annual reports · December 31, 2012

Annual Report of the Federal Reserve Board, 2013

100th Annual Report 2013 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. May2014 TheSpeakerof theHouseof Representatives: Pursuanttotherequirementsof section10of theFederalReserveAct,Iampleasedtosubmitthe100thannual reportof theBoardof Governorsof theFederalReserveSystem. Thisreportcoversoperationsof theBoardduringcalendaryear2013. Sincerely, JanetL.Yellen Chair

v Contents Overview .....................................................................................................................................1 AboutThisReport .......................................................................................................................1 AbouttheFederalReserveSystem ..............................................................................................2 Monetary Policy and Economic Developments ............................................................5 MonetaryPolicyReportofFebruary2014 ....................................................................................5 MonetaryPolicyReportofJuly2013 ..........................................................................................23 Supervision and Regulation ................................................................................................39 2013Developments ..................................................................................................................39 Supervision ..............................................................................................................................43 Regulation ................................................................................................................................65 Consumer and Community Affairs .................................................................................69 SupervisionandExaminations ...................................................................................................69 ConsumerResearchandEmerging-IssuesandPolicyAnalysis ...................................................81 CommunityDevelopment ..........................................................................................................83 ConsumerLawsandRegulations ...............................................................................................85 Federal Reserve Banks ..........................................................................................................87 FederalReservePricedServices ................................................................................................87 CurrencyandCoin ....................................................................................................................90 FiscalAgencyandGovernmentDepositoryServices...................................................................91 UseofFederalReserveIntradayCredit ......................................................................................94 FedLineAccesstoReserveBankServices .................................................................................95 InformationTechnology .............................................................................................................96 ExaminationsoftheFederalReserveBanks ...............................................................................96 IncomeandExpenses ...............................................................................................................97 SOMAHoldingsandLoans .......................................................................................................97 FederalReserveBankPremises ...............................................................................................100 ProFormaFinancialStatementsforFederalReservePricedServices ......................................102 Other Federal Reserve Operations ..................................................................................109 RegulatoryDevelopments:Dodd-FrankActImplementation ......................................................109 TheBoardofGovernorsandtheGovernmentPerformanceandResultsAct ..............................116 Record of Policy Actions of the Board of Governors .............................................117 RulesandRegulations .............................................................................................................117

vi PolicyStatementsandOtherActions .......................................................................................121 DiscountRatesforDepositoryInstitutionsin2013 ....................................................................122 Minutes of Federal Open Market Committee Meetings .........................................123 MeetingHeldonJanuary29–30,2013......................................................................................124 MeetingHeldonMarch19–20,2013 ........................................................................................142 MeetingHeldonApril30–May1,2013 .....................................................................................167 MeetingHeldonJune18–19,2013 ..........................................................................................177 MeetingHeldonJuly30–31,2013 ...........................................................................................202 MeetingHeldonSeptember17–18,2013 .................................................................................213 MeetingHeldonOctober29–30,2013 .....................................................................................238 MeetingHeldonDecember17–18,2013 ..................................................................................249 Litigation .................................................................................................................................275 Statistical Tables ....................................................................................................................277 Federal Reserve System Audits ........................................................................................307 BoardofGovernorsFinancialStatements .................................................................................308 FederalReserveBanksCombinedFinancialStatements ...........................................................330 FederalReserveBanks ............................................................................................................332 OfficeofInspectorGeneralActivities ........................................................................................391 GovernmentAccountabilityOfficeReviews...............................................................................392 Federal Reserve System Budgets .....................................................................................395 SystemBudgetsOverview .......................................................................................................395 BoardofGovernorsBudgets ...................................................................................................397 FederalReserveBanksBudgets ..............................................................................................401 CurrencyBudget .....................................................................................................................406 Federal Reserve System Organization ...........................................................................411 BoardofGovernors .................................................................................................................411 FederalOpenMarketCommittee .............................................................................................416 BoardofGovernorsAdvisoryCouncils .....................................................................................417 FederalReserveBanksandBranches ......................................................................................420 Index .........................................................................................................................................437

1 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. 2,648-personstaff.Besidesconductingresearch, analysis,andpolicymakingrelatedtodomesticand internationalfinancialandeconomicmatters,the • Policyactionsandlitigation.Section7and Boardplaysamajorroleinthesupervisionandregu- section8provideaccountsof policyactionstaken lationof U.S.financialinstitutionsandactivities,has bytheBoardin2013,includingneworamended broadoversightresponsibilityforthenation’spay- rulesandregulationsandotheractionsaswellas mentssystemandtheoperationsandactivitiesof the thedeliberationsanddecisionsof theFederalOpen FederalReserveBanks,andplaysanimportantrole MarketCommittee(FOMC);section9summarizes inpromotingconsumerprotection,fairlending,and litigationinvolvingtheBoard.1 communitydevelopment. • Statisticaltables.Section10includes14statistical About This Report tablesthatprovideupdatedhistoricaldataconcerningBoardandSystemoperationsandactivities. ThisreportcoversBoardandSystemoperationsand • FederalReserveSystemaudits.Section11provides activitiesduringcalendar-year2013.Thereport detailedinformationontheseverallevelsof audit includesthefollowingsections: andreviewconductedinregardstoSystemoperationsandactivities,includingthoseprovidedby • Monetarypolicyandeconomicdevelopments. outsideauditorsandtheBoard’sOfficeof Inspec- Section2providesadaptedversionsof theBoard’s torGeneral. semiannualmonetarypolicyreportstoCongress. • FederalReserveSystembudgets.Section12presents • FederalReserveoperations.Section3providesa informationonthe2013budgetperformanceof summaryof BoardandSystemactivitiesinthe theBoardandReserveBanks,aswellastheir2014 areasof supervisionandregulation;section4,in budgets,budgetingprocesses,andtrendsintheir consumerandcommunityaffairs;andsection5,in expensesandemployment. ReserveBankoperations. • FederalReserveSystemorganization.Section13 • Dodd-FrankActimplementationandotherrequireprovideslistingsof keyofficialsattheBoardandin ments.Section6summarizestheBoard’seffortsin theFederalReserveSystem,includingtheBoardof 2013toimplementprovisionsof theDodd-Frank WallStreetReformandConsumerProtectionAct aswellastheBoard’scompliancewiththeGovern- 1 FormoreinformationontheFOMC,seetheBoard’swebsiteat mentPerformanceandResultsActof 1993. www.federalreserve.gov/monetarypolicy/fomc.htm.

2 100thAnnualReport|2013 Governors,itsofficers,FOMCmembers,several TheFederalReserveBanksaretheoperatingarmsof Systemcouncils,andFederalReserveBankand thecentralbankingsystem,carryingoutavarietyof Branchofficersanddirectors. Systemfunctions,includingoperatinganationwide paymentsystem;distributingthenation’scurrency andcoin;underauthoritydelegatedbytheBoardof Governors,supervisingandregulatingavarietyof About the Federal Reserve System financialinstitutionsandactivities;servingasfiscal agentsof theU.S.Treasury;andprovidingavariety TheFederalReserveSystem,whichservesasthe of financialservicesfortheTreasury,othergovernnation’scentralbank,wascreatedbyanactof Con- mentagencies,andotherfiscalprincipals. gressonDecember23,1913.TheSystemconsistsof aseven-memberBoardof Governorswithheadquar- ThefollowingmapsidentifyFederalReserveDistersinWashington,D.C.,andthe12ReserveBanks trictsbytheirofficialnumber,city,andletter locatedinmajorcitiesthroughouttheUnitedStates. designation. ■FederalReserveBankcity ■NBoardofGovernorsoftheFederalReserveSystem,Washington,D.C.

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

5 2 Monetary Policy and Economic Developments Asrequiredbysection2Bof theFederalReserveAct, pointssinceAugust2012,themonthbeforetheFedtheFederalReserveBoardsubmitswrittenreportsto eralOpenMarketCommittee(FOMC)beganitscur- Congressthatcontaindiscussionsof “theconductof rentassetpurchaseprogram.Nevertheless,evenwith monetarypolicyandeconomicdevelopmentsand theseimprovements,theunemploymentrateremains prospectsforthefuture.”TheMonetaryPolicy wellabovelevelsthatFOMCparticipantsjudgetobe Report,submittedsemiannuallytotheSenateCom- sustainableinthelongerrun. mitteeonBanking,Housing,andUrbanAffairsand totheHouseCommitteeonBankingandFinancial Consumerpriceinflationremainedlow.Theprice Services,isdeliveredconcurrentlywithtestimony indexforpersonalconsumptionexpendituresroseat fromtheFederalReserveBoardChair. anannualrateof only1percentinthesecondhalf of lastyear,noticeablybelowtheFOMC’slonger-run Thefollowingdiscussionisareviewof U.S.monetary objectiveof 2percent.However,someof therecent policyandeconomicdevelopmentsin2013,excerpted softnessreflectsfactorsthatseemlikelytoprovetranfromtheMonetaryPolicyReportspublishedinFeb- sitory,andsurvey-andmarket-basedmeasuresof ruary2014andJuly2013.Thosecompletereports, longer-terminflationexpectationshaveremainedin whichincludeacopyof theFederalOpenMarket therangesseenoverthepastseveralyears. Committee’sStatementonLonger-RunGoalsand MonetaryPolicyStrategy,areavailableonthe Economicgrowthpickedupinthesecondhalf of last Board’swebsiteatwww.federalreserve.gov/ year.Realgrossdomesticproductisestimatedto monetarypolicy/files/20140211_mprfullreport.pdf haveincreasedatanannualrateof 3¾percent,up (February2014)andwww.federalreserve.gov/ froma1¾percentgaininthefirsthalf.Fiscal monetarypolicy/files/20130717_mprfullreport.pdf policy—whichwasunusuallyrestrictivein2013asa (July2013). whole—likelybegantoimposesomewhatless restraintonthepaceof expansioninthelatterpart Othermaterialsinthisannualreportrelatedtothe of theyear.Moreover,financialmarketsremained conductof monetarypolicycanbefoundinsec- supportiveof economicgrowth—ashouseholdnet tion8,“Minutesof FederalOpenMarketCommittee worthrosefurther,creditbecamemorereadilyavail- Meetings,”andsection10,“StatisticalTables”(see able,andinterestratesremainedrelativelylow—and tables1–4). economicconditionsintherestof theworld improvedoveralldespiterecentturbulenceinsome emergingfinancialmarkets.Asaresult,growthin Monetary Policy Report consumerspending,businessinvestment,andexports of February 2014 allincreasedinthesecondhalf of lastyear. Summary Onthewhole,theU.S.financialsystemcontinuedto strengthen.Capitalandliquidityprofilesatlarge Thelabormarketimprovedfurtherduringthesecond bankholdingcompaniesimprovedfurther.Inaddihalf of 2013andintoearly2014astheeconomic tion,theFederalReserveandotheragenciestook recoverystrengthened:Employmenthasincreasedat furtherstepstoenhancetheresilienceof thefinancial anaveragemonthlypaceof about175,000sinceJune, system,includingstrengtheningcapitalregulations andtheunemploymentratefellfrom7.5percentin forlargefinancialinstitutionsandissuingafinalrule Juneto6.6percentinJanuary.Withthesegains,pay- implementingtheVolckerrule,whichrestrictssuch rollshaverisenacumulative3¼millionandthe firms’proprietarytradingactivities.Useof financial unemploymentratehasdeclined1½percentage leveragewasrelativelyrestrained,andvaluationsin

6 100thAnnualReport|2013 mostassetmarketswerebroadlyinlinewithhistori- aftertheassetpurchaseprogramendsandtheecocalnorms.Overall,thevulnerabilityof thesystemto nomicrecoverystrengthens.Inparticular,theComadverseshocksremainedatamoderatelevel. mitteeindicateditsintentiontomaintainthecurrent lowtargetrangeforthefederalfundsrateatleastas Withtheeconomicrecoverycontinuing,mostCom- longastheunemploymentrateremainedabove mitteemembersjudgedbythetimeof theDecem- 6½percent,inflationbetweenoneandtwoyears ber2013FOMCmeetingthattheyhadseenmean- aheadwasprojectedtobenomorethanahalf peringful,sustainableimprovementineconomicand centagepointabovetheCommittee’s2percent labormarketconditionssincethebeginningof the longer-rungoal,andlonger-terminflationexpectacurrentassetpurchaseprogram,evenwhilerecogniz- tionscontinuedtobewellanchored.AttheDecemingthattheunemploymentrateremainedelevated ber2013FOMCmeeting,withtheunemployment andthatinflationwasrunningnoticeablybelowthe ratemovingdowntowardthe6½percentthreshold, Committee’s2percentlonger-runobjective.Accord- theCommitteedecidedtoprovideadditionalinforingly,theFOMCconcludedthatahighlyaccommo- mationabouthowitexpectsitspoliciestoevolve dativepolicystanceremainedappropriate,butthatin afterthethresholdiscrossed.Specifically,theComlightof thecumulativeprogresstowardmaximum mitteeindicateditsanticipationthatitwilllikely employmentandtheimprovementintheoutlookfor maintainthecurrentfederalfundsratetargetwell labormarketconditions,theCommitteecouldbegin pastthetimethattheunemploymentratedeclines totrimthepaceof itsassetpurchases.Specifically, below6½percent,especiallyif projectedinflation theCommitteedecidedthat,beginninginJanuary,it continuestorunbelowits2percentgoal. wouldaddtoitsholdingsof longer-termsecuritiesat apaceof $75billionpermonthratherthan$85bil- Atthetimeof themostrecentFOMCmeetinginlate lionpermonthasithaddonepreviously.AtitsJanu- January,Committeeparticipantssawtheeconomic arymeeting,theCommitteecontinuedtosee outlookaslittlechangedfromthetimeof their improvementsineconomicconditionsandtheout- Decembermeeting,whenthemostrecentSummary lookandreducedthepaceof itsassetpurchasesby of EconomicProjections(SEP)wascompiled.(The anadditional$10billionpermonth,to$65billion. DecemberSEPisincludedasPart3of theFebru- TheFOMCindicatedthatif incominginformation ary2014MonetaryPolicyReportonpages37–49;itis continuestobroadlysupporttheCommittee’sexpec- alsoincludedinsection8of thisannualreport.)Partationof ongoingimprovementinlabormarketcon- ticipantsviewedlabormarketindicatorsasshowing ditionsandinflationmovingbacktowarditslonger- furtherimprovementonbalance—notwithstanding runobjective,theCommitteewilllikelyreducethe recentmixedreadings—andoveralleconomicactivity paceof assetpurchasesinfurthermeasuredstepsat asconsistentwithgrowingunderlyingstrengthinthe futuremeetings.Nonetheless,theCommitteereiter- broadereconomy.Eventakingintoaccountthe atedthatassetpurchasesarenotonapresetcourse, recentvolatilityinglobalfinancialmarkets,particiandthatitsdecisionsabouttheirpacewillremain pantsregardedtheriskstotheoutlookforthe contingentontheCommittee’soutlookforthelabor economyandthelabormarketashavingbecome marketandinflationaswellasitsassessmentof the morenearlybalancedinrecentmonths.FOMCparlikelyefficacyandcostsof suchpurchases.The ticipantsexpectedthat,withappropriatepolicy FOMCalsonotedthatitssizableandstill-increasing accommodation,economicactivitywouldexpandat holdingsof longer-termsecuritiesshouldmaintain amoderatepace,andthattheunemploymentrate downwardpressureonlonger-terminterestrates, wouldgraduallydeclinetowardlevelstheCommittee supportmortgagemarkets,andhelpmakebroader judgesconsistentwithitsdualmandate.TheComfinancialconditionsmoreaccommodative. mitteerecognizedthatinflationpersistentlybelowits 2percentobjectivecouldposeriskstoeconomicper- Atthesametime,toemphasizeitscommitmentto formance,anditismonitoringinflationdevelopprovideahighlevelof monetaryaccommodationfor mentscarefullyforevidencethatinflationwillmove aslongasneededtosupportcontinuedprogress backtowarditsobjectiveoverthemediumterm. towardmaximumemploymentandpricestability,the Committeeenhanceditsforwardguidanceregarding Part 1: Recent Economic and thefederalfundsrate.OvertheyearpriortoDecem- Financial Developments ber2013,theFOMChadreaffirmeditsviewthata highlyaccommodativestanceof monetarypolicy Thelabormarketcontinuedtoimproveoverthesecwouldremainappropriateforaconsiderabletime ondhalf of lastyear.Jobgainshaveaveragedabout

MonetaryPolicyandEconomicDevelopments 7 175,000permonthsinceJune,andtheunemploy- Figure1.Netchangeinpayrollemployment mentratefellfrom7.5percentinJune2013to 6.6percentinJanuaryof thisyear.Evenso,the 3-month moving averages Thousands of jobs unemploymentrateremainswellaboveFederalOpen MarketCommittee(FOMC)participants’estimates 400 Private of thelong-runsustainablerate.Inflationremained 200 low,asthepriceindexforpersonalconsumption + expenditures(PCE)increasedatanannualrateof _0 1percentfromJunetoDecember—noticeablybelow Total nonfarm 200 theFOMC’slonger-rungoalof 2percent.However, 400 transitoryinfluencesappeartohavebeenpartly responsibleforthelowreadingsoninflationlastyear, 600 andmeasuresof inflationexpectationsremained 800 steadyandnearlonger-runaverages.Growthineconomicactivitypickedupinthesecondhalf of 2013. 2007 2008 2009 2010 2011 2012 2013 2014 Realgrossdomesticproduct(GDP)isestimatedto Source:DepartmentofLabor,BureauofLaborStatistics. haverisenatanannualrateof 3¾percent,upfroma 1¾percentrateof increaseinthefirsthalf.Fiscal policy—whichwasunusuallyrestrictivein2013asa gram—totalpayrollemploymenthasincreaseda whole—likelystartedtoexertsomewhatlessrestraint cumulative3¼million,andtheunemploymentrate oneconomicgrowthinthesecondhalf of theyear. hasdeclined1½percentagepoints. Inaddition,householdnetworthrosefurtheraskey ...althoughlaborforceparticipationremained assetpricescontinuedtoincrease,creditbecame weak,... moreavailablewhileinterestratesremainedlow,and economicconditionsintherestof theworld Whiletheunemploymentrateandtotalpayroll improvedoverallinspiteof recentturbulencein employmenthaveimprovedfurther,thelaborforce emergingfinancialmarkets.Consumerspending, participationratehascontinuedtomoveloweron businessinvestment,andexportsallincreasedmore net.Asaresult,theemployment-to-populationratio, rapidlyinthelatterpartof lastyear.Incontrast,the ameasurethatcombinestheunemploymentrateand recoveryinthehousingsectorappearedtopausein thelaborforceparticipationrate,haschangedlittle thesecondhalf of lastyearfollowingincreasesin duringthepastyear.Althoughmuchof thedecline mortgageinterestratesinthespringandsummer. inparticipationlikelyreflectschangingdemographics—mostnotablytheincreasingshareinthepopula- DomesticDevelopments tionof olderpeople,whohavelower-than-average participationrates—andwouldhaveoccurredevenif Thelabormarketcontinuedtoimprove,... thelabormarkethadbeenstronger,someof the Thelabormarketcontinuedtoimproveoverthesec- weaknessinparticipationisalsolikelyduetoworkondhalf of 2013.Payrollemploymenthasincreased ers’perceptionsof relativelypoorjobopportunities. anaverageof about175,000permonthsinceJune, roughlysimilartotheaveragegainoverthefirsthalf ...considerableslackinlabormarkets of lastyear(figure1).Inaddition,theunemploy- remains,... mentratedeclinedfrom7.5percentinJuneto Despiteitsrecentdeclines,theunemploymentrate 6.6percentinJanuaryof thisyear(figure2).Avari- remainswellaboveFOMCparticipants’estimatesof etyof alternativemeasuresof laborforceunderuti- thelong-runsustainablerateof unemploymentand lization—whichinclude,inadditiontotheunem- wellaboveratesthatprevailedpriortotherecent ployed,thoseclassifiedasdiscouraged,otherindi- recession.Moreover,beyondlaborforceparticipavidualswhoareoutof workandclassifiedas tion,someotheraspectsof thelabormarketremain marginallyattachedtothelaborforce,andindividu- of concern.Forexample,theshareof theunemalswhohaveajobbutwouldliketoworkmore ployedwhohavebeenoutof worklongerthansix hours—havealsoimprovedinthepastseveral monthsandthepercentageof theworkforcethatis months.SinceAugust2012—themonthbeforethe workingparttimebutwouldliketoworkfulltime Committeebeganitscurrentassetpurchasepro- havedeclinedonlymodestlyovertherecovery.In

8 100thAnnualReport|2013 Figure2.Measuresoflaborunderutilization Monthly Percent U-6 16 U-4 14 12 10 U-5 8 Unemployment rate 6 4 2002 2004 2006 2008 2010 2012 2014 Note:U-4measurestotalunemployedplusdiscouragedworkers,asapercentofthelaborforceplusdiscouragedworkers.Discouragedworkersareasubsetofmarginally attachedworkerswhoarenotcurrentlylookingforworkbecausetheybelievenojobsareavailableforthem.U-5measurestotalunemployedplusallmarginallyattachedtothe laborforce,asapercentofthelaborforcepluspersonsmarginallyattachedtothelaborforce.Marginallyattachedworkersarenotinthelaborforce,wantandareavailablefor work,andhavelookedforajobinthepast12months.U-6measurestotalunemployedplusallmarginallyattachedworkersplustotalemployedparttimeforeconomicreasons,asapercentofthelaborforceplusallmarginallyattachedworkers.TheshadedbarindicatesaperiodofbusinessrecessionasdefinedbytheNationalBureauofEconomicResearch. Source:DepartmentofLabor,BureauofLaborStatistics. addition,thequitrate—anindicatorof workers’con- Productivitygrowthhasalsobeenrelativelyweak fidenceintheavailabilityof otherjobs—remainslow. overtherecovery.Fromtheendof 2009totheendof 2013,annualgrowthinoutputperhourinthenon- ...andgainsincompensationhavebeenslow farmbusinesssectoraveragedonly1¼percent,con- Therelativelyweaklabormarkethasalsobeenevi- siderablyslowerthantheaverageratebeforethe dentinthebehaviorof wages,asthemodestgainsin recentrecession.However,withtherecentstrengthlaborcompensationseenearlierintherecoverycon- eninginthepaceof economicactivity,productivity tinuedlastyear.The12-monthchangeintheemploy- growthrosetoanannualrateof nearly3½percent mentcostindexforprivateindustryworkers,which overthesecondhalf of lastyear. measuresbothwagesandthecosttoemployersof providingbenefits,hasremainedcloseto2percent Inflationwaslow... throughoutmostof therecovery.Similarly,average Inflationremainedlowinthesecondhalf of 2013, hourlyearningsforallemployees—thetimeliest withthePCEpriceindexincreasingatanannualrate measureof wagedevelopments—increasedcloseto of only1percentfromJunetoDecember,similarto 2percentoverthe12monthsendinginJanuary, theincreaseinthefirsthalf andnoticeablybelowthe aboutthesamepaceasovertheprecedingyear. FOMC’slong-runobjectiveof 2percent(figure3). Compensationperhourinthenonfarmbusinesssec- CorePCEprices—orpricesof PCEgoodsandsertor—ameasurederivedfromthelaborcompensation vicesexcludingfoodandenergy—alsoincreasedatan datainthenationalincomeandproductaccounts annualrateof about1percentoverthesecondhalf (NIPA)—canbequitevolatileevenatannualfre- of 2013.Othermeasuresof coreconsumerprice quencies,but,overthepastthreeyears,thismeasure inflation,suchasthecoreconsumerpriceindex,were hasincreasedatanannualaveragepaceof 2¼per- alsolowlastyearrelativetonormsprevailinginthe cent,wellbelowtheaveragepacepriortothe yearspriortotherecentrecession,thoughnotaslow recentrecession. ascorePCEinflation.

MonetaryPolicyandEconomicDevelopments 9 Figure3.Changeinthechain-typepriceindexforpersonal Figure4.Pricesofoilandnonfuelcommodities consumptionexpenditures January 2, 2008 = 100 Dollars per barrel Monthly Percent 140 140 5 130 120 Total 4 120 co N m o m n o fu d e it l ies 110 100 3 100 80 2 90 60 Excluding food 1 80 Oil and energy + 40 _0 70 1 2008 2009 2010 2011 2012 2013 2014 Note:ThedataareweeklyaveragesofdailydatathroughFebruary6,2014.The 2007 2008 2009 2010 2011 2012 2013 priceofoilisthespotpriceofBrentcrudeoil,andthepriceofnonfuelcommoditiesisanindexof23primary-commodityprices. Note:ThedataextendthroughDecember2013;changesarefromoneyear earlier. Source:CommodityResearchBureau. Source:DepartmentofCommerce,BureauofEconomicAnalysis. cancrudeoilproductionhashelpedbuffertheeffects of somesupplydisruptionselsewhere(figure4). Someof therecentsoftnessincorePCEpriceinfla- Meanwhile,strongharvestshaveputdownwardprestionreflectsfactorsthatappeartohavebeentransisureonfoodcommodityprices,and,asaresult,contory.Inparticular,afterincreasingatanaverage sumerfoodprices—whichreflectbothcommodity annualrateof 1¾percentfromtheendof 2009to pricesandprocessingcosts—werelittlechangedin theendof 2012,non-oilimportpricesfell1¼percent thesecondhalf of lastyear. in2013,pusheddownbytheeffectsof dollarappreciationanddecliningcommoditypricesduringthe ...butinflationexpectationschangedlittle firsthalf of lastyear.Thesefactorshaveabatedsince TheFederalReservemonitorsthepublic’sexpectalastsummer,asthebroadnominalvalueof thedollar tionsof inflation,inpartbecausetheseexpectations hasmoveduponlyalittle,onnet,andthefallin mayinfluencewage-andprice-settingbehaviorand overallnonfuelcommoditypriceshaseased.Inaddithusactualinflation.Despitetheweaknessinrecent tion,duringthefinalpartof 2013,pricesforafew inflationdata,survey-andmarket-basedmeasuresof industrialmetalsreversedpartof theirearlier longer-terminflationexpectationschangedlittle,on declines,supportedbyapositiveturnaroundin net,overthesecondhalf of lastyearandhave Chinesedemand. remainedfairlystableinrecentyears.Median expectedinflationoverthenext5to10years,as Moreover,despitetherelativelymeagergainsin reportedintheThomsonReuters/Universityof wages,recentincreasesinthecostof laborneededto MichiganSurveysof Consumers,was2.9percentin produceaunitof output(unitlaborcosts)—which January,withinthenarrowrangeof thepastdecade reflectsmovementsinbothlaborcompensationand (figure5).1IntheSurveyof ProfessionalForecasters, productivityandisausefulgaugeof theinfluenceof conductedbytheFederalReserveBankof Philadellabor-relatedproductioncostsoninflation—donot phia,themedianexpectationfortheannualrateof suggestanunusualamountof downwardpressureon increaseinthePCEpriceindexoverthenext10years inflation.Unitlaborcostsincreasedatanannualrate was2percentinthefourthquarterof 2013,similar of 1½percentoverthepasttwoyears,justalittle toitslevelinrecentyears.Meanwhile,measuresof belowtheiraveragepriortotherecentrecession. medium-andlonger-terminflationcompensation derivedfromdifferencesbetweenyieldsonnominal Consumerenergyandfoodpriceschangedrelatively andinflation-protectedTreasurysecuritieshave littleoverthesecondhalf of 2013.Thespotpriceof remainedwithintheirrespectiverangesobservedover Brentcrudeoil,afterpeakinginlateAugustatnearly thepastseveralyears. $120perbarrel,hasbeenrelativelystableinrecent months,tradingatabout$110perbarrelsincemid- 1 ThequestionintheMichigansurveyasksaboutinflationgener- September,asacontinuedincreaseinNorthAmeri- allybutdoesnotrefertoanyspecificpriceindex.

10 100thAnnualReport|2013 Figure5.Medianinflationexpectations Figure6.Changeinrealgrossdomesticproduct Percent Percent, annual rate 5 H2 4 Michigan survey expectations for next 5 to 10 years 4 H1 2 3 + _0 2 SPF expectations for next 10 years 2 1 + 4 _0 2002 2004 2006 2008 2010 2012 2014 2007 2008 2009 2010 2011 2012 2013 Note:TheMichigansurveydataaremonthly.TheSPFdataforinflationexpecta- Source:DepartmentofCommerce,BureauofEconomicAnalysis. tionsforpersonalconsumptionexpendituresarequarterlyandextendfrom 2007:Q1through2013:Q4. Source:ThomsonReuters/UniversityofMichiganSurveysofConsumers;Surveyof ProfessionalForecasters(SPF). morethanoffsettingaslowinginthepaceof residentialinvestment. Growthineconomicactivitypickedup Fiscalpolicywasanotableheadwindin2013,... RealGDPisestimatedtohaveincreasedatanannual Relativetopriorrecoveries,fiscalpolicyinrecent rateof 3¾percentoverthesecondhalf of lastyear, yearshasbeenunusuallyrestrictive,andthedragon upfromareported1¾percentpaceinthefirsthalf GDPgrowthin2013wasparticularlylarge.Theexpi- (figure6).Grossdomesticincome,orGDI,analter- rationof thetemporarypayrolltaxcutandtax nativemeasureof economicoutput,increasedalittle increasesforhigh-incomehouseholdsatthebeginmorethan3percentoverthefourquartersendingin ningof 2013restrainedconsumerspending.Morethethirdquarterof lastyear(themostrecentdata over,federalpurchaseswerepusheddownbythe available),1percentagepointfasterthantheincrease sequestration,budgetcapsondiscretionaryspending, inGDPoverthisperiod.2 andthedrawdowninforeignmilitaryoperations.As aresult,realfederalpurchases,asmeasuredinthe Someof thestrengthinGDPgrowthinthesecond NIPA,fellatanannualrateof morethan7percent half of 2013reflectedapickupinthepaceof inven- overthesecondhalf of theyear(figure7).Duetothe toryinvestment,afactorthatcannotcontinueindefi- governmentshutdowninOctober,whichtemporarily nitely.Butotherlikelymorepersistentfactorsinflu- helddownpurchasesinthefourthquarter,this encingdemandshiftedinamorefavorabledirection declinewassomewhatsteeperthaninthefirsthalf.3 aswell.Inparticular,restraintfromfiscalpolicy likelystartedtodiminishinthelatterpartof last Thefederalbudgetdeficitdeclinedasashareof year.Inaddition,furtherincreasesinthepricesof GDPforthefourthconsecutiveyearinfiscalyear corporateequitiesandhousingboostedhousehold 2013,reachingabout4percentof GDP.Although networth,whilecreditbecamemorebroadlyavail- downfromnearly10percentinfiscal2009,thefiscal abletohouseholdsandbusinessesandinterestrates 2013deficitisstill1½percentagepointshigherthan remainedlow.Moreover,theboominoilandgas its50-yearaverage.Federalreceiptsroseinfiscal2013 productioncontinued.Finally,economicconditions butstillwereonly16¾percentof GDP;federaloutintherestof theworldimprovedoverall,notwith- lays,whilefalling,remainedelevatedat20¾percent standingrecentmarketturmoilinsomeemerging of GDPinthepastfiscalyear.Withthedeficitstill marketeconomies(EMEs).Asaresult,consumer elevated,thedebt-to-GDPratioincreasedfrom spending,businessinvestment,andexportsall increasedmorerapidlyinthelatterpartof theyear, 3 Throughareductioninhoursworkedbyfederalemployees,the shutdownisestimatedtohavedirectlyreducedrealGDPgrowth 2 Conceptually,GDIandGDPshouldbeequal,butbecausethey about¼percentagepointatanannualrateinthefourthquararemeasuredwithdifferentsourcedata,theycansenddifferent ter.Thisinfluenceislikelytobereversedinthefirstquarter signalsaboutgrowthinU.S.economicoutput. of2014.

MonetaryPolicyandEconomicDevelopments 11 Figure7.Changeinrealgovernmentexpenditureson Figure8.Changeinrealpersonalconsumption consumptionandinvestment expenditures Percent, annual rate Percent, annual rate Federal State and local 12 H2 3 9 H1 2 6 3 1 H1 H2 + + _0 _0 3 1 6 2 9 2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013 Source:DepartmentofCommerce,BureauofEconomicAnalysis. Source:DepartmentofCommerce,BureauofEconomicAnalysis. ...aswellasincreasesinhouseholdnetworth 69percentattheendof fiscal2012to71percentat andlowinterestrates theendof fiscal2013. Consumerspendingwasalsolikelysupportedbya significantincreaseinhouseholdnetworthinthesec- ...butfiscaldragappearstobeeasing ondhalf of lastyear,aspricesof corporateequities Althoughtheexpirationof emergencyunemploy- andhousingcontinuedtorise.(Forfurtherinformamentcompensationatthebeginningof thisyearwill tion,seethebox“RecentChangesinHousehold imposesomefiscalrestraint,fiscalpolicyisinthe Wealth”onpages12–13of theFebruary2014Monprocessof becominglessrestrictiveforGDPgrowth. etaryPolicyReport.)Inaddition,consumercreditfor Mostimportantly,thedragongrowthinconsumer autopurchases(includingloanstoborrowerswith spendingfromthetaxincreasesatthebeginningof subprimecreditscores)andforeducationhas 2013haslikelybeguntowane.Inaddition,theBipar- remainedbroadlyavailable.Moreover,interestrates tisanBudgetActof 2013willeasethelimitson forautoloanshavestayedlow.Andspendingonconspendingassociatedwiththesequestration,andan sumerdurables—whichisquitesensitivetointerest increaseintransfersfromtheAffordableCareAct rates—roseatanannualrateof nearly7percentin shouldprovideaboosttodemandbeginningthis thesecondhalf of theyear.Nevertheless,standards year.Also,fiscalconditionsatthestateandlocallev- andtermsforcreditcarddebthaveremainedtight, elsof governmenthaveimproved,andrealpurchases and,partlyasaresult,creditcardbalanceschanged bysuchgovernmentsareestimatedtohaveedgedup relativelylittleoverthesecondhalf. in2013afterseveralyearsof declines. Businessinvestmentpickedup... Consumerspendingrosefaster,supportedby Businessfixedinvestment(BFI)roseatanannual improvementsinlabormarkets,... rateof 4¼percentinthesecondhalf of 2013after Afterincreasingatanannualrateof 2percentinthe changinglittleinthefirsthalf.Investmentinequipfirsthalf of 2013,realPCEroseata2¾percentrate mentandintangiblecapitalroseatanannualrateof overthesecondhalf (figure8).Realdisposableper- nearly4percent,whileinvestmentinnonresidential sonalincome—whichhadbeenpushedlowerbythe structuresincreasedcloseto6percent(figure9).On taxincreasesinthefirstquarterof 2013—movedup balance,nationalandregionalsurveysof purchasing inthefinalthreequartersof theyear.Continuedjob managerssuggestthatordersfornewequipmentcongainshelpedimprovetheeconomicprospectsof tinuedtoincreaseattheturnof theyear.However, manyhouseholdslastyearandboostedaggregate still-highvacancyratesandrelativelytightfinancing incomegrowth.Andthenetriseinconsumersenti- conditionslikelycontinuedtolimitbuildinginvestmentinrecentmonthssuggeststhatgreateroptimism ment;despitetherecentincreases,investmentin abouttheeconomyonthepartof householdsshould buildingsremainswellbelowthepeaksreachedprior supportconsumerspendinginearly2014. tothemostrecentrecession.

12 100thAnnualReport|2013 Figure9.Changeinrealbusinessfixedinvestment Figure10.Changeinrealimportsandexportsofgoods andservices Percent, annual rate Percent, annual rate Structures Equipment and intangible capital 30 Imports Exports 12 20 H2 9 H2 10 H1 + 6 _0 H1 3 10 + _0 20 3 30 6 2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013 Source:DepartmentofCommerce,BureauofEconomicAnalysis. Source:DepartmentofCommerce,BureauofEconomicAnalysis. Therelativelymodestrateof increaseinthedemand forbusinessoutputhaslikelyrestrainedBFIinrecent todecline.Financingconditionsforsmallbusinesses quarters.In2012andthefirsthalf of 2013,business alsoimproved:Reductionsinloanspreadshavebeen outputincreasedatanannualrateof only2½per- mostnotableforthetypesof loanslikelymadeto cent.However,theaccelerationinoveralleconomic smallbusinesses—thatis,loansof $1millionorless activityinthesecondhalf of 2013mayprovidemore orthoseoriginatedbysmalldomesticbanks.Stanimpetusforbusinessinvestmentintheperiodahead. dardsoncommercialrealestate(CRE)loans extendedbybanksalsoeasedoverthesecondhalf of ...asfinancingconditionsforbusinesseswere lastyear,movingbacktowardlonger-runnorms, generallyquitefavorable accordingtotheSLOOS.Still,standardsforcon- Moreover,thefinancialconditionof nonfinancial structionandlanddevelopmentloans,asubsetof firmsremainedstronginthesecondhalf of 2013, CREloans,likelyremainedrelativelytight. withprofitabilityhighandthedefaultrateonnonfi- Exportsstrengthened nancialcorporatebondsclosetozero.Interestrates oncorporatebonds,whileupsincethespring,have Exportdemandalsoprovidedsignificantsupportto stayedlowrelativetohistoricalnorms.Andnetissu- domesticeconomicactivityinthesecondhalf of anceof nonfinancialcorporatedebtappearstohave 2013(figure10).Realexportsof goodsandservices remainedstronginthesecondhalf of theyear.In roseatanannualrateof 7½percent,consistentwith addition,inrecentquartersanincreasingportionof improvingforeignGDPgrowthinthelatterpartof theaggregateproceedsfromtheissuanceof theyearandbuoyedbysoaringsalesbothof petrospeculative-gradedebtwasreportedlyintendedfor leumproducts—associatedwiththeboominU.S.oil usesbeyondtherefinancingof existingdebt. production—andof agriculturalgoods.Acrossthe majordestinations,therobustincreaseinexportswas supportedbyhighershipmentstoCanada,China, Conditionsinbusinessloanmarketsalsocontinued andotherAsianemergingeconomies. toimprove.AccordingtotheFederalReserve Board’sJanuary2014SeniorLoanOfficerOpinion Thegrowthof realimportsof goodsandservices SurveyonBankLendingPractices(SLOOS),amodsteppeddowntoanannualrateof 1½percentinthe estnetfractionof respondentsindicatedtheyhad secondhalf of lastyear.Amongthemajorcategories, easedstandardsoncommercialandindustrial(C&I) loansoverthesecondhalf of 2013.4Inaddition, importsof non-oilgoodsandservicesrosemore moderately,whileoilimportscontinuedtodecline. accordingtotheFederalReserveBoard’sNovember2013Surveyof Termsof BusinessLending,loan Altogether,realnettradeaddedanestimated¾perratespreadsoverbanks’costof fundshavecontinued centagepointtoGDPgrowthoverthesecondhalf of 2013,whereasinthefirsthalf itmadeasmallnega- 4 TheSLOOSisavailableontheBoard’swebsiteatwww .federalreserve.gov/boarddocs/snloansurvey. tivecontribution.Owinginparttotheimprovement

MonetaryPolicyandEconomicDevelopments 13 Figure11.Privatehousingstartsandpermits Figure12.Pricesofexistingsingle-familyhouses Monthly Millions of units, annual rate Monthly Peak = 100 2.2 100 Single-family starts FHFA index 1.8 90 1.4 80 CoreLogic price index Single-family permits 1.0 70 S&P/Case-Shiller Multifamily starts .6 20-city index 60 .2 50 2001 2003 2005 2007 2009 2011 2013 2004 2007 2010 2013 Note:ThedataextendthroughDecember2013. Source:DepartmentofCommerce,BureauofEconomicAnalysis. Note:ThedatafortheFHFAindexandtheS&P/Case-Shillerindexextendthrough November2013,andthedatafortheCoreLogicindexextendthroughDecember2013.Eachindexhasbeennormalizedsothatitspeakis100.BoththeCoreinnetpetroleumtrade,thenominaltradedeficit LogicpriceindexandtheFHFAindexincludepurchasetransactionsonly.TheS&P/ Case-Shillerindexreflectsallarm’s-lengthsalestransactionsinselectedmetroshrank,onbalance,overthesecondhalf of 2013. politanareas. Thatdecreasecontributedtothenarrowingof the Source:FederalHousingFinanceAgency(FHFA);Case-ShillerdataviaS&PCapital currentaccountdeficitto2¼percentof GDPinthe IQSolutions’CapitalIQPlatform;staffcalculationsbasedondataprovidedby CoreLogic. thirdquarter,alevelgenerallynotseensincethe late1990s. growthinhousingdemand,and,becausenewhome Thecurrentaccountdeficitcontinuedtobefinanced constructionisstillwellbelowlevelsconsistentwith bystrongfinancialinflowsinthethirdquarterof populationgrowth,thepotentialforfurthergrowth 2013,mostlyintheformof purchasesof Treasury inthehousingsectorisconsiderable. andcorporatesecuritiesbybothforeignofficialand ...andmortgagecreditcontinuedtobetight,... foreignprivateinvestors.Partialmonthlydatasuggestthatthesetrendslikelycontinuedinthefourth Lendingpoliciesforhomepurchaseremainedquite quarter.U.S.investorscontinuedtofinancedirect tightoverall,buttherearesomeindicationsthat investmentprojectsabroadatarapidpaceinthe mortgagecreditisstartingtobecomemorewidely thirdquarter.AlthoughU.S.purchasesof foreign available.Amodestnetfractionof SLOOSresponsecuritiesedgeddowninthesummer,consistentwith dentsreportedhavingeasedstandardsonprimeresistressesobservedinemergingmarkets,theyappearto dentialloansduringthesecondhalf of lastyear. havereboundedinthefinalpartof theyear. And,inasignthatlendingconditionsforhomerefinancearebecominglessrestrictive,thecreditscores Therecoveryinhousinginvestmentpausedwith of individualsrefinancingmortgagesattheendof thebackupininterestrates... lastyearwerelower,onaverage,thanscoresforindi- Afterincreasingatclosetoa15percentannualrate vidualsrefinancingearlierintheyear.However, in2012andthefirstpartof 2013,residentialinvest- creditscoresof individualsreceivingmortgagesfor mentwaslittlechangedinthesecondhalf of last homepurchaseshaveyettodrop. year.Mortgageinterestratesincreasedabout1percentagepoint,toaround4¼percent,overMayand ...buthousepricescontinuedtorise Juneof lastyearandhaveremainednearthislevel Homepricescontinuedtoriseinthesecondhalf of sincethen.Soonaftertheincrease,mortgagerefi- theyear,althoughsomewhatlessquicklythaninthe nancingdroppedsharply,whilehomesalesdeclined firsthalf (figure12).Overthe12monthsendingin somewhatandtheissuanceof newsingle-family December,homepricesincreased11percent.Much housingpermitsleveledoff (figure11).However, of therecentgaininhomepriceshasbeenconcenrelativetohistoricalnorms,mortgageratesremain tratedinareasthatsawthelargestdeclinesinprices low,andhousingisstillquiteaffordable.Moreover, duringtherecessionandearlyrecovery,aspricesin steadygrowthinjobsislikelycontinuingtosupport theseareaslikelydroppedbelowlevelsconsistent

14 100thAnnualReport|2013 withtherentsthesehomescouldbring,spurringpur- Figure13.YieldsonnominalTreasurysecurities chasesbylargeandsmallinvestorswhohaveconvertedsomehomesintorentalproperties. Daily Percent FinancialDevelopments 7 6 Theexpectedpathforthefederalfundsrate 10-year 30-year 5 throughmid-2017movedlower... Market-basedmeasuresof theexpected(ormean) 4 futurepathof thefederalfundsratethroughmid- 5-year 3 2017movedlower,onbalance,overthesecondhalf of 2013andearly2014,mostlyreflectingFOMC 2 communicationsthatwerebroadlyseenasindicating 1 thatahighlyaccommodativestanceof monetary policywouldbemaintainedforlongerthanhadbeen 2000 2002 2004 2006 2008 2010 2012 2014 expected.Measuresof theexpectedpolicypathrose Note:TheTreasuryceasedpublicationofthe30-yearconstantmaturityserieson inthesummerinconjunctionwithlonger-terminter- February18,2002,andresumedthatseriesonFebruary9,2006. estrates,asinvestorsincreasinglyexpectedtheCom- Source:DepartmentoftheTreasury. mitteetostartreducingthepaceof assetpurchasesat theSeptemberFOMCmeeting.However,those increasesweremorethanretracedovertheweekssur- movedoutabouttwoquarterssincethemiddleof roundingtheSeptembermeeting,inpartbecausethe lastyear,tothefourthquarterof 2015.5 decisiontokeepthepaceof assetpurchases ...whileyieldsonlonger-termsecurities unchangedandtheaccompanyingcommunications increasedbutremainedlowbyhistorical bytheFederalReservewereviewedasmoreaccomstandards modativethaninvestorshadanticipated.Expectationsforthepathof thefederalfundsratethrough Despitethelowerexpectedpathof thefederalfunds mid-2016havechangedlittle,onnet,sincemid- rate,yieldsonlonger-termTreasurysecuritiesand October.FederalReservecommunicationssincelast agencymortgage-backedsecurities(MBS)rosemod- September,includingtheenhancedforwardguidance eratelyoverthesecondhalf of 2013(figure13). includedintheDecemberandJanuaryFOMCstate- Theseincreaseslikelyreflectedeconomicdatathat ments,reportedlyhelpedkeepfederalfundsrate weregenerallybetterthaninvestorsexpected,aswell expectationsneartheirearlierlevelsdespitegenerally asmarketadjustmentstorisingexpectationsthatthe stronger-than-expectedeconomicdataandthemod- Committeewouldstartreducingthepaceof itsasset estreductionsinthepaceof FederalReserveasset purchases,astepthatwastakenattheDecember purchasesannouncedattheDecemberandJanuary FOMCmeeting.Subsequently,yieldsdeclinedamid FOMCmeetings. flight-to-safetyflowsinresponsetorecentemerging marketturbulence(seethebox“FinancialStressand Themodalpathof thefederalfundsrate—thatis,the VulnerabilitiesintheEmergingMarketEconomies” valuesforfuturefederalfundsratesthatmarketpar- onpages28–29of theFebruary2014Monetary ticipantsseeasmostlikely—derivedfrominterest PolicyReport).Onnet,yieldson5-,10-,and30-year rateoptionsalsoshifteddownforhorizonsthrough nominalTreasurysecuritieshaveincreasedbetween 2017,suggestingthatinvestorsmaynowexpectthe about10and20basispointsfromtheirlevelsatthe targetfederalfundsratetoliftoff fromitscurrent endof June2013.Yieldson30-yearagencyMBS rangesubstantiallylaterthantheyhadexpectedat edgedup,onbalance,overthesameperiod. theendof June2013.Similarly,themostrecentSurveyof PrimaryDealersconductedbytheOpenMarketDeskattheFederalReserveBankof NewYork 5 TheresultsoftheSurveyofPrimaryDealersareavailableon justpriortotheJanuaryFOMCmeetingshowedthat theFederalReserveBankofNewYork’swebsiteatwww dealers’expectationsof thedateof liftoff have .newyorkfed.org/markets/primarydealer_survey_questions.html.

MonetaryPolicyandEconomicDevelopments 15 Nonetheless,yieldsonlonger-termsecuritiescon- effectseasedquicklyafteranagreementtoraisethe tinuetobelowbyhistoricalstandards.Thoselow debtlimitwasreachedinmid-October,and,overall, levelsreflectseveralfactors,includingsubduedinfla- thedebtceilingstandoff leftnopermanentimprint tionexpectationsaswellasmarketperceptionsof a onshort-termfundingmarkets. still-modestglobaleconomicoutlook.Inaddition, termpremiums—theextrareturninvestorsexpectto Onbalance,sincetheendof June2013,conditionsin obtainfromholdinglonger-termsecuritiesas bothsecuredandunsecuredshort-termfundingmaropposedtoholdingandrollingoverasequenceof ketshavechangedlittle,withmanymoneymarket short-termsecuritiesforthesameperiod—while ratesremainingnearthebottomof therangesthey abovethehistoricallylowlevelsobservedpriortothe haveoccupiedsincethefederalfundsratefirst bondmarketselloff inthesummer,remainedwithin reacheditszerolowerbound.Unsecuredoffshore thelowrangetheyhaveoccupiedsincetheonsetof dollarfundingmarketsgenerallydidnotexhibitany thefinancialcrisis,reflectingboththeFOMC’slarge- signsof stress.Ratesonasset-backedcommercial scaleassetpurchasesandstrongdemandforlonger- paperandunsecuredfinancialcommercialpaperfor termsecuritiesfromglobalinvestors. themostpartalsostayedlow.Intherepomarket, ratesforgeneralcollateralTreasuryreposalsowere Indicatorsof Treasurymarketfunctioningwere low,consistentwithreducedfinancingactivitiesof solid,onbalance,overthesecondhalf of 2013and dealers.Theseratesdeclinednoticeablyatyear-end, earlyin2014.Forexample,availabledatasuggest leadingtoincreasedparticipationintheFederal thatbid–askedspreadsintheTreasurymarketstayed Reserve’sovernightreverserepurchaseagreement inlinewithrecentaverages.Moreover,Treasuryauc- operations(seePart2of thisreport).Overall,yeartionsgenerallycontinuedtobewellreceivedbyinves- endpressuresinshort-termfundingmarketswere tors.LiquidityconditionsintheagencyMBSmarket modestandroughlyinlinewithexperiencesduring deterioratedsomewhatforatimeoverthesummer, otheryearssincethefinancialcrisis. amidheightenedvolatility,andabitagaintoward year-endbuthavelargelyreturnedtonormallevels Broadequitypriceindexesincreasedfurther andriskspreadsoncorporatedebtdeclined... sincetheturnof theyear.Overthepastseven months,thenumberof tradesintheMBSmarket Boostedbyimprovedmarketsentimentregardingthe thatfailedtosettleremainedlow,andimpliedfinanc- economicoutlookandtheFOMC’ssustainedhighly ingratesinthe“dollarroll”market—anindicatorof accommodativemonetarypolicy,broadmeasuresof thescarcityof agencyMBSforsettlement—have equitypricescontinuedpostingsubstantialgains beenstable.6 throughtheendof 2013.Aroundtheturnof the year,however,investorsentimentdeterioratedamid Short-termfundingmarketscontinuedto resurfacingconcernsaboutemergingfinancialmarfunctionwell,onbalance,despitesomestrains kets,andequitypricesretracedsomeof theirearlier duringthedebtceilingstandoff increases.Asof earlyFebruary,broadmeasuresof Inthefallof 2013,manyshort-termfundingmarkets equitypricesweremorethan10percenthigher,on wereadverselyaffectedforatimebyconcernsabout net,thantheirlevelsinthemiddleof 2013(figthepossibilityof adelayinraisingthefederaldebt ure14).Consistentwiththedevelopmentsinequity limit.TheTreasurybillmarketexperiencedthelarg- markets,thespreadsof yieldsoncorporatebondsto esteffectasyieldsonbillsmaturingbetweenmid- yieldsonTreasurysecuritiesof comparablematuri- OctoberandearlyNovemberrosesharply,somebill tieshavenarrowed,onnet,sincethemiddleof 2013. auctionssawreduceddemand,andliquidityinthis Spreadsonsyndicatedloanshavealsonarrowed marketdeteriorated,especiallyforcertainsecurities some,andissuanceof leveragedloans,boostedby thatwereseenasbeingatriskof delayedpayment. strongdemandfromcollateralizedloanobligations, Conditionsinothershort-termfundingmarkets, wasgenerallystronginthesecondhalf of 2013. suchasthemarketforrepurchaseagreements (repos),werealsostrainedforatime.However,these Whilesomebroadequitypriceindexestouchedalltimehighsinnominaltermssincethemiddleof 2013 andvaluationmetricsinsomesectorsappear 6 Adollarrolltransactionconsistsofapurchaseorsaleofagency MBSwithasimultaneousagreementtosellorpurchasesub- stretched,valuationmeasuresfortheoverallmarket stantiallysimilarsecuritiesonaspecifiedfuturedate.TheCom- arenowgenerallyatlevelsnotfarabovetheirhistorimitteedirectstheDesktoengageinthesetransactionsasnecescalaveragelevels,suggestingthat,inaggregate,invessarytofacilitatesettlementoftheFederalReserve’sagency MBSpurchases. torsarenotexcessivelyoptimisticintheirattitudes

16 100thAnnualReport|2013 Figure14.Equityprices Figure15.Delinquencyandcharge-offratesfor commercialbanks Daily December 31, 2007 = 100 Quarterly Percent 140 8 D ba o n w k J in o d n e e x s 120 7 100 6 5 80 4 60 Delinquencies, all loans 3 S&P 500 index 40 2 Net charge-offs, all loans 20 1 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1992 1995 1998 2001 2004 2007 2010 2013 Source:DowJonesbankindexandStandard&Poor’s500indexviaBloomberg. Note:Thedataextendthrough2013:Q3.Thedelinquencyratesarethepercentof loans30daysormorepastdueornotaccruinginterest.Thenetcharge-offrates arethepercentofloanschargedoffnetofrecoveries.Theshadedbarsindicatea towardequities.ImpliedvolatilityfortheS&P500 periodofbusinessrecessionasdefinedbytheNationalBureauofEconomic index,ascalculatedfromoptionprices,generally Research. Source:FederalFinancialInstitutionsExaminationCouncil,FFIEC031/041,“Conremainedlowovertheperiod;ithasrisensinceearly solidationReportsofConditionandIncomeforCommericalBanks”(CallReports). Januarybutremainsbelowtherecenthighreached duringthedebtceilingstandoff inthefall. ...andmarketsentimenttowardfinancial mortgageoriginationsandrevenuefromfixedinstitutionscontinuedtostrengthenastheir incometrading,aswellasasharpincreaseinlitigacapitalandliquidityprofilesimproved tionexpenses,wereoffsetprimarilybydecreasesin provisionsforloanlossesandinemployeecompensa- Marketsentimenttowardthefinancialsectorcontintion.AssetqualitycontinuedtoimproveforBHCs, uedtostrengtheninthesecondhalf of 2013,reportwithdelinquencyratesdecliningacrossarangeof edlydriveninlargepartbyimprovementsinbanks’ assetclassesandtheindustry’snetcharge-off rate capitalandliquidityprofiles,aswellasfurther nowclosetopre-crisislevels(figure15).Netinterest improvementsinassetquality.Onaverage,equity marginsremainedaboutunchangedoverthesame pricesof largedomesticbanksandinsurancecompaperiod.(Forfurtherdiscussionof thefinancialcondiniesperformedroughlyinlinewithbroaderequity tionof BHCs,seethebox“DevelopmentsRelatedto indexes.Thespreadsonthecreditdefaultswap FinancialStability”onpages24–25of theFebru- (CDS)contractswrittenonthedebtof thesefirms ary2014MonetaryPolicyReport.)Meanwhile,aggregenerallynarrowed.Amongnonbankfinancialinstigatecreditprovidedbycommercialbanksinchedup tutions,manyhedgefundssignificantlyunderperinthesecondhalf of 2013followingtherisein formedbenchmarkindexesinthesecondhalf of longer-terminterestrates.Stronggrowthinloancat- 2013and,accordingtoresponsestotheFederal egoriesthataremorelikelytohavefloatinginterest ReserveBoard’sDecemberSeniorCreditOfficer ratesorshortermaturities—includingC&I,CRE, OpinionSurveyonDealerFinancingTerms,have reducedtheiruseof leverageonnet.7Theindustryas andautoloans—waspartlyoffsetbyrunoffsinassets thathavelongerdurationandsoaremoresensitive awholecontinuedtoseestronginflows,however, toincreasesininterestrates—includingresidential bringingitsassetsundermanagementtoanall-time mortgagesandsomesecurities. highbytheendof 2013. Financialconditionsinthemunicipalbond Standardmeasuresof profitabilityof bankholding marketgenerallyremainedstable companies(BHCs)werelittlechangedinthethird Yieldson20-yeargeneralobligationmunicipalbonds quarterof 2013,aslargereductionsinincomefrom rosesinceJune2013.However,thespreadsof municipalbondyieldsoverthoseof comparable- 7 TheSeniorCreditOfficerOpinionSurveyonDealerFinancing maturityTreasurysecuritiesgenerallyfelloverthe TermsisavailableontheBoard’swebsiteatwww.federalreserve .gov/econresdata/releases/scoos.htm. sameperiod,andCDSspreadsondebtobligationsof

MonetaryPolicyandEconomicDevelopments 17 individualstatesweregenerallylittlechangedand Figure16.U.S.dollarexchangerateagainstbroadindex remainedatmoderatelevels. andselectedmajorcurrencies Nevertheless,significantfinancialstrainshavebeen Daily January 4, 2012 = 100 evidentforsomeissuers.Forexample,theCityof 140 DetroitfiledforbankruptcyinJuly2013,makingit 135 thelargestmunicipalbankruptcyfilinginU.S.his- 130 tory.Inaddition,thepricesof bondsissuedby Yen 125 PuertoRicocontinuedtoreflectthesubstantial 120 financialpressuresfacingtheterritoryandthe 115 spreadsforfive-yearCDScontractswrittenonthe 110 debtissuedbytheterritorysoared.InearlyFebruary, Broad 105 someof theterritory’sbondsweredowngradedto 100 belowtheinvestmentgrade. 95 Euro 90 M2rosebriskly 2012 2013 2014 M2hasincreasedatanannualrateof about7½per- Note:Thedataareinforeigncurrencyunitsperdollar. centsinceJune,fasterthanthepaceregisteredinthe Source:FederalReserveBoard,StatisticalReleaseH.10,“ForeignExchange Rates.” firsthalf of 2013.FlowsintoM2pickedupamidthe selloff infixed-incomemarketsinthesummer,which promptedlargeoutflowsfrombondfunds,aswellas theuncertaintyaboutthepassageof debtlimitlegis- cutitsmainrefinancingrateafurther25basispoints lationinthefall,whichappearedtohaveledsome inNovember.Incontrast,Japanesegovernmentbond institutionalinvestorstoshiftfrommoneyfund yieldsweredownmodestly,onnet,sincemid-July,in sharestobankdeposits.Followingtheresolutionof partasmarketparticipantsanticipatedthattheBank thefiscalstandoff,M2growthslowedsignificantlyas of Japan(BOJ)wouldexpandthesizeof itsasset investorsreallocatedoutof cashpositions. purchaseprogram.Overthepasttwoweeks,however, AFEsovereignyieldsingeneraldeclinedsomewhat, InternationalDevelopments asmarketparticipantspulledbackfromriskyassets. Bondyieldsrosesharplyinsomeemerging Thedollarhasappreciatedalittleonnet marketeconomies,butwereflattodownin Thebroadnominalvalueof thedollarisupalittle, mostadvancedforeigneconomies onnet,sincelastsummer(figure16).Thedollar Foreignlong-termbondyieldsrosesignificantlyfrom depreciatedagainstboththeeuroandtheBritish Mayof lastyearthroughmostof thesummer,as poundinthesecondhalf of theyear,asmacroecoexpectationsof animminentreductioninthepaceof nomicconditionsimprovedinEuropeandasfinanlarge-scaleassetpurchasesbytheFederalReserve cialstressesandtheassociatedflighttosafetycontinintensified.InmanyEMEs,yieldsstabilizedafterthe uedtoabate.However,thedollarhasappreciated SeptemberFOMCmeeting.However,inahandfulof sharplyagainsttheJapaneseyensinceOctober,in vulnerableEMEs,sovereignyieldscontinuedto partreflectinganticipationsof anexpansioninthe exhibitoutsizedincreases—particularlyinBraziland BOJ’sassetpurchaseprogram,althoughitretraced Turkey—and,morerecently,EMEyieldsgenerally somewhatinrecentweeksamidtherecentturbulence movedupasseveralEMEsexperiencedheightened inemergingfinancialmarkets.TheU.S.dollaralso financialstresses(seethebox“FinancialStressand appreciatedagainstthecurrenciesof somevulnerable VulnerabilitiesintheEmergingMarketEconomies” EMEsamidhigherlong-termyieldsintheUnited onpages28–29of theFebruary2014Monetary States,and,morerecently,asmarketparticipants PolicyReport).Ratesintheadvancedforeignecono- expressedconcernsaboutdevelopmentsinseveral mies(AFEs)roseslightlyonbalanceduringthesec- economies(figure17).EME-dedicatedbondand ondhalf of 2013,withimprovedeconomiccondi- equityfundsexperiencedoutflowsoverthesecond tionsgenerallysupportingyields.Inparticular,bond half of lastyearandinto2014,suggestingareduced yieldsincreasedintheUnitedKingdomasunem- willingnessbyinvestorstomaintainexposuresto ploymentfellmorequicklythananticipated.Inthe EMEs.Inanattempttocurbthedepreciationof euroarea,yieldswerelittlechanged,asbelow-target theircurrencies,centralbanksinsomeEMEs,suchas inflationledtheEuropeanCentralBank(ECB)to BrazilandTurkey,intervenedincurrencymarkets.

18 100thAnnualReport|2013 Amidstrongergrowthandrisingimportprices,Japa- Figure17.Exchangeratesofselectedemergingmarket neseinflationmovedabove1percentforthefirst currenciesagainsttheU.S.dollar timesince2008.Incontrast,12-monthratesof infla- Daily January 2, 2013 = 100 tionfellbelow1percentinsomeotherAFEs,with muchof thisdeclinereflectingfallingretailenergy 110 andfoodpricesaswellascontinuedeconomicslack. Mexico Taiwan 105 Withinflationlowandeconomicactivitystillslug- 100 gish,monetarypolicyintheAFEsremainsvery 95 accommodative.InadditiontotheECB’scutof its Korea Brazil mainrefinancingrateinNovember,theBankof 90 EnglandissuedforwardguidanceinAugustthatit 85 intendstomaintainahighlystimulativepolicystance India Turkey 80 untileconomicslackhasbeensubstantiallyreduced, 75 whiletheBOJcontinueditsaggressiveprogramof assetpurchases. J F M A M J J A S O N D J F 2013 2014 Note:Upwardmovementindicatesappreciationofthelocalcurrencyagainstthe ...whilegrowthintheemergingmarket U.S.dollar. economiesmovedbackupfromitssoftness Source:Bloomberg. earlierlastyear Afterslowingearlierlastyear,economicgrowthin Duringthesecondhalf of 2013,equityindexesinthe theEMEsmovedbackupinthethirdquarter, AFEsaddedconsiderablytoearliergains,likely reflectingareboundof Mexicanactivityfromits reflectingtheimprovedeconomicoutlook.Overthe second-quartercontractionandapickupinemerging yearasawhole,equitymarketsinJapanoutper- Asia.RecentdatasuggestthatactivityinEMEsconformedotherforeignindexes,increasingmorethan tinuedtostrengtheninthefourthquarter. 50percent.Sincetheendof lastyear,however,AFE equityindexeshavereversedpartof theirearlier InChina,economicgrowthpickedupinthesecond gains,withthedecreasecoincidingwithheightened half of 2013,supportedinpartbyrelativelyaccomfinancialvolatilityintheEMEs.Equitymarketsin modativepoliciesandrapidcreditgrowthearlierin theEMEs,afterunderperformingthoseintheAFEs theyear.Sincethemiddleof lastyear,thepaceof duringthesecondhalf of lastyear,havealsofallen creditcreationhasslowed,interbankinterestrates morerecently. havetrendedup,andtheinterbankmarkethasexperiencedboutsof volatilityduringwhichinterestrates Activityintheadvancedforeigneconomies spiked.Inmid-November,Chineseleadersunveiled continuedtorecover... anambitiousreformagendathataimstoenhancethe IndicatorssuggestthateconomicgrowthintheAFEs roleof marketsintheeconomy,addressworrisome edgedhigherinthesecondhalf of 2013,supported imbalances,andimprovetheprospectsforsustainbydiminishedfiscaldragandfurthereasingof Euro- ableeconomicgrowth. peanfinancialstresses.Theeuroareacontinuedto pullslowlyoutof recessioninthethirdquarter,with Thestep-upinChinesegrowth,alongwithfirmer someof themostvulnerableeconomiesreturningto activityintheadvancedeconomies,generallyhelped positivegrowth,butunemploymentremainedat supporteconomicactivityinotherpartsof Asia.In recordlevels.RealGDPgrowthintheUnitedKing- Mexico,growthappearstohavereboundedinthe dompickeduptoarobust3percentpaceinthesec- secondhalf of theyear,supportedbyhighergovernondhalf of lastyear,driveninpartbyimproving mentspendingandapickupinU.S.manufacturing householdandbusinesssentiment,andCanadian activity.Inrecentmonths,Mexicocontinuedtomake growthreboundedinthethirdquarterafterbeing progressonthegovernment’sreformagenda,withits restrainedbyfloodsthatimpededeconomicactivity Congressapprovingfiscal,energy,andfinancialsecinthesecondquarter.JapaneseGDPgrowthstepped torreforms.Bycontrast,insomeEMEs,suchasBradowninthethirdquarterfromtherapid4percent zil,India,andIndonesia,shiftsinmarketexpectapaceregisteredinthefirsthalf,asexportsdippedand tionsaboutthepathof U.S.monetarypolicyappear householdspendingmoderated,butdataonmanu- tohaveresultedintightenedfinancialconditions, facturingandexportssuggestthatgrowthrebounded whichweighedongrowthoverthesecondhalf of towardyear-end. lastyear.

MonetaryPolicyandEconomicDevelopments 19 InflationremainedsubduedinmostEMEs,andtheir inflationremainingnoticeablybelowtheCommitcentralbanksgenerallykeptpolicyratesonholdor, tee’s2percentlonger-runobjective,theFOMCleftin asinChile,Mexico,andThailand,cutthemtofur- placethekeyparametersof itsmonetarypolicy thersupportgrowth.Incontrast,inflationremained stancewhileawaitingfurtherevidencethatprogress elevatedinafewEMEs,suchasBrazil,India,Indo- towarditseconomicobjectiveswouldbesustained. nesia,andTurkey,duetocurrencydepreciationas Nonetheless,theCommitteerecognizedthecumulawellascountry-specificfactors,includingsupply tiveimprovementinlabormarketconditionsand bottlenecksandtightlabormarketconditionsin thereforebelieveditimportanttobegintheprocessof somesectors.Inresponsetohigherinflation,central outliningtheconsiderationsthatwouldultimately banksinthesecountriesraisedratesand,insome governthewinding-downof theprogramof largecases,intervenedinforeignexchangemarketstosup- scaleassetpurchases.Inhispressconferencefollowporttheircurrencies. ingtheJune2013FOMCmeeting,ChairmanBernankeindicatedthat,if theeconomyweretoevolve Part 2: Monetary Policy broadlyinlinewiththeexpectationsthattheCommitteeheldatthattime,theFOMCwouldmoderate Inlightof thecumulativeprogresstowardmaximum thepaceof purchaseslaterin2013and,if economic employmentandtheimprovementintheoutlookfor developmentsremainedbroadlyconsistentwiththe labormarketconditions,theFederalOpenMarket Committee’sexpectations,subsequentlyreducethem Committee(FOMC)decidedtomodestlyreducethe infurthermeasuredsteps.However,theChairman paceof itsassetpurchasesatitsDecember2013and emphasizedthattheCommittee’spurchaseswerein January2014meetings.Nonetheless,withunemploy- nowaypredetermined,andthatadecisionabout mentstillwellaboveitslonger-runnormalleveland reducingthepaceof purchaseswoulddependon inflationbelowtheCommittee’s2percentobjective, howeconomicconditionsevolved.8 thestanceof monetarypolicyremainshighlyaccommodative,withtheFederalReservecontinuingto Ateachof itssubsequentmeetingspriortoDecemincreasethesizeof itsbalancesheet,albeitata ber2013,theCommitteejudgedthattheoutlookfor reducedpace,andhavingenhanceditsforwardguid- theeconomyandthelabormarkethadimproved,on ancewithregardtothefuturepathof thefederal net,sincetheinceptionof thecurrentassetpurchase fundsrate. program,butthatitwasappropriatetoawaitmore evidencethattheprogresswouldbesustainedbefore Throughmostoflastyear,theFOMCmaintained theCommitteebeganadjustingthepaceof itspurthecurrentpaceoflarge-scaleassetpurchases chases.Inaddition,attheJulymeeting,theCommitwhileawaitingmoreevidencethatprogress teerecognizedthatinflationpersistentlybelowits towarditseconomicobjectiveswouldbe 2percentobjectivecouldposeriskstoeconomicpersustained... formance.9AttheSeptemberFOMCmeeting,Com- Sincetheonsetof thefinancialcrisisandensuing mitteemembersalsoexpressedconcernaboutneardeeprecession,theunemploymentratehasremained termfiscaluncertaintiesandtherapidtighteningof wellaboveitsnormallevelsandtheinflationratehas financialconditionsobservedoverthesummer, tendedtorunatorbelowtheFOMC’s2percent which,if sustained,couldhaveslowedimprovements objectivedespitethetargetrangeforthefederal intheeconomyandthelabormarket.10TheCommitfundsrateremainingatitseffectivelowerbound. teethereforedecidedtoawaitmoreevidencethat Accordingly,thestrategyof theFOMCduringthe progresstowarditsgoalswouldbemaintainedbefore pastseveralyearshasbeentoemployalternative adjustingthepaceof assetpurchasesand,inthe methodsof providingadditionalmonetaryaccommodationandpromotingthemorerapidachieve- 8 SeeBoardofGovernorsoftheFederalReserveSystem(2013), mentof itsmandatedobjectivesof maximum “TranscriptofChairmanBernanke’sPressConference,” employmentandpricestability.Inparticular,the June19,www.federalreserve.gov/mediacenter/files/ FOMChasusedlarge-scaleassetpurchasesandfor- FOMCpresconf20130619.pdf. wardguidanceregardingthefuturepathof thefed- 9 SeeBoardofGovernorsoftheFederalReserveSystem(2013), “FederalReserveIssuesFOMCStatement,”pressrelease, eralfundsratetoputdownwardpressureonlonger- July31,www.federalreserve.gov/newsevents/press/monetary/ terminterestrates. 20130731a.htm. 10 SeeBoardofGovernorsoftheFederalReserveSystem(2013), “TranscriptofChairmanBernanke’sPressConference,”Sep- Duringmostof thesecondhalf of 2013,withunemtember18,www.federalreserve.gov/mediacenter/files/ ploymentstillelevated(thoughdeclining),andwith FOMCpresconf20130918.pdf.

20 100thAnnualReport|2013 meantime,continuedaddingtoitsholdingsof onlonger-terminterestrates,supportingmortgage agencymortgage-backedsecurities(MBS)and markets,andhelpingtomakebroaderfinancialconlonger-termTreasurysecuritiesatapaceof $40bil- ditionsmoreaccommodative.TheCommitteereiterlionand$45billionpermonth,respectively. atedthatitwillcontinueitsassetpurchasesand employitsotherpolicytoolsasappropriateuntilthe ...beforemodestlyreducingthepaceofasset outlookforthelabormarkethasimprovedsubstanpurchasesinlightofthecumulativeprogress tiallyinacontextof pricestability.TheFOMCalso towardmaximumemploymentandthe maintaineditspracticesof reinvestingprincipalpayimprovementintheoutlookforlabormarket mentsitreceivesonagencydebtandagencyconditions guaranteedMBSinnewagencyMBSandof rolling Bythetimeof theDecember2013meeting,most overmaturingTreasurysecuritiesatauction. Committeemembersviewedthecumulativeimprovementinlabormarketconditionsasmeaningfuland TheCommitteefirstkeptinplaceandthen likelytobesustained.Participantsalsoanticipated reinforceditsforwardguidanceonthepathof thatinflationwouldmovebacktoward2percent thefederalfundsrate overtimeastheeconomicrecoverystrengthenedand Withregardtothefederalfundsrate,theCommittee longer-runinflationexpectationsremainedsteady. continuedtoindicatethroughthesecondhalf of Therefore,mostmembersagreedthattheCommittee 2013itsexpectationthatahighlyaccommodative couldappropriatelybegintoslowthepaceof itsasset stanceof monetarypolicywillremainappropriate purchases.Nonetheless,somemembersexpressed foraconsiderabletimeaftertheassetpurchaseproconcernaboutthepotentialforanunintendedtight- gramendsandtheeconomicrecoverystrengthens.In eningof financialconditionsif areductioninthe particular,theCommitteestatedthatthecurrent paceof assetpurchaseswasmisinterpretedassignal- exceptionallylowtargetrangeforthefederalfunds ingthattheCommitteewaslikelytowithdrawpolicy rateof 0to¼percentwillbeappropriateatleastas accommodationmorequicklythanhadbeenantici- longastheunemploymentrateremainsabove pated.Manymembersthereforejudgedthatthe 6½percent,inflationbetweenoneandtwoyears Committeeshouldproceedcautiouslyintakingits aheadisprojectedtobenomorethanahalf percentfirstactiontoreducethepaceof assetpurchasesand agepointabovetheCommittee’s2percentlongershouldindicatethatfurtherreductionswouldbe rungoal,andlonger-terminflationexpectationsconundertakeninmeasuredsteps.Membersalsostressed tinuetobewellanchored.TheCommitteeemphatheneedtounderscorethatthepaceof assetpur- sizedthatthesecriteriaarethresholds,nottriggers, chaseswasnotonapresetcourseandwouldremain meaningthatcrossingathresholdwillnotleadautocontingentontheCommittee’soutlookforthelabor maticallytoanincreaseinthefederalfundsratebut marketandinflationaswellasitsassessmentof the willindicateonlythatitisappropriatefortheComefficacyandcostsof purchases. mitteetoconsiderwhetherthebroadereconomic outlookjustifiessuchanincrease. Consistentwiththisapproach,theCommittee announcedattheDecembermeetingthatitwould InDecember,withtheunemploymentratehaving reducethepaceof itspurchasesof agencyMBSfrom movedclosertothe6½percentthreshold,the $40billionto$35billionpermonthandreducethe FOMCdecidedtoprovidequalitativeguidanceto paceof itspurchasesof longer-termTreasurysecuri- clarifyitslikelyactionsduringthetimeafterthe tiesfrom$45billionto$40billionpermonth.The unemploymentthresholdiscrossedand,inparticu- Committeecontinuedtoseeimprovementsineco- lar,toemphasizeitscommitmenttoprovidingahigh nomicconditionsandthelabormarketoutlookat levelof monetaryaccommodationforaslongas theJanuarymeetingandfurtherreducedthepaceof neededtofosteritsobjectives.Specifically,theComitsassetpurchasesto$30billionpermonthfor mitteeindicatedthatindetermininghowlongto agencyMBSand$35billionpermonthforlonger- maintainahighlyaccommodativestanceof montermTreasurysecurities. etarypolicy,itwillconsidernotonlytheunemploymentratebutalsootherindicators,includingaddi- Whiledecidingtomodestlyreduceitspaceof pur- tionalmeasuresof labormarketconditions,indicachases,theCommitteeemphasizedthatitsholdings torsof inflationpressuresandinflationexpectations, of longer-termsecuritiesweresizableandwouldstill andreadingsonfinancialdevelopments.Further,the beincreasing,whichwouldpromoteastrongereco- Committeestatedthat,basedonthesefactors,itconnomicrecoverybymaintainingdownwardpressure tinuestoanticipatethatitwilllikelybeappropriateto

MonetaryPolicyandEconomicDevelopments 21 Figure18.FederalReserveassetsandliabilities Weekly Trillions of dollars — 4.0 Assets — 3.5 Other assets — 3.0 — 2.5 Agency debt and mortgage-backed securities holdings — 2.0 Credit and liquidity — 1.5 facilities — 1.0 Treasury securities held outright — .5 — 0 Federal Reserve notes in circulation — .5 — 1.0 — 1.5 Deposits of depository institutions — 2.0 — 2.5 — 3.0 Liabilities and capital Capital and other liabilities — 3.5 — 4.0 1/30 4/30 8/5 10/29 1/28 4/29 8/12 11/4 1/27 4/28 8/10 11/3 1/26 4/27 8/9 11/2 1/25 4/25 8/1 10/24 1/30 5/1 7/31 10/30 1/29 3/18 6/25 9/16 12/16 3/18 6/24 9/23 12/16 3/16 6/23 9/21 12/14 3/15 6/22 9/21 12/13 3/13 6/20 9/13 12/12 3/20 6/19 9/18 12/18 2008 2009 2010 2011 2012 2013 2014 Note:ThedataextendthroughFebruary7,2014.Creditandliquidityfacilitiesconsistsofprimary,secondary,andseasonalcredit;termauctioncredit;centralbankliquidity swaps;supportforMaidenLane,BearStearns,andAIG;andothercreditfacilities,includingthePrimaryDealerCreditFacility,theAsset-BackedCommercialPaperMoneyMarketMutualFundLiquidityFacility,theCommercialPaperFundingFacility,andtheTermAsset-BackedSecuritiesLoanFacility.Otherassetsincludesunamortizedpremiumsand discountsonsecuritiesheldoutright.Otherliabilitiesincludesreverserepurchaseagreements,theU.S.TreasuryGeneralAccount,andtheU.S.TreasurySupplementaryFinancingAccount.ThedatesonthehorizontalaxisarethoseofregularlyscheduledFederalOpenMarketCommitteemeetings. Source:FederalReserveBoard,StatisticalReleaseH.4.1,“FactorsAffectingReserveBalances,”www.federalreserve.gov/releases/h41/. maintainthecurrentfederalfundsratetargetwell theliabilitysideof thebalancesheet,theriseresulted pastthetimethattheunemploymentratedeclinesto inafurtherincreaseinreservebalances. below6½percent,especiallyif projectedinflation continuestorunbelowtheCommittee’s2percent Reflectingthecontinuedimprovementinoffshore longer-rungoal.TheCommitteecontinuedtoindi- U.S.dollarfundingmarkets,theoutstandingamount catethatwhenitdecidestobegintoremovepolicy of dollarsprovidedthroughthetemporaryU.S.dolaccommodation,itwilltakeabalancedapproach larliquidityswaparrangementswithforeigncentral consistentwithitslonger-rungoalsof maximum banksdecreased$1billion,bringingthelevelcloseto employmentandinflationof 2percent. zero.Toreduceuncertaintiesamongmarketparticipantsastowhetherandwhenthesearrangements TheCommittee’slarge-scaleassetpurchases wouldberenewed,attheOctoberFOMCmeeting ledtoasignificantincreaseinthesizeofthe theCommitteeagreedtoconverttheexistingtempo- FederalReserve’sbalancesheet rarycentralbankliquidityswaparrangementsto Asaresultof theCommittee’slarge-scaleassetpur- standingarrangementswithnopresetexpiration chaseprogram,FederalReserveassetshaveincreased dates,withtheintentiontoreviewparticipationin significantlysincethemiddleof lastyear(figure18). thesearrangementsannually.Thesemodificationsto Theparvalueof theholdingsof U.S.Treasurysecu- theliquidityswaparrangementswereintroducedto ritiesintheSystemOpenMarketAccount(SOMA) helpsupportfinancialstabilityandconfidencein increased$315billionto$2.2trillion,andthepar globalfundingmarkets. valueof itsholdingsof agencydebtandMBS increased$308billion,onnet,to$1.5trillion.11Asof InterestincomeontheSOMAportfoliocontinuedto theendof January2014,theSOMA’sholdingsof supportasubstantialvolumeof remittancestothe Treasuryandagencysecuritiesconstituted55percent U.S.TreasuryDepartment.Preliminaryestimates and39percent,respectively,of the$4trillionintotal suggestthatin2013theFederalReserveprovided FederalReserveassets.Asaresultof thesepurchases, morethan$77billionof suchdistributionstothe thesizeof theoverallFederalReservebalancesheet Treasury.12 increasedbrisklyoverthesecondhalf of theyear;on 12 SeeBoardofGovernorsoftheFederalReserveSystem(2014), 11 ThedifferencebetweenchangesintheparvalueofSOMAhold- “ReserveBankIncomeandExpenseDataandTransferstothe ingsandtheamountofpurchasesofsecuritiessincethemiddle Treasuryfor2013,”pressrelease,January10,www of2013reflects,inpart,lagsinsettlements. .federalreserve.gov/newsevents/press/other/20140110a.htm.

22 100thAnnualReport|2013 TheFederalReservecontinuedtotesttoolsthat Fromtheoperations’inceptionthroughearlyFebrucouldpotentiallybeusedtomanagereserves ary,thefixedrateontheoperationshasbeen Aspartof itsongoingprogramtoensurethereadi- adjustedgraduallywithintheauthorizedlimitsof nessof toolstomanagereserves,theFederalReserve 0to5basispointssetbytheFOMC,andthedaily conductedaseriesof small-scaletransactionswith counterpartyallotmentlimithasbeengradually eligiblecounterparties.Sincetheendof June2013, raisedfrom$500millionto$5billion.Alloperations theFederalReservehasconductedfouroperations todatehaveproceededsmoothly.Participationin for28-daytermdepositsundertheTermDeposit andusageof ONRRPoperationshasvariedfrom Facility.Theofferingshadafixed-rateformat,with daytoday,inpartreflectingchangesinthespread individualoperationstotalingbetweenabout$12bil- betweenmarketratesonrepurchaseagreementtranslionand$13.5billionindeposits.Inaddition,in actionsandtherateofferedintheFederalReserve’s August2013,theFederalReserveconductedsixover- ONRRPoperations,aswellasquarter-enddynamnightreverserepurchaseoperationswithauction ics.Inparticular,take-upattheseoperationssurged sizesbetween$1billionand$5billion,usingTreas- atyear-endandonlypartlyretracedoverrecent urysecuritiesandagencyMBSascollateral. weeks,asratesinmarketsforTreasuryrepurchase agreementsremainedgenerallylowagainsttheback- Moreover,insupportof theCommittee’slonger-run dropof reducedsupplyof U.S.Treasurysecuritiesin planforimprovementsintheimplementationof collateralmarkets.Theoperationswerereauthorized monetarypolicy,attheJuly2013FOMCmeeting, attheJanuaryFOMCmeetingthroughJanuary30, theCommitteediscussedthepotentialforestablish- 2015,toallowtheCommitteetoobtainadditional ingafixed-rate,full-allotmentovernightreverse informationaboutthepotentialusefulnessof ON repurchaseagreement(ONRRP)facilityasanaddi- RRPoperationstoaffectmarketinterestrateswhen tionaltoolformanagingmoneymarketinterestrates. doingsobecomesappropriate. AttheSeptember2013meeting,theCommittee authorizedtheOpenMarketDesktoconducta Inaddition,theDeskhasbeendevelopingthecapaseriesof fixed-rateONRRPoperationsinvolving bilitytoconductagencyMBStransactionsover U.S.governmentsecuritiesandsecuritiesthatare FedTrade,itsproprietarytradingplatform.Totest directobligationsof,orfullyguaranteedastoprinci- thiscapability,theDeskconductedanexerciseconpalandinterestby,anyagencyof theUnitedStates, sistingof aseriesof small-valuepurchaseandsale forthepurposeof assessingoperationalreadiness.A operationsof agencyMBSviaFedTrade,running numberof meetingparticipantsemphasizedthat fromNovember21,2013,throughJanuary14,2014. theirinterestintheseoperationsreflectedanongoing Theoperationsconductedaspartof thisexercisedid efforttoimprovethetechnicalexecutionof policy notexceed$500millionintotalandwerenotcounted anddidnotsignalanychangeintheCommittee’s towardthemonthlyagencyMBSpurchasesthatthe viewsaboutpolicygoingforward. Deskwasconductingatthedirectionof theFOMC.

MonetaryPolicyandEconomicDevelopments 23 Monetary Policy Report cantlyandassetpricevolatilityincreasedasinvestors respondedtosomewhatbetter-than-expectedecoof July 2013 nomicdataaswellasFederalReservecommunicationsaboutmonetarypolicy.Despitetheirrecent Summary moves,interestrateshavegenerallyremainedlowby historicalstandards,importantlyduetotheFederal Thusfarthisyear,labormarketconditionshave Reserve’shighlyaccommodativemonetarypolicy improvedfurther,whileconsumerpriceinflationhas stance. runbelowtheFederalOpenMarketCommittee’s (FOMC)longer-runobjectiveof 2percent.Gainsin Withunemploymentstillwellabovenormallevels payrollemploymentsincethestartof theyearhave andinflationquitelow,andwiththeeconomicrecovaveragedabout200,000jobspermonth,andvarious eryanticipatedtopickuponlygradually,theFOMC measuresof underutilizationinlabormarketshave hascontinueditshighlyaccommodativemonetary continuedtotrenddown.Evenso,theunemploy- policythisyearinordertosupportprogresstoward mentrate,at7½percentinJune,wasstillwellabove maximumemploymentandpricestability. levelsprevailingpriortotherecentrecessionandwell abovethelevelsthatFOMCparticipantsthinkcan TheFOMCkeptitstargetrangeforthefederalfunds besustainedinthelongertermconsistentwith rateat0to¼percentandanticipatedthatthisexceppricestability. tionallylowrangewouldbeappropriateatleastas longastheunemploymentrateremainsabove Consumerpriceinflationhasslowedthisyear.Over 6½percent,inflationbetweenoneandtwoyears thefirstfivemonthsof theyear,thepriceindexfor aheadisprojectedtobenomorethanahalf percentpersonalconsumptionexpendituresincreasedatan agepointabovetheCommittee’s2percentlongerannualrateof only½percent,whiletheindex rungoal,andlonger-terminflationexpectationsconexcludingfoodandenergypricesroseatarateof tinuetobewellanchored.TheCommitteealsostated 1percent,bothdownfromincreasesof about thatwhenitdecidestobegintoremovepolicy 1½percentover2012.Thisslowingappearstoowe accommodation,itwouldtakeabalancedapproach partlytotransitoryfactors.Surveymeasuresof consistentwithitslonger-rungoalsof maximum longer-terminflationexpectationshaveremainedin employmentandinflationof 2percent. thenarrowrangesseenoverthepastseveralyears, whilemarket-basedmeasureshavedeclinedsofar TheFOMCalsohascontinueditsassetpurchase thisyear,reversingtheirriseoverthesecondhalf program,purchasingadditionalagencymortgageof 2012. backedsecuritiesatapaceof $40billionpermonth andlonger-termTreasurysecuritiesatapaceof Meanwhile,realgrossdomesticproduct(GDP)con- $45billionpermonth.TheCommitteehasreiterated tinuedtoincreaseatamoderatepaceinthefirst thatthepurchaseprogramwillcontinueuntilthe quarterof thisyear.Availableindicatorssuggestthat outlookforthelabormarkethasimprovedsubstanthegrowthof realGDPproceededatasomewhat tiallyinacontextof pricestability.Inaddition,the slowerpaceinthesecondquarter.Althoughfederal FOMChasindicatedthatthesize,pace,andcompofiscalpolicyisimposingasubstantialdragongrowth sitionof purchaseswillbeadjustedinlightof the thisyearandexportdemandisstilldampedbysub- Committee’sassessmentof thelikelyefficacyand duedgrowthinforeigneconomies,someof theother costsof suchpurchasesaswellastheextentof progheadwindsthathaveweighedontheeconomicrecov- resstowarditseconomicobjectives.TheCommittee eryhavebeguntodissipate.Againstthisbackdrop,a hasnotedthatitispreparedtoincreaseorreducethe sustainedhousingmarketrecoverynowappearstobe paceof purchasestomaintainappropriatepolicy underway,andconsumptiongrowthisestimatedto accommodationastheoutlookforthelabormarket haveheldupreasonablywelldespitetheincreasein orinflationchanges. taxesearlierthisyear. AttheJuneFOMCmeeting,Committeeparticipants Creditconditionsgenerallyhaveeasedfurther, generallythoughtitwouldbehelpfultoprovide thoughtheyremainrelativelytightforhouseholds greaterclarityabouttheCommittee’sapproachto withlowercreditscores—andespeciallyforsuch decisionsaboutitsassetpurchaseprogramand householdsseekingmortgageloans.However,begin- therebyreduceinvestors’uncertaintyabouthowthe ninginMay,longer-terminterestratesrosesignifi- Committeemightreacttofutureeconomicdevelop-

24 100thAnnualReport|2013 ments.Inchoosingtoprovidethisclarification,the future,withmostexpectingthefirstincreasetooccur Committeemadenochangestoitsapproachtomon- in2015or2016. etarypolicy.Againstthisbackdrop,ChairmanBernanke,athispostmeetingpressconference,described Part 1: Recent Economic and apossiblepathforassetpurchasesthattheCommit- Financial Developments teewouldanticipateimplementingif economicconditionsevolvedinamannerbroadlyconsistentwith Realeconomicactivitycontinuedtoincreaseata theoutcomestheCommitteesawasmostlikely.The moderatepaceinthefirstquarterof 2013,though Chairmannotedthatsucheconomicoutcomes availableindicatorssuggestthatthepaceof ecoinvolvedcontinuedgainsinlabormarkets,supported nomicgrowthwassomewhatslowerinthesecond bymoderategrowththatpicksupoverthenextsev- quarter.Federalfiscalpolicyisimposingasubstaneralquarters,andinflationmovingbacktowardits tialdragoneconomicgrowththisyear,andsubdued 2percentobjectiveovertime.If theeconomywereto growthinforeigneconomiescontinuestoweighon evolvebroadlyinlinewiththeCommittee’sexpecta- exportdemand.However,someotherheadwinds tions,theFOMCwouldmoderatethepaceof pur- havediminished,andinterestrates,despiterecent chaseslaterthisyearandcontinuetoreducethepace increases,havegenerallyremainedlowbyhistorical of purchasesinmeasuredstepsuntilpurchasesended standards,importantlyduetotheongoingmonetary aroundthemiddleof nextyear,atwhichtimethe accommodationprovidedbytheFederalOpenMarunemploymentratewouldlikelybeinthevicinityof ketCommittee(FOMC).Asustainedhousingmar- 7percent,withsolideconomicgrowthsupporting ketrecoveryappearstobeunderway,and,despite furtherjobgainsandinflationmovingbacktoward theincreaseintaxesearlierthisyear,consumption theFOMC’s2percenttarget.Inemphasizingthat growthisestimatedtohaveheldupreasonablywell, theCommittee’spolicywasinnowaypredeter- supportedbyhigherequityandhomeprices,moremined,theChairmannotedthatthepaceof asset upbeatconsumersentiment,andtheimprovingjobs purchasescouldincreaseordecreasedependingon situation.Payrollemploymenthascontinuedtorise theevolutionof theoutlookanditsimplicationsfor atamoderatepace,andvariousmeasuresof underfurtherprogressinthelabormarket.TheChairman utilizationinlabormarketshaveimprovedfurther. alsodrewastrongdistinctionbetweentheassetpur- But,at7½percentinJune,theunemploymentrate chaseprogramandtheforwardguidanceregarding wasstillwellabovelevelsprevailingpriortothe thetargetforthefederalfundsrate,notingthatthe recentrecession.Meanwhile,consumerpriceinfla- Committeeanticipatesthattherewillbeaconsider- tionhasslowedfurtherthisyear,inpartbecauseof ableperiodbetweentheendof assetpurchasesand fallingenergyandimportpricesandotherfactors thetimewhenitbecomesappropriatetoincreasethe thatareexpectedtoprovetransitory,anditremains targetforthefederalfundsrate. belowtheFOMC’slonger-runobjectiveof 2percent. Surveymeasuresof longer-terminflationexpecta- InconjunctionwiththemostrecentFOMCmeeting tionshaveremainedinthefairlynarrowrangesseen inJune,Committeeparticipantssubmittedindividual overthepastseveralyears. economicprojectionsundereachparticipant’sjudgmentof appropriatemonetarypolicy.Accordingto DomesticDevelopments theSummaryof EconomicProjections(SEP),Committeeparticipantssawthedownsideriskstotheout- Economicgrowthcontinuedatamoderatepace lookfortheeconomyandthelabormarketashaving earlythisyear diminishedsincethefall.(TheJuneSEPisincluded Outputappearstohaverisenfurtherinthefirsthalf asPart3of theJuly2013MonetaryPolicyReporton of 2013despitethesubstantialdragoneconomic pages39–52;itisalsoincludedinsection8of this growthfromfederalfiscalpolicythisyearandthe annualreport.Committeeparticipantsalsoprojected restraintonexportdemandfromsubduedforeign that,withappropriatemonetarypolicyaccommoda- growth.Realgrossdomesticproduct(GDP) tion,economicgrowthwouldpickup,theunemploy- increasedatanestimatedannualrateof 1¾percent mentratewouldgraduallydecline,andinflation inthefirstquarterof theyear,thesameastheaverwouldmoveupoverthemediumtermfromrecent agepacein2012,thoughavailableindicatorspointat verylowreadingsandsubsequentlymoveback presenttoasomewhatsmallergaininthesecond towardtheFOMC’s2percentlonger-runobjective. quarter.Economicactivitysofarthisyearhasbeen Committeeparticipantssawincreasesinthetarget supportedbythecontinuedexpansionindemandby forthefederalfundsrateasbeingquitefarinthe U.S.householdsandbusinesses,includingwhat

MonetaryPolicyandEconomicDevelopments 25 appearstobeasustainedrecoveryinthehousing numberof workerswhohavestoppedlookingfor market.Privatedemandhasbeenbolsteredbythe workbecauseof poorjobprospects.1 historicallylowinterestratesandrisingpricesof housesandotherassets,partlyassociatedwiththe ...butconsiderableslackinlabormarkets FOMC’scontinuedpolicyaccommodation. remains... Althoughlabormarketconditionshaveimproved Inaddition,someof theotherheadwindsthathave moderatelysofarthisyear,thejobmarketremains heldbacktheeconomyinrecentyearshavedissi- weakoverall.Theunemploymentrateandother patedfurther.Risksof heightenedfinancialstresses measuresof laborunderutilizationarestillwellabove inEuropeappeartohavediminishedsomewhat,con- theirpre-recessionlevels,despitepayrollemployment sumerconfidencehasimprovednoticeably,andcredit havingnowexpandedbynearly7millionjobssince conditionsintheUnitedStatesgenerallyhaveeased. itsrecenttroughandtheunemploymentratehaving Nonetheless,tightcreditconditionsforsomehouse- fallen2½percentagepointssinceitspeak.Moreover, holdsarestilllikelyrestrainingresidentialinvestment unemploymenthasbeenunusuallyconcentrated andconsumerspending,anduncertaintyaboutthe amongthelong-termunemployed;inJune,thefracforeignoutlookcontinuestorepresentadownside tionof theunemployedwhohadbeenoutof work riskforU.S.financialmarketsandforsalesabroad. formorethansixmonthsremainedgreaterthanonethird,althoughthissharehascontinuedtoedge Conditionsinthelabormarkethavecontinuedto down.Inaddition,lastmonth,8millionpeople,or improve... 5percentof theworkforce,wereworkingparttime Thelabormarkethascontinuedtoimprovegradu- becausetheywereunabletofindfull-timeworkdue ally.Gainsinpayrollemploymentaveragedabout toeconomicconditions. 200,000jobspermonthoverthefirsthalf of 2013, slightlyabovetheaverageincreaseineachof thepre- ...andgainsincompensationhavebeenslow vioustwoyears.Thecombinationof thisyear’sout- Increasesinhourlycompensationcontinuetobe putandemploymentincreasesimplythatgainsin restrainedbytheweakconditionof thelabormarket. laborproductivityhaveremainedslow.Accordingto The12-monthchangeintheemploymentcostindex thelatestpublisheddata,outputperhourinthenon- forprivateindustryworkers,whichmeasuresboth farmbusinesssectorroseatanannualrateof only wagesandthecosttoemployersof providingben- ½percentinthefirstquarterof 2013,similartoits efits,hasremainedcloseto2percentthroughout averagepaceinboth2011and2012. mostof therecovery.Compensationperhourinthe nonfarmbusinesssector—ameasurederivedfrom Meanwhile,theunemploymentratedeclinedto thelaborcompensationdatainthenationalincome 7½percentinthesecondquarterof thisyearfrom andproductaccounts—rose2percentovertheyear around8¼percentayearearlier.Avarietyof alter- endinginthefirstquarterof 2013.Similarly,average native,broadermeasuresof laborforceunderutiliza- hourlyearningsforallemployees—thetimeliest tionhavealsoimprovedoverthepastyear,roughlyin measureof wagedevelopments—increased2¼perlinewiththeofficialunemploymentrate. centinnominaltermsoverthe12monthsendingin June.Evenwithrelativelyslowproductivitygains,the Whiletheunemploymentrateandtotalpayroll changeinunitlaborcostsfacedbyfirms—anestiemploymenthaveimprovedfurther,thelaborforce mateof theextenttowhichnominalhourlycompenparticipationratehascontinuedtodecline,onbal- sationrisesinexcessof laborproductivity—has ance.Asaresult,theemployment–populationratio,a remainedsubdued. measurethatcombinestheunemploymentrateand laborforceparticipationrate,haschangedlittleso 1 Aswasdiscussedinthebox“AssessingConditionsintheLabor farthisyear.Toanimportantextent,thedeclinein Market”intheFebruary2013MonetaryPolicyReport,the theparticipationratelikelyreflectschangingdemo- unemploymentratetypicallyprovidesaverygoodsummaryof graphics—mostnotablytheincreasingshareinthe labormarketconditions;however,otherindicatorsalsoprovide importantperspectivesonthehealthofthelabormarket,with populationof olderpersons,whohavelower-thanthemostaccurateassessmentoflabormarketconditions averageparticipationrates—thatwouldhave obtainedbycombiningthesignalsfrommanysuchindicators. occurredregardlessof thestrengthof thelabormar- Forthebox,seeBoardofGovernorsoftheFederalReserve System(2013),MonetaryPolicyReport(Washington:Boardof ket.However,itisalsolikelythatsomeof thedecline Governors,February),www.federalreserve.gov/monetarypolicy/ intheparticipationratereflectsanincreaseinthe mpr_20130226_part1.htm.

26 100thAnnualReport|2013 Consumerpriceinflationhasbeenespecially ...andasoilandothercommodityprices low... declined... Thepriceindexforpersonalconsumptionexpendi- Globaloilpriceshavecomedown,onnet,fromtheir tures(PCE)increasedatanannualrateof just½per- Februarypeakof nearly$120perbarrel,thoughin centoverthefirstfivemonthsof theyear,downfrom recentweekstheyhaveincreasedsomewhatfrom ariseof 1½percentover2012andbelowthe theirspringlowstoalmost$110perbarrel.Tensions FOMC’slong-runobjectiveof 2percent.Thevery intheMiddleEasthavelikelycontinuedtoput lowrateof inflationsofarthisyearpartlyreflects upwardpressuresoncrudeoilprices,butthosepresdeclinesinconsumerenergyprices,butpriceinflation sureshavebeenmitigatedbyconcernsaboutthe forotherconsumergoodsandserviceshasalsobeen strengthof oildemandinChinaandtherestof subdued.Consumerfoodpriceshaveremained emergingAsiaandbyrisingoilproductioninNorth largelyunchangedsofarthisyear,andconsumer America.Nonfuelcommoditypriceshaveeasedsince pricesexcludingfoodandenergyincreasedatan thebeginningof theyear,alsoreflectingslowingecoannualrateof 1percentinthefirstfivemonthsof nomicgrowthinemergingAsia.Notably,thepriceof thisyearafterrising1½percentover2012.With ironore,widelyviewedasanindicatorof Chinese wagesgrowingslowlyandmaterialspricesflator demandforcommodities,hasfallenroughly20permovingdownward,firmshavegenerallynotfaced centsinceearlyJanuary.Alongwithfallingcommodcostpressuresthattheymightotherwisetryto ityprices,pricesof non-oilimportedgoodsdeclined passon. inthefirsthalf of 2013,alsolikelyholdingdown domesticpriceincreasesthisyear. ...assometransitoryfactorsweighedon prices... ...butlonger-terminflationexpectations Inadditiontothedeclineinenergyprices,thisyear’s remainedintheirhistoricalrange especiallylowinflationreflects,inpart,otherspecial TheFederalReservemonitorsthepublic’sexpectafactorsthatareexpectedtobetransitory.Notably, tionsof inflation,inpartbecausetheseexpectations increasesinbothmedicalservicespricesandthenon- mayinfluencewage-andprice-settingbehaviorand marketcomponentof PCEpriceshavebeenunusu- thusactualinflation.Survey-basedmeasuresof allylow.Whiletheaveragerateof medical-priceinfla- longer-terminflationexpectationshavechanged tionasmeasuredbythePCEindexhasbeenconsid- little,onnet,sofarthisyear.Medianexpectedinflaerablylowerduringthepastfewyearsthanitwas tionoverthenext5to10years,asreportedinthe earlier,theincreaseoverthefirstfivemonthsof ThomsonReuters/Universityof MichiganSurveysof 2013—atbelow½percent—hasbeenextraordinarily Consumers(Michigansurvey),was2.9percentin muted,largelyreflectingtheeffectsonmedicalser- earlyJuly,withinthenarrowrangeof thepast vicespricesof cutsinMedicarereimbursementsasso- decade.2IntheSurveyof ProfessionalForecasters, ciatedwithfederalbudgetsequestration.(Incontrast, conductedbytheFederalReserveBankof Philadelmedicalservicespricesintheconsumerpriceindex phia,themedianexpectationfortheincreaseinthe (CPI),whichexcludemostMedicarepayments,have PCEpriceindexoverthenext10yearswas2percent risenatanannualrateof nearly2percentsofarthis inthesecondquarterof thisyear,similartoitslevel year.)Becausemedicalserviceshavearelativelylarge inrecentyears. weightinPCEexpenditures(asthePCEpriceindex reflectspaymentsbyallpayers,notjustout-of-pocket Measuresof medium-andlonger-terminflation expensesasintheCPI),pricechangesinthiscompo- compensationderivedfromthedifferencesbetween nentof spendingcanhaveasizableeffectontop-line yieldsonnominalandinflation-protectedTreasury PCEinflation. securitieshavedeclinedbetween¼and½percentage pointsofarthisyear.Nonetheless,thesemeasuresof ThenonmarketPCEpriceindexcoversspending inflationcompensationalsoremainwithintheir componentsforwhichmarketpricesarenot respectiverangesobservedoverthepastseveralyears, observed,suchasfinancialservicesrenderedwithout astherecentdeclinesreversedtheriseoverthesecexplicitcharge;asaresult,theBureauof Economic ondhalf of lastyear.Ingeneral,movementsininfla- Analysisimputespricesforthoseitems.Overall,this tioncompensationcanreflectnotonlymarketparnonmarketindexdeclinedearlythisyearbeforemov- ticipants’expectationsof futureinflationbutalso ingupagaininrecentmonths;however,theseprices tendtobevolatileandappeartocontainlittlesignal 2 ThequestionintheMichigansurveyasksaboutinflationgenerforfutureinflation. allybutdoesnotrefertoanyspecificpriceindex.

MonetaryPolicyandEconomicDevelopments 27 changesininvestorriskaversionandfluctuationsin 75percentof nominalGDPinthefirstquarter therelativeliquidityof nominalversusinflation- of 2013. protectedsecurities;therecentdeclinesininflation compensationmayhavebeenamplifiedbyareduc- Atthestateandlocallevelaswell,thestrengthening tionindemandforTreasuryinflation-protectedsecu- economyhashelpedfosteragradualimprovementin ritiesamidincreasedvolatilityinfixed-income thebudgetsituationsof mostjurisdictions.Inthe markets. firstquarterof 2013,statetaxreceiptscamein9percenthigherthanayearearlier.(Someof therecent Fiscalconsolidationhasquickened,leadingto strengthinreceipts,though,likelyreflectstaxpaystrongerheadwindsbutsmallerdeficits mentsonincomethatwasshiftedinto2012inantici- Fiscalpolicyatthefederallevelhastightenedsignifi- pationof higherfederaltaxratesthisyear.)Consiscantlythisyear.Asdiscussedinthebox“Economic tentwithimprovingsectorfinances,statesand Effectsof FederalFiscalPolicy”(seepages10–11of municipalitiesarenolongerreducingtheirworktheJuly2013MonetaryPolicyReport),fiscalpolicy forces;employmentinthenonfederalgovernment changes—includingtheexpirationof thepayrolltax sectoredgedupoverthefirsthalf of theyearafter cut,theenactmentof othertaxincreases,theeffects contractingonlyslightlyin2012.However,construcof thebudgetcapsondiscretionaryspending,the tionexpendituresbythesegovernmentshavedeclined onsetof thesequestration,andthedeclinesin significantlyfurtherthisyear.Inall,realgovernment defensespendingforoverseasmilitaryoperations— purchasesatthestateandlocalleveldecreasedinthe areestimated,collectively,tobeexertingasubstantial firstquarterandhaveimposedadragonthepaceof dragoneconomicactivitythisyear.Evenpriortothe economicgrowthsofarthisyear. bulkof thespendingcutsassociatedwiththesequestrationthatstartedinMarch,totalrealfederalpur- Thehousingmarketrecoverycontinued chasescontractedatanannualrateof nearly9per- togaintraction... centinthefirstquarter,reflectingprimarilyasignifi- Activityinthehousingmarkethascontinuedto cantdeclineindefensespending.Thesequestration strengthen,supportedbylowmortgagerates,suswillinducefurtherreductionsinrealfederalexpendi- tainedjobgains,andimprovedsentimentonthepart turesoverthenextfewquarters.Forexample,many of potentialbuyers.IntheMichigansurvey,many federalagencieshaveannouncedplanstofurlough householdsreportthatlowinterestratesandhouse workers,especiallyinthethirdquarter.However, pricesmakeitagoodtimetobuyahome;agrowconsiderableuncertaintycontinuestosurroundthe ingpercentageof respondentsalsoexpectthathouse timingof theseeffects. pricegainswillcontinue.Reflectingtheimproving demandconditions,salesof bothnewandexisting Thesefiscalpolicychanges—alongwiththeongoing homeshavecontinuedtomoveup,onnet,thisyear. economicrecoveryandpositivenetpaymentstothe Constructionof newhousingunitshasalsotrended TreasurybyFannieMaeandFreddieMac—have upoverthepastyear,contributingtosolidratesof resultedinanarrowerfederaldeficitthisyear.Nomi- increaseinrealresidentialinvestmentinthefirsthalf naloutlayshavedeclinedsubstantiallyasashareof of 2013.Evenso,thelevelof constructionactivity GDPsincetheirpeakduringthepreviousrecession, remainslowbyhistoricalstandards.Thesteeprisein andtaxreceiptshavemoveduptoabout17percent mortgageinterestratessinceMaycouldtemperthe of GDP,theirhighestlevelsincetherecession.Asa paceof homesalesandconstructiongoingforward, result,thedeficitinthefederalunifiedbudgetfellto thoughthepaceof purchasemortgageapplications about$500billionoverthefirstninemonthsof the sofarhasshownnomaterialsignsof slowing,even currentfiscalyear,almost$400billionlessthanover asthepaceof refinancingapplicationshastailed thesameperiodayearearlier.Accordingly,theCon- off sharply. gressionalBudgetOfficeprojectsthatthebudget deficitforfiscalyear2013asawholewillbe4per- Thestrengtheninginhousingdemandhasoccurred centof GDP,markedlynarrowerthanthedeficitof despitethefactthatmortgagecreditremainslimited 7percentof GDPinfiscal2012.Inaddition,the forborrowerswithoutexcellentcreditscoresorthe deficitisprojectedtonarrowfurtheroverthenext abilitytomakesizabledownpayments.Responsesto coupleof yearsinlightof ongoingpolicyactions specialquestionsintheFederalReserve’sApril andcontinuedimprovementintheeconomy.Despite SeniorLoanOfficerOpinionSurveyonBankLendthesubstantialdeclineinthedeficit,federaldebtheld ingPractices(SLOOS)suggestedthatsomebanks bythepublichascontinuedtoriseandstoodat hadactuallytightenedstandardsoverthepastyear

28 100thAnnualReport|2013 onsomeloansthatareeligibleforpurchasebythe Consumerspendinghasheldupdespitethedrag government-sponsoredenterprisesandloansguaran- fromtaxincreasesearlythisyear teedbytheFederalHousingAdministration,specifi- Realconsumptionexpendituresroseatanannualrate callythosetoborrowerswithcreditscoresbelow620 of about2percentoverthefirstfivemonthsof this andwithlowdownpayments.Indeed,onlyabout year,aboutthesameasintheprevioustwoyears. 10percentof newprimemortgageoriginationsmade Theseincreaseshaveoccurreddespitehighertaxes thisspringwerereportedtobeassociatedwithFICO andhavebeensupportedbyseveralfactors.The scoresbelow690,comparedwithaquarterof origi- gainsthisyearinhousepricesandequityvalueshave nationsin2005. helpedhouseholdsrecoversomeof thewealthlost duringtherecession;indeed,theratioof household ...ashousepricesrosefurther netwealthtoincomeisestimatedtohavemovedup Houseprices,asmeasuredbyseveralnational sharplyinthefirstquarter.Inrecentmonths,indicaindexes,haveincreasedsignificantlyfurthersincethe torsof consumersentimenthavebecomemore endof lastyear.Inparticular,theCoreLogicrepeat- upbeataswell.Furthermore,incontrasttomortgage salesindexroseabout7percent(notatanannual rates,interestratesonautoloansandcreditcards rate)overthefirstfivemonthsof 2013toreachits havechangedlittle,onbalance,sincetheendof 2012. highestlevelsincethethirdquarterof 2008.Someof Withinterestrateslow,thehouseholddebtservice thelargestrecentgainshaveoccurredwherethe ratio—theratioof requiredprincipalandinterest housingmarkethasbeenmostseverelydepressed. paymentsonoutstandinghouseholddebttodispos- Recentincreasesnotwithstanding,houseprices ablepersonalincome—remainednearhistoricallows. remainfarbelowthepeaksreachedbeforetherecession,andthenationalprice-to-rentratiocontinuesto Inaddition,realdisposablepersonalincomehas benearitslong-runaverage.Still,theincreasein increasedslightly,onbalance,overthepastyear,as housepriceshashelpedtomateriallyreducethenum- moderategainsinemploymentandwageshavemore berof “underwater”mortgagesandmadehouse- thanoffsettheimplicationsforincomeof changesin holdssomewhatlesslikelytodefaultontheir taxpolicy.3Andhouseholdpurchasingpowerhas mortgages. beensupportedsofarthisyearbylowconsumer priceinflation.Onbalance,moderateincreasesin spendinghaveoutpaceddisposableincomegrowth, Mortgageinterestratesincreasedbutremained pushingthepersonalsavingratedowntoaround lowbyhistoricalstandards 3percentinrecentmonths,closetothelevelthatpre- Mortgageinterestrateshaveincreasedsignificantlyin vailedbeforetherecession. thepastcoupleof monthsfromrecordlowsreached earlierthisyear.However,ratesarestilllowbyhis- Thefinancialconditionsofhouseholdscontinued toricalstandards,reflectinginparttheFederal toimproveslowly Reserve’songoingpurchasesof mortgage-backed Althoughmortgagedebtcontinuedtocontractamid securities(MBS)andhighlyaccommodativeoverall still-tightcreditconditionsforsomeborrowers,constanceof monetarypolicy.Thespreadbetweenrates sumercreditexpandedatanannualrateof about onconformingmortgagesandyieldsonagency- 6percentinthefirstquarterof 2013.Studentloans, guaranteedMBShasdecreasedslightlysincetheend thevastmajorityof whichareguaranteedororigiof 2012. natedbythefederalgovernmentandsubjecttominimalunderwritingcriteria,areestimatedtohave Lowmortgagerates,alongwithrisinghouseprices, continuedtofacilitateasignificantpaceof refinanc- 3 Theincomedatahavebeenquitevolatileinrecentmonths, ingformostof thefirsthalf of 2013,whichhas reflectingbothdirectandindirecteffectsofthechangesintax helpedhouseholdsreducemonthlydebtservicepay- policythisyear.Personalincomeisreportedtohavesurgedlate lastyearandthenfallenbacksharplyearlythisyear,asmany ments.However,refinancingremaineddifficultfor firmsapparentlyshifteddividendandemployeebonuspayments householdswithoutsolidcreditratingsandthose into2012inanticipationofhighermarginaltaxratesforhighwithlimitedhomeequity.Moreover,asmortgage incomehouseholdsthisyear.Inaddition,theriseinthepayroll taxrateandasurgeinpersonalincometaxesatthebeginningof ratesmovedhigher,refinancingactivitybeganto theyearpusheddowndisposablepersonalincomeinthefirst decreasesharplyinMay. quarter.

MonetaryPolicyandEconomicDevelopments 29 increasedrapidlyandnowtotalnearly$1trillion, ...andcorporatebondandloanissuance makingthemthelargestcategoryof consumer remainedrobust indebtednessoutsideof mortgages.Autoloansare Withcorporatecreditqualitystrongandinterest alsoestimatedtohaveincreasedatarobustpace. ratesnearhistoricallylowlevelsthroughmuchof the Stablecollateralvaluesandfavorableconditionsin firsthalf of 2013,nonfinancialfirmscontinuedto theasset-backedsecuritiesmarketmayhavecontrib- raisefunds,especiallyusinglonger-durationinstruutedtoeasierstandardsforsuchloans.Incontrast, ments.Thepaceof bondissuancebyboth revolvingconsumercredit(primarilycreditcardlend- investment-andspeculative-gradenonfinancialfirms ing)waslittlechangedinthefirstquarter,andstan- remainedextraordinarilybriskuntilinterestrates dardsandtermsoncreditcardloansappearedto rosesignificantlyinMay,whilenonfinancialcomremaintight,especiallyforconsumerswithless-than- mercialpaper(CP)outstandingwaslittlechanged. pristinecredithistories.Forinstance,spreadsof C&Iloansoutstandingatcommercialbanksinthe interestratesoncreditcardloansoverreference UnitedStatescontinuedtoexpandduringthefirst interestratesremainedhistoricallywide.Conse- half of 2013butataslowerpacethaninthesecond quently,creditcarddebtextendedtoconsumerswith half of 2012,whenfirmsreportedlyrampeduptheir primecreditscoresremainedwellbelowitspre-crisis C&Iborrowinginparttomakelarger-than-usual levels,whiledebtextendedtothosewithsubprime dividendandbonuspaymentsinadvanceof anticicreditscores—thatis,EquifaxRiskScoresbelow patedyear-endtaxhikes.Arelativelylargefractionof 660—continuedtotrenddown. respondentstotheAprilSLOOSindicatedthat,over theprecedingthreemonths,theyhadeasedstandards Accordingtothemostrecentavailabledata,indica- andpricingtermsforC&Iloanstofirmsof allsizes. torsof distressformosttypesof householddebt Meanwhile,issuanceof leveragedloansextendedby havedeclinedsincetheendof 2012.Forhomemort- nonbankinstitutionsinthesyndicatedloanmarket gages,forexample,thefractionof currentmortgages wasveryelevated,boostedbystronginvestor becoming30ormoredaysdelinquenthasnow demandforthesefloating-rateinstrumentsmanireachedrelativelylowlevelsasaresultof strict festedthroughinflowstoloanmutualfundsand underwritingconditionsfornewmortgagesaswellas rapidgrowthof newlyestablishedcollateralizedloan improvedconditionsinhousingandlabormarkets. obligations.Morethantwo-thirdsof theproceeds Measuresof late-stagemortgagedelinquency,suchas fromsuchsyndicatedloanissuance,however,were theinventoryof propertiesinforeclosure,also reportedlyusedtorepayexistingdebt. improvedbutremainedelevated.Delinquencyrates onstudentloansalsoremainedhigh,likelyreflecting Borrowingconditionsforsmallbusinesses inpartthelackof underwritingonthefederally improved,thoughdemandforcreditremained subdued backedloansthatmakeupthebulkof thestudent loansoutstanding. Someindicatorsof borrowingconditionsforsmall businesseshaveimprovedsincetheendof 2012. Thefinancialconditionsofnonfinancialfirms AccordingtothesurveysconductedbytheNational continuedtobestrong... Federationof IndependentBusiness(NFIB)during thefirsthalf of 2013,thefractionof smallbusinesses Inthefirstquarter,theaggregateratioof liquidto thatfoundcreditmoredifficulttoobtainthanthree totalassetsfornonfinancialfirmstickedupand monthspriordeclinedonnet.Recentreadingsfrom remainednearitshighestlevelin20years,whilethe theFederalReserve’sSurveyof Termsof Business aggregateratioof debttoassetswasstillwellbelow Lendingindicatethatthespreadschargedbycomitsaverageoverthesameperiod.Strongbalance mercialbanksonnewlyoriginatedC&Iloanswith sheets,inturn,havecontributedtosolidcreditqualoriginalamountslessthan$1million—alargeshare ity:Bonddefaultrates,asof June,stayedlowbyhisof whichlikelyconsistof loanstosmallbusinesses— toricalstandards,andthedelinquencyrateoncomcontinuedtoedgedown,thoughtheyremained mercialandindustrial(C&I)loanscontinuedtofall elevated.4However,demandforcreditfromsmall inthefirstquarterfromalreadylowlevels.However, firmsapparentlyremainedsubduedcomparedwith overthefirsthalf of theyear,thevolumeof nonfinancialcorporatebondsthatwereupgradedby 4 DatareleasesfortheSurveyofTermsofBusinessLendingare Moody’sInvestorsServicewaslessthanthevolume availableontheFederalReserveBoard’swebsiteat downgraded. www.federalreserve.gov/releases/e2/default.htm.

30 100thAnnualReport|2013 demandfromlargeandmiddle-marketfirms.Rela- goodsandservicesdeclinedatanannualrateof tivelylargefractionsof respondentsinrecentNFIB 1percentinthefirstquarterof 2013,thoughdatafor surveysindicatedthattheydidnothaveanyborrow- thefirsttwomonthsof thesecondquartersuggest ingneeds,andthetotaldollarvolumeof business thattheyrebounded.ExportstoJapanhavebeen loanswithoriginalamountsof $1millionorlessout- particularlyweak,butthosetoCanadacontinue standingatU.S.commercialbankswaslittlechanged torise. inthefirstquarter. Realimportsof goodsandservicesedgeddownin However,businessspendingoncapital thefirstquarterafterfallingsubstantiallyinthe investmenthasbeenrisingatonlyamodestpace fourthquarterof 2012.DataforAprilandMaysug- Despitethelargeamountof businessborrowing, gestthatimportsrecoveredatamoderatepaceinthe businesses’capitalinvestmenthasbeenrisingonly secondquarter.Althoughimportsof non-oilgoods modestly.Realspendingonequipmentandsoftware andservicesrose,importsof oildeclinedfurtheras (E&S)increasedatanannualrateof 4percentinthe U.S.oilproductioncontinueditsclimbof recent firstquarterafterhavingrisenatasimilar,below- years. averagepacein2012;theseincreaseslikelyreflectthe tepidgrowthinbusinessoutputoverthepastyear. Altogether,netexportswereaneutralinfluenceon Shipmentsandordersof nondefensecapitalgoods thegrowthof realGDPinthefirstquarterof 2013, andotherforward-lookingindicatorsof business andpartialdatasuggestthatthesamewasthecasein spendingareconsistentwithfurthermoderategains thesecondquarter. inE&Sspendinginthespringandsummerof thisyear. Thecurrentaccountdeficitremainedatabout 2½percentof GDPinthefirstquarterof 2013,a Businessinvestmentinstructureshasalsobeenrela- levellittlechangedsince2009.Thecurrentaccount tivelylowsofarthisyear,evenapartfromasharp deficithadnarrowedsubstantiallyinlate2008and drop-off inexpendituresonwind-powerfacilitiesfol- early2009whenU.S.importsdroppedsharply,in lowingatax-relatedburstof constructionlatelast partreflectingthesteepdeclineinoilprices. year.Thelevelof investmentindrillingandmining structureshasstayedelevated,supportedbyhighoil Inthefirstquarterof 2013,thecurrentaccountdefipricesandthecontinuedexploitationof newdrilling citcontinuedtobefinancedbystrongfinancial technologies.However,investmentinnonresidential inflows,mostlyfrompurchasesof Treasurysecurities buildingscontinuestoberestrainedbyhighvacancy bybothforeignofficialandforeignprivateinvestors. ratesforexistingproperties,lowcommercialreal Consistentwithcontinuedimprovementinmarket estate(CRE)prices,andtightfinancingconditions sentiment,U.S.investorsmadefurtherstrongpurfornewconstruction.Indeed,banks’holdingsof chasesof foreignsecurities,especiallyequities. constructionandlanddevelopmentloanshavecontractedeveryquartersincethefirsthalf of 2008. Nationalsavingisverylow Netnationalsaving—thatis,thesavingof U.S. Despiteweakfundamentals,conditionsinmarkets households,businesses,andgovernments,netof forCREfinancingappearedtoloosensomewhat.A depreciationcharges—remainsextremelylowbyhismoderatefractionof banksintheAprilSLOOS toricalstandards.Inthefirstquarterof 2013,net againreportedhavingeasedtheirlendingstandards nationalsavingwas1percentof nominalGDP,up onCREloans,whileasomewhatlargerfractioncon- fromfiguresthataveragedaroundzerooverthepast tinuedtoreportsomeincreaseindemandforthese fewyears.Asdiscussedearlier,thenear-termfederal loans.Inaddition,thepaceof issuanceof commer- deficithasnarrowedbecauseof fiscalpolicychanges cialmortgage-backedsecuritieshassteppedup,on andtheeconomicrecovery,andfurtherdeclinesin balance,thisyear,butitremainedwellbelowitspeak thefederalbudgetdeficitoverthenextfewyears reachedin2007. shouldboostnationalsavingsomewhat.Withthe economystillweakanddemandforinvestablefunds Foreigntradehasbeenrelativelyweak limited,thelowlevelof nationalsavingisnotcon- Exportdemand,whichprovidedsubstantialsupport straininggrowthorleadingtohigherinterestrates. todomesticactivityearlierintherecovery,hasweak- However,if lowlevelsof nationalsavingpersistover enedsincethemiddleof 2012,partlyreflectingsub- thelongerrun,theywilllikelybeassociatedwith duedforeigneconomicactivity.Realexportsof bothlowratesof capitalformationandheavybor-

MonetaryPolicyandEconomicDevelopments 31 rowingfromabroad,limitingtheriseinthestandard 3½percent.AgencyMBSyieldsalsorosesignifiof livingforU.S.residentsovertime. cantlymorethantheyieldsoncomparablenominal Treasurysecuritiesafteradjustingfortheeffectsof FinancialDevelopments higherinterestratesonthelikelihoodthatborrowers willprepaytheirmortgages(theoption-adjusted Theexpectedpathforthefederalfundsratein spread),likelyreflectinginvestors’reassessmentof 2014and2015steepened... theoutlookfortheFederalReserve’sMBSpurchases Market-basedmeasuresof theexpectedfuturepath aswellassubsequentmarketdynamics. of thefederalfundsratemovedhigheroverthefirst half of theyear,asinvestorsrespondedtosomewhat Nonetheless,yieldsonlonger-termsecuritiesconbetter-than-expectedincomingeconomicdataandto tinuetobelowbyhistoricalstandards.Thoselow communicationsfromFederalReserveofficialsthat levelsreflectseveralfactors,includingsubduedinflawereseenassuggestingatighterstanceof monetary tionexpectationsaswellasstill-modesteconomic policythanhadbeenanticipated.Themodalpathof growthprospectsintheUnitedStatesandother thefederalfundsrate—thatis,thevaluesforfuture majordevelopedeconomies.Inaddition,despite federalfundsratesthatmarketparticipantsseeas theirrecentrise,termpremiums—theextrareturn mostlikely—derivedfrominterestrateoptions investorsexpecttoobtainfromholdinglonger-term shiftedupconsiderably,especiallyaroundtheJune securitiesasopposedtoholdingandrollingovera FOMCmeeting,suggestingthatinvestorsmaynow sequenceof short-termsecuritiesforthesame expectthetargetfundsratetoliftoff fromitscurrent period—remainsmall,reflectingboththeFOMC’s rangesignificantlyearlierthantheyexpectedatthe ongoinglarge-scaleassetpurchaseprogramand endof 2012.However,apartof thisincreasemay strongdemandforlonger-termsecuritiesfrom havereflectedariseintermpremiumsassociated globalinvestors. withincreaseduncertaintyaboutthemonetarypolicy outlook.Accordingtoasurveyof primarydealers Indicatorsof marketfunctioninginboththeTreasconductedshortlyaftertheJuneFOMCmeetingby uryandagencyMBSmarketsweregenerallysolid theOpenMarketDeskattheFederalReserveBank overthefirsthalf of theyear.Inparticular,the of NewYork,dealers’expectationsof thedateof Desk’soutrightpurchasesof Treasurysecuritiesand liftoff havemoveduponequartersincetheendof agencyMBSdidnotappeartohaveamaterial lastyear,tothesecondquarterof 2015.5 adverseeffectonliquidityinthosemarkets.For example,availabledatasuggestbid–askedspreadsin ...whileyieldsonlonger-termsecurities TreasuryandagencyMBSmarketscontinuedtobe increasedsignificantlybutremainedlowby inlinewithrecentaverages,thoughsomewidening historicalstandards hasbeenobservedof lateamidincreasedmarket Reflectingthesamefactors,yieldsonlonger-term volatility.IntheTreasurymarket,auctionsgenerally TreasurysecuritiesandagencyMBSarealsosubstancontinuedtobewellreceivedbyinvestors.Inthe tiallyhighernowthantheywereattheendof last agencyMBSmarket,settlementfailsremainedlow, year.Theriseinlonger-termyieldsappearstohave andimpliedfinancingratesinthe“dollarroll”marbeenamplifiedbyapullbackfromdurationriskas ket—anindicatorof thescarcityof agencyMBSfor wellastechnicalfactors,includingrapidchangesin settlement—havedriftedupoverthepastsixmonths, tradingstrategiesandpositionsthathadbeenprediindicatingreducedsettlementpressures.6 catedonthecontinuationof verylowratesandvolatility.Onbalance,yieldson5-,10-,and30-yearnomi- Short-termfundingmarketscontinuedto nalTreasurysecuritieshaveincreasedbetween65and functionwell 85basispoints,onnet,to1½percent,2½percent, Conditionsinshort-termfundingmarketsremained and3¾percent,respectively,sincetheendof good,withmanymoneymarketrateshavingedged lastyear. downfromalreadylowlevelssincetheendof 2012to nearthebottomof therangestheyhaveoccupied Yieldson30-yearagencyMBSincreasedmorethan thoseonTreasurysecurities,risingabout1¼percent- 6 Dollarrolltransactionsconsistofapurchaseorsaleofagency agepoints,onnet,sincetheendof 2012,toabout MBSwiththesimultaneousagreementtosellorpurchasesubstantiallysimilarsecuritiesonaspecifiedfuturedate.TheCom- 5 Theresultsofthesurveyofprimarydealersareavailableonthe mitteedirectstheDesktoengageinthesetransactionsasneces- FederalReserveBankofNewYork’swebsiteatwww sarytofacilitatesettlementoftheFederalReserve’sagency .newyorkfed.org/markets/primarydealer_survey_questions.html. MBSpurchases.

32 100thAnnualReport|2013 sincethezero-lower-boundperiodbegan.Inthemar- interestmarginsastheyieldcurvesteepenedoverthe ketforrepurchaseagreements,bid–askedspreads pastfewmonths.However,pricesof realestate andhaircutsformostcollateraltypeswerereportedly investmenttrust(REIT)sharesunderperformed, littlechanged,whileratesmoveddownslightly,on especiallyafterinterestratesstartedrisinginMay, net,forgeneralcollateralfinancerepurchaseagree- partiallyreflectingabroadershiftonthepartof ments.Despitethehighlevelof reservebalancesand investorsfromincome-orientedsharestowardmore thesubstantiallyreducedvolumeof tradinginthe cyclicallysensitiveissues.Sharesof mortgageREITs federalfundsmarketsince2008,theeffectivefederal wereparticularlyaffectedbythesharpriseinTreasfundsratehascontinuedtobestronglycorrelated uryandagencyMBSyields. withthesemoneymarketrates.Ratesonassetbackedcommercialpaper(ABCP)alsofell,and Equitypricesforlargedomesticbankshaveincreased spreadsonABCPwithEuropeanbanksponsors 24percentsincetheendof 2012.However,theyhave havegenerallyconvergedbacktothoseonABCP yettofullyrecoverfromtheverydepressedlevels withU.S.banksponsors.Ratesonunsecuredfinan- reachedduringthefinancialcrisis.StandardmeascialCPforbothU.S.andEuropeanissuershave uresof theprofitabilityof bankholdingcompanies remainedlow,evenduringthetemporaryflare-upof (BHCs)edgeddowninthefirstquarterbutremained concernsaboutEuropeanfinancialstabilitysur- intheupperendof theirsubduedpost-crisisrange. roundingthebankingproblemsinCyprus,whilefor- BHCprofitswerehelddownbymodestnoninterest wardmeasuresof fundingspreadshavecontinuedto incomeandafurthernarrowingof netinterestmarbenarrowbyhistoricalstandards. gins.Bycontrast,profitsweresupportedbyadditionalreductionsinnoninterestexpensesand Broadequitypriceindexesincreasedfurther... decreasesinprovisioningforloanlosses,asindicators Broadequitypriceindexesnotchedsubstantialgains of creditqualityimprovedfurtherineverymajor andreachedrecordlevelsinnominalterms,boosted assetclass.Banks’allowancesforloanandlease byimprovedmarketsentimentregardingtheeco- lossescontinuedtotrenddownascharge-offsof bad nomicoutlook,theFOMC’ssustainedhighlyaccom- loansonceagainexceededprovisionsinthefirst modativemonetarypolicy,andstableexpectations quarter. aboutmedium-termearningsgrowth.Despitethe increasedvolatilityaroundthetimeof theJune Risk-basedcapitalratios(basedoncurrentBaselI FOMCmeeting,asof mid-July,broadmeasuresof definitions)of the25largestBHCsdecreasedinthe equitypriceswere18percenthigher,onnet,than firstquarterbecauseof theadoptionof thenewmartheirlevelsattheendof 2012.Nonetheless,the ketriskcapitalrule,whilerisk-basedcapitalratiosat spreadbetweenthe12-monthexpectedforward smallerBHCsedgedup.7Nonetheless,BHCsof all earnings–priceratiofortheS&P500andalong-run sizesremainedwellcapitalizedbyhistoricalstandards realTreasuryyield—aroughgaugeof theequityrisk astheyprepareforthetransitiontostricterBaselIII premium—stayedveryelevatedbyhistoricalstan- requirements(seethebox“DevelopmentsRelatedto dards,suggestingthatinvestorsremainsomewhat FinancialStability”onpages26–27of theJuly2013 cautiousintheirattitudestowardequities.Outsideof MonetaryPolicyReport).Aggregatecreditprovided theperiodsurroundingtheJuneFOMCmeeting, bycommercialbankscontinuedtoincreaseinthe impliedvolatilityfortheS&P500index,ascalculated firsthalf of 2013. fromoptionprices,generallyremainednearthebottomendof therangeithasoccupiedsincetheonset M2roseatamoremoderaterate,butbalances of thefinancialcrisis. remainelevated M2hasincreasedatanannualrateof about4¾per- ...andmarketsentimenttowardfinancial centsincetheendof 2012,notablyslowerthanthe institutionscontinuedtostrengthenascredit paceregisteredlastyear.However,holdingsof M2 qualityimproved assets—includingtheirlargestcomponent,liquid Onaverage,theequitypricesof domesticfinancial institutionshaveoutperformedbroaderequity 7 Thenewmarketriskcapitalrulerequiresbankingorganizations withsignificanttradingactivitiestoadjusttheircapitalrequireindexessincetheendof lastyear.Improvedinvestor mentstobetteraccountforthemarketrisksofthoseactivities. sentimenttowardthefinancialsectorreportedlywas Formoreinformationonthischange,seeBoardofGovernors drivenbyperceptionsof reduceddownsideriskinthe oftheFederalReserveSystem(2012),“FederalReserveBoard ApprovesFinalRuletoImplementChangestoMarketRisk housingmarketaswellasexpectationsof continued CapitalRule,”pressrelease,June7,www.federalreserve.gov/ improvementsincreditqualityandof increasednet newsevents/press/bcreg/20120607b.htm.

MonetaryPolicyandEconomicDevelopments 33 deposits—remainedelevatedrelativetowhatwould TheimprovedsentimenttowardtheU.S.economic havebeenexpectedbasedonhistoricalrelationships outlookandanticipationof less-accommodative withnominalincomeandinterestrates,likelydueto monetarypolicyhavepushedtheU.S.dollarhigher investors’continuedpreferencetoholdsafeandliq- againstabroadsetof currenciessincetheendof uidassets.Themonetarybase—whichisequaltothe 2012.Inparticular,thedollarhasappreciatedsharply sumof currencyandreservebalances—increased againsttheJapaneseyen,onnet,astheBOJadopted brisklyoverthefirsthalf of theyear,drivenmainly amoreaccommodativemonetarypolicystance. bythesignificantriseinreservebalancesduetothe FederalReserve’sassetpurchases. Activityintheadvancedforeigneconomies remainedsubdueddespiteapickup... InternationalDevelopments ActivityintheAFEsimprovedtoastill-mutedpace inthefirsthalf of 2013,supportedinpartby Foreignbondyieldshaverisenandassetprices strongerexportsandtheeasinginfinancialstressesin havedeclined,onnet,especiallyin Europe.Theeuro-areaeconomyshrankfurtherinthe emergingmarketeconomies firstquarter,butthepaceof contractionmoderated Foreignbenchmarksovereignyieldshavemoved asconsumptionstabilized.IntheUnitedKingdom, somewhathigher,onnet,sincethebeginningof the realGDPresumedgrowing,ata1¼percentpace,in year.RatesmovedlowerinMarchandApril,inpart thefirstquarter;retailsalesandthepurchasingmanreflectingweakincomingdataonactivity;anticipaagersindex(PMI)suggestthatgrowthfirmedinthe tionof theBankof Japan’s(BOJ)assetpurchase secondquarter.First-quarteractivityacceleratedin programmayhavealsocontributedtodeclining Japan,reflectingastrongreboundof exportsanda Japanesegovernmentbond(JGB)yieldsearlyinthe pickupinconsumption.Canadiangrowthalso year.SinceearlyMay,however,aswithU.S.Treasury firmedinthefirstquarter,andthelabormarket securities,sovereignyieldshaverisenworldwide,as notchedsolidemploymentgainsthroughthesecond investorsrespondedtobetter-than-expectedU.S.ecoquarter. nomicdataandtoFederalReservecommunications aboutmonetarypolicy.Sovereignyieldsareup,on Withactivityweakandinflationarypressureslow, net,inEurope,Japan,andCanadaandhave severalforeigncentralbankstookadditionalstepsto increasedsubstantiallyinKorea,Mexico,andother supporttheireconomies.(Seethebox“TheExpanemergingmarketeconomies(EMEs). sionof CentralBankBalanceSheets”onpages30–31 of theJuly2013MonetaryPolicyReportfora Equityindexesinthemajoradvancedforeigneconobroaderoverviewof centralbankactions.)TheEuromies(AFEs)roseearlierintheyear,especiallyin peanCentralBank(ECB)andtheReserveBankof Japan,wherestockpricescontinuedtosoarasPrime Australialoweredtheirmainpolicyrates,andthe MinisterAbe’sambitiousstimulusprogrambeganto ECBstatedafteritsJulymeetingthatitwillkeepkey takeshape.However,sincemid-May,equityprices policyrateslow“foranextendedperiod.”TheBank havedeclinedonnet.Corporatebondissuanceeased of EnglandextendeditsFundingforLending somewhatinJuneasratesclimbedhigher,butyear- SchemeuntilJanuary2015andincreasedbanks’ to-dateissuancetotalsarestillstrongrelativeto incentivestolendtosmallandmedium-sizedbusirecentyears.Sincethestartof theyear,sovereignand nesses.InApril,theBOJannouncedasharprisein corporatecreditspreadshavenarrowedslightly. itspurchasesof JGBsandotherassets,aswellasan FinancialstressesinEuropehaveremainedwell extensionof thematurityof theJGBsthatit belowtheirhighslastyeardespitebankingproblems purchases. inCyprusandpoliticaltensionsinseveralother Europeancountries. AuthoritiesinsomeAFEsalsoeasedfiscalpolicyin ThesignificantlyhigherinterestratesinEMEshave responsetostill-subduedactivity.TheJapaneseparbeenaccompaniedbysharpmovesinotherEME liamentapprovedafiscalstimuluspackageworth financialmarkets.Sincemid-May,stockpriceshave about2percentof GDP,withthebulkof thespenddeclinedandcreditspreadshavewidenedmarkedly. ingdirectedtoinfrastructureprojects.European EMEbondandequityfundshavealsoexperienced authoritiespostponeddeadlinesforseveraleuro-area sizableoutflows,asinvestorsreassessedtheeconomic countries,includingFranceandSpain,toreducefisoutlookintheseeconomiesaswellasthereturnson caldeficitsbelow3percentof GDP. EMEassetsrelativetothoseinadvancedeconomies.

34 100thAnnualReport|2013 ...whilegrowthslowedintheemergingmarket tothetargetforthefederalfundsrateandcontinuing economies itsprogramof large-scaleassetpurchases. AggregaterealGDPgrowthintheEMEspickedup Tofostertheattainmentofmaximum inthefourthquarterof 2012despitetheweaknessin employmentandpricestability,theFOMCkeptin EuropeandtheUnitedStates,ledbyastrongperforplaceitsforwardguidanceonthepathofthe manceof theChineseeconomy.However,EME federalfundsrate... growthslowedconsiderablyinthefirstquarter,in partasastep-downinChinesegrowthweighedon Withunemploymentstillelevatedanddecliningonly activityintherestof emergingAsiaandonthe gradually,andinflationhavingmovedfurtherbelow commodity-dependenteconomiesof SouthAmerica. theCommittee’s2percentlonger-runobjective,the Recentindicatorsof exports,industrialproduction, FOMChasmaintaineditshighlyaccommodative andPMIssuggestthatEMEactivityremainedsub- monetarypolicystancethisyear.Becausethetarget duedinthesecondquarter.Amidconcernsabout rangeforthefederalfundsrateremainsatitseffective economicgrowthandlackof inflationarypressures, lowerbound,theCommitteehasbeenrelyingmainly thecentralbanksof severalcountriesinAsiaand onitsforwardguidanceaboutthefuturepathof the LatinAmericafurthereasedmonetarypolicyover federalfundsrateandonitsprogramof large-scale thefirsthalf of theyear.However,morerecently, assetpurchasestomakeprogresstowarditsmanconcernsaboutreversalof capitalinflowsandcur- datedobjectives. rencydepreciationpressuresaregivingEMEcentral bankspauseaboutfurtherratecuts,andafewhave Withregardtothefederalfundsrate,theCommittee beguntoraiserates. hascontinuedtoindicateitsexpectationthatthecurrentexceptionallylowtargetrangeof 0to¼percent InChina,macroeconomicdataforthesecondquar- willbeappropriateatleastaslongastheunemployterindicatethatgrowthcontinuedtobemodestby mentrateremainsabove6½percent,inflation thestandardsof recentyears.Althoughretailsales betweenoneandtwoyearsaheadisprojectedtobe roseslightlyfasterinAprilandMaythaninthesub- nomorethanahalf percentagepointabovethe duedfirstquarter,fixedinvestmentincreasedat Committee’s2percentlonger-rungoal,andlongerroughlyitsfirst-quarterpace. terminflationexpectationscontinuetobewell anchored.Indetermininghowlongtomaintainits targetrangeforthefederalfundsrate,theCommittee ActivityalsocooledacrossLatinAmerica.In hasstatedthatitwouldalsoconsiderotherinforma- Mexico,growthhadalreadyslowedinthesecondhalf tion,includingadditionalmeasuresof labormarket of lastyear,weigheddownbyweakerU.S.manufacconditions,indicatorsof inflationpressuresand turingactivity.Growthslowedfurtherinthefirst inflationexpectations,andreadingsonfinancial quarter,asexportsdeclinedanddomesticdemand developments.TheFOMCalsohasreiteratedthata weakened.Inresponse,theBankof Mexicoreduced highlyaccommodativestanceof monetarypolicy itspolicyrateforthefirsttimesincemid-2009.Mexiwouldremainappropriateforaconsiderabletime canactivityappearstohaveremainedsubduedinthe aftertheassetpurchaseprogramendsandtheecosecondquarter.BrazilianrealGDPgrowthstepped nomicrecoverystrengthens.Moreover,theCommitdownalittleinthefirstquarter,extendingthelackteehasindicatedthatwhenitdecidestobeginto lusterperformanceof thepasttwoyears.Indicators removepolicyaccommodation,itwouldtakeabalof economicactivityforthesecondquarter,includancedapproachconsistentwithitslonger-rungoals ingindustrialproductionandexports,havebeen of maximumemploymentandinflationof 2percent. mixed.Unlikemanyof itsEMEcounterparts,Brazil’scentralbankraiseditspolicyratetocombat ...andmaintaineditspolicyoflarge-scaleasset risinginflation. purchases... Tosustaindownwardpressureonlonger-terminter- Part 2: Monetary Policy estrates,supportmortgagemarkets,andhelpmake broaderfinancialconditionsmoreaccommodative, Withunemploymentstillwellabovenormallevels theFOMChascontinueditslarge-scaleassetpurandinflationbelowitslonger-runobjective,theFed- chases;theCommitteealsohasmaintaineditspraceralOpenMarketCommittee(FOMC)hascontin- ticesof reinvestingprincipalpaymentsitreceiveson ueditshighlyaccommodativemonetarypolicythis agencydebtandagency-guaranteedmortgageyearbymaintainingitsforwardguidancewithregard backedsecurities(MBS)innewagencyMBSandof

MonetaryPolicyandEconomicDevelopments 35 rollingovermaturingTreasurysecuritiesatauction. information,theCommitteenotedthatitwaspre- Overthefirsthalf of thisyear,purchasesof longer- paredtoincreaseorreducethepaceof itspurchases termsecuritiestotaled$510billion,withtheCommit- tomaintainappropriatepolicyaccommodationas teepurchasingadditionalagencyMBSatapaceof theoutlookforthelabormarketorinflation $40billionpermonthandlonger-termTreasury changed.11 securitiesatapaceof $45billionpermonth.The Committeereconfirmedateachmeetingduringthe AttheJuneFOMCmeeting,Committeeparticipants firsthalf of 2013thatitwouldcontinuepurchasing generallythoughtitwouldbehelpfultoprovide TreasuryandagencyMBSuntiltheoutlookforthe greaterclarityabouttheCommittee’sapproachto labormarkethasimprovedsubstantiallyinacontext decisionsaboutitsassetpurchaseprogramand of pricestability. therebyreduceinvestors’uncertaintyabouthowit mightreacttofutureeconomicdevelopments.In Indeterminingthesize,pace,andcompositionof its choosingtoprovidethisclarification,theCommittee assetpurchases,theCommitteehastakenaccountof madenochangestoitsapproachtomonetarypolicy. thelikelyefficacyandcostsof suchpurchases.As Againstthisbackdrop,ChairmanBernanke,athis notedintheminutesof theMarchFOMCmeeting, postmeetingpressconference,describedapossible mostparticipantssawassetpurchasesashavinga pathforassetpurchasesthattheCommitteewould meaningfuleffectineasingfinancialconditions—for anticipateimplementingif economicconditions example,keepinglonger-terminterestrates,including evolvedinamannerbroadlyconsistentwiththeoutmortgagerates,lowerthantheywouldbeother- comestheCommitteesawasmostlikely.12The wise—andsosupportingeconomicgrowth.8FOMC Chairmannotedthatsucheconomicoutcomes participantsgenerallyjudgedthatthesebenefitsout- involvedcontinuedgainsinlabormarkets,supported weighedthelikelycostsandrisksof additionalpur- bymoderategrowththatpicksupoverthenextsevchases.However,theCommitteehascontinuedto eralquarters,andinflationmovingbacktowardits monitorthosecostsandrisks,includingpossible 2percentobjectiveovertime.If theeconomywereto effectsonfinancialstability,securitymarketfunc- evolvebroadlyinlinewiththeCommittee’sexpectationing,thesmoothwithdrawalof monetaryaccom- tions,theFOMCwouldmoderatethepaceof purmodationwheniteventuallybecomesappropriate, chaseslaterthisyearandcontinuetoreducethepace andtheFederalReserve’snetincome.9 of purchasesinmeasuredstepsuntilpurchasesended aroundthemiddleof nextyear,atwhichtimethe ...whileprovidingadditionalinformationabout unemploymentratewouldlikelybeinthevicinityof potentialadjustmentstoitsassetpurchases 7percent,withsolideconomicgrowthsupporting Duringthefirsthalf of 2013,theFOMCtookvari- furtherjobgainsandinflationmovingbacktoward ousstepstoprovidegreaterclarityregardingits theFOMC’s2percenttarget. thinkingaboutpossibleadjustmentsinthepaceof assetpurchasesandtheeventualcessationof those InemphasizingthattheCommittee’spolicywasin purchases.InitsstatementaftertheMarchmeeting, nowaypredetermined,theChairmannotedthatif theCommitteeaddedthatthesize,pace,andcompoeconomicconditionsimprovedfasterthanexpected, sitionof itsassetpurchaseswouldreflecttheextent thepaceof assetpurchasescouldbereducedsomeof progresstowarditseconomicobjectives,inaddiwhatmorequickly.Conversely,if theoutlookforthe tiontothelikelyefficacyandcostsof suchpureconomyorthelabormarketbecamelessfavorable, chases.10AndinMay,tohighlightitswillingnessto inflationdidnotmoveovertimetowardtheCommitadjusttheflowof purchasesinlightof incoming tee’s2percentlonger-termobjective,orfinancial conditionswerejudgedtobeinconsistentwithfur- 8 SeeBoardofGovernorsoftheFederalReserveSystem(2013), therprogressinthelabormarkets,reductionsinthe “MinutesoftheFederalOpenMarketCommittee,March19– 20,2013,”pressrelease,April10,www.federalreserve.gov/ paceof purchasescouldbedelayedorthepace newsevents/press/monetary/20130410a.htm. increasedforatime.TheChairmanalsodrewa 9 Forfurtherdiscussionoftheseissues,seethebox“Efficacyand CostsofLarge-ScaleAssetPurchases”inBoardofGovernors oftheFederalReserveSystem(2013),MonetaryPolicyReport 11 SeeBoardofGovernorsoftheFederalReserveSystem(2013), (Washington:BoardofGovernors,February),www “FederalReserveIssuesFOMCStatement,”pressrelease, .federalreserve.gov/monetarypolicy/mpr_20130226_part2.htm. May1,www.federalreserve.gov/newsevents/press/monetary/ 10 SeeBoardofGovernorsoftheFederalReserveSystem(2013), 20130501a.htm. “FederalReserveIssuesFOMCStatement,”pressrelease, 12 SeeBenS.Bernanke(2013),“TranscriptofChairmanBernan- March20,www.federalreserve.gov/newsevents/press/monetary/ ke’sPressConference,”June19,www.federalreserve.gov/ 20130320a.htm. mediacenter/files/FOMCpresconf20130619.pdf.

36 100thAnnualReport|2013 strongdistinctionbetweentheassetpurchasepro- marketoperationsanddiscountwindowoperations gramandtheforwardguidanceregardingthetarget withatwo-yearlagincompliancewiththeDodd– forthefederalfundsrate,notingthattheCommittee FrankWallStreetReformandConsumerProtection anticipatesthattherewillbeaconsiderableperiod Actof 2010. betweentheendof assetpurchasesandthetime whenitbecomesappropriatetoincreasethetarget TheCommitteealsoreviewedtheprinciplesfor forthefederalfundsrate. policynormalization DuringitsMayandJunemeetings,theFOMC TheCommittee’slarge-scaleassetpurchases reviewedtheFederalReserve’sprinciplesforthe ledtoasignificantincreaseinthesizeofthe eventualnormalizationof thestanceof monetary FederalReserve’sbalancesheet policy,whichinitiallywerepublishedintheminutes Asaresultof theCommittee’slarge-scaleassetpur- of theCommittee’sJune2011meeting.16TheComchaseprogram,FederalReserveassetshaveincreased mittee’sdiscussionincludedvariousaspectsof those significantlysincetheendof lastyear.Theparvalue principles—thesizeandcompositionof theSOMA of theSystemOpenMarketAccount’s(SOMA) portfoliointhelongerrun,theuseof arangeof holdingsof U.S.Treasurysecuritiesincreasedabout reserve-drainingtools,theapproachtosalesof secu- $300billionto$2trillion,andtheparvalueof its rities,theeventualframeworkforpolicyimplementaholdingsof agencydebtandMBSincreasedabout tion,andtherelationshipbetweentheprinciplesand $270billion,onnet,to$1.3trillion.13Theseasset theeconomicthresholdsintheCommittee’sforward purchasesaccountedfornearlyallof theincreasein guidanceonthefederalfundsrate.Meetingparticitotalassetsof theFederalReserveandwereaccom- pants,ingeneral,continuedtoviewthebroadprinpaniedbyasignificantriseinreservebalancesover ciplessetoutin2011asstillapplicable.Nonetheless, theperiod.Asof July10,theSOMA’sholdingsof theyagreedthatmanyof thedetailsof theeventual Treasuryandagencysecuritiesconstituted56percent normalizationprocesswouldlikelydifferfromthose and36percent,respectively,of the$3.5trillionin specifiedtwoyearsago,thattheappropriatedetails totalFederalReserveassets.Bycontrast,balancesof woulddependinpartoneconomicandfinancial facilitiesestablishedduringthefinancialcrisis developmentsbetweennowandthetimewhenit declinedfurtherfromalreadylowlevels.14 becomesappropriatetobeginnormalizingmonetary policy,andthattheCommitteewouldneedtopro- InterestincomeontheSOMAportfoliocontinuedto videadditionalinformationaboutitsintentionsas supportasubstantialsumof remittancestothe thattimeapproaches.Participantscontinuedtothink TreasuryDepartment.Inthefirstquarter,theFed- thattheFederalReserveshould,inthelongrun,hold eralReserveprovidedmorethan$15billionof such predominantlyTreasurysecurities.Most,however, distributionstotheTreasury.15TheFederalReserve nowanticipatedthattheCommitteewouldnotsell hasalsoreleaseddetailedtransactionsdataonopen agencyMBSaspartof thenormalizationprocess, althoughsomeindicatedthatlimitedsalesmightbe 13 ThedifferencebetweenchangesintheparvalueofSOMAhold- warrantedinthelongerruntoreduceoreliminate ingsandtheamountofpurchasesofsecuritiessincetheendof residualholdings. 2012reflects,inpart,lagsinsettlements. 14 Theoutstandingamountofdollarsprovidedthroughthetem- TheFederalReservecontinuedtotesttoolsthat poraryU.S.dollarliquidityswaparrangementswithforeigncencouldpotentiallybeusedtomanagereserves tralbanksdecreased$7billiontoabout$1billionbecauseofthe improvementinoffshoreU.S.dollarfundingmarkets.During Aspartof theFederalReserve’songoingprogramto thefinancialcrisis,theFederalReservecreatedseveralspecial ensurethereadinessof toolstomanagereserves,the lendingfacilitiestosupportfinancialinstitutionsandmarkets andstrengtheneconomicactivity.Thesefacilitieswereclosedby FederalReserveconductedaseriesof small-scale 2010;however,someloansmadeundertheTermAsset-Backed transactionswitheligiblecounterparties.Duringthe SecuritiesLoanFacility,whichisclosedtonewlending,remain firsthalf of 2013,theFederalReserveconductedfour outstandingandwillmatureoverthenexttwoyears.Otherprogramssupportedcertainspecificinstitutionsinordertoavert repurchaseagreement(repo)operationsandthree disorderlyfailuresthatcouldhaveresultedinseveredislocations reverserepurchaseagreement(reverserepo)operaandstrainsforthefinancialsystemasawholeandharmedthe U.S.economy.WhiletheloansmadebytheFederalReserve undertheseprogramshavebeenrepaid,theFederalReservewill Board’swebsiteatwww.federalreserve.gov/monetarypolicy/ continuetoreceivecashflowsgeneratedfromassetsremaining quarterly-balance-sheet-developments-report.htm. intheportfoliosestablishedinconnectionwithsuchsupport, 16 SeeBoardofGovernorsoftheFederalReserveSystem(2011), principallytheportfolioofMaidenLaneLLC. “MinutesoftheFederalOpenMarketCommittee,June21–22, 15 TheQuarterlyReportonFederalReserveBalanceSheetDevelop- 2011,”pressrelease,July12,www.federalreserve.gov/newsevents/ mentsforthefirstquarterisavailableontheFederalReserve press/monetary/20110712a.htm.

MonetaryPolicyandEconomicDevelopments 37 tions.Operationsizesrangedbetween$0.2and ReserveBoardconductedthreeoperationsfor28-day $2.8billionusingalleligiblecollateraltypes.While termdepositsundertheTermDepositFacility therepotransactionswereconductedonlywithpri- (TDF).Theseoperationsincludedtwocompetitive marydealers,twoof thereverserepooperationswere single-priceTDFauctionstotaling$3billionin opentotheexpandedsetof eligiblecounterparties, depositsandanofferingwithafixed-rate,fullwhichincludenotonlyprimarydealers,butalso allotmentformat,whichtotaled$10billionin banks,government-sponsoredenterprises,and deposits. moneymarketfunds.17Inaddition,theFederal partiesareinadditiontotheexistingsetofprimarydealercoun- 17 Toprepareforthepotentialneedtoconductlarge-scalereverse terpartieswithwhomtheFederalReservecanalreadyconduct repotransactions,theFederalReserveBankofNewYorkis reverserepos.Thelistoftheexpandedsetofcounterpartiesis developingarrangementswithanexpandedsetofcounterpar- availableontheFederalReserveBankofNewYork’swebsiteat tieswithwhichitcanconductthesetransactions.Thesecounter- www.newyorkfed.org/markets/expanded_counterparties.html.

39 3 Supervision and Regulation TheFederalReservehassupervisoryandregulatory recovery,withthenonperformingassetratioremainauthorityoveravarietyof financialinstitutionsand ingelevatedat2.5percentof loansandforeclosed activitieswiththegoalof promotingasafe,sound, assets,animprovementfrom3.4percentatyear-end andstablefinancialsystemthatsupportsthegrowth 2012.(Alsosee“BankHoldingCompanies”laterin andstabilityof theU.S.economy.Asdescribedin thissection.) thisreport,theFederalReservecarriesoutitssupervisoryandregulatoryresponsibilitiesandsupporting Performanceof statememberbanks.Theperforfunctionsprimarilyby manceatstatememberbanksin2013improvedmodestlycomparedto2012.Asagroup,statemember • promotingthesafetyandsoundnessof individual banksreportedaprofitof $18.2billionfor2013,up financialinstitutionssupervisedbytheFederal from$17.8billionfor2012andnearpre-crisislevels. Reserve; However,profitabilityfromareturnonaverageassets • developingsupervisorypolicy(rulemakings,super- (ROA)andreturnonequity(ROE)perspectivestill visionandregulationletters(SRletters),policy lagspre-crisislevelsbynearlyaquarterandonestatements,andguidance); third,respectively.Provisions(asapercentof revenue)havecontinuedtodecreaseandarenow • identifyingrequirementsandsettingprioritiesfor 3.1percent,downfromacrisishighof 32.4percent supervisoryinformationtechnologyinitiatives; atyear-end2009.Further,4.1percentof allstate • ensuringongoingstaff developmenttomeetevolv- memberbankscontinuedtoreportlosses,downfrom ingsupervisoryresponsibilities; 6.5percentforyear-end2012.Thenonperforming assetsratioremainedelevatedat1.4percentof loans • regulatingtheU.S.bankingandfinancialstructure andforeclosedassets,reflectingongoingweaknesses byactingonavarietyof proposals;and inassetquality.Growthinproblemloanscontinued • enforcingotherlawsandregulations. toslowduring2013;however,loantypeswiththe largestdollarweaknessincludednonresidentiallendingandresidentialmortgages.Therisk-basedcapital 2013 Developments ratiosforstatememberbankswerebasically unchangedcomparedtotheprioryearintheaggre- During2013,theU.S.bankingsystemandfinancial gate,andthepercentof statememberbanksdeemed marketscontinuedtoimprovefollowingtheirrecov- wellcapitalizedunderpromptcorrectiveactionstaneryfromthefinancialcrisisthatstartedinmid-2007. dardsremainedhighat99percent.In2013,onestate memberbankwith$45millioninassetsfailed.(Also Performanceof bankholdingcompanies.Animprove- see“StateMemberBanks”laterinthissection.) mentinbankholdingcompanies’(BHCs)performancewasevidentduring2013.U.S.BHCs,inaggre- Revisedregulatorycapitalframework.InJuly2013, gate,reportedearningsapproachinganall-time thefederalbankingagenciesissuedrulesthatrestruchigh—$139billionfor2013,upfrom$117billionfor turetheagencies’currentregulatorycapitalrules. theyearendingDecember31,2012.Theproportion Thecapitalrequirementsintherevisedframework of unprofitableBHCscontinuestodecline,reaching serveasthefoundationforotherkeyinitiatives 6percent,downfrom11percentin2012,butremains designedtostrengthenfinancialstability,including elevatedcomparedtohistoricalrates;unprofit- theBoard’scapitalplanrule,Dodd-FrankActstress ableBHCsencompassroughly1percentof banking testing,andcapitalsurchargesforsystemicallyimporindustryassets,inlinewithhistoricalnorms.Nonper- tantfinancialinstitutions(SIFIs).(Seebox1for formingassetscontinuetobeachallengetoindustry details.)

40 100thAnnualReport|2013 Box 1. Revised Regulatory Capital Framework InJuly2013,thefederalbankingagenciesissued tivity.Theruleincludesrevisionstothemethodrulesthatrestructuretheagencies’currentregula- ologiesfordeterminingrisk-weightedassets, torycapitalrulesintoaharmonized,comprehensive suchasforsecuritizationexposures,past-due frameworkthataddressesshortcomingsinregula- loans,andcounterpartycreditrisk.Inaddition, torycapitalrequirementsthatbecameapparentdur- therulemodifiestherecognitionofcreditrisk ingtherecentfinancialcrisis.Thecapitalrequire- mitigationtoincludegreaterrecognitionoffinanmentsintherevisedframeworkserveasthefoun- cialcollateralandawiderrangeofeligibleguardationforotherkeyinitiativesdesignedto antors.Therulealsoeliminatesreferencesto strengthenfinancialstability,includingtheBoard’s andrelianceoncreditratingsinthecalculation capitalplanrule,Dodd-FrankActstresstesting,and ofrisk-weightedassets,consistentwiththe capitalsurchargesforsystemicallyimportantfinan- requirementsoftheDodd-FrankAct. cialinstitutions. 3. Appliesadditionalrequirementstolarge, Therevisedframeworkappliestoallbanks,savings internationallyactivebankingorganizations associations,bankholdingcompaniesthatarenot toaddressthesystemicrisktheseorganizasubjecttotheBoard’ssmallbankholdingcompany tionsmaypose.Toaddresscertainshortcompolicystatement,andcertainsavingsandloanhold- ingsidentifiedduringthefinancialcrisis,therule ingcompanies.Theframeworkimplementsinthe requiresthatlarge,internationallyactivebanking UnitedStatestheBaselIIIregulatorycapitalreforms organizationsmaintainhigherlevelsofcapitalfor fromtheBaselCommitteeonBankingSupervision exposurestolargeandunregulatedfinancial andcertainchangesrequiredbytheDodd-Frank institutions.Therulealsoincludeshighercoun- Act.Morespecifically,thenewcapitalframework: terpartycreditriskcapitalrequirementsforoverthe-counterderivativesandintroducesacounter- 1. Increasesthequantityandqualityofcapital cyclicalcapitalbufferthatallowsregulatorsto bankingorganizationsmusthold.Tohelp expandthecapitalconservationbufferofthese ensurethatbankingorganizationsmaintain firmsduringperiodsofexcessivecreditgrowth. strongcapitalpositions,therevisedframework Inaddition,thesefirmsaresubjecttoanew incorporatestheBaselIIIdefinitionofcapital, minimumsupplementaryleverageratiothat newminimumratios,andacapitalconservation takesintoaccountoff-balancesheetexposures. buffer.Theframeworkemphasizescommon equitytier1capitalasthehighestquality,most TransitionArrangements loss-absorbingformofcapital.Highamountsof loss-absorbingcapitalallowbankingorganiza- Bankingorganizationshaveasignificanttransition tionstoremainviableandcontinuelendingto periodtomeetthenewrequirements.Thephase-in creditworthyborrowersintimesoffinancial periodforsmaller,lesscomplexbankingorganizastress.Thecapitalconservationbufferlimitsa tionswillnotbeginuntilJanuary2015whilethe bankingorganization’scapitaldistributionsand phase-inperiodforlargerinstitutionssubjecttothe certaindiscretionarybonuspaymentsiftheorga- advancedapproachesrulebeginsinJanuary2014. nizationdoesnotholdaspecifiedamountof Inaddition,savingsandloanholdingcompanies commonequitytier1capitalinadditiontothe withsignificantcommercialorinsuranceunderwriting amountnecessarytomeettheminimumrisk- activitieswillnotbesubjecttotheruleatthistime. basedcapitalrequirements.Thisbufferis TheFederalReservewilltakeadditionaltimeto designedtoprovideincentivesforbankingorga- evaluatetheappropriateregulatorycapitalframenizationstoconservecapitalduringbenigneco- workfortheseentities. nomicperiods,sothattheyarepreparedtowithstandseverestresseventsandstillremain Therevisedregulatorycapitalframeworkisavailable abovetheminimumcapitallevels. atwww.gpo.gov/fdsys/pkg/FR-2013-10-11/pdf/2013- 21653.pdf. 2. Improvesthemethodologyforcalculating risk-weightedassetstoenhancerisksensi- Proposedliquiditycoverageratio.InOctober2013, Capitalplanningandstresstesting.Sincethefinancial thefederalbankingagenciesjointlypublisheda crisis,theBoardhasledaseriesof initiativesto noticeof proposedrulemaking(NPR)toimplement, strengthenthecapitalpositionsof thelargestbankforthefirsttime,quantitativeliquidityrequirements ingorganizations.Tworelatedinitiativesarethe forinternationallyactiveU.S.bankingorganizations. ComprehensiveCapitalAnalysisandReview (Seebox2fordetails.) (CCAR)andtheDodd-FrankActstresstests.(Also

SupervisionandRegulation 41 Box 2. Proposed Liquidity Coverage Ratio InOctober2013,thefederalbankingagencies HighQualityLiquidAssets jointlypublishedanNPRtoimplement,forthefirst ToensurethattheHQLAcangeneratetherequired time,quantitativeliquidityrequirementsforinternaliquidityinaperiodofstress,onlyassetsthatare tionallyactiveU.S.bankingorganizations.Atthe highlyliquidareeligiblefortheLCRnumerator.Fursametime,theFederalReservealsoproposeda thermore,themixoftheeligibleassetsisconmodifiedversionoftheserequirementsapplicableto strainedbycompositionlimitstoensurethatthe certainlarge,non-internationallyactiveholdingcommajorityoftheHQLAisoftheveryhighestquality. panies.TheNPRwouldestablishaliquiditycover- Forexample,someeligibleassets,suchasU.S. ageratiobasedontheBaselCommitteeonBanking Treasuries,maybeincludedwithoutanyhaircut Supervision(BCBS)’sstandardforinternationally beingappliedtotheirmarketvalueandcancomactivefirms.TheproposedintroductionofaquantipriseanyamountofthetotalHQLA.Incontrast,the tativeminimumthresholdforliquiditycomplements valueofothereligibleassetsaresubjecttoahaircut themorequalitativeprudentialliquiditystandards andtheymayonlyconstitutealimitedproportionof thattheFederalReserveproposedinJanuaryand thetotalHQLA. December2012undersection165oftheDodd- FrankAct. NetCashOutflowCategories InternationalCoordination TheNPRsetsforthvariouscategoriesofcashoutflowsandeligibleinflowsthatwouldbeusedincal- Therecentfinancialcrisisdemonstratedsignificant culatingtheratiodenominator.Eachcategoryperweaknessesinboththeliquiditypositionsandthe tainingtoafirm’sbalancesheetandoff-balance liquidityrisk-managementpracticesofbankingorgasheetexposureswouldbeprescribedanoutflow nizations.Inresponse,theFederalReserveworked rate,designedtoreflectthe30-daystressscenario. withregulatorsaroundtheglobetoestablishinterna- Theserateswouldbemultipliedbytheoutstanding tionalliquiditystandards.Thesestandardsinclude exposureforeachcategorytoarriveattheoutflow bothprinciplesforsoundliquidityriskmanagement amount.Theoutflowratesarereflectiveofthe andalsoquantitativestandardsforliquidity.The liquiditycharacteristicsofthecategory.Forexample, BCBSpublishedtwoliquiditymeasuresinDecemstable,fullyinsuredretaildepositswouldreceivea ber2010applicabletointernationallyactivebanking relativelylowoutflowrateof3percent.Bycontrast, organizations:aliquiditycoverageratio(LCR)anda balancesofcertainunsecuredwholesaledeposits netstablefundingratio(NSFR).InJanuary2013, thatareuninsuredandprovidedbyafinancialentity theBCBSupdatedkeycomponentsoftheLCRand wouldreceivea100percentoutflowrate.Theprohascontinuedworkonthedevelopmentofthe posalrecognizesthatcertaintypesofwholesale NSFRstandard. depositsareplacedatfirmsforoperationalpurposes,andtheoutflowratesforoperationaldeposits TheU.S.LCRandModifiedLCR reflecttheirimpliedstability. UndertheproposedU.S.LCRframework,internationallyactivebankingorganizationswouldbe HighestCumulativeNetCashOutflow requiredtoholdanamountofunencumberedhigh- Totalstressednetcashoutflowswouldbecalcuqualityliquidassets(HQLA)tomeettheirobligations latedforeachofthe30-daysfollowingtheLCRcalandotherliquidityneedsduringastandardized culationdate.TheLCRdenominatorforinternation- 30-daystressscenario.Expressedasacoverage allyactivebankingorganizationswouldbethe ratio: amountonthedaywithinthe30-daystressperiod thathasthehighestcumulativenetoutflow. Unencumbered HQLA ≥ 100% TransitionArrangements Net Cash Outflows over 30-Day Stress Scenario TheNPRwouldrequirecoveredcompaniestocom- Forlarge,non-internationallyactivefirms,theFed- plywithaminimumLCRof80percentbeginningon eralReserveproposedamodifiedversionofthe January1,2015,increasingto90percentbeginning LCRthatincorporatesashorter,21-daystresssce- onJanuary1,2016,andthento100percentbeginnario.Thesefirmsaregenerallysmallerinsize,less ningonJanuary1,2017.Formoreinformationsee complexinstructure,andlessreliantonriskier theBoard’spressreleaseatwww.federalreserve formsofmarketfundingwhencomparedtointerna- .gov/newsevents/press/bcreg/20131024a.htm. tionallyactivefirms.Theyarealsolesslikelytohave asgreatasystemicimpactinastressevent.

42 100thAnnualReport|2013 Box 3. Recovery and Resolution Planning TheFederalReserve,incollaborationwithother processesrelatedtoresolution,andimpedimentsto U.S.agencies,hascontinuedtoworkwithlarge resolutionandtheactionsthefinancialinstitutionwill financialinstitutionstodeveloparangeofrecovery taketofacilitateitsorderlyresolution.Thesecond andresolutionstrategiesintheeventoftheirdis- iterationplanssubmittedbythefirstgroupoffirms tressorfailure. addressedsupplementalguidancefromtheFederal ReserveandFDIC. RecoveryPlanning • Guidancefor2013§165(d)AnnualResolution TheFederalReservehasrequiredthatthelargest PlanSubmissionsbyDomesticandForeignandmostgloballyactiveU.S.financialinstitutions BasedCoveredCompanies:Tofurtherassistthe developrecoveryplansthatdescribeanumberof FederalReserveandFDICintheirreviewof optionsandactionstobetakenbymanagementto annualresolutionplans,theagenciesprovided maintainthefinancialinstitutionasagoingconcern additionalguidance,clarification,anddirectionfor duringinstancesofextremestress.Eightdomestic theinstitutionsrequiredtosubmittheirsecond bankholdingcompaniesandtwonon-bankfinancial iterationresolutionplanonOctober1,2013.The institutionsthatmayposeelevatedrisktoU.S. guidanceincludedadditionalclarityaroundcertain financialstabilitycurrentlysubmitrecoveryplansto assumptionsandrequestedmore-detailedinfortheFederalReserve. mationon,andanalysisof,thefirm’sabilityto overcomecertainobstaclestorapidandorderly ResolutionPlanning resolutionundertheBankruptcyCodeidentifiedby theFederalReserveandFDIC,including Coveredfinancialinstitutionsarerequiredbythe obstaclesrelatedtooperationalandglobalinter- Dodd-FrankActtosubmitannualresolutionplans connectedness,accesstofinancialmarketutilities, fortheirorderlyresolutionundertheBankruptcy derivativesclose-out,collateralmanagementprac- Codeintheeventoftheirmaterialfinancialdistress tices,andfundingandliquidity.Theguidanceis orfailure.In2011,theFederalReserveandFDIC availableatwww.federalreserve.gov/newsevents/ jointlyissuedrulesimplementingtheresolutionplan press/bcreg/20130415c.htm. requirementforfinancialinstitutionsthataresubject tohigherprudentialstandards.Thefinalresolution Resolutionplansubmissionsmustincludebotha planruleisavailableatwww.gpo.gov/fdsys/pkg/FR- confidentialandpublicportion.Thepublicportionof 2011-11-01/html/2011-27377.htm. eachresolutionplanisavailableontheFederal Reserve’swebsite(www.federalreserve.gov/ Inaphasedapproachbasedonnonbankassetsize, bankinforeg/resolution-plans.htm).TheFederal thefirstgroupof11financialinstitutions,including ReserveandtheFDICmaydeterminethataresolufourforeignbankingorganizationswithoperationsin tionplanisnotcredibleorwouldnotfacilitatean theUnitedStates,submittedresolutionplanson orderlyresolutionoftheinstitutionundertheBank- July1,2012,andagainonOctober1,2013.The ruptcyCode.Theagenciescontinuetoreviewand secondgroupoffourfinancialinstitutionssubmitted workwithfirmstodeveloptheirresolutionplans. theirfirstplansonJuly1,2013;thethirdgroupof 116financialinstitutionssubmittedtheirfirstplans Inaccordancewithprinciplespromulgatedbythe onDecember31,2013;andthreenon-bankfinan- FinancialStabilityBoard,theFederalReserveparcialfirmswillsubmittheirfirstplansonJuly1,2014. ticipateswithotherU.S.andinternationalsupervi- Theinitialplansubmissionsidentifiedanddescribed sorsincrisismanagementgroupmeetingsto thefirms’criticaloperations,corebusinesslines, enhancepreparednessforthecross-bordermanmateriallegalentities,interconnectionsandinterde- agementandresolutionofafailedglobalsystemipendencies,corporategovernancestructureand callyimportantfinancialinstitution. see“CapitalAdequacyStandards”laterinthis Easingregulatoryburdenoncommunitybankingorgasection.) nizations.TheSubcommitteeonSmallerRegional andCommunityBankingwasestablishedtoensure Recoveryandresolutionplanning.TheFederal thatthedevelopmentof supervisoryguidanceis Reservecontinuestoworkwithotherregulatory informedbyanunderstandingof theuniquecharacagenciestoreducetheprobabilityof failureof the teristicsof communityandregionalbanksandconlargest,mostcomplexfinancialfirmsandtomini- siderationof thepotentialforexcessiveburdenand mizethelossestothefinancialsystemandthe adverseeffectsonlending.Sinceitsestablishment, economyif suchafirmshouldfail.(Seebox3for thesubcommitteehasledanumberof initiatives details.) focusedonreducingregulatoryburdenon

SupervisionandRegulation 43 community-bankingorganizationsandgainingaddi- nationoraninspectionisbeingconducted,the tionalperspectiveoncommunitybankconcerns.(See reviewof operationsentails box4fordetails.) • anevaluationof theadequacyof governanceprovidedbytheboardandseniormanagement, includinganassessmentof internalpolicies,proce- Supervision dures,controls,andoperations; • anassessmentof thequalityof therisk- TheFederalReserveisthefederalsupervisorand managementandinternalcontrolprocessesin regulatorof allU.S.BHCs,includingfinancialholdplacetoidentify,measure,monitor,andcontrol ingcompanies,andstate-charteredcommercialbanks risks; thataremembersof theFederalReserveSystem.The FederalReservealsohasresponsibilityforsupervis- • anassessmentof thekeyfinancialfactorsof capiingtheoperationsof allEdgeActandagreement tal,assetquality,earnings,andliquidity;and corporations,theinternationaloperationsof state memberbanksandU.S.BHCs,andtheU.S.opera- • areviewforcompliancewithapplicablelawsand tionsof foreignbankingorganizations.Furthermore, regulations. throughtheDodd-FrankAct,theFederalReserve hasbeenassignedresponsibilitiesfornonbankfinan- Table1providesinformationonexaminationsand cialfirmsandfinancialmarketutilities(FMUs)des- inspectionsconductedbytheFederalReserveduring ignatedbytheFinancialStabilityOversightCouncil thepastfiveyears. (FSOC)assystemicallyimportant.Inaddition,the ConsolidatedSupervision Dodd-FrankActtransferredauthorityforconsolidatedsupervisionof morethan400savingsandloan Consolidatedsupervision,amethodof supervision holdingcompanies(SLHCs)andtheirnon- thatencompassestheparentcompanyanditssubsiddepositorysubsidiariesfromtheOfficeof Thrift iaries,allowstheFederalReservetounderstandthe Supervision(OTS)totheFederalReserve. organization’sstructure,activities,resources,risks, andfinancialandoperationalresilience.Working Inoverseeingtheinstitutionsunderitsauthority,the withotherrelevantsupervisorsandregulators,the FederalReserveseeksprimarilytopromotesafety FederalReserveseekstoensurethatfinancial,operaandsoundness,includingcompliancewithlawsand tional,orotherdeficienciesareaddressedbeforethey regulations. poseadangertotheconsolidatedorganization,its bankingoffices,orthebroadereconomy.1 Safety and Soundness Largefinancialinstitutionsincreasinglyoperateand managetheirintegratedbusinessesacrosscorporate TheFederalReserveusesarangeof supervisory boundaries.Financialtroubleinonepartof afinanactivitiestopromotethesafetyandsoundnessof cialinstitutioncanspreadrapidlytootherpartsof financialinstitutionsandmaintainacomprehensive theinstitution.Risksthatcrosslegalentitiesorthat understandingandassessmentof eachfirm.These aremanagedonaconsolidatedbasiscannotbe activitiesincludehorizontalreviews,firm-specific monitoredproperlythroughsupervisionthatis examinationsandinspections,continuousmonitordirectedatanyoneof thelegalentitysubsidiaries ingandsurveillanceactivities,andimplementationof withintheoverallorganization. enforcementorothersupervisoryactionsasnecessary.TheFederalReservealsoprovidestrainingand technicalassistancetoforeignsupervisorsand Tostrengthenitssupervisionof thelargest,most minority-ownedanddenovodepositoryinstitutions. complexfinancialinstitutions,theFederalReserve createdacentralizedmultidisciplinarybodycalled ExaminationsandInspections theLargeInstitutionSupervisionCoordinating Committee(LISCC)tooverseethesupervisionand TheFederalReserveconductsexaminationsof state evaluateconditionsof supervisedfirms.Thecommitmemberbanks,FMUs,theU.S.branchesandagenteealsodevelopscross-firmperspectivesandmoniciesof foreignbanks,andEdgeActandagreement corporations.Inaprocessdistinctfromexamina- 1 “Bankingoffices”aredefinedasU.S.depositoryinstitutionsubtions,itconductsinspectionsof holdingcompanies sidiaries,aswellastheU.S.branchesandagenciesofforeign andtheirnonbanksubsidiaries.Whetheranexami- bankingorganizations.

