnnualReport|2012 TheSystemPlan’spolicyweightandactualassetallocationsatDecember31,by assetcategory,areasfollows: Actualassetallocations Policyweight 2012 2011 U.S.equities 35.0% 34.9% 39.0% Internationalequities 15.0% 13.6% 13.8% Fixedincome 50.0% 50.4% 46.6% Cash 0.0% 1.1% 0.6% Total 100.0% 100.0% 100.0% EmployercontributionstotheSystemPlanmaybedeterminedusingdifferent assumptionsthanthoserequiredforfinancialreporting.TheSystemPlan’santicipatoryfundinglevelfor2013is$900million.In2013,theSystemplanstomake monthlycontributionsof $75millionandwillreevaluatethemonthlycontributionsuponcompletionof the2013actuarialvaluation.TheReserveBanks’projectedbenefitobligation,fundedstatus,andnetpensionexpensesfortheBEPand theSERPatDecember31,2012and2011,andfortheyearsthenended,werenot material. 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 maydiffersignificantlyfromthevaluesthatwouldhavebeenreportedif areadily availablefairvaluehadexistedfortheseinvestmentsandmaydiffermaterially fromthevaluesthatmayultimatelyberealized.

FederalReserveSystemAudits 401 Thefollowingtablespresentthefinancialinstrumentsrecordedatfairvalueasof December31byASC820hierarchy(inmillions): 2012 Description Level11 Level21 Level3 Total Short-terminvestments $ 23 $ 25 $ – $ 48 TreasuryandFederalagencysecurities 141 1,746 – 1,887 Corporatebonds – 1,947 – 1,947 Otherfixedincomesecurities – 352 – 352 Commingledfunds – 5,206 – 5,206 Total $164 $9,276 $ – $9,440 1 U.S.TreasurySTRIPswithafairvalueof$1,737millionweretransferredfromLevel1toLevel2becausetheywerevalued basedonquotedpricesinnon-activemarkets(Level2).TherewerenoothertransfersbetweenLevel1andLevel2duringthe year. 2011 Description Level11 Level21 Level3 Total Short-terminvestments $ 31 $ 29 $ – $ 60 TreasuryandFederalagencysecurities 1,685 14 – 1,699 Corporatebonds2 – 1,656 – 1,656 Otherfixedincomesecurities2 – 306 – 306 Commingledfunds – 4,256 – 4,256 Total $1,716 $6,261 $ – $7,977 1 TherewerenotransfersbetweenLevel1andLevel2duringtheyear. 2 Investmentswithafairvalueof$1,656asofDecember31,2011wererecategorizedfrom“Otherfixedincomesecurities”toa newlineitemlabeled“Corporatebonds”toconformtothecurrentyearpresentation. 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. AtDecember31,2012and2011,aportionof short-terminvestmentswasavailable forfuturestrading.Therewere$7millionand$6millionof Treasurysecurities pledgedascollateralfortheyearsendedDecember31,2012and2011,respectively. ThriftPlan Employeesof theReserveBanksparticipateinthedefinedcontributionThrift PlanforEmployeesof theFederalReserveSystem(ThriftPlan).TheReserve Banksmatches100percentof thefirstsixpercentof employeecontributionsfrom thedateof hireandprovidesanautomaticemployercontributionof onepercent of eligiblepay.TheReserveBanks’ThriftPlancontributionstotaled$102million and$96millionfortheyearsendedDecember31,2012and2011,respectively,and arereportedasacomponentof “Operatingexpenses:Salariesandbenefits”inthe CombinedStatementsof IncomeandComprehensiveIncome.

402 99thAnnualReport|2012 (10)PostretirementBenefitsOtherThanRetirementPlansand PostemploymentBenefits PostretirementBenefitsOtherThanRetirementPlans InadditiontotheReserveBanks’retirementplans,employeeswhohavemetcertainageandlength-of-servicerequirementsareeligibleforbothmedicalandlife insurancebenefitsduringretirement. TheReserveBanksfundbenefitspayableunderthemedicalandlifeinsurance plansasdueand,accordingly,hasnoplanassets. Followingisareconciliationof thebeginningandendingbalancesof thebenefit obligation(inmillions): 2012 2011 AccumulatedpostretirementbenefitobligationatJanuary1 $1,506 $1,358 Servicecostbenefitsearnedduringtheperiod 59 49 Interestcostonaccumulatedbenefitobligation 69 72 Netactuarialloss(gain) 181 114 Curtailmentloss(gain) – (7) Specialterminationbenefitsloss 1 1 Contributionsbyplanparticipants 22 21 Benefitspaid (87) (86) MedicarePartDsubsidies 5 5 Planamendments (1) (21) AccumulatedpostretirementbenefitobligationatDecember31 $1,755 $1,506 AtDecember31,2012and2011,theweighted-averagediscountrateassumptions usedindevelopingthepostretirementbenefitobligationwere3.75percentand 4.50percent,respectively. Discountratesreflectyieldsavailableonhigh-qualitycorporatebondsthatwould generatethecashflowsnecessarytopaytheplan’sbenefitswhendue. Followingisareconciliationof thebeginningandendingbalanceof theplan assets,theunfundedpostretirementbenefitobligation,andtheaccruedpostretirementbenefitcosts(inmillions): 2012 2011 FairvalueofplanassetsatJanuary1 $ – $ – Contributionsbytheemployer 60 60 Contributionsbyplanparticipants 22 21 Benefitspaid (87) (86) MedicarePartDsubsidies 5 5 FairvalueofplanassetsatDecember31 $ – $ – Unfundedobligationandaccruedpostretirementbenefitcost $1,755 $1,506 Amountsincludedinaccumulatedothercomprehensivelossareshownbelow: Priorservicecost $ 36 $ 45 Netactuarial(loss) (538) (388) Totalaccumulatedothercomprehensiveloss $ (502) $ (343) Accruedpostretirementbenefitcostsarereportedasacomponentof “Accrued benefitcosts”intheCombinedStatementsof Condition.

FederalReserveSystemAudits 403 Formeasurementpurposes,theassumedhealth-carecosttrendratesatDecember31areasfollows: 2012 2011 Health-carecosttrendrateassumedfornextyear 7.00% 7.50% Ratetowhichthecosttrendrateisassumedtodecline(theultimatetrendrate) 5.00% 5.00% Yearthattheratereachestheultimatetrendrate 2018 2017 Assumedhealth-carecosttrendrateshaveasignificanteffectontheamountsreported forhealth-careplans.Aonepercentagepointchangeinassumedhealth-carecosttrend rateswouldhavethefollowingeffectsfortheyearendedDecember31,2012(in millions): Onepercentage Onepercentage pointincrease pointdecrease Effectonaggregateofserviceandinterestcostcomponentsof netperiodicpostretirementbenefitcosts $ 21 $ (17) Effectonaccumulatedpostretirementbenefitobligation 245 (207) Thefollowingisasummaryof thecomponentsof netperiodicpostretirement benefitexpensefortheyearsendedDecember31(inmillions): 2012 2011 Servicecost-benefitsearnedduringtheperiod $ 59 $ 49 Interestcostonaccumulatedbenefitobligation 69 72 Amortizationofpriorservicecost (10) (7) Amortizationofnetactuarialloss 31 21 Totalperiodicexpense 149 135 Specialterminationbenefitsloss 1 1 Netperiodicpostretirementbenefitexpense $150 $136 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive lossintonetperiodicpostretirementbenefitexpensein2013areshownbelow: Priorservicecost $(10) Netactuarialloss 47 Total $37 NetpostretirementbenefitcostsareactuariallydeterminedusingaJanuary1measurementdate.AtJanuary1,2012and2011,theweighted-averagediscountrate assumptionsusedtodeterminenetperiodicpostretirementbenefitcostswere 4.50percentand5.25percent,respectively. Netperiodicpostretirementbenefitexpenseisreportedasacomponentof “Operatingexpenses:Salariesandbenefits”intheCombinedStatementsof Incomeand ComprehensiveIncome. Therecognitionof specialterminationbenefitlossesisprimarilytheresultof enhancedretirementbenefitsprovidedtoemployeesduringtherestructuring describedinNote12. TheMedicarePrescriptionDrug,ImprovementandModernizationActof 2003 establishedaprescriptiondrugbenefitunderMedicare(MedicarePartD)anda federalsubsidytosponsorsof retireehealth-carebenefitplansthatprovidebenefitsthatareatleastactuariallyequivalenttoMedicarePartD.Thebenefitspro-

404 99thAnnualReport|2012 videdundertheReserveBanks’plantocertainparticipantsareatleastactuarially equivalenttotheMedicarePartDprescriptiondrugbenefit.Theestimatedeffects of thesubsidyarereflectedinactuariallossintheaccumulatedpostretirement benefitobligationandnetperiodicpostretirementbenefitexpense. FederalMedicarePartDsubsidyreceiptswere$4.3millionand$4.2millioninthe yearsendedDecember31,2012and2011,respectively.Expectedreceiptsin2013, relatedtobenefitspaidintheyearsendedDecember31,2012and2011,are $3.1million. Followingisasummaryof expectedpostretirementbenefitpayments(inmillions): Withoutsubsidy Withsubsidy 2013 $ 78 $ 73 2014 82 76 2015 85 79 2016 89 82 2017 94 86 2018–2022 536 488 Total $964 $884 PostemploymentBenefits TheReserveBanksofferbenefitstoformerorinactiveemployees.PostemploymentbenefitcostsareactuariallydeterminedusingaDecember31measurement dateandincludethecostof providingdisability,medical,dental,andvisioninsurance,andsurvivorincomebenefits.TheaccruedpostemploymentbenefitcostsrecognizedbytheReserveBanksatDecember31,2012and2011,were$164million and$157million,respectively.Thiscostisincludedasacomponentof “Accrued benefitcosts”intheCombinedStatementsof Condition.Netperiodicpostemploymentbenefitexpenseincludedin2012and2011operatingexpenseswere $25millionand$27million,respectively,andarerecordedasacomponentof “Operatingexpenses:Salariesandbenefits”intheCombinedStatementsof IncomeandComprehensiveIncome.

FederalReserveSystemAudits 405 (11)AccumulatedOtherComprehensiveIncomeandOther ComprehensiveIncome Followingisareconciliationof beginningandendingbalancesof accumulated othercomprehensiveincome(loss)asof December31(inmillions): 2012 2011 Amountrelated Amountrelated Total Total Amountrelated to Amountrelated to accumulated accumulated todefined postretirement todefined postretirement other other benefit benefitsother benefit benefitsother comprehensive comprehensive retirementplan thanretirement retirementplan thanretirement income(loss) income(loss) plans plans BalanceatJanuary1 $(4,449) $(343) $(4,792) $(3,360) $(270) $(3,630) Changeinfundedstatus ofbenefitplans: Priorservicecosts arising duringtheyear 64 1 65 (78) 22 (56) Amortizationofprior servicecost 116 (10) 106 110 (8) 102 Changeinprior service costsrelatedto benefitplans 180 (9) 171 32 14 46 Netactuarialloss arisingduring theyear (366) (181) (547) (1,308) (108) (1,416) Amortizationofnet actuarialloss 292 31 323 187 21 208 Changeinactuarial lossesrelatedto benefitplans (74) (150) (224) (1,121) (87) (1,208) Changeinfundedstatus ofbenefitplans– othercomprehensive income(loss) 106 (159) (53) (1,089) (73) (1,162) BalanceatDecember31 $(4,343) $(502) $(4,845) $(4,449) $(343) $(4,792) Additionaldetailregardingtheclassificationof accumulatedothercomprehensive lossisincludedinNotes9and10. (12)BusinessRestructuringCharges TheReserveBankshadnomaterialbusinessrestructuringchargesin2012. In2011,theU.S.Treasuryannouncedarestructuringinitiativetoconsolidatethe TreasuryRetailSecuritiesoperations.Asaresultof thisinitiative,TreasuryRetail SecuritiesoperationsperformedbytheFRBCwereconsolidatedintotheFederal ReserveBankof Minneapolis.Additionalannouncementsin2011includedthe consolidationof papercheckprocessing,performedbytheFRBC,intothe FRBA. Inyearspriorto2011,theReserveBanksannouncedtheaccelerationof their checkrestructuringinitiativestoalignthecheckprocessinginfrastructureand operationswithdecliningcheckprocessingvolumes.ThenewinfrastructureconsolidatedpaperandelectroniccheckprocessingattheFRBA.

406 99thAnnualReport|2012 Followingisasummaryof financialinformationrelatedtotherestructuringplans (inmillions): 2010 2011 andprior restructuring Total restructuring plans plans Informationrelatedtorestructuringplansasof December31,2012: Totalexpectedcostsrelatedtorestructuringactivity $ 9 $ 34 $ 43 Estimatedfuturecostsrelatedtorestructuringactivity – – – Expectedcompletiondate 2012 2011 Reconciliationofliabilitybalances: BalanceatDecember31,2010 $ – $ 10 $ 10 Employeeseparationcosts 11 1 12 Adjustments (1) (2) (3) Payments (4) (4) (8) BalanceatDecember31,2011 $ 6 $ 5 $ 11 Employeeseparationcosts – – – Adjustments (1) (2) (3) Payments (4) (2) (6) BalanceatDecember31,2012 $ 1 $ 1 $ 2 Employeeseparationcostsareprimarilyseverancecostsforidentifiedstaff reductionsassociatedwiththeannouncedrestructuringplans.Separationcoststhatare providedundertermsof ongoingbenefitarrangementsarerecordedbasedonthe accumulatedbenefitearnedbytheemployee.Separationcoststhatareprovided underthetermsof one-timebenefitarrangementsaregenerallymeasuredbased ontheexpectedbenefitasof theterminationdateandrecordedratablyoverthe periodtotermination.Restructuringcostsrelatedtoemployeeseparationsare reportedasacomponentof “Operatingexpenses:Salariesandbenefits”inthe CombinedStatementsof IncomeandComprehensiveIncome. Adjustmentstotheaccruedliabilityareprimarilyduetochangesintheestimated restructuringcostsandareshownasacomponentof theappropriateexpensecategoryintheCombinedStatementsof IncomeandComprehensiveIncome. Restructuringcostsassociatedwiththeimpairmentof certainBankassets,includingsoftware,buildings,leaseholdimprovements,furniture,andequipment,arediscussedinNote7.

FederalReserveSystemAudits 407 (13)DistributionofComprehensiveIncome InaccordancewithBoardpolicy,ReserveBanksremitexcessearnings,afterprovidingfordividendsandtheamountnecessarytoequatesurpluswithcapitalpaidin,totheU.S.TreasuryasinterestonFederalReservenotes.Thefollowingtable presentsthedistributionof theReserveBanks’comprehensiveincomeinaccordancewiththeBoard’spolicyfortheyearsendedDecember31(inmillions): 2012 2011 Dividendsoncapitalstock $ 1,637 $ 1,577 Transfertosurplus–amountrequiredto equatesurpluswithcapitalpaid-in 461 375 InterestonFederalReservenotes expenseremittedtoTreasury 88,418 75,424 Totaldistribution $90,516 $77,376 (14)SubsequentEvents OnJanuary15,2013,theTreasury,FRBNY,andtheTALFLLCagreedtoeliminateintheirentiretytheTreasury’ssubordinatefundingcommitmenttotheTALF LLCandtheFRBNY’sseniorfundingcommitmenttotheTALFLLC.These commitmentswerenolongerdeemednecessarybecausetheaccumulatedfeescollectedthroughtheTALFprogram,andcurrentlyheldinliquidassetsintheTALF LLC,exceedtheamountof TALFloansoutstanding.Inaddition,theagreement relatedtodistributionof proceedswasamendedtolimitfundingof thecashcollateralaccounttoanamountequaltotheoutstandingprincipalplusaccruedinterestof allTALFloansasof thepaymentdeterminationdate;allaccumulatedfundinginexcessof thatamountwouldthenbedistributedaccordingtothedistributionprioritiesdescribedintheagreementsgoverningTALFLLC.Pursuanttothis agreement,theTALFLLCrepaidinfulltheoutstandingprincipalandaccrued interestonthesubordinatedloantotheTreasury,andadditionaldistributions weremadetotheTreasuryandFRBNYascontingentinterestintheamountsof $310millionand$35million,respectively. Therewerenoothersubsequenteventsthatrequireadjustmentstoordisclosures inthecombinedfinancialstatementsasof December31,2012.Subsequentevents wereevaluatedthroughMarch14,2013,whichisthedatethatthecombinedfinancialstatementswereissued.

