annual reports · December 31, 2013

Annual Report of the Federal Reserve Board, 2014

101st Annual Report 2014 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: Publications Fulfillment Mail Stop N-127 Board of Governors of the Federal Reserve System Washington, DC 20551 (ph) 202-452-3245 (fax) 202-728-5886 (e-mail) Publications-BOG@frb.gov

Letter of Transmittal Boardof Governorsof theFederalReserveSystem Washington,D.C. June2015 TheSpeakerof theHouseof Representatives: Pursuanttotherequirementsof section10of theFederalReserveAct,Iampleasedtosubmitthe101stannual reportof theBoardof Governorsof theFederalReserveSystem. Thisreportcoversoperationsof theBoardduringcalendaryear2014. Sincerely, JanetL.Yellen Chair

v Contents Overview .....................................................................................................................................1 AboutThisReport .......................................................................................................................1 AbouttheFederalReserveSystem ..............................................................................................2 Monetary Policy and Economic Developments ............................................................5 MonetaryPolicyReportofFebruary2015 ....................................................................................5 MonetaryPolicyReportofJuly2014 ..........................................................................................22 Financial Stability ..................................................................................................................37 MonitoringRiskstoFinancialStability ........................................................................................38 MacroprudentialSupervisionofLarge,ComplexFinancialInstitutions .........................................43 DomesticandInternationalCooperationandCoordination ..........................................................44 Supervision and Regulation ................................................................................................47 2014Developments ..................................................................................................................47 Supervision ..............................................................................................................................49 Regulation ................................................................................................................................71 Consumer and Community Affairs .................................................................................75 SupervisionandExaminations ...................................................................................................75 ConsumerLawsandRegulations ...............................................................................................86 ConsumerResearchandEmerging-IssuesandPolicyAnalysis ...................................................88 CommunityDevelopment ..........................................................................................................91 Federal Reserve Banks ..........................................................................................................95 FederalReservePricedServices ................................................................................................95 CurrencyandCoin ....................................................................................................................98 FiscalAgencyandGovernmentDepositoryServices...................................................................99 UseofFederalReserveIntradayCredit ....................................................................................102 FedLineAccesstoReserveBankServices ...............................................................................102 InformationTechnology ...........................................................................................................103 ExaminationsoftheFederalReserveBanks .............................................................................103 IncomeandExpenses .............................................................................................................104 SOMAHoldingsandLoans ......................................................................................................105 FederalReserveBankPremises ...............................................................................................108 ProFormaFinancialStatementsforFederalReservePricedServices ......................................109

vi Other Federal Reserve Operations ..................................................................................115 RegulatoryDevelopments:Dodd-FrankActImplementation ......................................................115 TheBoardofGovernorsandtheGovernmentPerformanceandResultsAct ..............................119 Record of Policy Actions of the Board of Governors .............................................121 RulesandRegulations .............................................................................................................121 PolicyStatementsandOtherActions .......................................................................................125 DiscountRatesforDepositoryInstitutionsin2014 ....................................................................126 Minutes of Federal Open Market Committee Meetings .........................................129 MeetingHeldonJanuary28–29,2014......................................................................................130 MeetingHeldonMarch18–19,2014 ........................................................................................149 MeetingHeldonApril29–30,2014 ...........................................................................................174 MeetingHeldonJune17–18,2014 ..........................................................................................184 MeetingHeldonJuly29–30,2014 ...........................................................................................210 MeetingHeldonSeptember16–17,2014 .................................................................................222 MeetingHeldonOctober28–29,2014 .....................................................................................248 MeetingHeldonDecember16–17,2014 ..................................................................................261 Litigation .................................................................................................................................285 Statistical Tables ....................................................................................................................287 Federal Reserve System Audits ........................................................................................317 BoardofGovernorsFinancialStatements .................................................................................318 FederalReserveBanksCombinedFinancialStatements ...........................................................340 OfficeofInspectorGeneralActivities ........................................................................................398 GovernmentAccountabilityOfficeReviews...............................................................................399 Federal Reserve System Budgets .....................................................................................401 SystemBudgetsOverview .......................................................................................................401 BoardofGovernorsBudgets ...................................................................................................404 FederalReserveBanksBudgets ..............................................................................................408 CurrencyBudget .....................................................................................................................412 Federal Reserve System Organization ...........................................................................417 BoardofGovernors .................................................................................................................417 FederalOpenMarketCommittee .............................................................................................422 BoardofGovernorsAdvisoryCouncils .....................................................................................424 FederalReserveBanksandBranches ......................................................................................427 Index .........................................................................................................................................443

1 1 Overview TheFederalReserve,thecentralbankof theUnited For More Background on States,isafederalsystemcomposedof acentralgov- Board 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.gov/ Presidentof theUnitedStatesandsupportedbya publications/annual-report/default.htm. 2,745-personstaff.Besidesconductingresearch, analysis,andpolicymakingrelatedtodomesticand internationalfinancialandeconomicmatters,the • Policyactionsandlitigation.Section8and Boardplaysamajorroleinthesupervisionandregusection9provideaccountsof policyactionstaken lationof U.S.financialinstitutionsandactivities,has bytheBoardin2014,includingneworamended broadoversightresponsibilityforthenation’spayrulesandregulationsandotheractionsaswellas mentssystemandtheoperationsandactivitiesof the thedeliberationsanddecisionsof theFederalOpen FederalReserveBanks,andplaysanimportantrole MarketCommittee(FOMC);1section10summainpromotingconsumerprotection,fairlending,and rizeslitigationinvolvingtheBoard. communitydevelopment. • Statisticaltables.Section11includes14statistical About This Report tablesthatprovideupdatedhistoricaldataconcerningBoardandSystemoperationsandactivities. ThisreportcoversBoardandSystemoperationsand • FederalReserveSystemaudits.Section12provides activitiesduringcalendar-year2014.Thereport detailedinformationontheseverallevelsof audit includesthefollowingsections: andreviewconductedinregardstoSystemopera- • Monetarypolicyandeconomicdevelopments. tionsandactivities,includingthoseprovidedby outsideauditorsandtheBoard’sOfficeof Inspec- Section2providesadaptedversionsof theBoard’s torGeneral. semiannualmonetarypolicyreportstoCongress. • FederalReserveoperations.Section3providesa • FederalReserveSystembudgets.Section13presents informationonthe2014budgetperformanceof summaryof BoardandSystemactivitiesinthe theBoardandReserveBanks,aswellastheir2015 areasof financialstabilitypolicyandresearch;secbudgets,budgetingprocesses,andtrendsintheir tion4,insupervisionandregulation;section5,in expensesandemployment. consumerandcommunityaffairs;andsection6,in ReserveBankoperations. • FederalReserveSystemorganization.Section14 • Dodd-FrankActimplementationandotherrequire- provideslistingsof keyofficialsattheBoardandin theFederalReserveSystem,includingtheBoardof ments.Section7summarizestheBoard’seffortsin 2014toimplementprovisionsof theDodd-Frank WallStreetReformandConsumerProtectionAct aswellastheBoard’scompliancewiththeGovern- 1 FormoreinformationontheFOMC,seetheBoard’swebsiteat mentPerformanceandResultsActof 1993. www.federalreserve.gov/monetarypolicy/fomc.htm.

2 101stAnnualReport|2014 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, abovemostFOMCparticipants’estimatesof its theFederalReserveBoardsubmitswrittenreportsto longer-runnormallevel,thelaborforceparticipation theCongressthatcontaindiscussionsof “thecon- rateremainsbelowmostassessmentsof itstrend,an ductof monetarypolicyandeconomicdevelopments unusuallylargenumberof peoplecontinuetowork andprospectsforthefuture.”TheMonetaryPolicy parttimewhentheywouldpreferfull-timeemploy- Report,submittedsemiannuallytotheSenateCom- ment,andwagegrowthhascontinuedtobeslow. mitteeonBanking,Housing,andUrbanAffairsand totheHouseCommitteeonBankingandFinancial Asteepdropincrudeoilpricessincethemiddleof Services,isdeliveredconcurrentlywithtestimony lastyearhasputdownwardpressureonoverallinflafromtheFederalReserveBoardChair. tion.Asof December2014,thepriceindexforpersonalconsumptionexpenditureswasonly¾percent Thefollowingdiscussionisareviewof U.S.monetary higherthanayearearlier,arateof increasethatis policyandeconomicdevelopmentsin2014,excerpted wellbelowtheFOMC’slonger-rungoalof 2percent. fromtheMonetaryPolicyReportspublishedinFeb- Evenapartfromtheenergysector,priceincreases ruary2015andJuly2014.Thosecompletereports havebeensubdued.Indeed,thepricesof itemsother areavailableontheBoard’swebsiteatwww thanfoodandenergyproductsroseatanannualrate .federalreserve.gov/monetarypolicy/files/20150224_ of onlyabout1percentoverthelastsixmonthsof mprfullreport.pdf(February2015)andwww 2014,noticeablylessthaninthefirsthalf of theyear. .federalreserve.gov/monetarypolicy/files/20140715_ Theslowpaceof priceincreasesduringthesecond mprfullreport.pdf(July2014). half waslikelyassociated,inpart,withfallingimport pricesandperhapsalsowithsomepass-throughof Othermaterialsinthisannualreportrelatedtothe loweroilprices.Survey-basedmeasuresof longerconductof monetarypolicycanbefoundinsec- terminflationexpectationshaveremainedstable; tion9,“Minutesof FederalOpenMarketCommittee howevermarket-basedmeasuresof inflationcom- Meetings,”andsection11,“StatisticalTables”(see pensationhavedeclinedsincelastsummer. tables1–4). Economicactivityexpandedatastrongpaceinthe secondhalf of lastyear.Notablyreflectingsolid Monetary Policy Report gainsinconsumerspending,realgrossdomestic of February 2015 product(GDP)isestimatedtohaveincreasedatan annualrateof 3¾percentafterareportedincreaseof Summary just1¼percentinthefirsthalf of theyear.The growthinGDPwassupportedbyaccommodative Thelabormarketimprovedfurtherduringthesecond monetarypolicy,areductioninthedegreeof half of lastyearandintoearly2015,andlabormar- restraintimpartedbyfiscalpolicy,andtheincreasein ketconditionsmovedclosertothosetheFederal households’purchasingpowerarisingfromthedrop OpenMarketCommittee(FOMC)judgesconsistent inoilprices.ThegainsinGDPhaveoccurreddespite withitsmaximumemploymentmandate.Sincethe continuedsluggishgrowthabroadandasizable middleof lastyear,monthlypayrollshaveexpanded appreciationof theU.S.dollar,bothof whichhave byabout280,000,onaverage,andtheunemployment weighedonnetexports. ratehasdeclinednearly½percentagepointonnet. Nevertheless,arangeof labormarketindicatorssug- FinancialconditionsintheUnitedStateshavegenergestthatthereisstillroomforimprovement.Inpar- allyremainedsupportiveof economicgrowth. ticular,at5.7percent,theunemploymentrateisstill Longer-terminterestratesintheUnitedStatesand

6 101stAnnualReport|2014 otheradvancedeconomieshavecontinuedtomove FOMCconcludedtheassetpurchaseprogramthat down,onnet,sincethemiddleof 2014amiddisap- beganinSeptember2012.Thedecisiontoendthe pointingeconomicgrowthandlowinflationabroad purchaseprogramreflectedthesubstantialimproveaswellastheassociatedanticipatedandactualmon- mentintheoutlookforthelabormarketsincethe etarypolicyactionsbyforeigncentralbanks.Broad program’sinception—thestatedaimof theassetpurindexesof U.S.equitypriceshaverisenmoderately, chases—andajudgmentthattheunderlyingstrength onnet,sincetheendof June.Creditflowstononfi- of thebroadereconomywassufficienttosupport nancialbusinesseslargelyremainedsolidinthesec- ongoingprogresstowardtheCommittee’spolicy ondhalf of lastyear.Overallborrowingconditions objectives. forhouseholdseasedfurther,butmortgagelending standardsarestilltightformanypotentialborrowers. Nonetheless,theCommitteecontinuedtojudgethat ahighdegreeof policyaccommodationremained Thevulnerabilityof theU.S.financialsystemto appropriate.Asaresult,theFOMChasmaintained financialinstabilityhasremainedmoderate,primarily theexceptionallylowtargetrangeof 0to¼percent reflectinglow-to-moderatelevelsof leverageand forthefederalfundsrateandkepttheFederal maturitytransformation.Assetvaluationpressures Reserve’sholdingsof longer-termsecuritiesatsizable haveeasedalittle,onbalance,butcontinuetobe levels.TheCommitteehasalsocontinuedtoprovide notableinsomesectors.Thecapitalandliquidity forwardguidancebearingontheanticipatedpathof positionsof thebankingsectorhaveimprovedfur- thefederalfundsrate.Inparticular,theFOMChas ther.Overthesecondhalf of 2014,theFederal stressedthatindecidinghowlongtomaintainthe Reserveandotheragenciesfinalizedorproposedsev- currenttargetrange,itwillconsiderabroadsetof eralmorerulesrelatedtotheDodd-FrankWallStreet indicatorstoassessrealizedandexpectedprogress ReformandConsumerProtectionActof 2010, towarditsobjectives.Onthebasisof itsassessment, whichweredesignedtofurtherstrengthentheresil- theCommitteeindicatedinitstwomostrecentpostienceof thefinancialsystem. meetingstatementsthatitcanbepatientinbeginning tonormalizethestanceof monetarypolicy. Atthetimeof theFOMCmeetinginlateJanuaryof thisyear,theCommitteesawtheoutlookasbroadly Tofurtheremphasizethedata-dependentnatureof similartothatatthetimeof itsDecembermeeting, itspolicystance,theFOMChasstatedthatif incomwhenthemostrecentSummaryof EconomicProjec- inginformationindicatesfasterprogresstowardits tions(SEP)wascompiled.(TheDecemberSEPis policyobjectivesthantheCommitteecurrently includedasPart3of theFebruary2015Monetary expects,increasesinthetargetrangeforthefederal PolicyReportonpages39–52;itisalsoincludedin fundsratewilllikelyoccursoonerthantheCommitsection9of thisannualreport.)TheFOMCexpects teeanticipates.TheFOMChasalsoindicatedthatin that,withappropriatemonetarypolicyaccommoda- thecaseof slower-than-expectedprogress,increases tion,economicactivitywillexpandatamoderate inthetargetrangewilllikelyoccurlaterthancurpace,andthatlabormarketindicatorswillcontinue rentlyanticipated.Moreover,theCommitteecontintomovetowardlevelstheCommitteejudgesconsis- uestoexpectthat,evenafteremploymentandinflatentwithitsdualmandateof maximumemployment tionarenearmandate-consistentlevels,economic andpricestability.Inaddition,theCommitteecon- conditionsmay,forsometime,warrantkeepingthe tinuestoseetheriskstotheoutlookforeconomic targetfederalfundsratebelowlevelstheCommittee activityandthelabormarketasnearlybalanced. viewsasnormalinthelongerrun. Inflationisanticipatedtodeclinefurtherinthenear term,mainlyreflectingthepass-throughof loweroil Aspartof prudentplanning,theFederalReservehas pricestoconsumerenergyprices.However,theCom- continuedtopreparefortheeventualnormalization mitteeexpectsinflationtorisegraduallytowardits of thestanceandconductof monetarypolicy.The 2percentlonger-runobjectiveoverthemediumterm FOMCannouncedupdatedprinciplesandplansfor asthelabormarketimprovesfurtherandthetransi- thenormalizationprocessfollowingitsSeptember toryeffectsof lowerenergypricesandotherfactors meetingandhascontinuedtotesttheoperational dissipate. readinessof itsmonetarypolicytools.TheCommitteeremainsconfidentthatithasthetoolsitneedsto Attheendof October,andafterhavingmadefurther raiseshort-terminterestrateswhendoingsobecomes measuredreductionsinthepaceof itsassetpur- appropriate,despitetheverylargesizeof theFederal chasesatitsJulyandSeptembermeetings,the Reserve’sbalancesheet.

MonetaryPolicyandEconomicDevelopments 7 Part 1: Recent Economic and Financial Figure1.Netchangeinpayrollemployment Developments 3-month moving averages Thousands of jobs Thelabormarketcontinuedtoimproveinthesecond half of lastyearandearlythisyear.Jobgainshave 400 Private averagedcloseto280,000permonthsinceJune,and 200 theunemploymentratefellfrom6.1percentinJune + to5.7percentinJanuary.Evenso,thelabormarket _0 likelyhasnotyetfullyrecovered,andwagegrowth Total nonfarm 200 hasremainedslow.SinceJune,asteepdropincrude oilpriceshasexerteddownwardpressureonoverall 400 inflation,andnon-energypriceincreaseshavebeen 600 subduedaswell.Thepriceindexforpersonalcon- 800 sumptionexpenditures(PCE)increasedonly¾percentduringthe12monthsendinginDecember,a 2008 2009 2010 2011 2012 2013 2014 2015 ratethatiswellbelowtheFederalOpenMarket Source:DepartmentofLabor,BureauofLaborStatistics. Committee’s(FOMC)longer-runobjectiveof 2percent;theindexexcludingfoodandenergypriceswas up1¼percentoverthisperiod.Surveymeasuresof portionof thedeclineinunemploymentoverthepast longer-runinflationexpectationshavebeenstable, yearcamefromadecreaseinthenumberof indibutmeasuresof inflationcompensationderivedfrom vidualsreportingunemploymentspellslongerthan financialmarketquoteshavemoveddown.Mean- sixmonths. while,realgrossdomesticproduct(GDP)increased atanestimatedannualrateof 3¾percentinthesec- Thelaborforceparticipationratehasbeenroughly ondhalf of theyear,upfromareportedrateof just flatsincelate2013afterhavingdeclinednotonlydur- 1¼percentinthefirsthalf.ThegrowthinGDPhas ingtherecession,butalsoduringmuchof therecovbeensupportedbyaccommodativemonetarypolicy eryperiodwhenmostotherindicatorsof labormarandgenerallyfavorablefinancialconditions,the kethealthwereimproving.Whilemuchof that boosttohouseholds’purchasingpowerfromlower declinelikelyreflectedongoingdemographic oilprices,andimprovingconsumerandbusinesscon- trends—suchastheagingof membersof thebabyfidence.However,housingmarketactivityhasbeen boomgenerationintotheirretirementyears—some advancingonlyslowly,andsluggishgrowthabroad of thedeclinelikelyreflectedworkers’perceptionsof andthehigherforeignexchangevalueof thedollar poorjobopportunities.Judgedagainstthebackdrop haveweighedonnetexports.Longer-terminterest of adecliningtrend,therecentstabilityof theparratesintheUnitedStatesandotheradvancedecono- ticipationratelikelyrepresentssomecyclical miesdeclined,onnet,amiddisappointinggrowth improvement.Nevertheless,theparticipationrate andlowinflationabroadandtheassociatedactual remainslowerthanwouldbeexpectedgiventhe andanticipatedaccommodativemonetarypolicy unemploymentrate,andthusitcontinuestosuggest actionsbyforeigncentralbanks. morecyclicalweaknessthanisindicatedbythe unemploymentrate. DomesticDevelopments Anothersignthatthelabormarketremainsweaker Thelabormarkethasstrengthenedfurther... thanindicatedbytheunemploymentratealoneisthe Employmentroseappreciablyandtheunemployment still-elevatedshareof workerswhoareemployedpart ratefellinthesecondhalf of 2014andearlythisyear. timebutwouldliketoworkfulltime.Thisshareof Payrollemploymenthasincreasedbyanaverageof involuntarypart-timeemployeeshasgenerallyshown about280,000permonthsinceJune,almost40,000 lessimprovementthantheunemploymentrateover fasterthaninthefirsthalf of lastyear(figure1).The thepastfewyears;inpartforthisreason,themore gaininpayrollemploymentfor2014asawholewas comprehensiveU-6measureof laborunderutilizathelargestforanyyearsince1999.Inaddition,the tionremainsquiteelevated(figure2). unemploymentratecontinuedtomovedown,decliningfrom6.1percentinJuneto5.7percentinJanuary Nevertheless,mostbroadmeasuresof labormarket of thisyear,aratemorethan4percentagepoints healthhaveimproved.Withemploymentrising belowitspeakin2009.Furthermore,asubstantial andtheparticipationrateholdingsteady,the

8 101stAnnualReport|2014 Figure2.Measuresoflaborunderutilization Monthly Percent U-6 16 U-4 14 U-5 12 10 8 Unemployment rate 6 4 2003 2005 2007 2009 2011 2013 2015 Note:U-4measurestotalunemployedplusdiscouragedworkers,asapercentofthelaborforceplusdiscouragedworkers.Discouragedworkersareasubsetofmarginally attachedworkerswhoarenotcurrentlylookingforworkbecausetheybelievenojobsareavailableforthem.U-5measurestotalunemployedplusallmarginallyattachedtothe laborforce,asapercentofthelaborforcepluspersonsmarginallyattachedtothelaborforce.Marginallyattachedworkersarenotinthelaborforce,wantandareavailablefor work,andhavelookedforajobinthepast12months.U-6measurestotalunemployedplusallmarginallyattachedworkersplustotalemployedparttimeforeconomicreasons,asapercentofthelaborforceplusallmarginallyattachedworkers.TheshadedbarindicatesaperiodofbusinessrecessionasdefinedbytheNationalBureauofEconomicResearch. Source:DepartmentofLabor,BureauofLaborStatistics. employment-to-populationratioclimbednoticeably efits,rose2¼percentoverthe12monthsendingin higherin2014andearly2015afterhavingmoved December,onlyslightlyfasterthanthegainsof moreorlesssidewaysformuchof therecovery.The about2percentthathadprevailedforseveralyears. quitrate,whichisoftenperceivedasameasureof Twootherprominentmeasuresof compensation— workerconfidenceinlabormarketopportunities,has averagehourlyearningsandbusiness-sectorcompenlargelyrecoveredtoitspre-recessionlevel.Moreover, sationperhour—increasedslightlylessthantheECI anindexconstructedbyFederalReserveBoardstaff overthepastyearandhaveshownfewersignsof thataimstosummarizemovementsinawidearrayof acceleration.Overthepastfiveyears,thegainsinall labormarketindicatorsalsosuggeststhatlabormar- threeof thesemeasuresof nominalcompensation ketconditionsstrengthenedfurtherin2014,andthat havefallenwellshortof theirpre-recessionaverages thegainshavebeenquitestronginrecentmonths.1 andhaveonlyslightlyoutpacedinflation.Thatsaid, thedropinenergypriceshaspusheduprealwagesin ...whilegainsincompensationhavebeen recentmonths. modest... Evenasthelabormarkethasbeenimproving,most ...andproductivitygrowthhasbeenlackluster measuresof laborcompensationhavecontinuedto Overtime,increasesinproductivityarethecentral showonlymodestgains.Theemploymentcostindex determinantof improvementsinlivingstandards. (ECI)forprivateindustryworkers,whichmeasures Laborproductivityintheprivatebusinesssectorhas bothwagesandthecostof employer-providedbenincreasedatanaverageannualpaceof 1¼percent sincetherecessionbeganinlate2007.Thispaceis 1 Fordetailsontheconstructionofthelabormarketconditions closetotheaveragethatprevailedbetweenthemidindex,seeHessChung,BruceFallick,ChristopherNekarda, andDavidRatner(2014),“AssessingtheChangeinLaborMar- 1970sandthemid-1990s,butitiswellbelowthepace ketConditions,”FinanceandEconomicsDiscussionSeries of theearlierpost–WorldWarIIperiodandthe 2014-109(Washington:BoardofGovernorsoftheFederal periodfromthemid-1990stotheeveof thefinancial ReserveSystem,December),www.federalreserve.gov/ econresdata/feds/2014/files/2014109pap.pdf. crisis.Inrecentyears,productivitygrowthhasbeen

MonetaryPolicyandEconomicDevelopments 9 Figure3.Brentspotandfuturesprices Figure4.Changeinthechain-typepriceindexforpersonal consumptionexpenditures Daily Dollars per barrel Monthly Percent 140 Spot price 130 5 120 Total 4 110 100 3 90 2 Dec. 2017 futures contracts 80 1 70 Excluding food and energy + 60 _0 50 1 2011 2012 2013 2014 2015 2 Source:NYMEX. 2008 2009 2010 2011 2012 2013 2014 Note:ThedataextendthroughDecember2014;changesarefromoneyear helddownby,amongotherfactors,thesharpdropin earlier. businesses’capitalexpendituresovertherecession Source:DepartmentofCommerce,BureauofEconomicAnalysis. andthemoderaterecoveryinexpendituressince then.Productivitygainsmaybebettersupportedin thefutureasinvestmentcontinuestostrengthen. 2014asawhole,corePCEpriceswereupalittle morethan1¼percent(figure4).Thetrimmedmean Aplungeincrudeoilpriceshashelddown PCEpriceindex,analternativeindicatorof underlyconsumerprices... inginflationconstructedbytheFederalReserve Asdiscussedinthebox“TheEffectof theRecent Bankof Dallas,alsoincreasedmoreslowlyinthesec- DeclineinOilPricesonEconomicActivity”onpages ondhalf of lastyear.Fallingimportpriceslikelyheld 8–9of theFebruary2015MonetaryPolicyReport, downcoreinflationinthesecondhalf of theyear; crudeoilpriceshaveplummetedsinceJune2014(fig- loweroilprices,andeasingpricesforcommodities ure3).Thissharpdrophascausedoverallconsumer moregenerally,mayhaveplayedaroleaswell.In priceinflationtoslow,mainlyduetofallinggasoline addition,ongoingresourceslackhasreinforcedthe prices:Thenationalaverageof retailgasolineprices low-inflationenvironment,thoughwiththeimprovmoveddownfromabout$3.75pergalloninJuneto ingeconomy,downwardpressurefromthisfactoris about$2.20pergalloninJanuary.Crudeoilprices likelywaning. haveturnedslightlyhigherinrecentweeks,and futuresmarketssuggestthatpricesareexpectedto Lookingattheoverallbasketof itemsthatpeople edgeupfurtherincomingyears;nevertheless,oil consume,priceincreasesremainmutedandbelow pricesarestillexpectedtoremainwellbelowthelev- theFOMC’slonger-runobjectiveof 2percent.In elsthathadprevailedthroughlastJune. December,thePCEpriceindexwasonly¾percent aboveitslevelfromayearearlier.Withretailsurveys Overthepastsixmonths,increasesinfoodprices showingafurthersharpdeclineingasolinepricesin havemoderated.Consumerfoodpriceincreaseshad January,overallconsumerpriceslikelymovedlower beensomewhatelevatedinearly2014asaresultof earlythisyear. risingfoodcommodityprices,butthosecommodity priceshavesinceeased,andincreasesattheretail Survey-basedmeasuresoflonger-terminflation levelhaveslowedaccordingly. expectationshaveremainedstable,while market-basedmeasuresofinflation ...butevenoutsideoftheenergyandfood compensationhavedeclined categories,inflationhasremainedsubdued TheFederalReservetracksindicatorsof inflation Inflationforitemsotherthanfoodandenergy(so- expectationsbecausesuchexpectationslikelyfactor calledcoreinflation)remainsmodest.CorePCE intowage-andprice-settingdecisionsandsoinflupricesroseatanannualrateof onlyabout1percent enceactualinflation.Survey-basedmeasuresof overthelastsixmonthsof 2014afterhavingrisenat longer-terminflationexpectations,includingsurveys a1¾percentrateinthefirsthalf of theyear;for of bothhouseholdsandprofessionalforecasters,have

10 101stAnnualReport|2014 Figure5.Medianinflationexpectations Figure6.Changeinrealgrossdomesticproduct,gross domesticincome,andprivatedomesticfinalpurchases Percent Percent, annual rate Gross domestic product 5 Michigan survey expectations 4 Gross domestic income H2* for next 5 to 10 years Private domestic final purchases 4 H1 3 3 2 1 + SPF expectations 2 _0 for next 10 years 1 1 2 3 4 2001 2003 2005 2007 2009 2011 2013 2015 2008 2009 2010 2011 2012 2013 2014 Note:TheMichigansurveydataaremonthlyandextendthroughFebruary2015. TheSPFdataforinflationexpectationsforpersonalconsumptionexpendituresare *Grossdomesticincomeisnotyetavailablefor2014:H2. quarterlyandextendfrom2007:Q1through2015:Q1. Source:DepartmentofCommerce,BureauofEconomicAnalysis. Source:UniversityofMichiganSurveysofConsumers;SurveyofProfessional Forecasters(SPF). declinesinthecostof borrowingformanyhousebeenquitestableoverthepast15years;inparticular, holdsandbusinesses;byareductionintherestraint theyhavechangedlittle,onnet,overthepastfew fromfiscalpolicyrelativeto2013;andbyincreasesin years(figure5).Incontrast,measuresof longer-term spendingspurredbycontinuingjobgainsand,more inflationcompensationderivedfromfinancialmarket recently,byfallingoilprices.ThegainsinGDPhave instrumentshavefallennoticeablyduringthepast occurreddespiteanappreciatingU.S.dollarandconseveralmonths.Asisdiscussedinmoredetailinthe cernsaboutglobaleconomicgrowth,whichremain box“ChallengesinInterpretingMeasuresof Longer- animportantsourceof uncertaintyfortheeconomic TermInflationExpectations”onpages12–13of the outlook. February2015MonetaryPolicyReport,deducingthe sourcesof changesininflationcompensationisdiffi- Consumerspendingwassupportedby cultbecausesuchmovementsmaybecausedbyfac- continuingimprovementinthelabormarketand torsotherthanshiftsinmarketparticipants’inflation fallingoilprices,... expectations. RealPCEroseatanannualrateof 3¾percentinthe secondhalf of 2014—anoticeablestep-upfromthe Economicactivityexpandedatastrongpacein sluggishrateof onlyabout2percentinthefirsthalf thesecondhalfof2014 (figure7).Theincreasesinspendinghavebeensup- RealGDPisestimatedtohaveincreasedatanannual portedbytheimprovinglabormarket.Inaddition, rateof 3¾percentinthesecondhalf of lastyear thefallingasolineandotherenergypriceshas afterareportedincreaseof just1¼percentinthe boostedpurchasingpowerforconsumers,especially firsthalf,whenoutputwaslikelyrestrainedbysevere thoseinlower-andmiddle-incomebracketswho weatherandothertransitoryfactors(figure6).Pri- spendasizableshareof theirincomeongasoline. vatedomesticfinalpurchases—ameasureof house- Realdisposablepersonalincome—thatis,income holdandbusinessspendingthattendstoexhibitless aftertaxesandadjustedforpricechanges—rose quarterlyvariationthanGDP—alsoadvancedata 3percentatanannualrateinthesecondhalf of last substantialpaceinthesecondhalf of lastyear. year,roughlydoubletheaverageraterecordedover theprecedingfiveyears. Thesecond-half gainsinGDPreflectedsolid advancesinconsumerspendingandinbusiness ...furtherincreasesinhouseholdwealthand investmentspendingonequipmentandintangibles lowinterestrates,... (E&I)aswellassubduedgainsforbothresidential Consumerspendinggrowthwasalsolikelysupported investmentandnonresidentialstructures.Moregen- byfurtherincreasesinhouseholdnetworth,asthe erally,thegrowthinGDPhasbeensupportedby stockmarketcontinuedtoriseandhouseprices accommodativefinancialconditions,including movedupinthesecondhalf of lastyear.Thevalue

MonetaryPolicyandEconomicDevelopments 11 Figure7.Changeinrealpersonalconsumption Figure8.Pricesofexistingsingle-familyhouses expendituresanddisposablepersonalincome Monthly Peak = 100 Percent, annual rate Personal consumption expenditures 6 Disposable personal income 100 5 Zillow H1 H2 4 index 90 3 2 + 1 CoreLogic 80 _0 price index 1 70 S&P/Case-Shiller 2 national index 3 2005 2008 2011 2014 2008 2009 2010 2011 2012 2013 2014 Note:ThedatafortheZillowandS&P/Case-Shillerindexesextendthrough Source:DepartmentofCommerce,BureauofEconomicAnalysis. November2014.ThedatafortheCoreLogicindexextendthroughDecember2014.Eachindexhasbeennormalizedsothatitspeakis100.TheCoreLogic priceindexincludespurchasetransactionsonlyandisadjustedbyFederal ReserveBoardstaff.TheS&P/Case-Shillerindexreflectsallarm’s-lengthsales of corporateequitiesroseabout10percentin2014, transactionsnationwide. ontopof the30percentgainseenin2013.Although Source:TheS&P/Case-ShillerU.S.NationalHomePriceIndex(“Index”)isaproductofS&PDowJonesIndicesLLCand/oritsaffiliatesandhasbeenlicensedfor thegainsinhousepricesslowedlastyear—for usebytheBoard.Copyright©2015S&PDowJonesIndicesLLC,asubsidiaryof example,theCoreLogicnationalindexincreasedonly theMcGrawHillFinancialInc.,and/oritsaffiliates.Allrightsreserved.Redistribution,reproductionand/orphotocopyinginwholeorinpartareprohibitedwithout 5percentafterhavingrisenmoresubstantiallyin writtenpermissionofS&PDowJonesIndicesLLC.Formoreinformationonanyof 2012and2013—thesegainsaffectedalargershareof S&PDowJonesIndicesLLC’sindicespleasevisitwww.spdji.com.S&P®isaregisteredtrademarkofStandard&Poor’sFinancialServicesLLCandDowJones® thepopulationthandidthegainsinequities,asmore isaregisteredtrademarkofDowJonesTrademarkHoldingsLLC.NeitherS&P individualsownhomesthanownstocks(figure8). DowJonesIndicesLLC,DowJonesTrademarkHoldingsLLC,theiraffiliatesnor theirthirdpartylicensorsmakeanyrepresentationorwarranty,expressor Reflectingincreasesinhomeandequityprices,aggreimplied,astotheabilityofanyindextoaccuratelyrepresenttheassetclassor gatehouseholdnetwealthhasrisenappreciablyfrom marketsectorthatitpurportstorepresentandneitherS&PDowJonesIndices LLC,DowJonesTrademarkHoldingsLLC,theiraffiliatesnortheirthirdpartylicenitslevelsduringtherecessionanditsaftermathto sorsshallhaveanyliabilityforanyerrors,omissions,orinterruptionsofanyindex morethansixtimesthevalueof disposable orthedataincludedtherein. personalincome. Coupledwithlowinterestrates,theriseinincomes sentimentmovedupnoticeablyinthesecondhalf of haslowereddebtpaymentburdensformanyhouse- lastyear.TheUniversityof MichiganSurveysof holds.Thehouseholddebtserviceratio—thatis,the Consumers’indexof consumersentiment—which ratioof requiredprincipalandinterestpaymentson incorporateshouseholds’viewsabouttheirown outstandinghouseholddebttodisposablepersonal financialsituationsaswellasbroadereconomicconincome—hasremainedataverylowlevelbyhistori- ditions—hasmovedupstrongly,onnet,inrecent calstandards. monthsandisnowclosetoitslong-runaverage.The Michigansurvey’smeasureof households’expecta- ...andincreasedcreditavailabilityfor tionsof realincomechangesintheyearaheadhas consumers alsocontinuedtotrendupoverthepastseveral Consumercreditcontinuedtoexpandthroughlate months,perhapsreflectingthefallingasolineprices. 2014,asautoandstudentloanshaveremainedavail- However,thismeasureremainssubstantiallybelow ableeventoborrowerswithlowercreditscores.In itshistoricalaverageandsuggestsamoreguarded addition,creditcardshavebecomesomewhatmore outlookthantheheadlinesentimentindex. accessibletoindividualsonthelowerendof the creditspectrum,andoverallcreditcarddebt However,thepaceofhomebuildinghasimproved increasedmoderatelylastyear. onlyslowly Afteradvancingreasonablywellin2012andearly Consumerconfidencehasmovedup 2013,therecoveryinresidentialconstructionactivity Consistentwiththeimprovementinthelabormarket hasslowedmarkedly.Single-familyhousingstarts andthefallinenergyprices,indicatorsof consumer onlyedgedupin2014,andmultifamilyconstruction

12 101stAnnualReport|2014 Figure9.Privatehousingstartsandpermits Figure10.Changeinrealbusinessfixedinvestment Percent, annual rate Monthly Millions of units, annual rate Structures Equipment and intangible capital 30 2.2 20 Single-family starts 1.8 H1H2 10 1.4 + _0 Single-family 1.0 10 permits .6 20 Multifamily starts .2 30 2007 2008 2009 2010 2011 2012 2013 2014 2001 2003 2005 2007 2009 2011 2013 2015 Source:DepartmentofCommerce,BureauofEconomicAnalysis. Source:DepartmentofCommerce,BureauoftheCensus. activitywasalsolittlechanged(figure9).Andsales sinceretracedmuchof thoseincreases.The30-year of bothnewandexistinghomeswereflat,onnet,last fixedmortgageratedeclinedroughly60basispoints year.Inall,realresidentialinvestmentroseonly in2014,andithasedgeddownfurther,onnet,this 2½percentin2014,anditremainswellbelowitspre- yeartoalevelnotfarfromitsall-timelowin2012. recessionpeak.Theweakrecoveryinconstruction Likelyrelatedtothemostrecentdeclineinmortgage likelyrelatestotherateof householdformation, rates,refinancingactivityrosemodestlyinJanuary. which,notwithstandingtentativesignsof arecent pickup,hasgenerallystayedverylowdespitethe Overallbusinessinvestmenthasmovedup,but improvementinthelabormarket. investmentintheenergysectorisstartingtobe affectedbythedropinoilprices Lendingpoliciesforhomepurchasesremainedtight Businessfixedinvestmentroseatanannualrateof overall,althoughtherearesomeindicationsthat 5¼percentinthesecondhalf of 2014,closetothe mortgagecredithasstartedtobecomemorewidely rateof increaseseeninthefirsthalf.Spendingon accessible.Overthecourseof 2014,thefractionof E&Icapitalroseatanannualrateof about6percent, home-purchasemortgagesissuedtoborrowerswith whilespendingonnonresidentialstructuresmoved creditscoresonthelowerendof thespectrumedged upabout4percent(figure10).Businessinvestment up.Additionally,intheSeniorLoanOfficerOpinion hasbeensupportedbystrengtheningfinaldemandas SurveyonBankLendingPractices(SLOOS),several wellasbylowinterestratesandgenerallyaccommolargebanksreportedhavingeasedlendingstandards dativefinancialconditions.Regardingnonresidential onprimehome-purchaseloansinthethirdand structures,vacancyratesforexistingpropertieshave fourthquartersof lastyear.2InJanuary,theFederal beendeclining,andfinancingconditionsfornew HousingAdministrationreduceditsmortgageinsur- constructionhaveeasedfurther—bothfactorsthat ancepremiumsbyaboutone-thirdof thelevelthat bodewellforfutureconstruction.Morerecently, hadprevailedduringthepastfouryears—astepthat however,thesteepdeclineinthenumberof drilling maylowerthecostof creditforhouseholdswith rigsinoperationsuggeststhatasharpfalloff inthe smalldownpaymentsandlowcreditscores.Evenso, drillingandminingcomponentof investmentinnonmortgageshaveremaineddifficulttoobtainformany residentialstructuresmaybeunderway. households. Corporatefinancingconditionsweregenerally Meanwhile,forborrowerswhocanqualifyfora favorable mortgage,thecostof creditislow.Afterrisingappre- Thefinancialconditionof largenonfinancialfirms ciablyaroundmid-2013,mortgageinterestrateshave generallyremainedsolidinthesecondhalf of last year;profitabilitystayedhigh,anddefaultrateson nonfinancialcorporatebondsweregenerallyvery 2 TheSLOOSisavailableontheBoard’swebsiteatwww .federalreserve.gov/boarddocs/snloansurvey. low.Nonfinancialfirmshavecontinuedtoraisefunds

MonetaryPolicyandEconomicDevelopments 13 throughcapitalmarketsatarobustpace,givensturdy Figure11.Changeinrealimportsandexportsofgoodsand corporatecreditquality,historicallylowinterestrates services oncorporatebonds,andhighlyaccommodativelendingconditionsformostfirms.Bondissuanceby Percent, annual rate investment-gradenonfinancialfirms,andsyndicated Imports lendingtothosefirms,havebothbeenparticularly Exports 12 strong.However,speculative-gradeissuanceinthose 9 markets,whichhadremainedelevatedformostof H1 2014,diminishedlateintheyear,becausevolatility 6 H2 increasedandspreadswidenedandperhapsalso 3 becauseof greaterscrutinybyregulatorsof syndi- + catedleveragedloanswithweakercreditqualityand _0 lowerrepaymentcapacity. 3 6 Creditalsowasreadilyavailabletomostbankdependentbusinesses.AccordingtotheOctober2014 2008 2009 2010 2011 2012 2013 2014 andJanuary2015SLOOSreports,banksgenerally Source:DepartmentofCommerce,BureauofEconomicAnalysis. continuedtoeasepriceandnonpricetermsoncommercialandindustrial(C&I)loanstofirmsof all sizesinthesecondhalf of 2014.Thatsaid,inthe fourthquarter,severalbanksreportedhavingtight- theslowestinmorethanadecade,reflectingasignifienedlendingpoliciesforoilandgasfirmsor,more cantslowdowninreserveaccumulationbyemerging broadly,inresponsetolegislative,supervisory,or marketeconomies(EMEs). accountingchanges.Inaddition,althoughoverall C&Iloansonbanks’booksregisteredsubstantial Federalfiscalpolicywaslessofadrag increasesinthesecondhalf of 2014,loanstobusi- onGDP... nessesinamountsof $1millionorless—aproxyfor Fiscalpolicyatthefederallevelhadbeenafactor lendingtosmallbusinesses—increasedonlymodestly. restrainingGDPgrowthforseveralyears,especially Theweakgrowthinthesesmallloansappearslargely in2013.In2014,however,thecontractionaryeffects duetosluggishdemand;however,banklendingstan- of taxandspendingchangeseasedappreciablyasthe dardstosmallbusinessesarestillreportedlysome- restrainingeffectsof the2013taxincreasesabated whattighterthanthemidpointof theirrangeover andtherewasaslowinginthedeclinesinfederalpurthepastdecadedespiteconsiderablelooseningover chasesduetosequestrationandtheBudgetControl thepastfewyears. Actof 2011(figure12).Moreover,someof theover- Netexportshelddownsecond-halfrealGDP growthslightly Figure12.Changeinrealgovernmentexpenditureson Exportsincreasedatamodestpaceinthesecondhalf consumptionandinvestment of 2014,heldbackbylacklustergrowthabroadas wellastheappreciationof thedollar.Importgrowth Percent, annual rate wasalsorelativelysubdued,despitetheimpetusfrom Federal thestrongerdollar,andwaswellbelowthepace State and local 9 observedinthefirsthalf (figure11).Alltold,realnet 6 tradewasaslightdragonrealGDPgrowthinthe secondhalf of 2014. 3 H1 H2 + _0 Thecurrentaccountdeficitwaslittlechangedinthe 3 thirdquarterof 2014and,at2¼percentof nominal GDP,wasnearitsnarrowestreadingsincethelate 6 1990s.Thecurrentaccountdeficitinthefirstthree 9 quartersof 2014wasfinancedmainlybypurchases of Treasuryandcorporatesecuritiesbyforeignpri- 2008 2009 2010 2011 2012 2013 2014 vateinvestors.Incontrast,thepaceof foreignofficial Source:DepartmentofCommerce,BureauofEconomicAnalysis. purchasesinthefirstthreequartersof theyearwas

14 101stAnnualReport|2014 alldragondemandwasoffsetin2014byanincrease Figure13.YieldsonnominalTreasurysecurities intransfersresultingfromtheAffordableCareAct. Daily Percent Thefederalunifieddeficitnarrowedfurtherlastyear, reflectingboththepreviousyears’spendingcutsand 7 anincreaseintaxreceiptsresultingfromtheongoing 6 economicexpansion.Thebudgetdeficitwas2¾per- 10-year 30-year 5 centof GDPforfiscalyear2014,andtheCongres- 4 sionalBudgetOfficeprojectsthatitwillbeabout 2½percentin2015.Asaresult,overallfederaldebt 5-year 3 heldbythepublicstabilizedasashareof GDPin 2 2014,albeitatarelativelyhighlevel. 1 ...andstateandlocalgovernmentexpenditures 0 arealsoturningup 2001 2003 2005 2007 2009 2011 2013 2015 Theexpansionof economicactivityhasalsoledto Note:TheTreasuryceasedpublicationofthe30-yearconstantmaturityserieson continuedslowimprovementsinthefiscalpositionof February18,2002,andresumedthatseriesonFebruary9,2006. moststateandlocalgovernments.Consistentwith Source:DepartmentoftheTreasury. improvingfinances,statesandlocalitiesexpanded employmentrollsin2014.Furthermore,stateand localexpendituresonconstructionprojectsrosea taintybasedoninterestratederivativesedgedhigher, touchlastyearfollowingseveralyearsof declines. onnet,fromtheirmid-2014levels. FinancialDevelopments Longer-termTreasuryyieldsandothersovereign benchmarkyieldsdeclined Theexpectedpathforthefederalfundsrate Yieldsonlonger-termTreasurysecuritieshaveconflattened tinuedtomovedownsincethemiddleof lastyearon Marketparticipantsseemedtojudgetheincoming net(figure13).Inparticular,theyieldson10-and domesticeconomicdatasincethemiddleof lastyear, 30-yearnominalTreasurysecuritiesdeclinedabout especiallytheemploymentreports,assupporting 40basispointsand60basispoints,respectively,from expectationsforcontinuedeconomicexpansionin theirlevelsattheendof June2014.Thedecreasesin theUnitedStates;however,concernsaboutthefor- longer-termyieldsweredrivenespeciallybyreduceigneconomicoutlookweighedoninvestorsenti- tionsinlonger-horizonforwardrates.Forexample, ment.Onbalance,market-basedmeasuresof the the5-yearforwardrate5yearsaheaddroppedabout expected(ormean)pathof thefederalfundsrate 80basispointsoverthesameperiod.Long-term throughlate2017haveflattened,buttheexpected benchmarksovereignyieldsinadvancedforeign timingof theinitialincreaseinthefederalfundsrate economies(AFEs)havealsomoveddownsignififromitscurrenttargetrangewasaboutunchanged. cantlyinresponsetodisappointinggrowthandvery Inaddition,accordingtotheresultsof themost lowanddecliningratesof inflationinanumberof recentSurveyof PrimaryDealersandtheSurveyof foreigncountriesaswellastheassociatedactualand MarketParticipants,bothconductedbytheFederal anticipatedchangesinmonetarypolicyabroad. ReserveBankof NewYorkjustpriortotheJanuary FOMCmeeting,respondentsjudgedthattheinitial Thedeclinesinlonger-termTreasuryyieldsandlongincreaseinthetargetfederalfundsratewasmost horizonforwardratesseemtolargelyreflectreduclikelytooccuraroundmid-2015,littlechangedfrom tionsintermpremiums—theextrareturninvestors theresultsof thosesurveysfromlastJune.3Mean- expecttoobtainfromholdinglonger-termsecurities while,inpartbecausethepassageof timebrought asopposedtoholdingandrollingoverasequenceof theanticipateddateof theinitialincreaseinthefed- short-termsecuritiesforthesameperiod.Market eralfundsratecloser,measuresof policyrateuncer- participantspointedtoseveralfactorsthatmayhelp toexplainthereductionintermpremiums.First, 3 TheresultsoftheSurveyofPrimaryDealersandoftheSurvey verylowanddecliningAFEyieldsandsafe-haven ofMarketParticipantsareavailableontheFederalReserve flowsassociatedwiththedeteriorationintheforeign BankofNewYork’swebsiteatwww.newyorkfed.org/markets/ economicoutlooklikelyhaveincreaseddemandfor primarydealer_survey_questions.htmlandwww.newyorkfed.org/ markets/survey_market_participants.html,respectively. Treasurysecurities.Second,theweakerforeigneco-

MonetaryPolicyandEconomicDevelopments 15 nomicoutlookcoupledwiththesteepdeclineinoil Figure14.Equityprices pricesmayhaveledinvestorstoputhigheroddson scenariosinwhichU.S.inflationremainsquitelow Daily December 31, 2007 = 100 foranextendedperiod.Investorsmayseenominal long-termTreasurysecuritiesasanespeciallygood 140 hedgeagainstsuchrisks.Finally,marketparticipants Dow Jones 120 mayhaveincreasedtheprobabilitytheyattachto bank index outcomesinwhichU.S.economicgrowthispersis- 100 tentlysubdued.Indeed,the5-yearforwardrealyield 80 5yearsahead,obtainedfromyieldsonTreasury Inflation-ProtectedSecurities,hasdeclinedfurther, 60 onnet,sincethemiddleof lastyearandstandswell S&P 500 index 40 belowlevelscommonlycitedasestimatesof the 20 longer-runrealshortrate. 1994 1997 2000 2003 2006 2009 2012 2015 Consistentwithmovesintheyieldsonlonger-term Source:DowJonesbankindexandStandard&Poor’s500indexviaBloomberg. Treasurysecurities,yieldson30-yearagency mortgage-backedsecurities(MBS)—animportant determinantof mortgageinterestrates—decreased ketratesmovedmodestlyhigherlatein2014but about30basispoints,onbalance,overthesecond remainedclosetotheiraveragessincethefederal half of 2014andearly2015. fundsratereacheditseffectivelowerbound.Unsecuredoffshoredollarfundingmarketsgenerallydid LiquidityconditionsinTreasuryandagencyMBS notexhibitsignsof stress,andtherepurchaseagreemarketsweregenerallystable... ment,orrepo,marketfunctionedsmoothlywith Onbalance,indicatorsof Treasurymarketfunction- modestyear-endpressures. ingremainedstableoverthesecondhalf of 2014even astheFederalReservetrimmedthepaceof itsasset Moneymarketparticipantscontinuedtofocusonthe purchasesandultimatelybroughtthepurchasepro- ongoingtestingof theFederalReserve’smonetary gramtoacloseattheendof October.TheTreasury policytools.Theofferingrateintheovernightreverse marketexperiencedasharpdropinyieldsandsignifi- repurchaseagreement(ONRRP)exercisehascontincantlyelevatedvolatilityonOctober15,astechnical uedtoprovideasoftfloorforotherratesonsecured factorsreportedlyamplifiedpricemovementsfollow- borrowing,andthetermRRPtestingoperationsthat ingthereleaseof thesomewhatweaker-than- wereconductedinDecemberandmaturedinearly expectedSeptemberU.S.retailsalesdata.However, Januaryseemedtohelpalleviateyear-endpressures marketconditionsrecoveredquicklyandliquidity inmoneymarkets.Foradetaileddiscussionof the measures,suchasbid-askedspreads,havebeengen- testingof monetarypolicytools,seethebox“Addierallystablesincethen.Moreover,Treasuryauctions tionalTestingof MonetaryPolicyTools”onpages generallycontinuedtobewellreceivedbyinvestors. 36–37of theFebruary2015MonetaryPolicyReport. AsintheTreasurymarket,liquidityconditionsinthe Broadequitypriceindexesrosedespitehigher agencyMBSmarketweregenerallystable,withthe volatility,whileriskspreadsoncorporatedebt exceptionof mid-October.Dollar-roll-implied widened financingratesforproductioncouponMBS—an Overthesecondhalf of 2014andearly2015,broad indicatorof thescarcityof agencyMBSforsettle- measuresof U.S.equitypricesincreasedfurther,on ment—suggestedlimitedsettlementpressuresin balance,butstockpricesfortheenergysector thesemarketsoverthesecondhalf of 2014and declinedsubstantially,reflectingthesharpdropsin early2015. oilprices(figure14).Althoughincreasedconcerns abouttheforeigneconomicoutlookseemedtoweigh ...andshort-termfundingmarketsalso onrisksentiment,thegenerallypositivetoneof U.S. continuedtofunctionwellasratesmoved economicdatareleasesaswellasdeclininglongerslightlyhigheroverall terminterestratesappearedtoprovidesupportfor Conditionsinshort-termdollarfundingmarketsalso equityprices.Overallequityvaluationsbysomeconremainedstableduringthesecondhalf of 2014and ventionalmeasuresaresomewhathigherthantheir early2015.Bothunsecuredandsecuredmoneymar- historicalaveragelevels,andvaluationmetricsin

16 101stAnnualReport|2014 Measuresof bankprofitabilitywerelittlechangedin Figure15.Ratiooftotalcommercialbankcredittonominal thesecondhalf of 2014,onnet,andremainedbelow grossdomesticproduct theirhistoricalaverages.Equitypricesof large Quarterly Percent domesticbankholdingcompanies(BHCs)have increasedmoderately,onnet,sincethemiddleof last year.Creditdefaultswap(CDS)spreadsforlarge 75 BHCswereaboutunchanged. 70 TheM2measureof themoneystockhasincreasedat 65 anaverageannualizedrateof about5½percentsince lastJune,belowthepaceregisteredinthefirsthalf of 60 2014andaboutinlinewiththepaceof nominal GDP.Thedecelerationwasdrivenbyamoderation 55 inthegrowthrateof liquiddepositsinthebanking sectorrelativetothefirsthalf of 2014.Although demandforcurrencyweakenedinthethirdquarter 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 of 2014relativetothefirsthalf of theyear,currency Source:FederalReserveBoard,StatisticalReleaseH.8,“AssetsandLiabilitiesof CommercialBanksintheUnitedStates”;DepartmentofCommerce,Bureauof growthhasbeenstrongsinceNovember. EconomicAnalysis. Municipalbondmarketsfunctionedsmoothly,but someissuersremainedstrained Creditconditionsinmunicipalbondmarketshave somesectorscontinuetoappearstretchedrelativeto generallyremainedstablesincethemiddleof last historicalnorms.ImpliedvolatilityfortheS&P500 year.Overthatperiod,theMCDX—anindexof index,ascalculatedfromoptionsprices,increased CDSspreadsforabroadportfolioof municipal moderately,onnet,fromlowlevelsoverthesummer. bonds—andratiosof yieldson20-yeargeneralobligationmunicipalbondstothoseonlonger-term Corporatecreditspreads,particularlythosefor Treasurysecuritiesincreasedslightly. speculative-gradebonds,widenedfromthefairlylow levelsof lastsummer,inpartbecauseof theunder- Nevertheless,significantfinancialstrainswerestill performanceof energyfirms.Overall,corporate evidentforsomeissuers.PuertoRico,with bondspreadsacrossthecreditspectrumhavebeen speculative-grade-ratedgeneralobligationbonds, neartheirhistoricalmedianlevelsrecently.Forfurcontinuedtofacechallengesfromsubduedeconomic therdiscussionof assetpricesandotherfinancialstaperformance,severeindebtedness,andotherfiscal bilityissues,seethebox“DevelopmentsRelatedto pressures.Meanwhile,theCityof Detroitemerged FinancialStability”onpages24–25of theFebrufrombankruptcylatein2014afteritsdebtrestructurary2015MonetaryPolicyReport. ingplanwasapprovedbyafederaljudge. BankcreditandtheM2measureofthemoney InternationalDevelopments stockcontinuedtoexpand Aggregatecreditprovidedbycommercialbanks Bondyieldsintheadvancedforeigneconomies increasedatasolidpaceinthesecondhalf of 2014 continuedtodecline... (figure15).Theexpansioninbankcreditwasmainly Asnotedpreviously,long-termsovereignyieldsinthe drivenbymoderateloangrowthcoupledwithcontin- AFEsmoveddownfurtherduringthesecondhalf of uedrobustexpansionof banks’holdingsof U.S. 2014andintoearly2015oncontinuedlowinflation Treasurysecurities,whichwasreportedlyinfluenced readingsabroadandheightenedconcernsoverthe byeffortsof largebankstomeetthenewBaselIII strengthof foreigneconomicgrowthaswellasamid LiquidityCoverageRatiorequirements.Thegrowth substantialmonetarypolicyaccommodation(figof loansonbanks’bookswasgenerallyconsistent ure16).Germanyieldsfelltorecordlows,asthe withtheSLOOSreportsof increasedloandemand EuropeanCentralBank(ECB)implementednew andfurthereasingof lendingstandardsformany liquidityfacilities,purchasedcoveredbondsand loancategoriesoverthesecondhalf of 2014.Mean- asset-backedsecurities,andannounceditwould while,delinquencyandcharge-off ratesfellacross beginbuyingeuro-areasovereignbonds.Specifically, mostmajorloantypes. theECBsaidthatitwouldpurchase€60billionper

MonetaryPolicyandEconomicDevelopments 17 Figure16.10-yearnominalbenchmarkyieldsinadvanced Figure17.U.S.dollarexchangerateagainstbroadindex foreigneconomies andselectedmajorcurrencies Daily Percent Daily January 4, 2012 = 100 160 United Kingdom 155 3.0 150 145 2.5 140 Germany 135 2.0 130 Yen 125 1.5 120 1.0 115 Japan 110 Broad .5 105 100 Euro 0 95 90 2013 2014 2015 2012 2013 2014 2015 Source:Bloomberg. Note:Thedataareinforeigncurrencyunitsperdollar. Source:FederalReserveBoard,StatisticalReleaseH.10,“ForeignExchange Rates.” monthof euro-areapublicandprivatebonds throughatleastSeptember2016.Japaneseyieldsalso Foreignequityindexesweremixedovertheperiod. declined,reflectingtheexpansionbytheBankof JapaneseequitiesoutperformedotherAFEindexes, Japan(BOJ)of itsassetpurchaseprogram.Inthe helpedbytheBOJ’sassetpurchaseexpansion.Euro- UnitedKingdom,yieldsfellasdatashoweddeclining areaequitiesareupmodestlyfromtheirmid-2014 inflationandsomemoderationineconomicgrowth, levels,boostedrecentlybymonetaryeasing.Howalthoughtheyhaveretracedalittleof thatmovein ever,euro-areabanksharessubstantiallyunderperrecentweeks,inpartasmarketsentimenttowardthe formedbroaderindexes,partlyreflectinglowprofit- U.K.outlookappearstohaveimprovedsomewhat. ability,weakoperatingenvironments,andlingering Inemergingmarkets,yieldsweremixed—falling,for vulnerabilitiestoeconomicandfinancialshocks. themostpart,inAsiaandgenerallyrisingmodestly EMEequitiesindexesweremixed,withmostemerginLatinAmerica—asCDSspreadswidenedamid ingAsianindexesrisingandsomeof themajorLatin growingcreditconcerns,particularlyinsomeoil- Americanindexesmovingdown. exportingcountries. Economicgrowthintheadvancedforeign ...whilethedollarhasstrengthenedmarkedly economies,whilestillgenerallyweak,firmed Thebroadnominalvalueof thedollarhasincreased towardtheendoftheyear markedlysincethemiddleof 2014,withtheU.S.dol- EconomicgrowthintheAFEs,whichwasweakin larappreciatingagainstalmostallcurrencies(fig- thefirsthalf of 2014,firmedtowardtheendof the ure17).Theincreaseinthevalueof thedollarwas secondhalf of theyear,supportedinpartbylower largelydrivenbyadditionalmonetaryeasingabroad oilpricesandmoreaccommodativemonetarypoliandrisingconcernsaboutforeigngrowth—forces cies.Theeuro-areaeconomybarelygrewinthethird similartothosethatdrovebenchmarkyields quarterandunemploymentremainednearrecord lower—inthefaceof expectationsof solidU.S. highs,butthepaceof economicactivitymovedupin growthandtheanticipatedstartof monetarytight- thefourthquarter.Notwithstandingmoresupportive eningintheUnitedStateslaterthisyear.Boththe monetarypolicyandtherecentpickupineuro-area euroandtheyenhavedepreciatedabout20percent growth,negotiationsoveradditionalfinancialassisagainstthedollarsincemid-2014.Notwithstanding tanceforGreecehavethepotentialtotriggeradverse thesharpnominalappreciationof thedollarsince marketreactionsandresurrectfinancialstressesthat mid-2014,therealvalueof thedollar,measured mightimpairgrowthinthebroadereuro-area againstabroadbasketof currencies,iscurrently economy.JapaneserealGDPcontractedagaininthe somewhatbelowitshistoricalaveragesince1973and thirdquarter,followingataxhike–inducedplungein wellbelowthepeakitreachedinearly1985. thesecondquarter,butitreboundedtowardtheend

18 101stAnnualReport|2014 of theyearasexportsandhouseholdspending oilpriceswereespeciallydisruptiveforseveraleconoincreased.Incontrast,economicactivityinthe mieswithheavydependenceonoilexports,including UnitedKingdomandCanadawasrobustinthethird RussiaandVenezuela. quarterbutmoderatedinthefourthquarter. InflationcontinuedtobesubduedinmostEMEs. Thefallinoilpricesandothercommodityprices Thefallinthepriceof oilcontributedtoamoderapusheddownheadlineinflationacrossthemajor tionof headlineinflationinseveralEMEs,including AFEs.Mostnotably,12-montheuro-areainflation China.However,thiscontributionwaslimitedin continuedtotrenddown,fallingtonegative0.6per- manyEMEsduetotheprevalenceof administered centinJanuary.Declinesininflationandinmarket- energyprices,whichlowerthepass-throughof basedmeasuresof inflationexpectationssincemid- changesinoilpricestoconsumerprices.Inseveral 2014promptedtheECBtoincreaseitsmonetary countries,includingIndonesiaandMalaysia,thefall stimulus.SimilarconsiderationsledtheBOJtostep inenergypricespromptedgovernmentstocutfuel upitspaceof assetpurchasesinOctober.TheBank subsidies,leadingtoariseindomesticpricesof fuel of Canadalowereditstargetfortheovernightratein andininflationlatein2014.Withinflationlowor Januaryinlightof thedepressingeffectof loweroil declining,somecentralbanks,includingthoseof pricesonCanadianinflationandeconomicactivity, China,Korea,andChile,loosenedmonetarypolicy asoilexportsarenearly20percentof totalgoods tosupportgrowth.InotherEMEs,includingBrazil exports.Severalotherforeigncentralbankslowered andMalaysia,inflationarypressuresstemmingfrom theirpolicyrates,eitherreachingorpushingfurther depreciatingcurrenciesorfromreductionsinfuel intonegativeterritory,includinginDenmark,Swe- subsidiespromptedcentralbankstoraisepolicy den,andSwitzerland—thelastof whichdidsointhe rates.Thecentralbankof Russiasharplytightened contextof removingitsfloorontheeuro-Swissfranc monetarypolicytocombatinflationarypressures exchangerate. andstabilizeitsfinancialmarkets,whichcameunder considerablepressureinlate2014. Growthintheemergingmarketeconomies improvedbutremainedsubdued Part 2: Monetary Policy Followingweakgrowthearlierlastyear,overalleconomicactivityintheEMEsimprovedabitinthesec- TheFederalOpenMarketCommittee(FOMC)conondhalf of 2014,butperformancevariedacross cludeditsassetpurchaseprogramattheendof Octoeconomies.GrowthinAsiawasgenerallysolid,sup- berinlightof thesubstantialimprovementintheoutportedbyexternaldemand,particularlyfromthe lookforthelabormarketsincetheinceptionof the UnitedStates,andimprovedtermsof tradedueto program.Tosupportfurtherprogresstowardmaxithesharpdeclineincommodityprices.Incontrast, mumemploymentandpricestability,theFOMChas thedeclineincommodityprices,alongwithmacro- keptthetargetfederalfundsrateatitseffectivelower economicpolicychallenges,weighedoneconomic boundandmaintainedtheFederalReserve’sholdings activityinseveralSouthAmericancountries. of longer-termsecuritiesatsizablelevels.Togive greaterclaritytothepublicaboutitspolicyoutlook, InChina,exportsexpandedrapidlyinthesecond theCommitteehasalsocontinuedtoprovidequalitahalf of lastyear,butfixedinvestmentsoftened,as tiveguidanceregardingthefuturepathof thefederal realestateinvestmentslowedamidaweakeningprop- fundsrate.Inparticular,theCommitteeindicatedatits ertymarket.Respondingtoincreasedconcernsover twomostrecentmeetingsthatitcanbepatientin thestrengthof growth,theauthoritiesannounced beginningtonormalizethestanceof monetarypolicy additionaltargetedstimulusmeasuresinaneffortto andcontinuedtoemphasizethedata-dependentnature preventtheeconomyfromslowingabruptly.Inmuch of itspolicystance.FollowingitsSeptembermeeting, of therestof emergingAsia,exports,particularlyto andaspartof prudentplanning,theCommittee theUnitedStates,supportedastep-upingrowth announcedupdatedprinciplesandplansfortheevenfromthefirsthalf of theyear.TheMexicaneconomy tualnormalizationof monetarypolicy. continuedtogrowatamoderatepaceinthesecond half of 2014,withsolidexportstotheUnitedStates TheFOMCconcludeditsassetpurchasesatthe butlingeringsoftnessinhouseholddemand.InBra- endofOctoberinlightofsubstantial zil,economicactivityremainedlacklusteramidfall- improvementintheoutlookforthelabormarket ingcommodityprices,diminishedbusinessconfi- Attheendof October,theFOMCendedtheasset dence,andtightermacroeconomicpolicy.Declining purchaseprogramthatbeganinSeptember2012

MonetaryPolicyandEconomicDevelopments 19 afterhavingmadefurthermeasuredreductionsinthe forthefederalfundsrateforaconsiderabletimefolpaceof itsassetpurchasesatthepriormeetingsin lowingtheendof theassetpurchaseprogram,espe- JulyandSeptember.4Thedecisiontoendthepur- ciallyif projectedinflationcontinuedtorunbelow chaseprogramreflectedthesubstantialimprovement theCommittee’s2percentlonger-rungoalandprointheoutlookforthelabormarketsincethepro- videdthatlonger-terminflationexpectations gram’sinception—whichhadbeenthegoalof the remainedwellanchored. assetpurchases—andtheCommittee’sjudgmentthat theoverallrecoverywassufficientlystrongtosupport Inlightof theconclusionof theassetpurchaseproongoingprogresstowardtheCommittee’spolicy gramattheendof Octoberandthefurtherprogress objectives.However,theCommitteejudgedthata thattheeconomyhadmadetowardtheCommittee’s highdegreeof policyaccommodationstillremained objectives,theFOMCupdateditsforwardguidance appropriateandmaintaineditsexistingpolicyof atitsDecembermeeting.Inparticular,theCommitreinvestingprincipalpaymentsfromitsholdingsof teestatedthatitcanbepatientinbeginningtonoragencydebtandagencymortgage-backedsecurities malizethestanceof monetarypolicy,butitalso (MBS)inagencyMBSandof rollingovermaturing emphasizedthattheCommitteesawtherevisedlan- Treasurysecuritiesatauction.BykeepingtheFederal guageasconsistentwiththeguidanceinitsprevious Reserve’sholdingsof longer-termsecuritiesatsizable statement.5TheCommitteerestatedtheupdatedforlevels,thispolicyisexpectedtohelpmaintainaccom- wardguidancefollowingitsJanuarymeetingbased modativefinancialconditionsbyputtingdownward onitsassessmentof theeconomicinformationavailpressureonlonger-terminterestratesandsupporting ableatthattime.6 mortgagemarkets.Inturn,thoseeffectsareexpected tocontributetoprogresstowardboththemaximum InherDecemberpressconference,ChairYellen employmentandpricestabilityobjectivesof emphasizedthattheupdatetotheforwardguidance theFOMC. didnotsignifyachangeintheCommittee’spolicy intentions,butratherwasabetterreflectionof the Tosupportfurtherprogresstowarditsobjectives, Committee’sfocusontheeconomicconditionsthat theCommitteehaskeptthetargetfederalfunds wouldmakeanincreaseinthefederalfundsrate rateatitslowerboundandupdateditsforward appropriate.7ChairYellenadditionallyindicated rateguidance that,consistentwiththenewlanguage,theCommit- TheCommitteehasmaintainedtheexceptionallylow teewasunlikelytobeginthenormalizationprocess targetrangeof 0to¼percentforthefederalfunds foratleastthefollowingtwomeetings.Therearea ratetosupportfurtherprogresstowarditsobjectives rangeof viewswithintheCommitteeregardingthe of maximumemploymentandpricestability.Inaddiappropriatetimingof thefirstincreaseinthefederal tion,theFOMChasprovidedguidanceaboutthe fundsrate,inpartreflectingdifferencesinparticilikelyfuturepathof thefederalfundsrateinaneffort pants’expectationsforhowtheeconomywould togivegreaterclaritytothepublicaboutitspolicy evolve.Bythetimeof liftoff,theCommitteeexpects outlook.Inparticular,theCommitteehasreiterated somefurtherdeclineintheunemploymentrateand that,indetermininghowlongtomaintainthistarget additionalimprovementinlabormarketconditions. range,itwillassessrealizedandexpectedprogress Inaddition,theCommitteeanticipatesthat,onthe towarditsobjectives.Thisassessmentwillcontinueto basisof incomingdata,itwillbereasonablyconfitakeintoaccountawiderangeof information, dentthatinflationwillmovebackoverthemedium includingmeasuresof labormarketconditions,inditermtoits2percentobjective. catorsof inflationpressuresandinflationexpectations,andreadingsonfinancialandinternational developments.Basedonitsassessmentof thesefac- 5 SeeBoardofGovernorsoftheFederalReserveSystem(2014), tors,beforeupdatingitsguidanceinDecember,the “FederalReserveIssuesFOMCStatement,”pressrelease, Committeehadbeenindicatingthatitlikelywould December17,www.federalreserve.gov/newsevents/press/ beappropriatetomaintainthecurrenttargetrange monetary/20141217a.htm. 6 SeeBoardofGovernorsoftheFederalReserveSystem(2015), “FederalReserveIssuesFOMCStatement,”pressrelease,January28,www.federalreserve.gov/newsevents/press/monetary/ 20150128a.htm. 4 SeeBoardofGovernorsoftheFederalReserveSystem(2014), 7 SeeBoardofGovernorsoftheFederalReserveSystem(2014), “FederalReserveIssuesFOMCStatement,”pressrelease,Octo- “TranscriptofChairYellen’sFOMCPressConference,” ber29,www.federalreserve.gov/newsevents/press/monetary/ December17,www.federalreserve.gov/mediacenter/files/ 20141029a.htm. FOMCpresconf20141217.pdf.

20 101stAnnualReport|2014 Figure18.FederalReserveassetsandliabilities Weekly Trillions of dollars — 4.5 Assets — 4.0 Other assets — 3.5 — 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 Capital and other liabilities — 3.5 Liabilities and capital — 4.0 — 4.5 2008 2009 2010 2011 2012 2013 2014 2015 Note:“Creditandliquidityfacilities”consistsofprimary,secondary,andseasonalcredit;termauctioncredit;centralbankliquidityswaps;supportforMaidenLane,Bear Stearns,andAIG;andothercreditfacilities,includingthePrimaryDealerCreditFacility,theAsset-BackedCommercialPaperMoneyMarketMutualFundLiquidityFacility,the CommercialPaperFundingFacility,andtheTermAsset-BackedSecuritiesLoanFacility.“Otherassets”includesunamortizedpremiumsanddiscountsonsecuritiesheldoutright.“Capitalandotherliabilities”includesreverserepurchaseagreements,theU.S.TreasuryGeneralAccount,andtheU.S.TreasurySupplementaryFinancingAccount.Data extendthroughFebruary18,2015. Source:FederalReserveBoard,StatisticalReleaseH.4.1,“FactorsAffectingReserveBalances.” TheCommitteehasreiteratedthat,whenitdecidesto ure18).Asaresultof theassetpurchasesoverthe begintoremovepolicyaccommodation,itwilltakea secondhalf of 2014,beforethecompletionof the balancedapproachconsistentwithitslonger-run program,holdingsof U.S.Treasurysecuritiesinthe goalsof maximumemploymentandinflationof SystemOpenMarketAccount(SOMA)increased 2percent.Inaddition,theCommitteecontinuesto $56billionto$2.5trillion,andholdingsof agency anticipatethat,evenafteremploymentandinflation debtandagencyMBSincreased$78billionto arenearmandate-consistentlevels,economiccondi- $1.8trilliononnet.Ontheliabilitysideof thebaltionsmay,forsometime,warrantkeepingthetarget ancesheet,theincreaseintheFederalReserve’s federalfundsratebelowlevelstheCommitteeviews assetswaslargelymatchedbyincreasesincurrencyin asnormalinthelongerrun.AsemphasizedbyChair circulationandreverserepurchaseagreements. Yelleninherrecentpressconferences,FOMCparticipantsprovideanumberof explanationsforthisview, GiventheFederalReserve’slargesecuritiesholdings, withmanycitingtheresidualeffectsof thefinancial interestincomeontheSOMAportfoliocontinuedto crisis.Theseeffectsareexpectedtoeasegradually, supportsubstantialremittancestotheU.S.Treasury buttheyareseenaslikelytocontinuetoconstrain Department.Preliminaryestimatessuggestthatthe householdspendingforsometime. FederalReserveprovidedmorethan$98billionof suchdistributionstotheTreasuryin2014andabout TheFOMChasstressedthedata-dependentnature $500billiononacumulativebasissince2008.8 of itspolicystanceandindicatedthatif incoming informationsignalsfasterprogressthantheCommit- TheFOMCcontinuedtoplanfortheeventual teeexpects,increasesinthetargetrangeforthefed- normalizationofmonetarypolicy... eralfundsratewilllikelyoccursoonerthantheCom- FOMCmeetingparticipantshavehadongoingdismitteeanticipates.TheFOMCalsostatedthatinthe cussionsof issuesassociatedwiththeeventualnorcaseof slower-than-expectedprogress,increasesin malizationof thestanceandconductof monetary thetargetrangewilllikelyoccurlaterthan policyaspartof prudentplanning.9Thediscussions anticipated. 8 SeeBoardofGovernorsoftheFederalReserveSystem(2015), ThesizeoftheFederalReserve’sbalancesheet “ReserveBankIncomeandExpenseDataandTransferstothe stabilizedwiththeconclusionoftheasset Treasuryfor2014,”pressrelease,January9,www.federalreserve purchaseprogram .gov/newsevents/press/other/20150109a.htm. Aftertheconclusionof thelarge-scaleassetpurchase 9 SeeBoardofGovernorsoftheFederalReserveSystem(2014), “MinutesoftheFederalOpenMarketCommittee,July29–30, programattheendof October,theFederalReserve’s 2014,”pressrelease,August20,www.federalreserve.gov/ totalassetsstabilizedataround$4.5trillion(fig- newsevents/press/monetary/20140820a.htm.

MonetaryPolicyandEconomicDevelopments 21 involvedvarioustoolsthatcouldbeusedtocontrol couldchange,andthatitwaspreparedtomake thelevelof short-terminterestrates,evenwhilethe adjustmentstoitsnormalizationplansif warranted. balancesheetof theFederalReserveremainsvery large,aswellasapproachestonormalizingthesize ...includingbytestingthepolicytoolstobe andcompositionof theFederalReserve’sbalance used sheet. TheFederalReservehascontinuedtotesttheoperationalreadinessof itspolicytools,conductingdaily Toinformthepublicaboutitsapproachtonormal- overnightreverserepurchaseagreement(ONRRP) izationandtoconveytheCommittee’sconfidencein operations,aseriesof termRRPoperations,andsevitsplans,theFOMCissuedastatementregardingits eraltestsof theTermDepositFacility.Todate,testintentionsfortheeventualnormalizationof policy inghasprogressedsmoothly,andshort-termmarket followingitsSeptembermeeting.(Thatstatementis rateshavegenerallytradedabovetheONRRPrate, reproducedinthebox“PolicyNormalizationPrinciples whichsuggeststhatthefacilitywillbeauseful andPlans”onpage35of theFebruary2015Mon- supplementarytoolfortheFOMCtouseinaddition etaryPolicyReport.)Aswasthecasebeforethecrisis, totheinterestrateitpaysonexcessreserves(the theCommitteeintendstoadjustthestanceof mon- IOERrate)tocontrolthefederalfundsrateduring etarypolicyduringnormalizationprimarilythrough thenormalizationprocess.Overall,testingoperations actionsthatinfluencethelevelof thefederalfunds reinforcedtheFederalReserve’sconfidenceinits rateandothershort-terminterestrates.Regarding viewthatithasthetoolsnecessarytotightenpolicy thebalancesheet,theCommitteeintendstoreduce attheappropriatetime.(Formorediscussionof the securitiesholdingsinagradualandpredictableman- FederalReserve’spreparationsfortheeventualnornerprimarilybyceasingtoreinvestrepaymentsof malizationofmonetarypolicy,seethebox“Additional principalonsecuritiesheldintheSOMA.TheCom- Testingof MonetaryPolicyTools”onpages36–37of mitteenotedthateconomicandfinancialconditions theFebruary2015MonetaryPolicyReport.)

22 101stAnnualReport|2014 Monetary Policy Report tinuetomovegraduallytowardlevelsthattheCommitteejudgesconsistentwithitsdualmandateof of July 2014 maximumemploymentandpricestability.Inaddition,theCommitteeanticipatesthatwithstableinfla- Summary tionexpectationsandstrengtheningeconomicactivity,inflationwill,overtime,returntotheCommit- Theoverallconditionof thelabormarketcontinued tee’s2percentobjective.Thoseexpectationsare toimproveduringthefirsthalf of 2014.Gainsin reflectedintheJuneSummaryof EconomicProjecpayrollemploymentpickeduptoanaveragemonthly tions,whichisincludedasPart3of thisreport.(The paceof about230,000,andtheunemploymentrate JuneSEPisincludedasPart3of theJuly2014Monfellto6.1percentinJune,nearly4percentagepoints etaryPolicyReportonpages41–54;itisalsoincluded belowitspeakin2009.Notwithstandingthose insection9of thisannualreport.) improvements,abroadarrayof labormarketindicators—suchaslaborforceparticipation,hiringand Financialconditionshavegenerallyremainedsupquitrates,andthenumberof peopleworkingpart portiveof economicgrowth.Longer-terminterest timeforeconomicreasons—generallysuggeststhat rateshavecontinuedtobelowbyhistoricalstansignificantslackremainsinthelabormarket.Contindards,andoverthefirsthalf of theyearthoseinteruedslowincreasesinmostmeasuresof laborcomestratesmoveddownsignificantlyintheUnited pensationalsocorroboratetheviewthatlabor Statesaswellasinmostotheradvancedeconomies. resourcesarenotbeingfullyutilized. Overall,borrowingconditionsforhouseholdshave continuedtoslowlyimproveamidrisinghouseand Inflationhasmovedupthisyearfollowingunusually equitypricesandthefasterpaceof employment lowreadingsin2013,butithasremainedsomewhat growthsofarthisyear.CreditflowstolargenonfibelowtheFederalOpenMarketCommittee’s nancialbusinesseshaveremainedstrong,andsmall (FOMC)longer-rungoalof 2percent.Theprice businesslendingactivityhasshownsignsof improveindexforpersonalconsumptionexpenditures(PCE) mentinrecentmonths. rose1¾percentoverthe12monthsendinginMay, upfromanincreaseof only1percentayearearlier. Withrespecttofinancialstability,signsof risk-taking ThePCEpriceindexexcludingfoodandenergy thatcouldleavesegmentsof theU.S.financialsector itemsrose1½percentoverthepast12months. vulnerabletopossibleadverseeventshaveincreased Meanwhile,bothsurvey-andmarket-basedmeasures modestlythisyear,albeitfromasubduedlevel.Prices of longer-terminflationexpectationshaveremained forrealestate,equities,andcorporatedebthaverisen stable. andvaluationmeasureshaveincreased,butvaluationsremainroughlyinlinewithhistoricalnorms. Realgrossdomesticproductisreportedtohave Signsof excessesthatcouldleadtohigherfuture declinedinthefirstquarterof thisyear,butanum- defaultsandlosseshaveemergedinsomesectors, berof recentindicatorssuggestthateconomicactiv- includingforspeculative-gradecorporatebondsand ityreboundedinthesecondquarter.Thepaceof leveragedloans.Atthesametime,financialfirms’use economicgrowthabroadalsoappearstohavequick- of short-termwholesalefundinghasnotincreased enedinthesecondquarterfollowingweaknessearlier materiallyandthecapitalandliquiditypositionof thisyear,whichshouldprovidesupportforexport thebankingsectorcontinuedtoimprove.TheFederal sales.Moreover,expansionineconomicactivitycon- Reserveandotheragenciestookfurthersupervisory tinuestobesupportedbyongoingjobgains,awan- andregulatorystepstoimproveresilience,including ingdragfromfiscalpolicy,andaccommodative conductingthe2014stresstestsof thelargestbank financialconditions.However,thehousingsectorhas holdingcompanies(BHCs);finalizingrulesto shownlittlerecentprogress.Whileithasrecovered strengthenprudentialstandardsforthelargest notablyfromitsearliertrough,activityinthesector domesticBHCsandfortheU.S.operationsof forleveledoff inthewakeof lastyear’sincreaseinmort- eignbankingfirms;andraisingleverageratiostangagerates,andreadingsthisyearhave,overall,con- dardsforthelargest,mostinterconnectedfirms. tinuedtobedisappointing. Tosupportcontinuedprogresstowardmaximum TheCommitteeexpectsthat,withappropriatepolicy employmentandpricestability,theFOMChasmainaccommodation,economicactivitywillexpandata tainedahighlyaccommodativestanceof monetary moderatepaceandlabormarketconditionswillcon- policy.Specifically,theCommitteehaskeptitstarget

MonetaryPolicyandEconomicDevelopments 23 rangeforthefederalfundsrateat0to¼percent; interestratesthereafter,evenwhiletheFederal updateditsforwardguidanceregardingthepathof Reserveisholdingaverylargebalancesheet.The thefederalfundsrate;andcontinuedtoincreaseits Committeeintendstocontinueitsdiscussionsabout sizableholdingsof longer-termsecurities,thoughata policynormalizationatupcomingmeetingswhileit graduallydiminishingpace.Inparticular,theCom- proceedswithtestingtheoperationalreadinessof its mitteemadeadditionalmeasuredreductionsateach tools;itexpectstoprovidetothepublicmoreinforof itsfirstfourrebegularlyscheduledmeetingsin mationaboutitsnormalizationplanslaterthisyear. 2014inthemonthlypaceof itsassetpurchases.The FOMCalsostatedateachmeetingthat,if incoming Part 1: Recent Economic and Financial informationcontinuedtobroadlysupporttheCom- Developments mittee’sassessmentof theeconomicoutlook,the Committeewouldlikelyreducethepaceof assetpur- Labormarketconditionscontinuedtoimproveover chasesinfurthermeasuredstepsatfuturemeetings. thefirsthalf of thisyear.Gainsinpayrollemploy- However,theCommitteealsonotedthatitsassetpur- mentsincethestartof theyearhaveaveragedabout chasesarenotonapresetcourse,andthatdecisions 230,000jobspermonth,upalittlefromtheaverage abouttheirpacewillremaincontingentontheeco- pacein2013,andtheunemploymentratedeclinedto nomicoutlook. 6.1percentinJune,thelowestraterecordedinmore thanfiveyears.Nevertheless,thejoblessrateisstill TheFOMChasprovidedforwardguidanceforthe aboveFederalOpenMarketCommittee(FOMC) federalfundsratebasedonitsassessmentof eco- participants’estimatesof thelonger-runnormalrate. nomicandfinancialconditions.As2014began,the Othermeasuresof laborutilization,aswellasthe Committee’sforwardrateguidanceincludedquanti- continuedslowincreasesinmostmeasuresof labor tativethresholdsrelatingtotheunemploymentrate compensation,generallycorroboratetheviewthat andinflation.However,withtheunemploymentrate significantslackremainsinthelabormarket.Inflahavingnearedits6½percentthreshold,theCommit- tion,asmeasuredbythepriceindexforpersonalconteedecidedatitsMarchmeetingtoreplacethe sumptionexpenditures(PCE),averaged1¾percent numericalthresholdswithaqualitativecharacteriza- overthe12monthsendinginMay,higherthanthe tionof itsapproachtodetermininghowlongto unusuallylowleveloverthepreceding12monthsbut maintainthecurrent0to¼percenttargetrangefor stillsomewhatbelowtheCommittee’s2percent thefederalfundsrate.Specifically,theCommittee objective.Meanwhile,bothsurvey-andmarket-based statedthatitwillassessprogress—bothrealizedand measuresof longer-terminflationexpectationshave expected—towarditsobjectivesof maximum remainedquitestable.Realgrossdomesticproduct employmentand2percentinflation,takinginto (GDP)wasreportedtohavedecreasedinthefirst accountawiderangeof information,including quarterof thisyear,buttheavailableinformationfor measuresof labormarketconditions,indicatorsof thesecondquartersuggeststhatthedeclinewastraninflationpressuresandinflationexpectations,and sitory.Oneareaof concern,however,isthehousing readingsonfinancialdevelopments.TheCommittee sector,whereactivitysoftenedbymore,relativetoits continuestoanticipate,basedonitsassessmentof earliertrajectory,thanwouldhavebeenexpected thesefactors,thatitlikelywillbeappropriateto basedonlastyear’sriseinmortgageinterestrates. maintainthecurrenttargetrangeforthefederal Financialconditionshavegenerallyremainedsupfundsrateforaconsiderabletimeaftertheassetpur- portiveof economicgrowth.Longer-terminterest chaseprogramends.TheCommitteeadditionally ratesintheUnitedStatesaswellasinmostother stateditsanticipationthat,evenafteremployment advancedeconomieshavepartiallyreversedlast andinflationarenearmandate-consistentlevels,eco- year’sincreases,andborrowingconditionsforhousenomicconditionsmay,forsometime,warrantkeep- holdsandsmallbusinesseshaveslowlyimproved, ingthetargetfederalfundsratebelowlevelsthe whilecreditflowstolargenonfinancialcorporations Committeeviewsasnormalinthelongerrun. haveremainedstrong. Aspartof prudentplanning,theFederalReservehas DomesticDevelopments continuedtopreparefortheeventualnormalization of thestanceandconductof monetarypolicy.The Labormarketconditionshavestrengthened FOMCremainsconfidentthatithasthetoolsit further... needstoraiseshort-terminterestrateswhenthetime Thelabormarketcontinuedtoimproveinthefirst isrightandtoachievethedesiredlevelof short-term half of 2014.Payrollemploymenthasincreasedby

24 101stAnnualReport|2014 anaverageof about230,000permonthsofarthis lower-than-averageparticipationratesbecausethey year,higherthantheaveragegainin2013.Theunem- aremorelikelytoberetired.Assuch,manyof those ploymentratecontinuedtotrenddown,declining exitsfromthelaborforceprobablywouldhave from6.7percentinDecember2013to6.1percentin occurredevenif thelabormarkethadbeenstronger. Juneof thisyear,whilethelaborforceparticipation However,someexitsarelikelyoccurringbecausethe ratewaslittlechanged,onnet,overthefirsthalf of prolongedperiodof highunemploymenthasled thisyearafterhavingmoveddownconsiderablyin someindividualstogiveuptheirjobsearch,andsuch thesecondhalf of lastyear.Theunemploymentrate dynamicscouldhaveharmfulconsequencesforecohasdeclinednearly4percentagepointsfromitspeak nomicactivityinthelongrun. in2009,althoughitremainselevatedwhenjudged againstFOMCparticipants’estimatesof thelonger- ...andwagegrowthhasremainedtepid runnormalrate.Payrollshavereversedthecumula- Continuedslowincreasesinmostmeasuresof labor tivejoblossesthatoccurredoverthelastrecession, compensationofferfurtherevidenceof labormarket thoughthatrecoveryhasbeenachievedinthecon- slack.Compensationperhourinthenonfarmbusitextof alargerpopulationandlaborforce. nesssectorisestimatedtohaverisenatamodestpace of 2¼percentoverthefourquartersendinginthe AnindexconstructedbyBoardstaff thataimsto firstquarterof thisyear;theemploymentcostindex summarizemovementsinabroadarrayof labor forprivateindustryworkersroseatanannualrateof marketindicatorsalsosuggeststhatlabormarket only1¾percentinthesameperiod;andaverage conditionshavestrengthenedfurtherthisyear.1 hourlyearningsroseabout2percentoverthe Whileincreasesinthatindexslowedatouchatthe 12monthsendinginJune,littlechangedfromthe beginningof thisyear,partlyreflectingtheeffectsof averagerateof increaseinhourlyearningsduringthe theunseasonablycoldandsnowyweatherthiswinter, pastseveralyears.Overthepastfiveyears,thevarithepacehaspickedupagaininrecentmonths. ousmeasuresof nominalhourlycompensationhave increasedroughly2percentperyear,onaverage,and ...butsignificantslackremains... afteradjustingforinflation,growthof realcompen- Notwithstandingthoseimprovements,variouslabor sationhasfallenshortof thegainsinproductivity marketindicatorssuggestthatasignificantdegreeof overthisperiod. slackremainsinlaborutilization.Forinstance,meas- Consumerpriceinflationhasmovedup... uresof laborunderutilizationthatincorporate broaderdefinitionsof unemploymentarestillwell Inflationhasmovedhigherthisyearfollowingunusuabovetheirpre-recessionlevels,eventhoughthey allylowreadingsin2013.ThePCEpriceindexrose havemoveddownfurtherthisyear.Theproportion 1¾percentoverthe12monthsendinginMay,up of workersemployedparttimebecausetheyare fromthe1percentincreaserecordedovertheprecedunabletofindfull-timeworkhassimilarlydeclined ing12months.ThePCEpriceindexexcludingfood butremainselevated,andhiringandquitratesare andenergyitemsrose1½percentoverthe12months stillbelowtheirpre-recessionnorms.Moreover,the endinginMay,slightlylessthantheoverallindex. mediandurationof unemploymentisstillwellabove TheFOMCcontinuestojudgethatinflationatthe itslong-runaverage. rateof 2percent,asmeasuredbytheannualchange inthePCEpriceindex,ismostconsistentoverthe Thedeclinesintheparticipationrateduringthepast longerrunwiththeFederalReserve’sstatutorymanfewyears,withinthecontextof astrengtheninglabor date.Thus,inflationremainedsomewhatbelowthe market,alsocouldbeanindicationof continuing Committee’sgoal.Someof thefactorsthatcontriblabormarketslack.Tobesure,movementsinthepar- utedtotheunusuallylowinflationin2013,suchas ticipationratepartlyreflectthechangingdemo- thesoftnessseeninnon-oilimportprices,havebegun graphiccompositionof thepopulation,mostnotably tounwindandarepushingupinflationalittlethis theincreasingshareof olderpersons,whohave year.Moregenerally,however,withwagesgrowing slowlyandrawmaterialspricesgenerallyflatormovingdownward,firmsarenotfacingmuchintheway 1 Fordetailsontheconstructionofthelabormarketconditions of costpressuresthattheymightotherwisetryto index,seeHessChung,BruceFallick,ChristopherNekarda, andDavidRatner(2014),“AssessingtheChangeinLaborMar- passon. ketConditions,”FEDSNotes(Washington:BoardofGovernorsoftheFederalReserveSystem,May22),www Aportionof therecentincreaseininflationreflects .federalreserve.gov/econresdata/notes/feds-notes/2014/assessingthe-change-in-labor-market-conditions-20140522.html. movementsinenergyandfoodpricesthatappear

MonetaryPolicyandEconomicDevelopments 25 transitory.Consumerenergypricesroseatanannual forwhichtheavailablemonthlydatapointtoa rateof nearly6percentoverthe12monthsendingin reboundinthesecondquarter.Inaddition,anumber May,partlyreflectingstrongdemandforelectricity of recentindicatorsof second-quarterspending, andnaturalgasduringthecoldwinter.Globaloil includingmotorvehiclesales,retailsales,andshippriceshavebeenremarkablystableformuchof the mentsof capitalgoods,suggeststhattheoverallpace pastyear,withoilpricesremainingmostlyinanar- of consumerandbusinessspendingalsopickedupin rowrangeof betweenabout$105and$110perbarrel thesecondquarter.Expansioninrealactivitycontinandmovingabovethatrangeonlytemporarilyin uestobesupportedbyongoingjobgains,awaning reactiontoeventsinIraq.Meanwhile,adversegrow- dragfromfiscalpolicy,andaccommodativefinancial ingconditionsinboththeUnitedStatesandabroad conditions.However,activityinthehousingsector havepushedupwholesalepricesforvariousfood hasyettoshowpersistentgainssinceitslowedinthe commodities—includingcorn,wheat,andcoffee— wakeof lastyear’sriseinmortgageinterestrates. andthesehigherrawmaterialspriceshaveledto somewhatlargerincreasesinconsumerfoodprices Exportdeclinesweighedheavilyon thisyear. first-quarterGDP Realexportsof goodsandservicesdeclinedatan ...butinflationexpectationshavechangedlittle annualrateof about9percentinthefirstquarterof Survey-andmarket-basedmeasuresof inflation 2014,coincidingwithaglobalslowdownintrade. expectationsatmedium-andlonger-termhorizons Thedeclinepartlyreflectedaretrenchmentintwo haveremainedquitestablethroughouttherecent volatilecategories,petroleumandagriculture,that period.Readingsoninflationexpectations5to hadsurgedinthefourthquarterof 2013.Withreal 10yearsahead,asreportedintheThomsonReuters/ importsof goodsandservicesadvancinginthefirst Universityof MichiganSurveysof Consumers,have quarter,albeitslowly,netexportssubtracted1½percontinuedtomovewithinanarrowrange.IntheSur- centagepoints—anunusuallylargeamount—from veyof ProfessionalForecasters,conductedbythe overallGDPgrowth.However,availabledatafor FederalReserveBankof Philadelphia,themedian AprilandMayindicatethatexportsreboundedinthe expectationinthesecondquarterfortheannualrate secondquarter,andnetexportswilllikelybemore of increaseinthePCEpriceindexoverthenext supportiveof growthinthesecondquarter. 10yearswas2percent,similartoitslevelinrecent years.Meanwhile,market-basedmeasuresof Thecurrentaccountdeficitwidenedsomewhatinthe medium-(5-year)andlonger-term(5-to-10-years- firstquarterof thisyearafterhavingnarrowedfurahead)inflationcompensationderivedfromdiffer- therover2013;however,measuredrelativetonomiencesbetweenyieldsonnominalTreasurysecurities nalGDP,thedeficitremainsnearitsnarrowestreadandTreasuryInflation-ProtectedSecuritieshavealso ingssincethelate1990s.Inthesecondhalf of 2013, remainedwithintheirrespectiverangesobservedover thecurrentaccountdeficitcontinuedtobefinanced thepastfewyears. mostlybypurchasesof Treasuryandcorporatesecuritiesbybothforeignofficialinvestorsandforeign Thefirst-quarterdeclineinrealGDPappearsto privateinvestors.Foreignprivatepurchasesremained havebeentransitory stronginthefirstquarterof 2014,butofficialinflows Measuresof realaggregateoutput—thatis,GDP weakenedasconditionsinemergingmarketeconoandgrossdomesticincome—werebothreportedto mies(EMEs)worsenedearlyinthequarter. havedeclinedinthefirstquarterof thisyear.2Partof theweaknessinoutputwaslikelyrelatedtosevere Gainsinwealthandincomearesupporting weatherearlyintheyear.3Butmuchof thedropin consumerspending first-quarterGDPreflectedunusuallylargeswingsin Smoothingthroughweather-relatedfluctuations, inventoriesandnetexports,twovolatilecategories consumerspendingwasreportedtohaverisenata modestannualrateof 1percentoverthefirstfive 2 Grossdomesticincomemeasuresthesameeconomicconceptas monthsof thisyear,whiledisposablepersonal GDP,andthetwoestimateswouldbeidenticaliftheywere incomeadvancedatastrongerpaceof 2¼percent measuredwithouterror overthesameperiod.4Thefasterpaceof jobgainsso 3 Manufacturingoutputwashelddownbybothsnowand extremecoldinpartsofthecountryinJanuaryandFebruary.In March,outputappearstohavebeenboostedsignificantlyby 4 InitsthirdreleaseofquarterlyGDP,theBureauofEconomic manufacturersmakingupforearlierproductioncurtailments. Analysisreportedthatconsumerspendingonhealth-careser- FactoryoutputsubsequentlydroppedbackinApril,consistent vicesdeclinedinthefirstquarter.Thisestimatereflectedthe withtheviewthatthismakeupproductionhadbeenachieved. incorporationofcensusdatafromtheU.S.CensusBureau’s

26 101stAnnualReport|2014 farthisyearhashelpedimprovetheeconomicpros- so,mortgagelendingstandardshaveremainedtight pectsof manyhouseholdsandhascontributedtoa formanyhouseholds;indeed,standardsonnontradipickupinthepaceof aggregateincomegrowth, tionalmortgageloanswerereportedtohavetightthoughitisnotyetclearhowwidelytheseincome enedfurtherintheAprilsurvey.Likelyreflecting,in gainshavebeensharedacrossthepopulation.In part,theincreasedwillingnesstolend,therateof addition,personaltaxpaymentsandsocialsecurity declineinmortgagedebthasslowedsofarthisyear, contributions,whichsurgedlastyearasaconse- andgrowthinotherconsumercredithasbeenrobust. quenceof higherfederalpayrollandincometaxes, arenolongerweighingasheavilyonincomegrowth. ...butconsumerconfidenceremainstepid Despitethestrengtheninginhouseholdincomesand Consumptiongrowththisyearalsohasbeensup- wealth,indicatorsof consumersentimentstillappear portedbyongoinggainsinhouseholdnetworth. somewhatdepressedcomparedwiththeirlonger-run Houseprices,whichareof particularimportancefor norms.TheMichigansurvey’sindexof consumer thewealthpositionof manymiddle-incomehouse- sentiment—whichincorporateshouseholds’views holds,havecontinuedtomovehigher,withtheCore- abouttheirownfinancialsituationsaswellas Logicnationalindexshowingariseof almost9per- broadereconomicconditions—hasrecoverednoticecentoverthe12monthsendinginMay.Meanwhile, ablyfromitsrecessionarylowbuthaschangedlittle, thevalueof corporateequitieshasrisenmorethan onnet,overthepastyear.Theresponsestoasepa- 15percentoverthepastyearandhasaddedsubstan- ratesurveyquestionaboutincomeexpectationsdistiallytonetwealth.Reflectingthosesolidgains, playasimilarpattern:Althoughanindexof houseaggregatehouseholdnetwealthisestimatedtohave holds’expectationsof realincomechangesinthe approached6½timesthevalueof disposableper- yearaheadhasrecoveredsomewhatsince2011,it sonalincomeinthefirstquarterof thisyear,the remainssubstantiallybelowthehistoricalaverage highestlevelobservedforthatratiosince2007. andsuggestsamoreguardedoutlookthantheheadlineindex. Coupledwithlowinterestrates,theriseinincomes hasenabledmanyhouseholdstoreducetheirdebt Businessinvestmenthasbeenlackluster,... paymentburdens.Thehouseholddebtserviceratio— Afterrecordingmodestgainsin2013,businessfixed thatis,theratioof requiredprincipalandinterest investmenttickeddowninthefirstquarterof this paymentsonoutstandinghouseholddebttodispos- year,asalargedeclineinspendingonnonresidential ablepersonalincome—droppedfurtherinthefirst structureswaspartlyoffsetbyasmallincreaseinoutquarterof thisyearandstoodataverylowlevelby laysforequipmentandintangible(E&I)capital. historicalstandards. Althoughtheexpirationof ataxprovisionallowing 50percentbonusdepreciationmayhavepulledsome Borrowingconditionsforhouseholdsareslowly capitalinvestmentforwardintolate2013,looking improving... overalongerperiod,thepatternof investmentout- Theimprovementsinhouseholds’balancesheetsso laysoverthepastyearandahalf appearsbroadly farthisyearhavebeenaccompaniedbyagradual consistentwiththesluggishpaceof businessoutput easinginborrowingconditions.Forexample,large growthduringtheperiod.Nevertheless,various banksreportedaneteasingof standardsforhome forward-lookingindicators,suchasbusinesssentipurchaseloanstoprimeborrowersintheFederal mentandearningsexpectationsof capitalgoodspro- ReserveBoard’sApril2014SeniorLoanOfficer ducers,paintafairlyupbeatpictureandpointtoa OpinionSurveyonBankLendingPractices pickupinthegrowthof E&Iinvestment. (SLOOS).5SLOOSresponsesalsoindicatedanet easingincreditstandardsforconsumerloans.Even Businessinvestmentinstructureshasbeenrelatively weakthisyear,asdemandfornonresidentialbuild- QuarterlyServicesSurvey,whichshowedadeclineintherevingscontinuestoberestrainedbyhighvacancyrates enuesofhealth-careproviders.Bycontrast,avarietyofother indicators,includingdataonMedicaidpaymentsaswellas forexistingpropertiesandtightfinancingconditions health-careexchangeenrollmentsandsubsidiesrelatedtothe fornewconstruction.However,thelevelof invest- AffordableCareAct,aresuggestiveofgreaterstrengthin mentindrillingandminingstructuresisextremely health-carespending. highbyhistoricalstandards,areflectionof theboom 5 TheSLOOSisavailableontheBoard’swebsiteatwww .federalreserve.gov/boarddocs/snloansurvey. inoilandnaturalgasextraction.

MonetaryPolicyandEconomicDevelopments 27 ...evenascorporateborrowinghasexpanded sizesandtermstomaturity.Nevertheless,standards andloantermsandstandardsappeartobe forconstructionandlanddevelopmentloansappear easing tohaveremainedrelativelytight. Thefinancialconditionof largenonfinancialfirms hasremainedstrongsofarthisyear,withprofitabil- Thedragfromfederalfiscalrestraintis waning... ityhighandthedefaultrateonnonfinancialcorporatebondsgenerallylow.Nonfinancialfirmshave Fiscalpolicyhasbeenacontractionaryforcethrough continuedtoraisefundsatarobustpace,given mostof thepastthreeyearsandwasespeciallysoin strongcorporatecreditqualityandhistoricallylow 2013,whenthetemporarypayrolltaxcutexpired, interestratesoncorporatebonds.Indeed,bondissu- taxesincreasedforhigh-incomehouseholds,andfedancebybothinvestment-andspeculative-gradenon- eralpurchaseswerepusheddownbythesequestrafinancialfirmshasbeenstrong. tionandcapsondiscretionaryspending.Moreover, inthefourthquarterof lastyear,disruptionsrelated Moreover,creditavailabilityinbusinessloanmarkets tothegovernmentshutdownledtoasharpbuttemhasshownfurtherimprovement.Accordingtothe poraryreductioninfederalpurchases.For2013asa AprilSLOOS,banksagaineasedstandardsoncom- whole,realfederalpurchases(asmeasuredinthe mercialandindustrial(C&I)loanstofirmsof all nationalincomeandproductaccounts)fell6¼persizesinthefirstquarter,andmanybankshaveeased cent,twiceaslargeastheaveragedeclineinthepreviprice-relatedandothertermsonsuchloans.Inaddi- oustwoyears. tion,accordingtotheFederalReserveBoard’s May2014Surveyof Termsof BusinessLending, Thisyear,however,fiscalpolicyhasbecomesomeloanratespreadsovermarketinterestratesfornewly whatlessrestrictiveforGDPgrowth,astheeffectsof originatedC&Iloanshavecontinuedtodecline.In the2013taxandspendingchangesarefading.While thisenvironment,C&Iloansonbanks’booksand theexpirationof emergencyunemploymentcompencommercialpaperoutstandingbothhaveregistered sationatthebeginningof theyearhasexertedadrag solidincreases.Issuanceof leveragedloanscontinued onconsumerspending,medicalbenefitsprovidedfor toberapidinthefirsthalf of 2014,andissuanceof undertheAffordableCareActwilllikelysupport collateralizedloanobligationsreachedveryhighlev- increasedconsumptionof medicalservices. elsintheperiodfromFebruarytoApril.6Smallbusinesslendingactivityhaspickedupaswellinrecent Withfewmajorchangesintaxpolicyin2014,federal months,likelyreflectingsomeincreaseincreditavail- receiptshaveedgeduptoaround17percentof GDP, abilityaswellasastrengtheninginbusinesses’ theirhighestlevelsincebeforetherecession.Meandemandforcredit. while,nominalfederaloutlaysasashareof GDP havecontinuedtotrenddownwardbuthave Inthecommercialrealestate(CRE)sector,loans remainedabovethelevelsobservedbeforethestartof continuedtoexpandatamoderatepace,and therecession.Thus,thefederalunifiedbudgetdeficit increasesinbanks’CREloansremainedwidespread hasnarrowedagainthisyear;theCongressionalBudacrossallmajorCREsegments(thatis,loanssecured getOfficeprojectsthatthebudgetdeficitforfiscal bynonfarmnonresidentialproperties,multifamily year2014asawholewillbe3percentof GDP,comresidentialproperties,andconstructionandland paredwiththefiscal2013deficitof 4percentof developmentloans).AccordingtotheAprilSLOOS, GDP.OverallfederaldebtheldbythepublichasconstandardsonCREloansextendedbybanksalso tinuedtorise,andtheratioof nominalfederaldebt easedinthefirstquarter.Specialsurveyquestions toGDPmoveduptonear75percentinearly2014. askedaboutchangesintermsonCREloansoverthe pastyear,andmanybanksreportedhavingeased ...andstateandlocalgovernmentexpenditures interestratespreadsandincreasedmaximumloan areturningup Atthestateandlocallevel,theongoingstrengthen- 6 Newcollateralizedloanobligation(CLO)dealsoverthisperiod ingineconomicactivity,aswellaspreviousspending werereportedlystructuredtoaddresscertainrestrictionsinthe cuts,hashelpedfosteragradualimprovementinthe Volckerrule.Inaddition,theFederalReserveBoardannounced thatbankholdingcompanieshaveuntilJuly21,2017,todisin- budgetsituationsof mostjurisdictions.Consistent vestfromnon-Volcker-compliantCLOsoriginatedpriortothe withimprovingsectorfinances,statesandlocalities endof2013.Theextensionforcomplyingwiththerequirement havebeenexpandingtheirworkforces;employment reportedlyalleviatedtheriskofforcedliquidationsofsuch instrumentsinthenearterm. acceleratedinthefirsthalf of theyearafterrising

28 101stAnnualReport|2014 modestlyinthesecondhalf of 2013.Construction of NewYork.Thosesurveyssuggestthatdealersand expendituresbythosegovernments,however,have buy-siderespondentsbothanticipatethattheinitial yettoshowasustainedrecovery. increaseinthetargetfederalfundsratefromitscurrentrangewilloccurinthethirdquarterof 2015, Therecoveryinthehousingmarkethaslost slightlyearlierthandealershadanticipatedatthe traction beginningof thisyearandaboutthesameaswhat Afterproceedingbrisklyin2012andthefirsthalf of buy-siderespondentshadanticipated.7Finally,while 2013,therecoveryinresidentialconstructionseems someforwardmeasuresof policyrateuncertainty tohavefaltered.Realresidentialinvestmentdeclined haverisen,overallpolicyrateuncertaintyhasgenerfortwosuccessivequartersaroundtheturnof the allyremainedrelativelylow. year,andtheavailabledatapointtoonlyamodest gaininthesecondquarter.Therenewedsoftnessof However,Treasuryyieldsdeclinedsignificantly, latehasprovenmoreextensiveandpersistentthan especiallyatlongermaturities,ashavesovereign bondyieldsinotheradvancedeconomies wouldhavebeenexpectedgiventheriseinmortgage interestratesaroundthemiddleof lastyear(seethe Afterrisingnotablyoverthespringandsummer box“TheSlowRecoveryof HousingActivity”on monthsof 2013,yieldsonlonger-termTreasurysecupages16–17of theJuly2014MonetaryPolicy ritiesdrifteddownoverthefirsthalf of 2014and Report).Thatsaid,householdformationremains nowstandatfairlylowlevelsbyhistoricalstandards. depressedrelativetodemographicnorms,andthe Inparticular,whiletheyieldon5-yearnominal ongoingimprovementinlabormarketconditions Treasurysecuritiesedgeddownonlyabout5basis couldhelpspuramoredecisivereturntothose pointsfromitslevelattheendof December2013,the norms. yieldsonthe10-and30-yearsecuritiesdecreased about50basispointsand60basispoints,respec- Productivitygrowthhasbeenmodest tively.Thedeclineinlonger-termyieldsreflectsa Ingeneral,gainsinlaborproductivityhavebeen notablereductioninlonger-horizonforwardrates, modestinrecentyears.Outputperhourinthenon- withthe5-year-forwardrate5yearsaheaddropping farmbusinesssectorhasrisenatanannualrateof about105basispointssinceyear-end.Five-yearlessthan1½percentsince2007,wellbelowthepace forwardinflationcompensationoverthisperiod of gainsobservedoverthelate1990sandearly2000s. declined20basispoints,implyingthatmuchof this Therelativelyslowpaceof productivitygrowthlikely reductioninnominalforwardrateswasconcentrated reflects,inpart,thesustainedweaknessincapital inforwardrealrates.Yieldson30-yearagency investmentovertherecessionandrecoveryperiod, mortgage-backedsecurities(MBS)decreasedabout andproductivitygainsmaybebettersupportedin 35basispoints,onbalance,overthesameperiod. thefutureasoutlaysforproductivity-enhancingcapitalequipmentstrengthen. Long-termbenchmarksovereignyieldsinadvanced foreigneconomies(AFEs)havealsomoveddown FinancialDevelopments sincelatelastyear,withparticularlymarkedreductionsintheeuroarea.Marketparticipantshave Theexpectedpathforthefederalfundsrate pointedtoseveralpotentialexplanationsforthe edgeddown declinesinU.S.andforeignyields.Onepossible Market-basedmeasuresof theexpectedpathof the explanationisthatmarketparticipantshavelowered federalfundsratethroughlate2017edgeddown,on theirexpectationsforfutureshort-terminterestrates balance,overthefirsthalf of theyear.Afteraccount- aroundtheglobe.Thisdownwardadjustmentin ingfortransitoryfactorssuchasweather,market expectationsmaybeduetoacombinationof alower participantsappearedtojudgetheincomingeco- assessmentof theglobaleconomy’slong-runpotennomicdataassomewhatbetterthantheyhad tialgrowthrateandadecreaseinlong-runinflation expectedbutasstillcontinuingtopointtosubdued expectations.Indeed,theloweryieldsintheeuroarea inflationarypressuresandanaccommodativepolicy areconsistentwithindicationsof declininginflation stancebytheFOMC.Therelativelysmallmovements of themarket-basedmeasuresareconsistentwiththe 7 TheresultsoftheSurveyofPrimaryDealersandofthepilot resultsof themostrecentSurveyof PrimaryDealers surveyofmarketparticipantsareavailableontheFederal andthepilotsurveyof marketparticipants,each ReserveBankofNewYork’swebsiteatwww.newyorkfed.org/ markets/primarydealer_survey_questions.htmland conductedjustpriortotheJuneFOMCmeetingby www.newyorkfed.org/markets/pilot_survey_market_participants theOpenMarketDeskattheFederalReserveBank .html,respectively.

MonetaryPolicyandEconomicDevelopments 29 andweakgrowthintheeuroareainrecentmonths, thoseforsmallerfirmsinthesocialmediaandbiobolsteringexpectationsthattheEuropeanCentral technologyindustries,despiteanotabledownturnin Bank(ECB)wouldloosenitsmonetarypolicy,asit equitypricesforsuchfirmsearlyintheyear.MoreeventuallydidatitsmeetinginearlyJune. over,impliedvolatilityfortheoverallS&P500index, ascalculatedfromoptionprices,hasdeclinedin Inaddition,termpremiums—theextrareturninves- recentmonthstolowlevelslastrecordedinthemidtorsexpecttoobtainfromholdinglonger-termsecu- 1990sandmid-2000s,reflectingimprovedmarket ritiesasopposedtoholdingandrollingovera sentimentand,perhaps,theinfluenceof “reachfor sequenceof short-termsecuritiesforthesame yield”behaviorbysomeinvestors. period—mayhavecomedown,reflectingseveral potentialfactors.Onepotentialfactorisareduction Creditspreadsinthecorporatesectorhavealso intheamountof compensationforinterestraterisk declined,onbalance,inrecentmonths.Afterhaving thatinvestorsrequiretoholdfixed-incomesecurities, temporarilyincreasedearlyintheyear,thespreadsof likelydueinparttoperceptionsthatuncertainty yieldsoncorporatebondstoyieldsonTreasurysecuabouttheoutlookformonetarypolicyandeconomic ritiesof comparablematuritiesendedthefirsthalf of growthhasdecreased;indeed,swaption-impliedvola- theyearaboutunchangedorabitnarrower.Credit tilityonlonger-termrateshasfallennoticeablysince spreadsonhigh-yieldcorporatebondsarenearthe thebeginningof theyear.Anotherpotentialfactoris bottomof theirrangeoverthepastdecade.While increaseddemandforTreasurysecuritiesfromprice- spreadsonsyndicatedloanshavechangedlittlethis insensitiveinvestors,suchaspensionfundsandcom- year,theyarealsorelativelylow.Forfurtherdiscusmercialbanks.Lastly,inlightof thenotable sionof assetpricesandotherfinancialstability co-movementsbetweenforwardinterestratesat issues,seethebox“DevelopmentsRelatedtoFinanlongerhorizonsintheUnitedStatesandother cialStability”onpages22–23of theJuly2014Monadvancedeconomies,itappearslikelythatthereisa etaryPolicyReport. globalcomponentof termpremiumsthatisaffected notonlybyU.S.developments,butalsobyforeign Treasurymarketfunctioningandliquidity developments,suchasinvestorsbecomingincreas- conditionsintheMBSmarketweregenerally inglyconfidentthatpolicyratesatthemajorforeign stable... centralbankswillremainlowforanextendedperiod. Indicatorsof Treasurymarketfunctioningremained stableamidongoingreductionsinthepaceof the Broadequitypriceindexesincreasedfurther,and FederalReserve’sassetpurchasesoverthefirsthalf riskspreadsoncorporatedebtdeclined of 2014.Inparticular,liquidityconditionsinTreas- Althoughequityinvestorsappearedtopullback urymarketsremainedstable,withwithbid–asked fromthemarketforatimeearlyintheyearinreac- spreadsintheTreasurymarketstayinginlinewith tiontoconcernsaboutthestrengthof someEMEs recentaverages.Inaddition,theTreasury’sfirst-ever andthepossibleimplicationsforglobalgrowth, auctionof aFloatingRateNoteinJanuarywaswell broadmeasuresof U.S.equitypriceshaveposted received,asweresubsequentauctionsof thosenotes. solidgainsof 6percentsincethebeginningof 2014, onbalance,afterhavingrisen30percentin2013. LiquidityconditionsintheMBSmarketswerealso Overall,equityinvestorsappearedtobecomemore generallystable,thoughtherehavebeensomesigns confidentinthenear-termeconomicoutlookamid of scarcityof certainsecurities,asevidencedby somewhatbetter-than-expectedeconomicdata somewhatlowlevelsof impliedfinancingratesinthe releases,declininglonger-terminterestrates,and production-coupon“dollarroll”marketsduringthe upwardrevisionstoexpectedyear-aheadearningsper firsthalf of thisyear.However,theimpliedfinancing shareforfirmsintheS&P500index. ratesroseinrecentdays,suggestingeasingof settlementpressuresinthesemarketsof late.8Grossissu- Somebroadequitypriceindexeshaveincreasedto all-timehighsinnominaltermssincetheendof 2013. 8 Dollarrolltransactionsconsistofapurchaseorsaleofagency However,valuationmeasuresfortheoverallmarket MBSwiththesimultaneousagreementtosellorpurchasesubinearlyJulyweregenerallyatlevelsnotfarabove stantiallysimilarsecuritiesonaspecifiedfuturedate.TheFederalReserveengagesinthesetransactionsasnecessarytofacilitheirhistoricalaverages,suggestingthat,inaggregate, tatesettlementofitsagencyMBSpurchases. investorsarenotexcessivelyoptimisticregarding DuringAprilandMay,theOpenMarketDesktransitionedpurequities.Nevertheless,valuationmetricsinsomesecchasesofagencyMBStoFedTrade,theDesk’sproprietary torsdoappearsubstantiallystretched—particularly tradingsystemthatusesmultiple-pricecompetitiveauctions.

30 101stAnnualReport|2014 anceof thesesecuritiesremainedsomewhatlower 2014,andmeasuresof bankliquidityremained thaninthepasttwoyears,reflectingrelativelylow robust.Inaddition,creditqualityatBHCscontinued mortgageoriginations. toimproveacrossmajorloancategories,andthe ratiosof lossreservestodelinquenciesandtocharge- ...andshort-termfundingmarketsalso offseachedgedup.Atthesametime,standardmeascontinuedtofunctionwell uresof theprofitabilityof BHCshavebeenlittle Conditionsinshort-termdollarfundingmarketsalso changedforthepastsixmonths.Profitabilityof these remainedstableduringthefirsthalf of 2014.Earlyin companiesremainedbelowitshistoricalaverage,in theyear,yieldsonTreasurybillsmaturingbetween partbecauseof subduedincomefrommortgageand lateFebruaryandmid-Marchof 2014—thosethat tradingbusinessesandcompressednetinterestmarcouldhavebeenaffectedbydelayedpaymentsif a ginsatlargebanks.Afewlargebankshavealso debtceilingagreementhadnotbeenreached—were incurredsizablecostsfromlegalsettlementsassocielevatedforatime,butthoseyieldsdeclinedinmid- atedwiththeoriginationof mortgagespriortothe Februaryinresponsetonewsof pendinglegislation recentfinancialcrisis.Aggregatecreditprovidedby tosuspendthedebtceilinguntilMarch2015.The commercialbanksgrewatasolidpaceinthefirst federalfundsrateremainedatverylowlevels,and half of 2014.Theincreasewasdrivenbyapickupin broadermeasuresof unsecureddollarbankfunding loangrowthandariseinholdingsof U.S.Treasury costs,suchastheLIBOR,orLondoninterbank securitiesthatwasreportedlyinfluencedbybanks’ offeredrate,remainatverylowlevels,reflectingthe effortstomeetnewliquidityregulations.Equity absenceof majorfundingpressures. pricesof largedomesticbanksincreasedabitfrom thebeginningof theyear,onnet,butunderper- Moneymarketparticipantscontinuedtofocusonthe formedtheoverallmarket.Creditdefaultswap FederalReserve’stestingof itsmonetarypolicytools. (CDS)spreadsforlargeBHCsremainlow. Dailyawardsattheovernightreverserepurchase agreement(ONRRP)exercisehaverangedbetween Amongnonbankfinancialinstitutions,equityprices about$50billionandabout$340billionsinceearly of insurancecompanieshavealsoincreasedslightly, 2014.Thenumberof counterpartiesparticipating onnet,sincethebeginningof theyear.Nonbank andthedollarvolumeof take-uphavebeensensitive financialinstitutionscontinuedtogrowatavery tothespreadbetweenmarketratesforrepurchase strongpace,asassetsundermanagementathedge agreementsandthefixedONRRPrateofferedinthe fundsandprivateequitygroupseachreachedrecord exercise.9Indeed,take-uphasbeenlargeatquarterhighs,reflectingmodestincreasesinassetvaluesas ends,whenbalancesheetadjustmentsbyfinancial wellasnetinflows.Nevertheless,inresponsetothe institutionstendtolimitotherinvestmentoptions. FederalReserveBoard’sSeniorCreditOfficerOpin- ExperiencetodatesuggeststhatONRRPoperations ionSurveyonDealerFinancingTermsforMarch havehelpedestablishaflooronmoneymarketinter- andJune,mostdealersindicatedthathedgefunds estrates.Testingof theTermDepositFacility,aswell hadnotchangedtheiruseof leveragesincethebeginastake-upof andparticipationinitstestofferings, ningof theyear.10Inthesamesurvey,somedealers hasexpandedduringthefirsthalf of 2014.(Forfur- notedthattheuseof financialleveragebytrading therdiscussionof thetestingof monetarypolicy REITs,orrealestateinvestmenttrusts,had tools,seethebox“PlanningforMonetaryPolicy decreased,continuingatrendthatbeganinthesum- ImplementationduringNormalization”onpages merof 2013.Assetsundermanagementatbond 38–39of theJuly2014MonetaryPolicyReport.) mutualfundsalsoreachedarecordhigh. Theconditionoffinancialinstitutionsimproved Municipalbondmarketsfunctionedsmoothly,but further,althoughprofitabilityremainedbelowits someissuersremainedstrained historicalaverage Creditconditionsinmunicipalbondmarketsgener- Regulatorycapitalratiosatbankholdingcompanies allyappearedtoremainstableoverthefirsthalf of (BHCs)increasedfurtherduringthefirsthalf of theyear.Yieldson20-yeargeneralobligationmunicipalbondshavedeclinedslightlysincethebeginning 9 Fixed-rateONRRPoperationswerefirstauthorizedbythe of theyear,andtheMCDX,anindexof CDSfora FOMCattheSeptember2013meeting,andwerereauthorized inJanuary2014,forthepurposeofassessingoperationalreadiness.TheCommitteeauthorizedtheOpenMarketDesktoconductsuchoperationsinvolvingU.S.governmentsecuritiesand 10 TheSeniorCreditOfficerOpinionSurveyonDealerFinancing securitiesthataredirectobligationsof,orfullyguaranteedasto TermsisavailableontheBoard’swebsiteatwww principalandinterestby,anyagencyoftheUnitedStates. .federalreserve.gov/econresdata/releases/scoos.htm.

MonetaryPolicyandEconomicDevelopments 31 broadportfolioof municipalbonds,hasalsomoved movedhigher,asmarketsentimenttowardthese down.However,theratioof anindexof municipal economieshascontinuedtoimprove.However,the bondyieldstoTreasuryyieldshasincreasedabit. Chinesestockmarketfellonconcernsovertheeconomicoutlook.Realizedvolatilityacrossmostfinan- Nevertheless,significantfinancialstrainshavebeen cialmarketsandcountrieshasdeclinedsinceJanuary, evidentforsomeissuers.Standard&Poor’s,Moody’s inpartassentimenttowardriskyassetsgenerally InvestorsService,andFitchRatingsdowngraded improved. PuertoRico’sgeneralobligationbondsfrominvestmentgradetospeculativegradeinFebruary.Inaddi- ...andthedollarisaboutunchanged tion,theCityof Detroitcontinuestonegotiatethe Thebroadnominalvalueof thedollarislittle termsof itsbankruptcyplan. changed,onnet,sincethebeginningof theyear.The U.S.dollarappreciatednotablyagainsttheChinese Liquiddepositsinthebankingsectorcontinued renminbiinthefirstmonthsof theyear.However, toadvancebriskly,boostingM2 thePeople’sBankof Chinahassincekeptthevalue M2hasincreasedatanannualrateof about7per- of therenminbisteady.Incontrast,thedollardeprecentsinceDecember,aboutthesamepaceregistered ciatedagainstmostotheremergingmarketcurreninthesecondhalf of 2013andsomewhatfasterthan cies,asfinancialstressesearlierintheyearunwound. thepaceof nominalGDP.ThegrowthinM2has Inaddition,thedollardepreciatedagainsttheBritish beendrivenbyanincreaseinliquiddepositsaswell pound,asmacroeconomicconditionsimprovedin asanuptickindemandforcurrency. theUnitedKingdomandmarketsmovedforward theirexpectationsforthefirstratehikebytheBank InternationalDevelopments of England,andalsodepreciatedagainsttheJapaneseyen,asinvestorsreducedtheirexpectationsfor AsintheUnitedStates,foreignbondyields strongerpolicyaccommodationinJapan. declinedandassetpricesincreased,onnet... Asnotedearlier,foreignlong-termbenchmarksover- Activityintheemergingmarketeconomies eignyieldshavemovedsignificantlylowersincethe slowedinthefirstquarterbutshowedsignsof beginningof theyear.Factorscontributingtothe pickingupinthesecondquarter... declineincludeexpectationsforlowerpolicyinterest AggregaterealGDPgrowthintheEMEsslowedin rates,adeclineintherequiredcompensationforrisk, thefirstquarterof thisyear,ledbyastep-downin andincreaseddemandbyprice-insensitiveinvestors China’seconomythatalsoweighedonactivityin fortheseassets.Similarly,foreigncorporateandsov- manyof itstradingpartners,especiallyinemerging ereignyieldspreadshavealsodeclinedsincethestart Asia.TheslowinginChinareflectedasharpfallin of theyear.Inparticular,peripheraleuro-areasover- exports,aswellasarestraintondomesticdemand eignyieldspreadsnarrowedsubstantially,onbalance, fromtighterfinancialconditions,asthegovernment asfinancialstressesintheeuroareahaveeasedand attemptedtoreinincredit.InMexico,growth centralbanksintheadvancedeconomieshave remainedweakinthefirstquarter,likelyrestrained emphasizedthattheywillkeepmonetarypolicy byhikesintaxratesandadministeredfuelpricesand accommodativeforsometime,thoughspreadsina softerU.S.demandforMexicanexports.Brazilian feweconomieshavemovedupmorerecently.Sover- realGDProseatatepidpaceinthefirstquarter, eignyieldspreadsinEMEshavealsodeclined,on extendingthelacklusterperformanceof thepasttwo net,consistentwithmeasuresadoptedbyEMEcen- years. tralbankstoreducevulnerabilitiesandwiththegeneralincreaseinthepricesforriskyassets. Recentindicators,notablyexports,suggestthatEME growthpickedupinthesecondquarter.Inparticular, Foreignequityindexesrose,onnet,duringthefirst Chineseexportsgrewrobustlyinthesecondquarter, half of theyear.Stockpricesincreased,onbalance, reversingmostof thesharpdeclineinFebruary,and inmostof theAFEs.Japaneseequitiesunderper- theauthoritiesannouncedaseriesof smalltargeted formedearlyintheyear,buttheyhavemovedup stimulusmeasurestosupportgrowth.Theimproverecentlyonstronger-than-expectedincomingeco- mentinChinesegrowth,alongwithfirmergrowthin nomicdata.AndEuropeanbankstockprices theadvancedeconomies,willhelpboostglobalecodeclinedlatelyinpartonconcernsovertroublesat nomicactivityintherestof emergingAsia.Growth severalbanks.EquitiesinmostEMEshavealso inMexicoisalsoexpectedtostepupinthesecond

32 101stAnnualReport|2014 quarter,inlinewithU.S.manufacturingoutput,and AdvancedEconomies”onpages30–31of the recentdatainBrazilpointtosome,albeitmodest, July2014MonetaryPolicyReport.) improvement. Part 2: Monetary Policy InflationremainedsubduedinmostEMEs,andcentralbanksinsomecountries,suchasChile,Mexico, Tosupportfurtherprogresstowardmaximum andThailand,cutratestosupportgrowth.Incon- employmentandpricestability,monetarypolicyhas trast,thecentralbanksof afewEMEs,suchasBrazil remainedhighlyaccommodative.TheFederal andIndia,whereinflationremainedelevated,raised Reservekeptthetargetfederalfundsrateatitseffecpolicyrates. tivelowerbound,updateditsforwardguidance regardingthepathof thefederalfundsrate,and ...whileeconomicgrowthinmostadvanced addedtoitssizableholdingsof longer-termsecuriforeigneconomiesremainedmoderate ties,albeitatareducedpace.TheFederalReservehas Indicatorssuggestthataverageeconomicgrowthin alsocontinuedtoplanfortheeventualnormalization theAFEsremainedmoderateinthefirsthalf of of monetarypolicy. 2014.Theseverewinterweatherthathampered TheFederalOpenMarketCommitteecontinued growthintheUnitedStatesalsoweighedonreal touselarge-scaleassetpurchasesandforward GDPinCanada,wheregrowthslowedtoanannualrateguidancetosupportfurtherprogresstoward ized1¼percentpaceinthefirstquarter.However, maximumemploymentandpricestability dataincludingthepurchasingmanagersindexare TheCommitteehascontinuedtojudgethatahighly consistentwithCanadiangrowthbouncingbackin accommodativestanceof monetarypolicyremains thesecondquarter.InJapan,GDPgrowthsurgedin warrantedtosupportprogresstowarditsdualmanthefirstquarteratanearly7percentpace,ledby dateof maximumemploymentandpricestability. householdspendingaheadof theAprilhikeinthe Withthetargetrangeforthefederalfundsrate Japaneseconsumptiontax,butrecentretailsalesdata remainingatitseffectivelowerbound,theFederal suggestthatactivityfellbacksharplyinApril.Inthe OpenMarketCommittee(FOMC)hasmadefurther UnitedKingdom,GDPgrowthremainedrobustin useof nontraditionalpolicytoolstoprovideapprothefirstquarterat3¼percent,andtheunemploypriatemonetarystimulus.Inparticular,theFOMC mentratefellabout1percentagepointbetweenmidhasusedlarge-scaleassetpurchasestoputdownward 2013andthefirstquarterof 2014.Theeuroarea’s pressureonlonger-terminterestratesandtoease recoverycontinuedatasubduedpace—withGDP financialconditionsmorebroadlysoastopromote risingatanannualrateof around¾percentinthe themorerapidachievementof itsdualobjectives.In firstquarter—andrecentindicatorspointtoafirmaddition,theFOMChasprovidedguidanceabout ingingrowthinthesecondquarterasfinancialand thelikelyfuturepathof thefederalfundsrateinan creditconditionscontinuetonormalize. efforttogivegreaterclaritytothepublicaboutits policyoutlookandintentions.Inlightof thecumula- Inflationduringthefirsthalf of theyearhasbeen tiveprogresstowarditsmonetarypolicyobjectives around2percentinCanadaandsomewhatbelow andtheoutlookforfurtherprogressovercoming thatlevelintheUnitedKingdom.InJapan,theApril years,theCommitteemadeadjustmentsduringthe taxhikeaswellasrisingimportpricesinresponseto firsthalf of 2014tobothitsassetpurchaseprogram recentyendepreciationpushedupthe12-monthrate anditsforwardguidanceaboutthepathof thefedof consumerpriceinflationinApril.However,inflaeralfundsrate. tionexcludingtaxesremainedmuchlower,andthe Bankof Japancontinueditsaggressiveprogramof TheFOMCmadefurthermeasuredreductionsin assetpurchasesaimedatachievingitsinflationtarget thepaceofitsassetpurchases... of 2percentinastablemanner.Intheeuroarea, Duringthefirsthalf of 2014,theCommitteemade inflationslowedtojust½percentinMay,andthe furthermeasuredreductionsinthepaceof itsasset ECBrespondedinJunebycuttingitskeypolicy purchases,followingtheinitialmodestreduction rates—takingthedepositrateintonegativeterriannouncedattheDecember2013meeting.11These tory—andbyannouncingmeasurestoeasecredit actionsreflectedthecumulativeprogresstoward conditions.(Forfurtherdiscussionof monetary policyatforeigncentralbanks,seethebox“Pros- 11 SeeBoardofGovernorsoftheFederalReserveSystem(2013), pectsforMonetaryPolicyNormalizationinthe “FederalReserveIssuesFOMCStatement,”pressrelease,

MonetaryPolicyandEconomicDevelopments 33 maximumemploymentandtheimprovementinthe emphasizedthatassetpurchasesarenotonapreset outlookforlabormarketconditionssincetheincep- course,andthatdecisionsabouttheirpacewould tionof thecurrentassetpurchaseprograminthefall remaincontingentontheCommittee’soutlookfor of 2012aswellastheCommittee’sjudgmentthat thelabormarketandinflationaswellasitsassesstherewassufficientunderlyingstrengthinthe mentof thelikelyefficacyandcostsof such broadereconomytosupportongoingimprovement purchases. inlabormarketconditionsandinflationmoving backtowarditslonger-runobjective. ...updateditsforwardguidancewitha qualitativedescriptionofthefactorsthatwill influenceitsdecisiontobeginraisingthefederal Specifically,atitsfourmeetingsinthefirsthalf of fundsrate... 2014,theCommitteereducedthemonthlypaceof its purchasesof agencymortgage-backedsecurities As2014began,theCommittee’sforwardguidance (MBS)andof longer-termTreasurysecuritiesby includedquantitativethresholds,statingthatthe $5billioneach.Accordingly,beginninginJuly,the exceptionallylowtargetrangeforthefederalfunds Committeeisaddingtoitsholdingsof agencyMBS rateof 0to¼percentwouldbeappropriateatleast atapaceof $15billionpermonth(comparedwith aslongastheunemploymentrateremainedabove $35billionpermonthatthebeginningof theyear) 6½percent,inflationbetweenoneandtwoyears andisaddingtoitsholdingsof longer-termTreasury aheadwasprojectedtobenomorethanahalf persecuritiesatapaceof $20billionpermonth(com- centagepointabovetheCommittee’s2percent paredwith$40billionpermonthatthebeginningof longer-rungoal,andlonger-terminflationexpectatheyear).TheFOMCalsomaintaineditsexisting tionscontinuedtobewellanchored.12TheCommitpolicyof reinvestingprincipalpaymentsfromits teealsoindicatedthatindetermininghowlongto holdingsof agencydebtandagencyMBSinagency maintainahighlyaccommodativestanceof mon- MBSandof rollingovermaturingTreasurysecurities etarypolicy,itwouldconsidernotonlytheunematauction. ploymentratebutalsootherindicators,including additionalmeasuresof labormarketconditions,indicatorsof inflationpressuresandinflationexpecta- Whilemakingmeasuredreductionsinthepaceof its tions,andreadingsonfinancialdevelopments.Based purchases,theCommitteenotedthatitssizableand onitsassessmentof thesefactors,theCommittee still-increasingholdingsof longer-termsecurities notedthatitlikelywouldbeappropriatetomaintain shouldmaintaindownwardpressureonlonger-term thecurrenttargetrangeforthefederalfundsratewell interestrates,supportmortgagemarkets,andhelp pastthetimetheunemploymentratedeclinesbelow makebroaderfinancialconditionsmoreaccommoda- 6½percent,especiallyif projectedinflationcontinues tive.Moreaccommodativefinancialconditions,in torunbelowtheCommittee’s2percentlonger-run turn,shouldpromoteastrongereconomicrecovery,a goal. furtherimprovementinlabormarketconditions,and areturnof inflation,overtime,towardtheCommit- Atthetimeof theMarchmeeting,withtheunemtee’s2percentobjective. ploymentratequicklyapproachingthethresholdof 6½percent,theFOMCdecidedtoupdateitsforward Ateachof itsmeetingssofarthisyear,theFOMC guidancebyprovidingaqualitativedescriptionof the reiteratedthatitwouldcloselymonitorincoming factorsthatwouldinfluenceitsdecisionregardingthe informationoneconomicandfinancialdevelopappropriatetimeof thefirstincreaseinthetarget ments,andthatitwouldcontinueassetpurchases federalfundsratefromitscurrent0to¼percenttarandemployitsotherpolicytoolsasappropriateuntil getrange.13TheCommitteeagreedthatwhilerelitheoutlookforthelabormarkethadimprovedsubanceonasingleindicator—theunemploymentrate— stantiallyinacontextof pricestability.TheCommithadbeenusefulforcommunicationspurposeswhen teealsonotedthatif incominginformationbroadly employmentconditionsweremuchfurtherfrom supportsitsexpectationof ongoingimprovementin labormarketconditionsandinflationmovingback 12 SeeBoardofGovernorsoftheFederalReserveSystem(2014), towarditslonger-runobjective,itwouldlikelyreduce “FederalReserveIssuesFOMCStatement,”pressrelease,Januthepaceof assetpurchasesinfurthermeasuredsteps ary29,www.federalreserve.gov/newsevents/press/monetary/ 20140129a.htm. atfuturemeetings.However,theCommitteealso 13 SeeBoardofGovernorsoftheFederalReserveSystem(2014), “FederalReserveIssuesFOMCStatement,”pressrelease, December18,www.federalreserve.gov/newsevents/press/ March19,www.federalreserve.gov/newsevents/press/monetary/ monetary/20131218a.htm. 20140319a.htm.

34 101stAnnualReport|2014 mandate-consistentlevels,withlabormarketcondi- TheCommittee’slarge-scaleassetpurchasesled tionsimproving,theCommitteewouldbaseitsjudg- toafurtherincreaseinthesizeoftheFederal mentconcerningprogressinthelabormarketona Reserve’sbalancesheet muchbroadersetof indicatorsfromthatpointfor- Asaresultof theFOMC’songoinglarge-scaleasset ward.Specifically,theCommitteeindicatedthatin purchaseprogram,FederalReserveassetshave determininghowlongtomaintainthecurrenttarget increasedfurthersincetheendof lastyear.Holdings range,itwouldassessprogress—bothrealizedand of U.S.TreasurysecuritiesintheSystemOpenMarexpected—towarditsobjectivesof maximum ketAccount(SOMA)increased$200billionto employmentand2percentinflation.Thisassessment $2.4trillion,andholdingsof agencydebtandMBS wouldtakeintoaccountawiderangeof information, increased$160billion,onnet,to$1.7trillion.14On includingmeasuresof labormarketconditions,indi- theliabilitysideof thebalancesheet,theincreasein catorsof inflationpressuresandinflationexpecta- theFederalReserve’sassetswaslargelymatchedby tions,andreadingsonfinancialdevelopments.Based increasesinreservebalances,currencyincirculation, onitsassessmentof thesefactors,theCommittee depositswithFederalReservebanks,andreverse indicatedthatitlikelywouldbeappropriatetomain- repurchaseagreements. tainthecurrenttargetrangeforthefederalfundsrate foraconsiderabletimeaftertheassetpurchasepro- GiventheFederalReserve’slargeandgrowingbalgramends,especiallyif projectedinflationcontinued ancesheet,interestincomeontheSOMAportfolio torunbelowtheCommittee’s2percentlonger-run continuedtosupportsubstantialremittancestothe goalandprovidedthatlonger-terminflationexpecta- U.S.Treasury.Lastyear,remittancestotaled$80biltionsremainedwellanchored.Tohelpforestallmisin- lion,andremittancesoverthefirstquarterof this terpretationof thenewforwardguidance,theCom- yearremainedveryhigh.Cumulativeremittancesto mitteenotedthatthechangeinitsguidancedidnot theTreasuryfrom2008throughthefirstquarterof indicateanychangeinitspolicyintentionsasset 2014exceeded$420billion.15 forthinitsrecentstatements. TheFederalReservecontinuedtoplanforthe ...andaddedinformationregardingthelikely eventualnormalizationofmonetarypolicy behaviorofthetargetfederalfundsrateafterthe AtitsAprilmeeting,theFOMCdiscussedissues rateisraisedaboveitseffectivelowerbound associatedwiththeeventualnormalizationof the TheCommitteealsostatedthat,whenitdecidesto stanceandconductof monetarypolicyduringa begintoremovepolicyaccommodation,itwilltakea periodwhentheFederalReserve’sbalancesheetwill balancedapproachconsistentwithitslonger-run beverylarge.16TheCommittee’sdiscussionof this goalsof maximumemploymentandinflationof topicwasundertakenaspartof prudentplanning 2percent.Inaddition,theCommitteeindicatedits anddidnotimplythatnormalizationwillbeginsoon. anticipationthat,evenafteremploymentandinfla- TheCommitteediscussedvarioustoolsthatcouldbe tionarenearmandate-consistentlevels,economic usedtoraiseshort-terminterestrates—andtoconconditionsmay,forsometime,warrantkeepingthe targetfederalfundsratebelowlevelstheCommittee 14 ThechangesintheparvalueofSOMAholdings,notedearlier, candifferfromtheamountofsecuritiespurchasedoverthe viewsasnormalinthelongerrun. sameperiod,largelybecauseoflagsinthesettlementofthepurchases.Amongotherassets,theoutstandingamountofdollars Committeeparticipantshavenotedthataprolonged providedthroughthetemporaryU.S.dollarliquidityswap arrangementswithforeigncentralbanksedgedlowersincethe periodof lowinterestratescouldleadinvestorsto endoflastyearandremainsclosetozero,reflectingthecontintakeonexcessiverisk,potentiallyposingrisksto uedstabilityinoffshoreU.S.dollarfundingmarkets. longer-termfinancialstability.TheFederalReserve 15 SeeBoardofGovernorsoftheFederalReserveSystem(2014), QuarterlyReportonFederalReserveBalanceSheetDevelopments willcontinuetomonitorthefinancialsystemforany (Washington:BoardofGovernors,May),www.federalreserve signsof thebuildupof suchrisksandwilltake .gov/monetarypolicy/files/quarterly_balance_sheet_ appropriatestepstoaddresssuchrisksasneeded(see developments_report_201405.pdf. thebox“DevelopmentsRelatedtoFinancial 16 SeeBoardofGovernorsoftheFederalReserveSystem(2014), “MinutesoftheFederalOpenMarketCommittee,April29–30, Stability”onpages22–23of theJuly2014Monetary 2014,”pressrelease,May21,www.federalreserve.gov/ PolicyReport). newsevents/press/monetary/20140521a.htm.

MonetaryPolicyandEconomicDevelopments 35 trolthelevelof short-terminterestratesoncethey facilitycouldplayanimportantroleinthepolicy areabovetheeffectivelowerbound—evenwhilethe normalizationprocess,participantsdiscussedseveral balancesheetof theFederalReserveremainsvery possibleconcernsaboutusingsuchafacility,includlarge.Thosetoolsincludedtherateof interestpaid ingthepotentialforsubstantialshiftsininvestments onexcessreservebalances,fixed-rateovernight towardthefacilityandawayfromfinancialandnonreverserepurchaseagreement(ONRRP)operations, financialfirmsintimesof financialstress,thepotentermreverserepurchaseagreements,andtheTerm tialexpansionof theFederalReserve’sroleinfinan- DepositFacility(TDF).Participantsconsideredhow cialintermediation,andtheextenttowhichmonvariouscombinationsof toolscouldhavedifferent etarypolicyoperationsmightbeconductedwith implicationsforthedegreeof controlovershort-term nontraditionalcounterparties.Participantsdiscussed interestrates,theFederalReserve’sbalancesheetand designfeaturesthatcouldhelpaddresstheseconremittancestotheTreasury,thefunctioningof the cerns.Severalparticipantsemphasizedthat,although federalfundsmarket,andfinancialstabilityinboth theONRRPratewouldbeusefulincontrolling normaltimesandperiodsof stress. short-terminterestratesduringnormalization,they didnotanticipatethatsuchafacilitywouldbeaper- AttheJuneFOMCmeeting,participantscontinued manentpartof theCommittee’slonger-runoperattheirdiscussionof normalizationissuesandconsid- ingframework.Overall,participantsgenerally eredsomepossiblestrategiesforimplementingand expressedapreferenceforasimpleandclear communicatingmonetarypolicyduringthatpro- approachtonormalization,anditwasobservedthat cess.17Mostparticipantsagreedthatadjustmentsin itwouldbeusefulfortheCommitteetodevelopits therateof interestonexcessreserves(IOER)should plansandcommunicatethemtothepubliclaterthis playacentralroleduringthenormalizationprocess. year,wellbeforethefirststepsinnormalizingpolicy ItwasgenerallyagreedthatanONRRPfacilitywith becomeappropriate,andtomaintainflexibilityabout aninterestratesetbelowtheIOERratecouldplaya theevolutionof thenormalizationprocessaswellas usefulsupportingrolebyhelpingtofirmthefloor theCommittee’slonger-runoperatingframework. undermoneymarketinterestrates.AfewparticipantscommentedthattheCommitteeshouldalsobe TheFederalReservehascontinuedtotesttheoperapreparedtouseitsotherpolicytools,includingterm tionalreadinessof itspolicytools,conductingdaily depositsandtermreverserepurchaseagreements,if ONRRPoperationsandseveraltestsof theTDF necessary.Mostparticipantsthoughtthatthefederal duringthefirsthalf of 2014.Todate,testinghasprofundsrateshouldcontinuetoplayaroleintheCom- gressedsmoothly,and,inrecentmonths,short-term mittee’soperatingframeworkandcommunications marketrateshavegenerallytradedabovetheON duringnormalization,withmanyof themindicating RRPrate.(Formorediscussionof theFederal apreferenceforcontinuingtoannounceatarget Reserve’spreparationsfortheeventualnormalization range.WhilegenerallyagreeingthatanONRRP of monetarypolicy,seethebox“Planningfor MonetaryPolicyImplementationduring 17 SeeBoardofGovernorsoftheFederalReserveSystem(2014), Normalization”onpages38–39of theJuly2014 “MinutesoftheFederalOpenMarketCommittee,June17–18, MonetaryPolicyReport.) 2014,”pressrelease,July9,www.federalreserve.gov/newsevents/ press/monetary/20140709a.htm.

37 3 Financial Stability Aprimaryobjectiveof theFederalReservesinceits (BHCs),theU.S.operationsof certainforeignbankinceptionhasbeenthepromotionof financialstability ingorganizations(FBOs),andfinancialmarketutili- (box1).AstheU.S.andglobalfinancialsystemshave ties(FMUs).Inaddition,theFederalReserveserves evolved,theFederalReserve’sroleinhelpingmain- asa“consolidatedsupervisor”of nonbankfinancial tainfinancialsystemstabilityhasnecessarilyadapted. companiesthathavebeendesignatedbytheFinancial StabilityOversightCouncil(FSOC)asinstitutions TheDodd-FrankWallStreetReformandConsumer whosedistressorfailurecouldposeathreattothe ProtectionActof 2010(Dodd-FrankAct),for stabilityof theU.S.financialsystemasawhole(see example,explicitlyassignedtheFederalReservenew “FinancialStabilityOversightCouncilActivities” responsibilitiesforpromotingfinancialstability.A laterinthissection). centralelementintheDodd-FrankActistherequirementthattheFederalReserveandotherfinancial Furthermore,thechangingnatureof risksandflucregulatoryagenciesadoptamacroprudential tuationsinfinancialmarketsandthebroader approachtosupervisionandregulation.Whereasa economyrequiretimelymonitoringof conditionsin traditional—ormicroprudential—approachtosuper- domesticandforeignfinancialmarkets,amongfinanvisionandregulationfocusesonthesafetyand cialinstitutions,andinthenonfinancialsectorin soundnessof individualinstitutions,themacropru- ordertoidentifythebuildupof vulnerabilitiesthat dentialapproachcentersonthestabilityof thefinan- mightrequirefurtherstudyorpolicyaction. cialsystemasawhole. Promotionof financialstabilitystronglycomple- Inparticular,themacroprudentialapproachinforms mentstheprimarygoalsof monetarypolicy—price thesupervisionof systemicallyimportantfinancial stabilityandfullemployment.Asmoothlyoperating institutions—includinglargebankholdingcompanies financialsystempromotestheefficientallocationof Box 1. Financial Stability and the Founding of the Federal Reserve In2014,theFederalReservemarkedthecentennial InthewordsofoneauthoroftheFederalReserve anniversaryofitsactivitiessincethepassageofthe Act,U.S.SenatorRobertLathamOwenofOkla- FederalReserveActin1913.Financialstabilitycon- homa,“Itshouldalwaysbekeptinmindthat...itis siderationswereakeyelementinthefoundingof thepreventionofpanic,theprotectionofourcomtheSystem.Indeed,theFederalReservewascre- merce,thestabilityofbusinessconditions,andthe atedinresponsetothePanicof1907,thelatestina maintenanceinactiveoperationoftheproductive seriesofseverefinancialpanicsthatbefellthe energiesofthenationwhichisthequestionofvital nationinthelate19thandearly20thcenturies. importance.”1TheFederalReservehascontinuedto servethisfunctionandadapttoU.S.andglobal ThispanicledtothecreationoftheNationalMoneconomicandfinancialsystemevolution,innovation, etaryCommission,whose1911reportwasamajor conditions,anddynamics. impetustotheFederalReserveAct,signedintolaw byPresidentWoodrowWilsononDecember23, 1913.Uponenactment,theprocessoforganizing andopeningtheBoardandtheReserveBanks acrossthecountrybegan.OnNovember16,1914, theFederalReserveSystembeganfull-fledged 1 SeeRobertL.Owen(1919),TheFederalReserveAct:ItsOrigin operations. andPrinciples(NewYork:CenturyCompany),pp.43–44.

38 101stAnnualReport|2014 savingandinvestment,facilitatingeconomicgrowth Eachquarter,FederalReserveBoardstaff systematiandemployment.Andpricestabilitycontributesnot callyassessastandardsetof vulnerabilitiesrelevant onlytotheefficientallocationof resourcesinthereal forfinancialstability:assetvaluationsandriskappeeconomy,butalsotoreduceduncertaintyandeffi- tite,leverageinthefinancialsystem,liquidityrisks cientpricinginfinancialmarkets,therebysupporting andmaturitytransformationbythefinancialsystem, financialstability. andborrowingbythenonfinancialsector(householdsandnonfinancialbusinesses).Thesemonitoringeffortsinforminternaldiscussionsconcerning Thissectiondiscusseskeyfinancialstabilityactivities bothmacroprudentialsupervisionandregulatory undertakenbytheFederalReservein2014,which policiesandmonetarypolicy.TheyalsoinformFedincludemonitoringriskstofinancialstability;macroeralReserveinteractionswithbroadermonitoring prudentialsupervisionandregulationof large,comefforts,suchasthosebytheFSOCandtheFinancial plexfinancialinstitutions;anddomesticandinterna- StabilityBoard(FSB). tionalcooperationandcoordination. Themorespecificdiscussionthatfollowsfocuseson Someof theseactivitiesarealsodiscussedelsewhere asubsetof themostimportantdevelopmentsover inthisannualreport.Abroadersetof economicand thecourseof 2014concerningspecificindicators, financialdevelopmentsarediscussedinsection2, includingassetvaluationsandriskappetite,leverage, “MonetaryPolicyandEconomicDevelopments,” maturityandrisktransformation,andnonfinancialwiththediscussionthatfollowsconcerningsurveilsectorborrowing. lanceof economicandfinancialdevelopments focusedonfinancialstability.Thefullrangeof activi- Asset Valuations and Risk Appetite tiesassociatedwithsupervisionof systemically importantfinancialinstitutions,designatednonbank Overvaluedassetsconstituteafundamentalvulnercompanies,anddesignatedFMUsisdiscussedinsecabilitybecausetheunwindingof highpricescanbe tion4,“SupervisionandRegulation.” destabilizing,especiallyif theassetsarewidelyheld andthevaluesaresupportedbyexcessiveleverage, maturitytransformation,orriskopacity. Monitoring Risks to Moreover,stretchedassetvaluationsmaybeanindi- Financial Stability catorof abroaderbuildupinrisk-taking.Nonetheless,itisverydifficulttojudgewhetheranassetprice Financialinstitutionsarelinkedtogetherthrougha isovervaluedrelativetofundamentals.Asaresult, complexsetof relationships.Moreover,thecondition analysistypicallyconsidersarangeof possiblevaluaof financialinstitutionsandfinancialstability tionmetrics,developmentsinareasinwhichasset dependsontheeconomicconditionof thenonfinan- pricesarerisingespeciallyrapidlyorintowhich cialsector,whoseborrowingfromthefinancialsector investorflowshavebeenconsiderable,ortheimplicaimpliesthatthestrengthof financialinstitutions’bal- tionsof unusuallyloworhighlevelsof volatilityin ancesheetsdependsontheconditionof thenonfi- certainmarkets. nancialsector.Asaresult,researchonfinancialstabilityhasbeenanimportantpartof FederalReserve Lookingacrossmarkets,valuationpressureswere effortsinpursuitof overalleconomicstability(see notableorbuildinginseveralareas.Overthecourse box2forinformationonrecentresearch). of 2014,yieldsfellininvestment-gradeandinthe upperendof thespeculative-gradecorporatedebt Inordertounderstandtheinteractionamongthese markets,andyieldsoncorporatedebtarehistorically factorsandconsiderappropriatepolicyresponses, low.AkeycontributingfactortothedeclineincortheFederalReservemaintainsaflexible,forward- poratebondyieldsover2014wasthesizabledecline lookingfinancialstabilitymonitoringprogramto inU.S.Treasuryyieldsovertheyear(figure1). helpinformpolicymakersof thefinancialsystem’s SpreadsrelativetoTreasuryyields,agaugeof the vulnerabilitiestoarangeof potentialadverseevents compensationinvestorsdemandascompensationfor orshocks.Suchamonitoringprogramisacritical exposuretothecreditriskassociatedwithriskiercorpartof abroaderprogramintheFederalReserve porateborrowers,rosesomewhatinlate2014from Systemtoassessandaddressvulnerabilitiesinthe lowlevelsandsuggestedmoderatevaluationpressure U.S.financialsystem. incorporatebondsoverall.Thespreadonhigh-yield

FinancialStability 39 Figure1.Bondyields,2010–15 Figure2.Leveragedloanandhigh-yieldbondissuance, 2004–14 Percent Billions of dollars (annual rate) Four-quarter percent change Daily High-yield 10 1600 35 High-yield bonds (left scale) Total outstanding (right scale) Triple-B 10-year Treasury 1400 Leveraged loans (left scale) 30 8 1200 25 Q1Q2 6 1000 Q3 20 Mar. 800 Q4 15 26 4 600 10 2 400 5 200 0 0 2010 2011 2012 2013 2014 2015 0 -5 2004 2006 2008 2010 2012 2014 Source:Staffestimatesofsmoothedcorporateyieldcurvesbasedondatafrom BofAMerrillLynchGlobalResearch,usedwithpermission,andsmoothed Note:Totaloutstandingisquarterlydata.Dataincludebondsandloanstoboth Treasuryyieldcurve. financialandnonfinancialcompanies,aswellasunratedbondsandloans. Source:Standard&Poor’sLeveragedCommentary&Data(LCD);MergentCorporateFixedIncome(FISD).S&Panditsthird-partyinformationprovidersexpressly disclaimtheaccuracyandcompletenessoftheinformationprovidedtotheBoard, bondswidenedmorenotablythanthaton aswellasanyerrorsoromissionsarisingfromtheuseofsuchinformation.Furinvestment-gradecorporatebonds. ther,theinformationprovidedhereindoesnotconstitute,andshouldnotbeused as,adviceregardingthesuitabilityofsecuritiesforinvestmentpurposesorany othertypeofinvestmentadvice. Someof thiswideninginspreadsreflectedincreased concernsabouttheabilityof firmsintheenergysectortorepaytheirborrowinginlightof thesharp eralReservestresstestingexploredthepotential declineinthepriceof oiloverthesecondhalf of the strainsonparticipatinginstitutionsthatcouldstem year.DespitethewideninginspreadsoverTreasury fromalargedeteriorationinthecreditqualityof securities,valuationpressuresappearednotablein riskycorporateborrowersinitsseverelyadverse riskiercorporatedebtmarkets.Issuanceof high-yield scenario. bondsremainedhighin2014,asdidissuanceof leveragedloans(figure2)—althoughthepaceof issu- Thecommercialrealestatemarketexhibitedgrowing anceslowedlateintheyear. valuationpressuresoverthecourseof 2014.Prices haverisenrelativetorents,andlendingstandards Asaresult,thelevelof suchriskydebtgrewmore haveeased.Therehavealsobeenindicationsof than10percentin2014,thethirdyearof growthin weakeninginunderwritingstandardsinsecuritizaexcessof 10percent.Inaddition,theunderwriting tions,suchasanincreasedshareof interest-only qualityof leveragedloansarrangedorheldbybank- loansandrisingloan-to-valueratiosincommercial inginstitutionsremainedrelativelyweakin2014, mortgage-backedsecurities(CMBS)pools.However, althoughtheremayhavebeensomeimprovementlate unlikecorporatedebtmorebroadly,thevolumeof intheyearinresponsetosupervisoryenforcementof commercialrealestatedebtoutstandinghasbegunto the2013guidanceforleveragedlending.For accelerateappreciablyonlyoverthepastyear. example,debtmultiplesoverearningsonnewdeals remainhighrelativetohistoricalaveragesbut Inothermarkets,valuationpressuresappearmoderdecreasedsomewhat,onbalance,inthefourthquar- ate.Broadmeasuresof equitypricesroseabout terof 2014.Evenso,theincreaseinborrowingand 10percentoverthecourseof 2014,buttheequity loosestandardsforlendingoverrecentyearscould premium,measuredasthegapbetweentheexpected implythatinvestorsinhigh-yieldbondsandlever- returnonequityandthereallong-termTreasury agedloansareexposedtolargerrisksof lowreturns yield,isestimatedtohaveremainedrelativelywide. orlossesincomingyears,andthegrowthindebt However,equitypriceswerehighrelativetoaggregate amonglower-ratedcorporationsmayplacestrainson sales,reflectinghighprofitmargins.Inaddition,resithesefirms,especiallyif macroeconomicconditions dentialrealestatevaluationsappearwithinhistorical turnouttobeweakerthanexpected.Indeed,as norms.Forexample,housepricesrelativetorents— describedinmoredetaillater,the2015roundof Fed- onemeasureof valuations—haveremainedwell

40 101stAnnualReport|2014 annualstresstestsforlargerbankingorganizations. Figure3.Ratioofpricestorents,1990–2015 Asaresultof steadyimprovementsincapitalpositionssincethefinancialcrisis,U.S.banks,inaggre- Jan. 2010 = 100 180 gate,appeartobebetterpositionedtoabsorbpoten- Monthly tialshocks,suchasthoserelatedtolitigation,falling 160 United States oilprices,andfinancialcontagionstemmingfrom Median abroad. Interquartile range 140 120 Securitization,whichcontinuestobeanimportant Jan. meansof financingforseveralassetclasses,remains 100 relativelysubdued,thoughissuanceof non-agency CMBSandcollateralizedloanobligations(CLOs) 80 continuedtoberobustamidcontinuedreportsof 60 relativelyaccommodativeunderwritingstandardsfor 1991 1995 1999 2003 2007 2011 2015 theunderlyingassets.RecentresultsfromtheFederal Note:Percentilesarebasedon25metropolitanstatisticalareas. Reserve’sSeniorCreditOfficerOpinionSurveyon Source:Forhouseprices,CoreLogic;forrentdata,BureauofLaborStatistics. DealerFinancingTermsindicatethattheuseof financialleveragebyinstitutionalinvestorclientsto withinatypicalrangeandremainfarbelowthelevels fundthepurchasesof securitieswaslittlechanged seeninthepastdecadeacrossmuchof thecountry overrecentquarters,althoughdemandforfunding (figure3). non-agencyresidentialmortgage-backedsecurities andhigh-yieldbondshasbeenrisingrecently.1 Leverage in the Financial System Liquidity Risks and Maturity Thefinancialstrengthof thebankingsectorhascon- Transformation by the Financial System tinuedtoimprove.Boththeratioof Tier1common equitytorisk-weightedassetsandtheleverageratio Bankbalancesheetsshowcontinuedimprovementin haverisentolevelsfarabovethoseseeninthemid- liquiditypositioningasthelargestBHCstransition 2000s(figure4).Theincreaseincapitalreflectsthe toBaselIIIliquidityrequirements.TheBaselIII tougherstandardsimplementedgloballyaspartof liquiditycoverageratio(LCR)requirementbegan theBaselIIIprocessandadditionaleffortsimple- phasinginforU.S.BHCswithgreaterthan$250bilmentedfollowingthepassageof theDodd-Frank lioninconsolidatedassetsonJanuary1,2015,and Act,includingmorestringentstandardsandthe willtakefulleffectinJanuary2017.InJanuary2016, a“modified”LCRrequirementforBHCswith between$50billionand$250billioninassetswill Figure4.Regulatorycapitalratios,CCARbankholding begintobephasedin. companies,2001–14 Againstthisbackdrop,balancesheetdatathrough Gross ratio 2014:Q4showtheratioof high-qualityliquidassets Quarterly, S.A. 12 tototalassetsatlarge-andmedium-sizedBHCscon- Tier 1 common tinuedtogrow(figure5). Leverage ratio Q4 Short-termwholesalefundingremainedsubdued throughout2014.Netovernightborrowingatbroker- 8 dealersagainstfixed-incomesecuritiescontinuedto trenddown(figure6). Thetotaloutstandingdollarvaluesof commercial 4 paperandmoneymarketmutualfunds(MMFs)were 2002 2004 2006 2008 2010 2012 2014 relativelyunchangedin2014.Structuralvulnerabili- Note:Theshadedbarsindicateperiodsofbusinessrecessionasdefinedbythe tiesatMMFspersist:Inparticular,primeMMFsare NationalBureauofEconomicResearch.CCARisComprehensiveCapitalAnalysis andReview. 1 TheSeniorCreditOfficerOpinionSurveyonDealerFinancing Source:FederalReserveBoard,FRY-9C,ConsolidatedFinancialStatementsfor TermsisavailableontheBoard’swebsiteatwww.federalreserve BankHoldingCompanies. .gov/econresdata/releases/scoos.htm.

willmonitortheeffectsof thenewrulesaftertheyare Figure5.Ratioofhigh-qualityliquidassetstototalassets, implemented. 2010–14 Percent Therearesignsthatthestructureof someassetmar- 30 ketsischangingduetochangesinbroker-dealer Quarterly activitiesandincreasedtradingspeedsthatarecon- Large (>$250B total assets or >$10B foreign assets)* 25 tributingtoabuildupof liquidityrisksinsomemar- Medium ($50B–$250B)** kets.Inaddition,thegrowthof bondmutualfunds 20 Q4 andexchange-tradedfunds(ETFs)inrecentyears meansthatthesefundsnowholdamuchhigherfrac- 15 tionof theavailablestockof relativelylessliquid assets—suchashigh-yieldcorporatedebt,bank 10 loans,andinternationaldebt—thantheydidbefore thefinancialcrisis.Itispossiblethat,becausemutual 5 2010 2011 2012 2013 2014 fundsandETFsmayappeartooffergreaterliquidity *Bankholdingcompanies(BHCs)subjecttothefullliquiditycoverageratio(LCR) thanthemarketsinwhichtheytransact,theirgrowth rule. heightensthepotentialforaforcedsaleintheunder- **BHCssubjecttomodifiedLCRrule. lyingmarketsif someeventweretotriggerlargevol- Source:High-qualityliquidassetsestimatedusingquarter-endbalancesreported umesof redemptions.Thispossibility—amongother infilingsofFederalReserveBoardreportingformsFRY-9C(ConsolidatedFinancialStatementsforBankHoldingCompanies)andFR2900(ReportofTransaction potentialvulnerabilities—wasthesubjectof arecent Accounts,OtherDeposits,andVaultCash). requestforcommentsfromthepublicissuedbythe FSOC(see“FinancialStabilityOversightCouncil Activities”laterinthissection). vulnerabletoinvestorrunsif adropinthecredit qualityof theirassetsoradeclineinthewillingness Borrowing by the Nonfinancial Sector of marketparticipantstobearcreditriskinducesa fallinthemarketvalueof theirassets.TheU.S.Secu- ExcessiveborrowingbytheprivatenonfinancialsecritiesandExchangeCommission(SEC)rulesthat torhasbeenanimportantcontributortofinancial willrequireinstitutionalprimeMMFstomovefrom crises.Highlyindebtedhouseholdsandnonfinancial afixedtoafloatingnetassetvaluestartingin2016 businessesmayhaveadifficulttimewithstanding maymitigatetheirsusceptibilitytoruns.TheSEC negativeshockstoincomesorassetvaluesandmay beforcedtocurtailspendinginwaysthatamplifythe effectsof financialshocks.Inturn,lossesamong householdsandbusinessescanleadtomounting Figure6.Primarydealernetborrowing,bymaturity, lossesatfinancialinstitutions,creatingan“adverse 2001–14 feedbackloop”inwhichweaknessamonghouseholds,nonfinancialbusinesses,andfinancialinstitu- Billions of dollars tionscausesfurtherdeclinesinincomeandfinancial Revised survey Weekly losses,potentiallyleadingtofinancialinstabilityand Net overnight borrowing asharpcontractionineconomicactivity. Net term borrowing Borrowingbyhouseholdsremainedrelativelysub- Dec. duedthroughthefourthquarterof 2014.Atthe 31 sametime,borrowingbythenonfinancialbusiness sectorhasgrownonlymoderately.Asaresult,the ratioof householdandnonfinancialbusinesscredit tonominalGDPhasremainedsignificantlybelow thepeakseeninthe2000s(figure7).Nonetheless, thisratioremainsabovelevelsseenpriortothe mid-2000s. Withinthehouseholdsector,thelevelof borrowing hasedgedupamonghouseholdswithstrongcredit histories,whileborrowingbyhouseholdswithdamgniworrob teN gnidnel teN FinancialStability 41 2500 2000 1500 1000 500 0 -500 -1000 -1500 2002 2004 2006 2008 2010 2012 2014 Note:Termfinancingreferstoagreementswithanoriginalfixedmaturityofmore thanonebusinessday.Overnightfinancingreferstoagreementswithanoriginal fixedmaturityofonebusinessdayandagreementswithnospecificmaturitythat canbeterminatedondemandbyeithertheborrowerorlender.Netborrowingis thedifferencebetweenfundsreceived(borrowing)andfundspaid(lending). Source:FederalReserveBoard,FR2004C,WeeklyReportofDealerFinancingand Fails.

42 101stAnnualReport|2014 Box 2. 2014 Research on Financial Stability Themacroprudentialapproachtoensuringfinancial withafocusontheeffectofsovereigndistresson stabilitybuildsonasubstantialandgrowingbodyof banksolvencyandfinancing.Italsohighlightsthe researchonthefactorsthatleadtovulnerabilitiesin notablecosttotherealeconomyofthecloseconthefinancialsystemandhowpoliciescanmitigate nectionbetweensovereignsandbanks.2 suchrisks. • Systemicriskandpolicyactions.Aworking Itremainsthecase,however,thatunderstandingof paperstudyingtheimpactofcapitalinjectionson thearrayoffactorsimportantforfinancialstabilityis thesystemicriskinthebankingsectorinthe incompleteandevolving.Asaresult,theFederal UnitedStatesandtheeuroarea.3 Reserveengagesactivelyinfinancialstability • Capitalandliquidityregulation.Aworkingpaper research.Thisresearchseekstoimproveunderstudyingtheinteractionofcapitalandliquidity standingofrelatedissues,engagesthebroader regulationinamacroeconomicmodel.4 researchcommunityinpolicyissues,andoften involvescollaborationwithacademiaandresearch- • Lenderoflastresortinthe2007–09crisis.A ersatotherdomesticandinternationalinstitutions. workingpaperstudyinglender-of-last-resort actionsduringtherecentfinancialcrisis.5 Finally,researcheffortsbyFederalReservestaff reflecttheirattemptstoidentifyandgrapplewithtop- • CapitalandliquidityreformsandBaselIII.Two icsofconcerntotheFederalReserve,andthe publishedjournalarticlesstudyingtheeffectsof viewsexpressedarethoseoftheindividualauthors capitalreforms,liquidityreforms,orboththatare andnotthoseoftheFederalReserve.Examplesof similartothoseassociatedwiththeBaselIIIproresearchonfinancialstabilityin2014includethe cessoneconomicactivityinthemediumandlong following: run.6 • Trackingtime-varyingsourcesofsystemic 2 SeeRicardoCorreaandHoracioSapriza(2014),“Sovereign risk.Aresearchnotepresentingaforward-looking Debt Crises,” International Finance Discussion Papers 2014monitoringprogramtoidentifyandtracktime- 1104 (Washington: Board of Governors of the Federal Reserve varyingsourcesofsystemicrisk.Theprogramdis- System, May), www.federalreserve.gov/pubs/ifdp/2014/1104/ tinguishesbetweenshocks,whicharedifficultto ifdp1104.pdf. prevent,andthevulnerabilitiesthatamplify 3 SeeJuanM.LondonoandMaryTian(2014),“BankInterventions and Options-Based Systemic Risk: Evidence from the shocks,whichcanbeaddressed.Drawingona Global and Euro-Area Crisis,” International Finance Discussion substantialbodyofresearch,theauthorsidentify Papers 2014-1117 (Washington: Board of Governors of the leverage,maturitytransformation,interconnected- Fed-eral Reserve System, September), www.federalreserve.gov/ ness,complexity,andthepricingofriskasthepri- econresdata/ifdp/2014/files/ifdp1117.pdf. maryvulnerabilitiesinthefinancialsystem.The 4 SeeFranciscoCovasandJohnC.Driscoll(2014),“BankLiquidity and Capital Regulation in General Equilibrium,” Finance and monitoringprogramtracksthesevulnerabilitiesin Economics Discussion Series 2014-85 (Washington: Board of foursectorsoftheeconomy:assetmarkets,the Governors of the Federal Reserve System, September), www bankingsector,shadowbanking,andthenonfi- .federalreserve.gov/econresdata/feds/2014/files/201485pap.pdf. nancialsector.Theframeworkalsohighlightsthe 5 SeeDietrichDomanski,RichhildMoessner,andWilliamNelson policytradeoffbetweenreducingsystemicriskand (2014), “Central Banks as Lender of Last Resort: Experiences during the 2007-2010 Crisis and Lessons for the Future,” raisingthecostoffinancialintermediationbytak- Finance and Economics Discussion Series 2014-110 (Washingingpreemptiveactionstoreducevulnerabilities.1 ton: Board of Governors of the Federal Reserve System, May), www.federalreserve.gov/econresdata/feds/2014/files/2014110pap • Spilloversbetweendistressamongsovereigns .pdf. andbanks.Aworkingpaperexaminingthetrans- 6 SeeMichaelT.KileyandJaeW.Sim(2014),“BankCapitaland missionchannelsbetweensovereignsandbanks, theMacroeconomy:PolicyConsiderations,”JournalofEconomic DynamicsandControl,vol.43(June),pp.175–98,doi:10.1016/ j.jedc.2014.01.024;andPaoloAngelini,LaurentClerc,Vasco 1 SeeTobiasAdrian,DanielCovitz,andNellieLiang(2014), Cúrdia,LeonardoGambacorta,AndreaGerali,AlbertoLocarno, “Financial Stability Monitoring,” FEDS Notes (Washington: Board RobertoMotto,WermerRoeger,SkanderVandenHeuvel,and of Governors of the Federal Reserve System, August), www JanVlek(2015),“BaselIII:Long-TermImpactonEconomic .federalreserve.gov/econresdata/notes/feds-notes/2014/financial- PerformanceandFluctuations,”ManchesterSchool,vol.83 stability-monitoring-20140804.html. (March),pp.217–51,doi:10.1111/manc.12056.

FinancialStability 43 Figure7.RatioofnonfinancialsectorcredittoGDP, Figure8.Speculative-gradeandunratedfirmnetleverage, 1980–2014 1995–2014 Ratio Percent 2.0 35 Quarterly Quarterly 1.6 30 Q4 Q3 1.2 25 Household 0.8 20 Business 0.4 15 1984 1989 1994 1999 2004 2009 2014 1996 1999 2002 2005 2008 2011 2014 Note:Theshadedbarsindicateperiodsofbusinessrecessionasdefinedbythe Note:Dataareannualuntil1999andquarterlythereafter.Netleverageistheratio NationalBureauofEconomicResearch. ofthebookvalueoftotaldebtminuscashandcashequivalentstothebookvalue Source:FederalReserveBoard,StatisticalReleaseZ.1,“FinancialAccountsofthe oftotalassets. UnitedStates.” Source:S&PCapitalIQCompustat©2015Standard&Poor’sFinancialServices LLC(“S&P”).Allrightsreserved.Forintendedrecipientonly.Nofurtherdistribution and/orreproductionpermitted. agedcredithistories—so-calledsubprimeborrowing—contractedfurther,intheaggregate,in2014. Key Supervisory Activities Thecombinationof anemicgrowthinborrowingin theaggregateandthetendencyforsuchgrowthto Oneimportantelementof enhancedsupervisionof representborrowingbyhouseholdswithstrongcredit largebankingorganizationsisthestress-testingprohistoriessuggeststhatvulnerabilitiesfromhousehold cess,whichincludestheDodd-FrankActstresstests borrowingdidnotrisein2014.Nonetheless,pockets andtheComprehensiveCapitalAnalysisandReview. of householdcreditmarketswitnessedashifttoward Inadditiontofosteringthesafetyandsoundnessof borrowinginriskiercreditsegments—forexample,in theparticipatinginstitutions,stresstestsembedmacsubprimeautolending—atrendthatshouldbe roprudentialelementsby monitored. • examiningtheloss-absorbingcapacityof institutionsunderacommonmacroeconomicscenario Inthebusinesssector,therapidgrowthinborrowing thathasfeaturessimilartothestrainsexperienced inriskiersegmentsof corporatedebtmarkets,highinasevererecessionandwhichincludes,asapprolightedinthediscussionof assetvaluationsearlier, priate,identifiedsalientrisks; hasledtoanotableincreaseinleverage—thatis,debt relativetobookequity—amongspeculative-grade • conductinghorizontaltestingacrosslargeinstitucorporations(figure8). tionstounderstandthepotentialcorrelatedexposures;and Macroprudential Supervision of • consideringtheeffectsof counterpartydistresson Large, Complex Financial Institutions thelargest,mostinterconnectedfirms. Themacroeconomicandfinancialscenariosthatare Large,complexfinancialinstitutionsinteractwith usedinthestresstestshaveprovedtobeanimporfinancialmarketsandthebroadereconomyina tantmacroprudentialtool.Asdescribedinthe2013 mannerthatmay—duringtimesof stressandinthe policystatementondevelopingscenariosforstress absenceof anappropriateregulatoryframeworkand tests,theFederalReserveadjuststheseverityof the effectivesupervision—leadtofinancialinstability.2 macroeconomicscenarioinawaythatcounteracts thenaturaltendencyforriskstobuildwithinthe 2 FormoreontheFederalReserve’ssupervisionandregulationof largeinstitutions,andespeciallyrelatedtotheintegrationofthe institutionswiththemacroprudentialeffortsoutlinedlaterin microprudentialobjectiveofsafetyandsoundnessofindividual thissection,seesection4,“SupervisionandRegulation.”

44 101stAnnualReport|2014 financialsystemduringperiodsof strongeconomic resiliencyof thefinancialsystem,includingapproval activity.3Thescenarioscanalsobeusedtoassessthe of afinalruleestablishingenhancedprudentialstanfinancialsystem’svulnerabilitytoparticularlysignifi- dardswithrespecttocapital,liquidity,andriskmancantrisksandtohighlightcertainriskstoinstitutions agementforlargeU.S.BHCsandFBOs(pursuantto participatinginthetesting.4Inaseverelyadversesce- section165of theDodd-FrankAct). nariofor2015(releasedinOctober2014),theU.S. corporatesectorexperiencesincreasesinfinancial Theenhancedprudentialstandards,togetherwith distressthatareevenlargerthanwouldbeexpected stresstestingandotherregulatorysafeguards,help inasevererecession.5Thisdeteriorationincredit ensurethatlargeU.S.BHCsandFBOsoperatingin qualityisparticularlyconcentratedinriskierfirms. theUnitedStateshaverobustlevelsof capitaland Investorspullbackfromavarietyof assetslinkedto liquidityandstrongriskmanagement.Together,these riskycorporateborrowersand,inparticular,highly effortsnotonlyhelpensurethatthesefirmsarefinanleveragedcorporations.Spreadsonassetslinkedto ciallyrobustindividually,butalsolimittheriskthat thesecorporations,particularlyhigh-yieldbonds,lev- financialdistressatthesefirmscouldcausenegative eragedloans,andCLOsbackedbyleveragedloans, spilloverstothefinancialsectorandthebroader widentothesamelevelsasthepeaksreachedinthe economy.Theyarecomplementedbynewrulesand 2007–09recession.Thesedevelopmentsweremoti- proposalsconcerningliquiditycoverageratiosand vated,inpart,bytherapidgrowthindebtowedby strengthenedcapitalrequirementsforglobalsystemiriskyfirmsandvaluationpressuresobservedin callyimportantfinancialinstitutions,includingprorelatedmarketsthatwerehighlightedearlierinthis posedhighercapitalrequirementsforinstitutionsmore section. reliantonwholesaleshort-termfunding.Formore informationonenhancedprudentialstandardsactivity, TheFederalReserveincorporatesamacroprudential seesection4,“SupervisionandRegulation.” approach,too,initssupervisionof FMUs.In2014, theFederalReserveBoardupdateditsrisk- Duringthe2007–09financialcrisis,thelackof effecmanagementexpectationsforFMUs.Fordesignated tiveresolutionstrategiescontributedtotheperni- FMUsforwhichtheBoardoranotherfederalbank- ciousspilloversof distressatorbetweenindividual ingagencyservesasthesupervisoryagencyunder institutionsandfromthoseinstitutionstothe titleVIIIof theDodd-FrankAct,theBoard broadereconomy.TheFederalReserve,incollaboraamendeditsrisk-managementstandardstotakeinto tionwithotherU.S.agencies,hascontinuedtowork accountnewinternationalstandardsforsuchentities withlargefinancialinstitutionstodeveloparangeof (effectiveDecember2014). recoveryandresolutionstrategiesintheeventof theirdistressorfailure.Improvementsinresolution Aswithotherelementsof supervision,amorethor- planningwillmitigateadverseeffectsfrompercepoughreviewof activitiesin2014isdiscussedinsec- tionsof “toobigtofail”andcontributetomore tion4,“SupervisionandRegulation.” orderlyconditionsinthefinancialsystemif institutionsfacestrains.Formoreinformationonrecovery Key Regulatory Activities andresolutionplanningactivity,seesection4, “SupervisionandRegulation.” Overthecourseof 2014,theFederalReservehas takenanumberof stepstocontinueimprovingthe Domestic and International Cooperation and Coordination 3 SeeBoardofGovernorsoftheFederalReserveSystem(2013), “FederalReserveBoardIssuesFinalPolicyStatementforDevelopingScenariosforFutureCapitalPlanningandStressTesting TheFederalReservecooperatedorcoordinatedwith Exercises,”pressrelease,November7,www.federalreserve.gov/ newsevents/press/bcreg/20131107a.htm. bothdomesticandinternationalinstitutionsin 4 In2014,30institutionsparticipatedinthesestresstests.For 2014topromotefinancialstability. moreinformation,see“StressTestsandCapitalPlanning”on theFederalReserveBoard’swebsiteatwww.federalreserve.gov/ Financial Stability Oversight bankinforeg/stress-tests-capital-planning.htm. 5 SeeBoardofGovernorsoftheFederalReserveSystem(2014), Council Activities 2015SupervisoryScenariosforAnnualStressTestsRequired undertheDodd-FrankActStressTestingRulesandtheCapital AsmandatedbytheDodd-FrankAct,theFSOCwas PlanRule(Washington:BoardofGovernors,October),www createdin2010andischairedbytheTreasurySecre- .federalreserve.gov/newsevents/press/bcreg/bcreg20141023a1 .pdf. tary(box3).Itestablishesaninstitutionalframework

FinancialStability 45 managementindustry),andacademicparticipants, Box 3. Regular Reporting on amongothers. Financial Stability Oversight Council • Roundtableondesignationprocess.OnNovember12, Activities 2014,theFSOChostedaroundtabletodiscusspos- TheFinancialStabilityOversightCouncil(FSOC), sibleimprovementstotheprocessfordesignating createdundertheDodd-FrankWallStreetReform systemicallyimportantfinancialinstitutions. andConsumerProtectionActof2010andchaired bytheSecretaryoftheTreasuryDepartment,meets • Requestforpubliccommentsonassetmanagement regularlytocoordinateonfinancialstabilitytopics industryrisks.OnDecember18,2014,aspartof its thatpotentiallyaffecttheU.S.economyanddisongoinganalysisof potentialriskstothefinancial closesitsactivities. systemposedbytheassetmanagementindustry, • Monthlymeetingminutes.In2014,theFSOC theFSOCreleasedanoticeseekingpubliccommetmonthly,andtheminutesforeachmeeting mentaboutpotentialriskstothesystemassociated areavailableontheU.STreasurywebsite(www withcertainproductsandactivitiesintheasset .treasury.gov/initiatives/fsoc/council-meetings/ Pages/meeting-minutes.aspx). managementindustryrelatingtoliquidityand redemptions,leverage,operationalfunctions,and • FSOCannualreport.OnMay7,2014,the resolution. FSOCreleaseditsfourthannualreport(www .treasury.gov/initiatives/fsoc/studies-reports/ • Determinationof anadditionalsystemicallyimpor- Pages/2014-Annual-Report.aspx),which tantentity.OnDecember19,2014,theFSOC includesareviewofkeydevelopmentsthrough thebeginningof2014andasetofrecom- announceditsfinaldeterminationtodesignate mendedactionsthatcouldbetakentoensure MetLifeasasystemicallyimportantnonbank financialstabilityandtomitigatesystemicrisks financialcompany.Thedeterminationwasbased thataffecttheeconomy. ontheFSOC’sassessmentthatmaterialfinancial FormoreontheFSOC,seewww.treasury.gov/ distressatMetLifecouldposeathreattothefinaninitiatives/fsoc/pages/home.aspx. cialstabilityof theUnitedStates.6 Financial Stability Board Activities foridentifyingandrespondingtosourcesof systemic risk.TheFederalReserveChairman,alongwith TheFederalReserveparticipatesininternational otherfinancialregulators,isamemberof theFSOC. bodies,suchastheFSB,giventheinterconnected globalfinancialsystemandtheglobalactivitiesof ThroughcollaborativeparticipationintheFSOC, largeU.S.financialinstitutions. U.S.financialregulatorsmonitornotonlyinstitutions,butthefinancialsystemasawhole.TheFed- TheFSBisaninternationalbodythatmonitorsthe eralReserveplaysanimportantroleinthismacro- globalfinancialsystemandpromotestheadoptionof prudentialframework:Itassistsinmonitoringfinan- soundpoliciesacrosscountries,withmuchactivityin cialrisks,analyzestheimplicationsof thoserisksfor recentyearsfocusedonfinancialstability.TheFedfinancialstability,andidentifiesstepsthatcanbe eralReserveparticipatesintheFSB,alongwiththe takentomitigatethoserisks.Inaddition,whenan SECandtheU.S.Treasury.7 institutionisdesignatedbytheFSOCassystemically important,theFederalReserveassumesresponsibil- In2014,theFederalReservecontinueditsactiveparityforsupervisingthatinstitution. ticipationintheFSB.TheFSBisengagedinseveral issues,includingshadowbanking,supervisionof In2014,theFederalReserveworked,inconjunction globalsystemicallyimportantfinancialinstitutions, withotherFSOCparticipants,onseveralmajor andthedevelopmentof effectiveresolutionregimes initiatives: forlargefinancialinstitutions. • Conferenceexaminingassetmanagementindustry. 6 Formoreinformation,seeU.S.DepartmentoftheTreasury OnMay19,2014,theFSOCheldaconference (2014),“FinancialStabilityOversightCouncilAnnouncesNonexaminingtheassetmanagementindustryandits bankFinancialCompanyDesignation,”pressrelease,December19,www.treasury.gov/press-center/press-releases/Pages/ relationshiptofinancialstability.Participants jl9726.aspx. includedstaff fromU.S.governmentagencies,the 7 SeetheFinancialStabilityBoardwebsiteatwww privatesector(includingindividualsfromtheasset .financialstabilityboard.org.