44 100thAnnualReport|2013 Box 4. Easing Regulatory Burden on Community Banking Organizations AsubcommitteeofBoardmemberswasestablished creditunionsfromeachofthe12Federal in2011withaprimarygoaltoensurethatthedevel- ReserveDistricts,providestheBoardofGovopmentofsupervisoryguidanceisinformedbyan ernorswithindustryinputontheeconomy, understandingoftheuniquecharacteristicsofcom- lendingconditions,andothertopicsofinterest munityandregionalbanksandconsiderationofthe tocommunitybankingorganizations.The potentialforexcessiveburdenandadverseeffects CouncilcontinuestomeetwithBoardofficials onlending.Sinceitsestablishment,thesubcommit- twiceayeartocommunicatetheirviewson teehasledanumberofinitiativesfocusedonreduc- boththebankingindustryandpertinentregulaingregulatoryburdenoncommunitybankingorgani- torymatters. zationsandgainingadditionalperspectiveoncom- • Clarifyingnewregulationsorproposalsto munitybankconcerns.Keyaspectsofthese helpcommunitybankingorganizations initiativesincludethefollowing: understandandidentifyitemsapplicableto 1. Consideringtheimpactofnewandexisting theirorganizations.Tosupportthisobjective, regulationsoncommunitybankingorganiza- thesubcommitteesetfortharequirementthat tions.Thesubcommitteeconvenesregularlyto allnewsupervisoryproposalsandrules reviewregulatoryproposals,supervisoryguid- includeaclearstatementofapplicabilityto ance,andexaminationpracticestoevaluatethe communitybankinginstitutions.Thisrequireeffectsofthesecomponentsoncommunity mentisintendedtohelpcommunitybanks banks.Theprimarygoalofthesereviewsisto morereadilyidentifyaspectsofsupervisory ensurethatregulatorydirectivesrelevanttocom- directivesapplicabletotheirorganizations.As munitybankingorganizationsremaincommensu- anexample,inJuly2013,afterthefinalBasel ratewiththesizeandcomplexityofthese IIIcapitalruleswereadopted,theFederal institutions. Reserve,incollaborationwiththeFederal DepositInsuranceCorporationandtheOffice 2. EnhancingcommunicationwiththecommuoftheComptrolleroftheCurrency,issueda nitybankindustry.TheFederalReserve comprehensiveguidetohelpcommunitybankremainscommittedtofosteringenhancedcomingorganizationsunderstandthesectionsof municationbetweenbankingsupervisorsand the rule that were relevant to their operations communitybankers.Primaryeffortstosupport (www.federalreserve.gov/ thisobjectiveincludethefollowing: bankinforeg/basel/files/capital_rule • EstablishingtheCommunityDepository _community_bank_guide_20130709.pdf). InstitutionsAdvisoryCouncil.Establishedin (continuedonnextpage) 2010,thisCouncil,comprisedofindividuals representingcommunitybanks,thrifts,and torsinterconnectednessandcommonpracticesthat 1. Enhancingresiliencyof afirmtolowertheprobcouldleadtosystemicrisk. abilityof itsfailureorinabilitytoserveasafinancialintermediary.Eachfirmisexpectedtoensure Anewframeworkfortheconsolidatedsupervisionof thattheconsolidatedorganization(orthecom- LISCCfirmsandotherlargefinancialinstitutions binedU.S.operationsinthecaseof foreignbankwasissuedinDecember2012.2Thisframework ingorganizations)anditscorebusinesslinescan strengthenedtraditionalmicroprudentialsupervision surviveunderabroadrangeof internalorexterandregulationtoenhancethesafetyandsoundness nalstresses.Thisrequiresfinancialresilienceby of individualfirmsandincorporatesmacroprudential maintainingsufficientcapitalandliquidity,and considerationstoreducepotentialthreatstothesta- operationalresiliencebymaintainingeffective bilityof thefinancialsystem.Theframeworkhastwo corporategovernance,riskmanagement,and primaryobjectives: recoveryplanning. 2. Reducingtheimpactonthefinancialsystemand 2 Formoreinformationaboutthesupervisoryframework,seethe thebroadereconomyintheeventof afirm’sfailure Board’spressreleaseandSRletter12-17/CA12-14atwww .federalreserve.gov/newsevents/press/bcreg/20121217a.htm. ormaterialweakness.Eachfirmisexpectedto 31 444

SupervisionandRegulation 45 Box 4. Easing Regulatory Burden on Community Banking Organizations—continued 2. continued 3. Focusingoncommunitybankresearch.To supportwell-informedsupervisorydecisionsrela- • Disseminatingsupervisorypublications tivetocommunitybankingorganizations,the withafocusoncommunitybankingorganisubcommitteeestablishedaninformalworking zations.TheFederalReserveusesthefollowgroupofeconomistsfromtheresearchand ingSystempublicationstocommunicatewith supervisionfunctionsintheFederalReserve communitybankingorganizationsonemerging System.Findingsfromresearchproducedby risksandimportantsupervisorymatters: thisgroupcontinuetohelpguidecommunity —CommunityBankingConnections®— bankpolicydevelopmentandimplementation. Throughout2013,thepublicationcontinued Asanexampleofresearcheffortsencouraged toofferanumberofarticlesfocusedon bythesubcommitteeandundertakenbythis timelyregulatorytopics,includinginterest group,in2013,theFederalReserveBankofSt. rateriskmanagement,cybersecurity,and Louis,incollaborationwiththeConferenceof capitalplanning(http:// StateBankSupervisors,hostedaCommunity communitybankingconnectionsqa.phil.frb.org/ BankingResearchandPolicyConference archives.cfm). focusedontheroleofcommunitybanksinthe financialsystem.Duringtheconference,partici- —FedLinks™—Articlespublishedthroughout pantsdiscussedandidentifiedissuesmost 2013coveredtopicsoutliningsupervisory importanttocommunitybankvitality.Participants expectationsforanumberofbankingfuncalsoexploredanumberofresearchtopicsreltions,includingtheinternalcontrolfunction, evanttothecommunity-bankbusinessmodel, theallowanceforloanandleaselosses,and includingtheeffectsoftheDodd-FrankActon appraisalandevaluationprograms(http:// communitybanks,therelationshipbetweencomcommunitybanking munitybankcapitalratiosandthelikelihoodof connectionsqa.phil.frb.org/fedlinks.cfm). failure,andthecharacteristicsofcommunity banksthatrecoveredfromsignificantfinancial distress. ensurethesustainabilityof itscriticaloperations reviewsthroughthededicationof experiencedstaff andbankingofficesunderabroadrangeof inter- withmultidisciplinaryskills.Examplesinclude nalorexternalstresses.Thisrequires,among analysisof capitaladequacyandplanningthrough otherthings,effectiveresolutionplanningthat theComprehensiveCapitalAnalysisandReview addressesthecomplexityandtheinterconnectiv- (CCAR),aswellashorizontalevaluationsof resoityof thefirm’soperations. lutionplansandincentivecompensationpractices. • Firm-specificexaminationsand/orinspectionsand Theframeworkisdesignedtosupportatailored continuousmonitoringactivities.Theseactivitiesare supervisoryapproachthataccountsfortheunique designedtomaintainanunderstandingandassessriskcharacteristicsof eachfirm,includingthenature mentacrossthecoreareasof supervisoryfocus. anddegreeof potentialsystemicriskinherentina Theseactivitiesincludereviewandassessmentof firm’sactivitiesandoperations,andisbeingimplechangesinstrategy,inherentrisks,controlpromentedinamulti-stageapproach. cesses,andkeypersonnel,andfollow-uponprevi- TheFederalReserveusesarangeof supervisory ouslyidentifiedconcerns(forexample,areassubactivitiestomaintainacomprehensiveunderstanding jecttoenforcementactions),oremerging andassessmentof eachlargefinancialinstitution: vulnerabilities. • Coordinatedhorizontalreviews.Thesereviews • Interagencyinformationsharingandcoordination. involveexaminingseveralinstitutionssimultane- Indevelopingandexecutingadetailedsupervisory ouslyandencompassfirm-specificsupervisionand planforeachfirm,theFederalReservegenerally thedevelopmentof cross-firmperspectives.The reliestothefullestextentpossibleontheinforma- FederalReserverecognizesthepriorityof these tionandassessmentsprovidedbyotherrelevant

46 100thAnnualReport|2013 Table1.Statememberbanksandbankholdingcompanies,2009–13 Entity/item 2013 2012 2011 2010 2009 Statememberbanks Totalnumber 850 843 828 829 845 Totalassets(billionsofdollars) 2,060 2,005 1,891 1,697 1,690 Numberofexaminations 745 769 809 912 850 ByFederalReserveSystem 459 487 507 722 655 Bystatebankingagency 286 282 302 190 195 Top-tierbankholdingcompanies Large(assetsofmorethan$1billion) Totalnumber 505 508 491 482 488 Totalassets(billionsofdollars) 16,269 16,112 16,443 15,986 15,744 Numberofinspections 716 712 672 677 658 ByFederalReserveSystem1 695 691 642 654 640 Onsite 509 514 461 491 501 Offsite 186 177 181 163 139 Bystatebankingagency 21 21 30 23 18 Small(assetsof$1billionorless) Totalnumber 4,036 4,124 4,251 4,362 4,486 Totalassets(billionsofdollars) 953 983 982 991 1,018 Numberofinspections 3,131 3,329 3,306 3,340 3,264 ByFederalReserveSystem 2,962 3,150 3,160 3,199 3,109 Onsite 148 200 163 167 169 Offsite 2,814 2,950 2,997 3,032 2,940 Bystatebankingagency 169 179 146 141 155 Financialholdingcompanies Domestic 420 408 417 430 479 Foreign 39 38 40 43 46 1 Forlargebankholdingcompaniessubjecttocontinuous,risk-focusedsupervision,includesmultipletargetedreviews. supervisorsandfunctionalregulators.TheFederal institutions,therisk-focusedconsolidatedsupervi- Reserveactivelyparticipatesininteragencyinfor- sionprogramprovidesthatexaminationandinspecmationsharingandcoordination,consistentwith tionproceduresaretailoredtoeachorganization’s applicablelaws,topromotecomprehensiveand size,complexity,riskprofile,andcondition.The effectivesupervisionandlimitunnecessaryduplica- supervisoryprogramforaninstitution,regardlessof tionof informationrequests.Supervisoryagencies itsassetsize,entailsbothoff-siteandon-sitework, continuetoenhanceformalandinformaldiscus- includingdevelopmentof supervisoryplans,presionstojointlyidentifyandaddresskeyvulner- examinationvisits,detaileddocumentation,and abilities,andtocoordinatesupervisorystrategies preparationof examinationreportstailoredtothe forlargefinancialinstitutions. scopeandfindingsof theexamination. • Internalauditandcontrolfunctions.Incertain StateMemberBanks instances,supervisorsmaybeabletorelyona firm’sinternalauditorinternalcontrolfunctionsin Attheendof 2013,2,003banks(excludingnondedevelopingacomprehensiveunderstandingand positorytrustcompaniesandprivatebanks)were assessment. membersof theFederalReserveSystem,of which 850werestatechartered.FederalReserveSystem TheFederalReserveusesarisk-focusedapproachto memberbanksoperated58,074branches,and supervision,withactivitiesdirectedtowardidentify- accountedfor34percentof allcommercialbanksin ingtheareasof greatestrisktofinancialinstitutions theUnitedStatesandfor71percentof allcommerandassessingtheabilityof institutions’management cialbankingoffices.State-charteredcommercial processestoidentify,measure,monitor,andcontrol banksthataremembersof theFederalReserve,comthoserisks.Formediumandsmall-sizedfinancial monlyreferredtoasstatememberbanks,represented

SupervisionandRegulation 47 approximately14percentof allinsuredU.S.commer- Condition(F),andthepotentialImpact(I)of the cialbanksandheldapproximately15percentof all parentcompanyanditsnondepositorysubsidiaries insuredcommercialbankassetsintheUnitedStates. onthesubsidiarydepositoryinstitution.Thefourth component,DepositoryInstitution(D),isintended Undersection10of theFederalDepositInsurance tomirrortheprimarysupervisor’sratingof thesub- Act,asamendedbysection111of theFederal sidiarydepositoryinstitution.5NoncomplexBHCs DepositInsuranceCorporationImprovementActof withconsolidatedassetsof $1billionorlessaresub- 1991andbytheRiegleCommunityDevelopment jecttoaspecialsupervisoryprogramthatpermitsa andRegulatoryImprovementActof 1994,theFed- moreflexibleapproach.6In2013,theFederalReserve eralReservemustconductafull-scope,on-siteexami- conducted695inspectionsof largeBHCsand2,962 nationof statememberbanksatleastonceayear,3 inspectionsof small,noncomplexBHCs. althoughcertainwell-capitalized,well-managedorganizationswithtotalassetsof lessthan$500million FinancialHoldingCompanies maybeexaminedonceevery18months.4TheFed- UndertheGramm-Leach-BlileyAct,BHCsthat eralReserveconducted459examsof statemember meetcertaincapital,managerial,andotherrequirebanksin2013. mentsmayelecttobecomefinancialholdingcompaniesandtherebyengageinawiderrangeof financial BankHoldingCompanies activities,includingfull-scopesecuritiesunderwrit- Atyear-end2013,atotalof 5,095U.S.BHCswerein ing,merchantbanking,andinsuranceunderwriting operation,of which4,541weretop-tierBHCs.These andsales.Asof year-end2013,420domesticBHCs organizationscontrolled4,930insuredcommercial and39foreignbankingorganizationshadfinancial banksandheldapproximately99percentof all holdingcompanystatus.Of thedomesticfinancial insuredcommercialbankassetsintheUnitedStates. holdingcompanies,23hadconsolidatedassetsof $50billionormore;29,between$10billionand FederalReserveguidelinescallforannualinspections $50billion;113,between$1billionand$10billion; of largeBHCsandcomplexsmallercompanies.In and255,lessthan$1billion. judgingthefinancialconditionof thesubsidiary banksownedbyholdingcompanies,FederalReserve SavingsandLoanHoldingCompanies examinersconsultexaminationreportspreparedby OnJuly21,2011,responsibilityforsupervisionand thefederalandstatebankingauthoritiesthathave regulationof SLHCstransferredfromtheOTSto primaryresponsibilityforthesupervisionof those theFederalReserve,pursuanttotheDodd-Frank banks,therebyminimizingduplicationof effortand Act.Atyear-end2013,atotalof 607SLHCswerein reducingthesupervisoryburdenonbanking operation,of which331weretoptierSLHCs.These organizations. SLHCscontrol344thriftinstitutionsandinclude30 companiesengagedprimarilyinnonbankingactivi- Inspectionsof BHCs,includingfinancialholding ties,suchasinsuranceunderwriting(15SLHCs), companies,arebuiltaroundaratingsystemintro- securitiesbrokerage(8SLHCs),andcommercial ducedinearlyJanuaryof 2005.Thesystemreflects activities(7SLHCs).ExcludingSIFISLHCs,the25 theshiftinsupervisorypracticesawayfromahistori- largestSLHCsaccountedformorethan$1.3trillion calanalysisof financialconditiontowardamore of totalcombinedassets.Teninstitutionsinthetop dynamic,forward-lookingassessmentof risk- 25andapproximately90percentof allSLHCs managementpracticesandfinancialfactors.Under engageprimarilyindepositoryactivities.Thesefirms thesystem,knownasRFIbutmorefullytermed holdapproximately13percent($364billion)of the RFI/C(D),holdingcompaniesareassignedacom- totalcombinedassetsof allSLHCs.TheOfficeof positerating(C)thatisbasedonassessmentsof threecomponents:RiskManagement(R),Financial 5 Eachofthefirsttwocomponentshasfoursubcomponents: RiskManagement—(1)BoardandSeniorManagementOver- 3 TheOfficeoftheComptrolleroftheCurrencyexaminesnation- sight;(2)Policies,Procedures,andLimits;(3)RiskMonitoring allycharteredbanks,andtheFederalDepositInsuranceCorpo- andManagementInformationSystems;and(4)InternalConrationexaminesstate-charteredbanksthatarenotmembersof trols.FinancialCondition—(1)Capital,(2)AssetQuality, theFederalReserve. (3)Earnings,and(4)Liquidity. 4 TheFinancialServicesRegulatoryReliefActof2006,which 6 Thespecialsupervisoryprogramwasimplementedin1997,most becameeffectiveinOctober2006,authorizedthefederalbank- recentlymodifiedin2013.SeeSRletter13-21foradiscussionof ingagenciestoraisethethresholdfrom$250millionto thefactorsconsideredindeterminingwhetheraBHCiscom- $500million,andfinalrulesincorporatingthechangeintoexist- plexornoncomplex.(www.federalreserve.gov/bankinforeg/ ingregulationswereissuedonSeptember21,2007. srletters/sr1321.htm).

48 100thAnnualReport|2013 theComptrollerof theCurrency(OCC)isthepri- andconditionsunderwhichtheBoardmayauthorize maryregulatorformostof thesubsidiarysavings adesignatedFMUaccesstoReserveBankaccounts associationsof thefirmsengagedprimarilyin andservices. depositoryactivities. TheFederalReserve’srisk-basedsupervisionpro- Boardstaff continuestoworkonoperational,techni- gramforFMUsisadministeredbytheFMUSupercal,andsupervisorytransitionissueswhileengaging visionCommittee(FMU-SC).TheFMU-SCisa theindustry,ReserveBanks,andotherfinancial multidisciplinarycommitteeof seniorsupervision, regulatoryagencies.Approximately95percentof the paymentpolicy,andlegalstaff attheBoardof Gov- SLHCsarenowfilingallrequiredFederalReserve ernorsandReserveBankswhoareresponsiblefor, regulatoryreports.Othersignificantmilestoneshave andknowledgeableabout,supervisoryissuesfor beenachieved;however,severalcomplexpolicyissues FMUs.TheFMU-SC’sprimaryobjectiveistoprocontinuetobeaddressedbytheBoard,including videseniorleveloversight,consistency,anddirection thoserelatedtoconsolidatedcapitalrequirements, totheFederalReserve’ssupervisoryprocessfor intermediateholdingcompanies,adoptionandappli- FMUs.TheFMU-SCcoordinateswiththeLISCC cationof aformalratingsystem,andtheapplicabil- onissuesrelatedtolargefinancialinstitutions’roles ityof OTSpoliciesandprocedurestoSLHCs. inFMUs;thepayment,clearing,andsettlement activitiesof largefinancialinstitutions;andtheFMU FinancialMarketUtilities activitiesandimplicationsforlargefinancial FMUsmanageoroperatemultilateralsystemsfor institutions. thepurposeof transferring,clearing,orsettlingpayments,securities,orotherfinancialtransactions Inanefforttopromotegreaterfinancialmarketstaamongfinancialinstitutionsorbetweenfinancial bilityandmitigatesystemicrisk,theBoardworks institutionsandtheFMU.UndertheFederal closelywiththeU.S.SecuritiesandExchangeCom- ReserveAct,theFederalReservesupervisesFMUs mission(SEC)andtheU.S.CommodityFutures thatarecharteredasmemberbanksorEdgeActcor- TradingCommission,bothof whichalsohavesuperporationsandcooperateswithotherfederalbanking visoryauthorityforcertainFMUs.TheFederal supervisorstosuperviseFMUsconsideredbankser- Reserve’sworkwiththeseagenciesundertitleVIII, viceprovidersundertheBankServiceCompanyAct. includingthesharingof appropriateinformationand participationindesignatedFMUexaminations,aims InJuly2012,theFSOCvotedtodesignateeight toimproveconsistencyinFMUsupervision,pro- FMUsassystemicallyimportantundertitleVIIIof moterobustFMUriskmanagement,andimprove theDodd-FrankAct.Asaresultof thesedesigna- theregulators’abilitytomonitorandmitigatesystions,theFederalReserveassumedanexpandedset temicrisk. of responsibilitiesrelatedtothesedesignatedFMUs thatincludepromotinguniformrisk-management DesignatedNonfinancialCompanies standards,playinganenhancedroleinthesupervi- In2013,theFSOCdesignatedthreenonbankfinansionof designatedFMUs,reducingsystemicrisk, cialcompaniesforsupervisionbytheBoard:Ameriandsupportingthestabilityof thebroaderfinancial canInternationalGroup,Inc.(AIG);GeneralElecsystem.FordesignatedFMUssubjecttotheFederal tricCapitalCorporation,Inc.(GECC);andPruden- Reserve’ssupervision,theBoardestablishedrisk- tialFinancial,Inc.(Prudential).TheFederal managementstandardsandexpectationsthatare Reserve’ssupervisoryapproachforthesefirmsas articulatedinBoardRegulationHH(effectiveSep- designatedcompaniesisconsistentwiththeapproach tember2012).Proposedrevisionstothesestandards usedforthelargestfinancialholdingcompaniesbut totakeintoaccountnewinternationalstandardshave tailoredtoaccountfordifferentmaterialcharacterisbeenissuedbytheBoardforpubliccomment ticsof eachfirm.TheDodd-FrankActrequiresthe throughMarch2014.Inadditiontosettingminimum Boardtoapplyenhancedprudentialstandardsand risk-managementstandards,RegulationHHalso earlyremediationrequirementstoBHCswithatleast establishesrequirementsfortheadvancenoticeof $50billioninconsolidatedassetsandtothenonbank proposedmaterialchangestotherules,procedures, financialcompaniesdesignatedbytheFSOCfor oroperationsof adesignatedFMUforwhichthe supervisionbytheBoard.Theactauthorizesthe FederalReserveisthesupervisoryagencyundertitle Boardtotailortheapplicationof thesestandards VIIIof theDodd-FrankAct.Section234.6of Regu- andrequirementstodifferentcompaniesonanindilationHH(effectiveFebruary2014)establishesterms vidualbasisorbycategory.

SupervisionandRegulation 49 InternationalActivities investmentsthatarebroaderthanthosepermissible TheFederalReservesupervisestheforeignbranches formemberbanks. andoverseasinvestmentsof memberbanks,Edge Actandagreementcorporations,andBHCs(includ- Atyear-end2013,outof 48bankingorganizations ingtheinvestmentsbyBHCsinexporttradingcom- charteredasEdgeActoragreementcorporations,3 panies).Inaddition,itsupervisestheactivitiesthat operated7EdgeActandagreementbranches.These foreignbankingorganizationsconductthroughenti- corporationsareexaminedannually. tiesintheUnitedStates,includingbranches,agencies,representativeoffices,andsubsidiaries. U.S.activitiesof foreignbanks.ForeignbankscontinuetobesignificantparticipantsintheU.S.bank- Foreignoperationsof U.S.bankingorganizations.In ingsystem.Asof fourthquarter2013,166foreign supervisingtheinternationaloperationsof state banksfrom50countriesoperated188state-licensed memberbanks,EdgeActandagreementcorpora- branchesandagencies,of which6wereinsuredby tions,andBHCs,theFederalReservegenerallycon- theFederalDepositInsuranceCorporation(FDIC), ductsitsexaminationsorinspectionsattheU.S.head and48OCC-licensedbranchesandagencies,of officesof theseorganizations,wheretheultimate which4wereinsuredbytheFDIC.Theseforeign responsibilityfortheforeignofficesresides.Examin- banksalsoowned10EdgeActandagreementcorpoersalsovisittheoverseasofficesof U.S.banking rationsand1commerciallendingcompany.Inaddiorganizationstoobtainfinancialandoperatinginfor- tion,theyheldacontrollinginterestin50U.S.commationand,insomeinstances,totesttheiradherence mercialbanks.Altogether,theU.S.officesof these tosafeandsoundbankingpracticesandcompliance foreignbankscontrolledapproximately20percentof withrulesandregulations.Examinationsabroadare U.S.commercialbankingassets.These166foreign conductedwiththecooperationof thesupervisory banksalsooperated87representativeoffices;an authoritiesof thecountriesinwhichtheytakeplace; additional40foreignbanksoperatedintheUnited fornationalbanks,theexaminationsarecoordinated Statesthrougharepresentativeoffice.TheFederal withtheOCC. Reserve—incoordinationwithappropriatestate regulatoryauthorities—examinesstate-licensed,non- FDICinsuredbranchesandagenciesof foreign Attheendof 2013,41memberbankswereoperating bankson-siteatleastonceevery18months.7Inmost 488branchesinforeigncountriesandoverseasareas cases,on-siteexaminationsareconductedatleast of theUnitedStates;24nationalbankswereoperatonceevery12months,buttheperiodmaybe ing414of thesebranches,and17statemember extendedto18monthsif thebranchoragencymeets bankswereoperatingtheremaining54.Inaddition, certaincriteria.Aspartof thesupervisoryprocess,a 13nonmemberbankswereoperating20branchesin reviewof thefinancialandoperationalprofileof foreigncountriesandoverseasareasof theUnited eachorganizationisconductedtoassesstheorgani- States. zation’sabilitytosupportitsU.S.operationsandto determinewhatrisks,if any,theorganizationposes EdgeActandagreementcorporations.EdgeActcortothebankingsystemthroughitsU.S.operations. porationsareinternationalbankingorganizations TheFederalReserveconductedorparticipatedwith charteredbytheBoardtoprovideallsegmentsof the stateandfederalregulatoryauthoritiesin411exami- U.S.economywithameansof financinginternanationsin2013. tionalbusiness,especiallyexports.Agreementcorporationsaresimilarorganizations,stateorfederally CompliancewithRegulatoryRequirements chartered,thatenterintoagreementswiththeBoard TheFederalReserveexaminesinstitutionsforcomtorefrainfromexercisinganypowerthatisnotperpliancewithabroadrangeof legalrequirements, missibleforanEdgeActcorporation.Sections25 includinganti-money-laundering(AML)andconand25Aof theFederalReserveActgrantEdgeAct sumerprotectionlawsandregulations,andother andagreementcorporationspermissiontoengagein lawspertainingtocertainbankingandfinancial internationalbankingandforeignfinancialtransacactivities.Mostcompliancesupervisionisconducted tions.Thesecorporations,mostof whicharesubsidundertheoversightof theBoard’sDivisionof Bankiariesof memberbanks,may(1)conductadeposit andloanbusinessinstatesotherthanthatof thepar- 7 TheOCCexaminesfederallylicensedbranchesandagencies, ent,providedthatthebusinessisstrictlyrelatedto andtheFDICexaminesstate-licensedFDIC-insuredbranches internationaltransactionsand(2)makeforeign incoordinationwiththeappropriatestateregulatoryauthority.

50 100thAnnualReport|2013 ingSupervisionandRegulation,butconsumercom- theseorganizations.Allsafety-and-soundnessexamipliancesupervisionisconductedundertheoversight nationsincludearisk-focusedreviewof information of theDivisionof ConsumerandCommunity technologyrisk-managementactivities.During2013, Affairs.Thetwodivisionscoordinatetheirefforts theFederalReservecontinuedastheleadsupervisory witheachotherandalsowiththeBoard’sLegalDivi- agencyforeightof the15large,multiregionaldata siontoensureconsistentandcomprehensiveFederal processingservicersrecognizedonaninteragency Reservesupervisionforcompliancewithlegal basisandassumedleadershipof twomoreof the requirements. largeservicers. Anti-Money-LaunderingExaminations FiduciaryActivities TheTreasuryregulationsimplementingtheBank TheFederalReservehassupervisoryresponsibility SecrecyAct(BSA)generallyrequirebanksandother forstatememberbanksandstatemembernondetypesof financialinstitutionstofilecertainreports positorytrustcompanies,whichholdassetsinvariandmaintaincertainrecordsthatareusefulincrimi- ousfiduciaryandcustodialcapacities.On-siteexaminal,tax,orregulatoryproceedings.TheBSAand nationsof fiduciaryandcustodialactivitiesareriskseparateBoardregulationsrequirebankingorganiza- focusedandentailthereviewof anorganization’s tionssupervisedbytheBoardtofilereportsonsuspi- compliancewithlaws,regulations,andgeneralfiduciousactivityrelatedtopossibleviolationsof federal ciaryprinciples,includingeffectivemanagementof law,includingmoneylaundering,terrorismfinanc- conflictsof interest;managementof legal,operaing,andotherfinancialcrimes.Inaddition,BSAand tional,andreputationalriskexposures;andaudit Boardregulationsrequirethatbanksdevelopwritten andcontrolprocedures.In2013,FederalReserve BSAcomplianceprogramsandthattheprogramsbe examinersconducted107fiduciaryexaminations, formallyapprovedbybankboardsof directors.The excludingtransferagentexaminations,of statemem- FederalReserveisresponsibleforexamininginstitu- berbanks. tionsforcompliancewithapplicableAMLlawsand regulationsandconductssuchexaminationsinaccor- TransferAgents dancewiththeFederalFinancialInstitutionsExami- AsdirectedbytheSecuritiesExchangeActof 1934, nationCouncil’s(FFIEC)BankSecrecyAct/Anti- theFederalReserveconductsspecializedexamina- MoneyLaunderingExaminationManual.8 tionsof thosestatememberbanksandBHCsthat areregisteredwiththeBoardastransferagents. SpecializedExaminations Amongotherthings,transferagentscountersignand TheFederalReserveconductsspecializedexamina- monitortheissuanceof securities,registerthetranstionsof supervisedfinancialinstitutionsintheareas ferof securities,andexchangeorconvertsecurities. of informationtechnology,fiduciaryactivities,trans- On-siteexaminationsfocusontheeffectivenessof an feragentactivities,andgovernmentandmunicipal organization’soperationsanditscompliancewith securitiesdealingandbrokering.TheFederalReserve relevantsecuritiesregulations.During2013,theFedalsoconductsspecializedexaminationsof certain eralReserveconductedon-sitetransferagentexaminonbankentitiesthatextendcreditsubjecttothe nationsat14of the30statememberbanksand Board’smarginregulations. BHCsthatwereregisteredastransferagents. InformationTechnologyActivities GovernmentandMunicipalSecurities Inrecognitionof theimportanceof information DealersandBrokers technologytosafeandsoundoperationsinthefinan- TheFederalReserveisresponsibleforexamining cialindustry,theFederalReservereviewstheinfor- statememberbanksandforeignbanksforcomplimationtechnologyactivitiesof supervisedfinancial ancewiththeGovernmentSecuritiesActof 1986 institutions,aswellascertainindependentdatacen- andwiththeTreasuryregulationsgoverningdealing tersthatprovideinformationtechnologyservicesto andbrokeringingovernmentsecurities.Fourteen statememberbanksandsixstatebranchesof foreign 8 TheFFIECisaninteragencybodyoffinancialregulatoryagen- bankshavenotifiedtheBoardthattheyaregovernciesestablishedtoprescribeuniformprinciples,standards,and mentsecuritiesdealersorbrokersnotexemptfrom reportformsandtopromoteuniformityinthesupervisionof financialinstitutions.TheCouncilhassixvotingmembers:the theTreasury’sregulations.During2013,theFederal BoardofGovernorsoftheFederalReserveSystem,theFDIC, Reserveconductedsixexaminationsof broker–dealer theNationalCreditUnionAdministration,theOCC,theConactivitiesingovernmentsecuritiesattheseorganizasumerFinancialProtectionBureau,andthechairoftheState LiaisonCommittee. tions.Theseexaminationsaregenerallyconducted

SupervisionandRegulation 51 concurrentlywiththeFederalReserve’sexamination SurveillanceandOff-SiteMonitoring of thestatememberbankorbranch. TheFederalReserveusesautomatedscreeningsystemstomonitorthefinancialconditionandperfor- TheFederalReserveisalsoresponsibleforensuring manceof statememberbanksandBHCsinthe thatstatememberbanksandBHCsthatactas periodbetweenon-siteexaminations.SuchmonitormunicipalsecuritiesdealerscomplywiththeSecuri- ingandanalysishelpsdirectexaminationresourcesto tiesActAmendmentsof 1975.Municipalsecurities institutionsthathavehigherriskprofiles.Screening dealersareexamined,pursuanttotheMunicipal systemsalsoassistintheplanningof examinations SecuritiesRulemakingBoard’sruleG-16,atleast byidentifyingcompaniesthatareengaginginnewor onceeverytwocalendaryears.Fourof the12entities complexactivities. supervisedbytheFederalReservethatdealtin municipalsecuritieswereexaminedduring2013. Theprimaryoff-sitemonitoringtoolusedbythe FederalReserveistheSupervisionandRegula- SecuritiesCreditLenders tionStatisticalAssessmentof BankRiskmodel(SR- UndertheSecuritiesExchangeActof 1934,the SABR).Drawingmainlyonthefinancialdatathat Boardisresponsibleforregulatingcreditincertain banksreportontheirReportsof Conditionand transactionsinvolvingthepurchasingorcarryingof Income(CallReports),SR-SABRuseseconometric securities.Aspartof itsgeneralexaminationpro- techniquestoidentifybanksthatreportfinancial gram,theFederalReserveexaminesthebanksunder characteristicsweakerthanthoseof otherbanks itsjurisdictionforcompliancewithBoardRegula- assignedsimilarsupervisoryratings.Tosupplement tionU(CreditbyBanksandPersonsotherthanBro- theSR-SABRscreening,theFederalReservealso kersorDealersforthePurposeof Purchasingor monitorsvariousmarketdata,includingequity CarryingMarginStock).TheFederalReservemay prices,debtspreads,agencyratings,andmeasuresof conductspecializedexaminationsof theselendersif expecteddefaultfrequency,togaugemarketperceptheyarenotalreadysubjecttosupervisionbythe tionsof theriskinbankingorganizations.Inaddi- FarmCreditAdministrationortheNationalCredit tion,theFederalReservepreparesquarterlyBank UnionAdministration(NCUA). 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.In2013, theFederalReservecompleted50formalenforce- FederalReserveanalystsusePerformanceReport mentactions.Civilmoneypenaltiestotaling InformationandSurveillanceMonitoring(PRISM), $250,030,130wereassessed.Asdirectedbystatute,all aqueryingtool,toaccessanddisplayfinancial,surcivilmoneypenaltiesareremittedtoeithertheTreas- veillance,andexaminationdata.Intheanalytical uryortheFederalEmergencyManagementAgency. module,userscancustomizethepresentationof Enforcementordersandpromptcorrectiveaction institutionalfinancialinformationdrawnfromCall directives,whichareissuedbytheBoard,andwritten Reports,UniformBankPerformanceReports,FR agreements,whichareexecutedbytheReserve Y-9statements,BHCPRs,andotherregulatory Banks,aremadepublicandarepostedonthe reports.Inthesurveillancemodule,userscangener- Board’swebsite(www.federalreserve.gov/apps/ atereportssummarizingtheresultsof surveillance enforcementactions/). screeningforbanksandBHCs.During2013,two majorandtwominorupgradestotheweb-based In2013,theReserveBankscompleted161informal PRISMapplicationwerecompleted. enforcementactions.Informalenforcementactions includememorandaof understanding(MOU),com- TheFederalReserveworksthroughtheFFIECTask mitmentletters,andboardof directors’resolutions. ForceonSurveillanceSystemstocoordinatesurveil-

52 100thAnnualReport|2013 lanceactivitieswiththeotherfederalbanking EffortstoSupportMinority-Owned agencies. DepositoryInstitutions TheFederalReserveSystemimplementsitsresponsi- TrainingandTechnicalAssistance bilitiesundersection367of theDodd-FrankActpri- TheFederalReserveprovidestrainingandtechnical marilythroughitsPartnershipforProgress(PFP) assistancetoforeignsupervisorsandminority-owned program.Establishedin2008,thisprogrampromotes depositoryinstitutions. theviabilityof minority-ownedinstitutions(MOIs) byfacilitatingactivitiesdesignedtostrengthentheir InternationalTrainingandTechnicalAssistance businessstrategies,maximizetheirresources,and In2013,theFederalReservecontinuedtoprovide increasetheirawarenessandunderstandingof regutechnicalassistanceonbanksupervisorymattersto latorytopics.Inaddition,theFederalReservecontinforeigncentralbanksandsupervisoryauthorities. uestomaintainthePFPwebsite,whichsupports TechnicalassistanceinvolvesvisitsbyFederal MOIsbyprovidingthemwithtechnicalinformation Reservestaff memberstoforeignauthoritiesaswell andlinkstousefulresources(www.fedpartnership asconsultationswithforeignsupervisorswhovisit .gov).Representativesfromeachof the12Reserve theBoardortheReserveBanks.TheFederal Bankdistricts,alongwithstaff fromtheBoardof Reserve,alongwiththeOCC,theFDIC,andthe Governors,continuetooffertechnicalassistancetai- Treasury,wasanactiveparticipantintheMiddle loredtoMOIsbyprovidingtargetedsupervisory EastandNorthAfricaFinancialRegulators’Train- guidance,identifyingadditionalresources,andfosteringInitiative,whichispartof theU.S.government’s ingmutuallybeneficialpartnershipsbetweenMOIs MiddleEastPartnershipInitiative.TheFederal andcommunityorganizations.Asof year-end2013, Reservealsocontributestotheregionaltrainingpro- theFederalReserve’sMOIportfolioincluded17 visionundertheAsiaPacificEconomicCooperation statememberbanks. FinancialRegulators’TrainingInitiative. Throughout2013,theFederalReserveSystemcon- In2013,theFederalReserveofferedanumberof tinuedtosupportMOIsthroughthefollowingactivitrainingcoursesexclusivelyforforeignsupervisory ties: authorities,bothintheUnitedStatesandinanum- • issuingSRletter13-15“FederalReserveResources berof foreignjurisdictions.FederalReservestaff also forMinorityDepositoryInstitutions”toreaffirm tookpartintechnicalassistanceandtrainingmistheFederalReserveSystem’scommitmenttosupsionsledbytheInternationalMonetaryFund,the portminoritydepositories WorldBank,theAsianDevelopmentBank,theBasel CommitteeonBankingSupervision,andtheFinan- • incollaborationwiththeFDICandtheComptrolcialStabilityInstitute. lerof theCurrency,participatinginabiannual interagencyconferencetohelppromoteandpre- TheFederalReserveisalsoanassociatememberof serveMOIs theAssociationof Supervisorsof Banksof the Americas(ASBA),anumbrellagroupof banksuper- • participatinginthe86thNationalBankersAssociavisorsfromcountriesintheWesternHemisphere. tion(NBA)Convention,withseniorBoardofficials Thegroup,headquarteredinMexico, attendingthiseventtoexplaintheimpactof Basel IIIcapitalrulesoncommunitybanking • promotescommunicationandcooperationamong organizations banksupervisorsintheregion; • providingtechnicalassistancetoMOIsonawide • coordinatestrainingprogramsthroughoutthe varietyof topics,includingtopicsfocusedon regionwiththehelpof nationalbankingsuperviimprovingregulatoryratings,navigatingtheregulasorsandinternationalagencies;and toryapplicationsprocess,andrefiningcapital- • aimstohelpmembersdevelopbankinglaws,regu- planningpractices lations,andsupervisorypracticesthatconformto • continuingtoofferprescreeningof MOIapplicainternationalbestpractices. tions,tosupportearlyidentificationandresolution of factorsthatmaycauseprocessingdelays TheFederalReservecontributessignificantlyto ASBA’sorganizationalmanagementandtoitstrain- • partneringwiththeNBA,theNationalUrban ingandtechnicalassistanceactivities. League,andtheMinorityCouncilof theIndepen-

SupervisionandRegulation 53 dentCommunityBankersAssociationinoutreach Supervisory Policy events TheFederalReserve’ssupervisorypolicyfunction, • inconjunctionwiththeDivisionof Consumerand carriedoutbytheBoard,isresponsiblefordevelop- CommunityAffairs,conductingseveraljointoutingregulationsandguidanceforfinancialinstitutions reacheffortstoeducateMOIsonsupervisory undertheFederalReserve’ssupervision,aswellas topics guidanceforexaminers.TheBoard(ofteninconcert • participatinginaninteragencytaskforcetocon- withtheotherfederalbankingagencies)issuesrulesiderandaddresssupervisorychallengesfac- makings,publicSRletters,andotherpolicystateingMOIs mentsandguidanceinordertocarryoutitssupervisorypolicies.FederalReservestaff alsotakepartin Throughout2013,PFPrepresentativeshostedand supervisoryandregulatoryforums,providesupport participatedinnumerousbankingworkshopsand fortheworkof theFFIEC,andparticipateininterseminarsaimedatpromotingandpreservingMOIs, nationalpolicymakingforums,includingtheBasel includingtheNBA’sLegislativeandRegulatoryCon- CommitteeonBankingSupervision,theFinancial ferenceandtheNationalUrbanLeagueConvention. StabilityBoard,andtheJointForum. Further,programrepresentativescontinuedtocollaboratewithcommunityleaders,tradegroups,the CapitalAdequacyStandards SmallBusinessAdministration,andotherorganiza- In2013,theBoardissuedseveralrulemakingsand tionstoseeksupportforMOIs. guidancedocumentsrelatedtocapitaladequacystandards,includingjointrulemakingswiththeotherfed- BusinessContinuity eralbankingagenciesthatwouldimplementcertain In2013,theFederalReservecontinueditseffortsto revisionstotheBaselcapitalframeworkandthat strengthentheresilienceof theU.S.financialsystem addresscertainprovisionsof theDodd-FrankAct. intheeventof unexpecteddisruptions,including focusedsupervisoryeffortstoevaluatetheresiliency • InMarch,theFederalReserveissuedguidanceto of thebankinginstitutionsunderitsjurisdictionand explaintheavailabilityontheBoard’spublicwebtheirtechnologyservicesproviders.Asaresultof siteof examinationguidancerelatingtoimplemenseveraleventsthatpresentedmajorchallengestothe tationof theadvancedapproachesrisk-basedcapifinancialsystem,includingthecontinuingdistributed talrule.Aseriesof bulletinswillbeusedtoaddress denialof service(DDoS)attacksagainstU.S.finan- technicalandothermattersontheimplementation cialinstitutions,in2013theFederalReserve,incon- of theadvancedapproachesrule.Thisguidance junctionwiththeotherFFIECagencies,tooksteps onlyappliestoafewlarge,internationallyactive topromotethecontinuedresilienceof thefinancial bankingorganizations.Sevenbulletinswerepubsystem.First,theFFIECagenciesreviewedsupervi- lishedin2013andareavailable,withtheassociated sorylessonslearnedfromSuperstormSandyand guidance,atwww.federalreserve.gov/bankinforeg/ developedspecificactionstepsforaddressingthese basel/basel-coordination-committee-bulletins.htm. supervisoryconcerns.Second,theFFIECagencies • InJuly,theFederalReserveandtheOCCpubcreatedtheCybersecurityandCriticalInfrastructure lishedafinalruletoamendtheregulatorycapital WorkingGrouptoassesstheriskstobanksand rules.TheFDICpublishedaninterimfinalrule creditunionsfromtheevolvingcyberthreatlandthatisconsistentwiththefinalruleadoptedbythe scape.Inaddition,asaresultof thelessonslearned BoardandtheOCC.Thefinalruleestablishesan fromSuperstormSandy,theDDoSattacks,and integratedregulatorycapitalframeworkthat othercybersecuritythreats,theFederalReserveled addressesshortcomingsinregulatorycapital anFFIECagencyreviewof businessresiliencyfor requirementsthatbecameapparentduringthe technologyserviceproviders.Finally,theFederal recentfinancialcrisis.Forinternationallyactive Reserve,togetherwithotherfederalandstatefinanbankingorganizations,thefinalruleimplementsin cialregulators,continuedtoparticipateintheFinantheUnitedStatestheBaselIIIregulatorycapital cialandBankingInformationInfrastructureComreformsadoptedbytheBaselCommitteeonBankmittee,whichsupportsimprovedcoordinationand ingSupervision.Thefinalrulealsomakeschanges communicationamongfinancialregulators,prorequiredbytheDodd-FrankAct,including motestheresiliencyof thefinancialsector,andproremovalof referencestoandrelianceoncreditratmotespublic/privatepartnership.

54 100thAnnualReport|2013 ings.Thefinalruleisavailableatwww.gpo.gov/ stresstests.Theotherinterimfinalruleprovidesa fdsys/pkg/FR-2013-10-11/pdf/2013-21653.pdf. one-yeartransitionperiodformostbankingorganizationswithbetween$10billionand$50billion • InJuly,thefederalbankingagenciesissuedaprointotalconsolidatedassets.Thesecompanieswill posedruletostrengthentheleverageratiostanberequiredtocalculatetheirstresstestprojections dardsforthelargest,mostsystemicallysignificant usingtheBoard’scurrentregulatorycapitalrules U.S.bankingorganizations.Undertheproposed duringthecurrentcycleinordertoallowtimeto rule,U.S.toptierBHCswithmorethan$700biladjusttheirinternalsystemstotherevisedcapital lioninconsolidatedtotalassetsor$10trillionin framework.Theinterimfinalrulesareavailableat assetsundercustody(coveredBHCs)wouldbe www.gpo.gov/fdsys/pkg/FR-2013-09-30/pdf/ requiredtomaintainatier1capitalleveragebuffer 2013-23618.pdfandwww.gpo.gov/fdsys/pkg/FRof morethan2percentabovetheminimumsupple- 2013-09-30/pdf/2013-23619.pdf. mentaryleverageratiorequirementof 3percentto avoidlimitationsondistributionsanddiscretionary • InNovember,thefederalbankingagencies bonuspayments.Thesubsidiaryinsureddepository announcedtheavailabilityof arevisedregulatory institutionsof coveredBHCswouldberequiredto capitalestimationtooltohelpcommunitybanks meeta6percentsupplementaryleverageratiotobe andotherinterestedpartiesevaluatetherevised considered“wellcapitalized”forpromptcorrective regulatorycapitalframeworkissuedinJuly.The actionpurposes.Theproposedrulewouldapplyto toolwasdevelopedtoassistthesebanksinestimattheeightlargest,mostsystemicallysignificantU.S. ingthepotentialeffectsontheircapitalratiosof bankingorganizationsandwouldstrengthenthe theagencies’recentlyrevisedregulatorycapital leveragerequirementsforthesefirmsinproportion framework.Theannouncementandthecapital tothestrongerrisk-basedcapitalrequirementsin estimationtoolareavailableatwww.federalreserve effectundertherevisedcapitalframeworkinorder .gov/newsevents/press/bcreg/20131119a.htm. tomaintainaneffectivecomplementaryrelation- • InDecember,theFederalReservepublishedafinal shipbetweenthetwotypesof requirements.The rulethatmakestechnicalchangestothemarket proposedruleisavailableatwww.gpo.gov/fdsys/ riskcapitalruletoalignitwiththeBaselIIIrevised pkg/FR-2013-08-20/pdf/2013-20143.pdf. capitalframeworkadoptedbytheagenciesearlier • InAugust,theFederalReserveissuedapaper, thisyear.Themarketriskcapitalruleisusedby CapitalPlanningatLargeBankHoldingCompa- bankingorganizationswithsignificanttrading nies:SupervisoryExpectationsandRangeof Cur- activitiestocalculateregulatorycapitalrequirerentPractice.Thepaperisintendedtopromote mentsformarketrisk.Theruleisavailableatwww bettercapitalplanningatBHCsgenerally,andto .federalreserve.gov/newsevents/press/bcreg/ providegreaterclarityonthestandardsagainst 20131206a.htm. whichthosepracticesareevaluatedaspartof the • InDecember,theFederalReserveissuedguidance CCARexercise.Inparticular,theFederalReserve tolargefinancialinstitutionsthatprovidesclarifiemphasizedthatBHCs,whenconsideringtheir cationonsupervisoryexpectationswhenassessing capitalneeds,shouldfocusonthespecificrisks afirm’scapitaladequacyincertaincircumstances theycouldfaceunderpotentiallystressfulcondiwhentherisk-basedcapitalframeworkmaynot tions.Thepaperisavailableatwww.federalreserve fullycapturetheresidualrisksof atransaction.For .gov/bankinforeg/bcreg20130819a1.pdf. suchtransactions,afinancialinstitutionshouldbe • InSeptember,theFederalReserveissuedtwo abletodemonstratethatitreflectstheresidualrisk interimfinalrulesthatclarifyhowcompanies initsinternalassessmentof capitaladequacyand shouldincorporatetherevisedregulatorycapital maintainssufficientcapitaltoaddresssuchrisk. framework,implementingtheBaselIIIregulatory Theletterisavailableatwww.federalreserve.gov/ capitalreforms,intotheircapitalandbusinesspro- bankinforeg/srletters/sr1323.pdf. jectionsduringthecycleof capitalplansubmissionsandstressteststhatbeganOctober1,2013 In2013,BoardandReserveBankstaff conducted (currentcycle).Theinterimfinalruleapplicableto in-depthsupervisoryanalysesof anumberof com- BHCswith$50billionormoreintotalconsoli- plexcapitalissuancesandprivatecapitalinvestments datedassetsclarifiesthatthesecompaniesmust toevaluatetheirqualificationforinclusioninregulaincorporatetherevisedcapitalframeworkintotheir torycapital.Forcertaintransactions,bankingorgacapitalplanningprojectionsandintotherequired nizationswererequiredtomakechangesnecessary

SupervisionandRegulation 55 forinstrumentstosatisfyregulatorycapitalcriteria, • RevisedBaselIIIleverageratioframeworkanddiswhereasotherinstrumentsweredisallowedfrom closurerequirements(issuedinJuneandavailableat inclusioninabankingorganization’sregulatory www.bis.org/publ/bcbs251.pdf). capital. • Capitaltreatmentof bankexposurestocentralcounterparties(issuedinJuneandavailableatwww.bis InternationalCoordinationon .org/publ/bcbs253.pdf). SupervisoryPolicies Asamemberof theBaselCommitteeonBanking • Thenon-internalmodelmethodforcapitalising Supervision,theFederalReserveactivelyparticipates counterpartycreditriskexposures(issuedinJune ineffortstoadvancesoundsupervisorypoliciesfor andavailableatwww.bis.org/publ/bcbs254.pdf). internationallyactivebankingorganizationsand • Capitalrequirementsforbanks'equityinvestmentsin enhancethestrengthandstabilityof theinternafunds(issuedinJulyandavailableatwww.bis.org/ tionalbankingsystem. publ/bcbs257.pdf). BaselCommittee • Liquiditycoverageratiodisclosurestandards(issued During2013,theFederalReserveparticipatedin inJulyandavailableatwww.bis.org/publ/bcbs259 ongoinginternationalinitiativestotracktheprogress .pdf). of implementationof theBaselframeworkinmem- • Fundamentalreviewof thetradingbook:Arevised bercountries. marketriskframework(issuedinOctoberandavailableatwww.bis.org/publ/bcbs265.pdf). TheFederalReservecontributedtosupervisory policyrecommendations,reports,andpapersissued • Revisionstothesecuritisationframework(issuedin forconsultativepurposesorfinalizedbytheBasel Decemberandavailableatwww.bis.org/publ/ Committeethatweredesignedtoimprovethesuper- bcbs269.pdf). visionof bankingorganizations’practicesandto addressspecificissuesthatemergedduringthefinan- JointForum cialcrisis.Thelistingbelowincludeskeyfinaland In2013,theFederalReservecontinueditsparticipaconsultativepapersfrom2013. tionintheJointForum—aninternationalgroupof supervisorsof thebanking,securities,andinsurance Finalpapers: industriesestablishedtoaddressvariouscross-sector issues,includingtheregulationof financialconglom- • BaselIII:TheLiquidityCoverageRatioandliquiderates.TheJointForumoperatesundertheaegisof ityriskmonitoringtools(issuedinJanuaryand theBaselCommittee,theInternationalOrganization availableatwww.bis.org/publ/bcbs238.pdf). of SecuritiesCommissions,andtheInternational • Monitoringtoolsforintradayliquiditymanagement Associationof InsuranceSupervisors.TheFederal (issuedinAprilandavailableatwww.bis.org/publ/ Reserveisalsocurrentlyparticipatinginanewinitiabcbs248.pdf). tivethatwillanalyzehowincreasedrequirementsfor collateralhaveimpactedfirmbehaviorinthebank- • Globalsystemicallyimportantbanks:updated ing,securities,andinsurancesectors.FinalandconassessmentmethodologyandthehigherlossabsorsultativepapersissuedbytheJointForumin2013 bencyrequirement(issuedinJulyandavailableat include: www.bis.org/publ/bcbs255.pdf). • Mortgageinsurance:marketstructure,underwriting • Marginrequirementsfornon-centrallycleared cycleandpolicyimplications(issuedinFebruary derivatives(issuedinSeptemberandavailableat andavailableatwww.bis.org/publ/joint30.pdf). www.bis.org/publ/bcbs261.pdf). • Longevityrisktransfermarkets:marketstructure, • Capitalrequirementsforbanks’equityinvestments growthdriversandimpediments,andpotentialrisks infunds(issuedinDecemberandavailableatwww (issuedinDecemberandavailableatwww.bis.org/ .bis.org/publ/bcbs266.pdf). publ/joint34.pdf). Consultativepapers: FinancialStabilityBoard • Supervisoryframeworkformeasuringandcontrol- In2013,theFederalReservecontinueditsactiveparlinglargeexposures(issuedinMarchandavailable ticipationintheFinancialStabilityBoard(FSB)—an atwww.bis.org/publ/bcbs246.pdf). internationalgroupthathelpscoordinatetheworkof

56 100thAnnualReport|2013 nationalfinancialauthoritiesandinternationalstan- ingpracticesforallregulatedfinancialinstitutions. dardsettingbodies,anddevelopsandpromotesthe Accordingly,theFederalReserve’saccountingpolicy implementationof financialsectorpoliciesinthe functionisresponsibleforprovidingexpertisein interestof financialstability.ThroughtheFSB policydevelopmentandimplementationefforts,both StandingCommitteeonSupervisoryandRegulatory withinandoutsidetheFederalReserveSystem,on Cooperation,theFSBisengagedinseveralissues, issuesaffectingthebankingindustryintheareasof includingshadowbanking,supervisionof globally accounting,auditing,internalcontrolsoverfinancial systemicallyimportantfinancialinstitutions,andthe reporting,financialdisclosure,andsupervisoryfinandevelopmentof effectiveresolutionregimesforlarge cialreporting. financialinstitutions.Guidanceandconsultative papersissuedbytheFSBin2013include: FederalReservestaff regularlyconsultwithkeyconstituentsintheaccountingandauditingprofessions, • PrinciplesforanEffectiveRiskAppetiteFramework includingdomesticandinternationalstandard- (issuedinJulyandavailableatwww setters,accountingfirms,accountingandfinancial .financialstabilityboard.org/publications/r_130717 sectortradegroups,andotherfinancialsectorregula- .pdf). torstofacilitatetheBoard’sunderstandingof • Informationsharingforresolutionpurposes(issued domesticandinternationalpractices;proposed inAugustandavailableatwww accounting,auditing,andregulatorystandards;and .financialstabilityboard.org/publications/r_130812b theinteractionsbetweenaccountingstandardsand .pdf). regulatoryreformefforts.TheFederalReservealso participatesinvariousaccounting,auditing,and • Applicationof theKeyAttributesof EffectiveResoregulatoryforumsinordertobothformulateand lutionRegimestoNon-BankFinancialInstitutions communicateitsviews. (issuedinAugustandavailableatwww .financialstabilityboard.org/publications/r_130812a During2013,FederalReservestaff addressednumer- .pdf). ousissuesincludingloanaccounting,troubleddebt • AssessmentMethodologyfortheKeyAttributesof restructurings,otherrealestateaccounting,account- EffectiveResolutionRegimesforFinancialInstitu- ingforcreditlosses,financialinstrumentaccounting tions(issuedinAugustandavailableatwww andreporting,securitiesfinancingtransactions, .financialstabilityboard.org/publications/r_130828 deferredtaxes,insurancecontractsaccounting,and .pdf). externalandinternalauditprocesses. • StrengtheningOversightandRegulationof Shadow TheFederalReserveshareditsviewswithaccounting Banking–AnOverviewof PolicyRecommendations andauditingstandard-settersthroughinformaldis- (issuedinAugustandavailableatwww cussionsandpubliccommentletters.Commentlet- .financialstabilityboard.org/publications/r_130829a tersonFinancialAccountingStandardsBoardpro- .pdf). posalsrelatedtoaccountingforcreditlosses,recognitionandmeasurementof financialassetsand • StrengtheningOversightandRegulationof Shadow financialliabilities,accountingforleases,and Banking–PolicyFrameworkforAddressingShadow accountingforinsurancecontractswereissueddur- BankingRisksinSecuritiesLendingandRepos ingthepastyear. (issuedinAugustandavailableatwww .financialstabilityboard.org/publications/r_130829b TheFederalReservestaff alsoparticipatedinmeet- .pdf). ingsof theBaselCommittee’sAccountingExperts • StrengtheningOversightandRegulationof Shadow Group(formerlyknownastheAccountingTask Banking–PolicyFrameworkforStrengthening Force),whichrepresentstheBaselCommitteeat OversightandRegulationof ShadowBankingEnti- internationalmeetingsonaccounting,auditing,and ties(issuedinAugustandavailableatwww disclosureissuesaffectingglobalbankingorganiza- .financialstabilityboard.org/publications/r_130829c tions.Workingwithinternationalbanksupervisors, .pdf). FederalReservestaff contributedtothedevelopment of numerousothercommentlettersthatweresubmit- AccountingPolicy tedtostandardsettersthroughtheBaselCommittee. TheFederalReservestronglyendorsessoundcorpo- Theissuesaddressedinthecommentlettersduring rategovernanceandeffectiveaccountingandaudit- 2013includedaccountingforcreditlosses,classifica-

SupervisionandRegulation 57 tionandmeasurementof financialinstruments,and bonds,anddebenturestakenasdebtspreviouslyconauditor’sreportingmodel. tracted—extendedtoborrowersbyasupervisedinstitution,itssubsidiaries,andaffiliates.ASNCmust In2013,theFederalReserveissuedsupervisoryguid- haveanoriginalloanamountthataggregatesto ancetofinancialinstitutionsandsupervisorystaff on $20millionormoreandeither(1)issharedbythree accountingmatters,asappropriate,andparticipated ormoreunaffiliatedsupervisedinstitutionsundera inanumberof supervisory-relatedactivities.For formallendingagreementor(2)aportionof whichis example,FederalReservestaff soldtotwoormoreunaffiliatedsupervisedinstitutions,withthepurchasinginstitutionsassumingtheir • issuedguidanceontheinternalauditfunction, proratashareof thecreditrisk. troubleddebtrestructurings,andsecuredconsumer debtdischargedinChapter7bankruptcy;9 The2013SNCreviewwasbasedonanalysespre- • developedandparticipatedinanumberof domes- paredinthesecondquarterof 2013usingcreditticandinternationalsupervisorytrainingprograms relateddataprovidedbyfederallysupervisedinstituandeducationsessionstoeducatesupervisorsand tionsasof December31,2012,andMarch31,2013. bankersaboutnewandemergingaccountingand The2013SNCportfoliototaled$3.01trillion,with reportingtopicsaffectingfinancialinstitutions;and roughly9,300creditfacilitiestoapproximately5,800 borrowers.Fromthepreviousperiod,thedollarvol- • supportedtheeffortsof theReserveBanksin umeof theportfoliocommitmentamountroseby financialinstitutionsupervisoryactivities,through $219billionor7.8percent,andthenumberof credits participationinexaminationsandprovisionof increasedby590,or6.8percent. expertguidanceonspecificqueriesrelatedtofinancialaccounting,auditing,reporting,and Thequalityof 2012originationsslightlyimproved disclosures. from2011originationsasmoretransactionswere reportedasinvestmentgrade.However,theSNC TheFederalReserveSystemstaff alsoprovidedtheir examinationnotedweakunderwritingstandardsin accountingandbusinessexpertisethroughparticipa- 24percentof theloantransactionssampled. tioninothersupervisoryactivitiesduringthepast Thispercentagecomparesunfavorablyto2011,2010, year.TheseactivitiesincludedsupportingDoddand2009percentagesof 19percent,16percentand FrankActinitiativesrelatedtostresstestingof banks 13percent,respectively.Leveragedlendingtransacandresolutionplanningbybanks,aswellas,various tionsaretheprimarydriverof thisdeterioration.The BaselIIIissues. mostfrequentlycitedunderwritingdeficienciesiden- Credit-RiskManagement tifiedduringthe2013SNCReviewwereminimalor noloancovenants,liberalrepaymentterms,repay- TheFederalReserveworkswiththeotherfederal mentdependentonrefinancing,andinadequatecolbankingagenciestodevelopguidanceonthemanlateralvaluations.Theweakunderwritingstructures agementof creditrisk;tocoordinatetheassessment areinpartattributabletoaggressivecompetitionand of regulatedinstitutions’creditrisk;andtoensure marketliquidity. thatinstitutionsproperlyidentify,measure,andmanagecreditrisk. InconjunctionwiththeMarch21,2013,issuanceof SharedNationalCreditProgram theInteragencyGuidanceonLeveragedLending,the InSeptember,theFederalReserveandtheother 2013SNCreviewincludedareviewof 496leveraged bankingagenciesreleasedsummaryresultsof the obligors,with$429billionincommitments(approxi- 2013annualreviewof theSharedNationalCredit mately53.6percentof reviewedSNCcommitments). (SNC)Program.Theagenciesestablishedthepro- Thereviewidentifiedahighlevelof riskassociated gramin1977topromoteanefficientandconsistent withthissubsetof theportfolio.Theleveragedloan reviewandclassificationof sharednationalcredits.A criticizedrate,at42percent,wassubstantiallyhigher SNCisanyloanorformalloancommitment—and thanthatof non-leveragedloans,whichcarrieda anyasset,suchasotherrealestate,stocks,notes, criticizedrateof 3.1percent. 9 Finalguidancedocumentsareavailableatwww.federalreserve RefinancingriskhasdeclinedintheSNCportfolioas .gov/bankinforeg/srletters/sr1301.pdf;www.federalreserve.gov/ only15percentof SNCswillmatureoverthenext bankinforeg/srletters/sr1324.pdf;www.federalreserve.gov/ twoyearscomparedwith23percentforthesame bankinforeg/srletters/sr1317.pdf;andwww.federalreserve.gov/ reportforms/supplemental/SI_FRY9_201306.pdf. timeframeinthe2012SNCReview.Poorlyunder-

58 100thAnnualReport|2013 writtencreditsoriginatedin2006and2007continued Commission,theInternalRevenueService,andthe toadverselyaffecttheSNCportfolio.During2012 Officeof ForeignAssetsControl(OFAC). andinto2013,syndicationscontinuedtomodifyloan agreementstoextendmaturities.Thesetransactions TheFFIECBSA/AMLworkinggroupisresponsible hadtheeffectof relievingnear-termrefinancingrisk, forupdatingtheFFIECBankSecrecyAct/Antibutmaynotimproveborrowers’abilitytorepaytheir MoneyLaunderingExaminationManual).The debtsinthelongerterm. FFIECdevelopedthismanualaspartof itsongoing commitmenttoprovidecurrentandconsistentinter- Formoreinformationonthe2013SNCreview,visit agencyguidanceonrisk-basedpolicies,procedures, theBoard’swebsiteatwww.federalreserve.gov/ andprocessesforfinancialinstitutionstocomply newsevents/press/bcreg/20131010a.htm. withtheBSAandsafeguardtheiroperationsfrom moneylaunderingandterroristfinancing. ComplianceRiskManagement TheFederalReserveworkswithinternationaland Throughout2013,theFederalReserveandotherfeddomesticsupervisorstodevelopguidancethatpro- eralbankingagenciescontinuedtoregularlyshare motescompliancewithBankSecrecyActandAnti- examinationfindingsandenforcementproceedings Money-LaunderingCompliance(BSA/AML)and withFinCENaswellaswithOFACundertheintercounterterrorismlaws. agencyMOUsfinalizedin2004and2006.TheFederalReservealsoprovidedaspeakerforandpartici- BankSecrecyActand patedinOFAC’sday-longFinancialInstitution Anti-Money-LaunderingCompliance Symposium. In2013,theFederalReservecontinuedtoactively promotethedevelopmentandmaintenanceof effec- In2013,theFederalReservecontinuedtoparticipate tiveBSA/AMLcompliancerisk-managementpro- intheU.S.Treasury’sInteragencyTaskForceon grams,includingdevelopingsupervisorystrategies StrengtheningandClarifyingtheBSA/AMLFrameandprovidingguidancetotheindustryontrendsin work(TaskForce),createdin2012,whichincludes BSA/AMLcompliance.Forexample,theFederal representativesfromtheDepartmentof Justice, Reservesupervisorystaff participatedinanumberof OFAC,FinCEN,thefederalbankingagencies,the industryconferencestocontinuetocommunicate SEC,andtheCommodityFuturesTradingCommisregulatoryexpectationsandpolicyinterpretationsfor sion.Theprimaryfocusof theTaskForceisto financialinstitutions. reviewtheBSA,itsimplementation,anditsenforcementwithrespecttoU.S.financialinstitutionsthat TheFederalReserveisamemberof theTreasury-led aresubjecttotheserequirements,andtodeveloprec- BSAAdvisoryGroup,whichincludesrepresentatives ommendationsforensuringthecontinuedeffectiveof regulatoryagencies,lawenforcement,andthe nessof theBSAandefficiencyinagencyeffortsto financialservicesindustryandcoversallaspectsof monitorcompliance. theBSA.TheFederalReservealsoparticipatedin severalTreasury-ledprivate/publicsectordialogues InternationalCoordinationon withLatinAmericanandMexicanfinancialinstitu- Sanctions,Anti-Money-Laundering,and tions,regulators,andsupervisors.Theobjectiveof Counter-TerrorismFinancing thesedialoguesistooptimizecorrespondentrelations TheFederalReserveparticipatesinanumberof betweenU.S.andcountry-specificfinancialsectors. internationalcoordinationinitiativesrelatedtosanc- Inaddition,theFederalReserveparticipatedinmeet- tions,moneylaundering,andterrorismfinancing. ingsduringtheyeartodiscussBSA/AMLissueswith Forexample,theFederalReservehasalong-standing delegationsfromJapan,Columbia,andHongKong roleintheU.S.delegationtotheintergovernmental regardingmanagingandreportingonAMLrisk, FinancialActionTaskForce(FATF)anditsworking customerduediligence,andemergingpayments.The groups,contributingabankingsupervisoryperspec- FederalReservealsoparticipatesintheFFIECBSA/ tivetoformulationof internationalstandards.The AMLworkinggroup,amonthlyforumforthedis- FederalReserveparticipatedindevelopingtheFATF cussionof pendingBSApolicyandregulatorymat- guidanceforthebankingsectoronidentifying, ters.InadditiontotheFFIECagencies,theBSA/ assessing,andmonitoringmoneylaunderingandthe AMLworkinggroupincludestheFinancialCrimes financingof terrorismonarisk-assessedbasis.The EnforcementNetwork(FinCEN)and,onaquarterly FederalReservealsoparticipatedineffortsbyFATF basis,theSEC,theCommodityFuturesTrading tomorefullyunderstandeffectiveAMLsupervision

SupervisionandRegulation 59 andenforcement.Inaddition,theFederalReserve ThroughtwoBoard-ledhorizontalreviewsandwith hasprovidedinputandreviewof ongoingworkto ongoingengagementwiththelargestfirmsandour revisetheFATFRecommendationstoensurethat supervisoryteams,wehaveimprovedpracticeand theycontinuetoprovideacomprehensiveandcur- designof incentivecompensationarrangementsat rentframeworkforcombatingmoneylaunderingand firmswithgreaterthan$50billioninU.S.assets.This terroristfinancing.Finally,theFederalReservecon- horizontalreviewwasdesignedtoassessthepotential tinuestoparticipateinasubcommitteeof theBasel forincentivecompensationarrangementstoencour- CommitteethatfocusesonAML/counter-terrorism ageimprudentrisk-taking;theactionsthelarge financingissues.Withrespecttothatsubcommittee, bankingorganizationshavetakentocorrectdeficientheFederalReserveactivelycontributedtothedevel- ciesinincentivecompensationdesign;andthe opmentof aconsultativepaperonthesoundman- adequacyof thefirms’compensation-relatedrisk agementof risksrelatedtomoneylaunderingandthe management,controls,andcorporategovernance.12 financingof terrorism. TheDodd-FrankActrequiresthereportingtoregu- IncentiveCompensation latorsof incentivecompensationarrangementsand Tofosterimprovedincentivecompensationpractices prohibitsincentivecompensationarrangementsthat inthefinancialindustry,theFederalReservealong provideexcessivecompensationorthatcouldexpose withtheotherfederalbankingagenciesadopted thefirmtoinappropriaterisks.Bankingorganizainteragencyguidanceorientedtotherisk-taking tions,broker–dealers,investmentadvisers,andcerincentivescreatedbyincentivecompensation tainotherfirmsarecoveredundertheactif they arrangements.10Theguidanceisprinciples-based, have$1billionormoreintotalconsolidatedassets. recognizingthatthemethodsusedtoachieveappro- Toimplementtheact,sevenfinancialregulatory priatelyrisk-sensitivecompensationarrangements agencies(FederalReserve,OCC,FDIC,OTS, likelywilldiffersignificantlyacrossandwithinfirms. NCUA,SEC,FHFA)issuedajointproposedrulein Thethreeprinciplesatthecoreof theguidanceare: April2011.Attheheartof theproposedrulearethe threeprinciplesinthebankingagencies’guidance.A • Incentivecompensationarrangementsshouldbalverylargenumberof commentswerereceivedfrom anceriskandfinancialresultsinamannerthat thepublicandthesecommentsarebeingcarefully doesnotencourageemployeestoexposetheirorgaconsideredinthedraftingof thefinalrule. nizationstoimprudentrisks. OtherPolicymakingInitiatives • Abankingorganization’srisk-managementprocessesandinternalcontrolsshouldreinforceand • InMarch,theFederalReserveandtheotherfedsupportthedevelopmentandmaintenanceof bal- eralbankingagenciesissuedupdatedguidanceon ancedincentivecompensationarrangements,and leveragedlending.Theguidanceoutlineshigh-level incentivecompensationshouldnothinderrisk principlesrelatedtosafe-and-soundleveragedlendmanagementandcontrols. ingactivities.Itaddressespertinentriskmanagementissuessurroundingleveragedloans • Bankingorganizationsshouldhavestrongand thatcametotheforefrontpriortoandduringthe effectivecorporategovernanceof incentive recentfinancialcrisisandencouragescompaniesto compensation. developandmaintainadefinitionof leveraged lendingthatcanbeappliedacrossbusinesslines. Theseprinciplesandtheguidancemoregenerallyare Theguidancehighlightstheimportanceof develconsistentwiththePrinciplesforSoundCompensaopingandmaintainingasoundleveragedlending tionPracticesissuedinApril2009bytheFinancial policyandextendingprudentrisk-management StabilityBoardandassociatedimplementation practicesequallytoloansoriginatedtoholdandto standards.11 thoseoriginatedtodistribute.Theguidanceis availableatwww.federalreserve.gov/bankinforeg/ 10 See“GuidanceonSoundIncentiveCompensationPolicies,”vol. srletters/sr1303.htm. 75FederalRegister,pp.36395–36414,June25,2010. 11 InJuly2011,theBaselCommitteeonBankingSupervisionpub- noticeofproposedrulemakingtoimplementthekeyelementsof lisheditsPillar3DisclosureRequirementsforRemuneration. theBaselCommittee’sissuance. Thesedisclosurerequirementsaredesignedtosupporteffective 12 See“IncentiveCompensationPractices:AReportontheHorimarketdisciplinewiththegoalofprovidingaccesstothequality zontalReviewofPracticesatLargeBankingOrganizations,” ofthecompensationpracticesandthequalityofsupportfora publishedinOctober2011bytheBoardofGovernorsofthe firm’sstrategyandriskposture.TheBoardplanstoissuea FederalReserveSystem.

60 100thAnnualReport|2013 • InAugust,theBoardissuedafinalrule(Regula- tionstandardsforsecuritiesheldbyaninstitution tionTT,12CFR246etseq.)establishinganannual andprovidesexamplesthatdemonstratewhena assessmentforitssupervisionandregulationof securityisinvestmentgradeandwhenitisnot largefinancialcompaniespursuanttosection318 investmentgrade.Theguidanceisavailableatwww of theDodd-FrankAct,whichdirectstheBoardto .federalreserve.gov/bankinforeg/srletters/sr1318 collectassessmentsequaltotheexpensesitesti- .htm. matesarenecessaryorappropriatetosupervise • InDecember,theFederalReserveissuedguidance andregulateBHCsandSLHCswith$50billionor onmanagingoutsourcingrisk.Theguidance moreintotalconsolidatedassetsandnonbank expandsupontheexistinginteragencyguidanceon financialcompaniesdesignatedbytheFSOCfor outsourcingof informationtechnologyservices supervisionbytheFederalReserve.Thefinalrule thatwasissuedbytheFFIECin2004.Specifically, becameeffectiveonOctober25,2013,andisavailitappliestoserviceproviderrelationshipswhere ableatwww.gpo.gov/fdsys/pkg/FR-2013-08-23/pdf/ businessfunctionsoractivitiesareoutsourced.The 2013-20306.pdf.Thefinalruleprovidesthateach guidancehighlightspotentialrisksarisingfromthe calendaryearisanassessmentperiodandoutlines useof serviceprovidersanddescribeselementsof howtheBoarddetermineswhichcompaniesare anappropriateserviceproviderrisk-management charged,estimatestheapplicableexpenses,deterprogram.Theguidanceisavailableatwww mineseachcompany’sassessment,andbillsforand .federalreserve.gov/bankinforeg/srletters/sr1319 collectstheassessment.In2013,theBoardbilled .htm. 72companiesforthe2012assessmentperiod.In accordancewithRegulationTTandasrequiredby • InDecember,theFederalReserveandtheother law,theBoardcollectedandtransferredatotalof federalfinancialinstitutionsregulatoryagencies $433,483,299totheU.S.Treasury.Assuch,the issuedastatementtoclarifysafety-and-soundness Boarddoesnotrecognizetheassessmentsasrev- expectationsandCommunityReinvestmentAct enuenordoestheBoardusethecollectionstofund considerationsforregulatedmortgagelendersin Boardexpenses. lightof theConsumerFinancialProtection Bureau’sAbility-to-RepayandQualifiedMortgage • InAugust,sixfederalagencies(theFederal StandardsRule.Thestatementwasintendedto Reserve,Departmentof HousingandUrban guideinstitutionsastheyassessedtheimplementa- Development,theFDIC,theFederalHousing tionof theBureau’sAbility-to-RepayRule.Froma FinanceAgency,theOCC,andtheSEC)issueda safety-and-soundnessperspective,theFederal revisedproposedrulerequiringsponsorsof securi- Reserveandtheotheragenciesemphasizedthatan tizationtransactionstoretainriskinthosetransacinstitutionmayoriginatebothqualifiedandnontions.Thenewproposalrevisesaproposedrulethe qualifiedresidentialmortgageloans(QMandnonagenciesissuedin2011toimplementtheriskreten- QM,respectively)basedonitsbusinessstrategy tionrequirementintheDodd-FrankAct.Therule andriskappetite.Theagencieswillnotsubjecta wouldprovideasset-backedsecuritiessponsors residentialmortgageloantosafety-and-soundness withseveraloptionstosatisfytheriskretention criticismsolelybecauseof theloan’sstatusasa requirements.Theproposedruleisavailableat QMornon-QMloan.Thestatementalsoemphawww.gpo.gov/fdsys/pkg/FR-2013-09-20/pdf/2013sizedthat,fromaconsumerprotectionperspective, 21677.pdf. theagenciesdonotanticipatethataninstitution’s • InOctober,thefederalbankingagenciesissued decisiontooriginateonlyQMs,absentotherfacsecuritiesclassificationguidance.Theguidance tors,wouldadverselyaffectitsCRAevaluations. outlinesprinciplesrelatedtotheproperclassifica- Theletterandguidanceareavailableatwww tionof securitieswithoutrelyingonratingsissued .federalreserve.gov/bankinforeg/srletters/SR1320 bynationallyrecognizedstatisticalratingorganiza- .htm. tions(externalcreditratings).Section939Aof the • InDecember,theFederalReserveissuedguidance Dodd-FrankWallStreetReformandConsumer toclarifythatfinancialinstitutionswithsignificant ProtectionActof 2010requireseachfederalagency foreignexchangeoperationsintheUnitedStates toremovereferencesto,andrequirementsof relishouldapplytheprinciplesof theSupervisory anceon,externalcreditratingsinanyregulation GuidanceforManagingRisksAssociatedwiththe issuedbytheagencythatrequirestheassessmentof Settlementof ForeignExchangeTransactions, thecreditworthinessof asecurityormoneymarket whichwaspublishedinFebruarybytheBasel instrument.Thisguidanceclarifiestheclassifica-

SupervisionandRegulation 61 CommitteeonBankingSupervision.TheBasel tomonitorandevaluateriskprofilesandcapital Committee’sguidancediscussestheimportanceof adequacy,toevaluateproposalsforHCmergers stronggovernanceoverforeignexchangesettlement andacquisitions,andtoanalyzeaholdingcomparisksandcallsfortheuseof paymentversuspay- ny’soverallfinancialcondition. mentsettlementsystemsandbilateralnettingwhen • Nonbanksubsidiaryreports—theFRY-11,FR possible,alongwiththeexchangeof variationmar- 2314,FRY-7N,andFR2886b—helptheFederal ginontransactionswithfinancialinstitutions.The Reservedeterminetheconditionof HCsthatare letterandguidanceareavailableatwww engagedinnonbankactivitiesandalsoaidinmoni- .federalreserve.gov/bankinforeg/srletters/sr1324 toringthenumber,nature,andconditionof the .htm. companies’nonbanksubsidiaries. • InDecember,theFederalReserve,theotherfederal • TheFRY-8reportprovidesinformationontransbankingagencies,andtheSECissuedastatement actionsbetweenaninsureddepositoryinstitution regardingthetreatmentof certaincollateralized anditsaffiliatesthataresubjecttosection23Aof debtobligationsbackedbytrustpreferredsecuritheFederalReserveAct;itisusedtomonitorbank tiesundertheinvestmentprohibitionsof secexposurestoaffiliatesandtoensurebanks’complition619of theDodd-FrankAct,otherwiseknown ancewithsection23Aof theFederalReserveAct. asthe“Volckerrule.”Theletterandguidanceare availableatwww.federalreserve.gov/bankinforeg/ • TheFRY-10reportprovidesdataonchangesin srletters/sr1325.htm. organizationstructureatdomesticandforeign bankingorganizations. RegulatoryReports • TheFRY-6andFRY-7reportsgatheradditional TheFederalReserve’ssupervisorypolicyfunctionis informationonorganizationstructureandsharealsoresponsiblefordeveloping,coordinating,and holdersfromdomesticbankingorganizationsand implementingregulatoryreportingrequirementsfor foreignbankingorganizations,respectively;the variousfinancialreportingformsfiledbydomestic informationisusedtomonitorstructuresoasto andforeignfinancialinstitutionssubjecttoFederal determinecompliancewithprovisionsof theBank Reservesupervision.FederalReservestaff members HoldingCompanyAct(BHCAct)andRegulainteractwithotherfederalagenciesandrelevantstate tionY,andtheHomeOwnersLoanAct(HOLA) supervisors,includingforeignbanksupervisorsas andRegulationLLandtoassesstheabilityof a needed,torecommendandimplementappropriate foreignbankingorganizationtocontinueasa andtimelyrevisionstothereportingformsandthe sourceof strengthtoitsU.S.operations. attendantinstructions. • TheFFIEC101reportcollectsinformationabout BankHoldingCompanyRegulatoryReports thecomponentsof reportingentities’regulatory TheFederalReserverequiresthatU.S.holdingcom- capital,risk-weightedassetsbytypeof credit-risk panies(HCs)periodicallysubmitreportsthatprovide exposureundertheAdvancedInternalRatingsinformationabouttheirfinancialconditionand BasedApproach,andrisk-weightedassetsand structure.13Thisinformationisessentialtoformulat- operationallossesundertheAdvancedMeasureingandconductingbankregulationandsupervision. mentApproach.Thereportisusedtoassessand ItisalsousedinrespondingtorequestsbyCongress monitorthelevelsandcomponentsof eachreportandthepublicforinformationaboutHCsandtheir ingentity’srisk-basedcapitalrequirementsandthe nonbanksubsidiaries.Foreignbankingorganizations adequacyof theentity'scapitalunderthe alsoarerequiredtoperiodicallysubmitreportstothe AdvancedCapitalAdequacyFramework. FederalReserve. • TheFFIEC009reportcollectsdetailedinforma- • FRY-9seriesreports—theFRY-9C,FRY-9LP, tiononthedistribution,bycountry,of claimson foreignersheldbythereportinginstitution.The FRY-9SPandFRY-9ES—providestandardized reportisusedtodeterminethedegreeof riskinthe financialstatementsforHCsonbothaconsolireportinginstitution’sportfoliosandtheeffect datedandaparent-onlybasis.Thereportsareused adversedevelopmentsinparticularcountriesmay todetectemergingfinancialproblems,toreview haveontheU.S.bankingsystem. performanceandconductpre-inspectionanalysis, During2013,theFederalReserveproposedtorevise 13 HCsaredefinedasbankholdingcompanies,savingsandloan holdingcompanies,andsecuritiesholdingcompanies. theFRY-9C,FRY-9SPandtheFFIEC101reports

62 100thAnnualReport|2013 toimplementtherevisedregulatorycapitalframe- marysourceof dataforthesupervisionandregulawork.TheFederalReservewouldmodifytheFR tionof banksandtheongoingassessmentof the Y-9CtosplitthecurrentScheduleHC-R,Regulatory overallsoundnessof thenation’sbankingsystem. Capital,intotwoparts:PartI,whichwouldcollect CallReportdataprovidethemostcurrentstatistical informationonregulatorycapitalcomponentsand dataavailableforevaluatinginstitutions’corporate ratios,andPartII,whichwouldcollectinformation applications,foridentifyingareasof focusforboth onrisk-weightedassets.TheFederalReservewould on-siteandoff-siteexaminations,andforconsidering modifytheFRY-9SPtoaddanewScheduleSC-R, monetaryandotherpublicpolicyissues.CallReport RegulatoryCapital,tobegincollectinginformation data,whichalsoserveasbenchmarksforthefinanonregulatorycapitalcomponentsandratiosand cialinformationrequiredbymanyotherFederal risk-weightedassetsfromsmallcoveredSLHCs.The Reserveregulatoryfinancialreports,arewidelyused FederalReserve(withtheotherFFIECmember bystateandlocalgovernments,statebankingsuperbankingagencies)wouldmodifyFFIEC101Sched- visors,thebankingindustry,securitiesanalysts,and uleA,AdvancedRisk-BasedCapital,andnineother theacademiccommunity. schedulestoimplementtherevisedadvanced approachescapitalrules. During2013,theFFIECproposedtorevisetheCall Reporttoimplementthebankingagencies’revised EffectiveinDecember2013,theFFIEC009report regulatorycapitalframework.TheFFIECwould wasrevisedto(1)increasethenumberof counter- modifytheCallReporttosplitthecurrentSchedpartycategories;(2)addadditionalinformationon uleRC-R,RegulatoryCapital,intotwoparts:PartI, thetypeof claimbeingreported;(3)providedetails whichwouldcollectinformationonregulatorycapionalimitednumberof riskmitigantstohelpprovide talcomponentsandratios,andPartII,whichwould perspectivetocurrentlyreportedgrossexposure collectinformationonrisk-weightedassets.Alsodurnumbers;(4)addmoredetailedreportingof credit ing2013,theFFIECproposedrevisionstothefolderivatives;(5)addtheUnitedStatesasacountry lowingtypesof informationontheCallReport: rowtofacilitatetheanalysisof domesticandforeign effectiveMarch2014(1)informationaboutinternaexposuresandcomplywithenhancementstoInterna- tionalremittancetransfers;(2)informationontrade tionalBankingStatisticsproposedbytheBankfor names(otherthananinstitution’slegaltitle)usedto InternationalSettlements;and(6)effective identifyphysicalofficesandtheaddressesof any March2014,expandtheentitiesthatmustreportto public-facingInternetwebsites(otherthantheinstiincludeSLHCs. tution’sprimaryInternetwebsiteaddress)atwhich theinstitutionacceptsorsolicitsdepositsfromthe AlsoeffectiveinDecember2013,theFederalReserve public;(3)responsestoayes-noquestionasking reducedreportingburdenbyincreasingtheassetsize whetherthereportinginstitutionoffersanydeposit thresholdsforfilingtheannualFRY-11/S,FR accountproducts(otherthantimedeposits)primar- 2314/S,andFRY-7N/S.Inaddition,theFederal ilyintendedforconsumers;(4)forinstitutionswith ReserveeliminatedtheFRY-11SandFR2314S $1billionormoreintotalassetsthatofferoneor thresholdrequirementbasedonthepercentageof moredepositaccountproducts(otherthantime consolidatedassetsof thetop-tierorganization. deposits)primarilyintendedforconsumers,informationonthetotalbalancesof theseconsumerdeposit SavingsandLoanHoldingCompany accountproducts;andeffectiveMarch2015(5)for RegulatoryReports institutionswith$1billionormoreintotalassetsthat Themajorityof SLHCsbecamecompliantwithFed- offeroneormoredepositaccountproducts(other eralReserveregulatoryreportingbytheendof 2013. thantimedeposits)primarilyintendedforconsum- Atthistime,approximately20commercialandinsur- ers,informationontheamountof incomeearned anceSLHCsremainexemptfromfilingconsolidated fromeachof threecategoriesof servicechargeson regulatoryreports. theirconsumerdepositaccountproducts. CommercialBankRegulatoryReports Supervisory Information Technology Asthefederalsupervisorof statememberbanks,the FederalReserve,alongwiththeotherbankingagen- TheFederalReserve’ssupervisoryinformationtechcies(throughtheFFIEC),requiresbankstosubmit nologyfunction,carriedoutbytheBoard’sDivision quarterlytheConsolidatedReportsof Condition of BankingSupervisionandRegulationandthe andIncome(CallReports).CallReportsarethepri- ReserveBanksundertheguidanceof theSubcom-

SupervisionandRegulation 63 mitteeonSupervisoryAdministrationandTechnol- collaborationamongfederalandstatebankingreguogy,workstoidentifyandsetprioritiesforinforma- latorsforthesupervisionof bankingorganizations; tiontechnologyinitiativeswithinthesupervisionand and(4)theCentralDocumentandTextRepository regulationbusinessline. (CDTR),anapplicationthatcontainsdocuments supportingthesupervisoryprocesses. In2013,thesupervisoryinformationtechnology functionfocusedon WithintheNIC,thesupportingsystemscontinueto bemodifiedovertimetoextendtheirusefulnessand • Largebanksupervision.Improvedthesupervision improvebusinessworkflowefficiency,especiallyfor of largeandregionalfinancialinstitutionswith thesourcingtransactionaldatasystems.Throughout newprocessesandlinkedworkflowstoenablecon- 2013,theNICsupervisoryandstructuredatabases tinuousupdatesof informationprovidedthrough continuedtobemodifiedtosupportDodd-Frank examinationsandongoingmonitoringactivities. Actchangesandtofacilitatethesupervisionof • Communityandregionalbanksupervision.Worked SLHCs.Thecaptureandintegrationof theformer withcommunityandregionalbankexaminersand OTSdataanddocumentsintoseveralNICdatabases otherregulatorstoimplementenhancedtoolsto werecompletedthisyear,whichresultedinsubstansupportcommunityandregionalbank tiallymoreSLHCexaminationandenforcement examinations. actiondatabeingavailable.Additionally,SLHCs wereaddedtothereportingpanelfortheReportof • Datamanagementandanalysis.Implementeda ChangesinOrganizationalStructure(FRY-10). DataManagementOfficetostrengthencapabilities intheareasof datacollectionanddatasteward- NICstaff areengagedwiththeBoard’snewOfficeof ship.Implementednewtoolsfortheanalysisof theChief DataOfficerestablishedin2013toconlargevolumesof data,especiallyinsupportof tinueimprovingdatamanagementanddatagoverstresstestingandriskanalysis. nancepracticesfortheBoardandFRSenterprise • Collaboration.(1)Enhancedinformationsharing information.During2013,anumberof FRSmanamongstaff attheBoardandReserveBanks agementgroupsweremodifiedtoalignwiththe throughnewandenhancedcollaborationtools; Board’sstrategicplanninginitiatives. (2)implementedanelectronicsolutiontosupport examteams’abilitytosharedocuments,and ChangestotheNICpublicwebsitecontinuedtobe (3)leveragedanInteragencySteeringGroupto implementedinresponsetotheDodd-FrankAct, improvemethodsforsharingworkamongstate includingimplementationof changestoallowaccess andfederalregulators. totheBankingOrganizationSystemicRiskReport (FRY-15).Similarlythewebsitewasenhancedto • Modernization.ImplementedproductstomodernprovideaccesstotheRisk-BasedCapitalReporting izebusinesscapabilitiesintheareasof loanreview, forInstitutionsSubjecttotheAdvancedCapital examinercredentialing,andscheduling. AdequacyFramework(FFIEC101).Thedatafor • Informationsecurity.Commencedseveralinitiatives thesetwoserieswillbeavailablein2014. toimproveoverallinformationsecurityandthe efficiencyof ourinformationsecuritypractices. Alsoin2013,enhancementsweremadetothe CDTR,whichincludedtheexpansionof theapplica- NationalInformationCenter tiontoaccommodateadditionaltextassociatedwith TheNationalInformationCenter(NIC)istheFed- newsupervisorydatacollectionsandmodifications eralReserve’scomprehensiverepositoryforsupervi- tofacilitatethesharingof informationbetweenthe sory,financial,andbankingstructuredata.Itisalso FederalReserveSystemandtheConsumerFinancial themainrepositoryformanysupervisorydocuments. ProtectionBureau. TheNICincludes(1)dataonbankingstructure throughouttheUnitedStatesaswellasforeignbank- TheNICstaff participatedinanumberof interingconcerns;(2)theNationalExaminationData agencytechnology-relatedinitiativesaspartof (NED),anapplicationthatenablessupervisoryper- FFIECtaskforcesandinteragencycommittees. sonnelaswellasfederalandstatebankingauthorities Theseeffortssupportstandardizeddatacollections toaccessNICdata;(3)theBankingOrganization andcross-agencyinformationsharing.Workinthis NationalDesktop,anapplicationthatfacilitates areawillcontinuetobeimportantastheagencies secure,real-timeelectronicinformationsharingand workthroughtheimplementationof theremaining

64 100thAnnualReport|2013 Table2.Trainingforbankingsupervisionandregulation,2013 Numberofenrollments Instructionaltime Numberofcourse Coursesponsorortype FederalReserve S b t a a n te ki a n n g d a f g e e d n e c r y al (approxi d m ay a s te )1 training offerings personnel personnel FederalReserveSystem 2,313 489 560 112 FFIEC 725 318 432 108 TheOptionsInstitute2 9 2 3 1 RapidResponseTM 20,595 3,368 13 106 1 Trainingdaysareapproximate.Systemcourseswerecalculatedusingfivedaysasanaverage,withFFIECcoursescalculatedusingfourdaysasanaverage. 2 TheOptionsInstitute,aneducationalarmoftheChicagoBoardOptionsExchange,providesathree-dayseminarontheuseofoptionsinriskmanagement. Dodd-FrankActinitiatives.Onesuchtechnology- ExaminerCommissioningProgram relatedinitiativerequiredBoardstaff tocollaborate TheFederalReserveSystem’scommissioningprowiththeFDICandOCCtoreviewproposalsonand gramforassistantexaminersissetforthintheExamawardacontractfortheenhancementstoandthe inerCommissioningProgram(SRletter98-02).14 operationsandmaintenanceof theFFIECCentral Examinerschoosefromoneof threespecialty DataRepository(CDR),thedatacollectionandvali- tracks—(1)safetyandsoundness,(2)consumercomdationsystemfortheFFIECcommercialbankCon- pliance,or(3)informationtechnology.Onaverage, solidatedReportsof ConditionandIncome(Call individualsmovethroughacombinationof class- Reports:FFIEC031andFFIEC041)andtheUni- roomofferings,self-pacedlearning,andon-the-job formBankPerformanceReport. trainingoveraperiodof threeyears.Achievementis measuredbycompletingtherequiredcoursecontent, TheNICalsosupportstheinteragencyShared demonstratingadequateon-the-jobknowledge,and NationalCredit(SNC)Program,theannualreview passingaprofessionallyvalidatedproficiency of largesyndicatedloans.During2013,theagencies examination. continuedtoreviewandimplementremainingbusinessrequirementstocompletetheSNCautomation In2013,157examinerspassedthefirstproficiency buildout.Thisautomationisfocusedonimproving examand142passedthesecondproficiencyexam theefficiencyof theannualSNCexaminationpro- (103insafetyandsoundnessand39inconsumer cessandenhancingthesupervisoryinsightderived compliance). fromtheseexams. Currently,theFederalReserveisundertakingamajor Additionally,throughout2013,NICstaff provided initiativetomodernizeitsExaminerCommissioning projectmanagementsupportforthematurationof Program.Asaresult,thecurriculumforexaminers datamanagementpracticesassociatedwiththe involvedincommunitybankingsupervisionandcon- CCAR,CapitalPlanReview,andDFASTprogram sumercompliancehasbeenrevisedoriscurrently initiativesandfortheautomationof theCapital beingrevised. AssessmentandStressTesting(FRY-14)informa- ContinuingProfessionalDevelopment tioncollection. Otherformalandinformallearningopportunitiesare availabletoexaminersintheformof self-studymate- Staff Development rials,onlinelearning,andclassroominstruction. Schools,conferences,andprogramscoveringavari- TheFederalReserve’sstaff developmentprogram etyof regulatorytopicsareofferedwithinthe supportstheongoingdevelopmentof about3,200 System,Board,andFFIEC.Systemprogramsare professionalsupervisorystaff,ensuringthattheyhave alsoavailabletostateandfederalbankingagency theskillsnecessarytomeettheirevolvingsupervisory personnel. responsibilities.TheFederalReservealsoprovides courseofferingstostaff atstatebankingagencies. 14 SRletter98-02isavailableatwww.federalreserve.gov/ Trainingactivitiesin2013aresummarizedintable2. boarddocs/srletters/1998/sr9802.htm.

SupervisionandRegulation 65 Regulation onthecircumstances,theseactivitiesmayormaynot requireFederalReserveapprovalinadvanceof their commencement. TheFederalReserveexercisesimportantregulatory influenceoverentryintotheU.S.bankingsystem WhenreviewingaBHCapplicationornoticethat andthesystemstructurethroughitsadministration requirespriorapproval,theFederalReservemayconof severalfederalstatutes.TheFederalReserveisalso siderthefinancialandmanagerialresourcesof the responsibleforimposingmarginrequirementson applicant,thefutureprospectsof boththeapplicant securitiestransactions.Incarryingoutitsresponsiandthefirmtobeacquired,financialstabilityfacbilities,theFederalReservecoordinatessupervisory tors,theconvenienceandneedsof thecommunityto activitieswiththeotherfederalbankingagencies, beserved,thepotentialpublicbenefits,thecompetistateagencies,functionalregulators(thatis,regulativeeffectsof theapplication,andtheapplicant’s torsforinsurance,securities,andcommodities abilitytomakeavailabletotheFederalReserveinforfirms),andforeignbankregulatoryagencies. mationdeemednecessarytoensurecompliancewith applicablelaw.Inthecaseof aforeignbankingorga- Regulation of the U.S. Banking Structure nizationseekingtoacquirecontrolof aU.S.bank, theFederalReservealsoconsiderswhetherthefor- TheFederalReserveadministerssixfederalstatutes eignbankissubjecttocomprehensivesupervisionor thatapplytoBHCs,financialholdingcompanies, regulationonaconsolidatedbasisbyitshomememberbanks,SLHCs,andforeignbankingorganicountrysupervisor.In2013,theFederalReserve zations:theBHCAct,theBankMergerAct,the actedon242applicationsandnoticesfiledbyBHCs ChangeinBankControlAct,theFederalReserve toacquireabankoranonbankfirm,ortootherwise Act,section10of theHomeOwners’LoanAct expandtheiractivities,includingapplicationsinvolv- (HOLA(appliestoSLHCs)),andtheInternational ingprivateequityfirms. BankingAct. ABHCmayrepurchaseitsownsharesfromits Inadministeringthesestatutes,theFederalReserve shareholders.Whenthecompanyborrowsmoneyto actsonavarietyof applicationsthatdirectlyorindibuytheshares,thetransactionincreasesthecomparectlyaffectthestructureof theU.S.bankingsystem ny’sdebtanddecreasesitsequity.TheFederal atthelocal,regional,andnationallevels;theinterna- Reservemayobjecttostockrepurchasesbyholding tionaloperationsof domesticbankingorganizations; companiesthatfailtomeetcertainstandards,includortheU.S.bankingoperationsof foreignbanks.The ingtheBoard’scapitaladequacyguidelines.In2013, applicationsconcernBHCandSLHCformations theFederalReserveactedon13stockrepurchase andacquisitions,bankmergers,andothertransacapplicationsbyBHCs. tionsinvolvingbanksandsavingsassociationsor nonbankfirms.In2013,theFederalReserveactedon TheFederalReservealsoreviewselectionssubmitted 994applicationsfiledunderthesixstatutes.Manyof byBHCsseekingfinancialholdingcompanystatus theseapplicationsinvolvedtargetbankingorganizaundertheauthoritygrantedbytheGramm-Leachtionsinlessthansatisfactoryfinancialcondition. BlileyAct.BHCsseekingfinancialholdingcompany statusmustfileawrittendeclarationwiththeFederal BankHoldingCompanyActApplications Reserve.In2013,26domesticfinancialholdingcom- UndertheBHCAct,acorporationorsimilarlegal panydeclarationswereapproved. entitymustobtaintheFederalReserve’sapproval beforeformingaBHCthroughtheacquisitionof BankMergerActApplications oneormorebanksintheUnitedStates.Once TheBankMergerActrequiresthatallapplications formed,aBHCmustreceiveFederalReserve involvingthemergerof insureddepositoryinstituapprovalbeforeacquiringorestablishingadditional tionsbeactedonbytherelevantfederalbanking banks.Also,BHCsgenerallymayengageinonly agency.TheFederalReservehasprimaryjurisdiction thosenonbankingactivitiesthattheBoardhaspreviif theinstitutionsurvivingthemergerisastatememouslydeterminedtobecloselyrelatedtobanking berbank.Beforeactingonamergerapplication,the undersection4(c)(8)of theBHCAct.15Depending FederalReserveconsidersthefinancialandmanage- 15 Since1996,theacthasprovidedanexpeditedpriornoticeproce- acthasalsopermittedwell-runBHCsthatsatisfycertaincriteria dureforcertainpermissiblenonbankactivitiesandforacquisi- tocommencecertainothernonbankactivitiesonadenovo tionsofsmallbanksandnonbankentities.Sincethattime,the basiswithoutfirstobtainingFederalReserveapproval.

66 100thAnnualReport|2013 rialresourcesof theapplicant,thefutureprospectsof ingapplicationsforforeignbranches,theFederal theexistingandcombinedorganizations,theconve- Reserveconsiders,amongotherthings,thecondition nienceandneedsof thecommunitiestobeserved, of thebankandthebank’sexperienceininternaandthecompetitiveeffectsof theproposedmerger. tionalbanking.In2013,theFederalReserveactedon TheFederalReservealsomustconsidertheviewsof membershipapplicationsfor39banks,andnewand theU.S.Departmentof Justiceregardingthecom- merger-relatedbranchapplicationsfor420domestic petitiveaspectsof anyproposedbankmergerinvolv- branchesandthreeforeignbranches. ingunaffiliatedinsureddepositoryinstitutions.In 2013,theFederalReserveapproved41mergerappli- StatememberbanksmustalsoobtainFederal cationsundertheact. Reserveapprovaltoestablishfinancialsubsidiaries. Thesesubsidiariesmayengageinactivitiesthatare ChangeinBankControlActApplications financialinnatureorincidentaltofinancialactivities, TheChangeinBankControlActrequiresindividuals includingsecurities-relatedandinsuranceagencyandcertainotherpartiesthatseekcontrolof aU.S. relatedactivities.In2013,nofinancialsubsidiary bank,BHC,orSLHCtoobtainapprovalfromthe applicationsweresubmitted. relevantfederalbankingagencybeforecompleting thetransaction.TheFederalReserveisresponsible HomeOwners’LoanActApplications forreviewingchangesinthecontrolof statemember UnderHOLA,acorporationorsimilarlegalentity banks,BHCs,andSLHCs.Initsreview,theFederal mustobtaintheFederalReserve’sapprovalbefore Reserveconsidersthefinancialposition,competence, forminganSLHCthroughtheacquisitionof oneor experience,andintegrityof theacquiringperson;the moresavingsassociationsintheUnitedStates.Once effectof theproposedchangeonthefinancialcondi- formed,anSLHCmustreceiveFederalReserve tionof thebank,BHC,orSLHCbeingacquired;the approvalbeforeacquiringorestablishingadditional futureprospectsof theinstitutiontobeacquired;the savingsassociations.Also,SLHCsgenerallymay effectof theproposedchangeoncompetitioninany engageinonlythosenonbankingactivitiesthatare relevantmarket;thecompletenessof theinformation specificallyenumeratedinHOLAorwhichtheBoard submittedbytheacquiringperson;andwhetherthe haspreviouslydeterminedtobecloselyrelatedto proposedchangewouldhaveanadverseeffectonthe bankingundersection4(c)(8)of theBHCAct. DepositInsuranceFund.Aproposedtransaction Dependingonthecircumstances,theseactivitiesmay shouldnotjeopardizethestabilityof theinstitution ormaynotrequireFederalReserveapprovalin ortheinterestsof depositors.Duringitsreviewof a advanceof theircommencement.In2013,theFedproposedtransaction,theFederalReservemaycon- eralReserveactedon15applicationsandnotices tactotherregulatoryorlawenforcementagenciesfor filedbySLHCstoacquireabankoranonbankfirm, informationaboutrelevantindividuals.In2013,the ortootherwiseexpandtheiractivities. FederalReserveapproved153changeincontrol noticesanddeniedonenotice. UnderHOLA,asavingsassociationreorganizingto amutualholdingcompany(MHC)structuremust FederalReserveActApplications receiveFederalReserveapprovalpriortoitsreorgani- UndertheFederalReserveAct,abankmustseek zation.Inaddition,anMHCmustreceiveFederal FederalReserveapprovaltobecomeamemberbank. Reserveapprovalbeforeconvertingtostockform, AmemberbankmayberequiredtoseekFederal andMHCsmustreceiveFederalReserveapproval Reserveapprovalbeforeexpandingitsoperations beforewaivingdividendsdeclaredbytheMHC’s domesticallyorinternationally.Statememberbanks subsidiary.In2013,theFederalReserveactedonno mustobtainFederalReserveapprovaltoestablish applicationsforMHCreorganizations.In2013,the domesticbranches,andallmemberbanks(including FederalReserveactedonsixapplicationsfiledby nationalbanks)mustobtainFederalReserve MHCstoconverttostockform,andsixapplications approvaltoestablishforeignbranches.Whenreview- towaivedividends. ingapplicationsformembership,theFederalReserve considers,amongotherthings,thebank’sfinancial WhenreviewinganSLHCapplicationornoticethat conditionanditsrecordof compliancewithbanking requirespriorapproval,theFederalReservemayconlawsandregulations.Whenreviewingapplicationsto siderthefinancialandmanagerialresourcesof the establishdomesticbranches,theFederalReservecon- applicant,thefutureprospectsof boththeapplicant siders,amongotherthings,thescopeandnatureof andthefirmtobeacquired,theconvenienceand thebankingactivitiestobeconducted.Whenreview- needsof thecommunitytobeserved,thepotential

SupervisionandRegulation 67 publicbenefits,thecompetitiveeffectsof theapplica- whetherthehomecountryof theforeignbankis tion,andtheapplicant’sabilitytomakeavailableto developingalegalregimetoaddressmoneylaundertheFederalReserveinformationdeemednecessaryto ingorisparticipatinginmultilateraleffortstocomensurecompliancewithapplicablelaw. batmoneylaundering;andtherecordof theforeign bankwithrespecttocompliancewithU.S.law.In TheFederalReservealsoreviewselectionssubmitted 2013,theFederalReserveapprovedsevenapplicabySLHCsseekingstatusasfinancialholdingcompa- tionsbyforeignbankstoestablishbranches,agencies, niesundertheauthoritygrantedbytheDodd-Frank orrepresentativeofficesintheUnitedStates. Act.SLHCsseekingfinancialholdingcompanystatusmustfileawrittendeclarationwiththeFederal PublicNoticeofFederalReserveDecisions Reserve.In2013,noSLHCfinancialholdingcom- CertaindecisionsbytheFederalReservethatinvolve panydeclarationswereapproved. anacquisitionbyaBHC,abankmerger,achangein control,ortheestablishmentof anewU.S.banking OverseasInvestmentApplicationsby presencebyaforeignbankaremadeknowntothe U.S.BankingOrganizations publicbyanorderoranannouncement.Ordersstate U.S.bankingorganizationsmayengageinabroad thedecision,theessentialfactsof theapplicationor rangeof activitiesoverseas.Manyof theactivitiesare notice,andthebasisforthedecision;announcements conductedindirectlythroughEdgeActandagree- stateonlythedecision.Allordersandannouncementcorporationsubsidiaries.Althoughmostfor- mentsaremadepublicimmediately;theyaresubseeigninvestmentsaremadeundergeneralconsentpro- quentlyreportedintheBoard’sweeklyH.2statistical ceduresthatinvolveonlyafter-the-factnotificationto release.TheH.2releasealsocontainsannouncements theFederalReserve,largeandothersignificant of applicationsandnoticesreceivedbytheFederal investmentsrequirepriorapproval.In2013,theFed- Reserveuponwhichactionhasnotyetbeentaken. eralReserveapproved23applicationsandnoticesfor Foreachpendingapplicationandnotice,therelated overseasinvestmentsbyU.S.bankingorganizations, H.2Areleasegivesthedeadlineforcomments.The manyof whichrepresentedinvestmentsthroughan Board’swebsiteprovidesinformationonordersand EdgeActoragreementcorporation. announcements(www.federalreserve.gov/newsevents/ press/orders/2013orders.htm)aswellasaguidefor InternationalBankingActApplications U.S.andforeignbankingorganizationsthatwishto TheInternationalBankingAct,asamendedbythe submitapplications(www.federalreserve.gov/ ForeignBankSupervisionEnhancementActof bankinforeg/afi/afi.htm). 1991,requiresforeignbankstoobtainFederal Reserveapprovalbeforeestablishingbranches,agen- Enforcement of Other Laws and cies,commerciallendingcompanysubsidiaries,or Regulations representativeofficesintheUnitedStates. TheFederalReserve’senforcementresponsibilities Inreviewingapplications,theFederalReservegener- alsoextendtothedisclosureof financialinformation allyconsiderswhethertheforeignbankissubjectto bystatememberbanksandtheuseof credittopurcomprehensivesupervisionorregulationonacon- chaseandcarrysecurities. solidatedbasisbyitshome-countrysupervisor.It alsoconsiderswhetherthehome-countrysupervisor FinancialDisclosuresbyStateMemberBanks hasconsentedtotheestablishmentof theU.S.office; UndertheSecuritiesExchangeActof 1934andFedthefinancialconditionandresourcesof theforeign eralReserve’sRegulationH,certainstatemember bankanditsexistingU.S.operations;themanagerial banksarerequiredtomakefinancialdisclosuresto resourcesof theforeignbank;whetherthehome- theFederalReserveusingthesamereportingforms countrysupervisorsharesinformationregardingthe (suchasForm10K-annualreportandSchedule14A operationsof theforeignbankwithothersupervi- -proxystatement)thatarenormallyusedbypublicly soryauthorities;whethertheforeignbankhaspro- heldentitiestosubmitinformationtotheSecurities videdadequateassurancesthatinformationconcern- ExchangeCommission.16Asmostof thepublicly ingitsoperationsandactivitieswillbemadeavailable totheFederalReserve,if deemednecessarytodeter- 16 UnderSection12(g)oftheSecuritiesExchangeAct,certain mineandenforcecompliancewithapplicablelaw; companiesthathaveissuedsecuritiesaresubjecttoSECregistrationandfilingrequirementsthataresimilartothoseimposed whethertheforeignbankhasadoptedandimpleonpubliccompanies.PerSection12(i)oftheSecurities mentedprocedurestocombatmoneylaunderingand ExchangeAct,thepowersoftheSECoverbankingentitiesthat

68 100thAnnualReport|2013 heldbankingorganizationsareBHCsandthereport- chasedebtandequitysecurities.TheBoard’sRegulaingthresholdwasrecentlyraised,onlythreestate tionUlimitstheamountof creditthatmaybepromemberbankswererequiredtosubmitdatatothe videdbylendersotherthanbrokersanddealerswhen FederalReservein2013.Theinformationsubmitted thecreditisusedtopurchaseorcarrypubliclyheld bythesethreesmallstatememberbanksisavailable equitysecuritiesif theloanissecuredbythoseor tothepublicuponrequestandisprimarilyusedfor otherpubliclyheldequitysecurities.TheBoard’s disclosuretothebank’sshareholdersandpublic RegulationXappliesthesecreditlimitations,ormarinvestors. ginrequirements,tocertainborrowersandtocertain creditextensions,suchascreditobtainedfromfor- SecuritiesCredit eignlendersbyU.S.citizens. UndertheSecuritiesExchangeActof 1934,the Boardisresponsibleforregulatingcreditincertain SeveralregulatoryagenciesenforcetheBoard’ssecutransactionsinvolvingthepurchasingorcarryingof ritiescreditregulations.TheSEC,theFinancial securities.TheBoard’sRegulationTlimitsthe IndustryRegulatoryAuthority,andtheChicago amountof creditthatmaybeprovidedbysecurities BoardOptionsExchangeexaminebrokersanddealbrokersanddealerswhenthecreditisusedtopur- ersforcompliancewithRegulationT.Withrespectto compliancewithRegulationU,thefederalbanking agenciesexaminebanksundertheirrespectivejurisfallunderSection12(g)arevestedwiththeappropriatebanking regulator.Specifically,statememberbankswith2,000ormore dictions;theFarmCreditAdministrationandthe shareholdersandmorethan$10millionintotalassetsare NCUAexaminelendersundertheirrespectivejurisrequiredtoregisterwith,andsubmitdatato,theFederal dictions;andtheFederalReserveexaminesother Reserve.Thesethresholdsreflecttherecentamendmentsbythe JumpstartOurBusinessStartupsAct(JOBSAct). RegulationUlenders.

69 4 Consumer and Community Affairs Themissionof theDivisionof ConsumerandCom- ers.Throughouttheyear,DCCAconvenedpromunityAffairs(DCCA)istoensurethatthevoices gramstoshareinformationandresearchoneffecandconcernsof consumersandcommunitiesarerep- tivecommunitydevelopmentpoliciesand resentedatthecentralbankof theUnitedStates. strategies. DCCAhasprimaryresponsibilityforcarryingout theBoardof Governor’sconsumerfinancialprotec- • Consumerlawsandregulations.Thedivisioncontionandcommunitydevelopmentprograms.Italso tinuedtoadministertheBoard’sregulatoryresponconductsconsumer-focusedsupervision,research, sibilitieswithrespecttocertainentitiesandspecific andpolicyanalysis,aswellasimplementsstatutory statutoryprovisionsof theconsumerfinancialserrequirementsandfacilitatescommunitydevelopment. vicesandfairlendinglaws.DCCAdraftedand Theseactivitiespromoteafairandtransparentcon- consultedwithotheragenciesonregulationsand sumerfinancialservicesmarket,includingfortradi- officialinterpretations,aswellasissuedregulatory tionallyunderservedhouseholdsandneighborhoods. interpretationsandcomplianceguidanceforthe industry,theReserveBanks,otherfederalagencies, andcongressionalstaff. Throughout2013,thedivisionengagedinnumerous consumerandcommunity-relatedfunctionsand policyactivitiesinthefollowingareas: Supervision and Examinations • Consumer-focusedsupervisionandexaminations. DCCAdevelopsandsupportssupervisorypolicyand ThedivisionprovidedleadershipfortheReserve examinationproceduresforconsumerprotection Bankconsumercompliancesupervisionandexamilawsandregulations,aswellastheCommunityReinnationprogramsinstatememberbanksandbank vestmentAct(CRA),aspartof itssupervisionof the holdingcompaniesthroughpolicydevelopment, organizationsforwhichithasauthority,including examinertraining,supervisionoversight,fairlendholdingcompanies,statememberbanks,andforeign ing,UnfairorDeceptiveActsorPractices(UDAP) bankingorganizations.Thedivisionalsoadministers andfloodenforcement,analysisof bankandbank theFederalReserveSystem’srisk-focusedprogram holdingcompanyapplicationsinregardtoconforassessingconsumercomplianceriskatthelargest sumerprotection,andprocessingconsumer bankandfinancialholdingcompaniesintheSystem, complaints. withdivisionstaff ensuringthatconsumercompli- • Consumerresearchandemerging-issuesandpolicy anceriskiseffectivelyintegratedintotheconsolianalysis.Thedivisionanalyzedemergingissuesin datedsupervisionoversightof theholdingcompany. consumerfinancialservicespoliciesandpractices Thedivisionoverseestheeffortsof the12Reserve inordertounderstandtheirimplicationsforthe Bankstoensurethatcompliancewithconsumerproeconomicandsupervisorypoliciesthatarecoreto tectionlawsandregulationsisfullyevaluatedand thecentralbank’sfunctions,aswellastogain fairlyenforced.Divisionstaff providesguidanceand insightintoconsumerdecisionmakingaround expertisetotheReserveBanksonconsumerprotecfinancialservices. tionlawsandregulations,bankandbankholding companyapplicationanalysisandprocessing,exami- • Communitydevelopmentactivities.Thedivision nationandenforcementtechniquesandpolicymatcontinuedtopromotefairandinformedaccessto ters,examinertraining,andemergingissues.Staff financialmarketsforallconsumers,particularlythe reviewReserveBanksupervisoryreports,examinaneedsof underservedpopulations,byengaging tionworkproducts,andconsumercomplaintanalylenders,governmentofficials,andcommunitylead- sesandresponses.Finally,staff membersparticipate

70 100thAnnualReport|2013 ininteragencyactivitiesthatpromoteconsistencyin InternalAuditFunctionanditsOutsourcing,”2 examinationprinciples,standards,andprocesses. whichaddressesthecharacteristics,governance,and operationaleffectivenessof afinancialinstitution’s Examinationsareoneof theFederalReserve’smeth- internalauditfunction.Theguidancereflects odsof enforcingcompliancewithconsumerprotec- changesoverthepastseveralyearsinbankingregulationlawsandassessingtheadequacyof consumer tionsrelatedtoauditorindependenceandlimitations compliancerisk-managementsystemswithinregu- placedontheexternalauditor.TheFederalReserve latedentities.During2013,theReserveBankscom- encouragesfinancialinstitutionstoenhancetheir pleted296consumercomplianceexaminationsof internalauditpracticesandtoadoptprofessional statememberbanksand1examinationof aforeign auditstandards. bankingorganization.1 InApril,theFederalReserveissuedguidanceentitled “Extensionof theUseof IndicativeRatingsforSav- Bank Holding Company Consolidated ingsandLoanHoldingCompanies.”3WhentheFed- Supervision Program eralReserveassumedresponsibilityforsupervisionof savingsandloanholdingcompanies(SLHC)in During2013,staff intheBankHoldingCompany July2011,theFederalReservesetforththeSLHC (BHC)ConsolidatedSupervisionProgramhad supervisoryapproachforthefirstsupervisorycycle responsibilityforreviewingmorethan120bankand inSRletter11-11/CAletter11-5,“Supervisionof financialholdingcompaniestoensureconsumer SavingsandLoanHoldingCompanies(SLHCs).” complianceriskwasappropriatelyincorporatedinto Underthatapproach,theFederalReserveissuesan theconsolidatedriskassessmentfortheorganization. indicativeratingtoeachSLHCtoindicatehowthe BHCConsolidatedSupervisionProgramstaff par- SLHCwouldberatedundertheRFIratingsystem.4 ticipatedjointlywithstaff fromtheBoard’sDivision Thecurrentguidanceclarifiesthatuntilfinalization of BankingSupervisionandRegulationonnumerous of aproposedratingsystemforSLHCs,theFederal projectsrelatedtoimplementationof theDodd- Reservewillcontinuetoassignindicativeratingsto FrankWallStreetReformandConsumerProtection SLHCs. Actof 2010(Dodd-FrankAct),includingsupervisoryassessmentfees,consolidatedsupervision,and InDecember,theFederalReserveissuedguidance thriftholdingcompanyintegration.Also,aspartof entitled“GuidanceonManagingOutsourcingRisk,” theconsolidatedsupervisionof BHCs,staff continwhichaddressesthecharacteristics,governance,and uedtomonitorcompliancewiththeprovisionsof the operationaleffectivenessof afinancialinstitution’s consentordersthatwereimplementedin2011and serviceproviderrisk-managementprogramforout- 2012atthe6mortgageservicersand10BHCsfor sourcedactivities.5Theguidancehighlightsthe whichtheFederalReservehassupervisoryauthority. potentialrisksarisingfromtheuseof serviceprovid- Staff’soversightisdesignedtodetermineif theserersanddescribestheelementsof anappropriateservicersandBHCshavecorrectedthenoteddeficienviceproviderrisk-managementprogram. cies;thatfutureabusesintheloanmodificationand foreclosureprocessareprevented;andthatborrowers Mortgage Servicing and Foreclosure: arecompensatedforfinancialinjurytheysuffered Remediating Borrowers through the becauseof errors,misrepresentations,orotherdefi- Payment Agreement cienciesintheforeclosureprocess. InJanuary2013,thePaymentAgreementreplaced InJanuary,theFederalReserveissuedguidance theIndependentForeclosureReviewrequirementof entitled“SupplementalPolicyStatementonthe 2 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ srletters/sr1301.htm. 3 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ 1 Beginningwith2013,reportingofthenumberofexaminations srletters/sr1308.htm. completedwillreflecttheperiodfromJanuary1toDecember31.TheFederalReserve’s2012AnnualReporttoCongress 4 ThemaincomponentsoftheRFIratingsystemrepresentRisk capturedconsumercomplianceandCRAexaminationsfrom Management(R),FinancialCondition(F),andpotential July1,2011,toJune30,2012.FortheperiodfromJuly1to Impact(I)oftheparentcompanyandnondepositorysubsidiar- December31,2012,theFederalReservecompleted136con- ies(collectively,nondepositoryentities)onthesubsidiary sumercomplianceexaminationsofstatememberbanksandof depositoryinstitution(s). 1foreignbankingorganization,aswellas121CRAexamina- 5 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ tionsofstatememberbanks. srletters/sr1319.htm.

ConsumerandCommunityAffairs 71 theenforcementactionsissuedbyfederalbanking agreementsforGMACMortgageandEverBank regulatorsthatincludedcase-by-casefilereviewsand werereleasedinJulyandOctober2013,respectively. insteadprovidesforcashpaymentstoborrowers.6It InDecember,RustConsultingmailedpostcardsto resultedfromanagreementreachedamong13sepa- morethan232,000borrowerswhosemortgageloans ratemortgageservicersandtheFederalReserve wereservicedbyGMACMortgage,notifyingthem BoardandtheOfficeof theComptrollerof theCur- thattheyshouldexpecttoreceiveapayment,oraletrency(OCC).Theparticipatingservicersagreedto terdescribingadditionalinformationneededtopropayanestimated$3.6billionto4.2millionborrowers cesstheirpayment,bytheendof January2014.8 whoseprimaryresidencewasinaforeclosureprocess in2009or2010.ThePaymentAgreementalso ThePaymentAgreementalsorequiredservicersto includedanadditional$5.7billiondollarsinother undertakewell-structuredloss-mitigationefforts foreclosurepreventionassistance,suchasloanmodi- focusedonforeclosureprevention,withpreference ficationsandforgivenessof deficiencyjudgments.In giventoactivitiesdesignedtokeepborrowersintheir lateFebruary,theBoardandtheOCCreleased homesthroughaffordable,sustainable,andmeaningamendmentsthatmemorializedtheagreementsin fulhome-preservationactionswithintwoyearsfrom principleannouncedinJanuary.Fortheparticipating thedatetheagreementinprinciplewasreached. servicers,fulfillmentof theagreementwillsatisfythe UnderthePaymentAgreement,servicersmustnot foreclosurereviewrequirementsof theenforcement disfavoraspecificgeographywithinoramongstates, actionsissuedbytheBoard,theOCC,andtheOffice nordisfavorlow-and/ormoderate-incomeborrowof ThriftSupervisioninAprilandSeptember2011 ers,andshouldnotdiscriminateagainstanyproandApril2012. tectedclass.Servicersmayfulfilltheirobligations throughthreespecificconsumer-relief activitiesset Apayingagent,RustConsulting,Inc.(RustConsult- forthintheNationalMortgageSettlement,including ing),wasretainedtoadministerpaymentstoborrow- first-lienloanmodifications,second-lienloanmodifiersonbehalf of theparticipatingservicers.Beginning cations,andshortsalesordeeds-in-lieuof forecloinApril2013,aletterwithanenclosedcheckwas sure.Servicersweregiventheoption,subjecttononsenttoborrowerswhohadaforeclosureactioniniti- objectionfromtheirregulator,tomeettheirforecloated,pending,orcompletedin2009or2010withany surepreventionassistancerequirementsbypaying of theparticipatingservicers.7Forchecksthatwere additionalcashintothequalifiedsettlementfundsto returnedundeliverable,RustConsulting,atthedirec- beusedfordirectpaymentstoconsumersorbyprotionof theregulators,isattemptingtolocatemore vidingcashorotherresourcecommitmentstoborcurrentaddressinformationfortheborrowersand rowercounselingoreducation. willsendanewchecktotheupdatedaddress.Asof December31,2013,morethan$3billionhasbeen Inadditiontotheforeclosurereviewrequirements, distributedthrough3.4millionchecks.Receivinga theenforcementactionsrequiredservicerstosubmit paymentundertheagreementwillnotpreventbor- acceptablewrittenplanstoaddressvariousmortgage rowersfromtakinganyactiontheymaywishtopur- loanservicingandforeclosureprocessingdeficiencies. suerelatedtotheirforeclosure.Servicersarenotper- ThePaymentAgreementdidnoteliminatetheother mittedtoaskborrowerstosignawaiverof anylegal existingprovisionsof theApril2011enforcement claimstheymayhaveagainsttheirservicerinconnec- actions,whichremaininfullforceandeffect.Since tionwithreceivingpayment. theenforcementactionswereissued,thebanking organizationshavebeenimplementingtheaction Insummer2013,twoadditionalmortgageservicers, plansthatincludeenhancedcontrols,andimproving GMACMortgageandEverBank,alsoreachedagree- systemsandprocesses.FederalReservesupervisory mentswiththeBoardandtheOCCthatendedthe teamscontinuetomonitorandevaluatetheservicers’ IndependentForeclosureReviewforthoseservicers. progressonimplementingtheactionplanstoaddress Theamendedconsentordersthatmemorializedthe unsafeandunsoundmortgageservicingandforeclosurepracticesasrequiredbytheenforcementactions. 6 Formoreinformation,seewww.federalreserve.gov/newsevents/ press/bcreg/20130107a.htm. 8 Formoreinformation,seewww.federalreserve.gov/ 7 Formoreinformation,seewww.federalreserve.gov/newsevents/ consumerinfo/independent-foreclosure-review-paymentpress/bcreg/20130409a.htm. agreement.htm.

72 100thAnnualReport|2013 Supervisory Matters sizethresholdforthefrequencycategoryforsmaller financialinstitutionswasraisedfrom$250millionto Risk-FocusedSupervision $350million,andanewtierwasaddedtotheexami- InNovember2013,theBoardreviseditsCommunity nationfrequencyscheduleforbankswithassets BankRisk-FocusedConsumerComplianceSupervi- between$350millionand$1billion.TheexaminasionProgramforstatememberbankswithconsoli- tionfrequencyfortheseinstitutionsislongerbecause datedassetsof $10billionorlessandtheirsubsidiar- theseinstitutionstendtobelesscomplexandpose ies.9ThenewprogrambecameeffectiveonJanuary1, more-limitedcomplianceriskthanlargerinstitutions. 2014,andisdesignedtopromotestrongcompliance Theexaminationfrequencyscheduleforfinancial risk-managementpracticesandconsumerprotection institutionswithassetsover$1billionandinstituatstatemembercommunitybanks.Underthe tionswithlessthansatisfactorycomplianceorCRA updatedprogram,consumercomplianceexaminers ratingsremainsthesame.TheBoardexpectsthatthe willbasetheexaminationintensitymoreexplicitlyon newexaminationfrequencypolicywillreduceburden theindividualfinancialinstitution’sriskprofile, onmanycommunitybanks. includingitsconsumercompliancecultureandhow FloodInsurance effectivelyitidentifiesandmanagesconsumercompliancerisk.Thenewprogramisintendedtoenhance TheNationalFloodInsuranceActimposescertain theefficacyof theBoard’ssupervisionprogramand requirementsonloanssecuredbybuildingsormobile reduceregulatoryburdenonmanycommunitybank- homeslocatedin,ortobelocatedin,areasdeteringorganizations. minedtohavespecialfloodhazards.UndertheFederalReserve’sRegulationH,whichimplementsthe Theprogramprovidesanenhancedrisk-assessment act,statememberbanksaregenerallyprohibited processbasedoncurrentinformationaboutafinan- frommaking,extending,increasing,orrenewingany cialinstitution’sproductsandservices,aswellas suchloanunlessthebuildingormobilehome,aswell relatedlegalandregulatoryfactors,theenvironment asanypersonalpropertysecuringtheloan,arecovinwhichtheinstitutionoperates,anditscompliance eredbyfloodinsuranceforthetermof theloan.The risk-managementpractices.Basedonthelevelof lawrequirestheBoardandotherfederalfinancial residualriskidentifiedintherisk-assessmentprocess, institutionregulatoryagenciestoimposecivilmoney acustomizedworkprogramwillbedevelopedthat penaltieswhentheyfindapatternorpracticeof vioincludesexaminationactivitiesconsistentwiththe lationsof theregulation.Thecivilmoneypenalties size,complexity,andriskprofileof theinstitution’s arepayabletotheFederalEmergencyManagement products,services,andbusinesslines. Agency(FEMA)fordepositintotheNationalFlood MitigationFund. Theprogramalsoincorporatesongoingsupervision, typicallyasupervisorycontactclosetothemid-cycle In2012,theBiggert-WatersFloodInsuranceReform betweenconsumercomplianceexaminations.How- Act(Biggert-WatersAct)wassignedintolaw,with ever,insomecaseswhentheinstitution’sriskprofile certainprovisionsimpactingregulationsandguidishighoritchangesmateriallyasaresultof theaddi- ancethatthefederalfinancialinstitutionsupervisory tionof morecomplexorhigher-riskstrategies,more agencieshaveprovidedtolenderstoassistthemin frequentcontactsmaybeappropriate.Ongoing complyingwithfederalfloodinsurancestatutes. supervisionisintendedtoidentifyand,if necessary, addresssignificantchangesintheinstitution’scom- InMarch2013,theBoardandfourotherfederal pliancerisk-managementprogramorinthelevelof agenciesresponsibleforimplementingtheBiggertconsumercomplianceriskpresentandensurethat WatersActissuedguidancetoinformfinancialinstisupervisoryinformationisuptodate. tutionsabouttheseprovisions.10Theguidanceidentifiedanddescribedseveralprovisionsof theBiggert- Theprogramiscomplementedbyarevisedexamina- WatersActthatwillbecomeeffectivewhenthe tionfrequencypolicy,whichwillpromoteeffective agenciespublishimplementingregulations.Theguidsupervisionthroughdeploymentof examiner ancefurtherdiscussedtwolender-relatedprovisions resourcescommensuratewithaninstitution’ssize, of theBiggert-WatersActaddressingforceplacement compliancerating,andCRArating.Theupperasset andcivilmoneypenalties,whichbecameeffective 9 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ 10 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ caletters/caltr1319.htm. caletters/caltr1302.htm.

ConsumerandCommunityAffairs 73 immediatelyuponenactment.Amongotherthings, Therevisionsfocusprimarilyoncommunitydeveloptheactraisedthecivilmoneypenaltycapwhenapat- ment.Communitydevelopmentactivitiesareconsidternorpracticeof floodviolationsexists.Specifically, eredaspartof theCRAperformancetestsforlarge thecapwasraisedfrom$385perviolationto$2,000 institutions,intermediatesmallinstitutions,and perviolation.Inaddition,theoverallcalendaryear wholesaleandlimitedpurposeinstitutions.Small caponpenaltieswasremoved. institutionsmayusecommunitydevelopmentactivity toreceiveconsiderationtowardanoutstandingCRA In2013,theFederalReserveissuedeightformalcon- rating.Amongotherthings,therevisions sentordersandassessed$26,720incivilmoneypen- • clarifyhowtheagenciesconsidercommunitydevelaltiesagainststatememberbankstoaddressviolaopmentactivitiesthatbenefitabroaderstatewide tionsof thefloodregulations.Thesestatutorilymanorregionalareathatincludesaninstitution’s datedpenaltieswereforwardedtotheNationalFlood assessmentarea; MitigationFundheldbytheDepartmentof the Treasuryforthebenefitof FEMA. • provideguidancerelatedtoCRAconsiderationof, anddocumentationassociatedwith,investmentsin CommunityReinvestmentAct nationwidefunds; TheCommunityReinvestmentAct(CRA)requires • clarifytheconsiderationof certaincommunity thattheFederalReserveandotherfederalbanking developmentservices,suchasserviceonacommuandthriftagenciesencouragefinancialinstitutionsto nitydevelopmentorganization’sboardof directors; helpmeetthecreditneedsof thelocalcommunities inwhichtheydobusiness,consistentwithsafeand • addressthetreatmentof loansorinvestmentsto soundoperations.Tocarryoutthismandate,the organizationsthat,inturn,investthosefundsand FederalReserve useonlyaportionof theincomefromtheirinvestmenttosupportacommunitydevelopmentpur- • examinesstatememberbankstoassesstheircompose;and pliancewiththeCRA; • clarifythatcommunitydevelopmentlendingper- • analyzesapplicationsformergersandacquisitions formanceisalwaysafactorconsideredinalarge bystatememberbanks’andbankholdingcompainstitution’slendingtestrating. nies’CRAperformanceincontextwithother supervisoryinformation;and MergersandAcquisitions • disseminatesinformationaboutcommunitydevel- During2013,theBoardconsideredandapproved opmenttechniquestobankersandthepublic sevenbankingmergerapplicationsthatwereprothroughCommunityDevelopmentofficesatthe testedonCRAorfairlendinggroundsorthatraised ReserveBanks. issuesinvolvingconsumercomplianceortheCRA.12 • AnapplicationbyTrustmarkCorporation,Jack- TheFederalReserveassessesandratestheCRAperson,Mississippi,tomergewithBancTrustFinanformanceof statememberbanksinthecourseof cialGroup,Inc.andacquireBancTrust’ssubsidiary examinationsconductedbystaff atthe12Reserve bank,BankTrust(bothinMobile,Alabama)was Banks.Duringthe2013reportingperiod,theReserve approvedinJanuary. Bankscompleted248CRAexaminationsof state memberbanks.Of thosebanksexamined,31were • AnapplicationbyFirstMeritCorporation,Akron, rated“Outstanding,”212wererated“Satisfactory,”4 Ohio,toacquireCitizensRepublicBancorp,Inc., wererated“NeedstoImprove,”and1wasrated andtherebyindirectlyacquireCitizensBank,both “SubstantialNon-Compliance.” of Flint,Michigan,wasapprovedinMarch. • AnapplicationbyLiveOakBancshares,Inc., InNovember,theBoard,OCC,andFDICissued Wilmington,NorthCarolina,toengageincertain finalrevisionstotheirInteragencyQuestionsand nonbankingactivitiesthroughtheacquisitionof AnswersRegardingCommunityReinvestment.11The GovernmentLoanSolutions,Inc.,Cleveland, documentprovidesadditionalguidancetofinancial Ohio,wasapprovedinAugust. institutionsandthepublicontheagencies’CRA regulations. 12 Anotherprotestedapplicationwaswithdrawnbytheapplicant. FormoreinformationonOrdersonBankingApplicationsin 11 Formoreinformation,seewww.federalreserve.gov/newsevents/ 2013,gotohttp://federalreserve.gov/newsevents/press/orders/ press/bcreg/20131115a.htm. 2013orders.htm.

74 100thAnnualReport|2013 • AnapplicationbyInvestorsBancorp,MHC,and fairlendingandotherconsumerprotectionlawsand InvestorsBancorp,Inc.,bothof ShortHills,New regulationsandconferredwithotherregulatorsfor Jersey,toacquireRomaFinancialCorporation, theirsupervisoryviews.TheBoardconductedanaly- MHC,RomaFinancialCorporation,andRoma sestounderstandthelendingactivitiesandpractices Bank,allof Robbinsville,NewJersey,andRomA- of theapplicantandtargetinstitutions.Onseveral siaBank,SouthBrunswickTownship,NewJersey¸ applications,theBoardplacedconditionsonits wasapprovedinDecember. approvalthatwererelatedtoconsumercompliance. • AnapplicationbyAmerisBancorp,Moultrie, TheBoardalsoconsidered98applications,witha Georgia,toacquireTheProsperityBankingComrangeof topicsfromchangeincontrolnotices, pany,St.Augustine,Florida,wasapprovedin branchingrequests,andmergersandacquisitions, December. withoutstandingissuesinvolvingcompliancewith • AnapplicationbyUnitedBankshares,Inc., consumerprotectionstatutesandregulations,includ- Charleston,WestVirginia,anditssubsidiary, ingfairlendinglawsandtheCRA.Eighty-sixof GeorgeMasonBankshares,Inc.,Fairfax,Virginia thoseapplicationswereapprovedand12werewith- (collectively,“United”),toacquireVirginiaCom- drawnorsuspended. merceBancorp,Inc.,Arlington,Virginia;andfor United’ssubsidiarybank,UnitedBank,Fairfax, InApril2013,theBoardissuedguidancetothepub- Virginia,to(1)mergewithVirginiaCommerce licontheprocessforstatememberbanksinless- Bank,Arlington,Virginia,and(2)retainandoper- than-satisfactoryconditiontoestablishadenovo atebranchesatthelocationsof VirginiaCommerce branch.Theguidanceaimstoincreasetransparency Bank’smainofficeandbrancheswasapprovedin intheapplicationsprocessrelatedtobranching December. requirements.Thepolicyindicatesthatinstitutions with3-ratings(orworse)generallyshouldnotpursue • AnapplicationbyInvestorsBancorp,MHC,and expansionaryproposalsandshouldfocusonremedi- InvestorsBancorp,Inc.,bothof ShortHills,New atingidentifiedsupervisoryissues;however,the Jersey,toacquireGatewayCommunityFinancial, policydescribescertaincircumstancesunderwhicha MHC,GatewayCommunityFinancialCorpora- statememberbankmaybepermittedtobranchona tion,andGCFBank,allof Sewell,NewJersey,was denovobasis. approvedinDecember. FairLendingEnforcement Membersof thepublicsubmittedcommentsoneach TheFederalReservesupervises850statemember of theaboveapplications.Publiccommentsraised banks.Pursuanttoprovisionsof theDodd-Frank variousissuesforstaff toconsiderintheiranalysesof Act,effectiveonJuly21,2011,theConsumerFinanthesupervisoryandlendingrecordsof theappli- cialProtectionBureau(CFPB)supervisesstatememcants.Severalcommentersallegedthatvariousinsti- berbankswithassetsof morethan$10billionfor tutionsfailedtomakecreditavailabletocertain compliancewiththeEqualCreditOpportunityAct minoritygroupsandtolow-andmoderate-income (ECOA),andtheBoardhassupervisoryauthority (LMI)individuals.Othercommentersraisedcon- forcompliancewiththeFairHousingAct.Forthe cernsoverthegreaterincidenceof higher-costloans 829statememberbankswithassetsof $10billionor tominorityandLMIborrowersatahighercostthan less,theBoardretainstheauthoritytoenforceboth tootherborrowers.Commentersalsoallegedthat theECOAandtheFairHousingAct. institutionsfailedtomeettheneedsof smallbusinessesinLMIgeographies.Severalcommenters Fairlendingreviewsareconductedregularlywithin raisedCRA-relatedconcernsaboutinadequateplans thesupervisorycycle.Additionally,examinersmay tomeetcommunities’creditneeds. conductfairlendingreviewsoutsideof theusual supervisorycycle,if warrantedbyfairlendingrisk. Inevaluatingthemeritsof thesecomments,the Whenexaminersfindevidenceof potentialdiscrimi- Boardconsideredinformationprovidedbyapplicants nation,theyworkcloselywithDCCA’sFairLending andanalyzedrelevantlendingdatainmarketsof EnforcementSection,whichprovidesadditionallegal interesttothecommenters.TheBoardalsoincorpo- andstatisticalexpertiseandensuresthatfairlending ratedotherinformation,includingexamination lawsareenforcedconsistentlyandrigorously reportswithon-siteevaluationsof compliancewith throughouttheFederalReserveSystem.

ConsumerandCommunityAffairs 75 PursuanttotheECOA,if theBoardhasreasonto commercialandagriculturalloans,inviolationof believethatacreditorhasengagedinapatternor RegulationB. practiceof discriminationinviolationof theECOA, thematterwillbereferredtotheU.S.Departmentof If afairlendingviolationdoesnotconstituteapat- Justice(DOJ).TheDOJreviewsthereferraland ternorpractice,theFederalReserveactsonitsown determineswhetherfurtherinvestigationiswar- toensurethattheviolationisremediedbythebank. ranted.ADOJinvestigationmayresultinapublic Mostlendersreadilyagreetocorrectfairlendingviocivilenforcementactionorsettlement.Alternatively, lations.Infact,lendersoftentakecorrectiveactionas theDOJmaydecidetoreturnthemattertothe soonastheybecomeawareof aproblem.Thus,the Boardforadministrativeenforcement.Whenamat- FederalReservegenerallyusesinformalsupervisory terisreturnedtotheBoard,staff ensuresthatthe tools(suchasmemorandaof understandingbetween institutiontakesallappropriatecorrectiveaction. banks’boardsof directorsandtheReserveBanks,or boardresolutions)toensurethatviolationsarecor- During2013,theBoardreferredthefollowingsix rected.If necessarytoprotectconsumers,however, matterstotheDOJ: theBoardcanbringpublicenforcementactions. • Onereferralinvolveddiscriminationonthebasisof GuidanceonMinimumStandardsfor nationalorigininviolationof theECOAandthe PrioritizationandHandlingBorrowerFileswith FHA.Forsecondarymarketloans,thelender ImminentScheduledForeclosureSale chargedHispanicborrowershigherpricesthan InApril,theBoardissuedguidanceonsoundbusisimilarlysituatednon-Hispanicwhiteborrowers. nesspracticesforresidentialmortgageservicingthat Legitimatepricingfactorsfailedtoexplainthe FederalReserve-supervisedfinancialinstitutionsare pricingdisparities. expectedtoaddressintheircollections,lossmitiga- • Onereferralinvolveddiscriminationonthebasisof tion,andforeclosureprocessingfunctions.13The nationalorigin,inviolationof theECOA.The guidanceconfirmstheminimumstandardsforthe lenderchargedHispanicborrowershigherinterest handlingandprioritizationof borrowers’filesthat ratesthannon-Hispanicborrowersforunsecured aresubjecttoanimminent(within60days)schedconsumerloans.Legitimatepricingfactorsfailedto uledforeclosuresale.Theseminimumreviewcriteria explainthepricingdisparities. areintendedtoensurealevelof consistencyacross • Onereferralinvolveddiscriminationagainstpoten- servicers,andareintendedtobeusedtodetermine whetherascheduledforeclosuresaleshouldbeposttialborrowersbasedontheracialandethniccomponed,suspended,orcancelledbecauseof critical positionof theirneighborhoodinviolationof the defectsintheborrower’sfile.Thepurposeof the ECOAandtheFHA.Basedonananalysisof the guidanceistoensurethatborrowerswillnotlose bank’sdelineatedassessmentareaundertheCRA, theirhomeswithouttheirfilesfirstreceivingaprethelocationof itsbranches,itslendingpractices, foreclosuresalereviewthat,ataminimum,meetsthe anditsmarketing,theBoarddeterminedthatthe standardslistedintheBoard’sguidance. bankavoidedlendingintheminorityneighborhoodsof amajormetropolitanarea. StatementonDepositAdvanceProducts • Onereferralinvolveddiscriminationonthebasisof InApril2013,theBoardissuedastatementto receiptof publicassistanceinviolationof the emphasizetostatememberbanksthesignificantcon- ECOAanddiscriminationonthebasisof handicap sumerrisksassociatedwithdepositadvanceprodstatusinviolationof theFHA.Althoughtheappli- ucts.Statememberbanksareexpectedtoconsider cantprovidedtheinformationnecessarytoverify therisksassociatedwithdepositadvanceproducts, disabilityincomepursuanttoallrelevantrequire- includingpotentialconsumerharmandthepotential ments,thelenderrequestedadditionalinformation, forelevatedcompliancerisk,whendesigningand includingadoctor’sletterstatingthatincome offeringsuchproducts.14 receivedfromdisabilitywouldlastforatleastthree years. • Tworeferralsinvolveddiscriminationonthebasis 13 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ srletters/sr1309.htm. of maritalstatus,inviolationof theECOA.The 14 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ banksimproperlyrequiredspousalguaranteeson caletters/caltr1307.htm.

76 100thAnnualReport|2013 Thestatementnotesthatindesigningandoffering emergingfairlendingissuesandpromotesoundfair depositadvanceproducts,statememberbanksmust lendingcompliance. complywithallapplicablefederallawsandregulations,includingbutnotlimitedtorequirements Coordination with Other Federal undertheTruthinLendingAct(TILA),theElec- Banking Agencies tronicFundTransferAct(EFTA),theTruthinSavingsAct,andECOA.Inadditiontotheselaws,insti- Thememberagenciesof theFederalFinancialInstitutionsmustactinaccordancewithsection5of the tutionsExaminationCouncil(FFIEC)developcon- FederalTradeCommission(FTC)Act,whichprohib- sistentexaminationprinciples,standards,procedures, itsUDAP,andsection1036of theDodd-FrankAct, andreportformats.16In2013,theFFIECmember whichprohibitsunfair,deceptive,orabusiveactsor organizationsissuedexaminationproceduresforconpractices.Depositoryinstitutionsmustalsocomply sumerprotectionregulations,asdiscussedbelow.17 withstatelawsandregulations.Thestatementfurther setsforththeBoard’sexpectationthatFederal InteragencyExaminationProcedures Reserveexaminerswillthoroughlyreviewanydeposit forRegulationXandZ advanceproductsofferedbysupervisedinstitutions Procedureswererevisedtoreflectaseriesof amendforcompliancewithsection5of theFTCAct,aswell mentstoRegulationsX(RealEstateSettlementProasotherapplicablelaws. ceduresAct)andZ(TruthinLendingAct)thatwere issuedin2013bytheCFPB.18TheCFPB’srulemak- Financial Fraud Enforcement Task ingsimplementprovisionsof theDodd-FrankAct Force and Other Outreach thatpertaintoability-to-repayandqualifiedmortgage(ATR/QM)standards,loanoriginatorcompen- Asanactivememberof theFinancialFraud sationandqualification,mortgageservicing,loans EnforcementTaskForce(FFETF),theBoardcoor- subjecttotheHomeOwnershipandEquityProtecdinateswithotheragenciestofacilitateconsistent tionAct,andescrows.Thenewrequirementsgenerandeffectiveenforcementof thefairlendinglaws.15 allybecameeffectiveonJanuary10,2014.TheRegu- Thedirectorof theBoard’sDCCAco-chairsthe lationZprocedureswerealsorevisedtoincorporate FFETF’sNon-DiscriminationWorkingGroupwith interagencyamendmentsregardingappraisalsfinaltheassistantattorneygeneralforDOJ’sCivilRights izedinJanuary2013andgenerallyeffectiveonJanu- Division,thedeputygeneralcounselof theU.S. ary18,2014. Departmentof HousingandUrbanDevelopment, theassistantdirectorof theCFPB’sOfficeof Fair InteragencyExaminationProcedures LendingandEqualOpportunity,andtheConference forRegulationE of StateBankSupervisors.In2013,theBoardand ProcedureswererevisedtoincorporatetheCFPB’s theNon-DiscriminationWorkingGroupsponsoreda additionof remittancetransferprovisionsinanew freeinteragencywebinarthathadmorethan4,000 SubpartBtoRegulationE(ElectronicFundTransfer registrants,mostof whichwerecommunitybanks. Act),andtoreflecteliminationof therequirement Inaddition,theFederalReserveparticipatesin numerousmeetings,conferences,andtrainingsspon- 16 FFIECmemberagenciesincludetheBoardofGovernors,the soredbyconsumeradvocates,industryrepresenta- FDIC,theNCUA,theOCC,theStateLiaisonCommittee tives,andinteragencygroups.FairLendingEnforce- (SLC),andtheCFPB. mentstaff meetsregularlywithconsumeradvocates, 17 Inprioryears,theBoardincludedinthissectionthefindings andrateofcompliancewiththeconsumerprotectionrulesfor supervisedinstitutions,andindustryrepresentatives whichithadrulemakingauthorityasreportedbythevarious todiscussfairlendingmattersandreceivefeedback. federalagencieswithsupervisoryauthorityforthoseregulations. Throughthisoutreach,theBoardisabletoaddress ThisreportingresponsibilitytransferredtotheCFPBin July2011.Formoreinformationseewww.consumerfinance.gov/ reports. 18 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ 15 FormoreinformationabouttheFFETF,gotowww.stopfraud caletters/caltr1326.htmandwww.federalreserve.gov/bankinforeg/ .gov. caletters/caltr1325.htm.

ConsumerandCommunityAffairs 77 thatafeenoticebepostedonoratautomatedteller institutionsthatreportingsuspectedelderfinancial machines.19 abusetolawenforcement,socialserviceandother appropriateagenciesdoesnot,ingeneral,violatethe InteragencyExaminationProceduresfor privacyprovisionsof theGLBA.Theguidancedoes theGarnishmentofAccountsContaining notimposeadditionalrequirementsonfinancial FederalBenefitPaymentsRule institutionsbut,rather,informsindividualswhomay Procedureswererevisedtoreflectafinalruleissued observesignsof possiblefinancialexploitationof an bytheDepartmentof theTreasury,theSocialSecu- olderadultaboutGLBAexceptionsthatmaypermit rityAdministration,theDepartmentof Veteran sharingof nonpublicpersonalinformationwith Affairs,theRailroadRetirementBoard,andthe local,state,orfederalagenciesforthepurposeof Officeof PersonnelManagementtoimplementstatu- reportingsuspectedfinancialabuseof olderadults. toryrestrictionsongarnishmentof certainexempt federalbenefitpayments.20Theruleestablishespro- InteragencyGuidanceontheRelationship ceduresthatafinancialinstitutionmustfollowwhen betweenAbilitytoRepay(ATR)/Qualified itreceivesagarnishmentorderagainstanaccount Mortgage(QM)andOtherRequirements holderwhoreceivescertainFederalbenefitpayments TheCFPB’sATR/QMrulerequireslenderstomake bydirectdeposit. reasonable,goodfaithdeterminationsthatconsumershavetheabilitytorepaymortgageloansbefore InteragencyGuidanceRegardingSocialMedia: extendingsuchloans.Theruleprovideslenderswith ConsumerComplianceRiskManagement apresumptionof compliancewiththeability-to- InDecember,theFFIECmemberagenciesjointly repayrequirementsforloansthatmeettheregulatory issuedguidanceaddressingtheapplicabilityof fed- definitionof a“qualifiedmortgage.”Atthesame eralconsumerprotectionandcompliancelaws,regu- time,therulepermitslenderstomakeloansthatdo lations,andpoliciestoactivitiesconductedviasocial notqualifyasQMs,referredtoas“non-QMloans.” mediabyfinancialinstitutions.21Theuseof social mediatoattractandinteractwithcustomerscan TheBoardandotherfederalbankingregulators impactafinancialinstitution’sriskprofile,including receivedinquiriesregardingtherelationshipbetween riskof harmtoconsumers,complianceandlegal theATR/QMruleandotherregulatoryrequirerisks,operationalrisks,andreputationrisks.The ments,includingthosethatpertaintofairlending guidanceisintendedtoassistfinancialinstitutionsin andtheCommunityReinvestmentAct.Inparticular, understandingpotentialrisksassociatedwiththeuse institutionsraisedconcernsregardingwhetheradeciof socialmedia,alongwithexpectationsformanagsiontoofferonlyqualifiedmortgageswould ingthoserisks.Theguidancedoesnotimposeaddiadverselyimpacttheircompliancewiththoseother tionalobligationsonfinancialinstitutions,but requirements.InOctober2013,theFFIECmember insteadhighlightsexistinglegalrequirementsthat agenciesissuedastatementclarifyingthattheagenapplytosocialmediaforums. ciesdonotanticipatethatacreditor’sdecisionto offeronlyqualifiedmortgageswould,absentother InteragencyGuidanceonPrivacyLawsand factors,elevateasupervisedinstitution’sfairlending ReportingFinancialAbuseofOlderAdults risk.InDecember2013,theBoard,FDIC,NCUA, InSeptember,theFFIECmemberagencies,Com- andOCCissuedastatementclarifyingthatresidenmodityFuturesTradingCommission,FederalTrade tialmortgageloanswillnotbesubjecttosafety-and- Commission,andSecuritiesandExchangeCommis- soundnesscriticismbasedsolelyontheirstatusas sionissuedguidancetoclarifytheapplicabilityof QMsornon-QMs.TheagenciesthatconductCRA privacyprovisionsof theGramm-Leach-BlileyAct evaluations(theBoard,FDIC,andOCC)further (GLBA)toreportingsuspectedfinancialexploitation clarifiedthattheydonotanticipatethatinstitutions’ of olderadults.22Theguidanceclarifiesforfinancial decisionstooriginateonlyQMs,absentotherfactors, wouldadverselyaffecttheirCRAevaluations.23 19 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ caletters/caltr1317.htm. 20 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ caletters/caltr1316.htm. 21 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ caletters/caltr1322.htm. 22 Formoreinformation,seewww.federalreserve.gov/newsevents/ 23 Formoreinformation,seewww.federalreserve.gov/newsevents/ press/bcreg/20130924a.htm. press/bcreg/20131213a.htm.

78 100thAnnualReport|2013 CoordinationwiththeConsumerFinancial BoardandReserveBankstaff regularlyreviewthe ProtectionBureau corecurriculumforexaminertraining,updatingsub- During2013,staff continuedtoworkthroughthe jectmatterandaddingnewelementsasappropriate. implementationof theInteragencyMemorandumof During2013,staff beganmigratingfundamentals UnderstandingonSupervisionCoordinationwith contentfromaclassroom-basedtrainingmodelto theCFPB.Theagreementisintendedtoestablish moreonlinedelivery,dedicatingclassroomtimefor arrangementsforcoordinationandcooperation examinerstoapplytheirlearningusingcasestudies betweentheCFPBandtheOCC,FederalDeposit andreviewingloanfiles. InsuranceCorporation(FDIC),NationalCredit OutreachandTraining:Dodd-FrankAct UnionAssociation(NCUA),andtheBoardof Governors.Theagreementstrivestominimizeunneces- In2013,theCFPBpromulgatednewrulespursuant saryregulatoryburden,andavoidunnecessarydupli- totheDodd-FrankAct.BoardandCFPBstaff colcationof effortandconflictingsupervisorydirectives laboratedonexaminertrainingandoutreachto amongsttheprudentialregulators.Theregulators bankers.Specifically,trainingwasprovidedtoexamworkcooperativelytoshareexamschedulesforcov- inersusingtheFederalReserve’sRapidResponse eredinstitutionsandcoveredactivitiestoplansimul- webinarplatformonthefollowingtopics:theHome taneousexams,providefinaldraftsof examination OwnershipandEquityProtectionAct,qualified reportsforcomment,andsharesupervisory mortgage/ability-to-repay,appraisals,escrow,andserinformation. vicingrulesunderRegulationZ. TheBoardcollaboratedwiththeCFPBtoprovide Examiner Training outreachtobankers,usingtheFederalReserve’sOutlookLiveplatformtobroadcastafreewebinaron Ensuringthatfinancialinstitutionscomplywithlaws smallcreditorqualifiedmortgages(seebox1). thatprotectconsumersandencouragecommunity reinvestmentisanimportantpartof thebankexami- OngoingTrainingOpportunities nationandsupervisionprocess.Asthecomplexityof Inadditiontoprovidingcoreexaminertraining,the bothconsumerfinancialtransactionsandtheregula- examinerstaff developmentfunctionemphasizesthe torylandscapehasincreased,trainingforconsumer importanceof continuinglife-longlearning.Opporcomplianceexaminershasbecomemoreimportant tunitiesforcontinuinglearningincludespecialprojthaneverbefore.Theexaminerstaff development ectsandassignments,self-studyprograms,rotational functionisresponsiblefortheongoingdevelopment assignments,theopportunitytoinstructatSystem of theprofessionalconsumercompliancesupervisory schools,mentoringprograms,andanannualconstaff,andensuringthatthesestaff membershavethe sumercomplianceexaminerforum,whereseniorconskillsnecessarytomeettheirsupervisoryresponsi- sumercomplianceexaminersreceiveinformationon bilitiesnowandinthefuture. emergingcomplianceissuesandareabletosharebest practicesfromacrosstheSystem. ConsumerComplianceExaminer TrainingCurriculum In2013,theSystemcontinuedtoofferRapid Theconsumercomplianceexaminertrainingcurricu- Responsesessions.Debutedin2008,RapidResponse lumconsistsof fivecoursesfocusedonconsumer sessionsofferexaminersone-hourteleconference protectionlaws,regulations,andexaminingconcepts. webinarsonemergingissuesorurgenttrainingneeds In2013,thesecourseswereofferedin13sessions, thatresultfromtheimplementationof newlaws, andtrainingwasdeliveredtoatotalof 242System regulationsorsupervisoryguidanceaswellascase consumercomplianceexaminersandstaff members studies.Atotalof 18consumercomplianceRapid and8statebankingagencyexaminers. Responsesessionsweredesigned,developed,andpresentedtoSystemstaff during2013. Whenappropriate,coursesaredeliveredviaalternativemethods,suchastheInternetorotherdistance- Responding to Consumer learningtechnologies.Forinstance,severalcourses Complaints and Inquiries useacombinationof instructionalmethods,includingbothclassroominstructionfocusedoncasestud- TheFederalReserveinvestigatescomplaintsagainst iesandspeciallydevelopedcomputer-basedinstruc- statememberbanksandselectednonbanksubsidiartionthatincludesinteractiveself-checkexercises. iesof bankholdingcompanies(FederalReserve

ConsumerandCommunityAffairs 79 Box 1. Promoting Outreach, Communication, and Education to Support Financial Institutions and Advance Consumer Compliance TheFederalReservehasworkedtoincreasetrans- Toaddressconsumercomplianceissueswithoffiparencyandoutreachinrecentyearsinorderto cialsofstatememberbanksandothersupervised providethepublicandthefinancialindustrywitha institutions,theFederalReserveBankofSanFranbetterunderstandingofitspoliciesanddecisions. ciscohostsanationalwebinarseriescalledOutlook Examplesoffulfillmentofthiscommitmentinclude Live,whichcomplementstheConsumerCompliance theBoard’spressconferencestocommunicate Outlookpublication.4OutlookLivewebinarsfremonetarypolicydecisionsandvariouseffortsto quentlyfeaturestafffromeachofthefederalbankincreaseoutreachtothefinancialindustry.1 ingregulators,sothatinstitutionshavetheopportunitytohearperspectivesoftheFederalReserveas TheDivisionofConsumerandCommunityAffairs wellastheotheragencies.Forexample,in2013, (DCCA)contributestoincreasedtransparencyinthe ConsumerFinancialProtectionBureau(CFPB)staff consumercompliancearenabyprovidingguidance presentedanOutlookLivesessionthatdiscussed andclarificationtobankersastheynavigatean provisionsoftheCFPB’snewqualifiedmortgage expandedsupervisoryenvironmentandanarrayof ruleapplicabletosmallcreditors.Inanotherwebinewregulations.Inrecentyears,newcommunicanar,Boardstaffandrepresentativesfromsixother tionchannelshavebeendevelopedtoincreaseoutagenciesdiscussedemergingfairlendingissues reachbyandaccesstoconsumercompliance andhottopicsfromtheiragencies’vantagepoint. expertstoprovideinsightonsupervisoryissuesand Eachofthesewebinarsregularlyattractsthousands policies.DCCAworkswithitsbankingsupervision ofregistrants. colleaguesthroughouttheFederalReserveSystem andatotheragenciestosupportavarietyofcom- Further,theBoardfostersimprovedcommunication municationplatforms,someofwhichleveragetech- andoutreachwithcommunitybankersthroughits nologyandfostertwo-waycommunicationbetween CommunityDepositoryInstitutionsAdvisoryCounregulatorsandbanksonconsumercompliancetop- cil.5Thecouncil’smembershipisdrawnfrom icsandemergingissues.Topicsrangefromcomply- smallerbanks,creditunions,andsavingsassociaingwiththeprohibitiononunfairordeceptiveactsor tions,withrepresentativesfromeachofthe12 practicestounderstandingmortgageappraisalrules. ReserveBankdistricts,providingtheBoardwitha directlineofcommunicationfromcommunitybank- ConsumerComplianceOutlook,aquarterlyonline ersaboutsupervisoryandregulatoryissuesthat publicationsponsoredbytheFederalReserveBank affecttheirinstitutionsaswellasaboutlocalecoofPhiladelphia,featuresin-deptharticlesonemergnomictrends.Duringrecentmeetings,councilmemingcomplianceissuesandonimportantdevelopbershavediscussedwiththeBoardpotential mentswithintheconsumercompliancearena.2For impactsofnewmortgagerulesoncommunitybanks’ example,recentarticleshaveaddressedtopicssuch productofferingsandcompliancefunctions. asnewgarnishmentrulesandtheroleofinternal audit,andhavealsoprovidedinsightsfrom(former) Thesecommunication,outreach,andeducation GovernorElizabethDukeincommemorationofthe mechanismshelpprovidevaluabletransparencyin newsletter’sfive-yearanniversary.Thepublication theimplementationofconsumercompliancesupervireachesmorethan15,000subscribers.Inaddition, sionpolicies,advancingthegoalofenablingstrong theFederalReservehaslaunchedCommunity consumerprotectionprogramsatfinancialinstitu- BankingConnections,awebsitethatservesasa tionsandprovidingconsumerswiththeprotections “one-stopshop”forinformationonissuesthataffect intendedbysuchpolicies. communitybanks,aswellasprovidinglinkstotools andresourcesthatcanhelpthem.3 1 Formoreinformation,seewww.federalreserve.gov/mediacenter/ media.htm. 4 Formoreinformation,seewww.philadelphiafed.org/bank- 2 Formoreinformation,seewww.philadelphiafed.org/bank- resources/publications/consumer-compliance-outlook/outlookresources/publications/consumer-compliance-outlook/index.cfm. live/. 3 Formoreinformation,seewww.communitybankingconnections 5 Formoreinformation,seewww.federalreserve.gov/aboutthefed/ .org/. cdiac.htm. regulatedentities),andforwardscomplaintsagainst nonbanksubsidiariesinitsDistrict.TheFederal othercreditorsandbusinessestotheappropriate Reservealsorespondstoconsumerinquiriesona enforcementagency.EachReserveBankinvestigates broadrangeof bankingtopics,includingconsumer complaintsagainststatememberbanksandselected protectionquestions. 45 444

80 100thAnnualReport|2013 Inlate2007,theFederalReserveestablishedFederal Table1.Complaintsagainststatememberbanksand ReserveConsumerHelp(FRCH)tocentralizethe selectednonbanksubsidiariesofbankholdingcompanies processingof consumercomplaintsandinquiries.In aboutregulatedpractices,byregulation/act,2013 2013,FRCHprocessed41,220cases—approximately 5percentof caseswerereferredtotheFederal Regulation/act Number Reservefromotheragencies.Of thesecases,more Total 444 thanhalf (27,720)wereinquiriesandtheremainder RegulationAA(UnfairorDeceptiveActsorPractices) 10 (13,500)werecomplaints,withmostcasesreceived RegulationB(EqualCreditOpportunity) 15 directlyfromconsumers.Of the13,500complaints RegulationBB(CommunityReinvestment) 2 received,2,529werecomplaintsagainstFederal RegulationC(HomeMortgageDisclosure) 1 RegulationCC(ExpeditedFundsAvailability) 60 Reserveregulatedentities,andtheremainingcom- RegulationD(ReserveRequirements) 2 plaintswerereferredtotheappropriateregulatory RegulationDD(TruthinSavings) 58 agenciesandgovernmentofficesforinvestigation.To RegulationE(ElectronicFundsTransfers) 46 minimizethetimerequiredtore-routecomplaintsto RegulationH(NationalFloodInsuranceAct/InsuranceSales) 14 theseagencies,referralsweretransmitted RegulationP(PrivacyofConsumerFinancialInformation) 13 RegulationV(FairandAccurateCreditTransactions) 13 electronically. RegulationZ(TruthinLending) 59 Check21Act 1 ConsumerscancontactFRCHbytelephone,fax, FairCreditReportingAct 86 mail,e-mail,oronline,butmostFRCHconsumer FairDebtCollectionPracticesAct 23 contactsin2013occurredbytelephone(58percent). FairHousingAct 17 HOPA(HomeownersProtectionAct) 1 Thirty-ninepercent(15,875)of complaintand RealEstateSettlementProceduresAct 11 inquirysubmissionsweremadeelectronically(via ProtectingTenantsatForeclosureAct 1 e-mail,onlinesubmissions,andfax),andtheonline ServicemembersCivilReliefAct(SCRA) 11 formpagereceivedapproximately66,147visitsdur- RegulationAA(UnfairorDeceptiveActsorPractices) 7 ingtheyear. RegulationB(EqualCreditOpportunity) 26 RegulationBB(CommunityReinvestment) 2 ConsumerComplaints RegulationC(HomeMortgageDisclosure) 0 RegulationCC(ExpeditedFundsAvailability) 65 ComplaintsreceivedagainstFederalReserveregu- RegulationD(ReserveRequirements) 3 latedentitiestotaled2,529in2013.Approximately RegulationDD(TruthinSavings) 55 35percent(892)of thesecomplaintswereclosed RegulationE(ElectronicFundsTransfers) 67 withoutinvestigationpendingthereceiptof addi- RegulationG(Disclosure/ReportingofCRA-Related Agreements) 0 tionalinformationfromconsumers.Nearly9percent RegulationH(NationalFloodInsuranceAct/InsuranceSales) 20 of thetotalcomplaintsremainedopenandunder RegulationM(ConsumerLending) 0 investigationatDecember31,2013.Of theremaining RegulationP(PrivacyofConsumerFinancialInformation) 17 complaints(1,412),69percent(968)involvedunregu- RegulationQ(PaymentofInterest) 1 RegulationV(FairandAccurateCreditTransactions) 14 latedpractices,and31percent(444)involvedregu- RegulationZ(TruthinLending) 51 latedpractices.(Table1showsthebreakdownof FairCreditReportingAct 49 complaintsaboutregulatedpracticesbyregulationor FairDebtCollectionPracticesAct 15 act;table2showscomplaintsbyproducttype.) FairHousingAct 14 HomeOwnershipCounseling 0 ComplaintsaboutRegulatedPractices HOPA(HomeownersProtectionAct) 2 RealEstateSettlementProceduresAct 31 Themajorityof regulatedpracticescomplaintscon- RighttoFinancialPrivacyAct 3 cernedcheckingaccounts(30percent),realestate24 ProtectingTenantsatForeclosureAct 2 (19.4percent),andcreditcards(27.4percent).The ServicemembersCivilReliefAct 3 mostcommoncheckingaccountcomplaintsrelated tofundsavailabilitynotasexpected(31percent); insufficientfundsoroverdraftchargesandproce- (9percent);anddisputedrates,terms,orfees(7perdures(19percent);disputedwithdrawalof funds cent).Themostcommonrealestatecomplaintsby problemcoderelatedtodebtcollection/foreclosure 24 Realestateloansincludeadjustable-ratemortgages,residential concerns(24percent);floodinsurance(14percent); constructionloans,open-endhomeequitylinesofcredit,home disputedrates,terms,andfees(14percent);andpayimprovementloans,homepurchaseloans,homerefinance/ closed-endloans,andreversemortgages. menterrorsordelays(9percent).Themostcommon

ConsumerandCommunityAffairs 81 Table2.Complaintsagainststatememberbanksandselectednonbanksubsidiariesofbankholdingcompaniesabout regulatedpractices,byproducttype,2013 Allcomplaints Complaintsinvolvingviolations Subjectofcomplaint/producttype Number Percent Number Percent Total 444 100 31 7 Discriminationalleged Realestateloans 16 4 0 0 Creditcards 1 0.2 0 0 Otherloans 2 1 0 0 Nondiscriminationcomplaints Checkingaccounts 136 30 13 3 Realestateloans 86 19.4 9 2 Creditcards 122 27.4 1 0.2 Other 81 18 8 1.8 creditcardcomplaintsrelatedtoinaccuratecredit cent),creditcards(16percent),checkingaccount reporting(37percent),bankdebt-collectiontactics activity(14percent),andcommercialloans/leases (13percent),andbillingerrorresolutions(7percent). (8percent). Nineteenregulatedpracticescomplaintsallegingdis- ComplaintReferrals criminationwerereceived.Of these,sixcomplaints TheFederalReserveforwarded22complaintstothe (1percentof totalregulatedcomplaints)allegeddis- Departmentof HousingandUrbanDevelopment criminationbasedonprohibitedborrowertraitsor (HUD)thatallegedviolationsof theFairHousing rights.25Twodiscriminationcomplaintswererelated Act.26TheFederalReserve’sinvestigationof these totherace,color,nationaloriginorethnicityof the complaintsrevealedoneinstanceof illegalcreditdisapplicantorborrower.Onediscriminationcomplaint crimination.27 wasrelatedtoeithertheageorhandicapof theapplicantorborrower.Of thecomplaintsallegingdis- ConsumerInquiries criminationbasedonaprohibitedbasis,therewere TheFederalReservereceived27,720consumerinquinoviolations. riesin2013,coveringawiderangeof topics.Consumersweretypicallydirectedtootherresources, In80percentof investigatedcomplaintsagainstFed- includingotherfederalagenciesorwrittenmaterials, eralReserveregulatedentities,evidencerevealedthat toaddresstheirinquiries. institutionscorrectlyhandledthesituation.Of the remaining20percentof investigatedcomplaints, Consumer Research and 7percentweredeemedviolationsof law;5percent wereidentifiederrorswhichwerecorrectedbythe Emerging-Issues and Policy Analysis bank;andtheremainderincludedmattersinvolving litigationorfactualdisputes,withdrawncomplaints, Throughout2013,DCCAanalyzedemergingissues internallyreferredcomplaints,orinformationwas inconsumerfinancialservicespoliciesandpractices providedtotheconsumer. inordertounderstandtheirimplicationsfortheeconomicandsupervisorypoliciesthatarecoretothe ComplaintsaboutUnregulatedPractices FederalReserve’sfunctions,aswellastogaininsight TheBoardcontinuedtomonitorcomplaintsabout intoconsumerfinancialdecisionmaking. bankingpracticesnotsubjecttoexistingregulations. In2013,theBoardreceived968complaintsagainst FederalReserveregulatedentitiesthatinvolvedthese unregulatedpractices.Themajorityof thecomplaintswererelatedtorealestateconcerns(39per- 26 AmemorandumofunderstandingbetweenHUDandthefed- 25 Thisincludesallegeddiscriminationbasedonrace,color,reli- eralbankregulatoryagenciesrequiresthatcomplaintsalleginga gion,nationalorigin,sex,maritalstatus,age,applicantincome violationoftheFairHousingActbeforwardedtoHUD. derivedfrompublicassistanceprograms,orapplicantreliance 27 ThecomplaintreferredtoHUDwasreceivedin2012,andthe onprovisionsoftheConsumerCreditProtectionAct. violationdeterminationandreferralwerecompletedin2013.

82 100thAnnualReport|2013 Consumer Financial Services Research veyfoundthatmanyolderadultscarrydebtlatein life,potentiallyunderminingtheirfinancialsecurity. Inrecentyears,twonotableforceshavebeenconverg- One-half of creditcarduserscarrybalances.Also, ingintoday’sfinancialserviceslandscape:1)the oneineightcarriesstudentloandebtforthemselves increasingarrayof financialservices—including ortheirchildren.Furthermore,owningahomeoutbankingservices,shoppingtools,andpayment rightbylatemiddle-ageisnolongerthenorm. options—thathasbecomeavailabletoconsumers Thoughnotnecessarilyasignof financialstress,subusingcellphonesandothermobiledevices,and stantialnumbersof olderadultscarrydebtsecured 2)theagingof thepopulation.Collectively,these bytheirhomes,includingsixintenof thoseintheir developmentsmayultimatelyhavesignificanteffects 60sandnearlyfourintenof thoseage70andolder. onthewaysinwhichconsumersconducttheirfinan- Mortgagedebtisof particularsignificancebecause ciallives.In2013,DCCAexploredtheissuesassoci- homesarethelargestcomponentof networthof atedwitheachof thesetopicsandconductedcon- manyolderadulthouseholds,andthisdebtmaysigsumersurveystogaininsightsandimproveunder- nalalackof resourcestohelpfundretirementor standingof thedynamicsineacharea. otherexpenses. Withrespecttotheuseof mobilefinancialservices, Toexploretheseissuesfurther,PolicyAnalysisstaff DCCAconducteditsannualsurveytorevisitcon- convenedaone-dayeventinJuly,heldinconjunction sumers’useof,andopinionsabout,mobilefinancial withthereleaseof aBoardbriefingpaper,Insights services.Since2011,thesurveyhaspolledmorethan intotheFinancialExperiencesof OlderAdults.29The 2,200individualseachyeartolearnwhetherandhow forumaimedtoidentifyfutureresearchareasforthe theyusemobiledevicesforbankingandpayments, fieldatlarge.Discussionsfocusedonthefinancial anditwasamongthefirsttointegratequestions circumstancesof subgroupsof olderadults,housing aboutusingmobiledevicesforshoppingandcom- needsandaffordability,employmentandretirement paringproductsalongwithquestionsaboutusing transitions,andtheroleof cognitioninfinancial mobiledevicesforbankingandpayments. decisionmaking.Forumparticipantssharedexamples of policies,products,andservicesthatmaybeprom- Thefindingsof thesurveys,conductedinthewinter, isingwaystomeetthefinancialneedsandchoicesof arereleasedeachspringinthereportConsumersand agingconsumers. MobileFinancialServices.Resultsfromthesurvey conductedinNovember2012werepublishedin Emerging-Issues Analysis March2013.28Forthethirdannualsurvey,conductedinDecember2013,resultswillbepublishedin ThePolicyAnalysisfunctionof DCCAprovideskey early2014.Giventherapidpaceof developmentsin insights,information,andanalysisonemerging themobilefinancialservicesmarket,DCCAplansto financialservicesissuesthataffectthewell-beingof continueconductingthisannualsurveyof consum- consumersandcommunities.Tothisend,staff follow ers’useof mobilefinancialservicesandproducinga andanalyzetrends,leaddivision-wideworking correspondingreportsummarizingthesurveyresults. groups,andorganizeexpertroundtablestoidentify emergingrisksandinformpolicyrecommendations. RecognizingthatintheagingU.S.population,about In2013,theteamwasactivelyengagedinissuesand oneinfiveindividualswillbeovertheageof 65by activitiestopromotehouseholdfinancialsecurity 2060(upfromoneinseventoday),DCCAconducted andsustainablerecoveryfromthefinancialcrisis. theOlderAdultsSurveytogatherdataaroundthe Staff contributedanalysesonabroadrangeof policy financialexperienceof 1,800adultsovertheageof issuesfromrecoverytrendsinlocalhousingmarkets, 40.Thecombinationof amajordemographicshift totheimplicationsof mobilebanking,existingand withtheagingof thebabyboomers,whohavelonger emergingcreditproducts,andchallengesfacingcerlifeexpectancies,andanincreasinglycomplexfinan- tainsegmentsof consumers. cialmarketplaceraisequestionsaboutthefinancial stabilityof olderadultsintheyearsahead.Thesur- 28 SeeBoardofGovernorsoftheFederalReserveSystem(2013), ConsumersandMobileFinancialServices2013,(Washington: 29 Formoreinformation,thebriefingpaper,videoclips,andother BoardofGovernors,March),www.federalreserve.gov/ materialsfromtheforum,seewww.federalreserve.gov/ econresdata/mobile-devices/files/consumers-and-mobile- newsevents/conferences/financial-experiences-of-older-adultsfinancial-services-report-201303.pdf. agenda.htm.

ConsumerandCommunityAffairs 83 InvestorsinSingle-FamilyHousing: unexpectedhouserepair,lostjob,orsuddenillnessof ChangingtheProfileofCommunities afamilybreadwinner—muchlesstoinvestforthe Whilemanysignspointtocontinuedrecoveryinthe future.Duringafinancialcrisis,thelackof sufficient housingsectornationally,theimpactof thehousing wealthtoovercomefinancialshockscandelayconcrisisandtheextentof recoveryvarygreatlybymar- siderablyafamily’sabilitytorecover.Minorityfamiket.Somecommunitiesareexperiencingasurgein liesfaceparticularchallenges.Disparitiesinwealth demandforforeclosedpropertiesbyprivateinvestors, betweenwhiteandminorityfamilieshavepersisted includinglargeinstitutionalinvestorsandhedge fordecades,inbothstrongandweakeconomies,and funds.Becauseof theirabilitytotransactpurchases themostrecentcrisiswasnoexception.Nationalsurquickly,buylargenumbersof homesandthenreno- veydata,includingtheBoard’sSurveyof Consumer vatethemasrentals,investorshavebeenabletohelp Finances,showminorityfamiliesexperiencedlarger absorbexcessinventoryandstabilizecommunities. declinesintheirnetworththanwhitefamilies,andin However,theprevalenceof investoractivityinsome turn,havefewerassetstodrawupontorebuild areasraisesconcernsaboutcrowdingoutowner- wealth. occupantsandtheabilityof firmstomanageand maintainthepropertiestheyacquire.Meanwhile, InNovember2013,theDCCApolicyanalysisstaff othercommunitiescontendwithlargenumbersof convenedanexternalgroupof researchersandpublic vacantandabandonedhomesthathaveimposedsig- policyexpertstodiscussraceandwealthtrendsand nificantcostsonthesurroundingneighborhoods— toconsidertheimplicationsof continueddisparities includingdecreasedpropertyvaluesand,insome inwealth,particularlyintherecenteconomiccrisis. places,ariseincrime.Theycontinuetostrugglewith Discussionfocusedonconstraintsonsavingand alackof investorsorprospectiveowner-occupantsto rebuildingwealthduetohigherunemploymentrates purchaseexcessvacantproperties. andonfalloutfromthehousingcrisis—whicherased homeownershipgainsandreducedhomeequitytoa InlateFebruary,DCCAstaff fromboththeCom- greaterextentforblackandHispanichouseholds. munityDevelopmentandPolicyAnalysisteams, Staff willcontinuetomonitorthesetrendsandthe togetherwithstaff fromtheFederalReserveBanks effectivenessof alternativerecoverystrategiesto of ClevelandandPhiladelphia,convenedRenters, assistminorityfamilieshardhitbytherecession. Homeowners,andInvestors:TheChangingProfileof Communities,aone-dayeventfocusedoncurrent patternsof housinginvestmentinneighborhoods Community Development andthevariouswaysthisactivityischangingcommunities.Morethan100researchers,practitioners, investorsandstateandlocalofficialsattendedtodis- TheFederalReserveSystem’sCommunityDevelopcusseffectiveapproachesforstabilizingneighbor- mentfunctionpromoteseconomicgrowthandfinanhoodspost-crisis.30 cialstabilityforlow-andmoderate-income(LMI) communitiesandindividualsthrougharangeof ThroughouttheyearDCCAstaff,togetherwithcol- activities:conveningstakeholders,conductingand leaguesfromtheFederalReserveBanks,continuedto sharingresearch,andidentifyingemergingissues(see closelymonitorhousingmarketsacrossthenationto box2foranexample).Asadecentralizedfunction, betterunderstandthedirectandindirecteffectsof theCommunityAffairsOfficers(CAOs)ateachof thecrisesonneighborhoodsandtheirresidents.Staff the12ReserveBanksdesignactivitiestorespondto alsocontributedtothestabilizationof neighbor- thespecificneedsof thecommunitiestheyserve,with hoodsbyconductingappliedresearch,conveningkey oversightfromBoardstaff.TheBoard’sCommunity stakeholders,andhighlightingcommunity Developmentstaff promoteandcoordinateSystemapproachesthatareworking. widepriorities,includingthefollowingfiveSystem CommunityDevelopmentstrategicgoals: RaceandWealth:ExaminingtheTrends 1. supportprogramsandpromotepoliciesthat Withoutwealth,itisdifficultforfamiliestomaintain improvethefinancialstabilityof LMIhouseholds theirstandardof livingwhentherearesetbacks—the 2. strengthenLMIcommunitiesbyadvancingcom- 30 Formoreinformation,presentations,videoclips,andsummaries prehensiveneighborhoodrevitalizationandstabiofthediscussions,seewww.federalreserve.gov/newsevents/ conferences/renters-homeowners-investors-agenda.htm. lizationstrategies

84 100thAnnualReport|2013 Box 2. Resilience and Rebuilding for Low-Income Communities: Research to Inform Policy and Practice “Resilientcommunitiesrequiremorethandecenthousing,importantasthatis;theyrequireanarrayofamenitiesthatsupportthesocialfabricofthecommunityandbuildthecapabilitiesofcommunityresidents.The holisticapproachhasthepowertotransformneighborhoodsand,asaresult,thelivesoftheirlower-income residents.” —FederalReserveChairmanBenS.Bernanke,April12,2013 Everytwoyears,theFederalReserveSystemhosts • Housing:Whatistheimpactofinitiativesaimed itssignaturecommunitydevelopmentresearchcon- ataddressingdistressedhousingmarketsinlowference,conveningacross-disciplineaudienceto incomecommunities,suchashousingvouchers generateandexplorethelatestresearchincommu- onrentalprices,theeffectofpre-purchasehomenityeconomicpolicyandtosharemodelsofsuc- ownershipcounselingonmortgagedelinquency, cess.Theeventisauniqueforumthatgathersa andtheneighborhoodsocialimpactsofhome diversegroupofcommunitydevelopersandpracti- rehabilitation? tioners,policymakers,philanthropists,researchers, • Smallbusiness:Whatfactorsleadtosmallbusifinancialservicesproviders,governmentofficials, nessresilience? andstudents. • Rural:Whatarethecriticalcommunityandeco- InApril,theSystemhelditseighthconference,with nomicdevelopmentissuesinruralareas? thethemeofimprovingresiliencyandrebuildingin low-incomehouseholdsandneighborhoods.1Ledby • Usingdatatotestandtell:Whatdataand theCommunityDevelopmentOfficesoftheBoard researchapproacheshelpovercomethechallenge andtheFederalReserveBankofAtlanta,theevent ofanalyzingthecomplexdevelopmentissuesof attractednearly350participantsandwasacatalyst low-incomecommunities? fornewideas,approaches,andstrategiesforthe communitydevelopmentindustryandacademic • Collaboratingforthefuture:Howcantheinterfield.Duringthetwo-dayprogram,featuredpanel relatedsectorsofeducation,publichealth,finandiscussionsdelvedintothecoreissuescriticalto cialstability,andemploymentcollaboratemore advanceeffectiveandsustainabledevelopment: effectively? • People:Whydidyounghouseholdslosesomuch Additionalhighlightsoftheeventwerethoughtwealthduringthehousingcrisis? provokingkeynotesaddressesbyBenBernanke, ChairmanoftheFederalReserveBoard,andSudhir • Places:Whatarethelinkagesbetweenthe Venkatesh,aprofessorofSociologyColumbiaUninationalpovertyrateandthenumberofpeopleliv- versityandnationallyrecognizedexpertintheecoinginconcentratedpoverty? nomicsofunderservedcommunities.2 • Humancapitalandjobs:Whatinsightscanbring betterunderstandingofthedynamicsoflabor marketinlow-incomecommunities? 2 Fortranscriptsofthekeynoteaddresses,seewww 1 Formoreinformation,papers,andvideosfromtheconference, .federalreserve.gov/newsevents/speech/bernanke20130412a.htm seewww.frbatlanta.org/news/conferences/13resilience_rebuilding andwww.frbatlanta.org/news/multimedia/13resilience_rebuilding_ .cfm. venkatesh_transcript.cfm. 3. fosterinnovativestrategiesthatassistLMIcom- emergingcommunitydevelopmentissuesand munitiesandindividualsinlaunching,growing, trendsthathavenationalimplications andsustainingsmallbusinesses Labor Markets and Human Capital 4. advanceinnovationandefficiencyincommunity developmentprograms,funding,andinfrastruc- In2013,DCCAcommunitydevelopmentstaff,in turetopromotescale,sustainability,andimpact conjunctionwithstaff fromanumberof Reserve 5. strategicallycommunicatekeyfindingsof the Banks,convenedinternalandexternalexpertsto CommunityDevelopmentfunctionandshare explorechangingaspectsof theU.S.labormarket 37 444

ConsumerandCommunityAffairs 85 andtheimpactonworkers.Thisinitiativedemon- TheReserveBanksadministerweb-basedpollsand stratedthattheincreaseduseof “contingent”work- surveysof keystakeholderswithintheirdistricts.The ers31wasripeforresearch,astheimpactof thisshift Boardsurveysaffiliatesandgranteesof Neighboronworkersisnotclear-cut.Inparticular,DCCA Works®America,providingamenuof national staff soughttodeterminetheexperienceandexpecta- benchmarkfindingsforReserveBankcomparisons. tionsof youngworkersenteringtheworkforceinthis AllinformationcollectedthroughtheCDIis newenvironmentof workersincreasinglyactingas voluntary. theirownagentsof employment,ratherthanprimarilyasemployeesof aparticularfirm.Asaresult,the Communitystakeholdersoftenplayacentralrolein Boardsurveyedmorethan2,000individualsbetween thecommunityandeconomicdevelopmentof low- 18and30abouttheireducationandtraining,experi- incomelocales.Thesestakeholdersincludesuchorgaenceasapaidemployee,andself-employmentactivi- nizationsascommunitydevelopmentfinancialinstities.In2014,theBoardwillusethedatacollectedto tutions,creditunions,communitybanks,non-profit developareportforpolicymakers,researchers,and serviceprovidersandfaith-basedorganizations,pubpractitionerstofurthertheirwork. licsectoragencies,smallbusinessowners,andcommunitycolleges.Recognizingthatinformationfrom Thisbodyof workisacontinuationof work,begun suchorganizationscanhelpexplainlocalchanges infall2011,thatarosefromconcernsof theattenuat- andcancomplementtheresultsof othersurveys, ingeffectsof long-termunemploymentonthe FederalReserveSystemstaff hasengagedinseveral broadereconomicrecoveryandtheparticularissues modesof systematicallycollectingsuchinformation facinglow-incomecommunities.Acollectionof atthecommunitylevel.Whiletheinitiativeistoonew regionalperspectivesonthisissuewasgathereddur- toyielddefinitiveresults,theFederalReserveis ingaseriesof forumsheldthroughoutthecountry exploringthemosteffectiveandefficientmeansto withprimarilyintermediaryorganizationsinvolvedin gatherandinterpretinformationfromthesecommuthedeliveryof workforcedevelopmentservicesand nitystakeholders. localemployers.Insightsintothecomplexfactors creatinglong-termunemploymentconditions,par- Thisworkparallelsexploratoryworkhappeningoutticularlyinlow-incomecommunities,andpromising sidetheUnitedStates.Boardstaff presentedanoverworkforcedevelopmentstrategieswerepublishedin viewof theCDIprojectattheWorldStatisticsCon- December2012,in“APerspectivefromMainStreet: gressin2013,promptingconversationswithother Long-TermUnemploymentandWorkforceDevelop- centralbanksandexternalresearchersabouttheir ment,”whichprovidesasummaryof thekeytopics owninterestsinbetterunderstandingemergingissues thatemergedfromtheforumsandexamplesof how intheirowncommunities. thoseissueswerereflectedindifferentpartsof the countryandfordifferentpopulations.32 Community Data Initiative Consumer Laws and Regulations TheCommunityDataInitiative(CDI)isapilot Throughout2013,DCCAcontinuedtoadminister efforttobetterunderstandcurrentandemerging theBoard’sregulatoryresponsibilitieswithrespectto communityeconomicconditionsaroundthecountry, certainentitiesandspecificstatutoryprovisionsof withaspecialfocusoncapturingissuesimpacting theconsumerfinancialservicesandfairlendinglaws. low-to-moderateincomecommunities,usingtargeted DCCAalsodraftsregulationsandissuesregulatory polling.TheBoardandeachof the12ReserveBanks interpretationsandcomplianceguidanceforthe participateinthiscollaborativeresearchprojectto industry,theReserveBanks,andotherfederal providesystematicandrelevantcommunitycondiagencies. tionsandtrendinformationonaconsistentbasis. Appraisal Requirements for 31 SeeDepartmentofLabor,“ContingentWorkers,”www.dol .gov/_sec/media/reports/dunlop/section5.htm. “Higher-Risk Mortgage Loans” 32 BoardofGovernorsoftheFederalReserveSystem(2012),A PerspectivefromMainStreet:Long-TermUnemploymentand InJanuary2013,theBoardandfivefederalfinancial WorkforceDevelopment(BoardofGovernors:Washington, regulatoryagenciesissuedafinalruletoestablish D.C.,December),www.federalreserve.gov/communitydev/pdfs/ Workforce_errata_final2.pdf. appraisalrequirementsfor“higher-riskmortgage

86 100thAnnualReport|2013 loans.”33Theruleimplementsamendmentstothe homeloanswillnotbecomeeffectivefor18months. TILAmadebytheDodd-FrankAct.34Mortgage StartingonJuly18,2015,loanssecuredbyanexistloansarecoveredbytheruleif theyarehigher-priced ingmanufacturedhomeandlandwillbesubjectto securedbyaconsumer’shomeandhaveinterestrates theDodd-FrankAct’sappraisalrequirements.Loans abovecertainthresholds. securedbyanewmanufacturedhomeandlandwill beexemptfromtherequirementthattheappraiser Forhigher-pricedmortgageloans,therulerequires visitthehome’sinterior.Forloanssecuredbymanucreditorstousealicensedorcertifiedappraiserwho facturedhomeswithoutland,creditorswillbe preparesawrittenappraisalreportbasedonaphysi- allowedtouseothervaluationmethodswithoutan calvisitof theinteriorof theproperty.Therulealso appraisal,suchasusingthird-partyvaluationservices requirescreditorstodisclosetoapplicantsinforma- or“bookvalues.” tionaboutthepurposeof theappraisalandprovide consumerswithafreecopyof anyappraisalreport. Proposed Flood Insurance Rule InOctober,theBoardandfourotherfederalagencies If theselleracquiredthepropertyforalowerprice issuedajointnoticeof proposedrulemakingto duringthepriorsixmonthsandthepricedifference amendregulationspertainingtoloanssecuredby exceedscertainthresholds,creditorswillhaveto propertylocatedinspecialfloodhazardareas.36The obtainasecondappraisalatnocosttotheconsumer. proposedrulewouldimplementcertainprovisionsof Thisrequirementforhigher-pricedhome-purchase theBiggert-WatersActwithrespecttoprivateflood loansisintendedtoaddressfraudulentpropertyflipinsurance,theescrowof floodinsurancepayments, pingbyseekingtoensurethatthevalueof thepropandtheforced-placementof floodinsurance. ertylegitimatelyincreased. Theproposedrulewouldrequirethatregulatedlend- Inresponsetopubliccomments,theagenciespubinginstitutionsacceptprivatefloodinsuranceas lishedasupplementalproposaltorequestcomment definedintheBiggert-WatersActtosatisfythemanonpossibleexemptionsfor“streamlined”refinance datorypurchaserequirements.Italsosolicitscomprogramsandsmall-dollarloans,andtosolicitviews mentonwhethertheagenciesshouldadoptaddiontherule’sapplicabilitytoloanssecuredbymanutionalregulationsontheacceptanceof floodinsurfacturedhomes.AfinalrulewasissuedinDecember ancepoliciesissuedbyprivateinsurers.Inaddition, toexemptasubsetof higher-pricedmortgageloans theproposalwouldrequireregulatedlendinginstitufromtheseappraisalrequirements,withtheintention tionstoescrowpaymentsandfeesforfloodinsurance of savingborrowerstimeandmoneywhilestillensuringthattheloansarefinanciallysound.35Underthe foranyneworoutstandingloanssecuredbyresidentialimprovedrealestateoramobilehome—not supplementalrule,loansof $25,000orlessandcerincludingbusiness,agricultural,andcommercial tain“streamlined”refinancingsareexemptfromthe loans—unlesstheinstitutionsqualifyforthestatu- Dodd-FrankAct’sappraisalrequirementsforhighertoryexception.Finally,theproposalwouldclarify riskloans,whichtookeffectJanuary18,2014. thatregulatedlendinginstitutionshavetheauthority tochargeaborrowerforthecostof force-placed Therulealsocontainsspecialprovisionsformanufloodinsurancecoveragebeginningonthedateon facturedhomes,whichcanpresentuniqueissuesin whichtheborrower’scoveragelapsedorbecame determiningtheappropriatevaluationmethod.To insufficientandwouldstipulatethecircumstances ensurethataccesstoaffordablehousingoptionsis underwhichalendermustterminateforce-placed nothinderedwhilecreditorsmakethenecessary floodinsurancecoverageandrefundpaymentstoa adjustments,therequirementsformanufactured borrower. 33 ThefiveagenciesissuingtherulearetheCFPB,theFDIC,the FederalHousingFinanceAgency(FHFA),NCUA,andOCC. Thepubliccommentperiodfortheruleclosedon 34 SeeBoardofGovernors,CFPB,FDIC,FHFA,NCUA,and December10,2013,otherthanforcommentsrelated OCC(2013),“AgenciesIssueFinalRuleonAppraisalsfor tothePaperworkReductionActanalysis,whichwere Higher-PricedMortgageLoans,”jointpressrelease,January18, duebyDecember30,2013. www.federalreserve.gov/newsevents/press/bcreg/20130118a.htm. 35 SeeBoardofGovernors,CFPB,FDIC,FHFA,NCUA,and OCC(2013),“AgenciesIssueFinalRuletoExemptSubsetof 36 SeeBoardofGovernors,CFPB,FDIC,FHA,NCUA,and Higher-PricedMortgageLoansfromAppraisalRequirements,” OCC(2013),“AgenciesRequestCommentonProposedFlood jointpressrelease,December12,www.federalreserve.gov/ InsuranceRule,”jointrelease,October11,www.federalreserve newsevents/press/bcreg/20131212a.htm. .gov/newsevents/press/bcreg/20131011a.htm.