408 99thAnnualReport|2012 Office of Inspector General Activities During2012,theOIGcompleted24audits,inspections,andevaluations(table1)andconductedanumberof follow-upreviewstoevaluateactiontakenon TheOfficeof InspectorGeneral(OIG)fortheFedpriorrecommendations.Duetothesensitivenature eralReserveBoard,whichisalsotheOIGforthe of someof thematerial,certainreportswereonly ConsumerFinancialProtectionBureau,operatesin issuedinternallytotheBoard,asindicated.OIG accordancewiththeInspectorGeneralActof 1978, investigativeworkresultedin6arrests,8indictments, asamended.TheOIGconductsactivitiesandmakes 10convictions,and1suspension/termination,aswell recommendationstopromoteeconomyandeffias$37,673,456incriminalfinesandrestitution.Nineciency;enhancepoliciesandprocedures;andprevent teeninvestigationswereopenedandfiveinvestigaanddetectwaste,fraud,andabuseinBoardprotionswereclosedduringtheyear.TheOIGalso gramsandoperations,includingfunctionsthatthe issued2semiannualreportstoCongressandper- BoardhasdelegatedtotheFederalReserveBanks. formedapproximately35reviewsof legislationand Accordingly,theOIGplansandconductsaudits, regulationsrelatedtotheoperationsof theBoard inspections,evaluations,investigations,andother and/ortheOIG. reviewsrelatingtoBoardandBoard-delegatedprogramsandoperations.Italsoretainsanindependent publicaccountingfirmtoannuallyaudittheBoard’s Formoreinformation,visittheOIGwebsiteat andtheFederalFinancialInstitutionsExamination www.federalreserve.gov/oig/.Inparticular,specific Council’sfinancialstatements.Inaddition,theOIG detailsabouttheOIG’sbodyof workmaybefound keepstheCongressandtheBoardof Governorsfully intheOIG’sworkplanandsemiannualreportsto informedaboutseriousabusesanddeficiencies. Congress. Table1.OIGaudit,inspection,andevaluationreportsissuedin2012 Reporttitle Monthissued ReviewofRBOPS’OversightoftheNextGeneration$100Note January MaterialLossReviewofFirstChicagoBankandTrust February FederalFinancialInstitutionsExaminationCouncilFinancialStatementsandIndependentAuditors’Report, December31,2011and2010 March BoardFinancialStatementsandIndependentAuditors’Report,December31,2011and2010 March StatusoftheTransferofOfficeofThriftSupervisionFunctions March InquiryintoAllegationsofUnduePoliticalInterferencewithFederalReserveOfficialsRelatedtothe1972WatergateBurglary andIraqWeaponsPurchasesduringthe1980s March SecurityControlReviewoftheNationalRemoteAccessServicesSystem(internalreport) March MaterialLossReviewoftheBankoftheCommonwealth April SecurityControlReviewoftheBoard’sPublicWebsite(internalreport) April MaterialLossReviewofCommunityBanksofColorado May AuditoftheBoard’sProgressinDevelopingEnhancedPrudentialStandards May ReviewoftheUnauthorizedDisclosureofaConfidentialStaffDraftoftheVolckerRuleNoticeofProposedRulemaking July SecurityControlReviewoftheFederalReserveBankofRichmond’sLotusNotesSystemsSupportingtheBoard’sDivisionofBanking SupervisionandRegulation(internalreport) August InspectionoftheBoard’sProtectiveServicesUnit(internalreport) August AuditoftheSmallCommunityBankExaminationProcess August AuditoftheBoard’sGovernmentTravelCardProgram September StatusoftheTransferofOfficeofThriftSupervisionFunctions September AuditoftheBoard’sActionstoAnalyzeMortgageForeclosureProcessingRisks September OfficeofPersonnelManagementOIGPeerReview(postedontheOfficeofPersonnelManagementOIG’swebsite) September SecurityControlReviewoftheAonHewittEmployeeBenefitsSystem(internalreport) September EvaluationoftheConsumerFinancialProtectionBureau’sConsumerResponseUnit September 2012AuditoftheBoard’sInformationSecurityProgram November 2012AuditoftheConsumerFinancialProtectionBureau’sInformationSecurityProgram November SecurityControlReviewofContingencyPlanningControlsfortheInformationTechnologyGeneralSupportSystem(internalreport) December

FederalReserveSystemAudits 409 Government Accountability Office In2012,theGAOcompleted21projectsthat involvedtheFederalReserve(table1).Tenprojects Reviews remainedopenasof December31,2012(table2). Someof themajorprojectsthatGAOhasundertaken TheFederalBankingAgencyAuditAct(Pub.L. includeastudyof theIndependentForeclosure No.95–320)authorizestheGovernmentAccount- Reviewprocess;areviewof BoardandReserveBank abilityOffice(GAO)toauditcertainaspectsof Fedofficesof MinorityandWomenInclusionandthe eralReserveSystemoperations.TheDodd-Frank diversityof theFederalReserveSystemworkforce;a WallStreetReformandConsumerProtectionActof reviewof enforcementof theServicemembersCivil 2010(Dodd-FrankAct)directsGAOtoconduct Relief Act;andseveralstudiesonthecostsandbenadditionalauditswithrespecttotheseoperations. efitsassociatedwiththeimplementationof the Manyof theseDodd-Frank-mandatedauditshave Dodd-FrankAct. nowbeencompleted,butnotall.Inaddition,the GAOhasinitiateditsownreviewof financialregulators’progressonimplementingDodd-FrankAct regulations. Table1.Reportscompletedduring2012 Reporttitle Reportnumber Monthissued(2012) Agencies’EffortstoAnalyzeandCoordinateTheirRules 13-101 December NewCouncilandResearchOfficeShouldStrengthentheAccountabilityandTransparencyofTheir Decisions 12-886 September ImpactoftheDodd-FrankActDependsLargelyonFutureRuleMakings 12-881 September ChallengesinQuantifyingItsEffectonLow-IncomeHousingTaxCreditInvestment 12-869R August OpportunitiesExisttoIncreaseCollaborationandConsiderConsolidation 12-554 August OverlapofProgramsSuggestsThereMayBeOpportunitiesforConsolidation 12-588 July RegulatoryOversightofCompliancewithServicemembersCivilReliefActHasBeenLimited 12-700 July AgenciesContinueRulemakingsforClarifyingSpecificProvisionsofOrderlyLiquidationAuthority 12-735 July OpportunitiesExisttoFurtherEnhanceBorrowerOutreachEfforts 12-776 June AgenciesCouldImproveEffectivenessofFederalEffortswithAdditionalDataCollectionandAnalysis 12-296 June Government’sExposuretoAIGLessensasEquityInvestmentsAreSold 12-574 May AreasforImprovementinInformationSystemsControls 12-615R April RevenuesHaveExceededInvestments,butConcernsaboutOutstandingInvestmentsRemain 12-301 March BuybacksCanEnhanceTreasury’sCapacitytoManageunderChangingMarketConditions[Reissuedon March21,2012] 12-314 March ApproachesinOtherCountriesOfferBeneficialStrategiesinSeveralAreas 12-328 March AlternativeScenariosSuggestDifferentBenefitsandLossesfromReplacingthe$1Notewitha$1Coin 12-307 February CharacteristicsandRegulationofExemptInstitutionsandtheImplicationsofRemovingtheExemptions 12-160 January AppraisalSubcommitteeNeedstoImproveMonitoringProcedures 12-147 January HybridCapitalInstrumentsandSmallInstitutionAccesstoCapital 12-237 January PotentialEffectsofNewChangesonForeignHoldingCompaniesandU.S.BanksAbroad 12-235 January OverviewofMarketStructure,Pricing,andRegulation 12-265 January Table2.Projectsactiveatyear-end2012 Subjectofproject Monthinitiated GAOengagement# Status Automatedtellermachine(ATM)industry November2011 250640 Open FinancialcrisislossesandpotentialimpactsoftheDodd-FrankAct November2011 250638 Closed02/14/13 Annualauditoffinancialstatements February2012 198702 Open Causesandconsequencesofrecentbankfailures February2012 250660 Closed01/03/13 Trendsinmanagement{leveldiversityanddiversityinitiatives February2012 250656 Open EffectofU.S.andinternationalsanctionsontheIranianeconomy June2012 320896 Closed02/25/13 Foreclosurereview July2012 250676 Open Dodd{FrankActfinancialregulatoryefforts August2012 250681 Closed01/23/13 Financialcompanybankruptcies November2012 250692 Open Collegecredit,debit,andprepaidcardagreements November2012 250691 Open

411 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.Forafulllistingof Boardmembersfrom1913throughthepresent,visitwww.federalreserve.gov/bios/boardmembership.htm. BenS.Bernanke ElizabethA.Duke JeremyC.Stein Chairman DanielK.Tarullo JeromeH.Powell JanetL.Yellen SarahBloomRaskin ViceChair DivisionsandOfficers Fifteendivisionssupportandcarryoutthemissionof theBoardof Governors,whichisbasedin Washington,D.C. OfficeofBoardMembers MichelleA.Smith BrianJ.Gross AndrewT.Levin Director SpecialAssistanttotheBoardfor SpecialAdvisertotheBoard LindaL.Robertson CongressionalLiaison JonW.Faust AssistanttotheBoard LucretiaM.Boyer SpecialAdvisortotheBoard RosannaPianalto-Cameron SpecialAssistanttotheBoardfor AdrienneD.Hurt AssistanttotheBoard PublicInformation Adviser DavidW.Skidmore WinthropP.Hambley AssistanttotheBoard SeniorAdviser

412 99thAnnualReport|2012 LegalDivision ScottG.Alvarez AnnMisback AlisonM.Thro GeneralCounsel AssociateGeneralCounsel AssistantGeneralCounsel RichardM.Ashton LaurieS.Schaffer CaryK.Williams DeputyGeneralCounsel AssociateGeneralCounsel AssistantGeneralCounsel KathleenM.O’Day KatherineH.Wheatley DeputyGeneralCounsel AssociateGeneralCounsel StephanieMartin JeanC.Anderson AssociateGeneralCounsel AssistantGeneralCounsel OfficeoftheSecretary RobertdeV.Frierson MargaretM.Shanks MichaelJ.Lewandowski Secretary DeputySecretary AssistantSecretary DivisionofInternationalFinance StevenB.Kamin DavidH.Bowman JaneHaltmaier Director DeputyAssociateDirector SeniorAdviser ThomasA.Connors CharlesP.Thomas JohnH.Rogers DeputyDirector DeputyAssociateDirector SeniorAdviser MichaelP.Leahy BethAnneWilson SallyM.Davies DeputyDirector DeputyAssociateDirector SeniorAdviser TrevorA.Reeve ShaghilAhmed BrianM.Doyle SeniorAssociateDirector AssistantDirector Adviser RalphW.Tryon JosephW.Gruber AssociateDirector AssistantDirector ChristopherJ.Erceg MarkS.Carey AssociateDirector SeniorAdviser OfficeofFinancialStabilityPolicyandResearch J.NellieLiang MichaelT.Kiley RochelleM.Edge Director AssociateDirector AssistantDirector AndreasW.Lehnert SethF.Wheeler DeputyDirector Chief of Staff DivisionofMonetaryAffairs WilliamB.English SethB.Carpenter MargaretG.DeBoer Director SeniorAssociateDirector DeputyAssociateDirector JamesA.Clouse FabioM.Natalucci JaneE.Ihrig DeputyDirector AssociateDirector DeputyAssociateDirector DeborahJ.Danker GretchenC.Weinbach J.DavidLopez-Salido DeputyDirector AssociateDirector DeputyAssociateDirector StephenA.Meyer EgonZakrajsek ThomasB.King DeputyDirector AssociateDirector AssistantDirector WilliamNelson WilliamF.Bassett MatthewM.Luecke DeputyDirector DeputyAssociateDirector AssistantDirector

FederalReserveSystemOrganization 413 EdwardM.Nelson EllenE.Meade MaryT.Hoffman AssistantDirector SeniorAdviser Adviser MinWei JoyceK.Zickler AssistantDirector SeniorAdviser DivisionofResearchandStatistics DavidW.Wilcox DavidE.Lebow ElizabethK.Kiser Director AssociateDirector AssistantDirector MatthewJ.Eichner MichaelG.Palumbo KarenM.Pence DeputyDirector AssociateDirector AssistantDirector DavidL.Reifschneider S.WaynePassmore JohnM.Roberts DeputyDirector AssociateDirector AssistantDirector JaniceShack-Marquez SeanD.Campbell StevenA.Sharpe DeputyDirector DeputyAssociateDirector AssistantDirector WilliamL.WascherIII JeffreyC.Campione JohnJ.Stevens DeputyDirector DeputyAssociateDirector AssistantDirector DanielM.Covitz SandraA.Cannon StaceyM.Tevlin AssociateDirector DeputyAssociateDirector AssistantDirector MichaelS.Cringoli JoshuaH.Gallin GlennB.Canner AssociateDirector DeputyAssociateDirector SeniorAdviser EricM.Engen DianaHancock RobinA.Prager AssociateDirector DeputyAssociateDirector SeniorAdviser HeinrichT.Laubach ArthurB.Kennickell JeremyRudd AssociateDirector AssistantDirector Adviser DivisionofBankingSupervisionandRegulation MichaelS.Gibson KevinM.Bertsch MichaelJ.Hsu Director AssociateDirector AssistantDirector MaryannF.Hunter NidaDavis MichaelJ.Kraemer DeputyDirector AssociateDirector AssistantDirector BarbaraJ.Bouchard GeraldA.EdwardsJr. RobertT.Maahs SeniorAssociateDirector AssociateDirector AssistantDirector TimothyP.Clark DavidS.Jones StevenP.Merriett SeniorAssociateDirector AssociateDirector AssistantDirector JackP.JenningsII MichaelD.Solomon ThomasK.Odegard SeniorAssociateDirector AssociateDirector AssistantDirector ArthurW.Lindo RichardA.NaylorII NancyJ.Perkins SeniorAssociateDirector DeputyAssociateDirector AssistantDirector PeterJ.Purcell RobertT.Ashman TameikaL.Pope SeniorAssociateDirector AssistantDirector AssistantDirector WilliamG.Spaniel KevinJ.Clarke LaurieF.Priest SeniorAssociateDirector AssistantDirector AssistantDirector MarkE.VanDerWeide AdrienneT.Haden LisaH.Ryu SeniorAssociateDirector AssistantDirector AssistantDirector ToddA.Vermilyea AnnaL.Hewko MichaelJ.Sexton SeniorAssociateDirector AssistantDirector AssistantDirector

414 99thAnnualReport|2012 RichardC.Watkins NorahM.Barger AssistantDirector SeniorAdviser SarkisYoghourtdjian WilliamF.Treacy AssistantDirector Adviser DivisionofConsumerandCommunityAffairs SandraF.Braunstein AllenJ.Fishbein CarolA.Evans Director AssociateDirector AssistantDirector TondaE.Price JamesA.Michaels PhyllisL.Harwell DeputyDirector AssociateDirector AssistantDirector AnnaAlvarezBoyd JosephA.Firschein MarisaA.Reid SeniorAssociateDirector DeputyAssociateDirector AssistantDirector SuzanneG.Killian DavidE.Buchholz SeniorAssociateDirector AssistantDirector DivisionofReserveBankOperationsandPaymentSystems LouiseL.Roseman DorothyB.LaChapelle StuartE.Sperry Director AssociateDirector DeputyAssociateDirector JeffreyC.Marquardt GregoryL.Evans TimothyW.Maas DeputyDirector DeputyAssociateDirector AssistantDirector SusanV.Foley LisaK.Hoskins JeffreyD.Walker SeniorAssociateDirector DeputyAssociateDirector AssistantDirector Jeff J.Stehm MichaelJ.Lambert PaulW.Bettge SeniorAssociateDirector DeputyAssociateDirector SeniorAdviser KennethD.Buckley JenniferA.Lucier MichaelJ.Stan AssociateDirector DeputyAssociateDirector Advisor OfficeoftheChiefOperatingOfficer DonaldV.Hammond SheilaClark Chief OperatingOfficer DiversityandInclusionPrograms Director FinancialManagement WilliamL.Mitchell ChristineM.Fields JeffreyR.Peirce DirectorandChief Financial AssociateDirector AssistantDirector Officer JamesR.Riesz KarenL.Vassallo AssociateDirector AssistantDirector ManagementDivision MichellC.Clark MarieS.Savoy CurtisB.Eldridge Director AssociateDirector AssistantDirectorandChief DavidJ.Capp TaraTinsley-Pelitere ReginaldV.Roach DeputyDirector AssociateDirector AssistantDirector DavidJ.Harmon KeithF.Bates TheresaA.Trimble AssociateDirector AssistantDirector AssistantDirector