47 4 Supervision and Regulation TheFederalReservehassupervisoryandregulatory endingDecember31,2013.Theproportionof unprofauthorityoveravarietyof financialinstitutionsand itableBHCscontinuestodecline,reaching4percent, activitieswiththegoalof promotingasafe,sound, downfrom6percentin2013,butremainselevated andstablefinancialsystemthatsupportsthegrowth comparedtohistoricalrates;unprofitableBHCsnow andstabilityof theU.S.economy.Asdescribedin encompasslessthan1percentof bankingindustry thisreport,theFederalReservecarriesoutitssuper- assets,inlinewithhistoricalnorms.Netinterestmarvisoryandregulatoryresponsibilitiesandsupporting gincontinuestodecline,reaching2.2percent,thelowfunctionsprimarilyby estlevelinover20years.Provisionswereflatat 0.19percentof averageassets,inlinewithhistorical • promotingthesafetyandsoundnessof individual lows.Nonperformingassetscontinuetobeachallenge financialinstitutionssupervisedbytheFederal toindustryrecovery,withthenonperformingasset Reserve; ratioremainingelevatedat1.9percentof loansand • takingamacroprudentialapproachtothesupervi- foreclosedassets,animprovementfrom2.5percentat sionof thelargest,mostsystemicallyimportant year-end2013.(Alsosee“BankHoldingCompanies” financialinstitutions(SIFIs);1 laterinthissection.) • developingsupervisorypolicy(rulemakings,super- Performanceof statememberbanks.Theperforvisionandregulationletters(SRletters),policy manceatstatememberbanksin2014improvedfrom statements,andguidance); 2013.Asagroup,statememberbanksreporteda • identifyingrequirementsandsettingprioritiesfor profitof $18.9billionfor2014,upfrom$18.2billion supervisoryinformationtechnologyinitiatives; for2013andnearpre-crisislevels.However,profitabilityfromareturnonaverageassets(ROA)and • ensuringongoingstaff developmenttomeetevolvreturnonequity(ROE)perspectivestilllagspre-crisis ingsupervisoryresponsibilities; levelsbynearlyaquarterandone-third,respectively. • regulatingtheU.S.bankingandfinancialstructure Provisions(asapercentof revenue)havecontinued byactingonavarietyof proposals;and todecreaseandarenow2.2percent,downfroma crisishighof 32.4percentatyear-end2009.Further, • enforcingotherlawsandregulations. 3.6percentof allstatememberbankscontinuedto reportlosses,downfrom4.1percentforyear-end 2014 Developments 2013.Thenonperformingassetsratioremained elevatedat1.0percentof loansandforeclosedassets, reflectingongoingweaknessesinassetqualitysince During2014,theU.S.bankingsystemandfinancial thecrisis.Problemloanscontinuedtodeclineduring marketscontinuedtoimprovefollowingtheirrecov- 2014;however,nonaccrualsinCommercial&Induseryfromthefinancialcrisisthatstartedinmid-2007. trialandCreditCardsincreasedfromtheprioryear. Therisk-basedcapitalratiosforstatememberbanks Performanceofbankholdingcompanies.Animprovewerebasicallyunchangedcomparedtotheprioryear mentinbankholdingcompanies’(BHCs)perforintheaggregate,andthepercentof statemember mancewasevidentduring2014.U.S.BHCs,inaggrebanksdeemedwellcapitalizedunderpromptcorrecgate,reportedearningsapproachinganall-timehigh— tiveactionstandardsremainedhighat99percent.In $139billionfor2014,upfrom$138billionfortheyear 2014,onestatememberbank,with$155millionin assets,failed.(Alsosee“StateMemberBanks”later 1 Foradetaileddiscussionofmacroprudentialsupervisionand regulation,refertosection3,“FinancialStability.” inthissection.)

48 101stAnnualReport|2014 Box 1. Recovery and Resolution Planning TheFederalReserve,incollaborationwithotherU.S. entities,interconnectionsandinterdependencies, agencies,hascontinuedtoworkwithlargefinancial corporategovernancestructureandprocesses institutionstodeveloparangeofrecoveryandreso- relatedtoresolution,impedimentstoresolution,and lutionstrategiesintheeventoftheirdistressor theactionsthefinancialinstitutionwilltaketofacilifailure. tateitsorderlyresolution. Undertheresolutionplanrule,resolutionplansare RecoveryPlanning requiredtobesubmittedonanannualbasisafterthe initialfiling. TheFederalReservehasrequiredthatthelargest andmostgloballyactiveU.S.financialinstitutions Whereappropriate,theseconditerationplanssubdeveloprecoveryplansthatdescribeanumberof mittedbyfirmsaddressedsupplementalguidance optionsandactionsthatmaybetakenbymanage- fromtheFederalReserveandtheFDIC(www menttomaintainthefinancialinstitutionasagoing .federalreserve.gov/newsevents/press/bcreg/ concernduringinstancesofextremestress.OnSep- bcreg20130415c2.pdf). tember25,2014,theFederalReserveissuedSRletter14-8(“ConsolidatedRecoveryPlanningforCer- • Feedbackonsecondroundresolutionplans.In tainLargeDomesticBankHoldingCompanies”)that 2014,theFederalReserveandtheFDICprovided appliestoeightdomesticbankholdingcompanies feedbackontheseconditerationofsubmissions thatmayposeelevatedrisktoU.S.financialstability from12largefirmsthatareimportanttoU.S. (www.federalreserve.gov/bankinforeg/srletters/ financialstability(www.federalreserve.gov/ sr1408.pdf).AkeyobjectiveofSRletter14-8isto newsevents/press/bcreg/20140805a.htmand enhancetheresiliencyofafirmtoadversedevelop- www.federalreserve.gov/newsevents/press/bcreg/ mentswhich,inturn,willlowertheprobabilityofits 20141125a.htm).Theagenciesrequirethatthe failureorinabilitytoserveasafinancialintermediary. nextroundofsubmissionsonJuly1,2015,demonstratethatthefirmsaremakingsignificantprogresstoaddresstheshortcomingsidentifiedinthe ResolutionPlanning agencylettersandaretakingsignificantactionsto improvetheirresolvabilityundertheU.S.Bank- In2011,theFederalReserveandtheFDICjointly ruptcyCode. issuedrulesimplementingtheresolutionplanrequirementforfinancialinstitutionsthataresubjectto Resolutionplansubmissionsmustincludebotha heightenedprudentialstandards.TheFederal confidentialandpublicportion.Thepublicportionof Reserve’sfinalresolutionplanrule,RegulationQQ,is eachresolutionplanisavailableontheFederal availableatwww.gpo.gov/fdsys/pkg/FR-2011-11-01/ Reserve’swebsite(www.federalreserve.gov/ html/2011-27377.htm. bankinforeg/resolution-plans.htm).TheFederal ReserveandtheFDICmaydeterminethataresolu- Inaphasedapproachbasedonnonbankassetsize, tionplanisnotcredibleorwouldnotfacilitatean initialresolutionplansweresubmittedbythefirst orderlyresolutionoftheinstitutionundertheU.S. groupof11financialinstitutionsinJuly2012,the BankruptcyCode. secondgroupoffourinstitutionsinJuly2013,andall othercoveredcompaniesinDecember2013.Since Inaccordancewithprinciplespromulgatedbythe thepassageoftherule,sevenfinancialinstitutions, FinancialStabilityBoard,theFederalReserveparticithreeofwhicharenonbankfinancialinstitutions, pateswithotherU.S.andinternationalsupervisorsin havequalifiedasnewcoveredcompaniesandfiled crisis-managementgroupmeetingstoenhancepretheirinitialresolutionplansin2014.Theinitialplan parednessforthecross-bordermanagementand submissionsidentifiedanddescribedthefirms’criti- resolutionofafailedglobalsystemicallyimportant caloperations,corebusinesslines,materiallegal financialinstitution. Enhancedprudentialstandards.TheDodd-Frank Recoveryandresolutionplanning.TheFederal WallStreetReformandConsumerProtectionActof Reserve,incollaborationwithotherU.S.agencies, 2010(Dodd-FrankAct)directstheBoard,inpart,to hascontinuedtoworkwithlargefinancialinstituestablishprudentialstandardsinordertopreventor tionstodeveloparangeof recoveryandresolution mitigateriskstoU.S.financialstabilitythatcould strategiesintheeventof theirdistressorfailure.(See arisefromthematerialfinancialdistressorfailure,or box1fordetails.) ongoingactivitiesof,large,interconnectedfinancial institutions.In2014,theBoardestablishedorpro- Communitybankfocus.In2014,theBoardrenewed posedtoestablishavarietyof enhancedprudential itsfocusonsupervisionandregulationof community standards.(See“EnhancedPrudentialStandards” banks(definedasastatememberbankand/orholdlaterinthissectionfordetails.) ingcompanywith$10billionorlessintotalconsoli-

SupervisionandRegulation 49 datedassets),withanemphasisonweighingthecosts nationoraninspectionisbeingconducted,the of regulatoryproposals,supervisoryguidance,and reviewof operationsentails examinationpracticesontheseinstitutionsagainst • anevaluationof theadequacyof governanceprosafety-and-soundnessbenefits.(Seebox2fordetails.) videdbytheboardandseniormanagement, includinganassessmentof internalpolicies,proce- Supervision dures,controls,andoperations; • anassessmentof thequalityof therisk-management TheFederalReserveisthefederalsupervisorand andinternalcontrolprocessesinplacetoidentify, regulatorof allU.S.BHCs,includingfinancialhold- measure,monitor,andcontrolrisks; ingcompanies,andstate-charteredcommercialbanks • anassessmentof thekeyfinancialfactorsof capithataremembersof theFederalReserveSystem.The tal,assetquality,earnings,andliquidity;and FederalReservealsohasresponsibilityforsupervisingtheoperationsof allEdgeActandagreement • areviewforcompliancewithapplicablelawsand corporations,theinternationaloperationsof state regulations. memberbanksandU.S.BHCs,andtheU.S.operationsof foreignbankingorganizations.Furthermore, Table1providesinformationonexaminationsand throughtheDodd-FrankAct,theFederalReserve inspectionsconductedbytheFederalReserveduring hasbeenassignedresponsibilitiesfornonbankfinan- thepastfiveyears. cialfirmsandfinancialmarketutilities(FMUs)des- ConsolidatedSupervision ignatedbytheFinancialStabilityOversightCouncil (FSOC)assystemicallyimportant.Inaddition,the Consolidatedsupervision,amethodof supervision Dodd-FrankActtransferredauthorityforconsoli- thatencompassestheparentcompanyanditssubsiddatedsupervisionof morethan400savingsandloan iaries,allowstheFederalReservetounderstandthe holdingcompanies(SLHCs)andtheirnon- organization’sstructure,activities,resources,risks, depositorysubsidiariesfromtheformerOfficeof andfinancialandoperationalresilience.Working ThriftSupervision(OTS)totheFederalReserve. withotherrelevantsupervisorsandregulators,the FederalReserveseekstoensurethatfinancial,opera- Inoverseeingtheinstitutionsunderitsauthority,the tional,orotherdeficienciesareaddressedbeforethey FederalReserveseeksprimarilytopromotesafety poseadangertotheconsolidatedorganization,its andsoundness,includingcompliancewithlawsand bankingoffices,orthebroadereconomy.2 regulations. Largefinancialinstitutionsincreasinglyoperateand Safety and Soundness managetheirintegratedbusinessesacrosscorporate boundaries.Financialtroubleinonepartof afinan- TheFederalReserveusesarangeof supervisory cialinstitutioncanspreadrapidlytootherpartsof activitiestopromotethesafetyandsoundnessof theinstitution.Risksthatcrosslegalentitiesorthat financialinstitutionsandmaintainacomprehensive aremanagedonaconsolidatedbasiscannotbe understandingandassessmentof eachfirm.These monitoredproperlythroughsupervisionthatis activitiesincludehorizontalreviews,firm-specific directedatanyoneof thelegalentitysubsidiaries examinationsandinspections,continuousmonitor- withintheoverallorganization. ingandsurveillanceactivities,andimplementationof enforcementorothersupervisoryactionsasneces- Tostrengthenitssupervisionof thelargest,most sary.TheFederalReservealsoprovidestrainingand complexfinancialinstitutions,theFederalReserve technicalassistancetoforeignsupervisorsand createdacentralizedmultidisciplinarybodycalled minority-ownedanddenovodepositoryinstitutions. theLargeInstitutionSupervisionCoordinating Committee(LISCC)tooverseethesupervisionand ExaminationsandInspections evaluateconditionsof supervisedfirms.Thecommitteealsodevelopscross-firmperspectivesandmoni- TheFederalReserveconductsexaminationsof state torsinterconnectednessandcommonpracticesthat memberbanks,FMUs,theU.S.branchesandagencouldleadtosystemicrisk. ciesof foreignbanks,andEdgeActandagreement corporations.Inaprocessdistinctfromexamina- 2 “Bankingoffices”aredefinedasU.S.depositoryinstitutionsubtions,itconductsinspectionsof holdingcompanies sidiaries,aswellastheU.S.branchesandagenciesofforeign andtheirnonbanksubsidiaries.Whetheranexami- bankingorganizations.

50 101stAnnualReport|2014 Box 2. Efforts to Tailor Supervision for Community Banking Organizations In2011,theBoardestablishedacommunityand • Communicatingexpectationsrelatedtothe regionalbanksubcommitteeinordertobetterunder- supervisionofcommunitybankingorganizastandandrespondtoconcernsraisedbytheseinsti- tions.Insupportofthisobjective,applicability tutions.TheBoardiscommittedtoensuringthat statementswereaddedtonewsupervisory regulatoryrequirementsbothsuitcommunitybank proposalstohelpcommunitybankersmore characteristicsandfosterhealthylendingconditions. readilyidentifyaspectsofsupervisorydirec- During2014,thesubcommitteesoughtadditional tivespertinenttotheirorganizations.Inaddiperspectivesoncommunitybankconcernsand tion,stafffromtheBoardofGovernorshad exploredadditionalopportunitiestotailorcommunity regulardiscussionswithcommunitybank banksupervision.Keyaspectsoftheseefforts examinerstoclarifyexpectationsrelatedtothe includethefollowing: applicabilityofsupervisoryrulestocommunity banks.Withasimilarobjective,theFederal 1. Consideringtheimpactofnewandexisting Reservebegantoenhancethecommunity regulationsoncommunitybankingorganiza- bankexaminer-trainingcurriculumtoensure tionsandstreamliningregulatoryrules.Asub- thatsupervisoryexpectationsforlargerbanks committeeoftheBoardconvenedregularlyto donotmaketheirwayintothecurriculumor evaluatetheeffectsofregulatoryproposals, theexaminationprocess. supervisoryguidance,andexaminationpractices • Disseminatingsupervisorypublicationswith oncommunitybanks.Thesereviewshelpensure afocusoncommunitybankingorganizathatregulatorydirectivesarecommensuratewith tions.TheFederalReserveusesthefollowing thesizeandcomplexityofcommunitybanking Systempublicationstocommunicatewith organizations.Inaddition,throughout2014, communitybankingorganizationsonemerging throughaninternalreviewofallFederalReserve risksandimportantsupervisorymatters: guidanceandthroughparticipationininteragencyeffortstocomplywiththeEconomic —CommunityBankingConnections®— GrowthandRegulatoryPaperworkReduction Throughout2014,thepublicationoffereda Actof1996,theFederalReservebeganareview numberofarticlesfocusedontimelyregulatory ofoutstandingsupervisoryguidancetoidentify topics,includingloanpolicydevelopment, andaddressanyoutdated,undulyburdensome, cybersecurity,andthird-partyrelationship orunnecessaryrequirements. management(www .communitybankingconnections.org/). 2. Risk-focusingexaminationactivities.TheFederalReserveenhanceditsoffsitefinancial —FedLinks®—Articlespublishedthroughout screeningprocess,whichallowsdeploymentof 2014coveredtopicsoutliningsupervisory resourcesbasedontheriskprofileofindividual expectationsforanumberofbankingfuncinstitutions.Accordingly,examinationsofbanks tions,includingimplementationofthenew engagedinhigher-riskactivitieswillbemore capitalrules,developmentofcontingency involvedthanexaminationsofbanksengagedin fundingplans,andintroductionofnewprodless-riskyactivities. uctsandservices(www .communitybankingconnections.org/fedlinks). 3. Enhancingcommunicationwiththecommunitybankindustry.TheFederalReserveremains 4. Focusingoncommunitybankresearch.In committedtofosteringenhancedcommunica- 2014,forthesecondconsecutiveyear,thesubtionbetweenbankingsupervisorsandcommu- committeeworkedwithaninformalworking nitybankers.Primaryeffortstosupportthis groupofeconomistsfromtheresearchand objectiveincludethefollowing: supervisionfunctionsintheFederalReserve Systemtoconsiderandsupportsupervisorydeci- • MeetingwiththeCommunityDepository sionsrelativetocommunitybankingorganiza- InstitutionsAdvisoryCouncil.Establishedin tions.Findingsofresearchconductedbythis 2010,acouncilcomposedofcommunitybank, grouphelpedguidecommunitybankpolicy thrift,andcreditunionrepresentativesfrom developmentandimplementation.Further,in eachofthe12FederalReserveDistrictspro- 2014,forthesecondconsecutiveyear,theFedvidedtheBoardofGovernorswithindustry eralReserveBankofSt.Louis,incollaboration inputontheeconomy,lendingconditions,and withtheConferenceofStateBankSupervisors, othertopicsofinteresttocommunitybanking hostedaCommunityBankingResearchand organizations.During2014,thiscouncilpar- PolicyConferencefocusedontheroleofcommuticipatedinbiannualmeetingswithBoardoffi- nitybanksinthefinancialsystem.Aswiththefirst cialstocommunicatetheirviewsonboththe conference,thisconferencehelpedtohighlight bankingindustryandonpertinentregulatory theissuesmostimportanttocommunitybank matters. vitality.

SupervisionandRegulation 51 Table1.Statememberbanksandbankholdingcompanies,2010–14 Entity/item 2014 2013 2012 2011 2010 Statememberbanks Totalnumber 858 850 843 828 829 Totalassets(billionsofdollars) 2,233 2,060 2,005 1,891 1,697 Numberofexaminations 723 745 769 809 912 ByFederalReserveSystem 438 459 487 507 722 Bystatebankingagency 285 286 282 302 190 Top-tierbankholdingcompanies Large(assetsofmorethan$1billion) Totalnumber 522 505 508 491 482 Totalassets(billionsofdollars) 16,642 16,269 16,112 16,443 15,986 Numberofinspections 738 716 712 672 677 ByFederalReserveSystem1 706 695 691 642 654 Onsite 501 509 514 461 491 Offsite 205 186 177 181 163 Bystatebankingagency 32 21 21 30 23 Small(assetsof$1billionorless) Totalnumber 3,902 4,036 4,124 4,251 4,362 Totalassets(billionsofdollars) 953 953 983 982 991 Numberofinspections 2,824 3,131 3,329 3,306 3,340 ByFederalReserveSystem 2,737 2,962 3,150 3,160 3,199 Onsite 142 148 200 163 167 Offsite 2,595 2,814 2,950 2,997 3,032 Bystatebankingagency 87 169 179 146 141 Financialholdingcompanies Domestic 426 420 408 417 430 Foreign 40 39 38 40 43 1 Forlargebankholdingcompaniessubjecttocontinuous,risk-focusedsupervision,includesmultipletargetedreviews. Theframeworkfortheconsolidatedsupervisionof corporategovernance,riskmanagement,and LISCCfirmsandotherlargefinancialinstitutions recoveryplanning. wasissuedinDecember2012.3Thisframework 2. Reducingtheimpactonthefinancialsystemand strengthenstraditionalmicroprudentialsupervision thebroadereconomyintheeventof afirm’sfailure andregulationtoenhancethesafetyandsoundness ormaterialweakness.Eachfirmisexpectedto of individualfirmsandincorporatesmacroprudential ensurethesustainabilityof itscriticaloperations considerationstoreducepotentialthreatstothestaandbankingofficesunderabroadrangeof interbilityof thefinancialsystem.Theframeworkhastwo nalorexternalstresses.Thisrequires,among primaryobjectives: otherthings,effectiveresolutionplanningthat 1. Enhancingresiliencyof afirmtolowertheprob- addressesthecomplexityandtheinterconnectivabilityof itsfailureorinabilitytoserveasafinan- ityof thefirm’soperations. cialintermediary.Eachfirmisexpectedtoensure thattheconsolidatedorganization(orthecom- Theframeworkisdesignedtosupportatailored binedU.S.operationsinthecaseof foreignbank- supervisoryapproachthataccountsfortheunique ingorganizations)anditscorebusinesslinescan riskcharacteristicsof eachfirm,includingthenature surviveunderabroadrangeof internalorexter- anddegreeof potentialsystemicriskinherentina nalstresses.Thisrequiresfinancialresilienceby firm’sactivitiesandoperations,andisbeingimplemaintainingsufficientcapitalandliquidity,and mentedinamulti-stageapproach. operationalresiliencebymaintainingeffective TheFederalReserveusesarangeof supervisory 3 Formoreinformationaboutthesupervisoryframework,seethe activitiestomaintainacomprehensiveunderstanding Board’spressreleaseandSRletter12-17/CA12-14atwww .federalreserve.gov/newsevents/press/bcreg/20121217a.htm. andassessmentof eachlargefinancialinstitution:

52 101stAnnualReport|2014 • Coordinatedhorizontalreviews.Thesereviewsinvolve tionproceduresaretailoredtoeachorganization’s examiningseveralinstitutionssimultaneouslyand size,complexity,riskprofile,andcondition.The encompassfirm-specificsupervisionandthedevel- supervisoryprogramforaninstitution,regardlessof opmentof cross-firmperspectives.Inaddition,the itsassetsize,entailsbothoff-siteandon-sitework, FederalReserveusesamultidisciplinaryapproachto includingdevelopmentof supervisoryplans,predrawonawiderangeof perspectives,including examinationvisits,detaileddocumentation,and thosefromsupervisors,examiners,economists, preparationof examinationreportstailoredtothe financialexperts,paymentssystemsanalysts,and scopeandfindingsof theexamination. otherspecialists.Examplesincludeanalysisof capital adequacyandplanningthroughtheComprehensive CapitalPlanningandStressTests CapitalAnalysisandReview(CCAR),aswellas Sincethefinancialcrisis,theBoardhasledaseriesof horizontalevaluationsof resolutionplansandincen- initiativestostrengthenthecapitalpositionsof the tivecompensationpractices. largestbankingorganizations.Tworelatedinitiatives aretheCCARandtheDodd-FrankActstresstests • Firm-specificexaminationsand/orinspectionsand (DFAST). continuousmonitoringactivities.Theseactivitiesare designedtomaintainanunderstandingandassess- CCARisahorizontalexercisetoevaluatecapital mentacrossthecoreareasof supervisoryfocus. adequacy,internalcapitaladequacyassessmentpro- Theseactivitiesincludereviewandassessmentof cesses,andplannedcapitaldistributionsatlarge changesinstrategy,inherentrisks,controlpro- BHCs.InCCAR,theFederalReserveassesses cesses,andkeypersonnel,andfollow-uponpreviwhethertheseBHCshavesufficientcapitaltowithouslyidentifiedconcerns(forexample,areassubstandhighlystressfuloperatingenvironmentsandbe jecttoenforcementactions),oremerging abletocontinueoperations,maintainreadyaccessto vulnerabilities. funding,meetobligationstocreditorsandcounter- • Interagencyinformationsharingandcoordination. parties,andserveascreditintermediaries.Capitalis Indevelopingandexecutingadetailedsupervisory centraltoaBHC’sabilitytoabsorblossesandconplanforeachfirm,theFederalReservegenerally tinuetolendtocreditworthybusinessesandconsumreliestothefullestextentpossibleontheinforma- ers.ThroughCCAR,aBHC’scapitaladequacyis tionandassessmentsprovidedbyotherrelevant evaluatedonaforward-looking,post-stressbasisas supervisorsandfunctionalregulators.TheFederal theBHCsarerequiredtodemonstrateintheircapital Reserveactivelyparticipatesininteragencyinfor- planshowtheywillmaintain,throughoutavery mationsharingandcoordination,consistentwith stressfulperiod,capitalaboveatier1commonratio applicablelaws,topromotecomprehensiveand of 5percentandaboveminimumregulatorycapital effectivesupervisionandlimitunnecessaryduplica- requirements.Fromamicroprudentialperspective, tionof informationrequests.Supervisoryagencies theCCARprovidesastructuredmeansforsupervicontinuetoenhanceformalandinformaldiscus- sorstoassessnotonlywhethertheseBHCshold sionstojointlyidentifyandaddresskeyvulner- enoughcapital,butalsowhethertheyareabletorapabilitiesandtocoordinatesupervisorystrategies idlyandaccuratelydeterminetheirriskexposures,an forlargefinancialinstitutions. essentialelementof effectiveriskmanagement.From amacroprudentialperspective,theuseof acommon • Internalauditandcontrolfunctions.Incertain scenarioallowsustolearnhowaparticularriskor instances,supervisorsmaybeabletorelyonafirm’s combinationof risksmightaffectthebankingsystem internalauditorinternalcontrolfunctionsindevel- asawhole—notjustindividualinstitutions. opingacomprehensiveunderstandingand assessment. In2014,CCARincorporatedthetransitionarrangementsandminimumcapitalrequirementsfromthe TheFederalReserveusesarisk-focusedapproachto revisedregulatorycapitalframeworkimplementing supervision,withactivitiesdirectedtowardidentify- theBaselIIIregulatorycapitalreformstheBoard ingtheareasof greatestrisktofinancialinstitutions finalizedinJuly2013.The2014CCARresultsare andassessingtheabilityof institutions’management availableatwww.federalreserve.gov/newsevents/press/ processestoidentify,measure,monitor,andcontrol bcreg/ccar_20140326.pdf. thoserisks.Formedium-andsmall-sizedfinancial institutions,therisk-focusedconsolidatedsupervi- DFASTisasupervisorystresstestconductedbythe sionprogramprovidesthatexaminationandinspec- FederalReservetoevaluatewhetherlargeBHCsand

SupervisionandRegulation 53 allnonbankfinancialcompaniesdesignatedbythe BankHoldingCompanies FSOChavesufficientcapitaltoabsorblossesresult- Atyear-end2014,atotalof 4,922U.S.BHCswerein ingfromstressfuleconomicandfinancialmarket operation,of which4,424weretop-tierBHCs.These conditions.TheDodd-FrankActalsorequiresBHCs organizationscontrolled4,755insuredcommercial andotherfinancialcompaniessupervisedbytheFed- banksandheldapproximately99percentof all eralReservetoconducttheirownstresstests. insuredcommercialbankassetsintheUnitedStates. Together,theDodd-FrankActsupervisorystress testsandthecompany-runstresstestsareintendedto FederalReserveguidelinescallforannualinspections providecompanymanagementandboardsof direcof largeBHCsandcomplexsmallercompanies.In tors,thepublic,andsupervisorswithforwardjudgingthefinancialconditionof thesubsidiary lookinginformationtohelpgaugethepotentialeffect banksownedbyholdingcompanies,FederalReserve of stressfulconditionsonthecapitaladequacyof examinersconsultexaminationreportspreparedby theselargebankingorganizations.The2014DFAST thefederalandstatebankingauthoritiesthathave resultsareavailableatwww.federalreserve.gov/ primaryresponsibilityforthesupervisionof those newsevents/press/bcreg/bcreg20140320a1.pdf. banks,therebyminimizingduplicationof effortand reducingthesupervisoryburdenonbanking StateMemberBanks organizations. Attheendof 2014,1,923banks(excludingnondepositorytrustcompaniesandprivatebanks)were Inspectionsof BHCs,includingfinancialholding membersof theFederalReserveSystem,of which companies,arebuiltaroundaratingsystemintro- 858werestatechartered.FederalReserveSystem ducedinearlyJanuaryof 2005.Thesystemreflects memberbanksoperated57,265branches,and theshiftinsupervisorypracticesawayfromahistoriaccountedfor34percentof allcommercialbanksin calanalysisof financialconditiontowardamore theUnitedStatesandfor71percentof allcommerdynamic,forward-lookingassessmentof riskcialbankingoffices.State-charteredcommercial managementpracticesandfinancialfactors.Under banksthataremembersof theFederalReserve,comthesystem,knownasRFIbutmorefullytermed monlyreferredtoasstatememberbanks,represented RFI/C(D),holdingcompaniesareassignedacomapproximately15percentof allinsuredU.S.commerpositerating(C)thatisbasedonassessmentsof cialbanksandheldapproximately15percentof all threecomponents:RiskManagement(R),Financial insuredcommercialbankassetsintheUnitedStates. Condition(F),andthepotentialImpact(I)of the parentcompanyanditsnondepositorysubsidiaries Undersection10of theFederalDepositInsurance onthesubsidiarydepositoryinstitution.Thefourth Act,asamendedbysection111of theFederal component,DepositoryInstitution(D),isintended DepositInsuranceCorporationImprovementActof tomirrortheprimarysupervisor’sratingof thesub- 1991andbytheRiegleCommunityDevelopment sidiarydepositoryinstitution.6NoncomplexBHCs andRegulatoryImprovementActof 1994,theFed- withconsolidatedassetsof $1billionorlessaresuberalReservemustconductafull-scope,on-siteexami- jecttoaspecialsupervisoryprogramthatpermitsa nationof statememberbanksatleastonceayear,4 moreflexibleapproach.7In2014,theFederalReserve althoughcertainwell-capitalized,well-managedorga- conducted695inspectionsof largeBHCsand2,737 nizationswithtotalassetsof lessthan$500million inspectionsof small,noncomplexBHCs. maybeexaminedonceevery18months.5TheFederalReserveconducted438examsof statemember FinancialHoldingCompanies banksin2014. UndertheGramm-Leach-BlileyAct,BHCsthatmeet certaincapital,managerial,andotherrequirements 6 Eachofthefirsttwocomponentshasfoursubcomponents: RiskManagement—(1)BoardandSeniorManagementOver- 4 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. 5 TheFinancialServicesRegulatoryReliefActof2006,which 7 Thespecialsupervisoryprogramwasimplementedin1997,most becameeffectiveinOctober2006,authorizedthefederalbank- recentlymodifiedin2013.SeeSRletter13-21foradiscussionof ingagenciestoraisethethresholdfrom$250millionto thefactorsconsideredindeterminingwhetheraBHCiscom- $500million,andfinalrulesincorporatingthechangeintoexist- plexornoncomplex(www.federalreserve.gov/bankinforeg/ ingregulationswereissuedonSeptember21,2007. srletters/sr1321.htm).

54 101stAnnualReport|2014 Table2.Savingsandloanholdingcompanies,2011–14 Entity/item 2014 2013 2012 20111 Top-tiersavingsandloanholdingcompanies Large2 Totalnumber 76 81 94 n/a Totalassets $1,492,964,310 $1,500,412,835 $1,715,259,113 n/a Numberofexaminations ByFederalReserveSystem Onsite 45 58 53 n/a Offsite 37 13 27 n/a Bystates’DepartmentofInsurance 1 1 2 n/a Small Totalnumber 221 251 272 n/a Totalassets(billionsofdollars) $ 64,813,982 $ 75,952,384 $ 81,558,809 n/a Numberofexaminations ByFederalReserveSystem Onsite 10 21 46 n/a Offsite 202 237 183 n/a 1 ResponsibilityforSLHCswastransferredtotheBoardin2011.Assetdataarenotavailableforyear-end2011duetotransition. 2 ExcludesSIFISLHCs(AIGandGE). mayelecttobecomefinancialholdingcompaniesand informationonexaminationsof SLHCsforthepast therebyengageinawiderrangeof financialactivities, threeyears. includingfull-scopesecuritiesunderwriting,merchant banking,andinsuranceunderwritingandsales.Asof Boardstaff continuestoworkonoperational,policy, year-end2014,426domesticBHCsand40foreign andsupervisoryissueswhileengagingtheindustry, bankingorganizationshadfinancialholdingcompany ReserveBanks,andotherregulatoryagencies.Nearly status.Of thedomesticfinancialholdingcompanies, allof theSLHCsarenowfilingallrequiredFederal 23hadconsolidatedassetsof $50billionormore;32, Reserveregulatoryreports.Significantmilestones between$10billionand$50billion;122,between achievedincludetheformalincorporationof Federal $1billionand$10billion;and249,lessthan$1billion. ReservepoliciesintotheSLHCsupervisionprogram. Severalcomplexpolicyissuescontinuetobe SavingsandLoanHoldingCompanies addressedbytheBoard,includingthoserelatedto TheDodd-FrankActtransferredresponsibilityfor consolidatedcapitalrequirementsforinsurance supervisionandregulationof SLHCsfromtheOTS SLHCs,intermediateholdingcompanies,andthe totheFederalReserveinJuly2011.Atyear-end adoptionof formalratingsystems. 2014,atotalof 542SLHCswereinoperation,of which297weretoptierSLHCs.TheseSLHCscon- FinancialMarketUtilities trol305thriftinstitutionsandinclude27companies FMUsmanageoroperatemultilateralsystemsfor engagedprimarilyinnonbankingactivities,suchas thepurposeof transferring,clearing,orsettlingpayinsuranceunderwriting(15SLHCs),securitiesbro- ments,securities,orotherfinancialtransactions kerage(6SLHCs),andcommercialactivities(6 amongfinancialinstitutionsorbetweenfinancial SLHCs).ExcludingnonbankSIFISLHCs,the25 institutionsandtheFMU.UndertheFederal largestSLHCsaccountedformorethan$1.3trillion ReserveAct,theFederalReservesupervisesFMUs of totalcombinedassets.Approximately90percent thatarecharteredasmemberbanksorEdgeActcorof SLHCsengageprimarilyindepositoryactivities. porationsandcooperateswithotherfederalbanking Thesefirmsholdapproximately20.8percent supervisorstosuperviseFMUsconsideredbankser- ($321billion)of thetotalcombinedassetsof all viceprovidersundertheBankServiceCompanyAct. SLHCs.TheOfficeof theComptrollerof theCurrency(OCC)istheprimaryregulatorformostof the InJuly2012,theFSOCvotedtodesignateeight subsidiarysavingsassociationsof thefirmsengaged FMUsassystemicallyimportantundertitleVIIIof primarilyindepositoryactivities.Table2provides theDodd-FrankAct.Asaresultof thesedesigna-

SupervisionandRegulation 55 tions,theFederalReserveassumedanexpandedset DesignatedNonfinancialCompanies of responsibilitiesrelatedtothesedesignatedFMUs In2013,theFSOCdesignatedthreenonbankfinanthatincludepromotinguniformrisk-management cialcompaniesforsupervisionbytheBoard:Ameristandards,playinganenhancedroleinthesupervi- canInternationalGroup,Inc.;GeneralElectricCapisionof designatedFMUs,reducingsystemicrisk, talCorporation,Inc.(GECC);andPrudentialFinanandsupportingthestabilityof thebroaderfinancial cial,Inc.Inlate2014,theFSOCdesignatedafourth system.FordesignatedFMUssubjecttotheFederal nonbankfinancialcompany,Metlife,Inc.TheFed- Reserve’ssupervision,theBoardestablishedrisk- eralReserve’ssupervisoryapproachforthesefirmsas managementstandardsandexpectationsthatare designatedcompaniesisconsistentwiththeapproach articulatedinBoardRegulationHH(effectiveSep- usedforthelargestfinancialholdingcompanies,taitember2012).TheBoardsubsequentlyrevisedthese loredtoaccountfordifferentmaterialcharacteristics standardstotakeintoaccountnewinternational of eachfirm.TheDodd-FrankActrequiresthe standards(effectiveDecember2014).Inadditionto Boardtoapplyenhancedprudentialstandardsand settingminimumrisk-managementstandards,Regu- earlyremediationrequirementstoBHCswithatleast lationHHalsoestablishesrequirementsforthe $50billioninconsolidatedassetsandtothenonbank advancenoticeof proposedmaterialchangestothe financialcompaniesdesignatedbytheFSOCfor rules,procedures,oroperationsof adesignated supervisionbytheBoard.Theactauthorizesthe FMUforwhichtheFederalReserveisthesupervi- Boardtotailortheapplicationof thesestandards soryagencyundertitleVIIIof theDodd-FrankAct. andrequirementstodifferentcompaniesonanindi- Section234.6of RegulationHH(effectiveFebru- vidualbasisorbycategory.Asdiscussedin ary2014)establishestermsandconditionsunder “EnhancedPrudentialStandards”laterinthissecwhichtheBoardmayauthorizeadesignatedFMU tion,inNovembertheBoardinvitedpubliccomment accesstoReserveBankaccountsandservices. onenhancedprudentialstandardsfortheregulation andsupervisionof GECC. TheFederalReserve’srisk-basedsupervisionprogram forFMUsisadministeredbytheFMUSupervision Committee(FMU-SC).TheFMU-SCisamultidisci- InternationalActivities plinarycommitteeof seniorsupervision,payment TheFederalReservesupervisestheforeignbranches policy,andlegalstaff attheBoardof Governorsand andoverseasinvestmentsof memberbanks,Edge ReserveBankswhoareresponsiblefor,andknowl- Actandagreementcorporations,andBHCs(includedgeableabout,supervisoryissuesforFMUs.The ingtheinvestmentsbyBHCsinexporttradingcom- FMU-SC’sprimaryobjectiveistoprovideseniorlevel panies).Inaddition,itsupervisestheactivitiesthat oversight,consistency,anddirectiontotheFederal foreignbankingorganizationsconductthroughenti- Reserve’ssupervisoryprocessforFMUs.The tiesintheUnitedStates,includingbranches,agen- FMU-SCcoordinateswiththeLISCConissues cies,representativeoffices,andsubsidiaries. relatedtolargefinancialinstitutions’rolesinFMUs; thepayment,clearing,andsettlementactivitiesof largefinancialinstitutions;andtheFMUactivitiesand Foreignoperationsof U.S.bankingorganizations.In implicationsforlargefinancialinstitutions. supervisingtheinternationaloperationsof state memberbanks,EdgeActandagreementcorpora- Inanefforttopromotegreaterfinancialmarketsta- tions,andBHCs,theFederalReservegenerallyconbilityandmitigatesystemicrisk,theBoardworks ductsitsexaminationsorinspectionsattheU.S.head closelywiththeSecuritiesandExchangeCommission officesof theseorganizations,wheretheultimate (SEC)andtheCommodityFuturesTradingCom- responsibilityfortheforeignofficesresides.Examinmission,bothof whichalsohavesupervisoryauthor- ersalsovisittheoverseasofficesof U.S.banking ityforcertainFMUs.TheFederalReserve’swork organizationstoobtainfinancialandoperatinginforwiththeseagenciesundertitleVIII,includingthe mationand,insomeinstances,totesttheiradherence sharingof appropriateinformationandparticipation tosafeandsoundbankingpracticesandcompliance indesignatedFMUexaminations,aimstoimprove withrulesandregulations.Examinationsabroadare consistencyinFMUsupervision,promoterobust conductedwiththecooperationof thesupervisory FMUriskmanagement,andimprovetheregulators’ authoritiesof thecountriesinwhichtheytakeplace; abilitytomonitorandmitigatesystemicrisk.

56 101stAnnualReport|2014 fornationalbanks,theexaminationsarecoordinated Reserve—incoordinationwithappropriatestate withtheOCC. regulatoryauthorities—examinesstate-licensed,non- FDIC-insuredbranchesandagenciesof foreign Attheendof 2014,39memberbankswereoperating bankson-siteatleastonceevery18months.8Inmost 444branchesinforeigncountriesandoverseasareas cases,on-siteexaminationsareconductedatleast of theUnitedStates;22nationalbankswereoperat- onceevery12months,buttheperiodmaybe ing391of thesebranches,and17statemember extendedto18monthsif thebranchoragencymeets bankswereoperatingtheremaining53.Inaddition, certaincriteria.Aspartof thesupervisoryprocess,a 11nonmemberbankswereoperating18branchesin reviewof thefinancialandoperationalprofileof foreigncountriesandoverseasareasof theUnited eachorganizationisconductedtoassesstheorgani- States. zation’sabilitytosupportitsU.S.operationsandto determinewhatrisks,if any,theorganizationposes EdgeActandagreementcorporations.EdgeActcor- tothebankingsystemthroughitsU.S.operations. porationsareinternationalbankingorganizations TheFederalReserveconductedorparticipatedwith charteredbytheBoardtoprovideallsegmentsof the stateandfederalregulatoryauthoritiesin512exami- U.S.economywithameansof financinginterna- nationsin2014. tionalbusiness,especiallyexports.Agreementcorporationsaresimilarorganizations,stateorfederally CompliancewithRegulatoryRequirements chartered,thatenterintoagreementswiththeBoard TheFederalReserveexaminesinstitutionsforcomtorefrainfromexercisinganypowerthatisnotper- pliancewithabroadrangeof legalrequirements, missibleforanEdgeActcorporation.Sections25 includinganti-money-laundering(AML)andconand25Aof theFederalReserveActgrantEdgeAct sumerprotectionlawsandregulations,andother andagreementcorporationspermissiontoengagein lawspertainingtocertainbankingandfinancial internationalbankingandforeignfinancialtransac- activities.Mostcompliancesupervisionisconducted tions.Thesecorporations,mostof whicharesubsid- undertheoversightof theBoard’sDivisionof Bankiariesof memberbanks,may(1)conductadeposit ingSupervisionandRegulation,butconsumercomandloanbusinessinstatesotherthanthatof thepar- pliancesupervisionisconductedundertheoversight ent,providedthatthebusinessisstrictlyrelatedto of theDivisionof ConsumerandCommunity internationaltransactionsand(2)makeforeign Affairs.Thetwodivisionscoordinatetheirefforts investmentsthatarebroaderthanthosepermissible witheachotherandalsowiththeBoard’sLegalDiviformemberbanks. siontoensureconsistentandcomprehensiveFederal Reservesupervisionforcompliancewithlegal Atyear-end2014,outof 44bankingorganizations requirements. charteredasEdgeActoragreementcorporations,3 operated7EdgeActandagreementbranches.These Anti-Money-LaunderingExaminations corporationsareexaminedannually. TheTreasuryregulationsimplementingtheBank SecrecyAct(BSA)generallyrequirebanksandother U.S.activitiesof foreignbanks.Foreignbankscon- typesof financialinstitutionstofilecertainreports tinuetobesignificantparticipantsintheU.S.bank- andmaintaincertainrecordsthatareusefulincrimiingsystem.Asof year-end2014,163foreignbanks nal,tax,orregulatoryproceedings.TheBSAand from49countriesoperated187state-licensed separateBoardregulationsrequirebankingorganizabranchesandagencies,of which6wereinsuredby tionssupervisedbytheBoardtofilereportsonsuspitheFederalDepositInsuranceCorporation(FDIC), ciousactivityrelatedtopossibleviolationsof federal and48OCC-licensedbranchesandagencies,of law,includingmoneylaundering,terrorismfinancwhich4wereinsuredbytheFDIC.Theseforeign ing,andotherfinancialcrimes.Inaddition,BSAand banksalsoowned10EdgeActandagreementcorpo- Boardregulationsrequirethatbanksdevelopwritten rationsand1commerciallendingcompany.Inaddi- BSAcomplianceprogramsandthattheprogramsbe tion,theyheldacontrollinginterestin47U.S.com- formallyapprovedbybankboardsof directors.The mercialbanks.Altogether,theU.S.officesof these FederalReserveisresponsibleforexamininginstituforeignbankscontrolledapproximately21percentof tionsforcompliancewithapplicableAMLlawsand U.S.commercialbankingassets.These163foreign banksalsooperated89representativeoffices;an 8 TheOCCexaminesfederallylicensedbranchesandagencies, additional34foreignbanksoperatedintheUnited andtheFDICexaminesstate-licensedFDIC-insuredbranches Statesthrougharepresentativeoffice.TheFederal incoordinationwiththeappropriatestateregulatoryauthority.

SupervisionandRegulation 57 regulationsandconductssuchexaminationsinaccor- TransferAgents dancewiththeFederalFinancialInstitutionsExami- AsdirectedbytheSecuritiesExchangeActof 1934, nationCouncil’s(FFIEC)BankSecrecyAct/Anti- theFederalReserveconductsspecializedexamina- MoneyLaunderingExaminationManual.9 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.During2014,theFedalsoconductsspecializedexaminationsof certain eralReserveconductedtransferagentexaminations nonbankentitiesthatextendcreditsubjecttothe at7of the36statememberbanksandBHCsthat Board’smarginregulations. wereregisteredastransferagents. InformationTechnologyActivities GovernmentandMunicipalSecurities Inrecognitionof theimportanceof information DealersandBrokers technologytosafeandsoundoperationsinthefinan- TheFederalReserveisresponsibleforexamining cialindustry,theFederalReservereviewstheinfor- statememberbanksandforeignbanksforcomplimationtechnologyactivitiesof supervisedfinancial ancewiththeGovernmentSecuritiesActof 1986 institutions,aswellascertainindependentdatacen- andwiththeTreasuryregulationsgoverningdealing tersthatprovideinformationtechnologyservicesto andbrokeringingovernmentsecurities.Fourteen theseorganizations.Allsafety-and-soundnessexami- statememberbanksandsixstatebranchesof foreign nationsincludearisk-focusedreviewof information bankshavenotifiedtheBoardthattheyaregoverntechnologyrisk-managementactivities.During2014, mentsecuritiesdealersorbrokersnotexemptfrom theFederalReservecontinuedastheleadsupervisory theTreasury’sregulations.During2014,theFederal agencyfor8of the16large,multiregionaldatapro- Reserveconductedsevenexaminationsof broker– cessingservicersrecognizedonaninteragencybasis. dealeractivitiesingovernmentsecuritiesatthese organizations.Theseexaminationsaregenerallycon- FiduciaryActivities ductedconcurrentlywiththeFederalReserve’s TheFederalReservehassupervisoryresponsibility examinationof thestatememberbankorbranch. forstatememberbanksandstatemembernondepositorytrustcompanies,whichholdassetsinvari- TheFederalReserveisalsoresponsibleforensuring ousfiduciaryandcustodialcapacities.On-siteexami- thatstatememberbanksandBHCsthatactas nationsof fiduciaryandcustodialactivitiesarerisk- municipalsecuritiesdealerscomplywiththeSecurifocusedandentailthereviewof anorganization’s tiesActAmendmentsof 1975.Municipalsecurities compliancewithlaws,regulations,andgeneralfidu- dealersareexamined,pursuanttotheMunicipal ciaryprinciples,includingeffectivemanagementof SecuritiesRulemakingBoard’sruleG-16,atleast conflictsof interest;managementof legal,opera- onceeverytwocalendaryears.Eightof the10entitional,andreputationalriskexposures;andaudit tiessupervisedbytheFederalReservethatdealtin andcontrolprocedures.In2014,FederalReserve municipalsecuritieswereexaminedduring2014. examinersconducted97fiduciaryexaminations, SecuritiesCreditLenders excludingtransferagentexaminations,of statememberbanks. UndertheSecuritiesExchangeActof 1934,the Boardisresponsibleforregulatingcreditincertain transactionsinvolvingthepurchasingorcarryingof securities.Aspartof itsgeneralexaminationprogram,theFederalReserveexaminesthebanksunder 9 TheFFIECisaninteragencybodyoffinancialregulatoryagen- itsjurisdictionforcompliancewithBoardRegulaciesestablishedtoprescribeuniformprinciples,standards,and tionU(CreditbyBanksandPersonsotherthanBroreportformsandtopromoteuniformityinthesupervisionof financialinstitutions.TheCouncilhassixvotingmembers:the kersorDealersforthePurposeof Purchasingor BoardofGovernorsoftheFederalReserveSystem,theFDIC, CarryingMarginStock).TheFederalReservemay theNationalCreditUnionAdministration,theOCC,theConconductspecializedexaminationsof theselendersif sumerFinancialProtectionBureau,andthechairoftheState LiaisonCommittee. theyarenotalreadysubjecttosupervisionbythe

58 101stAnnualReport|2014 FarmCreditAdministrationortheNationalCredit In2014,theReserveBankscompleted117informal UnionAdministration(NCUA). enforcementactions.Informalenforcementactions includememorandaof understanding(MOU),com- CybersecurityandCriticalInfrastructure mitmentletters,andboardof directors’resolutions. TheFederalReserveisactivelyengagedwithinteragencygroupssuchastheFinancialandBanking SurveillanceandOff-SiteMonitoring InformationInfrastructureCommittee(FBIIC)and TheFederalReserveusesautomatedscreeningsystheFFIEC’sCybersecurityandCriticalInfrastruc- temstomonitorthefinancialconditionandperfortureWorkingGroup(CCIWG)toshareinformation manceof statememberbanksandBHCsinthe andcollaborateoncyber-andcriticalinfrastructure- periodbetweenon-siteexaminations.Suchmonitorrelatedissuesimpactingthefinancialservicessector. ingandanalysishelpsdirectexaminationresourcesto institutionsthathavehigherriskprofiles.Screening In2014,theFederalReserveconductedatargeted systemsalsoassistintheplanningof examinations cybersecurityassessmentonaselectgroupof large byidentifyingcompaniesthatareengaginginnewor financialinstitutionsandFMUs.TheFederalReserve complexactivities. andotherCCIWGmembersalsoconductedcybersecurityassessmentsatover500communityfinancial Theprimaryoff-sitemonitoringtoolusedbythe institutionstoevaluatetheircybersecurityriskexpo- FederalReserveistheSupervisionandRegulasureandpreparedness.Thecybersecurityassessment tionStatisticalAssessmentof BankRiskmodel(SRreviewedfinancialinstitutions’currentpracticesand SABR).Drawingmainlyonthefinancialdatathat overallpreparednessrelativetoriskmanagementand banksreportontheirReportsof Conditionand oversight,threatintelligenceandcollaboration,cyber- Income(CallReports),SR-SABRuseseconometric securitycontrols,externaldependencymanagement, techniquestoidentifybanksthatreportfinancial andcyberincidentmanagementandresilience. characteristicsweakerthanthoseof otherbanks assignedsimilarsupervisoryratings.Tosupplement TheFederalReserveisalsoactivelyengagedinrais- theSR-SABRscreening,theFederalReservealso ingfinancialinstitutionawarenessof supervisory monitorsvariousmarketdata,includingequity expectationsrelativetocybersecurityriskassessment prices,debtspreads,agencyratings,andmeasuresof andriskmitigation.In2014,theFederalReserve expecteddefaultfrequency,togaugemarketpercepcontributedtothelaunchof thenewFFIECcyberse- tionsof theriskinbankingorganizations.Inaddicurityawarenesswebpage,whichisacentralreposi- tion,theFederalReservepreparesquarterlyBank toryforcurrentandfutureFFIEC-relatedmaterials HoldingCompanyPerformanceReports(BHCPRs) oncybersecurity(www.ffiec.gov/cybersecurity.htm). foruseinmonitoringandinspectingsupervised bankingorganizations.TheBHCPRs,whichare EnforcementActions compiledfromdataprovidedbylargeBHCsinquar- TheFederalReservehasenforcementauthorityover terlyregulatoryreports(FRY-9CandFRY-9LP), thefinancialinstitutionsitsupervisesandtheiraffili- contain,forindividualcompanies,financialstatistics atedparties.Enforcementactionsmaybetakento andcomparisonswithpeercompanies.BHCPRsare addressunsafeandunsoundpracticesorviolations madeavailabletothepublicontheNationalInforof anylaworregulation.Formalenforcementactions mationCenter(NIC)website,whichcanbeaccessed includeceaseanddesistorders,writtenagreements, atwww.ffiec.gov. promptcorrectiveactiondirectives,removalandprohibitionorders,andcivilmoneypenalties.In2014, FederalReserveanalystsusePerformanceReport theFederalReservecompleted37formalenforce- InformationandSurveillanceMonitoring(PRISM), mentactions.Civilmoneypenaltiestotaling aqueryingtool,toaccessanddisplayfinancial,sur- $817,653,925wereassessed.Asdirectedbystatute,all veillance,andexaminationdata.Intheanalytical civilmoneypenaltiesareremittedtoeithertheTreas- module,userscancustomizethepresentationof uryortheFederalEmergencyManagementAgency. institutionalfinancialinformationdrawnfromCall Enforcementordersandpromptcorrectiveaction Reports,UniformBankPerformanceReports,FR directives,whichareissuedbytheBoard,andwritten Y-9statements,BHCPRs,andotherregulatory agreements,whichareexecutedbytheReserve reports.Inthesurveillancemodule,userscangener- Banks,aremadepublicandarepostedonthe atereportssummarizingtheresultsof surveillance Board’swebsite(www.federalreserve.gov/apps/ screeningforbanksandBHCs.During2014,two enforcementactions/). majorandtwominorupgradestotheweb-based

SupervisionandRegulation 59 PRISMapplicationwerecompletedtoenhancethe • coordinatestrainingprogramsthroughoutthe user’sexperienceandprovidethelatesttechnology. regionwiththehelpof nationalbankingsupervisorsandinternationalagencies;and, TheFederalReserveworksthroughtheFFIECTask • aimstohelpmembersdevelopbankinglaws,regu- ForceonSurveillanceSystemstocoordinatesurveillations,andsupervisorypracticesthatconformto lanceactivitieswiththeotherfederalbankingagencies. internationalbestpractices. TrainingandTechnicalAssistance TheFederalReservecontributessignificantlyto TheFederalReserveprovidestrainingandtechnical ASBA’sorganizationalmanagementandtoitstrainassistancetoforeignsupervisorsandminority-owned ingandtechnicalassistanceactivities.Moreover,the depositoryinstitutions. FederalReservealsocontributestotheregionaltrain- InternationalTrainingandTechnicalAssistance ingprovisionundertheAsiaPacificEconomicCooperationFRTI. In2014,theFederalReservecontinuedtoprovide technicalassistanceonbanksupervisorymattersto foreigncentralbanksandsupervisoryauthorities. EffortstoSupportMinority-Owned TechnicalassistanceinvolvesvisitsbyFederal DepositoryInstitutions Reservestaff memberstoforeignauthoritiesaswell TheFederalReserveSystemimplementsitsresponsiasconsultationswithforeignsupervisorswhovisit bilitiesundersection367of theDodd-FrankActpritheBoardortheReserveBanks.Inaddition,the marilythroughitsPartnershipforProgress(PFP) MiddleEastandNorthAfrica(MENA)Financial program.Establishedin2008,thisprogrampromotes Regulator’sTrainingInitiative(FRTI)successfully theviabilityof minority-ownedinstitutions(MOIs) concluded.This10-yearinitiativewasestablishedto byfacilitatingactivitiesdesignedtostrengthentheir providetechnicalassistanceandbanksupervision businessstrategies,maximizetheirresources,and trainingtocentralbanksandsupervisoryauthorities increasetheirawarenessandunderstandingof reguintheregion.MENAFRTI’smanyaccomplishments latorytopics.Inaddition,theFederalReservecontinoverthepastdecadeincludethesponsorshipof over uestomaintainthePFPwebsite,whichsupports 50programsandconferencesaswellasmanyshort- MOIsbyprovidingthemwithtechnicalinformation term,on-the-jobtrainingopportunitiesprovidedfor andlinkstousefulresources(www.fedpartnership MENAregulatorswithU.S.bankingagencies.Now .gov).Representativesfromeachof the12Reserve thattheMENAFRTIhasconcluded,theFederal Bankdistricts,alongwithstaff fromtheBoardof Reservewillforgetrainingpartnershipswiththecen- Governors,continuetooffertechnicalassistancetaitralbanksof Bahrain,UnitedArabEmirates,and loredtoMOIsbyprovidingtargetedsupervisory Qatartocontinuetechnicalcapacitybuilding guidance,identifyingadditionalresources,andfosterthroughouttheregion. ingmutuallybeneficialpartnershipsbetweenMOIs andcommunityorganizations.Asof year-end2014, In2014,theFederalReserveofferedanumberof theFederalReserve’sMOIportfolioincluded18 trainingcoursesexclusivelyforforeignsupervisory statememberbanks. authorities,bothintheUnitedStatesandinanumberof foreignjurisdictions.FederalReservestaff also Throughout2014,theFederalReserveSystemcontookpartintechnicalassistanceandtrainingmis- tinuedtosupportMOIsthroughthefollowing sionsledbytheInternationalMonetaryFund,the activities: WorldBank,theAsianDevelopmentBank,theBasel • facilitatingameetingbetweentheNationalBank- CommitteeonBankingSupervision,andtheFinanersAssociation(NBA),ChairYellen,ViceChaircialStabilityInstitute. manFischer,andGovernorPowellduringwhich theNBAsharedwiththegovernorstheirperspec- TheFederalReserveisanassociatememberof the tiveoncommunitybankingissuesof importance Associationof Supervisorsof Banksof theAmericas toMOIs; (ASBA),anumbrellagroupof banksupervisors fromcountriesintheWesternHemisphere.The • publishinganarticleintheFederalReserve’sComgroup,headquarteredinMexico, munityBankingConnections®publicationtohigh- • promotescommunicationandcooperationamong lightMOIsandtheircontributiontotheeconomy banksupervisorsintheregion; (www.communitybankingconnections.org/articles/

60 101stAnnualReport|2014 2014/q3-q4/promoting-an-inclusive-financial- latoryforums,providesupportfortheworkof the system); FFIEC,andparticipateininternationalpolicymakingforums,includingtheBaselCommitteeonBank- • participatinginthe87thannualNBAconvention; ingSupervision(BCBS),theFinancialStability • hostinganinternalRapidResponse®sessiononthe Board,andtheJointForum. topicof MOIstoeducatetheFederalReserve’s communitybankexaminationstaff ontheunique EnhancedPrudentialStandards characteristicsof theseorganizations; TheBoardisresponsibleforissuinganumberof • providingtechnicalassistancetoMOIsonawide rulesandguidancestatementsundertheDoddvarietyof topics,includingtopicsfocusedon FrankAct,sometimesinconjunctionwithother improvingregulatoryratings,navigatingtheregula- agencies.Listedbelowaretheinitiativesundertaken toryapplicationsprocess,andrefiningcapital- bytheBoardin2014. planningpractices; • InJanuary,theBoardissuedasupervisoryguid- • creatingformalproceduresrelatedtomonitoring ancestatement,SR14-1,toclarifytheheightened MOI-relatedproposalsandcontinuingtoofferpre- supervisoryexpectationsforrecoveryandresolureviewof MOIapplicationstosupportearlyidenti- tionpreparednessfortheeightlargestdomestic ficationandresolutionof issuesthatcouldcreate BHCsthatposeelevatedrisktoU.S.financialstadelaysinthereviewprocess; bility.TheBoardissuedthisSRletterasasupplementtoSRletter12-17/CAletter12-14,“Consoli- • partneringwiththeNBA,theNationalUrban datedSupervisionFrameworkforLargeFinancial League,andtheMinorityCouncilof theIndepen- Institutions.”TheBoardplanstoincorporate dentCommunityBankersAssociationinoutreach reviewsof keycapabilitiesforrecoveryandresoluevents; tionpreparednessinitsongoingsupervisorywork • inconjunctionwiththeDivisionof Consumerand foreachBHCsubjecttothisguidance,whichis CommunityAffairs,conductingseveraljointout- availableatwww.federalreserve.gov/bankinforeg/ reacheffortstoeducateMOIsonsupervisorytop- srletters/SR1401.htm. ics;and • InMarch,theBoardpublishedafinalruleto • participatinginaninteragencytaskforcetocon- implementcertainenhancedprudentialstandards siderandaddresssupervisorychallengesfacing requiredundersection165of theDodd-FrankAct MOIs. forBHCs,includingforeignbankingorganizations, withtotalglobalconsolidatedassetsof $50billion Throughout2014,PFPrepresentativeshostedand ormore.Thesestandardsincluderisk-basedand participatedinnumerousbankingworkshopsand leveragecapitalrequirements,liquiditystandards, seminarsaimedatpromotingandpreservingMOIs, andrequirementsforoverallriskmanagement.In includingtheNBA’sLegislativeandRegulatoryCon- addition,thefinalrulerequiresaforeignbanking ferenceandtheNationalUrbanLeagueConvention. organizationwith$50billionormoreinU.S.non- Further,programrepresentativescontinuedtocol- branchassetstoformanintermediateholding laboratewithcommunityleaders,tradegroups,the companyoveritsU.S.subsidiaries.Theintermedi- SmallBusinessAdministration,andotherorganiza- ateholdingcompanyof theforeignbankingorgationstoseeksupportforMOIs. nizationwillberequiredtomeetsubstantiallythe samecapital,liquidity,andrisk-managementstan- Supervisory Policy dardsasasimilarU.S.BHC.Thefinalrulealso establishesriskcommitteerequirementsandcapital TheFederalReserve’ssupervisorypolicyfunction, stress-testingrequirementsforcertainBHCsand carriedoutbytheBoard,isresponsiblefordevelopforeignbankingorganizationswithtotalconsoliingregulationsandguidanceforfinancialinstitutions datedassetsof $10billionormore.Thefinalruleis undertheFederalReserve’ssupervision,aswellas availableatwww.gpo.gov/fdsys/pkg/FR-2014-03guidanceforexaminers.TheBoard,ofteninconcert 27/pdf/2014-05699.pdf. withtheOCCandtheFDIC(together,thefederal bankingagencies),issuesrulemakings,publicSRlet- • InMarch,thefederalbankingagenciesissued ters,andotherpolicystatementsandguidancein supervisoryguidancethatdiscussessupervisory ordertocarryoutitssupervisorypolicies.Federal expectationsforimplementingtheDodd-Frank Reservestaff alsotakepartinsupervisoryandregu- Actcompany-runstresstestsforbankingorganiza-

SupervisionandRegulation 61 tionswithtotalconsolidatedassetsof morethan ormorethatarenototherwisecoveredbytherule, $10billionbutlessthan$50billion.Thisguidance effectiveJanuary1,2016.Thefinalruleisavailable buildsupontheinteragencystresstestingguidance atwww.gpo.gov/fdsys/pkg/FR-2014-10-10/pdf/ issuedinMay2012forcompanieswithmorethan 2014-22520.pdf. $10billionintotalconsolidatedassets.Itisimpor- • InDecember,theBoardinvitedpubliccommenton tanttonotethattheguidancestatesthatsuch enhancedprudentialstandardsfortheregulation bankingorganizationsarenotsubjecttoother andsupervisionof GeneralElectricCapitalCorporequirementsandexpectationsapplicabletoBHCs ration(GECC),anonbankfinancialcompanythat withassetsof atleast$50billion,includingthe theFSOCdesignatedforsupervisionbytheBoard. FederalReserve’scapitalplanrule,annualCompre- Inlightof thesubstantialsimilarityof GECC’s hensiveCapitalAnalysisandReview,supervisory activitiesandriskprofiletothatof asimilarlysized stresstestsforcapitaladequacy,ortherelateddata BHC,theproposalwouldapplyenhancedprudencollectionssupportingthesupervisorystresstest. tialstandardstoGECCthataregenerallysimilar Theguidanceisavailableatwww.gpo.gov/fdsys/ tothosethatapplytolargeBHCs,includingstanpkg/FR-2014-03-13/pdf/2014-05518.pdf. dardsforrisk-basedandleveragecapital,capital • InMay,thefederalbankingagenciesissuedafinal planning,stresstesting,liquidity,andriskmanageruletostrengthentheleverageratiostandardsfor ment.Theproposalisavailableatwww.gpo.gov/ theeightlargest,mostsystemicallysignificantU.S. fdsys/pkg/FR-2014-12-03/pdf/2014-28414.pdf. bankingorganizations.Underthefinalrule,U.S. • InDecember,theBoardissuedaproposedrulethat top-tierBHCswithmorethan$700billioninconwouldestablishamethodologytoidentifywhether solidatedtotalassetsor$10trillioninassetsunder aU.S.BHCisaglobalsystemicallyimportant custodyarerequiredtomaintainaleveragebuffer bankingorganization(GSIB).Assuch,aGSIB greaterthan2percentagepointsabovethe3perwouldbesubjecttoarisk-basedcapitalsurcharge centminimumsupplementaryleverageratio,fora thatiscalibratedbasedonitssystemicriskprofile. totalof morethan5percent,toavoidrestrictions TheproposalbuildsonaGSIBcapitalsurcharge oncapitaldistributionsandcertaindiscretionary frameworkagreedtobytheBCBSandisaugbonuspayments.Theinsureddepositoryinstitution mentedtoaddresstheriskarisingfromtheover- (IDI)subsidiariesof theseBHCsmustmaintainat relianceonshort-termwholesalefunding.The leasta6percentsupplementaryleverageratiotobe GSIBsurchargeundertheproposalwouldgenerconsidered“wellcapitalized”undertheagencies’ allybehigherthanundertheBCBSapproach.Failpromptcorrectiveactionframework.Thefinalrule, uretomaintainthecapitalsurchargewouldsubject whichhasaneffectivedateof January1,2018,is theGSIBtorestrictionsoncapitaldistributions availableatwww.gpo.gov/fdsys/pkg/FR-2014-05andcertaindiscretionarybonuspayments.The 01/pdf/2014-09367.pdf. proposalwouldbephasedinbeginningonJanu- • InOctober,thefederalbankingagenciesfinalizeda ary1,2016,becomingfullyeffectiveonJanuary1, ruleimplementingaliquiditycoverageratio(LCR) 2019.Theproposedruleisavailableatwww.gpo requirementbasedontheBCBS’sLCRstandard. .gov/fdsys/pkg/FR-2014-12-18/pdf/2014-29330.pdf. TheLCRwillbethefirstbroadlyapplicablequantitativeliquidityrequirementforU.S.banking firms.UndertheLCR,largebankingorganizations OtherCapitalAdequacyStandards arerequiredtoholdanamountof high-qualityliq- In2014,theBoardissuedseveralrulemakingsand uidassetssufficienttomeetexpectednetcashoutguidancedocumentsrelatedtocapitaladequacy, flowsovera30-daytimehorizoninastandardized includingjointrulemakingswiththeotherfederal supervisorystressscenario.Thefinalrule,effective bankingagenciesthatwouldimplementcertainrevi- January1,2015,appliesthemoststringentLCR sionstotheBaselcapitalframework. requirementstobankingorganizationswithconsolidatedtotalassetsof $250billionormoreor • InMarch,theBoardandtheOCCpermittedcerconsolidatedtotalon-balancesheetforeignexpo- tainbankingorganizationstoexitfromtheparallel sureof $10billionormore,andtheirsubsidiary runstageof theagencies’advancedapproaches insureddepositoryinstitutionswith$10billionor risk-basedcapitalframework,andhenceforth,to moreof consolidatedtotalassets.Thefinalrule usetheadvancedapproachesruletodetermine appliesasimpler,lessstringentLCRrequirement theirrisk-basedcapitalrequirements.Concurrently, todepositoryholdingcompanieswith$50billion theBoardissuedafinalruleclarifyingthatBHCs

62 101stAnnualReport|2014 usingtheadvancedapproachesframeworkincor- cationof theBoard’sregulatorycapitalframework poratesuchframeworkintotheircapitalplanning todepositoryinstitutionholdingcompaniesthat andstresstestingcyclesthatbeginOctober1,2015. havenon-traditionalcapitalstructures.Thepro- Thefinalruleisavailableatwww.gpo.gov/fdsys/ posaldescribesexamplesof capitalinstruments pkg/FR-2014-03-11/pdf/2014-05053.pdf. potentiallyissuedbynon-stockentitiesthatmay notqualifyascommonequitytier1capital,and • InApril,thefederalbankingagenciesproposeda providessuggestionsonchangesthatwouldallow ruletocorrectthedefinitionof eligibleguaranteein qualification.Theproposalalsonotesthatthe therisk-basedcapitalrulesbyclarifyingthetypesof Boardexpectstoproposeregulatorycapitalrulesin guaranteesthatcanberecognizedforpurposesof thefutureforSLHCsthatarepersonalorfamily calculatingabankingorganization’sregulatorycapitrustsandarenotbusinesstrusts,andwouldprotalundertheadvancedapproachesframework.The videatemporaryexemptionforthoseentitiesfrom federalbankingagenciesfinalizedtheruleinJuly. theregulatorycapitalrules.Similarly,theproposal Thefinalruleisavailableatwww.gpo.gov/fdsys/pkg/ statesthattheBoardexpectstoclarifytheapplica- FR-2014-07-30/pdf/2014-17858.pdf. tionof theregulatorycapitalrulestodepository • InSeptember,thefederalbankingagenciesadopted institutionholdingcompaniesthatareemployee afinalrulemodifyingthedefinitionof thedenomi- stockownershipplans.Theproposedruleisavailnatorof thesupplementaryleverageratio,which ableatwww.gpo.gov/fdsys/pkg/FR-2014-12-19/pdf/ appliestoadvancedapproachesbankingorganiza- 2014-29561.pdf. tions,inamannerconsistentwithchangesagreed • InDecember,theBoardandtheOCCissuedan tobytheBCBS.Thefinalrulestrengthensthe interimfinalruletoensurethatthetreatmentof supplementaryleverageratiobymodifyingthe over-the-counterderivatives,eligiblemarginloans, methodologyforincludingoff-balancesheetitems, andrepo-styletransactionsunderthetwoagencies’ includingcreditderivatives,repo-styletransactions, regulatorycapitalandliquiditycoverageratiorules andlinesof credit,inthedenominatorof the wouldbeunaffectedbytheimplementationof cersupplementaryleverageratio.Thefinalruleis tainforeignspecialresolutionregimesforfinancial availableatwww.gpo.gov/fdsys/pkg/FR-2014-09companiesorbyabankingorganization’sadher- 26/pdf/2014-22083.pdf. encetotheInternationalSwapsandDerivatives • InOctober,theBoardissuedafinalrulethatmodi- Association’sResolutionStayProtocol.The fiestheregulationsforcapitalplanningandstress interimfinalruleiseffectiveasof January1,2015, testingandadjuststheduedateforBHCswithtotal andisavailableatwww.federalreserve.gov/ consolidatedassetsof $50billionormoretosubmit newsevents/press/bcreg/20141216a.htm. theircapitalplansandstresstestresults.Beginning in2016,theduedatewillshiftfromJanuarytoApril. InternationalCoordinationon Thefinalruleisavailableatwww.gpo.gov/fdsys/pkg/ SupervisoryPolicies FR-2014-10-27/pdf/2014-25170.pdf. Asamemberof theBCBS,theFederalReserve activelyparticipatesineffortstoadvancesound • InDecember,thefederalbankingagenciesissueda supervisorypoliciesforinternationallyactivebankproposedruleclarifyingtheregulatorycapitalrules ingorganizationsandtoenhancethestrengthand adoptedbytheagenciesinJuly2013.Theproposal stabilityof theinternationalbankingsystem. appliesonlytolargeinternationallyactivebanking organizationsthataresubjecttotheadvanced BaselCommitteeonBankingSupervision approachesrule.Theproposedrulewouldmake During2014,theFederalReserveparticipatedin technicalcorrectionsandclarifycertainaspectsof ongoinginternationalinitiativestotracktheprogress theadvancedapproachesrule,includingthequaliof implementationof theBCBSframeworkinmemficationcriteriaforapplicationof theadvanced bercountries. approachesandcalculationrequirementsforriskweightedassets.Theproposedruleisavailableat TheFederalReservecontributedtosupervisory www.gpo.gov/fdsys/pkg/FR-2014-12-18/pdf/2014policyrecommendations,reports,andpapersissued 28690.pdf. forconsultativepurposesorfinalizedbytheBCBS • InDecember,theBoardissuedaproposedruleto thataredesignedtoimprovethesupervisionof provideadditionalinformationregardingtheappli- bankingorganizations’practicesandtoaddressspe-

SupervisionandRegulation 63 cificissuesthatemergedduringthefinancialcrisis. berandavailableatwww.bis.org/bcbs/publ/ Thelistbelowincludeskeyfinalandconsultative d305.htm). papersissuedin2014. • Capitalfloors:thedesignof aframeworkbasedon standardisedapproaches–consultativedocument Finalpapers: (issuedinDecemberandavailableatwww.bis.org/ • BaselIIIleverageratioframeworkanddisclosure bcbs/publ/d306.htm). requirements(issuedinJanuaryandavailableat • Revisionstothestandardisedapproachforcreditrisk www.bis.org/publ/bcbs270.htm). –consultativedocument(issuedinDecemberand • Liquiditycoverageratiodisclosurestandards–final availableatwww.bis.org/bcbs/publ/d307.htm). document(issuedinJanuaryandavailableat www.bis.org/publ/bcbs272.htm). FinancialStabilityBoard In2014,theFederalReservecontinueditsactivepar- • TheLiquidityCoverageRatioandrestricted-use ticipationintheactivitiesof theFinancialStability committedliquidityfacilities(issuedinJanuaryand Board,aninternationalgroupthathelpscoordinate availableatwww.bis.org/publ/bcbs274.htm). theworkof nationalfinancialauthoritiesandinter- • Thestandardisedapproachformeasuringcounter- nationalstandardsettingbodies,anddevelopsand partycreditriskexposures(issuedinMarchand promotestheimplementationof financialsectorpoliavailableatwww.bis.org/publ/bcbs279.htm). ciesintheinterestof financialstability. • Capitalrequirementsforbankexposurestocentral Formoreinformationontheworkof theFinancial counterparties–finalstandard(issuedinApriland StabilityBoard,refertosection3,“Financial availableatwww.bis.org/publ/bcbs282.htm). Stability.” • Supervisoryframeworkformeasuringandcontrol- JointForum linglargeexposures–finalstandard(issuedinApril In2014,theFederalReservecontinueditsparticipaandavailableatwww.bis.org/publ/bcbs283.htm). tionintheJointForum—aninternationalgroupof • BaselIII:thenetstablefundingratio(issuedin supervisorsof thebanking,securities,andinsurance Octoberandavailableatwww.bis.org/bcbs/publ/ industriesestablishedtoaddressvariouscross-sector d295.htm). issues,includingtheregulationof financialconglom- • Revisionstothesecuritisationframework(issuedin erates.TheJointForumoperatesundertheaegisof theBCBS,theInternationalOrganizationof Securi- Decemberandavailableatwww.bis.org/bcbs/publ/ tiesCommissions,andtheInternationalAssociation d303.htm). of InsuranceSupervisors.Finalpapersissuedbythe JointForumin2014include: Consultativepapers: • Pointof Saledisclosureintheinsurance,banking • BaselIII:theNetStableFundingRatio–consultaandsecuritiessectors–finalreport(issuedinApril tivedocument(issuedinJanuaryandavailableat andavailableatwww.bis.org/publ/joint35.pdf). www.bis.org/publ/bcbs271.htm). • Reportonsupervisorycollegesforfinancialconglom- • Reviewof Pillar3disclosurerequirements(issued erates(issuedinSeptemberandavailableat inJuneandavailableatwww.bis.org/publ/ www.bis.org/publ/joint36.pdf). bcbs286.htm). • Operationalrisk–Revisionstothesimpler AccountingPolicy approaches–consultativedocument(issuedin TheFederalReservestronglyendorsessoundcorpo- Octoberandavailableatwww.bis.org/publ/ rategovernanceandeffectiveaccountingandauditbcbs291.htm). ingpracticesforallregulatedfinancialinstitutions. Accordingly,theFederalReserve’saccountingpolicy • NetStableFundingRatiodisclosurestandards– functionisresponsibleforprovidingexpertisein consultativedocument(issuedinDecemberand policydevelopmentandimplementationefforts,both availableatwww.bis.org/bcbs/publ/d302.htm). withinandoutsidetheFederalReserveSystem,on • Fundamentalreviewof thetradingbook:outstand- issuesaffectingthebankingandinsuranceindustries ingissues–consultativedocument(issuedinDecem- intheareasof accounting,auditing,internalcontrols

64 101stAnnualReport|2014 overfinancialreporting,financialdisclosure,and accountingmatters,asappropriate,andparticipated supervisoryfinancialreporting. inanumberof supervisory-relatedactivities.For example,FederalReservestaff FederalReservestaff regularlyconsultwithkeycon- • issuedguidanceonincometaxallocationinaholdstituentsintheaccountingandauditingprofessions, ingcompanystructure; includingdomesticandinternationalstandardsetters,accountingfirms,accountingandfinancial • developedandparticipatedinanumberof domessectortradegroups,andotherfinancialsectorregula- ticandinternationalsupervisorytrainingprograms torstofacilitatetheBoard’sunderstandingof andeducationsessionstoeducatesupervisorsand domesticandinternationalpractices;proposed bankersaboutnewandemergingaccountingand accounting,auditing,andregulatorystandards;and reportingtopicsaffectingfinancialinstitutions;and theinteractionsbetweenaccountingstandardsand • supportedtheeffortsof theReserveBanksin regulatoryreformefforts.TheFederalReservealso financialinstitutionsupervisoryactivitiesthrough participatesinvariousaccounting,auditing,and participationinexaminationsandprovisionof regulatoryforumsinordertobothformulateand expertguidanceonspecificqueriesrelatedtofinancommunicateitsviews. cialaccounting,auditing,reporting,and disclosures. During2014,FederalReservestaff addressednumerousissuesincludingloanaccounting,troubleddebt TheFederalReserveSystemstaff alsoprovidedtheir restructurings,accountingalternativesforprivate accountingandbusinessexpertisethroughparticipacompanies,financialinstrumentaccountingand tioninothersupervisoryactivitiesduringthepast reporting,consolidationof structuredentities,securi- year.TheseactivitiesincludedsupportingDoddtizations,securitiesfinancingtransactions,andexter- FrankActinitiativesrelatedtostresstestingof banks nalandinternalauditprocesses. andcreditriskretentionrequirementsforsecuritization,aswellasvariousBaselIIIissues. TheFederalReserveshareditsviewswithaccounting andauditingstandard-settersthroughinformaldis- Credit-RiskManagement cussionsandpubliccommentletters.Commentlet- TheFederalReserveworkswiththeotherfederal tersontheFinancialAccountingStandardsBoard’s bankingagenciestodevelopguidanceonthemanproposalrelatedtobusinesscombinationsandonthe agementof creditrisk;tocoordinatetheassessment PublicCompanyAccountingOversightBoard’spro- of regulatedinstitutions’credit-riskmanagement posalrelatedtothechangesintheauditor’sreporting practices;andtoensurethatinstitutionsproperly modelwereissuedduringthepastyear. identify,measure,andmanagecreditrisk. TheFederalReservestaff alsoparticipatedinmeet- SharedNationalCreditProgram ingsof theBaselCommittee’sAccountingExperts InNovember,theFederalReserveandtheotherbank- GroupandtheInternationalAssociationof Insur- ingagenciesreleasedsummaryresultsof the2014 anceSupervisors’(IAIS)AccountingandAuditing annualreviewof theSharedNationalCredit(SNC) WorkingGroup.Thesegroupsrepresenttheirrespec- Program,along-standingprogramtopromoteaneffitiveorganizationsatinternationalmeetingson cientandconsistentreviewandclassificationof shared accounting,auditing,anddisclosureissuesaffecting nationalcredits.ASNCisanyloanorformalloan globalbankingorganizations.Workingwithinterna- commitment—andanyasset,suchasotherrealestate, tionalbanksupervisors,FederalReservestaff con- stocks,notes,bonds,anddebenturestakenasdebts tributedtothedevelopmentof numerouscomment previouslycontracted—extendedtoborrowersbya lettersandpublicationsthatwereissuedbytheBasel supervisedinstitution,itssubsidiaries,andaffiliates.A CommitteeandtheIAIS.Thepublicationsissued SNCmusthaveanoriginalloanamountthataggreduring2014includedguidanceontheexternalaudits gatesto$20millionormoreandeither(1)issharedby of banksandtheconsultativedocumentonthe threeormoreunaffiliatedsupervisedinstitutions reviewof pillar3disclosurerequirements. underaformallendingagreement,or(2)aportionof whichissoldtotwoormoreunaffiliatedsupervised In2014,theFederalReserveissuedsupervisoryguid- institutionswiththepurchasinginstitutionsassuming ancetofinancialinstitutionsandsupervisorystaff on theirproratashareof thecreditrisk.

SupervisionandRegulation 65 The2014SNCreviewwaspreparedinthesecond ComplianceRiskManagement quarterof 2014usingdataasof December31,2013, TheFederalReserveworkswithinternationaland andMarch31,2014.The2014SNCportfoliototaled domesticsupervisorstodevelopguidancethatpro- $3.39trillion,withroughly9,800creditfacilitiesto motescompliancewithBankSecrecyActandantiapproximately6,200borrowers.Fromtheprevious money-launderingcompliance(BSA/AML)and period,thedollarvolumeof theportfoliocommitment counterterrorismlaws. amountroseby$379billionor12.6percent,andthe numberof creditsincreasedby502or5.4percent. BankSecrecyActand Anti-Money-LaunderingCompliance TheSNCexaminationfoundthatthevolumeof In2014,theFederalReservecontinuedtoactively criticizedassetsincreased12.8percentto$340.8bil- promotethedevelopmentandmaintenanceof effeclion.Asapercentageof totalcommitments,theover- tiveBSA/AMLcompliancerisk-managementproallcriticizedassetrateremainedelevatedat10.1per- grams,includingdevelopingsupervisorystrategies cent,upfrom10.0percentin2013.Theelevatedcriti- andprovidingguidancetotheindustryontrendsin cizedrateishistoricallyhighwhencomparedtoSNC BSA/AMLcompliance.Forexample,theFederal portfoliosatthisstageof theeconomiccycle. Reservesupervisorystaff participatedinanumberof industryconferencestocontinuetocommunicate Forthe2014SNCreview,supervisorsplacedsignifi- regulatoryexpectationsandpolicyinterpretationsfor cantemphasisonreviewingleveragedloanstoevalu- financialinstitutions. atesafetyandsoundnessof bankunderwritingand risk-managementpracticesrelativetoexpectations TheFederalReserveisamemberof theTreasury-led articulatedinthe2013InteragencyGuidanceonLev- BSAAdvisoryGroup,whichincludesrepresentatives eragedLending.Thereviewfoundthatriskinthe of regulatoryagencies,lawenforcement,andthefinanoverallSNCportfoliowascenteredintheleveraged cialservicesindustryandcoversallaspectsof theBSA. portfolio,notingacriticizedrateof 33.2percentfor TheFederalReservealsoparticipatedinseveral leveragedloanscomparedwith3.3percentforthe Treasury-ledprivate/publicsectordialogueswithLatin non-leveragedportfolio.The2014SNCreviewalso AmericanandMexicanfinancialinstitutions,regulaidentifiedseveralareaswhereinstitutionsneedto tors,andsupervisors.Thesedialoguesaredesignedto strengthenrisk-managementpractices,including promoteinformationsharingandunderstandingof inadequatesupportforenterprisevaluationsand/or issuessurroundingcorrespondentbankingrelations relianceondatedvaluations,weaknessesincredit betweenU.S.andcountry-specificfinancialsectors.In analysis,andoverrelianceonsponsor’sprojections. addition,theFederalReserveparticipatedinmeetings Underwritingstandardswerealsonotedasweakin duringtheyeartodiscussBSA/AMLissueswithdel- 31percentof theSNCloantransactionssampled. egationsfromLatvia,China,andMexicoregarding Leveragedlendingtransactionsweretheprimary managingandreportingonAMLrisk,customerdue driverof thisunderwritingdeterioration. diligence,andemergingpayments.TheFederal ReservealsoparticipatesintheFFIECBSA/AML RefinancingriskincreasedmoderatelyintheSNC workinggroup,amonthlyforumforthediscussionof portfolioas25.0percentof SNCcommitmentswill pendingBSApolicyandregulatorymatters.Inaddimaturein2015and2016,comparedwith15.0per- tiontotheFFIECagencies,theBSA/AMLworking centforthesameperiodinthe2013SNCReview. groupincludestheFinancialCrimesEnforcementNet- During2013andinto2014,syndicatedlenderscon- work(FinCEN)and,onaquarterlybasis,theSEC, tinuedtorefinanceandmodifyloanagreementsto theCommodityFuturesTradingCommission,the extendmaturities.Thesetransactionshadtheeffect InternalRevenueService,andtheOfficeof Foreign of relievingnear-termrefinancingrisk,but,inmany AssetsControl(OFAC). instances,didnotimproveborrowers’abilitytorepay theirdebtsinthelongertermasobligorsfrequently TheFFIECBSA/AMLworkinggroupisresponsible addedtotheirexistingdebtburden.Formoreinfor- forupdatingtheFFIECBankSecrecyAct/Anti-Money mationonthe2014SNCreview,visittheBoard’s LaunderingExaminationManual.TheFFIECdevelwebsiteatwww.federalreserve.gov/newsevents/press/ opedthismanualaspartof itsongoingcommitment bcreg/20141107a.htm. toprovidecurrentandconsistentinteragencyguidance

66 101stAnnualReport|2014 onrisk-basedpolicies,procedures,andprocessesfor revisingaconsultativepaperonthegeneralguideto financialinstitutionstocomplywiththeBSAandsafe- accountopening,originallyissuedin2003. guardtheiroperationsfrommoneylaunderingandterroristfinancing.In2014,theFFIECBSA/AMLwork- IncentiveCompensation inggroupupdatedthemanualtofurtherclarifysuper- Tofosterimprovedincentivecompensationpractices visoryexpectationsandincorporateregulatory inthefinancialindustry,theFederalReservealong changessinceits2010revision.The2014revisionsalso withtheotherfederalbankingagenciesadopted incorporatefeedbackfromthebankingindustryand interagencyguidanceorientedtotherisk-taking examinationstaff. incentivescreatedbyincentivecompensation arrangements.10Theguidanceisprinciples-based, Throughout2014,theFederalReserveandotherfed- recognizingthatthemethodsusedtoachieveapproeralbankingagenciescontinuedtoregularlyshare priatelyrisk-sensitivecompensationarrangements examinationfindingsandenforcementproceedings likelywilldiffersignificantlyacrossandwithinfirms. withFinCENaswellaswithOFACundertheinter- Threeprinciplesareatthecoreof theguidance: agencyMOUsfinalizedin2004and2006. • Incentivecompensationarrangementsshouldbalanceriskandfinancialresultsinamannerthat In2014,theFederalReservecontinuedtoparticipate doesnotencourageemployeestoexposetheirorgaintheU.S.Treasury’sInteragencyTaskForceon nizationstoimprudentrisks. StrengtheningandClarifyingtheBSA/AMLFramework(taskforce),createdin2012,whichincludes • Abankingorganization’srisk-managementprorepresentativesfromtheDepartmentof Justice, cessesandinternalcontrolsshouldreinforceand OFAC,FinCEN,thefederalbankingagencies,the supportthedevelopmentandmaintenanceof bal- SEC,andtheCommodityFuturesTradingCommis- ancedincentivecompensationarrangements,and sion.Theprimaryfocusof thetaskforceistoreview incentivecompensationshouldnothinderrisk theBSA,itsimplementation,anditsenforcement managementandcontrols. withrespecttoU.S.financialinstitutionsthatare • Bankingorganizationsshouldhavestrongand subjecttotheserequirements,andtodeveloprecomeffectivecorporategovernanceof incentive mendationsforensuringthecontinuedeffectiveness compensation. of theBSAandefficiencyinagencyeffortstomonitorcompliance. ThroughtwoBoard-ledhorizontalreviewsandwith ongoingengagementwiththelargestfirmsandour InternationalCoordinationon supervisoryteams,wehaveimprovedpracticeand Sanctions,Anti-Money-Laundering,and designof incentivecompensationarrangementsat Counter-TerrorismFinancing firmswithgreaterthan$50billioninU.S.assets.This TheFederalReserveparticipatesinanumberof supervisoryworkhasbeenfocusedonassessingthe internationalcoordinationinitiativesrelatedtosancpotentialforincentivecompensationarrangementsto tions,moneylaundering,andterrorismfinancing. encourageimprudentrisk-taking;reviewingactions Forexample,theFederalReservehasalong-standing largebankingorganizationshavetakentocorrect roleintheU.S.delegationtotheintergovernmental deficienciesinincentivecompensationdesign;and FinancialActionTaskForce(FATF)anditsworking evaluatingtheadequacyof firms’compensationgroups,contributingabankingsupervisoryperspecrelatedriskmanagement,controls,andcorporate tivetoformulationof internationalstandards.The governance. FederalReserveparticipatedindevelopingtheFATF guidanceforthebankingsectoronidentifying, TheDodd-FrankActrequiresthereportingtoreguassessing,andmonitoringmoneylaunderingandthe latorsof incentivecompensationarrangementsand financingof terrorismonarisk-assessedbasis,which prohibitsincentivecompensationarrangementsthat waspublishedinOctober2014.TheFederalReserve provideexcessivecompensationorthatcouldexpose alsoparticipatedineffortsbyFATFtomorefully thefirmtoinappropriaterisks.BankingorganizaunderstandeffectiveAMLsupervisionandenforcetions,broker–dealers,investmentadvisers,andcerment.Finally,theFederalReservecontinuestopartainotherfirmsarecoveredundertheactif they ticipateinasubcommitteeof theBaselCommittee have$1billionormoreintotalconsolidatedassets. thatfocusesonAML/counter-terrorismfinancing issues.Withrespecttothatsubcommittee,theFed- 10 See“GuidanceonSoundIncentiveCompensationPolicies,”75 eralReserveactivelycontributedtoupdatingand FederalRegister36395–36414(June25,2010).

SupervisionandRegulation 67 In2011,thesevendesignatedfinancialregulatory riskinthosetransactions,implementingtherisk agencies(FederalReserve,OCC,FDIC,OTS, retentionrequirementsintheDodd-FrankAct. NCUA,SEC,andtheFederalHousingFinance Thefinalrulerequiressponsorsof securitizations, Agency)issuedajointproposedincentivecompensa- suchasasset-backedsecurities(ABS),toretainnot tionrule.Theagenciescontinuetoworktowarda lessthan5percentof thecreditriskof theassets ruletoimplementtheact. collateralizingtheABSissuanceunlesscertain underwritingcriteriaonthesecuritizedassetsare OtherPolicymakingInitiatives met.Therulealsosetsforthprohibitionsontrans- • InMarch,theBoardissuedanadvancenoticeof ferringorhedgingthecreditriskthatthesponsoris requiredtoretain.Thefinalruleisavailableat proposedrulemakingseekingcommenttoinform www.gpo.gov/fdsys/pkg/FR-2014-12-24/pdf/2014itsconsiderationof physicalcommodityactivities 29256.pdf. conductedbyfinancialholdingcompanies,includingcurrentauthorizationsof theseactivitiesand • InNovember,theBoardannouncedthatitwould theappropriatenessof furtherrestrictions.The applytoSLHCscertainFederalReservesuperviproposedruleisavailableatwww.gpo.gov/fdsys/ soryguidancedocumentsissuedpriortoJuly21, pkg/FR-2014-03-05/pdf/2014-04742.pdf. 2011,thedateof transferof supervisionandregu- • InJuly,thefederalbankingagencieswiththeCon- lationof SLHCsfromtheformerOTStothe ferenceof StateBankSupervisors,issuedasuper- Board.TheBoard’sdeterminationtoapplythese visoryguidancestatement,SR14-5,toreiterate SRletterstoSLHCsfollowsanextensivereview of itsexistingguidancedocuments.Thelistof principlesof soundriskmanagementforhome SRlettersapplicabletoSLHCsisavailableat equitylinesof credit(HELOCs)thathavereached www.federalreserve.gov/bankinforeg/srletters/ orwillbereachingtheirend-of-drawperiods.The guidancedescribesrisk-managementpracticesto sr1409.pdf. promoteaclearunderstandingof potentialexpo- • InNovember,theBoardissuedafinalruleto suresandtohelpguideconsistent,effective implementsection622of theDodd-FrankAct, responsestoHELOCborrowerswhomaybe whichestablishesafinancialsectorconcentration unabletomeetcontractualobligationsattheirendlimitthatpreventsafinancialcompanyfrommergof-drawperiodsandhighlightsconceptsrelatedto ingandconsolidatingwithanotherfinancialcomfinancialreportingforHELOCs.Theguidanceis panyif theresultingcompany’sconsolidated availableatwww.federalreserve.gov/bankinforeg/ liabilitieswouldexceed10percentof theaggregate srletters/sr1405.htm. consolidatedliabilitiesof allfinancialcompanies. • InSeptember,thefederalbankingagencies,along Financialcompaniessubjecttothelimitinclude withtheFarmCreditAdministrationandtheFed- insureddepositoryinstitutions,BHCs,SLHCs,foreralHousingFinanceAgency,issuedaproposed eignbankingorganizations,companiesthatcontrol rulethatwouldestablishmarginrequirementsfor insureddepositoryinstitutions,andnonbank swapdealers,majorswapparticipants,security- financialcompaniesdesignatedbytheFSOCfor basedswapdealers,andmajorsecurity-basedswap Boardsupervision.Thefinalruleisavailableat participantsasrequiredbytheDodd-FrankAct. www.gpo.gov/fdsys/pkg/FR-2014-11-14/pdf/2014- Theproposedrulewouldestablishminimum 26747.pdf. requirementsfortheexchangeof initialandvariationmarginbetweencoveredswapentitiesand RegulatoryReports theircounterpartiestonon-clearedswapsandnon- TheFederalReserve’ssupervisorypolicyfunctionis clearedsecurity-basedswaps.Theproposedruleis alsoresponsiblefordeveloping,coordinating,and availableatwww.gpo.gov/fdsys/pkg/FR-2014-09- implementingregulatoryreportingrequirementsfor 24/pdf/2014-22001.pdf. variousfinancialreportingformsfiledbydomestic • InDecember,thefederalbankingagencies,along andforeignfinancialinstitutionssubjecttoFederal Reservesupervision.FederalReservestaff members withtheDepartmentof HousingandUrban interactwithotherfederalagenciesandrelevantstate Development,theFederalHousingFinance supervisors,includingforeignbanksupervisorsas Agency,andtheSEC,issuedafinalrulerequiring needed,torecommendandimplementappropriate sponsorsof securitizationtransactionstoretain

68 101stAnnualReport|2014 andtimelyrevisionstothereportingformsandthe tosection165of theDodd-FrankAct.Thenew attendantinstructions. item,TotalU.S.Non-BranchAssets,isusedto determinewhichFBOswouldberequiredtoform HoldingCompanyRegulatoryReports anintermediateholdingcompany. TheFederalReserverequiresthatU.S.holdingcom- • FR2052aand2052b—finalizedin2014.Subsepanies(HCs)periodicallysubmitreportsthatprovide quently,inDecember2014,theFederalReserve informationabouttheirfinancialconditionand BoardproposedchangestotheFR2052areport, structure.11Thisinformationisessentialtoformulatincludingincreasinggranularityof dataitems, ingandconductingbankregulationandsupervision. updatingreportingplatformstructure,andexpand- ItisalsousedinrespondingtorequestsbyCongress ingthescopeof thoseinstitutionsreporting.These andthepublicforinformationaboutHCsandtheir changesallowtheFederalReservetomonitorcomnonbanksubsidiaries.Foreignbankingorganizations pliancewiththeliquiditycoverageratio,butmore (FBOs)alsoarerequiredtoperiodicallysubmit generallyimprovesupervisorystaff’sabilityto reportstotheFederalReserve.Formoreinformation monitorliquidityrisk. onthevariousreportingforms,seewww .federalreserve.gov/apps/reportforms/default.aspx. • FRXX-1—createdtoimplementareporting requirementestablishedbyRegulationXX(Con- During2014,thefollowingreportingformswere centrationLimit)forfinancialcompaniesthatdo revised: nototherwisereportconsolidatedtotalliabilitiesto theFederalReserveorotherappropriatefederal • FRY-9C,FRY-9SP,andtheFFIEC101—to bankingagency. reflectchangestothecalculationof regulatory capitalconsistentwiththeFederalReserve’srevised • FRY-14—tobetteralignFRY-14AScheduleA regulatorycapitalrules.TheFederalReservemodi- (Summary)withthechangestoPartIIof SchedfiedtheFRY-9CtosplitScheduleHC-R,Regula- uleHC-Rof theFRY-9Cmentionedabove.Also, toryCapital,intotwoparts:PartI,whichcollects numerousitemswereaddedtothecounterparty informationonrevisedregulatorycapitalcompo- collectionthatprovidesnettingsetandassettype nentsandratios;andPartII,whichcollectsinfor- informationforsecuritiesfinancingtransactions mationonexistingrisk-weightedassets.TheFed- andderivativeexposurestosupportongoingsupereralReserve(withtheotherFFIECmemberbank- visionandsupervisorymodelling.Finally,several ingagencies)modifiedtheFFIEC101ScheduleA, itemswereaddedtothecollectionof wholesale AdvancedRisk-BasedCapital,andnineother loaninformation. schedulestoimplementtherevisedadvanced • FRY-16—toincorporatethenewcapitalframeapproachescapitalrules. workrequirementsof collectingcommonequity • PartIIof ScheduleHC-Rof theFRY-9C,and tier1capitalandthecommonequitytier1risklineitemsrelatedtosecuritieslentandborrowedon basedcapitalratio,andtomodifythereporting theFRY-9C—toensurethatallbankingorganiza- instructionstoclarifyanumberof items. tionsarereportingrisk-weightedassetsconsistent withthestandardizedapproachoutlinedinthe Themajorityof SLHCsbecamecompliantwithFedrevisedregulatorycapitalrules. eralReserveregulatoryreportingbytheendof 2013. Atthistime,approximately20commercialandinsur- • FRY-7Q—torequireallFBOswithtotalconsolianceSLHCsremainexemptfromfilingconsolidated datedassetsof $50billionormoretobeginfiling regulatoryreports. quarterlyregardlessof financialholdingcompany status.Inaddition,adataitemwasaddedtoPart1 CommercialBankRegulatoryReports tocollectthetop-tierFBO’stotalcombinedassets Asthefederalsupervisorof statememberbanks,the of U.S.operations,netof intercompanybalances FederalReserve,alongwiththeotherbankingagenandtransactionsbetweenU.S.domiciledaffiliates, cies(throughtheFFIEC),requiresbankstosubmit branches,andagencies(effectiveMarch2014).In quarterlytheConsolidatedReportsof Condition December2014,theFRY-7Qreportwasrevisedto andIncome(CallReports).CallReportsarethepricollectanewdataitemtoimplementtheenhanced marysourceof dataforthesupervisionandregulaprudentialstandardsforFBOsadoptedpursuant tionof banksandtheongoingassessmentof the overallsoundnessof thenation’sbankingsystem. 11 HCsaredefinedasbankholdingcompanies,savingsandloan holdingcompanies,andsecuritiesholdingcompanies. CallReportdataprovidethemostcurrentstatistical

SupervisionandRegulation 69 dataavailableforevaluatinginstitutions’corporate Supervisory Information Technology applications,foridentifyingareasof focusforboth on-siteandoff-siteexaminations,andforconsidering TheFederalReserve’ssupervisoryinformationtechmonetaryandotherpublicpolicyissues.CallReport nologyfunction,undertheguidanceof theSubcomdata,whichalsoserveasbenchmarksforthefinan- mitteeonSupervisoryAdministrationandTechnolcialinformationrequiredbymanyotherFederal ogy,workstoidentifyandsetprioritiesforinforma- Reserveregulatoryfinancialreports,arewidelyused tiontechnologyinitiativeswithinthesupervisionand bystateandlocalgovernments,statebankingsuper- regulationbusinessline.Initiativesincludethedevelvisors,thebankingindustry,securitiesanalysts,and opmentandmaintenanceof applicationsandtools theacademiccommunity. toassistwiththeexaminationof bankinginstitutions,datacollectionandstorage,developmentand During2014,theFFIECrevisedtheCallReportto deploymentof collaborationtools,anddatasecurity. reflectchangestothecalculationof regulatorycapitalconsistentwiththebankingagencies’revisedregu- In2014,theinformationtechnologysupervisory latorycapitalrules.TheFFIECmodifiedtheCall functionfocusedon ReporttosplitScheduleRC-R,RegulatoryCapital, • Largebankandforeignbanksupervision.Continintotwoparts:PartI,whichcollectsinformationon uedimprovingthesupervisionof largefinancial revisedregulatorycapitalcomponentsandratios,and institutionsandforeignbanksbyintegratingdocu- PartII,whichcollectsinformationonexistingriskmentrepositoriesforcontinuousmonitoringand weightedassets.TheFFIECalsorevisedthefollowpoint-in-timeexaminations.Onesuchapplication ingtypesof informationontheCallReport:effective usedtoimprovemonitoringandtrackingcapabili- March2014(1)informationaboutinternational tiesisC-SCAPE(ConsolidatedSupervisionComremittancetransfers;(2)informationontradenames parativeAnalysisPlanningandExecution). (otherthananinstitution’slegaltitle)usedtoidentify physicalofficesandtheaddressesof anypublic- • Communityandregionalbanksupervision.For facingInternetwebsites(otherthantheinstitution’s bankinginstitutionswithlessthan$50billionin primaryInternetwebsiteaddress)atwhichtheinsti- assets,workedwithcommunityandregionalbank tutionacceptsorsolicitsdepositsfromthepublic; examiners,aswellastheFDICandstatebank (3)responsestoayes-noquestionaskingwhetherthe supervisors,toenhancesupervisorytoolsused reportinginstitutionoffersanydepositaccountprod- jointlybythefederalandstatebankingagencies. ucts(otherthantimedeposits)primarilyintendedfor • Supervisorysupporttools.Continuedtodevelop consumers;(4)forinstitutionswith$1billionor andimplementadministrativetechnicalsolutions moreintotalassetsthatofferoneormoredeposit tohelpsupportexaminersandothersupervisory accountproducts(otherthantimedeposits)primarstaff becomemoreefficientthroughthemanageilyintendedforconsumers,informationonthetotal mentof documentation,travel,andtime.Onesuch balancesof theseconsumerdepositaccountprodapplicationimplementedin2014isROAM–S—a ucts;and,effectiveMarch2015,(5)forinstitutions newsupervisoryschedulingtoolthatsupportsall with$1billionormoreintotalassetsthatofferone supervisoryprograms. ormoredepositaccountproducts(otherthantime deposits)primarilyintendedforconsumers,informa- • Content,collaboration,andmobility.(1)Provided tionontheamountof incomeearnedfromeachof technologydevelopmentandsupportonabroader threecategoriesof servicechargesontheirconsumer scale,withapplicationsandprogramsdesignedto depositaccountproducts. beusedacrossthesupervisoryfunctiontoenhance efficiencyandincreasecollaboration,mobility,and Alsoduring2014,theFFIECproposedrevisionsto datacollectionandstorage;(2)implementedanew PartIIof ScheduleRC-R,andtolineitemsrelatedto documentmanagementplatformtoreplaceretired securitieslentandborrowedonScheduleRC-L, platformsusedbytheReserveBanks;(3)unveiled DerivativesandOff-Balance-SheetItems,toensure newandenhancedcollaborationtools,including thatallbankingorganizationsarereportingrisk- businesssocialsitesforinternalandexternalcolweightedassetsconsistentwiththestandardized laboration;and(4)leveragedanInteragencySteerapproachoutlinedintherevisedregulatorycapital ingGrouptoimprovemethodsforsharingwork rules. amongstateandfederalregulators.

70 101stAnnualReport|2014 Table3.Trainingforbankingsupervisionandregulation,2014 Numberofenrollments Instructionaltime Numberofcourse Coursesponsorortype FederalReserve S b t a a n te ki a n n g d a f g e e d n e c r y al (approxi d m ay a s te )1 training offerings personnel personnel FederalReserveSystem 1,948 489 838 1,892 FFIEC 7,445 336 428 107 RapidResponse2 17,146 4,022 11 90 1 Trainingdaysareapproximate.Systemcourseswerecalculatedusingfivedaysasanaverage,withFFIECcoursescalculatedusingfourdaysasanaverage. 2 RapidResponse®isavirtualprogramcreatedbytheFederalReserveSystemasameansofprovidinginformationonemergingtopicstoFederalReserveandstatebank examiners. • Streamlineddataaccessandimprovedsecurity.Con- (FFIEC101).Structuredataweremadeavailable tinuedtostreamlinedataaccessforthesupervisory inbulkformatforattributes,relationships,and function,whileenhancingoveralldatasecurity. transformationinformationforholdingcompanies withtotalassetsgreaterthan$10billion.Inaddi- NationalInformationCenter tion,stepsweretakentoimprovecollaboration TheNationalInformationCenter(NIC)istheFed- withotheragenciesintermsof sharinginstitutioneralReserve’scomprehensiverepositoryforsupervi- specificfinancialdata. sory,financial,bankingstructuredata,aswellas supervisorydocuments.TheNICincludes(1)data Staff Development onbankingstructurethroughouttheUnitedStatesas wellasforeignbankingconcerns;(2)theNational TheFederalReserve’sstaff developmentprogram ExaminationData,anapplicationthatenablessuper- supportstheongoingdevelopmentof about3,000 visorypersonnelandfederalandstatebanking professionalsupervisorystaff,ensuringthattheyhave authoritiestoaccessNICdata;(3)theBankingOrga- theskillsnecessarytomeettheirevolvingsupervisory nizationNationalDesktop,anapplicationthatfacili- responsibilities.TheFederalReservealsoprovides tatessecure,real-timeelectronicinformationsharing courseofferingstostaff atstatebankingagencies. andcollaborationamongfederalandstatebanking Trainingactivitiesin2014aresummarizedintable3. regulatorsforthesupervisionof bankingorganiza- ExaminerCommissioningProgram tions;and(4)theCentralDocumentandText Repository,anapplicationthatcontainsdocuments TheFederalReserveSystem’scommissioningprosupportingthesupervisoryprocesses. gramforassistantexaminersissetforthintheExaminerCommissioningProgram(SRletter98-02).12 • Databaseenhancements.In2014,thesupervisory Examinerschooseoneof twospecialtytracks— informationtechnologyfunctionstrengthened (1)safetyandsoundnessor(2)consumercompliance. capabilitiesintheareasof datacollectionanddata stewardship,implementednewtoolsfortheanaly- Onaverage,individualsmovethroughacombination sisof largevolumesof data,andenhanceddata of classroomofferings,self-pacedlearning,and acquisitionandanalysisthroughthedeploymentof on-the-jobtrainingoveraperiodof threeyears. neworimprovedapplications.TheNICteamhas Achievementismeasuredbycompletingtherequired alsocontinuedtopartnerwiththeBoard’sOffice coursecontent,demonstratingadequateon-the-job of theChief DataOfficertocollaborateonenterknowledge,andpassingaprofessionallyvalidated prisedatainventory,applicationarchitecture,and proficiencyexamination. integrationactivities. • Publicwebsiteandexternalcollaboration.Several In2014,156examinerspassedthefirstproficiency reportswereaddedtotheNICpublicwebsite, exam(113insafetyandsoundnessand43inconincludingtheBankingOrganizationSystemicRisk sumercompliance). Report,snapshotsof datausedinthecalculation of globalsystemicallyimportantbanks,andRisk- BasedCapitalReportingforInstitutionsSubjectto 12 SRletter98-02isavailableatwww.federalreserve.gov/ theAdvancedCapitalAdequacyFramework boarddocs/srletters/1998/sr9802.htm.

SupervisionandRegulation 71 Currently,theFederalReserveisundertakingamajor foreignbanks.Theapplicationsandnoticesconcern initiativetomodernizeitsCommunityBankExam- BHCandSLHCformationsandacquisitions,bank inerCommissioningProgram.Additionally,efforts mergers,andothertransactionsinvolvingbanksand areunderwaytobuildanExaminerCommissioning savingsassociationsornonbankfirms.In2014,the ProgramforLargeFinancialInstitutions. FederalReserveactedon1,133applicationsfiled underthesixstatutes. ContinuingProfessionalDevelopment Aspartof anongoingstrategiceffortrelatedto In2014,theFederalReservereleaseditsfirstSemianlearninganddevelopment,theFederalReserveis nualReportonBankingApplicationsActivity,which enhancingcontinuingprofessionaldevelopment providesaggregateinformationonproposalsfiledby throughtheadditionandmodernizationof several bankingorganizationsandreviewedbytheFederal courses,tools,andprograms. Reserve.Thereportincludesstatisticsonthenumber of proposalsthathavebeenapproved,denied,and Technical,professional,andleadershipskilldevelop- withdrawn,aswellasgeneralinformationaboutthe mentopportunitiesareavailabletoexaminersina lengthof timetakentoprocessproposals.Additionblendedlearningapproach.Thisincludesself-study ally,thereportdiscussescommonreasonsthatpromaterials,onlinevirtuallearningoptions,andtradi- posalshavebeenwithdrawnfromconsideration.The tionalclassroominstruction.Schools,conferences, firstreportisavailableatwww.federalreserve.gov/ andprogramscoveringavarietyof regulatorytopics newsevents/press/other/20141124a.htm. areofferedwithintheSystem,Board,andFFIEC. Systemprogramsarealsoavailabletostateandfed- BankHoldingCompanyActApplications eralbankingagencypersonnel. UndertheBHCAct,acorporationorsimilarlegal entitymustobtaintheFederalReserve’sapproval beforeformingaBHCthroughtheacquisitionof Regulation oneormorebanksintheUnitedStates.Once formed,aBHCmustreceiveFederalReserve TheFederalReserveexercisesimportantregulatory approvalbeforeacquiringorestablishingadditional influenceoverentryintotheU.S.bankingsystem banks.Also,BHCsgenerallymayengageinonly structurethroughitsadministrationof severalfederal thosenonbankingactivitiesthattheBoardhasprevistatutes.TheFederalReserveisalsoresponsiblefor ouslydeterminedtobecloselyrelatedtobanking imposingmarginrequirementsonsecuritiestransac- undersection4(c)(8)of theBHCAct.13Depending tions.Incarryingoutitsresponsibilities,theFederal onthecircumstances,theseactivitiesmayormaynot Reservecoordinatessupervisoryactivitieswiththe requireFederalReserveapprovalinadvanceof their otherfederalbankingagencies,stateagencies,func- commencement. tionalregulators(thatis,regulatorsforinsurance, securities,andcommoditiesfirms),andforeignbank WhenreviewingaBHCapplicationornoticethat regulatoryagencies. requiresapproval,theFederalReserveconsidersthe financialandmanagerialresourcesof theapplicant, Regulation of the U.S. Banking Structure thefutureprospectsof boththeapplicantandthe firmtobeacquired,financialstabilityfactors,the TheFederalReserveadministerssixfederalstatutes convenienceandneedsof thecommunitytobe thatapplytoBHCs,financialholdingcompanies, served,thepotentialpublicbenefits,thecompetitive memberbanks,SLHCs,andforeignbankingorganieffectsof theapplication,andtheapplicant’sability zations:theBHCAct,theBankMergerAct,the tomakeavailabletotheFederalReserveinformation ChangeinBankControlAct,theFederalReserve deemednecessarytoensurecompliancewithappli- Act,section10of theHomeOwnersLoanAct cablelaw.TheFederalReservealsomustconsiderthe (HOLA),andtheInternationalBankingAct. viewsof theU.S.Departmentof Justiceregarding Inadministeringthesestatutes,theFederalReserve 13 Since1996,theBHCActhasprovidedanexpeditedpriornotice actsonavarietyof applicationsandnoticesthat procedureforcertainpermissiblenonbankactivitiesandfor directlyorindirectlyaffectthestructureof theU.S. acquisitionsofsmallbanksandnonbankentities.Sincethat bankingsystematthelocal,regional,andnational time,theBHCActhasalsopermittedwell-runBHCsthatsatisfycertaincriteriatocommencecertainothernonbankactivilevels;theinternationaloperationsof domesticbanktiesonadenovobasiswithoutfirstobtainingFederalReserve ingorganizations;ortheU.S.bankingoperationsof approval.

72 101stAnnualReport|2014 thecompetitiveaspectsof anyproposedBHCacqui- bank,BHC,orSLHCtoobtainapprovalfromthe sitioninvolvingunaffiliatedinsureddepositoryinsti- relevantfederalbankingagencybeforecompleting tutions.Inthecaseof aforeignbankingorganization thetransaction.TheFederalReserveisresponsible seekingtoacquirecontrolof aU.S.bank,theFederal forreviewingchangesinthecontrolof statemember Reservealsoconsiderswhethertheforeignbankis banks,BHCs,andSLHCs.Initsreview,theFederal subjecttocomprehensivesupervisionorregulation Reserveconsidersthefinancialposition,competence, onaconsolidatedbasisbyitshome-countrysupervi- experience,andintegrityof theacquiringperson;the sor.In2014,theFederalReserveactedon253appli- effectof theproposedchangeonthefinancialcondicationsandnoticesfiledbyBHCstoacquireabank tionof thebank,BHC,orSLHCbeingacquired;the oranonbankfirm,ortootherwiseexpandtheir futureprospectsof theinstitutiontobeacquired;the activities. effectof theproposedchangeoncompetitioninany relevantmarket;thecompletenessof theinformation ABHCmayrepurchaseitsownsharesfromits submittedbytheacquiringperson;andwhetherthe shareholders.Certainstockredemptionsrequire proposedchangewouldhaveanadverseeffectonthe priorFederalReserveapproval.TheFederalReserve DepositInsuranceFund.Aproposedtransaction mayobjecttostockrepurchasesbyholdingcompa- shouldnotjeopardizethestabilityof theinstitution niesthatfailtomeetcertainstandards,includingthe ortheinterestsof depositors.Duringitsreviewof a Board’scapitaladequacyguidelines.In2014,the proposedtransaction,theFederalReservealsomay FederalReserveactedonsixstockrepurchaseappli- contactotherregulatoryorlawenforcementagencies cationsbyBHCs. forinformationaboutrelevantindividuals.In2014, theFederalReserveapproved131changeincontrol TheFederalReservealsoreviewselectionssubmitted notices. byBHCsseekingfinancialholdingcompanystatus undertheauthoritygrantedbytheGramm-Leach- FederalReserveActApplications BlileyAct.BHCsseekingfinancialholdingcompany UndertheFederalReserveAct,abankmustseek statusmustfileawrittendeclarationwiththeFederal FederalReserveapprovaltobecomeamemberbank. Reserve.In2014,32domesticfinancialholdingcom- AmemberbankmayberequiredtoseekFederal panydeclarationswereapproved. Reserveapprovalbeforeexpandingitsoperations domesticallyorinternationally.Statememberbanks BankMergerActApplications mustobtainFederalReserveapprovaltoestablish TheBankMergerActrequiresthatallapplications domesticbranches,andallmemberbanks(including involvingthemergerof insureddepositoryinstitu- nationalbanks)mustobtainFederalReserve tionsbeactedonbytherelevantfederalbanking approvaltoestablishforeignbranches.Whenreviewagency.TheFederalReservehasprimaryjurisdiction ingapplicationsformembership,theFederalReserve if theinstitutionsurvivingthemergerisastatemem- considers,amongotherthings,thebank’sfinancial berbank.Inactingonamergerapplication,theFed- conditionanditsrecordof compliancewithbanking eralReserveconsidersthefinancialandmanagerial lawsandregulations.Whenreviewingapplicationsto resourcesof theapplicant,thefutureprospectsof the establishdomesticbranches,theFederalReserveconexistingandcombinedorganizations,financialstabil- siders,amongotherthings,thescopeandnatureof ityfactors,theconvenienceandneedsof thecommu- thebankingactivitiestobeconducted.Whenreviewnitiestobeserved,andthecompetitiveeffectsof the ingapplicationsforforeignbranches,theFederal proposedmerger.TheFederalReservealsomustcon- Reserveconsiders,amongotherthings,thecondition sidertheviewsof theU.S.Departmentof Justice of thebankandthebank’sexperienceininternaregardingthecompetitiveaspectsof anyproposed tionalbanking.In2014,theFederalReserveactedon bankmergerinvolvingunaffiliatedinsureddeposi- 47membershipapplications,525newandmergertoryinstitutions.In2014,theFederalReserve relateddomesticbranchapplications,andoneforeign approved70mergerapplicationsundertheBank branchapplication. MergerAct. StatememberbanksalsomustobtainFederal ChangeinBankControlActApplications Reserveapprovaltoestablishfinancialsubsidiaries. TheChangeinBankControlActrequiresindividuals Thesesubsidiariesmayengageinactivitiesthatare andcertainotherpartiesthatseekcontrolof aU.S. financialinnatureorincidentaltofinancialactivities,

SupervisionandRegulation 73 includingsecurities-relatedandinsuranceagency- Act.SLHCsseekingfinancialholdingcompanystarelatedactivities.In2014,onefinancialsubsidiary tusmustfileawrittendeclarationwiththeFederal applicationwasapproved. Reserve.In2014,threeSLHCfinancialholdingcompanydeclarationswereapproved. HomeOwners’LoanActApplications UnderHOLA,acorporationorsimilarlegalentity OverseasInvestmentApplicationsby mustobtaintheFederalReserve’sapprovalbefore U.S.BankingOrganizations forminganSLHCthroughtheacquisitionof oneor U.S.bankingorganizationsmayengageinabroad moresavingsassociationsintheUnitedStates.Once rangeof activitiesoverseas.Manyof theactivitiesare formed,anSLHCmustreceiveFederalReserve conductedindirectlythroughEdgeActandagreeapprovalbeforeacquiringorestablishingadditional mentcorporationsubsidiaries.Althoughmostforsavingsassociations.Also,SLHCsgenerallymay eigninvestmentsaremadeundergeneralconsentproengageinonlythosenonbankingactivitiesthatare ceduresthatinvolveonlyafter-the-factnotificationto specificallyenumeratedinHOLAorthattheBoard theFederalReserve,largeandothersignificant haspreviouslydeterminedtobecloselyrelatedto investmentsrequirepriorapproval.In2014,theFedbankingundersection4(c)(8)of theBHCAct. eralReserveapproved15applicationsandnoticesfor Dependingonthecircumstances,theseactivitiesmay overseasinvestmentsbyU.S.bankingorganizations, ormaynotrequireFederalReserveapprovalin manyof whichrepresentedinvestmentsthroughan advanceof theircommencement.In2014,theFed- EdgeActoragreementcorporation. eralReserveactedon29applicationsfiledbySLHCs toacquireabankoranonbankfirm,ortootherwise InternationalBankingActApplications expandtheiractivities. TheInternationalBankingAct,asamendedbythe ForeignBankSupervisionEnhancementActof UnderHOLA,asavingsassociationreorganizingto 1991,requiresforeignbankstoobtainFederal amutualholdingcompany(MHC)structuremust Reserveapprovalbeforeestablishingbranches,agenreceiveFederalReserveapprovalpriortoitsreorgani- cies,commerciallendingcompanysubsidiaries,or zation.Inaddition,anMHCmustreceiveFederal representativeofficesintheUnitedStates. Reserveapprovalbeforeconvertingtostockform, andMHCsmustreceiveFederalReserveapproval Inreviewingapplications,theFederalReservegenerbeforewaivingdividendsdeclaredbytheMHC’s allyconsiderswhethertheforeignbankissubjectto subsidiary.In2014,theFederalReserveactedonno comprehensivesupervisionorregulationonaconapplicationsforMHCreorganizations.In2014,the solidatedbasisbyitshome-countrysupervisor.It FederalReserveactedonnineapplicationsfiledby alsoconsiderswhetherthehome-countrysupervisor MHCstoconverttostockform,andsevenapplica- hasconsentedtotheestablishmentof theU.S.office; tionstowaivedividends. thefinancialconditionandresourcesof theforeign bankanditsexistingU.S.operations;themanagerial WhenreviewinganSLHCapplicationornoticethat resourcesof theforeignbank;whetherthehomerequiresapproval,theFederalReserveconsidersthe countrysupervisorsharesinformationregardingthe financialandmanagerialresourcesof theapplicant, operationsof theforeignbankwithothersupervithefutureprospectsof boththeapplicantandthe soryauthorities;whethertheforeignbankhasprofirmtobeacquired,theconvenienceandneedsof the videdadequateassurancesthatinformationconcerncommunitytobeserved,thepotentialpublicbenefits, ingitsoperationsandactivitieswillbemadeavailable thecompetitiveeffectsof theapplication,andthe totheFederalReserve,if deemednecessarytodeterapplicant’sabilitytomakeavailabletotheFederal mineandenforcecompliancewithapplicablelaw; Reserveinformationdeemednecessarytoensure whethertheforeignbankhasadoptedandimplecompliancewithapplicablelaw.TheFederalReserve mentedprocedurestocombatmoneylaunderingand alsomustconsidertheviewsof theU.S.Department whetherthehomecountryof theforeignbankis of Justiceregardingthecompetitiveaspectsof any developingalegalregimetoaddressmoneylaunder- SLHCproposalinvolvingtheacquisitionormerger ingorisparticipatinginmultilateraleffortstocomof unaffiliatedinsureddepositoryinstitutions. batmoneylaundering;andtherecordof theforeign bankwithrespecttocompliancewithU.S.law.In TheFederalReservealsoreviewselectionssubmitted 2014,theFederalReserveapprovedfourapplications bySLHCsseekingstatusasfinancialholdingcompa- byforeignbankstoestablishbranches,agencies,or niesundertheauthoritygrantedbytheDodd-Frank representativeofficesintheUnitedStates.

74 101stAnnualReport|2014 PublicNoticeofFederalReserveDecisions publiclyheldbankingorganizationsareBHCsand CertaindecisionsbytheFederalReservethatinvolve thereportingthresholdwasrecentlyraised,onlytwo anacquisitionbyaBHC,abankmerger,achangein statememberbankswererequiredtosubmitdatato control,ortheestablishmentof anewU.S.banking theFederalReservein2014.Theinformationsubmitpresencebyaforeignbankaremadeknowntothe tedbythesetwosmallstatememberbanksisavailpublicbyanorderoranannouncement.Ordersstate abletothepublicuponrequestandisprimarilyused thedecision,theessentialfactsof theapplicationor fordisclosuretothebank’sshareholdersandpublic notice,andthebasisforthedecision;announcements investors. stateonlythedecision.Allordersandannounce- SecuritiesCredit mentsaremadepublicimmediatelyandaresubsequentlyreportedintheBoard’sweeklyH.2statistical UndertheSecuritiesExchangeActof 1934,the release.TheH.2releasealsocontainsannouncements Boardisresponsibleforregulatingcreditincertain of applicationsandnoticesreceivedbytheFederal transactionsinvolvingthepurchasingorcarryingof Reserveuponwhichactionhasnotyetbeentaken. securities.TheBoard’sRegulationTlimitsthe Foreachpendingapplicationandnotice,therelated amountof creditthatmaybeprovidedbysecurities H.2Areleasegivesthedeadlineforcomments.The brokersanddealerswhenthecreditisusedtopur- Board’swebsiteprovidesinformationonordersand chasedebtandequitysecurities.TheBoard’sRegulaannouncements(www.federalreserve.gov/newsevents/ tionUlimitstheamountof creditthatmaybepropress/orders/2014orders.htm)aswellasaguidefor videdbylendersotherthanbrokersanddealerswhen U.S.andforeignbankingorganizationsthatwishto thecreditisusedtopurchaseorcarrypubliclyheld submitapplications(www.federalreserve.gov/ equitysecuritiesif theloanissecuredbythoseor bankinforeg/afi/afi.htm). otherpubliclyheldequitysecurities.TheBoard’s RegulationXappliesthesecreditlimitations,ormar- Enforcement of Other Laws ginrequirements,tocertainborrowersandtocertain and Regulations creditextensions,suchascreditobtainedfromforeignlendersbyU.S.citizens. TheFederalReserve’senforcementresponsibilities alsoextendtothedisclosureof financialinformation SeveralregulatoryagenciesenforcetheBoard’ssecubystatememberbanksandtheuseof credittopur- ritiescreditregulations.TheSEC,theFinancial chaseandcarrysecurities. IndustryRegulatoryAuthority,andtheChicago BoardOptionsExchangeexaminebrokersanddeal- FinancialDisclosuresbyStateMemberBanks ersforcompliancewithRegulationT.Withrespectto UndertheSecuritiesExchangeActof 1934andFed- compliancewithRegulationU,thefederalbanking eralReserve’sRegulationH,certainstatemember agenciesexaminebanksundertheirrespectivejurisbanksarerequiredtomakefinancialdisclosuresto dictions;theFarmCreditAdministrationandthe theFederalReserveusingthesamereportingforms NCUAexaminelendersundertheirrespectivejuris- (suchasForm10K—annualreportandSched- dictions;andtheFederalReserveexaminesother ule14A—proxystatement)thatarenormallyusedby RegulationUlenders. publiclyheldentitiestosubmitinformationtothe SecuritiesExchangeCommission.14Asmostof the ExchangeAct,thepowersoftheSECoverbankingentitiesthat fallunderSection12(g)arevestedwiththeappropriatebanking regulator.Specifically,statememberbankswith2,000ormore 14 UnderSection12(g)oftheSecuritiesExchangeAct,certain shareholdersandmorethan$10millionintotalassetsare companiesthathaveissuedsecuritiesaresubjecttoSECregis- requiredtoregisterwith,andsubmitdatato,theFederal trationandfilingrequirementsthataresimilartothoseimposed Reserve.Thesethresholdsreflecttherecentamendmentsbythe onpubliccompanies.PerSection12(i)oftheSecurities JumpstartOurBusinessStartupsAct(JOBSAct).

75 5 Consumer and Community Affairs TheDivisionof ConsumerandCommunityAffairs services,implicationsof thefinancialcrisison (DCCA)hasprimaryresponsibilityforcarryingout youngworkers,andaccesstocreditforsmall theBoardof Governor’sroleinconsumerfinancial businesses. protectionandcommunitydevelopment.DCCAcon- • Engaging,convening,andinformingkeystakeholdductsconsumer-focusedsupervision,research,and erstoidentifyemergingissuesandadvancewhat policyanalysis,aswellasimplementsrelevantstatuworksincommunityreinvestmentandconsumerprotoryrequirementsandfacilitatescommunitydeveloptection.Thedivisioncontinuedtopromotefairand ment.Throughtheseefforts,thedivisionworksto informedaccesstofinancialmarketsforallconensurethatconsumerandcommunityperspectives sumers,particularlytheneedsof underserved informFederalReservepolicy,actions,andresearch populations,byengaginglenders,governmentoffiinadvancingDCCA’smissiontopromoteafairand cials,andcommunityleaders.Throughouttheyear, transparentconsumerfinancialservicesmarketplace DCCAconvenedprogramstoshareinformation andeffectivecommunitydevelopment. andresearchoneffectivecommunitydevelopment policiesandstrategies. Throughout2014,thedivisionengagedinnumerous consumerandcommunity-relatedfunctionsand • Writingandreviewingregulationsthateffectively policyactivitiesinthefollowingareas: implementconsumerprotectionandcommunityreinvestmentlaws.ThedivisionmanagestheBoard’s • Formulatingconsumer-focusedsupervisionand regulatoryresponsibilitieswithrespecttocertain examinationpolicytoensurethatfinancialinstituentitiesandspecificstatutoryprovisionsof the tionsforwhichtheFederalReservehasauthority consumerfinancialservicesandfairlendinglaws. complywithconsumerprotectionandmeetrequire- DCCAdraftedregulationsandissuedinterpretamentsof communityreinvestmentlawsandregulationsandcomplianceguidancefortheindustryand tions.Thedivisionprovidedoversightforthe theReserveBanks. ReserveBankconsumercompliancesupervision andexaminationprogramsinstatememberbanks andbankholdingcompanies(BHCs)throughits Supervision and Examinations policydevelopment,examinertraining,andsupervisionoversightprograms,whichincludeenforce- DCCAdevelopsandsupportssupervisorypolicyand mentof fairlending,unfairordeceptiveactsor examinationproceduresforconsumerprotection practices(UDAP),andfloodinsurancerules; lawsandregulations,aswellastheCommunityReinanalysisof bankandBHCapplicationsinregard vestmentAct(CRA),aspartof itssupervisionof the toconsumerprotection;andprocessingof conorganizationsforwhichtheBoardhasauthority, sumercomplaints. includingholdingcompanies,statememberbanks, • Conductingrigorousresearch,analysis,anddata andforeignbankingorganizations.Thedivisionalso collectiontoinformFederalReserveandotherpoli- administerstheFederalReserveSystem’sriskcymakersaboutconsumerprotectionandcommunity focusedprogramforassessingconsumercompliance economicdevelopmentissuesandopportunities.The riskatthelargestbankandfinancialholdingcompadivisionanalyzedemergingissuesinconsumer niesintheSystem,withdivisionstaff ensuringthat financialservicesresearch,policies,andpracticesin consumercomplianceriskiseffectivelyintegrated ordertounderstandtheirimplicationsfortheeco- intotheconsolidatedsupervisionoversightof the nomicandsupervisorypoliciesthatarecoretothe holdingcompany.Thedivisionoverseestheeffortsof centralbank’sfunctions,aswellastogaininsight the12ReserveBankstoensurethatconsumerprointoconsumerdecisionmakingrelatedtofinancial tectionlawsandregulationsarerigorouslyandcon-

76 101stAnnualReport|2014 sistentlyenforcedforthe850statememberbanks InNovember2014,theFederalReserveissueda thattheFederalReservesupervisesforcompliance detailedlistingof FederalReservesupervisoryguidwithconsumerprotectionandcommunityreinvest- ancedocumentsthatareapplicabletoSLHCs.2The mentlawsandregulations.Divisionstaff provide listingissupplementaltopreviouslyissuedguidance guidanceandexpertisetotheReserveBanksoncon- thatinformedSLHCstocomplywithFederal sumerprotectionlawsandregulations,bankand ReserveguidanceandnotOfficeof ThriftSupervi- BHCapplicationanalysisandprocessing,examina- sion(OTS)guidanceissuedpriortoJuly21,2011— tionandenforcementtechniquesandpolicymatters, thedatethatsupervisionandregulationof SLHCs examinertraining,andemergingissues.Finally,staff transferredfromtheOTStotheFederalReserve. membersparticipateininteragencyactivitiesthat promoteconsistencyinexaminationprinciples,stan- Mortgage Servicing and Foreclosure dards,andprocesses. PaymentAgreementStatus Examinationsareoneof theFederalReserve’smeth- Throughout2014,Boardstaff continuedtoworkto odsof ensuringcompliancewithconsumerprotec- overseeandimplementtheenforcementactions tionlawsandassessingtheadequacyof consumer against16mortgageloanservicersthatwereissued compliancerisk-managementsystemswithinregu- bytheFederalReserveandtheOfficeof theComplatedentities.During2014,theReserveBankscom- trollerof theCurrency(OCC)betweenApril2011 pleted225consumercomplianceexaminationsof andApril2012.Atthattime,alongwithother statememberbanksand31examinationsof foreign requirements,thetworegulatorsdirectedservicersto bankingorganizations,1examinationof anEdge retainindependentconsultantstoconductcompre- Actcorporation,and1examinationof anagreement hensivereviewsof foreclosureactivitytodetermine corporation.1 whethereligible3borrowerssufferedfinancialinjury becauseof servicererrors,misrepresentations,or Bank Holding Company otherdeficiencies.Thefilereviewinitiatedbythe Consolidated Supervision independentconsultants,combinedwithasignificant borroweroutreachprocess,wasreferredtoasthe During2014,staff reviewedmorethan115bankand IndependentForeclosureReview(IFR). financialholdingcompaniestoensureconsumer complianceriskwasappropriatelyincorporatedinto In2013,theregulatorsenteredintoagreementswith theconsolidatedrisk-managementprogramforthe 15of themortgageloanservicerstoreplacetheIFR organization.Divisionstaff participatedwithstaff withdirectcashpaymentstoalleligibleborrowers fromtheBoard’sDivisionof BankingSupervision andotherassistance(thePaymentAgreement).4The andRegulationonnumerousprojectsrelatedto participatingservicersagreedtopayanestimated ongoingimplementationof theDodd-FrankWall $3.9billionto4.4millionborrowerswhoseprimary StreetReformandConsumerProtectionActof 2010 residencewasinaforeclosureprocessin2009or (Dodd-FrankAct),includingstandardsforassessing 2010.ThePaymentAgreementalsorequiredthesercorporategovernanceandcontinuedintegrationof vicerstocontributeanadditional$5.8billiondollars savingsandloanholdingcompanies(SLHCs)under inotherforeclosurepreventionassistance,suchas FederalReservesupervision. loanmodificationsandforgivenessof deficiency judgments.Fortheparticipatingservicers,fulfillment 1 In2013,DCCAbeganreportingthenumberofexaminations of theagreementwillsatisfytheforeclosurereview completedbasedonthecalendaryear(fromJanuary1to requirementsof theenforcementactionsissuedby December31);inprioryears,numbershadbeenreportedforthe periodfromJuly1throughJune30.Agencyandbranchoffices theregulatorsin2011and2012.ThePaymentAgreeofforeignbankingorganizations,EdgeActcorporations,and mentdidnotaffecttheservicers’continuingobligaagreementcorporationsfallundertheFederalReserve’spurview tionsundertheenforcementactionstoaddressdefiforconsumercomplianceactivities.Anagreementcorporationis atypeofbankcharteredbyastatetoengageininternational banking.Thebank“agrees”withtheFederalReserveBoardto 2 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ limititsactivitiestothoseallowedanEdgeActcorporation.An srletters/sr1409.htm. EdgeActcorporationisabankinginstitutionwithaspecial charterfromtheFederalReservetoconductinternationalbank- 3 Borrowerswereeligibleiftheirprimaryresidencewasinaforeingoperationsandcertainotherformsofbusinesswithoutcom- closureactionwithoneofthe16mortgageloanservicersatany plyingwithstate-by-statebankinglaws.Bysettinguporinvest- timein2009or2010. inginEdgeActcorporations,U.S.banksareabletogainportfo- 4 OneOCC-regulatedservicerelectedtocompletetheIndepenlioexposuretofinancialinvestingoperationsnotavailableunder dentForeclosureReview,anddidnot,therefore,enterintothe standardbankinglaws. PaymentAgreement.

ConsumerandCommunityAffairs 77 cienciesintheirmortgageservicingandforeclosure Servicersmayfulfilltheirobligationsthroughthree policiesandprocedures. specificconsumer-relief activitiessetforthinthe NationalMortgageSettlement,includingfirst-lien Apayingagent,RustConsulting,Inc.,(Rust)was loanmodifications,second-lienloanmodifications, retainedtoadministerpaymentstoborrowerson andshortsalesordeeds-in-lieuof foreclosure.Serbehalf of theparticipatingservicers.Beginningin vicersweregiventheoption,subjecttonon-objection April2013,aletterwithanenclosedcheckwassent fromtheirregulator,tomeettheirforeclosurepreventoborrowerswhohadaforeclosureactioninitiated, tionassistancerequirementsbypayingadditional pending,orcompletedin2009or2010withanyof cashintothequalifiedsettlementfundstobeusedfor theparticipatingservicers.Letterswithcheckswere directpaymentstoconsumersorbyprovidingcash mailedtoeligibleborrowersthroughout2013and orotherresourcecommitmentstoborrowercounsel- 2014,includingchecksthatwerereissueduponthe ingoreducation.Severalof theparticipatingserborrower’srequestduetoexpiration,arequestfora vicerschosethisoptionandhavemettheirforeclochangeinpayee,orarequestbyborrowerstosplit surepreventionobligations. thecheckamongsttheborrowersontheloan.For checksthathavenotbeencashedorwerereturned Asof December31,2014,allservicershavesubmitundeliverable,theagenciesdirectedRusttoexpand tedreportsdetailingtheconsumer-relief actionsthey itseffortstolocatemore-currentaddressinformation havetakentosatisfytheserequirements.Theforeclofortheunpaidborrowers.Thisresultedinadditional surepreventionassistanceactionsreportedinclude consumersreceivingpaymentsundertheagreements, loanmodifications,shortsales,deeds-in-lieuof forewithreplacementchecksscheduledtobesenttoany closure,debtcancellation,andlienextinguishment. updatedaddressorthelastknownaddressonrecord Inordertoreceivecredittowardtheservicer’stotal forthoseborrowerswhohavenotyetcashedtheir foreclosurepreventionobligation,theactionssubmitchecks. tedmustbevalidatedbytheregulators.Aprocesshas beenestablishedforathirdpartytoconductthisvali- Asof December31,2014,$3.4billionhasbeendis- dationandensurethattheforeclosureprevention tributedthrough3.7millionchecks,representing assistanceamountsmeettherequirementsof the 87percentof thetotalvalueof thefunds.Receivinga amendmentstotheenforcementactions. paymentundertheagreementwillnotpreventbor- ServicerEffortstoAddressDeficiencies rowersfromtakinganyactiontheymaywishtopursuerelatedtotheirforeclosure.Servicersarenotper- Inadditiontotheforeclosurereviewrequirements, mittedtoaskborrowerstosignawaiverof anylegal theenforcementactionsrequiredmortgageservicers claimstheymayhaveagainsttheirservicerinconnec- tosubmitacceptablewrittenplanstoaddressvarious tionwithreceivingpayment.5 mortgageloanservicingandforeclosureprocessing deficiencies.Inthetimesincetheenforcementactions ForeclosurePreventionActions wereissued,thebankingorganizationshavebeen ThePaymentAgreementalsorequiredservicersto implementingtheactionplans,includingenhanced undertakewell-structuredloss-mitigationefforts controls,andimprovingsystemsandprocesses.To focusedonforeclosureprevention,withpreference date,thesupervisoryreviewof themortgagesergiventoactivitiesdesignedtokeepborrowersintheir vicers’actionplanshasshownthatthebankingorgahomesthroughaffordable,sustainable,andmeaning- nizationsundertheenforcementactionshaveimplefulhomepreservationactionswithintwoyearsfrom mentedsignificantcorrectiveactionswithregardto thedatetheagreementinprinciplewasreached.The theirmortgageservicingandforeclosureprocesses, foreclosurepreventionactionsareexpectedtopro- butthatsomeadditionalactionsneedtobetaken. videsignificantandmeaningfulrelief orassistanceto FederalReservesupervisoryteamswillcontinueto qualifiedborrowersand,asstatedintheagreement, monitorandevaluatetheservicers’progresson “shouldnotdisfavoraspecificgeographywithinor implementingtheactionplanstoaddressunsafeand amongstates,nordisfavorlowand/ormoderate unsoundmortgageservicingandforeclosurepracincomeborrowers,andnotdiscriminateagainstany ticesasrequiredbytheenforcementactions. protectedclass.” InJuly2014,theFederalReserveBoardpublisheda reportregardingtheIFRandthePaymentAgree- 5 Formoreinformation,seewww.federalreserve.gov/ mentthatreplacedtheIFR.Thereport,which consumerinfo/independent-foreclosure-review-paymentagreement.htm. focusedprimarilyonservicersregulatedbytheFed-

78 101stAnnualReport|2014 eralReserve,providesinformationontheprocessfor Outlooknewsletter9articleinthesecond-quarter thereviewof theforeclosurefilesduringtheIFRand 2014edition. file-reviewresults—includingservicererrorratesduringtheIFR—uptothetimetheIFRwasreplaced.6 Inaddition,theBoardissuedanenhancedexamina- Inaddition,thereportcontainsinformationon tionfrequencypolicytocomplementthenewComdirectborrowerpaymentsandotherassistancefrom munityBankRisk-FocusedSupervisionProgram. thePaymentAgreementanddiscussestheFederal Thefrequencypolicypromoteseffectivesupervision Reserve’songoingsupervisionof correctiveactions throughdeploymentof examinerresourcescommenthemortgageservicersarerequiredtoimplement. suratewithaninstitution’ssize,compliancerating, AfterthePaymentAgreementhasbeenfullyimple- andCRAratingwhilereducingburdenonmany mented,theFederalReserveexpectstopublishdata communitybanks.Thisnewpolicyexpandsthenumonthefinalstatusof thecashpaymentsandthefore- berof financialinstitutionssubjecttoalongerconclosurepreventionassistanceaswellasthestatusof sumercomplianceandCRAexaminationfrequency correctiveactionsimplementedbythemortgage cycle,asfollows: servicers. • 48or60monthsforbankswithassetslessthan $350millionandsatisfactoryorbettercompliance Supervisory Matters andCRAratings(formerlythethresholdwas Risk-FocusedSupervision $250million) OnJanuary1,2014,theBoardimplementedanew • 36monthsforfinancialinstitutionswithassets CommunityBankRisk-FocusedConsumerCompli- between$350millionand$1billionandsatisfacanceSupervisionProgramforstatememberbanks toryorbettercomplianceandCRAratings(forwithconsolidatedassetsof $10billionorlessand merly24months) theirsubsidiaries.Thenewprogramisdesignedto promotestrongcompliancerisk-managementprac- Thenewexaminationpolicydoesnotaffectfinancial ticesandconsumerprotectionatstatemembercom- institutionswithassetslessthan$250millionand munitybanks.Undertheupdatedprogram,con- thosewithassetsmorethanorequalto$1billion. sumercomplianceexaminersbasetheexamination Theexamfrequencyscheduleremainsthesamefor intensitymoreexplicitlyontheindividualfinancial thesefinancialinstitutionsandinstitutionswithless institution’sriskprofile,includingitsconsumercom- thansatisfactorycomplianceand/orCRAratings,as pliancecultureandhoweffectivelyitidentifiesand follows: managesconsumercompliancerisk.Thenewprogramisintendedtoenhancetheefficacyof the • 48or60monthsforinstitutionswithassetsless Board’ssupervisionprogramandreduceregulatory than$250millionandsatisfactoryorbettercomburdenonmanycommunitybankingorganizations.7 plianceandCRAratings(48monthsif theCRA ratingissatisfactory;60monthsif theratingis outstanding) Toensureeffectiveimplementationof theCommunityBankRisk-FocusedConsumerCompliance • 24monthsforinstitutionswithassetsgreaterthan SupervisionProgram,theBoardundertookseveral orequalto$1billionandsatisfactoryorbetter examinertrainingandbankeroutreachinitiatives. complianceandCRAratings ConsumercomplianceexaminertrainingwasdeliveredthroughtwoRapidResponsewebinars(dis- • 12monthsforanyinstitutionwithlessthansatiscussedfurtherinthissectionunder“OngoingTrain- factoryratingsforeithercomplianceorCRA ingOpportunities”)andadaylongcasestudyexerciseconductedateachReserveBank.Banker outreachwasprovidedinapublicOutlookLive8 webinarinMarch2014andaConsumerCompliance outlook-live/2014/community-bank-risk-focused-consumer- 6 Thereportisavailableatwww.federalreserve.gov/publications/ compliance-supervision-program/. other-reports/files/independent-foreclosure-review-2014.pdf. 9 ConsumerComplianceOutlookisaFederalReserveSystempub- 7 Formoreinformation,seewww.federalreserve.gov/boarddocs/ licationdedicatedtoconsumercomplianceissues.Formore supmanual/supervision_cch.htm. informationonthisnewsletterarticle,seehttps:// 8 OutlookLiveistheFederalReserveSystem’saudioconference consumercomplianceoutlook.org/2014/second-quarter/riskseriesonconsumercomplianceissues.Formoreinformationon focused-consumer-compliance-supervision-program-forthiswebinar,seehttps://consumercomplianceoutlook.org/ community-banks/.

ConsumerandCommunityAffairs 79 EnforcementActivities banks’boardsof directorsandtheReserveBanks,or boardresolutions)toensurethatviolationsarecor- FairLendingandUDAPEnforcement rected.Whennecessary,theBoardcanbringpublic Withrespecttofairlending,pursuanttoprovisions enforcementactions. of theDodd-FrankActthattookeffectJuly21, 2011,theConsumerFinancialProtectionBureau Giventhecomplexityof thisareaof supervision,the (CFPB)supervisesstatememberbankswithassetsof FederalReserveseekstoprovideclarityonitspermorethan$10billionforcompliancewiththeEqual spectivesandprocessestotheindustryandthepub- CreditOpportunityAct(ECOA).TheBoardalsohas lic.DCCAstaff participatesinnumerousmeetings, supervisoryauthorityforcompliancewiththeFair conferences,andtrainingssponsoredbyconsumer HousingAct.Forthe829statememberbankswith advocates,industryrepresentatives,andinteragency assetsof $10billionorless,theBoardretainsthe groups.FairLendingEnforcementstaff meetreguauthoritytoenforceboththeECOAandtheFair larlywithconsumeradvocates,supervisedinstitu- HousingAct.WithrespecttotheFederalTrade tions,andindustryrepresentativestodiscussfair CommissionAct,whichprohibitsUDAP,theBoard lendingmattersandreceivefeedback.Throughthis hassupervisoryauthorityoverstatememberbanks, outreach,theBoardisabletoaddressemergingfair regardlessof assetsize. lendingissuesandpromotesoundfairlendingcompliance.Forexample,in2014,theBoardsponsoreda FairlendingandUDAPreviewsareconductedregu- freeinteragencywebinaronfairlendingsupervision larlywithinthesupervisorycycle.Additionally, throughComplianceOutlookLive,whichwas examinersmayconductfairlendingandUDAP attendedbymorethan5,000registrants,mostof reviewsoutsideof theusualsupervisorycycle,if war- whichwerecommunitybanks.10 rantedbyfairlendingandUDAPrisk.Whenexaminersfindevidenceof potentialdiscriminationor In2014,theBoardissuedaconsentordertocease potentialUDAPviolations,theyworkcloselywith anddesistandacivilmoneypenaltyassessmentof DCCA’sFairLendingEnforcementSection,which $3.5millionagainstaninstitutionanditsnon-bank providesadditionallegalandstatisticalexpertiseand agentfordeceptivepracticesassociatedwithan ensuresthatfairlendingandUDAPlawsare accountthatwasinviolationof theFederalTrade enforcedconsistentlyandrigorouslythroughoutthe CommissionAct. FederalReserveSystem. Theactionsaddressedinthisorderinvolvedseveral Withrespecttofairlending,pursuanttotheECOA, practicesthat,atvariouspointsinthefinancialaid if theBoardhasreasontobelievethatacreditorhas refundselectionprocess,misledstudentsaboutvariengagedinapatternorpracticeof discriminationin ousaspectsof theaccount,includingtermsand violationof theECOA,thematterwillbereferredto fees.11 theDepartmentof Justice(DOJ).TheDOJreviews thereferralanddetermineswhetherfurtherinvestiga- FloodInsurance tioniswarranted.ADOJinvestigationmayresultin TheNationalFloodInsuranceActimposescertain apubliccivilenforcementactionorsettlement.Alter- requirementsonloanssecuredbybuildingsormobile natively,theDOJmaydecidetoreturnthematterto homeslocatedin,ortobelocatedin,areasdetertheBoardforadministrativeenforcement.Whena minedtohavespecialfloodhazards.UndertheFedmatterisreturnedtotheBoard,staff ensurethatthe eralReserve’sRegulationH,whichimplementsthe institutiontakesallappropriatecorrectiveaction. act,statememberbanksaregenerallyprohibited TherewerenoreferralstotheDOJin2014. frommaking,extending,increasing,orrenewingany suchloanunlessthebuildingormobilehome,aswell If thereisaUDAPorfairlendingviolationthatdoes asanypersonalpropertysecuringtheloan,arecovnotconstituteapatternorpracticeunderECOA,the eredbyfloodinsuranceforthetermof theloan.The FederalReserveactsonitsowntoensurethatthe lawrequirestheBoardandotherfederalfinancial violationisremediedbythebank.Mostlendersread- institutionregulatoryagenciestoimposecivilmoney ilyagreetocorrectfairlendingandUDAPviolations. Infact,lendersoftentakecorrectiveactionassoonas 10 Formoreinformationandtoobtainthewebcast,seehttps:// consumercomplianceoutlook.org/outlook-live/2014/federaltheybecomeawareof aproblem.Thus,theFederal interagency-fair-lending-hot-topics/. Reservegenerallyusesinformalsupervisorytools 11 Formoreinformation,seewww.federalreserve.gov/newsevents/ (suchasmemorandaof understandingbetween press/enforcement/20140701b.htm.

80 101stAnnualReport|2014 penaltieswhentheyfindapatternorpracticeof vio- gationFundheldbytheDepartmentof theTreasury lationsof theregulation.Thecivilmoneypenalties forthebenefitof FEMA. arepayabletotheFederalEmergencyManagement Agency(FEMA)fordepositintotheNationalFlood CommunityReinvestmentAct MitigationFund. TheCRArequiresthattheFederalReserveandother federalbankingandthriftregulatoryagencies Theenactmentof twostatutes,theBiggert-Waters encouragefinancialinstitutionstohelpmeetthe FloodInsuranceReformActof 2012(Biggert- creditneedsof thelocalcommunitiesinwhichthey WatersAct)andtheHomeownerFloodInsurance dobusiness,consistentwithsafeandsoundopera- AffordabilityActof 2014(HFIAA),requiresthefed- tions.Tocarryoutthismandate,theFederalReserve eralfinancialinstitutionsupervisoryagenciesto • examinesstatememberbankstoassesstheircomupdatecertainprovisionsof thefederalfloodinsurpliancewiththeCRA; anceregulations.Tothatend,theBoardandfour otherfederalagencieshaveissuedtwojointnoticesof • considersstatememberbanks’andbankholding proposedrulemaking,oneinOctober2013andasec- companies’CRAperformanceincontextwith ondinOctober2014,toimplementportionsof the othersupervisoryinformationwhenanalyzing Biggert-WatersActandHFIAAwithrespecttopri- applicationsformergersandacquisitions;and vatefloodinsurance,theescrowof floodinsurance • disseminatesinformationaboutcommunitydevelpayments,andtheforcedplacementof floodinsuropmenttechniquestobankersandthepublic ance.TheagenciescontinueworktofinalizeregulathroughCommunityDevelopmentofficesatthe tionstoimplementthesestatutes. ReserveBanks. TheBiggert-WatersActalsoincreasedthemaximum TheFederalReserveassessesandratestheCRAperlimitsof buildingcoverageavailablefornon- formanceof statememberbanksinthecourseof condominiumresidentialbuildingsdesignedforuse examinationsconductedbystaff atthe12Reserve forfiveormorefamilies,classifiedas“OtherResi- Banks.Duringthe2014reportingperiod,theReserve dential”buildings.FEMAannouncedtheavailability Bankscompleted189CRAexaminationsof state of insuranceundertheStandardFloodInsurance memberbanks.Of thosebanksexamined,18were Policy,orSFIP,reflectingtheseincreasedmaximum rated“Outstanding,”169wererated“Satisfactory,” limitseffectiveJune1,2014.Inresponsetotheavail- twowererated“NeedstoImprove,”andnonewere abilityof SFIPswiththeincreasedlimits,thefederal rated“SubstantialNon-Compliance.” financialinstitutionsupervisoryagenciesissuedthe “InteragencyStatementonIncreasedMaximum InApril,theBoard,theOCC,andtheFederal FloodInsuranceCoverageforOtherResidential DepositInsuranceCorporation(FDIC)published Buildings”onMay30,2014.12Thisstatementcon- revisedlarge-institutionCRAexaminationproceveystheagencies’expectationsof supervisedinstitu- dures,whichexplainhowcommunitydevelopment tionswithregardtoanyloanssecuredbyotherresi- activitiesthatbenefitabroaderstatewideorregional dentialbuildingslocatedinaspecialfloodhazard areathatincludesaninstitution’sassessment areathatmaybeaffectedbytheavailabilityof area(s)andinvestmentsinnationwidefundswillbe increasedmaximuminsuranceforthesetypesof consideredwhenevaluatinganinstitution’sCRAperproperties. formance,assigningratings,anddevelopingpublic performanceevaluations.Therevisedexamination In2014,theFederalReserveissued14formalconsent proceduresreflect,andareconsistentwith,revisions ordersandassessed$143,925incivilmoneypenalties totheInteragencyQuestionsandAnswersRegarding againststatememberbankstoaddressviolationsof CommunityReinvestmentthatwerepublishedin thefloodregulations.Thesestatutorilymandated November2013.13 penaltieswereforwardedtotheNationalFloodMiti- InSeptember,theBoard,theOCC,andtheFDIC proposedadditionalrevisionstotheInteragency 12 TheagenciesissuingthisstatementaretheBoardofGovernors, theFarmCreditAdministration,theFederalDepositInsurance 13 Formoreinformation,seewww.ffiec.gov/cra/whatsnew.htmand Corporation(FDIC),theNationalCreditUnionAdministra- www.federalreserve.gov/bankinforeg/caletters/caltr1402.htm. tion(NCUA),andtheOfficeoftheComptrolleroftheCur- TheInteragencyQuestionsandAnswersdocumentprovides rency(OCC).Formoreinformation,seewww.federalreserve additionalguidancetofinancialinstitutionsandthepublicon .gov/bankinforeg/caletters/caltr1403.htm. theagencies’CRAregulations.

ConsumerandCommunityAffairs 81 QuestionsandAnswers.14Theproposedguidance becauseitrepresentsadetailedon-siteevaluationof addressesadditionalquestionsraisedbybankers, theinstitution’sperformanceundertheCRAbyits communityorganizations,andothersregardingthe federalsupervisor. agencies’CRAregulations.Inparticular,theproposedrevisionstothequestionsandanswerswould Aspartof theanalysisof managerialresources,the FederalReservereviewstheinstitution’srecordof • addressalternativesystemsfordeliveringretail compliancewithconsumerprotectionlawsandregubankingservices; lations.Theinstitution’smostrecentconsumercom- • addexamplesof innovativeorflexiblelending plianceratingiscentraltothisreviewbecause,like practices; theCRAperformanceevaluation,itrepresentsthe detailedfindingsof theinstitution’ssupervisory • addresscommunitydevelopment-relatedissuesby agency. (1)clarifyingguidanceoneconomicdevelopment, (2)providingexamplesof communitydevelopment LessthansatisfactoryCRAorconsumercompliance loansandactivitiesthatareconsideredtorevitalize ratingscanposeanimpedimenttotheprocessingand orstabilizeanunderservednonmetropolitan approvalof theapplication.FederalReservestaff middle-incomegeography,and(3)clarifyinghow gatheradditionalinformationaboutCRAandconcommunitydevelopmentservicesareevalusumercomplianceperformancewhenthefinancial ated;and institution(s)involvedinanapplicationhaveless • offerguidanceonhowexaminersevaluatethe thansatisfactoryCRAorcomplianceratingsor responsivenessandinnovativenessof aninstitu- whentheFederalReservereceivescommentsfrom tion’sloans,qualifiedinvestments,andcommunity interestedpartiesthatraiseCRAorconsumercomdevelopmentservices. plianceissues.Tofurtherenhancetransparencyon thisprocess,theBoardissuedguidancetothepublic Theagenciesarecurrentlyreviewingcomments inFebruary2014describingtheFederalReserve’s receivedinresponsetotheproposedrevisionstothe approachtoapplicationsandnotices,indicating InteragencyQuestionsandAnswers. thosethatmaynotsatisfystatutoryrequirementsfor approvalof aproposalorotherwiseraisesupervisory MergersandAcquisitions orregulatoryconcerns.15 TheFederalReserveanalyzesexpansionaryapplicationsbybanksorBHCs,takingintoaccountthe TheBoardprovidesinformationonitsactionsassolikelyeffectsof theacquisitiononcompetition,the ciatedwiththesemergerandacquisitiontransactions, convenienceandneedsof thecommunitiestobe issuingpressreleasesandtheBoardOrdersfor served,thefinancialandmanagerialresourcesand each.16Aspartof theFebruary2014guidance,the futureprospectsof thecompaniesandbanks FederalReservealsoinformedtheindustryandpubinvolved,andtheeffectivenessof thecompany’spoli- licthattheFederalReservewouldstartpublishinga ciestocombatmoneylaundering.Aspartof this semiannualreportthatprovidespertinentinformaprocess,DCCAevaluateswhethertheinstitutionsare tiononapplicationsandnoticesfiledwiththeFedcurrentlymeetingtheconvenienceandneedsof their eralReserve.Thefirstof thesereportswasissuedin communitiesandexistingmanagerialresources,as November2014,coveringthefirstsixmonthsof wellastheinstitutions’abilitytomeettheconve- 2014.17Thereportincludedstatisticsonthenumber nienceandneedsof theircommunitiesandtheir of proposalsthathadbeenapproved,denied,and managerialresourcesaftertheproposedtransaction. withdrawn,aswellasgeneralinformationaboutthe lengthof timetakentoprocessproposals.Addition- TheCRArequirestheFederalReservetoconsidera ally,thereportdiscussedcommonreasonsthatprodepositoryinstitution’srecordof helpingtomeetthe posalshadbeenwithdrawnfromconsideration. creditneedsof itslocalcommunitiesinevaluating Boardstaff alsoconductededucationalwebinarsto applicationsformergers,acquisitions,andbranches. Aninstitution’smostrecentCRAperformance 15 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ srletters/sr1402.htm. evaluationisaparticularlyimportant,andoftencon- 16 ForaccesstotheBoard’sOrdersonBankingApplications,see trolling,considerationintheapplicationsprocess www.federalreserve.gov/newsevents/press/orders/2014orders .htm. 14 Formoreinformation,seewww.federalreserve.gov/newsevents/ 17 Forthereport,seewww.federalreserve.gov/newsevents/press/ press/bcreg/20140908a.htm. other/20141124a.htm.

82 101stAnnualReport|2014 discussthisguidanceandreportwithbankinginsti- • PacWestBancorp,LosAngeles,California,andits tutionsandmembersof thepublic.18Becausethese controllingshareholders,CapGenCapitalGroupII applicationsareof interesttothepublic,theyoften LPandCapGenCapitalGroupIILLC,bothof generatecommentsthatraisevariousissuesfor NewYork,NewYork,toacquireCapitalSource Boardstaff toconsiderintheiranalysesof thesuper- Inc.andtherebyindirectlyacquireitssubsidiary visoryandlendingrecordsof theapplicants.With industrialbank,CapitalSourceBank,bothof Los respecttoconsumercomplianceandcommunity Angeles,wasapprovedinApril. reinvestment,commentersoftenallegethatvarious • UmpquaHoldingsCorporation,Portland,Oregon, institutionsfailtomakecreditavailabletocertain tomergewithSterlingFinancialCorporationand minoritygroupsandtolow-andmoderate-income therebyacquireitssubsidiarybank,SterlingSav- (LMI)individuals,orwhentheydoextendcreditto ingsBank,bothof Spokane,Washington,was thoseborrowers,itisatahighercost.Commenters approvedinApril. alsooftenexpresstheirviewthattheinstitutionsfail tomeettheneedsof smallbusinessesinLMIgeogra- • OldNationalBancorp,Evansville,Indiana,to phiesand/ortoadequatelyfulfilltheirCRAobliga- mergewithTowerFinancialCorporationand tiontomeetthecreditneedsof allof thecommuni- therebyindirectlyacquireitssubsidiarybank, tiesintheirassessmentarea,particularlyLMIareas. TowerBankandTrustCompany,bothof Fort Wayne,Indiana,wasapprovedinApril. Inevaluatingtheapplicationsandthemeritsof pub- • MercantileBankCorporation,GrandRapids,to liccomments,theBoardconsidersinformationpromergewithFirstbankCorporation,Alma,and videdbyapplicantsandanalyzessupervisoryinfortherebyindirectlyacquireitssubsidiarybanks, mation,includingexaminationreportswithevalua- Firstbank,MountPleasant,andKeystoneComtionsof compliancewithfairlendingandother munityBank,Kalamazoo,allof Michigan,andan consumerprotectionlawsandregulations,andconelectionbyMercantileBankCorporationto ferswithotherregulatorsfortheirsupervisoryviews. becomeafinancialholdingcompanywere TheBoardconductsanalysestounderstandthelendapprovedinMay. ingactivitiesof theapplicantandtargetinstitutions. • Cullen/FrostBankers,Inc.,SanAntonio,Texas, During2014,theBoardconsideredover100applica- (1)tomergewithWNBBancshares,Inc.,and tions—witharangeof topicsfromchangeincontrol therebyacquireitssubsidiarybank,Western notices,tobranchingrequests,tomergersandacqui- NationalBank,bothof Odessa,Texas;(2)tohave sitions—withoutstandingissuesinvolvingcompli- Cullen/Frost’ssubsidiarystatememberbank,Frost ancewithconsumerprotectionstatutesandregula- Bank,SanAntonio,mergewithWesternNational tions,includingfairlendinglawsandtheCRA. Bank,withFrostBankasthesurvivingentity;and DCCAstaff analyzedthefollowing14unrelated (3)tohaveFrostBankestablishandoperate noticesandapplicationsfortransactionsinvolving branchesatthemainofficeandthebranchesof bankmergersandbranchingthatinvolvedadverse WesternNationalBankwereapprovedinMay. publiccommentsonCRAissuesorconsumercom- • MBFinancial,Inc.,Chicago,tomergewithTaylor plianceissues,suchasfairlending,whichtheBoard CapitalGroup,Inc.,Rosemont,andtherebyindiconsideredandapproved:19 rectlyacquireitssubsidiarybank,ColeTaylor • Community&SouthernHoldings,Inc.,Atlanta, Bank,Chicago,allof Illinois,wasapprovedinJuly. Georgia,toacquireVerityCapitalGroup,Inc.and • OldNationalBancorp,Evansville,Indiana,to therebyindirectlyacquireitssubsidiarybank,VermergewithUnitedBancorp,Inc.,andtherebyindiityBank,bothof Winder,Georgia,wasapproved rectlyacquireitssubsidiarybank,UnitedBank& inMarch. Trust,bothof AnnArbor,Michigan,wasapproved inJuly. 18 Thewebinarswerepartofthe“AsktheFed”and“Consumer ComplianceOutlookLive”series.Foraccessto“AsktheFed,” • RegionsBank,Birmingham,Alabama,toestablish seehttps://bsr.stlouisfed.org/askthefed/public-users/login.aspx? abranchinKingwood,Texas,wasapprovedin ReturnUrl=%2faskthefed%2ffaq.Foraccessto“Consumer September. ComplianceOutlookLive,”seehttps:// consumercomplianceoutlook.org/outlook-live/. • FirstAmericanBankCorporation,ElkGroveVil- 19 RelatednoticesandapplicationsforwhichasingleBoardOrder lage,Illinois,toacquireBankof CoralGables, wasissuedwerecountedasasinglenoticeorapplicationinthis total. CoralGables,Florida,wasapprovedinNovember.

ConsumerandCommunityAffairs 83 • VeritexCommunityBank,astatememberbank draftsof examinationreportsforcomment,and subsidiaryof VeritexHoldings,Inc.,bothof Dal- sharesupervisoryinformation. las,Texas,toestablishabranchat2700OakLawn Avenue,Dallas,Texas,wasapprovedinDecember. CoordinationwithOther FederalBankingAgencies • ViewPointFinancialGroup,Inc.tomergewith Thememberagenciesof theFederalFinancialInsti- LegacyTexasGroup,Inc.,andtherebyacquireits tutionsExaminationCouncil(FFIEC)developconsubsidiarystatememberbank,LegacyTexasBank, sistentexaminationprinciples,standards,procedures, allof Plano,Texas;LegacyTexasBanktomerge andreportformats.21In2014,theFFIECmember withViewPoint’ssubsidiarybank,ViewPoint organizationscontinuedtoworktogetheronvarious Bank,N.A.,Plano,Texas,withLegacyTexasBank initiatives,includingdevelopingexaminationproceasthesurvivingentity;andLegacyTexasBankto duresthatincorporateamendmentstoRegulationsX establishandoperatebranchesatthelocationsof (RealEstateSettlementProceduresAct[RESPA]) themainofficeandthebranchesof ViewPoint andZ(TruthinLendingAct[TILA])issuedbythe BankwereapprovedinDecember. CFPBin2013thatintegratecertainmortgageloan • MidlandStatesBancorp,Effingham,Illinois,to disclosurescurrentlyrequiredunderTILAand acquirebymergerLoveSavingsHoldingCompany RESPA.Thoseamendmentswillbeeffectiveon anditswhollyownedsubsidiary,HeartlandBank, August1,2015. FSB,bothof St.Louis,Missouri;MidlandStates Bank,Midland’ssubsidiarystatememberbank, InteragencyGuidanceonHomeEquityLinesof alsoof Effingham,Illinois,tomergewithHeart- CreditNearingTheirEnd-of-DrawPeriods landBank,withMidlandBankasthesurviving InJuly,theBoard—alongwiththeConferenceof entity;andMidlandStatesBanktoestablishand StateBankSupervisors,theFDIC,theNCUA,and operatebranchesatthelocationsof Heartland theOCC—issuedguidancetoreiterateprinciplesof Bank’smainofficeandbrancheswereapprovedin soundriskmanagementforhomeequitylinesof December.20 credit(HELOCs)thathavereachedorwillbereachingtheirend-of-drawperiods.22Theguidancearticu- • AnoticebySouthsideBancshares,Inc.,Tyler, latestheagencies’expectationthatsupervisedfinan- Texas,toacquireOmniAmericanBancorp,Inc., cialinstitutionswillhaveadequaterisk-management andtherebyindirectlyacquireitssubsidiarysavings practicestomonitor,manage,andcontroltherisksin association,OmniAmericanBank,bothof Fort theirHELOCportfoliosaslinesneartheirend-of- Worth,Texas,wasapprovedinDecember. drawperiodsaswellastopromotecompliancewith CoordinationwiththeConsumerFinancial applicablelawsandregulations.Inparticular,this ProtectionBureau HELOCguidancedescribesrisk-managementpracticesthatpromoteaclearunderstandingof potential During2014,staff continuedtoworkthroughthe exposuresandhelpguideconsistent,effective implementationof theInteragencyMemorandumof responsestoHELOCborrowerswhomaybeunable UnderstandingonSupervisionCoordinationwith tomeetcontractualobligationsattheirend-of-draw theCFPB.Theagreementisintendedtoestablish periods.Theguidancealsohighlightsconcepts arrangementsforcoordinationandcooperation relatedtofinancialreportingforHELOCs.AdditionamongtheCFPBandtheOCC,theFDIC,the ally,itremindsfinancialinstitutionsthatapplicable NationalCreditUnionAssociation(NCUA),andthe consumerprotectionlawsinclude,butarenotlimited Boardof Governors.Theagreementstrivestominito,theEqualCreditOpportunityAct,theFairHousmizeunnecessaryregulatoryburdenandtoavoid unnecessaryduplicationof effortandconflicting 21 TheFFIECisaformalinteragencybodyempoweredtopresupervisorydirectivesamongsttheprudentialregulascribeuniformprinciples,standards,andreportformsforthe tors.Theregulatorsworkcooperativelytoshare federalexaminationoffinancialinstitutionsbytheBoardof examschedulesforcoveredinstitutionsandcovered Governors,theFDIC,theNCUA,theOCC,andtheCFPBand tomakerecommendationstopromoteuniformityinthesuperviactivitiestoplansimultaneousexams,providefinal sionoffinancialinstitutions.In2006,theStateLiaisonCommittee(SLC)wasaddedtothecouncilasavotingmember.The 20 Anadversecommentwasalsoreceivedforarelatednoticeunder SLCincludesrepresentativesfromtheConferenceofStateBank theChangeinBankControlActof1978,asamended,with Supervisors,theAmericanCouncilofStateSavingsSupervisors, respecttothistransaction.TheBoardapprovedthatnoticein andtheNationalAssociationofStateCreditUnion December.ForaccesstonoticesundertheChangeinBank Supervisors. ControlAct,seewww.federalreserve.gov/bankinforeg/ 22 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ LegalInterpretations/bhc_changeincontrol2014.htm. srletters/sr1405.htm.

84 101stAnnualReport|2014 ingAct,federalandstateprohibitionsagainstUDAP In2014,thesecourseswereofferedin10sessions, (suchassection5of theFederalTradeCommission andtrainingwasdeliveredtoatotalof 175System Act),RESPA,theServicemembersCivilRelief Act, consumercomplianceexaminersandstaff members andTILA. and12statebankingagencyexaminers. InteragencyGuidanceRegardingUnfairor Whenappropriate,coursesaredeliveredviaalterna- DeceptiveCreditPractices tivemethods,suchasonlineorotherdistance- InAugust,theBoard—inconjunctionwiththe learningtechnologies.Forinstance,severalcourses CFPB,theFDIC,theNCUA,andtheOCC—issued useacombinationof instructionalmethods,includguidanceregardingcertainconsumercreditprac- ingbothclassroominstructionfocusedoncasestudtices.23TheguidancenotesthatpriortotheDodd- iesandspeciallydevelopedcomputer-basedinstruc- FrankAct,severalrulesprohibitedbanks,savings tionthatincludesinteractiveself-checkexercises. associations,andfederalcreditunionsfromengaging BoardandReserveBankstaff regularlyreviewthe incertaincreditpractices.TheDodd–FrankAct corecurriculumforexaminertraining,updatingsubrepealedtherulemakingauthorityforthesecredit jectmatterandaddingnewelementsasappropriate. practicesrulesand,consequently,theBoard,the During2014,staff beganmigratingintroductory OCC,andtheNCUAarerepealingthoseformer contentfromaclassroom-basedtrainingmodelto rules.Thisguidancestatestheagencies’viewthatthe moreonlinedelivery,dedicatingclassroomtimefor unfairordeceptiveactsorpracticesdescribedin examinerstoapplytheirlearningusingcasestudies theseformercreditpracticesrules,includingthosein andreviewingloanfiles. theBoard’sformerRegulationAA,couldviolatethe prohibitionagainstunfairordeceptiveactsorprac- OutreachandTraining:Dodd-FrankAct ticesinsection5of theFederalTradeCommission During2014,theCFPBcontinuedtopromulgate ActandtitleXof theDodd-FrankAct,eveninthe newrulespursuanttotheDodd-FrankAct.Board absenceof aspecificregulationgoverningthe andCFPBstaff collaboratedonexaminertraining conduct. andoutreachtobankers.Forinstance,fourOutlook LivewebinarsdedicatedtotheCFPB’sTILA/ ExaminerTraining RESPAIntegratedDisclosuresRule,werebroadcast Ensuringthatfinancialinstitutionscomplywithlaws beginninginJune2014andcontinuingthrough thatprotectconsumersandencouragecommunity November2014.OtherOutlookLivewebinarscovreinvestmentisafundamentalaspectof thebank eredissuesrangingfromgeneralcompliancemanageexaminationandsupervisionprocess.Asthecom- menttospecificfairlendingandcommunityreinvestplexityof bothconsumerfinancialtransactionsand mentmatters,foratotalof ninecompliance-related theregulatorylandscapehasincreased,trainingfor broadcastsin2014.24 consumercomplianceexaminershasbecomemore importantthaneverbefore.Thedivision’sexaminer OngoingTrainingOpportunities trainingfunctionisresponsiblefortheongoingdevel- Inadditiontoprovidingcoreexaminertraining,the opmentof theprofessionalconsumercompliance examinerstaff developmentfunctionemphasizesthe supervisorystaff,fromaninitialintroductiontothe importanceof continuinglifelonglearning.Opportu- FederalReserveSystemthroughthedevelopmentof nitiesforcontinuinglearningincludespecialprojects proficiencyinconsumercompliancetopicssufficient andassignments,self-studyprograms,rotational toearnanexaminer’scommission.DCCA’sroleisto assignments,theopportunitytoinstructatSystem ensurethatexaminershavetheskillsnecessaryto schools,mentoringprograms,andanannualconmeettheirsupervisoryresponsibilitiesnowandinthe sumercomplianceexaminerforumwhereseniorconfuture. sumercomplianceexaminersreceiveinformationon emergingcomplianceissuesandareabletosharebest ConsumerComplianceExaminer practicesfromacrosstheSystem. TrainingCurriculum Theconsumercomplianceexaminertrainingcurricu- In2014,theSystemcontinuedtoofferRapid lumconsistsof fivecoursesfocusedonconsumer Responsesessions.Introducedin2008,thisplatform protectionlaws,regulations,andexaminingconcepts. offersexaminersone-hourteleconferencesthat 23 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ 24 Formoreinformation,seehttps://consumercomplianceoutlook caletters/caltr1405.htm. .org/outlook-live/2014/consumer-compliance-hot-topics/.

ConsumerandCommunityAffairs 85 exploreemergingissues;provideurgenttrainingto Table1.Complaintsagainststatememberbanksand addresstheimplementationof newlaws,regulations, selectednonbanksubsidiariesofbankholdingcompanies orsupervisoryguidance;andhighlightcasestudies. aboutregulatedpractices,byregulation/act,2014 SevenconsumercomplianceRapidResponsesessions weredesigned,developed,andpresentedtoSystem Regulation/act Number staff during2014.Thesessionscoveredabroad RegulationAA(UnfairorDeceptiveActsorPractices) 5 rangeof topicsincludingsocialmedia,floodinsur- RegulationB(EqualCreditOpportunity) 25 anceviolations,andvendormanagement RegulationBB(CommunityReinvestment) 2 considerations. RegulationCC(ExpeditedFundsAvailability) 71 RegulationD(ReserveRequirements) 4 RespondingtoConsumerComplaints RegulationDD(TruthinSavings) 50 RegulationE(ElectronicFundsTransfers) 51 andInquiries RegulationH(NationalFloodInsuranceAct/InsuranceSales) 9 TheFederalReserveinvestigatescomplaintsagainst RegulationM(ConsumerLeasingAct) 1 statememberbanksandselectednonbanksubsidiar- RegulationP(PrivacyofConsumerFinancialInformation) 18 iesof BHCs(FederalReserveregulatedentities),and RegulationV(FairandAccurateCreditTransactions) 18 RegulationZ(TruthinLending) 86 forwardscomplaintsagainstothercreditorsandbusi- GarnishmentRule 1 nessestotheappropriateenforcementagency.Each FairCreditReportingAct 158 ReserveBankinvestigatescomplaintsagainstFederal FairDebtCollectionPracticesAct 54 ReserveregulatedentitiesinitsDistrict.TheFederal FairHousingAct 18 Reservealsorespondstoconsumerinquiriesona HomeownersProtectionAct 5 RealEstateSettlementProceduresAct 28 broadrangeof bankingtopics,includingconsumer ServicemembersCivilReliefAct 6 protectionquestions. Total 610 Inlate2007,theFederalReserveestablishedFederal ReserveConsumerHelp(FRCH)tocentralizethe Act.25TheFederalReserve’sinvestigationof these intakeof consumercomplaintsandinquiries.In complaintsrevealedoneinstanceof illegalcredit 2014,FRCHprocessed32,339cases.Of thesecases, discrimination. morethanhalf (19,179)wereinquiriesandthe ConsumerInquiries remainder(13,160)werecomplaints,withmostcases receiveddirectlyfromconsumers.Of the13,160com- TheFederalReservereceivedover19,000consumer plaints,FRCHreferred76percenttootherfederal inquiriesin2014,coveringawiderangeof topics. andstatebankingagenciesin2014.Approximately Consumersweretypicallydirectedtootherresources, 5percentof caseswerereferredtotheFederal includingotherfederalagenciesorwrittenmaterials, Reservefromotheragencies. toaddresstheirinquiries. ConsumerComplaints WhileconsumerscancontactFRCHbytelephone, fax,mail,e-mail,oronline,mostFRCHconsumer ComplaintsagainstFederalReserveregulatedentities contactsoccurredbytelephone(59percent).Thirty- totaled3,159in2014.Approximately42percent sevenpercent(12,118)of complaintandinquirysub- (1,334)of thesecomplaintswerereceivedbytelemissionsweremadeelectronically(viae-mail,online phone,with94percent(1,254)of thoserequiring submissions,andfax),andtheonlineformpage additionalinformationfromconsumerstobeproreceivedapproximately59,174visitsduringtheyear. videdinwritingtoenableinvestigation.Approximatelysixpercentof thetotalcomplaintsreceivedin ComplaintReferrals 2014werestillunderinvestigationasof Decem- In2014,theFederalReserveforwarded9,992com- ber2014.Of theremainingcomplaints(1,412), plaintsagainstotherbanksandcreditorstothe 67percent(1,215)involvedunregulatedpracticesand appropriateregulatoryagenciesandgovernment 33percent(610)involvedregulatedpractices.(Table1 officesforinvestigation.Tominimizethetime showsthebreakdownof complaintsaboutregulated requiredtore-routecomplaintstotheseagencies, referralsweretransmittedelectronically. TheFederalReserveforwarded11complaintstothe 25 AmemorandumofunderstandingbetweenHUDandthefed- Departmentof HousingandUrbanDevelopment eralbankregulatoryagenciesrequiresthatcomplaintsalleginga (HUD)thatallegedviolationsof theFairHousing violationoftheFairHousingActbeforwardedtoHUD.