87 5 Federal Reserve Banks TheFederalReserveBanksprovidepaymentservices PolicyonPaymentSystemRisk(PSR)andconformtodepositoryandcertainotherinstitutions,distribute ingamendmentstoRegulationJ(Collectionof thenation’scurrencyandcointodepositoryinstitu- ChecksandOtherItemsbyFederalReserveBanks tions,andserveasfiscalagentsanddepositoriesfor andFundsTransfersthroughFedwire).1TheprotheU.S.governmentandotherentities.TheReserve posedchangesrelatetotheBoard’sproceduresfor Banksalsocontributetosettingnationalmonetary postingdebitandcreditentriestoinstitutions’Fedpolicyandsupervisionof banksandotherfinancial eralReserveaccountsforACHdebitandcommercial entitiesoperatingintheUnitedStates(discussedin checktransactions. sections2through4of thisannualreport). Underthecurrentpostingrulesforcommercialand governmentACHtransactionsestablishedin1994, Federal Reserve Priced Services ACHdebittransactionspostat11:00a.m.eastern time(ET),andACHcredittransactionspostat8:30 FederalReserveBanksprovidearangeof payment a.m.ET.2TheBoardelectedtodelaythepostingof andrelatedservicestodepositoryandcertainother ACHdebittransactionstoallowreceivinginstituinstitutions;these“pricedservices”includecollecting tionstimetoobtainfundsaftertheopeningof the checks,operatinganautomatedclearinghouse ReserveBanks’FedwireFundsService,whichatthat (ACH)service,transferringfundsandsecurities,and timeopenedat8:30a.m.Sincethen,theFedwire providingamultilateralsettlementservice. FundsServiceopeninghasbeenmovedearlier,and theservicenowopensat9:00p.m.thepreviouseve- TheFederalReserveBanks,workingwiththefinan- ning.Therefore,theBoarddeemedthatcontinuing cialservicesindustry,havemadesubstantialprogress thepracticeof delayingthesettlementof ACHdebit intheirefforttomigratetoamoreefficientelectronic transactionsuntil11:00a.m.wasnolongernecessary paymentsystembyexpandingtheuseof ACHpay- andmayretardeffortsbyinstitutionstoexpedite mentsandbyconvertingfromapaper-basedcheck- fundssettlements.3 clearingprocesstoanelectronicone.Overthepast severalyears,theReserveBankshavecapitalizedon Inaddition,theBoard’scurrentpostingrulesfor efficienciesgainedfromincreasedelectronicprocess- commercialchecktransactionsreflectapresumption ing;theReserveBanksbundleall-electronicpayment thatbanksgenerallyhandlechecksinpaperformand servicesandofferinformationandrisk-management donotreflectbanks’widespreaduseof electronic services,whichhelpdepositoryinstitutionsmanage check-processingmethods.Asaconsequence,the effectivelyboththeirpaymentoperationsandassoci- Board’spostingrulesalignwiththeprocessingof less atedoperationalandcreditrisk. thanone-tenthof 1percentof checksthatthe ReserveBankshandle.4TheBoardbelievesthat TheReserveBankshavealsobeenengagedinanumberof multiyeartechnologyinitiativesthatwillmod- 1 ThecommentperiodforthechangestothePSRpolicyand ernizetheirpriced-servicesprocessingplatforms.In RegulationJendedonFebruary10,2014. 2013,theBankscontinuedeffortstomigratethe 2 Alltimesareeasterntimeunlessotherwisespecified. FedACH,FedwireFunds,andFedwireSecuritiesser- 3 TheBoardinitiallyrequestedcommentin2008onmovingthe postingtimeofACHdebittransactionsfrom11:00a.m.to8:30 vicesoff amainframesystemandtoadistributed a.m.tocoincidewiththepostingofACHcredittransactions computingenvironment. butdecidednottopursuethechangebecauseofeconomicconditionsatthetimeandtheadditionalcostsandliquiditypressuresthatcouldbeplacedonsomeinstitutions. InDecember2013,theFederalRegisterpublisheda 4 Underthecurrentpostingrules,commercialcheckcreditspost noticeof proposedchangestotheFederalReserve accordingtooneoftwooptions:(1)allcreditspostatasingle,

88 100thAnnualReport|2013 Call to Improve the Speed and Efficiency of the Payment System TheFederalReserveBanksreleasedapubliccon- groups.2TheReserveBanksareanalyzingthe sultationpaperin2013thatrequestedcommentson responsesandseekingclarificationsasneeded. gapsandopportunitiesinthepaymentsystemand Inconcertwiththisanalysisofresponses,the potentialdesiredoutcomes,strategies,andtacticsto shapethefutureofU.S.paymentsfromendtoend.1 ReserveBankshaveengagedinanumberofadditionalinformation-gatheringeffortsthataredesigned ThepaperalsosoughtinputontheFederal toinformtheReserveBanks’futureplans.These Reserve’sroleinimplementingthestrategiesand effortsinclude tactics. • researchingend-userdemandforspecificpay- Themesexploredintheconsultationpaperincluded mentattributes,includingpaymentspeed, theneedforanear-real-timepaymentsystem,the needforcontemporaryfeaturesandprocess • conductinganassessmentofalternativesfor improvementsinlegacypaymentsystems,thecost speedingU.S.retailpayments,and andconvenienceofinternationalpayments,andthe • identifyinggapsandopportunitiesrelatedtopaymitigationofthreatstopaymentsystemsecurity. mentsystemsecurity.3 ResponsesweredueinDecember2013,andthe ReserveBanksreceivedfeedbackfromarangeof Theconsultationpaperresponsesandtheseaddiinterestedparties,includingindividualfinancialinsti- tionalinformation-gatheringeffortswillserveas tutions,businesses,paymentnetworksandproces- importantinputstotheReserveBanks’collective sors,softwarevendors,paymentinnovators,consul- thinkinginregardtofutureimprovementinitiatives, tants,andconsumers,aswellasfromtrade whichwillbecommunicatedinapaperexpectedto bepublishedin2014. 1 SeePaymentSystemImprovement—PublicConsultationPaper, 2 SeeConsultationPaperResponseSummary,FederalReserve FederalReserveFinancialServices(http:// FinancialServices(http://fedpaymentsimprovement.org/wpfedpaymentsimprovement.org/wp-content/uploads/2013/09/ content/uploads/industry_feedback_summary.pdf). Payment_System_Improvement-Public_Consultation_Paper.pdf). 3 SeeEnd-UserPaymentResearchSummary,FederalReserve Foranoverviewoftheinitiative,seeInPursuitofaBetterPay- FinancialServices(http://fedpaymentsimprovement.org/wpmentSystem(http://fedpaymentsimprovement.org/). content/uploads/enduser_demand_summary.pdf). settlementpracticesshouldreflectthespeedof clear- costsactuallyincurredaswellastheimputedcosts ingaswellasthetimingof depositsandpresent- thatwouldhavebeenincurred—includingfinancing ments,andthatitspostingrulesshouldbeupdatedto costs,taxes,andcertainotherexpenses—andthe alignwithtoday’selectroniccheck-processingenvi- returnonequity(profit)thatwouldhavebeenearned ronment.Inordertoreflecttoday’selectroniccheck- if aprivatebusinessfirmhadprovidedtheservices.5 processingenvironment,theBoardproposedtopost Theimputedcostsandimputedprofitarecollectively commercialchecktransactions—bothcreditsand referredtoastheprivate-sectoradjustmentfactor debits—at8:30a.m.,1:00p.m.,and5:30p.m.,with (PSAF).Overthepast10years,ReserveBankshave thespecificpostingtimedependingonwhenthe recovered102.0percentof theirpricedservicescosts, checkwasdepositedwiththeReserveBanks(for includingthePSAF(seetable1).6 credits)orpresentedbytheReserveBanks(for debits). 5 Financialdatareportedthroughoutthissection—includingrevenue,otherincome,costs,incomebeforetaxes,andnet Recovery of Direct and Indirect Costs income—willreferencethe“ProFormaFinancialStatementsfor FederalReservePricedServices”attheendofthissection. TheMonetaryControlActof 1980requiresthatthe 6 EffectiveDecember31,2006,theReserveBanksimplemented FederalReserveestablishfeesforpricedservicessoas theFinancialAccountingStandardsBoard’sStatementof FinancialAccountingStandards(SFAS)No.158,Employers’ torecover,overthelongrun,alldirectandindirect AccountingforDefinedBenefitPensionandOtherPostretirement Plans[AccountingStandardsCodification(ASC)Topic715 float-weightedpostingtime,or(2)fractionalcreditspost (ASC715),Compensation–RetirementBenefits],whichhas between11:00a.m.and6:00p.m.,dependingontheinstitution’s resultedintherecognitionofa$466.2millionreductionin preference.Bothcreditingoptionsarebasedonsurveysofcheck equityrelatedtothepricedservices’benefitplansthrough2013. presentmenttimesandvaryacrosstimezones.Commercial Includingthisreductioninequity,whichrepresentsadeclinein checkdebitsarepostedonthenextclockhouratleastonehour economicvalue,resultsincostrecoveryof95.9percentforthe afterpresentmentbeginningat11:00a.m.forpaperchecksand 10-yearperiod.FordetailsonhowimplementingASC715 1:00p.m.localtimeforelectronicchecks,andendingat3:00 affectedtheproformafinancialstatements,refertonote4tothe p2.m5.loca4lt4im4e. proformafinancialstatementsattheendofthissection.

FederalReserveBanks 89 Table1.Pricedservicescostrecovery,2004–13 Millionsofdollars,exceptasnoted Operatingexpensesand Year Revenuefromservices1 Targetedreturnonequity3 Totalcosts Costrecovery(percent)4,5 imputedcosts2 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 2013 441.3 409.3 4.2 413.5 106.7 2004–13 7,443.9 6,802.2 497.2 7,299.4 102.0 Note:Hereandelsewhereinthissection,componentsmaynotsumtototalsoryieldpercentagesshownbecauseofrounding. 1 Forthe10-yearperiod,includesrevenuefromservicesof$6,924.4millionandotherincomeandexpense(net)of$519.5million. 2 Forthe10-yearperiod,includesoperatingexpensesof$6,480.9million,imputedcostsof$34.8million,andimputedincometaxesof$286.5million. 3 From2009to2012,thePSAFwasadjustedtoreflecttheactualclearingbalancelevelsmaintained;previously,thePSAFhadbeencalculatedbasedonaprojectionof clearingbalancelevels. 4 Revenuefromservicesdividedbytotalcosts. 5 Revenuefromservicesdividedbytotalcosts.Forthe10-yearperiod,costrecoveryis95.9percent,includingtheeffectofaccumulatedothercomprehensiveincome(AOCI) reportedbythepricedservicesunderASC715.Fordetailsonchangestotheestimationofpricedservicesaccumulatedothercomprehensiveincomeandtheireffectonthe proformafinancialstatements,refertonote4tothe“ProFormaFinancialStatementsforFederalReservePricedServices”attheendofthissection. In2013,ReserveBanksrecovered106.7percentof table2).ThedeclineinReserveBankcheckvolume totalpricedservicescosts,includingthePSAF.7The continuestobeinfluencedbynationwidetrendsaway Banks’operatingcostsandimputedexpensestotaled fromtheuseof checks. $409.3million.Revenuefromoperationstotaled $441.3millionandotherincomewas$0.1million, Byyear-end2013,99.9percentof checkdeposits resultinginnetincomefrompricedservicesof processedbytheReserveBanksand99.9percentof $32.0million. checkspresentedbytheReserveBankstopaying bankswereprocessedelectronically.Inaddition, Commercial Check-Collection Service 98.7percentof unpaidcheckswerereturnedelectronicallytoaReserveBankand96.8percentwere In2013,ReserveBanksrecovered115.4percentof deliveredelectronicallybytheReserveBanktothe thetotalcostsof theircommercialcheck-collection bankof firstdeposit. service,includingtherelatedPSAF.TheBanks’operatingexpensesandimputedcoststotaled$170.7mil- Commercial Automated lion.Revenuefromoperationstotaled$198.8million Clearinghouse Service andotherincometotaled$0.1million,resultingin netincomeof $28.2million.In2013,check-service TheAutomatedClearinghouseServiceenables revenuefromoperationsdecreased$21.2million depositoryinstitutionsandtheircustomerstoprofrom2012.8ReserveBankshandled6.0billionchecks cesslargevolumesof paymentseffectivelythrough in2013,adecreaseof 9.6percentfrom2012(see electronic,batchprocesses.In2013,theReserve Banksrecovered101.2percentof thetotalcostsof theircommercialACHservices,includingtherelated 7 Totalcostisthesumofoperatingexpenses,imputedcosts (incometaxes,interestondebt,interestonfloat,andsales PSAF.ReserveBankoperatingexpensesandimputed taxes),andthetargetedreturnonequity. coststotaled$116.3million. 8 Section17oftheCheckClearingforthe21stCenturyAct requirestheFederalReserveBoard’sAnnualReporttoinclude RevenuefromACHoperationstotaled$118.8milcostsofandrevenuefrominter-Districtcommercialchecktransportation.In2008,theReserveBanksdiscontinuedthetrans- lion,resultinginnetincomeof $2.6million.The portationofcommercialchecksbetweentheircheck-processing ReserveBanksprocessed11.1billioncommercial offices.Asaresult,in2013,therewerenocostsorimputedrev- ACHtransactions,anincreaseof 4.5percentfrom enuesassociatedwiththetransportationofcommercialchecks betweenReserveBankcheck-processingoffices. 2012.

90 100thAnnualReport|2013 Table2.ActivityinFederalReservepricedservices,2011–13 Thousandsofitems Percentchange Service 2013 2012 2011 2012to2013 2011to2012 Commercialcheck 5,988,302 6,622,265 6,779,607 -9.6 -2.3 CommercialACH 11,142,821 10,664,613 10,348,802 4.5 3.1 Fedwirefundstransfer 137,219 134,409 129,734 2.2 3.6 Nationalsettlement 661 663 571 -0.4 16 Fedwiresecurities 6,535 6,441 7,271 1.3 -11.4 Note:Activityincommercialcheckisthetotalnumberofcommercialcheckscollected,includingprocessedandfine-sortitems;incommercialACH,thetotalnumberof commercialitemsprocessed;inFedwirefundstransferandsecuritiestransfer,thenumberoftransactionsoriginatedonlineandoffline;andinnationalsettlement,thenumber ofsettlemententriesprocessed. Fedwire Funds and National PSAF.TheBanks’operatingexpensesandimputed Settlement Services costsforprovidingthisservicetotaled$25.3million in2013.Revenuefromtheservicetotaled$26.8mil- In2013,ReserveBanksrecovered98.6percentof the lionandtherewasnootherincome,resultinginanet costsof theirFedwireFundsandNationalSettle- incomeof $1.5million. mentServices,includingtherelatedPSAF.Reserve Bankoperatingexpensesandimputedcostsforthese TheFedwireSecuritiesServiceallowsitsparticipants operationstotaled$97.1millionin2013.Revenue totransferelectronicallytootherserviceparticipants fromtheseservicestotaled$96.7million,resultingin certainsecuritiesissuedbytheU.S.Treasury,federal anetlossof $0.3million. governmentagencies,government-sponsoredenterprises,andcertaininternationalorganizations.9In FedwireFundsService 2013,thenumberof non-Treasurysecuritiestransfers TheFedwireFundsServiceallowsitsparticipantsto processedviatheserviceincreased1.3percentfrom usetheirbalancesatReserveBankstotransferfunds 2012,toapproximately6.5million. tootherparticipantsintheservice.In2013,thenumberof Fedwirefundstransfersoriginatedbydeposi- Float toryinstitutionsincreased2.2percentfrom2012,to approximately137.2million.Theaveragedailyvalue In2013,theReserveBankshaddailyaveragecredit of Fedwirefundstransfersin2013was$2.8trillion, floatof $630.2million,comparedwithdailyaverage anincreaseof 19percentfromthepreviousyear. creditfloatof $767.1millionin2012.10 NationalSettlementService Currency and Coin TheNationalSettlementServiceisamultilateral settlementsystemthatallowsparticipantsinprivate- TheFederalReserveBoardistheissuingauthority sectorclearingarrangementstosettletransactions forthenation’scurrency(intheformof Federal usingFederalReservebalances.In2013,theservice Reservenotes).In2013,theBoardpaidtheU.S. processedsettlementfilesfor17localandnational TreasuryDepartment’sBureauof Engravingand private-sectorarrangements,onemorethanin2012. Printing(BEP)approximately$664.0millionfor TheReserveBanksprocessedslightlyfewerthan 10,200filesthatcontainedaround725,000settlement 9 Theexpenses,revenues,volumes,andfeesreportedherearefor entriesforthesearrangementsin2013.Activityin transfersofsecuritiesissuedbyfederalgovernmentagencies, 2013representsanincreasefromthe663,000settle- government-sponsoredenterprises,andcertaininternational mententriesprocessedin2012. organizations.ReserveBanksprovideTreasurysecuritiesservicesintheirroleastheU.S.Treasury’sfiscalagent.Theseservicesarenotconsideredpricedservices.Fordetails,see“Treas- Fedwire Securities Service urySecuritiesServices”laterinthissection. 10 CreditfloatoccurswhentheReserveBankspresentchecksand In2013,theReserveBanksrecovered105.0percent otheritemstothepayingbankpriortoprovidingcredittothe depositingbank(debitfloatoccurswhentheReserveBanks of thetotalcostsof thepriced-servicecomponentof creditthedepositingbankbeforepresentingchecksandother theirFedwireSecuritiesService,includingtherelated itemstothepayingbank).

FederalReserveBanks 91 costsassociatedwiththeproductionof 6.4billion notesreceivedannuallyforauthenticationandfitness FederalReservenotes.TheFederalReserveBanks sorting. distributeandreceivecurrencyandcointhrough depositoryinstitutionsinresponsetopublicdemand. Since2009,policychangesandimprovementstothe Together,theFederalReserveBoardandReserve ReserveBanks’high-speed,currency-processing Banksworktomaintaintheintegrityof andconfi- equipmenthaveincreasedproductivityalmost20perdenceinFederalReservenotes. centandReserveBankshavereducedstaffinglevels incashservicesbyapproximately8percent.The In2013,theReserveBanksdistributed37.4billion ReserveBanks,inconsultationwithBoardstaff,are FederalReservenotesintocirculation,thesameasin investigatingadditionalopportunitiestoimprove 2012,andreceived35.8billionFederalReservenotes processingtechnologytofurtherincreaseproductivfromcirculation,a0.6percentincreasefrom2012. ityandenhanceriskmanagement.In2013,Reserve Banksbeganseveralfieldteststoevaluatethefeasi- Thevalueof FederalReservenotesincirculation bilityandeffectivenessof newprocesses. increasednearly6.4percentin2013,to$1,197.9billionatyear-end,largelybecauseof international Other Improvements and Efforts demandfor$100notes.In2013,theReserveBanks ReserveBankscontinuetodevelopanewcashalsodistributed68.3billioncoinsintocirculation,a automationplatformthatwillreplacelegacysoftware 1.2percentdecreasefrom2012,andreceived56.8bilapplications,automatebusinessconceptsandprolioncoinsfromcirculation,a3.2percentdecrease cesses,andemploytechnologiestomeetthecash from2012. business’scurrentandfutureneedsmorecosteffec- Redesigned $100 Note tively.Thenewplatformwillalsofacilitatebusiness continuityandcontingencyplanningandenhance TheFederalReservebegansupplyingfinancialinsti- thesupportprovidedtoReserveBankcustomers.In tutionswitharedesigned$100noteonOctober8, 2013,theReserveBankssuccessfullyimplemented 2013.Theredesigned$100noteincorporatesnew anothermajorcomponentof thenewautomation securityfeaturestodetercounterfeitersandhelp platformthatwillallowcommunicationbetween businessesandconsumerstellwhetheranoteisgenu- variousinterfaces.Thefinalautomationplatformis ine.TheFederalReserve,U.S.Departmentof the scheduledtobedeployedtoallcashofficesin2017. Treasury,theBEP,andtheU.S.SecretServicepartnertoredesignFederalReservenotestostayahead During2013,theBoard,itsqualityconsultants,and of counterfeitingthreats.Theredesigned$100note theBEPcontinuedimplementingcomponentsof a includestwonewsecurityfeatures:ablue3-Dsecu- newqualitysystemfortheBEP.Specifically,theconrityribbonwithimagesof bellsand100s,anda sultantsturnedovertoBEPstaff severalkeycompocolor-changingbellinaninkwell.Thenewfeatures, nentsof thenewqualitysystem,andcompletedwork andadditionalfeaturesretainedfromtheprevious onaprocess-changeprocedurethatallowsstaff to design,suchasawatermark,offerthepublicasimple identify,submit,andevaluateopportunitiesfor waytovisuallyauthenticatethenew$100note. improvementinallareasof production.Onesuggestionhasalreadyresulted—inlessthanayear—insav- Improvements to Efficiency and ingsof about$2millionininkcosts.Thisprogram Risk Management willcontinuetoenabletheBEPtomoreefficiently andeffectivelymeettheFederalReserveBoard’s Advancesincurrency-processingequipmentandsen- print-orderrequirementsandthefutureproduction sortechnologyhaveincreasedproductivityand of banknotesthataremoretechnologicallycomplex improvednoteauthenticationandfitnessmeasurement,therebyreducingtheprematuredestructionof Fiscal Agency and Government fitcurrencywhilemaintainingthequalityandinteg- Depository Services rityof currencyincirculation.In2013,Reserve Banksbeganimplementinganewauthenticationsensorandfitnesssensor,whichwillbefullydeployedin Asfiscalagentsanddepositoriesforthefederalgov- 2014.TheReserveBanksalsobeganworkingwith ernment,theFederalReserveBanksauctionTreasury equipmentmanufacturerstoexplorethenextgenera- securities,processelectronicandcheckpaymentsfor tionof equipmenttoprocessthehighvolumeof Treasury,collectfundsowedtothefederalgovern-

92 100thAnnualReport|2013 ment,maintainTreasury’sbankaccount,and Retail Securities Programs develop,operate,andmaintainanumberof automatedsystemstosupportTreasury’smission.The ReserveBankoperatingexpensesfortheretailsecuri- ReserveBanksalsoprovidecertainfiscalagencyand tiesprogramswere$55.3millionin2013,an8perdepositoryservicestootherentities;theseservicesare centdecreasefrom$60.2millionin2012.Thiscost primarilyrelatedtobook-entrysecurities.Treasury decreaseislargelyexplainedbyincreasedoperational andotherentitiesfullyreimbursedtheReserveBanks efficienciesthatresultedinlowerstaffinglevels,as forthecostsof providingfiscalagencyanddeposi- wellasbycontinuedsavingsfroma2012Reserve toryservices. Bankinitiativethatusesimageprocessingtohandle savingsbondredemptions.In2013,theReserve In2013,fiscalagencyexpensesamountedto Banksfurtherenhancedtheircustomerserviceand $530million,a4.7percentincreasefrom2012(see supportenvironmentbycentralizingcorefunctions table3).Thesecostsincreasedasaresultof requests of Treasury’sRetailE-Servicesinitiative.Reserve fromTreasury’sBureauof theFiscalService(Fiscal Banksalsocontinuedtheirworkondecommissioning Service).SupportforTreasuryprogramsaccounted theLegacyTreasuryDirect(LTD)system—estabfor93.6percentof thecost,andsupportforother lishedin1986asanapplicationforinvestorstohold entitiesaccountedfor6.4percent. Treasurymarketablesecurities(bills,notes,bonds, andTreasuryInflation-ProtectedSecurities,or Treasury Securities Services TIPS)—inordertoeliminateagingtechnology platforms. TheReserveBanksworkcloselywithTreasury’sFiscalServiceinsupportof theborrowingneedsof the Wholesale Securities Programs federalgovernment.TheBanksauction,issue,maintain,andredeemsecurities;providecustomerservice; TheReserveBankssupportwholesalesecuritiesproandoperatetheautomatedsystemssupportingU.S. gramsthroughthesale,issuance,safekeeping,and savingsbondsandmarketableTreasurysecurities transferof marketableTreasurysecuritiesforinstitu- (bills,notes,andbonds).Treasurysecuritiesservices tionalinvestors.In2013,ReserveBankoperating consistof retailsecuritiesprograms(whichprimarily expensesinsupportof Treasurysecuritiesauctions serveindividualinvestors)andwholesalesecurities were$26.7million,comparedwith$30.6millionin programs(whichserveinstitutionalcustomers). 2012.Thecostdecreaseisattributabletoloweroper- Table3.ExpensesoftheFederalReserveBanksforfiscalagencyanddepositoryservices,2011–13 Thousandsofdollars Agencyandservice 2013 2012 2011 DepartmentoftheTreasury Treasurysecuritiesservices Treasuryretailsecurities 55,334 60,208 79,346 Treasurysecuritiessafekeepingandtransfer 14,397 14,131 11,187 Treasuryauction 26,673 30,648 29,258 Computerinfrastructuredevelopmentandsupport 5,801 4,990 1,969 Otherservices 2,971 3,340 4,036 Total 105,176 113,317 125,796 Payment,collection,andcash-managementservices Paymentservices 151,715 141,534 125,196 Collectionservices 44,788 41,456 38,707 Cash-managementservices 66,519 58,975 53,832 Computerinfrastructuredevelopmentandsupport 75,565 70,075 67,014 Otherservices 9,360 9,075 9,536 Total 347,947 321,115 294,285 OtherTreasury Total 42,826 37,011 36,233 Total,Treasury 495,949 471,443 456,314 Otherfederalagencies Total,otheragencies 34,077 34,569 27,893 Totalreimbursableexpenses 530,026 506,012 484,207

FederalReserveBanks 93 atingcostsafterprogramassetswerefullyamortized. TheIPPispartof Treasury’sall-electronicinitia- TheBanksconducted267Treasurysecuritiesauc- tive—anelectronicinvoicingandpaymentinformations,comparedwith264in2012.ReserveBanksalso tionsystemthatallowsvendorstoenterinvoicedata completedworkontheFloatingRateNote(FRN),a electronically,eitherthroughaweb-basedportalor newtypeof marketableTreasurysecuritywitha electronicsubmission.TheIPPaccepts,processes, floatingrateinterestpayment.Treasuryhelditsinau- andpresentsdatafromagenciesandsuppliersystems guralFRNauctioninJanuary2014—thefirstnew relatedtoallstagesof paymenttransactions(includ- Treasurysecurityissuedsincetheintroductionof ingpurchaseorders,invoices,andotherpayment TIPSalmosttwodecadesago. information).In2013,theReserveBanks’IPP expensesincreased45.6percent,to$17.3million. OperatingexpensesassociatedwithTreasurysecuri- Thisincreaseisprimarilydrivenbythehigherstafftiessafekeepingandtransferactivitieswere$14.4mil- inglevelsrequiredtosupport11newfederalagencies lionin2013,comparedwith$14.1millionin2012. andbureausthatbeganusingtheIPPplatform. Payment Services ThecostdecreasesassociatedwiththeGoDirectinitiativepartlyoffsetTreasury’sotherpayments-related TheReserveBanksworkcloselywithTreasury’sFis- expenses.In2013,expensesforGoDirectdecreased calServiceandothergovernmentagenciestoprocess 18.7percent,to$23.8million,becausethepublicoutpaymentstoindividualsandcompanies.Forexample, reachcampaignendedandbecauseof lowercalltheBanksprocessfederalpayrollpayments,Social centersupportcosts.Thesecostreductionsresulted Securityandveterans’benefits,incometaxrefunds, becauseGoDirectachievedTreasury’sMarch2013 vendorpayments,andothertypesof payments. goalof making95percentof federalbenefitcheck paymentsviaelectronicdisbursementmethods.Asof ReserveBankoperatingexpensesforpayments- December2013,97.5percentof allfederalbenefit relatedactivitytotaled$151.7millionin2012,com- recipientsreceivedtheirpaymentselectronically. paredwith$141.5millionin2012.Theincreasein expensesislargelyduetocostsassociatedwiththe Treasury’spayments-relatedexpensesalsowereoffset newPostPaymentSystem(PPS)initiative,expanded bylowerspendingfortheStoredValueCard(SVC) TreasuryrequirementsfortheDoNotPay(DNP) program.Thisprogramprovidesstoredvaluecards andInvoiceProcessingPlatform(IPP)programs, thatmilitarypersonnelcanusetopurchasegoods whichwerepartlyoffsetbylowercostsfortheGo andservicesonmilitarybases.In2013,theSVCpro- Directinitiative.ReserveBanksbeganamultiyear gram’sexpensesdecreased6.6percentfrom2012,to efforttomodernizeseveralof Treasury’spost- $13.5million,becauseof adeclineinnewcardand paymentprocessingsystemsintoasingleapplication kioskorders. underthePPSinitiative.Theresultingapplication willprovideacentralizedandstandardizedsetof Collection Services paymentdata,greatlyenhancingoperationswhile reducingcostsandprovidingbetterdataanalytics TheReserveBanksalsoworkcloselywithTreasury’s capabilities.In2013,programexpensesforPPSwere FiscalServicetocollectfundsowedthefederalgov- $3.8million. ernment,includingvarioustaxes,feesforgoodsand services,anddelinquentdebts.In2013,ReserveBank Insupportof Treasury’sDNPinitiative,theReserve operatingexpensesrelatedtocollectionsservices BankscontinuedtoenhancetheDNPPortal,which increased8.0percentto$44.8million,largelyasa isasinglepointof accessthroughwhichfederal resultof theexpandedfunctionalityof thePay.gov agenciescanquerymultipledatasourcesbeforemak- application. ingfederalpayments.TheReserveBanksimplementedanumberof softwarereleases,established TheReserveBanksoperatePay.gov,anapplication advanceddataanalyticsfunctionalityforfraudanaly- thatallowsthepublictousetheInternettoauthorize sis,andaddedanumberof newagencyparticipants. andinitiatepaymentstofederalagencies.Duringthe In2013,expensesforDNPincreasedto$13.9mil- year,thePay.govprogramexpandedtoinclude109 lion,from$8.0millionin2012,largelybecauseof the newagencyprograms,anditprocessedmorethan needforadditionalstaffingtosupportapplication 116milliononlinepaymentstotaling$110billion,a development,maintenance,andnewdatasource 23percentanda17percentincrease,respectively, purchases. from2012.Increasesinoperationalsupportand

94 100thAnnualReport|2013 enhancedfunctionalityresultedinexpensesincreas- providefiscalagencyanddepositoryservicestoother ing33percent,to$15.5million. domesticandinternationalentities. TheReserveBanksalsobegansupportingTreasury’s ReserveBankoperatingexpensesforservicespronewelectroniccommerce(eCommerce)initiativeto videdtootherentitieswere$34.1millionin2013, expandwaysforagenciesandthepublictodobusi- comparedwith$34.6millionin2012.Book-entry nesswithTreasury—throughonlinebankingsolu- securitiesissuanceandmaintenanceactivities tions,mobiletechnologies,andotherpaymentmeth- accountforasignificantamountof theworkperods.In2013,initialprogramexpensesforeCom- formedforotherentities,withthemajoritypermercewere$156,000andwereincludedunder formedfortheFederalHomeLoanMortgageAsso- Pay.gov’sbudget. ciation,theFederalNationalMortgageAssociation, andtheGovernmentNationalMortgage TheReserveBanksalsocontinuedtosupportthe Association. government’scentralizeddelinquentdebt-collection program.Specifically,theBanksdevelopedand TheReserveBankscontinuetoprocesspostalmoney maintainedsoftwarethatfacilitatesthecollectionof ordersprimarilyinimageform,resultinginoperadelinquentdebtsowedtofederalagenciesandstates tionalimprovements,lowerstaffinglevels,andlower bymatchingfederalpaymentsagainstdelinquent coststotheU.S.PostalService.In2013,expensesfor debts,includingpast-duechildsupportpayments postalmoneyorderswere$3.4million,compared owedtocustodialparents. with$4.0millionin2012. Treasury Cash-Management Services Use of Federal Reserve Intraday Credit TheReserveBanksmaintainTreasury’soperating cashaccountandprovidecollateral-managementand TheBoard’sPaymentSystemRisk(PSR)policygovcollateral-monitoringservicesforthoseTreasuryproernstheuseof FederalReserveBankintradaycredit, gramsthathavecollateralrequirements.TheReserve alsoknownasdaylightoverdrafts.Adaylightover- BanksalsosupportTreasury’seffortstomodernize draftoccurswhenaninstitution’saccountactivity itsfinancialmanagementprocessesbydeveloping createsanegativebalanceintheinstitution’sFederal software,operatinghelpdesks,andmanagingproj- Reserveaccountatanytimeintheoperatingday. ectsonbehalf of theFiscalService. Daylightoverdraftsenableaninstitutiontosendpaymentsmorefreelythroughoutthedaythanif itwere In2013,ReserveBankoperatingexpensesrelatedto limitedstrictlybyitsavailableintradayfundsbalance. Treasurycash-managementservicestotaled ThePSRpolicyrecognizesexplicitlytheroleof the $66.5million,comparedwith$59.0millionin2012. centralbankinprovidingintradaybalancesand credittohealthyinstitutions;underthepolicy,the During2013,theReserveBankscontinuedtosup- ReserveBanksprovidecollateralizedintradaycredit portTreasury’seffortstoimprovecentralizedgovernatnocost. mentaccountingandreportingfunctions.Inparticular,theReserveBankscollaboratedwiththeFiscal Beforethe2007–09financialcrisis,overnightbal- Serviceonseveralongoingsoftwaredevelopment ancesweremuchloweranddaylightoverdraftssigefforts,suchastheCentralAccountingReporting nificantlyhigherthanlevelsobservedsincelate2008. System(CARS),whichisintendedtoprovideTreas- In2007,forexample,institutionsheld,onaverage, urywithamodernizedsystemforthecollectionand lessthan$20billioninovernightbalances,andtotal disseminationof financialmanagementandaccountaveragedaylightoverdraftswerearound$60billion. inginformationtransmittedfromandtofederalprogramagencies.In2013,expensesforCARSwere Incontrast,institutionsheldhistoricallyhighlevels $26.6million,comparedwith$22.1millionin2012. of overnightbalances—onaveragemorethan$2trillion—attheReserveBanksin2013,whiledaylight Services Provided to Other Entities overdraftsremainedhistoricallylow.AveragedaylightoverdraftsacrosstheSystemdeclinedto Whenpermittedbyfederalstatuteorwhenrequired $1.9billionin2013from$2.1billionin2012,a bytheSecretaryof theTreasury,theReserveBanks decreaseof about10percent(seefigure1).Theaver-

FederalReserveBanks 95 Figure1.Aggregatedaylightoverdrafts,2007–13 Billions of dollars 200 180 160 140 120 100 Peak daylight overdrafts 80 60 40 20 Average daylight overdrafts 0 2007 2008 2009 2010 2011 2012 2013 agelevelof peakdaylightoverdraftsfellfromalmost time,thenumberof employeeswithindepository $20billionin2012to$12billionin2013;theaverage institutionswhohavecredentialsthatestablishthem levelof peakdaylightoverdraftsin2013wasjusta astrustedusersincreased,reflectinginpartthe fractionof itslevelin2008(about7percent). expansionof electronicvalue-addedservicesprovided.Between2007and2013,thetotalnumberof Daylightoverdraftfeesarealsoathistoricallylow depositoryinstitutionsintheU.S.declined19.2perlevels.In2013,institutionspaidabout$40,000in cent.Thenumberof depositoryinstitutionswith daylightoverdraftfees;incontrast,feestotaledmore FedLineconnectionsdeclined8.8percent,whilethe than$50millionin2008.Thedecreaseinfeesis numberof trustedusersincreased10.5percentover largelyattributabletotheelevatedlevelof reserve thesameperiod. balancesthatbegantoaccumulateinlate2008andto theMarch2011policyrevisionthateliminatedfees TheReserveBankscontinuetomaintaintheirfocus forcollateralizeddaylightoverdrafts. onsecurityandresiliencybyupgradingcriticalelementsof theFedLinesolutions.Thenext-generation FedLine Access VPNsolutionisakeycomponentof thesecurity to Reserve Bank Services modelfortheFedLineAdvantageandFedLineCommandaccesssolutions,usedbyapproximately 6,000financialinstitutions.Thesolutionwascertified TheReserveBanks’FedLineaccesssolutionsprovide forgeneralavailabilityinJuly2013,andtheoverall depositoryinstitutionswithavarietyof alternatives migrationisscheduledforcompletionbySeptemforelectronicallyaccessingtheBanks’paymentand ber2015. informationservices.TheseFedLinechannelsare designedtomeettheindividualconnectivity,security, andcontingencyrequirementsof depositoryinstitu- TheBank’scredentialmanagementstrategy,known tioncustomers. asFedLineUserAuthenticationEnhancements, focusedoneliminatingtheuseof userIDsandpass- Forthepastfewyears,asaresultof thedeclining wordsforauthenticationtoanyFedLineenvironnumberof depositoryinstitutions,ReserveBank ment.TheprojectwascompletedinNovember2013, FedLineconnectionshavedecreased.Atthesame withmorethan30,000credentialsmigrated.

96 100thAnnualReport|2013 Information Technology review.12Thecombinedfinancialstatementsof the ReserveBanks—aswellasthefinancialstatements of eachof the12Banksandthoseof theconsoli- TheFederalReserveBankscontinuedtoimprovethe datedVIEs—areauditedannuallybyanindependent efficiency,effectiveness,andsecurityof information publicaccountantretainedbytheBoardof Govertechnology(IT)servicesandoperationsin2013. nors.13Inaddition,theReserveBanks,includingthe consolidatedVIEs,aresubjecttooversightbythe TheFederalReserveSystem’sNationalITreorga- Boardof Governors,whichperformsitsownreviews. nizedtoalignfunctionalresponsibilitiesandimprove serviceandsupport.Additionaleffortswereinitiated TheReserveBanksusethe1992frameworkestabtohelpSystemleadersarticulatebusinessneeds lishedbytheCommitteeof SponsoringOrganizathroughITroadmapsandtoidentifyadditional tionsof theTreadwayCommission(COSO)toassess opportunitiestoemploycommontechnologyservices theirinternalcontrolsoverfinancialreporting, andsolutions. includingthesafeguardingof assets.Withinthis framework,themanagementof eachReserveBank MajormultiyearprogramstoconsolidatetheFederal annuallyprovidesanassertionlettertoitsboardof Reserve’sIToperationsandnetworkingservicesare directorsthatconfirmsadherencetoCOSOstannearingcompletionandareexpectedtoimprovethe dards.Similarly,eachconsolidatedVIEannuallyprooverallefficiencyandqualityof businessoperations. videsanassertionlettertotheboardof directorsof Twoprojectswithintheprogramsarefinished,and theNewYorkReserveBank. thecentralizationof theremainingenterpriseIT functionswillbecompletebytheendof 2014. TheFederalReserveBoardengagedDeloitte&ToucheLLP(D&T)toauditthe2013combinedand Additionally,NationalITcontinuedtoimprovethe individualfinancialstatementsof theReserveBanks ReserveBanks’informationsecurityposture,andthe andthoseof theconsolidatedVIEs.14 chief informationsecurityofficer(CISO)continued effortstoensureSystempreparednessforpotential In2013,D&Talsoconductedauditsof theinternal informationsecurity(IS)riskarecoordinatedtomiticontrolsassociatedwithfinancialreportingforeach gateadvancedpersistentthreatsamongtheFederal of theReserveBanks.FeesforD&T’sservices ReserveBanks.11Underthedirectionof theCISO, totaled$7million,of which$1millionwasforthe managementof theFederalReserve’sISriskcontinauditsof theconsolidatedVIEs.Toensureauditor uestomature,withprioritygiventoISstrategy,perindependence,theBoardrequiresthatD&Tbeindeformanceobjectives,andmeasuresof successfor pendentinallmattersrelatingtotheaudits.Specifi- NationalIT’sISoperations.TheFederalReserve cally,D&TmaynotperformservicesfortheReserve Systemcontinueditsimplementationof anewIS Banksorothersthatwouldplaceitinapositionof framework,knownasSystemAssurancefortheFedauditingitsownwork,makingmanagementdecieralReserve,whichisbasedonguidancefromthe sionsonbehalf of theReserveBanks,orinanyother NationalInstituteof StandardsandTechnologyand wayimpairingitsauditindependence.In2013,the adaptedtotheFederalReserve’senvironment. BanksdidnotengageD&Tforanynon-audit services.15 Examinations of the Federal Reserve Banks 12 TheNewYorkReserveBankisconsideredtobethecontrolling financialinterestholderofeachoftheconsolidatedVIEs. TheReserveBanksandseveralconsolidatedvariable 13 See“FederalReserveBanksCombinedFinancialStatements”in section11ofthisreport.EachVIEreimbursestheBoardof interestentities(VIEs)operatedbytheFederal Governors—fromtheentity’savailablenetassets—forthefees ReserveSysteminresponsetothe2007–09financial relatedtotheauditofitsfinancialstatements. crisisaresubjecttoseverallevelsof auditand 14 Inaddition,D&TauditedtheOfficeofEmployeeBenefitsof theFederalReserveSystem(OEB),theRetirementPlanfor EmployeesoftheFederalReserveSystem(SystemPlan),and theThriftPlanforEmployeesoftheFederalReserveSystem (ThriftPlan).TheSystemPlanandtheThriftPlanprovide 11 NationalITsuppliesnationalinfrastructureandbusinessline retirementbenefitstoemployeesoftheBoard,theFederal technologyservicestotheFederalReserveBanksandprovides ReserveBanks,theOEB,andtheConsumerFinancialProtecguidanceontheSystem’sinformationtechnologyarchitecture tionBureau. andbusinessuseoftechnology. 15 OneBankleasesofficespacetoD&T.

FederalReserveBanks 97 TheBoard’sreviewsof theReserveBanksincludea alizedlossesonforeigncurrencydenominatedassets widerangeof off-siteandon-siteoversightactivities, revaluedtoreflectcurrentmarketexchangerates; conductedprimarilybyitsDivisionof ReserveBank $181millioninnetincomeassociatedwithconsoli- OperationsandPaymentSystems.Divisionpersonnel datedVIEs;and$51millioninrealizedgainsonfedmonitoronanongoingbasistheactivitiesof each eralagencyandgovernment-sponsoredenterprise ReserveBankandconsolidatedVIE,FRIT,andthe mortgage-backedsecurities(GSEMBS).Dividends Officeof EmployeeBenefitsof theFederalReserve paidtomemberbanks,setat6percentof paid-in System(OEB),andtheyconductacomprehensive capitalbysection7(1)of theFederalReserveAct, on-sitereviewof eachReserveBank,FRIT,and totaled$1,650million. OEBatleastonceeverythreeyears. ComprehensivenetincomebeforeinterestonFederal Thecomprehensiveon-sitereviewsincludeanassess- ReservenotesexpenseremittedtoTreasurytotaled mentof theinternalauditfunction’seffectiveness $81,430millionin2013(netincomeof $79,141milanditsconformancetotheInstituteof Internal lion,increasedbyothercomprehensivegainof Auditors’(IIA)InternationalStandardsforthePro- $2,289million).EarningsremittancestoTreasury fessionalPracticeof InternalAuditing,applicable totaled$79,633millionin2013.Theremittances policiesandguidance,andtheIIA’scodeof ethics. equalcomprehensiveincomeafterthedeductionof dividendspaidandtheamountnecessarytoequate TheBoardalsoreviewstheSystemOpenMarket theReserveBanks’surplustopaid-incapital. Account(SOMA)andforeigncurrencyholdingsto (1)determinewhethertheNewYorkReserveBank, Section10of thisreport(StatisticalTables)provides whileconductingtherelatedtransactions,complies moredetailedinformationontheReserveBanksand withthepoliciesestablishedbytheFederalOpen theVIEs.Table9isastatementof conditionforeach MarketCommittee(FOMC)and(2)assessSOMA- ReserveBank;table10detailstheincomeand relatedITprojectmanagementandapplicationdevel- expensesof eachReserveBankfor2013;table11 opment,vendormanagement,andsystemresiliency showsacondensedstatementforeachReserveBank andcontingencyplans.Inaddition,D&Tauditsthe fortheyears1914through2013;andtable13gives year-endscheduleof participatedassetandliability thenumberandannualsalariesof officersand accountsandtherelatedscheduleof participated employeesforeachReserveBank.Adetailedaccount incomeaccounts.TheFOMCisprovidedwiththe of theassessmentsandexpendituresof theBoardof externalauditreportsandareportontheBoard GovernorsappearsintheBoardof Governors review. FinancialStatements(seesection11,“Federal ReserveSystemAudits”). Income and Expenses Table4summarizestheincome,expenses,anddistri- SOMA Holdings and Loans butionsof netearningsof theReserveBanksfor TheReserveBanks’averagenetdailyholdingsof 2013and2012.Incomein2013was$91,150million, securitiesandloansduring2013amountedto comparedwith$81,586millionin2012. $3,341,859million,anincreaseof $625,883million from2012(seetable5). Expensestotaled$10,980million:$5,223millionin interestpaidtodepositoryinstitutionsonreservebalancesandtermdeposits;$3,765millioninoperating SOMA Securities Holdings expenses;$617millioninnetperiodicpension expense,$60millionininterestexpenseonsecurities Theaveragedailyholdingsof Treasurysecurities soldunderagreementstorepurchase;$580millionin increasedby$318,726million,toanaveragedaily assessmentsforBoardof Governorsexpenditure; amountof $2,092,769million.Theaveragedaily $702millionfornewcurrencycosts;$563millionfor holdingsof GSEdebtsecuritiesdecreasedby ConsumerFinancialProtectionBureaucosts;the $24,376million,toanaveragedailyamountof expenseswerereducedby$530millioninreimburse- $69,872million.Theaveragedailyholdingsof fedmentsforservicesprovidedtogovernmentagencies. eralagencyandGSEMBSincreasedby Netdeductionsfromcurrentnetincometotaled $376,991million,toanaveragedailyamountof $1,029million,whichincludes$1,257millioninunre- $1,249,810million.

98 100thAnnualReport|2013 Table4.Income,expenses,anddistributionofnetearningsoftheFederalReserveBanks,2013and2012 Millionsofdollars Item 2013 20121 Currentincome 91,150 81,586 Loaninterestincome 6 81 SOMAinterestincome 90,503 80,860 Othercurrentincome2 641 645 Netexpenses 9,135 7,798 Operatingexpenses 3,765 3,646 Reimbursements -530 -506 Netperiodicpensionexpense 617 641 Interestpaidondepositoryinstitutionsdepositsandtermdeposits 5,223 3,875 Interestexpenseonsecuritiessoldunderagreementstorepurchase 60 142 Currentnetincome 82,015 73,788 Netadditionsto(deductionsfrom)currentnetincome -1,029 18,380 Treasurysecuritiesgains,net 0 13,255 Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities 51 241 Foreigncurrencytranslationlosses -1,257 -1,116 Netincome(loss)fromconsolidatedVIEs 181 6,038 Otherdeductions3 -4 -38 AssessmentsbytheBoardofGovernors 1,845 1,599 ForBoardexpenditures 580 490 Forcurrencycosts 702 722 ForConsumerFinancialProtectionBureaucosts4 563 385 ForOfficeofFinancialResearchcosts4 0 2 NetincomebeforeprovidingforremittancestoTreasury 79,141 90,569 EarningsremittancestoTreasury 79,633 88,418 Netincome(loss) -492 2,151 Othercomprehensivegain(loss) 2,289 -53 Comprehensiveincome 1,797 2,098 Totaldistributionofnetincome 81,430 90,516 Dividendsoncapitalstock 1,650 1,637 Transfertosurplusandchangeinaccumulatedothercomprehensiveincome 147 461 EarningsremittancestoTreasury 79,633 88,418 1 Certainamountsrelatingto2012havebeenreclassifiedtoconformtothecurrent-yearpresentation. 2 Includesincomefrompricedservices,compensationreceivedforservicesprovided,andsecuritieslendingfees. 3 IncludesunrealizedlossonTermAsset-BackedSecuritiesLoanFacilityloans. 4 TheBoardofGovernorsassessestheReserveBankstofundtheoperationsoftheConsumerFinancialProtectionBureauand,foratwo-yearperiodbeginningJuly21,2010, theOfficeofFinancialResearch. Theincreasesinaveragedailyholdingsof Treasury $3,361millionin2013and$38,737millionin2012. securitiesandfederalagencyandGSEMBSaredue Theaveragedailybalanceof securitiessoldunder tothepurchasesthroughalarge-scaleassetpurchase agreementstorepurchasewas$95,519million,an programandreinvestmentof principalpayments increaseof $3,734millionfrom2012. fromotherSOMAholdingsinfederalagencyand GSEMBS.Theaveragedailyholdingsof GSEdebt Theaverageratesof interestearnedontheReserve securitiesdecreasedasaresultof maturities. Banks’holdingsof Treasurysecuritiesdecreasedto 2.47percentandtheaverageratesonGSEdebtsecu- Therewerenosignificantholdingsof securitiespur- ritiesincreasedto3.10percentin2013.Theaverage chasedunderagreementstoresellin2013or2012. rateof interestearnedonfederalagencyandGSE Averagedailyholdingsof foreigncurrencydenomi- MBSdecreasedto2.93percentin2013.Theaverage natedassetsin2013were$23,941million,compared interestratesforsecuritiessoldunderagreementsto with$25,488millionin2012.Theaveragedailybal- repurchasedecreasedto0.06percentin2013.The anceof centralbankliquidityswapdrawingswas averagerateof interestearnedonforeigncurrency

FederalReserveBanks 99 Table5.SystemOpenMarketAccount(SOMA)holdingsandloansoftheFederalReserveBanks,2013and2012 Millionsofdollars,exceptasnoted Averagedailyassets(+)/liabilities(–) Currentincome(+)/expense(–) Averageinterestrate(percent) Item 2013 2012 2013 2012 2013 2012 U.S.Treasurysecurities1 2,092,769 1,774,043 51,591 46,416 2.47 2.62 Government-sponsoredenterprisedebtsecurities1 69,872 94,248 2,166 2,626 3.10 2.79 Federalagencyandgovernment-sponsoredenterprise mortgage-backedsecurities2 1,249,810 872,819 36,628 31,429 2.93 3.60 Foreigncurrencydenominatedassets3 23,941 25,488 96 139 0.40 0.55 Centralbankliquidityswaps4 3,361 38,737 22 241 0.65 0.62 OtherSOMAinvestments5 63 66 * 9 0.03 … TotalSOMAassets 3,439,816 2,805,401 90,503 80,860 2.63 2.88 Securitiessoldunderagreementstorepurchase -95,519 -91,785 -60 -142 0.06 0.15 OtherSOMAliabilities6 -2,781 -2,209 … … … … TotalSOMAliabilities -98,300 -93,994 -60 -142 0.06 0.15 TotalSOMAholdings 3,341,516 2,711,407 90,443 80,718 2.71 2.98 Primary,secondary,andseasonalcredit 79 72 * * 0.25 0.38 Totalloanstodepositoryinstitutions 79 72 * * 0.25 0.38 TermAsset-BackedSecuritiesLoanFacility(TALF)7 264 4,497 6 80 2.27 1.78 Totalloanstoothers 264 4,497 6 80 2.27 1.78 Totalloans 343 4,569 6 80 1.75 1.75 TotalSOMAholdingandloans 3,341,859 2,715,976 90,449 80,798 2.71 2.97 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 Representstheremainingprincipalbalance. * Lessthan$500thousand. …Notapplicable. denominatedassetsdecreasedto0.40percentwhile ReserveAct,involvedcreatingandlendingtothe theaveragerateof interestearnedoncentralbank consolidatedVIEs(seetable6).Consistentwithgenliquidityswapsincreasedto0.65percentin2013. erallyacceptedaccountingprinciples,theassetsand liabilitiesof theseVIEshavebeenconsolidatedwith Lending theassetsandliabilitiesof theNewYorkReserve Bankinthepreparationof thestatementsof condi- In2013,theaveragedailyprimary,secondary,and tionincludedinthisreport.Theproceedsatthe seasonalcreditextendedbytheReserveBanksto maturityortheliquidationof theconsolidatedVIEs’ depositoryinstitutionsincreasedby$7million,to assetsareusedtorepaytheloansextendedbythe $79million.Theaveragerateof interestearnedon NewYorkReserveBank. primary,secondary,andseasonalcreditdecreasedto 0.25percentin2013,from0.38percentin2012.The averagedailybalanceof TermAsset-BackedSecuri- Netportfolioassetsof theconsolidatedVIEs tiesLoanFacility(TALF)loansin2013was decreasedfrom$2,750millionin2012to $264million,adecreaseof $4,233millionfrom2012. $1,926millionin2013.Thesaleof portfolioassets Theaveragerateof interestearnedonTALFloansin heldbyMaidenLaneLLC,MaidenLaneIILLC, 2013was2.27percent. andMaidenLaneIIILLCduring2012enabledthe repaymentinfull,includingaccruedinterest, Investments of the Consolidated VIEs of loansextendedtothoseVIEsbytheFederal ReserveBankof NewYork.Fundsadvancedto Certainlendingfacilitiesestablishedduring2008and thoseVIEsbyotherbeneficialinterestswerealso 2009,underauthorityof section13(3)of theFederal repaidinfull.

100 100thAnnualReport|2013 Table6.Keyfinancialdataforconsolidatedvariableinterestentities(VIEs),2013and2012 Millionsofdollars TALFLLC MaidenLaneLLC MaidenLaneIILLC MaidenLaneIIILLC TotalVIEs Item 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 NetportfolioassetsoftheconsolidatedVIEsandthenetpositionoftheNewYorkReserveBank(FRBNY)andsubordinatedinterestholders Netportfolioassets1 109 856 1,732 1,811 63 61 22 22 1,926 2,750 LiabilitiesofconsolidatedVIEs 0 0 -157 -415 0 0 0 0 -157 -415 Netportfolioassetsavailable2 109 856 1,575 1,396 63 61 22 22 1,769 2,335 Loansextendedtotheconsolidated VIEsbytheFRBNY3 0 0 0 0 0 0 0 0 0 0 Otherbeneficialinterests3,4 0 113 0 0 0 0 0 0 0 113 Totalloansandotherbeneficial interests 0 113 0 0 0 0 0 0 0 113 Cumulativechangeinnetassetssincetheinceptionoftheprogram5 AllocatedtoFRBNY 11 71 1,575 1,396 53 51 15 15 1,654 1,533 Allocatedtootherbeneficialinterests 98 672 0 0 10 10 7 7 115 689 Cumulativechangeinnetassets 109 743 1,575 1,396 63 61 22 22 1,769 2,222 SummaryofconsolidatedVIEnetincome,includingareconciliationoftotalconsolidatedVIEnetincometotheconsolidatedVIEnetincome Portfoliointerestincome6 0 1 2 34 4 52 * 1,023 6 1,110 Interestexpenseonloansextendedby FRBNY7 0 0 0 -10 0 -11 0 -46 0 -67 Interestexpense–other 0 -3 0 -45 0 -7 0 -98 0 -153 Portfolioholdingsgains(losses) -573 0 183 552 0 1,393 0 5,506 -390 7,451 Professionalfees -1 -1 -6 -12 -1 -1 * -11 -8 -25 Netincome(loss)ofconsolidatedVIEs -574 -3 179 519 3 1,426 * 6,374 -392 8,316 Less:Netincome(loss)allocatedto otherbeneficialinterests 574 4 0 0 -1 238 * 2,103 573 2,345 Netincome(loss)allocatedtoFRBNY 0 -7 179 519 2 1,188 * 4,271 181 5,971 Add:Interestexpenseonloans extendedbyFRBNY,eliminatedin consolidation7 0 0 0 10 0 11 0 46 0 67 Netincome(loss)recordedbyFRBNY8 0 -7 179 529 2 1,199 0 4,317 181 6,038 BalancesofloansextendedtotheconsolidatedVIEsbytheFRBNY Balanceatbeginningoftheyear 0 0 0 4,859 0 6,792 0 9,826 0 21,477 Accruedandcapitalizedinterest 0 0 0 10 0 11 0 46 0 67 Repayments 0 0 0 -4,869 0 -6,803 0 -9,872 0 -21,544 Balanceatendoftheyear 0 0 0 0 0 0 0 0 0 0 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$3milliononTALFloansduringtheyearendedDecember31,2013(interestincomeof$6millionanda lossonthevaluationofloansof$3million).FRBNYearned$46milliononTALFloansduringtheyearendedDecember31,2012(interestincomeof$80millionandlosson thevaluationofloansof$34million). * Lessthan$500thousand. Federal Reserve Bank Premises vationprogramsattheBoston,NewYork,Richmond,St.Louis,andSanFranciscoReserveBanks’ SeveralReserveBankstookactionin2013tomain- headquartersbuildingscontinued.TheNewYork tainandrenovatetheirfacilities.Themultiyearreno- ReserveBankbegananticipatedrenovationstothe

FederalReserveBanks 101 33MaidenLanebuilding,andtheChicagoFederal Branchandin2014willpursuethesaleof thebuild- ReserveBankbeganconstructionof security ingthatpreviouslyhousedtheBranch’soperations. enhancementstoitsbuilding.TheClevelandand AtlantaReserveBanksdisposedof thebuildingsfor- Formoreinformationontheacquisitioncostsand merlyusedtohousetheirPittsburghandNashville netbookvalueof theFederalReserveBanksand Branches,respectively.TheDallasReserveBank Branches,seetable14inthe“StatisticalTables”secsecuredleasedofficespaceforitsSanAntonio tionof thisreport.

102 100thAnnualReport|2013 Pro Forma Financial Statements for Federal Reserve Priced Services Table7:ProformabalancesheetforFederalReservepricedservices,December31,2013and2012 Millionsofdollars Item 2013 2012 Short-termassets(Note2) Imputedreserverequirementsonclearingbalances 913.3 510.9 Receivables 36.2 35.6 Materialsandsupplies 0.9 0.9 Prepaidexpenses 6.6 9.4 Itemsinprocessofcollection 165.3 216.0 Totalshort-termassets 1,122.5 772.8 Long-termassets(Note3) Premises 144.2 171.2 Furnitureandequipment 32.5 33.8 Leases,leaseholdimprovements,andlong-termprepayments 95.0 78.6 Prepaidpensioncosts 59.2 - PrepaidFDICasset - 20.3 Deferredtaxasset 291.8 287.5 Totallong-termassets 622.8 591.4 Totalassets 1,745.3 1,364.1 Short-termliabilities Deferred-availabilityitems 1,078.6 703.6 Short-termdebt 20.4 - Short-termpayables 23.4 35.4 Totalshort-termliabilities 1,122.5 738.9 Long-termliabilities Long-termdebt 129.4 - Accruedbenefitcosts 406.1 549.8 Totallong-termliabilities 535.5 549.8 Totalliabilities 1,658.0 1,288.7 Equity(includingaccumulatedothercomprehensivelossof$466.2million and$643.0millionatDecember31,2013and2012,respectively) 87.3 75.4 Totalliabilitiesandequity(Note4) 1,745.3 1,364.1 Note:Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements.

FederalReserveBanks 103 Table8:ProformaincomestatementforFederalReservepricedservices,2013and2012 Millionsofdollars Item 2013 2012 Revenuefromservicesprovidedtodepositoryinstitutions(Note5) 441.2 449.3 Operatingexpenses(Note6) 385.5 406.1 Incomefromoperations 55.7 43.2 Imputedcosts(Note7) Interestonfloat -0.7 -1.1 Interestondebt 0.1 – Salestaxes 4.4 4.6 FDICInsurance 0.0 3.8 1.4 4.9 Incomefromoperationsafterimputedcosts 51.9 38.3 Otherincomeandexpenses(Note8) Investmentincome 0.1 1.0 Earningscredits 0.0 0.1 -0.5 0.5 Incomebeforeincometaxes 52.0 38.8 Imputedincometaxes(Note7) 20.0 12.0 Netincome 32.0 26.8 Memo:Targetedreturnonequity(Note7) 4.2 8.9 Note:Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements. Table9:ProformaincomestatementforFederalReservepricedservices,byservice,2013 Millionsofdollars Commercialcheck Item Total CommercialACH Fedwirefunds Fedwiresecurities collection Revenuefromservices(Note5) 441.2 198.8 118.8 96.7 26.8 Operatingexpenses(Note6)1 385.5 151.8 113.5 96.2 24.1 Incomefromoperations 55.7 47.0 5.4 0.5 2.8 Imputedcosts(Note7) 3.8 1.2 1.2 1.1 0.3 Incomefromoperationsafterimputedcosts 51.9 45.8 4.2 -0.6 2.5 Otherincomeandexpenses,net(Note8) 0.1 0.1 0.0 0.0 0.0 Incomebeforeincometaxes 52.0 45.8 4.2 -0.5 2.5 Imputedincometaxes(Note7) 20.0 17.6 1.6 -0.2 1.0 Netincome 32.0 28.2 2.6 -0.3 1.5 Memo:Targetedreturnonequity(Note7) 4.2 1.6 1.2 1.0 0.3 Costrecovery(percent)(Note9) 106.7 115.4 101.2 98.6 105.0 Note:Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements. 1 Operatingexpensesincludepensioncosts,Boardexpenses,andreimbursementsforcertainnonpricedservices.

104 100thAnnualReport|2013 Notes to Pro Forma Financial Statements for Priced Services (1)DiscontinuationofClearingBalanceProgram EffectiveJuly11,2012,theBoarddiscontinuedthecontractualclearingbalance programinconnectionwithitssimplificationof reserverequirements.Clearing balanceswereaprimarycomponentof theproformabalancesheetusedtocomputetheimputedcostsinthePSAF.Asaresultof theBoarddiscontinuingthe clearingbalanceprogram,ReserveBankpricedservicesnolongerimputerelated expensesorinvestmentincome. (2)Short-TermAssets Beforethediscontinuationof theclearingbalanceprogramin2012,aportionof theclearingbalanceswasusedtofinanceshort-andlong-termassets.Theremainderof theseclearingbalancesandthedepositbalancesarisingfromfloatwere assumedtobeinvestedinaportfolioof investments,shownasimputedinvestments.Inaddition,pricedservicesimputedareserverequirementonclearingbalances,whicharecomparabletocompensatingbalancesheldatcorrespondent banksbyrespondentinstitutions,heldatReserveBanksbydepositoryinstitutions. TheBoard’sreserverequirementimposedonrespondentbalancescouldbeheldas vaultcashorasbalancesmaintained;thus,aportionof pricedservicesclearing balanceswasshownasrequiredreservesontheassetsideof thebalancesheet. Therewerenoclearingbalancesorrelatedreserverequirementbalanceson December31,2012(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.Thetaxrateassociatedwiththe deferredtaxassetwas38.5percentand30.9percentfor2013and2012, respectively. Long-termassetsalsoconsistof anestimateof theassetsof theBoardof Governorsusedinthedevelopmentof pricedservices. (4)LiabilitiesandEquity Underthematched-bookcapitalstructureforassets,short-termassetsare financedwithshort-termpayablesandimputedshort-termdebt,if needed.Longtermassetsarefinancedwithlong-termliabilities,imputedlong-termdebt,and

FederalReserveBanks 105 imputedequity,if needed.Equityisimputedat5percentof totalassetsand 10percentof risk-weightedassetsfor2013and2012,respectively,tosatisfythe FDICrequirementsforawell-capitalizedinstitution. EffectiveDecember31,2006,theReserveBanksimplementedtheFinancial AccountingStandardBoard’s(FASB)Statementof FinancialAccountingStandards(SFAS)No.158,Employers’AccountingforDefinedBenefitPensionand OtherPostretirementPlans(codifiedinFASBAccountingStandardsCodification (ASC)Topic715(ASC715),Compensation–RetirementBenefits),whichrequires anemployertorecordthefundedstatusof itspensionandotherbenefitplanson itsbalancesheet.Toreflectthefundedstatusof itsbenefitplans,theReserve Banksrecognizedthedeferreditemsrelatedtotheseplans,whichincludepriorservicecostsandactuarialgainsorlosses,onthebalancesheet.Thisresultedinan adjustmenttothepensionandotherbenefitplansrelatedtopricedservicesand therecognitionof anassociateddeferredtaxassetwithanoffsettingadjustment, netof tax,toaccumulatedothercomprehensiveincome(AOCI),whichisincluded inequity. TheReserveBankpricedservicesrecognizedapensionassetof $59.2millionand apensionliability,whichisacomponentof accruedbenefitcosts,of $103.6millionin2013and2012,respectively.Thechangeinthefundedstatusof thepension andotherbenefitplansresultedinacorrespondingincreaseinaccumulatedother comprehensivelossof $176.8millionin2013. Themethodforestimatingthepricedservicesportionof theSFAS158/ASC715 adjustmentstothepensionandotherbenefitliabilities,AOCI,anddeferredtax assetwasrefinedin2012andincorporatesAOCIcomponentchangesfromyearto-yearsincetheadoptionof SFAS158in2006.Thisestimationchangedoesnot directlyaffecttheincomestatementorcostrecovery. (5)Revenue Revenuerepresentsfeeschargedtodepositoryinstitutionsforpricedservicesand isrealizedfromeachinstitutionthroughdirectchargestoaninstitution’saccount or,untiltheeliminationof theclearingbalanceprogram,chargesagainstitsaccumulatedearningscredits(seenote7). Afterallaccumulatedearningscreditsexpiredin2013,institutionscouldnolonger useearningscreditstopayforpricedservices. (6)OperatingExpenses Operatingexpensesconsistof thedirect,indirect,andothergeneraladministrative expensesof theReserveBanksforpricedservicesandtheexpensesof theBoardof Governorsrelatedtothedevelopmentof pricedservices.Boardexpenseswere $4.0millionin2013and$4.1millionin2012. InaccordancewithSFASNo.87,Employers’AccountingforPensions(codifiedin ASC715),theReserveBankpricedservicesrecognizedqualifiedpension-plan operatingexpensesof $45.4millionin2013and$49.1millionin2012.Operating expensesalsoincludethenonqualifiedpensioncreditandexpenseof $(0.7)million in2013and$0.3millionin2012.Theimplementationof SFASNo.158(ASC715) doesnotchangethesystematicapproachrequiredbygenerallyacceptedaccountingprinciplestorecognizetheexpensesassociatedwiththeReserveBanks’benefit plansintheincomestatement.Asaresult,theseexpensesdonotincludeamounts

106 100thAnnualReport|2013 relatedtochangesinthefundedstatusof theReserveBanks’benefitplans,which arereflectedinAOCI(seenote4). Theincomestatementbyservicereflectsrevenue,operatingexpenses,imputed costs,otherincomeandexpenses,andcostrecovery. (7)ImputedCosts Imputedcostsconsistof incometaxes,returnonequity,interestondebt,sales taxes,interestonfloat,and,in2012,anFDICassessment.Manyimputedcostsare derivedfromthePSAFmodel.The2013costof short-termdebtimputedinthe PSAFmodelisbasedonnonfinancialcommercialpaperrates;thecostof imputed long-termdebtisbasedonAaaandBaaMoody’sbondyields;andtheeffective taxrateisderivedfromU.S.publiclytradedfirmdata,whichserveastheproxyfor thefinancialdataof arepresentativeprivate-sectorfirm.Theafter-taxrateof returnonequityisbasedonthereturnsof theequitymarketasawhole.16 Interestisimputedonthedebtassumednecessarytofinancepriced-serviceassets. Theseimputedcostsareallocatedamongpricedservicesaccordingtotheratioof operatingexpenses,lessshippingexpenses,foreachservicetothetotalexpenses, lessthetotalshippingexpenses,forallservices. Interestonfloatisderivedfromthevalueof floattoberecoveredforthecheck andACHservices,FedwireFundsService,andFedwireSecuritiesServicesthrough per-itemfeesduringtheperiod. Floatincomeorcostisbasedontheactualfloatincurredforeachpricedservice. Thefollowingshowsthedailyaveragerecoveryof actualfloatbytheReserve Banksfor2013,inmillionsof dollars: Totalfloat (630.2) Unrecoveredfloat 7.1 Floatsubjecttorecoverythroughperitemfees (637.3) Unrecoveredfloatincludesfloatgeneratedbyservicestogovernmentagenciesand byothercentralbankservices.Floatthatiscreatedbyaccountadjustmentsdueto transactionerrorsandtheobservanceof nonstandardholidaysbysomedepositoryinstitutionswasrecoveredfromthedepositoryinstitutionsthroughcharging institutionsdirectly.Floatsubjecttorecoveryisvaluedatthefederalfundsrate. CertainACHfundingrequirementsandcheckproductsgeneratecreditfloat;this floathasbeensubtractedfromthecostbasesubjecttorecoveryin2013and2012. (8)OtherIncomeandExpenses Beforethecontractualclearingbalanceprogramwasdiscontinued,otherincome andexpensesconsistedof incomeontheimputedinvestmentof therequiredportionof theclearingbalances,earningattheaveragecoupon-equivalentyieldon three-monthTreasurybills,andincomefromexpiredearningscredits.Earnings creditsweregrantedtodepositoryinstitutionsontheirclearingbalancesbasedon adiscountedaveragecoupon-equivalentyieldonthree-monthTreasurybills,and thecreditsexpired52weeksaftertheyweregranted.For2013,otherincomeand 16 DetailsregardingthePSAFmethodologychangecanbefoundatwww.gpo.gov/fdsys/pkg/FR-2012- 11-08/pdf/2012-26918.pdf.

FederalReserveBanks 107 expensesconsistsexclusivelyof incomefromexpiredearningscredits.Expired earningscreditsin2013wereimmaterial. (9)CostRecovery Annualcostrecoveryistheratioof revenue,includingotherincome,tothesumof operatingexpenses,imputedcosts,imputedincometaxes,andafter-taxtargeted returnonequity.

109 6 Other Federal Reserve Operations Regulatory Developments: certainsecurities,derivatives,commodityfutures,and optionsontheseinstrumentsfortheirownaccount. Dodd-Frank Act Implementation Thisprohibitionissubjecttoexemptionsforunderwriting,marketmaking-relatedactivities,risk- Throughout2013,theFederalReservecontinuedto mitigatinghedging,activitiesof foreignbankingentiworkdiligentlytoimplementtheDodd-FrankWall tiessolelyoutsidetheUnitedStates,andcertain StreetReformandConsumerProtectionActof 2010 otheractivities. (Dodd-FrankAct)(Pub.L.No.111-203),whichgives theFederalReserveimportantresponsibilitiesto Thefinalrulesalsoprohibitbankingentitiesfrom issuerulesandsupervisefinancialcompaniesto acquiringorretaininganownershipinterestin,or enhancefinancialstabilityandpreservethesafety havingcertainrelationshipswith,ahedgefundor andsoundnessof thebankingsystem.TheBoard privateequityfund(coveredfund),subjecttoexempalsocontinuedtoimplementvariousinternational tionsforinvestmentsmadeinconnectionwithorgaframeworksdevelopedundertheauspicesof the nizingandofferingacoveredfund,includingmaking BaselCommitteeonBankingSupervision(BCBS). andretainingdeminimisinvestmentsinacovered fund,certaininvestmentsmadeonbehalf of custom- TheBoardhasissuedavarietyof finalrulestoimple- ers,activitiesof foreignbankingentitiessolelyoutmenttheprovisionsof theDodd-FrankActand sidetheUnitedStates,andcertainotheractivities. BCBSinternationalframeworksthataredesignedto promotethesafetyandsoundnessof thebanking Thefinalrulesrequireabankingentitytoestablisha systemandenhanceconsumerfinancialprotection. complianceprogramdesignedtohelpensureand Thefollowingisasummaryof thekeyregulatoryini- monitorcompliancewiththeprohibitionsand tiativesthatwerecompletedduring2013. restrictionsof section619andthefinalrules.The compliancerequirementsvarybasedonthesizeof The Volcker Rule: Prohibitions against thebankingentityandthesize,scope,andcomplex- Proprietary Trading and Other Activities ityof activitiesconducted.Thefinalrulerequires bankingentitieswithtotalassetsgreaterthan$10bil- Section619of theDodd-FrankActgenerallyprohib- lionandlessthan$50billiontohaveacompliance itsinsureddepositoryinstitutions(IDIs)andtheir programthatincludessixpillars(includingwritten affiliates(collectively,bankingentities)fromengag- policiesandprocedures,internalcontrols,manageinginproprietarytradingorfrominvestingin,spon- mentframeworkandaccountability,independent soring,orhavingcertainrelationshipswithahedge testingandaudits,training,andrecordkeeping). fundorprivateequityfund.Theseprohibitionsand Bankingentitieswithsignificanttradingoperations otherprovisionsof section619arecommonlyknown andbankingentitieswithtotalassetsof $50billion asthe“Volckerrule.” ormorewillberequiredtoestablishadetailedcomplianceprogram,andtheirchief executiveofficers OnDecember10,2013,theBoard—jointlywiththe willberequiredtoattestthattheprogramisreason- CommodityFuturesTradingCommission(CFTC), ablydesignedtoachievecompliancewiththefinal theFederalDepositInsuranceCorporation(FDIC), rule. theOfficeof theComptrollerof theCurrency (OCC),andtheSecuritiesandExchangeCommis- Thefinalrulesreducetheburdenonsmaller,lesssion(SEC)—issuedfinalrulestoimplementsec- complexinstitutionsbylimitingtheircompliance tion619.Thefinalrulesprohibitbankingentities requirements.Forabankingentitythathastotal fromengaginginshort-termproprietarytradingof assetsof $10billionorlessthatengagesinsome

110 100thAnnualReport|2013 activityregulatedunderthefinalrule,thecompliance Inaddition,foradvancedapproachesbankingorgaprogrammaybelimitedtoappropriatereferencesin nizations(generally,thelargest,mostcomplexbankexistingcompliancepolicies,appropriatetothe ingorganizations),thefinalruleincludesanew3peractivities,size,scopeandcomplexityof thebanking centminimumsupplementaryleverageratiobasedon entity.Abankingentitythatdoesnotengageincov- theBCBSinternationalleveragestandardthattakes eredactivitiesorinvestments(otherthantradingin intoaccountoff-balance-sheetexposures.Therule certaingovernmentobligations)willnotneedto alsointroducesacountercyclicalcapitalbufferappliestablishacomplianceprogram. cabletoadvancedapproachesbankingorganizations toaugmentthecapitalconservationbufferduring TheDodd-FrankActdirectstheBoardtoadopt periodsof excessivecreditgrowth. rulesgoverningtheconformanceperiodforsection619andrequiresbankingentitiestoconform Thefinalruleenhancesthequalityof bankingorgatheiractivitiesandinvestmentsbyJuly21,2014, nizations’regulatorycapitalthroughtheestablishunlessextendedbytheBoard.OnDecember10, mentof standardsbasedoncommonequitytier1 2013,theBoardextendedtheconformanceperiod capital—themostloss-absorbingformof capital— untilJuly21,2015,toensureeffectivecompliance andtheimplementationof stricteligibilitycriteria withtherules. forregulatorycapitalinstruments.Thefinalrulealso improvesthemethodologyforcalculatingrisk- Integrated Regulatory Capital Framework weightedassetstoenhancerisksensitivity. OnJuly2,2013,theBoardadoptedafinalrule Thefinalrulealsoestablishestransitionperiods (RegulationQ)thatrevisesitsrisk-basedandlever- designedtoprovidesufficienttimeforbankingorgaagecapitalrequirementstoimplementtheBaselIII nizationstomeetthenewcapitalstandardswhile regulatorycapitalreformsandintegratetheBoard’s supportinglending.Underthefinalrule,thephase-in capitalrulesintoacomprehensiveregulatoryframe- periodforsmaller,lesscomplexbankingorganizawork.Thefinalrulewaspublishedjointlywiththe tionsandallcoveredSLHCsbeginsinJanuary2015. OCC,andtheFDICpublishedasubstantivelyidenti- Thephase-inperiodforlargerbankingorganizations calinterimfinalrule. thatarenotSLHCsbeganinJanuary2014. Underthefinalrule,minimumrequirementsincrease Consistentwithsection939Aof theDodd-Frank forboththequantityandqualityof capitalheldby Act,thefinalruleremovesreferencesto,andreliance alldepositoryinstitutions,bankholdingcompanies on,creditratingsfromtheBoard’scapitalrules. (BHCs)withtotalconsolidatedassetsof $500million ormore,andsavingsandloanholdingcompanies OnDecember6,2013,theBoardissuedafinalrule (SLHCs)thatarenotsubstantiallyengagedincom- thatmakestechnicalchangestothemarketriskcapimercialorinsuranceunderwritingactivities(collec- talruletoalignitwiththeBaselIIIrevisedcapital tively,bankingorganizations).Consistentwiththe framework.Technicalchangestotherulereflect BCBSinternationalstandard,theruleincludesanew modificationsbytheOrganisationforEconomic minimumratioof commonequitytier1capitalto Co-operationandDevelopmentregardingcountry risk-weightedassetsof 4.5percent,raisesthemini- riskclassifications.Thefinalrulealsoclarifiescriteria mumratioof tier1capitaltorisk-weightedassets fordeterminingwhetherunderlyingassetsaredelinfrom4percentto6percent,andincludesaminimum quentforcertaintradedsecuritizationpositions.It leverageratioof 4percentforallbankingorganiza- clarifiesdisclosuredeadlinesandmodifiesthedefinitions.Inaddition,therulerequiresabankingorgani- tionof acoveredposition. zationtoholdacapitalconservationbufferof commonequitytier1capitalinanamountgreaterthan Stress Testing Requirements: Basel III 2.5percentof totalrisk-weightedassetstoavoidlimi- Application and Transition Period tationsoncapitaldistributionsanddiscretionary bonuspaymentstoexecutiveofficers.Thefinalrule OnSeptember24,2013,theBoardissuedtwointerim alsoincorporatesthenewandrevisedminimum finalrulestoclarifyhowcompaniesshouldincorporequirementsintotheagencies’promptcorrective ratetheBaselIIIregulatorycapitalreformsintotheir actionframework. capitalandbusinessprojectionsforcapitalplansub-

OtherFederalReserveOperations 111 missionsandtheirstresstestsrequiredunderthe lishestheprocessforstatememberbanksandunin- Dodd-FrankAct. suredstatebranchesoragenciesof foreignbanksto applytotheBoardforatransitionperiodof upto ThefirstinterimfinalruleappliestoBHCswith 24months. $50billionormoreintotalconsolidatedassets.The ruleclarifiesthatforthe2013–14capitalplanning Supervisory Assessment Fees andstress-testingcycle,thesecompaniesmustincorporatetherevisedcapitalframeworkintotheircapital Section318of theDodd-FrankActdirectsthe planningprojectionsandintothestresstestsrequired BoardtocollectassessmentsfromBHCsandSLHCs undertheDodd-FrankActusingthetransitionpaths with$50billionormoreintotalconsolidatedassets establishedintheBaselIIIfinalrule.Thisrulealso andfromnonbankfinancialcompaniesdesignated clarifiesthatforthe2013–14cycle,capitaladequacy bytheFinancialStabilityOversightCouncil(Counatlargebankingorganizationswouldcontinuetobe cil)equaltotheexpensestheBoardestimatesarenecassessedagainstaminimum5percenttier1common essaryorappropriatetocarryoutitssupervisionand ratiocalculatedinthesamemannerasunderprevi- regulationof thosecompanies. ousstresstestsandcapitalplansubmissions,ensuringconsistencywiththosepreviousexercises. TheBoardissuedaproposedruleonApril15,2013, andafinalruleonAugust16,2013,establishinghow Thesecondinterimfinalruleprovidesaone-year theBoardwilldeterminewhichcompaniesare transitionperiodformostbankingorganizations charged,estimatetheapplicableexpenses,determine withbetween$10billionand$50billionintotalcon- eachcompany’sassessmentfee,andbillforandcolsolidatedassetstoincorporatetheBaselIIIcapital lectassessments.Underthefinalrule,eachcalendar reformsintotheirstresstests.Thesecompaniescon- yearisanassessmentperiod.Paymentsforthe2012 ductedtheirfirstcompany-runstresstestunderthe assessmentperiod,thefirstassessmentperiodunder Board’srulesimplementingtheDodd-FrankAct thefinalrule,wereduebyDecember15,2013.Beginduringthefallof 2013.Theinterimfinalrulerequires ningwiththe2013assessmentperiod,theFederal thesecompaniestocalculatetheirstresstestprojec- Reservewillnotifyeachcompanyof theamountof tionsintheir2013–14stresstestsusingtheBoard’s itsassessmentnolaterthanJune30of theyearfolthen-currentregulatorycapitalrulestoallowthe lowingtheassessmentperiod,withpaymentdueby firmstimetoadjusttheirinternalsystemstothe September15.TheFederalReservewilltransferthe revisedcapitalframework. assessmentsitcollectstotheU.S.Departmentof the Treasury. Swaps Push-Out Provision Applicability to Uninsured U.S. Branches and Agencies of Bank Secrecy Act Regulations Foreign Banking Organizations OnDecember3,2013,theBoardandtheFinancial Section716of theDodd-FrankAct,commonly CrimesEnforcementNetwork,abureauof theTreasreferredtoastheswapspush-outprovision,prohibits ury,issuedafinalruletoamendthedefinitionsof theprovisionof certainkindsof federalassistanceto “fundstransfer”and“transmittalof funds”under IDIsandotherinstitutionsthatengageinswaps regulationsimplementingtheBankSecrecyAct activities,subjecttocertainexceptions.Undersec- (BSA).Thefinalruleaddressesanambiguityregardtion716,whichbecameeffectiveonJuly16,2013,the ingtheamendmentstotheElectronicFundsTransfer appropriatefederalbankingagencyforanIDIis ActmadebytheDodd-FrankActbyaffirmingthe requiredtoprovideatransitionperiodof upto scopeof fundstransfersandtransmittalssubjectto 24monthsforconformancewiththerequirementsof theBSApriortotheenactmentof theDoddsection716if requestedbyanIDI. FrankAct. TheBoardissuedaninterimfinalruleonJune5, Requirements for Determining 2013,andafinalruleonDecember24,2013,clarify- When a Nonbank Financial Company ingthetreatmentof uninsuredU.S.branchesand Is Predominantly Engaged in agenciesof foreignbanksundersection716.The Financial Activities finalruleprovidesthat,forpurposesof section716, uninsuredU.S.branchesandagenciesof foreign TheDodd-FrankActestablishedtheCouncil,which, banksaretreatedasIDIs.Thefinalrulealsoestab- amongotherauthoritiesandduties,maysubjecta

112 100thAnnualReport|2013 nonbankfinancialcompanytosupervisionbythe tantbytheCouncil.FMUsaremultilateralsystems Boardandconsolidatedprudentialstandards.The thatprovidetheessentialinfrastructurefortransferactdefinesanonbankfinancialcompanytoincludea ring,clearing,andsettlingpayments,securities,and company(otherthanaBHCandcertainotherspeci- otherfinancialtransactionsamongfinancialinstitufiedtypesof entities)thatispredominantlyengaged tionsorbetweenfinancialinstitutionsandthe infinancialactivities.Acompanyisconsideredtobe system.Amongotherthings,theactpermitsthe predominantlyengagedinfinancialactivitiesif BoardtoauthorizeaFederalReserveBanktoestab- 85percentormoreof itsrevenuesorassetsare lishandmaintainanaccountforadesignatedFMU relatedtoactivitiesthataredefinedasfinancialin andprovidecertainservices,includingwiretransfers, natureundertheBankHoldingCompanyAct.The settlement,andsecuritiessafekeeping,tothedesig- Dodd-FrankActdirectstheBoardtoestablishthe natedFMU.TitleVIIIalsopermitsaFederal requirementsfordeterminingif acompanyispre- ReserveBanktopayearningsonbalancesmaindominantlyengagedinfinancialactivities. tainedbyoronbehalf of adesignatedFMUinthe samemannerandtothesameextentastheFederal OnApril3,2013,theBoardissuedafinalrulethat ReserveBankmaypayearningstoadepositoryinstiestablishestherequirementsfordeterminingwhena tutionundertheFederalReserveAct,subjecttoany companyispredominantlyengagedinfinancial applicablerules,orders,standards,orguidelinesproactivities.Underthefinalrule,thecomputationof videdbytheBoard. assetsandrevenuesforpurposesof determiningif a companymeetsthestatutorythresholdwouldbe OnDecember5,2013,theBoardissuedafinalrule basedontherelevantcompany’sannualfinancialrev- toamendRegulationHHthatsetsoutstandards, enuesin,orfinancialassetsattheendof,eitherof its restrictions,andguidelinesfortheestablishmentand twomostrecentfiscalyears.Thefinalrulelistsinan maintenanceof anaccountat,andprovisionof appendixtheactivitiesthatwillbedefinedasfinan- financialservicesfrom,aReserveBankforadesigcialforthepurposesof determiningwhetheracom- natedFMU.Thetermsandconditionsforaccessto panyispredominantlyengagedinfinancialactivities. ReserveBankaccountsandservicesareintendedto facilitatetheuseof ReserveBankaccountsandser- TheDodd-FrankActrequirestheBoardtodefine vicesbyadesignatedFMUinordertoreducesettle- “significantnonbankfinancialcompany”and“sig- mentriskandstrengthensettlementprocesseswhile nificantbankholdingcompany,”andthefinalrule limitingtheriskpresentedbythedesignatedFMUto alsodefinestheseterms.Amongthefactorsthe theReserveBanks. Councilmustconsiderwhendeterminingwhetherto designateanonbankfinancialcompanyforconsoli- Inaddition,thefinalrulewouldauthorizeaReserve datedsupervisionbytheBoardistheextentand Banktopayinterestonthebalancesmaintainedbya natureof thecompany’stransactionsandrelation- designatedFMUinaccordancewiththestatuteand shipswithothersignificantnonbankfinancialcom- othertermsandconditionsastheBoardmayprepaniesandsignificantBHCs.If designated,those scribe.Thefinalruleprovidesthatinterestonbalnonbankfinancialcompanieswouldberequiredto ancespaidtodesignatedFMUswillbetheratepaid disclosetotheFederalReserve,theCouncil,andthe onbalancesof depositoryinstitutionsoranotherrate FDICthenatureandextentof thecompany’scredit determinedbytheBoardfromtimetotime,notto exposuretoothersignificantnonbankfinancialcom- exceedthegenerallevelof short-terminterestrates. paniesandsignificantBHCsaswellasthecredit exposureof suchsignificantentitiestothecompany. Retail Foreign Exchange Futures Underthefinalrule,afirmwillbeconsideredsignifi- and Options cantif ithas$50billionormoreintotalconsolidated assetsorhasbeendesignatedbytheCouncilassys- OnApril4,2013,theBoardissuedafinalrulethat temicallyimportant. setsstandardsforinstitutionsregulatedbytheFederalReservethatengageincertaintypesof foreign Federal Reserve Accounts and Services exchangetransactionswithretailcustomers.Therule for Financial Market Utilities outlinesrequirementsfordisclosure,recordkeeping, businessconduct,anddocumentationforretailfor- TitleVIIIof theDodd-FrankActestablishesa eignexchangetransactions.Underthefinalrule, supervisoryframeworkforfinancialmarketutilities institutionsengaginginsuchtransactionsare (FMUs)thataredesignatedassystemicallyimpor- requiredtonotifytheFederalReserveandtobewell

OtherFederalReserveOperations 113 capitalized.Suchinstitutionsarealsorequiredtocol- Key Regulatory Initiatives Proposed lectmarginforretailforeignexchangetransactions. in 2013 Anumberof importantregulatorydevelopmentsare Appraisals for Higher-Risk Mortgage intheproposalstage.Thefollowingisasummaryof Loans additionalregulatoryinitiativesthattheBoardproposedin2013. OnJanuary18,2013,theBoard—jointlywiththe ConsumerFinancialProtectionBureau,theFDIC, LiquidityRequirementsfor theFederalHousingFinanceAgency,theNational LargeFinancialInstitutions CreditUnionAdministration,andtheOCC—issued OnOctober24,2013,theBoardissuedaproposed afinalruletoimplementsection129Hof theTruth ruleforcommentthatwouldstrengthentheliquidity inLendingAct,addedbytheDodd-FrankAct, positionsof largefinancialinstitutions.Theproposal whichrequiresacreditortoobtainanappraisal isbasedonaninternationalstandardagreedtoby beforeissuinga“higher-riskmortgage.”Underthe theBCBSandwaspublishedforcommentjointly act,mortgageloansarehigher-riskif theyare withtheFDICandOCC. securedbyaconsumer’shomeandhaveinterestrates aboveacertainthreshold. Theproposalwouldrequireinstitutionssubjecttothe ruletomeetaminimumquantitativeliquidity Forhigher-riskmortgageloans,thefinalrulerequires requirementintheformof aliquiditycoverageratio creditorstousealicensedorcertifiedappraiserwho (LCR).UndertheLCR,eachinstitutionwouldhold preparesawrittenappraisalreportbasedonaphysi- anamountof high-quality,liquidassetssuchascencalinspectionof theinteriorof theproperty.The tralbankreservesandgovernmentandcorporate finalrulealsorequirescreditorstodisclosetoappli- debtthatisequaltoorgreaterthanitsprojectedcash cantsinformationaboutthepurposeof theappraisal outflowslessupto75percentof itsprojectedcash andprovideconsumerswithafreecopyof any inflowsduringashort-termstressperiod.Theproappraisalreport.Creditorsarerequiredtoobtainan posaldefinesvariouscategoriesof liquidassetsand additionalappraisalatnocosttotheconsumerfora alsospecifieshowafirm’sprojectednetcashouthome-purchasehigher-riskmortgageloanif the flowsoverthestressperiodwouldbecalculatedusing selleracquiredthepropertyforalowerpriceduring common,standardizedassumptionsabouttheoutthepastsixmonthsandthepricedifferenceexceeds flowsandinflowsassociatedwithspecificliabilities, certainthresholds.Thisrequirementaddresses assets,andoff-balance-sheetobligations. fraudulentpropertyflippingbyseekingtoensurethat thevalueof thepropertybeingusedascollateralfor TheLCRwouldapplytoallinternationallyactive theloanlegitimatelyincreased. BHCsandSLHCs—generally,thosewith$250billionormoreintotalconsolidatedassetsor$10bil- Theruleexemptsseveraltypesof loans,suchas lionormoreinon-balance-sheetforeignexposure— qualifiedmortgages,temporarybridgeloansand andtononbankfinancialcompaniesdesignatedby constructionloans,andloansformobilehomes,trail- theCouncil.Itwouldalsoapplytodepositoryinstiers,andboatsthataredwellings.Therulealsohas tutionswith$10billionormoreinconsolidated exemptionsfromthesecondappraisalrequirementto assetsthataresubsidiariesof BHCsorSLHCssubfacilitateloansinruralareasandothertransactions. jecttotherule.Theproposalalsowouldapplyaless stringent,modifiedLCRtoBHCsandSLHCsthat OnDecember12,2013,theBoard,togetherwiththe arenotinternationallyactivebuthavemorethan otheragencies,issuedasupplementalfinalrulethat $50billionintotalassets.BHCsandSLHCswith providesadditionalexemptionsfromtheappraisal substantialinsurancesubsidiariesandnonbank requirementsforhigher-riskmortgageloans.Therule financialcompaniessuperviseddesignatedbythe providesthatloansof $25,000orlessandcertain Councilwithsubstantialinsuranceoperationsarenot “streamlined”refinancingsareexemptfromthe coveredbytheproposal. appraisalrequirements.Inaddition,thefinalrule containsspecialprovisionsformanufacturedhomes. SupplementaryLeverageRatiofor Theseprovisionsareintendedtosaveborrowerstime LargeFinancialInstitutions andmoneywhilestillensuringthattheloansare OnJuly9,2013,theBoard,togetherwiththeFDIC financiallysound. andtheOCC,issuedaproposedruletostrengthen

114 100thAnnualReport|2013 theleverageratiostandardsforthelargest,mostsys- theirrisk-retentionrequirement,includingstandard temicallysignificantfinancialinstitutions.TheBoard riskretentionbasedonholdinga“vertical”interest proposedtoestablishanewleveragebufferforBHCs ineachtrancheof thetransaction,a“horizontal” withmorethan$700billioninconsolidatedtotal interestintheresidualtrancheof thetransaction,or assetsor$10trillioninassetsundercustody(covered acombinationof thetwo.However,thenewproposal BHCs)abovetheminimumsupplementaryleverage wouldallowgreaterflexibilityincombiningvertical ratiorequirementinRegulationQof 3percenttier1 andhorizontalriskretentionandincludesmodificacapitaltototalleverageexposure.Underthepro- tionstomeasuringriskretention.Theoriginalproposal,acoveredBHCthatmaintainedaleveragebuf- posalgenerallymeasuredcompliancewiththestanferof tier1capitalinanamountgreaterthan2per- dardrisk-retentionrequirementbasedonthepar centof itstotalleverageexposurewouldnotbesub- valueof securitiesissuedinasecuritizationtransacjecttolimitationsondiscretionarybonuspayments tionandincludedaprovisionintendedtoensurethe andcapitaldistributions.Inadditiontotheleverage securitizerretainedaneconomicallymeaningfulrisk bufferforcoveredBHCs,theproposedrulewould retentioninterest.Underthenewproposal,risk establishunderthepromptcorrectiveactionrulesa retentiongenerallywouldbebasedonfair-valuemea- “wellcapitalized”thresholdof 6percentforthe surements,whichtheagenciesbelieveshouldgenersupplementaryleverageratioforIDIsubsidiariesof allyensuremeaningfulriskretention. coveredBHCs.Theproposedrulewouldcurrently applytotheeightlargest,mostsystemicallysignifi- Liketheoriginalproposal,thenewproposalcontains cantU.S.BHCsandtheirIDIsubsidiaries. risk-retentionoptionsexplicitlydesignedforspecific assetclasses,includingcommercialrealestatetrans- Credit-RiskRetention actions,securitizationsthroughrevolvingmaster Undersection941of theDodd-FrankAct,the trusts,andasset-backedcommercialpapersecuritiza- Board—alongwiththeOCC,theFDIC,andthe tions.Theprovisionsinthenewproposalweremodi- SEC,andwithrespecttoresidentialmortgages,the fiedincertaincasesfortheseoptionsinresponseto FederalHousingFinanceAdministrationandthe commentsreceivedontheoriginalproposal.Inaddi- Secretaryof HousingandUrbanDevelopment— tion,thenewproposalincludesanoptionthatwould mustestablishregulationstorequiresecuritizers allowleadarrangersinsyndicatedloanstosatisfy (sponsorsof securitizationtransactions)toholdat riskretentionbyretainingriskwithrespecttothat least5percentof thecreditriskof theassetsthey loan,withnofurtherriskretentionrequiredwith securitize.OnAugust28,2013,theBoardandthe respecttotheloanif itwassecuritizedthroughacolotheragenciesissuedarevisedproposaltoimplement lateralizedloanobligationtransaction. therequirementsof section941(newproposal).The originalproposalwasreleasedonMarch29,2011 Similartotheoriginalproposal,underthenewpro- (originalproposal).Theagenciesissuedthenewpro- posal,securitizationsof commercialloans,commerposalafterconsideringthemanycommentsreceived cialmortgages,orautomobileloansthatmeetunderontheoriginalproposal. writingstandardsthatreflectlowcreditriskwould notbesubjecttoriskretention.Alsosimilartothe Asrequiredbythestatute,thenewproposalincludes originalproposal,therulewouldrecognizethefull avarietyof exemptions,includinganexemptionfor guaranteeonpaymentsof principalandinterestpromortgage-backedsecuritiesthatarecollateralized videdbyFannieMaeandFreddieMacfortheirresiexclusivelybyresidentialmortgagesthatqualifyas dentialmortgage-backedsecuritiesasmeetingthe qualifiedresidentialmortgages(QRMs).Thenew risk-retentionrequirementswhileFannieMaeand proposalwoulddefineQRMstohavethesame FreddieMacareinconservatorshiporreceivership meaningas“qualifiedmortgages”asdefinedbythe andhavecapitalsupportfromtheU.S.government. ConsumerFinancialProtectionBureauunderthe TruthinLendingAct,asamendedbytheDodd- FederalReserveEmergencyLendingAuthority FrankAct.Thenewproposalalsorequestscomment Section1101of theDodd-FrankActmadeextensive onanalternativedefinitionof QRMthatwould amendmentstotheemergencylendingprovisionsof includecertainunderwritingstandardsinadditionto section13(3)of theFederalReserveAct.Theamendthequalifiedmortgagecriteria. mentsgenerallyprohibittheFederalReservefrom extendingemergencycredittoanysingleorspecific Asundertheoriginalproposal,thenewproposal companyandinsteadrequireemergencycredittobe includesvariousoptionstoallowsecuritizerstomeet extendedonlytoparticipantsinaprogramorfacility

OtherFederalReserveOperations 115 withbroadbasedeligibility.Theamendmentsalso wouldfurtherimplementadditionalrequirements requiretheBoardtoestablish,byregulation,policies imposedbysection1101of theDoddFrankAct, andproceduresthatimposeadditionallimitationson suchasrequirementsrelatingtoreportingandtermiextensionsof emergencycredit. nationof emergencycreditprogramsorfacilities. OnDecember23,2013,theBoardissuedproposed FloodInsurance amendmentstoRegulationAtoimplementthe OnOctober11,2012,theBoardandfourotherfedchangestosection13(3)madebytheDodd-Frank eralregulatoryagenciesissuedaproposedruleto Act.Asrequiredbytheact,theproposedamend- implementcertainprovisionsof theBiggert-Waters mentsaredesignedtoensurethatanyemergency FloodInsuranceReformActof 2012,whichsignifilendingprogramorfacilityisforthepurposeof pro- cantlyrevisedfederalfloodinsurancestatutes.The vidingliquiditytothefinancialsystemandnottoaid proposedrulewouldrequirethatregulatedlending afailingfinancialcompany.Theproposedamend- institutionsacceptprivatefloodinsurancetosatisfy mentswouldestablishprocedurestoprohibitexten- mandatorypurchaserequirements.Inaddition,the sionsof emergencycredittoinsolventborrowers.In proposalwouldrequireregulatedlendinginstitutions addition,theywouldestablishthataprogramor toescrowpaymentsandfeesforfloodinsurancefor facilitythatisstructuredtoremoveassetsfromthe anyneworoutstandingloanssecuredbyresidential balancesheetof asingleandspecificcompany,or improvedrealestateoramobilehome,notincluding thatisestablishedforthepurposeof assistingasingle business,agricultural,andcommercialloans,unless andspecificcompanytoavoidinsolvencyproceed- theinstitutionsqualifyforastatutoryexception. ings,wouldnotbeaprogramorfacilitywithbroadbasedeligibility. Theproposalincludesnewandrevisedsamplenotice formsandclausesconcerningtheavailabilityof pri- Theproposedamendmentsalsowouldrequirethe vatefloodinsurancecoverageandtheescrowrequiresecurityforemergencyloanstobesufficienttopro- ment.Theproposalalsowouldclarifythatregulated tecttaxpayersfromlossesandwouldrequirethe lendinginstitutionshavetheauthoritytochargea lendingReserveBanktoassign,atthetimethecredit borrowerforthecostof force-placedfloodinsurance isinitiallyextended,alendablevaluetoallcollateral coveragebeginningonthedateonwhichtheborrowfortheprogramorfacility,consistentwithsound er’scoveragelapsedorbecameinsufficientandwould risk-managementpractices,indeterminingwhether stipulatethecircumstancesunderwhichalender theextensionof creditissecuredtotheReserve mustterminateforce-placedfloodinsurancecoverage Bank’ssatisfaction.Theproposedamendments andrefundpaymentstoaborrower.

116 100thAnnualReport|2013 The Board of Governors and the textof resourcesrequiredtomeetDodd-FrankAct mandates,closecross-disciplinaryknowledgegaps, Government Performance and developappropriatepolicy,andcontinueaddressing Results Act therecoveryof afragileglobaleconomy.Theframeworksetsforthmajorgoals,outlinesstrategiesfor Overview achievingthosegoals,andidentifieskeymeasuresof performancetowardachievingthestrategic TheGovernmentPerformanceandResultsAct objectives. (GPRA)of 1993requiresfederalagencies,inconsultationwithCongressandoutsidestakeholders,to Theannualperformanceplanoutlinestheplanned prepareastrategicplancoveringamultiyearperiod. projects,initiatives,andactivitiesthatsupportthe GPRAalsorequireseachagencytosubmitanannual framework’slong-termobjectivesandresourcesnecperformanceplanandanannualperformancereport. essarytoachievethoseobjectives.Theannualperfor- TheGPRAModernizationActof 2010further mancereportsummarizestheBoard’saccomplishrefinesthoserequirementstoincludequarterlypermentsthatcontributedtowardachievingthestrategic formancereporting.AlthoughtheBoardisnotcovgoalsandobjectivesidentifiedintheframework. eredbyGPRA,theBoardfollowsthespiritof theact and,likeotherfederalagencies,preparesanannual performanceplanandanannualperformancereport. Theframework,performanceplan,andperformance reportareavailableontheBoard’swebsitesatwww Strategic Framework, Performance Plan, .federalreserve.gov/publications/gpra/files/2012-2015and Performance Report strategic-framework.pdf,www.federalreserve.gov/ publications/gpra/files/2013-gpra-performance-plan TheBoard’s2012–15StrategicFramework(frame- .pdf,andwww.federalreserve.gov/publications/gpra/ work)articulatestheBoard’smissionwithinthecon- files/2012-gpra-performance-report.pdf.

117 7 Record of Policy Actions of the Board of Governors Policyactionsof theBoardof Governorsarepre- requirementsforboththequalityandquantityof sentedpursuanttosection10of theFederalReserve bankingorganizations’capitalbyestablishinganew Act.ThatsectionprovidesthattheBoardshallkeep minimumcommonequitytier1capitalratioand arecordof allquestionsof policydeterminedbythe implementingacapitalconservationbuffer.Therule BoardandshallincludeinitsannualreporttoCon- alsoincludes(1)anumberof macroprudentialfeagressafullaccountof suchactions.Thissectionpro- turesthatapplyonlytolarge,internationallyactive videsasummaryof policyactionsin2013,asimple- bankingorganizationsand(2)otherfeaturesto mentedthrough(1)rulesandregulations,(2)policy reducethecomplexityandregulatoryburdenfor statementsandotheractions,and(3)discountrates smallerandcommunitybanks.Thefinalruleiseffecfordepositoryinstitutions.Policyactionswere tiveJanuary1,2014,withlatercompliancedatesfor approvedbyallBoardmembersinoffice,unlessindi- certainprovisions.Thephase-inperiodforsmaller, catedotherwise.1Informationontheactionsisalso lesscomplexbankingorganizationsbeginsinJanuavailablefromthe“ReadingRooms”ontheBoard’s ary2015,andsavingsandloanholdingcompanies Freedomof Information(FOI)Actwebpageoron thathavesignificantcommercialorinsuranceunderrequestfromtheBoard’sFOIOffice. writingactivitiesarenotsubjecttothefinalrule. ForinformationonFederalOpenMarketCommittee Votingforthisaction:ChairmanBernanke,Vice policyactionsrelatingtoopenmarketoperations,see ChairYellen,andGovernorsDuke,Tarullo, section8,“Minutesof FederalOpenMarketCom- Raskin,Stein,andPowell. mitteeMeetings.” OnDecember3,2013,theBoardapprovedafinal rule(DocketNo.R-1459)makingconforming Rules and Regulations changestoitsmarketriskcapitalruleinorderto alignthatrulewiththeBaselIIIrevisedcapital Regulation H (Membership of State frameworkadoptedinJuly2013.3TheBoardalso Banking Institutions in the FRS), approvedafinalrule(DocketNo.R-1442)making Regulation Q (Capital Adequacy of Bank minormodificationstotheBaselIIIrevisedcapital Holding Companies, Savings and Loan frameworkinordertoclarifythecriteriaforsubordi- Holding Companies, and State Member nateddebtinstrumentsthatmaybecountedastier2 Banks), and Regulation Y (Bank Holding capital.4Thetechnicalchangestothemarketriskrule areeffectiveApril1,2014,andtheBaselIIImodifi- Companies and Change in Bank Control) cationsareeffectiveJanuary1,2014. OnJuly2,2013,theBoardapprovedafinalrule (DocketNo.R-1442),issuedjointlywiththeOffice Votingforthisaction:ChairmanBernanke,Vice of theComptrollerof theCurrency,toimplementin ChairYellen,andGovernorsTarullo,Raskin, theUnitedStatesthecapitalreformspopularly Stein,andPowell. knownasBaselIIIandcertainchangesrequiredby theDodd-FrankWallStreetReformandConsumer ProtectionAct(theDodd-FrankAct).2Amongother provisions,thefinalruleincreasestheminimum 3 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2013- 1 GovernorDukeresignedfromtheBoardonAugust31,2013. 12-18/html/2013-29785.htm. 2 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2013- 4 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2013- 10-11/html/2013-21653.htm. 12-20/html/2013-29883.htm.

118 100thAnnualReport|2013 Regulation M (Consumer Leasing) and providesaone-yeartransitionperiodformostbank- Regulation Z (Truth in Lending) ingorganizationswithbetween$10billionand $50billionintotalconsolidatedassets.Thesecompa- OnNovember12,2013,theBoardapprovedfinal niesareconductingtheirfirstDodd-FrankAct rules(DocketNos.R-1469andR-1470)toincrease company-runstresstestsandwillberequiredtocalthedollarthresholdforexemptconsumercreditand culatetheirstresstestprojectionsusingtheBoard’s leasetransactionsfrom$53,000to$53,500,inaccor- currentregulatorycapitalrulessothatthecompanies dancewiththeDodd-FrankAct.5Thefinalrules havetimetoadjusttheirinternalsystemstothe werepublishedjointlywiththeConsumerFinancial revisedBaselIIIcapitalframework.Theinterimfinal ProtectionBureau(CFPB).Thedollarthresholdis rulesalsoincludeotherclarifyingprovisions—such adjustedtoreflecttheannualpercentageincreasein aswhen,foragivencapitalplanningandstresstest theconsumerpriceindex.Transactionsatorbelow cycle,acompanyisrequiredtousetheBoard’s thethresholdaresubjecttotheprotectionsof the advancedapproachescapitalrules.Theinterimfinal regulations.AlthoughtheDodd-FrankActgenerally rulesareeffectiveSeptember30,2013. transferredrulemakingauthorityundertheConsumerLeasingActandtheTruthinLendingActto Votingforthisaction:ChairmanBernanke,Vice theCFPB,theBoardretainsauthoritytoissuerules ChairYellen,andGovernorsTarullo,Raskin, forcertainmotorvehicledealers.Thefinalrulesare Stein,andPowell. effectiveJanuary1,2014. Note:OnFebruary20,2014,theBoardapproveda Votingforthisaction:ChairmanBernanke,Vice finalrule(DocketNos.R-1463and1464)tofurther ChairYellen,andGovernorsTarullo,Raskin, clarifytheBoard’sstresstestingandcapitalplanning Stein,andPowell. requirements,includingrequirementsforbankholdingcompaniesusingtheadvancedapproachescapital Regulation Y (Bank Holding Companies rules.7 and Change in Bank Control) and Regulation YY (Enhanced Prudential Regulation Z (Truth in Lending) Standards) OnJanuary11,2013,theBoardapprovedafinalrule OnSeptember24,2013,theBoardapprovedtwo (DocketNo.R-1443)toestablishappraisalrequireinterimfinalrules(DocketNos.R-1463andR-1464) mentsfor“higher-pricedmortgageloans,”inaccortoclarifyhowfinancialinstitutionsshouldincorpodancewiththeDodd-FrankAct.8TheBoardissued ratetherecentBaselIIIregulatorycapitalreforms thefinalrulejointlywiththeFederalDepositInsurintotheircapitalandbusinessprojectionsduringthe anceCorporation(FDIC),Officeof theComptroller cycleof capitalplansubmissionsandstressteststhat of theCurrency(OCC),NationalCreditUnion beginOctober1,2013.6Theplanninghorizonfor Administration(NCUA),ConsumerFinancialProthiscapitalplanandstresstestcyclerunsfromthe tectionBureau(CFPB),andFederalHousing October1startdatethroughthefourthquarterof FinanceAgency(FHFA).Undertheact,a“higher- 2015andthusoverlapswiththeimplementationof pricedmortgageloan”issecuredbyaconsumer’s theBaselIIIcapitalreforms.Thefirstinterimfinal homeandhasanannualpercentageratethatexceeds rule,whichappliestobankholdingcompanieswith certainthresholds.Thefinalrulerequirescreditorsto $50billionormoreintotalconsolidatedassets,clari- obtainanappraisalbyalicensedorcertified fiesthatinthiscapitalplanningandstresstestcycle, appraiser,disclosetoapplicantsinformationabout thesecompaniesmustincorporatetherevisedcapital thepurposeof theappraisal,andprovideafreecopy frameworkintotheircapitalplanningprojections of anyappraisalreport.Secondappraisalsare andintothestresstestsrequiredundertheDodd- requiredinsomecircumstancestoaddressfraudulent FrankActusingthetransitionpathsestablishedin propertyflipping.ThefinalrulealsoprovidesexemptheBaselIIIfinalrule.Thesecondinterimfinalrule tionsforcertaintypesof loans,includingqualified mortgagesandloansfornewmanufacturedhomes, 5 SeeFederalRegisternoticesatwww.gpo.gov/fdsys/pkg/FR- 2013-11-25/html/2013-28194.htmandwww.gpo.gov/fdsys/pkg/ FR-2013-11-25/html/2013-28195.htm. 7 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 6 SeeFederalRegisternoticesatwww.gpo.gov/fdsys/pkg/FR- 03-11/html/2014-05053.htm. 2013-09-30/html/2013-23618.htmandwww.gpo.gov/fdsys/pkg/ 8 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2013- FR-2013-09-30/html/2013-23619.htm. 02-13/html/2013-01809.htm.

Recordof PolicyActionsof theBoardof Governors 119 andexemptionstofacilitateloansinruralareas.The Regulation KK (Margin and Capital finalruleiseffectiveJanuary18,2014. Requirements for Covered Swap Entities) Votingforthisaction:ChairmanBernanke,Vice OnJune4,2013,theBoardapprovedaninterimfinal ChairYellen,andGovernorsDuke,Tarullo, rule(DocketNo.R-1458)clarifyingthetreatmentof Raskin,Stein,andPowell. uninsuredU.S.branchesandagenciesof foreign banksundersection716of theDodd-FrankAct, OnDecember5,2013,theBoardapprovedafinal commonlyreferredtoastheswapspush-outprovirule(DocketNo.R-1443)toestablishadditional sion.11Section716generallyprohibitstheprovision exemptionsfromcertainappraisalrequirementsfora of certainkindsof federalassistance,suchasdissubsetof higher-pricedmortgageloans.9Thefinal countwindowlendinganddepositinsurance,to rule,issuedjointlywiththeFDIC,OCC,NCUA, insureddepositoryinstitutionsandotherinstitutions CFPB,andFHFA,providesthatloansof $25,000or thatengageinswapsactivities,subjecttospecified lessandcertain“streamlined”refinancingsare exceptions.Insureddepositoryinstitutionsthatare exemptfromspecifiedappraisalrequirementsfor swapsentitiesareeligibleforcertainstatutoryexcephigher-pricedmortgages.Loanssecuredbyanexist- tionsandatransitionperiodof upto24monthsto ingmanufacturedhomeandlandwillnotbesubject complywiththerequirementsof section716.For totheappraisalrequirementsfor18months,andthe purposesof section716,theinterimfinalruleproruleincludesotherspecialprovisionsrelatingtoloans videsthatuninsuredU.S.branchesandagenciesof formanufacturedhomes.Thefinalruleiseffective foreignbanksaretreatedasinsureddepositoryinsti- January18,2014,andtheprovisionsonmanufac- tutions.Theinterimfinalrulealsoestablishesthe turedhomeloansareeffectiveJuly18,2015. processforstatememberbanksanduninsuredstate branchesoragenciesof foreignbankstoapplytothe Votingforthisaction:ChairmanBernanke,Vice Boardforatransitionperiodof upto24months. ChairYellen,andGovernorsTarullo,Raskin, TheBoardalsorequestedcommentontheinterim Stein,andPowell. finalrule,whichiseffectiveJune10,2013. Regulation HH (Designated Financial Votingforthisaction:ChairmanBernankeand Market Utilities) GovernorsDuke,Tarullo,Raskin,Stein,and Powell.Absentandnotvoting:ViceChairYellen. OnDecember2,2013,theBoardapprovedafinal rule(DocketNo.R-1455)tosetoutthestandards, OnDecember20,2013,theBoardapprovedafinal restrictions,andguidelinesfortheestablishmentand rule(DocketNo.R-1458)adoptingwithoutchange maintenanceof anaccountat,andfortheprovision theinterimfinalruleapprovedinJune2013.12The of financialservicesfrom,aReserveBankforfinan- finalruleiseffectiveJanuary31,2014. cialmarketutilitiesthataredesignatedassystemicallyimportantbytheFinancialStabilityOversight Votingforthisaction:ChairmanBernanke,Vice Council.10Inaddition,thefinalrulewouldauthorize ChairYellen,andGovernorsTarullo,Stein,and aReserveBanktopayinterestontheseaccountbal- Powell.Abstaining:GovernorRaskin. ances,inaccordancewiththeDodd-FrankActand othertermsandconditionsastheBoardmaypre- Regulation NN (Retail Foreign scribe.ThefinalruleiseffectiveFebruary18,2014. Exchange Transactions) Votingforthisaction:ChairmanBernanke,Vice OnApril1,2013,theBoardapprovedafinalrule ChairYellen,andGovernorsTarullo,Raskin, (DocketNo.R-1428)toestablishstandardsforbank- Stein,andPowell. ingorganizationsregulatedbytheFederalReserve thatengageincertaintypesof foreignexchange transactionswithretailcustomers.13Foreign 11 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2013- 06-10/html/2013-13670.htm. 9 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2013- 12 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 12-26/html/2013-30108.htm. 01-03/html/2013-31204.htm. 10 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2013- 13 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2013- 12-20/html/2013-29711.htm. 04-09/html/2013-08163.htm.

120 100thAnnualReport|2013 exchangetransactionscoveredbytheruleinclude Regulation TT (Supervision and futuresoroptionsonfutures,over-the-counter Regulation Assessments of Fees) optionsonforeigncurrency,andso-calledrolling spottransactions.Theruleestablishesrequirements OnAugust14,2013,theBoardapprovedafinalrule forriskdisclosurestocustomersandbusinesscon- (DocketNo.R-1457)toestablishannualassessment duct,recordkeeping,anddocumentationrequire- feestoimplementsection318of theDodd-Frank ments.Bankingorganizationsthatengageincovered Act.15Undersection318,theBoardisdirectedto transactionsarealsoexpectedtonotifytheFederal collectassessmentsequaltotheexpensesitestimates Reserveandtobewellcapitalized.Thefinalruleis arenecessaryorappropriatetosuperviseandreguissuedinaccordancewiththeDodd-FrankActandis latebankholdingcompaniesandsavingsandloan effectiveMay13,2013. holdingcompanieswith$50billionormoreintotal consolidatedassetsandnonbankfinancialcompanies Votingforthisaction:ChairmanBernanke,Vice designatedbytheFinancialStabilityOversight ChairYellen,andGovernorsDuke,Tarullo, CouncilforsupervisionbytheFederalReserve.The Raskin,Stein,andPowell. finalruledescribeshowtheBoardestimatesapplicableexpensesanddetermineseachcompany’s Regulation PP (Definitions Relating to assessmentfee,aswellastheprocessforbillingand Title I of the Dodd-Frank Act) collectingthefees.ThefinalruleiseffectiveOctober25,2013. OnMarch28,2013,theBoardapprovedafinalrule (DocketNo.R-1405)toestablishtherequirements Votingforthisaction:ChairmanBernanke,Vice fordeterminingwhetheracompanyis“predomi- ChairYellen,andGovernorsDuke,Tarullo, nantlyengagedinfinancialactivities.”14Underthe Raskin,Stein,andPowell. Dodd-FrankAct,theFinancialStabilityOversight Councilmaysubjectanonbankfinancialcompanyto Regulation VV (Prohibitions and supervisionbytheBoardandtoconsolidatedpru- Restrictions on Proprietary Trading and dentialstandards.Theactdefinesanonbankfinan- Certain Interests in, and Relationships cialcompanytoincludeacompany(otherthana with, Hedge Funds and Private bankholdingcompanyandcertainotherspecified Equity Funds) typesof entities)thatispredominantlyengagedin financialactivities.Underthefinalrule,thecomputa- OnDecember10,2013,theBoardapprovedafinal tionof assetsandrevenuesforpurposesof determinrule(DocketNo.R-1432),developedjointlywiththe ingif acompanymeetsthestatutorythresholdwould FDIC,OCC,CFTC,andSEC,toimplementsecbebasedontherelevantcompany’sannualfinancial tion619of theDodd-FrankAct,theso-calledVolrevenuesin,orfinancialassetsattheendof,eitherof ckerrule.16Underthefinalrule,insureddepository itstwomostrecentfiscalyears.Thefinalrulelistsin institutionsandtheiraffiliates(bankingentities)are anappendixtheactivitiesthatwillbedefinedas (1)prohibitedfromshort-termproprietarytradingin financialforthepurposesof determiningwhethera certaininstrumentsfortheirownaccount,(2)limited companyispredominantlyengagedinfinancial intheirinvestmentsinandrelationshipswithhedge activities.AsrequiredbytheDodd-FrankAct,the fundsandprivateequityfunds(coveredfunds),and finalruledefinestheterms“significantnonbank (3)subjecttocertaincompliancerequirementsthat financialcompany”and“significantbankholding includeestablishingadetailedcomplianceprogramif company.”Therulespecifiesthatsuchacompany theentitiesengageinsignificantcoveredactivitiesor willbeconsidered“significant”if ithas$50billionor investments.Inaddition,thefinalruleimplements moreintotalconsolidatedassetsorhasbeendesigthestatuteandprovidesexemptionsforcertain natedbytheCouncilassystemicallyimportant.The activities,suchasmarketmaking,underwriting, finalruleiseffectiveMay6,2013. hedging,andacquiringorretaininganownership interestaspartof organizingandofferingacovered Votingforthisaction:ChairmanBernanke,Vice fund.Thefinalrulealsolimitscomplianceandother ChairYellen,andGovernorsDuke,Tarullo, Raskin,Stein,andPowell. 15 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2013- 08-23/html/2013-20306.htm. 14 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2013- 16 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 04-05/html/2013-07688.htm. 01-31/html/2013-31511.htm.

Recordof PolicyActionsof theBoardof Governors 121 requirementsforsmaller,less-complexbankingenti- ingobligationtocoverpotentiallossesfromtheTerm ties.ThefinalruleiseffectiveApril1,2014.The Asset-BackedSecuritiesLoanFacility(TALF)using Boardalsoapprovedanorderextendingtheconfor- fundsfromtheTroubledAssetRelief Program.20The manceperiodforbankingentitiessubjecttothefinal BoardandTreasuryagreedthatthecreditprotection ruleforanadditionalyearuntilJuly21,2015.17 wasnolongernecessarybecausetheaccumulated feescollectedthroughtheTALFprogramexceeded Votingfortheseactions:ChairmanBernanke, theamountof TALFloansoutstanding.TheTALF ViceChairYellen,andGovernorsTarullo, programclosedinJune2010,andmostloanshave Raskin,Stein,andPowell. beenrepaidormatured.TheTreasury’soriginal $20billionincreditprotectionfortheTALFwas Note:OnJanuary14,2014,theBoardapprovedan reducedto$4.3billioninJune2010andto$1.4bilinterimfinalrule(DocketNo.R-1480)thatisacom- lioninJune2012. panionruletotheDecember2013finalrule.18The interimfinalrulewouldpermitbankingentitiesto Votingforthisaction:ChairmanBernanke,Vice retaininvestmentsincertainpooledinvestment ChairYellen,andGovernorsDuke,Tarullo, vehiclesthatinvestedtheirofferingproceedsprimar- Raskin,Stein,andPowell. ilyincertainsecuritiesissuedbycommunitybanking organizationsof thetypegrandfatheredundersec- Leveraged Lending tion171of theDodd-FrankAct.Theinterimfinal rulewasdevelopedjointlyandalsoapprovedbythe OnMarch7,2013,theBoardapprovedfinalguid- FDIC,OCC,CFTC,andSEC. ance(DocketNo.OP-1438),issuedjointlywiththe FDICandOCC,onleveragedlending.21Theguid- Bank Secrecy Act Regulations ance,whichappliestoallfinancialinstitutionssupervisedbytheseagenciesthatengageinleveragedlend- OnJuly18,2013,theBoardapprovedafinalrule ingactivities,coverstransactionswithborrowers (RIN1506-AB20),issuedjointlywiththeDepart- whosedegreeof financialleveragesignificantly mentof theTreasury’sFinancialCrimesEnforce- exceedsindustrynorms.TheguidanceoutlineshighmentNetwork,amendingthedefinitionsof “funds levelprinciplesforsafeandsoundleveragedlending, transfer”and“transmittalof funds”intheregula- includingunderwriting,monitoring,andreporting tionsimplementingtheBankSecrecyAct.19Thefinal practicesfortheseloans,andreplacesexistingguidrulemaintainsthecurrentscopeof fundstransfers anceissuedinApril2001.Theguidanceiseffective andtransmittalsof fundssubjecttotheactinlightof onMarch22,2013(thecompliancedateisMay21, Dodd-FrankActamendmentstotheElectronic 2013). FundTransferAct.TheruleiseffectiveJanuary3, 2014. Votingforthisaction:ChairmanBernanke,Vice ChairYellen,andGovernorsDuke,Tarullo, Votingforthisaction:ChairmanBernanke,Vice Raskin,Stein,andPowell. ChairYellen,andGovernorsDuke,Tarullo, Raskin,Stein,andPowell. Community Reinvestment Act OnSeptember30,2013,theBoardapprovedfinal Policy Statements and Other Actions newandrevisedInteragencyQuestionsandAnswers RegardingCommunityReinvestment(DocketNo. Term Asset-Backed Securities OP-1456),issuedjointlywiththeFDICandOCC,to Loan Facility provideadditionalguidancetofinancialinstitutions andthepublicregardingtheagencies’Community OnJanuary15,2013,theBoardapprovedeliminating ReinvestmentActregulations.22Thequestionsand theDepartmentof theTreasury’s(Treasury)remain- answersclarifyseveralcommunitydevelopmentmat- 17 Seepressreleaseatwww.federalreserve.gov/newsevents/press/ 20 Seepressreleaseatwww.federalreserve.gov/newsevents/press/ bcreg/20131210b.htm. monetary/20130115b.htm. 18 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 21 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2013- 01-31/html/2014-02019.htm. 03-22/html/2013-06567.htm. 19 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2013- 22 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2013- 12-04/html/2013-28951.htm. 11-20/html/2013-27738.htm.

122 100thAnnualReport|2013 ters,includinghowtheagenciesconsidercommunity Discount Rates for Depository developmentactivitiesthatbenefitabroaderstate- Institutions in 2013 wideorregionalareathatincludesaninstitution’s assessmentareaandhowtheyconsidercertaincommunitydevelopmentservices.Thequestionsand UndertheFederalReserveAct,theboardsof direcanswersareeffectiveNovember20,2013. torsof theFederalReserveBanksmustestablish ratesondiscountwindowloanstodepositoryinstitu- Votingforthisaction:ChairmanBernanke,Vice tionsatleastevery14days,subjecttoreviewand ChairYellen,andGovernorsTarullo,Raskin, determinationbytheBoardof Governors. Stein,andPowell. Primary, Secondary, and Seasonal Credit Stress Testing Scenarios Primarycredit,theFederalReserve’smainlending OnNovember5,2013,theBoardapprovedafinal programfordepositoryinstitutions,isextendedat policystatement(DocketNo.OP-1452)describingits theprimarycreditrate,whichissetabovetheusual processesfordevelopingthescenariostobeusedin levelof short-termmarketinterestrates.Itismade theannualsupervisoryandcompany-runstresstests available,withminimaladministrationandforvery requiredundertheBoard’sDodd-FrankActstress shortterms,asabackupsourceof liquidityto testrulesandcapitalplanrule.23Thepolicystate- depositoryinstitutionsthat,inthejudgmentof the mentiseffectiveJanuary1,2014. lendingFederalReserveBank,areingenerallysound financialcondition.Throughout2013,theprimary Votingforthisaction:ChairmanBernanke,Vice creditratewas¾percent. ChairYellen,andGovernorsTarullo,Raskin, Stein,andPowell. Secondarycreditisavailableinappropriatecircumstancestodepositoryinstitutionsthatdonotqualify Social Media and Financial Institutions forprimarycredit.Thesecondarycreditrateissetat aspreadabovetheprimarycreditrate.Throughout OnNovember12,2013,theBoardapprovedfinal 2013,thespreadwassetat50basispointsresulting guidance(DocketNo.FFIEC-2013-0002)tohelp inasecondarycreditrateof 1¼percent.Seasonal financialinstitutionsunderstandandmanagepoten- creditisavailabletosmallerdepositoryinstitutionsto tialconsumercompliance,legal,reputational,and meetliquidityneedsthatarisefromregularswingsin operationalrisksassociatedwiththeiruseof social theirloansanddeposits.Therateonseasonalcredit media.24Theguidancealsoprovidesconsiderations iscalculatedeverytwoweeksasanaverageof thatfinancialinstitutionsmayfindusefulwhencon- selectedmoney-marketyields,typicallyresultingina ductingriskassessmentsanddevelopingandevaluat- rateclosetothefederalfundsratetarget.Atyearingpoliciesandproceduresrelatedtosocialmedia. end,theseasonalcreditratewas0.15percent.25 TheFederalFinancialInstitutionsExamination Council,onbehalf of itsmemberagencies,issuedthe Votes on Changes to Discount Rates for guidanceonDecember11,2013.Theguidanceis Depository Institutions effectiveimmediately. Abouteverytwoweeksduring2013,theBoard Votingforthisaction:ChairmanBernanke,Vice approvedproposalsbythe12ReserveBanksto ChairYellen,andGovernorsTarullo,Raskin, maintaintheformulasforcomputingthesecondary Stein,andPowell. andseasonalcreditrates.In2013,theBoarddidnot approveanychangesintheprimarycreditrate. 23 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2013- 11-29/html/2013-27009.htm. 24 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2013- 25 Forcurrentandhistoricaldiscountrates,seewww 12-17/html/2013-30004.htm. .frbdiscountwindow.org/.

123 Minutes of 8 Federal Open Market Committee Meetings Thepolicyactionsof theFederalOpenMarketCom- adecision,theyareidentifiedintheminutesanda mittee,containedintheminutesof itsmeetings,are summaryof thereasonsfortheirdissentisprovided. presentedintheAnnualReportof theBoardof Governorspursuanttotherequirementsof section10of Policydirectivesof theFederalOpenMarketComtheFederalReserveAct.Thatsectionprovidesthat mitteeareissuedtotheFederalReserveBankof New theBoardshallkeepacompleterecordof theactions YorkastheBankselectedbytheCommitteeto takenbytheBoardandbytheFederalOpenMarket executetransactionsfortheSystemOpenMarket Committeeonallquestionsof policyrelatingtoopen Account.Intheareaof domesticopenmarketoperamarketoperations,thatitshallrecordthereinthe tions,theFederalReserveBankof NewYorkopervotestakeninconnectionwiththedeterminationof atesunderinstructionsfromtheFederalOpenMaropenmarketpoliciesandthereasonsunderlyingeach ketCommitteethattaketheformof anAuthorizapolicyaction,andthatitshallincludeinitsannual tionforDomesticOpenMarketOperationsanda reporttoCongressafullaccountof suchactions. DomesticPolicyDirective.(AnewDomesticPolicy Directiveisadoptedateachregularlyscheduled Theminutesof themeetingscontainthevotesonthe meeting.)Intheforeigncurrencyarea,theFederal policydecisionsmadeatthosemeetings,aswellasa ReserveBankof NewYorkoperatesunderanAuthosummaryof theinformationanddiscussionsthatled rizationforForeignCurrencyOperations,aForeign tothedecisions.Inaddition,fourtimesayear,start- CurrencyDirective,andProceduralInstructionswith ingwiththeOctober2007Committeemeeting,a RespecttoForeignCurrencyOperations.Changesin Summaryof EconomicProjectionsispublishedasan theinstrumentsduringtheyeararereportedinthe addendumtotheminutes.Thedescriptionsof eco- minutesfortheindividualmeetings.1 nomicandfinancialconditionsintheminutesandthe Summaryof EconomicProjectionsarebasedsolely ontheinformationthatwasavailabletotheCommit- 1 AsofJanuary1,2013,theFederalReserveBankofNewYork teeatthetimeof themeetings. wasoperatingundertheDomesticPolicyDirectiveapprovedat theDecember11–12,2012,Committeemeeting.Theother policyinstruments(theAuthorizationforDomesticOpenMar- Membersof theCommitteevotingforaparticular ketOperations,theAuthorizationforForeignCurrencyOperaactionmaydifferamongthemselvesastothereasons tions,theForeignCurrencyDirective,andProceduralInstructionswithRespecttoForeignCurrencyOperations)ineffectas fortheirvotes;insuchcases,therangeof theirviews ofJanuary1,2013,wereapprovedattheJanuary24–25,2012, isnotedintheminutes.Whenmembersdissentfrom meeting.

124 100thAnnualReport|2013 Meeting Held on January 29–30, 2013 ThomasC.Baxter DeputyGeneralCounsel Ameetingof theFederalOpenMarketCommittee StevenB.Kamin washeldintheofficesof theBoardof Governorsof Economist theFederalReserveSysteminWashington,D.C.,on DavidW.Wilcox Tuesday,January29,2013,at2:00p.m.,andcontin- Economist uedonWednesday,January30,2013,at9:00a.m. ThomasA.Connors,TroyDavig, Present MichaelP.Leahy,JamesJ.McAndrews, StephenA.Meyer,DavidReifschneider, BenBernanke DanielG.Sullivan,ChristopherJ.Waller, Chairman andWilliamWascher WilliamC.Dudley AssociateEconomists ViceChairman SimonPotter JamesBullard Manager,SystemOpenMarketAccount ElizabethDuke NellieLiang1 CharlesL.Evans Director,Officeof FinancialStabilityPolicyand Research,Boardof Governors EstherL.George JonW.Faust JeromeH.Powell SpecialAdvisortotheBoard,Officeof Board SarahBloomRaskin Members,Boardof Governors EricRosengren JamesA.ClouseandWilliamNelson DeputyDirectors,Divisionof MonetaryAffairs, JeremyC.Stein Boardof Governors DanielK.Tarullo MarkE.VanDerWeide JanetL.Yellen DeputyDirector,Divisionof BankingSupervision andRegulation,Boardof Governors ChristineCumming,RichardW.Fisher, NarayanaKocherlakota,SandraPianalto, LindaRobertson andCharlesI.Plosser AssistanttotheBoard,Officeof BoardMembers, AlternateMembersof theFederalOpenMarket Boardof Governors Committee JoyceK.Zickler JeffreyM.Lacker,DennisP.Lockhart, SeniorAdviser,Divisionof MonetaryAffairs, andJohnC.Williams Boardof Governors Presidentsof theFederalReserveBanksof EricM.Engen,ThomasLaubach, Richmond,Atlanta,andSanFrancisco,respectively andDavidE.Lebow WilliamB.English AssociateDirectors,Divisionof Researchand SecretaryandEconomist Statistics,Boardof Governors DeborahJ.Danker BethAnneWilson DeputySecretary DeputyAssociateDirector,Divisionof International Finance,Boardof Governors MatthewM.Luecke AssistantSecretary KarenM.PenceandStaceyTevlin AssistantDirectors,Divisionof Researchand DavidW.Skidmore Statistics,Boardof Governors AssistantSecretary JeremyB.Rudd MichelleA.Smith Adviser,Divisionof ResearchandStatistics, AssistantSecretary Boardof Governors ScottG.Alvarez GeneralCounsel 1 AttendedTuesday’ssessiononly.

Minutesof FederalOpenMarketCommitteeMeetings|January 125 DavidH.Small WilliamC.Dudley ProjectManager,Divisionof MonetaryAffairs, Presidentof theFederalReserveBankof NewYork, Boardof Governors with AndrewFigura ChristineCumming GroupManager,Divisionof ResearchandStatistics, FirstVicePresidentof theFederalReserveBankof Boardof Governors NewYork,asalternate. JohnC.DriscollandJenniferE.Roush EricRosengren SeniorEconomists,Divisionof MonetaryAffairs, Presidentof theFederalReserveBankof Boston, Boardof Governors with CharlesI.Plosser RuthJudson Presidentof theFederalReserveBankof SeniorEconomist,Divisionof InternationalFinance, Philadelphia,asalternate. Boardof Governors JonathanD.Rose CharlesL.Evans Economist,Divisionof MonetaryAffairs, Presidentof theFederalReserveBankof Chicago, Boardof Governors with SandraPianalto SarahG.Green Presidentof theFederalReserveBankof Cleveland, FirstVicePresident,FederalReserveBankof asalternate. Richmond JamesBullard DavidAltig,Jeff Fuhrer,LorettaJ.Mester, Presidentof theFederalReserveBankof St.Louis, GlennD.Rudebusch,andMarkS.Sniderman with ExecutiveVicePresidents,FederalReserveBanksof Atlanta,Boston,Philadelphia,SanFrancisco,and RichardW.Fisher Cleveland,respectively Presidentof theFederalReserveBankof Dallas, asalternate. RonFeldmanandLorieK.Logan SeniorVicePresidents,FederalReserveBanksof EstherL.George MinneapolisandNewYork,respectively Presidentof theFederalReserveBankof KansasCity,with EvanF.KoenigandStevenM.Friedman VicePresidents,FederalReserveBanksof Dallasand NarayanaKocherlakota NewYork,respectively Presidentof theFederalReserveBankof Minneapolis,asalternate. MatthewD.Raskin MarketsOfficer,FederalReserveBankof NewYork Byunanimousvote,thefollowingofficersof theFed- RobertL.Hetzel eralOpenMarketCommitteewereselectedtoserve SeniorEconomist,FederalReserveBankof untiltheselectionof theirsuccessorsatthefirstregu- Richmond larlyscheduledmeetingof theCommitteein2014: BenBernanke Annual Organizational Matters2 Chairman Intheagendaforthismeeting,itwasreportedthat WilliamC.Dudley advicesof theelectionof thefollowingmembersand ViceChairman alternatemembersof theFederalOpenMarketCom- WilliamB.English mitteeforatermbeginningJanuary29,2013,had SecretaryandEconomist beenreceivedandthattheseindividualshadexecuted theiroathsof office. DeborahJ.Danker DeputySecretary Theelectedmembersandalternatememberswereas follows: MatthewM.Luecke AssistantSecretary 2 VersionsofthecurrentCommitteedocumentsareavailableat DavidW.Skidmore http://www.federalreserve.gov/monetarypolicy/ rules_authorizations.htm. AssistantSecretary

126 100thAnnualReport|2013 MichelleA.Smith naturaldisaster,theriskof abroader,moresystemic AssistantSecretary disruptiontothefunctioningof assetmarketscould result.Inthiscase,theprospectthatrepurchase ScottG.Alvarez operationscouldpotentiallyalleviatesomeof the GeneralCounsel marketstrainsmightwarrantimmediateaction.Con- ThomasC.Baxter sistentwithCommitteepractice,theChairman,if DeputyGeneralCounsel feasible,wouldconsultwiththeCommitteebefore makinganysuchinstruction.Thesecondamendment RichardM.Ashton harmonizedthelanguagereferringtotheCommit- AssistantGeneralCounsel tee’slonger-runobjectiveswiththatintheCommit- StevenB.Kamin tee’sStatementonLonger-RunGoalsandMonetary Economist PolicyStrategy.TheGuidelinesfortheConductof SystemOpenMarketOperationsinFederal-Agency DavidW.Wilcox Issuesremainedsuspended. Economist ThomasA.Connors AuthorizationforDomesticOpenMarket Operations(AmendedEffectiveon TroyDavig January29,2013) MichaelP.Leahy JamesJ.McAndrews 1. TheFederalOpenMarketCommitteeauthorizes anddirectstheFederalReserveBankof New StephenA.Meyer York,totheextentnecessarytocarryoutthe DavidReifschneider mostrecentdomesticpolicydirectiveadoptedat DanielG.Sullivan ameetingof theCommittee: GeoffreyTootell A. TobuyorsellU.S.governmentsecurities, ChristopherJ.Waller includingsecuritiesof theFederalFinancing WilliamWascher Bank,andsecuritiesthataredirectobliga- AssociateEconomists tionsof,orfullyguaranteedastoprincipal andinterestby,anyagencyof theUnited Byunanimousvote,theFederalReserveBankof Statesintheopenmarket,fromortosecuri- NewYorkwasselectedtoexecutetransactionsfor tiesdealersandforeignandinternational theSystemOpenMarketAccount. accountsmaintainedattheFederalReserve Bankof NewYork,onacash,regular,or Byunanimousvote,SimonPotterwasselectedto deferreddeliverybasis,fortheSystemOpen serveatthepleasureof theCommitteeasManager, MarketAccountatmarketprices,and,for SystemOpenMarketAccount,ontheunderstanding suchAccount,toexchangematuringU.S. thathisselectionwassubjecttobeingsatisfactoryto governmentandfederalagencysecurities theFederalReserveBankof NewYork. withtheTreasuryortheindividualagencies ortoallowthemtomaturewithoutreplace- Secretary’snote:Advicesubsequentlywas ment;and receivedthattheselectionof Mr.PotterasManagerwassatisfactorytotheFederalReserveBank B. TobuyorsellintheopenmarketU.S.govof NewYork. ernmentsecurities,andsecuritiesthatare directobligationsof,orfullyguaranteedasto Byunanimousvote,theAuthorizationforDomestic principalandinterestby,anyagencyof the OpenMarketOperationswasapprovedwithtwo UnitedStates,fortheSystemOpenMarket amendments.Thefirstbroadenedtheactionsthatthe Accountunderagreementstoresellorrepur- OpenMarketDeskmaytake,attheChairman’s chasesuchsecuritiesorobligations(including instructionduringanintermeetingperiod,toinclude suchtransactionsasarecommonlyreferred transactionstoaddresstemporarydisruptionsof an toasrepoandreverserepotransactions)in operationalorhighlyunusualnatureinU.S.dollar 65businessdaysorless,atratesthat,unless fundingmarkets.Forexample,if securedfunding otherwiseexpresslyauthorizedbytheComratesweretoincreasetohighlevelsinthewakeof a mittee,shallbedeterminedbycompetitive

Minutesof FederalOpenMarketCommitteeMeetings|January 127 bidding,afterapplyingreasonablelimitations UnitedStatespursuanttosection15of theFedonthevolumeof agreementswithindividual eralReserveAct,theFederalOpenMarketComcounterparties. mitteeauthorizesanddirectstheFederalReserve Bankof NewYork: 2. TheFederalOpenMarketCommitteeauthorizes theFederalReserveBankof NewYorktounder- A. FortheSystemOpenMarketAccount,tosell taketransactionsof thetypedescribedinpara- U.S.governmentsecuritiesandsecuritiesthat graphs1.Aand1.Bfromtimetotimeforthepur- aredirectobligationsof,orfullyguaranteed poseof testingoperationalreadiness.Theaggre- astoprincipalandinterestby,anyagencyof gateparvalueof suchtransactionsof thetype theUnitedStatestosuchaccountsonthe describedinparagraph1.Ashallnotexceed basessetforthinparagraph1.Aunderagree- $5billionpercalendaryear.Theoutstanding mentsprovidingfortheresalebysuch amountof suchtransactionsof thetype accountsof thosesecuritiesin65business describedinparagraph1.Bshallnotexceed daysorlessontermscomparabletothose $5billionatanygiventime.Thesetransactions availableonsuchtransactionsinthemarket; shallbeconductedwithpriornoticetothe Committee. B. FortheNewYorkBankaccount,when appropriate,toundertakewithdealers,sub- 3. Inordertoensuretheeffectiveconductof open jecttotheconditionsimposedonpurchases marketoperations,theFederalOpenMarket andsalesof securitiesinparagraphl.B, CommitteeauthorizestheFederalReserveBank repurchaseagreementsinU.S.government of NewYorktouseagentsinagencyMBS-related securitiesandsecuritiesthataredirectobligatransactions. tionsof,orfullyguaranteedastoprincipal andinterestby,anyagencyof theUnited 4. Inordertoensuretheeffectiveconductof open States,andtoarrangecorrespondingsaleand marketoperations,theFederalOpenMarket repurchaseagreementsbetweenitsown CommitteeauthorizestheFederalReserveBank accountandsuchforeign,international,and of NewYorktolendonanovernightbasisU.S. fiscalagencyaccountsmaintainedatthe governmentsecuritiesandsecuritiesthatare Bank;and directobligationsof anyagencyof theUnited States,heldintheSystemOpenMarketAccount, C. FortheNewYorkBankaccount,when todealersatratesthatshallbedeterminedby appropriate,tobuyU.S.governmentsecuricompetitivebidding.TheFederalReserveBank tiesandobligationsthataredirectobligations of NewYorkshallsetaminimumlendingfee of,orfullyguaranteedastoprincipaland consistentwiththeobjectivesof theprogramand interestby,anyagencyof theUnitedStates applyreasonablelimitationsonthetotalamount fromsuchforeignandinternationalaccounts of aspecificissuethatmaybeauctionedandon maintainedattheBankunderagreements theamountof securitiesthateachdealermay providingfortherepurchasebysuch borrow.TheFederalReserveBankof NewYork accountsof thosesecuritiesonthesamebusimayrejectbidsthatcouldfacilitateadealer’sabil- nessday. itytocontrolasingleissueasdeterminedsolely bytheFederalReserveBankof NewYork.The Transactionsundertakenwithsuchaccounts FederalReserveBankof NewYorkmaylend undertheprovisionsof thisparagraphmayprosecuritiesonlongerthananovernightbasisto videforaservicefeewhenappropriate. accommodateweekend,holiday,andsimilartradingconventions. 6. Intheexecutionof theCommittee’sdecision regardingpolicyduringanyintermeetingperiod, 5. Inordertoensuretheeffectiveconductof open theCommitteeauthorizesanddirectstheFederal marketoperations,whileassistingintheprovision ReserveBankof NewYork,upontheinstruction of short-terminvestmentsorotherauthorized of theChairmanof theCommittee,to(i)adjust servicesforforeignandinternationalaccounts somewhatinexceptionalcircumstancesthedegree maintainedattheFederalReserveBankof New of pressureonreservepositionsandhencethe YorkandaccountsmaintainedattheFederal intendedfederalfundsrateandtotakeactions ReserveBankof NewYorkasfiscalagentof the thatresultinmaterialchangesinthecomposition

128 100thAnnualReport|2013 andsizeof theassetsintheSystemOpenMarket throughspotorforwardtransactionsonthe Accountotherthanthoseanticipatedbythe openmarketathomeandabroad,including Committeeatitsmostrecentmeetingor transactionswiththeU.S.Treasury,withthe (ii)undertaketransactionsof thetypedescribed U.S.ExchangeStabilizationFundestablished inparagraphs1.Aand1.Binordertoappropri- bysection10of theGoldReserveActof atelyaddresstemporarydisruptionsof anopera- 1934,withforeignmonetaryauthorities,with tionalorhighlyunusualnatureinU.S.dollar theBankforInternationalSettlements,and fundingmarkets.Anysuchadjustmentas withotherinternationalfinancialinstitutions: describedinclause(i)shallbemadeinthecontext of theCommittee’sdiscussionanddecisionatits Australiandollars mostrecentmeetingandtheCommittee’slong- Brazilianreais runobjectivestofostermaximumemployment Canadiandollars andpricestability,andshallbebasedoneco- Danishkroner nomic,financial,andmonetarydevelopments euro duringtheintermeetingperiod.Consistentwith Japaneseyen Committeepractice,theChairman,if feasible, Koreanwon willconsultwiththeCommitteebeforemaking Mexicanpesos anyinstructionunderthisparagraph. NewZealanddollars Norwegiankroner TheCommitteevotedunanimouslytoamendthe Poundssterling AuthorizationforForeignCurrencyOperationsand Singaporedollars theProceduralInstructionswithRespecttoForeign Swedishkronor CurrencyOperations,andtoreaffirmtheForeign Swissfrancs CurrencyDirectiveintheformshownbelow.The approvalof thesedocumentsincludedapprovalof theSystem’swarehousingagreementwiththeU.S. B. Toholdbalancesof,andtohaveoutstanding Treasury.TheAuthorizationforForeignCurrency forwardcontractstoreceiveortodeliver,the OperationsandtheProceduralInstructionswith foreigncurrencieslistedinparagraphA RespecttoForeignCurrencyOperationswere above. amendedtoincludetheauthoritytoconductsmallvalueoperationsagainstthefullrangeof foreign C. TodrawforeigncurrenciesandtopermitfortransactionsthattheDeskisauthorizedtoconduct. eignbankstodrawdollarsundertherecipro- Thischangewasmadetoallowforprudenttestingof calcurrencyarrangementslistedinparagraph operationalreadiness,andissimilarinpurposetothe 2below,providedthatdrawingsbyeither amendmentthattheCommitteeapprovedin partytoanysucharrangementshallbefully June2012totheAuthorizationforDomesticOpen liquidatedwithin12monthsafterany MarketOperations. amountoutstandingatthattimewasfirst drawn,unlesstheCommittee,becauseof AuthorizationforForeignCurrencyOperations exceptionalcircumstances,specificallyautho- (AmendedEffectiveonJanuary29,2013) rizesadelay. 1. TheFederalOpenMarketCommitteeauthorizes D. Tomaintainanoverallopenpositioninall anddirectstheFederalReserveBankof New foreigncurrenciesnotexceeding$25.0billion. York,fortheSystemOpenMarketAccount,to Forthispurpose,theoverallopenpositionin theextentnecessarytocarryouttheCommittee’s allforeigncurrenciesisdefinedasthesum foreigncurrencydirectiveandexpressauthoriza- (disregardingsigns)of netpositionsininditionsbytheCommitteepursuantthereto,andin vidualcurrencies,excludingchangesindollar conformitywithsuchproceduralinstructionsas valueduetoforeignexchangeratemovetheCommitteemayissuefromtimetotime: mentsandinterestaccruals.Thenetposition inasingleforeigncurrencyisdefinedas A. Topurchaseandsellthefollowingforeign holdingsof balancesinthatcurrency,plus currenciesintheformof cabletransfers outstandingcontractsforfuturereceipt,

Minutesof FederalOpenMarketCommitteeMeetings|January 129 minusoutstandingcontractsforfuturedeliv- shallbereferredforreviewandapprovaltothe eryof thatcurrency,i.e.,asthesumof these Committee. elementswithdueregardtosign. 5. Foreigncurrencyholdingsshallbeinvestedto 2. TheFederalOpenMarketCommitteedirectsthe ensurethatadequateliquidityismaintainedto FederalReserveBankof NewYorktomaintain meetanticipatedneedsandsothateachcurrency reciprocalcurrencyarrangements(“swap” portfolioshallgenerallyhaveanaverageduration arrangements)fortheSystemOpenMarket of nomorethan18months(calculatedas Accountforperiodsuptoamaximumof Macaulayduration).Suchinvestmentsmay 12monthswiththefollowingforeignbanks, includebuyingorsellingoutrightobligationsof, whichareamongthosedesignatedbytheBoard orfullyguaranteedastoprincipalandinterestby, of Governorsof theFederalReserveSystem aforeigngovernmentoragencythereof;buying undersection214.5of RegulationN,Relations suchsecuritiesunderagreementsforrepurchase withForeignBanksandBankers,andwiththe of suchsecurities;sellingsuchsecuritiesunder approvalof theCommitteetorenewsuch agreementsfortheresaleof suchsecurities;and arrangementsonmaturity: holdingvarioustimeandotherdepositaccounts atforeigninstitutions.Inaddition,whenappropriateinconnectionwitharrangementstopro- Amountofarrangement Foreignbank (millionsofdollarsequivalent) videinvestmentfacilitiesforforeigncurrency holdings,U.S.governmentsecuritiesmaybepur- BankofCanada 2,000 chasedfromforeigncentralbanksunderagree- BankofMexico 3,000 mentsforrepurchaseof suchsecuritieswithin30 calendardays. Anychangesinthetermsof existingswap arrangements,andtheproposedtermsof any 6. Alloperationsundertakenpursuanttotheprenewarrangementsthatmaybeauthorized,shall cedingparagraphsshallbereportedpromptlyto bereferredforreviewandapprovaltothe theForeignCurrencySubcommitteeandthe Committee. Committee.TheForeignCurrencySubcommittee consistsof theChairmanandViceChairmanof 3. Alltransactionsinforeigncurrenciesundertaken theCommittee,theViceChairmanof theBoard underparagraph1.Aaboveshall,unlessother- of Governors,andsuchothermemberof the wiseexpresslyauthorizedbytheCommittee,beat BoardastheChairmanmaydesignate(orinthe prevailingmarketrates.Forthepurposeof pro- absenceof membersof theBoardservingonthe vidinganinvestmentreturnonSystemholdings Subcommittee,otherBoardmembersdesignated of foreigncurrenciesorforthepurposeof adjust- bytheChairmanasalternates,andintheabsence inginterestratespaidorreceivedinconnection of theViceChairmanof theCommittee,theVice withswapdrawings,transactionswithforeign Chairman’salternate).Meetingsof theSubcomcentralbanksmaybeundertakenatnon-market mitteeshallbecalledattherequestof anymemexchangerates. ber,orattherequestof theManager,System OpenMarketAccount(“Manager”),forthepur- 4. Itshallbethenormalpracticetoarrangewith posesof reviewingrecentorcontemplatedoperaforeigncentralbanksforthecoordinationof for- tionsandof consultingwiththeManageron eigncurrencytransactions.Inmakingoperating othermattersrelatingtotheManager’sresponsiarrangementswithforeigncentralbankson bilities.Attherequestof anymemberof theSub- Systemholdingsof foreigncurrencies,theFederal committee,questionsarisingfromsuchreviews ReserveBankof NewYorkshallnotcommit andconsultationsshallbereferredfordeterminaitself tomaintainanyspecificbalance,unless tiontotheFederalOpenMarketCommittee. authorizedbytheFederalOpenMarketCommittee.Anyagreementsorunderstandingsconcern- 7. TheChairmanisauthorized: ingtheadministrationof theaccountsmaintainedbytheFederalReserveBankof NewYork A. Withtheapprovalof theCommittee,toenter withtheforeignbanksdesignatedbytheBoardof intoanyneededagreementorunderstanding Governorsundersection214.5of RegulationN withtheSecretaryof theTreasuryaboutthe

130 100thAnnualReport|2013 divisionof responsibilityforforeigncurrency AlloperationsundertakenpursuanttosuchclearoperationsbetweentheSystemandthe ancesshallbereportedpromptlytotheCommittee. Treasury; 1. TheManagershallclearwiththeSubcommittee B. TokeeptheSecretaryof theTreasuryfully (orwiththeChairman,if theChairmanbelieves advisedconcerningSystemforeigncurrency thatconsultationwiththeSubcommitteeisnot operations,andtoconsultwiththeSecretary feasibleinthetimeavailable): onpolicymattersrelatingtoforeigncurrency operations; A. Anyoperationthatwouldresultinachange intheSystem’soverallopenpositioninfor- C. Fromtimetotime,totransmitappropriate eigncurrenciesexceeding$300milliononany reportsandinformationtotheNational dayor$600millionsincethemostrecent AdvisoryCouncilonInternationalMonetary regularmeetingof theCommittee. andFinancialPolicies. B. Anyoperationthatwouldresultinachange 8. Staff officersof theCommitteeareauthorizedto onanydayintheSystem’snetpositionina transmitpertinentinformationonSystemforeign singleforeigncurrencyexceeding$150milcurrencyoperationstoappropriateofficialsof the lion,or$300millionwhentheoperationis TreasuryDepartment. associatedwithre-paymentof swapdrawings. 9. AllFederalReserveBanksshallparticipateinthe C. Anyoperationthatmightgenerateasubstantialvolumeof tradinginaparticularcurforeigncurrencyoperationsforSystemAccount rencybytheSystem,eventhoughthechange inaccordancewithparagraph3G(1)of theBoard intheSystem’snetpositioninthatcurrency of Governors’Statementof Procedurewith mightbelessthanthelimitsspecifiedin1.B. RespecttoForeignRelationshipsof Federal ReserveBanksdatedJanuary1,1944. D. Anyswapdrawingproposedbyaforeign banknotexceedingthelargerof (i)$200mil- 10.TheFederalOpenMarketCommitteeauthorizes lionor(ii)15percentof thesizeof theswap theFederalReserveBankof NewYorktounderarrangement. taketransactionsof thetypedescribedinparagraphs1,2,and5,andforeignexchangeand 2. TheManagershallclearwiththeCommittee(or investmenttransactionsthatitmaybeotherwise withtheSubcommittee,if theSubcommittee authorizedtoundertakefromtimetotimeforthe believesthatconsultationwiththefullCommittee purposeof testingoperationalreadiness.The isnotfeasibleinthetimeavailable,orwiththe aggregateamountof suchtransactionsshallnot Chairman,if theChairmanbelievesthatconsulexceed$2.5billionpercalendaryear.ThesetranstationwiththeSubcommitteeisnotfeasiblein actionsshallbeconductedwithpriornoticeto thetimeavailable): theCommittee. ProceduralInstructionswithRespectto A. Anyoperationthatwouldresultinachange ForeignCurrencyOperations(Amended intheSystem’soverallopenpositioninfor- EffectiveonJanuary29,2013) eigncurrenciesexceeding$1.5billionsince themostrecentregularmeetingof the Inconductingoperationspursuanttotheauthoriza- Committee. tionanddirectionof theFederalOpenMarketCommitteeassetforthintheAuthorizationforForeign B. Anyswapdrawingproposedbyaforeign CurrencyOperationsandtheForeignCurrency bankexceedingthelargerof (i)$200million Directive,theFederalReserveBankof NewYork, or(ii)15percentof thesizeof theswap throughtheManager,SystemOpenMarketAccount arrangement. (“Manager”),shallbeguidedbythefollowingproceduralunderstandingswithrespecttoconsultations 3. TheManagershallalsoconsultwiththeSubcomandclearanceswiththeCommittee,theForeignCur- mitteeortheChairmanaboutproposedswap rencySubcommittee,andtheChairmanof theCom- drawingsbytheSystemandaboutanyoperations mittee,unlessotherwisedirectedbytheCommittee. thatarenotof aroutinecharacter.

Minutesof FederalOpenMarketCommitteeMeetings|January 131 4. TheFederalOpenMarketCommitteeauthorizes B. Incooperation,asappropriate,withforeign theFederalReserveBankof NewYorktounder- monetaryauthorities;and taketransactionsof thetypedescribedinparagraphs1,2,and5of theForeignAuthorization C. Inamannerconsistentwiththeobligations andforeignexchangeandinvestmenttransactions of theUnitedStatesintheInternational thatitmaybeotherwiseauthorizedtoundertake MonetaryFundregardingexchangearrangefromtimetotimeforthepurposeof testing mentsunderIMFArticleIV. operationalreadiness.Theaggregateamountof suchtransactionsshallnotexceed$2.5billionper Allparticipantsbutonesupportedmakingonly calendaryear.Thesetransactionsshallbecon- minorwordingchangestotheStatementonLongerductedwithpriornoticetotheCommittee. RunGoalsandMonetaryPolicyStrategy.Mr. Tarulloabstainedbecausehedidnotthinkthestate- ForeignCurrencyDirective(Reaffirmed menthadadvancedthecauseof achievingorcom- January29,2013) municatinggreaterconsensusinthepolicyviewsof theCommittee. 1. Systemoperationsinforeigncurrenciesshallgen- StatementonLonger-RunGoalsandMonetary erallybedirectedatcounteringdisorderlymarket PolicyStrategy(AmendedEffectiveon conditions,providedthatmarketexchangerates January29,2013) fortheU.S.dollarreflectactionsandbehavior consistentwithIMFArticleIV,Section1. “TheFederalOpenMarketCommittee(FOMC) isfirmlycommittedtofulfillingitsstatutory 2. ToachievethisendtheSystemshall: mandatefromtheCongressof promotingmaximumemployment,stableprices,andmoderate A. Undertakespotandforwardpurchasesand long-terminterestrates.TheCommitteeseeksto salesof foreignexchange. explainitsmonetarypolicydecisionstothepublicasclearlyaspossible.Suchclarityfacilitates B. Maintainreciprocalcurrency(“swap”) well-informeddecisionmakingbyhouseholds arrangementswithselectedforeigncentral andbusinesses,reduceseconomicandfinancial banks. uncertainty,increasestheeffectivenessof monetarypolicy,andenhancestransparencyand C. Cooperateinotherrespectswithcentral accountability,whichareessentialinademobanksof othercountriesandwithinterna- craticsociety. tionalmonetaryinstitutions. Inflation,employment,andlong-terminterest 3. Transactionsmayalsobeundertaken: ratesfluctuateovertimeinresponsetoeconomic andfinancialdisturbances.Moreover,monetary A. ToadjustSystembalancesinlightof prob- policyactionstendtoinfluenceeconomicactivablefutureneedsforcurrencies. ityandpriceswithalag.Therefore,theCommittee’spolicydecisionsreflectitslonger-rungoals, B. ToprovidemeansformeetingSystemand itsmedium-termoutlook,anditsassessmentsof Treasurycommitmentsinparticularcurren- thebalanceof risks,includingriskstothefinancies,andtofacilitateoperationsof the cialsystemthatcouldimpedetheattainmentof ExchangeStabilizationFund. theCommittee’sgoals. C. Forsuchotherpurposesasmaybeexpressly TheinflationrateoverthelongerrunisprimarauthorizedbytheCommittee. ilydeterminedbymonetarypolicy,andhence theCommitteehastheabilitytospecifya 4. Systemforeigncurrencyoperationsshallbe longer-rungoalforinflation.TheCommittee conducted: judgesthatinflationattherateof 2percent,as measuredbytheannualchangeintheprice A. Incloseandcontinuousconsultationand indexforpersonalconsumptionexpenditures,is cooperationwiththeUnitedStatesTreasury; mostconsistentoverthelongerrunwiththe

132 100thAnnualReport|2013 FederalReserve’sstatutorymandate.Communi- onExternalCommunicationsof FederalReserve catingthisinflationgoalclearlytothepublic SystemStaff wereamendedtoclarifytheprecise helpskeeplonger-terminflationexpectations beginningandendof thecommunicationblackout firmlyanchored,therebyfosteringpricestability periodsurroundingregularmeetingsof theFederal andmoderatelong-terminterestratesand OpenMarketCommittee(FOMC). enhancingtheCommittee’sabilitytopromote maximumemploymentinthefaceof significant Byunanimousvote,theRulesof Procedurewere economicdisturbances. amendedtochangethequorumrequirementstostate thatameetingof theFOMCcouldnotbeconvened Themaximumlevelof employmentislargely withoutarepresentativeof aReserveBank. determinedbynonmonetaryfactorsthataffect thestructureanddynamicsof thelabormarket. Byunanimousvote,theCommitteereaffirmedits Thesefactorsmaychangeovertimeandmay ProgramforSecurityof FOMCInformation. notbedirectlymeasurable.Consequently,it wouldnotbeappropriatetospecifyafixedgoal Developments in Financial Markets and foremployment;rather,theCommittee’spolicy the Federal Reserve’s Balance Sheet decisionsmustbeinformedbyassessmentsof themaximumlevelof employment,recognizing TheManagerof theSystemOpenMarketAccount thatsuchassessmentsarenecessarilyuncertain (SOMA)reportedondevelopmentsindomesticand andsubjecttorevision.TheCommitteeconsid- foreignfinancialmarketsaswellastheSystemopen ersawiderangeof indicatorsinmakingthese marketoperationsduringtheperiodsincethe assessments.InformationaboutCommitteepar- FOMCmetonDecember11–12,2012.Byunaniticipants’estimatesof thelonger-runnormal mousvote,theCommitteeratifiedtheOpenMarket ratesof outputgrowthandunemploymentis Desk’sdomestictransactionsovertheintermeeting publishedfourtimesperyearintheFOMC’s period.Therewerenointerventionoperationsinfor- Summaryof EconomicProjections.For eigncurrenciesfortheSystem’saccountoverthe example,inthemostrecentprojections,FOMC intermeetingperiod. participants’estimatesof thelonger-runnormal rateof unemploymenthadacentraltendencyof Staff Review of the Economic Situation 5.2percentto6.0percent,unchangedfromone yearagobutsubstantiallyhigherthanthecorre- TheinformationreviewedattheJanuary29–30meetspondingintervalseveralyearsearlier. ingindicatedthattheexpansioninoveralleconomic activityslowedinthefourthquarterof lastyear, Insettingmonetarypolicy,theCommitteeseeks reflectingweather-relateddisruptionsandothertrantomitigatedeviationsof inflationfromits sitoryfactors,butprivatedomesticfinaldemand longer-rungoalanddeviationsof employment grewatasolidrate.Employmentcontinuedto fromtheCommittee’sassessmentsof itsmaxi- increaseatamoderatepace,andtheunemployment mumlevel.Theseobjectivesaregenerally rate,thoughstillhigh,waslowerattheendof the complementary.However,undercircumstances fourthquarterthanintheprecedingquarter.ConinwhichtheCommitteejudgesthattheobjec- sumerpriceinflationwassubdued,andmeasuresof tivesarenotcomplementary,itfollowsabal- longer-runinflationexpectationsremainedstable. ancedapproachinpromotingthem,takinginto accountthemagnitudeof thedeviationsandthe PrivatenonfarmemploymentexpandedinDecember potentiallydifferenttimehorizonsoverwhich ataboutthesamerateasinthefourthquarterasa employmentandinflationareprojectedto whole,whilegovernmentemploymentdecreased.The returntolevelsjudgedconsistentwithits unemploymentratewas7.8percentinDecember, mandate. belowitsaverageinthethirdquarter,whilethelabor forceparticipationratewasthesameasitsthird- TheCommitteeintendstoreaffirmtheseprin- quarteraverage.Therateof long-durationunemciplesandtomakeadjustmentsasappropriateat ploymentandtheshareof workersemployedpart itsannualorganizationalmeetingeachJanuary.” timeforeconomicreasonsedgeddowninDecember, butbothmeasureswerestillelevated.Therateof Byunanimousvote,thePolicyonExternalCommu- private-sectorhiring,alongwithindicatorsof job nicationsof CommitteeParticipantsandthePolicy openingsandfirms’hiringplans,wasgenerally

Minutesof FederalOpenMarketCommitteeMeetings|January 133 mutedbutremainedconsistentwithcontinuedmod- plans,suggestedthatoutlaysforbusinessequipment erateincreasesinemploymentinthecomingmonths. wouldriseonlymodestlyinthecomingmonths.Real businessspendingfornonresidentialconstruction Manufacturingproductionincreasedbrisklyin declinedsomewhatinthefourthquarterand NovemberandDecemberafterdeclininginOctober remainedatarelativelylowlevel.Areductioninthe whenactivitywasdisruptedbyHurricaneSandy.As accumulationof nonfarmbusinessinventoriessubaresult,factoryoutputexpandedonlyslightlyinthe tractedaconsiderableamountfromthechangein fourthquarterasawhole,andtherateof manufac- realgrossdomesticproduct(GDP)inthefourth turingcapacityutilizationwasonlyalittlehigherin quarter. Decemberthaninthethirdquarter.Theproduction of motorvehiclesandpartsincreasedconsiderablyin Realfederalgovernmentpurchasesdecreasedsubthefourthquarter,butfactoryoutputoutsideof the stantiallyinthefourthquarter,primarilybecauseof motorvehiclesectordeclinedsomewhat.Automak- asharpdeclineindefensespendingthatfolloweda ers’schedulesindicatedthatthepaceof motor markedincreaseinthepreviousquarter.Realstate vehicleassembliesinthefirstquarterwouldbe andlocalgovernmentpurchasesdecreasedslightlyin roughlythesameasinthefourthquarter.Broader thefourthquarter. indicatorsof manufacturingproduction,suchasthe diffusionindexesof newordersfromthenational TheU.S.internationaltradedeficitwidenedsubstanandregionalmanufacturingsurveys,wereatlevels tiallyinNovember,asimportsrosemorequickly consistentwithonlymodestincreasesinfactoryout- thanexports.Theriseinimportswasfairlybroadputinthenearterm. based,ledbystrongincreasesinconsumergoods, whiletheincreaseinexportsmainlyreflectedhigher Increasesinrealpersonalconsumptionexpenditures salesof capitalgoodsandautomotiveproducts. pickedupsomewhatinthefourthquarter,boosted ExportstoEuropepostedanothersignificantdecline importantlybyhigherspendingonmotorvehicles. inNovember.BasedondataforOctoberand Afterbeingroughlyflatinthethirdquarter,house- Novemberandanestimateof thetradedatafor holds’realdisposableincomeroseconsiderably,in December,theadvancereleaseof thenational partreflectinganaccelerationof incomepaymentsin incomeandproductaccountsshowedthatrealnet anticipationof increasesinindividualincometax exportsof goodsandservicesmadeasmallnegative ratesaftertheturnof theyear.InDecemberand arithmeticcontributiontothechangeinU.S.real January,consumersentimentwasmoredownbeat GDPinthefourthquarter,withexportsdeclining thaninthepreviousseveralmonths. morethanimports. Conditionsinthehousingsectorcontinuedto OverallU.S.consumerpricesincreasedmoreslowly improve,butconstructionactivityremainedatarela- inthefourthquarterthaninthepreviousquarter. tivelylowlevel,restrainedbytightunderwritingstan- ConsumerenergypricesdeclinedinNovemberand dardsformortgageloansandthesubstantialinven- December,andsurveydataindicatedthatretailgasotoryof foreclosedanddistressedproperties.Startsof linepricesfellfurtherinthefirstfewweeksof Janubothnewsingle-familyhomesandmultifamilyunits ary.Consumerfoodpricescontinuedtoriseata advancedinthefourthquarter,andpermitsalsorose, fasterpaceinNovemberandDecemberthaninthe whichpointedtoadditionalgainsinconstructionin thirdquarter,likelyreflectingtheongoingeffectsof thecomingmonths.Homepricesincreasedfurtherin lastsummer’sdrought.Inthefourthquarter,therise November.Inthefourthquarter,salesof bothnew inconsumerpricesexcludingfoodandenergy andexistinghomeswerehigherthanintheprevious slowed.Near-terminflationexpectationsfromthe quarter. ThomsonReuters/Universityof MichiganSurveysof ConsumersrosealittleinDecemberandearlyJanu- Realbusinessexpendituresonequipmentandsoft- ary;longer-terminflationexpectationswere warerosebrisklyinthefourthquarterafterdeclining unchanged. moderatelyintheprecedingquarter.Althoughnominalnewordersfornondefensecapitalgoodsexclud- Availablemeasuresof laborcompensationindicated ingaircraftalsoincreasedmarkedlylastquarter,the thatrecentgainsinnominalwagesremainedrelalevelof ordersremainedbelowshipments.Moreover, tivelyslow.Increasesinaveragehourlyearningsfor otherrecentforward-lookingindicators,suchassur- allemployeespickedupalittleinthefourthquarter veysof businessconditionsandcapitalspending butcontinuedtobefairlysubdued.