FederalReserveSystemOrganization 415 ToddA.Glissman CarolA.Sanders ChristopherJ.Suma SeniorAdviser SpecialAdviser SpecialAdviser DivisionofInformationTechnology SharonL.Mowry WilliamDennison TheresaC.Palva Director DeputyAssociateDirector AssistantDirector GearyL.Cunningham GlennS.Eskow VirginiaM.Wall DeputyDirector DeputyAssociateDirector AssistantDirector WayneA.Edmondson MariettaMurphy EdgarWang DeputyDirector DeputyAssociateDirector AssistantDirector RaymondRomero KassandraAranaQuimby CharlesB.YoungII AssociateDirector DeputyAssociateDirector AssistantDirector KofiA.Sapong SherylLynnWarren TillenaG.Clark AssociateDirector DeputyAssociateDirector Adviser LisaM.Bell RajasekharR.Yelisetty CanXuanNguyen DeputyAssociateDirector DeputyAssociateDirector Adviser OfficeofInspectorGeneral MarkBialek JacquelineM.Becker AndrewPatchanJr. InspectorGeneral AssociateInspectorGeneral AssociateInspectorGeneral JamesA.Ogden EliseM.Ennis HarveyWitherspoon DeputyInspectorGeneral AssociateInspectorGeneral AssociateInspectorGeneral

416 99thAnnualReport|2012 FEDERAL OPEN MARKET COMMITTEE TheFederalOpenMarketCommitteeismadeupof thesevenmembersof theBoardof Governors;thepresidentof theFederalReserveBankof NewYork;andfourof theremaining11ReserveBankpresidents,who serveone-yeartermsonarotatingbasis.During2012,theFederalOpenMarketCommitteeheldeightregularly scheduledmeetings(see“Minutesof FederalOpenMarketCommitteeMeetings”). Members BenS.Bernanke DennisP.Lockhart JeremyC.Stein Chairman,Boardof Governors President,FederalReserveBank Member,Boardof Governors of Atlanta WilliamC.Dudley DanielK.Tarullo ViceChairman,President,Federal SandraPianalto Member,Boardof Governors ReserveBankof NewYork President,FederalReserveBank JohnC.Williams of Cleveland ElizabethDuke President,FederalReserveBank Member,Boardof Governors JeromeH.Powell of SanFrancisco Member,Boardof Governors JeffreyM.Lacker JanetL.Yellen President,FederalReserveBank SarahBloomRaskin Member,Boardof Governors of Richmond Member,Boardof Governors AlternateMembers JamesBullard CharlesL.Evans EricRosengren President,FederalReserveBank President,FederalReserveBank President,FederalReserveBank of St.Louis of Chicago of Boston ChristineM.Cumming EstherL.George FirstVicePresident,Federal President,FederalReserveBank ReserveBankof NewYork of KansasCity Officers WilliamB.English RichardM.Ashton WilliamNelson SecretaryandEconomist AssistantGeneralCounsel AssociateEconomist DeborahJ.Danker StevenB.Kamin DavidReifschneider DeputySecretary Economist AssociateEconomist GlennD.Rudebusch MatthewM.Luecke DavidW.Wilcox AssociateEconomist AssistantSecretary Economist MarkS.Sniderman DavidW.Skidmore DavidAltig AssociateEconomist AssistantSecretary AssociateEconomist WilliamWascher MichelleA.Smith ThomasA.Connors AssociateEconomist AssistantSecretary AssociateEconomist JohnA.Weinberg ScottG.Alvarez MichaelP.Leahy AssociateEconomist GeneralCounsel AssociateEconomist SimonPotter ThomasC.Baxter JamesJ.McAndrews Manager,SystemOpenMarket DeputyGeneralCounsel AssociateEconomist Account

FederalReserveSystemOrganization 417 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.In2012,itmetonFebruary2–3,May10–11,September13–14, andDecember13–14.ThecouncilmetwiththeBoardonFebruary3,May11,September14,andDecember14,2012. 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 VikramPandit DarylG.Byrd StanleyA.Lybarger Chief ExecutiveOfficer, PresidentandChief Executive PresidentandChief Executive Citigroup,Inc.,NewYork,NY Officer,IBERIABANK Officer,Bankof Oklahoma, (resignedOctober16,2012) Corporation,Lafayette,LA NationalAssociation,Tulsa,OK JamesP.Gorman ChairmanandChief Executive District7 District11 Officer,MorganStanley,New DavidW.Nelms RichardW.EvansJr. York,NY ChairmanandChief Executive ChairmanandChief Executive Officer,DiscoverFinancial Officer,Cullen/FrostBankers District3 Services,Riverwoods,IL Inc.,SanAntonio,TX BharatB.Masrani PresidentandChief Executive District8 District12 Officer,TDBank, D.BryanJordan J.MichaelShepherd CherryHill,NJ Chairman,President,andChief ChairmanandChief Executive ExecutiveOfficer,FirstHorizon Officer,Bankof theWestand District4 NationalCorporation, BancWestCorporation,San JamesE.Rohr Memphis,TN Francisco,CA ChairmanandChief Executive Officer,ThePNCFinancial ServicesGroup,Inc., Pittsburgh,PA

418 99thAnnualReport|2012 Officers RichardK.Davis D.BryanJordan JamesE.Annable President VicePresident Secretary CommunityDepositoryInstitutionsAdvisoryCouncil TheCommunityDepositoryAdvisoryCounciladvisestheBoardof Governorsontheeconomy,leadingconditions,andotherissues.Membersareselectedfromrepresentativesof banks,thriftinstitutions,andcreditunions servingonlocaladvisorycouncilsatthe12FederalReserveBanks.Onememberof eachof theReserveBank councilsservesontheCommunityDepositoryInstitutionsAdvisoryCouncil,whichmeetstwiceayearwiththe FederalReserveBoardinWashington. Members HowardT.Boyle CharlesH.Majors MichaelJ.Castellana PresidentandChief Executive ChairmanandChief Executive PresidentandChief Executive Officer,HometownBank, Officer,AmericanNationalBank, Officer,SEFCU,Albany,NY Kent,OH Danville,VA DennisD.Cirucci PeterG.Humphrey DrakeMills PresidentandChief Executive PresidentandChief Executive PresidentandChief Executive Officer,AllianceBank, Officer,FiveStarBankand Officer,CommunityTrustBank, Broomall,PA FinancialInstitutions,Inc., Ruston,LA JohnV.Evans,Jr. Warsaw,NY(resigned WilliamT.Stapleton Chief ExecutiveOfficer,D.L. August2012) PresidentandChief Executive EvansBank,Burley,ID Officer,Northampton PeterJ.Johnson TimothyG.Marshall CooperativeBank, PresidentandChief Executive PresidentandChief Executive Northampton,MA Officer,AmericanFederalSavings Officer,Bankof AnnArbor,Ann Bank,Helena,MT DennisM.Terry Arbor,MI PresidentandChief Executive MichaelKloiber Officer,FirstCloverLeaf Bank, PresidentandChief Executive Edwardsville,IL Officer,TinkerFederalCredit ClaireW.Tucker Union,TinkerAirForce PresidentandChief Executive Base,OK Officer,CapStarBank, Nashville,TN Officer HowardT.Boyle President

FederalReserveSystemOrganization 419 ModelValidationCouncil TheModelValidationCouncilwasestablishedin2012bytheBoardof Governorstoprovideexpertandindependentadviceonitsprocesstorigorouslyassessthemodelsusedinstresstestsof bankinginstitutions.The Dodd-FrankWallStreetReformandConsumerProtectionActrequiredtheFederalReservetoconductannual stresstestsof largebankholdingcompaniesandsystemicallyimportant,nonbankfinancialinstitutionssupervisedbytheBoard.TheModelValidationCouncilprovidesinputontheBoard’seffortstoassesstheeffectivenessof themodelsusedinthestresstests.Thecouncilisintendedtoimprovethequalityof theFederal Reserve’smodelassessmentprogramandtostrengthentheconfidenceintheintegrityandindependenceof the program. Members FrancisX.Diebold,Chair PhilippeJorion AllanTimmermann Professor,Universityof Professor,Universityof Professor,Universityof Pennsylvania CaliforniaatIrvine CaliforniaatSanDiego PeterChristoffersen ChesterSpatt Professor,Universityof Toronto Professor,CarnegieMellon MarkFlannery University Professor,Universityof Florida

420 99thAnnualReport|2012 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/aboutthefed/ directors/about.htm. Thedirectorsof theBanksandBranchesarelistedbelow.Foreachdirector,theclassof directorship,thedirector’sprincipalbusiness,andtheexpirationdateof thedirector’stermareshown. District1–Boston ClassA KathrynG.Underwood,2014 JohnF.Fish,2013 PresidentandChief Executive Chief ExecutiveOfficer,Suffolk PeterL.Judkins,2012 Officer,LedyardNationalBank, ConstructionCompany,Inc., PresidentandChief Executive Hanover,NH Boston,MA Officer,FranklinSavingsBank, Farmington,ME GaryL.Gottlieb,2014 ClassB PresidentandChief Executive RichardE.Holbrook,2013 RogerS.Berkowitz,2012 Officer,PartnersHealthCare ChairmanandChief Executive PresidentandChief Executive System,Inc.,Boston,MA Officer,EasternBank, Officer,LegalSeaFoods,LLC, Boston,MA Boston,MA

FederalReserveSystemOrganization 421 ClassC KirkA.Sykes,2013 WilliamD.Nordhaus,2014 President,NewBoston’sUrban SterlingProfessorof Economics, CatherineD’Amato,2012 StrategyAmericaFund, YaleUniversity,NewHaven,CT PresidentandChief Executive Boston,MA Officer,TheGreaterBostonFood Bank,Boston,MA District2–NewYork ClassA ClassB ClassC JamesDimon,2012 GlennH.Hutchins,2012 LeeC.Bollinger,2012 ChairmanandChief Executive Co-FounderandManaging President,ColumbiaUniversity, Officer,JPMorganChase&Co., Director,SilverLake, NewYork,NY NewYork,NY NewYork,NY KathrynS.Wylde,2013 AlphonsoO’Neil-White,2013 RichardL.Carrión,2013 PresidentandChief Executive PresidentandChief Executive Chairman,President,andChief Officer,PartnershipforNewYork Officer,HealthNowNewYork ExecutiveOfficer,Popular,Inc., City,NewYork,NY Inc.,Buffalo,NY SanJuan,PR EmilyK.Rafferty,2014 TerryJ.Lundgren,2014 PaulP.Mello,2014 President,TheMetropolitan Chairman,President,andChief PresidentandChief Executive Museumof Art,NewYork,NY ExecutiveOfficer,Macy’s,Inc., Officer,SolvayBank,Solvay,NY NewYork,NY District3–Philadelphia ClassA ClassB ClassC 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, JeremyNowak,2013 R.ScottSmith,2013 Philadelphia,PA FormerPresident/FormerChief ChairmanandChief Executive ExecutiveOfficer,WilliamPenn KeithS.Campbell,2013 Officer,FultonFinancial Foundation/TheReinvestment Chairman,ManningtonMills, Corporation,Lancaster,PA Fund,Philadelphia,PA Inc.,Salem,NJ FrederickC.Peters,2014 MichaelAngelakis,2014 PatrickHarker,2014 ChairmanandChief Executive ViceChairandChief Financial President,Universityof Officer,BrynMawrTrust Officer,ComcastCorporation, Delaware,Newark,DE Company,BrynMawr,PA Philadelphia,PA

422 99thAnnualReport|2012 District4–Cleveland ClassA CincinnatiBranch PittsburghBranch C.DanielDeLawder,2012 AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank ChairmanandChief Executive DonaldE.Bloomer,2012 GrantOliphant,2012 Officer,ParkNationalBank, PresidentandChief Executive PresidentandChief Executive Newark,OH Officer,CitizensNationalBank, Officer,ThePittsburgh PaulG.Greig,2013 Somerset,KY Foundation,Pittsburgh,PA Chairman,President,andChief AustinW.Keyser,2013 ToddD.Brice,2013 ExecutiveOfficer,FirstMerit MidwestSeniorField PresidentandChief Executive Corporation,Akron,OH Representative,AFL-CIO, Officer,S&TBancorp,Inc., ToddA.Mason,2014 McDermott,OH Indiana,PA PresidentandChief Executive Officer,FirstNationalBankof GregoryB.Kenny,2014 DawneS.Hickton,2014 Pandora,Pandora,OH PresidentandChief Executive ViceChair,President,andChief Officer,GeneralCable ExecutiveOfficer,RTI ClassB Corporation,Highland InternationalMetals,Inc., Heights,KY Pittsburgh,PA SusanTomasky,2012 RetiredPresident,AEP AmosL.Otis,2014 PetraMitchell,2014 Transmission,Columbus,OH Founder,President,andChief President,CatalystConnection, ExecutiveOfficer,SoBran,Inc., Pittsburgh,PA HaroldKeller,2013 Dayton,OH President,OhioCapital AppointedbytheBoardofGovernors CorporationforHousing, AppointedbytheBoardofGovernors RobertA.Paul,2012 Columbus,OH DanielB.Cunningham,2012 ChairmanandChief Executive TilmonF.Brown,2014 PresidentandChief Executive Officer,Ampco-Pittsburgh PresidentandChief Executive Officer,TheLong-Stanton Corporation,Pittsburgh,PA Officer,NewHorizonsBaking Group,Cincinnati,OH GlennR.Mahone,2013 Company,Norwalk,OH PeterS.Strange,2013 PartnerandAttorneyatLaw, Chairman,Messer,Inc., ReedSmithLLP,Pittsburgh,PA ClassC Cincinnati,OH RichardK.Smucker,2012 CharlesL.HammelIII,2014 Chief ExecutiveOfficer,TheJ.M. SusanCroushore,2014 President,PITTOHIO, SmuckerCompany,Orrville,OH PresidentandChief Executive Pittsburgh,PA Officer,TheChristHospital, ChristopherM.Connor,2013 Cincinnati,OH ChairmanandChief Executive Officer,TheSherwin-Williams Company,Cleveland,OH AlfredM.Rankin,Jr.,2014 Chairman,President,andChief ExecutiveOfficer,NACCO Industries,Inc.,Cleveland,OH

FederalReserveSystemOrganization 423 District5–Richmond ClassA BaltimoreBranch CharlotteBranch RichardJ.Morgan,2012 AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank RegionalPresident,SandySpring JamesT.Brady,2012 LuciaZ.Griffith,2012 Bank,Annapolis,MD ManagingDirector–Mid-Atlantic, Chief ExecutiveOfficerand AlanL.Brill,2013 BallantraeInternational,Ltd., Principal,METROLandmarks, PresidentandChief Executive Ijamsville,MD Charlotte,NC Officer,CaponValleyBank, AnitaG.Newcomb,2012 JohnS.Kreighbaum,2012 Wardensville,WV PresidentandManagingDirector, PresidentandChief Executive EdwardL.WillinghamIV,2014 A.G.Newcomb&Co., Officer,CarolinaPremierBank President,FirstCitizens Columbia,MD andPremaraFinancial,Inc., BancShares,Inc.,andFirst Charlotte,NC CitizensBank,Raleigh,NC WilliamB.Grant,2013 Chairman,President,andChief RobertR.Hill,Jr.,2013 ClassB ExecutiveOfficer,FirstUnited PresidentandChief Executive Corporation,Oakland,MD Officer,SCBTFinancial WilburE.Johnson,2012 Corporation,Columbia,SC ManagingPartner,Young JanaWheatley,2014 ClementRivers,LLP, President,WarwickEnterprises, ChristopherJ.Estes,2014 Charleston,SC Inc.,EastNewMarket,MD PresidentandChief Executive Officer,NationalHousing PatrickC.GraneyIII,2013 AppointedbytheBoardofGovernors Conference,Washington,DC MaxumEastRegionalPresident, StephenR.Sleigh,2012 MaxumPetroleum,Belle,WV FundDirector,IAMNational AppointedbytheBoardofGovernors MarshallO.Larsen,2014 PensionFund,Washington,DC DavidJ.Zimmerman,2012 RetiredChairman,President,and President,SouthernShows,Inc., SamuelL.Ross,2013 Chief ExecutiveOfficer,Goodrich Charlotte,NC Chief ExecutiveOfficer,Bon Corporation,Charlotte,NC SecoursBaltimoreHealthSystem, Vacancy,2013 Baltimore,MD ClassC ClaudeZ.Demby,2014 RussellC.Lindner,2012 JennyG.Morgan,2014 Chief ExecutiveOfficer,Noël ChairmanandChief Executive PresidentandChief Executive Group,LLC,Zebulon,NC Officer,TheForgeCompany, Officer,basys,inc., Washington,DC Linthicum,MD MargaretE.McDermid,2013 SeniorVicePresidentandChief InformationOfficer,Dominion Resources,Inc.,Richmond,VA LindaD.Rabbitt,2014 ChairmanandChief Executive Officer,RandConstruction Corporation,Washington,DC