86 101stAnnualReport|2014 Table2.Complaintsagainststatememberbanksandselectednonbanksubsidiariesofbankholdingcompaniesabout regulatedpractices,byproducttype,2014 Allcomplaints Complaintsinvolvingviolations Subjectofcomplaint/producttype Number Percent Number Percent Total 610 100 22 4 Discriminationalleged Realestateloans 22 3.6 0 0 Creditcards 2 0.4 0 0 Otherloans 2 0.4 0 0 Nondiscriminationcomplaints Checkingaccounts 128 20.9 7 1.3 Realestateloans 83 13.6 8 1.4 Creditcards 216 35.4 0 0 Other 157 25.7 7 1.3 practicesbyregulationoract;table2showscom- plaintsallegingdiscriminationbasedonaprohibited plaintsbyproducttype.) basisreceivedin2014,therewerenoviolations. ComplaintsaboutRegulatedPractices In86percentof complaintsagainstFederalReserve Themajorityof regulatedpracticescomplaintscon- regulatedentitiesreceivedin2014,staff analysis cernedcheckingaccounts(21percent),realestate revealedthatinstitutionscorrectlyhandledthesitua- (17percent),andcreditcards(36percent).26The tion.Of theremaining14percentof investigated mostcommoncheckingaccountcomplaintsrelated complaints,4percentweredeemedviolationsof law; tofundsavailabilitynotasexpected(34percent), 4percentwereidentifiederrors,whichwerecorrected insufficientfunds/overdraftchargesandprocedures bythebank;andtheremainderincludedmatters (19percent),andallegedforgery/fraud/ involvinglitigationorfactualdisputes,withdrawn embezzlement/theft(9percent).Themostcommon complaints,internallyreferredcomplaints,orinforrealestatecomplaintsrelatedtodebtcollection/ mationwasprovidedtotheconsumer. foreclosureconcerns(14percent);escrowproblems ComplaintsaboutUnregulatedPractices (12percent);anddisputedrates,terms,andfees (8percent).Themostcommoncreditcardcom- TheBoardcontinuedtomonitorcomplaintsabout plaintsrelatedtoinaccuratecreditreporting(38per- bankingpracticesnotsubjecttoexistingregulations. cent),bankdebt-collectiontactics(18percent),bill- In2014,theBoardreceived1,215complaintsagainst ingerrorresolutions(8percent),andpaymenterrors/ FederalReserveregulatedentitiesthatinvolvedthese delays(7percent). unregulatedpractices.28Themajorityof thecomplaintswererelatedtoelectronictransactions/prepaid Twenty-sixregulatedpracticescomplaintsalleging products(30percent),creditcards(20percent), discriminationonthebasisof prohibitedborrower checkingaccountactivity(13percent),realestate traitsorrightswerereceivedin2014.27Nineteendis- products(13percent),andcommercialloans/leases criminationcomplaintswererelatedtotherace, (6percent). color,nationalorigin,orethnicityof theapplicantor borrower.Sevendiscriminationcomplaintswere Consumer Laws and Regulations relatedtoeithertheage,handicap,familialstatus,or religionof theapplicantorborrower.Of thecom- Throughout2014,DCCAcontinuedtoadminister theBoard’sregulatoryresponsibilitieswithrespectto certainentitiesandspecificstatutoryprovisionsof 26 Realestateloansincludeadjustable-ratemortgages,residential theconsumerfinancialservicesandfairlendinglaws. constructionloans,open-endhomeequitylinesofcredit,home improvementloans,homepurchaseloans,homerefinance/ closed-endloans,andreversemortgages. 28 Examplesofunregulatedpracticesinclude(butarenotlimited 27 Thisincludesallegeddiscriminationonthebasisofrace,color, to)customerserviceissues;allegationsofforgery,embezzlereligion,nationalorigin,sex,maritalstatus,age,applicant ment,ortheft;policyorprocedureconcerns;issueswithaccount incomederivedfrompublicassistanceprograms,orapplicant openingandclosing;andcontractualissuesthatarenotcovered relianceonprovisionsoftheConsumerCreditProtectionAct. underexistingfederalbankingregulations.

ConsumerandCommunityAffairs 87 Thisincludesdraftingregulationsandissuinginter- Repealing Rules Pursuant to pretationsandcomplianceguidancefortheindustry the Dodd-Frank Act andtheReserveBanks. UndertitleXof theDodd-FrankAct,rulemaking Proposed Flood Insurance Rule authorityforanumberof consumerfinancialprotectionlawswastransferredfromtheBoardtothe InOctober,theBoard,alongwiththeFarmCredit CFPB,exceptwithrespecttocertainmotorvehicle Administration,theFDIC,theNCUA,andtheOCC dealers.InMay2014,theBoardrepealeditsRegulajointlyissuedaproposedruletoamendregulations tionDD(TruthinSavings)andRegulationP(Pripertainingtoloanssecuredbyresidentialimproved vacyof ConsumerFinancialInformation),which realestateormobilehomeslocatedinspecialflood weresupersededbysubstantiallyidenticalrules hazardareas.29Theproposedrulewouldimplement issuedbytheCFPB.30Atthesametime,theBoard provisionsof theHomeownerFloodInsurance issuedfinalamendmentstotheIdentityTheftRed AffordabilityActof 2014(HFIAA)relatingto FlagsruleinRegulationV(FairCreditReporting), escrowingfloodinsurancepaymentsandtheexemp- whichrequirefinancialinstitutionsandcreditorsto tionof certaindetachedstructuresfromthemanda- implementidentitytheftpreventionprogramsand toryfloodinsurancepurchaserequirement.The clarifythattheseprovisionsapplyonlytocreditors HFIAAamendstheescrowprovisionsof theBig- thatregularlyextendcreditorobtainconsumer gert-WatersAct. reportsintheordinarycourseof theirbusiness.31 InaccordancewiththeHFIAA,theproposedrule InAugust,theBoardissuedaproposaltorepealits wouldrequireregulatedlendinginstitutionsto RegulationAA(UnfairorDeceptiveActsorPracescrowfloodinsurancepremiumsandfeesforloans tices),whichincludestheBoard’s“creditpractices made,increased,extended,orrenewedonorafter rule”thatprohibitsbanksfromusingcertainrem- January1,2016,unlesstheregulatedlendinginstitu- ediestoenforceconsumercreditobligationsand tionoraloanqualifiesforastatutoryexception.In fromincludingtheseremediesintheirconsumer addition,foroutstandingresidentialloansmade creditcontracts.32TheDodd-FrankActrepealedthe beforethatdate,theproposedrulewouldrequire provisionintheFederalTradeCommissionActthat institutionstoprovideborrowerstheoptionto authorizedtheBoardtoissuerulesaddressingunfair escrowfloodinsurancepremiumsandfees.Tofacili- ordeceptiveactsorpracticesbybanks.Notwithtatecompliance,theagencies’proposalincludesnew standingtherepealof theBoard’srulemaking andrevisedsamplenoticeformsandclausesconcern- authority,theBoardcontinuestohaveenforcement ingtheescrowrequirementandtheoptiontoescrow. authorityundertheFederalTradeCommissionAct andtheDodd-FrankActtopreventandremedy ConsistentwiththeHFIAA,theproposedrule unfairordeceptiveactsorpracticesbytheinstituwouldeliminatethelegalrequirementtopurchase tionsitsupervises.Concurrentwiththeproposed floodinsuranceforastructurethatisapartof aresi- repealof RegulationAA,theBoard,theCFPB,the dentialpropertylocatedinaspecialfloodhazard FDIC,theNCUA,andtheOCCissuedinteragency areaif thatstructureisdetachedfromtheprimary guidanceclarifyingthattheunfairordeceptivepracresidentialstructureanddoesnotalsoserveasaresi- ticesdescribedintheformercreditpracticesrules, dence.UndertheHFIAA,however,lendersmaynev- includingthoseinRegulationAA,couldviolatethe erthelessrequirethepurchaseof floodinsurancefor statutoryprohibitionsagainstunfairordeceptive suchstructurestoprotectthevalueof thecollateral practices,evenintheabsenceof aspecificregulation securingtheloan. governingtheconduct. Inaseparaterulemaking,theagencieswilladdress otherprovisionsof theBiggert-WatersActforwhich theagencieshavejurisdictionandthatwerenot 30 Formoreinformation,seewww.federalreserve.gov/newsevents/ amendedbytheHFIAA. press/bcreg/20140522a.htm. 31 TheamendmentstotheFairCreditReportingActwere intendedtonarrowthescopeofthelawsothatitwouldnotbe appliedtoprofessionals,suchasdoctorsorlawyers,whosometimesallowconsumerstodelaypayment. 29 Formoreinformation,seewww.federalreserve.gov/newsevents/ 32 Formoreinformation,seewww.federalreserve.gov/newsevents/ press/bcreg/20141024a.htm. press/bcreg/bcreg20140822a.htm.

88 101stAnnualReport|2014 Consumer Research and duceacorrespondingreportsummarizingthesurvey results. Emerging-Issues and Policy Analysis Inaddition,resultsfromDCCA’snewestsurveyin Throughout2014,DCCAanalyzedemergingissues thefinancialservicesarea—theSurveyof Household inconsumerfinancialservicespoliciesandpractices EconomicsandDecisionmaking—werepublishedin inordertounderstandtheirimplicationsforthemar- theReportontheEconomicWell-Beingof U.S. ketrisksurveillanceandsupervisorypoliciesthatare Householdsin2013,releasedinAugust2014.(See coretotheFederalReserve’sfunctions,aswellasto box1fordetails.)DCCAlaunchedthesurveytobetgaininsightintoconsumerfinancialdecisionmaking. terunderstandconsumerdecisionmakinginthewake of theGreatRecession. Researching Issues Affecting Consumers and Communities SurveyofExperiencesandPerspectives ofYoungWorkers In2014,DCCAexploredvariousissuesrelatedto In2013,theCommunityDevelopmentstaff atthe consumersandcommunitiesthroughconvening FederalReserveBoardbeganexploringtheexperiexperts,conductingoriginalresearch,andfielding encesandexpectationsof youngAmericansentering newandongoingsurveys.Theinformationgleaned thelabormarket.Staff reviewedexistingresearch fromtheseundertakingsprovidedinsightsintothe andengagedexternalresearchandpolicyexpertsto factorsaffectingconsumersandhouseholds. identifythepotentialeconomicimplicationsof these labormarkettrendsonyoungworkers.Thisinitial ConsumerBehaviorResearchSurveys explorationraisedseveralquestionsabouttheexperi- Inordertobetterunderstandconsumerdecision- encesof youngworkersthatwerenotfullyexplained makingintherapidlyevolvingfinancialservicessec- byexistingdata.Inresponse,theFederalReserve tor,DCCAperiodicallyconductsInternetpanelsur- conductedtheSurveyof YoungWorkersinDecemveystogatherdataonconsumers’experiencesand ber2013todevelopadeeperunderstandingof the perspectivesonvariousissuesof interest. forcesatplay.Theonlinesurveywasintendedtobe exploratory—ultimatelyconfirmingsomeinsights Withrespecttoongoingsurveys,DCCAconducted andhighlightingareasworthyof additionalstudy. itsannualsurveyof consumers’useof,andopinions ThesurveywasadministeredviaanInternetpanel. about,mobilefinancialservices.Since2011,thesur- The2,097surveyrespondentsrangedinagefrom veyhaspolledmorethan2,200individualseachyear 18to30. tolearnwhetherandhowtheyusemobiledevicesfor bankingandpayments.Thesurveywasalsoamong IntheShadowof theGreatRecession:Experiences thefirsttointegratequestionsaboutusingmobile andPerspectivesof YoungWorkerswasreleasedin devicesforshoppingandcomparingproductsalong November2014,withpreliminaryfindingshighwithquestionsaboutusingmobiledevicesforbank- lightedataconferenceco-sponsoredbytheFederal ingandpayments. ReserveBanksof AtlantaandKansasCityandRutgersUniversity’sJohnJ.HeldrichCenterforWork- Thefindingsof thesesurveys,conductedinthewin- forceDevelopment.34Thereportsummarizesinsights ter,arereleasedeachspringinthereportConsumers fromtheSurveyof YoungWorkersandframespolicy andMobileFinancialServices.Resultsfromthesur- andresearchissuesforfutureconsiderationbythe veyconductedinNovember2013werepublishedin FederalReserveBoard.Oneof themajorfindings March2014.33Forthefourthsurvey,conductedin highlightedinthereportisthatmanyyoungadults December2014,resultswillbepublishedin remainoptimisticabouttheirjobfutureandthat March2015.Giventherapidpaceof developments respondentswithhigherlevelsof educationandwork inthemobilefinancialservicesmarket,DCCAplans experiencearemorelikelytobeoptimisticthan toconductanothersurveyof consumers’useof respondentswholacksuchskillsandexperiences.A mobilefinancialservicesinthecomingyearandpro- secondfindingisthatyoungworkersareresponding tothelabormarket’sincreasingdemandforpostsec- 33 SeeBoardofGovernorsoftheFederalReserveSystem(2014), ConsumersandMobileFinancialServices2014(Washington: 34 Formoreinformationontheevent,seewww.frbatlanta.org/ BoardofGovernors,March),www.federalreserve.gov/ news/conferences/2014/141015-workforce-development.aspxand econresdata/consumers-and-mobile-financial-services-report- www.kc.frb.org/events/eventdetail.cfm?event= 201403.pdf. 7379EDCCC3274761D20CF8C1F7524B47.

ConsumerandCommunityAffairs 89 Box 1. Shedding Light on Household Finances: Survey of Household Economics and Decisionmaking DCCAhasbeenexploringknowledgegapsabout commonreasonsforrentingratherthanowninga consumerfinancialbehavior,decisionmaking,and homewereaninabilitytoaffordthedownpayment experiencesfollowingtheGreatRecession.The (45percent)andaninabilitytoqualifyforamort- SurveyofHouseholdEconomicsandDecisionmak- gage(29percent).Overall,confidenceinmortgage ing(SHED)focusesonissuesnotsufficientlyunder- approvalwasmixed,with53percentofallresponstoodthroughexternaldataandresearchornot dents—includinghomeowners—indicatingtheywere alreadyexploredthroughotherFederalReserve confidentthattheywouldbeapprovedforamortresources,suchastheSurveyofConsumer gageiftheyweretoapplyatthetimeofthesurvey. Finances.TheSHEDincludesquestionsabout Incontrast,29percentsaidtheywerenotconfident housingandlivingarrangements,creditaccessand and17percentdidnotknowwhethertheycould behavior,educationandstudentdebt,savings, obtainapproval. retirement,andmedicalexpenses. Educationdebt:Twenty-fourpercentofthepopula- TheresultsoftheSeptember2013SHEDsurvey tionheldeducationdebtforthemselvesorafamily areoutlinedintheReportontheEconomicWell- member,with16percentholdingdebtfromtheir BeingofU.S.Householdsin2013,releasedin owneducation.Someindividualsstruggletoservice July2014.1Asecondroundofthesurveywascon- thisdebt,with18percentofthosewitheducation ductedinthefallof2014,andareportonitsfind- debtindicatingthattheywerebehindonpayments ingswillbepublishedinsummer2015. insomeway,including9percentwithloansincollections.Therateofbeingbehindorincollections Overall,thesurveyfoundthat,asofSeptemwasfargreateramongthosewhofailedtocomplete ber2013,manyhouseholdswerefaringwellbutthat theprogramforwhichtheyborrowedmoney,and sizablefractionsofthepopulationweredisplaying alsovariedbytypeofinstitutionattended. somesignsoffinancialstress: Emergencysavings:Manyrespondentsindicateda Lingeringeffectsoftherecession:Thirtylackofpreparednessforfinancialemergencies. fourpercentofindividualsreportedthattheywere Whenaskedhowtheywouldpayforatheoretical worseofffinanciallythantheyhadbeenfiveyears emergencyexpenseof$400,lessthanhalfof earlierin2008,and34percentsaidthattheywere respondentssaidthattheywouldcompletelypayit doingaboutthesame.Whileover60percentof usingcashoracreditcardthattheypayinfull, respondentsindicatedthattheirfamilieswereeither while19percentindicatedtheycouldnotpaythe “doingokay”or“livingcomfortably”financially,oneexpenseand33percentwouldpaytheexpenseby fourthsaidthattheywere“justgettingby”and borrowingorsellingsomething.Overtwo-fifthsof another13percentsaidtheywerestrugglingto respondentsareill-preparedforalossoftheirmain doso. sourceofincomeandcouldnotcoverexpensesfor Creditavailability:While31percentofsurvey threemonthsevenbyborrowingmoney,usingsavrespondentshadappliedforsometypeofcreditin ings,sellingassets,orborrowingfromfriendsor theprior12months,one-thirdofthosewhoapplied family. forcreditwereturneddownorgivenlesscreditthan Retirementplanning:Thesurveyresultssuggest theyappliedfor.Moreover,15percentofthosewho thatmanyindividualsarenotadequatelyprepared didnotapplyreportedthattheyputoffapplying forretirement.Thirty-onepercentofnon-retired becausetheythoughttheywouldbeturneddown. respondentsreportedhavingnoretirementsavings Overall,23percentofrespondentswereeither orpension,including19percentofthoseages55to deniedcredit,offeredlesscreditthanthey 64.Retirementplansformanyindividualsatornear requested,orputoffapplyingforfearofdenial. retirementwerealsoalteredbytheGreatReces- Housingandmortgages:Manyrentersexpressed sion.Two-fifthsofthoseoverage45whohadnot animpliedinterestinhomeownership,asthemost yetretiredsaidthattheypushedbacktheplanned dateofretirementbecauseoftherecession,and 15percentofthosewhohadretiredsince2008 1 For the press release and publication, see www.federalreserve reportedthattheyretiredearlierthanplanneddueto .gov/newsevents/press/other/20140807a.htm. therecession.

90 101stAnnualReport|2014 ondarycredentialsanddegrees.Athirdfindingis mortgagepaymentsforaninitialperiod,arebeginthatintangiblesstillplayanimportantroleandthat ningtoresettopaymentsthatreflectfullamortizafindingajobisstillheavilybasedonpersonalcon- tion.Paymentincreases,insomecases,maybe nections.Lastly,thesurveyfoundthatyoungworkers significant. valuejobstability,andwhengiventhechoice,respondentsgenerallypreferredsteadyemployment(67per- Meanwhile,thefirstloanmodificationsmadeunder cent)tohigherpay(30percent). thegovernment’sHAMPprogramarereachingtheir five-yearmark,afterwhichinterestrateswillincrease Emerging-Issues Analysis upto1percentperyearuntiltheyadjusttothemarketrateatthetimeof theirmodification.HAMP ThePolicyAnalysisfunctionof DCCAprovideskey modificationswillcontinuetoenterthismultiyear insights,information,andanalysisonemerging resetprocesswithcompletionexpectedby2021. financialservicesissuesthataffectthewell-beingof consumersandcommunities.Tothisend,Policy ThePolicyAnalysisteamparticipatedinaninter- Analysisstaff follow,analyze,andanticipatetrends; agencyregulatoryconferenceonmortgageresets leadDivision-wideissuesworkinggroups;andorgawithresearchersandexaminersworkingonthetopic. nizeexpertroundtablestoidentifyemergingrisks Assistancealsowasprovidedforinteragencyguidandinformpolicyrecommendations. anceonmortgageresetstoensurethat,inadditionto banksafetyandsoundnessconsiderations,consum- In2014,thePolicyAnalysisteamcontributedanalyerswillbeprovidedwithadequatenoticetoprepare sesonabroadrangeof policyissues—fromrecent fortheincreasesandthatconcernsonthepartof trendsinautolending,totheimpactonconsumers affectedborrowerswillbeaddressed.35 of studentloandebt,totheimplicationsof mobile banking,toexistingandemergingcreditproductsfor TrendsinAutoLending smallbusinesses,andtochallengesfacingcertainseg- ThePolicyteamcontinuedtomonitordevelopments mentsof consumers.Newmortgagerulestookeffect inautolending.WhileFederalReserveresearch atthebeginningof theyearandPolicystaff,together showsasolidrecoveryof theautomarketpost-crisis withcolleaguesattheBoardandintheFederal andgrowthinautoloanoriginations,concernshave ReserveBanks,continuedtocloselymonitorthe beenraisedthatincreasedlendingtobelow-prime availabilityof mortgagecreditandtheimpacton borrowers,high-costloans,andlongerloanterms localhousingmarkets,neighborhoods,andpotential couldresultinfinancialhardshipforhouseholds homebuyers. strugglingwithlivingexpenses.InAugust,Policy Analysisstaff heldaforumforFederalReserve ImpactofResetsonHomeEquityLinesof Systemstaff todiscusstheirresearchtoassesscur- CreditandMortgageInterestRates rentautomarketconditionsandloanperformance In2014,thefirstwaveof interest-rateresetsoccurred data,withaparticularfocusonthesubprimesector, onHELOCs,interest-only(I-O)loans,andloansin andexploreanypotentialriskareasandconsumer theHomeAffordableModificationProgram harms.Staff alsoengagedwithindustryrepresenta- (HAMP)program.Theseresetscouldresultinpaytivesandconsumergroupswhoalsoattendedto mentshockformillionsof homeowners,depending sharetheirperspectivesaboutcertainautolending ontheirFICOscoresandotherdebts. practicesandtheimplicationsforconsumers.The dialogueprovidedanopportunityforstaff andexter- Aboutone-quarter,or2.5million,of themorethan nalexpertstoexchangeviewsaboutthefuturestate 10millionHELOCsoutstandingareexpectedto of autofinancingandtoidentifyareaswhereaddireachtheirend-of-drawperiodsandconverttoamortionaldataandanalysiswouldbeusefultobetter tizingloansbytheendof 2017,withtheaveragepaymonitormarketandlendingconditionsaffectingthe mentestimatedtoriseby$250permonth.In availabilityof andaccesstoaffordableautoloan response,somelargebankshaveimplemented products. HELOC-assistanceprogramstoborrowersinneedof flexiblepaymentarrangements. Also,manyof theI-Omortgages,whichwereinwide useduringtheheightof thelendingbubblein2007 35 Formoreinformation,seewww.federalreserve.gov/bankinforeg/ andputborrowersintohomeswithartificiallylow srletters/sr1405.htm.

ConsumerandCommunityAffairs 91 TheEvolvingSmallBusiness–Bank arebecomingmoreconservativeintheirunderwriting Relationship forsmallbusinessborrowers.Thesecondstudy,an TheFederalReserveSystemhastypicallyconcen- onlinefocusgroupof 22smallbusinessborrowers, trateditssmallbusiness–relatedactivitiesaroundthe examinedsmallbusinesses’awareness,perceptions, studyof creditconditionsandtheimpactof astrong andunderstandingof short-term,small-dollaronline businessclimateoncommunityandeconomicdevel- loanproducts.Thestudyrevealedthatsmallbusiopment.Lessunderstoodistheoverallimpactof a nessesfinditdifficulttocompareandevaluatethe changingfinanciallandscapeonthesmallbusiness costsandbenefitsof variousonlinesmall-dollar customerandexistingbankingbusinessmodels. products.Potentialborrowersalsoexpressedconcernsaboutsafeguardstoprotecttheirpersonaland Inthepast,smallbusinessbankinghasbeenconsid- businessinformationweretheytoborrowfundsfrom eredlargely“relationshipbanking.”Recenttrends, theseonlinesources. however,suggestthatsmallbusinessesengageina morecomplexwebof relationshipsamongcompet- Community Development ingfinancialserviceproviders.Avastarrayof nonbankserviceprovidershascroppeduptohelpsmall businessesmanagevariousaspectsof theirbanking TheFederalReserveSystem’sCommunityDevelopandpaymentsprocesses,includingdeposits,debit mentfunctionpromoteseconomicgrowthandfinanandcreditcardpayments,Treasuryservices,remote cialstabilityforLMIcommunitiesandindividuals deposit,payroll,automatedclearinghouse(ACH), througharangeof activities:conveningstakeholders, andwireservices.Likewise,onlinealternativelenders conductingandsharingresearch,andidentifying havedevelopedinnovativetechnologiestounderwrite emergingissues(seebox2formoreinformation).As andoriginateloansandnowoffershort-termloan adecentralizedfunction,theCommunityAffairs productsaimedatfillingsmallbusinesses’small- Officers(CAOs)ateachof the12ReserveBanks dollarneeds.Amongthesenewplayersarepeer-to- designactivitiestorespondtothespecificneedsof peerlenders,directloanproviders,andpaymentpro- thecommunitiestheyserve,withoversightfrom cessingfirmsmakingforaysintocash-advancelend- Boardstaff topromoteandcoordinateSystemwide ing.Consequently,competitionandnewtechnologies priorities. arealteringtheconventionalconceptof smallbusi- Exploring New Sources of nessrelationshipbanking. Community Development Finance ThePolicyteamconvenedaworkingsessionforstaff fromthroughouttheFederalReserveSystem—in- Oneof theresponsibilitiesof theFederalReserve’s cludingthecommunitydevelopment,research, CommunityDevelopmentfunctionistoresearchthe regionaleconomics,consumercompliance,and sourcesof communitydevelopmentfinancefor operationsfunctions—whoareconcernedwithsmall underservedcommunitiesandworkwithstakeholdbusinessissues.Internalandexternalexpertspre- erstoimprovethesupplyanddeliveryof thesefunds. sentedresearchoncurrenttrendsintraditionaland Historically,theFederalReserve’sinterestinthese onlinesmallbusinessbanking.Thesessionwasaimed fundingsourceshasmainlyincludedthemoretradiatexploringhowsmallbusiness–bankrelationships tionalsources,suchasgovernmentfunding,foundaaredevelopedandmaintainedinanenvironmentof tions,CommunityDevelopmentFinancialInstitutechnologicalchange,thegrowthof nonbankservice tions,andCRA-motivatedbankinvestments.Allof providers,andtheresultingimpactontraditional theseremaincriticalsourcesof funding,butmanyof bankbusinessmodelsandsmallbusinesses. thesehavealsobeenshrinkinginrecentyears.Therefore,theBoard’sCommunityDevelopmentteamhas Tosupplementsmallbusinessresearchbeingcon- beguntoinvestigatehownewandinnovativesources ductedthroughouttheFederalReserveSystem,the of fundingcouldbeusedtofinancecommunity Policyteamcommissionedtworesearchstudiesfrom developmentandsmallbusiness.Akeypartof this outsideorganizations.One,asurveyof 60commu- expansionistechnology,whichischangingfundraisnitybankCEOs,foundthatbanksrecognizethat ingandinvestmentandhasthepotentialtostreamtheirsmallbusinesscustomersaresavviertodaythan lineandscalecommunitydevelopmenttransactions. inthepastwhenitcomestoassessingtheirbanking needsandoptions.Thesurveyalsofoundthatbanks InMarch2014,theBoard’sCommunityDevelopappeartohavethedesireandliquiditytolend,but mentteamhostedasmallgroupof communitydevel-

92 101stAnnualReport|2014 Box 2. How Does the Fed Promote Effective Community Development? TheFederalReserveunderstandsthatstablecom- pointsofengagementinthisworkaroundthecounmunitiespromotestableregionsandamorerobust try.ReleasedinconjunctionwiththeFedCommunieconomyoverall.StaffintheCommunityDevelop- ties.orgsitelaunch,thisreportincludesbriefsummamentfunctionattheBoardandall12ReserveBanks riesofCommunityDevelopment’sworkinitsstrateengageinappliedresearch,publicprograms,out- gicfocalpointsofpeople,place,thepolicyand reach,andtechnicalassistanceinordertohelppro- practiceofcommunitydevelopment,andsmallbusimoteeconomicgrowthandfinancialstabilityincom- ness.Withineachofthesefocusareas,thereport munitiesacrossthecountry,especiallylow-and includesbackgroundinformationthathelpstopromoderate-incomeareas. videcontextforthiswork;asamplingofkey research,outreachprograms,andotherinitiatives; TheSystem’scommitmenttocommunitydevelopandsomeideasonfuturechallenges,needs,and mentiscapturedintheCommunityDevelopment opportunities.Readtheinteractivereportat Perspectivesreport,whichrepresentsitsvarious www.fedcommunities.org. opmentandtechnologythoughtleadersforadiscus- Expanding Access to siononthechallengesandopportunitiespresented Information on System bycrowdfundinginvestmentasasignificantnew Community Development Activities sourceof capitalforthecommunitydevelopment industry.Theeventwasalsolive-streamedonthe In2012,theFederalReserve’sCommunityDevelop- Board’swebsiteandsetthegroundworkforthesetwo mentfunctionconductedanenvironmentalscanto otherwisedivergentfieldstofacilitateafunctional, assesscommunitydevelopmentneedsaroundthe fair,andprosperouscrowdfundingmarketforcom- country.Oneof thekeyfindingsfromthisprocess munitydevelopment. wasthatCommunityDevelopmentstaff could improvetheireffortstosharethewidearrayof InSeptember2014,theBoardhostedameeting resourceswiththepublicandSystemcolleaguesalike entitled“FamilyPhilanthropyandImpactInvest- inamoresystematicanduser-friendlyway.Asa ing,”andbroughttogetherstaff andtrusteesfrom result,theFedCommunities.orgwebportalwascrefamilyfoundations,familyoffices,advisors,and atedtoimprovetheawarenessof,andaccessto,Fedotherthoughtleaderstodiscusstheincreasing eralReservecommunitydevelopmentresourcesby demandforfamilyfoundationstoengageinimpact providinguserswithasingle,web-basedentrypoint. investing. ResourcesareorganizedaccordingtotheSystem’s strategicfocusareassupportingpeople,place,the InOctober2014,theBoardhostedatargetedmeet- policyandpracticeof communitydevelopment,and ingforonlinecommunitydevelopmentplatforms. smallbusiness.36 Themeetingbroughttogetherpractitionersthatwere eithercurrentlyoperating,orseriouslyinvestingin LaunchedinJune2014,FedCommunities.orgfuncthedevelopmentof,onlineplatformsthatfacilitate tionsasareferralsite,inthatitaggregatesinformacommunitydevelopmenttransactions.Themeeting tiononrelevant,timelycommunitydevelopment wasstructuredasapeer-to-peerinteractionand resourcesfromall12ReserveBanksandtheBoardof focusedonidentifyingthecurrentlandscapeof com- Governorsinacentralizedspot.Usersarethenredimunitydevelopmentonlineplatforms,commonbar- rectedtospecificReserveBankwebsitesforaccessto riersandchallenges,bestpractices,andopportunities thematerialsthemselves,andforadditionalcontent. forcollaboration. Initsfirstquarterof operation,FedCommunities.org drew12,840pageviewsfortheapproximately350 Thesethreemeetings,inadditiontodozensof other resourcesithostedfromacrosstheFederalReserve conversationsandmeetings,havegreatlyexpanded System.Thesiteoffersfourkeyfeatures: theBoard’sknowledgeof potentialnewsourcesof communitydevelopmentfinance,andhelpedtoconnectthevariousstakeholdersinthisfield. 36 Toaccessthesite,seewww.fedcommunities.org.

ConsumerandCommunityAffairs 93 • Resourcesareeasytolocateandareorganized • Userscansignuptobenotifiedof newcontent bytwokeypiecesof information:topic/community accordingtopreferencecriteriathattheyselect. developmentcontentandtypeof resource(e.g., • Contentispopulatedregularlytokeepthesite nationalandlocaldata,speeches,publications, freshandcurrent. etc.). • Arobustsearchfeaturehelpsuserslocate resources,eitherbyspecificcriteriaorgeneralinterestcategories.

95 6 Federal Reserve Banks TheFederalReserveBanksprovidepaymentservices stonewasreachedbysuccessfullymigratingtheFedtodepositoryandcertainotherinstitutions,distribute wireFundsSettlementapplicationandtheReserve thenation’scurrencyandcointodepositoryinstitu- Banks’accountingsystemtoadistributedenvirontions,andserveasfiscalagentsanddepositoriesfor ment.TheReserveBankscontinuedtomakeprogress theU.S.governmentandotherentities.TheReserve onthemigrationof theFedwireSecuritiesapplica- Banksalsocontributetosettingnationalmonetary tions.However,afterconductinganassessmentof policyandsupervisionof banksandotherfinancial theviabilityandcost-effectivenessof theFedACH entitiesoperatingintheUnitedStates(discussedin program,theReserveBankssuspendedtheinitiative sections2through4of thisannualreport). andbegantoinvestigatetheuseof othertechnology solutions. Federal Reserve Priced Services InOctober2014,theFederalReserveBoard announcedfinalrevisionstopartIof theFederal ReserveBanksprovidearangeof paymentand ReservePolicyonPaymentSystemRisk(PSRpolicy) relatedservicestodepositoryandcertainotherinstithatarebasedonandgenerallyconsistentwiththe tutions;these“pricedservices”includecollecting internationalrisk-managementstandardsinthe checks,operatinganautomatedclearinghouse April2012PrinciplesforFinancialMarketInfrastruc- (ACH)service,transferringfundsandsecurities,and turesdevelopedjointlybytheCommitteeonPayment providingamultilateralsettlementservice.1 andSettlementSystemsandtheInternationalOrganizationof SecuritiesCommissions.2Therevised TheReserveBanks,workingwiththefinancialserpolicyretainstheexpectationthattheFedwireFunds vicesindustry,havemadesubstantialprogressintheir ServiceandtheFedwireSecuritiesServicewillmeet efforttomigratetoamoreefficientelectronicpayorexceedtheapplicablerisk-managementstandards mentsystembyexpandingtheuseof ACHpayments inthepolicy.Thefinalpolicybecameeffectiveon andbyconvertingfromapaper-basedcheck-clearing December31,2014. processtoanelectronicone.Overthepastseveral years,theReserveBankshavecapitalizedonefficien- InDecember2014,theFederalReserveBoard ciesgainedfromincreasedelectronicprocessing;the adoptedchangestopartIIof thePSRpolicyand ReserveBanksofferabundleof all-electronicpaycompanionamendmentstoRegulationJ(Collection mentservicesandofferinformationandriskof ChecksandOtherItemsbyFederalReserve managementservices,whichhelpdepositoryinstitu- BanksandFundsTransfersthroughFedwire)that tionsmanageeffectivelyboththeirpaymentoperaweredesignedtoenhancetheefficiencyof thepaytionsandassociatedoperationalandcreditrisk.The mentsystem.Thechangesarelargelyrelatedtothe ReserveBankshavealsobeenengagedinanumber postingrulesforACHandcommercialchecktransof multiyeartechnologyinitiativesthatwillmodernactions.3 izetheirpriced-servicesprocessingplatforms. Underthecurrentpostingrulesforcommercialand In2014,theReserveBankscontinuedeffortsto governmentACHtransactions,ACHdebittransacmigratetheFedACH,FedwireFunds,andFedwire tionspostat11:00a.m.,andACHcredittransactions Securitiesservicesfromamainframesystemtoadistributedcomputingenvironment.Asignificantmile- 2 EffectiveSeptember1,2014,theCommitteeonPaymentand 1 TheACHenablesdepositoryinstitutionsandtheircustomersto SettlementSystemschangeditsnametoCommitteeonPayprocesslargevolumesofpaymentseffectivelythroughelectronic mentsandMarketInfrastructures. batchprocesses. 3 12CFRpart210.

96 101stAnnualReport|2014 Table1.Pricedservicescostrecovery,2005–14 Millionsofdollars,exceptasnoted Operatingexpensesand Year Revenuefromservices1 Targetedreturnonequity3 Totalcosts Costrecovery(percent)4 imputedcosts2 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 2014 433.1 418.7 5.5 424.1 102.1 2005–14 6,962.4 6,378.3 390.3 6,768.6 102.9 Note:Hereandelsewhereinthissection,componentsmaynotsumtototalsoryieldpercentagesshownbecauseofrounding. 1 Forthe10-yearperiod,includesrevenuefromservicesof$6,491.6millionandotherincomeandexpense(net)of$470.8million. 2 Forthe10-yearperiod,includesoperatingexpensesof$6,079.4million,imputedcostsof$34.5million,andimputedincometaxesof$264.5million. 3 From2009to2012,thePSAFwasadjustedtoreflecttheactualclearingbalancelevelsmaintained;previously,thePSAFhadbeencalculatedbasedonaprojectionof clearingbalancelevels. 4 Revenuefromservicesdividedbytotalcosts.Forthe10-yearperiod,costrecoveryis95.1percent,includingtheeffectofaccumulatedothercomprehensiveincome(AOCI) reportedbythepricedservicesunderASC715.Fordetailsonchangestotheestimationofpricedservicesaccumulatedothercomprehensiveincomeandtheireffectonthe proformafinancialstatements,refertonote3tothe“ProFormaFinancialStatementsforFederalReservePricedServices”attheendofthissection. postat8:30a.m.4TheBoardchangedthepostingof Recovery of Direct and Indirect Costs ACHdebittransactionsto8:30a.m.toalignwiththe postingtimeof ACHcredittransactions. TheMonetaryControlActof 1980requiresthatthe FederalReserveestablishfeesforpricedservicesto Inaddition,theBoard’scurrentpostingrulesfor recover,overthelongrun,alldirectandindirectcosts commercialchecktransactionsreflectapresumption actuallyincurredaswellastheimputedcoststhat thatbanksgenerallyhandlechecksinpaperformand wouldhavebeenincurred—includingfinancingcosts, donotreflectbanks’widespreaduseof electronic taxes,andcertainotherexpenses—andthereturnon check-processingmethods.Toreflectthecurrentelec- equity(profit)thatwouldhavebeenearnedif apritroniccheck-processingenvironment,theBoard vatebusinessfirmhadprovidedtheservices.5The changedthepostingtimeforreceivingmostcredits imputedcostsandimputedprofitarecollectively fordepositsanddebitsforpresentmentsto8:30a.m. referredtoastheprivate-sectoradjustmentfactor andestablishedtwootherpostingtimesat1:00p.m. (PSAF).From2005through2014,theReserveBanks and5:30p.m. recovered102.9percentof thetotalpricedservices costs,includingthePSAF(seetable1).6 TheamendmentstoRegulationJpermittheReserve Bankstoobtainsettlementfrompayingbanksas earlyas8:30a.m.forchecksthattheReserveBanks present.TheamendmentsalsopermittheReserve 5 Pub.LawNo.96-221,March31,1980.Financialdatareported Bankstorequirepayingbanksthatreceivepresentthroughoutthissection—includingrevenue,otherincome,costs, mentof checksfromtheReserveBankstomakethe incomebeforetaxes,andnetincome—willreferencethe“Pro proceedsof settlementforthosechecksavailableto FormaFinancialStatementsforFederalReservePricedServices”attheendofthissection. theReserveBanksassoonas30minutesafterreceipt 6 AccordingtotheAccountingStandardsCodification(ASC) of thechecks.ThesechangestothePSRpolicyand Topic715(ASC715),Compensation–RetirementBenefits,the RegulationJbecomeeffectiveJuly23,2015. ReserveBanksrecognizeda$549.7millionreductioninequity relatedtothepricedservices’benefitplansthrough2014. Includingthisreductioninequity,whichrepresentsadeclinein economicvalue,resultsincostrecoveryof95.1percentforthe 10-yearperiod.FordetailsonhowimplementingASC715 affectedtheproformafinancialstatements,refertonote3tothe 4 Alltimesareeasterntimeunlessotherwisespecified. proformafinancialstatementsattheendofthissection.

FederalReserveBanks 97 Table2.ActivityinFederalReservepricedservices,2012–14 Thousandsofitems Percentchange Service 2014 2013 2012 2013to2014 2012to2013 Commercialcheck 5,741,527 5,988,302 6,622,265 -4.1 -9.6 CommercialACH 11,620,376 11,142,821 10,664,613 4.3 4.5 Fedwirefundstransfer 138,133 137,219 134,409 0.7 2.1 Nationalsettlement 597 661 663 -9.7 -0.3 Fedwiresecurities 4578 6,535 6,441 -30.0 1.5 Note:Activityincommercialcheckisthetotalnumberofcommercialcheckscollected,includingprocessedandfine-sortitems;incommercialACH,thetotalnumberof commercialitemsprocessed;inFedwirefundstransferandsecuritiestransfer,thenumberoftransactionsoriginatedonlineandoffline;andinnationalsettlement,thenumber ofsettlemententriesprocessed. In2014,ReserveBanksrecovered102.1percentof Commercial Automated thetotalpricedservicescosts,includingthePSAF.7 Clearinghouse Service TheReserveBanks’operatingexpensesandimputed coststotaled$418.7million.Revenuefromopera- TheReserveBanks’long-runcostrecoveryaverage tionstotaled$433.1million,resultinginnetincome from2005to2014forFedACHwas100.0percent.In frompricedservicesof $14.5million.Althoughthe 2014,theReserveBanksrecovered86.7percentof checkservice,theFedwireFundsandNational thetotalcostsof theircommercialACHservices, SettlementServices,andtheFedwireSecuritiesSer- includingtherelatedPSAF.RevenuefromACH viceachievedfullcostrecovery,theFedACHService operationstotaled$124.4million,anincreaseof recovered86.7percentof itscostsbecauseof a $5.5millionfrom2013.ReserveBankoperating $31.6millionchargeassociatedwiththedecisionto expensesandimputedcoststotaled$141.4million, suspenditsinvestmentinamultiyeartechnologyini- resultinginanetlossof $17.0million.In2014,the tiativetomodernizeitsprocessingplatform.Greater- ReserveBanksprocessed11.6billioncommercial than-expectedcheckvolumeprocessedbythe ACHtransactions,anincreaseof 4.3percentfrom ReserveBankswasthesinglemostsignificantfactor 2013.Theaveragedailyvalueof FedACHtransfers influencingpricedservicescostrecovery. in2014wasapproximately$79.2billion,anincrease of 1.0percentfromthepreviousyear. Commercial Check-Collection Service Fedwire Funds and National In2014,ReserveBanksrecovered115.6percentof thetotalcostsof theircommercialcheck-collection Settlement Services service,includingtherelatedPSAF.Revenuefrom operationstotaled$174.7million,resultinginnet In2014,ReserveBanksrecovered103.2percentof incomeof $25.4million.Thisrevenuedecreased thecostsof theirFedwireFundsandNationalSettle- $24.1millionfrom2013.TheReserveBanks’operat- mentServices,includingthePSAF.ReserveBank ingexpensesandimputedcoststotaled$149.3mil- operatingexpensesandimputedcostsforthese lion.ReserveBankshandled5.7billionchecksin operationstotaled$105.2millionin2014.Revenue 2014,adecreaseof 4.1percentfrom2013(see fromtheseservicestotaled$110.1million,resulting table2).ThedeclineinReserveBankcheckvolume, inanetincomeof $4.8million. attributabletothedeclineinthenumberof checks FedwireFundsService writtengenerally,wasnotasgreatasanticipatedand ledtotheresultingnetincome.Theaveragedaily TheFedwireFundsServiceallowsitsparticipantsto valueof checkscollectedbytheReserveBanksin usetheirbalancesatReserveBankstotransferfunds 2014wasapproximately$32.3billion,anincreaseof tootherparticipantsintheservice.In2014,thenum- 1.9percentfromthepreviousyear. berof Fedwirefundstransfersoriginatedbydepositoryinstitutionsincreased0.7percentfrom2013,to approximately138million.Theaveragedailyvalueof 7 Totalcostisthesumofoperatingexpenses,imputedcosts Fedwirefundstransfersin2014was$3.5trillion,an (incometaxes,interestondebt,interestonfloat,andsales taxes),andthetargetedreturnonequity. increaseof 24percentfromthepreviousyear.

98 101stAnnualReport|2014 NationalSettlementService Currency and Coin TheNationalSettlementServiceisamultilateral settlementsystemthatallowsparticipantsinprivate- TheBoardistheissuingauthorityforthenation’s sectorclearingarrangementstosettletransactions currency(intheformof FederalReservenotes).In usingFederalReservebalances.In2014,theservice 2014,theBoardpaidtheU.S.TreasuryDepartment’s processedsettlementfilesfor17localandnational Bureauof EngravingandPrinting(BEP)$656.8milprivate-sectorarrangements.TheReserveBankspro- lionforcostsassociatedwiththeproductionof cessed9,896filesthatcontained569,502settlement 6.9billionFederalReservenotes.TheReserveBanks entriesforthesearrangementsin2014.Activityin distributeandreceivecurrencyandcointhrough 2014representsadecreasefromthe661,466settle- depositoryinstitutionsinresponsetopublicdemand. mententriesprocessedin2013. Together,theBoardandReserveBanksworkto maintaintheintegrityof andconfidenceinFederal Fedwire Securities Service Reservenotes. TheFedwireSecuritiesServiceallowsitsparticipants In2014,theReserveBanksdistributed37.6billion totransferelectronicallytootherserviceparticipants FederalReservenotesintocirculation,a0.6percent certainsecuritiesissuedbytheU.S.TreasuryDepart- increasefrom2013,andreceived35.7billionFederal ment,federalgovernmentagencies,government- Reservenotesfromcirculation,a0.2percentdecrease sponsoredenterprises(GSEs),andcertaininterna- from2013.Thevalueof FederalReservenotesincirtionalorganizations.8In2014,thenumberof non- culationincreasednearly8.4percentin2014,to Treasurysecuritiestransfersprocessedviatheservice $1,298.7billionatyear-end,largelybecauseof interdecreased30.0percentfrom2013,toapproximately nationaldemandfor$100notes.In2014,theReserve 9.4million.Theaveragedailyvalueof FedwireSecu- Banksalsodistributed69.4billioncoinsintocircularitiestransfersin2014was$1.1trillion,adecreaseof tion,a1.7percentincreasefrom2013,andreceived 3percentfromthepreviousyear. 55.4billioncoinsfromcirculation,a2.5percent decreasefrom2013. TheReserveBanksrecovered104.1percentof the totalcostsof thepriced-servicecomponentof their Redesigned $100 Note FedwireSecuritiesService,includingthePSAF.The ReserveBanks’operatingexpensesandimputed TheFederalReservebegansupplyingfinancialinsticostsforprovidingthisservicetotaled$22.7million tutionswitharedesigned$100noteonOctober8, in2014.Revenuefromtheservicetotaled$24.0mil- 2013.TheFederalReserve,U.S.Departmentof the lion,resultinginanetincomeof $1.2million. Treasury,theBEP,andtheU.S.SecretServicepartnertoredesignFederalReservenotestostayahead Float of counterfeitingthreats.During2014,theFederal ReserveBanksdistributed3.6billionredesigned$100 In2014,theReserveBankshaddailyaveragecredit notesandreplacednearly30percentof all$100notes floatof $590.8million,comparedwithdailyaverage incirculationwiththeredesigned$100note. creditfloatof $630.2millionin2013.9 Improvements to Efficiency and Risk Management Advancesincurrency-processingequipmentandsensortechnologyincreasedproductivityandimproved 8 Theexpenses,revenues,volumes,andfeesreportedherearefor noteauthenticationandfitnessmeasurement, transfersofsecuritiesissuedbyfederalgovernmentagencies, government-sponsoredenterprises,andcertaininternational therebyreducingtheprematuredestructionof fit organizations.ReserveBanksprovideTreasurysecuritiesser- currencywhilemaintainingthequalityandintegrity vicesintheirroleastheU.S.Treasury’sfiscalagent.Theseserof currencyincirculation.In2014,ReserveBanks vicesarenotconsideredpricedservices.Fordetails,see“TreasurySecuritiesServices”laterinthissection. installedanewtypeof fitnesssensorandbegan 9 CreditfloatoccurswhentheReserveBankspresentchecksand installinganewtypeof authenticationsensor.Addiotheritemstothepayingbankpriortoprovidingcredittothe tionally,theReserveBankscontinueworkingwith depositingbank(debitfloatoccurswhentheReserveBanks equipmentmanufacturerstoexplorethenextgeneracreditthedepositingbankbeforepresentingchecksandother itemstothepayingbank). tionof equipmenttoprocessthehighvolumeof

FederalReserveBanks 99 notesreceivedannuallyforauthenticationandfitness inspection,”shouldreducespoilageratesandprintsorting. ingcosts. During2014,someReserveBanksbeganimplement- Fiscal Agency and Government ingnewprocessesdesignedtoincreaseproductivity Depository Services andenhanceriskmanagement,whichallReserve Bankswillimplementin2015. Asfiscalagentsanddepositoriesforthefederalgov- Other Improvements and Efforts ernment,theReserveBanksauctionTreasurysecurities,processelectronicandcheckpaymentsforTreas- ReserveBankscontinuetodevelopanewcashauto- ury,collectfundsowedtothefederalgovernment, mationplatformthatwillreplacelegacysoftware maintainTreasury’sbankaccount,anddevelop, applications,automatebusinessconceptsandpro- operate,andmaintainanumberof automatedsyscesses,andemploytechnologiestomeetthecash temstosupportTreasury’smission.TheReserve business’scurrentandfutureneedsmorecosteffec- Banksalsoprovidecertainfiscalagencyanddepositively.Thenewplatformwillalsofacilitatebusiness toryservicestootherentities;theseservicesarepricontinuityandcontingencyplanningandenhance marilyrelatedtobook-entrysecurities.Treasuryand thesupportprovidedtoReserveBankcustomers.In otherentitiesfullyreimbursetheReserveBanksfor 2014,theReserveBankscontinuedapplicationdevel- theexpenseof providingfiscalagencyanddepository opmentandtestingeffortsforthenewautomation services. platform,whichisscheduledtobedeployedtoall cashofficesbyyear-end2017. In2014,fiscalagencyexpensesamountedto $569.6million,a7.5percentincreasefrom2013(see TheBoardandtheBEPcontinuedimplementing table3).Expensesincreasedasaresultof requests componentsof anewqualitysystemfortheBEP fromTreasury’sBureauof theFiscalService(Fiscal throughout2014.TheBEPinstalledandbeganusing Service).SupportforTreasuryprogramsaccounted sortingequipmentthatcullsgoodnotesfromrejected for93.9percentof expenses,andsupportforother half sheets.Thisprocess,knownas“singlenote entitiesaccountedfor6.1percent. Table3.ExpensesoftheFederalReserveBanksforfiscalagencyanddepositoryservices,2012–14 Thousandsofdollars Agencyandservice 2014 2013 2012 DepartmentoftheTreasury Treasurysecuritiesservices Treasuryretailsecurities 54,966 55,334 60,208 Treasurysecuritiessafekeepingandtransfer 16,568 14,397 14,131 Treasuryauction 29,499 26,673 30,648 Computerinfrastructuredevelopmentandsupport 5,792 5,801 4,990 Otherservices 853 2,971 3,340 Total 107,678 105,176 113,317 Payment,collection,andcash-managementservices Paymentservices 161,629 151,715 141,534 Collectionservices 54,355 44,788 41,456 Cash-managementservices 75,878 66,519 58,975 Computerinfrastructuredevelopmentandsupport 79,289 75,565 70,075 Otherservices 11,465 9,360 9,075 Total 382,615 347,947 321,115 OtherTreasury Total 44,756 42,826 37,011 Total,Treasury 535,049 495,949 471,443 Otherfederalagencies Total,otheragencies 34,588 34,077 34,569 Totalreimbursableexpenses 569,638 530,026 506,012 Note:Thedecreasein“TreasurySecuritiesServices:OtherServices”isduetothereclassificationofprogramsinto“TreasurySecuritiesServices:TreasuryRetailSecurities.”

100 101stAnnualReport|2014 InApril2014,aspartof thefederalgovernment’s transferof marketableTreasurysecuritiesforinstituefforttoincreaseoperationalefficiencyandeffective- tionalinvestors.TheReserveBanksconducted270 ness,Treasuryannouncedtheconsolidationof the Treasurysecuritiesauctionsin2014.Of the270aucfiscalagencyservicesprovidedbytheReserveBanks. tions,12auctionswereforFloatingRateNotes—a AlthoughTreasuryexpectslong-termsavingsby newmarketableTreasurysecuritywithafloatingrate reducingthenumberof ReserveBanksthatprovide interestpayment.FloatingRateNotesarethefirst fiscalagencyservices,anincreaseinexpensesispro- newTreasurysecurityissuedsincetheintroductionof jectedduringtheconsolidationprocess.Select TreasuryInflation-ProtectedSecuritiesalmosttwo ReserveBankbusinesslinesbegantransitioningin decadesago. 2014andtheconsolidationisexpectedtoconcludein 2018.Totalconsolidationexpensesfor2014 In2014,ReserveBankoperatingexpensesinsupport amountedto$27.3million.Consolidationexpenses of Treasurysecuritiesauctionswere$29.5million, areincludedinthelineitemsforPayment,Collec- comparedwith$26.7millionin2013.Thisincrease tion,andCash-managementservicesintable3.Of wasdrivenbyupgradestotheauctionsystem,which theconsolidationexpenses,$6.7millionisattribut- receivesandprocessesbidssubmittedprimarilyby abletopensioncostsincurredbyexitingReserve wholesalesecurityauctionparticipants. Banks. OperatingexpensesassociatedwithTreasurysecuri- Treasury Securities Services tiessafekeepingandtransferactivitieswere$16.6millionin2014,comparedwith$14.4millionin2013. TheReserveBanksworkcloselywithTreasury’sFis- TheincreaseisattributabletotheReserveBanks’ calServiceinsupportof theborrowingneedsof the ongoingtechnologicalefforttomigratesecuritiesserfederalgovernment.TheReserveBanksauction, vicesfromamainframesystemtoadistributedcomissue,maintain,andredeemsecurities;providecus- putingenvironment. tomerservice;andoperatetheautomatedsystems supportingU.S.savingsbondsandmarketableTreas- Payment Services urysecurities(bills,notes,andbonds).Treasurysecuritiesservicesconsistof retailsecuritiesprograms, TheReserveBanksworkcloselywiththeTreasury’s whichprimarilyserveindividualinvestors,and FiscalServiceandothergovernmentagenciestoprowholesalesecuritiesprograms,whichserveinstitu- cesspaymentstoindividualsandcompanies.The tionalcustomers. ReserveBanksprocessfederalpayrollpayments, SocialSecurityandveterans’benefits,incometax Retail Securities Programs refunds,vendorpayments,andothertypesof payments. ReserveBankoperatingexpensesfortheretailsecuritiesprogramswere$55.0millionin2014,a0.7per- ReserveBankoperatingexpensesforpaymentscentdecreasecomparedwith$55.3millionin2013. relatedactivitytotaled$161.6millionin2014,com- Increasedoperationalefficienciesinretailsecurities paredwith$151.7millionin2013.Totalpaymentsresultedinlowerstaffinglevelsandledtoanoverall relatedoperatingexpensesin2014included decreaseinexpenses.Throughouttheyear,Reserve $17.0millioninconsolidationexpenses.Theincrease BanksandTreasurycontinuedworkonTreasury’s in2014expenseswasduetoacombinationof con- RetailE-Servicesinitiativetocreateanewcustomer solidationcostsandincreasedprogrammatic serviceandsupportenvironment.ReserveBanksalso expensesassociatedwiththeInvoiceProcessingPlatengagedinanongoingefforttodecommissionthe form(IPP),thePostPaymentSystem(PPS)initiative, LegacyTreasuryDirectsystem—establishedin1986 DoNotPay(DNP),andInternationalTreasurySerasanapplicationforinvestorstoholdTreasurymar- vices(ITS).Theseexpenseincreaseswerepartlyoffketablesecurities(bills,notes,bonds,andTreasury setbylowerexpensesfortheU.S.TreasuryElectronic Inflation-ProtectedSecurities)—inordertoeliminate PaymentSolutionCenter(formerlyknownastheGo agingtechnologyplatforms. DirectContactCenter). Wholesale Securities Programs TheIPPispartof Treasury’sall-electronicinitiative—anelectronicinvoicingandpaymentinforma- TheReserveBankssupportwholesalesecuritiespro- tionsystemthatallowsvendorstoenterinvoicedata gramsthroughthesale,issuance,safekeeping,and electronically,eitherthroughaweb-basedportalor

FederalReserveBanks 101 electronicsubmission.TheIPPaccepts,processes, decreased31.3percent,to$16.4million,primarily andpresentsdatafromagenciesandsuppliersystems becauseof areductioninenrollmentcallsthatfolrelatedtoallstagesof apaymenttransaction,includ- lowedtheendof theGoDirectCampaign. ingthepurchaseorder,invoice,andotherpayment information.In2014,theReserveBanks’IPP Collection Services expensesincreased42.0percent,to$24.6million. Thisincreasewasprimarilyattributableto$5.3mil- TheReserveBanksalsoworkcloselywiththeFiscal lioninconsolidationexpenses.Additionalprogram Servicetocollectfundsowedtothefederalgovernexpenseswereincurredtoincreasestaffinglevelsin ment,includingvarioustaxes,feesforgoodsandsersupportof aDepartmentof Defensemandateto vices,anddelinquentdebts.In2014,ReserveBank implementIPPforintragovernmentaltransactions,as operatingexpensesrelatedtocollectionservices wellastoprovidesupportforbroaderagencypartici- increased21.4percentto$54.4million,largely pationandgreaterinvoicevolumes. becauseof $3.7millioninconsolidationexpenses andincreasedoperatingexpensesforPay.govand ReserveBankscontinuedworkonthePPSinitiative, eCommerce. amultiyearefforttomodernizeseveralof Treasury’s legacypost-paymentprocessingsystemsintoasingle TheReserveBanksoperatePay.gov,anapplication applicationtoprovideacentralizedandstandardized thatallowsthepublictousetheInternettoauthorize setof paymentdata,enhanceoperations,reduce andinitiatepaymentstofederalagencies.Duringthe expenses,andimprovedataanalyticscapabilities.In year,thePay.govprogramexpandedtoinclude100 2014,programexpensesforPPSincreased248.4per- newagencyprogramsandprocessedmorethan cent,from$4.9millionto$17.0million,astheresult 123milliononlinepaymentstotaling$144billion,a of greatersystemdevelopmentexpensesand 9percentanda20percentincrease,respectively,from $3.9millioninconsolidationexpenses. 2013.Increasedoperationalsupportandexpanded functionalityresultedinexpensesincreasing18.2per- Insupportof Treasury’sDNPinitiative,theReserve cent,to$18.3million. BankscontinuedtoenhancetheDNPPortal,which isasinglepointof accessthroughwhichfederal TheReserveBanksalsocontinuedsupportingthe agenciescanquerymultipledatasourcesbeforemak- Treasury’selectroniccommerceinitiative(eComingfederalpayments.In2014,expensesforDNP merce)toexpandwaysforagenciesandthepublicto increased10.8percentto$15.4million,largely dobusinesswiththeTreasurythroughonlinebankbecauseof additionalstaffingnecessarytosupport ingsolutions,mobiletechnologies,andotherpayapplicationdevelopment,advancedanalytics,and mentmethods.ProgramexpensesforeCommerce newdatasourcepurchases. increasedfrom$156,000in2013to$1.6millionin 2014,largelybecauseof expensesassociatedwith TheReserveBanksoperatetheITSapplication, developinganewmobilepaymentplatformthatwill whichprovidescross-borderpaymentandcollection facilitatemore-efficientfederalrevenuecollections. servicesaswellascash-managementfunctionson behalf of theTreasury.U.S.governmentagenciesuse Treasury Cash-Management Services ITStoissueinternationalbenefit,payroll,andvendorpaymentsin100currenciestorecipientsinestab- TheReserveBanksmaintainTreasury’soperating lishedandemergingmarkets.ITSexpensesincreased cashaccountandprovidecollateral-managementand 24.3percent,to$17.9million,in2014primarily collateral-monitoringservicesforthoseTreasuryprobecauseof $3.7millioninconsolidationcosts. gramsthathavecollateralrequirements.TheReserve BanksalsosupportTreasury’seffortstomodernize TheTreasury’s2014payments-relatedexpenseswere itsfinancialmanagementprocessesbydeveloping offsetbylowerspendingfortheU.S.TreasuryElec- software,operatinghelpdesks,andmanagingprojtronicPaymentSolutionCenter,whichhelpsconvert ectsonbehalf of theFiscalService.In2014,Reserve individuals’federalbenefitpaymentsfrompaper BankoperatingexpensesrelatedtoTreasurycashchecktoelectronicdelivery.Asof December2014, managementservicestotaled$75.9million,compared 97.8percentof allfederalbenefitpaymentswere with$66.5millionin2013.Totalcash-managementmadeelectronically.In2014,expensesfortheU.S. relatedoperatingexpensesfor2014included TreasuryElectronicPaymentSolutionCenter $6.0millioninconsolidationexpenses.

102 101stAnnualReport|2014 During2014,theReserveBankscontinuedtosup- Figure1.Aggregatedaylightoverdrafts,2007–14 portTreasury’seffortstoimprovecentralizedgovernmentaccountingandreportingfunctions.Inparticu- Billions of dollars lar,theReserveBanks,incollaborationwiththeFis- 200 Peak daylight overdrafts calService,completedsoftwaredevelopmentefforts Average daylight overdrafts fortheCentralAccountingReportingSystem 160 (CARS).CARSwillprovideTreasurywithamodernizedsystemforthecollectionanddissemination 120 of financialmanagementandaccountinginformationtransmittedbyandtofederalprogramagencies. 80 In2014,expensesforCARSdecreasedto$18.6mil- 40 lion,from$26.6millionin2013,primarilybecauseof decreasedapplicationdevelopmentexpenses. 0 2007 2008 2009 2010 2011 2012 2013 2014 Services Provided to Other Entities Whenpermittedbyfederalstatuteorwhenrequired lessthan$20billioninovernightbalances,andtotal bytheSecretaryof theTreasury,theReserveBanks averagedaylightoverdraftswerearound$60billion. providefiscalagencyanddepositoryservicestoother Incontrast,institutionsheldhistoricallyhighlevels domesticandinternationalentities. of overnightbalances—onaveragemorethan $2.7trillion—attheReserveBanksin2014,while ReserveBankoperatingexpensesforservicespro- daylightoverdraftsremainedhistoricallylow.Avervidedtootherentitieswere$34.6millionin2014, agedaylightoverdraftsacrosstheFederalReserve comparedwith$34.1millionin2013.Book-entry Systemdeclinedto$1.62billionin2014from securitiesissuanceandmaintenanceactivities $1.9billionin2013,adecreaseof about17percent accountforasignificantamountof theworkper- (seefigure1).Theaveragelevelof peakdaylight formedforotherentities,withthemajorityper- overdraftsfellto$8.44billionin2014from$12bilformedfortheFederalHomeLoanMortgageAsso- lionin2013;theaveragelevelof peakdaylightoverciation(FreddieMac),theFederalNationalMort- draftsin2014wasjustafractionof itslevelin2008 gageAssociation(FannieMae),andtheGovernment (about5percent). NationalMortgageAssociation(GinnieMae). Daylightoverdraftfeesarealsoathistoricallylow levels.In2014,institutionspaidabout$31,000in Use of Federal Reserve daylightoverdraftfees;incontrast,feestotaledmore Intraday Credit than$50millionin2008.Thedecreaseinfeesis largelyattributabletotheelevatedlevelof reserve TheBoard’sPSRpolicygovernstheuseof Federal balancesthatbegantoaccumulateinlate2008andto ReserveBankintradaycredit,alsoknownasdaylight theMarch2011policyrevisionthateliminatedfees overdrafts.Adaylightoverdraftoccurswhenaninsti- forcollateralizeddaylightoverdrafts. tution’saccountactivitycreatesanegativebalancein theinstitution’sFederalReserveaccountatanytime FedLine Access intheoperatingday.Daylightoverdraftsenablean to Reserve Bank Services institutiontosendpaymentsmorefreelythroughout thedaythanif itwerelimitedstrictlybyitsavailable intradayfundsbalance.ThePSRpolicyrecognizes TheReserveBanks’FedLineaccesssolutionsprovide explicitlytheroleof thecentralbankinproviding depositoryinstitutionswithavarietyof alternatives intradaybalancesandcredittohealthyinstitutions; forelectronicallyaccessingtheBanks’paymentand underthepolicy,theReserveBanksprovidecollater- informationservices.TheReserveBankschargefees alizedintradaycreditatnocost. fortheseelectronicconnectionsandallocatetheassociatedcostsandrevenuetothevariouspricedser- Beforethe2007–09financialcrisis,overnightbal- vices.TherearecurrentlyfiveFedLinechannels ancesweremuchloweranddaylightoverdraftssig- throughwhichcustomerscanaccesstheReserve nificantlyhigherthanlevelsobservedsincelate2008. Banks’pricedservices:FedMail,FedLineWeb,Fed- In2007,forexample,institutionsheld,onaverage, LineAdvantage,FedLineCommand,andFedLine

FederalReserveBanks 103 Direct.TheseFedLinechannelsaredesignedtomeet NationalITalsoledanefforttoinstitutecommonIT theindividualconnectivity,security,andcontingency principlesthroughouttheSystemtomotivatestraterequirementsof depositoryinstitutioncustomers. gicdecisionsandbehaviorsthroughoutSystemIT.12 Theseprinciplesprovideacommonfoundationfor Between2007and2014,thenumberof depository deliveringITservicesaseffectively,securely,effiinstitutionsintheUnitedStatesdeclined22.2per- ciently,andinnovativelyaspossible,andsupportthe cent,andReserveBankFedLineconnections System’sITobjectivetodeliverhighlyeffectiveand decreased11.7percent.Duringthissameperiod,the efficientITservicesandsolutionsthatsupportbusinumberof employeeswithindepositoryinstitutions nessobjectivesandenhanceproductivitywhilesafewhohaveFedLinecredentialsincreased11.6percent, guardingFederalReservedataandassets. reflectinginparttheexpansionof value-addedservicesprovided.Additionally,theFedLinenetwork Finally,underthedirectionof thechief information wasbroadenedtononfinancialservices.Between securityofficer,managementof theFederalReserve’s 2012and2014,morethan10,000credentialswere informationsystems(IS)riskcontinuestomature, issuedtoindividualsaccessingcentralbankapplica- withprioritygiventocybersecurityandISstrategy. tionsviaFedLine. TheFederalReserveremainsvigilantaboutitscybersecurityposture,makingthoughtfulinvestmentsin TheReserveBankscontinuetomaintaintheirfocus keyrisk-mitigationinitiativesandprogramsandcononsecurityandresiliencybyupgradingcriticalele- tinuouslymonitoringandassessingcybersecurity mentsof theFedLinesolutions.Thenext-generation riskstoitsoperations.In2014,theFederalReserve virtualprivatenetworksolutionisakeycomponent completeditsimplementationof anewISframework of thesecuritymodelfortheFedLineAdvantageand forkeysystems.Theframework,knownasSystem FedLineCommandaccesssolutionsusedbyapproxi- AssurancefortheFederalReserve,isbasedonguidmately5,000financialinstitutions.10Thesolution ancefromtheNationalInstituteof Standardsand wascertifiedforgeneralavailabilityinJuly2013,and TechnologyandadaptedtotheFederalReserve’s theoverallmigrationisnearingcompletion. environment. Information Technology Examinations of the Federal Reserve Banks TheFederalReserveBankscontinuedtoimprovethe efficiency,effectiveness,andsecurityof information TheReserveBanksandseveralconsolidatedvariable technology(IT)servicesandoperationsin2014. interestentities(VIEs)operatedbytheFederal ReserveSysteminresponsetothe2007–09financial NationalITcontinueditsrestructuringtostreamline crisisaresubjecttoseverallevelsof auditand theorganizationtomaintainstrongoperationalper- review.13Thecombinedfinancialstatementsof the formance;streamlinelayersof managementto ReserveBanks—aswellasthefinancialstatementsof achieveaflatter,moreefficientstructure;and eachof the12ReserveBanksandMaidenLane strengthenskillsandproficiencyincriticalareas.11 LLC—areauditedannuallybyanindependentpublic MajormultiyearprogramstoconsolidatetheFederal accountantretainedbytheBoardof Governors.14In Reserve’sIToperationsandnetworkingserviceswere addition,theReserveBanks,includingtheconsolicompletedandimprovedtheoverallefficiencyand datedVIEs,aresubjecttooversightbytheBoardof qualityof businessoperations.Additionalefforts Governors,whichperformsitsownreviews. helpedSystemleadersarticulatebusinessneeds throughITroadmapsandtoidentifymoreopportu- TheReserveBanksusethe2013frameworkestabnitiestoemploycommontechnologyservicesand lishedbytheCommitteeof SponsoringOrganizasolutions. tionsof theTreadwayCommission(COSO)toassess theirinternalcontrolsoverfinancialreporting, 10 VirtualprivatenetworkorVPNtechnologysupportsremote, secure,andprivatenetworkaccessoverapublicnetworkcon- 12 SystemITistechnologyprovisionedforandbyReserveBanks, nection,suchastheInternet. businesslines,andNationalIT. 11 NationalITsuppliesnationalinfrastructureandbusinessline 13 TheNewYorkReserveBankisconsideredtobethecontrolling technologyservicestotheFederalReserveBanksandprovides financialinterestholderofeachoftheconsolidatedVIEs. guidanceontheSystem’sinformationtechnologyarchitecture 14 See“FederalReserveBanksCombinedFinancialStatements”in andbusinessuseoftechnology. section12ofthisreport.

104 101stAnnualReport|2014 includingthesafeguardingof assets.Withinthis TheBoardalsoreviewsSOMAandforeigncurrency framework,themanagementof eachReserveBank holdingsto annuallyprovidesanassertionlettertoitsboardof • determinewhethertheNewYorkReserveBank, directorsthatconfirmsadherencetoCOSO whileconductingtherelatedtransactions,complies standards. withthepoliciesestablishedbytheFederalOpen MarketCommittee(FOMC);and TheFederalReserveBoardengagedDeloitte& ToucheLLP(D&T)toauditthe2014combinedand • assessSOMA-relatedITprojectmanagementand individualfinancialstatementsof theReserveBanks applicationdevelopment,vendormanagement,and andMaidenLaneLLC.15 systemresiliencyandcontingencyplans. In2014,D&Talsoconductedauditsof theinternal Inaddition,D&Tauditstheyear-endscheduleof controlsassociatedwithfinancialreportingforeach participatedassetandliabilityaccountsandthe of theReserveBanks.FeesforD&T’sservices relatedscheduleof participatedincomeaccounts. totaled$6.9million,of which$0.4millionwasforthe TheFOMCisprovidedwiththeexternalaudit auditof MaidenLaneLLC.Toensureauditorinde- reportsandareportontheBoardreview. pendence,theBoardrequiresthatD&Tbeindependentinallmattersrelatingtotheaudits.Specifically, Income and Expenses D&TmaynotperformservicesfortheReserve Banksorothersthatwouldplaceitinapositionof Table4summarizestheincome,expenses,anddistriauditingitsownwork,makingmanagementdecibutionsof netearningsof theReserveBanksfor sionsonbehalf of theReserveBanks,orinanyother 2014and2013.Incomein2014was$116,562million, wayimpairingitsauditindependence.In2014,the comparedwith$91,150millionin2013. ReserveBanksdidnotengageD&Tforanynonauditservices.16 Expensestotaled$12,579million: TheBoard’sreviewsof theReserveBanksincludea • $6,862millionininterestpaidtodepositoryinstituwiderangeof off-siteandon-siteoversightactivities, tionsonreservebalancesandtermdeposits; conductedprimarilybyitsDivisionof ReserveBank • $3,926millioninReserveBankoperatingexpenses; OperationsandPaymentSystems.Divisionpersonnel monitoronanongoingbasistheactivitiesof each • $383millioninnetperiodicpensionexpense; ReserveBankandconsolidatedVIE,NationalIT, • $112millionininterestexpenseonsecuritiessold andtheSystem’sOfficeof EmployeeBenefits(OEB). underagreementstorepurchase; Theyconductacomprehensiveon-sitereviewof each ReserveBank,andOEBatleastonceeverythree • $590millioninassessmentsforBoardof GoveryearsandreviewNationalIT,theSystemOpenMar- norsexpenditure; ketAccount(SOMA),andFedwireannually. • $711millionfornewcurrencycosts; Thecomprehensiveon-sitereviewsincludeanassess- • $563millionforConsumerFinancialProtection mentof theinternalauditfunction’seffectiveness Bureaucosts;and anditsconformancetotheInstituteof Internal • $2millioninothercosts. Auditors’(IIA)InternationalStandardsfortheProfessionalPracticeof InternalAuditing,applicable Theexpenseswerereducedby$570millioninreimpoliciesandguidance,theIIA’scodeof ethics,and bursementsforservicesprovidedtogovernment thedefinitionof internalauditing. agencies.Netdeductionsfromcurrentnetincome totaled$2,718million,whichincludes$2,907million 15 Inaddition,D&TauditedtheOfficeofEmployeeBenefitsof inunrealizedlossesonforeigncurrencydenominated theFederalReserveSystem(OEB),theRetirementPlanfor investmentsrevaluedtoreflectcurrentmarket EmployeesoftheFederalReserveSystem(SystemPlan),and theThriftPlanforEmployeesoftheFederalReserveSystem exchangerates,$110millioninnetincomeassociated (ThriftPlan).TheSystemPlanandtheThriftPlanprovide withconsolidatedVIEs,and$81millioninrealized retirementbenefitstoemployeesoftheBoard,theFederal gainsonfederalagencyandGSEmortgage-backed ReserveBanks,theOEB,andtheConsumerFinancialProtectionBureau. securities(GSEMBS).Dividendspaidtomember 16 OneBankleasesofficespacetoD&T. banks,setat6percentof paid-incapitalbysec-

FederalReserveBanks 105 Table4.Income,expenses,anddistributionofnetearningsoftheFederalReserveBanks,2014and2013 Millionsofdollars Item 2014 20131 Currentincome 116,562 91,150 Loaninterestincome 2 6 SOMAinterestincome 115,933 90,503 Othercurrentincome2 627 641 Netexpenses 10,715 9,135 Operatingexpenses 3,926 3,765 Reimbursements -570 -530 Netperiodicpensionexpense 383 617 Interestpaidondepositoryinstitutionsdepositsandtermdeposits 6,862 5,223 Interestexpenseonsecuritiessoldunderagreementstorepurchase 112 60 Otherexpenses 2 0 Currentnetincome 105,847 82,015 Netadditionsto(deductionsfrom)currentnetincome -2,718 -1,029 Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities 81 51 Foreigncurrencytranslationlosses -2,907 -1,257 Netincome(loss)fromconsolidatedVIEs 110 181 Otherdeductions -2 -4 AssessmentsbytheBoardofGovernors 1,864 1,845 ForBoardexpenditures 590 580 Forcurrencycosts 711 702 ForConsumerFinancialProtectionBureaucosts3 563 563 NetincomebeforeprovidingforremittancestotheTreasury 101,265 79,141 EarningsremittancestotheTreasury 96,902 79,633 Netincome(loss) 4,363 -492 Othercomprehensive(loss)gain -1,612 2,289 Comprehensiveincome 2,751 1,797 Totaldistributionofnetincome 99,653 81,430 Dividendsoncapitalstock 1,686 1,650 Transfertosurplusandchangeinaccumulatedothercomprehensiveincome 1,065 147 EarningsremittancestotheTreasury 96,902 79,633 1 Certainamountsrelatingto2013havebeenreclassifiedtoconformtothecurrent-yearpresentation. 2 Includesincomefrompricedservices,compensationreceivedforservicesprovided,andsecuritieslendingfees. 3 TheBoardofGovernorsassessestheReserveBankstofundtheoperationsoftheConsumerFinancialProtectionBureau. tion7(1)of theFederalReserveAct,totaled incomeandexpensesof eachReserveBankfor2014; $1,686million. table11showsacondensedstatementforeach ReserveBankfortheyears1914through2014;and ComprehensivenetincomebeforeinterestonFederal table13givesthenumberandannualsalariesof offi- ReservenotesexpenseremittedtoTreasurytotaled cersandemployeesforeachReserveBank.A $99,653millionin2014(netincomeof $101,265mil- detailedaccountof theassessmentsandexpenditures lion,decreasedbyothercomprehensivelossof of theBoardof GovernorsappearsintheBoardof $1,612million).EarningsremittancestoTreasury GovernorsFinancialStatements(seesection12, totaled$96,902millionin2014.Theremittances “FederalReserveSystemAudits”). equalcomprehensiveincomeafterthedeductionof dividendspaidandtheamountnecessarytoequate SOMA Holdings and Loans theReserveBanks’surplustopaid-incapital. Section11of thisreport,“StatisticalTables,”pro- TheReserveBanks’averagenetdailyholdingsof videsmoredetailedinformationontheReserve securitiesandloansduring2014amountedto BanksandtheVIEs.Table9isastatementof condi- $4,055,301million,anincreaseof $717,603million tionforeachReserveBank;table10detailsthe from2013(seetable5).

106 101stAnnualReport|2014 Table5.SystemOpenMarketAccount(SOMA)holdingsandloansoftheFederalReserveBanks,2014and2013 Millionsofdollars,exceptasnoted Averagedailyassets(+)/liabilities(–) Currentincome(+)/expense(–) Averageinterestrate(percent) Item 2014 2013 2014 2013 2014 2013 U.S.Treasurysecurities1 2,520,120 2,092,769 63,011 51,591 2.50 2.47 Government-sponsoredenterprisedebt(GSE)securities1 46,122 69,872 1,579 2,166 3.42 3.10 FederalagencyandGSEmortgage-backedsecurities2 1,700,521 1,249,810 51,264 36,628 3.01 2.93 Foreigncurrencydenominatedinvestments3 23,296 23,941 78 96 0.33 0.40 Centralbankliquidityswaps4 192 3,361 1 22 0.52 0.65 OtherSOMAassets5 28 63 * * 0.01 0.03 TotalSOMAassets 4,290,279 3,439,816 115,933 90,503 2.70 2.63 Securitiessoldunderagreementstorepurchase -233,249 -99,680r -112 -60 0.05 0.06 OtherSOMAliabilities6 -1,899 -2,781 n/a n/a n/a n/a TotalSOMAliabilities -235,148 -102,461r -112 -60 0.05 0.06 TotalSOMAholdings 4,055,131 3,337,355r 115,821 90,443 2.86 2.55r Primary,secondary,andseasonalcredit 118 79 * * 0.21 0.25 Totalloanstodepositoryinstitutions 118 79 * * 0.21 0.25 TermAsset-BackedSecuritiesLoanFacility(TALF)7 52 264 2 6 3.85 2.27 Totalloanstoothers 52 264 2 6 3.85 2.27 Totalloans 170 343 2 6 1.18 1.75 TotalSOMAholdingsandloans 4,055,301 3,337,698r 115,823 90,449 2.86 2.55r 1 Facevalue,netofunamortizedpremiumsanddiscounts. 2 Facevalue,whichistheremainingprincipalbalanceofthesecurities,netofunamortizedpremiumsanddiscounts.Doesnotincludeunsettledtransactions. 3 Includesaccruedinterest.Foreigncurrencydenominatedassetsarerevalueddailyatmarketexchangerates. 4 Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. 5 Cashandshort-terminvestmentsrelatedtothefederalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities(GSEMBS)portfolio. 6 RepresentstheobligationtoreturncashmarginpostedbycounterpartiesascollateralundercommitmentstopurchaseandsellfederalagencyandGSEMBS,aswellas obligationsthatarisefromthefailureofasellertodeliversecuritiesonthesettlementdate. 7 Representstheremainingprincipalbalance.DuringtheyearendedDecember31,2014,allremainingTALFloanswererepaidinfull,includingaccruedinterest. r Revised. n/a Notapplicable. * Lessthan$500thousand. SOMA Securities Holdings Therewerenosignificantholdingsof securitiespurchasedunderagreementstoresellin2014or2013. Theaveragedailyholdingsof Treasurysecurities Averagedailyholdingsof foreigncurrencydenomiincreasedby$427,351million,toanaveragedaily natedinvestmentsin2014were$23,296million,comamountof $2,520,120million.Theaveragedaily paredwith$23,941millionin2013.Theaveragedaily holdingsof GSEdebtsecuritiesdecreasedby balanceof centralbankliquidityswapdrawingswas $23,750million,toanaveragedailyamountof $192millionin2014and$3,361millionin2013.The $46,122million.Theaveragedailyholdingsof averagedailybalanceof securitiessoldunderagreefederalagencyandGSEMBSincreasedby mentstorepurchasewas$233,249million,an $450,711million,toanaveragedailyamountof increaseof $133,569millionfrom2013. $1,700,521million. Theaverageratesof interestearnedontheReserve Theincreasesinaveragedailyholdingsof Treasury Banks’holdingsof Treasurysecuritiesincreasedto securitiesandfederalagencyandGSEMBSaredue 2.50percentandtheaverageratesonGSEdebtsecutothepurchasesthroughalarge-scaleassetpurchase ritiesincreasedto3.42percentin2014.Theaverage programandreinvestmentof principalpayments rateof interestearnedonfederalagencyandGSE fromotherSOMAholdingsinfederalagencyand MBSincreasedto3.01percentin2014.Theaverage GSEMBS.Theaveragedailyholdingsof GSEdebt interestratesforsecuritiessoldunderagreementsto securitiesdecreasedasaresultof maturities. repurchasedecreasedto0.05percentin2014.The

FederalReserveBanks 107 Table6.Keyfinancialdataforconsolidatedvariableinterestentities(VIEs),2014and2013 Millionsofdollars TALFLLC MaidenLaneLLC MaidenLaneIILLC MaidenLaneIIILLC TotalVIEs Item 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 NetportfolioassetsoftheconsolidatedVIEsandthenetpositionoftheNewYorkReserveBank(FRBNY)andsubordinatedinterestholders Netportfolioassets1 0 109 1,811 1,732 0 63 0 22 1,811 1,926 LiabilitiesofconsolidatedVIEs 0 0 -127 -157 0 0 0 0 -127 -157 Netportfolioassetsavailable2 0 109 1,684 1,575 0 63 0 22 1,684 1,769 Loansextendedtotheconsolidated VIEsbytheFRBNY3 0 0 0 0 0 0 0 0 0 0 Otherbeneficialinterests3 0 0 0 0 0 0 0 0 0 0 Totalloansextendedtothe consolidatedVIEsbytheFRBNYand otherbeneficialinterests 0 0 0 0 0 0 0 0 0 0 Cumulativechangeinnetassetssincetheinceptionoftheprogram4 AllocatedtoFRBNY 0 11 1,684 1,575 0 53 0 15 1,684 1,654 Allocatedtootherbeneficialinterests 0 98 0 0 0 10 0 7 0 115 Cumulativechangeinnetassets 0 109 1,684 1,575 0 63 0 22 1,684 1,769 SummaryofconsolidatedVIEnetincome,includingareconciliationoftotalconsolidatedVIEnetincometotheconsolidatedVIEnetincome Portfoliointerestincome5 * 0 77 2 * 4 * * 77 6 Portfolioholdingsgains(losses) * -573 37 183 0 0 * 0 37 -390 Professionalfees * -1 -4 -6 * -1 * * -4 -8 Netincome(loss)ofconsolidatedVIEs * -574 110 179 * 3 * * 110 -392 Less:Netincome(loss)allocatedto otherbeneficialinterests * 574 0 0 * -1 * * 0 573 Netincome(loss)allocatedtoand recordedbyFRBNY6 * 0 110 179 * 2 * 0 110 181 1 TALF,MaidenLane,MaidenLaneII,andMaidenLaneIIIholdingsarerecordedatfairvalue.Fairvaluereflectsanestimateofthepricethatwouldbereceiveduponsellingan assetifthetransactionweretobeconductedinanorderlymarketonthemeasurementdate. 2 RepresentsthenetassetsavailablefordistributiontoFRBNYand“otherbeneficiaries”oftheconsolidatedVIEs.DuringtheyearendedDecember31,2014,allremaining assetsofTALFLLC,MaidenLaneII,andMaidenLaneIII,weredistributedtotheFRBNYandotherbeneficialinterestholdersandtheseentitiesweredissolved. 3 TheremainingbalancesoftheloansextendedtotheconsolidatedVIEsbytheFRBNYandbyamountsprovidedtotheVIEsbyotherbeneficialinterestholderswererepaidin full,includingaccruedinterest,duringtheyearsendedDecember31,2012,andDecember31,2013. 4 RepresentstheallocationofthechangeinnetassetsandliabilitiesoftheconsolidatedVIEsthatareavailablefordistributiontoFRBNYandtheotherbeneficiariesofthe consolidatedVIEs.Thedifferencesbetweenthefairvalueofthenetassetsavailableandthebookvalueoftheloans(includingaccruedinterest)areindicativeofgainsor lossesthatwouldbeincurredbythebeneficiariesiftheassetshadbeenfullyliquidatedatpricesequaltothefairvalue. 5 Interestincomeisrecordedwhenearnedandincludesamortizationofpremiums,accretionofdiscounts,andpaydowngainsandlosses. 6 InadditiontothenetincomeattributabletoTALFLLC,FRBNYearned$3milliononTALFloansduringtheyearendedDecember31,2013(interestincomeof$6millionanda lossonthevaluationofloansof$3million). * Lessthan$500thousand. averagerateof interestearnedonforeigncurrency agerateof interestearnedonTALFloansin2014 denominatedinvestmentsdecreasedto0.33percent was3.85percent. whiletheaveragerateof interestearnedoncentral bankliquidityswapsdecreasedto0.52percentin Investments of the Consolidated VIEs 2014. Certainlendingfacilitiesestablishedduring2008and Lending 2009,underauthorityof section13(3)of theFederal ReserveAct,involvedcreatingandlendingtothe In2014,theaveragedailyprimary,secondary,and consolidatedVIEs(seetable6).ConsistentwithgenseasonalcreditextendedbytheReserveBanksto erallyacceptedaccountingprinciples(GAAP),the depositoryinstitutionsincreasedby$39million,to assetsandliabilitiesof theseVIEshavebeenconsoli- $118million.Theaveragerateof interestearnedon datedwiththeassetsandliabilitiesof theNewYork primary,secondary,andseasonalcreditdecreasedto ReserveBankinthepreparationof thestatementsof 0.21percentin2014,from0.25percentin2013.The conditionincludedinthisreport. averagedailybalanceof TermAsset-BackedSecuritiesLoanFacility(TALF)loansin2014was$52mil- Netportfolioassetsof theconsolidatedVIEs lion,adecreaseof $212millionfrom2013.Theaver- decreasedfrom$1,926millionin2013to$1,811mil-

108 101stAnnualReport|2014 lionin2014.In2013,theloanextendedtoTALF continuedtoimplementprojectstomaintainbuilding LLCbytheTreasurywasrepaidinfull,including systemstoensureefficientandreliableoperations. outstandingprincipalandaccruedinterest.During TheNewYorkReserveBankcontinuedrepairsand 2014,finaldistributionsof assetsweremadeby renovationstothe33MaidenLanebuilding,andthe MaidenLaneIILLC,MaidenLaneIIILLC,and ChicagoFederalReserveBankcontinuedconstruc- TALFLLC,andtheentitiesweredissolved. tionof securityenhancementstoitsbuilding.In 2014,theDallasReserveBankmovedtoleasedoffice spaceforitsSanAntonioBranchandsoldthebuild- Federal Reserve Bank Premises ingthatpreviouslyhousedtheBranch’soperations. SeveralReserveBankstookactionin2014tomain- Formoreinformationontheacquisitioncostsand tainandrenovatetheirfacilities.Themultiyearreno- netbookvalueof theReserveBanksandBranches, vationprogramsattheBoston,NewYork,Rich- seetable14inthe“StatisticalTables”sectionof this mond,St.Louis,andSanFranciscoReserveBanks’ report. headquartersbuildingscontinued.AllReserveBanks

FederalReserveBanks 109 Pro Forma Financial Statements for Federal Reserve Priced Services Table7.ProformabalancesheetforFederalReservepricedservices,December31,2014and2013 Millionsofdollars Item 2014 2013 Short-termassets(Note1) Imputedinvestments 556.7 913.3 Receivables 36.9 36.2 Materialsandsupplies 0.7 0.9 Prepaidexpenses 11.1 6.6 Itemsinprocessofcollection 85.7 165.3 Totalshort-termassets 691.2 1,122.5 Long-termassets(Note2) Premises 131.2 144.2 Furnitureandequipment 35.9 32.5 Leases,leaseholdimprovements,andlong-termprepayments 101.7 95.0 Prepaidpensioncosts 0.0 59.2 Deferredtaxasset 325.6 291.8 Totallong-termassets 594.4 622.8 Totalassets 1,285.6 1,745.3 Short-termliabilities Deferred-availabilityitems 642.4 1,078.6 Short-termdebt 24.8 20.4 Short-termpayables 24.0 23.4 Totalshort-termliabilities 691.2 1,122.5 Long-termliabilities Long-termdebt 60.9 129.4 Accruedbenefitcosts 459.3 406.1 Totallong-termliabilities 520.2 535.5 Totalliabilities 1,211.4 1,658.0 Equity(includingaccumulatedothercomprehensivelossof$549.7million and$466.2millionatDecember31,2014and2013,respectively) 74.2 87.3 Totalliabilitiesandequity(Note3) 1,285.6 1,745.3 Note:Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements.

110 101stAnnualReport|2014 Table8.ProformaincomestatementforFederalReservepricedservices,2014and2013 Millionsofdollars Item 2014 2013 Revenuefromservicesprovidedtodepositoryinstitutions(Note4) 433.1 441.2 Operatingexpenses(Note5) 399.0 385.5 Incomefromoperations 34.1 55.7 Imputedcosts(Note6) Interestondebt 7.1 0.1 Interestonfloat -0.5 -0.7 Salestaxes 4.5 11.0 4.4 3.8 Incomefromoperationsafterimputedcosts 23.0 51.9 Otherincomeandexpenses(Note7) Investmentincome 0.0 0.1 0.1 Incomebeforeincometaxes 23.0 52.0 Imputedincometaxes(Note6) 8.6 20.0 Netincome 14.5 32.0 Memo:Targetedreturnonequity(Note6) 5.5 4.2 Note:Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements. Table9.ProformaincomestatementforFederalReservepricedservices,byservice,2014 Millionsofdollars Commercialcheck Item Total CommercialACH Fedwirefunds Fedwiresecurities collection Revenuefromservices(Note4) 433.1 174.7 124.4 110.1 24.0 Operatingexpenses(Note5)1 399.0 130.9 147.2 99.5 21.4 Incomefromoperations 34.1 43.8 -22.9 10.5 2.6 Imputedcosts(Note6) 11.0 3.4 4.2 2.9 0.6 Incomefromoperationsafterimputedcosts 23.0 40.4 -27.0 7.7 2.0 Otherincomeandexpenses,net(Note7) 0.0 0.0 0.0 0.0 0.0 Incomebeforeincometaxes 23.0 40.4 -27.0 7.7 2.0 Imputedincometaxes(Note6) 8.6 15.0 -10.1 2.9 0.7 Netincome 14.5 25.4 -17.0 4.8 1.2 Memo:Targetedreturnonequity(Note6) 5.5 1.8 2.0 1.4 0.3 Costrecovery(percent)(Note8) 102.1 115.6 86.7 103.2 104.1 Note:Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements. 1 Operatingexpensesincludepensioncosts,Boardexpenses,andreimbursementsforcertainnonpricedservices.

FederalReserveBanks 111 Notes to Pro Forma Financial Statements for Priced Services (1)Short-TermAssets 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.Investmentsof excessfinancing derivedfromcreditfloatareassumedtobeinvestedinfederalfunds. (2)Long-TermAssets Long-termassetsconsistof long-termassetsusedsolelyinpricedservicesandthe priced-serviceportionof long-termassetssharedwithnonpricedservices,includingadeferredtaxassetrelatedtothepricedservicespensionandpostretirement benefitsobligation.Thetaxrateassociatedwiththedeferredtaxassetwas 37.2percentand38.5percentfor2014and2013,respectively. Long-termassetsalsoconsistof anestimateof theassetsof theBoardof Governorsusedinthedevelopmentof pricedservices. (3)LiabilitiesandEquity Underthematched-bookcapitalstructureforassets,short-termassetsare financedwithshort-termpayablesandimputedshort-termdebt,if needed.Longtermassetsarefinancedwithlong-termliabilities,imputedlong-termdebt,and imputedequity,if needed.TomeettheFederalDepositInsuranceCorporation (FDIC)requirementsforawell-capitalizedinstitution,in2014equityisimputedat 5.8percentof totalassetsand10percentof risk-weightedassets,andin2013 equityisimputedat5.0percentof totalassetsand10.2percentof risk-weighted assets.InaccordancewithAccountingStandardsCodification(ASC)Topic715 (ASC715),Compensation–RetirementBenefits,theReserveBanksrecordedthe fundedstatusof pensionandotherbenefitplansontheirbalancesheets.Toreflect thefundedstatusof theirbenefitplans,theReserveBanksrecognizedthedeferred itemsrelatedtotheseplans,whichincludepriorservicecostsandactuarialgainsor losses,onthebalancesheet.Thisresultedinanadjustmenttothepensionand otherbenefitplanliabilitiesrelatedtopricedservicesandtherecognitionof an associateddeferredtaxassetwithanoffsettingadjustment,netof tax,toaccumulatedothercomprehensiveincome(AOCI),whichisincludedinequity.The ReserveBankpricedservicesrecognizedapensionliability,whichisacomponent of accruedbenefitcosts,of $42.0millionandapensionassetof $59.2millionin 2014and2013,respectively.Thechangeinthefundedstatusof thepensionand otherbenefitplansresultedinacorrespondingincreaseinaccumulatedothercomprehensivelossof $83.5millionin2014.

112 101stAnnualReport|2014 (4)Revenue Revenuerepresentsfeeschargedtodepositoryinstitutionsforpricedservicesand isrealizedfromeachinstitutionthroughdirectchargestoaninstitution’saccount. (5)OperatingExpenses Operatingexpensesconsistof thedirect,indirect,andothergeneraladministrative expensesof theReserveBanksforpricedservicesandtheexpensesof theBoard relatedtothedevelopmentof pricedservices.Boardexpenseswere$4.1millionin 2014and$4.0millionin2013. InaccordancewithASC715,theReserveBankpricedservicesrecognizedqualifiedpension-planoperatingexpensesof $22.7millionin2014and$45.4millionin 2013.Operatingexpensesalsoincludethenonqualifiednetpensionexpenseof $4.7millionin2014andnetpensioncreditof $0.7millionin2013.Theimplementationof ASC715doesnotchangethesystematicapproachrequiredbyGAAPto recognizetheexpensesassociatedwiththeReserveBanks’benefitplansinthe incomestatement.Asaresult,theseexpensesdonotincludeamountsrelatedto changesinthefundedstatusof theReserveBanks’benefitplans,whichare reflectedinAOCI. Theincomestatementbyservicereflectsrevenue,operatingexpenses,imputed costs,otherincomeandexpenses,andcostrecovery. (6)ImputedCosts Imputedcostsconsistof incometaxes,returnonequity,interestondebt,sales taxes,andinterestonfloat.ManyimputedcostsarederivedfromthePSAF model.The2014costof short-termdebtimputedinthePSAFmodelisbasedon nonfinancialcommercialpaperrates;thecostof imputedlong-termdebtisbased onMerrillLynchCorporateandHighYieldIndexreturns;andtheeffectivetax rateisderivedfromU.S.publiclytradedfirmdata,whichserveastheproxyforthe financialdataof arepresentativeprivate-sectorfirm.Theafter-taxrateof return onequityisbasedonthereturnsof theequitymarketasawhole.17 Interestisimputedonthedebtassumednecessarytofinancepriced-serviceassets. Theseimputedcostsareallocatedamongpricedservicesaccordingtotheratioof operatingexpenses,lessshippingexpenses,foreachservicetothetotalexpenses, lessthetotalshippingexpenses,forallservices. Interestonfloatisderivedfromthevalueof floattoberecoveredforthecheck andACHservices,FedwireFundsService,andFedwireSecuritiesServicesthrough per-itemfeesduringtheperiod.Floatincomeorcostisbasedontheactualfloat incurredforeachpricedservice. 17 DetailsregardingthePSAFmethodologychangecanbefoundatwww.gpo.gov/fdsys/pkg/FR-2012- 11-08/pdf/2012-26918.pdf.

FederalReserveBanks 113 Thefollowingshowsthedailyaveragerecoveryof actualfloatbytheReserve Banksfor2014,inmillionsof dollars: Totalfloat -590.8 Unrecoveredfloat 4.7 Floatsubjecttorecoverythroughperitemfees -595.5 Unrecoveredfloatincludesfloatgeneratedbyservicestogovernmentagenciesand byothercentralbankservices.Floatthatiscreatedbyaccountadjustmentsdueto transactionerrorsandtheobservanceof nonstandardholidaysbysomedepositoryinstitutionswasrecoveredfromthedepositoryinstitutionsthroughcharging institutionsdirectly.Floatsubjecttorecoveryisvaluedatthefederalfundsrate. CertainACHfundingrequirementsandcheckproductsgeneratecreditfloat;this floathasbeensubtractedfromthecostbasesubjecttorecoveryin2014and2013. (7)OtherIncomeandExpenses Otherincomeconsistsof incomeonimputedinvestments.ExcessfinancingresultingfromadditionalequityimputedtomeettheFDICwell-capitalizedrequirementsisassumedtobeinvestedandearninginterestatthe3-monthTreasurybill rate. (8)CostRecovery Annualcostrecoveryistheratioof revenue,includingotherincome,tothesumof operatingexpenses,imputedcosts,imputedincometaxes,andafter-taxtargeted returnonequity.

115 7 Other Federal Reserve Operations Regulatory Developments: termdebtlimits—andotherprudentialstandards thattheBoarddeterminesareappropriate. Dodd-Frank Act Implementation InFebruary2014,theBoardadoptedafinalruleto Throughout2014,theFederalReservecontinuedto implementenhancedprudentialstandardsunderthe implementtheDodd-FrankWallStreetReformand Dodd-FrankActforBHCsandforeignbanking ConsumerProtectionAct(Dodd-FrankAct)(Pub.L. organizationswith$50billionormoreintotalcon- No.111-203),whichgivestheFederalReserveimpor- solidatedassets.ForaBHCwithtotalconsolidated tantresponsibilitiestoissuerulesandsupervise assetsof $50billionormore,thefinalruleadopts financialcompaniestoenhancefinancialstabilityand enhancedrisk-managementandliquidityrequirepreservethesafetyandsoundnessof thebanking ments.The165finalrulealsoincorporatesthe system.TheBoardalsocontinuedtoimplementother Board’scapital,capitalplanning,andstresstesting regulatoryreformstoincreasetheresiliencyof bank- requirementsasenhancedprudentialstandards. ingorganizationsandhelptoensurethattheyare operatinginasafeandsoundmanner. Foraforeignbankingorganizationwithtotalconsolidatedassetsof $50billionormore,thefinalrule Thefollowingisasummaryof thekeyregulatoryini- implementsenhancedrisk-basedandleveragecapital, tiativesthatwerecompletedduring2014. liquidity,risk-management,andstresstesting requirements.Inaddition,thefinalrulerequiresfor- Enhanced Prudential Standards for eignbankingorganizationswithU.S.non-branch U.S. and Foreign Banking Organizations assetsof $50billionormoretoformaU.S.intermediateholdingcompanyandimposesenhancedpru- Section165of theDodd-FrankActrequiresthe dentialstandardsonthatintermediateholdingcom- Boardtoestablishenhancedprudentialstandardsfor pany.Generally,asthesize,complexity,andriskto bankholdingcompanies(BHCs)andforeignbank- U.S.financialstabilityof aU.S.BHCorforeign ingorganizationswithtotalconsolidatedassetsof bankingorganizationincreases,thestandards $50billionormoreandnonbankfinancialcompa- imposedontheorganizationbecomemorestringent, niesthathavebeendesignatedbytheFinancialSta- mitigatingriskstothefinancialstabilityof the bilityOversightCouncil(FSOC)forsupervisionby UnitedStatesposedbythematerialfinancialdistress theBoard.Thestandardsmustincludeenhanced orfailureof theinstitution. risk-basedandleveragecapital;liquidity,riskmanagement,andrisk-committeerequirements;a Finally,thefinalrulealsoestablishesariskrequirementtosubmitaresolutionplan;single- committeerequirementforpubliclytradedU.S.and counterpartycreditlimits;stresstestsrequirements; foreignbankingorganizationswithtotalconsolidated and,forcompaniesthattheFSOChasdetermined assetsof $10billionormore,implementsstresstestposeagravethreattofinancialstability,adebt-to- ingrequirementsforforeignbankingorganizations equitylimit.Section165alsopermitstheBoardto andforeignsavingsandloanholdingcompanieswith establishadditionalprudentialstandards,including totalconsolidatedassetsof morethan$10billion, threeenumeratedstandards—acontingentcapital andrequirescompaniesthattheFSOChasdeterrequirement,enhancedpublicdisclosures,andshort- minedposeagravethreattothefinancialstabilityof

116 101stAnnualReport|2014 theUnitedStatesachieveandmaintainadebt-to- cifically,thefinalrulemodifiesthemethodologyfor equityratioof nomorethan15to1. includingoff-balance-sheetitems,suchascredit derivatives,repo-styletransactions,andlinesof Continued Implementation of the credit,inthedenominatorof thesupplementary Regulatory Capital Framework leverageratiotomoreappropriatelycaptureabankingorganization’son-andoff-balance-sheetexpo- InJuly2013,theBoardissuedafinalruletocompre- sures.InDecember2014,theBoardandtheOCC hensivelyrevisethecapitalregulationsapplicableto adoptedaninterimfinalruletoadjustthedefinition bankingorganizations(revisedcapitalframework).1 of “qualifyingmasternettingagreement”andrelated Therevisedcapitalframeworkstrengthensthedefini- definitionsintheregulatorycapitalandtheliquidity tionof regulatorycapital,generallyincreasesthe coverageratiorules.Thechangeswereintendedto minimumrisk-basedcapitalrequirements,modifies ensurethattheregulatorycapitalandliquiditytreatthemethodologiesforcalculatingrisk-weighted mentof certainfinancialtransactionsisnotaffected assets,andimposesaminimumgenerallyapplicable bytheimplementationof specialresolutionregimes leverageratioof 4percent(measuredastheratioof inforeignjurisdictionsorbycontractualprovisions tier1capitaltoon-balance-sheetassets).Inaddition, thatincorporatestaysof specialresolutionregimes. internationallyactivebankingorganizationsmust meetaminimumsupplementaryleverageratioof Capital Planning and Stress Testing 3percent(measuredastheratioof tier1capitalto Requirements on-andoff-balance-sheetexposures).Therulewas publishedjointlywiththeOfficeof theComptroller Onanannualbasis,theFederalReserveassesses of theCurrency(OCC),andtheFederalDeposit whetherBHCswithtotalconsolidatedassetsof InsuranceCorporation(FDIC)publishedasubstan- $50billionormorehaveeffectivecapitalplanning tivelyidenticalrule. processesandsufficientcapitaltoabsorblossesduringstressfulconditions,whilemeetingobligationsto TheBoardcontinuedtodevelopandenhancethe creditorsandcounterpartiesandcontinuingtoserve regulatorycapitalframeworkin2014.InApril2014, ascreditintermediaries.Thisannualassessment theBoard,theFDIC,andtheOCCadoptedafinal includestworelatedprograms:theComprehensive rulethatenhancesthesupplementaryleverageratio CapitalAnalysisandReview(CCAR),whichevalurequirementdescribedaboveforthelargest,most atesaBHC’scapitaladequacy,capitaladequacyprointerconnectedU.S.bankingorganizations.ABHC cess,andplannedcapitaldistributionsinaccordance withatleast$700billionintotalconsolidatedassets withtheBoard’scapitalplanrule,andtheDoddoratleast$10trillioninassetsundercustodymust FrankActsupervisorystresstests.Pursuanttothe maintainasupplementaryleverageratioof 5percent Dodd-FrankAct,BHCsandstatememberbanks ormoreinordertoavoidlimitationsondistributions withmorethan$10billionintotalconsolidated andcertaindiscretionarybonuspayments,andtheir assetsarerequiredtoconductcompany-runstress insureddepositoryinstitutionsubsidiariesmust tests. maintainasupplementaryleverageratioof 6percent ormoretobe“wellcapitalized.”Theseenhanced OnOctober16,2014,theBoardreviseditscapital supplementaryleverageratiostandardsaredesigned planandstresstestingrulestoadjustthetimeframe tohelpreducetheprobabilityof failureof systemi- forannualsubmissionsof capitalplansandthe callyimportantbankingorganizations,therebymiti- company-runandsupervisorystresstests.Beginning gatingtheriskstothefinancialstabilityof the in2016,participatingBHCsmustsubmittheircapital UnitedStatesposedbytheseorganizations. plansandstresstestingresultstotheFederalReserve onorbeforeApril5. In2014,theagenciesissuedthreeotherfinalrulesto adjustaspectsof theregulatorycapitalframework. Liquidity Requirements for Large InJuly2015,theagenciesadoptedafinalruletocor- Financial Institutions rectthedefinitionof “eligibleguarantee.”InSeptember2014,theagenciesadoptedafinalruletorevise InOctober2014,theBoard,theOCC,andtheFDIC thedefinitionof totalleverageexposureusedinthe issuedafinalruleimplementingtheliquiditycovercalculationof thesupplementaryleverageratio.Spe- ageratio(LCR),aquantitativeliquidityrequirement forlargeandinternationallyactivebankingorganiza- 1 See78FederalRegister62018(October11,2013). tions.TheLCRisthefirstbroadlyapplicablequanti-

OtherFederalReserveOperations 117 tativeliquidityrequirementforU.S.bankingfirms otherprovisionsof section619arecommonlyknown andestablishesanenhancedprudentialliquidity asthe“Volckerrule.” standardconsistentwiththeDodd-FrankAct. Underthefinalrule,coveredbankingfirmswillbe InJanuary2014,theBoard,theFDIC,theOCC,the requiredtomaintainaminimumamountof high- SEC,andtheCommodityFuturesTradingCommisqualityliquidassetssufficienttocovertheirnetcash sionapprovedaninterimfinalrulepermittingbankoutflowsovera30-calendar-dayperiodinastan- ingentitiestoretaininterestsin,andactassponsors dardizedsupervisorystressscenario.Themoststrin- to,certaincollateralizeddebtobligationsbackedprigentLCRrequirementsapplytobankingorganiza- marilybytrustpreferredsecuritiesthatmeetthedefitionswithconsolidatedtotalassetsof $250billionor nitionof coveredfunds,aspermittedunderthe moreorconsolidatedtotalon-balance-sheetforeign grandfatheringprovisionsforcertaintrustpreferred exposureof $10billionormoreandtheirsubsidiary securitiesintheDodd-FrankAct.Theinterimfinal insureddepositoryinstitutionswith$10billionor rule,acompanionruletotheVolckerruleapproved moreof consolidatedtotalassets.Theruleappliesa inDecember2013,establishesspecificqualifications simpler,lessstringentLCRrequirementtocertain forthetypeof coveredfundsthatmayberetained. smallerdepositoryinstitutionholdingcompanies with$50billionormorethatarenototherwisecov- Financial Sector Concentration Limits eredbytherule. InNovember2014,theBoardissuedafinalruleto Credit-Risk Retention implementsection622of theDodd-FrankAct, whichgenerallyprohibitsafinancialcompanyfrom InDecember2014,theBoard—jointlywithother mergingorconsolidatingwith,orfromacquiring, federalbankingagencies,theDepartmentof Hous- anothercompanyif theresultingcompany’sliabiliingandUrbanDevelopment,theFederalHousing tieswouldexceed10percentof theaggregateliabili- FinanceAgency,andtheSecuritiesandExchange tiesof allfinancialcompanies.Financialcompanies Commission(SEC)—approvedafinalruletoimple- subjecttothelimitincludeinsureddepositoryinstitumentthecredit-riskretentionrequirementsinthe tions,BHCs,savingsandloanholdingcompanies, Dodd-FrankAct.Thefinalrulegenerallyrequires foreignbankingorganizations,companiesthatconthesponsorsof securitizationtransactionstoretain trolinsureddepositoryinstitutions,andnonbank notlessthan5percentof thecreditriskof theassets financialcompaniesdesignatedbytheFSOCfor theysecuritizeandincludesprohibitionsontransfer- Boardsupervision.Inaddition,thefinalruleestabringorhedgingtheretainedcreditrisk.Thefinalrule lishesreportingrequirementsforfinancialcompanies providesexemptionsforasset-backedsecuritiesthat thatdonototherwisereportconsolidatedfinancial arecollateralizedexclusivelybyresidentialmortgages informationtotheBoardoranotherfederalbanking thatqualifyasqualifiedresidentialmortgages agency,inaccordancewiththeBankHoldingCom- (QRMs).Inaddition,thefinalruledoesnotrequire panyAct. riskretentionforsecuritizationsof commercialloans, commercialmortgages,orautomobileloans,pro- Risk-Management Standards videdthatthetransactionsmeetspecificstandards for Financial Market Utilities forhigh-qualityunderwriting.Theimplementing agencieshaveagreedtoreviewtheQRMdefinition TitleVIIIof theDodd-FrankActestablishesa anditseffectontheresidentialmortgagemarketno supervisoryframeworkforfinancialmarketutilities laterthanfouryearsaftertherule’seffectivedateand (FMUs)thataredesignatedassystemicallyimporperiodicallythereafter. tantbytheFSOC.FMUsaremultilateralsystems thatprovidetheessentialinfrastructurefortransfer- The Volcker Rule: Prohibitions against ring,clearing,andsettlingpayments,securities,and Proprietary Trading and Other Activities otherfinancialtransactionsamongfinancialinstitutionsorbetweenfinancialinstitutionsandthe Section619of theDodd-FrankActgenerallyprohib- system. itsinsureddepositoryinstitutions(IDIs)andtheir affiliates(collectively,bankingentities)fromengag- InOctober2014,theBoardapprovedfinalamendinginproprietarytradingorfrominvestingin,spon- mentstoRegulationHHregardingtherisksoring,orhavingcertainrelationshipswithahedge managementstandardsforFMUsthathavebeen fundorprivateequityfund.Theseprohibitionsand designatedassystemicallyimportantbytheFSOC

118 101stAnnualReport|2014 andforwhichtheBoardhasstandard-settingauthor- short-termwholesalefunding.Failuretomaintain ityundertheDodd-FrankAct.TheBoardalso thecapitalsurchargewouldsubjecttheGSIBto approvedrevisionstotheFederalReservePolicyon restrictionsoncapitaldistributionsandcertaindis- PaymentSystemRisk,whichappliestofinancial cretionarybonuspayments. marketinfrastructuresmoregenerally,including thoseoperatedbytheFederalReserveBanks.2The EnhancedPrudentialStandardsforthe finalruleadoptsstandardstoaddresscreditriskand RegulationandSupervisionofGeneralElectric liquidityrisk,newrequirementsonrecoveryand CapitalCorporation orderlywind-downplanning,anewstandardongen- InDecember2014,theBoardinvitedpubliccomeralbusinessrisk,anewstandardontieredparticipa- mentonenhancedprudentialstandardsfortheregutionarrangements,andheightenedrequirementson lationandsupervisionof GeneralElectricCapital transparencyanddisclosure. Corporation(GECC),anonbankfinancialcompany thattheFSOCdesignatedforsupervisionbythe Key Regulatory Initiatives Proposed Board.Inlightof thesubstantialsimilarityof in 2014 GECC’sactivitiesandriskprofiletothatof asimilarlysizedBHC,theproposalwouldapplyenhanced Anumberof importantregulatorydevelopmentsare prudentialstandardstoGECCthataregenerally intheproposalstage.Thefollowingisasummaryof similartothosethatapplytolargeBHCs,including additionalregulatoryinitiativesthattheBoardpro- standardsforrisk-basedandleveragecapital,capital posedin2014. planning,stresstesting,liquidity,andrisk management. CapitalSurchargeforGlobalSystemically ImportantBankingOrganizations ClarificationstoRegulatoryCapitalRules InDecember2014,theBoardinvitedcommentona TheBoardcontinuestoimplementtheregulatory proposedrulethatwouldestablishamethodologyto capitalrules.InDecember2014,thefederalbanking identifywhetheraU.S.BHCisaglobalsystemically agenciesissuedaproposedruletomaketechnical importantbankingorganization(GSIB).Assuch,a correctionsandclarifycertainaspectsof the GSIBwouldbesubjecttoarisk-basedcapitalsur- advancedapproachesrule.AlsoinDecember2014, chargethatiscalibratedbasedonitssystemicrisk theBoardissuedaproposedruletoprovideaddiprofile.TheproposalbuildsonaGSIBcapitalsur- tionalinformationregardingtheapplicationof the chargeframeworkdesignedbytheBaselCommittee Board’sregulatorycapitalframeworktodepository onBankingSupervisionandaugmentsthatframe- institutionholdingcompaniesthathavenontradiworktoaddresstheriskarisingfromrelianceon tionalcapitalstructures. 2 FormoreinformationontheFederalReservePolicyonPaymentSystemRisk,seewww.federalreserve.gov/paymentsystems/ psr_about.htm.

OtherFederalReserveOperations 119 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’swebsiteatwww Strategic Framework, Performance Plan, .federalreserve.gov/publications/gpra/files/2012-2015and Performance Report strategic-framework.pdf,www.federalreserve.gov/ publications/gpra/files/2014-gpra-performance-plan TheBoard’s2012–15StrategicFramework(frame- .pdf,andwww.federalreserve.gov/publications/gpra/ work)articulatestheBoard’smissionwithinthecon- files/2013-gpra-performance-report.pdf.

121 8 Record of Policy Actions of the Board of Governors Policyactionsof theBoardof Governorsarepre- tionandOfficeof theComptrollerof theCurrency.2 sentedpursuanttosection10of theFederalReserve ThefinalruleappliestoanyU.S.top-tierbankhold- Act.ThatsectionprovidesthattheBoardshallkeep ingcompanywithmorethan$700billionintotal arecordof allquestionsof policydeterminedbythe consolidatedassetsormorethan$10trillioninassets BoardandshallincludeinitsannualreporttoCon- undercustody(coveredbankholdingcompanies) gressafullaccountof suchactions.Thischapterpro- andtoitsinsureddepositoryinstitutionsubsidiaries. videsasummaryof policyactionsin2014,asimple- Currently,eightlargeU.S.bankingorganizations mentedthrough(1)rulesandregulations,(2)policy meettheassetthresholdtobeconsideredcovered statementsandotheractions,and(3)discountrates bankholdingcompanies.Undertherule,covered fordepositoryinstitutions.Policyactionswere bankholdingcompaniesmustmaintainaleverage approvedbyallBoardmembersinoffice,unlessindi- buffergreaterthan2percentagepointsabovethe catedotherwise.1Moreinformationontheactionsis minimumsupplementaryleverageratiorequirement availablefromtherelevantFederalRegisternoticesor of 3percent,foratotalof morethan5percent,to otherdocuments(seelinksinfootnotes)oron avoidrestrictionsoncapitaldistributionsanddiscrerequestfromtheBoard’sFreedomof Information tionarybonuspayments.Insureddepositoryinstitu- Office. tionsubsidiariesof coveredbankholdingcompanies mustmaintainatleasta6percentsupplementary ForinformationontheFederalOpenMarketCom- leverageratiotobeconsidered“wellcapitalized” mittee’spolicyactionsrelatingtoopenmarketopera- undertheagencies’promptcorrectiveactionframetions,seesection9,“Minutesof FederalOpenMar- work.ThefinalruleiseffectiveJanuary1,2018. ketCommitteeMeetings.” Votingforthisaction:ChairYellenandGovernorsTarullo,Stein,andPowell. Rules and Regulations Regulation Q (Capital Adequacy of Bank Regulation H (Membership of State Holding Companies, Savings and Loan Banking Institutions in the Federal Holding Companies, and State Member Reserve System) and Regulation Q Banks) (Capital Adequacy of Bank Holding Companies, Savings and Loan Holding OnJuly14,2014,theBoardapprovedafinalrule Companies, and State Member Banks) (DocketNo.R-1488)torevisethedefinitionof “eligibleguarantee”toremovetherequirementthatthis OnApril8,2014,theBoardapprovedafinalrule typeof guaranteebemadebyaneligibleguarantor (DocketNo.R-1460)tostrengthenthesupplemen- forpurposesof calculatingabankingorganization’s taryleverageratiostandardsforlarge,interconnected regulatorycapitalundertheadvancedapproaches U.S.bankingorganizations.Therulewaspublished risk-basedcapitalrule.3Bankingorganizationsuse jointlywiththeFederalDepositInsuranceCorpora- eligibleguaranteestoreducethecreditriskof certain exposures.Thefinalrule,publishedjointlywiththe FederalDepositInsuranceCorporationandOfficeof 1 ChairmanBernanke’stermexpiredonJanuary31,andVice ChairYellentookofficeasChaironFebruary3,2014.GovernorRaskinresignedonMarch13,andGovernorSteinresigned 2 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014onMay28,2014.GovernorFischerjoinedtheBoardon 05-01/html/2014-09367.htm. May28andtookofficeasViceChairmanonJune16,2014. 3 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- GovernorBrainardjoinedtheBoardonJune16,2014. 07-30/html/2014-17858.htm.

122 101stAnnualReport|2014 theComptrollerof theCurrency,iseffectiveOcto- noticeof proposedrulemakingwiththesame ber1,2014. modifications.) Votingforthisaction:ChairYellen,ViceChair- Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo,Powell, manFischer,andGovernorsTarullo,Powell, andBrainard. andBrainard. OnSeptember3,2014,theBoardapprovedafinal Regulation Y (Bank Holding Companies rule(DocketNo.R-1487)torevisethedefinitionof and Change in Bank Control) and totalleverageexposureusedinthecalculationof the Regulation YY (Enhanced Prudential supplementaryleverageratiointheagencies’2013 Standards) revisedcapitalrule.4Thefinalrulemodifiesthemethodologyforincludingoff-balance-sheetitems,suchas OnFebruary20,2014,theBoardapprovedafinal creditderivatives,repo-styletransactions,andlinesof rule(DocketNos.R-1463andR-1464)revisingthe credit,inthedenominatorof thesupplementary capitalplanandstresstestingrulestodeferuntil leverageratiotomoreappropriatelycaptureabank- October1,2015,useof theadvancedapproaches ingorganization’son-andoff-balance-sheetexpo- frameworkintheBoard’scapitalplanandstresstestsures.Therevisedsupplementaryleverageratio ingrules.6Inaddition,theBoardandOfficeof the appliestoallbankingorganizationssubjecttothe Comptrollerof theCurrencypermittedeightbankadvancedapproachesrisk-basedcapitalrule.The ingorganizationstobeginusingtheadvanced finalrule,publishedjointlywiththeFederalDeposit approachesframeworktodeterminetheirrisk-based InsuranceCorporationandOfficeof theComptrol- capitalrequirements.Exceptfortheadvanced lerof theCurrency,iseffectiveJanuary1,2015. approachesdeferral,thefinalrulealsomaintainsall thechangestotheBoard’scapitalplanruleand Votingforthisaction:ChairYellen,ViceChair- stresstestingrulescontainedintwointerimfinal manFischer,andGovernorsTarullo,Powell, rulesissuedinSeptember2013.ThefinalruleiseffecandBrainard. tiveApril15,2014. Regulation Q (Capital Adequacy of Bank Votingforthisaction:ChairYellenandGover- Holding Companies, Savings and Loan norsTarullo,Raskin,Stein,andPowell. Holding Companies, and State Member Banks) and Regulation WW (Liquidity Risk OnOctober16,2014,theBoardapprovedafinalrule Measurement Standards) (DocketNo.R-1492)revisingthecapitalplanand stresstestingrulestoadjustthetimeframeforannual OnDecember15,2014,theBoardapprovedan submissionsof capitalplansandfortheconductof interimfinalrule(DocketNo.R-1507)revisingthe company-runandsupervisorystresstests.7Forthe definitionof “qualifyingmasternettingagreement” 2015capitalplancycle,bankholdingcompanieswith andrelateddefinitionsintheregulatorycapitaland totalconsolidatedassetsof $50billionormoreare theliquiditycoverageratiorules.5Thechangesare requiredtosubmitcapitalplansonorbeforeJanudesignedtoensurethattheregulatorycapitaland ary5,2015,whichisunchangedfromprioryears.For liquiditytreatmentof certainfinancialtransactionsis subsequentcycles,beginningin2016,participating notaffectedbytheimplementationof specialresolu- bankholdingcompanieswillberequiredtosubmit tionregimesinforeignjurisdictionsorbycontractual theircapitalplansandstresstestingresultstothe provisionsthatincorporatestaysof specialresolution FederalReserveonorbeforeApril5.Thefinalrule regimes.Theinterimfinalrule,publishedjointlywith alsoincludesothermodificationstothecapitalplan theOfficeof theComptrollerof theCurrency,is andstresstestingrules,includingalimitationonthe effectiveJanuary1,2015.(Note:TheFederalDeposit abilityof abankholdingcompanywith$50billion InsuranceCorporationissuedaseparatelypublished ormoreintotalconsolidatedassetstomakecapital distributionsunderthecapitalplanruleif thebank 4 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 6 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 09-26/html/2014-22083.htm. 03-11/html/2014-05053.htm. 5 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 7 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 12-30/html/2014-30218.htm. 10-27/html/2014-25170.htm.

Recordof PolicyActionsof theBoardof Governors 123 holdingcompany’snetcapitalissuancesarelessthan sightCouncilandforwhichtheBoardhasstandardtheamountindicatedinitscapitalplan.Thefinal settingauthorityundertheDodd-FrankAct.10The ruleiseffectiveNovember26,2014,exceptforthe BoardalsoapprovedrevisionstopartIof theFedlimitonnetcapitaldistributions,whichiseffectiveon eralReservePolicyonPaymentSystemRisk(Docket April1,2015. No.OP-1478),whichappliestofinancialmarket infrastructuresmoregenerally,includingthoseoper- Votingforthisaction:ChairYellen,ViceChair- atedbytheFederalReserveBanks.11TheamendmanFischer,andGovernorsTarullo,Powell, mentsandrevisionsarebasedon2012international andBrainard. risk-managementstandardsforfinancialmarket infrastructures.Keyamendmentsandrevisions Regulation DD (Truth in Savings), includeseparatestandardstoaddresscreditriskand Regulation P (Privacy of Consumer liquidityrisk,newrequirementsonrecoveryand Information), and Regulation V orderlywind-downplanning,anewstandardongen- (Fair Credit Reporting) eralbusinessrisk,anewstandardontieredparticipationarrangements,andheightenedrequirementson OnMay20,2014,theBoardapprovedfinalrules transparencyanddisclosure.Theamendmentsand (DocketNos.R-1482andR-1483)torepealRegula- revisionsareeffectiveonDecember31,2014,except tionsDDandP,inaccordancewiththetransferof severalof thenewrequirementshavealatercomplirulemakingauthorityforanumberof consumerpro- ancedate,asdescribedintheFederalRegister tectionlawstotheConsumerFinancialProtection notices. Bureau(CFPB)undertheDodd-FrankAct.8The CFPBhasissuedinterimfinalrulesthataresubstan- Votingforthisaction:ChairYellen,ViceChairtiallyidenticaltothoseregulations.WhiletheBoard manFischer,andGovernorsTarullo,Powell, retainsauthoritytoissuerulesforcertainmotor andBrainard. vehicledealers,thereisnoevidencethatanymotor vehicledealerssubjecttotheBoard’sjurisdiction Regulation RR (Credit Risk Retention) engageinactivitiescoveredbytheTruthinSavings Act.Furthermore,pursuanttotheDodd-FrankAct, OnOctober22,2014,theBoardapprovedafinalrule entitiessupervisedbytheBoardthatwerepreviously (DocketNo.R-1411)toimplementthecreditrisk coveredbytheBoard’sRegulationParenowsubject retentionrequirementsintheDodd-FrankAct.12 totheprivacyrulesissuedbytheCFPB.Inaddition, Thefinalrulegenerallyrequiresthesponsorsof theBoardamended(DocketNo.R-1484)Regula- securitizationtransactionstoretainnotlessthan tionVtoreflectchangestotheFairCreditReporting 5percentof thecreditriskof theassetstheysecuri- Actthatlimittheapplicationof theIdentityTheft tize.Therulealsoincludesprohibitionsontransfer- RedFlagsruletoonlycertaincreditors.9Thefinal ringorhedgingtheretainedcreditrisk.Thefinalrule rulesareeffectiveJune30,2014. providesexemptionsforasset-backedsecuritiesthat arecollateralizedexclusivelybyresidentialmortgages Votingforthisaction:ChairYellenandGover- thatqualifyasqualifiedresidentialmortgages norsTarullo,Stein,andPowell. (QRMs).Undertherule,theQRMdefinitionis alignedwiththatof a“qualifiedmortgage,”as Regulation HH (Designated Financial adoptedbytheConsumerFinancialProtection Market Utilities) and Federal Reserve Bureau.Exemptionsarealsoavailableforcertain othertypesof residentialmortgagesecuritizations, Policy on Payment System Risk includingthoseguaranteedorinsuredbyagenciesof OnOctober24,2014,theBoardapprovedfinal theU.S.governmentandthoseoriginatedbystate amendmentstoRegulationHH(DocketNo.R-1477) housingfinanceagencies.Inaddition,thefinalrule regardingtherisk-managementstandardsforfinan- doesnotrequireriskretentionforsecuritizationsof cialmarketutilitiesthathavebeendesignatedassys- commercialloans,commercialmortgages,orautotemicallyimportantbytheFinancialStabilityOver- 10 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 8 SeeFederalRegisternoticesatwww.gpo.gov/fdsys/pkg/FR- 11-05/html/2014-26090.htm. 2014-05-29/html/2014-12356.htmandwww.gpo.gov/fdsys/pkg/ 11 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- FR-2014-05-29/html/2014-12357.htm. 11-13/html/2014-26791.htm. 9 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 12 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 05-29/html/2014-12358.htm. 12-24/html/2014-29256.htm.

124 101stAnnualReport|2014 mobileloans,providedthatthetransactionsmeet 2017)toconformtheirinvestmentsinandsponsorspecificstandardsforhigh-qualityunderwriting.The shipof certaincollateralizedloanobligationsthat finalrulewasalsoapprovedbytheFederalDeposit wereinplacebeforeDecember31,2013,andarecon- InsuranceCorporation,Officeof theComptrollerof sideredtobecoveredfundsundersection13of the theCurrency,FederalHousingFinanceAgency, BankHoldingCompanyAct.14OnDecember17, SecuritiesandExchangeCommission,andDepart- 2014,theBoardapprovedanextension,untilJuly21, mentof HousingandUrbanDevelopment.The 2016,forbankingentitiestoconformtheirinvestimplementingagencieshaveagreedtoreviewthe mentsinandrelationshipswithcoveredfundsand QRMdefinitionanditseffectontheresidential foreignfundsthatwereinplacebeforeDecember31, mortgagemarketnolaterthanfouryearsafterthe 2013(legacycoveredfunds)withtherequirementsof rule’seffectivedateandperiodicallythereafter.The theVolckerrule.15TheBoardalsoannouncedits finalruleiseffectiveFebruary23,2015,withcompli- intentiontoactnextyeartoextendtheconformance ancedatesof December24,2015,forasset-backed periodforlegacycoveredfundsforoneadditional securitiescollateralizedbyresidentialmortgagesand year,untilJuly21,2017. December24,2016,forothertypesof asset-backed securities. Regulation WW (Liquidity Risk Measurement Standards) Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo,Powell, OnSeptember3,2014,theBoardapprovedafinal andBrainard. rule(DocketNo.R-1466)implementingtheliquidity coverageratio(LCR),aquantitativeliquidity Regulation VV (Proprietary Trading and requirementforlargeandinternationallyactive Certain Interests in and Relationships with bankingorganizations.16TheLCRisbasedon Covered Funds) liquiditystandardspromulgatedundertheBaselIII reformmeasuresandalsoestablishesanenhanced OnJanuary14,2014,theBoardapprovedaninterim prudentialliquiditystandardconsistentwiththe finalrule(DocketNo.R-1480)permittingbanking Dodd-FrankAct.Underthefinalrule,coveredbankentitiestoretaininterestsin,andactassponsorsto, ingfirmswillberequiredtomaintainaminimum certaincollateralizeddebtobligationsbackedprimar- amountof high-qualityliquidassetssufficientto ilybytrustpreferredsecuritiesthatmeetthedefini- covertheirnetcashoutflowsovera30-calendar-day tionof coveredfunds,aspermittedunderthegrand- stressperiod.TheruleappliesalessstringentLCR fatheringprovisionsforcertaintrustpreferredsecuri- requirementtocertainsmallerdepositoryinstitution tiesintheDodd-FrankAct.13Theinterimfinalrule, holdingcompanies.Inaddition,thefinalruledoes acompanionruletotheso-calledVolckerrule notallowmunicipalsecuritiestobedesignatedas approvedinDecember2013,establishesspecific high-qualityliquidassets.Theruledoesnotapplyto qualificationsforthetypeof coveredfundsthatmay bankholdingcompaniesandsavingsandloanholdberetained.Theinterimfinalrulewaspublished ingcompanieswithlessthan$50billionintotalconjointlywiththeFederalDepositInsuranceCorpora- solidatedassetsortononbankfinancialcompanies tion,Officeof theComptrollerof theCurrency, designatedassystemicallyimportantbytheFinancial CommodityFuturesTradingCommission,andSecu- StabilityOversightCouncil(companiessodesignated ritiesandExchangeCommission,andiseffective willhavetheirliquidityrequirementsestablished April1,2014. throughaseparateruleororder).Thefinalrule,publishedjointlywiththeFederalDepositInsurance Votingforthisaction:ChairmanBernanke,Vice CorporationandOfficeof theComptrollerof the ChairYellen,andGovernorsTarullo,Raskin, Currency,iseffectiveJanuary1,2015. Stein,andPowell. Note:OnApril3,2014,theBoardapprovedastatementthatitstandsreadytograntbankingentities coveredbytheVolckerruletwoadditionalone-year 14 Seepressreleaseatwww.federalreserve.gov/newsevents/press/ bcreg/20140407a.htm. extensions(whichtogetherwouldbeuntilJuly21, 15 Seepressreleaseatwww.federalreserve.gov/newsevents/press/ bcreg/20141218a.htm. 13 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 16 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 01-31/html/2014-02019.htm. 10-10/html/2014-22520.htm.

Recordof PolicyActionsof theBoardof Governors 125 Votingforthisaction:ChairYellen,ViceChair- Policy Statements and Other Actions manFischer,andGovernorsTarullo,Powell, andBrainard. Supervisory Guidance on Implementing Dodd-Frank Act Company-Run Stress Regulation XX (Concentration Limit) Tests for Medium-Sized Institutions OnNovember3,2014,theBoardapprovedafinal OnFebruary25,2014,theBoardapprovedfinal rule(DocketNo.R-1489)toimplementtheDoddguidance(DocketNo.OP-1485),publishedjointly FrankActfinancial-sectorconcentrationlimitthat withtheFederalDepositInsuranceCorporation generallyprohibitsafinancialcompanyfrommerging (FDIC)andOfficeof theComptrollerof theCurorconsolidatingwith,orfromacquiring,another rency(OCC),describingsupervisoryexpectations companyif theresultingcompany’sliabilitieswould andprovidingexamplesof soundpracticesforstress exceed10percentof theaggregateliabilitiesof all testsconductedbyfinancialinstitutionswithbetween financialcompanies.17Inaddition,thefinalrule $10billionand$50billionintotalconsolidated establishesreportingrequirementsforfinancialcomassets.19Thesemedium-sizedcompaniesarerequired paniesthatdonototherwisereportconsolidated toconductannual,company-runstresstestsunder financialinformationtotheBoardoranotherfederal theagencies’rulesandtheDodd-FrankAct.Consisbankingagency,inaccordancewiththeBankHoldtentwiththeflexibilityof theserules,theguidance ingCompanyAct.ThefinalruleiseffectiveJanutakesintoaccountthedifferentriskprofiles,sizes, ary1,2015. businessmixes,andlevelsof complexityinmediumsizedinstitutions.Further,thefinalguidancecon- Votingforthisaction:ChairYellen,ViceChairfirmsthatcompaniesinthe$10billionto$50billion manFischer,andGovernorsTarullo,Powell, assetrangearenotsubjecttotheFederalReserve’s andBrainard. capitalplanrule,comprehensivecapitalanalysisand review,stresstestsconductedbythesupervisory Regulation YY (Enhanced Prudential agencies,orrelateddatacollectionrequirements Standards) applicabletobankholdingcompanieswithassetsof atleast$50billion.TheBoard’sguidanceiseffective OnFebruary18,2014,theBoardapprovedafinal April1,2014,andfinalguidancefromtheFDICand rule(DocketNo.R-1438)toimplementenhanced OCCiseffectiveMarch31,2014. prudentialstandardsundertheDodd-FrankActfor bankholdingcompaniesandforeignbankingorgani- Votingforthisaction:ChairYellenandGoverzationswith$50billionormoreintotalconsolidated norsTarullo,Raskin,Stein,andPowell. assets.18Theenhancedprudentialstandardsinclude risk-basedandleveragecapitalrequirements,liquid- Term Deposit Facility Testing itystandards,risk-managementrequirements,stress testingrequirements,andadebt-to-equitylimitfor OnMay1,2014,theBoardapprovedaseriesof eight companiesthattheFinancialStabilityOversight consecutiveofferingsthroughitsTermDepositFacil- Councilhasdeterminedposeagravethreattofinanity(TDF),withagraduallyincreasingindividual cialstability.ForeignbankingorganizationswithU.S. awardcapforeachauctionof upto$10billionand nonbranchassetsof $50billionormorearealso anincreaseinofferingratesof upto5basispoints requiredtoformaU.S.intermediateholdingcomovertheinterestrateonexcessreserves.20Theofferpanythatwillgenerallybesubjecttothesamepruingsarepartof theBoard’songoingTDFtestoperadentialstandardsasU.S.bankholdingcompanies, tionsandarealsointendedtofamiliarizeeligible includingcapitalplanningandstresstestingrequireinstitutionswithTDFprocedures. ments.ThefinalruleiseffectiveJune1,2014. Votingforthisaction:ChairYellenandGover- Votingforthisaction:ChairYellenandGovernorsTarullo,Stein,andPowell. norsTarullo,Raskin,Stein,andPowell. 17 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 19 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 11-14/html/2014-26747.htm. 03-13/html/2014-05518.htm. 18 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 20 Seepressreleaseatwww.federalreserve.gov/newsevents/press/ 03-27/html/2014-05699.htm. monetary/20140509a.htm.

126 101stAnnualReport|2014 OnAugust18,2014,theBoardapprovedadditional Federal Reserve Policy on Payment changestothetermsof itsTDFtestingtoauthorize System Risk and Regulation J (Collection (1)offeringsof termdepositswithanearlywith- of Checks and Other Items by Federal drawalfeaturethatallowsdepositoryinstitutionsto Reserve Banks and Funds Transfers obtainareturnof fundsbeforematurity,subjectto through Fedwire) forfeitureof allinterestonthewithdrawnterm depositplusanearlywithdrawalpenalty,and(2)an OnNovember26,2014,theBoardapprovedreviincreaseof upto$20billionintheindividualaward sionstopartIIof theFederalReservePolicyonPaycapforTDFtestoperations.21 mentSystemRisk(PSRpolicy)(DocketNo. OP-1472)relatedtotheproceduresforpostingdebit Votingforthisaction:ChairYellen,ViceChairandcreditentriestoinstitutions’accountsatFederal manFischer,andGovernorsTarullo,Powell, ReserveBanksforautomatedclearinghouse(ACH) andBrainard. debitandcommercialchecktransactions.23ThePSR policyrevisionsalsosetprinciplesforestablishing Addendum to the Interagency Policy futurepostingrulesforReserveBanks’same-day Statement on Income Tax Allocation in a ACHservice,clarifiedtheReserveBanks’adminis- Holding Company Structure trationof thepolicyforU.S.branchesandagencies of foreignbankingorganizations,andmadeother OnJune10,2014,theBoardapprovedafinaladden- technicalcorrections.Inaddition,theBoard dum(DocketNo.OP-1474)totheInteragencyPolicy approvedrelatedamendmentstoRegulationJ StatementonIncomeTaxAllocationinaHolding (DocketNo.R-1473)regardingthetimingof when CompanyStructuretoensurethatinsureddepository payingbanksmustsettleforthechecktransactions institutionsinaconsolidatedgroupmaintainan presentedtothembytheReserveBanks.24Thereviappropriaterelationshipregardingthepaymentof sionsareeffectiveDecember5,2014,exceptforthe taxesandtreatmentof taxrefunds.22Theaddendum, policychangestotheBoard’spostingproceduresfor publishedjointlywiththeFederalDepositInsurance ACHdebitandcommercialchecktransactionsand CorporationandOfficeof theComptrollerof the therelatedamendmentstoRegulationJ,allof which Currency,supplementsa1998policystatementon areeffectiveJuly23,2015.25 incometaxallocationbyinstructinginsureddepositoryinstitutionsandtheirholdingcompaniesto Votingforthisaction:ChairYellen,ViceChairreviewtheirtaxallocationagreementsinorderto manFischer,andGovernorsTarullo,Powell, confirmthattheagreementsexpresslyacknowledge andBrainard. theholdingcompanyreceivesanytaxrefundsasan agentfortheinsureddepositoryinstitutions,consis- Discount Rates for Depository tentwithsections23Aand23Bof theFederal ReserveAct.Inaddition,theaddendumincludesspe- Institutions in 2014 cificlanguagethatbankingorganizationscould includeintheirtaxallocationagreementstofacilitate UndertheFederalReserveAct,theboardsof directheagencies’instructions.Institutionsandholding torsof theFederalReserveBanksmustestablish companiesareexpectedtoimplementtheaddendum ratesondiscountwindowloanstodepositoryinstitunotlaterthanOctober31,2014. tionsatleastevery14days,subjecttoreviewand determinationbytheBoardof Governors. Votingforthisaction:ChairYellen,andGovernorsTarullo,Powell,andFischer. 23 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 12-05/html/2014-28664.htm. 21 Seepressreleaseatwww.federalreserve.gov/newsevents/press/ 24 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014monetary/20140904a.htm. 12-05/html/2014-28516.htm. 22 SeeFederalRegisternoticeatwww.gpo.gov/fdsys/pkg/FR-2014- 25 Atechnicalamendmenttosection210.2(c)ofRegulationJis 06-19/html/2014-14325.htm. effectiveDecember5,2014.

Recordof PolicyActionsof theBoardof Governors 127 Primary, Secondary, and Seasonal Credit creditisavailabletosmallerdepositoryinstitutionsto meetliquidityneedsthatarisefromregularswingsin Primarycredit,theFederalReserve’smainlending theirloansanddeposits.Therateonseasonalcredit programfordepositoryinstitutions,isextendedat iscalculatedeverytwoweeksasanaverageof theprimarycreditrate,whichissetabovetheusual selectedmoney-marketyields,typicallyresultingina levelof short-termmarketinterestrates.Itismade rateclosetothefederalfundsratetarget.Atyearavailable,withminimaladministrationandforvery end,theseasonalcreditratewas0.15percent.26 shortterms,asabackupsourceof liquidityto depositoryinstitutionsthat,inthejudgmentof the Votes on Changes to Discount Rates for lendingFederalReserveBank,areingenerallysound Depository Institutions financialcondition.Throughout2014,theprimary creditratewas¾percent. Abouteverytwoweeksduring2014,theBoard approvedproposalsbythe12ReserveBanksto Secondarycreditisavailableinappropriatecircum- maintaintheformulasforcomputingthesecondary stancestodepositoryinstitutionsthatdonotqualify andseasonalcreditrates.In2014,theBoarddidnot forprimarycredit.Thesecondarycreditrateissetat approveanychangesintheprimarycreditrate. aspreadabovetheprimarycreditrate.Throughout 2014,thespreadwassetat50basispointsresulting 26 Forcurrentandhistoricaldiscountrates,seewww inasecondarycreditrateof 1¼percent.Seasonal .frbdiscountwindow.org/.

129 Minutes of 9 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 AsofJanuary1,2014,theFederalReserveBankofNewYork teeatthetimeof themeetings. wasoperatingundertheDomesticPolicyDirectiveapprovedat theDecember17–18,2013,Committeemeeting.Theother policyinstruments(theAuthorizationforDomesticOpenMar- Membersof theCommitteevotingforaparticular ketOperations,theAuthorizationforForeignCurrencyOperaactionmaydifferamongthemselvesastothereasons tions,theForeignCurrencyDirective,andProceduralInstructionswithRespecttoForeignCurrencyOperations)ineffectas fortheirvotes;insuchcases,therangeof theirviews ofJanuary1,2014,wereapprovedattheJanuary29–30,2013, isnotedintheminutes.Whenmembersdissentfrom meeting.

130 101stAnnualReport|2014 Meeting Held on January 28–29, 2014 JamesA.Clouse,ThomasA.Connors, EvanF.Koenig,ThomasLaubach, MichaelP.Leahy,LorettaJ.Mester, Ameetingof theFederalOpenMarketCommittee PaoloA.Pesenti,SamuelSchulhofer-Wohl, washeldintheofficesof theBoardof Governorsof MarkE.Schweitzer,andWilliamWascher theFederalReserveSysteminWashington,D.C.,on AssociateEconomists Tuesday,January28,2014,at2:00p.m.andcontinuedonWednesday,January29,2014,at9:00a.m. SimonPotter Manager,SystemOpenMarketAccount Present LorieK.Logan BenBernanke DeputyManager,SystemOpenMarketAccount Chairman MichaelS.Gibson WilliamC.Dudley Director,Divisionof BankingSupervisionand ViceChairman Regulation,Boardof Governors RichardW.Fisher NellieLiang NarayanaKocherlakota Director,Officeof FinancialStabilityPolicyand Research,Boardof Governors SandraPianalto StephenA.MeyerandWilliamNelson CharlesI.Plosser DeputyDirectors,Divisionof MonetaryAffairs, JeromeH.Powell Boardof Governors JeremyC.Stein JonW.Faust SpecialAdvisertotheBoard,Officeof Board DanielK.Tarullo Members,Boardof Governors JanetL.Yellen LindaRobertsonandDavidW.Skidmore ChristineCumming,CharlesL.Evans, AssistantstotheBoard,Officeof BoardMembers, JeffreyM.Lacker,DennisP.Lockhart, Boardof Governors andJohnC.Williams TrevorA.Reeve AlternateMembersof theFederalOpenMarket SeniorAssociateDirector, Divisionof International Committee Finance,Boardof Governors JamesBullard,EstherL.George, JoyceK.Zickler andEricRosengren SeniorAdviser,Divisionof MonetaryAffairs, Presidentsof theFederalReserveBanksof St.Louis, Boardof Governors KansasCity,andBoston,respectively DanielM.CovitzandMichaelT.Kiley WilliamB.English AssociateDirectors,Divisionof Researchand SecretaryandEconomist Statistics,Boardof Governors MatthewM.Luecke DeputySecretary JaneE.Ihrig DeputyAssociateDirector,Divisionof Monetary MichelleA.Smith Affairs,Boardof Governors AssistantSecretary EdwardNelson ScottG.Alvarez AssistantDirector,Divisionof MonetaryAffairs, GeneralCounsel Boardof Governors ThomasC.Baxter JohnJ.Stevens DeputyGeneralCounsel AssistantDirector,Divisionof Researchand StevenB.Kamin Statistics,Boardof Governors Economist JeremyB.Rudd DavidW.Wilcox Adviser,Divisionof ResearchandStatistics, Economist Boardof Governors

Minutesof FederalOpenMarketCommitteeMeetings|January 131 DanaL.Burnett WilliamC.Dudley SectionChief,Divisionof MonetaryAffairs, Presidentof theFederalReserveBankof NewYork, Boardof Governors with BurcuDuygan-Bump ChristineCumming SeniorProjectManager,Divisionof Monetary FirstVicePresidentof theFederalReserveBankof Affairs,Boardof Governors NewYork,asalternate. DavidH.Small CharlesI.Plosser ProjectManager,Divisionof MonetaryAffairs, Presidentof theFederalReserveBankof Boardof Governors Philadelphia,with AndrewFigura JeffreyM.Lacker GroupManager,Divisionof ResearchandStatistics, Presidentof theFederalReserveBankof Richmond, Boardof Governors asalternate. MicheleCavallo SandraPianalto SeniorEconomist,Divisionof InternationalFinance, Presidentof theFederalReserveBankof Cleveland, Boardof Governors with YuriyKitsul CharlesL.Evans Economist,Divisionof MonetaryAffairs, Presidentof theFederalReserveBankof Chicago,as Boardof Governors alternate. RandallA.Williams RichardW.Fisher RecordsProjectManager,Divisionof Monetary Presidentof theFederalReserveBankof Dallas, Affairs,Boardof Governors with KennethC.Montgomery DennisP.Lockhart FirstVicePresident,FederalReserveBankof Boston Presidentof theFederalReserveBankof Atlanta,as alternate. DavidAltig,GlennD.Rudebusch, andDanielG.Sullivan NarayanaKocherlakota ExecutiveVicePresidents,FederalReserveBanksof Presidentof theFederalReserveBankof Atlanta,SanFrancisco,andChicago,respectively Minneapolis,with TroyDavig,GeoffreyTootell, JohnC.Williams andChristopherJ.Waller Presidentof theFederalReserveBankof SeniorVicePresidents,FederalReserveBanksof SanFrancisco,asalternate. KansasCity,Boston,andSt.Louis,respectively Byunanimousvote,theCommitteeselectedBenBer- RobertL.Hetzel nanketoserveasChairmanthroughJanuary31, SeniorEconomist,FederalReserveBankof 2014,andJanetL.YellentoserveasChairman,effec- Richmond tiveFebruary1,2014,untiltheselectionof hersuccessoratthefirstregularlyscheduledmeetingof the Annual Organizational Matters1 Committeein2015. Intheagendaforthismeeting,itwasreportedthat Byunanimousvote,thefollowingofficersof the advicesof theelectionof thefollowingmembersand Committeewereselectedtoserveuntiltheselection alternatemembersof theFederalOpenMarketComof theirsuccessorsatthefirstregularlyscheduled mittee(the“Committee”)foratermbeginningJanumeetingof theCommitteein2015: ary28,2014,hadbeenreceivedandthattheseindividualshadexecutedtheiroathsof office. WilliamC.Dudley ViceChairman Theelectedmembersandalternatememberswereas WilliamB.English follows: SecretaryandEconomist 1 VersionsofthecurrentCommitteedocumentsareavailableat MatthewM.Luecke www.federalreserve.gov/monetarypolicy/rules_authorizations .htm. DeputySecretary

132 101stAnnualReport|2014 MichelleA.Smith aredirectobligationsof,orfullyguaranteed AssistantSecretary astoprincipalandinterestby,anyagencyof theUnitedStates,fromortosecuritiesdeal- ScottG.Alvarez ersandforeignandinternationalaccounts GeneralCounsel maintainedattheFederalReserveBankof ThomasC.Baxter NewYork,onacash,regular,ordeferred DeputyGeneralCounsel deliverybasis,fortheSystemOpenMarket Accountatmarketprices,and,forsuch RichardM.Ashton Account,toexchangematuringU.S.govern- AssistantGeneralCounsel mentandfederalagencysecuritieswiththe StevenB.Kamin Treasuryortheindividualagenciesorto Economist allowthemtomaturewithoutreplacement;and DavidW.Wilcox Economist B. TobuyorsellintheopenmarketU.S.gov- JamesA.Clouse ernmentsecurities,andsecuritiesthatare directobligationsof,orfullyguaranteedasto ThomasA.Connors principalandinterestby,anyagencyof the EvanF.Koenig UnitedStates,fortheSystemOpenMarket ThomasLaubach Accountunderagreementstoresellorrepurchasesuchsecuritiesorobligations(including MichaelP.Leahy suchtransactionsasarecommonlyreferred LorettaJ.Mester toasrepoandreverserepotransactions)in PaoloA.Pesenti 65businessdaysorless,atratesthat,unless otherwiseexpresslyauthorizedbytheCom- SamuelSchulhofer-Wohl mittee,shallbedeterminedbycompetitive MarkE.Schweitzer bidding,afterapplyingreasonablelimitations WilliamWascher onthevolumeof agreementswithindividual AssociateEconomists counterparties. Byunanimousvote,theFederalReserveBankof 2. TheFederalOpenMarketCommitteeauthorizes NewYorkwasselectedtoexecutetransactionsfor theFederalReserveBankof NewYorktoundertheSystemOpenMarketAccount. taketransactionsof thetypedescribedinparagraphs1.Aand1.Bfromtimetotimeforthepur- Byunanimousvote,theAuthorizationforDomestic poseof testingoperationalreadiness.Theaggre- OpenMarketOperationswasapprovedwithan gateparvalueof suchtransactionsof thetype amendmentthatmakesthestructureof paragraphs describedinparagraph1.Ashallnotexceed 1.Aand1.Bmoresimilar.TheGuidelinesforthe $5billionpercalendaryear.Theoutstanding Conductof SystemOpenMarketOperationsin amountof suchtransactionsof thetype Federal-AgencyIssuesremainedsuspended. describedinparagraph1.Bshallnotexceed $5billionatanygiventime.Thesetransactions AuthorizationforDomesticOpenMarket shallbeconductedwithpriornoticetothe Operations(AsAmendedEffective Committee. January28,2014) 3. Inordertoensuretheeffectiveconductof open 1. TheFederalOpenMarketCommitteeauthorizes marketoperations,theFederalOpenMarket anddirectstheFederalReserveBankof New CommitteeauthorizestheFederalReserveBank York,totheextentnecessarytocarryoutthe of NewYorktouseagentsinagencyMBS-related mostrecentdomesticpolicydirectiveadoptedat transactions. ameetingof theCommittee: 4. Inordertoensuretheeffectiveconductof open A. TobuyorsellintheopenmarketU.S.gov- marketoperations,theFederalOpenMarket ernmentsecurities,includingsecuritiesof the CommitteeauthorizestheFederalReserveBank FederalFinancingBank,andsecuritiesthat of NewYorktolendonanovernightbasisU.S.

Minutesof FederalOpenMarketCommitteeMeetings|January 133 governmentsecuritiesandsecuritiesthatare fiscalagencyaccountsmaintainedattheFeddirectobligationsof anyagencyof theUnited eralReserveBank;and States,heldintheSystemOpenMarketAccount, todealersatratesthatshallbedeterminedby C. FortheNewYorkBankaccount,when competitivebidding.TheFederalReserveBank appropriate,tobuyU.S.governmentsecuriof NewYorkshallsetaminimumlendingfee tiesandobligationsthataredirectobligations consistentwiththeobjectivesof theprogramand of,orfullyguaranteedastoprincipaland applyreasonablelimitationsonthetotalamount interestby,anyagencyof theUnitedStates of aspecificissuethatmaybeauctionedandon fromsuchforeignandinternationalaccounts theamountof securitiesthateachdealermay maintainedattheFederalReserveBank borrow.TheFederalReserveBankof NewYork underagreementsprovidingfortherepurmayrejectbidsthatcouldfacilitateadealer’sabil- chasebysuchaccountsof thosesecuritieson itytocontrolasingleissueasdeterminedsolely thesamebusinessday. bytheFederalReserveBankof NewYork.The FederalReserveBankof NewYorkmaylend Transactionsundertakenwithsuchaccounts securitiesonlongerthananovernightbasisto undertheprovisionsof thisparagraphmayproaccommodateweekend,holiday,andsimilartrad- videforaservicefeewhenappropriate. ingconventions. 6. Intheexecutionof theCommittee’sdecision 5. Inordertoensuretheeffectiveconductof open regardingpolicyduringanyintermeetingperiod, marketoperations,whileassistingintheprovision theCommitteeauthorizesanddirectstheFederal of short-terminvestmentsorotherauthorized ReserveBankof NewYork,upontheinstruction servicesforforeignandinternationalaccounts of theChairmanof theCommittee,to(i)adjust maintainedattheFederalReserveBankof New somewhatinexceptionalcircumstancesthedegree YorkandaccountsmaintainedattheFederal of pressureonreservepositionsandhencethe ReserveBankof NewYorkasfiscalagentof the intendedfederalfundsrateandtotakeactions UnitedStatespursuanttosection15of theFed- thatresultinmaterialchangesinthecomposition eralReserveAct,theFederalOpenMarketCom- andsizeof theassetsintheSystemOpenMarket mitteeauthorizesanddirectstheFederalReserve Accountotherthanthoseanticipatedbythe Bankof NewYork: Committeeatitsmostrecentmeetingor (ii)undertaketransactionsof thetypedescribed A. FortheSystemOpenMarketAccount,tosell inparagraphs1.Aand1.Binordertoappropri- U.S.governmentsecuritiesandsecuritiesthat atelyaddresstemporarydisruptionsof anoperaaredirectobligationsof,orfullyguaranteed tionalorhighlyunusualnatureinU.S.dollar astoprincipalandinterestby,anyagencyof fundingmarkets.Anysuchadjustmentas theUnitedStatestosuchaccountsonthe describedinclause(i)shallbemadeinthecontext basessetforthinparagraph1.Aunderagree- of theCommittee’sdiscussionanddecisionatits mentsprovidingfortheresalebysuch mostrecentmeetingandtheCommittee’slongaccountsof thosesecuritiesin65business runobjectivestofostermaximumemployment daysorlessontermscomparabletothose andpricestability,andshallbebasedonecoavailableonsuchtransactionsinthemarket; nomic,financial,andmonetarydevelopments duringtheintermeetingperiod.Consistentwith B. FortheNewYorkBankaccount,when Committeepractice,theChairman,if feasible, appropriate,toundertakewithdealers,sub- willconsultwiththeCommitteebeforemaking jecttotheconditionsimposedonpurchases anyinstructionunderthisparagraph. andsalesof securitiesinparagraphl.B, repurchaseagreementsinU.S.government TheCommitteevotedunanimouslytoamendthe securitiesandsecuritiesthataredirectobliga- AuthorizationforForeignCurrencyOperations,the tionsof,orfullyguaranteedastoprincipal ForeignCurrencyDirective,andtheProcedural andinterestby,anyagencyof theUnited InstructionswithRespecttoForeignCurrency States,andtoarrangecorrespondingsaleand Operationsintheformshownbelow.Theapprovalof repurchaseagreementsbetweenitsown thesedocumentsincludedapprovalof theSystem’s accountandsuchforeign,international,and warehousingagreementwiththeU.S.Treasury.These

134 101stAnnualReport|2014 documentsweremodifiedtoincorporatethedollar Swedishkronor andforeigncurrencyliquidityswaparrangements Swissfrancs authorizedbyaresolutiononOctober29,2013. ChangesweremadetotheAuthorizationforForeign B. Toholdbalancesof,andtohaveoutstanding CurrencyOperationsandtheProceduralInstructions forwardcontractstoreceiveortodeliver,the withRespecttoForeignCurrencyOperationsto foreigncurrencieslistedinparagraphA alignthetreatmentof theliquidityswaparrange- above. mentsandthatof thereciprocalcurrencyarrangementsthathavebeeninplacewiththecentralbanks C. Todrawforeigncurrenciesandtopermitforof MexicoandCanadasince1994aspartof the eignbankstodrawdollarsunderthe NorthAmericanFrameworkAgreement.TheAutho- arrangementslistedinparagraph2below,in rizationforForeignCurrencyOperationswas accordancewiththeProceduralInstructions amendedtoremovelanguageregardingthetransmis- withRespecttoForeignCurrency sionof pertinentinformationonSystemforeigncur- Operations. rencyoperationstoappropriateofficialsof theTreasuryDepartmentbecausethislanguageduplicated D. Tomaintainanoverallopenpositioninall languageintheProgramforSecurityof FOMC foreigncurrenciesnotexceeding$25.0billion. Information. Forthispurpose,theoverallopenpositionin allforeigncurrenciesisdefinedasthesum AuthorizationforForeignCurrencyOperations (disregardingsigns)of netpositionsinindi- (AsAmendedEffectiveJanuary28,2014) vidualcurrencies,excludingchangesindollar valueduetoforeignexchangeratemove- 1. TheFederalOpenMarketCommitteeauthorizes mentsandinterestaccruals.Thenetposition anddirectstheFederalReserveBankof New inasingleforeigncurrencyisdefinedas York,fortheSystemOpenMarketAccount,to holdingsof balancesinthatcurrency,plus theextentnecessarytocarryouttheCommittee’s outstandingcontractsforfuturereceipt, foreigncurrencydirectiveandexpressauthorizaminusoutstandingcontractsforfuturedelivtionsbytheCommitteepursuantthereto,andin eryof thatcurrency,i.e.,asthesumof these conformitywithsuchproceduralinstructionsas elementswithdueregardtosign. theCommitteemayissuefromtimetotime: 2. TheFederalOpenMarketCommitteedirectsthe A. Topurchaseandsellthefollowingforeign FederalReserveBankof NewYorktomaintain currenciesintheformof cabletransfers fortheSystemOpenMarketAccount(subjectto throughspotorforwardtransactionsonthe therequirementsof section214.5of Regulaopenmarketathomeandabroad,including tionN,RelationswithForeignBanksand transactionswiththeU.S.Treasury,withthe Bankers): U.S.ExchangeStabilizationFundestablished bysection10of theGoldReserveActof A. Reciprocalcurrencyarrangementswiththe 1934,withforeignmonetaryauthorities,with followingforeignbanks: theBankforInternationalSettlements,and withotherinternationalfinancialinstitutions: Amountofarrangement Foreignbank (millionsofdollarsequivalent) Australiandollars Brazilianreais BankofCanada 2,000 BankofMexico 3,000 Canadiandollars Danishkroner B. Standingdollarliquidityswaparrangements euro withthefollowingforeignbanks: Japaneseyen Koreanwon Bankof Canada Mexicanpesos NewZealanddollars Bankof England Norwegiankroner Bankof Japan Poundssterling EuropeanCentralBank Singaporedollars SwissNationalBank

Minutesof FederalOpenMarketCommitteeMeetings|January 135 C. Standingforeigncurrencyliquidityswap of suchsecurities;sellingsuchsecuritiesunder arrangementswiththefollowingforeign agreementsfortheresaleof suchsecurities;and banks: holdingvarioustimeandotherdepositaccounts atforeigninstitutions.Inaddition,whenappro- Bankof Canada priateinconnectionwitharrangementstopro- Bankof England videinvestmentfacilitiesforforeigncurrency Bankof Japan holdings,U.S.governmentsecuritiesmaybepur- EuropeanCentralBank chasedfromforeigncentralbanksunderagree- SwissNationalBank mentsforrepurchaseof suchsecuritieswithin30 calendardays. Dollarandforeigncurrencyliquidityswap arrangementshavenopre-setsizelimits.Any 6. Alloperationsundertakenpursuanttotheprenewswaparrangementsshallbereferredfor cedingparagraphsshallbereportedpromptlyto reviewandapprovaltotheCommittee.All theForeignCurrencySubcommitteeandthe swaparrangementsaresubjecttoannual Committee.TheForeignCurrencySubcommittee reviewandapprovalbytheCommittee. consistsof theChairmanandViceChairmanof theCommittee,theViceChairmanof theBoard 3. Alltransactionsinforeigncurrenciesundertaken of Governors,andsuchothermemberof the underparagraph1.Aaboveshall,unlessother- BoardastheChairmanmaydesignate(orinthe wiseexpresslyauthorizedbytheCommittee,beat absenceof membersof theBoardservingonthe prevailingmarketrates.Forthepurposeof pro- Subcommittee,otherBoardmembersdesignated vidinganinvestmentreturnonSystemholdings bytheChairmanasalternates,andintheabsence of foreigncurrenciesorforthepurposeof adjust- of theViceChairmanof theCommittee,theVice inginterestratespaidorreceivedinconnection Chairman’salternate).Meetingsof theSubcomwithswapdrawings,transactionswithforeign mitteeshallbecalledattherequestof anymemcentralbanksmaybeundertakenatnon-market ber,orattherequestof themanager,System exchangerates. OpenMarketAccount(“manager”),forthepurposesof reviewingrecentorcontemplatedopera- 4. Itshallbethenormalpracticetoarrangewith tionsandof consultingwiththemanageron foreigncentralbanksforthecoordinationof for- othermattersrelatingtothemanager’sresponsieigncurrencytransactions.Inmakingoperating bilities.Attherequestof anymemberof theSubarrangementswithforeigncentralbankson committee,questionsarisingfromsuchreviews Systemholdingsof foreigncurrencies,theFederal andconsultationsshallbereferredfordetermina- ReserveBankof NewYorkshallnotcommit tiontotheFederalOpenMarketCommittee. itself tomaintainanyspecificbalance,unless authorizedbytheFederalOpenMarketCommit- 7. TheChairmanisauthorized: tee.Anyagreementsorunderstandingsconcerningtheadministrationof theaccountsmain- A. Withtheapprovalof theCommittee,toenter tainedbytheFederalReserveBankof NewYork intoanyneededagreementorunderstanding withtheforeignbanksdesignatedbytheBoardof withtheSecretaryof theTreasuryaboutthe Governorsundersection214.5of RegulationN divisionof responsibilityforforeigncurrency shallbereferredforreviewandapprovaltothe operationsbetweentheSystemandthe Committee. Treasury; 5. Foreigncurrencyholdingsshallbeinvestedto B. TokeeptheSecretaryof theTreasuryfully ensurethatadequateliquidityismaintainedto advisedconcerningSystemforeigncurrency meetanticipatedneedsandsothateachcurrency operations,andtoconsultwiththeSecretary portfolioshallgenerallyhaveanaverageduration onpolicymattersrelatingtoforeigncurrency of nomorethan18months(calculatedas operations; Macaulayduration).Suchinvestmentsmay includebuyingorsellingoutrightobligationsof, C. Fromtimetotime,totransmitappropriate orfullyguaranteedastoprincipalandinterestby, reportsandinformationtotheNational aforeigngovernmentoragencythereof;buying AdvisoryCouncilonInternationalMonetary suchsecuritiesunderagreementsforrepurchase andFinancialPolicies.

136 101stAnnualReport|2014 8. AllFederalReserveBanksshallparticipateinthe A. ToadjustSystembalancesinlightof probforeigncurrencyoperationsforSystemAccount ablefutureneedsforcurrencies. inaccordancewithparagraph3G(1)of theBoard of Governors’Statementof Procedurewith B. ToprovidemeansformeetingSystemand RespecttoForeignRelationshipsof Federal Treasurycommitmentsinparticularcurren- ReserveBanksdatedJanuary1,1944. cies,andtofacilitateoperationsof the ExchangeStabilizationFund. 9. TheFederalOpenMarketCommitteeauthorizes theFederalReserveBankof NewYorktounder- C. Forsuchotherpurposesasmaybeexpressly taketransactionsof thetypedescribedinpara- authorizedbytheCommittee. graphs1,2,and5,andforeignexchangeand investmenttransactionsthatitmaybeotherwise 4. Systemforeigncurrencyoperationsshallbe authorizedtoundertakefromtimetotimeforthe conducted: purposeof testingoperationalreadiness.The aggregateamountof suchtransactionsshallnot A. Incloseandcontinuousconsultationand exceed$2.5billionpercalendaryear.Thesetrans- cooperationwiththeUnitedStatesTreasury; actionsshallbeconductedwithpriornoticeto theCommittee. B. Incooperation,asappropriate,withforeign monetaryauthorities;and ForeignCurrencyDirective(AsAmended EffectiveJanuary28,2014) C. Inamannerconsistentwiththeobligations of theUnitedStatesintheInternational 1. Systemoperationsinforeigncurrenciesshallgen- MonetaryFundregardingexchangearrangeerallybedirectedatcounteringdisorderlymarket mentsunderIMFArticleIV. conditions,providedthatmarketexchangerates fortheU.S.dollarreflectactionsandbehavior ProceduralInstructionswithRespectto consistentwithIMFArticleIV,Section1. ForeignCurrencyOperations(AsAmended EffectiveJanuary28,2014) 2. ToachievethisendtheSystemshall: Inconductingoperationspursuanttotheauthorizationanddirectionof theFederalOpenMarketCom- A. Undertakespotandforwardpurchasesand mittee(the“Committee”)assetforthintheAuthorisalesof foreignexchange. zationforForeignCurrencyOperationsandtheForeignCurrencyDirective,theFederalReserveBankof B. Maintainreciprocalcurrencyarrangements NewYork,throughthemanager,SystemOpenMarwithforeigncentralbanksinaccordancewith ketAccount(“manager”),shallbeguidedbythefoltheAuthorizationforForeignCurrency lowingproceduralunderstandingswithrespectto Operations. consultationsandclearanceswiththeCommittee,the ForeignCurrencySubcommittee(the“Subcommit- C. Maintainstandingdollarliquidityswap tee”),andtheChairmanof theCommittee,unless arrangementswithforeignbanksinaccor- otherwisedirectedbytheCommittee.Alloperations dancewiththeAuthorizationforForeign undertakenpursuanttosuchclearancesshallbe CurrencyOperations. reportedpromptlytotheCommittee. D. Maintainstandingforeigncurrencyliquidity 1. Forthereciprocalcurrencyarrangementsauthorswaparrangementswithforeignbanksin izedinparagraphs2.Aof theAuthorizationfor accordancewiththeAuthorizationforFor- ForeignCurrencyOperations: eignCurrencyOperations. A. DrawingsmustbeapprovedbytheSubcom- E. Cooperateinotherrespectswithcentral mittee(orbytheChairman,if theChairman banksof othercountriesandwithinterna- believesthatconsultationwiththeSubcomtionalmonetaryinstitutions. mitteeisnotfeasibleinthetimeavailable)if theswapdrawingproposedbyaforeignbank 3. Transactionsmayalsobeundertaken: doesnotexceedthelargerof (i)$200million

Minutesof FederalOpenMarketCommitteeMeetings|January 137 or(ii)15percentof thesizeof theswap A. TheSubcommittee(orbytheChairman,if arrangement. theChairmanbelievesthatconsultationwith theSubcommitteeisnotfeasibleinthetime B. DrawingsmustbeapprovedbytheCommit- available)if it: tee(orbytheSubcommittee,if theSubcomi. WouldresultinachangeintheSystem’s mitteebelievesthatconsultationwiththefull overallopenpositioninforeigncurrencies Committeeisnotfeasibleinthetimeavailexceeding$300milliononanydayor able,orbytheChairman,if theChairman $600millionsincethemostrecentregular believesthatconsultationwiththeSubcommeetingof theCommittee. mitteeisnotfeasibleinthetimeavailable)if theswapdrawingproposedbyaforeignbank ii. Wouldresultinachangeonanydayin exceedsthelargerof (i)$200millionor theSystem’snetpositioninasinglefor- (ii)15percentof thesizeof theswap eigncurrencyexceeding$150million,or arrangement. $300millionwhentheoperationisassociatedwithrepaymentof swapdrawings. C. ThemanagershallalsoconsultwiththeSubcommitteeortheChairmanaboutproposed iii. Mightgenerateasubstantialvolumeof swapdrawingsbytheSystem. tradinginaparticularcurrencybythe System,eventhoughthechangeinthe D. Anychangesinthetermsof existingswap System’snetpositioninthatcurrency(as arrangementsshallbereferredforreviewand definedinparagraph1.Dof theAuthoriapprovaltotheChairman.TheChairman zationforForeignCurrencyOperations) shallkeeptheCommitteeinformedof any mightbelessthanthelimitsspecifiedin changesinterms,andthetermsshallbecon- 3.A.ii. sistentwithprinciplesdiscussedwithand guidanceprovidedbytheCommittee. B. TheCommittee(orbytheSubcommittee,if theSubcommitteebelievesthatconsultation 2. Forthedollarandforeigncurrencyliquidityswap withthefullCommitteeisnotfeasibleinthe arrangementsauthorizedinparagraphs2.Band timeavailable,orbytheChairman,if the 2.Cof theAuthorizationforForeignCurrency Chairmanbelievesthatconsultationwiththe Operations: Subcommitteeisnotfeasibleinthetime available)if itwouldresultinachangeinthe A. DrawingsmustbeapprovedbytheChairman System’soverallopenpositioninforeigncurinconsultationwiththeSubcommittee.The renciesexceeding$1.5billionsincethemost ChairmanortheSubcommitteewillconsult recentregularmeetingof theCommittee. withtheCommitteepriortotheinitialdrawingonthedollarorforeigncurrencyliquidity 4. TheCommitteeauthorizestheFederalReserve swaplinesif possibleunderthecircumstances Bankof NewYorktoundertaketransactionsof thenprevailing;authoritytoapprovesubse- thetypedescribedinparagraphs1,2,and5of quentdrawingsforeitherthedollarorfor- theAuthorizationforForeignCurrencyOperaeigncurrencyliquidityswaplinesmaybedel- tionsandforeignexchangeandinvestmenttransegatedtothemanagerbytheChairman. actionsthatitmaybeotherwiseauthorizedto undertakefromtimetotimeforthepurposeof B. Anychangesinthetermsof existingswap testingoperationalreadiness.Theaggregate arrangementsshallbereferredforreviewand amountof suchtransactionsshallnotexceed approvaltotheChairman.TheChairman $2.5billionpercalendaryear.Thesetransactions shallkeeptheCommitteeinformedof any shallbeconductedwithpriornoticetothe changesinterms,andthetermsshallbecon- Committee. sistentwithprinciplesdiscussedwithand guidanceprovidedbytheCommittee. Initsannualreconsiderationof theStatementon Longer-RunGoalsandMonetaryPolicyStrategy, 3. Anyoperationmustbeapprovedby: participantsgenerallyagreedthatonlyminorupdates

138 101stAnnualReport|2014 wererequiredatthismeeting.Itwasnoted,however, theCommitteehastheabilitytospecifya thatbecausethiswasthethirdyearinwhichthe longer-rungoalforinflation.TheCommittee statementwasbeingissued,thecomingyearwould reaffirmsitsjudgmentthatinflationattherate beanappropriatetimetoconsiderwhetherthestate- of 2percent,asmeasuredbytheannualchange mentcouldbeenhancedinanyway.Forexample, inthepriceindexforpersonalconsumption someparticipantsadvocatedanexplicitindication expenditures,ismostconsistentoverthelonger thatinflationpersistentlybelowtheCommittee’s runwiththeFederalReserve’sstatutoryman- 2percentlonger-runobjectiveandinflationpersis- date.Communicatingthisinflationgoalclearly tentlyabovethatobjectivewouldbeequallyundesir- tothepublichelpskeeplonger-terminflation able.Someotherssuggestedthatthestatementcould expectationsfirmlyanchored,therebyfostering moreclearlydescribehowthemandatedgoalsof pricestabilityandmoderatelong-terminterest maximumemploymentandpricestabilityarelinked ratesandenhancingtheCommittee’sabilityto withtheobjectiveof financialstability.Followingthe promotemaximumemploymentinthefaceof discussion,theCommitteevotedtoapproveminor significanteconomicdisturbances. wordingchangestothestatementandtoupdatethe statement’sreferencetoparticipants’estimatesof the Themaximumlevelof employmentislargely longer-runnormalunemploymentrate.Mr.Tarullo determinedbynonmonetaryfactorsthataffect abstainedfromthevotebecausehecontinuedto thestructureanddynamicsof thelabormarket. thinkthatthestatementhadnotadvancedthecause Thesefactorsmaychangeovertimeandmay of communicatingorachievinggreaterconsensusin notbedirectlymeasurable.Consequently,it thepolicyviewsof theCommittee. wouldnotbeappropriatetospecifyafixedgoal foremployment;rather,theCommittee’spolicy StatementonLonger-RunGoalsandMonetary decisionsmustbeinformedbyassessmentsof PolicyStrategy(AsAmendedEffective themaximumlevelof employment,recognizing January28,2014) thatsuchassessmentsarenecessarilyuncertain “TheFederalOpenMarketCommittee(FOMC) andsubjecttorevision.TheCommitteeconsidisfirmlycommittedtofulfillingitsstatutory ersawiderangeof indicatorsinmakingthese mandatefromtheCongressof promotingmaxi- assessments.InformationaboutCommitteeparmumemployment,stableprices,andmoderate ticipants’estimatesof thelonger-runnormal long-terminterestrates.TheCommitteeseeksto ratesof outputgrowthandunemploymentis explainitsmonetarypolicydecisionstothepub- publishedfourtimesperyearintheFOMC’s licasclearlyaspossible.Suchclarityfacilitates Summaryof EconomicProjections.For well-informeddecisionmakingbyhouseholds example,inthemostrecentprojections,FOMC andbusinesses,reduceseconomicandfinancial participants’estimatesof thelonger-runnormal uncertainty,increasestheeffectivenessof mon- rateof unemploymenthadacentraltendencyof etarypolicy,andenhancestransparencyand 5.2percentto5.8percent. accountability,whichareessentialinademocraticsociety. Insettingmonetarypolicy,theCommitteeseeks tomitigatedeviationsof inflationfromits Inflation,employment,andlong-terminterest longer-rungoalanddeviationsof employment ratesfluctuateovertimeinresponsetoeconomic fromtheCommittee’sassessmentsof itsmaxiandfinancialdisturbances.Moreover,monetary mumlevel.Theseobjectivesaregenerally policyactionstendtoinfluenceeconomicactiv- complementary.However,undercircumstances ityandpriceswithalag.Therefore,theCommit- inwhichtheCommitteejudgesthattheobjectee’spolicydecisionsreflectitslonger-rungoals, tivesarenotcomplementary,itfollowsabalitsmedium-termoutlook,anditsassessmentsof ancedapproachinpromotingthem,takinginto thebalanceof risks,includingriskstothefinan- accountthemagnitudeof thedeviationsandthe cialsystemthatcouldimpedetheattainmentof potentiallydifferenttimehorizonsoverwhich theCommittee’sgoals. employmentandinflationareprojectedto returntolevelsjudgedconsistentwithits Theinflationrateoverthelongerrunisprimar- mandate. ilydeterminedbymonetarypolicy,andhence

Minutesof FederalOpenMarketCommitteeMeetings|January 139 TheCommitteeintendstoreaffirmtheseprin- tolifttheper-counterpartybidlimit.Underthe ciplesandtomakeadjustmentsasappropriateat termsof theproposal,theinterestrateonONRRPs itsannualorganizationalmeetingeachJanuary.” wouldremainbetween0and5basispoints.The Chairof theFOMCwouldauthorizeanychangesin Byunanimousvote,theCommitteeamendedits theofferedrateorper-counterpartybidlimit.Adjust- Rulesof Organizationtoaddthepositionof deputy mentstothebidlimitwouldbemadeingradual managerof theSystemOpenMarketAccount. steps,andtheCommitteewouldbeconsultedbefore theexercisewouldmovetofullallotment.Thepro- Byunanimousvote,theCommitteeamendeditsPro- posedchangeswereintendedtoallowtheCommittee gramforSecurityof FOMCInformationwithminor toobtainadditionalinformationaboutthepotential changestothereviewandreportingprocessfor usefulnessof ONRRPoperationsforaffectingmarbreachesintheinformationsecurityrulesandwith ketinterestrateswhenthatstepbecomesappropriate. severalotherminorupdatesandclarifications. Mostmeetingparticipantssupportedtheproposal, withacoupleemphasizingthattheperiodforwhich Byunanimousvote,theCommitteeselectedSimon theexercisewouldbeextendedwaslikelysufficiently PotterandLorieK.Logantoserveatthepleasureof longthatcounterpartieswouldbewillingtoadjust theCommitteeasmanageranddeputymanagerof theircurrentmoneymarketpractices,therebyprovidtheSystemOpenMarketAccount,respectively,on ingbetterinformationonthepossiblemarketeffects theunderstandingthattheirselectionwassubjectto of suchoperations.ItwasremarkedthattheadditheirbeingsatisfactorytotheFederalReserveBank tionalinsightsobtainedfromtheexercisecouldbe of NewYork. usefulinthecontextof theCommittee’sfuturediscussionsaboutmonetarypolicyimplementationover Secretary’snote:Advicesubsequentlywas themediumandlongerterm.Anumberof particireceivedthatthemanageranddeputymanager pants,however,indicatedapreferenceforretaininga selectionsindicatedaboveweresatisfactorytothe capontheper-counterpartybidlimituntiltheCom- FederalReserveBankof NewYork. mitteehasdiscussedpossibleapproachestomediumtermpolicyimplementation,andafewof thesepar- Developments in Financial Markets and ticipantspreferredtoextendtheexerciseforashorter the Federal Reserve’s Balance Sheet period. Themanagerof theSystemOpenMarketAccount Followingthediscussion,theCommitteeapproved (SOMA)reportedondevelopmentsindomesticand thefollowingresolution: foreignfinancialmarketsaswellasSystemopenmarketoperationsduringtheperiodsincetheFederal “TheFederalOpenMarketCommittee(FOMC) OpenMarketCommitteemetonDecember17–18, authorizestheFederalReserveBankof New 2013.Themanageralsopresentedanupdateonthe Yorktoconductaseriesof fixed-rate,overnight ongoingovernightreverserepurchaseagreement(ON reverserepurchaseoperationsinvolvingU.S. RRP)exercise.Alloperationstodatehadproceeded Governmentsecurities,andsecuritiesthatare smoothly.Thenumberof participatingcounterpar- directobligationsof,orfullyguaranteedasto tiesandtotalallotmentinthedailyoperations principalandinterestby,anyagencyof the increasedinlateDecember,inpartreflectingthefact UnitedStates,forthepurposeof furtherassessthatovernightsecuredrateswerelowcomparedwith ingthepotentialroleforsuchoperationsinsupthefixedrateofferedintheoperationsaswellasthe portingtheimplementationof monetarypolicy. increaseinthecaponindividualcounterpartybidsto Thereverserepurchaseoperationsauthorizedby $3billionfrom$1billionthatwasimplementedon thisresolutionshallbeofferedatafixedrate December23,2013.Counterparties’year-endbal- thatmayvaryfromzerotofivebasispoints,and ancesheetadjustmentsalsoboostedparticipationfor foranovernightterm,orsuchlongertermasis atime;theONRRPoperationsreportedlyhelped warrantedtoaccommodateweekend,holiday, limitdownwardpressureonmoneymarketrates andsimilartradingconventions.Anychangeto aroundyear-end. theofferedratewithintherangespecifiedabove ortheper-counterpartybidlimitswillrequire Followingthemanager’sreport,meetingparticipants approvalof theChairman.TheSystemOpen discussedaproposaltoextendtheDesk’sauthority MarketAccountmanagerwillnotifytheFOMC toconducttheONRRPexercisefor12monthsand inadvanceaboutanychangestothetermsof

140 101stAnnualReport|2014 operations.Theseoperationsshallbeauthorized suchasthereadingsonnewordersfromnationaland throughJanuary30,2015.” regionalmanufacturingsurveys,wereconsistentwith afurtherexpansioninfactoryoutputearlythisyear, Messrs.FisherandPlosserdissentedbecauseof their butautomakers’productionschedulesindicatedthat preferenceforretainingacaponthemaximumsize thepaceof lightmotorvehicleassemblieswould of counterparties’offersduringtheextension;Mr. declineinthefirstquarter. Plosseralsopreferredashorterextensionof the exercise. Realpersonalconsumptionexpenditures(PCE)rose atafasterpaceinOctoberandNovemberthaninthe Byunanimousvote,theCommitteeratifiedtheOpen thirdquarter.InDecember,thecomponentsof the MarketDesk’sdomestictransactionsovertheinter- nominalretailsalesdatausedbytheBureauof Ecomeetingperiod.Therewerenointerventionopera- nomicAnalysistoconstructitsestimateof PCE tionsinforeigncurrenciesfortheSystem’saccount increasedstrongly,althoughsalesof lightmotor overtheintermeetingperiod. vehiclesdeclinedafterpostingalargegaininNovember.Recentinformationonseveralimportantfactors Staff Review of the Economic Situation thatinfluencehouseholdspendingwassomewhat mixed.Households’realdisposableincomewaslittle TheinformationreviewedfortheJanuary28–29 changedinOctoberandNovember,andtheexpirameetingindicatedthattherateof economicgrowth tionof theemergencyunemploymentcompensation pickedupinthesecondhalf of 2013.Totalpayroll programattheendof 2013wasexpectedtoreduce employmentincreasedinDecember,butataslower aggregateincomegrowthearlythisyear.However, pacethaninpreviousmonths,andtheunemploy- households’networthlikelycontinuedtoexpandin mentratedeclinedbutwasstillelevated.Consumer recentmonthsasaresultof risingequitypricesand priceinflationcontinuedtorunbelowtheCommit- homevalues.ConsumersentimentintheThomson tee’slonger-runobjective,whilemeasuresof longer- Reuters/Universityof MichiganSurveysof Consumterminflationexpectationsremainedstable. ersimproved,onbalance,inDecemberandearly Januaryafteradeclineinthefallof 2013. Overall,labormarketindicatorsappearedconsistent withagradualongoingimprovementinlabormarket Thepaceof activityinthehousingsectorshowed conditions.Totalnonfarmpayrollemployment sometentativesignsof stabilizing,astheeffectsof expandedbylessinDecemberthanintheprevious thepastyear’sriseinmortgageratesappearedto twomonths,perhapspartlybecauseof unusuallybad wane.Single-familyhousingstartsincreasedin weather.Theunemploymentratedeclinedto6.7per- Novemberandonlypartlyreversedthatgainin centinDecember.Thelaborforceparticipationrate December,whilepermitsfornewconstructionrosea alsodecreased,andtheemployment-to-population little,onbalance,inthefourthquarter.Newhome ratiowaslittlechanged.Therateof long-duration salesdeclinedinNovemberandDecemberbutwere unemploymentdeclined,buttheshareof workers nonethelesshigherthaninthethirdquarter,and employedparttimeforeconomicreasonswaslittle existinghomesalesflattenedoutinDecemberafter changed,andbothmeasuresremainedelevated. decreasingforseveralmonths. Amongotherindicatorsof labormarketconditions, therateof jobopeningsedgedupinrecentmonths, Realprivateexpendituresforbusinessequipmentand andtheshareof smallbusinessesreportingthatthey intellectualpropertyproductsappearedtostrengthen hadhard-to-fillpositionstrendedup.Measuresof inthefourthquarter,asnominalshipmentsof nonfirms’hiringplanswerehigherthanayearearlier, defensecapitalgoodsroseatasolidpace.Although buttherateof grossprivate-sectorhiringwasstill nominalnewordersforthesecapitalgoodsdeclined low.Initialclaimsforunemploymentinsurance inDecemberandNovember’sincreasewasrevised moveddown,onbalance,overtheintermeeting down,thelevelof ordersremainedabovethatof period,andhouseholdexpectationsof thelabormar- shipments,pointingtofurtherincreasesinshipments ketsituationimproved,onnet,inDecemberand insubsequentmonths.Otherforward-lookingindicaearlyJanuary. tors,suchassurveysof businessconditionsandcapitalspendingplans,werealsogenerallyconsistentwith Manufacturingproductionincreasedatarobustpace near-termgainsinbusinessequipmentspending. inthefourthquarter,withbroad-basedgainsacross Nominalexpendituresfornonresidentialconstrucindustries.Indicatorsof manufacturingproduction, tion,whichhadbeenflatinOctober,movedhigherin

Minutesof FederalOpenMarketCommitteeMeetings|January 141 November.Dataonbook-valueinventoriessuggested runbelowcentralbanktargetsinseveraladvanced littlechangeinthepaceof nonfarminventoryinvest- economies,andmonetarypolicyremainedexpanmentinthefourthquarter,andtheavailableinforma- sionaryintheseeconomies.Inflationinemerging tiondidnotpointtosignificantinventoryimbalances marketeconomiesremainedmoderateonaverage, inmostindustries. althoughBrazil,India,andTurkeyagaintightened monetarypolicyduringtheintermeetingperiodin Realfederalgovernmentpurchaseslikelyfellsharply responsetoconcernsaboutinflationandcurrency inthefourthquarterbecauseof continueddeclinesin depreciation.ThepolicytighteninginTurkeywas defensespendingandthetemporarypartialshut- particularlysharpandfollowedseveraldaysof downof thefederalgovernmentinOctober. heightenedfinancialmarketpressurestowardtheend Increasesinrealstateandlocalgovernmentpur- of theintermeetingperiod.Similarpressureswere chasesappearedtohavemoderatedinthefourth evidentinsomeotheremergingmarketeconomiesas quarter.Thepayrollsof thesegovernmentswere well. aboutunchangedduringthefourthquarter,and nominalstateandlocalconstructionexpendituresfor OctoberandNovemberincreasedataslowerpace, Staff Review of the Financial Situation onnet,thaninthethirdquarter. Financialmarketconditionsovertheintermeeting TheU.S.internationaltradedeficitnarrowedsub- periodwereimportantlyinfluencedbyFederal stantiallyinNovember,asexportsincreasedand Reservecommunications,somewhatbetter-thanimportsfell.Thehighervalueof exportsstemmedin expectedeconomicdatareleases,anddevelopments largepartfromanincreaseinsalesof petroleum inemergingmarketeconomies.Onnet,financialconproducts,whilethefallinimportswasprimarilydue ditionsintheUnitedStatesremainedsupportiveof toadeclineinpurchasesof crudeoil. growthineconomicactivityandemployment:Equity pricesincreasedabit,longer-terminterestrates TotalU.S.consumerpriceinflation,asmeasuredby declined,andthedollarappreciatedagainstmost thePCEpriceindex,wasalittleunder1percentover othercurrencies. the12monthsendinginNovember,wellbelowthe Committee’s2percentlonger-termobjective.Over Whileinvestorsweresomewhatsurprisedbythe thatperiod,consumerenergypricesdeclined,con- FOMC’sdecisionatitsDecembermeetingtoreduce sumerfoodpricesrosemodestly,andcorePCE thepaceof itsassetpurchases,thepolicyactionand prices—whichexcludeconsumerfoodandenergy associatedcommunicationsappearedtohaveonlya prices—increasedslightlymorethan1percent.In limitedeffectonmarketparticipants’outlookforthe December,theconsumerpriceindex(CPI)rose FederalReserve’sbalancesheet.Indeed,theCommitsomewhatfasterthaninrecentmonths,primarily tee’sdecisiontocutthepaceof purchasesandits reflectinganupturninconsumerenergyprices;core rationalefordoingsoseemedtoincreaseinvestors’ CPIinflationremainedlow.Bothnear-termand confidenceintheeconomicoutlook,ashiftthatwas longer-terminflationexpectationsfromtheMichigan furthersupportedbysubsequentU.S.economicdata surveywerelittlechanged,onnet,inDecemberand releases.However,thoseeffectswerereversedlatein earlyJanuary.Overthe12monthsendinginDecem- theperiodwheninvestorsappearedtopullbackfrom ber,nominalaveragehourlyearningsforallemploy- riskierassetsinreactiontorisingconcernabout eesincreasedslightlyfasterthanconsumerprice developmentsinsomeemergingmarketeconomies inflation. andtheirpossibleimplicationsforglobaleconomic growth. Foreigneconomicactivitycontinuedtoimprove,with economicgrowthinthethirdquarterof 2013higher ResultsfromtheDesk’ssurveyof primarydealers thaninthefirsthalf of theyearandmorerecent conductedpriortotheJanuarymeetingindicated indicatorssuggestingfurthergains.Thepickupwas thatdealersanticipatedonlyminorchangestothe widespread,astheeuroarearegisteredasecondcon- Committee’spostmeetingstatement.Inaddition,the secutivequarterof positiveeconomicgrowth,the mediandealerexpecteda$10billionreductioninthe Mexicaneconomybouncedbackfromasecond- monthlypaceof assetpurchasestobeannouncedat quartercontraction,andstrongerexternaldemand eachmeetinginthefirstthreequartersof 2014,with boostedgrowthinemergingmarketeconomiesmore thepurchaseprogramendingwithafinal$15billion generally.Atthesametime,inflationcontinuedto reductionattheOctober2014meeting.