134 100thAnnualReport|2013 Economicgrowthintheadvancedforeigneconomies nominalandinflation-protectedTreasurysecurities appearedtoremainweakinthefourthquarter.Inthe roseslightlyovertheintermeetingperiod. euroarea,industrialproductionandretailsaleswere belowtheirthird-quarterlevelsthroughNovember, Conditionsinshort-termdollarfundingmarkets andrealGDPcontractedintheUnitedKingdom.In weregenerallylittlechangedonbalance;year-end Japan,indicatorsof productionandexports fundingpressuresweremodestoverallandroughlyin remainedweak;however,householdconsumption linewithmarketexpectations.Theoutstanding showedsomeimprovement,andthenewgovernment amountof unsecuredcommercialpaperissuedby introducedalargefiscalstimulusprogramandcalled Europeanfinancialinstitutionsincreasednoticeably. foraggressivemonetaryeasingtoenddeflation.In emergingmarketeconomies,realGDPgrowthisesti- Indicatorsof theconditionof domesticfinancial matedtohavepickedupinChinainthefourthquar- institutionsgenerallyimprovedovertheintermeeting ter,consistentwithotherChineseindicatorsthat period.Abroadindexof bankstockpricesrose,and pointedtoanimprovementinactivity.Production themedianspreadoncreditdefaultswapsof the andexportsreboundedatyear-endinanumberof largestbankingorganizationsmovedlower. otheremergingAsianeconomiesaswell.Inflation generallyremainedwellcontainedinbothadvanced BroadU.S.equitypriceindexesincreasedonnetover foreigneconomiesandemergingmarketeconomies. theintermeetingperiod,buoyedbymanyof thesame factorsthatcontributedtotheriseinTreasuryyields. Inaddition,thefourth-quarterearningsreporting Staff Review of the Financial Situation seasonstartedoff well,asearningsandrevenue resultswereaboveanalysts’expectationsforahigher- U.S.financialmarketconditionsimprovedonnet than-averagenumberof firms.Option-impliedvolabetweentheDecemberandJanuaryFOMCmeet- tilityfortheS&P500indexoverthenearterm ings,largelyinresponsetothepartialresolutionof dippedtoitslowestlevelsinceearly2007.The theissuesassociatedwiththeso-calledfiscalcliff,a option-impliedpriceof insuranceagainstdownside positivestarttothecorporateearningsreportingsea- riskontheindexatlongerhorizonsremained son,andsomefavorablepolicydevelopmentsin elevated. Europe. Yieldsonspeculative-gradecorporatebonds Theexpectedpathof thefederalfundsratebasedon decreasedovertheintermeetingperiod,andyieldson marketquotesmoveduponbalanceovertheinter- investment-gradecorporatebondswereupabit. meetingperiod,likelyreflectingasomewhatmore Riskspreadsonspeculative-gradebondsnarrowed positiveassessmentof theeconomicoutlook.Results substantially,andspreadsoninvestment-gradebonds fromtheDesk’ssurveyof primarydealersconducted decreasedaswell. priortotheJanuarymeetingshowedthatdealers continuedtoviewthethirdquarterof 2015asthe Netdebtfinancingbynonfinancialfirmsincreasedin mostlikelytimeof thefirstincreaseinthetargetfed- thefourthquarter.Outstandingvolumesof corpoeralfundsrate.Inaddition,themediandealercontin- ratebonds,commercialandindustrialloans,and uedtoseethefirstquarterof 2014asthemostlikely nonfinancialcommercialpaperallexpanded.The timefortheCommittee’sassetpurchasestocon- paceof grosspublicissuanceof equitybynonfinanclude,althoughfewerdealersthaninDecember cialfirmsremainedsolidinthefourthquarter,butit expectedthosepurchasestocontinuebeyond2014. wassubduedinJanuary,likelybecauseof seasonal factors. Treasurycouponyieldsincreasedovertheintermeetingperiod,includinganotablerisejustafteryear-end Conditionsinthecommercialrealestatesectorconwhenpassageof theAmericanTaxpayerRelief Act tinuedtobestrainedamidelevatedvacancyand of 2012apparentlylessenedconcernsabouttherisk delinquencyrates.However,issuanceof commercial of substantiallyhigherfiscaldragongrowthinthe mortgage-backedsecuritiesstrengthenedduringthe nearterm.More-positiveinvestorsentimentregard- fourthquarter,andspreadsonthosesecuritiesnaringtheoutlookforglobaleconomicgrowth,along rowedovertheintermeetingperiod. withsomeoptimismaboutafederaldebtceilingdeal, mayalsohavecontributedtotheincreaseinyields. Conforminghomemortgageratesedgedup,onnet, Measuresof inflationcompensationderivedfrom aftertouchingnewlowsduringtheintermeeting

Minutesof FederalOpenMarketCommitteeMeetings|January 135 period.Yieldsonresidentialmortgage-backedsecuri- termJapanesesovereignbondsroseafewbasis ties(MBS)rosebymore,leavingthespreadbetween pointsonnetovertheintermeetingperiod,butyields theprimarymortgagerateandMBSyieldsnarrower. onotherforeignbenchmarksovereignbonds MortgagerefinancingoriginationsinDecemberand increasedmore,reflectingboththeimprovementin Januarystayedneartheirhighestlevelssincethe globalsentimentandreducedexpectationsforaddihousingmarketbegantorecover.Theshareof exist- tionalmonetaryaccommodation,astheEuropean ingmortgagesthatwereseriouslydelinquentedged CentralBankandtheBankof Englandkepttheir downinOctoberandNovemberbutremainedhigh. policyratesonholdandappearedtosignallesslikelihoodof furthereasing. ConsumercreditexpandedbrisklyagaininOctober andNovember.Nonrevolvingcreditcontinuedto Staff Economic Outlook increaseatarobustpacebecauseof growthinstudentandautoloans,whilerevolvingcreditmoved Intheeconomicforecastpreparedbythestaff forthe roughlysideways.Issuanceof consumerasset-backed Januarymeetingof theFOMC,thenear-termprojecsecuritiesremainedstronginthefourthquarter. tionforrealGDPgrowthwasrevisedup,inlarge partbecausethefiscalpolicylegislationenactedin Growthof bankcreditinthefourthquarterslowed earlyJanuarywasslightlylessrestrictivethanthe toabouthalf itspacecomparedwithearlierinthe staff hadassumed.Thestaff’smedium-termforecast year,asloangrowthdeclined.AccordingtotheJanu- forrealGDPgrowthwasessentiallyunchanged.With arySeniorLoanOfficerOpinionSurveyonBank fiscalpolicystillanticipatedtobetighterthisyear LendingPractices,domesticbankscontinuedtoease thanlastyear,thestaff expectedthatincreasesinreal somewhattheirlendingstandardsandsomeloan GDPwouldonlymoderatelyexceedthegrowthrate terms,onbalance;theyalsoexperiencedanincrease of potentialoutput.In2014and2015,realGDPwas indemand,onnet,inmostmajorloancategoriesin projectedtoaccelerategradually,supportedbyan thefourthquarter. eventuallesseningof fiscalpolicyrestraint,increases inconsumerandbusinesssentiment,further M2anditslargestcomponent,liquiddeposits, improvementsincreditavailabilityandfinancialconexpandedrobustlyinDecember.Initialdatasug- ditions,andaccommodativemonetarypolicy.The gestedthattheexpirationof unlimiteddepositinsur- expansionineconomicactivitywasexpectedto anceonnoninterest-bearingtransactionaccountsat slowlyreducetheslackinlaborandproductmarkets year-endhadonlyalimitedeffectonbankdeposits overtheprojectionperiod,andprogressinreducing throughearlyJanuary.Themonetarybaseexpanded theunemploymentratewasanticipatedtobe atastrongrateinDecember,reflectinggrowthin gradual. bothcurrencyandreservebalances. Thestaff’sforecastforinflationwaslittlechanged Foreignfinancialconditionsimprovedovertheinter- fromthatpreparedfortheDecemberFOMCmeetmeetingperiodasmarketsrespondedfavorablytothe ing.Thestaff continuedtoprojectthatinflation passageof fiscalpolicylegislationintheUnited wouldbesubduedthrough2015.Thatforecastis Statesandtofurtherprogressinaddressingeuro-area basedontheexpectationthatcrudeoilpriceswill strains.Onnet,globalequitypricesroseandeuro- trenddownslowlyfromtheircurrentlevels,theboost areaperipheralspreadsnarrowed.Asglobalrisksen- toretailfoodpricesfromlastsummer’sdroughtwill timentimproved,thedollardepreciatedagainstthe betemporaryandrelativelysmall,longer-runinflaeuroandmostemergingmarketcurrencies.Against tionexpectationswillremainstable,andsignificant theyen,however,thedollarappreciatedsubstantially. resourceslackwillpersistovertheforecastperiod. Theyen’sdepreciationappearedtooccurinpartin responsetostatementsfromJapan’snewprimemin- Participants’ Views on Current Conditions ister,whourgedtheBankof Japantoeasepolicy and the Economic Outlook moreaggressively.AtitsJanuarymeeting,theBank of Japanrestateditsmonetarypolicyframework, Intheirdiscussionof theeconomicsituation,meetreplacingitsinflationgoalof 1percentwithaninfla- ingparticipantsindicatedthattheyviewedtheinfortiontargetof 2percent,andannounceditwould mationreceivedduringtheintermeetingperiodas commenceaprogramof assetpurchasesinJanu- suggestingthat,apartfromsometemporaryfactors ary2014withnopredeterminedlimitonthemaxi- thathadledtoapauseinoveralloutputgrowthin mumamountultimatelypurchased.Yieldsonlong- recentmonths,theeconomyremainedonamoderate

136 100thAnnualReport|2013 growthpath.Inparticular,participantssawtheeco- federaltaxpolicy.Moreover,itwasnotedthatbusinomicoutlookaslittlechangedormodestly nesseswereinagoodpositiontoexpandoncethey improvedrelativetotheDecembermeeting.Most cametoviewtheeconomicenvironmentasmore participantsjudgedthattherehadbeensomereduc- favorable.SurveydatafromoneDistrictindicated tionindownsiderisksfacingtheeconomy:Strainsin thatmorethanhalf of therespondentsexpectedto globalfinancialmarketshadeasedsomewhat,and increaseemploymentthisyear,withmanyciting U.S.fiscalpolicymakershadcometoapartialresolu- expectedsalesgrowthasthereason.Reportsfroma tionof theso-calledfiscalcliff.Supportedbyahighly numberof industriesacrossthecountryalsosugaccommodativestanceof monetarypolicy,thehous- gestedamorepositiveassessmentof futureprosingsectorwasstrengthening,andtheunemployment pects,particularlyintheautomotive,energy,and rateappearedlikelytocontinueitsgradualdecline. technologysectors.However,reportsfromthenon- Nearlyallparticipantsanticipatedthatinflationover automotivemanufacturingsectorwerelesspositive. themedium-termwouldrunatorbelowtheCommit- Inagriculture,recordpayoutsfromcropinsurance tee’s2percentobjective. followinglastyear’sdroughtsupportedfarm incomes,andlandpricescontinuedtorise.Reports Intheirdiscussionof thehouseholdsector,partici- onbusinessconditionsinthecommercialrealestate pantsnotedvariousfactorsinfluencingconsumer sectorweremoremixedbut,onthewhole,somewhat spending.Someparticipantsstatedthatlowinterest improved.Thestrengthof exportsreportedlyvaried, ratesappearedtobecontributingtostrongsalesof withindicationsof higherdemandfromMexicobut autosor,moregenerally,of consumerdurables.It somerelativelypessimisticreadingsfromfirmsabout wasalsonotedthatcontinueddeleveragingbyhouse- businessconditionsinEurope.Participantsgenerally holdswasimprovingtheirfinancialpositions,which welcomedanapparentpickupineconomicgrowthin wouldlikelysupportincreasedspending.Holiday partsof AsiaandsawreducedriskthattheChinese shoppingreportedlywasrelativelysolid,and,reflect- economywouldslowabruptly,butitwasnotedthat ingtheimprovementinthehousingmarket,demand noeconomywascurrentlyinapositiontoleadglobal forhomefurnishingsandconstructionmaterialswas growthhigher. up.However,someparticipantswereconcernedthat therecentincreaseinthepayrolltaxcouldhaveasig- Thepassageof legislationinearlyJanuaryresolved nificantnegativeeffectonspending,particularlyon someof theuncertaintiessurroundingthefederalfisthepartof lower-incomeconsumers. caloutlook,butnear-termuncertaintiesremained, includingtheprospectof automaticbudgetcuts.Par- Participantsremarkedontheongoingrecoveryinthe ticipantsgenerallyagreedthatfiscalnegotiations housingmarket,pointingvariouslytorisinghouse coulddevelopinawaythatwouldresultinsignifiprices,growthinresidentialconstructionandsales, cantlygreaterdragoneconomicgrowththanintheir andthelowerinventoryof homesforsale.Anumber baselineoutlook.Oneparticipantnotedpositive of participantsthoughtitlikelythathigherhomeval- newsaboutthefiscalpositionof thestates;insome uesandlowmortgagerateswerehelpingsupport cases,revenueshadrisensufficientlytoenable othersectorsof theeconomyaswell,andacouple increasesinstategovernmentspendingand sawthehousingmarketashavingthepotentialto employment. causeoverallgrowthtobestrongerthanexpectedthis year.Nonetheless,itwasnotedthatmortgagecredit Intheircommentsonlabormarketdevelopments, remainedtightandthefractionof homeownerswith participantsviewedthedeclineintheunemployment mortgagebalancesexceedingthevalueof their ratefromthethirdquartertothefourthandtheconhomesremainedhigh. tinuedmoderategainsinpayrollemploymentasconsistentwithagraduallyimprovingjobmarket.How- Ingeneral,participantsindicatedthat,relativetothe ever,theunemploymentrateremainedwellabove recentpast,morebusinesscontactsreportedan estimatesof itslonger-runnormallevel,andother improvementinconfidenceandsomecautiousopti- indicators,suchastheshareof long-termunemmismabouttheeconomicoutlook.Anecdotal ployedandthenumberof peopleworkingparttime reportssuggestedthatuncertaintyabouttheevolu- foreconomicreasons,suggestedthattherecoveryin tionof theeconomyandgovernmentpolicycontin- thelabormarketwasfarfromcomplete.Oneparticiuedtorestrainfirms’hiringandcapitalspending pantreportedthatfirmsinhisDistrictcontinuedto decisions,butthepassageof fiscallegislationinearly havedifficultyfindingworkerswithsuitableskills, Januaryhelpedresolvesomeof theuncertaintyabout suggestingthatlabormarketmismatchwasafactor

Minutesof FederalOpenMarketCommitteeMeetings|January 137 deterringjobgrowth.Afewothers,however,pointed accommodativemonetarypolicy,andactionstaken toevidencethatweakaggregatedemandwasthepri- byEuropeanauthorities.WithregardtoEurope,parmaryfactorrestrainingjobgrowth,citingdataand ticipantscontinuedtoseedownsideriskstogrowth analysesinsupportof theviewthattherewasstilla emanatingfromthatregion,givenitsunresolved substantialmarginof slackinthelabormarket.For imbalancesandweakeconomicoutlook.Severalparexample,acoupleof participantsnotedevidencesug- ticipantsmentionedthatdomesticcreditconditions gestingthatashiftintherelationshipbetweenthe appearedtohaveimproved:Automobileloanswere unemploymentrateandthelevelof jobvacanciesin expandingrapidlyanditwasreportedthatcompetirecentyearswasunlikelytopersistastheeconomy tiontomakecommercialandindustrialloanswas recoveredandunemploymentbenefitsreturnedto robust.Althoughmortgageavailabilitywasstilllimcustomarylevels.Similarly,oneparticipantcited ited,acoupleof participantsindicatedthatthey empiricalanalysisshowingthatemploymentgrowth expectedincreasedcompetitiontobringaboutsome waslowerinthestateswhereagreatershareof small lesseningof therestraintsonmortgagecredit.Ingenbusinessesidentifiedlackof demandastheirmost eral,afterhavingbeendepressedforsometime,invesimportantbusinessproblem.Severalparticipants torappetiteforriskhadincreased.Afewparticipants expressedconcernthatcontinuationof onlyslowjob commentedthattheCommittee’saccommodative growthandpersistentlyhighlong-durationunem- policieswereintendedinparttopromoteamorebalploymentcouldleadtopermanentdamagetothe ancedapproachtorisk-taking,butseveralothers labormarket. expressedconcernaboutthepotentialforexcessive risk-takingandadverseconsequencesforfinancial Participantsgenerallysawrecentpricedevelopments stability.Someparticipantsmentionedthepotential asconsistentwiththeirprojectionsthatinflation forasharpincreaseinlonger-terminterestratesto wouldremainatorbelowtheCommittee’s2percent adverselyaffectfinancialstabilityandindicatedtheir objectiveoverthemediumrun.Therewaslittleevi- interestinfurtherworkonthistopic. denceof wageorcostpressuresoutsideof isolated sectors,andmeasuresof inflationexpectations TheCommitteeagaindiscussedthepossiblebenefits remainedstable.However,afewparticipants andcostsof additionalassetpurchases.Mostparticiexpressedconcernsthatthecurrenthighlyaccommo- pantscommentedthattheCommittee’sassetpurdativestanceof monetarypolicyposedupsiderisks chaseshadbeeneffectiveineasingfinancialconditoinflationinthemediumorlongerterm. tionsandhelpingstimulateeconomicactivity,and manypointed,inparticular,tothesupportthatlow Participantsalsotouchedontheimplicationsfor longer-terminterestrateshadprovidedtohousingor monetarypolicyof changesinestimatesof the consumerdurablepurchases.Inaddition,theComeconomy’spotentialoutput.Anumberof partici- mittee’shighlyaccommodativepolicywasseenas pantsthoughtthatthegrowthof potentialoutput helpingkeepinflationoverthemediumtermcloserto hadbeenreducedinrecentyears,possiblyinpart itslonger-rungoalof 2percentthanwouldotherwise becauserestrictivefinancialconditionsandweakeco- havebeenthecase.Policywasalsoaimedatimprovnomicactivityintheaftermathof thefinancialcrisis ingthelabormarketoutlook.Inthisregard,several hadreducedinvestment,businessformation,andthe participantsstressedtheeconomicandsocialcostsof paceof adoptionof newtechnologies.Manyof these highunemployment,aswellasthepotentialfornegaparticipantsworriedthat,shouldtheeconomycon- tiveeffectsontheeconomy’slonger-termpathof a tinuetooperatebelowpotentialfortoolong,reduced prolongedperiodof underutilizationof resources. investmentandunderutilizationof laborcouldfur- However,manyparticipantsalsoexpressedsome therunderminethegrowthof potentialoutputover concernsaboutpotentialcostsandrisksarisingfrom time.Acoupleof participantsnotedthatuncertain- furtherassetpurchases.Severalparticipantsdistiesconcerningboththelevelof,andthesourceof cussedthepossiblecomplicationsthatadditional shiftsin,potentialoutputmadeitdifficulttobase purchasescouldcausefortheeventualwithdrawalof decisionsaboutmonetarypolicyonreal-timemeas- policyaccommodation,afewmentionedtheprospect uresof theoutputgap. of inflationaryrisks,andsomenotedthatfurther assetpurchasescouldfostermarketbehaviorthat Participantsnotedthatfinancialconditionsappeared couldunderminefinancialstability.Severalparticitohavebeensupportedbytherecentfiscalagree- pantsnotedthataverylargeportfolioof longment,aperceivedreductionintheriskthatthedebt durationassetswould,undercertaincircumstances, ceilingwouldnotberaisedinatimelymanner, exposetheFederalReservetosignificantcapital

138 100thAnnualReport|2013 losseswhentheseholdingswereunwound,butothers oldsastriggersthat,whenreached,wouldnecessarily pointedtooffsettingfactorsandonenotedthat leadtoanimmediateriseinthefederalfundsrate.A losseswouldnotimpedetheeffectiveoperationof coupleof participantsnotedthatthispolicytool monetarypolicy.Afewalsoraisedconcernsabout wouldbemoreeffectiveif theCommitteewereable thepotentialeffectsof furtherassetpurchasesonthe tocommunicateaconsensusexpectationforthepath functioningof particularfinancialmarkets,although of thefederalfundsrateafterathresholdwas acoupleof otherparticipantsnotedthattherehad crossed.Oneparticipantalsoindicatedapreference beenlittleevidencetodateof sucheffects.Inlightof forloweringthethresholdfortheunemploymentrate thisdiscussion,thestaff wasaskedforadditional asameansof providingadditionalaccommodation. analysisaheadof futuremeetingstosupportthe Committee’songoingassessmentof theassetpur- Committee Policy Action chaseprogram. Committeememberssawtheinformationreceived SeveralparticipantsemphasizedthattheCommittee overtheintermeetingperiodassuggestingthat shouldbepreparedtovarythepaceof assetpur- growthineconomicactivityhadpausedinrecent chases,eitherinresponsetochangesintheeconomic months,inlargepartbecauseof weather-relateddisoutlookorasitsevaluationof theefficacyandcosts ruptionsandothertransitoryfactors.Employment of suchpurchasesevolved.Forexample,onepartici- hadcontinuedtoexpandatamoderatepace,butthe pantarguedthatpurchasesshouldvaryincrementally unemploymentrateremainedelevated.However, frommeetingtomeetinginresponsetoincoming membersgenerallyexpectedthat,withappropriately informationabouttheeconomy.Anumberof par- accommodativemonetarypolicy,economicgrowth ticipantsstatedthatanongoingevaluationof the wouldproceedatamoderatepaceandtheunemployefficacy,costs,andrisksof assetpurchasesmight mentratewouldgraduallydeclinetowardlevelsthey wellleadtheCommitteetotaperorenditspurchases judgedtobeconsistentwiththeCommittee’sdual beforeitjudgedthatasubstantialimprovementinthe mandate.Althoughmemberssawstrainsinglobal outlookforthelabormarkethadoccurred.Several financialmarketsashavingeasedsomewhat,they othersarguedthatthepotentialcostsof reducingor continuedtoseeanincreaseinsuchstrainsaswellas endingassetpurchasestoosoonwerealsosignificant, slowerglobalgrowthandagreater-than-expectedfisorthatassetpurchasesshouldcontinueuntilasub- caltighteningintheUnitedStatesasdownsiderisks stantialimprovementinthelabormarketoutlook totheeconomy.Membersgenerallycontinuedto hadoccurred.Afewparticipantsnotedexamplesof anticipatethat,withlonger-terminflationexpectapastinstancesinwhichpolicymakershadprema- tionsstableandslackinresourceutilizationremainturelyremovedaccommodation,withadverseeffects ing,inflationoverthemediumtermwouldrunator oneconomicgrowth,employment,andpricestabil- belowtheCommittee’slonger-runobjectiveof ity;theyalsostressedtheimportanceof communi- 2percent. catingtheCommittee’scommitmenttomaintaining ahighlyaccommodativestanceof policyaslongas Intheirdiscussionof monetarypolicyfortheperiod warrantedbyeconomicconditions.Inthisregard,a ahead,memberssawtheeconomicoutlookasrelanumberof participantsdiscussedthepossibilityof tivelylittlechangedsincethepreviousmeeting. providingmonetaryaccommodationbyholding Accordingly,allbutonememberjudgedthatmainsecuritiesforalongerperiodthanenvisionedinthe tainingthehighlyaccommodativestanceof mon- Committee’sexitprinciples,eitherasasupplement etarypolicywaswarrantedinordertofostera to,orareplacementfor,assetpurchases. strongereconomicrecoveryinacontextof pricestability.TheCommitteeagreedthatitwouldbeappro- Participantsalsodiscussedtheeconomicthresholds priatetocontinuepurchasesof MBSatapaceof intheCommittee’sforwardguidanceonthepathof $40billionpermonthandpurchasesof longer-term thefederalfundsrate.Onthewhole,participants Treasurysecuritiesatapaceof $45billionper judgedthatfinancialmarketshadadaptedtothe month,aswellastomaintaintheCommittee’sreinshiftfromdate-basedcommunicationtoguidance vestmentpolicies.TheCommitteealsoretainedits basedoneconomicthresholdswithoutdifficulty, forwardguidanceaboutthefederalfundsrate, althoughafewparticipantsstatedthatcommunica- includingthethresholdsontheunemploymentand tionschallengesremained.Forexample,onepartici- inflationrates.Somemembersremarkedfavorablyon pantcommentedthatsomemarketparticipants themoveawayfromprovidingcalendardatesinthe appearedtohaveincorrectlyinterpretedthethresh- forwardguidanceandtowardhighlightingtheeco-

Minutesof FederalOpenMarketCommitteeMeetings|January 139 nomicconditionalityof futuremonetarypolicy.One mortgage-backedsecuritiesinagencymortgagememberdissentedfromtheCommittee’spolicydeci- backedsecurities.TheSystemOpenMarket sion,expressingconcernthatthecontinuedhighlevel AccountManagerandtheSecretarywillkeep of monetaryaccommodationincreasedtherisksof theCommitteeinformedof ongoingdevelopfutureeconomicandfinancialimbalancesand,over mentsregardingtheSystem’sbalancesheetthat time,couldcauseanincreaseinlong-terminflation couldaffecttheattainmentovertimeof the expectations. Committee’sobjectivesof maximumemploymentandpricestability.” Inthestatementtobereleasedfollowingthemeeting, theCommitteemaderelativelysmallmodificationsto Thevoteencompassedapprovalof thestatement thelanguageof itsDecemberstatement,includingto belowtobereleasedat2:15p.m.: acknowledgeboththepauseineconomicgrowthduringthefourthquarterandsomeeasingof thestrains “InformationreceivedsincetheFederalOpen inglobalfinancialmarkets.Inlightof theimpor- MarketCommitteemetinDecembersuggests tanceof ongoingU.S.fiscalconcerns,membersdis- thatgrowthineconomicactivitypausedin cussedwhethertoincludeareferencetounresolved recentmonths,inlargepartbecauseof weatherfiscalissues,butdecidedtorefrain.Similarly,one relateddisruptionsandothertransitoryfactors. memberraisedaquestionaboutwhetherthestate- Employmenthascontinuedtoexpandatamodmentlanguageadequatelycapturedtheimportance eratepacebuttheunemploymentrateremains of theCommittee’sassessmentof thelikelyefficacy elevated.Householdspendingandbusinessfixed andcostsinitsassetpurchasedecisions,butthe investmentadvanced,andthehousingsectorhas Committeedecidedtomaintainthecurrentlanguage shownfurtherimprovement.Inflationhasbeen pendingareview,plannedfortheMarchmeeting,of runningsomewhatbelowtheCommittee’s itsassetpurchases. longer-runobjective,apartfromtemporary variationsthatlargelyreflectfluctuationsin Attheconclusionof thediscussion,theCommittee energyprices.Longer-terminflationexpectavotedtoauthorizeanddirecttheFederalReserve tionshaveremainedstable. Bankof NewYork,untilitwasinstructedotherwise, toexecutetransactionsintheSystemAccountin Consistentwithitsstatutorymandate,theComaccordancewiththefollowingdomesticpolicy mitteeseekstofostermaximumemployment directive: andpricestability.TheCommitteeexpectsthat, withappropriatepolicyaccommodation,eco- “Consistentwithitsstatutorymandate,theFed- nomicgrowthwillproceedatamoderatepace eralOpenMarketCommitteeseeksmonetary andtheunemploymentratewillgradually andfinancialconditionsthatwillfostermaxi- declinetowardlevelstheCommitteejudgesconmumemploymentandpricestability.Inparticu- sistentwithitsdualmandate.Althoughstrains lar,theCommitteeseeksconditionsinreserve inglobalfinancialmarketshaveeasedsomemarketsconsistentwithfederalfundstradingin what,theCommitteecontinuestoseedownside arangefrom0to¼percent.TheCommittee riskstotheeconomicoutlook.TheCommittee directstheDesktoundertakeopenmarket alsoanticipatesthatinflationoverthemedium operationsasnecessarytomaintainsuchcondi- termlikelywillrunatorbelowits2percent tions.TheDeskisdirectedtocontinuepurchas- objective. inglonger-termTreasurysecuritiesatapaceof about$45billionpermonthandtocontinue Tosupportastrongereconomicrecoveryandto purchasingagencymortgage-backedsecuritiesat helpensurethatinflation,overtime,isatthe apaceof about$40billionpermonth.The ratemostconsistentwithitsdualmandate,the CommitteealsodirectstheDesktoengagein Committeewillcontinuepurchasingadditional dollarrollandcouponswaptransactionsasnec- agencymortgage-backedsecuritiesatapaceof essarytofacilitatesettlementof theFederal $40billionpermonthandlonger-termTreasury Reserve’sagencyMBStransactions.TheCom- securitiesatapaceof $45billionpermonth. mitteedirectstheDesktomaintainitspolicyof TheCommitteeismaintainingitsexistingpolicy rollingovermaturingTreasurysecuritiesinto of reinvestingprincipalpaymentsfromitsholdnewissuesanditspolicyof reinvestingprincipal ingsof agencydebtandagencymortgagepaymentsonallagencydebtandagency backedsecuritiesinagencymortgage-backed

140 100thAnnualReport|2013 securitiesandof rollingovermaturingTreasury Rosengren,JeremyC.Stein,DanielK.Tarullo,and securitiesatauction.Takentogether,these JanetL.Yellen. actionsshouldmaintaindownwardpressureon longer-terminterestrates,supportmortgage Votingagainstthisaction:EstherL.George. markets,andhelptomakebroaderfinancial conditionsmoreaccommodative. Ms.Georgedissentedoutof concernthatthecontinuedhighlevelof monetaryaccommodation TheCommitteewillcloselymonitorincoming increasedtherisksof futureeconomicandfinancial informationoneconomicandfinancialdevelop- imbalancesand,overtime,couldcauseanincreasein mentsincomingmonths.If theoutlookforthe inflationexpectations.Inherview,thepotentialcosts labormarketdoesnotimprovesubstantially,the andrisksposedbytheCommittee’sassetpurchases Committeewillcontinueitspurchasesof Treas- outweighedtheiruncertainbenefits.Althoughshe uryandagencymortgage-backedsecurities,and notedthatmonetarypolicyneededtoremainsupemployitsotherpolicytoolsasappropriate, portiveof theeconomy,Ms.Georgebelievedthat untilsuchimprovementisachievedinacontext policyhadbecometooaccommodativeandthatposof pricestability.Indeterminingthesize,pace, sibleunintendedsideeffectsof ongoingassetpurandcompositionof itsassetpurchases,the chases,posingriskstofinancialstabilityandcompli- Committeewill,asalways,takeappropriate catingfuturemonetarypolicy,arguedagainstconaccountof thelikelyefficacyandcostsof such tinuingontheCommittee’scurrentpath. purchases. Discussion of Communications Regarding Tosupportcontinuedprogresstowardmaxi- Economic Projections mumemploymentandpricestability,theCommitteeexpectsthatahighlyaccommodative Asafollow-uptotheFOMC’sdiscussioninOctober stanceof monetarypolicywillremainappropri- aboutprovidingmoreinformationontheCommitateforaconsiderabletimeaftertheassetpur- tee’scollectivejudgmentregardingtheeconomicoutchaseprogramendsandtheeconomicrecovery lookandappropriatemonetarypolicy,thestaff prestrengthens.Inparticular,theCommittee sentedseveraloptionsforenhancingtheSummaryof decidedtokeepthetargetrangeforthefederal EconomicProjections(SEP).Mostof theoptions fundsrateat0to¼percentandcurrentlyantici- involveddisplayingtheinformationcurrentlycolpatesthatthisexceptionallylowrangeforthe lectedfromparticipantsinnewwaysbyusingdifferfederalfundsratewillbeappropriateatleastas entsummarystatisticsoraggregations.Intheensuing longastheunemploymentrateremainsabove discussion,participantsexpressedarangeof views 6½percent,inflationbetweenoneandtwoyears ontheadvantagesanddisadvantagesof implementaheadisprojectedtobenomorethanahalf per- ingchangestotheSEP.Forexample,theygenerally centagepointabovetheCommittee’s2percent judgedthattheadditionof themedianof particilonger-rungoal,andlonger-terminflation pants’projectionscouldbeusefultobetterillustrate expectationscontinuetobewellanchored.In thecentraloutlookof theCommittee.Manyparticidetermininghowlongtomaintainahighly pantsalsoexpressedinterestinexploringthepotenaccommodativestanceof monetarypolicy,the tialforusingtheSEPtoconveyinformationabout Committeewillalsoconsiderotherinformation, issuesrelatedtotheCommittee’sfutureassetpurincludingadditionalmeasuresof labormarket chasesandtheFederalReserve’sbalancesheet.Howconditions,indicatorsof inflationpressuresand ever,thediscussionhighlightedthecomplexity inflationexpectations,andreadingsonfinancial involvedinprovidingthisinformation,inpart developments.WhentheCommitteedecidesto becauseparticipants’quantitativeassessmentsof the begintoremovepolicyaccommodation,itwill likelyevolutionof theFederalReserve’sassetholdtakeabalancedapproachconsistentwithits ingsunderappropriatepolicymaynotadequately longer-rungoalsof maximumemploymentand conveythenatureof theconditionalityandthe inflationof 2percent.” broadercost–benefitconsiderationsguidingthe Committee’sactionsinthisarea.Attheendof the Votingforthisaction:BenBernanke,WilliamC. discussion,theChairmanaskedthesubcommitteeon Dudley,JamesBullard,ElizabethDuke,CharlesL. communicationstoexplorepotentialapproachesto Evans,JeromeH.Powell,SarahBloomRaskin,Eric providingmoreinformationaboutparticipants’indi-

Minutesof FederalOpenMarketCommitteeMeetings|January 141 vidualviewsof appropriatebalancesheetpolicyand Notation Vote itsconditionality. BynotationvotecompletedonJanuary2,2013,the Itwasagreedthatthenextmeetingof theCommittee Committeeunanimouslyapprovedtheminutesof the wouldbeheldonTuesday–Wednesday,March19–20, FOMCmeetingheldonDecember11–12,2012. 2013.Themeetingadjournedat1:45p.m.onJanuary30,2013. WilliamB.English Secretary

142 100thAnnualReport|2013 Meeting Held on March 19–20, 2013 ThomasC.Baxter DeputyGeneralCounsel Ameetingof theFederalOpenMarketCommittee StevenB.Kamin washeldintheofficesof theBoardof Governorsof Economist theFederalReserveSysteminWashington,D.C.,on DavidW.Wilcox Tuesday,March19,2013,at10:00a.m.,andcontin- Economist uedonWednesday,March20,2013,at9:00a.m. ThomasA.Connors,TroyDavig, Present MichaelP.Leahy,StephenA.Meyer, DavidReifschneider,ChristopherJ.Waller, BenBernanke andWilliamWascher Chairman AssociateEconomists WilliamC.Dudley SimonPotter ViceChairman Manager,SystemOpenMarketAccount JamesBullard MichaelS.Gibson ElizabethDuke Director,Divisionof BankingSupervisionand Regulation,Boardof Governors CharlesL.Evans NellieLiang EstherL.George Director,Officeof FinancialStabilityPolicyand JeromeH.Powell Research,Boardof Governors SarahBloomRaskin JamesA.ClouseandWilliamNelson DeputyDirectors,Divisionof MonetaryAffairs, EricRosengren Boardof Governors JeremyC.Stein JonW.Faust DanielK.Tarullo SpecialAdvisertotheBoard,Officeof Board Members,Boardof Governors JanetL.Yellen LindaRobertson ChristineCumming,RichardW.Fisher, AssistanttotheBoard,Officeof BoardMembers, NarayanaKocherlakota,SandraPianalto, Boardof Governors andCharlesI.Plosser AlternateMembersof theFederalOpenMarket SethB.Carpenter Committee SeniorAssociateDirector,Divisionof Monetary Affairs,Boardof Governors JeffreyM.Lacker,DennisP.Lockhart, andJohnC.Williams EllenM.Meade Presidentsof theFederalReserveBanksof SeniorAdviser,Divisionof MonetaryAffairs, Richmond,Atlanta,andSanFrancisco,respectively Boardof Governors WilliamB.English EricM.Engen,ThomasLaubach, SecretaryandEconomist DavidE.Lebow,andMichaelG.Palumbo AssociateDirectors,Divisionof Researchand DeborahJ.Danker Statistics,Boardof Governors DeputySecretary WilliamF.Bassett MatthewM.Luecke DeputyAssociateDirector,Divisionof Monetary AssistantSecretary Affairs,Boardof Governors DavidW.Skidmore StaceyTevlin AssistantSecretary AssistantDirector,Divisionof Researchand MichelleA.Smith Statistics,Boardof Governors AssistantSecretary MinWei ScottG.Alvarez AssistantDirector,Divisionof MonetaryAffairs, GeneralCounsel Boardof Governors

Minutesof FederalOpenMarketCommitteeMeetings|March 143 JeremyB.Rudd aftertheslowdownlatelastyear.Private-sector Adviser,Divisionof ResearchandStatistics, employmentincreasedatafairlysolidpace,onbal- Boardof Governors ance,andtheunemploymentrate,thoughstill elevated,wasslightlylowerinFebruarythaninthe DavidH.Small fourthquarterof lastyear.Consumerpriceinflation, ProjectManager,Divisionof MonetaryAffairs, excludingsometemporaryfluctuationsinenergy Boardof Governors prices,wassubdued,whilemeasuresof longer-run GregoryL.Stefani inflationexpectationsremainedstable. FirstVicePresident,FederalReserveBankof Cleveland Privatenonfarmemploymentincreasedatamodest rateinJanuarybutexpandedmorebrisklyinFebru- DavidAltig,LorettaJ.Mester, ary,whilegovernmentemploymentcontinuedto GlennD.Rudebusch,andMarkS.Sniderman decrease.Theunemploymentratewas7.7percentin ExecutiveVicePresidents,FederalReserveBanksof February,slightlylessthanitsfourth-quarteraverage; Atlanta,Philadelphia,SanFrancisco,andCleveland, thelaborforceparticipationratewasalsoabitbelow respectively itsfourth-quarteraverage.Therateof long-duration SpencerKrane,LorieK.Logan, unemploymentandtheshareof workersemployed KevinStiroh,andKei-MuYi parttimeforeconomicreasonswerelittlechanged, SeniorVicePresidents,FederalReserveBanksof onnet,andbothmeasuresremainedhigh.Initial Chicago,NewYork,NewYork,andMinneapolis, claimsforunemploymentinsurancetrendeddown respectively somewhatovertheintermeetingperiod.Therateof private-sectorhiring,alongwithindicatorsof job EvanF.Koenig,JonathanP.McCarthy, openingsandfirms’hiringplans,weregenerallysub- GiovanniOlivei,andJulieAnnRemache1 duedandwereconsistentwithcontinuedmoderate VicePresidents,FederalReserveBanksof Dallas, increasesinemploymentinthecomingmonths. NewYork,Boston,andNewYork,respectively ManufacturingproductionincreasedstronglyinFeb- RobertL.Hetzel ruaryafterdeclininginJanuary,andtherateof SeniorEconomist,FederalReserveBankof manufacturingcapacityutilizationinFebruarywasa Richmond littlehigherthaninthefourthquarter.Theproductionof motorvehiclesandpartsroseconsiderablyin Developments in Financial Markets and February,andtherewerealsowidespreadincreasesin the Federal Reserve’s Balance Sheet factoryoutputinothersectors.Automakers’schedules,however,indicatedthatthepaceof motor TheManagerof theSystemOpenMarketAccount vehicleassembliesinthecomingmonthswouldbea reportedondevelopmentsindomesticandforeign bitbelowthatinFebruary.Broaderindicatorsof financialmarketsaswellastheSystemopenmarket manufacturingproduction,suchasthediffusion operationsduringtheperiodsincetheFederalOpen indexesof newordersfromthenationalandregional MarketCommittee(FOMC)metonJanuary29–30, manufacturingsurveys,wereatlevelsthatpointedto 2013.TheManageralsoreportedondevelopmentsin moderateincreasesinfactoryproductioninthenear foreignmoneymarketsandimplicationsforthe term. assetsthattheFederalReserveholdsinitsforeign currencyportfolio.Byunanimousvote,theCommit- RealpersonalconsumptionexpendituresrosemodteeratifiedtheOpenMarketDesk’sdomestictransestlyinJanuary.InFebruary,nominalretailsales, actionsovertheintermeetingperiod.Therewereno excludingthoseatmotorvehicleandpartsoutlets, interventionoperationsinforeigncurrenciesforthe increasedatastrongrate,whilelightmotorvehicle System’saccountovertheintermeetingperiod. salesedgedup.Somekeyfactorsthattendtoinfluencehouseholdspendingweremixed:Households’ Staff Review of the Economic Situation realdisposableincomesdeclinedinJanuary,reflect- TheinformationreviewedattheMarch19–20meet- inginparttheincreasesinbothpayrollandincome ingsuggestedthateconomicactivitywasexpanding taxesthatwentintoeffectatthebeginningof the atamoderaterateinthefirstquarterof thisyear yearandthepreviouspullingforwardof taxable incomefrom2013into2012;incontrast,household 1 AttendedTuesday’ssessiononly. networthlikelyroseinrecentmonthsasaresultof

144 100thAnnualReport|2013 higherequityvaluesandhomeprices.Consumersen- Consumerpricesexcludingfoodandenergy timentintheThomsonReuters/Universityof Michi- increasedmoderatelyinJanuaryandFebruary.NearganSurveysof ConsumersrosesomewhatinFebru- terminflationexpectationsfromtheMichigansurvey ary,butitdeclinedinearlyMarchandremainedrela- wereunchangedinFebruaryandearlyMarch; tivelydownbeat. longer-terminflationexpectationsinthesurveywere alsolittlechangedandremainedwithinthenarrow Conditionsinthehousingsectorimprovedfurther, rangethattheyhaveoccupiedforsometime. butconstructionactivitywasstillatarelativelylow levelandcontinuedtoberestrainedbytightcredit Measuresof laborcompensationindicatedthatgains standardsformortgages.Bothstartsandpermitsof innominalwagesremainedrelativelyslow,only newsingle-familyhomesincreased,onnet,over slightlyabovetherateof priceinflation.Compensa- JanuaryandFebruary.Startsof multifamilyunits tionperhourinthenonfarmbusinesssectorrose declined,onbalance,butpermitsrose,consistent modestlyover2012,and,withsmallincreasesinprowithadditionalgainsinconstructionincoming ductivity,unitlaborcostsalsoadvancedonlymodmonths.Salesof bothnewandexistinghomes estly.Gainsintheemploymentcostindexwereeven advancedinJanuary,andhomepricesincreased slowerthanforthemeasureof compensationper further. hourlastyear.InJanuaryandFebruary,increasesin averagehourlyearningsforallemployeescontinued Realbusinessexpendituresonequipmentandsoft- tobesubdued. wareappearedtoslowsomewhatearlythisyearafter risingatabriskrateinthefourthquarter.Nominal Economicgrowthweakenedinanumberof the shipmentsfornondefensecapitalgoodsexcluding advancedforeigneconomiesinthefourthquarterof aircraftdecreasedinJanuary,butnominalorders 2012.Intheeuroarea,realgrossdomesticproduct increasedtoalevelabovethatof shipments,pointing (GDP)contractedforafifthconsecutivequarter. tohighershipmentsinthenearterm.Otherforward- RecentdataforEuropeaneconomies,includingretail lookingindicators,suchassurveysof businesscondi- salesandpurchasingmanagersindexes,suggestthat tionsandcapitalspendingplans,alsosuggestedthat therateof economiccontractionmayhavediminoutlaysforbusinessequipmentwouldriseinthe ishedsincethebeginningof theyear.Inemerging comingmonths.Nominalbusinessspendingfornon- marketeconomies(EMEs),anincreaseinexports residentialconstructiondeclinedinJanuary.Business contributedtoapickupinthepaceof economic inventoriesinmostindustriesappearedtobegener- growthinthefourthquarter,includingforChina. allyalignedwithsalesinrecentmonths. More-recentindicatorssuggestthateconomicactivityinChinahasslowedsome.Inflationremained Realfederalgovernmentpurchasesappearedto generallycontainedinbothadvancedforeigneconodecreasefurtherinJanuaryandFebruary,asdefense miesandEMEs. spendingcontinuedtocontractonbalance.Realstate andlocalgovernmentpurchaseslookedtohave Staff Review of the Financial Situation declinedasnonfederalgovernmentpayrolls decreasedinJanuaryandFebruaryandnominalcon- GenerallyfavorableU.S.economicdatareleases, structionexpendituresfellinJanuary. alongwithcommunicationsfromFederalReserve policymakersregardingtheoutlookfortheeconomy TheU.S.internationaltradedeficitnarrowedin andmonetarypolicy,appearedtocontributeto DecemberbutwidenedinJanuary.Importsrosein improvedsentimentindomesticfinancialmarkets January,largelyreflectingareboundinthevalueof overtheintermeetingperioddespitesomerenewed oilimports,andexportsdecreased,drivenbya concernsabouteconomicandfinancialconditionsin declineinthevalueof exportsof petroleumproducts. Europe. Exportsof capitalgoodsincreased;theothermajor categoriesof exportsremainedaboutunchanged. Theexpectedpathforthefederalfundsrateimplied bymarketquotesmoveddownovertheintermeeting Indexesof overallU.S.consumerpriceswerelittle period,likelyreflectingpolicymakers’communicachangedinJanuarybuttheconsumerpriceindex tionsthatreinforcedmarketexpectationsof continmovedupbrisklyinFebruary,largelyreflectinga uedmonetarypolicyaccommodation.Resultsfrom sharpriseingasolineprices.Consumerfoodprices theDesk’ssurveyof primarydealersconductedprior wereflatinJanuaryandonlyedgedupinFebruary. totheMarchmeetingshowedthatdealerscontinued

Minutesof FederalOpenMarketCommitteeMeetings|March 145 toviewthethirdquarterof 2015asthemostlikely andnonfinancialCPalsocontinuedtoexpand.After timeof thefirstincreaseinthetargetfederalfunds pickingupinJanuary,grosspublicissuanceof equity rate.Inaddition,themediandealercontinuedtosee bynonfinancialfirmsremainedstronginFebruary, thefirstquarterof 2014asthemostprobabletime andissuanceof collateralizedloanobligations fortheFederalReserve’sassetpurchasestoend,and reachedapost-financial-crisishigh. mostdealersanticipatedthatthepaceof purchases wouldbeadjusteddownbeforeending. Conditionsinthecommercialrealestate(CRE)sectorimprovedsomewhat.Commercialmortgagedebt YieldsonnominalTreasurysecuritiesweremodestly increasedinthefourthquarterafterhavingdecreased lower,onnet,overtheintermeetingperiod.Inlate ineachquartersincethebeginningof 2009,and February,theseyieldsdeclinednotablyfollowingthe commercialmortgage-backedsecurity(CMBS)issuinconclusiveelectionoutcomesinItalybutmostly ancecontinuedtoberobustovertheintermeeting retracedthisdeclineaseconomicdatareleasesinsub- period.Nonetheless,delinquencyratesonloans sequentweeksexceededexpectations.Measuresof underlyingexistingCMBSremainednearhistorically inflationcompensationderivedfromnominaland highlevelsinFebruary,andCREpricesflattenedout inflation-protectedTreasurysecuritiesedgeddown inthefourthquarterafterseveralquartersof overtheperiod. increases. Conditionsindomesticandoffshoredollarfunding Bothconforminghomemortgageratesandyieldson marketsweregenerallylittlechanged,onbalance, agencymortgage-backedsecurities(MBS)rose,on duringtheintermeetingperiod.Theoutstanding net,duringtheintermeetingperiod,andthespread amountof unsecuredcommercialpaper(CP)issued betweentheprimarymortgagerateandMBSyields byfinancialinstitutionswithEuropeanparents narrowedabit.Despitetheincreaseinmortgage increasedslightlyonnet,andCPissuedbyinstitu- ratessincethestartof theyear,mortgagerefinancing tionswithU.S.parentsremainedstable. originationsdeclinedonlyslightly. IntheMarchSeniorCreditOfficerOpinionSurvey Consumercreditsustaineditsmoderateexpansionin onDealerFinancingTerms,respondentsreported DecemberandJanuary.Nonrevolvingcreditcontinthatleveragedinvestorsseemedtohavebecome uedtoincreaseatasolidpacebecauseof growthin somewhatmorewillingtotakepositionsinrisky studentandautoloans,whilerevolvingcreditwas assetssinceDecember. roughlyflat.Issuanceof consumerasset-backed securitiesremainedstrong. Marketreactiontotheresultsof theDodd-Frank Actannualstresstestsandof theComprehensive DrivenlargelybycontinuedgrowthinC&Iloans, CapitalAnalysisandReviewwaslimited.Overall,a totalbankcreditexpandedinJanuaryandFebruary broadindexof U.S.bankequitypricesrose,onnet, atroughlyitsfourth-quarterpace.TheFebruarySurovertheintermeetingperiod,andcreditdefaultswap veyof Termsof BusinessLendingindicatedsome spreadsformostlargedomesticbanksedgeddown easinginloanpricing. onbalance. Thelevelof M2wasaboutunchanged,onnet,over Broadequitypriceindexesincreasedovertheinter- JanuaryandFebruary.Incontrast,themonetary meetingperiod,bolsteredbyfavorableincomingeco- baseexpandedbrisklyfromJanuarythroughmidnomicdata.Option-impliedvolatilityfortheS&P March,drivenmainlybytheincreaseinreservebal- 500indexovertheneartermroseslightlybut ancesresultingfromtheFederalReserve’spurchases remainedlow,atlevelslastseeninearly2007. of TreasurysecuritiesandagencyMBS. Fourth-quarterearningspershareforS&P500firms wereestimatedtohaveincreasedmodestlyfromthe Financialmarketconcernsregardingtheeuroarea previousquarter. roseovertheintermeetingperiodamidweaker-thanexpectedeconomicdatareleasesandpoliticaluncer- Yieldsoninvestment-andspeculative-gradecorpo- taintiesgeneratedbytheinconclusiveelectionresults ratebondsroseabitovertheintermeetingperiod, inItaly.Addingtotheconcernswastheproposalin leavingriskspreadsalittlewider.Corporatebond Cyprustotaxinsured,alongwithuninsured,deposits issuancebynonfinancialfirmsremainedfairlyrobust aspartof thecountry’sefforttosecureanaidpackinFebruary;commercialandindustrial(C&I)loans agefromtheeuroareaandtheInternationalMon-

146 100thAnnualReport|2013 etaryFund.Ten-yearsovereignyieldsinmostperiph- changed,onbalance,astheeffectsof somewhatmore eraleuro-areacountriesroserelativetoGermanbond fiscalpolicyrestraintandahigherassumedpathfor yields,withspreadsforItaliansovereigndebtincreas- theforeignexchangevalueof thedollarwereesseningnoticeably;euro-areabanking-sectorshareprices tiallyoffsetbyabrighteroutlookfordomesticenergy fellsharply.Witheconomicdatafortheeuroarea, productionandahigherprojectionforhousehold theUnitedKingdom,andCanadacominginweaker wealth,whichreflectedupwardrevisionstotheprothananticipated,yieldsonbunds,gilts,andlong- jectedpathsforbothequitypricesandhomeprices. termCanadiangovernmentsecuritiesfell.Inaddi- Onbalance,withfiscalpolicyexpectedtobetighter tion,market-basedmeasuresof expectedovernight in2013thanin2012,thestaff expectedthatincreases interestratesalsodeclinedinthosecountries,andthe inrealGDPthisyearwouldonlymodestlyexceedthe dollarappreciatedagainsttheeuro,sterling,andthe growthrateof potentialoutput.Fiscalpolicy Canadiandollar.Expectationsintensifiedthatthe restraintoneconomicgrowthwasassumedtoease Bankof Japanwouldpursueaggressivemonetary overtime,andrealGDPwasprojectedtoaccelerate easingafterthenewgovernorof theBankof Japan graduallyin2014and2015,supportedbyincreasesin wasinstalled;overtheintermeetingperiod,theyen consumerandbusinesssentiment,furtherimprovedepreciatedfurther,10-yearJapanesegovernment mentsincreditavailabilityandfinancialconditions, bondyieldsdeclinedtonearrecordlows,andthe andaccommodativemonetarypolicy.Theexpansion Nikkeistockpriceindexrosesubstantially.Move- ineconomicactivitywasanticipatedtoslowlyreduce mentsinthecurrenciesof EMEsagainstthedollar theslackinlaborandproductmarketsovertheproweregenerallysmall.Althoughinflowsintoemerging jectionperiod,andprogressinreducingtheunemmarketmutualfundscontinued,theyslowednotably ploymentratewasexpectedtobegradual. inrecentweeks,andEMEequityindexeswere,on average,slightlylower.SomeEMEcentralbankscut Thestaff’sforecastforinflationwaslittlechanged interestrates,citingconcernsabouteconomic fromtheprojectionpreparedfortheJanuaryFOMC growth. meeting.Withcrudeoilpricesanticipatedtotrend downslowlyfromtheircurrentlevels,long-runinfla- Thestaff alsoreportedonpotentialriskstofinancial tionexpectationsassumedtoremainstable,andsigstability,includingthoseassociatedwiththecurrent nificantresourceslackpersistingovertheforecast lowinterestrateenvironment.Someobservershave period,thestaff continuedtoprojectthatinflation suggestedthatalengthyperiodof lowlong-term wouldbesubduedthrough2015. ratescouldencourageexcessiverisk-takingthatcould haveadverseconsequencesforfinancialstabilityat Thestaff viewedtheuncertaintyarounditsforecast somepointinthefuture.Thestaff surveyedawide foreconomicactivityassimilartotheaveragelevel rangeof assetmarketsandfinancialinstitutionsfor overthepast20years.However,theriskswere signsof excessvaluations,leverage,orrisk-taking viewedasskewedtothedownside,reflectinginpart thatcouldposesystemicrisks.Lowinterestrates theconcernsaboutthesituationinEuropeandthe likelyhavesupportedgainsinassetpricesand possibilityof amoreseveretighteninginU.S.fiscal encouragedtheflowof credittohouseholdsand policythancurrentlyanticipated.Thestaff sawthe businesses,butthesechangestodatedonotappear uncertaintyarounditsprojectionforinflationas tohavebeenaccompaniedbysignificantfinancial aboutaverage,anditviewedtheriskstotheinflation imbalances.However,trendsinafewspecificmarkets outlookasroughlybalanced. borewatching,andthestaff willcontinuetomonitor forsignsof developmentsthatcouldposerisksto Participants’ Views on Current Conditions financialstability. and Economic Outlook Staff Economic Outlook InconjunctionwiththisFOMCmeeting,meeting participants—the7membersof theBoardof Gover- Intheeconomicforecastpreparedbythestaff forthe norsandthepresidentsof the12FederalReserve MarchFOMCmeeting,realGDPgrowthwas Banks,allof whomparticipateinthedeliberationsof reviseddownsomewhatinthenearterm,largely theFOMC—submittedtheirassessmentsof realoutreflectingthefederalspendingsequestrationthat putgrowth,theunemploymentrate,inflation,and wentintoeffectonMarch1andtheresultingdrag thetargetfederalfundsrateforeachyearfrom2013 fromreducedgovernmentpurchases.Thestaff’s through2015andoverthelongerrun,undereach medium-termforecastforrealGDPgrowthwaslittle participant’sjudgmentof appropriatemonetary

Minutesof FederalOpenMarketCommitteeMeetings|March 147 policy.Thelonger-runprojectionsrepresenteach whyspendingbylower-incomehouseholdsappeared participant’sassessmentof theratetowhicheach tobedepressed,asthosechangesdisproportionately variablewouldbeexpectedtoconverge,overtime, cutintothedisposableincomeof thosehouseholds. underappropriatemonetarypolicyandinthe Acoupleof otherparticipantsthoughtthatoverall absenceof furthershockstotheeconomy.Theseeco- consumerspendingwaslikelystillheldback,atleast nomicprojectionsandpolicyassessmentsare inpart,byongoingconcernsaboutfutureincome describedintheSummaryof EconomicProjections, andemploymentprospects.Bothfiscalrestraintand whichisattachedasanaddendumtotheseminutes. thehighlevelof studentdebtwerementionedasrisks toaggregatehouseholdspendingovertheforecast Meetingparticipantsgenerallyindicatedthatthey period. viewedtheeconomicdatareceivedduringtheintermeetingperiodassomewhatmorepositivethanhad Participantsgenerallysawconditionsinthehousing beenexpected,butthatfiscalpolicyappearedtohave marketashavingimprovedfurtherovertheinterbecomemorerestrictive,leavingtheoutlookforthe meetingperiod.RisinghousepriceswerestrengtheneconomylittlechangedonbalancesincetheJanuary inghouseholdbalancesheetsbyraisingwealthand meeting.Participantsjudgedthattheeconomyhad byincreasingtheabilityof somehomeownerstorefireturnedtomoderategrowthfollowingapauselate nancetheirmortgagesatlowerrates.Suchadynamic lastyear,andafewnotedthatthedownsiderisks wasseenaspotentiallyleadingtoavirtuouscycle mayhavediminished.Conditionsinlabormarkets thatcouldhelpsupporthouseholdspendingand hadshownsignsof improvement,althoughthe financialmarketconditionsovertime.Reportsfrom unemploymentrateremainedelevated.Spendingby homebuildersinmanypartsof thecountrywere householdsandbusinesseswascontinuingtoexpand, encouraging.Oneparticipantpointedtoongoing perhapsreflectingsomeincreasedoptimism.Partici- changesinarangeof factors—includingdemographpantsnotedthatthehousingmarket,inparticular, ics,creditconditions,businessmodels,andconsumer hadfirmedsomewhatfurther.Accommodativemon- preferences—thatwerelikelyshiftingbothsupply etarypolicywaslikelyprovidingimportantsupport anddemandinthehousingsectorandconcluded tothesedevelopments. thattheoutlookforthesectorwasquiteuncertain andpotentiallysubjecttorapidchanges. Incontrast,participantsthoughtthatfiscalpolicy wasexertingsignificantnear-termrestraintonthe Manyparticipantsreportedthattheirbusinessconeconomy.Participantsgenerallyanticipatedthat tactswereseeingsomefurtherimprovementinthe growthwouldproceedatamoderatepaceandthat economicoutlook.Firmsreportedincreasedplantheunemploymentratewoulddeclinegradually ningforcapitalexpenditures,supportedbylowintertowardlevelsconsistentwiththeCommittee’sman- estratesandsubstantialcashholdings.Investment date.InflationhadbeenrunningbelowtheCommit- spendingonproductivity-enhancingtechnologywas tee’s2percentobjectiveforsometime,andnearlyall strong,aswaspipelineconstructionintheenergysecof theparticipantsanticipatedthatitwouldrunator tor.Afewparticipantsindicatedthattheircontacts below2percentoverthemediumterm. sawthelevelof uncertaintyabouttheeconomicoutlookashavingdeclinedrecently,adevelopmentthat Intheirdiscussionof thehouseholdsector,mostpar- couldleadtoincreasedinvestmentexpenditures. ticipantsnotedthatthedataonspendingweresomewhatencouraging,particularlywithregardtospend- Mostparticipantsremarkedonthefederalspending ingonautomobiles,otherconsumerdurables,and sequesteranditspotentialeffectsontheeconomy; housing.Severalparticipantsstatedthatthemoder- theyjudgedthatrecenttaxandspendingchanges ateaccelerationinspendingmightinpartreflect werealreadyrestrainingaggregatedemandorwould pent-updemandfollowingyearsof deleveragingand dosooverthecourseof theyear.Acoupleof parwasimportantlysupportedbythestanceof mon- ticipants,however,suggestedthattheyhadcuttheir etarypolicy,whichhasreducedthecostof financing estimatesof theeffectof recentfederalausterity purchasesandimprovedcreditavailabilitytosome measuresorhadneverconsideredtheeffectstobe degree.Acoupleof participantsnotedthatthe substantial. increaseinthepayrolltaxappearedtohavenotyet hadamaterialeffectonhouseholdspending;how- Recentreadingsonprivateemploymentandthe ever,anothersuggestedthatthepayrolltaxincrease, unemploymentrateindicatedsomeimprovementin alongwithhighergasolineprices,maybeonereason labormarketconditions.Nonetheless,participants

148 100thAnnualReport|2013 generallysawtheunemploymentrateasstillelevated pantsgenerallyagreedthattherewasanongoing andwerenotyetconfidentthattherecentprogress needtoevaluatethepossibleinteractionsbetween towardtheCommittee’semploymentobjectivewould monetarypolicydecisionsandfinancialstability, besustained.Theneedtousearangeof indicatorsto withsomenotingthatadverseshockstofinancialstagaugelabormarketconditionswasnoted.Onepar- bilitycanaffectprogresstowardtheCommittee’s ticipanthighlightedthathiringratesandquitrates dualmandate. remainedsomewhatlow.Anotherparticipantdiscussedevidencethatthelabormarketmayhave Review of Efficacy and Costs of Asset becomelessdynamicovertime,withtheresultthat Purchases recentpayrollgainsmightbemoremeaningfulthan wouldfirstappear.Inferenceaboutthelaborforce Thestaff providedpresentationscoveringtheefficacy participationratewascomplicatedbyitslong-run of theFederalReserve’sassetpurchases,theeffects downwardtrend.Oneparticipantcitedresearchindi- of thepurchasesonsecuritymarketfunctioning,the catingthatlong-termunemployment,whichiscur- waysinwhichassetpurchasesmightamplifyor rentlyespeciallyhigh,couldleadtopersistentlylower reduceriskstofinancialstability,andthefiscalimpliincomeandwealthforthoseaffected,evenafterthey cationsof purchases.Intheirdiscussionof thistopic, foundjobs.Morebroadly,firmsreportedlyremained meetingparticipantsgenerallyjudgedthemacroecocautiousabouthiring,whichsomeparticipants nomicbenefitsof thecurrentpurchaseprogramto attributedinparttorestrictivefiscalpolicycombined outweighthelikelycostsandrisks,buttheyagreed withgrowingregulatoryburden.Thiscaution thatanongoingassessmentof thebenefitsandcosts appearedtohaveresultedinjobsremainingvacant wasnecessary.PointingtoacademicandFederal forsubstantiallylongerthanwouldnormallybethe Reservestaff research,mostparticipantssawasset case,giventheunemploymentrate. purchasesashavingameaningfuleffectineasing financialconditionsandsosupportingeconomic Recentpricedevelopmentswereconsistentwithsub- growth.Someexpressedtheviewthattheseeffects duedinflationpressuresandinflationremainingator hadlikelybeenstrongerduringtheFederalReserve’s belowtheCommittee’s2percentobjectiveoverthe initiallarge-scaleassetpurchasesbecausethatpromediumrun.Participantssawlittlenear-terminfla- gramalsohelpedsupportmarketfunctioningduring tionarypressure,withafewnotingthattheapprecia- thefinancialcrisis.Otherparticipants,however,saw tionof thedollarwasholdingdownimportcostsor littleevidencethattheefficacyof assetpurchaseshad thattherecentincreasesingasolinepricesdidnot declinedovertime,andacoupleof thesesuggested appeartohavepassedthroughmorebroadlyto thattheeffectivenessof purchasesmightevenhave pricesof othergoods.Pointingtoinflationthathad increasedmorerecently,astheeasingof creditconbeenrunningbelowtheirobjectiveforsometime, straintsallowedmoreborrowerstotakeadvantageof someparticipantssawdownsideriskstoinflation, lowerinterestrates.Oneparticipantemphasizedthe especiallyif economicactivitydidnotpickupaspro- roleof recentassetpurchasesinkeepinginflation jected.Butafewparticipantsnotedthattherisk fromdecliningfurtherbelowtheCommittee’slongerremainedthatinflationarypressurescouldriseasthe rungoal.AfewparticipantsfeltthatMBSpurchases expansioncontinued,especiallyif monetarypolicy providedmoresupporttotheeconomythanpurremainedhighlyaccommodativefortoolong. chasesof longer-termTreasurysecuritiesbecause theystimulatedthehousingsectordirectly;however, Participantsdiscussedtheirassessmentsof risksto afewpreferredtofocusanypurchasesintheTreasfinancialstability,particularlyinlightof theCom- urymarkettoavoidallocatingcredittoaspecificsecmittee’shighlyaccommodativestanceof monetary torof theeconomy.Itwasnotedthat,inadditionto policy.Manyparticipantsnotedthatinthecurrent thestandardchannelsthroughwhichmonetary low-interestrateenvironment,investorsinsome policyaffectstheeconomy,assetpurchasescould financialmarketsweretakingonadditionalrisk—ei- helpsignaltheCommittee’scommitmenttoaccomthercreditriskorinterestraterisk—inaneffortto modativemonetarypolicy,therebymakingtheforboostreturns.Asaresult,vigilanceonthepartof wardguidanceaboutthefederalfundsratemore policymakersandregulatorswaswarranted,espe- effective.However,afewparticipantswerenotconciallyinlightof episodicstrainsinEuropeanmar- vincedof thebenefitsof assetpurchases,statingthat kets.Acoupleof participantsnotedthatU.S.banks theeffectsonfinancialmarketsappearedtobeshort hadexpandedtheircapitalpositionsandweregener- livedorthattheysawlittleevidenceof asignificant allyinsoundfinancialcondition.Meetingpartici- macroeconomiceffect.Oneparticipantsuggested

Minutesof FederalOpenMarketCommitteeMeetings|March 149 thatthesignalingeffectof assetpurchasesmayhave Committeefrompursuingitsmandatedobjectivesfor beenreducedbytheadoptionof threshold-basedfor- inflationandemployment.Inanycase,itwasindiwardguidance.Ingeneral,reflectingthelimitedexpe- catedthatthefiscalbenefitsof astrongereconomy riencewithlarge-scaleassetpurchases,participants wouldbemuchgreaterthananyshort-termfluctuarecognizedthatestimatesof theeconomiceffects tionsinremittances,andmoreover,acoupleof parwerenecessarilyimpreciseandcoveredawiderange. ticipantsnotedthatcumulativeremittancestothe Treasurywouldlikelybehigherthanwouldhave Participantsgenerallyagreedthatassetpurchases beenthecasewithoutanyassetpurchases.Someparalsohavepotentialcostsandrisks.Inparticular,par- ticipantsalsowereconcernedthatadditionalasset ticipantspointedtopossibleriskstothestabilityof purchasescouldcomplicatetheeventualfirmingof thefinancialsystem,thefunctioningof particular policy—forexample,byimpairingtheCommittee’s financialmarkets,thesmoothwithdrawalof mon- controloverthefederalfundsrate.Afewparticipants etaryaccommodationwheniteventuallybecomes raisedthepossibilityof anundesirableriseininflaappropriate,andtheFederalReserve’snetincome. tion.However,othersexpressedconfidenceinthe Theirviewsonthepracticalimportanceof theserisks Committee’sexittoolsanditsresolvetokeepinflavaried,asdidtheirprescriptionsformitigatingthem. tionnearitslonger-rungoal.Anotherexit-related Assetpurchaseswereseenbysomeashavinga concernwasapossibleadverseeffectonmarketfuncpotentialtocontributetoimbalancesinfinancial tioningfromMBSsalesduringthenormalizationof marketsandassetprices,whichcouldundermine theFederalReserve’sbalancesheet.Althoughthe financialstabilityovertime.Moreover,totheextent Committee’sassetpurchaseshavehadlittleapparent thatassetpurchasespushdownlonger-terminterest effectonsecuritiesmarketfunctioningtodate,some rates,theypotentiallyexposefinancialmarketstoa participantsfeltthatfutureassetsalescouldprove rapidriseinthoseratesinthefuture,whichcould morechallenging.Inthisregard,severalparticipants imposesignificantlossesonsomeinvestorsandinter- notedthatadecisionbytheCommitteetoholdits mediaries.Severalparticipantssuggestedthat MBStomaturityinsteadof sellingthemwould enhancedsupervisioncouldservetolimit,atleastto essentiallyeliminatethisrisk.Adecisionnottosell someextent,theincreasedrisk-takingassociatedwith MBS,ortosellMBSonlyveryslowly,wouldalso alengthyperiodof lowlong-terminterestrates,and mitigatesomeof thefinancialstabilityrisksthat thateffectivepolicycommunicationorbalancesheet couldbeassociatedwithsuchsalesaswellasdamp managementbytheCommitteecouldreducethe thedeclineinremittancestotheTreasuryatthat probabilityof excessivelyrapidincreasesinlonger- time.Suchadecisionwasalsoseenbysomeasa termrates.Itwasalsonotedthattheaccommodative potentialsourceof additionalnear-termpolicy stanceof policycouldbesupportingfinancialstabil- accommodation.Overall,mostmeetingparticipants itybyreturningtheeconomytoastablefooting thoughttherisksandcostsof additionalassetpursoonerthanwouldotherwisebethecaseandperhaps chasesremainedmanageable,butalsothatcontinued byallowingborrowerstosecurelonger-termfinanc- closeattentiontotheseissueswaswarranted.Afew ingandtherebyreducefundingrisks;bycontrast, participantsnotedthatcurtailingthepurchaseprocurtailingassetpurchasescouldslowtherecovery gramwasthemostdirectwaytomitigatethecosts andsoextendtheperiodof verylowinterestrates. andrisks. Nevertheless,anumberof participantsremained concernedaboutthepotentialforfinancialstability Inlightof theirdiscussionof thebenefitsandcosts riskstobuild.Oneconsequenceof assetpurchases of assetpurchases,participantsdiscussedtheirviews hasbeentheincreaseintheFederalReserve’snet ontheappropriatecourseforthecurrentassetpurincomeanditsremittancestotheTreasury,butthose chaseprogram.Afewparticipantsnotedthatthey valueswereprojectedtodecline,perhapseventozero alreadyviewedthecostsaslikelyoutweighingthe foratime,astheCommitteeeventuallywithdraws benefitsandsowouldliketobringtheprogramtoa policyaccommodation.Someparticipantswerecon- closerelativelysoon.Afewotherssawtherisksas cernedthatasubstantialdeclineinremittancesmight increasingfairlyquicklywiththesizeof theFederal leadtoanadversepublicreactionorpotentially Reserve’sbalancesheetandjudgedthatthepaceof undermineFederalReservecredibilityoreffective- purchaseswouldlikelyneedtobereducedbefore ness.Thepossibilityof suchoutcomeswasseenas long.Manyparticipants,includingsomeof those necessitatingclearcommunicationsabouttheout- whowerefocusedontheincreasingrisks,expressed lookforFederalReservenetincome.Severalpartici- theviewthatcontinuedsolidimprovementinthe pantsstatedthatsuchrisksshouldnotinhibitthe outlookforthelabormarketcouldprompttheCom-

150 100thAnnualReport|2013 mitteetoslowthepaceof purchasesbeginningat paceof $45billionpermonth,aswellastomaintain somepointoverthenextseveralmeetings,whilea theCommittee’sreinvestmentpolicies.TheCommitfewparticipantssuggestedthateconomicconditions teealsoretaineditsforwardguidanceaboutthefedwouldlikelyjustifycontinuingtheprogramatitscur- eralfundsrate,includingthethresholdsontheunemrentpaceatleastuntillateintheyear.Arangeof ploymentandinflationrates.Onememberdissented viewswasexpressedregardingtheeconomicand fromtheCommittee’spolicydecision,expressing labormarketconditionsthatwouldcallforanadjust- concernthatthecontinuedhighlevelof monetary mentinthepaceof purchases.Manyparticipants accommodationincreasedtherisksof futureecoemphasizedthatanydecisiontoreducethepaceof nomicandfinancialimbalancesand,overtime,could purchasesshouldreflectbothanimprovementin causeanincreaseininflationexpectations. theiroveralloutlookforlabormarketconditions,as impliedbyawiderangeof availableindicators,and Membersstressedthatanychangestothepurchase theirconfidenceinthesustainabilityof thatimprove- programshouldbeconditionaloncontinuingassessment.Acoupleof theseparticipantsnotedthatif mentsbothof labormarketandinflationdevelopprogresstowardtheCommittee’seconomicgoals mentsandof theefficacyandcostsof assetpurwerenotmaintained,thepaceof purchasesmight chases.Inlightof thecurrentreviewof benefitsand appropriatelybeincreased.Anumberof participants costs,onememberjudgedthatthepaceof purchases suggestedthattheCommitteecouldchangethemix shouldideallybeslowedimmediately.Afewmembers of itspolicytoolsif necessarytoincreaseormaintain feltthattherisksandcostsof purchases,alongwith overallaccommodation,includingpotentiallyadjust- theimprovedoutlooksincelastfall,wouldlikely ingitsforwardguidanceoritsbalancesheetpolicies. makeareductioninthepaceof purchasesappropriatearoundmidyear,withpurchasesendinglaterthis Committee Policy Action year.Severalothersthoughtthatif theoutlookfor labormarketconditionsimprovedasanticipated,it Committeememberssawtheinformationreceived wouldprobablybeappropriatetoslowpurchases overtheintermeetingperiodassuggestingthatmod- laterintheyearandtostopthembyyear-end.Two erateeconomicgrowthhadresumedfollowinga membersindicatedthatpurchasesmightwellconpauselatelastyear.Labormarketconditionshad tinueatthecurrentpaceatleastthroughtheendof shownsignsof improvement,buttheunemployment theyear.Itwasalsonotedthatweretheoutlookto rateremainedelevated.Householdspendingand deteriorate,thepaceof purchasescouldbeincreased. businessfixedinvestmenthadadvanced,andthe Inlightof thisdiscussion,theCommitteeincluded housingsectorhadstrengthenedfurther,butfiscal languageinthestatementtobereleasedfollowingthe policyhadbecomesomewhatmorerestrictive.The meetinginparttomakeexplicitthatthesize,pace, Committeeexpectedthat,withappropriatemonetary andcompositionof itsassetpurchaseswerecondipolicyaccommodation,economicgrowthwouldpro- tionalnotonlyonthelikelyefficacyandcostsof ceedatamoderatepaceandresultinagradual thosepurchases,butalsoontheextentof progress declineintheunemploymentratetowardlevelsthat towardtheCommittee’seconomicobjectives. theCommitteejudgesconsistentwithitsdualmandate.Membersgenerallycontinuedtoanticipatethat, Attheconclusionof thediscussion,theCommittee withlonger-terminflationexpectationsstableand votedtoauthorizeanddirecttheFederalReserve slackinresourceutilizationremaining,inflationover Bankof NewYork,untilitwasinstructedotherwise, themediumtermwouldlikelyrunatorbelowthe toexecutetransactionsintheSystemAccountin Committee’s2percentobjective. accordancewiththefollowingdomesticpolicy directive: Intheirdiscussionof monetarypolicyfortheperiod ahead,memberssawtheeconomicoutlookaslittle “Consistentwithitsstatutorymandate,theFedchangedsincethepreviousmeeting,and,conse- eralOpenMarketCommitteeseeksmonetary quently,allbutonememberjudgedthatahighly andfinancialconditionsthatwillfostermaxiaccommodativestanceof monetarypolicywaswar- mumemploymentandpricestability.Inparticurantedinordertofosterastrongereconomicrecov- lar,theCommitteeseeksconditionsinreserve eryinacontextof pricestability.TheCommittee marketsconsistentwithfederalfundstradingin agreedthatitwouldbeappropriatetocontinuepur- arangefrom0to¼percent.TheCommittee chasesof MBSatapaceof $40billionpermonth directstheDesktoundertakeopenmarket andpurchasesof longer-termTreasurysecuritiesata operationsasnecessarytomaintainsuchcondi-

Minutesof FederalOpenMarketCommitteeMeetings|March 151 tions.TheDeskisdirectedtocontinuepurchas- Tosupportastrongereconomicrecoveryandto inglonger-termTreasurysecuritiesatapaceof helpensurethatinflation,overtime,isatthe about$45billionpermonthandtocontinue ratemostconsistentwithitsdualmandate,the purchasingagencymortgage-backedsecuritiesat Committeedecidedtocontinuepurchasing apaceof about$40billionpermonth.The additionalagencymortgage-backedsecuritiesat CommitteealsodirectstheDesktoengagein apaceof $40billionpermonthandlonger-term dollarrollandcouponswaptransactionsasnec- Treasurysecuritiesatapaceof $45billionper essarytofacilitatesettlementof theFederal month.TheCommitteeismaintainingitsexist- Reserve’sagencymortgage-backedsecurities ingpolicyof reinvestingprincipalpayments transactions.TheCommitteedirectstheDeskto fromitsholdingsof agencydebtandagency maintainitspolicyof rollingovermaturing mortgage-backedsecuritiesinagencymortgage- Treasurysecuritiesintonewissuesanditspolicy backedsecuritiesandof rollingovermaturing of reinvestingprincipalpaymentsonallagency Treasurysecuritiesatauction.Takentogether, debtandagencymortgage-backedsecuritiesin theseactionsshouldmaintaindownwardpresagencymortgage-backedsecurities.TheSystem sureonlonger-terminterestrates,supportmort- OpenMarketAccountManagerandtheSecre- gagemarkets,andhelptomakebroaderfinantarywillkeeptheCommitteeinformedof ongo- cialconditionsmoreaccommodative. ingdevelopmentsregardingtheSystem’sbalancesheetthatcouldaffecttheattainmentover TheCommitteewillcloselymonitorincoming timeof theCommittee’sobjectivesof maximum informationoneconomicandfinancialdevelopemploymentandpricestability.” mentsincomingmonths.TheCommitteewill continueitspurchasesof Treasuryandagency Thevoteencompassedapprovalof thestatement mortgage-backedsecurities,andemployits belowtobereleasedat2:00p.m.: otherpolicytoolsasappropriate,untiltheoutlookforthelabormarkethasimprovedsubstan- “InformationreceivedsincetheFederalOpen tiallyinacontextof pricestability.Indetermin- MarketCommitteemetinJanuarysuggestsa ingthesize,pace,andcompositionof itsasset returntomoderateeconomicgrowthfollowinga purchases,theCommitteewillcontinuetotake pauselatelastyear.Labormarketconditions appropriateaccountof thelikelyefficacyand haveshownsignsof improvementinrecent costsof suchpurchasesaswellastheextentof monthsbuttheunemploymentrateremains progresstowarditseconomicobjectives. elevated.Householdspendingandbusinessfixed investmentadvanced,andthehousingsectorhas Tosupportcontinuedprogresstowardmaxistrengthenedfurther,butfiscalpolicyhas mumemploymentandpricestability,theCombecomesomewhatmorerestrictive.Inflationhas mitteeexpectsthatahighlyaccommodative beenrunningsomewhatbelowtheCommittee’s stanceof monetarypolicywillremainapproprilonger-runobjective,apartfromtemporary ateforaconsiderabletimeaftertheassetpurvariationsthatlargelyreflectfluctuationsin chaseprogramendsandtheeconomicrecovery energyprices.Longer-terminflationexpecta- strengthens.Inparticular,theCommittee tionshaveremainedstable. decidedtokeepthetargetrangeforthefederal fundsrateat0to¼percentandcurrentlyantici- Consistentwithitsstatutorymandate,theCom- patesthatthisexceptionallylowrangeforthe mitteeseekstofostermaximumemployment federalfundsratewillbeappropriateatleastas andpricestability.TheCommitteeexpectsthat, longastheunemploymentrateremainsabove withappropriatepolicyaccommodation,eco- 6½percent,inflationbetweenoneandtwoyears nomicgrowthwillproceedatamoderatepace aheadisprojectedtobenomorethanahalf perandtheunemploymentratewillgradually centagepointabovetheCommittee’s2percent declinetowardlevelstheCommitteejudgescon- longer-rungoal,andlonger-terminflation sistentwithitsdualmandate.TheCommittee expectationscontinuetobewellanchored.In continuestoseedownsideriskstotheeconomic determininghowlongtomaintainahighly outlook.TheCommitteealsoanticipatesthat accommodativestanceof monetarypolicy,the inflationoverthemediumtermlikelywillrunat Committeewillalsoconsiderotherinformation, orbelowits2percentobjective. includingadditionalmeasuresof labormarket

152 100thAnnualReport|2013 conditions,indicatorsof inflationpressuresand higherlong-terminflationexpectations.Inherview, inflationexpectations,andreadingsonfinancial theCommittee’sassetpurchaseswereprovidingreladevelopments.WhentheCommitteedecidesto tivelysmallbenefits,and,giventherisksthatthey begintoremovepolicyaccommodation,itwill posedaswellastheimprovementintheoutlookfor takeabalancedapproachconsistentwithits thelabormarket,shethoughttheyshouldbewound longer-rungoalsof maximumemploymentand down. inflationof 2percent.” Itwasagreedthatthenextmeetingof theCommittee Votingforthisaction:BenBernanke,WilliamC. wouldbeheldonTuesday–Wednesday,April30– Dudley,JamesBullard,ElizabethDuke,CharlesL. May1,2013.Themeetingadjournedat11:30a.m. Evans,JeromeH.Powell,SarahBloomRaskin,Eric onMarch20,2013. Rosengren,JeremyC.Stein,DanielK.Tarullo,and JanetL.Yellen. Notation Vote BynotationvotecompletedonFebruary19,2013, Votingagainstthisaction:EstherL.George. theCommitteeunanimouslyapprovedtheminutesof theFOMCmeetingheldonJanuary29–30,2013. Ms.Georgedissentedbecauseshecontinuedtoview monetarypolicyastooaccommodativeandtherefore WilliamB.English asposingriskstotheachievementof theCommit- Secretary tee’seconomicobjectivesinthelongrun.Inparticular,thecurrentstanceof policycouldleadtofinancialimbalances,amispricingof risk,and,overtime,

Minutesof FederalOpenMarketCommitteeMeetings|March 153 Addendum: recoverywouldgraduallypickupoverthe2013–15 periodandinflationwouldremainsubdued(table1 Summary of Economic Projections andfigure1).Participantsanticipatedthatthe growthrateof realgrossdomesticproduct(GDP) InconjunctionwiththeMarch19–20,2013,Federal wouldincreasesomewhatovertheforecastperiodto OpenMarketCommittee(FOMC)meeting,meeting apacethatgenerallyexceededtheirestimatesof the participants—the7membersof theBoardof Gover- longer-runsustainablerateof growth.Participants norsandthe12presidentsof theFederalReserve expectedtheunemploymentratetodeclinegradually Banks,allof whomparticipateinthedeliberationsof through2015.Nearlyallparticipantsprojectedthat theFOMC—submittedtheirassessmentsof realout- inflation,asmeasuredbytheannualchangeinthe putgrowth,theunemploymentrate,inflation,and priceindexforpersonalconsumptionexpenditures thetargetfederalfundsrateforeachyearfrom2013 (PCE),wouldremainsomewhatbelowthelonger-run through2015andoverthelongerrun.Eachpartici- goalin2013andthenrisetoward2percentoverthe pant’sassessmentwasbasedoninformationavailable forecastperiod. atthetimeof themeetingplushisorherjudgmentof appropriatemonetarypolicyandassumptionsabout Asshowninfigure2,mostparticipantsjudgedthat thefactorslikelytoaffecteconomicoutcomes.The highlyaccommodativemonetarypolicywaslikelyto longer-runprojectionsrepresenteachparticipant’s bewarrantedoverthenextfewyearstosupport judgmentof thevaluetowhicheachvariablewould stablepricesandcontinuedprogresstowardmaxibeexpectedtoconverge,overtime,underappropriate mumemployment.Inparticular,14participants monetarypolicyandintheabsenceof furthershocks thoughtthatitwouldbeappropriateforthefirst totheeconomy.“Appropriatemonetarypolicy”is increaseinthetargetfederalfundsratetooccurdurdefinedasthefuturepathof policythateachpartici- ing2015orlater.Mostparticipantsalsojudgedthat pantdeemsmostlikelytofosteroutcomesforeco- itwouldbeappropriatetocontinuepurchasing nomicactivityandinflationthatbestsatisfyhisor agencymortgage-backedsecurities(MBS)and herindividualinterpretationof theFederalReserve’s longer-termTreasurysecuritiesintothesecondhalf objectivesof maximumemploymentandstable of 2013. prices. Manyparticipantscontinuedtojudgetheuncer- Overall,theassessmentssubmittedinMarchindi- taintyassociatedwiththeoutlookforrealactivity catedthatFOMCparticipantsprojectedthat,under andtheunemploymentratetobeunusuallyhigh appropriatemonetarypolicy,thepaceof economic comparedwiththenormof thepast20years.Incon- Table1.EconomicprojectionsofFederalReserveBoardmembersandFederalReserveBankpresidents,March2013 Percent Centraltendency1 Range2 Variable 2013 2014 2015 Longerrun 2013 2014 2015 Longerrun ChangeinrealGDP 2.3to2.8 2.9to3.4 2.9to3.7 2.3to2.5 2.0to3.0 2.6to3.8 2.5to3.8 2.0to3.0 Decemberprojection 2.3to3.0 3.0to3.5 3.0to3.7 2.3to2.5 2.0to3.2 2.8to4.0 2.5to4.2 2.2to3.0 Unemploymentrate 7.3to7.5 6.7to7.0 6.0to6.5 5.2to6.0 6.9to7.6 6.1to7.1 5.7to6.5 5.0to6.0 Decemberprojection 7.4to7.7 6.8to7.3 6.0to6.6 5.2to6.0 6.9to7.8 6.1to7.4 5.7to6.8 5.0to6.0 PCEinflation 1.3to1.7 1.5to2.0 1.7to2.0 2.0 1.3to2.0 1.4to2.1 1.6to2.6 2.0 Decemberprojection 1.3to2.0 1.5to2.0 1.7to2.0 2.0 1.3to2.0 1.4to2.2 1.5to2.2 2.0 CorePCEinflation3 1.5to1.6 1.7to2.0 1.8to2.1 1.5to2.0 1.5to2.1 1.7to2.6 Decemberprojection 1.6to1.9 1.6to2.0 1.8to2.0 1.5to2.0 1.5to2.0 1.7to2.2 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andprojectionsforbothmeasuresofinflationarefromthefourthquarterofthepreviousyeartothefourth quarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures (PCE)andthepriceindexforPCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarterofthe yearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’s assessmentoftheratetowhicheachvariablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.The DecemberprojectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonDecember11–12,2012. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

154 100thAnnualReport|2013 Figure1.Centraltendenciesandrangesofeconomicprojections,2013–15andoverthelongerrun Percent Change in real GDP 5 Central tendency of projections 4 Range of projections 3 2 1 + Actual 0 - 1 2 3 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Percent Unemployment rate 10 9 8 7 6 5 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Percent PCE inflation 3 2 1 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Percent Core PCE inflation 3 2 1 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Note:Definitionsofvariablesareinthegeneralnotetotable1.Thedatafortheactualvaluesofthevariablesareannual.

Minutesof FederalOpenMarketCommitteeMeetings|March 155 Figure2.OverviewofFOMCparticipants’assessmentsofappropriatemonetarypolicy Number of participants Appropriate timing of policy firming 13 13 12 11 10 9 8 7 6 5 4 4 3 2 1 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 2013 2014 2015 Longer run Note:Intheupperpanel,theheightofeachbardenotesthenumberofFOMCparticipantswhojudgethat,underappropriatemonetarypolicy,thefirstincreaseinthetargetfederalfundsratefromitscurrentrangeof0to¼percentwilloccurinthespecifiedcalendaryear.InDecember2012,thenumbersofFOMCparticipantswhojudgedthatthefirst increaseinthetargetfederalfundsratewouldoccurin2013,2014,2015,and2016were,respectively,2,3,13,and1.Inthelowerpanel,eachshadedcircleindicatesthe value(roundedtothenearest¼percentagepoint)ofanindividualparticipant’sjudgmentoftheappropriatelevelofthetargetfederalfundsrateattheendofthespecifiedcalendaryearoroverthelongerrun.

156 100thAnnualReport|2013 trasttoDecember,however,moreparticipants tothemorefavorabledatafromthelabormarketor viewedtheriskstothoseoutlooksasbroadlybal- smallchangesintheirestimatedrateof potentialoutancedthansawtherisksasskewedtowardadverse putgrowth.However,thecentraltendencyof the outcomes.Amajorityof participantsindicatedthat forecastsfortheendof 2015,at6.0to6.5percent, theuncertaintysurroundingtheirprojectionsfor changedlittle.Thecentraltendencyof participants’ PCEinflationwasbroadlysimilartohistorical estimatesof thelonger-runnormalrateof unemnorms,andnearlyallconsideredtheriskstoinflation ploymentthatwouldprevailunderappropriatemontobeeitherbroadlybalancedorweightedtothe etarypolicyandintheabsenceof furthershocksto downside. theeconomywas5.2to6.0percent,thesameasin December.Mostparticipantsprojectedthatthe The Outlook for Economic Activity unemploymentratewouldconvergetotheirestimates of itslonger-runnormalrateinfiveorsixyears, Participantsprojectedthat,conditionalontheirindi- whilesomejudgedthatlesstimewouldbeneeded. vidualassumptionsaboutappropriatemonetary policy,theeconomywouldgrowatasomewhatfaster Asshowninfigures3.Aand3.B,participants’views pacein2013thanithadin2012.Theyalsogenerally regardingthelikelyoutcomesforrealGDPgrowth judgedthatgrowthwouldstrengthenfurtherin2014 andtheunemploymentrateoverthenextthreeyears and2015,inmostcasestoarateabovewhatpartici- andoverthelongerrunremaineddiverse,reflecting pantssawasthelonger-runrateof outputgrowth. theirindividualassessmentsof appropriatemonetary Mostparticipantsnotedthatthehighdegreeof policyanditseconomiceffects,thelikelyrateof monetarypolicyaccommodationassumedintheir improvementinthehousingsectoranddomestic projectionswouldhelppromotetheeconomicrecov- spendingmoregenerally,thedomesticimplicationsof eryovertheforecastperiodandexpectedthatcontin- foreigneconomicdevelopments,theextentof strucuedimprovementinthehousingsectorwouldadd turaldislocationstothelabormarketandtheeconomorebroadlytoprivatedemand;however,theyalso my’sproductivepotential,andanumberof other judgedthatincreasedfiscalrestraintintheUnited factors.Thedispersionof participants’projectionsof Stateswouldholdbackthepaceof economicexpan- realGDPgrowthwaslittlechangedrelativeto sion,especiallyin2013,andpointedtothesituation December,withasmallreductionintheupperendof inEuropeasanongoingdownsiderisk. thedistributioninallthreeyearsof theforecast periodandaslightoveralldownwardshiftin2014. Thecentraltendencyof participants’projectionsfor Thedistributionsof theunemploymentrateprojecthechangeinrealGDPwas2.3to2.8percentfor tionsineachyearnarrowedafewtenths,reflecting 2013,2.9to3.4percentfor2014,and2.9to3.7per- decreasesinthehighendsof theranges.Thedispercentfor2015;theseprojectionswerelittlechanged,to sionof estimatesforthelonger-runrateof output slightlybelow,theonesinDecember.Whenpartici- growthstayedfairlynarrow,withallbutfourwithin pantscomparedtheirownMarchforecastwiththe thecentraltendencyof 2.3to2.5percent;twoparonetheymadeinDecember,manymentionedthat ticipants,however,droppedtheirestimatestobelow stronger-than-anticipatedincomingdataonprivate 2.2percent.Therangeof participants’estimatesof economicactivityhadnearlyoffsettheeffectsof thelonger-runrateof unemployment,at5.0to greater-than-expectedfiscalrestraintlikelytobeput 6.0percent,wasunchangedrelativetoDecember. inplacethisyear.Thecentraltendencyforthe longer-runrateof increaseof realGDPwas2.3to The Outlook for Inflation 2.5percent,unchangedfromDecember. Participants’broadoutlookforinflationunder Participantsanticipatedagradualdeclineinthe appropriatemonetarypolicysuggestedthatboth unemploymentrateovertheforecastperiod;evenso, headlineandcoreinflationwouldremainsubdued theygenerallythoughtthattheunemploymentrateat overthe2013–15period,withnearlyallparticipants theendof 2015wouldremainwellabovetheirindi- judgingthatinflationwouldbeequaltoorbelowthe vidualestimatesof itslonger-runnormallevel.The FOMC’slonger-runobjectiveof 2percentineach centraltendenciesof participants’forecastsforthe year.Specifically,thecentraltendencyof particiunemploymentratewere7.3to7.5percentattheend pants’projectionsforoverallinflationin2013,as of 2013and6.7to7.0percentattheendof 2014. measuredbythegrowthinthePCEpriceindex,nar- TheseprojectionsareslightlylowerthaninDecem- rowedto1.3to1.7percent,whilethecentraltendenber,withafewparticipantsattributingtheirrevisions ciesfor2014and2015wereunchangedat1.5to

Minutesof FederalOpenMarketCommitteeMeetings|March 157 Figure3.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2013–15andoverthelongerrun Number of participants 2013 20 March projections 18 December projections 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 20 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 2015 20 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 20 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.

158 100thAnnualReport|2013 Figure3.B.Distributionofparticipants’projectionsfortheunemploymentrate,2013–15andoverthelongerrun Number of participants 2013 20 March projections 18 December projections 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 - 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 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 - 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 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 - 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 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 - 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 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|March 159 2.0percentand1.7to2.0percent,respectively.The runobjectiveof 2percentandtopreventarisein centraltendencyof theforecastsforcoreinflationin inflationexpectations. 2013alsonarrowed,to1.5to1.6percent,but,unlike overallinflation,edgedupslightlyin2014and2015; Figure3.Eprovidesthedistributionof participants’ nevertheless,thecentraltendenciesremainednearor judgmentsregardingtheappropriatelevelof thetarbelow2percentinbothyears.Indiscussingfactors getfederalfundsrateattheendof eachcalendaryear likelytokeepinflationneartheCommittee’sinflation from2013to2015andoverthelongerrun.Aspreviobjectiveof 2percent,severalparticipantscitedthe ouslynoted,mostparticipantsjudgedthateconomic roleof stableinflationexpectationsandexisting conditionswouldwarrantmaintainingthecurrent resourceslackthatwasexpectedtodiminishonly lowlevelof thefederalfundsrateuntil2015.Among gradually. thefiveparticipantswhosawthefederalfundsrate leavingtheeffectivelowerboundearlier,theirprojec- Figures3.Cand3.Dprovideinformationonthe tionsforthefederalfundsrateattheendof 2014 diversityof participants’viewsabouttheoutlookfor rangefrom½to2¾percent.Viewsontheappropriinflation.Therangesof participants’projectionsfor atelevelof thefederalfundsrateattheendof 2015 overallinflationin2013and2014werealmost varied,with15participantsseeingtheappropriate unchangedcomparedwiththecorrespondingdistri- levelof thefederalfundsrateas1¼percentorlower butionsforDecember.Therangesforcoreinflation andtheothersseeingtheappropriatelevelas2perwerealsolittlechanged,but,in2013,manyof the centorhigher.Onbalance,participants’projections projectionsshiftedtowardthelowerendof therange. fortheappropriatefederalfundsrateattheendof Thedistributionsforcoreandoverallinflationin 2015shifteddownabitfromthoseintheirDecember 2015remainedconcentratedneartheCommittee’s forecasts. longer-runobjective,andallparticipantscontinued toprojectthatoverallinflationwouldconvergetothe Nearlyallparticipantssawtheappropriatetargetfor 2percentgoaloverthelongerrun. thefederalfundsrateattheendof 2015asstillwell belowtheirassessmentof itsexpectedlonger-run Appropriate Monetary Policy value.Estimatesof thelonger-runtargetfederal fundsraterangedfrom3¼to4½percent,reflecting Asindicatedinfigure2,mostparticipantsjudged theCommittee’sinflationobjectiveof 2percentand thatexceptionallylowlevelsof thefederalfundsrate participants’individualjudgmentsaboutthelongerwouldremainappropriateforacouplemoreyears.In runlevelof therealfederalfundsrate. particular,13participantsthoughtthatthefirst increaseinthetargetfederalfundsratewouldnotbe Participantsalsodescribedtheirviewsregardingthe warranteduntilsometimein2015,andonejudged appropriatepathof theFederalReserve’sbalance thatpolicyfirmingwouldlikelynotbeappropriate sheet.Allbutafewparticipantsthoughtthat,given until2016(upperpanel).Fiveparticipantsjudged thecurrenteconomicoutlook,itwouldbeapproprithatanearlierincreaseinthefederalfundsrate,in atefortheCommitteetocontinuepurchasingMBS 2013or2014,wouldbemostconsistentwiththe andlonger-termTreasurysecuritiesataboutthecur- Committee’sstatutorymandate. rentpaceatleastthroughmidyear.Anumberof theseparticipantsanticipatedthatthepacewouldbe Allof theparticipantswhojudgedthatraisingthe tapereddownaroundmidyear.Afewothersthought federalfundsratetargetwouldfirstbeappropriatein thatitwouldbeappropriatefortheCommitteeto 2015alsoprojectedthattheunemploymentrate purchasesecuritiesatthecurrentpacethroughthe wouldfirstdeclinebelow6½percentduringthatyear thirdquarterof 2013beforebeginningtoadjustthe andthatinflationwouldremainnearorbelow2per- paceandafewsawthecurrentrateof purchasesconcent.Inaddition,thoseparticipants,aswellasthe tinuingatleastthroughtheendof 2013,withtwo participantwhosawliftoff in2016asappropriate, participantsspecifyingthatsomepurchaseswould alsoprojectedthatasizablegapbetweentheunem- likelyextendinto2014.Severalparticipantsemphaploymentrateandthelonger-runnormallevelof the sizedthattheassetpurchaseprogramwaseffectivein unemploymentratewouldpersistuntil2015orlater. supportingtheeconomicexpansion,thatthebenefits Themajorityof thefiveparticipantswhojudgedthat continuedtoexceedthecosts,andthatadditional policyfirmingshouldbeginin2013or2014indicated purchaseswouldbenecessarytoachieveasubstantial thattheCommitteewouldneedtoactrelativelysoon improvementintheoutlookforthelabormarket.In inordertokeepinflationneartheFOMC’slonger- contrast,acoupleof participantsindicatedthatthe

160 100thAnnualReport|2013 Figure3.C.Distributionofparticipants’projectionsforPCEinflation,2013–15andoverthelongerrun Number of participants 2013 20 March projections 18 December projections 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 20 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 2015 20 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 20 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|March 161 Figure3.D.Distributionofparticipants’projectionsforcorePCEinflation,2013–15 Number of participants 2013 20 March projections December projections 18 16 14 12 10 8 6 4 2 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 2.5 - 1.6 1.8 2.0 2.2 2.4 2.6 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 - 2.5 - 1.6 1.8 2.0 2.2 2.4 2.6 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 - 2.5 - 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

162 100thAnnualReport|2013 Figure3.E.Distributionofparticipants’projectionsforthetargetfederalfundsrate,2013–15andoverthelongerrun Number of participants 2013 March projections 20 December 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 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.

Minutesof FederalOpenMarketCommitteeMeetings|March 163 Committeecouldbestfosteritsdualobjectivesand Table2.Averagehistoricalprojectionerrorranges limitthepotentialcostsof theprogrambybeginning Percentagepoints totaperitspurchasesbeforemidyearorbyending purchasesaltogether. Variable 2013 2014 2015 ChangeinrealGDP1 ±1.3 ±1.7 ±1.8 Keyfactorsinformingparticipants’viewsof theeco- Unemploymentrate1 ±0.6 ±1.2 ±1.7 nomicoutlookandtheappropriatesettingformon- Totalconsumerprices2 ±0.9 ±1.0 ±1.1 etarypolicyincludedtheirjudgmentsregardinglabor marketconditionsthatwouldbeconsistentwith Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared errorofprojectionsfor1993through2012thatwerereleasedinthespringby maximumemployment,theextenttowhichemploy- variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast mentcurrentlydeviatedfrommaximumemployment, Uncertainty,”undercertainassumptions,thereisabouta70percentprobability thatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein theextenttowhichprojectedinflationoverthe rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Further mediumtermdeviatedfromtheCommittee’slonger- informationisinDavidReifschneiderandPeterTulip(2007),“Gaugingthe UncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,”Finance termobjectiveof 2percent,andparticipants’projec- andEconomicsDiscussionSeries2007-60(Washington:BoardofGovernorsof tionsof thelikelytimehorizonnecessarytoreturn theFederalReserveSystem,November). 1 Definitionsofvariablesareinthegeneralnotetotable1. employmentandinflationtomandate-consistentlev- 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen els.Participantsgenerallydiscussedtheirforecastsfor mostwidelyusedingovernmentandprivateeconomicforecasts.Projection thetimeof thefirstincreaseinthefederalfundsrate ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof theyearindicated. inthecontextof thethresholdsadoptedbytheCommitteeinDecember2012.Acoupleof participants notedthattheirassessmentsof theappropriatepath stability,thoughafewparticipantsnotedadeclinein forthefederalfundsratetookintoaccountthelikeli- thelikelyseverityof thoserisksasareasonfor hoodthattheneutrallevelof thefederalfundsrate changingtheirassessmentsof uncertaintyfrom wascurrentlysomewhatbelowitshistoricalnorm.It “higher”to“broadlysimilar”tothenorm. wasalsonotedthat,becausetheappropriatestance of monetarypolicyisconditionalonthepathof real Amajorityof participants,somewhatmorethanin activityandinflationovertime,assessmentsof the December,reportedthattheysawtheriskstotheir appropriatefuturepathof thefederalfundsrateand forecastsof realGDPgrowthandunemploymentas thebalancesheetcouldchangeif economiccondi- broadlybalanced,withtheremaindergenerallyinditionsweretoevolveinanunexpectedmanner. catingthattheysawtheriskstotheirforecastsfor realGDPgrowthasweightedtothedownsideand Uncertainty and Risks forunemploymentasweightedtotheupside.Some participantswhochangedtheirassessmentto Amajorityof theparticipantscontinuedtojudge “broadlybalanced”indicatedthat,whileU.S.fiscal thatthelevelsof uncertaintyabouttheirprojections policyhadbecomemorerestrictivethisyear,the forrealGDPgrowthandunemploymentremained futurepathof thatpolicyhadbecomelessuncertain higherthanwasthenormduringtheprevious thanitwasinDecember. 20years;however,thenumberof participantswith thisviewwasnoticeablysmallerthaninDecember Participantsreportedlittlechangeintheirassess- (figure4).2Themainfactorcitedascontributingto mentsof thelevelof uncertaintyandthebalanceof theelevateduncertaintyabouteconomicoutcomes risksaroundtheirforecastsforoverallPCEinflation wasthechallengeassociatedwithforecastingthepath andcoreinflation.Thirteenparticipantsjudgedthe of theU.S.economicrecoveryfollowingafinancial levelsof uncertaintyassociatedwiththeirforecasts crisisandrecessionthatdifferedmarkedlyfrom forthoseinflationmeasurestobebroadlysimilarto, recenthistoricalexperience.Severalparticipantsalso orlowerthan,historicalnorms;thesamenumber notedthedifficultiesinvolvedinpredictingfiscal assessedtheriskstothoseprojectionstobebroadly policyintheUnitedStatesandthepotentialfor balanced.Severalparticipantshighlightedthelikely EuropeandevelopmentstothreatenU.S.financial roleplayedbytheCommittee’sadoptionof a2percentinflationgoaloritscommitmenttomaintaining 2 Table2providesestimatesoftheforecastuncertaintyforthe accommodativemonetarypolicyascontributingto changeinrealGDP,theunemploymentrate,andtotalconsumerpriceinflationovertheperiodfrom1993through2012. therecentstabilityof longer-terminflationexpecta- Attheendofthissummary,thebox“ForecastUncertainty” tions.Fourparticipantssawtheriskstotheirinfladiscussesthesourcesandinterpretationofuncertaintyinthe tionforecastastiltedtothedownside,reflecting,for economicforecastsandexplainstheapproachusedtoassessthe uncertaintyandrisksattendingtheparticipants’projections. example,risksof disinflationthatcouldarisefrom

164 100thAnnualReport|2013 adverseshockstotheeconomythatpolicywould lightof thecurrenthighlyaccommodativestanceof havelimitedscopetooffsetinthecurrentenviron- monetarypolicyandtheirconcernsabouttheComment.Conversely,acoupleof theparticipantssaw mittee’sabilitytoshifttoalessaccommodative theriskstoinflationasweightedtotheupsidein policystancewhenitbecomesappropriatetodoso.

Minutesof FederalOpenMarketCommitteeMeetings|March 165 Figure4.Uncertaintyandrisksineconomicprojections Number of participants Number of participants Uncertainty about GDP growth 20 Risks to GDP growth 20 March projections 18 March projections 18 December projections 16 December 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.

166 100thAnnualReport|2013 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers inthethirdyear.Thecorresponding70percentconfioftheBoardofGovernorsandthepresidentsofthe denceintervalsforoverallinflationwouldbe1.1to FederalReserveBanksinformdiscussionsofmon- 2.9percentinthecurrentyear,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 rangeof1.7to4.3percentinthecurrentyear,1.3to pointforward. 4.7percentinthesecondyear,and1.2to4.8percent

Minutesof FederalOpenMarketCommitteeMeetings|April–May 167 Meeting Held StevenB.Kamin Economist on April 30–May 1, 2013 DavidW.Wilcox Ameetingof theFederalOpenMarketCommittee Economist washeldintheofficesof theBoardof Governorsof ThomasA.Connors,TroyDavig, theFederalReserveSysteminWashington,D.C.,on MichaelP.Leahy,StephenA.Meyer, Tuesday,April30,2013,at2:00p.m.andcontinued DavidReifschneider,DanielG.Sullivan, onWednesday,May1,2013,at9:00a.m. andWilliamWascher AssociateEconomists Present SimonPotter BenBernanke Manager,SystemOpenMarketAccount Chairman MichaelS.Gibson WilliamC.Dudley Director,Divisionof BankingSupervisionand ViceChairman Regulation,Boardof Governors JamesBullard JamesA.ClouseandWilliamNelson DeputyDirectors,Divisionof MonetaryAffairs, ElizabethDuke Boardof Governors CharlesL.Evans AndreasLehnert EstherL.George DeputyDirector,Officeof FinancialStabilityPolicy andResearch,Boardof Governors JeromeH.Powell JonW.Faust SarahBloomRaskin SpecialAdvisertotheBoard,Officeof Board Members,Boardof Governors EricRosengren LindaRobertson JeremyC.Stein AssistanttotheBoard,Officeof BoardMembers, DanielK.Tarullo Boardof Governors JanetL.Yellen SethB.Carpenter SeniorAssociateDirector,Divisionof Monetary ChristineCumming,RichardW.Fisher, Affairs,Boardof Governors NarayanaKocherlakota,SandraPianalto, andCharlesI.Plosser JoyceK.Zickler AlternateMembersof theFederalOpenMarket SeniorAdviser,Divisionof MonetaryAffairs, Committee Boardof Governors JeffreyM.Lacker,DennisP.Lockhart, MichaelT.KileyandThomasLaubach andJohnC.Williams AssociateDirectors,Divisionof Researchand Presidentsof theFederalReserveBanksof Statistics,Boardof Governors Richmond,Atlanta,andSanFrancisco,respectively DavidBowman DeborahJ.Danker DeputyAssociateDirector,Divisionof International DeputySecretary Finance,Boardof Governors StevenA.SharpeandJohnJ.Stevens MatthewM.Luecke AssistantDirectors,Divisionof Researchand AssistantSecretary Statistics,Boardof Governors DavidW.Skidmore MinWei AssistantSecretary AssistantDirector,Divisionof MonetaryAffairs, MichelleA.Smith Boardof Governors AssistantSecretary StefaniaD’Amico ScottG.Alvarez SeniorEconomist,Divisionof MonetaryAffairs, GeneralCounsel Boardof Governors

168 100thAnnualReport|2013 RandallA.Williams aprovisionintheFrameworkAgreementrequires RecordsProjectManager,Divisionof Monetary eachpartytoprovidesixmonths’priornoticeof an Affairs,Boardof Governors intentiontoterminateitsparticipation. KennethC.Montgomery Staff Review of the Economic Situation FirstVicePresident,FederalReserveBankof Boston DavidAltig,Jeff Fuhrer,andLorettaJ.Mester TheinformationreviewedattheApril30–May1 ExecutiveVicePresidents,FederalReserveBanksof meetingindicatedthateconomicactivityexpandedat Atlanta,Boston,andPhiladelphia,respectively amoderatepaceinthefirstquarter.InMarch,the unemploymentrateedgeddownfurther,althoughit LorieK.LoganandMarkE.Schweitzer continuedtobeelevated,andemploymentgrowth SeniorVicePresidents,FederalReserveBanksof slowed.Consumerpriceinflationwasrelativelylow, NewYorkandCleveland,respectively whilemeasuresof longer-runinflationexpectations FredFurlong remainedstable. GroupVicePresident,FederalReserveBankof SanFrancisco AfterfastergainsinJanuaryandFebruary,private nonfarmemploymentincreasedatasubduedratein EvanF.KoenigandDavidC.Wheelock March,andgovernmentemploymentdeclined VicePresidents,FederalReserveBanksof Dallasand slightly.Theunemploymentratewas7.6percentin St.Louis,respectively March,alittlebelowitsaverageinthefourthquarter RobertL.HetzelandAndreaTambalotti of lastyear.Thelaborforceparticipationratealso SeniorEconomists,FederalReserveBanksof edgeddowntobelowitsfourth-quarteraverage.The RichmondandNewYork,respectively rateof long-durationunemploymentandtheshareof workersemployedparttimeforeconomicreasons JonathanHeathcote declinedsomewhatinMarch,butthesemeasures SeniorResearchEconomist,FederalReserveBankof remainedwellabovetheirpre-recessionlevels.Indica- Minneapolis torsof near-termlabormarketconditionswereconsistentwithprojectionsof moderateincreasesin Developments in Financial Markets and employmentinthecomingmonths:Measuresof job the Federal Reserve’s Balance Sheet openingsgenerallymovedup,buttherateof gross TheManagerof theSystemOpenMarketAccount private-sectorhiringandindicatorsof firms’hiring (SOMA)reportedondevelopmentsindomesticand plansweresubdued,onbalance,andinitialclaimsfor foreignfinancialmarketsaswellastheSystemopen unemploymentinsurancetrendedupalittleoverthe marketoperationsduringtheperiodsincetheFed- intermeetingperiod. eralOpenMarketCommittee(FOMC)meton March19–20,2013.Byunanimousvote,theCom- Manufacturingproductiondecreasedslightlyin mitteeratifiedtheOpenMarketDesk’sdomestic Marchbutexpandedatabriskrateinthefirstquartransactionsovertheintermeetingperiod.Therewere terasawhole,supportedinpartbyarecoveryinoutnointerventionoperationsinforeigncurrenciesfor putfollowingHurricaneSandy,andtherateof theSystem’saccountovertheintermeetingperiod. manufacturingcapacityutilizationinMarchwas somewhathigherthaninthefourthquarter.Thepro- Byunanimousvote,theCommitteeagreedtoextend ductionof motorvehiclesandpartsrosesolidlyin thereciprocalcurrency(swap)arrangementswiththe March,butfactoryoutputoutsideof themotor Bankof CanadaandtheBancodeMéxicoforan vehiclesectordeclined.Automakers’schedulesindiadditionalyearbeginninginmid-December2013; catedthatthepaceof motorvehicleassembliesinthe thesearrangementsareassociatedwiththeFederal comingmonthswouldbeabitbelowthatinMarch. Reserve’sparticipationintheNorthAmerican Broadindicatorsof manufacturingproduction,such FrameworkAgreementof 1994.Thearrangement asthediffusionindexesof newordersfromthe withtheBankof Canadaallowsforcumulative nationalandregionalmanufacturingsurveys,wereat drawingsof upto$2billionequivalent,andthe levelsthatpointedtosmallincreasesinfactoryoutarrangementwiththeBancodeMéxicoallowsfor putinthenearterm. cumulativedrawingsof upto$3billionequivalent. ThevotetorenewtheSystem’sparticipationinthese Realpersonalconsumptionexpenditures(PCE) swaparrangementswastakenatthismeetingbecause expandedatasolidpaceinMarchandinthefirst

Minutesof FederalOpenMarketCommitteeMeetings|April–May 169 quarterasawhole.Somefactorsthattendtoinflu- moderatelyfromrealgrossdomesticproduct(GDP) encehouseholdspendingweregenerallypositivein growth,asrealimportsoutpacedrealexports. recentmonths.Forexample,realdisposableincome increasedinFebruaryandMarch,supportedinpart Overallconsumerprices,asmeasuredbytheprice byrecentdeclinesinretailgasolinepricesthatraised indexforPCE,edgeddowninMarchandrosejust householdpurchasingpowerandoffsettosome 1percentfromayearearlier.Consumerenergyprices extenttheeffectsof thisyear’shigherpayrolland declinedinMarch,andretailgasolinepricesfellfurincometaxes.Inaddition,householdnetworthlikely therinthefirstfewweeksof April.Consumerfood roseinrecentmonthsasaresultof higherequityval- pricesonlyedgedupinMarch.Consumerprices uesandhomeprices.Incontrast,consumersenti- excludingfoodandenergywereflatinMarch,and mentintheThomsonReuters/Universityof Michi- theirincreasefrom12monthsearlierwassimilarto ganSurveysof Consumerswasroughlyflat,onbal- thatfortotalconsumerprices.Near-terminflation ance,inMarchandAprilandremainedrelatively expectationsfromtheThomsonReuters/University downbeat. of MichiganSurveysof Consumerswereslightly lowerinApril,andlonger-terminflationexpectations Conditionsinthehousingsectorcontinuedto inthesurveywerelittlechangedandremainedwithin improve,asrealexpendituresforresidentialinvest- thenarrowrangethattheyhaveoccupiedforseveral mentexpandedbrisklyinthefirstquarter,although years. fromalowlevel.Totalcombinedstartsof newsinglefamilyhomesandmultifamilyunitsincreasedin Measuresof laborcompensationindicatedthatgains Marchtoalevelwellabovethatatthebeginningof innominalwagesremainedsubdued.Increasesinthe theyear.HomepricescontinuedtorisethroughFeb- employmentcostindexweremodestovertheyear ruary,andsalesof newhomesroseinMarch,but endinginthefirstquarter.Averagehourlyearnings salesof existinghomesdecreasedalittle. forallemployeeswereunchangedinMarch,and hourlyearningsgainsinthefirstquarterasawhole Growthinrealbusinessexpendituresonequipment weremuted. andsoftwareslowedinthefirstquarter.Nominal shipmentsof nondefensecapitalgoodsexcludingair- Economicgrowthinforeigneconomiesoverallinthe craftcontinuedtorisegraduallyinFebruaryand firstquarterof 2013showedonlyasmallimprove- March,butneworderswereslightlybelowthelevel mentfromthatregisteredinthesecondhalf of 2012. of shipments,pointingtomodestgainsinshipments RealGDPgrowthpickedupintheUnitedKingdom, inthenearterm.Otherforward-lookingindicators, andrecentindicatorssuggestedthatthepaceof consuchassurveysof businessconditionsandcapital tractionmoderatedintheeuroarea.Incontrast,ecospendingplans,alsosuggestedthatoutlaysforbusi- nomicgrowthinChinaslowedabruptlyaftersurging nessequipmentwouldriseatasubduedpaceinthe latelastyear.Foreigninflationappearedtoincreasea comingmonths.Realbusinessspendingfornonresi- littleinthefirstquarter,partlyasaresultof higher dentialconstructiondeclinedalittleinthefirstquar- foodpricesinseveralemergingmarketeconomies, ter.Realinventoryinvestmentincreasedinthefirst butremainedquitemoderate. quarter,andbusinessinventoriesinmostindustries appearedtobebroadlyalignedwithsalesinrecent Staff Review of the Financial Situation months. Financialconditionsimprovedalittle,onbalance, Realfederalgovernmentpurchasesdeclinedmark- overtheintermeetingperiod.Yieldsof longer-term edlyinthefirstquarter,ledbyasignificantdecrease Treasurysecuritiesandforeignbenchmarksovereign indefensespending,whichmayhavepartially bondsdeclinedappreciably,reflectingthesomewhat reflectedtheanticipatedeffectsof thefederalspend- negativetoneof U.S.andforeigneconomicdata ingsequestration.Realstateandlocalgovernment releasesaswellaspolicyactionsbytheBankof purchasesalsodecreasedsomewhatinthefirstquar- Japanthatweremoreaccommodativethanthemarter,asstateandlocalconstructionexpenditurescon- ketshadexpected.Equitypricesrosemodestly,on tinuedtodecline. net,supportedinpartbysolidquarterlyearnings reports. Theadvancereleaseof first-quarterdataforthe nationalincomeandproductaccountsshowedthat Theexpectedpathof thefederalfundsrateimplied realnetexportsof goodsandservicesalsosubtracted bymarketquotesshifteddownmoderatelyoverthe

170 100thAnnualReport|2013 intermeetingperiod.However,theDesk’ssurveyof amounts.Syndicatedleveragedloanswereissuedata primarydealers,conductedpriortotheApril30– recordpaceinthefirstquarter,supportedbystrong May1meeting,indicatedthatthedealerscontinued demandforthistypeof asset,particularlyfromnontoviewthethirdquarterof 2015asthemostlikely bankinstitutions.Grosspublicissuanceof equityby timefortheinitialincreaseinthetargetfederalfunds nonfinancialfirmswassolidoverthesameperiod. rate.ThemediandealeranticipatedthattheFOMC wouldmaintainitscurrentpaceof assetpurchases Conditionsinsomesegmentsof thecommercialreal throughDecember2013andsawthesecondquarter estate(CRE)sectorcontinuedtoimproveinrecent of 2014asthemostprobabletimefortheendof months.OutstandingCREloansheldbycommercial assetpurchases,implyingaslightupwardrevisionto banksedgedupinthepasttwoquartersfollowinga theprojectedtotalsizeof theFederalReserve’sasset prolongedperiodof decline,andcommercial purchaseprogram. mortgage-backedsecurityissuancewasstronginthe firstquarter.AccordingtotheSeniorLoanOfficer Overtheintermeetingperiod,near-termmeasuresof OpinionSurveyonBankLendingPractices(SLOOS) inflationcompensationderivedfromyieldsonnomi- conductedinApril,thefractionof banksthateased nalandinflation-protectedTreasurysecuritiesmoved standardsonCREloansoverthepastthreemonths loweramidsomewhatdisappointingeconomicdata increasedtoarelativelyhighlevel,whiledemandfor anddeclinesinenergyandothercommodityprices; theseloansstrengthenedfurther.CREpricescontinforwardmeasuresof inflationcompensationchanged uedtomoveupslowly,andpriceindexesforvarious littleatlongerhorizons.Yieldsonagencymortgage- marketsegmentsreachedlevelslastseeninlate2008. backedsecurities(MBS)decreasedaboutinlinewith thoseonnominalTreasurysecuritiesof comparable Ratesonconforminghomemortgageloansdeclined duration. overtheintermeetingperiod,andthespreadbetween theprimarymortgagerateandMBSyieldsremained Conditionsindomesticdollarfundingmarketswere wellbelowitspeakduringthesecondhalf of 2012. generallylittlechanged,andoffshoredollarfunding Theestimatedpaceof mortgagerefinancingoriginamarketsreactedonlymodestlytotheelevateduncertionscontinuedtobehigh,supportedbyhistorically taintysurroundingthenegotiations,earlyinthe lowmortgagerates.However,purchasemortgage intermeetingperiod,toresolvethebankingcrisisin applicationsstayedatlowlevels.Overalldelinquen- Cyprus. ciestrendedlowerforbothprimeandsubprime mortgages,primarilyreflectingtheverytightunder- Someindicatorsof theconditionof domesticfinanwritingstandardsimposedoverthepastseveralyears. cialinstitutionsweakenedslightly.Sharepricesfor thelargestdomesticbankingorganizationsdeclined ConsumercreditcontinuedtoexpandinJanuaryand somewhat,onbalance,andbankcreditdefaultswap February,mostlydrivenbysizableincreasesinnonrespreadsedgedabithigher,onaverage,acrossthe volvingcredit.Growthwasparticularlystrongin largerfirmsinthesector. autoloansaswellasinstudentloansextended throughtheDepartmentof Education’sDirectLoan Broadequitypriceindexesincreased,onnet,overthe Program.Incontrast,totalrevolvingcreditwas intermeetingperiod,likelyreflectingsolidquarterly aboutflatamidcontinuedtightunderwritingstanearningsreports,stablemedium-termearningsexpecdardsandtermsoncreditcardloans.Issuanceof tations,andlowerinterestrates.Option-impliedvolaconsumerasset-backedsecurities—inparticular, tilityfortheS&P500indexoverthenearterm thosebackedbysubprimeautoloans—remained remainedinarangethatwaslowbyhistorical robustinrecentmonths. standards. Yieldsoncorporatebondsfellroughlyinlinewith Totalbankcreditexpandedmoderatelyduringthe thoseonTreasurysecuritiesof comparablematurity, firstquarterof 2013.Gainscontinuedtobeconcengenerallyleavingtheirspreadslittlechanged.Therate tratedincommercialandindustrial(C&I)loans, of corporatebondissuancebynonfinancialfirms whichincreasedespeciallystronglyatdomestic remainedrobustinMarchandApril.Consistentwith banks.IntheAprilSLOOS,relativelylargenetfracrecenttrends,somecompaniesreportedlyretireda tionsof thesebanksreportedhavingeasedstandards notableportionof theiroutstandingcommercial andreducedspreadsonC&Iloanstofirmsof all paperandissuedlonger-termbondsincomparable sizes.

Minutesof FederalOpenMarketCommitteeMeetings|April–May 171 M2grewatafasterpaceinMarchandAprilthan anticipatedtoslowlyreducetheslackinlaborand earlierintheyear,possiblyboostedbythehigher productmarketsovertheprojectionperiod,andthe levelof annualtaxpaymentsandrefundsrelativeto unemploymentratewasexpectedtodecline recentyears.Meanwhile,themonetarybase gradually. expandedbrisklyoverthosetwomonths,driven mainlybytheincreaseinreservebalancesresulting Thestaff’sforecastforinflationwasalsolittlerevised fromtheFederalReserve’sassetpurchases. fromtheprojectionpreparedfortheMarchFOMC meeting.Withlonger-runinflationexpectations Earlyintheintermeetingperiod,pricesof arangeof assumedtoremainstable,energypricesexpectedto riskyassetsabroadfellinreactiontoreportsof the continuetotrenddown,andsignificantresource “bail-in”of depositorsatbanksinCyprusandthe slackpersistingovertheforecastperiod,thestaff impositionof anextendedbankholidayinthatcoun- continuedtoprojectthatinflationwouldremainsubtry,butoutsideof Cyprusthosemovementsgenerally duedthrough2015. provedtemporary.Euro-areaequityindexes,which fellasstressesinCyprusintensified,endedtheperiod Thestaff viewedtheuncertaintyarounditsforecast upslightly.Bycontrast,stockpricesinJapanrose foreconomicactivityassimilartotheaveragelevel sharply,astheBankof Japansurprisedinvestors overthepast20years.However,theriskstothisoutwiththescaleof itsnewmonetarypolicyprogram lookwereviewedasskewedtothedownside,reflectaimedatraisinginflationto2percent.Yieldson inginpartconcernsaboutthesituationinEurope. longer-termJapanesegovernmentbondsdisplayed Althoughthestaff sawtheoutlookforinflationas considerablevolatilityinthedaysfollowingthe uncertain,theriskswereviewedasbalancedandnot announcement,althoughtheywerelittlechanged,on unusuallyhigh. net,overtheintermeetingperiod.Outsideof Japan, foreignbenchmarksovereignyieldsfellovertheinter- Participants’ Views on Current Conditions meetingperiod,withmarketcommentarycitingweak and the Economic Outlook U.S.andforeignmacroeconomicdatareleases, increasedexpectationsforfurthermonetaryaccom- Intheirdiscussionof theeconomicsituation,meetmodationbysomeforeigncentralbanks,andthe ingparticipantsgenerallyindicatedthattheyviewed announcementbytheBankof Japan. theinformationreceivedduringtheintermeeting periodassuggestingthattheeconomywasexpanding Afterappreciating,onbalance,sinceearlythisyear, atamoderatepacedespitesomesoftnessinrecent thedollardepreciatedagainstmostcurrencies, economicdata.Conditionsinthelabormarket althoughitcontinuedtoappreciateagainsttheyen. showedsomecontinuedimprovement,althoughthe Emergingmarketstockpriceschangedlittle,onnet, unemploymentrateremainedelevated.Spendingby andemergingmarketequitymutualfundsexperi- consumerscontinuedtoexpand,supportedbybetter encedmodestoutflows. creditconditions,risingequityandhousingprices, andlowerenergyprices;andthehousingsector Staff Economic Outlook improvedfurther.However,growthinbusiness investmentspendingslowedsomewhat,andfiscal Intheeconomicforecastpreparedbythestaff forthe policyappearedtobeexertingsignificantnear-term April30–May1FOMCmeeting,theprojectionfor restraintontheeconomy.Perhapsreflectingmore realGDPgrowthwaslittlerevisedfromthatpre- subduedgrowthabroad,especiallyinEuropeand paredfortheMarchmeeting.Withfiscalpolicy China,netexportsweakenedinthefirstquarter. expectedtobetighterthisyearthanlastyear,the staff stillanticipatedthatthepaceof expansionin Participantsgenerallysawtheeconomicoutlookas realGDPwouldonlysomewhatexceedthegrowth littlechangedsincetheymetinMarch.However,ecorateof potentialoutputin2013.Thestaff alsocon- nomicdatareleasesovertheintermeetingperiod tinuedtoprojectthatrealGDPwouldaccelerate weremixed,raisingsomeconcernthattherecovery graduallyin2014and2015,supportedbyaneventual mightbeslowingafterasolidstartearlierthisyear, easingintheeffectsof fiscalpolicyrestraintoneco- therebyrepeatingthepatternobservedinrecent nomicgrowth,increasesinconsumerandbusiness years.Variousviewsonthisprospectwereoffered, sentiment,furtherimprovementsincreditavailability fromthoseparticipantswhoputmoreemphasison andfinancialconditions,andaccommodativemon- theunderlyingmomentumof theeconomy,noting etarypolicy.Theexpansionineconomicactivitywas thestrengtheninginprivatedomesticfinaldemand,

172 100thAnnualReport|2013 tothosewhostressedthegrowingfiscalrestraintor puttheirhousesonthemarket.Theimprovementin theotherheadwindsstillfacingtheeconomy.Partici- thehousingsectorwasalsoseenascontributingtoa pantscontinuedtoanticipatethat,withappropriate pickupinactivityinrelatedindustries. monetarypolicy,growthwouldproceedatamoderatepaceoverthemediumrunandthattheunem- Withsomeexceptions,businesscontactswerereportploymentratewoulddeclinegraduallytowardlevels ingcontinuedcautionaboutexpandinginvestmentor consistentwiththeCommittee’smandate.Anumber payrolls.Reportsincludedsomeweakeninginmanuof participantsnotedthatthebalanceof risksto facturingactivity,dueinparttoreduceddemand growthremainedtothedownside,althoughacouple fromabroad,andfarmexportsinoneDistrictwere suggestedthatsuchriskshaddiminishedappreciably projectedtobeflatfollowingstronggrowthinprevisincelastfall.Afewparticipantswarnedthat,inlight ousyears.However,theCREsectorshowedsome of ongoingfiscalrestraintandaweakglobalout- signsof recovery,andsurveyresultsindicatedthat look,economicdatacouldremainsoftforthenext thetermsof CRElendingwereeasingandloan fewmonths,regardlessof theunderlyingstrengthof demandincreasing. theeconomy. Thefederalspendingsequestrationandrecenttax Consumerspendingwasreportedtobestrongina increaseswereviewedasrestrainingaggregate numberof areasof thecountryand,morebroadly, demand.Participantsdifferedsomewhatintheir appearedtobesupportedbyrisingequityandhouse assessmentsof themagnitudeof theseeffectsonthe prices,improvedhouseholdbalancesheets,andeasier economy,withviewsrangingfromanestimateof creditconditions.However,concernswereexpressed substantialfiscaldragtooneof lessrestraintthan thatthisrateof growthinconsumerexpenditures previouslyexpected.Afewparticipantsmentioned mightnotbesustainablewithoutthesupportof a thesequestration’simpactonhiringandspendingby notablepickupinbusinessinvestmentandhiring. thedefenseindustryorgovernmentcontractors,but Otherfactorsthatmightaffectspendingalsowere oneparticipantnotedthatadeclineinexpected mentioned.Forexample,thelossesinincomeand futuretaxliabilitiesof theprivatesectorassociated wealthexperiencedduringthecrisismightlead withlowerfederalspendingmightprovideapartial householdstobemorecautiousintheirspendingand offsettotheeconomiceffectsof thebudgetcuts. tosaveatahigherrate;wealthgainsinrecentyears appearedconcentratedamonghigher-net-worthindi- Participantsgenerallysawsignsof improvementin viduals,whomayhavealowerpropensitytospend labormarketconditionsdespitetheweaker-thanoutof additionalwealth;andretailersreportedweak- expectedMarchpayrollemploymentfigure.Employnessinspendingbylower-incomehouseholds,who mentgrowthinearliermonthshadbeensolid,and hadbeenmoreaffectedbytheincreaseinpayroll more-recentimprovementsincludedthefurther taxes. declineintheunemploymentrateinMarchandthe gradualprogressbeingmadeinsomeotherlabor Participantssawthehousingmarketashaving marketindicators.However,severalparticipantscaustrengthenedfurtherduringtheintermeetingperiod tionedthatthedropintheunemploymentrateinthe andpointedvariouslytorisinghouseprices,growth latestmonthwasalsoaccompaniedbyanother inhomesales,alowerinventoryof housesforsale,a reductioninthelaborforceparticipationrate;the reductionintheaveragetimehousesstayedonthe declineinlaborforceparticipationoverrecentquarmarket,andencouragingreportsfromhomebuilders. terscouldindicatethatthereductioninoveralllabor Moreall-cashorinvestorpurchaseswerebeing marketslackhadbeensubstantiallysmallerthansugreported,andthepaceof homepurchasesoverall gestedbythechangeintheunemploymentrateover appearedtobeconstrainedlessbyalackof demand thatperiod.Oneparticipantcommentedthatassessthanbyalackof homesforsale,inpartreflecting ingtheshortfallof employmentfromitsmaximum fewernewlyforeclosedhousescomingontothemar- levelrequiredtakingaccountof notonlythegap ket.Therateof newdelinquenciesonmortgages betweentheunemploymentrateanditscorresponddeclinednearlytopre-crisislevels,andthepipelineof ingnaturalrate,butalsothegapbetweenthelabor propertiesintheforeclosureprocesswasbeingslowly forceparticipationrateanditslonger-termtrend—a workeddown,inpartthroughmodificationsand trendwhichwasadmittedlysubjecttoconsiderable shortsales.Overtime,thesupplyof homesforsale uncertainty.Afewparticipantsmentionedthatjob wasexpectedtoincreaseasnewconstructionpicked growthmayhavebeenrestrainedtoanextentby upandsellerssawmoreattractiveopportunitiesto businessespostponinghiringbecauseof uncertainties

Minutesof FederalOpenMarketCommitteeMeetings|April–May 173 overtheimplementationof health-carelegislationor couldprovedifficultforregulatorstoidentifyand becausetheywereunabletofindcertaintypesof address,andthatitwouldbeappropriatetoadjust skilledworkers. monetarypolicytohelpguardagainstriskstofinancialstability. BothheadlineandcorePCEinflationinthefirst quartercameinbelowtheCommittee’slonger-run Indiscussingtheeffectsof theCommittee’sasset goalof 2percent,buttheserecentlowerreadings purchases,severalparticipantspointedtothe appearedtobedue,inpart,totemporaryfactors; improvementininterest-sensitivesectors,suchas othermeasuresof inflationaswellasinflationexpec- consumerdurablesandhousing,overtherecent tationshadremainedmorestable.Accordingly,par- periodasevidencethatthepurchaseswerehaving ticipantsgenerallycontinuedtoexpectthatinflation positiveresultsfortheeconomy.Theeffectsona wouldmoveclosertothe2percentobjectiveoverthe rangeof assetpricesof theBankof Japan’srecent mediumrun.Nonetheless,anumberof participants announcementwerecitedasaddedevidencethat expressedconcernthatinflationwasbelowtheCom- large-scaleassetpurchaseswereeffectiveineasing mittee’stargetandstressedthatfuturepricedevelop- financialconditionsandtherebyhelpingstimulate mentsborecarefulwatching.Mostof therecent economicactivity.Inevaluatingtheprospectsfor reportsfrombusinesscontactsrevealedlittleupward benefitsfromassetpurchases,however,oneparticipressureonpricesorwages.Acoupleof participants pantvieweduncertaintyaboutU.S.fiscalandregulaexpressedtheviewthatanadditionalmonetary torypoliciesasinterferingwiththetransmissionof policyresponsemightbewarrantedshouldinflation monetarypolicyandaspreventingassetpurchases fallfurther.Itwasalsopointedoutthat,evenabsent fromhavingameaningfuleffectontherealeconomy. furtherdisinflation,continuedlowinflationmight poseathreattotheeconomicrecoveryby,for Participantsalsotouchedontheconditionsunder example,raisingdebtburdens.Oneparticipant whichitmightbeappropriatetochangethepaceof focusedinsteadontheupsideriskstoinflationover assetpurchases.Mostobservedthattheoutlookfor thelongertermresultingfromhighlyaccommodative thelabormarkethadshownprogresssincethepromonetarypolicy. gramwasstartedinSeptember,butmanyof these participantsindicatedthatcontinuedprogress,more Financialconditionsappearedtohaveeasedfurther confidenceintheoutlook,ordiminisheddownside overtheintermeetingperiod:Longer-terminterest riskswouldberequiredbeforeslowingthepaceof ratesdeclinedsignificantly,banksloosenedtheirC&I purchaseswouldbecomeappropriate.Anumberof lendingtermsandstandardsonbalance,andcompe- participantsexpressedwillingnesstoadjusttheflow titiontomakecommercialandautoloanswasstrong. of purchasesdownwardasearlyastheJunemeeting Businesseswerereportedlystillborrowingtorefi- if theeconomicinformationreceivedbythattime nance,buttheyhadbeguntotakeoutmorenew showedevidenceof sufficientlystrongandsustained loansaswell.WhiletheCommittee’saccommodative growth;however,viewsdifferedaboutwhatevidence policycontinuedtoprovidesupporttofinancialcon- wouldbenecessaryandthelikelihoodof thatoutditions,eventsabroadalsoinfluencedU.S.markets come.Oneparticipantpreferredtobegindecreasing overtheintermeetingperiod.Inparticular,theBank therateof purchasesimmediately,whileanotherparof Japanannouncedanewmonetarypolicyprogram ticipantpreferredtoaddmoremonetaryaccommothatwasconsiderablymoreexpansionarythanmar- dationatthecurrentmeetingandmentionedthatthe ketshadexpected.FinancialconditionsinEurope Committeehadseveralothertoolsitcouldpotenimprovedsomewhatovertheperiod,butsomepar- tiallyusetodoso.Mostparticipantsemphasizedthat ticipantsstillsawthesituationinEuropeasposing itwasimportantfortheCommitteetobepreparedto downsideriskstoU.S.growth.Atthismeeting,afew adjustthepaceof itspurchasesupordownas participantsexpressedconcernthatconditionsincer- neededtoalignthedegreeof policyaccommodation tainU.S.financialmarketswerebecomingtoobuoy- withchangesintheoutlookforthelabormarketand ant,pointingtotheelevatedissuanceof bondsby inflationaswellastheextentof progresstowardthe lower-credit-qualityfirmsorof bondswithfewer Committee’seconomicobjectives.Regardingthe restrictionsoncollateralandpaymentterms(so- compositionof purchases,oneparticipantexpressed calledcovenant-litebonds).Oneparticipantcau- theviewthat,inlightof thesubstantialimprovement tionedthattheemergenceof financialimbalances inthehousingmarketandtoavoidfurthercredit

174 100thAnnualReport|2013 allocationacrosssectorsof theeconomy,theCom- waslaunchedorhadrespondedappropriatelyto mitteeshouldstarttoshiftanyassetpurchasesaway incominginformation.Membersgenerallyagreedon fromMBSandtowardTreasurysecurities. theneedfortheCommitteetocommunicateclearly thatthepaceandultimatesizeof itsassetpurchases Committee Policy Action woulddependontheCommittee’scontinuedassessmentof theoutlookforthelabormarketandinfla- Committeememberssawtheinformationreceived tioninadditiontoitsjudgmentsregardingtheeffiovertheintermeetingperiodassuggestingthateco- cacyandcostsof additionalpurchasesandtheextent nomicactivityhadbeenexpandingatamoderate of progresstowarditseconomicobjectives.Tohighpace.Labormarketconditionshadshownsome lightitswillingnesstoadjusttheflowof purchasesin improvementinrecentmonths,onbalance,butthe lightof incominginformation,theCommittee unemploymentrateremainedelevated.Household includedlanguageinthestatementtobereleasedfolspendingandbusinessfixedinvestmentadvanced, lowingthemeetingthatsaidtheCommitteewaspreandthehousingsectorhadstrengthenedfurther,but paredtoincreaseorreducethepaceof itspurchases fiscalpolicywasrestrainingeconomicgrowth.The tomaintainappropriatepolicyaccommodationas Committeeexpectedthat,withappropriatemonetary theoutlookforthelabormarketorinflationchanges. policyaccommodation,economicgrowthwouldproceedatamoderatepaceandresultinagradual Attheconclusionof thediscussion,theCommittee declineintheunemploymentratetowardlevelsthat votedtoauthorizeanddirecttheFederalReserve theCommitteejudgedconsistentwithitsdualman- Bankof NewYork,untilitwasinstructedotherwise, date.Membersgenerallycontinuedtoanticipatethat, toexecutetransactionsintheSystemAccountin withlonger-terminflationexpectationsstableand accordancewiththefollowingdomesticpolicy persistingslackinresourceutilization,inflationover directive: themediumtermwouldlikelyrunatorbelowthe Committee’s2percentobjective. “Consistentwithitsstatutorymandate,theFederalOpenMarketCommitteeseeksmonetary Intheirdiscussionof monetarypolicyfortheperiod andfinancialconditionsthatwillfostermaxiahead,allbutonememberjudgedthatahighly mumemploymentandpricestability.Inparticuaccommodativestanceof monetarypolicywaswar- lar,theCommitteeseeksconditionsinreserve rantedinordertofosterastrongereconomicrecov- marketsconsistentwithfederalfundstradingin eryinacontextof pricestability.TheCommittee arangefrom0to¼percent.TheCommittee agreedtocontinuepurchasesof MBSatapaceof directstheDesktoundertakeopenmarket $40billionpermonthandpurchasesof longer-term operationsasnecessarytomaintainsuchcondi- Treasurysecuritiesatapaceof $45billionper tions.TheDeskisdirectedtocontinuepurchasmonth,aswellastomaintaintheCommittee’srein- inglonger-termTreasurysecuritiesatapaceof vestmentpolicies.TheCommitteealsoretainedits about$45billionpermonthandtocontinue forwardguidanceaboutthefederalfundsrate, purchasingagencymortgage-backedsecuritiesat includingthethresholdsontheunemploymentand apaceof about$40billionpermonth.The inflationrates.OnememberdissentedfromtheCom- CommitteealsodirectstheDesktoengagein mittee’spolicydecision,expressingconcernthatthe dollarrollandcouponswaptransactionsasneccontinuedhighlevelof monetaryaccommodation essarytofacilitatesettlementof theFederal increasedtherisksof futureeconomicandfinancial Reserve’sagencymortgage-backedsecurities imbalancesand,overtime,couldcauseanincreasein transactions.TheCommitteedirectstheDeskto inflationexpectations. maintainitspolicyof rollingovermaturing Treasurysecuritiesintonewissuesanditspolicy Afewmembersexpressedconcernsthatinvestor of reinvestingprincipalpaymentsonallagency expectationsof thecumulativesizeof theassetpur- debtandagencymortgage-backedsecuritiesin chaseprogramappearedtohaveincreasedsomewhat agencymortgage-backedsecurities.TheSystem sinceitwaslaunchedlastSeptemberdespitea OpenMarketAccountManagerandtheSecrenotabledeclineintheunemploymentrateandother tarywillkeeptheCommitteeinformedof ongoimprovementsinthelabormarketsincethen.Incon- ingdevelopmentsregardingtheSystem’sbaltrast,afewothermembersfocusedonevidencethat ancesheetthatcouldaffecttheattainmentover marketexpectationsaboutthetotalsizeof thepro- timeof theCommittee’sobjectivesof maximum gramhadchangedlittle,onnet,sincetheprogram employmentandpricestability.”

Minutesof FederalOpenMarketCommitteeMeetings|April–May 175 Thevoteencompassedapprovalof thestatement mortgage-backedsecurities,andemployits belowtobereleasedat2:00p.m.: otherpolicytoolsasappropriate,untiltheoutlookforthelabormarkethasimprovedsubstan- “InformationreceivedsincetheFederalOpen tiallyinacontextof pricestability.TheCommit- MarketCommitteemetinMarchsuggeststhat teeispreparedtoincreaseorreducethepaceof economicactivityhasbeenexpandingatamod- itspurchasestomaintainappropriatepolicy eratepace.Labormarketconditionshaveshown accommodationastheoutlookforthelabor someimprovementinrecentmonths,onbalance, marketorinflationchanges.Indeterminingthe buttheunemploymentrateremainselevated. size,pace,andcompositionof itsassetpur- Householdspendingandbusinessfixedinvest- chases,theCommitteewillcontinuetotake mentadvanced,andthehousingsectorhas appropriateaccountof thelikelyefficacyand strengthenedfurther,butfiscalpolicyisrestrain- costsof suchpurchasesaswellastheextentof ingeconomicgrowth.Inflationhasbeenrun- progresstowarditseconomicobjectives. ningsomewhatbelowtheCommittee’slongerrunobjective,apartfromtemporaryvariations Tosupportcontinuedprogresstowardmaxithatlargelyreflectfluctuationsinenergyprices. mumemploymentandpricestability,theCom- Longer-terminflationexpectationshave mitteeexpectsthatahighlyaccommodative remainedstable. stanceof monetarypolicywillremainappropriateforaconsiderabletimeaftertheassetpur- Consistentwithitsstatutorymandate,theCom- chaseprogramendsandtheeconomicrecovery mitteeseekstofostermaximumemployment strengthens.Inparticular,theCommittee andpricestability.TheCommitteeexpectsthat, decidedtokeepthetargetrangeforthefederal withappropriatepolicyaccommodation,eco- fundsrateat0to¼percentandcurrentlyanticinomicgrowthwillproceedatamoderatepace patesthatthisexceptionallylowrangeforthe andtheunemploymentratewillgradually federalfundsratewillbeappropriateatleastas declinetowardlevelstheCommitteejudgescon- longastheunemploymentrateremainsabove sistentwithitsdualmandate.TheCommittee 6½percent,inflationbetweenoneandtwoyears continuestoseedownsideriskstotheeconomic aheadisprojectedtobenomorethanahalf peroutlook.TheCommitteealsoanticipatesthat centagepointabovetheCommittee’s2percent inflationoverthemediumtermlikelywillrunat longer-rungoal,andlonger-terminflation orbelowits2percentobjective. expectationscontinuetobewellanchored.In determininghowlongtomaintainahighly Tosupportastrongereconomicrecoveryandto accommodativestanceof monetarypolicy,the helpensurethatinflation,overtime,isatthe Committeewillalsoconsiderotherinformation, ratemostconsistentwithitsdualmandate,the includingadditionalmeasuresof labormarket Committeedecidedtocontinuepurchasing conditions,indicatorsof inflationpressuresand additionalagencymortgage-backedsecuritiesat inflationexpectations,andreadingsonfinancial apaceof $40billionpermonthandlonger-term developments.WhentheCommitteedecidesto Treasurysecuritiesatapaceof $45billionper begintoremovepolicyaccommodation,itwill month.TheCommitteeismaintainingitsexist- takeabalancedapproachconsistentwithits ingpolicyof reinvestingprincipalpayments longer-rungoalsof maximumemploymentand fromitsholdingsof agencydebtandagency inflationof 2percent.” mortgage-backedsecuritiesinagencymortgagebackedsecuritiesandof rollingovermaturing Votingforthisaction:BenBernanke,WilliamC. Treasurysecuritiesatauction.Takentogether, Dudley,JamesBullard,ElizabethDuke,CharlesL. theseactionsshouldmaintaindownwardpres- Evans,JeromeH.Powell,SarahBloomRaskin,Eric sureonlonger-terminterestrates,supportmort- Rosengren,JeremyC.Stein,DanielK.Tarullo,and gagemarkets,andhelptomakebroaderfinan- JanetL.Yellen. cialconditionsmoreaccommodative. Votingagainstthisaction:EstherL.George. TheCommitteewillcloselymonitorincoming informationoneconomicandfinancialdevelop- Ms.Georgedissentedbecauseshecontinuedtoview mentsincomingmonths.TheCommitteewill monetarypolicyasoverlyaccommodativeandtherecontinueitspurchasesof Treasuryandagency foreasposingriskstothelong-termsustainable

176 100thAnnualReport|2013 growthof theeconomy.Sheexpressedconcernthat therstaff studyof potentialalternativeapproachesto thestanceof policymightbefosteringimbalances implementingmonetarypolicyinthelongerterm andexcessiverisk-takinginsomefinancialmarkets andof possiblenewtoolstoimprovecontrolover andinstitutions,andshecitedthepotentialforthe short-terminterestrates. Committee’songoingassetpurchasestocomplicate thefutureconductof policy,raiseuncertainty,and Viewsdifferedregardingwhetherthebestcourseat affectfutureinflationexpectations.Accordingly,Ms. thispointwouldbetosimplyacknowledgethatcer- Georgepreferredtosignalanear-termtaperingof taincomponentsof theJune2011principleshad assetpurchases,whichwouldbegintomovepolicy beenovertakenbyeventsorrathertoformallyrevise towardamoreappropriatestance. theprinciples.Acknowledgingthattheprinciples needtobeupdatedwouldhelpavoidpossibleconfu- Review of Exit Strategy Principles sionregardingtheCommittee’sintentions;waitingto updatetheprincipleswouldallowtheCommitteeto Afterthepolicyvote,participantsbeganareviewof obtainadditionalinformationbeforerevisingthem. theexitstrategyprinciplesthatwerepublishedinthe Itwasalsomentionedthatthepublic’sunderstanding minutesof theCommittee’sJune2011meeting. of thelikelyexitprocessmightnotbeimprovedif the Thoseprinciples,whichtheCommitteeissuedto Committeeissuedonlyasetof broadprincipleswithclarifyhowitintendedtonormalizethestanceand outprovidingdetailedinformationonthesteps conductof monetarypolicywhendoingsoeventu- anticipatedfornormalization.However,issuing allybecameappropriate,includedbroadprinciples revisedprinciplesrelativelysooncouldgivethepublic alongwithsomedetailsaboutthetimingand additionalconfidencethattheCommitteehadthe sequenceof specificstepstheCommitteeexpectedto toolsandaplanforeventuallynormalizingthecontake.Theparticipants’discussiontouchedonvarious ductof policy.Moreover,oneparticipantstressed aspectsof theexitstrategyprinciplesandpolicynor- thattheCommittee’sabilitytoprovideforwardguidmalizationmoregenerally,includingthesizeand anceaboutthenormalizationprocesswasakeymoncompositionof theSOMAportfoliointhelonger etarypolicytool,andrevisedprincipleswouldpermit run,theuseof arangeof reserve-drainingtools,the useof thattooltohelpadjustthestanceof policy. approachtosalesof securities,theeventualframe- Participantsemphasizedthattheirreviewof the workforpolicyimplementation,andtherelationship June2011exitstrategyprinciplesdidnotsuggestany betweentheprinciplesandtheeconomicthresholds changeintheirviewsabouttheeconomicconditions intheCommittee’sforwardguidanceonthefederal thatwouldeventuallywarrantbeginningtheprocess fundsrate.Thebroadprinciplesadoptedalmosttwo of normalizingthestanceof monetarypolicy.Atthe yearsagoappearedgenerallystillvalid,butdevelop- conclusionof thediscussion,theChairmandirected mentssincethen—includingthechangeinthesize thestaff toundertakeadditionalpreparatorywork andcompositionof SOMAassetholdings—sug- onthisissueforCommitteeconsiderationinthe gestedaneedforgreaterflexibilityregardingthe future. detailsof implementingpolicynormalization,particularlybecausethosedetailswouldappropriately Itwasagreedthatthenextmeetingof theCommittee dependatleastinpartuponfutureeconomicand wouldbeheldonTuesday–Wednesday,June18–19, financialdevelopments.Also,becausenormalization 2013.Themeetingadjournedat1:05p.m.onMay1, stillappearedtobewellinthefuture,theCommittee 2013. mightwishtowaitandacquireadditionalexperience toinformitsplans.Inparticular,theprocessof nor- Notation Vote malizingpolicycouldyieldinformationaboutthe mosteffectiveframeworkforimplementingmonetary BynotationvotecompletedonApril9,2013,the policyinthelongerrun,andthusabouttheappro- Committeeunanimouslyapprovedtheminutesof the priatesizeof theSOMAportfolioandlevelof FOMCmeetingheldonMarch19–20,2013. reservebalances.Inaddition,severalparticipants raisedthepossibilitythatthefederalfundsratemight WilliamB.English not,inthefuture,bethebestindicatorof thegeneral Secretary levelof short-terminterestrates,andsupportedfur-

Minutesof FederalOpenMarketCommitteeMeetings|June 177 Meeting Held on June 18–19, 2013 ThomasC.Baxter DeputyGeneralCounsel Ameetingof theFederalOpenMarketCommittee StevenB.Kamin washeldintheofficesof theBoardof Governorsof Economist theFederalReserveSysteminWashington,D.C.,on DavidW.Wilcox Tuesday,June18,2013,at1:30p.m.andcontinued Economist onWednesday,June19,2013,at9:00a.m. ThomasA.Connors,TroyDavig,MichaelP.Leahy, Present JamesJ.McAndrews,StephenA.Meyer, DavidReifschneider,GeoffreyTootell, BenBernanke ChristopherJ.Waller,andWilliamWascher Chairman AssociateEconomists WilliamC.Dudley SimonPotter ViceChairman Manager,SystemOpenMarketAccount JamesBullard NellieLiang ElizabethDuke Director,Officeof FinancialStabilityPolicyand Research,Boardof Governors CharlesL.Evans JamesA.ClouseandWilliamNelson EstherL.George DeputyDirectors,Divisionof MonetaryAffairs, JeromeH.Powell Boardof Governors SarahBloomRaskin MatthewJ.Eichner DeputyDirector,Divisionof ResearchandStatistics, EricRosengren Boardof Governors JeremyC.Stein MaryannF.Hunter DanielK.Tarullo DeputyDirector,Divisionof BankingSupervision andRegulation,Boardof Governors JanetL.Yellen JonW.Faust ChristineCumming,RichardW.Fisher, SpecialAdvisertotheBoard,Officeof Board NarayanaKocherlakota,andCharlesI.Plosser Members,Boardof Governors AlternateMembersof theFederalOpenMarket Committee LindaRobertson AssistanttotheBoard,Officeof BoardMembers, JeffreyM.Lacker,DennisP.Lockhart, Boardof Governors andJohnC.Williams Presidentsof theFederalReserveBanksof EllenE.MeadeandJoyceK.Zickler Richmond,Atlanta,andSanFrancisco,respectively SeniorAdvisers,Divisionof MonetaryAffairs, Boardof Governors GregoryL.Stefani FirstVicePresident,FederalReserveBankof DanielM.Covitz,EricM.Engen, Cleveland andThomasLaubach AssociateDirectors,Divisionof Researchand WilliamB.English Statistics,Boardof Governors SecretaryandEconomist SeanD.CampbellandJoshuaGallin MatthewM.Luecke DeputyAssociateDirectors,Divisionof Researchand AssistantSecretary Statistics,Boardof Governors DavidW.Skidmore JaneE.IhrigandDavidLópez-Salido AssistantSecretary DeputyAssociateDirectors,Divisionof Monetary MichelleA.Smith Affairs,Boardof Governors AssistantSecretary JosephW.Gruber ScottG.Alvarez AssistantDirector,Divisionof InternationalFinance, GeneralCounsel Boardof Governors

178 100thAnnualReport|2013 JeremyB.Rudd sionwaspremature.Meetingparticipants,ingeneral, Adviser,Divisionof ResearchandStatistics, continuedtoviewthebroadprinciplessetoutin2011 Boardof Governors asstillapplicable.Nonetheless,theyagreedthatmany of thedetailsof theeventualnormalizationprocess DavidH.Small wouldlikelydifferfromthosespecifiedtwoyears ProjectManager,Divisionof MonetaryAffairs, ago,thattheappropriatedetailswoulddependin Boardof Governors partoneconomicandfinancialdevelopments DeborahJ.Lindner betweennowandthetimewhenitbecomesappropri- GroupManager,Divisionof ResearchandStatistics, atetobeginnormalizingmonetarypolicy,andthat Boardof Governors theCommitteewouldneedtoprovideadditional informationaboutitsintentionsasthattime PatriceRobitaille approaches.Participantscontinuedtothinkthatthe SeniorEconomist,Divisionof InternationalFinance, FederalReserveshould,inthelongrun,holdpre- Boardof Governors dominantlyTreasurysecurities.Most,however,now SeungJ.Lee anticipatedthattheCommitteewouldnotsellagency Economist,Divisionof MonetaryAffairs, mortgage-backedsecurities(MBS)aspartof thenor- Boardof Governors malizationprocess,althoughsomeindicatedthatlimitedsalesmightbewarrantedinthelongerrunto PeterM.Garavuso reduceoreliminateresidualholdings.Acoupleof RecordsManagementAnalyst,Divisionof Monetary participantsstatedthattheypreferredthattheCom- Affairs,Boardof Governors mitteemakenodecisionaboutsalesof MBSuntil JamesM.Lyon closertothestartof thenormalizationprocess.Par- FirstVicePresident,FederalReserveBankof ticipantsagreedthattheCommittee’sfocuscontin- Minneapolis uedtobeonprovidingappropriatemonetaryaccommodationtopromoteastrongerrecoveryinthecon- DavidAltigandLorettaJ.Mester textof pricestabilityandsojudgedthatadditional ExecutiveVicePresidents,FederalReserveBanksof discussionregardingpolicynormalizationshouldbe AtlantaandPhiladelphia,respectively deferred. LorieK.Logan,DavidMarshall, MarkE.Schweitzer,andKei-MuYi Developments in Financial Markets and SeniorVicePresidents,FederalReserveBanksof the Federal Reserve’s Balance Sheet NewYork,Chicago,Cleveland,andMinneapolis, respectively TheManagerof theSOMAreportedondevelop- EvanF.Koenig mentsindomesticandforeignfinancialmarketsas VicePresident,FederalReserveBankof Dallas wellastheSystemopenmarketoperationsduringthe periodsincetheFederalOpenMarketCommittee AndreasL.Hornstein (FOMC)metonApril30–May1,2013.Thereview SeniorAdvisor,FederalReserveBankof Richmond includedareportthattheSystem’spurchasesof JohnFernald longer-termassetsdidnotappeartohavehadan SeniorResearchAdviser,FederalReserveBankof adverseeffectonthefunctioningof themarketsfor SanFrancisco TreasurysecuritiesoragencyMBS,andthatthe OpenMarketDesk’soperationsinbothsectorshad Discussion of Guidelines for Policy proceededsmoothly.Byunanimousvote,theCom- Normalization mitteeratifiedtheDesk’sdomestictransactionsover theintermeetingperiod.Therewerenointervention Inlightof thechangesintheSystemOpenMarket operationsinforeigncurrenciesfortheSystem’s Account(SOMA)portfoliooverthepasttwoyears, accountovertheintermeetingperiod. theCommitteeagaindiscusseditsstrategyforthe eventualnormalizationof thestanceof monetary Staff Review of the Economic Situation policyandthesizeandcompositionof theFederal Reserve’sbalancesheetthatwasreleasedinthemin- TheinformationreviewedfortheJune18–19meeting utesof theCommittee’sJune2011meeting. suggestedthateconomicactivitycontinuedto Althoughmostparticipantssawthisreviewaspru- increaseatamoderaterateinthesecondquarter. dentlonger-rangeplanning,somefeltthatthediscus- Private-sectoremploymentexpandedfurtherin

Minutesof FederalOpenMarketCommitteeMeetings|June 179 recentmonths,andtheunemploymentrateinApril increasedinrecentmonths,asequityvaluesand andMaywasbelowitsfirst-quarteraverage, homepricesrosefurther.Moreover,consumersentialthoughitcontinuedtobeelevated.Consumerprice mentintheThomsonReuters/Universityof Michiinflationwassubdued,partlyreflectingtransitory ganSurveysof Consumersimprovednotably,onbalinfluences.However,measuresof longer-runinflation ance,inMayandearlyJuneandwasatitsmost expectationsremainedstable. upbeatlevelsincetheonsetof therecession. Privatenonfarmemploymentrosemoderatelyin Conditionsinthehousingsectorgenerallyimproved AprilandMay,whiletotalgovernmentemployment further,butconstructionactivitywasstillatarelacontinuedtodeclinesomewhat.Theunemployment tivelylowlevel,anddemandcontinuedtobe ratewas7.6percentinMay,littlechangedfromits restrainedbytightcreditstandardsformortgage levelinApril.Thelaborforceparticipationrate loans.Startsof newsingle-familyhomesdeclined,on edgedupinMay,butwasstillslightlybelowitsfirst- net,inAprilandMay,butpermitsrose,suggesting quarteraverage,andtheemployment-to-population gainsinconstructioninthecomingmonths.Startsof ratioincreasedabitinrecentmonths.Therateof newmultifamilyunitsdecreasedinAprilbut long-durationunemploymentdeclinedslightly,while increasedinMay.Homepricescontinuedtoriseraptheshareof workersemployedparttimeforeco- idlythroughApril,whilesalesof bothnewandexistnomicreasonswaslittlechanged;bothof these inghomesadvanced. measuresremainedwellabovetheirpre-recessionlevels.Forward-lookingindicatorsof near-termlabor Realbusinessexpendituresonequipmentandsoftmarketactivityweremixedbutgenerallypointedto wareappearedtoslowsomewhatgoingintothesecsomefurtherimprovementinlabormarketcondi- ondquarterafterexpandingmodestlyearlierinthe tionsinthecomingmonths:Householdexpectations year.Nominalshipmentsof nondefensecapital of thelabormarketsituationimproved;initialclaims goodsexcludingaircraftdecreasedinApril,but forunemploymentinsurancewerelittlechanged,on nominalnewordersforthesecapitalgoodsincreased net,overtheintermeetingperiod;andfirms’hiring andwereslightlyabovethelevelof shipments,pointplansedgedup.However,measuresof jobopenings ingtomodestgainsinshipmentsinthenearterm. andtherateof grossprivate-sectorhiringwereabout Otherforward-lookingindicators,suchassurveysof flat,onbalance,inrecentmonthsandremainednear businessconditionsandcapitalspendingplans,also theirlevelsof ayearago. suggestedthatoutlaysforbusinessequipmentwould continuetoriseatonlyamodestpaceinthecoming ManufacturingproductionincreasedslightlyinMay months.Nominalbusinessspendingfornonresidenafterdecliningintheprevioustwomonths,andthe tialconstructionincreasedinAprilafterithad rateof manufacturingcapacityutilizationinMay declinedinthefirstquarter.Businessinventoriesin waslowerthaninthefirstquarter.Automakers’ mostindustriesappearedtobebroadlyalignedwith schedulesindicatedthatthepaceof motorvehicle salesinrecentmonths. assemblieswouldholdroughlysteadyinthecoming months,andbroaderindicatorsof manufacturing Realfederalgovernmentpurchasesappearedtobe production,suchasthereadingsonnewordersfrom declininglessrapidlygoingintothesecondquarter nationalandregionalmanufacturingsurveys,were thantheyhadduringthefirstquarter,asdecreasesin generallyatsubduedlevelsthatpointedtoonlymod- defensespendingslowed,onbalance,inApriland estincreasesinfactoryoutputinthenearterm. May.Theongoingdeclinesinrealstateandlocalgovernmentpurchasesappearedtomoderateoverrecent Realpersonalconsumptionexpenditures(PCE)rose months;thepayrollsof thesegovernmentsexpanded inApril.InMay,nominalretailsales,excludingthose inAprilandMay,butstateandlocalconstruction atmotorvehicleandpartsoutlets,increasedbriskly, expenditurescontinuedtodeclinenoticeably. whilelightmotorvehiclesalesmovedupsolidly. Somekeyfactorsthattendtosupportgrowthin TheU.S.internationaltradedeficitnarrowedin householdspendingwerepositiveinrecentmonths. MarchbutwidenedinApril,leavingthelevelof the Afterdecreasinginthefirstquarterwhenpayrolland tradedeficitinAprilsimilartoitsaverageinthefirst incometaxesincreased,households’realdisposable quarter.BothimportsandexportsfellinMarchbut incomeroseinApril,inpartreflectingasmalldecline largelyrecoveredinApril,althoughoilimports inconsumerprices.Households’networthlikely remainedbelowtheirfirst-quarteraverage.Exports

180 100thAnnualReport|2013 of consumergoodsandautomotiveproductsreached tionabouttheU.S.economywassomewhatbetter, newhighsinApril,butexportsof agriculturalprod- onbalance,thaninvestorshadanticipated,appaructsdeclined. entlygivingthemgreaterconfidenceintheeconomic outlook.FederalReservecommunicationsoverthe OverallU.S.consumerprices,asmeasuredbythe periodreportedlywereinterpretedbymarketpartici- PCEpriceindex,edgeddowninApril,whilethecon- pantsaspointingtoalessaccommodativestanceof sumerpriceindex(CPI)rosesomewhatinMay.Both futuremonetarypolicythantheypreviouslyhad theCPIandthePCEpriceindexincreasedatasub- expected. duedrateoverthemostrecent12-monthperiodfor eachseries.Afterdecliningintheprevioustwo Market-basedindicatorssuggestedthatinvestors months,consumerenergypricesrosealittleinMay, reviseduptheirexpectationsaboutthepathof the andretailgasolineprices,measuredonaseasonally federalfundsrateincomingyears.Forwardratestwo adjustedbasis,wereupfurtherinthefirstcoupleof tothreeyearsaheadderivedfromovernightindex weeksinJune.Consumerfoodpricesedgeddownin swapsshiftedup25to40basispointsovertheinter- MayafterrisingmodestlyinApril.Partlyreflecting meetingperiod,likelyreflectingbothanincreasein sometransitoryfactors,suchasaone-timereduction theexpectedpathforthefederalfundsrateandan inMedicarepricesassociatedwiththefederalgovern- increaseintermpremiums.Incontrasttothereadmentspendingsequestration,consumerprices ingsfromfinancialmarketquotes,whichsuggested excludingfoodandenergyonlyedgedupinAprilbut thatinvestorshadcometoexpecttheFOMCto roseslightlymoreinMay.Near-terminflationexpec- increaseitstargetforthefederalfundsratesooner tationsfromtheMichigansurveywerelittlechanged thantheypreviouslyhadanticipated,theresultsfrom inMayandearlyJune;longer-terminflationexpecta- theDesk’ssurveyof primarydealersconductedprior tionsinthesurveyalsowereessentiallyflatand totheJunemeetingshowedlittlematerialchange,on remainedwithinthenarrowrangethattheyhave balance,inthedealers’expectationsof themostlikely occupiedforanumberof years. timingof thefirstincreaseinthefederalfundsrate target. Measuresof laborcompensationindicatedthatgains innominalwagesremainedmodest.Compensation NominalyieldsonTreasurysecuritiesrosesharply perhourinthenonfarmbusinesssectorincreased overtheintermeetingperiodamidsomebetter-thanmoderatelyovertheyearendinginthefirstquarter, expectedU.S.economicdataandFederalReserve and,withasmallriseinproductivity,unitlaborcosts communicationsthatwereinterpretedbymarketparadvancedonlyalittle.Gainsinaveragehourlyearn- ticipantsassignalingapossibleearlier-than-expected ingsforallemployeesweremuted,onbalance,in reductioninthepaceof purchasesunderthe AprilandMay. FOMC’sflow-basedassetpurchaseprogram.Nominalyieldson5-to30-yearTreasurysecurities Foreigneconomicgrowthremainedsluggishsofar increasedabout35to55basispoints.Yieldson thisyear.Aslowerpaceof expansioninmanyemerg- agencyMBSrosemorethanthoseoncomparableingmarketeconomies(EMEs),includingChina, maturityTreasurysecurities,leavingoption-adjusted sincethebeginningof theyearoffsetanincreasein spreadstoTreasurysecuritiesnotablywider.Therise theaveragerateof economicgrowthintheadvanced inlonger-termTreasuryyieldsappearedtoreflect foreigneconomies.InJapan,whererecentpolicy bothanincreaseintermpremiumsandarisein measuresappearedtohaveboostedhouseholdconfi- expectedfutureshort-termrates.Theriseinterm dence,economicgrowthpickedupnoticeablyearlyin premiums,inturn,likelyreflectedinpartareassesstheyear.Recentindicatorsof Canadianeconomic mentof thepaceandultimatesizeof theFederal activityalsostrengthened.However,indicatorsfor Reserve’sassetpurchaseprogram,aswellas theeuro-areaeconomiesremainedweak.Adeclinein increaseduncertaintyaboutthefuturepathof moncommoditypricesandcontinuedlacklustereconomic etarypolicy. growthcontributedtoadeclineinforeigninflation. Measuresof inflationcompensationderivedfrom Staff Review of the Financial Situation yieldsonnominalandinflation-protectedTreasury securitiesfellnotablybutendedtheintermeeting Financialmarketswerevolatileduringtheintermeet- periodwithintheirrangesoverthepastfewyears. ingperiodasinvestorsreactedtoincomingeconomic Investorperceptionsof asomewhatlessaccommodadataandFederalReservecommunications.Informa- tivetoneof FederalReservecommunications,aswell

Minutesof FederalOpenMarketCommitteeMeetings|June 181 asthesofter-than-expectedreadingfortheAprilCPI, wasestimatedtohavedecreasedsubstantially.Prilikelycontributedtothedeclineininflation marymortgageratesincreasedwithyieldsonMBS compensation. overtheintermeetingperiod,andthespreadbetween primarymortgageratesandMBSyieldsremained Conditionsindomesticandoffshoredollarfunding nearthelowendof itsrangeoverrecentyears.Conmarketsweregenerallylittlechanged,onbalance, sumercreditcontinuedtoexpandatasolidpace overtheintermeetingperiod.Insecuredfunding becauseof theongoingexpansioninautoandstumarkets,ratesonTreasurygeneralcollateralrepur- dentloans;creditcarddebtremainedaboutflat.Issuchaseagreementsdecreased,onnet,inlargepart anceof consumerasset-backedsecuritiesincreased becauseof theseasonaldeclineinthesupplyof stronglyagaininMay. Treasurysecurities. GrowthintotalbankcreditmoderatedinApriland Marketsentimenttowardlargedomesticbanking Maycomparedwiththefirstquarter,ascoreloans organizationsappearedtoimprovesomewhatover slowedandsecuritiesdeclinedslightly.Growthin theintermeetingperiod,likelyrelatedinparttofur- commercialandindustrialloansatlargebanks therreductionsinnonperformingloansandgrowing decreasednoticeablyinrecentmonths,reportedly confidenceintheeconomicoutlook.Equityprices reflectingbothincreasedpaydownsandreduced forlargedomesticbanksoutperformedbroadequity originations.Incontrast,increasesincommercialreal indexesovertheintermeetingperiod,asdidthe estateloanspickedup,especiallyatlargebanks. equitypricesformostothertypesof financialinstitutions.Incontrast,equitypricesforagencymortgage TheM2monetaryaggregateexpandedatanannual realestateinvestmenttrustsdeclined,reflectingthe rateof about5percentfromAprilthroughmid-June. riseinlonger-terminterestrates,theunderperfor- Themonetarybasegrewatanannualrateexceeding manceof agencyMBS,andweaker-than-expected 40percentoverthesameperiod,drivenmainlybythe earningsreports. increaseinreservebalancesthatresultedfromthe FederalReserve’sassetpurchases. ResponsestotheJuneSeniorCreditOfficerOpinion SurveyonDealerFinancingTermsgenerallysug- Overtheintermeetingperiod,yieldson10-yearsovgestedlittlechangeoverthepastthreemonthsinthe ereigndebtof theadvancedforeigneconomiesfolcredittermsapplicabletoimportantclassesof coun- lowedtheyieldsoncomparable-maturityU.S.Treasterpartiesandintheuseof financialleveragebymost urysecuritieshigher,andvolatilityinsovereignbond classesof counterpartiescoveredbythesurvey.How- marketsrose,particularlyinJapan.Japaneseequity ever,aboutone-fourthof dealersreportedanincrease marketsalsodisplayedsubstantialvolatility;equity intheuseof leveragebyhedgefunds. pricesfellsharplylateintheperiodanderasedthe gainsthathadbeenregisteredsinceearlyApril,when Corporatebondyieldsrosesignificantlyoverthe theBankof Japanannouncedthatitwouldexpand intermeetingperiod,andtheirspreadsrelativeto itsassetpurchasesinordertonearlydoublethesize comparable-maturityTreasuryyieldsedgedhigheron of itsbalancesheet.Europeanequityindexeswere net.Creditflowstononfinancialbusinessesremained littlechanged,onnet,overtheperiod,andeuro-area stronginMay,especiallythroughbondissuance. financialconditionsremainedrelativelystable. Grossissuanceof speculative-gradecorporatebonds Spreadsof yieldsonItalianandSpanishgovernment wasparticularlyelevatedearlyintheintermeeting debtoveryieldsonGermanbundsincreasedonlya period,butsuchissuanceslowedaftermid-Mayin fewbasispoints,whilecomparablespreadsforGreek responsetotheriseininterestratesandinmarket sovereigndebtdeclinednotably.Theforeign volatility.Meanwhile,theissuanceof syndicatedlev- exchangevalueof thedollarwaslittlechanged,on eragedloansremainedrobustinAprilandMay,sup- average,relativetothecurrenciesof theadvanced portedbystronginvestordemandforfloating-rate foreigneconomies,butappreciatedagainstEMEcurcorporatedebtinstruments. renciesamidweakincomingdataoneconomicactivityandmonetarypolicyeasinginsomeEMEs,along Housepricescontinuedtoriseinrecentmonths,with withrisingU.S.Treasuryyields.Emergingmarket nationalhomepriceindexesupbetween5and12per- mutualfundsexperiencedsharpoutflowsinrecent centoverthe12-monthperiodendinginApril.Asa weeks,whileEMEstockpricesdeclinedandEME result,thenumberof mortgageswithnegativeequity creditspreadswidenedonnet.

182 100thAnnualReport|2013 Thestaff reportedonpotentialriskstofinancialsta- yearswasreviseddownalittle,relativetoitsprevious bility,includingthestabilityof bankingfirms,non- forecast. bankfinancialintermediaries,andassetmarkets. Mostmarket-basedmeasuresof thehealthof the Thestaff’sforecastforinflationintheneartermwas bankingsector—suchasbanks’stockprices,credit alsoreviseddownalittlefromtheprojectionpredefaultswapspreads,andequitycorrelations— paredforthepreviousFOMCmeeting,reflectingin pointedtoanimprovementinthestabilityof the partsomeof therecentsofter-than-expectedreadings bankingsector,inpartbecauseof risinglevelsof onconsumerprices.Nonetheless,thestaff expected liquidityandcapitalaswellasdiminishedconcerns thatmuchof therecentsoftnessininflationwouldbe aboutdownsiderisks.However,anumberof indica- transitory,andthusdidnotmateriallychangeits torspointedtoamodestincreaseinrisk-takingand medium-termprojection.Thestaff projectedthat leveragethatwaslargelybeingintermediatedthrough inflationwouldpickupinthesecondhalf of this theshadowbankingsystem.Signsof upwardpres- year,butgiventheassumptionof stablelonger-run suresonthevaluationsof someriskyassetswerealso inflationexpectationsandonlymodestchangesin noted.Overall,theriskstofinancialstabilitywere commodityandimportpricesaswellasforecastsof viewedasroughlyunchangedsinceMarch. graduallydiminishingresourceslackovertheprojectionperiod,inflationwasprojectedtostillberela- Staff Economic Outlook tivelysubduedthrough2015. Intheeconomicforecastpreparedbythestaff forthe Thestaff viewedtheuncertaintyaroundtheforecast JuneFOMCmeeting,theprojectionfornear-term foreconomicactivityasnormalrelativetotheexperigrowthof realgrossdomesticproduct(GDP)was enceof thepast20years.However,theriskswerestill littlechangedfromtheonepreparedfortheprevious viewedasskewedtothedownside,inpartbecauseof meeting.However,thestaff’smedium-termprojec- concernsaboutthesituationinEuropeandtheabiltionforrealGDPwasrevisedupsomewhat.Thestaff ityof theU.S.economytoweatherpotentialadverse raiseditsprojectedpathsforequityandhomeprices, shocks.Althoughthestaff sawtheoutlookforinflawhichpushedupexpectedconsumerspendingover tionasuncertain,theriskswereviewedasbalanced themediumterm,andboosteditsoutlookfor andnotunusuallyhigh. domesticoilproduction,whichreducedoilimports intheforecast.Thesepositivefactorswerepartlyoff- Participants’ Views on Current Conditions setinthestaff’smedium-termGDPprojectionby and the Economic Outlook higherprojectedpathsforbothlonger-terminterest ratesandtheforeignexchangevalueof thedollar. InconjunctionwiththisFOMCmeeting,meeting Nevertheless,withfiscalpolicyexpectedtorestrain participants—the7membersof theBoardof Govereconomicgrowththisyear,thestaff stillanticipated norsandthepresidentsof the12FederalReserve thatthepaceof expansioninrealGDPwouldonly Banks,allof whomparticipateinthedeliberationsof moderatelyexceedthegrowthrateof potentialout- theFOMC—submittedtheirassessmentsof realoutput.Thestaff alsocontinuedtoforecastthatreal putgrowth,theunemploymentrate,inflation,and GDPwouldaccelerategraduallyin2014and2015, thetargetfederalfundsrateforeachyearfrom2013 supportedbyaccommodativemonetarypolicy,an through2015andoverthelongerrun,undereach eventualeasingintheeffectsof fiscalpolicyrestraint participant’sjudgmentof appropriatemonetary oneconomicgrowth,increasesinconsumerandbusi- policy.1Thelonger-runprojectionsrepresenteach nesssentiment,andfurtherimprovementsincredit participant’sassessmentof theratetowhicheach availabilityandfinancialconditions.Theexpansion variablewouldbeexpectedtoconverge,overtime, ineconomicactivitywasanticipatedtoslowlyreduce underappropriatemonetarypolicyandinthe theslackinlaborandproductmarketsoverthepro- absenceof furthershockstotheeconomy.Theseecojectionperiod,andtheunemploymentratewas nomicprojectionsandpolicyassessmentsare expectedtodeclinegradually.Inaddition,although describedintheSummaryof EconomicProjections, thestaff didnotchangeitsviewof thelonger-run whichisattachedasanaddendumtotheseminutes. levelof thenaturalrateof unemployment,itjudged thatthenaturalratewasonamorepronounced downwardtrajectorybacktowarditslonger-runlevel 1 AlthoughPresidentPianaltowasunabletoattendtheJune18– 19,2013,FOMCmeeting,shesubmittedeconomicprojections. thanpreviouslyassumed;asaresult,thestaff’spro- FirstVicePresidentGregoryL.StefanirepresentedtheFederal jectionfortheunemploymentrateoverthenexttwo ReserveBankofClevelandatthemeeting.

Minutesof FederalOpenMarketCommitteeMeetings|June 183 Intheirdiscussionof theeconomicsituation,meet- ing,andgreaterhiringwasanimportantfactorinthe ingparticipantsgenerallyindicatedthattheinforma- projectedpickupineconomicactivitybutalsothat tionreceivedduringtheintermeetingperiodcontin- thisfavorabledynamiccouldbevulnerabletoan uedtosuggestthattheeconomywasexpandingata adverseshock.Afewparticipantsexpressedsome moderatepace.Anumberof participantsmentioned concernabouttheoutlookforconsumerspending, thattheywereencouragedbytheapparentresilience citingtheweaknessinlaborincomeandhouseholds’ of privatespendingsofarthisyeardespiteconsider- cautiousattitudestowardusingdebt. abledownwardpressurefromlowergovernment spendingandhighertaxes.Inparticular,consumer Housingmarketscontinuedtostrengthen,withparspendingroseatamoderaterate,andthehousing ticipantsvariouslyreportingincreasesinhouse sectorcontinuedtostrengthen.Businessinvestment prices,sales,andbuildingpermits;lowinventoriesof advanced,althoughonlymodestly,andslowereco- homesonthemarket;andrisingdemandforconnomicactivityabroadrestraineddomesticproduc- structionsupplies.Theimprovementinthehousing tion.Overallconditionsinthelabormarketimproved sectorwasseenassupportingthebroadereconomy furtherinrecentmonths,althoughtheunemploy- throughrelatedspendingandemployment,withrismentrateremainedelevated.Inflationcontinuedto ingrealestatevaluesboostinghouseholdwealth,conrunbelowtheCommittee’slonger-runobjective,but fidence,andaccesstocredit.Participantsgenerally longer-terminflationexpectationsremainedstable. wereoptimisticthattherecoveryinhousingactivity wouldbesustained,althoughacoupleof partici- Mostparticipantsanticipatedthatgrowthof real pantswereconcernedthattherun-upinmortgage GDPwouldpickupsomewhatinthesecondhalf of ratesinrecentweeksmightbegintocrimpdemand. 2013.Growthof economicactivitywasprojectedto However,therecentincreaseinmortgagepurchase strengthenfurtherduring2014and2015,supported applicationswasseenassuggestingthatthedemand byaccommodativemonetarypolicy;waningfiscal forhousingwasbeingdrivenbyfactorsbeyondlow restraint;andongoingimprovementsinhousehold mortgagerates. andbusinessbalancesheets,creditavailability,and labormarketconditions.Accordingly,theunemploy- Reportsonbusinessspendingweremixed.Anumber mentratewasprojectedtograduallydeclinetoward of participantscontinuedtohearthatbusinesses levelsconsistentwiththeCommittee’sdualmandate. werelimitingtheircapitalspendingtoprojects Manyparticipantssawthedownsideriskstothe intendedtoenhanceproductivityandthatthey medium-runoutlookfortheeconomyandthelabor remainedreluctanttoinvesttoexpandcapacity,orto marketashavingdiminishedsomewhatinrecent stepuphiring.Uncertaintiesaboutregulatoryissues months,orexpressedgreaterconfidencethatstronger andfiscalpoliciesaswellasweakeconomicactivity economicactivitywasintrain.However,somepar- abroadwerecitedasfactorsweighingonbusiness ticipantsnotedthattheyremaineduncertainabout decisionmaking.Somebusinesses,particularly theprojectedpickupingrowthof economicactivity smallerfirms,wereagainreportedtobeconcerned incomingquarters,andthusabouttheprospectsfor abouttheimplicationsof newhealth-careregulations furtherimprovementinlabormarketconditions, fortheirlaborcosts.Nonetheless,afewparticipants giventhat,inrecentyears,forecastsof asustained reportedthattheirbusinesscontactsexpressedsomepickupingrowthhadnotbeenrealized. whatgreaterconfidenceintheeconomicoutlookor reportedplanstoexpandcapacity.Apickupinbank Participantsnotedthatconsumerspendingcontinued lendingtosmallbusinesseswasalsoreported. toincreaseatamoderaterateinrecentmonths Althoughthemanufacturingsectorslowedconsiderdespitetaxincreasesandonlymodestgainsinwages. ablyduringthespring,contactsinseveralDistricts Amongthefactorsviewedassupportingconsump- reportedthatactivityturnedupmorerecently. tionwereimprovementsinhouseholdbalancesheets Reportsonactivityintheairline,trucking,andwareandinthejobmarket,aswellaslowinterestrates.In housingindustrieswereuneven.Agriculture addition,consumersentimentimprovedoverthe remainedrobust,supportedinpartbystrong intermeetingperiod,whichsomeparticipantsattrib- demandfromemergingmarketeconomies.However, utedtorisinghousepricesandgainsinthestock prospectsforfarmincomewerelesspositiveasa market.Itwasnotedthatthemutuallyreinforcing resultof thewetweatherintheMidwestandexpectadynamicof risingconfidence,decliningriskpremi- tionsof lowerpricesforcorn.Theoutlookforthe ums,improvingcreditavailability,increasingspend- energysectorremainedpositive.

184 100thAnnualReport|2013 Whilethefederalsequestrationandthetaxincreases pricesdeclined,andnonfuelcommoditypriceswere thatbecameeffectiveearlierintheyearwereexpected soft.Overthepastyear,bothcoreandoverallcontobeasubstantialdragoneconomicactivitythis sumerpriceinflationtrendedlower;participants year,themagnitudeandtimingof theeffects citedvariousalternativemeasuresof consumerprice remainedunclear.Severalparticipantscommented inflation,includingthetrimmedmeanPCEandCPI thatthedirecteffectsof thecutbacksinfederal aswellasthestickypriceCPI,thatsuggestedthatthe spending,todate,didnotappearasgreatashad slowingwasbroadbased.Market-basedmeasuresof beenexpected,butthattheyanticipatedthatfiscal inflationexpectationsdecreasedovertheintermeetpolicywouldcontinuetorestraineconomicgrowthin ingperiodbutremainedwithintheirrangesoverthe comingquarters.Inparticular,onepointedoutthat pastfewyears.Mostparticipantsexpectedinflation thefurloughsscheduledforthesecondhalf of the tobegintomoveupoverthecomingyearasecoyearwerelikelytoreducehouseholdincomeand nomicactivitystrengthened,butmanyanticipated spending.Areportonthefavorablefiscalcondition thatitwouldremainbelowtheCommittee’s2perof onestatewasindicativeof theimprovementinthe centobjectiveforsometime.Oneparticipant budgetsituationatstateandlocalgovernments. expressedconcernabouttheriskof amorerapidrise ininflationoverthemediumterm,giventhehighly Participantsgenerallyagreedthatlabormarketcon- accommodativestanceof monetarypolicy.Inconditionshadcontinuedtoimprove,onbalance,in trast,manyothersworriedaboutthelowlevelof recentmonths;manysawthecumulativedeclinein inflation,andanumberindicatedthattheywouldbe theunemploymentrateandgainsinnonfarmpay- watchingcloselyforsignsthattheshiftdownininflarollsoverthepastninemonthsasconsiderable. tionmightpersistorthatinflationexpectationswere Reflectingthesedevelopments,participants’forecasts persistentlymovinglower. fortheunemploymentrateatthismeetingwerelower thanthosepreparedfortheSeptember2012meeting. Intheirdiscussionof financialmarketdevelopments Amongtheencouragingaspectsof labormarket overtheintermeetingperiod,participantsweighed developmentssincethenwerethestep-upinaverage theextenttowhichtheriseinmarketinterestrates monthlygainsinprivateemployment,thebreadthof andincreaseinvolatilityreflectedareassessmentof jobgainsacrossindustries,thedeclineinlayoffs,and marketparticipants’expectationsformonetary ariseinvoluntaryquitsinsomeindustries.However, policyandtheextenttowhichitreflectedgrowing someparticipantsdiscussedanumberof indicators confidenceabouttheeconomicoutlook.Itwasnoted thatsuggestedthattheimprovementinbroadlabor thatcorporatecreditspreadshadnotwidenedsubmarketconditionswaslessthanmightbeimpliedby stantiallyandthatthestockmarkethadpostedfurthedeclineintheunemploymentratealone.Some thergains,suggestingthatthehigherratesreflected, pointedoutthattherateof hiringstillfellshortof atleastinpart,increasingconfidencethatmoderate thepacethattheysawasconsistentwithmore- economicgrowthwouldbesustained.Severalparticinoticeableprogressinlabormarketconditions,thata pantsworriedthathighermortgageratesandbond portionof theimprovementinpayrollemployment yieldscouldslowtherecoveryinthehousingmarket sincetheSeptembermeetingwasduetodatarevi- andrestrainbusinessexpansion.However,someothsions,orthattherewerenosignsof anincreasein erscommentedthatanyadverseeffectsof the wagepressures.Othersexpressedconcernaboutthe increaseinratesonfinancialconditionsmorebroadly still-elevatedlevelof long-durationjoblessnessand appearedtobelimited. theweaknessinlaborforceparticipation.Mostparticipantsstillsawslackremaininginthelabormar- Anumberof participantsofferedviewsonrisksto ket,althoughtheydifferedontheextenttowhichthe financialstability.Acoupleof participantsexpressed progresstodatehadreducedthatslackandhowcon- concernsthatsomefinancialinstitutionsmightnot fidenttheywereaboutfuturelabormarket bewellpositionedtoweatherarapidrun-upininterimprovement. estrates.Twoothersemphasizedtheimportanceof bolsteringtheresilienceof moneymarketfunds Inflationwaslowinthemonthspriortothemeeting, againstdisorderlyoutflows.Andafewstatedtheir withthetrendsinallbroadmeasuresremaining viewthataprolongedperiodof lowinterestrates belowtheCommittee’s2percentlonger-runobjec- wouldencourageinvestorstotakeonexcessivecredit tive.Severaltransitoryfactors,includingaone-time orinterestrateriskandwoulddistortsomeasset reductioninMedicarecosts,contributedtothe prices.However,otherssuggestedthattherecentrise recentverylowinflationreadings.Inaddition,energy inratesmighthavereducedsuchincentives.While

Minutesof FederalOpenMarketCommitteeMeetings|June 185 marketvolatilityhadincreasedof late,itwasnoted purchasesinresponsetochangesineconomiccondithattheriseinmeasuredvolatility,whilenoticeable, tions,whichtheyviewedasakeyelementinthe occurredfromalowlevel,andthatabroadindexof designof thepurchaseprogram.Otherswereconfinancialstressremainedbelowaverage.Onepartici- cernedthatstatinganintentiontoslowthepaceof pantfeltthattheCommitteeshouldexplorewaysto assetpurchases,evenif theintentionwerecondicalibratethemagnitudeof theriskstofinancialsta- tionalontheeconomydevelopingaboutinlinewith bilitysothatthoseconsiderationscouldbemore theCommittee’sexpectations,mightbemisinterfullyincorporatedintodeliberationsonmonetary pretedassignalinganendtotheadditionof policy policy. accommodationorevenbeseenastheinitialstep towardexitfromtheCommittee’shighlyaccommo- Participantsdiscussedhowbesttocommunicatethe dativepolicystance.Itwassuggestedthatanystate- Committee’sapproachtodecisionsaboutitsasset mentaboutassetpurchasesmakeclearthatdecisions purchaseprogramandhowtoreduceuncertainty concerningthepaceof purchasesaredistinctfrom abouthowtheCommitteemightadjustitspurchases decisionsconcerningthefederalfundsrate. inresponsetoeconomicdevelopments.Importantly, participantswantedtoemphasizethatthepace,com- ParticipantsgenerallyagreedthattheCommittee position,andextentof assetpurchaseswouldcon- shouldprovideadditionalclarityaboutitsassetpurtinuetobedependentontheCommittee’sassessment chaseprogramrelativelysoon.Anumberthought of theimplicationsof incominginformationforthe thatthepostmeetingstatementmightbetheapproeconomicoutlook,aswellasthecumulativeprogress priatevehicleforprovidingadditionalinformationon towardtheCommittee’seconomicobjectivessince theCommittee’sthinking.However,somesawpotentheinstitutionof theprogramlastSeptember.The tialdifficultiesinbeingabletoconveysuccinctlythe discussioncenteredonthepossibilityof providinga desiredinformationinthepostmeetingstatement. roughdescriptionof thepathforassetpurchasesthat OthersnotedtheneedtoensurethatanynewstatetheCommitteewouldanticipateimplementingif mentlanguageintendedtoprovidemoreinformation economicconditionsevolvedinamannerbroadly abouttheassetpurchaseprogrambeclearlyinteconsistentwiththeoutcomestheCommitteesawas gratedwithcommunicationabouttheCommittee’s mostlikely.Severalparticipantspointedtothechal- otherpolicytools.Attheconclusionof thediscuslengeof makingitclearthatpolicymakersnecessarily sion,mostparticipantsthoughtthattheChairman, weighabroadrangeof economicvariablesand duringhispostmeetingpressconference,should longer-runeconomictrendsinassessingtheoutlook. describealikelypathforassetpurchasesincoming Asanalternative,somesuggestedprovidingforward quartersthatwasconditionaloneconomicoutcomes guidanceaboutassetpurchasesbasedonnumerical broadlyinlinewiththeCommittee’sexpectations.In valuesforoneormoreeconomicvariables,broadly addition,hewouldmakeclearthatdecisionsabout akintotheCommittee’sguidanceregardingitstarget assetpurchasesandotherpolicytoolswouldconforthefederalfundsrate,arguingthatsuchguidance tinuetobedependentontheCommittee’songoing wouldbemoreeffectiveinreducinguncertaintyand assessmentof theeconomicoutlook.Hewouldalso communicatingtheconditionalityof policy.How- drawthedistinctionbetweentheassetpurchaseproever,participantsalsonotedpossibledisadvantages gramandtheforwardguidanceregardingthetarget of suchanapproach,includingthatsuchforward forthefederalfundsrate,notingthattheCommittee guidancemightinappropriatelyconstraintheCom- anticipatesthattherewillbeaconsiderabletime mittee’sdecisionmaking,orthatitmightprovediffi- betweentheendof assetpurchasesandthetime culttocommunicatetoinvestorsandthegeneral whenitbecomesappropriatetoincreasethetarget public. forthefederalfundsrate. SincetheSeptembermeeting,someparticipantshad Committee Policy Action becomemoreconfidentof sustainedimprovementin theoutlookforthelabormarketandsothoughtthat Committeemembersviewedtheinformationreceived adownwardadjustmentinassetpurchaseshador overtheintermeetingperiodassuggestingthatecowouldlikelysoonbecomeappropriate;theysawa nomicactivityhadexpandedatamoderatepace. needtoclearlycommunicateanintentiontolower Labormarketconditionsshowedfurtherimprovethepaceof purchasesbeforelong.However,tosome mentinrecentmonths,onbalance,buttheunemotherparticipants,thisapproachappearedlikelyto ploymentrateremainedelevated.HouseholdspendlimittheCommittee’sflexibilityinadjustingasset ingandbusinessfixedinvestmentadvanced,andthe

186 100thAnnualReport|2013 housingsectorstrengthenedfurther,butfiscalpolicy marketconditionssincethefall,manymembersindiwasrestrainingeconomicgrowth.TheCommittee catedthatfurtherimprovementintheoutlookforthe expectedthat,withappropriatepolicyaccommoda- labormarketwouldberequiredbeforeitwouldbe tion,economicgrowthwouldproceedatamoderate appropriatetoslowthepaceof assetpurchases. paceandresultinagradualdeclineintheunemploy- Someaddedthattheywould,aswell,needtosee mentratetowardlevelsconsistentwithitsdualman- moreevidencethattheprojectedaccelerationinecodate.Witheconomicactivityandemploymentcon- nomicactivitywouldoccur,beforereducingthepace tinuingtogrowatamoderatepacedespitetighterfis- of assetpurchases.Foronemember,suchadecision calpolicy,andwithglobalfinancialconditionsless wouldalsodependimportantlyonevidencethat strained,membersgenerallysawthedownsiderisks inflationwasmovingbacktowardtheCommittee’s totheoutlookfortheeconomyandthelabormarket 2percentobjective;thatmemberurgedtheCommitashavingdiminishedsincethefall.Inflationwasrun- teetomodifyitspostmeetingstatementtosayexplicningbelowtheCommittee’slonger-runobjective, itlythattheCommitteewillacttomoveinflation partlyreflectingtransitoryinfluences,butlonger-run backtowarditsgoal.Acoupleof othermembersalso inflationexpectationswerestable,andtheCommittee worriedthatthedownsideriskstoinflationhad anticipatedthatinflationoverthemediumterm increased,withoneof themsuggestingthatthestatewouldmoveclosertoits2percentobjective. mentmoreexplicitlyreflectthisincreasedrisk.However,severalmembersjudgedthatareductioninasset Intheirdiscussionof monetarypolicyfortheperiod purchaseswouldlikelysoonbewarranted,inlightof ahead,allmembersbutonejudgedthattheoutlook thecumulativedeclineinunemploymentsincethe foreconomicactivityandinflationwarrantedthe Septembermeetingandongoingincreasesinprivate continuationof theCommittee’scurrenthighly payrolls,whichhadincreasedtheirconfidenceinthe accommodativestanceof monetarypolicyinorder outlookforsustainedimprovementinlabormarket tofosterastrongereconomicrecoveryandsustained conditions.Twoof thesemembersalsoindicatedthat improvementinlabormarketconditionsinacontext theCommitteeshouldbegincurtailingitspurchases of pricestability.Intheviewof onemember,the relativelysooninordertopreventthepotentialnegaimprovementintheoutlookforthelabormarket tiveconsequencesof theprogramfromexceedingits warrantedamoredeliberatestatementfromthe anticipatedbenefits.Anothermemberpointedout Committeethatassetpurchaseswouldbereducedin thatif theprogramwereendedbecauseof concerns theverynearfuture.Attheconclusionof itsdiscus- aboutsuchconsequences,theCommitteewouldneed sion,theCommitteedecidedtocontinueadding toexploreotheroptionsforprovidingappropriate policyaccommodationbypurchasingadditional monetaryaccommodation.Manymembersindicated MBSatapaceof $40billionpermonthandlonger- thatdecisionsaboutthepaceandcompositionof termTreasurysecuritiesatapaceof $45billionper assetpurchasesweredistinctfromdecisionsabout monthandtomaintainitsexistingreinvestmentpoli- theappropriatelevelof thefederalfundsrate,which cies.Inaddition,theCommitteereaffirmeditsinten- wouldcontinuetobeguidedbythethresholdsinthe tiontokeepthetargetfederalfundsrateat0to Committee’sstatement.Ingeneral,memberscontin- ¼percentandretaineditsforwardguidancethatit uedtoanticipatethatmaintainingthecurrentexcepanticipatesthatthisexceptionallylowrangeforthe tionallylowlevelof thefederalfundsratewaslikely federalfundsratewillbeappropriateatleastaslong toremainappropriateforaconsiderableperiodafter astheunemploymentrateremainsabove6½percent, assetpurchasesareconcluded. inflationbetweenoneandtwoyearsaheadisprojectedtobenomorethanahalf percentagepoint Attheconclusionof thediscussion,theCommittee abovetheCommittee’s2percentlonger-rungoal, votedtoauthorizeanddirecttheFederalReserve andlonger-terminflationexpectationscontinuetobe Bankof NewYork,untilitwasinstructedotherwise, wellanchored. toexecutetransactionsintheSystemAccountin accordancewiththefollowingdomesticpolicy Regardingtheoutlookforpolicy,membersagreed directive: thatmonetarypolicyincomingquarterswould dependontheevolutionof theeconomicoutlook “Consistentwithitsstatutorymandate,theFedandprogresstowardtheCommittee’slonger-run eralOpenMarketCommitteeseeksmonetary objectivesof maximumemploymentandinflationof andfinancialconditionsthatwillfostermaxi- 2percent.Whilerecognizingtheimprovementina mumemploymentandpricestability.Inparticunumberof indicatorsof economicactivityandlabor lar,theCommitteeseeksconditionsinreserve

Minutesof FederalOpenMarketCommitteeMeetings|June 187 marketsconsistentwithfederalfundstradingin patesthatinflationoverthemediumtermlikely arangefrom0to¼percent.TheCommittee willrunatorbelowits2percentobjective. directstheDesktoundertakeopenmarket operationsasnecessarytomaintainsuchcondi- Tosupportastrongereconomicrecoveryandto tions.TheDeskisdirectedtocontinuepurchas- helpensurethatinflation,overtime,isatthe inglonger-termTreasurysecuritiesatapaceof ratemostconsistentwithitsdualmandate,the about$45billionpermonthandtocontinue Committeedecidedtocontinuepurchasing purchasingagencymortgage-backedsecuritiesat additionalagencymortgage-backedsecuritiesat apaceof about$40billionpermonth.The apaceof $40billionpermonthandlonger-term CommitteealsodirectstheDesktoengagein Treasurysecuritiesatapaceof $45billionper dollarrollandcouponswaptransactionsasnec- month.TheCommitteeismaintainingitsexistessarytofacilitatesettlementof theFederal ingpolicyof reinvestingprincipalpayments Reserve’sagencymortgage-backedsecurities fromitsholdingsof agencydebtandagency transactions.TheCommitteedirectstheDeskto mortgage-backedsecuritiesinagencymortgagemaintainitspolicyof rollingovermaturing backedsecuritiesandof rollingovermaturing Treasurysecuritiesintonewissuesanditspolicy Treasurysecuritiesatauction.Takentogether, of reinvestingprincipalpaymentsonallagency theseactionsshouldmaintaindownwardpresdebtandagencymortgage-backedsecuritiesin sureonlonger-terminterestrates,supportmortagencymortgage-backedsecurities.TheSystem gagemarkets,andhelptomakebroaderfinan- OpenMarketAccountManagerandtheSecre- cialconditionsmoreaccommodative. tarywillkeeptheCommitteeinformedof ongoingdevelopmentsregardingtheSystem’sbal- TheCommitteewillcloselymonitorincoming ancesheetthatcouldaffecttheattainmentover informationoneconomicandfinancialdeveloptimeof theCommittee’sobjectivesof maximum mentsincomingmonths.TheCommitteewill employmentandpricestability.” continueitspurchasesof Treasuryandagency mortgage-backedsecurities,andemployits Thevoteencompassedapprovalof thestatement otherpolicytoolsasappropriate,untiltheoutbelowtobereleasedat2:00p.m.: lookforthelabormarkethasimprovedsubstantiallyinacontextof pricestability.TheCommit- “InformationreceivedsincetheFederalOpen teeispreparedtoincreaseorreducethepaceof MarketCommitteemetinMaysuggeststhat itspurchasestomaintainappropriatepolicy economicactivityhasbeenexpandingatamod- accommodationastheoutlookforthelabor eratepace.Labormarketconditionshaveshown marketorinflationchanges.Indeterminingthe furtherimprovementinrecentmonths,onbal- size,pace,andcompositionof itsassetpurance,buttheunemploymentrateremains chases,theCommitteewillcontinuetotake elevated.Householdspendingandbusinessfixed appropriateaccountof thelikelyefficacyand investmentadvanced,andthehousingsectorhas costsof suchpurchasesaswellastheextentof strengthenedfurther,butfiscalpolicyisrestrain- progresstowarditseconomicobjectives. ingeconomicgrowth.Partlyreflectingtransitory influences,inflationhasbeenrunningbelowthe Tosupportcontinuedprogresstowardmaxi- Committee’slonger-runobjective,butlonger- mumemploymentandpricestability,theComterminflationexpectationshaveremainedstable. mitteeexpectsthatahighlyaccommodative stanceof monetarypolicywillremainappropri- Consistentwithitsstatutorymandate,theCom- ateforaconsiderabletimeaftertheassetpurmitteeseekstofostermaximumemployment chaseprogramendsandtheeconomicrecovery andpricestability.TheCommitteeexpectsthat, strengthens.Inparticular,theCommittee withappropriatepolicyaccommodation,eco- decidedtokeepthetargetrangeforthefederal nomicgrowthwillproceedatamoderatepace fundsrateat0to¼percentandcurrentlyanticiandtheunemploymentratewillgradually patesthatthisexceptionallylowrangeforthe declinetowardlevelstheCommitteejudgescon- federalfundsratewillbeappropriateatleastas sistentwithitsdualmandate.TheCommittee longastheunemploymentrateremainsabove seesthedownsideriskstotheoutlookforthe 6½percent,inflationbetweenoneandtwoyears economyandthelabormarketashavingdimin- aheadisprojectedtobenomorethanahalf perishedsincethefall.TheCommitteealsoantici- centagepointabovetheCommittee’s2percent

188 100thAnnualReport|2013 longer-rungoal,andlonger-terminflation ward,hevieweditasparticularlyimportantforthe expectationscontinuetobewellanchored.In Committeetomonitorpricedevelopmentsclosely determininghowlongtomaintainahighly andtoadaptitspolicyinresponsetoincomingecoaccommodativestanceof monetarypolicy,the nomicinformation. Committeewillalsoconsiderotherinformation, includingadditionalmeasuresof labormarket Ms.Georgedissentedbecausesheviewedtheongoconditions,indicatorsof inflationpressuresand ingimprovementinlabormarketconditionsandin inflationexpectations,andreadingsonfinancial theoutlookaswarrantingadeliberatestatement developments.WhentheCommitteedecidesto fromtheCommitteeatthismeetingthatthepaceof begintoremovepolicyaccommodation,itwill itsassetpurchaseswouldbereducedintheverynear takeabalancedapproachconsistentwithits future.Shecontinuedtohaveconcernsaboutmainlonger-rungoalsof maximumemploymentand tainingaggressivemonetarystimulusinthefaceof a inflationof 2percent.” growingeconomyandpointedtothepotentialfor financialimbalancestoemergeasaresultof thehigh Votingforthisaction:BenBernanke,WilliamC. levelof monetaryaccommodation. Dudley,ElizabethDuke,CharlesL.Evans,Jerome H.Powell,SarahBloomRaskin,EricRosengren,Jer- Itwasagreedthatthenextmeetingof theCommittee emyC.Stein,DanielK.Tarullo,andJanetL.Yellen. wouldbeheldonTuesday–Wednesday,July30–31, 2013.Themeetingadjournedat11:25a.m.on Votingagainstthisaction:JamesBullardandEsther June19,2013. L.George. Notation Vote Mr.Bullarddissentedbecausehebelievedthat,in BynotationvotecompletedonMay21,2013,the lightof recentlowreadingsoninflation,theCom- Committeeunanimouslyapprovedtheminutesof the mitteeshouldsignalmorestronglyitswillingnessto FOMCmeetingheldonApril30–May1,2013. defenditsgoalof 2percentinflation.Hepointedout thatinflationhadtrendeddownsincethebeginning WilliamB.English of 2012andwasnowwellbelowtarget.Goingfor- Secretary

Minutesof FederalOpenMarketCommitteeMeetings|June 189 Addendum: objectivesof maximumemploymentandstable prices. Summary of Economic Projections Overall,FOMCparticipantsprojectedthat,under InconjunctionwiththeJune18–19,2013,Federal appropriatemonetarypolicy,thepaceof economic OpenMarketCommittee(FOMC)meeting,meeting recoverywouldgraduallypickupoverthe2013–15 participants—the7membersof theBoardof Gover- period,andinflationwouldmoveupfromrecent norsandthe12presidentsof theFederalReserve verylowreadingsbutremainsubdued(table1and Banks,allof whomparticipateinthedeliberationsof figure1).Almostallof theparticipantsprojected theFOMC—submittedtheirassessmentsof realout- thatinflation,asmeasuredbytheannualchangein putgrowth,theunemploymentrate,inflation,and thepriceindexforpersonalconsumptionexpendithetargetfederalfundsrateforeachyearfrom2013 tures(PCE),wouldberunningatoralittlebelowthe through2015andoverthelongerrun.2Eachpartici- Committee’s2percentobjectivein2015. pant’sassessmentwasbasedoninformationavailable atthetimeof themeetingplushisorherjudgmentof Asshowninfigure2,mostparticipantsjudgedthat appropriatemonetarypolicyandassumptionsabout highlyaccommodativemonetarypolicywaslikelyto thefactorslikelytoaffecteconomicoutcomes.The bewarrantedoverthenextfewyearstosupportconlonger-runprojectionsrepresenteachparticipant’s tinuedprogresstowardmaximumemploymentanda judgmentof thevaluetowhicheachvariablewould gradualreturntoward2percentinflation.Moreover, beexpectedtoconverge,overtime,underappropriate allparticipantsbutonejudgedthatitwouldbe monetarypolicyandintheabsenceof furthershocks appropriatetocontinuepurchasingbothagency totheeconomy.“Appropriatemonetarypolicy”is mortgage-backedsecurities(MBS)andlonger-term definedasthefuturepathof policythateachpartici- Treasurysecuritiesatleastuntillaterthisyear. pantdeemsmostlikelytofosteroutcomesforeconomicactivityandinflationthatbestsatisfyhisor Amajorityof participantssawtheuncertaintyassoherindividualinterpretationof theFederalReserve’s ciatedwiththeiroutlookforeconomicgrowthand theunemploymentrateassimilartothatof thepast 20years.Anequalnumberof participantsalsoindi- 2 AlthoughPresidentPianaltowasunabletoattendtheJune18– catedthattheriskstotheoutlookforrealgross 19,2013,FOMCmeeting,shesubmittedeconomicprojections. Table1.EconomicprojectionsofFederalReserveBoardmembersandFederalReserveBankpresidents,June2013 Percent Centraltendency1 Range2 Variable 2013 2014 2015 Longerrun 2013 2014 2015 Longerrun ChangeinrealGDP 2.3to2.6 3.0to3.5 2.9to3.6 2.3to2.5 2.0to2.6 2.2to3.6 2.3to3.8 2.0to3.0 Marchprojection 2.3to2.8 2.9to3.4 2.9to3.7 2.3to2.5 2.0to3.0 2.6to3.8 2.5to3.8 2.0to3.0 Unemploymentrate 7.2to7.3 6.5to6.8 5.8to6.2 5.2to6.0 6.9to7.5 6.2to6.9 5.7to6.4 5.0to6.0 Marchprojection 7.3to7.5 6.7to7.0 6.0to6.5 5.2to6.0 6.9to7.6 6.1to7.1 5.7to6.5 5.0to6.0 PCEinflation 0.8to1.2 1.4to2.0 1.6to2.0 2.0 0.8to1.5 1.4to2.0 1.6to2.3 2.0 Marchprojection 1.3to1.7 1.5to2.0 1.7to2.0 2.0 1.3to2.0 1.4to2.1 1.6to2.6 2.0 CorePCEinflation3 1.2to1.3 1.5to1.8 1.7to2.0 1.1to1.5 1.5to2.0 1.7to2.3 Marchprojection 1.5to1.6 1.7to2.0 1.8to2.1 1.5to2.0 1.5to2.1 1.7to2.6 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andprojectionsforbothmeasuresofinflationarefromthefourthquarterofthepreviousyeartothefourth quarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures (PCE)andthepriceindexforPCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarterofthe yearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’s assessmentoftheratetowhicheachvariablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.The MarchprojectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonMarch19–20,2013. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

190 100thAnnualReport|2013 Figure1.Centraltendenciesandrangesofeconomicprojections,2013–15andoverthelongerrun Percent Change in real GDP 5 Central tendency of projections 4 Range of projections 3 2 1 + Actual 0 - 1 2 3 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Percent Unemployment rate 10 9 8 7 6 5 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Percent PCE inflation 3 2 1 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Percent Core PCE inflation 3 2 1 2008 2009 2010 2011 2012 2013 2014 2015 Longer run Note:Definitionsofvariablesareinthegeneralnotetotable1.Thedatafortheactualvaluesofthevariablesareannual.