424 99thAnnualReport|2012 District6–Atlanta ClassA BirminghamBranch CarolynM.Fennell,2013 Directorof PublicAffairs,Greater RudyE.Schupp,2012 AppointedbytheFederalReserveBank OrlandoAviationAuthority, PresidentandChief Executive JohnA.Langloh,2012 OrlandoInternationalAirport, Officer,1stUnitedBank, PresidentandChief Executive Orlando,FL WestPalmBeach,FL Officer,UnitedWayof Central T.AnthonyHumphries,2013 Alabama,Birmingham,AL HughF.Dailey,2014 PresidentandChief Executive PresidentandChief Executive JamesK.Lyons,2012 Officer,CommunityBank& Officer,NobleBank&Trust, DirectorandChief Executive Trustof Florida,Ocala,FL N.A.,Anniston,AL Officer,AlabamaStatePort WilliamH.Rogers,Jr.,2014 Authority,Mobile,AL AppointedbytheBoardofGovernors ChairmanandChief Executive C.RichardMoore,Jr.,2013 LeerieT.Jenkins,Jr.,2012 Officer,SunTrustBanks,Inc., Chairman,President,andChief Chairman,Reynolds,Smithand Atlanta,GA ExecutiveOfficer,Peoples Hills,Inc.,Jacksonville,FL SouthernBank,Clanton,AL MichaelJ.Grebe,2013 ClassB MackeB.Mauldin,2014 ChairmanandChief Executive ClarenceOtis,Jr.,2012 President,BankIndependent, Officer,InterlineBrands,Inc., ChairmanandChief Executive Sheffield,AL Jacksonville,FL Officer,DardenRestaurants,Inc., AppointedbytheBoardofGovernors LyndaL.Weatherman,2014 Orlando,FL F.MichaelReilly,2012 PresidentandChief Executive JoséS.Suquet,2013 ChairmanandChief Executive Officer,EconomicDevelopment Chairman,President,andChief Officer,Randall-ReillyPublishing Commissionof Florida’sSpace ExecutiveOfficer,Pan-American Company,Tuscaloosa,AL Coast,Rockledge,FL LifeInsuranceGroup, HowardLeroyNicholson,2013 NewOrleans,LA MiamiBranch FormerDirector,Alabama RenéeLewisGlover,2014 AFL-CIOLIFT, AppointedbytheFederalReserveBank PresidentandChief Executive Montgomery,AL LeonardL.Abess,2012 Officer,AtlantaHousing ThomasR.Stanton,2014 ChairmanandChief Executive Authority,Atlanta,GA ChairmanandChief Executive Officer,ThinkLABVentures, Officer,ADTRAN,Inc., LLC,Miami,FL ClassC Huntsville,AL GaryL.Tice,2013 ThomasA.Fanning,2012 ChairmanandChief Executive Chairman,President,andChief JacksonvilleBranch Officer,FirstNationalBankof ExecutiveOfficer,Southern AppointedbytheFederalReserveBank theGulf Coast,Naples,FL Company,Atlanta,GA OscarJ.Horton,2012 CarolC.Lang,2014 CarolB.Tomé,2013 PresidentandChief Executive President,HealthLink Chief FinancialOfficerand Officer,SunStateInternational Enterprises,Inc.,Miami ExecutiveVicePresident,The Trucks,LLC,Tampa,FL Beach,FL HomeDepot,Atlanta,GA D.KevinJones,2012 FacundoL.Bacardi,2014 ThomasI.Barkin,2014 PresidentandChief Executive Chairman,Barcardi,Limited, Director,McKinsey&Company, Officer,MIDFLORIDACredit CoralGables,FL Atlanta,GA Union,Lakeland,FL

FederalReserveSystemOrganization 425 AppointedbytheBoardofGovernors DanW.Hogan,2014 GerardR.Host,2013 EduardoJ.Padrón,2012 Chief OperatingOfficer,CapStar PresidentandChief Executive President,MiamiDadeCollege, Bank,Nashville,TN Officer,TrustmarkCorporation, Miami,FL Jackson,MS AppointedbytheBoardofGovernors MichaelJ.Jackson,2013 WilliamJ.Krueger,2012 CarlJ.Chaney,2014 ChairmanandChief Executive ViceChairman,NissanAmericas, PresidentandChief Executive Officer,AutoNation,Inc., NissanNorthAmerica,Inc., Officer,HancockBankand FortLauderdale,FL Franklin,TN HancockHoldingCompany, Gulfport,MS KathleenCalligan,2013 ThomasW.Hurley,2014 ChairmanandChief Executive Chief ExecutiveOfficer,Better AppointedbytheBoardofGovernors BusinessBureauMiddle Officer,BeckerHolding RobertS.Boh,2012 Tennessee,Nashville,TN Corporation,VeroBeach,FL PresidentandChief Executive ScottMcWilliams,2014 Officer,BohBros.Construction NashvilleBranch ExecutiveChairman,OHL, Co.,LLC,NewOrleans,LA Brentwood,TN AppointedbytheFederalReserveBank TerrieP.Sterling,2013 CordiaW.Harrington,2012 NewOrleansBranch ExecutiveVicePresidentand Chief ExecutiveOfficer, Chief OperatingOfficer,Our TennesseeBunCompany, AppointedbytheFederalReserveBank Ladyof theLakeRegional Nashville,TN MatthewG.Stuller,Sr.,2012 MedicalCenter,BatonRouge,LA ChairmanandChief Executive JenniferS.Banner,2012 Officer,Stuller,Inc., T.LeeRobinson,Jr.,2014 Chief ExecutiveOfficer,Schaad Lafayette,LA President,OHC,Inc.,Mobile,AL Companies,LLC,Knoxville,TN E.RenaeConley,2012 WilliamY.Carroll,Jr.,2013 ExecutiveVicePresident,Human PresidentandChief Executive ResourcesandAdministration, Officer,SmartBank, EntergyCorporation, PigeonForge,TN NewOrleans,LA District7–Chicago ClassA ClassB ClassC StephenJ.Goodenow,2012 TerryMazany,2012 WilliamC.Foote,2012 ChairmanandChief Executive PresidentandChief Executive RetiredChairman,USG Officer,BankMidwest, Officer,TheChicagoCommunity Corporation,Chicago,IL SpiritLake,IA Trust,Chicago,IL Vacancy,2013 MarkC.Hewitt,2013 AnnD.Murtlow,2013 JeffreyA.Joerres,2014 PresidentandChief Executive FormerPresidentandChief ChairmanandChief Executive Officer,ClearLakeBank&Trust ExecutiveOfficer,Indianapolis Officer,ManpowerGroup, Company,ClearLake,IA Power&LightCompany, Milwaukee,WI Indianapolis,IN FrederickH.Waddell,2014 ChairmanandChief Executive NeldaJ.Connors,2014 Officer,NorthernTrust ChairwomanandChief Executive CorporationandTheNorthern Officer,PineGroveHoldings, TrustCompany,Chicago,IL LLC,Chicago,IL

426 99thAnnualReport|2012 DetroitBranch BrianC.Walker,2014 CarlT.Camden,2013 PresidentandChief Executive PresidentandChief Executive AppointedbytheFederalReserveBank Officer,HermanMiller,Inc., Officer,KellyServices,Inc., SheilahP.Clay,2012 Zeeland,MI Troy,MI PresidentandChief Executive FernandoRuiz,2014 MichaelE.Bannister,2014 Officer,NeighborhoodService CorporateVicePresidentand ChairmanandChief Executive Organization,Detroit,MI Treasurer,TheDowChemical Officer,FordMotorCredit NancyM.Schlichting,2013 Company,Midland,MI Company,Dearborn,MI Chief ExecutiveOfficer,Henry AppointedbytheBoardofGovernors FordHealthSystem,Detroit,MI LouAnnaK.Simon,2012 President,MichiganState University,EastLansing,MI District8–St.Louis ClassA ClassC LittleRockBranch WilliamE.Chappel,2012 GeorgePaz,2012 AppointedbytheFederalReserveBank PresidentandChief Executive Chairman,President,andChief WilliamC.Scholl,2012 Officer,TheFirstNationalBank, ExecutiveOfficer,ExpressScripts, President,FirstSecurityBancorp, Vandalia,IL St.Louis,MO Searcy,AR RobertG.Jones,2013 SharonD.Fiehler,2013 MichaelA.Cook,2013 PresidentandChief Executive ExecutiveVicePresidentand VicePresidentandAssistant Officer,OldNationalBancorp, Chief AdministrativeOfficer, Treasurer,Wal-MartStores,Inc., Evansville,IN PeabodyEnergy, Bentonville,AR SusanS.Stephenson,2014 St.Louis,MO Co-ChairmanandPresident, MarkD.Ross,2014 WardM.Klein,2014 IndependentBank,Memphis,TN ViceChairmanandChief Chief ExecutiveOfficer,Energizer OperatingOfficer,Bankof the Holdings,Inc.,St.Louis,MO ClassB Ozarks,LittleRock,AR SonjaYatesHubbard,2012 MaryAnnGreenwood,2014 Chief ExecutiveOfficer,E-ZMart PresidentandInvestmentAdvisor, Stores,Inc.,Texarkana,TX GreenwoodGearhartInc., Fayetteville,AR CalMcCastlain,2013 Partner,DoverDixonHorne AppointedbytheBoardofGovernors PLLC,LittleRock,AR C.SamWalls,2012 GregoryM.Duckett,2014 Chief ExecutiveOfficer,Arkansas SeniorVicePresidentand CapitalCorporation,Little CorporateCounsel,Baptist Rock,AR MemorialHealthCare Corporation,Memphis,TN

FederalReserveSystemOrganization 427 KaleybraMitchellMorehead, AppointedbytheBoardofGovernors ClydeWarrenNunn,2014 2013,VicePresidentforCollege BarbaraAnnPopp,2012 ChairmanandPresident,Security Affairs/Advancement,Southeast President,SchulerBauerReal Bancorpof Tennessee,Inc., ArkansasCollege,PineBluff,AR EstateServices, Halls,TN RayC.Dillon,2014 NewAlbany,IN R.MolitorFord,Jr.,2014 PresidentandChief Executive GaryA.Ransdell,2013 ViceChairmanandChief Officer,DelticTimber President,WesternKentucky ExecutiveOfficer,Commercial Corporation,ElDorado,AR University,BowlingGreen,KY BankandTrustCompany, Memphis,TN LouisvilleBranch GeraldR.Martin,2014 ManagingMember,RiverHill AppointedbytheBoardofGovernors AppointedbytheFederalReserveBank Capital,LLC,Louisville,KY CharlieE.ThomasIII,2012 JonA.Lawson,2012 RegionalDirectorof External& President,Chief ExecutiveOfficer MemphisBranch LegislativeAffairs, andChairman,Bankof Ohio AT&TTennessee, County,BeaverDam,KY AppointedbytheFederalReserveBank Memphis,TN DavidP.Heintzman,2013 AllegraC.Brigham,2012 CharlesS.Blatteis,2013 ChairmanandChief Executive MUWFoundationPresidentand Officer,StockYardsBank& VicePresidentforUniversity ManagingMember,BlatteisLaw TrustCompany,Louisville,KY RelationsandAdvancement, Firm,PLLC,Memphis,TN KevinShurn,2014 MississippiUniversityfor LawrenceC.Long,2014 PresidentandOwner,Superior Women,Columbus,MS Partner,St.RestPlantingCo., MaintenanceCo., MarkP.Fowler,2013 Indianola,MS Elizabethtown,KY ViceChairman,LibertyBankof Arkansas,Jonesboro,AR MalcolmBryant,2014 President,TheMalcolmBryant Corporation,Owensboro,KY District9–Minneapolis ClassA ClassB ClassC RichardL.Westra,2012 WilliamJ.Shorma,2012 RandallJ.Hogan,2012 PresidentandChief Executive PresidentandChief Executive ChairmanandChief Executive Officer,DacotahBankand Officer,Rush-Co/StrategicRail Officer,Pentair,Inc., DacotahBanks,Inc., SystemsSRS,Springfield,SD Minneapolis,MN Aberdeen,SD LawrenceR.Simkins,2013 MaryK.Brainerd,2013 JulieCausey,2013 PresidentandChief Executive PresidentandChief Executive Chairman,WesternBank, Officer,TheWashington Officer,HealthPartners, St.Paul,MN Corporations,Missoula,MT Minneapolis,MN KennethA.Palmer,2014 HowardA.Dahl,2014 MayKaoY.Hang,2014 Chairman,President,andChief PresidentandChief Executive PresidentandChief Executive ExecutiveOfficer,Range Officer,AmityTechnologyLLC, Officer,AmherstH.Wilder FinancialCorporation&Range Fargo,ND Foundation,St.Paul,MN Bank,NA,Negaunee,MI

428 99thAnnualReport|2012 HelenaBranch DuanaKurokawa,2014 DavidB.Solberg,2014 President,WesternBankof Wolf Owner,SevenBlackfootRanch AppointedbytheFederalReserveBank Point,Wolf Point,MT Company,Billings,MT TimothyJ.Bartz,2012 Chairman,Anderson AppointedbytheBoardofGovernors ZurMuehlen&Company,P.C., JosephF.McDonald,2012 Helena,MT PresidentEmeritus,Salish ThomasR.Swenson,2013 KootenaiCollege,Pablo,MT PresidentandChief Executive Officer,Bankof Montanaand Bancorpof MontanaHolding Company,Missoula,MT District10–KansasCity ClassA TerryL.Moore,2013 MargaretM.Kelly,2013 President,OmahaFederationof Chief ExecutiveOfficer, DavidW.Brownback,2012 Labor,AFL-CIO,Omaha,NE RE/MAX,LLC,Denver,CO PresidentandChief Executive Officer,CitizensStateBank& BarbaraMowry,2014 LarissaL.Herda,2014 TrustCompany,Ellsworth,KS Chief ExecutiveOfficer, Chair,Chief ExecutiveOfficer, GoreCreekAdvisors,Greenwood andPresident,twtelecominc., MaxT.Wake,2013 Village,CO Littleton,CO President,JonesNationalBank& TrustCo.,Seward,NE DenverBranch OklahomaCityBranch JohnA.Ikard,2014 AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank PresidentandChief Executive CharlesH.BrownIII,2012 Officer,FirstBankHolding RoseM.Washington,2012 President,C.H.BrownCo., Company,Lakewood,CO ExecutiveDirector,Tulsa Wheatland,WY EconomicDevelopment ClassB AnneHainesYatskowitz,2012 Corporation,Tulsa,OK PresidentandChief Executive JohnT.Stout,Jr.,2012 Officer,ACCIONNew Vacancy,2013 Chief ExecutiveOfficer,Plaza Mexico–Arizona–Colorado, DouglasE.Tippens,2013 BelmontManagementGroup Albuquerque,NM PresidentandChief Executive LLC,ShawneeMission,KS Officer,Bankof Commerce, MarkA.Zaback,2013 Vacancy,2013 PresidentandChief Executive Yukon,OK RichardK.Ratcliffe,2014 Officer,JonahBankof Wyoming, LindaCapps,2014 Chairman,Ratcliffe’sInc., Casper,WY ViceChairman,Citizen Weatherford,OK BrianR.Wilkinson,2014 PotawatomiNation, President,SteeleStreetBank& Shawnee,OK ClassC Trust,Denver,CO AppointedbytheBoardofGovernors PaulDeBruce,2012 AppointedbytheBoardofGovernors PeterB.Delaney,2012 Chief ExecutiveOfficerand RichardL.Lewis,2012 Chairman,Chief Executive Founder/ExecutiveVicePresident, PresidentandChief Executive Officer,andPresident,OGE DeBruceGrain,Inc./Gavilon, Officer,RTLNetworksInc., EnergyCorporation, LLC,KansasCity,MO Denver,CO OklahomaCity,OK

FederalReserveSystemOrganization 429 K.Vasudevan,2013 JamesL.Thom,2012 Vacancy,2013 ChairmanandFounder,Service& VicePresident,T-LIrrigationCo., JamesC.Farrell,2014 TechnologyCorporation, Hastings,NE PresidentandChief Executive Bartlesville,OK JoAnnM.Martin,2013 Officer,FarmersNational JamesD.Dunn,2014 Chair,President,andChief Company,Omaha,NE Chair,MillCreekLumber& ExecutiveOfficer,AmeritasLife SupplyCo.,Tulsa,OK InsuranceCorp.,Lincoln,NE Jeff W.Krejci,2014 OmahaBranch President,FirstStateBank, Hickman,NE AppointedbytheFederalReserveBank ToddS.Adams,2012 AppointedbytheBoardofGovernors Chief ExecutiveOfficer,Adams G.RichardRussell,2012 Bank&Trust,Ogallala,NE PresidentandChief Executive Officer,MillardLumberInc., Omaha,NE District11–Dallas ClassA ClassC AppointedbytheBoardofGovernors PeteCook,2012 MyronE.UllmanIII,2012 RenardU.Johnson,2012 RetiredChief ExecutiveOfficer, RetiredChairmanandChief President/Chief ExecutiveOfficer, FirstNationalBankin ExecutiveOfficer,J.C.Penney Management&Engineering Alamogordo,Alamogordo,NM Company,Inc.,Plano,TX TechnologiesInternationalInc. (METI),ElPaso,TX JoeKimKing,2013 HerbertD.Kelleher,2013 Chief ExecutiveOfficerand FounderandChairmanEmeritus, CindyJ.Ramos-Davidson,2013 Chairmanof theBoard,Texas SouthwestAirlines,Dallas,TX PresidentandChief Executive CountryBancshares,Inc., RenuKhator,2014 Officer,ElPasoHispanic Brady,TX Chancellor/President,University Chamberof Commerce, GeorgeF.Jones,Jr.,2014 of Houston,Houston,TX ElPaso,TX Chief ExecutiveOfficer,Texas RobertE.McKnight,Jr.,2014 ElPasoBranch CapitalBank,Dallas,TX Partner,McKnightRanch Company,FortDavis,TX AppointedbytheFederalReserveBank ClassB RobertNachtmann,2012 HoustonBranch MargaretH.Jordan,2012 DeanandProfessorof Finance, PresidentandChief Executive TheUniversityof TexasatEl AppointedbytheFederalReserveBank Officer,DallasMedicalResource, Paso,ElPaso,TX PaulB.Murphy,Jr.,2012 Dallas,TX LarryL.Patton,2013 PresidentandChief Executive EltonM.Hyder,2013 PresidentandChief Executive Officer,CadenceBank, President,TheEMH Officer,WestStarBank, Houston,TX Corporation,FortWorth,TX ElPaso,TX GeraldB.Smith,2013 LauraM.Conniff,2014 JorgeA.Bermudez,2014 ChairmanandChief Executive QualifyingBroker,Mathers PresidentandChief Executive Officer,Smith,Graham& Realty,Inc.,LasCruces,NM Officer,ByebrookGroup,College CompanyInvestmentAdvisors, Station,TX Vacancy,2014 L.P.,Houston,TX