142 101stAnnualReport|2014 Onbalance,10-and30-yearnominalTreasuryyields Conditionsinthecommercialrealestatesectorrecovdeclinedabout10basispointsand20basispoints, eredfurtherinthefourthquarter,withrisingproprespectively,overtheintermeetingperiod,inpart ertypricesandfewerdistressedsales.Inthemarket becauseof anincreaseinsafe-havendemandstoward forcommercialmortgage-backedsecurities,investor theendof theperiod.TheDecemberpolicyaction demandremainedstrongandspreadscontinuedto andsubsequentmutedmarketreactionledto betightdespitehighissuancenearyear-end.Comdecreaseduncertaintyaboutfuturelonger-terminter- mercialrealestateloansonbanks’booksexpanded estrates,perhapscontributingtothedeclinein moderately. longer-termrates.Themeasureof 5-yearinflation compensationbasedonTreasuryinflation-protected Creditconditionsinmunicipalbondmarketsgenersecuritiesincreasedalittle,whileinflationcompensa- allyremainedstable,althoughafewissuerscontinued tion5to10yearsaheaddecreasedsomewhat. toexperiencesubstantialstrain.Availabledatasuggestthat,forthefirsttimeinseveralyears,theratings Conditionsinshort-termdollarfundingmarketsgen- agencyMoody’sInvestorsServicemademore erallyremainedstable.Year-endfundingpressures upgradesthandowngradestomunicipaldebtinthe weremodest,andovernightmoneymarketrates fourthquarter.However,Moody’sputPuertoRico declinedaboutinlinewiththeirtypicalbehaviorin onwatchforadowngrade. pastyears.Reporateswerequitelowattheendof theyearandremainedlowthroughmostof January, HouseholdscontinuedtofacemixedcreditcondileadingtoincreasedparticipationintheFederal tionsinthefourthquarter.Consumercredit Reserve’sONRRPoperations,withasubstantial expandedagaininNovember,boostedbyfurther temporaryincreaseintake-upatyear-end.Primarily gainsinautoandstudentloans,andbankcreditdata reflectingtheincreasedparticipationintheexercise, indicatethatthisexpansionlikelycontinuedthrough reservebalancesexpandedmoreslowlyandtherate December.Incontrast,creditcardbalanceswere of increaseinthemonetarybaseslowedinDecem- littlechanged,onnet,throughNovember,asunderber.M2continuedtoexpandmoderately. writingappearedtoremainquitetight.Thevolume of mortgageapplicationsforhomepurchasesheld Reflectingtheimprovedoutlookforeconomicactiv- aboutsteadysincethepreviousFOMCmeetingwhile ityanddespitemixedfourth-quarterearningsresults, refinanceapplicationsremainedatverylowlevels. thestockpricesof bankholdingcompaniesrose Mortgageratesdeclinedslightly,inlinewithmodnotablyandspreadsoncreditdefaultswapsforthe estlyloweryieldsonagencymortgage-backedsecurilargestbankholdingcompaniesnarrowedsomewhat. ties.Despitetightmortgageavailabilityandsubdued AccordingtotheJanuarySeniorLoanOfficerOpin- borrowing,housepricescontinuedtoincreasein ionSurveyonBankLendingPractices,domestic November,althoughnotasquicklyasearlierin2013. bankscontinuedtoeasetheirlendingstandardsand someloantermsonbalance;theyalsoexperiencedan Financialmarketconditionsintheadvancedforeign increaseindemand,onnet,inmostmajorloancat- economiesovertheintermeetingperiodgenerally egoriesinthefourthquarter. becamemoresupportiveof growth.Long-termgovernmentbondyieldsdeclinedandheadlineequity BroadU.S.equitypriceindexesedgedhigher,onnet, indexesincreased,onnet,inmostof thesecountries, overtheintermeetingperiod,andequityissuanceby withbankstockpricesintheeuroarearisingmore nonfinancialcorporationsincreased.Creditremained thanbroaderindexes.Inaddition,debtissuanceby widelyavailabletolargenonfinancialcorporations. bothgovernmentsandbanksintheEuropean Corporatebondspreadscontinuedtonarrowover peripherypickedup,andsovereignyieldspreadsin theintermeetingperiod,withinvestment-gradebond thosecountrieswereflattodown,onbalance,over spreadsreachingtheirlowestlevelsinseveralyears theperiod.Incontrast,amidaratcheting-upof andthoseonspeculative-gradecorporatebonds financialmarketstrainsinsomeemergingmarket approachingpre-crisislevels.Bondissuanceby economies,headlinestockpriceindexesinmost domesticcorporationsgenerallystayedstrong,com- emergingmarketeconomiesdeclined,outflowsfrom mercialandindustrialloansonbanks’books emergingmarketmutualfundscontinued,andyield increasedbyanotableamountlateinthefourth spreadsondollar-denominatedemergingmarket quarter,andissuanceof leveragedloansandcollater- bondsincreased.Local-currencyyieldsroseinsome alizedloanobligationsgenerallycontinuedapace. emergingmarketeconomies,suchasBrazil,South

Minutesof FederalOpenMarketCommitteeMeetings|January 143 Africa,andTurkey,andshort-terminterbankratesin Inconsideringrecenteventsinemergingmarket Chinawerevolatileandtrendedhigheroverthe economies,thestaff judgedthattheeffectsof recent period.Theforeignexchangevalueof thedollar financialmarketvolatilityhadnotbeenlargeenough appreciatedagainstmostothercurrenciesoverthe tohaveamaterialeffectontheoveralloutlookfor period,withparticularlylargeincreasesagainstthe thoseeconomiesand,similarly,thatthespillover ArgentinepesoandtheTurkishlira. effectsontheUnitedStatesof developmentstodate werelikelytobemodest.Becauseconditionswerein Staff Economic Outlook flux,however,thesemarketswouldrequirecareful monitoring. Intheeconomicprojectionpreparedbythestaff for theJanuaryFOMCmeeting,growthof realgross Thestaff continuedtoseeanumberof risksaround domesticproduct(GDP)inthesecondhalf of 2013 itsoutlook.Thedownsideriskstotheforecastfor wasestimatedtohavebeenstrongerthanthestaff realGDPgrowthwerethoughttohavediminished, hadexpected,thoughsomeof thestrengthininven- buttheriskswerestillseenastiltedalittletothe toryinvestmentandnetexportswaspossiblytransi- downsidebecause,withthetargetfederalfundsrate tory.Thestaff’smedium-termforecastforrealGDP atitseffectivelowerbound,theeconomywasnot growthwaslittlerevised,onbalance,asthemomen- wellpositionedtowithstandfutureadverseshocks. tumimpliedbyfasterGDPgrowthinthesecondhalf Atthesametime,thestaff viewedtherisksaround of 2013waslargelyoffsetbyahigherprojectedpath itsoutlookfortheunemploymentrateandforinflafortheforeignexchangevalueof thedollar.Inaddi- tionasroughlybalanced. tion,thestaff reviseddownwarditsviewof thepace atwhichpotentialoutputhadincreasedoverrecent Participants’ Views on Current Conditions yearsandwouldincreasethisyearandnext.Thestaff and the Economic Outlook continuedtoprojectthatrealGDPwouldexpand morequicklyoverthenextfewyearsthanin2013 Intheirdiscussionof theeconomicsituationandthe andthatrealGDPwouldrisefasterthanpotential outlook,participantsgenerallynotedthateconomic output.Thisaccelerationineconomicactivitywas activityhadstrengthenedmoreinthesecondhalf of expectedtobesupportedbystill-accommodative 2013thantheyhadexpectedatthetimeof the monetarypolicyandaneasingintheeffectsof fiscal Decembermeeting.Inparticular,consumerspending policyrestraintoneconomicgrowth,aswellasby hadstrengthened,andbusinessinvestmentappeared increasesinconsumerandbusinessconfidence,fur- tobeonamoresoliduptrend.Althoughthegoverntherimprovementsincreditavailabilityandfinancial mentshutdownlikelydampedeconomicgrowth conditions,andcontinuedgainsinforeigneconomic somewhat,theextentof restraintongrowthfromfisgrowth.Theexpansionineconomicactivitywas calpolicydiminishedlateintheyear.However,sevanticipatedtoleadtoaslowreductioninresource eralparticipantsobservedthattemporaryfactorshad slackovertheprojectionperiod,andtheunemploy- helpedboostrealGDPduringthesecondhalf,pointmentratewasexpectedtodeclinegradually,reaching ingspecificallytothesubstantialcontributionsfrom thestaff’sestimateof itslonger-runnaturalratein netexportsandincreasedinventoryinvestment.Asa 2016. result,participantsgenerallydidnotexpecttherecent paceof economicgrowthtobesustained,butthey Thestaff’sforecastforinflationwaslittlechanged nonethelessanticipatedthattheeconomywould fromtheprojectionpreparedforthepreviousFOMC expandatamoderatepaceincomingquarters.That meeting,althoughthenear-termforecastwasrevised expansionwasexpectedtobesupportedbyhighly downalittletoreflectrecentdeclinesinenergy accommodativemonetarypolicy,afurthereasingof prices.Thestaff continuedtoforecastthatinflation fiscalrestraint,andamodestadditionalpickupin wouldrunwellbelowtheCommittee’s2percent globaleconomicgrowth,aswellascontinued objectiveearlythisyearbutabovethelowlevel improvementincreditconditionsandtheongoing observedovermuchof 2013.Overthemediumterm, strengtheninginhouseholdbalancesheets.Anumber withlonger-runinflationexpectationsassumedto of participantsnotedthatrecenteconomicnewshad remainstable,changesincommodityandimport reinforcedtheirconfidenceintheirprojectionof pricesexpectedtobemuted,andslackinlaborand moderateeconomicgrowthoverthemediumrun.It productmarketsrecedinggradually,inflationwas wasalsonotedthatrecentdevelopmentsinseveral projectedtomovebackslowlytowardtheCommit- emergingmarketeconomies,if theycontinued,could tee’sobjective. posedownsideriskstotheoutlook.Overall,most

144 101stAnnualReport|2014 participantsstillviewedtheriskstotheoutlookfor longer-terminterestratescouldrisesharplyif market theeconomyandthelabormarketashavingbecome participants’expectationsof futuremonetarypolicy morenearlybalancedinrecentmonths. cametodeviatefromthoseof policymakers,as appearedtohavehappenedlastsummer,whilea Consumerspendinghadadvancedstronglyinlate coupleof othersarguedthatthecurrenthighly 2013,contributingimportantlytothepickupin accommodativestanceof monetarypolicycouldlead growthof economicactivity.Thispicturewasrein- investorstotakeonexcessiveriskandsoundermine forcedbysurveydatathatsuggestedthatconsumers longer-termfinancialstability.Recentvolatilityin hadbecomemoreoptimisticaboutfutureincome emergingmarketsappearedtohavehadonlyalimgains.Whilenotingthathouseholdsremainedcau- itedeffecttodateonU.S.financialmarkets.Nevertious,participantscitedanumberof factorsthat theless,participantsagreedthatanumberof develwerelikelytocontinuetounderpingainsinhouse- opmentsinfinancialmarketsneededtobewatched holdspending,includingrisinghouseprices,growing carefully,includingthefinancingsituationof the confidenceinthesustainabilityof theeconomic PuertoRicangovernmentandparticularlythe expansion,increasingpayrolls,andthehighratioof unfoldingeventsinemergingmarkets. householdwealthtodisposableincome. Intheirdiscussionof recentlabormarketdevelop- Althoughtherecoveryinthehousingsectorhad ments,manyparticipantscommentedontherelaslowedsomewhatinrecentmonths,anumberof par- tivelysmallincreaseinpayrollsinDecemberandthe ticipantsreportedsolidactivityintheirDistricts. furtherdeclineintheunemploymentrate.Anumber Moreover,variousfactorswereseenaslikelytosup- of participantsindicatedthattheDecemberpayrolls portstrongergrowthinthesectorgoingforward, figuremayhavebeenananomaly,perhapsimporincludingfavorablehousingaffordability,whichwas tantlyreflectingbadweather,anditwasnotedthat inturnpartlyduetostill-lowmortgagerates,and theinitialreadingsonpayrollsinrecentyearshad demographictrends.However,therewerealsorea- subsequentlytendedtoberevisedup.Inaddition, sonsforbeingcautiousabouttheprospectsforhous- someparticipantsreportedthattheirbusinessconingconstruction,suchasrecentdisappointingnews tactshadbecomemorepositiveabouthiringinthe onpermitsfornewconstructionandthepossibility yearahead.Participantscontinuedtodebatetherelithatinvestors’interestinpurchasingpropertiesfor abilityof theunemploymentrateasanindicatorof therentalmarketwouldrecede. overalllabormarketconditions,takingintoaccount thefurtherdeclineinlaborforceparticipationin Businesscontactsinmanypartsof thecountry recentquarters,still-elevatedlevelsof underemployreportedthattheywereguardedlyoptimisticabout mentandlong-termunemployment,andtheapparprospectsfor2014.Whileinventoryinvestment entabsenceof wagepressures.Muchof thedownwouldlikelycomedownfromitsrecentunusually wardtrendinthelaborforceparticipationratesince highlevel,participantsheardmorereportsthatthe thestartof therecessionwasseenastheresultof businesssectorwaswillingtoincreasespendingon shiftsinthedemographiccompositionof theworkcapitalprojects.Anumberof factorswerecitedas forceandtheretirementof olderworkers;theextent likelytosupportsuchanincrease,includingthehigh of thecyclicalportionof thedeclinewasviewedby levelof profits,thelowlevelof interestrates,areduc- someasdifficulttogaugeatpresent.Afewparticitioninpolicyuncertainty,theeasingof lendingstan- pantsjudgedthatthedeclineinparticipationfor dards,andlargeholdingsof liquidassetsby youngerandprime-ageworkerslikelyreflectedthe corporations. slowrecoveryinjobsandwagesandsomightbe reversedaslabormarketconditionsstrengthened.In Indiscussingfinancialdevelopmentsovertheinter- addition,severalotherspointedoutthatbroader meetingperiod,severalparticipantsnotedthatthe conceptsof theunemploymentrate,suchasthose Committee’sDecemberdecisiontomakeamodest thatincludenonparticipantswhoreportthatthey reductioninthemonthlypaceof assetpurchaseshad wantajobandthoseworkingparttimewhowant notresultedinanadversemarketreaction.Several full-timework,remainedwellabovetheofficial participantsobservedthatcurrentmarketexpecta- unemploymentrate,suggestingthatconsiderable tionsforassetpurchasesandthefuturecourseof the labormarketslackremaineddespitethereductionin federalfundsratewerereasonablywellalignedwith theunemploymentrate.Afewparticipantsnoted participants’ownexpectationsof thepathforpolicy. workershortagesinspecificregionsandoccupations, However,oneparticipantexpressedconcernthat withoneDistrictreportingwidespreadshortagesof

Minutesof FederalOpenMarketCommitteeMeetings|January 145 skilledlaborleadingtoemerginglaborcostpressures. theformthatsuchforwardguidancemighttake. However,anumberof participantssawthelowrates Someparticipantsfavoredquantitativeguidance of increaseinmostmeasuresof wagesasconsistent alongthelinesof theexistingthresholds,whileothers withcontinuedlabormarketslack. preferredaqualitativeapproachthatwouldprovide additionalinformationregardingthefactorsthat InflationremainedbelowtheCommittee’slonger-run wouldguidetheCommittee’spolicydecisions.Sevobjectiveovertheintermeetingperiod.Participants eralparticipantssuggestedthatriskstofinancialstastillanticipatedthat,withlonger-runinflationexpec- bilityshouldappearmoreexplicitlyinthelistof factationsstable,transitoryfactorsthathadbeendamp- torsthatwouldguidedecisionsaboutthefederal inginflationlikelytorecede,andeconomicactivity fundsrateoncetheunemploymentratethresholdis pickingup,inflationwouldmovebacktowardthe crossed,andseveralparticipantsarguedthatthefor- Committee’s2percentobjectiveoverthemedium wardguidanceshouldgivegreateremphasistothe run.However,severalfactorsthatcastdoubtonthis Committee’swillingnesstokeeprateslowif inflation outcomewerealsomentioned,includingslowgrowth weretoremainpersistentlybelowtheCommittee’s inlaborcosts,thelackof pricingpowerreportedby 2percentlonger-runobjective.Additionalproposals businesscontactsinvariouspartsof thecountry,the includedrelyingtoagreaterextentontheSummary lowlevelof inflationinotheradvancedeconomies, of EconomicProjectionsasacommunicationsdevice andthedangerthatinflationexpectationsatshort andincludingintheguidanceanindicationof the andmediumhorizonsmightnotbeaswellanchored Committee’swillingnesstoadjustpolicytolean aslonger-runinflationexpectations.Participants againstundesiredchangesinfinancialconditions. notedthatinflationpersistentlybelowtheCommittee’sobjectivewouldposeriskstoeconomicperfor- Afewparticipantsraisedthepossibilitythatitmight manceandthatinflationdevelopmentswouldneed beappropriatetoincreasethefederalfundsraterelatobemonitoredcarefully. tivelysoon.Oneparticipantcitedevidencethatthe equilibriumrealinterestratehadmovedhigher,anda Intheirdiscussionof thepathformonetarypolicy, coupleof themnotedthatsomestandardpolicyrules mostparticipantsjudgedthattheincominginforma- tendedtosuggestthatthefederalfundsrateshould tionabouttheeconomywasbroadlyinlinewiththeir beraisedaboveitseffectivelowerboundbeforethe expectationsandthatafurthermodeststepdownin middleof thisyear.Otherparticipants,however,sugthepaceof purchaseswasappropriate.Acoupleof gestedthatprescriptionsfromstandardpolicyrules participantsobservedthatcontinuedlowreadingson werenotappropriateincurrentcircumstances,either inflationandconsiderableslackinthelabormarket becausethetargetfederalfundsratehadbeenconraisedquestionsaboutthedesirabilityof reducing strainedbythelowerboundforsometimeorbecause thepaceof purchases;theseparticipantsjudged, theequilibriumrealrateof interestwaslikelystill however,thatapauseinthereductionof purchases beinghelddownbyvariousfactors,includingthelinwasnotjustifiedatthisstage,especiallyinlightof geringeffectsof thefinancialcrisis,andwassignifithestrengthof theeconomyinthesecondhalf of cantlybelowthevalueof thelonger-runratebuilt 2013.Severalparticipantsarguedthat,intheabsence intostandardpolicyrules. of anappreciablechangeintheeconomicoutlook, thereshouldbeaclearpresumptioninfavorof con- Committee Policy Action tinuingtoreducethepaceof purchasesbyatotalof $10billionateachFOMCmeeting.Thatsaid,a Committeememberssawtheinformationreceived numberof participantsnotedthatif theeconomy overtheintermeetingperiodasindicatingthat deviatedsubstantiallyfromitsexpectedpath,the growthineconomicactivityhadpickedupinrecent Committeeshouldbepreparedtorespondwithan quarters.Labormarketindicatorsweremixedbuton appropriateadjustmenttothetrajectoryof its balanceshowedfurtherimprovement.Theunempurchases. ploymentratehaddeclinedbutremainedelevated whenjudgedagainstmembers’estimatesof the Participantsagreedthat,withtheunemploymentrate longer-runnormalrateof unemployment.Houseapproaching6½percent,itwouldsoonbeappropri- holdspendingandbusinessfixedinvestmenthad atefortheCommitteetochangeitsforwardguidance advancedmorequicklyinrecentmonthsthanearlier inordertoprovideinformationaboutitsdecisions in2013,whiletherecoveryinthehousingsectorhad regardingthefederalfundsrateafterthatthreshold slowedsomewhat.Fiscalpolicywasrestrainingecowascrossed.Arangeof viewswasexpressedabout nomicgrowth,althoughtheextentof therestraint

146 101stAnnualReport|2014 haddiminished.TheCommitteeexpectedthat,with Inconsideringforwardguidanceaboutthetargetfedappropriatepolicyaccommodation,theeconomy eralfundsrate,allmembersagreedtoretainthe wouldexpandatamoderatepaceandtheunemploy- thresholds-basedlanguageemployedinrecentstatementratewouldgraduallydeclinetowardlevelscon- ments.Inaddition,theCommitteedecidedtorepeat sistentwiththedualmandate.Moreover,members thequalitativeguidance,introducedinDecember, continuedtojudgethattheriskstotheoutlookfor clarifyingthatarangeof labormarketindicators theeconomyandthelabormarkethadbecomemore wouldbeusedwhenassessingtheappropriatestance nearlybalanced.Inflationwasrunningbelowthe of policyoncetheunemploymentratethresholdhad Committee’slonger-runobjective,andthiswasseen beencrossed.Membersalsoagreedtoreiteratelanasposingpossibleriskstoeconomicperformance, guageindicatingtheCommittee’santicipation,based butmembersanticipatedthatstableinflationexpec- onitscurrentassessmentof additionalmeasuresof tationsandstrengtheningeconomicactivitywould, labormarketconditions,indicatorsof inflationpresovertime,returninflationtotheCommittee’s2per- suresandinflationexpectations,andreadingson centobjective.However,inlightof theirconcerns financialdevelopments,thatitwouldbeappropriate aboutthepersistenceof lowinflation,manymem- tomaintainthecurrenttargetrangeforthefederal berssawaneedfortheCommitteetomonitorinfla- fundsratewellpastthetimethattheunemployment tiondevelopmentscarefullyforevidencethatinfla- ratedeclinesbelow6½percent,especiallyif projected tionwasmovingbacktowarditslonger-run inflationcontinuestorunbelowtheCommittee’s objective. longer-runobjective. Intheirdiscussionof monetarypolicyintheperiod Membersalsodiscussedotherelementsof thepolicy ahead,allmembersagreedthatthecumulative statementtobeissuedfollowingthemeeting.Memimprovementinlabormarketconditionsandthelike- bersagreedonupdatingthedescriptionof thestate lihoodof continuingimprovementindicatedthatit of theeconomytoreflecttherecentstrengthof wouldbeappropriatetomakeafurthermeasured householdandbusinessspendingandtonotethat, reductioninthepaceof itsassetpurchasesatthis althoughthelabormarketshowedfurtherimprovemeeting.Membersagainjudgedthat,if theeconomy mentonbalance,therecentindicatorsweremixed. continuedtodevelopasanticipated,furtherreduc- Membersdidnotseeanappreciablechangeinthe tionswouldbeundertakeninmeasuredsteps.Mem- balanceof risksandsoleftthestatement’sdescripbersalsounderscoredthatthepaceof assetpur- tionof risksunchanged. chaseswasnotonapresetcourseandwouldremain contingentontheCommittee’soutlookforthelabor Attheconclusionof thediscussion,theCommittee marketandinflationaswellasitsassessmentof the votedtoauthorizeanddirecttheFederalReserve efficacyandcostsof purchases.Accordingly,the Bankof NewYork,untilitwasinstructedotherwise, Committeeagreedthat,beginninginFebruary,it toexecutetransactionsintheSOMAinaccordance wouldaddtoitsholdingsof agencymortgage- withthefollowingdomesticpolicydirective: backedsecuritiesatapaceof $30billionpermonth ratherthan$35billionpermonth,andwouldaddto “Consistentwithitsstatutorymandate,theFeditsholdingsof longer-termTreasurysecuritiesata eralOpenMarketCommitteeseeksmonetary paceof $35billionpermonthratherthan$40billion andfinancialconditionsthatwillfostermaxipermonth.Whilemakingafurthermeasuredreduc- mumemploymentandpricestability.Inparticutioninitspaceof purchases,theCommitteeempha- lar,theCommitteeseeksconditionsinreserve sizedthatitsholdingsof longer-termsecuritieswere marketsconsistentwithfederalfundstradingin sizableandwouldstillbeincreasing,whichwould arangefrom0to¼percent.TheCommittee promoteastrongereconomicrecoverybymaintain- directstheDesktoundertakeopenmarket ingdownwardpressureonlonger-terminterestrates, operationsasnecessarytomaintainsuchcondisupportingmortgagemarkets,andhelpingtomake tions.BeginninginFebruary,theDeskis broaderfinancialconditionsmoreaccommodative. directedtopurchaselonger-termTreasurysecu- TheCommitteealsoreiteratedthatitwouldcontinue ritiesatapaceof about$35billionpermonth itsassetpurchases,andemployitsotherpolicytools andtopurchaseagencymortgage-backedsecuriasappropriate,untiltheoutlookforthelabormarket tiesatapaceof about$30billionpermonth. hasimprovedsubstantiallyinacontextof price TheCommitteealsodirectstheDesktoengage stability. indollarrollandcouponswaptransactionsas

Minutesof FederalOpenMarketCommitteeMeetings|January 147 necessarytofacilitatesettlementof theFederal uestoseetheimprovementineconomicactivity Reserve’sagencymortgage-backedsecurities andlabormarketconditionsoverthatperiodas transactions.TheCommitteedirectstheDeskto consistentwithgrowingunderlyingstrengthin maintainitspolicyof rollingovermaturing thebroadereconomy.Inlightof thecumulative Treasurysecuritiesintonewissuesanditspolicy progresstowardmaximumemploymentandthe of reinvestingprincipalpaymentsonallagency improvementintheoutlookforlabormarket debtandagencymortgage-backedsecuritiesin conditions,theCommitteedecidedtomakea agencymortgage-backedsecurities.TheSystem furthermeasuredreductioninthepaceof its OpenMarketAccountManagerandtheSecre- assetpurchases.BeginninginFebruary,the tarywillkeeptheCommitteeinformedof ongo- Committeewilladdtoitsholdingsof agency ingdevelopmentsregardingtheSystem’sbal- mortgage-backedsecuritiesatapaceof $30bilancesheetthatcouldaffecttheattainmentover lionpermonthratherthan$35billionper timeof theCommittee’sobjectivesof maximum month,andwilladdtoitsholdingsof longeremploymentandpricestability.” termTreasurysecuritiesatapaceof $35billion permonthratherthan$40billionpermonth. Thevoteencompassedapprovalof thestatement TheCommitteeismaintainingitsexistingpolicy belowtobereleasedat2:00p.m.: of reinvestingprincipalpaymentsfromitsholdingsof agencydebtandagencymortgage- “InformationreceivedsincetheFederalOpen backedsecuritiesinagencymortgage-backed MarketCommitteemetinDecemberindicates securitiesandof rollingovermaturingTreasury thatgrowthineconomicactivitypickedupin securitiesatauction.TheCommittee’ssizable recentquarters.Labormarketindicatorswere andstill-increasingholdingsof longer-term mixedbutonbalanceshowedfurtherimprove- securitiesshouldmaintaindownwardpressure ment.Theunemploymentratedeclinedbut onlonger-terminterestrates,supportmortgage remainselevated.Householdspendingandbusi- markets,andhelptomakebroaderfinancial nessfixedinvestmentadvancedmorequicklyin conditionsmoreaccommodative,whichinturn recentmonths,whiletherecoveryinthehousing shouldpromoteastrongereconomicrecovery sectorslowedsomewhat.Fiscalpolicyis andhelptoensurethatinflation,overtime,isat restrainingeconomicgrowth,althoughthe theratemostconsistentwiththeCommittee’s extentof restraintisdiminishing.Inflationhas dualmandate. beenrunningbelowtheCommittee’slonger-run objective,butlonger-terminflationexpectations TheCommitteewillcloselymonitorincoming haveremainedstable. informationoneconomicandfinancialdevelopmentsincomingmonthsandwillcontinueits Consistentwithitsstatutorymandate,theCom- purchasesof Treasuryandagencymortgagemitteeseekstofostermaximumemployment backedsecurities,andemployitsotherpolicy andpricestability.TheCommitteeexpectsthat, toolsasappropriate,untiltheoutlookforthe withappropriatepolicyaccommodation,eco- labormarkethasimprovedsubstantiallyina nomicactivitywillexpandatamoderatepace contextof pricestability.If incominginformaandtheunemploymentratewillgradually tionbroadlysupportstheCommittee’sexpectadeclinetowardlevelstheCommitteejudgescon- tionof ongoingimprovementinlabormarket sistentwithitsdualmandate.TheCommittee conditionsandinflationmovingbacktowardits seestheriskstotheoutlookfortheeconomy longer-runobjective,theCommitteewilllikely andthelabormarketashavingbecomemore reducethepaceof assetpurchasesinfurther nearlybalanced.TheCommitteerecognizesthat measuredstepsatfuturemeetings.However, inflationpersistentlybelowits2percentobjec- assetpurchasesarenotonapresetcourse,and tivecouldposeriskstoeconomicperformance, theCommittee’sdecisionsabouttheirpacewill anditismonitoringinflationdevelopmentscare- remaincontingentontheCommittee’soutlook fullyforevidencethatinflationwillmoveback forthelabormarketandinflationaswellasits towarditsobjectiveoverthemediumterm. assessmentof thelikelyefficacyandcostsof suchpurchases. Takingintoaccounttheextentof federalfiscal retrenchmentsincetheinceptionof itscurrent Tosupportcontinuedprogresstowardmaxiassetpurchaseprogram,theCommitteecontin- mumemploymentandpricestability,theCom-

148 101stAnnualReport|2014 mitteetodayreaffirmeditsviewthatahighly Committeedecidestobegintoremovepolicy accommodativestanceof monetarypolicywill accommodation,itwilltakeabalanced remainappropriateforaconsiderabletimeafter approachconsistentwithitslonger-rungoalsof theassetpurchaseprogramendsandtheeco- maximumemploymentandinflationof 2 nomicrecoverystrengthens.TheCommitteealso percent.” reaffirmeditsexpectationthatthecurrentexceptionallylowtargetrangeforthefederalfunds Votingforthisaction:BenBernanke,WilliamC. rateof 0to¼percentwillbeappropriateatleast Dudley,RichardW.Fisher,NarayanaKocherlakota, aslongastheunemploymentrateremainsabove SandraPianalto,CharlesI.Plosser,JeromeH.Pow- 6½percent,inflationbetweenoneandtwoyears ell,JeremyC.Stein,DanielK.Tarullo,andJanetL. aheadisprojectedtobenomorethanahalf per- Yellen. centagepointabovetheCommittee’s2percent longer-rungoal,andlonger-terminflation Votingagainstthisaction:None. expectationscontinuetobewellanchored.In determininghowlongtomaintainahighly Itwasagreedthatthenextmeetingof theCommittee accommodativestanceof monetarypolicy,the wouldbeheldonTuesday–Wednesday,March18–19, Committeewillalsoconsiderotherinformation, 2014.Themeetingadjournedat10:55a.m.onJanuincludingadditionalmeasuresof labormarket ary29,2014. conditions,indicatorsof inflationpressuresand inflationexpectations,andreadingsonfinancial Notation Vote developments.TheCommitteecontinuesto anticipate,basedonitsassessmentof thesefac- BynotationvotecompletedonJanuary7,2014,the tors,thatitlikelywillbeappropriatetomaintain Committeeunanimouslyapprovedtheminutesof the thecurrenttargetrangeforthefederalfundsrate CommitteemeetingheldonDecember17–18,2013. wellpastthetimethattheunemploymentrate declinesbelow6½percent,especiallyif pro- WilliamB.English jectedinflationcontinuestorunbelowtheCom- Secretary mittee’s2percentlonger-rungoal.Whenthe

Minutesof FederalOpenMarketCommitteeMeetings|March 149 Meeting Held on March 18–19, 2014 JamesA.Clouse,ThomasA.Connors, EvanF.Koenig,ThomasLaubach, MichaelP.Leahy,LorettaJ.Mester, Ameetingof theFederalOpenMarketCommittee SamuelSchulhofer-Wohl,MarkE.Schweitzer, washeldintheofficesof theBoardof Governorsof andWilliamWascher theFederalReserveSysteminWashington,D.C.,on AssociateEconomists Tuesday,March18,2014,at2:00p.m.andcontinued onWednesday,March19,2014,at8:30a.m. SimonPotter Manager,SystemOpenMarketAccount Present LorieK.Logan JanetL.Yellen DeputyManager,SystemOpenMarketAccount Chair MichaelS.Gibson WilliamC.Dudley Director,Divisionof BankingSupervisionand ViceChairman Regulation,Boardof Governors RichardW.Fisher LouiseL.Roseman Director,Divisionof ReserveBankOperationsand NarayanaKocherlakota PaymentSystems,Boardof Governors SandraPianalto NellieLiang Director,Officeof FinancialStabilityPolicyand CharlesI.Plosser Research,Boardof Governors JeromeH.Powell StephenA.MeyerandWilliamNelson JeremyC.Stein DeputyDirectors,Divisionof MonetaryAffairs, Boardof Governors DanielK.Tarullo JonW.Faust ChristineCumming,CharlesL.Evans, SpecialAdvisertotheBoard,Officeof Board JeffreyM.Lacker,DennisP.Lockhart, Members,Boardof Governors andJohnC.Williams TrevorA.Reeve AlternateMembersof theFederalOpenMarket SpecialAdvisertotheChair, Officeof Board Committee Members,Boardof Governors JamesBullard,EstherL.George, EllenE.Meade andEricRosengren SeniorAdviser,Divisionof MonetaryAffairs, Presidentsof theFederalReserveBanksof St.Louis, Boardof Governors KansasCity,andBoston,respectively EricM.Engen,MichaelG.Palumbo, WilliamB.English andWaynePassmore SecretaryandEconomist AssociateDirectors,Divisionof Researchand MatthewM.Luecke Statistics,Boardof Governors DeputySecretary BrianJ.Gross MichelleA.Smith SpecialAssistanttotheBoard,Officeof Board AssistantSecretary Members,Boardof Governors ScottG.Alvarez EdwardNelson GeneralCounsel AssistantDirector,Divisionof MonetaryAffairs, Boardof Governors ThomasC.Baxter JeremyB.Rudd DeputyGeneralCounsel Adviser,Divisionof ResearchandStatistics, StevenB.Kamin Boardof Governors Economist StephanieAaronson DavidW.Wilcox SectionChief,Divisionof ResearchandStatistics, Economist Boardof Governors

150 101stAnnualReport|2014 LauraLipscomb quarterof lastyear.Theunemploymentratewas SectionChief,Divisionof MonetaryAffairs, 6.7percentinFebruary,thesameasinDecemberof Boardof Governors lastyear.Thelaborforceparticipationrate,along withtheemployment-to-populationratio,increased, DavidH.Small onnet,inrecentmonths.Boththeshareof workers ProjectManager,Divisionof MonetaryAffairs, employedparttimeforeconomicreasonsandthe Boardof Governors rateof long-durationunemploymentwerelowerin PeterM.Garavuso Februarythantheywerelatelastyear,althoughboth RecordsManagementAnalyst,Divisionof Monetary measureswerestillhigh.Initialclaimsforunemploy- Affairs,Boardof Governors mentinsurancewerelittlechangedovertheintermeetingperiod.Therateof jobopeningsstepped DavidAltig,Jeff Fuhrer,GlennD.Rudebusch, down,whiletherateof hiringwasunchangedin andDanielG.Sullivan DecemberandJanuary. ExecutiveVicePresidents,FederalReserveBanksof Atlanta,Boston,SanFrancisco,andChicago, Manufacturingproductionwasroughlyflat,onbalrespectively ance,inJanuaryandFebruary,inpartbecauseof the TroyDavig,ChristopherJ.Waller, effectsof theseverewinterweather,whichhelddown andJohnA.Weinberg bothmotorvehicleoutputandproductionoutside SeniorVicePresidents,FederalReserveBanksof themotorvehiclesector.Automakers’production KansasCity,St.Louis,andRichmond,respectively schedulesindicatedthatthepaceof lightmotor vehicleassemblieswouldincreaseinthesecondquar- JonathanP.McCarthy,KeithSill, ter,andbroaderindicatorsof manufacturingproducandDouglasTillett tion,suchasthereadingsonnewordersfrom VicePresidents,FederalReserveBanksof NewYork, nationalmanufacturingsurveys,wereconsistentwith Philadelphia,andChicago,respectively anexpectationof moderateexpansioninfactoryoutputinthecomingmonths. Developments in Financial Markets and the Federal Reserve’s Balance Sheet Realpersonalconsumptionexpenditures(PCE) increasedalittle,onnet,inDecemberandJanuary. Themanagerof theSystemOpenMarketAccount However,thecomponentsof thenominalretailsales (SOMA)reportedondevelopmentsindomesticand datausedbytheBureauof EconomicAnalysisto foreignfinancialmarketsaswellastheSystemopen constructitsestimateof PCEroseatafasterratein marketoperationsduringtheperiodsincetheFed- Februarythaninthepreviouscoupleof months,and eralOpenMarketCommittee(FOMC)metonJanulightmotorvehiclesalesalsomovedup.Recentinforary28–29,2014.Byunanimousvote,theCommittee mationonkeyfactorsthatinfluencehousehold ratifiedtheOpenMarketDesk’sdomestictransacspending,alongwiththeexpectationthattheweather tionsovertheintermeetingperiod.Therewereno wouldreturntoseasonalnorms,generallypointed interventionoperationsinforeigncurrenciesforthe towardadditionalgainsinPCEinthecoming System’saccountovertheintermeetingperiod. months.Households’networthprobablycontinued Staff Review of the Economic Situation toexpandasequitypricesandhomevaluesincreased further,andconsumersentimentintheThomson TheinformationreviewedfortheMarch18–19meet- Reuters/Universityof MichiganSurveysof Consumingindicatedthateconomicgrowthslowedearlythis ersduringFebruaryandearlyMarchremainedabove year,likelyonlyinpartbecauseof thetemporary itsaveragelastfall;however,realdisposableincomes effectsof theunusuallycoldandsnowywinter onlyedgedup,onbalance,inDecemberandJanuary. weather.Totalpayrollemploymentexpandedfurther, whiletheunemploymentrateheldsteady,onbalance, Thepaceof activityinthehousingsectorappeared andwasstillelevated.Consumerpriceinflationcon- tosoften.Startsforbothnewsingle-familyhomes tinuedtorunbelowtheCommittee’slonger-run andmultifamilyunitswerelowerinJanuaryandFebobjective,butmeasuresof longer-runinflationexpec- ruarythanattheendof lastyear.Permitsforsingletationsremainedstable. familyhomes—whicharetypicallylesssensitiveto fluctuationsintheweatherandabetterindicatorof TotalnonfarmpayrollemploymentroseinJanuary theunderlyingpaceof construction—alsomoved andFebruaryataslowerpacethaninthefourth downinthosemonthsandhadnotshownasus-

Minutesof FederalOpenMarketCommitteeMeetings|March 151 tainedimprovementsincelastspringwhenmortgage TotalU.S.consumerpriceinflation,asmeasuredby ratesbegantorise.Salesof existinghomesdecreased thePCEpriceindex,wasabout1¼percentoverthe inJanuaryandpendinghomesaleswerelittle 12monthsendinginJanuary,continuingtorun changed,althoughnewhomesalesexpanded. belowtheCommittee’slonger-runobjectiveof 2percent.Overthesame12-monthperiod,consumer Growthinrealprivateexpendituresforbusiness energypricesrosefasterthantotalconsumerprices equipmentandintellectualpropertyproductsstepped whileconsumerfoodpricesonlyedgedup,andcore upinthefourthquartertoafasterratethaninthe PCEprices—whichexcludefoodandenergyprices— thirdquarter.InJanuary,nominalshipmentsof non- increasedjustabitmorethan1percent.InFebruary, defensecapitalgoodsexcludingaircraftdecreased theconsumerpriceindex(CPI)roseatapacesimilar slightly.However,newordersforthesecapitalgoods tothatseeninrecentmonths,asfoodpricesrose increasedandremainedabovethelevelof shipments morequickly,energypricesdeclined,andtheincrease inJanuary,pointingtoincreasesinshipmentsinsub- inthecoreCPIremainedslow.Bothnear-and sequentmonths.Otherforward-lookingindicators, longer-terminflationexpectationsfromtheMichigan suchassurveysof businessconditions,alsoweregen- surveywerelittlechangedinFebruaryandearly erallyconsistentwithmodestincreasesinbusiness March. equipmentspendinginthenearterm.Realbusiness spendingfornonresidentialstructureswasessentially Measuresof laborcompensationindicatedthat unchangedinthefourthquarter,andnominalexpen- increasesinnominalwagesremainedsubdued.ComdituresforsuchstructureswereflatinJanuary.Real pensationperhourinthenonfarmbusinesssector nonfarminventoryinvestmentincreasedatasignifi- increasedslightlyovertheyearendinginthefourth cantlyslowerpaceinthefourthquarterthaninthe quarter,and,withsomegainsinlaborproductivprecedingquarter,andrecentdataonthebookvalue ity,unitlaborcostsdeclinedalittle.Overthesame of inventories,alongwithreadingsoninventories year-longperiod,theemploymentcostindexand fromnationalandregionalmanufacturingsurveys, averagehourlyearningsforallemployeesroseonlya didnotpointtosignificantinventoryimbalancesin littlefasterthanconsumerpriceinflation. mostindustries;however,days’supplyof lightmotor vehiclesinJanuaryandFebruaryexceededtheauto- Foreignrealgrossdomesticproduct(GDP)expanded makers’targets. atamoderatepaceinthefourthquarterof 2013, withweakeconomicgrowthinJapanandMexico FederalspendingdatainJanuaryandFebruary offsettingstrongergainsinmanyothereconomies. pointedtowardrealfederalgovernmentpurchases Recentindicatorssuggestedthattotalforeignreal beingroughlyflatinthefirstquarter,asthegeneral GDPwasexpandingatasimilarpaceinthefirst downtrendinpurchasesseemedlikelytobeabout quarterof 2014.Theeconomicrecoveryintheeuro offsetbyareversalof theeffectsof thepartialgov- areaappearedtobecontinuing,andthepaceof ernmentshutdownduringthefourthquarter.Total Japaneseeconomicgrowthlookedtohavepickedup. realstateandlocalgovernmentpurchasesalso InCanada,however,severewinterweatherappeared appearedtobeaboutflatgoingintothefirstquarter. tohavehelddowneconomicactivityinearly2014. Thepayrollsof thesegovernmentsexpandedsome- Amongtheemergingmarketeconomies(EMEs), what,onbalance,inJanuaryandFebruary,but recentdatasuggestedthateconomicgrowthinChina nominalstateandlocalconstructionexpenditures wasslowinginthefirstquarter,andthattherateof declinedalittleinJanuary. growthintheotherAsianeconomieswasalsodecliningfromaveryrobustfourth-quarterpace.Mexican TheU.S.internationaltradedeficit,afterwideningin realGDPgrowthslowedsharplyinthefourthquar- December,remainedaboutunchangedinJanuary. ter,ledbyacontractioninthemanufacturingsector, ExportsincreasedinJanuary,butthegainswere butrecentindicators,suchasautoproduction,sugmodestasdecreasesinsalesof cars,petroleumprod- gestedsomereboundinthepaceof economicactivity ucts,andagriculturalgoodswerejustoffsetbygains inthecurrentquarter.Inflationincreasedslightlyin inothermajorcategories.ImportsalsoroseinJanu- someadvancedeconomiesbutremainedwellbelow aryastheincreaseinthevolumeof oilimportsmore centralbanks’targets.Atthesametime,inflation thanoffsetdeclinesinimportsof non-oilgoodsand declinedinsomeemergingAsianeconomies.Monservices. etarypolicyremainedhighlyaccommodativeinthe

152 101stAnnualReport|2014 advancedforeigneconomies.AcrosstheEMEs,mon- compensationbasedonTreasuryinflation-protected etarypolicyadjustmentsvariedaccordingtoeco- securitiesalsodeclinedsomewhat. nomicandfinancialdevelopments,withsomecentral bankstighteningpolicyandotherslooseningit. TheFederalReservecontinueditsfixed-rateovernightreverserepurchaseagreement(ONRRP)exercise.Earlyintheintermeetingperiod,marketrateson Staff Review of the Financial Situation repurchaseagreementswereclosetothefixedrate offeredintheexercise,promptinghightake-upinthe FinancialmarketconditionsintheUnitedStatesover ONRRPoperations.Theincreasesintheinterest theintermeetingperiodappearedtohavebeeninflurateofferedbytheFederalReserveinitsONRRP encedbyaneasingof concernsaboutdevelopments exercise,alongwiththeincreasesincapsforindiintheEMEsbutrelativelylittleaffectedbythegenervidualbids,alsomayhavecontributedtohigherlevallyweaker-than-expectedeconomicdata,which elsof activityatdailyoperations.Laterintheperiod, marketparticipantsappearedtoattributeinlarge marketratesonrepurchaseagreementsmovedhigher, parttothetemporaryeffectsof unusuallyseverewinapparentlyinresponsetoariseinTreasurybillissuterweather.Onbalance,U.S.financialconditions ance,andONRRPvolumesmoderated.Reflecting remainedsupportiveof growthineconomicactivity thelargersizeof theONRRPexercisesandthe andemployment:Theexpectedpathof thefederal reducedpaceof assetpurchases,therateof increase fundsratewaslittlechanged,longer-termyieldson inthemonetarybaseslowedoverJanuaryand Treasurysecuritiesedgeddown,equitypricesrose, February. speculative-gradecorporatebondspreadsnarrowed, andtheforeignexchangevalueof thedollardepreci- Conditionsinunsecuredshort-termdollarfunding atedslightly. marketsremainedstableovertheintermeeting period.ResponsestotheMarch2014SeniorCredit FOMCcommunicationsovertheintermeeting OfficerOpinionSurveyonDealerFinancingTerms periodwereaboutinlinewithmarketexpectations. suggestedlittlechangeoverthepastthreemonthsin TheFOMCdecisionandstatementinJanuarywere conditionsinsecuritiesfinancingandover-thelargelyanticipatedbymarketparticipants.TheMon- counterderivativesmarketsandincredittermsapplietaryPolicyReportandChairYellen’saccompanying cabletomostclassesof counterparties. congressionaltestimonyinFebruarywereviewedas emphasizingcontinuityintheapproachtomonetary Broadstockpriceindexesroseovertheintermeeting policy,solidifyingexpectationsthatthepaceof the period,apparentlyboostedbyasolidfinishtothe Committee’sassetpurchaseswouldbereducedbya corporateearningsseason.Equitypriceswerealso further$10billionateachupcomingmeetingabsent supportedbyabroadincreaseininvestors’willingamaterialchangeintheeconomicoutlook. nesstotakeriskierpositions,inpartlikelyreflecting aneasingof concernsaboutEMEsearlyinthe ResultsfromtheDesk’sSurveyof PrimaryDealers period. forMarchindicatedthatthedealers’expectations aboutboththelikelyfuturepathof thefederalfunds Creditflowstononfinancialcorporationsremained rateandFederalReserveassetpurchaseswerelargely robust.FollowingaslowdowninJanuary,nonfinanunchangedsinceJanuary.Thesurveyresultsshowed cialcorporatebondissuancereboundedinFebruary, thatmostdealersexpectedtheCommitteetomodify withthemajorityof proceedsgoingtoinvestmentitsforwardrateguidanceattheMarchmeeting,with gradefirms.Thegrowthof commercialandindusmanyanticipatingashifttowardqualitative trialloansonbanks’balancesheetsincreasedover guidance. theperiod.Institutionalissuanceof leveragedloans continuedatabriskpace. Yieldsonshort-andintermediate-termTreasury securitieswerelittlechanged,onbalance,overthe Financingconditionsinthecommercialrealestate intermeetingperiod,astheeffectsof awaningof (CRE)sectorcontinuedtoimprovegradually.Inthe flight-to-qualitydemandsearlyintheperiodroughly fourthquarter,banks’CREloansincreasedacrossall offsetthoseof generallyweaker-than-expectedeco- majorloancategories,andCREloansonbanks’ nomicdata.Yieldsonlonger-termTreasurysecurities booksadvancedatasolidpaceinthefirsttwo edgeddown.Measuresof longer-horizoninflation monthsof theyear.Issuanceof commercial

Minutesof FederalOpenMarketCommitteeMeetings|March 153 mortgage-backedsecuritieswasrobustinFebruary Staff Economic Outlook afteraslowstartinJanuary. Intheeconomicforecastpreparedbythestaff forthe Conditionsinthemunicipalbondmarketremained MarchFOMCmeeting,realGDPgrowthinthefirst favorableovertheintermeetingperiodwiththe half of thisyearwassomewhatlowerthanintheprospreadof municipalyieldsoveryieldson jectionfortheJanuarymeeting.Theavailablereadcomparable-maturityTreasurysecuritieslittle ingsonconsumerspending,residentialconstruction, changed.AlthoughPuertoRico’sgeneralobligation andbusinessinvestmentpointedtolessspending (GO)bondsweredowngradedfrominvestmentgrade growthinthefirstquarterthanthestaff hadprevitospeculativegrade,pricesof thesebondsheld ouslyexpected.Thestaff’sassessmentwasthatthe steady,albeitatdepressedlevels.PuertoRicosuccess- unusuallyseverewinterweathercouldaccountfor fullybroughttomarketaGObondissueinearly some,butnotall,of therecentunanticipatedweak- March,substantiallyeasingitsnear-termliquidity nessineconomicactivity,andthestaff loweredits pressures. projectionfornear-termoutputgrowth.Largely becauseof thecombinationof recentdownwardsur- HousepricesregisteredafurthernotableriseinJanu- prisesintheunemploymentrateandweaker-thanary.Mortgageinterestratesandtheirspreadsover expectedrealGDPgrowth,thestaff loweredslightly Treasuryyieldswerelittlechangedovertheinter- theassumedpaceof potentialoutputgrowthin meetingperiod.Bothmortgageapplicationsfor recentyearsandovertheprojectionperiod.Asa homepurchasesandrefinancingapplications result,thestaff’smedium-termforecastforrealGDP remainedatlowlevelsthroughearlyMarch.Financ- growthalsowasreviseddownslightly.Nevertheless, ingconditionsinresidentialmortgagemarketsstayed thestaff continuedtoprojectthatrealGDPwould tight,evenasfurtherincrementalsignsof easing expandatafasterpaceoverthenextfewyearsthanit emerged. didlastyear,andthatrealGDPgrowthwouldexceed thegrowthrateof potentialoutput.Thefasterpace Conditionsinconsumercreditmarketswerestill of realGDPgrowthwasexpectedtobesupportedby mixed.Autoloanscontinuedtobebroadlyavailable, aneasingintherestraintfromchangesinfiscal whilecreditcardlimitsforborrowerswithsubprime policy,increasesinconsumerandbusinessconfiandprimecreditscoresremainedatlowlevelsinthe dence,furtherimprovementsincreditavailabilityand fourthquarter.Partlyreflectingtheseconditions, financialconditions,andapickupintherateof forcreditcardbalancesstayedaboutflatthroughJanu- eigneconomicgrowth.Theexpansionineconomic ary,whileautoandstudentloanscontinuedto activitywasanticipatedtoleadtoaslowreductionin expandbriskly.Issuanceof autoandcreditcard resourceslackovertheprojectionperiod,andthe asset-backedsecuritieswasrobustagaininJanuary unemploymentratewasexpectedtodeclinegradually andFebruary. tothestaff’sestimateof itslonger-runnaturalrate. Financialmarketsentimentabroadappearedto Thestaff’sforecastforinflationwasbasically improveovertheperiod,particularlywithrespectto unchangedfromtheprojectionpreparedfortheprethestressesthathaddevelopedinsomeEMEsjust viousFOMCmeeting.Thestaff continuedtoforepriortotheJanuaryFOMCmeeting.Although castthatinflationwouldstaybelowtheCommittee’s globalequitypriceindexesfellabruptlyonMarch3 longer-runobjectiveof 2percentoverthenextfew amidthedeepeningof thepoliticalcrisisinUkraine, years.Inflationwasprojectedtorisegradually mostmarketsquicklyretracedthoselosses.Consis- towardtheCommittee’sobjective,aslonger-run tentwiththegeneralimprovementinfinancialmar- inflationexpectationswereassumedtoremainstable, ketsentiment,mostforeigncurrenciesappreciated changesincommodityandimportpriceswere againstthedollarasflight-to-safetyflowsreversed. expectedtobesubdued,andslackinlaborandprod- OnenotableexceptionwastheChineserenminbi, uctmarketswasanticipatedtodiminishslowly. whichdepreciatedagainstthedollar.Theperformanceof foreignequitypriceindexeswasmixed,on Thestaff’seconomicprojectionsfortheMarchmeetnet:StockpricesroseintheEMEs,buttheywereflat ingwerequitesimilartoitsforecastspresentedatthe inEuropeanddeclinedsubstantiallyinJapan. DecembermeetingwhentheFOMClastprepareda Longer-termsovereignbondyieldsintheadvanced Summaryof EconomicProjections(SEP).The economiesfellmodestlyovertheperiod. staff’sMarchprojectionsforbothrealGDPgrowth

154 101stAnnualReport|2014 andtheunemploymentrateoverthenextfewyears Mostparticipantsnotedthatunusuallyseverewinter werejustslightlylowerthaninitsDecemberfore- weatherhadhelddowneconomicactivityduringthe casts,whiletheinflationprojectionwasessentially earlymonthsof theyear.Businesscontactsinvariunchanged. ouspartsof thecountryreportedanumberof weather-induceddisruptions,includingreduced Thestaff viewedtheextentof uncertaintyaroundits manufacturingactivityduetolostworkdays,inter- MarchprojectionsforrealGDPgrowthandthe ruptionstosupplychainsof inputsanddeliveryof unemploymentrateasroughlyinlinewiththeaver- finalproducts,andlower-than-expectedretailsales. ageof thepast20years.Nonetheless,theriskstothe Participantsexpectedeconomicactivitytopickupas forecastforrealGDPgrowthwereviewedastilteda theweather-relateddisruptionstospendingandprolittletothedownside,especiallybecausetheeconomy ductiondissipated.Afewparticipants,however, wasnotwellpositionedtowithstandadverseshocks highlightedfactorsotherthanweatherthathadlikely whilethetargetforthefederalfundsratewasatits contributedtotheslowdownduringthefirstquarter, effectivelowerbound.Atthesametime,thestaff includingslowergrowthinnetexportsfollowingits viewedtherisksarounditsoutlookfortheunem- unusuallylargepositivecontributiontogrowthinthe ploymentrateandforinflationasroughlybalanced. fourthquarterof 2013.Moreover,itwasnotedthat someof thepickupineconomicgrowththathad Participants’ Views on Current Conditions appearedtohavebeenindicatedbythedataavailable and the Economic Outlook attheJanuarymeetinghadbeenreversedbysubsequentdatarevisions.Formanyparticipants,theout- InconjunctionwiththisFOMCmeeting,themeeting lookforeconomicactivityovercomingquartershad participants—the4membersof theBoardof Gover- changedlittle,onbalance,sincethetimeof the norsandthepresidentsof the12FederalReserve Decembermeeting. Banks,allof whomparticipatedinthedeliberations—submittedtheirassessmentsof realoutput Housingactivityremainedslowovertheintermeeting growth,theunemploymentrate,inflation,andthe period.Althoughunfavorableweatherhadcontribtargetfederalfundsrateforeachyearfrom2014 utedtotherecentdisappointingperformanceof through2016andoverthelongerrun,undereach housing,afewparticipantssuggestedthatlastyear’s participant’sjudgmentof appropriatemonetary riseinmortgageinterestratesmighthaveproduceda policy.Thelonger-runprojectionsrepresenteach larger-than-expectedreductioninhomesales.In participant’sassessmentof theratetowhicheach addition,itwasnotedthatthereturnof houseprices variablewouldbeexpectedtoconverge,overtime, tomore-normallevelscouldbedampingthepaceof underappropriatemonetarypolicyandinthe thehousingrecovery,andthathomeaffordabilityhas absenceof furthershockstotheeconomy.Theseeco- beenreducedforsomeprospectivebuyers.Slackening nomicprojectionsandpolicyassessmentsare demandfrominstitutionalinvestorswascitedas describedintheSEP,whichisattachedasanadden- anotherfactorbehindthedeclineinhomesales. dumtotheseminutes. Nonetheless,theunderlyingfundamentals,including populationgrowthandhouseholdformation,were Intheirdiscussionof theeconomicsituationandthe viewedaspointingtoacontinuingrecoveryof the outlook,participantsgenerallynotedthatdata housingmarket. releasedsincetheirJanuarymeetinghadindicated somewhatslower-than-expectedgrowthineconomic Intheirdiscussionof labormarketdevelopments, activityduringthewintermonths,inpartreflecting participantsnotedfurtherimprovement,onbalance, adverseweatherconditions.Labormarketindicators inlabormarketconditions.Theunemploymentrate weremixed.Inflationhadcontinuedtorunbelowthe hadmoveddowninrecentmonths,ashadbroader Committee’slonger-runobjective,butlonger-term measuresof unemploymentandunderemployment. inflationexpectationshadremainedstable.Several Otherlabormarketindicators,suchaspayrollsand participantsindicatedthatrecenteconomicnews, hiringandquitrates,whilenotallshowingthesame althoughleadingthemtomarkdownsomewhattheir extentof improvement,alsopointedtoongoing estimatesof economicgrowthinlate2013aswellas gainsinlabormarkets.Goingforward,participants theirassessmentsof likelygrowthinthefirstquarter continuedtoexpectagradualdeclineintheunemof 2014,hadnotpromptedasignificantrevisionof ploymentrateoverthemediumterm,withjudgments theirprojectionsof moderateeconomicgrowthover differingsomewhatacrossparticipantsaboutthe comingquarters. likelypaceof thedecline.Itwasalsonotedthat

Minutesof FederalOpenMarketCommitteeMeetings|March 155 uncertaintyaboutthetrendrateof productivity expectationsandthecontinuedgradualrecoveryin growthwasmakingitdifficulttoascertaintherateof economicactivity. realGDPgrowththatwouldbeassociatedwithprogressinreducingtheunemploymentrate. Severalparticipantspointedtointernationaldevelopmentsthatbearwatching.Itwassuggestedthat Whiletherewasgeneralagreementthatslackremains slowergrowthinChinahadlikelyalreadyputsome inthelabormarket,participantsexpressedarangeof downwardpressureonworldcommodityprices,and viewsregardingtheamountof slackandhowwell acoupleof participantsobservedthatalarger-thantheunemploymentrateperformsasasummaryindi- expectedslowdownineconomicgrowthinChina catorof labormarketconditions.Severalparticipants couldhaveadverseimplicationsforglobaleconomic pointedtoanumberof factors—includingthelow growth.Inaddition,itwasnotedthateventsin laborforceparticipationrateandthestill-highrates Ukrainewerelikelytohavelittledirecteffectonthe of longer-durationunemploymentandof workers U.S.economicoutlookbutmighthavenegative employedparttimeforeconomicreasons—assug- implicationsforglobalgrowthif theyescalatedand gestingthattheremightbeconsiderablymorelabor ledtoaprotractedperiodof geopoliticaltensionsin marketslackthanindicatedbytheunemployment thatregion. ratealone.Acoupleof otherparticipants,however, sawreasonstobelievethatslackwasmorelimited, Intheirdiscussionof recentfinancialdevelopments, viewingthedeclineintheparticipationrateaspri- participantssawfinancialconditionsasgenerally marilyreflectingdemographictrendswithlittlerole consistentwiththeCommittee’spolicyintentions. forcyclicalfactorsandobservingthatbroadermeas- However,severalparticipantsmentionedtrendsthat, uresof unemploymenthadregistereddeclinesinthe if continued,couldbecomeaconcernfromtheperpastyearthatwerecomparablewiththedeclinein spectiveof financialstability.Acoupleof particithestandardmeasure.Severalparticipantscitedlow pantspointedtothedeclineincreditspreadstorelanominalwagegrowthaspointingtotheexistenceof tivelylowlevelsbyhistoricalstandards;oneof these continuedlabormarketslack.Participantsalsonoted participantsnotedtheriskof eitherasharprisein thedebateintheresearchliteratureandelsewhere spreads,whichcouldhavenegativerepercussionsfor concerningwhetherlong-termunemploymentdiffers aggregatedemand,oracontinuationof thedeclinein materiallyfromshort-termunemploymentinits spreads,whichcouldunderminefinancialstability implicationsforwageandpricepressures. overtime.Oneparticipantvoicedconcernabouthigh levelsof margindebtandof equitymarketvaluations InflationcontinuedtorunbelowtheCommittee’s aswellasanotableshiftintocommodityinvest- 2percentlonger-runobjectiveovertheintermeeting ments.Anotherparticipantstressedthegrowthin period.Acoupleof participantsexpressedconcern consumercredittolesscredit-worthyhouseholds. thatinflationmightnotreturnto2percentinthe nextfewyearsandsuggestedthataprotractedperiod Intheirdiscussionof monetarypolicygoingforof inflationbelow2percentraisedquestionsabout ward,participantsfocusedprimarilyonpossible whethertheCommitteewasprovidinganappropriate changestotheCommittee’sforwardguidanceforthe degreeof monetaryaccommodation.Oneof these federalfundsrate.Almostallparticipantsagreedthat participantssuggestedthatpersistentlylowinflation itwasappropriateatthismeetingtoupdatetheforwasaclearreflectionof asizableshortfallof wardguidance,inpartbecausetheunemployment employmentfromitsmaximumlevel.Anumberof ratewasseenaslikelytofallbelowits6½percent participantsnotedthatapickupinnominalwage thresholdvaluebeforelong.Mostparticipantspregrowthwouldbeconsistentwithlabormarketcondi- ferredreplacingthenumericalthresholdswitha tionsmovingclosertonormalandwouldsupportthe qualitativedescriptionof thefactorsthatwould returnof consumerpriceinflationtotheCommit- influencetheCommittee’sdecisiontobeginraising tee’s2percentlonger-rungoal.However,acoupleof thefederalfundsrate.Oneparticipant,however, otherparticipantssuggestedthatfactorsotherthan favoredretainingtheexistingthresholdlanguageon economicslackhadplayedanotableroleinholding thegroundsthatremovingitbeforetheunemploydowninflationof late,includingunusuallyslow mentratereached6½percentcouldbemisintergrowthinpricesof medicalservices.Mostpartici- pretedasasignalthatthepathof policygoingforpantsexpectedinflationtoreturnto2percentover wardwouldbelessaccommodative.Anotherparticithenextfewyears,supportedbystableinflation pantfavoredintroducingnewquantitativethresholds

156 101stAnnualReport|2014 of 5½percentfortheunemploymentrateand tions.Inaddition,anumberof participantsobserved 2¼percentforprojectedinflation.Afewparticipants thatanupwardshiftwasarguablywarrantedbythe proposedaddingnewlanguageinwhichtheCommit- improvementinparticipants’outlooksforthelabor teewouldindicateitswillingnesstokeeprateslowif marketsinceDecemberandthereforeneednotbe projectedinflationremainedpersistentlybelowthe viewedassignifyingalessaccommodativereaction Committee’s2percentlonger-runobjective;these function.Mostparticipantsfavoredprovidingan participantssuggestedthattheinclusionof this explicitindicationinthestatementthatthenewforquantitativeelementintheforwardguidancewould wardguidance,takenasawhole,didnotimplya demonstratetheCommittee’scommitmenttodefend changeintheCommittee’spolicyintentions,onthe itsinflationobjectivefrombelowaswellasfrom groundsthatsuchanindicationcouldhelpforestall above.Otherparticipants,however,judgedthatitwas misinterpretationof thenewforwardguidance. alreadywellunderstoodthattheCommitteerecognizesthatinflationpersistentlybelowits2percent Committee Policy Action objectivecouldposeriskstoeconomicperformance. Mostparticipantsthereforedidnotfavoraddingnew Committeememberssawtheinformationreceived quantitativelanguage,preferringtoshifttoqualita- overtheintermeetingperiodasindicatingthat tivelanguagethatwoulddescribetheCommittee’s growthineconomicactivityslowedduringthewinter likelyreactiontothestateof theeconomy. months,inpartreflectingadverseweatherconditions. Labormarketindicatorsweremixedbutonbalance Mostparticipantsalsobelievedthat,aspartof the showedfurtherimprovement.Theunemployment processof clarifyingtheCommittee’sfuturepolicy rate,however,remainedelevatedwhenjudgedagainst intentions,itwouldbeappropriateatthistimeforthe members’estimatesof thelonger-runnormalrateof Committeetoprovideadditionalguidanceinitspost- unemployment.Householdspendingandbusiness meetingstatementregardingthelikelybehaviorof fixedinvestmentcontinuedtoadvance,whilethe thefederalfundsrateafteritsfirstincrease.For recoveryinthehousingsectorremainedslow.Fiscal example,thestatementcouldindicatethattheCom- policywasrestrainingeconomicgrowth,althoughthe mitteecurrentlyanticipatesthat,evenafteremploy- extentof restrainthaddiminished.TheCommittee mentandinflationarenearmandate-consistentlev- expectedthat,withappropriatepolicyaccommodaels,economicconditionsmay,forsometime,warrant tion,theeconomywouldexpandatamoderatepace keepingthetargetfederalfundsratebelowlevelsthe andlabormarketconditionswouldcontinueto Committeeviewsasnormalinthelongerrun.Par- improvegradually,movingtowardthosetheComticipantsobservedthatanumberof factorswere mitteejudgesconsistentwiththedualmandate. likelytohavecontributedtoapersistentdeclinein Moreover,membersjudgedthattheriskstotheoutthelevelof interestratesconsistentwithattaining lookfortheeconomyandthelabormarketwere andmaintainingtheCommittee’sobjectives.Inpar- nearlybalanced.Inflationwasrunningbelowthe ticular,participantscitedhigherprecautionarysav- Committee’slonger-runobjective,andthiswasseen ingsbyU.S.householdsfollowingthefinancialcrisis, asposingpossibleriskstoeconomicperformance, highergloballevelsof savings,demographicchanges, butmembersanticipatedthatstableinflationexpecslowergrowthinpotentialoutput,andcontinued tationsandstrengtheningeconomicactivitywould, restraintontheavailabilityof credit.Afewpartici- overtime,returninflationtotheCommittee’s2perpantssuggestedthatnewlanguagealongtheselines centobjective.However,inlightof theirconcerns couldinsteadbeintroducedwhenthefirstincreasein aboutthepossiblepersistenceof lowinflation,memthefederalfundsratehaddrawncloserorafterthe bersagreedthatinflationdevelopmentsshouldbe Committeehadfurtherdiscussedthereasonsfor monitoredcarefullyforevidencethatinflationwas anticipatingarelativelylowfederalfundsrateduring movingbacktowardtheCommittee’slonger-run theperiodof policyfirming.Anumberof partici- objective. pantsnotedtheoverallupwardshiftsinceDecember inparticipants’projectionsof thefederalfundsrate Intheirdiscussionof monetarypolicyintheperiod includedintheMarchSEP,withsomeexpressing ahead,membersagreedthattherewassufficient concernthatthiscomponentof theSEPcouldbe underlyingstrengthinthebroadereconomytosupmisconstruedasindicatingamovebytheCommittee portongoingimprovementinlabormarketconditoalessaccommodativereactionfunction.However, tions.Inlightof thecumulativeprogresstoward severalparticipantsnotedthattheincreaseinthe maximumemploymentandtheimprovementinthe medianprojectionoverstatedtheshiftintheprojec- outlookforlabormarketconditionssincetheincep-

Minutesof FederalOpenMarketCommitteeMeetings|March 157 tionof thecurrentassetpurchaseprogram,members projectedinflationremainedpersistentlybelowthe decidedthatitwouldbeappropriatetomakeafur- Committee’s2percentlonger-runobjective.Oneof thermeasuredreductioninthepaceof itsassetpur- thesemembersarguedthattheCommitteeshould chasesatthismeeting.Membersagainjudgedthat,if continuetoprovidequantitativethresholdsforboth theeconomycontinuedtodevelopasanticipated,the theunemploymentrateandinflation. Committeewouldlikelyreducethepaceof assetpurchasesinfurthermeasuredstepsatfuturemeetings. Membersalsoconsideredstatementlanguagethat Membersalsounderscoredthatthepaceof asset wouldprovideinformationabouttheanticipated purchaseswasnotonapresetcourseandwould behaviorof thefederalfundsrateonceitisraised remaincontingentontheCommittee’soutlookfor aboveitseffectivelowerbound.TheCommittee thelabormarketandinflationaswellasitsassess- decidedthatitwasappropriatetoaddlanguageindimentof thelikelyefficacyandcostsof purchases. catingthattheCommitteecurrentlyanticipatesthat, Accordingly,theCommitteeagreedthat,beginning evenafteremploymentandinflationarenear inApril,itwouldaddtoitsholdingsof agency mandate-consistentlevels,economicconditionsmay, mortgage-backedsecuritiesatapaceof $25billion forsometime,warrantkeepingthetargetfederal permonthratherthan$30billionpermonth,and fundsratebelowlevelstheCommitteeviewsasnorwouldaddtoitsholdingsof longer-termTreasury malinthelongerrun.Indiscussingthisaddition,a securitiesatapaceof $30billionpermonthrather coupleof memberssuggestedthatlanguagealong than$35billionpermonth.Whilemakingafurther theselinesmightbetterbeintroducedatalatermeetmeasuredreductioninitspaceof purchases,the ing.However,anothermemberindicatedthatadding Committeeemphasizedthatitsholdingsof longer- thenewlanguageatthisstagecouldbebeneficialfor termsecuritiesweresizableandwouldstillbe theeffectivenessof policybecausefinancialcondiincreasing,whichwouldpromoteastrongereco- tionsdependonboththelengthof timethatthefednomicrecoverybymaintainingdownwardpressure eralfundsrateisattheeffectivelowerboundandon onlonger-terminterestrates,supportingmortgage theexpectedpaththatthefederalfundsratewillfolmarkets,andhelpingtomakebroaderfinancialcon- lowoncepolicyfirmingbegins.Itwasalsonotedthat ditionsmoreaccommodative.TheCommitteealso thepostmeetingstatements,ratherthantheSEP,proreiteratedthatitwouldcontinueitsassetpurchases, videthepublicwithinformationontheCommittee’s andemployitsotherpolicytoolsasappropriate,until monetarypolicydecisionsandthatitwastherefore theoutlookforthelabormarkethasimprovedsub- appropriateforthepostmeetingstatementtoconvey stantiallyinacontextof pricestability.Onemember, theCommittee’spositiononthelikelyfuturebehavwhileconcurringwiththispolicyaction,suggested iorof thefederalfundsrate. thatinfuturestatementstheCommitteemightprovidefurtherinformationaboutthetrajectoryof the Attheconclusionof thediscussion,theCommittee FederalReserve’sbalancesheet,includinginforma- votedtoauthorizeanddirecttheFederalReserve tionaboutwhentheCommitteemightdiscontinueits Bankof NewYork,untilitwasinstructedotherwise, policyof reinvestingprincipalpaymentsonall toexecutetransactionsintheSOMAinaccordance agencydebtandagencymortgage-backedsecurities withthefollowingdomesticpolicydirective: inagencymortgage-backedsecurities. “Consistentwithitsstatutorymandate,theFed- Withrespecttoforwardguidanceaboutthefederal eralOpenMarketCommitteeseeksmonetary fundsrate,allmembersjudgedthat,astheunemploy- andfinancialconditionsthatwillfostermaximentratewaslikelytofallbelow6½percentbefore mumemploymentandpricestability.Inparticulong,itwasappropriatetoreplacetheexistingquan- lar,theCommitteeseeksconditionsinreserve titativethresholdsatthismeeting.Almostallmem- marketsconsistentwithfederalfundstradingin bersjudgedthatthenewlanguageshouldbequalita- arangefrom0to¼percent.TheCommittee tiveinnatureandshouldindicatethat,indetermin- directstheDesktoundertakeopenmarket inghowlongtomaintainthecurrent0to¼percent operationsasnecessarytomaintainsuchconditargetrangeforthefederalfundsrate,theCommittee tions.BeginninginApril,theDeskisdirectedto wouldassessprogress,bothrealizedandexpected, purchaselonger-termTreasurysecuritiesata towarditsobjectivesof maximumemploymentand paceof about$30billionpermonthandtopur- 2percentinflation.However,acoupleof members chaseagencymortgage-backedsecuritiesata preferredtoincludelanguageinthestatementindi- paceof about$25billionpermonth.TheComcatingthattheCommitteewouldkeeprateslowif mitteealsodirectstheDesktoengageindollar

158 101stAnnualReport|2014 rollandcouponswaptransactionsasnecessary TheCommitteecurrentlyjudgesthatthereis tofacilitatesettlementof theFederalReserve’s sufficientunderlyingstrengthinthebroader agencymortgage-backedsecuritiestransactions. economytosupportongoingimprovementin TheCommitteedirectstheDesktomaintainits labormarketconditions.Inlightof thecumulapolicyof rollingovermaturingTreasurysecuri- tiveprogresstowardmaximumemploymentand tiesintonewissuesanditspolicyof reinvesting theimprovementintheoutlookforlabormarket principalpaymentsonallagencydebtand conditionssincetheinceptionof thecurrent agencymortgage-backedsecuritiesinagency assetpurchaseprogram,theCommitteedecided mortgage-backedsecurities.TheSystemOpen tomakeafurthermeasuredreductioninthe MarketAccountManagerandtheSecretarywill paceof itsassetpurchases.BeginninginApril, keeptheCommitteeinformedof ongoingdevel- theCommitteewilladdtoitsholdingsof agency opmentsregardingtheSystem’sbalancesheet mortgage-backedsecuritiesatapaceof $25bilthatcouldaffecttheattainmentovertimeof the lionpermonthratherthan$30billionper Committee’sobjectivesof maximumemploy- month,andwilladdtoitsholdingsof longermentandpricestability.” termTreasurysecuritiesatapaceof $30billion permonthratherthan$35billionpermonth. Thevoteencompassedapprovalof thestatement TheCommitteeismaintainingitsexistingpolicy belowtobereleasedat2:00p.m.: of reinvestingprincipalpaymentsfromitsholdingsof agencydebtandagencymortgage- “InformationreceivedsincetheFederalOpen backedsecuritiesinagencymortgage-backed MarketCommitteemetinJanuaryindicatesthat securitiesandof rollingovermaturingTreasury growthineconomicactivityslowedduringthe securitiesatauction.TheCommittee’ssizable wintermonths,inpartreflectingadverse andstill-increasingholdingsof longer-term weatherconditions.Labormarketindicators securitiesshouldmaintaindownwardpressure weremixedbutonbalanceshowedfurther onlonger-terminterestrates,supportmortgage improvement.Theunemploymentrate,however, markets,andhelptomakebroaderfinancial remainselevated.Householdspendingandbusi- conditionsmoreaccommodative,whichinturn nessfixedinvestmentcontinuedtoadvance, shouldpromoteastrongereconomicrecovery whiletherecoveryinthehousingsector andhelptoensurethatinflation,overtime,isat remainedslow.Fiscalpolicyisrestrainingeco- theratemostconsistentwiththeCommittee’s nomicgrowth,althoughtheextentof restraintis dualmandate. diminishing.Inflationhasbeenrunningbelow theCommittee’slonger-runobjective,but TheCommitteewillcloselymonitorincoming longer-terminflationexpectationshave informationoneconomicandfinancialdevelopremainedstable. mentsincomingmonthsandwillcontinueits purchasesof Treasuryandagencymortgage- Consistentwithitsstatutorymandate,theCom- backedsecurities,andemployitsotherpolicy mitteeseekstofostermaximumemployment toolsasappropriate,untiltheoutlookforthe andpricestability.TheCommitteeexpectsthat, labormarkethasimprovedsubstantiallyina withappropriatepolicyaccommodation,eco- contextof pricestability.If incominginformanomicactivitywillexpandatamoderatepace tionbroadlysupportstheCommittee’sexpectaandlabormarketconditionswillcontinueto tionof ongoingimprovementinlabormarket improvegradually,movingtowardthosethe conditionsandinflationmovingbacktowardits Committeejudgesconsistentwithitsdualman- longer-runobjective,theCommitteewilllikely date.TheCommitteeseestheriskstotheout- reducethepaceof assetpurchasesinfurther lookfortheeconomyandthelabormarketas measuredstepsatfuturemeetings.However, nearlybalanced.TheCommitteerecognizesthat assetpurchasesarenotonapresetcourse,and inflationpersistentlybelowits2percentobjec- theCommittee’sdecisionsabouttheirpacewill tivecouldposeriskstoeconomicperformance, remaincontingentontheCommittee’soutlook anditismonitoringinflationdevelopmentscare- forthelabormarketandinflationaswellasits fullyforevidencethatinflationwillmoveback assessmentof thelikelyefficacyandcostsof towarditsobjectiveoverthemediumterm. suchpurchases.

Minutesof FederalOpenMarketCommitteeMeetings|March 159 Tosupportcontinuedprogresstowardmaxi- increaseinflationtothe2percenttargetandbysugmumemploymentandpricestability,theCom- gestingthattheCommitteeviewsinflationpersismitteetodayreaffirmeditsviewthatahighly tentlybelow2percentasanacceptableoutcome. accommodativestanceof monetarypolicy Moreover,hejudgedthatthenewguidancewouldact remainsappropriate.Indetermininghowlongto asadragoneconomicactivitybecauseitprovided maintainthecurrent0to¼percenttargetrange littleinformationaboutthedesiredrateof progress forthefederalfundsrate,theCommitteewill towardmaximumemploymentandnoquantitative assessprogress—bothrealizedandexpected— measureof whatconstitutesmaximumemployment, towarditsobjectivesof maximumemployment andthuswouldgenerateuncertaintyabouttheextent and2percentinflation.Thisassessmentwilltake towhichtheCommitteeiswillingtousemonetary intoaccountawiderangeof information, stimulustofosterfastergrowth.Mr.Kocherlakota includingmeasuresof labormarketconditions, stronglyendorsedthesixthparagraphof thestateindicatorsof inflationpressuresandinflation mentbecauseprovidinginformationabouttheComexpectations,andreadingsonfinancialdevelop- mittee’sintentionsforthefederalfundsrateonce ments.TheCommitteecontinuestoanticipate, employmentandinflationarenearmandatebasedonitsassessmentof thesefactors,thatit consistentlevelsshouldhelpstimulateeconomic likelywillbeappropriatetomaintainthecurrent activitybyreducinguncertainty. targetrangeforthefederalfundsrateforaconsiderabletimeaftertheassetpurchaseprogram Itwasagreedthatthenextmeetingof theCommittee ends,especiallyif projectedinflationcontinues wouldbeheldonTuesday–Wednesday,April29–30, torunbelowtheCommittee’s2percentlonger- 2014.Themeetingadjournedat10:05a.m.on rungoal,andprovidedthatlonger-terminfla- March19,2014. tionexpectationsremainwellanchored. Notation Vote WhentheCommitteedecidestobegintoremove policyaccommodation,itwilltakeabalanced BynotationvotecompletedonFebruary18,2014, approachconsistentwithitslonger-rungoalsof theCommitteeunanimouslyapprovedtheminutesof maximumemploymentandinflationof 2per- theCommitteemeetingheldonJanuary28–29,2014. cent.TheCommitteecurrentlyanticipatesthat, evenafteremploymentandinflationarenear Videoconference meeting of March 4 mandate-consistentlevels,economicconditions may,forsometime,warrantkeepingthetarget TheCommitteemetbyvideoconferenceonMarch4, federalfundsratebelowlevelstheCommittee 2014,todiscussissuesassociatedwithitsforward viewsasnormalinthelongerrun. guidanceforthefederalfundsrate.TheCommittee discussedpossiblechangestoitsforwardguidance Withtheunemploymentratenearing6½per- thatcouldprovideadditionalinformationaboutthe cent,theCommitteehasupdateditsforward factorslikelytoenteritsdecisionsregardingthefedguidance.ThechangeintheCommittee’sguid- eralfundsratetargetastheunemploymentrate ancedoesnotindicateanychangeintheCom- approachedits6½percentthresholdandoncethat mittee’spolicyintentionsassetforthinits thresholdwascrossed.Theagendadidnotcontemrecentstatements.” plateanypolicydecisions,andnoneweretaken. Votingforthisaction:JanetL.Yellen,WilliamC. Manyparticipantsnotedthatmarketexpectationsof Dudley,RichardW.Fisher,SandraPianalto,Charles thefuturecourseof thefederalfundsratewerecur- I.Plosser,JeromeH.Powell,JeremyC.Stein,and rentlyreasonablywellalignedwiththoseof policy- DanielK.Tarullo. makers,andthatasizablechangetotheforward guidancecoulddisturbthisalignment.Nonetheless, Votingagainstthisaction:NarayanaKocherlakota. participantsgenerallysawtheCommittee’supcoming meetingasanopportuneoccasionforareformula- Mr.Kocherlakotadissentedbecause,inhisview,the tionof theguidancelanguage;oneof theseparticinewforwardguidanceinthefifthparagraphof the pantssuggestedthatthereformulationcouldbe statementwouldweakenthecredibilityof theCom- accompaniedbyastatementthatthenewlanguage mittee’scommitmenttoitsinflationgoalbyfailingto wasintendedtobeconsistentwithcurrentmarket communicatepurposefulstepstomorerapidly expectations.Afewparticipantsstressedthatthe

160 101stAnnualReport|2014 Committeehadseveralothervehicles,includingthe Incontrast,someparticipantsexpressedapreference Chair’spostmeetingpressconference,throughwhich forquantitativeguidance.Afewparticipantssaw itcouldclarifyitsfuturepolicyintentions. meritinstatingexplicitlythattheCommitteewould provideaccommodationtotheextentnecessaryto Participantsagreedthattheexistingforwardguid- preventinflationfromrunningpersistentlybelowits ance,withitsreferencetoa6½percentthresholdfor 2percentlonger-rungoal.Oneof theseparticipants theunemploymentrate,wasbecomingoutdatedas arguedthatsuchforwardguidancewouldstrengthen theunemploymentratecontinueditsexpected thecredibilityof theCommittee’sinflationobjective gradualdecline.Mostparticipantsfeltthatthequan- aswellasencourageemploymentoutcomesthatwere titativethresholdshadbeenveryusefulincommuni- mostconsistentwiththeCommittee’sotherobjective catingpolicyintentionswhenemploymentwasfar of maximumemployment.Anotherparticipantsugfrommandate-consistentlevels,but,withthe gestedthattheCommitteestatethatitwouldadjust economyhavingmovedappreciablyclosertomaxi- policytokeepprojectedinflationnear2percentover mumemployment,theforwardguidanceshould themediumterm,andthatitwouldbalancedeviaemphasizethattheCommitteeisfocusingmoreona tionsfromitsobjectivesinthenearterm.Still broadersetof economicindicators.Thus,mostpar- anotherparticipantexpressedapreferenceforstating ticipantsfeltthatquantitativethresholds,triggers,or explicitquantitativecriteriaforsomelabormarket floorsshouldnotbeapartof futurestatementlan- variableorvariables. guage,withanumberof participantsnotingthe uncertaintyassociatedwithdefiningandmeasuring Mostparticipantsfavoredprovidinginformation theunemploymentrateandthelevelof employment aboutthelikelybehaviorof thefederalfundsrate thatwouldbemostconsistentwiththeCommittee’s afteritsfirstincrease.Afewparticipants,however, maximumemploymentobjective,orothersimilar viewedtheperiodof policyfirmingaslikelytobefar concepts.Theseparticipantsgenerallyfavoredquali- enoughinthefuturethattheCommitteedidnot tativelanguagedescribingtheeconomicfactorsthat needtoprovidesuchinformationatthisstage. wouldinfluencetheCommittee’sdecisionregarding thefirstincreaseinthefederalfundsratetarget.Par- Committeeparticipantsalsoconsideredwhether ticipantsputforwardanumberof suggestionsfor revisedforwardguidanceshouldincludeamore suchqualitativelanguage.Oneparticipantfavored prominentmentionof financialdevelopmentsorof linkingthelengthof timethatthefederalfundsrate potentialriskstofinancialstability.Mostparticipants wouldremainatthelowerboundtotheperiodover feltthattheCommittee’smonitoringof financial whichcompleterecoveryof thelabormarketwas conditionsandof riskstofinancialstabilitywas projectedtooccur,whileanotheradvocatedqualita- alreadywellunderstoodbymarketsandthat,while tiveforwardguidanceexpressedintermsof the somereferencetofinancialdevelopmentsmightuse- Committee’sprojectionsof realoutputgrowth,argu- fullybeincludedinthestatement,alengthyaddition ingthatsuchanapproachwouldavoidtheuncertain- didnotseemnecessary.Oneparticipantfavored tiesassociatedwithestimatesof potentialoutputor includingareferenceinthestatementto“financial maximumemployment.Yetanotherparticipant conditions,”ratherthan“financialstability,”emphaarguedthatitwouldbedesirableforthestatementto sizingthat,whenfactorsotherthanmonetarypolicy describetheCommittee’sreasonsforkeepingthefed- induceachangeinfinancialconditions,theCommiteralfundsrateatthelowerboundwhenstandard teemayneedtotakethatchangeinfinancialcondipolicyruleswereprescribingthattherateshouldbe tionsintoaccountwhenmakingitsmonetarypolicy increasedandnotedthatonepossiblereasonfor decisions. doingsoisthattheeffectivelowerboundonthefederalfundsratelimitstheCommittee’sscopetopro- WilliamB.English videaccommodationinresponsetoadverseshocks. Secretary

Minutesof FederalOpenMarketCommitteeMeetings|March 161 Addendum: downabitbutremainingaboveitslonger-runratein 2016,andthattheunemploymentratewoulddecline Summary of Economic Projections graduallytowarditslonger-runnormalleveloverthe projectionperiod(table1andfigure1).Almostallof InconjunctionwiththeMarch18–19,2014,Federal theparticipantsprojectedthatinflation,asmeasured OpenMarketCommittee(FOMC)meeting,meeting bytheannualchangeinthepriceindexforpersonal participants—the4membersof theBoardof Gover- consumptionexpenditures(PCE),wouldrisesteadily norsandthe12presidentsof theFederalReserve toalevelatorslightlybelowtheCommittee’s2per- Banks,allof whomparticipatedinthedelibera- centobjectivein2016. tions—submittedtheirassessmentsof realoutput growth,theunemploymentrate,inflation,andthe Mostparticipantsexpectedthathighlyaccommodatargetfederalfundsrateforeachyearfrom2014 tivemonetarypolicywouldremainwarrantedover through2016andoverthelongerrun.Eachpartici- thenextfewyearstofosterprogresstowardtheFedpant’sassessmentwasbasedoninformationavailable eralReserve’slonger-runobjectives.Asshowninfigatthetimeof themeetingplushisorherjudgmentof ure2,allbutoneof theparticipantsprojectedthatit appropriatemonetarypolicyandassumptionsabout wouldbeappropriatetowaituntil2015orlater thefactorslikelytoaffecteconomicoutcomes.The beforebeginningtoincreasethefederalfundsrate, longer-runprojectionsrepresenteachparticipant’s andalargemajorityprojectedthatitwouldthenbe judgmentof thevaluetowhicheachvariablewould appropriatetoraisethetargetfederalfundsrate beexpectedtoconverge,overtime,underappropriate fairlygradually.Almostallparticipantsviewed monetarypolicyandintheabsenceof furthershocks appropriatepolicyasbroadlyconsistentwithcontintotheeconomy.“Appropriatemonetarypolicy”is uedgradualslowinginthepaceof theCommittee’s definedasthefuturepathof policythateachpartici- purchasesof longer-termsecuritiesandthecomplepantdeemsmostlikelytofosteroutcomesforeco- tionof theprograminthesecondhalf of thisyear. nomicactivityandinflationthatbestsatisfyhisor herindividualinterpretationof theFederalReserve’s Mostparticipantssawtheuncertaintyassociated objectivesof maximumemploymentandstable withtheiroutlooksforeconomicgrowthandthe prices. unemploymentrateassimilartothatof thepast 20years,andamajoritysawtheuncertaintyassoci- Overall,FOMCparticipantsexpectedthat,under atedwiththeirprojectionsforinflationassimilarto appropriatemonetarypolicy,economicgrowth thatof thepast20years.Inaddition,mostparticiwouldpickupthisyearandnext,beforemoving pantsconsideredtheriskstotheoutlookforreal Table1.EconomicprojectionsofFederalReserveBoardmembersandFederalReserveBankpresidents,March2014 Percent Centraltendency1 Range2 Variable 2014 2015 2016 Longerrun 2014 2015 2016 Longerrun ChangeinrealGDP 2.8to3.0 3.0to3.2 2.5to3.0 2.2to2.3 2.1to3.0 2.2to3.5 2.2to3.4 1.8to2.4 Decemberprojection 2.8to3.2 3.0to3.4 2.5to3.2 2.2to2.4 2.2to3.3 2.2to3.6 2.1to3.5 1.8to2.5 Unemploymentrate 6.1to6.3 5.6to5.9 5.2to5.6 5.2to5.6 6.0to6.5 5.4to5.9 5.1to5.8 5.2to6.0 Decemberprojection 6.3to6.6 5.8to6.1 5.3to5.8 5.2to5.8 6.2to6.7 5.5to6.2 5.0to6.0 5.2to6.0 PCEinflation 1.5to1.6 1.5to2.0 1.7to2.0 2.0 1.3to1.8 1.5to2.4 1.6to2.0 2.0 Decemberprojection 1.4to1.6 1.5to2.0 1.7to2.0 2.0 1.3to1.8 1.4to2.3 1.6to2.2 2.0 CorePCEinflation3 1.4to1.6 1.7to2.0 1.8to2.0 1.3to1.8 1.5to2.4 1.6to2.0 Decemberprojection 1.4to1.6 1.6to2.0 1.8to2.0 1.3to1.8 1.5to2.3 1.6to2.2 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andprojectionsforbothmeasuresofinflationarefromthefourthquarterofthepreviousyeartothefourth quarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures (PCE)andthepriceindexforPCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarterofthe yearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’s assessmentoftheratetowhicheachvariablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.The DecemberprojectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonDecember17–18,2013. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

162 101stAnnualReport|2014 Figure1.Centraltendenciesandrangesofeconomicprojections,2014–16andoverthelongerrun Percent Change in real GDP Central tendency of projections 4 Range of projections 3 2 Actual 1 + 0 - 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Percent Unemployment rate 10 9 8 7 6 5 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Percent PCE inflation 3 2 1 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Percent Core PCE inflation 3 2 1 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Note:Definitionsofvariablesareinthegeneralnotetotable1.Thedatafortheactualvaluesofthevariablesareannual.

Minutesof FederalOpenMarketCommitteeMeetings|March 163 Figure2.OverviewofFOMCparticipants’assessmentsofappropriatemonetarypolicy Number of participants Appropriate timing of policy firming 14 13 13 12 11 10 9 8 7 6 5 4 3 2 2 1 1 2014 2015 2016 Appropriate pace of policy firming Percent Target federal funds rate at year-end 6 5 4 3 2 1 0 2014 2015 2016 Longer run Note:Intheupperpanel,theheightofeachbardenotesthenumberofFOMCparticipantswhojudgethat,underappropriatemonetarypolicy,thefirstincreaseinthetargetfederalfundsratefromitscurrentrangeof0to¼percentwilloccurinthespecifiedcalendaryear.InDecember2013,thenumbersofFOMCparticipantswhojudgedthatthefirst increaseinthetargetfederalfundsratewouldoccurin2014,2015,and2016were,respectively,2,12,and3.Inthelowerpanel,eachshadedcircleindicatesthevalue (roundedtothenearest¼percentagepoint)ofanindividualparticipant’sjudgmentoftheappropriatelevelofthetargetfederalfundsrateattheendofthespecifiedcalendar yearoroverthelongerrun.

164 101stAnnualReport|2014 grossdomesticproduct(GDP),theunemployment Figures3.Aand3.Bshowthatparticipantscontinrate,andinflationtobebroadlybalanced,although uedtoholdarangeof viewsregardingthelikelyoutsomesawtheriskstotheirinflationforecastsastilted comesforrealGDPgrowthandtheunemployment tothedownside. rateoverthenexttwoyears.Thediversityof views reflectedtheirindividualassessmentsof therateat whichtheheadwindsthathavebeenholdingbackthe The Outlook for Economic Activity paceof theeconomicrecoverywouldabate,the anticipatedpathforforeigneconomicactivity,the Participantsgenerallyprojectedthat,conditionalon trajectoryforgrowthinhouseholdnetworth,andthe theirindividualassumptionsaboutappropriatemon- appropriatepathof monetarypolicy.Relativeto etarypolicy,realGDPgrowthwouldpickupgradu- December,thedispersionsof participants’projecallythisyearandnexttoapacesomewhatexceeding tionsforrealGDPgrowthandtheunemployment theirestimatesof thelonger-runnormalrateof out- rateovertheperiodfrom2014to2016narrowed putgrowth.Subsequently,in2016,realGDPgrowth slightly. wasprojectedtobegintomovebacktowardits longer-runrate.Mostparticipantsreviseddownabit The Outlook for Inflation theirprojectionsof realGDPgrowthfor2014,comparedwiththeirprojectionsinDecember2013,and Participants’viewsonthebroadoutlookforinflation thetopendof thecentraltendenciesforoutput undertheassumptionof appropriatemonetary growthineachyearandoverthelongerrunmoved policywerenearlyunchanged,onbalance,from downslightly.Nonetheless,participantspointedtoa thoseintheirDecemberprojections.Allparticipants numberof factorsthattheyexpectedwouldcontrib- anticipatedthat,onaverage,bothheadlineandcore utetoapickupineconomicgrowththisyear,suchas inflationwouldrisegraduallyoverthenextfewyears, aneasingof theheadwindsthathavebeenweighing andalargemajorityof participantsexpectedheadongrowth,includingdiminishedrestraintfromfiscal lineinflationtobeatorslightlybelowtheCommitpolicy;risinghouseholdnetworthandhighlyaccom- tee’s2percentobjectivein2016.Specifically,thecenmodativemonetarypolicyalsowereexpectedtocon- traltendenciesforPCEinflationwere1.5to1.6pertribute.Inaddition,manyattributedsomeof the centin2014,1.5to2.0percentin2015,and1.7to softnessinrecenteconomicdatatothetransitory 2.0percentin2016.Thecentraltendenciesof the effectsof unusuallyseverewinterweather.Thecen- forecastsforcoreinflationwerebroadlysimilarto traltendenciesof participants’projectionsforreal thosefortheheadlinemeasure.Anumberof partici- GDPgrowthwere2.8to3.0percentin2014,3.0to pantsviewedthecombinationof stableinflation 3.2percentin2015,and2.5to3.0percentin2016. expectationsandsteadilydiminishingresourceslack Thecentraltendencyforthelonger-runnormalrate aslikelytocontributetoagradualriseof inflation of growthof realGDPwas2.2to2.3percent. backtowardtheCommittee’slonger-runobjective. Participantsanticipatedagradualdeclineinthe Figures3.Cand3.Dprovideinformationonthe unemploymentrateovertheprojectionperiod.The diversityof participants’viewsabouttheoutlookfor centraltendenciesof participants’forecastsforthe inflation.Therangesof participants’projectionsfor unemploymentrateinthefourthquarterof each overallinflationwerelittlechangedrelativeto yearwere6.1to6.3percentin2014,5.6to5.9per- December.TheforecastsforPCEinflationin2016 centin2015,and5.2to5.6percentin2016.Nearly wereatorbelowtheCommittee’slonger-runobjecallparticipantsreviseddowntheirprojectedpathsfor tive.Similartotheprojectionsforheadlineinflation, theunemploymentraterelativetotheirDecember theprojectionsforcoreinflationin2016werealso projections,withsomepointingtothedeclineinthe concentratednear2percent. unemploymentrateinrecentmonths.Thecentral tendencyof participants’estimatesof thelonger-run Appropriate Monetary Policy normalrateof unemploymentthatwouldprevail underappropriatemonetarypolicyandinthe Asindicatedinfigure2,mostparticipantsjudged absenceof furthershockstotheeconomyalsomoved thatverylowlevelsof thefederalfundsratewould lower,to5.2to5.6percent.Amajorityof partici- remainappropriateforthenextfewyears.Inparticupantsprojectedthattheunemploymentratewouldbe lar,13participantsthoughtthatthefirstincreasein closetotheirindividualestimatesof itslonger-run thetargetfederalfundsratewouldnotbewarranted levelattheendof 2016. untilsometimein2015,andtwojudgedthatpolicy

Minutesof FederalOpenMarketCommitteeMeetings|March 165 Figure3.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2014–16andoverthelongerrun Number of participants 2014 20 March projections 18 December projections 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.

166 101stAnnualReport|2014 Figure3.B.Distributionofparticipants’projectionsfortheunemploymentrate,2014–16andoverthelongerrun Number of participants 2014 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 - 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 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 - 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 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 - 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 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 - 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|March 167 Figure3.C.Distributionofparticipants’projectionsforPCEinflation,2014–16andoverthelongerrun Number of participants 2014 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 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2016 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

168 101stAnnualReport|2014 Figure3.D.Distributionofparticipants’projectionsforcorePCEinflation,2014–16 Number of participants 2014 20 March projections December projections 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2016 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|March 169 theendof 2016wouldstillbebelowtheirindividual Table2.Averagehistoricalprojectionerrorranges assessmentsof itslonger-runlevel,withmanypoint- Percentagepoints ingtosubduedinflationpressures,below-mandate Variable 2014 2015 2016 inflation,thestill-noticeableeffectsof headwinds,or theneedtomaintainlowratestosupporttherecov- ChangeinrealGDP1 ±1.6 ±2.1 ±2.0 eryasreasonstokeepthefederalfundsratelowat Unemploymentrate1 ±0.6 ±1.2 ±1.7 thattime.Estimatesof thelonger-runtargetforthe Totalconsumerprices2 ±0.9 ±1.0 ±1.1 federalfundsraterangedfrom3½toabout4¼per- Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared cent,reflectingtheCommittee’sinflationobjectiveof errorofprojectionsfor1994through2013thatwerereleasedinthespringby variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast 2percentandparticipants’individualjudgments Uncertainty,”undercertainassumptions,thereisabouta70percentprobability abouttheappropriatelonger-runlevelof therealfedthatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Formore eralfundsrateintheabsenceof furthershockstothe information,seeDavidReifschneiderandPeterTulip(2007),“Gaugingthe economy. UncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,”Finance andEconomicsDiscussionSeries2007-60(Washington:BoardofGovernorsof theFederalReserveSystem,November),availableatwww.federalreserve.gov/ Participantsalsodescribedtheirviewsregardingthe pubs/feds/2007/200760/200760abs.html;andBoardofGovernorsoftheFederal ReserveSystem,DivisionofResearchandStatistics(2014),“UpdatedHistorical appropriatepathof theFederalReserve’sbalance ForecastErrors,”memorandum,April9,http://www.federalreserve.gov/foia/files/ sheet.Conditionalontheirrespectiveeconomicout- 20140409-historical-forecast-errors.pdf. 1 Definitionsofvariablesareinthegeneralnotetotable1. looks,almostallparticipantsjudgedthatitwouldbe 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen appropriatetocontinuetoreducethepaceof the mostwidelyusedingovernmentandprivateeconomicforecasts.Projection Committee’spurchasesof longer-termsecuritiesin ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof theyearindicated. measuredstepsandtoconcludepurchasesinthesecondhalf of thisyear.Twoparticipantsprojecteda morerapidreductioninthepaceof purchasesandan firmingwouldlikelynotbeappropriateuntil2016. earlierendtotheassetpurchaseprogram. Onlyoneparticipantthoughtthatanincreaseinthe federalfundsratewouldbeappropriatein2014. Participants’viewsof theappropriatepathformonetarypolicywereinformedbytheirjudgmentsabout Allparticipantsbutoneprojectedthattheunemploy- thestateof theeconomy,includingthevaluesof the mentratewouldbebelow6percentattheendof the unemploymentrateandotherlabormarketindicayearinwhichtheycurrentlyanticipatethatitwill torsthatwouldbeconsistentwithmaximumemploybecomeappropriatetoraisethefederalfundsrate ment,theextenttowhichtheeconomywascurrently aboveitseffectivelowerbound.Moreover,allbutone fallingshortof maximumemployment,theprospects projectedthatinflationwouldbeatorbelowthe forinflationtoreachtheCommittee’slonger-term Committee’slonger-runobjectiveatthattime.Most objectiveof 2percent,andthebalanceof risks participantsprojectedthattheunemploymentrate aroundtheoutlook.Acoupleof participantsalso wouldremainabovetheirestimatesof itslonger-run mentionedusingvariousmonetarypolicyrulesto normallevelattheendof theyearinwhichtheysaw guidetheirthinkingontheappropriatepathforthe thefederalfundsrateincreasingfromitseffective federalfundsrate. lowerbound. Uncertainty and Risks Figure3.Eprovidesthedistributionof participants’ Nearlyallparticipantscontinuedtojudgethelevels judgmentsregardingtheappropriatelevelof thetarof uncertaintyabouttheirprojectionsforrealGDP getfederalfundsrateattheendof eachcalendaryear growthandtheunemploymentrateasbroadlysimifrom2014to2016andoverthelongerrun.Asnoted lartothenormduringtheprevious20years(figearlier,almostallparticipantsjudgedthateconomic ure4).1AsinDecember,mostparticipantscontinued conditionswouldwarrantmaintainingthecurrent tojudgetheriskstorealGDPgrowthandtheunemexceptionallylowlevelof thefederalfundsrateuntil ploymentratetobebroadlybalanced.Twopartici- 2015.Themedianvalueof therateattheendof 2015 and2016increased25and50basispoints,respec- 1 Table2providesestimatesoftheforecastuncertaintyforthe tively,sinceDecember,whilethemeanvalues changeinrealGDP,theunemploymentrate,andtotalconincreased7and25basispoints,respectively.Thedis- sumerpriceinflationovertheperiodfrom1994through2013. persionof projectionsforthevalueof thefederal Attheendofthissummary,thebox“ForecastUncertainty” discussesthesourcesandinterpretationofuncertaintyinthe fundsrateineachyearnarrowedslightly.Almostall economicforecastsandexplainstheapproachusedtoassessthe participantsexpectedthatthefederalfundsrateat uncertaintyandrisksattendingtheparticipants’projections.

170 101stAnnualReport|2014 Figure3.E.Distributionofparticipants’projectionsforthetargetfederalfundsrate,2014–16andoverthelongerrun Number of participants 2014 March projections 20 December 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 - 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.

Minutesof FederalOpenMarketCommitteeMeetings|March 171 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.

172 101stAnnualReport|2014 pantsviewedriskstooutputgrowthasweightedto measurestobebroadlysimilartohistoricalnorms thedownside,reflectingtheirconcernsaboutpossible andtheriskstothoseprojectionstobebroadlybalgeopoliticaldevelopmentsandthestrengthof exter- anced.Fiveparticipants,however,sawtherisksto naldemand. theirinflationforecastsastiltedtothedownside, reflecting,forexample,thepossibilitythatthecur- Almostallparticipantssawthelevelof uncertainty rentlowlevelsof inflationcouldprovemorepersisandthebalanceof risksaroundtheirforecastsfor tentthananticipatedaswellaselevatedglobalrisks overallPCEinflationandcoreinflationaslittle totheoutlook.Conversely,oneparticipantcited changedfromDecember.Themajorityof partici- upsideriskstoinflationstemmingfromuncertainty pantscontinuedtojudgethelevelsof uncertainty aboutthetimingandefficacyof theCommittee’s associatedwiththeirforecastsforthetwoinflation withdrawalof accommodation.

Minutesof FederalOpenMarketCommitteeMeetings|March 173 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 rangeof1.4to4.6percentinthecurrentyear,0.9to pointforward. 5.1percentinthesecondyear,and1.0to5.0percent

174 101stAnnualReport|2014 Meeting Held on April 29–30, 2014 JamesA.Clouse,ThomasA.Connors,1 EvanF.Koenig,ThomasLaubach, MichaelP.Leahy,LorettaJ.Mester, Ameetingof theFederalOpenMarketCommittee SamuelSchulhofer-Wohl, washeldintheofficesof theBoardof Governorsof MarkE.Schweitzer,andWilliamWascher theFederalReserveSysteminWashington,D.C.,on AssociateEconomists Tuesday,April29,2014,at10:30a.m.andcontinued onWednesday,April30,2014,at9:00a.m. SimonPotter Manager,SystemOpenMarketAccount LorieK.Logan Present DeputyManager,SystemOpenMarketAccount JanetL.Yellen RobertdeV.Frierson2 Chair Secretaryof theBoard,Officeof theSecretary, WilliamC.Dudley Boardof Governors ViceChairman MichaelS.Gibson RichardW.Fisher Director,Divisionof BankingSupervisionand Regulation,Boardof Governors NarayanaKocherlakota NellieLiang SandraPianalto Director,Officeof FinancialStabilityPolicyand Research,Boardof Governors CharlesI.Plosser MatthewJ.Eichner JeromeH.Powell DeputyDirector,Divisionof ResearchandStatistics, JeremyC.Stein Boardof Governors DanielK.Tarullo StephenA.MeyerandWilliamNelson DeputyDirectors,Divisionof MonetaryAffairs, CharlesL.Evans,JeffreyM.Lacker, Boardof Governors DennisP.Lockhart,andJohnC.Williams AlternateMembersof theFederalOpenMarket JonW.Faust Committee SpecialAdvisertotheBoard,Officeof Board Members,Boardof Governors JamesBullard,EstherL.George, andEricRosengren TrevorA.Reeve Presidentsof theFederalReserveBanksof St.Louis, SpecialAdvisertotheChair,Officeof Board KansasCity,andBoston,respectively Members,Boardof Governors WilliamB.English LindaRobertson3 SecretaryandEconomist AssistanttotheBoard,Officeof BoardMembers, Boardof Governors MatthewM.Luecke DeputySecretary EllenE.MeadeandJoyceK.Zickler SeniorAdvisers,Divisionof MonetaryAffairs, MichelleA.Smith Boardof Governors AssistantSecretary DavidBowman4andBethAnneWilson ScottG.Alvarez AssociateDirectors,Divisionof International GeneralCounsel Finance,Boardof Governors StevenB.Kamin Economist 1 AttendedWednesday’ssessiononly. DavidW.Wilcox 2 Attendedthediscussionofmonetarypolicynormalization. Economist 3 AttendedTuesday’ssessiononly. 4 AttendedTuesday’ssessionfollowingthediscussionofmonetarypolicynormalization.

Minutesof FederalOpenMarketCommitteeMeetings|April 175 DanielM.Covitz,DavidE.Lebow, AndreasL.Hornstein andMichaelG.Palumbo SeniorAdvisor,FederalReserveBankof Richmond AssociateDirectors,Divisionof Researchand JohnFernald Statistics,Boardof Governors SeniorResearchAdviser,FederalReserveBankof FabioM.Natalucci2andGretchenC.Weinbach2 SanFrancisco AssociateDirectors,Divisionof MonetaryAffairs, SeanSavage Boardof Governors SeniorAssociate,FederalReserveBankof NewYork MarnieGillisDeBoer2andJaneE.Ihrig2 DeputyAssociateDirectors,Divisionof Monetary Monetary Policy Normalization Affairs,Boardof Governors Inajointsessionof theFederalOpenMarketCom- BrianJ.Gross1 mittee(FOMC)andtheBoardof Governorsof the SpecialAssistanttotheBoard,Officeof Board FederalReserveSystem,meetingparticipantsdis- Members,Boardof Governors cussedissuesassociatedwiththeeventualnormalizationof thestanceandconductof monetarypolicy. StaceyTevlin TheCommittee’sdiscussionof thistopicwasunder- AssistantDirector,Divisionof Researchand takenaspartof prudentplanninganddidnotimply Statistics,Boardof Governors thatnormalizationwouldnecessarilybeginsometime RobertJ.Tetlow soon.Astaff presentationoutlinedseveral Adviser,Divisionof MonetaryAffairs, approachestoraisingshort-terminterestrateswhen Boardof Governors itbecomesappropriatetodoso,andtocontrolling thelevelof short-terminterestratesoncetheyare DanaL.Burnett abovetheeffectivelowerbound,duringaperiod SectionChief,Divisionof MonetaryAffairs, whentheFederalReservewillhaveaverylargebal- Boardof Governors ancesheet.Theapproachesdifferedintermsof the PatrickMcCabe2 combinationof policytoolsthatmightbeusedto SeniorEconomist,Divisionof Researchand accomplishthoseobjectives.Inadditiontotherateof Statistics,Boardof Governors interestpaidonexcessreservebalances,thetools PenelopeA.Beattie2 consideredincludedfixed-rateovernightreverse repurchase(ONRRP)operations,termreverse AssistanttotheSecretary,Officeof theSecretary, repurchaseagreements,andtheTermDepositFacil- Boardof Governors ity(TDF).Thestaff presentationdiscussedthe RandallA.Williams potentialimplicationsof eachapproachforfinancial RecordsProjectManager,Divisionof Monetary intermediationandfinancialmarkets,includingthe Affairs,Boardof Governors federalfundsmarket,andthepossibleimplications forfinancialstability.Inaddition,thestaff outlined JamesM.Lyon optionsforadditionaloperationaltestingof the FirstVicePresident,FederalReserveBankof policytools. Minneapolis DavidAltig,JamesJ.McAndrews, Followingthestaff presentation,meetingparticiandAlbertoG.Musalem pantsdiscussedawiderangeof topicsrelatedto ExecutiveVicePresidents,FederalReserveBanksof policynormalization.Participantsgenerallyagreed Atlanta,NewYork,andNewYork,respectively thatstartingtoconsidertheoptionsfornormalizationatthismeetingwasprudent,asitwouldhelpthe JoshuaL.FrostandSpencerKrane Committeetomakedecisionsaboutapproachesto SeniorVicePresidents,FederalReserveBanksof policynormalizationandtocommunicateitsplansto NewYorkandChicago,respectively thepublicwellbeforethefirststepsinnormalizing GeorgeA.Kahn,AntoineMartin,JoePeek, policybecomeappropriate.Earlycommunication,in KeithSill,DanielL.Thornton,andDouglasTillett turn,wouldenhancetheclarityandcredibilityof VicePresidents,FederalReserveBanksof monetarypolicyandhelppromotetheachievement KansasCity,NewYork,Boston,Philadelphia, of theCommittee’sstatutoryobjectives.Itwas St.Louis,andChicago,respectively emphasizedthatthetoolsavailabletotheCommittee

176 101stAnnualReport|2014 willallowittoreducepolicyaccommodationwhen Staff Review of the Economic Situation doingsobecomesappropriate.Participantsconsideredhowvariouscombinationsof toolscouldhave TheinformationreviewedfortheApril29–30meetdifferentimplicationsforthedegreeof controlover ingindicatedthatgrowthineconomicactivitypaused short-terminterestrates,fortheFederalReserve’s inthefirstquarterasawhole,butthatactivity balancesheetandremittancestotheTreasury,forthe steppeduplateinthequarter;thispatternreflected, functioningof thefederalfundsmarket,andfor inpart,thetemporaryeffectsof theunusuallycold financialstabilityinbothnormaltimesandinperi- andsnowyweatherearlierinthequarterandthe odsof stress.BecausetheFederalReservehasnot unwindingof thoseeffectslaterinthequarter.In previouslytightenedthestanceof policywhilehold- March,payrollemploymentincreasedfurther, ingalargebalancesheet,mostparticipantsjudged althoughtheunemploymentrateheldsteadyandwas thattheCommitteeshouldconsiderarangeof stillelevated.Consumerpriceinflationcontinuedto optionsandbepreparedtoadjustthemixof its runbelowtheCommittee’slonger-runobjective,but policytoolsaswarranted.Participantsgenerally measuresof longer-runinflationexpectations favoredthefurthertestingof varioustools,including remainedstable. theTDF,tobetterassesstheiroperationalreadiness andeffectiveness.Nodecisionsregardingpolicynor- Theunemploymentratestayedat6.7percentin malizationweretaken;participantsrequestedaddi- March,butboththelaborforceparticipationrate tionalanalysisfromthestaff andagreedthatitwould andtheemployment-to-populationratioincreased behelpfultocontinuetoreviewtheseissuesat slightly.Therateof long-durationunemployment upcomingmeetings.TheBoardmeetingconcludedat declinedsomewhat,buttheshareof workers theendof thediscussion. employedparttimeforeconomicreasonsmovedup; bothof thesemeasureswerestillwellabovetheirprerecessionlevels.Initialclaimsforunemployment Developments in Financial Markets and insuranceremainedlowovertheintermeetingperiod. the Federal Reserve’s Balance Sheet Althoughtherateof jobopeningsmovedupinFebruary,thehiringratewasflatandcontinuedtobe Themanagerof theSystemOpenMarketAccount subdued. (SOMA)reportedondevelopmentsindomesticand foreignfinancialmarketsaswellastheSystemopen FollowingareboundinFebruarythatwaspartly marketoperationsduringtheperiodsincetheCom- weatherrelated,manufacturingproductionrosefurmitteemetonMarch18–19,2014.Byunanimous therinMarchandtherateof manufacturingcapacvote,theCommitteeratifiedtheOpenMarketDesk’s ityutilizationincreased.Theproductionof motor domestictransactionsovertheintermeetingperiod. vehiclesandpartsdeclinedinMarch,butfactory Therewerenointerventionoperationsinforeigncur- outputoutsideof themotorvehiclesectorexpanded. renciesfortheSystem’saccountovertheintermeet- Automakers’schedulesindicatedthatthepaceof ingperiod. motorvehicleassembliesinthecomingmonths wouldbesimilartothelevelinMarch.However, Byunanimousvote,theCommitteeagreedtorenew broadindicatorsof manufacturingproduction,such thereciprocalcurrencyarrangementswiththeBank asthenewordersindexesfromthenationaland of CanadaandtheBankof Mexico;thesearrange- regionalmanufacturingsurveys,wereatlevelsconsismentsareassociatedwiththeFederalReserve’spar- tentwithmoderateincreasesinfactoryoutputinthe ticipationintheNorthAmericanFrameworkAgree- nearterm. mentof 1994.Inaddition,byunanimousvote,the Committeeagreedtorenewthedollarandforeign Realpersonalconsumptionexpenditures(PCE) currencyliquidityswaparrangementswiththeBank expandedslightlylessrapidlyinthefirstquarterthan of Canada,theBankof England,theBankof Japan, inthefourthquarter.Aftermovingroughlysideways, theEuropeanCentralBank,andtheSwissNational onnet,inJanuaryandFebruary,thecomponentof Bank.ThevotestorenewtheFederalReserve’spar- nominalretailsalesusedbytheBureauof Economic ticipationinthesearrangementsweretakenatthis Analysis(BEA)toconstructitsmonthlyestimateof meetingbecauseprovisionsinthearrangements PCErosebrisklyinMarch,inpartbecausethe specifythattheFederalReserveprovidesixmonths’ weatherreturnedtomoreseasonalnorms.Recent priornoticeof anintentiontoterminateits informationonseveralimportantfactorsthatinfluparticipation. encehouseholdspendingwaspositive.Realdispos-

Minutesof FederalOpenMarketCommitteeMeetings|April 177 ableincomecontinuedtoincreaseinthefirstquarter, advancereleaseof thenationalincomeandproduct furthergainsinhousepriceslikelybolsteredhouse- accounts,theBEAestimatedthatnetexportssubholdnetworth,andconsumersentimentinthe tractedsubstantiallyfromrealgrossdomesticprod- ThomsonReuters/Universityof MichiganSurveysof uct(GDP)growthinthefirstquarter. Consumersimproved,onbalance,inMarchand April. U.S.consumerprices,asmeasuredbythePCEprice index,roseataslowrateinthefirstquarter,though Thepaceof activityinthehousingsectorremained somewhatfasterthanthepacepostedinthefourth soft,asrealexpendituresforresidentialinvestment quarter,andwereabout1percenthigherthanayear decreasedagaininthefirstquarter.Startsof new earlier.Afterfallinginthefourthquarter,consumer single-familyhomesincreasedinMarch.However, energypricesincreasedmarkedlyinthefirstquarter permitsforsingle-familyhomes—whicharetypically asnaturalgaspricesmovedhigheronasharpdecline lesssensitivetofluctuationsintheweatherandabet- ininventoriesduringtheunusuallycoldwinter terindicatorof theunderlyingpaceof construc- months.ThePCEpriceindexforitemsexcluding tion—remainedbelowtheirfourth-quarterleveland foodandenergyroseatthesamerateinthefirst hadnotshownasustainedimprovementsincelast quarterasinthepreviousoneandwasaround spring,whenmortgageratesbegantorise.Salesof 1¼percenthigherthanfourquartersearlier.Both bothnewandexistinghomesdecreasedinMarchof near-andlonger-terminflationexpectationsfromthe thisyear,butpendinghomesalesrose. MichigansurveywereunchangedinMarchand April.Overthe12monthsendinginMarch,boththe Realprivateexpendituresonbusinessequipmentand employmentcostindexforprivate-sectorworkers intellectualpropertyproductsdeclinedinthefirst andaveragehourlyearningsforallemployees quarter.However,nominalshipmentsof nondefense increasedonlyalittlemorethanconsumerprice capitalgoodsexcludingaircraftroseinFebruaryand inflation. inMarch,andnewordersweresomewhatabovethe levelof shipments,pointingtomodestgainsinship- Indicatorsof foreigneconomicactivitysuggested mentsinthenearterm.Otherforward-lookingindi- continuedexpansioninthefirstquarterbutatarate cators,suchassurveysof businessconditionsand somewhatbelowthatinthefourthquarter.The capitalspendingplans,werealsoconsistentwith decelerationwasconcentratedinemergingmarket increasedoutlaysforbusinessequipmentinthecom- economies(EMEs).RealGDPgrowthslowedmarkingmonths.Realspendingfornonresidentialcon- edlyinChina,largelyreflectinglowerinvestment structionwasaboutflatinthefirstquarterafter growthandexports.Weakerexportsalsorestrained declininginthefourthquarter,whilerealinventory economicactivityinotheremergingAsianeconoinvestmentmovedlower.Businessinventoriesinmost mies.InMexico,indicatorsof activitysuggested industriesappearedtobebroadlyalignedwithsales someimprovementfromalacklusterfourthquarter. inrecentmonths. Bycontrast,economicgrowthremainednearitssolid fourth-quarterpaceintheadvancedforeignecono- Realfederalgovernmentpurchasesroseslightlyinthe mies(AFEs).Intheeuroarea,theUnitedKingdom, firstquarter,astheincreasefromthereversalof the andCanada,averageindustrialproductioninthe governmentshutdowninthefourthquarterwas firsttwomonthsof theyearwasupmoderatelyfrom mostlyoffsetbytheongoingdowntrendinpurchases. thefourthquarter;inJapan,industrialproduction Realstateandlocalgovernmentpurchasesdecreased roserobustly,andconsumerdemandwasboostedby somewhatinthefirstquarter,asstateandlocalcon- anticipationof theAprilincreaseintheconsumption structionexpendituresdeclined. tax.Inflationdevelopmentsweremixed.Inflation reboundedinCanadabutremainedverylowinthe TheU.S.internationaltradedeficitwidenedinFeb- euroarea.InChinaandIndia,inflationfellinthe ruaryasexportsfellandimportsrose.Theexport firstquarter,largelybecauseof lowerfoodprices. declineswereconcentratedinaircraftandpetroleum Monetarypolicyremainedhighlyaccommodative products,whileexportsof consumergoodsrose.Ris- duringtheintermeetingperiodintheAFEsandalso ingimportsof servicesandautomotiveproductsoff- inmanyEMEs,althoughmonetarypolicyinBrazil setdeclinesinimportsof oilandcapitalgoods.Inthe wastightenedtocontaininflationpressures.

178 101stAnnualReport|2014 Staff Review of the Financial Situation levelof about$240billionattheendof March.Part of theincreaseinONRRPusageattheendof Despitesomevolatilityincertainassetprices,finan- Marchrelativetotheendof Decemberlikely cialconditionsdidnotchangeappreciably,onnet, reflectedhighercounterpartyallotmentlimits,which overtheintermeetingperiod.Assetpricesmovedin wereraisedfrom$3billionto$7billionduringthe responsetoeconomicdatareleasesthatwere,onbal- firstquarter.Theallotmentlimitwassubsequently ance,alittlestrongerthanexpectedandtoFederal increasedto$10billionpercounterpartyinearly Reservecommunications.Theanticipatedpathof the April.Theseasonalpaydownof short-termTreasury federalfundsratemovedupsomewhat,asdid debtfollowingtheApriltaxdatewasaccompanied intermediate-datedTreasuryyields,whilecorporate byanotablepickupinparticipationatONRRP bondspreadsnarrowedandtheS&P500increased operations,butTreasuryreporatesgenerally slightly.Theforeignexchangevalueof thedollarwas remainedveryclosetotheONRRPrateof 5basis littlechanged. points. FederalReservecommunicationsgarneredsignificant TheS&P500increasedabit,onnet,overtheinterattentionfrommarketparticipantsovertheperiod meetingperiod,butbroaderstockmarketindexes butappearedtohaveonlyamodestneteffecton edgeddown.Thepricesof socialmediaandbiotechtheirexpectationsformonetarypolicy.Thecommu- nologystocks,whichhadrisensubstantiallyfaster nicationsfollowingtheconclusionof theMarch thanthebroadermarketoverthepreviousyear,fell FOMCmeetingwereinterpretedassomewhatless sharplyovertheintermeetingperiod,leavingthe accommodativethanexpected.However,subsequent gainsonthesesharesaboutinlinewiththoseon communications—includingthereleaseof themin- broaderindexesoverthepast12months.Someinitial utesof theMarchFOMCmeeting—appearedto publicofferingswerereportedlyputonholdasprices mostlyreversetheearlierchangeinexpectations. of small-capitalizationstocksdeclined.Bycontrast, stocksthatgenerallyhavemorestabledividends,such Yieldsonshort-andmedium-termnominalTreasury asthoseof utilityandtelecommunicationscompasecuritiesrose,onbalance,overtheintermeeting nies,advanced.First-quarterearningsreportsfor period.Incontrast,yieldsatthelongendof the largebankingorganizationsweremixed,andthe curvedeclined,continuingadownwardtrendevident stockpricesof suchfirmsgenerallyunderperformed overmuchof thisyear.Marketparticipantsciteda broadequityindexes. numberof factorsascontributingtothedropin long-termyieldssofarthisyear,includingportfolio Creditflowstononfinancialcorporationsremained reallocationbylargeinstitutionalinvestors,thetrad- robust,onbalance,notwithstandingsubduedbond ingstrategiespursuedbysomeinvestors,andsafe- issuanceinAprilthatwasattributedtotypicalconhavenflows.Somemarketparticipantsreportedly straintsonissuanceduringtheperiodwhenmany alsoreviseddowntheirestimateof theaveragereal firmsarereportingtheirearnings.Thegrowthin federalfundsrateoverthelongerterm,reflectingin commercialandindustrialloansonbanks’balance partchangesintheirassessmentsof long-runeco- sheetsremainedrobust,consistentwiththeincrease nomicconditions.Measuresof longer-horizoninfla- inloandemandbylargeandmiddle-marketfirms tioncompensationbasedonTreasuryInflation- reportedintheAprilSeniorLoanOfficerOpinion ProtectedSecuritieswerelittlechanged. SurveyonBankLendingPractices(SLOOS).Institutionalissuanceof leveragedloanscontinuedata Conditionsinshort-termfundingmarketsremained briskpaceamidreportsof anongoinggradualeasing fairlystableovertheintermeetingperiod.Take-upin of credittermsanddealstructures. theFederalReserve’sfixed-rateONRRPexercise continuedtobesensitivetothespreadbetweenmar- Financingconditionsinthecommercialrealestate ketratesandtherateofferedintheexercise,with (CRE)sectorimprovedfurther.Inthefirstquarter, highertake-upoccurringondayswhenthemarket commercialmortgageloansheldonbanks’books rateonrepurchaseagreementswasclosetoorbelow continuedtogrowsolidly.AccordingtotheApril theONRRPrate.AshasbeenthecasesincetheON SLOOS,banksagaineasedstandardsonCREloans RRPexercisebegan,moneymarketfundsincreased duringthefirstquarter;theyalsoreportedan theirusageatquarter-end;take-upreachedarecord increaseinloandemand,especiallyforconstruction

Minutesof FederalOpenMarketCommitteeMeetings|April 179 andlanddevelopmentloans.Incontrast,issuanceof segmentsof theequitymarket,continuedstrong commercialmortgage-backedsecuritiesin2014has demandforcorporatedebtinstrumentsandassocibeenabitslowerthanlastyear’space. atedpressuresonunderwritingstandards,andliquidityrisksassociatedwithfixed-incomemutualfunds. Mortgagecreditconditionsgenerallyremainedtight overtheintermeetingperiod,thoughsignsof easing Staff Economic Outlook continuedtoemergeamidfurthergainsinhouse prices.Inparticular,theAprilSLOOSindicatedanet Intheeconomicforecastpreparedbythestaff forthe easingof banks’creditstandardsforhome-purchase AprilFOMCmeeting,realGDPgrowthinthefirst loanstoprimecustomersinthefirstquarter.Mort- half of thisyearwassomewhatslowerthaninthe gageinterestratesandtheirspreadsoverTreasury projectionfortheMarchmeeting.Theavailablereadyieldswerelittlechangedovertheintermeeting ingsonnetexportsand,toalesserextent,residential period,andapplicationsforrefinancingandpur- investmentpointedtolessspendinggrowthinthe chasemortgagesremainedtepid. firstquarterthanthestaff previouslyexpected.However,thestaff’sassessmentwasthattheunanticipated Conditionsinconsumercreditmarketscontinuedto weaknessineconomicactivityinthefirstquarter bemixed.Studentandautoloansexpandedata wouldbelargelytransitoryandimpliedlittlerevision robustpace,whilecreditcarddebtoutstanding toitsprojectionforsecond-quarteroutputgrowth.In stayedflat,asithadbeeninrecentmonths.Financ- addition,themedium-termforecastforrealGDP ingconditionsintheconsumerasset-backedsecuri- growthwasessentiallyunrevised.Thestaff continued tiesmarketremainedfavorable,andissuancecontin- toprojectthatrealGDPwouldexpandatafaster uedtobesolid. paceoverthenextfewyearsthanitdidlastyear,and thatitwouldrisemorequicklythanthegrowthrate Mostforeignequityindexesroseovertheperiod of potentialoutput.Thefasterpaceof realGDP despiteaglobalselloff of technology-relatedstocks, growthwasexpectedtobesupportedbyaneasingin and10-yearsovereignbondyieldsinCanada,Ger- therestraintfromchangesinfiscalpolicy,increases many,andtheUnitedKingdomwerenearly inconsumerandbusinessconfidence,further unchangedonnet.Yieldspreadsonperipheraleuro- improvementsincreditavailabilityandfinancialconareadebtoverGermanbondsof similarmaturity ditions,andapickupintherateof foreigneconomic continuedtonarrow.Thebroadnominalexchange growth.Theexpansionineconomicactivitywas rateindexforthedollarwasaboutunchanged,asthe anticipatedtoslowlyreduceresourceslackoverthe dollarappreciatedagainsttheeuro,yen,andren- projectionperiod,andtheunemploymentratewas minbibutdepreciatedagainstmostothercurrencies. expectedtodeclinegraduallytothestaff’sestimate InvestorsentimenttowardEMEscontinuedto of itslonger-runnaturalrate. improveovertheperioddespiteincomingdatathat weresomewhatweakerthanexpected.Increasingten- Thestaff’sforecastforinflationwasbasically sionsbetweenUkraineandRussia,aswellasthelow- unchangedfromtheprojectionpreparedforthepreeringof Russia’ssovereigndebtratingbyStandard& viousFOMCmeeting.Thestaff continuedtofore- Poor’s,contributedtoariseinRussia’s10-yearsov- castthatinflationwouldremainbelowtheCommitereignbondyieldandasharpdeclineinitsmain tee’slonger-runobjectiveof 2percentoverthenext equityindex.Outsideof thatregion,however,these fewyears.Withlonger-runinflationexpectations buildingtensionsleftlittleimprintonglobalfinancial assumedtoremainstable,changesincommodityand markets. importpricesexpectedtobesubdued,andslackin laborandproductmarketsanticipatedtodiminish Thestaff’speriodicreportonpotentialriskstofinan- slowly,inflationwasprojectedtorisegradually cialstabilityconcludedthatthevulnerabilityof the towardtheCommittee’sobjective. financialsystemtoadverseshocksremainedatmoderatelevelsoverall.Relativelystrongcapitalprofiles Thestaff viewedtheextentof uncertaintyaroundits of largedomesticbankingfirms,lowlevelsof aggre- AprilprojectionsforrealGDPgrowth,inflation,and gateleverageinthenonfinancialsector,andmoder- theunemploymentrateasroughlyinlinewiththe ateuseof short-termwholesalefundingacrossthe averageoverthepast20years.Nonetheless,therisks financialsectorwereseenastheprimaryfactorssup- totheforecastforrealGDPgrowthwereviewedas portingoverallfinancialstability.However,thestaff tiltedalittletothedownside,especiallybecausethe reportalsohighlightedvaluationpressuresinsome economywasnotwellpositionedtowithstand

180 101stAnnualReport|2014 adverseshockswhilethetargetforthefederalfunds potentiallyputtingdownwardpressureonpricesand ratewasatitseffectivelowerbound.Atthesame rents,butthedemandforthistypeof housing time,thestaff viewedtherisksarounditsoutlookfor expectedtoriseasthepopulationages.Acoupleof theunemploymentrateandforinflationasroughly participantsnotedthatmortgagecreditavailability balanced. remainedconstrainedandlendingstandardswere tightcomparedwithhistoricalnorms,especiallyfor Participants’ Views on Current Conditions purchasemortgages.However,reportsfromsome and the Economic Outlook Districtsindicatedthatrealestateandhousingrelatedbusinessactivityhadstrengthenedrecently, Intheirdiscussionof theeconomicsituationandthe consistentwiththesolidgainsinconsumerspending outlook,meetingparticipantsgenerallyindicated registeredinMarch. thattheirassessmentof theeconomicoutlookhad notchangedmateriallysincetheMarchmeeting. Conditionsinthelabormarketcontinuedtoimprove Severewinterweatherhadcontributedtoasharp overtheintermeetingperiodandparticipantsgenerslowinginactivityduringthefirstquarter,butrecent allyexpectedfurthergradualimprovement.Particiindicatorspointedtoareboundandsuggestedthat pantsdiscussedarangeof researchandanalysis theeconomyhadreturnedtoatrajectoryof moder- bearingontheamountof availableslackremaining ategrowth.However,someparticipantsremarked inthelabormarket.Anumberof themarguedthat thatitwastooearlytoconfirmthatthebounceback severalindicatorsof laborunderutilization—includineconomicactivitywouldputtheeconomyona ingthelowlaborforceparticipationrateandthestillpathof sustainedabove-trendeconomicgrowth.In elevatedratesof longer-durationunemploymentand general,participantscontinuedtoviewtherisksto of workersemployedparttimeforeconomicreatheoutlookfortheeconomyandthelabormarketas sons—suggestedthatthereismoreslackinthelabor nearlybalanced.However,anumberof participants marketthaniscapturedbytheunemploymentrate pointedtopossiblesourcesof downsideriskto alone.Lownominalwageinflationwasalsoviewedas growth,includingapersistentslowdowninthehous- consistentwithslackinlabormarkets.However, ingsectororpotentialinternationaldevelopments, someparticipantsreportedthatlabormarketswere suchasafurtherslowingof growthinChinaoran tightintheirDistrictsorthatcontactsindicatedsome increaseingeopoliticaltensionsregardingRussiaand sectorsoroccupationswereexperiencingshortagesof Ukraine. workers.Anotherparticipantobservedthatlabor underutilization,asmeasuredbyanindexthattakes Participantsnotedthatbusinesscontactsinmany employmenttransitionratesintoaccount,wasconpartsof thecountryweregenerallyoptimisticabout sistentwithpastperiodsinwhichtheofficialunemeconomicprospects,withreportsof increasedsales ploymentratehadreacheditscurrentlevel,andhad of automobiles,higherproductionintheaerospace declinedaboutasmuchrelativetotheofficialunemindustry,andincreasedusageof industrialpower;in ploymentrateasithadinpreviouseconomic addition,acoupleof firmswithaglobalpresence recoveries. reportedanotableincreaseindemandfromcustomersinEurope.ContactsinseveralDistrictspointedto Indiscussingtheeffectof labormarketconditionson plansforincreasingcapitalexpendituresorto inflation,anumberof participantsexpressedskeptistrongerdemandforcommercialandindustrialloans. cismaboutrecentstudiessuggestingthatlong-term Intheagriculturalsector,theplantingseasonwas unemploymentprovideslessdownwardpressureon underway,buttherewereconcernsabouttheeffects wageandpriceinflationthanshort-termunemployof droughtonproductioninsomeareas. mentdoes.Acoupleof participantscitedother researchfindingsthatbothshort-andlong-term Mostparticipantscommentedonthecontinuing unemploymentratesexertpressureonwages,with weaknessinhousingactivity.Theysawarangeof theeffectsof long-termunemploymentincreasingas factorsaffectingthehousingmarket,including thelevelof short-termunemploymentdeclines. higherhomeprices,constructionbottlenecksstem- Moreover,afewparticipantspointedoutthat mingfromascarcityof laborandharshwinter becauseof downwardnominalwagerigidityduring weather,inputcostpressures,orashortageinthe therecession,wageincreasesarelikelytoremainrelasupplyof availablelots.Viewsvariedregardingthe tivelymodestforsometimeduringtherecovery,even outlookforthemultifamilysector,withthelarge asthelabormarketstrengthens.Itwasalsonoted increaseinmultifamilyunitscomingtomarket thatbecauseinflationwasexpectedtoremainwell

Minutesof FederalOpenMarketCommitteeMeetings|April 181 belowtheCommittee’s2percentobjectiveandthe nomicconditionsmay,forsometime,warrantkeepunemploymentratewasstillaboveparticipants’esti- ingthetargetfederalfundsratebelowlevelsthe matesof itslonger-runnormallevel,theCommittee Committeeviewsasnormalinthelongerrun.In didnot,atpresent,faceatradeoff betweenits addition,afewparticipantsjudgedthatadditional employmentandinflationobjectives,andanexpan- clarityabouttheCommittee’sreactionfunction sionof aggregatedemandwouldresultinfurther couldbeparticularlyimportantintheeventthat progressrelativetobothobjectives. futureeconomicconditionsnecessitateamorerapid riseinthetargetfederalfundsratethantheCommit- InflationcontinuedtorunbelowtheCommittee’s teecurrentlyanticipates.Anumberof participants 2percentlonger-runobjectiveovertheintermeeting suggestedthatitwouldbeusefultoprovideaddiperiod.Manyparticipantssawtherecentbehaviorof tionalinformationregardinghowlongtheCommitthepricesof food,energy,shelter,andimportsas teewouldcontinueitspolicyof rollingovermaturing consistentwithastabilizationininflationandjudged Treasurysecuritiesatauctionandreinvestingprincithatthetransitoryfactorsthathadreducedinflation, palpaymentsonallagencydebtandagency suchasdeclinesinadministeredpricesformedical mortgage-backedsecuritiesinagencymortgageservices,werefading.Mostparticipantsexpected backedsecurities. inflationtoreturnto2percentwithinthenextfew years,supportedbyhighlyaccommodativemonetary Committee Policy Action policy,stableinflationexpectations,andacontinued gradualrecoveryineconomicactivity.However,afew Membersviewedtheinformationreceivedoverthe othersexpressedtheconcernthatthereturnto2per- intermeetingperiodasindicatingthateconomic centinflationcouldbeevenmoregradual. growthhadpickeduprecently,followingasharp slowdownduringthewinterdueinparttounusually Intheirdiscussionof financialstability,participants severeweatherconditions.Althoughlabormarket generallydidnotseeimbalancesthatposedsignifi- indicatorsweremixed,onbalancetheyshowedfurcantnear-termriskstothefinancialsystemandthe therimprovement.Theunemploymentrate,however, broadereconomy,buttheyneverthelessreviewed remainedelevated.Whilehouseholdspending somefinancialdevelopmentsthatpointedtopoten- appearedtoberisingmorerapidly,businessfixed tialfuturerisks.Acoupleof participantsnotedthat investmenthadedgeddownandtherecoveryinthe conditionsintheleveragedloanmarkethadbecome housingsectorremainedslow.Fiscalpolicywas stretched,althoughequitycushionsonnewdeals restrainingeconomicgrowth,buttheextentof that remainedabovelevelsseenpriortothefinancialcri- restrainthaddiminished.TheCommitteeexpected sis.Twootherssawdecliningcreditspreads,particu- that,withappropriatepolicyaccommodation,ecolarlyonspeculative-gradecorporatebonds,asconsis- nomicactivitywouldexpandatamoderatepaceand tentwithanincreaseininvestors’appetiteforrisk.In labormarketconditionswouldcontinuetoimprove addition,severalparticipantsnotedthatthelowlevel gradually,movingtowardthosetheCommittee of expectedvolatilityimpliedbysomefinancialmar- judgestobeconsistentwithitsdualmandate.Moreketpricesmightalsosignalanincreaseinriskappe- over,memberscontinuedtoseeriskstotheoutlook tite.Somestatedthatitwouldbehelpfultocontinue fortheeconomyandthelabormarketasnearlybaltoexploretheappropriateregulatory,supervisory, anced.InflationwasrunningbelowtheCommittee’s andmonetarypolicyresponsestopotentialrisksto longer-runobjectiveandwasseenasposingpossible financialstability. riskstoeconomicperformance,butmembersanticipatedthatstableinflationexpectationsandstrength- ItwasnotedthatthechangestotheCommittee’sfor- eningeconomicactivitywould,overtime,return wardguidanceattheMarchFOMCmeetinghad inflationtotheCommittee’s2percenttarget.Howbeenwellunderstoodbyinvestors.However,anum- ever,inlightof theirconcernsaboutthepossibleperberof participantsemphasizedtheimportanceof sistenceof lowinflation,membersagreedthatinflacommunicatingstillmoreclearlyabouttheCommit- tiondevelopmentsshouldbemonitoredcarefullyfor tee’spolicyintentionsasthetimeof thefirstincrease evidencethatinflationwasmovingbacktowardthe inthefederalfundsratemovescloser.Somethought Committee’slonger-runobjective. itwouldbehelpfultoclarifythereasoningunderlyingthelanguageintheFOMC’spostmeetingstate- Intheirdiscussionof monetarypolicyintheperiod mentindicatingthatevenafteremploymentand ahead,membersnotedthattherehadbeenlittle inflationarenearmandate-consistentlevels,eco- changeintheeconomicoutlooksincetheMarch

182 101stAnnualReport|2014 meetinganddecidedthatitwouldbeappropriateto policyof rollingovermaturingTreasurysecurimakeafurthermeasuredreductioninthepaceof tiesintonewissuesanditspolicyof reinvesting assetpurchasesatthismeeting.Accordingly,the principalpaymentsonallagencydebtand Committeeagreedthat,beginninginMay,itwould agencymortgage-backedsecuritiesinagency addtoitsholdingsof agencymortgage-backedsecu- mortgage-backedsecurities.TheSystemOpen ritiesatapaceof $20billionpermonthratherthan MarketAccountManagerandtheSecretarywill $25billionpermonth,andwouldaddtoitsholdings keeptheCommitteeinformedof ongoingdevelof longer-termTreasurysecuritiesatapaceof opmentsregardingtheSystem’sbalancesheet $25billionpermonthratherthan$30billionper thatcouldaffecttheattainmentovertimeof the month.Membersagainjudgedthat,if theeconomy Committee’sobjectivesof maximumemploycontinuedtodevelopasanticipated,theCommittee mentandpricestability.” wouldlikelyreducethepaceof assetpurchasesin furthermeasuredstepsatfuturemeetings.However, Thevoteencompassedapprovalof thestatement membersunderscoredthatthepaceof assetpur- belowtobereleasedat2:00p.m.: chaseswasnotonapresetcourseandwouldremain contingentontheCommittee’soutlookforthelabor “InformationreceivedsincetheFederalOpen marketandinflationaswellasitsassessmentof the MarketCommitteemetinMarchindicatesthat likelyefficacyandcostsof purchases. growthineconomicactivityhaspickedup recently,afterhavingslowedsharplyduringthe TheCommitteeagreedthatnochangestoitstarget winterinpartbecauseof adverseweathercondirangeforthefederalfundsrateoritsforwardguid- tions.Labormarketindicatorsweremixedbut ancewerewarrantedatthismeeting,asidefrom onbalanceshowedfurtherimprovement.The removingashortparagraphthatwasaddedwhenthe unemploymentrate,however,remainselevated. forwardguidancewasupdatedattheMarchmeeting Householdspendingappearstoberisingmore andwhichnotedthatthechangeintheCommittee’s quickly.Businessfixedinvestmentedgeddown, guidancedidnotsignalachangeintheCommittee’s whiletherecoveryinthehousingsector policyintentions;membersdeemedthislanguageno remainedslow.Fiscalpolicyisrestrainingecolongernecessary. nomicgrowth,althoughtheextentof restraintis diminishing.Inflationhasbeenrunningbelow Attheconclusionof thediscussion,theCommittee theCommittee’slonger-runobjective,but votedtoauthorizeanddirecttheFederalReserve longer-terminflationexpectationshave Bankof NewYork,untilitwasinstructedotherwise, remainedstable. toexecutetransactionsintheSOMAinaccordance withthefollowingdomesticpolicydirective: Consistentwithitsstatutorymandate,theCommitteeseekstofostermaximumemployment “Consistentwithitsstatutorymandate,theFed- andpricestability.TheCommitteeexpectsthat, eralOpenMarketCommitteeseeksmonetary withappropriatepolicyaccommodation,ecoandfinancialconditionsthatwillfostermaxi- nomicactivitywillexpandatamoderatepace mumemploymentandpricestability.Inparticu- andlabormarketconditionswillcontinueto lar,theCommitteeseeksconditionsinreserve improvegradually,movingtowardthosethe marketsconsistentwithfederalfundstradingin Committeejudgesconsistentwithitsdualmanarangefrom0to¼percent.TheCommittee date.TheCommitteeseestheriskstotheoutdirectstheDesktoundertakeopenmarket lookfortheeconomyandthelabormarketas operationsasnecessarytomaintainsuchcondi- nearlybalanced.TheCommitteerecognizesthat tions.BeginninginMay,theDeskisdirectedto inflationpersistentlybelowits2percentobjecpurchaselonger-termTreasurysecuritiesata tivecouldposeriskstoeconomicperformance, paceof about$25billionpermonthandtopur- anditismonitoringinflationdevelopmentscarechaseagencymortgage-backedsecuritiesata fullyforevidencethatinflationwillmoveback paceof about$20billionpermonth.TheCom- towarditsobjectiveoverthemediumterm. mitteealsodirectstheDesktoengageindollar rollandcouponswaptransactionsasnecessary TheCommitteecurrentlyjudgesthatthereis tofacilitatesettlementof theFederalReserve’s sufficientunderlyingstrengthinthebroader agencymortgage-backedsecuritiestransactions. economytosupportongoingimprovementin TheCommitteedirectstheDesktomaintainits labormarketconditions.Inlightof thecumula-

Minutesof FederalOpenMarketCommitteeMeetings|April 183 tiveprogresstowardmaximumemploymentand remainsappropriate.Indetermininghowlongto theimprovementintheoutlookforlabormarket maintainthecurrent0to¼percenttargetrange conditionssincetheinceptionof thecurrent forthefederalfundsrate,theCommitteewill assetpurchaseprogram,theCommitteedecided assessprogress—bothrealizedandexpected— tomakeafurthermeasuredreductioninthe towarditsobjectivesof maximumemployment paceof itsassetpurchases.BeginninginMay, and2percentinflation.Thisassessmentwilltake theCommitteewilladdtoitsholdingsof agency intoaccountawiderangeof information, mortgage-backedsecuritiesatapaceof $20bil- includingmeasuresof labormarketconditions, lionpermonthratherthan$25billionper indicatorsof inflationpressuresandinflation month,andwilladdtoitsholdingsof longer- expectations,andreadingsonfinancialdeveloptermTreasurysecuritiesatapaceof $25billion ments.TheCommitteecontinuestoanticipate, permonthratherthan$30billionpermonth. basedonitsassessmentof thesefactors,thatit TheCommitteeismaintainingitsexistingpolicy likelywillbeappropriatetomaintainthecurrent of reinvestingprincipalpaymentsfromitshold- targetrangeforthefederalfundsrateforaconingsof agencydebtandagencymortgage- siderabletimeaftertheassetpurchaseprogram backedsecuritiesinagencymortgage-backed ends,especiallyif projectedinflationcontinues securitiesandof rollingovermaturingTreasury torunbelowtheCommittee’s2percentlongersecuritiesatauction.TheCommittee’ssizable rungoal,andprovidedthatlonger-terminflaandstill-increasingholdingsof longer-term tionexpectationsremainwellanchored. securitiesshouldmaintaindownwardpressure onlonger-terminterestrates,supportmortgage WhentheCommitteedecidestobegintoremove markets,andhelptomakebroaderfinancial policyaccommodation,itwilltakeabalanced conditionsmoreaccommodative,whichinturn approachconsistentwithitslonger-rungoalsof shouldpromoteastrongereconomicrecovery maximumemploymentandinflationof 2perandhelptoensurethatinflation,overtime,isat cent.TheCommitteecurrentlyanticipatesthat, theratemostconsistentwiththeCommittee’s evenafteremploymentandinflationarenear dualmandate. mandate-consistentlevels,economicconditions may,forsometime,warrantkeepingthetarget TheCommitteewillcloselymonitorincoming federalfundsratebelowlevelstheCommittee informationoneconomicandfinancialdevelop- viewsasnormalinthelongerrun.” mentsincomingmonthsandwillcontinueits purchasesof Treasuryandagencymortgage- Votingforthisaction:JanetL.Yellen,WilliamC. backedsecurities,andemployitsotherpolicy Dudley,RichardW.Fisher,NarayanaKocherlakota, toolsasappropriate,untiltheoutlookforthe SandraPianalto,CharlesI.Plosser,JeromeH. labormarkethasimprovedsubstantiallyina Powell,JeremyC.Stein,andDanielK.Tarullo. contextof pricestability.If incominginformationbroadlysupportstheCommittee’sexpecta- Votingagainstthisaction:None. tionof ongoingimprovementinlabormarket conditionsandinflationmovingbacktowardits Itwasagreedthatthenextmeetingof theCommittee longer-runobjective,theCommitteewilllikely wouldbeheldonTuesday–Wednesday,June17–18, reducethepaceof assetpurchasesinfurther 2014.Themeetingadjournedat10:55a.m.on measuredstepsatfuturemeetings.However, April30,2014. assetpurchasesarenotonapresetcourse,and theCommittee’sdecisionsabouttheirpacewill remaincontingentontheCommittee’soutlook Notation Vote forthelabormarketandinflationaswellasits assessmentof thelikelyefficacyandcostsof BynotationvotecompletedonApril8,2014,the suchpurchases. Committeeunanimouslyapprovedtheminutesof the CommitteemeetingheldonMarch18–19,2014. Tosupportcontinuedprogresstowardmaximumemploymentandpricestability,theCom- WilliamB.English mitteetodayreaffirmeditsviewthatahighly Secretary accommodativestanceof monetarypolicy

184 101stAnnualReport|2014 Meeting Held on June 17–18, 2014 JamesA.Clouse,ThomasA.Connors, EvanF.Koenig,ThomasLaubach, MichaelP.Leahy,SamuelSchulhofer-Wohl, Ameetingof theFederalOpenMarketCommittee MarkE.Schweitzer,andWilliamWascher washeldintheofficesof theBoardof Governorsof AssociateEconomists theFederalReserveSysteminWashington,D.C.,on Tuesday,June17,2014,at10:00a.m.andcontinued SimonPotter onWednesday,June18,2014,at9:00a.m. Manager,SystemOpenMarketAccount Present LorieK.Logan DeputyManager,SystemOpenMarketAccount JanetL.Yellen Chair RobertdeV.Frierson1 Secretaryof theBoard,Officeof theSecretary, WilliamC.Dudley Boardof Governors ViceChairman NellieLiang LaelBrainard Director,Officeof FinancialStabilityPolicyand Research,Boardof Governors StanleyFischer StephenA.MeyerandWilliamR.Nelson RichardW.Fisher DeputyDirectors,Divisionof MonetaryAffairs, NarayanaKocherlakota Boardof Governors LorettaJ.Mester MarkE.VanDerWeide DeputyDirector,Divisionof BankingSupervision CharlesI.Plosser andRegulation,Boardof Governors JeromeH.Powell JonW.FaustandStaceyTevlin DanielK.Tarullo SpecialAdviserstotheBoard,Officeof Board Members,Boardof Governors ChristineCumming,CharlesL.Evans, JeffreyM.Lacker,DennisP.Lockhart, TrevorA.Reeve andJohnC.Williams SpecialAdvisertotheChair,Officeof Board AlternateMembersof theFederalOpenMarket Members,Boardof Governors Committee LindaRobertson JamesBullard,EstherL.George, AssistanttotheBoard,Officeof BoardMembers, andEricRosengren Boardof Governors Presidentsof theFederalReserveBanksof St.Louis, BrianM.Doyle KansasCity,andBoston,respectively SeniorAdviser,Divisionof InternationalFinance, WilliamB.English Boardof Governors SecretaryandEconomist EllenE.MeadeandJoyceK.Zickler MatthewM.Luecke SeniorAdvisers,Divisionof MonetaryAffairs, DeputySecretary Boardof Governors MichelleA.Smith DanielM.Covitz,EricM.Engen, AssistantSecretary MichaelT.Kiley,andDavidE.Lebow AssociateDirectors,Divisionof Researchand ScottG.Alvarez Statistics,Boardof Governors GeneralCounsel FabioM.Natalucci1andGretchenC.Weinbach1 StevenB.Kamin AssociateDirectors,Divisionof MonetaryAffairs, Economist Boardof Governors DavidW.Wilcox Economist 1 AttendedthejointsessionoftheFederalOpenMarketCommitteeandtheBoardofGovernors.

Minutesof FederalOpenMarketCommitteeMeetings|June 185 BethAnneWilson CletusC.Coughlin,MaryDaly,TroyDavig, AssociateDirector,Divisionof InternationalFinance, MichaelDotsey,JoshuaL.Frost, Boardof Governors andJohnA.Weinberg SeniorVicePresidents,FederalReserveBanksof WilliamF.BassettandJaneE.Ihrig1 St.Louis,SanFrancisco,KansasCity,Philadelphia, DeputyAssociateDirectors,Divisionof Monetary NewYork,andRichmond,respectively Affairs,Boardof Governors DeborahL.Leonard,1GiovanniOlivei, JoshuaGallin andDouglasTillett DeputyAssociateDirector,Divisionof Researchand VicePresidents,FederalReserveBanksof NewYork, Statistics,Boardof Governors Boston,andChicago,respectively MinWei2 MarcGiannoni AssistantDirector,Divisionof MonetaryAffairs, ResearchOfficer,FederalReserveBankof NewYork Boardof Governors JeremyB.Rudd Intheagendaforthismeeting,itwasreportedthat Adviser,Divisionof ResearchandStatistics, LorettaJ.Mesterhadbeenelectedamemberof the Boardof Governors FederalOpenMarketCommitteeandthatshehad executedheroathof office. PenelopeA.Beattie1 AssistanttotheSecretary,Officeof theSecretary, Developments in Financial Markets and Boardof Governors the Federal Reserve’s Balance Sheet LauraLipscomb1 SectionChief,Divisionof MonetaryAffairs, Inajointsessionof theFederalOpenMarketCom- Boardof Governors mittee(FOMC)andtheBoardof Governorsof the FederalReserveSystem,thedeputymanagerof the DavidH.Small SystemOpenMarketAccount(SOMA)reportedon ProjectManager,Divisionof MonetaryAffairs, developmentsindomesticandforeignfinancialmar- Boardof Governors kets.TheSOMAmanagerreportedontheSystem KatieRoss1 openmarketoperationsduringtheperiodsincethe Manager,Officeof theSecretary, CommitteemetonApril29–30,2014,outlinedthe Boardof Governors testingof theTermDepositFacility,describedthe resultsfromthefixed-rateovernightreverserepur- WendyDunnandPatrickMcCabe1 chaseagreement(ONRRP)operationalexercise,and SeniorEconomists,Divisionof Researchand providedsomepossibleoptionsforadjustingthelist Statistics,Boardof Governors of counterpartieseligibletoparticipateinONRRP EtienneGagnon operations.Themanageralsonotedtheeffectsof SeniorEconomist,Divisionof MonetaryAffairs, recentforeigncentralbankpolicyactionsonthe Boardof Governors yieldsontheinternationalportionof theSOMA portfolioanddiscussedongoingstaff workon JonathanRose improvingdatacollectionsregardingbankfunding Economist,Divisionof MonetaryAffairs, markets.Byunanimousvote,theCommitteeratified Boardof Governors theOpenMarketDesk’sdomestictransactionsover AchillesSangsterII theintermeetingperiod.Therewerenointervention RecordsManagementAnalyst,Divisionof Monetary operationsinforeigncurrenciesfortheSystem’s Affairs,Boardof Governors accountovertheintermeetingperiod. MarkL.Mullinix Monetary Policy Normalization FirstVicePresident,FederalReserveBankof Richmond Meetingparticipantscontinuedtheirdiscussionof DavidAltigandDanielG.Sullivan issuesassociatedwiththeeventualnormalizationof ExecutiveVicePresidents,FederalReserveBanksof thestanceandconductof monetarypolicy.The AtlantaandChicago,respectively Committee’sconsiderationof thistopicwasundertakenaspartof prudentplanninganddidnotimply 2 AttendedTuesday’ssessiononly. thatnormalizationwouldnecessarilybeginsometime

186 101stAnnualReport|2014 soon.Astaff presentationincludedsomepossible WhilegenerallyagreeingthatanONRRPfacility strategiesforimplementingandcommunicating couldplayanimportantroleinthepolicynormalizamonetarypolicyduringaperiodwhentheFederal tionprocess,participantsdiscussedseveralpotential Reservewillhaveaverylargebalancesheet.Inaddi- unintendedconsequencesof usingsuchafacilityand tion,thepresentationoutlineddesignfeaturesof a designfeaturesthatcouldhelptomitigatetheseconpotentialONRRPfacilityanddiscussedoptionsfor sequences.Mostparticipantsexpressedconcernsthat theCommittee’spolicyof rollingovermaturing intimesof financialstress,thefacility’scounterpar- Treasurysecuritiesatauctionandreinvestingprinci- tiescouldshiftinvestmentstowardthefacilityand palpaymentsonallagencydebtandagency awayfromfinancialandnonfinancialcorporations, mortgage-backedsecurities(MBS)inagencyMBS. possiblycausingdisruptionsinfundingthatcould magnifythestress.Inaddition,anumberof partici- Mostparticipantsagreedthatadjustmentsintherate pantsnotedthatarelativelylargeONRRPfacility of interestonexcessreserves(IOER)shouldplaya hadthepotentialtoexpandtheFederalReserve’s centralroleduringthenormalizationprocess.Itwas roleinfinancialintermediationandreshapethe generallyagreedthatanONRRPfacilitywithan financialindustryinwaysthatweredifficulttoanticiinterestratesetbelowtheIOERratecouldplaya pate.Participantsdiscusseddesignfeaturesthatcould usefulsupportingrolebyhelpingtofirmthefloor addresstheseconcerns,includingconstraintson undermoneymarketinterestrates.Oneparticipant usageeitherintheaggregateorbycounterpartyand thoughtthattheONRRPratewouldbethemore arelativelywidespreadbetweentheONRRPrate effectivepolicytoolduringnormalizationinlightof andtheIOERratethatwouldhelplimitthefacility’s thewidervarietyof counterpartieseligibletopartici- size.Severalparticipantsemphasizedthat,although pateinONRRPoperations.Theappropriatesizeof theONRRPratewouldbeusefulincontrolling thespreadbetweentheIOERandONRRPrates short-terminterestratesduringnormalization,they wasdiscussed,withmanyparticipantsjudgingthata didnotanticipatethatsuchafacilitywouldbeaperrelativelywidespread—perhapsnearorabovethe manentpartof theCommittee’slonger-runoperatcurrentlevelof 20basispoints—wouldsupporttrad- ingframework.Finally,anumberof participants inginthefederalfundsmarketandprovideadequate expressedconcernaboutconductingmonetarypolicy controlovermarketinterestrates.Severalpartici- operationswithnontraditionalcounterparties. pantsnotedthatthespreadmightbeadjustedduring thenormalizationprocess.Acoupleof participants Participantsalsodiscussedtheappropriatetimefor suggestedthatadequatecontrolof short-termrates makingachangetotheCommittee’spolicyof rolling mightbeaccomplishedwithaverywidespreador overmaturingTreasurysecuritiesatauctionandreinevenwithoutanONRRPfacility.Afewparticipants vestingprincipalpaymentsonallagencydebtand commentedthattheCommitteeshouldalsobepre- agencyMBSinagencyMBS.Itwasnotedthat,inthe paredtouseitsotherpolicytools,includingterm staff’smodels,makingachangetotheCommittee’s depositsandtermreverserepurchaseagreements,if reinvestmentpolicypriortotheliftoff of thefederal necessary.Mostparticipantsthoughtthatthefederal fundsrate,atthetimeof liftoff,orsometimethereaffundsrateshouldcontinuetoplayaroleintheCom- terwouldbeexpectedtohaveonlylimitedimplicamittee’soperatingframeworkandcommunications tionsformacroeconomicoutcomes,theCommittee’s duringnormalization,withmanyof themindicating statutoryobjectives,orremittancestotheTreasury. apreferenceforcontinuingtoannounceatarget Manyparticipantsagreedthatendingreinvestments range.However,afewparticipantsthoughtthat, atorafterthetimeof liftoff wouldbebest,with giventhedegreeof uncertaintyabouttheeffectsof mostof theseparticipantspreferringtoendthem theCommittee’stoolsonmarketrates,itmightbe afterliftoff.Theseparticipantsthoughtthatanearpreferabletofocusonanadministeredrateincom- lierchangetothereinvestmentpolicywouldinvolve municatingthestanceof policyduringthenormal- riskstotheeconomicoutlookif itwasseenassugizationperiod.Inaddition,participantsexamined gestingthattheCommitteewaslikelytotighten possibilitiesforchangingthecalculationof theeffec- policymorerapidlythancurrentlyanticipatedorif it tivefederalfundsrateinordertoobtainamore hadunexpectedlylargeeffectsinMBSmarkets; robustmeasureof overnightbankfundingratesand moreover,anearlychangecouldaddcomplexityto toapplylessonsfrominternationaleffortstodevelop theCommittee’scommunicationsatatimewhenit improvedstandardsforbenchmarkinterestrates. wouldbeclearertosignalchangesinpolicythrough

Minutesof FederalOpenMarketCommitteeMeetings|June 187 interestratesalone.However,someparticipants Mostmeasuresof labormarketconditionsimproved favoredendingreinvestmentspriortothefirstfirm- inrecentmonths.Totalnonfarmpayrollemployment inginpolicyinterestrates,asstatedintheCommit- expandedinAprilandMayatafasterratethanthe tee’sexitstrategyprinciplesannouncedinJune2011. averagemonthlypaceduringtheprevioustwoquar- Thoseparticipantsthoughtthatsuchanapproach ters.Theunemploymentratedroppedto6.3percent wouldavoidweakeningthecredibilityof theCom- inAprilandremainedatthatlevelinMay.However, mittee’scommunicationsregardingnormalization, thelaborforceparticipationratealsodeclinedin wouldacttomodestlyreducethesizeof theFederal AprilandthenheldsteadyinMay,whilethe Reserve’sbalancesheet,orwouldhelppreparethe employment-to-populationratioremainedflat.Both publicfortheeventualriseinshort-terminterest theshareof workersemployedparttimeforecorates.Regardlessof whethertheypreferredtointro- nomicreasonsandtherateof long-durationunemduceachangetotheCommittee’sreinvestment ploymentedgeddowninrecentmonths,although policybeforeoraftertheinitialtighteninginshort- bothmeasureswerestillhigh.Initialclaimsfor terminterestrates,anumberof participantsthought unemploymentinsurancedecreasedslightly,onnet, thatitmightbebesttofollowagraduatedapproach overtheintermeetingperiod,andtherateof job withrespecttowindingdownreinvestmentsorto openingssteppedupinApril;nevertheless,therateof managereinvestmentsinamannerthatwould hiringwasunchangedandremainedatamodest smooththedeclineinthebalancesheet.Some level. stressedthatthedetailsshoulddependonfinancial andeconomicconditions. Industrialproductionincreased,onbalance,inApril andMay,asmanufacturingoutputandproductionin Overall,participantsgenerallyexpressedapreference theminingsectorexpandedandmorethanoffseta forasimpleandclearapproachtonormalizationthat furtherdeclineintheoutputof utilitiesfromthe wouldfacilitatecommunicationtothepublicand elevatedlevelsrecordedduringtheunusuallycold enhancethecredibilityof monetarypolicy.Itwas wintermonths.Asaresult,therateof industrial observedthatitwouldbeusefulfortheCommitteeto capacityutilizationroseinrecentmonths.Automakdevelopandcommunicateitsplanstothepubliclater ers’schedulesindicatedthatthepaceof lightmotor thisyear,wellbeforethefirststepsinnormalizing vehicleassemblieswouldstepupinthecoming policybecomeappropriate.Mostparticipantsindi- months,andbroaderindicatorsof manufacturing catedthattheyexpectedtolearnmoreaboutthe production,suchasthereadingsonnewordersfrom effectsof theCommittee’svariouspolicytoolsas nationalmanufacturingsurveys,wereconsistentwith normalizationproceeds,andmanyfavoredmaintain- moderateincreasesinfactoryoutputinthenear ingflexibilityabouttheevolutionof thenormaliza- term. tionprocessaswellastheCommittee’slonger-run operatingframework.Participantsrequestedaddi- Realpersonalconsumptionexpenditures(PCE) tionalanalysisfromthestaff onissuesrelatedtonor- declinedalittleinAprilfollowingstronggainsin malizationandagreedthatitwouldbehelpfulto FebruaryandMarch.Thecomponentof thenominal continuetoreviewtheseissuesatupcomingmeetings. retailsalesdatausedbytheBureauof Economic TheBoardmeetingconcludedattheendof the Analysistoconstructitsestimateof PCEedged discussion. downinMay,butlightmotorvehiclesalesmovedup briskly.Recentinformationaboutkeyfactorsthat influencehouseholdspendingmostlypointedto Staff Review of the Economic Situation gainsinPCEinthecomingmonths.Realdisposable incomecontinuedtoriseinApril,andhouseholds’ TheinformationreviewedfortheJune17–18meeting networthlikelyincreasedasequitypricesandhome indicatedthatrealgrossdomesticproduct(GDP) valuesadvancedfurther;however,consumersentihaddroppedsignificantlyearlyintheyearbutthat mentintheThomsonReuters/Universityof Michieconomicgrowthhadbouncedbackinrecent ganSurveysof Consumersmoveddownsomewhatin months.Theaveragepaceof employmentgains MayandearlyJune. steppedup,andtheunemploymentratedeclined markedlyinAprilandheldsteadyinMay,although Thepaceof activityinthehousingsectorremained itwasstillelevated.Consumerpriceinflationpicked subdued.Startsof newsingle-familyhomesdeclined upinrecentmonths,whilemeasuresof longer-run slightly,onnet,inAprilandMay,althoughstartsof inflationexpectationsremainedstable. multifamilyunitsincreased.Permitsforsingle-family

188 101stAnnualReport|2014 homes,whichareusuallyabetterindicatorof the PCEinflation—whichexcludesfoodandenergy underlyingpaceof residentialconstruction,increased prices—wasalsoaround1½percent.InMay,the onlyalittleonbalance.Salesof newhomesrosein consumerpriceindex(CPI)increasedatafasterpace Aprilbutremainedneartheiraveragemonthlylevel thanintheprecedingfewmonths;bothfoodand lastyear.ExistinghomesalesonlyedgedupinApril energypricesrosemorebriskly,andcoreCPIinflaandwerestillbelowlastyear’saveragelevel,while tionalsosteppedup.Overthe12monthsendingin pendinghomesaleswerelittlechanged. May,bothtotalandcoreCPIinflationwereabout 2percent.Near-terminflationexpectationsfromthe Realprivateexpendituresforbusinessequipmentand Michigansurveydeclinedslightly,onbalance,inMay intellectualpropertyproductswereestimatedtohave andearlyJune,whilelonger-terminflationexpectaincreasedslowlyinthefirstquarterasawhole.In tionsfromthesurveywerelittlechanged. April,nominalordersandshipmentsof nondefense capitalgoodsexcludingaircraftdecreasedalittle Increasesinmeasuresof laborcompensation afterrisingbrisklyinMarch.However,thelevelof remainedmodest.Compensationperhourinthe newordersforthesecapitalgoodsremainedabove nonfarmbusinesssectorroseabout2¼percentover thelevelof shipmentsinApril,pointingtoincreases theyearendinginthefirstquarter;withsmallgains inshipmentsinsubsequentmonths.Otherforward- inlaborproductivity,unitlaborcostsadvancedmore lookingindicators,suchassurveysof businesscondi- slowlythancompensationperhour.Overtheyear tions,werealsogenerallyconsistentwithmodest endinginMay,averagehourlyearningsforall increasesinbusinessequipmentspendinginthenear employeesincreasedaround2percent. term.Nominalbusinessspendingfornonresidential structureswasessentiallyunchangedinApril.Recent ForeignrealGDPgrowthslowedinthefirstquarter, dataonthebookvalueof inventories,alongwith especiallyinChinaandsomeotheremergingmarket readingsoninventoriesfromnationalandregional economies.RealGDPalsoincreasedmoreslowlyin manufacturingsurveys,didnotpointtosignificant Canada,inpartbecauseof severewinterweather, inventoryimbalancesinmostindustriesexceptinthe andthepaceof economicactivityremainedweakin energysector,whereinventoriesappearedunusually theeuroarea.Economicgrowthcontinuedtobe lowafterhavingbeendrawndownduringthewinter. strongintheUnitedKingdom,andeconomicactivityjumpedinJapanashouseholdspendingsurgedin FederalspendingdataforAprilandMaypointed advanceof April’sconsumptiontaxhike.Indicators towardonlyasmalldeclineinrealfederalgovern- forthesecondquartergenerallysuggestedthatformentpurchasesinthesecondquarter,asthepaceof eigneconomicgrowthpickedupfromthefirstquardecreasesindefenseexpendituresseemedtoease. ter.Insomeadvancedforeigneconomies,inflation Realstateandlocalgovernmentpurchasesappeared moveduprecentlyfromearlierlowreadings.Inflatoedgeupgoingintothesecondquarter.Thepay- tioncontinuedtobelow,however,intheeuroarea, rollsof thesegovernmentsexpandedinApriland andtheEuropeanCentralBank(ECB)announced May,andnominalstateandlocalconstruction additionalstimulusmeasures. expendituresincreasedalittleinApril. Staff Review of the Financial Situation TheU.S.internationaltradedeficitwidenedin MarchandinApril.Bothimportsandexportsrecov- Onbalance,financialconditionsintheUnitedStates eredfromweakreadingsinFebruary,withimportsof remainedsupportiveof growthineconomicactivity consumergoods,automotiveproducts,andcapital andemployment:Theexpectedpathof thefederal goodsrisingsignificantlyandexportsof capital fundsratewasslightlylowerinthelongrun,yields goodsandindustrialsuppliesshowingparticular onlonger-termTreasurysecuritiesmoveddown strength. modestly,equitypricesrose,corporatebondspreads narrowed,andtheforeignexchangevalueof thedol- U.S.consumerpriceinflation,asmeasuredbythe larwaslittlechanged. PCEpriceindex,wasabout1½percentoverthe 12monthsendinginApril,belowtheCommittee’s FederalReservecommunicationsovertheintermeetlonger-runobjectiveof 2percent.Overthesame ingperiodhadlimitedeffectsinfinancialmarkets. 12-monthperiod,consumerenergypricesrosefaster TheAprilFOMCstatementandminutesappearedto thantotalconsumerprices,whileconsumerfood begenerallyinlinewithexpectations,whilethe pricesclimbedmoreslowlythanoverallprices;core Chair’scongressionaltestimonybeforetheJointEco-

Minutesof FederalOpenMarketCommitteeMeetings|June 189 nomicCommitteeinearlyMayandthesubsequent Broadstockpriceindexesroseovertheintermeeting question-and-answersessionwereviewedbymarket period,apparentlyboostedbyamoreoptimistic participantsassuggestingmarginallymoreaccom- assessmentof near-termeconomicprospectsand modativepolicythanexpected. likelysupportedbycontinuedlowinterestrates. Despitegenerallylacklusterresultsforfirst-quarter ResultsfromtheDesk’sJuneSurveyof Primary earnings,corporateguidanceforprofitsincoming Dealersindicatednochangeinthedealers’consensus quartersledtoupwardrevisionsinanalysts’forecasts expectationaboutthemostlikelytimingof thefirst of year-aheadearningspershareforS&P500firms. increaseinthefederalfundsratetargetbutshoweda TheVIX,anindexof option-impliedvolatilityfor lowermedianlonger-runlevelof thefederalfunds one-monthreturnsontheS&P500index,continued raterelativetotheAprilsurvey.Expectationsfor todeclineandendedtheperiodnearitshistorical FederalReserveassetpurchaseswerelargely lows.Measuresof uncertaintyinotherfinancialmarunchanged.Inaddition,althoughtherewassignifi- ketsalsodeclined;resultsfromtheDesk’sprimary cantdispersionamongdealerresponses,themedian dealersurveysuggestedthisdevelopmentmighthave dealerexpectedtheFOMCtoenditsreinvestmentof reflectedlowrealizedvolatilities,generallyfavorable principalpaymentsonTreasurysecurities,agency economicnews,lessuncertaintyforthepathof mondebt,andagencyMBSsometimeafterthefirst etarypolicy,andcomplacencyonthepartof market increaseinthefederalfundsratetarget;intheApril participantsaboutpotentialrisks. survey,themediandealerhadexpectedreinvestments toendbeforeliftoff. Creditflowstononfinancialcorporationsremained strong.Amidlowyieldsandreducedmarketvolatil- Yieldsonshort-andmedium-termnominalTreasury ity,grossissuanceof investment-andspeculativesecuritiesincreasedslightly,onbalance,overthe gradebondsreboundedinMay.Commercialand intermeetingperiod.Incontrast,yieldsatthelong industrial(C&I)loansonbanks’balancesheets endof thecurveedgedlower,continuingadownward increasedandissuanceof leveragedloansremained trendevidentovermuchof thisyear.Marketpartici- strong.ResponsestotheJuneSeniorCreditOfficer pantscontinuedtodiscussthedecreasesinlongfor- OpinionSurveyonDealerFinancingTermsindiwardratessincethebeginningof theyearand catedthatinvestordemandforfinancingtofundpurpointedtoavarietyof domesticandglobalfactors chasesof collateralizedloanobligationsrosesomepossiblycontributingtothistrend,includinglower whatsincethebeginningof theyear. expectationsforpotentialgrowthandpolicyratesin thelongerrun,adeclineininflationriskpremiums, Commercialrealestateloanscontinuedtoincrease purchasesof longer-termsecuritiesbyprice- amidsomefurthereasingof underwritingstandards insensitiveinvestors,unwindingof shortTreasury forcommercialmortgages.Whileissuanceof compositions,andfallinginterestrateuncertainty.Meas- mercialmortgage-backedsecuritiesstartedtheyeara uresof longer-horizoninflationcompensationbased bitslowrelativeto2013,ithaspickeduprecently. onTreasuryInflation-ProtectedSecuritiesremained Bankandinsurancecompanyoriginationsof comaboutsteady. mercialmortgagesexpandedinthefirstquarter. Conditionsinunsecuredshort-termdollarfunding Mortgagecreditconditionsgenerallyremainedtight, marketsremainedstableovertheintermeeting thoughfurtherincrementalsignsof easingemerged period.TheFederalReservecontinueditsONRRP amidcontinuedgainsinhouseprices.Mortgage exercise.Totaltake-upintheONRRPexerciserose interestratesdeclinedsomewhatmorethanlonginAprilandMaybeforefallingbackinJune.Much termTreasuryyieldsovertheintermeetingperiod, of thetransitoryincreaseintake-upoccurredin whileoption-adjustedspreadsonproduction-coupon responsetoalargeseasonalreductioninoutstanding MBSnarrowed.Bothmortgageapplicationsfor Treasurydebtandanassociateddropintherateson homepurchasesandrefinancingapplications Treasuryrepurchaseagreementsduringthefirsthalf remainedatverylowlevels. of thesecondquarterthatwerereversedduringthe secondhalf.InMay,theFederalReservebeganan Conditionsinconsumercreditmarketsweresolidin eight-weekseriesof testauctionsof seven-dayterm recentmonths.Creditcardloanbalancesincreased. deposits.Thenumberof participantsandthetotal Growthinstudentloansmoderatedfurtherbut amountawardedincreasedoverthecourseof the remainedsolid,andoutstandingautoloanscontinfirstfiveoperations.