Minutesof FederalOpenMarketCommitteeMeetings|June 191 Figure2.OverviewofFOMCparticipants’assessmentsofappropriatemonetarypolicy Number of participants Appropriate timing of policy firming 14 14 13 12 11 10 9 8 7 6 5 4 3 3 2 1 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 2013 2014 2015 Longer run Note:Intheupperpanel,theheightofeachbardenotesthenumberofFOMCparticipantswhojudgethat,underappropriatemonetarypolicy,thefirstincreaseinthetargetfederalfundsratefromitscurrentrangeof0to¼percentwilloccurinthespecifiedcalendaryear.InMarch2013,thenumbersofFOMCparticipantswhojudgedthatthefirst increaseinthetargetfederalfundsratewouldoccurin2013,2014,2015,and2016were,respectively,1,4,13,and1.Inthelowerpanel,eachshadedcircleindicatesthe value(roundedtothenearest¼percentagepoint)ofanindividualparticipant’sjudgmentoftheappropriatelevelofthetargetfederalfundsrateattheendofthespecifiedcalendaryearoroverthelongerrun.

192 100thAnnualReport|2013 domesticproduct(GDP)growthandtheunemploy- 6.0percent,thesameasinMarch.Mostparticipants mentratewerebroadlybalanced.Someparticipants, projectedthattheunemploymentratewouldconhowever,continuedtoseedownsideriskstogrowth vergetotheirestimatesof itslonger-runnormalrate andupsideriskstounemployment.Amajorityof infiveorsixyears,whilesomejudgedthatlesstime participantsindicatedthattheuncertaintysurround- wouldbeneeded. ingtheirprojectionsforPCEinflationwassimilarto historicalnorms,andnearlyallconsideredtherisks Asshowninfigures3.Aand3.B,thedistributionsof toinflationtobeeitherbroadlybalancedorweighted participants’viewsregardingthelikelyoutcomesfor tothedownside. realGDPgrowthandtheunemploymentratewere relativelynarrowfor2013.Theirprojectionsforeco- The Outlook for Economic Activity nomicactivityweremorediversefor2014and2015, reflectingtheirindividualassessmentsof appropriate Participantsprojectedthat,conditionalontheirindi- monetarypolicyanditseconomiceffects,thelikely vidualassumptionsaboutappropriatemonetary rateof improvementinthehousingsectorandhousepolicy,theeconomywouldgrowatafasterpacein holds’balancesheets,thedomesticimplicationsof 2013thanithadin2012.Theyalsogenerallyjudged foreigneconomicdevelopments,theprospectivepath thatgrowthwouldstrengthenfurtherin2014and forU.S.fiscalpolicy,theextentof structuraldisloca- 2015,inmostcasestoarateabovetheirestimatesof tionstothelabormarket,andanumberof otherfacthelonger-runrateof outputgrowth.Mostpartici- tors.Thedispersionof participants’projectionsfor pantsnotedthatthehighdegreeof monetarypolicy 2015andforthelongerrunwaslittlechangedrelaaccommodationassumedintheirprojections,contin- tivetoMarch;therewassomereductionintheupper uedimprovementinthehousingsectorandthe endsof thedistributionsin2013and2014forboth accompanyingriseinhouseholdnetworth,andthe realGDPgrowthandtheunemploymentrate. absenceof furtherfiscaltighteningshouldresultina pickupingrowth;however,theypointedtothefor- The Outlook for Inflation eigneconomicoutlookasanongoingdownsiderisk. Allparticipantsmarkeddowntheirprojectionsfor Thecentraltendencyof participants’projectionsfor bothPCEandcorePCEinflationin2013,reflecting realGDPgrowthwas2.3to2.6percentfor2013, thelowreadingsoninflationsofarthisyear.Partici- 3.0to3.5percentfor2014,and2.9to3.6percentfor pantsgenerallyjudgedthattherecentslowingin 2015.Mostparticipantsnotedthattheirprojections inflationpartlyreflectedtransitoryfactors,andtheir werelittlechangedsinceMarch,withthedownward projectionsforinflationunderappropriatemonetary revisionstogrowthin2013reflectingthesomewhat policyovertheperiod2014–15wereonlyalittle slower-than-anticipatedgrowthinthefirsthalf.The lowerthaninMarch.Participantsprojectedthat centraltendencyforthelonger-runrateof growthof bothheadlineandcoreinflationwouldmoveupbut realGDPwas2.3to2.5percent,unchangedfrom remainsubdued,withnearlyallprojectingthatinfla- March. tionwouldbeequalto,orsomewhatbelow,the FOMC’slonger-runobjectiveof 2percentineach Participantsanticipatedagradualdeclineinthe year.Specifically,thecentraltendencyof particiunemploymentrateovertheforecastperiod;alarge pants’projectionsforoverallinflation,asmeasured majorityprojectedthattheunemploymentrate bythegrowthinthePCEpriceindex,moveddown wouldnotreachtheirestimatesof itslonger-runlevel to0.8to1.2percentin2013andwas1.4to2.0perbefore2016.Thecentraltendenciesof participants’ centin2014and1.6to2.0percentin2015.Thecenforecastsfortheunemploymentratewere7.2to traltendencyof theforecastsforcoreinflation 7.3percentattheendof 2013,6.5to6.8percentat shifteddownslightlyin2013and2014,to1.2to theendof 2014,and5.8to6.2percentattheendof 1.3percentand1.5to1.8percent,respectively;the 2015.Theseprojectionswereslightlylowerthanin centraltendencyin2015waslittlechangedand March,withparticipantsreactingtorecentdataindi- broadlysimilartothatof headlineinflation.Indiscatingthattheunemploymentratehaddeclinedbya cussingfactorslikelytoreturninflationtonearthe littlemorethantheyhadpreviouslyexpected.The Committee’sinflationobjectiveof 2percent,several centraltendencyof participants’estimatesof the participantsnotedthatthereversalof transitoryfaclonger-runnormalrateof unemploymentthatwould torscurrentlyholdingdowninflationwouldcause prevailunderappropriatemonetarypolicyandinthe inflationtomoveupalittleinthenearterm.Inaddiabsenceof furthershockstotheeconomywas5.2to tion,manyparticipantsviewedthecombinationof

Minutesof FederalOpenMarketCommitteeMeetings|June 193 Figure3.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2013–15andoverthelongerrun Number of participants 2013 20 June projections 18 March projections 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 - 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 Percent range Number of participants 2014 20 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 - 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 Percent range Number of participants 2015 20 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 - 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 Percent range Number of participants Longer run 20 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 - 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

194 100thAnnualReport|2013 Figure3.B.Distributionofparticipants’projectionsfortheunemploymentrate,2013–15andoverthelongerrun Number of participants 2013 20 June projections 18 March projections 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 - 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 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 - 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 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 - 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 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 - 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 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|June 195 stableinflationexpectationsanddiminishing theirprojectionsforthefederalfundsrateattheend resourceslackaslikelytoleadtoagradualpickupin of 2014rangedfrom1to1½percent;however,the inflationtowardtheCommittee’slonger-run medianforallparticipantsremainedattheeffective objective. lowerbound.Viewsontheappropriatelevelof the federalfundsrateattheendof 2015varied,withthe Figures3.Cand3.Dprovideinformationonthe rangeof participants’projectionsabitnarrowerthan diversityof participants’viewsabouttheoutlookfor intheMarchSummaryof EconomicProjectionsand inflation.Therangeof participants’projectionsfor themedianvalueunchangedat1percent. overallandcoreinflationin2013shifteddown,while thoserangesnarrowedin2014–15.Thedistributions Allparticipantssawtheappropriatetargetforthe forcoreandoverallinflationin2015remainedcon- federalfundsrateattheendof 2015asstillwell centratedneartheCommittee’slonger-runobjective, belowtheirassessmentsof itsexpectedlonger-run andallparticipantscontinuedtoprojectthatoverall value.Estimatesof thelonger-runtargetfederal inflationwouldconvergetotheFOMC’s2percent fundsraterangedfrom3¼to4½percent,reflecting goaloverthelongerrun. theCommittee’sinflationobjectiveof 2percentand participants’individualjudgmentsabouttheappro- Appropriate Monetary Policy priatelonger-runlevelof therealfederalfundsratein theabsenceof furthershockstotheeconomy. Asindicatedinfigure2,mostparticipantsjudged thatexceptionallylowlevelsof thefederalfundsrate Participantsalsodescribedtheirviewsregardingthe wouldremainappropriateforacoupleof years.In appropriatepathof theFederalReserve’sbalance particular,14participantsthoughtthatthefirst sheet.Giventheirrespectiveeconomicoutlooks,all increaseinthetargetfederalfundsratewouldnotbe participantsbutonejudgedthatitwouldbeapprowarranteduntilsometimein2015,andonejudged priatetocontinuepurchasingbothagencyMBSand thatpolicyfirmingwouldlikelynotbeappropriate longer-termTreasurysecurities.Abouthalf of these until2016.Fourparticipantsjudgedthatanincrease participantsindicatedthatitlikelywouldbeapprointhefederalfundsratein2013or2014wouldbe priatetoendassetpurchaseslatethisyear.Many appropriate. otherparticipantsanticipatedthatitlikelywouldbe appropriatetocontinuepurchasesinto2014.Several Allof theparticipantswhojudgedthatraisingthe participantsemphasizedthattheassetpurchaseprofederalfundsratetargetwouldbecomeappropriate gramwaseffectiveinsupportingtheeconomic in2015alsoprojectedthattheunemploymentrate expansion,thatthebenefitscontinuedtoexceedthe woulddeclinebelow6½percentduringthatyearand costs,orthatcontinuingpurchaseswouldbenecesthatinflationwouldremainnearorbelow2percent. sarytoachieveasubstantialimprovementintheout- Inaddition,mostof thoseparticipantsalsoprojected lookforthelabormarket.Afewparticipants,howthatasizablegapbetweentheunemploymentrate ever,indicatedthattheCommitteecouldbestfoster andthelonger-runnormallevelof theunemploy- itsdualobjectivesandlimitthepotentialcostsof the mentratewouldpersistuntil2015orlater.Threeof programbyslowing,orstopping,itspurchasesatthe thefourparticipantswhojudgedthatpolicyfirming Junemeeting. shouldbeginin2013or2014indicatedthat,intheir judgment,theCommitteewouldneedtoactrelatively Keyfactorsinformingparticipants’viewsof the sooninordertokeepinflationneartheFOMC’s appropriatepathformonetarypolicyincludedtheir longer-runobjectiveof 2percentandtokeeplonger- judgmentsregardingthevaluesof theunemployment runinflationexpectationswellanchored. rateandotherlabormarketindicatorsthatwouldbe consistentwithmaximumemployment;theextentto Figure3.Eprovidesthedistributionof participants’ whichtheeconomyfellshortof maximumemployjudgmentsregardingtheappropriatelevelof thetar- mentandtheextenttowhichinflationwasrunning getfederalfundsrateattheendof eachcalendaryear belowtheCommittee’slonger-termobjectiveof from2013to2015andoverthelongerrun.Asprevi- 2percent;andtheimplicationsof alternativepolicy ouslynoted,mostparticipantsjudgedthateconomic pathsforthelikelyextentof progress,overthe conditionswouldwarrantmaintainingthecurrent medium-term,inreturningemploymentandinflation lowlevelof thefederalfundsrateatleastuntil2015. tomandate-consistentlevels.Acoupleof partici- Amongthefourparticipantswhosawthefederal pantsnotedthatpersistentheadwindsandsomewhat fundsrateleavingtheeffectivelowerboundearlier, slowerproductivitygrowthsincetheendof thereces-

196 100thAnnualReport|2013 Figure3.C.Distributionofparticipants’projectionsforPCEinflation,2013–15andoverthelongerrun Number of participants 2013 20 June projections 18 March projections 16 14 12 10 8 6 4 2 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 2.5 - 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 2.5 - 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 2.5 - 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 2.5 - 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|June 197 Figure3.D.Distributionofparticipants’projectionsforcorePCEinflation,2013–15 Number of participants 2013 20 June projections 18 March projections 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 2.5 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 2.5 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Number of participants 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 - 2.5 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

198 100thAnnualReport|2013 Figure3.E.Distributionofparticipants’projectionsforthetargetfederalfundsrate,2013–15andoverthelongerrun Number of participants 2013 June projections 20 March projections 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|June 199 sionmadetheirassessmentsof thelonger-runnor- Table2.Averagehistoricalprojectionerrorranges mallevelof thefederalfundsrate,andthusof the Percentagepoints appropriatepathforthefederalfundsrate,lower thanwouldotherwisebethecase. Variable 2013 2014 2015 ChangeinrealGDP1 ±1.0 ±1.6 ±1.8 Uncertainty and Risks Unemploymentrate1 ±0.4 ±1.2 ±1.8 Totalconsumerprices2 ±0.8 ±1.0 ±1.0 Amajorityof participantsreportedthattheysawthe levelsof uncertaintyabouttheirprojectionsforreal Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared errorofprojectionsfor1993through2012thatwerereleasedinthesummerby GDPgrowthandunemploymentasbroadlysimilar variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast tothenormduringtheprevious20years,withthe Uncertainty,”undercertainassumptions,thereisabouta70percentprobability thatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein remaindergenerallyindicatingthattheysawhigher rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Further uncertaintyabouttheseeconomicoutcomes(fig- informationisinDavidReifschneiderandPeterTulip(2007),“Gaugingthe UncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,”Finance ure4).3InMarch,asimilarnumberof participants andEconomicsDiscussionSeries2007-60(Washington:BoardofGovernorsof hadseenthelevelof uncertaintyaboutrealGDP theFederalReserveSystem,November). 1 Definitionsofvariablesareinthegeneralnotetotable1. growthandtheunemploymentrateasaboveaverage. 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen Amajorityof participantscontinuedtojudgethat mostwidelyusedingovernmentandprivateeconomicforecasts.Projection theriskstotheirforecastsof realGDPgrowthand ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof theyearindicated. unemploymentwerebroadlybalanced,withthe remaindergenerallyindicatingthattheysawtherisks totheirforecastsforrealGDPgrowthasweightedto levelsof uncertaintyassociatedwiththeirforecasts thedownsideandforunemploymentasweightedto forthoseinflationmeasurestobebroadlysimilarto, theupside.Themainfactorscitedascontributingto orlowerthan,historicalnorms;thesamenumbersaw theuncertaintyandbalanceof risksabouteconomic theriskstothoseprojectionsasbroadlybalanced.A outcomeswerethelimitsontheabilityof monetary fewparticipantshighlightedthelikelyroleplayedby policytooffsettheeffectsof adverseshockswhen theCommittee’sadoptionof a2percentinflation short-terminterestratesareneartheireffectivelower goaloritscommitmenttomaintainingaccommodabound,aswellaschallengeswithforecastingthepath tivemonetarypolicyascontributingtotherecent of fiscalpolicyandeconomicandfinancialdevelopstabilityof longer-terminflationexpectationsand, mentsabroad. hence,therelativelylowlevelof uncertainty.Four participantssawtheriskstotheirinflationforecasts Participantsreportedlittlechangeintheirassessastiltedtothedownside,reflecting,forexample, mentsof thelevelof uncertaintyandthebalanceof risksof disinflationthatcouldarisefromadverse risksaroundtheirforecastsforoverallPCEinflation shockstotheeconomythatpolicywouldhavelimited andcoreinflation.Fourteenparticipantsjudgedthe scopetooffsetinthecurrentenvironment.Conversely,oneparticipantsawtheriskstoinflationas 3 Table2providesestimatesoftheforecastuncertaintyforthe weightedtotheupside,citingthepresenthighly changeinrealGDP,theunemploymentrate,andtotalconsumerpriceinflationovertheperiodfrom1993through2012. accommodativestanceof monetarypolicyandcon- Attheendofthissummary,thebox“ForecastUncertainty” cernsabouttheCommittee’sabilitytoshifttoaless discussesthesourcesandinterpretationofuncertaintyinthe accommodativepolicystancewhenitbecomes economicforecastsandexplainstheapproachusedtoassessthe uncertaintyandrisksattendingtheparticipants’projections. appropriatetodoso.

200 100thAnnualReport|2013 Figure4.Uncertaintyandrisksineconomicprojections Number of participants Number of participants Uncertainty about GDP growth 20 Risks to GDP growth 20 June projections 18 June projections 18 March projections 16 March 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 201 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. rangeof2.0to4.0percentinthecurrentyear,1.4to 4.6percentinthesecondyear,and1.2to4.8percent

202 100thAnnualReport|2013 Meeting Held on July 30–31, 2013 ThomasC.Baxter DeputyGeneralCounsel Ameetingof theFederalOpenMarketCommittee StevenB.Kamin washeldintheofficesof theBoardof Governorsof Economist theFederalReserveSysteminWashington,D.C.,on Tuesday,July30,2013,at2:00p.m.andcontinuedon DavidW.Wilcox Wednesday,July31,2013,at9:00a.m. Economist ThomasA.Connors,TroyDavig,MichaelP.Leahy, Present StephenA.Meyer,DanielG.Sullivan, BenBernanke andWilliamWascher Chairman AssociateEconomists WilliamC.Dudley SimonPotter ViceChairman Manager,SystemOpenMarketAccount JamesBullard NellieLiang Director,Officeof FinancialStabilityPolicyand ElizabethDuke Research,Boardof Governors CharlesL.Evans JamesA.ClouseandWilliamNelson EstherL.George DeputyDirectors,Divisionof MonetaryAffairs, Boardof Governors JeromeH.Powell MaryannF.Hunter SarahBloomRaskin DeputyDirector,Divisionof BankingSupervision EricRosengren andRegulation,Boardof Governors JeremyC.Stein JonW.Faust SpecialAdvisertotheBoard,Officeof Board DanielK.Tarullo Members,Boardof Governors JanetL.Yellen LindaRobertson ChristineCumming,RichardW.Fisher, AssistanttotheBoard,Officeof BoardMembers, NarayanaKocherlakota,SandraPianalto, Boardof Governors andCharlesI.Plosser JoyceK.Zickler AlternateMembersof theFederalOpenMarket SeniorAdviser,Divisionof MonetaryAffairs, Committee Boardof Governors JeffreyM.Lacker,DennisP.Lockhart, andJohnC.Williams MichaelT.Kiley,ThomasLaubach, Presidentsof theFederalReserveBanksof andDavidE.Lebow Richmond,Atlanta,andSanFrancisco,respectively AssociateDirectors,Divisionof Researchand Statistics,Boardof Governors WilliamB.English SecretaryandEconomist JoshuaGallin DeputyAssociateDirector,Divisionof Researchand DeborahJ.Danker Statistics,Boardof Governors DeputySecretary EdwardNelson MatthewM.Luecke AssistantDirector,Divisionof MonetaryAffairs, AssistantSecretary Boardof Governors DavidW.Skidmore StaceyTevlin AssistantSecretary AssistantDirector,Divisionof Researchand MichelleA.Smith Statistics,Boardof Governors AssistantSecretary LauraLipscomb ScottG.Alvarez SectionChief,Divisionof MonetaryAffairs, GeneralCounsel Boardof Governors

Minutesof FederalOpenMarketCommitteeMeetings|July 203 DavidH.Small issuesthatwouldrequireconsiderationinthedesign ProjectManager,Divisionof MonetaryAffairs, of suchafacility,includingthechoiceof theappro- Boardof Governors priatefacilityinterestrateandpossibleadditionsto therangeof eligiblecounterparties.Ingeneral,meet- MarieGooding ingparticipantsindicatedthattheythoughtsucha FirstVicePresident,FederalReserveBankof Atlanta facilitycouldprovehelpful;theyaskedthestaff to DavidAltig,Jeff Fuhrer,andLorettaJ.Mester undertakefurtherworktoexaminehowitmight ExecutiveVicePresidents,FederalReserveBanksof operateandhowitmightaffectshort-termfunding Atlanta,Boston,andPhiladelphia,respectively markets.Anumberof thememphasizedthattheir interestinhavingthestaff conductadditional LorieK.Logan researchreflectedanongoingefforttoimprovethe SeniorVicePresident,FederalReserveBankof technicalexecutionof policyanddidnotsignalany NewYork changeintheCommittee’sviewsaboutpolicygoing ToddE.Clark,WilliamGavin,EvanF.Koenig, forward. PaoloA.Pesenti,JulieAnnRemache,1 andMarkSpiegel VicePresidents,FederalReserveBanksof Cleveland, Staff Review of the Economic Situation St.Louis,Dallas,NewYork,NewYork, andSanFrancisco,respectively TheinformationreviewedfortheJuly30–31meeting indicatedthateconomicactivityexpandedatamod- RobertL.HetzelandSamuelSchulhofer-Wohl estpaceinthefirsthalf of theyear.Private-sector SeniorEconomists,FederalReserveBanksof employmentincreasedfurtherinJune,buttheunem- RichmondandMinneapolis,respectively ploymentratewasstillelevated.Consumerprice inflationslowedmarkedlyinthesecondquarter, Developments in Financial Markets and likelyrestrainedinpartbysometransitoryfactors, the Federal Reserve’s Balance Sheet butmeasuresof longer-terminflationexpectations remainedstable.TheBureauof EconomicAnalysis TheManagerof theSystemOpenMarketAccount (BEA)releaseditsadvanceestimateforsecondreportedondevelopmentsindomesticandforeign quarterrealgrossdomesticproduct(GDP),along financialmarketsaswellastheSystemopenmarket withreviseddataforearlierperiods,duringthesecoperationsduringtheperiodsincetheFederalOpen onddayof theFOMCmeeting.Thestaff’sassess- MarketCommittee(FOMC)metonJune18–19, mentof economicactivityandinflationinthefirst 2013.Byunanimousvote,theCommitteeratifiedthe half of 2013,basedoninformationavailablebefore OpenMarketDesk’sdomestictransactionsoverthe themeetingbegan,wasbroadlyconsistentwiththe intermeetingperiod.Therewerenointervention newinformationfromtheBEA. operationsinforeigncurrenciesfortheSystem’s accountovertheintermeetingperiod. Privatenonfarmemploymentroseatasolidpacein Insupportof theCommittee’slonger-runplanning June,asinrecentmonths,whiletotalgovernment forimprovementsintheimplementationof monetary employmentdecreasedfurther.Theunemployment policy,theDeskreportalsoincludedabriefingon ratewas7.6percentinJune,littlechangedfromits thepotentialforestablishingafixed-rate,full- levelinthepriorfewmonths.Thelaborforceparticiallotmentovernightreverserepurchaseagreement pationrateroseslightly,asdidtheemployment-tofacilityasanadditionaltoolformanagingmoney populationratio.Therateof long-durationunemmarketinterestrates.Thepresentationsuggestedthat ploymentdecreasedsomewhat,buttheshareof suchafacilitywouldallowtheCommitteetoofferan workersemployedparttimeforeconomicreasons overnight,risk-freeinstrumentdirectlytoarelatively movedup;bothof thesemeasuresremainedrelawiderangeof marketparticipants,perhapscomple- tivelyhigh.Forward-lookingindicatorsof labormarmentingthepaymentof interestonexcessreserves ketactivityintheneartermweremixed:Although heldbybanksandtherebyimprovingtheCommit- householdexpectationsforthelabormarketsituation tee’sabilitytokeepshort-termmarketratesatlevels generallyimprovedandfirms’hiringplansmovedup, thatitdeemsappropriatetoachieveitsmacroeco- initialclaimsforunemploymentinsurancewere nomicobjectives.Thestaff alsoidentifiedseveralkey essentiallyflatovertheintermeetingperiod,and measuresof jobopeningsandtherateof gross 1 AttendedTuesday’ssessiononly. private-sectorhiringwerelittlechanged.

204 100thAnnualReport|2013 ManufacturingproductionexpandedinJune,andthe dituresfornonresidentialconstructionincreasedin rateof manufacturingcapacityutilizationedgedup. thesecondquarterafterfallinginthefirstquarter. Autoproductionandsaleswerenearpre-recession Businessinventoriesinmostindustriesappearedto levels,andautomakers’schedulesindicatedthatthe bebroadlyalignedwithsalesinrecentmonths. rateof motorvehicleassemblieswouldcontinueata similarpaceinthecomingmonths.Broaderindica- Realfederalgovernmentpurchasescontractedlessin torsof manufacturingproduction,suchastheread- thesecondquarterthaninthefirstquarterasreducingsonnewordersfromthenationalandregional tionsindefensespendingslowed.Realstateandlocal manufacturingsurveys,weregenerallyconsistent governmentpurchaseswerelittlechangedinthesecwithfurthermodestgainsinfactoryoutputinthe ondquarter;thepayrollsof thesegovernments nearterm. expandedsomewhat,butstateandlocalconstruction expenditurescontinuedtodecrease. Realpersonalconsumptionexpenditures(PCE) increasedmoreslowlyinthesecondquarterthanin TheU.S.internationaltradedeficitwidenedinMay thefirst.However,somekeyfactorsthattendtosup- asexportsfellslightlyandimportsrose.Thedecline porthouseholdspendingweremorepositiveinrecent inexportswasledbyasizabledropinconsumer months;inparticular,gainsinequityvaluesand goods,whilemostothercategoriesof exportsshowed homepricesboostedhouseholdnetworth,andcon- modestgains.Importsincreasedinawiderangeof sumersentimentintheThomsonReuters/University categories,withparticularstrengthinoil,consumer of MichiganSurveysof ConsumersroseinJulytoits goods,andautomotiveproducts. highestlevelsincetheonsetof therecession. OverallU.S.consumerprices,asmeasuredbythe Conditionsinthehousingsectorgenerallyimproved PCEpriceindex,wereunchangedfromthefirstquarfurther,asrealexpendituresforresidentialinvestment tertothesecondandwereabout1percenthigher continuedtoexpandbrisklyinthesecondquarter. thanayearearlier.Consumerenergypricesdeclined However,constructionactivitywasstillatalowlevel, significantlyinthesecondquarter,althoughretail withdemandrestrainedinpartbytightcreditstan- gasolineprices,measuredonaseasonallyadjusted dardsformortgageloans.Startsof newsingle-family basis,movedupinJuneandJuly.ThePCEprice homeswereessentiallyflatinJune,butthelevelof indexforitemsexcludingfoodandenergyroseata permitissuancewasconsistentwithgainsincon- subduedrateinthesecondquarterandwasaround structioninsubsequentmonths.Inthemultifamily 1¼percenthigherthanayearearlier.Near-term sector,whereactivityismorevariable,startsandper- inflationexpectationsfromtheMichigansurveywere mitsbothdecreased.Homepricescontinuedtorise littlechangedinJuneandJuly,aswerelonger-term stronglythroughMay,andsalesof bothnewand inflationexpectations,whichremainedwithinthe existinghomesincreased,onbalance,inMayand narrowrangeseeninrecentyears.Measuresof labor June.Therecentriseinmortgageratesdidnotyet compensationindicatedthatgainsinnominalwages appeartohavehadanadverseeffectonhousing andemployeebenefitsremainedmodest. activity. Foreigneconomicgrowthappearedtoremainsub- Growthinrealprivateinvestmentinequipmentand duedincomparisonwithlonger-runtrends.Noneintellectualpropertyproductswasgreaterinthesec- theless,thereweresomesignsof improvementinthe ondquarterthaninthefirstquarter.2Nominalnew advancedforeigneconomies.Productionandbusiordersfornondefensecapitalgoodsexcludingair- nessconfidenceturnedupinJapan,realGDPgrowth craftcontinuedtotrendupinMayandJuneand pickeduptoamoderatepaceinthesecondquarter wererunningabovethelevelof shipments.Other intheUnitedKingdom,andrecentindicatorssugrecentforward-lookingindicators,suchassurveysof gestedthattheeuro-arearecessionmightbenearing businessconditionsandcapitalspendingplans,were anend.Incontrast,ChineserealGDPgrowthmodmixedandpointedtomodestgainsinbusinessequip- eratedinthefirsthalf of thisyearcomparedwith mentspendinginthenearterm.Realbusinessexpen- 2012,andindicatorsforotheremergingmarket economies(EMEs)alsopointedtoless-robust 2 Withthemostrecentrevisiontothenationalaccounts,theBEA growth.Foreigninflationgenerallyremainedwell introducedintellectualpropertyproductsasanewcategoryof contained.Monetarypolicystayedhighlyaccommoinvestmentthatincludedsoftware;researchanddevelopment; andentertainment,literary,andartisticoriginals. dativeintheadvancedforeigneconomies,butsome

Minutesof FederalOpenMarketCommitteeMeetings|July 205 EMEcentralbankstightenedpolicyinreactionto Marketsentimenttowardlargedomesticbanking capitaloutflowsandtoconcernsaboutinflationary organizationsappearedtoimprovesomewhatover pressuresfromcurrencydepreciation. theintermeetingperiod,asthelargestbanksreported second-quarterearningsthatwereaboveanalysts’ Staff Review of the Financial Situation expectations.Stockpricesof largedomesticbanks outperformedbroaderequityindexes,andcredit Financialmarketswerevolatileattimesduringthe defaultswapspreadsforthelargestbankholding intermeetingperiodasinvestorsreactedtoFederal companiesmovedaboutinlinewithtrendsinbroad Reservecommunicationsandtoincomingeconomic creditindexes. dataandasmarketdynamicsappearedtoamplify someassetpricemoves.Broadequitypriceindexes Municipalbondyieldsrosesharplyovertheinterendedtheperiodhigher,andlonger-terminterest meetingperiod,increasingsomewhatmorethan ratesrosesignificantly.Sizableincreasesinrates yieldsonTreasurysecurities.InJune,grossissuance occurredfollowingtheJuneFOMCmeeting,as of long-termmunicipalbondsremainedsolidand investorsreportedlysawCommitteecommunications wassplitroughlyevenlybetweenrefundingandnewassuggestingalessaccommodativestanceof mon- capitalissuance.TheCityof Detroit’sbankruptcyfiletarypolicythanhadbeenexpectedgoingforward; ingreportedlyhadonlyalimitedeffectonthemarket however,aportionof theincreaseswasreversedas formunicipalsecuritiesasithadbeenwidelyanticisubsequentpolicycommunicationsloweredthese patedbymarketparticipants. concerns.U.S.economicdata,particularlytheJune employmentreport,alsocontributedtotherisein Creditflowstononfinancialbusinessesshowed yieldsovertheperiod. mixedchanges.Reflectingthereducedincentiveto refinanceaslonger-terminterestratesrose,thepace Onbalance,yieldsonintermediate-andlonger-term of grossissuanceof investment-andspeculative- Treasurysecuritiesroseabout30to45basispoints gradecorporatebondsdroppedinJuneandJuly, sincetheJuneFOMCmeeting,withstaff models comparedwiththeelevatedpaceearlierthisyear.In attributingmostof theincreasetoariseintermpre- contrast,grossissuanceof equitybynonfinancial miumsandtheremaindertoanupwardrevisionin firmsmaintaineditsrecentstrengthinJune.Levertheexpectedpathof short-termrates.Thefederal agedloanissuancealsocontinuedtobestrongamid fundsratepathimpliedbyfinancialmarketquotes demandforfloating-rateinstrumentsbyinvestors. steepenedslightly,onnet,buttheresultsfromthe Financingconditionsforcommercialrealestatecon- Desk’sJulysurveyof primarydealersshowedlittle tinuedtorecoverslowly.InresponsetotheJuly changeindealers’viewsof themostlikelytimingof SeniorLoanOfficerOpinionSurveyonBankLendthefirstincreaseinthefederalfundsratetarget. ingPractices(SLOOS),banksgenerallyindicated Market-basedmeasuresof inflationcompensation thattheyhadeasedstandardsonbothcommercial wereaboutunchanged. andindustrial(C&I)andcommercialrealestateloans overthepastthreemonths.ForC&Iloans,standards Overtheperiod,ratesonprimarymortgagesand werecurrentlyreportedtobesomewhateasycomyieldsonagencymortgage-backedsecurities(MBS) paredwithlonger-termnorms,whileforcommercial roseaboutinlinewiththe10-yearTreasuryyield. realestateloans,standardsremainedsomewhat Theoption-adjustedspreadforproduction-coupon tighterthanlonger-termnorms.Banksreported MBSwidenedsomewhat,possiblyreflectingadown- somewhatstrongerdemandformosttypesof loans. wardrevisionininvestors’expectationsforFederal ReserveMBSpurchases,anincreaseinuncertainty Financingconditionsinthehouseholdsector aboutlonger-terminterestrates,andconvexity- improvedfurtherinrecentmonths.MortgagepurrelatedMBSselling. chaseapplicationsdeclinedmodestlythroughJuly evenasrefinancingapplicationsfelloff sharplywith Spreadsbetweenyieldson10-yearnonfinancialcor- theriseinmortgagerates.Theoutstandingamounts poratebondsandyieldsonTreasurysecuritiesnar- of studentandautoloanscontinuedtoexpandata rowedsomewhatonnet.Earlyintheperiod,yields robustpaceinMay.Creditcarddebtremainedabout oncorporatebondsincreased,andbondmutual flatonayear-over-yearbasis.IntheJulySLOOS, fundsandbondexchange-tradedfundsexperienced banksreportedthattheyhadeasedstandardson largenetredemptionsinJune;therateof redemp- mostcategoriesof loanstohouseholdsinthesecond tionsthenslowedinJuly. quarter,butthatstandardsonalltypesof mortgages,

206 100thAnnualReport|2013 andespeciallyonsubprimemortgageloansand jectedincreaseintherateof realGDPgrowth homeequitylinesof credit,remainedtightwhen reflectedthestaff’sexpectationthatthedragonecojudgedagainstlonger-runnorms. nomicgrowthfromfiscalpolicywouldbesmallerin thesecondhalf asthepaceof reductionsinfederal Increasesintotalbankcreditslowedinthesecond governmentpurchasesslowedandastherestrainton quarter,asthebookvalueof securitiesholdingsfell growthinconsumerspendingstemmingfromthe slightlyandC&Iloanbalancesatlargebanks highertaxesputinplaceatthebeginningof theyear increasedonlymodestlyinAprilandMay.M2grew diminished.Fortheyearasawhole,thestaff anticiatanannualrateof about7percentinJuneandJuly, patedthattherateof growthof realGDPwould supportedbyflowsintoliquiddepositsandretail onlyslightlyexceedthatof potentialoutput.The moneymarketfunds.Bothof thesecomponentsof staff’sprojectionforrealGDPgrowthoverthe M2mayhavebeenboostedrecentlybythesizable mediumtermwasessentiallyunrevised,ashigher redemptionsfrombondmutualfunds.Themonetary equitypriceswereseenasoffsettingtherestrictive basecontinuedtoexpandrapidlyinJuneandJuly, effectsof theincreaseinlonger-terminterestrates. drivenmainlybytheincreaseinreservebalances Thestaff continuedtoforecastthattherateof real resultingfromtheFederalReserve’sassetpurchases. GDPgrowthwouldstrengthenin2014and2015, supportedbyafurthereasingintheeffectsof fiscal Ten-yearsovereignyieldsintheUnitedKingdomand policyrestraintoneconomicgrowth,increasesin GermanyrosewithU.S.yieldsearlyintheintermeet- consumerandbusinessconfidence,additional ingperiodbutfellbacksomewhatafterstatementsby improvementsincreditavailability,andaccommodatheEuropeanCentralBankandtheBankof Eng- tivemonetarypolicy.Theexpansionineconomic landwerebothinterpretedbymarketparticipantsas activitywasanticipatedtoleadtoaslowreductionin signalingthattheirpolicyrateswouldbekeptlowfor theslackinlaborandproductmarketsovertheproaconsiderabletime.Onnet,theU.K.10-yearsover- jectionperiod,andtheunemploymentratewas eignyieldincreased,thoughbylessthanthecompa- expectedtodeclinegradually. rableyieldintheUnitedStates,whiletheyieldon Germanbundswaslittlechanged.Peripheraleuro- Thestaff’sforecastforinflationwaslittlechanged areasovereignspreadsoverGermanbundswerealso fromtheprojectionpreparedforthepreviousFOMC littlechangedonnet.Japanesegovernmentbond meeting.Thestaff continuedtojudgethatmuchof yieldswererelativelystableovertheperiod,after therecentsoftnessinconsumerpriceinflationwould experiencingsubstantialvolatilityinMay.Thestaff’s betransitoryandthatinflationwouldpickupsomebroadnominaldollarindexmovedupasthedollar whatinthesecondhalf of thisyear.Withlonger-run appreciatedagainstthecurrenciesof theadvanced inflationexpectationsassumedtoremainstable, foreigneconomies,consistentwiththelargerincrease changesincommodityandimportpricesexpectedto inU.S.interestrates.Thedollarwasmixedagainst bemodest,andsignificantresourceslackpersisting theEMEcurrencies.Foreignequitypricesgenerally overtheforecastperiod,inflationwasforecasttobe increased,althoughequitypricesinChinadeclined subduedthrough2015. amidinvestorconcernsregardingfurthersignsthat theeconomywasslowingandovervolatilityinChi- Thestaff continuedtoseenumerousrisksaroundthe neseinterbankfundingmarkets.OutflowsfromEME forecast.Amongthedownsiderisksforeconomic equityandbondfunds,whichhadbeenparticularly activityweretheuncertaineffectsandfuturecourse rapidinJune,moderatedinJuly. of fiscalpolicy,thepossibilityof adversedevelopmentsinforeigneconomies,andconcernsaboutthe Staff Economic Outlook abilityof theU.S.economytoweatherpotential futureadverseshocks.Themostsalientriskforthe Thedatareceivedsincetheforecastwaspreparedfor inflationoutlookwasthattherecentsoftnessininflathepreviousFOMCmeetingsuggestedthatreal tionwouldnotabateasanticipated. GDPgrowthwasweaker,onnet,inthefirsthalf of theyearthanhadbeenanticipated.3Nevertheless, Participants’ Views on Current Conditions thestaff stillexpectedthatrealGDPwouldaccelerand the Economic Outlook ateinthesecondhalf of theyear.Partof thispro- Intheirdiscussionof theeconomicsituation,meet- 3 Thestaff’sforecastfortheJulyFOMCmeetingwasprepared ingparticipantsnotedthatincominginformationon beforetheBEAreleaseditsestimateforrealGDPinthesecond quarterandtherevisionsforearlierperiods. economicactivitywasmixed.Householdspending

Minutesof FederalOpenMarketCommitteeMeetings|July 207 andbusinessfixedinvestmentcontinuedtoadvance, Whilerecentmortgagerateincreasesmightserveto andthehousingsectorwasstrengthening.Private restrainhousingactivity,severalparticipants domesticfinaldemandcontinuedtoincreaseinthe expressedconfidencethatthehousingrecovery faceof tighterfederalfiscalpolicythisyear,butsev- wouldberesilientinthefaceof thehigherrates,varieralparticipantspointedtoevidencesuggestingthat ouslycitingpent-uphousingdemand,banks’increasfiscalpolicyhadrestrainedspendinginthefirsthalf ingwillingnesstomakemortgageloans,strongconof theyearmorethantheypreviouslythought.Per- sumerconfidence,still-lowrealinterestrates,and hapspartlyforthatreason,anumberof participants expectationsof continuingrisesinhouseprices. indicatedthatgrowthineconomicactivityduringthe Nonetheless,refinancingactivitywasdownsharply, firsthalf of thisyearwassomewhatbelowtheirear- andtheincomingdatawouldneedtobewatched lierexpectations.Inaddition,subpareconomicactiv- carefullyforsignsof agreater-than-anticipatedeffect ityabroadwasanegativefactorforexportgrowth. of highermortgageratesonhousingactivitymore Conditionsinthelabormarketimprovedfurtheras broadly. privatepayrollsroseatasolidpaceinJune,butthe unemploymentrateremainedelevated.Inflationcon- Inthebusinesssector,theoutlookstillappearedto tinuedtorunbelowtheCommittee’slonger-run bemixed.Manufacturingactivitywasreportedto objective. havepickedupinanumberof Districts,andactivity intheenergysectorremainedatahighlevel. Participantsgenerallycontinuedtoanticipatethatthe Althoughastep-upinbusinessinvestmentwaslikely growthof realGDPwouldpickupsomewhatinthe tobeanecessaryelementof theprojectedpickupin secondhalf of 2013andstrengthenfurtherthereaf- economicgrowth,reportsfrombusinessesranged ter.Factorscitedaslikelytosupportapickupineco- fromthosecontactswhoexpressedheightenedoptinomicactivityincludedhighlyaccommodativemon- mismtothosewhosuggestedthatlittleacceleration etarypolicy,improvingcreditavailability,receding waslikelyinthesecondhalf of theyear. effectsof fiscalrestraint,continuedstrengthinhousingandautosales,andimprovementsinhousehold Participantsreportedfurthersignsthatthetightening andbusinessbalancesheets.Anumberof partici- infederalfiscalpolicyrestrainedeconomicactivityin pantsindicated,however,thattheyweresomewhat thefirsthalf of theyear:Cutsingovernmentpurlessconfidentaboutanear-termpickupineconomic chasesandgrantsreportedlyhadbeenafactorcongrowththantheyhadbeeninJune;factorscitedin tributingtoslowergrowthinsalesandequipment thisregardincludedrecentincreasesinmortgage ordersinsomepartsof thecountry,andconsumer rates,higheroilprices,slowgrowthinkeyU.S.export spendingseemedtohavebeenheldbackbytax markets,andthepossibilitythatfiscalrestraintmight increases.Moreover,uncertaintyabouttheeffectsof notlessen. thefederalspendingsequestrationandrelatedfurloughscloudedtheoutlook.Itwasnoted,however, Consumerspendingcontinuedtoadvance,but thatfiscalrestrictionbystateandlocalgovernments spendingonitemsotherthanmotorvehicleswas seemedtobeeasing. relativelysoft.Recenthighreadingsonconsumer confidenceandbooststohouseholdwealthfrom TheJuneemploymentreportshowedcontinuedsolid increasedequityandrealestatepricessuggestedthat gainsinpayrolls.Nonetheless,theunemployment consumerspendingwouldgathermomentuminthe rateremainedelevated,andthecontinuinglowreadsecondhalf of theyear.However,afewparticipants ingsontheparticipationrateandtheemploymentexpressedconcernthathigherhouseholdwealth to-populationratio,togetherwithahighincidenceof mightnottranslateintogreaterconsumerspending, workersbeingemployedparttimeforeconomicreacautioningthathouseholdincomegrowthremained sons,weregenerallyseenasindicatingthatoverall slow,thathouseholdsmightnottreattheadditionsto labormarketconditionsremainedweak.Itwasnoted wealtharisingfromrecentequitypriceincreasesas thatemploymentgrowthhadbeenstrongerthan lasting,orthathouseholds’scopetoextracthousing wouldhavebeenexpectedgiventherecentpaceof equityforthepurposeof increasingtheirexpendi- outputgrowth,reflectingweakgainsinproductivity. tureswaslessthaninthepast. Someparticipantspointedoutthatonceproductivity growthpickedup,fastereconomicgrowthwouldbe Thehousingsectorcontinuedtopickup,asindicated requiredtosupportfurtherincreasesinemployment byincreasesinhouseprices,lowinventoriesof alongthelinesseenof late.However,oneparticipant homesforsale,andstrongdemandforconstruction. thoughtthatsluggishproductivityperformancewas

208 100thAnnualReport|2013 likelytopersist,implyingthattherecentpaceof out- theirownexpectations.Nonetheless,someparticiputgrowthwouldbesufficienttomaintainemploy- pantsfeltthat,asaresultof recentfinancialmarket mentgainsnearcurrentrates. developments,overallfinancialmarketconditions hadtightenedsignificantly,importantlyreflecting RecentreadingsoninflationwerebelowtheCommit- largertermpremiums,andtheyexpressedconcern tee’slonger-runobjectiveof 2percent,inpartreflect- thatthehigherlevelof longer-terminterestrates ingtransitoryfactors,andparticipantsexpresseda couldbeasignificantfactorholdingbackspending rangeof viewsabouthowsooninflationwould andeconomicgrowth.Severalothers,however, returnto2percent.Afewparticipants,whofeltthat judgedthattheriseinrateswaslikelytoexertrelatherecentlowinflationrateswereunlikelytopersist tivelylittlerestraint,orthattheincreaseinequity orthatthelowPCEinflationreadingsmightbe pricesandeasinginbanklendingstandardswould markedupinfuturedatarevisions,suggestedthat,as largelyoffsettheeffectsof theriseinlonger-term transitoryfactorsrecededandthepaceof recovery interestrates.Someparticipantsalsostatedthat improved,inflationcouldbeexpectedtoreturnto financialdevelopmentsduringtheintermeeting 2percentreasonablyquickly.Anumberof others, periodmighthavehelpedputthefinancialsystemon however,viewedthelowinflationreadingsaslargely amoresustainablefooting,insofarasthosedevelopreflectingpersistentlydeficientaggregatedemand, mentswereassociatedwithanunwindingof unsusimplyingthatinflationcouldremainbelow2percent tainablespeculativepositionsoranincreaseinterm foraprotractedperiodandfurthersupportingthe premiumsfromextraordinarilylowlevels. caseforhighlyaccommodativemonetarypolicy. Inlookingahead,meetingparticipantscommented Bothdomesticandforeignassetmarketswerevola- onseveralconsiderationspertainingtothecourseof tileattimesduringtheintermeetingperiod,reacting monetarypolicy.First,almostallparticipantscontopolicycommunicationsanddatareleases.Indis- firmedthattheywerebroadlycomfortablewiththe cussingtheincreasesinU.S.longer-terminterest characterizationof thecontingentoutlookforasset ratesthatoccurredinthewakeof theJuneFOMC purchasesthatwaspresentedintheJunepostmeeting meetingandtheassociatedpressconference,meeting pressconferenceandintheJulymonetarypolicytesparticipantspointedtoheightenedfinancialmarket timony.Underthatoutlook,if economicconditions uncertaintyaboutthepathof monetarypolicyanda improvedbroadlyasexpected,theCommitteewould shiftof marketexpectationstowardlesspolicy moderatethepaceof itssecuritiespurchaseslater accommodation.Afewparticipantssuggestedthat thisyear.Andif economicconditionscontinuedto thisshiftoccurredinpartbecauseCommitteepartici- developbroadlyasanticipated,theCommitteewould pants’economicprojections,releasedfollowingthe reducethepaceof purchasesinmeasuredstepsand Junemeeting,generallyshowedasomewhatmore concludethepurchaseprogramaroundthemiddleof favorableoutlookthanthoseof privateforecasters, 2014.Atthatpoint,if theeconomyevolvedalongthe orbecausetheJunepolicystatementandpresscon- linesanticipated,therecoverywouldhavegainedfurferencewereseenasindicatingrelativelylittlecon- thermomentum,unemploymentwouldbeinthe cernaboutinflationreadings,whichhadbeenlow vicinityof 7percent,andinflationwouldbemoving anddeclining.Moreover,investorsmayhaveper- towardtheCommittee’s2percentobjective.While ceivedthatCommitteecommunicationsaboutthe participantsviewedthefuturepathof purchasesas possibilityof slowingthepaceof assetpurchasesalso contingentoneconomicandfinancialdevelopments, impliedahigherprobabilityof anearlierfirmingof oneparticipantindicateddiscomfortwiththecontinthefederalfundsrate.SubsequentFederalReserve gentplanonthegroundsthatthereferencestospecommunications,whichemphasizedthatdecisions cificdatescouldbemisinterpretedbythepublicas aboutthetwopolicytoolsweredistinctandunder- suggestingthatthepurchaseprogramwouldbe scoredthatahighlyaccommodativestanceof mon- wounddownonamore-or-lesspresetschedulerather etarypolicywouldremainappropriateforaconsider- thaninamannerdependentonthestateof the ableperiodafterpurchasesarecompleted,wereseen economy.Generally,however,participantsweresatisashavinghelpedclarifytheCommittee’spolicystrat- fiedthatinvestorshadcometounderstandthedataegy.Anumberof participantsmentionedthat,bythe dependentnatureof theCommittee’sthinkingabout endof theintermeetingperiod,marketexpectations assetpurchases.Afewparticipants,whilecomfortof thefuturecourseof monetarypolicy,bothwith ablewiththeplan,stressedtheneedtoavoidputting regardtoassetpurchasesandwithregardtothepath toomuchemphasisonthe7percentvalueforthe of thefederalfundsrate,appearedwellalignedwith unemploymentrate,whichtheysawonlyasillustra-

Minutesof FederalOpenMarketCommitteeMeetings|July 209 tiveof conditionsthatcouldobtainatthetimewhen belowagivenlevelataspecifichorizon.Thelatter theassetpurchasesarecompleted. enhancementtotheforwardguidancemightbeseen asreinforcingthemessagethattheCommitteewas Second,participantsconsideredwhetheritwouldbe willingtodefenditslonger-terminflationgoalfrom desirabletoincludeintheCommittee’spolicystate- belowaswellasfromabove. mentadditionalinformationregardingtheCommittee’scontingentoutlookforassetpurchases.Most Committee Policy Action participantssawtheprovisionof suchinformation, whichwouldreaffirmthecontingentoutlookpre- Committeemembersviewedtheinformationreceived sentedfollowingtheJunemeeting,aspotentiallyuse- overtheintermeetingperiodassuggestingthatecoful;however,manyalsosawpossibledifficulties,such nomicactivityexpandedatamodestpaceduringthe asthechallengeof conveyingthedesiredinformation firsthalf of theyear.Labormarketconditions succinctlyandwithadequatenuance,andtheassoci- showedfurtherimprovementinrecentmonths,on atedriskof againraisinguncertaintyabouttheCom- balance,buttheunemploymentrateremained mittee’spolicyintentions.Afewparticipantssaw elevated.Householdspendingandbusinessfixed otherformsof communicationasbettersuitedfor investmentadvanced,andthehousingsectorwas thispurpose.Severalparticipantsfavoredincluding strengthening,butmortgagerateshadrisensomesuchadditionalinformationinthepolicystatement whatandfiscalpolicywasrestrainingeconomic tobereleasedfollowingthecurrentmeeting;several growth.TheCommitteeexpectedthat,withapproothersindicatedthatprovidingsuchinformation priatepolicyaccommodation,economicgrowth wouldbemostusefulwhenthetimecameforthe wouldpickupfromitsrecentpace,resultingina Committeetobeginreducingthepaceof itssecuri- gradualdeclineintheunemploymentratetowardlevtiespurchases,reasoningthatearlierinclusionmight elsconsistentwiththeCommittee’sdualmandate. triggeranunintendedtighteningof financial Witheconomicactivityandemploymentcontinuing conditions. togrowdespitetighterfiscalpolicy,andwithglobal financialconditionslessstrainedoverall,members Finally,thepotentialforclarifyingorstrengthening generallycontinuedtoseethedownsideriskstothe theCommittee’sforwardguidanceforthefederal outlookfortheeconomyandthelabormarketas fundsratewasdiscussed.Ingeneral,therewassup- havingdiminishedsincelastfall.Inflationwasrunportformaintainingthecurrentnumericalthresholds ningbelowtheCommittee’slonger-runobjective, intheforwardguidance.Afewparticipantsexpressed partlyreflectingtransitoryinfluences,butlonger-run concernthatadecisiontolowertheunemployment inflationexpectationswerestable,andtheCommittee thresholdcouldpotentiallyleadthepublictoview anticipatedthatinflationwouldmovebacktoward theunemploymentthresholdasapolicyvariablethat its2percentobjectiveoverthemediumterm.Memcouldnotonlybemoveddownbutalsoup,thereby bersrecognized,however,thatinflationpersistently callingintoquestionthecredibilityof thethresholds belowtheCommittee’s2percentobjectivecouldpose andunderminingtheireffectiveness.Nonetheless, riskstoeconomicperformance. severalparticipantswerewillingtocontemplateloweringtheunemploymentthresholdif additional Intheirdiscussionof monetarypolicyfortheperiod accommodationweretobecomenecessaryorif the ahead,membersjudgedthatahighlyaccommodative Committeewantedtoadjustthemixof policytools stanceof monetarypolicywaswarrantedinorderto usedtoprovidetheappropriatelevelof accommoda- fosterastrongereconomicrecoveryandsustained tion.Anumberof participantsalsoremarkedonthe improvementinlabormarketconditionsinacontext possibleusefulnessof providingadditionalinforma- of pricestability.Inconsideringthelikelypathfor tionontheCommittee’sintentionsregardingadjust- theCommittee’sassetpurchases,membersdiscussed mentstothefederalfundsrateafterthe6½percent thedegreeof improvementinthelabormarketoutunemploymentratethresholdwasreached,inorder looksincethepurchaseprogrambeganlastfall.The tostrengthenorclarifytheCommittee’sforward unemploymentratehaddeclinedconsiderablysince guidance.OneparticipantsuggestedthattheCom- then,andrecentgainsinpayrollemploymenthad mitteecouldannounceanadditional,lowersetof beensolid.However,othermeasuresof laborutilizathresholdsforinflationandunemployment;another tion—includingthelaborforceparticipationrateand indicatedthattheCommitteecouldprovideguidance thenumbersof discouragedworkersandthoseworkstatingthatitwouldnotraiseitstargetforthefederal ingparttimeforeconomicreasons—suggestedmore fundsrateif theinflationratewasexpectedtorun modestimprovement,andotherindicatorsof labor

210 100thAnnualReport|2013 demand,suchasratesof hiringandquits,remained ahighlyaccommodativestanceof monetarypolicy low.Whilearangeof viewswereexpressedregarding willremainappropriateforaconsiderabletimeafter thecumulativeimprovementinthelabormarket theassetpurchaseprogramendsandtheeconomic sincelastfall,almostallCommitteemembersagreed recoverystrengthens. thatachangeinthepurchaseprogramwasnotyet appropriate.However,intheviewof theonemember Attheconclusionof thediscussion,theCommittee whodissentedfromthepolicystatement,the votedtoauthorizeanddirecttheFederalReserve improvementinthelabormarketwasanimportant Bankof NewYork,untilitwasinstructedotherwise, reasonforcallingforamoreexplicitstatementfrom toexecutetransactionsintheSystemAccountin theCommitteethatassetpurchaseswouldbe accordancewiththefollowingdomesticpolicy reducedinthenearfuture.Afewmembersempha- directive: sizedtheimportanceof beingpatientandevaluating additionalinformationontheeconomybeforedecid- “Consistentwithitsstatutorymandate,theFedingonanychangestothepaceof assetpurchases.At eralOpenMarketCommitteeseeksmonetary thesametime,afewotherspointedtothecontingent andfinancialconditionsthatwillfostermaxiplanthathadbeenarticulatedonbehalf of theCom- mumemploymentandpricestability.Inparticumitteethepreviousmonth,andsuggestedthatit lar,theCommitteeseeksconditionsinreserve mightsoonbetimetoslowsomewhatthepaceof marketsconsistentwithfederalfundstradingin purchasesasoutlinedinthatplan.Attheconclusion arangefrom0to¼percent.TheCommittee of itsdiscussion,theCommitteedecidedtocontinue directstheDesktoundertakeopenmarket addingpolicyaccommodationbypurchasingaddi- operationsasnecessarytomaintainsuchconditionalMBSatapaceof $40billionpermonthand tions.TheDeskisdirectedtocontinuepurchaslonger-termTreasurysecuritiesatapaceof $45bil- inglonger-termTreasurysecuritiesatapaceof lionpermonthandtomaintainitsexistingreinvest- about$45billionpermonthandtocontinue mentpolicies.Inaddition,theCommitteereaffirmed purchasingagencymortgage-backedsecuritiesat itsintentiontokeepthetargetfederalfundsrateat apaceof about$40billionpermonth.The 0to¼percentandretaineditsforwardguidancethat CommitteealsodirectstheDesktoengagein itanticipatesthatthisexceptionallylowrangeforthe dollarrollandcouponswaptransactionsasnecfederalfundsratewillbeappropriateatleastaslong essarytofacilitatesettlementof theFederal astheunemploymentrateremainsabove6½percent, Reserve’sagencymortgage-backedsecurities inflationbetweenoneandtwoyearsaheadispro- transactions.TheCommitteedirectstheDeskto jectedtobenomorethanahalf percentagepoint maintainitspolicyof rollingovermaturing abovetheCommittee’s2percentlonger-rungoal, Treasurysecuritiesintonewissuesanditspolicy andlonger-terminflationexpectationscontinuetobe of reinvestingprincipalpaymentsonallagency wellanchored. debtandagencymortgage-backedsecuritiesin agencymortgage-backedsecurities.TheSystem Membersalsodiscussedthewordingof thepolicy OpenMarketAccountManagerandtheSecrestatementtobeissuedfollowingthemeeting.Inaddi- tarywillkeeptheCommitteeinformedof ongotiontoupdatingitsdescriptionof thestateof the ingdevelopmentsregardingtheSystem’sbaleconomy,theCommitteedecidedtounderlineits ancesheetthatcouldaffecttheattainmentover concernaboutrecentshortfallsof inflationfromits timeof theCommittee’sobjectivesof maximum longer-rungoalbyincludinginthestatementanindi- employmentandpricestability.” cationthatitrecognizesthatinflationpersistently belowits2percentobjectivecouldposeriskstoeco- Thevoteencompassedapprovalof thestatement nomicperformance,whilealsonotingthatitcontin- belowtobereleasedat2:00p.m.: uestoanticipatethatinflationwillmovebacktoward itsobjectiveoverthemediumterm.TheCommittee “InformationreceivedsincetheFederalOpen alsoconsideredwhethertoaddmoreinformation MarketCommitteemetinJunesuggeststhat concerningthecontingentoutlookforassetpur- economicactivityexpandedatamodestpace chasestothepolicystatement,butjudgedthatdoing duringthefirsthalf of theyear.Labormarket somightpromptanunwarrantedshiftinmarket conditionshaveshownfurtherimprovementin expectationsregardingassetpurchases.TheCommit- recentmonths,onbalance,buttheunemployteedecidedtoindicateinthestatementthatit“reaf- mentrateremainselevated.Householdspending firmeditsview”—ratherthansimply“expects”—that andbusinessfixedinvestmentadvanced,andthe

Minutesof FederalOpenMarketCommitteeMeetings|July 211 housingsectorhasbeenstrengthening,but marketorinflationchanges.Indeterminingthe mortgagerateshaverisensomewhatandfiscal size,pace,andcompositionof itsassetpurpolicyisrestrainingeconomicgrowth.Partly chases,theCommitteewillcontinuetotake reflectingtransitoryinfluences,inflationhas appropriateaccountof thelikelyefficacyand beenrunningbelowtheCommittee’slonger-run costsof suchpurchasesaswellastheextentof objective,butlonger-terminflationexpectations progresstowarditseconomicobjectives. haveremainedstable. Tosupportcontinuedprogresstowardmaxi- Consistentwithitsstatutorymandate,theCom- mumemploymentandpricestability,theCommitteeseekstofostermaximumemployment mitteetodayreaffirmeditsviewthatahighly andpricestability.TheCommitteeexpectsthat, accommodativestanceof monetarypolicywill withappropriatepolicyaccommodation,eco- remainappropriateforaconsiderabletimeafter nomicgrowthwillpickupfromitsrecentpace theassetpurchaseprogramendsandtheecoandtheunemploymentratewillgradually nomicrecoverystrengthens.Inparticular,the declinetowardlevelstheCommitteejudgescon- Committeedecidedtokeepthetargetrangefor sistentwithitsdualmandate.TheCommittee thefederalfundsrateat0to¼percentandcurseesthedownsideriskstotheoutlookforthe rentlyanticipatesthatthisexceptionallylow economyandthelabormarketashavingdimin- rangeforthefederalfundsratewillbeappropriishedsincethefall.TheCommitteerecognizes ateatleastaslongastheunemploymentrate thatinflationpersistentlybelowits2percent remainsabove6½percent,inflationbetweenone objectivecouldposeriskstoeconomicperfor- andtwoyearsaheadisprojectedtobenomore mance,butitanticipatesthatinflationwillmove thanahalf percentagepointabovetheCommitbacktowarditsobjectiveoverthemediumterm. tee’s2percentlonger-rungoal,andlonger-term inflationexpectationscontinuetobewell Tosupportastrongereconomicrecoveryandto anchored.Indetermininghowlongtomaintain helpensurethatinflation,overtime,isatthe ahighlyaccommodativestanceof monetary ratemostconsistentwithitsdualmandate,the policy,theCommitteewillalsoconsiderother Committeedecidedtocontinuepurchasing information,includingadditionalmeasuresof additionalagencymortgage-backedsecuritiesat labormarketconditions,indicatorsof inflation apaceof $40billionpermonthandlonger-term pressuresandinflationexpectations,andread- Treasurysecuritiesatapaceof $45billionper ingsonfinancialdevelopments.WhentheCommonth.TheCommitteeismaintainingitsexist- mitteedecidestobegintoremovepolicyaccomingpolicyof reinvestingprincipalpayments modation,itwilltakeabalancedapproachconfromitsholdingsof agencydebtandagency sistentwithitslonger-rungoalsof maximum mortgage-backedsecuritiesinagencymortgage- employmentandinflationof 2percent.” backedsecuritiesandof rollingovermaturing Treasurysecuritiesatauction.Takentogether, Votingforthisaction:BenBernanke,WilliamC. theseactionsshouldmaintaindownwardpres- Dudley,JamesBullard,ElizabethDuke,CharlesL. sureonlonger-terminterestrates,supportmort- Evans,JeromeH.Powell,SarahBloomRaskin,Eric gagemarkets,andhelptomakebroaderfinan- Rosengren,JeremyC.Stein,DanielK.Tarullo,and cialconditionsmoreaccommodative. JanetL.Yellen. TheCommitteewillcloselymonitorincoming Votingagainstthisaction:EstherL.George. informationoneconomicandfinancialdevelopmentsincomingmonths.TheCommitteewill Ms.Georgedissentedbecauseshefavoredincluding continueitspurchasesof Treasuryandagency inthepolicystatementamoreexplicitsignalthatthe mortgage-backedsecurities,andemployits paceof theCommittee’sassetpurchaseswouldbe otherpolicytoolsasappropriate,untiltheout- reducedinthenearterm.Sheexpressedconcerns lookforthelabormarkethasimprovedsubstan- abouttheopen-endedapproachtoassetpurchases tiallyinacontextof pricestability.TheCommit- andviewedprovidingsuchasignalasimportantat teeispreparedtoincreaseorreducethepaceof thistime,inlightof theongoingimprovementin itspurchasestomaintainappropriatepolicy labormarketconditionsaswellasthepotentialcosts accommodationastheoutlookforthelabor anduncertainbenefitsof large-scaleassetpurchases.

212 100thAnnualReport|2013 Itwasagreedthatthenextmeetingof theCommittee Notation Vote wouldbeheldonTuesday–Wednesday,September17–18,2013.Themeetingadjournedat12:30 BynotationvotecompletedonJuly9,2013,the p.m.onJuly31,2013. Committeeunanimouslyapprovedtheminutesof the FOMCmeetingheldonJune18–19,2013. WilliamB.English Secretary

Minutesof FederalOpenMarketCommitteeMeetings|September 213 Meeting Held DavidW.Wilcox Economist on September 17–18, 2013 ThomasA.Connors,TroyDavig,MichaelP.Leahy, Ameetingof theFederalOpenMarketCommittee StephenA.Meyer,GeoffreyTootell,ChristopherJ. washeldintheofficesof theBoardof Governorsof Waller,andWilliamWascher theFederalReserveSysteminWashington,D.C.,on AssociateEconomists Tuesday,September17,2013,at1:00p.m.andcon- SimonPotter tinuedonWednesday,September18,2013,at Manager,SystemOpenMarketAccount 8:30a.m. MichaelS.Gibson Present Director,Divisionof BankingSupervisionand Regulation,Boardof Governors BenBernanke Chairman NellieLiang Director,Officeof FinancialStabilityPolicyand WilliamC.Dudley Research,Boardof Governors ViceChairman JamesBullard JamesA.ClouseandWilliamNelson DeputyDirectors,Divisionof MonetaryAffairs, CharlesL.Evans Boardof Governors EstherL.George JonW.Faust JeromeH.Powell SpecialAdvisertotheBoard,Officeof Board Members,Boardof Governors EricRosengren LindaRobertson JeremyC.Stein AssistanttotheBoard,Officeof BoardMembers, DanielK.Tarullo Boardof Governors JanetL.Yellen EllenE.MeadeandJoyceK.Zickler ChristineCumming,RichardW.Fisher, SeniorAdvisers,Divisionof MonetaryAffairs, NarayanaKocherlakota,SandraPianalto, Boardof Governors andCharlesI.Plosser EricM.Engen,MichaelT.Kiley,ThomasLaubach, AlternateMembersof theFederalOpenMarket DavidE.Lebow,andMichaelG.Palumbo Committee AssociateDirectors,Divisionof Researchand JeffreyM.Lacker,DennisP.Lockhart, Statistics,Boardof Governors andJohnC.Williams FabioM.Natalucci Presidentsof theFederalReserveBanksof AssociateDirector,Divisionof MonetaryAffairs, Richmond,Atlanta,andSanFrancisco,respectively Boardof Governors DeborahJ.Danker JoshuaGallin DeputySecretary DeputyAssociateDirector,Divisionof Researchand MatthewM.Luecke Statistics,Boardof Governors AssistantSecretary JeremyB.Rudd DavidW.Skidmore Adviser,Divisionof ResearchandStatistics, AssistantSecretary Boardof Governors MichelleA.Smith ChristopherJ.GustandElizabethKlee AssistantSecretary SectionChiefs,Divisionof MonetaryAffairs, ScottG.Alvarez Boardof Governors GeneralCounsel GordonWerkema StevenB.Kamin FirstVicePresident,FederalReserveBankof Economist Chicago

214 100thAnnualReport|2013 DavidAltig,LorettaJ.Mester, thepotentialroleforanovernightRRPfacility,the andHarveyRosenblum1 possibleeffectsonthefunctioningof thefederal ExecutiveVicePresidents,FederalReserveBanksof fundsmarketorthestructureof moneymarkets,and Atlanta,Philadelphia,andDallas,respectively theusefulnessof expandingtheDesk’stestoperationsinRRPs.Meetingparticipantsgenerallysup- JoyceHansen,EvanF.Koenig,SpencerKrane, portedaproposaltoauthorizetheDesktoconducta LorieK.Logan,MarkE.Schweitzer,JohnA. limitedexerciseinordertoprovidesomeinsightinto Weinberg,andKei-MuYi thepotentialusageof anovernightRRPfacilityas SeniorVicePresidents,FederalReserveBanksof wellasadditionalexperiencewithoperationalaspects NewYork,Dallas,Chicago,NewYork,Cleveland, of suchafacility.Oneparticipant,however,preferred Richmond,andMinneapolis,respectively thatfurtheranalysisbeundertakenbeforeproceeding ChrisBurkeandJonathanP.McCarthy withtheexercise.Anumberof meetingparticipants VicePresidents,FederalReserveBankof NewYork emphasizedthattheirinterestintheseoperations reflectedanongoingefforttoimprovethetechnical EricT.Swanson executionof policyanddidnotsignalanychangein SeniorResearchAdvisor,FederalReserveBankof theCommittee’sviewsaboutpolicygoingforward. SanFrancisco Followingthediscussion,theCommitteeunanimouslyapprovedthefollowingresolution: Developments in Financial Markets and the Federal Reserve’s Balance Sheet “TheFederalOpenMarketCommittee(FOMC) TheManagerof theSystemOpenMarketAccount authorizestheFederalReserveBankof New reportedondevelopmentsindomesticandforeign Yorktoconductaseriesof fixed-rate,overnight financialmarketsaswellastheSystemopenmarket reverserepurchaseoperationsinvolvingU.S. operationsduringtheperiodsincetheFederalOpen Governmentsecurities,andsecuritiesthatare MarketCommittee(FOMC)metonJuly30–31, directobligationsof,orfullyguaranteedasto 2013.ThereviewincludedareportthattheSystem’s principalandinterestby,anyagencyof the purchasesof longer-termassetsdidnotappearto UnitedStates,forthepurposeof assessing havehadanadverseeffectonthefunctioningof the operationalreadiness.Thereverserepurchase marketsforTreasurysecuritiesoragencymortgage- operationsauthorizedbythisresolutionshallbe backedsecurities(MBS),andthattheOpenMarket (i)offeredatafixedratethatmayvaryfromzero Desk’soperationsinbothsectorshadproceeded tofivebasispoints,(ii)offeredatuptoacapped smoothly.Byunanimousvote,theCommitteeratified allotmentpercounterpartyof $1billionperday theDesk’sdomestictransactionsovertheintermeet- and(iii)foranovernightterm,orsuchlonger ingperiod.Therewerenointerventionoperationsin termasiswarrantedtoaccommodateweekend, foreigncurrenciesfortheSystem’saccountoverthe holiday,andsimilartradingconventions.The intermeetingperiod. SystemOpenMarketAccountManagerwill informtheFOMCinadvanceof thetermsof Insupportof theCommittee’slonger-runplanning theplannedoperations.Theseoperationsmay forimprovementsintheimplementationof monetary beannouncedwhenauthorizedbytheChairpolicy,thestaff presentedanupdateonthepotential man,maybeginwhenauthorizedbytheChairforestablishingafixed-rate,full-allotmentovernight manonorafterSeptember23,2013,andshall reverserepurchaseagreement(RRP)facility.Thepre- beauthorizedthroughtheFOMCmeetingthat sentationsummarizedinitialdiscussionswithfinan- endsonJanuary29,2014.” cialmarketfirmsabouthowsuchafacilitymight affectmoneymarketinterestratesandintermedia- Staff Review of the Economic Situation tionflows,whattherelationshipmightbebetween thefacilityrateandothermoneymarketrates,and TheinformationreviewedfortheSeptember17–18 howthedifferenttypesof firmsmightviewthefacil- meetingsuggestedthateconomicactivitycontinued ity.Overall,theinquiriessuggestedthatthefacility toincreaseatamoderaterate.Private-sectoremploycouldbeaneffectiveadditionaltoolformanaging mentrosefurtherinJulyandAugust,buttheunemmoneymarketinterestratesandhelpingtosupporta ploymentratewasstillelevated.Totalconsumerprice flooronthoserates.Meetingparticipantsdiscussed inflationpickedupinrecentmonthsbutcontinuedto bemodest,andmeasuresof longer-runinflation 1 AttendedintroductoryremarksatTuesday’ssessiononly. expectationsremainedstable.

Minutesof FederalOpenMarketCommitteeMeetings|September 215 Privatenonfarmemploymentcontinuedtoexpandin Growthinrealprivateexpendituresforbusiness JulyandAugust,butatasomewhatslowerpacethan equipmentandintellectualpropertyproducts inthefirsthalf of theyear,whiletotalgovernment appearedtobesubduedgoingintothethirdquarter. employmentedgeddownonbalance.Theunemploy- Nominalshipmentsof nondefensecapitalgoods mentratedeclinedfurtherto7.3percentinAugust. excludingaircraftdeclinedagaininJuly.However, Thelaborforceparticipationratealsodecreased, nominalnewordersforthesecapitalgoodscontinued leavingtheemployment-to-populationratioessen- tobeabovethelevelof shipments,pointingto tiallyunchangedinrecentmonths.Otherindicators increasesinshipmentsinsubsequentmonths,and of labormarketactivityalsoweremixed.Measures otherforward-lookingindicators,suchassurveysof of firms’hiringplansmovedup,initialclaimsfor businessconditions,wereconsistentwithmoderate unemploymentinsurancedeclined,andtheshareof gainsinspendingforbusinessequipmentinthenear workersemployedparttimeforeconomicreasons term.Nominalbusinessexpendituresfornonresidendecreasedalittle.However,householdexpectations tialconstructionincreasedinJulybutwerestillata of thelabormarketsituationdeterioratedsomewhat, lowlevel.Recentbook-valuedataforinventory-sales ratesof jobopeningsandgrossprivate-sectorhiring ratios,alongwithreadingsoninventoriesfrom werelittlechanged,onnet,andtherateof long- nationalandregionalmanufacturingsurveys,didnot durationunemploymentroseslightly. pointtosignificantinventoryimbalances. ManufacturingproductionincreasedinAugustafter Reductionsinrealfederalgovernmentpurchases adeclineinJuly,andtherateof manufacturing appearedtopersist:Defensespendingcontinuedto capacityutilizationwasunchanged,onbalance,over decreaseinJulyandAugust,whilefederalemploythosetwomonths.Automakers’schedulesindicated mentedgeddownfurther.Realstateandlocalgovthatthepaceof motorvehicleassemblieswould ernmentpurchaseslookedtobeaboutflat—thepayremainroughlyflatinthecomingmonths,but rollsof thesegovernmentsexpandedslightly,onbalbroaderindicatorsof manufacturingproduction, ance,inJulyandAugust,andstateandlocal suchasthereadingsonnewordersfromthenational constructionexpendituresseemedtobelevelingoff. andregionalmanufacturingsurveys,pointedtomoderateincreasesinfactoryoutputinthenearterm. TheU.S.internationaltradedeficitnarrowedsubstantiallyinJunebeforewideninginJulytoalevel Realpersonalconsumptionexpenditures(PCE)were nearitssecond-quarteraverage.Exportsexpandedin flatinJuly.InAugust,nominalretailsales,excluding June,withparticularstrengthinindustrialsupplies thoseatmotorvehicleandpartsoutlets,edgedup, andcapitalgoods,beforesteppingdownsomewhatin whilesalesof lightmotorvehiclesrosenotably. July.ImportsfellinJunebutthenlargelyrecoveredin Recentinformationonkeyfactorsthatinfluencecon- July,drivenbyswingsinimportsof oilandconsumer sumerspendingweremixed:Households’networth goods. likelyexpandedfurtherashomepricespostedadditionalgainsthroughJuly,butrealdisposableincomes TotalU.S.inflation,asmeasuredbythePCEprice increasedonlyalittleinJulyandconsumersentiment indexthroughJulyandbytheconsumerpriceindex intheThomsonReuters/Universityof MichiganSur- throughAugust,wasabout1½percentoverthepreveysof ConsumersmovedlowerinAugustandearly ceding12-monthperiodforeachseries.Consumer September. foodpricesonlyedgedupinJulyandAugust,while energypriceswerelittlechanged,onnet,overthose Improvementsinhousing-sectoractivityappearedto twomonths,andretailgasolinepricesmoveddown slow,possiblyreflectingtheriseinmortgagerates inthefirsthalf of September.Coreconsumerprice sincethespring.Startsandpermitsof newsingle- inflation,whichexcludesfoodandenergy,wasmodfamilyhomesmoveddowninJuly,butthelevelof estinJulyandAugust.Bothnear-termandlongerpermitissuancewasstillsomewhatabovethatfor terminflationexpectationsfromtheMichigansurvey startsandpointedtomoderateincreasesinconstruc- werelittlechangedinAugustandearlySeptember. tioninsubsequentmonths.Inthemultifamilysector, bothstartsandpermitsroseinJulybutconstruction Measuresof laborcompensationindicatedthat remainedaroundthesamelevelasearlyintheyear. increasesinnominalwageswerestillsubdued.Both Salesof existinghomesincreased,butnewhome compensationperhourandunitlaborcostsinthe salesdeclined. nonfarmbusinesssectorrosemodestlyovertheyear

216 100thAnnualReport|2013 endinginthesecondquarter,astherewereonlyslight inflation-protectedsecuritiesroseaboutinlinewith gainsinproductivity.InJulyandAugust,increasesin thoseonnominalTreasurysecurities. averagehourlyearningsforallemployeeswerefairly slowonbalance. Conditionsinshort-termdollarfundingmarkets weregenerallystableduringtheperiodsincetheJuly Averageforeigneconomicgrowthremainedmutedin FOMCmeeting.ResponsestotheSeptemberSenior thefirsthalf of theyear,althoughthereweresome CreditOfficerOpinionSurveyonDealerFinancing notabledivergencesacrosscountries.Growthinreal Termssuggestedlittlechangeoverthepreceding grossdomesticproduct(GDP)pickedupinthesec- threemonthsinthecredittermsapplicabletomost ondquarterintheUnitedKingdomandremained classesof counterpartiescoveredbythesurvey.A stronginJapan,recentdatasuggestedthattheeuro- moderatenetfractionof respondentsreporteda areaeconomywascomingoutof recession,andeco- declineintheuseof financialleveragebyhedge nomicindicatorswerepositiveforChinaandseveral funds,andamoresubstantialnetfractionreporteda otheremergingmarketeconomies(EMEs)inAsia. decreaseinfinancialleverageusedbyrealestate However,realGDPfellinthesecondquarterin investmenttrusts.Inresponsetospecialquestionsin MexicoanddeceleratednotablyinIndia.Foreign thesurvey,dealersindicatedthat,duringtheperiod inflationwasgenerallysubdued.Monetarypolicy of heightenedvolatilitybeginninginMayand remainedhighlyaccommodativeintheadvanced extendingintoearlyJuly,liquidityandfunctioning economies,butsomeEMEcentralbanksmoved haddeterioratedinanumberof fixed-income towardtightermonetarypolicyinthefaceof capital markets. outflowsanddepreciationpressures.Anexception wastheBankof Mexico,whichcutitspolicyratein Stockpricesforfinancial-sectorfirmsunderperresponsetoeconomicweakness. formedthebroadequitymarketsomewhatoverthe intermeetingperiod.However,spreadsoncredit defaultswaps(CDS)forthelargestbankholding Staff Review of the Financial Situation companiesremainedstableatlevelsnearthebottom of theirrangeoverthepastfewyears. Longer-terminterestratesroseovertheintermeeting period,whileequitypriceswerefairlyvolatilebut Creditflowstononfinancialbusinessesremained endedtheperiodmodestlyhigher.Themoveininter- solidinthefaceof higherlonger-terminterestrates. estratesappearedtobeimportantlyinfluencedby Relativetothetypicalsummerlull,grossissuanceof shiftingexpectationsaboutmonetarypolicy. corporatebondsandleveragedloanswasrobustin August;commercialandindustrial(C&I)loanson Thepathof thefederalfundsrateimpliedbyfinan- banks’bookscontinuedtoexpandmoderately,on cialmarketquotessteepenednotablyduringthe average,inJulyandAugust.Commercialrealestate period,inpartreflectingsomeincreaseinuncertainty (CRE)loansatbanksacceleratedoverthesummer, abouttheoutlookformonetarypolicyasindicated andissuanceof commercialmortgage-backedsecuribyoption-impliedmeasuresof uncertaintyaboutthe tiesremainedstrongdespiteslightlywiderspreadson futurepathof thepolicyrate.Incontrasttomarket- thosesecurities. basedquotes,theresultsfromtheDesk’sSeptember surveyof primarydealersshowedlittlechangeinthe Recentinformationabouthouseholdcreditwas projectedpathof thepolicyraterelativetothatinthe mixed.Mortgageratesincreasedfurtheroverthe Julysurvey.However,thesurveyalsosuggestedthat intermeetingperiod,andcreditstandardsformortprimarydealersmarkedupsomewhattheoddsthat gageloansremainedtight.Nonetheless,applications theFOMCwouldbegintocutthepaceof assetpur- fornewmortgagesdeclinedonlymodestly,apparchasesatitsSeptembermeeting,aresultgenerallyin entlysupportedbyimprovementsinlabormarket linewithothersurveysof marketparticipants. conditionsandsomepent-updemand.Highermortgageratesweighedmoreheavilyonapplicationsto Five-and10-yearTreasuryyieldsincreasedabout refinanceexistingmortgages,whichdecreasedsignifi- 25basispointsovertheintermeetingperiod.Yields cantly.Thepaceof homepriceappreciationmoderoncorporatebonds,agencyMBS,andTreasury atedabitinJuly,althoughitwasstillstrong.Innon-

Minutesof FederalOpenMarketCommitteeMeetings|September 217 mortgagecredit,automobileloansandstudentloans improvedovertheperiod,whileyieldspreadsof bothcontinuedtoexpandrapidly,whilebalanceson SpanishandItaliansovereignsecuritiesrelativeto revolvingconsumercreditstayedaboutflat.Issuance Germangovernmentdebtdeclinedabitfurther. of consumerasset-backedsecuritiesremainedrobust inJulyandAugust. Thestaff reportedonpotentialriskstofinancialstability,includingthosehighlightedbytheriseinyields Inthemunicipalbondmarket,despitetheongoing andvolatilityonlonger-termfixed-incomesecurities bankruptcyproceedingsforDetroitandgreaterscru- sincethespring.Theincreaseinyieldsappearedto tinyof PuertoRico’sfiscalproblems,broadermarket reduceinvestors’appetitefortakingdurationrisk, sentimentwasreportedlysupportedbythelessening butif asignificantvolumeof bondinvestorsmoved inbudgetpressuresformanyotherstateandlocal tosellatafuturetime,issuessurroundingdealer governments.Grossissuanceof long-termmunicipal capacityandwillingnesstomakemarketsinvolatile bondswassolidinAugust,andyieldratioson conditionscouldagainamplifypricemovements.On general-obligationmunicipalbondsovercomparable balance,thevulnerabilityof thefinancialsystem Treasurysecuritieswereaboutunchanged,onbal- appearedmoderate,asloss-absorbingcapitalhad ance,overtheintermeetingperiod. increasedandtherelianceonshort-termfundingand theexposureof financialinstitutionstononfinancial BankcreditdeclinedinJulyandAugustamidthe creditriskhaddecreased.Nonetheless,anumberof generalriseinlonger-terminterestrates.While potentialshockscouldprovechallengingtomarkets banks’holdingsof assetswithlongerduration,such andinstitutions,includingafailuretoraisetheU.S. asresidentialmortgages,decreased,growthinC&I, federaldebtlimit,financialinstabilityinEMEs,and CRE,andautomobileloans—whicharemorelikely geopoliticaleventsintheMiddleEast. tohavefloatinginterestratesorrelativelyshort maturities,andthereforelessdurationrisk—tended Staff Economic Outlook toholdupinrecentmonths. Intheeconomicforecastpreparedbythestaff forthe M2increasedsignificantlyinJulyandAugust,asthe SeptemberFOMCmeeting,theprojectionforreal selloff infixed-incomemarketsthatbeganinMay, GDPgrowthinthesecondhalf of thisyearwas alongwiththeassociatedoutflowsfrombondfunds, reviseddownalittlefromtheonepreparedforthe likelycontinuedtosupportreallocationsintoliquid previousmeeting.Thestaff’sforecastforrealGDP M2assets.Themonetarybasecontinuedtoexpand overthemediumtermalsowasreviseddownsomerapidly,primarilyreflectingtheriseinreservebal- what,reflectinghigherprojectedpathsforboth ancesresultingfromtheFederalReserve’sasset longer-terminterestratesandtheforeignexchange purchases. valueof thedollar,alongwithslightlylowerprojectedpathsforequityandhomeprices.Thestaff Againstabackdropof higherinterestratesinthe stillanticipatedthatthepaceof expansioninreal advancedeconomiesandslowingeconomicgrowthin GDPthisyearwouldonlymoderatelyexceedthe theEMEs,severalEMEcurrenciescameunder growthrateof potentialoutputbutcontinuedto downwardpressureinAugust;yieldsandCDSpre- forecastthatrealGDPwouldacceleratein2014and miumsonEMEsovereigndebtincreased,particu- 2015,supportedbyaneventualeasingintheeffects larlyforthoseeconomiesexperiencingsharpcur- of fiscalpolicyrestraintoneconomicgrowth, rencydepreciations;andinvestorscontinuedto increasesinconsumerandbusinesssentiment,furdecreasetheirholdingsinEMEmutualfunds.In therimprovementsincreditavailabilityandfinancial response,someEMEauthoritiestookactionstosup- conditions,andaccommodativemonetarypolicy.In porttheircurrencies,includingtighteningmonetary 2016,realGDPgrowthwasprojectedtobeginto policy,modifyingcapitalcontrols,andpurchasing edgedowntowardthegrowthrateof potentialouttheircurrenciesinforeignexchangemarkets.Onnet put.Overtheprojectionperiod,theexpansioninecoovertheperiod,thedollarendedlittlechangedona nomicactivitywasanticipatedtoslowlyreducethe trade-weightedbasisagainstabroadsetof curren- slackinlaborandproductmarkets,andtheunemcies,butitappreciatednotablyagainstthecurrencies ploymentratewasexpectedtodeclinegradually. of India,Indonesia,andTurkey.Equitypricesin Germanyincreasedsubstantiallyandsovereignyields Thestaff’sforecastforinflationwaslittlechanged intheUnitedKingdomandGermanycontinuedto fromtheprojectionpreparedforthepreviousFOMC riseasdataoneconomicactivityinEuropegenerally meeting.Inthenearterm,thestaff continuedto

218 100thAnnualReport|2013 projectthatinflationwouldbemodestinthesecond ingyears,supportedbyhighlyaccommodativemonhalf of thisyearbuthigherthanthereadingsposted etarypolicyandthegradualabatementof theheadinthefirsthalf.Overthemediumterm,withlonger- windsthathavebeenslowingthepaceof economic runinflationexpectationsassumedtoremainstable, recovery,suchashousehold-sectordeleveraging,tight changesincommodityandimportpricesexpectedto creditconditionsforsomehouseholdsandbusibemodest,andresourceslackpersistingovermostof nesses,andfiscalrestraint.Accordingly,theunemtheprojectionperiod,inflationwasforecasttobe ploymentratewasprojectedtocontinuetodecline subduedthrough2016. overtimetowardlevelsjudgedtobeconsistentwith theCommittee’sdualmandate.Whiledownsiderisks Thestaff viewedtheuncertaintyaroundtheforecast totheoutlookfortheeconomyandthelabormarket foreconomicactivityassimilartoitsnormallevel weregenerallyviewedashavingdiminished,onbaloverthepast20years.However,theriskswere ance,sincelastfall,anumberof significantrisks viewedasskewedtothedownside,reflectingcon- remained,includingthoserelatedtothepotential cernsabouttheeconomiceffectsof therecenttight- economiceffectsof thesizableincreasesininterest eninginU.S.financialmarketconditions,theresolu- ratessincethespring,ongoingfiscaldrag,andthe tionof federalfiscalpolicyissuesinthecoming possiblefalloutfromnear-termfiscaldebates.Inflamonths,theeconomicandfinancialstressesinthe tioncontinuedtorunbelowtheCommittee’slonger- EMEs,andtheabilityof theU.S.economyto runobjective,apartfromfluctuationsthatlargely weatherpotentialfutureadverseshocks.Thestaff did reflectedchangesinenergyprices,andparticipants notseetheuncertaintyarounditsoutlookforinfla- generallysawitasmovingbackgraduallyto2pertionasunusuallyhigh,andtheriskswereviewedas centinthemediumterm. balanced. Inthehouseholdsector,consumerspendingcontin- Participants’ Views on Current Conditions uedtoadvance,butincomingdataonretailsales and the Economic Outlook weresomewhatweakerthanexpected.Autosales, however,remainedstrong,supportedinpartby InconjunctionwiththisFOMCmeeting,meeting steadyinterestratesonautoloans,which,unlike participants—5membersof theBoardof Governors mortgagerates,didnotrisesubstantiallyinrecent andthepresidentsof the12FederalReserveBanks, months.Despitethecontinuedimprovementin allof whomparticipatedinthedeliberations—sub- householdbalancesheets,anumberof factorswere mittedtheirassessmentsof realoutputgrowth,the mentionedaspossiblerestraintsonspending,includunemploymentrate,inflation,andthetargetfederal ingdeclinesinconsumerconfidence,concernsabout fundsrateforeachyearfrom2013through2016and jobsecurityandavailability,andthelingeringeffects overthelongerrun,undereachparticipant’sjudg- of thisyear’spayrolltaxincrease.Whilethehousing mentof appropriatemonetarypolicy.Thelonger-run sectorcontinuedtostrengthen,supportedbyimprovprojectionsrepresenteachparticipant’sassessmentof ingfundamentalsandgainsinhouseprices,the theratetowhicheachvariablewouldbeexpectedto increasesinmortgageratessincethespringwereseen converge,overtime,underappropriatemonetary asapotentialrisk.Theextenttowhichthehigher policyandintheabsenceof furthershockstothe mortgagerateshadmateriallyaffectedthatsector economy.Theseeconomicprojectionsandpolicy remainedunclear,withtheexceptionof thesharp assessmentsaredescribedintheSummaryof Eco- declineinrefinancingactivity.Butitwasnotedthat nomicProjections(SEP),whichisattachedasan recentsoftnessinhousingstartsandhomesales addendumtotheseminutes. mightwellreflectsomerestraintfromthosehigher rates. Intheirdiscussionof theeconomicsituationand outlook,meetingparticipantsregardedtheinforma- Businesscontactsinselectedpartsof thecountry tionreceivedduringtheintermeetingperiodasindi- werereportedtobecautiouslyoptimistic,consistent catingthateconomicactivityhadcontinuedto withencouragingresponsestoanumberof business expandatamoderatepace,albeitsomewhatmore surveys.Nonetheless,uncertaintiesregardingtheoutslowlythanearlieranticipated,andtheygenerally lookfortheeconomyandfiscalandregulatorypoliindicatedthatthebroadcontoursof theoutlookfur- cieswerereportedlycontinuingtoweighonbusiness therouthadnotchangedmateriallysincetheirJuly decisionmaking,withfirmsfocusedonimproving meeting.Participantscontinuedtoprojecttherateof theirbalancesheetsandenhancingproductivityand growthof economicactivitytostrengthenovercom- stillquitecautiousaboutexpandingtheirworkforces.

Minutesof FederalOpenMarketCommitteeMeetings|September 219 Reportsonmanufacturingactivitypointedtosome pantnotedtheriskthatthelongerthedurationof rebound,withproductionrelatedtoautosthemost elevatedunemployment,themorelikelyitwasthat notableareaof strength,andactivityintheenergy thelabormarketandeconomywouldexperience sectorcontinuedtoexpandatasteadypace.Inthe somelastingstructuraldamage.Whilejudgingthe agriculturalsector,farmlandvaluesincreasedfurther, extentof structuraldamagecontinuedtobequitedifeventhoughfarmincomewasreportedtobedeclin- ficult,onepieceof evidenceconsistentwiththisview ing.Somebusinesscontactsindicatedthatwageand wastheapparentdeclineinthejob-findingrateof pricepressuresweresubdued;however,inoneDis- thelong-termunemployed. trict,contactspointedtorisingwagepressuresand laborshortages. Despitethereversalof sometransitoryfactorsthat hadcontributedtotheearliersoftnessininflation, Participantsdiscussedtheextenttowhichtheongo- recentreadingscontinuedtobebelowtheCommitingtighteninginfiscalpolicywaslikelytofurther tee’slonger-runobjectiveof 2percent.However,parrestraineconomicactivityinthesecondhalf of this ticipantsgenerallyexpectedinflationtopickupover year,withoneparticipantnotingthattheeffectsof thecomingyearasthepaceof economicgrowth thefederalsequestrationappearedtobelesspro- acceleratedandslackinresourceutilizationdiminnouncedthanpreviouslyanticipated.However,a ishedfurther,althoughtoaratestillbelowtheComnumberof otherspointedtoheighteneduncertainty mittee’slonger-runobjective. aboutthecourseof federalfiscalpolicyovercoming months,includingthepotentialforagovernment Participantsdiscussedfinancialmarketdevelopshutdownorstrainsrelatedtothedebtceilingdebate, ments,includingtheirviewsontheextenttowhich whichposeddownsideriskstotheeconomicoutlook. theriseinlonger-terminterestratessinceMay reflectedgrowingconfidenceabouttheeconomic Indiscussinglabormarketdevelopments,anumber outlookoraperceptionbyfinancialmarketsthat of participantsindicatedthatgainsinpayrollsinthe monetarypolicywouldbelessaccommodativegoing JulyandAugustemploymentreportsweredisap- forwardthanhadbeenpreviouslyanticipated.Sevpointing,butoneparticipantalsonotedthatseasonal eralparticipantsjudgedthatoverallfinancialcondiadjustmenttendedtobechallengingduringthesum- tionshadtightenednotablyoverthepastfew mermonths.Takingarangeof dataintoaccount, months,asseenmostimportantlyintheriseinmortparticipantsgenerallyagreedthatlabormarketcon- gagerates.Whileacknowledgingthatitwastooearly ditionshadimprovedmeaningfullysincethestartof toassesstheeffectsof suchanincrease,they theassetpurchaseprograminSeptember2012.Par- expressedconcernsthattighterfinancialconditions ticipantsdiscussedhowtoreconcilethenotable mightweighontherecoveryinthehousingsector.A declineintheunemploymentrateoverthepastyear fewothersobservedthattheincreaseinlonger-term withtheonlymoderatepaceof expansioninreal yieldsinrecentmonthshadnotseemedtoleavea GDP.Onepossibleexplanationwasthat,tothe meaningfulimprintonotherassetprices,suggesting extentthedeclineintheunemploymentratewaspri- thattheeffectsontheeconomywerelikelytoberelamarilydrivenbyafallinthelaborforceparticipation tivelymuted.Whilerecognizingthepotentiallysigrateandlowproductivitygrowth,suchadecline nificantimpactof highermortgageratesonthe mightoverstatethedegreeof improvementin housingmarket,thesesameparticipantspointedto broaderlabormarketconditions.Indeed,thecontin- higherequityprices,thefurthergraduallooseningof uedlowreadingsontheemployment-to-population termsinbanklending,andthecontinuedavailability ratioweresupportiveof thisexplanation,suggesting of creditatinexpensivetermsincorporatedebtmarthatoveralllabormarketconditionshadnot ketsassignsthatfinancialconditionsmoregenerally improvedasmuchastheunemploymentratewould hadnottightenedmaterially.Inanycase,however, indicate.Analternativeexplanationforthesignifi- theassessmentof theadverseeffectsof theincrease cantimprovementinthelabormarketperformance inlonger-termratesonfinancialconditionsandultidespitethemoderategrowthinrealGDPoverthe matelyoneconomicactivitywoulddependimporpastyearwasthatgrowthhadbeenunderstated tantlyupontheextenttowhichratesstabilizedat somewhat;notably,someresearchsuggestedthatreal currentlevelsorinsteadcontinuedtorise. grossdomesticincome,whichexpandedatasomewhatfasterpacethanrealGDP,mayprovidebetter Participantsalsotouchedontheimplicationsfor informationaboutoveralleconomicactivity.Despite financialstabilityresultingfromtheincreaseininterrecentdeclinesintheunemploymentrate,onepartici- estrates,focusingontheeffectsonsecuritiesheldby

220 100thAnnualReport|2013 bankingandothernonbankinstitutions,theunwind- Junepressconference,assetpurchaseswerecontiningof leveragedtrades,andtheliquidityandfunc- gentontheCommittee’songoingassessmentof the tioningof anumberof fixed-incomemarkets.One economicoutlookandwerenotonapresetcourse; participantnotedthat,notwithstandingtherecent thisapproachimpliedaneedtoadaptandtoadjust riseininterestrates,netinterestmarginsremained assetpurchasesinresponsetochangesineconomic underpressureatcommunityandregionalbanks, conditionsinordertopreservetheCommittee’scredandasaresultmanyof thesebankscontinuedtoadd ibility.Withmanyoutsideobserversexpectingadecitoriskexposures.Anotherparticipantraisedthepos- siontoreducepurchasesatthismeeting,someparsibilitythatfinancialstabilityrisksmightarisefrom ticipantsemphasizedaneedtoclearlycommunicate recentadversedevelopmentsinmunicipalbondmar- therationalebehindanydecisionnottodoso,in kets.Itwasalsonotedthatfinancialconditionsina ordertoavoidconveyingamessageof pessimism numberof EMEshadtightenedasaresultof some regardingtheeconomicoutlookortoreinforcethe depreciationof theircurrencies,anincreaseinyields distinctionbetweendecisionsconcerningthepaceof andborrowingcosts,andsomecapitaloutflowsas purchasesandthoseconcerningthefederalfunds measuredbywithdrawalsfrombondfunds.More rate.Oneparticipantsuggestedthatpostponingthe broadly,acoupleof participantsnotedthecomplexi- reductioninthepaceof assetpurchaseswouldalso tiesrelatedtotheinteractionbetweenthestanceof allowtimefortheCommitteetofurtherdiscussand monetarypolicyandthevulnerabilitiesinthefinan- toimplementaclarificationorstrengtheningof its cialsystem. forwardguidanceforthefederalfundsrate,which couldtempertheriskthatafuturedownwardadjust- Intheirdiscussionof thepathformonetarypolicy, mentinassetpurchaseswouldcauseanundesirable participantsdebatedtheadvantagesanddisadvan- tighteningof financialconditions. tagesof reducingthepaceof theCommittee’sasset purchasesatthismeeting,focusingimportantlyon Theparticipantswhospokeinfavorof moderating whethertheconditionspresentedtothepublicin thepaceof securitiespurchasesatthismeetingalso Juneforreducingthepaceof assetpurchaseshadyet citedtheincomingdata,butviewedthosedataas beenmet.Ingeneral,thosewhopreferredtomain- broadlyconsistentwiththeCommittee’soutlookfor tainfornowthepaceof purchasesviewedincoming thelabormarketatthetimeof theJuneFOMC dataashavingbeenonthedisappointingsideand, meetingwhenthecontingentexpectationthatthe despiteclearimprovementsinlabormarketcondi- paceof assetpurchaseswouldbereducedlaterinthe tionssincethepurchaseprogram’sinceptioninSep- yearwasfirstpresentedtothepublic.Moreover,they tember2012,werenotyetadequatelyconfidentof highlightedwhattheysawasmeaningfulcumulative continuedprogress.Manyof theseparticipantshad progressinlabormarketconditionssincethepurreviseddowntheirforecastsforeconomicactivityor chaseprogrambegan.Thoseparticipantsgenerally pointedtonear-termrisksanduncertainties.For weresatisfiedthatinvestorshadcometounderstand example,questionswereraisedabouttheeffectson thedata-dependentnatureof theCommittee’sthinkthehousingsectorandonthebroadereconomyof ingaboutassetpurchases,and,becausetheyjudged thetighteninginfinancialconditionsinrecent thattheconditionslaidoutinJunehadbeenmet, months,aswellasabouttheconsiderableriskssur- theybelievedthatthecredibilityof theCommittee roundingfiscalpolicy.Moreover,theannouncement wouldbestbeservedbyannouncingadownward of areductioninassetpurchasesatthismeeting adjustmentinassetpurchasesatthismeeting.With mighttriggeranadditional,unwarrantedtightening themarketsapparentlyviewingacutinpurchasesas of financialconditions,perhapsbecausemarkets themostlikelyoutcome,itwasnotedthatthepostwouldreadsuchanannouncementassignalingthe ponementof suchanannouncementtolaterinthe Committee’swillingness,notwithstandingmixed yearorbeyondcouldhavesignificantimplications recentdata,totakeaninitialsteptowardexitfromits fortheeffectivenessof Committeecommunications. highlyaccommodativepolicy.Asaresultof such Inparticular,concernswereexpressedthatadelay concerns,anumberof participantsthoughtthatrisk- couldpotentiallyunderminethecredibilityorpremanagementconsiderationscalledforacautious dictabilityof monetarypolicyby,forexample, approachandthat,inlightof theambiguouscastof increasinguncertaintyabouttheCommittee’sreacrecentreadingsontheeconomy,itwouldbeprudent tionfunctionandaboutitscommitmenttothefortoawaitfurtherevidenceof progressbeforereducing wardguidanceforthefederalfundsrate,withthe thepaceof assetpurchases.Consistentwiththe resultof anincreaseinvolatilityinfinancialmarkets. frameworkdiscussedbytheChairmanduringthe Moreover,maintainingthepaceof purchasescould

Minutesof FederalOpenMarketCommitteeMeetings|September 221 beperceivedasasignthattheFOMChadturned of credibilityfortheeffectivenessof theforward morepessimisticabouttheeconomicoutlook. guidanceforthefederalfundsrate,participants Finally,itwasnotedthatif theCommitteedidnot notedthepossibleimplicationsof uncertainties parebackitspurchasesinthesecircumstances,it relatedtotheFederalReserveleadershiptransitionin mightbedifficulttoexplainacutincomingmonths, consideringtheappropriatetimingof anyenhanceabsentclearlystrongerdataontheeconomyanda mentstotheguidance. swiftresolutionof federalfiscaluncertainties.Most of theparticipantsleaningtowardadownward Indiscussingtheprojectionsforthetargetfederal adjustmentinthepaceof assetpurchasesalsoindi- fundsrateattheendof 2016asreportedintheSEP, catedthattheyfavoredarelativelysmallreductionto someparticipantshighlightedtheimportanceof signaltheCommittee’sintentiontoproceed communicatingtothepublicthereasonswhythe cautiously. policyratesthatwereprojectedbymost,butnotall, participantsappearedtoremainatlowlevelsevenas Withregardtoadjustmentsinthepaceof assetpur- theunemploymentrateandinflationbythenwere chases,whetheratthisorafuturemeeting,afewpar- expectedtobeclosetotheirlonger-runvalues.In ticipantsexpressedapreferencefornotcuttingMBS particular,if economicheadwindsdiedawayonly purchasesbutreducingpurchasesonlyof Treasury slowly,asanumberof participantsexpected,the securitiesinitially,withtheintentof continuingto achievementof theCommittee’semploymentand supporttherecoveryinthehousingsector.However, pricestabilityobjectiveswouldlikelyrequirekeeping theappealof includingbothtypesof securitiesin thefederalfundsratebelowitslonger-runequilibanyreductionwasalsomentioned.Inaddition,inan riumvalueforsometimeevenaseconomiccondiefforttoreduceuncertaintyabouthowtheCommit- tionsimproved.Inlightof thepotentialdifficultiesin teemightadjustitspurchasesinresponsetoeco- succinctlyconveyingthisinformationintheCommitnomicdevelopmentsandtoalleviatesomeof the tee’spolicystatement,theChairman’spostmeeting relatedcommunicationsissues,oneparticipantsug- pressconferenceandtheminuteswerementionedas gestedanapproachthatwouldmechanicallylinkthe moreappropriatevehiclesforprovidingthisinformareductioninassetpurchasestonumericalvaluesfor tion.Acoupleof participantsalsoremarkedthat theunemploymentrate,withthegoalof endingthe theyviewedtheirprojectionsof alowfederalfunds programwhentheunemploymentratereacheda ratein2016asreflectingacommitmenttosupport statedlevel. theeconomybymaintainingamoreaccommodative policyforlonger. Participantsalsodiscussedthepotentialforclarifying orstrengtheningtheCommittee’sforwardguidance Committee Policy Action forthefederalfundsrate.Totheextentthatfinancial marketshaveattimesinterpretedtheCommittee’s Committeememberssawtheinformationreceived communicationsregardingtheassetpurchasepro- overtheintermeetingperiodassuggestingthatecogramasalsosignalinginformationaboutthefederal nomicactivitywasexpandingatamoderatepace. fundsratetarget,participantsthoughtitmightbe Someindicatorsof labormarketconditionsshowed importanttoreiteratethedistinctionbetweenthe furtherimprovementinrecentmonths,buttheunemtwo,andaclarificationorstrengtheningof thefor- ploymentrateremainedelevated.Householdspendwardguidancemighthelptoreinforcethismessage. ingandbusinessfixedinvestmentadvanced,andthe Inparttowardthisend,participantsmentionedsev- housingsectorwasstrengthening,butmortgagerates eralpossiblestepsthatmightbeconsidered,includ- hadrisenfurtherandfiscalpolicywasrestraining ingstatingthattheCommitteewouldnotraiseits growth.TheCommitteeexpectedthat,withapprotargetforthefederalfundsrateif theinflationrate priatepolicyaccommodation,economicgrowth wasexpectedtorunbelowagivenlevelorproviding wouldpickupfromitsrecentpace,resultingina additionalinformationontheCommittee’sinten- gradualdeclineintheunemploymentratetowardlevtionsregardingthefederalfundsrateafterthe elsconsistentwiththeCommittee’sdualmandate. 6½percentunemploymentthresholdwasreached. Membersgenerallycontinuedtoseethedownside OneparticipantstressedthattheCommitteecould riskstotheoutlookfortheeconomyandthelabor usethefullrangeof itstools,includingforwardguid- marketashavingdiminished,onnet,sincelastfall, ance,tofurtherimprovethealignmentof the butindicatedthatthetighteningof financialcondimedium-termoutlookforemploymentandinflation tionsobservedinrecentmonths,if sustained,could withitslonger-termgoals.Inlightof theimportance slowthepaceof improvementintheeconomyand

222 100thAnnualReport|2013 labormarket.Apartfromfluctuationsduetochanges half percentagepointabovetheCommittee’s2perinenergyprices,inflationwasrunningbelowthe centlonger-rungoal,andlonger-terminflation Committee’slonger-runobjective,butlonger-term expectationscontinuetobewellanchored. inflationexpectationswerestable,andtheCommittee anticipatedthatinflationwouldmovebacktoward Membersalsodiscussedthewordingof thepolicy itsobjectiveoverthemediumterm.Membersrecog- statementtobeissuedfollowingthemeeting.Inaddinized,however,thatinflationpersistentlybelowthe tiontoupdatingitsdescriptionof thestateof the Committee’s2percentobjectivecouldposerisksto economy,theCommitteedecidedtounderlineits economicperformance. concernaboutthetighteningof financialconditions observedinrecentmonths.Italsoacknowledgedthe Intheirdiscussionof monetarypolicyfortheperiod improvementineconomicactivityandlabormarket ahead,membersreviewedthedegreeof improvement conditionssinceitsassetpurchaseprogrambegan, ineconomicactivityandlabormarketconditions whileemphasizingthatitwaspreparedtobepatient sincetheassetpurchaseprogrambeganayearago andawaitmoreevidencethatprogresswouldbesusandjudgedthat,takingintoaccounttheextentof tainedbeforeadjustingdownwardthepaceof purfederalfiscalretrenchment,theimprovementwas chases.TheCommitteealsoadoptedlanguagetothe consistentwithgrowingunderlyingstrengthinthe effectthat,injudgingwhentomoderatethepaceof broadereconomy.However,allmembersbutone assetpurchasesatitscomingmeetings,itwould judgedthatitwouldbeappropriatefortheCommit- assesswhetherincominginformationcontinuedto teetoawaitmoreevidencethatprogresswouldbe supportitsexpectationof ongoingimprovementin sustainedbeforeadjustingthepaceof assetpur- labormarketconditionsandof inflationmoving chases.Intheviewof onemember,theprogressto backtowarditslonger-runobjective.Finally,the dateinlabormarketsandinbroadereconomiccon- Committeereiteratedthecontingentnatureof the ditionsamplysupportedareductioninpurchases. outlookforassetpurchases,indicatingthatassetpur- Duringtheexchangeof viewsonwhethertotrimthe chaseswerenotonapresetcourseandthattheComflowof assetpurchasesatthismeeting,anumberof mittee’sdecisionsabouttheirpacewouldcontinueto membersemphasizedthecontingentanddata- dependonitseconomicoutlookaswellasitsassessdependentnatureof theCommittee’spurchasepro- mentof thelikelyefficacyandcostsof such gram.Inlightof themixeddatarecently,including purchases. inflationreadingsthatremainedbelowtheCommittee’slonger-runobjective,andtheconcernsover Attheconclusionof thediscussion,theCommittee near-termfiscaluncertainties,somemembersindi- votedtoauthorizeanddirecttheFederalReserve catedthattheypreferredtoawaitmoreevidencethat Bankof NewYork,untilitwasinstructedotherwise, theirexpectationof continuingimprovementwould toexecutetransactionsintheSystemAccountin berealized.Butwithfinancialmarketsappearingto accordancewiththefollowingdomesticpolicy expectareductioninpurchasesatthismeeting,con- directive: cernswereraisedabouttheeffectivenessof FOMC communicationsif theCommitteedidnottakethat “Consistentwithitsstatutorymandate,theFedstep.Forseveralmembers,thevariousconsiderations eralOpenMarketCommitteeseeksmonetary madethedecisiontomaintainanunchangedpaceof andfinancialconditionsthatwillfostermaxiassetpurchasesatthismeetingarelativelyclosecall. mumemploymentandpricestability.Inparticu- Attheconclusionof thediscussion,theCommittee lar,theCommitteeseeksconditionsinreserve decidedtocontinueaddingpolicyaccommodation marketsconsistentwithfederalfundstradingin bypurchasingadditionalMBSatapaceof $40bil- arangefrom0to¼percent.TheCommittee lionpermonthandlonger-termTreasurysecuritiesat directstheDesktoundertakeopenmarket apaceof $45billionpermonthandtomaintainits operationsasnecessarytomaintainsuchcondiexistingreinvestmentpolicies.Inaddition,theCom- tions.TheDeskisdirectedtocontinuepurchasmitteereaffirmeditsintentiontokeepthetargetfed- inglonger-termTreasurysecuritiesatapaceof eralfundsrateat0to¼percentandretaineditsfor- about$45billionpermonthandtocontinue wardguidancethatitanticipatesthatthisexception- purchasingagencymortgage-backedsecuritiesat allylowrangeforthefederalfundsratewillbe apaceof about$40billionpermonth.The appropriateatleastaslongastheunemploymentrate CommitteealsodirectstheDesktoengagein remainsabove6½percent,inflationbetweenoneand dollarrollandcouponswaptransactionsasnectwoyearsaheadisprojectedtobenomorethana essarytofacilitatesettlementof theFederal

Minutesof FederalOpenMarketCommitteeMeetings|September 223 Reserve’sagencymortgage-backedsecurities Takingintoaccounttheextentof federalfiscal transactions.TheCommitteedirectstheDeskto retrenchment,theCommitteeseestheimprovemaintainitspolicyof rollingovermaturing mentineconomicactivityandlabormarketcon- Treasurysecuritiesintonewissuesanditspolicy ditionssinceitbeganitsassetpurchaseprogram of reinvestingprincipalpaymentsonallagency ayearagoasconsistentwithgrowingunderlying debtandagencymortgage-backedsecuritiesin strengthinthebroadereconomy.However,the agencymortgage-backedsecurities.TheSystem Committeedecidedtoawaitmoreevidencethat OpenMarketAccountManagerandtheSecre- progresswillbesustainedbeforeadjustingthe tarywillkeeptheCommitteeinformedof ongo- paceof itspurchases.Accordingly,theCommitingdevelopmentsregardingtheSystem’sbal- teedecidedtocontinuepurchasingadditional ancesheetthatcouldaffecttheattainmentover agencymortgage-backedsecuritiesatapaceof timeof theCommittee’sobjectivesof maximum $40billionpermonthandlonger-termTreasury employmentandpricestability.” securitiesatapaceof $45billionpermonth. TheCommitteeismaintainingitsexistingpolicy Thevoteencompassedapprovalof thestatement of reinvestingprincipalpaymentsfromitsholdbelowtobereleasedat2:00p.m.: ingsof agencydebtandagencymortgagebackedsecuritiesinagencymortgage-backed “InformationreceivedsincetheFederalOpen securitiesandof rollingovermaturingTreasury MarketCommitteemetinJulysuggeststhat securitiesatauction.Takentogether,these economicactivityhasbeenexpandingatamod- actionsshouldmaintaindownwardpressureon eratepace.Someindicatorsof labormarketcon- longer-terminterestrates,supportmortgage ditionshaveshownfurtherimprovementin markets,andhelptomakebroaderfinancial recentmonths,buttheunemploymentrate conditionsmoreaccommodative,whichinturn remainselevated.Householdspendingandbusi- shouldpromoteastrongereconomicrecovery nessfixedinvestmentadvanced,andthehousing andhelptoensurethatinflation,overtime,isat sectorhasbeenstrengthening,butmortgage theratemostconsistentwiththeCommittee’s rateshaverisenfurtherandfiscalpolicyis dualmandate. restrainingeconomicgrowth.Apartfromfluctuationsduetochangesinenergyprices,infla- TheCommitteewillcloselymonitorincoming tionhasbeenrunningbelowtheCommittee’s informationoneconomicandfinancialdeveloplonger-runobjective,butlonger-terminflation mentsincomingmonthsandwillcontinueits expectationshaveremainedstable. purchasesof Treasuryandagencymortgagebackedsecurities,andemployitsotherpolicy Consistentwithitsstatutorymandate,theCom- toolsasappropriate,untiltheoutlookforthe mitteeseekstofostermaximumemployment labormarkethasimprovedsubstantiallyina andpricestability.TheCommitteeexpectsthat, contextof pricestability.Injudgingwhento withappropriatepolicyaccommodation,eco- moderatethepaceof assetpurchases,theComnomicgrowthwillpickupfromitsrecentpace mitteewill,atitscomingmeetings,assess andtheunemploymentratewillgradually whetherincominginformationcontinuestosupdeclinetowardlevelstheCommitteejudgescon- porttheCommittee’sexpectationof ongoing sistentwithitsdualmandate.TheCommittee improvementinlabormarketconditionsand seesthedownsideriskstotheoutlookforthe inflationmovingbacktowarditslonger-run economyandthelabormarketashavingdimin- objective.Assetpurchasesarenotonapreset ished,onnet,sincelastfall,butthetighteningof course,andtheCommittee’sdecisionsabout financialconditionsobservedinrecentmonths, theirpacewillremaincontingentontheComif sustained,couldslowthepaceof improve- mittee’seconomicoutlookaswellasitsassessmentintheeconomyandlabormarket.The mentof thelikelyefficacyandcostsof such Committeerecognizesthatinflationpersistently purchases. belowits2percentobjectivecouldposerisksto economicperformance,butitanticipatesthat Tosupportcontinuedprogresstowardmaxiinflationwillmovebacktowarditsobjective mumemploymentandpricestability,theComoverthemediumterm. mitteetodayreaffirmeditsviewthatahighly

224 100thAnnualReport|2013 accommodativestanceof monetarypolicywill Votingagainstthisaction:EstherL.George. remainappropriateforaconsiderabletimeafter theassetpurchaseprogramendsandtheeco- Ms.Georgedissentedbecauseshesawrecentinfornomicrecoverystrengthens.Inparticular,the mationontheeconomyassufficientlypositiveto Committeedecidedtokeepthetargetrangefor warrantareductioninthepaceof theCommittee’s thefederalfundsrateat0to¼percentandcur- assetpurchasesatthismeeting.Inherview,waiting rentlyanticipatesthatthisexceptionallylow formoreevidenceof progressdiscountedthecumurangeforthefederalfundsratewillbeappropri- lativeimprovementintheeconomyaswellasthe ateatleastaslongastheunemploymentrate potentialcostsof ongoingpurchases.Accordingly, remainsabove6½percent,inflationbetweenone notonlywouldareductionbeappropriateinlightof andtwoyearsaheadisprojectedtobenomore theongoingimprovementinlabormarketconditions, thanahalf percentagepointabovetheCommit- butitalsowouldsupportthecredibilityandpredicttee’s2percentlonger-rungoal,andlonger-term abilityof monetarypolicybecauseitwouldbeseen inflationexpectationscontinuetobewell asfollowingthroughontheCommittee’searliercomanchored.Indetermininghowlongtomaintain municationsabouttheoutlookfortheassetpurchase ahighlyaccommodativestanceof monetary program. policy,theCommitteewillalsoconsiderother information,includingadditionalmeasuresof Itwasagreedthatthenextmeetingof theCommittee labormarketconditions,indicatorsof inflation wouldbeheldonTuesday–Wednesday,October29– pressuresandinflationexpectations,andread- 30,2013.Themeetingadjournedat11:15a.m.on ingsonfinancialdevelopments.WhentheCom- September18,2013. mitteedecidestobegintoremovepolicyaccommodation,itwilltakeabalancedapproachcon- Notation Vote sistentwithitslonger-rungoalsof maximum employmentandinflationof 2percent.” BynotationvotecompletedonAugust20,2013,the Committeeunanimouslyapprovedtheminutesof the Votingforthisaction:BenBernanke,WilliamC. FOMCmeetingheldonJuly30–31,2013. Dudley,JamesBullard,CharlesL.Evans,JeromeH. Powell,EricRosengren,JeremyC.Stein,DanielK. WilliamB.English Tarullo,andJanetL.Yellen. Secretary

Minutesof FederalOpenMarketCommitteeMeetings|September 225 Addendum: (table1andfigure1).Almostallof theparticipants projectedthatinflation,asmeasuredbytheannual Summary of Economic Projections changeinthepriceindexforpersonalconsumption expenditures(PCE),wouldrisetoalevelatorsome- InconjunctionwiththeSeptember17–18,2013,FedwhatbelowtheCommittee’s2percentobjectivein eralOpenMarketCommittee(FOMC)meeting, 2016. meetingparticipants—5membersof theBoardof Governorsandthe12presidentsof theFederal Mostparticipantsjudgedthathighlyaccommodative ReserveBanks,allof whomparticipatedinthedelibmonetarypolicywaslikelytoremainwarrantedover erations—submittedtheirassessmentsof realoutput thenextfewyearstosupportcontinuedprogress growth,theunemploymentrate,inflation,andthe towardmaximumemploymentandareturnto2pertargetfederalfundsrateforeachyearfrom2013 centinflation.Asshowninfigure2,alargemajority through2016andoverthelongerrun.Eachparticiof participantsjudgednotonlythatitwouldbe pant’sassessmentwasbasedoninformationavailable appropriatetowaituntil2015orlaterbeforebeginatthetimeof themeetingplushisorherjudgmentof ningtoincreasethefederalfundsrate,butalsothatit appropriatemonetarypolicyandassumptionsabout wouldthenbeappropriatetoraisethefederalfunds thefactorslikelytoaffecteconomicoutcomes.The ratetargetrelativelygradually.Mostparticipants longer-runprojectionsrepresenteachparticipant’s viewedtheireconomicprojectionsasbroadlyconsisjudgmentof thevaluetowhicheachvariablewould tentwithaslowinginthepaceof theCommittee’s beexpectedtoconverge,overtime,underappropriate purchasesof longer-termsecuritiesthisyearandthe monetarypolicyandintheabsenceof furthershocks completionof theprograminmid-2014. totheeconomy.“Appropriatemonetarypolicy”is definedasthefuturepathof policythateachpartici- Mostparticipantssawtheuncertaintyassociated pantdeemsmostlikelytofosteroutcomesforecowiththeiroutlookforeconomicgrowth,theunemnomicactivityandinflationthatbestsatisfyhisor ploymentrate,andinflationassimilartothatof the herindividualinterpretationof theFederalReserve’s past20years.Inaddition,mostparticipantsconsidobjectivesof maximumemploymentandstable eredtheriskstotheoutlookfortheunemployment prices. rateandinflationasbroadlybalanced.Aslimmajorityof theparticipantsalsojudgedthattherisksto Overall,FOMCparticipantsexpected,underapprotheoutlookforrealgrossdomesticproduct(GDP) priatemonetarypolicy,apickupineconomicgrowth, growthwerebroadlybalanced,whilenearlyasmany withtheunemploymentratedeclininggradually Table1.EconomicprojectionsofFederalReserveBoardmembersandFederalReserveBankpresidents,September2013 Percent Centraltendency1 Range2 Variable 2013 2014 2015 2016 Longerrun 2013 2014 2015 2016 Longerrun ChangeinrealGDP 2.0to2.3 2.9to3.1 3.0to3.5 2.5to3.3 2.2to2.5 1.8to2.4 2.2to3.3 2.2to3.7 2.2to3.5 2.1to2.5 Juneprojection 2.3to2.6 3.0to3.5 2.9to3.6 n.a. 2.3to2.5 2.0to2.6 2.2to3.6 2.3to3.8 n.a. 2.0to3.0 Unemploymentrate 7.1to7.3 6.4to6.8 5.9to6.2 5.4to5.9 5.2to5.8 6.9to7.3 6.2to6.9 5.3to6.3 5.2to6.0 5.2to6.0 Juneprojection 7.2to7.3 6.5to6.8 5.8to6.2 n.a. 5.2to6.0 6.9to7.5 6.2to6.9 5.7to6.4 n.a. 5.0to6.0 PCEinflation 1.1to1.2 1.3to1.8 1.6to2.0 1.7to2.0 2.0 1.0to1.3 1.2to2.0 1.4to2.3 1.5to2.3 2.0 Juneprojection 0.8to1.2 1.4to2.0 1.6to2.0 n.a. 2.0 0.8to1.5 1.4to2.0 1.6to2.3 n.a. 2.0 CorePCEinflation3 1.2to1.3 1.5to1.7 1.7to2.0 1.9to2.0 1.2to1.4 1.4to2.0 1.6to2.3 1.7to2.3 Juneprojection 1.2to1.3 1.5to1.8 1.7to2.0 n.a. 1.1to1.5 1.5to2.0 1.7to2.3 n.a. Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andprojectionsforbothmeasuresofinflationarefromthefourthquarterofthepreviousyeartothefourth quarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures (PCE)andthepriceindexforPCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarterofthe yearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’s assessmentoftheratetowhicheachvariablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.TheJune projectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonJune18–19,2013. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

226 100thAnnualReport|2013 Figure1.Centraltendenciesandrangesofeconomicprojections,2013–16andoverthelongerrun Percent Change in real GDP 5 Central tendency of projections 4 Range of projections 3 2 1 + Actual 0 - 1 2 3 2008 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Percent Unemployment rate 10 9 8 7 6 5 2008 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Percent PCE inflation 3 2 1 2008 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Percent Core PCE inflation 3 2 1 2008 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Note:Definitionsofvariablesareinthegeneralnotetotable1.Thedatafortheactualvaluesofthevariablesareannual.

Minutesof FederalOpenMarketCommitteeMeetings|September 227 Figure2.OverviewofFOMCparticipants’assessmentsofappropriatemonetarypolicy Number of participants Appropriate timing of policy firming 12 12 11 10 9 8 7 6 5 4 3 3 2 2 1 2014 2015 2016 Appropriate pace of policy firming Percent Target federal funds rate at year-end 6 5 4 3 2 1 0 2013 2014 2015 2016 Longer run Note:Intheupperpanel,theheightofeachbardenotesthenumberofFOMCparticipantswhojudgethat,underappropriatemonetarypolicy,thefirstincreaseinthetargetfederalfundsratefromitscurrentrangeof0to¼percentwilloccurinthespecifiedcalendaryear.InJune2013,thenumbersofFOMCparticipantswhojudgedthatthefirst increaseinthetargetfederalfundsratewouldoccurin2013,2014,2015,and2016were,respectively,1,3,14,and1.Inthelowerpanel,eachshadedcircleindicatesthe value(roundedtothenearest¼percentagepoint)ofanindividualparticipant’sjudgmentoftheappropriatelevelofthetargetfederalfundsrateattheendofthespecifiedcalendaryearoroverthelongerrun.

228 100thAnnualReport|2013 indicatedthattheriskswereweightedtothe remaineddispersed.Thisdiversityreflectedtheir downside. individualassessmentsof thelikelyrateof improvementinthehousingsectorandinhouseholdbalance The Outlook for Economic Activity sheets,thedomesticimplicationsof foreigneconomic developments,theprospectivepathforU.S.fiscal Participantsgenerallyprojectedthat,conditionalon policy,thelikelyevolutionof financialconditions, theirindividualassumptionsaboutappropriatemon- andanumberof otherfactors.RelativetoJune,the etarypolicy,realGDPgrowthwouldbesimilarin dispersionsof participants’projectionsforGDP 2013toitsratein2012andwouldincreaseinthe growthin2014and2015narrowedtosomeextent, 2014–16periodtoapaceabovewhatparticipants whilethedispersionsof projectionsfortheunemsawasthelonger-runrateof outputgrowth.Many ploymentrateinthoseyearsgenerallywidenedabit. participantspointedtodiminishingrestraintfrom fiscalpolicy,pent-updemandforconsumerandpro- The Outlook for Inflation ducerdurables,orrisinghouseholdnetworthascontributingtothepickupingrowth.Inaddition,a Participants’viewsonthebroadoutlookforinflation numberof participantsnotedcontinuedimprove- undertheassumptionof appropriatemonetary mentinthehousingsector,supportedbyrising policywerelittlechangedfromJune.Althoughmost employmentandincomeandbyimprovedcredit participantsrevisedupslightlytheirprojectionfor availability. PCEinflationin2013,anumberof participants reviseddownabittheirforecastsfor2014.Allpar- Thecentraltendenciesof participants’projections ticipantsanticipatedthatbothheadlineandcore forrealGDPgrowthwere2.0to2.3percentin2013, inflationwouldrisegraduallyoverthenextfewyears, 2.9to3.1percentin2014,3.0to3.5percentin2015, andalmostallparticipantsexpectedinflationtobeat and2.5to3.3percentin2016.Ingeneral,partici- orsomewhatbelowtheCommittee’s2percentobjecpants’projectionsforgrowthin2013,2014,and,toa tivein2016.Specifically,thecentraltendenciesfor lesserextent,2015werebelowthosecollectedinJune. PCEinflationwere1.1to1.2percentin2013,1.3to Mostparticipantsattributedthedownwardrevisions 1.8percentin2014,1.6to2.0percentin2015,and totheirprojectionsin2013and2014inpartto 1.7to2.0percentin2016.Thecentraltendenciesof weaker-than-expectedincomingdata,whilesome theforecastsforcoreinflationwerelittlechanged participantspointedtotighterfinancialconditions. fromJuneandbroadlysimilartothoseforthehead- Thecentraltendencyforthelonger-runrateof linemeasureovertheprojectionperiod.Anumberof growthof realGDPwas2.2to2.5percent,little participantsviewedthecombinationof stableinflachangedfromJune. tionexpectationsanddiminishingresourceslackas importantfactorsleadingtoagradualpickupin Participantsanticipatedagradualdeclineinthe inflationtowardtheCommittee’slonger-run unemploymentrateovertheprojectionperiod.The objective. centraltendenciesof participants’forecastsforthe unemploymentrateinthefourthquarterof each Figures3.Cand3.Dprovideinformationonthe yearwere7.1to7.3percentin2013,6.4to6.8per- diversityof participants’viewsabouttheoutlookfor centin2014,5.9to6.2percentin2015,and5.4to inflation.Therangesof participants’projectionsfor 5.9percentin2016.Theseprojectionswerelittle overallinflationin2014and2015widenedslightly changedfromJune.Thecentraltendencyof partici- fromJuneandwere1.2to2.0percentin2014and pants’estimatesof thelonger-runnormalrateof 1.4to2.3percentin2015.In2016,theforecastsfor unemploymentthatwouldprevailunderappropriate PCEinflationwereconcentratedneartheCommitmonetarypolicyandintheabsenceof furthershocks tee’slonger-runobjective,thoughoneparticipant totheeconomywas5.2to5.8percent.Amajorityof expectedinflationtobenoticeablyabovetheComparticipantsprojectedthattheunemploymentrate mittee’sobjectiveandanotherexpectedittobe wouldbenearorslightlyabovetheirindividualesti- ½percentagepointbelow.Similartotheprojections matesof itslonger-runlevelattheendof 2016. forheadlineinflation,theprojectionsforcoreinflationbecamemoreconcentratednearthe2percent Figures3.Aand3.Bshowthatparticipants’views objectivein2016thaninearlieryears;however,the regardingthelikelyoutcomesforrealGDPgrowth dispersionof theprojectionsforcoreinflationin andtheunemploymentratein2014and2015 eachyearwaslowerthanforheadlineinflation.

Minutesof FederalOpenMarketCommitteeMeetings|September 229 Figure3.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2013–16andoverthelongerrun Number of participants 2013 20 September projections 18 16 June projections 14 12 10 8 6 4 2 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 3.2 - 3.4 - 3.6 - 3.8 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 3.2 - 3.4 - 3.6 - 3.8 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 3.2 - 3.4 - 3.6 - 3.8 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 Percent range Number of participants 2016 20 18 16 14 12 10 8 6 4 2 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 3.2 - 3.4 - 3.6 - 3.8 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 3.2 - 3.4 - 3.6 - 3.8 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

230 100thAnnualReport|2013 Figure3.B.Distributionofparticipants’projectionsfortheunemploymentrate,2013–16andoverthelongerrun Number of participants 2013 20 September projections 18 16 June projections 14 12 10 8 6 4 2 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 6.0 - 6.2 - 6.4 - 6.6 - 6.8 - 7.0 - 7.2 - 7.4 - 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 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 - 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 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 - 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 Percent range Number of participants 2016 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 - 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 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 - 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 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|September 231 Figure3.C.Distributionofparticipants’projectionsforPCEinflation,2013–16andoverthelongerrun Number of participants 2013 20 September projections 18 16 June projections 14 12 10 8 6 4 2 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.8 1.0 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 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.8 1.0 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 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2016 20 18 16 14 12 10 8 6 4 2 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.8 1.0 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 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

232 100thAnnualReport|2013 Figure3.D.Distributionofparticipants’projectionsforcorePCEinflation,2013–16 Number of participants 2013 20 September projections 18 June 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 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 2016 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|September 233 Appropriate Monetary Policy of thefederalfundsrateattheendof 2016would stillbebelowtheirindividualassessmentof its Asindicatedinfigure2,mostparticipantsjudged expectedlonger-runvalue.Incontrast,thethreeparthatexceptionallylowlevelsof thefederalfundsrate ticipantswhosawthefirsttighteningin2014believed wouldremainappropriateforthenextfewyears.In thattheappropriatelevelof thefederalfundsrateat particular,12participantsthoughtthatthefirst theendof 2016wouldbeattheirassessmentof its increaseinthetargetfederalfundsratewouldnotbe longer-runlevel,whichtheyviewedaseitherator warranteduntilsometimein2015,andtwojudged justabove4percent.Amongallparticipants,estithatpolicyfirmingwouldlikelynotbeappropriate matesof thelonger-runtargetfederalfundsrate until2016.Threeparticipantsjudgedthatanincrease rangedfrom3¼toabout4¼percent,reflectingthe inthefederalfundsratein2014wouldbe Committee’sinflationobjectiveof 2percentandparappropriate. ticipants’individualjudgmentsabouttheappropriate longer-runlevelof therealfederalfundsrateinthe Allparticipantsprojectedthattheunemployment absenceof furthershockstotheeconomy. ratewouldbebelowtheCommittee’s6½percent thresholdattheendof theyearinwhichtheyviewed Participantsalsodescribedtheirviewsregardingthe theinitialincreaseinthefederalfundsratetobe appropriatepathof theFederalReserve’sbalance appropriate,andallbutonejudgedthatinflation sheet.ConditionalontheirrespectiveeconomicoutwouldbeatorbelowtheCommittee’slonger-run looks,mostparticipantsjudgedthatitwouldlikely objective.Almostallparticipantsprojectedthatthe beappropriatetobegintoreducethepaceof the unemploymentratewouldstillbeabovetheirviewof Committee’spurchasesof longer-termsecuritiesthis itslonger-runlevelattheendof theyearinwhich yearandtoconcludepurchasesinthemiddleof theysawthefederalfundsrateincreasingfromthe 2014.Acoupleof participantsthoughtitappropriate effectivelowerbound. forthefirstreductioninthepaceof assetpurchases tooccurlater,andanotherspecifiedthatpurchases Figure3.Eprovidesthedistributionof participants’ likelywouldcontinuepastmidyear2014;incontrast, judgmentsregardingtheappropriatelevelof thetaracoupleof participantsthoughtthattheprogram getfederalfundsrateattheendof eachcalendaryear shouldbeendedconsiderablysoonerthanthemiddle from2013to2016andoverthelongerrun.Asnoted of nextyear. above,mostparticipantsjudgedthateconomicconditionswouldwarrantmaintainingthecurrentlow Participants’viewsof theappropriatepathformonlevelof thefederalfundsrateuntil2015.Amongthe etarypolicywereinformedbytheirjudgmentsonthe threeparticipantswhosawthefederalfundsrate stateof theeconomy,includingthevaluesof the leavingtheeffectivelowerboundearlier,projections unemploymentrateandotherlabormarketindicaforthefederalfundsrateattheendof 2014ranged torsthatwouldbeconsistentwithmaximumemployfrom1to1¼percent.Thesethreeparticipants ment,theextenttowhichtheeconomywascurrently viewedtheappropriatelevelof thefederalfundsrate fallingshortof maximumemployment,theprospects as3percentorhigherattheendof 2015,whilethe forinflationtoreachtheCommittee’slonger-term remainderof participantssawtheappropriatelevel objectiveof 2percent,andthebalanceof risks of thefundsrateas1½percentorlower.Onbalance, aroundtheoutlook.Someparticipantsalsomenthedispersionof participants’projectionsforthe tionedtheusefulnessof examiningtheimplications appropriatefederalfundsrateattheendof 2015widof alternativepolicystrategiesforreturningemployenedabitfromJune,whilethemedianvalueof the mentandinflationtomandate-consistentlevelsover ratewasunchanged. themediumterm. Allof theparticipantswhosawthefirsttighteningin either2015or2016judgedthattheappropriatelevel

234 100thAnnualReport|2013 Figure3.E.Distributionofparticipants’projectionsforthetargetfederalfundsrate,2013–16andoverthelongerrun Number of participants 2013 20 September projections 18 June projections 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 2016 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|September 235 Uncertainty and Risks Table2.Averagehistoricalprojectionerrorranges Percentagepoints Mostparticipantsjudgedthatthelevelsof uncertaintyabouttheirprojectionsforrealGDPgrowth Variable 2013 2014 2015 2016 andunemploymentwerebroadlysimilartothenorm duringtheprevious20years,althoughfourpartici- ChangeinrealGDP1 ±0.9 ±1.5 ±1.8 ±1.9 Unemploymentrate1 ±0.3 ±1.0 ±1.6 ±1.9 pantscontinuedtoseethemashigher(figure4).2The Totalconsumerprices2 ±0.8 ±1.0 ±1.1 ±1.1 numberof participantswhoviewedtherisksaround theirGDPprojectionsasweightedtothedownside Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared errorofprojectionsfor1993through2012thatwerereleasedinthefallby wasnearlyequaltothenumberwhoviewedthemas variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast broadlybalanced.Mostparticipantssawtherisks Uncertainty,”undercertainassumptions,thereisabouta70percentprobability thatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein aroundtheirunemploymentprojectionsasbroadly rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Further balanced.Themainfactorscitedascontributingto informationmaybefoundinDavidReifschneiderandPeterTulip(2007),“Gauging theUncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,” theuncertaintyandbalanceof risksaroundeco- FinanceandEconomicsDiscussionSeries2007-60(Washington:Boardof nomicoutcomeswerethelimitsontheabilityof GovernorsoftheFederalReserveSystem,November). 1 Definitionsofvariablesareinthegeneralnotetotable1. monetarypolicyatthezerolowerboundtorespond 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen toadverseshocks,aswellaschallengesassociated mostwidelyusedingovernmentandprivateeconomicforecasts.Projection withforecastingthepathof fiscalpolicyanddevel- ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof theyearindicated. opmentsabroad.Inaddition,someparticipants pointedtothetighteninginfinancialconditionsin recentmonthsandthepossibilityof heightenedvolatilityinfinancialmarkets,whileotherspointedto levelsof uncertaintyassociatedwiththeirforecasts risksassociatedwithstructuralchangesaffectingproforthoseinflationmeasurestobebroadlysimilarto ductivitygrowthandlabormarkets. historicalnorms;thesamenumbersawtherisksto thoseprojectionsasbroadlybalanced.Fivepartici- Participantsreportedlittlechangeintheirassesspantssawtheriskstotheirinflationforecastsas mentsof thelevelof uncertaintyandthebalanceof tiltedtothedownside,reflecting,forexample,the risksaroundtheirforecastsforoverallPCEinflation possibilitythatthecurrentlowlevelsof inflation andcoreinflation.Elevenparticipantsjudgedthe couldpersistandbecomeembeddedininflation expectations.Conversely,acoupleof participants 2 Table2providesestimatesoftheforecastuncertaintyforthe citedupsideriskstoinflationstemmingfromthecurchangeinrealGDP,theunemploymentrate,andtotalconsumerpriceinflationovertheperiodfrom1993through2012. renthighlyaccommodativestanceof monetary Attheendofthissummary,thebox“ForecastUncertainty” policyorconcernsabouttheCommittee’sabilityto discussesthesourcesandinterpretationofuncertaintyinthe shifttoalessaccommodativepolicystancewhenit economicforecastsandexplainstheapproachusedtoassessthe uncertaintyandrisksattendingtheparticipants’projections. becomesappropriatetodoso.

236 100thAnnualReport|2013 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.

Minutesof FederalOpenMarketCommitteeMeetings|September 237 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers year.Thecorresponding70percentconfidenceinteroftheBoardofGovernorsandthepresidentsofthe valsforoverallinflationwouldbe1.2to2.8percentin FederalReserveBanksinformdiscussionsofmon- thecurrentyear,1.0to3.0percentinthesecond etarypolicyamongpolicymakersandcanaidpublic year,and0.9to3.1percentinthethirdandfourth understandingofthebasisforpolicyactions.Con- years. 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 rangeof2.1to3.9percentinthecurrentyear,1.5to pointforward. 4.5percentinthesecondyear,1.2to4.8percentin thethirdyear,and1.1to4.9percentinthefourth

238 100thAnnualReport|2013 Meeting Held StevenB.Kamin Economist on October 29–30, 2013 DavidW.Wilcox Ameetingof theFederalOpenMarketCommittee Economist washeldintheofficesof theBoardof Governorsof ThomasA.Connors,MichaelP.Leahy,StephenA. theFederalReserveSysteminWashington,D.C.,on Meyer,DanielG.Sullivan,ChristopherJ.Waller, Tuesday,October29,2013,at1:00p.m.andcontinandWilliamWascher uedonWednesday,October30,2013,at9:00a.m. AssociateEconomists Present SimonPotter Manager,SystemOpenMarketAccount BenBernanke MichaelS.Gibson Chairman Director,Divisionof BankingSupervisionand WilliamC.Dudley Regulation,Boardof Governors ViceChairman JamesA.Clouse JamesBullard DeputyDirector,Divisionof MonetaryAffairs, Boardof Governors CharlesL.Evans JonW.Faust EstherL.George SpecialAdvisertotheBoard,Officeof Board JeromeH.Powell Members,Boardof Governors EricRosengren LindaRobertson AssistanttotheBoard,Officeof BoardMembers, JeremyC.Stein Boardof Governors DanielK.Tarullo TrevorA.Reeve JanetL.Yellen SeniorAssociateDirector, Divisionof International Finance,Boardof Governors RichardW.Fisher,NarayanaKocherlakota, SandraPianalto,andCharlesI.Plosser EllenE.MeadeandJoyceK.Zickler AlternateMembersof theFederalOpenMarket SeniorAdvisers,Divisionof MonetaryAffairs, Committee Boardof Governors JeffreyM.Lacker,DennisP.Lockhart, EricM.Engen,MichaelT.Kiley, andJohnC.Williams ThomasLaubach,andDavidE.Lebow Presidentsof theFederalReserveBanksof AssociateDirectors,Divisionof Researchand Richmond,Atlanta,andSanFrancisco,respectively Statistics,Boardof Governors WilliamB.English MarnieGillisDeBoer SecretaryandEconomist DeputyAssociateDirector,Divisionof Monetary Affairs,Boardof Governors DeborahJ.Danker DeputySecretary RochelleM.Edge AssistantDirector,Officeof FinancialStabilityPolicy MatthewM.Luecke andResearch,Boardof Governors AssistantSecretary EricEngstrom DavidW.Skidmore SectionChief,Divisionof ResearchandStatistics, AssistantSecretary Boardof Governors MichelleA.Smith DavidH.Small AssistantSecretary ProjectManager,Divisionof MonetaryAffairs, ScottG.Alvarez Boardof Governors GeneralCounsel MarkA.Carlson ThomasC.Baxter SeniorEconomist,Divisionof MonetaryAffairs, DeputyGeneralCounsel Boardof Governors

Minutesof FederalOpenMarketCommitteeMeetings|October 239 RobertJ.Tetlow oppositiontoswaplineswithforeigncentralbanksin SeniorEconomist,Divisionof Researchand generalorquestioningthegovernanceimplicationsof Statistics,Boardof Governors thesestandingarrangementsinparticular.Following thediscussion,theCommitteeunanimously BlakePrichard approvedthefollowingresolution: FirstVicePresident,FederalReserveBankof Philadelphia “TheFederalOpenMarketCommitteedirects DavidAltig,GlennD.Rudebusch, theFederalReserveBankof NewYorktoconandMarkS.Sniderman verttheexistingtemporarydollarliquidityswap ExecutiveVicePresidents,FederalReserveBanksof arrangementswiththeBankof Canada,the Atlanta,SanFrancisco,andCleveland,respectively Bankof England,theBankof Japan,theEuropeanCentralBank,andtheSwissNational CraigS.Hakkio,EvanF.Koenig, Banktostandingfacilities,withthemodifica- LorieK.Logan,andKei-MuYi tionsapprovedbytheCommittee.Inaddition, SeniorVicePresidents,FederalReserveBanksof theFederalOpenMarketCommitteedirectsthe KansasCity,Dallas,NewYork,andMinneapolis, FederalReserveBankof NewYorktoconvert respectively theexistingtemporaryforeigncurrencyliquidity AnnaNordstromandGiovanniOlivei swaparrangementswiththeBankof Canada, VicePresidents,FederalReserveBanksof NewYork theBankof England,theBankof Japan,the andBoston,respectively EuropeanCentralBank,andtheSwissNational Banktostandingfacilities,alsowiththemodifi- ArgiaM.Sbordone cationsapprovedbytheCommittee. AssistantVicePresident,FederalReserveBankof NewYork Drawingsonthedollarandforeigncurrency AndreasL.Hornstein liquidityswaplineswillbeapprovedbythe SeniorAdvisor,FederalReserveBankof Richmond ChairmaninconsultationwiththeForeignCur- SatyajitChatterjee rencySubcommittee.TheForeignCurrency SeniorEconomicAdvisor,FederalReserveBankof SubcommitteewillconsultwiththeFederal Philadelphia OpenMarketCommitteepriortotheinitial drawingonthedollarorforeigncurrencyliquid- Developments in Financial Markets and ityswaplinesif possibleunderthecircumthe Federal Reserve’s Balance Sheet stancesthenprevailing;authoritytoapprove subsequentdrawingsof amoreroutinecharac- TheManagerof theSystemOpenMarketAccount terforeitherthedollarorforeigncurrency reportedondevelopmentsindomesticandforeign liquidityswaplinesmaybedelegatedtothe financialmarketsaswellasSystemopenmarket Manager,inconsultationwiththeChairman. operations,includingtheprogressof theovernight reverserepurchaseagreementoperationalexercise, TheChairmanmaychangetheratesandfeeson duringtheperiodsincetheFederalOpenMarket theswaparrangementsbymutualagreement Committee(FOMC)metonSeptember17–18,2013. withtheforeigncentralbanksandinconsulta- Byunanimousvote,theCommitteeratifiedthe tionwiththeForeignCurrencySubcommittee. Desk’sdomestictransactionsovertheintermeeting TheChairmanshallkeeptheFederalOpenMarperiod.Therewerenointerventionoperationsinfor- ketCommitteeinformedof anychangesinrates eigncurrenciesfortheSystem’saccountoverthe orfees,andtheratesandfeesshallbeconsistent intermeetingperiod. withprinciplesdiscussedwithandguidanceprovidedbytheCommittee.” TheCommitteeconsideredaproposaltoconvertthe existingtemporarycentralbankliquidityswap Staff Review of the Economic Situation arrangementstostandingarrangementswithnopresetexpirationdates.TheManagerdescribedthepro- Ingeneral,thedataavailableatthetimeof theOctoposedarrangements,notingthattheCommittee ber29–30meetingsuggestedthateconomicactivity wouldstillbeaskedtoreviewparticipationinthe continuedtoriseatamoderatepace;thesetof inforarrangementsannually.Acoupleof participants mationreviewedforthismeeting,however,was expressedreservationsabouttheproposal,citing reducedsomewhatbydelaysinselectedstatistical

240 100thAnnualReport|2013 releasesassociatedwiththepartialshutdownof the Startsandpermitsof newsingle-familyhomes federalgovernmentearlierinthemonth.Inthelabor increasedinAugust,butstartsandpermitsof multimarket,totalpayrollemploymentincreasedfurtherin familyunitsdeclined.Afterfallingsignificantlyin September,buttheunemploymentratewasstillhigh. July,salesof newhomesincreasedinAugust,but Consumerpriceinflationcontinuedtobemodest, existinghomesalesdecreased,onbalance,inAugust andmeasuresof longer-runinflationexpectations andSeptember,andpendinghomesalesalso remainedstable. contracted. PrivatenonfarmemploymentroseinSeptemberbut Growthinrealprivateexpendituresforbusiness ataslowerpacethaninthepreviousmonth,while equipmentandintellectualpropertyproducts totalgovernmentemploymentincreasedatasolid appearedtobetepidinthethirdquarter.Nominal rate.Theunemploymentrateedgeddownto7.2per- shipmentsof nondefensecapitalgoodsexcludingaircentinSeptember;boththelaborforceparticipation craftrosemodestly,onbalance,inAugustandSeprateandtheemployment-to-populationratiowere temberafterdeclininginJuly.However,nominalnew unchanged.Otherrecentindicatorsof labormarket ordersforthesecapitalgoodscontinuedtobeabove activityweremixed.Measuresof firms’hiringplans thelevelof shipments,pointingtoincreasesinshipimproved,therateof jobopeningsincreasedslightly, mentsinsubsequentmonths,andotherforwardandtherateof long-durationunemployment lookingindicators,suchassurveysof businesscondideclinedalittle.However,householdexpectationsof tions,wereconsistentwithsomegainsinbusiness thelabormarketsituationdeterioratedsomewhat, equipmentspendinginthenearterm.Nominalbusitherateof grossprivate-sectorhiringremainedflat, nessexpendituresfornonresidentialconstruction andtheshareof workersemployedparttimeforeco- wereessentiallyunchangedinAugust.Recentbooknomicreasonswasessentiallyunchangedandcontin- valuedataforinventory-to-salesratios,alongwith uedtobeelevated.Inaddition,initialclaimsfor readingsoninventoriesfromnationalandregional unemploymentinsuranceroseinthefirstfewweeks manufacturingsurveys,didnotpointtonotable of October,likelyreflecting,inpart,somespillover inventoryimbalances. effectsfromthegovernmentshutdown. Realfederalgovernmentpurchaseslikelydeclinedas Manufacturingproductionexpandedmodestlyin federalemploymentedgeddownfurtherinSeptem- September,butoutputwasflatoutsideof themotor berandmanyfederalemployeesweretemporarily vehiclesectorandtherateof totalmanufacturing furloughedduringthepartialgovernmentshutdown capacityutilizationwasunchanged.Automakers’ inOctober.Realstateandlocalgovernmentpurschedulesindicatedthatthepaceof lightmotor chases,however,appearedtoincrease;thepayrollsof vehicleassemblieswouldbeslightlylowerinthecom- thesegovernmentsexpandedbrisklyinSeptember, ingmonths,butbroaderindicatorsof manufacturing andnominalstateandlocalconstructionexpendiproduction,suchasthereadingsonnewordersfrom turesroseinAugust. thenationalandregionalmanufacturingsurveys, pointedtofurthergainsinfactoryoutputinthenear TheU.S.internationaltradedeficitremainedabout term. unchangedinAugust,asbothexportsandimports wereflat. Realpersonalconsumptionexpenditures(PCE)rose moderatelyinAugust.InSeptember,nominalretail Availablemeasuresof totalU.S.consumerprices— sales,excludingthoseatmotorvehicleandpartsout- thePCEpriceindexforAugustandtheconsumer lets,increasedsignificantly,whilesalesof lightmotor priceindexforSeptember—increasedmodestly,as vehiclesdeclined.Recentreadingsonkeyfactorsthat didthecoremeasures,whichexcludepricesof food influenceconsumerspendingweresomewhatmixed: andenergy.Bothnear-andlonger-terminflation Households’networthlikelyexpandedfurtheras expectationsfromtheThomsonReuters/University bothequityvaluesandhomepricesroseinrecent of MichiganSurveysof Consumerswerelittle months,andrealdisposableincomesincreasedsolidly changed,onbalance,inSeptemberandOctober. inAugust,butmeasuresof consumersentiment Nominalaveragehourlyearningsforallemployees declinedinSeptemberandOctober. increasedslowlyinSeptember. Therecoveryinthehousingsectorappearedtocon- Foreigneconomicgrowthappearedtoimproveinthe tinue,althoughrecentdatainthissectorwerelimited. thirdquarterfollowingasluggishfirsthalf,largely

Minutesof FederalOpenMarketCommitteeMeetings|October 241 reflectingstrongergrowthestimatedforChinaanda alsoreflectedinotherlonger-termrates,suchas reboundinMexicofromcontractionintheprevious thoseonagencymortgage-backedsecurities(MBS) quarter.Growthalsopickedupinthethirdquarterin andcorporatesecurities. theUnitedKingdom,andavailableindicatorssuggestedanincreaseingrowthinCanadaandcontin- Short-termfundingmarketswereadverselyaffected uedmildrecoveryintheeuroarea.Economicactivity foratimebyconcernsaboutpotentialdelaysinraisinJapanappearedtohavedeceleratedsomewhat ingthefederaldebtlimit.TheTreasurybillmarket fromitsfirst-half pacebutcontinuedtoexpand,and wasparticularlyaffectedasyieldsonbillsmaturing inflationmeasuredona12-monthbasisturnedposi- betweenmid-OctoberandearlyNovemberrose tiveinthemiddleof thisyear.Inflationelsewhere sharplyandsomebillauctionssawreduceddemand. generallyremainedsubdued.Monetarypolicystayed Conditionsinothershort-termmarkets,suchasthe highlyaccommodativeinadvancedforeignecono- marketforrepurchaseagreements,werealsostrained. mies.Inaddition,theBankof Mexicocontinuedto However,theseeffectseasedquicklyafteranagreeeasemonetarypolicy,citingconcernsaboutthe menttoraisethedebtlimitwasreachedin strengthof theeconomy,butcentralbanksincertain mid-October. otheremergingmarketeconomies,includingBrazil andIndia,tightenedpolicyandintervenedincur- Creditflowstononfinancialbusinessesappearedto rencymarketsinresponsetoconcernsaboutthe slowsomewhatduringthefiscalstandoff amid potentialeffectof currencydepreciationoninflation. increasedmarketvolatility;however,accesstocredit generallyremainedampleforlargefirms.Grossissu- Staff Review of the Financial Situation anceof nonfinancialcorporatebondsandcommercialpaper,whichhadbeenparticularlystronginSep- Onbalanceovertheintermeetingperiod,longer-term tember,slowedabitinOctober.InSeptember,leverinterestratesdeclinedandequitypricesrose,largely agedloanissuancewasalsorobust.Commercialand inresponsetoexpectationsformore-accommodative industrial(C&I)loansatbankscontinuedto monetarypolicy.Inaddition,financialmarketswere advance,onbalance,inthethirdquarterataboutthe affectedforatimebyuncertaintiesaboutraisingthe pacepostedinthepreviousquarter,andcommercial federaldebtlimitandresolvingthegovernment realestate(CRE)loansatbanksrosemoderately.In shutdown. responsetotheOctoberSeniorLoanOfficerOpinion SurveyonBankLendingPractices(SLOOS),banks Financialmarketviewsabouttheoutlookformon- generallyindicatedthattheyhadeasedstandardson etarypolicyshiftednotablyfollowingtheSeptember C&IandCREloansoverthepastthreemonths. FOMCmeeting,astheoutcomeandcommunicationsfromthatmeetingwereseenasmoreaccommo- Developmentsaffectingfinancingforthehousehold dativethanexpected.Investorspushedouttheir sectorweregenerallyfavorable.Housepricesposted anticipatedtimingof boththefirstreductioninthe furthergainsinAugust.Mortgageratesdeclinedover paceof FOMCassetpurchasesandthefirsthikein theintermeetingperiod,althoughtheywerestill thetargetfederalfundsrate.Thepathof thefederal abovetheirearly-Maylows.Mortgagerefinancing fundsrateimpliedbyfinancialmarketquotesshifted applicationsweredowndramaticallycomparedwith downovertheperiod,asdidthepathbasedonthe May,butpurchaseapplicationswereonlyabitbelow resultsfromtheDesk’ssurveyof primarydealers. theirearlierlevel.Somelargebanksrespondingto TheDesk’ssurveyalsoindicatedthatthedealershad theOctoberSLOOSreportedhavingeasedstandards reviseduptheirexpectationsof thetotalsizeof the onhome-purchaseloanstoprimeborrowersonnet. Committee’sassetpurchaseprogram.Concerns Innonmortgagecredit,automobileloansandstudent aboutthefiscalsituationandsomewhatweaker-than- loanscontinuedtoexpandatarobustpace,while expectedeconomicdatareleasesalsocontributedto balancesonrevolvingconsumercreditwereagain thechangeinexpectationsaboutthetimingof mon- aboutflat. etarypolicyactions. Inthemunicipalbondmarket,issuanceof bondsfor Five-and10-yearyieldsonbothnominaland newcapitalprojectsremainedsolid.Yieldson inflation-protectedTreasurysecuritiesdeclined 20-yeargeneralobligationmunicipalbondsdecreased 30basispointsormoreovertheintermeetingperiod. aboutinlinewithotherlonger-termmarketrates Thereductioninlonger-termTreasuryyieldswas overtheintermeetingperiod.

242 100thAnnualReport|2013 Bankcreditdeclinedslightlyduringthethirdquarter. potentialoutputgrowth.Theexpansionineconomic Growthof coreloansslowed,primarilybecauseof a activitywasanticipatedtoslowlyreduceresource sizabledeclineinoutstandingbalancesof residential slackovertheprojectionperiod,andtheunemploymortgagesonbanks’books.Third-quarterearnings mentratewasexpectedtodeclinegradually. reportsforlargebanksgenerallymetorexceeded analysts’modestexpectations. Thestaff’sforecastforinflationwaslittlechanged fromtheprojectionpreparedforthepreviousFOMC M2grewmoderatelyinSeptember.Preliminarydata meeting.Thestaff continuedtoexpectthatinflation indicatedthatgrowthinM2pickeduptemporarilyin wouldbemodestinthesecondhalf of thisyear,but earlyOctoberamiduncertaintyaboutthepassageof higherthanitslevelinthefirsthalf.Overthemedium debtlimitlegislation;depositsincreasedsharplyas term,withlonger-runinflationexpectationsassumed institutionalinvestorsappearedtoshiftfrommoney toremainstable,changesincommodityandimport fundsharestobankdeposits,andasmoneyfunds pricesexpectedtoberelativelysmall,andslackin increasedtheirbankdepositsinanticipationof pos- laborandproductmarketspersistingovermostof sibleredemptions.Theseinflowstodepositswere theprojectionperiod,inflationwasprojectedtorun estimatedtohavereversedshortlyafterthedebtlimit somewhatbelowtheFOMC’slonger-runinflation agreementwasreached. objectiveof 2percentthrough2016. Foreignstockpricesrose,foreignyieldsandyield Thestaff continuedtoseeanumberof risksaround spreadsdeclined,andthedollardepreciatedagainst theforecast.Thedownsideriskstoeconomicactivity mostothercurrencies.Alargeportionof theseasset includedtheuncertaineffectsandfuturecourseof pricechangesoccurredimmediatelyfollowingthe fiscalpolicy,concernsabouttheoutlookforcon- SeptemberFOMCannouncement.Inaddition, sumerspendinggrowth,andthepotentialeffectson yieldsandthevalueof thedollarfellfurtherafterthe residentialconstructionof theincreaseinmortgage debtceilingagreementwasreachedandinresponse ratessincethespring.Withregardtoinflation,the totheU.S.labormarketreport.Mutualfundflowsto staff sawrisksbothtothedownside,thatthelow emergingmarketsstabilized,followinglargeoutflows ratesof coreconsumerpriceinflationpostedearlier earlierthisyear. thisyearcouldbemorepersistentthananticipated, andtotheupside,thatunanticipatedincreasesin Staff Economic Outlook energyorothercommoditypricescouldemerge. Intheeconomicprojectionpreparedbythestaff for theOctoberFOMCmeeting,theforecastforgrowth Participants’ Views on Current Conditions inrealgrossdomesticproduct(GDP)inthenear and the Economic Outlook termwasreviseddownsomewhatfromtheonepreparedforthepreviousmeeting,primarilyreflecting Intheirdiscussionof theeconomicsituationandthe theeffectsof thefederalgovernmentshutdownand outlook,meetingparticipantsgenerallyindicated somedataonconsumerspendingthatweresofter thatthebroadcontoursof theirmedium-termecothananticipated.Incontrast,thestaff’smedium- nomicprojectionshadnotchangedmateriallysince termforecastforrealGDPwasrevisedupslightly, theSeptembermeeting.Althoughtheincomingdata mostlyreflectinglowerprojectedpathsfortheforeign suggestedthatgrowthinthesecondhalf of 2013 exchangevalueof thedollarandlonger-terminterest mightprovesomewhatweakerthanmanyof them rates,alongwithsomewhathigherprojectedpathsfor hadpreviouslyanticipated,participantsbroadlyconequitypricesandhomevalues.Thestaff anticipated tinuedtoprojectthepaceof economicactivityto thatthepaceof expansioninrealGDPthisyear pickup.Theaccelerationoverthemediumtermwas wouldbeaboutthesameasthegrowthrateof expectedtobebolsteredbythegradualabatementof potentialoutputbutcontinuedtoprojectthatreal headwindsthathavebeenslowingthepaceof eco- GDPwouldacceleratein2014and2015,supported nomicrecovery—suchashousehold-sectordeleveragbyaneasingintheeffectsof fiscalpolicyrestrainton ing,tightcreditconditionsforsomehouseholdsand economicgrowth,increasesinconsumerandbusiness businesses,andfiscalrestraint—aswellasimproved sentiment,furtherimprovementsincreditavailability prospectsforglobalgrowth.Whiledownsiderisksto andfinancialconditions,andaccommodativemon- theoutlookfortheeconomyandthelabormarket etarypolicy.RealGDPgrowthwasprojectedto weregenerallyviewedashavingdiminished,onbalbegintoslowalittlein2016buttoremainabove ance,sincelastfall,severalsignificantrisksremained,

Minutesof FederalOpenMarketCommitteeMeetings|October 243 includingtheuncertaineffectsof ongoingfiscaldrag itwasnotedthatthestanceof fiscalpolicywaslikely andof thecontinuingfiscaldebate. toremainoneof themostimportantheadwinds restraininggrowthoverthemediumterm. Consumerspendingappearedtohaveslowedsomewhatinthethirdquarter.Anumberof participants Althoughanumberof participantsindicatedthatthe notedthattheiroutlookforstrongereconomicactiv- Septemberemploymentreportwassomewhatdisapitywascontingentonapickupingrowthof con- pointing,theyjudgedthatthelabormarketcontinsumerspendingandreviewedthefactorsthatmight uedtoimprove,albeitslowly.Thelimitedpaceof contributetosuchadevelopment,includinglow gainsinwagesandpayrolls,aswellasthenumberof interestrates,easingof debtburdens,continuedgains employeesworkingparttimeforeconomicreasons, inemployment,lowergasolineprices,higherreal werementionedasevidenceof substantialremaining incomes,andhigherhouseholdwealthboostedbyris- slackinthelabormarket.Thedropintheunemployinghomepricesandequityvalues.Nonetheless,con- mentrateoverthepastyear,whilewelcomeandsigsumersentimentremainedunusuallylow,posinga nificant,couldoverstatethedegreeof improvement downsiderisktotheforecast,anduncertaintysur- inlabormarketconditions,inpartbecauseof the roundingprospectivefiscaldeliberationscouldweigh declineinthelaborforceparticipationrate.However, furtheronconsumerconfidence.Afewparticipants afewparticipantsofferedreasonswhyrecentreadcommentedthatapickupinthegrowthratesof eco- ingsontheunemploymentratemightprovidean nomicactivityorrealdisposableincomecould accurateassessment,onbalance,of theextentof requireimprovementsinproductivitygrowth.How- improvementinthelabormarket.Forinstance,if the ever,itwasnotedthatslowergrowthinproductivity declineinlaborforceparticipationreflecteddecisions mighthavebecomethenorm. toretire,itwasunlikelytobereversed,becauseretireeswereunlikelytoreturntothelaborforce.Fur- Businesscontactsgenerallyreportedcontinuedmod- thermore,aseculardeclineinlabormarketdynaerategrowthinsales,butremainedcautiousabout mism,orturnover,mighthavecontributedtoa expandingpayrollsandcapitalexpenditures.Manu- reductioninthesizeof normalmonthlypayroll facturingactivityinpartsof thecountrywas gains.Finally,reviseddatashowedthatthehistorical reportedtohavepickedup,andautosalesremained relationshipbetweenrealGDPgrowthandchanges strong.ReportsfromseveralDistrictsindicatedthat intheunemploymentratehadremainedbroadlyin commercialrealestateandhousing-relatedbusiness placeinrecentyears,suggestingthattheunemployactivitycontinuedtoadvance.Intheagriculturalsec- mentratecontinuedtoprovideareasonablyaccurate tor,cropyieldswerehealthy,farmlandvalueswere signalaboutthestrengthof thelabormarketandthe up,andlowercroppriceswereincreasingtheafford- degreeof slackintheeconomy. abilityof livestockfeed.Wageandcostpressures remainedlimited,butbusinesscontactsinsomeDis- Availableinformationsuggestedthatinflation trictsmentionedthatselectedlabormarketswere remainedsubduedandbelowtheCommittee’s tightorexpressedconcernsaboutashortageof longer-runobjectiveof 2percent.Similarly,longerskilledworkers.Reportsfromtheretailsectorwere runinflationexpectationsremainedstableand,by mixed,withremarksabouthigherluxurysalesand somemeasures,below2percent. expectationsforreducedhiringof seasonalworkers overtheupcomingholidayseason.Uncertainty Financialconditionseasednotablyovertheinteraboutfuturefiscalpolicyandtheregulatoryenviron- meetingperiod,withdeclinesinlonger-terminterest ment,includingchangesinhealthcare,weremen- ratesandincreasesinequityvalues.Financialquotes tionedasweighingonbusinessplanning. suggestedthatmarketsmovedoutthedateatwhich theyexpectedtoseetheCommitteefirstincreasethe Participantsgenerallysawthedirecteconomiceffects federalfundsratetarget.Itwasnotedthatinterest of thepartialshutdownof thefederalgovernmentas ratevolatilitywassubstantiallylowerthanatthetime temporaryandlimited,butanumberof them of theSeptembermeeting,andacoupleof particiexpressedconcernaboutthepossibleeconomic pantspointedtosignssuggestingthatreaching-foreffectsof repeatedfiscalimpassesonbusinessand yieldbehaviormightbeincreasingagain.Nevertheconsumerconfidence.Morebroadly,fiscalpolicy, less,termpremiumsappearedtoonlypartially whichhasbeenexertingsignificantrestraintoneco- retracetheirriseof earlierintheyear,andlongernomicgrowth,wasexpectedtobecomesomewhat terminterestratesremainedwellabovetheirlevelsin lessrestrictiveovertheforecastperiod.Nonetheless, thespring.Afewparticipantsexpressedconcerns

244 100thAnnualReport|2013 abouttheeventualeconomicimpactof thechangein gramaswellastheoutlookforfuturegains,andthat financialconditionssincethespring;inparticular, acontinuingassessmentof theefficacyandcostsof increasesinmortgageratesandhomepriceshad assetpurchasesmightleadtheCommitteetodecide reducedtheaffordabilityof housing,andthehigher atsomepointtochangethemixof itspolicytools rateswereatleastpartlyresponsibleforsomeslowing whilemaintainingahighdegreeof accommodation. inthatsector.Oneparticipantstatedthatthe Anothersuggestionforenhancingcommunications extendedperiodof near-zerointerestratescontinued wastousetheSummaryof EconomicProjectionsto tocreatechallengesforthebankingindustry,asnet providemoreinformationaboutparticipants’views. interestmarginsremainedunderpressure. Duringthisgeneraldiscussionof policystrategyand Policy Planning tactics,participantsreviewedissuesspecifictothe Committee’sassetpurchaseprogram.Theygenerally Afteranintroductorybriefingbythestaff,meeting expectedthatthedatawouldproveconsistentwith participantshadawide-rangingdiscussionof topics theCommittee’soutlookforongoingimprovement relatedtothepathof monetarypolicyoverthe inlabormarketconditionsandwouldthuswarrant mediumterm,includingstrategicandcommunica- trimmingthepaceof purchasesincomingmonths. tionissuesassociatedwiththeCommittee’sassetpur- However,participantsalsoconsideredscenarios chaseprogramaswellaspossibilitiesforclarifyingor underwhichitmight,atsomestage,beappropriate strengtheningitsforwardguidanceforthefederal tobegintowinddowntheprogrambeforeanunamfundsrate.Inthiscontext,participantsdiscussedthe biguousfurtherimprovementintheoutlookwas financialmarketresponsetotheCommittee’sdeci- apparent.Acoupleof participantsthoughtitpremasionsatitsJuneandSeptembermeetingsand,more turetofocusonthislattereventuality,observingthat generally,thecomplexitiesassociatedwithcommuni- thepurchaseprogramhadbeeneffectiveandthat cationsabouttheCommittee’scurrentpolicytools.A moretimewasneededtoassesstheoutlookforthe numberof participantsnotedthatrecentmovements labormarketandinflation;moreover,international ininterestratesandotherindicatorssuggestedthat comparisonssuggestedthattheFederalReserve’s financialmarketsviewedtheCommittee’stools—as- balancesheetretainedamplecapacityrelativetothe setpurchasesandforwardguidanceregardingthe scaleof theU.S.economy.Nonetheless,someparticifederalfundsrate—ascloselylinked.Onepossible pantsnotedthat,if theCommitteeweregoingto explanationforthisviewwasaninferenceonthepart contemplatecuttingpurchasesinthefuturebasedon of investorsthatachangeinassetpurchasesreflected criteriaotherthanimprovementinthelabormarket achangeintheCommittee’soutlookforthe outlook,suchasconcernsabouttheefficacyorcosts economy,whichwouldbeassociatedwithadjust- of furtherassetpurchases,itwouldneedtocommumentsinboththepurchaseprogramandthe nicateeffectivelyaboutthoseothercriteria.Inthose expectedpathof policyrates;anotherwasaperspec- circumstances,itmightwellbeappropriatetooffset tivethatachangeinassetpurchaseswouldbereadas theeffectsof reducedpurchasesbyundertakingalterprovidinginformationaboutthewillingnessof the nativeactionstoprovideaccommodationatthesame Committeetopursueitseconomicobjectiveswith time. bothtools.Acoupleof participantsobservedthat thedecisionattheSeptemberFOMCmeetingmight Participantsgenerallyexpressedreservationsabout havestrengthenedthecredibilityof monetarypolicy, thepossibilityof introducingasimplemechanical assuggestedbythedownwardshiftintheexpected rulethatwouldadjustthepaceof assetpurchases pathof short-terminterestratesthathadbroughtthe automaticallybasedonasinglevariablesuchasthe pathmorecloselyintoalignmentwiththeCommit- unemploymentrateorpayrollemployment.While tee’sforwardguidance.Participantsbroadly somewereopentoconsideringsucharule,others endorsedmakingtheCommittee’scommunications viewedthatapproachasunlikelytoreliablyproduce assimple,clear,andconsistentaspossible,anddis- appropriatepolicyoutcomes.Asanalternative,some cussedwaysof doingso.Withregardtotheasset participantsmentionedthatitmightbepreferableto purchaseprogram,onesuggestionwastorepeataset adoptanevensimplerplanandannounceatotalsize of principlesinpubliccommunications;forexample, of remainingpurchasesoratimetableforwinding participantscouldemphasizethattheprogramwas downtheprogram.Acalendar-basedstep-down datadependent,thatanyreductioninthepaceof wouldruncountertothedata-dependent,statepurchaseswoulddependonboththecumulative contingentnatureof thecurrentassetpurchaseproprogressinlabormarketssincethestartof thepro- gram,butitwouldbeeasiertocommunicateand

Minutesof FederalOpenMarketCommitteeMeetings|October 245 mighthelpthepublicseparatetheCommittee’spur- tosupporttheeconomybymaintainingmorechaseprogramfromitspolicyforthefederalfunds accommodativepolicyforlonger.Theseorother rateandtheoverallstanceof policy.Withregardto modificationstotheforwardguidanceforthefederal futurereductionsinassetpurchases,participantsdis- fundsratecouldbeimplementedinthefuture,either cussedhowthosemightbesplitacrossassetclasses. toimproveclarityortoaddtopolicyaccommoda- Anumberof participantsbelievedthatmaking tion,perhapsinconjunctionwithareductioninthe roughlyequaladjustmentstopurchasesof Treasury paceof assetpurchasesaspartof arebalancingof securitiesandMBSwouldbeappropriateandrela- theCommittee’stools. tivelystraightforwardtocommunicatetothepublic. However,someothersindicatedthattheycouldback Participantsalsodiscussedarangeof possible trimmingthepaceof Treasurypurchasesmorerap- actionsthatcouldbeconsideredif theCommittee idlythanthoseof MBS,perhapstosignalaninten- wishedtosignalitsintentiontokeepshort-termrates tiontosupportmortgagemarkets,andonepartici- loworreinforcetheforwardguidanceonthefederal pantthoughtthattrimmingMBSfirstwouldreduce fundsrate.Forexample,mostparticipantsthought thepotentialfordistortionsincreditallocation. thatareductionbytheBoardof Governorsinthe interestratepaidonexcessreservescouldbeworth Aspartof theplanningdiscussion,participantsalso consideringatsomestage,althoughthebenefitsof examinedseveralpossibilitiesforclarifyingor suchastepweregenerallyseenaslikelytobesmall strengtheningtheforwardguidanceforthefederal exceptpossiblyasasignalof policyintentions.By fundsrate,includingbyprovidingadditionalinfor- contrast,participantsexpressedarangeof concerns mationaboutthelikelypathof therateeitherafter aboutusingopenmarketoperationsaimedataffectoneof theeconomicthresholdsinthecurrentguid- ingtheexpectedpathof short-terminterestrates, ancewasreachedorafterthefundsratetargetwas suchasastandingpurchasefacilityforshorter-term eventuallyraisedfromitscurrent,exceptionallylow Treasurysecuritiesortheprovisionof termfunding level.Acoupleof participantsfavoredsimplyreduc- throughrepurchaseagreements.Amongtheconcerns ingthe6½percentunemploymentratethreshold,but voicedwasthatsuchoperationswouldinhibitprice othersnotedthatsuchachangemightraiseconcerns discoveryandremovevaluablesourcesof market aboutthedurabilityof theCommittee’scommitment information;inaddition,suchoperationsmightbe tothethresholds.Participantsalsoweighedthemer- difficulttoexplaintothepublic,complicatethe itsof statingthat,evenaftertheunemploymentrate Committee’scommunications,andappearinconsisdroppedbelow6½percent,thetargetforthefederal tentwiththeeconomicthresholdsforthefederal fundsratewouldnotberaisedsolongastheinfla- fundsrate.Nevertheless,anumberof participants tionratewasprojectedtorunbelowagivenlevel.In notedthatsuchoperationswereworthyof further general,thebenefitsof addingthiskindof quantita- studyorsawthemaspotentiallyhelpfulinsome tivefloorforinflationwereviewedasuncertainand circumstances. likelytoberathermodest,andcommunicatingit couldpresentchallenges,butafewparticipants Attheendof thediscussion,participantsagreedthat remainedfavorablyinclinedtowardit.Severalpartici- itwouldbehelpfultocontinuereviewingtheseissues pantsconcludedthatprovidingadditionalqualitative of longer-runpolicystrategyatupcomingmeetings. informationontheCommittee’sintentionsregarding Nodecisionsonthesubstanceweretaken,andparthefederalfundsrateaftertheunemploymentthresh- ticipantsgenerallynotedtheusefulnessof planning oldwasreachedcouldbemorehelpful.Suchguid- forvariouscontingencies. ancecouldindicatetherangeof informationthatthe Committeewouldconsiderinevaluatingwhenit Committee Policy Action wouldbeappropriatetoraisethefederalfundsrate. Alternatively,thepolicystatementcouldindicatethat Committeememberssawtheinformationreceived evenafterthefirstincreaseinthefederalfundsrate overtheintermeetingperiodassuggestingthatecotarget,theCommitteeanticipatedkeepingtherate nomicactivitywascontinuingtoexpandatamoderbelowitslonger-runequilibriumvalueforsometime, atepace.Althoughindicatorsof labormarketcondiaseconomicheadwindswerelikelytodiminishonly tionshadshownsomefurtherimprovement,the slowly.Otherfactorsbesidesthoseheadwindswere unemploymentrateremainedelevated.Household alsomentionedaspossiblyprovidingarationalefor spendingandbusinessfixedinvestmentadvanced, maintainingalowtrajectoryforthefederalfunds buttherecoveryinthehousingsectorslowedsomerate,includingfollowingthroughonacommitment whatinrecentmonths,andfiscalpolicywasrestrain-

246 100thAnnualReport|2013 ingeconomicgrowth.TheCommitteeexpectedthat, half percentagepointabovetheCommittee’s2perwithappropriatepolicyaccommodation,economic centlonger-rungoal,andlonger-terminflation growthwouldpickupfromitsrecentpace,resulting expectationscontinuetobewellanchored. inagradualdeclineintheunemploymentratetoward levelsconsistentwiththeCommittee’sdualmandate. Membersalsodiscussedthewordingof thepolicy Membersgenerallycontinuedtoseethedownside statementtobeissuedfollowingthemeeting.Inaddiriskstotheoutlookfortheeconomyandthelabor tiontoupdatingitsdescriptionof thestateof the marketashavingdiminished,onnet,sincelastfall. economy,theCommitteeconsideredwhethertonote InflationwasrunningbelowtheCommittee’slonger- thattheeffectsof thetemporarygovernmentshutrunobjective,butlonger-terminflationexpectations downhadmadeeconomicconditionsmoredifficult werestable,andtheCommitteeanticipatedthat toassess,butjudgedthatthismightoveremphasize inflationwouldmovebacktowarditsobjectiveover theroleof theshutdownintheCommittee’spolicy themediumterm.Membersrecognized,however, deliberations.Membersnotedtheimprovementin thatinflationpersistentlybelowtheCommittee’s financialconditionssincethetimeof theSeptember 2percentobjectivecouldposeriskstoeconomic meetingandagreedthatitwasappropriatetodrop performance. thereference,whichwasincludedintheSeptember statement,tothetighteningof financialconditions Intheirdiscussionof monetarypolicyfortheperiod seenoverthesummer.Membersalsodiscussed ahead,membersgenerallynotedthattherehadbeen whethertoaddtotheforwardguidanceinthepolicy littlechangeintheeconomicoutlooksincetheSep- statementanindicationthattheheadwindsrestraintembermeeting,andallmembersbutoneagain ingtheeconomicrecoverywerelikelytoabateonly judgedthatitwouldbeappropriatefortheCommit- gradually,withthefederalfundsratetargetanticiteetoawaitmoreevidencethatprogresstowardits patedtoremainbelowitslonger-runnormalvalue economicobjectiveswouldbesustainedbefore foraconsiderabletime.Whiletherewassomesupadjustingthepaceof assetpurchases.Intheviewof portforaddingthislanguageatsomestage,arange onemember,thecumulativeimprovementinthe of concernswereexpressedaboutincludingitatthis economyindicatedthatthecontinuedeasingof meeting.Inparticular,givenitscomplexity,many monetarypolicyatthecurrentpacewasnolonger membersfeltthatitwouldbedifficulttocommuninecessary.Manymembersstressedthedata- catethispointsuccinctlyinthestatement.Inaddidependentnatureof thecurrentassetpurchasepro- tion,therewasnotcompleteconsensuswithinthe gram,andsomepointedoutthat,if economiccondi- Committeethatheadwindsweretheonlyexplanation tionswarranted,theCommitteecoulddecidetoslow forthelowexpectedfuturepathof policyrates. thepaceof purchasesatoneof itsnextfewmeetings. Acoupleof membersalsocommentedthatitwould Attheconclusionof thediscussion,theCommittee beimportanttocontinuelayingthegroundworkfor votedtoauthorizeanddirecttheFederalReserve suchareductioninpacethroughpublicstatements Bankof NewYork,untilitwasinstructedotherwise, andspeeches,whileemphasizingthattheoverall toexecutetransactionsintheSystemAccountin stanceof monetarypolicywouldremainhighly accordancewiththefollowingdomesticpolicy accommodativeasneededtomeettheCommittee’s directive: objectives. “Consistentwithitsstatutorymandate,theFed- Attheconclusionof thediscussion,theCommittee eralOpenMarketCommitteeseeksmonetary decidedtocontinueaddingpolicyaccommodation andfinancialconditionsthatwillfostermaxibypurchasingadditionalMBSatapaceof $40bil- mumemploymentandpricestability.Inparticulionpermonthandlonger-termTreasurysecuritiesat lar,theCommitteeseeksconditionsinreserve apaceof $45billionpermonthandtomaintainits marketsconsistentwithfederalfundstradingin existingreinvestmentpolicies.Inaddition,theCom- arangefrom0to¼percent.TheCommittee mitteereaffirmeditsintentiontokeepthetargetfed- directstheDesktoundertakeopenmarket eralfundsrateat0to¼percentandretaineditsfor- operationsasnecessarytomaintainsuchcondiwardguidancethatitanticipatesthatthisexception- tions.TheDeskisdirectedtocontinuepurchasallylowrangeforthefederalfundsratewillbe inglonger-termTreasurysecuritiesatapaceof appropriateatleastaslongastheunemploymentrate about$45billionpermonthandtocontinue remainsabove6½percent,inflationbetweenoneand purchasingagencymortgage-backedsecuritiesat twoyearsaheadisprojectedtobenomorethana apaceof about$40billionpermonth.The

Minutesof FederalOpenMarketCommitteeMeetings|October 247 CommitteealsodirectstheDesktoengagein Takingintoaccounttheextentof federalfiscal dollarrollandcouponswaptransactionsasnec- retrenchmentoverthepastyear,theCommittee essarytofacilitatesettlementof theFederal seestheimprovementineconomicactivityand Reserve’sagencymortgage-backedsecurities labormarketconditionssinceitbeganitsasset transactions.TheCommitteedirectstheDeskto purchaseprogramasconsistentwithgrowing maintainitspolicyof rollingovermaturing underlyingstrengthinthebroadereconomy. Treasurysecuritiesintonewissuesanditspolicy However,theCommitteedecidedtoawaitmore of reinvestingprincipalpaymentsonallagency evidencethatprogresswillbesustainedbefore debtandagencymortgage-backedsecuritiesin adjustingthepaceof itspurchases.Accordingly, agencymortgage-backedsecurities.TheSystem theCommitteedecidedtocontinuepurchasing OpenMarketAccountManagerandtheSecre- additionalagencymortgage-backedsecuritiesat tarywillkeeptheCommitteeinformedof ongo- apaceof $40billionpermonthandlonger-term ingdevelopmentsregardingtheSystem’sbal- Treasurysecuritiesatapaceof $45billionper ancesheetthatcouldaffecttheattainmentover month.TheCommitteeismaintainingitsexisttimeof theCommittee’sobjectivesof maximum ingpolicyof reinvestingprincipalpayments employmentandpricestability.” fromitsholdingsof agencydebtandagency mortgage-backedsecuritiesinagencymortgage- Thevoteencompassedapprovalof thestatement backedsecuritiesandof rollingovermaturing belowtobereleasedat2:00p.m.: Treasurysecuritiesatauction.Takentogether, theseactionsshouldmaintaindownwardpres- “InformationreceivedsincetheFederalOpen sureonlonger-terminterestrates,supportmort- MarketCommitteemetinSeptembergenerally gagemarkets,andhelptomakebroaderfinansuggeststhateconomicactivityhascontinuedto cialconditionsmoreaccommodative,whichin expandatamoderatepace.Indicatorsof labor turnshouldpromoteastrongereconomicrecovmarketconditionshaveshownsomefurther eryandhelptoensurethatinflation,overtime, improvement,buttheunemploymentrate isattheratemostconsistentwiththeCommitremainselevated.Availabledatasuggestthat tee’sdualmandate. householdspendingandbusinessfixedinvestmentadvanced,whiletherecoveryinthehous- TheCommitteewillcloselymonitorincoming ingsectorslowedsomewhatinrecentmonths. informationoneconomicandfinancialdevelop- Fiscalpolicyisrestrainingeconomicgrowth. mentsincomingmonthsandwillcontinueits Apartfromfluctuationsduetochangesin purchasesof Treasuryandagencymortgageenergyprices,inflationhasbeenrunningbelow backedsecurities,andemployitsotherpolicy theCommittee’slonger-runobjective,but toolsasappropriate,untiltheoutlookforthe longer-terminflationexpectationshave labormarkethasimprovedsubstantiallyina remainedstable. contextof pricestability.Injudgingwhento moderatethepaceof assetpurchases,theCom- Consistentwithitsstatutorymandate,theCom- mitteewill,atitscomingmeetings,assess mitteeseekstofostermaximumemployment whetherincominginformationcontinuestosupandpricestability.TheCommitteeexpectsthat, porttheCommittee’sexpectationof ongoing withappropriatepolicyaccommodation,eco- improvementinlabormarketconditionsand nomicgrowthwillpickupfromitsrecentpace inflationmovingbacktowarditslonger-run andtheunemploymentratewillgradually objective.Assetpurchasesarenotonapreset declinetowardlevelstheCommitteejudgescon- course,andtheCommittee’sdecisionsabout sistentwithitsdualmandate.TheCommittee theirpacewillremaincontingentontheComseesthedownsideriskstotheoutlookforthe mittee’seconomicoutlookaswellasitsassesseconomyandthelabormarketashavingdimin- mentof thelikelyefficacyandcostsof such ished,onnet,sincelastfall.TheCommitteerec- purchases. ognizesthatinflationpersistentlybelowits 2percentobjectivecouldposeriskstoeconomic Tosupportcontinuedprogresstowardmaxiperformance,butitanticipatesthatinflationwill mumemploymentandpricestability,theCommovebacktowarditsobjectiveoverthemedium mitteetodayreaffirmeditsviewthatahighly term. accommodativestanceof monetarypolicywill

248 100thAnnualReport|2013 remainappropriateforaconsiderabletimeafter Videoconference meeting of October 16 theassetpurchaseprogramendsandtheeconomicrecoverystrengthens.Inparticular,the OnOctober16,2013,theCommitteemetbyvideo- Committeedecidedtokeepthetargetrangefor conferencetodiscussissuesassociatedwithcontinthefederalfundsrateat0to¼percentandcur- genciesintheeventthattheTreasurywastemporarrentlyanticipatesthatthisexceptionallylow ilyunabletomeetitsobligationsbecausethestaturangeforthefederalfundsratewillbeappropri- toryfederaldebtlimitwasnotraised.Themeeting ateatleastaslongastheunemploymentrate coveredissuessimilartothosediscussedattheComremainsabove6½percent,inflationbetweenone mittee’svideoconferencemeetingof August1,2011. andtwoyearsaheadisprojectedtobenomore Thestaff providedanupdateonlegislativedevelopthanahalf percentagepointabovetheCommit- mentsbearingonthedebtceilingandthefundingof tee’s2percentlonger-rungoal,andlonger-term thefederalgovernment,recentconditionsinfinancial inflationexpectationscontinuetobewell markets,technicalaspectsof theprocessingof fedanchored.Indetermininghowlongtomaintain eralpayments,potentialimplicationsforbanksuperahighlyaccommodativestanceof monetary visionandregulatorypolicies,andpossibleactions policy,theCommitteewillalsoconsiderother thattheFederalReservecouldtakeif disruptionsto information,includingadditionalmeasuresof marketfunctioningposedathreattotheFederal labormarketconditions,indicatorsof inflation Reserve’seconomicobjectives.Meetingparticipants pressuresandinflationexpectations,andread- sawnolegaloroperationalneedintheeventof ingsonfinancialdevelopments.WhentheCom- delayedpaymentsonTreasurysecuritiestomake mitteedecidestobegintoremovepolicyaccom- changestotheconductorproceduresemployedin modation,itwilltakeabalancedapproachcon- currentlyauthorizedDeskoperations,suchasopen sistentwithitslonger-rungoalsof maximum marketoperations,large-scaleassetpurchases,or employmentandinflationof 2percent.” securitieslending,ortotheoperationof thediscount window.TheyalsogenerallyagreedthattheFederal Votingforthisaction:BenBernanke,WilliamC. Reservewouldcontinuetoemployprevailingmarket Dudley,JamesBullard,CharlesL.Evans,JeromeH. valuesof securitiesinallitstransactionsandopera- Powell,EricRosengren,JeremyC.Stein,DanielK. tions,undertheusualterms.Withrespecttopotential Tarullo,andJanetL.Yellen. additionalactions,participantsnotedthattheappropriateresponseswoulddependimportantlyonthe Votingagainstthisaction:EstherL.George. actualconditionsobservedinfinancialmarkets. Undercertaincircumstances,theDeskmightactto Ms.Georgedissentedbecauseshedidnotseethe facilitatethesmoothtransmissionof monetary continuedaggressiveeasingof monetarypolicyas policythroughmoneymarketsandtoaddressdiswarrantedinthefaceof bothactualandforecasted ruptionsinmarketfunctioningandliquidity.Superimprovementsintheeconomy.Inherview,thecumu- visorypolicywouldtakeintoaccountandmake lativeprogressinlabormarketsjustifiedtakingsteps appropriateallowanceforunusualmarketconditions. towardslowingthepaceof theCommittee’sasset Theneedtomaintainthetraditionalseparationof purchases.Moreover,marketexpectationsforthesize theFederalReserve’sactionsfromtheTreasury’s of thepurchaseprogramhadcontinuedtoescalate debtmanagementdecisionswasnoted.Participants despitethatprogress,increasingherconcernsabout agreedthatwhiletheFederalReserveshouldtake communicationschallengesandthepotentialcosts whateverstepsitcould,therisksposedtothefinanassociatedwithassetpurchases. cialsystemandtothebroadereconomybyadelayin paymentsonTreasurysecuritieswouldbepotentially Itwasagreedthatthenextmeetingof theCommittee catastrophic,andthussuchasituationshouldbe wouldbeheldonTuesday–Wednesday,Decem- avoidedatallcosts. ber17–18,2013.Themeetingadjournedat12:05 p.m.onOctober30,2013. WilliamB.English Secretary Notation Vote BynotationvotecompletedonOctober8,2013,the Committeeunanimouslyapprovedtheminutesof the FOMCmeetingheldonSeptember17–18,2013.