430 99thAnnualReport|2012 KirkS.Hachigian,2014 SanAntonioBranch AppointedbytheBoardofGovernors ChairmanandChief Executive CatherineM.Burzik,2012 AppointedbytheFederalReserveBank Officer,CooperIndustries,Ltd., FormerPresidentandChief Houston,TX ManojSaxena,2012 ExecutiveOfficer,Kinetic GeneralManager,IBMSoftware AnnB.Stern,2014 Concepts,Inc.,SanAntonio,TX Group,IBM,Austin,TX PresidentandChief Executive CurtisV.Anastasio,2013 Officer,HoustonEndowment, JosueRobles,Jr.,2013 PresidentandChief Executive Inc.,Houston,TX PresidentandChief Executive Officer,NuStarEnergyL.P., Officer,USAA,SanAntonio,TX AppointedbytheBoardofGovernors SanAntonio,TX EllenOchoa,2012 YgnacioD.Garza,2014 ThomasE.Dobson,2014 DeputyDirector,NASAJohnson Partner,LongChiltonLLP, ChairmanandChief Executive SpaceCenter,Houston,TX Brownsville,TX Officer,Whataburger GregL.Armstrong,2013 JanieBarrera,2014 Restaurants,L.P., ChairmanandChief Executive PresidentandChief Executive SanAntonio,TX Officer,PlainsAllAmerican Officer,AccionTexas,Inc., Pipeline,L.P.,Houston,TX SanAntonio,TX PaulW.Hobby,2014 ChairmanandManagingPartner, GenesisPark,LP,Houston,TX District12–SanFrancisco ClassA RichardGalanti,2014 JosephC.Berenato,2012 ExecutiveVicePresidentand Director,Ducommun KennethP.Wilcox,2012 Chief FinancialOfficer,Costco Incorporated,Carson,CA Chairman,SiliconValleyBank, WholesaleCorporation, SantaClara,CA DavidI.Rainer,2013 Issaquah,WA Chairman,President,andChief BetsyLawer,2013 ExecutiveOfficer,California ViceChair,FirstNationalBank ClassC UnitedBank,Encino,CA Alaska,Anchorage,AK WilliamD.Jones,2012 PeggyTsiangCherng,2014 MeganF.Clubb,2014 PresidentandChief Executive Co-ChairandCo-Chief Executive PresidentandChief Executive Officer,CitySceneManagement Officer,PandaRestaurantGroup, Officer,BakerBoyerNational Company,SanDiego,CA Inc.,Rosemead,CA Bank,WallaWalla,WA PatriciaE.Yarrington,2013 VicePresidentandChief Financial AppointedbytheBoardofGovernors ClassB Officer,ChevronCorporation, AndrewJ.Sale,2012 SanRamon,CA Partner,AmericasAutomotive BlakeW.Nordstrom,2012 Leader,Ernst&YoungLLP, President,Nordstrom,Inc., DouglasW.Shorenstein,2014 LosAngeles,CA Seattle,WA ChairmanandChief Executive Officer,ShorensteinProperties GraceEvansCherashore,2013 NicoleC.Taylor,2013 LLC,SanFrancisco,CA PresidentandChief Executive PresidentandChief Executive Officer,EvansHotels, Officer,EastBayCommunity LosAngelesBranch SanDiego,CA Foundation,Oakland,CA AppointedbytheFederalReserveBank KeithE.Smith,2014 JohnC.Molina,2012 PresidentandChief Executive Chief FinancialOfficer,Molina Officer,BoydGaming Healthcare,Inc.,LongBeach,CA Corporation,LasVegas,NV

FederalReserveSystemOrganization 431 PortlandBranch SaltLakeCityBranch NicoleW.Piasecki,2013 VicePresident,Business AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank Development&Strategic S.RandolphCompton,2012 CarolCarter,2012 Integration,BoeingCommercial PresidentandChief Executive PresidentandChief Executive Airplanes,Renton,WA Officer,PioneerTrustBank, Officer,IndustrialCompressor N.A.,Salem,OR Products,Inc.,ParkCity,UT ScottL.Morris,2014 Chairman,President,andChief AlbertT.Wada,2013 RogerW.Hinshaw,2013 ExecutiveOfficer,Avista ChairmanandChief Executive President,OregonandSW Corporation,Spokane,WA Officer,WadaFarms,Inc., WashingtonandCommercial Pingree,ID PatrickG.Yalung,2014 MarketExecutiveforOregonand InlandNorthwest,Bankof DamonG.Miller,2014 RegionalPresident,Washington, AmericaOregon,N.A., UtahMarketPresident,U.S. WellsFargoBank,N.A., Portland,OR Bank,SaltLakeCity,UT Seattle,WA RobertC.Hale,2014 JoshEngland,2014 AppointedbytheBoardofGovernors Chief ExecutiveOfficer,Hale President,EnglandLogistics,Inc., MaryO.McWilliams,2012 Companies,Hermiston,OR SaltLakeCity,UT ExecutiveDirector,PugetSound HealthAlliance,Seattle,WA TamaraL.Lundgren,2014 AppointedbytheBoardofGovernors PresidentandChief Executive BradleyJ.Wiskirchen,2012 MarthaChoe,2013 Officer,SchnitzerSteelIndustries, Chief ExecutiveOfficer, Chief AdministrativeOfficer, Inc.,Portland,OR Keynetics,Inc.,Boise,ID TheBill&MelindaGates ScottL.Hymas,2013 Foundation,Seattle,WA AppointedbytheBoardofGovernors Chief ExecutiveOfficer,RC AdaM.Healey,2014 DavidY.Chen,2012 Willey,SaltLakeCity,UT VicePresident,RealEstate, Chief ExecutiveOfficer, PatrickF.Keenan,2014 VulcanInc.,Seattle,WA EquilibriumCapitalGroupLLC, Chief FinancialOfficer,RioTinto Portland,OR KennecottUtahCooper,South JosephE.Robertson,Jr.,M.D., Jordan,UT 2013,President, OregonHealth&Science SeattleBranch University,Portland,OR AppointedbytheFederalReserveBank RoderickC.Wendt,2014 HenryL.(Skip)Kotkins,Jr.,2012 Chief ExecutiveOfficer, ChairmanandChief Executive JELD-WEN,inc.,Klamath Officer,SWLHoldingsInc., Falls,OR Seattle,WA

432 99thAnnualReport|2012 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 PeterS.Strange,Chair LeerieT.Jenkins,Jr.,Chair KirkA.Sykes,Chair LaVaughnM.Henry, ChristopherL.Oakley,Vice WilliamD.Nordhaus,Deputy SeniorRegionalOfficer PresidentandRegionalExecutive Chair EricS.Rosengren,President Pittsburgh Miami KennethC.Montgomery, GlennR.Mahone,Chair EduardoJ.Padrón,Chair FirstVicePresident RobertB.Schaub, JuandelBusto,VicePresidentand SeniorRegionalOfficer RegionalExecutive NewYork LeeC.Bollinger,Chair Richmond Nashville KathrynS.Wylde,DeputyChair WilliamJ.Krueger,Chair MargaretE.McDermid,Chair WilliamC.Dudley,President LeeC.Jones,VicePresidentand LindaD.Rabbitt,DeputyChair ChristineM.Cumming, RegionalExecutive JeffreyM.Lacker,President FirstVicePresident SarahG.Green, NewOrleans AdditionalofficeatEastRutherford,NJ FirstVicePresident RobertS.Boh,Chair Philadelphia Baltimore RobertJ.Musso,SeniorVice PresidentandRegionalExecutive JeremyNowak,Chair JennyG.Morgan,Chair JamesE.Nevels,DeputyChair DavidE.Beck,OfficerinCharge Chicago CharlesI.Plosser,President Charlotte WilliamC.Foote,Chair D.BlakePrichard, FirstVicePresident DavidJ.Zimmerman,Chair JeffreyA.Joerres,DeputyChair MatthewA.Martin, CharlesL.Evans,President Cleveland OfficerinCharge GordonWerkema,FirstVice President AlfredM.Rankin,Jr.,Chair Atlanta AdditionalofficeatDesMoines,IA. RichardK.Smucker, DeputyChair CarolB.Tomé,Chair Detroit SandraPianalto,President ThomasI.Barkin,DeputyChair CarlT.Camden,Chair GregoryStefani, DennisP.Lockhart,President RobertWiley,OfficerinCharge FirstVicePresident MarieC.Gooding, FirstVicePresident Birmingham F.MichaelReilly,Chair LesleyMcClure,VicePresident andRegionalExecutive 1 ThechairofaFederalReserveBankserves,bystatute,asFederalReserveagent.

FederalReserveSystemOrganization 433 DaronD.Peschel,Officerin St.Louis KansasCity Charge WardM.Klein,Chair PaulDeBruce,Chair BarbaraMowry,DeputyChair SanAntonio SharonD.Fiehler,DeputyChair EstherL.George,President CatherineM.Burzik,Chair JamesBullard,President KellyJ.Dubbert,FirstVice DavidA.Sapenaro,FirstVice BlakeHastings,OfficerinCharge President President Denver SanFrancisco LittleRock LarissaL.Herda,Chair DouglasW.Shorenstein,Chair RayC.Dillon,Chair AlisonFelix,OfficerinCharge PatriciaE.Yarrington, RobertA.Hopkins,Regional DeputyChair Executive OklahomaCity JohnC.Williams,President JamesD.Dunn,Chair Louisville JohnF.Moore, ChadR.Wilkerson,Officerin FirstVicePresident BarbaraAnnPopp,Chair Charge AdditionalofficeatPhoenix,AZ. MariaGerwingHampton, Omaha RegionalExecutive LosAngeles JamesC.Farrell,Chair Memphis KeithE.Smith,Chair JasonR.Henderson,Officerin CharlesS.Blatteis,Chair Charge MarkL.Mullinix, OfficerinCharge MarthaPerineBeard,Regional Executive Dallas Portland HerbertD.Kelleher,Chair DavidY.Chen,Chair Minneapolis MyronE.UllmanIII,Deputy StevenH.Walker, Chair MaryK.Brainerd,Chair OfficerinCharge RichardW.Fisher,President RandallJ.Hogan,DeputyChair HelenE.Holcomb,FirstVice SaltLakeCity NarayanaR.Kocherlakota, President President ScottL.Hymas,Chair JamesM.Lyon,FirstVice ElPaso RobinA.Rockwood, President CindyJ.Ramos-Davidson,Chair OfficerinCharge RobertoA.Coronado,Officerin Helena Seattle Charge DavidB.Solberg,Chair MaryO.McWilliams,Chair Houston R.PaulDrake,OfficerinCharge MarkA.Gould,OfficerinCharge PaulW.Hobby,Chair

434 99thAnnualReport|2012 OfficerConferences Anumberof theofficersof eachBankalsoserveoncouncilsthatexamineissuesof importancetotheir districts. ConferenceofChairs Thechairsof theFederalReserveBanksareorganizedintotheConferenceof Chairs,whichmeetstoconsider mattersof commoninterestandtoconsultwithandadvisetheBoardof Governors.Suchmeetings,also attendedbythedeputychairs,wereheldinWashington,D.C.,onMay22and23andNovember6and7,2012. Theconference’sexecutivecommitteemembersfor2012and2013arelistedbelow. ConferenceofChairs ConferenceofChairs ExecutiveCommittee–2012 ExecutiveCommittee–2013 AlfredM.Rankin,Jr.,Chair, HerbertD.Kelleher,Chair, FederalReserveBankof FederalReserveBankof Dallas Cleveland MaryK.Brainerd,ViceChair, HerbertD.Kelleher,ViceChair, FederalReserveBankof FederalReserveBankof Dallas Minneapolis MaryK.Brainerd,Member, WardM.Klein,Member, FederalReserveBankof FederalReserveBankof Minneapolis St.Louis ConferenceofPresidents Thepresidentsof theFederalReserveBanksareorganizedintotheConferenceof Presidents,whichmeetsperiodicallytoidentify,define,anddeliberateissuesof strategicsignificancetotheFederalReserveSystem;toconsidermattersof commoninterest;andtoconsultwithandadvisetheBoardof Governors.Conferenceofficers for2012arelistedbelow.2 ConferenceofPresidents–2012 RichardW.Fisher,Chair, FederalReserveBankof Dallas CharlesI.Plosser,ViceChair, FederalReserveBankof Philadelphia HarveyR.Mitchell,Secretary, FederalReserveBankof Dallas FrankJ.Doto, AssistantSecretary, FederalReserveBankof Philadelphia 2 OnDecember14,2012,theConferenceelectedCharlesI.Plosseraschairfor2013-14andDennisP.Lockhart,presidentoftheFederal ReserveBankofAtlanta,asvicechair.TheConferencealsoelectedFrankJ.Dotoassecretaryfor2013-14andMariaSmith,Federal ReserveBankofAtlanta,asassistantsecretary.

FederalReserveSystemOrganization 435 ConferenceofFirstVicePresidents TheConferenceof FirstVicePresidentsof theFederalReserveBankswasorganizedin1969tomeetperiodicallyfortheconsiderationof operationsandothermatters.Conferenceofficersfor2012arelistedbelow. ConferenceofFirstVice Presidents–2012 BlakePrichard,Chair, FederalReserveBankof Philadelphia KennethMontgomery,ViceChair, FederalReserveBankof Boston ThomasLombardo,Secretary, FederalReserveBankof Philadelphia JeanneMacNevin,Assistant Secretary,FederalReserveBank of Boston

437 Index A Audits Boardof Governors,320–341 Abbreviations,344–345 FederalReserveBanks,342–407 ABCP.SeeAsset-backedcommercialpaper FederalReserveSystem,55 ABSs.SeeAsset-backedsecurities byGovernmentAccountabilityOffice,409 Accountingpolicies,64–65,327–329,350–363 byOfficeof theInspectorGeneral,408 AccountingStandardsCodification(ASC),108 Autoloans,31 AccountingStandardsUpdate,328 Automatedclearinghouse(ACH)services,93,349 AccountingTaskForce,64 Accumulatedothercomprehensiveincome,337 ACH.SeeAutomatedclearinghouseservices B Acquisitions,79–80 Balancesheets Advancedforeigneconomies(AFEs),21,43 Boardof Governors,323 AdvisoryCouncils FederalReserveBanks,19–20,41–42,132,150,157,167, CommunityDepositoryInstitutionsAdvisoryCouncil, 193,217–218,228,253,262 418 BancodeMéxico,167 FederalAdvisoryCouncil,417–418 BankControlAct,72 AFEs.SeeAdvancedforeigneconomies BankHoldingCompaniesandChangeinBankControl Agreementcorporations,51 (RegulationY),118 AIG.SeeAmericanInternationalGroup,Inc. Bankholdingcompanies(BHCs) AllowanceforLoanLossEstimationPracticesforJunior Banksaffiliatedwith,293 LienLoansandLinesof Credit,65 Capitalplanning,54–55 AmericanExpressCompany,78–79 Complaintsagainst,83–84 AmericanExpressTravelRelatedServicesCompany ConsolidatedSupervisionProgram,76–77 (TRS),78 Developmentsin2012,49 AmericanInternationalGroup,Inc.(AIG),19,42, Equityprices,18,39 101–102,353,367–368,385 Numberof,56 AmericanRecoveryandReinvestmentAct(ARRA),14,34 Profitabilityof,40 Prudentialstandards,111–112 AML.SeeAnti-moneylaundering Regulationof,71–74 Anti-moneylaundering(AML) Regulatoryreports,67–68 Compliancewithregulatoryrequirements,58–59,66–67 RFI/C(D)system,56 Examinations,59 Stresstesting,54–55,112 AOCI.SeeAccumulatedothercomprehensiveincome Supervisionof,56,112 ARRA.SeeAmericanRecoveryandReinvestmentAct Surveillanceandoff-sitemonitoring,60–61 ASBA.SeeAssociationof Supervisorsof Banksof the BankHoldingCompanyAct,67,71–72,111 Americas BankHoldingCompanyPerformanceReports(BHCPRs), ASC.SeeAccountingStandardsCodification 60 AsiaPacificEconomicCooperation,61 BankMergerAct,72 AsianDevelopmentBank,61 Bankof Canada,167 Asset-backedcommercialpaper(ABCP),18,39 Bankof China,44 Asset-backedsecurities(ABSs),31,169 Bankof England AssetPurchaseProgram,22,228 Assetpurchases,21–22 Assetsandliabilities ExtendedCollateralTermRepo,43 Commercialbanks,302 Bankof Japan FederalReserveBanks,41–42,294–295,298–299 Assetpurchases,43 Associationof Supervisorsof Banksof theAmericas Loanprograms,22 (ASBA),61 Swaparrangementwith,36