190 101stAnnualReport|2014 uedtopickup.Issuanceof autoandcreditcard andoverthenexttwoyearsthanitdidlastyearand asset-backedsecuritieswasagainrobust. thatitwouldrisemorequicklythanpotentialoutput. Thefasterpaceof realGDPgrowthwasexpectedto Theexpectedpathof ECBpolicyratesimpliedby besupportedbydiminishingdragonspendingfrom marketquotesforshort-terminterestratesfellover changesinfiscalpolicy,increasesinconsumerand theintermeetingperiod,asinvestorsanticipatedthe businessconfidence,furtherimprovementsincredit easingof policyannouncedbytheECBatitsJune availability,andapickupintherateof foreignecomeeting.Bycontrast,lateintheperiod,marketpar- nomicgrowth.Theexpansionineconomicactivity ticipantsinterpretedstatementsbyBankof England wasanticipatedtoslowlyreduceresourceslackover GovernorCarneyassignalinganearliertighteningof theprojectionperiod,andtheunemploymentrate policythanhadbeenanticipated,andnear-term wasexpectedtodeclinegraduallytothestaff’sestipolicyrateexpectationsmovedhigherinresponse. mateof itslonger-runnaturalrateinthemedium Benchmarksovereignbondyieldsdeclinedmodestly term.Inthelonger-runoutlook,thestaff slightly inmostcountries,butU.K.giltyieldsrose.Thefor- lowereditsassumptionsforrealGDPgrowthandthe eignexchangevalueof thedollarwaslittlechanged, levelof equilibriumrealinterestrates. onbalance,overtheperiod,asthedollarappreciated againsttheeurobutdeclinedagainsttheCanadian Thestaff’sforecastforinflationintheneartermwas dollarandmanyemergingmarketcurrencies.Consis- revisedupalittleasrecentdatashowedsomewhat tentwithsomeimprovementininvestorsentiment fasterincreasesinconsumerpricesthananticipated. towardriskyassets,foreignequitypricesgenerally However,themedium-termprojectionforinflation roseovertheintermeetingperiod,andforeignsover- wasreviseddownslightly,reflectingareassessmentby eignandcorporatebondspreadsnarrowed.Inaddi- thestaff of theunderlyingtrendininflation.Thestaff tion,bothbondandequityemergingmarketmutual continuedtoforecastthatinflationwouldremain fundssawnetinflowsovertheperiod. belowtheCommittee’slonger-runobjectiveof 2percentoverthenextfewyears.Withlonger-runinflation Staff Economic Outlook expectationsassumedtoremainstable,changesin commodityandimportpricesexpectedtobesubdued, Intheeconomicforecastpreparedbythestaff forthe andslackinlaborandproductmarketsanticipatedto JuneFOMCmeeting,realGDPgrowthinthefirst diminishslowly,inflationwasprojectedtorisegraduhalf of thisyearasawholewaslower,onnet,thanin allytowardtheCommittee’sobjective.Thestaff contheprojectionfortheAprilmeeting.Inparticular, tinuedtoprojectthatinflationwouldreachtheComtheavailablereadingsonexports,inventoryinvest- mittee’sobjectiveinthelongerrun. ment,outlaysforhealth-careservices,andconstructionpointedtomuchweakerrealGDPinthefirst Thestaff’seconomicprojectionsfortheJunemeeting quarterthanthestaff hadexpected.However,the weresomewhatdifferentfromtheforecastspresented staff stillanticipatedthatrealGDPgrowthwould attheMarchmeeting,whentheFOMClastprepared reboundbrisklyinthesecondquarter,consistent aSummaryof EconomicProjections(SEP).The withrecentindicatorsforconsumerspendingand staff’sJuneprojectionsfortheunemploymentrate, businessinvestment,alongwiththeexpectationthat realGDPgrowth,andinflationoverthenextfew exportsandinventoryinvestmentwouldreturnto yearswereallalittlelower,onbalance,thanthosein morenormallevelsandthateconomicactivitythat itsMarchforecast. hadbeenrestrainedbytheseverewinterweather wouldbounceback.Primarilybecauseof thecombi- Thestaff viewedtheextentof uncertaintyaroundits nationof recentdownwardsurprisesintheunem- JuneprojectionsforrealGDPgrowthandtheunemploymentrateandweaker-than-expectedrealGDP, ploymentrateasroughlyinlinewiththeaverageover thestaff slightlylowereditsassumedpaceof poten- thepast20years.Nonetheless,theriskstotheforetialoutputgrowththisyearandnextandslightly castforrealGDPgrowthwereviewedastiltedalittle decreaseditsassumptionforthenaturalrateof tothedownside,asneithermonetarypolicynorfiscal unemploymentoverthissameperiod.Asaresult,the policywasseenasbeingwellpositionedtohelpthe staff’smedium-termforecastforrealGDPgrowth economywithstandadverseshocks.Atthesame wasreviseddownalittleonbalance.Nevertheless, time,thestaff viewedtherisksarounditsoutlookfor thestaff continuedtoprojectthatrealGDPwould theunemploymentrateandforinflationasroughly expandatafasterpaceinthesecondhalf of thisyear balanced.

Minutesof FederalOpenMarketCommitteeMeetings|June 191 Participants’ Views on Current Conditions motorvehicles,inparticular,risingstrongly.Howand the Economic Outlook ever,severalparticipantsreadtherecentsoftinformationonretailsalesandhealth-carespendingas InconjunctionwiththisFOMCmeeting,themeeting raisingsomeconcernabouttheunderlyingstrength participantssubmittedtheirassessmentsof realout- inconsumerspending.Acoupleof participants putgrowth,theunemploymentrate,inflation,and notedthat,todate,consumerspendinghadbeensupthetargetfederalfundsrateforeachyearfrom2014 portedimportantlybygainsinhouseholdnetworth through2016andoverthelongerrun,undereach whileincomegainshadbeenheldbackbyonlymodparticipant’sjudgmentof appropriatemonetary estincreasesinwages.Intheirview,animportantelepolicy.3Thelonger-runprojectionsrepresenteach mentintheeconomicoutlookwasapickupin participant’sassessmentof theratetowhicheach income,fromhigherwagesaswellasongoing variablewouldbeexpectedtoconverge,overtime, employmentgains,thatwouldbeexpectedtosupport underappropriatemonetarypolicyandinthe asustainedriseinconsumerspending. absenceof furthershockstotheeconomy.Theseeconomicprojectionsandpolicyassessmentsare Therecoveryinthehousingsectorwasreportedto describedintheSEP,whichisattachedasanadden- haveremainedslowinallbutafewareasof thecoundumtotheseminutes. try.Manyparticipantsexpressedconcernaboutthe still-softindicatorsof residentialconstruction,and Intheirdiscussionof theeconomicsituationandthe theydiscussedarangeof factorsthatmightbeconoutlook,meetingparticipantsviewedtheinformation tributingtoeitheratemporarydelayinthehousing receivedovertheintermeetingperiodassuggesting recoveryorapersistentlylowerlevelof homebuilding thateconomicactivitywasreboundinginthesecond thanpreviouslyanticipated.Despiteattractivemortquarterfollowingasurprisinglylargedeclineinreal gagerates,housingdemandwasseenasbeing GDPinthefirstquarterof theyear.Labormarket dampedbysuchfactorsasrestrictivecreditcondiconditionsgenerallyimprovedfurther.Althoughpar- tions,particularlyforhouseholdswithlowcredit ticipantsmarkeddowntheirexpectationsforaverage scores;highdownpayments;orlowdemandamong growthof realGDPoverthefirsthalf of 2014,their youngerhomebuyers,dueinparttotheburdenof projectionsbeginninginthesecondhalf of 2014 studentloandebt.Othersnotedsupplyconstraints, changedlittle.Overthenexttwoandahalf years, pointingtoshortagesof lots,lowinventoriesof theycontinuedtoexpecteconomicactivitytoexpand desirablehomesforsale,anoverhangof homesassoataratesufficienttoleadtoafurtherdeclineinthe ciatedwithforeclosuresorseriouslydelinquentmortunemploymentratetolevelsclosetotheircurrent gages,orrisingconstructioncosts.Severalotherparassessmentsof itslonger-runnormalvalue.Among ticipantssuggestedthepossibilitythatmorepersisthefactorsanticipatedtosupportthesustainedeco- tentstructuralchangesinhousingdemandassociated nomicexpansionwereaccommodativemonetary withanagingpopulationandevolvinglifestyleprefpolicy,diminisheddragfromfiscalrestraint,further erenceswereboostingdemandformultifamilyunits gainsinhouseholdnetworth,improvingcreditcon- attheexpenseof single-familyhomes. ditionsforhouseholdsandbusinesses,andrising employmentandwages.Whileinflationwasstillseen Informationfromparticipants’businesscontactssugasrunningbelowtheCommittee’slonger-runobjec- gestedcapitalspendingwaslikelytoincreasegoing tive,longer-runinflationexpectationsremained forward.Contactsinanumberof Districtsreported stableandtheCommitteeanticipatedthatinflation thattheyweregenerallyoptimisticaboutthebusiness wouldmovebacktowardits2percentobjectiveover outlook,althoughinacoupleof regionsrespondents theforecastperiod.Mostparticipantsviewedthe remainedcautiousaboutprospectsforstrongerecoriskstotheoutlookfortheeconomy,thelabormar- nomicgrowthorworriedaboutarenewalof federal ket,andinflationasbroadlybalanced. fiscalrestraintafterthecurrentcongressionalbudget agreementexpires.Amongtheindustriescitedas Householdspendingappearedtohaverisenmoder- relativelystronginrecentmonthsweretransportaately,onbalance,inrecentmonths,withsalesof tion,energy,telecommunications,andmanufacturing,particularlymotorvehicles.Someparticipants 3 FourmembersoftheBoardofGovernorsandthepresidentsof commentedthattheircontactsinsmallandmediumthe12FederalReserveBankssubmittedprojections.Governor sizedbusinessesreportedanimprovedoutlookfor BrainardtookofficeonJune16,2014,andparticipatedinthe sales,andseveralheardbusinessesmoregenerallydis- June17–18,2014,meeting;shewasnotabletosubmiteconomic projections. cussplanstoincreasecapitalexpenditures.Onepar-

192 101stAnnualReport|2014 ticipantnotedthatDistrictbusinesseswereinvesting quitsandjobopenings,andmorepositiveviewsof largelytomeetreplacementneeds,whileanothersug- jobavailabilitybyhouseholds.Inassessinglabor gestedthatthebacklogof suchneedswouldlikely marketconditions,participantsagainofferedarange providesomeimpetustobusinessinvestment. of viewsonhowfarconditionsinthelabormarket werefromthoseassociatedwithmaximumemploy- Favorablefinancialconditionsappearedbesupport- ment.Manyjudgedthatslackremainedelevated,and ingeconomicactivity.Whileinformationaboutmort- anumberof themthoughtitwasgreaterthanmeasgagelendingwasmixed,anumberof participants uredbytheofficialunemploymentrate,citing,inparreportedincreasesinC&Ilendingbybanksintheir ticular,thestill-highlevelof workersemployedpart Districts,apickupinloandemandatbanks,orbetter timeforeconomicreasonsorthedepressedlabor creditqualityforborrowers.Inaddition,smallbusi- forceparticipationrate.Evenso,severalparticipants nessesreportedimprovementsincreditavailability. pointedoutthatbothlong-andshort-termunem- However,participantsalsodiscussedwhethersome ploymentandmeasuresthatincludemarginally recenttrendsinfinancialmarketsmightsuggestthat attachedworkershaddeclined.Mostparticipants investorswerenotappropriatelytakingaccountof projectedtheimprovementinlabormarketcondirisksintheirinvestmentdecisions.Inparticular,low tionstocontinue,withtheunemploymentratemovimpliedvolatilityinequity,currency,andfixed- ingdowngraduallyoverthemediumterm.However, incomemarketsaswellassignsof increasedrisk- acoupleof participantsanticipatedthatthedecline takingwereviewedbysomeparticipantsasanindi- inunemploymentwouldbedampedaspart-time cationthatmarketparticipantswerenotfactoringin workersshifttofull-timejobsandasnonparticipants sufficientuncertaintyaboutthepathof theeconomy rejointhelaborforce,whileafewotherscommented andmonetarypolicy.TheyagreedthattheCommit- thattheyexpectednolastingreversalof thedeclinein teeshouldcontinuetocarefullymonitorfinancial laborforceparticipation. conditionsandtoemphasizeinitscommunications thedependenceof itspolicydecisionsontheevolu- Aggregatewagemeasurescontinuedtoriseatonlya tionof theeconomicoutlook;itwasalsopointedout modestrate,andreportsonwagesfrombusinessconthat,whereappropriate,supervisorymeasuresshould tactsandsurveysinanumberof Districtswere beappliedtoaddressexcessiverisk-takingandasso- mixed.Severalof thosereportspointedtoanabsence ciatedfinancialimbalances.Atthesametime,itwas of wagepressures,whilesomeothersindicatedthat notedthatmonetarypolicyneededtocontinueto tightlabormarketsorshortagesof skilledworkers promotethefavorablefinancialconditionsrequired wereleadingtoupwardpressureonwagesinsome tosupporttheeconomicexpansion. areasoroccupationsandthatanincreasingproportionof smallbusinesseswereplanningtoraisewages. Indiscussingeconomicdevelopmentsabroad,a Participantsdiscussedtheprospectsforwage coupleof participantsnotedthatrecentmonetary increasestopickupasslackinthelabormarket policyactionsbytheECBandtheBankof Japan diminishes.Severalnotedthatareturntogrowthin hadimprovedtheoutlookforeconomicactivityin realwagesinlinewithproductivitygrowthwould thoseareasandcouldhelpreturninflationtotarget. providewelcomesupportforhouseholdspending. Severalothers,however,remainedconcernedthat persistentlowinflationinEuropeandJapancould Readingsonarangeof pricemeasures—including eventuallyerodeinflationexpectationsmorebroadly. thePCEpriceindex,theCPI,andanumberof the Andacoupleof participantsexpresseduncertainty analyticalmeasuresdevelopedattheReserve abouttheoutlookforeconomicgrowthinJapanand Banks—appearedtoprovideevidencethatinflation China.Inaddition,severalsawdevelopmentsinIraq hadmoveduprecentlyfromlowlevelsearlierinthe andUkraineasposingpossibledownsiderisksto year,consistentwiththeCommittee’sforecastof a globaleconomicactivityorpotentialupsiderisksto gradualincreaseininflationoverthemediumterm. worldoilprices. Reportsfrombusinesscontactsweremixed,spanning anabsenceof pricepressuresinsomeDistrictsand Labormarketconditionsgenerallycontinuedto risinginputcostsinothers.Someparticipants improveovertheintermeetingperiod.Thatimprove- expressedconcernaboutthepersistenceof belowmentwasevidencedbythedeclineintheunemploy- trendinflation,andacoupleof themsuggestedthat mentrateaswellasbychangesinotherindicators, theCommitteemayneedtoallowtheunemployment suchassolidgainsinnonfarmpayrolls,alowlevelof ratetomovebelowitslonger-runnormallevelfora newclaimsforunemploymentinsurance,uptrendsin timeinorderkeepinflationexpectationsanchored

Minutesof FederalOpenMarketCommitteeMeetings|June 193 andreturninflationtoits2percenttarget,though sionaboutthetimingof thefirstincreaseinthefedoneparticipantemphasizedtherisksof doingso.In eralfundsrate—adecisionthatwilldependonthe contrast,someothersexpectedafasterpickupin Committee’sevolvingassessmentsof actualand inflationorsawupsideriskstoinflationandinflation expectedprogresstowarditsobjectives.Inlightof expectationsbecausetheyanticipatedamorerapid theseconsiderations,participantsgenerallyagreed declineineconomicslack. thatif incominginformationcontinuedtosupportits expectationof improvementinlabormarketcondi- Duringtheirconsiderationof issuesrelatedtomon- tionsandareturnof inflationtowarditslonger-run etarypolicyoverthemediumterm,participantsgen- objective,itwouldbeappropriatetocompleteasset erallysupportedtheCommittee’scurrentguidance purchaseswitha$15billionreductioninthepaceof aboutthelikelypathof itsassetpurchasesandabout purchasesinordertoavoidhavingthesmall,remainitsapproachtodeterminingthetimingof thefirst inglevelof purchasesreceiveunduefocusamong increaseinthefederalfundsrateandthepathof the investors.If theeconomyprogressesaboutasthe policyratethereafter.Participantsofferedviewsona Committeeexpects,warrantingreductionsinthe rangeof issuesrelatedtopolicycommunications. paceof purchasesateachupcomingmeeting,this SomeparticipantssuggestedthattheCommittee’s finalreductionwouldoccurfollowingtheOctober communicationsaboutitsforwardguidanceshould meeting. emphasizemorestronglythatitspolicydecisions woulddependonitsongoingassessmentacrossa Committee Policy Action rangeof indicatorsof economicactivity,labormarketconditions,inflationandinflationexpectations, Intheirdiscussionof monetarypolicyintheperiod andfinancialmarketdevelopments.Inthatregard, ahead,membersjudgedthatinformationreceived circumstancesthatmightentaileitheraslowerora sincetheFederalOpenMarketCommitteemetin morerapidremovalof policyaccommodationwere Aprilindicatedthateconomicactivitywasreboundcited.Forexample,anumberof participantsnoted ingfromthedeclineinthefirstquarterof theyear. theirconcernthatamoregradualapproachmightbe Labormarketindicatorsgenerallyshowedfurther appropriateif forecastsof above-trendeconomic improvement.Theunemploymentrate,thoughlower, growthlaterthisyearwerenotrealized.Andacouple remainedelevated.Householdspendingappearedto suggestedthattheCommitteemightneedto berisingmoderatelyandbusinessfixedinvestment strengthenitscommitmenttomaintainsufficient resumeditsadvance,whiletherecoveryinthehouspolicyaccommodationtoreturninflationtoitstar- ingsectorremainedslow.Fiscalpolicywasrestraingetoverthemediumterminordertopreventan ingeconomicgrowth,althoughtheextentof restraint undesirabledeclineininflationexpectations.Alterna- wasdiminishing.TheCommitteeexpectedthat,with tively,someotherparticipantsexpressedconcernthat appropriatepolicyaccommodation,economicactiveconomicgrowthoverthemediumrunmightbe itywouldexpandatamoderatepaceandlabormarfasterthancurrentlyexpectedorthattherateof ketconditionswouldcontinuetoimprovegradually, growthof potentialoutputmightbelowerthancur- movingtowardthosetheCommitteejudgesconsisrentlyexpected,callingforamorerapidmoveto tentwithitsdualmandate.Memberssawtherisksto beginraisingthefederalfundsrateinordertoavoid theoutlookfortheeconomyandthelabormarketas significantlyovershootingtheCommittee’sunem- nearlybalanced.Inflationwasrunningbelowthe ploymentandinflationobjectives. Committee’slonger-runobjective,buttheCommittee anticipatedthatwithstableinflationexpectations Whilethecurrentassetpurchaseprogramisnotona andstrengtheningeconomicactivity,inflationwould, presetcourse,participantsgenerallyagreedthatif the overtime,returntotheCommittee’s2percentobjececonomyevolvedastheyanticipated,theprogram tive.However,memberscontinuedtorecognizethat wouldlikelybecompletedlaterthisyear.Somecom- inflationpersistentlybelowitslonger-runobjective mitteemembershadbeenaskedbymembersof the couldposeriskstoeconomicperformanceand publicwhether,if taperinginthepaceof purchases agreedtomonitorinflationdevelopmentscloselyfor continuesasexpected,thefinalreductionwould evidencethatinflationwasmovingbacktowardits comeinasingle$15billionpermonthreductionor objectiveoverthemediumterm. ina$10billionreductionfollowedbya$5billion reduction.Mostparticipantsviewedthisasatechni- Membersjudgedthattheeconomyhadsufficient calissuewithnosubstantivemacroeconomicconse- underlyingstrengthtosupportongoingimprovement quencesandnoconsequencesfortheeventualdeci- inlabormarketconditionsandareturnof inflation

194 101stAnnualReport|2014 towardtheCommittee’slonger-run2percentobjec- “Consistentwithitsstatutorymandate,theFedtive,andthusagreedthatafurthermeasuredreduc- eralOpenMarketCommitteeseeksmonetary tioninthepaceof theCommittee’sassetpurchases andfinancialconditionsthatwillfostermaxiwasappropriateatthismeeting.Accordingly,the mumemploymentandpricestability.Inparticu- CommitteeagreedthatbeginninginJuly,itwould lar,theCommitteeseeksconditionsinreserve addtoitsholdingsof agencyMBSatapaceof marketsconsistentwithfederalfundstradingin $15billionpermonthratherthan$20billionper arangefrom0to¼percent.TheCommittee month,anditwouldaddtoitsholdingsof Treasury directstheDesktoundertakeopenmarket securitiesatapaceof $20billionpermonthrather operationsasnecessarytomaintainsuchcondithan$25billionpermonth.Membersagainjudged tions.BeginninginJuly,theDeskisdirectedto that,if incominginformationbroadlysupportedthe purchaselonger-termTreasurysecuritiesata Committee’sexpectationsforongoingprogress paceof about$20billionpermonthandtopurtowardmeetingitsdualobjectivesof maximum chaseagencymortgage-backedsecuritiesata employmentandinflationof 2percent,theCommit- paceof about$15billionpermonth.TheComteewouldlikelyreducethepaceof assetpurchasesin mitteealsodirectstheDesktoengageindollar furthermeasuredstepsatfuturemeetings.TheCom- rollandcouponswaptransactionsasnecessary mitteereiterated,however,thatpurchaseswerenot tofacilitatesettlementof theFederalReserve’s onapresetcourse,andthatitsdecisionsaboutthe agencymortgage-backedsecuritiestransactions. paceof purchaseswouldremaincontingentonits TheCommitteedirectstheDesktomaintainits outlookforthelabormarketandinflationaswellas policyof rollingovermaturingTreasurysecuriitsassessmentof thelikelyefficacyandcostsof such tiesintonewissuesanditspolicyof reinvesting purchases. principalpaymentsonallagencydebtand agencymortgage-backedsecuritiesinagency TheCommitteeagreedtomaintainitstargetrange mortgage-backedsecurities.TheSystemOpen forthefederalfundsrateandtoreiterateitsforward MarketAccountmanagerandthesecretarywill guidanceabouthowitwouldassesstheappropriate keeptheCommitteeinformedof ongoingdeveltimingof thefirstincreaseinthetargetrateandthe opmentsregardingtheSystem’sbalancesheet anticipatedbehaviorof thefederalfundsrateafterit thatcouldaffecttheattainmentovertimeof the israised.Theguidancecontinuedtoemphasizethat Committee’sobjectivesof maximumemploytheCommittee’sdecisionsabouthowlongtomain- mentandpricestability.” tainthecurrenttargetrangeforthefederalfundsrate woulddependonitsassessmentof actualand Thevoteencompassedapprovalof thestatement expectedprogresstowarditsobjectivesof maximum belowtobereleasedat2:00p.m.: employmentand2percentinflation.TheCommittee againstatedthatitcurrentlyanticipatedthatitlikely “InformationreceivedsincetheFederalOpen wouldbeappropriatetomaintainthecurrenttarget MarketCommitteemetinAprilindicatesthat rangeforthefederalfundsrateforaconsiderable growthineconomicactivityhasreboundedin timeaftertheassetpurchaseprogramends,especially recentmonths.Labormarketindicatorsgenerif projectedinflationcontinuedtorunbelowthe allyshowedfurtherimprovement.Theunem- Committee’s2percentlonger-rungoal,andprovided ploymentrate,thoughlower,remainselevated. thatlonger-terminflationexpectationsremainedwell Householdspendingappearstoberisingmoderanchored.Theforwardguidancealsoreiteratedthe atelyandbusinessfixedinvestmentresumedits Committee’sexpectationthatevenafteremployment advance,whiletherecoveryinthehousingsector andinflationarenearmandate-consistentlevels,eco- remainedslow.Fiscalpolicyisrestrainingeconomicconditionsmay,forsometime,warrantkeep- nomicgrowth,althoughtheextentof restraintis ingthetargetfederalfundsratebelowlevelsthe diminishing.Inflationhasbeenrunningbelow Committeeviewsasnormalinthelongerrun. theCommittee’slonger-runobjective,but longer-terminflationexpectationshave Attheconclusionof thediscussion,theCommittee remainedstable. votedtoauthorizeanddirecttheFederalReserve Bankof NewYork,untilitwasinstructedotherwise, Consistentwithitsstatutorymandate,theComtoexecutetransactionsintheSOMAinaccordance mitteeseekstofostermaximumemployment withthefollowingdomesticpolicydirective: andpricestability.TheCommitteeexpectsthat,

Minutesof FederalOpenMarketCommitteeMeetings|June 195 withappropriatepolicyaccommodation,eco- labormarkethasimprovedsubstantiallyina nomicactivitywillexpandatamoderatepace contextof pricestability.If incominginformaandlabormarketconditionswillcontinueto tionbroadlysupportstheCommittee’sexpectaimprovegradually,movingtowardthosethe tionof ongoingimprovementinlabormarket Committeejudgesconsistentwithitsdualman- conditionsandinflationmovingbacktowardits date.TheCommitteeseestheriskstotheout- longer-runobjective,theCommitteewilllikely lookfortheeconomyandthelabormarketas reducethepaceof assetpurchasesinfurther nearlybalanced.TheCommitteerecognizesthat measuredstepsatfuturemeetings.However, inflationpersistentlybelowits2percentobjec- assetpurchasesarenotonapresetcourse,and tivecouldposeriskstoeconomicperformance, theCommittee’sdecisionsabouttheirpacewill anditismonitoringinflationdevelopmentscare- remaincontingentontheCommittee’soutlook fullyforevidencethatinflationwillmoveback forthelabormarketandinflationaswellasits towarditsobjectiveoverthemediumterm. assessmentof thelikelyefficacyandcostsof suchpurchases. TheCommitteecurrentlyjudgesthatthereis sufficientunderlyingstrengthinthebroader Tosupportcontinuedprogresstowardmaxieconomytosupportongoingimprovementin mumemploymentandpricestability,theComlabormarketconditions.Inlightof thecumula- mitteetodayreaffirmeditsviewthatahighly tiveprogresstowardmaximumemploymentand accommodativestanceof monetarypolicy theimprovementintheoutlookforlabormarket remainsappropriate.Indetermininghowlongto conditionssincetheinceptionof thecurrent maintainthecurrent0to¼percenttargetrange assetpurchaseprogram,theCommitteedecided forthefederalfundsrate,theCommitteewill tomakeafurthermeasuredreductioninthe assessprogress—bothrealizedandexpected— paceof itsassetpurchases.BeginninginJuly, towarditsobjectivesof maximumemployment theCommitteewilladdtoitsholdingsof agency and2percentinflation.Thisassessmentwilltake mortgage-backedsecuritiesatapaceof $15bil- intoaccountawiderangeof information, lionpermonthratherthan$20billionper includingmeasuresof labormarketconditions, month,andwilladdtoitsholdingsof longer- indicatorsof inflationpressuresandinflation termTreasurysecuritiesatapaceof $20billion expectations,andreadingsonfinancialdeveloppermonthratherthan$25billionpermonth. ments.TheCommitteecontinuestoanticipate, TheCommitteeismaintainingitsexistingpolicy basedonitsassessmentof thesefactors,thatit of reinvestingprincipalpaymentsfromitshold- likelywillbeappropriatetomaintainthecurrent ingsof agencydebtandagencymortgage- targetrangeforthefederalfundsrateforaconbackedsecuritiesinagencymortgage-backed siderabletimeaftertheassetpurchaseprogram securitiesandof rollingovermaturingTreasury ends,especiallyif projectedinflationcontinues securitiesatauction.TheCommittee’ssizable torunbelowtheCommittee’s2percentlongerandstill-increasingholdingsof longer-term rungoal,andprovidedthatlonger-terminflasecuritiesshouldmaintaindownwardpressure tionexpectationsremainwellanchored. onlonger-terminterestrates,supportmortgage markets,andhelptomakebroaderfinancial WhentheCommitteedecidestobegintoremove conditionsmoreaccommodative,whichinturn policyaccommodation,itwilltakeabalanced shouldpromoteastrongereconomicrecovery approachconsistentwithitslonger-rungoalsof andhelptoensurethatinflation,overtime,isat maximumemploymentandinflationof 2pertheratemostconsistentwiththeCommittee’s cent.TheCommitteecurrentlyanticipatesthat, dualmandate. evenafteremploymentandinflationarenear mandate-consistentlevels,economicconditions TheCommitteewillcloselymonitorincoming may,forsometime,warrantkeepingthetarget informationoneconomicandfinancialdevelop- federalfundsratebelowlevelstheCommittee mentsincomingmonthsandwillcontinueits viewsasnormalinthelongerrun.” purchasesof Treasuryandagencymortgagebackedsecurities,andemployitsotherpolicy Votingforthisaction:JanetL.Yellen,WilliamC. toolsasappropriate,untiltheoutlookforthe Dudley,LaelBrainard,StanleyFischer,RichardW.

196 101stAnnualReport|2014 Fisher,NarayanaKocherlakota,LorettaJ.Mester, Notation Vote CharlesI.Plosser,JeromeH.Powell,andDanielK. Tarullo. BynotationvotecompletedonMay19,2014,the Committeeunanimouslyapprovedtheminutesof the Votingagainstthisaction:None. CommitteemeetingheldonApril29–30,2014. WilliamB.English Itwasagreedthatthenextmeetingof theCommittee Secretary wouldbeheldonTuesday–Wednesday,July29–30. Themeetingadjournedat11:10a.m.onJune18, 2014.

Minutesof FederalOpenMarketCommitteeMeetings|June 197 Addendum: Overall,FOMCparticipantsexpectedthat,under appropriatemonetarypolicy,economicgrowth Summary of Economic Projections wouldpickupnotablyinthesecondhalf of 2014and remainin2015and2016abovetheirestimatesof the InconjunctionwiththeJune17–18,2014,Federal longer-runnormalrateof economicgrowth.Consis- OpenMarketCommittee(FOMC)meeting,meeting tentwiththatoutlook,theunemploymentratewas participantssubmittedtheirassessmentsof realoutprojectedtocontinuetodeclinetowarditslonger-run putgrowth,theunemploymentrate,inflation,and normallevelovertheprojectionperiod(table1and thetargetfederalfundsrateforeachyearfrom2014 figure1).Themajorityof participantsprojectedthat through2016andoverthelongerrun.4Eachparticiinflation,asmeasuredbytheannualchangeinthe pant’sassessmentwasbasedoninformationavailable priceindexforpersonalconsumptionexpenditures atthetimeof themeetingplushisorherjudgmentof (PCE),wouldrisetoalevelatorslightlybelowthe appropriatemonetarypolicyandassumptionsabout Committee’s2percentobjectivein2016. thefactorslikelytoaffecteconomicoutcomes.The longer-runprojectionsrepresenteachparticipant’s Themajorityof participantsexpectedthathighly judgmentof thevaluetowhicheachvariablewould accommodativemonetarypolicywouldremain beexpectedtoconverge,overtime,underappropriate appropriateoverthenextfewyearstofosterprogress monetarypolicyandintheabsenceof furthershocks towardtheFederalReserve’slonger-runobjectives. totheeconomy.“Appropriatemonetarypolicy”is Asshowninfigure2,allbutoneof theparticipants definedasthefuturepathof policythateachpartici- anticipatedthatitwouldbeappropriatetowaitat pantdeemsmostlikelytofosteroutcomesforeco- leastuntil2015beforebeginningtoincreasethefednomicactivityandinflationthatbestsatisfyhisor eralfundsrate,andmostprojectedthatitwouldthen herindividualinterpretationof theFederalReserve’s beappropriatetoraisethetargetfederalfundsrate objectivesof maximumemploymentandstable fairlygradually.Giventheireconomicoutlooks,most prices. participantsjudgedthatitwouldbeappropriateto continuegraduallyslowingthepaceof theCommittee’spurchasesof longer-termsecuritiesandcompletetheassetpurchaseprogramlaterthisyear. 4 FourmembersoftheBoardofGovernorsandthepresidentsof the12FederalReserveBankssubmittedprojections.Governor Mostparticipantssawtheuncertaintyassociated BrainardtookofficeonJune16,2014,andparticipatedinthe withtheiroutlooksforeconomicgrowth,theunem- June17–18,2014,FOMCmeeting;shewasnotabletosubmit economicprojections. Table1.EconomicprojectionsofFederalReserveBoardmembersandFederalReserveBankpresidents,June2014 Percent Centraltendency1 Range2 Variable 2014 2015 2016 Longerrun 2014 2015 2016 Longerrun ChangeinrealGDP 2.1to2.3 3.0to3.2 2.5to3.0 2.1to2.3 1.9to2.4 2.2to3.6 2.2to3.2 1.8to2.5 Marchprojection 2.8to3.0 3.0to3.2 2.5to3.0 2.2to2.3 2.1to3.0 2.2to3.5 2.2to3.4 1.8to2.4 Unemploymentrate 6.0to6.1 5.4to5.7 5.1to5.5 5.2to5.5 5.8to6.2 5.2to5.9 5.0to5.6 5.0to6.0 Marchprojection 6.1to6.3 5.6to5.9 5.2to5.6 5.2to5.6 6.0to6.5 5.4to5.9 5.1to5.8 5.2to6.0 PCEinflation 1.5to1.7 1.5to2.0 1.6to2.0 2.0 1.4to2.0 1.4to2.4 1.5to2.0 2.0 Marchprojection 1.5to1.6 1.5to2.0 1.7to2.0 2.0 1.3to1.8 1.5to2.4 1.6to2.0 2.0 CorePCEinflation3 1.5to1.6 1.6to2.0 1.7to2.0 1.4to1.8 1.5to2.4 1.6to2.0 Marchprojection 1.4to1.6 1.7to2.0 1.8to2.0 1.3to1.8 1.5to2.4 1.6to2.0 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andprojectionsforbothmeasuresofinflationarefromthefourthquarterofthepreviousyeartothefourth quarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures (PCE)andthepriceindexforPCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarterofthe yearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’s assessmentoftheratetowhicheachvariablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.The MarchprojectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonMarch18–19,2014. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

198 101stAnnualReport|2014 Figure1.Centraltendenciesandrangesofeconomicprojections,2014–16andoverthelongerrun Percent Change in real GDP Central tendency of projections 4 Range of projections 3 2 Actual 1 + 0 - 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Percent Unemployment rate 10 9 8 7 6 5 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Percent PCE inflation 3 2 1 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Percent Core PCE inflation 3 2 1 2009 2010 2011 2012 2013 2014 2015 2016 Longer run Note:Definitionsofvariablesareinthegeneralnotetotable1.Thedatafortheactualvaluesofthevariablesareannual.

Minutesof FederalOpenMarketCommitteeMeetings|June 199 Figure2.OverviewofFOMCparticipants’assessmentsofappropriatemonetarypolicy Number of participants Appropriate timing of policy firming 13 12 12 11 10 9 8 7 6 5 4 3 3 2 1 1 2014 2015 2016 Appropriate pace of policy firming Percent Target federal funds rate at year-end 6 5 4 3 2 1 0 2014 2015 2016 Longer run Note:Intheupperpanel,theheightofeachbardenotesthenumberofFOMCparticipantswhojudgethat,underappropriatemonetarypolicy,thefirstincreaseinthetargetfederalfundsratefromitscurrentrangeof0to¼percentwilloccurinthespecifiedcalendaryear.InMarch2014,thenumbersofFOMCparticipantswhojudgedthatthefirst increaseinthetargetfederalfundsratewouldoccurin2014,2015,and2016were,respectively,1,13,and2.Inthelowerpanel,eachshadedcircleindicatesthevalue (roundedtothenearest¼percentagepoint)ofanindividualparticipant’sjudgmentoftheappropriatelevelofthetargetfederalfundsrateattheendofthespecifiedcalendar yearoroverthelongerrun.

200 101stAnnualReport|2014 ploymentrate,andinflationassimilartothatof the down,to5.2to5.5percent.Mostparticipantspropast20years.Inaddition,mostparticipantsconsid- jectedthattheunemploymentratewouldbecloseto eredtheriskstotheoutlookforrealGDPgrowth theirindividualestimatesof itslonger-runlevelatthe andtheunemploymentratetobebroadlybalanced, endof 2016. andamajoritysawtheriskstoinflationasbroadly balanced.However,somesawtheriskstotheirfore- Figures3.Aand3.Bshowthatparticipantscontincastsforeconomicgrowthorinflationastiltedtothe uedtoholdarangeof viewsregardingthelikelyoutdownside,andacouplesawtheriskstotheirfore- comesforrealGDPgrowthandtheunemployment castsforinflationastiltedtotheupside. rateoverthenexttwoyears.Thediversityof views reflectedtheirindividualassessmentsof therateat The Outlook for Economic Activity whichtheheadwindsthathavebeenholdingbackthe paceof theeconomicrecoverywouldabateandof Participantsgenerallyprojectedthat,conditionalon theanticipatedpathforforeigneconomicactivity,the theirindividualassumptionsaboutappropriatemon- trajectoryforgrowthinhouseholdnetworth,andthe etarypolicy,realGDPgrowthwouldpickupnotably appropriatepathof monetarypolicy.Relativeto inthesecondhalf of thisyearandremainin2015 March,thedispersionof participants’projectionsfor and2016abovetheirestimatesof thelonger-runnor- realGDPgrowthnarrowedabitin2014butwas malrateof outputgrowth.Allparticipantsrevised largelyunchangedoverthenexttwoyears,andthe downtheirprojectionsof realGDPgrowthforthe dispersionof projectionsfortheunemploymentrate firsthalf of 2014comparedwiththeirprojectionsin overtheentireprojectionperiodwaslittlechanged. March,butmostlefttheirforecastsfortheremainder of theprojectionperiodlargelyunchanged.Partici- The Outlook for Inflation pantsgenerallyjudgedthatrealGDPgrowthinthe firsthalf of thisyearwashelddownbytransitory ComparedwithMarch,thecentraltendenciesof factorsdepressingoutputearlyintheyear,andthey participants’projectionsforinflationwerelargely pointedtoanumberof factorsthattheyexpected unchangedforallyearsintheprojectionperiod, wouldcontinuetocontributetoapickupineco- althoughmanyparticipantsmarkedupabittheir nomicgrowthlaterthisyearandnext,includingris- projectionsforinflationin2014.Thevastmajorityof inghouseholdnetworth,diminishedrestraintfrom participantsanticipatedthat,onaverage,bothheadfiscalpolicy,improvinglabormarketconditions,and lineandcoreinflationwouldrisegraduallyoverthe highlyaccommodativemonetarypolicy.Thecentral nextfewyears,andthemajorityof participants tendenciesof participants’projectionsforrealGDP expectedheadlineinflationtobeatorslightlybelow growthwere2.1to2.3percentin2014,3.0to3.2per- theCommittee’s2percentobjectivein2016.Specificentin2015,and2.5to3.0percentin2016.Thecen- cally,thecentraltendenciesforPCEinflationwere traltendencyforthelonger-runnormalrateof 1.5to1.7percentin2014,1.5to2.0percentin2015, growthof realGDPwas2.1to2.3percent,only and1.6to2.0percentin2016.Thecentraltendencies slightlylowerthaninMarch. of theforecastsforcoreinflationwerebroadlysimilartothosefortheheadlinemeasure.Itwasnoted Participantscontinuedtoanticipateagradualdecline thatsomecombinationof stableinflationexpectaintheunemploymentrateovertheprojectionperiod. tionsandsteadilydiminishingresourceslackwas Thecentraltendenciesof participants’forecastsfor likelytocontributetoagradualriseof inflationback theunemploymentrateinthefourthquarterof each towardtheCommittee’slonger-runobjectiveof yearwere6.0to6.1percentin2014,5.4to5.7per- 2percent. centin2015,and5.1to5.5percentin2016.Nearly allparticipantsreviseddowntheirprojectedpathsfor Figures3.Cand3.Dprovideinformationonthe theunemploymentratethisyearandnextrelativeto diversityof participants’viewsabouttheoutlookfor theirMarchprojections,withthemajoritypointing inflation.Therangesof participants’projectionsfor tothedeclineintheunemploymentrateinrecent overallinflationwerelittlechangedrelativetoMarch. monthsasareasonforthedownwardrevision.The TheforecastsforPCEinflationin2016wereator centraltendencyof participants’estimatesof the belowtheCommittee’slonger-runobjective.Similar longer-runnormalrateof unemploymentthatwould totheprojectionsforheadlineinflation,theprojecprevailunderappropriatemonetarypolicyandinthe tionsforcoreinflationin2016wereconcentratedat absenceof furthershockstotheeconomyalsoedged orbelow2percent.

Minutesof FederalOpenMarketCommitteeMeetings|June 201 Figure3.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2014–16andoverthelongerrun Number of participants 2014 20 June projections 18 March projections 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.

202 101stAnnualReport|2014 Figure3.B.Distributionofparticipants’projectionsfortheunemploymentrate,2014–16andoverthelongerrun Number of participants 2014 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 - 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 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 - 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 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 - 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 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 - 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|June 203 Figure3.C.Distributionofparticipants’projectionsforPCEinflation,2014–16andoverthelongerrun Number of participants 2014 20 June projections 18 March projections 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2016 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

204 101stAnnualReport|2014 Figure3.D.Distributionofparticipants’projectionsforcorePCEinflation,2014–16 Number of participants 2014 20 June projections March projections 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2015 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 PPercent range Number of participants 2016 20 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|June 205 Appropriate Monetary Policy subsequentrecession,andadesiretoraisethefederal fundsrateatagradualpaceafterliftoff asexplana- Asindicatedinfigure2,nearlyallparticipants tionsforthestill-lowlevelof theprojectedfederal judgedthatlowlevelsof thefederalfundsratewould fundsrateattheendof 2016.Acoupleof particiremainappropriateforthenextfewyears.Inparticu- pantsalsomentionedbroadermeasuresof labor lar,12participantsthoughtthatthefirstincreasein marketslackthatmaytakelongertoreturntotheir thetargetfederalfundsratewouldnotbewarranted normallevelsthantheunemploymentrate.Estimates untilsometimein2015,and3judgedthatpolicy of thelonger-runlevelof thefederalfundsrate firmingwouldlikelynotbeappropriateuntil2016. rangedfrom3¼toabout4¼percent,reflectingthe Only1participantthoughtthatanincreaseinthe Committee’sinflationobjectiveof 2percentandparfederalfundsratewouldbewarrantedin2014. ticipants’individualjudgmentsregardingtheappropriatelonger-runlevelof therealfederalfundsratein Allparticipantsprojectedthattheunemployment theabsenceof furthershockstotheeconomy.Comratewouldbebelow6percentattheendof theyear paredwithMarch,someparticipantsreviseddown inwhichtheyjudgedtheinitialincreaseinthefederal theirestimatesof thelonger-runfederalfundsrate, fundsratetobewarranted,andallbutoneantici- withalowerassessmentof thelonger-runlevelof patedthatinflationwouldbeatorbelowtheCom- potentialoutputgrowthcitedasacontributingfactor mittee’slonger-runobjectiveatthattime.Mostpar- forthemajorityof thoserevisions.Asaresult,the ticipantsprojectedthattheunemploymentrate medianestimateof thelonger-runfederalfundsrate wouldremainabovetheirestimatesof itslonger-run shifteddownto3.75percentfrom4percentin normallevelattheendof theyearinwhichtheysaw March,whileitsmeanvaluedeclined11basispoints thefederalfundsrateincreasingfromitseffective to3.78percent. lowerbound. Participantsalsodescribedtheirviewsregardingthe Figure3.Eprovidesthedistributionof participants’ appropriatepathof theFederalReserve’sbalance judgmentsregardingtheappropriatelevelof thetar- sheet.Conditionalontheirrespectiveeconomicoutgetfederalfundsrateattheendof eachcalendaryear looks,mostparticipantsjudgedthatitwouldbe from2014to2016andoverthelongerrun.Asnoted appropriatetocontinuetoreducethepaceof the earlier,nearlyallparticipantsjudgedthateconomic Committee’spurchasesof longer-termsecuritiesin conditionswouldwarrantmaintainingthecurrent measuredstepsandtoconcludethepurchaseslater exceptionallylowlevelof thefederalfundsrateat thisyear.Acoupleof participantsjudgedthata leastuntil2015.Relativetotheirprojectionsin morerapidreductioninthepaceof purchasesandan March,themedianvaluesof thefederalfundsrateat earlierendtotheassetpurchaseprogramwouldbe theendof 2015and2016increased13basispoints appropriate. and25basispointsto1.13percentand2.50percent, respectively,whilethemeanvaluesrose7basispoints Participants’viewsof theappropriatepathformonand11basispointsto1.18percentand2.53percent, etarypolicywereinformedbytheirjudgmentsabout respectively.Thedispersionof projectionsforthe thestateof theeconomy,includingthevaluesof the valueof thefederalfundsratewaslittlechangedin unemploymentrateandotherlabormarketindica- 2015butwidenedslightlyin2016.Mostparticipants torsthatwouldbeconsistentwithmaximumemployexpectedthatthefederalfundsrateattheendof ment,theextenttowhichtheeconomywascurrently 2016wouldstillbesignificantlybelowtheirindi- fallingshortof maximumemployment,theprospects vidualassessmentsof itslonger-runlevel.Forabout forinflationtoreturntotheCommittee’slongerhalf of theseparticipants,thelowlevelof thefederal termobjectiveof 2percent,andthebalanceof risks fundsrateatthattimewasassociatedwithinflation aroundtheoutlook.ManyparticipantsalsomenwellbelowtheCommittee’s2percentobjective.In tionedtheprescriptionsof variousmonetarypolicy contrast,therestof theseparticipantssawthefederal rulesasfactorstheyconsideredinjudgingtheapprofundsrateattheendof 2016asstillsignificantlylow priatepathforthefederalfundsrate. despitetheirprojectionsthattheunemploymentrate wouldbeclosetoorbelowtheirindividuallonger- Uncertainty and Risks runprojectionsandinflationwouldbeatorcloseto 2percentatthattime.Theseparticipantscitedsome Thevastmajorityof participantscontinuedtojudge combinationof alowerequilibriumrealinterestrate, thelevelsof uncertaintyabouttheirprojectionsfor continuingheadwindsfromthefinancialcrisisand realGDPgrowthandtheunemploymentrateas

206 101stAnnualReport|2014 Figure3.E.Distributionofparticipants’projectionsforthetargetfederalfundsrate,2014–16andoverthelongerrun Number of participants 2014 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 - 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.

Minutesof FederalOpenMarketCommitteeMeetings|June 207 ploymentratetobebroadlybalanced,althoughafew Table2.Averagehistoricalprojectionerrorranges participantsviewedtherisksasweightedtothe Percentagepoints downside,reflecting,forexample,theirconcerns Variable 2014 2015 2016 aboutthelimitedabilityof monetarypolicyatthe zerolowerboundtorespondtonegativeshocksto ChangeinrealGDP1 ±1.4 ±2.0 ±2.1 theeconomyaswellasexternaleconomicandgeopo- Unemploymentrate1 ±0.4 ±1.2 ±1.8 liticalrisks.SimilartoMarch,nearlyallparticipants Totalconsumerprices2 ±0.8 ±1.0 ±1.0 continuedtojudgetheriskstotheunemployment Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared ratetobebroadlybalanced. errorofprojectionsfor1994through2013thatwerereleasedinthespringby variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast Uncertainty,”undercertainassumptions,thereisabouta70percentprobability Almostallparticipantssawthelevelof uncertainty thatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Formore andthebalanceof risksaroundtheirforecastsfor information,seeDavidReifschneiderandPeterTulip(2007),“Gaugingthe overallPCEinflationandcoreinflationaslittle UncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,”Finance andEconomicsDiscussionSeries2007-60(Washington:BoardofGovernorsof changedfromMarch.Mostparticipantscontinuedto theFederalReserveSystem,November),availableathttp://www.federalreserve judgethelevelsof uncertaintyassociatedwiththeir .gov/pubs/feds/2007/200760/200760abs.html;andBoardofGovernorsofthe FederalReserveSystem,DivisionofResearchandStatistics(2014),“Updated forecastsforthetwoinflationmeasurestobebroadly HistoricalForecastErrors,”memorandum,April9,http://www.federalreserve.gov/ similartohistoricalnorms,andamajoritycontinued foia/files/20140409-historical-forecast-errors.pdf. 1 Definitionsofvariablesareinthegeneralnotetotable1. toseetheriskstothoseprojectionsasbroadlybal- 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen anced.Afewparticipants,however,viewedtherisks mostwidelyusedingovernmentandprivateeconomicforecasts.Projection totheirinflationforecastsastiltedtothedownside, ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof theyearindicated. reflecting,forexample,thepossibilitiesthatthe recentlowlevelsof inflationcouldprovemorepersistentthananticipated,andthattheupwardpullon broadlysimilartothenormsduringtheprevious pricesfrominflationexpectationsmightbeweaker 20years(figure4).5Mostparticipantscontinuedto thanassumed.Conversely,twoparticipantssaw judgetheriskstorealGDPgrowthandtheunemupsideriskstoinflation,withonecitinguncertainty aboutthetimingandefficacyof theCommittee’s 5 Table2providesestimatesoftheforecastuncertaintyforthe withdrawalof accommodation. changeinrealGDP,theunemploymentrate,andtotalconsumerpriceinflationovertheperiodfrom1994through2013. Attheendofthissummary,thebox“ForecastUncertainty” economicforecastsandexplainstheapproachusedtoassessthe discussesthesourcesandinterpretationofuncertaintyinthe uncertaintyandrisksattendingtheparticipants’projections.

208 101stAnnualReport|2014 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 209 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers inthethirdyear.Thecorresponding70percentconfioftheBoardofGovernorsandthepresidentsofthe denceintervalsforoverallinflationwouldbe1.2to FederalReserveBanksinformdiscussionsofmon- 2.8percentinthecurrentyearand1.0to3.0percent etarypolicyamongpolicymakersandcanaidpublic inthesecondandthirdyears. understandingofthebasisforpolicyactions.Con- Becausecurrentconditionsmaydifferfromthose siderableuncertaintyattendstheseprojections,howthatprevailed,onaverage,overhistory,participants ever.Theeconomicandstatisticalmodelsandrelaprovidejudgmentsastowhethertheuncertainty tionshipsusedtohelpproduceeconomicforecasts attachedtotheirprojectionsofeachvariableis arenecessarilyimperfectdescriptionsofthereal greaterthan,smallerthan,orbroadlysimilartotypiworld,andthefuturepathoftheeconomycanbe callevelsofforecastuncertaintyinthepast,as affectedbymyriadunforeseendevelopmentsand shownintable2.Participantsalsoprovidejudgments events.Thus,insettingthestanceofmonetary astowhethertheriskstotheirprojectionsare policy,participantsconsidernotonlywhatappearsto weightedtotheupside,areweightedtothedownbethemostlikelyeconomicoutcomeasembodiedin side,orarebroadlybalanced.Thatis,participants theirprojections,butalsotherangeofalternative judgewhethereachvariableismorelikelytobe possibilities,thelikelihoodoftheiroccurring,andthe aboveorbelowtheirprojectionsofthemostlikely potentialcoststotheeconomyshouldtheyoccur. outcome.Thesejudgmentsabouttheuncertainty Table2summarizestheaveragehistoricalaccuracy andtherisksattendingeachparticipant’sprojections ofarangeofforecasts,includingthosereportedin aredistinctfromthediversityofparticipants’views pastMonetaryPolicyReportsandthosepreparedby aboutthemostlikelyoutcomes.Forecastuncertainty theFederalReserveBoard’sstaffinadvanceof isconcernedwiththerisksassociatedwithaparticumeetingsoftheFederalOpenMarketCommittee. larprojectionratherthanwithdivergencesacrossa Theprojectionerrorrangesshowninthetableillus- numberofdifferentprojections. tratetheconsiderableuncertaintyassociatedwith Aswithrealactivityandinflation,theoutlookforthe economicforecasts.Forexample,supposeaparticifuturepathofthefederalfundsrateissubjecttoconpantprojectsthatrealgrossdomesticproduct(GDP) siderableuncertainty.Thisuncertaintyarisesprimarily andtotalconsumerpriceswillrisesteadilyatannual becauseeachparticipant’sassessmentoftheapproratesof,respectively,3percentand2percent.Ifthe priatestanceofmonetarypolicydependsimportantly uncertaintyattendingthoseprojectionsissimilarto ontheevolutionofrealactivityandinflationover thatexperiencedinthepastandtherisksaroundthe time.Ifeconomicconditionsevolveinanunexpected projectionsarebroadlybalanced,thenumbers manner,thenassessmentsoftheappropriatesetting reportedintable2wouldimplyaprobabilityofabout ofthefederalfundsratewouldchangefromthat 70percentthatactualGDPwouldexpandwithina pointforward. rangeof1.6to4.4percentinthecurrentyear,1.0to 5.0percentinthesecondyear,and0.9to5.1percent

210 101stAnnualReport|2014 Meeting Held on July 29–30, 2014 JamesA.Clouse,ThomasA.Connors, EvanF.Koenig,ThomasLaubach, MichaelP.Leahy,PaoloA.Pesenti, Ameetingof theFederalOpenMarketCommittee MarkE.Schweitzer,andWilliamWascher washeldintheofficesof theBoardof Governorsof AssociateEconomists theFederalReserveSysteminWashington,D.C.,on Tuesday,July29,2014,at10:00a.m.andcontinued SimonPotter onWednesday,July30,2014,at9:00a.m. Manager,SystemOpenMarketAccount Present LorieK.Logan DeputyManager,SystemOpenMarketAccount JanetL.Yellen Chair RobertdeV.Frierson1 Secretaryof theBoard,Officeof theSecretary, WilliamC.Dudley Boardof Governors ViceChairman NellieLiang LaelBrainard Director,Officeof FinancialStabilityPolicyand StanleyFischer Research,Boardof Governors RichardW.Fisher MatthewJ.Eichner1 DeputyDirector,Divisionof ResearchandStatistics, NarayanaKocherlakota Boardof Governors LorettaJ.Mester MaryannF.Hunter CharlesI.Plosser DeputyDirector,Divisionof BankingSupervision andRegulation,Boardof Governors JeromeH.Powell StephenA.MeyerandWilliamR.Nelson DanielK.Tarullo DeputyDirectors,Divisionof MonetaryAffairs, CharlesL.Evans,JeffreyM.Lacker, Boardof Governors DennisP.Lockhart,andJohnC.Williams JonW.FaustandStaceyTevlin AlternateMembersof theFederalOpenMarket SpecialAdviserstotheBoard,Officeof Board Committee Members,Boardof Governors JamesBullard,EstherL.George, TrevorA.Reeve andEricRosengren SpecialAdvisertotheChair,Officeof Board Presidentsof theFederalReserveBanksof St.Louis, Members,Boardof Governors KansasCity,andBoston,respectively WilliamB.English LindaRobertson SecretaryandEconomist AssistanttotheBoard,Officeof BoardMembers, Boardof Governors MatthewM.Luecke DeputySecretary EllenE.MeadeandJoyceK.Zickler SeniorAdvisers,Divisionof MonetaryAffairs, MichelleA.Smith Boardof Governors AssistantSecretary DavidBowman ScottG.Alvarez AssociateDirector,Divisionof InternationalFinance, GeneralCounsel Boardof Governors ThomasC.Baxter DavidE.Lebow2andMichaelG.Palumbo DeputyGeneralCounsel AssociateDirectors,Divisionof Researchand StevenB.Kamin Statistics,Boardof Governors Economist 1 AttendedthejointsessionoftheFederalOpenMarketCom- DavidW.Wilcox mitteeandtheBoardofGovernors. Economist 2 Attendedtheportionofthemeetingfollowingthejointsession oftheFederalOpenMarketCommitteeandtheBoardof Governors.

Minutesof FederalOpenMarketCommitteeMeetings|July 211 FabioM.Natalucci1andGretchenC.Weinbach1 RobertL.Hetzel AssociateDirectors,Divisionof MonetaryAffairs, SeniorEconomist,FederalReserveBankof Boardof Governors Richmond JaneE.Ihrig DuringtheintervalbetweentheJuneandJulymeet- DeputyAssociateDirector,Divisionof Monetary ings,ChairYellenappointedasubcommitteeon Affairs,Boardof Governors communicationsissueschairedbyGovernorFischer EricC.Engstrom,PatrickE.McCabe,1 andincludingPresidentMester,GovernorPowell, andKarenM.Pence andPresidentWilliams.GovernorFischerindicated Advisers,Divisionof ResearchandStatistics, thatthesubcommitteewouldcontinuetheworkof Boardof Governors previoussubcommitteesinhelpingtheCommittee PenelopeA.Beattie1 frameandorganizethediscussionof abroadrange of communicationsissues. AssistanttotheSecretary,Officeof theSecretary, Boardof Governors Developments in Financial Markets and FranciscoCovasandElizabethKlee1 the Federal Reserve’s Balance Sheet SectionChiefs,Divisionof MonetaryAffairs, Boardof Governors Inajointsessionof theFederalOpenMarketCommittee(FOMC)andtheBoardof Governorsof the DavidH.Small FederalReserveSystem,themanagerof theSystem ProjectManager,Divisionof MonetaryAffairs, OpenMarketAccount(SOMA)reportedondevel- Boardof Governors opmentsindomesticandforeignfinancialmarkets. KatieRoss1 ThemanageralsoreportedontheSystemopenmar- Manager,Officeof theSecretary, ketoperationsconductedduringtheperiodsincethe Boardof Governors CommitteemetonJune17–18,2014,summarized ElmarMertens theoutcomesof recenttestoperationsof theTerm SeniorEconomist,Divisionof MonetaryAffairs, DepositFacility(TDF),describedtheresultsfrom Boardof Governors thefixed-rateovernightreverserepurchaseagreement (ONRRP)operationalexercise,andreviewedthe PeterM.Garavuso ongoingeffectsof recentforeigncentralbankpolicy RecordsProjectManager,Divisionof Monetary actionsonyieldsontheinternationalportionof the Affairs,Boardof Governors SOMAportfolio.Inaddition,themanagernoted GregoryL.Stefani plansforapilotprogramforincreasingthenumber FirstVicePresident,FederalReserveBankof of theOpenMarketDesk’scounterpartiesforagency Cleveland mortgage-backedsecurities(MBS)operationsto includeafewfirmsthataretoosmalltoqualifyas DavidAltig,RonFeldman, primarydealers.Byunanimousvote,theCommittee Jeff Fuhrer,andDanielG.Sullivan ratifiedtheDesk’sdomestictransactionsoverthe ExecutiveVicePresidents,FederalReserveBanksof intermeetingperiod.Therewerenointervention Atlanta,Minneapolis,Boston,andChicago, operationsinforeigncurrenciesfortheSystem’s respectively accountovertheintermeetingperiod. MichaelDotseyandMegMcConnell SeniorVicePresidents,FederalReserveBanksof Monetary Policy Normalization PhiladelphiaandNewYork,respectively Meetingparticipantscontinuedtheirdiscussionof FredFurlong issuesassociatedwiththeeventualnormalizationof GroupVicePresident,FederalReserveBankof thestanceandconductof monetarypolicy,consis- SanFrancisco tentwiththeCommittee’sintentiontoprovideaddi- AntoineMartin,1DouglasTillett, tionalinformationtothepubliclaterthisyear,well DavidC.Wheelock,JonathanL.Willis, beforemostparticipantsanticipatethefirststepsin andPatriciaZoebel1 reducingpolicyaccommodationtobecomeappropri- VicePresidents,FederalReserveBanksof NewYork, ate.Thestaff detailedapossibleapproachforimple- Chicago,St.Louis,KansasCity,andNewYork, mentingandcommunicatingmonetarypolicyonce respectively theCommitteebeginstotightenthestanceof policy.

212 101stAnnualReport|2014 TheapproachreflectedtheCommittee’sdiscussion couldhelpdeterminetheappropriatefeaturestotemof normalizationstrategiesandpolicytoolsduring pertherisksthatmightbeassociatedwithanON theprevioustwomeetings. RRPfacility. Participantsexpressedgeneralsupportforthenor- Participantsalsodiscussedapproachestonormalizmalizationapproachoutlinedbythestaff,though ingthesizeandcompositionof theFederalReserve’s somenotedreservationsaboutoneormoreof itsfea- balancesheet.Ingeneral,theyagreedthatthesizeof tures.Almostallparticipantsagreedthatitwouldbe thebalancesheetshouldbereducedgraduallyand appropriatetoretainthefederalfundsrateasthekey predictably.Inaddition,theybelievedthat,inthe policyrate,andtheysupportedcontinuingtotargeta longrun,thebalancesheetshouldbereducedtothe rangeof 25basispointsforthisrateatthetimeof smallestlevelconsistentwithefficientimplementaliftoff andforsometimethereafter.However,one tionof monetarypolicyandshouldconsistprimarily participantpreferredtousetherangeforthefederal of Treasurysecuritiesinordertominimizetheeffect fundsrateasacommunicationtoolratherthanasa of theSOMAportfolioontheallocationof credit hardtarget,andanotherpreferredthatpolicycom- acrosssectorsof theeconomy.Afewparticipants municationsduringthenormalizationperiodfocus notedthattheappropriatesizeof thebalancesheet ontherateof interestonexcessreserves(IOER)and woulddependontheCommittee’sfuturedecisions theONRRPrateinadditiontothefederalfunds regardingitsframeworkformonetarypolicy.Most rate.Participantsagreedthatadjustmentsinthe participantssupportedreducingorendingreinvest- IOERratewouldbetheprimarytoolusedtomove mentsometimeafterthefirstincreaseinthetarget thefederalfundsrateintoitstargetrangeandinflu- rangeforthefederalfundsrate.Afew,however, enceothermoneymarketrates.Inaddition,most believedthatceasingreinvestmentbeforeliftoff wasa thoughtthattemporaryuseof alimited-scaleON betterapproachbecauseitwouldleadtoanearlier RRPfacilitywouldhelpsetafirmerfloorunder reductioninthesizeof theportfolio.Mostparticimoneymarketinterestratesduringnormalization. pantscontinuedtoanticipatethattheCommittee Mostparticipantsanticipatedthat,atleastinitially, wouldnotsellMBS,exceptperhapstoeliminate theIOERratewouldbesetatthetopof thetarget residualholdings.However,acoupleof participants rangeforthefederalfundsrate,andtheONRRP preferredtosellMBSinordertounwindtheeffectof ratewouldbesetatthebottomof thefederalfunds theFederalReserve’sholdingsonmortgagerates targetrange.Alternatively,someparticipantssug- relativetootherinterestratesmorerapidlythan gestedtheONRRPratecouldbesetbelowthebot- wouldoccurasaresultof repaymentsof principal tomof thefederalfundstargetrange,judgingthatit alone.Someothersnotedthat,giventheuncertainties mightbepossibletobeginthenormalizationprocess attendingthenormalizationprocessandtheoutlook withminimalornorelianceonanONRRPfacility fortheeconomyandfinancialmarkets,itcouldbe andincreaseitsroleonlyif necessary.However,many helpfultoretaintheoptiontosellsomeassets. otherparticipantsthoughtthatsuchastrategymight resultininsufficientcontrolof moneymarketratesat ParticipantsagreedthattheCommitteeshouldproliftoff,whichcouldcauseconfusionaboutthelikely videadditionalinformationtothepublicregarding pathof monetarypolicyorraisequestionsaboutthe thedetailsof normalizationwellbeforemostpartici- Committee’sabilitytoimplementpolicyeffectively. pantsanticipatethefirststepsinreducingpolicy accommodationtobecomeappropriate.They ParticipantsgenerallyagreedthattheONRRPfacil- stressedtheimportanceof communicatingaclear ityshouldbeonlyaslargeasneededforeffective planwhileatthesametimenotingtheimportanceof monetarypolicyimplementationandshouldbe maintainingflexibilitysothatadjustmentstothenorphasedoutwhenitisnolongerneededforthatpur- malizationapproachcouldbemadeasthesituation pose.Participantsexpressedtheirdesiretoinclude changedandinlightof experience.Participants featuresinthefacility’sdesignthatwouldlimitthe requestedadditionalanalysisfromthestaff onissues FederalReserve’sroleinfinancialintermediationand relatedtonormalizationasbackgroundforfurther mitigatetheriskthatthefacilitymightmagnify discussionattheirnextmeeting.Afewparticipants strainsinshort-termfundingmarketsduringperiods alsosuggestedthattheCommitteeshouldsolicit of financialstress.Theydiscussedoptionstoaddress additionalinformationfromthepublicregardingthe theseconcerns,includingmethodsforlimitingthe possibleeffectsof anONRRPfacility,butsomeothprogram’ssize.Manyparticipantsnotedthatfurther erspointedoutthattheCommitteewouldcontinue testingwouldprovideadditionalinformationthat toreceivesuchfeedbackinformallyinresponsetoits

Minutesof FederalOpenMarketCommitteeMeetings|July 213 ongoingcommunicationsregardingnormalization. partlyreflectinghigherpurchasesof lightmotor TheBoardmeetingconcludedattheendof thedis- vehicles.Keyfactorsthattendtoinfluencehousehold cussionof approachestopolicynormalization. spendingremainedpositiveinrecentmonths.Inparticular,gainsinequityvaluesandhomeprices Staff Review of the Economic Situation boostedhouseholdnetworth,andrealdisposable personalincomecontinuedtoriseinthesecondquar- TheinformationreviewedfortheJuly29–30meeting ter.ConsumersentimentintheThomsonReuters/ indicatedthatrealgrossdomesticproduct(GDP) Universityof MichiganSurveysof Consumersedged reboundedinthesecondquarterfollowingitsfirst- downinearlyJulybutwasonlyslightlybelowits quarterdecline,butitexpandedatonlyamodestpace, averageoverthefirsthalf of theyear. onbalance,overthefirsthalf of theyear.Consumer priceinflationrosesomewhatinthesecondquarter, Realexpendituresforresidentialinvestmentturned butfuturespricesforenergyandagriculturalcom- upinthesecondquarterafterdecliningfortwoconmoditiesgenerallyweretrendingdownoverthenext secutivequarters.Startsof newsingle-familyhouses coupleof yearsandlonger-runmeasuresof inflation declinedinJune,buttheyroseforthequarterasa expectationsremainedstable.TheBureauof Eco- whole,andthelevelof permitissuancewasconsisnomicAnalysis(BEA)releaseditsadvanceestimatefor tentwithincreasesinstartsinsubsequentmonths.In second-quarterrealGDP,alongwithreviseddatafor themultifamilysector,startsandpermitsalso earlierperiods,ontheseconddayof theFOMCmeet- increased,onnet,inthesecondquarter.Existing ing.Thestaff’sassessmentof economicactivityand homesalesmovedupduringthesecondquarterbut inflationinthefirsthalf of 2014,basedoninformation remainedbelowyear-earlierlevels,whilenewhome availablebeforethemeetingbegan,wasbroadlyconsis- salesdeclined.Homepricescontinuedtorisethrough tentwiththenewinformationfromtheBEA. May,thoughtherateof increasewaslessrapidthan earlierintheyear. Measuresof labormarketconditionsgenerallycontinuedtoimproveduringtheintermeetingperiod. Realprivateexpendituresforbusinessequipmentand Totalnonfarmpayrollemploymentincreased intellectualpropertyproductsincreasedinthesecond stronglyinJune,andtheaveragemonthlygainfor quarter.Nominalnewordersfornondefensecapital thesecondquarterwasthelargestsincethefirst goodswerelittlechanged,onnet,inMayandJune; quarterof 2012.Theunemploymentratedeclinedto however,thelevelof orderswasabovethatforship- 6.1percentinJune,thelaborforceparticipationrate ments,pointingtoincreasesinshipmentsinsubsewasunchanged,andtheemployment-to-population quentmonths.Otherforward-lookingindicators, ratioedgedup.Therateof long-durationunemploy- suchasnationalandregionalsurveysof business mentmoveddown,andtheshareof workers conditions,alsogenerallysuggestedmoderate employedparttimeforeconomicreasonsedgedup; increasesinbusinessequipmentspendinginthenear bothmeasuresremainedelevatedbyhistoricalstan- term.Realbusinessexpendituresfornonresidential dards.Initialclaimsforunemploymentinsurance constructionalsoincreasedinthesecondquarter. declinedfurtherinrecentweeks.Therateof job Meanwhile,businessinventoriesgenerallyappeared openingsrosefurtherinMay,buttherateof hiring wellalignedwithsales,apartfromtheenergysector, wasunchangedandremainedatamodestlevel. whereinventoriesremainedbelowyear-earlierlevels. Industrialproductionincreasedinthesecondquar- Realfederalgovernmentpurchasesdecreasedover ter,ashigheroutputfrommanufacturersandmines thefirsthalf of theyear,reflectingongoingfiscal morethanoffsetadeclineintheoutputof electric consolidationandcontinueddeclinesindefense andnaturalgasutilities.Capacityutilizationalso spending.Incontrast,realstateandlocalgovernment movedhigherinthesecondquarter.Automakers’ purchasesincreasedinthesecondquarter,aspayrolls productionschedulesindicatedthatlightmotor expandedatafasterpacethaninthefirstquarter vehicleassemblieswouldincreaseinthethirdquarter, andoutlaysforconstructionmovedhigher. andreadingsonnewordersfromnationaland regionalmanufacturingsurveyswereconsistentwith TheU.S.internationaltradedeficitnarrowedinMay moderategainsinfactoryoutputinthenearterm. asimportsfellandexportsrose.Theriseinexports wasconcentratedinpetroleumproductsandauto- Realpersonalconsumptionexpenditures(PCE)rose motiveparts.Thefallinimportswasledbydeclines morequicklyinthesecondquarterthaninthefirst, inoilandconsumergoods.Forthesecondquarter

214 101stAnnualReport|2014 overall,netexportsexertedamoderatedragonthe expected.Theanticipatedpathof thefederalfunds changeinU.S.realGDP,comparedwithamoresub- rateshifteddownmodestlyfollowingtheJune stantialnegativecontributioninthefirstquarter. FOMCstatementandtheChair’spressconference. Policyexpectationsalsoedgeddownonthereleaseof U.S.consumerprices,asmeasuredbythePCEprice theminutesof theJuneFOMCmeeting.Marketparindex,increasedatafasterpaceinthesecondquarter ticipantstooknoteof thediscussionof monetary thaninthefirstandwereabout1½percenthigher policynormalizationintheminutesand,particularly, thanayearearlier.Consumerenergypriceinflation thediscussionof thelikelyspreadbetweentheON roseinthesecondquarter,butretailgasolineprices, RRPrateandtheIOERrate. measuredonaseasonallyadjustedbasis,subsequentlymovedlowerthroughthefourthweekof ResultsfromtheDesk’sJulySurveyof Primary July.Consumerfoodpriceinflationalsoincreasedin Dealers,conductedshortlybeforetheJulyFOMC thesecondquarter,reflectingtheeffectsof drought meeting,indicatedthatmarketparticipants’expectaanddiseaseoncropandlivestockproduction;how- tionsforthetimingof thefirstincreaseinthefederal ever,spotpricesforcropsmoveddowninrecent fundsrateandthesubsequentpolicypathwere weeks,andfuturespricespointedtolowerpricesfor largelyunchangedfromthosereportedinthesurvey livestockintheyearahead.ThePCEpriceindexfor takenjustbeforetheJunemeeting.Themedian itemsexcludingfoodandenergyalsorosemore dealercontinuedtoseethethirdquarterof 2015as quicklyinthesecondquarterthaninthefirstand themostlikelytimefortheliftoff of thefederalfunds was1½percenthigherthanayearearlier.Near-term ratefromtheeffectivelowerbound,although,relainflationexpectationsfromtheMichigansurveywere tivetotheJunesurvey,thedistributionof themodal littlechanged,onnet,inJuneandearlyJuly,while expectedtimeof liftoff becamemoreconcentrated longer-termexpectationsdeclined.Measuresof labor aroundthethirdquarterof 2015. compensationindicatedthatgainsinnominalwages andemployeebenefitsremainedmodest. Onbalance,10-and30-yearnominalTreasuryyields bothdeclinedabout20basispointsovertheinter- Recentindicatorssuggestedthatforeigneconomic meetingperiod.ConcernsabouttensionsinUkraine activitystrengthenedinthesecondquarter:Chinese andtheMiddleEastandthereleaseof theJunemin- GDPacceleratedsubstantially,andMexicandatasug- utesappearedtocontributetothedeclinesinlongergestedapickupthere.RealGDPgrowthremained termTreasuryyields.Thedeclineinyieldsatthelong strongintheUnitedKingdom,anddataforboth endof thecurvelikelyalsoreflectedacontinuation Canadaandtheeuroareashowedimprovementrela- of apatternthatbeganlastyear,whichsomemarket tivetothefirstquarter.Bycontrast,householdspend- participantsattributedtoareductionininvestors’ inginJapandroppedsharplyfollowingthecountry’s expectationsforlonger-runeconomicgrowthand April1consumptiontaxincrease.Inmanyadvanced declinesintermpremiums.Measuresof longerforeigneconomies,inflationpickedupinthesecond horizoninflationcompensationbasedonTreasury quarterfromverylowratesinthefirst,although Inflation-ProtectedSecuritieswereaboutunchanged. second-quarterinflationintheeuroarearemainedwell belowtheEuropeanCentralBank’sobjective. Conditionsinunsecuredshort-termdollarfunding marketsremainedstableovertheintermeeting Staff Review of the Financial Situation period.TheFederalReservecontinueditsONRRP exerciseandTDFtesting.Asaresultof somewhat Financialconditionseasedsomewhat,onbalance, highermarketratesonrepurchaseagreements,ON betweentheJuneandJulyFOMCmeetings, RRPtake-up,onaverage,wasalittlelowerthanin althoughgeopoliticalrisksweighedoninvestorsenti- thepriorintermeetingperiod,althoughparticipation mentattimes.Onnet,yieldsonlonger-termTreasury intheONRRPexercisejumpedtoarecordhighat securitiesfell,equitypricesrose,andtheforeign quarter-endonJune30.Moreover,theONRRP exchangevalueof thedollarwaslittlechanged. exerciseappearedtohavecontinuedtohelpfirmthe floorundermoneymarketinterestrates.InTDF MarketparticipantscharacterizedtheFederal testingthatranfrommid-MaytoearlyJuly,gradual Reserve’smonetarypolicycommunicationsoverthe increasesinofferratesandinthemaximumindiintermeetingperiodassuggestingaslightlymore vidualawardamountsgenerallyresultedinhigher accommodativepolicystancethanhadbeen participation.

Minutesof FederalOpenMarketCommitteeMeetings|July 215 TheS&P500indexroseabout1½percentoverthe risingtensionsintheMiddleEastandUkrainedurintermeetingperiod,asearningsreportsfromarange ingtheintermeetingperiodlikelyaddingsometothe of companiesappearedtoindicatethatprofitsinthe downwardpressure.Concernsaboutoneof Portusecondquarterhadincreasedmodestlyrelativetothe gal’slargestbanksandaboutlitigationrisksfacing firstquarter.TheVIX,anindexof option-implied EuropeanbanksweighedonEuropeanfinancialmarvolatilityforone-monthreturnsontheS&P500 kets,promptingyieldspreadsonperipheralsovereign index,remainedatlowlevelsovertheintermeeting bondsintheeuroareatowidenandequityprice period. indexesforEuropeanbankstodecline.Intermeeting datareleasesoneuro-areaindustrialproductioncame Creditflowstononfinancialcorporationsremained inbelowmarketexpectations,alsoweighingonheadstronginthesecondquarter.Grossissuanceof lineequitymarketsintheregion.Mixednewsfrom investment-andspeculative-gradebondsstayed emergingmarketeconomies,includingbetter-thanbrisk.Commercialandindustrialloansonbanks’ expectedGDPgrowthinChinaandconcernsabout balancesheetscontinuedtoincreaseatarobustpace, Argentina’sscheduleddebtpayments,generallyhad consistentwithreportsintheJulySeniorLoanOffi- modestmarketeffects.Changesinemergingmarket cerOpinionSurveyonBankLendingPractices equityindexesweremixedovertheperiod,and (SLOOS)of easierlendingstandardsandtermsas emergingmarketbondyieldsgenerallydeclined.The wellasstrongerloandemandfromfirmsof allsizes. broadtrade-weighteddollarwaslittlechanged,on Issuanceof leveragedloansbyinstitutionalinvestors net,overtheintermeetingperiod. alsoremainedsolid. Thestaff’speriodicreportonpotentialriskstofinan- Creditconditionsinmarketsforcommercialreal cialstabilityconcludedthatrelativelystrongcapital estate(CRE)improvedfurtherinthesecondquarter. positionsof U.S.banks,subdueduseof maturity AccordingtotheJulySLOOS,bankscontinuedto transformationandleveragewithinthebroader easetheirstandardsandreportstrongerdemandfor financialsector,andrelativelylowlevelsof leverage CREloansduringthesecondquarteronbalance. fortheaggregatenonfinancialsectorwereimportant CREloansonbanks’bookscontinuedtoexpand factorssupportingoverallfinancialstability.Howmoderately,andissuanceof commercialmortgage- ever,thestaff reportalsohighlightedthatlowand backedsecuritiesremainedsolid. decliningriskpremiums,lowlevelsof marketvolatility,andalooseningof underwritingstandardsina Creditconditionsinresidentialmortgagemarketsgen- numberof marketsraisedsomewhattheriskof an erallyremainedtightovertheintermeetingperiod. eventualcorrectioninassetvaluations. Mortgageinterestratesheldsteadyaround4percent, andoriginationvolumescontinuedtobelow.Accord- Staff Economic Outlook ingtotheJulySLOOS,underwritingstandardson Thedatareceivedsincethestaff prepareditsforecast primehome-purchaseloansappearedtohaveeased fortheJuneFOMCmeetingsuggestedthatrealGDP furtheratbanksduringthesecondquarterbut,onnet, growthwasevenweakerinthefirsthalf of theyear standardsonalltypesof residentialrealestateloans thanhadbeenanticipated.3However,thestaff leftits reportedlyremainedtighterthanthemidpointsof the forecastforrealGDPgrowthinthesecondhalf of respondentbanks’longer-termranges. theyearessentiallyunrevisedbecauseotherindicatorsof economicactivityappearedcomparatively Incontrasttomortgagelending,consumercredit stronginrelationtorealGDPduringthefirsthalf of continuedtoexpandrobustlyinMay,largelyonthe theyear.Inparticular,payrollemploymentcontinued strengthof autoandstudentloans,thoughcredit toadvanceatasolidpace,theunemploymentrate carddebtpickedupsomewhataswell.Banks declinedfurther,industrialproductionpostedsteady respondingtotheJulySLOOSindicatedthat gains,andreadingsfrombusinesssurveyswere demandforautoloansstrengthenedfurtherinthe strong.Thestaff’smedium-termforecastforreal secondquarter.Inaddition,demandforcreditcard GDPgrowthwasalsolittlerevised.Thestaff continloansincreased,andafewlargebanksreportedhavuedtoprojectthatrealGDPwouldexpandata ingeasedlendingpoliciesforsuchloans. fasterpaceinthesecondhalf of thisyearandover Benchmarkyieldsonlong-termsovereignbondsin 3 Thestaff’sforecastfortheJulyFOMCmeetingwasprepared theadvancedforeigneconomiescontinuedthedownpriortotheJuly30releaseoftheBEA’sadvanceestimateof wardtrendthatbeganatthestartof theyear,with realGDPinthesecondquarterandrevisionsforearlierperiods.

216 101stAnnualReport|2014 thenexttwoyearsthanin2013.Thisforecastwas reboundinrealGDPinthesecondquarterandthe predicatedonafurtheranticipatedwaningof the ongoingimprovementinlabormarketconditionsas restraintonspendinggrowthfromchangesinfiscal supportingtheirexpectationsforcontinuedmoderate policy,continuedimprovementincreditavailability, economicexpansionwithlabormarketindicators increasesinconsumerandbusinessconfidence,anda andinflationmovingtowardlevelstheCommittee pickupinforeigneconomicgrowth.Inresponsetoa judgesconsistentwithitsdualmandate.Although furtherdownwardsurpriseintheunemploymentrate, mostparticipantscontinuedtoviewtheriskstothe thestaff againlowereditsforecastfortheunemploy- outlookforeconomicactivityandthelabormarket mentrateovertheprojectionperiod.Toreconcilethe asnearlybalanced,somepointedtopossiblesources downwardrevisiontorealGDPgrowthforthefirst of downsiderisk,includingpersistentweaknessin half of yearwithanunemploymentratethatwas thehousingsector,acontinuedslowriseinhousenowclosertothestaff’sestimateof itslonger-run holdincome,orspilloversfromdevelopmentsinthe naturalrate,thestaff lowereditsassumedpaceof MiddleEastandUkraine.Participantsnotedthat potentialoutputgrowththisyearbymorethanit inflationhadmovedsomewhatclosertotheCommitmarkeddownGDPgrowth.Asaresult,resource tee’s2percentlonger-runobjectiveandgenerallysaw slackinthisprojectionwasanticipatedtobesome- therisksof inflationrunningpersistentlybelowtheir whatnarrowerthisyearthaninthepreviousforecast objectiveashavingdiminishedsomewhat. andtobetakenupslowlyovertheprojectionperiod. Householdspendingappearedtoberisingmoder- Thestaff’snear-termforecastforinflationwas atelyandwasexpectedtocontributetostrongerecorevisedupalittle,asrecentdatashowedsomewhat nomicgrowthinthesecondhalf of theyearthanin faster-than-anticipatedincreasesthatwerejudgedto thefirsthalf.BusinesscontactsinseveralDistricts beonlypartlytransitory.Withalittlelessresource reportedapickupinconsumerspendingafterthe slackinthisprojection,themedium-termforecastfor weaknessinthefirstquarter.However,afewparticiinflationwasalsorevisedupslightly.Nonetheless,as pantsraisedconcernsthathouseholdsmightremain intheJuneprojection,inflationwasprojectedtostep cautious,withthepersonalsavingratestaying downinthesecondhalf of thisyearandtoremain elevated,orthattheslowriseinwagesandincome belowtheCommittee’slonger-runobjectiveof 2per- mightbeinsufficienttosupportstrongerconsumer centoverthenextfewyears.Withlonger-runinfla- spending. tionexpectationsassumedtoremainstable,changes incommodityandimportpricesexpectedtobesub- Therecoveryinhousingactivityremainedslow dued,andslackinlaborandproductmarketsantici- accordingtomostparticipants.Althoughmortgage patedtodiminishonlyslowly,inflationwasforecast rateswerestilllowandhousingappearedtoberelatorisegraduallyandtoreachtheCommittee’sobjec- tivelyaffordable,variousfactorswereseenas tiveinthelongerrun. restrainingdemand,includinglowexpectedincome andhighlevelsof studentdebtaswellasdifficultyin Thestaff continuedtoviewuncertaintyaroundits obtainingmortgagecredit,particularlyforyounger, projectionsforrealGDPgrowth,inflation,andthe first-timehomebuyers.Itwasalsonotedthatthe unemploymentrateasroughlyinlinewiththeaver- weaknessinhomebuildingalongwiththecontinued ageof thepast20years.AlthoughtheriskstoGDP riseinhousepricessuggestedthatsupplyconstraints growthwerestillseenastiltedalittletothedown- werealsoweighingonconstructionactivity.Acouple side,asneithermonetarypolicynorfiscalpolicywas of participantsindicatedthatsomedemandappeared viewedaswellpositionedtohelptheeconomywith- tohaveshiftedtorentalproperties.Therising standadverseshocks,theseriskswereconsideredto demandforrentalswasinpartbeingsatisfiedby bemorenearlybalancedthaninthepreviousprojec- investorsbuyinghomesfortherentalmarket;itwas tion.Thestaff continuedtoviewtherisksaroundits alsoprovidingsupportformultifamilyconstruction. outlookfortheunemploymentrateandforinflation Someparticipantsnotedtheirconcernthatanumber asroughlybalanced. of thefactorsrestrainingresidentialconstruction mightpersist,dampingthehousingrecoveryfor Participants’ Views on Current Conditions sometime. and the Economic Outlook Manyparticipantsreportedcontinuedimprovement Intheirdiscussionof theeconomicsituationandthe insentimentamongtheirbusinesscontactsand outlook,meetingparticipantsgenerallyviewedthe notedpositivereadingsfromrecentregionaland

Minutesof FederalOpenMarketCommitteeMeetings|July 217 nationalsurveysof manufacturingandservice-sector arguedthattheunemploymentratecontinuesto activity.Inparticular,participantscitedstrengthin serveasareliablesummarystatisticfortheoverall airlines,railroads,truckingfirms,businessessupply- stateof thelabormarketandthoughtthatitshould ingthemotorvehicleandaerospaceindustries,and betheCommittee’sprincipalfocusforevaluating thoseinthehigh-techsector.Inaddition,higher labormarketconditions.However,manyparticipants energypricescontinuedtoprovidesupportforactiv- continuedtoseealargergapbetweencurrentlabor ityintheenergysector.Intheagriculturesector, marketconditionsandthoseconsistentwiththeir favorablegrowingconditionsforcropshadlowered assessmentsof normallevelsof laborutilizationthan pricesbutincreasedtheprofitabilityof livestockpro- indicatedbythedifferencebetweentheunemployducers.Thereportsfromtheirbusinesscontactspro- mentrateandestimatesof itslonger-runnormal videdsupportforparticipants’expectationof level.Theseparticipantscited,forexample,thestillstrongereconomicgrowthinthesecondhalf of the elevatedlevelsof long-termunemploymentand year.Insomecases,theinformationfrombusinesses workersemployedparttimeforeconomicreasonsas suggestedincreasesinspendingoncapitalequipment wellaslowlaborforceparticipation.Severalparticiorapickupininvestmentincommercialandindus- pantspointedoutthattherecentdropintheunemtrialconstructionandtransportation.Contactsina ploymentratehadbeenassociatedwithprogressin numberof areasindicatedthatcreditwasreadily reabsorbingthelong-termunemployedintojobsand available,andreportsfromparticipants’businessand reducingpart-timework,suggestingthatslackwas financialcontactsindicatedastrengtheningin diminishingandcouldbereducedfurtherasemploydemandforbankcredit.However,severalpartici- mentopportunitiesexpanded. pantsreportedthatbusinessesremainedsomewhat uncertainabouttheeconomicoutlookandthuswere Laborcompensationwasstillrisingonlymodestly. stillcautiousaboutsteppingupcapitalspendingand Manyparticipantscontinuedtoattributethesubhiring.Federalfiscalrestraintreportedlycontinued duedriseinwagestotheremainingslackinthelabor todepressbusinessactivityinsomeareasdependent market;itwasnotedthattheelevatedlevelof relaonfederalspending. tivelylow-paidpart-timeworkerswasholdingdown overallwageincreases.Severalotherparticipants Labormarketconditionsimprovedinrecentmonths pointedtoreportsthatwagepressureshadincreased accordingtoparticipants’reportsondevelopmentsin insomeregionsandoccupationsthatwereexperienctheirDistrictsaswellasarangeof nationalindica- inglaborshortagesorrelativelylowunemployment. tors.Theimprovementwasreflectednotonlyina However,acoupleof participantsindicatedthatthe pickupinpayrollemploymentgainsandanoticeable pass-throughof laborcostshasbeenmoreattenuated declineintheoverallunemploymentrate,butalsoin sincethemid-1980sandthatwagepressuresmight reductionsinbroadermeasuresof underutilization notbeareliableleadingindicatorof higherinflation. suchaslong-durationjoblessnessandthenumberof workerswithpart-timejobswhowouldpreferfull- Inflationfirmedinrecentmonths,andmostparticitimeemployment.Thelaborforceparticipationrate pantsanticipatedthatitwouldcontinuetomoveup wasstable,andacoupleof participantspointedout towardtheCommittee’s2percentobjective.Manyof thatthetransitionratefromlong-durationunem- themexpectedthatinflationwaslikelytorisegraduploymenttoemploymenthadmovedup.Moreover, allyoverthemediumterm,asresourceslackdiminsomeparticipantscitedpositivesignsof increased ishedandinflationexpectationsremainedstable.In hiringandturnoverinthelabormarket,including supportof theirassessments,severalreportedresults increasesinjobopeningsandhiringplans,higher fromvariousstatisticalmodelsof inflationandinflaquitrates,andapparentimprovementsinmatching tionexpectations.Mostnowjudgedthatthedownworkersandjobs. sideriskstoinflationhaddiminished,butafewparticipantscontinuedtoseeinflationaslikelytopersist Participantsgenerallyagreedthatboththerecent belowtheCommittee’sobjectiveoverthemedium improvementinlabormarketconditionsandthe term.Severalcommentedthattheupsideriskshad cumulativeprogressoverthepastyearhadbeen notincreased.However,afewothersarguedthatthe greaterthananticipatedandthatlabormarketcondi- recenttighteningof thelabormarkethadincreased tionshadmovednoticeablyclosertothoseviewedas theupsideriskstoinflationandinflationexpectanormalinthelongerrun.Participantsdiffered,how- tions,particularlyinanenvironmentinwhichthe ever,intheirassessmentsof theremainingdegreeof economicexpansionwasexpectedtostrengthen labormarketslackandhowtomeasureit.Afew further.

218 101stAnnualReport|2014 Intheirdiscussionof financialstabilityissues,par- veryslowly,therebywarrantingacontinuationof ticipantsnotedevidenceof valuationpressuresin highlyaccommodativepolicyaslongasprojected someparticularassetmarkets,butthosepressures inflationremainedbelow2percentandlonger-term didnotappeartobewidespreadandothermeasures inflationexpectationswerewellanchored. of vulnerabilityinthefinancialsystemwereatlowto moderatelevels.Asaresult,theygenerallysawthe Committee Policy Action vulnerabilitiesinthefinancialsystemaswellcontained.SomeparticipantsdiscussedhowtheCom- Intheirdiscussionof monetarypolicyintheperiod mitteemightbetterincorporatefinancialstability ahead,membersjudgedthatinformationreceived risksinitsdiscussionof macroeconomicrisks.They sincetheFederalOpenMarketCommitteemetin alsosuggestedthattheCommitteeconsiderhow Juneindicatedthateconomicactivityreboundedin promptlyvariousfinancialstabilityconcernscould thesecondquarter.Householdspendingappearedto beaddressed,if needbe,andwhichtools,including berisingmoderately,andbusinessfixedinvestment monetarypolicyandregulatoryresponses,wouldbe wasadvancing,whiletherecoveryinthehousingsecmosttimelyandeffectiveindoingso. torremainedslow.Fiscalpolicywasrestrainingeconomicgrowth,althoughtheextentof therestraint Withrespecttomonetarypolicyoverthemedium wasdiminishing.TheCommitteeexpectedthat,with run,participantsgenerallyagreedthatlabormarket appropriatepolicyaccommodation,economicactivconditionsandinflationhadmovedclosertothe itywouldexpandatamoderatepacewithlabormar- Committee’slonger-runobjectivesinrecentmonths, ketindicatorsandinflationmovingtowardlevelsthat andmostanticipatedthatprogresstowardthose theCommitteejudgesconsistentwithitsdual goalswouldcontinue.Moreover,manyparticipants mandate. notedthatif convergencetowardtheCommittee’s objectivesoccurredmorequicklythanexpected,it Withtheincominginformationbroadlysupporting mightbecomeappropriatetobeginremovingmon- theCommittee’sexpectationof ongoingimproveetarypolicyaccommodationsoonerthantheycur- mentinlabormarketconditionsandinflationmovrentlyanticipated.Indeed,someparticipantsviewed ingbacktotheCommittee’s2percentobjective, theactualandexpectedprogresstowardtheCommit- membersgenerallyagreedthatafurthermeasured tee’sgoalsassufficienttocallforarelativelyprompt reductioninthepaceof assetpurchaseswasappromovetowardreducingpolicyaccommodationto priateatthismeeting.Accordingly,theCommittee avoidovershootingtheCommittee’sunemployment agreedthat,beginninginAugust,itwouldaddtoits andinflationobjectivesoverthemediumterm.These holdingsof agencyMBSatapaceof $10billionper participantswereincreasinglyuncomfortablewith monthratherthan$15billionpermonth,andit theCommittee’sforwardguidance.Intheirview,the wouldaddtoitsholdingsof Treasurysecuritiesata guidancesuggestedalaterinitialincreaseinthetar- paceof $15billionpermonthratherthan$20billion getfederalfundsrateaswellaslowerfuturelevelsof permonth.TheCommitteeagainjudgedthat,if thefundsratethantheyjudgedlikelytobeappropri- incomingdatabroadlysupporteditsexpectations ate.Theysuggestedthattheguidanceshouldmore thatlabormarketindicatorsandinflationwouldconclearlycommunicatehowpolicy-settingwould tinuetomovetowardmandate-consistentlevels,the respondtotheevolutionof economicdata.However, Committeewouldlikelyreducethepaceof assetpurmostparticipantsindicatedthatanychangeintheir chasesinfurthermeasuredstepsatfuturemeetings. expectationsfortheappropriatetimingof thefirst However,theCommitteereiteratedthatassetpurincreaseinthefederalfundsratewoulddependon chaseswerenotonapresetcourseandthatitsdecifurtherinformationonthetrajectoriesof economic sionsremainedcontingentontheoutlookforthe activity,thelabormarket,andinflation.Inparticular, labormarketandinflationaswellasitsassessmentof althoughparticipantsgenerallysawthedropinreal thelikelyefficacyandcostsof suchpurchases. GDPinthefirstquarterastransitory,somenoted thatitincreaseduncertaintyabouttheoutlook,and Membersdiscussedtheirassessmentsof progress— theywerelookingtoadditionaldataonproduction, bothrealizedandexpected—towardtheCommittee’s spending,andlabormarketdevelopmentstoshed objectivesof maximumemploymentand2percent lightontheunderlyingpaceof economicgrowth. inflationandconsideredenhancementstothestate- Moreover,despiterecentinflationdevelopments,sev- mentlanguagethatwouldmoreclearlycommunicate eralparticipantscontinuedtobelievethatinflation theCommittee’sviewonsuchprogress.Regarding waslikelytomovebacktotheCommittee’sobjective thelabormarket,manymembersconcludedthata

Minutesof FederalOpenMarketCommitteeMeetings|July 219 rangeof indicatorsof labormarketconditions—in- Bankof NewYork,untilitwasinstructedotherwise, cludingtheunemploymentrateaswellasanumber toexecutetransactionsintheSOMAinaccordance of othermeasuresof laborutilization—had withthefollowingdomesticpolicydirective: improvedmoreinrecentmonthsthantheyanticipatedearlier.Theyjudgeditappropriatetoreplace “Consistentwithitsstatutorymandate,theFedthedescriptionof recentlabormarketconditions eralOpenMarketCommitteeseeksmonetary thatmentionedsolelytheunemploymentratewitha andfinancialconditionsthatwillfostermaxidescriptionof theirassessmentof theremaining mumemploymentandpricestability.Inparticuunderutilizationof laborresourcesbasedontheir lar,theCommitteeseeksconditionsinreserve evaluationof arangeof labormarketindicators.In marketsconsistentwithfederalfundstradingin theirdiscussion,somemembersexpressedreserva- arangefrom0to¼percent.TheCommittee tionsaboutdescribingtheextentof underutilization directstheDesktoundertakeopenmarket inlaborresourcesmorebroadly.Inparticular,they operationsasnecessarytomaintainsuchcondiworriedthatthedegreeof labormarketslackwas tions.BeginninginAugust,theDeskisdirected difficulttocharacterizesuccinctlyandthatthestate- topurchaselonger-termTreasurysecuritiesata mentlanguagemightprovedifficulttoadjustas paceof about$15billionpermonthandtopurlabormarketconditionscontinuedtoimprove.More- chaseagencymortgage-backedsecuritiesata over,theywereconcernedthat,despitetheimprove- paceof about$10billionpermonth.TheCommentinlabormarketconditions,thenewlanguage mitteealsodirectstheDesktoengageindollar mightbemisinterpretedasindicatingincreasedcon- rollandcouponswaptransactionsasnecessary cernaboutunderutilizationof laborresources.Atthe tofacilitatesettlementof theFederalReserve’s conclusionof thediscussion,theCommitteeagreed agencymortgage-backedsecuritiestransactions. tostatethatlabormarketconditionshadimproved, TheCommitteedirectstheDesktomaintainits withtheunemploymentratedecliningfurther,while policyof rollingovermaturingTreasurysecurialsostatingthatarangeof labormarketindicators tiesintonewissuesanditspolicyof reinvesting suggestedthatthereremainedsignificantunderuti- principalpaymentsonallagencydebtand lizationof laborresources.Manymembersnoted, agencymortgage-backedsecuritiesinagency however,thatthecharacterizationof labormarket mortgage-backedsecurities.TheSystemOpen underutilizationmighthavetochangebeforelong, MarketAccountmanagerandthesecretarywill particularlyif progressinthelabormarketcontinued keeptheCommitteeinformedof ongoingdeveltobefasterthananticipated.Regardinginflation, opmentsregardingtheSystem’sbalancesheet membersagreedtoupdatethelanguageinthestate- thatcouldaffecttheattainmentovertimeof the menttoacknowledgethatinflationhadrecently Committee’sobjectivesof maximumemploymovedsomewhatclosertotheCommittee’slonger- mentandpricestability.” runobjectiveandtoconveytheirjudgmentthatthe likelihoodof inflationrunningpersistentlybelow Thevoteencompassedapprovalof thestatement 2percenthaddiminishedsomewhat. belowtobereleasedat2:00p.m.: Afterthediscussion,allmembersbutonevotedto “InformationreceivedsincetheFederalOpen maintaintheCommittee’stargetrangeforthefederal MarketCommitteemetinJuneindicatesthat fundsrateandtoreiterateitsforwardguidanceonhow growthineconomicactivityreboundedinthe itwouldassesstheappropriatetimingof thefirst secondquarter.Labormarketconditions increaseinthetargetrateandtheanticipatedbehavior improved,withtheunemploymentratedeclining of thefederalfundsrateafteritisraised.Onemember, further.However,arangeof labormarketindihowever,objectedtotheguidancethatitwouldlikely catorssuggeststhatthereremainssignificant beappropriatetomaintainthecurrentrangeforthe underutilizationof laborresources.Household federalfundsrateforaconsiderabletimeaftertheasset spendingappearstoberisingmoderatelyand purchaseprogramendsbecauseitwastimedependent businessfixedinvestmentisadvancing,whilethe anddidnotrecognizetheimplicationsformonetary recoveryinthehousingsectorremainsslow.Fispolicyof theconsiderableprogressthathadbeenmade calpolicyisrestrainingeconomicgrowth, towardtheCommittee’sgoals. althoughtheextentof restraintisdiminishing. Inflationhasmovedsomewhatclosertothe Attheconclusionof thediscussion,theCommittee Committee’slonger-runobjective.Longer-term votedtoauthorizeanddirecttheFederalReserve inflationexpectationshaveremainedstable.

220 101stAnnualReport|2014 Consistentwithitsstatutorymandate,theCom- tionbroadlysupportstheCommittee’sexpectamitteeseekstofostermaximumemployment tionof ongoingimprovementinlabormarket andpricestability.TheCommitteeexpectsthat, conditionsandinflationmovingbacktowardits withappropriatepolicyaccommodation,eco- longer-runobjective,theCommitteewilllikely nomicactivitywillexpandatamoderatepace, reducethepaceof assetpurchasesinfurther withlabormarketindicatorsandinflationmov- measuredstepsatfuturemeetings.However, ingtowardlevelstheCommitteejudgesconsis- assetpurchasesarenotonapresetcourse,and tentwithitsdualmandate.TheCommitteesees theCommittee’sdecisionsabouttheirpacewill theriskstotheoutlookforeconomicactivity remaincontingentontheCommittee’soutlook andthelabormarketasnearlybalancedand forthelabormarketandinflationaswellasits judgesthatthelikelihoodof inflationrunning assessmentof thelikelyefficacyandcostsof persistentlybelow2percenthasdiminished suchpurchases. somewhat. Tosupportcontinuedprogresstowardmaxi- TheCommitteecurrentlyjudgesthatthereis mumemploymentandpricestability,theComsufficientunderlyingstrengthinthebroader mitteetodayreaffirmeditsviewthatahighly economytosupportongoingimprovementin accommodativestanceof monetarypolicy labormarketconditions.Inlightof thecumula- remainsappropriate.Indetermininghowlongto tiveprogresstowardmaximumemploymentand maintainthecurrent0to¼percenttargetrange theimprovementintheoutlookforlabormarket forthefederalfundsrate,theCommitteewill conditionssincetheinceptionof thecurrent assessprogress—bothrealizedandexpected— assetpurchaseprogram,theCommitteedecided towarditsobjectivesof maximumemployment tomakeafurthermeasuredreductioninthe and2percentinflation.Thisassessmentwilltake paceof itsassetpurchases.BeginninginAugust, intoaccountawiderangeof information, theCommitteewilladdtoitsholdingsof agency includingmeasuresof labormarketconditions, mortgage-backedsecuritiesatapaceof $10bil- indicatorsof inflationpressuresandinflation lionpermonthratherthan$15billionper expectations,andreadingsonfinancialdevelopmonth,andwilladdtoitsholdingsof longer- ments.TheCommitteecontinuestoanticipate, termTreasurysecuritiesatapaceof $15billion basedonitsassessmentof thesefactors,thatit permonthratherthan$20billionpermonth. likelywillbeappropriatetomaintainthecurrent TheCommitteeismaintainingitsexistingpolicy targetrangeforthefederalfundsrateforaconof reinvestingprincipalpaymentsfromitshold- siderabletimeaftertheassetpurchaseprogram ingsof agencydebtandagencymortgage- ends,especiallyif projectedinflationcontinues backedsecuritiesinagencymortgage-backed torunbelowtheCommittee’s2percentlongersecuritiesandof rollingovermaturingTreasury rungoal,andprovidedthatlonger-terminflasecuritiesatauction.TheCommittee’ssizable tionexpectationsremainwellanchored. andstill-increasingholdingsof longer-term securitiesshouldmaintaindownwardpressure WhentheCommitteedecidestobegintoremove onlonger-terminterestrates,supportmortgage policyaccommodation,itwilltakeabalanced markets,andhelptomakebroaderfinancial approachconsistentwithitslonger-rungoalsof conditionsmoreaccommodative,whichinturn maximumemploymentandinflationof 2pershouldpromoteastrongereconomicrecovery cent.TheCommitteecurrentlyanticipatesthat, andhelptoensurethatinflation,overtime,isat evenafteremploymentandinflationarenear theratemostconsistentwiththeCommittee’s mandate-consistentlevels,economicconditions dualmandate. may,forsometime,warrantkeepingthetarget federalfundsratebelowlevelstheCommittee TheCommitteewillcloselymonitorincoming viewsasnormalinthelongerrun.” informationoneconomicandfinancialdevelopmentsincomingmonthsandwillcontinueits Votingforthisaction:JanetL.Yellen,WilliamC. purchasesof Treasuryandagencymortgage- Dudley,LaelBrainard,StanleyFischer,RichardW. backedsecurities,andemployitsotherpolicy Fisher,NarayanaKocherlakota,LorettaJ.Mester, toolsasappropriate,untiltheoutlookforthe JeromeH.Powell,andDanielK.Tarullo. labormarkethasimprovedsubstantiallyina contextof pricestability.If incominginforma- Votingagainstthisaction:CharlesI.Plosser.

Minutesof FederalOpenMarketCommitteeMeetings|July 221 Mr.Plosserdissentedbecauseheobjectedtothe Itwasagreedthatthenextmeetingof theCommittee statement’sguidanceindicatingthatitlikelywillbe wouldbeheldonTuesday–Wednesday,Septemappropriatetomaintainthecurrenttargetrangefor ber16–17,2014.Themeetingadjournedat11:55 thefederalfundsratefor“aconsiderabletimeafter a.m.onJuly30,2014. theassetpurchaseprogramends.”Inhisview,the referencetocalendartimeshouldbereplacedwith languagethatindicateshowmonetarypolicywill Notation Vote respondtoincomingdata.Moreover,hejudgedthat thestatementdidnotacknowledgethesubstantial BynotationvotecompletedonJuly8,2014,the progressthathadbeenmadetowardtheCommittee’s Committeeunanimouslyapprovedtheminutesof the economicgoalsandthusrisksunnecessaryanddis- CommitteemeetingheldonJune17–18,2014. ruptivevolatilityinfinancialmarkets,andperhapsin theeconomy,if theCommitteereducesaccommoda- WilliamB.English tionsoonerormorequicklythanfinancialmarkets Secretary anticipate.

222 101stAnnualReport|2014 Meeting Held JamesA.Clouse,EvanF.Koenig, ThomasLaubach,MichaelP.Leahy, on September 16–17, 2014 MarkE.Schweitzer,andWilliamWascher AssociateEconomists Ameetingof theFederalOpenMarketCommittee washeldintheofficesof theBoardof Governorsof SimonPotter theFederalReserveSysteminWashington,D.C.,on Manager,SystemOpenMarketAccount Tuesday,September16,2014,at11:00a.m.andcon- LorieK.Logan tinuedonWednesday,September17,2014,at DeputyManager,SystemOpenMarketAccount 9:00a.m. RobertdeV.Frierson1 Present Secretaryof theBoard,Officeof theSecretary, Boardof Governors JanetL.Yellen Chair MichaelS.Gibson2 Director,Divisionof BankingSupervisionand WilliamC.Dudley Regulation,Boardof Governors ViceChairman MatthewJ.Eichner1 LaelBrainard DeputyDirector,Divisionof ResearchandStatistics, StanleyFischer Boardof Governors RichardW.Fisher StephenA.MeyerandWilliamR.Nelson DeputyDirectors,Divisionof MonetaryAffairs, NarayanaKocherlakota Boardof Governors LorettaJ.Mester MarkE.VanDerWeide3 CharlesI.Plosser DeputyDirector,Divisionof BankingSupervision andRegulation,Boardof Governors JeromeH.Powell DanielK.Tarullo AndreasLehnert DeputyDirector,Officeof FinancialStabilityPolicy ChristineCumming,CharlesL.Evans, andResearch,Boardof Governors JeffreyM.Lacker,DennisP.Lockhart, andJohnC.Williams AndrewFigura,DavidReifschneider, AlternateMembersof theFederalOpenMarket andStaceyTevlin Committee SpecialAdviserstotheBoard,Officeof Board Members,Boardof Governors JamesBullard,EstherL.George, andEricRosengren TrevorA.Reeve Presidentsof theFederalReserveBanksof St.Louis, SpecialAdvisertotheChair,Officeof Board KansasCity,andBoston,respectively Members,Boardof Governors WilliamB.English LindaRobertson SecretaryandEconomist AssistanttotheBoard,Officeof BoardMembers, Boardof Governors MatthewM.Luecke DeputySecretary ChristopherJ.Erceg SeniorAssociateDirector,Divisionof International MichelleA.Smith Finance,Boardof Governors AssistantSecretary ScottG.Alvarez GeneralCounsel StevenB.Kamin Economist 1 AttendedthejointsessionoftheFederalOpenMarketCommitteeandtheBoardofGovernors. DavidW.Wilcox 2 AttendedWednesday’ssessiononly. Economist 3 AttendedTuesday’ssessiononly.

Minutesof FederalOpenMarketCommitteeMeetings|September 223 MichaelT.Kiley4andJeremyB.Rudd4 TroyDavig,MichaelDotsey,GeoffreyTootell, SeniorAdvisers,Divisionof ResearchandStatistics, ChristopherJ.Waller,andJohnA.Weinberg Boardof Governors SeniorVicePresidents,FederalReserveBanksof KansasCity,Philadelphia,Boston,St.Louis,and JoyceK.Zickler Richmond,respectively SeniorAdviser,Divisionof MonetaryAffairs, Boardof Governors SylvainLeduc,JonathanP.McCarthy, andDouglasTillett EricM.EngenandMichaelG.Palumbo VicePresidents,FederalReserveBanksof AssociateDirectors,Divisionof Researchand SanFrancisco,NewYork,andChicago,respectively Statistics,Boardof Governors Kei-MuYi FabioM.Natalucci SpecialPolicyAdvisortothePresident, AssociateDirector,Divisionof MonetaryAffairs, FederalReserveBankof Minneapolis Boardof Governors Developments in Financial Markets and MarnieGillisDeBoer the Federal Reserve’s Balance Sheet DeputyAssociateDirector,Divisionof Monetary Affairs,Boardof Governors Inajointsessionof theFederalOpenMarketCom- JoshuaGallin mittee(FOMC)andtheBoardof Governorsof the DeputyAssociateDirector,Divisionof Researchand FederalReserveSystem,themanagerof theSystem Statistics,Boardof Governors OpenMarketAccount(SOMA)reportedondevelopmentsindomesticandforeignfinancialmarkets EdwardNelson andreviewedtheeffectsof recentforeigncentral AssistantDirector,Divisionof MonetaryAffairs, bankpolicyactionsonyieldsontheinternational Boardof Governors portionof theSOMAportfolio.Thedeputymanager PatrickE.McCabe1 reportedontheSystemopenmarketoperationscon- Adviser,Divisionof ResearchandStatistics, ductedduringtheperiodsincetheCommitteemeton Boardof Governors July29–30,2014,summarizedplansforadditional testoperationsof theTermDepositFacility,and PenelopeA.Beattie1 describedtheresultsfromthefixed-rateovernight AssistanttotheSecretary,Officeof theSecretary, reverserepurchaseagreement(ONRRP)operational Boardof Governors exercise. DavidH.Small ProjectManager,Divisionof MonetaryAffairs, Thedeputymanageralsooutlinedaproposalfor Boardof Governors changestotheongoingONRRPexercisetotestpossibledesignfeaturesthatcouldallowanONRRP KatieRoss1 facilitytoserveasaneffectivesupplementarytool Manager,Officeof theSecretary, duringpolicynormalizationwhilealsomitigatingthe Boardof Governors potentialforunintendedeffectsinfinancialmarkets. Participantsdiscussedtheproposedchangesinthe ValerieHinojosa ONRRPexercise,includingraisingthe RecordsProjectManager,Divisionof Monetary counterparty-specificlimitfrom$10billionto Affairs,Boardof Governors $30billion,limitingtheoverallsizeof eachoperation MarieGooding to$300billion,andintroducinganauctionprocess FirstVicePresident,FederalReserveBankof Atlanta thatwouldbeusedtodeterminetheinterestrateon suchoperationsandallocatetake-upif thesumof DavidAltig,AlbertoG.Musalem, bidsexceededtheoveralllimit.Testingthesedesign andDanielG.Sullivan featureswasgenerallyseenasfurtheringtheCommit- ExecutiveVicePresidents,FederalReserveBanksof tee’sunderstandingof howanONRRPfacility Atlanta,NewYork,andChicago,respectively mightbestructuredtobestbalanceitsobjectivesof supportingmonetarycontrolandof limitingthe FederalReserve’sroleinfinancialintermediationas 4 Attendedtheportionofthemeetingfollowingthejointsession wellasreducingpotentialfinancialstabilityrisksthe oftheFederalOpenMarketCommitteeandtheBoardof Governors. facilitymightposeduringperiodsof stress.Partici-

224 101stAnnualReport|2014 pantsalsodiscussedotherteststhatcouldbeincor- tothelimitsspecifiedin(iii)and(iv).The poratedintheexerciseatalaterdate,includinga SystemOpenMarketAccountmanagerwill dailytime-varyingcapalongwiththeoveralllimiton notifytheFOMCinadvanceaboutanychanges thesizeof ONRRPoperations,smallvariationsin totheofferingrate,per-counterpartylimit,or theofferedrateonONRRPoperations,andmoder- overallsizelimitappliedtooperations.These ateincreasesanddecreasesintheoverallsizelimit.A operationsshallbeauthorizedthroughJanunumberof participantsexpressedconcernthatthese ary30,2015.” testscouldbemisunderstoodasprovidingasignalof theCommittee’sintentionsregardingtheparameters Byunanimousvote,theCommitteeratifiedtheOpen of theONRRPprogramthatwillbeimplemented MarketDesk’sdomestictransactionsovertheinterwhennormalizationbegins;theywantedtoempha- meetingperiod.Therewerenointerventionoperasizethatthetestsareintendedtoprovideadditional tionsinforeigncurrenciesfortheSystem’saccount informationtoguidetheCommittee’sdecisions.Par- overtheintermeetingperiod. ticipantsagreedtoconsiderpotentialadditionalrevisionstotheONRRPexerciseatfutureFOMCmeet- Monetary Policy Normalization ings.Followingthediscussion,theCommitteeunanimouslyapprovedthefollowingresolution: Meetingparticipantsconsideredpublicationof a summarystatementof theirmonetarypolicynormal- “TheFederalOpenMarketCommittee(FOMC) izationprinciplesandplansbasedonthediscussions authorizestheFederalReserveBankof New atrecentCommitteemeetings.Participantsagreed Yorktoconductaseriesof overnightreverse thatitwasappropriateatthistimetoprovideaddirepurchaseoperationsinvolvingU.S.govern- tionalinformationregardingtheirapproachtonormentsecuritiesforthepurposeof furtherassess- malization.Theproposedstatementwasseenasa ingtheappropriatestructureof suchoperations concisesummaryof participants’viewsthatwould insupportingtheimplementationof monetary helpthepublicunderstandthestepsthattheCompolicyduringnormalization.Thereverserepur- mitteeplanstotakewhenthetimecomestobeginthe chaseoperationsauthorizedbythisresolution normalizationprocessandthatwouldconveythe shallbe(i)conductedatanofferingratethat Committee’sconfidenceinitsplans.However,itwas mayvaryfromzerotofivebasispoints,(ii)for emphasizedthattheCommitteewouldneedtobe anovernightterm,orsuchlongertermasiswar- flexibleandpragmaticduringnormalization,adjustrantedtoaccommodateweekend,holiday,and ingthedetailsof itsapproach,if necessary,inlightof similartradingconventions,(iii)subjecttoaper- changingconditions.Regardingthespecificpointsin counterpartylimitof upto$30billionperday, theproposedstatement,acoupleof participants (iv)subjecttoanoverallsizelimitof upto expressedtheirpreferencethattheprinciplesmake $300billionperday,(v)awardedtoallsubmit- greaterallowanceforsalesof agencymortgageters(A)atthespecifiedofferingrateif thesum backedsecurities(MBS)overthenextfewyearsin of thebidsreceivedislessthanorequaltothe ordertonormalizethesizeandcompositionof the overallsizelimit,or(B)atthestopoutrate, FederalReserve’sbalancesheetmorequicklyandto determinedbyevaluatingbidsinascending limitdistortionsintheallocationof creditthatthey orderbysubmittedrateuptothepointatwhich believedwereassociatedwiththeFederalReserve’s thetotalquantityof bidsequalstheoverallsize holdingsof agencyMBS.Inaddition,afewparticilimit,withallbidsbelowthisrateawardedinfull pantsnotedthattheywouldhavepreferredthatthe atthestopoutrateandallbidsatthestopout principlespointtoanearlierendtothereinvestment rateawardedonaproratabasis,if thesumof of repaymentsof principalonsecuritiesheldinthe thecounterpartyoffersreceivedisgreaterthan SOMAportfolio.Attheendof thediscussion,allbut theoverallsizelimit,and(vi)offeredbeginning oneparticipantcouldsupportthepublicationof the withtheoperationconductedonSeptember22, followingstatementafterthemeeting: 2014,withtheresolutionadoptedattheJanuary28–29,2014,FOMCmeetingremainingin PolicyNormalizationPrinciplesandPlans placeuntiltheconclusionof theoperationconductedonSeptember19,2014.TheChairmust Duringitsrecentmeetings,theFederalOpen approveanychangeintheofferingratewithin MarketCommittee(FOMC)discussedwaysto therangespecifiedin(i)andanychangestothe normalizethestanceof monetarypolicyandthe per-counterpartyandoverallsizelimitssubject FederalReserve’ssecuritiesholdings.Thedis-

Minutesof FederalOpenMarketCommitteeMeetings|September 225 cussionswerepartof prudentplanninganddo —TheCommitteeexpectstoceaseorcomnotimplythatnormalizationwillnecessarily mencephasingoutreinvestmentsafterit beginsoon.TheCommitteecontinuestojudge beginsincreasingthetargetrangeforthe thatmanyof thenormalizationprinciplesthatit federalfundsrate;thetimingwilldependon adoptedinJune2011remainapplicable.How- howeconomicandfinancialconditionsand ever,inlightof thechangesintheSystemOpen theeconomicoutlookevolve. MarketAccount(SOMA)portfoliosince2011 —TheCommitteecurrentlydoesnotanticiandenhancementsinthetoolstheCommittee patesellingagencymortgage-backedsecuriwillhaveavailabletoimplementpolicyduring tiesaspartof thenormalizationprocess, normalization,theCommitteehasconcluded althoughlimitedsalesmightbewarrantedin thatsomeaspectsof theeventualnormalization thelongerruntoreduceoreliminate processwilllikelydifferfromthosespecifiedearresidualholdings.Thetimingandpaceof lier.TheCommitteealsohasagreedthatitis anysaleswouldbecommunicatedtothe appropriateatthistimetoprovideadditional publicinadvance. informationregardingitsnormalizationplans. AllFOMCparticipantsbutoneagreedonthe • TheCommitteeintendsthattheFederal followingkeyelementsof theapproachthey Reservewill,inthelongerrun,holdnomore intendtoimplementwhenitbecomesappropri- securitiesthannecessarytoimplementmonatetobeginnormalizingthestanceof monetary etarypolicyefficientlyandeffectively,andthat policy: itwillholdprimarilyTreasurysecurities, therebyminimizingtheeffectof Federal • TheCommitteewilldeterminethetimingand Reserveholdingsontheallocationof credit paceof policynormalization—meaningsteps acrosssectorsof theeconomy. toraisethefederalfundsrateandothershortterminterestratestomorenormallevelsand • TheCommitteeispreparedtoadjustthe toreducetheFederalReserve’ssecuritieshold- detailsof itsapproachtopolicynormalization ings—soastopromoteitsstatutorymandate inlightof economicandfinancial of maximumemploymentandpricestability. developments. —Wheneconomicconditionsandtheeconomicoutlookwarrantalessaccommoda- TheBoardmeetingconcludedattheendof thedistivemonetarypolicy,theCommitteewill cussionof policynormalizationprinciplesandplans. raiseitstargetrangeforthefederalfunds rate. Staff Review of the Economic Situation —Duringnormalization,theFederalReserve intendstomovethefederalfundsrateinto TheinformationreviewedfortheSeptember16–17 thetargetrangesetbytheFOMCprimarily meetingsuggestedthateconomicactivitywas byadjustingtheinterestrateitpayson expandingatamoderatepaceinthethirdquarter. excessreservebalances. Labormarketconditionsimprovedalittlefurther, althoughtheunemploymentratewasessentially —Duringnormalization,theFederalReserve unchangedovertheintermeetingperiod.Consumer intendstouseanovernightreverserepurpriceinflationwasrunningbelowtheFOMC’s chaseagreementfacilityandothersupplelonger-runobjectiveof 2percent,butmeasuresof mentarytoolsasneededtohelpcontrolthe longer-runinflationexpectationsremainedstable. federalfundsrate.TheCommitteewilluse anovernightreverserepurchaseagreement TotalnonfarmpayrollemploymentincreasedinJuly facilityonlytotheextentnecessaryandwill andAugustbutataslowerpacethaninthefirsthalf phaseitoutwhenitisnolongerneededto of theyear.Theunemploymentratewas6.1percent helpcontrolthefederalfundsrate. inAugust,thesameasinJune,andthelaborforce • TheCommitteeintendstoreducetheFederal participationrateandtheemployment-to-population Reserve’ssecuritiesholdingsinagradualand ratioalsowereunchangedsincethattime.Boththe predictablemannerprimarilybyceasingto shareof workersemployedparttimeforeconomic reinvestrepaymentsof principalonsecurities reasonsandtherateof long-durationunemployment heldintheSOMA. declinedalittleoverthepasttwomonths.Other

226 101stAnnualReport|2014 recentindicatorsgenerallypointedtoongoing months.Inaddition,otherforward-lookingindicaimprovementinlabormarketconditions:Although tors,suchassurveysof businessconditions,were somemeasuresof householdexpectationsof the consistentwithmoderategainsinbusinessequipment labormarketsituationdeterioratedsomewhat,the spendinginthenearterm.Nominalbusinessexpenratesof jobopeningsandof grossprivate-sectorhir- dituresfornonresidentialconstructionalsoincreased ingmovedup,initialclaimsforunemploymentinsur- inJuly.Recentbook-valuedataforinventories,along ancewereessentiallyflatatarelativelylowlevel,and withreadingsoninventoriesfromnationaland somereadingsonfirms’hiringplansimproved. regionalmanufacturingsurveys,didnotpointtosignificantinventoryimbalancesinmostindustries;in Onbalance,industrialproductionedgedupoverJuly theenergysector,inventoriesweredrawndownsigandAugust,andtherateof manufacturingcapacity nificantlyearlyintheyearand,despitesubstantial utilizationwasunchanged.Automakers’schedules stockbuildingsincethen,remainedlow. indicatedthatthepaceof motorvehicleassemblies woulddeclineslightlyinthefourthquarter,but Totalrealgovernmentpurchasesseemedtobe broaderindicatorsof manufacturingproduction, roughlyflatinthethirdquarter.Federalgovernment suchasthereadingsonnewordersfromthenational purchasesprobablydeclinedalittle,asdefense andregionalmanufacturingsurveys,wereconsistent spendingwaslowerinJulyandAugustthaninthe withmoderateincreasesinfactoryoutputinthenear secondquarter.Stateandlocalgovernmentpurterm. chasesappearedtoberisingslowlyasthepayrollsof thesegovernmentsexpandedabitfurtherinJulyand Realpersonalconsumptionexpenditures(PCE) Augustandtheirnominalconstructionexpenditures appearedtoberisingatamoderatepaceinthethird increasedinJuly. quarter.5Thecomponentsof nominalretailsales datausedbytheBureauof EconomicAnalysis TheU.S.internationaltradedeficitnarrowedinboth (BEA)toconstructitsestimatesof PCEincreasedat JuneandJuly.ExportswerelittlechangedinJune, asolidrateinJulyandAugust,andsalesof light buttheyexpandedrobustlyinJuly,withparticular motorvehiclessurgedinAugustafteredgingdownin strengthinindustrialsuppliesandautomotiveprod- July.Recentinformationpertainingtokeyfactors ucts.ImportsfellinJunebutthenpartlyrecoveredin thatinfluenceconsumerspendingwerepositive:Real July,drivenbyswingsinimportsof oilandautomodisposableincomescontinuedtoincreaseinJuly, tiveproducts. households’networthlikelyedgedupasequity pricesandhomevaluesrosesomewhatfurther,and TotalU.S.consumerpriceinflation,asmeasuredby consumersentimentasmeasuredbytheThomson thePCEpriceindex,wasabout1½percentoverthe Reuters/Universityof MichiganSurveysof Consum- 12monthsendinginJuly.Overthe12monthsending ersimprovedinAugustandearlySeptember. inAugust,theconsumerpriceindex(CPI)roseabout 1¾percent.Consumerenergypricesdeclinedinboth Thepaceof activityinthehousingsectorseemedto JulyandAugust,whileconsumerfoodpricesrose. bepickingup.Startsandpermitsof bothnewsingle- Corepriceinflation(whichexcludesfoodandenergy familyhomesandmultifamilyunitswerehigherin prices)wasessentiallythesameastotalinflationfor Julythantheiraveragelevelsinthesecondquarter. thePCEpricemeasureandfortheCPIovertheir Salesof existinghomesincreasedfurtherinJuly, mostrecent12-monthperiods.Near-terminflation althoughnewhomesalesdeclined. expectationsfromtheMichigansurveymoveddown abitinAugustandearlySeptember,whilelonger- Realprivateexpendituresforbusinessequipmentand terminflationexpectationsinthesurveywerelittle intellectualpropertyproductsappearedtorisefur- changed. thergoingintothethirdquarter.Nominalshipments of nondefensecapitalgoodsexcludingaircraftmoved Measuresof laborcompensationincreasedalittle upinJuly.Moreover,newordersforthesecapital fasterthanconsumerprices.Compensationperhour goodscontinuedtobeabovethelevelof shipments, inthebusinesssectorrose2¾percentovertheyear pointingtoincreasesinshipmentsinsubsequent endinginthesecondquarter;withmodestgainsin laborproductivity,unitlaborcostsadvancedmore 5 Recentlyreleaseddataforhealth-servicesconsumptioninthe slowlythancompensationperhour.Overthesame secondquarterwerenotablystrongerthantheBureauofEcoyear-longperiod,theemploymentcostindexrose nomicAnalysisestimatedwhenconstructingitsmostrecent PCEestimatesforthesecondquarter. onlyabout2percent,andaveragehourlyearnings

Minutesof FederalOpenMarketCommitteeMeetings|September 227 increasedatasimilarrateoverthe12monthsending FOMCmetinJuly,likelyboostedinpartbyFederal inAugust. Reservecommunications.Measuresof inflationcompensationbasedonTreasuryInflation-Protected Foreigneconomiescontinuedtoexpandinthesec- Securitiesedgeddown,reportedlyreflectingthe ondquarter,butwithsignificantdifferencesacross lower-than-expectedCPIdatainJulyandrecent countries.Economicgrowthreboundedstrongly declinesinoilprices. fromaweakfirst-quarterpaceinCanada,China, andMexico,supportedbyimprovementinexports. Broadmeasuresof domesticequitypriceswereup Incontrast,theJapaneseeconomycontracted modestlyovertheintermeetingperiod,withsome sharplyfollowingtheconsumptiontaxincreasein reportssuggestingthatinvestorswereinterpreting April,economicactivitystagnatedintheeuroarea, incomingeconomicdataasimplyingthattheecoandtheBrazilianeconomyfellintorecession.Inthe nomicrecoverywasstrengthening. thirdquarter,householdspendingappearedtobe normalizinginJapan,andproductioncontinuedto YieldsoncorporatebondsandagencyMBSrose riseinMexico.However,indicatorsof economic aboutinlinewiththoseoncomparable-maturity activityintheeuroarearemainedweak,andChinese Treasurysecurities.High-yieldbondmutualfunds economicdataforJulyandAugustsuggestedsome experiencedsharpoutflowsearlyintheintermeeting slowinginthethirdquarter.Withinflationverylow period,andspreadsonsuchbondswidenednoticeintheeuroarea,theEuropeanCentralBankreduced ably;however,thesespreadsreturnedtotheirinitial itspolicyinterestratesatitsSeptember4meeting levelsoversubsequentweeks,andhigh-yieldbond andannouncedplanstopurchaseprivateassets. fundsattractedmodestinflows.Measuresof liquidity inthecorporatebondmarketremainedstableinthe Staff Review of the Financial Situation faceof thesesubstantialflows. Datareleasesondomesticeconomicactivitywere Conditionsinshort-termdollarfundingmarkets reportedlyinterpretedbyfinancialmarketpartici- werelittlechanged.TheFederalReservecontinued pantsassomewhatbetterthanexpected,onbalance, itstestingof ONRRPoperationsovertheintermeetnotwithstandingthedisappointingemployment ingperiod.Take-upinONRRPoperationsincreased reportforAugust.FederalReservecommunications, alittle,onaverage,overtheperiodrelativetothepreparticularlytheJulyFOMCminutesandtheChair’s viousintermeetingperiod. speechattheJacksonHoleeconomicpolicysymposium,wereviewedassignalingslightlylesspolicy Creditconditionsfordomesticbusinessesremained accommodationthananticipated.Reflectingthese favorable.CorporatebondissuanceslowedinJuly andotherdevelopments,yieldsonnominalTreasury andAugust,reflectingafairlytypicalsummerlullas securitiesrosesomewhatandequitypricesedgedup wellastheelevatedvolatilityinthehigh-yieldbond overtheintermeetingperiod.Onnet,theconflictsin marketearlyintheintermeetingperiod,butissuance theMiddleEastandUkraineandothergeopolitical reboundedstronglyinthefirstweekof September. tensionshadlimitedeffectsondomesticfinancial Commercialpaperoutstandingandcommercialand markets. industrialloansatbanksexpandedbriskly.Credit conditionsinthecommercialrealestate(CRE)sector Thefederalfundsratepathimpliedbyfinancialmar- continuedtoease,andgrowthinCREloansatbanks ketquoteswasessentiallyunchangedovertheinter- stayedsolid.Theissuanceof commercialmortgagemeetingperiod.ButtheresultsfromtheDesk’sSep- backedsecuritiesremainedrobustinJulyand temberSurveyof PrimaryDealersindicatedthatthe August. distributionof thelikelydateof liftoff acrossdealers shiftedtosomewhatearlierdates,andshowedthe Issuanceof institutionalleveragedloanscontinued secondquarterof 2015asthemostlikelydateforlift- apaceinJulyandAugust,traditionallyaslowperiod off.However,thedealers’expectedlevelsof various inthismarket.Theissuanceof “newmoney”loans, employmentandinflationindicatorsatthetimeof whicharetypicallyearmarkedforcorporate liftoff didnotchangemateriallyfromtheprevious leveraged-buyoutsandmergersandacquisitions,was survey. strong,andthepipelineof suchloanswasreported tobequitelargeheadingintothefall.Theissuanceof Theyieldon10-yearnominalTreasurysecurities collateralizedloanobligationswasstillamajor movedupabout15basispoints,onnet,sincethe sourceof demandforleveragedloans.

228 101stAnnualReport|2014 Financingconditionsforhouseholdsremained Thestaff’snear-termforecastforinflationwasalittle mixed.Autoloanswerewidelyavailable;standards lowerthantheprojectionpreparedfortheprevious andtermsforcreditcardloanseasedsomewhat, FOMCmeeting,reflectingrecentreadingsoncore thoughtheywerestilltight;andaccesstoresidential consumerpriceinflationthatwerelowerthananticimortgagescontinuedtobelimitedforallbutthose patedanddeclinesinoilpricesthatwerefasterthan withexcellentcredithistories. expected,buttheforecastforinflationoverthe mediumtermwaslittlechanged.Thestaff continued Respondinginparttodisappointingeconomicdata toprojectinflationtobelowerinthesecondhalf of abroad,theU.S.dollarappreciatedagainstmostcur- thisyearthaninthefirsthalf andtoremainbelow renciesovertheintermeetingperiod,includinglarge theCommittee’slonger-runobjectiveof 2percent appreciationsagainsttheeuro,theyen,andthe overthenextfewyears.Withlonger-terminflation poundsterling.Greatermonetaryaccommodationin expectationsassumedtoremainstable,resourceslack theeuroareaandexpectationsof alowerpolicyrate projectedtodiminishslowly,andchangesincomintheneartermaddedtothedownwardpressureon modityandimportpricesexpectedtobesubdued, theeurowhileuncertaintyabouttheoutcomeof the inflationwasprojectedtorisegraduallyandtoreach forthcomingreferendumonScottishindependence theCommittee’sobjectiveinthelongerrun. weighedonthevalueof thepound.Inaddition,neartermpolicyrateexpectationsmoveddowninthe Overall,thestaff’seconomicprojectionfortheSep- UnitedKingdom,reactingtoboththereleaseof the tembermeetingwasquitesimilartotheforecastpre- AugustInflationReportanduncertaintyinducedby sentedattheJunemeeting,whentheFOMClastprethereferendum.SovereignyieldsintheEuropean paredaSummaryof EconomicProjections(SEP). economiesgenerallydeclined,andyieldspreadsof Thestaff’sSeptemberprojectionshowedaslightly sovereignbondsfromtheeuro-areaperipheryover higherpathfortheunemploymentrate,abitlower Germanbundsnarrowedconsiderably.Mostforeign realGDPgrowth,andessentiallynochangetoinflaequityindexesendedtheperiodmodestlyhigher. tioncomparedwithitsJuneforecast. Staff Economic Outlook Thestaff continuedtoviewtheuncertaintyaround itsprojectionsforrealGDPgrowth,theunemploy- Intheeconomicforecastpreparedbythestaff forthe mentrate,andinflationassimilartotheaverageover SeptemberFOMCmeeting,theprojectionforgrowth thepast20years.Theriskstotheforecastforreal inrealgrossdomesticproduct(GDP)inthesecond GDPgrowthwerestillseenastiltedalittletothe half of thisyearwasreviseddownslightlyfromthe downside,asneithermonetarypolicynorfiscal onepreparedforthepreviousmeeting,primarily policywasviewedaswellpositionedtohelpthe becauseof asomewhatweakernear-termoutlookfor economywithstandadverseshocks.Atthesame consumerspending.Thestaff’smedium-termfore- time,thestaff viewedtherisksarounditsoutlookfor castforrealGDPwasalsoreviseddownalittle, theunemploymentrateandforinflationasroughly reflectingahigherprojectedpathfortheforeign balanced. exchangevalueof thedollaralongwithslightly smallerprojectedgainsforhomeprices.Thestaff still Participants’ Views on Current Conditions anticipatedthatthepaceof realGDPgrowthin2015 and the Economic Outlook and2016wouldexceedthegrowthrateof potential output,supportedbycontinuedincreasesincon- InconjunctionwiththisFOMCmeeting,members sumerandbusinessconfidence,thefurthereasingof of theBoardof GovernorsandtheFederalReserve therestraintonspendingfromchangesinfiscal Bankpresidentssubmittedtheirprojectionsof real policy,additionalimprovementsincreditavailability, outputgrowth,theunemploymentrate,inflation,and andapickupinforeigneconomicgrowth.In2017, thefederalfundsrateforeachyearfrom2014 realGDPgrowthwasprojectedtobeginslowing through2017andoverthelongerrun,conditionalon toward,buttoremainabove,therateof potential eachparticipant’sassessmentof appropriatemonoutputgrowth.Theexpansionineconomicactivity etarypolicy.Thelonger-runprojectionsrepresent overtheprojectionperiodwasanticipatedtosteadily eachparticipant’sassessmentof thevaluetowhich reduceresourceslack,andtheunemploymentrate eachvariablewouldbeexpectedtoconverge,over wasexpectedtodeclinegraduallyandtemporarily time,underappropriatemonetarypolicyandinthe moveslightlybelowthestaff’sestimateof itslonger- absenceof furthershockstotheeconomy.Theseecorunnaturalratetowardtheendof theperiod. nomicprojectionsandpolicyassessmentsare

Minutesof FederalOpenMarketCommitteeMeetings|September 229 describedintheSEP,whichisattachedasanadden- heldbackbyshortagesof materials,of lotsavailable dumtotheseminutes. fordevelopment,andof skilledworkersorbythe overhangof vacanthomesnotonthemarket. Intheirdiscussionof theeconomicsituationandthe Householdswithrelativelylowcreditscorescontinoutlook,meetingparticipantsviewedtheinformation uedtohavedifficultyobtainingmortgageloans.It receivedovertheintermeetingperiodassuggesting wasnotedthatthisdifficultycouldbeafactor thateconomicactivitywasexpandingatamoderate restrainingthedemandforhousing,particularly rate.Onbalance,labormarketconditionsimproved amongyoungerhouseholdswhohavehighlevelsof somewhatfurther;however,theunemploymentrate studentloandebtorweakjobprospects.Afewparwaslittlechanged,andmostparticipantsjudgedthat ticipantspointedouttherelativestrengthinconthereremainedsignificantunderutilizationof labor structionof anddemandformultifamilyunits,which resources.Participantsgenerallyexpectedthat,over possiblywasduetoashiftindemandamong themediumterm,realeconomicactivitywould youngerhomebuyersawayfromsingle-familyhomes. increaseatapacesufficienttoleadtoafurther gradualdeclineintheunemploymentratetowardlev- Informationfrombusinesscontactsinmostpartsof elsconsistentwiththeCommittee’sobjectiveof thecountryindicatedimprovementsinbusinessconmaximumemployment.Inflationwasrunningbelow ditions,risingconfidenceabouttheeconomicouttheCommittee’slonger-runobjective,butlonger- look,andincreasingwillingnesstoundertakenew terminflationexpectationswerestable.Participants investmentprojects.Accordingtonationaland anticipatedthatinflationwouldmovetowardthe regionalsurveys,manufacturingactivitywasstrong, Committee’s2percentgoalincomingyears,with andseveralparticipantshadreceivedreportsof hirseveralexpressingconcernthatinflationmightpersist ingandincreasedcapitalspendinginthatsector. belowtheCommittee’sobjectiveforquitesometime. Amongtheotherindustriescitedasrelativelystrong Mostviewedtheriskstotheoutlookforeconomic inrecentmonthsweretransportation,energy,and activityandthelabormarketasbroadlybalanced. services.Severalparticipantsnotedpositivesignsof However,anumberof participantsnotedthateco- furtherincreasesininvestmentspendinggoingfornomicgrowthoverthemediumtermmightbeslower ward,includingelevatedlevelsof newordersand thantheyexpectedif foreigneconomicgrowthcame shipmentsof capitalgoods,stronginterestinthe inweakerthananticipated,structuralproductivity technologysector,andtheneedtoreplaceagingcapicontinuedtoincreaseonlyslowly,ortherecoveryin tal.Acoupleof participantsaddedthatnonresidenresidentialconstructioncontinuedtolag. tialconstructionactivitywasrisingintheirDistricts. Householdspendingappearedtoberisingmoder- Theimprovementinbusinessconditionswas ately,withseveralparticipantsnotingthattherecent reflectedinreportsof increaseddemandforloansat positivereportsonretailsales,motorvehiclepur- banksinseveralDistricts.Demandroseforloansto chases,andhealth-carespendinghadreducedtheir bothhouseholdsandbusinesses,andacoupleof parconcernaboutweaknessintheunderlyingpaceof ticipantsindicatedthatborrowerswereexpanding householdspending.Amongthefavorablefactors theiruseof existingcreditlinesaswellasobtaining attendingtheoutlookforconsumerspending,par- newcommitments.BankersinoneDistrictstated ticipantscitedcontinuedgainsinhouseholdwealth, that,whiletheyhadeasedthetermsandconditions improvedhouseholdbalancesheets,lowdelinquency onloansinresponsetocompetitionfromotherlendrates,ahighsavingrate,orrisingconfidencein ers,theyhadnottakenonriskierloans.Somefinanemploymentandincomeprospects.However,other cialdevelopmentsthatcouldunderminefinancialstaparticipantssaidtheyheardmixedreportsfrombusi- bilityovertimewerenoted,includingadeterioration nesscontactsregardingconsumerspendingorwere inleveragedlendingstandards,stretchedstockmaruncertainabouttheprospectsforstrongergainsin ketvaluations,andcompressedriskspreads.Howrealincomenecessarytosustainmoderategrowthin ever,oneparticipantsuggestedthattheleveraged householdspending. loanmarketseemedtobemovingintobetterbalance, andthatmarketparticipantsappearedtobetaking Therecoveryinhousingactivityremainedslowinall appropriateaccountof thechangesininterestrates butafewareasof thecountrydespiterelativelylow thatmightbeassociatedwiththeeventualnormalizamortgagerates,risinghouseprices,andimprove- tionof thestanceof monetarypolicy.Moreover,a mentsinhouseholdwealth.Contactsinacoupleof coupleof participants,whilestressingtheimportance Districtsreportedthatnewconstructionwasbeing of remainingvigilantaboutpotentialriskstofinan-

230 101stAnnualReport|2014 cialstability,observedthatconditionsinfinancial pantspointedoutthattheappreciationof thedollar marketsatpresentdidnotsuggestthetypesof finan- mightalsotendtoslowthegradualincreaseininflacialstabilityconsiderationsthatwouldimpedethe tiontowardtheFOMC’s2percentgoal. achievementof theCommittee’smacroeconomic objectives. Labormarketconditionscontinuedtoimproveover theintermeetingperiod.Althoughtheunemploy- Someparticipantsnotedthatexpectationsforthe mentratewaslittlechanged,participantsvariously pathof thefederalfundsrateimpliedbymarket citedpositivereadingsfromotherindicators,includquotesappearedtoremainbelowmostof theprojec- ingadeclineinlonger-termunemployment,thelow tionsof thefederalfundsrateprovidedbyCommit- levelof newclaimsforunemploymentinsurance,the teeparticipantsintheSEP,whichrepresenteach riseinjobopenings,andsurveyreportsof increased individualparticipant’sassessmentof theappropri- hiringplansandjobavailability.Whilethemost atepathforthefederalfundsrateconsistentwithhis recentestimateof nonfarmpayrollemployment orhereconomicoutlook.However,itwaspointed showedasmallermonthlygainthanearlierinthe outthatmeasuresof financialmarketparticipants’ year,itfollowedsixmonthsinwhichincreaseshad expectationsincorporatetheirjudgmentsregarding averagedmorethan200,000.Someparticipantswere notonlythemostlikelyoutcomes,butalsothepos- reluctanttoplacemuchweightononemonthly sibledownsidetailrisksthatmightbeassociatedwith reportornotedthatthefirstestimateforAugusthas especiallylowpathsforthefederalfundsrate.For frequentlybeenrevisedupinrecentyears.Particiexample,respondentstotherecentSurveyof Pri- pantsgenerallyagreedthattheaccumulatedprogress maryDealersplacedconsiderableoddsonthefederal inlabormarketconditionssincetheCommittee’s fundsratereturningtothezerolowerboundduring currentassetpurchaseprogrambeganinSeptemthetwoyearsfollowingtheinitialincreaseinthat ber2012hadbeensubstantialandexpectedthat rate.Theprobabilitythatinvestorsattachtosuchlow progresswouldbesustained.Nonetheless,theyconinterestratescenarioscouldpulltheexpectedpathof tinuedtoexpressdifferingviewsontheextentof thefederalfundsratecomputedfrommarketquotes remainingslackinlabormarkets.Mostagreedthat belowmostCommitteeparticipants’assessmentsof underutilizationof laborresourcesremainedsignifiappropriatepolicyasreportedintheSEP. cant;theseparticipantsnotedvariouslythatthelevel of nonfarmpayrolljobshadonlyrecentlyreturned Therestraintoneconomicactivityfromfiscalpolicy toitspre-recessionlevel,thatthenumberof indiwasseenasdiminishing,andacoupleof participants vidualsworkingparttimeforeconomicreasonswas pointedoutthat,overthesecondhalf of theyear,the stillelevatedrelativetothelevelof unemployment, remainingdragwaslikelytobesmall.Nonetheless, andthatthelaborforceparticipationratewasstill thecutbacksinbothdefenseandnondefensefederal belowassessmentsof itsstructuraltrend.Inthis outlays,aswellasstategovernments’budget regard,acoupleof participantspointedoutthatthe restraint,continuedtoweighonjobsandincomein stabilityof theparticipationrate,onbalance,over somepartsof thecountry.Fiscalpolicyoverallwas thepastyearsuggestedthatsomeof thecyclical anticipatedtobeaneutralfactorforeconomic shortfallhaddiminished.MostagreedthattheComgrowthoverthenextseveralyears. mittee’sassessmentof labormarketslackshouldbe groundedinitsreviewof arangeof labormarket Duringparticipants’discussionof prospectsforeco- indicators,althoughafewsawthegapbetweenthe nomicactivityabroad,theycommentedonanumber unemploymentrateandtheirestimateof itslongerof uncertaintiesandrisksattendingtheoutlook. runnormallevelasareliableindicatorof slack. Overtheintermeetingperiod,theforeignexchange valueof thedollarhadappreciated,particularly Mostmeasuresof laborcompensationshowedno againsttheeuro,theyen,andthepoundsterling. broad-basedincreaseinwageinflation.However, Someparticipantsexpressedconcernthatthepersis- businessesinseveralDistrictscontinuedtoreport tentshortfallof economicgrowthandinflationinthe upwardpressureonwagesinspecificindustriesand euroareacouldleadtoafurtherappreciationof the occupationsassociatedwithlaborshortagesor dollarandhaveadverseeffectsontheU.S.external difficult-to-filljobs,whileacoupleof participants sector.Severalparticipantsaddedthatslowereco- notedamoregeneralriseincurrentorplannedwage nomicgrowthinChinaorJapanorunanticipated increasesintheirregions.SeveralparticipantscomeventsintheMiddleEastorUkrainemightposea mentedthattherelativelysubduedriseinnominal similarrisk.Atthesametime,acoupleof partici- laborcompensationwasstillbelowlonger-runtrend

Minutesof FederalOpenMarketCommitteeMeetings|September 231 ratesof productivitygrowthandinflationandwasa to“considerabletime”inthecurrentforwardguidsignalof slackremaininginthelabormarket.How- ancecouldbemisunderstoodasacommitment ever,acoupleof otherssuggestedsomecautionin ratherthanasdatadependent.However,itwasnoted readingsubduedwageinflationasanindicatorof thatthecurrentformulationof theCommittee’sforlabormarketunderutilization.Theypointedoutthat wardguidanceclearlyindicatedthattheCommittee’s if nominalwagesdidnotadjustdownwardwhen policydecisionswereconditionalonitsongoing unemploymentwashigh,pent-upwagedeflation assessmentof realizedandexpectedprogresstoward couldhelpexplainthemodestincreasesinwagesso itsobjectivesof maximumemploymentand2percent farduringtherecovery,andwagescouldrisemore inflation,andthatitsassessmentreflecteditsreview rapidlygoingforwardastheunemploymentratecon- of abroadarrayof economicindicators.Itwas tinuestodecline. emphasizedthatthecurrentforwardguidanceforthe federalfundsratewasdatadependentanddidnot InflationhadbeenrunningbelowtheCommittee’s indicatethatthefirstincreaseinthetargetrangefor longer-runobjective,andthereadingsonconsumer thefederalfundsratewouldoccurmechanicallyafter pricesovertheintermeetingperiodweresomewhat somefixedcalendarintervalfollowingthecompletion softerthanduringtheprecedingfourmonths,inpart of thecurrentassetpurchaseprogram.If employbecauseof decliningenergyprices.Mostparticipants mentandinflationconvergedmorerapidlytoward anticipatedthatinflationwouldmovegraduallyback theCommittee’sgoalsthancurrentlyexpected,the towarditsobjectiveoverthemediumterm.However, dateof liftoff couldbeearlier,andsubsequent participantsdifferedsomewhatintheirassessments increasesinthefederalfundsratetargetmorerapid, of howquicklyinflationwouldmoveup.Somecited thanparticipantscurrentlyanticipated.Conversely,if thestabilityof longer-runinflationexpectationsata employmentandinflationreturnedtowardtheComlevelconsistentwiththeCommittee’sobjectiveasan mittee’sobjectivesmoreslowlythancurrentlyanticiimportantfactorintheirforecaststhatinflation pated,thedateof liftoff forthefederalfundsrate wouldreach2percentincomingyears.Participants’ couldbelater,andfuturefederalfundsratetarget viewsontheresponsivenessof inflationtothelevel increasescouldbemoregradual.Inaddition,some andchangeinresourceutilizationvaried,withafew participantssawthecurrentforwardguidanceas seeinglabormarketsassufficientlytightthatwages appropriateinlightof risk-managementconsiderandpriceswouldsoonbegintomoveupnoticeably ations,whichsuggestedthatitwouldbeprudentto butwithsomeothersindicatingthatinflationwas erronthesideof patiencewhileawaitingfurthereviunlikelytoapproach2percentuntiltheunemploy- denceof sustainedprogresstowardtheCommittee’s mentratefallsbelowitslonger-runnormallevel. goals.Intheirview,thecostsof downsideshocksto Whilemostviewedtheriskthatinflationwouldrun theeconomywouldbelargerthanthoseof upside persistentlybelow2percentashavingdiminished shocksbecause,incurrentcircumstances,itwouldbe somewhatsinceearlierintheyear,acouplenotedthe lessproblematictoremoveaccommodationquickly, possibilitythatlonger-terminflationexpectations if doingsobecomesnecessary,thantoaddaccommightbeslightlylowerthantheCommittee’s2per- modation.Anumberof participantsalsonotedthat centobjectiveorthatdomesticinflationmightbe changestotheforwardguidancemightbemisinterhelddownbypersistentdisinflationamongU.S.trad- pretedasasignalof afundamentalshiftinthestance ingpartnersandfurtherappreciationof thedollar. of policythatcouldresultinanunintendedtighteningof financialconditions. Intheirdiscussionof theappropriatepathformonetarypolicyoverthemediumterm,meetingpartici- Participantsalsodiscussedhowtheforward-guidance pantsagreedthatthetimingof thefirstincreasein languagemightevolveoncetheCommitteedecides thefederalfundsrateandtheappropriatepathof the thatthecurrentformulationnolongerappropriately policyratethereafterwoulddependonincomingeco- conveysitsintentionsaboutthefuturestanceof nomicdataandtheirimplicationsfortheoutlook. policy.Mostparticipantsindicatedapreferencefor Thatsaid,severalparticipantsthoughtthatthecur- clarifyingthedependenceof thecurrentforward rentforwardguidanceregardingthefederalfunds guidanceoneconomicdataandtheCommittee’s ratesuggestedalongerperiodbeforeliftoff,andper- assessmentof progresstowarditsobjectivesof maxihapsalsoamoregradualincreaseinthefederalfunds mumemploymentand2percentinflation.Aclarifiratethereafter,thantheybelievedwaslikelytobe cationalongtheselineswasseenaslikelytoimprove appropriategiveneconomicandfinancialconditions. thepublic’sunderstandingof theCommittee’sreac- Inaddition,theconcernwasraisedthatthereference tionfunctionwhileallowingtheCommitteetoretain

232 101stAnnualReport|2014 flexibilitytorespondappropriatelytochangesinthe securitiesatapaceof $10billionpermonthrather economicoutlook.Oneparticipantfavoredusinga than$15billionpermonth.TheCommitteejudged numericalthresholdbasedontheinflationoutlookas that,if incominginformationbroadlysupportedits aformof forwardguidance.Afewparticipants,how- expectationsthatlabormarketindicatorandinflaever,notedthedifficultiesassociatedwithexpressing tionwouldcontinuetomovetowardmandateforwardguidanceintermsof numericalthresholds consistentlevels,itwouldenditscurrentprogramof forsomesetof economicvariables.Anotherpartici- assetpurchasesatitsOctobermeeting. pantindicatedapreferenceforreducingrelianceon explicitforwardguidanceinthestatementandcon- Membersdiscussedtheirassessmentsof progress veyinginsteadguidanceregardingthefuturestance towardtheCommittee’sobjectivesof maximum of monetarypolicythroughothermechanisms, employmentand2percentinflationandconsidered includingtheSEP.Itwasnotedthatproviding possibleenhancementstothestatementthatwould explicitforwardguidanceregardingthefuturepath moreclearlycommunicatetheCommittee’sviewon of thefederalfundsratemightbecomelessimpor- suchprogress.Regardingthelabormarket,many tantonceahighlyaccommodativestanceof policyis membersindicatedthat,althoughlabormarketconnolongerappropriateandtheprocessof policynor- ditionshadgenerallycontinuedtoimprove,therewas malizationiswellunderway.Itwasgenerallyagreed stillsignificantslackinlabormarkets.Afewmemthatwhenchangestotheforwardguidancebecome bers,however,expressedreservationsaboutcontinuappropriate,theywilllikelypresentcommunication ingtocharacterizetheextentof underutilizationof challenges,andthatcautionwillbeneededtoavoid laborresourcesassignificant.Intheend,members sendingunintendedsignalsabouttheCommittee’s agreedtoindicatethatlabormarketconditionshad policyoutlook. improvedsomewhatfurther,butthattheunemploymentratewaslittlechangedandarangeof labor Committee Policy Action marketindicatorscontinuedtosuggestthatthere remainedsignificantunderutilizationof labor Intheirdiscussionof monetarypolicyfortheperiod resources.Itwasnoted,however,thatthecharacterahead,membersjudgedthatinformationreceived izationof labormarketunderutilizationmighthave sincetheFOMCmetinJulyindicatedthateconomic tobechangedif progressinthelabormarketcontinactivitywasexpandingatamoderatepace.House- ued.Regardinginflation,membersagreedthatinflaholdspendingappearedtoberisingmoderately,and tionhadmovedclosertotheCommittee’s2percent businessfixedinvestmentwasadvancing,whilethe objectiveduringthefirsthalf of theyearbut,more recoveryinthehousingsectorremainedslow.Fiscal recently,hadfallenbacksomewhat.Asaconsepolicywasrestrainingeconomicgrowth,althoughthe quence,theyupdatedthelanguageinthestatement extentof restraintwasdiminishingandwouldsoon toindicatethatinflationhadbeenrunningbelowthe bequitesmall.InflationwasrunningbelowtheCom- Committee’slonger-runobjective.However,with mittee’slonger-runobjective,butlonger-terminfla- stablelonger-terminflationexpectations,theComtionexpectationswerestable.TheCommittee mitteecontinuedtojudgethatthelikelihoodof inflaexpectedthat,withappropriatepolicyaccommoda- tionrunningpersistentlybelow2percenthaddimintion,economicactivitywouldexpandatamoderate ishedsomewhatsinceearlyintheyear. pace,withlabormarketindicatorsandinflationmovingtowardlevelsthattheCommitteejudgesconsis- Afterthediscussion,allmembersbuttwovotedto tentwithitsdualmandate. maintaintheCommittee’stargetrangeforthefederal fundsrateandtoreiterateitsforwardguidanceabout Withincominginformationcontinuingtobroadly thefederalfundsrate.Theguidancecontinuedto supporttheCommittee’sexpectationof ongoing statethattheCommittee’sdecisionsabouthowlong improvementinlabormarketconditionsandinfla- tomaintainthecurrenttargetrangeforthefederal tionmovingbacktowardtheCommittee’s2percent fundsratewoulddependonitsassessmentof actual objective,membersagreedthatafurthermeasured andexpectedprogresstowarditsobjectivesof maxireductioninthepaceof assetpurchaseswasappro- mumemploymentand2percentinflation.TheCompriateatthismeeting.Accordingly,theCommittee mitteeagainanticipatedthatitlikelywouldbeapproagreedthat,beginninginOctober,itwouldaddtoits priatetomaintainthecurrenttargetrangeforthe holdingsof agencyMBSatapaceof $5billionper federalfundsrateforaconsiderabletimeafterthe monthratherthan$10billionpermonth,andit assetpurchaseprogramends,especiallyif projected wouldaddtoitsholdingsof longer-termTreasury inflationcontinuedtorunbelowtheCommittee’s

Minutesof FederalOpenMarketCommitteeMeetings|September 233 2percentlonger-rungoal,andprovidedthatlonger- Thevoteencompassedapprovalof thestatement terminflationexpectationsremainedwellanchored. belowtobereleasedat2:00p.m.: TheforwardguidancealsoreiteratedtheCommittee’sexpectationthat,evenafteremploymentand “InformationreceivedsincetheFederalOpen inflationarenearmandate-consistentlevels,eco- MarketCommitteemetinJulysuggeststhat nomicconditionsmay,forsometime,warrantkeep- economicactivityisexpandingatamoderate ingthetargetfederalfundsratebelowlevelsthe pace.Onbalance,labormarketconditions Committeeviewsasnormalinthelongerrun.Two improvedsomewhatfurther;however,theunemmembers,however,dissentedbecause,intheirview, ploymentrateislittlechangedandarangeof thestatementlanguagedidnotaccuratelyreflectthe labormarketindicatorssuggeststhatthere progressmadetodatetowardtheCommittee’sgoals remainssignificantunderutilizationof labor of maximumemploymentandinflationof 2percent, resources.Householdspendingappearstobe andtheybelievedthatongoingprogresswilllikely risingmoderatelyandbusinessfixedinvestment warrantanearlierincreaseinthefederalfundsrate isadvancing,whiletherecoveryinthehousing thansuggestedbytheforwardguidanceintheCom- sectorremainsslow.Fiscalpolicyisrestraining mittee’spostmeetingstatement. economicgrowth,althoughtheextentof restraintisdiminishing.Inflationhasbeenrun- Attheconclusionof thediscussion,theCommittee ningbelowtheCommittee’slonger-runobjecvotedtoauthorizeanddirecttheFederalReserve tive.Longer-terminflationexpectationshave Bankof NewYork,untilitwasinstructedotherwise, remainedstable. toexecutetransactionsintheSOMAinaccordance withthefollowingdomesticpolicydirective: Consistentwithitsstatutorymandate,theCommitteeseekstofostermaximumemployment “Consistentwithitsstatutorymandate,theFed- andpricestability.TheCommitteeexpectsthat, eralOpenMarketCommitteeseeksmonetary withappropriatepolicyaccommodation,ecoandfinancialconditionsthatwillfostermaxi- nomicactivitywillexpandatamoderatepace, mumemploymentandpricestability.Inparticu- withlabormarketindicatorsandinflationmovlar,theCommitteeseeksconditionsinreserve ingtowardlevelstheCommitteejudgesconsismarketsconsistentwithfederalfundstradingin tentwithitsdualmandate.TheCommitteesees arangefrom0to¼percent.TheCommittee theriskstotheoutlookforeconomicactivity directstheDesktoundertakeopenmarket andthelabormarketasnearlybalancedand operationsasnecessarytomaintainsuchcondi- judgesthatthelikelihoodof inflationrunning tions.BeginninginOctober,theDeskisdirected persistentlybelow2percenthasdiminished topurchaselonger-termTreasurysecuritiesata somewhatsinceearlythisyear. paceof about$10billionpermonthandtopurchaseagencymortgage-backedsecuritiesata TheCommitteecurrentlyjudgesthatthereis paceof about$5billionpermonth.TheCom- sufficientunderlyingstrengthinthebroader mitteealsodirectstheDesktoengageindollar economytosupportongoingimprovementin rollandcouponswaptransactionsasnecessary labormarketconditions.Inlightof thecumulatofacilitatesettlementof theFederalReserve’s tiveprogresstowardmaximumemploymentand agencymortgage-backedsecuritiestransactions. theimprovementintheoutlookforlabormarket TheCommitteedirectstheDesktomaintainits conditionssincetheinceptionof thecurrent policyof rollingovermaturingTreasurysecuri- assetpurchaseprogram,theCommitteedecided tiesintonewissuesanditspolicyof reinvesting tomakeafurthermeasuredreductioninthe principalpaymentsonallagencydebtand paceof itsassetpurchases.BeginninginOctoagencymortgage-backedsecuritiesinagency ber,theCommitteewilladdtoitsholdingsof mortgage-backedsecurities.TheSystemOpen agencymortgage-backedsecuritiesatapaceof MarketAccountmanagerandthesecretarywill $5billionpermonthratherthan$10billionper keeptheCommitteeinformedof ongoingdevel- month,andwilladdtoitsholdingsof longeropmentsregardingtheSystem’sbalancesheet termTreasurysecuritiesatapaceof $10billion thatcouldaffecttheattainmentovertimeof the permonthratherthan$15billionpermonth. Committee’sobjectivesof maximumemploy- TheCommitteeismaintainingitsexistingpolicy mentandpricestability.” of reinvestingprincipalpaymentsfromitshold-

234 101stAnnualReport|2014 ingsof agencydebtandagencymortgage- ends,especiallyif projectedinflationcontinues backedsecuritiesinagencymortgage-backed torunbelowtheCommittee’s2percentlongersecuritiesandof rollingovermaturingTreasury rungoal,andprovidedthatlonger-terminflasecuritiesatauction.TheCommittee’ssizable tionexpectationsremainwellanchored. andstill-increasingholdingsof longer-term securitiesshouldmaintaindownwardpressure WhentheCommitteedecidestobegintoremove onlonger-terminterestrates,supportmortgage policyaccommodation,itwilltakeabalanced markets,andhelptomakebroaderfinancial approachconsistentwithitslonger-rungoalsof conditionsmoreaccommodative,whichinturn maximumemploymentandinflationof 2pershouldpromoteastrongereconomicrecovery cent.TheCommitteecurrentlyanticipatesthat, andhelptoensurethatinflation,overtime,isat evenafteremploymentandinflationarenear theratemostconsistentwiththeCommittee’s mandate-consistentlevels,economicconditions dualmandate. may,forsometime,warrantkeepingthetarget federalfundsratebelowlevelstheCommittee TheCommitteewillcloselymonitorincoming viewsasnormalinthelongerrun.” informationoneconomicandfinancialdevelopmentsincomingmonthsandwillcontinueits Votingforthisaction:JanetL.Yellen,WilliamC. purchasesof Treasuryandagencymortgage- Dudley,LaelBrainard,StanleyFischer,Narayana backedsecurities,andemployitsotherpolicy Kocherlakota,LorettaJ.Mester,JeromeH.Powell, toolsasappropriate,untiltheoutlookforthe andDanielK.Tarullo. labormarkethasimprovedsubstantiallyina contextof pricestability.If incominginforma- Votingagainstthisaction:RichardW.Fisherand tionbroadlysupportstheCommittee’sexpecta- CharlesI.Plosser. tionof ongoingimprovementinlabormarket conditionsandinflationmovingbacktowardits PresidentFisherdissentedbecausehebelievedthat longer-runobjective,theCommitteewillendits thecontinuedstrengtheningof therealeconomy,the currentprogramof assetpurchasesatitsnext improvedoutlookforlaborutilizationandforgenmeeting.However,assetpurchasesarenotona eralpricestability,andcontinuedsignsof financial presetcourse,andtheCommittee’sdecisions marketexcesswilllikelywarrantanearlierreduction abouttheirpacewillremaincontingentonthe inmonetaryaccommodationthanissuggestedbythe Committee’soutlookforthelabormarketand Committee’sstatedforwardguidance. inflationaswellasitsassessmentof thelikely efficacyandcostsof suchpurchases. Mr.Plosserdissentedbecauseheobjectedtothe statement’sguidanceindicatingthatitlikelywillbe Tosupportcontinuedprogresstowardmaxiappropriatetomaintainthecurrenttargetrangefor mumemploymentandpricestability,theComthefederalfundsratefor“aconsiderabletimeafter mitteetodayreaffirmeditsviewthatahighly theassetpurchaseprogramends.”Inhisview,the accommodativestanceof monetarypolicy referencetocalendartimeshouldbereplacedwith remainsappropriate.Indetermininghowlongto languagethatindicateshowmonetarypolicywill maintainthecurrent0to¼percenttargetrange respondtoincomingdata.Moreover,hejudgedthat forthefederalfundsrate,theCommitteewill thestatementdidnotacknowledgethesubstantial assessprogress—bothrealizedandexpected— progressthathadbeenmadetowardtheCommittee’s towarditsobjectivesof maximumemployment economicgoalsandthusrisksunnecessaryanddisand2percentinflation.Thisassessmentwilltake ruptivevolatilityinfinancialmarkets,andperhapsin intoaccountawiderangeof information, theeconomy,if theCommitteereducesaccommodaincludingmeasuresof labormarketconditions, tionsoonerormorequicklythanfinancialmarkets indicatorsof inflationpressuresandinflation anticipate. expectations,andreadingsonfinancialdevelopments.TheCommitteecontinuestoanticipate, Itwasagreedthatthenextmeetingof theCommittee basedonitsassessmentof thesefactors,thatit wouldbeheldonTuesday–Wednesday,October28– likelywillbeappropriatetomaintainthecurrent 29,2014.Themeetingadjournedat10:35a.m.on targetrangeforthefederalfundsrateforacon- September17,2014. siderabletimeaftertheassetpurchaseprogram

Minutesof FederalOpenMarketCommitteeMeetings|September 235 Notation Vote pant’sassessmentof thevaluetowhicheachvariable wouldbeexpectedtoconverge,overtime,under BynotationvotecompletedonAugust19,2014,the appropriatemonetarypolicyandintheabsenceof Committeeunanimouslyapprovedtheminutesof the furthershockstotheeconomy.“Appropriatemon- CommitteemeetingheldonJuly29–30,2014. etarypolicy”isdefinedasthefuturepathof policy thateachparticipantdeemsmostlikelytofosterout- WilliamB.English comesforeconomicactivityandinflationthatbest Secretary satisfyhisorherindividualinterpretationof theFederalReserve’sobjectivesof maximumemployment andstableprices. Addendum: Summary of Economic Projections Overall,FOMCparticipantsexpectedthat,under appropriatemonetarypolicy,economicgrowth InconjunctionwiththeSeptember16–17,2014,Fed- wouldbefasterinthesecondhalf of 2014andin eralOpenMarketCommittee(FOMC)meeting, 2015thantheirestimatesof theU.S.economy’s meetingparticipantssubmittedtheirprojectionsof longer-runnormalgrowthrate.Participantsthensaw realoutputgrowth,theunemploymentrate,inflation, realgrowthmovingbackslowlytowarditslonger-run andthefederalfundsrateforeachyearfrom2014 ratein2016and2017.Theunemploymentratewas through2017andinthelongerrun.5Eachpartici- projectedtocontinuetodeclinegraduallyoverthe pant’sprojectionwasbasedoninformationavailable forecastperiod,andtobeatorbelowparticipants’ atthetimeof themeetingplushisorherassessment individualjudgmentsof itslonger-runnormallevel of appropriatemonetarypolicyandassumptions bytheendof 2017(table1andfigure1).Almostall aboutthefactorslikelytoaffecteconomicoutcomes. participantsprojectedthatinflation,asmeasuredby Thelonger-runprojectionsrepresenteachpartici- thefour-quarterchangeinthepriceindexforpersonalconsumptionexpenditures(PCE),wouldrise 5 AsdiscussedinitsPolicyNormalizationPrinciplesandPlans, graduallyoverthenextfewyears,reachingalevelat releasedonSeptember17,2014,theCommitteeintendstotar- orneartheCommittee’s2percentobjectivein2016 getarangeforthefederalfundsrateduringnormalization.Paror2017. ticipantswereaskedtoprovide,intheircontributionstothe SummaryofEconomicProjections,eitherthemidpointofthe targetrangeforthefederalfundsrateforanyperiodwhena Participantsjudgedthatitwouldbeappropriateto rangewasanticipatedorthetargetlevelforthefederalfunds beginadjustingthecurrenthighlyaccommodative rate,asappropriate.Inthelowerpaneloffigure2,thesevalues havebeenroundedtothenearest⅛percentagepoint. stanceof policyovertheprojectionperiodaslabor Table1.EconomicprojectionsofFederalReserveBoardmembersandFederalReserveBankpresidents,September2014 Percent Centraltendency1 Range2 Variable 2014 2015 2016 2017 Longerrun 2014 2015 2016 2017 Longerrun ChangeinrealGDP 2.0to2.2 2.6to3.0 2.6to2.9 2.3to2.5 2.0to2.3 1.8to2.3 2.1to3.2 2.1to3.0 2.0to2.6 1.8to2.6 Juneprojection 2.1to2.3 3.0to3.2 2.5to3.0 n.a. 2.1to2.3 1.9to2.4 2.2to3.6 2.2to3.2 n.a. 1.8to2.5 Unemploymentrate 5.9to6.0 5.4to5.6 5.1to5.4 4.9to5.3 5.2to5.5 5.7to6.1 5.2to5.7 4.9to5.6 4.7to5.8 5.0to6.0 Juneprojection 6.0to6.1 5.4to5.7 5.1to5.5 n.a. 5.2to5.5 5.8to6.2 5.2to5.9 5.0to5.6 n.a. 5.0to6.0 PCEinflation 1.5to1.7 1.6to1.9 1.7to2.0 1.9to2.0 2.0 1.5to1.8 1.5to2.4 1.6to2.1 1.7to2.2 2.0 Juneprojection 1.5to1.7 1.5to2.0 1.6to2.0 n.a. 2.0 1.4to2.0 1.4to2.4 1.5to2.0 n.a. 2.0 CorePCEinflation3 1.5to1.6 1.6to1.9 1.8to2.0 1.9to2.0 1.5to1.8 1.6to2.4 1.7to2.2 1.8to2.2 Juneprojection 1.5to1.6 1.6to2.0 1.7to2.0 n.a. 1.4to1.8 1.5to2.4 1.6to2.0 n.a. Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andprojectionsforbothmeasuresofinflationarefromthefourthquarterofthepreviousyeartothefourth quarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures (PCE)andthepriceindexforPCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourthquarterofthe yearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’s assessmentoftheratetowhicheachvariablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstotheeconomy.TheJune projectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonJune17–18,2014. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

236 101stAnnualReport|2014 Figure1.Centraltendenciesandrangesofeconomicprojections,2014–17andoverthelongerrun Percent Change in real GDP Central tendency of projections 4 Range of projections 3 2 Actual 1 + 0 - 2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Percent Unemployment rate 10 9 8 7 6 5 2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Percent PCE inflation 3 2 1 2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Percent Core PCE inflation 3 2 1 2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Note:Definitionsofvariablesareinthegeneralnotetotable1.Thedatafortheactualvaluesofthevariablesareannual.

Minutesof FederalOpenMarketCommitteeMeetings|September 237 marketindicatorsandinflationmovebacktoward torsleadingthemtomarkdowntheirprojectedpaths valuestheCommitteejudgesconsistentwiththe forrealGDPgrowthincludingtheincorporationof attainmentof itsmandatedobjectivesof maximum weaker-than-expecteddataonconsumerspending employmentandstableprices.Asshowninfigure2, andperceptionsof slowergrowthinpotentialGDP. allbutafewparticipantsanticipatedthatitwouldbe Thecentraltendenciesof participants’projections appropriatetobeginraisingthetargetrangeforthe forrealGDPgrowthintheirmostrecentprojections federalfundsratein2015,withmostprojectingthat were2.0to2.2percentin2014,2.6to3.0percentin itwillbeappropriatetoraisethetargetfederalfunds 2015,2.6to2.9percentin2016,and2.3to2.5perratefairlygradually.Consistentwiththeimprove- centin2017.Thecentraltendencyof theprojections mentintheoutlookforthelabormarketsincethe of realGDPgrowthoverthelongerrunwas2.0to Committeebeganitscurrentassetpurchaseprogram 2.3percent,essentiallythesameasinJune. inSeptember2012,aswellasparticipants’expectationof ongoingimprovementinlabormarketcondi- Participantsanticipatedthattheunemploymentrate tionsandinflationmovingbacktowardtheirlonger- wouldcontinuetodeclinegraduallyovertheforecast runobjective,allparticipantsjudgedthatitwouldbe periodand,bythefourthquarterof 2017,wouldbe appropriatetocompletetheassetpurchaseprogram closetoorbelowtheirindividualassessmentsof its inOctoberof thisyear. longer-runnormallevel.Thecentraltendenciesof participants’forecastsfortheunemploymentratein Mostparticipantssawtheuncertaintyassociated thefourthquarterof eachyearwere5.9to6.0perwiththeiroutlooksforeconomicgrowth,theunem- centin2014,5.4to5.6percentin2015,5.1to5.4perploymentrate,andinflationassimilartothatof the centin2016,and4.9to5.3percentin2017.Participast20years,althoughafewjudgeditassomewhat pants’projectedpathsfortheunemploymentrate higher.Inaddition,mostparticipantsconsideredthe wereslightlylowerthaninJune,withmanyparticiriskstotheoutlookforrealgrossdomesticproduct pantscitinglower-than-expectedincomingunem- (GDP)growthandtheunemploymentratetobe ploymentdata.Thecentraltendencyof participants’ broadlybalanced,andasubstantialmajoritysawthe estimatesof thelonger-runnormalrateof unemriskstoinflationasbroadlybalanced.However,afew ploymentthatwouldprevailunderappropriatemonparticipants,onnet,sawtheriskstotheirforecasts etarypolicyandintheabsenceof furthershocksto foreconomicgrowthorinflationastiltedtothe theeconomywasunchangedat5.2to5.5percent. downside. Figures3.Aand3.Bshowthatparticipantshelda The Outlook for Economic Activity rangeof viewsregardingthelikelyoutcomesforreal GDPgrowthandtheunemploymentratethrough Participantsgenerallyprojectedthat,conditionalon 2017.Thediversityof viewsreflectedtheirindividual theirindividualassumptionsaboutappropriatemon- assessmentsof therateatwhichtheforcesthathave etarypolicy,economicgrowthwouldpickupfromits beenrestrainingthepaceof theeconomicrecovery lowlevelinthefirsthalf of theyearandrunabove wouldabate,of theanticipatedpathforforeignecotheirestimatesof thelonger-runnormalrateof eco- nomicactivity,of thetrajectoryforgrowthinconnomicgrowthinthesecondhalf of 2014andin2015. sumptionaslabormarketslackdiminishes,andof Participantspointedtoanumberof factorsthatthey theappropriatepathof monetarypolicy.Relativeto expectedwouldcontributetoapickupineconomic June,thedispersionsof participants’projectionsfor growthinthesecondhalf of thisyearandnextyear, realGDPgrowthandfortheunemploymentrate includingrisinghouseholdnetworth,diminished overtheentireprojectionperiodwerelittlechanged. restraintfromfiscalpolicy,improvinglabormarket conditions,andhighlyaccommodativemonetary The Outlook for Inflation policy.Ingeneral,participantsthensawrealgrowth movinggraduallybacktoward,butremainingator ComparedwithJune,thecentraltendenciesof parsomewhatabove,itslonger-runratein2016and ticipants’projectionsforinflationundertheassump- 2017. tionof appropriatepolicywerelargelyunchangedfor 2014to2016,andthetrendsanticipatedoverthat Manyparticipantsreviseddowntheirprojectionsof periodweregenerallyexpectedtocontinuein2017. realGDPgrowthsomewhatinoneormoreyearsand AlmostallparticipantsprojectedthatPCEinflation particularlyfor2015,comparedwiththeirprojec- wouldrisegraduallyoverthenextfewyearstoalevel tionsinJune.Participantspointedtoacoupleof fac- atorneartheCommittee’s2percentobjective.Afew

238 101stAnnualReport|2014 Figure2.OverviewofFOMCparticipants’assessmentsofappropriatemonetarypolicy Number of participants Appropriate timing of policy firming 15 14 14 13 12 11 10 9 8 7 6 5 4 3 2 2 1 1 2014 2015 2016 Percent Appropriate pace of policy firming: Midpoint of target range or target level for the federal funds rate 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2014 2015 2016 2017 Longer run Note:Intheupperpanel,theheightofeachbardenotesthenumberofFOMCparticipantswhojudgethat,underappropriatemonetarypolicy,thefirstincreaseinthetarget rangeforthefederalfundsratefromitscurrentrangeof0to¼percentwilloccurinthespecifiedcalendaryear.InJune2014,thenumbersofFOMCparticipantswhojudged thatthefirstincreaseinthetargetfederalfundsratewouldoccurin2014,2015,and2016were,respectively,1,12,and3.Inthelowerpanel,eachshadedcircleindicatesthe value(roundedtothenearest⅛percentagepoint)ofanindividualparticipant’sjudgmentofthemidpointoftheappropriatetargetrangeforthefederalfundsrateortheappropriatetargetlevelforthefederalfundsrateattheendofthespecifiedcalendaryearoroverthelongerrun.