Minutesof FederalOpenMarketCommitteeMeetings|December 249 Meeting Held DavidW.Wilcox Economist on December 17–18, 2013 ThomasA.Connors,TroyDavig,MichaelP.Leahy, Ameetingof theFederalOpenMarketCommittee StephenA.Meyer,andWilliamWascher washeldintheofficesof theBoardof Governorsof AssociateEconomists theFederalReserveSysteminWashington,D.C.,on SimonPotter Tuesday,December17,2013,at1:00p.m.andcontin- Manager,SystemOpenMarketAccount uedonWednesday,December18,2013,at8:30a.m. MichaelS.Gibson Present Director,Divisionof BankingSupervisionand Regulation,Boardof Governors BenBernanke Chairman NellieLiang Director,Officeof FinancialStabilityPolicyand WilliamC.Dudley Research,Boardof Governors ViceChairman JamesA.ClouseandWilliamNelson JamesBullard DeputyDirectors,Divisionof MonetaryAffairs, CharlesL.Evans Boardof Governors EstherL.George JonW.Faust SpecialAdvisertotheBoard,Officeof Board JeromeH.Powell Members,Boardof Governors EricRosengren LindaRobertson JeremyC.Stein AssistanttotheBoard,Officeof BoardMembers, Boardof Governors DanielK.Tarullo TrevorA.Reeve JanetL.Yellen SeniorAssociateDirector, Divisionof International ChristineCumming,RichardW.Fisher,Narayana Finance,Boardof Governors Kocherlakota,SandraPianalto,andCharlesI.Plosser EllenE.MeadeandJoyceK.Zickler AlternateMembersof theFederalOpenMarket SeniorAdvisers,Divisionof MonetaryAffairs, Committee Boardof Governors JeffreyM.Lacker,DennisP.Lockhart, andJohnC.Williams EricM.Engen,ThomasLaubach,DavidE.Lebow, Presidentsof theFederalReserveBanksof andMichaelG.Palumbo Richmond,Atlanta,andSanFrancisco,respectively AssociateDirectors,Divisionof Researchand Statistics,Boardof Governors WilliamB.English SecretaryandEconomist GretchenC.Weinbach AssociateDirector,Divisionof MonetaryAffairs, MatthewM.Luecke Boardof Governors AssistantSecretary MarnieGillisDeBoer DavidW.Skidmore DeputyAssociateDirector,Divisionof Monetary AssistantSecretary Affairs,Boardof Governors MichelleA.Smith DianaHancock AssistantSecretary DeputyAssociateDirector,Divisionof Researchand ScottG.Alvarez Statistics,Boardof Governors GeneralCounsel StaceyTevlin StevenB.Kamin AssistantDirector,Divisionof Researchand Economist Statistics,Boardof Governors

250 100thAnnualReport|2013 EricEngstrom likelyrecommendacontinuationalongwithpossible SectionChief,Divisionof ResearchandStatistics, adjustmentstoprogramparametersthatcouldpro- Boardof Governors videadditionalinsightsintothedemandforapotentialfacilityanditsefficacyinputtingaflooron DavidH.Small moneymarketrates. ProjectManager,Divisionof MonetaryAffairs, Boardof Governors FollowingtheManager’sreport,theCommitteecon- PeterM.Garavuso sideredaproposaltoincreasethecapsonindividual RecordsManagementAnalyst,Divisionof Monetary allocationsintheONRRPtestoperationsfrom Affairs,Boardof Governors $1billionto$3billionpercounterparty.TheproposedincreaseincapswasintendedtotesttheDesk’s JohnF.Moore abilitytomanagesomewhatlargeroperationalflows FirstVicePresident,FederalReserveBankof andtoprovideadditionalinformationaboutthe SanFrancisco potentialusefulnessof ONRRPoperationstoaffect marketinterestrateswhendoingsobecomesappro- DavidAltig,Jeff Fuhrer,LorettaJ.Mester, priate.Participantsgenerallysupportedtheproposal, andMarkS.Sniderman withoneparticipantemphasizingtheusefulnessof ExecutiveVicePresidents,FederalReserveBanksof extendingtheenddateof theprogrambeyondthe Atlanta,Boston,Philadelphia,andCleveland, endof January.However,someparticipantsquesrespectively tionedtheextenttowhichtheproposedlimited EvanF.Koenig,LorieK.Logan, increaseinthecapswouldprovideadditionalinsights andSamuelSchulhofer-Wohl abouttheoperationalaspectsof theONRRPpro- SeniorVicePresidents,FederalReserveBanksof gramorthepotentialmarketeffectsof ONRRP Dallas,NewYork,andMinneapolis,respectively operations.Afewparticipantssuggestedthatit wouldbeusefultoevaluatethepotentialroleof an DavidAndolfatto,JamesP.Bergin,JonasD.M. ONRRPfacilityinthecontextof theCommittee’s Fisher,SylvainLeduc,andPaoloA.Pesenti plansformonetarypolicyimplementationoverthe VicePresidents,FederalReserveBanksof St.Louis, mediumandlongerterm. NewYork,Chicago,SanFrancisco,andNewYork, respectively Followingthediscussion,theCommitteeunani- RobertL.Hetzel mouslyapprovedthefollowingresolution: SeniorEconomist,FederalReserveBankof Richmond “TheFederalOpenMarketCommitteeauthorizesanincreaseinthemaximumallotmentcap Developments in Financial Markets and fortheseriesof fixed-rate,overnightreverse the Federal Reserve’s Balance Sheet repurchaseoperationsapprovedonSeptember17,2013,to$3billionpercounterpartyper TheManagerof theSystemOpenMarketAccount dayfromitspreviouslevelof $1billionper reportedondevelopmentsindomesticandforeign counterpartyperday.Allotheraspectsof the financialmarketsaswellasSystemopenmarket resolutionremainunchanged.” operationsduringtheperiodsincetheFederalOpen MarketCommittee(FOMC)metonOctober29–30, Byunanimousvote,theCommitteeratifiedthe 2013.Thestaff alsopresentedanupdateonthe Desk’sdomestictransactionsovertheintermeeting ongoingtestingof overnightreverserepurchase period.Therewerenointerventionoperationsinforagreement(ONRRP)operationsthattheCommittee eigncurrenciesfortheSystem’saccountoverthe approvedatitsSeptembermeetingandthatissched- intermeetingperiod. uledtoendonJanuary29,2014.Alloperationsto datehadproceededsmoothly.ParticipationinON Thestaff presentedashortbriefingsummarizinga RRPoperationsvariedsomewhatfromdaytoday,in surveythatwasconductedovertheintermeeting partreflectingchangesinthespreadbetweenmarket periodregardingparticipants’viewsof themarginal ratesonrepurchaseagreementtransactionsandthe costsandmarginalefficacyof assetpurchases.Most rateofferedintheFederalReserve’sONRRPopera- participantsjudgedthemarginalcostsof assetpurtions.Thestaff reportedthattheysawpotentialben- chasesasunlikelytobesufficient,relativetotheir efitstoextendingtheexerciseandinJanuarywould marginalbenefits,tojustifyendingthepurchases

Minutesof FederalOpenMarketCommitteeMeetings|December 251 noworrelativelysoon;afewparticipantsidentified effectsinfinancialmarketsinrecentmonthsof news somepossiblecostsasbeingmoresubstantial,indi- aboutthelikelypathof purchases. catingthatthecostscouldjustifyendingpurchases noworrelativelysoonevenif theCommittee’smac- Staff Review of the Economic Situation roeconomicgoalsforthepurchaseprogramhadnot yetbeenachieved.Participantsweremostconcerned TheinformationreviewedfortheDecember17–18 aboutthemarginalcostof additionalassetpurchases meetingindicatedthateconomicactivitywasexpandarisingfromriskstofinancialstability,pointingout ingatamoderatepace.Totalpayrollemployment thatahighlyaccommodativestanceof monetary increasedfurther,andtheunemploymentrate policycouldprovideanincentiveforexcessiverisk- declinedbutremainedelevated.Consumerprice takinginthefinancialsector.Itwasnotedthatthe inflationcontinuedtorunbelowtheCommittee’s riskstofinancialstabilitycouldbesomewhatlarger objective,althoughmeasuresof longer-runinflation inthecaseof assetpurchasesthaninthecaseof expectationsremainedstable. interestratepolicybecausepurchasesworkinpartby affectingtermpremiumsandpolicymakershaveless TotalnonfarmpayrollemploymentroseinOctober experiencewithtermpremiumeffectsthanwithmore andNovemberatafastermonthlypacethaninthe conventionalinterestratepolicy.Participantsalso previoustwoquarters.Theunemploymentrate expressedsomeconcernthatadditionalassetpur- declined,onnet,from7.2percentinSeptemberto chasesincreasethelikelihoodthattheFederal 7.0percentinNovember.Thelaborforceparticipa- Reservemightatsomepointsuffercapitallosses.But tionratealsodecreased,onbalance,andthe itwaspointedoutthattheFederalReserve’sasset employment-to-populationratioinNovemberwas purchaseswouldalmostcertainlyprovidesignificant thesameasinSeptember.Theshareof workers netincometotheTreasuryoverthelifeof thepro- employedparttimeforeconomicreasonsdeclined gram,especiallywhentheeffectsof theprogramon slightlywhiletherateof long-durationunemploythebroadereconomyweretakenintoaccount,and mentwaslittlechanged,butbothmeasureswerestill thatpotentialreputationalriskstotheFederal high.Otherindicatorsweregenerallyconsistentwith Reservearisingfromanyfuturecapitallossescould graduallyimprovingconditionsinthelabormarket. bemitigatedbycommunicatingthatpointtothe Therateof jobopeningsedgedupinrecentmonths, public.Further,participantsnotedthatongoingasset theshareof smallbusinessesreportingthattheyhad purchasescouldincreasethedifficultyof managing hard-to-fillpositionsincreased,andthefour-week exitfromthecurrenthighlyaccommodativepolicy movingaverageof initialclaimsforunemployment stancewhenthetimecame.Manyparticipants,how- insurancetrendeddown,onnet,overtheintermeetever,expressedconfidenceinthetoolsattheFederal ingperiod,althoughtherateof grossprivate-sector Reserve’sdisposalformanagingitsbalancesheetand hiringwasstillsomewhatlow.Measuresof firms’hirfornormalizingthestanceof policyattheappropri- ingplansremainedhigherthanayearearlier,and atetime.Regardingthemarginalefficacyof thepur- householdexpectationsof thelabormarketsituation chaseprogram,mostparticipantsviewedthepro- improvedinearlyDecember. gramascontinuingtosupportaccommodativefinancialconditions,withanumberof thempointingto Manufacturingproductionacceleratedbrisklyin theimportanceof purchasesinservingtoenhance OctoberandNovemberafterincreasingatasubdued thecredibilityof theCommittee’sforwardguidance paceinthethirdquarter,andthegainswerebroad aboutthetargetfederalfundsrate.Amajorityof basedacrossindustries.Automakers’schedulesindiparticipantsjudgedthatthemarginalefficacyof pur- catedthatthepaceof lightmotorvehicleassemblies chaseswaslikelydecliningaspurchasescontinue, wouldriseinDecember,andbroaderindicatorsof althoughsomenotedthedifficultyinherentinmak- manufacturingproduction,suchasthereadingson ingsuchanassessment.Acoupleof participants newordersfromthenationalandregionalmanufacthoughtthatthemarginalefficacyof theprogram turingsurveys,wereconsistentwithafurtherexpanwasnotdeclining,asevidencedbythesubstantial sioninfactoryoutputinthecomingmonths.

252 100thAnnualReport|2013 Realpersonalconsumptionexpenditures(PCE) reflectingtheeffectof thetemporarypartialgovernincreasedmodestlyinthethirdquarterbutroseata mentshutdowninOctoberandfurthercutsin fasterpaceinSeptemberandOctober.Thecompo- defensespendinginOctoberandNovember.Real nentsof thenominalretailsalesdatausedbythe stateandlocalgovernmentpurchasesrosemarkedly Bureauof EconomicAnalysistoconstructitsesti- inthethirdquarter.Moreover,thepayrollsof these mateof PCEincreasedatastrongpaceinNovember, governmentscontinuedtoexpand,onnet,inOctober andlightmotorvehiclesalesmovedupsignificantly. andNovember,andnominalstateandlocalconstruc- Moreover,recentinformationforkeyfactorsthat tionexpendituresincreasedinOctober. supporthouseholdspendingwasconsistentwithfurthersolidgainsinPCEinthecomingmonths. TheU.S.internationaltradedeficitnarrowedin Households’networthlikelyexpandedasequityval- Octoberasexportsrosemorethanimports.The uesandhomepricesincreasedfurtherinrecent gainsinexportswerefairlywidespreadacrosscategomonths;realdisposableincomerose,onnet,inSep- riesandwereledbysalesof consumergoods,industemberandOctober;andconsumersentimentinthe trialsupplies,andagriculturalproducts.Thehigher ThomsonReuters/Universityof MichiganSurveysof valueof importsreflectedincreasesinservices,con- ConsumersimprovedsignificantlyinearlyDecember. sumergoods,andpetroleumproductsthatmorethan offsetlowerpurchasesof computers,semiconductors, Thepaceof activityinthehousingsectorappeared andautomotiveproducts. tocontinuetoslowsomewhat,likelyreflectingthe higherlevelof mortgageratessincethespring.Starts TotalU.S.consumerpriceinflation,asmeasuredby forbothnewsingle-familyhomesandmultifamily thePCEpriceindex,waslessthan1percentoverthe unitsincreased,onbalance,fromAugusttoNovem- 12monthsendinginOctober,inpartbecauseconber,butpermits—whicharetypicallyabetterindica- sumerenergypricesdeclinedoverthesame12-month torof theunderlyingpaceof construction—rose period.Inaddition,corePCEpriceinflation—which moregraduallythanstartsoverthesameperiod. excludesconsumerenergyandfoodprices—wasonly Salesof existinghomesandpendinghomesales alittleabove1percent,partlyreflectingsubdued decreasedfurtherinOctober,althoughnewhome increasesinmedicalservicespricesandrecent salesroseinOctoberafterfallingmarkedlyinthe declinesinthepricesof manynonfuelimported thirdquarter. goods.InNovember,theconsumerpriceindex(CPI) wasflat,andcoreCPIpricesroseslightlyfasterthan Growthinrealprivateexpendituresforbusiness intheprecedingfewmonths.Bothnear-termand equipmentandintellectualpropertyproductswas longer-terminflationexpectationsfromtheMichigan subduedinthethirdquarter.InOctober,nominal surveywerelittlechanged,onnet,inNovemberand shipmentsof nondefensecapitalgoodsexcludingair- earlyDecember. craftedgeddown.However,nominalnewordersfor thesecapitalgoodsremainedabovethelevelof ship- Measuresof laborcompensationindicatedthat ments,pointingtoincreasesinshipmentsinsubse- increasesinnominalwagescontinuedtobemodest. quentmonths,andotherforward-lookingindicators, Compensationperhourinthenonfarmbusinesssecsuchassurveysof businessconditions,weregenerally torrosemoderatelyovertheyearendinginthethird consistentwithmoderategainsinbusinessequipment quarter,andunitlaborcostsmovedupatasimilar spendinginthenearterm.Realbusinessspendingfor paceasgainsinproductivityweresmall.Theemploynonresidentialstructuresrosesubstantiallyinthe mentcostindexexpandedalittlemoreslowlythan thirdquarter,butnominalexpendituresfornewbusi- thecompensationperhourmeasureoverthesame nessbuildingsdeclinedslightlyinOctober.Realnon- yearlongperiod.Theincreaseinnominalaverage farminventoryinvestmentincreasednoticeablyinthe hourlyearningsforallemployeesoverthe12months thirdquarter,butrecentbook-valuedatafor endinginNovemberwasalsomodest. inventory-to-salesratios,alongwithreadingson inventoriesfromnationalandregionalmanufactur- Foreigneconomicactivitystrengthenedinthethird ingsurveys,didnotpointtosignificantinventory quarter,astheeuroareacontinuedtorecoverfrom imbalancesinmostindustries. itsrecentrecession,economicgrowthpickedupin Chinaafterslowinginthefirsthalf of theyear,and Realfederalgovernmentpurchasesdeclinedsome- theMexicaneconomyreboundedfromasecondwhatinthethirdquarterbutappearedlikelyto quartercontraction.Inflationslowedrecentlyin decreasemoresubstantiallyinthefourthquarter, manyadvancedforeigneconomies,partlyasaresult

Minutesof FederalOpenMarketCommitteeMeetings|December 253 of adecelerationinpricesforenergyandothercom- Businessfinanceflowswererobustovertheintermodities.Monetarypolicyremainedveryaccommo- meetingperiod.Grossequityissuancebythenonfidativeinmostadvancedeconomies,butcentral nancialcorporatesectorinOctoberandNovember banksinsomeemergingmarketeconomiesrecently reachedlevelsnotseeninadecade.Grossbondissutightenedpolicyfurthertocontaininflationandsup- ancebynonfinancialcorporationspickedupagain porttheforeignexchangevalueof theircurrencies. afteradiprelatedtothefiscalstandoff inOctober. Similarly,institutionalissuanceof leveragedloans Staff Review of the Financial Situation roseinOctoberandNovember,andcollateralized loanobligationissuanceremainedstrong. Financialmarketdevelopmentsovertheintermeeting periodappearedtobedrivenlargelybyincoming Financingconditionsincommercialrealestate dataonemploymentandeconomicactivitythat (CRE)marketswereconsistentwithincreasedconfiexceededinvestorexpectationsaswellasbyFederal dence.Year-to-dateissuanceof commercial Reservecommunications. mortgage-backedsecurities(CMBS)remained strong,butfarbelowlevelsseenbeforethefinancial Investorsappearedtoreadtheeconomicdata crisis.ResponsestotheDecember2013SeniorCredit releasesovertheintermeetingperiodasbetterthan OfficerOpinionSurveyonDealerFinancingTerms hadbeenexpectedandthereforeasraisingtheodds (SCOOS)suggestedthatdemandforfundingfor thattheFOMCmightdecidetoreducethepaceof CMBSpickedupsinceSeptember.CREloanson assetpurchasesatitsDecembermeeting.Surveyevi- banks’booksexpandedinOctoberandNovemberat dencesuggestedthatmarketparticipantsnowsaw anincreasingpace. roughlysimilarprobabilitiesof thefirstreductionin thepaceof assetpurchasesoccurringattheDecem- AutomobileloanscontinuedtoexpandinOctober, ber,January,orMarchmeeting.Marketexpectations andavailabledatasuggestedthatthistrendwassusregardingthetimingof liftoff of thefederalfunds tainedinNovember.Automobileasset-backedsecurirateseemedtobelittlechangedovertheperiod.In ties(ABS)issuanceacceleratedinNovember,and part,avarietyof FederalReservecommunications issuanceof paperbackedbysubprimeautomobile wereseenasstrengtheningtheCommittee’sforward loansstayedstrong.Incontrast,creditcardbalances guidanceforthefederalfundsrateandcontributing movedsideways,andABSissuanceinthatsector tothestabilityof expectationsforthenear-termpath stayedflat. of thefederalfundsrateinthefaceof animproved economicoutlook. Intheresidentialmortgagemarket,severallarge lenderswerereportedtohaveeasedtheirunderwrit- Onnet,judgingbyfinancialmarketquotesoninter- ingstandardsslightly,butdatasuggestedthatmortestratefutures,theexpectedfederalfundsratepath gagelendersgenerallycontinuedtobereluctantto throughtheendof 2015movedonlyslightlysincethe lendtoborrowerswithless-than-pristinecredit OctoberFOMCmeeting.Theexpectedfederalfunds scores.Mortgageratesroseovertheintermeeting ratepathatlongerhorizonsrosesomewhat,andthe periodtolevelsabout100basispointsabovetheir Treasuryyieldcurvesteepened,withthe2-yearTreas- early-Maylows.Onbalance,refinancingapplications uryyieldaboutunchangedbutthe5-and10-year weredownsubstantiallysinceMaywhilepurchase yieldshigherby21and34basispoints,respectively. applicationsdeclinedmuchless.Housepricesrose Themeasureof 5-yearinflationcompensationbased significantlyinOctober,butsomeindicatorssugonTreasuryinflation-protectedsecuritiesdipped gestedthatthepaceof housepricegainscontinued 5basispoints,whilethe5-yearforwardmeasure todeceleraterelativetoearlierintheyear. increased7basispoints.The30-yearcurrent-coupon yieldonagencymortgage-backedsecuritiesincreased ResponsestotheDecemberSCOOSgenerally abitmorethanthe10-yearTreasuryyield. showedlittlechangeindealer-intermediatedfinancingsinceSeptember.Credittermsformostclassesof Stockpriceswereaboutunchanged,onnet,overthe counterpartieswerelittlechanged.One-thirdof intermeetingperiod,eventhoughsomebroadequity respondentsreportedadeclineintheuseof financial priceindexestemporarilytouchedall-timenominal leveragebytradingrealestateinvestmenttrusts, highs.Corporateriskspreadsnarrowedsomewhat. whereastheuseof financialleveragebyotherclasses

254 100thAnnualReport|2013 of counterpartieswasbasicallyunchanged.In eratelevelsoverall.Relativelystrongcapitalprofiles responsetospecialquestionsinthesurvey,dealers of largedomesticbankingfirms,lowlevelsandmodindicatedthatthecurrentuseof repurchaseagree- erategrowthof aggregatecreditinthenonfinancial mentsorotherformsof short-termfundingfor sectors,andsomereductioninrelianceonshort-term longer-durationassetswasroughlyinlinewithor wholesalefundingacrossthefinancialsectorwere somewhatbelowthelevelsseenearlyin2013. seenasfactorssupportingfinancialstabilityinthe currentenvironment.Valuationsinmostassetmar- BankcreditroseslightlyinOctoberandNovember, ketsseemedbroadlyinlinewithhistoricalnorms. asgrowthincommercialandindustrialloans,CRE However,thestaff reportnotedthatthecomplexity loans,andconsumerloanswaspartiallyoffsetby andinterconnectednessof largefinancialinstitutions, declinesintheoutstandingbalancesof closed-end alongwithsomeapparentincreasesininvestorapperesidentialmortgagesonbanks’books.Stockprices titeforhigher-yieldingassetsandassociatedpresforlargeandregionaldomesticbankingfirmsout- suresonunderwritingstandardsremainedpotential performedthebroadequitymarketovertheinter- sourcesof risktothefinancialsystem. meetingperiodamidbetter-than-expectedeconomic dataandthesettlementof mortgage-relatedlitigation Staff Economic Outlook bysomelargebankingorganizations.Spreadson creditdefaultswapsforthelargestbankholding Intheeconomicprojectionpreparedbythestaff for companiesalsomovedlower,onnet. theDecemberFOMCmeeting,theforecastfor growthinrealgrossdomesticproduct(GDP)inthe M2contractedinNovember,likelyreflectinginpart secondhalf of thisyearwasrevisedupalittlefrom portfolioreallocationsbyinvestorsthathadtempo- theonepreparedforthepreviousmeeting,asthe rarilyplacedfundsinbankdepositsasasafehaven recentinformationonprivatedomesticfinal duringtherecentfederaldebtlimitimpasse.Mean- demand—particularlyconsumerspending—was while,themonetarybasecontinuedtoexpandrap- somewhatbetter,onbalance,thanthestaff had idly,primarilyreflectingtheincreaseinreservebal- anticipated.Thestaff’smedium-termforecastforreal ancesresultingfromtheFederalReserve’sasset GDPgrowthwasalsorevisedupslightly,reflectinga purchases. smallreductioninfiscalrestraintfromtherecentfederalbudgetagreement,whichthestaff assumed Theforeignexchangevalueof thedollarappreciated wouldbeenacted;aloweranticipatedtrajectoryfor followingtheOctoberFOMCmeetingandtheOcto- longer-terminterestrates;andhigherpathsforequity beremploymentreportandendedtheintermeeting valuesandhomeprices.Thosefactors,intotal,more periodhigheronbalance.Ashiftinmarketexpecta- thanoffsetahigherpathfortheforeignexchange tionstowardeasiermonetarypolicyabroadmayhave valueof thedollar.Thestaff continuedtoproject alsoboostedtheexchangevalueof thedollar,most thatrealGDPwouldexpandmorequicklyoverthe notablyagainsttheJapaneseyen,andequitypricesin nextfewyearsthanithasthisyearandwouldrise Japanrosesubstantiallyfurtherduringtheperiod.By significantlyfasterthanthegrowthrateof potential contrast,equitypricesdeclinedinmanyemerging output.Thisaccelerationineconomicactivitywas marketeconomies;insomecases,thosedeclineswere expectedtobesupportedbyaneasingintheeffects largeandaccompaniedbysizabledecreasesincur- of fiscalpolicyrestraintoneconomicgrowth, rencyvaluesandsovereignbondprices.European increasesinconsumerandbusinesssentiment,conequitypriceswerealsolowerovertheperiod.Long- tinuedimprovementsincreditavailabilityandfinantermbenchmarksovereignyieldsintheUnitedKing- cialconditions,afurthereasingof theeconomic domandCanadaincreased,inlinewith,butsome- stressesinEurope,andstill-accommodativemonwhatlessthan,theriseinyieldsoncomparableU.S. etarypolicy.Theexpansionineconomicactivitywas Treasurysecurities.YieldsonGermansovereign anticipatedtoslowlyreduceresourceslackoverthe bonds,whichreactedtoapolicyratecutbytheEuro- projectionperiod,andtheunemploymentratewas peanCentralBankandthereleaseof datashowing expectedtodeclinegraduallytothestaff’sestimate lower-than-expectedeuro-areainflation,wereonly of itslonger-runnaturalrate. slightlyhigheronnet. Thestaff’sforecastforinflationwasquitesimilarto Thestaff’speriodicreportonpotentialriskstofinan- theprojectionpreparedforthepreviousFOMC cialstabilityconcludedthatthevulnerabilityof the meeting.Thenear-termforecastforinflationwas financialsystemtoadverseshocksremainedatmod- reviseddownslightlytoreflectsomerecentsofter-

Minutesof FederalOpenMarketCommitteeMeetings|December 255 than-expecteddata.Thestaff continuedtoforecast assessmentsaredescribedintheSummaryof Ecothatinflationwouldbemodest,onnet,throughearly nomicProjections(SEP),whichisattachedasan nextyearbuthigherthanitslowlevelinthefirsthalf addendumtotheseminutes. of thisyear.Thestaff’sprojectionforinflationover themediumtermwasessentiallyunchanged.With Intheirdiscussionof theeconomicsituationandthe longer-runinflationexpectationsassumedtoremain outlook,meetingparticipantsviewedtheinformation stable,changesincommodityandimportprices receivedovertheintermeetingperiodassuggesting expectedtobemeasured,andslackinlaborand thattheeconomywasexpandingatamoderatepace. productmarketspersistingovermostof theprojec- Theygenerallyindicatedthatthebroadcontoursof tionperiod,inflationwasprojectedtobesubdued theiroutlookforrealactivity,thelabormarket,and through2016. inflationhadnotchangedmateriallysincetheirOctobermeeting,butmostexpressedgreaterconfidencein Thestaff viewedtheuncertaintyaroundtheprojec- theoutlookandsawtherisksassociatedwiththeir tionforeconomicactivityassimilartoitsaverage forecastsof realGDPgrowthandtheunemployment overthepast20years.Nonetheless,theriskstothe rateasmorenearlybalancedthanearlierintheyear. forecastforrealGDPgrowthwereviewedastiltedto Almostallparticipantscontinuedtoprojectthatthe thedownside,reflectingconcernsthattheextentof rateof growthof economicactivitywouldstrengthen supply-sidedamagetotheeconomysincethereces- incomingyears,andallanticipatedthattheunemsioncouldprovegreaterthanassumed;thatthetight- ploymentratewouldgraduallydeclinetowardlevels eninginmortgageratessincelastspringcouldexert consistentwiththeircurrentassessmentsof its greaterrestraintonthehousingrecoverythanhad longer-runnormalvalue.Theprojectedimprovement beenprojected;thateconomicandfinancialstresses ineconomicactivitywasexpectedtobesupportedby inemergingmarketeconomiesandtheeuroarea highlyaccommodativemonetarypolicy,diminished couldintensify;andthat,withthetargetfederal fiscalpolicyrestraint,andapickupinglobalecofundsratealreadynearitslowerbound,theU.S. nomicgrowth,aswellasafurthereasingof credit economywasnotwellpositionedtoweatherfuture conditionsandcontinuedimprovementsinhouseadverseshocks.However,thestaff viewedtherisks holdbalancesheets.Inflationremainedbelowthe aroundtheprojectionfortheunemploymentrateas Committee’slonger-runobjectiveovertheintermeetroughlybalanced,withtheriskof ahigherunem- ingperiod.Nevertheless,participantsstillanticipated ploymentrateresultingfromadversedevelopments thatwithlonger-runinflationexpectationsstableand roughlycounteredbythepossibilitythattheunem- economicactivitypickingup,inflationwouldmove ploymentratecouldcontinuetofallmorethan backtowarditsobjectiveoverthemediumrun.But expected,asithadinrecentyears.Thestaff didnot theynotedthatinflationpersistentlybelowtheComseetheuncertaintyarounditsoutlookforinflationas mittee’sobjectivewouldposeriskstoeconomicperunusuallyhigh,andtheriskstothatoutlookwere formanceandsosawaneedtomonitorinflation viewedasbroadlybalanced. developmentscarefully. Participants’ Views on Current Conditions Consumerspendingappearedtobestrengthening, and the Economic Outlook withsolidgainsinretailsalesinrecentmonthsanda reboundinmotorvehiclesalesinNovember.Onbal- InconjunctionwiththisFOMCmeeting,themeeting ance,retailcontactsreportedlywerefairlyoptimistic participants—5membersof theBoardof Governors aboutholidaysales.Participantscitedanumberof andthepresidentsof the12FederalReserveBanks, factorsthatlikelycontributedtotherecentpickupin allof whomparticipatedinthedeliberations—sub- spending,includingthewaningeffectsof thepayroll mittedtheirassessmentsof realoutputgrowth,the taxincreasethathadtrimmeddisposableincomeearunemploymentrate,inflation,andthetargetfederal lierintheyear,thedropinenergycosts,andthe fundsrateforeachyearfrom2013through2016and recentimprovementinconsumersentiment.More overthelongerrun,undereachparticipant’sjudg- broadly,spendingwasbeingsupportedbygainsin mentof appropriatemonetarypolicy.Thelonger-run householdwealthassociatedwithrisinghouseprices projectionsrepresenteachparticipant’sassessmentof andequityvalues,thestill-lowlevelof interestrates, theratetowhicheachvariablewouldbeexpectedto andtheprogressthathouseholdshavemadeinreducconverge,overtime,underappropriatemonetary ingdebtandstrengtheningtheirbalancesheets. policyandintheabsenceof furthershockstothe Thesefavorabletrendsweregenerallyanticipatedto economy.Theseeconomicprojectionsandpolicy continueandtobeaccompaniedbystrongerrealdis-

256 100thAnnualReport|2013 posableincomeaslabormarketconditionsimprove declinefurthergoingforward.Moreover,anumber andinflationremainslow. of participantsobservedthattheprospectthatthe Congresswouldshortlyreachanaccordonthebud- Activityinthehousingsectorslowedinrecent getseemedtobereducinguncertaintyandlowering months.Someparticipantsnotedthattheincreasein therisksthatmightbeassociatedwithadisruptive mortgageinterestratessincethespringwashavinga politicalimpasse. greatereffectonthatsectorthantheyhadanticipated earlier.Despitetherecentsoftening,participantsdis- Committeeparticipantsgenerallyviewedthe cussedanumberof factorsthatshouldsupporta increasesinnonfarmpayrollemploymentof more continuedrecoveryinhousinggoingforward.These than200,000permonthinOctoberandNovember includedexpectationsthatmortgageinterestrates andthedeclineintheunemploymentrateto7perwouldremainrelativelyfavorable,thatrisinghome centasencouragingsignsof ongoingimprovementin valueswouldboosthouseholdwealthandfurther labormarketconditions.Severalcitedotherindicareducethenumberof borrowerswithunderwater torsof progressinthelabormarket,suchasthe mortgages,thatconsumerincomesandconfidence declineinnewclaimsforunemploymentinsurance, wouldcontinuetoriseasemploymentexpanded,and theuptrendinquits,ortheriseinthenumberof thatapickupinhouseholdformationwouldsupport smallbusinessesreportingjobopeningsthatwere thedemandforhousing. hardtofill.Participantsexchangedviewsonthe extenttowhichthedecreaseinlaborforceparticipa- Businessinvestmentappearedtobeadvancingata tionoverrecentyearsrepresentedcyclicalweakness moderaterate.Anumberof thefundamentaldeter- inthelabormarketthatwasnotadequatelycaptured minantsof businessinvestmentwerepositive:Busi- bytheunemploymentrate.Someparticipantscited nessbalancesheetsremainedingoodshape,cash researchthatfoundthatdemographicandother flowwasample,andinputcostsweresubdued.Busi- structuralfactors,particularlyrisingretirementsby nesscontactsinanumberof Districtswerereport- olderworkers,accountedformuchof therecent edlysomewhatmoreconfidentabouttheoutlook declineinparticipation.However,severalothersconthantheyhadbeenearlierinthefall,butacoupleof tinuedtoseeimportantelementsof cyclicalweakness participantsreportedthattheircontactscontinuedto inthelowlaborforceparticipationrateandcited focusoninvestmentsintendedtoreducecostsand otherindicatorsof considerableslackinthelabor werestillcautiousregardinginvestmenttoexpand market,includingthestill-highlevelsof longcapacity,orthatconcernsabouthealthcarecosts durationunemploymentandof workersemployed wereholdingbackhiring.Inthemanufacturingsec- parttimeforeconomicreasonsandthestilltor,productionappearedtobeincreasingatasolid depressedratioof employmenttopopulationfor rateaccordingtobothnationalandmostof the workersages25to54.Inaddition,althoughacouple regionalsurveysof activity,andtheavailableindexes of participantshadheardreportsof laborshortages, of futureactivitycontinuedtosuggestoptimism particularlyforworkerswithspecializedskills,most amongfirms.Renewedexportdemandandabuildup measuresof wageshadnotaccelerated.Afewparinautoinventories,whichmaybereversedin2014, ticipantsnotedtheriskthatthepersistentweakness werecitedascontributingtotherecentgainsinpro- inlaborforceparticipationandlowratesof producduction.Participantsheardpositivereportsfrom tivitygrowthmightindicatelastingstructuralecotheircontactsinthetechnology,rail,freight,andair- nomicdamagefromthefinancialcrisisandensuing lineindustries,andactivityintheenergysector recession. remainedstrong.Inagriculture,recordyieldswere reportedforcornandsoybeans,butfarmincomewas InflationcontinuedtorunnoticeablybelowtheCombeingreducedbylowercropprices.Measuresof mittee’slonger-runobjectiveof 2percent,butparfarmlandvalueswerestillrising,butanecdotal ticipantsanticipatedthatitwouldmovebacktoward reportssuggestedsofteninginsomeareas. 2percentovertimeastheeconomicrecovery strengthenedandlonger-runinflationexpectations Fiscalpolicycontinuedtorestraineconomicgrowth. remainedsteady.Severalparticipantssuggestedthat However,participantsgenerallyjudgedthatthe someof thefactorsthathadhelddowninflation extentof therestraintmayhavebeguntodiminishas recently,suchastheslowinginpriceincreasesfor theeffectsof thepayrolltaxincreasesearlierinthe medicalcareandbankingservices,werelikelyto yearseemtohavewaned,andthedragonrealactiv- provetransitory.Someparticipantssuggestedthat ityfromrestrictivefiscalpolicieswasexpectedto inflation,whilelow,wasunlikelytoslowfurther,

Minutesof FederalOpenMarketCommitteeMeetings|December 257 pointingtocore,trimmedmean,orsticky-priceinfla- forwardguidanceforthefederalfundsrateandasset tionmeasuresasindicativeof fairlysteadyunderly- purchases. ingpricetrends;mostmeasuresof wagegainswere alsosteady.Nonetheless,manyparticipantsexpressed Intheirdiscussionof theappropriatepathformonconcernaboutthedecelerationinconsumerprices etarypolicy,participantsconsideredwhetherthe overthepastyear,andacouplepointedoutthata cumulativeimprovementinlabormarketconditions numberof otheradvancedeconomieswerealsoexpe- sincetheassetpurchaseprogrambeganinSeptemriencingverylowinflation.Amongthecostsof very ber2012andtheassociatedimprovementintheoutlowordeclininginflationthatwerecitedwereits lookforthelabormarketwarrantedareductionin effectsinraisingrealinterestratesanddebtburdens. thepaceof assetpurchases.Themostrecentdata Afewparticipantsraisedthepossibilitythatrecent showedthatincreasesinnonfarmpayrollemploydeclinesininflationmightsuggestthattheeconomic menthadaveragedaround190,000permonthforthe recoverywasnotasstrongassomethought. past15months,andtheunemploymentratehad fallenmorequicklyoverthatperiodthanmostpar- Domesticfinancialmarketswereinfluencedimpor- ticipantshadexpected.Moreover,participantsgenertantlyovertheintermeetingperiodbyFederal allyanticipatedthattheimprovementinlabormarket Reservecommunicationsandbyeconomicdatathat conditionswouldcontinue,andmosthadbecome weregenerallybetterthanmarketparticipants moreconfidentinthatoutlook.Againstthisbackexpected.Thesefactorsapparentlyledmarketpar- drop,mostparticipantssawareductioninthepace ticipantstoraisetheoddstheyassignedtoareduc- of purchasesasappropriateatthismeetingandcontioninthepaceof assetpurchasesattheDecember sistentwiththeCommittee’spreviouspolicycommumeeting,andtoleaveroughlyunchangedtheirexpec- nications.Manycommentedthatprogresstodate tationsforthetimingof thefirstincreaseinthetar- hadbeenmeaningful,andsomeexpressedtheview getfederalfundsrate.Anumberof participants thatthecriterionof substantialimprovementinthe notedthatcurrentmarketexpectationswerereason- outlookforthelabormarketwaslikelytobemetin ablywellalignedwiththeCommittee’srecentpolicy thecomingyearif theeconomyevolvedasexpected. communications. However,severalparticipantsstressedthattheunemploymentrateremainedelevated,thatarangeof Participantsalsoreviewedindicatorsof financialvul- otherindicatorshadshownlessprogresstowardlevnerabilitiesthatcouldposeriskstofinancialstability elsconsistentwithafullrecoveryinthelabormarket, andthebroadereconomy.Theseindicatorsgenerally andthattheprojectedpickupineconomicgrowth suggestedthatsuchrisksweremoderate,inpart wasnotassured.Someparticipantsalsoquestioned becauseof thereductioninleverageandmaturity whetherslowingthepaceof purchasesatatime transformationthathasoccurredinthefinancialsec- wheninflationwasrunningwellbelowtheCommittorsincetheonsetof thefinancialcrisis.Intheirdis- tee’slonger-runobjectivewasappropriate.Forsome, cussionof potentialrisks,severalparticipantscom- theconsiderableslackremaininginthelabormarket mentedontheriseinforwardprice-to-earningsratios andshortfallof inflationfromtheCommittee’s forsomesmall-capstocks,theincreasedlevelof longer-runobjectivewarrantedcontinuingassetpurequityrepurchases,ortheriseinmargincredit.One chasesatthecurrentpaceforatimeinordertowait pointedtotheincreaseinissuanceof leveragedloans foradditionalinformationconfirmingsustained thisyearandtheapparentdeclineintheaverage progresstowardtheCommittee’sobjectivesorto qualityof suchloans.Acoupleof participants promotefasterprogresstowardthoseobjectives. offeredviewsontheroleof financialstabilityin Amongthoseinclinedtobegintoreducethepaceof monetarypolicydecisionmakingmorebroadly.One assetpurchasesatthismeeting,manyfavoredamodproposedthattheCommitteeanalyzemoreexplicitly estinitialreductionaccompaniedbyguidanceindithepotentialconsequencesof specificriskstothe catingthatdecisionsregardingfuturereductions financialsystemforitsdual-mandateobjectivesand woulddependoneconomicandfinancialdeveloptakeaccountof thepossibleeffectsof monetary mentsaswellastheefficacyandcostsof purchases. policyonsuchrisksinitsassessmentof appropriate Someotherparticipantspreferredalargerreduction policy.Anothersuggestedthattheimportanceof inpurchasesatthismeetingandfuturereductions financialstabilityconsiderationsintheCommittee’s thatwouldbringtheprogramtoacloserelatively deliberationswouldlikelyincreaseovertimeasprog- quickly.AfewproposedthattheCommitteelayout, ressismadetowardtheCommittee’sobjectives,and eitheratthismeetingorsubsequently,amoredeterthatsuchconsiderationsshouldbeincorporatedinto ministicpathforwindingdowntheprogramorthat

258 100thAnnualReport|2013 itannounceafixedamountof additionalpurchases economywasexpandingatamoderatepace.Labor andanexpectedcompletiondate,therebyreducing marketconditionshadimprovedinrecentmonths, uncertaintyaboutthetrajectoryof thepurchase withmonthlygainsinpayrollemploymentof more program. than200,000inOctoberandNovember.Theunemploymentratehaddeclinedbutremainedelevated. Participantsalsoconsideredthepotentialforclarify- Householdspendingandbusinessfixedinvestment ingorstrengtheningtheCommittee’sforwardguid- advanced,whiletherecoveryinthehousingmarket anceforthefederalfundsrate.Ingeneral,partici- slowedsomewhatinrecentmonths.Fiscalpolicywas pantswhofavoredamendingtheforwardguidance restrainingeconomicgrowth,althoughtheextentof sawaneedtomorefullycommunicatehow,if the therestraintmayhavebeguntodiminish.TheComunemploymentratethresholdwasreachedfirst,the mitteeexpectedthat,withappropriatepolicyaccom- Committeewouldlikelysetmonetarypolicyafter modation,economicgrowthwouldstrengthenand thatthresholdwascrossed.Anumberof participants theunemploymentratewouldgraduallydecline pointedoutthatthefederalfundsratepathsunderly- towardlevelsconsistentwithitsdualmandate.Moreingtheeconomicforecaststhattheypreparedforthis over,membersjudgedthattheriskstotheoutlook meeting,aswellasexpectationsforthefundsrate fortheeconomyandthelabormarkethadbecome pathpricedintofinancialmarkets,wereconsistent morenearlybalanced,reflectinginpartaneasingof withtheviewthattheCommitteewouldnotraisethe fiscalpolicyconcernsandanimprovementinthe federalfundsrateuntilwellafterthetimethatthe prospectsforglobaleconomicgrowth.Inflationwas thresholdwascrossed.Afewparticipantsdiscussed runningbelowtheCommittee’slonger-runobjective, thepotentialadvantagesanddisadvantagesof using andthiswasseenasposingpossibleriskstoecomediansof theprojectionsof thefederalfundsrate nomicperformance.MembersanticipatedthatinflafromtheSEPasameansof communicatingthelikely tionwould,overtime,returntotheCommittee’s pathof short-terminterestrates.Someworriedthat, 2percentobjective,supportedbystableinflation if theCommitteebegantoreduceassetpurchases, expectationsandstrongereconomicactivity.Howmarketexpectationsmightshift,andtheywantedto ever,inlightof theirconcernsaboutthepersistence reinforcetheforwardguidancetomitigatetherisks of lowinflation,manymemberssawaneedforthe of anundesiredtighteningof financialconditions Committeetomonitorinflationdevelopmentscarethatcouldhaveadverseeffectsontheeconomy.In fullyforevidencethatinflationwasmovingback lightof theirconcernthatinflationmightcontinueto towarditslonger-runobjective. runwellbelowtheCommittee’slonger-runobjective, severalparticipantssawtheneedtoclearlyconvey Intheirdiscussionof monetarypolicyintheperiod thatinflationremainsanimportantconsiderationin ahead,mostmembersagreedthatthecumulative adjustingthetargetfundsrate.Participantsdebated improvementinlabormarketconditionsandtheliketheadvantagesanddisadvantagesof loweringthe lihoodthattheimprovementwouldbesustainedindiunemploymentratethresholdprovidedinthefor- catedthattheCommitteecouldappropriatelybegin wardguidance.Intheviewof thefewparticipants toslowthepaceof itsassetpurchasesatthismeetwhoadvocatedsuchachange,alowerthreshold ing.However,membersalsoweighedanumberof wouldbeaclearsignalof theCommittee’sintentions considerationsregardingsuchanaction,including andwasanappropriateadjustmentinlightof recent theirdegreeof confidenceinprospectsforsustained labormarketandinflationtrends.Incontrast,afew above-potentialeconomicgrowth,continued othersexpressedconcernthatanychangeinthe improvementinlabormarketconditions,anda thresholdmightbeconfusingandcouldundermine returnof inflationtoitsmandate-consistentlevel thecredibilityof theCommittee’sforwardguidance. overtime.Somealsoexpressedconcernaboutthe Mostwereinclinedtoretainthecurrentthresholds potentialforanunintendedtighteningof financial fortheunemploymentandinflationratesandto conditionsif areductioninthepaceof assetpurinsteadprovidequalitativeguidanceregardingthe chaseswasmisinterpretedassignalingthattheCom- Committee’slikelybehaviorafterathresholdwas mitteewaslikelytowithdrawpolicyaccommodation crossed. morequicklythanhadbeenanticipated.Asaconsequence,manymembersjudgedthattheCommittee Committee Policy Action shouldproceedcautiouslyintakingitsfirstactionto reducethepaceof assetpurchasesandshouldindi- Committeemembersviewedtheinformationreceived catethatfurtherreductionswouldbeundertakenin overtheintermeetingperiodasindicatingthatthe measuredsteps.Membersalsostressedtheneedto

Minutesof FederalOpenMarketCommitteeMeetings|December 259 underscorethatthepaceof assetpurchaseswasnot thislanguagemightappearcalendar-basedrather onapresetcourseandwouldremaincontingenton thanconditionaloneconomicandfinancialdeveloptheCommittee’soutlookforthelabormarketand ments,andonememberobjectedtohavingforward inflationaswellasitsassessmentof theefficacyand guidancethatmightbeseenasrelativelyinflexiblein costsof purchases.Consistentwiththisapproach, responsetochangesinmembers’viewsaboutthe theCommitteeagreedthat,beginninginJanuary,it appropriatepathof thetargetfederalfundsrate. wouldaddtoitsholdingsof agencymortgage- However,thoseconcernsgenerallywereseenasoutbackedsecuritiesatapaceof $35billionpermonth weighedbythebenefitof avoidingtyingtheComratherthan$40billionpermonth,andaddtoits mittee’sdecisiontoocloselytotheunemployment holdingsof longer-termTreasurysecuritiesatapace ratealone,whilestillbeingclearabouttheCommitof $40billionpermonthratherthan$45billionper tee’sintentiontoprovidethemonetaryaccommodamonth.Whiledecidingtomodestlyreduceitspaceof tionneededtosupportareturntomaximumemploypurchases,theCommitteeemphasizedthatitshold- mentandstableprices. ingsof longer-termsecuritiesweresizableandwould stillbeincreasing,whichwouldpromoteastronger Attheconclusionof thediscussion,theCommittee economicrecoverybymaintainingdownwardpres- votedtoauthorizeanddirecttheFederalReserve sureonlonger-terminterestrates,supportingmort- Bankof NewYork,untilitwasinstructedotherwise, gagemarkets,andhelpingtomakebroaderfinancial toexecutetransactionsintheSystemAccountin conditionsmoreaccommodative.TheCommittee accordancewiththefollowingdomesticpolicy alsoreiteratedthatitwillcontinueitsassetpurchases, directive: andemployitsotherpolicytoolsasappropriate,until theoutlookforthelabormarkethasimprovedsub- “Consistentwithitsstatutorymandate,theFedstantiallyinacontextof pricestability.Intheviewof eralOpenMarketCommitteeseeksmonetary onemember,areductioninthepaceof purchases andfinancialconditionsthatwillfostermaxiwasprematureand,beforetakingsuchastep,the mumemploymentandpricestability.Inparticu- Committeeshouldwaitformoreconvincingevidence lar,theCommitteeseeksconditionsinreserve thateconomicgrowthwasrisingfasterthanits marketsconsistentwithfederalfundstradingin potentialandthatinflationwouldreturntotheCom- arangefrom0to¼percent.TheCommittee mittee’s2percentobjective. directstheDesktoundertakeopenmarket operationsasnecessarytomaintainsuchcondi- Intheirdiscussionof forwardguidanceaboutthe tions.BeginninginJanuary,theDeskisdirected targetfederalfundsrate,afewmemberssuggested topurchaselonger-termTreasurysecuritiesata thatloweringtheunemploymentthresholdto6per- paceof about$40billionpermonthandtopurcentcouldeffectivelyconveytheCommittee’sinten- chaseagencymortgage-backedsecuritiesata tiontokeepthetargetfederalfundsratelowforan paceof about$35billionpermonth.TheComextendedperiod.However,mostmemberswantedto mitteealsodirectstheDesktoengageindollar makenochangetothethresholdandinsteadpre- rollandcouponswaptransactionsasnecessary ferredtoprovidequalitativeguidancetoclarifythata tofacilitatesettlementof theFederalReserve’s rangeof labormarketindicatorswouldbeusedwhen agencymortgage-backedsecuritiestransactions. assessingtheappropriatestanceof policyoncethe TheCommitteedirectstheDesktomaintainits thresholdhadbeencrossed.Anumberof members policyof rollingovermaturingTreasurysecurithoughtthattheforwardguidanceshouldemphasize tiesintonewissuesanditspolicyof reinvesting theimportanceof inflationasafactorintheirdeci- principalpaymentsonallagencydebtand sions.Accordingly,almostallmembersagreedtoadd agencymortgage-backedsecuritiesinagency languageindicatingtheCommittee’santicipation, mortgage-backedsecurities.TheSystemOpen basedonitscurrentassessmentof additionalmeas- MarketAccountManagerandtheSecretarywill uresof labormarketconditions,indicatorsof infla- keeptheCommitteeinformedof ongoingdeveltionpressuresandinflationexpectations,andread- opmentsregardingtheSystem’sbalancesheet ingsonfinancialdevelopments,thatitwouldbe thatcouldaffecttheattainmentovertimeof the appropriatetomaintainthecurrenttargetrangefor Committee’sobjectivesof maximumemploythefederalfundsratewellpastthetimethatthe mentandpricestability.” unemploymentratedeclinesbelow6½percent,especiallyif projectedinflationcontinuestorunbelowthe Thevoteencompassedapprovalof thestatement Committee’slonger-runobjective.Itwasnotedthat belowtobereleasedat2:00p.m.:

260 100thAnnualReport|2013 “InformationreceivedsincetheFederalOpen securitiesatauction.TheCommittee’ssizable MarketCommitteemetinOctoberindicates andstill-increasingholdingsof longer-term thateconomicactivityisexpandingatamoder- securitiesshouldmaintaindownwardpressure atepace.Labormarketconditionshaveshown onlonger-terminterestrates,supportmortgage furtherimprovement;theunemploymentrate markets,andhelptomakebroaderfinancial hasdeclinedbutremainselevated.Household conditionsmoreaccommodative,whichinturn spendingandbusinessfixedinvestment shouldpromoteastrongereconomicrecovery advanced,whiletherecoveryinthehousingsec- andhelptoensurethatinflation,overtime,isat torslowedsomewhatinrecentmonths.Fiscal theratemostconsistentwiththeCommittee’s policyisrestrainingeconomicgrowth,although dualmandate. theextentof restraintmaybediminishing.InflationhasbeenrunningbelowtheCommittee’s TheCommitteewillcloselymonitorincoming longer-runobjective,butlonger-terminflation informationoneconomicandfinancialdevelopexpectationshaveremainedstable. mentsincomingmonthsandwillcontinueits purchasesof Treasuryandagencymortgage- Consistentwithitsstatutorymandate,theCom- backedsecurities,andemployitsotherpolicy mitteeseekstofostermaximumemployment toolsasappropriate,untiltheoutlookforthe andpricestability.TheCommitteeexpectsthat, labormarkethasimprovedsubstantiallyina withappropriatepolicyaccommodation,eco- contextof pricestability.If incominginformanomicgrowthwillpickupfromitsrecentpace tionbroadlysupportstheCommittee’sexpectaandtheunemploymentratewillgradually tionof ongoingimprovementinlabormarket declinetowardlevelstheCommitteejudgescon- conditionsandinflationmovingbacktowardits sistentwithitsdualmandate.TheCommittee longer-runobjective,theCommitteewilllikely seestheriskstotheoutlookfortheeconomy reducethepaceof assetpurchasesinfurther andthelabormarketashavingbecomemore measuredstepsatfuturemeetings.However, nearlybalanced.TheCommitteerecognizesthat assetpurchasesarenotonapresetcourse,and inflationpersistentlybelowits2percentobjec- theCommittee’sdecisionsabouttheirpacewill tivecouldposeriskstoeconomicperformance, remaincontingentontheCommittee’soutlook anditismonitoringinflationdevelopmentscare- forthelabormarketandinflationaswellasits fullyforevidencethatinflationwillmoveback assessmentof thelikelyefficacyandcostsof towarditsobjectiveoverthemediumterm. suchpurchases. Takingintoaccounttheextentof federalfiscal Tosupportcontinuedprogresstowardmaxiretrenchmentsincetheinceptionof itscurrent mumemploymentandpricestability,theComassetpurchaseprogram,theCommitteeseesthe mitteetodayreaffirmeditsviewthatahighly improvementineconomicactivityandlabor accommodativestanceof monetarypolicywill marketconditionsoverthatperiodasconsistent remainappropriateforaconsiderabletimeafter withgrowingunderlyingstrengthinthebroader theassetpurchaseprogramendsandtheecoeconomy.Inlightof thecumulativeprogress nomicrecoverystrengthens.TheCommitteealso towardmaximumemploymentandtheimprove- reaffirmeditsexpectationthatthecurrentexcepmentintheoutlookforlabormarketconditions, tionallylowtargetrangeforthefederalfunds theCommitteedecidedtomodestlyreducethe rateof 0to¼percentwillbeappropriateatleast paceof itsassetpurchases.BeginninginJanu- aslongastheunemploymentrateremainsabove ary,theCommitteewilladdtoitsholdingsof 6½percent,inflationbetweenoneandtwoyears agencymortgage-backedsecuritiesatapaceof aheadisprojectedtobenomorethanahalf per- $35billionpermonthratherthan$40billionper centagepointabovetheCommittee’s2percent month,andwilladdtoitsholdingsof longer- longer-rungoal,andlonger-terminflation termTreasurysecuritiesatapaceof $40billion expectationscontinuetobewellanchored.In permonthratherthan$45billionpermonth. determininghowlongtomaintainahighly TheCommitteeismaintainingitsexistingpolicy accommodativestanceof monetarypolicy,the of reinvestingprincipalpaymentsfromitshold- Committeewillalsoconsiderotherinformation, ingsof agencydebtandagencymortgage- includingadditionalmeasuresof labormarket backedsecuritiesinagencymortgage-backed conditions,indicatorsof inflationpressuresand securitiesandof rollingovermaturingTreasury inflationexpectations,andreadingsonfinancial

Minutesof FederalOpenMarketCommitteeMeetings|December 261 developments.TheCommitteenowanticipates, Committee’slonger-runobjectiveof 2percent, basedonitsassessmentof thesefactors,thatit changesintheassetpurchaseprogramshouldbe likelywillbeappropriatetomaintainthecurrent postponeduntilincomingdatamoreclearlyindicate targetrangeforthefederalfundsratewellpast thateconomicgrowthislikelytobesustainedabove thetimethattheunemploymentratedeclines itspotentialrate.Hesawthecostsof delayingaction below6½percent,especiallyif projectedinfla- atthismeetingaslikelytobesmallrelativetothe tioncontinuestorunbelowtheCommittee’s gainsfrompromotingafasterreturnof bothele- 2percentlonger-rungoal.WhentheCommittee mentsof theCommittee’sdualmandatetotheir decidestobegintoremovepolicyaccommoda- longer-runobjectives. tion,itwilltakeabalancedapproachconsistent withitslonger-rungoalsof maximumemploy- Itwasagreedthatthenextmeetingof theCommittee mentandinflationof 2percent.” wouldbeheldonTuesday–Wednesday,January28– 29,2014.Themeetingadjournedat11:00a.m.on Votingforthisaction:BenBernanke,WilliamC. December18,2013. Dudley,JamesBullard,CharlesL.Evans,EstherL. George,JeromeH.Powell,JeremyC.Stein,Daniel Notation Vote K.Tarullo,andJanetL.Yellen. BynotationvotecompletedonNovember19,2013, theCommitteeunanimouslyapprovedtheminutesof Votingagainstthisaction:EricRosengren. theFOMCmeetingheldonOctober29–30,2013. Mr.Rosengrendissentedbecauseheviewedthedeci- WilliamB.English siontoslowthepaceof assetpurchasesatthismeet- Secretary ingaspremature.Inhisview,withtheunemployment ratestillelevatedandtheinflationratewellbelowthe

262 100thAnnualReport|2013 Addendum: theunemploymentratedeclininggradually(table1 andfigure1).Almostallof theparticipantsprojected Summary of Economic Projections thatinflation,asmeasuredbytheannualchangein thepriceindexforpersonalconsumptionexpendi- InconjunctionwiththeDecember17–18,2013,Fedtures(PCE),wouldrisetoalevelatorslightlybelow eralOpenMarketCommittee(FOMC)meeting, theCommittee’s2percentobjectivein2016. meetingparticipants—5membersof theBoardof Governorsandthe12presidentsof theFederal Mostparticipantsexpectedthathighlyaccommoda- ReserveBanks,allof whomparticipatedinthedelibtivemonetarypolicywouldremainwarrantedover erations—submittedtheirassessmentsof realoutput thenextfewyearstofosterprogresstowardtheFedgrowth,theunemploymentrate,inflation,andthe eralReserve’slonger-runobjectives.Asshowninfigtargetfederalfundsrateforeachyearfrom2013 ure2,alargemajorityof participantsprojectednot through2016andoverthelongerrun.Eachparticionlythatitwouldbeappropriatetowaituntil2015 pant’sassessmentwasbasedoninformationavailable orlaterbeforebeginningtoincreasethefederalfunds atthetimeof themeetingplushisorherjudgmentof rate,butalsothatitwouldthenbeappropriateto appropriatemonetarypolicyandassumptionsabout raisethetargetfederalfundsraterelativelygradually. thefactorslikelytoaffecteconomicoutcomes.The Mostparticipantsviewedtheireconomicprojections longer-runprojectionsrepresenteachparticipant’s asbroadlyconsistentwithaslowinginthepaceof judgmentof thevaluetowhicheachvariablewould theCommittee’spurchasesof longer-termsecurities beexpectedtoconverge,overtime,underappropriate inearly2014andthecompletionof theprogramin monetarypolicyandintheabsenceof furthershocks thesecondhalf of theyear. totheeconomy.“Appropriatemonetarypolicy”is definedasthefuturepathof policythateachpartici- Mostparticipantssawtheuncertaintyassociated pantdeemsmostlikelytofosteroutcomesforecowiththeiroutlookforeconomicgrowth,theunemnomicactivityandinflationthatbestsatisfyhisor ploymentrate,andinflationassimilartothatof the herindividualinterpretationof theFederalReserve’s past20years.Inaddition,mostparticipantsconsidobjectivesof maximumemploymentandstable eredtheriskstotheoutlookforrealgrossdomestic prices. product(GDP),theunemploymentrate,andinflationtobebroadlybalanced,althoughafewsawthe Overall,FOMCparticipantsexpected,underapproriskstotheirinflationforecastsastiltedtothe priatemonetarypolicy,thateconomicgrowthwould downside. pickup,onaverage,overthenextthreeyears,with Table1.EconomicprojectionsofFederalReserveBoardmembersandFederalReserveBankpresidents,December2013 Percent Centraltendency1 Range2 Variable 2013 2014 2015 2016 Longerrun 2013 2014 2015 2016 Longerrun ChangeinrealGDP 2.2to2.3 2.8to3.2 3.0to3.4 2.5to3.2 2.2to2.4 2.2to2.4 2.2to3.3 2.2to3.6 2.1to3.5 1.8to2.5 Septemberprojection 2.0to2.3 2.9to3.1 3.0to3.5 2.5to3.3 2.2to2.5 1.8to2.4 2.2to3.3 2.2to3.7 2.2to3.5 2.1to2.5 Unemploymentrate 7.0to7.1 6.3to6.6 5.8to6.1 5.3to5.8 5.2to5.8 7.0to7.1 6.2to6.7 5.5to6.2 5.0to6.0 5.2to6.0 Septemberprojection 7.1to7.3 6.4to6.8 5.9to6.2 5.4to5.9 5.2to5.8 6.9to7.3 6.2to6.9 5.3to6.3 5.2to6.0 5.2to6.0 PCEinflation 0.9to1.0 1.4to1.6 1.5to2.0 1.7to2.0 2.0 0.9to1.2 1.3to1.8 1.4to2.3 1.6to2.2 2.0 Septemberprojection 1.1to1.2 1.3to1.8 1.6to2.0 1.7to2.0 2.0 1.0to1.3 1.2to2.0 1.4to2.3 1.5to2.3 2.0 CorePCEinflation3 1.1to1.2 1.4to1.6 1.6to2.0 1.8to2.0 1.1to1.2 1.3to1.8 1.5to2.3 1.6to2.2 Septemberprojection 1.2to1.3 1.5to1.7 1.7to2.0 1.9to2.0 1.2to1.4 1.4to2.0 1.6to2.3 1.7to2.3 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andprojectionsforbothmeasuresofinflationarefromthefourthquarterofthepreviousyeartothefourth quarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures (PCE)andthepriceindexforPCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarterofthe yearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’s assessmentoftheratetowhicheachvariablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.The SeptemberprojectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonSeptember17–18,2013. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

Minutesof FederalOpenMarketCommitteeMeetings|December 263 Figure1.Centraltendenciesandrangesofeconomicprojections,2013–16andoverthelongerrun Percent Change in real GDP 5 Central tendency of projections 4 Range of projections 3 2 1 + Actual 0 - 1 2 3 2008 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Percent Unemployment rate 10 9 8 7 6 5 2008 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Percent PCE inflation 3 2 1 2008 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Percent Core PCE inflation 3 2 1 2008 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Note:Definitionsofvariablesareinthegeneralnotetotable1.Thedatafortheactualvaluesofthevariablesareannual.

264 100thAnnualReport|2013 Figure2.OverviewofFOMCparticipants’assessmentsofappropriatemonetarypolicy Number of participants Appropriate timing of policy firming 12 12 11 10 9 8 7 6 5 4 3 3 2 2 1 2014 2015 2016 Appropriate pace of policy firming Percent Target federal funds rate at year-end 6 5 4 3 2 1 0 2013 2014 2015 2016 Longer run Note:Intheupperpanel,theheightofeachbardenotesthenumberofFOMCparticipantswhojudgethat,underappropriatemonetarypolicy,thefirstincreaseinthetargetfederalfundsratefromitscurrentrangeof0to¼percentwilloccurinthespecifiedcalendaryear.InSeptember2013,thenumbersofFOMCparticipantswhojudgedthatthefirst increaseinthetargetfederalfundsratewouldoccurin2014,2015,and2016were,respectively,3,12,and2.Inthelowerpanel,eachshadedcircleindicatesthevalue (roundedtothenearest¼percentagepoint)ofanindividualparticipant’sjudgmentoftheappropriatelevelofthetargetfederalfundsrateattheendofthespecifiedcalendar yearoroverthelongerrun.

Minutesof FederalOpenMarketCommitteeMeetings|December 265 The Outlook for Economic Activity andtheunemploymentrateremaineddispersed.The diversityevidentlyreflectedtheirindividualassess- Participantsgenerallyprojectedthat,conditionalon mentsof thelikelyrateatwhichtherestraintfrom theirindividualassumptionsaboutappropriatemon- fiscalpolicywilldiminishanddemandforconsumer etarypolicy,realGDPgrowthwouldacceleratein andproducerdurableswillrecover,theanticipated 2014fromitsratein2013andwouldpickupfurther pathforforeigneconomicactivity,thetrajectoryfor in2015.Subsequently,in2016,realGDPgrowth growthinhouseholdnetworth,andtheappropriate wouldbegintoconvergebacktoapacethatpartici- pathof monetarypolicy.RelativetoSeptember,the pantssawasthelonger-runrateof outputgrowth. dispersionsof participants’projectionsforGDP Participantspointedtoanumberof factorscontrib- growthin2014andbeyondwereaboutunchanged, utingtothepickupingrowthinthenearterm, whiledispersionsof theprojectionsfortheunemincludingdiminishingrestraintfromfiscalpolicy, ploymentratenarrowedsomethrough2015. pent-updemandforconsumerandproducer durables,risinghouseholdnetworth,strongergrowth abroad,andaccommodativemonetarypolicy.A The Outlook for Inflation numberof participantsnotedthatgrowthinresidentialinvestmenthadslowedsomerecentlyasaresult Participants’viewsonthebroadoutlookforinflation of highermortgagerates,buttheyexpectedgrowth undertheassumptionof appropriatemonetary tostrengthenbeginningin2014.Severalparticipants policyweremarkeddownabitin2013and2014 alsonotedaslowdowninthegrowthof business fromthoseintheirSeptemberprojections,butthe investmentbutsawgrowthpickingupovertheforecentraltendenciesfor2015andbeyondweresimilar. casthorizon,reflectinganexpectedaccelerationin Allparticipantsanticipatedthat,onaverage,both sales. headlineandcoreinflationwouldrisegraduallyover thenextfewyears,andalargemajorityof partici- Thecentraltendenciesof participants’projections pantsexpectedheadlineinflationtobeatorslightly forrealGDPgrowthwere2.2to2.3percentin2013, belowtheCommittee’s2percentobjectivein2016. 2.8to3.2percentin2014,3.0to3.4percentin2015, Specifically,thecentraltendenciesforPCEinflation and2.5to3.2percentin2016.Thecentraltendency were0.9to1.0percentin2013,1.4to1.6percentin forthelonger-runrateof growthof realGDPwas 2014,1.5to2.0percentin2015,and1.7to2.0per- 2.2to2.4percent.Theseprojectionswerelittle centin2016.Thecentraltendenciesof theforecasts changedfromSeptember. forcoreinflationwereslightlylowerovertheprojectionperiodthaninSeptemberandbroadlysimilarto Participantsanticipatedagradualdeclineinthe thosefortheheadlinemeasure.Anumberof particiunemploymentrateovertheprojectionperiod.The pantsviewedthecombinationof stableinflation centraltendenciesof participants’forecastsforthe expectationsanddiminishingresourceslackaslikely unemploymentrateinthefourthquarterof each tocontributetoagradualriseof inflationback yearwere7.0to7.1percentin2013,6.3to6.6pertowardtheCommittee’slonger-runobjective. centin2014,5.8to6.1percentin2015,and5.3to 5.8percentin2016.Nearlyallparticipantsmadea Figures3.Cand3.Dprovideinformationonthe modestdownwardrevisiontotheirprojectedpathfor diversityof participants’viewsabouttheoutlookfor theunemploymentrate,reflectingitsrecentlargerinflation.RelativetoSeptember,therangesof parthan-expecteddecline;however,thecentraltendency ticipants’projectionsforoverallinflationnarrowed of participants’estimatesof thelonger-runnormal somein2013and2014butremainedrelatively rateof unemploymentthatwouldprevailunder unchangedthereafter.In2016,theforecastsforPCE appropriatemonetarypolicyandintheabsenceof inflationwereconcentratedneartheCommittee’s furthershockstotheeconomywasunchangedat longer-runobjective,thoughoneparticipant 5.2to5.8percent.Amajorityof participantsproexpectedinflationtobe¼percentagepointabovethe jectedthattheunemploymentratewouldbenearor Committee’sobjectiveandanotherthreeexpectedit slightlyabovetheirindividualestimatesof itslongertobealmost½percentagepointbelow.Similartothe runlevelattheendof 2016. projectionsforheadlineinflation,theprojectionsfor coreinflationalsowereconcentratednear2percent Figures3.Aand3.Bshowthatparticipants’views in2016. regardingthelikelyoutcomesforrealGDPgrowth

266 100thAnnualReport|2013 Figure3.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2013–16andoverthelongerrun Number of participants 2013 20 December projections 18 16 September projections 14 12 10 8 6 4 2 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 3.2 - 3.4 - 3.6 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 Percent range Number of participants 2014 20 18 16 14 12 10 8 6 4 2 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 3.2 - 3.4 - 3.6 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 3.2 - 3.4 - 3.6 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 Percent range Number of participants 2016 20 18 16 14 12 10 8 6 4 2 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 3.2 - 3.4 - 3.6 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 3.2 - 3.4 - 3.6 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|December 267 Figure3.B.Distributionofparticipants’projectionsfortheunemploymentrate,2013–16andoverthelongerrun Number of participants 2013 20 18 December projections 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 - 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 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 - 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 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 - 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 Percent range Number of participants 2016 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 - 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 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 - 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

268 100thAnnualReport|2013 Figure3.C.Distributionofparticipants’projectionsforPCEinflation,2013–16andoverthelongerrun Number of participants 2013 20 December projections 18 16 September projections 14 12 10 8 6 4 2 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.0 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 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.0 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 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2016 20 18 16 14 12 10 8 6 4 2 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.0 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 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|December 269 Figure3.D.Distributionofparticipants’projectionsforcorePCEinflation,2013–16 Number of participants 2013 20 December projections 18 September 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 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 2016 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.

270 100thAnnualReport|2013 Appropriate Monetary Policy mentsof itsexpectedlonger-runvalue.Incontrast, thetwoparticipantswhosawthefirsttighteningin Asindicatedinfigure2,mostparticipantsjudged 2014believedthattheappropriatelevelof thefederal thatexceptionallylowlevelsof thefederalfundsrate fundsrateattheendof 2016wouldbeattheirassesswouldremainappropriateforthenextfewyears.In mentof itslonger-runlevel,whichtheyjudgedtobe particular,12participantsthoughtthatthefirst eitheratorjustabove4percent.Amongallparticiincreaseinthetargetfederalfundsratewouldnotbe pants,estimatesof thelonger-runtargetfederal warranteduntilsometimein2015,and3judgedthat fundsraterangedfrom3½toabout4¼percent, policyfirmingwouldlikelynotbeappropriateuntil reflectingtheCommittee’sinflationobjectiveof 2016.Only2participantsjudgedthatanincreasein 2percentandparticipants’individualjudgments thefederalfundsratein2014wouldbeappropriate. abouttheappropriatelonger-runlevelof therealfederalfundsrateintheabsenceof furthershockstothe Allparticipantsprojectedthattheunemployment economy. ratewouldbebelowtheCommittee’s6½percent thresholdattheendof theyearinwhichtheyviewed Participantsalsodescribedtheirviewsregardingthe theinitialincreaseinthefederalfundsratetobe appropriatepathof theFederalReserve’sbalance appropriate,andallbutonejudgedthatinflation sheet.ConditionalontheirrespectiveeconomicoutwouldbeatorbelowtheCommittee’slonger-run looks,mostparticipantsjudgedthatitwouldlikely objective.Almostallparticipantsprojectedthatthe beappropriatetobegintoreducethepaceof the unemploymentratewouldremainabovetheirviewof Committee’spurchasesof longer-termsecuritiesin itslonger-runnormallevelattheendof theyearin thefirstquarterof 2014andtoconcludepurchases whichtheysawthefederalfundsrateincreasingfrom inthesecondhalf of theyear.Anumberof particitheeffectivelowerbound. pantsthoughtitwouldbeappropriatetoendthe assetpurchaseprogramearlier;incontrast,onepar- Figure3.Eprovidesthedistributionof participants’ ticipantthoughtamoreaccommodativepathfor judgmentsregardingtheappropriatelevelof thetar- assetpurchaseswouldbeappropriate. getfederalfundsrateattheendof eachcalendaryear from2013to2016andoverthelongerrun.Asnoted Participants’viewsof theappropriatepathformonabove,mostparticipantsjudgedthateconomicconetarypolicywereinformedbytheirjudgmentsonthe ditionswouldwarrantmaintainingthecurrentlow stateof theeconomy,includingthevaluesof the levelof thefederalfundsrateuntil2015.Thetwo unemploymentrateandotherlabormarketindicaparticipantswhosawthefederalfundsrateleaving torsthatwouldbeconsistentwithmaximumemploytheeffectivelowerboundearliersubmittedprojecment,theextenttowhichtheeconomywascurrently tionsforthefederalfundsrateattheendof 2014of fallingshortof maximumemployment,theprospects ¾percentand1¼percent.Thesetwoparticipants’ forinflationtoreachtheCommittee’slonger-term viewsof theappropriatelevelof thefederalfunds objectiveof 2percent,andthebalanceof risks rateattheendof 2015were2¾percentand3¼peraroundtheoutlook.Afewparticipantsalsomencent,whiletheremainderof participantssawthe tionedusingvariousmonetarypolicyrulestoguide appropriatelevelof thefundsrateatthattimetobe theirthinkingontheappropriatepathforthefederal 2percentorlower.Onbalance,whilethedispersion fundsrate. of projectionsforthevalueof thefederalfundsrate ineachyearchangedlittlesinceSeptember,the medianvalueof therateattheendof 2015and2016 Uncertainty and Risks decreased¼percentagepoint. Nearlyallparticipantsjudgedthatthelevelsof AsinSeptember,allof theparticipantswhosawthe uncertaintyabouttheirprojectionsforrealGDP firsttighteningineither2015or2016judgedthatthe growthandunemploymentwerebroadlysimilarto appropriatelevelof thefederalfundsrateattheend thenormduringtheprevious20years,although of 2016wouldstillbebelowtheirindividualassess- threeparticipantscontinuedtoseethemashigher

Minutesof FederalOpenMarketCommitteeMeetings|December 271 Figure3.E.Distributionofparticipants’projectionsforthetargetfederalfundsrate,2013–16andoverthelongerrun Number of participants 2013 20 December projections 18 September projections 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 - 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 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 - 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 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 - 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 Percent range Number of participants 2016 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 - 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 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 - 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 Percent range Note:Thetargetfederalfundsrateismeasuredasthelevelofthetargetrateattheendofthecalendaryearorinthelongerrun.

272 100thAnnualReport|2013 (figure4).1MoreparticipantsthaninSeptember Table2.Averagehistoricalprojectionerrorranges judgedtheriskstorealGDPgrowthandtheunem- Percentagepoints ploymentratetobebroadlybalanced.Arangeof factorswascitedascontributingtothischangein Variable 2013 2014 2015 2016 view,includinganimprovedoutlookforglobalfinan- ChangeinrealGDP1 ±0.5 ±1.4 ±1.8 ±1.8 cialandeconomicconditions,amoderationingeo- Unemploymentrate1 ±0.1 ±0.7 ±1.4 ±1.8 politicalrisks,anupgradedassessmentof thepros- Totalconsumerprices2 ±0.3 ±0.9 ±1.0 ±1.0 pectsforconsumptiongrowth,andreducedoddsof Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared afiscalimpasse. errorofprojectionsfor1993through2012thatwerereleasedinthewinterby variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast Uncertainty,”undercertainassumptions,thereisabouta70percentprobability ParticipantsreportedlittlechangeintheirassessthatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein mentsof thelevelof uncertaintyandthebalanceof rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Further informationmaybefoundinDavidReifschneiderandPeterTulip(2007),“Gauging risksaroundtheirforecastsforoverallPCEinflation theUncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,” andcoreinflation.Mostparticipantsjudgedthelev- FinanceandEconomicsDiscussionSeries2007-60(Washington:Boardof GovernorsoftheFederalReserveSystem,November). elsof uncertaintyassociatedwiththeirforecastsfor 1 Definitionsofvariablesareinthegeneralnotetotable1. thetwoinflationmeasurestobebroadlysimilarto 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen historicalnormsandtheriskstothoseprojectionsas mostwidelyusedingovernmentandprivateeconomicforecasts.Projection ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof broadlybalanced.Fourparticipantssawtherisksto theyearindicated. theirinflationforecastsastiltedtothedownside, reflecting,forexample,thepossibilitythatthecur- 1 Table2providesestimatesoftheforecastuncertaintyforthe rentlowlevelsof inflationcouldprovemorepersischangeinrealGDP,theunemploymentrate,andtotalconsumerpriceinflationovertheperiodfrom1993through2012. tentthananticipated.Conversely,oneparticipant Attheendofthissummary,thebox“ForecastUncertainty” citedupsideriskstoinflationstemmingfromuncerdiscussesthesourcesandinterpretationofuncertaintyinthe taintyaboutthetimingandefficacyof theCommiteconomicforecastsandexplainstheapproachusedtoassessthe uncertaintyandrisksattendingtheparticipants’projections. tee’swithdrawalof accommodation.

Minutesof FederalOpenMarketCommitteeMeetings|December 273 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.

274 100thAnnualReport|2013 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers inthethirdandfourthyears.Thecorresponding oftheBoardofGovernorsandthepresidentsofthe 70percentconfidenceintervalsforoverallinflation FederalReserveBanksinformdiscussionsofmon- wouldbe1.7to2.3percentinthecurrentyear,1.1to etarypolicyamongpolicymakersandcanaidpublic 2.9percentinthesecondyear,and1.0to3.0percent understandingofthebasisforpolicyactions.Con- inthethirdandfourthyears. 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 rangeof2.5to3.5percentinthecurrentyear,1.6to pointforward. 4.4percentinthesecondyear,and1.2to4.8percent

275 9 Litigation During2013,theBoardof Governorswasapartyin Dodd-FrankWallStreetReformandConsumerPro- 14lawsuitsorappealsfiledthatyearandwasaparty tectionActrelatingtodebitcardinterchangefees. in15othercasespendingfrompreviousyears,fora totalof 29cases.In2012,theBoardhadbeenaparty StateNationalBankof BigSpringv.Bernanke, inatotalof 26cases.Asof December31,2013,15 No.13-5247(D.C.Circuit,noticeof appealfiled caseswerepending. August2,2013),isanappealof adistrictcourtruling dismissingplaintiffs’challengetotheconstitutionality AmericanBankersAssociation,etal.,v.Boardof Gov- of theConsumerFinancialProtectionBureauand ernors,No.13-cv-02050(D.Districtof Columbia, theFinancialStabilityOversightCouncil. filedDecember24,2013),wasachallengetoaportionof theso-called“Volckerrule”issuedbythe LawOfficeLaLeyconJohnH.Ruizv.JohnDoeBor- Boardandotherregulators.OnFebruary12,2014, rowers,etal.,No.13-cv-22783(S.D.Fla.,removed theplaintiffsvoluntarilydismissedtheaction. fromstatecourtonAugust2,2013),wasanactionto forecloseonattorneys’chargingliens.OnOctober3, AmericanBankersAssociation,etal.,v.Boardof Gov- 2013,thedistrictcourtgrantedinpartanddeniedin ernors,No.13-1310(D.C.Circuit,filedDecember23, parttheBoard’smotiontodismiss,andremanded 2013),isachallengetoaportionof theso-called themattertothestatecourt. “Volckerrule”issuedbytheBoardandotherregulators.OnFebruary12,2014,thepartiesstipulatedtoa dismissalof thepetitionforreview. Ferrerv.Bernanke,No.13-29975(S.D.Florida,filed July29,2013),isanactionallegingthatplaintiffs receivedimproperrelief undertheBoard’sandthe Blairv.Bernanke,No.CJ-2013-3525,No.14-CV- Officeof theComptrollerof theCurrency’sfinancial 00022(N.D.Oklahoma,filedNovember25,2013),is remediationordersregardingdeficientmortgageserathird-party,pro-secomplaintoriginallyfiledin vicingandforeclosurepractices. OklahomastatecourtallegingthattheBoardviolated theplaintiff’sconstitutionalrightsthroughitsregulationof directdepositpayments. LawOfficesLaLeyconJohnH.Ruizv.JohnDoe Borrowers,etal.,No.13-cv-22476(S.D.Florida, Richterv.Boardof Governors,No.13-cv-015107 removedfromstatecourtJuly11,2013),wasan (D.D.C.,filedOctober1,2013),wasaFreedomof actionseekinginjunctionanddeclarationthatplain- InformationActcase.OnFebruary14,2014,thedis- tiffs’attorneys’chargingliensarevalidandenjoining trictcourtgrantedtheBoard’smotionforsummary disbursalof fundstoindividualsunderaBoard judgment. enforcementorder.OnOctober3,2013,thedistrict courtgrantedinpartanddeniedinparttheBoard’s WMILiquidatingTrustv.Boardof Governors, motiontodismiss,andremandedthemattertothe No.13-cv-01706(W.D.Washington,filedSeptem- statecourt. ber20,2013),isanactionforadeclaratoryjudgment regardinggoldenparachutepayments. LawOfficesLaLeyconJohnH.Ruizv.RustConsulting,No.13-cv-22119(S.D.Florida,removedfrom NACSetal.v.Boardof Governors,No.13-5720(D.C. statecourtJune13,2013),wasanactionseeking Circuit,noticeof appealfiledAugust21,2013),isan injunctionpreventingdisbursementof fundstoindiappealfromdistrictcourtrulinginvalidatingBoard vidualsunderBoardenforcementorder.Thedistrict regulationsissuedpursuanttosection1075of the courtdismissedtheactiononJuly12,2013.

276 100thAnnualReport|2013 Goldstein,Trusteev.Boardof Governors,No.13-MC- Mashakv.FederalReserveBankSystem,etal.,No.12- 00445-RC(D.D.C.,motiontocompelfiledMay1, cv-1333(D.Minnesota,filedJune1,2012),wasachal- 2013),wasamotiontocompelproductionof bank lengeregardingmortgageforeclosure.OnFebruary14, examinationmaterial.OnJanuary17,2014,theplain- 2013,thedistrictcourtdismissedtheaction. tiff voluntarilydismissedtheaction. DeNaplesv.Boardof Governorsetal.,No.12-1198 Ballv.Boardof Governors,No.13-cv-00603(D.Dis- (D.C.Circuit,filedApril19,2012),wasapetitionfor trictof Columbia,filedApril30,2013),isaFreedom reviewof cease-and-desistordersissuedbytheBoard of InformationActcase. andtheOfficeof theComptrollerof theCurrency. OnJanuary29,2013,theCourtof Appealsvacated Taylorv.Bernanke,etal.,No.13-cv-1013(E.D.New theordersandremandedtotheagenciesforaddi- York,filedFebruary26,2013),wasanactionforan tionalaction. orderrequiringagenciestoissuefinalrulesunder 12U.S.C.1851(the“Volckerrule”).OnSeptember9, FreedomWatchv.Boardof Governors,No.12-cv-314 2013,thedistrictcourtgrantedthegovernment’s (D.Districtof Columbia,filedFebruary27,2012), motiontodismisstheaction. wasaFreedomof InformationActcase.OnFebruary27,2013,thedistrictcourtgrantedthegovern- Conoverv.Boardof Governors,No.12-cv-6480(N.D. ment’smotiontodismiss. California,filedDecember20,2012),wasaFreedom of InformationActcase.OnApril2,2013,thedis- Estateof Deleonv.Boardof Governors,No.11-cvtrictcourtgrantedtheBoard’smotiontodismiss. 1538(N.D.NewYork,filedDecember30,2011),was acomplaintinvolvingallegedfailuretoaddressa Crismanv.Boardof Governorsetal.,No.12-cv-1871 consumercomplaintataregulatedbank.OnFebru- (D.Districtof Columbia,filedNovember19,2012), ary14,2013,thedistrictcourtdismissedthecase. isaFreedomof InformationActcase. Hallerv.U.S.Departmentof HousingandUrban Wisev.FederalReserveBoard,No.12-cv-1636(D. Developmentetal.,No11-cv-881MRB-KLL(S.D. Districtof Columbia,filedOctober2,2012),isa Ohio,filedDecember16,2011),wasanactionarising claimundertheFederalTortClaimsAct. outof amortgageforeclosure.OnMarch4,2013,the districtcourtgrantedtheBoard’smotiontodismiss. McKinleyv.BoardofGovernors,No12-cv-1175(D. Districtof Columbia,filedJuly18,2012),wasaFree- CitiMortgage,Inc.v.Kokolis,No.11-cv-2933-RBH domof InformationActcase.OnMarch7,2013,the (D.SouthCarolina,filedinstatecourtAugust5, plaintiff voluntarilydismissedtheactionwith 2011;noticeof removalfiledOctober27,2011),isa prejudice. third-partycomplaintagainsttheBoardandthe UnitedStatesDepartmentof theTreasurybythe JudicialWatchv.BoardofGovernorsandFederalOpen defendantinamortgageforeclosureaction.Thedis- MarketCommittee,No.12-cv-1114(D.Districtof trictcourtdismissedtheactiononMay30,2012,and Columbia,filedJuly6,2012),wasaFreedomof Infor- theplaintiff’sappealtotheFourthCircuitCourtof mationActcase.OnFebruary12,2013,theplaintiff Appeals(No.12-1917)ispending. voluntarilydismissedtheactionwithprejudice. FirstCitizensBankandTrustCo.v.Spirakis,No.11- Marcussev.UnitedStatesDepartmentof Justice,et cv-2895-RBH(D.SouthCarolina,filedinstatecourt al.,No.12-cv-1025(D.Districtof Columbia,filed August5,2011;noticeof removalfiledOctober24, June22,2012),wasaFreedomof InformationAct 2011),wasathird-partycomplaintagainsttheBoard case.OnAugust12,2013,thedistrictcourtgranted andtheUnitedStatesDepartmentof theTreasuryby theBoard’smotionforsummaryjudgmentanddis- thedefendantinamortgageforeclosureaction.The missedtheactionastotheBoard. districtcourtdismissedtheactiononMay30,2012, andtheFourthCircuitaffirmedthedismissal Gelbv.Boardof Governors,No.12-cv-4880(S.D.New (No.12-1914)onMarch15,2013. York,filedJune21,2012),wasaFreedomof InformationActcase.OnJuly17,2013,thedistrictcourt Artisv.Greenspan,No.01-cv-0400(D.Districtof grantedtheBoard’smotiontodismisstheactionas Columbia,filedFebruary22,2001),isanemploytotheBoard. mentdiscriminationaction.

277 10 Statistical Tables Table1.FederalReserveopenmarkettransactions,2013 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 0 0 0 0 0 0 0 0 0 0 0 0 0 Fornewbills 0 0 0 0 0 0 0 0 0 0 0 0 0 Redemptions 0 0 0 0 0 0 0 0 0 0 0 0 0 Otherswithin1year Grosspurchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Maturityshifts 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 0 0 0 0 0 0 0 0 0 0 0 0 0 Redemptions 2 3 1 2 3 2 2 2 2 1 2 1 21 1to5years Grosspurchases 5,468 6,048 4,113 10,342 9,433 12,844 7,487 9,513 8,353 8,297 7,808 7,770 97,476 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Maturityshifts 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 0 0 0 0 0 0 0 0 0 0 0 0 0 5to10years Grosspurchases 25,841 24,553 21,398 20,714 21,591 22,987 22,499 21,800 22,698 21,990 22,370 22,806 271,247 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 12,888 14,092 15,544 14,600 13,753 12,606 15,469 14,510 12,607 14,940 15,572 14,755 171,336 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 44,197 44,693 41,055 45,656 44,777 48,437 45,455 45,823 43,658 45,227 45,750 45,331 540,059 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Redemptions 2 3 1 2 3 2 2 2 2 1 2 1 21 NetchangeinU.S. Treasury securities 44,195 44,690 41,054 45,654 44,774 48,435 45,453 45,821 43,656 45,226 45,748 45,330 540,038 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 1,672 1,523 1,165 370 1,163 1,710 2,659 808 5,061 1,572 708 1,151 19,562 Netchangeinfederal agencyobligations -1,672 -1,523 -1,165 -370 -1,163 -1,710 -2,659 -808 -5,061 -1,572 -708 -1,151 -19,562 Mortgage-backedsecurities3 Netsettlements2 Netchangein mortgage-backed securities 39,166 50,107 55,011 50,570 43,455 43,162 38,831 44,400 50,724 51,603 46,167 50,304 563,500 (continuedonnextpage)

278 100thAnnualReport|2013 Table1.—continued Typeofsecurity Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total andtransaction Temporarytransactions Repurchaseagreements4 Grosspurchases 820 0 0 0 0 1,220 0 0 0 0 0 0 2,040 Grosssales 820 0 0 0 0 1,220 0 0 0 0 0 0 2,040 Reverserepurchaseagreements4 Grosspurchases 2,000,002 1,725,868 1,962,784 2,094,496 2,001,001 1,811,382 1,970,863 2,074,490 1,930,370 2,401,905 2,028,922 2,727,351 24,729,434 Grosssales 1,982,135 1,733,111 1,971,677 2,091,924 1,997,642 1,812,509 1,966,796 2,078,416 1,992,763 2,369,383 2,032,210 2,915,105 24,943,670 Netchangein temporary transactions 17,868 -7,243 -8,894 2,573 3,359 -1,128 4,068 -3,927 -62,393 32,522 -3,287 -187,754 -214,235 Totalnetchangein SystemOpenMarket Account 99,557 86,032 86,006 98,427 90,425 88,759 85,694 85,487 26,927 127,779 87,919 -93,271 869,741 Note:Sales,redemptions,andnegativefiguresreduceholdingsoftheSystemOpenMarketAccount;allotherfiguresincreasesuchholdings.Componentsmaynotsumtototals becauseofrounding. 1 Transactionsexcludechangesincompensationfortheeffectsofinflationontheprincipalofinflation-indexedsecurities.Transactionsincludetherolloverofinflation compensationintonewsecurities. 2 Excludestheeffectoftemporarytransactions—repurchaseagreementsandreverserepurchaseagreements. 3 GuaranteedbyFannieMae,FreddieMac,andGinnieMae.Monthlynetchangeintheremainingprincipalbalanceofthesecurities,reportedatfacevalue. 4 Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities,andmortgage-backedsecurities.

StatisticalTables 279 Table2.FederalReserveBankholdingsofU.S.Treasuryandfederalagencysecurities,December31,2011–13 Millionsofdollars December31 Change Description 2013 2012 2011 2012to2013 2011to2012 U.S.Treasurysecurities Heldoutright1 2,208,775 1,666,145 1,663,446 542,630 2,699 Byremainingmaturity Bills 1–90days 0 0 18,423 0 -18,423 91daysto1year 0 0 0 0 0 Notesandbonds 1yearorless 474 21 114,829 453 -114,808 Morethan1yearthrough5years 763,329 378,476 649,698 384,853 -271,222 Morethan5yearsthrough10years 864,700 862,410 649,913 2,290 212,497 Morethan10years 580,272 425,238 230,583 155,034 194,655 Bytype Bills 0 0 18,423 0 -18,423 Notes 1,467,427 1,110,398 1,286,344 357,029 -175,946 Bonds 741,348 555,747 358,679 185,601 197,068 Federalagencysecurities Heldoutright1 57,221 76,783 103,994 -19,562 -27,211 Byremainingmaturity Discountnotes 1–90days 0 0 0 0 0 91daysto1year 0 0 0 0 0 Coupons 1yearorless 18,544 19,562 27,211 -1,018 -7,649 Morethan1yearthrough5years 36,268 52,830 60,603 -16,562 -7,773 Morethan5yearsthough10years 62 2,044 13,833 -1,982 -11,789 Morethan10years 2,347 2,347 2,347 0 0 Bytype Discountnotes 0 0 0 0 0 Coupons 57,221 76,783 103,994 -19,562 -27,211 Byissuer FederalHomeLoanMortgageCorporation 24,986 32,261 45,126 -7,275 -12,865 FederalNationalMortgageAssociation 25,555 31,906 39,707 -6,351 -7,801 FederalHomeLoanBanks 6,680 12,616 19,161 -5,936 -6,545 Mortgage-backedsecurities2 Heldoutright1 1,490,162 926,662 837,683 563,500 88,979 Byremainingmaturity 1yearorless 0 2 0 -2 2 Morethan1yearthrough5years 5 1 13 4 -12 Morethan5yearsthough10years 2,549 2,365 34 184 2,331 Morethan10years 1,487,608 924,294 837,636 563,314 86,658 Byissuer FederalHomeLoanMortgageCorporation 426,311 292,155 289,537 134,156 2,618 FederalNationalMortgageAssociation 774,689 503,696 460,910 270,993 42,786 GovernmentNationalMortgageAssociation 289,162 130,811 87,237 158,351 43,574 Temporarytransactions Repurchaseagreements3 0 0 0 0 0 Reverserepurchaseagreements3 315,924 107,188 99,900 208,736 7,288 Foreignofficialandinternationalaccounts 118,169 107,188 99,900 10,981 7,288 Dealers 197,755 0 0 197,755 0 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Excludestheeffectoftemporarytransactions—repurchaseagreementsandreverserepurchaseagreements. 2 GuaranteedbyFannieMae,FreddieMac,andGinnieMae. 3 Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities,andmortgage-backedsecurities.

280 100thAnnualReport|2013 Table3.FederalReserveBankinterestratesonloansto Table4.Reserverequirementsofdepositoryinstitutions, depositoryinstitutions,December31,2013 December31,2013 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 0.15 Nettransactionaccounts1 Note:Fordetailsonratechangesoverthecourseof2013,seethesectionon $0million–$13.3million2 0 12/24/2013 discountratesin“RecordofPolicyActionsoftheBoardofGovernors.”Primary Morethan$13.3million–$89.0million3 3 12/24/2013 creditisavailableforveryshorttermsasabackupsourceofliquidityto Morethan$89.0million 10 12/24/2013 depositoryinstitutionsthatareingenerallysoundfinancialconditioninthe judgmentofthelendingFederalReserveBank.Secondarycreditisavailablein Nonpersonaltimedeposits 0 12/27/1990 appropriatecircumstancestodepositoryinstitutionsthatdonotqualifyforprimary Eurocurrencyliabilities 0 12/27/1990 credit.Seasonalcreditisavailabletohelprelativelysmalldepositoryinstitutions meetregularseasonalneedsforfundsthatarisefromaclearpatternof Note:Requiredreservesmustbeheldintheformofvaultcashand,ifvaultcash intra-yearlymovementsintheirdepositsandloans.Thediscountrateonseasonal isinsufficient,alsointheformofadepositwithaFederalReserveBank.An credittakesintoaccountrateschargedbymarketsourcesoffundsandis institutionmustholdthatdepositdirectlywithaReserveBankorwithanother reestablishedonthefirstbusinessdayofeachtwo-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 281 Table5.BankingofficesandbanksaffiliatedwithbankholdingcompaniesintheUnitedStates,December31,2012and2013 Commercialbanks1 Statechartered Typeofoffice Total Member savings Total Nonmember banks Total National State Allbankingoffices Banks Number,Dec.31,2012 6,359 6,062 2,051 1,222 829 4,011 297 Changesduring2013 Newbanks 19 15 6 3 3 9 4 Banksconvertedintobranches -192 -182 -59 -38 -21 -123 -10 Ceasedbankingoperations2 -53 -53 -18 -16 -2 -35 0 Other3 0 0 -1 -27 26 1 0 Netchange -226 -220 -72 -78 6 -148 -6 Number,Dec.31,2013 6,133 5,842 1,979 1,144 835 3,863 291 Branchesandadditionaloffices Number,Dec.31,2012 84,716 82,081 58,668 44,251 14,417 23,413 2,635 Changesduring2013 Newbranches 1,422 1,324 923 763 160 401 98 Banksconvertedtobranches 192 183 58 32 26 125 9 Discontinued2 -2,194 -2,160 -1,544 -1,174 -370 -616 -34 Other3 0 -2 -31 60 -91 29 2 Netchange -580 -655 -594 -319 -275 -61 75 Number,Dec.31,2013 84,136 81,426 58,074 43,932 14,142 23,352 2,710 Banksaffiliatedwithbankholdingcompanies Banks Number,Dec.31,2012 5,181 5,054 1,800 1,066 734 3,254 127 Changesduring2013 BHC-affiliatednewbanks 50 40 13 9 4 27 10 Banksconvertedintobranches -165 -156 -52 -32 -20 -104 -9 Ceasedbankingoperations2 -51 -51 -16 -15 -1 -35 0 Other3 0 0 -2 -26 24 2 0 Netchange -166 -167 -57 -64 7 -110 1 Number,Dec.31,2013 5,015 4,887 1,743 1,002 741 3,144 128 Note:Includesbanks,bankingoffices,andbankholdingcompaniesinU.S.territoriesandpossessions(affiliatedinsularareas). 1 Forpurposesofthistable,banksareentitiesthataredefinedasbanksintheBankHoldingCompanyAct,asamended,whichisimplementedbyFederalReserve RegulationY.Generally,abankisanyinstitutionthatacceptsdemanddepositsandisengagedinthebusinessofmakingcommercialloansoranyinstitutionthatisdefined asaninsuredbankinsection3(h)oftheFDICAct. 2 InstitutionsthatnolongermeettheRegulationYdefinitionofabank. 3 Interclasschangesandsalesofbranches.

282 100thAnnualReport|2013 Table6A.Reservesofdepositoryinstitutions,FederalReserveBankcredit,andrelateditems,year-end1984–2013and month-end2013 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 Total4 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 g5 outright1 extensions3 assets4 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 2010 2,161,094 0 138,311 -1,421 110,255 2,408,240 11,041 5,200 43,542 2011 2,605,124 0 144,098 -631 152,568 2,901,159 11,041 5,200 44,198 2012r 2,669,589 0 11,867 -486 218,296 2,899,266 11,041 5,200 44,751 2013 3,756,158 0 2,177 -962 246,947 4,004,320 11,041 5,200 45,539 Jan 2,750,982 0 8,127 -698 227,534 2,985,945 11,041 5,200 44,847 Feb 2,844,074 0 10,746 -640 225,524 3,079,704 11,041 5,200 44,912 Mar 2,939,417 0 10,333 -591 236,702 3,185,861 11,041 5,200 44,971 Apr 3,036,415 0 10,892 -1,033 245,475 3,291,749 11,041 5,200 45,029 May 3,124,081 0 3,989 -705 242,495 3,369,859 11,041 5,200 45,084 Jun 3,213,905 0 3,842 -714 250,282 3,467,315 11,041 5,200 45,147 Jul 3,295,892 0 3,641 -816 253,952 3,552,669 11,041 5,200 45,225 Aug 3,385,572 0 2,350 -541 243,337 3,630,718 11,041 5,200 45,266 Sep 3,475,024 0 2,483 -566 246,094 3,723,035 11,041 5,200 45,334 Oct 3,570,525 0 2,202 61 250,965 3,823,753 11,041 5,200 45,418 Nov 3,661,905 0 2,150 -857 244,125 3,907,323 11,041 5,200 45,483 Dec 3,756,158 0 2,177 -962 246,947 4,004,320 11,041 5,200 45,539 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-end1984–2013andmonth-end2013”fordetail. 4 Asof2013,unamortizeddiscountsonsecuritiesheldoutrightareincludedasacomponentofOtherFederalReserveassets.Previously,theywereincludedinOtherFederal Reserveliabilitiesandcapital. 5 Includescurrencyandcoin(otherthangold)issueddirectlybytheU.S.Treasury.Thelargestcomponentsarefractionalanddollarcoins.Fordetailsreferto“U.S.Currency andCoinOutstandingandinCirculation,”TreasuryBulletin.

StatisticalTables 283 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 6 ho c ld a i s n h gs7 de T p e o rm sits T g r e e n a e su ra r l y sup f T i p n r l e a e a n m s c u e in r n y g tary Foreign Other b c a l l e a a n r c in e g s8 an l d R ia e c b s a i e l p it r i i v t e a e s l4,9 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 2010 982,750 59,703 177 0 140,773 199,964 3,337 13,631 2,374 99,602 965,712 2011 1,075,820 99,900 128 0 85,737 0 125 64,909 2,480 72,766 1,559,731 2012r 1,169,159 107,188 150 0 92,720 0 6,427 27,476 … 66,093 1,491,044 2013 1,241,274 315,924 234 0 162,399 0 7,970 26,181 … 63,049 2,249,070 Jan 1,156,245 89,321 190 3,036 120,247 0 7,595 8,266 … 62,925 1,599,208 Feb 1,171,363 96,563 218 0 81,750 0 8,635 22,620 … 64,565 1,695,144 Mar 1,176,943 105,457 231 3,045 79,152 0 9,183 20,463 … 65,291 1,787,307 Apr 1,181,856 97,384 186 0 213,863 0 9,950 12,062 … 66,611 1,771,108 May 1,190,468 94,025 152 10,496 34,681 0 11,208 22,082 … 63,120 2,004,952 Jun 1,193,796 95,153 121 0 134,858 0 10,022 19,777 … 61,713 2,013,263 Jul 1,197,437 91,085 144 11,913 109,693 0 10,481 9,630 … 62,908 2,120,843 Aug 1,208,308 95,012 140 0 26,135 0 10,381 21,163 … 63,708 2,267,378 Sep 1,207,063 157,405 167 11,662 88,386 0 8,938 24,346 … 65,900 2,220,743 Oct 1,218,421 124,883 206 0 83,001 0 8,654 9,382 … 63,497 2,377,369 Nov 1,227,586 128,170 224 13,532 33,433 0 8,735 8,643 … 63,525 2,485,200 Dec 1,241,274 315,924 234 0 162,399 0 7,970 26,181 … 63,049 2,249,070 6 Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities,andagencymortgage-backedsecurities. 7 CoinandpapercurrencyheldbytheTreasury. 8 RequiredclearingbalanceswerediscontinuedinJuly2012. 9 In2010,includesfundsfromAmericanInternationalGroup,Inc.assetdispositions,heldasagent. …Notapplicable. r Revised.

284 100thAnnualReport|2013 Table6B.Loansandothercreditextensions,bytype,year-end1984–2013andmonth-end2013 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 2013 2,177 0 74 … … 97 … … … 1,541 63 22 109 … 272 (continuedonnextpage)

StatisticalTables 285 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 2013,month-end Jan 8,127 0 47 … … 547 … … … 1,401 61 22 857 … 5,192 Feb 10,746 0 25 … … 388 … … … 1,400 61 22 507 … 8,343 Mar 10,333 0 9 … … 382 … … … 1,402 64 22 399 … 8,056 Apr 10,892 0 33 … … 377 … … … 1,427 64 22 393 … 8,576 May 3,989 0 50 … … 271 … … … 1,424 64 22 388 … 1,771 Jun 3,842 0 120 … … 258 … … … 1,419 64 22 281 … 1,679 Jul 3,641 0 135 … … 185 … … … 1,488 64 22 268 … 1,479 Aug 2,350 0 158 … … 102 … … … 1,492 64 22 195 … 317 Sep 2,483 0 177 … … 101 … … … 1,497 64 22 112 … 511 Oct 2,202 0 120 … … 100 … … … 1,515 64 22 111 … 272 Nov 2,150 0 68 … … 98 … … … 1,517 63 22 110 … 272 Dec 2,177 0 74 … … 97 … … … 1,541 63 22 109 … 272 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.

286 100thAnnualReport|2013 Table6C.Reservesofdepositoryinstitutions,FederalReserveBankcredit,andrelateditems,year-end1918–1983 Millionsofdollars Factorssupplyingreservefunds FederalReserveBankcreditoutstanding Special Period drawing Treasury Sec h u e r l i d ties Repurchase Loans Float3 All F O ed th e e ra r l Total s G to o c l k d 6 ce r r i t g if h ic ts ate ou c ts u t r a re n n d c in y g7 outright1 agreements2 other4 Reserve account assets5 1918 239 0 1,766 199 294 0 2,498 2,873 … 1,795 1919 300 0 2,215 201 575 0 3,292 2,707 … 1,707 1920 287 0 2,687 119 262 0 3,355 2,639 … 1,709 1921 234 0 1,144 40 146 0 1,563 3,373 … 1,842 1922 436 0 618 78 273 0 1,405 3,642 … 1,958 1923 80 54 723 27 355 0 1,238 3,957 … 2,009 1924 536 4 320 52 390 0 1,302 4,212 … 2,025 1925 367 8 643 63 378 0 1,459 4,112 … 1,977 1926 312 3 637 45 384 0 1,381 4,205 … 1,991 1927 560 57 582 63 393 0 1,655 4,092 … 2,006 1928 197 31 1,056 24 500 0 1,809 3,854 … 2,012 1929 488 23 632 34 405 0 1,583 3,997 … 2,022 1930 686 43 251 21 372 0 1,373 4,306 … 2,027 1931 775 42 638 20 378 0 1,853 4,173 … 2,035 1932 1,851 4 235 14 41 0 2,145 4,226 … 2,204 1933 2,435 2 98 15 137 0 2,688 4,036 … 2,303 1934 2,430 0 7 5 21 0 2,463 8,238 … 2,511 1935 2,430 1 5 12 38 0 2,486 10,125 … 2,476 1936 2,430 0 3 39 28 0 2,500 11,258 … 2,532 1937 2,564 0 10 19 19 0 2,612 12,760 … 2,637 1938 2,564 0 4 17 16 0 2,601 14,512 … 2,798 1939 2,484 0 7 91 11 0 2,593 17,644 … 2,963 1940 2,184 0 3 80 8 0 2,274 21,995 … 3,087 1941 2,254 0 3 94 10 0 2,361 22,737 … 3,247 1942 6,189 0 6 471 14 0 6,679 22,726 … 3,648 1943 11,543 0 5 681 10 0 12,239 21,938 … 4,094 1944 18,846 0 80 815 4 0 19,745 20,619 … 4,131 1945 24,262 0 249 578 2 0 25,091 20,065 … 4,339 1946 23,350 0 163 580 1 0 24,093 20,529 … 4,562 1947 22,559 0 85 535 1 0 23,181 22,754 … 4,562 1948 23,333 0 223 541 1 0 24,097 24,244 … 4,589 1949 18,885 0 78 534 2 0 19,499 24,427 … 4,598 1950 20,725 53 67 1,368 3 0 22,216 22,706 … 4,636 1951 23,605 196 19 1,184 5 0 25,009 22,695 … 4,709 1952 24,034 663 156 967 4 0 25,825 23,187 … 4,812 1953 25,318 598 28 935 2 0 26,880 22,030 … 4,894 1954 24,888 44 143 808 1 0 25,885 21,713 … 4,985 1955 24,391 394 108 1,585 29 0 26,507 21,690 … 5,008 1956 24,610 305 50 1,665 70 0 26,699 21,949 … 5,066 1957 23,719 519 55 1,424 66 0 25,784 22,781 … 5,146 1958 26,252 95 64 1,296 49 0 27,755 20,534 … 5,234 1959 26,607 41 458 1,590 75 0 28,771 19,456 … 5,311 1960 26,984 400 33 1,847 74 0 29,338 17,767 … 5,398 1961 28,722 159 130 2,300 51 0 31,362 16,889 … 5,585 1962 30,478 342 38 2,903 110 0 33,871 15,978 … 5,567 1963 33,582 11 63 2,600 162 0 36,418 15,513 … 5,578 1964 36,506 538 186 2,606 94 0 39,930 15,388 … 5,405 1965 40,478 290 137 2,248 187 0 43,340 13,733 … 5,575 1966 43,655 661 173 2,495 193 0 47,177 13,159 … 6,317 1967 48,980 170 141 2,576 164 0 52,031 11,982 … 6,784 1968 52,937 0 186 3,443 58 0 56,624 10,367 … 6,795 (continuedonnextpage)

StatisticalTables 287 Table6C.—continued Factorssupplyingreservefunds FederalReserveBankcreditoutstanding Special Period drawing Treasury Sec h u e r l i d ties Repurchase Loans Float3 All F O ed th e e ra r l Total s G to o c l k d 6 ce r r i t g if h ic ts ate ou c ts u t r a re n n d c in y g7 outright1 agreements2 other4 Reserve account assets5 1969 57,154 0 183 3,440 64 2,743 63,584 10,367 … 6,852 1970 62,142 0 335 4,261 57 1,123 67,918 10,732 400 7,147 1971 69,481 1,323 39 4,343 261 1,068 76,515 10,132 400 7,710 1972 71,119 111 1,981 3,974 106 1,260 78,551 10,410 400 8,313 1973 80,395 100 1,258 3,099 68 1,152 86,072 11,567 400 8,716 1974 84,760 954 299 2,001 999 3,195 92,208 11,652 400 9,253 1975 92,789 1,335 211 3,688 1,126 3,312 102,461 11,599 500 10,218 1976 100,062 4,031 25 2,601 991 3,182 110,892 11,598 1,200 10,810 1977 108,922 2,352 265 3,810 954 2,442 118,745 11,718 1,250 11,331 1978 117,374 1,217 1,174 6,432 587 4,543 131,327 11,671 1,300 11,831 1979 124,507 1,660 1,454 6,767 704 5,613 140,705 11,172 1,800 13,083 1980 128,038 2,554 1,809 4,467 776 8,739 146,383 11,160 2,518 13,427 1981 136,863 3,485 1,601 1,762 195 9,230 153,136 11,151 3,318 13,687 1982 144,544 4,293 717 2,735 1,480 9,890 163,659 11,148 4,618 13,786 1983 159,203 1,592 918 1,605 418 8,728 172,464 11,121 4,618 15,732 Note:Foradescriptionoffiguresanddiscussionoftheirsignificance,seeBankingandMonetaryStatistics,1941–1970(BoardofGovernorsoftheFederalReserveSystem, 1976),pp.507–23.Componentsmaynotsumtototalsbecauseofrounding. 1 In1969andthereafter,includessecuritiesloaned—fullyguaranteedbyU.S.governmentsecuritiespledgedwithFederalReserveBanks—andexcludessecuritiessoldand scheduledtobeboughtbackundermatchedsale–purchasetransactions.OnSeptember29,1971,andthereafter,includesfederalagencyissuesboughtoutright. 2 OnDecember1,1966,andthereafter,includesfederalagencyobligationsheldunderrepurchaseagreements. 3 In1960andthereafter,figuresreflectaminorchangeinconcept;refertoFederalReserveBulletin,vol.47(February1961),p.164. 4 Principallyacceptancesand,untilAugust21,1959,industrialloans,theauthorityforwhichexpiredonthatdate. 5 FortheperiodbeforeApril16,1969,includesthetotalofFederalReservecapitalpaidin,surplus,othercapitalaccounts,andotherliabilitiesandaccrueddividends,lessthe sumofbankpremisesandotherassets,andisreportedas‘‘OtherFederalReserveaccounts;”thereafter,‘‘OtherFederalReserveassets’’and‘‘OtherFederalReserve liabilitiesandcapital’’areshownseparately. 6 BeforeJanuary30,1934,includesgoldheldinFederalReserveBanksandincirculation. 7 Includescurrencyandcoin(otherthangold)issueddirectlybytheTreasury.Thelargestcomponentsarefractionalanddollarcoins.Fordetailsreferto‘‘U.S.Currencyand CoinOutstandingandinCirculation,’’TreasuryBulletin.

288 100thAnnualReport|2013 Table6C.Reservesofdepositoryinstitutions,FederalReserveBankcredit,andrelateditems,year-end1918–1983—continued Millionsofdollars Factorsabsorbingreservefunds Memberbankreserves9 DepositswithFederalReserveBanks, otherthanreservebalances Other Period Currency Treasury Other Required Federal Federal circu in lation ho c ld a i s n h gs8 Treasury Foreign Other a R cc e o se u r n v t e s5 b c a le la a n ri c n e g s an l R i d a e b c s i a e li p t r i v i e t e a s l5 R F e e W s d i e e t r h r v a e l Cu a rr n e d ncy Required11 Excess11,12 coin10 Banks 1918 4,951 288 51 96 25 118 0 0 1,636 … 1,585 51 1919 5,091 385 31 73 28 208 0 0 1,890 … 1,822 68 1920 5,325 218 57 5 18 298 0 0 1,781 … … … 1921 4,403 214 96 12 15 285 0 0 1,753 … 1,654 99 1922 4,530 225 11 3 26 276 0 0 1,934 … … … 1923 4,757 213 38 4 19 275 0 0 1,898 … 1,884 14 1924 4,760 211 51 19 20 258 0 0 2,220 … 2,161 59 1925 4,817 203 16 8 21 272 0 0 2,212 … 2,256 -44 1926 4,808 201 17 46 19 293 0 0 2,194 … 2,250 -56 1927 4,716 208 18 5 21 301 0 0 2,487 … 2,424 63 1928 4,686 202 23 6 21 348 0 0 2,389 … 2,430 -41 1929 4,578 216 29 6 24 393 0 0 2,355 … 2,428 -73 1930 4,603 211 19 6 22 375 0 0 2,471 … 2,375 96 1931 5,360 222 54 79 31 354 0 0 1,961 … 1,994 -33 1932 5,388 272 8 19 24 355 0 0 2,509 … 1,933 576 1933 5,519 284 3 4 128 360 0 0 2,729 … 1,870 859 1934 5,536 3,029 121 20 169 241 0 0 4,096 … 2,282 1,814 1935 5,882 2,566 544 29 226 253 0 0 5,587 … 2,743 2,844 1936 6,543 2,376 244 99 160 261 0 0 6,606 … 4,622 1,984 1937 6,550 3,619 142 172 235 263 0 0 7,027 … 5,815 1,212 1938 6,856 2,706 923 199 242 260 0 0 8,724 … 5,519 3,205 1939 7,598 2,409 634 397 256 251 0 0 11,653 … 6,444 5,209 1940 8,732 2,213 368 1,133 599 284 0 0 14,026 … 7,411 6,615 1941 11,160 2,215 867 774 586 291 0 0 12,450 … 9,365 3,085 1942 15,410 2,193 799 793 485 256 0 0 13,117 … 11,129 1,988 1943 20,449 2,303 579 1,360 356 339 0 0 12,886 … 11,650 1,236 1944 25,307 2,375 440 1,204 394 402 0 0 14,373 … 12,748 1,625 1945 28,515 2,287 977 862 446 495 0 0 15,915 … 14,457 1,458 1946 28,952 2,272 393 508 314 607 0 0 16,139 … 15,577 562 1947 28,868 1,336 870 392 569 563 0 0 17,899 … 16,400 1,499 1948 28,224 1,325 1123 642 547 590 0 0 20,479 … 19,277 1,202 1949 27,600 1,312 821 767 750 706 0 0 16,568 … 15,550 1,018 1950 27,741 1,293 668 895 565 714 0 0 17,681 … 16,509 1,172 1951 29,206 1,270 247 526 363 746 0 0 20,056 … 19,667 389 1952 30,433 1,270 389 550 455 777 0 0 19,950 … 20,520 -570 1953 30,781 761 346 423 493 839 0 0 20,160 … 19,397 763 1954 30,509 796 563 490 441 907 0 0 18,876 … 18,618 258 1955 31,158 767 394 402 554 925 0 0 19,005 … 18,903 102 1956 31,790 775 441 322 426 901 0 0 19,059 … 19,089 -30 1957 31,834 761 481 356 246 998 0 0 19,034 … 19,091 -57 1958 32,193 683 358 272 391 1,122 0 0 18,504 … 18,574 -70 1959 32,591 391 504 345 694 841 0 0 18,174 310 18,619 -135 1960 32,869 377 485 217 533 941 0 0 17,081 2,544 18,988 637 1961 33,918 422 465 279 320 1,044 0 0 17,387 2,823 20,114 96 1962 35,338 380 597 247 393 1,007 0 0 17,454 3,262 20,071 645 1963 37,692 361 880 171 291 1,065 0 0 17,049 4,099 20,677 471 1964 39,619 612 820 229 321 1,036 0 0 18,086 4,151 21,663 574 1965 42,056 760 668 150 355 211 0 0 18,447 4,163 22,848 -238 1966 44,663 1,176 416 174 588 -147 0 0 19,779 4,310 24,321 -232 1967 47,226 1,344 1,123 135 653 -773 0 0 21,092 4,631 25,905 -182 (continuedonnextpage)

StatisticalTables 289 Table6C.—continued Factorsabsorbingreservefunds Memberbankreserves9 DepositswithFederalReserveBanks, otherthanreservebalances Other Period Currency Treasury Other Required Federal Federal circu in lation ho c ld a i s n h gs8 Treasury Foreign Other a R cc e o se u r n v t e s5 b c a le la a n ri c n e g s an l R i d a e b c s i a e li p t r i v i e t e a s l5 R F e e W s d i e e t r h r v a e l Cu a rr n e d ncy Required11 Excess11,12 coin10 Banks 1968 50,961 695 703 216 747 -1,353 0 0 21,818 4,921 27,439 -700 1969 53,950 596 1,312 134 807 0 0 1,919 22,085 5,187 28,173 -901 1970 57,093 431 1,156 148 1,233 0 0 1,986 24,150 5,423 30,033 -460 1971 61,068 460 2,020 294 999 0 0 2,131 27,788 5,743 32,496 1,035 1972 66,516 345 1,855 325 840 0 0 2,143 25,647 6,216 32,044 98 1973 72,497 317 2,542 251 1,14913 0 0 2,669 27,060 6,781 35,268 -1,360 1974 79,743 185 3,113 418 1,27513 0 0 2,935 25,843 7,370 37,011 -3,798 1975 86,547 483 7,285 353 1,090 0 0 2,968 26,052 8,036 35,197 -1,10314 1976 93,717 460 10,393 352 1,357 0 0 3,063 25,158 8,628 35,461 -1,535 1977 103,811 392 7,114 379 1,187 0 0 3,292 26,870 9,421 37,615 -1,265 1978 114,645 240 4,196 368 1,256 0 0 4,275 31,152 10,538 42,694 -893 1979 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 -2,835 1980 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675 1981 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 -1,442 1982 154,908 429 5,033 328 1,033 0 436 4,990 26,053 16,666 41,391 1,328 1983 171,935 479 3,661 191 851 0 1013 5,392 20,413 17,821 39,179 -945 8 CoinandpapercurrencyheldbytheTreasury,aswellasanygoldinexcessofthegoldcertificatesissuedtotheReserveBank. 9 InNovember1979andthereafter,includesreservesofmemberbanks,EdgeActcorporations,andU.S.agenciesandbranchesofforeignbanks.OnNovember13,1980,and thereafter,includesreservesofalldepositoryinstitutions. 10BetweenDecember1,1959,andNovember23,1960,partwasallowedasreserves;thereafter,allwasallowed. 11Estimatedthrough1958.Before1929,datawereavailableonlyoncalldates(in1920and1922thecalldatewasDecember29).SinceSeptember12,1968,theamounthas beenbasedonclose-of-businessfiguresforthereserveperiodtwoweeksbeforethereportdate. 12FortheweekendingNovember15,1972,andthereafter,includes$450millionofreservedeficienciesonwhichFederalReserveBanksareallowedtowaivepenaltiesfora transitionperiodinconnectionwithbankadaptationtoRegulationJasamended,effectiveNovember9,1972.Allowabledeficienciesareasfollows(beginningwithfirst statementweekofquarter,inmillions):1973—Q1,$279;Q2,$172;Q3,$112;Q4,$84;1974—Q1,$67;Q2,$58.Thetransitionperiodendedwiththesecondquarterof 1974. 13FortheperiodbeforeJuly1973,includescertaindepositsofdomesticnonmemberbanksandforeign-ownedbankinginstitutionsheldwithmemberbanksandredeposited infullwithFederalReserveBanksinconnectionwithvoluntaryparticipationbynonmemberinstitutionsintheFederalReserveSystemprogramofcreditrestraint.Asof December12,1974,theamountofvoluntarynonmemberbankandforeign-agencyandbranchdepositsatFederalReserveBanksthatareassociatedwithmarginal reservesisnolongerreported.However,twoamountsarereported:(1)depositsvoluntarilyheldasreservesbyagenciesandbranchesofforeignbanksoperatinginthe UnitedStatesand(2)Eurodollarliabilities. 14Adjustedtoincludewaiversofpenaltiesforreservedeficiencies,inaccordancewithchangeinBoardpolicy,effectiveNovember19,1975. …Notapplicable.

290 100thAnnualReport|2013 Table7.Principalassetsandliabilitiesofinsuredcommercialbanks,byclassofbank,June30,2013and2012 Millionsofdollars,exceptasnoted Memberbanks Item Total Nonmemberbanks Total National State 2013 Assets Loansandinvestments 9,172,541 7,391,014 6,030,022 1,360,992 1,781,527 Loans,gross 6,504,679 5,140,529 4,246,189 894,340 1,364,150 Net 6,503,501 5,139,891 4,245,753 894,138 1,363,610 Investments 2,667,862 2,250,485 1,783,833 466,652 417,377 U.S.Treasuryand federalagency securities 358,895 270,712 196,611 74,101 88,183 Other 2,308,967 1,979,773 1,587,222 392,551 329,194 Cashassets,total 1,156,918 1,002,496 784,998 217,498 154,422 Liabilities Deposits,total 8,526,007 6,910,665 5,660,131 1,250,534 1,615,342 Interbank 165,606 142,523 117,971 24,552 23,083 Othertransactions 1,319,528 1,061,576 763,172 298,404 257,952 Othernontransactions 7,040,874 5,706,567 4,778,989 927,578 1,334,307 Equitycapital 1,473,092 1,227,059 1,012,790 214,269 246,033 Numberofbanks 5,938 2,012 1,193 819 3,926 2012 Assets Loansandinvestments 8,943,041 7,239,395 5,926,675 1,312,720 1,703,646 Loans,gross 6,291,336 4,994,716 4,137,450 857,266 1,296,620 Net 6,289,913 4,994,026 4,136,998 857,028 1,295,887 Investments 2,651,706 2,244,679 1,789,225 455,454 407,027 U.S.Treasuryand federalagency securities 380,004 299,723 234,048 65,675 80,281 Other 2,271,703 1,944,957 1,555,178 389,779 326,746 Cashassets,total 917,467 758,048 572,540 185,508 159,419 Liabilities Deposits,total 7,979,043 6,433,954 5,241,953 1,192,001 1,545,089 Interbank 165,317 142,602 122,121 20,481 22,715 Othertransactions 1,189,735 950,745 687,651 263,094 238,990 Othernontransactions 6,623,992 5,340,608 4,432,181 908,427 1,283,384 Equitycapital 1,445,286 1,207,939 995,035 212,904 237,347 Numberofbanks 6,187 2,097 1,284 813 4,090 Note:IncludesU.S.-insuredcommercialbankslocatedintheUnitedStatesbutnotU.S.-insuredcommercialbanksoperatinginU.S.territoriesorpossessions.Dataare domesticassetsandliabilities(exceptforthosecomponentsreportedonaconsolidatedbasisonly).Componentsmaynotsumtototalsbecauseofrounding.Datafor2012 havebeenrevised.

StatisticalTables 291 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.

292 100thAnnualReport|2013 Table9A.StatementofconditionoftheFederalReserveBanks,byBank,December31,2013and2012 Millionsofdollars Total Boston NewYork Philadelphia Cleveland Richmond Item 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Assets Goldcertificates 11,037 11,037 391 408 3,925 3,824 397 437 512 515 856 890 Specialdrawingrights certificates 5,200 5,200 196 196 1,818 1,818 210 210 237 237 412 412 Coin 1,955 2,108 35 38 82 90 123 141 130 145 335 373 Loansandsecurities Primary,secondary, andseasonalloans 74 70 0 2 10 18 0 2 0 0 1 0 TermAsset-Backed SecuritiesLoan Facility1 98 560 … … 98 560 … … … … … … Treasurysecurities, boughtoutright2 2,208,775 1,666,145 57,757 40,467 1,224,856 934,131 63,998 55,079 56,410 42,361 137,343 118,582 Government-sponsored enterprisedebt securities,bought outright2 57,221 76,783 1,496 1,865 31,731 43,048 1,658 2,538 1,461 1,952 3,558 5,465 Federalagencyand government-sponsored enterprise mortgage-backed securities,bought outright3 1,490,162 926,662 38,966 22,507 826,356 519,536 43,176 30,633 38,057 23,560 92,659 65,952 Unamortized premiumson securitiesheld outright4 208,610 170,962 5,455 4,153 115,682 95,852 6,043 5,651 5,329 4,346 12,972 12,168 Unamortized discountson securitiesheld outright4 -12,352 -1,564 -323 -37 -6,850 -877 -357 -50 -316 -40 -768 -112 Totalloansand securities 3,952,588 2,839,618 103,351 68,958 2,191,883 1,592,268 114,518 93,853 100,941 72,179 245,765 202,055 Accruedinterest receivable-System OpenMarket Account 23,493 19,031 616 463 13,007 10,645 685 635 605 489 1,474 1,369 Netportfolioholdings ofconsolidated variableinterest entities5 1,926 2,750 … … 1,926 2,750 … … … … … … Foreigncurrency denominated assets6 23,724 24,873 1,166 872 7,583 8,023 1,835 2,157 1,851 1,839 4,982 5,145 Centralbankliquidity swaps7 272 8,889 13 312 87 2,867 21 771 21 657 57 1,839 Otherassets Itemsinprocessof collection 165 216 0 0 0 0 0 0 0 8 0 0 Bankpremises 2,290 2,318 123 119 432 431 73 71 111 115 228 230 Allotherassets8 1,499 1,096 64 56 581 251 43 45 42 47 247 226 Interdistrictsettlement account 0 0 6,796 31,984 166,886 -110,116 -19,721 -16,451 4,138 3,671 -32,634 -28,388 Totalassets 4,024,149 2,917,136 112,751 103,406 2,388,210 1,512,851 98,184 81,869 108,588 79,902 221,722 184,151 Liabilities FederalReservenotes outstanding 1,400,977 1,354,878 45,182 47,464 513,592 478,110 41,983 47,566 58,552 60,564 104,492 103,121 Less:Notesheldby Federal ReserveBank 203,057 228,217 9,988 6,244 38,515 93,101 5,920 4,304 5,080 8,060 8,774 11,462 FederalReservenotes outstanding,net 1,197,920 1,126,661 35,194 41,220 475,077 385,008 36,063 43,262 53,472 52,504 95,718 91,659 (continuedonnextpage)

StatisticalTables 293 Table9A.—continued Total Boston NewYork Philadelphia Cleveland Richmond Item 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Securitiessoldunder agreementsto repurchase9 315,924 107,188 8,261 2,603 175,193 60,096 9,154 3,543 8,068 2,725 19,645 7,629 Deposits Depositoryinstitutions 2,249,070 1,491,045 66,567 56,666 1,518,974 917,383 48,568 30,547 42,425 20,154 94,182 72,657 Treasury,general account 162,399 92,720 … … 162,399 92,720 … … … … … … Foreign,official accounts 7,970 6,427 2 1 7,943 6,399 3 3 3 3 8 8 Other10 26,180 27,476 8 8 26,020 27,345 17 14 0 0 105 68 Totaldeposits 2,445,619 1,617,668 66,577 56,675 1,715,336 1,043,847 48,588 30,564 42,428 20,157 94,295 72,733 Otherliabilities Accruedremittancesto Treasury11 4,791 1,407 87 31 3,328 831 84 29 84 17 192 51 Deferredcredititems 1,127 702 0 0 0 0 0 0 3 3 0 0 Consolidatedvariable interestentities12 274 1,218 … … 274 1,218 … … … … … … Allotherliabilities13 3,480 7,572 130 187 1,312 4,361 159 239 157 228 400 587 Totalliabilities 3,969,135 2,862,416 110,249 100,716 2,370,520 1,495,361 94,048 77,637 104,212 75,634 210,250 172,659 Capitalaccounts Capitalpaidin 27,507 27,360 1,251 1,345 8,845 8,745 2,068 2,116 2,188 2,134 5,736 5,746 Surplus(including accumulatedother comprehensiveloss) 27,507 27,360 1,251 1,345 8,845 8,745 2,068 2,116 2,188 2,134 5,736 5,746 Totalliabilitiesand capitalaccounts 4,024,149 2,917,136 112,751 103,406 2,388,210 1,512,851 98,184 81,869 108,588 79,902 221,722 184,151 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Measuredatfairvalue.Amountsinclude$1millionand$4millioninunrealizedgainsasofDecember31,2013and2012,respectively. 2 Parvalue.Includessecuritiesloaned—fullycollateralizedbyU.S.Treasurysecurities,otherinvestment-gradesecurities,andcollateraleligiblefortri-partyrepurchase agreementspledgedwithFederalReserveBanks. 3 Theparamountshownistheremainingprincipalbalanceofthesecurities. 4 Reflectsthepremiumordiscount,whichisthedifferencebetweenthepurchasepriceandthefacevalueofthesecuritiesthathasnotbeenamortized.ForU.S.Treasuryand Federalagencydebtsecurities,amortizationisonastraight-linebasis.Formortgage-backedsecurities,amortizationisonaneffective-interestbasis. 5 TheFRBNYistheprimarybeneficiaryofTALFLLC,MaidenLaneLLC,MaidenLaneIILLC,andMaidenLaneIIILLCand,asaresult,theaccountsandresultsofoperationsof theseentitiesareincludedinthecombinedfinancialstatementsoftheFederalReserveBanks.Foradditionaldetails,seesection5,“Table6.Keyfinancialdatafor consolidatedvariableinterestentities.” 6 Valueddailyatmarketexchangerates. 7 Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. 8 Includesfurnitureandequipmentanddepositoryinstitutionoverdrafts. 9 Contractamountofagreements. 10Includesdepositsofgovernment-sponsoredenterprises,theConsumerFinancialProtectionBureau,andinternationalorganizations.Thesedepositsareprimarilyheldbythe FRBNY. 11RepresentstheestimatedweeklyremittancestoU.S.TreasuryasinterestonFederalReservenotesor,inthosecaseswheretheReserveBank’snetearningsarenot sufficienttoequatesurplustocapitalpaid-in,thedeferredassetforinterestonFederalReservenotes.TheamountsonthislinearecalculatedinaccordancewithBoardof Governorspolicy,whichrequirestheFederalReserveBankstoremitresidualearningstotheU.S.TreasuryasinterestonFederalReservenotesafterprovidingforthecosts ofoperations,paymentofdividends,andtheamountnecessarytoequatesurpluswithcapitalpaid-in. 12TheotherbeneficialinterestholderrelatedtotheTALFLLCistheU.S.Treasury;toMaidenLaneLLC,itisJPMorganChase;andtoMaidenLaneIIandMaidenLaneIIILLCs,it isAIG. 13IncludesaccruedbenefitcostsandcashcollateralpostedbycounterpartiesundercommitmentstopurchaseandsellfederalagencyandGSEMBS. …Notapplicable.

294 100thAnnualReport|2013 Table9A.StatementofconditionoftheFederalReserveBanks,byBank,December31,2013and2012—continued Millionsofdollars Atlanta Chicago St.Louis Minneapolis KansasCity Dallas SanFrancisco Item 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Assets Goldcertificates 1,421 1,337 792 839 310 313 190 192 309 315 728 725 1,206 1,242 Specialdrawingrights certificates 654 654 424 424 150 150 90 90 153 153 282 282 574 574 Coin 238 209 285 311 19 35 48 51 152 165 178 196 332 354 Loansandsecurities Primary,secondary, andseasonalloans 6 4 18 9 3 0 27 32 9 3 0 0 0 0 TermAsset-Backed SecuritiesLoan Facility1 …… … … … … … … … … … … … … … Treasurysecurities, boughtoutright2 146,726 100,457 119,354 92,430 35,540 26,048 20,960 15,147 41,788 33,473 85,772 64,738 218,271 143,229 Government-sponsored enterprisedebt securities,bought outright2 3,801 4,629 3,092 4,260 921 1,201 543 698 1,083 1,543 2,222 2,983 5,655 6,601 Federalagencyand governmentsponsored enterprise mortgage-backed securities,bought outright3 98,989 55,871 80,523 51,407 23,977 14,487 14,140 8,424 28,192 18,617 57,867 36,006 147,258 79,660 Unamortized premiumson securitiesheld outright4 13,858 10,308 11,273 9,485 3,355 2,673 1,980 1,555 3,947 3,434 8,101 6,643 20,614 14,697 Unamortized discountson securitiesheld outright4 -821 -93 -668 -87 -198 -24 -117 -15 -233 -31 -479 -61 -1,220 -135 Totalloansand securities 262,559 171,176 213,592 157,504 63,598 44,385 37,533 25,841 74,786 57,039 153,483 110,309 390,578 244,052 Accruedinterest receivable-System OpenMarket Account 1,560 1,147 1,267 1,053 377 297 222 173 444 381 910 737 2,325 1,643 Netportfolioholdings ofconsolidated variableinterest entities5 … … … … … … … … … … … … … … Foreigncurrency denominated assets6 1,352 1,422 677 663 198 203 99 101 240 247 376 398 3,365 3,800 Centralbankliquidity swaps7 15 508 8 237 2 73 1 36 3 89 4 142 39 1,358 Otherassets Itemsinprocessof collection 165 208 0 0 0 1 0 0 0 0 0 0 0 0 Bankpremises 211 215 203 203 127 131 99 103 247 252 231 239 204 209 Allotherassets8 95 108 61 58 84 56 72 59 42 38 60 63 109 89 Interdistrictsettlement account -44,679 36,287 -53,946 -856 -19,511 958 -14,795 2,869 -22,792 -4,827 -31,534 5,662 61,793 79,207 Totalassets 223,591 213,271 163,363 160,436 45,354 46,602 23,559 29,515 53,584 53,852 124,718 118,753 460,525 332,528 Liabilities FederalReservenotes outstanding 170,140 175,865 89,177 95,089 34,459 37,318 21,614 22,352 36,847 36,361 120,857 95,624 164,081 155,444 Less:Notesheldby Federal ReserveBank 18,059 26,016 13,399 12,410 3,161 3,780 9,275 3,123 10,308 6,603 53,146 28,068 27,431 25,047 FederalReservenotes outstanding,net 152,081 149,849 75,778 82,679 31,298 33,538 12,339 19,229 26,539 29,758 67,711 67,556 136,650 130,397 (continuedonnextpage)

StatisticalTables 295 Table9A.—continued Atlanta Chicago St.Louis Minneapolis KansasCity Dallas SanFrancisco Item 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Securitiessoldunder agreementsto repurchase9 20,986 6,463 17,071 5,946 5,083 1,676 2,998 974 5,977 2,153 12,268 4,165 31,219 9,214 Deposits Depositoryinstitutions 45,828 52,776 68,547 69,746 8,325 10,739 7,723 8,790 20,315 21,194 43,500 45,805 284,115 184,588 Treasury,general account … … … … … … … … … … … … … … Foreign,official accounts 2 2 1 1 0 0 0 0 0 0 1 1 6 6 Other10 10 8 13 26 0 0 0 0 1 2 3 6 3 1 Totaldeposits 45,840 52,786 68,561 69,773 8,325 10,739 7,723 8,790 20,316 21,196 43,504 45,812 284,124 184,595 Otherliabilities Acruedremittancesto Treasury11 231 90 186 89 62 27 44 11 66 39 137 75 292 118 Deferredcredititems 1,009 553 0 0 0 0 118 147 0 0 0 0 0 0 Consolidatedvariable interestentities12 … … … … … … … … … … … … … … Allotherliabilities13 280 412 249 389 124 166 105 134 106 152 178 277 278 442 Totalliabilities 220,427 210,153 161,845 158,876 44,892 46,146 23,327 29,285 53,004 53,298 123,798 117,885 452,563 324,766 Capitalaccounts Capitalpaidin 1,582 1,559 759 780 231 228 116 115 290 277 460 434 3,981 3,881 Surplus(including accumulatedother comprehensiveloss) 1,582 1,559 759 780 231 228 116 115 290 277 460 434 3,981 3,881 Totalliabilitiesand capitalaccounts 223,591 213,271 163,363 160,436 45,354 46,602 23,559 29,515 53,584 53,852 124,718 118,753 460,525 332,528 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Measuredatfairvalue.Amountsinclude$1millionand$4millioninunrealizedgainsasofDecember31,2013and2012,respectively. 2 Parvalue.Includessecuritiesloaned—fullycollateralizedbyU.S.Treasurysecurities,otherinvestment-gradesecurities,andcollateraleligiblefortri-partyrepurchase agreementspledgedwithFederalReserveBanks. 3 Theparamountshownistheremainingprincipalbalanceofthesecurities. 4 Reflectsthepremiumordiscount,whichisthedifferencebetweenthepurchasepriceandthefacevalueofthesecuritiesthathasnotbeenamortized.ForU.S.Treasuryand Federalagencydebtsecurities,amortizationisonastraight-linebasis.Formortgage-backedsecurities,amortizationisonaneffective-interestbasis. 5 TheFRBNYistheprimarybeneficiaryofTALFLLC,MaidenLaneLLC,MaidenLaneIILLC,andMaidenLaneIIILLCand,asaresult,theaccountsandresultsofoperationsof theseentitiesareincludedinthecombinedfinancialstatementsoftheFederalReserveBanks.Foradditionaldetails,seesection5,“Table6.Keyfinancialdatafor consolidatedvariableinterestentities.” 6 Valueddailyatmarketexchangerates. 7 Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. 8 Includesfurnitureandequipmentanddepositoryinstitutionoverdrafts. 9 Contractamountofagreements. 10Includesdepositsofgovernment-sponsoredenterprises,theConsumerFinancialProtectionBureau,andinternationalorganizations.Thesedepositsareprimarilyheldbythe FRBNY. 11RepresentstheestimatedweeklyremittancestoU.S.TreasuryasinterestonFederalReservenotesor,inthosecaseswheretheReserveBank’snetearningsarenot sufficienttoequatesurplustocapitalpaid-in,thedeferredassetforinterestonFederalReservenotes.TheamountsonthislinearecalculatedinaccordancewithBoardof Governorspolicy,whichrequirestheFederalReserveBankstoremitresidualearningstotheU.S.TreasuryasinterestonFederalReservenotesafterprovidingforthecosts ofoperations,paymentofdividends,andtheamountnecessarytoequatesurpluswithcapitalpaid-in. 12TheotherbeneficialinterestholderrelatedtotheTALFLLCistheU.S.Treasury;toMaidenLaneLLC,itisJPMorganChase;andtoMaidenLaneIIandMaidenLaneIIILLCs,it isAIG. 13IncludesaccruedbenefitcostsandcashcollateralpostedbycounterpartiesundercommitmentstopurchaseandsellfederalagencyandGSEMBS. …Notapplicable.

296 100thAnnualReport|2013 Table9B.StatementofconditionoftheFederalReserve Banks,December31,2013and2012 Supplementalinformation—collateralheldagainst FederalReservenotes:FederalReserveagents’accounts Millionsofdollars Item 2013 2012 FederalReservenotesoutstanding 1,400,977 1,354,877 Less:NotesheldbyFederalReserve Banksnotsubjectto collateralization 203,057 228,216 CollateralizedFederalReservenotes 1,197,920 1,126,661 CollateralforFederalReservenotes Goldcertificates 11,037 11,037 Specialdrawingrightscertificates 5,200 5,200 U.S.Treasurysecurities1 1,181,683 1,110,424 Totalcollateral 1,197,920 1,126,661 1 Facevalue.Includescompensationtoadjustfortheeffectofinflationonthe originalfacevalueofinflation-indexedsecurities.

StatisticalTables 297 Table10.IncomeandexpensesoftheFederalReserveBanks,byBank,2013 Thousandsofdollars Kansas San Item Total Boston NewYork Philadelphia Cleveland Richmond Atlanta Chicago St.Louis Minneapolis Dallas City Francisco Currentincome Interestincome Primary,secondary, andseasonalloans 194 3 8 8 3 8 20 32 20 32 25 12 23 TermAsset-Backed SecuritiesLoan Facility 5,820 … 5,820 … … … … … … … … … … Totalloaninterest income 6,014 3 5,828 8 3 8 20 32 20 32 25 12 23 Treasurysecurities 51,590,7211,324,21828,690,734 1,549,286 1,316,0453,327,9053,345,2432,806,982 824,023 484,241 991,6702,003,6984,926,676 Government-sponsored enterprisedebt securities 2,166,447 55,397 1,205,500 65,521 55,252 140,766 139,782 118,036 34,552 20,290 41,776 84,144 205,431 Federalagencyand government-sponsored enterprise mortgage-backed securities 36,628,566 940,86820,367,668 1,098,442 934,4132,359,4002,377,3591,992,374 585,213 343,952 703,6321,422,5843,502,661 Foreigncurrency denominatedassets 95,996 4,589 30,711 7,511 7,451 20,131 5,471 2,721 799 401 970 1,524 13,717 Centralbankliquidity swaps1 21,717 1,004 6,955 1,722 1,676 4,547 1,238 611 180 90 219 345 3,130 TotalSOMAinterest income 90,503,4472,326,07650,301,568 2,722,482 2,314,8375,852,7495,869,0934,920,7241,444,767 848,974 1,738,2673,512,2958,651,615 Totalinterestincome 90,509,4612,326,07950,307,396 2,722,490 2,314,8405,852,7575,869,1134,920,7561,444,787 849,006 1,738,2923,512,3078,651,638 Pricedservices 441,203 … 89,595 … … … 273,919 77,689 … … … … … Compensation receivedfor servicesprovided2 174,294 14,460 2,530 4,342 5,373 20,095 683 21,941 3,089 54,413 31,547 7,524 8,297 Securitieslendingfees 10,161 260 5,654 307 259 659 656 553 162 95 196 395 965 Otherincome 14,834 320 9,255 378 320 825 806 681 200 132 246 487 1,184 Totalotherincome 640,492 15,040 107,034 5,027 5,952 21,579 276,064 100,864 3,451 54,640 31,989 8,406 10,446 Totalcurrentincome 91,149,9532,341,11950,414,430 2,727,517 2,320,7925,874,3366,145,1775,021,6201,448,238 903,646 1,770,2813,520,7138,662,084 Netexpenses Personnel Salariesandother personnelexpenses 2,021,610 116,018 485,013 90,901 85,768 309,462 151,251 153,786 107,714 102,096 128,280 106,999 184,322 Retirementandother benefits 663,857 32,511 151,969 34,275 32,860 96,864 55,592 52,392 33,548 33,738 37,618 40,046 62,444 Administrative Fees 186,689 4,099 48,684 9,009 4,928 72,511 18,128 7,405 8,758 3,288 2,458 2,039 5,382 Travel 87,798 3,641 11,446 3,580 5,388 13,281 8,588 10,085 5,483 3,701 6,860 5,071 10,674 Postageandother shippingcosts 14,099 288 893 319 1,347 687 2,637 365 762 384 1,021 2,553 2,843 Communications 47,471 966 6,233 595 730 28,862 1,851 2,040 1,040 1,291 1,190 1,389 1,284 Materialsandsupplies 66,467 3,542 22,520 6,515 2,709 7,198 4,672 4,803 2,390 1,608 3,187 3,530 3,793 Building Taxesonrealestate 48,443 6,175 14,269 1,879 1,102 2,864 3,229 3,465 739 3,621 3,412 3,608 4,080 Propertydepreciation 132,304 11,693 26,883 6,463 6,793 14,373 9,191 15,483 7,878 4,312 8,159 9,769 11,307 Utilities 38,703 4,169 10,127 1,545 1,520 4,208 3,165 2,172 1,822 1,889 2,137 2,847 3,102 Rent 35,837 199 7,562 910 973 22,437 522 927 1,125 250 502 167 263 Otherbuilding 59,044 4,988 11,016 5,081 3,150 5,841 4,823 6,840 2,276 2,634 2,300 6,741 3,354 Equipment/software Purchases 30,680 1,807 4,804 1,100 999 8,794 1,933 2,171 1,315 1,510 1,924 1,947 2,376 Rentals 3,386 301 1,272 183 237 248 314 664 18 68 14 42 25 Depreciation 69,888 3,914 6,439 3,315 1,693 36,641 3,021 2,829 2,024 1,353 2,389 2,616 3,654 Repairsand maintenance 64,786 5,527 5,517 2,837 2,100 25,483 5,221 3,535 1,650 1,445 2,401 3,063 6,007 Software 182,073 5,247 34,345 9,896 6,605 70,858 14,347 3,913 4,582 6,434 6,340 9,430 10,076 (continuedonnextpage)

298 100thAnnualReport|2013 Table10.—continued Kansas San Item Total Boston NewYork Philadelphia Cleveland Richmond Atlanta Chicago St.Louis Minneapolis Dallas City Francisco Otherexpenses Compensationpaidfor servicecosts incurred2 174,294 … 36,899 … … … 125,501 11,894 … … … … … Otherexpenses 78,369 16,436 84,988 24,425 6,644 -314,839 31,463 59,243 80,963 24,110 16,091 22,966 25,882 Recoveries -159,790 -16,665 -21,102 -5,232 -4,935 -51,197 -12,236 -9,900 -5,930 -2,246 -8,552 -15,530 -6,265 Expensescapitalized3 -80,541 -6,141 -30,016 -2,779 -5,104 5,137 -423 -2,480 -4,726 -10,486 -10,671 -1,671 -11,182 Totaloperating expensesbefore pension expenseand reimbursements 3,765,467 198,715 919,761 194,817 155,507 359,713 432,790 331,632 253,431 181,000 207,060 207,622 323,421 Netperiodicpension expense4 616,286 -268 618,944 -37 -183 820 -187 -882 -86 -345 -742 273 -1,021 Reimbursements -530,055 -38,427 -120,184 -38,501 -27,235 -48,487 -22,223 -6,127 -122,239 -34,484 -33,468 -24,604 -14,076 Operating Expenses 3,851,698 160,020 1,418,521 156,279 128,089 312,046 410,380 324,623 131,106 146,171 172,850 183,291 308,324 Interestexpense onsecurities soldunder agreementsto repurchase 60,201 1,516 33,575 1,871 1,534 4,023 3,808 3,298 954 559 1,175 2,339 5,549 Intereston reserves5 5,211,912 82,253 3,712,634 98,956 51,443 214,826 114,022 168,129 27,382 19,351 47,516 114,405 560,995 Interestonterm deposits6 10,845 24 7,400 614 0 247 707 525 4 111 162 67 984 Netexpenses 9,134,656 243,813 5,172,130 257,720 181,066 531,142 528,917 496,575 159,446 166,192 221,703 300,102 875,852 Currentnetincome 82,015,2972,097,30645,242,300 2,469,797 2,139,7265,343,1945,616,2604,525,0451,288,792 737,454 1,548,5783,220,6117,786,232 Additionsto(+)anddeductionsfrom(-)currentnetincome Profitonsalesof federalagencyand government-sponsored enterprise mortgage-backed securities 50,954 1,397 28,044 1,335 1,305 2,857 3,598 2,703 836 497 923 1,978 5,481 Foreigncurrency translationgains (losses) -1,256,960 -60,198 -402,109 -98,276 -97,594 -263,625 -71,631 -35,639 -10,462 -5,252 -12,699 -19,959 -179,516 Netincomefrom consolidated variableinterest entities7 181,149 … 181,149 … … … … … … … … … … Otheradditions 653 21 5 1 2 6 598 7 2 1 2 3 5 Otherdeductions -5,537 -1 -3,639 59 -1,759 -216 -54 -39 -9 -4 0 139 -13 Netdeductionsto(-) currentnetincome -1,029,741 -58,781 -196,550 -96,881 -98,046 -260,978 -67,489 -32,968 -9,633 -4,758 -11,774 -17,839 -174,043 Costof unreimbursed Treasuryservices 9 … 9 … … … … … … … … … … AssessmentsbyBoard Boardexpenditures8 580,000 27,934 185,239 44,711 45,553 121,717 33,374 16,233 4,867 2,446 5,908 9,467 82,552 Costofcurrency 701,522 34,109 138,873 35,901 41,991 62,923 107,591 64,837 23,237 15,201 22,089 54,932 99,838 ConsumerFinancial ProtectionBureau9 563,200 26,966 179,558 43,280 44,357 117,808 32,547 15,686 4,743 2,384 5,751 9,303 80,819 Assessmentsbythe BoardofGovernors 1,844,722 89,009 503,670 123,892 131,901 302,448 173,512 96,756 32,847 20,031 33,748 73,702 263,209 Netincomebefore providingfor remittancesto Treasury 79,140,8251,949,51644,542,089 2,249,024 1,909,7794,779,7685,375,2594,395,3211,246,312 712,665 1,503,0563,129,0707,348,980 Earningsremittances toTreasury 79,633,2711,981,75845,940,958 2,189,384 1,749,3654,495,6265,286,3884,406,9211,245,055 721,260 1,485,4643,105,0497,026,043 Netincome(loss) -492,446 -32,242 -1,398,869 59,640 160,414 284,142 88,871 -11,600 1,257 -8,595 17,592 24,021 322,937 Othercomprehensive income(loss) 2,288,811 16,763 2,024,343 19,205 22,884 51,493 29,116 36,783 15,747 17,300 11,988 29,031 14,157 (continuedonnextpage)

StatisticalTables 299 Table10.—continued Kansas San Item Total Boston NewYork Philadelphia Cleveland Richmond Atlanta Chicago St.Louis Minneapolis Dallas City Francisco Comprehensive income 1,796,365 -15,479 625,474 78,845 183,298 335,635 117,987 25,183 17,004 8,705 29,580 53,052 337,094 Distributionofcomprehensiveincome Dividendsoncapital stock 1,649,277 78,102 525,884 126,774 129,908 345,446 94,989 45,858 13,877 6,992 16,902 27,207 237,338 Transferredto/from surplusandchange inaccumulated other comprehensive income 147,088 -93,581 99,576 -47,932 53,388 -9,812 22,996 -20,672 3,128 1,718 12,675 25,850 99,755 Earningsremittances toTreasury 79,633,2711,981,75845,940,958 2,189,384 1,749,3654,495,6265,286,3884,406,9211,245,055 721,260 1,485,4643,105,0497,026,043 Totaldistributionof netincome 81,429,6361,966,27946,566,418 2,268,226 1,932,6614,831,2605,404,3734,432,1071,262,060 729,970 1,515,0413,158,1067,363,136 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 Includesexpensesforlaborandmaterialscapitalizedanddepreciatedoramortizedaschargestoactivitiesintheperiodsbenefited. 4 ReflectstheeffectoftheFinancialAccountingStandardsBoard'sCodificationTopic(ASC715)Compensation-RetirementBenefits.NetpensionexpensefortheSystem RetirementPlanof$625,019thousandisrecordedonbehalfoftheSysteminthebooksoftheFRBNY.TheRetirementBenefitEqualizationPlanandtheSupplemental EmployeeRetirementPlanarerecordedbyeachFederalReserveBank. 5 InOctober2008,theReserveBanksbegantopayinteresttodepositoryinstitutionsonqualifyingbalancesheldattheFederalReserveBanks. 6 InApril2010,theReserveBanksbegantopayinterestontermdepositsundertheTermDepositFacility. 7 Representstheportionoftheconsolidatedvariableinterestentities’netincomerecordedbytheFRBNY.Theamountincludesinterestincome,interestexpenses,realizedand unrealizedgainsandlosses,andprofessionalfees. 8 Foradditionaldetails,see“BoardofGovernorsFinancialStatements”insection11. 9 TheBoardofGovernorsassessestheReserveBankstofundtheoperationsoftheConsumerFinancialProtectionBureauandOfficeofFinancialResearch.These assessmentsareallocatedtoeachReserveBankbasedoneachReserveBank’scapitalandsurplusbalancesasofthemostrecentquarter. …Notapplicable.

300 100thAnnualReport|2013 Table11.IncomeandexpensesoftheFederalReserveBanks,1914–2013 Thousandsofdollars Distributions Assessmentsbythe tothe BoardofGovernors U.S.Treasury Transferred to/from Trans- Federal Net Other surplus Reserve additions Consumer compre- ferred and p B e a a r n n i d o k d C in u c r o r m en e t exp N e e n t ses dedu ( o - c ) r 1 tions exp B en o d a i r t d ures cu C r o r o e s f n ts cy P F r B i o n u a t a e r n n e c d c a ti i u o a n l h in ( e l c o n o s s m s iv ) e e Div p id a e id nds t S ra ta n t s u f t e o r r s y 3 R I F n e e t s d e o e e r n e r r v a s e t l p f s r l t u o u o r m s / - 4 o a th c c c e h h u r e a m n c n o s g u i m e l v a e p i t n e re d - 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 (continuedonnextpage)

StatisticalTables 301 Table11.—continued Distributions Assessmentsbythe tothe BoardofGovernors U.S.Treasury Transferred to/from Trans- Federal Net Other surplus Reserve additions Consumer compre- ferred and p B e a a r n n i d o k d C in u c r o r m en e t exp N e e n t ses dedu ( o - c ) r 1 tions exp B en o d a i r t d ures cu C r o r o e s f n ts cy P F r B i o n u a t a e r n n e c d c a ti i u o a n l h in ( e l c o n o s s m s iv ) e e Div p id a e id nds t S ra ta n t s u f t e o r r s y 3 R I F n e e t s d e o e e r n e r r v a s e t l p f s r l t u o u o r m s / - 4 o a th c c c e h h u r e a m n c n o s g u i m e l v a e p i t n e re d - Officeof notes income5 Financial Research2 1962 1,048,508 161,451 -56 6,655 8,030 … … 27,412 … 799,366 … 45,538 1963 1,151,120 169,638 615 7,573 10,063 … … 28,912 … 879,685 … 55,864 1964 1,343,747 171,511 726 8,655 17,230 … … 30,782 … 1,582,119 … -465,823 1965 1,559,484 172,111 1,022 8,576 23,603 … … 32,352 … 1,296,810 … 27,054 1966 1,908,500 178,212 996 9,022 20,167 … … 33,696 … 1,649,455 … 18,944 1967 2,190,404 190,561 2,094 10,770 18,790 … … 35,027 … 1,907,498 … 29,851 1968 2,764,446 207,678 8,520 14,198 20,474 … … 36,959 … 2,463,629 … 30,027 1969 3,373,361 237,828 -558 15,020 22,126 … … 39,237 … 3,019,161 … 39,432 1970 3,877,218 276,572 11,442 21,228 23,574 … … 41,137 … 3,493,571 … 32,580 1971 3,723,370 319,608 94,266 32,634 24,943 … … 43,488 … 3,356,560 … 40,403 1972 3,792,335 347,917 -49,616 35,234 31,455 … … 46,184 … 3,231,268 … 50,661 1973 5,016,769 416,879 -80,653 44,412 33,826 … … 49,140 … 4,340,680 … 51,178 1974 6,280,091 476,235 -78,487 41,117 30,190 … … 52,580 … 5,549,999 … 51,483 1975 6,257,937 514,359 -202,370 33,577 37,130 … … 54,610 … 5,382,064 … 33,828 1976 6,623,220 558,129 7,311 41,828 48,819 … … 57,351 … 5,870,463 … 53,940 1977 6,891,317 568,851 -177,033 47,366 55,008 … … 60,182 … 5,937,148 … 45,728 1978 8,455,309 592,558 -633,123 53,322 60,059 … … 63,280 … 7,005,779 … 47,268 1979 10,310,148 625,168 -151,148 50,530 68,391 … … 67,194 … 9,278,576 … 69,141 1980 12,802,319 718,033 -115,386 62,231 73,124 … … 70,355 … 11,706,370 … 56,821 1981 15,508,350 814,190 -372,879 63,163 82,924 … … 74,574 … 14,023,723 … 76,897 1982 16,517,385 926,034 -68,833 61,813 98,441 … … 79,352 … 15,204,591 … 78,320 1983 16,068,362 1,023,678 -400,366 71,551 152,135 … … 85,152 … 14,228,816 … 106,663 1984 18,068,821 1,102,444 -412,943 82,116 162,606 … … 92,620 … 16,054,095 … 161,996 1985 18,131,983 1,127,744 1,301,624 77,378 173,739 … … 103,029 … 17,796,464 … 155,253 1986 17,464,528 1,156,868 1,975,893 97,338 180,780 … … 109,588 … 17,803,895 … 91,954 1987 17,633,012 1,146,911 1,796,594 81,870 170,675 … … 117,499 … 17,738,880 … 173,771 1988 19,526,431 1,205,960 -516,910 84,411 164,245 … … 125,616 … 17,364,319 … 64,971 1989 22,249,276 1,332,161 1,254,613 89,580 175,044 … … 129,885 … 21,646,417 … 130,802 1990 23,476,604 1,349,726 2,099,328 103,752 193,007 … … 140,758 … 23,608,398 … 180,292 1991 22,553,002 1,429,322 405,729 109,631 261,316 … … 152,553 … 20,777,552 … 228,356 1992 20,235,028 1,474,531 -987,788 128,955 295,401 … … 171,763 … 16,774,477 … 402,114 1993 18,914,251 1,657,800 -230,268 140,466 355,947 … … 195,422 … 15,986,765 … 347,583 1994 20,910,742 1,795,328 2,363,862 146,866 368,187 … … 212,090 … 20,470,011 … 282,122 1995 25,395,148 1,818,416 857,788 161,348 370,203 … … 230,527 … 23,389,367 … 283,075 1996 25,164,303 1,947,861 -1,676,716 162,642 402,517 … … 255,884 5,517,716 14,565,624 … 635,343 1997 26,917,213 1,976,453 -2,611,570 174,407 364,454 … … 299,652 20,658,972 0 … 831,705 1998 28,149,477 1,833,436 1,906,037 178,009 408,544 … … 343,014 17,785,942 8,774,994 … 731,575 1999 29,346,836 1,852,162 -533,557 213,790 484,959 … … 373,579 … 25,409,736 … 479,053 2000 33,963,992 1,971,688 -1,500,027 188,067 435,838 … … 409,614 … 25,343,892 … 4,114,865 2001 31,870,721 2,084,708 -1,117,435 295,056 338,537 … … 428,183 … 27,089,222 … 517,580 2002 26,760,113 2,227,078 2,149,328 205,111 429,568 … … 483,596 … 24,495,490 … 1,068,598 2003 23,792,725 2,462,658 2,481,127 297,020 508,144 … … 517,705 … 22,021,528 … 466,796 2004 23,539,942 2,238,705 917,870 272,331 503,784 … … 582,402 … 18,078,003 … 2,782,587 2005 30,729,357 2,889,544 -3,576,903 265,742 477,087 … … 780,863 … 21,467,545 … 1,271,672 2006 38,410,427 3,263,844 -158,846 301,014 491,962 … … 871,255 … 29,051,678 … 4,271,828 2007 42,576,025 3,510,206 198,417 296,125 576,306 … 324,481 992,353 … 34,598,401 … 3,125,533 2008 41,045,582 4,870,374 3,340,628 352,291 500,372 … -3,158,808 1,189,626 … 31,688,688 … 2,626,053 2009 54,463,121 5,978,795 4,820,204 386,400 502,044 … 1,006,813 1,428,202 … 47,430,237 … 4,564,460 2010 79,300,937 6,270,420 9,745,562 422,200 622,846 42,286 45,881 1,582,785 … 79,268,124 … 883,724 (continuedonnextpage)

302 100thAnnualReport|2013 Table11.—continued Distributions Assessmentsbythe tothe BoardofGovernors U.S.Treasury Transferred to/from Trans- Federal Net Other surplus Reserve additions Consumer compre- ferred and p B e a a r n n i d o k d C in u c r o r m en e t exp N e e n t ses dedu ( o - c ) r 1 tions exp B en o d a i r t d ures cu C r o r o e s f n ts cy P F r B i o n u a t a e r n n e c d c a ti i u o a n l h in ( e l c o n o s s m s iv ) e e Div p id a e id nds t S ra ta n t s u f t e o r r s y 3 R I F n e e t s d e o e e r n e r r v a s e t l p f s r l t u o u o r m s / - 4 o a th c c c e h h u r e a m n c n o s g u i m e l v a e p i t n e re d - Officeof notes income5 Financial Research2 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 2013 91,149,953 9,134,656 -1,029,750 580,000 701,522 563,200 2,288,811 1,649,277 … 79,633,271 … 147,088 Total, 1914–2013 1,186,252,728 98,226,703 41,513,683 7,704,117 13,106,200 1,274,477 -707,281 18,796,238 44,113,9581,010,388,214 -4 33,449,2366 AggregateforeachBank,1914–2013 Boston 51,279,178 4,828,708 478,994 328,411 735,103 56,441 9,877 821,871 2,579,504 40,972,606 135 1,445,269 NewYork 470,670,121 28,610,232727,102,475 2,039,651 3,670,015 398,835 -885,309 5,118,391 17,307,161 428,467,738 -433 11,275,692 Philadelphia 40,938,788 4,190,761 1,041,786 486,608 603,615 104,641 9,399 1,367,477 1,312,118 31,690,268 291 2,234,192 Cleveland 57,608,370 4,561,484 949,026 564,875 737,571 98,504 24,387 1,389,004 2,827,043 45,907,225 -10 2,496,089 Richmond 94,883,564 8,270,922 2,944,213 1,377,610 1,112,656 265,534 46,940 3,737,994 3,083,928 73,209,366 -72 6,816,783 Atlanta 81,548,299 11,349,617 1,905,852 544,630 1,281,413 72,931 7,813 1,255,535 2,713,230 64,342,341 5 1,902,259 Chicago 118,307,330 9,352,194 1,973,116 624,229 1,403,432 35,186 18,086 1,252,321 4,593,811 101,859,121 12 1,178,226 St.Louis 35,161,474 3,580,587 460,097 142,188 464,173 10,663 17,560 297,824 1,833,837 28,954,917 -27 354,974 Minneapolis 19,033,550 3,612,262 441,992 190,391 252,993 10,674 7,895 419,247 416,227 14,307,193 65 274,396 KansasCity 38,929,972 4,895,786 621,802 176,201 479,300 12,704 -2,122 345,634 1,249,703 31,978,396 -9 411,931 Dallas 51,198,780 5,146,967 1,142,028 264,248 730,078 20,312 27,038 502,867 1,510,802 43,564,602 55 627,916 SanFrancisco 126,693,302 9,827,187 2,452,312 965,077 1,635,850 188,054 11,154 2,288,074 4,686,594 105,134,440 -17 4,431,511 Total 1,186,252,728 98,226,703 41,513,683 7,704,117 13,106,200 1,274,477 -707,281 18,796,238 44,113,9581,010,388,214 -4 33,449,236 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$33,449,236thousandtransferredtosurpluswasreducedbydirectchargesof$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$27,506,847thousandon December31,2013. 7 Thisamountisreducedby$5,856,187thousandforexpensesoftheSystemRetirementPlan.Seenote4,"Table10.IncomeandexpensesoftheFederalReserveBanks,by Bank,2013.” …Notapplicable.

StatisticalTables 303 Table12.OperationsinprincipaldepartmentsoftheFederalReserveBanks,2010–13 Operation 2013 2012 2011 2010 Millionsofpieces Currencyprocessed 33,254 31,703 32,249 32,143 Currencydestroyed 5,564 4,614 4,813 5,948 Coinreceived 56,806 58,669 59,550 62,345 Checkshandled U.S.governmentchecks1 83 121 159 185 Postalmoneyorders 101 108 113 121 Commercial 5,987 6,622 6,780 7,712 Securitiestransfers2 19 18 19 20 Fundstransfers3 134 132 127 125 Automatedclearinghousetransactions Commercial 11,143 10,665 10,349 10,233 Government 1,467 1,382 1,305 1,222 Millionsofdollars Currencyprocessed 639,164 581,382 576,442 569,249 Currencydestroyed 206,998 105,464 81,943 120,049 Coinreceived 5,481 5,700 5,907 6,014 Checkshandled U.S.governmentchecks1 154,584 199,251 241,817 292,261 Postalmoneyorders 22,262 21,927 22,220 23,210 Commercial 7,960,028 8,125,424 7,943,524 8,811,010 Securitiestransfers2 295,186,170 284,401,670 291,823,993 320,123,901 Fundstransfers3 713,310,354 599,200,625 663,837,575 608,325,851 Automatedclearinghousetransactions Commercial 19,689,431 19,293,857 17,801,549 16,941,077 Government 4,714,428 4,609,914 4,534,707 4,426,808 1 Includesgovernmentcheckshandledelectronically(electronicchecks). 2 Dataonsecuritiestransfersdonotincludereversals. 3 Dataonfundstransfersdonotincludenon-valuetransfers.

304 100thAnnualReport|2013 Table13.NumberandannualsalariesofofficersandemployeesoftheFederalReserveBanks,December31,2013 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 71 14,671,048 937 29 88,352,943 1,038 103,374,391 NewYork 410,780 514 115,252,921 2,546 35 282,839,031 3,096 398,502,732 Philadelphia 350,400 66 11,536,765 823 16 67,149,811 906 79,036,976 Cleveland 347,400 54 9,668,100 839 23 66,771,202 917 76,786,702 Richmond 347,400 79 13,853,652 1,387 25 112,557,675 1,492 126,758,727 Atlanta 314,400 78 14,991,480 1,486 16 118,308,887 1,581 133,614,767 Chicago 350,400 111 20,615,543 1,324 44 120,412,103 1,480 141,378,047 St.Louis 281,300 88 15,772,000 910 34 71,690,841 1,033 87,744,141 Minneapolis 313,500 55 9,920,225 988 51 75,243,412 1,095 85,477,137 KansasCity 323,200 79 13,884,200 1,319 14 92,281,391 1,413 106,488,791 Dallas 350,400 70 11,812,352 1,085 9 78,959,645 1,165 91,122,396 SanFrancisco 367,500 87 18,403,012 1,521 18 142,695,287 1,627 161,465,799 FederalReserve Information Technology … 67 12,374,436 1,092 4 115,136,914 1,163 127,511,350 OfficeofEmployee Benefits … 14 3,178,250 38 0 3,949,040 52 7,127,290 Total 4,107,080 1,433 285,933,984 16,295 318 1,436,348,182 18,058 1,726,389,246 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Nopresidentorotherofficer,exceptforanofficerwhoreceivedapromotionwithasignificantincreaseinresponsibility,receivedasalaryincreasein2011,2012,or2013, duetotheBoard’sapplicationofthepayfreezetoReserveBankofficers. 2 Annualizedsalaryliability(excludingoutsideagencycosts)basedonsalariesineffectonDecember31,2013. …Notapplicable.