438 99thAnnualReport|2012 Bankof Tokyo,79–80 Litigation,287–288 BankSecrecyAct/Anti-MoneyLaunderingExamination Members,411 Manual,59,66 ModelValidationCouncil,419 BankSecrecyAct(BSA),59,66,113 Officers,411–415 BankServiceCompanyAct,57 Operationsandservices,326–327 Bankia,43 Operationsstatements,324 BankingOrganizationNationalDesktop,69 PaymentSystemRisk,97,120 Bankingorganizations,U.S.SeealsoBankholding Performanceplan,115 companies;Commercialbanks Performancereport,115 Affiliationwithbankholdingcompanies,293 Policyactions,117–122 Creditdefaultswaps,18,21,28,35,39 Policystatements,120–122 Developmentsin2012,49–51 Postemploymentbenefits,336 Offices,293 Postretirementbenefits,335–336 Overseasinvestmentsby,73 Property,equipment,andsoftware,329 Profitabilityof,18 Retirementbenefits,330–334 Regulationof,71–74 Strategicplan,115 Stresstesting,67 Structure,326 Supervisionof,51–71 Website,5,66,115 BankruptcyCode,51 Bonds BaselCommitteeonBankingSupervision(BCBS) Corporate,17,28,134,159,220,230–231,255,264 AccountingTaskForce,64 Municipal,35,159,169–170,195,220,231 Finalandconsultativepapers,63–64 Borrowersof SecuritiesCredit(RegulationX),74,303 Internationalframeworks,111 Branches.SeeFederalReserveBanks Regulatorycapitalframework,112–113 Brazil,economyof,22,44,265 Supervisorypolicies,62–64 BSA.SeeBankSecrecyAct Trainingandtechnicalassistance,61 Bureauof EconomicAnalysis(BEA),15,35 BaselIII,18,50,52,61–63,112 Bureauof EngravingandPrinting(BEP),94–95,340 Businesscontinuity,62 BCBS.SeeBaselCommitteeonBankingSupervision Businessinvestment,13 BEA.SeeBureauof EconomicAnalysis Businesssector,13–14,32–34,133,137,157–158,168, BearStearnsCompanies,Inc.,19,42,380 171–172,193–194,198,218,229,233,253,263 BenefitsEqualizationPlan(BEP),331,396 BEP.SeeBenefitsEqualizationPlan;Bureauof Engraving andPrinting C BHCPRs.SeeBankHoldingCompanyPerformance Reports CallReports,60,68,70 BHCs.SeeBankholdingcompanies Canada Biggert-WatersFloodInsuranceReformAct,81 Bondyields,42 BlackRockFinancialManagement,Inc.,385 Economyof,21,43 Boardof Governors Exportdemand,15,35 Accountingpolicies,327–329 CAOs.SeeCommunityAffairsOffices Accumulatedothercomprehensiveincome,337 Capital Advisorycouncils,417–419 FederalReserveBanks,348,360 Audits,320–341 Capitaladequacystandards,62–63 Balancesheets,323 Capitalleases,329–330 Cashflows,325 CapitalOneFinancialCorporation,79–80 Commitmentsandcontingencies,340 CapitalPlanReview,70 CommunityDepositoryInstitutionsAdvisoryCouncil, Capitalplanning,50,54–55 418 Cashflows,Boardof Governors,325 Divisionof BankingSupervisionandRegulation,76 Cashitemsinprocessof collection,107 Divisions,411–415 Cash-managementservices,97 FederalAdvisoryCouncil,417–418 CBO.SeeCongressionalBudgetOffice Financialstatements,320–341 CCAR.SeeComprehensiveCapitalAnalysisandReview Forecastuncertainty,155 CDI.SeeCommunityDataInitiative FunctionsforReserveBanks,337–338 CDSs.SeeCreditdefaultswaps GovernmentPerformanceandResultsActrequirements, CDTR.SeeCentralDocumentandTextRepository 115 CensusBureau,13,35 Hearingsrulesof practice,120 CentralDataRepository,70 Leases,329–330 CentralDocumentandTextRepository(CDTR),69

Index 439 CertifiedInformationSystemAuditorcertification,70 Conditionstatements CFPB.SeeConsumerFinancialProtectionBureau FederalReserveBanks,304–308,346 CFTC.SeeCommoditiesFuturesTradingCommission Conferences,FederalReserveBanksOfficers,434–435 Chairs,Conferenceof,FederalReserveBanks,434 Congress.SeeMonetarypolicyreportstoCongress; Checkcollectionservice,92–93 specificlegislationbyname ChicagoBoardOptionsExchange,74 CongressionalBudgetOffice(CBO),34 Chief informationsecurityofficer(CISO),99 ConsolidatedReportsof ConditionandIncome,70 Chile,economyof,44 Consolidatedsupervision,53–58 China,economyof,22,35,44,198 ConsolidatedSupervisionProgram,76–77 C&Iloans.SeeCommercialandindustrialloans Consolidation,352 CISO.SeeChief informationsecurityofficer Consultativepapers,63–64 Civilmoneypenalties,327 Consumerandcommunityaffairs CivilServiceRetirementSystem(CSRS),334 Communityeconomicdevelopment,86–88 CMBSs.SeeCommercialmortgage-backedsecurities Consumercomplaintsandinquiries,83–85 Coin.SeeCurrencyandcoinoperations Consumerlawsandregulations,88–89 Collateralizeddebtobligations,357 CoordinationwithFederalbankingagencies,81–82 Collectionof ChecksandOtheritemsbyFederalReserve Emerging-issuesanalysis,85–86 BanksandFundsTransfersthroughFedwire Examinations,75–85 (RegulationJ),117 Financialservicesresearch,85–86 Collectionservices,FederalReserveBanks,96–97 Floodinsurance,81 CollectionsandCashManagementModernization IndianCountryeconomies,87 initiative,96 Lawsandregulations,88–89 Commercialandindustrial(C&I)loans,14,28,33,40,135, Policyanalysis,85–87 159,169,195,220,231,264 Supervision,75–85 Commercialautomatedclearinghouse(ACH)services,93 Consumercomplaints,83–85 Commercialbanks Consumercomplianceexaminertraining,82–83 Assetsandliabilities,302 Consumerfinancialprotection,114 Creditavailability,18 ConsumerFinancialProtectionBureau(CFPB),69,79,80, Regulationof,71–74 100,114,326,339,408 Regulatoryreports,68–69 Consumerinquiries,85 Supervisionof,51–71 ConsumerLeasing(RegulationM),118 Commercialcheckcollectionservice,92–93 Consumerloans,31 Commercialmortgage-backedsecurities(CMBSs),14,34 Consumerprices,9,28,37–38,133,158,168,194,219, Commercialpaper(CP)market,14,17,33,39,134 229–230,254,263 Commercialrealestate(CRE)loans,13,14,33–34, Consumerspending,9,10,11,30–31 134–135,231,255,265 ConsumersandMobileFinancialServices,85 Committeeof SponsoringOrganizationsof theTreadway Continuingprofessionaldevelopment,71 Commission(COSO),99 Coreloans,18,40 CommitteeonInvestmentPerformance,399 CoreLogic,12–13,32 CommoditiesFuturesTradingCommission(CFTC),57,66 Corporatebonds Commodityprices,35–36 Issuanceof,28,159 Communityaffairs.SeeConsumerandcommunityaffairs Yields,17,134,220,230–231,255,264 CommunityAffairsOfficers(CAOs),86 Corporatedebt,14,28,40–41 Communitybanksupervision,69 Corporateprofits,13–14,33–34 CommunityDataInitiative(CDI),88 COSO.SeeCommitteeof SponsoringOrganizationsof the CommunityDepositoryInstitutionsAdvisoryCouncil,418 TreadwayCommission CommunityDevelopmentfunction,87 Cost-of-livingadjustments,34 Communityeconomicdevelopment,86–88 Costrecovery,91–92,110 CommunityReinvestmentAct(CRA) Counterterrorismactivities,66–67 Mergersandacquisitionsinrelationto,79–80 CP.SeeCommercialpaper(CP)market Regulationoversightandenforcement,75 CRA.SeeCommunityReinvestmentAct CommunityReinvestment(RegulationsB),62 CRE.SeeCommercialrealestateloans Complaintreferrals,84–85 Credit Complianceriskmanagement,66–67 Availability,11–12,14,18,159,170,172–173,195,231 ComprehensiveCapitalAnalysisandReview(CCAR),28, Consumercredit,31,255,265 38,39,50,54–55,70,112 Corporate,14 Comptrollerof theCurrency,Officeof the(OCC),57,58, Primary,121–122 61,70,77–79,114 Risk,383–385

440 99thAnnualReport|2012 Seasonal,121–122 Capitaladequacystandards,62–63 Secondary,121–122 Clearingactivities,113–114 CreditbyBanksandPersonsotherthanBrokersorDealers Consumerfinancialprotection,114,326–327,339,409 forthePurposeof PurchasingorCarryingMargin Debitinterchange,114 Stock(RegulationU),60,74,303 Enhancedprudentialstandardsimplementation,51, CreditbyBrokersandDealers(RegulationT),74,303 111–112 CreditCardAccountabilityResponsibilityandDisclosure Faircreditreporting,82 Act(CreditCardAct),31 Fairlendingenforcement,80 Creditcards FederalReserveimplementation,111–114 Lendinglevels,31 Financialmarketutilitiesregulations,57,113–114 Creditdefaultswaps(CDSs),18,21,28,35,39,134,135, Financialstabilityfactors,80 220,230,380,382–384 Jointguidanceoneffectivedate,120 Creditriskmanagement,65–66 Mortgageregulations,89 CSRS.SeeCivilServiceRetirementSystem NationalInformationCentersupport,69–70 Currencyandcoinoperations,94–95,339,353 Payments,113–114 Currencyrisk,384 Recoveryandresolutionplanning,50–51 Regulatorycapitalframework,112–113 Savingsandloanholdingcompaniesauthority,52,56, D 76 Securitiesholdingcompaniesregistration,113 Daylightoverdrafts,98 Settlementactivities,113–114 DCCA.SeeDivisionof CommunityandConsumer Stresstesting,50–51,54–55,70 Affairs Trainingandtechnicalassistanceresponsibilities,61 DCO.SeeDerivativeclearingorganization DOJ.SeeJustice,U.S.Departmentof Denovodepositoryinstitutions Dollarexchangerate,21,255 Trainingandtechnicalassistance,61–62 Dollarliquidityswaps,19,357,374 DebitCardInterchangeFeesandRouting(RegulationII), DPI.SeeDisposablepersonalincome 118–119 Debitinterchange,114 Debt Government,34 E Household,11–12,30 Debtsecurities,381 ECB.SeeEuropeanCentralBank Deferredcredititems,360 ECOA.SeeEqualCreditOpportunityAct Delinquencies.SeeForeclosures Economy,U.S. Deloitte&ToucheLLP,99,320–322,341,342–343 Businesssector,13–14,32–34,133,137,157–158,167, Depositoryinstitutions 168,171–172,193–194,198,218,229,233,253,263 Deposits,19–20,359 Externalsector,35–36 Discountrates,121–122 Financialmarkets,18–22,30,38,42–44 Loansto,363–364 Forecastuncertainty,155,215,250,285 Reserverequirements,292 Governmentsector,14–15,34–35,133,157,168,172, Reservesof,294–295,298–301 194,218,229,253,263 Deposits Householdsector,11–12,30–32,44,136,157,171,197, Depositoryinstitutions,19–20,359 233,267 FederalReserveBanks,295,300–301,359 Housingsector,12–13,31–32,46,133,137,157,171, Treasury,359 193–194,197–198,218,229,253,263 Derivativeclearingorganization(DCO),113 Interestrates,12,16,28,31,32,219,292 Derivativeinstruments,382–385 Labormarket,5,8–9,28,30,36–37,44,87–88,133,136, DesignatedFinancialMarketUtilities(RegulationHH), 157,158,161,169,172,194,198,219,230,233,254, 118 264,267 Directors,FederalReserveBanks,420–431 M2monetaryaggregates,20,41–42,135,159,170,195, Disposablepersonalincome(DPI),11,30,157,161 231,265 Divisionof BankingSupervisionandRegulation,69 Nationalsaving,16,36 Divisionof CommunityandConsumerAffairs(DCCA), Outlookandprojections,27–29,44–48,132–134, 61,75,80,85–86,88 136–138,141,143–150,160–162,170–173,177–178, DoNotPayprogram,96 192–193,196–199,203–209,220–223,231–235, Dodd-FrankWallStreetReformandConsumerProtection 238–239,255–258,260,272–273,275,278 Act Policyactions,44–48,138–140,162–164,173–176, BankSecrecyActregulations,113 199–202,223–225,235–237,258–260,269–271

Index 441 Prices,9,13,28,37–38,133,158,168,194,229–230,254, ExaminerCommissioningProgram(ECP),70–71 263 Expenses.SeeIncomeandexpenses Productivityandlaborcompensation,37 Exports,15–16,35,137,161,172 Recenteconomicandfinancialdevelopments,7–22, ExtendedCollateralTermRepo,43 29–44 Externalsector,35–36 Stateandlocalgovernments,14–15,35 Tradedeficit,15–16,133,158,168,194,219,229,254, F 263 Uncertaintyandrisk,152–155,186,188–190,213–215, FairCreditReportingAct(FCRA),82 248–250,281,283–285 FairHousingAct,80,84–85 ECP.SeeExaminerCommissioningProgram Fairlendingenforcement,80–81 EdgeActcorporations,51,53,57,58,73 FairLendingEnforcementSection,80 Emergingmarketeconomies(EMEs),13,15,21,22,36, FairLendingExaminationTechniques,82–83 43–44 Fairvaluemeasurement,386–389 EMEs.SeeEmergingmarketeconomies FAM.SeeFinancialAccountingManualforFederalReserve EmployeeBenefits,Officeof,99,330 Banks Employment,8,35,36–37,44,132,137,157,167,193,218, FarmCreditAdministration(FCA),60,74 228–229,253,263.SeealsoLabormarkets; FASB.SeeFinancialAccountingStandardsBoard Unemployment FATF.SeeFinancialActionTaskForce Energyprices,10,36,37 FBIIC.SeeFinancialBankingInformationInfrastructure Enforcementactions Committee FederalReserveSystem,60,74 FCA.SeeFarmCreditAdministration EnhancedPrudentialStandards(RegulationYY),119 FCRA.SeeFairCreditReportingAct EqualCreditOpportunityAct(ECOA),80–81 FDIC.SeeFederalDepositInsuranceCorporation Equipmentandsoftware(E&S),13,32,157–158,328,329, FedComplete,98 393–395 FedTransactionAnalyzer,98 Equitymarketsandprices,34,40–41,159–160 FederalAdvisoryCouncil,417–418 Equitypriceindexes,17,18,21,39,43,134,159,219–220, Federalagencysecuritiesandobligations 254–255,264 FederalReserveBankholdings,291 E&S.SeeEquipmentandsoftware Openmarkettransactions,289 Europe.Seealsospecificcountriesbyname FederalDepositInsuranceCorporation(FDIC),18,51,58, Economyof,20,134 61,70,79,107,114,159 Fiscalcrises,27,35–36,40,42–43 FederalDepositInsuranceCorporationImprovementAct, Governmentdebtspreads,21 56 EuropeanCentralBank(ECB) FederalEmergencyManagementAgency(FEMA),81,327 Bondpurchases,231 FederalEmployees'RetirementSystem(FERS),334 Debtpurchases,20–21,27 FederalFinancialInstitutionsExaminationCouncil Eurosystem,43 (FFIEC) Monetarypolicy,220 BankSecrecyAct/Anti-MoneyLaunderingExamination Refinancingoperations,29,38,39,42,44,160 Manual,59 Swaparrangementwith,36,134 Boardresponsibilities,338–339 EuropeanFinancialStabilityFacility,135 BSA/AMLworkinggroup,66 Eurosystem,43 Commercialbankregulatoryreportregulations,68 Examinationsandinspections coordinationwithotherbankingagencies,81–82 Anti-moneylaundering,59 Supervisorytaskforcesandinteragencycommittees,70 Consumerandcommunityaffairs,75–85 TaskForceonSurveillanceSystems,61 FederalReserveBanks,53,99–100 Federalfundsrate,16,22,25–26,29,44,144,150–152,180, Fiduciaryactivities,59 187,205,212,240,247,254,264,274,282 Informationtechnologyactivities,59 Federalgovernment Reviewof operations,53 Budgetdeficit,15 Securitiescreditlenders,60 Spending,15,133,158,168,194,229,253,263 Securitiesdealersandbrokers,governmentand FederalHomeLoanMortgageAssociation municipal,59–60 Collateral,354 Specialized,59–60 FederalReserveBankservicesto,97 Trainingprogram,82–83 FederalHousingAdministration(FHA),32 Transferagents,59 FederalHousingFinanceAgency(FHFA),114