Minutesof FederalOpenMarketCommitteeMeetings|September 239 Figure3.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2014–17andoverthelongerrun Number of participants 2014 18 September projections 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 - 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 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 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 2017 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 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.

240 101stAnnualReport|2014 Figure3.B.Distributionofparticipants’projectionsfortheunemploymentrate,2014–17andoverthelongerrun Number of participants 2014 September projections 18 16 June projections 14 12 10 8 6 4 2 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 6.0 - 6.2 - 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3 Percent range Number of participants 2015 18 16 14 12 10 8 6 4 2 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 6.0 - 6.2 - 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3 Percent range Number of participants 2016 18 16 14 12 10 8 6 4 2 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 6.0 - 6.2 - 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 6.0 - 6.2 - 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 6.0 - 6.2 - 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|September 241 participantsexpectedPCEinflationtorisesomewhat whichtheysawthetargetrangeforthefederalfunds above2percentatsomepointduringtheforecast rateincreasingfromitseffectivelowerbound, period,whileseveralothersexpectedinflationto althoughallbutonethoughtthat,bytheendof remainbelow2percentevenattheendof 2017.The 2016,theunemploymentratewouldbeatorbelow centraltendenciesforPCEinflationwere1.5to theirindividualjudgmentsof itslonger-runnormal 1.7percentin2014,1.6to1.9percentin2015,1.7to rate. 2.0percentin2016,and1.9to2.0percentin2017. Thecentraltendenciesof theforecastsforcoreinfla- Figure3.Eprovidesthedistributionof participants’ tionwerebroadlysimilartothosefortheheadline judgmentsregardingtheappropriatelevelof thetarmeasure.Itwasnotedthatacombinationof fac- getfederalfundsrateattheendof eachcalendaryear tors—includingstableinflationexpectations,steadily from2014to2017andoverthelongerrun.Asnoted diminishingresourceslack,apickupinwagegrowth, earlier,nearlyallparticipantsjudgedthateconomic agradualdeclineintheforeignexchangevaluefor conditionswouldwarrantmaintainingthecurrent thedollar,andstill-accommodativemonetary exceptionallylowlevelof thefederalfundsrateinto policy—waslikelytocontributetoagradualriseof 2015.RelativetotheirprojectionsinJune,the inflationbacktowardtheCommittee’slonger-run medianvaluesof thefederalfundsrateattheendof objectiveof 2percent. 2015and2016increased26basispointsand38basis pointsto1.38percentand2.88percent,respectively, Figures3.Cand3.Dprovideinformationonthe whilethemeanvaluesrose10basispointsand diversityof participants’viewsabouttheoutlookfor 16basispointsto1.28percentand2.69percent, inflation.Therangesof participants’projectionsfor respectively.Thedispersionof projectionsforthe inflationin2014,2015,and2016werelittlechanged appropriatelevelof thefederalfundsratewaslittle relativetoJune.Therangein2017showsaverysub- changedin2015and2016.Mostparticipantsjudged stantialconcentrationneartheCommittee’s2per- thatitwouldbeappropriatetosetthefederalfunds centlonger-runobjectivebythattime. rateatornearitslonger-runnormallevelin2017, thoughsomeprojectedthatthefederalfundsrate Appropriate Monetary Policy wouldstillneedtobesetappreciablybelowits longer-runnormallevel,andoneanticipatedthatit Participantsjudgedthatitwouldbeappropriateto wouldbeappropriatetotargetalevelnoticeably beginreducingpolicyaccommodationoverthepro- aboveitslonger-runnormallevel.Participantsprojectionperiodaslabormarketindicatorsandinfla- videdanumberof reasonswhytheythoughtitwould tionmovebacktowardvaluestheCommitteejudges beappropriateforthefederalfundsratetoremain consistentwiththeattainmentof itsmandatedobjec- belowitslonger-runnormallevelforsometimeafter tivesof maximumemploymentandpricestability.As inflationandunemploymentwerenearmandateshowninfigure2,allbutafewparticipantsantici- consistentlevels.Thesereasonsincludedanassesspatedthatitwouldbeappropriatetobeginraising mentthatheadwindsholdingbacktherecoverywill thetargetrangeforthefederalfundsratein2015, continuetoexertrestraintoneconomicactivityat andmostprojectedthattheappropriatelevelof the thattimeandthattheriskstotheeconomicoutlook federalfundsratewouldremainbelowitslonger-run areasymmetricasaresultof theconstraintsonmonnormallevelthrough2016.Mostparticipants etarypolicycausedbytheeffectivelowerboundon expectedtheappropriatelevelof thefederalfunds thefederalfundsrate. ratewouldbeapproaching,orwouldalreadyhave reached,theirindividualviewof itslonger-runnor- AsinJune,estimatesof thelonger-runlevelof the mallevelbytheendof 2017. federalfundsraterangedfrom3.25toabout 4.25percent.Allparticipantsjudgedthatinflationin Allparticipantsprojectedthattheunemployment thelongerrunwouldbeequaltotheCommittee’s ratewouldbebelow5.75percentattheendof the inflationobjectiveof 2percent,implyingthattheir yearinwhichtheyjudgedtheinitialincreaseinthe individualjudgmentsregardingtheappropriate targetrangeforthefederalfundsratewouldbewar- longer-runlevelof therealfederalfundsrateinthe ranted,andallbutoneanticipatedthatinflation absenceof furthershockstotheeconomyranged wouldbeatorbelowtheCommittee’s2percentgoal from1.25toabout2.25percent. atthattime.Mostparticipantsprojectedthatthe unemploymentratewouldbeabovetheirestimatesof Participantsalsodescribedtheirviewsregardingthe itslonger-runnormallevelattheendof theyearin appropriatepathof theFederalReserve’sbalance

242 101stAnnualReport|2014 Figure3.C.Distributionofparticipants’projectionsforPCEinflation,2014–17andoverthelongerrun Number of participants 2014 September projections 18 June projections 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2015 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2016 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|September 243 Figure3.D.Distributionofparticipants’projectionsforcorePCEinflation,2014–17 Number of participants 2014 September projections 18 June projections 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2015 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2016 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

244 101stAnnualReport|2014 Figure3.E.Distributionofparticipants’judgmentsofthemidpointoftheappropriatetargetrangeforthefederalfundsrateor theappropriatetargetlevelforthefederalfundsrate,2014–17andoverthelongerrun Number of participants 2014 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 2015 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 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 2017 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 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:Themidpointsofthetargetrangesforthefederalfundsrateandthetargetlevelsforthefederalfundsratearemeasuredattheendofthespecifiedcalendaryearorover thelongerrun.

Minutesof FederalOpenMarketCommitteeMeetings|September 245 sheet.Conditionalontheirrespectiveeconomicout- Table2.Averagehistoricalprojectionerrorranges looks,allparticipantsjudgedthatitlikelywouldbe Percentagepoints appropriatetoconcludeassetpurchasesinOctober of thisyear.Afewparticipantsthoughtthatitwould Variable 2014 2015 2016 2017 beappropriatetobeginreducingthesizeof thebal- ChangeinrealGDP1 ±1.3 ±1.9 ±2.1 ±2.2 ancesheetrelativelysoon,withacoupleof them Unemploymentrate1 ±0.3 ±1.0 ±1.6 ±1.9 judgingthattheCommitteeshouldreduceorcease Totalconsumerprices2 ±0.8 ±1.0 ±1.1 ±1.0 thereinvestmentof principalpaymentsonsecurities Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared heldintheFederalReserve’sportfolio. errorofprojectionsfor1994through2013thatwerereleasedinthespringby variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast Uncertainty,”undercertainassumptions,thereisabouta70percentprobability Participants’viewsof theappropriatepathformonthatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein etarypolicywereinformedbytheirjudgmentsabout rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Formore information,seeDavidReifschneiderandPeterTulip(2007),“Gaugingthe thestateof theeconomy,includingthevaluesof the UncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,”Finance unemploymentrateandotherlabormarketindica- andEconomicsDiscussionSeries2007-60(Washington:BoardofGovernorsof theFederalReserveSystem,November),availableatwww.federalreserve.gov/ torsthatwouldbeconsistentwithmaximumemploypubs/feds/2007/200760/200760abs.html;andBoardofGovernorsoftheFederal ment,theextenttowhichtheeconomywascurrently ReserveSystem,DivisionofResearchandStatistics(2014),“UpdatedHistorical ForecastErrors,”memorandum,April9,www.federalreserve.gov/foia/files/ fallingshortof maximumemployment,theprospects 20140409-historical-forecast-errors.pdf. forinflationtoreturntotheCommittee’slonger- 1 Definitionsofvariablesareinthegeneralnotetotable1. termobjectiveof 2percent,thedesiretominimize 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen mostwidelyusedingovernmentandprivateeconomicforecasts.Projection potentialdisruptioninfinancialmarkets,andthebalispercentchange,fourthquarterofthepreviousyeartothefourthquarterof anceof risksaroundtheoutlook.Manyparticipants theyearindicated. alsomentionedtheprescriptionsof variousmonetarypolicyrulesasfactorstheyconsideredinjudgingtheappropriatepathforthefederalfundsrate. theoutlookfortheunemploymentratetobebroadly balanced. Uncertainty and Risks Participantsgenerallysawthelevelof uncertainty Asignificantmajorityof participantscontinuedto andthebalanceof risksaroundtheirforecastsfor judgethelevelsof uncertaintyabouttheirprojections overallPCEinflationandcoreinflationaslittle forrealGDPgrowthandtheunemploymentrateas changedfromJune.Mostparticipantscontinuedto broadlysimilartothenormsduringtheprevious judgethelevelsof uncertaintyassociatedwiththeir 20years(figure4).6Mostparticipantscontinuedto forecastsforthetwoinflationmeasurestobebroadly judgetheriskstotheiroutlooksforrealGDPgrowth similartohistoricalnorms,andmostcontinuedto andtheunemploymentratetobebroadlybalanced. seetheriskstothoseprojectionsasbroadlybalanced. AfewparticipantsviewedtheriskstorealGDP Severalparticipants,however,viewedtherisksto growthasweightedtothedownside;oneviewedthe theirinflationforecastsastiltedtothedownside, risksasweightedtotheupside.Thoseparticipants reflecting,forexample,thepossibilitythattherecent whoviewedrisksasweightedtothedownsidecited, lowlevelsof inflationcouldprovemorepersistent forexample,concernaboutthelimitedabilityof thananticipated;thepossibilitythattheupwardpull monetarypolicyattheeffectivelowerboundto onpricesfrominflationexpectationsmightbe respondtofurthernegativeshockstotheeconomy. weakerthanassumed;thecurrentlackof inflation- AsinJune,nearlyallparticipantsjudgedtherisksto arypressuresdomesticallyorfromabroad;andthe judgmentthat,incurrentcircumstances,itwouldbe 6 Table2providesestimatesoftheforecastuncertaintyforthe difficultfortheCommitteetorespondeffectivelyto changeinrealGDP,theunemploymentrate,andtotalconsumerpriceinflationovertheperiodfrom1994through2013. low-inflationoutcomes.Conversely,oneparticipant Attheendofthissummary,thebox“ForecastUncertainty” sawupsideriskstoinflation,citinguncertaintyabout discussesthesourcesandinterpretationofuncertaintyinthe thetimingandefficacyof theCommittee’switheconomicforecastsandexplainstheapproachusedtoassessthe uncertaintyandrisksattendingtheparticipants’projections. drawalof monetarypolicyaccommodation.

246 101stAnnualReport|2014 Figure4.Uncertaintyandrisksineconomicprojections Number of participants Number of participants Uncertainty about GDP growth Risks to GDP growth 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 Risks to the unemployment rate 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Number of participants Number of participants Uncertainty about PCE inflation Risks to PCE inflation 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Number of participants Number of participants Uncertainty about core PCE inflation Risks to core PCE inflation 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Note:Fordefinitionsofuncertaintyandrisksineconomicprojections,seethebox“ForecastUncertainty.”Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|September 247 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers year.Thecorresponding70percentconfidenceinteroftheBoardofGovernorsandthepresidentsofthe valsforoverallinflationwouldbe1.2to2.8percentin FederalReserveBanksinformdiscussionsofmon- thecurrentyear,1.0to3.0percentinthesecond etarypolicyamongpolicymakersandcanaidpublic year,0.9to3.1percentinthethirdyear,and1.0to understandingofthebasisforpolicyactions.Con- 3.0percentinthefourthyear. 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,1.1to pointforward. 4.9percentinthesecondyear,0.9to5.1percentin thethirdyear,and0.8to5.2percentinthefourth

248 101stAnnualReport|2014 Meeting Held DavidW.Wilcox Economist on October 28–29, 2014 JamesA.Clouse,ThomasA.Connors, Ameetingof theFederalOpenMarketCommittee EvanF.Koenig,ThomasLaubach, washeldintheofficesof theBoardof Governorsof SamuelSchulhofer-Wohl,andWilliamWascher theFederalReserveSysteminWashington,D.C.,on AssociateEconomists Tuesday,October28,2014,at1:00p.m.andcontin- SimonPotter uedonWednesday,October29,2014,at9:00a.m. Manager,SystemOpenMarketAccount Present LorieK.Logan DeputyManager,SystemOpenMarketAccount JanetL.Yellen Chair RobertdeV.Frierson1 Secretaryof theBoard,Officeof theSecretary, WilliamC.Dudley Boardof Governors ViceChairman MichaelS.Gibson LaelBrainard Director,Divisionof BankingSupervisionand Regulation,Boardof Governors StanleyFischer NellieLiang RichardW.Fisher Director,Officeof FinancialStabilityPolicyand NarayanaKocherlakota Research,Boardof Governors LorettaJ.Mester StephenA.MeyerandWilliamR.Nelson DeputyDirectors,Divisionof MonetaryAffairs, CharlesI.Plosser Boardof Governors JeromeH.Powell AndrewFigura,DavidReifschneider, DanielK.Tarullo andStaceyTevlin SpecialAdviserstotheBoard,Officeof Board ChristineCumming,CharlesL.Evans, Members,Boardof Governors JeffreyM.Lacker,DennisP.Lockhart, andJohnC.Williams TrevorA.Reeve AlternateMembersof theFederalOpenMarket SpecialAdvisertotheChair,Officeof Board Committee Members,Boardof Governors JamesBullard,EstherL.George, LindaRobertson andEricRosengren AssistanttotheBoard,Officeof BoardMembers, Presidentsof theFederalReserveBanksof St.Louis, Boardof Governors KansasCity,andBoston,respectively ChristopherJ.Erceg SeniorAssociateDirector,Divisionof International WilliamB.English Finance,Boardof Governors SecretaryandEconomist EllenE.MeadeandJoyceK.Zickler MatthewM.Luecke SeniorAdvisers,Divisionof MonetaryAffairs, DeputySecretary Boardof Governors MichelleA.Smith EricM.EngenandDavidE.Lebow AssistantSecretary AssociateDirectors,Divisionof Researchand ScottG.Alvarez Statistics,Boardof Governors GeneralCounsel FabioM.Natalucci1 ThomasC.Baxter AssociateDirector,Divisionof MonetaryAffairs, DeputyGeneralCounsel Boardof Governors StevenB.Kamin 1 AttendedthejointsessionoftheFederalOpenMarketCom- Economist mitteeandtheBoardofGovernors.

Minutesof FederalOpenMarketCommitteeMeetings|October 249 JosephW.Gruber TroyDavig,MichaelDotsey,JoshuaL.Frost,1 DeputyAssociateDirector,Divisionof International SpencerKrane,andChristopherJ.Waller Finance,Boardof Governors SeniorVicePresidents,FederalReserveBanksof KansasCity,Philadelphia,NewYork,Chicago,and JohnJ.Stevens2 St.Louis,respectively DeputyAssociateDirector,Divisionof Researchand Statistics,Boardof Governors ToddE.ClarkandDouglasTillett VicePresidents,FederalReserveBanksof Cleveland StevenA.Sharpe andChicago,respectively AssistantDirector,Divisionof Researchand Statistics,Boardof Governors AndreasL.Hornstein SeniorAdvisor,FederalReserveBankof Richmond PatrickE.McCabe1 Adviser,Divisionof ResearchandStatistics, Developments in Financial Markets and Boardof Governors the Federal Reserve’s Balance Sheet RobertJ.Tetlow3 Inajointsessionof theFederalOpenMarketCom- Adviser,Divisionof MonetaryAffairs, mittee(FOMC)andtheBoardof Governorsof the Boardof Governors FederalReserveSystem,thedeputymanagerof the PenelopeA.Beattie1 SystemOpenMarketAccount(SOMA)reportedon AssistanttotheSecretary,Officeof theSecretary, developmentsindomesticandforeignfinancialmar- Boardof Governors ketsaswellasSystemopenmarketoperationsconductedduringtheperiodsincetheCommitteemeton ChristopherJ.Gust September16–17,2014.Inaddition,thedeputyman- SectionChief,Divisionof MonetaryAffairs, agersummarizedtheoutcomesof recenttestopera- Boardof Governors tionsof theTermDepositFacility,describedthe DavidH.Small resultsfromtheovernightreverserepurchaseagree- ProjectManager,Divisionof MonetaryAffairs, ment(ONRRP)operationalexercise,andreviewed Boardof Governors theimplicationsof recentforeigncentralbankpolicy actionsfortheinternationalportionof theSOMA KatieRoss1 portfolio.TheSOMAmanagerthendiscussedthe Manager,Officeof theSecretary, OpenMarketDesk’splansformodestlyexpanding Boardof Governors thelistof counterpartieseligibletoparticipateinON RRPoperationsbasedonsubstantiallythesamecri- CanlinLi teriaestablishedinthepastforsuchcounterparties. SeniorEconomist,Divisionof MonetaryAffairs, Themanageralsodescribedongoingstaff workon Boardof Governors improvingdatacollectionsregardingbankfunding RandallA.Williams marketsandpossiblyusingthosedatatoprovide RecordsProjectManager,Divisionof Monetary morerobustmeasuresof bankfundingrates.Finally, Affairs,Boardof Governors themanagerreportedonpotentialarrangementsthat wouldallowdepositoryinstitutionstopledgefunds HelenE.Holcomb heldinasegregatedaccountattheFederalReserveas FirstVicePresident,FederalReserveBankof Dallas collateralinborrowingtransactionswithprivate DavidAltig,Jeff Fuhrer,JamesJ. creditorsandwouldprovideanadditionalsupple- McAndrews,andGlennD.Rudebusch mentarytoolduringpolicynormalization;theman- ExecutiveVicePresidents,FederalReserveBanksof agernotedpossiblenextstepsthatthestaff could Atlanta,Boston,NewYork,andSanFrancisco, potentiallyundertaketoinvestigatetheissuesrelated respectively tosucharrangements. Next,thestaff outlinedtwoproposalsthattheCommitteecouldconsiderforfurthertestingof RRP 2 Attendedtheportionofthemeetingfollowingthejointsession operations.Inthefirstproposal,theDeskwouldvary oftheFederalOpenMarketCommitteeandtheBoardof bymodestamountstheinterestrateonONRRP Governors. operationsaccordingtoapreannouncedschedule. 3 Attendedthediscussionoflonger-rungoalsandmonetary policystrategy. VaryingthespreadbetweentheONRRPrateand

250 101stAnnualReport|2014 theinterestonexcessreservesratecouldprovidethe Byunanimousvote,theCommitteeapprovedthefol- Committeewithinformationabouttheeffectof that lowingresolutionontermRRPoperations: spreadonmoneymarketsandthedemandforON RRP.Inaddition,changesintheONRRPrate “Duringtheperiodof December1,2014,to wouldprovidefurtherinformationabouttheeffec- December30,2014,theFederalOpenMarket tivenessof anONRRPfacilityinprovidingafloor Committee(FOMC)authorizestheFederal formoneymarketratesduringpolicynormalization. ReserveBankof NewYorktoconductaseries Inthesecondproposal,theDeskwouldconducta of termreverserepurchaseoperationsinvolving seriesof preannouncedtermRRPoperationsthat U.S.Governmentsecurities.Suchoperations wouldextendacrosstheendof theyear.Intheirdis- shall:(i)maturenolaterthanJanuary5,2015; cussionof termRRPtesting,participantsnotedthat (ii)besubjecttoanoverallsizelimitof $300bilthetestingcouldprovideinformationaboutthe lionoutstandingatanyonetime;(iii)besubject potentialeffectivenessof anotherof theCommittee’s toamaximumbidrateof tenbasispoints; supplementarypolicytoolsandwouldhelpaddress (iv)beawardedtoallsubmitters:(A)atthehighexpecteddownwardpressuresonshort-termratesat estsubmittedrateif thesumof thebidsreceived year-end.Butitwasalsonotedthatbyconducting islessthanorequaltothepreannouncedsizeof thetermRRPs,theCommitteewouldbelosinginfor- theoperation,or(B)atthestopoutrate,determationonhowmarketparticipantsmightadjustand minedbyevaluatingbidsinascendingorderby makeinvestmentarrangementspriortoyear-end submittedrateuptothepointatwhichthetotal withonlythe$300billioninONRRPavailable.One quantityof bidsequalsthepreannouncedsizeof participantcommentedthatthedownwardpressure theoperation,withallbidsbelowthisrate onratesatyear-endmightbemoredirectlyaddressed awardedinfullatthestopoutrateandallbidsat byraisingtheoverallsizelimitontheONRRPexer- thestopoutrateawardedonaproratabasis,if cise.However,itwasemphasizedthatincreasingthe thesumof thecounterpartyoffersreceivedis caponONRRPoperationsatyear-endcouldraise greaterthanthepreannouncedsizeof theoperatherisksforfinancialmarketsthathadledthe tion.Suchoperationsmaybeforforwardsettle- FOMCtoimposethecap;theseconcernswereseen ment.TheSystemOpenMarketAccountmanaslesspronouncedwithatemporaryprogramof agerwillinformtheFOMCinadvanceof the termRRPoperations.Itwasalsonotedthatthepro- termsof theplannedoperations.TheChair posedtermRRPoperationswereonlyatestandthat mustapprovethetermsof,timingof the theCommitteehadnotyetdecidedtheconditions announcementof,andtimingof theoperations. underwhichsuchoperationswouldbeusedinthe Theseoperationsshallbeconductedinaddition future.4 totheauthorizedovernightreverserepurchase agreements,whichremainsubjecttoaseparate Followingthediscussionof thetestingof RRP overallsizelimitof $300billionperday.” operations,theCommitteeunanimouslyapproved thefollowingresolutionontheONRRPexercise: Byunanimousvote,theCommitteeratifiedthe Desk’sdomestictransactionsovertheintermeeting “TheFederalOpenMarketCommittee(FOMC) period.Therewerenointerventionoperationsinformodifiestheauthorizationconcerningovernight eigncurrenciesfortheSystem’saccountoverthe reverserepurchaseoperationsadoptedatthe intermeetingperiod. September17,2014,FOMCmeetingasfollows: TheBoardmeetingconcludedattheendof thedis- (i)Theofferingrateof theoperationsmayvary cussionof developmentsinfinancialmarketsandthe fromzerototenbasispoints. FederalReserve’sbalancesheet. Staff Review of the Economic Situation Thismodificationshallbeeffectivebeginning withtheoperationconductedonNovember3, TheinformationreviewedfortheOctober28–29 2014,andconcludewiththeoperationconmeetingindicatedthateconomicactivityexpandedat ductedonDecember12,2014.” amoderatepaceinthethirdquarterandthatlabor marketconditionsimprovedovertheintermeeting 4 Followingtheconclusionofthemeeting,theDeskreleaseda period.Consumerpriceinflationcontinuedtorun statementoutliningtheplannedONRRPandtermRRP exercises. belowtheFOMC’slonger-runobjectiveof 2percent.

Minutesof FederalOpenMarketCommitteeMeetings|October 251 Market-basedmeasuresof inflationcompensation upinAugust,andsalesof existingsingle-family declinedsomewhat,whilesurvey-basedmeasuresof homesmovedessentiallysidewaysoverthepastsevlonger-terminflationexpectationsremainedstable. eralmonths. TotalnonfarmpayrollemploymentroseinSeptem- Realspendingonbusinessequipmentandintellectual berandthegainsforJulyandAugustwererevised propertyproductsappearedtohaverisenatamoderup,leavingtheaverageincreaseinthethirdquarter atepaceinthethirdquarter.Nominalshipmentsof similartothatforthefirsthalf of theyear.InSep- nondefensecapitalgoodsexcludingaircraftwere tember,theunemploymentratedeclinedto5.9per- littlechanged,onnet,inAugustandSeptemberafter cent,andtheshareof workersemployedparttime asolidincreaseinJuly.Newordersforthesecapital foreconomicreasonsdecreasedalittle.Thelabor goodsdeclinedinSeptemberbutremainedabovethe forceparticipationrateedgeddown,andthe levelof shipments,indicatingthatshipmentsmay employment-to-populationratioremainedessentially increasefurtherinsubsequentmonths.Other unchanged.Otherindicatorsgenerallysuggesteda forward-lookingindicators,suchasnationaland continuedimprovementinlabormarketconditions. regionalsurveysof businessconditions,weregener- Althoughtherateof grossprivate-sectorhiring allyconsistentwithmoderategainsinbusinessequipdeclined,therateof jobopeningsmovedup,meas- mentspendinginthenearterm.Nominalbusiness uresof firms’hiringplansincreased,initialclaimsfor spendingfornewnonresidentialconstruction unemploymentinsuranceremainedlow,andsome decreasedinAugust,andvacancyratesfornonresimeasuresof householdexpectationsforlabormarket dentialbuildingsremainedelevated.Meanwhile, conditionsimproved. inventoriesinmostindustrieswereaboutinlinewith sales;intheenergysector,inventoriesappearedsome- IndustrialproductionincreasedbrisklyinSeptember whatleandespitesubstantialstockbuildingsinceearafterhavingbeenlittlechanged,onnet,overthefirst lierintheyear. twomonthsof thequarter,andtherateof capacity utilizationinthemanufacturingsectormovedup. Totalrealgovernmentpurchasesappearedtohave Readingsonnewordersfromthenationaland risenmodestlyinthethirdquarter.Federalgovernregionalmanufacturingsurveysweregenerallycon- mentpurchaseslikelyincreased,asnominaldefense sistentwithmoderatenear-termincreasesinfactory spendingwashigherinthethirdquarterthaninthe output,butautomakers’productionschedulesforthe secondquarter.Inaddition,realstateandlocalgovfourthquarterpointedtosomeslowinginthepaceof ernmentpurchasesprobablyrosesomewhat,asthe motorvehicleassemblies. payrollsof thesegovernmentsexpandedandtheir nominalconstructionexpendituresincreasedduring Realpersonalconsumptionexpenditures(PCE) thethirdquarter. appearedtohaveincreasedatamodestpaceinthe thirdquarter.Thecomponentsof thenominalretail TheU.S.internationaltradedeficitnarrowedslightly salesdatausedbytheBureauof EconomicAnalysis inAugust.FollowinglargeincreasesinJuly,both toconstructitsestimatesof PCEwere,intotal,little exportsandimportsgrewonlymodestly,withgains changedinSeptemberfollowingsolidgainsinJuly concentratedincapitalgoodsexcludingautomotive andAugust.Inaddition,salesof lightmotorvehicles products. fellbackinSeptemberfollowingasteepincreasein August.Recentdataonfactorsthattendtosupport TotalU.S.consumerpriceinflation,asmeasuredby householdspendingweremixed.Realdisposable thePCEpriceindex,wasabout1½percentoverthe incomecontinuedtoincreaseinAugust,andcon- 12monthsendinginAugust.Overthe12months sumersentimentasmeasuredbytheThomson endinginSeptember,boththeconsumerpriceindex Reuters/Universityof MichiganSurveysof Consum- (CPI)andtheCPIexcludingfoodandenergyprices ersimprovedinSeptemberandearlyOctober.In roseabout1¾percent.Consumerenergyprices contrast,householdnetworthlikelydecreased declinedfurtherinSeptember,largelyreflectingconbecauseof adeclineinequityprices. tinueddeclinesinretailgasolineprices,andsurvey datasuggestedgasolinepricesfellfurtheroverthe Housingmarketconditionsseemedtobeimproving firstfewweeksof October.Consumerfoodprices onlyslowly.Startsandpermitsof single-family rosesolidlyinrecentmonths.Near-terminflation homeswerelittlechanged,onnet,inrecentmonths. expectationsfromtheMichigansurveydeclinedin NewhomesaleswereflatinSeptemberaftermoving SeptemberandearlyOctober,whilelonger-term

252 101stAnnualReport|2014 inflationexpectationsinthesurveywerelittle TheTreasurymarketexperiencedsignificantvolatilchanged. ityonOctober15,with5-and10-yearTreasury yieldsdroppingasmuchas30basispointsinabout Foreigneconomiesappearedtohavecontinuedto anhourbeforeretracingmuchof thosemovesbythe expandatamoderaterateinthethirdquarter, endof theday.Amidveryhightradingvolumes, althoughwithconsiderabledivergenceacrosscoun- Treasurymarketliquidity,asmeasuredbybid–asked tries.InJapan,consumptionstagedamildrebound spreads,worsenedsignificantly,andmeasuresof the aftercontractinginthepreviousquarterinresponse impliedvolatilityof longer-termratesjumpedonthe toataxincrease,whileindicatorsfortheeuroarea daybutsubsequentlyfellback.Whilethereleaseof pointedtoonlycontinuedsluggishgrowth.Third- thesomewhatweaker-than-expecteddataforSeptemquartergrowthinrealgrossdomesticproduct(GDP) berU.S.retailsaleswasseenasthetriggerforthese remainedhealthyintheUnitedKingdom,andindi- sharpmovements,marketparticipantsindicatedthat catorsforCanadaalsowerepositive.Amongemerg- anumberof technicalfactorsrelatedtoinvestorposiingmarketeconomies,GDPgrowthremainedstrong tioningandtradingstrategieslikelyamplifiedthe inthethirdquarterinChinaandKoreaandindica- swingininterestrates. torsforMexicowerefavorableaswell.TheBrazilian economyappearedtobestabilizing.Foreigninflation Overtheintermeetingperiodasawhole,longer-term remainedgenerallysubduedandinsomeregions nominalTreasuryyieldsdeclinedabout30basis quitelow,especiallyintheeuroarea,whereheadline points.Market-basedmeasuresof inflationcompeninflationwaswellbelow1percent. sationmovedloweraswell,extendingthedeclines seensincethesummer.Thedeclineininflationcom- Staff Review of the Financial Situation pensationreportedlyreflectedinpartconcernsabout globalgrowthandtheriskof buildingdisinflationary Concernsabouttheglobaleconomicoutlookappar- pressures,thelower-than-expectedAugustCPI entlyhelpedtopromptasharppullbackfromrisky report,thedeclineinoilprices,andtheappreciation assetsintheUnitedStates,butpricesof thoseassets of theU.S.dollar.Yieldsonagencymortgage-backed subsequentlyreversedmuchof theirdeclinesbythe securities(MBS)declinedroughlyinlinewithcomendof theintermeetingperiod.Inaddition,anum- parableTreasuryyields,whilespreadsonboth berof technicalfactorsreportedlycontributedto investment-andspeculative-gradecorporatebonds volatileinterestratemovesinmid-October.Worries widenedmodestlyrelativetoTreasurysecurities. aboutapossiblespreadof Ebolaalsoappearedto weighonmarketsentimentsomewhatattimes.On TheS&P500indexdecreasedabout1percent,on net,yieldsonlonger-termTreasurysecuritiesfell net,overtheintermeetingperiod.Option-implied notably,U.S.equitypricesedgeddown,corporate volatilityfortheS&P500indexoverthenextmonth bondspreadswidenedmodestly,andthedollar increasedmoderately,onbalance,endingtheperiod appreciatedmoderatelyagainstmostother belowitslong-runhistoricalaverage,thoughduring currencies. themid-Octobervolatilityspike,itbrieflytouched highlevelslastseenin2011.Abouthalf of thefirms FederalReservecommunicationswerereportedly intheS&P500indexreportedearningsforthethird viewedasslightlymoreaccommodativethanantici- quarter,withthereportsgenerallyviewedaspositive. pated,onbalance.Theexpectedpathof thefederal Overall,third-quarterearningsestimatescontinued fundsrateimpliedbymarketquotesshifteddown toimplymodestgrowthinearningspersharecomnotably,onnet,overtheperiod.Market-basedmeas- paredwiththepreviousquarter. uressuggestedthattheexpecteddateof thefirst increaseinthefederalfundsratewaspushedout Despitesomevolatilityrelatedtoquarter-end,condifromthethirdquarterof 2015tolate2015.However, tionsinunsecuredfundingmarketswerelittle theresultsfromtheDesk’sOctoberSurveyof Pri- changed,onnet,overtheintermeetingperiod.In maryDealersindicatedthatthedealers’projected securedfundingmarkets,somemoneymarketrates pathof thefederalfundsratewaslittlechangedfrom fellinthedaysleadinguptoquarter-end,reportedly theSeptembersurvey,withdealerscontinuingtosee reflectinginparttheannouncementof the$300bilthemiddleof nextyearasthemostlikelytimeof lionoverallsizelimitontheONRRPexercisefollowliftoff. ingtheSeptemberFOMCmeeting.Afterquarter-

Minutesof FederalOpenMarketCommitteeMeetings|October 253 end,however,short-termratesgenerallymovedback policyratetozeroinresponsetothelowlevelof towardtheirpreannouncementlevels. Swedishinflation.SpreadsonperipheralEuropean sovereignbondsincreased,modestlyformostcoun- Creditflowstononfinancialbusinesspickedupin triesbutmoresubstantiallyforGreekbonds,reflect- SeptemberandearlyOctober.Grossissuanceof ing,inpart,marketconcernsthatGreecemightexit investment-andspeculative-gradebondsrebounded itsInternationalMonetaryFundprogrampremafromseasonallowsoverthesummer,notwithstand- turely.Spreadsonemergingmarketbondsgenerally ingtheslowdownduringthemid-Octobermarket edgedhigher.Inaddition,thebroadnominaldollar volatilityspike.Commercialandindustrialloanson indexendedtheperiodmoderatelyhigher. banks’bookscontinuedtoexpandatarobustpacein thethirdquarter,consistentwiththestrongdemand TheEuropeanCentralBankreleasedtheresultsof fromlargeandmiddle-marketfirmsreportedinthe the2014comprehensiveassessment,whichincluded OctoberSeniorLoanOfficerOpinionSurveyon bothanassetqualityreviewandaforward-looking BankLendingPractices(SLOOS).Intheleveraged stresstest.Underthestresstest,whichrecognizes loanmarket,institutionalissuanceslowedsomein capitalraisingandbalancesheetadjustmentsthrough September,thoughinvestors’interestintheasset September2014,13bankswereidentifiedasneeding classremainedstrong. tostrengthentheircapitalpositionsand8willbe requiredtoraisenetnewcapital.Theresultswere Financingconditionsinthecommercialrealestate broadlyinlinewithexpectations,andthemarket (CRE)marketcontinuedtoease.Accordingtothe reactiontothereleasewaslimited. OctoberSLOOS,bankseasedCRElendingstandards,onnet,andreportedstrongerdemandforsuch Thestaff’speriodicreportonpotentialriskstofinanloans.Growthof CREloansonthebalancesheetsof cialstabilitynotedthatrecentdevelopmentsinfinanlargebanksslowedinthethirdquarter,whilegrowth cialmarketshighlightedthepotentialforshocksto atsmallbanksremainedmoderate.Issuanceof com- triggerincreasesinmarketvolatilityanddeclinesin mercialmortgage-backedsecuritiesstayedrobustin assetpricesthatcouldunderminefinancialstability. September. Nevertheless,theU.S.financialsystemappeared resilienttoshocksof themagnitudeseenrecentlydue Overtheintermeetingperiod,mortgageratesto totherelativelystrongcapitalandliquidityprofiles qualifiedborrowersdeclinedabout25basispoints. of largedomesticbankingfirms,subduedaggregate Thedeclineinratescoincidedwithanappreciable leverageinthenonfinancialsector,andrelatively increaseinthevolumeof refinancingactivity.Mort- restraineduseof short-termwholesalefundingacross gagelendingconditionswerelittlechangedonnet. thefinancialsector.However,thestaff reportalso pointedtoassetvaluationpressuresthatwerebroad- Conditionsinmostconsumercreditmarkets ening,aswellasalooseningof underwritingstanremainedaccommodativeduringthethirdquarter. dardsinthespeculativecorporatedebtandCRE Autoloanscontinuedtobewidelyavailable,and markets;itnotedtheneedtocloselymonitorthese respondentstotheOctoberSLOOSindicatedthat developmentsgoingforward. demandforautoloanshadstrengthenedfurtherin thethirdquarter.Inaddition,demandforcreditcard Staff Economic Outlook loansincreased,andafewlargebanksreportedhavingeasedlendingpoliciesonsuchloans. Theinformationoneconomicactivityreceivedsince thestaff prepareditsforecastfortheSeptember AsintheUnitedStates,participantsinforeignfinan- FOMCmeetingwasclosetoexpectations,andtherecialmarketsbecamemoreconcerned,onbalance, fore,thestaff’sprojectionforrealGDPgrowthover aboutprospectsforglobaleconomicgrowth.Onnet theremainderof theyearwaslittlerevised.However, overtheperiod,equityindexesweredowninmost inresponsetoafurtherriseintheforeignexchange advancedandemergingmarketeconomies,and valueof thedollar,adeteriorationinglobalgrowth measuresof impliedvolatilityrose.Benchmarksov- prospects,andadeclineinequityprices,thestaff ereignyieldsfellsharply,withGermanyieldsreach- reviseddownitsprojectionforrealGDPgrowtha ingrecordlows.Expectedpolicyratepathsmoved littleoverthemediumterm.Evenwiththeslower downinmostadvancedeconomies,andmarket- expansionof economicactivityinthisprojection, basedmeasuresof inflationcompensationcontinued realGDPwasstillexpectedtorisefasterthanpotentodecline.TheRiksbankunexpectedlycutitsmain tialoutputin2015and2016,supportedbyaccom-

254 101stAnnualReport|2014 modativemonetarypolicyandafurthereasingof the tiveof maximumemployment.Inflationwascontinurestraintonspendingfromchangesinfiscalpolicy;in ingtorunbelowtheCommittee’slonger-runobjec- 2017,realGDPgrowthwasprojectedtostepdown tive.Market-basedmeasuresof inflationcompensatowardtherateof potentialoutputgrowth.Asa tiondeclinedsomewhat,whilesurvey-basedmeasures result,resourceslackwasanticipatedtodecline of longer-terminflationexpectationsremained steadily,albeitataslightlyslowerratethaninthe stable.Participantsanticipatedthatinflationwould previousprojection,andtheunemploymentratewas behelddownovertheneartermbythedeclinein expectedtograduallyimproveandtobeatthestaff’s energypricesandotherfactors,butwouldmove estimateof itslonger-runnaturalratein2017. towardtheCommittee’s2percentgoalincoming years,althoughafewexpressedconcernthatinflation Thestaff’sforecastforinflationthisquarterand mightpersistbelowtheCommittee’sobjectivefor earlynextyearwasreducedinresponsetofurther quitesometime.Mostviewedtheriskstotheoutdeclinesincrudeoilprices,buttheforecastforinfla- lookforeconomicactivityandthelabormarketas tionoverthemediumtermwasonlyatouchlower. nearlybalanced.However,anumberof participants Consumerpriceinflationwasprojectedtobelowerin notedthateconomicgrowthoverthemediumterm thesecondhalf of thisyearthaninthefirsthalf and mightbeslowerthantheycurrentlyexpectedif the toremainbelowtheCommittee’slonger-runobjec- foreigneconomicorfinancialsituationdeteriorated tiveof 2percentoverthenextfewyears.With significantly. resourceslackprojectedtodiminishslowlyand changesincommodityandimportpricesanticipated Householdspendingadvancedatamoderatepace tobesubdued,inflationwasprojectedtorisegradu- overtheintermeetingperiod,andreportsfromconallyandtoreachtheCommittee’sobjectiveinthe tactsinseveralpartsof thecountryindicatedthat longerrun. recentretailorautosaleshadbeenrobust.However, oneparticipantpointedtomixedretailsalesreports Thestaff continuedtoviewtheuncertaintyaround thatlikelyreflectedacontinuationof restraineddisitsprojectionsforrealGDPgrowth,theunemploy- cretionaryspendingonthepartof low-andmiddlementrate,andinflationassimilartotheaverageover incomehouseholds.Manyparticipantsjudgedthat thepast20years.Theriskstotheforecastforreal therecentsignificantdeclineinenergypriceswould GDPgrowthandinflationwereseenastiltedtothe provideaboosttoconsumerspendingoverthenear downside,reflectingrecentfinancialdevelopments term,withseveralof themnotingthatthedropin andconcernsabouttheforeigneconomicoutlook,as gasolinepriceswouldbenefitlower-incomehousewellasthestaff’sassessmentthatneithermonetary holdsinparticular.Amongtheotherfavorablefacpolicynorfiscalpolicyappearedwellpositionedto torsthatwereexpectedtosupportcontinuedgrowth helptheeconomywithstandadverseshocks.Atthe inconsumerspending,participantscitedsolidgains sametime,thestaff continuedtoviewtherisks inpayrollemployment,lowinterestrates,risingconarounditsoutlookfortheunemploymentrateas sumerconfidence,andthedeclineinlevelsof houseroughlybalanced. holddebtrelativetoincome. Participants’ Views on Current Conditions Therecoveryinthehousingsectorremainedslow and the Economic Outlook despitelowinterestratesandsomerecentimprovementintheavailabilityof mortgagecredit.Contacts Intheirdiscussionof theeconomicsituationandthe insomepartsof thecountryreportedcontinued outlook,mostmeetingparticipantsviewedtheinfor- weaknessinsingle-familyconstruction,whileinother mationreceivedovertheintermeetingperiodassug- regionsactivityreportedlywaspickingupgradually gestingthateconomicactivitycontinuedtoexpandat followingasluggishsummer.Afewparticipants amoderatepace.Labormarketconditionsimproved pointedtocontinuedstronggrowthinmultifamily somewhatfurther,withsolidjobgainsandalower construction,althoughthelimitedpipelineof new unemploymentrate;onbalance,participantsjudged projectsinoneDistrictsuggestedthatactivitycould thattheunderutilizationof laborresourceswas slowin2015. graduallydiminishing.Participantsgenerally expectedthat,overthemediumterm,realeconomic Reportsfrombusinesscontactsinmanypartsof the activitywouldincreaseatapacesufficienttoleadto countrypointedtoanimprovementinbusinessconafurthergradualdeclineintheunemploymentrate ditions,withindexesof themanufacturingsector towardlevelsconsistentwiththeCommittee’sobjec- postingbroad-basedgainsinrecentmonthsina

Minutesof FederalOpenMarketCommitteeMeetings|October 255 numberof Districts.Acoupleof participants torssuggestedthattheunderutilizationof laborhad reportedexpectationsof arobustholidaysalessea- continuedtodiminish,althoughanumberof particisonbasedonaccumulatinginventoriesof consumer pantsnotedthatunderutilizationof labormarket goodsoranincreaseine-commercetrafficand resourcesremained.Acoupleof participantsjudged relatedtransportationactivity.Contactsinseveral thatthelargenumberof individualsworkingpart regionsreportedreadyavailabilityof credit,strong timeforeconomicreasonsandthecontinueddrift loangrowth,orasteadyincreaseincommercialcon- downinthelaborforceparticipationratesuggested structionactivity.Whilethefallinenergypriceswas thattheunemploymentratewasunderstatingthe generallyregardedasapositivedevelopmentfor degreeof labormarketunderutilization. manybusinesses,itwasnotedthatasustaineddrop inpriceswouldhaveeffectsonoildrillingandrelated Mostparticipantsanticipatedthatinflationwas investmentactivity.Intheagriculturalsector,the likelytoedgelowerinthenearterm,reflectingthe robustfallharvesthaddrivendowncropprices;food declineinoilandothercommoditypricesandlower processingandfarmequipmentbusinesseswereslow- importprices.Theseparticipantscontinuedtoexpect ingasaresultof lowerfarmincomeandadropin inflationtomovebacktotheCommittee’s2percent exports. targetoverthemediumtermasresourceslackdiminishedinanenvironmentof well-anchoredinflation Indiscussingeconomicdevelopmentsabroad,par- expectations,althoughafewof themthoughtthe ticipantspointedtoasomewhatweakereconomic returnto2percentmightbequitegradual.SurveyoutlookandincreaseddownsiderisksinEurope, basedmeasuresof inflationexpectationsremained China,andJapan,aswellastothestrengtheningof wellanchored,butmarket-basedmeasuresof inflathedollarovertheperiod.Itwasobservedthatif for- tioncompensationoverthenextfiveyearsaswellas eigneconomicorfinancialconditionsdeteriorated overthefive-yearperiodbeginningfiveyearsahead further,U.S.economicgrowthoverthemediumterm haddeclinedovertheintermeetingperiod.Various mightbeslowerthancurrentlyexpected.However, explanationswereofferedforthedeclineinthe manyparticipantssawtheeffectsof recentdevelop- market-basedmeasures,andparticipantsexpressed mentsonthedomesticeconomyaslikelytobequite differentviewsabouthowtointerprettheserecent limited.Theseparticipantssuggestedvariouslythat movements.Theexplanationsincludedadeclinein theshareof externaltradeintheU.S.economyis inflationriskpremiums,possiblyreflectingalower relativelysmall,thattheeffectsof changesinthe perceivedprobabilityof higherinflationoutcomes; valueof thedollaronnetexportsaremodest,that andspecialfactors,includingliquidityriskpremiums, shiftsinthestructureof U.S.tradeandproduction thatmightbeinfluencingthepricingof Treasury overtimemayhavereducedtheeffectsonU.S.trade Inflation-ProtectedSecuritiesandinflationderivaof developmentslikethoseseenof late,orthatthe tives.Oneparticipantnotedthatevenif thedeclines slowdowninexternaldemandwouldlikelyproveto reflectedlowerinflationriskpremiumsandnota belessseverethaninitiallyfeared.Severalpartici- reductioninexpectedinflation,policymakersmight pantsjudgedthatthedeclineinthepricesof energy stillwanttotakethemintoaccountbecausesucha andothercommoditiesaswellaslowerlong-term changecouldreflectincreasedconcernsonthepart interestrateswouldlikelyprovideanoffsettothe of investorsaboutadverseoutcomesinwhichlow higherdollarandweakerforeigngrowth,orthatthe inflationwasaccompaniedbyweakeconomicactivdomesticrecoveryremainedonafirmfooting. ity.Acoupleof participantsnotedthatitwaslikely tooearlytodrawconclusionsregardingthesedevel- Indicatorsof labormarketconditionscontinuedto opments,especiallyinlightof therecentmarketvolaimproveovertheintermeetingperiod,withafurther tility.However,manyparticipantsobservedthatthe reductionintheunemploymentrate,declinesin Committeeshouldremainattentivetoevidenceof a longer-durationunemployment,stronggrowthin possibledownwardshiftinlonger-terminflation payrollemployment,andalowlevelof initialclaims expectations;someof themnotedthatif suchan forunemploymentinsurance.Businesscontacts outcomeoccurred,itwouldbeevenmoreworrisome reportedemploymentgainsinseveralpartsof the if growthfaltered. country,withrelativelyfewpointingtoemerging wagepressures,althoughoneparticipantindicated Intheirdiscussionof financialmarketdevelopments thatlargerwagegainshadbeenaccruingtosome andfinancialstabilityissues,participantsjudgedthat individualswhoswitchedjobs.Labormarketcondi- themovementsinthepricesof stocks,bonds,comtionsindexesconstructedfromabroadsetof indica- modities,andtheU.S.dollarovertheintermeeting

256 101stAnnualReport|2014 periodappearedtohavebeendrivenprimarilyby wasnotedthatcommunicationaboutpost-liftoff concernsaboutprospectsforforeigneconomic policywouldposechallengesgiventheinherent growth.Manyparticipantscommentedontheturbu- uncertaintyof theeconomicandfinancialoutlook lenceinfinancialmarketsthatoccurredinmid- andtheCommittee’sdesiretoretainflexibilityto October.Someparticipantspointedoutthat,despite adjustpolicyinresponsetotheincomingdata.Most themarketvolatility,financialconditionsremained participantssupportedretainingthelanguageinthe highlyaccommodativeandthatfurtherpocketsof statementindicatingthattheCommitteeanticipates turbulencewerelikelytoariseasthestartof policy thateconomicconditionsmaywarrantkeepingthe normalizationapproached.Thatsaid,moreworkto targetrangeforthefederalfundsratebelowlongerbetterunderstandtherecentmarketdynamicswas runnormallevelsevenafteremploymentandinflaseenasdesirable.Inaddition,acoupleof partici- tionarenearmandate-consistentlevels.However,a pantsnotedthepotentialusefulnessof collecting coupleof participantsthoughtthatthelanguage additionaldataonwholesalefundingmarketsin shouldbeamendedinlightof theprescriptionssugordertobetterunderstandhowchangesininterest gestedbymanymonetarypolicyrulesandtherisks ratescouldinfluencethosemarkets. associatedwithkeepinginterestratesbelowtheir longer-runvaluesforanextendedperiodof time. Intheirdiscussionof communicationsregardingthe pathof thefederalfundsrateoverthemediumterm, Committee Policy Action meetingparticipantsagreedthatthetimingof the firstincreaseinthefederalfundsrateandtheappro- Intheirdiscussionof monetarypolicyfortheperiod priatepathof thepolicyratethereafterwould ahead,membersjudgedthatinformationreceived dependonincomingeconomicdataandtheirimpli- sincetheFOMCmetinSeptemberindicatedthat cationsfortheoutlook.Mostparticipantsjudged economicactivitywasexpandingatamoderatepace. thatitwouldbehelpfultoincludenewlanguagein Labormarketconditionshadimprovedsomewhat theCommittee’sforwardguidancetoclarifyhowthe further,withsolidjobgainsandalowerunemploy- Committee’sdecisionaboutwhentobeginthepolicy mentrate;onbalance,arangeof indicatorssugnormalizationprocesswilldependonincominginfor- gestedthatunderutilizationof laborresourceswas mationabouttheeconomy.Someparticipantspre- graduallydiminishing.Householdspendingwasrisferredtoeliminatelanguageinthestatementindicat- ingmoderatelyandbusinessfixedinvestmentwas ingthatthecurrenttargetrangeforthefederalfunds advancing,whiletherecoveryinthehousingsector ratewouldlikelybemaintainedfora“considerable remainedslow.Inflationhadcontinuedtorunbelow time”aftertheendof theassetpurchaseprogram. theCommittee’slonger-runobjective.Market-based Theseparticipantswereconcernedthatsuchachar- measuresof inflationcompensationhaddeclined acterizationcouldbemisinterpretedassuggesting somewhat,butsurvey-basedmeasuresof longer-term thattheCommittee’sdecisionswouldnotdependon inflationexpectationshadremainedstable.TheComtheincomingdata.However,otherparticipants mitteeexpectedthat,withappropriatepolicyaccomthoughtthatthe“considerabletime”phrasewasuse- modation,economicactivitywouldexpandatamodfulincommunicatingtheCommittee’spolicyinten- eratepace,withlabormarketindicatorsandinflation tionsorthatadditionalwordingcouldbeusedto movingtowardlevelstheCommitteejudgesconsisemphasizethedata-dependenceof theCommittee’s tentwithitsdualmandate. decisionprocess.Acoupleof themnotedthatthe removalof the“considerabletime”phrasemightbe Intheirdiscussionof languageforthepost-meeting seenassignalingasignificantshiftinthestanceof statement,anumberof membersjudgedthat,while policy,potentiallyresultinginanunintendedtighten- someunderutilizationinthelabormarketremained, ingof financialconditions.Acoupleof others itappearedtobegraduallydiminishing.Inaddition, thoughtthatthecurrentforwardguidancemightbe membersconsideredtheadvantagesanddisadvanreadassuggestinganearlierdateof liftoff thanwas tagesof addinglanguagetothestatementto likelytoproveappropriate,giventheoutlookfor acknowledgerecentdevelopmentsinfinancialmarinflationandthedownsideriskstotheeconomy kets.Ontheonehand,includingareferencewould associatedwiththeeffectivelowerboundoninterest showthattheCommitteewasmonitoringfinancial rates.Withregardtothepaceof interestrate developmentswhilealsoprovidinganopportunityto increasesafterthestartof policynormalization,a notethatfinancialconditionsremainedhighlysupnumberof participantsthoughtthatitcouldsoonbe portiveof growth.Ontheotherhand,includinga helpfultoclarifytheCommittee’slikelyapproach.It referenceriskedthepossibilityof suggestinggreater

Minutesof FederalOpenMarketCommitteeMeetings|October 257 concernonthepartof theCommitteethanwasactu- tive.TheCommitteeagreedtoincludeadditional allythecase,perhapsleadingtothemisimpression wordinginthestatementinordertoemphasizethat thatmonetarypolicywaslikelytorespondto theCommittee’sdecisiononthetimingof thefirst increasesinvolatility.Intheend,theCommittee increaseinthefederalfundsratewouldbedata decidednottoincludesuchareference.Finally,a dependent.Inparticular,thestatementwouldsay coupleof memberssuggestedincludinglanguagein that,if incominginformationindicatedfasterprogthestatementindicatingthatrecentforeigneconomic resstowardtheCommittee’semploymentandinfladevelopmentshadincreaseduncertaintyorhad tionobjectivesthantheCommitteenowexpects,then boosteddownsideriskstotheU.S.economicout- increasesinthetargetrangeforthefederalfundsrate look,butparticipantsgenerallyjudgedthatsuch wouldlikelyoccursoonerthancurrentlyanticipated. wordingwouldsuggestgreaterpessimismaboutthe Itwouldalsonotethat,if progressprovesslower economicoutlookthantheythoughtappropriate. thanexpected,thenincreasesinthetargetrange wouldlikelyoccurlaterthancurrentlyanticipated. Intheirdiscussionof theassetpurchaseprogram, TheCommitteealsoagreedtoreiterateitsexpectamembersgenerallyagreedthattheconditionarticu- tionthat,evenafteremploymentandinflationare latedbytheCommitteewhenitbegantheprogramin nearmandate-consistentlevels,economicconditions September2012hadbeenachieved—thatis,there may,forsometime,warrantkeepingthetargetfedhadbeenasubstantialimprovementintheoutlook eralfundsratebelowlevelstheCommitteeviewsas forthelabormarket—andthattherewassufficient normalinthelongerrun. underlyingstrengthinthebroadereconomytosupportongoingprogresstowardmaximumemployment Attheconclusionof thediscussion,theCommittee inacontextof pricestability.Accordingly,allmem- votedtoauthorizeanddirecttheFederalReserve bersbutonesupportedconcludingtheCommittee’s Bankof NewYork,untilitwasinstructedotherwise, assetpurchaseprogramattheendof Octoberand toexecutetransactionsintheSOMAinaccordance maintainingitsexistingpolicyof reinvestingprinci- withthefollowingdomesticpolicydirective: palpaymentsfromitsholdingsof agencydebtand agencyMBSinagencyMBSandof rollingover “Consistentwithitsstatutorymandate,theFedmaturingTreasurysecuritiesatauction.Bykeeping eralOpenMarketCommitteeseeksmonetary theCommittee’sholdingsof longer-termsecuritiesat andfinancialconditionsthatwillfostermaxisizablelevels,thispolicywasexpectedtohelpmain- mumemploymentandpricestability.Inparticutainaccommodativefinancialconditions. lar,theCommitteeseeksconditionsinreserve marketsconsistentwithfederalfundstradingin Inaddition,theCommitteeagreedtomaintainthe arangefrom0to¼percent.TheCommittee targetrangeforthefederalfundsrateat0to¼per- directstheDesktoundertakeopenmarket centandtoreaffirmtheindicationinthestatement operationsasnecessarytomaintainsuchcondithattheCommittee’sdecisionabouthowlongto tions.TheDeskisdirectedtoconcludethecurmaintainthecurrenttargetrangeforthefederal rentprogramof purchasesof longer-termTreasfundsratewoulddependonitsassessmentof actual urysecuritiesandagencymortgage-backedsecuandexpectedprogresstowarditsobjectivesof maxi- ritiesbytheendof October.TheCommittee mumemploymentand2percentinflation.Allbut directstheDesktomaintainitspolicyof rolling onememberagreedthattheCommitteeshouldreit- overmaturingTreasurysecuritiesintonew eratetheexpectationthatitlikelywouldbeappropri- issuesanditspolicyof reinvestingprincipalpayatetomaintainthecurrenttargetrangeforthefed- mentsonallagencydebtandagencymortgageeralfundsrateforaconsiderabletimefollowingthe backedsecuritiesinagencymortgage-backed endof theassetpurchaseprograminOctober,espe- securities.TheCommitteealsodirectstheDesk ciallyif projectedinflationcontinuedtorunbelow toengageindollarrollandcouponswaptranstheCommittee’s2percentlonger-rungoal,andpro- actionsasnecessarytofacilitatesettlementof videdthatlonger-terminflationexpectations theFederalReserve’sagencymortgage-backed remainedwellanchored.Theonememberthought securitiestransactions.TheSystemOpenMarthattheCommitteeshouldinsteadstrengthenthe ketAccountmanagerandthesecretarywillkeep forwardguidanceinordertounderscoretheCom- theCommitteeinformedof ongoingdevelopmittee’scommitmenttoits2percentinflationobjec- mentsregardingtheSystem’sbalancesheetthat

258 101stAnnualReport|2014 couldaffecttheattainmentovertimeof the principalpaymentsfromitsholdingsof agency Committee’sobjectivesof maximumemploy- debtandagencymortgage-backedsecuritiesin mentandpricestability.” agencymortgage-backedsecuritiesandof rollingovermaturingTreasurysecuritiesatauction. Thevoteencompassedapprovalof thestatement Thispolicy,bykeepingtheCommittee’sholdbelowtobereleasedat2:00p.m.: ingsof longer-termsecuritiesatsizablelevels, shouldhelpmaintainaccommodativefinancial “InformationreceivedsincetheFederalOpen conditions. MarketCommitteemetinSeptembersuggests thateconomicactivityisexpandingatamoder- Tosupportcontinuedprogresstowardmaxiatepace.Labormarketconditionsimproved mumemploymentandpricestability,theComsomewhatfurther,withsolidjobgainsanda mitteetodayreaffirmeditsviewthatthecurrent lowerunemploymentrate.Onbalance,arange 0to¼percenttargetrangeforthefederalfunds of labormarketindicatorssuggeststhatunder- rateremainsappropriate.Indetermininghow utilizationof laborresourcesisgraduallydimin- longtomaintainthistargetrange,theCommitishing.Householdspendingisrisingmoderately teewillassessprogress—bothrealizedand andbusinessfixedinvestmentisadvancing, expected—towarditsobjectivesof maximum whiletherecoveryinthehousingsectorremains employmentand2percentinflation.Thisassessslow.Inflationhascontinuedtorunbelowthe mentwilltakeintoaccountawiderangeof Committee’slonger-runobjective.Market-based information,includingmeasuresof labormarket measuresof inflationcompensationhave conditions,indicatorsof inflationpressuresand declinedsomewhat;survey-basedmeasuresof inflationexpectations,andreadingsonfinancial longer-terminflationexpectationshave developments.TheCommitteeanticipates,based remainedstable. onitscurrentassessment,thatitlikelywillbe appropriatetomaintainthe0to¼percenttar- Consistentwithitsstatutorymandate,theCom- getrangeforthefederalfundsrateforaconsidmitteeseekstofostermaximumemployment erabletimefollowingtheendof itsassetpurandpricestability.TheCommitteeexpectsthat, chaseprogramthismonth,especiallyif prowithappropriatepolicyaccommodation,eco- jectedinflationcontinuestorunbelowthe nomicactivitywillexpandatamoderatepace, Committee’s2percentlonger-rungoal,andprowithlabormarketindicatorsandinflationmov- videdthatlonger-terminflationexpectations ingtowardlevelstheCommitteejudgesconsis- remainwellanchored.However,if incoming tentwithitsdualmandate.TheCommitteesees informationindicatesfasterprogresstowardthe theriskstotheoutlookforeconomicactivity Committee’semploymentandinflationobjecandthelabormarketasnearlybalanced. tivesthantheCommitteenowexpects,then Althoughinflationintheneartermwilllikelybe increasesinthetargetrangeforthefederalfunds helddownbylowerenergypricesandotherfac- ratearelikelytooccursoonerthancurrently tors,theCommitteejudgesthatthelikelihoodof anticipated.Conversely,if progressproves inflationrunningpersistentlybelow2percent slowerthanexpected,thenincreasesinthetarget hasdiminishedsomewhatsinceearlythisyear. rangearelikelytooccurlaterthancurrently anticipated. TheCommitteejudgesthattherehasbeena substantialimprovementintheoutlookforthe WhentheCommitteedecidestobegintoremove labormarketsincetheinceptionof itscurrent policyaccommodation,itwilltakeabalanced assetpurchaseprogram.Moreover,theCommit- approachconsistentwithitslonger-rungoalsof teecontinuestoseesufficientunderlying maximumemploymentandinflationof 2perstrengthinthebroadereconomytosupport cent.TheCommitteecurrentlyanticipatesthat, ongoingprogresstowardmaximumemployment evenafteremploymentandinflationarenear inacontextof pricestability.Accordingly,the mandate-consistentlevels,economicconditions Committeedecidedtoconcludeitsassetpur- may,forsometime,warrantkeepingthetarget chaseprogramthismonth.TheCommitteeis federalfundsratebelowlevelstheCommittee maintainingitsexistingpolicyof reinvesting viewsasnormalinthelongerrun.”

Minutesof FederalOpenMarketCommitteeMeetings|October 259 Votingforthisaction:JanetL.Yellen,WilliamC. twoobjectivesundercircumstancesinwhichthese Dudley,LaelBrainard,StanleyFischer,RichardW. objectivesarejudgednottobecomplementary,and Fisher,LorettaJ.Mester,CharlesI.Plosser,Jerome howfinancialstabilityislinkedtotheCommittee’s H.Powell,andDanielK.Tarullo. mandatedgoalsof maximumemploymentandprice stability.Followingthestaff presentation,partici- Votingagainstthisaction:NarayanaKocherlakota. pantsdiscussedarangeof topicsrelatedtothese threeissuesandtomonetarypolicycommunications Mr.Kocherlakotadissentedbecausehebelievedthat, morebroadly.Participantsgenerallythoughtthatit inlightof continuedsluggishnessintheinflationout- wasworthwhiletoperiodicallyconsiderpossible lookandtherecentslideinmarket-basedmeasures changestothestatement,regardlessof whetherany of longer-terminflationexpectations,theCommittee wereultimatelyimplemented.Mostparticipants shouldcommittomaintainingthecurrenttarget agreedthattheexistingconsensusstatementwas rangeforthefederalfundsrateatleastuntilpro- workingwellasacommunicationstoolandjudged jectedinflationonetotwoyearsaheadhasreturned thatthethresholdformakingchangestothedocuto2percentandshouldcontinuetheassetpurchase mentshouldbeahighone.Onthespecificissues, programatitscurrentpace.Mr.Kocherlakotanoted therewaswidespreadagreementthatinflationmodthatwhentheCommitteefirstreduceditsassetpur- eratelyabovetheCommittee’s2percentgoaland chasesinDecember2013,itsaidinthepost-meeting inflationthesameamountbelowthatlevelwere statementthatitwouldbemonitoringinflationdevel- equallycostly—andmanyparticipantsthoughtthat opmentscarefullyforevidencethatinflationwas thatviewwaslargelysharedbythepublic.Oneparmovingbacktowarditsobjectiveoverthemedium ticipantsuggestedthattheCommitteeshouldclarify term;Mr.Kocherlakotaindicatedhesawnosuch thetimehorizonwithinwhichitseekstoachieveits evidence. inflationobjective.ParticipantsbelievedthatthelanguagereferringtotheCommittee’sbalanced approachinpromotingitsobjectiveswasappropriatelybroadandencompassedtheviewsof partici- Longer-Run Goals and Monetary Policy pants.Anumberof participantsnotedthatfinancial Strategy stabilityisanecessaryconditionfortheachievement of theCommittee’slonger-rungoals.Afewof them InthediscussionattheJanuary2014FOMCmeeting offeredsuggestionsforcommunicatingmorespecifiregardingtheannualreaffirmationof theStatement callyhowfinancialstability,andperhapsotherasymonLonger-RunGoalsandMonetaryPolicyStrategy, metricriskstotheoutlook,aretakenintoaccountin participantsnotedthat,whiletheyweregenerallysatthesettingof monetarypolicy.However,several isfiedwiththestatement,itwouldbeappropriateto otherparticipantsnotedthatreachinganagreement considerwhetheranychangesmightbewarranted intheneartermonclarifyingthelinkagesbetween beforethestatementwasreaffirmedin2015.The monetarypolicyandfinancialstabilitycouldprove Committeesubsequentlyreferredthemattertothe challenging,inpartbecausetheissuesinvolvedare subcommitteeoncommunications,whichidentified complexandneedfurtherstudy.Regardingbroader possibleissuesforconsiderationbythefullCommitcommunicationsissues,anumberof participants tee.Thesubcommitteethenaskedthestaff topresuggestedthatthesubcommitteecouldagaininvestipareamemorandumtotheCommitteeexploring gatethefeasibilityanddesirabilityof constructinga thoseissues.Atthismeeting,astaff presentationdisconsensusforecast,buildingonthelessonsof the cussedthreeissuesrelatedtotheexistingstatement experimentscarriedoutin2012,andseveralthought thatmightwarrantelaborationorclarification: thatfurtherenhancementstotheSummaryof EcowhetherinflationpersistentlybelowtheCommittee’s nomicProjectionsmightalsobeworthconsidering. 2percentlonger-runobjectiveandinflationsimilarly Nodecisionsweremadeatthismeeting,andparticipersistentlyabovethatobjectivewouldberegarded pantsgenerallyagreedthatitwouldbeusefultodisasequallyundesirable,whetheradditionalinformacusstheseissuesfurtheratupcomingmeetings. tionshouldbeprovidedaboutthe“balanced approach”thattheCommitteetakesinpromotingits

260 101stAnnualReport|2014 Itwasagreedthatthenextmeetingof theCommittee Notation Vote wouldbeheldonTuesday–Wednesday,December16–17,2014.Themeetingadjournedat12:45 BynotationvotecompletedonOctober7,2014,the p.m.onOctober29,2014. Committeeunanimouslyapprovedtheminutesof the CommitteemeetingheldonSeptember16–17,2014. WilliamB.English Secretary

Minutesof FederalOpenMarketCommitteeMeetings|December 261 Meeting Held JamesA.Clouse,ThomasA.Connors, EvanF.Koenig,ThomasLaubach, on December 16–17, 2014 MichaelP.Leahy,PaoloA.Pesenti, SamuelSchulhofer-Wohl,MarkE.Schweitzer, Ameetingof theFederalOpenMarketCommittee andWilliamWascher washeldintheofficesof theBoardof Governorsof AssociateEconomists theFederalReserveSysteminWashington,D.C.,on Tuesday,December16,2014,at1:00p.m.andcontin- SimonPotter uedonWednesday,December17,2014,at9:00a.m. Manager,SystemOpenMarketAccount LorieK.Logan Present DeputyManager,SystemOpenMarketAccount JanetL.Yellen RobertdeV.Frierson1 Chair Secretaryof theBoard,Officeof theSecretary, WilliamC.Dudley Boardof Governors ViceChairman MichaelS.Gibson LaelBrainard Director,Divisionof BankingSupervisionand Regulation,Boardof Governors StanleyFischer StephenA.MeyerandWilliamR.Nelson RichardW.Fisher DeputyDirectors,Divisionof MonetaryAffairs, Boardof Governors NarayanaKocherlakota LorettaJ.Mester AndreasLehnert DeputyDirector,Officeof FinancialStabilityPolicy CharlesI.Plosser andResearch,Boardof Governors JeromeH.Powell AndrewFigura,DavidReifschneider, andStaceyTevlin DanielK.Tarullo SpecialAdviserstotheBoard,Officeof Board ChristineCumming,CharlesL.Evans, Members,Boardof Governors JeffreyM.Lacker,DennisP.Lockhart, TrevorA.Reeve andJohnC.Williams SpecialAdvisertotheChair,Officeof Board AlternateMembersof theFederalOpenMarket Members,Boardof Governors Committee LindaRobertson JamesBullard,EstherL.George, AssistanttotheBoard,Officeof BoardMembers, andEricRosengren Boardof Governors Presidentsof theFederalReserveBanksof St.Louis, KansasCity,andBoston,respectively ChristopherJ.Erceg SeniorAssociateDirector,Divisionof International WilliamB.English Finance,Boardof Governors SecretaryandEconomist MichaelT.Kiley MatthewM.Luecke SeniorAdviser,Divisionof Researchand DeputySecretary Statistics,and MichelleA.Smith SeniorAssociateDirector,Officeof Financial AssistantSecretary StabilityPolicyandResearch, Boardof Governors ScottG.Alvarez GeneralCounsel EllenE.MeadeandJoyceK.Zickler SeniorAdvisers,Divisionof MonetaryAffairs, StevenB.Kamin Boardof Governors Economist DavidW.Wilcox 1 AttendedthejointsessionoftheFederalOpenMarketCom- Economist mitteeandtheBoardofGovernors.

262 101stAnnualReport|2014 DanielM.Covitz,EricM.Engen, Developments in Financial Markets and andDianaHancock the Federal Reserve’s Balance Sheet AssociateDirectors,Divisionof Researchand Statistics,Boardof Governors Inajointsessionof theFederalOpenMarketCommittee(FOMC)andtheBoardof Governorsof the DavidLopez-Salido FederalReserveSystem,themanagerof theSystem DeputyAssociateDirector,Divisionof Monetary OpenMarketAccount(SOMA)reportedondevel- Affairs,Boardof Governors opmentsindomesticandforeignfinancialmarketsas JohnJ.Stevens wellasSystemopenmarketoperationsconducted DeputyAssociateDirector,Divisionof Researchand duringtheperiodsincetheCommitteemetonOcto- Statistics,Boardof Governors ber28–29,2014.Inaddition,themanagerreviewed theimplicationsof recentforeigncentralbankpolicy StephanieR.Aaronson actionsfortheinternationalportionof theSOMA AssistantDirector,Divisionof Researchand portfolio.Themanageralsoprovidedanupdateon Statistics,Boardof Governors staff workrelatedtopotentialarrangementsthat RobertJ.Tetlow wouldallowdepositoryinstitutionstopledgefunds Adviser,Divisionof MonetaryAffairs, heldinasegregatedaccountattheFederalReserveas Boardof Governors collateralinborrowingtransactionswithprivate creditorsandwhichcouldpotentiallyprovidean ElizabethKlee additionalsupplementarytoolduringpolicynormal- SectionChief,Divisionof MonetaryAffairs, ization.Afterfurtherreview,staff analysissuggested Boardof Governors thatsuchaccountsinvolvedanumberof operational, KatieRoss1 regulatory,andpolicyissues.Theseissuesraised Manager,Officeof theSecretary, questionsabouttheseaccounts’possibleeffectiveness Boardof Governors thatwouldbedifficulttoresolveinatimelyfashion. Itwasthereforedecidedthatfurtherworktoimple- AchillesSangsterII mentsuchaccountswouldbeshelvedfornow. InformationManagementAnalyst,Divisionof MonetaryAffairs,Boardof Governors Thedeputymanagerfollowedwithadiscussionof KellyJ.Dubbert theoutcomesof recenttestsof supplementarynor- FirstVicePresident,FederalReserveBankof malizationtools,namelytheTermDepositFacility KansasCity (TDF)andtermandovernightreverserepurchase agreements(termRRPsandONRRPs,respectively). DavidAltigandAlbertoG.Musalem RegardingtheTDFtesting,theintroductionof an ExecutiveVicePresidents,FederalReserveBanksof earlywithdrawaloptionledtosignificantincreasesin AtlantaandNewYork,respectively thenumberof participatingdepositoryinstitutions MichaelDotsey,GeoffreyTootell, andintake-uprelativetoearlieroperationswithout andChristopherJ.Waller thisfeature.Asexpected,bothparticipationand SeniorVicePresidents,FederalReserveBanksof take-upintheoperationscontinuedtobesensitiveto Philadelphia,Boston,andSt.Louis,respectively theofferingrateandmaximumindividualaward amount.TheOpenMarketDesksuccessfullycon- HesnaGenay,DouglasTillett, ductedthefirsttwoof fourpreannouncedtermRRP RobertG.Valletta,andAlexanderL.Wolman operationsextendingacrosstheendof theyearto VicePresidents,FederalReserveBanksof helpaddressexpecteddownwardpressuresonshort- Chicago,Chicago,SanFrancisco,andRichmond, termrates.Commentaryfrommarketparticipants respectively suggestedthattheseoperationsmayhelpalleviate WillemVanZandweghe someof thevolatilityinshort-termratesthatwould AssistantVicePresident,FederalReserveBankof otherwisebeexpectedaroundtheyear-end.Regard- KansasCity ingtheONRRPtesting—duringwhichtheoffered

Minutesof FederalOpenMarketCommitteeMeetings|December 263 ratewasvariedbetween3and10basispoints—in- theoverallsizelimit.TheChairmustapprove creasesinofferedratesappearedtoputsomeupward anychangeintheofferingratewithintherange pressureonunsecuredmoneymarketrates,asantici- specifiedin(i)andanychangestotheperpated,andtheofferedratecontinuedtoprovidea counterpartyandoverallsizelimitssubjectto softfloorforsecuredrates.Changesinthespread thelimitsspecifiedin(iii)and(iv).TheSystem betweentheratepaidonreservesandtheONRRP OpenMarketAccountmanagerwillnotifythe offeredratedidnotappeartoaffectthevolumeof FOMCinadvanceaboutanychangestothe activityinthefederalfundsmarket.Whilethetestsof offeringrate,per-counterpartylimit,oroverall ONRRPshadbeeninformative,thestaff suggested sizelimitappliedtooperations.Theseoperathatadditionaltestingcouldfurtherimproveunder- tionsshallbeauthorizedforoneadditionalyear standingof howthissupplementarytoolcouldbe beyondthepreviouslyauthorizedenddate— usedtoachievegreatercontrolof thefederalfunds thatis,throughJanuary29,2016.” rateduringpolicynormalization.Accordingly,participantsdiscussedadraftresolutiontoextendthe Byunanimousvote,theCommitteeratifiedthe Desk’sauthoritytoconducttheONRRPexercise Desk’sdomestictransactionsovertheintermeeting for12monthsbeyondtheexpirationof thecurrent period.TherewerenointerventionoperationsinforauthorizationonJanuary30,2015.Itwasnotedthat eigncurrenciesfortheSystem’saccountoverthe aone-yearextensiontowhathadbeenaone-year intermeetingperiod. testingprogramwasapracticalstepandsignaled nothingabouteitherthetimingof thestartof policy TheBoardmeetingconcludedattheendof thedisnormalizationorhowlonganONRRPfacility cussionof developmentsinfinancialmarketsandthe mightbeneeded. FederalReserve’sbalancesheet. Followingthediscussionof theextensionof ON Staff Review of the Economic Situation RRPtestoperations,theCommitteeunanimously approvedthefollowingresolution: TheinformationreviewedfortheDecember16–17 meetingsuggestedthateconomicactivitywas “TheFederalOpenMarketCommittee(FOMC) increasingatamoderatepaceinthefourthquarter authorizestheFederalReserveBankof New andthatlabormarketconditionshadimprovedfur- Yorktoconductaseriesof overnightreverse ther.Consumerpriceinflationcontinuedtorun repurchaseoperationsinvolvingU.S.govern- belowtheFOMC’slonger-runobjectiveof 2percent, mentsecuritiesforthepurposeof furtherassess- partlyrestrainedbydecliningenergyprices.Marketingtheappropriatestructureof suchoperations basedmeasuresof inflationcompensationmoved insupportingtheimplementationof monetary lower,butsurveymeasuresof longer-runinflation policyduringnormalization.Thereverserepur- expectationsremainedstable. chaseoperationsauthorizedbythisresolution shallbe(i)conductedatanofferingratethat Totalnonfarmpayrollemploymentexpandedin mayvaryfromzerotofivebasispoints;(ii)for OctoberandNovemberatafasterpacethaninthe anovernighttermorsuchlongertermasiswar- thirdquarter.Theunemploymentrateedgeddownto rantedtoaccommodateweekend,holiday,and 5.8percentinOctoberandremainedatthatlevelin similartradingconventions;(iii)subjecttoaper- November.Boththelaborforceparticipationrate counterpartylimitof upto$30billionperday; andtheemployment-to-populationratioroseslightly, (iv)subjecttoanoverallsizelimitof upto andtheshareof workersemployedparttimeforeco- $300billionperday;and(v)awardedtoallsub- nomicreasonsdeclined.Therateof private-sector mitters(A)atthespecifiedofferingrateif the jobopeningsstayed,onbalance,atitsrecentelevated sumof thebidsreceivedislessthanorequalto levelinSeptemberandOctober,andtheratesof hirtheoverallsizelimit,or(B)atthestop-outrate, ingandof quitssteppeduponnet. determinedbyevaluatingbidsinascending orderbysubmittedrateuptothepointatwhich IndustrialproductionroseinOctoberandNovember, thetotalquantityof bidsequalstheoverallsize ledbystrongincreasesinmanufacturingoutput. limit,withallbidsbelowthisrateawardedinfull Automakers’schedulesindicatedthatthepaceof atthestop-outrateandallbidsatthestop-out lightmotorvehicleassemblieswouldmoveupsomerateawardedonaproratabasis,if thesumof whatinthefirstquarter,andbroaderindicatorsof thecounterpartyoffersreceivedisgreaterthan manufacturingproduction,suchasthereadingson

264 101stAnnualReport|2014 newordersfromthenationalandregionalmanufac- remainingwiderthanthemonthlyaverageinthe turingsurveys,weregenerallyconsistentwithsolid thirdquarter,realnetexportslookedtobedeclining gainsinfactoryoutputoverthenearterm. inthefourthquarter. Realpersonalconsumptionexpenditures(PCE) BothtotalU.S.consumerpriceinflation,asmeasured appearedtoberisingrobustlyinthefourthquarter. bythePCEpriceindex,andcoreinflation,asmeas- Thecomponentsof thenominalretailsalesdataused uredbyPCEpricesexcludingfoodandenergy,were toconstructestimatesof PCErosestronglyinOcto- about1½percentoverthe12monthsendinginOctoberandNovember,andlightmotorvehiclesales ber;consumerenergypricesdeclined,whileconsumer increasednoticeably.Keyfactorsthatinfluence foodpricesrosemorethanoverallprices.Overthe householdspendingpointedtowardfurthersolid 12monthsendinginNovember,totalinflationas PCEgrowth.Realdisposableincomerosefurtherin measuredbytheconsumerpriceindex(CPI)was October,energypricescontinuedtodecline,house- 1¼percent,partlyreflectingthefurtherdeclinein holds’networthlikelyincreasedashomevalues energyprices,whilecoreCPIinflationwas1¾peradvanced,andconsumersentimentinearlyDecem- cent.Measuresof expectedlong-runinflationfroma berfromtheThomsonReuters/Universityof Michi- varietyof surveys,includingtheMichigansurvey,the ganSurveysof Consumerswasatitshighestlevel BlueChipEconomicIndicators,theSurveyof Professincebeforethemostrecentrecession. sionalForecasters,andtheDesk’sSurveyof Primary Dealers,remainedstable.Incontrast,market-based Thepaceof activityinthehousingsectorgenerally measuresof inflationcompensationmovedlower. remainedslow.Bothstartsandpermitsof new single-familyhomesincreasedonlyalittle,onbal- Laborcompensationcontinuedtoincreaseonlya ance,inOctoberandNovember.Startsof multifam- littlefasterthanconsumerprices.Compensationper ilyunitsdeclined,onnet,overthepasttwomonths. hourinthenonfarmbusinesssectorroseabout2per- Salesof newandexistinghomesrosemodestlyin centovertheyearendinginthethirdquarter.Similar October. ratesof increasewereobservedfortheemployment costindexoverthesameyear-longperiodandfor Realprivateexpendituresforbusinessequipmentand averagehourlyearningsforallemployeesoverthe intellectualpropertyappearedtobedeceleratingin 12monthsendinginNovember. thefourthquarter.Nominalordersandshipmentsof nondefensecapitalgoodsexcludingaircraftdeclined Overallgrowthinforeignrealgrossdomesticproduct inOctober.However,newordersforthesecapital (GDP)remainedsubduedinthethirdquarter.Inthe goodsremainedabovethelevelof shipments,and advancedforeigneconomies,realGDPcontracted otherforward-lookingindicators,suchasnational forasecondconsecutivequarterinJapan,roseonly andregionalsurveysof businessconditions,were slightlyintheeuroarea,butcontinuedtoexpand generallyconsistentwithmodestnear-termgainsin moderatelyinCanadaandtheUnitedKingdom.In businessequipmentspending.Firms’nominalspend- theemergingmarketeconomies,economicgrowth ingfornonresidentialstructuresedgeddowninOcto- slowedinMexicointhethirdquarterandremained berafterrisingslightlyinthethirdquarter. sluggishinBrazil;economicgrowthinChinalikely slowedmoderatelyinthefourthquarter.Oilprices DataforOctoberandNovemberpointedtowarda continuedtodecline,likelyreflectingfavorablesupply declineinrealfederalgovernmentpurchasesinthe developmentsaswellassomeweakeninginglobal fourthquarterafterasurprisinglylargethird-quarter demand.Inflationintheadvancedforeigneconomies increase.Realstateandlocalgovernmentpurchases remainedquitelowduringtheintermeetingperiod, appearedtoberisingmodestlyinthefourthquarter partlybecauseof thefallinoilprices.Decliningoil astheirpayrollsandconstructionexpenditures priceshadasmallereffectoninflationintheemergincreasedalittleinrecentmonths. ingmarketeconomies,reflectingthegreaterprevalenceof administeredenergyprices. TheU.S.internationaltradedeficitwaslittlechanged inOctober,asexportsandimportsbothrose.The Staff Review of the Financial Situation gainsinexportswereconcentratedinaircraftand othercapitalgoods,andtheincreaseinimports Overtheintermeetingperiod,marketparticipants reflectedapickupinpurchasesof automotiveprod- becameabitmoreoptimisticaboutU.S.economic uctsandcomputers.ButwiththeOctoberdeficit prospectswhilealsorespondingtoeconomicand

Minutesof FederalOpenMarketCommitteeMeetings|December 265 policydevelopmentsabroad.Thesharpdeclineinoil expandbriskly.Inaddition,issuanceof bothleverpricesweighedoninflationcompensationandlefta agedloansandcollateralizedloanobligationswere mixedimprintonotherassetmarkets.Onnet,yields stronginOctoberandNovember. onlonger-termTreasurysecuritiesfell,corporate bondspreadswidened,equitypriceswerelittle Financingforcommercialrealestate(CRE)remained changed,andtheforeignexchangevalueof thedollar broadlyavailable.CREloansonbanks’books appreciated. expandedatamoderatepaceinOctoberandNovember,andissuanceof commercialmortgage-backed Economicdatareleasesreinforcedtheviewsof mar- securities(CMBS)wasstrong.Accordingtothe ketparticipantsthattheU.S.economicrecoverycon- DecemberSeniorCreditOfficerOpinionSurveyon tinuedtogainmomentum.Inaddition,investors DealerFinancingTerms,broker-dealershadeased appearedtoreadtheOctoberFOMCstatementas somewhatallof thetermsonwhichtheyfinance suggestingaslightlylessaccommodativepathfor CMBSformost-favoredclients. futuremonetarypolicythantheyhadpreviously expected. Measuresof residentialmortgagelendingconditions werelittlechangedovertheintermeetingperiod. ResultsfromtheDecemberSurveyof PrimaryDeal- Creditconditionsformortgagesremainedtightfor ersindicatedthatthedealers’expectationsforthe borrowerswithless-than-pristinecredit.Interestrates timingof thefirstincreaseinthefederalfundstarget on30-yearfixed-ratemortgagesdeclined,consistent rangeandthesubsequentpolicypathwerelittle withthemovesinlonger-termTreasuryyields.RefichangedfromtheOctobersurvey.Theaverageprob- nancingactivitywassubdued. abilitydistributionof theexpecteddateof liftoff continuedtoimplythatthemostlikelydatewouldbe Financingconditionsinconsumercreditmarkets aroundthemiddleof 2015,withthedistributionhav- generallystayedaccommodative.Autoandstudent ingnarrowedslightlycomparedwiththeprevious loanbalancesexpandedrobustlyinOctober,and survey. revolvingcreditbalancesincreasedatamoderate pace.Issuanceof consumerasset-backedsecurities Longer-termnominalTreasuryyieldsdeclinedsig- wasstronginthefourthquarter. nificantly,onbalance,overtheintermeetingperiod. Measuresof inflationcompensationbasedonTreas- Reflectingdivergenteconomicandmonetarypolicy uryInflation-ProtectedSecuritiesandoninflation prospectsintheUnitedStatesandabroad,thedollar swapsdecreased,reportedlyreflecting,inpart,the appreciatedsubstantiallyagainstmostcurrencies declineinoilpricesandincreasedconcernsabout overtheintermeetingperiod.Thedollarmovedup globaleconomicgrowth. significantlyagainsttheyenastheBankof Japan expandeditsassetpurchaseprogramaswellas BroadU.S.equitypriceindexeswereabout againstthecurrenciesof oilexportersasoilprices unchangedovertheintermeetingperiod.Option- declined.Overtheperiod,marketparticipants impliedvolatilityforone-monthreturnsontheS&P seemedtoconcludethatmonetarypolicyinEurope 500index—theVIX—rosesharplylateintheperiod waslikelytobeputonamoreaccommodativepath, tolevelsclosetothoseinmid-October.Investment- and10-yearyieldsinGermanyandtheUnitedKingandspeculative-gradecorporatebondspreadswid- domdeclinedfurther.AsGermanyieldsfelltonew enedovertheperiod.Spreadsonspeculative-grade recordlows,spreadsof mosteuro-areaperipheral bondsforenergy-relatedfirmsrosesubstantially bondsoverthoseyieldsnarrowed.Changesinstock becauseof thepronounceddeclineinoilprices. pricesabroadweremixed,onnet,overtheintermeetingperiod:TherewerelargeincreasesinJapanand Businessfinancingflowswererobustovertheinter- Chinaalongwithlargedecreasesinoil-exporting meetingperiod.Grossbondissuancebynonfinancial countries,suchasCanada,Mexico,andRussia. corporationswasthestrongestinmorethanayear. Nonfinancialcommercialpaperoutstanding Lateintheintermeetingperiod,followingthesharp expandednoticeablyinNovember,morethancom- fallinoilprices,theRussianrubledepreciatedrapidly pensatingforaslowdowninOctober.Commercial andsubstantially,promptingtheRussiancentral andindustrialloansonbanks’bookscontinuedto bank,whichhadalreadyraiseditspolicyrateinearly

266 101stAnnualReport|2014 November,toraisetheratetwicemoreinfivedays, slackinlaborandproductmarketsanticipatedto withthemostrecentincreasefollowinganunsched- diminishslowly. uledpolicymeetingonDecember15. Thestaff viewedtheuncertaintyarounditsprojec- Staff Economic Outlook tionsforrealGDPgrowth,theunemploymentrate, andinflationassimilartotheaverageoverthepast Inthestaff forecastpreparedfortheDecember 20years.TheriskstotheforecastforrealGDP FOMCmeeting,realGDPgrowthinthesecondhalf growthandinflationwereviewedastiltedalittleto of 2014washigherthanintheprojectionforthe thedownside,reflectingthestaff’sassessmentthat Octobermeeting,largelyreflectingstronger-than- neithermonetarypolicynorfiscalpolicywaswell expecteddataforPCE.Nevertheless,realGDP positionedtohelptheeconomywithstandadverse growthwasanticipatedtoslowinthefourthquarter shocks.Atthesametime,thestaff viewedtherisks asbothnetexportsandfederalgovernmentpur- arounditsoutlookfortheunemploymentrateas chases—importantpositivecontributorstorealGDP roughlybalanced. growthinthethirdquarter—wereanticipatedto dropback.Thestaff’smedium-termforecastforreal Participants’ Views on Current Conditions GDPgrowthwasrevisedupalittleonnet.Thepro- and the Economic Outlook jectedpathforoilpriceswaslower,andthetrajectory forequitypriceswasabithigher.Andalthoughthe InconjunctionwiththisFOMCmeeting,members projectedpathof thedollarwasrevisedup,thestaff of theBoardof GovernorsandtheFederalReserve reviseddownitsestimateof howmuchtheapprecia- Bankpresidentssubmittedtheirprojectionsof the tionof thedollarsincelastsummerwouldrestrain mostlikelyoutcomesforrealGDPgrowth,the projectedgrowthinrealGDP.Thestaff continuedto unemploymentrate,inflation,andthefederalfunds forecastthatrealGDPwouldexpandatafasterpace rateforeachyearfrom2014through2017andover in2015and2016thanithadthisyearandthatit thelongerrun,conditionaloneachparticipant’s wouldrisemorequicklythanpotentialoutput,sup- judgmentof appropriatemonetarypolicy.The portedbyincreasesinconsumerandbusinessconfi- longer-runprojectionsrepresenteachparticipant’s denceandapickupinforeigneconomicgrowth, assessmentof theratetowhicheachvariablewould alongwithmonetarypolicythatwasassumedto beexpectedtoconverge,overtime,underappropriate remainhighlyaccommodativeforsometime.In monetarypolicyandintheabsenceof furthershocks 2017,realGDPgrowthwasprojectedtobeginslow- totheeconomy.Theseeconomicprojectionsand ingtoward,buttoremainabove,therateof potential policyassessmentsaredescribedintheSummaryof outputgrowthasthenormalizationof monetary EconomicProjections(SEP),whichisattachedasan policywasassumedtoproceed.Theexpansionin addendumtotheseminutes. economicactivityoverthemediumtermwasanticipatedtoslowlyreduceresourceslack,andtheunem- Intheirdiscussionof theeconomicsituationandthe ploymentratewasexpectedtodeclinegraduallyand outlook,meetingparticipantsregardedtheinformatotemporarilymoveslightlybelowthestaff’sesti- tionreceivedovertheintermeetingperiodassupmateof itslonger-runnaturalrate. portingtheirviewthateconomicactivitywas expandingatamoderatepace.Labormarketcondi- Thestaff’sforecastforinflationintheneartermwas tionsimprovedfurther,withsolidjobgainsanda reviseddowntoreflectthefurtherlargeenergyprice lowerunemploymentrate;participantsjudgedthat declinessincetheOctoberFOMCmeeting,which theunderutilizationof laborresourceswascontinuwereanticipatedtoleadtoatemporarydecreasein ingtodiminish.Participantsexpectedthat,overthe thetotalPCEpriceindexlatethisyearandearlynext mediumterm,realeconomicactivitywouldincrease year.Thestaff’sinflationprojectionforthenextfew atapacesufficienttoleadtofurtherimprovements yearswasessentiallyunchanged;thestaff continued inlabormarketindicatorstowardlevelsconsistent toprojectthatinflationwouldmoveupgradually withtheCommittee’sobjectiveof maximumemploytoward,butrunsomewhatbelow,theCommittee’s ment.Inflationwascontinuingtorunbelowthe longer-runobjectiveof 2percent.Nevertheless,infla- Committee’slonger-runobjective,reflectinginpart tionwasprojectedtoreachtheCommittee’sobjective continuedreductionsinoilpricesandfallingimport overtime,withlonger-runinflationexpectations prices.Market-basedmeasuresof inflationcompenassumedtoremainstable,pricesof energyandnon- sationdeclinedfurther,whilesurvey-basedmeasures oilimportsforecasttobeginrisingnextyear,and of longer-terminflationexpectationsremained

Minutesof FederalOpenMarketCommitteeMeetings|December 267 stable.Participantsgenerallyanticipatedthatinfla- incrudeoilpriceswoulddifferacrossregions,espetionwouldrisegraduallytowardtheCommittee’s ciallyif thepricedeclinesaffectedinflationexpecta- 2percentobjectiveasthelabormarketimprovedfur- tionsandfinancialmarkets;afewparticipantssaid therandthetransitoryeffectsof lowerenergyprices thattheeffectonoverseasemploymentandoutputas andotherfactorsdissipated.Theriskstotheoutlook awholewaslikelytobepositive.Whilesomeparticiforeconomicactivityandthelabormarketwereseen pantshadloweredtheirassessmentsof theprospects asnearlybalanced.Someparticipantssuggestedthat forglobaleconomicgrowth,severalnotedthatthe therecentdomesticeconomicdatahadincreased likelihoodof furtherresponsesbypolicymakers theirconfidenceintheoutlookforgrowthgoingfor- abroadhadincreased.Severalparticipantsindicated ward.Participantsgenerallyregardedtheneteffectof thattheyexpectedslowereconomicgrowthabroadto therecentdeclineinenergypricesaslikelytobeposi- negativelyaffecttheU.S.economy,principally tiveforeconomicactivityandemployment.However, throughlowernetexports,buttheneteffectof lower manyof themthoughtthatafurtherdeteriorationin oilpricesonU.S.economicactivitywasanticipated theforeigneconomicsituationcouldresultinslower tobepositive. domesticeconomicgrowththantheycurrently expected. Participantssawbroad-basedimprovementinlabor marketconditionsovertheintermeetingperiod, Householdspendingcontinuedtoadvanceoverthe includingsolidgainsinpayrollemployment,aslight intermeetingperiod,andreportsfromcontactsin reductionintheunemploymentrate,andincreasesin severalpartsof thecountryindicatedthatrecent theratesof hiringandquits.Positivesignalswere retailorautosaleshadbeenrobust.Manypartici- alsoseeninthedeclineintheshareof workers pantspointedtorelativelyhighlevelsof consumer employedparttimeforeconomicreasonsandinthe confidenceassignalingnear-termstrengthindiscre- increaseinthelaborforceparticipationrate.These tionaryconsumerspending,andmostparticipants favorabletrendsnotwithstanding,thelevelsof these judgedthattherecentsignificantdeclineinenergy measuressuggestedtosomeparticipantsthatthere priceswouldprovideaboosttoconsumerspending. remainedmorelabormarketslackthanwasindicated Participantsalsocitedsolidgainsinpayrollemploy- bytheunemploymentratealone.However,afewothment,lowinterestrates,andthedeclineinlevelsof erscontinuedtoviewtheunemploymentrateasa householddebtrelativetoincomeasfactorsthat reliableindicatorof overalllabormarketconditions wereexpectedtosupportcontinuedgrowthincon- andsawanarrowerdegreeof laborunderutilization sumerspending.Incontrast,residentialconstruction remaining.Althoughafewparticipantssuggested continuedtobeslow,andrecentreadingsonsingle- thattherecentuptickintheemploymentcostindex familybuildingpermitssuggestedthatthissluggish- oraveragehourlyearningscouldbeatentativesign nesswaslikelytocontinueintheshortrun. of anupturninwagegrowth,mostparticipantssaw noclearevidenceof abroad-basedaccelerationin Industrycontactspointedtogenerallysolidbusiness wages.Acoupleof participants,however,pointingto conditions,withbusinessesinmanypartsof the theweakstatisticalrelationshipbetweenwageinflacountryexpressingsomeoptimismaboutprospects tionandlabormarketconditions,suggestedthatthe forfurtherimprovementin2015.Manufacturing paceof wageinflationwasprovidingrelativelylittle activitywasstrong,asindicatedbytheindexof informationaboutthedegreeof laborunderindustrialproductionandavarietyof regional utilization. reports.Informationfromsomeregionspointedtoa pickupincapitalinvestment,althoughthecontinued Participantsgenerallyanticipatedthatinflationwas declineinoilpricesledbusinesscontactstoexpecta likelytodeclinefurtherinthenearterm,reflecting slowdownindrillingactivityand,if pricesremain thereductioninoilpricesandtheeffectsof therise low,reducedcapitalinvestmentintheoilandgas intheforeignexchangevalueof thedollaronimport industries.Intheagriculturalsector,therobustfall prices.Mostparticipantssawtheseinfluencesastemharvestreportedlyloweredcropprices;operating poraryandthuscontinuedtoexpectinflationto marginsforfoodprocessingandfarmequipment movebackgraduallytotheCommittee’s2percent businesseshavebeennarrowing,puttingstresson longer-runobjectiveasthelabormarketimproved someproducers. furtherinanenvironmentof well-anchoredinflation expectations.Survey-basedmeasuresof longer-term Intheirdiscussionof theforeigneconomicoutlook, inflationexpectationsremainedstable,although participantsnotedthattheimplicationsof thedrop market-basedmeasuresof inflationcompensation

268 101stAnnualReport|2014 overthenextfiveyears,aswellasoverthefive-year ment,particularlyif declinesinoilpricesandtheperperiodbeginningfiveyearsahead,moveddownfur- sistenceof weakeconomicgrowthabroadhadasubtherovertheintermeetingperiod.Participantsdis- stantialnegativeeffectonglobalfinancialmarketsor cussedvariousexplanationsforthedeclineinmarket- if foreignpolicyresponseswereinsufficient.Howbasedmeasures,includingafallinexpectedfuture ever,thedownsideriskswereseenasnearlybalanced inflation,reductionsininflationriskpremiums,and byriskstotheupside.Severalparticipants,pointing higherliquidityandotherpremiumsthatmightbe toindicatorsof consumerandbusinessconfidenceas influencingthepricesof TreasuryInflation-Protected wellastothesolidrecordof payrollemployment Securitiesandinflationderivatives.Model-based gainsin2014,suggestedthattherealeconomymay decompositionsof inflationcompensationseemedto endupshowingmoremomentumthananticipated, supportthemessagefromsurveysthatlonger-term whileafewothersthoughtthattheboosttodomestic inflationexpectationshadremainedstable,although spendingcomingfromlowerenergypricescouldturn itwasobservedthattheseresultsweresensitivetothe outtobequitelarge.Withregardtoinflation,anumassumptionsunderlyingtheparticularmodelsused. berof participantssawariskthatitcouldrunpersis- Itwasnotedthatevenif thedeclinesininflation tentlybelowtheir2percentobjective,withsome compensationreflectedlowerinflationriskpremiums expressingconcernthatsuchanoutcomecould ratherthanareductioninexpectedinflation,policy- underminethecredibilityof theCommittee’scommakersmightstillwanttotakethemintoaccount mitmenttothatobjective.Someparticipantswere becausesuchchangescouldreflectincreasedcon- worriedthattherecentsubstantialfallinenergy cernsonthepartof investorsaboutadverseout- pricescouldleadtoareductioninlonger-terminflacomesinwhichlowinflationwasaccompaniedby tionexpectations,whileotherswereconcernedthat weakeconomicactivity.Intheend,participantsgen- thedeclineinmarket-basedmeasuresof inflation erallyagreedthatitwouldtakemoretimeandanaly- compensationmightreflect,inpart,thatsucha sistodrawdefinitiveconclusionsregardingtherecent declinehadalreadybegun.However,acoupleof othbehaviorof inflationcompensation. ersnotedthatif theunemploymentratecontinuedto declinequickly,wageandpriceinflationcouldrise Intheirdiscussionof financialmarketdevelopments, morethangenerallyanticipated. participantsobservedthatmovementsinassetprices overtheintermeetingperiodappearedtohavebeen Intheirdiscussionof communicationsregardingthe importantlyinfluencedbyconcernsaboutprospects pathof thefederalfundsrateoverthemediumterm, forforeigneconomicgrowthandbyassociated mostparticipantsconcludedthatupdatingtheComexpectationsof monetarypolicyactionsinEurope mittee’sforwardguidancewouldbeappropriatein andJapan.Acoupleof participantsremarkedonthe lightof theconclusionof theassetpurchaseprogram apparentdisparitybetweenmarket-basedmeasures inOctoberandthefurtherprogressthattheeconomy of expectedfutureU.S.short-terminterestratesand hadmadetowardtheCommittee’sobjectives.Most projectionsforshort-termratesbasedonsurveysor participantsagreedthatitwouldbeusefultostate basedonthemedianof federalfundsrateprojections thattheCommitteejudgesthatitcanbepatientin intheSEP.Oneparticipantnotedthatverylowterm beginningtonormalizethestanceof monetary premiumsinmarket-basedmeasuresmightexplainat policy;theynotedthatsuchlanguagewouldprovide leastsomeportionof thisgap.Anotherpossibility moreflexibilitytoadjustpolicyinresponsetoincomwasthatmarket-basedmeasuresmightbeassigning inginformationthanthepreviouslanguage,which considerableweighttolessfavorableoutcomesfor hadtiedthebeginningof normalizationtotheendof theU.S.economyinwhichthefederalfundsrate theassetpurchaseprogram.Thisapproachwasseen wouldremainlowforquitesometimeorfallbackto asconsistent,giventheCommittee’sassessmentof verylowlevelsinthefuture,whereastheprojections theeconomicoutlookatthecurrentmeeting,with intheSEPreportthepathsforthefederalfundsrate theCommittee’spreviousstatement.Mostparticithatparticipantsseeasappropriategiventheirviews pantsthoughtthereferencetopatienceindicatedthat of themostlikelyevolutionof inflationandreal theCommitteewasunlikelytobeginthenormalizaactivity. tionprocessforatleastthenextcoupleof meetings. Someparticipantsregardedtherevisedlanguageas Participantsdiscussedanumberof riskstotheeco- riskinganunwarrantedconcentrationof market nomicoutlook.Manyparticipantsregardedthe expectationsforthetimingof theinitialincreasein internationalsituationasanimportantsourceof thefederalfundsratetargetonanarrowrangeof downsideriskstodomesticrealactivityandemploy- datesaroundmid-2015,andasnotadequatelyallow-

Minutesof FederalOpenMarketCommitteeMeetings|December 269 ingforthepossibilitythateconomicconditions expectedthat,withappropriatemonetarypolicy mightevolveinawaythatcouldcallforeitheran accommodation,economicactivitywouldcontinue earlieroralaterliftoff date.Afewparticipantssug- toexpandatamoderatepace,withlabormarket gestedthatthestatementshouldfocusontheeco- indicatorsmovingtowardlevelstheCommittee nomicconditionsthatwouldlikelyaccompanythe judgesconsistentwithitsdualmandate.TheComdecisiontoraiserates.Participantsgenerallystressed mitteealsoexpectedthatinflationwouldrisegradutheneedtocommunicatethatthetimingof thefirst allytoward2percentasthelabormarketimproves increaseinthefederalfundsratewoulddependon furtherandthetransitoryeffectsof lowerenergy theincomingdataandtheirimplicationsforthe pricesandotherfactorsdissipate. Committee’sassessmentof progresstowarditsobjectivesof maximumemploymentandinflationof Intheirdiscussionof languageforthepostmeeting 2percent.Withlowerenergypricesandthestronger statement,membersgenerallyagreedthatthey dollarlikelytokeepinflationbelowtargetforsome shouldacknowledgethebroadimprovementinlabor time,itwasnotedthattheCommitteemightbegin marketconditionsovertheintermeetingperiodas normalizationatatimewhencoreinflationwasnear wellastheirjudgmentthatlabormarketslackcontincurrentlevels,althoughinthatcircumstancepartici- uedtodiminish.Inaddition,theydecidedthatthe pantswouldwanttobereasonablyconfidentthat statementshouldnotethatthelowlevelof inflation inflationwillmovebacktoward2percentovertime. seenof latepartlyreflectedtherecentdeclinein energyprices.TheCommitteemodifiedtheprevious Afewparticipantsspokeof theimportanceof statementlanguagetomakeclearthatitexpectsthat explainingtothepublichoweconomicandfinancial inflationwillrisegraduallytoward2percentasthe conditionswouldinfluencetheCommittee’sdeci- labormarketimprovesfurtherandthetransitory sionsregardingtheappropriatepathforthefederal effectsof lowerenergypricesandotherfactorsdissifundsrateafternormalizationbegins.Itwasnoted pate.Giventheuncertaintiesabouttheoutlookfor thattotheextentthatsuchguidancecanbeeffec- inflation,membersdecidedthatitwouldbeappropritivelycommunicated,theprecisedateof liftoff atetoindicatethattheCommitteecontinuestomonibecomeslessimportantforeconomicoutcomes.In torinflationdevelopmentsclosely. thisregard,someparticipantsemphasizedthatpolicy willstillbehighlyaccommodativeforatimeafterthe TheCommitteeagreedtomaintainthetargetrange firstincreaseinthefederalfundsratetarget,giventhe forthefederalfundsrateat0to¼percentandto differencebetweenthecurrentsettingof thefederal reaffirmtheindicationinthestatementthatthe fundsratetargetrangeandtheCommittee’sviewof Committee’sdecisionabouthowlongtomaintain thelonger-runnormalrateaswellastheFederal thecurrenttargetrangeforthefederalfundsrate Reserve’selevatedholdingsof longer-termsecurities. woulddependonitsassessmentof actualand expectedprogresstowarditsobjectivesof maximum Committee Policy Action employmentand2percentinflation.Mostmembers agreedtoupdatetheCommittee’sforwardguidance Intheirdiscussionof monetarypolicyfortheperiod withlanguageindicatingthatitjudgesthatitcanbe ahead,membersjudgedthatinformationreceived patientinbeginningtonormalizethestanceof monsincetheFOMCmetinOctoberindicatedthateco- etarypolicy.Inordertoavoidthemisinterpretation nomicactivitywasexpandingatamoderatepace. thatthisnewwordingreflectedachangeintheCom- Labormarketconditionshadimprovedfurther,with mittee’spolicyintentions,thestatementincludeda solidjobgainsandalowerunemploymentrate;taken sentenceindicatingthattheCommitteeseesthis asawhole,labormarketindicatorssuggestedthatthe guidanceasconsistentwithitspreviousstatement underutilizationof laborresourceswascontinuingto thatitlikelywillbeappropriatetomaintainthe0to diminish.Householdspendingwasrisingmoderately ¼percenttargetrangeforthefederalfundsratefora andbusinessfixedinvestmentwasadvancing,while considerabletimefollowingtheendof itsassetpurtherecoveryinthehousingsectorremainedslow. chaseprograminOctober,especiallyif projected InflationhadcontinuedtorunbelowtheCommit- inflationcontinuestorunbelowtheCommittee’s tee’slonger-runobjective,inpartreflectingdeclines 2percentlonger-rungoal,andprovidedthatlongerinenergyprices.Market-basedmeasuresof inflation terminflationexpectationsremainwellanchored. compensationhaddeclinedsomewhatfurther,but Twomembersthoughtthatthisforwardguidancedid survey-basedmeasuresof longer-terminflation nottakesufficientaccountof theprogressthathad expectationshadremainedstable.TheCommittee beenmadetowardtheCommittee’sobjectives,while

270 101stAnnualReport|2014 onewantedtostrengthentheforwardguidancein of ongoingdevelopmentsregardingtheSystem’s ordertounderscoretheCommittee’scommitmentto balancesheetthatcouldaffecttheattainment its2percentinflationobjective.Membersagreedthat overtimeof theCommittee’sobjectivesof theirpolicydecisionswouldremaindatadependent, maximumemploymentandpricestability.” andtheycontinuedtoincludewordinginthestatementnotingthatif incominginformationindicates Thevoteencompassedapprovalof thestatement fasterprogresstowardtheCommittee’semployment belowtobereleasedat2:00p.m.: andinflationobjectivesthantheCommitteenow expects,thenincreasesinthetargetrangeforthefed- “InformationreceivedsincetheFederalOpen eralfundsratewouldlikelyoccursoonerthancur- MarketCommitteemetinOctobersuggeststhat rentlyanticipated,and,similarly,thatif progress economicactivityisexpandingatamoderate provesslowerthanexpected,thenincreasesinthetar- pace.Labormarketconditionsimprovedfurther, getrangewouldlikelyoccurlaterthancurrently withsolidjobgainsandalowerunemployment anticipated.TheCommitteedecidedtomaintainits rate.Onbalance,arangeof labormarketindicapolicyof reinvestingprincipalpaymentsfromits torssuggeststhatunderutilizationof labor holdingsof agencydebtandagencymortgage- resourcescontinuestodiminish.Household backedsecuritiesinagencymortgage-backedsecuri- spendingisrisingmoderatelyandbusinessfixed tiesandof rollingovermaturingTreasurysecurities investmentisadvancing,whiletherecoveryin atauction.Thispolicy,bykeepingtheCommittee’s thehousingsectorremainsslow.Inflationhas holdingsof longer-termsecuritiesatsizablelevels, continuedtorunbelowtheCommittee’slongershouldhelpmaintainaccommodativefinancialcon- runobjective,partlyreflectingdeclinesinenergy ditions.Finally,theCommitteealsodecidedtoreiter- prices.Market-basedmeasuresof inflationcomateitsexpectationthat,evenafteremploymentand pensationhavedeclinedsomewhatfurther; inflationarenearmandate-consistentlevels,eco- survey-basedmeasuresof longer-terminflation nomicconditionsmay,forsometime,warrantkeep- expectationshaveremainedstable. ingthetargetfederalfundsratebelowlevelsthe Committeeviewsasnormalinthelongerrun.Atthe Consistentwithitsstatutorymandate,theComconclusionof thediscussion,theCommitteevotedto mitteeseekstofostermaximumemployment authorizeanddirecttheFederalReserveBankof andpricestability.TheCommitteeexpectsthat, NewYork,untilitwasinstructedotherwise,to withappropriatepolicyaccommodation,ecoexecutetransactionsintheSOMAinaccordance nomicactivitywillexpandatamoderatepace, withthefollowingdomesticpolicydirective: withlabormarketindicatorsmovingtowardlevelstheCommitteejudgesconsistentwithitsdual “Consistentwithitsstatutorymandate,theFed- mandate.TheCommitteeseestheriskstothe eralOpenMarketCommitteeseeksmonetary outlookforeconomicactivityandthelabor andfinancialconditionsthatwillfostermaxi- marketasnearlybalanced.TheCommittee mumemploymentandpricestability.Inparticu- expectsinflationtorisegraduallytoward2perlar,theCommitteeseeksconditionsinreserve centasthelabormarketimprovesfurtherand marketsconsistentwithfederalfundstradingin thetransitoryeffectsof lowerenergypricesand arangefrom0to¼percent.TheCommittee otherfactorsdissipate.TheCommitteecontindirectstheDesktoundertakeopenmarket uestomonitorinflationdevelopmentsclosely. operationsasnecessarytomaintainsuchconditions.TheCommitteedirectstheDesktomain- Tosupportcontinuedprogresstowardmaxitainitspolicyof rollingovermaturingTreasury mumemploymentandpricestability,theComsecuritiesintonewissuesanditspolicyof rein- mitteetodayreaffirmeditsviewthatthecurrent vestingprincipalpaymentsonallagencydebt 0to¼percenttargetrangeforthefederalfunds andagencymortgage-backedsecuritiesin rateremainsappropriate.Indetermininghow agencymortgage-backedsecurities.TheCom- longtomaintainthistargetrange,theCommitmitteealsodirectstheDesktoengageindollar teewillassessprogress—bothrealizedand rollandcouponswaptransactionsasnecessary expected—towarditsobjectivesof maximum tofacilitatesettlementof theFederalReserve’s employmentand2percentinflation.Thisassessagencymortgage-backedsecuritiestransactions. mentwilltakeintoaccountawiderangeof TheSystemOpenMarketAccountmanagerand information,includingmeasuresof labormarket thesecretarywillkeeptheCommitteeinformed conditions,indicatorsof inflationpressuresand

Minutesof FederalOpenMarketCommitteeMeetings|December 271 inflationexpectations,andreadingsonfinancial Votingagainstthisaction:RichardW.Fisher, developments.Basedonitscurrentassessment, NarayanaKocherlakota,andCharlesI.Plosser. theCommitteejudgesthatitcanbepatientin beginningtonormalizethestanceof monetary Mr.FisheragreedthattheCommitteeshouldbe policy.TheCommitteeseesthisguidanceascon- patientinbeginningtonormalizethestanceof monsistentwithitspreviousstatementthatitlikely etarypolicy.Hedissentedbecausehesawthe willbeappropriatetomaintainthe0to¼per- improvementintheU.S.economicoutlooksince centtargetrangeforthefederalfundsratefora Octoberasindicatingthatitlikelywillbeappropriate considerabletimefollowingtheendof itsasset toincreasethefederalfundsratesoonerthanthe purchaseprograminOctober,especiallyif pro- Committee’scurrentstatementenvisions. jectedinflationcontinuestorunbelowtheCommittee’s2percentlonger-rungoal,andprovided Mr.Kocherlakotadissentedbecausehebelievedthat thatlonger-terminflationexpectationsremain theCommittee’sdecisionandstatementdidnot wellanchored.However,if incominginforma- respondtoongoingbelow-targetinflationandfalling tionindicatesfasterprogresstowardtheCom- market-basedmeasuresof longer-terminflation mittee’semploymentandinflationobjectives expectations.Inhisjudgment,thecredibilityof the thantheCommitteenowexpects,thenincreases Committee’s2percentinflationtargetwasatrisk, inthetargetrangeforthefederalfundsrateare callingforamoreaccommodativepolicystance. likelytooccursoonerthancurrentlyanticipated. Conversely,if progressprovesslowerthan Mr.Plosserdissentedfortworeasons.Hebelieved expected,thenincreasesinthetargetrangeare thattheCommittee’spolicyguidanceshouldbemore likelytooccurlaterthancurrentlyanticipated. datadependentandnotfocusontime.Inhisview, theimprovementineconomicconditionsthathas TheCommitteeismaintainingitsexistingpolicy occurredoverthecourseof theyearwasgreaterthan of reinvestingprincipalpaymentsfromitshold- anticipated,andhebelievedthatthestatement ingsof agencydebtandagencymortgage- shouldcommunicatethatthereisameasurableprobbackedsecuritiesinagencymortgage-backed abilitythatliftoff mayoccurinthefirstquarterof securitiesandof rollingovermaturingTreasury nextyear,evenif themostlikelyscenarioisfornorsecuritiesatauction.Thispolicy,bykeepingthe malizationtobeginaroundmidyear.Hefurther Committee’sholdingsof longer-termsecurities believedthatwaitingtoolongtoraiseratescould atsizablelevels,shouldhelpmaintainaccommo- leadtotheneedformore-aggressivepolicyinthe dativefinancialconditions. future,whichcouldpotentiallyleadtounnecessary volatilityandinstability. WhentheCommitteedecidestobegintoremove policyaccommodation,itwilltakeabalanced Itwasagreedthatthenextmeetingof theCommittee approachconsistentwithitslonger-rungoalsof wouldbeheldonTuesday–Wednesday,January27– maximumemploymentandinflationof 2per- 28,2015.Themeetingadjournedat11:00a.m.on cent.TheCommitteecurrentlyanticipatesthat, December17,2014. evenafteremploymentandinflationarenear mandate-consistentlevels,economicconditions Notation Vote may,forsometime,warrantkeepingthetarget BynotationvotecompletedonNovember18,2014, federalfundsratebelowlevelstheCommittee theCommitteeunanimouslyapprovedtheminutesof viewsasnormalinthelongerrun.” theCommitteemeetingheldonOctober28–29,2014. Votingforthisaction:JanetL.Yellen,WilliamC. WilliamB.English Dudley,LaelBrainard,StanleyFischer,LorettaJ. Secretary Mester,JeromeH.Powell,andDanielK.Tarullo.

272 101stAnnualReport|2014 Addendum: objectivesof maximumemploymentandstable prices. Summary of Economic Projections Overall,FOMCparticipantsexpectedthat,aftera InconjunctionwiththeFederalOpenMarketComslowdowninthefirsthalf of 2014,economicgrowth mittee(FOMC)meetingheldonDecember16–17, underappropriatepolicywouldbefasterinthesec- 2014,meetingparticipantssubmittedtheirprojecondhalf of 2014andover2015and2016thantheir tionsof themostlikelyoutcomesforrealoutput estimatesof theU.S.economy’slonger-runnormal growth,theunemploymentrate,inflation,andthe growthrate.Onbalance,participantsthensawecofederalfundsrateforeachyearfrom2014to2017 nomicgrowthmovingbacktowardtheirassessments andoverthelongerrun.2Eachparticipant’sprojecof itslonger-runpacein2017(table1andfigure1). tionwasbasedoninformationavailableatthetime Mostparticipantsprojectedthattheunemployment of themeetingplushisorherassessmentof appro- ratewillcontinuetodeclinein2015and2016,andall priatemonetarypolicyandassumptionsaboutthe participantsprojectedthattheunemploymentrate factorslikelytoaffecteconomicoutcomes.The willbeatorbelowtheirindividualjudgmentsof its longer-runprojectionsrepresenteachparticipant’s longer-runnormallevelbytheendof 2016.Allparassessmentof thevaluetowhicheachvariablewould ticipantsprojectedthatinflation,asmeasuredbythe beexpectedtoconverge,overtime,underappropriate four-quarterchangeinthepriceindexforpersonal monetarypolicyandintheabsenceof furthershocks consumptionexpenditures(PCE),wouldrisegradutotheeconomy.“Appropriatemonetarypolicy”is ally,onbalance,overthenextfewyears.Mostparticidefinedasthefuturepathof policythateachpartici- pantssawinflationapproachingtheCommittee’s pantdeemsmostlikelytofosteroutcomesforeco- 2percentlonger-runobjectivein2016and2017. nomicactivityandinflationthatbestsatisfyhisor Whileafewparticipantsprojectedthatinflation herindividualinterpretationof theFederalReserve’s wouldrisetemporarilyabove2percentduringthe forecastperiod,manyothersexpectedinflationto remainlowthrough2017. 2 AsdiscussedinitsPolicyNormalizationPrinciplesandPlans, releasedonSeptember17,2014,theCommitteeintendstotargetarangeforthefederalfundsrateduringnormalization.Par- Participantsjudgedthatitwouldbeappropriateto ticipantswereaskedtoprovide,intheircontributionstothe beginraisingthetargetrangeforthefederalfunds SummaryofEconomicProjections,eitherthemidpointofthe rateovertheprojectionperiodaslabormarketinditargetrangeforthefederalfundsrateforanyperiodwhena rangewasanticipatedorthetargetlevelforthefederalfunds catorsandinflationmovebacktowardvaluesthe rate,asappropriate.Inthelowerpaneloffigure2,thesevalues Committeejudgesconsistentwiththeattainmentof havebeenroundedtothenearest⅛percentagepoint. Table1.EconomicprojectionsofFederalReserveBoardmembersandFederalReserveBankpresidents,December2014 Percent Centraltendency1 Range2 Variable 2014 2015 2016 2017 Longerrun 2014 2015 2016 2017 Longerrun ChangeinrealGDP 2.3to2.4 2.6to3.0 2.5to3.0 2.3to2.5 2.0to2.3 2.3to2.5 2.1to3.2 2.1to3.0 2.0to2.7 1.8to2.7 Septemberprojection 2.0to2.2 2.6to3.0 2.6to2.9 2.3to2.5 2.0to2.3 1.8to2.3 2.1to3.2 2.1to3.0 2.0to2.6 1.8to2.6 Unemploymentrate 5.8 5.2to5.3 5.0to5.2 4.9to5.3 5.2to5.5 5.7to5.8 5.0to5.5 4.9to5.4 4.7to5.7 5.0to5.8 Septemberprojection 5.9to6.0 5.4to5.6 5.1to5.4 4.9to5.3 5.2to5.5 5.7to6.1 5.2to5.7 4.9to5.6 4.7to5.8 5.0to6.0 PCEinflation 1.2to1.3 1.0to1.6 1.7to2.0 1.8to2.0 2.0 1.2to1.6 1.0to2.2 1.6to2.1 1.8to2.2 2.0 Septemberprojection 1.5to1.7 1.6to1.9 1.7to2.0 1.9to2.0 2.0 1.5to1.8 1.5to2.4 1.6to2.1 1.7to2.2 2.0 CorePCEinflation3 1.5to1.6 1.5to1.8 1.7to2.0 1.8to2.0 1.5to1.6 1.5to2.2 1.6to2.1 1.8to2.2 Septemberprojection 1.5to1.6 1.6to1.9 1.8to2.0 1.9to2.0 1.5to1.8 1.6to2.4 1.7to2.2 1.8to2.2 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andprojectionsforbothmeasuresofinflationarepercentchangesfromthefourthquarterofthepreviousyear tothefourthquarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentageratesofchangein,respectively,thepriceindexforpersonalconsumption expenditures(PCE)andthepriceindexforPCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemploymentrateinthefourth quarteroftheyearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentofappropriatemonetarypolicy.Longer-runprojectionsrepresenteach participant’sassessmentoftheratetowhicheachvariablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershockstothe economy.TheSeptemberprojectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonSeptember16–17,2014. 1 Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2 Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthatvariableinthatyear. 3 Longer-runprojectionsforcorePCEinflationarenotcollected.

Minutesof FederalOpenMarketCommitteeMeetings|December 273 Figure1.Centraltendenciesandrangesofeconomicprojections,2014–17andoverthelongerrun Percent Change in real GDP Central tendency of projections 4 Range of projections 3 2 Actual 1 + 0 - 2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Percent Unemployment rate 10 9 8 7 6 5 2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Percent PCE inflation 3 2 1 2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Percent Core PCE inflation 3 2 1 2009 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Note:Definitionsofvariablesareinthegeneralnotetotable1.Thedatafortheactualvaluesofthevariablesareannual.

274 101stAnnualReport|2014 itsmandatedobjectivesof maximumemployment thelongerrunwas2.0to2.3percent,unchanged andstableprices.Asshowninfigure2,allbuta fromSeptember. coupleof participantsanticipatedthatitwouldbe appropriatetobeginraisingthetargetrangeforthe Allparticipantsprojectedthattheunemployment federalfundsratein2015,withmostprojectingthat ratewilldecline,onbalance,through2016,andall itwillbeappropriatetoraisethetargetfederalfunds participantsprojectedthat,bytheendof thatyear, ratefairlygradually. theunemploymentratewillbeatorbelowtheirindividualjudgmentsof itslonger-runnormallevel.The Mostparticipantsviewedtheuncertaintyassociated centraltendenciesof participants’forecastsforthe withtheiroutlooksforeconomicgrowthandthe unemploymentrateinthefourthquarterof each unemploymentrateasbroadlysimilartotheaverage yearwere5.8percentin2014,5.2to5.3percentin levelof thepast20years.Mostparticipantsalso 2015,5.0to5.2percentin2016,and4.9to5.3perjudgedthelevelof uncertaintyaboutinflationtobe centin2017.Almostallparticipants’projectedpaths broadlysimilartotheaveragelevelof thepast fortheunemploymentrateshifteddownslightly 20years,althoughafewparticipantsvieweditas through2015comparedwiththeirprojectionsinSephigher.Inaddition,mostparticipantscontinuedto tember;manyparticipantsnotedthatrecentdata seetheriskstotheoutlookforeconomicgrowthand pointingtoimprovinglabormarketconditionswere fortheunemploymentrateasbroadlybalanced.A animportantfactorunderlyingthedownwardrevimajoritysawtheriskstoinflationasbroadlybal- sionsintheirunemploymentrateforecasts.Thecenanced;however,anumberof participantssawthe traltendencyof participants’estimatesof thelongerriskstoinflationasweightedtothedownside,while runnormalrateof unemploymentthatwouldprevail onejudgedtheserisksastiltedtotheupside. underappropriatemonetarypolicyandinthe absenceof furthershockstotheeconomywas The Outlook for Economic Activity unchangedat5.2to5.5percent;therangeof these estimateswas5.0to5.8percent,downslightlyfrom Participantsprojectedthat,conditionalontheirindi- 5.0to6.0percentinSeptember. vidualassumptionsaboutappropriatemonetary policy,growthinrealgrossdomesticproduct(GDP) Figures3.Aand3.Bshowthatparticipantshelda wouldpickupfromitslowlevelinthefirsthalf of rangeof viewsregardingthelikelyoutcomesforreal 2014andrunabovetheirestimatesof itslonger-run GDPgrowthandtheunemploymentratethrough normalrateinthesecondhalf of 2014andover2015 2017.Someof thediversityof viewsreflectedtheir and2016.Participantspointedtoanumberof fac- individualassessmentsof theeffectsof loweroil torsthattheyexpectedwouldcontributetostronger pricesonconsumerspendingandbusinessinvestrealoutputgrowth,includingimprovinglabormar- ment,of therateatwhichtheforcesthathavebeen ketconditions,lowerenergyprices,risinghousehold restrainingthepaceof theeconomicrecoverywould networth,diminishingrestraintfromfiscalpolicy, continuetoabate,of thetrajectoryforgrowthinconandhighlyaccommodativemonetarypolicy.Onbal- sumptionaslabormarketslackdiminishes,andof ance,participantssawrealGDPgrowthmovingback theappropriatepathof monetarypolicy.Relativeto toward,butremainingatorsomewhatabove,its September,thedispersionof participants’projections longer-runratein2017asmonetarypolicyadjusts forrealGDPgrowthwaslittlechangedfrom2015to appropriately. 2017,whilefortheunemploymentrate,thedispersionwasabitnarrower. Ingeneral,participants’revisionstotheirforecasts forrealGDPgrowthrelativetotheirprojectionsfor The Outlook for Inflation theSeptembermeetingweremodest.However,all participantsreviseduptheirprojectionsof realGDP ComparedwithSeptember,thecentraltendenciesof growthsomewhatfor2014,withanumberof them participants’projectionsforPCEinflationunderthe notingthatrecentdatareleasesregardingrealeco- assumptionof appropriatemonetarypolicymoved nomicactivityhadbeenstrongerthananticipated. downfor2014and2015butwerelargelyunchanged Thecentraltendenciesof participants’currentpro- for2016and2017.Incommentingonthechangesto jectionsforrealGDPgrowthwere2.3to2.4percent theirprojections,manyparticipantsindicatedthat in2014,2.6to3.0percentin2015,2.5to3.0percent thesignificantdeclineinenergypricesandtheapprein2016,and2.3to2.5percentin2017.Thecentral ciationof thedollarsincetheCommittee’sSeptemtendencyof theprojectionsof realGDPgrowthover bermeetinglikelywillputtemporarydownward

Minutesof FederalOpenMarketCommitteeMeetings|December 275 Figure2.OverviewofFOMCparticipants’assessmentsofappropriatemonetarypolicy Number of participants Appropriate timing of policy firming 16 15 15 14 13 12 11 10 9 8 7 6 5 4 3 2 2 1 2015 2016 Percent Appropriate pace of policy firming: Midpoint of target range or target level for the federal funds rate 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2014 2015 2016 2017 Longer run Note:Intheupperpanel,theheightofeachbardenotesthenumberofFOMCparticipantswhojudgethat,underappropriatemonetarypolicy,thefirstincreaseinthetarget rangeforthefederalfundsratefromitscurrentrangeof0to¼percentwilloccurinthespecifiedcalendaryear.InSeptember2014,thenumbersofFOMCparticipantswho judgedthatthefirstincreaseinthetargetfederalfundsratewouldoccurin2014,2015,and2016were,respectively,1,14,and2.Inthelowerpanel,eachshadedcircleindicatesthevalue(roundedtothenearest⅛percentagepoint)ofanindividualparticipant’sjudgmentofthemidpointoftheappropriatetargetrangeforthefederalfundsrateor theappropriatetargetlevelforthefederalfundsrateattheendofthespecifiedcalendaryearoroverthelongerrun.

276 101stAnnualReport|2014 Figure3.A.Distributionofparticipants’projectionsforthechangeinrealGDP,2014–17andoverthelongerrun Number of participants 22 2014 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 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Percent range Number of participants 22 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 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Percent range Number of participants 22 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 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Percent range Number of participants 22 2017 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 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Percent range Number of participants 22 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 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|December 277 Figure3.B.Distributionofparticipants’projectionsfortheunemploymentrate,2014–17andoverthelongerrun Number of participants 22 2014 20 December projections 18 16 September projections 14 12 10 8 6 4 2 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 6.0 - 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 Percent range Number of participants 22 2015 20 18 16 14 12 10 8 6 4 2 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 6.0 - 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 Percent range Number of participants 22 2016 20 18 16 14 12 10 8 6 4 2 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 6.0 - 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 Percent range Number of participants 22 2017 20 18 16 14 12 10 8 6 4 2 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 6.0 - 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 Percent range Number of participants 22 Longer run 20 18 16 14 12 10 8 6 4 2 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 6.0 - 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

278 101stAnnualReport|2014 pressureoninflation.Thecentraltendenciesof par- remainconsiderablybelowitslonger-runnormal ticipants’projectionsforcorePCEinflationmoved levelthrough2016.Mostparticipantsexpectedthe downsomewhatfor2015butweremostlyunchanged appropriatelevelof thefederalfundsratewouldbe inotheryears.Almostallparticipantsprojectedthat near,oralreadywouldhavereached,theirindividual PCEinflationwouldrisegradually,onbalance,over viewof itslonger-runnormallevelbytheendof theperiodfrom2015to2017,reachingalevelator 2017. neartheCommittee’s2percentobjective.AfewparticipantsexpectedPCEinflationtoriseslightlyabove Allparticipantsprojectedthattheunemployment 2percentatsomepointduringtheforecastperiod, ratewouldbeatorbelow5.5percentattheendof whilemanyothersexpectedinflationtoremainbelow theyearinwhichtheyjudgedtheinitialincreasein 2percentfortheentireperiod.Thecentraltendencies thetargetrangeforthefederalfundsratewouldbe forPCEinflationwere1.2to1.3percentin2014, warranted,andallbutoneanticipatedthatinflation 1.0to1.6percentin2015,1.7to2.0percentin2016, wouldbeatorbelowtheCommittee’s2percentgoal and1.8to2.0percentin2017.Thecentraltendencies attheendof thatyear.Mostparticipantsprojected of theforecastsforcoreinflationwerehigherthan thattheunemploymentratewouldbeatorsomewhat thosefortheheadlinemeasurein2014and2015, abovetheirestimatesof itslonger-runnormallevelat reflectingtheeffectsof loweroilprices.Thecentral thattime. tendenciesof thetwomeasureswereequalin2016 andin2017.Factorscitedbyparticipantsaslikelyto Figure3.Eprovidesthedistributionof participants’ contributetoagradualriseof inflationtowardthe judgmentsregardingtheappropriatelevelof thetar- Committee’slonger-runobjectiveof 2percent getfederalfundsrate,conditionalontheirassessincludedstablelonger-terminflationexpectations, mentsof theeconomicoutlook,attheendof each steadilydiminishingresourceslack,apickupinwage calendaryearfrom2014to2017andoverthelonger growth,waningeffectsof declinesinoilprices,and run.Allparticipantsjudgedthateconomiccondistill-accommodativemonetarypolicy. tionswouldwarrantmaintainingthecurrentexceptionallylowlevelof thefederalfundsrateinto2015. Figures3.Cand3.Dprovideinformationonthe Themedianvaluesof thefederalfundsrateatthe diversityof participants’viewsabouttheoutlookfor endof 2015and2016fell25basispointsand38basis inflation.Inadditiontomovinglower,therangeof pointsrelativetoSeptember,to1.13percentand participants’projectionsforPCEinflationin2015 2.50percent,respectively,whilethemeanvaluesfell widenedsomewhatrelativetoSeptember,likely 15basispointsforbothyears,to1.13percentin2015 reflectinginpartdifferencesinparticipants’assess- and2.54percentin2016.Thedispersionof thepromentsof theeffectsof therecentdeclineinenergy jectionsfortheappropriatelevelof thefederalfunds pricesontheoutlookforinflation.Therangesfor ratewasnarrowerin2014and2015andwaslittle coreinflationnarrowedin2014and2015.Inother changedin2016and2017.Mostparticipantsjudged yearsof theprojection,therangesof theinflation thatitwouldbeappropriatetosetthefederalfunds projectionswererelativelylittlechanged.Therange rateatornearitslonger-runnormallevelin2017, forbothmeasuresin2017continuedtoshowavery althoughanumberof themprojectedthatthefederal substantialconcentrationneartheCommittee’s fundsratewouldstillneedtobesetappreciably 2percentlonger-runobjectivebythattime. belowitslonger-runnormallevelatthattimeand oneanticipatedthatitwouldbeappropriatetotarget Appropriate Monetary Policy alevelnoticeablyaboveitslonger-runnormallevel. Participantsprovidedanumberof reasonswhythey Participantsjudgedthatitwouldbeappropriateto thoughtitwouldbeappropriateforthefederalfunds beginraisingthetargetrangeforthefederalfunds ratetoremainbelowitslonger-runnormallevelfor rateovertheprojectionperiodaslabormarketindi- sometimeafterinflationandtheunemploymentrate catorsandinflationmovebacktowardvaluesthe werenearmandate-consistentlevels.Thesereasons Committeejudgesconsistentwiththeattainmentof includedanassessmentthattheheadwindsthathave itsmandatedobjectivesof maximumemployment beenholdingbacktherecoverywillcontinuetoexert andpricestability.Asshowninfigure2,allbuttwo somerestraintoneconomicactivityatthattime,that participantsanticipatedthatitwouldbeappropriate residualslackinthelabormarketwillstillbeevident tobeginraisingthetargetrangeforthefederalfunds inothermeasuresof laborutilization,andthatthe rateduring2015.However,mostprojectedthatthe riskstotheeconomicoutlookareasymmetricasa appropriatelevelof thefederalfundsratewould resultof theconstraintsonmonetarypolicyassoci-

Minutesof FederalOpenMarketCommitteeMeetings|December 279 Figure3.C.Distributionofparticipants’projectionsforPCEinflation,2014–17andoverthelongerrun Number of participants 22 2014 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 22 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 22 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 22 2017 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 22 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.

280 101stAnnualReport|2014 Figure3.D.Distributionofparticipants’projectionsforcorePCEinflation,2014–17 Number of participants 22 2014 20 December projections 18 September projections 16 14 12 10 8 6 4 2 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 22 2015 20 18 16 14 12 10 8 6 4 2 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 22 2016 20 18 16 14 12 10 8 6 4 2 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 22 2017 20 18 16 14 12 10 8 6 4 2 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.6 1.8 2.0 2.2 2.4 Percent range Note:Definitionsofvariablesareinthegeneralnotetotable1.

Minutesof FederalOpenMarketCommitteeMeetings|December 281 Figure3.E.Distributionofparticipants’projectionsforthetargetfederalfundsrate,2014–17andoverthelongerrun Number of participants 2014 22 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 - 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 22 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 22 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 2017 22 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 22 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.

282 101stAnnualReport|2014 atedwiththeeffectivelowerboundonthefederal Table2.Averagehistoricalprojectionerrorranges fundsrate. Percentagepoints AsinSeptember,estimatesof thelonger-runlevelof Variable 2014 2015 2016 2017 thefederalfundsraterangedfrom3.25to4.25per- ChangeinrealGDP1 ±0.9 ±1.8 ±2.1 ±2.1 cent.Allparticipantsjudgedthatinflationoverthe Unemploymentrate1 ±0.2 ±0.8 ±1.4 ±1.8 longerrunwouldbeequaltotheCommittee’sinfla- Totalconsumerprices2 ±0.2 ±0.9 ±1.0 ±1.0 tionobjectiveof 2percent,implyingthattheirindi- Note:Errorrangesshownaremeasuredasplusorminustherootmeansquared vidualjudgmentsregardingtheappropriatelongererrorofprojectionsfor1994through2013thatwerereleasedinthewinterby runlevelof therealfederalfundsrateintheabsence variousprivateandgovernmentforecasters.Asdescribedinthebox“Forecast Uncertainty,”undercertainassumptions,thereisabouta70percentprobability of furthershockstotheeconomyrangedfrom thatactualoutcomesforrealGDP,unemployment,andconsumerpriceswillbein 1.25to2.25percent. rangesimpliedbytheaveragesizeofprojectionerrorsmadeinthepast.Formore information,seeDavidReifschneiderandPeterTulip(2007),“Gaugingthe UncertaintyoftheEconomicOutlookfromHistoricalForecastingErrors,”Finance Participants’viewsof theappropriatepathformon- andEconomicsDiscussionSeries2007-60(Washington:BoardofGovernorsof theFederalReserveSystem,November),availableatwww.federalreserve.gov/ etarypolicywereinformedbytheirjudgmentsabout pubs/feds/2007/200760/200760abs.html;andBoardofGovernorsoftheFederal thestateof theeconomy,includingthevaluesof the ReserveSystem,DivisionofResearchandStatistics(2014),“UpdatedHistorical ForecastErrors,”memorandum,April9,www.federalreserve.gov/foia/files/ unemploymentrateandotherlabormarketindica- 20140409-historical-forecast-errors.pdf. torsthatwouldbeconsistentwithmaximumemploy- 1 Definitionsofvariablesareinthegeneralnotetotable1. ment,theextenttowhichtheeconomywascurrently 2 Measureistheoverallconsumerpriceindex,thepricemeasurethathasbeen mostwidelyusedingovernmentandprivateeconomicforecasts.Projection fallingshortof maximumemployment,theprospects ispercentchange,fourthquarterofthepreviousyeartothefourthquarterof forinflationtoreturntotheCommittee’slonger- theyearindicated. termobjectiveof 2percent,thedesiretominimize potentialdisruptioninfinancialmarketsbyavoiding unusuallyrapidincreasesinthefederalfundsrate, downsidecited,forexample,concernaboutthelimandthebalanceof risksaroundtheoutlook.Some itedabilityof monetarypolicyattheeffectivelower participantsalsomentionedtheprescriptionsof vari- boundtorespondtofurthernegativeshockstothe ousmonetarypolicyrulesasfactorstheyconsidered economyoraboutthetrajectoryforeconomic injudgingtheappropriatepathforthefederalfunds growthabroad.AsinSeptember,nearlyallparticirate. pantsjudgedtheriskstotheoutlookfortheunemploymentratetobebroadlybalanced. Uncertainty and Risks AsinSeptember,participantsgenerallyagreedthat Nearlyallparticipantscontinuedtojudgethelevels thelevelsof uncertaintyassociatedwiththeirinflaof uncertaintyattendingtheirprojectionsforreal tionforecastswerebroadlysimilartohistorical GDPgrowthandtheunemploymentrateasbroadly norms,andmostsawtheriskstothoseprojectionsas similartothenormsduringtheprevious20years broadlybalanced.Anumberof participants,how- (figure4).3Mostparticipantscontinuedtoseethe ever,viewedtheriskstotheirinflationforecastsas riskstotheiroutlooksforrealGDPgrowthas tiltedtothedownside;thereasonsdiscussedincluded broadlybalanced.Afewparticipantsviewedtherisks thepossibilitythattherecentlowlevelsof inflation torealGDPgrowthasweightedtothedownside;one couldprovemorepersistentthananticipated;the viewedtherisksasweightedtotheupside.Thoseparpossibilitythattheupwardpullonpricesfrominflaticipantswhoviewedtherisksasweightedtothe tionexpectationsmightbeweakerthanassumed;or thejudgmentthat,incurrentcircumstances,itwould 3 Table2providesestimatesoftheforecastuncertaintyforthe bedifficultfortheCommitteetorespondeffectively changeinrealGDP,theunemploymentrate,andtotalconsumerpriceinflationovertheperiodfrom1994through2013. tolow-inflationoutcomes.Conversely,onepartici- Attheendofthissummary,thebox“ForecastUncertainty” pantsawupsideriskstoinflation,citinguncertainty discussesthesourcesandinterpretationofuncertaintyinthe aboutthetimingandefficacyof theCommittee’s economicforecastsandexplainstheapproachusedtoassessthe uncertaintyandrisksattendingtheparticipants’projections. withdrawalof monetarypolicyaccommodation.

Minutesof FederalOpenMarketCommitteeMeetings|December 283 Figure4.Uncertaintyandrisksineconomicprojections Number of participants Number of participants Uncertainty about GDP growth 22 Risks to GDP growth 22 December projections 20 December projections 20 September projections 18 September projections 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 the unemployment rate 22 Risks to the unemployment rate 22 20 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 22 Risks to PCE inflation 22 20 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 22 Risks to core PCE inflation 22 20 20 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Note:Fordefinitionsofuncertaintyandrisksineconomicprojections,seethebox“ForecastUncertainty.”Definitionsofvariablesareinthegeneralnotetotable1.

284 101stAnnualReport|2014 Forecast Uncertainty Theeconomicprojectionsprovidedbythemembers inthethirdandfourthyears.Thecorresponding oftheBoardofGovernorsandthepresidentsofthe 70percentconfidenceintervalsforoverallinflation FederalReserveBanksinformdiscussionsofmon- wouldbe1.8to2.2percentinthecurrentyear,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 rangeof2.1to3.9percentinthecurrentyear,1.2to pointforward. 4.8percentinthesecondyear,and0.9to5.1percent

285 10 Litigation During2014,theBoardof Governorswasapartyin trictCourtgrantedtheBoard’smotiontodismissthe 6lawsuitsorappealsfiledthatyearandwasaparty action. in14othercasespendingfrompreviousyears,fora totalof 20cases.In2013,theBoardhadbeenaparty AmericanBankersAssociation,etal.,v.Boardof Govinatotalof 29cases.Asof December31,2014,13 ernors,No.13-cv-02050(D.Districtof Columbia, caseswerepending. filedDecember24,2013),wasachallengetoaportionof theso-calledVolckerruleissuedbytheBoard Rameyv.Boardof Governors,No.14-cv-220(D.D.C., andotherregulators.OnFebruary12,2014,the filedDecember22,2014),isaFreedomof Informa- plaintiffsvoluntarilydismissedtheaction. tionActcase. AmericanBankersAssociation,etal.,v.Boardof Governors,No.13-1310(D.C.Circuit,filedDecember23, TheLoanSyndicationsandTradingAssociationv. 2013),wasachallengetoaportionof theso-called Boardof Governors,No.14-1240(D.C.Circuit,peti- VolckerruleissuedbytheBoardandotherregulationforreviewfiledNovember10,2014),isachaltors.OnFebruary12,2014,thepartiesstipulatedtoa lengetothecreditriskretentionrulesissuedunder dismissalof thepetitionforreview. section941of theDodd-FrankWallStreetReform andConsumerProtectionActof 2010. Blairv.Bernanke,No.CJ-2013-3525,No.14-CV- 00022(N.D.Oklahoma,filedNovember25,2013), Richardsonv.Boardof Governors,No.14-cv-01673 wasathird-party,prosecomplaintoriginallyfiledin (D.Districtof Columbia,filedOctober8,2014),is OklahomastatecourtallegingthattheBoardviolated anemploymentdiscriminationclaim. theplaintiff’sconstitutionalrightsthroughitsregulationof directdepositpayments.OnJuly14,2014,the Noblesv.FederalReserveBankof AtlantaandBoard DistrictCourtdismissedtheactionastotheBoard. of Governors,No.14-cv-02541(N.D.Georgia,filed August6,2014),wasadiscriminationclaimbrought Richterv.Boardof Governors,No.13-cv-015107(D. byformeremployeeof theFederalReserveBankof Districtof Columbia,filedOctober1,2013),wasa Atlanta.OnOctober27,2014,theplaintiff volun- Freedomof InformationActcase.OnFebruary14, tarilydismissedtheBoardasadefendantinthe 2014,theDistrictCourtgrantedtheBoard’smotion action. forsummaryjudgment. CommunityFinancialServicesAssociationof WMILiquidatingTrustv.Boardof Governors, America,Ltd.,v.Boardof Governors,No.14-cv- No.13-cv-01706(W.D.Washington,filedSeptem- 00853(D.Districtof Columbia,filedJune11,2014), ber20,2013),isanactionforadeclaratoryjudgment isachallengetoactionsof theBoard,theFederal regardinggoldenparachutepayments.OnJuly3, DepositInsuranceCorporation,andtheOfficeof the 2014,theactionwastransferredtotheUnitedStates Comptrollerof theCurrencythatallegedlydisadvan- BankruptcyCourtfortheDistrictof Delaware(Adv. tagepaydaylenders. Pro.No.14-50435-MFW(Bankr.D.Del.)). Johnsonv.FederalReserveBoard,No.14-cv-50(E.D. NACSetal.v.Boardof Governors,No.13-5720(D.C. NorthCarolina,filedMarch28,2014),wasacom- Circuit,noticeof appealfiledAugust21,2013),was plaintbyincarceratedindividualthathisprosecution anappealfromaDistrictCourtrulinginvalidating andimprisonmentviolatedhisrightsunderthe Boardregulationsissuedpursuanttosection1075of “redemptiontheory.”OnJanuary30,2015,theDis- theDodd-FrankWallStreetReformandConsumer

286 101stAnnualReport|2014 ProtectionActrelatingtodebitcardinterchangefees. Ballv.Boardof Governors,No.13-cv-00603(D.Dis- OnMarch21,2014,theCourtof Appealsreversed trictof Columbia,filedApril30,2013),wasaFreetheDistrictCourt’sgrantof summaryjudgmentand domof InformationActcase.OnMarch31,2015, remandedtheactiontotheDistrictCourt.OnJanu- theDistrictCourtgrantedtheBoard’smotionfor ary20,2015,theSupremeCourtdeniedNACS’speti- summaryjudgment. tionforcertiorari(No.14-200). Crismanv.Boardof Governorsetal.,No.12-cv-1871 (D.Districtof Columbia,filedNovember19,2012), StateNationalBankof BigSpringv.Bernanke, isaFreedomof InformationActcase. No.13-5247(D.C.Circuit,noticeof appealfiled August2,2013),isanappealof aDistrictCourtrul- Wisev.FederalReserveBoard,No.12-cv-1636(D. ingdismissingplaintiffs’challengetotheconstitu- Districtof Columbia,filedOctober2,2012),isa tionalityof theConsumerFinancialProtection claimundertheFederalTortClaimsAct. BureauandtheFinancialStabilityOversight Council. CitiMortgage,Inc.v.Kokolis,No.11-cv-2933-RBH (D.SouthCarolina,filedinstatecourtAugust5, Ferrerv.Bernanke,No.13-29975(S.D.Florida,filed 2011;noticeof removalfiledOctober27,2011),wasa July29,2013),isanactionallegingthatplaintiffs third-partycomplaintagainsttheBoardandthe receivedimproperrelief undertheBoard’sandthe UnitedStatesDepartmentof theTreasurybythe Officeof theComptrollerof theCurrency’sfinancial defendantinamortgageforeclosureaction.TheDisremediationordersregardingdeficientmortgagesertrictCourtdismissedtheactiononMay30,2012, vicingandforeclosurepractices.OnOctober28, andonApril14,2014,theFourthCircuitCourtof 2014,theDistrictCourtgrantedtheBoard’smotion Appealsdismissedtheappealontheappellant’s todismisstheaction.OnNovember26,theplaintiffs motion(No.12-1917). filedanoticeof appealtotheEleventhCircuit (No.14-15325). Artisv.Greenspan,No.01-cv-0400(D.Districtof Columbia,filedFebruary22,2001),isanemploy- Goldstein,Trusteev.Boardof Governors,No.13-MC- mentdiscriminationaction.OnSeptember29,2014, 00445-RC(D.Districtof Columbia,motiontocom- theDistrictCourtdeniedtheplaintiffs’motionfor pelfiledMay1,2013),wasamotiontocompelpro- classcertification,andonJanuary15,2015,the ductionof bankexaminationmaterial.OnJanu- Courtof AppealsfortheDistrictof ColumbiaCirary17,2014,theplaintiff voluntarilydismissedthe cuitdeniedtheplaintiffs’petitionforinterlocutory action. appealof thatdenial(No.14-8003).

287 11 Statistical Tables Table1.FederalReserveopenmarkettransactions,2014 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 Exchanges 0 -295 0 0 0 -37 -40 0 -5 0 -88 0 -464 Redemptions 1 1 1 2 0 1 0 2 1 1 0 1 10 1to5years Grosspurchases 2,477 8,790 3,738 6,688 3,224 5,711 3,790 2,965 3,210 2,161 0 0 42,754 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 0 90 0 0 0 12 14 0 1 0 35 0 152 5to10years Grosspurchases 20,474 19,593 19,662 13,731 13,415 11,291 9,203 7,255 6,770 4,578 0 0 125,972 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 0 180 0 0 0 25 21 0 3 0 0 0 228 Morethan10years Grosspurchases 13,019 10,349 12,296 9,716 7,064 8,318 6,280 6,154 4,757 3,262 0 0 81,215 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 0 25 0 0 0 0 5 0 0 0 53 0 84 Allmaturities Grosspurchases 35,970 38,732 35,696 30,135 23,703 25,320 19,273 16,374 14,737 10,001 0 0 249,941 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Redemptions 1 1 1 2 0 1 0 2 1 1 0 1 10 NetchangeinU.S. Treasury securities 35,969 38,731 35,695 30,133 23,703 25,319 19,273 16,372 14,736 10,000 0 -1 249,931 Federalagencyobligations Outrighttransactions2 Grosspurchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Redemptions 2,310 3,500 4,068 2,378 883 423 1,532 565 1,556 306 1,023 0 18,544 Netchangeinfederal agencyobligations -2,310 -3,500 -4,068 -2,378 -883 -423 -1,532 -565 -1,556 -306 -1,023 0 -18,544 Mortgage-backedsecurities3 Netsettlements2 Netchangein mortgage-backed securities 42,066 37,866 33,014 28,767 16,108 15,917 10,463 3,949 18,112 21,471 11,906 7,031 246,671 (continuedonnextpage)

288 101stAnnualReport|2014 Table1.—continued Typeofsecurity Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total andtransaction Temporarytransactions Repurchaseagreements4 Grosspurchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Grosssales 0 0 0 0 0 0 0 0 0 0 0 0 0 Reverserepurchaseagreements4 Grosspurchases 3,888,403 3,793,139 3,714,026 4,734,608 6,327,094 4,466,710 5,185,940 5,094,880 5,542,761 5,626,645 4,219,033 4,087,951 56,681,190 Grosssales 3,776,234 3,805,923 3,838,511 4,719,082 6,278,279 4,646,528 4,996,369 5,105,118 5,675,723 5,512,078 4,200,731 4,320,526 56,875,104 Netchangein temporary transactions 112,169 -12,784 -124,485 15,525 48,815 -179,818 189,571 -10,239 -132,962 114,567 18,301 -232,575 -193,913 Totalnetchangein SystemOpenMarket Account 187,894 60,313 -59,844 72,048 87,743 -139,005 217,775 9,518 -101,670 145,732 29,185 -225,544 284,144 Note:Sales,redemptions,andnegativefiguresreduceholdingsoftheSystemOpenMarketAccount;allotherfiguresincreasesuchholdings.Componentsmaynotsumtototals becauseofrounding.Pleasereferencetable2oftheH.4.1release(www.federalreserve.gov/releases/h41/)forthematuritydistributionofthesecurities. 1 Transactionsexcludechangesincompensationfortheeffectsofinflationontheprincipalofinflation-indexedsecurities.Transactionsincludetherolloverofinflation compensationintonewsecurities. 2 Excludestheeffectoftemporarytransactions—repurchaseagreementsandreverserepurchaseagreements. 3 GuaranteedbyFannieMae,FreddieMac,andGinnieMae.Monthlynetchangeintheremainingprincipalbalanceofthesecurities,reportedatfacevalue. 4 Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities,andmortgage-backedsecurities.

StatisticalTables 289 Table2.FederalReserveBankholdingsofU.S.Treasuryandfederalagencysecurities,December31,2012–14 Millionsofdollars December31 Change Description 2014 2013 2012 2013to2014 2012to2013 U.S.Treasurysecurities Heldoutright1 2,461,363 2,208,775 1,666,145 252,588 542,630 Byremainingmaturity Bills 1–90days 0 0 0 0 0 91daysto1year 0 0 0 0 0 Notesandbonds 1yearorless 3,520 474 21 3,046 453 Morethan1yearthrough5years 1,112,927 763,329 378,476 349,598 384,853 Morethan5yearsthrough10years 686,627 864,700 862,410 -178,073 2,290 Morethan10years 658,289 580,272 425,238 78,017 155,034 Bytype Bills 0 0 0 0 0 Notes 1,634,949 1,467,427 1,110,398 167,522 357,029 Bonds 826,414 741,348 555,747 85,066 185,601 Federalagencysecurities Heldoutright1 38,677 57,221 76,783 -18,544 -19,562 Byremainingmaturity Discountnotes 1–90days 0 0 0 0 0 91daysto1year 0 0 0 0 0 Coupons 1yearorless 5,733 18,544 19,562 -12,811 -1,018 Morethan1yearthrough5years 30,597 36,268 52,830 -5,671 -16,562 Morethan5yearsthough10years 0 62 2,044 -62 -1,982 Morethan10years 2,347 2,347 2,347 0 0 Bytype Discountnotes 0 0 0 0 0 Coupons 38,677 57,221 76,783 -18,544 -19,562 Byissuer FederalHomeLoanMortgageCorporation 19,515 24,986 32,261 -5,471 -7,275 FederalNationalMortgageAssociation 13,470 25,555 31,906 -12,085 -6,351 FederalHomeLoanBanks 5,692 6,680 12,616 -988 -5,936 Mortgage-backedsecurities2 Heldoutright1 1,736,833 1,490,162 926,662 246,671 563,500 Byremainingmaturity 1yearorless 0 0 2 0 -2 Morethan1yearthrough5years 13 5 1 8 4 Morethan5yearsthough10years 6,453 2,549 2,365 3,904 184 Morethan10years 1,730,367 1,487,608 924,294 242,759 563,314 Byissuer FederalHomeLoanMortgageCorporation 501,914 426,311 292,155 75,603 134,156 FederalNationalMortgageAssociation 886,716 774,689 503,696 112,027 270,993 GovernmentNationalMortgageAssociation 348,203 289,162 130,811 59,041 158,351 Temporarytransactions Repurchaseagreements3 0 0 0 0 0 Reverserepurchaseagreements3 509,837 315,924 107,188 193,913 208,736 Foreignofficialandinternationalaccounts 113,132 118,169 107,188 -5,037 10,981 Dealers 396,705 197,755 0 198,950 197,755 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Excludestheeffectoftemporarytransactions—repurchaseagreementsandreverserepurchaseagreements. 2 GuaranteedbyFannieMae,FreddieMac,andGinnieMae. 3 Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities,andmortgage-backedsecurities.

290 101stAnnualReport|2014 Table3.FederalReserveBankinterestratesonloansto Table4.Reserverequirementsofdepositoryinstitutions, depositoryinstitutions,December31,2014 December31,2014 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:Fordetailsonratechangesoverthecourseof2014,seethesectionon $0million–$14.5million2 0 12/23/2014 discountratesin“RecordofPolicyActionsoftheBoardofGovernors.”Primary Morethan creditisavailableforveryshorttermsasabackupsourceofliquidityto $14.5million–$103.6million3 3 12/23/2014 depositoryinstitutionsthatareingenerallysoundfinancialconditioninthe Morethan$103.6million 10 12/23/2014 judgmentofthelendingFederalReserveBank.Secondarycreditisavailablein appropriatecircumstancestodepositoryinstitutionsthatdonotqualifyforprimary Nonpersonaltimedeposits 0 12/27/1990 credit.Seasonalcreditisavailabletohelprelativelysmalldepositoryinstitutions Eurocurrencyliabilities 0 12/27/1990 meetregularseasonalneedsforfundsthatarisefromaclearpatternof intra-yearlymovementsintheirdepositsandloans.Thediscountrateonseasonal Note:Requiredreservesmustbeheldintheformofvaultcashand,ifvaultcash credittakesintoaccountrateschargedbymarketsourcesoffundsandis isinsufficient,alsointheformofadepositwithaFederalReserveBank.An reestablishedonthefirstbusinessdayofeachtwo-weekreservemaintenance institutionmustholdthatdepositdirectlywithaReserveBankorwithanother period. institutioninapass-throughrelationship.Reserverequirementsareimposedon 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 291 Table5.BankingofficesandbanksaffiliatedwithbankholdingcompaniesintheUnitedStates,December31,2013and2014 Commercialbanks1 Statechartered Typeofoffice Total Member savings Total Nonmember banks Total National State Allbankingoffices Banks Number,Dec.31,2013 6,134 5,842 1,978 1,143 835 3,864 292 Changesduring2014 Newbanks 19 15 8 4 4 7 4 Banksconvertedintobranches -225 -219 -83 -47 -36 -136 -6 Ceasedbankingoperations2 -42 -38 -14 -11 -3 -24 -4 Other3 0 1 3 -33 36 -2 -1 Netchange -248 -241 -86 -87 1 -155 -7 Number,Dec.31,2014 5,886 5,601 1,892 1,056 836 3,709 285 Branchesandadditionaloffices Number,Dec.31,2013 83,977 81,275 57,958 43,828 14,130 23,317 2,702 Changesduring2014 Newbranches 1,369 1,253 724 541 183 529 116 Banksconvertedtobranches 225 220 106 65 41 114 5 Discontinued2 -2,171 -2,125 -1,584 -1,231 -353 -541 -46 Other3 0 -3 61 -94 155 -64 3 Netchange -577 -655 -693 -719 26 38 78 Number,Dec.31,2014 83,400 80,620 57,265 43,109 14,156 23,355 2,780 Banksaffiliatedwithbankholdingcompanies Banks Number,Dec.31,2013 5,014 4,886 1,741 1,000 741 3,145 128 Changesduring2014 BHC-affiliatednewbanks 54 50 19 9 10 31 4 Banksconvertedintobranches -192 -189 -77 -45 -32 -112 -3 Ceasedbankingoperations2 -40 -39 -15 -12 -3 -24 -1 Other3 0 0 1 -29 30 -1 0 Netchange -178 -178 -72 -77 5 -106 0 Number,Dec.31,2014 4,836 4,708 1,669 923 746 3,039 128 Note:Includesbanks,bankingoffices,andbankholdingcompaniesinU.S.territoriesandpossessions(affiliatedinsularareas). 1 Forpurposesofthistable,banksareentitiesthataredefinedasbanksintheBankHoldingCompanyAct,asamended,whichisimplementedbyFederalReserve RegulationY.Generally,abankisanyinstitutionthatacceptsdemanddepositsandisengagedinthebusinessofmakingcommercialloansoranyinstitutionthatisdefined asaninsuredbankinsection3(h)oftheFDICAct. 2 InstitutionsthatnolongermeettheRegulationYdefinitionofabank. 3 Interclasschangesandsalesofbranches.

292 101stAnnualReport|2014 Table6A.Reservesofdepositoryinstitutions,FederalReserveBankcredit,andrelateditems, year-end1984–2014andmonth-end2014 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 2012 2,669,589 0 11,867 -486 218,296 2,899,266 11,041 5,200 44,751 2013r 3,756,158 0 2,177 -962 246,947 4,004,320 11,041 5,200 45,493 2014 4,236,873 0 3,351 -555 239,238 4,478,908 11,041 5,200 46,355 Jan 3,831,690 0 2,245 -347 250,614 4,084,202 11,041 5,200 45,608 Feb 3,904,796 0 2,330 -586 239,529 4,146,068 11,041 5,200 45,677 Mar 3,970,056 0 2,298 -546 244,177 4,215,985 11,041 5,200 45,749 Apr 4,027,112 0 2,252 -770 248,459 4,277,053 11,041 5,200 45,814 May 4,066,824 0 2,168 -529 240,205 4,308,668 11,041 5,200 45,894 Jun 4,108,135 0 2,167 -524 243,896 4,353,674 11,041 5,200 45,963 Jul 4,136,789 0 2,125 -593 248,462 4,386,783 11,041 5,200 46,049 Aug 4,156,865 0 2,156 -509 238,624 4,397,136 11,041 5,200 46,104 Sep 4,188,172 0 2,289 -915 241,330 4,430,876 11,041 5,200 46,171 Oct 4,219,162 0 1,870 -450 245,971 4,466,554 11,041 5,200 46,243 Nov 4,230,132 0 1,794 -837 236,638 4,467,727 11,041 5,200 46,299 Dec 4,236,873 0 3,351 -555 239,238 4,478,908 11,041 5,200 46,355 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-end1984–2014andmonth-end2014”fordetail. 4 Asof2013,unamortizeddiscountsonsecuritiesheldoutrightareincludedasacomponentofOtherFederalReserveassets.Previously,theywereincludedinOtherFederal Reserveliabilitiesandcapital. 5 Includescurrencyandcoin(otherthangold)issueddirectlybytheU.S.Treasury.Thelargestcomponentsarefractionalanddollarcoins.Fordetailsreferto“U.S.Currency andCoinOutstandingandinCirculation,”TreasuryBulletin.

StatisticalTables 293 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 Other8 b c a l l e a a n r c in e g s9 and l R ia c e b a s i p e li i t r t i v a e e l s 4,10 R B e a s n e k rv s e account account 1984 183,796 0 513 n/a 5,316 n/a 253 867 1,126 5,952 20,693 1985 197,488 0 550 n/a 9,351 n/a 480 1,041 1,490 5,940 27,141 1986 211,995 0 447 n/a 7,588 n/a 287 917 1,812 6,088 46,295 1987 230,205 0 454 n/a 5,313 n/a 244 1,027 1,687 7,129 40,097 1988 247,649 0 395 n/a 8,656 n/a 347 548 1,605 7,683 37,742 1989 260,456 0 450 n/a 6,217 n/a 589 1,298 1,618 8,486 36,713 1990 286,963 0 561 n/a 8,960 n/a 369 528 1,960 8,147 36,081 1991 307,756 0 636 n/a 17,697 n/a 968 1,869 3,946 8,113 25,051 1992 334,701 0 508 n/a 7,492 n/a 206 653 5,897 7,984 25,544 1993 365,271 0 377 n/a 14,809 n/a 386 636 6,332 9,292 27,967 1994 403,843 0 335 n/a 7,161 n/a 250 1,143 4,196 11,959 25,061 1995 424,244 0 270 n/a 5,979 n/a 386 2,113 5,167 12,342 22,960 1996 450,648 0 249 n/a 7,742 n/a 167 1,178 6,601 13,829 17,310 1997 482,327 0 225 n/a 5,444 n/a 457 1,171 6,684 15,500 23,447 1998 517,484 0 85 n/a 6,086 n/a 167 1,869 6,780 16,354 19,164 1999 628,359 0 109 n/a 28,402 n/a 71 1,644 7,481 17,256 16,039 2000 593,694 0 450 n/a 5,149 n/a 216 2,478 6,332 17,962 11,295 2001 643,301 0 425 n/a 6,645 n/a 61 1,356 8,525 17,083 8,469 2002 687,518 21,091 367 n/a 4,420 n/a 136 1,266 10,534 18,977 11,988 2003 724,187 25,652 321 n/a 5,723 n/a 162 995 11,829 19,793 11,054 2004 754,877 30,783 270 n/a 5,912 n/a 80 1,285 9,963 26,378 14,137 2005 794,014 30,505 202 n/a 4,573 n/a 83 2,144 8,651 30,466 10,678 2006 820,176 29,615 252 n/a 4,708 n/a 98 972 6,842 36,231 11,847 2007 828,938 43,985 259 n/a 16,120 n/a 96 1,830 6,614 41,622 13,986 2008 889,898 88,352 259 n/a 106,123 259,325 1,365 21,221 4,387 48,921 855,599 2009 928,249 77,732 239 n/a 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 2012 1,169,159 107,188 150 0 92,720 0 6,427 27,476 n/a 66,093 1,491,044 2013r 1,241,228 315,924 234 0 162,399 0 7,970 26,181 n/a 63,049 2,249,070 2014 1,343,010 509,837 201 0 223,452 0 5,242 20,320 n/a 61,447 2,377,995 Jan 1,227,908 203,755 260 12,822 88,573 0 7,971 16,973 n/a 62,992 2,524,797 Feb 1,251,821 216,539 269 0 46,029 0 7,975 14,545 n/a 62,542 2,608,266 Mar 1,268,860 341,023 279 14,251 142,189 0 6,977 11,095 n/a 63,240 2,430,060 Apr 1,272,401 325,498 229 0 148,343 0 7,826 7,659 n/a 62,715 2,514,438 May 1,280,062 276,683 186 42,904 28,894 0 7,808 5,262 n/a 64,175 2,664,829 Jun 1,282,504 456,501 146 92,420 139,299 0 5,942 11,450 n/a 64,192 2,363,424 Jul 1,286,231 266,930 140 0 127,237 0 6,565 9,496 n/a 62,060 2,690,413 Aug 1,292,915 277,169 161 0 48,664 0 6,566 7,992 n/a 64,125 2,761,889 Sep 1,290,427 410,131 159 0 158,302 0 5,243 27,067 n/a 64,112 2,537,847 Oct 1,299,978 295,564 203 219,144 117,403 0 5,260 9,058 n/a 62,597 2,519,832 Nov 1,317,568 277,262 189 334,714 108,270 0 5,248 6,839 n/a 63,626 2,416,550 Dec 1,343,010 509,837 201 0 223,452 0 5,242 20,320 n/a 61,447 2,377,995 6 Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities,andagencymortgage-backedsecurities. 7 CoinandpapercurrencyheldbytheTreasury. 8 Asof2014,includesdespositsofdesignatedfinancialmarketutilites. 9 RequiredclearingbalanceswerediscontinuedinJuly2012. 10In2010,includesfundsfromAmericanInternationalGroup,Inc.assetdispositions,heldasagent. n/a Notapplicable. r Revised.

294 101stAnnualReport|2014 Table6B.Loansandothercreditextensions,bytype,year-end1984–2014andmonth-end2014 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 L a n C id e 8 e ,9 I n I L M L L a a C n id e 8, e 1 I n I 0 I L T L A C L 1 F 1 A in I L A t L e / C A i r n e s L s 1 IC 2 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 3 dealer credit1 credit2 1984 3,577 n/a 3,577 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1985 3,060 n/a 3,060 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1986 1,565 n/a 1,565 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1987 3,815 n/a 3,815 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1988 2,170 n/a 2,170 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1989 481 n/a 481 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1990 190 n/a 190 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1991 218 n/a 218 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1992 675 n/a 675 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1993 94 n/a 94 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1994 223 n/a 223 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1995 135 n/a 135 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1996 85 n/a 85 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1997 2,035 n/a 2,035 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1998 17 n/a 17 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1999 233 n/a 233 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 2000 110 n/a 110 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 2001 34 n/a 34 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 2002 40 n/a 40 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 2003 62 n/a 62 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 2004 43 n/a 43 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 2005 72 n/a 72 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 2006 67 n/a 67 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 2007 72,636 40,000 8,636 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 24,000 2008 1,605,848 450,219 93,791 37,404 23,765 n/a 38,914 334,102 0 27,023 20,117 26,785 n/a n/a 553,728 2009 281,095 75,918 20,700 0 0 47,532 22,184 14,064 n/a 26,701 15,659 22,661 298 25,106 10,272 2010 138,311 0 221 n/a n/a 24,703 19,953 n/a n/a 26,967 16,198 23,143 665 26,385 75 2011 144,098 0 196 n/a n/a 9,013 n/a n/a n/a 7,232 9,280 17,744 811 n/a 99,823 2012 11,867 0 70 n/a n/a 556 n/a n/a n/a 1,413 61 22 856 n/a 8,889 2013 2,177 0 74 n/a n/a 97 n/a n/a n/a 1,541 63 22 109 n/a 272 2014 3,351 0 145 n/a n/a n/a n/a n/a n/a 1,678 n/a n/a n/a n/a 1,528 (continuedonnextpage)

StatisticalTables 295 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 L a n C id e 8 e ,9 I n I L M L L a a C n id e 8, e 1 I n I 0 I L T L A C L 1 F 1 A in I L A t L e / C A i r n e s L s 1 IC 2 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 3 dealer credit1 credit2 2014,month-end Jan 2,245 0 17 n/a n/a 96 n/a n/a n/a 1,579 63 22 108 n/a 359 Feb 2,330 0 4 n/a n/a 95 n/a n/a n/a 1,581 63 22 106 n/a 458 Mar 2,298 0 35 n/a n/a 82 n/a n/a n/a 1,584 63 22 105 n/a 407 Apr 2,252 0 40 n/a n/a 81 n/a n/a n/a 1,654 63 22 92 n/a 300 May 2,168 0 83 n/a n/a 79 n/a n/a n/a 1,656 63 22 91 n/a 174 Jun 2,167 0 164 n/a n/a 49 n/a n/a n/a 1,655 63 22 90 n/a 124 Jul 2,125 0 213 n/a n/a 34 n/a n/a n/a 1,658 63 22 60 n/a 75 Aug 2,156 0 253 n/a n/a 34 n/a n/a n/a 1,664 63 22 44 n/a 76 Sep 2,289 0 327 n/a n/a 14 n/a n/a n/a 1,664 0 0 44 n/a 240 Oct 1,870 0 166 n/a n/a n/a n/a n/a n/a 1,679 0 0 24 n/a 1 Nov 1,794 0 112 n/a n/a n/a n/a n/a n/a 1,681 n/a n/a n/a n/a 1 Dec 3,351 0 145 n/a n/a n/a n/a n/a n/a 1,678 n/a n/a n/a n/a 1,528 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,andthelastloanrepaymentwasreceivedinOctober2014. 5 CreditextendedtoAmericanInternationalGroup,Inc.(AIG)includesoutstandingprincipalandcapitalizedinterestnetofunamortizeddeferredcommitmentfeesand allowanceforloanrestructuring.ExcludescreditextendedtoconsolidatedLLCs.UpontheclosingoftheAIGrecapitalizationplaninJanuary2011,thecreditextendedtoAIG bytheFRBNYundertherevolvingcreditfacilitywasrepaidinfull. 6 NetportfolioholdingsofCommercialPaperFundingFacility(CPFF)LLC.TheCPFFwasdiscontinuedinFebruary2010. 7 NetportfolioholdingsofMoneyMarketInvestorFundingFacility(MMIFF)LLC.TheMMIFFwasdiscontinuedinOctober2009. 8 Netportfolioholdingsatfairvalue. 9 MaidenLaneIILLCwasdiscontinuedinNovember2014. 10MaidenLaneIIILLCwasdiscontinuedinNovember2014. 11NetportfolioholdingsofTALFLLC,alimitedliabilitycompanyformedtopurchaseandmanageanyasset-backedsecuritiesthatmightbesurrenderedbyaTALFborroweror otherwiseclaimedbytheFRBNYinconnectionwithitsenforcementrightstotheTALFcollateral.TALFLLCwasdiscontinuedinNovember2014. 12PreferredinterestsinAIAAuroraLLCandALICOHoldingsLLCatbookvalue.AftertheclosingoftheAIGrecapitalizationplan,theFederalReservewaspaidinfullforits preferredinterestsinthespecialpurposevehiclesAIAAuroraLLCandALICOHoldingsLLC. 13Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. n/a Notapplicable.

296 101stAnnualReport|2014 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 n/a 1,795 1919 300 0 2,215 201 575 0 3,292 2,707 n/a 1,707 1920 287 0 2,687 119 262 0 3,355 2,639 n/a 1,709 1921 234 0 1,144 40 146 0 1,563 3,373 n/a 1,842 1922 436 0 618 78 273 0 1,405 3,642 n/a 1,958 1923 80 54 723 27 355 0 1,238 3,957 n/a 2,009 1924 536 4 320 52 390 0 1,302 4,212 n/a 2,025 1925 367 8 643 63 378 0 1,459 4,112 n/a 1,977 1926 312 3 637 45 384 0 1,381 4,205 n/a 1,991 1927 560 57 582 63 393 0 1,655 4,092 n/a 2,006 1928 197 31 1,056 24 500 0 1,809 3,854 n/a 2,012 1929 488 23 632 34 405 0 1,583 3,997 n/a 2,022 1930 686 43 251 21 372 0 1,373 4,306 n/a 2,027 1931 775 42 638 20 378 0 1,853 4,173 n/a 2,035 1932 1,851 4 235 14 41 0 2,145 4,226 n/a 2,204 1933 2,435 2 98 15 137 0 2,688 4,036 n/a 2,303 1934 2,430 0 7 5 21 0 2,463 8,238 n/a 2,511 1935 2,430 1 5 12 38 0 2,486 10,125 n/a 2,476 1936 2,430 0 3 39 28 0 2,500 11,258 n/a 2,532 1937 2,564 0 10 19 19 0 2,612 12,760 n/a 2,637 1938 2,564 0 4 17 16 0 2,601 14,512 n/a 2,798 1939 2,484 0 7 91 11 0 2,593 17,644 n/a 2,963 1940 2,184 0 3 80 8 0 2,274 21,995 n/a 3,087 1941 2,254 0 3 94 10 0 2,361 22,737 n/a 3,247 1942 6,189 0 6 471 14 0 6,679 22,726 n/a 3,648 1943 11,543 0 5 681 10 0 12,239 21,938 n/a 4,094 1944 18,846 0 80 815 4 0 19,745 20,619 n/a 4,131 1945 24,262 0 249 578 2 0 25,091 20,065 n/a 4,339 1946 23,350 0 163 580 1 0 24,093 20,529 n/a 4,562 1947 22,559 0 85 535 1 0 23,181 22,754 n/a 4,562 1948 23,333 0 223 541 1 0 24,097 24,244 n/a 4,589 1949 18,885 0 78 534 2 0 19,499 24,427 n/a 4,598 1950 20,725 53 67 1,368 3 0 22,216 22,706 n/a 4,636 1951 23,605 196 19 1,184 5 0 25,009 22,695 n/a 4,709 1952 24,034 663 156 967 4 0 25,825 23,187 n/a 4,812 1953 25,318 598 28 935 2 0 26,880 22,030 n/a 4,894 1954 24,888 44 143 808 1 0 25,885 21,713 n/a 4,985 1955 24,391 394 108 1,585 29 0 26,507 21,690 n/a 5,008 1956 24,610 305 50 1,665 70 0 26,699 21,949 n/a 5,066 1957 23,719 519 55 1,424 66 0 25,784 22,781 n/a 5,146 1958 26,252 95 64 1,296 49 0 27,755 20,534 n/a 5,234 1959 26,607 41 458 1,590 75 0 28,771 19,456 n/a 5,311 1960 26,984 400 33 1,847 74 0 29,338 17,767 n/a 5,398 1961 28,722 159 130 2,300 51 0 31,362 16,889 n/a 5,585 1962 30,478 342 38 2,903 110 0 33,871 15,978 n/a 5,567 1963 33,582 11 63 2,600 162 0 36,418 15,513 n/a 5,578 1964 36,506 538 186 2,606 94 0 39,930 15,388 n/a 5,405 1965 40,478 290 137 2,248 187 0 43,340 13,733 n/a 5,575 1966 43,655 661 173 2,495 193 0 47,177 13,159 n/a 6,317 1967 48,980 170 141 2,576 164 0 52,031 11,982 n/a 6,784 (continuedonnextpage)

StatisticalTables 297 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 1968 52,937 0 186 3,443 58 0 56,624 10,367 n/a 6,795 1969 57,154 0 183 3,440 64 2,743 63,584 10,367 n/a 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.

298 101stAnnualReport|2014 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 n/a 1,585 51 1919 5,091 385 31 73 28 208 0 0 1,890 n/a 1,822 68 1920 5,325 218 57 5 18 298 0 0 1,781 n/a n/a n/a 1921 4,403 214 96 12 15 285 0 0 1,753 n/a 1,654 99 1922 4,530 225 11 3 26 276 0 0 1,934 n/a n/a n/a 1923 4,757 213 38 4 19 275 0 0 1,898 n/a 1,884 14 1924 4,760 211 51 19 20 258 0 0 2,220 n/a 2,161 59 1925 4,817 203 16 8 21 272 0 0 2,212 n/a 2,256 -44 1926 4,808 201 17 46 19 293 0 0 2,194 n/a 2,250 -56 1927 4,716 208 18 5 21 301 0 0 2,487 n/a 2,424 63 1928 4,686 202 23 6 21 348 0 0 2,389 n/a 2,430 -41 1929 4,578 216 29 6 24 393 0 0 2,355 n/a 2,428 -73 1930 4,603 211 19 6 22 375 0 0 2,471 n/a 2,375 96 1931 5,360 222 54 79 31 354 0 0 1,961 n/a 1,994 -33 1932 5,388 272 8 19 24 355 0 0 2,509 n/a 1,933 576 1933 5,519 284 3 4 128 360 0 0 2,729 n/a 1,870 859 1934 5,536 3,029 121 20 169 241 0 0 4,096 n/a 2,282 1,814 1935 5,882 2,566 544 29 226 253 0 0 5,587 n/a 2,743 2,844 1936 6,543 2,376 244 99 160 261 0 0 6,606 n/a 4,622 1,984 1937 6,550 3,619 142 172 235 263 0 0 7,027 n/a 5,815 1,212 1938 6,856 2,706 923 199 242 260 0 0 8,724 n/a 5,519 3,205 1939 7,598 2,409 634 397 256 251 0 0 11,653 n/a 6,444 5,209 1940 8,732 2,213 368 1,133 599 284 0 0 14,026 n/a 7,411 6,615 1941 11,160 2,215 867 774 586 291 0 0 12,450 n/a 9,365 3,085 1942 15,410 2,193 799 793 485 256 0 0 13,117 n/a 11,129 1,988 1943 20,449 2,303 579 1,360 356 339 0 0 12,886 n/a 11,650 1,236 1944 25,307 2,375 440 1,204 394 402 0 0 14,373 n/a 12,748 1,625 1945 28,515 2,287 977 862 446 495 0 0 15,915 n/a 14,457 1,458 1946 28,952 2,272 393 508 314 607 0 0 16,139 n/a 15,577 562 1947 28,868 1,336 870 392 569 563 0 0 17,899 n/a 16,400 1,499 1948 28,224 1,325 1123 642 547 590 0 0 20,479 n/a 19,277 1,202 1949 27,600 1,312 821 767 750 706 0 0 16,568 n/a 15,550 1,018 1950 27,741 1,293 668 895 565 714 0 0 17,681 n/a 16,509 1,172 1951 29,206 1,270 247 526 363 746 0 0 20,056 n/a 19,667 389 1952 30,433 1,270 389 550 455 777 0 0 19,950 n/a 20,520 -570 1953 30,781 761 346 423 493 839 0 0 20,160 n/a 19,397 763 1954 30,509 796 563 490 441 907 0 0 18,876 n/a 18,618 258 1955 31,158 767 394 402 554 925 0 0 19,005 n/a 18,903 102 1956 31,790 775 441 322 426 901 0 0 19,059 n/a 19,089 -30 1957 31,834 761 481 356 246 998 0 0 19,034 n/a 19,091 -57 1958 32,193 683 358 272 391 1,122 0 0 18,504 n/a 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 299 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 1,013 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. n/a Notapplicable.