StatisticalTables 305 Table14.AcquisitioncostsandnetbookvalueofthepremisesoftheFederalReserveBanksandBranches,December31,2013 Thousandsofdollars Acquisitioncosts FederalReserveBank Net Other orBranch Buildings Buildingmachinery bookvalue realestate3 Land Total2 (includingvaults)1 andequipment Boston 27,293 184,197 31,605 243,095 122,983 … NewYork 67,570 508,520 109,422 685,512 432,479 … Philadelphia 8,146 113,616 25,487 147,249 72,553 … Cleveland 4,219 128,346 25,647 158,212 92,697 … Cincinnati 3,075 28,639 17,604 49,318 17,983 … Richmond 31,749 161,501 56,577 249,827 152,555 … Baltimore 7,917 39,807 13,746 61,470 34,245 … Charlotte 7,884 45,049 13,957 66,890 41,239 … Atlanta 22,995 158,265 20,140 201,400 149,016 … Birmingham 5,347 13,056 1,465 19,868 10,338 … Jacksonville 1,779 23,625 4,974 30,378 16,484 … NewOrleans 3,785 13,796 6,332 23,913 11,591 … Miami 4,254 30,087 7,470 41,811 24,448 … Chicago 5,403 219,708 28,302 253,413 122,634 … Detroit 12,329 74,283 11,554 98,166 80,412 … St.Louis 9,377 140,755 15,899 166,031 116,709 … Memphis 2,472 15,680 5,188 23,340 9,967 … Minneapolis 15,522 109,423 17,518 142,463 90,767 … Helena 2,890 10,335 1,548 14,773 8,654 … KansasCity 38,585 200,331 27,129 266,045 232,426 … Denver 3,694 9,873 5,902 19,469 8,435 … Omaha 3,559 7,692 1,925 13,176 5,992 … Dallas 37,461 124,081 32,298 193,840 115,142 … ElPaso 262 3,821 2,050 6,133 945 … Houston 25,119 104,059 9,209 138,387 111,335 7,204 SanAntonio 826 8,401 2,969 12,196 3,656 … SanFrancisco 20,988 122,479 29,882 173,349 90,028 … LosAngeles 6,306 75,494 20,244 102,044 51,659 … SaltLakeCity 1,294 5,407 1,610 8,311 2,745 … Seattle 13,101 49,970 6,744 69,815 59,790 Total 395,201 2,730,296 554,397 3,679,894 2,289,907 7,204 1 Includesexpendituresforconstructionatsomeoffices,pendingallocationtoappropriateaccounts. 2 Excludescharge-offsof$17,699thousandbefore1952. 3 Includesrealestateheldpendingsale. …Notapplicable.

307 11 Federal Reserve System Audits TheBoardof Governors,theFederalReserveBanks,andtheFederalReserve Systemasawholeareallsubjecttoseverallevelsof auditandreview. TheBoard’sfinancialstatementsandinternalcontrolsoverfinancialreportingare auditedannuallybyanindependentoutsideauditorretainedbytheBoard’sOffice of InspectorGeneral(OIG).TheoutsideauditoralsoteststheBoard’scompliance withcertainlawsandregulationsaffectingthosestatements. TheReserveBanks’financialstatementsareauditedannuallybyanindependent outsideauditorretainedbytheBoardof Governors.Inaddition,theReserve BanksaresubjecttoannualexaminationbytheBoard.Asdiscussedinsection5, “FederalReserveBanks,”theBoard’sexaminationincludesawiderangeof ongoingoversightactivitiesconductedonsiteandoff sitebystaff of theBoard’sDivisionof ReserveBankOperationsandPaymentSystems. Inaddition,theOIGconductsaudits,investigations,andotherreviewsrelatingto theBoard’sprogramsandoperationsaswellastoBoardfunctionsdelegatedtothe ReserveBanks.Certainaspectsof FederalReserveoperationsarealsosubjectto reviewbytheGovernmentAccountabilityOffice.

308 100thAnnualReport|2013 Board of Governors Financial Statements Thefinancialstatementsof theBoardof Governorsfor2013and2012were auditedbyDeloitte&ToucheLLP,independentauditors. March12,2014 Management’sReportonInternalControloverFinancialReporting TotheCommitteeonBoardAffairs: ThemanagementoftheBoardofGovernorsoftheFederalReserveSystem(“theBoard”)isresponsibleforthe preparationandfairpresentationofthebalancesheetasofDecember31,2013,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 madeonlyinaccordancewithauthorizationsbyitsmanagement;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionoftheBoard’sassetsthatcouldhavea materialeffectontheFinancialStatements. Internalcontrol,nomatterhowwelldesignedandoperated,canonlyprovidereasonableassuranceofachievingthe Board’scontrolobjectiveswithrespecttothepreparationofreliableFinancialStatements.Thelikelihoodofachievementofsuchobjectivesisaffectedbylimitationsinherenttointernalcontrol,includingthepossibilityofhuman error.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatspecificcontrols maybecomeinadequatebecauseofchangesinconditionsorthatthedegreeofcompliancewithpoliciesorproceduresmaydeteriorate. TheBoard’smanagementassesseditsinternalcontroloverfinancialreportingwithregardstotheFinancialStatementsbaseduponthecriteriaestablishedintheInternalControl—IntegratedFramework(1992)issuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission. Basedonthisassessment,webelievethattheBoardhasmaintainedeffectiveinternalcontroloverfinancialreporting asitrelatestoitsFinancialStatements. DonaldV.Hammond WilliamL.Mitchell ChiefOperatingOfficer ChiefFinancialOfficer

FederalReserveSystemAudits 309 INDEPENDENTAUDITORS’REPORT TotheBoardofGovernorsoftheFederalReserveSystem: WehaveauditedtheaccompanyingfinancialstatementsoftheBoardofGovernorsoftheFederalReserveSystem (the“Board”),whicharecomprisedofthebalancesheetsasofDecember31,2013and2012,andtherelatedstatementsofoperations,andcashflowsfortheyearsthenended,andtherelatednotestothefinancialstatements.We alsohaveauditedtheBoard’sinternalcontroloverfinancialreportingasofDecember31,2013,basedoncriteria establishedinInternalControl—IntegratedFramework(1992)issuedbytheCommitteeofSponsoringOrganizations oftheTreadwayCommission. Management’sResponsibility TheBoard’smanagementisresponsibleforthepreparationandfairpresentationofthesefinancialstatementsin accordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica;thisincludesthedesign, implementation,andmaintenanceofinternalcontrolrelevanttothepreparationandfairpresentationoffinancial statementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.TheBoard’smanagementisalso responsibleforitsassertionoftheeffectivenessofinternalcontroloverfinancialreporting,includedintheaccompanyingManagement’sAssertion. Auditors’Responsibility OurresponsibilityistoexpressanopiniononthesefinancialstatementsandanopinionontheBoard’sinternalcontroloverfinancialreportingbasedonouraudits.Weconductedourauditofthefinancialstatementsinaccordance withauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica,auditingstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates)(“PCAOB”),andthestandardsapplicabletofinancialauditscontainedinGovernmentAuditingStandardsissuedbytheComptrollerGeneraloftheUnitedStatesandweconducted ourauditofinternalcontroloverfinancialreportinginaccordancewithattestationstandardsestablishedbythe AmericanInstituteofCertifiedPublicAccountantsandinaccordancewiththeauditingstandardsofthePCAOB. Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreefrommaterialmisstatementandwhethereffectiveinternalcontroloverfinancialreportingwas maintainedinallmaterialrespects. Anauditoffinancialstatementsinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresinthefinancialstatements.Theproceduresselecteddependontheauditor’sjudgment,includingtheassessmentoftherisksofmaterialmisstatementofthefinancialstatements,whetherduetofraudorerror.Inmakingthose riskassessments,theauditorconsidersinternalcontrolrelevanttotheBoard’spreparationandfairpresentationof thefinancialstatementsinordertodesignauditproceduresthatareappropriateinthecircumstances.Anauditof financialstatementsalsoincludesevaluatingtheappropriatenessofaccountingpoliciesusedandthereasonableness ofsignificantaccountingestimatesmadebymanagement,aswellasevaluatingtheoverallpresentationofthefinancialstatements.Anauditofinternalcontroloverfinancialreportinginvolvesobtaininganunderstandingofinternal controloverfinancialreporting,assessingtheriskthatamaterialweaknessexists,testingandevaluatingthedesign andoperatingeffectivenessofinternalcontrolbasedontheassessedrisk,andperformingsuchotherproceduresaswe considerednecessaryinthecircumstances. 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

310 100thAnnualReport|2013 reasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsin accordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica,andthatreceiptsand expendituresoftheBoardarebeingmadeonlyinaccordancewithauthorizationsofmanagementandgovernorsof theBoard;and(3)providereasonableassuranceregardingpreventionortimelydetectionandcorrectionofunauthorizedacquisition,use,ordispositionoftheBoard’sassetsthatcouldhaveamaterialeffectonthefinancial statements. InherentLimitationsofInternalControlOverFinancialReporting Becauseoftheinherentlimitationsofinternalcontroloverfinancialreporting,includingthepossibilityofcollusion orimpropermanagementoverrideofcontrols,materialmisstatementsduetoerrororfraudmaynotbepreventedor detectedandcorrectedonatimelybasis.Also,projectionsofanyevaluationoftheeffectivenessoftheinternalcontroloverfinancialreportingtofutureperiodsaresubjecttotheriskthatthecontrolsmaybecomeinadequatebecause ofchangesinconditionsorthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate. Opinions Inouropinion,thefinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancialposition oftheBoardasofDecember31,2013and2012,andtheresultsofitsoperationsanditscashflowsfortheyearsthen endedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.Also,inouropinion,theBoardmaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofDecember31,2013,basedonthecriteriaestablishedinInternalControl—IntegratedFramework(1992)issuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission. ReportonComplianceandOtherMattersBasedonanAuditofFinancialStatementsPerformedin AccordancewithGovernmentAuditingStandards InaccordancewithGovernmentAuditingStandards,wehavealsoissuedareportdatedMarch12,2014onourtestsof theBoard’scompliancewithcertainprovisionsoflaws,regulations,contracts,grantagreements,andothermatters. Thepurposeofthatreportistodescribethescopeofourtestingofcomplianceandtheresultsofthattesting,and nottoprovideanopiniononcompliance.Thatreportisanintegralpartofanauditperformedinaccordancewith GovernmentAuditingStandardsandshouldbereadinconjunctionwiththisreportinconsideringtheresultsofour audits. March12,2014 Washington,DC

FederalReserveSystemAudits 311 BoardofGovernorsoftheFederalReserveSystemBalanceSheets AsofDecember31, 2013 2012 Assets Currentassets: Cash $ 90,851,317 $ 53,965,151 Accountsreceivable–net 7,911,011 2,437,241 Prepaidexpensesandotherassets 4,621,633 4,518,080 Totalcurrentassets 103,383,961 60,920,472 Noncurrentassets: Property,equipment,andsoftware–net 195,347,206 186,703,851 Otherassets 1,959,389 1,081,446 Totalnoncurrentassets 197,306,595 187,785,297 Total $300,690,556 $248,705,769 Liabilitiesandcumulativeresultsofoperations Currentliabilities: Accountspayableandaccruedliabilities $ 22,376,801 $ 16,181,003 Accruedpayrollandrelatedtaxes 25,105,590 20,907,437 Accruedannualleave 31,288,437 29,218,663 Capitalleasepayable 465,219 456,896 Unearnedrevenuesandotherliabilities 2,509,202 617,787 Totalcurrentliabilities 81,745,249 67,381,786 Long-termliabilities: Capitalleasepayable 603,897 1,069,116 Retirementbenefitobligation 30,129,567 33,740,310 Postretirementbenefitobligation 11,294,443 13,249,648 Postemploymentbenefitobligation 8,490,921 10,695,165 Otherliabilities 22,060,853 21,261,795 Totallong-termliabilities 72,579,681 80,016,034 Totalliabilities 154,324,930 147,397,820 Cumulativeresultsofoperations: Fundbalance 153,616,578 119,140,439 Accumulatedothercomprehensiveincome(loss) (7,250,952) (17,832,490) Totalcumulativeresultsofoperations 146,365,626 101,307,949 Total $300,690,556 $248,705,769 Seenotestofinancialstatements.

312 100thAnnualReport|2013 BoardofGovernorsoftheFederalReserveSystemStatementsofOperations FortheyearsendedDecember31, 2013 2012 Boardoperatingrevenues: AssessmentsleviedonFederalReserveBanksforBoardoperatingexpensesandcapitalexpenditures $580,000,000 $490,000,000 Otherrevenues 14,888,833 9,793,604 Totaloperatingrevenues 594,888,833 499,793,604 Boardoperatingexpenses: Salaries 322,740,797 299,889,043 Retirement,insurance,andbenefits 73,336,663 70,232,938 Contractualservicesandprofessionalfees 63,094,846 50,873,548 Depreciation,amortization,andnetgainsorlossesondisposals 24,694,987 21,969,729 Travel 14,726,855 15,068,161 Postage,supplies,andnon-capitalfurnitureandequipment 10,955,269 11,256,753 Utilities 9,330,903 9,016,693 Software 11,592,703 10,967,296 Rentalsofspace 14,790,457 14,120,215 Repairsandmaintenance 5,866,831 5,696,326 Printingandbinding 1,899,711 2,126,056 Otherexpenses 7,382,672 7,887,650 Totaloperatingexpenses 560,412,694 519,104,408 Netincome(loss) 34,476,139 (19,310,804) Currencycosts: AssessmentsleviedortobeleviedonFederalReserveBanksforcurrencycosts 705,030,765 721,074,064 Expensesforcostsrelatedtocurrency 705,030,765 721,074,064 Currencyassessmentsover(under)expenses – – BureauofConsumerFinancialProtection(Bureau): AssessmentsleviedontheFederalReserveBanksfortheBureau 563,200,000 385,200,000 TransferstotheBureau 563,200,000 385,200,000 Bureauassessmentsover(under)transfers – – OfficeofFinancialResearch(Office): AssessmentsleviedontheFederalReserveBanksfortheOffice – 2,078,298 TransferstotheOffice – 2,078,298 Officeassessmentsover(under)transfers – – Totalnetincome(loss) 34,476,139 (19,310,804) Othercomprehensiveincome: Amortizationofpriorservice(credit)cost 605,684 584,890 Amortizationofnetactuarial(gain)loss 1,218,367 1,659,956 Netactuarialgain(loss)arisingduringtheyear 8,757,487 (2,983,794) Totalothercomprehensiveincome(loss) 10,581,538 (738,948) Comprehensiveincome(loss) 45,057,677 (20,049,752) Cumulativeresultsofoperations–beginningofyear 101,307,949 121,357,701 Cumulativeresultsofoperations–endofyear $146,365,626 $101,307,949 Seenotestofinancialstatements.

FederalReserveSystemAudits 313 BoardofGovernorsoftheFederalReserveSystemStatementsofCashFlows FortheyearsendedDecember31, 2013 2012 Cashflowsfromoperatingactivities: Netincome(loss) $34,476,139 $(19,310,804) Adjustmentstoreconcileresultsofoperationstonetcashprovidedby(usedin)operating activities: Depreciationandamortization 22,804,365 21,901,984 Netloss(gain)ondisposalofpropertyandequipment 1,890,621 67,745 Otheradditionalnon-cashadjustmentstoresultsofoperations 119,355 492,739 (Increase)decreaseinassets: Accountsreceivable,prepaidexpensesandotherassets (6,455,266) 1,211,886 Increase(decrease)inliabilities: Accountspayableandaccruedliabilities 4,260,385 (6,317,712) Accruedpayrollandrelatedtaxes 4,198,153 2,290,903 Accruedannualleave 2,069,774 1,936,913 Unearnedrevenuesandotherliabilities 1,891,415 (255,081) Netretirementbenefitobligation 4,694,408 6,363,414 Netpostretirementbenefitobligation 321,182 602,805 Netpostemploymentbenefitobligation (2,204,244) (449,979) Otherlong-termliabilities (523,133) 437,509 Netcashprovidedby(usedin)operatingactivities 67,543,154 8,972,322 Cashflowsfrominvestingactivities: Capitalexpenditures (30,200,771) (28,057,137) Netcashprovidedby(usedin)investingactivities (30,200,771) (28,057,137) Cashflowsfromfinancingactivities: Capitalleasepayments (456,217) (542,160) Netcashprovidedby(usedin)financingactivities (456,217) (542,160) Netincrease(decrease)incash 36,886,166 (19,626,975) Cashbalance–beginningofyear 53,965,151 73,592,126 Cashbalance–endofyear $90,851,317 $53,965,151 Seenotestofinancialstatements.

314 100thAnnualReport|2013 Board of Governors of the Federal Reserve System Notes to Financial Statements as of and for the Years Ended December 31, 2013 and 2012 (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’spublicwebsite. TheDodd-FrankWallStreetReformandConsumerFinancialProtectionActof 2010(Dodd-FrankAct)establishedtheBureauof ConsumerFinancialProtection (Bureau)asanindependentbureauwithintheSystemanddesignatedtheBoard’s Officeof InspectorGeneral(OIG)astheOIGfortheBureau.Asrequiredbythe Dodd-FrankAct,theBoardtransferredcertainresponsibilitiestotheBureau.The Dodd-FrankActrequirestheBoardtofundtheBureaufromthecombinedearningsof theSystem.TheDodd-FrankActalsocreatedtheFinancialStabilityOversightCouncil(FSOC),of whichtheChairmanof theBoardisamember,aswell astheOfficeof FinancialResearch(Office)withintheU.S.Departmentof Treasury(Treasury)toprovidesupporttotheFSOCandthememberagencies.The Dodd-FrankActrequiredthattheBoardprovidefundingfortheFSOCandthe OfficeuntilJuly2012.Section1017of theDodd-FrankActprovidesthatthe financialstatementsof theBureauarenottobeconsolidatedwiththoseof the BoardortheSystem;theBoardhasalsodeterminedthatneithertheFSOCnor theOfficeshouldbeconsolidatedintheBoard’sfinancialstatements.Accordingly, theBoard’sfinancialstatementsdonotincludefinancialdataof theBureau,the FSOC,ortheOfficeotherthanthefundingthattheBoardisrequiredbythe Dodd-FrankActtoprovide. (2)OperationsandServices TheBoard’sresponsibilitiesrequirethoroughanalysisof domesticandinternationalfinancialandeconomicdevelopments.TheBoardcarriesoutthoseresponsibilitiesinconjunctionwiththeReserveBanksandtheFederalOpenMarketCommittee.TheBoardalsoexercisesgeneraloversightof theoperationsof theReserve Banksandexercisesbroadresponsibilityinthenation’spaymentssystem.Policy regardingopenmarketoperationsisestablishedbytheFederalOpenMarket Committee.However,theBoardhassoleauthorityoverchangesinreserverequirements,anditmustapproveanychangeinthediscountrateinitiatedbyaReserve Bank.TheBoardalsoplaysamajorroleinthesupervisionandregulationof the

FederalReserveSystemAudits 315 U.S.bankingsystem.Ithassupervisoryresponsibilitiesforstate-charteredbanks thataremembersof theSystem,bankholdingcompanies,savingsandloanholdingcompanies,foreignactivitiesof memberbanks,U.S.activitiesof foreignbanks, andanysystemicallyimportantnonbankfinancialcompaniesthataredesignated assuchbytheFSOC.AlthoughtheDodd-FrankActgavetheBureaugeneralrulewritingresponsibilityforFederalconsumerfinanciallaws,theBoardretainsrulewritingresponsibilityundertheCommunityReinvestmentActandotherspecific statutoryprovisions.TheBoardalsoenforcestherequirementsof Federalconsumerfinanciallawsforstatememberbankswithassetsof $10billionorless.In addition,theBoardenforcescertainotherconsumerlawsatallstatemember banks,regardlessof size. (3)SignificantAccountingPolicies Basisof Accounting—TheBoardpreparesitsfinancialstatementsinaccordance withaccountingprinciplesgenerallyacceptedintheUnitedStates(GAAP). Revenues—TheFederalReserveActauthorizestheBoardtolevyanassessment ontheReserveBankstofunditsoperations.TheBoardallocatestheassessmentto eachReserveBankbasedontheReserveBank’scapitalandsurplusbalances. AssessmentstoFundtheBureauandtheOffice—TheBoardassessestheReserve BanksforthefundstransferredtotheBureauandtheOfficebasedoneach ReserveBank’scapitalandsurplusbalances.Theseassessmentsandtransfersare reportedseparatelyfromtheBoard’soperatingactivitiesintheBoard’sStatements of Operations. AssessmentsforSupervisionandRegulation(S&R)—TheDodd-FrankActdirects theBoardtocollectassessments,fees,orotherchargesequaltothetotalexpenses theBoardestimatesarenecessaryorappropriatetocarryoutthesupervisoryand regulatoryresponsibilitiesof theBoardforbankholdingcompaniesandsavings andloanholdingcompanieswithtotalconsolidatedassetsof $50billionormore andnonbankfinancialcompaniesdesignatedforBoardsupervisionbytheFSOC. Morecomprehensiveinformationabouttheseassessmentsisavailableonthe Board’spublicwebsite.Asacollectingentity,theBoarddoesnotrecognizethe S&RassessmentsasrevenuenordoestheBoardusethecollectionstofundBoard expenses;thefundsaretransferredtotheTreasury.TheBoardcollectedandtransferred$433,483,299during2013. CivilMoneyPenalties—TheBoardhasenforcementauthorityoverthefinancial institutionsitsupervisesandtheiraffiliatedparties,includingtheauthorityto assesscivilmoneypenalties.Asdirectedbystatute,allcivilmoneypenaltiesthat areassessedandcollectedbytheBoardareremittedtoeithertheTreasuryorthe FederalEmergencyManagementAgency(FEMA).Asacollectingentity,the BoarddoesnotrecognizecivilmoneypenaltiesasrevenuenordoestheBoarduse thecivilmoneypenaltytofundBoardexpenses.Civilmoneypenaltieswhosecollectioniscontingentuponfulfillmentof certainconditionsintheenforcement actionarenotrecordedintheBoard’sfinancialrecords.Checksforcivilmoney penaltiesmadepayabletotheNationalFloodInsuranceProgramareforwardedto FEMAandarenotrecordedintheBoard’sfinancialrecords. CurrencyCosts—TheBoardissuesthenation’scurrency(intheformof Federal Reservenotes),andtheReserveBanksdistributecurrencythroughdepository institutions.TheBoardincursexpensesandassessestheReserveBanksforthe expensesrelatedtoproducing,issuing,andretiringFederalReservenotesaswell

316 100thAnnualReport|2013 asprovidingeducationalservices.Theassessmentisallocatedbasedoneach ReserveBank’sshareof thenumberof notescomprisingtheSystem’snetliability forFederalReservenotesonDecember31of theprioryear.Theseexpensesand assessmentsarereportedseparatelyfromtheBoard’soperatingactivitiesinthe Board’sStatementsof Operations. AccountsReceivableandAllowanceforDoubtfulAccounts—Accountsreceivable arerecordedwhenamountsareearnedbutnotyetreceivedandareshownnetof theallowancefordoubtfulaccounts.Accountsreceivableconsidereduncollectible arechargedagainsttheallowanceaccountintheyeartheyaredeemeduncollectible.Theallowancefordoubtfulaccountsisadjustedmonthly,basedupona reviewof outstandingreceivables.Theallowancefordoubtfulaccountsis$122,000 and$30,000asof December31,2013and2012,respectively. Property,Equipment,andSoftware—TheBoard’sproperty,equipment,andsoftwarearestatedatcostlessaccumulateddepreciationandamortization.Depreciationandamortizationarecalculatedonastraight-linebasisovertheestimatedusefullivesof theassets,whichrangefromthreetotenyearsforfurnitureandequipment,tentofiftyyearsforbuildingequipmentandstructures,andtwotofive yearsforsoftware.Uponthesaleorotherdispositionof adepreciableasset,the costandrelatedaccumulateddepreciationoramortizationareremovedandany gainorlossisrecognized.Constructioninprocessincludescostsincurredfor short-termandlong-termprojectsthathavenotbeenplacedintoservice;the majorityof 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.Leaseincentivesimpactdeferredrentandarenon-cash transactions. Estimates—Thepreparationof financialstatementsinconformitywithGAAP requiresmanagementtomakeestimatesandassumptionsthataffectthereported amountsof assetsandliabilitiesandthedisclosureof contingentassetsandliabilitiesatthedateof thefinancialstatementsandthereportedamountsof revenues andexpensesduringthereportingperiod.Actualresultscoulddifferfromthose estimates. RecentlyIssuedAccountingStandards—InFebruary2013,theFinancialAccountingStandardsBoard(FASB)issuedASU2013-02,ComprehensiveIncome(Topic 220):Reportingof AmountsReclassifiedOutof AccumulatedOtherComprehensive Incomerelatedtoreportingof significantreclassificationadjustmentsfromaccumulatedothercomprehensiveincome.Thisupdateimprovesthetransparencyof changesinothercomprehensiveincomeanditemsreclassifiedoutof accumulated othercomprehensiveincomeinthefinancialstatements.Therequireddisclosures

FederalReserveSystemAudits 317 inASU2013-02areeffectivefortheBoardfortheyearendedDecember31,2013, andarereflectedintheBoard’s2013financialstatementsandNote9. (4)Property,Equipment,andSoftware Thefollowingisasummaryof thecomponentsof theBoard’sproperty,equipment,andsoftware,atcost,lessaccumulateddepreciationandamortizationasof December31,2013and2012: AsofDecember31, 2013 2012 Land $ 18,640,314 $ 18,640,314 Buildingsandimprovements 217,293,649 205,006,985 Constructioninprocess 15,436,635 14,362,523 Furnitureandequipment 62,655,420 74,519,266 Softwareinuse 33,690,483 29,147,933 Softwareinprocess 1,641,886 2,422,381 Vehicles 1,205,025 960,745 Otherintangibleassets 0 496,675 Subtotal 350,563,412 345,556,822 Lessaccumulateddepreciationandamortization (155,216,206) (158,852,971) Property,equipment,andsoftware–net $195,347,206 $186,703,851 TheBoardretired$28,331,000and$5,972,000of long-termassetsduring2013 and2012,respectively. (5)Leases CapitalLeases—TheBoardenteredintocapitalleasesforcopierequipmentin 2008and2009thatterminatedinMarch2012.TheBoardsubsequentlyentered intonewcapitalleasesin2012.Underthenewcommitments,thecapitalleaseterm extendsthrough2016.Furnitureandequipmentincludescapitalizedleasesof $1,853,000asof 2013and2012.Accumulateddepreciationincludes$801,000and $337,000relatedtoassetsundercapitalleasesasof 2013and2012,respectively. Thedepreciationexpensefortheleasedequipmentis$464,000and$471,000for 2013and2012,respectively. Thefutureminimumleasepaymentsrequiredunderthecapitalleasesandthepresentvalueof thenetminimumleasepaymentsasof December31,2013,areas follows: YearsEndedDecember31, Amount 2014 $ 711,659 2015 711,659 2016 192,799 Totalminimumleasepayments 1,616,117 Lessamountrepresentingmaintenance (523,816) Netminimumleasepayments 1,092,301 Lessamountrepresentinginterest (23,185) Presentvalueofnetminimumleasepayments 1,069,116 Lesscurrentmaturitiesofcapitalleasepayments (465,219) Long-termcapitalleaseobligations $ 603,897

318 100thAnnualReport|2013 OperatingLeases—TheBoardhasenteredintoseveraloperatingleasestosecure office,training,datacenter,andwarehousespace.Minimumannualpayments underthemulti-yearoperatingleaseshavinganinitialorremainingnoncancelable leaseterminexcessof oneyearatDecember31,2013,areasfollows: YearsEndedDecember31, 2014 $ 15,315,273 2015 24,172,153 2016 26,260,510 2017 27,067,576 After2017 138,751,173 $231,566,685 Rentalexpensesunderthemulti-yearoperatingleaseswere$13,978,000and $13,553,000fortheyearsendedDecember31,2013and2012,respectively.The Boardenteredintofouroperatingleasesin2013,whicharereflectedinthescheduleabove.TheBoardenteredintoanewoperatingleaseinearly2014.Theestimatedfutureminimumleasepaymentsassociatedwiththenewleasetotal $1,068,000overatenyearperiod,whichisnotreflectedinthescheduleabove. TheBoardleasesandsubleasesspace,primarilytoothergovernmentalagencies. Therevenuescollectedfortheseleasesfromgovernmentalagencieswere$508,000 and$480,000in2013and2012. DeferredRent—Otherlong-termliabilitiesincludedeferredrentof $21,783,000 and$20,924,000asof theyearsendedDecember31,2013and2012,respectively. TheBoardrecordednon-cashleaseincentivesof $1,322,000and$563,000forthe yearsendedDecember31,2013and2012,respectively. (6)RetirementBenefits Substantiallyallof theBoard’semployeesparticipateintheRetirementPlanfor Employeesof theFederalReserveSystem(theSystemPlan).TheSystemPlanprovidesretirementbenefitstoemployeesof theBoard,theReserveBanks,theOffice of EmployeeBenefitsof theFederalReserveSystem(OEB),andcertainemployeesof theBureau.TheFederalReserveBankof NewYork(FRBNY),onbehalf of theSystem,recognizesthenetassetsandcostsassociatedwiththeSystemPlan initsfinancialstatements.CostsassociatedwiththeSystemPlanwerenotredistributedtotheBoardduringtheyearsendedDecember31,2013and2012. Employeesof theBoardwhobecameemployedpriorto1984arecoveredbya contributorydefinedbenefitsprogramundertheSystemPlan.Employeesof the Boardwhobecameemployedafter1983arecoveredbyanon-contributory definedbenefitsprogramundertheSystemPlan.FRBNY,onbehalf of the System,funded$900millionand$780millionduringtheyearsendedDecember31,2013and2012,respectively.TheBoardwasnotassessedacontributionfor 2013or2012. BoardemployeescoveredundertheSystemPlanarealsocoveredunderaBenefits EqualizationPlan(BEP).BenefitspaidundertheBEParelimitedtothosebenefits thatcannotbepaidfromtheSystemPlanduetolimitationsimposedbytheInter-

FederalReserveSystemAudits 319 nalRevenueCode.ActivityfortheBEPasof December31,2013and2012,is summarizedinthefollowingtables: 2013 2012 Changeinprojectedbenefitobligation: Benefitobligation–beginningofyear $15,152,833 $14,147,186 Servicecost 1,361,346 2,100,366 Interestcost 656,007 867,002 Planparticipants’contributions – – Actuarial(gain)loss (4,473,905) (1,928,409) Grossbenefitspaid (22,389) (33,312) Benefitobligation–endofyear $12,673,892 $15,152,833 Accumulatedbenefitobligation–endofyear $ 1,699,943 $ 3,149,276 Weighted-averageassumptionsusedtodeterminebenefitobligationasof December31: Discountrate 5.26% 4.25% Rateofcompensationincrease 4.50% 4.50% Changeinplanassets: Fairvalueofplanassets–beginningofyear $ – $ – Employercontributions 22,389 33,312 Planparticipants’contributions – – Grossbenefitspaid (22,389) (33,312) Fairvalueofplanassets–endofyear $ – $ – Fundedstatus: Reconciliationoffundedstatus–endofyear: Fairvalueofplanassets $ – $ – Benefitobligation(current) 55,061 97,085 Benefitobligation(noncurrent) 12,618,831 15,055,748 Fundedstatus (12,673,892) (15,152,833) Amountrecognized–endofyear $(12,673,892) $(15,152,833) Amountsrecognizedinthebalancesheetsconsistof: Asset $ – $ – Liability–current (55,061) (97,085) Liability–noncurrent (12,618,831) (15,055,748) Netamountrecognized $(12,673,892) $(15,152,833) Amountsrecognizedinaccumulatedothercomprehensiveincomeconsistof: Netactuarialloss(gain) $ (1,534,296) $ 2,939,609 Priorservicecost(credit) 521,188 620,967 Netamountrecognized $ (1,013,108) $ 3,560,576

320 100thAnnualReport|2013 Expectedcashflows: Expectedemployercontributions–2014 $ 55,061 Expectedbenefitpayments:* 2014 $ 55,061 2015 $ 60,238 2016 $ 78,421 2017 $ 99,944 2018 $110,329 2019–2023 $971,366 * ExpectedbenefitpaymentstobemadebytheBoard. 2013 2012 Componentsofnetperiodicbenefitcost: Servicecost $1,361,346 $2,100,366 Interestcost 656,007 867,002 Expectedreturnonplanassets – – Amortization: Actuarial(gain)loss – 667,775 Priorservice(credit)cost 99,779 78,985 Netperiodicbenefitcost(credit) $2,117,132 $3,714,128 Weighted-averageassumptionsusedtodeterminenetperiodicbenefitcost: Discountrate 4.25% 4.50% Rateofcompensationincrease 4.50% 5.00% Otherchangesinplanassetsandbenefitobligationsrecognizedin othercomprehensiveincome: Currentyearactuarial(gain)loss $(4,473,905) $(1,928,409) Amortizationofpriorservicecredit(cost) (99,779) (78,985) Amortizationofactuarialgain(loss) – (667,775) Totalrecognizedinothercomprehensive(income)loss $(4,573,684) $(2,675,169) Totalrecognizedinnetperiodicbenefitcostandothercomprehensiveincome $(2,456,552) $1,038,959 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive incomeintonetperiodicbenefitcost(credit)in2014areshownbelow: Netactuarial(gain)loss $(25,667) Priorservice(credit)cost 99,578 Total $73,911 TheBoardalsoprovidesanothernon-qualifiedplanforofficersof theBoard.The retirementbenefitscoveredunderthePensionEnhancementPlan(PEP)increase thepensionbenefitcalculationfrom1.8%abovetheSocialSecurityintegration

FederalReserveSystemAudits 321 levelto2.0%.ActivityforthePEPasof December31,2013and2012,issummarizedinthefollowingtables: 2013 2012 Changeinprojectedbenefitobligation: Benefitobligation–beginningofyear $18,440,730 $13,250,209 Servicecost 795,619 684,473 Interestcost 821,785 750,474 Planparticipants’contributions – – Actuarial(gain)loss (2,312,328) 3,856,673 Grossbenefitspaid (152,139) (101,099) Benefitobligation–endofyear $17,593,667 $18,440,730 Accumulatedbenefitobligation–endofyear $14,172,160 $14,766,590 Weighted-averageassumptionsusedtodeterminebenefitobligationasof December31: Discountrate 5.06% 4.00% Rateofcompensationincrease 4.50% 4.50% Changeinplanassets: Fairvalueofplanassets–beginningofyear $ – $ – Employercontributions 152,139 101,099 Planparticipants’contributions – – Grossbenefitspaid (152,139) (101,099) Fairvalueofplanassets–endofyear $ – $ – Fundedstatus: Reconciliationoffundedstatus–endofyear: Fairvalueofplanassets $ – $ – Benefitobligation–current 240,788 97,867 Benefitobligation–noncurrent 17,352,879 18,342,863 Fundedstatus (17,593,667) (18,440,730) Amountrecognized–endofyear $(17,593,667) $(18,440,730) Amountsrecognizedinthebalancesheetsconsistof: Asset $ – $ – Liability–current (240,788) (97,867) Liability–noncurrent (17,352,879) (18,342,863) Netamountrecognized $(17,593,667) $(18,440,730) Amountsrecognizedinaccumulatedothercomprehensiveincomeconsistof: Netactuarialloss(gain) $ 5,314,468 $ 8,514,540 Priorservicecost(credit) 1,649,093 2,180,488 Netamountrecognized $ 6,963,561 $10,695,028 Expectedcashflows: Expectedemployercontributions–2014 $ 240,788 Expectedbenefitpayments:* 2014 $ 240,788 2015 $ 318,244 2016 $ 399,161 2017 $ 483,738 2018 $ 576,898 2019–2023 $4,398,804 * ExpectedbenefitpaymentstobemadebytheBoard.

322 100thAnnualReport|2013 2013 2012 Componentsofnetperiodicbenefitcost: Servicecost $ 795,619 $ 684,473 Interestcost 821,785 750,474 Expectedreturnonplanassets – – Amortization: Actuarial(gain)loss 887,744 758,925 Priorservice(credit)cost 531,395 531,395 Netperiodicbenefitcost(credit) $3,036,543 $2,725,267 Weighted-averageassumptionsusedtodeterminenetperiodicbenefitcost: Discountrate 4.00% 4.50% Rateofcompensationincrease 4.50% 5.00% Otherchangesinplanassetsandbenefitobligationsrecognizedin othercomprehensiveincome: Currentyearactuarial(gain)loss $(2,312,328) $3,856,673 Amortizationofpriorservicecredit(cost) (531,395) (531,395) Amortizationofactuarialgain(loss) (887,744) (758,925) Totalrecognizedinothercomprehensive(income)loss $(3,731,467) $2,566,353 Totalrecognizedinnetperiodicbenefitcostandothercomprehensiveincome $ (694,924) $5,291,620 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive incomeintonetperiodicbenefitcost(credit)in2014areshownbelow: Netactuarial(gain)loss $387,019 Priorservice(credit)cost 531,395 Total $918,414 Thetotalaccumulatedretirementbenefitobligationincludesaliabilityfora supplementalretirementagreementandabenefitsequalizationplanunderthe FederalReserveSystem’sThriftPlan.Thetotalobligationasof December31, 2013and2012issummarizedinthefollowingtable: 2013 2012 Retirementbenefitobligation: Benefitobligation–BEP $12,673,892 $15,152,833 Benefitobligation–PEP 17,593,667 18,440,730 Additionalbenefitobligations 157,857 146,747 Totalaccumulatedretirementbenefitobligation $30,425,416 $33,740,310 Arelativelysmallnumberof BoardemployeesparticipateintheCivilService RetirementSystemortheFederalEmployees’RetirementSystem.Thesedefined benefitplansareadministeredbytheU.S.Officeof PersonnelManagement,which determinestherequiredemployercontributionlevels.TheBoard’scontributionsto theseplanstotaled$778,000and$586,000in2013and2012,respectively.The Boardhasnoliabilityforfuturepaymentstoretireesundertheseprogramsandis notaccountablefortheassetsof theplans. Employeesof theBoardmayalsoparticipateintheFederalReserveSystem’s ThriftPlanorRoth401(k).Boardcontributionstomembers’accountswere $20,288,000and$19,211,000in2013and2012,respectively.

FederalReserveSystemAudits 323 (7)PostretirementBenefits TheBoardprovidescertainlifeinsuranceprogramsforitsactiveemployeesand retirees.Activityasof December31,2013and2012,issummarizedinthefollowingtables: 2013 2012 Changeinbenefitobligation: Benefitobligation–beginningofyear $13,249,648 $11,799,079 Servicecost 219,222 210,030 Interestcost 533,435 534,224 Planparticipants’contributions – – Actuarial(gain)loss (1,971,254) 1,055,530 Grossbenefitspaid (337,740) (349,215) Benefitobligation–endofyear $11,693,311 $13,249,648 Weighted-averageassumptionsusedtodeterminebenefitobligationas ofDecember31–discountrate 4.97% 4.00% Changeinplanassets: Fairvalueofplanassets–beginningofyear $ – $ – Employercontributions 337,740 349,215 Grossbenefitspaid (337,740) (349,215) Fairvalueofplanassets–endofyear $ – $ – Fundedstatus: Reconciliationoffundedstatus–endofyear: Fairvalueofplanassets $ – $ – Benefitobligation–current 398,868 345,021 Benefitobligation–noncurrent 11,294,443 12,904,627 Fundedstatus (11,693,311) (13,249,648) Amountrecognized–endofyear $(11,693,311) $(13,249,648) Amountsrecognizedinthebalancesheetsconsistof: Asset $ – $ – Liability–current (398,868) (345,021) Liability–noncurrent (11,294,443) (12,904,627) Netamountrecognized $(11,693,311) $(13,249,648) Amountsrecognizedinaccumulatedothercomprehensiveincomeconsistof: Netactuarialloss(gain) $ 1,500,562 $ 3,802,439 Priorservicecost(credit) (200,064) (225,554) Netamountrecognized $ 1,300,498 $ 3,576,885 Expectedcashflows: Expectedemployercontributions–2014 $ 398,868 Expectedbenefitpayments:* 2014 $ 398,868 2015 $ 426,704 2016 $ 458,916 2017 $ 489,011 2018 $ 504,713 2019–2023 $2,989,203 * ExpectedbenefitpaymentstobemadebytheBoard.

324 100thAnnualReport|2013 2012 2011 Componentsofnetperiodicbenefitcost: Servicecost $ 219,222 $ 210,030 Interestcost 533,435 534,224 Expectedreturnonplanassets – – Amortization: Actuarial(gain)loss 330,623 233,256 Priorservice(credit)cost (25,490) (25,490) Netperiodicbenefitcost(credit) $1,057,790 $ 952,020 Weighted-averageassumptionsusedtodeterminenet periodicbenefitcost–discountrate 4.00% 4.50% Otherchangesinplanassetsandbenefitobligations recognizedinothercomprehensiveincome: Currentyearactuarial(gain)loss $(1,971,254) $1,055,530 Amortizationofpriorservicecredit(cost) 25,490 25,490 Amortizationofactuarialgain(loss) (330,623) (233,256) Totalrecognizedinothercomprehensive(income)loss $(2,276,387) $ 847,764 Totalrecognizedinnetperiodicbenefitcostandothercomprehensiveincome $(1,218,597) $1,799,784 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive incomeintonetperiodicbenefitcost(credit)in2014areshownbelow: Netactuarial(gain)loss $46,594 Priorservice(credit)cost (25,490) Total $21,104 (8)PostemploymentBenefits TheBoardprovidescertainpostemploymentbenefitstoeligibleformerorinactive employeesandtheirdependentsduringtheperiodsubsequenttoemploymentbut priortoretirement.Postemploymentcostswereactuariallydeterminedusinga December31measurementdateanddiscountratesof 3.43%and2.50%asof December31,2013and2012,respectively.Thenetperiodicpostemploymentbenefitcost(credit)recognizedbytheBoardasof December31,2013and2012,was ($217,000)and$518,000,respectively.

FederalReserveSystemAudits 325 (9)AccumulatedOtherComprehensiveIncome(Loss) Areconciliationof beginningandendingbalancesof accumulatedothercomprehensiveincome(loss)fortheyearsendedDecember31,2013and2012,isas follows: AmountRelatedto TotalAccumulated AmountRelatedto Postretirement Other DefinedBenefit BenefitsOther Comprehensive RetirementPlans ThanPensions Income(Loss) Balance–January1,2012 $(14,364,420) $(2,729,122) $(17,093,542) Changeinaccumulatedothercomprehensiveincome(loss): Netactuarialgain(loss)arisingduringtheyear(a) (1,928,264) (1,055,530) (2,983,794) Othercomprehensiveincomebeforereclassifications (1,928,264) (1,055,530) (2,983,794) Amortizationofpriorservice(credit)costs(a)(b) 610,380 (25,490) 584,890 Amortizationofnetactuarial(gain)loss(a)(b) 1,426,700 233,256 1,659,956 Amountsreclassifiedfromaccumulatedothercomprehensive income 2,037,080 207,766 2,244,846 Changeinaccumulatedothercomprehensiveincome(loss) 108,816 (847,764) (738,948) Balance–December31,2012 (14,255,604) (3,576,886) (17,832,490) Changeinaccumulatedothercomprehensiveincome(loss): Netactuarialgain(loss)arisingduringtheyear(a) 6,786,233 1,971,254 8,757,487 Othercomprehensiveincomebeforereclassifications 6,786,233 1,971,254 8,757,487 Amortizationofpriorservice(credit)costs(a)(b) 631,174 (25,490) 605,684 Amortizationofnetactuarial(gain)loss(a)(b) 887,744 330,623 1,218,367 Amountsreclassifiedfromaccumulatedothercomprehensive income 1,518,918 305,133 1,824,051 Changeinaccumulatedothercomprehensiveincome(loss) 8,305,151 2,276,387 10,581,538 Balance–December31,2013 $ (5,950,453) $(1,300,499) $ (7,250,952) (a)Thesecomponentsofaccumulatedothercomprehensiveincomeareincludedinthecomputationofnetperiodicpensioncost (seeNotes6and7foradditionaldetails). (b)Thesecomponentsofaccumulatedothercomprehensiveincomearereflectedinthe“Retirement,insurance,andbenefits”line ontheStatementsofOperations. (10)ReserveBanks TheBoardperformscertainfunctionsfortheReserveBanksinconjunctionwith itsresponsibilitiesfortheSystem,andtheReserveBanksprovidecertainadministrativefunctionsfortheBoard.TheBoardassessestheReserveBanksforitsoperatingexpenses,toincludeexpensesrelatedtoitscurrencyresponsibilities,aswellas forthefundingtheBoardisrequiredtoprovidetotheBureauandtheOffice.

326 100thAnnualReport|2013 ActivityrelatedtotheBoardandReserveBanksissummarizedinthefollowing table: 2013 2012 FortheyearsendedDecember31: AssessmentsleviedortobeleviedonReserveBanksfor: Currencyexpenses $ 705,030,765 $ 721,074,064 Boardoperations 580,000,000 490,000,000 TransfersoffundstotheBureau 563,200,000 385,200,000 TransfersoffundstotheOffice – 2,078,298 TotalassessmentsleviedortobeleviedonReserveBanks $1,848,230,765 $1,598,352,362 BoardexpenseschargedtotheReserveBanksfordata processingandofficespace $ 417,324 $ 423,209 ReserveBankexpenseschargedtotheBoard: Dataprocessingandcommunication $ 861,671 $ 1,313,902 Officespace 1,289,714 – Contingencysite 1,262,616 1,191,220 TotalReserveBankexpenseschargedtotheBoard $ 3,414,001 $ 2,505,122 NettransactionswithReserveBanks $1,845,234,088 $1,596,270,449 AsoftheyearsendedDecember31: AccountsreceivableduefromtheReserveBanks $ 5,496,852 $ 751,614 AccountspayableduetotheReserveBanks $ 1,000,923 $ 334,665 TheBoardcontractedforauditservicesonbehalf of entitiesthatareincludedin thecombinedfinancialstatementsof theReserveBanks.Theentitiesreimburse theBoardforthecostof theauditservices.TheBoardaccruedliabilitiesof $47,000and$185,000inauditservicesandrecordednetreceivablesof $47,000and $170,000fromtheentitiesasof December31,2013and2012,respectively. TheOEBadministerscertainSystembenefitprogramsonbehalf of theBoardand theReserveBanks,andcostsassociatedwiththeOEB’sactivitiesareassessedto theBoardandReserveBanks.TheBoardwasassessed$2,402,000and$2,530,000 fortheyearsendedDecember31,2013and2012,respectively. (11)FederalFinancialInstitutionsExaminationCouncil TheBoardisoneof thefivememberagenciesof theFederalFinancialInstitutions ExaminationCouncil(theCouncil),andcurrentlyperformscertainmanagement functionsfortheCouncil.ThefiveagenciesthatarerepresentedontheCouncil aretheBoard,FederalDepositInsuranceCorporation,NationalCreditUnion Administration,Officeof theComptrollerof theCurrency,andtheBureau.

FederalReserveSystemAudits 327 TheBoard’sfinancialstatementsdonotincludefinancialdatafortheCouncil. ActivityrelatedtotheBoardandCouncilissummarizedinthefollowingtable: 2013 2012 FortheyearsendedDecember31: CouncilexpenseschargedtotheBoard: Assessmentsforoperatingexpenses $ 141,111 $ 137,466 Assessmentsforexaminereducation 988,233 1,043,917 CentralDataRepository 1,049,787 1,111,793 HomeMortgageDisclosureAct/CommunityReinvestmentAct 717,177 753,464 UniformBankPerformanceReport 134,977 132,294 TotalCouncilexpenseschargedtotheBoard $3,031,285 $3,178,934 BoardexpenseschargedtotheCouncil: Dataprocessingrelatedservices $4,233,290 $4,392,625 Administrativeservices 223,000 261,000 TotalBoardexpenseschargedtotheCouncil $4,456,290 $4,653,625 AsoftheyearsendedDecember31: AccountsreceivableduefromtheCouncil $ 442,749 $ 545,770 AccountspayableduetotheCouncil $ 326,875 $ 211,061 (12)TheBureauofConsumerFinancialProtection BeginningJuly2011,section1017of theDodd-FrankActrequirestheBoardto fundtheBureaufromthecombinedearningsof theSystem,inanamountdeterminedbytheDirectorof theBureautobereasonablynecessarytocarryoutthe authoritiesof theBureauunderFederalconsumerfinanciallaw,takinginto accountsuchothersumsmadeavailabletotheBureaufromtheprecedingyear(or quarterof suchyear).TheDodd-FrankActlimitstheamounttobetransferred eachfiscalyeartoafixedpercentageof theSystem’stotaloperatingexpenses.The BoardreceivedandprocessedfundingrequestsfortheBureautotaling $563,200,000and$385,200,000duringcalendaryears2013and2012,respectively. TheBureautransferredtotheBoardfundingfortheoperationsof theOIGof $10millionand$3millionin2013and2012,respectively.Beginningin2014,the Bureau’sfundingshareof OIGoperationswillbeadjustedbasedonactualOIG expensesandworkallocationfromthepreviousyear.TheBoardaccruedaliability of $1.84millionasof December31,2013,whichwillbeappliedtosubsequent Bureautransfers. 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$42,000,000during2012.Attheendof thetwo-yearperiodin 2012,theOfficereturned$39,921,702totheBoardwhichwasreturnedtothe ReserveBanks.

328 100thAnnualReport|2013 (14)Currency TheBureauof EngravingandPrinting(BEP)isthesolesupplierforcurrency printingandalsoprovidescurrencyretirementservices.TheBoardprovidesor contractsforotherservicesassociatedwithcurrency,suchasshipping,education, andqualityassurance.ThecurrencycostsincurredbytheBoardfortheyears endedDecember31,2013and2012,arereflectedinthefollowingtable: 2013 2012 ExpensesrelatedtoBEPservices: Printing $660,957,789 $687,704,624 Retirement 3,081,392 3,132,105 SubtotalrelatedtoBEPservices $664,039,181 $690,836,729 Othercurrencyexpenses: Shipping $ 20,732,476 $ 17,179,610 Researchanddevelopment 5,393,220 5,316,005 Qualityassuranceservices 11,284,687 7,259,900 Educationservices 3,581,201 481,820 Subtotalothercurrencyexpenses $ 40,991,584 $ 30,237,335 Totalcurrencyexpenses $705,030,765 $721,074,064 (15)CommitmentsandContingencies Commitments—TheBoardhasenteredintoanagreementwiththeFederal DepositInsuranceCorporationandtheOfficeof theComptrollerof theCurrency,throughtheCouncil,tofundaportionof theenhancementsandmaintenancefeesforacentraldatarepositoryprojectthatrequiresmaintenancethrough 2019withtwoone-yearoptionperiods.TheestimatedBoardexpensetosupport thiseffortis$5to$6million. LitigationandContingentLiabilities—TheBoardissubjecttocontingentliabilitieswhicharisefromlitigationcasesandvariousbusinesscontracts.Thesecontingentliabilitiesariseinthenormalcourseof operationsandtheirultimatedispositionisunknown.Basedoninformationcurrentlyavailabletomanagement,itis management’sopinionthattheexpectedoutcomeof thesematters,intheaggregate,willnothaveamaterialadverseeffectonthefinancialstatements. (16)SubsequentEvents Therewerenosubsequenteventsthatrequireadjustmentstoordisclosuresinthe financialstatementsasof December31,2013.Subsequenteventswereevaluated throughMarch12,2014,whichisthedatethefinancialstatementswereavailable tobeissued.

FederalReserveSystemAudits 329 INDEPENDENTAUDITORS’REPORTONCOMPLIANCEANDOTHERMATTERSBASEDONANAUDIT OFFINANCIALSTATEMENTSPERFORMEDINACCORDANCEWITHGOVERNMENTAUDITING STANDARDS TotheBoardofGovernorsoftheFederalReserveSystem: Wehaveaudited,inaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica,auditing standardsofthePublicCompanyAccountingOversightBoard(UnitedStates)(“PCAOB”),andthestandardsapplicabletofinancialauditscontainedinGovernmentAuditingStandardsissuedbytheComptrollerGeneraloftheUnited States,thefinancialstatementsoftheBoardofGovernorsoftheFederalReserveSystem(the“Board”)asofandfor theyearsendedDecember31,2013and2012,andtherelatednotestothefinancialstatements.Wehavealsoaudited, inaccordancewithattestationstandardsestablishedbytheAmericanInstituteofCertifiedPublicAccountantsandin accordancewiththeauditingstandardsofthePCAOB,theBoard’sinternalcontroloverfinancialreportingasof December31,2013,basedonthecriteriaestablishedinInternalControl—IntegratedFramework(1992)issuedbythe CommitteeofSponsoringOrganizationsoftheTreadwayCommission.WehaveissuedourreportontheaforementionedauditsdatedMarch12,2014. ComplianceandOtherMatters AspartofobtainingreasonableassuranceaboutwhethertheBoard’sfinancialstatementsarefreefrommaterialmisstatement,weperformedtestsofitscompliancewithcertainprovisionsoflaws,regulations,contracts,andgrant agreements,noncompliancewithwhichcouldhaveadirectandmaterialeffectonthedeterminationoffinancialstatementamounts.However,providinganopiniononcompliancewiththoseprovisionswasnotanobjectiveofouraudit, andaccordingly,wedonotexpresssuchanopinion.Theresultsofourtestsdisclosednoinstancesofnoncompliance orothermattersthatarerequiredtobereportedunderGovernmentAuditingStandards. PurposeofthisReport Thepurposeofthisreportissolelytodescribethescopeofourtestingofcomplianceandtheresultsofthattesting, andnottoprovideanopiniononcompliance.Thisreportisanintegralpartofanauditperformedinaccordance withGovernmentAuditingStandardsinconsideringtheBoard’scompliance.Accordingly,thiscommunicationisnot suitableforanyotherpurpose. March12,2014 Washington,DC

330 100thAnnualReport|2013 Federal Reserve Banks Combined Financial Statements Thecombinedfinancialstatementsof theFederalReserveBankswereauditedby Deloitte&ToucheLLP,independentauditors,fortheyearsendedDecember31, 2013and2012. INDEPENDENTAUDITORS’REPORT TotheBoardofGovernorsoftheFederalReserveSystemandtheBoardsofDirectorsoftheFederalReserveBanks: WehaveauditedtheaccompanyingcombinedfinancialstatementsoftheFederalReserveBanks(the“Reserve Banks”),whicharecomprisedofthecombinedstatementsofconditionasofDecember31,2013and2012,andthe relatedcombinedstatementsofincomeandcomprehensiveincome,andchangesincapitalfortheyearsthenended, andtherelatednotestothecombinedfinancialstatements. Management’sResponsibilityfortheCombinedFinancialStatements ManagementisresponsibleforthepreparationandfairpresentationofthesecombinedfinancialstatementsinaccordancewithaccountingprinciplesestablishedbytheBoardofGovernorsoftheFederalReserveSystem(the“Board”) asdescribedinNote3tothecombinedfinancialstatements;thisincludesdeterminingthatthebasisofaccounting establishedbytheBoardisanacceptablebasisforthepreparationofthecombinedfinancialstatementsinthecircumstances.Managementisalsoresponsibleforthedesign,implementation,andmaintenanceofinternalcontrolrelevanttothepreparationandfairpresentationofthecombinedfinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror. Auditors’Responsibility Ourresponsibilityistoexpressanopiniononthesecombinedfinancialstatementsbasedonouraudits.Weconducted ourauditsinaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmericaandinaccordancewiththeauditingstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthecombinedfinancialstatementsarefreefrommaterialmisstatement. Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresinthecombinedfinancialstatements.Theproceduresselecteddependontheauditor'sjudgment,includingtheassessmentofthe risksofmaterialmisstatementofthecombinedfinancialstatements,whetherduetofraudorerror.Inmakingthose riskassessments,theauditorconsidersinternalcontrolrelevanttothepreparationandfairpresentationofthecombinedfinancialstatementsoftheFederalReserveBanks’inordertodesignauditproceduresthatareappropriatein thecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheFederalReserve Banks’internalcontrol.Accordingly,weexpressnosuchopinion.Anauditalsoincludesevaluatingtheappropriatenessofaccountingpoliciesusedandthereasonablenessofsignificantaccountingestimatesmadebymanagement,as wellasevaluatingtheoverallpresentationofthecombinedfinancialstatements. Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforouraudit opinion.

FederalReserveSystemAudits 331 Opinion Inouropinion,thecombinedfinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancial positionoftheReserveBanksasofDecember31,2013and2012,andtheresultsoftheiroperationsfortheyears thenendedinaccordancewiththebasisofaccountingdescribedinNote3tothecombinedfinancialstatements. BasisofAccounting WedrawattentiontoNote3tothecombinedfinancialstatements,whichdescribesthebasisofaccounting.TheDivisionofReserveBankOperationsandPaymentSystemshaspreparedthesecombinedfinancialstatementsinconformitywithaccountingprinciplesestablishedbytheBoard,assetforthintheFinancialAccountingManualforFederal ReserveBanks,whichisabasisofaccountingotherthanaccountingprinciplesgenerallyacceptedintheUnitedStates ofAmerica.Theeffectsonthecombinedfinancialstatementsofthedifferencesbetweentheaccountingprinciples establishedbytheBoardandaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericaarealso describedinNote3tothecombinedfinancialstatements.Ouropinionisnotmodifiedwithrespecttothismatter. March14,2014 Washington,DC

332 100thAnnualReport|2013 Federal Reserve Banks Abbreviations ABS Asset-backedsecurities ACH Automatedclearinghouse AIG AmericanInternationalGroup,Inc. 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. LLC Limitedliabilitycompany MBS Mortgage-backedsecurities ML MaidenLaneLLC MLII MaidenLaneIILLC MLIII MaidenLaneIIILLC MTM Mark-to-market OFR Officeof FinancialResearch RMBS Residentialmortgage-backedsecurities SBA SmallBusinessAdministration SDR Specialdrawingrights SERP SupplementalRetirementPlanforSelectOfficersof theFederalReserveBanks SOMA SystemOpenMarketAccount STRIPS SeparateTradingof RegisteredInterestandPrincipalof Securities TALF TermAsset-BackedSecuritiesLoanFacility TBA Tobeannounced

FederalReserveSystemAudits 333 TDF TermDepositFacility TRS Totalreturnswap VIE Variableinterestentity

334 100thAnnualReport|2013 FederalReserveBanksCombinedStatementsofCondition asofDecember31,2013andDecember31,2012 (inmillions) 2013 2012 Assets Goldcertificates $ 11,037 $ 11,037 Specialdrawingrightscertificates 5,200 5,200 Coin 1,955 2,108 Loans: Depositoryinstitutions 74 70 TermAsset-BackedSecuritiesLoanFacility(measuredatfairvalue) 98 560 SystemOpenMarketAccount: Treasurysecurities,net(ofwhich$17,153and$9,139islentasofDecember31,2013and2012, respectively) 2,359,434 1,809,188 Government-sponsoredenterprisedebtsecurities,net(ofwhich$1,099and$697islentasof December31,2013and2012,respectively) 59,122 79,479 Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities,net 1,533,860 950,321 Foreigncurrencydenominatedassets,net 23,724 24,873 Centralbankliquidityswaps 272 8,889 Accruedinterestreceivable 23,493 19,031 Otherinvestments 2 23 Investmentsheldbyconsolidatedvariableinterestentities(ofwhich$1,774and$2,266ismeasuredat fairvalueasofDecember31,2013and2012,respectively) 1,926 2,750 Bankpremisesandequipment,net 2,653 2,676 Itemsinprocessofcollection 165 216 Otherassets 1,134 713 Totalassets $4,024,149 $2,917,134 Liabilitiesandcapital FederalReservenotesoutstanding,net $1,197,920 $1,126,661 SystemOpenMarketAccount: Securitiessoldunderagreementstorepurchase 315,924 107,188 Otherliabilities 1,331 3,177 Consolidatedvariableinterestentities: Beneficialinterestinconsolidatedvariableinterestentities(measuredatfairvalue) 116 803 Otherliabilities(ofwhich$73and$71ismeasuredatfairvalueasofDecember31,2013and2012, respectively) 158 415 Deposits: Depositoryinstitutions 2,249,070 1,491,045 Treasury,generalaccount 162,399 92,720 Otherdeposits 34,150 33,903 Interestpayabletodepositoryinstitutions 99 199 Accruedbenefitcosts 1,823 3,964 Deferredcredititems 1,127 702 AccruedremittancestoTreasury 4,791 1,407 Otherliabilities 227 230 Totalliabilities 3,969,135 2,862,414 Capitalpaid-in 27,507 27,360 Surplus(includingaccumulatedothercomprehensivelossof$2,556and$4,845atDecember31,2013 and2012,respectively) 27,507 27,360 Totalcapital 55,014 54,720 Totalliabilitiesandcapital $4,024,149 $2,917,134 Theaccompanyingnotesareanintegralpartof thesecombinedfinancialstatements.

FederalReserveSystemAudits 335 FederalReserveBanksCombinedStatementsofIncomeandComprehensiveIncome fortheyearsendedDecember31,2013andDecember31,2012 (inmillions) 2013 2012 Interestincome Loans: TermAsset-BackedSecuritiesLoanFacility $ 6 $ 80 SystemOpenMarketAccount: Treasurysecurities,net 51,591 46,416 Government-sponsoredenterprisedebtsecurities,net 2,166 2,626 Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities,net 36,628 31,429 Foreigncurrencydenominatedassets,net 96 139 Centralbankliquidityswaps 22 241 Otherinvestments – 9 Investmentsheldbyconsolidatedvariableinterestentities 6 1,110 Totalinterestincome 90,515 82,050 Interestexpense SystemOpenMarketAccount: Securitiessoldunderagreementstorepurchase 60 142 Beneficialinterestinconsolidatedvariableinterestentities – 153 Deposits: Depositoryinstitutions 5,212 3,871 TermDepositFacility 11 4 Totalinterestexpense 5,283 4,170 Netinterestincome 85,232 77,880 Non-interestincome SystemOpenMarketAccount: Treasurysecuritiesgains,net – 13,255 Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecuritiesgains,net 51 241 Foreigncurrencytranslationlosses,net (1,257) (1,116) Consolidatedvariableinterestentities: Investmentsheldbyconsolidatedvariableinterestentitiesgains,net 183 7,451 Beneficialinterestinconsolidatedvariableinterestentitiesgains(losses),net 1 (2,345) Incomefromservices 441 449 Reimbursableservicestogovernmentagencies 530 506 Other 76 35 Totalnon-interestincome 25 18,476 Operatingexpenses Salariesandbenefits 3,225 3,084 Occupancy 314 314 Equipment 169 193 Other 563 597 Assessments: BoardofGovernorsoperatingexpensesandcurrencycosts 1,282 1,212 BureauofConsumerFinancialProtection 563 385 OfficeofFinancialResearch – 2 Totaloperatingexpenses 6,116 5,787 NetincomebeforeprovidingforremittancestoTreasury 79,141 90,569 EarningsremittancestoTreasury 79,633 88,418 Net(loss)income (492) 2,151 Changeinpriorservicecostsrelatedtobenefitplans 97 171 Changeinactuarialgains(losses)relatedtobenefitplans 2,192 (224) Totalothercomprehensiveincome(loss) 2,289 (53) Comprehensiveincome $ 1,797 $ 2,098 Theaccompanyingnotesareanintegralpartof thesecombinedfinancialstatements.

336 100thAnnualReport|2013 FederalReserveBanksCombinedStatementsofChangesinCapital fortheyearsendedDecember31,2013andDecember31,2012 (inmillions,exceptsharedata) Surplus Capital Accumulated Total paid-in Netincome other Total capital retained comprehensive surplus loss 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 Netchangeincapitalstockissued (2,941,791shares) 147 – – – 147 Comprehensiveincome: Netloss – (492) – (492) (492) Othercomprehensiveincome – – 2,289 2,289 2,289 Dividendsoncapitalstock – (1,650) – (1,650) (1,650) Netchangeincapital 147 (2,142) 2,289 147 294 BalanceatDecember31,2013 (550,136,936shares) $27,507 $30,063 $(2,556) $27,507 $55,014 Theaccompanyingnotesareanintegralpartof thesecombinedfinancialstatements.

FederalReserveSystemAudits 337 (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,andfederalagencyandGSEmortgage-backedsecurities

338 100thAnnualReport|2013 (MBS);thepurchaseof thesesecuritiesunderagreementstoresell;andthesaleof thesesecuritiesunderagreementstorepurchase.TheFRBNYholdstheresulting securitiesandagreementsinaportfolioknownastheSystemOpenMarket Account(SOMA).TheFRBNYisauthorizedanddirectedtolendtheTreasury securitiesandGSEdebtsecuritiesthatareheldintheSOMA. Tocounterdisorderlyconditionsinforeignexchangemarketsortomeetother needsspecifiedbytheFOMCtocarryouttheSystem’scentralbankresponsibilities,theFOMChasauthorizedanddirectedtheFRBNYtoexecutespotandforwardforeignexchangetransactionsin14foreigncurrencies,toholdbalancesin thosecurrencies,andtoinvestsuchforeigncurrencyholdings,whilemaintaining adequateliquidity.TheFOMChasalsoauthorizedtheFRBNYtomaintainreciprocalcurrencyarrangementswiththeBankof CanadaandtheBankof Mexicoin themaximumamountsof $2billionand$3billion,respectively,andtowarehouse foreigncurrenciesfortheTreasuryandtheExchangeStabilizationFundinthe maximumamountof $5billion. Becauseof theglobalcharacterof bankfundingmarkets,theSystemhasattimes coordinatedwithothercentralbankstoprovideliquidity.TheFOMCauthorized anddirectedtheFRBNYtoestablishtemporaryU.S.dollarliquidityswaplines withtheBankof Canada,theBankof England,theEuropeanCentralBank,the Bankof Japan,andtheSwissNationalBank.Inaddition,asacontingencymeasure,theFOMCauthorizedanddirectedtheFRBNYtoestablishtemporaryforeigncurrencyliquidityswaparrangementswiththesefivecentralbankstoallow fortheSystemtoaccessliquidity,if necessary,inanyof theforeigncentralbanks’ currencies.OnOctober31,2013,theFederalReserveandthesefivecentralbanks agreedtoconverttheirexistingtemporaryliquidityswaparrangementstostanding agreementswhichwillremainineffectuntilfurthernotice. 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 accountingpoliciesandpracticesthatareconsistentwiththeFAM.Thecombined financialstatementshavebeenpreparedinaccordancewiththeFAM. Limiteddifferencesexistbetweentheaccountingprinciplesandpracticesinthe FAMandaccountingprinciplesgenerallyacceptedintheUnitedStatesof America(GAAP),duetotheuniquenatureof theReserveBanks’powersand responsibilitiesaspartof thenation’scentralbankandgiventheSystem’sunique

FederalReserveSystemAudits 339 responsibilitytoconductmonetarypolicy.Theprimarydifferencesarethepresentationof allSOMAsecuritiesholdingsatamortizedcost,adjustedforcredit impairment,if any,andtherecordingof allSOMAsecuritiesonasettlement-date basis.Amortizedcost,ratherthanthefairvaluepresentation,moreappropriately reflectstheReserveBanks’securitiesholdingsgiventheSystem’suniqueresponsibilitytoconductmonetarypolicy.Althoughtheapplicationof fairvaluemeasurementstothesecuritiesholdingsmayresultinvaluessubstantiallygreaterorless thantheircarryingvalues,theseunrealizedchangesinvaluehavenodirecteffect onthequantityof reservesavailabletothebankingsystemorontheabilityof the ReserveBanks,asthecentralbank,tomeettheirfinancialobligationsandresponsibilities.Boththedomesticandforeigncomponentsof theSOMAportfoliomay involvetransactionsthatresultingainsorlosseswhenholdingsaresoldbefore maturity.Decisionsregardingsecuritiesandforeigncurrencytransactions,includingtheirpurchaseandsale,aremotivatedbymonetarypolicyobjectivesrather thanprofit.Accordingly,fairvalues,earnings,andgainsorlossesresultingfrom thesaleof suchsecuritiesandcurrenciesareincidentaltoopenmarketoperations anddonotmotivatedecisionsrelatedtopolicyoropenmarketactivities.Accountingforthesesecuritiesonasettlement-datebasis,ratherthanthetrade-datebasis requiredbyGAAP,betterreflectsthetimingof thetransaction’seffectonthe quantityof reservesinthebankingsystem.Thecostbasesof Treasurysecurities, GSEdebtsecurities,andforeigngovernmentdebtinstrumentsareadjustedfor amortizationof premiumsoraccretionof discountsonastraight-linebasis,rather thanusingtheinterestmethodrequiredbyGAAP. 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. In2013,thedescriptionof certainlineitemspresentedintheCombinedStatementsof IncomeandComprehensiveIncomeandtheCombinedStatementsof Conditionhavebeenrevisedtobetterreflectthenatureof theseitems.Amounts relatedtotheselineitemswerenotchangedfromtheprioryear,onlythenomenclatureforthelineitemwasrevised,asfurthernotedbelow: • Thelineitem,“AccruedinterestonFederalReservenotes,”hasbeenrevisedin theCombinedStatementsof Conditionto“AccruedremittancestoTreasury.” • Thelineitem,“NetincomebeforeinterestonFederalReservenotesexpense remittedtoTreasury,”hasbeenrevisedintheCombinedStatementsof Income andComprehensiveIncometo“Netincomebeforeprovidingforremittancesto Treasury.”

340 100thAnnualReport|2013 • Thelineitem,“InterestonFederalReservenotesexpenseremittedtoTreasury,” hasbeenrevisedintheCombinedStatementsof IncomeandComprehensive Incometo“EarningsremittancestoTreasury.” CertainamountsrelatingtotheprioryearhavebeenreclassifiedintheCombined Statementsof Conditiontoconformtothecurrentyearpresentation.Theamount reportedas“SystemOpenMarketAccount:Accruedinterestreceivable”forthe yearendedDecember31,2012($19,031million)waspreviouslyreportedasacomponentof “SystemOpenMarketAccount:Foreigncurrencydenominatedassets, net”($99million)and“Accruedinterestreceivable”($18,932million). Certainimmaterialamountsrelatingtotheprioryearhavebeenreclassifiedinthe CombinedStatementsof IncomeandComprehensiveIncometoconformtothe currentyearpresentation.$34millionpreviouslyreportedfortheyearended December31,2012as“Non-interestincome:TermAsset-BackSecuritiesLoan Facility,unrealizedlosses”havebeenreclassifiedto“Non-interestincome:Other,” and$25millionpreviouslyreportedas“Operatingexpenses:Professionalfees relatedtoconsolidatedvariableinterestentities”havebeenreclassifiedto“Operatingexpenses:Other.” Significantaccountsandaccountingpoliciesareexplainedbelow. 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 Bank,whichwasformedtoownandoperatethe33MaidenLanebuilding,which waspurchasedonFebruary28,2012. 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

FederalReserveSystemAudits 341 System.TheBoardof GovernorsfundstheBureauthroughassessmentsonthe ReserveBanksasrequiredbytheDodd-FrankAct.Section152of theDodd- FrankActestablishedtheOfficeof FinancialResearch(OFR)withintheTreasury andrequiredtheBoardof GovernorstofundtheOFRforthetwo-yearperiod endedJuly21,2012.TheReserveBanksreviewedthelawandevaluatedthedesign of andtheirrelationshipstotheBureauandtheOFRanddeterminedthatneither shouldbeconsolidatedintheReserveBanks’comibinedfinancialstatements. b.GoldandSpecialDrawingRightsCertificates TheSecretaryof theTreasuryisauthorizedtoissuegoldcertificatestotheReserve Banks.Uponauthorization,theReserveBanksacquiregoldcertificatesbycreditingequivalentamountsindollarstotheaccountestablishedfortheTreasury.The goldcertificatesheldbytheReserveBanksarerequiredtobebackedbythegold ownedbytheTreasury.TheTreasurymayreacquirethegoldcertificatesatany time,andtheReserveBanksmustdeliverthemtotheTreasury.Atsuchtime,the Treasury’saccountischarged,andtheReserveBanks’goldcertificateaccountsare reduced.Thevalueof goldforpurposesof backingthegoldcertificatesissetby lawat$422/9perfinetroyounce.GoldcertificatesarerecordedbytheBanksat originalcost.TheBoardof Governorsallocatesthegoldcertificatesamongthe ReserveBanksonceayearbasedoneachReserveBank’saverageFederalReserve notesoutstandingduringtheprecedingtwelvemonths. Specialdrawingrights(SDR)areissuedbytheInternationalMonetaryFund (IMF)toitsmembersinproportiontoeachmember’squotaintheIMFatthe timeof issuance.SDRsserveasasupplementtointernationalmonetaryreserves andmaybetransferredfromonenationalmonetaryauthoritytoanother.Under thelawprovidingforU.S.participationintheSDRsystem,theSecretaryof the TreasuryisauthorizedtoissueSDRcertificatestotheReserveBanks.WhenSDR certificatesareissuedtotheReserveBanks,equivalentamountsinU.S.dollarsare creditedtotheaccountestablishedfortheTreasuryandtheReserveBanks’SDR certificateaccountsareincreased.TheReserveBanksarerequiredtopurchase SDRcertificates,atthedirectionof theTreasury,forthepurposeof financing SDRacquisitionsorforfinancingexchange-stabilizationoperations.Atthetime SDRcertificatetransactionsoccur,theBoardof GovernorsallocatestheSDRcertificatesamongtheReserveBanksbaseduponeachReserveBank’sFederal Reservenotesoutstandingattheendof theprecedingcalendaryear.SDRcertificatesarerecordedbytheBanksatoriginalcost.TherewerenoSDRcertificate transactionsduringtheyearsendedDecember31,2013and2012. c.Coin TheamountreportedascoinintheCombinedStatementsof Conditionrepresents thefacevalueof allUnitedStatescoinheldbytheReserveBanks.TheReserve BanksbuycoinatfacevaluefromtheU.S.Mintinordertofilldepositoryinstitutionorders. d.Loans Loanstodepositoryinstitutionsarereportedattheiroutstandingprincipalbalancesandinterestincomeisrecognizedonanaccrualbasis. TheFRBNYhaselectedthefairvalueoptionforallTermAsset-BackedSecurities LoanFacility(TALF)loansinaccordancewithASC825.RecordingallTALF loansatfairvalue,ratherthanattheremainingprincipalamountoutstanding, providesthemostappropriatepresentationonthefinancialstatementsbymatchingthechangeinfairvalueof TALFloans,therelatedputagreementwithTALF

342 100thAnnualReport|2013 LLC,andthevaluationof thebeneficialinterestsinTALFLLC.Information regardingtheTALFLLC’sassetsandliabilitiesispresentedinNote6.Unrealized lossesonTALFloansthatarerecordedatfairvaluearereportedasacomponent of “Non-interestincome:Other”intheCombinedStatementsof Incomeand ComprehensiveIncome.TheinterestincomeonTALFloansisrecognizedbased onthecontractedrateandisreportedas“InterestIncome:TermAsset-Backed SecuritiesLoanFacility”intheCombinedStatementsof IncomeandComprehensiveIncome. Loans,otherthanthoserecordedatfairvalue,areimpairedwhencurrentinformationandeventsindicatethatitisprobablethattheReserveBankswillnotreceive theprincipalandinterestthataredueinaccordancewiththecontractualtermsof 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 settledthroughatri-partyarrangement.Inatri-partyarrangement,twocommercialcustodialbanksmanagethecollateralclearing,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),FederalHomeLoanMortgage Corporation(FreddieMac),andFederalHomeLoanBanks;andpass-through federalagencyandGSEMBS.Therepurchasetransactionsareaccountedforas financingtransactionswiththeassociatedinterestincomerecognizedoverthelife of thetransaction.Thesetransactionsarereportedattheircontractualamountsas

FederalReserveSystemAudits 343 “SystemOpenMarketAccount:Securitiespurchasedunderagreementstoresell” andtherelatedaccruedinterestreceivableisreportedasacomponentof “System OpenMarketAccount:Accruedinterestreceivable”intheCombinedStatements of Condition. TheFRBNYmayengageinsalesof securitiesunderagreementstorepurchase (reverserepurchasetransactions)withprimarydealersandwiththesetof expandedcounterpartieswhichincludesbanks,savingsassociations,GSEs,and domesticmoneymarketfunds.Thesereverserepurchasetransactions,when arrangedasopenmarketoperations,aresettledthroughatri-partyarrangement, similartorepurchasetransactions.Reverserepurchasetransactionsmayalsobe executedwithforeignofficialandinternationalaccountholdersaspartof aservice offering.Reverserepurchaseagreementsarecollateralizedbyapledgeof an amountof Treasurysecurities,GSEdebtsecurities,andfederalagencyandGSE MBSthatareheldintheSOMA.Reverserepurchasetransactionsareaccounted forasfinancingtransactions,andtheassociatedinterestexpenseisrecognizedover thelifeof thetransaction.Thesetransactionsarereportedattheircontractual amountsas“SystemOpenMarketAccount:Securitiessoldunderagreementsto repurchase”andtherelatedaccruedinterestpayableisreportedasacomponentof “Otherliabilities”intheCombinedStatementsof Condition. TreasurysecuritiesandGSEdebtsecuritiesheldintheSOMAmaybelenttoprimarydealers,typicallyovernight,tofacilitatetheeffectivefunctioningof the domesticsecuritiesmarkets.Theamortizedcostbasisof securitieslentcontinues tobereportedas“Treasurysecurities,net”and“Government-sponsoredenterprisedebtsecurities,net,”asappropriate,intheCombinedStatementsof Condition.SecuritieslendingtransactionsarefullycollateralizedbyTreasurysecurities thathavefairvaluesinexcessof thesecuritieslent.TheFRBNYchargestheprimarydealerafeeforborrowingsecurities,andthesefeesarereportedasacomponentof “Non-interestincome:Other”intheCombinedStatementsof Incomeand ComprehensiveIncome. Activityrelatedtosecuritiespurchasedunderagreementstoresell,securitiessold underagreementstorepurchase,andsecuritieslendingisallocatedtoeachof the ReserveBanksonapercentagebasisderivedfromanannualsettlementof the interdistrictsettlementaccountthatoccursinthesecondquarterof eachyear. f.TreasurySecurities;Government-SponsoredEnterpriseDebtSecurities; FederalAgencyandGovernment-SponsoredEnterpriseMortgage-Backed Securities;ForeignCurrencyDenominatedAssets;andWarehousing Agreements InterestincomeonTreasurysecurities,GSEdebtsecurities,andforeigncurrency denominatedassetsincludedintheSOMAisaccruedonastraight-linebasis. InterestincomeonfederalagencyandGSEMBSisaccruedusingtheinterest methodandincludesamortizationof premiums,accretionof discounts,andgains orlossesassociatedwithprincipalpaydowns.Premiumsanddiscountsrelatedto federalagencyandGSEMBSareamortizedoraccretedoverthetermof thesecuritytostatedmaturity,andtheamortizationof premiumsandaccretionof discountsareacceleratedwhenprincipalpaymentsarereceived.Gainsandlosses resultingfromsalesof securitiesaredeterminedbyspecificissuebasedonaverage cost.Treasurysecurities,GSEdebtsecurities,andfederalagencyandGSEMBS arereportednetof premiumsanddiscountsintheCombinedStatementsof Conditionandinterestincomeonthosesecuritiesisreportednetof theamortization

344 100thAnnualReport|2013 of premiumsandaccretionof discountsintheCombinedStatementsof Income andComprehensiveIncome. Inadditiontooutrightpurchasesof federalagencyandGSEMBSthatareheldin theSOMA,theFRBNYentersintodollarrolltransactions(dollarrolls),which primarilyinvolveaninitialtransactiontopurchaseorsell“tobeannounced” (TBA)MBSfordeliveryinthecurrentmonthcombinedwithasimultaneous agreementtosellorpurchaseTBAMBSonaspecifiedfuturedate.Duringthe yearsendedDecember31,2013and2012,theFRBNYexecuteddollarrollsprimarilytofacilitatesettlementof outstandingpurchasesof federalagencyandGSE MBS.TheFRBNYaccountsfordollarrollsaspurchasesorsalesonasettlementdatebasis.Inaddition,TBAMBStransactionsmaybepairedoff orassignedprior tosettlement.NetgainsresultingfromtheseMBStransactionsarereportedas “Non-interestincome:SystemOpenMarketAccount:Federalagencyand government-sponsoredenterprisemortgage-backedsecuritiesgains,net”inthe CombinedStatementsof IncomeandComprehensiveIncome. Foreigncurrencydenominatedassets,whichcanincludeforeigncurrencydeposits, securitiespurchasedunderagreementstoresell,andgovernmentdebtinstruments, arerevalueddailyatcurrentforeigncurrencymarketexchangeratesinorderto reporttheseassetsinU.S.dollars.Foreigncurrencytranslationgainsandlosses thatresultfromthedailyrevaluationof foreigncurrencydenominatedassetsare reportedas“Non-interestincome:SystemOpenMarketAccount:Foreigncurrencytranslationlosses,net”intheCombinedStatementsof IncomeandComprehensiveIncome. ActivityrelatedtoTreasurysecurities,GSEdebtsecurities,andfederalagencyand GSEMBS,includingthepremiums,discounts,andrealizedgainsandlosses,is allocatedtoeachReserveBankonapercentagebasisderivedfromanannual settlementof theinterdistrictsettlementaccountthatoccursinthesecondquarter of eachyear.Activityrelatedtoforeigncurrencydenominatedassets,includingthe premiums,discounts,andrealizedandunrealizedgainsandlosses,isallocatedto eachReserveBankbasedontheratioof eachReserveBank’scapitalandsurplus totheReserveBanks’aggregatecapitalandsurplusattheprecedingDecember31. WarehousingisanarrangementunderwhichtheFOMChasapprovedthe exchange,attherequestof theTreasury,of U.S.dollarsforforeigncurrenciesheld bytheTreasuryoveralimitedperiod.Thepurposeof thewarehousingfacilityis tosupplementtheU.S.dollarresourcesof theTreasuryforfinancingpurchasesof foreigncurrenciesandrelatedinternationaloperations.Warehousingagreements arevalueddailyatcurrentmarketexchangerates.ActivityrelatedtotheseagreementsisallocatedtoeachReserveBankbasedontheratioof eachReserveBank’s capitalandsurplustotheReserveBanks’aggregatecapitalandsurplusattheprecedingDecember31. TheFRBNYisauthorizedtoholdforeigncurrencyworkingbalancesandexecute foreignexchangecontractstofacilitateinternationalpaymentsandcurrencytransactionsitmakesonbehalf of foreigncentralbankandU.S.officialinstitutioncustomers.Theseforeigncurrencyworkingbalancesandcontractsarenotrelatedto theFRBNY’smonetarypolicyoperations.Foreigncurrencyworkingbalancesare reportedasacomponentof “Otherassets”intheCombinedStatementsof Conditionandtherelatedforeigncurrencytranslationgainsandlossesthatresultfrom thedailyrevaluationof theforeigncurrencyworkingbalancesandcontractsare

FederalReserveSystemAudits 345 reportedasacomponentof “Non-interestincome:Other”intheCombinedStatementsof IncomeandComprehensiveIncome. g.CentralBankLiquiditySwaps Centralbankliquidityswaps,whicharetransactedbetweentheFRBNYandaforeigncentralbank,canbestructuredaseitherU.S.dollarorforeigncurrency liquidityswaparrangements. Centralbankliquidityswapsactivity,includingtherelatedincomeandexpense,is allocatedtoeachReserveBankbasedontheratioof eachReserveBank’scapital andsurplustoaggregatecapitalandsurplusattheprecedingDecember31.The 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 TheinvestmentsheldbyconsolidatedVIEsconsistprimarilyof cashandcash equivalents,short-terminvestmentswithmaturitiesof greaterthanthreemonths andlessthanoneyear,commercialmortgageloans,andswapcontracts.Investmentsarereportedas“Investmentsheldbyconsolidatedvariableinterestentities” intheCombinedStatementsof Condition.Theseinvestmentsareaccountedfor andclassifiedasfollows: • ML’sinvestmentsindebtsecuritiesareaccountedforinaccordancewithFASB ASCTopic320(ASC320)Investments–DebtandEquitySecurities,andML electedthefairvalueoptionforalleligibleassetsandliabilitiesinaccordance withASC825.Otherfinancialinstruments,includingswapcontractsinML,are

346 100thAnnualReport|2013 recordedatfairvalueinaccordancewithFASBASCTopic815(ASC815) DerivativesandHedging. • MLIIandMLIIIqualifyasnonregisteredinvestmentcompaniesundertheprovisionsof FASBASCTopic946(ASC946)FinancialServices–InvestmentCompanies,andtherefore,allinvestmentsarerecordedatfairvalueinaccordance withASC946. • TALFLLCfollowstheguidanceinASC320whenaccountingforanyacquired asset-backedsecurities(ABS)investmentsandhaselectedthefairvalueoption foralleligibleassetsinaccordancewithASC825. i.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. Costsincurredtoacquiresoftwarearecapitalizedbasedonthepurchaseprice. Costsincurredduringtheapplicationdevelopmentstagetodevelopinternal-use softwarearecapitalizedbasedonthecostof directservicesandmaterialsassociatedwithdesigning,coding,installing,andtestingthesoftware.Capitalizedsoftwarecostsareamortizedonastraight-linebasisovertheestimatedusefullivesof thesoftwareapplications,whichgenerallyrangefromtwotofiveyears.Maintenancecostsrelatedtosoftwarearechargedtooperatingexpenseintheyear incurred. Capitalizedassets,includingsoftware,buildings,leaseholdimprovements,furniture,andequipment,areimpairedandanadjustmentisrecordedwheneventsor changesincircumstancesindicatethatthecarryingamountof assetsorasset groupsisnotrecoverableandsignificantlyexceedstheassets’fairvalue. j.FederalReserveNotes FederalReservenotesarethecirculatingcurrencyof theUnitedStates.These notes,whichareidentifiedasissuedtoaspecificReserveBank,mustbefullycollateralized.Allof theReseveBanks’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.

FederalReserveSystemAudits 347 “FederalReservenotesoutstanding,net”intheCombinedStatementsof ConditionrepresentstheReserveBanks’FederalReservenotesoutstanding,reducedby theReserveBanks’currencyholdingsof $203billionand$228billionatDecember31,2013and2012,respectively. AtDecember31,2013and2012,allFederalReservenotesoutstanding,reducedby theReserveBanks’currencyholdings,werefullycollateralized.AtDecember31, 2013,allgoldcertificates,allspecialdrawingrightscertificates,and$1,182billion of domesticsecuritiesheldintheSOMAwerepledgedascollateral.AtDecember31,2013,noinvestmentsdenominatedinforeigncurrencieswerepledgedas collateral. k.BeneficialInterestinConsolidatedVariableInterestEntities MLandTALFLLChaveoutstandingfinancialinterests,andMLIIandMLIII haveoutstandingseniorandsubordinatedfinancialinterests.Uponissuanceof the financialinterests,ML,MLII,MLIII,andTALFLLCeachelectedtomeasure theseobligationsatfairvalueinaccordancewithASC825.Principal,interest,and changesinfairvalueontheseniorfinancialinterest,whichwereextendedbythe FRBNY,areeliminatedinconsolidation.Thefinancialinterestsarerecordedat fairvalueas“Beneficialinterestinconsolidatedvariableinterestentities”inthe CombinedStatementsof Condition.Interestexpenseandchangesinfairvalueof thefinancialinterestarerecordedin“Interestexpense:Beneficialinterestinconsolidatedvariableinterestentities”and“Non-interestincome:Beneficialinterestin consolidatedvariableinterestentitiesgains(losses),net,”respectively,intheCombinedStatementsof IncomeandComprehensiveIncome. l.Deposits DepositoryInstitutions Depositoryinstitutions’depositsrepresentthereserveandservice-relatedbalances intheaccountsthatdepositoryinstitutionsholdattheReserveBanks.Theinterest ratespaidonrequiredreservebalancesandexcessbalancesaredeterminedbythe Boardof Governors,basedonanFOMC-establishedtargetrangeforthefederal fundsrate.Interestpayableisreportedasacomponentof “Interestpayableto depositoryinstitutions”intheCombinedStatementsof Condition. TheTermDepositFacility(TDF)consistsof depositswithspecificmaturitiesheld byeligibleinstitutionsattheReserveBanks.TheReserveBankspayintereston thesedepositsatinterestratesdeterminedbyauction.Interestpayableisreported asacomponentof “Interestpayabletodepositoryinstitutions”intheCombined Statementsof Condition.TherewerenodepositsheldbytheReserveBanksunder theTDFatDecember31,2013and2012. Treasury TheTreasurygeneralaccountistheprimaryoperationalaccountof theTreasury andisheldattheFRBNY. Other Otherdepositsincludeforeigncentralbankandforeigngovernmentdepositsheld attheFRBNY.OtherdepositsalsoincludeGSEdepositsheldbytheReserve Banks.

348 100thAnnualReport|2013 m.ItemsinProcessofCollectionandDeferredCreditItems Itemsinprocessof collectionprimarilyrepresentsamountsattributabletochecks thathavebeendepositedforcollectionandthat,asof thebalancesheetdate,have notyetbeenpresentedtothepayingbank.Deferredcredititemsrepresentsthe counterpartliabilitytoitemsinprocessof collection.Theamountsinthisaccount arisefromdeferringcreditfordepositeditemsuntiltheamountsarecollected.The balancesinbothaccountscanfluctuatesignificantly. n.CapitalPaid-in TheFederalReserveActrequiresthateachmemberbanksubscribetothecapital stockof theReserveBankinanamountequaltosixpercentof thecapitaland surplusof thememberbank.Thesesharesarenonvoting,withaparvalueof $100, andmaynotbetransferredorhypothecated.Asamemberbank’scapitalandsurpluschanges,itsholdingsof ReserveBankstockmustbeadjusted.Currently,only one-half of thesubscriptionispaidin,andtheremainderissubjecttocall.A memberbankisliableforReserveBankliabilitiesuptotwicetheparvalueof stocksubscribedbyit. Bylaw,eachReserveBankisrequiredtopayeachmemberbankanannualdividendof sixpercentonthepaid-incapitalstock.Thiscumulativedividendispaid semiannually. o.Surplus TheBoardof GovernorsrequirestheReserveBankstomaintainasurplusequal totheamountof capitalpaid-in.Onadailybasis,surplusisadjustedtoequatethe balancetocapitalpaid-in.Accumulatedothercomprehensiveincomeisreported asacomponentof “Surplus”intheCombinedStatementsof Conditionandthe CombinedStatementsof ChangesinCapital.Additionalinformationregarding theclassificationsof accumulatedothercomprehensiveincomeisprovidedin Notes9,10,and11. p.RemittancestoTreasury TheBoardof GovernorsrequirestheReserveBankstotransferexcessearningsto theTreasuryasinterestonFederalReservenotesafterprovidingforthecostsof operations,paymentof dividends,andreservationof anamountnecessaryto equatesurpluswithcapitalpaid-in.Currently,remittancestoTreasuryaremade onaweeklybasis.Thisamountisreportedas“EarningsremittancestoTreasury” intheCombinedStatementsof IncomeandComprehensiveIncome.Theamount duetotheTreasuryisreportedas“AccruedremittancestoTreasury”intheCombinedStatementsof Condition.SeeNote13foradditionalinformationonremittancestoTreasury. If earningsduringtheyeararenotsufficienttoprovideforthecostsof operations, paymentof dividends,andequatingsurplusandcapitalpaid-in,remittancestothe Treasuryaresuspended.Adeferredassetisrecordedthatrepresentstheamountof netearningsaReserveBankwillneedtorealizebeforeremittancestotheTreasury resume.Thisdeferredassetisperiodicallyreviewedforimpairment. q.IncomeandCostsRelatedtoTreasuryServices WhendirectedbytheSecretaryof theTreasury,theReserveBanksarerequiredby theFederalReserveActtoserveasfiscalagentanddepositaryof theUnited StatesGovernment.Bystatute,theTreasuryhasappropriationstopayforthese services.DuringtheyearsendedDecember31,2013and2012,theBankwasreimbursedforallservicesprovidedtotheTreasuryasitsfiscalagent.

FederalReserveSystemAudits 349 r.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. TheDodd-FrankActrequiresthat,afterthetransferdateof July21,2011,the Boardof GovernorsfundtheBureauinanamountnottoexceedafixedpercentageof thetotaloperatingexpensesof theSystemasreportedintheBoardof Governors’2009annualreport,whichtotaled$4.98billion.Thefixedpercentageof totaloperatingexpensesof theSystemfortheyearsendedDecember31,2013and 2012was12percent($597.6million)and11percent($547.8million),respectively. After2013,theamountwillbeadjustedinaccordancewiththeprovisionsof the Dodd-FrankAct.TheReserveBanks’assessmentforBureaufundingisreported as“Assessments:Bureauof ConsumerFinancialProtection”intheCombined Statementsof IncomeandComprehensiveIncome. TheBoardof GovernorsassessedtheReserveBankstofundtheoperationsof the OFRforthetwo-yearperiodendedJuly21,2012,followingenactmentof the Dodd-FrankAct;thereafter,theOFRisfundedbyfeesassessedonbankholding companiesandnonbankfinancialcompaniesthatmeetthecriteriaspecifiedinthe Dodd-FrankAct. s.FairValue CertainassetsandliabilitiesreportedontheReserveBanks’CombinedStatements of ConditionaremeasuredatfairvalueinaccordancewithASC820,including TALFloans,investmentsandbeneficialinterestsof theconsolidatedVIEs,and assetsof theRetirementPlanforEmployeesof theSystem.ASC820definesfair valueasthepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate. ASC820establishesathree-levelfairvaluehierarchythatdistinguishesbetween assumptionsdevelopedusingmarketdataobtainedfromindependentsources (observableinputs)andtheReserveBanks’assumptionsdevelopedusingthebest informationavailableinthecircumstances(unobservableinputs).Thethreelevels establishedbyASC820aredescribedasfollows: • Level1–Valuationisbasedonquotedpricesforidenticalinstrumentstradedin activemarkets. • Level2–Valuationisbasedonquotedpricesforsimilarinstrumentsinactive markets,quotedpricesforidenticalorsimilarinstrumentsinmarketsthatare notactive,andmodel-basedvaluationtechniquesforwhichallsignificant assumptionsareobservableinthemarket. • Level3–Valuationisbasedonmodel-basedtechniquesthatusesignificant inputsandassumptionsnotobservableinthemarket.Theseunobservableinputs andassumptionsreflecttheReserveBanks’estimatesof inputsandassumptions thatmarketparticipantswoulduseinpricingtheassetsandliabilities.Valuation techniquesincludetheuseof optionpricingmodels,discountedcashflowmodels,andsimilartechniques.

350 100thAnnualReport|2013 Theinputsormethodologyusedforvaluingassetsandliabilitiesarenotnecessarilyanindicationof theriskassociatedwiththoseassetsandliabilities. t.Taxes TheReserveBanksareexemptfromfederal,state,andlocaltaxes,exceptfortaxes onrealproperty.TheReserveBanks’realpropertytaxeswere$48millionand $47millionfortheyearsendedDecember31,2013and2012,respectively,andare reportedasacomponentof “Operatingexpenses:Occupancy”intheCombined Statementsof IncomeandComprehensiveIncome. u.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. v.RecentlyIssuedAccountingStandards InDecember2011,theFinancialAccountingStandardsBoard(FASB)issued AccountingStandardsUpdate(ASU)2011-11,BalanceSheet(Topic210):DisclosuresaboutOffsettingAssetsandLiabilities.Thisupdaterequiresareportingentity topresentenhanceddisclosuresforfinancialinstrumentsandderivativeinstrumentsthatareoffsetorsubjecttomasternettingagreementsorsimilarsuchagreements.InJanuary2013,theFASBissuedASU2013-01,BalanceSheet(Topic210): ClarifyingtheScopeof DisclosuresaboutOffsettingAssetsandLiabilities.This updateclarifiesthatthescopeof ASU2011-11appliestoderivativesaccountedfor inaccordancewithTopic815.TheseupdatesareeffectivefortheReserveBanks fortheyearendedDecember31,2013,andtherequireddisclosuresareincludedin Note6. 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.Thisupdate

FederalReserveSystemAudits 351 improvesthetransparencyof changesinothercomprehensiveincomeanditems reclassifiedoutof accumulatedothercomprehensiveincomeinthecombined financialstatements.Thesepresentationrequirementsof ASU2011-05and requireddisclosuresinASU2013-02areeffectivefortheReserveBanksforthe yearendingDecember31,2013,andarereflectedintheBank’s2013combined financialstatementsandNote11. InApril2013,theFASBissuedASU2013-07,Presentationof FinancialStatements (Topic205):LiquidationBasisof Accounting.Thisupdateclarifieswhenentitiesin liquidationshouldapplytheliquidationbasisof accountingandprovidesguidanceonfinancialstatementpresentation.Thisupdateiseffectiveforanentitythat determinesliquidationisimminentduringannualreportingperiodsbeginning afterDecember15,2013.During2012,MLIIandMLIIIsoldtheirremaining portfolioassets;however,thefinancialstatementpresentationsforMLIIandML IIIwerenotmodifiedtotheliquidationbasisasthestandarddoesnotapplyto entitieswhoseliquidationfollowsaplanforliquidationthatwasspecifiedinthe entity’sgoverningdocumentsatinception. InJune2013,theFASBissuedASU2013-08,FinancialServices–InvestmentCompanies(Topic946):AmendmentstotheScope,Measurement,andDisclosure Requirements.Thisupdatechangestheassessmentof whetheranentityisan investmentcompanybydevelopinganewtwo-tieredapproachforthatassessment, whichrequiresanentitytopossesscertainfundamentalcharacteristicswhileallowingjudgmentinassessingothertypicalcharacteristics.Thisupdate,whichisapplicabletoMLIIandMLIII,iseffectivefortheBankfortheyearendingDecember31,2014andisnotexpectedtohaveamaterialeffectontheReserveBanks’ combinedfinancialstatements. (4)Loans LoanstoDepositoryInstitutions TheReserveBanksoffersprimary,secondary,andseasonalloanstoeligibleborrowers,andeachprogramhasitsowninterestrate.Interestisaccruedusingthe applicableinterestrateestablishedatleastevery14daysbytheReserveBanks’ boardof directors,subjecttoreviewanddeterminationbytheBoardof Governors.Primaryandsecondaryloansareextendedonashort-termbasis,typically overnight,whereasseasonalloansmaybeextendedforaperiodof uptonine months. Primary,secondary,andseasonalloansarecollateralizedtothesatisfactionof eachReserveBanktoreducecreditrisk.Assetseligibletocollateralizetheseloans includeconsumer,business,andrealestateloans;Treasurysecurities;GSEdebt securities;foreignsovereigndebt;municipal,corporate,andstateandlocalgovernmentobligations;ABS;corporatebonds;commercialpaper;andbank-issued assets,suchascertificatesof deposit,banknotes,anddepositnotes.Collateralis assignedalendingvaluethatisdeemedappropriatebyeachReserveBank,which istypicallyfairvaluereducedbyamargin.Loanstodepositoryinstitutionsare monitoreddailytoensurethatborrowerscontinuetomeeteligibilityrequirements fortheseprograms.If aborrowernolongerqualifiesfortheseprograms,the ReserveBankwillgenerallyrequestfullrepaymentof theoutstandingloanor,for primaryorseasonalloans,mayconverttheloantoasecondarycreditloan.Collaterallevelsarerevieweddailyagainstoutstandingobligations,andborrowersthat nolongerhavesufficientcollateraltosupportoutstandingloansarerequiredto provideadditionalcollateralortomakepartialorfullrepayment.

352 100thAnnualReport|2013 Theremainingmaturitydistributionof loanstodepositoryinstitutionsoutstandingasof December31,2013,and2012,wasasfollows(inmillions): Within 16days Total 15days to90days December31,2013 $69 $5 $74 December31,2012 $67 $3 $70 AtDecember31,2013and2012,theReserveBanksdidnothaveanyloansthat wereimpaired,restructured,pastdue,oronnon-accrualstatus,andnoallowance forloanlosseswasrequired.Therewerenoimpairedloansduringtheyearsended December31,2013and2012. TALF TheTALFassistedfinancialmarketsinaccommodatingthecreditneedsof consumersandbusinessesof allsizesbyfacilitatingtheissuanceof ABScollateralized byavarietyof consumerandbusinessloans.EachTALFloanhadanoriginal maturityof threeyears,exceptloanssecuredbySmallBusinessAdministration (SBA)PoolCertificates,loanssecuredbySBADevelopmentCompanyParticipationCertificates,orABSbackedbystudentloansorcommercialmortgageloans, whichhadanoriginalmaturityof fiveyearsif theborrowersoelected.Theloans aresecuredbyeligiblecollateral,withtheFRBNYhavinglentanamountequalto thevalueof thecollateral,asdeterminedbytheFRBNY,lessamargin. TheTALFloanswereextendedonanonrecoursebasis.If theborrowerdoesnot repaytheloan,theFRBNYwillenforceitsrightsinthecollateralandmaysellthe collateraltoTALFLLC,aDelawareLLC,establishedforthepurposeof purchasingsuchassets.Asof December31,2013,theFRBNYhasnotenforceditsrights tothecollateralbecausetherehavebeennodefaults. PursuanttoaputagreementwiththeFRBNY,TALFLLChascommittedtopurchaseassetsthatsecureaTALFloanatapriceequaltotheprincipalamountoutstandingplusaccruedbutunpaidinterest,regardlessof thefairvalueof thecollateral.FundingforTALFLLC’spurchasesof thesesecuritiesisderivedfirst throughthefeesreceivedbyTALFLLCfromtheFRBNYforthiscommitment andanyinterestearnedonitsinvestments.Intheeventthatsuchfundingproved insufficientfortheassetpurchasesthatTALFLLChascommittedtomakeunder theputagreement,theTreasuryoriginallycommittedtolendupto$20billion, andonMarch25,2009,theTreasuryfunded$100million.InadditiontotheTreasury’scommitment,theFRBNYoriginallycommittedtolendupto$180billion toTALFLLCif itneededthefundingtopurchaseassetspursuanttotheput agreementandprovidedthattheTreasuryhadfullyfundeditscommitment.Subsequently,theTreasuryandFRBNYcommitmentstolendtoTALFLLCwere eliminated,becausethecashequivalentsandshort-terminvestmentsheldby TALFLLCexceededtheremainingamountof TALFloansoutstanding,andthe creditprotectionfromtheTreasurywasnolongerdeemednecessary.TheTALF remainsajointTreasury-FederalReserveprogram,andtheTreasuryandFederal Reservewillcontinuetoconsultontheadministrationof theprogram. TALFLLChasrepaidinfulltheoutstandingprincipalandaccruedinterestonthe initialfundingpreviouslyprovidedbytheTreasury.TheBoardof Governorshas alsoauthorizedTALFLLCtobegindistributionsfromtheaccumulatedfeesand incomeearnedbyTALFLLCsinceinceptiontotheTreasuryandtheFRBNYin theamountbywhichsuchaccumulatedfeesandincomeexceedsthecurrentout-

FederalReserveSystemAudits 353 standingTALFloanbalanceplusfundsreservedforfutureexpensesof TALF LLC.Treasuryreceives90percentof thedistributionsandtheFRBNYreceives 10percent. Asof December31,2013,TALFloanswereclassifiedwithinLevel2of thevaluationhierarchy.TALFloansweretransferredfromLevel3toLevel2becausethey werevaluedatDecember31,2013usingmodel-basedtechniquesforwhichallsignificantinputswereconsideredobservable(Level2).Previously,TALFloanswere valuedusingsignificantunobservableinputs(level3). ThefollowingtablepresentstheTALFloansatfairvalueasof December31by ASC820hierarchy(inmillions): 2013 2012 Level2 $98 $ - Level3 - 560 Totalfairvalue $98 $560 Thefollowingtablepresentsareconciliationof TALFloansmeasuredatfairvalue usingsignificantunobservableinputs(Level3)duringtheyearsendedDecember31,2013and2012(inmillions): TALFloans FairvalueatDecember31,2011 $9,059 Loanrepaymentsandprepayments (8,465) Totalrealizedandunrealized(losses) (34) FairvalueatDecember31,2012 $ 560 Grosstransferout1 (560) FairvalueatDecember31,2013 $ - 1 Theamountoftransfersisbasedonfairvaluesofthetransferredassetsatthebeginningofthereportingperiod. Thefairvalueof TALFloansreportedintheCombinedStatementsof Condition asof December31,2013and2012,includes$1millionand$3millioninunrealizedgains,respectively.TheFRBNYattributessubstantiallyallchangesinfair valueof loanstochangesininstrument-specificcreditspreads. EligiblecollateralincludesU.S.dollar-denominatedABSthatarebackedbystudentloans,insurancepremiumfinancialloans,orcommercialmortgageloans.The

354 100thAnnualReport|2013 followingtablepresentsthecollateralconcentrationandremainingmaturitydistributionmeasuredatfairvalueasof December31,2013and2012(inmillions): Timetomaturity Collateraltype1 Within90days 91daysto1year Over1yearto5years Total December31,2013: Studentloan $ - $14 $ 33 $ 47 CMBS - 51 - 51 Total $ - $65 $ 33 $ 98 December31,2012: Studentloan $ - $ - $382 $382 CMBS 3 - 129 132 Other2 46 - - 46 Total $49 $ - $511 $560 1 AllcreditratingsareAAAunlessotherwiseindicated. 2 Includesinsurancepremiumfinancialloans. TheaggregateremainingprincipalamountoutstandingonTALFloansasof December31,2013and2012,was$97millionand$556million,respectively. AtDecember31,2013and2012,noTALFloanswereover90dayspastdueoron nonaccrualstatus. EarningsreportedbytheFRBNYrelatedtotheTALFincludeinterestincome andunrealizedgainsandlossesonTALFloansaswellastheFRBNY’sallocated shareof theTALFLLC’snetincome.Additionalinformationregardingthe incomeof TALFLLCispresentedinNote6.Thefollowingtablepresentsthe componentsof TALFearningsrecordedbytheFRBNYfortheyearsended December31(inmillions): 2013 2012 Interestincome $6 $80 Unrealizedgains(losses) (3) (34) Subtotal–TALFloans $3 $46 AllocatedshareofTALFLLC - (7) TotalTALF $3 $39 (5)SystemOpenMarketAccount a.DomesticSecuritiesHoldings TheFRBNYconductsdomesticopenmarketoperationsand,onbehalf of the ReserveBanks,holdstheresultingsecuritiesintheSOMA. DuringtheyearsendedDecember31,2013and2012,theFRBNYcontinuedthe purchaseof TreasurysecuritiesandfederalagencyandGSEMBSunderthelargescaleassetpurchaseprogramsauthorizedbytheFOMC.InSeptember2011,the FOMCannouncedthattheFederalReservewouldreinvestprincipalpayments fromtheSOMAportfolioholdingsof GSEdebtsecuritiesandfederalagencyand GSEMBSinfederalagencyandGSEMBS.InJune2012,theFOMCannounced thatitwouldcontinuetheexistingpolicyof reinvestingprincipalpaymentsfrom theSOMAportfolioholdingsof GSEdebtsecuritiesandfederalagencyandGSE MBSinfederalagencyandGSEMBS.InSeptember2012,theFOMCannounced thattheFederalReservewouldpurchaseadditionalfederalagencyandGSEMBS atapaceof $40billionpermonth.InDecember2012,theFOMCannouncedthat

FederalReserveSystemAudits 355 theFederalReservewouldpurchaselonger-termTreasurysecuritiesinitiallyata paceof $45billionpermonthafteritsprogramtoextendtheaveragematurityof itsholdingsof Treasurysecuritieswascompletedattheendof 2012.InDecember2012,theFOMCannouncedthattheFederalReservewouldcontinuethe policyof rollingovermaturingTreasurysecuritiesintonewissuesatauction. DuringtheyearendedDecember31,2012,theFRBNYalsocontinuedthepurchaseandsaleof SOMAportfolioholdingsunderthematurityextensionprogramsauthorizedbytheFOMC.InSeptember2011,theFOMCannouncedthat theFederalReservewouldextendtheaveragematurityof theSOMAportfolio holdingsof securitiesbypurchasing$400billionparvalueof Treasurysecurities withmaturitiesof sixtothirtyyearsandsellingorredeeminganequalparamount of Treasurysecuritieswithremainingmaturitiesof threeyearsorlessbytheendof June2012.InJune2012,theFOMCannouncedthattheFederalReservewould continuethroughtheendof 2012itsprogramtoextendtheaveragematurityof securitiesbypurchasing$267billionparvalueof Treasurysecuritieswithmaturitiesof sixtothirtyyearsandsellingorredeeminganequalparamountof Treasurysecuritieswithmaturitiesof threeandaquarteryearsorlessbytheendof 2012. Thetotalof Treasurysecurities,GSEdebtsecurities,andfederalagencyandGSE MBS,net,excludingaccruedinterest,heldintheSOMAatDecember31wasas follows(inmillions): 2013 Total Unamortized Unaccreted Par amortized premiums discounts cost Notes $1,467,427 $ 33,385 $ (5,697) $1,495,115 Bonds 741,348 128,541 (5,570) 864,319 TotalTreasurysecurities $2,208,775 $161,926 $(11,267) $2,359,434 GSEdebtsecurities $ 57,221 $ 1,903 $ (2) $ 59,122 FederalagencyandGSEMBS $1,490,162 $ 44,781 $ (1,083) $1,533,860 2012 Total Unamortized Unaccreted Par amortized premiums discounts cost 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 TheFRBNYentersintotransactionsforthepurchaseof securitiesunderagreementstoresellandtransactionstosellsecuritiesunderagreementstorepurchase aspartof itsmonetarypolicyactivities.Inaddition,transactionstosellsecurities undertorepurchaseagreementsareenteredintoaspartof aserviceofferingto foreignofficialandinternationalaccountholders. TherewerenomaterialtransactionsrelatedtosecuritiespurchasedunderagreementstoresellduringtheyearsendedDecember31,2013and2012.Financial

356 100thAnnualReport|2013 informationrelatedtosecuritiessoldunderagreementstorepurchasefortheyears endedDecember31wasasfollows(inmillions): 2013 2012 Contractamountoutstanding,endofyear $315,924 $107,188 Averagedailyamountoutstanding,duringtheyear 99,681 91,898 Maximumbalanceoutstanding,duringtheyear 315,924 122,541 Securitiespledged(parvalue),endofyear 310,452 93,547 Securitiespledged(marketvalue),endofyear 314,901 107,188 Theremainingmaturitydistributionof Treasurysecurities,GSEdebtsecurities, federalagencyandGSEMBSboughtoutright,andsecuritiessoldunderagreementstorepurchaseatDecember31,2013and2012wasasfollows(inmillions): Over Over Within 16days 91days Over 1year 5years Total 15days to90days to1year 10years to5years to10years December31,2013: Treasurysecurities (parvalue) $ - $ 298 $ 176 $763,329 $864,700 $ 580,272 $2,208,775 GSEdebtsecurities (parvalue) 2,310 7,568 8,666 36,268 62 2,347 57,221 FederalagencyandGSE MBS(parvalue)1 - - - 5 2,549 1,487,608 1,490,162 Securitiessoldunder agreementsto repurchase (contractamount) 315,924 - - - - - 315,924 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 1 TheparamountshownforfederalagencyandGSEMBSistheremainingprincipalbalanceofthesecurities. FederalagencyandGSEMBSarereportedatstatedmaturityinthetableabove. Theestimatedweightedaveragelifeof thesesecurities,whichdiffersfromthe statedmaturityprimarilybecauseitfactorsinscheduledpaymentsandprepaymentassumptions,wasapproximately6.5and3.3yearsasof December31,2013 and2012,respectively. Theamortizedcostandparvalueof TreasurysecuritiesandGSEdebtsecurities thatwereloanedfromtheSOMAatDecember31wasasfollows(inmillions): 2013 2012 Treasurysecurities(amortizedcosts) $17,153 $9,139 Treasurysecurities(parvalue) 15,447 8,460 GSEdebtsecurities(amortizedcost) 1,099 697 GSEdebtsecurities(parvalue) 1,055 676 TheFRBNYentersintocommitmentstobuyandsellTreasurysecuritiesand recordstherelatedsecuritiesonasettlement-datebasis.Asof December31,2013, therewerenooutstandingcommitments.

FederalReserveSystemAudits 357 TheFRBNYentersintocommitmentstobuyandsellfederalagencyandGSE MBSandrecordstherelatedsecuritiesonasettlement-datebasis.Asof December31,2013,thetotalpurchasepriceof thefederalagencyandGSEMBSunder outstandingpurchasecommitmentswas$59,350million,of which$479million wasrelatedtodollarrolls.Asof December31,2013,therewerenooutstanding salescommitmentsforfederalagencyandGSEMBS.Thesecommitments,which hadcontractualsettlementdatesextendingthroughFebruary2014,areforthe purchaseof TBAMBSforwhichthenumberandidentityof thepoolsthatwillbe deliveredtofulfillthecommitmentareunknownatthetimeof thetrade.These commitmentsaresubjecttovaryingdegreesof off-balance-sheetmarketriskand counterpartycreditriskthatresultfromtheirfuturesettlement.TheFRBNY requiresthepostingof cashcollateralforcommitmentsaspartof theriskmanagementpracticesusedtomitigatethecounterpartycreditrisk. Otherinvestmentsconsistof cashandshort-terminvestmentsrelatedtothefederal agencyandGSEMBSportfolio.Otherliabilities,whicharerelatedtofederal agencyandGSEMBSpurchasesandsales,includestheFRBNY’sobligationto returncashmarginpostedbycounterpartiesascollateralundercommitmentsto purchaseandsellfederalagencyandGSEMBS.Inaddition,otherliabilities includesobligationsthatarisefromthefailureof asellertodeliversecuritiestothe FRBNYonthesettlementdate.AlthoughtheFRBNYhasownershipof and recordsitsinvestmentsintheMBSasof thecontractualsettlementdate,itisnot obligatedtomakepaymentuntilthesecuritiesaredelivered,andtheamount includedinotherliabilitiesrepresentstheobligationtopayforthesecuritieswhen delivered.Theamountof otherinvestmentsandotherliabilitiesheldintheSOMA atDecember31wasasfollows(inmillions): 2013 2012 Otherinvestments $ 2 $ 23 Otherliabilities: Cashmargin $1,320 $3,092 ObligationsfromMBStransactionfails 11 85 Totalotherliabilities $1,331 $3,177 Accruedinterestreceivableondomesticsecuritiesholdingswas$23,405million and$18,924millionasof December31,2013and2012,respectively.These amountsarereportedasacomponentof “SystemOpenMarketAccount:Accrued interestreceivable”intheCombinedStatementsof Condition.

358 100thAnnualReport|2013 InformationabouttransactionsrelatedtoTreasurysecurities,GSEdebtsecurities, andfederalagencyandGSEMBSduringtheyearsendedDecember31,2013and 2012,issummarizedasfollows(inmillions): Total Federal GSEdebt Bills Notes Bonds Treasury agencyand securities securities GSEMBS 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 Purchases1 - 358,656 206,208 564,864 - 864,538 Sales1 - - - - - - Realizedgains,net2 - - - - - - Principalpaymentsandmaturities - (21) - (21) (19,562) (273,991) Amortizationofpremiumsand accretionofdiscounts,net - (6,024) (9,503) (15,527) (795) (7,008) Inflationadjustmenton inflation-indexedsecurities - 285 645 930 - - BalanceDecember31,2013 $ - $1,495,115 $864,319 $2,359,434 $ 59,122 $1,533,860 YearendedDecember31,2012 Supplementalinformation– parvalueoftransactions: Purchases3 $118,892 $ 383,106 $205,115 $ 707,113 $ - $ 413,160 Sales3 - (492,234) (9,094) (501,328) - - YearendedDecember31,2013 Supplementalinformation– parvalueoftransactions: Purchases3 $ - $ 356,766 $184,956 $ 541,722 $ - $ 837,490 Sales3 - - - - - - 1 Purchasesandsalesmayincludepaymentsandreceiptsrelatedtoprincipal,premiums,discounts,andinflationcompensation adjustmentstothebasisofinflation-indexedsecurities.Theamountreportedassalesincludestherealizedgainsandlosses onsuchtransactions.PurchasesandsalesexcludeMBSTBAtransactionsthataresettledonanetbasis. 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 359 Informationaboutforeigncurrencydenominatedinvestmentsvaluedatamortized costandforeigncurrencymarketexchangeratesatDecember31wasasfollows(in millions): 2013 2012 Euro: Foreigncurrencydeposits $ 7,530 $ 8,925 Securitiespurchasedunder agreementstoresell 2,549 659 Germangovernmentdebtinstruments 2,397 2,133 Frenchgovernmentdebtinstruments 2,397 2,421 Japaneseyen: Foreigncurrencydeposits 2,926 3,553 Japanesegovernmentdebt instruments 5,925 7,182 Total $23,724 $24,873 Accruedinterestreceivableonforeigncurrencydenominatedassetswas$88millionand$99millionasof December31,2013and2012,respectively.These amountsarereportedasacomponentof “SystemOpenMarketAccount:Accrued interestreceivable”intheCombinedStatementsof Condition. Theremainingmaturitydistributionof foreigncurrencydenominatedinvestments atDecember31,2013and2012,wasasfollows(inmillions): Within 16days 91days Over1year Total 15days to90days to1year to5years December31,2013: Euro $ 7,037 $1,803 $2,161 $3,872 $14,873 Japaneseyen 3,116 380 1,870 3,485 8,851 Total $10,153 $2,183 $4,031 $7,357 $23,724 December31,2012: Euro $ 6,593 $1,726 $2,151 $3,668 $14,138 Japaneseyen 3,801 490 2,138 4,306 10,735 Total $10,394 $2,216 $4,289 $7,974 $24,873 Therewerenoforeignexchangecontractsrelatedtoopenmarketoperationsoutstandingasof December31,2013. TheFRBNYentersintocommitmentstobuyforeigngovernmentdebtinstrumentsandrecordstherelatedsecuritiesonasettlement-datebasis.Asof December31,2013,therewerenooutstandingcommitmentstopurchaseforeigngovernmentdebtinstrumentsDuring2013,therewerepurchases,sales,andmaturitiesof foreigngovernmentdebtinstrumentsof $3,539million,$0,and$3,431million, respectively. Inconnectionwithitsforeigncurrencyactivities,theFRBNYmayenterinto transactionsthataresubjecttovaryingdegreesof off-balance-sheetmarketrisk andcounterpartycreditriskthatresultfromtheirfuturesettlement.TheFRBNY controlstheserisksbyobtainingcreditapprovals,establishingtransactionlimits, receivingcollateralinsomecases,andperformingdailymonitoringprocedures. AtDecember31,2013and2012,therewasnobalanceoutstandingunderthe authorizedwarehousingfacility.

360 100thAnnualReport|2013 TherewerenotransactionsrelatedtotheauthorizedreciprocalcurrencyarrangementswiththeBankof CanadaandtheBankof Mexicoduringtheyearsended December31,2013and2012. Foreigncurrencyworkingbalancesheldandforeignexchangecontractsexecuted bytheBanktofacilitateitsinternationalpaymentsandcurrencytransactionsit madeonbehalf of foreigncentralbanksandU.S.officialinstitutioncustomers werenotmaterialasof December31,2013and2012. c.CentralBankLiquiditySwaps U.S.DollarLiquiditySwaps ThetotalforeigncurrencyheldunderU.S.dollarliquidityswapsintheSOMAat December31,2013and2012,was$272millionand$8,889million,respectively. Theremainingmaturitydistributionof U.S.dollarliquidityswapsthatwereallocatedtotheBankatDecember31wasasfollows(inmillions): 2013 2012 Within 16days Within 16days Total Total 15days to90days 15days to90days Euro $113 $159 $272 $1,741 $7,147 $8,888 Japaneseyen - - - 1 - 1 Total $113 $159 $272 $1,742 $7,147 $8,889 ForeignCurrencyLiquiditySwaps Therewerenotransactionsrelatedtotheforeigncurrencyliquidityswapsduring theyearsendedDecember31,2013and2012. d.FairValueofSOMAAssets Thefairvalueamountsbelowarepresentedsolelyforinformationalpurposes. Althoughthefairvalueof SOMAsecurityholdingscanbesubstantiallygreater thanorlessthantherecordedvalueatanypointintime,theseunrealizedgainsor losseshavenoeffectontheabilityof theReserveBanks,asthecentralbank,to meettheirfinancialobligationsandresponsibilities. Thefairvalueof theTreasurysecurities,GSEdebtsecurities,federalagencyand GSEMBS,andforeigngovernmentdebtinstrumentsintheSOMA’sholdingsis subjecttomarketrisk,arisingfrommovementsinmarketvariablessuchasinterest ratesandcreditrisk.Thefairvalueof federalagencyandGSEMBSisalso affectedbytheexpectedrateof prepaymentsof mortgageloansunderlyingthe securities.Thefairvalueof foreigngovernmentdebtinstrumentsisalsoaffectedby currencyrisk.Basedonevaluationsperformedasof December31,2013,thereare nocreditimpairmentsof SOMAsecuritiesholdings.

FederalReserveSystemAudits 361 Thefollowingtablepresentstheamortizedcostandfairvalueof andcumulative unrealizedgains(losses)ontheTreasurysecurities,GSEdebtsecurities,andfederalagencyandGSEMBS,netheldintheSOMAatDecember31(inmillions): 2013 2012 Cumulative Cumulative unrealized unrealized Amortized Amortized Fairvalue gains Fairvalue gains cost cost (losses) (losses) Treasurysecurities: Notes $1,495,115 $1,499,000 $ 3,885 $1,142,219 $1,213,177 $ 70,958 Bonds 864,319 842,336 (21,983) 666,969 761,138 94,169 TotalTreasurysecurities $2,359,434 $2,341,336 $(18,098) $1,809,188 $1,974,315 $165,127 GSEdebtsecurities 59,122 62,236 3,114 79,479 85,004 5,525 FederalagencyandGSEMBS 1,533,860 1,495,572 (38,288) 950,321 993,990 43,669 TotaldomesticSOMAportfolio securitiesholdings $3,952,416 $3,899,144 $(53,272) $2,838,988 $3,053,309 $214,321 Memorandum–Commitmentsfor: PurchasesofTreasurysecurities $ - $ - $ - $ - $ - $ - PurchasesofFederalagencyand GSEMBS 59,350 59,129 (221) 118,215 118,397 182 SalesofFederalagencyand GSEMBS - - - - - - Thefairvalueof TreasurysecuritiesandGSEdebtsecuritieswasdeterminedusing pricingservicesthatprovidemarketconsensuspricesbasedonindicativequotes fromvariousmarketparticipants.Thefairvalueof federalagencyandGSEMBS wasdeterminedusingapricingservicethatutilizesamodel-basedapproachthat considersobservableinputsforsimilarsecurities. AtDecember31,2013and2012,thefairvalueof foreigncurrencydenominated investments,was$23,802millionand$25,042million,respectively.Thefairvalue of governmentdebtinstrumentswasdeterminedusingpricingservicesthatprovidemarketconsensuspricesbasedonindicativequotesfromvariousmarketparticipants.Thefairvalueof foreigncurrencydepositsandsecuritiespurchased underagreementstoresellwasdeterminedbyreferencetomarketinterestrates. Thecostbasisof securitiespurchasedunderagreementstoresell,securitiessold underagreementstorepurchase,andotherinvestmentsheldintheSOMA approximatefairvalue.

362 100thAnnualReport|2013 Thefollowingtableprovidesadditionalinformationontheamortizedcostandfair valuesof thefederalagencyandGSEMBSportfolioatDecember31(inmillions): 2013 2012 Distribution ofMBSholdings bycouponrate Amortized Fairvalue Amortized Fairvalue cost cost 2.0% $ 14,191 $ 13,529 $ 845 $ 846 2.5% 123,832 118,458 37,562 37,766 3.0% 521,809 484,275 160,613 161,757 3.5% 349,689 338,357 179,587 184,752 4.0% 230,256 231,113 137,758 145,955 4.5% 185,825 195,481 262,485 282,182 5.0% 83,290 87,968 125,107 132,213 5.5% 21,496 22,718 39,970 41,819 6.0% 3,051 3,225 5,642 5,888 6.5% 421 448 752 812 Total $1,533,860 $1,495,572 $950,321 $993,990 BecauseSOMAsecuritiesarerecordedatamortizedcost,thechangeinthecumulativeunrealizedgains(losses)isnotreportedintheCombinedStatementsof IncomeandComprehensiveIncome.Thefollowingtablepresentstherealized gainsandthechangeinthecumulativeunrealizedgains(losses),presentedas“Fair valuechangesunrealizedlosses,”of thedomesticsecuritiesholdingsduringthe yearsendedDecember31,2013and2012(inmillions): 2013 2012 Totalportfolio Fairvalue Totalportfolio Fairvalue holdings changes holdings changes realized unrealized realized unrealized gains1 losses gains1 losses Treasurysecurities $ - $(183,225) $13,255 $(1,142) GSEdebtsecurities - (2,411) - (885) Federalagencyand GSEMBS 51 (81,957) 241 (3,568) Total $51 $(267,593) $13,496 $(5,595) 1 Totalportfolioholdingsrealizedgainsarereportedin“Non-interestincome(loss):SystemOpenMarketAccount”inthe CombinedStatementsofIncomeandComprehensiveIncome. Theamountof changeinunrealizedgainsposition,net,relatedtoforeigncurrencydenominatedassetswasadecreaseof $90millionandanincreaseof $3millionfortheyearsendedDecember31,2013and2012,respectively. Treasurysecurities,GSEdebtsecurities,FederalagencyandGSEMBS,andforeigngovernmentdebtinstrumentsareclassifiedasLevel2withintheASC820 hierarchybecausethefairvaluesarebasedonindicativequotesandotherobservableinputsobtainedfromindependentpricingservices.Thefairvaluehierarchy levelof SOMAfinancialassetsisnotnecessarilyanindicationof theriskassociatedwiththoseassets.

FederalReserveSystemAudits 363 (6)InvestmentsHeldbyConsolidatedVariableInterestEntities a.SummaryInformationforConsolidatedVariableInterestEntities Thetotalassetsof consolidatedVIEs,includingcash,cashequivalents,accrued interest,andotherreceivablesatDecember31wereasfollows(inmillions): 2013 2012 ML $1,732 $1,811 MLII 63 61 MLIII 22 22 TALFLLC 109 856 Total $1,926 $2,750 TheFRBNY’sapproximatemaximumexposuretolossatDecember31,2013and 2012,was$1,089millionand$829million,respectively.TheseestimatesincorporatepotentiallossesassociatedwithassetsrecordedontheFRBNY’sbalance sheet,netof thefairvalueof subordinatedinterests(beneficialinterestinconsolidatedVIEs). Theclassificationof significantassetsandliabilitiesof theconsolidatedVIEsat December31wasasfollows(inmillions): 2013 2012 Assets: Short-terminvestments $ 530 $ 690 Commercialmortgageloans 507 466 Swapcontracts 158 408 Non-agencyRMBS 8 2 Otherinvestments1 2 66 Subtotal $1,205 $1,632 Cash,cashequivalents,accruedinterestreceivable,and otherreceivables 721 1,118 TotalinvestmentsheldbyconsolidatedVIEs $1,926 $2,750 Liabilities: BeneficialinterestinconsolidatedVIEs $ 116 $ 803 Otherliabilities2 $ 158 $ 415 1 Investmentswithafairvalueof$1millionasofDecember31,2012wererecategorizedfrom“FederalagencyandGSEMBS” to“Otherinvestments”toconformtothecurrentyearpresentation. 2 Theamountreportedas“Consolidatedvariableinterestentities:Otherliabilities”intheCombinedStatementsofCondition includes$82millionand$341millionrelatedtocashcollateralreceivedonswapcontractsatDecember31,2013and2012, respectively.Theamountalsoincludesaccruedinterestandaccruedotherexpenses. Totalrealizedandunrealizedgains(losses)fortheyearendedDecember31,2013, wereasfollows(inmillions): Totalportfolio Fairvalue Totalportfolio holdingsrealized changesunrealized holdingsrealized/ gains(losses) gains(losses) unrealizedgains(losses) Commercialmortgageloans1 $ 28 $176 $204 Swapcontracts 83 (136) (53) Non-agencyRMBS 10 1 11 Residentialmortgageloans1 (1) 1 - CDOs 2 (2) - Otherinvestments 9 12 21 Total $131 $ 52 $183 1 Substantiallyallunrealizedgains(losses)onthecommercialmortgageloansareattributabletochangesininstrument-specific creditrisk.

364 100thAnnualReport|2013 Totalrealizedandunrealizedgains(losses)fortheyearendedDecember31,2012, wereasfollows(inmillions): Totalportfolio Fairvalue Totalportfolio holdingsrealized changesunrealized holdingsrealized/ gains(losses) gains(losses) unrealizedgains(losses) Short-terminvestments $ - $ 2 $ 2 Commercialmortgageloans1 (101) 394 293 Swapcontracts 75 (165) (90) Non-agencyRMBS (334) 2,038 1,704 Residentialmortgageloans1 (326) 322 (4) CDOs 1,110 4,439 5,549 Otherinvestments2 11 (14) (3) Total $ 435 $7,016 $7,451 1 Substantiallyallunrealizedgains(losses)onthecommercialandresidentialmortgageloansareattributabletochangesin instrument-specificcreditrisk. 2 Investmentswithrealizedgainsof$12million,unrealizedlossesof$13million,andtotalrealized/unrealizedlossesof $1millionasofDecember31,2012wererecategorizedfrom“FederalagencyandGSEMBS”to“Otherinvestments”to conformtothecurrentyearpresentation. Thenetincome(loss)attributabletoML,MLII,MLIII,andTALFLLCforthe yearendedDecember31,2013,wasasfollows(inmillions): ML MLII MLIII TALFLLC Total Interestincome: Portfoliointerestincome $ 2 $4 $ - $ - $ 6 Less:Interestexpense - - - - - Netinterestincome 2 4 - - 6 Non-interestincome: Portfolioholdingsgains,net 183 - - - 183 Realizedlossesonbeneficialinterestin consolidatedVIEs - - - (573)1 (573) Unrealizedgains(losses)onbeneficial interestinconsolidatedVIEs - (1) - 5741 573 Netnon-interestincome(loss) 183 (1) - 1 183 Totalnetinterestincomeandnon-interest income 185 3 - 1 189 Less:Professionalfees 6 1 - 1 8 NetincomeattributabletoconsolidatedVIEs $179 $2 $ - $ -2 $181 1 TheTALFLLC’srealizedandunrealizedlossonbeneficialinterestrepresentsTreasury’sfinancialinterestinthenetincomeof TALFLLCfortheyearendedDecember31,2013. 1 AdditionalinformationregardingTALF-relatedincomerecordedbytheFRBNYispresentedinNote4.

FederalReserveSystemAudits 365 Thenetincome(loss)attributabletoML,MLII,MLIII,andTALFfortheyear endedDecember31,2012,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) -1 (3,358) Unrealizedgains(losses)on beneficialinterestinconsolidatedVIEs - 216 801 (4)1 1,013 Netnon-interestincome(loss) 553 1,155 3,402 (4) 5,106 Totalnetinterestincomeand non-interestincome(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’srealizedandunrealizedlossonbeneficialinterestrepresentsTreasury’sfinancialinterestinthenetincomeof TALFLLCfortheyearendedDecember31,2012. 2 AdditionalinformationregardingTALF-relatedincomerecordedbytheFRBNYispresentedinNote4. Followingisasummaryof theconsolidatedVIEs’subordinatedfinancialinterest fortheyearsendedDecember31,2013and2012(inmillions): MLII ML MLIII TALF deferred subordinated equity financial Total purchase loan contribution interest price 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) Payments1 (1,430) (1,566) (8,544) - (11,540) Fairvalue,December31,2012 $ - $ 10 $ 7 $786 $ 803 Interestaccruedandcapitalized $ - $ - $ - $ - $ - Realized(gain)/loss - - - 573 573 Unrealized(gain)/loss - 1 - (574) (573) Payments1 - - - (687) (687) Fairvalue,atDecember31,2013 $ - $ 11 $ 7 $ 98 $ 116 1 ForMLincludespaymentsof$1,150millionofprincipaland$280millionofinterest.ForMLIIincludespaymentsof $1,000millionofprincipal,$113millionofinterest,and$453millionofvariabledeferredpurchaseprice.ForMLIIIincludes paymentsof$5,000millionofprincipal,$639millionofinterest,and$2,905millionofexcessamounts.ForTALFLLCincludes paymentsof$100millionofprincipal,$13millionofinterest,and$574millionofcontingentinterest. b.MaidenLaneLLC Tofacilitatethemergerof TheBearStearnsCompanies,Inc.(BearStearns)and JPMorganChase&Co.(JPMC),theFRBNYextendedcredittoMLin June2008.MLisaDelawareLLCformedbytheFRBNYtoacquirecertainassets of BearStearnsandtomanagethoseassets.TheassetsacquiredbyMLwerevaluedat$29.9billionasof March14,2008,thedatethattheFRBNYcommittedto thetransaction,andlargelyconsistedof federalagencyandGSEMBS,nonagencyresidentialmortgage-backsecurities(RMBS),commercialandresidential mortgageloans,andderivativesandassociatedhedges.

366 100thAnnualReport|2013 TheFRBNYextendedaseniorloanof approximately$28.8billionandJPMC extendedasubordinatedloanof $1.15billiontofinancetheacquisitionof the assets.OnJune14,2012,theremainingoutstandingbalanceof theseniorloan fromtheFRBNYtoMLwasrepaidinfull,withinterest.OnNovember15,2012, theremainingoutstandingbalanceof thesubordinatedloanfromJPMCwas repaidinfull,withinterest.TheFRBNYwillcontinuetoselltheremainingassets fromtheMLportfolioasmarketconditionswarrantandif thesalesrepresent goodvalueforthepublic.InaccordancewiththeMLagreements,proceedsfrom futureassetsaleswillbedistributedtotheFRBNYascontingentinterestafterall derivativeinstrumentsinMLhavebeenterminatedandpaidorsoldfromthe portfolio. Thefollowingisadescriptionof thesignificantholdingsatDecember31,2013, andtheassociatedriskforeachholding: i.DebtSecurities MLhasinvestmentsinshort-terminstrumentswithmaturitiesof greaterthan threemonthsandlessthanoneyearwhenacquired.Asof December31,2013, ML’sshort-terminstrumentsconsistedof approximately$530millioninU.S. Treasurybills. ii.CommercialMortgageLoans Commercialmortgageloansaresubjecttoahighdegreeof creditriskbecauseof exposuretofinanciallossresultingfromfailurebyacounterpartytomeetitscontractualobligations.Defaultratesaresubjecttoawidevarietyof factors,including,butnotlimitedto,propertyperformance,propertymanagement,supplyand demand,constructiontrends,consumerbehavior,regionaleconomicconditions, interestrates,andotherfactors. TheperformanceprofileforthecommercialmortgageloansatDecember31,2013, wasasfollows(inmillions): Fairvalueasa Unpaidprincipal percentageof Fairvalue balance unpaidprincipal balance Commercialmortgageloans: Performingloans $ 28 $ 28 99.6% Non-performing/non-accrualloans1 512 479 93.5% Total $540 $507 93.8% 1 Non-performing/non-accrualloansincludeloanswithpaymentspastduegreaterthan90days. CommercialmortgageloansheldbyMLarecomposedof differentlevelsof subordinationwithrespecttotheunderlyingproperties,andrelativetoeachother. Seniormortgageloansaresecuredpropertyloansevidencedbyafirstmortgage thatisseniortoanysubordinateormezzaninefinancing.Subordinatemortgage interests,sometimesknownasBNotes,areloansevidencedbyajuniornoteora juniorparticipationinamortgageloan.Mezzanineloansareloansmadetothe directorindirectownerof theproperty-owningentity.Mezzanineloansarenot securedbyamortgageonthepropertybutratherbyapledgeof themezzanine borrower’sdirectorindirectownershipinterestintheproperty-owningentity.As of December31,2013,MLhadunpaidprincipalbalancesof approximately $12millioninseniormortgageloansand$528millioninmezzanineloans.

FederalReserveSystemAudits 367 Asof December31,2013,thepropertytypesof commercialmortgageloanswere concentratedintheofficesectorwithonesponsorrepresentingallof thetotal unpaidprincipalbalance. iii.DerivativeInstruments Derivativecontractsareinstruments,suchasswapcontracts,thatderivetheirvalue fromunderlyingassets,indexes,referencerates,oracombinationof thesefactors. TheMLportfolioiscomposedof derivativefinancialinstrumentsincludedina totalreturnswap(TRS)agreementwithJPMC.MLandJPMCenteredintothe TRSwithreferenceobligationsrepresentingcreditdefaultswaps(CDS)primarily oncommercialmortgage-backedsecurities(CMBS)andRMBS,withvariousmarketparticipants,includingJPMC. Onanongoingbasis,MLpledgescollateralforcreditorliquidityrelatedshortfalls basedon20percentof thenotionalamountof soldCDSprotectionand10percentof thepresentvalueof futurepremiumsonpurchasedCDSprotection.FailuretopostthiscollateralconstitutesaTRSeventof default.Separately,MLand JPMCengageinbilateralpostingof collateraltocoverthenetmark-to-market (MTM)variationsintheswapportfolio.MLonlynetsthecollateralreceivedfrom JPMCfromthebilateralMTMpostingforthereferenceobligationsforwhich JPMCisthecounterparty. Thevaluesof ML’scashequivalents,purchasedbythere-hypothecationof cash collateralassociatedwiththeTRS,were$149millionand$477million,forthe yearsendedDecember31,2013and2012,respectively.Inaddition,MLhas pledged$124millionand$231millionof USTreasurynotestoJPMCasof December31,2013and2012,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

368 100thAnnualReport|2013 formof cashandmarketablesecuritiestocoverJPMCcounterpartyriskaspartof theTRSagreementwithJPMC.MLremainsexposedtocreditriskforcounterparties,otherthanJPMC,relatedtotheswapsthatunderlietheTRS. MLhasenteredintoanInternationalSwapsandDerivativesAssociation,Inc. masternettingagreementwithJPMCinconnectionwiththeTRS.Thisagreement providesMLwiththerighttoliquidatesecuritiesheldascollateralandtooffset receivablesandpayableswithJPMCintheeventof default.Thisagreementalso establishesthemethodfordeterminingthenetamountof receivablesandpayables thatMLisentitledtoreceivefromorowestoeachcounterpartytotheswapsthat underlietheTRSbasedupontherelevantfairvalueof theCDS. ForthederivativebalancesreportedintheCombinedStatementsof Condition, MLoffsetsitsassetandliabilitypositionsheldwiththesamecounterparty.In addition,MLoffsetsthecashcollateralheldwithJPMCagainstanynetliabilities of JPMCwithMLundertheTRS.Asof December31,2013and2012,therewere noamountssubjecttoanenforceablemasternettingagreementthatwerenotoffsetintheCombinedStatementsof Condition. Thefollowingtablesummarizesthefairvalueandnotionalamountsof derivative instrumentsbycontracttypeonagrossbasisasof December31,2013and2012, whichisreportedasacomponentof “Investmentsheldbyconsolidatedvariable interestentities”intheCombinedStatementsof Condition(inmillions,except contractdata): 2013 2012 Gross Gross Gross Gross Notional Notional derivative derivative derivative derivative amounts3 amounts3 assets liabilities assets liabilities Creditderivatives: CDS1,2 $345 $(193) $899 $816 $(343) $1,755 Amountsoffsetinthe CombinedStatementsof Condition Counterpartynetting (120) 120 (272) 272 Cashcollateral (67) - (136) - Netamountsinthe Combined Statementsof Condition $158 $ (73) $408 $ (71) 1 CDSfairvaluesasofDecember31,2013forassetsandliabilitiesincludeinterestreceivablesof$15millionandpayablesof $2million.CDSfairvaluesasofDecember31,2012forassetsandliabilitiesincludesinterestreceivablesof$15millionand payablesof$9million. 2 Therewere269and470CDScontractsoutstandingasofDecember31,2013and2012,respectively. 3 Representsthesumofgrosslongandgrossshortnotionalderivativecontracts.Thechangeinnotionalamountsis representativeofthevolumeofactivityfortheyearendedDecember31,2013.

FederalReserveSystemAudits 369 Thetablebelowsummarizescertaininformationregardingprotectionsoldthrough CDSasof December31(inmillions): Maximumpotentialpayout/notional 2013 2012 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-) $ – $ – $ – $ 13 $ 13 $ (3) $ 52 $ (5) Non-investmentgrade(BB+or lower) – – – 293 293 (188) 438 (329) Totalcreditprotectionsold $ – $ – $ – $306 $306 $(191) $490 $(334) Thetablebelowsummarizescertaininformationregardingprotectionbought throughCDSasof December31(inmillions): Maximumpotentialrecovery/notional 2013 2012 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-) $ – $ – $ 5 $ 51 $ 56 $ 2 $ 150 $ 27 Non-investmentgrade(BB+or lower) – – 9 528 537 327 1,115 774 Totalcreditprotectionbought $ – $ – $14 $579 $593 $329 $1,265 $801 CurrencyRisk Currencyriskistheriskof financiallossresultingfromexposuretochangesin exchangeratesbetweentwocurrencies.Underthetermsof theTRS,JPMCmay postcashcollateralintheformof eitherU.S.dollarorEurodenominatedcurrenciestocoverthenetMTMvariationintheswapportfolio.StartinginDecember2012,JPMCbeganpostingcollateralinEurocurrency.Thisriskismitigated bydailyvariationmarginupdatesthatcapturethemovementinthevalueof the swapportfolioinadditiontoanymovementinexchangeratesontheswapcollateral.SwapcollateralreceivedthatisdenominatedinaforeigncurrencyistranslatedintoU.S.dollaramountsusingtheprevailingexchangerateasof thedateof thecombinedfinancialstatements.Thereisnogainorlossassociatedwiththisforeigndenominatedcollateralastheassetandliabilitypositionsassociatedwithit areoffsetting. c.MaidenLaneIILLC TheFRBNYextendedcredittoMLII,aDelawareLLCformedtopurchasenonagencyRMBSfromthereinvestmentpoolof thesecuritieslendingportfoliosof severalregulatedU.S.insurancesubsidiariesof AmericanInternationalGroup, Inc.(AIG).MLIIborrowed$19.5billionfromtheFRBNYandusedtheproceeds topurchasenon-agencyRMBSthathadanapproximatefairvalueof $20.8billion asof October31,2008,fromAIG’sdomesticinsurancesubsidiaries.TheFRBNY isthesoleandmanagingmemberandthecontrollingpartyof MLIIandwill

370 100thAnnualReport|2013 remainasthecontrollingpartyaslongastheFRBNYretainsaneconomicinterestinMLII.Aspartof theagreement,theAIGsubsidiariesalsoreceivedfrom MLIIafixeddeferredpurchasepriceof upto$1.0billion,plusinterestonany suchfixeddeferredpurchasepriceoutstanding. OnFebruary28,2012,theFRBNYannouncedthesaleof theremainingsecurities intheMLIIportfolio.OnMarch1,2012,theloanfromtheFRBNYtoMLII wasrepaidinfullwithinterest,inaccordancewiththetermsof thefacility.On March15,2012,theremainingportionof thefixeddeferredpurchasepriceplus interestowedtotheAIGsubsidiarieswasrepaidinfull.Concurrently,distributionsweremadetotheBankandtheAIGsubsidiariesintheformof contingent interestandvariabledeferredpurchasepricefortheamountsof $2.3billionand $0.5billion,respectively. OnMarch19,2012,MLIIwasdissolvedandtheFRBNYbeganthewindupprocessinaccordancewithandasrequiredbyDelawarelawandtheagreementsgoverningMLII.WindinguprequiresMLIItopayormakereasonableprovisionto payallclaimsandobligations.Anyremainingproceedswillbedividedbetweenthe Bank,whichisentitledtoreceivefive-sixths,andtheAIGsubsidiaries,whichare entitledtoreceiveone-sixth.Whileitsaffairsarebeingwoundup,theMLIIis retainingcertainassetstomeettrailingexpensesandotherobligationsasrequired bylaw.Dissolutioncostsarenotexpectedtobematerial. d.MaidenLaneIIILLC TheFRBNYextendedcredittoMLIII,aDelawareLLCformedtopurchaseABS CDOsfromcertainthird-partycounterpartiesof AIGFinancialProductsCorp. MLIIIborrowedapproximately$24.3billionfromtheFRBNY,andAIGprovidedanequitycontributionof $5.0billiontoMLIII.Theproceedswereusedto purchaseABSCDOswithafairvalueof $29.6billion.OnApril3,2012,the FRBNYrevisedMLIII’sinvestmentobjectivetoallowforassetsalesandbegan conductingsuchsalesshortlythereafter.OnJune14,2012,theFRBNY announcedthatitsloantoMLIIIhadbeenrepaidinfull,withinterest.On July16,2012,theFRBYannouncedthatnetproceedsfromadditionalsalesof securitiesinMLIIIenabledthefullrepaymentof AIG’sequitycontributionplus accruedinterestandprovidedresidualprofitstotheFRBNYandAIG.During 2012,distributionsweremadetotheBankandAIGintheformof contingent interestandexcessamountsintheamountsof $5.9billionand$2.9billion,respectively.OnAugust23,2012,theFRBNYannouncedthatallremainingsecuritiesin MLIIIweresold. OnSeptember10,2012,MLIIIwasdissolvedandtheFRBNYbeganthewindup processinaccordancewithandasrequiredbyDelawarelawandtheagreements governingMLIII.WindinguprequiresMLIIItopayormakereasonableprovisiontopayallclaimsandobligations.Anyremainingproceedswillbedivided betweentheFRBNY,whichisentitledtoreceivetwo-thirds,andAIG(orits assignee),whichisentitledtoreceiveone-third,inaccordancewiththeagreement. Whileitsaffairsarebeingwoundup,MLIIIisretainingcertainassetstomeet trailingexpensesandotherobligationsasrequiredbylaw.Dissolutioncostsare notexpectedtobematerial. e.TALFLLC CashreceiptsresultingfromtheputoptionfeespaidtoTALFLLCareinvestedin thefollowingtypesof U.S.dollar-denominatedshort-terminvestmentsandcash equivalentseligibleforpurchasebytheLLC:(1)U.S.Treasurysecurities,(2)fed-

FederalReserveSystemAudits 371 eralagencysecuritiesthataresenior,negotiabledebtobligationsof FannieMae, FreddieMac,FederalHomeLoanBanks,andFederalFarmCreditBanks,which haveafixedrateof interest,(3)repurchaseagreementsthatarecollateralizedby Treasuryandfederalagencysecuritiesandfixed-rateagencymortgage-backed securities,and(4)moneymarketmutualfundsregisteredwiththeSecuritiesand ExchangeCommissionandregulatedunderRule2a-7of theInvestmentCompany ActthatinvestexclusivelyinU.S.Treasuryandfederalagencysecurities.Cashmay alsobeinvestedinademandinterest-bearingaccountheldatTheBankof New YorkMellon.ProceedsfromtheTreasury’sloanwerealsoinvestedintheseshortterminvestmentsandcashequivalentsuntiltheoutstandingprincipalontheloan wasrepaidinfullasdescribedbelow. OnJanuary15,2013,theTreasuryandFRBNYeliminatedtheTreasury’sand FRBNY’sfundingcommitmentstoTALFLLC.Thesecommitmentswerenolongerdeemednecessarybecausethecashequivalentsandshort-terminvestiments heldbyTALFLLCexceededtheamountof TALFloansthenoutstanding.In addition,theagreementrelatedtodistributionof proceedswasamendedtolimit fundingof thecashcollateralaccounttoanamountequaltotheoutstandingprincipalplusaccruedinterestof allTALFloansasof thepaymentdetermination date;allaccumulatedfundinginexcessof thatamountwouldthenbedistributed accordingtothedistributionprioritiesdescribedintheagreementsgoverning TALFLLC. PursuanttothisagreementonFebruary6,2013,TALFLLCrepaidinfulltheoutstandingprincipalandaccruedinterestontheTreasuryloan.Duringtheyear endedDecember31,2013,additionaldistributionsweremadetotheTreasuryand FRBNYascontingentinterestintheamountsof $573millionand$64million, respectively. f.FairValueMeasurement TheconsolidatedVIEshaveadoptedASC820andASC825andhaveelectedthe fairvalueoptionforallsecuritiesandmortgageloansheldbyMLandTALF LLC.MLIIandMLIIIqualifyasnonregisteredinvestmentcompaniesunderthe provisionsof ASC946,andtherefore,allinvestmentsarerecordedatfairvaluein accordancewithASC820.Inaddition,theFRBNYhaselectedtorecordthebeneficialinterestsinMLII,MLIII,andTALFLLCatfairvalue. Theaccountingandclassificationof theseinvestmentsappropriatelyreflectthe VIEs’andtheFRBNY’sintentwithrespecttothepurposeof theinvestmentsand mostcloselyreflecttheamountof theassetsavailabletoliquidatetheentities’ obligations. i.Determinationof FairValue TheconsolidatedVIEsvaluetheirinvestmentsonthebasisof thelastavailablebid pricesorcurrentmarketquotationsprovidedbydealersorpricingservicesselected bythedesignatedinvestmentmanagers.Todeterminethevalueof aparticular investment,pricingservicesmayuseinformationontransactionsinsuchinvestments;quotationsfromdealers;pricingmetrics;markettransactionsincomparableinvestments;relationshipsobservedinthemarketbetweeninvestments;and calculatedyieldmeasuresbasedonvaluationmethodologiescommonlyemployed inthemarketforsuchinvestments. Marketquotationsmaynotrepresentfairvalueincircumstancesinwhichthe investmentmanagerbelievesthatfactsandcircumstancesapplicabletoanissuer,a

372 100thAnnualReport|2013 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.Thesevaluationsalsoincorporatepricingmetricsderivedfromthereportedperformanceof theuniverseof similarinvestmentsandfromobservationsandestimatesof market data.Becauseexternalpriceinformationisnotavailable,market-basedmodelsare usedtovaluethesesecurities.Keyinputstothemodelmayincludemarketspreads oryieldestimatesforcomparableinstruments,performancedata(i.e.prepayment rates,defaultrates,andlossseverity),valuationestimatesforunderlyingproperty collateral,projectedcashflows,andotherrelevantcontractualfeatures.Because thereislackof observablepricing,somesecuritiesandinvestmentloansthatare carriedatfairvalueareclassifiedwithinLevel3. FortheCDSagreements,allof whicharecategorizedasLevel3assetsandliabilities,therearevariousvaluationmethodologies.Ineachcase,thefairvalueof the instrumentunderlyingtheswapisasignificantinputusedtoderivethefairvalue of theswap.Whentherearebrokerordealerpricesavailablefortheunderlying instruments,thefairvalueof theswapisderivedbasedonthoseprices.Whenthe instrumentunderlyingtheswapisamarketindex(i.e.CMBSindex),theclosing marketindexprice,whichcanalsobeexpressedasacreditspread,isusedtodeterminethefairvalueof theswap.Intheremainingcases,thefairvalueof theunderlyinginstrumentisprincipallybasedoninputsandassumptionsnotobservablein themarket(i.e.discountrates,prepaymentrates,defaultrates,andrecoveryrates).

FederalReserveSystemAudits 373 MLInputsforLevel3AssetsandLiabilities Thefollowingtablepresentsthevaluationtechniquesandrangesof significant unobservableinputsgenerallyusedtodeterminethefairvaluesof ML’sLevel3 assetsandliabilitiesasof December31,2013(inmillions,exceptforinputvalues): Principal Unobservable Rangeof Weighted Investment Fairvalue valuation inputs inputvalues average3 technique Commercialmortgage $507 Discounted Discountrate 4%–13% 12% loans cashflows Property 7% 7% capitalization rate Netoperating 3%–5% 4% income growthrate CDS1 $152 Discounted Creditspreads2 2,259bps– 6,299bps cashflows 8,870bps Discountrate 5%–25% 15% Constant 0%–17% 3% prepaymentrate Constantdefaultrate 0%–30% 6% Lossseverity 40%–95% 54% 1 Swapassetsandliabilitiesarepresentednetforthepurposesofthistable. 2 Impliedspreadonclosingmarketpricesforindexpositions. 3 Weightedaveragesarecalculatedbasedonthefairvalueoftherespectiveinstruments. Thefollowingtablepresentsthevaluationtechniquesandrangesof significant unobservableinputsgenerallyusedtodeterminethefairvaluesof ML’sLevel3 assetsandliabilitiesasof December31,2012(inmillions,exceptforinputvalues): Principal Unobservable Rangeof Weighted Investment Fairvalue valuation inputs inputvalues average3 technique Commercialmortgage $466 Discounted Discountrate 6%–20% 14% loans cashflows Property 6%–10% 7% capitalization rate Netoperating 3%–7% 3% income growthrate CDS1 $473 Discounted Creditspreads2 100bps– 4,995bps cashflows 6,451bps Discountrate 0%–47% 15% Constant 0%–20% 1% prepaymentrate Constantdefaultrate 0%–34% 7% Lossseverity 40%–80% 49% 1 Swapassetsandliabilitiesarepresentednetforthepurposesofthistable. 2 Impliedspreadonclosingmarketpricesforindexpositions. 3 Weightedaveragesarecalculatedbasedonthefairvalueoftherespectiveinstruments.

374 100thAnnualReport|2013 Sensitivityof MLLevel3FairValueMeasurementstoChangesinUnobservable Inputs Thefollowingprovidesageneraldescriptionof theimpactof achangeinanunobservableinputonthefairvaluemeasurementandtheinterrelationshipof unobservableinputs. I. MortgageLoans Ingeneral,anincreaseinisolationineitherthediscountrateortheproperty capitalizationrate,whichistheratiobetweenthenetoperatingincomeproducedbyanassetanditscurrentfairvalue,wouldresultinadecreaseinthe fairvaluemeasurement;whileanincreaseinnetoperatingincomegrowthrate, inisolationwouldresultinanincreaseinthefairvaluemeasurement.Foreach of therelationshipsdescribedabove,theinversewouldalsogenerallyapply. 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.

FederalReserveSystemAudits 375 ThefollowingtablespresentthefinancialinstrumentsrecordedinVIEsatfair valueasof December31byASC820hierarchy(inmillions): 2013 Total Level11 Level21 Level3 Netting2 fairvalue Assets: Cashequivalents3 $ 569 $ - $ - $ - $ 569 Short-terminvestments 530 - - - 530 Commercialmortgageloans - - 507 - 507 Swapcontracts - - 345 (187) 158 Non-agencyRMBS - 2 6 - 8 Otherinvestments - - 2 - 2 Totalassets $1,099 $ 2 $860 $(187) $1,774 Liabilities: BeneficialinterestinconsolidatedVIEs $ - $116 $ - $ - $ 116 Swapcontracts - - 193 (120) 73 Totalliabilities $ - $116 $193 $(120) $ 189 1 TherewerenotransfersbetweenLevel1andLevel2duringtheyearendedDecember31,2013. 2 Derivativereceivablesandpayablesandtherelatedcashcollateralreceivedandpaidareshownnetwhenamasternetting agreementexists. 3 Cashequivalentsconsistprimarilyofmoneymarketfunds. 2012 Total Level11 Level21 Level3 Netting2 fairvalue Assets: Cashequivalents3 $ 634 $ - $ - $ - $ 634 Short-terminvestments 454 236 - - 690 Commercialmortgageloans - - 466 - 466 Swapcontracts - - 816 (408) 408 Non-agencyRMBS - 2 - - 2 Otherinvestments4 - 11 55 - 66 Totalassets $1,088 $249 $1,337 $(408) $2,266 Liabilities: Beneficialinterestin consolidatedVIEs $ - $803 $ - $ - $ 803 Swapcontracts - - 343 (272) 71 Totalliabilities $ - $803 $ 343 $(272) $ 874 1 TherewerenosignificanttransfersbetweenLevel1andLevel2duringtheyearendedDecember31,2012. 2 Derivativereceivablesandpayablesandtherelatedcashcollateralreceivedandpaidareshownnettedwhenamasternetting agreementexists. 3 Cashequivalentsconsistprimarilyofmoneymarketfundsandrepurchaseagreements. 4 Investmentswithafairvalueof$1millionthatwereclassifiedasaLevel2instrumentasofDecember31,2012were recategorizedfrom“FederalagencyandGSEMBS”to“Otherinvestments”toconformtothecurrentyearpresentation.

376 100thAnnualReport|2013 Thetablebelowpresentsareconciliationof allassetsandliabilitiesmeasuredat fairvalueonarecurringbasisusingsignificantunobservableinputs(Level3)asof December31,2013(inmillions).Unrealizedgainsandlossesrelatedtothose assetsstillheldatDecember31,2013arereportedasacomponentof “Investmentsheldbyconsolidatedvariableinterestentities,net”intheCombinedStatementsof Condition. 2013 Changein unrealized gains(losses) Purchases, Net relatedto Fairvalue sales, realized/ Gross Gross Fairvalue financial December31, issuances, unrealized transfers transfers December31, instruments 2012 and gains in1,2 out1,2 2013 heldat settlements, (losses) December31, net 2013 Assets: Commercialmortgage loans $466 $(163) $204 $- $ - $507 $183 Non-agencyRMBS - 4 - 2 - 6 - CDOs - - - - - - (2) Otherinvestments 55 (73) 18 2 - 2 (2) Totalassets $521 $(232) $222 $4 $- $515 $179 Netswapcontracts3 $473 $(268) $(53) $- $- $152 $(53) 1 Theamountoftransfersisbasedonthefairvaluesofthetransferredassetsatthebeginningofthereportingperiod. 2 Non-agencyRMBSandotherinvestments,withDecember31,2012fairvaluesof$2and$2,respectively,weretransferred fromLevel2toLevel3becausetheyarevaluedatDecember31,2013basedonnon-observableinputs(Level3).These investmentswerevaluedintheprioryearbasedonquotedpricesforidenticalorsimilarassetsinnon-activemarketsor model-basedtechniquesforwhichallsignificantinputswereobservable(Level2). 3 Level3derivativeassetsandliabilitiesarepresentednetforpurposesofthistable. Thefollowingtablepresentsthegrosscomponentsof purchases,sales,issuances, andsettlements,net,shownfortheyearendedDecember31,2013(inmillions): 2013 Purchases, sales, issuances, Purchases Sales Issuances Settlements2 and settlements, net Assets: Commercialmortgageloans $- $ (88) - (75) (163) Non-agencyRMBS 4 - - - (4) CDOs 3 (5) $ - $ 2 $ - Otherinvestments - (74) - 1 (73) Totalassets $7 $(167) $ - $ (72) $(232) Netswapcontracts1 $- $(153) $ - $(115) $(268) 1 Level3swapassetsandliabilitiesarepresentednetforthepurposeofthistable. 2 Includespaydowns.

FederalReserveSystemAudits 377 Thetablebelowpresentsareconciliationof allassetsandliabilitiesmeasuredat fairvalueonarecurringbasisusingsignificantunobservableinputs(Level3)asof December31,2012(inmillions).Unrealizedgainsandlossesrelatedtothose assetsstillheldatDecember31,2012arereportedasacomponentof “Investmentsheldbyconsolidatedvariableinterestentities,net”intheCombinedStatementsof Condition. Changein 2012 unrealized gains(losses) relatedto Net Purchases, financial Fairvalue realized/ Gross Gross Fairvalue sales,and instruments December31, unrealized transfers transfers December31, settlements, heldat 2011 gains in1,2 out1,2 2012 net December31, (losses) 2012 Assets: Commercialmortgage loans $ 1,397 (1,187) $ 256 $ - $ - $466 $135 Non-agencyRMBS 5,410 (6,347) 937 - - - - Residentialmortgage loans 378 (374) (4) - - - (1) CDOs 17,687 $(23,196) 5,509 - - - (2) 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 3toLevel2becausetheyarevaluedatDecember31,2012,basedonmodel-basedtechniquesforwhichallsignificantinputs areobservable(Level2).Theseinvestmentswerevaluedintheprioryearonnon-observablemodelbasedinputs(Level3). Therewerealsocertainotherinvestmentsforwhichvaluationinputsbecamelessobservableduringtheyearended December31,2012,whichresultedin$10millionintransfersfromLevel2toLevel3.Therewerenoothertransfersbetween Level2andLevel3duringthecurrentyear. 3 Level3derivativeassetsandliabilitiesarepresentednetforpurposesofthistable.

378 100thAnnualReport|2013 Thefollowingtablepresentsthegrosscomponentsof purchases,sales,issuances, andsettlements,net,shownfortheyearendedDecember31,2012(inmillions): 2012 Purchases, sales, issuances, Purchases Sales Issuances Settlements2 and settlements, net Assets: Commercialmortgageloans $ - $ (1,119) $ - $ (68) $ (1,187) Non-agencyRMBS - (6,221) - (126) (6,347) Residentialmortgageloans - (370) - (4) (374) CDOs - (22,206) - (990) $(23,196) 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 Includespaydowns. g.ProfessionalFees TheconsolidatedVIEshaverecordedcostsforprofessionalservicesprovided, amongothers,byseveralnationallyrecognizedinstitutionsthatserveasinvestment managers,administrators,andcustodiansfortheVIEs’assets.Thefeeschargedby theinvestmentmanagers,custodians,administrators,auditors,attorneys,and otherserviceproviders,arerecordedin“OperatingExpenses:Other”intheCombinedStatementsof IncomeandComprehensiveIncome. (7)BankPremises,Equipment,andSoftware BankpremisesandequipmentatDecember31wereasfollows(inmillions): 2013 2012 Bankpremisesandequipment: Landandlandimprovements $ 395 $ 394 Buildings 2,693 2,659 Buildingmachineryandequipment 554 520 Constructioninprogress 37 27 Furnitureandequipment 1,006 1,024 Subtotal 4,685 4,624 Accumulateddepreciation (2,032) (1,948) Bankpremisesandequipment,net $2,653 $2,676 Depreciationexpense,fortheyearsendedDecember31 $ 202 $ 218 BankpremisesandequipmentatDecember31includedthefollowingamountsfor capitalizedleases(inmillions): 2013 2012 Leasedpremisesandequipmentundercapitalleases $27 $33 Accumulateddepreciation (18) (20) Leasedpremisesandequipmentundercapitalleases,net $ 9 $13 Depreciationexpenserelatedtoleasedpremises andequipmentundercapitalleases $ 6 $ 7

FederalReserveSystemAudits 379 TheReserveBanksleasespacetooutsidetenantswithremainingleasetermsrangingfrom1to11years.Rentalincomefromsuchleaseswas$35millionand $37millionfortheyearsendedDecember31,2013and2012,respectively,andis reportedasacomponentof “Non-interestincome:Other”intheCombinedStatementsof IncomeandComprehensiveIncome.Futureminimumleasepayments thattheReserveBankswillreceiveundernoncancelableleaseagreementsinexistenceatDecember31,2013,areasfollows(inmillions): 2014 $ 33 2015 29 2016 23 2017 18 2018 14 Thereafter 36 Total $153 TheReserveBankshadcapitalizedsoftwareassets,netof amortization,of $356millionand$213millionatDecember31,2013and2012,respectively.Amortizationexpensewas$73millionand$64millionfortheyearsendedDecember31, 2013and2012,respectively.Capitalizedsoftwareassetsarereportedasacomponentof “Otherassets”intheCombinedStatementsof Conditionandtherelated amortizationisreportedasacomponentof “Operatingexpenses:Other”inthe CombinedStatementsof IncomeandComprehensiveIncome. Asaresultof theFederalReserveBankof Cleveland’s(FRBC)restructuringplan discussedinNote12,theFRBCsolditsPittburghfacilityduringthethirdquarter of 2013.Thissaleresultedina$1.9millionloss,of which$0.2millionisreflected in“Operatingexpense:Occupancy”and$1.7millionisreflectedin“Operating expense:Other”intheStatementsof IncomeandComprehensiveIncome. In2008afterrelocatingoperationstoanewfacility,theFederalReserveBankof SanFrancisco(FRBSF)classifieditsformerSeattlebranchofficebuildingasheld forsale,andthebuildingwasreportedatfairvalueasacomponentof “Other Assets”intheStatementsof Condition.InApril2012,theFRBSFcompletedthe donationof thebuildingtotheUnitedStatesGeneralServicesAdministration (GSA).Underthedonationagreement,theFRBSFmustcontinuetomaintainthe buildingforuptofifteenmonthsfromthetimeGSAtakesownership.TheFRBSF recordedanadditionalimpairmentof $3.4millionduringtheyearendedDecember31,2012,toreflectthefinaldispositionof thisbuilding,whichwasrecordedas acomponentof “Operatingexpenses:Other”intheStatementsof Incomeand ComprehensiveIncome. (8)CommitmentsandContingencies Inconductingitsoperations,theReserveBanksenterintocontractualcommitments,normallywithfixedexpirationdatesorterminationprovisions,atspecific ratesandforspecificpurposes. AtDecember31,2013,theReserveBankswereobligatedundernoncancelable leasesforpremisesandequipmentwithremainingtermsrangingfrom1to approximately9years.Theseleasesprovideforincreasedleasepaymentsbased uponincreasesinrealestatetaxes,operatingcosts,orselectedpriceindexes. Rentalexpenseunderoperatingleasesforcertainoperatingfacilities,warehouses, anddataprocessingandofficeequipment(includingtaxes,insurance,andmainte-

380 100thAnnualReport|2013 nancewhenincludedinrent),netof subleaserentals,was$17millionand$16millionfortheyearsendedDecember31,2013and2012,respectively. Futureminimumleasepaymentsundernoncancelableoperatingleases,netof subleaserentals,withremainingtermsof oneyearormore,atDecember31,2013,are asfollows(inmillions): 2014 $ 5 2015 5 2016 2 2017 2 2018 2 Thereafter 4 Futureminimumrentalpayments $20 AtDecember31,2013,theReserveBankshadunrecordedunconditionalpurchase commitmentsandlong-termobligationsextendingthroughtheyear2022witha remainingfixedcommitmentof $240million.Purchasesof $37millionand $28millionweremadeagainstthesecommitmentsduring2013and2012,respectively.Thesecommitmentsareformaintenanceof currencyprocessingmachines andhavevariableand/orfixedcomponents.Thevariableportionof thecommitmentsisforadditionalservicesabovethefixedcontractualservicelimits.Thefixed paymentsforthenextfiveyearsunderthesecommitmentsareasfollows(in millions): 2014 $23 2015 27 2016 26 2017 26 2018 26 TheReserveBanksareinvolvedincertainlegalactionsandclaimsarisinginthe ordinarycourseof business.Althoughitisdifficulttopredicttheultimateoutcomeof theseactions,inmanagement’sopinion,basedondiscussionswithcounsel,thelegalactionsandclaimswillberesolvedwithoutmaterialadverseeffecton thefinancialpositionorresultsof operationsof theReserveBanks. OtherCommitments Insupportof financialmarketstabilityactivities,theFRBNYenteredintocommitmentstoprovidefinancialassistancetofinancialinstitutions.TheFRBNYhad remainingunfundedcontractualcommitmentsrelatedtocommercialmortgage loansinMLof $40and$55millionatDecember31,2013and2012,respectively. (9)RetirementandThriftPlans RetirementPlans TheReserveBankscurrentlyofferthreedefinedbenefitretirementplanstoits employees,basedonlengthof serviceandlevelof compensation.Substantiallyall of theemployeesof theReserveBanks,Boardof Governors,andOfficeof EmployeeBenefitsof theFederalReserveSystemparticipateintheRetirement PlanforEmployeesof theFederalReserveSystem(SystemPlan).Underthe Dodd-FrankAct,newlyhiredBureauemployeesareeligibletoparticipateinthe SystemPlan.Inaddition,employeesatcertaincompensationlevelsparticipatein theBenefitEqualizationRetirementPlan(BEP)andcertainReserveBankofficers

FederalReserveSystemAudits 381 participateintheSupplementalRetirementPlanforSelectOfficersof theFederal ReserveBanks(SERP). TheFRBNY,onbehalf of theSystem,recognizesthenetassetornetliabilityand costsassociatedwiththeSystemPlaninitsconsolidatedfinancialstatements.DuringtheyearsendedDecember31,2013and2012,certaincostsassociatedwiththe SystemPlanwerereimbursedbytheBureau. Followingisareconciliationof thebeginningandendingbalancesof theSystem Planbenefitobligation(inmillions): 2013 2012 EstimatedactuarialpresentvalueofprojectedbenefitobligationatJanuary1 $11,468 $10,198 Servicecost-benefitsearnedduringtheperiod 407 349 Interestcostonprojectedbenefitobligation 472 473 Actuarial(gain)loss (1,527) 833 Contributionsbyplanparticipants 5 4 Specialterminationbenefits 6 9 Benefitspaid (355) (334) Planamendments - (64) Estimatedactuarialpresentvalueofprojectedbenefitobligationat December31 $10,476 $11,468 Followingisareconciliationshowingthebeginningandendingbalanceof the SystemPlanassets,thefundedstatus,andtheaccruedpensionbenefitcosts(in millions): 2013 2012 EstimatedplanassetsatJanuary1(ofwhich$9,440and$7,977is measuredatfairvalueasofJanuary1,2013and2012,respectively) $ 9,566 $8,048 Actualreturnonplanassets 683 1,066 Contributionsbytheemployer 909 782 Contributionsbyplanparticipants 5 4 Benefitspaid (355) (334) EstimatedplanassetsatDecember31(ofwhich$10,687and$9,440is measuredatfairvalueasofDecember31,2013and2012,respectively) $10,808 $9,566 Fundedstatusandaccruedpensionbenefitcosts $ 332 $(1,902) Amountsincludedinaccumulatedothercomprehensivelossareshown below: Priorservicecost $ (456) $ (559) Netactuarialloss (1,928) (3,784) Totalaccumulatedothercomprehensiveloss $(2,384) $(4,343) TheFRBNY,onbehalf of theSystem,funded$900millionand$780millionduringtheyearsendedDecember31,2013and2012,respectively.TheBureauis requiredbytheDodd-FrankActtofundtheSystemplanforeachBureau employeebasedonanestablishedformula.DuringtheyearsendedDecember2013and2012,theBureaufundedcontributionsof $9millionand$2million, respectively. Accruedpensionbenefitcostsarereportedasacomponentof “Otherassets”and “Accruedbenefitcosts”respectively,intheCombinedStatementsof Condition. TheaccumulatedbenefitobligationfortheSystemPlan,whichdiffersfromthe estimatedactuarialpresentvalueof projectedbenefitobligationbecauseitisbased oncurrentratherthanfuturecompensationlevels,was$9,308millionand $10,035millionatDecember31,2013and2012,respectively.

382 100thAnnualReport|2013 Theweighted-averageassumptionsusedindevelopingtheaccumulatedpension benefitobligationfortheSystemPlanasof December31wereasfollows: 2013 2012 Discountrate 4.92% 4.00% Rateofcompensationincrease 4.50% 4.50% NetperiodicbenefitexpensesfortheyearsendedDecember31,2013and2012, wereactuariallydeterminedusingaJanuary1measurementdate.Theweightedaverageassumptionsusedindevelopingnetperiodicbenefitexpensesforthe SystemPlanfortheyearswereasfollows: 2013 2012 Discountrate 4.00% 4.50% Expectedassetreturn 6.50% 7.25% Rateofcompensationincrease 4.50% 5.00% Beginningin2013,theSystemPlandiscountrateassumptionsettingconvention changedfromroundingtheratetothenearest25basispointstousingan unroundedrate. Discountratesreflectyieldsavailableonhigh-qualitycorporatebondsthatwould generatethecashflowsnecessarytopaytheSystemPlan’sbenefitswhendue.The expectedlong-termrateof returnonassetsisanestimatethatisbasedonacombinationof factors,includingtheSystemPlan’sassetallocationstrategyandhistoricalreturns;surveysof expectedratesof returnforotherentities’plansandfor variousassetclasses;aprojectedreturnforequitiesandfixedincomeinvestments basedonrealinterestrates,inflationexpectations,andequityriskpremiums;and surveysof expectedreturnsinequityandfixedincomemarkets. Thecomponentsof netperiodicpensionbenefitexpensefortheSystemPlanfor theyearsendedDecember31areshownbelow(inmillions): 2013 2012 Servicecost-benefitsearnedduringtheperiod $407 $349 Interestcostonprojectedbenefitobligation 472 473 Amortizationofpriorservicecost 103 116 Amortizationofnetloss 284 292 Expectedreturnonplanassets (638) (599) Netperiodicpensionbenefitexpense 628 631 Specialterminationbenefits 6 9 BureauofConsumerFinancialProtectioncontributions (9) (2) Totalperiodicpensionbenefitexpense $625 $638 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive lossintonetperiodicpensionbenefitexpensein2014areshownbelow: Priorservicecost $100 Netactuarialloss 87 Total $187

FederalReserveSystemAudits 383 Followingisasummaryof expectedbenefitpayments,excludingenhancedretirementbenefits(inmillions): 2014 $ 406 2015 429 2016 455 2017 483 2018 512 2018–2023 2,982 Total $5,267 TheSystem’sCommitteeonInvestmentPerformance(CIP)isresponsiblefor establishinginvestmentpolicies,selectinginvestmentmanagers,andmonitoring theinvestmentmanagers’compliancewithitspolicies.AtDecember31,2013,the SystemPlan’sassetswereheldinnineinvestmentvehicles:threeactively-managed long-durationfixedincomeportfolios,apassively-managedlong-durationfixed incomeportfolio,anindexedU.S.equityfund,anindexednon-U.S.developedmarketsequityfund,anindexedemerging-marketsequityfund,aprivateequity limitedpartnership,andamoneymarketfund. Thediversificationof thePlan’sinvestmentsisdesignedtolimitconcentrationof riskandtheriskof lossrelatedtoanindividualassetclass.Thethreeactivelymanagedlong-durationfixedincomeportfoliosareseparateaccountsbenchmarkedtoacustombenchmarkof 55percentBarclaysLongCreditIndexand 45percentCitigroup15+yearsU.S.TreasurySTRIPSIndex.Thiscustombenchmarkwasselectedasaproxytomatchtheliabilitiesof thePlanandtheguidelines fortheseportfoliosaredesignedtolimitportfoliodeviationsfromthebenchmark. Thepassively-managedlong-durationfixed-incomeportfolioisinvestedintwo commingledfundsandisbenchmarkedto55percentBarclaysLongCreditIndex and45percentBarclays20+STRIPSIndex.TheindexedU.S.equityfundis intendedtotracktheoverallU.S.equitymarketacrossmarketcapitalizationsand isbenchmarkedtotheDowJonesU.S.TotalStockMarketIndex.Theindexed non-U.S.developed-marketsequityfundisintendedtotracktheMorganStanley CapitalInternational(MSCI)Worldex-USInvestibleMarketsIndex(IMI),which includesstocksfrom23marketsdeemedbyMSCItobe“developedmarkets.”The indexedemerging-marketsequityfundisintendedtotracktheMSCIEmerging MarketsIMIIndex,whichincludesstocksfrom21marketsdeemedbyMSCIto be“emergingmarkets.”Thethreeindexedequityfundsincludestocksfromacross themarketcapitalizationspectrum(i.e.,large-,mid-andsmall-capstocks).The privateequitylimitedpartnershipinvestsgloballyacrossvariousprivateequity strategies.Finally,themoneymarketfund,whichinvestsinshorttermTreasury andAgencydebtandrepurchaseagreementsbackedbyTreasuryandAgency debt,istherepositoryforcashbalancesandadherestoaconstantdollar methodology. Permittedandprohibitedinvestments,includingtheuseof derivatives,aredefined ineitherthetrustagreement(forthepassively-managedlong-durationfixed incomeportfolio)ortheinvestmentguidelines(fortheremaininginvestments). TheCIPreviewsthetrustagreementandapprovesallinvestmentguidelinesaspart of theselectionof eachinvestmenttoensurethatthetrustagreementisconsistent withtheCIP’sinvestmentobjectivesfortheSystemPlan’sassets.

384 100thAnnualReport|2013 TheSystemPlan’spolicyweightandactualassetallocationsatDecember31,by assetcategory,areasfollows: Actualassetallocations Policyweight 2013 2012 U.S.equities 30.0% 29.7% 34.9% Internationalequities 18.0% 18.3% 13.6% Emergingmarketequities 2.0% 1.9% 0.0% Fixedincome 50.0% 49.4% 50.4% Cashandcashequivalents 0.0% 0.7% 1.1% Total 100.0% 100.0% 100.0% InJune2013,theCommitteeonInvestmentPerformance(the“Committee”) approvedachangeintheallocationandbenchmarksforthePlan’spublicequity portfolio.ThenewbenchmarkistheMSCIAllCountryWorldInvestibleMarkets Index.ThisbenchmarkchangewillreducethePlan’sholdingsinU.S.equities, increasethePlan’sholdingsof developedmarketsinternationalequities,andadd aninvestmentinemergingmarketequitieswhenitisfullyimplementedinmid- 2014.TheCommitteeapprovedaphasedsix-monthimplementationperiodfor thesechanges,commencinginSeptember2013fordevelopedmarketequitiesand November2013foremergingmarketequities.Thepolicyweightpercentages shownabovereflectthetargetallocationasof December2013basedonthisimplementationstrategy. EmployercontributionstotheSystemPlanmaybedeterminedusingdifferent assumptionsthanthoserequiredforfinancialreporting.TheSystemPlan’santicipatedfundinglevelfor2014is$480million.In2014,theBankplanstomake monthlycontributionsof $40millionandwillreevaluatethemonthlycontributionsuponcompletionof the2014actuarialvaluation.TheBank’sprojectedbenefitobligation,fundedstatus,andnetpensionexpensesfortheBEPandtheSERP atDecember31,2013and2012,andfortheyearsthenended,werenotmaterial. Determinationof FairValue TheSystemPlan’spubliclyavailableinvestmentsarevaluedonthebasisof thelast availablebidpricesorcurrentmarketquotationsprovidedbydealers,orpricing services.Todeterminethevalueof aparticularinvestment,pricingservicesmay useinformationontransactionsinsuchinvestments;quotationsfromdealers;pricingmetrics;markettransactionsincomparableinvestments;relationshipsobserved inthemarketbetweeninvestments;andcalculatedyieldmeasuresbasedonvaluationmethodologiescommonlyemployedinthemarketforsuchinvestments. Becauseof theuncertaintyinherentindeterminingthefairvalueof investments thatdonothaveareadilyavailablefairvalue,thefairvalueof theseinvestments maydiffersignificantlyfromthevaluesthatwouldhavebeenreportedif areadily availablefairvaluehadexistedfortheseinvestmentsandmaydiffermaterially fromthevaluesthatmayultimatelyberealized.

FederalReserveSystemAudits 385 Thefollowingtablespresentthefinancialinstrumentsrecordedatfairvalueasof December31byASC820hierarchy(inmillions): 2013 Description Level11 Level21 Level3 Total Short-terminvestments2 $14 $ 126 $ - $ 140 TreasuryandFederalagencysecurities 38 1,565 - 1,603 Corporatebonds - 1,773 - 1,773 Otherfixedincomesecurities - 362 - 362 Commingledfunds - 6,795 - 6,795 PrivateEquity - - 14 14 Total $52 $10,621 $14 $10,687 1 TherewerenotransfersbetweenLevel1andLevel2duringtheyear. 2 Short-terminvestmentsincludescashequivalentsof$78million. 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. 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. AtDecember31,2013and2012,aportionof short-terminvestmentswasavailable forfuturestrading.Therewere$8millionand$7millionof Treasurysecurities pledgedascollateralfortheyearsendedDecember31,2013and2012,respectively. ThriftPlan Employeesof theReserveBanksparticipateinthedefinedcontributionThrift PlanforEmployeesof theFederalReserveSystem(ThriftPlan).TheReserve Banksmatch100percentof thefirstsixpercentof employeecontributionsfrom thedateof hireandprovidesanautomaticemployercontributionof onepercent of eligiblepay.TheReserveBanks’ThriftPlancontributionstotaled$108million and$102millionfortheyearsendedDecember31,2013and2012,respectively, andarereportedasacomponentof “Operatingexpenses:Salariesandbenefits”in theCombinedStatementsof IncomeandComprehensiveIncome.

386 100thAnnualReport|2013 (10)PostretirementBenefitsOtherThanRetirementPlansand PostemploymentBenefits PostretirementBenefitsOtherThanRetirementPlans InadditiontotheReserveBanks’retirementplans,employeeswhohavemetcertainageandlength-of-servicerequirementsareeligibleforbothmedicalandlife insurancebenefitsduringretirement. TheReserveBanksfundbenefitspayableunderthemedicalandlifeinsurance plansasdueand,accordingly,hasnoplanassets. Followingisareconciliationof thebeginningandendingbalancesof thebenefit obligation(inmillions): 2013 2012 AccumulatedpostretirementbenefitobligationatJanuary1 $1,755 $1,506 Servicecostbenefitsearnedduringtheperiod 75 59 Interestcostonaccumulatedbenefitobligation 67 69 Netactuarialloss(gain) (290) 181 Curtailmentloss(gain) - - Specialterminationbenefitsloss 1 1 Contributionsbyplanparticipants 24 22 Benefitspaid (93) (87) MedicarePartDsubsidies 5 5 Planamendments (6) (1) AccumulatedpostretirementbenefitobligationatDecember31 $1,538 $1,755 AtDecember31,2013and2012,theweighted-averagediscountrateassumptions usedindevelopingthepostretirementbenefitobligationwere4.79percentand 3.75percent,respectively. Discountratesreflectyieldsavailableonhigh-qualitycorporatebondsthatwould generatethecashflowsnecessarytopaytheplan’sbenefitswhendue.Beginningin 2013,theSystemPlandiscountrateassumptionsettingconventionchangedfrom roundingtheratetothenearest25basispointstousinganunroundedrate. Followingisareconciliationof thebeginningandendingbalanceof theplan assets,theunfundedpostretirementbenefitobligation,andtheaccruedpostretirementbenefitcosts(inmillions): 2013 2012 FairvalueofplanassetsatJanuary1 $ - $ - Contributionsbytheemployer 64 60 Contributionsbyplanparticipants 24 22 Benefitspaid (93) (87) MedicarePartDsubsidies 5 5 FairvalueofplanassetsatDecember31 $ - $ - Unfundedobligationandaccruedpostretirementbenefitcost $1,538 $1,755 Amountsincludedinaccumulatedothercomprehensivelossareshownbelow: Priorservicecost $ 29 $ 36 Netactuarialloss (201) (538) Totalaccumulatedothercomprehensiveloss $ (172) $ (502) Accruedpostretirementbenefitcostsarereportedasacomponentof “Accrued benefitcosts”intheCombinedStatementsof Condition.