442 99thAnnualReport|2012 FederalNationalMortgageAssociation FederalReserveBanks Collateral,354 Accountingpolicies,350–363 FederalReserveBankservicesto,97 Assessments,361 FederalOpenMarketCommittee(FOMC).SeealsoOpen Assetsandliabilities,19–20,294–295,298–299 marketoperations Audits,319–341 Annualorganizationalmatters,125–127 Automatedclearinghouse(ACH)services,93 Appropriatemonetarypolicy,144,150,152,181,186, Balancesheets,19–20,41–42,132,150,157,167,193, 188,209,213,244,248,278,281 217–218,228,253,262 Authorizations,127–130 Branches,293,420–433 Consensusforecast,225–226,237 Capital,348,359 Domesticpolicydirectives,5–6 Cash-managementservices,97 Forecastuncertainty,155,190,215,250,285 Collectionservices,96–97 Foreigncurrencyoperationsanddirectives,128–138 Commercialcheckcollectionservice,92–93 Meetingminutes,123–285 Commitmentsandcontingencies,395–396 Members,416 Conditionstatements,304–308,346 Monetarypolicystrategiesandcommunications,44–48, Conferences,434–435 164–165,167,217 Creditoutstanding,294–295,298–301 Notationvotes,140,165,176,202,226,237,260,271 Currencyandcoinoperationsanddevelopments,94–95 Officers,416 Deposits,295,359 Policyactions,44–48,138–140,162–164,173–176, Directors,420–431 199–202,223–225,235–237,258–260,269–271 Economicgrowthprojections,141 Policycompliance,100 Equipmentandsoftware,393–395 Responsibilities,349–350 Examinations,53,99–100 Statementonlonger-rungoalsandstrategy,7 Fairvalue,361–362 Summaryof EconomicProjections,6,47–48,123, FedLineaccesstoservices,98 140–154,177–189,203–214,237–249,272–284 FedwireFundsService,93 SystemOpenMarketAccount,127–128,150,157,167, FedwireSecuritiesService,93–94 217–218,253 Financialstatements,105–110,342–407 FederalReserveAct,57,58,72–73,326 Fiscalagencyservices,95–97 FederalReserveBankof Atlanta,103,306–307,309–311, Float,94 424–425 Governmentdepositoryservices,95–97 FederalReserveBankof Boston,304–305,309–311, Incomeandexpenses,95,100–101,309–314,347,360, 420–421 405,407 FederalReserveBankof Chicago,104,306–307,309–311, Informationtechnology,98–99 425–426 Interestratesondepositoryinstitutionsloans,292 FederalReserveBankof Cleveland,103–104,304–305, Intradaycredit,97–98 309–311,422 Investmentsof consolidatedVIEs,102 FederalReserveBankof Dallas,306–307,309–311, Lending,101–102 429–430 Loansandothercreditextensions,294,296–297, FederalReserveBankof KansasCity,306–307,309–311, 298–299,363–368 428–429 NationalSettlementService,93 FederalReserveBankof Minneapolis,306–307,309–311, Notesoutstanding,20,358–359 427–428 Officers,316,432–433 FederalReserveBankof Nashville,103 Openmarkettransactions,289–290 FederalReserveBankof NewYork,16,41–42,102,103, Operations,volumeof,315 126–130,304–305,309–311,330–331,349–350, Operationsandservices,349–350 354–358,364–373,380,385–388,421 Paymentsservices,96 FederalReserveBankof Philadelphia,38,304–305, Postemploymentbenefits,404 309–311,421 Postretirementbenefits,402–404 FederalReserveBankof Pittsburgh,103–104 Premises,102–104,317,358,393–395 FederalReserveBankof Richmond,80,304–305,309–311, Pricedservices,91–94 423 Recoveryof directandindirectcosts,91–92 FederalReserveBankof SanAntonio,103–104 Restructuringcharges,362,405–406 FederalReserveBankof SanFrancisco,103,306–307, Retailsecuritiesprograms,96 309–311,430–431 Retirementplans,396–401 FederalReserveBankof St.Louis,306–307,309–311, Riskmanagement,94 426–427 Salariesof officersandemployees,316

Index 443 Securitiesholdings,100–101,291,298–299 FinancialActionTaskForce(FATF),66 Structure,349 FinancialBankingInformationInfrastructureCommittee Supervisoryinformationtechnology,69 (FBIIC),62 SystemOpenMarketAccountholdingsandloans, FinancialCrimesEnforcementNetwork(FinCEN),66 100–102,368–377 FinancialFraudEnforcementTaskForce(FFETF),81 Taxes,362 Financialholdingcompanies Thriftplans,401 Supervisionof,56 Treasurysecuritiesservices,95–96 FinancialIndustryRegulatoryAuthority,74 Wholesalesecuritiesprograms,96 FinancialInstitutionSymposium,66 FederalReserveConsumerHelp(FRCH),83 Financialmarketutilities(FMUs),51–52,57,113–114 FederalReserveInformationTechnology(FRIT),99 FinancialMarketUtilitiesSupervisionCommittee FederalReserveSystem.SeealsoBoardof Governors; (FMU-SC),57 FederalReserveBanks Financialmarkets,18–22,30,38,42–44,49–52,132,137, Accountingpolicies,64–65 157,158–160,167,193,217–218,228,234,253,262 Audits,55 FinancialRegulators'TrainingInitiative,61 CommunityDevelopmentfunction,87 FinancialResearch,Officeof (OFR),100,339 Developmentsin2012,49–51 Financialservicesresearch,85–86 Dodd-FrankActimplementation,111–114 FinancialStabilityBoard(FSB),64 Enforcementactions,60,74 FinancialStabilityOversightCouncil(FSOC),52,57,113, Examinationsandinspections,53 326–327 IndependentForeclosureReview(IFR),77–78 Financialstatements Internationalactivities,57–58 Boardof Governors,320–341 JointForum,64 FederalReserveBanks,105–110,342–407 Large-scaleassetpurchaseprogram,23–24 FinCEN.SeeFinancialCrimesEnforcementNetwork Maps,2–3 FirstVice-Presidents,Conferenceof,FederalReserve Organization,411–435 Banks,435 Overview,1–2 Fiscalagencyservices,95–97 Publicnoticeof decisions,73–74 Fixedinvestment,32 Regulatoryresponsibilities,71–74 Float,FederalReserveBanks,94,294,298–299 Retirementbenefits,330–334 Floodinsurance,81 Safetyandsoundnessresponsibilities,52–62 FMU-SC.SeeFinancialMarketUtilitiesSupervision Staff development,70–71 Committee Supervisionresponsibilities,51–71 FMUs.SeeFinancialmarketutilities Supervisoryinformationtechnology,69–70 FOMC.SeeFederalOpenMarketCommittee Supervisorypolicy,62–69 Foodprices,38 Surveillanceandoff-sitemonitoring,60–61 Forecastuncertainty,155,190,250,285 Trainingandtechnicalassistance,61–62 Foreclosures Website,74 IndependentForeclosureReview,77–78 FedLineAccessSolutions,98 ForeignAssetsControl,Officeof (OFAC),66 FedwireFundsService,93 ForeignBankSupervisionEnhancementAct,73 FedwireSecuritiesService,93–94 Foreignbanks.Seealsospecificbanksbyname FEMA.SeeFederalEmergencyManagementAgency Deposits,295,300–301 FERS.SeeFederalEmployees'RetirementSystem Prudentialstandards,50,51,111–112 FFETF.SeeFinancialFraudEnforcementTaskForce Supervisionof,57–58 FFIEC.SeeFederalFinancialInstitutionsExamination U.S.activities,51,58,73 Council Foreigncurrencyoperations FHA.SeeFederalHousingAdministration Authorization,128–130 FHFA.SeeFederalHousingFinanceAgency Denominatedassets,355–356,372–374 Finance Directives,130 Business,13–14,33–34 Liquidityswaps,357,374 Household,11–12,30–31 Proceduralinstructions,130–138 Housing,31–32 Foreigneconomies,133–134,158,169,195–196,230,231, FinancialAccountingFoundation,64 232,254,264,265.SeealsoAdvancedforeign FinancialAccountingManualforFederalReserveBanks economies;Emergingmarketeconomies;specific (FAM),350–351 countriesbyname FinancialAccountingStandardsBoard(FASB),64,108, Foreignequityindexes,21 328–329 Fraud Financialaccounts,U.S.,36 FinancialFraudEnforcementTaskForce(FFETF),81

444 99thAnnualReport|2012 FRBNY.SeeFederalReserveBankof NewYork I FRCH.SeeFederalReserveConsumerHelp IFR.SeeIndependentForeclosureReview FreedomonInformationAct,117 IHC.SeeIntermediateholdingcompany FRIT.SeeFederalReserveInformationTechnology IMF.SeeInternationalMonetaryFund FSB.SeeFinancialStabilityBoard Imports,15–16,35 FundingforLendingScheme,22,43 Incomeandexpenses Boardof Governors,327 G Disposablepersonalincome,11,30 FederalReserveBanks,95,100–101,309–314,347,360, GAAP.SeeGenerallyacceptedaccountingprinciples 405,407 GAO.SeeGovernmentAccountabilityOffice,U.S. Pricedservices,91–94 GDP.SeeGrossdomesticproduct IndependentForeclosureReview(IFR),77–78,85 GEIC.SeeGrowingEconomiesinIndianCountry India,economyof,22,44 Generallyacceptedaccountingprinciples,327,351 IndianCountryeconomies,87 Germany Indonesia,economyof,44 Bondyields,21,42,196,265 Inflation,7,9–11,26,28,30,37–38,44,132,138,142,145, Economyof,43,170 148–150,152,154,173,181,184–185,198,206,209, GoDirectprogram,96 232,234,238,241,244,266,273,275,278 Goldstock,294,298–299,352–353 Informationsecurity(IS),99 GOVerifyprogram,96 InformationSystemsAuditControlAssociation,70 GovernmentAccountabilityOffice,U.S.(GAO),409 Informationtechnology(IT) Governmentdepositoryservices,95–97 FederalReserveBankdevelopments,98–99 GovernmentNationalMortgageAssociation FederalReserveexaminationof activities,59 Collateral,354–355 Securitypractices,69 FederalReserveBankservicesto,97 Supervisoryactivities,69–70 GovernmentPerformanceandResultsAct(GPRA),115 INGBank,79–80 Governmentsector,14–15,34–35,133,157,168,172,194, Initialpublicofferings,34 218,229,253,263.SeealsoFederalgovernment;State Inspections.SeeExaminationsandinspections andlocalgovernments InspectorGeneral,Officeof (OIG),326,408 Governmentsecuritiesdealersandbrokers,FederalReserve Instituteof InternalAuditors,99–100 examination,59–60 Insuredcommercialbanks.SeeCommercialbanks Government-sponsoredenterprises(GSEs),32,100–101, 355–356,368–372,374–376 InteragencyMinorityDepositoryInstitutionsNational GPRA.SeeGovernmentPerformanceandResultsAct Conference,62 GPRAModernizationAct,115 InteragencyTaskForceonStrengtheningandClarifying Gramm-LeachBlileyAct,56,72 theBSA/AMLFramework,66 Greece,economyof,20,27,42–44,265 Interest Grossdomesticproduct,5,7–8,15–16,27–29,34–36, FederalReservenotes,360 135–136,141–143,145–146,152,155,160,170,182, Rates,12,16,28,31,32,219,292 207,239,242,265–266,273,276 Intermediateholdingcompany(IHC),111 GrowingEconomiesinIndianCountry(GEIC),87 InternalRevenueService(IRS),66 GSEs.SeeGovernment-sponsoredenterprises InternationalAssociationof InsuranceSupervisors,64 InternationalBankingAct,73 Internationalfinancialmarkets,20–22,42–44 H InternationalMonetaryFund(IMF),61,265,353 H.2statisticalreleases,74 InternationalOrganizationof SecuritiesCommissions,64 HARP.SeeHomeAffordableRefinanceProgram InternationalStandardsfortheProfessionalPracticeof HOLA.SeeHomeOwners'LoanAct InternalAuditing,99–100 HomeAffordableRefinanceProgram(HARP),28,30,32 Internationaltrade,15–16,133,158,168,194,219,229, HomeOwners'LoanAct(HOLA),73 254,263 Householdsector,11–12,28,30–32,44,136,157,171,197, Internationaltraining,61 233,267 Intradaycredit,97 Housingactivity,12–13,31–32,46,133,137,157,168,171, Inventoryinvestment,32–33 193–194,197–198,218,229,253,263 Investments HousingandUrbanDevelopment,U.S.Departmentof Businesssector,13,32 (HUD) Fixed,32 Consumercomplaintreferrals,84–85 Inventory,32–33 HUD.SeeHousingandUrbanDevelopment,U.S. InvoiceProcessingPlatform(IPP),96 Departmentof IPOs.SeeInitialpublicofferings

Index 445 IPP.SeeInvoiceProcessingPlatform StateNationalBankof BigSpring,287 IRS.SeeInternalRevenueService VonBrincken,287 IS.SeeInformationsecurity Wise,287 IT.SeeInformationtechnology LMIconsumers.SeeLow-andmoderate-income Italy,economyof,43,170,265 consumers Loans.Seealsospecifictypesofloans FederalReserveBankholdings,294,296–297,298–299, J 353–354,363–368 Japan Localgovernments.SeeStateandlocalgovernments Economyof,21,43,170,265 Londoninterbankofferedrates(Libor),134,159,160,196 Exportsalesto,15 Longer-termrefinancingoperations(LTRO),134 Importsfrom,35 Low-andmoderate-incomeconsumers(LMI),79–80, Joblosses.SeeUnemployment 86–88 JOBSAct.SeeJumpstartourBusinessStartupsAct LSAP.SeeLarge-scaleassetpurchaseprograms JointForum,64 LTRO.SeeLonger-termrefinancingoperations JPMorganChase&Co.,380 JumpstartourBusinessStartupsAct(JOBSAct),74 Justice,U.S.Departmentof (DOJ) M Fairlendinglawsenforcement,81 M2monetaryaggregates.SeeMonetaryaggregates MaidenLaneIILLC,41–42,102,385 L MaidenLaneIIILLC,19,41–42,99,102,386 Labormarkets,5,8–9,28,30,36–37,44,87–88,133,136, MaidenLaneLLC,19,41–42,99,102,380–385 157,158,161,169,172,194,198,219,230,233,254, Maps,FederalReserveSystem,2–3 264,267 Marginrequirements,303 Largebanksupervision,50,69,76 Mark-to-marketvariations,382 LargeInstitutionSupervisionCoordinatingCommittee Marketrisk,383 (LISCC),50,54,70 Maturityextensionprogram(MEP),17–18,19,22–23,27, Large-scaleassetpurchaseprograms,23–24,228,234 29,38–39,41,44,46,203 LegalEntityIdentifier,69 MBSs.SeeMortgage-backedsecurities LegislativeandRegulatoryConference,62 Medicaid,34 LeveragedLendingpractices,65 MedicarePrescriptionDrug,Improvementand Liabilities.SeeAssetsandliabilities ModernizationAct,403 Libor.SeeLondoninterbankofferedrates Members Liquidityswaparrangements,19,356–357,374 Boardof Governors,411 LISCC.SeeLargeInstitutionSupervisionCoordinating FederalAdvisoryCouncil,417–418 Committee FederalOpenMarketCommittee,416 LitigationinvolvingBoardof Governors Membershipof StateBankingInstitutionsintheFederal Artis,288 ReserveSystem(RegulationH),118 Barragan,288 MEP.SeeMaturityextensionprogram CitiMortgage,Inc.,288 Mergersandacquisitions,79–80 Conover,287 Mexico Crisman,287 Economyof,22,44 DeNaples,287 Exportdemand,35 Estateof Deleon,287 Importsfrom,35 Farrell,288 MHC.SeeMutualholdingcompanies FirstCitizensBanksandTrustCo.,288 MichiganSurvey.SeeThomsonReuters/Universityof FirstPryorityBank,287 MichiganSurveysof Consumers FreedomWatch,287 MiddleEast Gelb,287 FinancialRegulators'TrainingInitiative,61 Haller,288 MiddleEastPartnershipInitiative,61 Handy,288 Militaryhomeowners JudicialWatch,Inc.,287 Mortgageservicing,82 Marcusse,287 MinorityCouncilof theIndependentCommunityBankers Mashak,287 Association,61 McKinley,287,288 Minority-ownedinstitutions(MOIs) Murray,288 Trainingandtechnicalassistance,61–62 NACS,288 MitsubishiUFJFinancialGroup,Inc.,79–80 Perry,288 MMFs.SeeMoneymarketfunds