300 101stAnnualReport|2014 Table7.Principalassetsandliabilitiesofinsuredcommercialbanks,byclassofbank,June30,2014and2013 Millionsofdollars,exceptasnoted Memberbanks Item Total Nonmemberbanks Total National State 2014 Assets Loansandinvestments 9,663,697 7,782,729 6,321,060 1,461,669 1,880,968 Loans,gross 6,848,106 5,389,059 4,422,865 966,194 1,459,047 Net 6,846,847 5,388,379 4,422,393 965,986 1,458,468 Investments 2,815,591 2,393,670 1,898,195 495,475 421,921 U.S.Treasuryand federalagency securities 447,347 357,408 276,851 80,557 89,939 Other 2,368,244 2,036,262 1,621,344 414,918 331,982 Cashassets,total 1,493,844 1,344,453 1,028,672 315,781 149,391 Liabilities Deposits,total 9,188,365 7,490,342 6,078,366 1,411,976 1,698,023 Interbank 179,462 156,755 122,672 34,083 22,707 Othertransactions 1,581,682 1,306,779 926,377 380,402 274,903 Othernontransactions 7,427,221 6,026,808 5,029,317 997,491 1,400,413 Equitycapital 1,571,665 1,308,480 1,078,546 229,934 263,185 Numberofbanks 5,713 1,935 1,109 826 3,778 2013 Assets Loansandinvestments 9,172,509 7,391,004 6,030,012 1,360,992 1,781,505 Loans,gross 6,504,652 5,140,521 4,246,181 894,340 1,364,131 Net 6,503,474 5,139,883 4,245,745 894,138 1,363,591 Investments 2,667,857 2,250,483 1,783,831 466,652 417,374 U.S.Treasuryand federalagency securities 359,076 270,899 196,797 74,102 88,177 Other 2,308,782 1,979,585 1,587,034 392,551 329,197 Cashassets,total 1,157,209 1,002,704 785,000 217,704 154,505 Liabilities Deposits,total 8,525,996 6,910,667 5,660,131 1,250,536 1,615,329 Interbank 165,734 142,536 117,971 24,565 23,198 Othertransactions 1,319,948 1,062,065 762,819 299,246 257,883 Othernontransactions 7,040,316 5,706,067 4,779,341 926,726 1,334,249 Equitycapital 1,473,317 1,227,341 1,013,073 214,268 245,976 Numberofbanks 5,938 2,012 1,193 819 3,926 Note:IncludesU.S.-insuredcommercialbankslocatedintheUnitedStatesbutnotU.S.-insuredcommercialbanksoperatinginU.S.territoriesorpossessions.Dataare domesticassetsandliabilities(exceptforthosecomponentsreportedonaconsolidatedbasisonly).Componentsmaynotsumtototalsbecauseofrounding.Datafor2013 havebeenrevised.

StatisticalTables 301 Table8.Initialmarginrequirements underRegulationsT,U,andX Percentofmarketvalue Short Margin Effectivedate Convertiblebonds sales, stocks Tonly1 1934,Oct.1 25–45 n/a n/a 1936,Feb.1 25–55 n/a n/a 1936,Apr.1 55 n/a n/a 1937,Nov.1 40 n/a 50 1945,Feb.5 50 n/a 50 1945,July5 75 n/a 75 1946,Jan.21 100 n/a 100 1947,Feb.1 75 n/a 75 1949,Mar.3 50 n/a 50 1951,Jan.17 75 n/a 75 1953,Feb.20 50 n/a 50 1955,Jan.4 60 n/a 60 1955,Apr.23 70 n/a 70 1958,Jan.16 50 n/a 50 1958,Aug.5 70 n/a 70 1958,Oct.16 90 n/a 90 1960,July28 70 n/a 70 1962,July10 50 n/a 50 1963,Nov.6 70 n/a 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. n/a Notapplicable.

302 101stAnnualReport|2014 Table9A.StatementofconditionoftheFederalReserveBanks,byBank,December31,2014and2013 Millionsofdollars Total Boston NewYork Philadelphia Cleveland Richmond Item 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 Assets Goldcertificates 11,037 11,037 352 391 4,125 3,925 338 397 464 512 824 856 Specialdrawingrights certificates 5,200 5,200 196 196 1,818 1,818 210 210 237 237 412 412 Coin 1,873 1,955 30 35 79 82 122 123 120 130 307 335 Loansandsecurities Primary,secondary, andseasonalloans 145 74 11 0 4 10 7 0 0 0 1 1 TermAsset-Backed SecuritiesLoan Facility1 0 98 n/a n/a 0 98 n/a n/a n/a n/a n/a n/a Treasurysecurities, boughtoutright2 2,461,363 2,208,775 49,789 57,757 1,510,695 1,224,856 58,967 63,998 53,740 56,410 137,567 137,343 Government-sponsored enterprisedebt securities,bought outright2 38,677 57,221 782 1,496 23,739 31,731 927 1,658 844 1,461 2,162 3,558 Federalagencyand government-sponsored enterprise mortgage-backed securities,bought outright3 1,736,833 1,490,162 35,133 38,966 1,066,005 826,356 41,609 43,176 37,921 38,057 97,073 92,659 Unamortized premiumson securitiesheld outright4 206,835 208,610 4,184 5,455 126,948 115,682 4,955 6,043 4,516 5,329 11,560 12,972 Unamortizeddiscounts onsecuritiesheld outright4 -18,394 -12,352 -372 -323 -11,290 -6,850 -441 -357 -402 -316 -1,028 -768 Totalloansand securities 4,425,459 3,952,588 89,527 103,351 2,716,101 2,191,883 106,024 114,518 96,619 100,941 247,335 245,765 Accruedinterest receivable-System OpenMarket Account 25,644 23,493 521 616 15,715 13,007 619 685 565 605 1,446 1,474 Netportfolioholdings ofconsolidated variableinterest entities5 1,811 1,926 n/a n/a 1,811 1,926 n/a n/a n/a n/a n/a n/a Foreigncurrency denominated investments6 20,900 23,724 951 1,166 6,720 7,583 1,571 1,835 1,662 1,851 4,358 4,982 Centralbankliquidity swaps7 1,528 272 70 13 491 87 115 21 122 21 319 57 OtherSOMAassets 29 1 1 0 18 1 1 0 1 0 2 0 Otherassets Itemsinprocessof collection 86 165 0 0 0 0 0 0 0 0 0 0 Bankpremises 2,263 2,290 124 123 437 432 76 73 110 111 220 228 Deferredasset (accruedliability)remittancestothe Treasury 667 0 -16 0 923 0 -7 0 5 0 -28 0 Allotherassets8 1,277 1,498 66 64 341 580 43 43 45 42 244 247 Interdistrictsettlement account 0 0 49,233 6,796 -187,283 166,886 -4,108 -19,721 38,162 4,138 -3,289 -32,634 Totalassets 4,497,774 4,024,149 141,055 112,751 2,561,296 2,388,210 105,004 98,184 138,112 108,588 252,150 221,722 Liabilities FederalReservenotes outstanding 1,469,554 1,400,977 45,956 45,182 475,290 513,592 46,452 41,983 68,649 58,552 103,087 104,492 (continuedonnextpage)

StatisticalTables 303 Table9A.—continued Total Boston NewYork Philadelphia Cleveland Richmond Item 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 Less:Notesheldby Federal ReserveBank 170,829 203,057 4,688 9,988 56,971 38,515 4,940 5,920 7,811 5,080 11,152 8,774 FederalReservenotes outstanding,net 1,298,725 1,197,920 41,268 35,194 418,319 475,077 41,512 36,063 60,838 53,472 91,935 95,718 Securitiessoldunder agreementsto repurchase9 509,837 315,924 10,313 8,261 312,919 175,193 12,214 9,154 11,132 8,068 28,495 19,645 Deposits Depositoryinstitutions 2,377,996 2,249,070 86,758 66,567 1,560,513 1,518,974 47,897 48,568 61,513 42,425 118,097 94,182 Treasury,general account 223,452 162,399 n/a n/a 223,452 162,399 n/a n/a n/a n/a n/a n/a Foreign,official accounts 5,242 7,970 2 2 5,214 7,943 3 3 3 3 8 8 Other10 20,318 26,180 2 8 20,177 26,020 25 17 0 0 92 105 Totaldeposits 2,627,008 2,445,619 86,762 66,577 1,809,356 1,715,336 47,925 48,588 61,516 42,428 118,197 94,295 Otherliabilities Accruedremittancesto Treasury11 0 4,791 0 87 0 3,328 0 84 0 84 0 192 Deferredcredititems 641 1,127 0 0 3 0 0 0 0 3 0 0 Consolidatedvariable interestentities12 127 274 n/a n/a 127 274 n/a n/a n/a n/a n/a n/a Allotherliabilities13 4,292 3,480 120 130 2,156 1,312 159 159 170 157 409 400 Totalliabilities 4,440,630 3,969,135 138,463 110,249 2,542,880 2,370,520 101,810 94,048 133,656 104,212 239,036 210,250 Capitalaccounts Capitalpaid-in 28,572 27,507 1,296 1,251 9,208 8,845 1,597 2,068 2,228 2,188 6,557 5,736 Surplus(including accumulatedother comprehensiveloss) 28,572 27,507 1,296 1,251 9,208 8,845 1,597 2,068 2,228 2,188 6,557 5,736 Totalliabilitiesand capitalaccounts 4,497,774 4,024,149 141,055 112,751 2,561,296 2,388,210 105,004 98,184 138,112 108,588 252,150 221,722 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 Measuredatfairvalue.Amountsinclude$0millionand$1millioninunrealizedgainsasofDecember31,2014and2013,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,seesection6,“Table6.Keyfinancialdatafor consolidatedvariableinterestentities.” 6 Valueddailyatmarketexchangerates. 7 Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. 8 Includesfurnitureandequipmentanddepositoryinstitutionoverdrafts. 9 Contractamountofagreements. 10Includesdepositsofgovernment-sponsoredenterprises,theConsumerFinancialProtectionBureau,internationalorganizations,anddesignatedfinancialmarketutilities. ThesedepositsareprimarilyheldbytheFRBNY. 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. n/a Notapplicable.

304 101stAnnualReport|2014 Table9A.StatementofconditionoftheFederalReserveBanks,byBank,December31,2014and2013—continued Millionsofdollars Atlanta Chicago St.Louis Minneapolis KansasCity Dallas SanFrancisco Item 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 Assets Goldcertificates 1,349 1,421 706 792 278 310 173 190 291 309 880 728 1,257 1,206 Specialdrawingrights certificates 654 654 424 424 150 150 90 90 153 153 282 282 574 574 Coin 208 238 279 285 23 19 45 48 152 152 188 178 320 332 Loansandsecurities Primary,secondary, andseasonalloans 5 6 30 18 0 3 48 27 31 9 0 0 8 0 TermAsset-Backed SecuritiesLoan Facility1 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Treasurysecurities, boughtoutright2 136,063 146,726 100,599 119,354 30,359 35,540 15,084 20,960 32,422 41,788 74,998 85,772 261,080 218,271 Government-sponsored enterprisedebt securities,bought outright2 2,138 3,801 1,581 3,092 477 921 237 543 510 1,083 1,179 2,222 4,103 5,655 Federalagencyand governmentsponsored enterprise mortgage-backed securities,bought outright3 96,011 98,989 70,987 80,523 21,423 23,977 10,644 14,140 22,878 28,192 52,922 57,867 184,228 147,258 Unamortized premiumson securitiesheld outright4 11,434 13,858 8,454 11,273 2,551 3,355 1,268 1,980 2,725 3,947 6,302 8,101 21,939 20,614 Unamortizeddiscounts onsecuritiesheld outright4 -1,017 -821 -752 -668 -227 -198 -113 -117 -242 -233 -561 -479 -1,951 -1,220 Totalloansand securities 244,634 262,559 180,899 213,592 54,583 63,598 27,168 37,533 58,324 74,786 134,840 153,483 469,407 390,578 Accruedinterest receivable-System OpenMarket Account 1,418 1,560 1,047 1,267 316 377 157 222 338 444 780 910 2,723 2,325 Netportfolioholdings ofconsolidated variableinterest entities5 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Foreigncurrency denominated investments6 1,202 1,352 577 677 176 198 88 99 220 240 349 376 3,024 3,365 Centralbankliquidity swaps7 88 15 42 8 13 2 6 1 16 3 26 4 221 39 OtherSOMAassets 2 0 1 0 0 0 0 0 0 0 1 0 3 0 Otherassets Itemsinprocessof collection 86 165 0 0 0 0 0 0 0 0 0 0 0 0 Bankpremises 212 211 201 203 122 127 96 99 241 247 223 231 201 204 Deferredasset (accruedliability)remittancestothe Treasury -51 0 -24 0 -12 0 14 0 -3 0 -19 0 -114 0 Allotherassets8 100 95 66 61 80 84 39 72 48 42 62 60 142 109 Interdistrictsettlement account 13,938 -44,679 -923 -53,946 -4,483 -19,511 3,814 -14,795 3,760 -22,792 23,691 -31,534 67,487 61,793 Totalassets 263,840 223,591 183,295 163,363 51,246 45,354 31,690 23,559 63,540 53,584 161,303 124,718 545,245 460,525 Liabilities FederalReservenotes outstanding 214,198 170,140 101,373 89,177 41,433 34,459 23,220 21,614 38,323 36,847 120,243 120,857 191,329 164,081 (continuedonnextpage)

StatisticalTables 305 Table9A.—continued Atlanta Chicago St.Louis Minneapolis KansasCity Dallas SanFrancisco Item 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 Less:Notesheldby Federal ReserveBank 22,254 18,059 10,427 13,399 4,734 3,161 3,077 9,275 4,537 10,308 14,760 53,146 25,476 27,431 FederalReservenotes outstanding,net 191,944 152,081 90,946 75,778 36,699 31,298 20,143 12,339 33,786 26,539 105,483 67,711 165,853 136,650 Securitiessoldunder agreementsto repurchase9 28,183 20,986 20,838 17,071 6,288 5,083 3,124 2,998 6,716 5,977 15,535 12,268 54,079 31,219 Deposits Depositoryinstitutions 39,629 45,828 69,727 68,547 7,610 8,325 7,978 7,723 22,332 20,315 39,292 43,500 316,649 284,115 Treasury,general account n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Foreign,official accounts 2 2 1 1 0 0 0 0 0 0 1 1 6 6 Other10 6 10 12 13 0 0 0 0 1 1 1 3 2 3 Totaldeposits 39,637 45,840 69,740 68,561 7,610 8,325 7,978 7,723 22,333 20,316 39,294 43,504 316,657 284,124 Otherliabilities Acruedremittancesto Treasury11 0 231 0 186 0 62 0 44 0 66 0 137 0 292 Deferredcredititems 556 1,009 0 0 0 0 82 118 0 0 0 0 0 0 Consolidatedvariable interestentities12 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Allotherliabilities13 268 280 237 249 117 124 123 105 103 106 167 178 264 278 Totalliabilities 260,588 220,427 181,761 161,845 50,714 44,892 31,450 23,327 62,938 53,004 160,479 123,798 536,853 452,563 Capitalaccounts Capitalpaid-in 1,626 1,582 767 759 266 231 120 116 301 290 412 460 4,196 3,981 Surplus(including accumulatedother comprehensiveloss) 1,626 1,582 767 759 266 231 120 116 301 290 412 460 4,196 3,981 Totalliabilitiesand capitalaccounts 263,840 223,591 183,295 163,363 51,246 45,354 31,690 23,559 63,540 53,584 161,303 124,718 545,245 460,525 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,seesection6,“Table6.Keyfinancialdatafor consolidatedvariableinterestentities.” 6 Valueddailyatmarketexchangerates. 7 Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhentheforeigncurrencyisreturnedtotheforeigncentralbank.This exchangerateequalsthemarketexchangerateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. 8 Includesfurnitureandequipmentanddepositoryinstitutionoverdrafts. 9 Contractamountofagreements. 10Includesdepositsofgovernment-sponsoredenterprises,theConsumerFinancialProtectionBureau,internationalorganizations,anddesignatedfinancialmarketutilities. ThesedepositsareprimarilyheldbytheFRBNY. 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. n/a Notapplicable.

306 101stAnnualReport|2014 Table9B.StatementofconditionoftheFederalReserve Banks,December31,2014and2013 Supplementalinformation—collateralheldagainst FederalReservenotes:FederalReserveagents’accounts Millionsofdollars Item 2014 2013 FederalReservenotesoutstanding 1,469,554 1,400,977 Less:NotesheldbyFederalReserve Banksnotsubjectto collateralization 170,829 203,057 CollateralizedFederalReservenotes 1,298,725 1,197,920 CollateralforFederalReservenotes Goldcertificates 11,037 11,037 Specialdrawingrightscertificates 5,200 5,200 U.S.Treasurysecurities1 1,282,488 1,181,683 Totalcollateral 1,298,725 1,197,920 1 Facevalue.Includescompensationtoadjustfortheeffectofinflationonthe originalfacevalueofinflation-indexedsecurities.

StatisticalTables 307 Table10.IncomeandexpensesoftheFederalReserveBanks,byBank,2014 Thousandsofdollars Kansas San Item Total Boston NewYork PhiladelphiaCleveland Richmond Atlanta Chicago St.Louis Minneapolis Dallas City Francisco Currentincome Interestincome Primary,secondary, andseasonalloans 251 3 6 4 3 7 28 26 29 83 22 11 30 TermAsset-Backed SecuritiesLoan Facility 1,553 n/a 1,553 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Totalloaninterest income 1,804 3 1,559 4 3 7 28 26 29 83 22 11 30 Treasurysecurities 63,010,8631,368,66337,732,894 1,589,259 1,434,6163,621,6523,660,3332,784,497 836,867 439,547 921,2962,052,809 6,568,428 Government-sponsored enterprisedebt securities,net 1,578,931 34,778 940,689 40,233 36,251 91,264 92,629 70,847 21,276 11,288 23,554 52,121 164,001 Federalagencyand government-sponsored enterprise mortgage-backed securities,net 51,264,4941,117,00730,663,905 1,295,949 1,169,3612,950,2172,984,5502,273,173 683,073 359,588 752,9361,675,055 5,339,682 Foreigncurrency denominated investments,net 77,852 3,567 25,020 5,869 6,181 16,245 4,473 2,156 654 329 816 1,296 11,246 Centralbankliquidity swaps1 1,147 53 369 87 91 239 66 32 10 5 12 19 166 TotalSOMAinterest income 115,933,2872,524,06869,362,877 2,931,397 2,646,5006,679,6176,742,0515,130,7051,541,880 810,757 1,698,6143,781,30012,083,523 Totalinterestincome 115,935,0912,524,07169,364,436 2,931,401 2,646,5036,679,6246,742,0795,130,7311,541,909 810,840 1,698,6363,781,31112,083,553 Pricedservices 433,122 n/a 95,430 n/a n/a n/a 252,974 84,717 n/a n/a n/a n/a n/a Compensation receivedfor servicesprovided2 176,758 15,802 2,160 2,564 5,621 15,660 698 23,950 2,234 61,392 31,055 7,139 8,484 Securitieslendingfees 7,331 160 4,383 185 167 422 427 326 98 52 108 240 763 Otherincome 9,210 145 6,502 165 155 386 398 302 90 49 127 219 672 Totalotherincome 626,421 16,107 108,475 2,914 5,943 16,468 254,497 109,295 2,422 61,493 31,290 7,598 9,919 Totalcurrentincome 116,561,5122,540,17869,472,911 2,934,315 2,652,4466,696,0926,996,5765,240,0261,544,331 872,333 1,729,9263,788,90912,093,472 Netexpenses Personnel Salariesandother personnelexpenses 2,122,219 130,515 496,857 99,765 91,986 321,406 155,328 163,074 117,298 100,627 141,020 108,898 195,444 Retirementandother benefits 675,590 33,504 156,794 32,991 33,484 100,347 57,781 52,494 35,585 33,477 39,540 39,009 60,584 Administrative Fees 188,816 4,382 42,718 10,105 6,854 73,889 17,793 7,967 8,650 3,743 2,729 2,952 7,032 Travel 88,937 3,831 12,456 3,280 5,198 13,731 8,584 9,687 5,374 3,625 7,034 5,147 10,991 Postageandother shippingcosts 13,491 259 797 310 1,374 553 2,628 375 718 433 1,036 2,341 2,668 Communications 46,354 1,043 6,023 580 582 29,606 1,671 1,922 962 1,092 749 965 1,157 Materialsandsupplies 63,909 3,577 21,135 6,587 2,232 6,532 4,767 4,544 2,484 1,583 2,819 3,422 4,226 Building Taxesonrealestate 47,638 6,400 14,875 999 1,824 954 3,260 3,767 739 3,641 3,372 3,769 4,038 Propertydepreciation 132,752 12,943 26,582 6,093 6,679 14,450 9,438 15,194 7,935 4,327 8,194 9,281 11,636 Utilities 39,953 4,151 10,380 1,756 1,467 4,439 3,116 2,239 1,969 1,990 2,246 2,871 3,329 Rent 32,271 229 2,730 936 958 23,209 320 999 1,248 187 640 592 221 Otherbuilding 61,086 5,174 9,925 5,388 3,610 6,770 4,499 6,925 2,361 2,579 2,015 6,083 5,755 Equipment/software Purchases 32,428 1,508 5,598 1,115 1,375 7,329 2,294 2,181 1,884 1,523 2,948 1,970 2,703 Rentals 3,355 317 1,232 187 227 270 336 616 23 64 12 28 45 Depreciation 72,858 4,633 5,531 2,624 2,086 38,939 3,282 3,549 1,829 1,543 2,068 2,649 4,128 Repairsand maintenance 66,426 5,617 5,358 2,620 2,153 26,861 5,499 3,748 1,581 1,370 2,169 3,289 6,161 Software 226,298 7,476 33,228 9,276 6,699 69,206 45,694 5,296 11,701 7,908 8,278 9,707 11,828 (continuedonnextpage)

308 101stAnnualReport|2014 Table10.—continued Kansas San Item Total Boston NewYork PhiladelphiaCleveland Richmond Atlanta Chicago St.Louis Minneapolis Dallas City Francisco Otherexpenses Compensationpaidfor servicecosts incurred2 176,758 n/a 38,979 n/a n/a n/a 126,557 11,222 n/a n/a n/a n/a n/a Otherexpenses 89,395 18,181 86,860 20,836 7,616 (330,894) 26,187 62,021 87,651 26,241 17,908 25,410 41,377 Recoveries (172,847) (18,016) (25,674) (4,287) (6,002) (57,016) (13,004) (9,843) (4,495) (1,793) (9,154) (15,602) (7,962) Expensescapitalized3 (81,602) (5,300) (23,830) (3,649) (7,396) 6,047 (593) (2,294) (2,759) (3,520) (16,812) (1,202) (20,295) Totaloperating expensesbefore pensionexpense and reimbursements 3,926,085 220,424 928,554 197,512 163,006 356,628 465,437 345,683 282,738 190,640 218,811 211,579 345,066 Netperiodicpension expense4 383,113 3,142 352,130 2,294 1,523 3,917 2,904 3,797 2,926 2,717 1,949 1,760 4,054 Reimbursements (569,638) (46,403) (119,696) (44,048) (31,582) (50,246) (21,762) (6,717) (143,587) (32,560) (35,049) (19,884) (18,104) Operatingexpenses 3,739,560 177,163 1,160,988 155,758 132,947 310,299 446,579 342,763 142,077 160,797 185,711 193,455 331,016 Interestexpenseon securitiessold under agreementsto repurchase 112,179 2,357 67,969 2,762 2,504 6,363 6,367 4,781 1,440 738 1,563 3,543 11,791 Intereston reserves5 6,705,226 143,415 4,797,274 146,280 81,358 297,250 110,526 165,197 22,973 17,451 48,961 101,839 772,702 Interestonterm deposits6 156,394 1,214 116,734 10,828 2,850 1,306 763 9,255 147 95 1,579 1,266 10,357 Otherexpenses 1,513 32 917 37 34 86 86 65 19 10 21 48 159 Netexpenses 10,714,872 324,181 6,143,882 315,665 219,693 615,304 564,321 522,061 166,656 179,091 237,835 300,151 1,126,025 Currentnetincome 105,846,6402,215,99763,329,029 2,618,650 2,432,7536,080,7886,432,2554,717,9651,377,675 693,242 1,492,0913,488,75810,967,447 Additionsto(+)anddeductionsfrom(-)currentnetincome Profitonsalesof federalagencyand government-sponsored enterprise mortgage-backed securities 80,850 1,757 48,408 2,040 1,841 4,648 4,698 3,574 1,074 564 1,183 2,635 8,427 Foreigncurrency translationgains (losses) (2,907,260) (131,729) (935,110) (218,304) (231,426) (606,061) (167,236) (80,154) (24,449) (12,298) (30,655) (48,728) (421,110) Netincomefrom consolidated variableinterest entities7 109,058 n/a 109,058 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Otheradditions 647 2 (3,180) 1 2 5 7 2 2 1 3 3,732 69 Otherdeductions (1,579) (73) 316 1 (29) (390) (477) (198) (42) (174) (115) (102) (295) Netdeductionsto(-) currentnetincome (2,718,283) (130,043) (780,508) (216,262) (229,612) (601,798) (163,008) (76,776) (23,415) (11,907) (29,584) (42,463) (412,909) Costof unreimbursed Treasuryservices 4 n/a 4 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a AssessmentsbyBoard Boardexpenditures8 590,000 26,817 191,211 44,315 46,703 121,848 33,789 16,142 5,078 2,475 6,171 9,846 85,606 Costofcurrency 710,807 33,373 151,545 33,966 42,806 65,352 101,404 61,510 21,440 14,072 22,039 55,582 107,718 ConsumerFinancial ProtectionBureau9 563,000 25,562 183,187 42,120 44,427 115,728 32,196 15,330 4,934 2,351 5,897 9,417 81,852 Assessmentsbythe BoardofGovernors 1,863,807 85,752 525,943 120,401 133,936 302,928 167,389 92,982 31,452 18,898 34,107 74,845 275,176 Netincomebefore providingfor remittancestothe Treasury 101,264,5462,000,20262,022,574 2,281,987 2,069,2065,176,0626,101,8584,548,2081,322,808 662,437 1,428,4003,371,45010,279,362 Earningsremittances totheTreasury 96,901,6951,881,29559,625,435 2,624,531 1,873,6013,974,1905,944,7474,481,8921,275,656 634,403 1,392,7183,383,408 9,809,819 Netincome(loss) 4,362,851 118,907 2,397,139 (342,544) 195,6051,201,872 157,111 66,316 47,152 28,034 35,682 (11,958) 469,543 Othercomprehensive income(loss) (1,611,569) 1,894 (1,485,591) (10,832) (22,830) (26,556) (16,594) (12,664) 2,713 (17,329) (6,932) (8,251) (8,598) (continuedonnextpage)

StatisticalTables 309 Table10.—continued Kansas San Item Total Boston NewYork PhiladelphiaCleveland Richmond Atlanta Chicago St.Louis Minneapolis Dallas City Francisco Comprehensive income 2,751,282 120,801 911,548 (353,376) 172,7751,175,316 140,517 53,652 49,865 10,705 28,750 (20,209) 460,945 Distributionofcomprehensiveincome Dividendsoncapital stock 1,685,826 76,432 548,911 118,281 132,812 354,416 96,282 45,772 14,966 7,040 17,680 27,535 245,699 Transferredto/from surplusandchange inaccumulated other comprehensive income 1,064,952 44,370 362,635 (471,660) 39,959 820,900 44,235 7,880 34,900 3,663 11,069 (48,235) 215,236 Earningsremittances totheTreasury 96,901,695 1,881,29559,625,435 2,624,531 1,873,6013,974,1905,944,7474,481,8921,275,656 634,403 1,392,7183,383,408 9,809,819 Totaldistributionof netincome 99,652,473 2,002,09760,536,981 2,271,152 2,046,3725,149,5066,085,2644,535,5441,325,522 645,106 1,421,4673,362,70810,270,754 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$328,466thousandisrecordedonbehalfoftheSysteminthebooksoftheFRBNY.TheRetirementBenefitEqualizationPlanandtheSupplemental EmployeeRetirementPlanarerecordedbyeachFederalReserveBank. 5 InOctober2008,theReserveBanksbegantopayinteresttodepositoryinstitutionsonqualifyingbalancesheldattheFederalReserveBanks. 6 InApril2010,theReserveBanksbegantopayinterestontermdepositsundertheTermDepositFacility. 7 Representstheportionoftheconsolidatedvariableinterestentities’netincomerecordedbytheFRBNY.Theamountincludesinterestincome,interestexpenses,realizedand unrealizedgainsandlosses,andprofessionalfees. 8 Foradditionaldetails,seethe“BoardofGovernorsFinancialStatements”onpage318insection12. 9 TheBoardofGovernorsassessestheReserveBankstofundtheoperationsoftheConsumerFinancialProtectionBureau.TheseassessmentsareallocatedtoeachReserve BankbasedoneachReserveBank’scapitalandsurplusbalancesasofthemostrecentquarter. n/a Notapplicable.

310 101stAnnualReport|2014 Table11.IncomeandexpensesoftheFederalReserveBanks,1914–2014 Thousandsofdollars Distributions AssessmentsbytheBoard ofGovernors tothe Transferred U.S.Treasury to/from surplus Federal Net Other Reserve additions Consumer compre- Trans- 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 c C u o r s r t e s n o cy f 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 I F n e t d e o e r n e ra st l s t u f o e r / r p fr r l o e u m d s4 ac c c c h o u o a m m t n h g p u e e r l r a e i t - n ed Officeof Reserve hensive Financial notes income5 Research2 Allbanks 1914–15 2,173 2,018 6 302 n/a n/a n/a 217 n/a n/a n/a n/a 1916 5,218 2,082 -193 192 n/a n/a n/a 1,743 n/a n/a n/a n/a 1917 16,128 4,922 -1,387 238 n/a n/a n/a 6,804 1,134 n/a n/a 1,134 1918 67,584 10,577 -3,909 383 n/a n/a n/a 5,541 n/a n/a n/a 48,334 1919 102,381 18,745 -4,673 595 n/a n/a n/a 5,012 2,704 n/a n/a 70,652 1920 181,297 27,549 -3,744 710 n/a n/a n/a 5,654 60,725 n/a n/a 82,916 1921 122,866 33,722 -6,315 741 n/a n/a n/a 6,120 59,974 n/a n/a 15,993 1922 50,499 28,837 -4,442 723 n/a n/a n/a 6,307 10,851 n/a n/a -660 1923 50,709 29,062 -8,233 703 n/a n/a n/a 6,553 3,613 n/a n/a 2,546 1924 38,340 27,768 -6,191 663 n/a n/a n/a 6,682 114 n/a n/a -3,078 1925 41,801 26,819 -4,823 709 n/a n/a n/a 6,916 59 n/a n/a 2,474 1926 47,600 24,914 -3,638 722 1,714 n/a n/a 7,329 818 n/a n/a 8,464 1927 43,024 24,894 -2,457 779 1,845 n/a n/a 7,755 250 n/a n/a 5,044 1928 64,053 25,401 -5,026 698 806 n/a n/a 8,458 2,585 n/a n/a 21,079 1929 70,955 25,810 -4,862 782 3,099 n/a n/a 9,584 4,283 n/a n/a 22,536 1930 36,424 25,358 -93 810 2,176 n/a n/a 10,269 17 n/a n/a -2,298 1931 29,701 24,843 311 719 1,479 n/a n/a 10,030 n/a n/a n/a -7,058 1932 50,019 24,457 -1,413 729 1,106 n/a n/a 9,282 2,011 n/a n/a 11,021 1933 49,487 25,918 -12,307 800 2,505 n/a n/a 8,874 n/a n/a n/a -917 1934 48,903 26,844 -4,430 1,372 1,026 n/a n/a 8,782 n/a n/a -60 6,510 1935 42,752 28,695 -1,737 1,406 1,477 n/a n/a 8,505 298 n/a 28 607 1936 37,901 26,016 486 1,680 2,178 n/a n/a 7,830 227 n/a 103 353 1937 41,233 25,295 -1,631 1,748 1,757 n/a n/a 7,941 177 n/a 67 2,616 1938 36,261 25,557 2,232 1,725 1,630 n/a n/a 8,019 120 n/a -419 1,862 1939 38,501 25,669 2,390 1,621 1,356 n/a n/a 8,110 25 n/a -426 4,534 1940 43,538 25,951 11,488 1,704 1,511 n/a n/a 8,215 82 n/a -54 17,617 1941 41,380 28,536 721 1,840 2,588 n/a n/a 8,430 141 n/a -4 571 1942 52,663 32,051 -1,568 1,746 4,826 n/a n/a 8,669 198 n/a 50 3,554 1943 69,306 35,794 23,768 2,416 5,336 n/a n/a 8,911 245 n/a 135 40,327 1944 104,392 39,659 3,222 2,296 7,220 n/a n/a 9,500 327 n/a 201 48,410 1945 142,210 41,666 -830 2,341 4,710 n/a n/a 10,183 248 n/a 262 81,970 1946 150,385 50,493 -626 2,260 4,482 n/a n/a 10,962 67 n/a 28 81,467 1947 158,656 58,191 1,973 2,640 4,562 n/a n/a 11,523 36 75,284 87 8,366 1948 304,161 64,280 -34,318 3,244 5,186 n/a n/a 11,920 n/a 166,690 n/a 18,523 1949 316,537 67,931 -12,122 3,243 6,304 n/a n/a 12,329 n/a 193,146 n/a 21,462 1950 275,839 69,822 36,294 3,434 7,316 n/a n/a 13,083 n/a 196,629 n/a 21,849 1951 394,656 83,793 -2,128 4,095 7,581 n/a n/a 13,865 n/a 254,874 n/a 28,321 1952 456,060 92,051 1,584 4,122 8,521 n/a n/a 14,682 n/a 291,935 n/a 46,334 1953 513,037 98,493 -1,059 4,100 10,922 n/a n/a 15,558 n/a 342,568 n/a 40,337 1954 438,486 99,068 -134 4,175 6,490 n/a n/a 16,442 n/a 276,289 n/a 35,888 1955 412,488 101,159 -265 4,194 4,707 n/a n/a 17,712 n/a 251,741 n/a 32,710 1956 595,649 110,240 -23 5,340 5,603 n/a n/a 18,905 n/a 401,556 n/a 53,983 1957 763,348 117,932 -7,141 7,508 6,374 n/a n/a 20,081 n/a 542,708 n/a 61,604 1958 742,068 125,831 124 5,917 5,973 n/a n/a 21,197 n/a 524,059 n/a 59,215 1959 886,226 131,848 98,247 6,471 6,384 n/a n/a 22,722 n/a 910,650 n/a -93,601 1960 1,103,385 139,894 13,875 6,534 7,455 n/a n/a 23,948 n/a 896,816 n/a 42,613 1961 941,648 148,254 3,482 6,265 6,756 n/a n/a 25,570 n/a 687,393 n/a 70,892 (continuedonnextpage)

StatisticalTables 311 Table11.—continued Distributions AssessmentsbytheBoard ofGovernors tothe Transferred U.S.Treasury to/from surplus Federal Net Other Reserve additions Consumer compre- Trans- 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 c C u o r s r t e s n o cy f 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 I F n e t d e o e r n e ra st l s t u f o e r / r p fr r l o e u m d s4 ac c c c h o u o a m m t n h g p u e e r l r a e i t - n ed Officeof Reserve hensive Financial notes income5 Research2 1962 1,048,508 161,451 -56 6,655 8,030 n/a n/a 27,412 n/a 799,366 n/a 45,538 1963 1,151,120 169,638 615 7,573 10,063 n/a n/a 28,912 n/a 879,685 n/a 55,864 1964 1,343,747 171,511 726 8,655 17,230 n/a n/a 30,782 n/a 1,582,119 n/a -465,823 1965 1,559,484 172,111 1,022 8,576 23,603 n/a n/a 32,352 n/a 1,296,810 n/a 27,054 1966 1,908,500 178,212 996 9,022 20,167 n/a n/a 33,696 n/a 1,649,455 n/a 18,944 1967 2,190,404 190,561 2,094 10,770 18,790 n/a n/a 35,027 n/a 1,907,498 n/a 29,851 1968 2,764,446 207,678 8,520 14,198 20,474 n/a n/a 36,959 n/a 2,463,629 n/a 30,027 1969 3,373,361 237,828 -558 15,020 22,126 n/a n/a 39,237 n/a 3,019,161 n/a 39,432 1970 3,877,218 276,572 11,442 21,228 23,574 n/a n/a 41,137 n/a 3,493,571 n/a 32,580 1971 3,723,370 319,608 94,266 32,634 24,943 n/a n/a 43,488 n/a 3,356,560 n/a 40,403 1972 3,792,335 347,917 -49,616 35,234 31,455 n/a n/a 46,184 n/a 3,231,268 n/a 50,661 1973 5,016,769 416,879 -80,653 44,412 33,826 n/a n/a 49,140 n/a 4,340,680 n/a 51,178 1974 6,280,091 476,235 -78,487 41,117 30,190 n/a n/a 52,580 n/a 5,549,999 n/a 51,483 1975 6,257,937 514,359 -202,370 33,577 37,130 n/a n/a 54,610 n/a 5,382,064 n/a 33,828 1976 6,623,220 558,129 7,311 41,828 48,819 n/a n/a 57,351 n/a 5,870,463 n/a 53,940 1977 6,891,317 568,851 -177,033 47,366 55,008 n/a n/a 60,182 n/a 5,937,148 n/a 45,728 1978 8,455,309 592,558 -633,123 53,322 60,059 n/a n/a 63,280 n/a 7,005,779 n/a 47,268 1979 10,310,148 625,168 -151,148 50,530 68,391 n/a n/a 67,194 n/a 9,278,576 n/a 69,141 1980 12,802,319 718,033 -115,386 62,231 73,124 n/a n/a 70,355 n/a 11,706,370 n/a 56,821 1981 15,508,350 814,190 -372,879 63,163 82,924 n/a n/a 74,574 n/a 14,023,723 n/a 76,897 1982 16,517,385 926,034 -68,833 61,813 98,441 n/a n/a 79,352 n/a 15,204,591 n/a 78,320 1983 16,068,362 1,023,678 -400,366 71,551 152,135 n/a n/a 85,152 n/a 14,228,816 n/a 106,663 1984 18,068,821 1,102,444 -412,943 82,116 162,606 n/a n/a 92,620 n/a 16,054,095 n/a 161,996 1985 18,131,983 1,127,744 1,301,624 77,378 173,739 n/a n/a 103,029 n/a 17,796,464 n/a 155,253 1986 17,464,528 1,156,868 1,975,893 97,338 180,780 n/a n/a 109,588 n/a 17,803,895 n/a 91,954 1987 17,633,012 1,146,911 1,796,594 81,870 170,675 n/a n/a 117,499 n/a 17,738,880 n/a 173,771 1988 19,526,431 1,205,960 -516,910 84,411 164,245 n/a n/a 125,616 n/a 17,364,319 n/a 64,971 1989 22,249,276 1,332,161 1,254,613 89,580 175,044 n/a n/a 129,885 n/a 21,646,417 n/a 130,802 1990 23,476,604 1,349,726 2,099,328 103,752 193,007 n/a n/a 140,758 n/a 23,608,398 n/a 180,292 1991 22,553,002 1,429,322 405,729 109,631 261,316 n/a n/a 152,553 n/a 20,777,552 n/a 228,356 1992 20,235,028 1,474,531 -987,788 128,955 295,401 n/a n/a 171,763 n/a 16,774,477 n/a 402,114 1993 18,914,251 1,657,800 -230,268 140,466 355,947 n/a n/a 195,422 n/a 15,986,765 n/a 347,583 1994 20,910,742 1,795,328 2,363,862 146,866 368,187 n/a n/a 212,090 n/a 20,470,011 n/a 282,122 1995 25,395,148 1,818,416 857,788 161,348 370,203 n/a n/a 230,527 n/a 23,389,367 n/a 283,075 1996 25,164,303 1,947,861 -1,676,716 162,642 402,517 n/a n/a 255,884 5,517,716 14,565,624 n/a 635,343 1997 26,917,213 1,976,453 -2,611,570 174,407 364,454 n/a n/a 299,652 20,658,972 0 n/a 831,705 1998 28,149,477 1,833,436 1,906,037 178,009 408,544 n/a n/a 343,014 17,785,942 8,774,994 n/a 731,575 1999 29,346,836 1,852,162 -533,557 213,790 484,959 n/a n/a 373,579 n/a 25,409,736 n/a 479,053 2000 33,963,992 1,971,688 -1,500,027 188,067 435,838 n/a n/a 409,614 n/a 25,343,892 n/a 4,114,865 2001 31,870,721 2,084,708 -1,117,435 295,056 338,537 n/a n/a 428,183 n/a 27,089,222 n/a 517,580 2002 26,760,113 2,227,078 2,149,328 205,111 429,568 n/a n/a 483,596 n/a 24,495,490 n/a 1,068,598 2003 23,792,725 2,462,658 2,481,127 297,020 508,144 n/a n/a 517,705 n/a 22,021,528 n/a 466,796 2004 23,539,942 2,238,705 917,870 272,331 503,784 n/a n/a 582,402 n/a 18,078,003 n/a 2,782,587 2005 30,729,357 2,889,544 -3,576,903 265,742 477,087 n/a n/a 780,863 n/a 21,467,545 n/a 1,271,672 2006 38,410,427 3,263,844 -158,846 301,014 491,962 n/a n/a 871,255 n/a 29,051,678 n/a 4,271,828 2007 42,576,025 3,510,206 198,417 296,125 576,306 n/a 324,481 992,353 n/a 34,598,401 n/a 3,125,533 2008 41,045,582 4,870,374 3,340,628 352,291 500,372 n/a -3,158,808 1,189,626 n/a 31,688,688 n/a 2,626,053 2009 54,463,121 5,978,795 4,820,204 386,400 502,044 n/a 1,006,813 1,428,202 n/a 47,430,237 n/a 4,564,460 2010 79,300,937 6,270,420 9,745,562 422,200 622,846 42,286 45,881 1,582,785 n/a 79,268,124 n/a 883,724 (continuedonnextpage)

312 101stAnnualReport|2014 Table11.—continued Distributions AssessmentsbytheBoard ofGovernors tothe Transferred U.S.Treasury to/from surplus Federal Net Other Reserve additions Consumer compre- Trans- 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 c C u o r s r t e s n o cy f 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 I F n e t d e o e r n e ra st l s t u f o e r / r p fr r l o e u m d s4 ac c c c h o u o a m m t n h g p u e e r l r a e i t - n ed Officeof Reserve hensive Financial notes income5 Research2 2011 85,241,366 7,316,643 2,015,991 472,300 648,798 281,712-1,161,848 1,577,284 n/a 75,423,597 n/a 375,175 2012 81,586,102 7,798,353 18,380,835 490,001 722,301 387,279 -52,611 1,637,934 n/a 88,417,936 n/a 460,528 2013 91,149,953 9,134,656 -1,029,750 580,000 701,522 563,200 2,288,811 1,649,277 n/a 79,633,271 n/a 147,088 2014 116,561,512 10,714,872 -2,718,283 590,000 710,807 563,000-1,611,569 1,685,826 n/a 96,901,695 n/a 1,064,952 Total, 1914–20141,302,814,240108,941,575 38,795,400 8,294,117 13,817,007 1,837,477-2,318,850 20,482,064 44,113,958 1,107,289,909 -4 34,514,1876 AggregateforeachBank,1914–2014 Boston 53,819,356 5,152,889 348,951 355,228 768,476 82,003 11,771 898,303 2,579,504 42,853,901 135 1,489,639 NewYork 540,143,032 34,754,114726,321,967 2,230,862 3,821,560 582,022-2,370,900 5,667,302 17,307,161 488,093,173 -433 11,638,327 Philadelphia 43,873,103 4,506,426 825,524 530,923 637,581 146,761 -1,433 1,485,758 1,312,118 34,314,799 291 1,762,532 Cleveland 60,260,816 4,781,177 719,414 611,578 780,377 142,931 1,557 1,521,816 2,827,043 47,780,826 -10 2,536,048 Richmond 101,579,656 8,886,226 2,342,415 1,499,458 1,178,008 381,262 20,384 4,092,410 3,083,928 77,183,556 -72 7,637,683 Atlanta 88,544,875 11,913,938 1,742,844 578,419 1,382,817 105,127 -8,781 1,351,817 2,713,230 70,287,088 5 1,946,494 Chicago 123,547,356 9,874,255 1,896,340 640,371 1,464,942 50,516 5,422 1,298,093 4,593,811 106,341,013 12 1,186,106 St.Louis 36,705,805 3,747,243 436,682 147,266 485,613 15,597 20,273 312,790 1,833,837 30,230,573 -27 389,874 Minneapolis 19,905,883 3,791,353 430,085 192,866 267,065 13,025 -9,434 426,287 416,227 14,941,596 65 278,059 KansasCity 40,659,898 5,133,621 592,218 182,372 501,339 18,601 -9,054 363,314 1,249,703 33,371,114 -9 423,000 Dallas 54,987,689 5,447,118 1,099,565 274,094 785,660 29,729 18,787 530,402 1,510,802 46,948,010 55 579,681 SanFrancisco 138,786,774 10,953,212 2,039,403 1,050,683 1,743,568 269,906 2,556 2,533,773 4,686,594 114,944,259 -17 4,646,747 Total 1,302,814,240108,941,575 38,795,400 8,294,117 13,817,007 1,837,477-2,318,850 20,482,064 44,113,958 1,107,289,909 -4 34,514,187 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 For1987andsubsequentyears,includesthecostofservicesprovidedtotheTreasurybyFederalReserveBanksforwhichreimbursementwasnotreceived. 2 Startingin2010,asrequiredundertheDodd-FrankWallStreetReformandConsumerProtectionActof2010,theBoardofGovernorsbeganassessingtheReserveBanksto fundtheoperationsoftheConsumerFinancialProtectionBureauand,foratwo-yearperiodbeginningJuly21,2010,theOfficeofFinancialResearch.Theseassessments areallocatedtotheReserveBanksbasedoneachReserveBank’scapitalandsurplusbalancesasofthemostrecentquarter. 3 Representstransfersmadeasafranchisetaxfrom1917through1932;transfersmadeundersection13boftheFederalReserveActfrom1935through1947;andtransfers madeundersection7oftheFederalReserveActfor1996and1997. 4 Transfersaremadeundersection13boftheFederalReserveAct. 5 Transfersaremadeundersection7oftheFederalReserveAct.Beginningin2006,accumulatedothercomprehensiveincomeisreportedasacomponentofsurplus. 6 The$34,514,187thousandtransferredtosurpluswasreducedbydirectchargesof$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$28,571,798thousandon December31,2014. 7 Thisamountisreducedby$6,184,653thousandforexpensesoftheSystemRetirementPlan.Seenote4,“Table10.IncomeandexpensesoftheFederalReserveBanks,by Bank,2014.” n/a Notapplicable.

StatisticalTables 313 Table12.OperationsinprincipaldepartmentsoftheFederalReserveBanks,2011–14 Operation 2014 2013 2012 2011 Millionsofpieces Currencyprocessed 33,372 33,219 31,703 32,249 Currencydestroyed 5,622 5,564 4,614 4,813 Coinreceived 55,401 56,806 58,669 59,550 Checkshandled U.S.governmentchecks1 63 83 121 159 Postalmoneyorders 95 101 108 113 Commercial 5,741 5,987 6,622 6,780 Securitiestransfers2 17 19 18 19 Fundstransfers3 135 134 132 127 Automatedclearinghousetransactions Commercial 11,620 11,143 10,665 10,349 Government 1,516 1,467 1,382 1,305 Millionsofdollars Currencyprocessed 638,245 638,237 581,382 576,442 Currencydestroyed 198,525 206,998 105,464 81,943 Coinreceived 5,363 5,481 5,700 5,907 Checkshandled U.S.governmentchecks1 141,396 154,584 199,251 241,817 Postalmoneyorders 20,902 22,262 21,927 22,220 Commercial 8,114,636 7,960,028 8,125,424 7,943,524 Securitiestransfers2 287,104,205 295,186,170 284,401,670 291,823,993 Fundstransfers3 884,551,876 713,310,354 599,200,625 663,837,575 Automatedclearinghousetransactions Commercial 19,891,274 19,689,431 19,293,857 17,801,549 Government 4,872,536 4,714,428 4,609,914 4,534,707 1 Includesgovernmentcheckshandledelectronically(electronicchecks). 2 Dataonsecuritiestransfersdonotincludereversals. 3 Dataonfundstransfersdonotincludenon-valuetransfers.

314 101stAnnualReport|2014 Table13.NumberandannualsalariesofofficersandemployeesoftheFederalReserveBanks,December31,2014 President1 Otherofficers Employees Total FederalReserveBank Number (includingbranches) Annualsalary Annualsalaries Annualsalaries Annualsalaries Number Number (dollars)2 (dollars)2 (dollars)2 (dollars)2 Fulltime Parttime Boston 367,200 71 15,545,016 929 33 92,739,181 1,034 108,651,397 NewYork 444,200 558 130,860,908 2,542 26 290,524,388 3,127 421,829,495 Philadelphia 379,900 65 12,015,155 805 15 68,628,859 886 81,023,914 Cleveland 358,800 61 11,260,000 849 23 69,017,034 934 80,635,834 Richmond 362,600 84 15,586,182 1,380 19 116,886,462 1,484 132,835,244 Atlanta 334,200 84 16,679,220 1,437 20 119,457,509 1,542 136,470,929 Chicago 365,100 116 23,144,019 1,330 50 126,233,827 1,497 149,742,946 St.Louis 320,900 98 18,569,400 984 36 80,512,368 1,119 99,402,668 Minneapolis 338,700 54 10,444,846 964 46 76,616,426 1,065 87,399,972 KansasCity 332,900 87 15,548,100 1,373 11 99,277,705 1,472 115,158,705 Dallas 395,700 67 12,114,101 1,088 10 81,644,283 1,166 94,154,084 SanFrancisco 378,500 87 19,052,263 1,514 18 147,684,358 1,620 167,115,121 FederalReserve Information Technology n/a 72 14,017,925 1,102 1 119,331,208 1,175 133,349,133 OfficeofEmployee Benefits n/a 13 3,143,645 38 0 4,173,740 51 7,317,385 Total 4,378,700 1,517 317,980,780 16,335 308 1,492,727,347 18,172 1,815,086,827 Note:Componentsmaynotsumtototalsbecauseofrounding. 1 AsofJanuary1,2014,theBoardimplementedanewcompensationpolicyforReserveBankpresidentsandindividualofficersalaryrangesforeachReserveBankreflecting thecostoflaborineachhead-officecity.TheBoardreviewsReserveBankofficersalaryrangesannuallyandmayadjustthoserangesbasedonmarketinformation.Salaries forReserveBankofficers,includingpresidents,arelimitedbycompensationcapsestablishedforeachReserveBank.The2014compensationcapswere$461,700for Boston,NewYork,andSanFrancisco;$428,200forPhiladelphia,Cleveland,Richmond,Atlanta,Chicago,St.Louis,Minneapolis,andDallas;and$412,900forKansasCity. Underthenewpolicy,apresident’sinitialappointmentsalarynormallywillbesetat95percentofthesalary-rangemidpoint(a95compa-ratio),withtheexceptionofthe presidentoftheNewYorkReserveBank,whoseappointmentsalarynormallywillbesetat105compa-ratio,reflectingthatposition’sadditionalresponsibilitiesandbroader scope.TheBoardhasdiscretiontoapproveanappointmentsalarygreaterthanthosenotedaboveattherequestofaReserveBank’sboardofdirectors. Underthenewpolicy,allpresidentswillnormallyreceiveannualsalaryincreasesonJanuary1,basedupontheBoard-approvedaverageReserveBankofficer meritpercentageforthatyear.Inaddition,eachincumbentpresident’s2014compensationwasadjustedtoreflectthetransitionfromthepreviouspresidentcompensation policy,inwhicheachpresidentreceivedanannualsalaryincreasetomaintainhisorhercompa-ratioandanadditionalincreasetrienniallytohisorhercompa-ratio.The previouspolicywassuspendedfrom2011through2013duetotheBoard’sapplicationofthepayfreezetoReserveBankofficers.Theadjustments,whichtakeinto considerationtenureaspresidentandpositionwithintherelevantsalaryrange,willbephasedinthrough2016. 2 Annualizedsalaryliability(excludingoutsideagencycosts)basedonsalariesineffectonDecember31,2014. n/a Notapplicable.

StatisticalTables 315 Table14.AcquisitioncostsandnetbookvalueofthepremisesoftheFederalReserveBanksandBranches,December31,2014 Thousandsofdollars Acquisitioncosts FederalReserveBank Net Other orBranch Buildings Buildingmachinery bookvalue realestate3 Land Total2 (includingvaults)1 andequipment Boston 27,293 182,589 40,919 250,801 123,780 n/a NewYork 68,161 529,677 103,873 701,711 436,913 n/a Philadelphia 8,146 119,580 28,305 156,031 75,925 n/a Cleveland 4,219 132,586 25,929 162,734 93,232 n/a Cincinnati 3,075 29,135 16,024 48,234 16,793 n/a Richmond 32,044 162,598 58,429 253,071 147,418 n/a Baltimore 7,916 40,295 13,746 61,957 32,869 n/a Charlotte 7,884 45,678 13,770 67,332 39,769 n/a Atlanta 22,995 159,336 20,379 202,710 145,400 n/a Birmingham 5,347 13,056 1,465 19,868 10,120 n/a Jacksonville 1,894 23,825 5,664 31,383 16,304 n/a NewOrleans 3,785 14,457 7,416 25,658 12,527 n/a Miami 4,254 33,648 8,437 46,339 27,423 n/a Chicago 5,801 230,310 28,979 265,090 123,268 n/a Detroit 12,328 74,385 11,613 98,326 78,230 n/a St.Louis 9,377 142,188 15,913 167,478 112,580 n/a Memphis 2,472 15,997 5,188 23,657 9,261 n/a Minneapolis 15,522 109,555 17,323 142,400 87,431 n/a Helena 2,890 10,327 1,516 14,733 8,318 n/a KansasCity 38,955 201,248 26,683 266,886 227,726 n/a Denver 3,694 9,873 5,916 19,483 7,800 n/a Omaha 3,559 7,596 1,885 13,040 5,800 n/a Dallas 38,100 125,740 32,541 196,381 113,046 n/a ElPaso 262 4,805 2,050 7,117 1,807 n/a Houston 25,119 104,059 9,209 138,387 108,144 7,204 SanFrancisco 20,988 126,094 30,533 177,615 88,703 n/a LosAngeles 6,306 76,826 21,306 104,438 51,538 n/a SaltLakeCity 1,294 5,406 1,710 8,410 2,594 n/a Seattle 13,101 50,083 6,744 69,928 58,229 n/a Total 396,781 2,780,952 563,465 3,741,198 2,262,948 7,204 1 Includesexpendituresforconstructionatsomeoffices,pendingallocationtoappropriateaccounts. 2 Excludescharge-offsof$17,699thousandbefore1952. 3 Includesrealestateheldpendingsale. n/a Notapplicable.

317 12 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.Asdiscussedinsection6, “FederalReserveBanks,”theBoard’sexaminationincludesawiderangeof ongoingoversightactivitiesconductedonsiteandoff sitebystaff of theBoard’sDivisionof ReserveBankOperationsandPaymentSystems. Inaddition,theOIGconductsaudits,investigations,andotherreviewsrelatingto theBoard’sprogramsandoperationsaswellastoBoardfunctionsdelegatedtothe ReserveBanks.Certainaspectsof FederalReserveoperationsarealsosubjectto reviewbytheGovernmentAccountabilityOffice.

318 101stAnnualReport|2014 Board of Governors Financial Statements Thefinancialstatementsof theBoardof Governorsfor2014and2013were auditedbyDeloitte&ToucheLLP,independentauditors. March12,2015 Management’sReportonInternalControloverFinancialReporting TotheCommitteeonBoardAffairs: ThemanagementoftheBoardofGovernorsoftheFederalReserveSystem(“theBoard”)isresponsibleforthe preparationandfairpresentationofthebalancesheetasofDecember31,2014,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(2013)issuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission. Basedonthisassessment,webelievethattheBoardhasmaintainedeffectiveinternalcontroloverfinancialreporting asitrelatestoitsFinancialStatements. DonaldV.Hammond WilliamL.Mitchell ChiefOperatingOfficer ChiefFinancialOfficer

FederalReserveSystemAudits 319 INDEPENDENTAUDITORS’REPORT TotheBoardofGovernorsoftheFederalReserveSystem: ReportontheFinancialStatements WehaveauditedtheaccompanyingfinancialstatementsoftheBoardofGovernorsoftheFederalReserveSystem (the“Board”),whicharecomprisedofthebalancesheetsasofDecember31,2014and2013,andtherelatedstatementsofoperationsandcashflowsfortheyearsthenended,andtherelatednotestothefinancialstatements.Wealso haveauditedtheBoard’sinternalcontroloverfinancialreportingasofDecember31,2014,basedoncriteriaestablishedinInternalControl—IntegratedFramework(2013)issuedbytheCommitteeofSponsoringOrganizationsof theTreadwayCommission. Management’sResponsibility TheBoard’smanagementisresponsibleforthepreparationandfairpresentationofthesefinancialstatementsin accordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica;thisincludesthedesign, implementation,andmaintenanceofinternalcontrolrelevanttothepreparationandfairpresentationoffinancial statementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.TheBoard’smanagementisalso responsibleforitsassertionoftheeffectivenessofinternalcontroloverfinancialreporting,includedintheaccompanyingManagement’sAssertion. Auditors’Responsibility OurresponsibilityistoexpressanopiniononthesefinancialstatementsandanopinionontheBoard’sinternalcontroloverfinancialreportingbasedonouraudits.Weconductedourauditsofthefinancialstatementsinaccordance withauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica,auditingstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates)(the“PCAOB”),andthestandardsapplicabletofinancialaudits containedinGovernmentAuditingStandardsissuedbytheComptrollerGeneraloftheUnitedStates,andweconductedourauditofinternalcontroloverfinancialreportinginaccordancewithattestationstandardsestablishedby theAmericanInstituteofCertifiedPublicAccountantsandinaccordancewiththeauditingstandardsofthe PCAOB.Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhether thefinancialstatementsarefreefrommaterialmisstatementandwhethereffectiveinternalcontroloverfinancial reportingwasmaintainedinallmaterialrespects. 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,in

320 101stAnnualReport|2014 reasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsoftheBoard;(2)provide reasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsin accordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica,andthatreceiptsand expendituresoftheBoardarebeingmadeonlyinaccordancewithauthorizationsofmanagement;and(3)provide reasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthe Board’sassetsthatcouldhaveamaterialeffectonthefinancialstatements. InherentLimitationsofInternalControlOverFinancialReporting Becauseoftheinherentlimitationsofinternalcontroloverfinancialreporting,includingthepossibilityofcollusion orimpropermanagementoverrideofcontrols,materialmisstatementsduetoerrororfraudmaynotbepreventedor detectedandcorrectedonatimelybasis.Also,projectionsofanyevaluationoftheeffectivenessoftheinternalcontroloverfinancialreportingtofutureperiodsaresubjecttotheriskthatthecontrolsmaybecomeinadequatebecause ofchangesinconditionsorthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate. Opinions Inouropinion,thefinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancialposition oftheBoardasofDecember31,2014and2013,andtheresultsofitsoperationsanditscashflowsfortheyearsthen endedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.Also,inouropinion,theBoardmaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofDecember31,2014,basedonthecriteriaestablishedinInternalControl—IntegratedFramework(2013)issuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission. ReportonComplianceandOtherMattersBasedonanAuditofFinancialStatementsPerformedin AccordancewithGovernmentAuditingStandards InaccordancewithGovernmentAuditingStandards,wehavealsoissuedareportdatedMarch12,2015onourtestsof theBoard’scompliancewithcertainprovisionsoflaws,regulations,contracts,grantagreements,andothermatters. Thepurposeofthatreportistodescribethescopeofourtestingofcomplianceandtheresultsofthattesting,and nottoprovideanopiniononcompliance.Thatreportisanintegralpartofanauditperformedinaccordancewith GovernmentAuditingStandardsandshouldbereadinconjunctionwiththisreportinconsideringtheresultsofour audits. March12,2015 Washington,DC

FederalReserveSystemAudits 321 BoardofGovernorsoftheFederalReserveSystemBalanceSheets AsofDecember31, 2014 2013 Assets Currentassets: Cash $ 69,243,271 $ 90,851,317 Accountsreceivable–net 4,800,677 7,911,011 Prepaidexpensesandotherassets 7,043,863 4,621,633 Totalcurrentassets 81,087,811 103,383,961 Noncurrentassets: Property,equipment,andsoftware–net 256,324,432 195,347,206 Otherassets 1,484,570 1,959,389 Totalnoncurrentassets 257,809,002 197,306,595 Total $338,896,813 $300,690,556 Liabilitiesandcumulativeresultsofoperations Currentliabilities: Accountspayableandaccruedliabilities $ 27,455,677 $ 22,376,801 Accruedpayrollandrelatedtaxes 22,699,129 25,105,590 Accruedannualleave 34,266,939 31,288,437 Capitalleasepayable 323,306 465,219 Unearnedrevenuesandotherliabilities 1,977,674 2,509,202 Totalcurrentliabilities 86,722,725 81,745,249 Long-termliabilities: Capitalleasepayable 92,204 603,897 Retirementbenefitobligation 45,461,450 30,129,567 Postretirementbenefitobligation 12,969,115 11,294,443 Postemploymentbenefitobligation 8,850,310 8,490,921 Otherliabilities 40,405,247 22,060,853 Totallong-termliabilities 107,778,326 72,579,681 Totalliabilities 194,501,051 154,324,930 Cumulativeresultsofoperations: Fundbalance 163,920,431 153,616,578 Accumulatedothercomprehensiveincome(loss) (19,524,669) (7,250,952) Totalcumulativeresultsofoperations 144,395,762 146,365,626 Total $338,896,813 $300,690,556 Seenotestofinancialstatements.

322 101stAnnualReport|2014 BoardofGovernorsoftheFederalReserveSystemStatementsofOperations FortheyearsendedDecember31, 2014 2013 Boardoperatingrevenues: AssessmentsleviedonFederalReserveBanksforBoardoperatingexpensesandcapitalexpenditures $590,000,000 $580,000,000 Otherrevenues 17,757,157 14,888,833 Totaloperatingrevenues 607,757,157 594,888,833 Boardoperatingexpenses: Salaries 351,495,519 322,740,797 Retirement,insurance,andbenefits 78,111,357 73,336,663 Contractualservicesandprofessionalfees 56,821,474 63,094,846 Depreciation,amortization,andnetgainsorlossesondisposals 25,411,096 24,694,987 Travel 15,467,118 14,726,855 Postage,supplies,andnon-capitalfurnitureandequipment 13,197,042 10,955,269 Utilities 10,511,203 9,330,903 Software 13,532,082 11,592,703 Rentalsofspace 16,518,231 14,790,457 Repairsandmaintenance 6,504,496 5,866,831 Otherexpenses 9,883,686 9,282,383 Totaloperatingexpenses 597,453,304 560,412,694 Netincome(loss) 10,303,853 34,476,139 Currencycosts: AssessmentsleviedortobeleviedonFederalReserveBanksforcurrencycosts 707,402,059 705,030,765 Expensesforcostsrelatedtocurrency 707,402,059 705,030,765 Currencyassessmentsover(under)expenses – – BureauofConsumerFinancialProtection(Bureau): AssessmentsleviedontheFederalReserveBanksfortheBureau 563,000,000 563,200,000 TransferstotheBureau 563,000,000 563,200,000 Bureauassessmentsover(under)transfers – – OfficeofFinancialResearch(Office): AssessmentstransferredtotheFederalReserveBanksfortheOffice 1,512,822 – TransfersfromtheOffice 1,512,822 – Officeassessmentsover(under)transfers – – Totalnetincome(loss) 10,303,853 34,476,139 Othercomprehensiveincome: Pensionandotherpostretirementbenefitplans: Amortizationofpriorservice(credit)cost 605,483 605,684 Amortizationofnetactuarial(gain)loss 481,850 1,218,367 Netactuarialgain(loss)arisingduringtheyear (13,361,050) 8,757,487 Totalothercomprehensiveincome(loss) (12,273,717) 10,581,538 Comprehensiveincome(loss) (1,969,864) 45,057,677 Cumulativeresultsofoperations–beginningofyear 146,365,626 101,307,949 Cumulativeresultsofoperations–endofyear $144,395,762 $146,365,626 Seenotestofinancialstatements.

FederalReserveSystemAudits 323 BoardofGovernorsoftheFederalReserveSystemStatementsofCashFlows FortheyearsendedDecember31, 2014 2013 Cashflowsfromoperatingactivities: Netincome(loss) $10,303,853 $34,476,139 Adjustmentstoreconcileresultsofoperationstonetcashprovidedby(usedin)operating activities: Depreciationandamortization 25,132,858 22,804,365 Netloss(gain)ondisposalofpropertyandequipment 278,238 1,890,621 Otheradditionalnon-cashadjustmentstoresultsofoperations (308,326) 119,355 (Increase)decreaseinassets: Accountsreceivable,prepaidexpensesandotherassets 1,162,924 (6,455,266) Increase(decrease)inliabilities: Accountspayableandaccruedliabilities (770,233) 4,260,385 Accruedpayrollandrelatedtaxes (2,406,461) 4,198,153 Accruedannualleave 2,978,502 2,069,774 Unearnedrevenuesandotherliabilities (531,528) 1,891,415 Netretirementbenefitobligation 4,326,019 4,694,408 Netpostretirementbenefitobligation 406,819 321,182 Netpostemploymentbenefitobligation 359,389 (2,204,244) Otherlong-termliabilities 515,365 (523,133) Netcashprovidedby(usedin)operatingactivities 41,447,419 67,543,154 Cashflowsfrominvestingactivities: Capitalexpenditures (62,703,485) (30,200,771) Netcashprovidedby(usedin)investingactivities (62,703,485) (30,200,771) Cashflowsfromfinancingactivities: Capitalleasepayments (351,980) (456,217) Netcashprovidedby(usedin)financingactivities (351,980) (456,217) Netincrease(decrease)incash (21,608,046) 36,886,166 Cashbalance–beginningofyear 90,851,317 53,965,151 Cashbalance–endofyear $69,243,271 $90,851,317 Seenotestofinancialstatements.

324 101stAnnualReport|2014 Board of Governors of the Federal Reserve System Notes to Financial Statements as of and for the Years Ended December 31, 2014 and 2013 (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 325 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. AssessmentstoFundtheBureau—TheBoardassessestheReserveBanksforthe fundstransferredtotheBureaubasedoneachReserveBank’scapitalandsurplus balances.TheseassessmentsandtransfersarereportedseparatelyfromtheBoard’s operatingactivitiesintheBoard’sStatementsof Operations. AssessmentsforSupervisionandRegulation(S&R)—TheDodd-FrankActdirects theBoardtocollectassessments,fees,orotherchargesequaltothetotalexpenses theBoardestimatesarenecessaryorappropriatetocarryoutthesupervisoryand regulatoryresponsibilitiesof theBoardforbankholdingcompaniesandsavings andloanholdingcompanieswithtotalconsolidatedassetsof $50billionormore andnonbankfinancialcompaniesdesignatedforBoardsupervisionbytheFSOC. Asacollectingentity,theBoarddoesnotrecognizetheS&RassessmentsasrevenuenordoestheBoardusethecollectionstofundBoardexpenses;thefundsare transferredtotheTreasury.TheBoardcollectedandtransferred$433,897,258and $433,483,299in2014and2013,respectively. CivilMoneyPenalties—TheBoardhasenforcementauthorityoverthefinancial institutionsitsupervisesandtheiraffiliatedparties,includingtheauthorityto assesscivilmoneypenalties.Asdirectedbystatute,allcivilmoneypenaltiesthat areassessedandcollectedbytheBoardareremittedtoeithertheTreasuryorFederalEmergencyManagementAgency(FEMA).Asacollectingentity,theBoard doesnotrecognizecivilmoneypenaltiesasrevenuenordoestheBoardusethe civilmoneypenaltytofundBoardexpenses.Civilmoneypenaltieswhosecollectioniscontingentuponfulfillmentof certainconditionsintheenforcementaction arenotrecordedintheBoard’sfinancialrecords.Checksforcivilmoneypenalties madepayabletotheNationalFloodInsuranceProgramareforwardedtoFEMA andarenotrecordedintheBoard’sfinancialrecords. CurrencyCosts—TheBoardissuesthenation’scurrency(intheformof Federal Reservenotes),andtheReserveBanksdistributecurrencythroughdepository institutions.TheBoardincursexpensesandassessestheReserveBanksforthe expensesrelatedtoproducing,issuing,andretiringFederalReservenotesaswell asprovidingeducationalservices.Theassessmentisallocatedbasedoneach ReserveBank’sshareof thenumberof notescomprisingtheSystem’snetliability

326 101stAnnualReport|2014 forFederalReservenotesonDecember31of theprioryear.Theseexpensesand assessmentsarereportedseparatelyfromtheBoard’soperatingactivitiesinthe Board’sStatementsof Operations. AccountsReceivableandAllowanceforDoubtfulAccounts—Accountsreceivable arerecordedwhenamountsarebilledbutnotyetreceivedandareshownnetof theallowancefordoubtfulaccounts.Accountsreceivableconsidereduncollectible arechargedagainsttheallowanceaccountintheyeartheyaredeemeduncollectible.Theallowancefordoubtfulaccountsisadjustedmonthly,basedupona reviewof outstandingreceivables.Theallowancefordoubtfulaccountsis$182,000 and$122,000asof December31,2014and2013,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.Significantitemssubjecttosuchestimatesincludeusefullivesof property,equipment,andsoftware;allowancefordoubtfulaccountsreceivable; accountspayable;retirementbenefitobligation;postretirementbenefitobligation; postemploymentobligation;andcommitmentsandcontingencies. BenefitObligations—TheBoardrecordsannualamountsrelatingtoitspension, postretirement,andpostemploymentplansbasedoncalculationsthatincorporate variousactuarialandotherassumptions,includingdiscountrates,mortality,compensationincreases,turnoverrates,andhealth-carecosttrendsrates.TheBoard reviewstheassumptionsonanannualbasisandmakesmodificationstothe assumptionsbasedonavarietyof factors.Theeffectof themodificationstothe assumptionsisrecordedinaccumulatedothercomprehensiveincomeandamor-

FederalReserveSystemAudits 327 tizedtonetperiodiccostoverfutureperiods,whichispresentedintheaccumulatedothercomprehensiveincome(loss)footnote. (4)Property,Equipment,andSoftware Thefollowingisasummaryof thecomponentsof theBoard’sproperty,equipment,andsoftware,atcost,lessaccumulateddepreciationandamortizationasof December31,2014and2013: AsofDecember31, 2014 2013 Land $ 18,640,314 $ 18,640,314 Buildingsandimprovements 282,596,215 217,293,649 Constructioninprocess 12,225,222 15,436,635 Furnitureandequipment 79,542,184 62,655,420 Softwareinuse 38,309,794 33,690,483 Softwareinprocess 1,040,801 1,641,886 Vehicles 1,835,191 1,205,025 Subtotal 434,189,721 350,563,412 Lessaccumulateddepreciationandamortization (177,865,292) (155,216,206) Property,equipment,andsoftware–net $256,324,429 $195,347,206 TheBoardretired$2,942,000and$28,331,000of long-termassetsduring2014 and2013,respectively. (5)Leases CapitalLeases—TheBoardenteredintocapitalleasesforcopierequipmentin 2012;theleasetermsextendthrough2016.In2014,theBoardterminatedaportionof thoseleasesof $313,000,whichisanon-casheventexcludedfromthe Statementsof CashFlows.Furnitureandequipmentincludescapitalizedleasesof $1,258,000and$1,853,000asof 2014and2013.Accumulateddepreciation includes$855,000and$801,000relatedtoassetsundercapitalleasesasof 2014 and2013,respectively.Thedepreciationexpenseforleasedequipmentis$339,000 and$464,000for2014and2013,respectively. Thefutureminimumleasepaymentsrequiredunderthecapitalleasesandthepresentvalueof thenetminimumleasepaymentsasof December31,2014,areas follows: YearsEndedDecember31, Amount 2015 $476,327 2016 133,966 Totalminimumleasepayments 610,293 Lessamountrepresentingmaintenance (188,525) Netminimumleasepayments 421,768 Lessamountrepresentinginterest (6,258) Presentvalueofnetminimumleasepayments 415,510 Lesscurrentmaturitiesofcapitalleasepayments (323,306) Long-termcapitalleaseobligations $ 92,204

328 101stAnnualReport|2014 OperatingLeases—TheBoardhasenteredintoseveraloperatingleasestosecure office,training,datacenter,andwarehousespace.Minimumannualpayments underthemultiyearoperatingleaseshavinganinitialorremainingnoncancelable leaseterminexcessof oneyearatDecember31,2014,areasfollows: YearsEndedDecember31, 2015 $ 24,266,047 2016 26,361,410 2017 27,168,904 2018 27,808,178 After2018 111,856,679 $217,461,218 Rentalexpensesunderthemultiyearoperatingleaseswere$15,854,000and $13,978,000fortheyearsendedDecember31,2014and2013,respectively.The Boardsignedtwolettersof intentinearly2015foradditionalofficespace.Oneis withoneof theReserveBanks.Theestimatedfutureminimumleasepayments associatedwiththetwolettersof intentarenotreflectedinthescheduleabove. TheBoardleasesandsubleasesspace,primarilytoothergovernmentalagencies. Therevenuescollectedfortheseleasesfromgovernmentalagencieswere$516,000 and$508,000in2014and2013,respectively. DeferredRent—Otherlong-termliabilitiesincludedeferredrentof $40,151,000 and$21,783,000asof theyearsendedDecember31,2014and2013,respectively. TheBoardrecordednon-cashleaseincentivesof $17,829,000and$1,322,000for theyearsendedDecember31,2014and2013,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.CostsassociatedwiththeSystemPlanwerenotredistributedtotheBoardduringtheyearsendedDecember31,2014and2013. Employeesof theBoardwhobecameemployedpriorto1984arecoveredbya contributorydefinedbenefitsprogramundertheSystemPlan.Employeesof the Boardwhobecameemployedafter1983arecoveredbyanon-contributory definedbenefitsprogramundertheSystemPlan.FRBNY,onbehalf of the System,funded$480millionand$900millionduringtheyearsendedDecember31,2014and2013,respectively.TheBoardwasnotassessedacontributionfor 2014or2013. InOctober2014,theSocietyof Actuariesreleasednewmortalitytables(RP-2014) andmortalityprojectionscales(MP-2014)foruseinvaluationsof benefitsliabilities.TheBoardadoptedthenewmortalitytablesandnewmortalityprojection scales,adjustedbasedontheSystem’srecentmortalityexperience(whichincluded theBoard’sworkforce)andtherecentretirementrateexperienceof Systemretirees,fortheBoardbenefitplansthatcannotbepaidfromtheSystemPlan.

FederalReserveSystemAudits 329 BenefitsEqualizationPlan—BoardemployeescoveredundertheSystemPlanare alsocoveredunderaBenefitsEqualizationPlan(BEP).Benefitspaidunderthe BEParelimitedtothosebenefitsthatcannotbepaidfromtheSystemPlandueto limitationsimposedbytheInternalRevenueCode.ActivityfortheBEPasof December31,2014and2013,issummarizedinthefollowingtables: 2014 2013 Changeinprojectedbenefitobligation: Benefitobligation–beginningofyear $12,673,892 $15,152,833 Servicecost 1,125,134 1,361,346 Interestcost 705,339 656,007 Planparticipants’contributions – – Actuarial(gain)loss 6,238,231 (4,473,905) Grossbenefitspaid (15,196) (22,389) Benefitobligation–endofyear $20,727,400 $12,673,892 Accumulatedbenefitobligation–endofyear $ 2,327,825 $ 1,699,943 Weighted-averageassumptionsusedtodeterminebenefitobligationasof December31: Discountrate 4.25% 5.26% Rateofcompensationincrease 4.00% 4.50% Changeinplanassets: Fairvalueofplanassets–beginningofyear $ – $ – Employercontributions 15,196 22,389 Planparticipants’contributions – – Grossbenefitspaid (15,196) (22,389) Fairvalueofplanassets–endofyear $ – $ – Fundedstatus: Reconciliationoffundedstatus–endofyear: Fairvalueofplanassets $ – $ – Benefitobligation(current) 31,281 55,061 Benefitobligation(noncurrent) 20,696,119 12,618,831 Fundedstatus (20,727,400) (12,673,892) Amountrecognized–endofyear $(20,727,400) $(12,673,892) Amountsrecognizedinthebalancesheetsconsistof: Asset $ – $ – Liability–current (31,281) (55,061) Liability–noncurrent (20,696,119) (12,618,831) Netamountrecognized $(20,727,400) $(12,673,892) Amountsrecognizedinaccumulatedothercomprehensiveincomeconsistof: Netactuarialloss(gain) $ 4,769,469 $ (1,534,296) Priorservicecost(credit) 421,610 521,188 Netamountrecognized $ 5,191,079 $ (1,013,108)

330 101stAnnualReport|2014 Expectedcashflows: Expectedemployercontributions–2015 $ 31,281 Expectedbenefitpayments:* 2015 $ 31,281 2016 $ 54,155 2017 $ 75,372 2018 $ 87,034 2019 $102,247 2020–2024 $995,786 * ExpectedbenefitpaymentstobemadebytheBoard. 2014 2013 Componentsofnetperiodicbenefitcost: Servicecost $1,125,134 $1,361,346 Interestcost 705,339 656,007 Expectedreturnonplanassets – Amortization: Actuarial(gain)loss $ (65,534) – Priorservice(credit)cost 99,578 99,779 Netperiodicbenefitcost(credit) $1,864,517 $2,117,132 Weighted-averageassumptionsusedtodeterminenetperiodicbenefitcost: Discountrate 5.26% 4.25% Rateofcompensationincrease 4.50% 4.50% Otherchangesinplanassetsandbenefitobligationsrecognizedin othercomprehensiveincome: Currentyearactuarial(gain)loss $6,238,231 $(4,473,905) Amortizationofpriorservicecredit(cost) (99,578) (99,779) Amortizationofactuarialgain(loss) 65,534 0 Totalrecognizedinothercomprehensive(income)loss $6,204,187 $(4,573,684) Totalrecognizedinnetperiodicbenefitcostandothercomprehensiveincome $8,068,704 $(2,456,552) Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive incomeintonetperiodicbenefitcost(credit)in2015areshownbelow: Netactuarial(gain)loss $234,334 Priorservice(credit)cost 99,578 Total $333,912 PensionEnhancementPlan—TheBoardalsoprovidesanothernon-qualifiedplan forofficersof theBoard.TheretirementbenefitscoveredunderthePension EnhancementPlan(PEP)increasethepensionbenefitcalculationfrom1.8percent

FederalReserveSystemAudits 331 abovetheSocialSecurityintegrationlevelto2.0percent.ActivityforthePEPasof December31,2014and2013,issummarizedinthefollowingtables: 2014 2013 Changeinprojectedbenefitobligation: Benefitobligation–beginningofyear $17,593,667 $18,440,730 Servicecost 676,722 795,619 Interestcost 961,720 821,785 Planparticipants’contributions – – Actuarial(gain)loss 5,824,802 (2,312,328) Grossbenefitspaid (199,423) (152,139) Benefitobligation–endofyear $24,857,488 $17,593,667 Accumulatedbenefitobligation–endofyear $20,463,136 $14,172,160 Weighted-averageassumptionsusedtodeterminebenefitobligationasof December31: Discountrate 4.12% 5.06% Rateofcompensationincrease 4.00% 4.50% Changeinplanassets: Fairvalueofplanassets–beginningofyear $ – $ – Employercontributions 199,423 152,139 Planparticipants’contributions – – Grossbenefitspaid (199,423) (152,139) Fairvalueofplanassets–endofyear $ – $ – Fundedstatus: Reconciliationoffundedstatus–endofyear: Fairvalueofplanassets $ – $ – Benefitobligation–current 279,260 240,788 Benefitobligation–noncurrent 24,578,228 17,352,879 Fundedstatus (24,857,488) (17,593,667) Amountrecognized–endofyear $(24,857,488) $(17,593,667) Amountsrecognizedinthebalancesheetsconsistof: Asset $ – $ – Liability–current (279,260) (240,788) Liability–noncurrent (24,578,228) (17,352,879) Netamountrecognized $(24,857,488) $(17,593,667) Amountsrecognizedinaccumulatedothercomprehensiveincomeconsistof: Netactuarialloss(gain) $10,647,540 $ 5,314,468 Priorservicecost(credit) 1,117,698 1,649,093 Netamountrecognized $11,765,238 $ 6,963,561 Expectedcashflows: Expectedemployercontributions–2015 $ 279,260 Expectedbenefitpayments:* 2015 $ 279,260 2016 $ 353,887 2017 $ 434,246 2018 $ 528,384 2019 $ 634,515 2020–2024 $4,767,388 * ExpectedbenefitpaymentstobemadebytheBoard.

332 101stAnnualReport|2014 2014 2013 Componentsofnetperiodicbenefitcost: Servicecost $ 676,722 $ 795,619 Interestcost 961,720 821,785 Expectedreturnonplanassets – – Amortization: Actuarial(gain)loss 491,730 887,744 Priorservice(credit)cost 531,395 531,395 Netperiodicbenefitcost(credit) $2,661,567 $3,036,543 Weighted-averageassumptionsusedtodeterminenetperiodicbenefitcost: Discountrate 5.06% 4.00% Rateofcompensationincrease 4.50% 4.50% Otherchangesinplanassetsandbenefitobligationsrecognizedin othercomprehensiveincome: Currentyearactuarial(gain)loss $5,824,802 $(2,312,328) Amortizationofpriorservicecredit(cost) (531,395) (531,395) Amortizationofactuarialgain(loss) (491,730) (887,744) Totalrecognizedinothercomprehensive(income)loss $4,801,677 $(3,731,467) Totalrecognizedinnetperiodicbenefitcostandothercomprehensiveincome $7,463,244 $ (694,924) Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive incomeintonetperiodicbenefitcost(credit)in2015areshownbelow: Netactuarial(gain)loss $ 870,684 Priorservice(credit)cost 531,395 Total $1,402,079 Thetotalaccumulatedretirementbenefitobligationincludesaliabilityfora supplementalretirementagreementandabenefitsequalizationplanunderthe System’sThriftPlan.Thetotalobligationasof December31,2014and2013,is summarizedinthefollowingtable: 2014 2013 Retirementbenefitobligation: Benefitobligation–BEP $20,727,400 $12,673,892 Benefitobligation–PEP 24,857,488 17,593,667 Additionalbenefitobligations 187,103 157,857 Totalaccumulatedretirementbenefitobligation $45,771,991 $30,425,416 Arelativelysmallnumberof BoardemployeesparticipateintheCivilService RetirementSystemortheFederalEmployees’RetirementSystem.Thesedefined benefitplansareadministeredbytheU.S.Officeof PersonnelManagement,which determinestherequiredemployercontributionlevels.TheBoard’scontributionsto theseplanstotaled$891,000and$778,000in2014and2013,respectively.The Boardhasnoliabilityforfuturepaymentstoretireesundertheseprogramsandis notaccountablefortheassetsof theplans. Employeesof theBoardmayalsoparticipateintheSystem’sThriftPlanorRoth 401(k).Boardcontributionstomembers’accountswere$21,982,000and $20,288,000in2014and2013,respectively.

FederalReserveSystemAudits 333 (7)PostretirementBenefits TheBoardprovidescertainlifeinsuranceprogramsforitsactiveemployeesand retirees.Activityasof December31,2014and2013,issummarizedinthefollowingtables: 2014 2013 Changeinbenefitobligation: Benefitobligation–beginningofyear $11,693,311 $13,249,648 Servicecost 163,420 219,222 Interestcost 582,779 533,435 Planparticipants’contributions – – Actuarial(gain)loss 1,298,018 (1,971,254) Grossbenefitspaid (353,234) (337,740) Benefitobligation–endofyear $13,384,294 $11,693,311 Weighted-averageassumptionsusedtodeterminebenefitobligationas ofDecember31–discountrate 4.05% 4.97% Changeinplanassets: Fairvalueofplanassets–beginningofyear $ – $ – Employercontributions 353,234 337,740 Grossbenefitspaid (353,234) (337,740) Fairvalueofplanassets–endofyear $ – $ – Fundedstatus: Reconciliationoffundedstatus–endofyear: Fairvalueofplanassets $ – $ – Benefitobligation–current 415,179 398,868 Benefitobligation–noncurrent 12,969,115 11,294,443 Fundedstatus (13,384,294) (11,693,311) Amountrecognized–endofyear $(13,384,294) $(11,693,311) Amountsrecognizedinthebalancesheetsconsistof: Asset $ – $ – Liability–current (415,179) (398,868) Liability–noncurrent (12,969,115) (11,294,443) Netamountrecognized $(13,384,294) $(11,693,311) Amountsrecognizedinaccumulatedothercomprehensiveincomeconsistof: Netactuarialloss(gain) $ 2,742,925 $ 1,500,562 Priorservicecost(credit) (174,574) (200,064) Netamountrecognized $ 2,568,351 $ 1,300,498 Expectedcashflows: Expectedemployercontributions–2015 $ 415,179 Expectedbenefitpayments:* 2015 $ 415,179 2016 $ 441,775 2017 $ 464,025 2018 $ 472,883 2019 $ 497,258 2020–2024 $2,890,444 * ExpectedbenefitpaymentstobemadebytheBoard.

334 101stAnnualReport|2014 2014 2013 Componentsofnetperiodicbenefitcost: Servicecost $ 163,420 $ 219,222 Interestcost 582,779 533,435 Expectedreturnonplanassets – – Amortization: Actuarial(gain)loss 55,654 330,623 Priorservice(credit)cost (25,490) (25,490) Netperiodicbenefitcost(credit) $ 776,363 $1,057,790 Weighted-averageassumptionsusedtodeterminenet periodicbenefitcost–discountrate 4.97% 4.00% Otherchangesinplanassetsandbenefitobligations recognizedinothercomprehensiveincome: Currentyearactuarial(gain)loss $1,298,017 $(1,971,254) Amortizationofpriorservicecredit(cost) 25,490 25,490 Amortizationofactuarialgain(loss) (55,654) (330,623) Totalrecognizedinothercomprehensive(income)loss $1,267,853 $(2,276,387) Totalrecognizedinnetperiodicbenefitcostandothercomprehensiveincome $2,044,216 $(1,218,597) Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive incomeintonetperiodicbenefitcost(credit)in2015areshownbelow: Netactuarial(gain)loss $170,536 Priorservice(credit)cost (25,490) Total $145,046 (8)PostemploymentBenefits TheBoardprovidescertainpostemploymentbenefitstoeligibleformerorinactive employeesandtheirdependentsduringtheperiodsubsequenttoemploymentbut priortoretirement.Postemploymentcostswereactuariallydeterminedusinga December31measurementdateanddiscountratesof 2.47percentand3.43percentasof December31,2014and2013,respectively.Thenetperiodicpostemploymentbenefitcost(credit)recognizedbytheBoardasof December31,2014and 2013,was$1,448,000and($217,000),respectively.

FederalReserveSystemAudits 335 (9)AccumulatedOtherComprehensiveIncome(Loss) Areconciliationof beginningandendingbalancesof accumulatedothercomprehensiveincome(loss)fortheyearsendedDecember31,2014and2013,isas follows: AmountRelatedto TotalAccumulated AmountRelatedto Postretirement Other DefinedBenefit BenefitsOther Comprehensive RetirementPlans ThanPensions Income(Loss) Balance–January1,2013 $(14,255,604) $(3,576,886) $(17,832,490) Changeinaccumulatedothercomprehensiveincome(loss): Netactuarialgain(loss)arisingduringtheyear 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) Changeinaccumulatedothercomprehensiveincome(loss): Netactuarialgain(loss)arisingduringtheyear(a) (12,063,033) (1,298,017) (13,361,050) Othercomprehensiveincomebeforereclassifications (12,063,033) (1,298,017) (13,361,050) Amortizationofpriorservice(credit)costs(a)(b) 630,973 (25,490) 605,483 Amortizationofnetactuarial(gain)loss(a)(b) 426,196 55,654 481,850 Amountsreclassifiedfromaccumulatedothercomprehensive income 1,057,169 30,164 1,087,333 Changeinaccumulatedothercomprehensiveincome(loss) (11,005,864) (1,267,853) (12,273,717) Balance–December31,2014 $(16,956,317) $(2,568,352) $(19,524,669) (a)Thesecomponentsofaccumulatedothercomprehensiveincomeareincludedinthecomputationofnetperiodicpensioncost (seeNotes6and7foradditionaldetails). (b)Thesecomponentsofaccumulatedothercomprehensiveincomearereflectedinthe“Retirement,insurance,andbenefits”line ontheStatementsofOperations. (10)ReserveBanks TheBoardperformscertainfunctionsfortheReserveBanksinconjunctionwith itsresponsibilitiesfortheSystem,andtheReserveBanksprovidecertainadministrativefunctionsfortheBoard.TheBoardassessestheReserveBanksforits operations,toincludeexpensesrelatedtoitscurrencyresponsibilities,aswellasfor

336 101stAnnualReport|2014 thefundingtheBoardisrequiredtoprovidetotheBureauandtheOffice.Activity relatedtotheBoardandReserveBanksissummarizedinthefollowingtable: 2014 2013 FortheyearsendedDecember31: AssessmentsleviedortobeleviedonReserveBanksfor: Currencyexpenses $ 707,402,059 $ 705,030,765 Boardoperations 590,000,000 580,000,000 TransfersoffundstotheBureau 563,000,000 563,200,000 TotalassessmentsleviedortobeleviedonReserveBanks $1,860,402,059 $1,848,230,765 FundsreturnedfromtheOfficeandtransferredto theReserveBanks $ 1,512,822 $ – BoardexpenseschargedtotheReserveBanksfordata processingandofficespace $ 364,165 $ 417,324 ReserveBankexpenseschargedtotheBoard: Dataprocessingandcommunication $ 1,250,884 $ 861,671 Officespace 468,463 1,289,714 Contingencysite 1,247,766 1,262,616 TotalReserveBankexpenseschargedtotheBoard $ 2,967,113 $ 3,414,001 NettransactionswithReserveBanks $1,856,286,289 $1,845,234,088 AsofDecember31: AccountsreceivableduefromtheReserveBanks $ 495,018 $ 5,496,852 AccountspayableduetotheReserveBanks $ 415,314 $ 1,000,923 TheBoardcontractedforauditservicesonbehalf of entitiesthatareincludedin thecombinedfinancialstatementsof theReserveBanks.Theentitiesreimburse theBoardforthecostof theauditservices.TheBoardaccruedliabilitiesof $39,000and$47,000inauditservicesandrecordednetreceivablesof $39,000and $47,000fromtheentitiesasof December31,2014and2013,respectively. TheOEBadministerscertainSystembenefitprogramsonbehalf of theBoardand theReserveBanks,andcostsassociatedwiththeOEB’sactivitiesareassessedto theBoardandReserveBanks.TheBoardwasassessed$2,503,000and$2,402,000 fortheyearsendedDecember31,2014and2013,respectively. (11)FederalFinancialInstitutionsExaminationCouncil TheBoardisoneof thefivememberagenciesof theFederalFinancialInstitutions ExaminationCouncil(theCouncil),andcurrentlyperformscertainadministrative functionsfortheCouncil.ThefiveagenciesthatarerepresentedontheCouncil aretheBoard,FederalDepositInsuranceCorporation,NationalCreditUnion Administration,Officeof theComptrollerof theCurrency,andtheBureau.

FederalReserveSystemAudits 337 TheBoard’sfinancialstatementsdonotincludefinancialdatafortheCouncil. ActivityrelatedtotheBoardandCouncilissummarizedinthefollowingtable: 2014 2013 FortheyearsendedDecember31: CouncilexpenseschargedtotheBoard: Assessmentsforoperatingexpenses $ 154,633 $ 141,111 Assessmentsforexaminereducation 1,047,803 988,233 CentralDataRepository 1,197,920 1,049,787 HomeMortgageDisclosureAct/CommunityReinvestmentAct 882,464 717,177 UniformBankPerformanceReport 224,797 134,977 TotalCouncilexpenseschargedtotheBoard $3,507,617 $3,031,285 BoardexpenseschargedtotheCouncil: Dataprocessingrelatedservices $4,611,282 $4,233,290 Otheradministrativeservices 245,000 223,000 TotalBoardexpenseschargedtotheCouncil $4,856,282 $4,456,290 AsofDecember31: AccountsreceivableduefromtheCouncil $ 221,749 $ 442,749 AccountspayableduetotheCouncil $ 132,125 $ 326,875 (12)TheBureauofConsumerFinancialProtection BeginningJuly2011,section1017of theDodd-FrankActrequirestheBoardto fundtheBureaufromthecombinedearningsof theSystem,inanamountdeterminedbytheDirectorof theBureautobereasonablynecessarytocarryoutthe authoritiesof theBureauunderfederalconsumerfinanciallaw,takinginto accountsuchothersumsmadeavailabletotheBureaufromtheprecedingyear(or quarterof suchyear).TheDodd-FrankActlimitstheamounttobetransferred eachfiscalyeartoafixedpercentageof theSystem’stotaloperatingexpenses.The BoardreceivedandprocessedfundingrequestsfortheBureautotaling $563,000,000and$563,200,000duringcalendaryears2014and2013,respectively. TheBureautransferredtotheBoardfundingfortheoperationsof theOIGof $9.3millionand$10millionin2014and2013,respectively.Beginningin2014,the Bureau’sfundingshareof OIGoperationswasadjustedbasedonactualOIG expensesandworkallocationfromthepreviousyear.TheBoardaccruedaliability of $1.84millionasof December31,2013,whichwasappliedtotheBureautransferin2014.TheBoardaccruedareceivableof $1.73millionasof December31, 2014,whichwillbeappliedtosubsequentBureautransfers. (13)TheOfficeofFinancialResearch Section155(c)of theDodd-FrankActrequirestheBoardtoprovideanamount sufficienttocovertheexpensesof theOfficeforthetwo-yearperiodfollowingthe dateof theenactment(July21,2010).Theexpensesof theFSOCareincludedin theexpensesof theOffice.Overthetwo-yearperiod,theBoardprovided $91,515,944tocovertheOffice’sexpenses.In2012,basedonitsreviewof actual expendituresandaccrualsthroughtheendof thetwo-yearperiod,theOffice determinedthat$39,921,702shouldbereturnedtotheBoard;theBoardsubsequentlyreceivedandreturnedthatamounttotheReserveBanks.Atthattime,the Officenotedthatanadditionaladjustmentmaybeneededbasedupontheactual expensesincurredforworkundertheDodd-FrankAct.In2014,theOfficeperformeditsfinalreviewanddeterminedthatanadditional$1,512,822shouldbe returnedtotheBoard.ThatamountwasreturnedtotheBoardandtransferredto theReserveBanksinSeptember2014.

338 101stAnnualReport|2014 (14)Currency TheBureauof EngravingandPrinting(BEP)isthesolesupplierforcurrency printingandalsoprovidescurrencyretirementandmeaningfulaccessservices.The Boardprovidesorcontractsforotherservicesassociatedwithcurrency,suchas shipping,education,andqualityassurance.Thecurrencycostsincurredbythe BoardfortheyearsendedDecember31,2014and2013,arereflectedinthefollowingtable: 2014 2013 ExpensesrelatedtoBEPservices: Printing $656,810,224 $660,957,789 Retirement 3,500,408 3,081,392 Meaningfulaccessprogram 808,017 – SubtotalrelatedtoBEPservices $661,118,649 $664,039,181 Othercurrencyexpenses: Shipping $ 27,460,180 $ 20,732,476 Researchanddevelopment 5,096,781 5,393,220 Qualityassuranceservices 11,690,796 11,284,687 Educationservices 2,035,653 3,581,201 Subtotalothercurrencyexpenses $ 46,283,410 $ 40,991,584 Totalcurrencyexpenses $707,402,059 $705,030,765 (15)CommitmentsandContingencies Commitments—TheBoardhasenteredintoanagreementwiththeFederal DepositInsuranceCorporationandtheOfficeof theComptrollerof theCurrency,throughtheCouncil,tofundaportionof theenhancementsandmaintenancefeesforacentraldatarepositoryprojectthatrequiresmaintenancethrough 2019andonetwo-yearoptionperiod.TheestimatedBoardexpensetosupport thiseffortis$5million. LitigationandContingentLiabilities—TheBoardissubjecttocontingentliabilitieswhicharisefromlitigationcasesandvariousbusinesscontracts.Thesecontingentliabilitiesariseinthenormalcourseof operationsandtheirultimatedispositionisunknown.Basedoninformationcurrentlyavailabletomanagement,itis management’sopinionthattheexpectedoutcomeof thesematters,intheaggregate,willnothaveamaterialadverseeffectonthefinancialstatements. (16)SubsequentEvents Therewerenosubsequenteventsthatrequireadjustmentstoordisclosuresinthe financialstatementsasof December31,2014.Subsequenteventswereevaluated throughMarch12,2015,whichisthedatethefinancialstatementswereavailable tobeissued.

FederalReserveSystemAudits 339 INDEPENDENTAUDITORS’REPORTONCOMPLIANCEANDOTHERMATTERSBASEDONANAUDIT OFFINANCIALSTATEMENTSPERFORMEDINACCORDANCEWITHGOVERNMENTAUDITING STANDARDS TotheBoardofGovernorsoftheFederalReserveSystem: Wehaveaudited,inaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica,auditing standardsofthePublicCompanyAccountingOversightBoard(UnitedStates)(the“PCAOB”),andthestandards applicabletofinancialauditscontainedinGovernmentAuditingStandardsissuedbytheComptrollerGeneralofthe UnitedStates,thefinancialstatementsoftheBoardofGovernorsoftheFederalReserveSystem(the“Board”)asof andfortheyearsendedDecember31,2014and2013,andtherelatednotestothefinancialstatements.Wehavealso audited,inaccordancewithattestationstandardsestablishedbytheAmericanInstituteofCertifiedPublicAccountantsandinaccordancewiththeauditingstandardsofthePCAOB,theBoard’sinternalcontroloverfinancialreportingasofDecember31,2014,basedonthecriteriaestablishedinInternalControl—IntegratedFramework(2013) issuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission.Wehaveissuedourreporton theaforementionedauditsdatedMarch12,2015. ComplianceandOtherMatters AspartofobtainingreasonableassuranceaboutwhethertheBoard’sfinancialstatementsarefreefrommaterialmisstatement,weperformedtestsofitscompliancewithcertainprovisionsoflaws,regulations,contracts,andgrant agreements,noncompliancewithwhichcouldhaveadirectandmaterialeffectonthedeterminationoffinancialstatementamounts.However,providinganopiniononcompliancewiththoseprovisionswasnotanobjectiveofouraudit, andaccordingly,wedonotexpresssuchanopinion.Theresultsofourtestsdisclosednoinstancesofnoncompliance orothermattersthatarerequiredtobereportedunderGovernmentAuditingStandards. PurposeofthisReport Thepurposeofthisreportissolelytodescribethescopeofourtestingofcomplianceandtheresultsofthattesting, andnottoprovideanopiniononcompliance.Thisreportisanintegralpartofanauditperformedinaccordance withGovernmentAuditingStandardsinconsideringtheBoard’scompliance.Accordingly,thiscommunicationisnot suitableforanyotherpurpose. March12,2015 Washington,DC

340 101stAnnualReport|2014 Federal Reserve Banks Combined Financial Statements Thecombinedfinancialstatementsof theFederalReserveBankswereauditedby Deloitte&ToucheLLP,independentauditors,fortheyearsendedDecember31, 2014and2013. INDEPENDENTAUDITORS’REPORT TotheBoardofGovernorsoftheFederalReserveSystemandtheBoardsofDirectorsoftheFederalReserveBanks: WehaveauditedtheaccompanyingcombinedfinancialstatementsoftheFederalReserveBanks(the“Reserve Banks”),whicharecomprisedofthecombinedstatementsofconditionasofDecember31,2014and2013,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,theauditorconsidersinternalcontrolrelevanttothepreparationandfairpresentationofthecombinedfinancialstatementsoftheFederalReserveBanksinordertodesignauditproceduresthatareappropriatein thecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheFederalReserve Banks’internalcontrol.Accordingly,weexpressnosuchopinion.Anauditalsoincludesevaluatingtheappropriatenessofaccountingpoliciesusedandthereasonablenessofsignificantaccountingestimatesmadebymanagement,as wellasevaluatingtheoverallpresentationofthecombinedfinancialstatements. Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforouraudit opinion.

FederalReserveSystemAudits 341 Opinion Inouropinion,thecombinedfinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancial positionoftheReserveBanksasofDecember31,2014and2013,andtheresultsoftheiroperationsfortheyears thenendedinaccordancewiththebasisofaccountingdescribedinNote3tothecombinedfinancialstatements. BasisofAccounting WedrawattentiontoNote3tothecombinedfinancialstatements,whichdescribesthebasisofaccounting.TheDivisionofReserveBankOperationsandPaymentSystemshaspreparedthesecombinedfinancialstatementsinconformitywithaccountingprinciplesestablishedbytheBoard,assetforthintheFinancialAccountingManualforFederal ReserveBanks,whichisabasisofaccountingotherthanaccountingprinciplesgenerallyacceptedintheUnitedStates ofAmerica.Theeffectsonthecombinedfinancialstatementsofthedifferencesbetweentheaccountingprinciples establishedbytheBoardandaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericaarealso describedinNote3tothecombinedfinancialstatements.Ouropinionisnotmodifiedwithrespecttothismatter. March11,2015 Washington,DC

342 101stAnnualReport|2014 Federal Reserve Banks Abbreviations ABS Asset-backedsecurities ACH Automatedclearinghouse AIG AmericanInternationalGroup,Inc. AIGFP AmericanInternationalGroup,Inc.FinancialProductsCorp. ASC AccountingStandardsCodification ASU AccountingStandardsUpdate BEP BenefitEqualizationRetirementPlan Bureau Bureauof ConsumerFinancialProtection CDO Collateralizeddebtobligation CDS Creditdefaultswaps CFE Collateralizedfinancingentity CIP CommitteeonInvestmentPerformance(relatedtoSystemRetirementPlan) CMBS Commercialmortgage-backedsecurities FAM FinancialAccountingManualforFederalReserveBanks FASB FinancialAccountingStandardsBoard FannieMae FederalNationalMortgageAssociation FreddieMac FederalHomeLoanMortgageCorporation FOMC FederalOpenMarketCommittee FRBC FederalReserveBankof Cleveland FRBKC FederalReserveBankof KansasCity FRBNY FederalReserveBankof NewYork FRBSL FederalReserveBankof St.Louis GAAP AccountingprinciplesgenerallyacceptedintheUnitedStatesof America GSE Government-sponsoredenterprise IMF InternationalMonetaryFund IMI InvestibleMarketsIndex JPMC JPMorganChase&Co. LLC Limitedliabilitycompany MBS Mortgage-backedsecurities ML MaidenLaneLLC MLII MaidenLaneIILLC MLIII MaidenLaneIIILLC MSCI MorganStanleyCapitalInternational MTM Mark-to-market RMBS Residentialmortgage-backedsecurities SBA SmallBusinessAdministration SDR Specialdrawingrights SERP SupplementalRetirementPlanforSelectOfficersof theFederalReserveBanks SOMA SystemOpenMarketAccount

FederalReserveSystemAudits 343 STRIPS SeparateTradingof RegisteredInterestandPrincipalof Securities TALF TermAsset-BackedSecuritiesLoanFacility TBA Tobeannounced TDF TermDepositFacility TRS Totalreturnswap VIE Variableinterestentity

344 101stAnnualReport|2014 FederalReserveBanksCombinedStatementsofCondition asofDecember31,2014andDecember31,2013 (inmillions) 2014 2013 Assets Goldcertificates $ 11,037 $ 11,037 Specialdrawingrightscertificates 5,200 5,200 Coin 1,873 1,955 Loans: Depositoryinstitutions 145 74 TermAsset-BackedSecuritiesLoanFacility(measuredatfairvalue) - 98 SystemOpenMarketAccount: Treasurysecurities,net(ofwhich$11,144and$17,153islentasofDecember31,2014and2013, respectively) 2,596,241 2,359,434 Government-sponsoredenterprisedebtsecurities,net(ofwhich$633and$1,099islentasof December31,2014and2013,respectively) 39,990 59,122 Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities,net 1,789,083 1,533,860 Foreigncurrencydenominatedinvestments,net 20,900 23,724 Centralbankliquidityswaps 1,528 272 Accruedinterestreceivable 25,644 23,493 Otherassets 29 2 Investmentsheldbyconsolidatedvariableinterestentities(ofwhich$1,808and$1,774ismeasuredat fairvalueasofDecember31,2014and2013,respectively) 1,811 1,926 Bankpremisesandequipment,net 2,630 2,653 Itemsinprocessofcollection 86 165 Deferredasset—remittancestotheTreasury 667 - Otherassets 910 1,134 Totalassets $4,497,774 $4,024,149 Liabilitiesandcapital FederalReservenotesoutstanding,net $1,298,725 $1,197,920 SystemOpenMarketAccount: Securitiessoldunderagreementstorepurchase 509,837 315,924 Otherliabilities 830 1,331 Liabilitiesofconsolidatedvariableinterestentities(ofwhich$41and$189ismeasuredatfairvalueasof December31,2014and2013,respectively) 127 274 Deposits: Depositoryinstitutions 2,377,996 2,249,070 Treasury,generalaccount 223,452 162,399 Otherdeposits 25,560 34,150 Interestpayabletodepositoryinstitutions 124 99 Accruedbenefitcosts 3,089 1,823 Deferredcredititems 641 1,127 AccruedremittancestotheTreasury - 4,791 Otherliabilities 249 227 Totalliabilities 4,440,630 3,969,135 Capitalpaid-in 28,572 27,507 Surplus(includingaccumulatedothercomprehensivelossof$4,168and$2,556atDecember31,2014 and2013,respectively) 28,572 27,507 Totalcapital 57,144 55,014 Totalliabilitiesandcapital $4,497,774 $4,024,149 Theaccompanyingnotesareanintegralpartof thesecombinedfinancialstatements.

FederalReserveSystemAudits 345 FederalReserveBanksCombinedStatementsofIncomeandComprehensiveIncome fortheyearsendedDecember31,2014andDecember31,2013 (inmillions) 2014 2013 Interestincome Loans: TermAsset-BackedSecuritiesLoanFacility $ 2 $ 6 SystemOpenMarketAccount: Treasurysecurities,net 63,011 51,591 Government-sponsoredenterprisedebtsecurities,net 1,579 2,166 Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecurities,net 51,264 36,628 Foreigncurrencydenominatedinvestments,net 78 96 Centralbankliquidityswaps 1 22 Investmentsheldbyconsolidatedvariableinterestentities 77 6 Totalinterestincome 116,012 90,515 Interestexpense SystemOpenMarketAccount: Securitiessoldunderagreementstorepurchase 112 60 Other 2 – Deposits: Depositoryinstitutions 6,705 5,212 TermDepositFacility 156 11 Totalinterestexpense 6,975 5,283 Netinterestincome 109,037 85,232 Non-interest(loss)income SystemOpenMarketAccount: Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecuritiesgains,net 81 51 Foreigncurrencytranslationlosses,net (2,907) (1,257) Other 14 22 Consolidatedvariableinterestentitiesgains,net 37 184 Incomefromservices 433 441 Reimbursableservicestogovernmentagencies 570 530 Other 59 54 Totalnon-interest(loss)income (1,713) 25 Operatingexpenses Salariesandbenefits 3,104 3,225 Occupancy 314 314 Equipment 175 169 Other 602 563 Assessments: BoardofGovernorsoperatingexpensesandcurrencycosts 1,301 1,282 BureauofConsumerFinancialProtection 563 563 Totaloperatingexpenses 6,059 6,116 NetincomebeforeprovidingforremittancestotheTreasury 101,265 79,141 EarningsremittancestotheTreasury 96,902 79,633 Netincome(loss) 4,363 (492) Changeinpriorservicecostsrelatedtobenefitplans 97 97 Changeinactuarial(losses)gainsrelatedtobenefitplans (1,709) 2,192 Totalothercomprehensive(loss)income (1,612) 2,289 Comprehensiveincome $ 2,751 $ 1,797 Theaccompanyingnotesareanintegralpartof thesecombinedfinancialstatements.

346 101stAnnualReport|2014 FederalReserveBanksCombinedStatementsofChangesinCapital fortheyearsendedDecember31,2014andDecember31,2013 (inmillions,exceptsharedata) Surplus Capital Accumulated Total paid-in Netincome other Total capital retained comprehensive surplus loss 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 Netchangeincapitalstockissued (21,299,030shares) 1,065 – – – 1,065 Comprehensiveincome: Netincome – 4,363 – 4,363 4,363 Othercomprehensiveloss – – (1,612) (1,612) (1,612) Dividendsoncapitalstock – (1,686) – (1,686) (1,686) Netchangeincapital 1,065 2,677 (1,612) 1,065 2,130 BalanceatDecember31,2014 (571,435,966shares) $28,572 $32,740 $(4,168) $28,572 $57,144 Theaccompanyingnotesareanintegralpartof thesecombinedfinancialstatements.

FederalReserveSystemAudits 347 (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 theSystemincludeallnationally-charteredbanksandanystatecharteredbanksthatapplyandareapprovedformembership.Memberbanksare dividedintothreeclassesaccordingtosize.Memberbanksineachclasselectone directorrepresentingmemberbanksandonerepresentingthepublic.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,includingtransfersof funds,automatedclearinghouse (ACH)operations,andcheckcollection;distributingcoinandcurrency;performingfiscalagencyfunctionsfortheU.S.Departmentof theTreasury(Treasury), certainfederalagencies,andotherentities;servingasthefederalgovernment’s bank;providingshort-termloanstodepositoryinstitutions;providingloansto participantsinprogramsorfacilitieswithbroad-basedeligibilityinunusualand exigentcircumstances;servingconsumersandcommunitiesbyprovidingeducationalmaterialsandinformationregardingfinancialconsumerprotectionrights andlawsandinformationoncommunitydevelopmentprogramsandactivities; andsupervisingbankholdingcompanies,statememberbanks,savingsandloan holdingcompanies,U.S.officesof foreignbankingorganizations,anddesignated financialmarketutilitiespursuanttoauthoritydelegatedbytheBoardof Governors.Certainservicesareprovidedtoforeignandinternationalmonetaryauthorities,primarilybytheFRBNY. TheFOMC,inconductingmonetarypolicy,establishespolicyregardingdomestic openmarketoperations,overseestheseoperations,andissuesauthorizationsand directivestotheFRBNYtoexecutetransactions.TheFOMCauthorizesand directstheFRBNYtoconductoperationsindomesticmarkets,includingthe directpurchaseandsaleof Treasurysecurities,government-sponsoredenterprise (GSE)debtsecurities,andfederalagencyandGSEmortgage-backedsecurities

348 101stAnnualReport|2014 (MBS);thepurchaseof thesesecuritiesunderagreementstoresell;andthesaleof thesesecuritiesunderagreementstorepurchase.TheFRBNYholdstheresulting securitiesandagreementsinaportfolioknownastheSystemOpenMarket Account(SOMA).TheFRBNYisauthorizedanddirectedtolendtheTreasury securitiesandGSEdebtsecuritiesthatareheldintheSOMA. Tobepreparedtocounterdisorderlyconditionsinforeignexchangemarketsorto meetotherneedsspecifiedbytheFOMCtocarryouttheSystem’scentralbank responsibilities,theFOMChasauthorizedanddirectedtheFRBNYtoexecute spotandforwardforeignexchangetransactionsin14foreigncurrencies,tohold balancesinthosecurrencies,andtoinvestsuchforeigncurrencyholdings,while maintainingadequateliquidity.TheFRBNYholdsthesesecuritiesandobligations intheSOMA.TheFOMChasalsoauthorizedtheFRBNYtomaintainreciprocal currencyarrangementswiththeBankof CanadaandtheBankof Mexicointhe maximumamountsof $2billionand$3billion,respectively,andtowarehouseforeigncurrenciesfortheTreasuryandtheExchangeStabilizationFundinthemaximumamountof $5billion. Becauseof theglobalcharacterof bankfundingmarkets,theSystemhasattimes coordinatedwithothercentralbankstoprovideliquidity.TheFOMCauthorized anddirectedtheFRBNYtoestablishU.S.dollarliquidityandreciprocalforeign currencyliquidityswaplineswiththeBankof Canada,theBankof England,the EuropeanCentralBank,theBankof Japan,andtheSwissNationalBank.The FRBNYholdsamountsoutstandingundertheseswaplinesintheSOMA.These swaplines,whichwereoriginallyestablishedastemporaryarrangements,wereconvertedtostandingarrangementsonOctober31,2013,andwillremaininplace untilfurthernotice. 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 responsibilitytoconductmonetarypolicy.Theprimarydifferencesarethepresen-

FederalReserveSystemAudits 349 tationof allSOMAsecuritiesholdingsatamortizedcost,adjustedforcredit impairment,if any,therecordingof allSOMAsecuritiesonasettlement-date basis,andtheuseof straight-lineamortizationforTreasurysecurities,GSEdebt securities,andforeigncurrencydenominatedinvestments.Amortizedcost,rather thanthefairvaluepresentation,moreappropriatelyreflectsthefinancialposition associatedwiththeReserveBanks’securitiesholdingsgiventheSystem’sunique responsibilitytoconductmonetarypolicy.Althoughtheapplicationof fairvalue measurementstothesecuritiesholdingsmayresultinvaluessubstantiallygreater orlessthantheircarryingvalues,theseunrealizedchangesinvaluehavenodirect effectonthequantityof reservesavailabletothebankingsystemorontheability of theReserveBanks,asthecentralbank,tomeettheirfinancialobligationsand responsibilities.Boththedomesticandforeigncomponentsof theSOMAportfoliomayinvolvetransactionsthatresultingainsorlosseswhenholdingsaresold beforematurity.Decisionsregardingsecuritiesandforeigncurrencytransactions, includingtheirpurchaseandsale,aremotivatedbymonetarypolicyobjectives ratherthanprofit.Accordingly,fairvalues,earnings,andgainsorlossesresulting fromthesaleof suchsecuritiesandcurrenciesareincidentaltoopenmarketoperationsanddonotmotivatedecisionsrelatedtopolicyoropenmarketactivities. Accountingforthesesecuritiesonasettlement-datebasis,ratherthanthetradedatebasisrequiredbyGAAP,betterreflectsthetimingof thetransaction’seffect onthequantityof reservesinthebankingsystem.Thecostbasesof Treasury securities,GSEdebtsecurities,andforeigngovernmentdebtinstrumentsare adjustedforamortizationof premiumsoraccretionof discountsonastraight-line basis,ratherthanusingtheinterestmethodrequiredbyGAAP. Inaddition,theReserveBanksdonotpresentaCombinedStatementof Cash FlowsasrequiredbyGAAPbecausetheliquidityandcashpositionof theReserve BanksarenotaprimaryconcerngiventheReserveBank’suniquepowersand 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. In2014,thedescriptionof certainlineitemspresentedintheCombinedStatementsof ConditionandtheCombinedStatementsof IncomeandComprehensive Incomehavebeenrevisedtobetterreflectthenatureof theseitems.Amounts relatedtotheselineitemswerenotchangedfromtheprioryear,onlythenomenclatureforthelineitemwasrevised,asfurthernotedbelow: • Thelineitem“SystemOpenMarketAccount:Otherinvestments”hasbeen revisedintheCombinedStatementsof Conditionto“SystemOpenMarket Account:Otherassets.” • Thelineitem“SystemOpenMarketAccount:Foreigncurrencydenominated assets,net”hasbeenrevisedintheCombinedStatementsof IncomeandCom-

350 101stAnnualReport|2014 prehensiveIncometo“SystemOpenMarketAccount:Foreigncurrencydenominatedinvestments,net.” CertainamountsrelatingtotheprioryearhavebeenreclassifiedintheCombined Statementsof Conditiontoconformtothecurrentyearpresentation.$116million and$158millionpreviouslyreportedasof December31,2013as“Consolidated variableinterestentities:Beneficialinterestinconsolidatedvariableinterestentities”and“Consolidatedvariableinterestentities:Otherliabilities,”respectively, havebeencombinedandreportedinanewlinetitled“Liabilitiesof consolidated variableinterestentities.” CertainamountsrelatingtotheprioryearhavebeenreclassifiedintheCombined Statementsof IncomeandComprehensiveIncometoconformtothecurrentyear presentation.$22millionpreviouslyreportedfortheyearendedDecember31, 2013as“Non-interest(loss)income:Other”hasbeenreclassifiedintoanewline titled“Non-interest(loss)income:SystemOpenMarketAccount:Other.” $183millionand$1millionpreviouslyreportedfortheyearendedDecember31, 2013as“Non-interest(loss)income:Consolidatedvariableinterestentities:Investmentsheldbyconsolidatedvariableinterestentitiesgains,net”and“Non-interest (loss)income:Consolidatedvariableinterestentities:Beneficialinterestinconsolidatedvariableinterestentitiesgains(losses),net,”respectively,havebeencombined andreportedinanewlinetitled“Non-interest(loss)income:Consolidatedvariableinterestentitiesgains,net.” Significantaccountsandaccountingpoliciesareexplainedbelow. a.Consolidation Thecombinedfinancialstatementsincludetheaccountsandresultsof operations of theReserveBanksaswellasseveralvariableinterestentities(VIEs),which includeMaidenLaneLimitedLiabilityCompany(LLC)(ML),MaidenLaneII LLC(MLII),MaidenLaneIIILLC(MLIII),andTermAsset-BackedSecurities LoanFacility(TALF)LLC.Theconsolidationof theVIEswasassessedinaccordancewithFinancialAccountingStandardsBoard(FASB)AccountingStandards Codification(ASC)Topic810(ASC810)Consolidation,whichrequiresaVIEto beconsolidatedbyitscontrollingfinancialinterestholder.Intercompanybalances andtransactionshavebeeneliminatedinconsolidation.SeeNote6foradditional informationontheVIEs.Thecombinedfinancialstatementsof theReserveBanks alsoincludeaccountsandresultsof operationsof MaidenandNassauLLC,a DelawareLLCwholly-ownedbytheBank,whichwasformedtoownandoperate theFRBNY-owned33MaidenLanebuilding. 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)asanindependentbureauwithintheSystemthathassupervisoryauthor-

FederalReserveSystemAudits 351 ityoversomeinstitutionspreviouslysupervisedbytheReserveBanksinconnectionwiththoseinstitutions’compliancewithconsumerprotectionstatutes.Section1017of theDodd-FrankActprovidesthatthefinancialstatementsof the Bureauarenottobeconsolidatedwiththoseof theBoardof Governorsorthe System.TheBoardof GovernorsfundstheBureauthroughassessmentsonthe ReserveBanksasrequiredbytheDodd-FrankAct.TheReserveBanksreviewed thelawandevaluatedthedesignof andtheirrelationshiptotheBureauanddeterminedthatitshouldnotbeconsolidatedintheBanks’combinedfinancial statements. 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 transactionsduringtheyearsendedDecember31,2014and2013. c.Coin TheamountreportedascoinintheCombinedStatementsof Conditionrepresents thefacevalueof allUnitedStatescoinheldbytheReserveBanks.TheReserve BanksbuycoinatfacevaluefromtheU.S.Mintinordertofilldepositoryinstitutionorders. d.Loans Loanstodepositoryinstitutionsarereportedattheiroutstandingprincipalbalancesandinterestincomeisrecognizedonanaccrualbasis. TheFRBNYhaselectedthefairvalueoptionforallTALFloansinaccordance withASC825.RecordingallTALFloansatfairvalue,ratherthanattheremainingprincipalamountoutstanding,providesthemostappropriatepresentationon

352 101stAnnualReport|2014 thefinancialstatementsbymatchingthechangeinfairvalueof TALFloans,the relatedputagreementwithTALFLLC,andthevaluationof thebeneficialinterestsinTALFLLC.InformationregardingtheTALFLLC’sassetsandliabilitiesis presentedinNote6.Unrealizedgains(losses)onTALFloansthatarerecordedat fairvaluearereportedasacomponentof “Non-interestincome:Other”inthe CombinedStatementsof IncomeandComprehensiveIncome.Theinterestincome onTALFloansisrecognizedbasedonthecontractedrateandisreportedas “InterestIncome:TermAsset-BackedSecuritiesLoanFacility”intheCombined Statementsof IncomeandComprehensiveIncome. Loans,otherthanthoserecordedatfairvalue,areimpairedwhencurrentinformationandeventsindicatethatitisprobablethattheReserveBankwillnotreceive 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 typicallysettledthroughatri-partyarrangement.Inatri-partyarrangement,two commercialcustodialbanksmanagethecollateralclearing,settlement,pricing, andpledging,andprovidecashandsecuritiescustodialservicesforandonbehalf of theFRBNYandcounterparty.Thecollateralpledgedmustexceedtheprincipal amountof thetransactionbyamargindeterminedbytheFRBNYforeachclass andmaturityof acceptablecollateral.CollateraldesignatedbytheFRBNYas acceptableunderrepurchasetransactionsprimarilyincludesTreasurysecurities (includingTreasuryInflation-ProtectedSecurities,SeparateTradingof Registered InterestandPrincipalof Securities(STRIPS)Treasurysecurities,andTreasury FloatingRateNotes);directobligationsof severalfederalandGSE-relatedagencies,includingFederalNationalMortgageAssociation(FannieMae),Federal HomeLoanMortgageCorporation(FreddieMac),andFederalHomeLoan Banks;andpass-throughfederalagencyandGSEMBS.Therepurchasetransactionsareaccountedforasfinancingtransactionswiththeassociatedinterest

FederalReserveSystemAudits 353 incomerecognizedoverthelifeof thetransaction.Thesetransactionsarereported attheircontractualamountsas“SystemOpenMarketAccount:Securitiespurchasedunderagreementstoresell”andtherelatedaccruedinterestreceivableis reportedasacomponentof “SystemOpenMarketAccount:Accruedinterest receivable”intheCombinedStatementsof Condition. TheFRBNYmayengageinsalesof securitiesunderagreementstorepurchase withprimarydealersandwithasetof expandedcounterpartiesthatincludes banks,savingsassociations,GSEs,anddomesticmoneymarketfunds(Overnight andtermreverserepurchaseagreements).Thesereverserepurchasetransactions aresettledthroughatri-partyarrangement,similartorepurchasetransactions. Reverserepurchasetransactionsmayalsobeexecutedwithforeignofficialand internationalaccountholdersaspartof aserviceoffering.Reverserepurchase agreementsarecollateralizedbyapledgeof anamountof Treasurysecurities, GSEdebtsecurities,orfederalagencyandGSEMBSthatareheldintheSOMA. Reverserepurchasetransactionsareaccountedforasfinancingtransactions,and theassociatedinterestexpenseisrecognizedoverthelifeof thetransaction.These transactionsarereportedattheircontractualamountsas“SystemOpenMarket Account:Securitiessoldunderagreementstorepurchase”andtherelatedaccrued interestpayableisreportedasacomponentof “SystemOpenMarketAccount: Otherliabilities”intheCombinedStatementsof Condition. TreasurysecuritiesandGSEdebtsecuritiesheldintheSOMAmaybelenttoprimarydealers,typicallyovernight,tofacilitatetheeffectivefunctioningof the domesticsecuritiesmarkets.Theamortizedcostbasisof securitieslentcontinues tobereportedas“SystemOpenMarketAccount:Treasurysecurities,net”and “SystemOpenMarketAccount:Government-sponsoredenterprisedebtsecurities, net,”asappropriate,intheCombinedStatementsof Condition.Securitieslending transactionsarefullycollateralizedbyTreasurysecuritiesbasedonthefairvalues of thesecuritieslentincreasedbyamargindeterminedbytheFRBNY.The FRBNYchargestheprimarydealerafeeforborrowingsecurities,andthesefees arereportedasacomponentof “Non-interest(loss)income:SystemOpenMarket Account:Other”intheCombinedStatementsof IncomeandComprehensive Income. Activityrelatedtosecuritiespurchasedunderagreementstoresell,securitiessold underagreementstorepurchase,andsecuritieslendingisallocatedtoeachof the ReserveBanksonapercentagebasisderivedfromanannualsettlementof the interdistrictsettlementaccountthatoccursinthesecondquarterof eachyear. f.TreasurySecurities;Government-SponsoredEnterpriseDebtSecurities; FederalAgencyandGovernment-SponsoredEnterpriseMortgage-Backed Securities;ForeignCurrencyDenominatedAssets; andWarehousingAgreements InterestincomeonTreasurysecurities,GSEdebtsecurities,andforeigncurrency denominatedinvestmentsincludedintheSOMAisaccruedusingthestraight-line method.InterestincomeonfederalagencyandGSEMBSisaccruedusingthe interestmethodandincludesamortizationof premiums,accretionof discounts, andgainsorlossesassociatedwithprincipalpaydowns.Premiumsanddiscounts relatedtofederalagencyandGSEMBSareamortizedoraccretedoverthetermof thesecuritytostatedmaturity,andtheamortizationof premiumsandaccretionof discountsareacceleratedwhenprincipalpaymentsarereceived.Gainsandlosses resultingfromsalesof securitiesaredeterminedbyspecificissuebasedonaverage cost.Treasurysecurities,GSEdebtsecurities,andfederalagencyandGSEMBS

354 101stAnnualReport|2014 arereportednetof premiumsanddiscountsintheCombinedStatementsof Conditionandinterestincomeonthosesecuritiesisreportednetof theamortization of premiumsandaccretionof discountsintheCombinedStatementsof Income andComprehensiveIncome. Inadditiontooutrightpurchasesof federalagencyandGSEMBSthatareheldin theSOMA,theFRBNYentersintodollarrolltransactions(dollarrolls),which primarilyinvolveaninitialtransactiontopurchaseorsell“tobeannounced” (TBA)MBSfordeliveryinthecurrentmonthcombinedwithasimultaneous agreementtosellorpurchaseTBAMBSonaspecifiedfuturedate.Duringthe yearsendedDecember31,2014and2013,theFRBNYexecuteddollarrollsto facilitatesettlementof outstandingpurchasesof federalagencyandGSEMBS. TheFRBNYaccountsfordollarrollsaspurchasesorsalesonasettlement-date basis.Inaddition,TBAMBStransactionsmaybepairedoff orassignedpriorto settlement.NetgainsresultingfromtheseMBStransactionsarereportedas“Noninterest(loss)income:SystemOpenMarketAccount:Federalagencyand government-sponsoredenterprisemortgage-backedsecuritiesgains,net”inthe CombinedStatementsof IncomeandComprehensiveIncome. Foreigncurrencydenominatedinvestments,whichcanincludeforeigncurrency deposits,securitiespurchasedunderagreementstoresell,andgovernmentdebt instruments,arerevalueddailyatcurrentforeigncurrencymarketexchangerates inordertoreporttheseassetsinU.S.dollars.Foreigncurrencytranslationgains andlossesthatresultfromthedailyrevaluationof foreigncurrencydenominated investmentsarereportedas“Non-interest(loss)income:SystemOpenMarket Account:Foreigncurrencytranslationlosses,net”intheCombinedStatementsof IncomeandComprehensiveIncome. BecausetheFRBNYentersintocommitmentstobuyTreasurysecurities,federal agencyandGSEMBS,andforeigngovernmentdebtinstrumentsandrecordsthe relatedsecuritiesonasettlement-datebasisinaccordancewiththeFAM,the relatedoutstandingcommitmentsarenotreflectedintheCombinedStatementsof Condition. ActivityrelatedtoTreasurysecurities,GSEdebtsecurities,andfederalagencyand GSEMBS,includingthepremiums,discounts,andrealizedgainsandlosses,is allocatedtoeachReserveBankonapercentagebasisderivedfromanannual settlementof theinterdistrictsettlementaccountthatoccursinthesecondquarter of eachyear.Activityrelatedtoforeigncurrencydenominatedinvestments,includingthepremiums,discounts,andrealizedandunrealizedgainsandlosses,isallocatedtoeachReserveBankbasedontheratioof eachReserveBank’scapitaland surplustotheReserveBanks’aggregatecapitalandsurplusatthepreceding December31. WarehousingisanarrangementunderwhichtheFOMChasapprovedthe exchange,attherequestof theTreasury,of U.S.dollarsforforeigncurrenciesheld bytheTreasuryoveralimitedperiod.Thepurposeof thewarehousingfacilityis tosupplementtheU.S.dollarresourcesof theTreasuryforfinancingpurchasesof foreigncurrenciesandrelatedinternationaloperations.Warehousingagreements arevalueddailyatcurrentmarketexchangerates.ActivityrelatedtotheseagreementsisallocatedtoeachReserveBankbasedontheratioof eachReserveBank’s capitalandsurplustotheReserveBanks’aggregatecapitalandsurplusattheprecedingDecember31.

FederalReserveSystemAudits 355 TheFRBNYisauthorizedtoholdforeigncurrencyworkingbalancesandexecute foreignexchangecontractstofacilitateinternationalpaymentsandcurrencytransactionsitmakesonbehalf of foreigncentralbankandU.S.officialinstitutioncustomers.Theseforeigncurrencyworkingbalancesandcontractsarenotrelatedto theFRBNY'smonetarypolicyoperations.Foreigncurrencyworkingbalancesare reportedasacomponentof “Otherassets”intheCombinedStatementsof Conditionandtherelatedforeigncurrencytranslationgainsandlossesthatresultfrom thedailyrevaluationof theforeigncurrencyworkingbalancesandcontractsare reportedasacomponentof “Non-interest(loss)income:Other”intheCombined Statementsof 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. TheforeigncentralbankcompensatestheFRBNYbasedontheamountoutstandingandtherateundertheswapagreement.TheFRBNYrecognizescompensation duringthetermof theswaptransaction,whichisreportedas“Interestincome: SystemOpenMarketAccount:Centralbankliquidityswaps”intheCombined Statementsof IncomeandComprehensiveIncome. Foreigncurrencyliquidityswaps Thestructureof foreigncurrencyliquidityswaptransactionsinvolvesthetransfer bytheFRBNY,attheprevailingmarketexchangerate,of aspecifiedamountof U.S.dollarstoanaccountfortheforeigncentralbankinexchangeforitscurrency. TheforeigncurrencyamountsthattheFRBNYreceivesarerecordedasaliability. h.InvestmentsHeldbyConsolidatedVariableInterestEntities TheinvestmentsheldbyconsolidatedVIEsconsistprimarilyof short-terminvestmentswithmaturitiesof greaterthanthreemonthsandlessthanoneyear,cash andcashequivalents,commercialmortgageloans,andswapcontracts.Swapcontractsconsistof creditdefaultswaps(CDS).Investmentsarereportedas“Invest-

356 101stAnnualReport|2014 mentsheldbyconsolidatedvariableinterestentities”intheCombinedStatements of Condition.Theseinvestmentsareaccountedforandclassifiedasfollows: • ML’sinvestmentsindebtsecuritiesareaccountedforinaccordancewithFASB ASCTopic320(ASC320)Investments—DebtandEquitySecurities,andML electedthefairvalueoptionforalleligibleassetsandliabilitiesinaccordance withASC825.Otherfinancialinstruments,includingswapcontractsinML,are recordedatfairvalueinaccordancewithFASBASCTopic815(ASC815) DerivativesandHedging. • MLIIandMLIIIqualifyasnonregisteredinvestmentcompaniesundertheprovisionsof FASBASCTopic946(ASC946)FinancialServices—InvestmentCompanies,andtherefore,allinvestmentsarerecordedatfairvalueinaccordance withASC946. • TALFLLCfollowstheguidanceinASC320whenaccountingforanyacquired asset-backedsecurities(ABS)investmentsandhaselectedthefairvalueoption foralleligibleassetsinaccordancewithASC825. i.BankPremises,Equipment,andSoftware ReserveBankpremisesandequipmentarestatedatcostlessaccumulateddepreciation.Depreciationiscalculatedonastraight-linebasisovertheestimateduseful livesof theassets,whichrangefrom2to50years.Majoralterations,renovations, andimprovementsarecapitalizedatcostasadditionstotheassetaccountsandare 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.Maintenancecostsandminorreplacementsrelatedtosoftwarearechargedtooperating expenseintheyearincurred. Capitalizedassets,includingsoftware,buildings,leaseholdimprovements,furniture,andequipment,areimpairedandanadjustmentisrecordedwheneventsor changesincircumstancesindicatethatthecarryingamountof assetsorasset groupsisnotrecoverableandsignificantlyexceedstheassets’fairvalue. j.FederalReserveNotes FederalReservenotesarethecirculatingcurrencyof theUnitedStates.These notes,whichareidentifiedasissuedtoaspecificReserveBank,mustbefullycollateralized.Allof theReserveBanks’assetsareeligibletobepledgedascollateral. Thecollateralvalueisequaltothebookvalueof thecollateraltenderedwiththe exceptionof securities,forwhichthecollateralvalueisequaltotheparvalueof thesecuritiestendered.Theparvalueof securitiessoldunderagreementstorepurchaseisdeductedfromtheeligiblecollateralvalue. TheBoardof Governorsmay,atanytime,calluponaReserveBankforadditional securitytoadequatelycollateralizeoutstandingFederalReservenotes.Tosatisfy theobligationtoprovidesufficientcollateralforoutstandingFederalReserve

FederalReserveSystemAudits 357 notes,theReserveBankshaveenteredintoanagreementthatprovidesforcertain assetsof theReserveBankstobejointlypledgedascollateralfortheFederal ReservenotesissuedtoallReserveBanks.Intheeventthatthiscollateralisinsufficient,theFederalReserveActprovidesthatFederalReservenotesbecomeafirst andparamountlienonalltheassetsof theReserveBanks.Finally,FederalReserve notesareobligationsof theUnitedStatesgovernment. “FederalReservenotesoutstanding,net”intheCombinedStatementsof ConditionrepresentstheReserveBanks’FederalReservenotesoutstanding,reducedby theReserveBanks’currencyholdingsof $171billionand$203billionatDecember31,2014and2013,respectively. AtDecember31,2014and2013,allFederalReservenotesoutstanding,reducedby theReserveBank’scurrencyholdings,werefullycollateralized.AtDecember31, 2014,allgoldcertificates,allspecialdrawingrightscertificates,and$1,282billion of domesticsecuritiesheldintheSOMAwerepledgedascollateral.AtDecember31,2014,noinvestmentsdenominatedinforeigncurrencieswerepledgedas collateral. k.LiabilitiesofConsolidatedVariableInterestEntities Theliabilitiesof consolidatedVIEsconsistprimarilyof swapcontracts,cashcollateralonswapcontracts,andbeneficialinterests.Swapcontractsarerecordedat fairvalueinaccordancewithASC815.TheVIEselectedtomeasureallbeneficial interestsatfairvalueinaccordancewithASC825.Liabilitiesarereportedas “Liabilitiesof consolidatedvariableinterestentities”intheCombinedStatements of Condition.Changesinfairvalueof theliabilitiesarerecordedin“Non-interest (loss)income:Consolidatedvariableinterestentitiesgains,net”intheCombined Statementsof 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.TherewerenodepositsheldbytheBankundertheTDF atDecember31,2014and2013. Treasury TheTreasurygeneralaccountistheprimaryoperationalaccountof theTreasury andisheldattheFRBNY. Other Otherdepositsincludeforeigncentralbankandforeigngovernmentdepositsheld attheFRBNY.OtherdepositsalsoincludecashcollateralandGSEdepositsheld bytheReserveBanks.

358 101stAnnualReport|2014 m.ItemsinProcessofCollectionandDeferredCreditItems Itemsinprocessof collectionprimarilyrepresentsamountsattributabletochecks thathavebeendepositedforcollectionandthat,asof thebalancesheetdate,have notyetbeenpresentedtothepayingbank.Deferredcredititemsrepresent amountsattributabletochecksthathavebeendepositedforcollectionandthat,as of thebalancesheetdate,havenotbeencreditedtoadepositoryinstitution’s account. 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,remittancestotheTreasuryare madeonaweeklybasis.Thisamountisreportedas“Earningsremittancestothe Treasury”intheCombinedStatementsof IncomeandComprehensiveIncome. TheamountduetotheTreasuryisreportedas“AccruedremittancestotheTreasury”intheCombinedStatementsof Condition.SeeNote13foradditionalinformationonearningsremittancestotheTreasury. If earningsduringtheyeararenotsufficienttoprovideforthecostsof operations, paymentof dividends,andequatingsurplusandcapitalpaid-in,remittancestothe Treasuryaresuspended.Adeferredassetisrecordedthatrepresentstheamountof netearningsaReserveBankwillneedtorealizebeforeremittancestotheTreasury resume.Accountingadjustments,includingthoserecordedasof ornearthefinancialstatementdate,canalsoresultinsuspendingremittancestotheTreasuryand recordingadeferredasset.Asof December31,2014,suchadjustmentsresultedin recordingadeferredassetintheamountof $667million,whichisreportedas “Deferredasset—remittancestotheTreasury”intheCombinedStatementsof Condition.Thedeferredassetisreviewedforimpairment,andasof December31, 2014,noimpairmentexisted.

FederalReserveSystemAudits 359 q.IncomeandCostsRelatedtoTreasuryServices WhendirectedbytheSecretaryof theTreasury,theReserveBanksarerequiredby theFederalReserveActtoserveasfiscalagentanddepositaryof theUnited StatesGovernment.Bystatute,theTreasuryhasappropriationstopayforthese services.DuringtheyearsendedDecember31,2014and2013,theBankwasreimbursedforallservicesprovidedtotheTreasuryasitsfiscalagent. r.Assessments TheBoardof GovernorsassessestheReserveBankstofunditsoperationsandthe operationsof theBureau.TheseassessmentsareallocatedtoeachReserveBank basedoneachReserveBanks’capitalandsurplusbalances.TheBoardof GovernorsalsoassesseseachReserveBankforexpensesrelatedtoproducing,issuing, andretiringFederalReservenotesbasedoneachReserveBank’sshareof the numberof notescomprisingtheSystem’snetliabilityforFederalReservenoteson December31of theprioryear. TheDodd-FrankActrequiresthat,afterthetransferof itsresponsibilitiestothe BureauonJuly21,2011,theBoardof GovernorsfundtheBureauinanamount nottoexceedafixedpercentageof thetotaloperatingexpensesof theSystemas reportedintheBoardof Governors’2009annualreport,whichtotaled$4.98billion.After2013,theamountwillbeadjustedannuallyinaccordancewiththeprovisionsof theDodd-FrankAct.Thepercentageof totaloperatingexpensesof the SystemfortheyearsendedDecember31,2014and2013was12.22percent ($608.4million)and12percent($597.6million),respectively.TheReserveBanks’ assessmentforBureaufundingisreportedas“Assessments:Bureauof Consumer FinancialProtection”intheCombinedStatementsof IncomeandComprehensive Income. 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.

360 101stAnnualReport|2014 Theinputsormethodologyusedforvaluingassetsandliabilitiesarenotnecessarilyanindicationof theriskassociatedwiththoseassetsandliabilities. t.Taxes TheReserveBanksareexemptfromfederal,state,andlocaltaxes,exceptfortaxes onrealproperty.TheReserveBanks’realpropertytaxeswere$48millionforboth yearsendedDecember31,2014and2013,andarereportedasacomponentof “Operatingexpenses:Occupancy”intheCombinedStatementsof Incomeand ComprehensiveIncome. u.RestructuringCharges TheReserveBanksrecognizerestructuringchargesforexitordisposalcosts incurredaspartof theclosureof businessactivitiesinaparticularlocation,the relocationof businessactivitiesfromonelocationtoanother,orafundamental reorganizationthataffectsthenatureof operations.Restructuringchargesmay includecostsassociatedwithemployeeseparations,contractterminations,and assetimpairments.ExpensesarerecognizedintheperiodinwhichtheReserve Bankscommittoaformalizedrestructuringplanorexecutesthespecificactions contemplatedintheplanandallcriteriaforfinancialstatementrecognitionhave beenmet. In2014,theTreasuryannouncedplanstoconsolidatetheprovisionof substantiallyallfiscalagentservicesfortheU.S.TreasuryattheFederalReserveBankof Cleveland(FRBC),theFederalReserveBankof KansasCity(FRBKC),the FRBNY,andtheFederalReserveBankof St.Louis(FRBSL).Theimplementationplanassociatedwiththisconsolidationisexpectedtobecompletedin2018. Note12describestheReserveBanks’restructuringinitiativesandprovidesinformationaboutthecostsandliabilitiesassociatedwithemployeeseparationsand contractterminations.Thecostsassociatedwiththesaleof certainReserveBank assetsarediscussedinNote7.Costsandliabilitiesassociatedwithenhancedpensionbenefitsinconnectionwiththerestructuringactivitiesforallof theReserve Banksarerecordedonthebooksof theFRBNY.Costsandliabilitiesassociated withenhancedpostretirementbenefitsarediscussedinNote10. v.RecentlyIssuedAccountingStandards InJune2013,theFASBissuedAccountingStandardsUpdate(ASU)2013-08, FinancialServices—InvestmentCompanies(Topic946):AmendmentstotheScope, Measurement,andDisclosureRequirements.Thisupdatechangedtheassessmentof whetheranentityisaninvestmentcompanybydevelopinganewtwo-tiered approachforthatassessment,whichrequiresanentitytopossesscertainfundamentalcharacteristicswhileallowingjudgmentinassessingothertypicalcharacteristics.Thisupdate,whichisapplicabletoMLIIandMLIII,waseffectiveforthe ReserveBanksfortheyearendedDecember31,2014anddidnothaveamaterial effectontheReserveBanks’combinedfinancialstatements. InApril2014,theFASBissuedASU2014-08,Presentationof FinancialStatements (Topic205)andProperty,Plant,andEquipment(Topic360):ReportingDiscontinuedOperationsandDisclosuresof Disposalsof Componentsof anEntity.This updatechangestherequirementsforreportingdiscontinuedoperations,whichmay includeacomponentof anentityoragroupof componentsof anentity,ora businessornonprofitactivity.ThisupdateiseffectivefortheReserveBanksforthe yearendingDecember31,2015,andisnotexpectedtohaveamaterialeffecton theReserveBanks’combinedfinancialstatements.

FederalReserveSystemAudits 361 InMay2014,theFASBissuedASU2014-09,RevenuefromContractswithCustomers(Topic606).Thisupdatewasissuedtocreatecommonrevenuerecognition guidanceforU.S.GAAPandInternationalFinancialReportingStandards.The guidanceisapplicabletoallcontractsforthetransferof goodsorservicesregardlessof industryortypeof transaction.Thisupdaterequiresrecognitionof revenue inamannerthatreflectstheconsiderationthattheentityexpectstoreceivein returnforthetransferof goodsorservicestocustomers.Thisupdateiseffective fortheReserveBanksfortheyearendingDecember31,2018,andisnotexpected tohaveamaterialeffectontheReserveBanks’combinedfinancialstatements. InJune2014,theFASBissuedASU2014-11,TransferandServicing(Topic860): Repurchase-to-MaturityTransactions,RepurchaseFinancings,andDisclosures.This updaterequireschangesintheaccountingforrepurchase-to-maturitytransactions andrepurchasefinancingtransactions.Additionally,thisupdateprovidesguidance forthedisclosuresforcertaintransfersof financialassetsaccountedforassales, wherethetransferorretainssubstantiallyallof theexposuretoeconomicreturnon thetransferredfinancialasset;andrepurchaseagreements,securitieslendingtransactions,andrepurchasetomaturitytransactionsthatareaccountedforassecured borrowings.ThisupdateiseffectivefortheReserveBanksfortheyearending December31,2015,andisnotexpectedtohaveamaterialeffectontheReserve Banks’combinedfinancialstatements. InAugust2014,theFASBissuedASU2014-13,Consolidation(Topic810):MeasuringtheFinancialAssetsandtheFinancialLiabilitiesof aConsolidatedCollateralizedFinancingEntity.Thisupdateprovidesguidanceforthemeasurementof the financialassetsandfinancialliabilitiesof acollateralizedfinancingentity(CFE). AreportingentitythatconsolidatesaCFEmayelecttomeasurethefinancial assetsandfinancialliabilitiesof thatCFEusingeitherthefairvalueorameasurementalternativeasprescribedintheaccountingpronouncement.Thisupdateis effectivefortheReserveBanksfortheyearendingDecember31,2016,andisnot expectedtohaveamaterialeffectontheReserveBanks’combinedfinancial statements. (4)Loans LoanstoDepositoryInstitutions TheReserveBanksofferprimary,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 assignedalendingvaluethatisdeemedappropriatebytheReserveBank,whichis typicallyfairvaluereducedbyamargin.Loanstodepositoryinstitutionsare monitoreddailytoensurethatborrowerscontinuetomeeteligibilityrequirements fortheseprograms.If aborrowernolongerqualifiesfortheseprograms,the

362 101stAnnualReport|2014 ReserveBankwillgenerallyrequestfullrepaymentof theoutstandingloanor,for primaryorseasonalloans,mayconverttheloantoasecondarycreditloan.Collaterallevelsarerevieweddailyagainstoutstandingobligations,andborrowersthat nolongerhavesufficientcollateraltosupportoutstandingloansarerequiredto provideadditionalcollateralortomakepartialorfullrepayment. Theremainingmaturitydistributionof loanstodepositoryinstitutionsoutstandingasof December31,2014and2013,wasasfollows(inmillions): Within 16days Total 15days to90days December31,2014 $140 $5 $145 December31,2013 $ 69 $5 $ 74 AtDecember31,2014and2013,theReserveBanksdidnothaveanyloansthat wereimpaired,restructured,pastdue,oronnon-accrualstatus,andnoallowance forloanlosseswasrequired.Therewerenoimpairedloansduringtheyearsended December31,2014and2013. TALF TheTALFassistedfinancialmarketsinaccommodatingthecreditneedsof consumersandbusinessesof allsizesbyfacilitatingtheissuanceof ABScollateralized byavarietyof consumerandbusinessloans.EachTALFloanhadanoriginal maturityof threeyears,exceptloanssecuredbySmallBusinessAdministration (SBA)PoolCertificates,loanssecuredbySBADevelopmentCompanyParticipationCertificates,orABSbackedbystudentloansorcommercialmortgageloans, whichhadanoriginalmaturityof fiveyearsif theborrowersoelected.Theloans weresecuredbyeligiblecollateral,withtheFRBNYhavinglentanamountequal tothevalueof thecollateral,asdeterminedbytheFRBNY,lessamargin. TheTALFloanswereextendedonanonrecoursebasis.If theborrowerdidnot repaytheloan,theFRBNYwouldhaveenforceditsrightsinthecollateraland mighthavesoldthecollateraltoTALFLLC,aDelawareLLC,establishedforthe purposeof purchasingsuchassets.PursuanttoaputagreementwiththeFRBNY, TALFLLChadcommittedtopurchaseassetsthatsecureaTALFloanataprice equaltotheprincipalamountoutstandingplusaccruedbutunpaidinterest, regardlessof thefairvalueof thecollateral. OnOctober29,2014,thefinaloutstandingTALFloanwasrepaidinfull.Overthe lifeof theprogram,allTALFloanswererepaidinfullatorbeforetheirrespective maturitydates,andassuch,theFRBNYdidnotincuralossonanyTALFloan. Subsequenttotherepaymentof thefinaloutstandingTALFloan,theFRBNY terminatedtheputagreementwithTALFLLC.RefertoNote6foradditional informationrelatedtoTALFLLC AtDecember31,2013,theaggregateremainingprincipalamountoutstandingon TALFloanswas$97million.NoTALFloanswereover90dayspastdueoron nonaccrualstatusandallTALFloanswereclassifiedwithinLevel2of thevaluationhierarchy.

FederalReserveSystemAudits 363 (5)SystemOpenMarketAccount a.DomesticSecuritiesHoldings TheFRBNYconductsdomesticopenmarketoperationsand,onbehalf of the ReserveBanks,holdstheresultingsecuritiesintheSOMA. DuringtheyearsendedDecember31,2014and2013,theFRBNYcontinuedthe purchaseof TreasurysecuritiesandfederalagencyandGSEMBSunderthelargescaleassetpurchaseprogramsauthorizedbytheFOMC.InSeptember2011,the FOMCannouncedthattheFederalReservewouldreinvestprincipalpayments fromtheSOMAportfolioholdingsof GSEdebtsecuritiesandfederalagencyand GSEMBSinfederalagencyandGSEMBS.InJune2012,theFOMCannounced thatitwouldcontinuethisreinvestmentpolicy.InSeptember2012,theFOMC announcedthattheFederalReservewouldpurchaseadditionalfederalagencyand GSEMBSatapaceof $40billionpermonth.InDecember2012,theFOMC announcedthattheFederalReservewouldalsopurchaselonger-termTreasury securitiesinitiallyatapaceof $45billionpermonthafteritsprogramtoextend theaveragematurityof itsholdingsof Treasurysecuritieswascompletedin2012. InDecember2013,theFOMCannouncedthatitwouldslowthepaceof itsadditionalassetpurchases.InOctober2014,theFOMCconcludeditsassetpurchase programwhilemaintainingitsexistingpolicyof reinvestingprincipalpayments fromitsholdingsof GSEdebtsecuritiesandfederalagencyandGSEMBSandof rollingovermaturingTreasurysecuritiesatauction. Thetotalof Treasurysecurities,GSEdebtsecurities,andfederalagencyandGSE MBS,net,excludingaccruedinterest,heldintheSOMAatDecember31wasas follows(inmillions): 2014 Total Unamortized Unaccreted Par amortized premiums discounts cost Notes $1,634,949 $ 27,670 $ (7,718) $1,654,901 Bonds 826,414 124,621 (9,695) 941,340 TotalTreasurysecurities $2,461,363 $152,291 $(17,413) $2,596,241 GSEdebtsecurities $ 38,677 $ 1,313 $ - $ 39,990 FederalagencyandGSEMBS $1,736,833 $ 53,231 $ (981) $1,789,083 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 TheFRBNYentersintotransactionsforthepurchaseof securitiesunderagreementstoresellandtransactionstosellsecuritiesunderagreementstorepurchase aspartof itsmonetarypolicyactivities.Theseoperationsareforthepurposeof furtherassessingtheappropriatestructureof suchoperationsinsupportingthe implementationof monetarypolicyduringnormalization.Inaddition,transac-

364 101stAnnualReport|2014 tionstosellsecuritiesunderagreementstorepurchaseareenteredintoaspartof a serviceofferingtoforeignofficialandinternationalaccountholders. TherewerenomaterialtransactionsrelatedtosecuritiespurchasedunderagreementstoresellduringtheyearsendedDecember31,2014and2013.Financial informationrelatedtosecuritiessoldunderagreementstorepurchasefortheyears endedDecember31wasasfollows(inmillions): 2014 2013 Overnightandtermreverserepurchaseagreements: Contractamountoutstanding,endofyear $396,705 $197,755 Averagedailyamountoutstanding,duringtheyear 130,281 4,161 Maximumbalanceoutstanding,duringtheyear 396,705 197,755 Securitiespledged(parvalue),endofyear 365,235 188,028 Securitiespledged(marketvalue),endofyear 398,540 196,726 Foreignofficialandinternationalaccounts: Contractamountoutstanding,endofyear $113,132 $118,169 Averagedailyamountoutstanding,duringtheyear 102,968 95,520 Maximumbalanceoutstanding,duringtheyear 122,232 118,169 Securitiespledged(parvalue),endofyear 108,355 122,424 Securitiespledged(marketvalue),endofyear 113,132 118,175 Totalcontractamountoutstanding,endofyear $509,837 $315,924 Securitiespledgedascollateral,atDecember31,2014and2013,consistedsolelyof Treasurysecurities. Theremainingmaturitydistributionof Treasurysecurities,GSEdebtsecurities, federalagencyandGSEMBSboughtoutright,andsecuritiessoldunderagreementstorepurchaseatDecember31,2014and2013wasasfollows(inmillions): Over Over Within 16days 91days Over 1year 5years Total 15days to90days to1year 10years to5years to10years December31,2014: Treasurysecurities (parvalue) $ - $ 4 $3,516 $1,112,927 $686,627 $ 658,289 $2,461,363 GSEdebtsecurities (parvalue) 1,089 711 3,933 30,597 - 2,347 38,677 FederalagencyandGSE MBS(parvalue)1 - - - 13 6,453 1,730,367 1,736,833 Securitiessoldunder agreementsto repurchase (contractamount) 509,837 - - - - - 509,837 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 1 TheparamountshownforfederalagencyandGSEMBSistheremainingprincipalbalanceofthesecurities. FederalagencyandGSEMBSarereportedatstatedmaturityinthetableabove. Theestimatedweightedaveragelifeof thesesecurities,whichdiffersfromthe statedmaturityprimarilybecauseitfactorsinscheduledpaymentsandprepay-

FederalReserveSystemAudits 365 mentassumptions,wasapproximately5.7and6.5yearsasof December31,2014 and2013,respectively. Theamortizedcostandparvalueof TreasurysecuritiesandGSEdebtsecurities thatwereloanedfromtheSOMAundersecuritieslendingagreements,atDecember31wereasfollows(inmillions): 2014 2013 Treasurysecurities(amortizedcosts) $11,144 $17,153 Treasurysecurities(parvalue) 10,105 15,447 GSEdebtsecurities(amortizedcost) 633 1,099 GSEdebtsecurities(parvalue) 616 1,055 TheFRBNYentersintocommitmentstobuyandsellTreasurysecuritiesand recordstherelatedsecuritiesonasettlement-datebasis.Asof December31,2014, therewerenooutstandingcommitments. TheFRBNYentersintocommitmentstobuyandsellfederalagencyandGSE MBSandrecordstherelatedsecuritiesonasettlement-datebasis.Asof December31,2014,thetotalpurchasepriceof thefederalagencyandGSEMBSunder outstandingpurchasecommitmentswas$28,692million,noneof whichwas relatedtodollarrolls.Asof December31,2014,therewerenooutstandingsales commitmentsforfederalagencyandGSEMBS.Thesecommitments,whichhad contractualsettlementdatesextendingthroughJanuary2015,areprincipallyfor thepurchaseof TBAMBSforwhichthenumberandidentityof thepoolsthat willbedeliveredtofulfillthecommitmentareunknownatthetimeof thetrade. Thesecommitmentsaresubjecttovaryingdegreesof off-balance-sheetmarketrisk andcounterpartycreditriskthatresultfromtheirfuturesettlement.TheFRBNY requiresthepostingof cashcollateralforMBScommitmentsaspartof itsrisk managementpracticesusedtomitigatethecounterpartycreditrisk. Otherassetsconsistsprimarilyof cashandshort-terminvestmentsrelatedtothe federalagencyandGSEMBSportfolio.Otherliabilities,whichareprimarily relatedtofederalagencyandGSEMBSpurchasesandsales,includestheFRB- NY’sobligationtoreturncashmarginpostedbycounterpartiesascollateralunder commitmentstopurchaseandsellfederalagencyandGSEMBS.Inaddition, otherliabilitiesincludesobligationsthatarisefromthefailureof asellertodeliver MBStotheFRBNYonthesettlementdate.AlthoughtheFRBNYhasownership of andrecordsitsinvestmentsintheMBSasof thecontractualsettlementdate,it isnotobligatedtomakepaymentuntilthesecuritiesaredelivered,andtheamount includedinotherliabilitiesrepresentstheobligationtopayforthesecuritieswhen

366 101stAnnualReport|2014 delivered.Theamountof otherassetsandotherliabilitiesheldintheSOMAat December31wasasfollows(inmillions): 2014 2013 Otherassets: MBSportfoliorelatedcashandshortterminvestments $ 28 $ 1 Other 1 1 Totalotherassets $ 29 $ 2 Otherliabilities: Cashmargin $793 $1,320 ObligationsfromMBStransactionfails 30 11 Other 7 - Totalotherliabilities $830 $1,331 Accruedinterestreceivableondomesticsecuritiesholdingswas$25,561million and$23,405millionasof December31,2014and2013,respectively.These amountsarereportedasacomponentof “SystemOpenMarketAccount:Accrued interestreceivable”intheCombinedStatementsof Condition.

FederalReserveSystemAudits 367 InformationabouttransactionsrelatedtoTreasurysecurities,GSEdebtsecurities, andfederalagencyandGSEMBSduringtheyearsendedDecember31,2014and 2013,issummarizedasfollows(inmillions): TotalSOMA Total Federal GSEdebt Notes Bonds Treasury agencyand securities securities GSEMBS 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) Amortizationofpremiumsandaccretionof discounts,net (6,024) (9,503) (15,527) (795) (7,008) Inflationadjustmentoninflation-indexed securities 285 645 930 - - BalanceDecember31,2013 1,495,115 864,319 2,359,434 59,122 1,533,860 Purchases1 165,306 85,826 251,132 - 466,384 Sales1 - - - - (29) Realizedgains,net2 - - - - - Principalpaymentsandmaturities (475) - (475) (18,544) (203,933) Amortizationofpremiumsandaccretionof discounts,net (5,545) (10,132) (15,677) (588) (7,199) Inflationadjustmentoninflation-indexed securities 500 1,327 1,827 - - BalanceDecember31,2014 $1,654,901 $941,340 $2,596,241 $39,990 $1,789,083 Year-endedDecember31,2013 Supplementalinformation– parvalueoftransactions: Purchases3 $ 356,766 $184,956 $ 541,722 $ - $ 837,490 Sales - - - - - Year-endedDecember31,2014 Supplementalinformation– parvalueoftransactions: Purchases3 $ 167,497 $ 83,739 $ 251,236 $ - $ 450,633 Sales - - - - (29) 1 Purchasesandsalesmayincludepaymentsandreceiptsrelatedtoprincipal,premiums,discounts,andinflationcompensation adjustmentstothebasisofinflation-indexedsecurities.Theamountreportedassalesincludestherealizedgainsandlosses onsuchtransactions.PurchasesandsalesexcludeMBSTBAtransactionsthataresettledonanetbasis. 2 Realizedgains,netoffsettheamountofrealizedgainsandlossesincludedinthereportedsalesamount. 3 Includesinflationcompensation. b.ForeignCurrencyDenominatedInvestments TheFRBNYconductsforeigncurrencyoperationsand,onbehalf of theReserve Banks,holdstheresultingforeigncurrencydenominatedinvestmentsinthe SOMA. TheFRBNYholdsforeigncurrencydepositswithforeigncentralbanksandthe BankforInternationalSettlementsandinvestsinforeigngovernmentdebtinstrumentsof Germany,France,andJapan.Theseforeigngovernmentdebtinstrumentsarebackedbythefullfaithandcreditof theissuingforeigngovernments.In addition,theFRBNYentersintotransactionstopurchaseEuro-denominated governmentdebtsecuritiesunderagreementstoresellforwhichtheacceptedcollateralisthedebtinstrumentsissuedbythegovernmentsof Belgium,France,Germany,Italy,theNetherlands,andSpain,whicharebackedbythefullfaithand creditof thoseissuinggovernments.

368 101stAnnualReport|2014 Informationaboutforeigncurrencydenominatedinvestmentsvaluedatamortized costandforeigncurrencymarketexchangeratesatDecember31wasasfollows(in millions): TotalSOMA 2014 2013 Euro: Foreigncurrencydeposits $ 6,936 $ 7,530 Securitiespurchasedunder agreementstoresell - 2,549 Germangovernmentdebtinstruments 2,494 2,397 Frenchgovernmentdebtinstruments 3,687 2,397 Japaneseyen: Foreigncurrencydeposits 2,576 2,926 Japanesegovernmentdebt instruments 5,207 5,925 Total $20,900 $23,724 Accruedinterestreceivableonforeigncurrencydenominatedinvestmentswas $83millionand$88millionasof December31,2014and2013,respectively.These amountsarereportedasacomponentof “SystemOpenMarketAccount:Accrued interestreceivable”intheCombinedStatementsof Condition. Theremainingmaturitydistributionof foreigncurrencydenominatedinvestments atDecember31,2014and2013,wasasfollows(inmillions): Within 16days 91days Over1year Total 15days to90days to1year to5years December31,2014: Euro $ 3,635 $2,809 $1,644 $5,029 $13,117 Japaneseyen 2,755 392 1,540 3,096 7,783 Total $ 6,390 $3,201 $3,184 $8,125 $20,900 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 Therewerenoforeignexchangecontractsrelatedtoopenmarketoperationsoutstandingasof December31,2014. TheFRBNYentersintocommitmentstobuyforeigngovernmentdebtinstrumentsandrecordstherelatedsecuritiesonasettlement-datebasis.Asof December31,2014,therewere$137millionof outstandingcommitmentstopurchase foreigngovernmentdebtinstruments.ThesesecuritiessettledonJanuary5,2015, andreplacedEuro-denominatedgovernmentdebtinstrumentsheldintheSOMA thatmaturedonthatdate.During2014,therewerepurchasesandmaturitiesof foreigngovernmentdebtinstrumentsof $5,494millionand$3,337million,respectively.Therewerenosalesof foreigngovernmentdebtinstrumentsin2014. Inconnectionwithitsforeigncurrencyactivities,theFRBNYmayenterinto transactionsthataresubjecttovaryingdegreesof off-balance-sheetmarketrisk andcounterpartycreditriskthatresultfromtheirfuturesettlement.TheFRBNY controlstheserisksbyobtainingcreditapprovals,establishingtransactionlimits, receivingcollateralinsomecases,andperformingmonitoringprocedures.

FederalReserveSystemAudits 369 AtDecember31,2014and2013,therewasnobalanceoutstandingunderthe authorizedwarehousingfacility. TherewerenotransactionsrelatedtotheauthorizedreciprocalcurrencyarrangementswiththeBankof CanadaandtheBankof Mexicoduringtheyearsended December31,2014and2013. Foreigncurrencyworkingbalancesheldandforeignexchangecontractsexecuted bytheBanktofacilitateitsinternationalpaymentsandcurrencytransactionsit madeonbehalf of foreigncentralbanksandU.S.officialinstitutioncustomers werenotmaterialasof December31,2014and2013. c.CentralBankLiquiditySwaps U.S.DollarLiquiditySwaps ThetotalforeigncurrencyheldunderU.S.dollarliquidityswapsintheSOMAat December31,2014and2013,was$1,528millionand$272million,respectively. Theremainingmaturitydistributionof U.S.dollarliquidityswapsthatwereallocatedtotheBankatDecember31wasasfollows(inmillions): 2014 2013 Within Within 16days Total 15days 15days to90days Euro $ - $113 $159 $272 Japaneseyen 1,528 - - - Total $1,528 $113 $159 $272 ForeignCurrencyLiquiditySwaps AtDecember31,2014and2013,therewasnobalanceoutstandingrelatedtoforeigncurrencyliquidityswaps. d.FairValueofSOMAAssetsandLiabilities Thefairvalueamountsbelowarepresentedsolelyforinformationalpurposes. Althoughthefairvalueof SOMAsecurityholdingscanbesubstantiallygreater thanorlessthantherecordedvalueatanypointintime,theseunrealizedgainsor losseshavenoeffectontheabilityof theReserveBanks,asthecentralbank,to meettheirfinancialobligationsandresponsibilities.BecauseSOMAsecuritiesare recordedatamortizedcost,cumulativeunrealizedgains(losses)arenotrecognized intheCombinedStatementsof Conditionandthechangesincumulativeunrealizedgains(losses)arenotrecognizedintheCombinedStatementsof Incomeand ComprehensiveIncome. Thefairvalueof theTreasurysecurities,GSEdebtsecurities,federalagencyand GSEMBS,andforeigngovernmentdebtinstrumentsintheSOMA’sholdingsis subjecttomarketrisk,arisingfrommovementsinmarketvariablessuchasinterest ratesandcreditrisk.Thefairvalueof federalagencyandGSEMBSisalso affectedbytheexpectedrateof prepaymentsof mortgageloansunderlyingthe securities.Thefairvalueof foreigngovernmentdebtinstrumentsisalsoaffectedby currencyrisk.Basedonevaluationsperformedasof December31,2014,thereare nocreditimpairmentsof SOMAsecuritiesholdings.

370 101stAnnualReport|2014 Thefollowingtablepresentstheamortizedcost,fairvalue,andcumulativeunrealizedgains(losses)ontheTreasurysecurities,GSEdebtsecurities,andfederal agencyandGSEMBSheldintheSOMAatDecember31(inmillions): 2014 2013 Cumulative Cumulative unrealized unrealized Amortized Amortized Fairvalue gains Fairvalue gains cost cost (losses) (losses) Treasurysecurities: Notes $1,654,901 $1,683,377 $ 28,476 $1,495,115 $1,499,000 $ 3,885 Bonds 941,340 1,052,916 111,576 864,319 842,336 (21,983) TotalTreasurysecurities 2,596,241 2,736,293 140,052 2,359,434 2,341,336 (18,098) GSEdebtsecurities 39,990 42,499 2,509 59,122 62,236 3,114 FederalagencyandGSEMBS 1,789,083 1,820,544 31,461 1,533,860 1,495,572 (38,288) TotaldomesticSOMAportfolio securitiesholdings $4,425,314 $4,599,336 $174,022 $3,952,416 $3,899,144 $(53,272) Memorandum–Commitmentsfor: PurchasesofTreasurysecurities $ - $ - $ - $ - $ - $ - PurchasesofFederalagencyand GSEMBS 28,692 28,803 111 59,350 59,129 (221) SalesofFederalagencyand GSEMBS - - - - - - Thefairvalueof TreasurysecuritiesandGSEdebtsecuritieswasdeterminedusing pricingservicesthatprovidemarketconsensuspricesbasedonindicativequotes fromvariousmarketparticipants.Thefairvalueof federalagencyandGSEMBS wasdeterminedusingapricingservicethatutilizesamodel-basedapproachthat considersobservableinputsforsimilarsecurities. Thecostbasisof securitiespurchasedunderagreementstoresell,securitiessold underagreementstorepurchase,andotherinvestmentsheldintheSOMAdomesticportfolioapproximatefairvalue. AtDecember31,2014and2013,thefairvalueof foreigncurrencydenominated investmentswas$20,996millionand$23,802million,respectively.Thefairvalueof foreigngovernmentdebtinstrumentswasdeterminedusingpricingservicesthat providemarketconsensuspricesbasedonindicativequotesfromvariousmarket participants.Thefairvalueof foreigncurrencydepositsandsecuritiespurchased underagreementstoresellwasdeterminedbyreferencetomarketinterestrates.

FederalReserveSystemAudits 371 Thefollowingtableprovidesadditionalinformationontheamortizedcostandfair valuesof thefederalagencyandGSEMBSportfolioatDecember31(inmillions): 2014 2013 Distribution ofMBSholdings bycouponrate Amortized Fairvalue Amortized Fairvalue cost cost 2.0% $ 12,788 $ 12,618 $ 14,191 $ 13,529 2.5% 114,609 113,468 123,832 118,458 3.0% 513,289 506,280 521,809 484,275 3.5% 481,305 489,390 349,689 338,357 4.0% 428,047 441,204 230,256 231,113 4.5% 155,867 167,844 185,825 195,481 5.0% 65,544 70,719 83,290 87,968 5.5% 15,232 16,414 21,496 22,718 6.0% 2,110 2,287 3,051 3,225 6.5% 292 320 421 448 Total $1,789,083 $1,820,544 $1,533,860 $1,495,572 Thefollowingtablespresenttherealizedgainsandthechangeinthecumulative unrealizedgains(losses)relatedtoSOMAdomesticsecuritiesholdingsduringthe yearsendedDecember31,2014and2013(inmillions): 2014 2013 Changein Totalportfolio Fairvalue Realized cumulative holdings changes gains1 unrealizedgains realized unrealized (losses)2 gains1 losses2 Treasurysecurities $ - $158,150 $ - $(183,225) GSEdebtsecurities - (605) - (2,411) Federalagencyand GSEMBS 81 69,749 51 (81,957) Total $81 $227,294 $51 $(267,593) 1 Realizedgainsarereportedin“Non-interest(loss)income:SystemOpenMarketAccount:Federalagencyand government-sponsoredenterprisemortgage-backedsecuritiesgains,net”intheCombinedStatementsofIncomeand ComprehensiveIncome. 2 BecauseSOMAsecuritiesarerecordedatamortizedcost,thechangeinthecumulativeunrealizedgains(losses)isnot reportedintheCombinedStatementsofIncomeandComprehensiveIncome. Theamountof changeincumulativeunrealizedgains(losses)position,net,related toforeigncurrencydenominatedinvestmentswasagainof $18millionandaloss of $90millionfortheyearsendedDecember31,2014and2013,respectively. Treasurysecurities,GSEdebtsecurities,federalagencyandGSEMBS,andforeigngovernmentdebtinstrumentsareclassifiedasLevel2withintheASC820 hierarchybecausethefairvaluesarebasedonindicativequotesandotherobservableinputsobtainedfromindependentpricingservices.Thefairvaluehierarchy levelof SOMAfinancialassetsisnotnecessarilyanindicationof theriskassociatedwiththoseassets.

372 101stAnnualReport|2014 (6)InvestmentsHeldByConsolidatedVariableInterestEntities a.SummaryInformationforConsolidatedVariableInterestEntities Theclassificationof significantassetsandliabilitiesof theconsolidatedVIEsat December31,2014and2013wasasfollows(inmillions): 2014 2013 ML ML MLII MLIII TALFLLC Total Assets: Short-terminvestments $1,399 $ 530 $ - $ - $ - $ 530 Commercialmortgageloans - 507 - - - 507 Swapcontracts 124 158 - - - 158 Otherinvestments1 11 10 - - - 10 Subtotal 1,534 1,205 - - - 1,205 Cash,cashequivalents,accrued interestreceivable,andother receivables 277 527 63 22 109 721 Totalinvestmentsheldby consolidatedVIEs $1,811 $1,732 $63 $22 $109 $1,926 Liabilities: BeneficialinterestinconsolidatedVIEs $ - $ - $11 $ 7 $ 98 $ 116 Swapcontracts2 41 73 - - - 73 Cashcollateralonswapcontracts2 85 82 - - - 82 Otherliabilities2 1 3 - - - 3 TotalliabilitiesofconsolidatedVIEs $ 127 $ 158 $11 $ 7 $ 98 $ 274 1 Investmentswithafairvalueof$8millionasofDecember31,2013wererecategorizedfrom“Non-agencyRMBS”to“Other investments”toconformtothecurrentyearpresentation. 2 Liabilitieswithavalueof$155millionasofDecember31,2013wererecategorizedfrom“Otherliabilities”totwonewline itemslabeled“Swapcontracts”and“Cashcollateralonswapcontracts,”toconformtothecurrentyearpresentation. TheFRBNY’sapproximatemaximumexposuretolossatDecember31,2014and 2013,was$1,534millionand$1,089million,respectively.TheseestimatesincorporatepotentiallossesassociatedwiththeinvestmentsrecordedontheFRBNY’s balancesheet,netof thefairvalueof subordinatedinterests(beneficialinterestin consolidatedVIEs).Additionally,informationconcerningthenotionalexposure onswapcontractsiscontainedintheMLcreditrisksectionof thisNote. ThenetincomeattributabletoML,MLII,MLIII,andTALFLLCfortheyear endedDecember31,2014,wasasfollows(inmillions): ML MLII MLIII TALFLLC Total Interestincome:InvestmentsheldbyconsolidatedVIEs $ 77 $ - $- $ - $ 77 Non-interestincome: Realizedportfolioholdingsgains,net 1 - - - 1 Unrealizedportfolioholdingsgains,net 36 - - - 36 Realizedlossesonbeneficialinterestin consolidatedVIEs - (11) (7) (98) (116) Unrealizedgainsonbeneficialinterestin consolidatedVIEs - 11 7 98 116 Non-interest(loss)income:ConsolidatedVIEs gains,net 37 - - - 37 Totalnetinterestincomeandnon-interest income(loss) 114 - - - 114 Less:Professionalfees 4 - - - 4 NetincomeattributabletoconsolidatedVIEs $110 $ - $- $ - $110

FederalReserveSystemAudits 373 ThenetincomeattributabletoML,MLII,MLIII,andTALFLLCfortheyear endedDecember31,2013,wasasfollows(inmillions): ML MLII MLIII TALFLLC Total Interestincome:InvestmentsheldbyconsolidatedVIEs $ 2 $4 $- $ - $ 6 Non-interestincome: Realizedportfolioholdingsgains,net1 130 - - - 130 Unrealizedportfolioholdingsgains,net1 53 - - - 53 Realizedlossesonbeneficialinterestin consolidatedVIEs - - - (573) (573) Unrealizedgains(losses)onbeneficial interestinconsolidatedVIEs - (1) - 574 573 Non-interest(loss)income: ConsolidatedVIEsgains(losses),net 183 (1) - 1 183 Totalnetinterestincomeand non-interestincome 185 3 - 1 189 Less:Professionalfees 6 1 - 1 8 Netincomeattributableto consolidatedVIEs $179 $2 $- $ - $181 1 PortfolioholdingsgainsforMLwithavalueof$183millionfortheyearendedDecember31,2013wererecategorizedfrom “Portfolioholdingsgains,net”totwonewlineitemslabeled“Realizedportfolioholdinggains(losses),net”and“Unrealized portfolioholdinggains(losses),net”toconformtothecurrentyearpresentation. Thefollowingisasummaryof theconsolidatedVIEs’subordinatedfinancial interestfortheyearsendedDecember31,2014and2013(inmillions): MLII MLIII TALF deferred equity financial Total purchase contribution interest price Fairvalue,December31,2012 $10 $7 $786 $803 Realizedloss - - 573 573 Unrealized(gain)/loss 1 - (574) (573) Payments1 - - (687) (687) Fairvalue,December31,2013 11 7 98 116 Realizedloss 11 7 98 116 Unrealizedgain (11) (7) (98) (116) Payments2 (11) (7) (98) (116) Fairvalue,atDecember31,2014 $ - $- $ - $ - 1 TALFLLCincludespaymentsof$100millionofprincipal,$13millionofinterest,and$574millionofcontingentinterest. 2 MLIIincludespaymentsof$11millionofvariabledeferredpurchaseprice.MLIIIincludespaymentsof$7millionofexcess amounts.TALFLLCincludespaymentsof$98millionofcontingentinterest. 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. TheFRBNYextendedaseniorloanof approximately$28.8billionandJPMC extendedasubordinatedloanof $1.15billiontofinancetheacquisitionof the assets,bothof whichwererepaidinfullplusinterestin2012.TheFRBNYhas continuedandwillcontinuetoselltheremainingassetsfromtheMLportfolioas

374 101stAnnualReport|2014 marketconditionswarrantandif thesalesrepresentgoodvalueforthepublic.In accordancewiththeMLagreements,proceedsfromfutureassetsaleswillbedistributedtotheFRBNYascontingentinterestafterallderivativeinstrumentsin MLhavebeenterminatedandpaidorsoldfromtheportfolio. Thefollowingisadescriptionof thesignificantholdingsatDecember31,2014, andtheassociatedriskforeachholding: i.DebtSecurities MLhasinvestmentsinshort-terminstrumentswithmaturitiesof greaterthan threemonthsandlessthanoneyearwhenacquired.Asof December31,2014and 2013,ML’sshort-terminstrumentsconsistedof U.S.Treasurybills. Otherinvestmentsareprimarilycomprisedof non-agencyRMBSandcommercial mortgage-backedsecurities(CMBS). ii.DerivativeInstruments Derivativecontractsareinstruments,suchasswapcontracts,thatderivetheirvalue fromunderlyingassets,indexes,referencerates,oracombinationof thesefactors. TheMLportfolioiscomposedof derivativefinancialinstrumentsincludedina totalreturnswap(TRS)agreementwithJPMC.MLandJPMCenteredintothe TRSwithreferenceobligationsrepresentingCDSprimarilyonCMBSandRMBS, withvariousmarketparticipants,includingJPMC. Onanongoingbasis,MLpledgescollateralforcreditorliquidityrelatedshortfalls basedon20percentof thenotionalamountof soldCDSprotectionand10percentof thepresentvalueof futurepremiumsonpurchasedCDSprotection.FailuretopostthiscollateralconstitutesaTRSeventof default.Separately,MLand JPMCengageinbilateralpostingof collateraltocoverthenetmark-to-market (MTM)variationsintheswapportfolio.MLonlynetsthecollateralreceivedfrom JPMCfromthebilateralMTMpostingforthereferenceobligationsforwhich JPMCisthecounterparty. Thevaluesof ML’scashandcashequivalentsincludecashcollateralassociated withtheTRSof $128millionand$149millionasof December31,2014and2013, respectively.Inaddition,MLhaspledged$87millionand$124millionof U.S. TreasurybillstoJPMCasof December31,2014and2013,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.Suchfuturepaymentscouldbereducedoroffsetbyamountsrecoveredunderrecourseorbycol-

FederalReserveSystemAudits 375 lateralprovisionsoutlinedinthecontract,includingseizureandliquidationof collateralpledgedbythebuyer. ML’sderivativesportfolioconsistsof purchasedandsoldcreditprotectionwith differingunderlyingreferencednamesthatdonotnecessarilyoffset. CreditRisk Creditriskistheriskof financiallossresultingfromfailurebyacounterpartyto meetitscontractualobligationstoML.Thiscanbecausedbyfactorsdirectly relatedtothecounterparty,suchasbusinessormanagement.Takingcollateralis themostcommonwaytomitigatecreditrisk.MLtakesfinancialcollateralinthe formof cashandmarketablesecuritiestocoverJPMCcounterpartyriskaspartof theTRSagreementwithJPMC.MLremainsexposedtocreditriskforcounterparties,otherthanJPMC,relatedtotheswapsthatunderlietheTRS. MLhasenteredintoanInternationalSwapsandDerivativesAssociation,Inc. masternettingagreementwithJPMCinconnectionwiththeTRS.Thisagreement providesMLwiththerighttoliquidatesecuritiesheldascollateralandtooffset receivablesandpayableswithJPMCintheeventof default.Thisagreementalso establishesthemethodfordeterminingthenetamountof receivablesandpayables thatMLisentitledtoreceivefromorowestoeachcounterpartytotheswapsthat underlietheTRSbaseduponthefairvalueof therelevantCDS. ForthederivativebalancesreportedintheCombinedStatementsof Condition, MLoffsetsitsassetandliabilitypositionsheldwiththesamecounterparty.In addition,MLoffsetsthecashcollateralheldwithJPMCagainstanynetliabilities of JPMCwithMLundertheTRS.Asof December31,2014and2013,therewere noamountssubjecttoanenforceablemasternettingagreementthatwerenotoffsetintheCombinedStatementsof Condition.