FederalReserveSystemAudits 387 Formeasurementpurposes,theassumedhealth-carecosttrendratesatDecember31areasfollows: 2013 2012 Health-carecosttrendrateassumedfornextyear 7.00% 7.00% Ratetowhichthecosttrendrateisassumedtodecline(theultimatetrendrate) 5.00% 5.00% Yearthattheratereachestheultimatetrendrate 2019 2018 Assumedhealth-carecosttrendrateshaveasignificanteffectontheamountsreported forhealth-careplans.Aonepercentagepointchangeinassumedhealth-carecosttrend rateswouldhavethefollowingeffectsfortheyearendedDecember31,2013(in millions): Onepercentage Onepercentage pointincrease pointdecrease Effectonaggregateofserviceandinterestcostcomponentsof netperiodicpostretirementbenefitcosts $ 25 $ (20) Effectonaccumulatedpostretirementbenefitobligation 184 (157) Thefollowingisasummaryof thecomponentsof netperiodicpostretirement benefitexpensefortheyearsendedDecember31(inmillions): 2013 2012 Servicecost-benefitsearnedduringtheperiod $ 75 $ 59 Interestcostonaccumulatedbenefitobligation 67 69 Amortizationofpriorservicecost (11) (10) Amortizationofnetactuarialloss 46 31 Totalperiodicexpense $177 $149 Curtailment(gain) - - Specialterminationbenefitsloss 1 1 Netperiodicpostretirementbenefitexpense $178 $150 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive lossintonetperiodicpostretirementbenefitexpensein2014areshownbelow: Priorservicecost $(10) Netactuarialloss 9 Total $ (1) NetpostretirementbenefitcostsareactuariallydeterminedusingaJanuary1measurementdate.AtJanuary1,2013and2012,theweighted-averagediscountrate assumptionsusedtodeterminenetperiodicpostretirementbenefitcostswere 3.75percentand4.5percent,respectively. Netperiodicpostretirementbenefitexpenseisreportedasacomponentof “Operatingexpenses:Salariesandbenefits”intheCombinedStatementsof Incomeand ComprehensiveIncome. TheMedicarePrescriptionDrug,ImprovementandModernizationActof 2003 establishedaprescriptiondrugbenefitunderMedicare(MedicarePartD)anda federalsubsidytosponsorsof retireehealth-carebenefitplansthatprovidebenefitsthatareatleastactuariallyequivalenttoMedicarePartD.ThebenefitsprovidedundertheReserveBanks’plantocertainparticipantsareatleastactuarially equivalenttotheMedicarePartDprescriptiondrugbenefit.Theestimatedeffects

388 100thAnnualReport|2013 of thesubsidyarereflectedinactuarialgainintheaccumulatedpostretirement benefitobligationandnetperiodicpostretirementbenefitexpense. FederalMedicarePartDsubsidyreceiptswere$4.0millionand$4.3millioninthe yearsendedDecember31,2013and2012,respectively.Expectedreceiptsin2014, relatedtobenefitspaidintheyearsendedDecember31,2013and2012,are $3.5million. Followingisasummaryof expectedpostretirementbenefitpayments(inmillions): Withoutsubsidy Withsubsidy 2014 $ 77 $ 72 2015 $ 81 $ 75 2016 $ 85 $ 79 2017 $ 89 $ 83 2018 $ 94 $ 87 2019–2023 $544 $498 Total $970 $894 PostemploymentBenefits TheReserveBanksofferbenefitstoformerorinactiveemployees.PostemploymentbenefitcostsareactuariallydeterminedusingaJanuary1measurementdate andincludethecostof providingdisability;medical,dental,andvisioninsurance; andsurvivorincomebenefits.TheaccruedpostemploymentbenefitcostsrecognizedbytheReserveBanksatDecember31,2013and2012,were$148millionand $164million,respectively.Thiscostisincludedasacomponentof “Accruedbenefitcosts”intheCombinedStatementsof Condition.Netperiodicpostemploymentbenefitexpenseincludedin2013and2012operatingexpenseswere$7millionand$25million,respectively,andarerecordedasacomponentof “Operating expenses:Salariesandbenefits”intheCombinedStatementsof IncomeandComprehensiveIncome.

FederalReserveSystemAudits 389 (11)AccumulatedOtherComprehensiveIncomeandOther ComprehensiveIncome Followingisareconciliationof beginningandendingbalancesof accumulated othercomprehensivelossasof December31(inmillions): 2013 2012 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 loss loss plans plans BalanceatJanuary1 $(4,343) $(502) $(4,845) $(4,449) $(343) $(4,792) Changeinfundedstatus ofbenefitplans: Priorservicecosts arisingduring theyear - 5 5 64 1 65 Amortizationofprior servicecost 1031 (11)2 92 1161 (10)2 106 Changeinprior servicecosts relatedto benefitplans 103 (6) 97 180 (9) 171 Netactuarial gain(loss)arising duringtheyear 1,572 290 1,862 (366) (181) (547) Amortizationofnet actuarialloss 2841 462 330 2921 312 323 Changeinactuarial gain(losses) relatedto benefitplans 1,856 336 2,192 (74) (150) (224) Changeinfundedstatus ofbenefitplans– othercomprehensive income(loss) 1,959 330 2,289 106 (159) (53) BalanceatDecember31 $(2,384) $(172) $(2,556) $(4,343) $(502) $(4,845) 1 Reclassificationisreportedasacomponentof“OperatingExpenses:Netperiodicpensionexpense”intheCombined StatementsofIncomeandComprehensiveIncome. 2 Reclassificationisreportedasacomponentof“OperatingExpenses:Salariesandbenefits”intheCombinedStatementsof IncomeandComprehensiveIncome. Additionaldetailregardingtheclassificationof accumulatedothercomprehensive lossisincludedinNote9and10. (12)BusinessRestructuringCharges TheReserveBankshadnomaterialbusinessrestructuringchargesin2013or2012. In2011,theU.S.Treasuryannouncedarestructuringinitiativetoconsolidatethe TreasuryRetailSecuritiesoperations.Asaresultof thisinitiative,TreasuryRetail SecuritiesoperationsperformedbytheFRBCwereconsolidatedintotheFederal ReserveBankof Minneapolis.Additionalannouncementsin2011includedthe consolidationof papercheckprocessing,performedbytheFRBC,intotheFederalReserveBankof Atlanta(FRBA). Inyearspriorto2011,theReserveBanksannouncedtheaccelerationof their checkrestructuringinitiativestoalignthecheckprocessinginfrastructureand operationswithdecliningcheckprocessingvolumes.ThenewinfrastructureconsolidatedpaperandelectroniccheckprocessingattheFRBA.

390 100thAnnualReport|2013 RestructuringcostsassociatedwithcertainBankassets,includingsoftware,buildings,leaseholdimprovements,furniture,andequipment,arediscussedinNote7. (13)DistributionofComprehensiveIncome InaccordancewithBoardpolicy,ReserveBanksremitexcessearnings,afterprovidingfordividendsandtheamountnecessarytoequatesurpluswithcapitalpaidin,totheU.S.TreasuryasearningsremittancestoTreasury.Thefollowingtable presentsthedistributionof theReserveBanks’comprehensiveincomeinaccordancewiththeBoard’spolicyfortheyearsendedDecember31(inmillions): 2013 2012 Dividendsoncapitalstock $ 1,650 $ 1,637 Transfertosurplus–amountrequiredto equatesurpluswithcapitalpaid-in 147 461 EarningsonremittancestoTreasury 79,633 88,418 Totaldistribution $81,430 $90,516 (14)SubsequentEvents Therewerenosubsequenteventsthatrequireadjustmentstoordisclosuresinthe combinedfinancialstatementsasof December31,2013.Subsequenteventswere evaluatedthroughMarch14,2014,whichisthedatethatthecombinedfinancial statementswereavailabletobeissued.

FederalReserveSystemAudits 391 Office of Inspector General Activities During2013,theOIGissued25audit,inspection, andevaluationreports(table1)andconducteda numberof follow-upreviewstoevaluateactiontaken TheOfficeof InspectorGeneral(OIG)fortheFedonpriorrecommendations.Duetothesensitive eralReserveBoard,whichisalsotheOIGforthe natureof someof thematerial,certainreportswere ConsumerFinancialProtectionBureau(CFPB), onlyissuedinternallytotheBoard,asindicated. operatesinaccordancewiththeInspectorGeneral OIGinvestigativeworkresultedin3arrests, Actof 1978,asamended.TheOIGconductsactivi- 20indictments,11convictions,and2suspensions/ tiesandmakesrecommendationstopromote terminations,aswellas$438,286,403incriminalfines economyandefficiency;enhancepoliciesandproceandrestitution.Eighteeninvestigationswereopened dures;andpreventanddetectwaste,fraud,andabuse andsixinvestigationswereclosedduringtheyear. inBoardprogramsandoperations,includingfunc- TheOIGalsoissuedtwoSemiannualReportstoContionsthattheBoardhasdelegatedtotheFederal gressandperformedapproximately50reviewsof leg- ReserveBanks.Accordingly,theOIGplansandconislationandregulationsrelatedtotheoperationsof ductsaudits,inspections,evaluations,investigations, theBoard,theCFPB,and/ortheOIG. andotherreviewsrelatingtoBoardandBoarddelegatedprogramsandoperations.Italsoretainsan independentpublicaccountingfirmtoannuallyaudit Formoreinformationandtoobtaincopiesof OIG theBoard’sandtheFederalFinancialInstitutions reports,visittheOIGwebsiteatwww.federalreserve ExaminationCouncil’sfinancialstatements.Inaddi- .gov/oig/.SpecificdetailsabouttheOIG’sbodyof tion,theOIGkeepstheCongressandtheBoardof workalsomaybefoundintheOIG’sWorkPlanand Governorsfullyinformedaboutseriousabusesand SemiannualReporttoCongress. deficiencies. Table1.OIGaudit,inspection,andevaluationreportsissuedin2013 Reporttitle Monthissued NoChangesRecommendedtoFreedomofInformationActExemptionIncludedintheAmendedFederalReserveAct January FederalFinancialInstitutionsExaminationCouncilFinancialStatementsasofandfortheYearsEndedDecember31,2012and2011, andIndependentAuditors’Reports March BoardofGovernorsoftheFederalReserveSystemFinancialStatementsasofandfortheYearsEndedDecember31,2012and2011, andIndependentAuditors’Reports March ReviewoftheFailureofBankofWhitman March StatusoftheTransferofOfficeofThriftSupervisionFunctions March SecurityControlReviewoftheConsumerFinancialProtectionBureau’sConsumerResponseSystem(internalreport) March CFPBContractSolicitationandSelectionProcessesFacilitateFARCompliance,butOpportunitiesExisttoStrengthenInternalControls March AuditObservationsontheBoard’sPlanningandContractingProcessfortheMartinBuildingConstruction,Renovation, andRelocationofStaff March ControlsovertheBoard’sPurchaseCardProgramCanBeStrengthened March BoardShouldEnhanceCompliancewithSmallEntityComplianceGuideRequirementsContainedintheSmallBusinessRegulatory EnforcementFairnessActof1996 July SecurityControlReviewoftheBoard’sNationalExaminationDatabaseSystem(internalreport) July SecurityControlReviewofaThird-partyCommercialDataExchangeServiceUsedbytheBoard’sDivisionofBankingSupervision andRegulation(internalreport) August OpportunitiesExisttoEnhancetheCFPB’sPolicies,Procedures,andMonitoringActivitiesforConferences August BoardShouldStrengthenControlsovertheHandlingoftheFederalOpenMarketCommitteeMeetingMinutes August TheBoardCanBenefitfromImplementinganAgency-WideProcessforMaintainingandMonitoringAdministrativeInternalControl September StatusoftheTransferofOfficeofThriftSupervisionFunctions September OpportunitiesExistfortheCFPBtoStrengthenCompliancewithItsPurchaseCardPoliciesandProcedures September TheBoardShouldImproveProceduresforPreparingforandRespondingtoEmergencyEvents September TheCFPBShouldStrengthenInternalControlsforItsGovernmentTravelCardProgramtoEnsureProgramIntegrity September ObservationsandMattersforConsiderationRegardingtheCFPB’sAnnualBudgetProcess October ResponsetoaCongressionalRequestRegardingtheCFPB’sCompliancewithFederalRequirementsforAddressingClimateChange October ResponsetoaCongressionalRequestRegardingtheBoard’sCompliancewithFederalRequirementsforAddressingClimateChange October 2013AuditoftheBoard’sInformationSecurityProgram November 2013AuditoftheCFPB’sInformationSecurityProgram December TheCFPBShouldReassessItsApproachtoIntegratingEnforcementAttorneysIntoExaminationsandEnhanceAssociatedSafeguards December

392 100thAnnualReport|2013 Government Accountability Office 2013,theGAOcompleted16projectsthatinvolved theFederalReserve(table1).Twenty-oneprojects Reviews wereongoingasof December31,2013(table2). Someof themajorprojectsthatGAOhasundertaken TheFederalBankingAgencyAuditAct(Pub.L. includepartsIIandIIIof astudyof theIndependent No.95–320)authorizestheGovernmentAccount- ForeclosureReviewprocess;areviewof theprocess abilityOffice(GAO)toauditcertainaspectsof Fedof enactingregulationspursuanttoDodd-FrankAct eralReserveSystemoperations.TheDodd-Frank requirements;areportonthediversityof employees WallStreetReformandConsumerProtectionActof ateconomicinstitutionsaswellasatfederalfinancial 2010(Dodd-FrankAct)directsGAOtoconduct regulators;andareviewof virtualcurrencies. additionalauditswithrespecttotheseoperations.In Table1.Reportscompletedduring2013 Reporttitle Reportnumber Monthissued(2013) StateSmallBusinessCreditInitiative:OpportunitiesExisttoEnhancePerformanceMeasurement andEvaluation GAO-14-97 December SmallBusinessLendingFund:TreasuryShouldEnsureEvaluationIncludesMethodstoIsolate ProgramImpact GAO-14-135 December Dodd-FrankRegulations:AgenciesConductedRegulatoryAnalysesandCoordinatedbutCouldBenefit fromAdditionalGuidanceonMajorRules GAO-14-67 December GovernmentSupportforBankHoldingCompanies:StatutoryChangestoLimitFutureSupportAreNotYet FullyImplemented GAO-14-18 November U.S.Currency:CoinInventoryManagementNeedsBetterPerformanceInformation GAO-14-110 November TroubledAssetReliefProgram:StatusofTreasury'sInvestmentsinGeneralMotorsandAllyFinancial GAO-14-6 October FinancialCompanyBankruptcies:NeedtoFurtherConsiderProposals'ImpactonSystemicRisk GAO-13-622 July FederalHousingAdministration:ImprovingDispositionandOversightPracticesMayIncreaseReturns onForeclosedPropertySales GAO-13-542 June DiversityManagement:TrendsandPracticesintheFinancialServicesIndustryandAgenciesafter theRecentFinancialCrisis GAO-13-238 May FederalReserveBanks:AreasforImprovementinInformationSystemControls GAO-13-419R May AutomatedTellerMachines:SomeConsumerFeesHaveIncreased GAO-13-266 April ForeclosureReview:LessonsLearnedCouldEnhanceContinuingReviewsandActivitiesunder AmendedConsentOrders GAO-13-277 March Iran:U.S.andInternationalSanctionsHaveAdverselyAffectedtheIranianEconomy GAO-13-326 February FinancialRegulatoryReform:FinancialCrisesLossesandPotentialImpactsoftheDodd-FrankAct GAO-13-180 January FinancialRegulatoryReform:RegulatorsHaveFacedChallengesFinalizingKeyReformsand UnaddressedAreasPosePotentialRisks GAO-13-195 January FinancialInstitutions:CausesandConsequencesofRecentBankFailures GAO-13-71 January

FederalReserveSystemAudits 393 Table2.Projectsactiveatyear-end2013 Subjectofproject Monthinitiated Status Collegecredit,debitandprepaidcardagreement November2012 Closed02/13/2014 AnnualauditofTreasuryfinancialstatements February2013 Open Internationalfinancialregulatoryreform March2013 Open Databreachresponsepoliciesandprocedures March2013 Closed01/08/2014 Collegecreditcards April2013 Closed02/25/2014 TARP:MakingHomesAffordablePrograms April2013 Closed02/06/2014 Regulatoryactionsandbanking-relatedfinancialcriseslessonslearned May2013 Open ImpactofServicemembersCivilServiceReliefAct(SCRA)protections May2013 Closed01/28/2014 CostsandrevenuesofPuertoRicostatehood May2013 Open Foreclosurereviewandamendedconsentorders May2013 Open Treasuryfloatingratenotes June2013 Open CFPB’sdatacollectionandinformationsecurity August2013 Open SmallBusinessAdministration’sOfficeofAdvocacy August2013 Open Potentialreformsofsingle-familyhousingfinance August2013 Open FinancialStabilityOversightCouncil(FSOC)designations November2013 Open Studentloanrepaymentprograms November2013 Open StudentloandebtofolderAmericans November2013 Open Capitalreformrequirements December2013 Open Virtualcurrency December2013 Open Perceivedgovernmentsupportforthelargestbankholdingcompanies December2013 Open Effectoflowinterestratesonseniors December2013 Open

395 12 Federal Reserve System Budgets TheFederalReserveBoardof Governorsandthe System Budgets Overview FederalReserveBanksprepareannualbudgetsas partof theireffortstoensureappropriatestewardship Tables1and2summarizetheFederalReserveBoard andaccountability.Thissectionpresentsinformation of Governors’andFederalReserveBanks’2013budonthe2013budgetperformanceof theBoardand getedandactualand2014budgetedoperating ReserveBanks,aswellastheir2014budgets,budgetexpensesandemployment. ingprocesses,andtrendsinexpensesandemployment.Thissectionalsopresentsinformationonthe 2013 Budget Performance costsof newcurrency. Incarryingoutitsresponsibilitiesin2013,theFed- Before2013,informationaboutthebudgeted eralReserveSystemincurred$3.9billioninnet expensesof theBoardandReserveBankswaspre- expenses.Totalspendingof $4,850.3millionwasoffsentedinaseparatereporttitledAnnualReport:Bud- setby$973.6millioninrevenuefrompricedservices, getReview.Copiesof thatreportareavailableat claimsforreimbursement,andotherincome.Total www.federalreserve.gov/publications/budget-review/ 2013expenseswere$222.4million,or4.4percent, default.htm. lessthantheamountbudgetedfor2013. Table1.TotaloperatingexpensesoftheFederalReserveSystem,netofreceiptsandclaimsforreimbursement,2013–14 Millionsofdollars Variance Variance 2013budgetto2013actual 2014budgetto2013actual Item 2013budget 2013actual 2014budget Amount Percent Amount Percent Board 586.9 553.7 -33.2 -5.7 611.1 57.4 10.4 ReserveBanks1 3,688.2 3,591.6 -96.6 -2.6 3,795.7 204.1 5.7 Currency 797.6 705.0 -92.6 -11.6 826.7 121.7 17.3 TotalSystemoperatingexpenses2 5,072.7 4,850.3 -222.4 -4.4 5,233.5 383.2 7.9 Revenuefrompricedservices 423.9 441.3 17.4 4.1 423.6 -17.8 -4.0 Claimsforreimbursement3 539.4 530.1 -9.4 -1.7 569.1 39.1 7.4 Otherincome4 2.2 2.2 0.0 2.0 2.7 0.5 21.4 Revenueandclaimsforreimbursement5 965.5 973.6 8.1 0.8 995.4 21.8 2.2 TotalSystemoperatingexpenses,netofrevenue andclaimsforreimbursement 4,107.2 3,876.7 -230.5 -5.6 4,238.1 361.4 9.3 Note:Hereandinsubsequenttables,componentsmaynotsumtototalsandmaynotyieldpercentagesshownbecauseofrounding. 1 ExcludesassessmentsfortheBoardofGovernors’operatingexpenses. 2 IncludestotaloperatingexpensesoftheOfficeofInspectorGeneral(OIG),theFederalReserveInformationTechnology(FRIT)supportfunction,andtheSystem’sOfficeof EmployeeBenefits(OEB).ExcludesoperatingexpensesoftheConsumerFinancialProtectionBureau(CFPB). 3 ReimbursableclaimsincludetheexpensesoffiscalagencyanddepositoryservicesprovidedtotheU.S.Treasury,othergovernmentagencies,andotherfiscalprincipals. 4 FeesthatdepositoryinstitutionspayforthesettlementcomponentoftheFedwireSecuritiesServicetransactionsforTreasurysecuritiestransfers. 5 ExcludesannualassessmentsforthesupervisionoflargefinancialcompaniespursuanttoRegulationTT,whicharenotrecognizedasrevenueorusedtofundBoard expenses.(Seesection3(“SupervisionandRegulation”)ofthisannualreportformoreinformation.)

396 100thAnnualReport|2013 Table2.EmploymentintheFederalReserveSystem,2013–14 Variance Variance 2013budgetto2013actual 2014budgetto2013actual Item 2013budget 2013actual 2014budget Amount Percent Amount Percent Board1 2,655 2,648 -7 -0.3 2,740 92 3.5 ReserveBanks2 18,656 18,744 88 0.5 18,979 236 1.3 TotalSystememployment 21,311 21,392 81 0.4 21,719 328 1.5 Note:EmploymentnumberspresentedincludeauthorizedpositioncountsfortheBoardandaveragenumberofpersonnel(ANP)fortheReserveBanks.ANPistheaverage numberofemployeesexpressedintermsoffull-timepositionsfortheperiod. 1 Budgetrepresentsauthorizedpositioncountatthebeginningoftheyearandactualrepresentsauthorizedpositioncountatyear-end.TheBoardtotalalsoincludes authorizedpositioncountfortheOIG.InJanuary,theBoardapprovedanincreaseof11authorizedpositionstosupporttheBoard'soversightresponsibilitiesrelatedto financialmarketutilitiesaswellasatechnicaleditortoworkonincreasedreportingrequirementsrelatedtotheDodd-FrankAct. 2 IncludesemploymentoftheFRITsupportfunctionandtheOEB. Substantiallyallemployeesof theBoardandReserve Trends in Expenses and Employment Banksparticipateinthedefinedbenefitretirement planforemployeesof theFederalReserveSystem Fromtheactual2005leveltothebudgeted2014 (SystemPlan).TheFederalReserveBankof New amount,thetotalexpensesof theFederalReserve YorkrecognizesthecostsassociatedwiththeSystem Systemhaveincreasedanaverageof 5.0percentper Plan.Inaddition,employeesatcertaincompensation year(figure2).Overthesameperiod,nondefensedislevelsparticipateintheBenefitEqualizationRetire- cretionaryspendingbythefederalgovernmenthas mentPlan,certainReserveBankofficersparticipate increasedanaverageof 3.1percentperyear(figintheSupplementalRetirementPlanforSelectOffi- ure3).Overthe2005–14period,FederalReserve cersof theFederalReserveBanks(SERP),and Systememploymentdeclinedthrough2010andsub- BoardofficersparticipateinthePensionEnhance- sequentlyincreasedduetorequirementsof the mentPlan. Dodd-FrankWallStreetReformandConsumer ProtectionActandresponsestothefinancialcrisis ExpensesrelatedtoBoardparticipantsintheBenefit (figure4). EqualizationRetirementPlanandPensionEnhancementPlanareincludedintheBoard’sbudgetandare Operatingexpensesincludeadditionalresourcesand reflectedintable1.ExpensesrelatedtoSystempar- staffingneededtorespondtothefinancialcrisisand ticipantsintheSystemPlanandtheReserveBank participantsintheBenefitEqualizationPlanand Figure1.Distributionofbudgetedexpensesofthe SERParenotincludedintheReserveBankbudgets FederalReserveSystem,2014 and,asaresult,arenotreflectedintable1.The2013 actualretirementplanexpensesrecordedbythe Board of Governors, 12% BoardandtheReserveBankswere$5.2millionand $616.5million,respectively. 2014 Operating Expense Budget Currency, 16% Budgeted2014operatingexpenses,netof revenue andreimbursements,are$361.4million,or9.3percent,higherthan2013actualexpenses.TheReserve Bankbudgetscomprisealmostthree-quartersof the Systembudget(figure1).Budgeted2014revenue frompricedservicesis4.0percentlowerthan2013 revenue,primarilybecauseof continueddeclinesin checkvolumeascustomersshifttootherpayment methods.Claimsforreimbursementsareexpectedto Reserve Banks, 73% increase7.4percentin2014,reflectingincreased Note:Componentsmaynotsumto100percentbecauseofrounding. activityinneworexpandedTreasuryservices.

FederalReserveSystemBudgets 397 Figure2.TotalexpensesoftheFederalReserveSystem, Figure4.EmploymentintheFederalReserveSystem, 2005–14 2005–14 Billions of dollars Thousands of persons 6 22 Current dollars 5 4 21 2005 dollars1 3 20 2 1 2005 2007 2009 2011 2013 19 Note:For2014,budgeted.IncludesexpensesoftheOfficeofInspectorGeneral 2005 2007 2009 2011 2013 (OIG). 1.CalculatedwiththeGDPpricedeflator. Note:For2014,budgeted.Employmentnumberspresentedincludeposition countsfortheBoardandaveragenumberofpersonnel(ANP)fortheReserve Banks. toimplementrequirementsundertheDodd-Frank Act.Morerecently,growthinthenumberof supernel,andotherprojects.Theseincreaseshavebeen visedstatememberbanksresultedinincreased partiallyoffsetbysubstantialexpenseandstaffing resourcedemands.Expensesinthecashareahave decreasesrelatedtothecontinueddeclineof paper increasedasaresultof themultiyearcash-processing checkvolumeandefficienciesassociatedwiththe modernizationproject.Expensesforservicesproelectroniccheck-processingfunction,cashoperavidedtoTreasuryhavegrowntomeetthatagency’s tions,andsupportfunctions. evolvingneeds,includingtheautomationof collectionandpaymentservicesandcontinuinginitiatives 2014 Capital Budgets suchastheDoNotPayproject,theInternetChan- ThecapitalbudgetsfortheBoardandReserveBanks total$133.0millionand$475.4million,respectively.1 Figure3.CumulativechangeinFederalReserveSystem expensesandfederalgovernmentexpenses,2005–14 Asinpreviousyears,the2014capitalbudgetsinclude fundingforprojectsthatsupportthestrategicdirec- Percent tionoutlinedbytheBoardandeachReserveBank. 60 Thesestrategicgoalsfocusoninvestmentsthatcontinuetoimproveoperationalefficiencies,enhanceser- 50 vicestoBankcustomers,andensureasafeandpro- Federal government1 ductiveworkenvironment. 40 30 Board of Governors Budgets 20 Federal Reserve2 TheBoard’sbudgetisgroundedinthedirection 10 setbyitsStrategicFramework2012–15(www .federalreserve.gov/publications/gpra/files/2012-2015- 0 2005 2007 2009 2011 2013 Note:For2014,budgeted.FederalgovernmentexpensesarereportedonafiscalyearbasisbeginningOctober1;theFederalReserveSystemexpensesare reportedonacalendar-yearbasis. 1 ThecapitalbudgetreportedfortheBoardincludestheamount budgetedfortheOfficeofInspectorGeneral(OIG).Thecapital 1.Discretionaryspendinglessexpendituresondefense.Source:Budgetofthe UnitedStatesGovernment,FiscalYear2014:HistoricalTables,Table8.1.Outlays budgetreportedfortheReserveBanksincludestheamounts byBudgetEnforcementActCategory,1962–2018. budgetedfortheFederalReserveInformationTechnology (FRIT)supportfunctionandtheOfficeofEmployeeBenefits 2.IncludesexpensesoftheOIG. (OEB).

398 100thAnnualReport|2013 Table3.OperatingexpensesoftheBoardofGovernors,bydivision,office,orspecialaccount,2013–14 Millionsofdollars Variance Variance 2013budgetto2013actual 2014budgetto2013actual Division,office,orspecialaccount 2013budget1 2013actual 2014budget Amount Percent Amount Percent BoardMembers 26.9 25.4 -1.5 -5.7 26.5 1.1 4.4 Secretary 9.4 9.2 -0.2 -1.8 9.7 0.4 4.6 ResearchandStatistics 64.3 59.3 -5.0 -7.8 61.7 2.4 4.1 InternationalFinance 25.1 23.8 -1.3 -5.2 27.0 3.2 13.6 MonetaryAffairs 30.9 29.5 -1.4 -4.4 32.3 2.7 9.2 OfficeofFinancialStabilityPolicyandResearch 4.9 5.2 0.3 5.5 7.0 1.8 35.2 BankSupervisionandRegulation 102.6 99.2 -3.4 -3.4 106.5 7.3 7.4 ConsumerandCommunityAffairs 24.1 22.7 -1.4 -5.8 24.5 1.8 8.1 Legal 22.7 20.9 -1.9 -8.1 24.3 3.4 16.4 ChiefOperatingOfficer 3.0 4.2 1.2 40.7 10.2 6.0 141.0 FinancialManagement 9.5 9.3 -0.2 -2.2 10.3 1.0 10.3 ReserveBankOperationsandPaymentSystems 33.9 33.8 -0.1 -0.4 34.7 1.0 2.8 InformationTechnology 81.6 79.6 -2.0 -2.4 93.5 13.8 17.4 Management 110.8 105.8 -5.0 -4.5 111.7 5.9 5.5 Dataprocessingincome -36.5 -37.0 -0.5 1.4 -36.7 0.3 -0.7 Residualretirement 14.7 9.2 -5.5 -37.4 9.9 0.7 7.3 Specialprojects 17.9 13.5 -4.4 -24.5 13.6 0.1 0.9 Savingsandreallocations -1.9 0.0 1.9 -100.0 0.0 0.0 0.0 Extraordinaryitems 16.0 14.4 -1.6 -10.3 17.8 3.4 24.0 Total,Boardoperations 559.9 527.9 -32.0 -5.7 584.2 56.3 10.7 OfficeofInspectorGeneral 26.9 25.8 -1.1 -4.1 26.9 1.1 4.3 1 2013budgetfiguresdonotreflectinternaltransfersbetweendivisionsduringtheyear. strategic-framework.pdf).2Thebudgetisstructured • Staff submitstheproposedbudgettotheCommitbydivision,office,orspecialaccount. teeonBoardAffairs(CBA)forreview. • Theadministrativegovernorof theCBAsubmits TheBoard’sbudgetprocessisasfollows: thebudgettothefullBoardforreviewandfinal • TheBoardestablishesabasebudgettosupport action. currentoperations. • Expensesaremonitoredthroughouttheyear.Vari- • Eachdivisionidentifiesnewinitiativesandoffset- ancesareanalyzedandreported. tingsavingsrequiredtoachieveitsobjectivesfor TheBoard’sOfficeof InspectorGeneral(OIG),in thenextbudgetcycle. keepingwithitsstatutoryindependence,preparesits • Thechief operatingofficer,thechief financialoffi- proposedbudgetapartfromtheBoard’sbudget.The cer,andtheexecutivecommitteeof theBoard OIGpresentsitsbudgetdirectlytotheBoardfor evaluateeachnewinitiativeandproposedsavings approval;thus,informationontheOIG’sbudgetis inthecontextof theBoard’sstrategicframework. alsoprovidedinthediscussionthatfollows. • Newinitiativesthatdonotcorrespondtothe Tables3and4summarizetheBoard’s2013budgeted themessetforthinthestrategicframeworkrequire andactualexpenditures,aswellasits2014budgeted savingsoffsets. expendituresbydivision,office,orspecialaccount andbyaccountclassification,respectively.Table5 2 Thedocumentidentifiedandframedsixoverarchingthemesfor summarizestheBoard’sbudgetedandactualauthortheBoardtoaddressoverthefour-yearplanninghorizon,along izedpositioncountfor2013and2014.Eachtable withrecommendedresourceinvestmentsintermsofpersonnel andfacilities. alsoincludesalineitemfortheOIG.

FederalReserveSystemBudgets 399 Table4.OperatingexpensesoftheBoardofGovernors,byaccountclassification,2013–14 Millionsofdollars Variance Variance 2013budgetto2013actual 2014budgetto2013actual Accountclassification 2013budget1 2013actual 2014budget Amount Percent Amount Percent Personnelservices Salaries 314.3 307.2 -7.1 -2.3 328.0 20.8 6.8 Retirement/thriftplans 43.3 40.2 -3.1 -7.1 42.2 2.0 4.9 Employeeinsurance 28.9 26.3 -2.6 -9.0 28.6 2.3 8.6 Subtotal,personnelservices 386.5 373.7 -12.8 -3.3 398.7 25.0 6.7 Goodsandservices Postageandshipping 0.7 0.3 -0.4 -62.9 0.5 0.3 107.7 Travel 14.2 13.7 -0.5 -3.2 15.1 1.4 9.8 Telecommunications 7.4 6.0 -1.5 -19.6 7.9 2.0 32.9 Printingandbinding 2.4 1.5 -1.0 -39.6 2.2 0.7 49.0 Publications 0.6 0.5 -0.2 -25.0 0.6 0.2 42.2 Stationeryandsupplies 1.6 1.4 -0.2 -15.0 2.3 1.0 70.6 Software 12.1 11.4 -0.7 -5.7 17.1 5.7 49.9 Furnitureandequipment 9.7 7.7 -2.0 -20.2 14.3 6.5 84.4 Rentals 12.8 12.4 -0.4 -3.0 16.2 3.7 30.1 Booksandsubscriptions 1.1 1.0 -0.1 -8.2 1.3 0.3 28.7 Utilities 3.9 3.3 -0.6 -14.9 3.6 0.3 8.7 Repairsandalterationsbldg. 3.0 2.5 -0.6 -18.3 3.0 0.6 22.4 RepairsandmaintenanceF&E 2.9 3.4 0.5 17.2 3.3 -0.1 -3.2 Contingencyprocessingcenter 1.3 1.3 0.0 -3.1 1.3 0.1 5.6 Contractualprofessionalservices 71.8 62.2 -9.6 -13.3 64.5 2.2 3.6 Interestexpense * * 0.0 0.0 * * -50.0 Tuition 4.9 3.9 -1.0 -20.2 5.1 1.2 29.9 Subsidiesandcontributions 0.8 0.7 -0.1 -10.0 0.8 0.1 9.7 Depreciation/amortization 24.1 23.8 -0.4 -1.5 27.7 4.0 16.7 Allother2 -1.8 -2.6 -0.8 44.4 -1.3 1.3 -50.0 Subtotal,goodsandservices 173.5 154.2 -19.3 -11.1 185.5 31.2 20.2 Total,Boardoperations 559.9 527.9 -32.0 -5.7 584.2 56.3 10.7 OfficeofInspectorGeneral Personnelservices 16.9 19.0 2.0 12.1 18.3 -0.7 -3.8 Goodsandservices 10.0 6.9 -3.1 -31.2 8.7 1.8 26.0 Total,OIGoperations 26.9 25.8 -1.1 -4.1 26.9 1.1 4.3 1 2013budgetfiguresdonotreflectinternaltransfersbetweendivisionsduringtheyear. 2 Allotherincludes,amongotheritems,incomefromoutsideagenciesfordataprocessingservices,rentalincome,andtransportationsubsidybenefitsforemployees. *Lessthan$500thousand. 2013 Budget Performance andallmultiyearcapitalprojectsremainedwithin theirtotalprojectbudgets. BoardofGovernors TotalexpensesforBoardoperationswere$527.9mil- The2013underrunisprimarilydrivenbylower-thanlion,whichis$32.0million,or5.7percent,lessthan plannedpersonnelandcontractualprofessionalsertheapproved2013budgetof $559.9million.The vicesexpenses.Personnelserviceswere$12.8million Board’s2013single-yearcapitalspendingwasalso lessthantheoperatingplanbecausedivisionsand lessthanbudgetedby$0.45million,or4.1percent, officestooklongerthanexpectedtofillvacancies

400 100thAnnualReport|2013 Table5.PositionsauthorizedbytheBoardofGovernors,bydivision,office,orspecialaccount Variance Variance 2013budgetto2013actual 2014budgetto2013actual Division,office,orspecialaccount 2013budget 2013actual 2014budget1 Amount Percent Amount Percent BoardMembers 115 116 1 0.9 117 1 0.9 Secretary 53 53 0 0.0 53 0 0.0 ResearchandStatistics 353 327 -26 -7.4 336 9 2.8 InternationalFinance 136 136 0 0.0 145 9 6.6 MonetaryAffairs 144 141 -3 -2.1 151 10 7.1 OfficeofFinancialStabilityPolicyandResearch 34 34 0 0.0 37 3 8.8 BankSupervisionandRegulation 412 412 0 0.0 423 11 2.7 ConsumerandCommunityAffairs 103 103 0 0.0 103 0 0.0 Legal 105 105 0 0.0 110 5 4.8 ChiefOperatingOfficer 16 42 26 162.5 59 17 40.5 FinancialManagement 67 69 2 3.0 69 0 0.0 ReserveBankOperationsandPaymentSystems 156 156 0 0.0 168 12 7.7 InformationTechnology 397 399 2 0.5 409 10 2.5 Management 449 440 -9 -2.0 440 0 0.0 Total,Boardoperations2 2,540 2,533 -7 -0.3 2,620 87 3.4 OfficeofInspectorGeneral 115 115 0 0.0 120 5 4.3 1 InJanuary,theBoardapprovedanincreaseof11authorizedpositionstosupporttheBoard'soversightresponsibilitiesrelatedtofinancialmarketutilitiesaswellasa technicaleditortoworkonincreasedreportingrequirementsrelatedtotheDodd-FrankAct. 2 Budgetrepresentsauthorizedpositioncountatthebeginningoftheyearandactualrepresentsauthorizedpositioncountatyear-end. andtheactuarialassumptions,demographics,and secondbudgetsincetheBoardapprovedtheframediscountratesfortheBoard’snon-qualifiedretire- workinJune2012. mentplanschanged.Contractualprofessionalserviceswere$9.6millionlessthanbudgetedbecause For2014,authorizedpositionsforBoardoperations divisionsandofficesengagedfewerconsultantsthan total2,620,anincreaseof 87positions,or3.4perexpectedforprojectsrelatedtoautomation,organi- cent,from2013.Thepositionsarealignedwiththe zationalskills,andexecutivesearches. strategicframeworkthemesandwillprimarilysupporttheBoard’sfinancialstabilityandsupervisory OfficeofInspectorGeneral mandateundertheDodd-FrankActandimplemen- TotalexpensesforOIGoperationswere$25.8mil- tationof adatagovernanceprogram.The2014 lion,or$1.1millionlessthantheapprovedoperating Boardbudgetreflectsameritincreaseof 3.0percent budget.Personnelserviceswere$2.0millionmore forstaff. thanbudgeted,largelybecausehiringwasearlier thananticipated.Goodsandserviceswere$3.1mil- OfficeofInspectorGeneral lionlessthanbudgeted. The2014budgetforOIGoperationsis$26.9million, whichis$1.1million,or4.3percent,higherthan 2014 Operating Expense Budget 2013actualexpenses.Thisincludesanincreaseof 5 positions,foratotalof 120positions.Areductionto BoardofGovernors the2014goodsandservicesbudgetoffsetstheper- The2014budgetforBoardoperationsis$584.2mil- sonnelcostassociatedwiththeseadditionalpositions. lion,whichis$56.3million,or10.7percent,higher than2013actualexpenses.Theoperatingbudget Risksinthe2014Budget includesamountstofundtheBoard’songoingopera- WhentheBoardapprovedthestrategicframework, tionsandtosupportthestrategicthemesidentifiedin thegovernorsconsideredtheresourcesnecessaryto theBoard’sStrategicFramework2012–15.Thisisthe implementthestrategicthemes,aswellasbudgetary

FederalReserveSystemBudgets 401 Table6.CapitalOutlaysoftheBoardofGovernors,bycapitaltype,2013–14 Millionsofdollars Variance Variance 2013budgetto2013actual 2014budgetto2013actual Item 2013budget 2013actual 2014budget1 Amount Percent Amount Percent Single-yearcapitaloutlays 11.1 10.5 -0.6 -5.4 5.1 -5.4 -51.4 Multiyearcapitaloutlays 56.5 19.0 -37.5 -66.4 127.9 108.9 573.2 Totalcapitaloutlays2 67.6 29.5 -38.1 -56.4 133.0 103.5 350.8 1 InJanuary,theBoardapprovedadditionalcapitalfundingof$0.62millionintheBoard’ssingle-yearcapitalbudgetand$13.72millionintheBoard’smultiyearcapitalbudget forinitiativesnotincludedintheapproved2014budget. 2 Capital,asshowninthisreport,includestheBoardandOIGcapitalbudgetsandexpenditures.Theamountreportedformultiyearcapitaloutlaysbudgetandactual representstheexpectedexpenditureandamountspentforthebudgetedyear. growthtargetstomanagecosts.The2014budget 2014 Capital Budget alignswiththeguidelinescontainedintheframework andplacestheBoardonatrajectorytomeetthe Table6summarizestheBoard’sandtheOIG’sbudcost-reductiontargetsdescribedintheframework. getedandactualcapitaloutlaysfor2013and2014. BoardofGovernors The2014budgetremainslargelyconsistentwithrisks identifiedinpreviousyears.Inparticular,theBoard’s TheBoard’s2014capitalbudgettotals$5.1million abilitytoattract,retain,andengagequalifiedstaff forsingle-yearcapitaland$127.9millionformultiandcontinuetomeetthedemandsof theincreased yearcapitalprojects.Thebudgetincreaseformultiworkrequirementsremainsatoppriority. yearcapitalprojectsover2013actualsisprimarily duetothedatacenterrelocationandMartinBuild- Overthenextfewyears,significantinvestmentsinthe ingrenovation.Effortsarecurrentlyunderwayto Boarddataenvironmentwillberequired.Aspartof relocatetheBoard’sdatacentertospaceidentified theframework,theBoardapproveditstwolargest withinabranchof theFederalReserveBankof capitalprojectsinrecentyears—therenovationof the Richmond.Theexpectedcostoverthelifeof the MartinBuildingandtherelocationof thedatacenter projectis$83.4million,whichincludesfundingfor (discussedfurtherunder“2014CapitalBudget”). spacebuild-outalongwithsoftwareandhardware AlthoughtheBoardhasretainedconsultantsto acquisitionsneededtosupportanetworkinfrastrucassistintheseeffortsandhascapablestaff whohave turethatcanhandletheincreaseindemandfordata. experiencedealingwithcomplexprojects,bothinitia- TotalexpectedcostfortheMartinBuildingrenovativescontinuetorequirecarefulmonitoringgiventhe tionoverthelifeof theproject—whichwilloverhaul sizeof theirbudgets,theinitiatives’criticalimpor- thebuilding’sinfrastructureaswellasprovideadditance,andthecontinuedpublicfocusonBoard tionalspaceformeetingsandconferences—is operations.Pastbudgetcycleshaveincludedpur- $244.0million. chasesforadditionaldatainsupportof supervisory OfficeofInspectorGeneral activitiesandadditionalinfrastructureinvestments (separatefromcostsalreadybudgetedforthedata The2014OIGcapitalbudgettotals$0.07millionfor centerrelocation).Asnotedintheframework,estab- single-yearcapitaland$3.2millionforthelifeof the lishinganinfrastructuretosharedataandimprove multiyearcapitalprojects.Theincreaseof $1.0milopportunitiesfordataintegrationisnecessaryto lioninmultiyearcapitalprojectsover2013actualsis expandtheBoard’sresearchandanalyticalcapabili- duetobuildoutfortheregionaloffices. tiesandprovidestaff withthenewtoolsnecessaryto obtain,interpret,andanalyzelargevolumesof data Federal Reserve Banks Budgets requiredbythenewsupervisorytools.Astheinitiativesputforwardaspartof the2014budgetprocess indicate,fundingthenewinfrastructurewillplace EachReserveBankestablishesmajoroperatinggoals upwardpressureontheoperatingbudget. forthecomingyear,devisesstrategiesforattaining

402 100thAnnualReport|2013 Table7.OperatingexpensesoftheFederalReserveBanks,bydistrict,2013–14 Millionsofdollars Variance Variance 2013budgetto2013actual 2014budgetto2013actual District 2013budget 2013actual 2014budget Amount Percent Amount Percent Boston 207.2 198.7 -8.5 -4.1 220.1 21.4 10.8 NewYork 896.8 883.1 -13.7 -1.5 908.9 25.8 2.9 Philadelphia 199.0 194.8 -4.2 -2.1 202.6 7.9 4.0 Cleveland 158.4 155.6 -2.8 -1.8 176.2 20.6 13.3 Richmond 372.7 359.9 -12.8 -3.4 361.0 1.0 0.3 Atlanta 318.7 307.3 -11.4 -3.6 319.0 11.7 3.8 Chicago 326.1 319.8 -6.4 -1.9 340.7 20.9 6.5 St.Louis 258.0 253.4 -4.6 -1.8 285.8 32.4 12.8 Minneapolis 189.6 181.0 -8.6 -4.5 199.8 18.8 10.4 KansasCity 214.5 207.1 -7.5 -3.5 222.4 15.3 7.4 Dallas 214.5 207.5 -7.0 -3.3 212.2 4.8 2.3 SanFrancisco 332.8 323.4 -9.3 -2.8 347.0 23.5 7.3 TotalReserveBankoperatingexpenses 3,688.2 3,591.6 -96.6 -2.6 3,795.7 204.1 5.7 Note:IncludesexpensesbudgetedbytheFRITsupportfunctionandtheOEB,andreflectsallredistributionsforsupportandallocationforoverhead.Excludescapitaloutlaysand assessmentsforBoardexpenses,currencycosts,andexpensesoftheCFPB. thosegoals,estimatesrequiredresources,andmoni- budgetstoBoardmembersforreviewandfinal torsresults.TheReserveBanks’budgetsarestruc- action. turedbyoperationalarea,withattributablesupport • Throughouttheyear,ReserveBankandBoard andoverheadchargedtoeacharea.Inadditionto staffsmonitoractualperformanceandcompareit thebudgetapprovalprocess,theReserveBanksmust withapprovedbudgetsandforecasts. submitproposalsformajorcapitalacquisitionsand capitalizedprojectstotheBoardforfurtherreview Tables7,8,and9summarizetheReserveBanks’ andapproval. 2013budgetedandactualexpenses,2014budgeted expenses,and2013and2014employmentbyReserve TheReserveBankbudgetprocessisasfollows: Bank,operatingarea,andaccountclassification, • ReserveBanksreceivebudgetguidanceregarding respectively.3Inaddition,table10showstheReserve majorfunctionalareasfortheupcomingbudget Banks’budgetedandactualemploymentfor2013 year. and2014. • TheReserveBanksdevelopbudgetsthatincorpo- 2013 Budget Performance ratethisguidance,whicharereviewedbysenior leadershipintheReserveBanksforalignmentwith Total2013operatingexpensesfortheReserveBanks ReserveBankandSystempriorities. were$3,591.6million,whichis$96.6million,or 2.6percent,lessthantheapproved2013budgetof • TheReserveBankssubmitpreliminarybudget $3,688.2million,whiletheaveragenumberof perinformationtotheBoardforreview,including sonnel(ANP)increasedby88,largelybecauseof documentationtosupportthebudgetrequest. applicationdevelopmentwork. • Boardstaff analyzestheBanks’budgets,bothindividuallyandinthecontextof Systeminitiatives The2013budgetunderrunisprimarilydrivenby andotherBanks’plans. lower-than-plannedexpensesforservicestofinancial institutionsandthepublic,supervision,Treasuryser- • TheBoard’sCommitteeonFederalReserveBank Affairs(BAC)reviewstheBankbudgets. 3 Additionalinformationabouttheoperatingexpensesofeachof theReserveBankscanbefoundinsection10(“Statistical • TheReserveBanksmakeanyrequestedorneeded Tables”)ofthisannualreport(see“Table10.Incomeand changesandtheBACchairsubmitstherevised expensesoftheFederalReserveBanks,byBank”).

FederalReserveSystemBudgets 403 Table8.OperatingexpensesoftheFederalReserveBanks,byoperatingarea,2013–14 Millionsofdollars Variance Variance 2013budgetto2013actual 2014budgetto2013actual Operatingarea 2013budget 2013actual 2014budget Amount Percent Amount Percent Monetaryandeconomicpolicy 602.3 596.5 -5.9 -1.0 614.1 17.6 3.0 ServicestotheU.S.Treasuryandother governmentagencies 522.7 500.5 -22.2 -4.2 550.2 49.6 9.9 Servicestofinancialinstitutionsandthepublic 1,033.1 1,003.4 -29.7 -2.9 1,048.5 45.2 4.5 Supervisionandregulation 1,146.3 1,118.8 -27.5 -2.4 1,189.4 70.6 6.3 Fee-basedservicestofinancialinstitutions1 383.8 372.4 -11.3 -3.0 393.4 21.0 5.6 TotalReserveBankoperatingexpenses 3,688.2 3,591.6 -96.6 -2.6 3,795.7 204.1 5.7 1 Operatingexpensesforfee-basedservicestofinancialinstitutionsexcludepensioncosts,Board-relatedexpenses,andreimbursementsforcertainnon-pricedservices. vices,andfee-basedservicestofinancialinstitutions timingof otherinitiatives.5Pricedservicesexpenses (pricedservices).ExpensesrelatedtotheCashFor- reflectcontinuedcheckvolumedeclines. wardinitiative,whichareacomponentof the expensesforservicestofinancialinstitutionsandthe Total2013actualemploymentof 18,744ANPreprepublic,were$17.8millionlowerthanbudget.4Inthe sentsanincreaseof 88ANP,or0.5percent,from supervisionfunction,efficiencyinitiativesanddelays 2013budgetedlevelsof 18,656ANP.Thehigherinhiringnewstaff ledtoloweroverallexpenses than-budgetedANPreflectsincreasedapplication (-$27.5million).TheunderruninTreasuryservicesis developmentsupportprimarilyforupdatestocash duetoprogramchangesprimarilyfortheDoNot technologyandsupervisionprojects.Additional Payprogram(-$5.1million),volumereductionsin informationtechnology(IT)ANPgrowthwasthe TreasuryRetailSecurities(-$5.3million),andthe resultof higher-than-anticipatedserverandstorage demandandanincreaseinnetworkservicessupport. Treasury’sGoDirectinitiativeaddedtemporarystaff 4 TheCashForwardinitiativewillreplacelegacysoftwareapplications,automatebusinessprocesses,andemploytechnologiesto 5 TheDoNotPayprogramwasestablishedtoreducethenumber meetcurrentandfutureneedsforthecashfunction.Phase1was ofimproperpaymentsmadethroughmajorprogramsadminiscompletedin2010,andPhase2wascompletedinJuly2012.The teredbythefederalgovernment. project’splannedcompletiondateisscheduledfor2017. Table9.OperatingexpensesoftheFederalReserveBanks,byaccountclassification,2013–14 Millionsofdollars Variance Variance 2013budgetto2013actual 2014budgetto2013actual Accountclassification 2013budget 2013actual 2014budget Amount Percent Amount Percent Personnel1 2,681.8 2,672.0 -9.8 -0.4 2,787.4 115.4 4.3 Building 319.9 315.5 -4.4 -1.4 320.3 4.8 1.5 Equipment 193.1 169.1 -24.1 -12.5 197.3 28.3 16.7 SoftwareCosts 188.6 183.1 -5.5 -2.9 211.9 28.8 15.7 Travel 95.6 88.1 -7.5 -7.8 96.2 8.1 9.1 MaterialsandSupplies 71.7 66.6 -5.0 -7.0 70.1 3.5 5.2 Communications 48.5 47.5 -1.0 -2.0 49.2 1.7 3.7 Shipping 16.1 14.5 -1.6 -9.7 15.5 1.0 6.8 Allother2 72.8 35.1 -37.8 -51.9 47.6 12.6 35.9 TotalReserveBankoperatingexpenses 3,688.2 3,591.6 -96.6 -2.6 3,795.7 204.1 5.7 1 Personnelexpenseincludessalaries,otherpersonnelexpense,andretirementandotheremploymentbenefitexpenses. 2 Includesoutsidefees,recoveries,andthetransferofexpensesforcapitalizablesoftwaredevelopmentefforts.

404 100thAnnualReport|2013 Table10.EmploymentattheFederalReserveBanks,byDistrict,andatFRITandOEB,2013–14 Variance Variance 2013budgetto2013actual 2014budgetto2013actual District 2013budget 2013actual 2014budget Amount Percent Amount Percent Boston 1,080 1,037 -42 -3.9 1,097 59 5.7 NewYork 3,326 3,277 -49 -1.5 3,247 -30 -0.9 Philadelphia 944 915 -30 -3.1 946 31 3.3 Cleveland 908 931 23 2.5 968 37 4.0 Richmond 1,541 1,549 8 0.5 1,586 37 2.4 Atlanta 1,630 1,623 -7 -0.4 1,627 5 0.3 Chicago 1,490 1,483 -7 -0.5 1,512 28 1.9 St.Louis 1,066 1,086 20 1.9 1,145 59 5.4 Minneapolis 1,147 1,131 -16 -1.4 1,133 3 0.3 KansasCity 1,430 1,443 13 0.9 1,512 69 4.8 Dallas 1,239 1,301 63 5.1 1,217 -84 -6.4 SanFrancisco 1,599 1,646 47 2.9 1,671 25 1.5 Total,allDistricts 17,400 17,422 22 0.1 17,662 240 1.4 FederalReserveInformationTechnology(FRIT) 1,202 1,272 70 5.8 1,265 -7 -0.5 OfficeofEmployeeBenefits(OEB) 53 50 -3 -6.1 52 2 4.5 Total 18,656 18,744 88 0.5 18,979 236 1.3 tomanagehighercallvolumesrelatedtothe System(PPS)($13.1million).7Thebudgetincludes March1,2013,deadlinetohaveallfederalbenefit $11.2millionfortheneweCommerceinitiativefor paymentsissuedelectronically.Partiallyoffsetting paymentstogovernmentagencies.TreasuryWeb theseincreasesarehiringdelaysinthesupervision ApplicationInfrastructure(TWAI)expenseswillalso andmonetarypolicyfunctionsandfortheTreasury’s increaseasthenumberof applicationshostedinthe InvoiceProcessingPlatform(IPP).6Otherrefine- infrastructureexpands($11.0million).Inaddition, mentsincludereductionsinsavingsbondoperations theReserveBankswillprovideincreasedsupportfor duetolower-than-expectedvolumes. theDoNotPay($5.6million)andtheGovernmentwideTreasuryAccountSymbolAdjustedTrialBal- 2014 Operating Expense Budget anceSystem(GTAS)($2.2million)programs.8 The2014operatingbudgetsof theReserveBanks Increasesinservicestofinancialinstitutionsandthe total$3,795.7million,whichis$204.1million,or publicincludecontinuingdevelopmentworkonthe 5.7percent,higherthan2013actualexpenses.The CashForwardprojects,cash-processingmachine largestincreaseisinthesupervisionfunction,which upgrades,andincreasedvideosurveillancesupport. isaddingresourcestosupportexpandedsupervisory PricedservicesincreasesaredrivenbytheFedwire, responsibilitiesforlargefinancialinstitutionsand FedACH,andFedLinemodernizationprogramsand continuedstatememberbankgrowth.Thesupervi- enhancements.9SeveralBanksareincreasinganalytisionfunctionalsoisaddingadditionalANPto improveitsanalyticalcapabilities. 7 TheInternetChannelapplicationisasecuregovernment-wide BudgetedexpensesforservicestotheTreasury,which collectionportalthatwasdevelopedtomeetTreasury’scommitmenttoelectroniccollectionsprocessingusingInternettecharefullyreimbursable,areincreasingtomeetgreater nologies.PPSwillstreamlinepost-paymentprocessesandelimidemandfromtheTreasuryandbecauseof theamor- nateredundantfunctionalitybyconsolidatingseveralexisting tizationof capitalizedsoftwareprojects.Expensesare applicationsintoasingle,centralizedsystem. 8 TheGTASwillreplacecurrentreportingsystemsinasingle expectedtogrowsignificantlybecauseof Treasury’s datacollectionsystemthatwillbeusedbyallgovernmentageneffortstomodernizeitsrevenuecollectionandpay- ciesastheprimarymeansofreportingtrialbalancedatatothe mentmanagementmethods,includingtheInternet OfficeofManagementandBudget. Channel(Pay.gov),IPP,andthePostPayment 9 TheFedwiremodernizationinitiativeinvolvesthetransitionof theFedwireFundsandFedwireSecuritiesapplicationsfromthe legacymainframeenvironmenttoadistributedplatform.The 6 IPPisasecure,web-basedsystemthatmanagesthegovern- FedACHprograminvolvesthetransitionoftheFedACHSerment’sinvoicingprocesses. viceplatformfromthemainframetoadistributedplatform.

FederalReserveSystemBudgets 405 calcapabilitiesandenhancingresiliencyintheirmon- employmentmarketisimproving.Anumberof etarypolicyfunctionsbyaddingANPandinvesting ReserveBankshaveaggressivehiringplans,andsome inITsolutions.Partiallyoffsettingtheseincreasesis Banksmayexperiencedifficultymeetingschedules reducedcheckoperationsexpenseresultingfromthe forhiringstaff withspecializedskillsandexperience, 2013completionandimplementationof thenew particularlyinsupervisionandIT.Theprimaryrisks checkprocessingplatform. inthesupervisionfunctionrelatetochangesthatmay beneededinsupervisoryprogramstoimplementkey Total2014budgetedemploymentfortheReserve FederalReserveresponsibilitiesundertheDodd- Banks,FederalReserveInformationTechnology FrankActwherethefinalruleshavenotyetbeen (FRIT),andtheOfficeof EmployeeBenefits(OEB) adopted.TheTreasurycontinuestorefineitsfuture is18,979ANP,anincreaseof 236ANP,or1.3per- visionforcollections,payments,andcashmanagecent,from2013employmentlevelsthatisprimarily mentsystems,includingthoseprovidedbythe drivenbysupervisionandIT.Thesupervisionfunc- ReserveBanks.TheeffectonTreasury-directed tionisadding109ANPduetoexpandingresponsi- ReserveBankinitiativesiscurrentlyunknown. bilitiesandgrowthinthenumberandsizeof institutionssupervised.ITANPisincreasingby204for 2014 Capital Budget largedevelopmentprojectsandinformationsecurity initiatives.Thesestaff increasesarepartiallyoffsetby Table11showstheReserveBanks’budgetedand adecreaseof temporarystaff hiredin2013forGo actualcapitaloutlaysfor2013and2014. Directandbyefficienciesfoundinsupportareas. The2014capitalbudgetssubmittedbytheReserve BudgetedReserveBankpersonnelexpensesfor Banks,FRIT,andOEBtotal$475.4million.The 2014total$2,787.4million,anincreaseof increaseinthe2014capitalbudgetis$170.6million, $115.4million,or4.3percent,over2013expenses. or56.0percent,abovethe2013actuallevels,largely Theincreasereflectsexpensesassociatedwithaddi- reflectingcapitalshiftsforongoingmultiyearprotionalstaff andbudgetedsalaryadjustments,includ- gramsfrom2013to2014.Thefewmajornewinitiaingmeritincreases,equityadjustments,promotions, tivesinthe2014capitalbudgetsupportmonetary andfundingforvariablepay.The2014ReserveBank policyfunctions,optimizeworkspace,andaccombudgetsreflectmeritincreasesof 3.0percent,totaling modateanincreasingdemandforvideo $48.8millionforofficers,seniorprofessionals,and conferencing. staff.10Equityadjustmentsandpromotionstotal $10.0millionforofficersandseniorprofessionals Insupportof theReserveBankstrategies,the2014 and$19.1millionforstaff.Fundingforvariablepay budgetsincludethreecategoriesof capitalinitiatives: programsforofficers,seniorprofessionals,andstaff ReserveBankautomation/ITprojects,buildingand totals$156.9million. infrastructure,andTreasuryinitiatives. Risksinthe2014Budget Automation/IT Riskstothebudgetremainlargelyconsistentwith TheReserveBanks,FRIT,andOEBincluded thoseidentifiedlastyear.Inparticular,themostsig- $225.5millioninfundingformajorITinitiativesand nificantrisksinthe2014budgetarerelatedtostaff- ReserveBankautomationprojects.Multiyearprojing.Banksareconcernedabouttheirabilitytohire ectscurrentlyunderwaytomigratemajorapplicaandretainstaff,particularlyinlocationswherethe tionsoff themainframeaccountfor$33.5millionof the2014capitalbudget.11TheReserveBankconsoli- FedLineprovidesfinancialinstitutionswithdirectaccesstoFed- datednetworkprojectandincreaseddemandfor eralReserveSystemservices. storagecapacityaccountforanadditional$67.6mil- 10 Congressenactedlegislationprohibitingstatutorypayadjustlion.Cashservicesautomationinitiativesinclude mentsformostfederalcivilianemployeesfortheperiodfrom January2011throughDecember31,2013.Althoughnot $37.9millionfortheCashForwardprojectand requiredtodosounderthelegislation,theReserveBankscom- $9.6millionforcashsensorupgrades.OtherautomapliedwiththespiritofthecivilianpayfreezeenactedbyContioninitiativesincludedevelopmentof analyticaland gressandinterpretedinsubsequentOfficeofPersonnelManagementguidance,whichpermittedincreasesforstaff(butnot officers)underperformance-basedcompensationsystemssuch 11 TheReserveBankmigrationstrategyinvolvesmovingamajorasthoseusedbytheReserveBanks.Asaresultoftheexpiration ityofapplicationsfromthemainframetoalternateprocessing ofthesalaryfreeze,ReserveBanksresumedprovisionofmerit environments.Projectsincludedinthe2014budgetincludethe increasesandequityadjustmentsforofficersandseniorprofes- migrationoftheFedwire,FedACH,accounting,andstatistics sionalseffectiveJanuary1,2014. andreservessystems.

406 100thAnnualReport|2013 Table11.CapitalOutlaysoftheFederalReserveBanks,byDistrict,andofFRITandOEB,2013–14 Millionsofdollars Variance Variance 2013budgetto2013actual 2014budgetto2013actual District 2013budget 2013actual 2014budget Amount Percent Amount Percent Boston 49.7 28.1 -21.6 -43.4 41.9 13.8 49.1 NewYork 122.5 72.8 -49.7 -40.6 115.0 42.2 57.9 Philadelphia 18.8 11.9 -6.9 -36.9 21.2 9.3 78.6 Cleveland 15.6 9.3 -6.3 -40.6 22.0 12.7 137.4 Richmond 32.1 19.1 -13.0 -40.5 15.7 -3.4 -17.7 Atlanta 21.9 10.9 -11.0 -50.4 16.7 5.9 54.0 Chicago 49.9 22.0 -27.9 -56.0 38.1 16.2 73.7 St.Louis 8.2 10.7 2.5 30.6 13.5 2.8 26.3 Minneapolis 15.6 17.4 1.8 11.4 13.5 -3.9 -22.2 KansasCity 8.5 10.9 2.4 27.7 15.6 4.7 43.7 Dallas 15.5 7.1 -8.4 -54.0 18.1 11.0 153.6 SanFrancisco 53.1 33.3 -19.8 -37.4 65.1 31.8 95.7 Total,allDistricts 411.4 253.3 -158.1 -38.4 396.5 143.2 56.5 FederalReserveInformationTechnology(FRIT) 80.5 51.4 -29.1 -36.1 78.4 27.0 52.5 OfficeofEmployeeBenefits(OEB) 0.2 0.0 -0.2 -100.0 0.5 0.5 0.0 Total 492.1 304.8 -187.4 -38.1 475.4 170.6 56.0 operationaltoolssupportingmonetarypolicy,data of unfitnotesdestroyedattheReserveBanks.Staff securityprojects,andscheduledsoftwareandequip- estimatesthenumberof notestheBoardwillorder mentupgrades. fromtheBureauof EngravingandPrinting(BEP)to meetdemandbasedonmonthlymonitoring,fore- BuildingandInfrastructure castsof growthratesforpaymentsof currencytocir- Buildingandinfrastructureprojectsaccountfor culationandreceiptsof currencyfromcirculation, $190.8millionof theproposedcapitalbudget.Reno- operationalfactors,andotherpolicyconsiderations. vationstoachievemore-efficientuseof existing TheBoardof GovernorsreimbursestheBEPforall buildingspaceareproposedfortheFederalReserve costsrelatedtotheproductionof currency.12Histori- Banksof NewYork,Cleveland,andRichmond.The cally,morethan90percentof thenotesthatthe FederalReserveBanksof BostonandSanFrancisco Boardorderseachyearreplaceunfitcurrencythat willundertakespace-renovationprograms.TheFed- ReserveBanksreceivefromcirculation. eralReserveBankof Chicagocontinuesitsbuilding securityproject,andtheFederalReserveBankof Theannualcurrencybudgetprocessisasfollows: Bostonwillmodernizeitselevators.Theremaining • EachAugust,basedonBoardstaff’sassessmentof outlaysinthiscategoryfundprogramsnecessaryto currencydemand,thedirectorof theDivisionof maintainthesafetyandsoundnessof theReserve ReserveBankOperationsandPaymentSystems Bankfacilities. submitsafiscalyear(FY)printorderforcurrency Treasury tothedirectorof theBEP. Thecapitalbudgetsalsoinclude$59.1millionfor • EachDecember,Boardstaff estimatesexpensesfor Treasuryinitiatives,includingsupportforTWAI, thecurrencybudget,includingprintingexpenses PPS,IPP,TreasuryRetailElectronicServices,andthe InternetChannel. 12 TheBEPdoesnotreceivefederalappropriations;alloperations oftheBEParefinancedbyarevolvingfundthatisreimbursed throughproductsales,virtuallyallofwhicharesalesofFederal Currency Budget ReservenotestotheBoardtofulfillitsannualprintorder.CustomerbillingsaretheBEP’sonlymeansofrecoveringcostsof operationsandgeneratingfundsnecessaryforcapitalinvestment.Section16oftheFederalReserveActrequiresallcosts Boardstaff monitorspaymentsof currencytoand incurredfortheissuingofnotesshallbepaidforbytheBoard receiptsof currencyfromcirculationandthenumber andincludedinitsassessmentstoReserveBanks.

FederalReserveSystemBudgets 407 Figure5.FederalReservecostsfornewcurrency,2000–2014 Millions of dollars 900 800 700 600 500 400 300 200 100 0 2000 2002 2004 2006 2008 2010 2012 2014 Note:For2014,budgeted. (basedonestimatedproductioncostsprovidedby tobeginissuingthemin2013,whichitdidstarting theBEP);certainotherBEPcosts;andexpenses onOctober8.Becausethefullquantityof old-design forthecurrencyeducationprogram,currency $100notesintheFY2013printorderwasnolonger transportation,andcounterfeit-deterrence needed,theBoardreduceditsorderforold-design research. $100notesbyapproximately1.0billionnotes,reducingestimatedexpensesbynearly$26.3million.The • TheBACreviewstheproposedcurrencybudget. remainderof thebudgetunderrunisattributablepri- • TheBACchairsubmitstheproposedcurrency marilytotheproductionof fewernotesinthefourth budgettotheBoardforfinalaction. quarterthanestimatedinthe2013budget.14 2013 Budget Performance 2014 Budget TheBoard’stotal2013actualexpensesfornewcur- The2014newcurrencybudgetof $826.7millionis rencywere$705.0million,whichrepresentsa 17.3percenthigherthan2013expenditures(figure5). decreaseof $92.6million,or11.6percent,fromthe PrintingcostsforFederalReservenotesmakeup 2013budget.Thedecreaseisprimarilyduetolower- about90percentof thenewcurrencybudget. than-budgetedexpensesforprintingnewnotesand Expensesforcurrencytransportation,thecurrency transportingnewandfitnotes,andforthecurrency readerprogram,thecurrencyqualityassurance educationprogram.Becauseof uncertaintyabout (CQA)programandcounterfeit-deterrenceresearch, whethertheBoardwouldissuethenew-design$100 andthecurrencyeducationprogram(CEP)constinotein2013,approximately1.5billionseries-1996 tutetheremaining10percent(table12). (old-design)$100noteswereincludedinthebudget toensurethatReserveBankswouldhavesufficient quantitiestomeetdemandduringFY2013.13By April,itwasclearthattheBEPcouldproducethe quantityof new-design$100notestheBoardneeded 14 BecausetheBEPoperatesonafiscalyearthatbeginsonOctober1andendsSeptember30,theBoardestimatesitscalendaryearbudgetfornewcurrencybyeliminatingthecostofnotes 13 TheBEPexperiencedunexpectedproductionproblemsthat thattheBEPwillproduceinthefirstquarterofitsfiscalyear causedtheBoardtodelayissuance,originallyscheduledforFeb- andestimatingthecostsofnotesthattheBoardprojectsthe ruary2011. BEPwillproduceinthefourthquarterofthecalendaryear.

408 100thAnnualReport|2013 Table12.FederalReservebudgetfornewcurrency,2013and2014 Thousandsofdollars,exceptasnoted Variance 2014budgetto2013actual Item 2013actual 2014budgeted Amount Percent BEP-relatedexpenses PrintingFederalReservenotes 660,958 745,387 84,429 12.8 Currencyreader 0 19,384 19,384 … Other 3,081 3,225 144 4.7 Boardexpenses Currencytransportation 20,732 33,222 12,490 60.2 Currencyqualityassuranceandcounterfeitdeterrence 16,678 21,091 4,413 26.5 Currencyeducationprogram 3,581 4,357 776 21.7 Totalcostofnewcurrency 705,030 826,666 121,636 17.3 …Notapplicable. BEPBureauofEngravingandPrinting. PrintingofFederalReserveNotes CompliancedevelopsReserveBankstandardsfor The2014currencybudgetincludes$745.4millionto cancellationanddestructionof unfitcurrencyand reimbursetheBEPforexpensesrelatedtoprinting fornoteaccountability,andreviewsReserveBanks’ newcurrency.Thebudgetreflectsthevariablecosts cashoperationsforcompliancewithitsstandards.As toproduceapproximately6.1billionnotes,aswellas apublicservice,theMutilatedCurrencyDivision fixedcostsattheBEPattributabletoexpensesassoci- processesclaimsfortheredemptionof damagedor atedwithdepreciationof anewinformationtechnol- mutilatedcurrency. ogyplatform,paymentstoothergovernmentagen- CurrencyTransportation cies,andstaffingtosupporttheCQAprogram.The averagecostperthousandnotesremainedlargely The2014currencytransportationbudgetis unchangedfrom2013to2014. $33.2million.Thisamountincludesthecostsof shippingnewcurrencyfromtheBEPtoReserve CurrencyReaderProgram Banks,intra-Systemshipmentsof fitandunpro- The2014budgetalsoincludes$19.4milliontofund cessedcurrency,andreturningcurrencypalletsfrom thefirstyearof amultiyearprogramtodistribute ReserveBankstotheBEP.TheBoardestimatesthat currencyreaderstoqualifiedindividualswhoare thenumberof notestransportedin2014willbe blindorvisuallyimpairedatnocosttotheuser.The approximatelythesameasin2013.Thebudget BEPwillimplementacurrencyreaderprogramto increaseisprimarilyattributabletoaplanned complywithacourtorderrequiringtheTreasury 6.0percentincreaseincontractedrateswitharmored Departmenttoprovidemeaningfulaccesstoindi- carrierstotransportcurrency. vidualswhoareblindorvisuallyimpairedindenomi- CurrencyQualityAssurance natingU.S.currency.During2014,theBEPexpects toawardacontracttoprocurecurrencyreadersand The2014budgetfortheCQAprogramis$13.9miltodistributethereadersbymid-2014throughan lion.ThebudgetwillallowtheCQAconsultantsto interagencyagreementwiththeLibraryof Congress’ continuefacilitatingtheimplementationof thenew bookreaderprogram,whichismanagedbythe qualitysystemattheBEP;supporttheresearch,tech- NationalLibraryService. nology,andproductdevelopmentrequiredforthe nextdesignfamilyof FederalReservenotes;andcon- OtherReimbursementstotheBureau tinueprovidingtemporaryresourcestotheBEPto ofEngravingandPrinting sustaincriticalprogramsthathavebeenimplemented The2014budgetincludes$3.2milliontoreimburse forthequalitysystem. theBEPforexpensesincurredbyitsDestruction CounterfeitDeterrence StandardsandComplianceDivisionof theOfficeof ComplianceandMutilatedCurrencyDivisionof the The2014budgetforcounterfeit-deterrenceresearch Officeof FinancialManagement.TheOfficeof is$7.2million.Thebudgetincludes$5.1millionfor

FederalReserveSystemBudgets 409 membershipintheCentralBankCounterfeitDeter- thosesecurityfeaturestodistinguishbetweengenuine renceGroup(CBCDG).TheCBCDGoperates andcounterfeitnotes. undertheauspicesof theG-10centralbankgovernorstocombatdigitalcounterfeitingandincludes The2014budgetreflectscontinuedactivityassoci- 33centralbanks. atedwitheducatingtheglobalpublicaboutthenewdesign$100note.Thisincludesworkthatwaspostponedbecauseof theshutdownof theU.S.govern- CurrencyEducationProgram mentinOctober2013.Spendingfor2014isexpected The2014CEPbudgetis$4.4million.TheCEPis todecreaseafterthesecondquarterof 2014because designedtoprotectandmaintainconfidenceinU.S. educationaleffortswillshifttopost-issuancelevels. currencyworldwidebyprovidinginformationonall Majorexpensedriversforthe2014budgetinclude circulatingdesignsof FederalReservenotestothe thefulfillmentof educationalmaterialsinmorethan globalpublic.Theprogramworkstoensurethat 20languages,internationaloutreachtobusinesses usersof U.S.currencyknowwhatgenuineFederal andretailersinmorethan25countries,andhosting Reservenoteslooklike,areawareof thesecurityfea- anddevelopingtheNewMoney.goveducational turesineachdenomination,andknowhowtouse website.

411 13 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 Boardmembersfrom1914throughthepresent,visitwww.federalreserve.gov/aboutthefed/bios/board/boardmembership .htm. BenS.Bernanke ElizabethA.Duke SarahBloomRaskin Chairman (resignedAugust31,2013) JeremyC.Stein JanetL.Yellen DanielK.Tarullo JeromeH.Powell 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 100thAnnualReport|2013 LegalDivision ScottG.Alvarez StephanieMartin JeanC.Anderson GeneralCounsel AssociateGeneralCounsel AssistantGeneralCounsel RichardM.Ashton LaurieS.Schaffer AlisonM.Thro DeputyGeneralCounsel AssociateGeneralCounsel AssistantGeneralCounsel KathleenM.O’Day KatherineH.Wheatley CaryK.Williams DeputyGeneralCounsel AssociateGeneralCounsel AssistantGeneralCounsel OfficeoftheSecretary RobertdeV.Frierson MargaretM.Shanks MichaelJ.Lewandowski Secretary DeputySecretary AssociateSecretary DivisionofInternationalFinance StevenB.Kamin CharlesP.Thomas SallyM.Davies Director AssociateDirector SeniorAdviser ThomasA.Connors BethAnneWilson BrianM.Doyle DeputyDirector AssociateDirector SeniorAdviser MichaelP.Leahy ShaghilAhmed JaneHaltmaier DeputyDirector DeputyAssistantDirector SeniorAdviser TrevorA.Reeve JosephW.Gruber JohnH.Rogers SeniorAssociateDirector DeputyAssistantDirector SeniorAdviser ChristopherJ.Erceg JamesDahl SeniorAssociateDirector AssistantDirector DavidH.Bowman MarkS.Carey AssociateDirector SeniorAdviser OfficeofFinancialStabilityPolicyandResearch J.NellieLiang MichaelT.Kiley RochelleM.Edge Director AssociateDirector AssistantDirector AndreasW.Lehnert JohnW.Schindler DeputyDirector AssistantDirector DivisionofMonetaryAffairs WilliamB.English GretchenC.Weinbach MatthewM.Luecke Director AssociateDirector AssistantDirector SethB.Carpenter EgonZakrajsek EdwardM.Nelson DeputyDirector AssociateDirector AssistantDirector JamesA.Clouse WilliamF.Bassett MinWei DeputyDirector DeputyAssociateDirector AssistantDirector StephenA.Meyer MargaretG.DeBoer DeborahJ.Danker DeputyDirector DeputyAssociateDirector SeniorAdviser WilliamNelson JaneE.Ihrig EllenE.Meade DeputyDirector DeputyAssociateDirector SeniorAdviser FabioM.Natalucci J.DavidLopez-Salido JoyceK.Zickler AssociateDirector DeputyAssociateDirector SeniorAdviser

FederalReserveSystemOrganization 413 MaryT.Hoffman RobertJ.Tetlow Adviser Adviser DivisionofResearchandStatistics DavidW.Wilcox MichaelG.Palumbo StevenA.Sharpe Director AssociateDirector AssistantDirector MatthewJ.Eichner S.WaynePassmore JohnJ.Stevens DeputyDirector AssociateDirector AssistantDirector JaniceShack-Marquez SeanD.Campbell StaceyM.Tevlin DeputyDirector DeputyAssociateDirector AssistantDirector WilliamL.WascherIII JeffreyC.Campione GlennB.Canner DeputyDirector DeputyAssociateDirector SeniorAdviser DanielM.Covitz JoshuaH.Gallin RobinA.Prager AssociateDirector DeputyAssociateDirector SeniorAdviser MichaelS.Cringoli DianaHancock AssociateDirector DeputyAssociateDirector KarenM.Pence Adviser EricM.Engen ArthurB.Kennickell AssociateDirector AssistantDirector JeremyRudd HeinrichT.Laubach ElizabethK.Kiser Adviser AssociateDirector AssistantDirector DavidE.Lebow JohnM.Roberts AssociateDirector AssistantDirector DivisionofBankingSupervisionandRegulation MichaelS.Gibson NidaDavis AdrienneT.Haden Director AssociateDirector AssistantDirector MaryannF.Hunter AnnMisback MichaelJ.Hsu DeputyDirector AssociateDirector AssistantDirector MarkE.VanDerWeide RichardA.NaylorII MichaelJ.Kraemer DeputyDirector AssociateDirector AssistantDirector BarbaraJ.Bouchard MichaelD.Solomon RyanP.Lordos SeniorAssociateDirector AssociateDirector AssistantDirector TimothyP.Clark JefferyW.Gunther DavidK.Lynch SeniorAssociateDirector DeputyAssociateDirector AssistantDirector JackP.JenningsII AnnaL.Hewko RobertT.Maahs SeniorAssociateDirector DeputyAssociateDirector AssistantDirector ArthurW.Lindo StevenP.Merriett ThomasK.Odegard SeniorAssociateDirector DeputyAssociateDirector AssistantDirector PeterJ.Purcell LisaH.Ryu NancyJ.Perkins SeniorAssociateDirector DeputyAssociateDirector AssistantDirector WilliamG.Spaniel MichaelJ.Sexton CatherineA.Piche SeniorAssociateDirector DeputyAssociateDirector AssistantDirector ToddA.Vermilyea MaryL.Aiken TameikaL.Pope SeniorAssociateDirector AssistantDirector AssistantDirector KevinM.Bertsch RobertT.Ashman LaurieF.Priest AssociateDirector AssistantDirector AssistantDirector

414 100thAnnualReport|2013 RichardC.Watkins NorahM.Barger MollyE.Mahar AssistantDirector SeniorAdviser Adviser SuzanneL.Williams DavidS.Jones WilliamF.Treacy AssistantDirector SeniorAdviser Adviser SarkisYoghourtdjian KeithA.Ligon 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 LawrenceE.Mize Director AssociateDirector AssistantDirector JeffreyC.Marquardt LisaK.Hoskins LoreleiW.Pagano DeputyDirector DeputyAssociateDirector AssistantDirector SusanV.Foley JenniferA.Lucier MarybethTraverso SeniorAssociateDirector DeputyAssociateDirector AssistantDirector Jeff J.Stehm StuartE.Sperry JeffreyD.Walker SeniorAssociateDirector DeputyAssociateDirector AssistantDirector KennethD.Buckley ShaunE.Ferrari PaulW.Bettge AssociateDirector AssistantDirector SeniorAdviser GregoryL.Evans TimothyW.Maas AssociateDirector AssistantDirector MichaelJ.Lambert DavidC.Mills AssociateDirector AssistantDirector OfficeoftheChiefOperatingOfficer DonaldV.Hammond SandraA.Cannon Chief OperatingOfficer DeputyChief DataOfficer MichelineM.Casey SheilaClark Chief DataOfficer DiversityandInclusionPrograms Director DivisionofFinancialManagement WilliamL.Mitchell ChristineM.Fields ChristopherJ.Suma DirectorandChief Financial AssociateDirector AssistantDirector Officer JeffreyR.Peirce KarenL.Vassallo DeputyAssociateDirector AssistantDirector

FederalReserveSystemOrganization 415 ManagementDivision MichellC.Clark TaraTinsley-Pelitere ReginaldV.Roach Director AssociateDirector AssistantDirector DavidJ.Capp KeithF.Bates CarolA.Sanders DeputyDirector AssistantDirector AssistantDirector DavidJ.Harmon CurtisB.Eldridge TheresaA.Trimble DeputyDirector AssistantDirectorandChief AssistantDirector MarieS.Savoy JeffreyMartin ToddA.Glissman SeniorAssociateDirector AssistantDirector SeniorAdviser DivisionofInformationTechnology SharonL.Mowry WilliamDennison TheresaC.Palya Director DeputyAssociateDirector AssistantDirector GearyL.Cunningham GlennS.Eskow VirginiaM.Wall DeputyDirector DeputyAssociateDirector AssistantDirector WayneA.Edmondson MariettaMurphy EdgarWang DeputyDirector DeputyAssociateDirector AssistantDirector LisaM.Bell KassandraAranaQuimby CharlesB.YoungII AssociateDirector DeputyAssociateDirector AssistantDirector RaymondRomero SherylLynnWarren TillenaG.Clark AssociateDirector DeputyAssociateDirector Adviser KofiA.Sapong RajasekharR.Yelisetty CanXuanNguyen AssociateDirector DeputyAssociateDirector Adviser OfficeofInspectorGeneral MarkBialek EliseM.Ennis LawrenceK.Valett InspectorGeneral AssociateInspectorGeneral AssociateInspectorGeneral JamesA.Ogden MelissaM.Heist DeputyInspectorGeneral AssociateInspectorGeneral JacquelineM.Becker AndrewPatchanJr. AssociateInspectorGeneral AssociateInspectorGeneral

416 100thAnnualReport|2013 FEDERAL OPEN MARKET COMMITTEE TheFederalOpenMarketCommitteeismadeupof thesevenmembersof theBoardof Governors;thepresidentof theFederalReserveBankof NewYork;andfourof theremaining11FederalReserveBankpresidents, whoserveone-yeartermsonarotatingbasis.During2013,theFederalOpenMarketCommitteeheldeight regularlyscheduledmeetings(seesection8,“Minutesof FederalOpenMarketCommitteeMeetings”). Members BenS.Bernanke CharlesL.Evans EricRosengren Chairman,Boardof Governors President,FederalReserveBank President,FederalReserveBank of Chicago of Boston WilliamC.Dudley ViceChairman,President,Federal EstherL.George JeremyC.Stein ReserveBankof NewYork President,FederalReserveBank Member,Boardof Governors JamesBullard of KansasCity DanielK.Tarullo President,FederalReserveBank JeromeH.Powell Member,Boardof Governors of St.Louis Member,Boardof Governors JanetL.Yellen ElizabethDuke SarahBloomRaskin Member,Boardof Governors Member,Boardof Governors Member,Boardof Governors (throughAugust2013) AlternateMembers ChristineM.Cumming NarayanaKocherlakota CharlesI.Plosser FirstVicePresident,Federal President,FederalReserveBank President,FederalReserveBank ReserveBankof NewYork of Minneapolis of Philadelphia RichardW.Fisher SandraPianalto President,FederalReserveBank President,FederalReserveBank of Dallas of Cleveland Officers WilliamB.English StevenB.Kamin DavidReifschneider SecretaryandEconomist Economist AssociateEconomist(through September2013) DeborahJ.Danker DavidW.Wilcox DeputySecretary Economist DanielG.Sullivan MatthewM.Luecke AssociateEconomist ThomasA.Connors AssistantSecretary AssociateEconomist GeoffreyTootell DavidW.Skidmore AssociateEconomist TroyDavig AssistantSecretary AssociateEconomist ChristopherJ.Waller MichelleA.Smith AssociateEconomist MichaelP.Leahy AssistantSecretary AssociateEconomist WilliamWascher ScottG.Alvarez AssociateEconomist GeneralCounsel JamesJ.McAndrews AssociateEconomist SimonPotter ThomasC.Baxter Manager,SystemOpenMarket DeputyGeneralCounsel StephenA.Meyer Account AssociateEconomist RichardM.Ashton AssistantGeneralCounsel

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.In2013,itmetonFebruary7–8,May16–17,September19–20, andDecember5–6.ThecouncilmetwiththeBoardonFebruary8,May17,September20,andDecember6, 2013. Members District1 District6 District11 JosephL.Hooley DarylG.Byrd RichardW.EvansJr. Chairman,President,andChief PresidentandChief Executive ChairmanandChief Executive ExecutiveOfficer,StateStreet Officer,IBERIABANK Officer,Cullen/FrostBankers Corporation,Boston,MA Corporation,Lafayette,LA Inc.,SanAntonio,TX(resigned August1,2013) District2 District7 RalphW.BabbJr. JamesP.Gorman DavidW.Nelms ChairmanandCEO,Comerica ChairmanandChief Executive ChairmanandChief Executive Inc.andComericaBank, Officer,MorganStanley,New Officer,DiscoverFinancial Dallas,TX York,NY Services,Riverwoods,IL District12 District3 District8 J.MichaelShepherd BharatB.Masrani D.BryanJordan ChairmanandChief Executive PresidentandChief Executive Chairman,President,andChief Officer,Bankof theWestand Officer,TDBank, ExecutiveOfficer,FirstHorizon BancWestCorporation,San CherryHill,NJ NationalCorporation, Francisco,CA Memphis,TN District4 JamesE.Rohr District9 ChairmanandChief Executive PatrickJ.Donovan Officer,ThePNCFinancial PresidentandCEO,Bremer ServicesGroup,Inc., FinancialCorporation,St. Pittsburgh,PA Paul,MN District5 District10 KellyS.King JonathanM.Kemper ChairmanandChief Executive ChairmanandCEO,Commerce Officer,BB&T Bank,N.A.(KansasCity), Corporation,Winston-Salem,NC KansasCity,MO

418 100thAnnualReport|2013 Officers JamesE.Rohr D.BryanJordan JamesE.Annable President VicePresident Secretary CommunityDepositoryInstitutionsAdvisoryCouncil TheCommunityDepositoryAdvisoryCounciladvisestheBoardof Governorsontheeconomy,leadingconditions,andotherissues.Membersareselectedfromrepresentativesof banks,thriftinstitutions,andcreditunions servingonlocaladvisorycouncilsatthe12FederalReserveBanks.Onememberof eachof theReserveBank councilsservesontheCommunityDepositoryInstitutionsAdvisoryCouncil,whichmeetstwiceayearwiththe FederalReserveBoardinWashington. Members CharlesH.Majors MichaelJ.Castellana TerryLobdell ExecutiveChairman,American PresidentandChief Executive President,CommunityFirstBank NationalBankandTrust, Officer,SEFCU,Albany,NY of Glendive,Glendive,MT Danville,VA DennisD.Cirucci (resignedAugust2013) DrakeMills PresidentandChief Executive BrianL.Johnson PresidentandChief Executive Officer,AllianceBank, Chief ExecutiveOfficer,Choice Officer,CommunityTrustBank, Broomall,PA FinancialGroup,Grand Ruston,LA JohnB.Dicus Forks,ND Chairman,President,andChief GlennD.Barks EddieSteiner ExecutiveOfficer,CapitolFederal PresidentandChief Executive PresidentandChief Executive SavingsBank,Topeka,KS Officer,FirstCommunityCredit Officer,TheCommercialand Union,Chesterfield,MO JohnV.EvansJr. SavingsBankof Millersburg, Chief ExecutiveOfficer,D.L. Ohio,Millersburg,OH ClaireW.Tucker EvansBank,Burley,ID PresidentandChief Executive ChandlerJ.Howard Officer,CapStarBank, PresidentandChief Executive Nashville,TN Officer,LibertyBank, Middletown,CT Officers CharlesH.Majors DrakeMills President VicePresident

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

420 100thAnnualReport|2013 FEDERAL RESERVE BANKS AND BRANCHES Tocarryouttheday-to-dayoperationsof theFederalReserveSystem,thenationhasbeendividedinto 12FederalReserveDistricts,eachwithaReserveBank.Themajorityof ReserveBanksalsohaveatleastone Branch.AsrequiredbytheFederalReserveActof 1913,eachof theReserveBanksissupervisedbyaboardof directorswhoarefamiliarwitheconomicandcreditconditionsintheDistrict.Similarly,eachof the24Reserve BankBrancheshasaboardof directorswhoarefamiliarwithconditionsintheareaencompassedbythe Branch. 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.Eachyear,theBoardof GovernorsdesignatesoneClassCdirectortoserveaschair,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 PeterL.Judkins,2015 GaryL.Gottlieb,2014 PresidentandChief Executive PresidentandChief Executive RichardE.Holbrook,2013 Officer,FranklinSavingsBank, Officer,PartnersHealthCare ChairmanandChief Executive Farmington,ME System,Inc.,Boston,MA Officer,EasternBank, Boston,MA RogerS.Berkowitz,2015 ClassB PresidentandChief Executive KathrynG.Underwood,2014 JohnF.Fish,2013 Officer,LegalSeaFoods,LLC, PresidentandChief Executive ChairmanandChief Executive Boston,MA Officer,LedyardNationalBank, Officer,SuffolkConstruction Hanover,NH Company,Inc.,Boston,MA

FederalReserveSystemOrganization 421 ClassC WilliamD.Nordhaus,2014 SterlingProfessorof Economics, KirkA.Sykes,2013 YaleUniversity,NewHaven,CT President,NewBoston’sUrban StrategyAmericaFund, CatherineD’Amato,2015 Boston,MA PresidentandChief Executive Officer,TheGreaterBostonFood Bank,Boston,MA District2–NewYork ClassA ClassB ClassC GeraldH.Lipkin,2013 AlphonsoO’Neil-White,2013 KathrynS.Wylde,2013 Chairman,President,andChief PresidentandChief Executive PresidentandChief Executive ExecutiveOfficer,ValleyNational Officer,HealthNowNewYork Officer,PartnershipforNewYork Bank,Wayne,NJ Inc.,Buffalo,NY City,NewYork,NY PaulP.Mello,2014 TerryJ.Lundgren,2014 EmilyK.Rafferty,2014 PresidentandChief Executive Chairman,President,andChief President,TheMetropolitan Officer,SolvayBank,Solvay,NY ExecutiveOfficer,Macy’s,Inc., Museumof Art,NewYork,NY NewYork,NY RichardL.Carrión,2015 SaraHorowitz,2015 Chairman,President,andChief GlennH.Hutchins,2015 ExecutiveDirector,Freelancers ExecutiveOfficer,Popular,Inc., Co-Founder,SilverLake,New Union,Brooklyn,NY SanJuan,PR York,NY District3–Philadelphia ClassA ClassB ClassC R.ScottSmith,2013 KeithS.Campbell,2013 JeremyNowak,2013 RetiredChairmanandChief Chairman,ManningtonMills, President,J.Nowakand ExecutiveOfficer,Fulton Inc.,Salem,NJ Associates,LLC, FinancialCorporation, Philadelphia,PA PatrickHarker,2014 Lancaster,PA President,Universityof MichaelAngelakis,2014 FrederickC.“Ted”PetersII,2014 Delaware,Newark,DE ViceChairandChief Financial ChairmanandChief Executive Officer,ComcastCorporation, Officer,BrynMawrTrust RosemaryTurner,2015 Philadelphia,PA Company,BrynMawr,PA President,UPS–NorthCalifornia District,Oakland,CA JamesE.Nevels,2015 DavidR.Hunsicker,2015 FounderandChairman,The Chairman,President,andChief SwarthmoreGroup, ExecutiveOfficer,NewTripoli Philadelphia,PA Bank,NewTripoli,PA

422 100thAnnualReport|2013 District4–Cleveland ClassA CincinnatiBranch PittsburghBranch PaulG.Greig,2013 AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank 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 Columbus,OH Indiana,PA PresidentandChief Executive GregoryB.Kenny,2014 PetraMitchell,2014 Officer,FirstNationalBankof PresidentandChief Executive President,CatalystConnection, Pandora,Pandora,OH Officer,GeneralCable Pittsburgh,PA ClaudeE.Davis,2015 Corporation,Highland PresidentandChief Executive GrantOliphant,2015 Heights,KY Officer,FirstFinancialBancorp, PresidentandChief Executive Cincinnati,OH AmosL.Otis,2014 Officer,ThePittsburgh Founder,President,andChief Foundation,Pittsburgh,PA ClassB ExecutiveOfficer,SoBran,Inc., SeanMcDonald,2015 Dayton,OH Harold(Hal)Keller,2013 PresidentandChief Executive President,OhioCapital DonaldE.Bloomer,2015 Officer,PrecisionTherapeutics, CorporationforHousing, PresidentandChief Executive Inc.,Pittsburgh,PA Columbus,OH Officer,CitizensNationalBank, AppointedbytheBoardofGovernors Somerset,KY TilmonF.Brown,2014 GlennR.Mahone,2013 PresidentandChief Executive AppointedbytheBoardofGovernors PartnerandAttorneyatLaw, Officer,NewHorizonsBaking PeterS.Strange,2013 ReedSmithLLP,Pittsburgh,PA Company,Norwalk,OH Chairman,Messer,Inc., CharlesL.HammelIII,2014 SusanTomasky,2015 Cincinnati,OH President,PITTOHIO, EnergyConsultantandFormer DeborahA.Feldman,2014 Pittsburgh,PA President,AEPTransmission, PresidentandChief Executive Columbus,OH DawneS.Hickton,2015 Officer,TheChildren’sMedical ViceChair,President,andChief Centerof Dayton,Dayton,OH ClassC ExecutiveOfficer,RTI ChristopherM.Connor,2013 CharlesH.Brown,2015 InternationalMetals,Inc., ChairmanandChief Executive VicePresidentandSecretary, Pittsburgh,PA Officer,TheSherwin-Williams ToyotaMotorEngineeringand Company,Cleveland,OH Manufacturing,N.A., Erlanger,KY JohnP.Surma,2014 ExecutiveChairman,United StatesSteelCorporation, Pittsburgh,PA RichardK.Smucker,2015 Chief ExecutiveOfficer,TheJ.M. SmuckerCompany,Orrville,OH

FederalReserveSystemOrganization 423 District5–Richmond ClassA BaltimoreBranch CharlotteBranch AlanL.Brill,2013 AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank PresidentandChief Executive WilliamB.Grant,2013 RobertR.HillJr.,2013 Officer,CaponValleyBank, Chairman,President,andChief PresidentandChief Executive Wardensville,WV ExecutiveOfficer,FirstUnited Officer,SCBTFinancial EdwardL.WillinghamIV,2014 CorporationandFirstUnited Corporation,Columbia,SC President,FirstCitizens Bank&Trust,Oakland,MD PaulE.Szurek,2014 BancShares,Inc.,andFirst RichardBernstein,2014 Chief FinancialOfficer,Biltmore CitizensBank,Raleigh,NC PresidentandChief Executive Farms,LLC,Asheville,NC BradE.Schwartz,2015 Officer,LWRCInternational, Chief ExecutiveOfficer,Monarch LuciaZ.Griffith,2015 LLC,Cambridge,MD BankandMonarchFinancial Chief ExecutiveOfficerand Holdings,Inc.,Chesapeake,VA AnitaG.Newcomb,2015 Principal,METROLandmarks, PresidentandManagingDirector, Charlotte,NC ClassB A.G.Newcomb&Co., JohnS.Kreighbaum,2015 Columbia,MD PatrickC.GraneyIII,2013 PresidentandChief Executive Chairman,OneStop, ChristopherJ.Estes,2015 Officer,CarolinaPremierBank Charleston,WV PresidentandChief Executive andPremaraFinancial,Inc., Officer,NationalHousing Charlotte,NC MarshallO.Larsen,2014 Conference,Washington,DC RetiredChairman,President,and AppointedbytheBoardofGovernors Chief ExecutiveOfficer,Goodrich AppointedbytheBoardofGovernors ElizabethA.Fleming,2013 Corporation,Charlotte,NC SamuelL.Ross,2013 President,ConverseCollege, WilburE.Johnson,2015 Chief ExecutiveOfficer,Bon Spartanburg,SC ManagingPartner,Young SecoursBaltimoreHealthSystem, ClaudeZ.Demby,2014 ClementRivers,LLP, Baltimore,MD Chief ExecutiveOfficer,Noël Charleston,SC JennyG.Morgan,2014 Group,LLC,Zebulon,NC PresidentandChief Executive ClassC DavidJ.Zimmerman,2015 Officer,basys,inc., MargaretG.Lewis,2013 President,SouthernShows,Inc., Linthicum,MD President,HCACapitalDivision, Charlotte,NC Richmond,VA StephenR.Sleigh,2015 FundDirector,IAMNational LindaD.Rabbitt,2014 PensionFund,Washington,DC ChairmanandChief Executive Officer,RandConstruction Corporation,Washington,DC RussellC.Lindner,2015 ChairmanandChief Executive Officer,TheForgeCompany, Washington,DC

424 100thAnnualReport|2013 District6–Atlanta ClassA ThomasA.Fanning,2015 JacksonvilleBranch Chairman,President,andChief T.AnthonyHumphries,2013 AppointedbytheFederalReserveBank ExecutiveOfficer,Southern PresidentandChief Executive Company,Atlanta,GA MichaelJ.Grebe,2013 Officer,NobleBank&Trust, ChairmanandChief Executive Anniston,AL BirminghamBranch Officer,InterlineBrands,Inc., WilliamH.RogersJr.,2014 Jacksonville,FL ChairmanandChief Executive AppointedbytheFederalReserveBank HughF.Dailey,2014 Officer,SunTrustBanks,Inc., C.RichardMooreJr.,2013 PresidentandChief Executive Atlanta,GA Chairman,President,andChief Officer,CommunityBank& ExecutiveOfficer,Peoples GerardR.Host,2015 Trustof Florida,Ocala,FL SouthernBank,Clanton,AL PresidentandChief Executive Officer,TrustmarkCorporation, MackeB.Mauldin,2014 OscarJ.Horton,2015 Jackson,MS President,BankIndependent, PresidentandChief Executive Officer,SunStateInternational Sheffield,AL ClassB Trucks,LLC,Tampa,FL JohnA.Langloh,2015 JoséS.Suquet,2013 D.KevinJones,2015 PresidentandChief Executive Chairman,President,andChief Officer,UnitedWayof Central PresidentandChief Executive ExecutiveOfficer,Pan-American Alabama,Birmingham,AL Officer,MIDFLORIDACredit LifeInsuranceGroup, Union,Lakeland,FL JamesK.Lyons,2015 NewOrleans,LA DirectorandChief Executive AppointedbytheBoardofGovernors RenéeLewisGlover,2014 Officer,AlabamaStatePort CarolynM.Fennell,2013 FormerPresidentandChief Authority,Mobile,AL Directorof PublicAffairs,Greater ExecutiveOfficer,Atlanta OrlandoAviationAuthority, HousingAuthority,Atlanta,GA AppointedbytheBoardofGovernors OrlandoInternationalAirport, ClarenceOtisJr.,2015 BrandonW.Bishop,2013 Orlando,FL ChairmanandChief Executive BusinessManagerandFinancial Officer,DardenRestaurants,Inc., Secretary,InternationalUnionof LyndaL.Weatherman,2014 Orlando,FL OperatingEngineers-Local312, PresidentandChief Executive Birmingham,AL Officer,EconomicDevelopment Commissionof Florida’sSpace ClassC ThomasR.Stanton,2014 Coast,Rockledge,FL CarolB.Tomé,2013 ChairmanandChief Executive Chief FinancialOfficerand Officer,ADTRAN,Inc., ExecutiveVicePresident,The Huntsville,AL HomeDepot,Atlanta,GA PamelaB.Hudson,2015 ThomasI.Barkin,2014 Chief ExecutiveOfficer, Director,McKinsey&Company, CrestwoodMedicalCenter, Atlanta,GA Huntsville,AL

FederalReserveSystemOrganization 425 LeerieT.JenkinsJr.,2015 NashvilleBranch NewOrleansBranch Chairman,Reynolds,Smithand AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank Hills,Inc.,Jacksonville,FL WilliamY.CarrollJr.,2013 ElizabethA.Ardoin,2013 MiamiBranch PresidentandChief Executive SeniorExecutiveVicePresident– Officer,SmartBank, Directorof Communications, AppointedbytheFederalReserveBank PigeonForge,TN IBERIABANK,Lafayette,LA GaryL.Tice,2013 DanW.Hogan,2014 CarlJ.Chaney,2014 ChairmanandChief Executive Officer,FirstNationalBankof Chief OperatingOfficer,CapStar PresidentandChief Executive theGulf Coast,Naples,FL Bank,Nashville,TN Officer,HancockHolding Company,NewOrleans,LA JenniferS.Banner,2015 CarolC.Lang,2014 President,HealthLink Chief ExecutiveOfficer,Schaad PhillipR.May,2015 Enterprises,Inc.,Miami Companies,LLC,Knoxville,TN PresidentandChief Executive Beach,FL KentM.Adams,2015 Officer,EntergyLouisiana,LLC andEntergyGulf States FacundoL.Bacardi,2014 PresidentandChief Executive Chairman,BarcardiLimited, Officer,CaterpillarFinancial Louisiana,L.L.C.,Jefferson,LA CoralGables,FL ServicesCorporation,Nashville, Vacancy,2015 TN MillarWilson,2015 VicePresident,Caterpillar,Inc., AppointedbytheBoardofGovernors PresidentandChief Executive Peoria,IL TerrieP.Sterling,2013 Officer,Mercantil ExecutiveVicePresidentand Commercebank,Coral AppointedbytheBoardofGovernors Chief OperatingOfficer,Our Gables,FL KathleenCalligan,2013 Ladyof theLakeRegional Chief ExecutiveOfficer,Better AppointedbytheBoardofGovernors MedicalCenter,BatonRouge,LA BusinessBureauMiddle MichaelJ.Jackson,2013 Tennessee,Nashville,TN T.LeeRobinsonJr.,2014 ChairmanandChief Executive President,OHC,Inc.,Mobile,AL Officer,AutoNation,Inc., ScottMcWilliams,2014 FortLauderdale,FL ExecutiveChairman,OHL, KevinP.Reilly,Jr.,2015 ThomasW.Hurley,2014 Brentwood,TN PresidentandChairmanof the Board,LamarAdvertising ChairmanandChief Executive WilliamJ.Krueger,2015 Company,BatonRouge,LA Officer,BeckerHolding SeniorVicePresident, Corporation,VeroBeach,FL Manufacturing,Process AlbertoDosal,2015 Engineering,Purchasing,Supply ChairmanandChief Executive ChainManagementandTotal Officer,DosalCapital,LLC, CustomerSatisfaction,Nissan Miami,FL Americas,Franklin,TN District7–Chicago ClassA FrederickH.Waddell,2014 WilliamM.Farrow,2015 ChairmanandChief Executive PresidentandChief Executive MarkC.Hewitt,2013 Officer,NorthernTrust Officer,UrbanPartnershipBank, PresidentandChief Executive CorporationandTheNorthern Chicago,IL Officer,ClearLakeBank&Trust TrustCompany,Chicago,IL Company,ClearLake,IA

426 100thAnnualReport|2013 ClassB GregBrown,2015 SheilahP.Clay,2015 ChairmanandChief Executive PresidentandChief Executive JorgeRamirez,2013 Officer,MotorolaSolutions,Inc., Officer,NeighborhoodService President,ChicagoFederationof Schaumburg,IL Organization,Detroit,MI Labor,Chicago,IL AppointedbytheBoardofGovernors NeldaJ.Connors,2014 DetroitBranch ChairwomanandChief Executive CarlT.Camden,2013 Officer,PineGroveHoldings, AppointedbytheFederalReserveBank PresidentandChief Executive LLC,Chicago,IL NancyM.Schlichting,2013 Officer,KellyServices,Inc., Chief ExecutiveOfficer,Henry Troy,MI TerryMazany,2015 FordHealthSystem,Detroit,MI PresidentandChief Executive MichaelE.Bannister,2014 Officer,TheChicagoCommunity SusanM.Collins,2014 RetiredChairmanandChief Trust,Chicago,IL JoanandSanfordWeillDeanof ExecutiveOfficer,FordMotor PublicPolicy,Universityof CreditCompany,Dearborn,MI ClassC Michigan,AnnArbor,MI LouAnnaK.Simon,2015 Vacancy,2013 FernandoRuiz,2014 President,MichiganState JeffreyA.Joerres,2014 CorporateVicePresidentand University,EastLansing,MI ChairmanandChief Executive Treasurer,TheDowChemical Officer,ManpowerGroup, Company,Midland,MI Milwaukee,WI District8–St.Louis ClassA ClassB ClassC RobertG.Jones,2013 CalMcCastlain,2013 SharonD.Fiehler,2013 PresidentandChief Executive Partner,DoverDixonHorne ExecutiveVicePresidentand Officer,OldNationalBancorp, PLLC,LittleRock,AR Chief AdministrativeOfficer, Evansville,IN PeabodyEnergy, GregoryM.Duckett,2014 St.Louis,MO SusanS.Stephenson,2014 SeniorVicePresidentand Co-ChairmanandPresident, CorporateCounsel,Baptist WardM.Klein,2014 IndependentBank,Memphis,TN MemorialHealthCare Chief ExecutiveOfficer,Energizer Corporation,Memphis,TN Holdings,Inc.,St.Louis,MO WilliamE.Chappel,2015 PresidentandChief Executive SonjaYatesHubbard,2015 GeorgePaz,2015 Officer,TheFirstNationalBank, Chief ExecutiveOfficer,E-ZMart Chairman,President,andChief Vandalia,IL Stores,Inc.,Texarkana,TX ExecutiveOfficer,ExpressScripts, St.Louis,MO

FederalReserveSystemOrganization 427 LittleRockBranch LouisvilleBranch MemphisBranch AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank MichaelA.Cook,2013 DavidP.Heintzman,2013 MarkP.Fowler,2013 SeniorVicePresidentand ChairmanandChief Executive ViceChairman,LibertyBankof AssistantTreasurer,Wal-Mart Officer,StockYardsBank& Arkansas,Jonesboro,AR Stores,Inc.,Bentonville,AR TrustCompany,Louisville,KY ClydeWarrenNunn,2014 Vacancy,2014 MalcolmBryant,2014 ChairmanandPresident,Security President,TheMalcolmBryant Bancorpof Tennessee,Inc., MaryAnnGreenwood,2014 Corporation,Owensboro,KY Halls,TN ChairmanandInvestmentAdvisor, R.MolitorFord,Jr.,2014 GreenwoodGearhartInc., KevinShurn,2014 ViceChairmanandChief Fayetteville,AR PresidentandOwner,Superior ExecutiveOfficer,Commercial MaintenanceCo., RonaldB.Jackson,2015 BankandTrustCompany, Elizabethtown,KY ChairmanandChief Executive Memphis,TN Officer,SimmonsFirstBank, JonA.Lawson,2015 LisaMcDanielHawkins,2015 Russellville,AR President,Chief ExecutiveOfficer, President,RoomtoRoom, andChairman,Bankof Ohio Tupelo,MS AppointedbytheBoardofGovernors County,BeaverDam,KY KaleybraMitchellMorehead, AppointedbytheBoardofGovernors AppointedbytheBoardofGovernors 2013,VicePresidentforCollege CharlesS.Blatteis,2013 GaryA.Ransdell,2013 Affairs/Advancement,Southeast ManagingMember,BlatteisLaw President,WesternKentucky ArkansasCollege,PineBluff,AR Firm,PLLC,Memphis,TN University,BowlingGreen,KY RayC.Dillon,2014 LawrenceC.Long,2014 PresidentandChief Executive GeraldR.Martin,2014 Partner,St.RestPlantingCo., Officer,DelticTimber ManagingMember,RiverHill Indianola,MS Capital,LLC,Louisville,KY Corporation,ElDorado,AR CharlieE.ThomasIII,2015 SusanE.Parsons,2015 RegionalDirectorof External& RobertMartinez,2015 Chief FinancialOfficer,Secretary, LegislativeAffairs, Owner,RanchoLaEsperanza, andTreasurer,KochEnterprises, AT&TTennessee, DeQueen,AR Inc.,Evansville,IN Memphis,TN District9–Minneapolis ClassA ClassB ClassC JulieCausey,2013 LawrenceR.Simkins,2013 MaryK.Brainerd,2013 Chairman,WesternBank, PresidentandChief Executive PresidentandChief Executive St.Paul,MN Officer,TheWashington Officer,HealthPartners, Companies,Missoula,MT Minneapolis,MN KennethA.Palmer,2014 Chairman,President,andChief HowardA.Dahl,2014 MayKaoY.Hang,2014 ExecutiveOfficer,Range PresidentandChief Executive PresidentandChief Executive FinancialCorporation&Range Officer,AmityTechnologyLLC, Officer,AmherstH.Wilder Bank,NA,Marquette,MI Fargo,ND Foundation,St.Paul,MN RandyL.Newman,2015 ChristineHamilton,2015 RandallJ.Hogan,2015 ChairmanandChief Executive ManagingPartner,Christiansen ChairmanandChief Executive Officer,AlerusFinancial,NAand LandandCattle,Ltd, Officer,Pentair, AlerusFinancialCorp.,Grand Kimball,SD Minneapolis,MN Forks,ND

428 100thAnnualReport|2013 HelenaBranch BarbaraStiffarm,2015 MarshaGoetting,2015 ExecutiveDirector,Opportunity ProfessorandExtensionFamily AppointedbytheFederalReserveBank Link,Inc.,Havre,MT EconomicsSpecialist,Montana ThomasR.Swenson,2013 StateUniversity,Bozeman,MT PresidentandChief Executive AppointedbytheBoardofGovernors Officer,Bankof Montanaand DavidB.Solberg,2014 Bancorpof MontanaHolding Owner,SevenBlackfootRanch Company,Missoula,MT Company,Billings,MT DuanaKurokawa,2014 President,WesternBankof Wolf Point,Wolf Point,MT District10–KansasCity ClassA SteveMaestas,2015 RichardL.Lewis,2015 ManagingPartner,NAIMaestas PresidentandChief Executive MaxT.Wake,2013 andWard,Albuquerque,NM Officer,RTLNetworksInc., President,JonesNationalBank& Denver,CO TrustCo.,Seward,NE DenverBranch Vacancy,2014 OklahomaCityBranch AppointedbytheFederalReserveBank DavidW.Brownback,2015 MarkA.Zaback,2013 AppointedbytheFederalReserveBank PresidentandChief Executive Officer,CitizensStateBank& PresidentandChief Executive DouglasE.Tippens,2013 TrustCompany,Ellsworth,KS Officer,JonahBankof Wyoming, PresidentandChief Executive Casper,WY Officer,Bankof Commerce, ClassB BrianR.Wilkinson,2014 Yukon,OK President,SteeleStreetBank& LenC.Rodman,2013 PaulaD.Bryant-Ellis,2013 Trust,Denver,CO Chairman,President,andChief Chief OperatingOfficer,BOK ExecutiveOfficer,Black& AnneHainesYatskowitz,2015 FinancialMortgageGroup, Veatch,OverlandPark,KS PresidentandChief Executive Tulsa,OK Officer,ACCIONNew RichardK.Ratcliffe,2014 LindaCapps,2014 Mexico–Arizona–Colorado, Chairman,Ratcliffe’sInc., ViceChairman,Citizen Albuquerque,NM Weatherford,OK PotawatomiNation, JohnT.StoutJr.,2015 LillyMarks,2015 Shawnee,OK VicePresidentforHealthAffairs Chief ExecutiveOfficer,Plaza MichaelC.Coffman,2015 andExecutiveViceChancellor, BelmontManagementGroup PresidentandChief Executive Universityof Coloradoand LLC,ShawneeMission,KS Officer,PanhandleOilandGas, AnschutzMedicalCampus, Inc.,OklahomaCity,OK Aurora,CO ClassC RoseWashington,2013 AppointedbytheBoardofGovernors AppointedbytheBoardofGovernors ExecutiveDirector,Tulsa MargaretM.Kelly,2013 K.Vasudevan,2013 EconomicDevelopment Chief ExecutiveOfficer, ChairmanandFounder,Service& Corporation,Tulsa,OK RE/MAX,LLC,Denver,CO TechnologyCorporation, Bartlesville,OK BarbaraMowry,2014 LarissaL.Herda,2014 Chief ExecutiveOfficer, Chair,Chief ExecutiveOfficer, JamesD.Dunn,2014 GoreCreekAdvisors,Greenwood andPresident,twtelecominc., Chair,MillCreekLumber& Village,CO Littleton,CO SupplyCo.,Tulsa,OK

FederalReserveSystemOrganization 429 PeterB.Delaney,2015 JamesL.Thom,2015 JamesC.Farrell,2014 Chairman,Chief Executive VicePresident,T-LIrrigationCo., PresidentandChief Executive Officer,andPresident,OGE Hastings,NE Officer,FarmersNational EnergyCorporation, Company,Omaha,NE BrianD.Esch,2015 OklahomaCity,OK PresidentandChief Executive G.RichardRussell,2015 Officer,McCookNationalBank, PresidentandChief Executive OmahaBranch McCook,NE Officer,MillardLumberInc., AppointedbytheFederalReserveBank Omaha,NE AppointedbytheBoardofGovernors JoAnnM.Martin,2013 AnneHindery,2013 Chair,President,andChief ExecutiveOfficer,AmeritasLife Chief ExecutiveOfficer, InsuranceCorp.,Lincoln,NE NonprofitAssociationof the Midlands,Omaha,NE Jeff W.Krejci,2014 PresidentandViceChairman, FirstStateBankNebraska, Lincoln,NE District11–Dallas ClassA JorgeA.Bermudez,2014 ElPasoBranch PresidentandChief Executive JoeKimKing,2013 AppointedbytheFederalReserveBank Officer,ByebrookGroup,College Chief ExecutiveOfficerand Station,TX LarryL.Patton,2013 Chairmanof theBoard,Texas PresidentandChief Executive CountryBancshares,Inc., AnnB.Stern,2015 Officer,WestStarBank, Brady,TX PresidentandChief Executive ElPaso,TX GeorgeF.JonesJr.,2014 Officer,HoustonEndowment, LauraM.Conniff,2014 Chief ExecutiveOfficer,Texas Inc.,Houston,TX QualifyingBroker,Mathers CapitalBank,Dallas,TX Realty,Inc.,LasCruces,NM ClassC AllanJames“Jimmy”Rasmussen, 2015 HerbertD.Kelleher,2013 JerryPacheco,2014 PresidentandChief Executive FounderandChairmanEmeritus, President,GlobalPerspectives Officer,HomeTownBank,N.A., SouthwestAirlines,Dallas,TX Integrated,Inc.,Santa Teresa,NM Galveston,TX RenuKhator,2014 Chancellor/President,University RobertNachtmann,2015 ClassB of Houston,Houston,TX DeanandProfessorof Finance, TheUniversityof TexasatEl EltonM.Hyder,2013 MyronE.UllmanIII,2015 Paso,ElPaso,TX President,TheEMH Chief ExecutiveOfficer,J.C. Corporation,FortWorth,TX PenneyCompany,Inc.,Plano,TX

430 100thAnnualReport|2013 AppointedbytheBoardofGovernors KirkS.Hachigian,2014 YgnacioD.Garza,2014 CindyJ.Ramos-Davidson,2013 Principal,SkyKarrCapitalLLC, Partner,LongChiltonLLP, PresidentandChief Executive Houston,TX Brownsville,TX Officer,ElPasoHispanic PaulB.MurphyJr.,2015 JanieBarrera,2014 Chamberof Commerce, PresidentandChief Executive PresidentandChief Executive ElPaso,TX Officer,CadenceBank, Officer,AccionTexas,Inc., RobertE.McKnightJr.,2014 Houston,TX SanAntonio,TX Partner,McKnightRanch AppointedbytheBoardofGovernors ManojSaxena,2015 Company,FortDavis,TX GregL.Armstrong,2013 GeneralManager,IBMSoftware RenardU.Johnson,2015 ChairmanandChief Executive Group,IBM,Austin,TX PresidentandChief Executive Officer,PlainsAllAmerican AppointedbytheBoardofGovernors Officer,Management& Pipeline,L.P.,Houston,TX CurtisV.Anastasio,2013 EngineeringTechnologies PaulW.Hobby,2014 PresidentandChief Executive InternationalInc.(METI),El ChairmanandFoundingPartner, Officer,NuStarEnergyL.P., Paso,TX GenesisPark,LP,Houston,TX SanAntonio,TX HoustonBranch EllenOchoa,2015 ThomasE.Dobson,2014 Director,NASAJohnsonSpace ChairmanandChief Executive AppointedbytheFederalReserveBank Center,Houston,TX Officer,Whataburger GeraldB.Smith,2013 Restaurants,L.P., ChairmanandChief Executive SanAntonioBranch SanAntonio,TX Officer,Smith,Graham& AppointedbytheFederalReserveBank CatherineM.Burzik,2015 CompanyInvestmentAdvisors, JosueRoblesJr.,2013 FormerPresidentandChief L.P.,Houston,TX PresidentandChief Executive ExecutiveOfficer,Kinetic Vacancy,2014 Officer,USAA,SanAntonio,TX Concepts,Inc.,SanAntonio,TX District12–SanFrancisco ClassA ClassB ClassC BetsyLawer,2013 NicoleC.Taylor,2013 PatriciaE.Yarrington,2013 ViceChairandPresident,First PresidentandChief Executive VicePresidentandChief Financial NationalBankAlaska, Officer,ThriveFoundationfor Officer,ChevronCorporation, Anchorage,AK Youth,MenloPark,CA SanRamon,CA MeganF.Clubb,2014 RichardA.Galanti,2014 RoyA.Vallee,2014 PresidentandChief Executive ExecutiveVicePresidentand RetiredExecutiveChairmanand Officer,BakerBoyerNational Chief FinancialOfficer,Costco Chief ExecutiveOfficer,Avnet, Bank,WallaWalla,WA WholesaleCorporation, Inc.,Phoenix,AZ Issaquah,WA PeterS.Ho,2015 AlexanderR.Mehran,2015 Chairman,President,andChief StevenE.Bochner,2015 PresidentandChief Executive ExecutiveOfficer,Bankof Partner,Wilson,Sonsini, Officer,SunsetDevelopment HawaiiandBankof Hawaii Goodrich,&Rosati,P.C.,Palo Company,SanRamon,CA Corporation,Honolulu,HI Alto,CA

FederalReserveSystemOrganization 431 LosAngelesBranch TamaraL.Lundgren,2014 PatrickF.Keenan,2014 PresidentandChief Executive Chief FinancialOfficer,RioTinto AppointedbytheFederalReserveBank Officer,SchnitzerSteelIndustries, KennecottUtahCopper,South DavidI.Rainer,2013 Inc.,Portland,OR Jordan,UT Chairman,President,andChief S.RandolphCompton,2015 BradleyJ.Wiskirchen,2015 ExecutiveOfficer,California President,Chief ExecutiveOfficer, Chief ExecutiveOfficer, UnitedBank,Encino,CA andCo-Chairpersonof theBoard, Keynetics,Inc.,Boise,ID PeggyTsiangCherng,2014 PioneerTrustBank,N.A., Co-Chairof theBoardand Salem,OR SeattleBranch Co-Chief ExecutiveOfficer, PandaRestaurantGroup,Inc., AppointedbytheBoardofGovernors AppointedbytheFederalReserveBank JosephE.RobertsonJr.,M.D., Rosemead,CA NicoleW.Piasecki,2013 2013,President, VicePresidentandGeneral JohnC.Molina,2015 OregonHealth&Science Manager,PropulsionSystems Chief FinancialOfficer,Molina University,Portland,OR Division,BoeingCommercial Healthcare,Inc.,LongBeach,CA RoderickC.Wendt,2014 Airplanes,Everett,WA JamesA.Hughes,2015 Chief ExecutiveOfficer, ScottL.Morris,2014 Chief ExecutiveOfficer,First JELD-WEN,inc.,Klamath Chairman,President,andChief Solar,Inc.,Tempe,AZ Falls,OR ExecutiveOfficer,Avista AppointedbytheBoardofGovernors RománD.Hernández,2015 Corporation,Spokane,WA Shareholder,Schwabe, GraceEvansCherashore,2013 Williamson&Wyatt,P.C., PatrickG.Yalung,2014 PresidentandChief Executive Portland,OR RegionalPresident,Washington, Officer,EvansHotels, WellsFargoBank,N.A., SanDiego,CA SaltLakeCityBranch Seattle,WA KeithE.Smith,2014 GregC.Leeds,2015 AppointedbytheFederalReserveBank PresidentandChief Executive PresidentandChief Executive AlbertT.Wada,2013 Officer,BoydGaming Officer,Wizardsof theCoast, Chairman,WadaFarms,Inc., Corporation,LasVegas,NV Hasbro,Inc.,Renton,WA Pingree,ID Vacancy,2015 JoshEngland,2014 AppointedbytheBoardofGovernors PresidentandChief Financial MarthaChoe,2013 PortlandBranch Officer,C.R.England,Inc.,Salt Chief AdministrativeOfficer, AppointedbytheFederalReserveBank LakeCity,UT TheBill&MelindaGates RogerW.Hinshaw,2013 DamonG.Miller,2014 Foundation,Seattle,WA President,OregonandSW UtahMarketPresident,U.S. AdaM.Healey,2014 WashingtonandCommercial Bank,SaltLakeCity,UT VicePresident,RealEstate, MarketExecutiveforOregonand SusanD.MooneyJohnson,2015 VulcanInc.,Seattle,WA InlandNorthwest,Bankof President,FuturaIndustries, MaryO.McWilliams,2015 AmericaOregon,N.A., Clearfield,UT ExecutiveDirector,PugetSound Portland,OR AppointedbytheBoardofGovernors HealthAlliance,Seattle,WA RobertC.Hale,2014 ScottL.Hymas,2013 Chief ExecutiveOfficer,Hale Chief ExecutiveOfficer,RC Companies,Hermiston,OR Willey,SaltLakeCity,UT

432 100thAnnualReport|2013 ReserveBankandBranchLeadership Eachyear,theBoardof GovernorsdesignatesoneClassCdirectortoserveaschair,andoneClassCdirector toserveasdeputychair,of eachReserveBankboard.EachReserveBankalsohasapresidentandfirstvice president,whoareappointedbytheboardof directorsof theBank,subjecttoapprovalbytheBoardof Governors.Thechairof aBranchboardisselectedfromamongtheBranch’sBoard-appointeddirectors. Cincinnati Jacksonville Boston PeterS.Strange,Chair CarolynM.Fennell,Chair KirkA.Sykes,Chair WilliamD.Nordhaus,Deputy LaVaughnM.Henry, ChristopherL.Oakley,Vice Chair SeniorRegionalOfficer PresidentandRegionalExecutive EricS.Rosengren,President Pittsburgh Miami KennethC.Montgomery, MichaelJ.Jackson,Chair FirstVicePresident GlennR.Mahone,Chair Vacancy,VicePresidentand GuhanVenkatu, RegionalExecutive NewYork SeniorRegionalOfficer EmilyK.Rafferty,Chair Nashville Richmond KathrynS.Wylde,DeputyChair KathleenCalligan,Chair WilliamC.Dudley,President LindaD.Rabbitt,Chair LeeC.Jones,VicePresidentand ChristineM.Cumming, RussellC.Lindner,DeputyChair RegionalExecutive FirstVicePresident JeffreyM.Lacker,President NewOrleans AdditionalofficeatEastRutherford,NJ MarkL.Mullinix, T.LeeRobinsonJr.,Chair FirstVicePresident Philadelphia AdrienneC.Slack,VicePresident Baltimore andRegionalExecutive JeremyNowak,Chair JamesE.Nevels,DeputyChair JennyG.Morgan,Chair Chicago CharlesI.Plosser,President DavidE.Beck,OfficerinCharge JeffreyA.Joerres,Chair D.BlakePrichard, FirstVicePresident Charlotte GregBrown,DeputyChair CharlesL.Evans,President DavidJ.Zimmerman,Chair Cleveland GordonWerkema,FirstVice MatthewA.Martin, President RichardK.Smucker,Chair OfficerinCharge AdditionalofficeatDesMoines,IA ChristopherM.Connor, DeputyChair Atlanta Detroit SandraPianalto,President ThomasI.Barkin,Chair CarlT.Camden,Chair GregoryStefani, FirstVicePresident CarolB.Tomé,DeputyChair RobertWiley,OfficerinCharge DennisP.Lockhart,President MarieC.Gooding, FirstVicePresident Birmingham ThomasR.Stanton,Chair LesleyMcClure,VicePresident andRegionalExecutive

FederalReserveSystemOrganization 433 DaronD.Peschel,Officerin St.Louis KansasCity Charge WardM.Klein,Chair BarbaraMowry,Chair SteveMaestas,DeputyChair SanAntonio SharonD.Fiehler,DeputyChair EstherL.George,President ThomasE.Dobson,Chair JamesBullard,President KellyJ.Dubbert,FirstVice DavidA.Sapenaro,FirstVice BlakeHastings,OfficerinCharge President President Denver SanFrancisco LittleRock LarissaL.Herda,Chair PatriciaE.Yarrington,Chair RayC.Dillon,Chair AlisonFelix,OfficerinCharge RoyA.Vallee, RobertA.Hopkins,Regional DeputyChair Executive OklahomaCity JohnC.Williams,President JamesD.Dunn,Chair Louisville JohnF.Moore, ChadR.Wilkerson,Officerin FirstVicePresident GeraldR.Martin,Chair Charge AdditionalofficeatPhoenix,AZ MariaGerwingHampton, Omaha RegionalExecutive LosAngeles JamesC.Farrell,Chair Memphis KeithE.Smith,Chair NathanKauffman,Officerin CharlesS.Blatteis,Chair Charge RogerW.Replogle,Officerin Charge MarthaPerineBeard,Regional Executive Dallas Portland HerbertD.Kelleher,Chair RoderickC.Wendt,Chair Minneapolis MyronE.UllmanIII,Deputy StevenH.Walker,Officerin Chair MaryK.Brainerd,Chair Charge 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 AdaM.Healey,Chair Houston R.PaulDrake,OfficerinCharge MarkA.Gould,OfficerinCharge PaulW.Hobby,Chair

434 100thAnnualReport|2013 LeadershipConferences ConferenceofChairs Thechairsof theFederalReserveBanksareorganizedintotheConferenceof Chairs,whichmeetstoconsider mattersof commoninterestandtoconsultwithandadvisetheBoardof Governors.Suchmeetings,also attendedbythedeputychairs,wereheldinWashington,D.C.,onMay21and22andNovember5and6,2013. Theconference’sexecutivecommitteemembersfor2013and2014arelistedbelow. ConferenceofChairs ConferenceofChairs ExecutiveCommittee–2013 ExecutiveCommittee–2014 HerbertD.Kelleher,Chair, JeffreyA.Joerres,Chair, FederalReserveBankof Dallas FederalReserveBankof Chicago MaryK.Brainerd,ViceChair, SharonD.Fiehler,ViceChair, FederalReserveBankof FederalReserveBankof Minneapolis St.Louis WardM.Klein,Member, EmilyK.Rafferty,Member, FederalReserveBankof FederalReserveBankof St.Louis NewYork ConferenceofPresidents Thepresidentsof theFederalReserveBanksareorganizedintotheConferenceof Presidents,whichmeetsperiodicallytoidentify,define,anddeliberateissuesof strategicsignificancetotheFederalReserveSystem;toconsidermattersof commoninterest;andtoconsultwithandadvisetheBoardof Governors.Conferenceofficers for2013arelistedbelow. ConferenceofPresidents–2013 CharlesI.Plosser,Chair, FederalReserveBankof Philadelphia DennisP.Lockhart,ViceChair, FederalReserveBankof Atlanta FrankJ.Doto,Secretary, FederalReserveBankof Philadelphia MariaSmith, AssistantSecretary, FederalReserveBankof Atlanta

FederalReserveSystemOrganization 435 ConferenceofFirstVicePresidents TheConferenceof FirstVicePresidentsof theFederalReserveBankswasorganizedin1969tomeetperiodicallyfortheconsiderationof operationsandothermatters.Conferenceofficersfor2013arelistedbelow.1 ConferenceofFirstVice Presidents–2013 BlakePrichard,Chair, FederalReserveBankof Philadelphia KennethMontgomery,ViceChair, FederalReserveBankof Boston ThomasLombardo,Secretary, FederalReserveBankof Philadelphia JeanneMacNevin, AssistantSecretary, FederalReserveBankof Boston 1 OnDecember3,2013,theConferenceelectedKennethMontgomeryaschairfor2014–15andGregoryStefani,firstvicepresidentofthe FederalReserveBankofCleveland,asvicechair.TheConferencealsoelectedJeanneMacNevinassecretaryfor2014–15andTerriBialowas,FederalReserveBankofCleveland,asassistantsecretary.

437 14 Index A Audits Boardof Governors,308–329 Abbreviations,332–333 FederalReserveBanks,330–390 ABCP.SeeAsset-backedcommercialpaper FederalReserveSystem,46 Ability-to-Repay,60,76,77 byGovernmentAccountabilityOffice,392–393 ABSs.SeeAsset-backedsecurities byOfficeof theInspectorGeneral,391 AccountingExpertsGroup,56 Autoloans,28–29 Accountingpolicies,56–57,315–317,338–351 Automatedclearinghouse(ACH)services,87,89–90,337 AccountingStandardsCodification(ASC),105,340 Averagenumberof personnel(ANP) AccountingStandardsUpdate,350 FederalReserveBanks,403–404 Accumulatedothercomprehensiveincome,105,325 Informationtechnology,404 ACH.SeeAutomatedclearinghouseservices Acquisitions,73–74 Advancedforeigneconomies(AFEs),17,18,33 B AdvisoryCouncils Balancesheets CommunityDepositoryInstitutionsAdvisoryCouncil, Boardof Governors,311 418 FederalReserveBanks,19,21,36,132,143–144,168, FederalAdvisoryCouncil,417–418 178,203,214,239,250–251 AFEs.SeeAdvancedforeigneconomies BankHoldingCompaniesandChangeinBankControl AffordableCareAct,11 (RegulationY),117,118 Agreementcorporations,43,49,67 Bankholdingcompanies(BHCs) AIG.SeeAmericanInternationalGroup,Inc. Banksaffiliatedwith,281 AmericanInternationalGroup,Inc.(AIG),48 Capitalplanning,54 AML.SeeAnti-moneylaundering Complaintsagainst,80–81 ANP.SeeAveragenumberof personnel ConsolidatedSupervisionProgram,70 Developmentsin2013,39 Anti-moneylaundering(AML) Internationalactivities,49 Compliancewithregulatoryrequirements,49–50,58 Numberof,46 Examinations,50 Profitabilityof,16,32 Anti-money-laundering(AML) Publicnoticeof acquisition,67 Complianceriskmanagement,58–59 Regulationof,60,65–66,110 AOCI.SeeAccumulatedothercomprehensiveincome Regulatoryreports,61–62 ASBA.SeeAssociationof Supervisorsof Banksof the RFI/C(D)system,47 Americas Stresstesting,118 ASC.SeeAccountingStandardsCodification Supervisionof,43,47 Asia Supervisoryassessmentfees,111 Exportdemand,12 Surveillanceandoff-sitemonitoring,51 Oildemand,26 BankHoldingCompanyAct,61,65,112 AsiaPacificEconomicCooperation,52 BankHoldingCompanyPerformanceReports(BHCPRs), AsianDevelopmentBank,52 51 Asset-backedcommercialpaper(ABCP),32 BankMergerAct,65–66 Asset-backedsecurities(ABS),29,170,352–353 Bankof England Assetpurchaseprogram,5,23–24,34–35,148–150 FundingforLendingScheme,33 Assetsandliabilities Refinancingrate,18 Commercialbanks,290 Bankof Japan FederalReserveBanks,21,102–107,282–283,286–287 Assetpurchaseprogram,17,33 Associationof Supervisorsof Banksof theAmericas BankSecrecyAct/Anti-MoneyLaunderingExamination (ASBA),52 Manual,50,58

438 100thAnnualReport|2013 BankSecrecyAct(BSA),50,58,111,121 Members,411 BankServiceCompanyAct,48 ModelValidationCouncil,419 BankingOrganizationNationalDesktop,63 Officers,411–415 Bankingorganizations,U.S.SeealsoBankholding Operationsandservices,314–315 companies;Commercialbanks Operationsstatements,312 Affiliationwithbankholdingcompanies,281 PaymentSystemRisk,94 Communitybankingorganizations,42–45 Performanceplan,116 Creditdefaultswaps,16,17–18 Performancereport,116 Developmentsin2013,39–43 Policyactions,117–122 Internationalactivities,49 Policystatements,121–122 Offices,281 Postemploymentbenefits,324 Overseasinvestmentsby,67 Postretirementbenefits,323–324 Regulationof,65–68 Property,equipment,andsoftware,316,317 Supervisionof,43–64 Retirementbenefits,318–322 Bankruptcies Socialmediaguidance,122 Cityof Detroit,17 StrategicFramework,116,397,400 BankruptcyCode,42 Stresstesting,122 BaselCommitteeonBankingSupervision(BCBS) Structure,314 AccountingExpertsGroup,56 Website,5,116 Capitaladequacystandards,53 Bonds Foreignexchangetransactions,60–61 Corporate,12,15,29,33 Liquiditycoverageratio,41 Defaultrates,29 Regulatorycapitalframework,40 Foreign,17,33 Supervisorypolicies,55 Municipal,16–17 Trainingandtechnicalassistance,52 Branches.SeeFederalReserveBanks BaselIII,32,40,53,54,110–111,118 Brazil,economyof,17,19,34 BCBS.SeeBaselCommitteeonBankingSupervision BSA.SeeBankSecrecyAct Budgets,FederalReserveSystem BEA.SeeBureauof EconomicAnalysis Boardof Governors,397–401 BearStearnsCompanies,Inc.,365 Budgetperformance,2013,395–396 BenefitsEqualizationPlan(BEP),318–319 Capitalbudgets,2014,397 BEP.SeeBenefitsEqualizationPlan;Bureauof Engraving Currency,406–409 andPrinting FederalReserveBanks,401–406 BFI.SeeBusinessfixedinvestment Operatingexpensebudget,2014,396 BHCPRs.SeeBankHoldingCompanyPerformance Trendsinexpensesandemployment,396,397 Reports Bureauof EconomicAnalysis(BEA),13,26 BHCs.SeeBankholdingcompanies Bureauof EngravingandPrinting(BEP),90,91,328, Biggert-WatersFloodInsuranceReformAct,72,86 406–408 BipartisanBudgetActof 2013,11 Businesscontinuity,53 Boardof Governors Businessfixedinvestment(BFI),11–12 Accountingpolicies,315–317 Businesssector,8,11–12,25,29,30 Accumulatedothercomprehensiveincome,325 Advisorycouncils,417–419 Audits,308–329 C Balancesheets,311 Budget,397–401 CallReports,51,62,64 Cashflows,313 Canada Commitmentsandcontingencies,328 Bondyields,33 CommunityDepositoryInstitutionsAdvisoryCouncil, Economyof,18,33 44,418 Exportdemand,12,30 Divisionof BankingSupervisionandRegulation,62,70 CAOs.SeeCommunityAffairsOfficers Divisions,411–415 Capital FederalAdvisoryCouncil,417–418 FederalReserveBanks,336,348 Financialstatements,308–329 Financialmarkets,16 FunctionsforReserveBanks,325–326 Regulatorycapitalframework,39–40 GovernmentPerformanceandResultsActrequirements, CapitalAdequacyof BankHoldingCompanies,Savings 116 andLoanHoldingCompanies,andStateMember Leases,317–318 Banks(RegulationQ),117 Litigation,275–276 Capitaladequacystandards,53–55

Index 439 Capitalleases,317 CommoditiesFuturesTradingCommission(CFTC),48, CapitalPlanReview,64 58,77,109 Capitalplanning,40,42,54 Commodityprices,9,26 CapitalPlanningatLargeBankHoldingCompanies: Communityaffairs.SeeConsumerandcommunityaffairs SupervisoryExpectationsandRangeofCurrent CommunityAffairsOfficers(CAOs),83 Practice,54 CommunityBankRisk-FocusedConsumerCompliance CARS.SeeCentralAccountingReportingSystem SupervisionProgram,72 Cashflows,Boardof Governors,313 CommunityBankingConnections®,45 Cashitemsinprocessof collection,104 Communitybankingorganizations,42–45 Cash-managementservices,94 CommunityBankingResearchandPolicyConference,45 CCAR.SeeComprehensiveCapitalAnalysisandReview Communitybanks,42–45,52–54,64,72,76,79,85,117, CDI.SeeCommunityDataInitiative 121 CDR.SeeCentralDataRepository CommunityDataInitiative(CDI),85 CDSs.SeeCreditdefaultswaps CommunityDepositoryInstitutionsAdvisoryCouncil,44, CDTR.SeeCentralDocumentandTextRepository 418 CentralAccountingReportingSystem(CARS),94 CommunityDevelopment,83–85 CentralBankCounterfeitDeterrenceGroup,409 Communityeconomicdevelopment,84,85 CentralDataRepository,64 CommunityReinvestmentAct(CRA) CentralDocumentandTextRepository(CDTR),63 InteragencyQuestionsandAnswersRegarding CFPB.SeeConsumerFinancialProtectionBureau CommunityReinvestment,121–122 CFTC.SeeCommoditiesFuturesTradingCommission Mergersandacquisitionsinrelationto,73–74 Chairs,Conferenceof,FederalReserveBanks,434 Regulationoversightandenforcement,69 ChangeinBankControlAct,66 Requirementsof,73 Checkcollectionservice,89 Safetyandsoundnessexpectations,60 ChicagoBoardOptionsExchange,68 Complaintreferrals,81 Chief informationsecurityofficer(CISO),96 Complianceriskmanagement,58–59 Chile,economyof,19 ComprehensiveCapitalAnalysisandReview(CCAR),40, China 42,45,54 Economyof,34 Comptrollerof theCurrency,Officeof the(OCC),44,48, Exportdemand,12 52,53,71,109 Oildemand,26 Conditionstatements C&Iloans.SeeCommercialandindustrialloans FederalReserveBanks,292–296,334 CISO.SeeChief informationsecurityofficer Conferenceof StateBankSupervisors,76 Civilmoneypenalties,315 Conferences,FederalReserveBanksOfficers,434–435 CivilRightsDivision,76 Congress.SeeMonetarypolicyreportstoCongress; CivilServiceRetirementSystem,322 specificlegislationbyname CMBS.SeeCommercialmortgage-backedsecurities CongressionalBudgetOffice,27 Coin.SeeCurrencyandcoinoperations ConsolidatedReportsof ConditionandIncome,51,62,64 Collectionservices,FederalReserveBanks,93–94 Consolidatedsupervision,43–49 Commercialandindustrial(C&I)loans,12,29 ConsolidatedSupervisionProgram,70 Commercialautomatedclearinghouse(ACH)services, Consolidation,340–341 89–90 Consultativepapers,55,56,59 Commercialbanks Consumerandcommunityaffairs Assetsandliabilities,290 BankHoldingCompanyConsolidatedSupervision Charge-off rates,16 Program,70 Creditavailability,16,29,30,32 Communitydevelopment,83–85 Delinquencies,16 Consumercomplaintsandinquiries,78–81 Regulationof,62 Consumerlawsandregulations,85–86 Regulatoryreports,62 Consumerresearch,81–82 Supervisionof,43 Coordinationwithfederalbankingagencies,76–78 Commercialcheckcollectionservice,89 Emerging-issuesanalysis,82–83 Commercialmortgage-backedsecurities(CMBS),30,367 Examinations,69 Commercialpaper(CP)market,15,29 Examinertraining,78 Commercialrealestate(CRE)loans,12,30,114 FinancialFraudEnforcementTaskForce,76 Committeeof SponsoringOrganizationsof theTreadway Financialservicesresearch,82 Commission(COSO),96 Floodinsurance,72–73,86 CommitteeonInvestmentPerformance,383–384 Lawsandregulations,85–86

440 100thAnnualReport|2013 Mortgageservicingandforeclosure,70–71 Denovodepositoryinstitutions Risk-focusedsupervision,72 Trainingandtechnicalassistance,43 Supervision,69–81 Debt Consumercomplaints,78–81 Corporate,15–16 Consumercomplianceexaminertraining,78 Federaldebtlimit,15 ConsumerComplianceOutlook,79 Household,28–39 Consumerfinancialprotection,69,109 Debtsecurities,342–345,366 ConsumerFinancialProtectionBureau(CFPB),60,63,74, Deferredcredititems,348 76,78,118,327,391 DefinitionsRelatingtoTitleIof theDodd-FrankAct Consumerinquiries,78–81 (RegulationPP),120 ConsumerLeasing(RegulationM),118 Delinquencies.SeeForeclosures Consumerloans,75 Deloitte&ToucheLLP,96,308–310,329–331 Consumerprices,9,23,26 Depositadvanceproducts,75–76 Consumerspending,11,28 DepositInsuranceFund,66 ConsumersandMobileFinancialServices,82 Depositoryinstitutions Continuingprofessionaldevelopment,64 Deposits,347 CoreLogic,13,28 Discountrates,122 Corporatebonds,12,15,29,33 Loansto,351–352 Corporatecredit,29,33 Reserverequirements,280 Corporatedebt,15–16 Reservesof,282–283,286–289 COSO.SeeCommitteeof SponsoringOrganizationsof the Depositoryservices,91–94 TreadwayCommission Deposits Costrecovery,107 Depositoryinstitutions,347 Counterfeitdeterrence,408–409 FederalReserveBanks,283,288–289,347 Counterterrorismactivities,58–59 Treasury,347 CP.SeeCommercialpaper(CP)market Derivativeinstruments,367–369 CRA.SeeCommunityReinvestmentAct DesignatedFinancialMarketUtilities(RegulationHH), CRE.SeeCommercialrealestateloans 48,119 Credit Designatednonfinancialcompanies,48 Availability,16,23,29,30,32 Detroit,Michigan Consumercredit,29 Bankruptcyfiling,17 Corporate,29,33 Directors,FederalReserveBanks,420–431 Primary,122 Disposablepersonalincome,28 Risk,367–369 Distributeddenialof service(DDoS),53 Seasonal,122 Divisionof BankingSupervisionandRegulation,62,70 Secondary,122 Divisionof CommunityandConsumerAffairs(DCCA), Smallbusinesses,29–30 50,53,69,74,76,79,81–83,85 CreditbyBanksandPersonsotherthanBrokersorDealers DNP.SeeDoNotPayprogram forthePurposeof PurchasingorCarryingMargin DoNotPay(DNP)program,93,404 Stock(RegulationU),51,68,291 CreditbyBrokersandDealers(RegulationT),68,291 Dodd-FrankWallStreetReformandConsumer Creditcards ProtectionAct Lendinglevels,29 BankSecrecyActregulations,111,121 Creditdefaultswaps(CDSs),16,17–18,367,369 Capitaladequacystandards,53 Creditriskmanagement,57–58 Communitybankregulation,45 Creditriskretention,114 Compliance,36 Currencyandcoinoperations,90–91,328,341,406–409 Consumerfinancialprotection,327 CurrencyEducationProgram,409 Credit-riskretention,114 Currencyrisk,369 DefinitionsrelatingtoTitleI,120 CybersecurityandCriticalInfrastructureWorkingGroup, Emergencylendingauthority,114–115 53 Enhancedprudentialstandardsimplementation,48,118 Examinertraining,78 Fairlendingenforcement,74 FederalReserveimplementation,109–115 D Financialmarketutilitiesregulations,43,48,112 Daylightoverdrafts,94–95 Floodinsurance,115 DCCA.SeeDivisionof CommunityandConsumer Incentivecompensationreporting,59 Affairs Liquidityrequirements,113 DDoS.SeeDistributeddenialof service Mortgageregulations,76,86,113

Index 441 NationalInformationCentersupport,63–64 Emergingmarketeconomies(EMEs),10,17–19,33–34 Nonbankfinancialcompanyrequirements,111–112 EMEs.SeeEmergingmarketeconomies Recoveryandresolutionplanning,42 EmployeeBenefits,Officeof,97,318,380,405 Regulatorycapitalframework,110 Employment,5,7–8,20,25,34.SeealsoLabormarkets; Retailforeignexchangefuturesandoptions,112–113 Unemployment Savingsandloanholdingcompaniesauthority,43,47 Employmentcostindex,25 Securitiesclassificationguidance,60 Energyprices,9,26 Stresstesting,39–40,42,110–111 Enforcementactions Supervisoryassessmentfees,111 FederalReserveSystem,51–53,67–68 Supplementaryleverageratios,113–114 EnhancedPrudentialStandards(RegulationYY),118 Swapspush-outprovision,111 EqualCreditOpportunityAct(ECOA),74–75,76 Trainingandtechnicalassistanceresponsibilities,52 Equipmentandsoftware(E&S),30,317,378–379 VolckerRule,5,61,109–110 Equitymarketsandprices,15,16,18,32–33,106 DOJ.SeeJustice,U.S.Departmentof Equitypriceindexes,15–16,18,32 Dollarexchangerate,17–18 E&S.SeeEquipmentandsoftware Dollarliquidityswaps,21,345,360 Europe.Seealsospecificcountriesbyname Dollarrollmarket,15 Bondyields,33 D&T.SeeDeloitte&ToucheLLP Economyof,18,32–33,134 EuropeanCentralBank(ECB) Policyrates,33 E Refinancingrate,17 EverBank,71 ECB.SeeEuropeanCentralBank Examinationsandinspections ECOA.SeeEqualCreditOpportunityAct Anti-moneylaundering,50 Economy,U.S. Consumerandcommunityaffairs,69 Activityreview,132–134,143–144,168–169,178–180, FederalReserveBanks,43,96–97 203–205,214–216,239–241,251–253 Fiduciaryactivities,50 Businesssector,8,11–12,25,29,30 Informationtechnologyactivities,50 Financialmarkets,14–19,132,134–135,143,144–146, Interagencyprocedures,76–78 168,169–171,178,180–182,203,205–206,214, Reviewof operations,43 216–217,239,241–242,250,253–254 Securitiescreditlenders,51 Forecastuncertainty,166,201,237 Securitiesdealersandbrokers,governmentand Governmentsector,11,27 municipal,50–51 Householdsector,11,28–29 Specialized,50–51 Housingsector,13–14,27–28 Trainingprogram,78 Interestrates,13 Transferagents,50 Labormarket,5,7–8,20,25,84–85 ExaminerCommissioningProgram,64 M2monetaryaggregates,17,32–33 Exitstrategyprinciples,176 Nationalsaving,30–31 Expenses.SeeIncomeandexpenses Outlookandprojections,6,24,135–138,140–141, Exports,12–13,30 146–148,153–166,171–174,182–185,189–201, 206–209,217–221,225–237,242–244,254–258,263, 265 Policyactions,19–22,34–37,138–140,150–152, F 174–176,185–188 Prices,9,13–14,23,26 FairHousingAct,74–75 Recenteconomicandfinancialdevelopments,6–19 FairLendingandEqualOpportunity,Officeof,76 Stateandlocalgovernments,27 Fairlendingenforcement,74–75 Tradedeficit,13 FairLendingEnforcementSection,74,76 Uncertaintyandrisk,163–165,199–200,235–236,270, Fairvaluemeasurement,349–350,360–362,371–378, 272,273 384–385 EdgeAct,43,48,49,67 FAM.SeeFinancialAccountingManualforFederalReserve EFTA.SeeElectronicFundTransferAct Banks Elderlyadults FarmCreditAdministration,68 Financialabuse,77 FASB.SeeFinancialAccountingStandardsBoard Electroniccommerce,94 FATF.SeeFinancialActionTaskForce ElectronicFundTransferAct,76 FCA.SeeFarmCreditAdministration ElectronicFundTransfer(RegulationE),76–77 FDIC.SeeFederalDepositInsuranceCorporation Emergencylending,114–115 FederalAdvisoryCouncil,417–418

442 100thAnnualReport|2013 Federalagencysecuritiesandobligations Members,416 FederalReserveBankholdings,279,343–345 Monetarypolicystrategiesandcommunications,19–22, Openmarkettransactions,277–278 34–37,131–132 FederalBankingAgencyAuditAct,392 Notationvotes,141,152,176,188,212,224,248,261 Federalbenefitpayments,77 Officers,416 FederalDepositInsuranceAct,47 Policyactions,19–22,34–37,138–140,150–152, FederalDepositInsuranceCorporation(FDIC),44,49,52, 174–176,185–188,209–212,221–224,245–248, 53,109 258–261 FederalDepositInsuranceCorporationImprovementAct, Policycompliance,97 47 Policyplanning,244–245 FederalEmergencyManagementAgency(FEMA),51, Summaryof EconomicProjections,6,140–141, 72–73,314 153–166,189–201,225–237,262–272 FederalEmployees’RetirementSystem,322 SystemOpenMarketAccount,21,36,132,178, FederalFinancialInstitutionsExaminationCouncil 338–339,354–362 (FFIEC) Uncertaintyandrisks,163–165,199–200,235–236,270, BankSecrecyAct/Anti-MoneyLaunderingExamination 272,273 Manual,50 FederalReserveAct,48,49,66,99,114 Boardresponsibilities,326–327 FederalReserveBankof Atlanta,101,294–295,297–299 BSA/AMLworkinggroup,58 FederalReserveBankof Boston,100,292–293,297–299 Coordinationwithotherbankingagencies,76–78 FederalReserveBankof Chicago,101,294–295,297–299 Effortstostrengthenresilienceof U.S.financialsystem, FederalReserveBankof Cleveland,101,292–293,297–299 53 FederalReserveBankof Dallas,101,294–295,297–299 Financialabuseof olderadults,77 FederalReserveBankof KansasCity,294–295,297–299 Outsourcingguidance,60 FederalReserveBankof Minneapolis,294–295,297–299 Regulatoryreports,61–62 FederalReserveBankof Nashville,101 Socialmediariskmanagement,77 FederalReserveBankof NewYork,14,99–100,292–293, TaskForceonSurveillanceSystems,51–52 297–299,337–338,342–345,352–355,357–359,363, Federalfundsrate,14,20–21,23,31,34,162,198,234,271 365–366 Federalgovernment FederalReserveBankof Philadelphia,9,26,292–293, Budgetdeficit,10,27,30 297–299 FederalHomeLoanMortgageAssociation FederalReserveBankof Pittsburgh,101 FederalReserveBankservicesto,94 FederalReserveBankof Richmond,100,292–293, FederalHousingAdministration(FHA),28 297–299 FederalHousingFinanceAgency(FHFA),13,60, FederalReserveBankof SanAntonio,101 113–114,118 FederalReserveBankof SanFrancisco,100,294–295, FederalNationalMortgageAssociation 297–299 FederalReserveBankservicesto,94 FederalReserveBankof St.Louis,45,100,294–295, FederalOpenMarketCommittee(FOMC).SeealsoOpen 297–299 marketoperations FederalReserveBanks Annualorganizationalmatters,125–132 Accountingpolicies,338–351 Appropriatemonetarypolicy,155,159,163,191,195, Assessments,349 199,227,233,264,270 Assetsandliabilities,21,282–283,286–289 Assetpurchaseprogram,5,23–24,34–35,148–150 Audits,330–390 Authorizations,126–130 Automatedclearinghouse(ACH)services,89 Economicoutlook,135–138,146–148,156,171–174, Balancesheets,132,143–144,168,178,203,214,239, 182–185,192,206–209,217–221,228,242–244, 250–251 254–258 Branches,281,420–433 Economicreview,132–134,143–144,168–169,178–180, Budget,401–406 203–205,214–216,239–241,251–253 Capital,336,348 Exitstrategyprinciples,176 Cash-managementservices,94 Financialmarketdevelopments,132,143,168,178,203, Collectionservices,93–94 214,239,241–242,250–251,253––254 Commercialcheckcollectionservice,89 Financialreview,134–135,144–145,169–171,180–182, Commitmentsandcontingencies,379–380 205–206,216–217 Conditionstatements,292–296,334 Forecastuncertainty,166,201,237,274 Conferences,434–435 Foreigncurrencyoperationsanddirectives,128–131 Creditoutstanding,282–283,286–289 Inflationoutlook,156,159,192,195,228 Currencyandcoinoperationsanddevelopments,90–91 Meetingminutes,123–274 Deposits,283,347

Index 443 Directors,420–431 Emergencylendingauthority,114–115 Efficiencyimprovement,91 Enforcementactions,67–68 Equipmentandsoftware,378–379 Examinationsandinspections,43 Examinations,43,96–97 IndependentForeclosureReview(IFR),70–71 Fairvalue,349–350 Internationalactivities,55–56 FedLineaccesstoservices,95 JointForum,55 FedwireFundsService,90 Large-scaleassetpurchaseprogram,34,36,98 FedwireSecuritiesService,90 Maps,2–3 Financialstatements,102–107,330–390 Operatingexpenses,395–397 Fiscalagencyservices,91–94 Organization,411–435 Float,90,282,286–287 Overview,1–2 Governmentdepositoryservices,91–94 Regulatorycapitalframework,39–40 Incomeandexpenses,97,297–302,335,389 Regulatoryresponsibilities,65–68 Informationtechnology,96 Retirementbenefits,322 InterestinconsolidatedVIEs,347 Safetyandsoundnessresponsibilities,43–53 Interestratesondepositoryinstitutionsloans,280 Staff development,64 Intradaycredit,94–95 Supervisionresponsibilities,43–64 InvestmentsheldbyconsolidatedVIEs,345–346, Supervisoryinformationtechnology,62–64 363–378 Supervisorypolicy,53–62 Liquidityswaps,345 Surveillanceandoff-sitemonitoring,51–52 Loansandothercreditextensions,282,284–285, Trainingandtechnicalassistance,52–53 286–287,341–342,351–354 Website,42,51 NationalSettlementService,90 FederalTradeCommission(FTC),76,77 Notesoutstanding,346–347 FedLine,95 Officers,304,432–433 FedlLinksTM,45 $100note,redesigned,91 FedwireFundsService,90 Openmarkettransactions,277–278 FedwireSecuritiesService,90 Operatingexpenses,402–405 FEMA.SeeFederalEmergencyManagementAgency Operations,volumeof,303 FFETF.SeeFinancialFraudEnforcementTaskForce Operationsandservices,337–338 FFIEC.SeeFederalFinancialInstitutionsExamination Paymentsservices,93 Council Postemploymentbenefits,388 FHA.SeeFederalHousingAdministration Postretirementbenefits,386–388 FHFA.SeeFederalHousingFinanceAgency Premises,100–101,305,346,378–379 Finance Pricedservices,87–90 Business,11–12 Recoveryof directandindirectcosts,88–89 Household,11 Restructuringcharges,350,389–390 Housing,13–14 Retailsecuritiesprograms,92 FinancialAccountingManualforFederalReserveBanks Retirementplans,380–385 (FAM),338–339 Riskmanagement,91 FinancialAccountingStandardsBoard(FASB),56,105, Salariesof officersandemployees,304 316,350 Securitiesholdings,343–345 FinancialActionTaskForce(FATF),58–59 Servicesprovidedtootherentities,94 FinancialandBankingInformationInfrastructure Statementsof Condition,292–295,334 Committee,53 Structure,337 FinancialCrimesEnforcementNetwork(FinCEN),58 SystemOpenMarketAccountholdingsandloans, FinancialFraudEnforcementTaskForce(FFETF),76 97–100,354–362 Financialholdingcompanies Taxes,350 Supervisionof,47 Thriftplans,385 FinancialIndustryRegulatoryAuthority,68 Treasurysecuritiesservices,92 FinancialInstitutionSymposium,58 Wholesalesecuritiesprograms,92–93 Financialmarketutilities(FMUs),43,48,112 FederalReserveConsumerHelp(FRCH),80 FinancialMarketUtilitiesSupervisionCommittee FederalReserveSystem.SeealsoBoardof Governors; (FMU-SC),48 FederalReserveBanks Financialmarkets,14–19,132,134–135,143,144–146,168, Accountingpolicies,56–57 169–171,178,180–182,203,205–206,214,216–217, Audits,46 239,241–242,250,253–254 Budget,395–409 FinancialRegulators’TrainingInitiative,52 Developmentsin2013,39–43 FinancialResearch,Officeof (OFR),327,341

444 100thAnnualReport|2013 Financialservicesresearch,82 G FinancialStabilityBoard(FSB),42,55–56,59 GAAP.SeeGenerallyacceptedaccountingprinciples FinancialStabilityInstitute,52 GAO.SeeGovernmentAccountabilityOffice,U.S. FinancialStabilityOversightCouncil(FSOC),43,111, GDP.SeeGrossdomesticproduct 119,120,275 GECC.SeeGeneralElectricCapitalCorporation,Inc. Financialstatements GeneralElectricCapitalCorporation,Inc.,48 Boardof Governors,308–329 Generallyacceptedaccountingprinciples,315,338–339 FederalReserveBanks,102–107,330–390 GLBA.SeeGramm-Leach-BlileyAct FinCEN.SeeFinancialCrimesEnforcementNetwork GMACMortgage,71 FirstVice-Presidents,Conferenceof,FederalReserve GoDirectprogram,93 Banks,435 Goldstock,282,286–287,341 Fiscalagencyservices,91–94 GovernmentAccountabilityOffice,U.S.(GAO),392–393 Fixedinvestment,11–12,34 Governmentdepositoryservices,91–94 Float,FederalReserveBanks,90,282,286–287 GovernmentNationalMortgageAssociation FloatingRateNote(FRN),93 FederalReserveBankservicesto,94 Floodinsurance,72–73,86,115 GovernmentPerformanceandResultsAct(GPRA),116 FMU-SC.SeeFinancialMarketUtilitiesSupervision Governmentsector,11,15,27.SeealsoFederal Committee government;Stateandlocalgovernments FMUs.SeeFinancialmarketutilities GovernmentSecuritiesAct,50 FOMC.SeeFederalOpenMarketCommittee Governmentsecuritiesdealersandbrokers,FederalReserve Foodprices,9 examination,50–51 Forecastuncertainty,166,201,237,274 Government-sponsoredenterprises(GSEs),27–28,97, Foreclosures 342–345,354–358 Commercialbanks,16 GPRA.SeeGovernmentPerformanceandResultsAct Mortgages,29,70–71,75 Gramm-Leach-BlileyAct,47,77 PaymentAgreement,70–71 Grossdomesticproduct,7,10–11,23,24,27,30,157,193, ForeignAssetsControl,Officeof (OFAC),58 229,266 ForeignBankSupervisionEnhancementAct,67 GSEs.SeeGovernment-sponsoredenterprises Foreignbanks.Seealsospecificbanksbyname Deposits,283 Prudentialstandards,48,118 H Supervisionof,55–56 Hedgefunds,16,83,109,120–121 U.S.activities,49 High-qualityliquidassets(HQLA),41 Foreignbonds,17,33 HOLA.SeeHomeOwners’LoanAct Foreigncurrencyoperations HomeOwners’LoanAct(HOLA),61,66–67 Authorization,128–130 HomeOwnershipandEquityProtectionAct,76 Denominatedassets,343–345,358–360 Householdsector,11,28–29 Directives,131 Housingactivity,13–14,27–28,83 Liquidityswaps,345 HousingandUrbanDevelopment,U.S.Departmentof Proceduralinstructions,130–131 (HUD),76,81 Foreigneconomies,17–18,23–24,33.SeealsoAdvanced HQLA.SeeHigh-qualityliquidassets foreigneconomies;Emergingmarketeconomies; HUD.SeeHousingandUrbanDevelopment,U.S. specificcountriesbyname Departmentof Foreignexchangetransactions,60–61,112–113 Fraud FinancialFraudEnforcementTaskForce,76 I FRBNY.SeeFederalReserveBankof NewYork IDIs.SeeInsureddepositoryinstitutions FRCH.SeeFederalReserveConsumerHelp IMF.SeeInternationalMonetaryFund Freedomof InformationAct,117,275–276 Imports,12 FRN.SeeFloatingRateNote Incentivecompensation,59 FSB.SeeFinancialStabilityBoard Incomeandexpenses FSOC.SeeFinancialStabilityOversightCouncil Boardof Governors,315 FTC.SeeFederalTradeCommission Disposablepersonalincome,28 FundingforLendingScheme,33 FederalReserveBanks,97,297–302,335,389

Index 445 Nationalincomeandproductaccounts,8 Joblosses.SeeUnemployment Pricedservices,87–90,102–107 JointForum,55 IndependentForeclosureReview,70–71 JPMorganChase&Co.,365,368 India,economyof,19 Justice,U.S.Departmentof (DOJ) Indonesia,economyof,19 Fairlendinglawsenforcement,75,76 Inflation,5,7,8–10,23,26–27,156,160–161,192,195, 228,231–232,265 Informationsecurity(IS),96 K Informationtechnology(IT) Budget,403,405–406 Korea FederalReserveBankdevelopments,96 Bondyields,33 FederalReserveexaminationof activities,50 Outsourcingguidance,60 Personnel,403 L Securitypractices,63 Supervisoryactivities,62–64 Labormarkets,5,7–8,20,25,84–85 InsightsintotheFinancialExperiencesofOlderAdults,82 Largebanksupervision,60,113–114 Inspections.SeeExaminationsandinspections LargeInstitutionSupervisionCoordinatingCommittee InspectorGeneral,Officeof (OIG),391,400,401 (LISCC),43–44 Instituteof InternalAuditors,97 Large-scaleassetpurchaseprograms,34,36,98 Insuredcommercialbanks.SeeCommercialbanks LCR.SeeLiquiditycoverageratio Insureddepositoryinstitutions(IDIs),109,111 LegacyTreasuryDirect(LTD)system,92 InteragencyGuidanceonLeveragedLending,57 LegislativeandRegulatoryConference,53 InteragencyQuestionsandAnswersRegarding Leverageratiostandards,113–114 CommunityReinvestment,121–122 Leveragedlending,59,121 InteragencyTaskForceonStrengtheningandClarifying Liabilities.SeeAssetsandliabilities theBSA/AMLFramework,58 Liquiditycoverageratio(LCR),40–41,113 Interest Liquidityswaparrangements,345,360 Rates,13,28,29 LISCC.SeeLargeInstitutionSupervisionCoordinating InternalRevenueService(IRS),58 Committee InternationalAssociationof InsuranceSupervisors,55 LitigationinvolvingBoardof Governors InternationalBankingAct,67 AmericanBankersAssociation,etal.,275 Internationalfinancialmarkets,17–19,33–34,41 Artis,276 InternationalMonetaryFund(IMF),52,341 Ball,276 InternationalOrganizationof SecuritiesCommissions,55 Blair,275 InternationalStandardsfortheProfessionalPracticeof CitiMortgage,Inc.,276 InternalAuditing,97 Conover,276 Internationaltrade,30 Crisman,276 Internationaltraining,52 DeNaples,276 Intradaycredit,94–95 Estateof Deleon,276 InvestibleMarketsIndex,383 Ferrer,275 Investments FirstCitizensBankandTrustCo.,276 Businesssector,30 FreedomWatch,276 Fixed,11–12,34 Gelb,276 Single-familyhousing,83 Goldstein,Trustee,276 InvoiceProcessingPlatform(IPP),93 Haller,276 IPP.SeeInvoiceProcessingPlatform JudicialWatch,276 IRS.SeeInternalRevenueService LawOfficeLaLeyconJohnH.Ruiz,275 IS.SeeInformationsecurity Marcusse,276 IT.SeeInformationtechnology Mashak,276 McKinley,276 NACSetal.,275 Richter,275 J StateNationalBankof BigSpring,275 Japan Taylor,276 Bondyields,33 Wise,276 Economyof,17–18 WMILiquidatingTrust,275 Japanesegovernmentbonds,33 LMIconsumers.SeeLow-andmoderate-income JGB.SeeJapanesegovernmentbonds consumers

446 100thAnnualReport|2013 Loans.Seealsospecifictypesofloans MonetarypolicyreportstoCongress FederalReserveBankholdings,282,284–285,286,287, February2014,5–22 341–342,351–354 July2013,23–37 Issuanceof,29 Moneylaunderingprevention.SeeAnti-moneylaundering SystemOpenMarketAccount,99 Moody’sInvestorsService,29 Localgovernments.SeeStateandlocalgovernments Mortgage-backedsecurities(MBS),14–15,20,22,28,31, Low-andmoderate-incomeconsumers(LMI),74,83–84 32,34–35,97–98,277,279,343–345,354,356–358 LTD.SeeLegacyTreasuryDirectsystem Mortgageinterestrates,13,27–28 Mortgageregulations Ability-to-Repay,60,76,77 M Commercialmortgageloans,366–367 Higher-riskloanappraisalrequirements,85–86,113 M2monetaryaggregates.SeeMonetaryaggregates Minimumstandardsforhandlingimminentscheduled MaidenLaneIILLC,99,340,369–370 foreclosuresale,75 MaidenLaneIIILLC,99,340,370 PaymentAgreement,70–71 MaidenLaneLLC,99,340,365–369 QualifiedMortgageStandardsRule,60,76,77 Maps,FederalReserveSystem,2–3 Qualifiedresidentialmortgages,114 MarginandCapitalRequirementsforCoveredSwap Safetyandsoundnessexpectations,60 Entities(RegulationKK),119 MOU.SeeMemorandaof understanding Marginrequirements,291 Municipalbonds,16–17 Marketrisk,367 Municipalsecuritiesdealersandbrokers,FederalReserve Maturityextensionprogram,355 examination,50–51 MBS.SeeMortgage-backedsecurities MunicipalSecuritiesRulemakingBoard,51 Medicalservices,26 Mutualholdingcompanies(MHC),66 Medicare,26 Members Boardof Governors,411 FederalAdvisoryCouncil,417–418 FederalOpenMarketCommittee,416 Membershipof StateBankingInstitutionsintheFederal N ReserveSystem(RegulationH),67,72,117 NationalBankersAssociation(NBA),52–53 Memorandaof understanding,51,58 NationalCreditUnionAdministration(NCUA),51,68 Mergersandacquisitions,73–74 NationalExaminationData(NED),63 Mexico NationalFederationof IndependentBusiness(NFIB), Associationof Supervisorsof Banksof theAmericas, 29–30 52 NationalFloodInsuranceAct,72 Bondyields,33 NationalFloodMitigationFund,73 Economyof,18–19,34 Nationalincomeandproductaccounts(NIPA),8 MHC.SeeMutualholdingcompanies NationalInformationCenter(NIC),51,63–64 MichiganSurvey.SeeThomsonReuters/Universityof NationalMortgageSettlement,71 MichiganSurveysof Consumers Nationalsaving,30–31 MiddleEast NationalSettlementService,90 FinancialRegulators’TrainingInitiative,52 NationalUrbanLeague,52–53 MinorityCouncilof theIndependentCommunityBankers NBA.SeeNationalBankersAssociation Association,52–53 NCUA.SeeNationalCreditUnionAdministration Minoritygroups NED.SeeNationalExaminationData Wealthand,83 NeighborWorksAmerica®,85 Minority-ownedinstitutions(MOIs) Netstablefundingratio(NSFR),41 Trainingandtechnicalassistance,52–53 NFIB.SeeNationalFederationof IndependentBusiness ModelValidationCouncil,419 NIC.SeeNationalInformationCenter MOIs.SeeMinority-ownedinstitutions Monetaryaggregates(M2),17,32–33 NIPAs.SeeNationalincomeandproductaccounts MonetaryControlAct,88 Non-DiscriminationWorkingGroup,76 Monetarypolicy Nonbankfinancialcompanies,111–112 Appropriatemonetarypolicy,155,159,163,191,195, NorthAfrica 199,227,233,264,270 FinancialRegulators’TrainingInitiative,52 Developments,19–22,34–37 Noticeof proposedrulemaking(NPR),40–41 Overview,5–6,23–24 NPR.SeeNoticeof proposedrulemaking Statementonlonger-rungoalsandstrategy,131–132 NSFR.SeeNetstablefundingratio

Index 447 O Premises,FederalReserveBanks,100–101,346,378–379 Presidents,Conferenceof,FederalReserveBanks,434 OCC.SeeComptrollerof theCurrency,Officeof the Pricedservices,87–90,102–107 OFAC.SeeForeignAssetsControl,Officeof Prices Off-sitemonitoring,51–52 Consumer,9,23,26 Officers Energy,9,26 Boardof Governors,411–415 Food,9 Conferencesof,434–435 Housing,13–14 FederalAdvisoryCouncil,418 Primarycredit,122 FederalOpenMarketCommittee,416 PrinciplesforSoundCompensationPractices,59 FederalReserveBanks,304,432–433 PRISM.SeePerformanceReportInformationand OFR.SeeFinancialResearch,Officeof SurveillanceMonitoring OIG.SeeInspectorGeneral,Officeof Privacylaws,77 Oilprices.SeeEnergyprices Privateequityfunds,65,109,120–121 Olderadults Private-sectoradjustmentfactor(PSAF),88–89,90,104 Financialabuse,77 ProhibitionsandRestrictionsonProprietaryTradingand Survey,82 CertainInterestsin,andRelationshipswithHedge ONRRP.SeeOvernightreverserepurchaseagreements FundsandPrivateEquityFunds(RegulationVV), $100note,redesigned,91 120–121 OpenMarketDesk,14 PrudentialFinancial,Inc.,48 Openmarketoperations.SeealsoFederalOpenMarket Prudentialstandards,48,118 Committee PSAF.SeePrivate-sectoradjustmentfactor Volumeof transactions,277–278 PSR.SeePaymentSystemRisk Operatingleases,318 PuertoRico OTS.SeeThriftSupervision,Officeof Economyof,17 Outsourcingrisk,60 Purchasingmanagersindex,33 Overdraftservices,94–95 Overnightreverserepurchaseagreements(ONRRP),22 Q P QRMs.SeeQualifiedresidentialmortgages QualifiedMortgageStandardsRule,60,76,77 PartnershipforProgress(PFP),52–53 Qualifiedresidentialmortgages(QRM),114 Pay.gov,93 PaymentAgreement,70–71 PaymentSystemRisk(PSR),94 R Paymentsservices,FederalReserveBanks,93 PCE,Personalconsumptionexpenditures RapidResponseprogram,78 Penalties.SeeCivilmoneypenalties Realestateinvestmenttrusts,32 PensionEnhancementPlan(PEP),320–321 Realestateloans.SeeCommercialrealestate(CRE)loans PEP.SeePensionEnhancementPlan RealEstateSettlementProcedures(RegulationX),68,76, PerformanceReportInformationandSurveillance 291 Monitoring(PRISM),51 Recoveryplanning,42 Personalconsumptionexpenditures(PCE),7,8–9,11,26, Regulations 160–161,196–197,231–232,268–269 E,ElectronicFundTransfer,76–77 Personnel,Management,Officeof,322 H,Membershipof StateBankingInstitutionsinthe PFP.SeePartnershipforProgress FederalReserveSystem,67,72,117 PMI.SeePurchasingmanagersindex HH,DesignatedFinancialMarketUtilities,48,119 Policyactions KK,MarginandCapitalRequirementsforCovered Boardof Governors,117–122 SwapEntities,119 FederalOpenMarketCommittee,19–22,34–37, M,ConsumerLeasing,118 138–140,150–152,174–176,185–188,209–212, NN,RetailForeignExchangeTransactions,119–120 221–224,245–248,258–261 PP,DefinitionsRelatingtoTitleIof theDodd-Frank Policyplanning Act,120 FederalOpenMarketCommittee,244–245 Q,CapitalAdequacyof BankHoldingCompanies, Policystatements,Boardof Governors,121–122 SavingsandLoanHoldingCompanies,andState PostPaymentSystem(PPS),93 MemberBanks,117 Postemploymentbenefits,324,388 T,CreditbyBrokersandDealers,68,291 Postretirementbenefits,323–324,386–388 TT,SupervisionandRegulationAssessmentsof Fees, PPS.SeePostPaymentSystem 120

448 100thAnnualReport|2013 U,CreditbyBanksandPersonsotherthanBrokersor SCOOS.SeeSeniorCreditOfficerOpinionSurveyon DealersforthePurposeof PurchasingorCarrying DealerFinancingTerms MarginStock,51,68,291 SDR.SeeSpecialdrawingrightscertificates VV,ProhibitionsandRestrictionsonProprietary Seasonalcredit,122 TradingandCertainInterestsin,andRelationships SEC.SeeSecuritiesandExchangeCommission withHedgeFundsandPrivateEquityFunds, Secondarycredit,122 120–121 Securities.SeealsoFederalagencysecurities;Treasury X,RealEstateSettlementProcedures,68,76,291 securities;specifictypesofsecurities Y,BankHoldingCompaniesandChangeinBank Classificationguidance,60 Control,117,118 Resellandrepurchaseagreements,342–343 YY,EnhancedPrudentialStandards,118 SystemOpenMarketAccountholdings,97–99 Z,TruthinLending,76,118–119 SecuritiesActAmendmentsof 1975,51 Regulatorycapitalframework,39–40,110 SecuritiesandExchangeCommission(SEC),48,67,68,77, Regulatoryreports,61–62 109 REITs.SeeRealestateinvestmenttrusts Securitiescredit,68 Renters,Homeowners,andInvestors:TheChangingProfile Securitiescreditlenders,51 ofCommunities,83 SecuritiesExchangeAct,50,51,67–68 Reportsof ConditionandIncome(CallReports),51 Security Repurchaseagreements,15,36–37,278,279,282,283,286, CybersecurityandCriticalInfrastructureWorking 287,342.SeealsoOvernightreverserepurchase Group,53 agreements;Reverserepurchaseagreements Informationtechnology,63 ReserveBankof Australia,33 SeniorCreditOfficerOpinionSurveyonDealerFinancing Residentialmortgage-backedsecurities(RMBS),365 Terms(SCOOS),16 Resolutionplanning,42 SeniorLoanOfficerOpinionSurveyonBankLending RetailE-Servicesinitiative,92 Practices(SLOOS),12,13,27,29,30 Retailforeignexchangetransactions,112–113 SEP.SeeSummaryof EconomicProjections RetailForeignExchangeTransactions(RegulationNN), SeparateTradingof RegisteredInterestandPrincipalof 119–120 Securities,342,383 Retailsecuritiesprogram,92 SFAS.SeeStatementof FinancialAccountingStandards Retirementplans,322,380–385 SharedNationalCredit(SNC)Program,57–58 Returnonaverageassets,39 Short-termfundingmarkets,31–32 Returnonequity,39 SIFI.SeeSystemicallyimportantfinancialinstitutions Revenue.SeeIncomeandexpenses Single-familyhousinginvestors,83 Reverserepurchaseagreements,36–37,278,279,283.See SLHCs.SeeSavingsandloanholdingcompanies alsoOvernightreverserepurchaseagreements SLOOS.SeeSeniorLoanOfficerOpinionSurveyonBank RFI/C(D)system,47 LendingPractices RiegleCommunityDevelopmentandRegulatory SmallBusinessAdministration(SBA),352 ImprovementAct,47 Smallbusinesses Risk-focusedsupervision,72 Borrowingconditions,29–30 Riskmanagement,91 SNC.SeeSharedNationalCreditProgram Riskretention,60 Socialmedia,77,122 RMBS.SeeResidentialmortgage-backedsecurities Software.SeeEquipmentandsoftware ROA.SeeReturnonaverageassets SOMA.SeeSystemOpenMarketAccount ROE.SeeReturnonequity S&P.SeeStandardandPoor’s500 Rollingspottransactions,120 Specialdrawingrightscertificateaccount,282,286–287 Roth401(k),322 Specialdrawingrightscertificates(SDR),341 RustConsulting,Inc.,71 SR-SABR.SeeSupervisionandRegulationStatistical Assessmentof BankRisk Staff development,64 StandardandPoor’s500(S&P500),13,16,32 S StandingCommitteeonSupervisoryandRegulatory Savingsandloanholdingcompanies(SLHCs) Cooperation,56 Regulationof,60,66–67,110 Stateandlocalgovernments,27 Regulatoryreports,62 Statememberbanks Supervisionandregulationof,43,47–48,70 Complaintsagainst,80–81 Supervisoryassessmentfees,111 Depositadvanceproducts,75–76 Savingsrate.SeeNationalsaving Developmentsin2013,39 SBA.SeeSmallBusinessAdministration Financialdisclosures,67–68

Index 449 Numberof,46 Technicalassistance,52–53 Supervisionof,46–47 TermAsset-BackedSecuritiesLoanFacility(TALF),99, Surveillanceandoff-sitemonitoring,51 121,341–342,352–354,370–371 Statementof FinancialAccountingStandards(SFAS),105 TermDepositFacility(TDF),22,37,347 Statementsof operations,312 Thailand,economyof,19 StoredValueCard(SVC)program,93 ThomsonReuters/Universityof MichiganSurveysof Stresstesting,39–40,42,54,110–111,118,122 Consumers,9–10,26,27 STRIPS.SeeSeparateTradingof RegisteredInterestand Thriftplans,322,385 Principalof Securities ThriftSupervision,Officeof (OTS),43 Studentloans,28–29 TILA.SeeTruthinLendingAct SubcommitteeonSmallerRegionalandCommunity TIPS.SeeTreasuryInflation-ProtectedSecurities Banking,42–43 Totalreturnswap,367 SubcommitteeonSupervisoryAdministrationand Tradedeficit,13 Technology,62–63 Trainingprograms,52–53,64 Summaryof EconomicProjections,6,24,153–166, Transferagents,50 189–201,225–237,262–274 Treasury,U.S.Departmentof the SuperstormSandy,53 Bureauof EngravingandPrinting,90,91 SupervisionandRegulationAssessmentsof Fees Cashholdings,283 (RegulationTT),120 Cashmanagementservices,94 SupervisionandRegulationStatisticalAssessmentof Bank Civilmonetarypenalties,51 Risk(SR-SABR),51 Collectionservices,93–94 Supervisoryassessmentfees,111 Currencyincirculationandoutstanding,282–283, SupervisoryGuidanceforManagingRisksAssociatedwith 286–289 theSettlementof ForeignExchangeTransactions, Deposits,347 60–61 InteragencyTaskForceonStrengtheningandClarifying Supervisorypolicy theBSA/AMLFramework,58 Accountingpolicy,56–57 Paymentsservices,93 Capitaladequacystandards,53–55 TroubledAssetRelief Program,121 Complianceriskmanagement,58–59 TreasuryInflation-ProtectedSecurities,92 Consumerandcommunityaffairs,69–81 Treasurysecurities Credit-riskmanagement,57–58 Collectionservices,93–94 Incentivecompensation,59 FederalReserveBankholdings,279,282,286,287, Informationtechnology,62–64 343–345 Internationalcoordination,55–56 FOMCpurchases,20,35 Policymakinginitiatives,59–61 Openmarkettransactions,277–278 Regulatorycapitalframework,110 Paymentservices,93 Regulatoryreports,61–62 Retailsecuritiesprogram,92 Staff development,64 Services,92 SupplementalRetirementPlanforSelectOfficersof the Yields,14,26–27,31 FederalReserveBanks,381,396 TroubledAssetRelief Program(TARP),121 SupplementaryFinancingAccount,283 TruthinLendingAct(TILA),76,118 Surveillance,51–52 TruthinLending(RegulationZ),76,118–119 Surveyof PrimaryDealers,14 TruthinSavingAct,76 Surveyof ProfessionalForecasters,9–10,26 Turkey,economyof,17,19 Surveyof Termsof BusinessLending,12,29 SVC.SeeStoredValueCardprogram Swaparrangements,21 U Swapspushoutactivity,111 SystemOpenMarketAccount(SOMA),21,36,97–100, UDAP.SeeUnfairorDeceptiveActsorPractices 132,178,338–339,354–362 Unemployment,5,7–8,23,25,158,194,230,267 Systemicallyimportantfinancialinstitutions,39–40 UnfairorDeceptiveActsorPractices(UDAP),69 UniformBankPerformanceReports,51 UnitedKingdom Bondyields,18 T Economyof,18,33 TALF.SeeTermAsset-BackedSecuritiesLoanFacility Universityof MichiganSurveys.SeeThomson TARP.SeeTroubledAssetRelief Program Reuters/Universityof MichiganSurveysof TaskForceonSurveillanceSystems,51–52 Consumers TDF.SeeTermDepositFacility Unregulatedpractices,consumercomplaints,81

450 100thAnnualReport|2013 U.S.Congress.SeeMonetarypolicyreportstoCongress; W specificlegislationbyname Wages,8,25 U.S.PostalService,94 Warehousingagreements,343–345 Websites V Boardof Governors,5,116 FederalReserve,42,51 Variableinterestentities(VIEs),96–97,99–100,340, Wholesalesecuritiesprograms,92 345–346,347,363–378,371,375,378 WorldBank,52 Vice-Presidents,Conferenceof,FederalReserveBanks,435 VIEs.SeeVariableinterestentities Volckerrule,5,61,109–110

Back Cover www.federalreserve.gov 0514 @FederalReserve Flickr.com/FederalReserve YouTube.com/FedReserveBoard

Cite this document

APA

Federal Reserve (2012, December 31). Annual Report of the Federal Reserve Board, 2013. Annual Reports, Federal Reserve. https://whenthefedspeaks.com/doc/annual_report_2013

BibTeX

@misc{wtfs_annual_report_2013,
  author = {Federal Reserve},
  title = {Annual Report of the Federal Reserve Board, 2013},
  year = {2012},
  month = {Dec},
  howpublished = {Annual Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/annual_report_2013},
  note = {Retrieved via When the Fed Speaks corpus}
}