446 99thAnnualReport|2012 Mobilefinancialservices,85–86 NFIB.SeeNationalFederationof IndependentBusiness ModelValidationCouncil,419 NIC.SeeNationalInformationCenter MOIs.SeeMinority-ownedinstitutions NIPAs.SeeNationalincomeandproductaccounts Monetaryaggregates(M2),20,41–42,135,159,170,195, Non-DiscriminationWorkingGroup,81 231,265 NorthAfrica MonetaryControlAct,91 FinancialRegulators'TrainingInitiative,61 Monetarypolicy Noticeof proposedrulemaking(NPR),51,52,62–63, Alternativescenarios,167 112–113 Communications,164–165 NPR.SeeNoticeof proposedrulemaking Developmentsandoutlook,44–48 NWA.SeeNeighborWorksAmerica® Expectations,22–26,38–39 Overview,5–6,180 O Statementonlonger-rungoalsandstrategy,7,131–132 MonetarypolicyreportstoCongress OCC.SeeComptrollerof theCurrency,Officeof the February2013,5–26 OFAC.SeeForeignAssetsControl,Officeof July2012,27–48 Off-sitemonitoring,60–61 Moneylaunderingprevention.SeeAnti-moneylaundering Officers Moneymarketfunds(MMFs),18 Boardof Governors,411–415 Moody'sInvestorsService,35 Conferencesof,434–435 MorganStanleyCapitalInternationalIndex,399 FederalAdvisoryCouncil,417–418 Mortgage-backedsecurities(MBSs),6,12,16–17,19, FederalOpenMarketCommittee,416 22–25,32,40–42,44,46,100–101,132,135,167,217, FederalReserveBanks,316,432–433 235,257–259,262,268,269,289,291,355–356, OFR.SeeFinancialResearch,Officeof 370–372,374–376 OIG.SeeInspectorGeneral,Officeof Mortgageinterestrates,12,28,32,159,195,231,255,265 Oilprices.SeeEnergyprices Mortgageregulations OIS.SeeOvernightindexswaps Commercialmortgageloans,381–382 OMT.SeeOutrightMonetaryTransactions Higher-riskloanappraisalrequirements,88–89 OpenMarketDesk,16–17,41,46 IndependentForeclosureReview,77–78 Openmarketoperations.SeealsoFederalOpenMarket Militaryhomeowners,82 Committee Municipalbonds,35,159,169–170,195,220,231 Volumeof transactions,289–290 Municipalsecuritiesdealersandbrokers,FederalReserve Operatingleases,330 examination,59–60 OREO.SeeOtherrealestateowned Mutualholdingcompanies(MHC),73 Otherrealestateowned(OREO),65 OTS.SeeThriftSupervision,Officeof OutrightMonetaryTransactions(OMT),20 Overdraftservices,98 N Overnightindexswaps(OIS),16,134,158–160,169 NationalBankersAssociation(NBA),61–62 NationalCashDataWarehouse,94 P NationalCreditUnionAdministration(NCUA),60,74, 114 PacificCapitalBancorp,79–80 NationalDataInventoryProject,70 PartnershipforProgress(PFP),61–62 NationalExaminationData(NED),69 Pay.gov,97 NationalFederationof IndependentBusiness(NFIB),14, PaymentSystemRisk(PSR),97,120 33 Paymentsservices,FederalReserveBanks,96 NationalFloodInsuranceAct,81 PCEs,Personalconsumptionexpenditures Nationalincomeandproductaccounts(NIPAs),9,15,34, PCS.SeePermanentChangeof Station 37 Penalties.SeeCivilmoneypenalties NationalInformationCenter(NIC),60,69–70 PensionEnhancementPlan(PEP),332–333 Nationalsaving,16,36 PEP.SeePensionEnhancementPlan NationalSettlementService,93 PerformanceReportInformationandSurveillance NationalUrbanLeague,61 Monitoring(PRISM),60–61 NativeAmericans PermanentChangeof Station(PCS),82 GrowingEconomiesinIndianCountry,87 Personalconsumptionexpenditures(PCEs),9,10,11,28, NBA.SeeNationalBankersAssociation 30,37–38,133,141–142,148–149,157,168,184–185, NCUA.SeeNationalCreditUnionAdministration 193,203,210–211,218,229,239,245–246,253,263, NED.SeeNationalExaminationData 273,279–280 NeighborWorksAmerica®(NWA),88 Personnel,Management,Officeof,334

Index 447 PFP.SeePartnershipforProgress M,ConsumerLeasing,118 Philippines,economyof,44 OO,SecuritiesHoldingCompanies,119 Policyactions T,CreditbyBrokersandDealers,74,303 Boardof Governors,117–122 U,CreditbyBanksandPersonsotherthanBrokersor FederalOpenMarketCommittee,44–48,138–140, DealersforthePurposeof PurchasingorCarrying 162–164,173–176,199–202,223–225,235–237, MarginStock,60,74,303 258–260,269–271 X,Borrowersof SecuritiesCredit,74,303 Policystatements,Boardof Governors,120–122 Y,BankHoldingCompaniesandChangeinBank Postemploymentbenefits,336,404 Control,118 Postretirementbenefits,335–336,402–404 YY,EnhancedPrudentialStandards,119 Preferredinterests,358 Z,TruthinLending,82,118 Premises,FederalReserveBanks,102–104,317,358, Regulatoryreports,67–69 393–395 REITs.SeeRealestateinvestmenttrusts Presidents,Conferenceof,FederalReserveBanks,434 Rentalhousing,31–32 Pricedservices,91–94,105–110 REO.SeeRealestateownedproperties Prices Reportsof ConditionandIncome(CallReports),60 Consumer,9,28,37–38,133,158,168,194,219, Repurchaseagreements,17,290,291,294–295,298–299, 229–230,254,263 354–355.SeealsoReverserepurchaseagreements Energy,37–38 Resellagreements,354–355 Food,38 ReserveRequirementsof DepositoryInstitutions Housing,13 (RegulationD),117 Primarycredit,121–122 Residentialmortgage-backedsecurities(RMBS),135,357, PRISM.SeePerformanceReportInformationand 385 SurveillanceMonitoring Residentialotherrealestateowned(OREO),65 PrivateCompanyStandardsImprovementCouncil,64 Resolutionplanning,50–51 Privatesectoradjustmentfactor(PSAF),91–93,107,109, RetailE-Servicesinitiative,96 121 Retailsecuritiesprogram,96 Productivityandlaborcompensation,37 Retirementplans,396–401 Professionaldevelopment,71 Revenue.SeeIncomeandexpenses Prudentialstandards,50,51,111–112 Reverserepurchaseagreements,20,290,291,295 PSAF.SeePrivatesectoradjustmentfactor RFI/C(D)system,56 PSR.SeePaymentSystemRisk RiegleCommunityDevelopmentandRegulatory Publicnotice,FederalReservedecisions,73–74 ImprovementAct,56 Riskmanagement,94 RMBS.SeeResidentialmortgage-backedsecurities Q Roth401(k),334 QualifiedThriftLender,68 QuarterlySavingsandLoanHoldingCompanyReport,70 S R SaudiArabia RapidResponse®program,71,83 crudeoilsupply,35 Realestateinvestmenttrusts,19 Savingsandloanholdingcompanies(SLHCs) Realestateloans.SeeCommercialrealestate(CRE)loans Numberof,56 Realestateowned(REO)properties,85,87 Regulatoryreports,68 Recoveryplanning,50–51 Stresstesting,112 Regionalbanksupervision,69 Supervisionandregulationof,52,56–57,69–70,72–73, Regulations 76,112 AA,UnfairorDeceptiveActsorPractices,75 Savingsrate.SeeNationalsaving B,CommunityReinvestment,62 SBA.SeeSmallBusinessAdministration D,ReserveRequirementsof DepositoryInstitutions, SCOOS.SeeSeniorCreditOfficerOpinionSurveyon 117 DealerFinancingTerms H,Membershipof StateBankingInstitutionsinthe SDR.SeeSpecialdrawingrightscertificates FederalReserveSystem,118 Seasonalcredit,121–122 HH,DesignatedFinancialMarketUtilities,57,118 SEC.SeeSecuritiesandExchangeCommission II,DebitCardInterchangeFeesandRouting,118–119 Secondarycredit,121–122 J,Collectionof ChecksandOtheritemsbyFederal Securities.SeealsoFederalagencysecurities;Treasury ReserveBanksandFundsTransfersthroughFedwire, securities;specifictypesofsecurities 117 Domesticholdings,368–372

448 99thAnnualReport|2012 Governmentandmunicipal,examinationof dealersand Developmentsin2012,49 brokers,59–60 Financialdisclosures,74 Lending,354–355 Numberof,55 Resellandrepurchaseagreements,354–355 Regulationof,71–74 Transferagents,59 Supervisionof,55–56 SecuritiesandExchangeCommission(SEC),57,66,113 Surveillanceandoff-sitemonitoring,60–61 Securitiescredit,74 Statementof FinancialAccountingStandards(SFAS),108 Securitiescreditlenders,60 Statementsof Condition SecuritiesExchangeAct,60,74 FederalReserveBanks,304–308,346 SecuritiesHoldingCompanies(RegulationOO),119 Statementsof operations,324 Securitiesholdingcompanies(SHCs) STBL.SeeSurveyof Termsof BusinessLending Registrationof,113 StimulatingBankLendingFacility,22 Supervisionof,67 StoredValueCard(SVC)program,96 Security Stresstesting,50,54–55,67,70,112,120–121 Informationtechnology,69 STRIPS.SeeSeparateTradingof RegisteredInterestand SeniorCreditOfficerOpinionSurveyonDealerFinancing Principalof Securities Terms(SCOOS),18–19,39,134,159,195,196,230, Studentloans,31 264 Summaryof EconomicProjections,6,47–48,123, SeniorLoanOfficerOpinionSurveyonBankLending 140–154,177–189,203–214,237–249,272–284 Practices(SLOOS),12,14,30,33,40,134–135,170, SupervisionandRegulationNationalDataInventory 220,255 Project,70 SEP.SeeSummaryof EconomicProjections SupervisionandRegulationStatisticalAssessmentof Bank SeparateTradingof RegisteredInterestandPrincipalof Risk(SR-SABR),60 Securities,354,399 SupervisoryCapitalAssessmentProgram,112 SFAS.SeeStatementof FinancialAccountingStandards Supervisorypolicy SharedNationalCreditModernization(SNCMod) Accountingpolicy,64–65 initiative,69 Capitaladequacystandards,62–63 SharedNationalCredit(SNC)Program,65–66,69 Complianceriskmanagement,66–67 SHCs.SeeSecuritiesholdingcompanies Consumerandcommunityaffairs,75–85 Short-termfundingmarkets,17–18,39 Credit-riskmanagement,65–66 SLHCs.SeeSavingsandloanholdingcompanies Informationtechnology,69–70 SLOOS.SeeSeniorLoanOfficerOpinionSurveyonBank Internationalcoordination,63–64 LendingPractices Policymakinginitiatives,67 SmallBankHoldingCompanyPolicyStatement,52 Regulatorycapitalframework,112–113 SmallBusinessAdministration(SBA),62 Regulatoryreports,67–69 Staff development,70–71 Smallbusinesses Creditavailability,14 SupplementalRetirementPlanforSelectOfficersof the FederalReserveBanks,396 SNC.SeeSharedNationalCreditProgram SupplementaryFinancingAccount,295 SNCMod.SeeSharedNationalCreditModernization Surveillance,60–61 initiative Surveyof PrimaryDealers,16 SocialSecurity,34 Surveyof ProfessionalForecasters,10,38 Software.SeeEquipmentandsoftware Surveyof Termsof BusinessLending(STBL),33 SOMA.SeeSystemOpenMarketAccount SVC.SeeStoredValueCardprogram SouthKorea,economyof,44 Swaparrangements,19,36,39,129,134 S&P.SeeStandardandPoor's500 SwissNationalBank,42 Spain,economyof,20,27,42–43,170,265 SystemOpenMarketAccount(SOMA),100–102, Specialdrawingrightscertificateaccount,294,298–299 127–128,150,157,167,217–219,253,351,368–377 Specialdrawingrightscertificates(SDR),352–353 Specializedexaminations,59 SR-SABR.SeeSupervisionandRegulationStatistical Assessmentof BankRisk T Staff development,70–71 StandardandPoor's500(S&P500),13,17,33,40,195 TALF.SeeTermAsset-BackedSecuritiesLoanFacility StandingCommitteeonSupervisoryandRegulatory TARP.SeeTroubledAssetRelief Program Cooperation,64 TaskForceonSurveillanceSystems,61 Stateandlocalgovernments,14–15,35 TDF.SeeTermDepositFacility Statememberbanks Technicalassistance,61–62 Complaintsagainst,83–84 TemporaryLiquidityGuaranteeProgram,159

Index 449 TermAsset-BackedSecuritiesLoanFacility(TALF),19, SOMAholdings,100–101 42,99,101,121,353,364–367,386,407 Wholesalesecuritiesprogram,96 TermDepositFacility(TDF),20,359 Yields,16–17,38–39,134,169,194–195,254 Thailand,economyof,43–44,134 TroubledAssetRelief Program(TARP),19,34 ThomsonReuters/Universityof MichiganSurveysof TRS.SeeAmericanExpressTravelRelatedServices Consumers,10,38 Company Thriftplans,401 TruthinLendingAct(TILA),88–89,114 ThriftSupervision,Officeof (OTS),52,69,77 TruthinLending(RegulationZ),82,118 TILA.SeeTruthinLendingAct Totalreturnswap,382–383 U Tradedeficit,15–16,133,158,168,194,219,229,254,263 Tradeprices,35–36 UDAP.SeeUnfairorDeceptiveActsorPractices Trainingprograms,82–83 Unemployment,8–9,28,29,30,36–37,87–88,133, TransactionAccountGuaranteeprogram,18 142–143,145,147,167,183,198,208,239,243,273, Transferagents,59 277 TravelRelatedServicesCompany,78 UnfairorDeceptiveActsorPractices(RegulationAA),75 Treasury,U.S.Departmentof the.SeealsoTroubledAsset UnionBanCalCorporation,79–80 Relief Program UnitedKingdom Bureauof EngravingandPrinting,94–95 Bondyields,42,196 Cashholdings,295,300–301 Economyof,21,43 Cash-managementservices,97 Unregulatedpractices,consumercomplaints,84 Collectionservices,96–97 U.S.Congress.SeeMonetarypolicyreportstoCongress; CollectionsandCashManagementModernization specificlegislationbyname initiative,96 U.S.SecretService,94 Currencyincirculationandoutstanding,294–295, UtahDepartmentof FinancialInstitutions,79 298–299,300–301 Deposits,359 V InteragencyTaskForceonStrengtheningandClarifying theBSA/AMLFramework,66 Variableinterestentities(VIEs),99,102–103,352,357,359, Paymentsservices,96 377–393 Treasurysecurities Vice-Presidents,Conferenceof,FederalReserveBanks,435 Collectionservices,96–97 VIEs.SeeVariableinterestentities FederalReserveBankholdings,100–101,291,294, VolckerRule,120 298–299 FOMCpurchases,22–23 W Interestincome,355–356 Interestrates,16 Warehousingagreements,355–356 Longer-term,262 Websites Openmarkettransactions,289–290 Boardof Governors,5,66,115 Paymentservices,96 FederalReserve,74 Retailsecuritiesprogram,96 Wholesalesecuritiesprogram,96 Services,95 WorldBank,61

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APA

Federal Reserve (2011, December 31). Annual Report of the Federal Reserve Board, 2012. Annual Reports, Federal Reserve. https://whenthefedspeaks.com/doc/annual_report_2012

BibTeX

@misc{wtfs_annual_report_2012,
  author = {Federal Reserve},
  title = {Annual Report of the Federal Reserve Board, 2012},
  year = {2011},
  month = {Dec},
  howpublished = {Annual Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/annual_report_2012},
  note = {Retrieved via When the Fed Speaks corpus}
}