376 101stAnnualReport|2014 Thefollowingtablesummarizesthefairvalueandnotionalamountsof derivative instrumentsbycontracttypeonagrossbasisasof December31,2014and2013, whichisreportedasacomponentof “Investmentsheldbyconsolidatedvariable interestentities”intheCombinedStatementsof Condition(inmillions,except contractdata): 2014 2013 Gross Gross Gross Gross Notional Notional derivative derivative derivative derivative amounts3 amounts3 assets liabilities assets liabilities Creditderivatives: CDS1,2 $240 $(115) $632 $345 $(193) $899 Amountsoffsetinthe CombinedStatements ofCondition: Counterpartynetting (74) 74 (120) 120 Cashcollateral (42) - (67) - Netamountsinthe Combined Statementsof Condition $124 $ (41) $158 $ (73) 1 CDSfairvaluesasofDecember31,2014forassetsandliabilitiesincludeinterestreceivablesof$1millionandpayablesof $4million.CDSfairvaluesasofDecember31,2013forassetsandliabilitiesincludesinterestreceivablesof$15millionand payablesof$2million. 2 Therewere210and269CDScontractsoutstandingasofDecember31,2014and2013,respectively. 3 Representsthesumofgrosslongandgrossshortnotionalderivativecontracts.Thechangeinnotionalamountsis representativeofthevolumeofactivityfortheyearendedDecember31,2014. Thetablebelowsummarizescertaininformationregardingprotectionboughtand protectionsoldthroughCDSasof December31(inmillions): Maximumpotentialpayout/notional Fairvalue 2014 2013 2014 2013 Creditratings Yearstomaturity ofthereferenceobligation After After Total Total Asset/ Asset/ 1year 1year 3years After (liability) (liability) orless through through 5years 3years 5years Creditprotectionbought: Investmentgrade(AAAtoBBB-) $- $- $5 $ 22 $ 27 $ 56 $ - $ 2 Non-investmentgrade(BB+or lower) - 8 - 378 386 537 239 327 Totalcreditprotectionbought $- $8 $5 $400 $413 $593 $239 $329 Creditprotectionsold: Investmentgrade(AAAtoBBB-) $- $- $- $ (4) $ (4) $ (13) $ - $ (3) Non-investmentgrade(BB+or lower) - - - (215) (215) (293) (111) (188) Totalcreditprotectionsold $- $- $- $(219) $(219) $(306) $(111) $(191) CurrencyRisk Currencyriskistheriskof financiallossresultingfromexposuretochangesin exchangeratesbetweentwocurrencies.Previously,underthetermsof theTRS, JPMCwasallowedtopostcashcollateralintheformof eitherU.S.dollaror Euro-denominatedcurrenciestocoverthenetMTMvariationintheswapportfolio.WhenJPMCpostedcollateralinEurocurrency,thisriskwasmitigatedby dailyvariationmarginupdatesthatcapturethemovementinthevalueof theswap portfolioinadditiontoanymovementinexchangeratesontheswapcollateral.In

FederalReserveSystemAudits 377 November2014,thetermsof theTRSwereamendedsuchthatJPMCisnolonger allowedtopostcashcollateralinEurocurrency. Swapcollateralreceivedthatisdenominatedinaforeigncurrencyistranslatedinto U.S.dollaramountsusingtheprevailingexchangerateasof thedateof thecombinedfinancialstatements.Thereisnogainorlossassociatedwiththisforeign denominatedcollateralastheassetandliabilitypositionsassociatedwithitare offsetting. c.MaidenLaneIILLC TheFRBNYextendedcredittoMLII,aDelawareLLCformedtopurchasenonagencyRMBSfromthereinvestmentpoolof thesecuritieslendingportfoliosof severalregulatedU.S.insurancesubsidiariesof AmericanInternationalGroup, Inc.(AIG).MLIIpurchasedfromtheAIGsubsidiariesnon-agencyRMBSwith anapproximatefairvalueof $20.8billionasof October31,2008.MLIIfinanced thispurchasebyborrowing$19.5billionfromtheFRBNYandthroughthedeferralof $1.0billionof thepurchasepricepayabletotheAIGsubsidiaries.Boththe loanandthefixeddeferredpurchasepricewerepaidinfullplusinterestin2012. OnMarch19,2012,MLIIwasdissolvedandtheFRBNYbegantheprocessof windingupinaccordancewithandasrequiredbyDelawarelawandtheagreementsgoverningMLII.Aspartof thatprocess,duringtheyearendedDecember31,2014,afterpayingexpenses,MLIIdistributeditsremainingassetstothe FRBNYandtoAIGanditssubsidiariesinaccordancewiththeagreement.DistributionsweremadetotheBankintheformof contingentinteresttotaling$53millionandtoAIGanditssubsidiariesintheformof variabledeferredpurchase pricetotaling$11millionduringtheyearendedDecember31,2014.OnNovember12,2014,acertificateof cancellationwasfiledintheofficeof theDelaware Secretaryof State,therebyterminatingthelegalexistenceof MLII. d.MaidenLaneIIILLC TheFRBNYextendedcredittoMLIII,aDelawareLLCformedtopurchaseABS collateralizeddebtobligations(CDOs)fromcertainthird-partycounterpartiesof AIGFinancialProductsCorp(AIGFP).MLIIIborrowedapproximately $24.3billionfromtheFRBNY,andAIGprovidedanequitycontributionof $5.0billiontoMLIII.TheproceedswereusedtopurchaseABSCDOswithafair valueof $29.6billionasof October31,2008.Thecounterpartiesreceived $26.8billionnetof principalandinterestreceivedandfinancechargespaidonthe ABSCDOs.TheLLCalsomadeapaymenttoAIGFPof $2.5billionrepresenting theovercollateralizationpreviouslypostedbyAIGFPandretainedbycounterpartiesinrespectof terminatedCDSascomparedtotheLLC’sfairvalueacquisition pricescalculatedasof October31,2008.Theaggregateamountof principaland interestproceedsfromCDOsreceivedaftertheannouncementdate,butpriorto thesettlementdates,netof financingcosts,amountedtoapproximately$0.3billionandthereforereducedtheamountof fundingrequiredatsettlementby $0.3billion,from$29.6billionto$29.3billion.Boththeloanandtheequitycontributionwererepaidinfullplusinterestin2012. OnSeptember10,2012,MLIIIwasdissolved,andtheFRBNYbegantheprocess of windingupinaccordancewithandasrequiredbyDelawarelawandtheagreementsgoverningMLIII.Aspartof thatprocess,duringtheyearendedDecember31,2014,afterpayingexpenses,MLIIIdistributeditsremainingassetstothe FRBNYandtoAIGinaccordancewiththeagreement.Distributionsweremade totheBankintheformof contingentinteresttotaling$14millionandtoAIGin

378 101stAnnualReport|2014 theformof excessamountstotaling$7millionduringtheyearendedDecember31,2014.OnNovember12,2014,acertificateof cancellationwasfiledinthe officeof theDelawareSecretaryof State,therebyterminatingthelegalexistenceof MLIII. e.TALFLLC AsdiscussedinNote4,TALFLLCwasformedinconnectionwiththeimplementationof theTALF.TALFLLCwasestablishedforthelimitedpurposeof purchasinganyABSthatmightbesurrenderedtotheFRBNYbyborrowersunder theTALFor,incertainlimitedcircumstances,TALFloans.FundingforTALF LLC’spurchasesof thesesecuritieswasderivedfirstthroughthefeesreceivedby TALFLLCfromtheFRBNYforthiscommitmentandanyinterestearnedonits investments.If thatfundinghadprovedinsufficientforthepurchasesTALFLLC hadcommittedtomakeundertheputagreement,theTreasuryandtheFRBNY hadcommittedtolendtoTALFLLC.OnMarch25,2009,theTreasuryprovided initialfundingtoTALFLLCof $100million.OnJanuary15,2013,theTreasury andtheFRBNYagreedtoeliminatetheirfundingcommitmentstoTALFLLC. PursuanttothisagreementonFebruary6,2013,TALFLLCrepaidinfulltheoutstandingprincipalandaccruedinterestontheTreasuryloan. OnOctober31,2014,TALFLLCwasdissolvedandtheFRBNYbegantheprocessof windingupinaccordancewithandasrequiredbyDelawarelawandthe agreementsgoverningTALFLLC.Aspartof thatprocess,duringtheyearended December31,2014,afterpayingexpenses,TALFLLCdistributeditsremaining assetstotheTreasuryandtotheFRBNYinaccordancewiththeagreement.Distributionsweremadeintheformof contingentinteresttotheTreasurytotaling $98millionand$573millionandtotheFRBNYtotaling$11millionand$64millionduringtheyearsendedDecember31,2014and2013,respectively.OnNovember26,2014,acertificateof cancellationwasfiledintheofficeof theDelaware Secretaryof State,therebyterminatingthelegalexistenceof TALFLLC. 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 TheconsolidatedVIEsvaluetheirinvestmentsandcashequivalentsonthebasisof lastavailablebidpricesorcurrentmarketquotationsprovidedbydealersorpricingservicesselectedunderthesupervisionof theFRBNY’sdesignatedinvestment manager.Todeterminethevalueof aparticularinvestment,pricingservicesmay usecertaininformationwithrespecttomarkettransactionsinsuchinvestmentsor comparableinvestments,variousrelationshipsobservedinthemarketbetween investments,quotationsfromdealers,andpricingmetricsandcalculatedyield measuresbasedonvaluationmethodologiescommonlyemployedinthemarketfor

FederalReserveSystemAudits 379 suchinvestments.Thefairvalueof swapcontractsisprovidedbyJPMCascalculationagentandisreviewedbytheinvestmentmanager. Marketquotationsmaynotrepresentfairvalueincertaininstancesinwhichthe investmentmanagerandtheVIEsbelievethatfactsandcircumstancesapplicable toanissuer,aseller,apurchaser,orthemarketforaparticularinvestmentcause suchmarketquotationstonotreflectthefairvalueof aninvestment.Insuchcases orwhenmarketquotationsareunavailable,theinvestmentmanagerappliesproprietaryvaluationmodelsthatusecollateralperformancescenariosandpricingmetricsderivedfromthereportedperformanceof investmentswithsimilarcharacteristicsaswellasavailablemarketdatatodeterminefairvalue. Duetotheuncertaintyinherentindeterminingthefairvalueof investmentsthat donothaveareadilyavailablefairvalue,thefairvalueof theseinvestmentsmay differfromthevaluesthatmayultimatelyberealizedandpaid. Thefairvalueof theliabilityforthebeneficialinterestsof consolidatedVIEsis estimatedbaseduponthefairvalueof theunderlyingassetsheldbytheVIEs.The holdersof thesebeneficialinterestsdonothaverecoursetothegeneralcreditof theFRBNY. ii.ValuationMethodologiesforLevel3AssetsandLiabilities Incertaincasesinwhichthereislimitedtradingactivityforparticularinvestments orcurrentmarketquotationsarenotavailableorreflectiveof thefairvalueof an instrument,thevaluationisbasedonmodelsthatuseinputs,estimates,and assumptionsthatmarketparticipantswoulduseinpricingtheinvestments.Tothe extentthatsuchinputs,estimates,andassumptionsarenotobservable,theinvestmentsareclassifiedwithinLevel3of thevaluationhierarchy.Forinstance,invaluingcertaindebtsecuritiesandwholemortgageloans,thedeterminationof fair valueisbasedonproprietaryvaluationmodelswhenexternalpriceinformationis notavailable.Keyinputstothemodelmayincludemarketspreadsoryieldestimatesforcomparableinstruments,performancedata(i.e.prepaymentrates, defaultrates,andlossseverity),valuationestimatesforunderlyingpropertycollateral,projectedcashflows,andotherrelevantcontractualfeatures. Fortheswapcontracts,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).

380 101stAnnualReport|2014 iii.InputsforLevel3AssetsandLiabilities Thefollowingtablepresentsthevaluationtechniquesandrangesof significant unobservableinputsgenerallyusedtodeterminethefairvaluesof Level3assets andliabilitiesasof December31,2014(inmillions,exceptforinputvalues): Principal Unobservable Rangeof Weighted Investment Fairvalue valuation inputs inputvalues average2 technique Swapcontracts,net $125 Discounted Creditspreads1 2,893bps– 9,023bps cashflows 12,683bps Discountrate 5%–25% 17% Constant 0%–8% 1% prepaymentrate Constantdefaultrate 0%–99% 6% Lossseverity 40%–95% 52% 1 Impliedspreadonclosingmarketpricesforindexpositions. 2 Weightedaveragesarecalculatedbasedonthefairvalueoftherespectiveinstruments. Thefollowingtablepresentsthevaluationtechniquesandrangesof significant unobservableinputsgenerallyusedtodeterminethefairvaluesof Level3assets andliabilitiesasof December31,2013(inmillions,exceptforinputvalues): Principal Unobservable Rangeof Weighted Investment Fairvalue valuation inputs inputvalues average2 technique Commercialmortgage $507 Discounted Discountrate 4%–13% 12% loans cashflows Property 7% 7% capitalization rate Netoperating 3%–5% 4% income growthrate Swapcontracts,net $152 Discounted Creditspreads1 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 Impliedspreadonclosingmarketpricesforindexpositions. 2 Weightedaveragesarecalculatedbasedonthefairvalueoftherespectiveinstruments. iv.Sensitivityof Level3FairValueMeasurementstoChanges inUnobservableInputs Thefollowingprovidesageneraldescriptionof theimpactof achangeinanunobservableinputonthefairvaluemeasurementandtheinterrelationshipof unobservableinputs. I. Commercialmortgageloans Ingeneral,anincreaseinisolationineitherthediscountrateortheproperty capitalizationrate,whichistheratioof netoperatingincomeproducedbyan assettoitscurrentfairvalue,wouldresultinadecreaseinthefairvaluemeasurement;whileanincreaseinnetoperatingincomegrowthrate,inisolation

FederalReserveSystemAudits 381 wouldresultinanincreaseinthefairvaluemeasurement.Foreachof therelationshipsdescribedabove,theinversewouldalsogenerallyapply. II. Swapcontracts ForCDSwithreferenceobligationsonCMBS,anincreaseincreditspreads wouldgenerallyresultinahigherfairvaluemeasurementforprotectionbuyers andalowerfairvaluemeasurementforprotectionsellers.Theinversewould alsogenerallyapplytothisrelationshipgivenadecreaseincreditspreads. ForCDSwithreferenceobligationsonRMBSorotherABSassets,changesin thediscountrate,constantprepaymentrate,constantdefaultrate,andloss severitywouldhaveanuncertaineffectontheoverallfairvaluemeasurement. Thisisbecause,ingeneral,changesintheseinputscouldpotentiallyhaveadifferentimpactonthefairvaluemeasurementof anindividualCDSbasedon thestructure,paymentstatus,andotherrelevantcontractualdetailsof its underlyingreferenceobligation.Additionally,changesinthefairvaluemeasurementbasedonvariationsintheinputsusedgenerallycannotbeextrapolatedbecausetherelationshipbetweeneachinputisnotperfectlycorrelated. ThefollowingtablespresentthefinancialinstrumentsrecordedinVIEsatfair valueasof December31,2014byASC820hierarchy(inmillions): Total Level11 Level21 Level3 Netting2 fairvalue Assets: Short-terminvestments $1,399 $- $ - $ - $1,399 Cashequivalents3 274 - - - 274 Swapcontracts - - 240 (116) 124 Otherinvestments - 6 5 - 11 Totalassets $1,673 $6 $245 $(116) $1,808 Liabilities: Swapcontracts $ - $- $115 $ (74) $ 41 1 TherewerenotransfersbetweenLevel1andLevel2duringtheyearendedDecember31,2014. 2 Derivativereceivablesandpayablesandtherelatedcashcollateralreceivedandpaidareshownnetwhenamasternetting agreementexists. 3 Cashequivalentsconsistprimarilyofmoneymarketfunds.

382 101stAnnualReport|2014 ThefollowingtablespresentthefinancialinstrumentsrecordedinVIEsatfair valueasof December31,2013byASC820hierarchy(inmillions): Total Level11 Level21 Level3 Netting2 fairvalue Assets: Short-terminvestments $ 530 $ - $ - $ - $ 530 Cashequivalents3 569 - - - 569 Commercialmortgageloans - - 507 - 507 Swapcontracts - - 345 (187) 158 Otherinvestments4 - 2 8 - 10 Totalassets $1,099 $ 2 $860 $(187) $1,774 Liabilities: Beneficialinterestin consolidatedVIEs $ - $116 $ - $ - $ 116 Swapcontracts - - 193 (120) 73 Totalliabilities $ - $116 $193 $(120) $ 189 1 TherewerenotransfersbetweenLevel1andLevel2duringtheyearendedDecember31,2013. 2 Derivativereceivablesandpayablesandtherelatedcashcollateralreceivedandpaidareshownnetwhenamasternetting agreementexists. 3 Cashequivalentsconsistprimarilyofmoneymarketfunds. 4 Investmentswithafairvalueof$2millionand$6millionthatwereclassifiedasLevel2andLevel3instrumentsrespectively, asofDecember31,2013wererecategorizedfrom“Non-agencyRMBS”to“Otherinvestments”toconformtothecurrentyear presentation. Thetablebelowpresentsareconciliationof allassetsandliabilitiesmeasuredat fairvalueonarecurringbasisusingsignificantunobservableinputs(Level3)asof December31,2014(inmillions).Unrealizedgainsandlossesrelatedtothose assetsstillheldatDecember31,2014arereportedasacomponentof “Investmentsheldbyconsolidatedvariableinterestentities,net”intheCombinedStatementsof Condition. Changein unrealized Purchases, Net gains(losses) sales, Fairvalue realized/ Gross Gross Fairvalue relatedto issuances, December31, unrealized transfers transfers December31, financial and 2013 gains in1,2 out1,2 2014 instruments settlements, (losses) heldat net December31, 2014 Assets: Commercialmortgage loans $507 $(523) $16 $- $- $ - $ - Otherinvestments 8 4 (4) - (3) 5 (4) Totalassets $515 $(519) $12 $- $(3) $ 5 $(4) Swapcontracts,net $152 $ (48) $21 $- $- $125 $13 1 Theamountoftransfersisbasedonthefairvaluesofthetransferredassetsatthebeginningofthereportingperiod. 2 Otherinvestments,withaDecember31,2013fairvalueof$3million,weretransferredfromLevel3toLevel2becausethey arevaluedatDecember31,2014basedonquotedpricesforidenticalorsimilarassetsinnon-activemarketsormodel-based techniquesforwhichallsignificantinputsareobservable(Level2).Theseinvestmentswerevaluedintheprioryearbasedon non-observableinputs(Level3).

FederalReserveSystemAudits 383 Thefollowingtablepresentsthegrosscomponentsof purchases,sales,issuances, andsettlements,net,shownfortheyearendedDecember31,2014(inmillions): Purchases, sales, issuances, Purchases Sales Issuances Settlements1 and settlements, net Assets: Commercialmortgageloans $- $ - - (523) (523) Otherinvestments 1 - - 3 4 Totalassets $1 $ - $- $(520) $(519) Swapcontracts,net $- $(24) $- $ (24) $ (48) 1 Includespaydowns. Thetablebelowpresentsareconciliationof allassetsandliabilitiesmeasuredat fairvalueonarecurringbasisusingsignificantunobservableinputs(Level3)asof December31,2013(inmillions).Unrealizedgainsandlossesrelatedtothose assetsstillheldatDecember31,2013arereportedasacomponentof “Investmentsheldbyconsolidatedvariableinterestentities,net”intheCombinedStatementsof Condition. Changein unrealized Net gains(losses) Purchases, Fairvalue realized/ Gross Gross Fairvalue relatedto sales,and December31, unrealized transfers transfers December31, financial settlements, 2012 gains in1,2 out1,2 2013 instruments net (losses) heldat December31, 2013 Assets: Commercialmortgage loans $466 $(163) $204 $- $- $507 $183 Otherinvestments3 55 (69) 18 4 - 8 (4) Totalassets $521 $(232) $222 $4 $- $515 $179 Swapcontracts,net $473 $(268) $(53) $- $- $152 $(53) 1 Theamountoftransfersisbasedonthefairvaluesofthetransferredassetsatthebeginningofthereportingperiod. 2 Otherinvestments,withaDecember31,2012fairvalueof$4million,weretransferredfromLevel2toLevel3becausethey arevaluedatDecember31,2013basedonnon-observableinputs(Level3).Theseinvestmentswerevaluedintheprioryear basedonquotedpricesforidenticalorsimilarassetsinnon-activemarketsormodel-basedtechniquesforwhichall significantinputsareobservable(Level2). 3 Investmentswithafairvalueof$6millionand$0millionasofDecember31,2013wererecategorizedfrom“Non-agency RMBS”and“CDOs,”respectively,to“Otherinvestments”toconformtothecurrentyearpresentation.Allotherassociated activityforthosesameassetclasseswasalsorecategorizedtothe“Otherinvestments”line.

384 101stAnnualReport|2014 Thefollowingtablepresentsthegrosscomponentsof purchases,sales,issuances, andsettlements,net,shownfortheyearendedDecember31,2013(inmillions): Purchases, sales, issuances, Purchases Sales Issuances Settlements1 and settlements, net Assets: Commercialmortgageloans $- $ (88) $ - $ (75) $(163) Otherinvestments2 7 (79) - 3 (69) Totalassets $7 $(167) $ - $ (72) $(232) Swapcontracts,net $- $(153) $ - $(115) $(268) 1 Includespaydowns. 2 Investmentswithnetactivityof$4millionand$0millionfortheyearendedDecember31,2013wererecategorizedfrom “Non-agencyRMBS”and“CDOs,”respectively,to“Otherinvestments”toconformtothecurrentyearpresentation.Allother activityforthosesameassetclasseswasalsorecategorizedtothe“Otherinvestments”line. 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): 2014 2013 Bankpremisesandequipment: Landandlandimprovements $ 397 $ 395 Buildings 2,748 2,693 Buildingmachineryandequipment 564 554 Constructioninprogress 33 37 Furnitureandequipment 1,032 1,006 Subtotal 4,774 4,685 Accumulateddepreciation (2,144) (2,032) Bankpremisesandequipment,net $2,630 $2,653 Depreciationexpense,fortheyearsendedDecember31 $ 206 $ 202 BankpremisesandequipmentatDecember31includedthefollowingamountsfor capitalizedleases(inmillions): 2014 2013 Leasedpremisesandequipmentundercapitalleases $26 $27 Accumulateddepreciation (20) (18) Leasedpremisesandequipmentundercapitalleases,net $ 6 $ 9 Depreciationexpenserelatedtoleasedpremises andequipmentundercapitalleases, fortheyearsendedDecember31 $ 6 $ 6

FederalReserveSystemAudits 385 TheReserveBanksleasespacetooutsidetenantswithremainingleasetermsof up to11years.Rentalincomefromsuchleaseswas$37millionand$35millionfor theyearsendedDecember31,2014and2013,respectively,andisreportedasa componentof “Non-interest(loss)income:Other”intheCombinedStatementsof IncomeandComprehensiveIncome.Futureminimumleasepaymentsthatthe ReserveBankswillreceiveundernoncancelableleaseagreementsinexistenceat December31,2014,areasfollows(inmillions): 2015 $ 33 2016 29 2017 25 2018 22 2019 21 Thereafter 64 Total $194 TheReserveBankshadcapitalizedsoftwareassets,netof amortization,of $376millionand$356millionatDecember31,2014and2013,respectively.Amortizationexpensewas$117millionand$73millionfortheyearsendedDecember31,2014and2013,respectively.Capitalizedsoftwareassetsarereportedasa componentof “Otherassets”intheCombinedStatementsof Conditionandthe relatedamortizationisreportedasacomponentof “Operatingexpenses:Other” intheCombinedStatementsof IncomeandComprehensiveIncome. SoftwareassetsrelatedtoamultiyearACHtechnologyinitiativewereimpaired andwrittenoff duetothesuspensionof developmentefforts.Theresultingasset impairmentlossof $23millionfortheyearendedDecember31,2014isreported asacomponentof “Operatingexpenses:Other”intheCombinedStatementsof IncomeandComprehensiveIncome.TheReserveBankshadnoimpairmentlosses in2013. Asresultof theFRBC’srestructuringplandiscussedinNote12,theFRBCsold itsPittsburghfacilityduringthethirdquarterof 2013.Thissaleresultedina $1.9millionloss,of which$0.2millionisreflectedin“OperatingExpense:Occupancy”and$1.7millionisreflectedin“OperatingExpense:Other”intheCombinedStatementsof IncomeandComprehensiveIncome. (8)CommitmentsandContingencies Inconductingitsoperations,theReserveBanksenterintocontractualcommitments,normallywithfixedexpirationdatesorterminationprovisions,atspecific ratesandforspecificpurposes. AtDecember31,2014,theReserveBankswereobligatedundernoncancelable leasesforpremisesandequipmentwithremainingtermsrangingfrom1to approximately14years.Theseleasesprovideforincreasedleasepaymentsbased uponincreasesinrealestatetaxes,operatingcosts,orselectedpriceindexes. Rentalexpenseunderoperatingleasesforcertainoperatingfacilities,warehouses, anddataprocessingandofficeequipment(includingtaxes,insurance,andmaintenancewhenincludedinrent),netof subleaserentals,was$13millionand$17millionfortheyearsendedDecember31,2014and2013,respectively.

386 101stAnnualReport|2014 Futureminimumleasepaymentsundernoncancelableoperatingleases,netof subleaserentals,withremainingtermsof oneyearormore,atDecember31,2014,are asfollows(inmillions): 2015 $ 8 2016 6 2017 6 2018 6 2019 5 Thereafter 17 Futureminimumleasepayments $48 AtDecember31,2014,theReserveBankshadunrecordedunconditionalpurchase commitmentsandlong-termobligationsextendingthroughtheyear2022witha remainingfixedcommitmentof $191million.Thesecommitmentsareformaintenanceof currencyprocessingmachinesandhavevariableand/orfixedcomponents.Purchasesof $44millionand$37millionweremadeagainstthesecommitmentsduring2014and2013,respectively.Thevariableportionof thecommitmentsisforadditionalservicesabovethefixedcontractualservicelimits.Thefixed paymentsforthenextfiveyearsunderthesecommitmentsareasfollows(in millions): 2015 $ 7 2016 25 2017 26 2018 26 2019 26 TheReserveBanksareinvolvedincertainlegalactionsandclaimsarisinginthe ordinarycourseof business.Althoughitisdifficulttopredicttheultimateoutcomeof theseactions,inmanagement’sopinion,basedondiscussionswithcounsel,thelegalactionsandclaimswillberesolvedwithoutmaterialadverseeffecton thefinancialpositionorresultsof operationsof theReserveBank. OtherCommitments Insupportof financialmarketstabilityactivities,theFRBNYmayenterintocommitmentstoprovidefinancialassistancetofinancialinstitutions.Therewereno remainingunfundedcontractualcommitmentsrelatedtocommercialmortgage loansinMLatDecember31,2014.TheFRBNYhadremainingunfundedcontractualcommitmentsrelatedtocommercialmortgageloansinMLof $40million atDecember31,2013. (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 participateintheSupplementalRetirementPlanforSelectOfficersof theFederal ReserveBanks(SERP).

FederalReserveSystemAudits 387 TheFRBNY,onbehalf of theSystem,recognizesthenetassetornetliabilityand costsassociatedwiththeSystemPlaninitsconsolidatedfinancialstatements.DuringtheyearsendedDecember31,2014and2013,certaincostsassociatedwiththe SystemPlanwerereimbursedbytheBureau. Followingisareconciliationof thebeginningandendingbalancesof theSystem Planbenefitobligation(inmillions): 2014 2013 EstimatedactuarialpresentvalueofprojectedbenefitobligationatJanuary1 $10,476 $11,468 Servicecost-benefitsearnedduringtheperiod 355 407 Interestcostonprojectedbenefitobligation 530 472 Actuarialloss(gain) 2,630 (1,527) Contributionsbyplanparticipants 5 5 Specialterminationbenefits 15 6 Benefitspaid (370) (355) Estimatedactuarialpresentvalueofprojectedbenefitobligationat December31 $13,641 $10,476 InOctober2014,theSocietyof Actuariesreleasednewmortalitytables(RP-2014) andmortalityprojectionscales(MP-2014)foruseinthevaluationof benefits liabilities.Theadoptionof thesenewmortalitytablesandnewmortalityprojection scales,adjustedfortheSystem’srecentmortalityexperienceandtheretirement ratesof Systemretirees,resultedinanetincreaseof theSystemPlanprojected benefitobligationof approximately$935million. Followingisareconciliationshowingthebeginningandendingbalanceof the SystemPlanassets,thefundedstatus,andtheaccruedpensionbenefitcosts(in millions): 2014 2013 EstimatedplanassetsatJanuary1(ofwhich$10,687and$9,440is measuredatfairvalueasofJanuary1,2014and2013,respectively) $10,808 $ 9,566 Actualreturnonplanassets 1,734 683 Contributionsbytheemployer 492 909 Contributionsbyplanparticipants 5 5 Benefitspaid (370) (355) EstimatedplanassetsatDecember31(ofwhich$12,608and$10,687is measuredatfairvalueasofDecember31,2014and2013,respectively) $12,669 $10,808 Fundedstatusandaccruedpensionbenefitcosts $ (972) $ 332 Amountsincludedinaccumulatedothercomprehensivelossareshown below: Priorservicecost $ (356) $ (456) Netactuarialloss (3,484) (1,928) Totalaccumulatedothercomprehensiveloss $(3,840) $(2,384) TheFRBNY,onbehalf of theSystem,funded$480millionand$900millionduringtheyearsendedDecember31,2014and2013,respectively.TheBureauis requiredbytheDodd-FrankActtofundtheSystemplanforeachBureau employeebasedonanestablishedformula.DuringtheyearsendedDecember2014and2013,theBureaufundedcontributionsof $12millionand$9million, respectively. Accruedpensionbenefitcostsarereportedasacomponentof “OtherAssets”if thefundedstatusisanetassetor“Accruedbenefitcosts”if thefundedstatusisa netliabilityintheCombinedStatementsof Condition.

388 101stAnnualReport|2014 TheaccumulatedbenefitobligationfortheSystemPlan,whichdiffersfromthe estimatedactuarialpresentvalueof projectedbenefitobligationbecauseitisbased oncurrentratherthanfuturecompensationlevels,was$11,985millionand $9,308millionatDecember31,2014and2013,respectively. Theweighted-averageassumptionsusedindevelopingtheaccumulatedpension benefitobligationfortheSystemPlanasof December31wereasfollows: 2014 2013 Discountrate 4.05% 4.92% Rateofcompensationincrease 4.00% 4.50% NetperiodicbenefitexpensesfortheyearsendedDecember31,2014and2013, wereactuariallydeterminedusingaJanuary1measurementdate.Theweightedaverageassumptionsusedindevelopingnetperiodicbenefitexpensesforthe SystemPlanfortheyearswereasfollows: 2014 2013 Discountrate 4.92% 4.00% Expectedassetreturn 7.00% 6.50% Rateofcompensationincrease 4.50% 4.50% 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): 2014 2013 Servicecost-benefitsearnedduringtheperiod $355 $407 Interestcostonprojectedbenefitobligation 530 472 Amortizationofpriorservicecost 100 103 Amortizationofnetloss 101 284 Expectedreturnonplanassets (759) (638) Netperiodicpensionbenefitexpense 327 628 Specialterminationbenefits 15 6 BureauofConsumerFinancialProtectioncontributions (12) (9) Totalperiodicpensionbenefitexpense $330 $625

FederalReserveSystemAudits 389 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive lossintonetperiodicpensionbenefitexpensein2015areshownbelow(in millions): Priorservicecost $ 93 Netactuarialloss 205 Total $298 Therecognitionof specialterminationlossesisprimarilytheresultof enhanced retirementbenefitsprovidedtoemployeesduringtherestructuringdescribedin Note12. Followingisasummaryof expectedbenefitpayments,excludingenhancedretirementbenefits(inmillions): 2015 $ 418 2016 442 2017 469 2018 499 2019 530 2020–2024 3,126 Total $5,484 TheSystem’sCommitteeonInvestmentPerformance(CIP)isresponsiblefor establishinginvestmentpolicies,selectinginvestmentmanagers,andmonitoring theinvestmentmanagers’compliancewithitspolicies.AtDecember31,2014,the SystemPlan’sassetswereheldinteninvestmentvehicles:threeactively-managed long-durationfixedincomeportfolios,apassively-managedlong-durationfixed incomeportfolio,anindexedU.S.equityfund,anindexednon-U.S.developedmarketsequityfund,anindexedemerging-marketsequityfund,aprivateequity limitedpartnership,aprivateequityseparateaccount,andamoneymarketfund. Thediversificationof theSystemPlan’sinvestmentsisdesignedtolimitconcentrationof riskandtheriskof lossrelatedtoanindividualassetclass.Thethree actively-managedlong-durationfixedincomeportfoliosareseparateaccounts benchmarkedtoacustombenchmarkof 55percentBarclaysLongCreditIndex and45percentCitigroup15+yearsU.S.TreasurySTRIPSIndex.Thiscustom benchmarkwasselectedasaproxytomatchtheliabilitiesof thePlanandthe guidelinesfortheseportfoliosaredesignedtolimitportfoliodeviationsfromthe benchmark.Thepassively-managedlong-durationfixed-incomeportfoliois investedintwocommingledfundsandisbenchmarkedto55percentBarclays LongCreditIndexand45percentBarclays20+STRIPSIndex.TheindexedU.S. equityfundisintendedtotracktheoverallU.S.equitymarketacrossmarketcapitalizationsandisbenchmarkedtotheDowJonesU.S.TotalStockMarketIndex. Theindexednon-U.S.developed-marketsequityfundisintendedtotrackthe MorganStanleyCapitalInternational(MSCI)Worldex-USInvestibleMarkets Index(IMI),whichincludesstocksfrom23marketsdeemedbyMSCItobe “developedmarkets.”Theindexedemerging-marketsequityfundisintendedto tracktheMSCIEmergingMarketsIMIIndex,whichincludesstocksfrom21marketsdeemedbyMSCItobe“emergingmarkets.”Thethreeindexedequityfunds includestocksfromacrossthemarketcapitalizationspectrum(i.e.,large-,midandsmall-capstocks).Theprivateequitylimitedpartnershipinvestsglobally acrossvariousprivateequitystrategiesandtheprivateequityseparateaccount investsinotherprivateequitylimitedpartnershipsgloballyacrossvariousstrategies.Theprivateequityseparateaccountinvestsinvariousprivateequityfunds

390 101stAnnualReport|2014 andcoinvestmentopportunitiesgloballyinprivatecompaniesandtargetsreturns inexcessof publicmarketsoveracompletemarketcycle.Finally,themoneymarketfund,whichinvestsinshorttermTreasuryandagencydebtandrepurchase agreementsbackedbyTreasuryandagencydebt,istherepositoryforcashbalancesandadherestoaconstantdollarmethodology. Permittedandprohibitedinvestments,includingtheuseof derivatives,aredefined ineitherthetrustagreement(forthepassively-managedlong-durationfixed incomeportfolio)ortheinvestmentguidelines(fortheremaininginvestments). TheCIPreviewsthetrustagreementandapprovesallinvestmentguidelinesaspart of theselectionof eachinvestmenttoensurethatthetrustagreementisconsistent withtheCIP’sinvestmentobjectivesfortheSystemPlan’sassets. TheSystemPlan’spolicyweightandactualassetallocationsatDecember31,by assetcategory,areasfollows: Actualassetallocations Policyweight 2014 2013 U.S.equities 26.3% 25.8% 29.7% Internationalequities 18.5% 17.6% 18.3% Emergingmarketequities 5.2% 4.9% 1.9% Fixedincome 50.0% 51.2% 49.4% Cash 0.0% 0.5% 0.7% Total 100.0% 100.0% 100.0% InJune2013,theCIPapprovedachangeintheallocationandbenchmarksforthe SystemPlan’spublicequityportfolio.ThenewbenchmarkistheMSCIAllCountryWorldInvestibleMarketsIndex.Thisbenchmarkchangehasreducedthe SystemPlan’sholdingsinU.S.equities,increasedtheSystemPlan’sholdingsof developedmarketsinternationalequities,andaddedaninvestmentinemerging marketequities.TheCIPapprovedaphasedsix-monthimplementationperiodfor thesechanges,commencinginSeptember2013fordevelopedmarketequitiesand November2013foremergingmarketequities. EmployercontributionstotheSystemPlanmaybedeterminedusingdifferent assumptionsthanthoserequiredforfinancialreporting.TheSystemPlan’santicipatedfundinglevelfor2015is$480million.In2015,theFRBNYplanstomake monthlycontributionsof $40millionandwillreevaluatethemonthlycontributionsuponcompletionof the2015actuarialvaluation.TheBank’sprojectedbenefitobligation,fundedstatus,andnetpensionexpensesfortheBEPandtheSERP atDecember31,2014and2013,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

FederalReserveSystemAudits 391 maydiffersignificantlyfromthevaluesthatwouldhavebeenreportedif areadily availablefairvaluehadexistedfortheseinvestmentsandmaydiffermaterially fromthevaluesthatmayultimatelyberealized. Thefollowingtablespresentthefinancialinstrumentsrecordedatfairvalueasof December31byASC820hierarchy(inmillions): 2014 Description Level11 Level21 Level3 Total Short-terminvestments2 $ 27 $ 94 $ - $ 121 TreasuryandFederalagencysecurities 111 2,179 - 2,290 Corporatebonds - 2,109 - 2,109 Otherfixedincomesecurities - 443 - 443 Commingledfunds - 7,598 - 7,598 PrivateEquity - - 47 47 Total $138 $12,423 $47 $12,608 1 TherewerenotransfersbetweenLevel1andLevel2duringtheyear. 2 Short-terminvestmentsincludescashequivalentsof$63million. 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. 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. AtDecember31,2014and2013,aportionof short-terminvestmentswasavailable forfuturestrading.Therewere$1millionand$8millionof Treasurysecurities pledgedascollateralfortheyearsendedDecember31,2014and2013,respectively. ThriftPlan Employeesof theReserveBanksparticipateinthedefinedcontributionThrift PlanforEmployeesof theFederalReserveSystem(ThriftPlan).TheReserve Banksmatch100percentof thefirst6percentof employeecontributionsfromthe dateof hireandprovidesanautomaticemployercontributionof 1percentof eli-

392 101stAnnualReport|2014 giblepay.TheReserveBanks’ThriftPlancontributionstotaled$113millionand $108millionfortheyearsendedDecember31,2014and2013,respectively,andare reportedasacomponentof “Operatingexpenses:Salariesandbenefits”inthe CombinedStatementsof IncomeandComprehensiveIncome. (10)PostretirementBenefitsOtherThanRetirementPlansand PostemploymentBenefits PostretirementBenefitsOtherThanRetirementPlans InadditiontotheReserveBanks’retirementplans,employeeswhohavemetcertainageandlength-of-servicerequirementsareeligibleforbothmedicalandlife insurancebenefitsduringretirement. TheReserveBanksfundbenefitspayableunderthemedicalandlifeinsurance plansasdueand,accordingly,hasnoplanassets. Followingisareconciliationof thebeginningandendingbalancesof thebenefit obligation(inmillions): 2014 2013 AccumulatedpostretirementbenefitobligationatJanuary1 $1,538 $1,755 Servicecost-benefitsearnedduringtheperiod 63 75 Interestcostonaccumulatedbenefitobligation 75 67 Netactuarialloss(gain) 164 (290) Curtailmentgain (2) - Specialterminationbenefitsloss - 1 Contributionsbyplanparticipants 25 24 Benefitspaid (92) (93) MedicarePartDsubsidies 5 5 Planamendments (7) (6) AccumulatedpostretirementbenefitobligationatDecember31 $1,769 $1,538 AtDecember31,2014and2013,theweighted-averagediscountrateassumptions usedindevelopingthepostretirementbenefitobligationwere3.96percentand 4.79percent,respectively. Discountratesreflectyieldsavailableonhigh-qualitycorporatebondsthatwould generatethecashflowsnecessarytopaytheplan’sbenefitswhendue.TheSystem Plandiscountrateassumptionsettingconventionusesanunroundedrate.

FederalReserveSystemAudits 393 Followingisareconciliationof thebeginningandendingbalanceof theplan assets,andtheunfundedpostretirementbenefitobligationandaccruedpostretirementbenefitcosts(inmillions): 2014 2013 FairvalueofplanassetsatJanuary1 $ - $ - Contributionsbytheemployer 62 64 Contributionsbyplanparticipants 25 24 Benefitspaid (92) (93) MedicarePartDsubsidies 5 5 FairvalueofplanassetsatDecember31 $ - $ - Unfundedobligationandaccruedpostretirementbenefitcost $1,769 $1,538 Amountsincludedinaccumulatedothercomprehensiveloss areshownbelow: Priorservicecost $ 26 $ 29 Netactuarialloss (355) (201) Deferredcurtailmentgain 1 - Totalaccumulatedothercomprehensiveloss $ (328) $ (172) Accruedpostretirementbenefitcostsarereportedasacomponentof “Accrued benefitcosts”intheCombinedStatementsof Condition. Formeasurementpurposes,theassumedhealth-carecosttrendratesatDecember31areasfollows: 2014 2013 Health-carecosttrendrateassumedfornextyear 6.60% 7.00% Ratetowhichthecosttrendrateisassumedtodecline(theultimatetrendrate) 4.75% 5.00% Yearthattheratereachestheultimatetrendrate 2019 2019 Assumedhealth-carecosttrendrateshaveasignificanteffectontheamounts reportedforhealth-careplans.AonepercentagepointchangeinassumedhealthcarecosttrendrateswouldhavethefollowingeffectsfortheyearendedDecember31,2014(inmillions): Onepercentage Onepercentage pointincrease pointdecrease Effectonaggregateofserviceandinterestcostcomponentsof netperiodicpostretirementbenefitcosts $ 27 $ (22) Effectonaccumulatedpostretirementbenefitobligation 240 (202) Thefollowingisasummaryof thecomponentsof netperiodicpostretirement benefitexpensefortheyearsendedDecember31(inmillions): 2014 2013 Servicecost-benefitsearnedduringtheperiod $ 63 $ 75 Interestcostonaccumulatedbenefitobligation 75 67 Amortizationofpriorservicecost (10) (11) Amortizationofnetactuarialloss 10 46 Totalperiodicexpense 138 177 Specialterminationbenefitsloss - 1 Netperiodicpostretirementbenefitexpense $138 $178

394 101stAnnualReport|2014 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensive lossintonetperiodicpostretirementbenefitexpensein2015areshownbelow: Priorservicecost $(10) Netactuarialloss 23 Total $13 NetpostretirementbenefitcostsareactuariallydeterminedusingaJanuary1measurementdate.AtJanuary1,2014and2013,theweighted-averagediscountrate assumptionsusedtodeterminenetperiodicpostretirementbenefitcostswere 4.79percentand3.75percent,respectively. Netperiodicpostretirementbenefitexpenseisreportedasacomponentof “Operatingexpenses:Salariesandbenefits”intheCombinedStatementsof Incomeand ComprehensiveIncome. Specialterminationbenefitsin2014areimmaterialandtherecognitionof special terminationbenefitlossesin2013isprimarilytheresultof enhancedretirement benefitsprovidedtoemployeesduringtherestructuringdescribedinNote12.A curtailmentgainassociatedwithrestructuringprogramsthataredescribedinNote 12wasrecognizedinnetincomeintheyearendedDecember31,2014,relatedto employeeswhoterminatedemploymentduring2014.Adeferredcurtailmentgain wasrecordedin2014asacomponentof accumulatedothercomprehensiveloss; thegainwillberecognizedinnetincomein2015andfutureyearswhentherelated employeesterminateemployment. TheMedicarePrescriptionDrug,ImprovementandModernizationActof 2003 establishedaprescriptiondrugbenefitunderMedicare(MedicarePartD)anda federalsubsidytosponsorsof retireehealth-carebenefitplansthatprovidebenefitsthatareatleastactuariallyequivalenttoMedicarePartD.ThebenefitsprovidedundertheReserveBanks’plantocertainparticipantsareatleastactuarially equivalenttotheMedicarePartDprescriptiondrugbenefit.Theestimatedeffects of thesubsidyarereflectedinactuariallossintheaccumulatedpostretirement benefitobligationandnetperiodicpostretirementbenefitexpense. FederalMedicarePartDsubsidyreceiptswere$5millionand$4millioninthe yearsendedDecember31,2014and2013,respectively.Expectedreceiptsin2015, relatedtobenefitspaidintheyearsendedDecember31,2014and2013,are $2million. Followingisasummaryof expectedpostretirementbenefitpayments(inmillions): Withoutsubsidy Withsubsidy 2015 $ 77 $ 72 2016 80 75 2017 84 78 2018 88 81 2019 92 85 2020–2024 526 482 Total $947 $873 PostemploymentBenefits TheReserveBanksofferbenefitstoformerorinactiveemployees.PostemploymentbenefitcostsareactuariallydeterminedusingaDecember31measurement

FederalReserveSystemAudits 395 dateandincludethecostof providingdisability;medical,dental,andvisioninsurance;andsurvivorincomebenefits.TheaccruedpostemploymentbenefitcostsrecognizedbytheReserveBanksatDecember31,2014and2013,were$156million and$148million,respectively.Thiscostisincludedasacomponentof “Accrued benefitcosts”intheCombinedStatementsof Condition.Netperiodicpostemploymentbenefitexpenseincludedin2014and2013operatingexpenseswere $29millionand$7million,respectively,andarerecordedasacomponentof “Operatingexpenses:Salariesandbenefits”intheCombinedStatementsof IncomeandComprehensiveIncome. (11)AccumulatedOtherComprehensiveIncomeAndOther ComprehensiveIncome Followingisareconciliationof beginningandendingbalancesof accumulated othercomprehensivelossasof December31(inmillions): 2014 2013 Amountrelated Amountrelated Total Total Amountrelated to Amountrelated to accumulated accumulated todefined postretirement todefined postretirement other other benefit benefitsother benefit benefitsother comprehensive comprehensive retirementplan thanretirement retirementplan thanretirement income(loss) income(loss) plans plans BalanceatJanuary1 $(2,384) $(172) $(2,556) $(4,343) $(502) $(4,845) Changeinfundedstatus ofbenefitplans: Priorservicecosts arisingduring theyear - 7 7 - 5 5 Amortizationofprior servicecost 1001 (10)2 90 1031 (11)2 92 Changeinprior servicecosts relatedto benefitplans 100 (3) 97 103 (6) 97 Netactuarial (loss)gainarising duringtheyear (1,657) (164) (1,821) 1,572 290 1,862 Deferred curtailmentgain - 1 1 - - - Amortizationofnet actuarialloss 1011 102 111 2841 462 330 Changeinactuarial (losses)gains relatedto benefitplans (1,556) (153) (1,709) 1,856 336 2,192 Changeinfundedstatus ofbenefitplans– othercomprehensive (loss)income (1,456) (156) (1,612) 1,959 330 2,289 BalanceatDecember31 $(3,840) $(328) $(4,168) $(2,384) $(172) $(2,556) 1 Reclassificationisreportedasacomponentof“OperatingExpenses:Netperiodicpensionexpense”intheCombined StatementsofIncomeandComprehensiveIncome. 2 Reclassificationisreportedasacomponentof“OperatingExpenses:Salariesandbenefits”intheCombinedStatementsof IncomeandComprehensiveIncome. Additionaldetailregardingtheclassificationof accumulatedothercomprehensive lossisincludedinNote9and10. (12)BusinessRestructuringCharges In2014,theTreasuryannouncedaplantoreducethenumberof ReserveBanks providingfiscalagentservicestotheTreasury.Thenewinfrastructurewillinvolve consolidationof substantiallyalloperationstotheFRBC,theFRBKC,FRBNY, andtheFRBSL.

396 101stAnnualReport|2014 TheReserveBankshadnomaterialbusinessrestructuringchargesin2013. Inyearspriorto2012,theU.S.Treasuryannouncedarestructuringinitiativeto consolidatetheTreasuryRetailSecurities.Asaresultof thisinitiative,Treasury RetailSecuritiesoperationsperformedbytheFRBCwereconsolidatedintothe FederalReserveBankof Minneapolis.Theremainingliabilityasof December31, 2014and2013relatedtotheFRBC’sTreasuryRetailSecuritiesrestructuringinitiativewasimmaterial. Followingisasummaryof financialinformationrelatedtotherestructuringplans (inmillions): 2014 restructuring plans Informationrelatedtorestructuringplans asofDecember31,2014: Totalexpectedcostsrelatedto restructuringactivity $ 21 Estimatedfuturecostsrelatedto restructuringactivity 5 Expectedcompletiondate 2018 Reconciliationofliabilitybalances: BalanceatDecember31,2013 $ - Employeeseparationcosts 14 Othercosts 1 Adjustments 1 BalanceatDecember31,2014 $ 16 Employeeseparationcostsareprimarilyseverancecostsforidentifiedstaff reductionsassociatedwiththeannouncedrestructuringplans.Separationcoststhatare providedundertermsof ongoingbenefitarrangementsarerecordedbasedonthe accumulatedbenefitearnedbytheemployee.Separationcoststhatareprovided underthetermsof one-timebenefitarrangementsaregenerallymeasuredbased ontheexpectedbenefitasof theterminationdateandrecordedratablyoverthe periodtotermination.Restructuringcostsrelatedtoemployeeseparationsare reportedasacomponentof “Operatingexpenses:Salariesandbenefits”inthe CombinedStatementsof IncomeandComprehensiveIncome. Othercostsincluderetentionpayandareshownasacomponentof “Operating Expenses:SalariesandBenefits”intheCombinedStatementsof Incomeand ComprehensiveIncome. Adjustmentstotheaccruedliabilityareprimarilyduetochangesintheestimated restructuringcostsandareshownasacomponentof theappropriateexpensecategoryintheCombinedStatementsof IncomeandComprehensiveIncome. RestructuringcostsassociatedwithReserveBankassets,includingsoftware,buildings,leaseholdimprovements,furniture,andequipment,arediscussedinNote7. CostsassociatedwithenhancedpensionbenefitsforallReserveBanksare recordedonthebooksof theFRBNYasdiscussedinNote9.Costsassociated withenhancedpostretirementbenefitsaredisclosedinNote10.

FederalReserveSystemAudits 397 (13)DistributionofComprehensiveIncome InaccordancewithBoardpolicy,ReserveBanksremitexcessearnings,afterprovidingfordividendsandtheamountnecessarytoequatesurpluswithcapitalpaidin,totheU.S.TreasuryasearningsremittancestotheTreasury.Thefollowing tablepresentsthedistributionof theReserveBanks’comprehensiveincomein accordancewiththeBoard’spolicyfortheyearsendedDecember31(inmillions): 2014 2013 Dividendsoncapitalstock $ 1,686 $ 1,650 Transfertosurplus–amountrequiredto equatesurpluswithcapitalpaid-in 1,065 147 EarningsonremittancestoTreasury 96,902 79,633 Totaldistribution $99,653 $81,430 (14)SubsequentEvents Therewerenosubsequenteventsthatrequireadjustmentstoordisclosuresinthe combinedfinancialstatementsasof December31,2014.Subsequenteventswere evaluatedthroughMarch11,2015,whichisthedatethatthecombinedfinancial statementswereavailabletobeissued.

398 101stAnnualReport|2014 Office of Inspector General Activities During2014,theOIGissued25audit,inspection, andevaluationreports(table1)andconducteda numberof follow-upreviewstoevaluateactiontaken TheOfficeof InspectorGeneral(OIG)fortheFed- onpriorrecommendations.Duetothesensitive eralReserveBoard,whichisalsotheOIGforthe natureof someof thematerial,certainreportswere ConsumerFinancialProtectionBureau(CFPB), onlyissuedinternallytotheBoard,asindicated.OIG operatesinaccordancewiththeInspectorGeneral investigativeworkresultedinthreearrests,33indict- Actof 1978,asamended.TheOIGconductsactivi- ments,andeightconvictions,aswellas$27,181,728 tiesandmakesrecommendationstopromote incriminalfinesandrestitution.Twenty-twoinvestieconomyandefficiency;enhancepoliciesandproce- gationswereopened,and24investigationswere dures;andpreventanddetectwaste,fraud,andabuse closedduringtheyear.TheOIGalsoissueditsfirst inBoardprogramsandoperations,includingfunc- listingof majormanagementchallengesfacingthe tionsthattheBoardhasdelegatedtotheFederal Board,aswellasalistingfortheCFPB.Further,the ReserveBanks.Accordingly,theOIGplansandcon- OIGissuedtwoSemiannualReportstoCongressand ductsaudits,inspections,evaluations,investigations, performedapproximately60reviewsof legislation andotherreviewsrelatingtoBoardandBoard- andregulationsrelatedtotheoperationsof the delegatedprogramsandoperations.Italsoretainsan Board,theCFPB,ortheOIG. independentpublicaccountingfirmtoannuallyaudit theBoard’sandtheFederalFinancialInstitutions Formoreinformationandtoobtaincopiesof OIG ExaminationCouncil’sfinancialstatements.Inaddi- reports,visittheOIGwebsiteathttp://oig tion,theOIGkeepstheCongressandtheBoardof .federalreserve.gov/.SpecificdetailsabouttheOIG’s Governorsfullyinformedaboutseriousabusesand bodyof workalsomaybefoundintheOIG’sWork deficiencies. PlanandSemiannualReporttoCongress. Table1.OIGaudit,inspection,andevaluationreportsissuedin2014 Reporttitle Monthissued AuditoftheCFPB’sCivilPenaltyFund January AuditoftheBoard’sDataCenterRelocation February OpportunitiesExisttoAchieveOperationalEfficienciesintheBoard’sManagementofInformationTechnologyServices February BoardofGovernorsoftheFederalReserveSystemFinancialStatementsasofandfortheYearsEndedDecember31,2013and2012, andIndependentAuditors’Reports March FederalFinancialInstitutionsExaminationCouncilFinancialStatementsasofandfortheYearsEndedDecember31,2013and2012, andIndependentAuditors’Reports March TransferofOfficeofThriftSupervisionFunctionsIsCompleted March TheCFPBCanImprovetheEfficiencyandEffectivenessofItsSupervisoryActivities March TheBoard’sLawEnforcementUnitCouldBenefitFromEnhancedOversightandControlstoEnsureComplianceWithApplicable RegulationsandPolicies March OpportunitiesExistfortheBoardtoImproveRecordkeeping,CostEstimation,andCostManagementProcessesfortheMartin BuildingConstructionandRenovationProject March TheCFPBHasEstablishedEffectiveGPRAProcesses,butOpportunitiesExistforFurtherEnhancement June ResponsetotheJanuary29,2014,CongressionalRequestRegardingtheCFPB’sHeadquartersRenovationProject June TheBoardShouldEnhanceItsPoliciesandProceduresRelatedtoConferenceActivities June SecurityControlReviewoftheCFPB’sCloudComputing–BasedGeneralSupportSystem(internalreport) July EnforcementActionsandProfessionalLiabilityClaimsAgainstInstitution-AffiliatedPartiesandIndividualsAssociatedwithFailed Institutions July SecurityControlReviewoftheBoard’sE2SolutionsTravelManagementSystem(internalreport) August TheCFPBCompliesWithSection1100GoftheDodd-FrankAct,butOpportunitiesExistfortheCFPBtoEnhanceItsProcess September AuditoftheCFPB’sAcquisitionandContractManagementofSelectCloudComputingServices September OpportunitiesExisttoEnhancetheOnsiteReviewsoftheReserveBanks’WholesaleFinancialServices September OpportunitiesExisttoEnhancetheBoard’sOversightofFutureComplexEnforcementActions September TheBoardShouldEnhanceItsSupervisoryProcessesasaResultofLessonsLearnedFromtheFederalReserve’sSupervisionof JPMorganChase&Company’sChiefInvestmentOffice(internalreport) October TheBoardCanBetterCoordinateItsContingencyPlanningandContinuityofOperationsProgram October 2014AuditoftheBoard’sInformationSecurityProgram November 2014AuditoftheCFPB’sInformationSecurityProgram November OpportunitiesExisttoImprovetheOperationalEfficiencyandEffectivenessoftheBoard’sInformationSecurityLifeCycle December FiscalYear2014RiskAssessmentoftheCFPB’sPurchaseCardandTravelCardPrograms December

FederalReserveSystemAudits 399 Government Accountability eralReserveSystemoperations.TheDodd-Frank WallStreetReformandConsumerProtectionActof Office Reviews 2010(Dodd-FrankAct)directstheGAOtoconduct additionalauditswithrespecttotheseoperations.In TheFederalBankingAgencyAuditAct(Pub.L. 2014,theGAOcompleted21projectsthatinvolved No.95–320)authorizestheGovernmentAccount- theFederalReserve(table1).Fifteenprojectswere abilityOffice(GAO)toauditcertainaspectsof Fed- ongoingasof December31,2013(table2). Table1.Reportscompletedduring2014 Reporttitle Reportnumber Monthissued(2014) Dodd-FrankRegulations:Regulators’AnalyticalandCoordinationEfforts GAO-15-81 December BankCapitalReforms:InitialEffectsofBaselIIIonCapital,Credit,andInternationalCompetitiveness GAO-15-67 November FinancialStabilityOversightCouncil:FurtherActionsCouldImprovetheNonbankDesignationProcess GAO-15-51 November HousingFinanceSystem:AFrameworkforAssessingPotentialChanges GAO-15-131 October U.S.Currency:ReaderProgramShouldBeEvaluatedWhileOtherAccessibilityFeaturesforVisually ImpairedPersonsAreDeveloped GAO-14-823 September ConsumerFinancialProtectionBureau:SomePrivacyandSecurityProceduresforDataCollectionsShould ContinueBeingEnhanced GAO-14-758 September FederalRulemaking:AgenciesIncludedKeyElementsofCost-BenefitAnalysis,butExplanationsof Regulations’SignificanceCouldBeMoreTransparent GAO-14-714 September OlderAmericans:InabilitytoRepayStudentLoansMayAffectFinancialSecurityofaSmallPercentageof Retirees GAO-14-866T September TroubledAssetRelief:Government’sExposuretoAllyFinancialLessensasTreasury’sOwnershipShare Declines GAO-14-698 August LargeBankHoldingCompanies:ExpectationsofGovernmentSupport GAO-14-621 July SmallBusinessAdministration:OfficeofAdvocacyNeedstoImproveControlsoverResearch,Regulatory, andWorkforcePlanningActivities GAO-14-525 July VirtualCurrencies:EmergingRegulatory,LawEnforcement,andConsumerProtectionChallenges GAO-14-496 June DebtManagement:FloatingRateNotesCanHelpTreasuryMeetBorrowingGoals,butAdditionalActions AreNeededtoHelpManageRisk GAO-14-535 June ForeclosureReview:RegulatorsCouldStrengthenOversightandImproveTransparencyoftheProcess GAO-14-376 April InternationalFinancialReforms:U.S.andOtherJurisdictions’EffortstoDevelopandImplementReforms GAO-14-261 April PuertoRico:InformationonHowStatehoodWouldPotentiallyAffectSelectedFederalProgramsand RevenueSources GAO-14-31 March CreditCards:MarketingtoCollegeStudentsAppearstoHaveDeclined GAO-14-225 February CollegeDebitCards:ActionsNeededtoAddressATMAccess,StudentChoice,andTransparency GAO-14-91 February TroubledAssetReliefProgram:MoreEffortsNeededonFairLendingControlsandAccessforNon-English SpeakersinHousingPrograms GAO-14-117* February ServicemembersCivilReliefAct:InformationonMortgageProtectionsandRelatedEducationEfforts GAO-14-221 January InformationSecurity:AgencyResponsestoBreachesofPersonallyIdentifiableInformationNeedtoBe MoreConsistent GAO-14-34 January Note:InSeptember2014,theGAOterminatedanengagementconcerningtheeffectoflowinterestratesonseniorswithoutissuingaformalreport. *ASpanishlanguagesummaryofGAO-14-117isavailableasGAO-14-457.

400 101stAnnualReport|2014 Table2.Projectsactiveatyear-end2014 Subjectofproject Monthinitiated Status Regulatoryactionsandbanking-relatedfinancialcrises May2013 Open Mortgagereforms January2014 Open DuplicationintheU.S.financialregulatorysystem February2014 Open Financialauditofthefiscalyear2014scheduleoffederaldebt February2014 Open* Cyberthreatstobanks April2014 Open Lender-placedinsurance April2014 Open Effectofdelaysinraisingthedebtlimit July2014 Open Internationalinsurancecapitalstandards July2014 Open Statusupdateonthebankruptcyoffinancialcompanies August2014 Open SecuritiesandExchangeCommission’soversightofnationalsecuritiesassociations August2014 Open FederalReserve’spaymentssystemoperations October2014 Open Remittanceserviceproviders October2014 Open Internationalremittancesupdate November2014 Open Resolutionplansforlargefinancialinstitutions November2014 Open FederalReservestresstests December2014 Open Note:InFebruary2015,theGAOadvisedthattheFederalReservewasremovedasanagencyparticipantfortheengagementonstudenloanrepaymentprograms. *GAO-15-157,publishedonNovember20,2014,relatestothisengagement.

401 13 Federal Reserve System Budgets TheFederalReserveBoardof Governorsandthe vices,claimsforreimbursement,andotherincome. FederalReserveBanksprepareannualbudgetsas Total2014expenseswere$183.0million,or3.5perpartof theireffortstoensureappropriatestewardship cent,lessthantheamountbudgetedfor2014. andaccountability.Thissectionpresentsinformation onthe2014budgetperformanceof theBoardand 2015 Operating Expense Budget ReserveBanks,aswellastheir2015budgets,budgetingprocesses,andtrendsinexpensesandemploy- Budgeted2015operatingexpenses,netof revenue ment.1Thissectionalsopresentsinformationonthe andreimbursements,are$256.5million,or6.3percostsof newcurrency.2 cent,higherthan2014actualexpenses.TheReserve Bankbudgetscomprisealmostthree-quartersof the Systembudget(figure1).Budgeted2015revenue System Budgets Overview frompricedservicesis4.3percentlowerthan2014 revenue,largelybecauseof continueddeclinesin Tables1and2summarizetheFederalReserveBoard checkvolumeascustomersshifttootherpayment of Governors’andFederalReserveBanks’2014bud- methods.Claimsforreimbursementsareexpectedto getedandactualand2015budgetedoperating increase9.9percentin2015,reflectingincreased expensesandemployment.3 expensesforseveralTreasuryDepartmentinitiatives andasaresultof transitioncostsrelatedtothe 2014 Budget Performance Treasuryfiscalagentconsolidation.4 Incarryingoutitsresponsibilitiesin2014,theFed- 4 InApril2014,theTreasuryannouncedtheconsolidationofthe eralReserveSystemincurred$4.0billioninnet fiscalagentservicesprovidedbytheFederalReserveBanksas expenses.Totalspendingof $5,050.4millionwasoffsetby$1,005.5millioninrevenuefrompricedser- Figure1.Distributionofbudgetedexpensesofthe FederalReserveSystem,2015 1 Eachbudgetcoversonecalendaryear. 2 Before2013,informationaboutthebudgetedexpensesofthe BoardandReserveBankswaspresentedinaseparatereport Board of Governors,1 12.3% titledAnnualReport:BudgetReview.Copiesofthatreportare availableatwww.federalreserve.gov/publications/budget-review/ default.htm. 3 SubstantiallyallemployeesoftheBoardandReserveBankspar- Currency, 13.4% ticipateintheRetirementPlanforEmployeesoftheFederal ReserveSystem(SystemPlan).ReserveBankemployeesatcertain compensationlevelsparticipateintheBenefitEqualizationPlan, andcertainReserveBankofficersparticipateintheSupplemental RetirementPlanforSelectOfficersoftheReserveBanks.The operatingexpensesoftheReserveBankspresentedinthissection donotincludeexpensesrelatedtotheretirementplans;additional informationabouttheseexpensescanbefoundinsection11, “StatisticalTables”(see“Table10.Incomeandexpensesofthe FederalReserveBanks,byBank”). BoardemployeesalsoparticipateintheBenefitEqualization Plan,andBoardofficersparticipateinthePensionEnhancementPlanforOfficersoftheBoardofGovernorsoftheFederalReserveSystem(PEP).TheoperatingexpensesoftheBoard presentedinthissectionincludeexpensesrelatedtoBoardpar- Reserve Banks, 74.3% ticipantsintheBenefitEqualizationPlanandPEP,butdonot 1.IncludesexpensesoftheOfficeofInspectorGeneral(OIG). includeexpensesrelatedtotheSystemPlan.

402 101stAnnualReport|2014 Table1.TotaloperatingexpensesoftheFederalReserveSystem,netofreceiptsandclaimsforreimbursement,2014–15 Millionsofdollars,exceptasnoted Variance Variance 2014actualto2014budget 2015budgetto2014actual Item 2014budget 2014actual 2015budget Amount Percent Amount Percent Board 584.2 565.3 -18.9 -3.2 629.3 64.0 11.3 OIG 26.9 25.4 -1.5 -5.6 29.0 3.6 14.2 ReserveBanks1 3,795.7 3,752.3 -43.3 -1.1 3,968.7 216.3 5.8 Currency 826.7 707.4 -119.3 -14.4 717.9 10.5 1.5 TotalSystemoperatingexpenses2 5,233.5 5,050.4 -183.0 -3.5 5,344.9 294.4 5.8 Revenuefrompricedservices 423.6 433.1 9.5 2.3 414.4 -18.7 -4.3 Claimsforreimbursement3 569.1 569.6 0.5 0.1 626.1 56.4 9.9 Otherincome4 2.7 2.7 0.0 0.5 2.9 0.2 6.7 Revenueandclaimsforreimbursement5 995.4 1,005.5 10.1 1.0 1,043.4 37.9 3.8 TotalSystemoperatingexpenses,netofrevenue andclaimsforreimbursement 4,238.1 4,045.0 -193.1 -4.6 4,301.5 256.5 6.3 Note:Hereandinsubsequenttables,componentsmaynotsumtototalsandmaynotyieldpercentagesshownbecauseofrounding. 1 ExcludesReserveBankcapitaloutlaysaswellasassessmentsbytheBoardofGovernorsforcostsrelatedtocurrencyandtheoperationsoftheBoardofGovernorsandthe ConsumerFinancialProtectionBureau(CFPB). 2 IncludestotaloperatingexpensesoftheFederalReserveInformationTechnology(FRIT)supportfunctionandtheSystem’sOfficeofEmployeeBenefits(OEB),themajorityof whichareintheReserveBanks. 3 ReimbursableclaimsincludetheexpensesoffiscalagencyanddepositoryservicesprovidedtotheU.S.Treasury,othergovernmentagencies,andotherfiscalprincipals. 4 FeesthatdepositoryinstitutionspayforthesettlementcomponentoftheFedwireSecuritiesServicetransactionsforTreasurysecuritiestransfers. 5 ExcludesannualassessmentsforthesupervisionoflargefinancialcompaniespursuanttoRegulationTT,whicharenotrecognizedasrevenueorusedtofundBoard expenses.(Seesection4,“SupervisionandRegulation,”formoreinformation.) Trends in Expenses and Employment year(figure2).Overthesameperiod,nondefensediscretionaryspendingbythefederalgovernmenthas Fromtheactual2005leveltothebudgeted2015 increasedanaverageof 1.7percentperyear(figamount,thetotalexpensesof theFederalReserve ure3).From2005through2010,FederalReserve Systemhaveincreasedanaverageof 4.7percentper Systememploymentdeclined.Ithassubsequently increasedbecauseof requirementsof theDoddpartofthefederalgovernment’sefforttoincreaseoperational FrankWallStreetReformandConsumerProtection efficiencyandeffectiveness.AlthoughtheTreasuryanticipates Actof 2010(Dodd-FrankAct)andresponsestothe long-termsavings,expensesincreasedin2014asselectbusiness linespreparedtotransitiontootherReserveBanks.Expenses financialcrisis(figure4). areprojectedtoincreasein2015asservicesareconsolidated fromtensitestofouroverthenextseveralyears.Increased Growthinsupervisionexpensesoverthepast expensesareprimarilyforseveranceandretentionpaymentsin exitingBanks. 10yearshasbeendrivenbyadditionalsupervisory Table2.EmploymentintheFederalReserveSystem,2014–15 Variance Variance 2014actualto2014budget 2015budgetto2014actual Item 2014budget 2014actual 2015budget Amount Percent Amount Percent Board1 2,620 2,625 5 0.2 2,673 48 1.8 OIG1 120 120 0 0.0 125 5 4.2 ReserveBanks2 18,979 18,744 -236 -1.2 19,295 552 2.9 TotalSystememployment 21,719 21,489 -231 -1.1 22,093 605 2.8 Note:EmploymentnumberspresentedincludeauthorizedpositioncountsfortheBoardandaveragenumberofpersonnel(ANP)fortheReserveBanks.ANPistheaverage numberofemployeesexpressedintermsoffull-timepositionsfortheperiodandincludesoutsideagencyhelp. 1 Budgetrepresentsauthorizedpositioncountatthebeginningoftheyearandactualrepresentsauthorizedpositioncountatyear-end. 2 IncludesemploymentoftheFRITsupportfunctionandtheOEB.

FederalReserveSystemBudgets 403 Figure2.TotalexpensesoftheFederalReserveSystem, Figure4.EmploymentintheFederalReserveSystem, 2005–15 2005–15 Billions of dollars Thousands of persons 6 23 Current dollars 5 22 4 2009 dollars1 3 21 2 20 1 2005 2007 2009 2011 2013 2015 Note:For2015,budgeted.IncludesexpensesoftheOIG. 1.CalculatedwiththeGDPpricedeflator. 19 2005 2007 2009 2011 2013 2015 Note:For2015,budgeted.Employmentnumberspresentedincludeposition countsfortheBoardandaveragenumberofpersonnel(ANP)fortheReserve Banks. resourcesneededtorespondtothefinancialcrisis,to continuetoimplementexpandedsupervisoryresponsibilitiesmandatedbytheDodd-FrankAct,andto Expensesinthecashareahaveincreasedasaresult maintainappropriatecoveragefollowinggrowthin of amultiyearefforttomodernizethecashthenumberof supervisedstatememberbanks. processingandinventory-trackinginfrastructure. Expensegrowthinthemonetarypolicyareaduring ExpensesforservicesprovidedtotheTreasuryhave thefinancialcrisishasbeenfollowedbyafocuson growntomeetthatagency’sevolvingneeds,includenhancingfinancialstabilitymonitoringanddedicat- ingtheautomationof theTreasury’scollectionand ingadditionalresourcestoregionaleconomic paymentservices,theadditionof Treasuryapplicaresearch. tionstotheTreasuryWebApplicationInfrastructure, andotherrequestedprojects.Theseincreaseshave beenpartiallyoffsetbysubstantialexpenseandstaffingdecreasesrelatedtoefficienciesfromautomation Figure3.CumulativechangeinFederalReserveSystem ororganizationalchangesinelectroniccheckexpensesandfederalgovernmentexpenses,2005–15 processing,fiscalagency,cash,andsupportfunctions.Theyhavealsobeenpartiallyoffsetbythecon- Percent 60 tinueddeclineof papercheckvolume. 50 2015 Capital Budgets Federal government1 40 ThecapitalbudgetsfortheBoardandReserveBanks total$76.6millionand$454.0million,respectively.5 30 Asinpreviousyears,the2015capitalbudgetsinclude 20 Federal Reserve2 fundingforprojectsthatsupportthestrategicdirectionoutlinedbytheBoardandeachReserveBank. 10 Thesestrategicgoalsemphasizeinvestmentsthatcontinuetoimproveoperationalefficiencies,enhanceser- 0 vicestoBankcustomers,andensureasafeandpro- 2005 2007 2009 2011 2013 2015 ductiveworkenvironment. Note:For2015,budgeted.FederalgovernmentexpensesarereportedonafiscalyearbasisbeginningOctober1;theFederalReserveSystemexpensesare reportedonacalendar-yearbasis. 5 ThecapitalbudgetreportedfortheBoardincludestheamount budgetedfortheOfficeofInspectorGeneral(OIG).Thecapital 1.Discretionaryspendinglessexpendituresondefense.Source:Budgetofthe UnitedStatesGovernment,FiscalYear2014:HistoricalTables,Table8.1.Outlays budgetreportedfortheReserveBanksincludestheamounts byBudgetEnforcementActCategory,1962–2019. budgetedfortheFederalReserveInformationTechnology (FRIT)supportfunctionandtheOfficeofEmployeeBenefits 2.IncludesexpensesoftheOIG. (OEB).

404 101stAnnualReport|2014 Board of Governors Budgets Tables3and4summarizetheBoard’s2014budgeted andactualexpenditures,aswellasits2015budgeted expendituresbydivision,office,orspecialaccount TheBoard’sbudgetisgroundedinthedirection andbyaccountclassification,respectively.Table5 setbyitsStrategicFramework2012–15(www summarizestheBoard’sbudgetedandactualauthor- .federalreserve.gov/publications/gpra/files/2012-2015strategic-framework.pdf).6Thebudgetisstructured izedpositioncountfor2014and2015.Eachtable alsoincludesalineitemfortheOIG. bydivision,office,orspecialaccount. TheBoard’sbudgetprocessisasfollows: 2014 Budget Performance • Atthestartof thebudgetprocess,thechief operat- BoardofGovernors ingofficer(COO)andchief financialofficer(CFO) TotalexpensesforBoardoperationswere$565.3milmeetwiththeCommitteeonBoardAffairs(CBA) lion,whichwas$18.9million,or3.2percent,less andrecommendaspecificgrowthtargetforthe thantheapproved2014budgetof $584.2million. Board’soperatingbudget. TheBoard’s2014single-yearcapitalspendingwas • Therecommendationisbasedonagrowthprojec- alsolessthanbudgetedby$2.2million,or44.3pertionthatincludesknownchangesintheBoard’s cent,andmultiyearcapitalprojectsremainedwithin basebudget(personnelexpensesaswellasgoods theirprojectsbudgetswithactualspendinglessthan andservices),positionsandfundingclearlydefined budgetedby$37.1million,or31.1percent. intheframework,andadditionalinitiatives. • Theprojectionalsoincorporatesthefull-year The2014operationalunderrunwasprimarilydriven impactof positionsaddedduringtheprioryearas bylower-than-plannedgoodsandservicesexpenses. wellasproposedchangestotheBoard’scompensa- Personnelserviceswere$8.8millionoverthe2014 tionandbenefitprogramsandhistoricspending budgetprimarilyduetotheabilityof divisionsto trendsingoodsandservices. hirefasterthanprojected,unplannedovertime,and revisionstothevariablepayprogram.Goodsand • Staff reviewsinitialbudgetrequestssubmittedby serviceswere$27.7millionlessthanbudgeted divisionsandoffices,includingproposedinitiatives becausedivisionsandofficesspentlessthananticiandpotentialsavings,andworkcollaboratively patedforcontractualprofessionalservicesforautowithalldivisionsandofficestorefinebudgetsubmationprojects,software,furnitureandequipment, missionsandbringtheproposedoperatingbudget andfortheMartinBuildingrenovationandData inlinewiththegrowthtarget. Centerrelocationprojects. • TheCOOandCFOsubsequentlymeetwiththe OfficeofInspectorGeneral ExecutiveCommitteeandtheCBAtofurther reviewandrefinethebudgetsubmissions. TotalexpensesforOIGoperationswere$25.4million,or$1.5millionlessthantheapproved2014 • Staff submitstheproposedbudgettotheCBAfor operatingbudget.Personnelserviceswere$1.0milreview. lionmorethanbudgeted,largelybecausehiringwas • Theadministrativegovernorsubmitsthebudgetto earlierthananticipated.Goodsandserviceswere thefullBoardforreviewandfinalaction. $2.6millionlessthanbudgeted,mainlyduetocosts relatedtoprojectdelays. • Expensesaremonitoredthroughouttheyear.Variancesareanalyzedandreported. 2015 Operating Expense Budget TheBoard’sOfficeof InspectorGeneral(OIG),in keepingwithitsstatutoryindependence,preparesits BoardofGovernors proposedbudgetapartfromtheBoard’sbudget.The The2015budgetforBoardoperationsis$629.3mil- OIGpresentsitsbudgetdirectlytotheBoardfor lion,whichis$64.0million,or11.3percent,higher approval;thus,informationontheOIG’sbudgetis than2014actualexpenses.Theoperatingbudget alsoprovidedinthediscussionthatfollows. includesamountstofundtheBoard’songoingoperationsandtosupportthestrategicthemesidentifiedin 6 Thedocumentidentifiedandframedsixoverarchingthemesfor theBoard’s2012–15strategicframework.Thisisthe theBoardtoaddressoverthefour-yearplanninghorizon,along thirdbudgetsincetheBoardapprovedtheframewithrecommendedresourceinvestmentsintermsofpersonnel andfacilities. workinJune2012.

FederalReserveSystemBudgets 405 Table3.OperatingexpensesoftheBoardofGovernors,bydivision,office,orspecialaccount,2014–15 Millionsofdollars,exceptasnoted Variance Variance 2014actualto2014budget 2015budgetto2014actual Division,office,orspecialaccount 2014budget1 2014actual 2015budget Amount Percent Amount Percent BoardMembers 26.5 25.5 -1.0 -3.8 27.3 1.8 7.1 Secretary 9.7 9.6 -0.1 -1.0 10.0 0.4 4.2 ResearchandStatistics 61.7 62.5 0.8 1.3 66.2 3.7 5.9 InternationalFinance 27.0 25.0 -2.0 -7.4 28.6 3.6 14.4 MonetaryAffairs 32.3 30.4 -1.9 -5.9 34.0 3.6 11.8 OfficeofFinancialStabilityPolicyandResearch 7.0 6.5 -0.5 -7.1 7.6 1.1 16.9 BankSupervisionandRegulation 106.5 113.2 6.7 6.3 122.4 9.2 8.1 ConsumerandCommunityAffairs 24.5 25.0 0.5 2.0 27.3 2.3 9.2 Legal 24.3 25.4 1.1 4.5 25.9 0.5 2.0 ChiefOperatingOfficer 10.2 9.3 -0.9 -8.8 14.0 4.7 50.5 FinancialManagement 10.3 10.6 0.3 2.9 11.1 0.5 4.7 ReserveBankOperationsandPaymentSystems 34.7 34.5 -0.2 -0.6 39.6 5.1 14.8 InformationTechnology 93.5 83.7 -9.8 -10.5 94.8 11.1 13.3 Management 111.7 108.1 -3.6 -3.2 114.0 5.9 5.5 Dataprocessingincome -36.7 -39.8 -3.1 8.4 -44.0 -4.2 10.6 Residualretirement 9.9 9.5 -0.4 -4.0 9.8 0.3 3.2 Specialprojects 13.6 16.8 3.2 23.5 14.7 -2.1 -12.5 Savingsandreallocations 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Extraordinaryitems 17.8 9.4 -8.4 -47.2 26.0 16.6 176.6 Total,Boardoperations 584.2 565.3 -18.9 -3.2 629.3 64.0 11.3 OfficeofInspectorGeneral 26.9 25.4 -1.5 -5.6 29.0 3.6 14.2 1 2014budgetfiguresdonotreflectinternaltransfersbetweendivisionsduringtheyear. For2015,authorizedpositionsforBoardoperations Risksinthe2015Budget total2,673,anincreaseof 48positions,or1.8per- WhentheBoardapprovedthe2012–15strategic cent,from2014actuallevels.Thepositionsare framework,thegovernorsconsideredtheresources alignedwiththestrategicframeworkthemesandwill necessarytoimplementthestrategicthemes,aswell primarilysupporttheBoard’sfinancialstabilityand asbudgetarygrowthtargetstomanagecosts.The supervisorymandateundertheDodd-FrankActand 2014operatingbudgettookaninitialsteptobetter newregulatoryresponsibilities.Thebudgetreflects alignthepersonnelservicesbudgetwithactualhiring thefullauthorizationof all192positionsidentified patterns.Additionalstepstakenfor2015inbudgeting inthestrategicframework. forpersonnelexpenses,aswellasingoodsandservices,shouldbringtheentireoperatingbudgetmuch OfficeofInspectorGeneral closertoactualhistoricspendingpatterns.Better The2015budgetforOIGoperationsis$29.0million, alignmentbetweenthebudgetandspendingtrends whichis$3.6million,or14.2percent,higherthan willdemonstratecontinuedcommitmenttothe 2014actualexpenses.Thisincludesanincreaseof 5 framework’sgoalforfiscalresponsibility,whilepropositions,foratotalof 125positions.Theadditional vidingnecessaryresourcesfortheBoardtoachieve fundingandpositionswillassisttheOIGinachiev- itsgoalsandobjectives. ingitsobjectiveslaidoutinitsstrategicplan,includingdeliveringtimely,high-qualityproductsandser- Duringthebudgetprocess,severaldivisionsidentivicesthatpromoteagencyimprovement;increasing fiedpotentialfuturestaffingneedstohelpfinish employeeengagementandleadershipdevelopment; implementingrequirementsstemmingfromthe andenhancingthecapacityof theOIGtoaccom- Dodd-FrankActandtomeetnewrequestsfrom plishexpandedoversightof theBoard’sandthe Boardmemberswhilecontinuingtoachieveongoing ConsumerFinancialProtectionBureau’scoremis- operationalrequirements.Projectedincreasesinstaffsionareasrelatedtosupervisionandregulationwhile ingwillimpactsupportfunctions,includingplacing improvingoperationaleffectiveness. additionaldemandsonavailableofficespace.

406 101stAnnualReport|2014 Table4.OperatingexpensesoftheBoardofGovernors,byaccountclassification,2014–15 Millionsofdollars,exceptasnoted Variance Variance 2014actualto2014budget 2015budgetto2014actual Accountclassification 2014budget1 2014actual 2015budget Amount Percent Amount Percent Personnelservices Salaries 328.0 335.9 7.9 2.4 362.5 26.6 7.9 Retirement/thriftplans2 42.2 42.3 0.1 0.2 44.8 2.5 5.9 Employeeinsurance 28.6 29.4 0.8 2.8 31.3 1.9 6.5 Subtotal,personnelservices 398.7 407.5 8.8 2.2 438.6 31.1 7.6 Goodsandservices Postageandshipping 0.5 0.3 -0.2 -40.0 0.8 0.5 166.7 Travel 15.1 14.9 -0.2 -1.3 14.7 -0.2 -1.3 Telecommunications 7.9 7.0 -0.9 -11.4 6.8 -0.2 -2.9 Printingandbinding 2.2 1.3 -0.9 -40.9 1.8 0.5 38.5 Publications 0.6 0.5 -0.1 -16.7 0.5 0.0 0.0 Stationeryandsupplies 2.3 1.6 -0.7 -30.4 1.5 -0.1 -6.3 Software 17.1 13.4 -3.7 -21.6 15.3 1.9 14.2 Furnitureandequipment 14.3 9.8 -4.5 -31.5 7.5 -2.3 -23.5 Rentals 16.2 14.3 -1.9 -11.7 22.9 8.6 60.1 Booksandsubscriptions 1.3 2.0 0.7 53.8 15.0 13.0 650.0 Utilities 3.6 3.4 -0.2 -5.6 2.9 -0.5 -14.7 Repairsandalterationsbldg. 3.0 2.4 -0.6 -20.0 2.9 0.5 20.8 RepairsandmaintenanceF&E 3.3 4.1 0.8 24.2 5.2 1.1 26.8 Contingencyprocessingcenter 1.3 1.2 -0.1 -7.7 1.3 0.1 8.3 Contractualprofessionalservices 64.5 55.4 -9.1 -14.1 51.6 -3.8 -6.9 Interestexpense * * 0.0 0.0 * 0.0 0.0 Tuition 5.1 3.8 -1.3 -25.5 4.6 0.8 21.1 Subsidiesandcontributions 0.8 0.8 0.0 0.0 0.8 0.0 0.0 Depreciation/amortization 27.7 24.4 -3.3 -11.9 36.9 12.5 51.2 Allother3 -1.3 -2.9 -1.6 123.1 -2.2 0.7 -24.1 Subtotal,goodsandservices 185.5 157.8 -27.7 -14.9 190.8 33.0 20.9 Total,Boardoperations 584.2 565.3 -18.9 -3.2 629.3 64.0 11.3 OfficeofInspectorGeneral Personnelservices 18.3 19.3 1.0 5.5 21.1 1.8 9.3 Goodsandservices 8.7 6.1 -2.6 -29.9 7.9 1.8 29.5 Total,OIGoperations 26.9 25.4 -1.5 -5.6 29.0 3.6 14.2 1 2014budgetfiguresdonotreflectinternaltransfersbetweendivisionsduringtheyear. 2 IncludesexpensesrelatedtoBoardparticipantsintheBenefitEqualizationRetirementPlanandPensionEnhancementPlan. 3 Allotherincludes,amongotheritems,incomefromoutsideagenciesfordataprocessingservices,rentalincome,andtransportationsubsidybenefitsforemployees. * Lessthan$500thousand. Otherbudgetrisksstemfromuncertaintyaboutthe Boardhasalsobegundevelopingastrategicplanto risingexpensesassociatedwiththeBoard’sdata guideitsoperationsoverthe2016–19horizon,which needsandtheinfrastructurenecessarytosupport willhelpinformfuturebudgetrequests. effectivedatamanagement.Aspartof thestrategic framework,theBoardapproveditstwolargestcapi- 2015 Capital Budget talprojectsinrecentyears:therenovationof the MartinBuildingandtherelocationof theDataCen- Table6summarizestheBoard’sandtheOIG’sbudter.TheBoardhasretainedconsultantstoassistin getedandactualcapitaloutlaysfor2014and2015. theseeffortsandhascapablestaff whohaveexperi- BoardofGovernors encedealingwithcomplexprojects,andbothinitiativescontinuetoreceivecarefulmonitoringgiventhe TheBoard’s2015capitalbudgettotals$11.1million sizeof theirbudgetsandcriticalimportance.The forsingle-yearcapital,whichrepresentsanincrease

FederalReserveSystemBudgets 407 Table5.PositionsauthorizedbytheBoardofGovernors,bydivision,office,orspecialaccount,2014–15 Variance Variance 2014actualto2014budget 2015budgetto2014actual Division,office,orspecialaccount 2014budget 2014actual 2015budget Amount Percent Amount Percent BoardMembers 117 118 1 0.9 118 0 0.0 Secretary 53 53 0 0.0 53 0 0.0 ResearchandStatistics 336 336 0 0.0 343 7 2.1 InternationalFinance 145 144 -1 -0.7 150 6 4.2 MonetaryAffairs 151 151 0 0.0 157 6 4.0 OfficeofFinancialStabilityPolicyandResearch 37 37 0 0.0 42 5 13.5 BankSupervisionandRegulation 423 428 5 1.2 441 13 3.0 ConsumerandCommunityAffairs 103 103 0 0.0 107 4 3.9 Legal 110 110 0 0.0 115 5 4.5 ChiefOperatingOfficer 59 59 0 0.0 59 0 0.0 FinancialManagement 69 69 0 0.0 69 0 0.0 ReserveBankOperationsandPaymentSystems 168 168 0 0.0 170 2 1.2 InformationTechnology 409 409 0 0.0 409 0 0.0 Management 440 440 0 0.0 440 0 0.0 Total,Boardoperations1 2,620 2,625 5 0.2 2,673 48 1.8 OfficeofInspectorGeneral 120 120 0 0.0 125 5 4.2 1 Budgetrepresentsauthorizedpositioncountatthebeginningoftheyearandactualrepresentsauthorizedpositioncountatyear-end. over2014actualsthatisprimarilydrivenbytechnol- andleasedspacetoaccommodateemployeesreloogyinfrastructureprojects,includinggeneralnetwork catedduringconstruction.TheDataCenterrelocasystems,statisticsfunctionupgrades,andinfrastruc- tionprojectincludesbuildout,alongwithsoftware turegrowth.TheBoard’smultiyearcapitalbudget andhardwareacquisitionsneededtosupportanettotals$437.5million,whichincludes2015expected workinfrastructurethatcanaccommodatethe cashoutlaysof $64.3million.Thetwolargestcom- increaseddemandfordata. ponentsof theBoard’smultiyearcapitalbudgetare theMartinBuildingrenovationandDataCenter OfficeofInspectorGeneral relocationprojects.TheMartinBuildingrenovation TheOIG’s2015capitalbudgettotals$0.2millionfor projectincludesacompletebuildingrenovation,con- single-yearcapitaland$1.0millionformultiyear structionof avisitorscreeningandconferencecenter, capitaloutlays.TheOIG’ssingle-yearcapitalbudget Table6.CapitaloutlaysoftheBoardofGovernors,bycapitaltype,2014–15 Millionsofdollars,exceptasnoted Variance Variance 2014actualto2014budget 2015budgetto2014actual Item 2014budget 2014actual 2015budget Amount Percent Amount Percent Board Single-yearcapitaloutlays 5.0 2.8 -2.2 -44.3 11.1 8.3 299.4 Multiyearcapitaloutlays 119.5 82.4 -37.1 -31.1 64.3 -18.1 -21.9 Totalcapitaloutlays 124.5 85.2 -39.3 -31.6 75.4 -9.7 -11.4 OIG Single-yearcapitaloutlays 0.1 0.0 0.0 -61.5 0.2 0.1 502.6 Multiyearcapitaloutlays 3.2 1.4 -1.9 -57.7 1.0 -0.3 -24.6 Totalcapitaloutlays 3.3 1.4 -1.9 -57.7 1.2 -0.2 -14.6 Combinedtotalcapitaloutlays 127.8 86.6 -41.2 -32.3 76.6 -9.9 -11.5 Note:Theamountreportedforthemultiyearcapitalbudgetrepresentstheexpectedexpenditureforthebudgetyear.

408 101stAnnualReport|2014 isprimarilydrivenbyinformationtechnology(IT) • TheReserveBankssubmitpreliminarybudget equipmentthatwillenhancethedatastoragecapa- informationtotheBoardforreview,including bilitieswithinitsIToperatingenvironment.Themul- documentationtosupportthebudgetrequest. tiyearcapitalbudgetincludesthecontinuedbuildout • Boardstaff analyzestheBanks’budgets,bothindiof itsregionaloffices;nonewfundingwasrequested viduallyandinthecontextof Systeminitiatives. fortheOIG’smultiyearcapitalbudget. • TheBoard’sCommitteeonFederalReserveBank Affairs(BAC)reviewstheBankbudgets. Federal Reserve Banks Budgets • TheReserveBanksmakeanyrequestedorneeded changes,andtheBACchairsubmitstherevised EachReserveBankestablishesmajoroperatinggoals budgetstoBoardmembersforreviewandfinal forthecomingyear,devisesstrategiesforattaining action. thosegoals,estimatesrequiredresources,andmoni- • Throughouttheyear,ReserveBankandBoard torsresults.TheReserveBanks’budgetsarestrucstaffsmonitoractualperformanceandcompareit turedbyfunctionalarea,withattributablesupport withapprovedbudgetsandforecasts. andoverheadchargedtoeacharea.Inadditionto thebudgetapprovalprocess,theReserveBanksmust Tables7,8,and9summarizetheReserveBanks’ submitproposalsformajorcapitalexpendituresto 2014budgetedandactualexpensesand2015budtheBoardforfurtherreviewandapproval. getedexpensesbyReserveBank,functionalarea,and accountclassification.7Inaddition,table10shows TheReserveBankbudgetprocessisasfollows: theReserveBanks’budgetedandactualemployment • ReserveBankandBoardgovernancebodiespro- for2014andbudgetedemploymentfor2015. videbudgetguidanceformajorfunctionalareasfor theupcomingbudgetyear. • TheReserveBanksdevelopbudgetsthatincorporatethisguidance,whicharereviewedbysenior 7 Additionalinformationabouttheoperatingexpensesofeachof theReserveBankscanbefoundinsection11,“Statistical leadershipintheReserveBanksforalignmentwith Tables”(see“Table10.IncomeandexpensesoftheFederal ReserveBankandSystempriorities. ReserveBanks,byBank”). Table7.OperatingexpensesoftheFederalReserveBanks,bydistrict,2014–15 Millionsofdollars,exceptasnoted Variance Variance 2014actualto2014budget 2015budgetto2014actual District 2014budget 2014actual 2015budget Amount Percent Amount Percent Boston 220.1 220.6 0.4 0.2 231.6 11.0 5.0 NewYork 908.9 889.7 -19.2 -2.1 938.3 48.6 5.5 Philadelphia 202.6 197.6 -5.0 -2.5 200.8 3.2 1.6 Cleveland 176.2 163.2 -13.1 -7.4 173.5 10.3 6.3 Richmond 361.0 357.3 -3.6 -1.0 359.7 2.4 0.7 Atlanta 319.0 339.4 20.5 6.4 323.0 -16.4 -4.8 Chicago 340.7 334.7 -6.0 -1.8 356.6 21.9 6.6 St.Louis 285.8 282.8 -3.0 -1.0 335.4 52.6 18.6 Minneapolis 199.8 190.8 -9.0 -4.5 214.5 23.7 12.4 KansasCity 222.4 218.9 -3.4 -1.5 255.3 36.4 16.6 Dallas 212.2 211.7 -0.5 -0.3 223.3 11.6 5.5 SanFrancisco 347.0 345.6 -1.4 -0.4 356.7 11.1 3.2 TotalReserveBankoperatingexpenses 3,795.7 3,752.3 -43.3 -1.1 3,968.7 216.3 5.8 Note:IncludesexpensesoftheFRITsupportfunctionandtheOEB,andreflectsallredistributionsforsupportandallocationforoverhead.ExcludesReserveBankcapitaloutlays aswellasassessmentsbytheBoardofGovernorsforcostsrelatedtocurrencyandtheoperationsoftheBoardofGovernorsandtheCFPB.

FederalReserveSystemBudgets 409 Table8.OperatingexpensesoftheFederalReserveBanks,byoperatingarea,2014–15 Millionsofdollars,exceptasnoted Variance Variance 2014actualto2014budget 2015budgetto2014actual Operatingarea 2014budget 2014actual 2015budget Amount Percent Amount Percent Monetaryandeconomicpolicy 614.1 609.2 -4.9 -0.8 636.8 27.5 4.5 ServicestotheU.S.Treasuryandother governmentagencies 550.2 531.7 -18.5 -3.4 579.9 48.2 9.1 Servicestofinancialinstitutionsandthepublic 1,048.5 1,032.7 -15.9 -1.5 1,073.6 40.9 4.0 Supervisionandregulation 1,189.4 1,168.5 -20.9 -1.8 1,260.2 91.7 7.8 Fee-basedservicestofinancialinstitutions 393.4 410.3 16.9 4.3 418.2 7.9 1.9 TotalReserveBankoperatingexpenses1 3,795.7 3,752.3 -43.3 -1.1 3,968.7 216.3 5.8 1 Operatingexpensesexcludepensioncosts,Board-relatedexpenses,andreimbursements. 2014 Budget Performance Forwardproject,cash-processingequipmentdelays, andhigher-than-expectedrecoveriesforcross- Total2014operatingexpensesfortheReserveBanks shippingfees.8Decreasingvolumesandprogram were$3,752.3million,whichis$43.3million,or changesforseveralTreasuryinitiatives,including 1.1percent,lessthantheapproved2014budgetof thoserelatedtotheTreasuryWebApplicationInfra- $3,795.7million.Theactualaveragenumberof per- structure,werepartiallyoffsetbytransitionexpenses sonnel(ANP)islessthanthe2014budget,largely relatedtothefiscalagentconsolidation.Increased becauseof turnoverandhiringdelays. expensesinthefee-basedservicesareaincludethe Supervisionandregulationoperatingexpensesare lessthanbudgetbecauseof increasedturnover, delaysinhiringbudgetedstaff,andaSysteminitia- 8 TheCashForwardinitiativewillreplacelegacysoftwareapplicativetoreducetravel.Intheservicestofinancialinsti- tions,automatebusinessprocesses,andemploytechnologiesto meetcurrentandfutureneedsforthecashfunction.Phase1was tutionsandthepublic,cashexpenseswerelowerthan completedin2010andPhase2wascompletedinJuly2012.The anticipatedbecauseof updatedplansfortheCash- project’splannedcompletiondateis2017. Table9.OperatingexpensesoftheFederalReserveBanks,byaccountclassification,2014–15 Millionsofdollars,exceptasnoted Variance Variance 2014actualto2014budget 2015budgetto2014actual Accountclassification 2014budget 2014actual 2015budget Amount Percent Amount Percent Personnel1 2,787.4 2,784.6 -2.8 -0.1 2,938.8 154.2 5.5 Building 320.3 315.2 -5.1 -1.6 326.6 11.4 3.6 Equipment 197.3 177.8 -19.6 -9.9 195.8 18.1 10.2 Softwarecosts 211.9 227.1 15.2 7.2 224.8 -2.3 -1.0 Travel 96.2 89.3 -6.9 -7.2 95.1 5.8 6.5 Materialsandsupplies 70.1 64.1 -6.1 -8.6 69.1 5.0 7.8 Communications 49.2 46.4 -2.8 -5.7 47.3 0.9 1.9 Shipping 15.5 13.9 -1.6 -10.6 15.5 1.6 11.7 Allother2 47.6 34.0 -13.6 -28.6 55.7 21.7 63.8 TotalReserveBankoperatingexpenses 3,795.7 3,752.3 -43.3 -1.1 3,968.7 216.3 5.8 1 Personnelincludessalaries,otherpersonnelexpense,andretirementandotheremploymentbenefitexpenses.Itdoesnotincludepensionexpensesrelatedtoallthe participantsintheRetirementPlanforEmployeesoftheFederalReserveSystemandtheReserveBankparticipantsintheBenefitEqualizationPlanandtheSupplemental RetirementPlanforSelectOfficersoftheFederalReserveBanks.Theseexpensesarerecordedasaseparatelineiteminthefinancialstatements;see“Table10.Incomeand expensesoftheFederalReserveBanks,byBank”insection11,“StatisticalTables.” 2 Includesoutsidefees,recoveries,andthetransferofexpensesforcapitalizablesoftwaredevelopmentefforts.

410 101stAnnualReport|2014 Table10.EmploymentattheFederalReserveBanks,byDistrict,andatFRITandOEB,2014–15 Variance Variance 2014actualto2014budget 2015budgetto2014actual District 2014budget 2014actual 2015budget Amount Percent Amount Percent Boston 1,097 1,071 -26 -2.3 1,109 38 3.5 NewYork 3,247 3,214 -33 -1.0 3,294 80 2.5 Philadelphia 946 937 -8 -0.9 921 -16 -1.8 Cleveland 968 943 -26 -2.7 990 47 5.0 Richmond 1,586 1,559 -28 -1.7 1,546 -13 -0.8 Atlanta 1,627 1,581 -46 -2.9 1,594 14 0.9 Chicago 1,512 1,496 -16 -1.0 1,529 33 2.2 St.Louis 1,145 1,141 -4 -0.3 1,246 104 9.1 Minneapolis 1,133 1,088 -45 -4.0 1,114 26 2.4 KansasCity 1,512 1,515 2 0.1 1,688 173 11.4 Dallas 1,217 1,234 17 1.4 1,267 33 2.7 SanFrancisco 1,671 1,663 -8 -0.5 1,700 37 2.2 Total,allDistricts 17,662 17,442 -220 -1.2 17,998 556 3.2 FederalReserveInformationTechnology(FRIT) 1,265 1,252 -14 -1.1 1,244 -7 -0.6 OfficeofEmployeeBenefits(OEB) 52 50 -2 -3.7 53 3 5.3 Total 18,979 18,744 -236 -1.2 19,295 552 2.9 dispositionof theFedACHTechnologyTransition function,whichisaddingresourcestosupport programasset.9 expandedsupervisoryresponsibilities,primarilyfor largefinancialinstitutionsandnationalsupervision Total2014actualemploymentof 18,744ANPrepre- initiatives.Inthemonetaryandeconomicpolicy sentsanunderrunof 236ANP,or1.2percent,from function,severalReserveBanksareaddingresources 2014budgetedlevelsof 18,979ANP.Increasedturn- tomeetpolicy,research,andoutreachdemands, overandhiringdelaysinthesupervisionfunctionare includinginvestmentsinanalyticalcapacity. largedriversof theunderrun.InTreasuryservices, programresourcereductionsinseveralTreasuryini- BudgetedexpensesforservicestotheTreasury,which tiativesinresponsetovolumedeclinesarepartially arefullyreimbursable,areincreasingtosupportthe offsetbytemporarystaff additionstosupportthefis- expansionof theTreasuryWebApplicationInfracalagentconsolidation.Staffingdelaysinmonetary structure($17.7million)andasaresultof transition policyandpublicprogramsandresourcechanges, costsrelatedtotheTreasuryfiscalagentconsolidaprimarilyinsupportandoverheadareas,alsocon- tion($9.6million).Inaddition,theReserveBanks tributetothereduction. willprovideincreasedsupportfortechnologymodernizationforseveralTreasuryinitiatives. 2015 Operating Expense Budget Increasesinservicestofinancialinstitutionsandthe The2015operatingbudgetsof theReserveBanks publicincludethecompletionof developmentwork total$3,968.7million,whichis$216.3million,or andthestartof qualityassurancetestingforthe 5.8percent,higherthan2014actualexpenses.The CashForwardprojectaswellasincreasedlaw largestincreaseisinthesupervisionandregulation enforcementandvideosurveillancesystemssupport. Inaddition,thebudgetincludesfundingfor“Strate- 9 TheReserveBankshavebeenengagedinamultiyeartechnology giesforImprovingtheU.S.PaymentSystem,”amulinitiativetomodernizetheFedACHprocessingplatformby tifacetedplanforcollaboratingwithpaymentsystem migratingtheservicefromamainframesystemtoadistributed computingenvironment.Inlate2013,theReserveBankscon- stakeholderstoenhancethespeed,safety,andeffiductedanassessmentfocusedontheviabilityandcost- ciencyof theU.S.paymentsystem.Expensesrelated effectivenessoftheprogram.Asaresult,theReserveBankssustofee-basedservicesareincreasingfortheFedwire pendedtheprogramin2014andbegantoinvestigatetheuseof othertechnologysolutions. Modernizationprograminitiative,offsetbytheone-

FederalReserveSystemBudgets 411 timedispositionof theFedACHTechnologyTransi- updateddemographicinformationthatareusedto tionprogramassetin2014.10 determinebenefitexpensewouldaffectReserveBank budgets.Additionally,Banksareconcernedabout TheReserveBank2015budgetsinclude$1,331.2mil- theirabilitytohireandretainstaff.Anumberof lioninexpensesand4,991ANPforIT.These ReserveBankshaveaggressivehiringplans,andsome resourcessupportapplicationdevelopment,informa- Banksmayexperiencedifficultymeetingschedules tionsecurity,infrastructure,andend-userservices forhiringstaff withspecializedskillsandexperience, andareallocatedtoalloperatingareaslistedin particularlyinsupervisionandIT.Theprimaryrisks table8. insupervisionrelatetotheimplementationof key supervisoryresponsibilitiesundertheDodd-Frank Total2015budgetedemploymentfortheReserve Actthatstillrequirefinalrulemakingandchanging Banks,FRIT,andOEBis19,295ANP,anincreaseof supervisoryprograms.TheTreasury’sfiscalagent 552ANP,or2.9percent,from2014actualstaff lev- consolidationeffortwillcontinuetoaffectprojects els.Theincreaseisprimarilydrivenbytheneedsof overalonger-termplanninghorizonasthefuture thesupervision,Treasury,andIToperatingareas. visionforcollections,payments,andcashmanage- SupervisionANPisincreasingasresourcesareadded mentsystemsisrefined. tosupportexpandedsupervisoryresponsibilities,primarilyforlargefinancialinstitutions.IntheTreasury 2015 Capital Budget operatingarea,personnelarebeingaddedforplanningandknowledgetransferaspartof thefiscal Table11showstheReserveBanks’budgetedand agentconsolidationandforongoingprojects. actualcapitaloutlaysfor2014andbudgetedcapital for2015. ITstaff isincreasingtosupportapplicationdevelopmentprojects,primarilyfortheSupervisionand The2015capitalbudgetssubmittedbytheReserve Treasuryoperatingareas,offsetbyareductionin Banks,FRIT,andOEBtotal$454.0million.The developmentworkfortheCashForwardproject. increaseinthe2015capitalbudgetis$118.9million, AdditionalITincreasesareforinformationsecurity or35.5percent,abovethe2014actuallevelsof efforts.Staff isalsoincreasingtosupportmonetary $335.1million,largelyreflectingongoingmultiyear policyandpublicprograms,fortheFedwiremodern- buildingandinfrastructureandautomationprojects. izationprogram,andforothersupportareasacross Newinitiativesinthe2015capitalbudgetsupport theSystem. workplacerenovationsandoptimizationprojects, conferencefacilities,andexpansionof theTreasury ReserveBankofficerandstaff personnelexpensesfor WebApplicationInfrastructure.Insupportof the 2015total$2,938.8million,anincreaseof ReserveBankstrategies,the2015budgetincludes $154.2million,or5.5percent,from2014actual threemajorcategoriesof capitalinitiatives:Reserve expenses.Theincreasereflectsexpensesassociated Bankautomation/ITprojects,buildingandinfrawithadditionalstaff andbudgetedsalaryadjust- structure,andTreasuryinitiatives. ments,includingmeritincreases,equityadjustments, promotions,andfundingforvariablepay. Automation/IT TheReserveBanks,FRIT,andOEBincluded The2015ReserveBankbudgetsincludea3.0percent $193.0millionin2015fundingformajorITinitiameritprogramforeligibleofficers,seniorprofessiontivesandReserveBankautomationprojects.About als,andstaff totaling$53.1million.Equityadjust- 25percentof theautomationcapitaloutlays,or mentsandpromotionstotal$8.5millionforofficers $50.1million,supportstheSystem’scomputingand andseniorprofessionalsand$22.8millionforstaff. networkinfrastructure.Multiyearprojectscurrently Fundingforvariablepayprogramsforofficers, underwaytomigratemajorapplicationsoff the seniorprofessionals,andstaff totals$170.7million. mainframeaccountfor$19.1millionof the2015 capitalbudget.Cashautomationinitiativesinclude Risksinthe2015Budget $39.3millionfortheCashForwardprojectand Themost-significantrisksinthe2015budgetare $5.1millionforcashsensorupgrades.Investmentsin relatedtopersonnel.Changesinassumptionsand analytical,technological,andoperationaltoolsare proposedformonetarypolicyandtosupportnew 10 TheFedwireModernizationinitiativeinvolvesthetransitionof andongoingsupervisoryresponsibilities.OtherautotheFedwireFundsandFedwireSecuritiesapplicationsfromthe legacymainframeenvironmenttoadistributedplatform. mationinvestmentsincludeenhancedfunctionality

412 101stAnnualReport|2014 Table11.CapitaloutlaysoftheFederalReserveBanks,byDistrict,andofFRITandOEB,2014–15 Millionsofdollars,exceptasnoted Variance Variance 2014actualto2014budget 2015budgetto2014actual District 2014budget 2014actual 2015budget Amount Percent Amount Percent Boston 41.9 23.8 -18.2 -43.3 28.5 4.8 20.0 NewYork 115.0 71.8 -43.1 -37.5 115.9 44.0 61.3 Philadelphia 21.2 15.5 -5.7 -26.8 20.5 5.0 32.3 Cleveland 22.0 14.5 -7.6 -34.3 17.0 2.5 17.6 Richmond 15.7 12.7 -3.1 -19.4 15.2 2.6 20.2 Atlanta 16.7 26.9 10.2 60.9 16.1 -10.8 -40.0 Chicago 38.1 17.7 -20.4 -53.4 26.5 8.8 49.4 St.Louis 13.5 8.8 -4.8 -35.2 14.3 5.6 63.3 Minneapolis 13.5 5.9 -7.7 -56.6 4.7 -1.2 -20.7 KansasCity 15.6 14.2 -1.3 -8.6 25.8 11.6 81.1 Dallas 18.1 10.5 -7.6 -42.0 17.3 6.8 65.2 SanFrancisco 65.1 53.3 -11.8 -18.1 60.5 7.1 13.4 Total,allDistricts 396.5 275.6 -120.9 -30.5 362.4 86.8 31.5 FederalReserveInformationTechnology(FRIT) 78.4 59.1 -19.4 -24.7 91.1 32.0 54.1 OfficeofEmployeeBenefits(OEB) 0.5 0.4 -0.1 -14.8 0.6 0.2 37.7 Total 475.4 335.1 -140.3 -29.5 454.0 118.9 35.5 forapplicationsthatsupporttheFederalReserve Currency Budget financialservices,informationsecurityprojects,and scheduledsoftwareandequipmentupgrades. Boardstaff monitorspaymentsof currencytoand receiptsof currencyfromcirculationandthenumber BuildingandInfrastructure of unfitnotesdestroyedattheReserveBanks.Staff Buildingandinfrastructureprojectsaccountfor estimatesthenumberof notestheBoardwillorder $183.2millionof the2015capitalbudget.RenovafromtheBureauof EngravingandPrinting(BEP)to tionstoreconfigureandoptimizeexistingbuilding meetdemandbasedonmonthlymonitoring,forespaceareincludedfortheFederalReserveBanksof castsof growthratesforpaymentsof currencytocir- NewYork,Cleveland,Richmond,KansasCity,and culationandreceiptsof currencyfromcirculation, Chicago.TheFederalReserveBankof KansasCity operationalfactors,andotherpolicyconsiderations. willbuildanadditiontoitsparkinggaragetoaccom- TheBoardreimbursestheBEPforallcostsrelatedto modatestaffinggrowth.TheFederalReserveBanks theproductionof currency.11Historically,morethan of DallasandSanFranciscowillcontinuetheirspace 90percentof thenotesthattheBoardorderseach renovationprograms,theFederalReserveBankof yearreplaceunfitcurrencythatReserveBanks Chicagowillcontinueitsbuildingsecurityproject receivefromcirculation. andcashreconfigurationproject,andtheFederal ReserveBankof Clevelandplanstoinvestinconfer- Theannualcurrencybudgetprocessisasfollows: encefacilities.Theremainingoutlaysinthiscategory fundotherongoingsafetyandmaintenanceneeds • EachAugust,basedonBoardstaff’sassessmentof andfacilityimprovements. currencydemand,thedirectorof theDivisionof ReserveBankOperationsandPaymentSystems Treasury Thecapitalbudgetincludes$77.8millionfor 11 TheBEPdoesnotreceivefederalappropriations;alloperations Treasuryinitiatives,includingadditionalspaceto oftheBEParefinancedbyarevolvingfundthatisreimbursed throughproductsales,virtuallyallofwhicharesalesofFederal accommodatestaff attheFederalReserveBankof ReservenotestotheBoardtofulfillitsannualprintorder.Cus- St.LouisforexpandedTreasuryoperations,support tomerbillingsaretheBEP’sonlymeansofrecoveringcostsof forTreasuryWebApplicationInfrastructure,and operationsandgeneratingfundsnecessaryforcapitalinvestment.Section16oftheFederalReserveActrequiresallcosts application-developmenteffortssupportingmultiple incurredfortheissuingofnotesshallbepaidforbytheBoard projects. andincludedinitsassessmentstoReserveBanks.

FederalReserveSystemBudgets 413 Figure5.FederalReservecostsfornewcurrency,2001–15 Millions of dollars 800 700 600 500 400 300 200 100 0 2001 2003 2005 2007 2009 2011 2013 2015 Note:For2015,budgeted. submitsafiscalyear(FY)printorderforcurrency new$100notetoavoidtheriskof stock-outsand tothedirectorof theBEP. potentialconcernsindomesticandinternational marketsthattheReserveBankswouldnotbeableto • EachDecember,Boardstaff estimatesexpensesfor meetdemand.TheinitialFY2014orderfor$100 thecalendaryearcurrencybudget,includingprintnoteswasbasedonpaymentsthatexceededthe ingexpenses(basedonestimatedproductioncosts record-highgrosspaymentsin2012by40percent. providedbytheBEP);certainotherBEPcosts;and Althoughactualdemandin2014hasbeenabout expensesforthecurrencyeducationprogram,cur- 4percenthigherthanthe2012level,itwasfarless rencytransportation,andcounterfeit-deterrence thantheworst-casedemandscenariouponwhichthe research. orderwasbased.Asaresult,theFY2014printorder • TheBACreviewstheproposedcurrencybudget. fornew$100noteswaslowered,whichresultedina $116.4millionreductioninbudgetedvariableprint- • TheBACchairsubmitstheproposedcurrency ingcosts.Someof thisreductionwasoffset,however, budgettotheBoardforfinalaction. byhigher-than-budgetedproductionof lowerdenomination($1,$5,$10,and$20)notesduringthe 2014 Budget Performance fourthquarter.12 TheBoard’stotal2014actualexpensesfornewcur- 2015 Budget rencywere$707.4million,whichrepresentsa decreaseof $119.3million,or14.4percent,fromthe The2015newcurrencybudgetof $717.9millionis 2014budget.Thebudgetunderrunisprimarily $10.5million,or1.5percent,higherthan2014actual attributabletolowerprintingcostsresultingfroma expenditures(figure5).PrintingcostsforFederal smallerorderforFederalReservenotes,aswellas Reservenotesmakeupabout90percentof thenew lower-than-projectedcostsforthecurrencyreader currencybudget.Expensesforcurrencytransportaprogramandtransportingnewandfitnotes.The 2014budgetincludedcoststoprintnearly2.2billion 12 BecausetheBEPoperatesonafiscalyearthatbeginsonOcto- $100notesbecausetheissuanceplanforthenew- ber1andendsSeptember30,theBoard’scalendar-yearbudget design$100notewasbasedonanaggressivereplace- fornewcurrencyexcludesthecostofnotesthattheBEPwill produceinthefirstquarterofitsfiscalyearandincludesthe mentrateof theoverninebillion$100notesincircuestimatedcostsofnotestheBEPisprojectedtoproduceinthe lation.Boardstaff plannedforhighdemandforthe fourthquarterofthecalendaryear.

414 101stAnnualReport|2014 Table12.FederalReservebudgetfornewcurrency,2014and2015 Thousandsofdollars,exceptasnoted Variance Variance 2014actualto2014budget 2015budgetto2014actual Item 2014budget 2014actual 2015budget Amount Percent Amount Percent BEP-relatedexpenses PrintingFederalReservenotes 745,387 656,810 -88,577.0 -11.9 642,527 -14,283 -2.2 Currencyreader 19,384 808 -18,576.0 -95.8 17,120 16,312 2018.8 Other 3,225 3,500 275.0 8.5 3,674 174 5.0 Boardexpenses Currencytransportation 33,222 27,460 -5,762.0 -17.3 29,235 1,775 6.5 Currencyqualityassuranceandcounterfeit deterrence 21,091 16,788 -4,303.0 -20.4 20,993 4,205 25.0 Currencyeducationprogram 4,357 2,036 -2,321.0 -53.3 4,390 2,354 115.6 Totalcostofnewcurrency 826,665 707,402 -119,263.0 -14.4 717,939 10,537 1.5 BEPBureauofEngravingandPrinting. tion,thecurrencyreaderprogram,thecurrency terlybasedonactualexpenses,ratherthanincluding qualityassurance(CQA)programandcounterfeit- anestimatedcostfortheprograminitsbillingrates. deterrenceresearch,andthecurrencyeducationprogram(CEP)constitutetheremaining10percent OtherReimbursementstotheBureau (table12). ofEngravingandPrinting The2015budgetincludes$3.7milliontoreimburse PrintingofFederalReserveNotes theBEPforexpensesincurredbyitsDestruction Thecurrencybudgetincludes$642.5millioninprint- StandardsandComplianceDivisionof theOfficeof ingcostsfor2015,whichrepresentsadecreaseof Compliance(OC)andMutilatedCurrencyDivision 13.8percentfromthe2014budgetand2.2percent (MCD)of theOfficeof FinancialManagement.The from2014actualexpenses.Thedecreaseisprimarily OCdevelopsstandardsforcancellationanddestrucbecausetheBEPagreedtoreducetheamountof its tionof unfitcurrencyandfornoteaccountabilityat workingcapitalfundby$40millionto$90million,to theReserveBanks,andreviewsReserveBanks’cash betteralignitwiththeBEP’sexpectedexpensesand operationsforcompliancewithitsstandards.Asa obligations. publicservice,theMCDalsoprocessesclaimsforthe redemptionof damagedormutilatedcurrency. CurrencyReaderProgram CurrencyTransportation The2015currencyreaderbudgetis$17.1million, whichisapproximately$16.3millionhigherthan The2015currencytransportationbudgetis 2014expensesand$2.3millionlowerthanthe2014 $29.2million,whichisnearly$1.8million,or6.5perbudget.Lowerreaderordersin2014resultedinthe cent,higherthan2014expenses.Thebudgetincludes majorityof 2014budgetedexpensesbeingmoved thecostof shippingnewcurrencyfromtheBEPto into2015.Thebudgetincludes$15.0milliontopur- ReserveBanks,of intra-Systemshipmentsof fitand chaseanddistributemorethan250,000currency unprocessedcurrency,andof returningcurrencypalreaderstoqualifiedindividualswhoareblindorvisu- letsfromtheReserveBankstotheBEP.Morenotes allyimpairedatnocosttotheuser.13Inaddition,the areprojectedtobeshippedin2015thanin2014 budgetincludes$1.8milliontoreimbursetheLibrary becausethe2015budgetincludesnearly6.0percent of Congressforadministeringtheprogramthrough morenotesthanthe2014estimate. theexistinginfrastructureof itsbookreaderpro- CurrencyQualityAssurance gram,whichismanagedbytheNationalLibraryService.TheBEPwillcontinuetobilltheBoardquar- The2015budgetfortheCQAprogramis$13.9million.ThebudgetwillallowtheCQAconsultantsto continuefacilitatingtheimplementationof thenew 13 TheBEPestimatesthatitmaydistributeupto500,000readers overathree-yearperiod. qualitysystemattheBEP;supporttheresearch,tech-

FederalReserveSystemBudgets 415 nology,andproductdevelopmentrequiredforthe informationonallcirculatingdesignsof Federal nextdesignfamilyof FederalReservenotes;andcon- ReservenotestotheglobalpublicandkeystaketinueprovidingtemporaryresourcestotheBEPto holdergroups. sustaincriticalprogramsthathavebeenimplemented forthequalitysystem. In2015,theCEPwillcontinuetousein-house CounterfeitDeterrence resourcesand,whenpossible,capitalizeonexisting ReserveBank,UnitedStatesSecretService,State The2015budgetforcounterfeit-deterrenceresearch Department,andBEPpartnershipsinordertominiis$7.1million.Thebudgetincludes$5.0millionfor mizeexpenses.Tasksthateithercannotbeorwould membershipintheCentralBankCounterfeitDeterbetooresource-intensivetobesourcedinternallywill renceGroup(CBCDG).TheCBCDGoperates becontracted;thesetasksaccountformorethan undertheauspicesof theG-10centralbankgover- 90percentof the2015CEPbudget.Themajor norstocombatdigitalcounterfeitingandincludes34 expensedriversforthe2015budgetincludethefulcentralbanks. fillmentof educationalmaterialsin30languages, internationaloutreachtobusinessesandretailers, CurrencyEducationProgram andhostinganddevelopingtheNewMoney.govedu- The2015CEPbudgetis$4.4million,whichrepre- cationalwebsite.Newinitiativesin2015includethe sentsanincreaseof nearly$2.4millionfrom2014 developmentof atailorededucationprogramforthe expensesbutisnearlyequivalenttothe2014budget. U.S.retailsectorandthedevelopmentof anew,com- TheCEPprogramprotectsandmaintainsconfidence prehensiveeducationalguideforconsumersand inU.S.currencyworldwidebyprovidingeducational businesses.

417 14 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.TheChairandtheViceChairmanof theBoardarealsonamedby thePresidentfromamongthemembersandareconfirmedbytheSenate.ThissectionlistsBoardmemberswho servedin2014.Forafulllistingof Boardmembersfrom1914throughthepresent,visitwww.federalreserve.gov/ aboutthefed/bios/board/boardmembership.htm. JanetL.Yellen StanleyFischer JeremyC.Stein Chair(asof February2014; ViceChairman(asof June2014; (resignedasof May2014) previously,ViceChair) previously,Member) JeromeH.Powell BenS.Bernanke DanielK.Tarullo LaelBrainard(asof June2014) Chairman(throughJanuary2014) SarahBloomRaskin (resignedasof March2014) DivisionsandOfficers Fifteendivisionssupportandcarryoutthemissionof theBoardof Governors,whichisbasedin Washington,D.C. OfficeofBoardMembers MichelleA.Smith DavidW.Skidmore WinthropP.Hambley Director AssistanttotheBoard SeniorAdviser LindaL.Robertson JenniferGallagher AdrienneD.Hurt AssistanttotheBoard SpecialAssistanttotheBoardfor Adviser CongressionalLiaison LucretiaM.Boyer TrevorA.Reeve AssistanttotheBoard SpecialAdvisertotheChair

418 101stAnnualReport|2014 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 MichaelJ.Lewandowski Secretary AssociateSecretary MargaretM.Shanks MicheleT.Fennell DeputySecretary AssistantSecretary DivisionofInternationalFinance StevenB.Kamin MarkS.Carey JamesA.Dahl Director AssociateDirector AssistantDirector ThomasA.Connors CharlesP.Thomas SallyM.Davies DeputyDirector AssociateDirector SeniorAdviser MichaelP.Leahy BethAnneWilson BrianM.Doyle DeputyDirector AssociateDirector SeniorAdviser ChristopherJ.Erceg ShaghilAhmed JaneHaltmaier SeniorAssociateDirector DeputyAssistantDirector SeniorAdviser DavidH.Bowman JosephW.Gruber JohnH.Rogers AssociateDirector DeputyAssistantDirector SeniorAdviser OfficeofFinancialStabilityPolicyandResearch J.NellieLiang MichaelT.Kiley JohnW.Schindler Director SeniorAssociateDirector AssistantDirector AndreasW.Lehnert RochelleM.Edge DeputyDirector DeputyAssociateDirector DivisionofMonetaryAffairs WilliamB.English EgonZakrajsek EdwardM.Nelson Director AssociateDirector AssistantDirector JamesA.Clouse WilliamF.Bassett MinWei DeputyDirector DeputyAssociateDirector AssistantDirector StephenA.Meyer MargaretG.DeBoer EllenE.Meade DeputyDirector DeputyAssociateDirector SeniorAdviser WilliamR.Nelson JaneE.Ihrig JoyceK.Zickler DeputyDirector DeputyAssociateDirector SeniorAdviser FabioM.Natalucci J.DavidLopez-Salido MaryT.Hoffman AssociateDirector DeputyAssociateDirector Adviser GretchenC.Weinbach MatthewM.Luecke RobertJ.Tetlow AssociateDirector AssistantDirector Adviser

FederalReserveSystemOrganization 419 DivisionofResearchandStatistics DavidW.Wilcox JoshuaH.Gallin PaulA.Smith Director DeputyAssociateDirector AssistantDirector MatthewJ.Eichner ElizabethK.Kiser KristinM.Vajs DeputyDirector DeputyAssociateDirector AssistantDirector JaniceShack-Marquez JohnJ.Stevens GlennB.Canner DeputyDirector DeputyAssociateDirector SeniorAdviser WilliamL.WascherIII StaceyTevlin MichaelCringoli DeputyDirector DeputyAssociateDirector SeniorAdviser DanielM.Covitz StephanieR.Aaronson WaynePassmore AssociateDirector AssistantDirector SeniorAdviser EricM.Engen GlennR.Follette AssociateDirector AssistantDirector RobinA.Prager SeniorAdviser DianaHancock ErikA.Heitfield AssociateDirector AssistantDirector JeremyRudd HeinrichT.Laubach ArthurB.Kennickell SeniorAdviser AssociateDirector AssistantDirector EricC.Engstrom DavidE.Lebow JohnM.Roberts Adviser AssociateDirector AssistantDirector PatrickC.McCabe MichaelG.Palumbo JohnE.Sabelhaus Adviser AssociateDirector AssistantDirector KarenM.Pence SeanD.Campbell StevenA.Sharpe Adviser DeputyAssociateDirector AssistantDirector JeffreyC.Campione ShaneM.Sherlund DeputyAssociateDirector AssistantDirector DivisionofBankingSupervisionandRegulation MichaelS.Gibson KevinM.Bertsch AnnaL.Hewko Director AssociateDirector DeputyAssociateDirector MaryannF.Hunter NidaDavis MichaelJ.Hsu DeputyDirector AssociateDirector DeputyAssociateDirector MarkE.VanDerWeide ChristopherFinger StevenP.Merriett DeputyDirector AssociateDirector DeputyAssociateDirector BarbaraJ.Bouchard AnnMisback NancyJ.Perkins SeniorAssociateDirector AssociateDirector DeputyAssociateDirector TimothyP.Clark RichardA.NaylorII TameikaL.Pope SeniorAssociateDirector AssociateDirector DeputyAssociateDirector JackP.JenningsII LisaH.Ryu RichardC.Watkins SeniorAssociateDirector AssociateDirector DeputyAssociateDirector ArthurW.Lindo MichaelJ.Sexton RobertT.Ashman SeniorAssociateDirector AssociateDirector AssistantDirector PeterJ.Purcell MichaelD.Solomon AdrienneT.Haden SeniorAssociateDirector AssociateDirector AssistantDirector WilliamG.Spaniel MaryL.Aiken ConstanceHorsley SeniorAssociateDirector DeputyAssociateDirector AssistantDirector ToddA.Vermilyea JefferyW.Gunther RyanP.Lordos SeniorAssociateDirector DeputyAssociateDirector AssistantDirector

420 101stAnnualReport|2014 DavidK.Lynch SuzanneL.Williams KeithA.Ligon AssistantDirector AssistantDirector Adviser RobertT.Maahs SarkisD.Yoghourtdjian MollyE.Mahar AssistantDirector AssistantDirector Adviser ThomasK.Odegard NorahM.Barger WilliamF.Treacy AssistantDirector SeniorAdviser Adviser CatherineA.Piche DavidS.Jones AssistantDirector SeniorAdviser LaurieF.Priest JohnBeebe AssistantDirector Adviser DivisionofConsumerandCommunityAffairs EricS.Belsky 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 PaulW.Bettge DavidC.Mills Director AssociateDirector AssistantDirector JeffreyC.Marquardt LisaK.Hoskins LawrenceE.Mize DeputyDirector DeputyAssociateDirector AssistantDirector SusanV.Foley JenniferA.Lucier LoreleiW.Pagano SeniorAssociateDirector DeputyAssociateDirector AssistantDirector KennethD.Buckley StuartE.Sperry JeffreyD.Walker AssociateDirector DeputyAssociateDirector AssistantDirector GregoryL.Evans ShaunE.Ferrari AssociateDirector AssistantDirector MichaelJ.Lambert TimothyW.Maas AssociateDirector AssistantDirector OfficeoftheChiefOperatingOfficer DonaldV.Hammond MichaelKraemer Jeff Monica Chief OperatingOfficer DeputyChief DataOfficer AssistantDirector MichelineM.Casey SheilaClark Chief DataOfficer DiversityandInclusionPrograms Director

FederalReserveSystemOrganization 421 DivisionofFinancialManagement WilliamL.Mitchell ChristineM.Fields ChristopherJ.Suma DirectorandChief Financial AssociateDirector AssistantDirector Officer JeffreyR.Peirce KarenL.Vassallo PatrickJ.McClanahan DeputyAssociateDirector AssistantDirector DeputyDirectorandController 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 JeffreyA.Martin ToddA.Glissman SeniorAssociateDirector AssistantDirector SeniorAdviser DivisionofInformationTechnology SharonL.Mowry GlennS.Eskow TheresaC.Palya Director DeputyAssociateDirector AssistantDirector WayneA.Edmondson MariettaMurphy VirginiaM.Wall DeputyDirector DeputyAssociateDirector AssistantDirector LisaM.Bell KassandraAranaQuimby EdgarWang AssociateDirector DeputyAssociateDirector AssistantDirector RaymondRomero SherylLynnWarren CharlesB.YoungII AssociateDirector DeputyAssociateDirector AssistantDirector KofiA.Sapong RajasekharR.Yelisetty TillenaG.Clark AssociateDirector DeputyAssociateDirector Adviser WilliamDennison CanXuanNguyen DeputyAssociateDirector AssistantDirector OfficeofInspectorGeneral MarkBialek EliseM.Ennis LawrenceK.Valett InspectorGeneral AssociateInspectorGeneral AssociateInspectorGeneral JamesA.Ogden MelissaM.Heist AlbertoRivera-Fournier DeputyInspectorGeneral AssociateInspectorGeneral AssistantInspectorGeneral JacquelineM.Becker AndrewPatchanJr. AssociateInspectorGeneral AssociateInspectorGeneral

422 101stAnnualReport|2014 FEDERAL OPEN MARKET COMMITTEE TheFederalOpenMarketCommitteeismadeupof thesevenmembersof theBoardof Governors;thepresidentof theFederalReserveBankof NewYork;andfourof theremainingelevenFederalReserveBankpresidents,whoserveone-yeartermsonarotatingbasis.During2014,theFederalOpenMarketCommitteeheld eightregularlyscheduledmeetingsandoneunscheduledmeeting(seesection9,“Minutesof FederalOpenMarketCommitteeMeetings”). Members JanetL.Yellen StanleyFischer SarahBloomRaskin Chair(asof February2014; Member,Boardof Governors(as Member,Boardof Governors previously,Member),Boardof of May2014) (resignedMarch13,2014) Governors EstherL.George EricRosengren BenS.Bernanke President,FederalReserveBank President,FederalReserveBank Chairman,Boardof Governors of KansasCity of Boston (throughJanuary2014) LorettaJ.Mester JeremyC.Stein WilliamC.Dudley President(asof June2014; Member,Boardof Governors ViceChairman,President,Federal previously,AssociateEconomist), (resignedMay28,2014) ReserveBankof NewYork FederalReserveBankof Cleveland DanielK.Tarullo LaelBrainard Member,Boardof Governors Member,Boardof Governors(as SandraPianalto of June2014) President,FederalReserveBank of Cleveland(throughMay2014) JamesBullard President,FederalReserveBank JeromeH.Powell of St.Louis Member,Boardof Governors AlternateMembers ChristineM.Cumming JeffreyM.Lacker JohnC.Williams FirstVicePresident,Federal President,FederalReserveBank President,FederalReserveBank ReserveBankof NewYork of Richmond of SanFrancisco CharlesL.Evans DennisP.Lockhart President,FederalReserveBank President,FederalReserveBank of Chicago of Atlanta Officers WilliamB.English ThomasC.Baxter JamesA.Clouse SecretaryandEconomist DeputyGeneralCounsel AssociateEconomist MatthewM.Luecke RichardM.Ashton ThomasA.Connors DeputySecretary AssistantGeneralCounsel AssociateEconomist MichelleA.Smith StevenB.Kamin EvanF.Koenig AssistantSecretary Economist AssociateEconomist ScottG.Alvarez DavidW.Wilcox ThomasLaubach GeneralCounsel Economist AssociateEconomist

FederalReserveSystemOrganization 423 MichaelP.Leahy SamuelSchulhofer-Wohl SimonPotter AssociateEconomist AssociateEconomist Manager,SystemOpenMarket Account LorettaJ.Mester MarkE.Schweitzer AssociateEconomist(through AssociateEconomist LorieK.Logan May2014) DeputyManager,SystemOpen WilliamWascher PaoloA.Pesenti MarketAccount AssociateEconomist AssociateEconomist

424 101stAnnualReport|2014 BOARD OF GOVERNORS ADVISORY COUNCILS TheFederalReserveBoardusesadvisorycommitteesincarryingoutitsvariedresponsibilities.Tolearnmore, visitwww.federalreserve.gov/aboutthefed/advisorydefault.htm. FederalAdvisoryCouncil TheFederalAdvisoryCouncil—astatutorybodyestablishedundertheFederalReserveAct—consultswithand advisestheBoardof GovernorsonallmatterswithintheBoard’sjurisdiction.Itiscomposedof onerepresentativefromeachFederalReserveDistrict,chosenbytheReserveBankinthatDistrict.Twomembersof thecouncilserveasitspresidentandvicepresident.TheFederalReserveActrequiresthecounciltomeetinWashington, D.C.,atleastfourtimesayear.In2014,thecouncilmetonFebruary6–7,May8–9,September18–19,and December4–5.ThecouncilmetwiththeBoardonFebruary7,May9,September19,andDecember5,2014. Members District1 District5 District9 RichardE.Holbrook KellyS.King PatrickJ.Donovan ChairmanandChief Executive ChairmanandChief Executive PresidentandChief Executive Officer,EasternBank Officer,BB&T Officer,BremerFinancial Corporation,Boston,MA Corporation,Winston-Salem,NC Corporation,St.Paul,MN District2 District6 District10 O.B.GraysonHallJr. JonathanM.Kemper JamesP.Gorman Chairman,President,andChief ChairmanandChief Executive ChairmanandChief Executive ExecutiveOfficer,Regions Officer,CommerceBank,N.A. Officer,MorganStanley,New FinancialCorporation, (KansasCity),KansasCity,MO York,NY Birmingham,AL District11 District3 District7 RalphW.BabbJr. ScottV.Fainor DavidW.Nelms ChairmanandChief Executive PresidentandChief Executive ChairmanandChief Executive Officer,ComericaInc.and Officer,NationalPenn Officer,DiscoverFinancial ComericaBank,Dallas,TX Bancshares,Inc.,Allentown,PA Services,Riverwoods,IL District12 District4 District8 J.MichaelShepherd PaulG.Greig RonaldJ.Kruszewski ChairmanandChief Executive Chairman,President,andChief Chairman,President,andChief Officer,Bankof theWestand ExecutiveOfficer,FirstMerit ExecutiveOfficer,StifelFinancial BancWestCorporation,San Corporation,Akron,OH Corp.,St.Louis,MO Francisco,CA Officers J.MichaelShepherd DavidW.Nelms President VicePresident

FederalReserveSystemOrganization 425 CommunityDepositoryInstitutionsAdvisoryCouncil TheCommunityDepositoryInstitutionsAdvisoryCounciladvisestheBoardof Governorsontheeconomy, leadingconditions,andotherissuesof interesttocommunitydepositoryinstitutions.Membersareselected fromamongrepresentativesof banks,thriftinstitutions,andcreditunionswhoareservingonlocaladvisory councilsatthe12FederalReserveBanks.Onememberof eachof theReserveBankcouncilsservesonthe CommunityDepositoryInstitutionsAdvisoryCouncil.Twomembersof thecouncilserveasitspresidentand vicepresident.ThecouncilusuallymeetswiththeBoardtwiceayearinWashington,D.C.In2014,thecouncil metonApril4andNovember7. Members District1 District5 District9 ChandlerJ.Howard JanRoche BrianL.Johnson PresidentandChief Executive PresidentandChief Executive Chief ExecutiveOfficer,Choice Officer,LibertyBank, Officer,StateDepartmentFCU, FinancialGroup,Grand Middletown,CT Alexandria,VA Forks,ND District2 District6 District10 MichaelJ.Castellana DouglasL.Williams JohnB.Dicus PresidentandChief Executive PresidentandChief Executive Chairman,President,andChief Officer,SEFCU,Albany,NY Officer,AtlanticCapitalBank, ExecutiveOfficer,CapitolFederal Atlanta,GA SavingsBank,Topeka,KS District3 DennisD.Cirucci District7 District11 PresidentandChief Executive TimothyG.Marshall DrakeMills Officer,AllianceBank, PresidentandChief Executive PresidentandChief Executive Broomall,PA Officer,Bankof AnnArbor,Ann Officer,CommunityTrustBank, Arbor,MI Ruston,LA District4 EddieL.Steiner District8 District12 PresidentandChief Executive GlennD.Barks JohnV.EvansJr. Officer,TheCommercialand PresidentandChief Executive Chief ExecutiveOfficer,D.L. SavingsBankof Millersburg, Officer,FirstCommunityCredit EvansBank,Burley,ID Ohio,Millersburg,OH Union,Chesterfield,MO Officers DrakeMills JohnB.Dicus President VicePresident

426 101stAnnualReport|2014 ModelValidationCouncil TheModelValidationCouncilwasestablishedin2012bytheBoardof Governorstoprovideexpertandindependentadviceonitsprocesstorigorouslyassessthemodelsusedinstresstestsof bankinginstitutions.The Dodd-FrankWallStreetReformandConsumerProtectionActrequiredtheFederalReservetoconductannual stresstestsof largebankholdingcompaniesandsystemicallyimportant,nonbankfinancialinstitutionssupervisedbytheBoard.TheModelValidationCouncilprovidesinputontheBoard’seffortstoassesstheeffectivenessof themodelsusedinthestresstests.Thecouncilisintendedtoimprovethequalityof theFederal Reserve’smodelassessmentprogramandtostrengthentheconfidenceintheintegrityandindependenceof theprogram. Members AllanTimmermann,Chair(asof PeterChristoffersen PhilipStrahan August2014;previously,Member) Professor,Universityof Toronto Professor,BostonCollege(asof Professor,Universityof PhilippeJorion October2014) CaliforniaatSanDiego Professor,Universityof NancyWallace MarkFlannery,Chair CaliforniaatIrvine Professor,Universityof Professor,Universityof Florida ChesterSpatt CaliforniaatBerkeley (resignedJuly2014) Professor,CarnegieMellon University

FederalReserveSystemOrganization 427 FEDERAL RESERVE BANKS AND BRANCHES Tocarryouttheday-to-dayoperationsof theFederalReserveSystem,thenationhasbeendividedinto 12FederalReserveDistricts,eachwithaReserveBank.Themajorityof ReserveBanksalsohaveatleastone Branch. ReserveBankandBranchDirectors AsrequiredbytheFederalReserveAct,eachFederalReserveBankissupervisedbyanine-memberboardwith threedifferentclassesof threedirectorseach:ClassAdirectors,whoarenominatedandelectedbythemember banksinthatDistricttorepresentthestockholdingbanks;ClassBdirectors,whoarenominatedandelectedby thememberbankstorepresentthepublic;andClassCdirectors,whoareappointedbytheBoardof Governors torepresentthepublic.ClassBandClassCdirectorsareselectedwithdue,butnotexclusive,considerationto theinterestsof agriculture,commerce,industry,services,labor,andconsumers.EachFederalReserveBank Branchalsohasaboardwitheitherfiveorsevendirectors.Amajorityof thedirectorsoneachBranchboard areappointedbytheFederalReserveBank,withtheremainingdirectorsappointedbytheBoardof Governors. FormoreinformationonReserveBankandBranchdirectors,seewww.federalreserve.gov/aboutthefed/ directors/about.htm. ReserveBankandBranchdirectorsarelistedbelow.Foreachdirector,theclassof directorship,thedirector’s principalplaceof business,andtheexpirationdateof thedirector’scurrenttermareshown. District1–Boston ClassA ClassB ClassC KathrynG.Underwood,2014 GaryL.Gottlieb,2014 WilliamD.Nordhaus,2014 PresidentandChief Executive PresidentandChief Executive SterlingProfessorof Economics, Officer,LedyardNationalBank, Officer,PartnersHealthCare YaleUniversity,NewHaven,CT Hanover,NH System,Inc.,Boston,MA CatherineD’Amato,2015 PeterL.Judkins,2015 RogerS.Berkowitz,2015 PresidentandChief Executive PresidentandChief Executive PresidentandChief Executive Officer,TheGreaterBostonFood Officer,FranklinSavingsBank, Officer,LegalSeaFoods,LLC, Bank,Boston,MA Farmington,ME Boston,MA JohnF.Fish,2016 JosephL.Hooley,2016 LauraJ.Sen,2016 ChairmanandChief Executive ChairmanandChief Executive PresidentandChief Executive Officer,SuffolkConstruction Officer,StateStreetCorporation, Officer,BJ’sWholesaleClub, Company,Inc.,Boston,MA Boston,MA Inc.,Westborough,MA District2–NewYork ClassA RichardL.Carrión,2015 GeraldH.Lipkin,2016 ChairmanandChief Executive Chairman,President,andChief PaulP.Mello,2014 Officer,Popular,Inc.,San ExecutiveOfficer,ValleyNational PresidentandChief Executive Juan,PR Bank,Wayne,NJ Officer,SolvayBank,Solvay,NY

428 101stAnnualReport|2014 ClassB DavidM.Cote,2016 SaraHorowitz,2015 ChairmanandChief Executive ExecutiveDirector,Freelancers TerryJ.Lundgren,2014 Officer,HoneywellInternational Union,Brooklyn,NY ChairmanandChief Executive Inc.,Morristown,NJ Officer,Macy’s,Inc.,New MarcTessier-Lavigne,2016 York,NY President,TheRockefeller ClassC University,NewYork,NY GlennH.Hutchins,2015 EmilyK.Rafferty,2014 Co-Founder,SilverLake,New President,TheMetropolitan York,NY Museumof Art,NewYork,NY District3–Philadelphia ClassA ClassB ClassC FrederickC.PetersII,2014 PatrickT.Harker,2014 MichaelJ.Angelakis,2014 ChairmanandChief Executive President,Universityof ViceChairmanandChief Officer,BrynMawrTrust Delaware,Newark,DE FinancialOfficer,Comcast Company,BrynMawr,PA Corporation,Philadelphia,PA RosemaryTurner,2015 DavidR.Hunsicker,2015 JamesE.Nevels,2015 President,UPS–NorthCalifornia Chairman,President,andChief FounderandChairman,The District,Oakland,CA ExecutiveOfficer,NewTripoli SwarthmoreGroup, Bank,NewTripoli,PA EdwardJ.Graham,2016 Philadelphia,PA ChairmanandChief Executive WilliamS.Aichele,2016 BrianMcNeill,2016 Officer,SouthJerseyIndustries, Chairman,UnivestCorporation PresidentandChief Executive Folsom,NJ of Pennsylvania,Souderton,PA Officer,TouchPoint,Inc., Concordville,PA

FederalReserveSystemOrganization 429 District4–Cleveland ClassA CincinnatiBranch PittsburghBranch ToddA.Mason,2014 AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank 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 SeanMcDonald,2014 ChairmanandChief Executive Heights,KY PresidentandChief Executive Officer,FirstFinancialBancorp, AmosL.Otis,2014 Officer,PrecisionTherapeutics, Cincinnati,OH Founder,President,andChief Inc.,Pittsburgh,PA KevinT.Kabat,2016 ExecutiveOfficer,SoBran,Inc., ViceChairmanandChief GrantOliphant,2015 Dayton,OH ExecutiveOfficer,FifthThird President,TheHeinz Bancorp,Cincinnati,OH DonaldE.Bloomer,2015 Endowments,Pittsburgh,PA PresidentandChief Executive RobertP.Oeler,2016 ClassB Officer,CitizensNationalBank, PresidentandChief Executive Somerset,KY TilmonF.Brown,2014 Officer,DollarBank, Chief ExecutiveOfficer,New AustinW.Keyser,2016 Pittsburgh,PA HorizonsBakingCompany, MidwestRegionalDirector, AppointedbytheBoardofGovernors Norwalk,OH AFL-CIO,Columbus,OH CharlesL.HammelIII,2014 SusanTomasky,2015 AppointedbytheBoardofGovernors President,PITTOHIO, EnergyConsultantandFormer DeborahA.Feldman,2014 Pittsburgh,PA President,AEPTransmission, PresidentandChief Executive Columbus,OH DawneS.Hickton,2015 Officer,DaytonChildren’s ViceChair,President,andChief HalKeller,2016 Hospital,Dayton,OH ExecutiveOfficer,RTI President,OhioCapital CharlesH.Brown,2015 InternationalMetals,Inc., CorporationforHousing, VicePresidentandSecretary, Pittsburgh,PA Columbus,OH ToyotaMotorEngineeringand DorisCarsonWilliams,2016 Manufacturing,NorthAmerica, ClassC PresidentandChief Executive Erlanger,KY JohnP.Surma,2014 Officer,AfricanAmerican RetiredChairmanandChief ValarieL.Sheppard,2016 Chamberof Commerce,Western ExecutiveOfficer,UnitedStates SeniorVicePresident, Pennsylvania,Pittsburgh,PA SteelCorporation,Pittsburgh,PA Comptroller,andTreasurer,The Procter&GambleCompany, RichardK.Smucker,2015 Cincinnati,OH Chief ExecutiveOfficer,TheJ.M. SmuckerCompany,Orrville,OH ChristopherM.Connor,2016 ChairmanandChief Executive Officer,TheSherwin-Williams Company,Cleveland,OH

430 101stAnnualReport|2014 District5–Richmond ClassA BaltimoreBranch CharlotteBranch EdwardL.WillinghamIV,2014 AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank Chief OperatingOfficer,First RichardBernstein,2014 PaulE.Szurek,2014 CitizensBankandFirstCitizens PresidentandChief Executive Chief FinancialOfficer,Biltmore BancShares,Inc.,Raleigh,NC Officer,LWRCInternational, Farms,LLC,Asheville,NC BradE.Schwartz,2015 LLC,Cambridge,MD JohnS.Kreighbaum,2015 Chief ExecutiveOfficer,Monarch AnitaG.Newcomb,2015 FormerPresidentandChief BankandMonarchFinancial President,A.G.Newcomb&Co., ExecutiveOfficer,Carolina Holdings,Inc.,Chesapeake,VA Columbia,MD PremierBankandPremara C.RichardMillerJr.,2016 Financial,Inc.,Charlotte,NC PresidentandChief Executive ChristopherJ.Estes,2015 Officer,WoodsboroBank, PresidentandChief Executive LuciaZ.Griffith,2015 Woodsboro,MD Officer,NationalHousing Chief ExecutiveOfficerand Conference,Washington,DC Principal,METROLandmarks, ClassB Charlotte,NC MaryAnnScully,2016 MarshallO.Larsen,2014 Chairman,President,andChief RobertR.HillJr.,2016 RetiredChairman,President,and ExecutiveOfficer,Howard Chief ExecutiveOfficer,South Chief ExecutiveOfficer,Goodrich Bancorp,EllicottCity,MD StateBankandSouthState Corporation,Charlotte,NC Corporation,Columbia,SC AppointedbytheBoardofGovernors WilburE.Johnson,2015 JennyG.Morgan,2014 AppointedbytheBoardofGovernors ManagingPartner,Young PresidentandChief Executive ClaudeZ.Demby,2014 ClementRivers,LLP, Officer,basys,inc., VicePresidentof Business Charleston,SC Linthicum,MD Development,Cree,Inc., CharlesR.Patton,2016 Durham,NC StephenR.Sleigh,2015 PresidentandChief Operating FundDirector,IAMNational LauraY.Clark,2015 Officer,AppalachianPower PensionFund,Washington,DC ExecutiveDirector,Renaissance Company,Charleston,WV WestCommunityInitiative, SamuelL.Ross,2016 Charlotte,NC ClassC Chief ExecutiveOfficer,Bon LindaD.Rabbitt,2014 SecoursBaltimoreHealthSystem, ElizabethA.Fleming,2016 ChairmanandChief Executive Baltimore,MD President,ConverseCollege, Officer,RandConstruction Spartanburg,SC Corporation,Washington,DC RussellC.Lindner,2015 ChairmanandChief Executive Officer,TheForgeCompany, Washington,DC MargaretG.Lewis,2016 RetiredPresident,HCACapital Division,Richmond,VA

FederalReserveSystemOrganization 431 District6–Atlanta ClassA BirminghamBranch D.KevinJones,2015 PresidentandChief Executive WilliamH.RogersJr.,2014 AppointedbytheFederalReserveBank Officer,MIDFLORIDACredit ChairmanandChief Executive MackeB.Mauldin,2014 Union,Lakeland,FL Officer,SunTrustBanks,Inc., President,BankIndependent, Atlanta,GA Sheffield,AL MichaelJ.Grebe,2016 ChairmanandChief Executive GerardR.Host,2015 JohnA.Langloh,2015 Officer,InterlineBrands,Inc., PresidentandChief Executive PresidentandChief Executive Jacksonville,FL Officer,TrustmarkCorporation, Officer,UnitedWayof Central Jackson,MS Alabama,Birmingham,AL AppointedbytheBoardofGovernors T.AnthonyHumphries,2016 JamesK.Lyons,2015 LyndaL.Weatherman,2014 PresidentandChief Executive DirectorandChief Executive PresidentandChief Executive Officer,NobleBank&Trust, Officer,AlabamaStatePort Officer,EconomicDevelopment Anniston,AL Authority,Mobile,AL Commissionof Florida’sSpace RobertW.Dumas,2016 Coast,Rockledge,FL ClassB PresidentandChief Executive HaroldMills,2015 RenéeLewisGlover,2014 Officer,AuburnBank, Chief ExecutiveOfficer, FormerPresidentandChief Auburn,AL ZeroChaos,Orlando,FL ExecutiveOfficer,Atlanta AppointedbytheBoardofGovernors CarolynM.Fennell,2016 HousingAuthority,Atlanta,GA ThomasR.Stanton,2014 Directorof PublicAffairs,Greater ClarenceOtisJr.,2015 ChairmanandChief Executive OrlandoAviationAuthority, FormerChairmanandChief Officer,ADTRAN,Inc., OrlandoInternationalAirport, ExecutiveOfficer,Darden Huntsville,AL Orlando,FL Restaurants,Inc.,Orlando,FL PamelaB.Hudson,MD,2015 Chief ExecutiveOfficer, MiamiBranch JoséS.Suquet,2016 CrestwoodMedicalCenter, Chairman,President,andChief AppointedbytheFederalReserveBank Huntsville,AL ExecutiveOfficer,Pan-American CarolC.Lang,2014 LifeInsuranceGroup, BrandonW.Bishop,2016 President,HealthLink NewOrleans,LA InternationalRepresentative, Enterprises,Inc.,Miami SouthernRegion,International Beach,FL ClassC Unionof OperatingEngineers, Birmingham,AL FacundoL.Bacardi,2014 ThomasI.Barkin,2014 Chairman,BacardiLimited,Coral Director,McKinsey&Company, JacksonvilleBranch Gables,FL Atlanta,GA AppointedbytheFederalReserveBank MillarWilson,2015 ThomasA.Fanning,2015 HughF.Dailey,2014 ViceChairmanandChief Chairman,President,andChief PresidentandChief Executive ExecutiveOfficer,Mercantil ExecutiveOfficer,Southern Officer,CommunityBank& Commercebank,Coral Company,Atlanta,GA Trustof Florida,Ocala,FL Gables,FL MichaelJ.Jackson,2016 OscarJ.Horton,2015 GaryL.Tice,2016 ChairmanandChief Executive PresidentandChief Executive ChairmanandChief Executive Officer,AutoNation,Inc.,Ft. Officer,SunStateInternational Officer,FirstFloridaIntegrity Lauderdale,FL Trucks,LLC,Tampa,FL Bank,Naples,FL

432 101stAnnualReport|2014 AppointedbytheBoardofGovernors WilliamY.CarrollJr.,2016 SuzanneT.Mestayer,2015 ThomasW.Hurley,2014 PresidentandChief Executive ManagingPrincipal,ThirtyNorth ChairmanandChief Executive Officer,SmartBank,Pigeon Investments,LLC,New Officer,BeckerHolding Forge,TN Orleans,LA Corporation,VeroBeach,FL AppointedbytheBoardofGovernors ElizabethA.Ardoin,2016 AlbertoDosal,2015 ScottMcWilliams,2014 SeniorExecutiveVicePresident– ChairmanandChief Executive ExecutiveChairmanandChief Directorof Communications, Officer,DosalCapital,LLC, CustomerOfficer,OHL, IBERIABANK,Lafayette,LA Doral,FL Brentwood,TN AppointedbytheBoardofGovernors WilliamJ.Krueger,2015 RolandoMontoya,2016 T.LeeRobinsonJr.,2014 Chairman,JATCOAmericas, Provost,MiamiDadeCollege, President,OHC,Inc.,Mobile,AL Franklin,TN Miami,FL KevinP.ReillyJr.,2015 KathleenCalligan,2016 PresidentandChairmanof the NashvilleBranch Chief ExecutiveOfficer,Better Board,LamarAdvertising BusinessBureauMiddle AppointedbytheFederalReserveBank Company,BatonRouge,LA Tennessee,Nashville,TN DanW.Hogan,2014 TerrieP.Sterling,2016 Chief OperatingOfficer,CapStar NewOrleansBranch ExecutiveVicePresidentand Bank,Nashville,TN Chief OperatingOfficer,Our AppointedbytheFederalReserveBank KentM.Adams,2015 CarlJ.Chaney,2014 Ladyof theLakeRegional MedicalCenter,BatonRouge,LA PresidentandChief Executive PresidentandChief Executive Officer,CaterpillarFinancial Officer,HancockHolding ServicesCorporation,Vice Company,NewOrleans,LA President,CaterpillarInc., PhillipR.May,2015 Nashville,TN PresidentandChief Executive JenniferS.Banner,2015 Officer,EntergyLouisiana,LLC Chief ExecutiveOfficer,Schaad andEntergyGulf States Companies,LLC,Knoxville,TN Louisiana,L.L.C.,Jefferson,LA District7–Chicago ClassA ClassB ClassC FrederickH.Waddell,2014 NeldaJ.Connors,2014 JeffreyA.Joerres,2014 ChairmanandChief Executive ChairwomanandChief Executive ExecutiveChairman, Officer,NorthernTrust Officer,PineGroveHoldings, ManpowerGroup,Milwaukee,WI CorporationandTheNorthern LLC,Chicago,IL GregBrown,2015 TrustCompany,Chicago,IL TerryMazany,2015 ChairmanandChief Executive WilliamM.FarrowIII,2015 PresidentandChief Executive Officer,MotorolaSolutions,Inc., PresidentandChief Executive Officer,TheChicagoCommunity Schaumburg,IL Officer,UrbanPartnershipBank, Trust,Chicago,IL AnneR.Pramaggiore,2016 Chicago,IL JorgeRamirez,2016 PresidentandChief Executive AbramA.Tubbs,2016 President,ChicagoFederationof Officer,ComEd,Chicago,IL ChairmanandChief Executive Labor,Chicago,IL Officer,OhnwardBank&Trust, Cascade,IA

FederalReserveSystemOrganization 433 DetroitBranch SheilahP.Clay,2015 LouAnnaK.Simon,2015 PresidentandChief Executive President,MichiganState AppointedbytheFederalReserveBank Officer,NeighborhoodService University,EastLansing,MI SusanM.Collins,2014 Organization,Detroit,MI DouglasW.Stotlar,2016 JoanandSanfordWeillDeanof NancyM.Schlichting,2016 PresidentandChief Executive PublicPolicy,Universityof Chief ExecutiveOfficer,Henry Officer,Con-wayInc.,Ann Michigan,AnnArbor,MI FordHealthSystem,Detroit,MI Arbor,MI FernandoRuiz,2014 AppointedbytheBoardofGovernors CorporateVicePresidentand MichaelE.Bannister,2014 Treasurer,TheDowChemical RetiredChairmanandChief Company,Midland,MI ExecutiveOfficer,FordMotor CreditCompany,Dearborn,MI District8–St.Louis ClassA ClassB ClassC SusanS.Stephenson,2014 GregoryM.Duckett,2014 RakeshSachdev,2014 Co-ChairmanandPresident, SeniorVicePresidentandChief PresidentandChief Executive IndependentBank,Memphis,TN LegalOfficer,BaptistMemorial Officer,Sigma-AldrichCorp.,St. HealthCareCorporation, Louis,MO WilliamE.Chappel,2015 Memphis,TN PresidentandChief Executive GeorgePaz,2015 Officer,TheFirstNationalBank, SonjaYatesHubbard,2015 ChairmanandChief Executive Vandalia,IL Chief ExecutiveOfficer,E-ZMart Officer,ExpressScripts, Stores,Inc.,Texarkana,TX St.Louis,MO D.BryanJordan,2016 Chairman,President,andChief CalMcCastlain,2016 SharonD.Fiehler,2016 ExecutiveOfficer,FirstHorizon Partner,DoverDixonHorne RetiredExecutiveVicePresident, NationalCorporation, PLLC,LittleRock,AR Officeof theChief Executive Memphis,TN Officer,PeabodyEnergy, St.Louis,MO

434 101stAnnualReport|2014 LittleRockBranch LouisvilleBranch MemphisBranch AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank KeithGlover,2014 MalcolmBryant,2014 ClydeWarrenNunn,2014 PresidentandChief Executive President,TheMalcolmBryant ChairmanandPresident,Security Officer,ProducersRiceMill,Inc., Corporation,Owensboro,KY Bancorpof Tennessee,Inc., Stuttgart,AR Halls,TN KevinShurn,2014 R.MolitorFordJr.,2014 JohnT.Womack,2014 PresidentandOwner,Superior ViceChairmanandChief ChairmanandChief Executive MaintenanceCo., ExecutiveOfficer,Commercial Officer,ArvestBank-Central Elizabethtown,KY BankandTrustCompany, Arkansas,LittleRock,AR JonA.Lawson,2015 Memphis,TN RonaldB.Jackson,2015 President,Chief ExecutiveOfficer, LisaMcDanielHawkins,2015 CommunityChairman,Simmons andChairman,Bankof Ohio President,RoomtoRoomInc., FirstNationalBankof Pine County,BeaverDam,KY Tupelo,MS Bluff,Russellville,AR DavidP.Heintzman,2016 J.BriceFletcher,2016 MichaelA.Cook,2016 ChairmanandChief Executive ChairmanandChief Executive SeniorVicePresidentand Officer,StockYardsBank& Officer,FirstNationalBankof AssistantTreasurer,Wal-Mart TrustCompany,Louisville,KY EasternArkansas,Forrest Stores,Inc.,Bentonville,AR City,AR AppointedbytheBoardofGovernors AppointedbytheBoardofGovernors GeraldR.Martin,2014 AppointedbytheBoardofGovernors RayC.Dillon,2014 VicePresident,RiverHillCapital, LawrenceC.Long,2014 PresidentandChief Executive LLC,Louisville,KY Partner,St.RestPlantingCo., Officer,DelticTimber Indianola,MS SusanE.Parsons,2015 Corporation,ElDorado,AR Chief FinancialOfficer,Secretary, CharlieE.ThomasIII,2015 RobertMartinez,2015 andTreasurer,KochEnterprises, RegionalDirectorof External& Owner,RanchoLaEsperanza, Inc.,Evansville,IN LegislativeAffairs,AT&T DeQueen,AR Tennessee,Memphis,TN RandyW.Schumaker,2016 CarolynChismHardy,2016 P.MarkWhite,2016 PresidentandChief Management PresidentandChief Executive PresidentandChief Executive Officer,LoganAluminum,Inc., Officer,ChismHardy Officer,ArkansasBlueCrossand Russellville,KY Investments,LLCandHardy BlueShield,LittleRock,AR LogisticsSolutions,LLC, Collierville,TN District9–Minneapolis ClassA CatherineT.Kelly,2016 ChristineHamilton,2015 PresidentandChief Executive ManagingPartner,Christiansen KennethA.Palmer,2014 Officer,MinnesotaBank&Trust, LandandCattle,Ltd, Chairman,President,andChief Edina,MN Kimball,SD ExecutiveOfficer,Range FinancialCorporation&Range LawrenceR.Simkins,2016 ClassB Bank,NA,Marquette,MI PresidentandChief Executive HowardA.Dahl,2014 Officer,TheWashington RandyL.Newman,2015 PresidentandChief Executive Companies,Missoula,MT ChairmanandChief Executive Officer,AmityTechnologyLLC, Officer,AlerusFinancial,NAand Fargo,ND AlerusFinancialCorp.,Grand Forks,ND

FederalReserveSystemOrganization 435 ClassC HelenaBranch AppointedbytheBoardofGovernors MayKaoY.Hang,2014 DavidB.Solberg,2014 AppointedbytheFederalReserveBank PresidentandChief Executive Owner,SevenBlackfootRanch DuaneKurokawa,2014 Officer,AmherstH.Wilder Company,Billings,MT President,WesternBankof Wolf Foundation,St.Paul,MN Point,Wolf Point,MT MarshaGoetting,2015 RandallJ.Hogan,2015 ProfessorandExtensionFamily BarbaraStiffarm,2015 ChairmanandChief Executive EconomicsSpecialist,Montana ExecutiveDirector,Opportunity Officer,Pentair, StateUniversity,Bozeman,MT Link,Inc.,Havre,MT Minneapolis,MN KendallJ.Powell,2016 ThomasR.Swenson,2016 ChairmanandChief Executive PresidentandChief Executive Officer,GeneralMills, Officer,Bankof Montanaand Minneapolis,MN Bancorpof MontanaHolding Company,Missoula,MT District10–KansasCity ClassA SteveMaestas,2015 AppointedbytheBoardofGovernors PaulJ.Thompson,2014 Chief ExecutiveOfficer,Maestas LarissaHerda,2014 DevelopmentGroup, PresidentandChief Executive Chair,Chief ExecutiveOfficer, Officer,CountryClubBank, Albuquerque,NM andPresident,twtelecominc., KansasCity,MO RoseWashington,2016 Littleton,CO DavidW.Brownback,2015 ExecutiveDirector,Tulsa RichardL.Lewis,2015 PresidentandChief Executive EconomicDevelopment PresidentandChief Executive Officer,CitizensStateBank& Corporation,Tulsa,OK Officer,RTLNetworksInc., TrustCo.,Ellsworth,KS Denver,CO DenverBranch MaxT.Wake,2016 MargaretM.Kelly,2016 President,JonesNationalBank& AppointedbytheFederalReserveBank Chief ExecutiveOfficer, TrustCo.,Seward,NE BrianR.Wilkinson,2014 RE/MAX,LLC,Denver,CO President,SteeleStreetBank& ClassB Trust,Denver,CO OklahomaCityBranch RichardK.Ratcliffe,2014 LillyMarks,2015 AppointedbytheFederalReserveBank Chairman,Ratcliffe’sInc., Weatherford,OK VicePresidentforHealthAffairs LindaCapps,2014 andExecutiveViceChancellor, ViceChairman,Citizen JohnT.StoutJr.,2015 Universityof Coloradoand PotawatomiNation, Chief ExecutiveOfficer,Plaza AnschutzMedicalCampus, Shawnee,OK BelmontManagementGroup Aurora,CO LLC,ShawneeMission,KS MichaelC.Coffman,2015 AnneHainesYatskowitz,2015 PresidentandChief Executive LenC.Rodman,2016 PresidentandChief Executive Officer,PanhandleOilandGas, FormerChairman,President,and Officer,ACCIONNew Inc.,OklahomaCity,OK Chief ExecutiveOfficer,Black& Mexico–Arizona–Colorado–Nevada, Veatch,Olathe,KS Albuquerque,NM ClassC MarkA.Zaback,2016 PresidentandChief Executive BarbaraMowry,2014 Officer,JonahBankof Wyoming, Chief ExecutiveOfficer, Casper,WY GoreCreekAdvisors,Greenwood Village,CO

436 101stAnnualReport|2014 CharlesR.Hall,2016 OmahaBranch AppointedbytheBoardofGovernors ChairmanandChief Executive JimFarrell,2014 AppointedbytheFederalReserveBank Officer,ExchangeBankandTrust PresidentandChief Executive Company,Perry,OK Jeff W.Krejci,2014 Officer,FarmersNational PresidentandDirector, JaneHaskin,2016 Company,Omaha,NE CornerstoneBank,York,NE PresidentandChief Executive G.RichardRussell,2015 Officer,FirstBethanyBank& BrianD.Esch,2015 PresidentandChief Executive Trust,Bethany,OK PresidentandChief Executive Officer,MillardLumberInc., Officer,McCookNationalBank, AppointedbytheBoardofGovernors Omaha,NE McCook,NE JamesD.Dunn,2014 JohnF.Bourne,2016 Chair,MillCreekLumber& JamesL.Thom,2015 InternationalRepresentative, SupplyCo.,Tulsa,OK VicePresident,T-LIrrigationCo., InternationalBrotherhoodof Hastings,NE PeterB.Delaney,2015 ElectricalWorkers,Omaha,NE ChairmanandChief Executive AnneHindery,2016 Officer,OGEEnergyCorp., Chief ExecutiveOfficer, OklahomaCity,OK NonprofitAssociationof the ClintD.Abernathy,2016 Midlands,Omaha,NE President,AbernathyFarms,Inc., Altus,OK District11–Dallas ClassA CurtisV.Anastasio,2016 RobertNachtmann,2015 RetiredPresidentandChief DeanandProfessorof Finance, GeorgeF.JonesJr.,2014 ExecutiveOfficer,NuStarEnergy Collegeof Business RetiredChief ExecutiveOfficer, L.P.,SanAntonio,TX Administration,TheUniversity TexasCapitalBank,Dallas,TX of TexasatElPaso,ElPaso,TX AllanJames“Jimmy”Rasmussen, ClassC PaulL.Foster,2016 2015 RenuKhator,2014 ExecutiveChairman,Western PresidentandChief Executive ChancellorandPresident, Refining,Inc.,ElPaso,TX Officer,HomeTownBank,N.A., Universityof Houston, Galveston,TX Houston,TX AppointedbytheBoardofGovernors RussellShannon,2016 MyronE.UllmanIII,2015 RobertE.McKnightJr.,2014 ChairmanandChief Executive Chief ExecutiveOfficer,J.C. Owner,McKnightRanch Officer,NationalBankof PenneyCompany,Inc.,Plano,TX Company,FortDavis,TX Andrews,Andrews,TX MatthewK.Rose,2016 RenardU.Johnson,2015 ExecutiveChairman,BNSF PresidentandChief Executive ClassB RailwayCompany,Fort Officer,Management& JorgeA.Bermudez,2014 Worth,TX EngineeringTechnologies PresidentandChief Executive InternationalInc.(METI),El Officer,ByebrookGroup,College ElPasoBranch Paso,TX Station,TX AppointedbytheFederalReserveBank J.EricEvans,2016 AnnB.Stern,2015 JerryPacheco,2014 Chief ExecutiveOfficer, PresidentandChief Executive President,GlobalPerspectives ProvidenceMemorialHospital Officer,HoustonEndowment, Integrated,Inc.,Santa andSierraMedicalCenter,El Inc.,Houston,TX Teresa,NM Paso,TX LauraM.Conniff,2014 QualifyingBroker,Mathers Realty,Inc.,LasCruces,NM

FederalReserveSystemOrganization 437 HoustonBranch AppointedbytheBoardofGovernors ManojSaxena,2015 PaulW.Hobby,2014 ManagingDirector,The AppointedbytheFederalReserveBank ChairmanandFoundingPartner, Entrepreneurs’Fund,Austin,TX MarcusA.Watts,2014 GenesisPark,LP,Houston,TX JosueRoblesJr.,2016 President,TheFriedkinGroup, EllenOchoa,2015 PresidentandChief Executive Houston,TX Director,NASAJohnsonSpace Officer,USAA,SanAntonio,TX KirkS.Hachigian,2014 Center,Houston,TX AppointedbytheBoardofGovernors PresidentandChief Executive GregL.Armstrong,2016 ThomasE.Dobson,2014 Officer,JELD-WEN, ChairmanandChief Executive ChairmanandChief Executive Houston,TX Officer,PlainsAllAmerican Officer,Whataburger PaulB.MurphyJr.,2015 Pipeline,L.P.,Houston,TX Restaurants,L.P., PresidentandChief Executive SanAntonio,TX Officer,CadenceBank, SanAntonioBranch CatherineM.Burzik,2015 Houston,TX AppointedbytheFederalReserveBank PresidentandChief Executive GeraldB.Smith,2016 JanieBarrera,2014 Officer,CFBInterests,LLC,San ChairmanandChief Executive PresidentandChief Executive Antonio,TX Officer,Smith,Graham& Officer,AccionTexas,Inc., James“Rad”ConradWeaver, CompanyInvestmentAdvisors, SanAntonio,TX 2016 L.P.,Houston,TX YgnacioD.Garza,2014 Chief ExecutiveOfficer, Partner,LongChiltonLLP, McCombsPartners,San Brownsville,TX Antonio,TX District12–SanFrancisco ClassA NicoleC.Taylor,2016 JamesA.Hughes,2015 PresidentandChief Executive Chief ExecutiveOfficer,First MeganF.Clubb,2014 Officer,ThriveFoundationfor Solar,Inc.,Tempe,AZ Chief ExecutiveOfficerand Youth,MenloPark,CA Chairmanof theBoard,Baker JohnC.Molina,2015 BoyerNationalBank,Walla Chief FinancialOfficer,Molina ClassC Walla,WA Healthcare,Inc.,LongBeach,CA RoyA.Vallee,2014 PeterS.Ho,2015 DavidI.Rainer,2016 RetiredExecutiveChairmanand Chairman,President,andChief ChairmanandChief Executive Chief ExecutiveOfficer,Avnet, ExecutiveOfficer,Bankof Officer,CaliforniaUnitedBank, Inc.,Phoenix,AZ HawaiiandBankof Hawaii Encino,CA Corporation,Honolulu,HI AlexanderR.Mehran,2015 AppointedbytheBoardofGovernors ChairmanandChief Executive StevenR.Gardner,2016 KeithE.Smith,2014 Officer,SunsetDevelopment PresidentandChief Executive PresidentandChief Executive Company,SanRamon,CA Officer,PacificPremierBank, Officer,BoydGaming Irvine,CA PatriciaE.Yarrington,2016 Corporation,LasVegas,NV VicePresidentandChief Financial ClassB Officer,ChevronCorporation, GinaMarieLindsey,2015 ExecutiveDirector,LosAngeles SanRamon,CA RichardA.Galanti,2014 WorldAirports,LosAngeles,CA ExecutiveVicePresidentand Chief FinancialOfficer,Costco LosAngelesBranch Vacancy,2016 WholesaleCorporation, AppointedbytheFederalReserveBank PortlandBranch Issaquah,WA PeggyTsiangCherng,2014 StevenE.Bochner,2015 Co-Chairof theBoardand AppointedbytheFederalReserveBank Partner,Wilson,Sonsini, Co-Chief ExecutiveOfficer, RobertC.Hale,2014 Goodrich,&Rosati,P.C.,Palo PandaRestaurantGroup,Inc., Chief ExecutiveOfficer,Hale Alto,CA Rosemead,CA Companies,Hermiston,OR

438 101stAnnualReport|2014 TamaraL.Lundgren,2014 SaltLakeCityBranch SeattleBranch PresidentandChief Executive AppointedbytheFederalReserveBank AppointedbytheFederalReserveBank Officer,SchnitzerSteelIndustries, Inc.,Portland,OR JoshEngland,2014 ScottL.Morris,2014 PresidentandChief Financial Chairman,President,andChief S.RandolphCompton,2015 Officer,C.R.England,Inc.,Salt ExecutiveOfficer,Avista President,Chief ExecutiveOfficer, LakeCity,UT Corporation,Spokane,WA andCo-Chairpersonof theBoard, PatrickG.Yalung,2014 PioneerTrustBank,N.A., Vacancy,2014 RegionalPresident,Washington, Salem,OR SusanD.MooneyJohnson,2015 WellsFargoBank,N.A., BrianK.Rice,2016 President,FuturaIndustries, Seattle,WA ExecutiveVicePresidentand Clearfield,UT GregC.Leeds,2015 Presidentof WealthManagement, AlbertT.Wada,2016 PresidentandChief Executive AequitasCapitalManagement, Chairman,WadaFarms,Inc., Officer,Wizardsof theCoast, LakeOswego,OR Pingree,ID Hasbro,Inc.,Renton,WA AppointedbytheBoardofGovernors NicoleW.Piasecki,2016 AppointedbytheBoardofGovernors RoderickC.Wendt,2014 VicePresidentandGeneral Vacancy,2014 ViceChairman,JELD-WEN,inc., Manager,PropulsionSystems KlamathFalls,OR BradleyJ.Wiskirchen,2015 Division,BoeingCommercial Chief ExecutiveOfficer, Airplanes,Everett,WA RománD.Hernández,2015 Keynetics,Inc.,Boise,ID Shareholder,Schwabe, AppointedbytheBoardofGovernors Williamson&Wyatt,P.C., PeterR.Metcalf,2016 AdaM.Healey,2014 Portland,OR LeadFounderandChief Executive VicePresident,RealEstate, Officer,BlackDiamond,Inc.,Salt VulcanInc.,Seattle,WA JosephE.RobertsonJr.,MD, LakeCity,UT MaryO.McWilliams,2015 2016 RetiredExecutiveDirector, President,OregonHealth& WashingtonHealthAlliance, ScienceUniversity,Portland,OR Seattle,WA Vacancy,2016

FederalReserveSystemOrganization 439 ReserveBankandBranchLeadership Eachyear,theBoardof GovernorsdesignatesoneClassCdirectortoserveaschair,andoneClassCdirector toserveasdeputychair,of eachReserveBankboard.ReserveBanksalsohaveapresidentandfirstvicepresidentwhoareappointedbytheBank’sClassC,andcertainClassB,directors,subjecttoapprovalbytheBoard of Governors.EachReserveBankselectsachairforeveryBranchinitsDistrictfromamongthedirectorson theBranchboardwhowereappointedbytheBoardof Governors.ForeachBranch,anofficerfromitsReserve Bankisalsochargedwiththeoversightof Branchoperations. Cincinnati Birmingham Boston CharlesH.Brown,Chair ThomasR.Stanton,Chair WilliamD.Nordhaus,Chair LaVaughnM.Henry,Senior LesleyMcClure,VicePresident JohnF.Fish,DeputyChair RegionalOfficer andRegionalExecutive EricS.Rosengren,Presidentand Chief ExecutiveOfficer Pittsburgh Jacksonville KennethC.Montgomery,First DawneS.Hickton,Chair LyndaL.Weatherman,Chair VicePresidentandChief OperatingOfficer GuhanVenkatu,SeniorRegional ChristopherL.Oakley,Vice Officer PresidentandRegionalExecutive NewYork Miami Richmond EmilyK.Rafferty,Chair ThomasW.Hurley,Chair LindaD.Rabbitt,Chair SaraHorowitz,DeputyChair KarenGilmore,VicePresidentand RussellC.Lindner,DeputyChair WilliamC.Dudley,President RegionalExecutive JeffreyM.Lacker,President ChristineM.Cumming,FirstVice President MarkL.Mullinix,FirstVice Nashville President ScottMcWilliams,Chair AdditionalofficeatEastRutherford,NJ Baltimore LeeC.Jones,VicePresidentand Philadelphia RegionalExecutive JennyG.Morgan,Chair JamesE.Nevels,Chair DavidE.Beck,SeniorVice NewOrleans MichaelJ.Angelakis,Deputy PresidentandBaltimoreRegional TerrieP.Sterling,Chair Chair Executive AdrienneC.Slack,VicePresident CharlesI.Plosser,President Charlotte andRegionalExecutive D.BlakePrichard,FirstVice President ClaudeZ.Demby,Chair Chicago MatthewA.Martin,SeniorVice Cleveland PresidentandCharlotteRegional JeffreyA.Joerres,Chair Executive GregBrown,DeputyChair RichardK.Smucker,Chair CharlesL.Evans,President ChristopherM.Connor,Deputy Atlanta Chair GordonWerkema,FirstVice President LorettaJ.Mester,President ThomasI.Barkin,Chair GregoryStefani,FirstVice ThomasA.Fanning,DeputyChair AdditionalofficeatDesMoines,IA President DennisP.Lockhart,President Detroit MarieC.Gooding,FirstVice LouAnnaK.Simon,Chair President RobertWiley,OfficerinCharge

440 101stAnnualReport|2014 Houston St.Louis KansasCity GregL.Armstrong,Chair SharonD.Fiehler,Chair BarbaraMowry,Chair DaronD.Peschel,Officerin GeorgePaz,DeputyChair SteveMaestas,DeputyChair Charge JamesBullard,President EstherL.George,President SanAntonio DavidA.Sapenaro,FirstVice KellyJ.Dubbert,FirstVice President President ThomasE.Dobson,Chair BlakeHastings,OfficerinCharge LittleRock Denver RayC.Dillon,Chair LarissaHerda,Chair SanFrancisco RobertA.Hopkins,Regional AlisonFelix,OfficerinCharge PatriciaE.Yarrington,Chair Executive RoyA.Vallee,DeputyChair OklahomaCity JohnC.Williams,President Louisville JamesD.Dunn,Chair MarkA.Gould,FirstVice GeraldR.Martin,Chair President ChadR.Wilkerson,Officerin MariaGerwingHampton, Charge AdditionalofficeatPhoenix,AZ RegionalExecutive Omaha LosAngeles Memphis JimFarrell,Chair KeithE.Smith,Chair CharlieE.ThomasIII,Chair RogerW.Replogle,Officerin NathanKauffman,Officerin MarthaPerineBeard,Regional Charge Charge Executive Portland Dallas Minneapolis RoderickC.Wendt,Chair MyronE.UllmanIII,Chair StevenH.Walker,Officerin RandallJ.Hogan,Chair Charge RenuKhator,DeputyChair MayKaoY.Hang,DeputyChair RichardW.Fisher,President NarayanaR.Kocherlakota, SaltLakeCity President HelenE.Holcomb,FirstVice BradleyJ.Wiskirchen,Chair President JamesM.Lyon,FirstVice RobinA.Rockwood,Officerin President Charge ElPaso Helena RobertE.McKnightJr.,Chair Seattle MarshaGoetting,Chair RobertoA.Coronado,Officerin AdaM.Healey,Chair SusanWoodrow,AssistantVice Charge SusanA.Sutherland,Officerin PresidentandBranchExecutive Charge

FederalReserveSystemOrganization 441 LeadershipConferences ConferenceofChairs Thechairsof theFederalReserveBanksareorganizedintotheConferenceof Chairs,whichmeetstoconsider mattersof commoninterestandtoconsultwithandadvisetheBoardof Governors.Suchmeetings,also attendedbythedeputychairs,wereheldinWashington,D.C.,onMay27and28andNovember4and5,2014. Theconference’sexecutivecommitteemembersfor2014arelistedbelow.1 ConferenceofChairs SharonD.Fiehler,ViceChair, EmilyK.Rafferty,Member, ExecutiveCommittee–2014 FederalReserveBankof FederalReserveBankof JeffreyA.Joerres,Chair, St.Louis NewYork FederalReserveBankof Chicago ConferenceofPresidents Thepresidentsof theFederalReserveBanksareorganizedintotheConferenceof Presidents,whichmeetsperiodicallytoidentify,define,anddeliberateissuesof strategicsignificancetotheFederalReserveSystem;toconsidermattersof commoninterest;andtoconsultwithandadvisetheBoardof Governors.Thechief executive officerof eachReserveBankwasoriginallylabeledgovernoranddidnotreceivethetitleof presidentuntilthe passageof theBankingActof 1935.Consequently,whentheConferencewasfirstestablishedin1914itwas knownastheConferenceof Governors.Conferenceofficersfor2014arelistedbelow.2 ConferenceofPresidents–2014 CharlesI.Plosser,Chair, FederalReserveBankof Philadelphia DennisP.Lockhart,ViceChair, FederalReserveBankof Atlanta FrankJ.Doto,Secretary, FederalReserveBankof Philadelphia MariaR.Smith, AssistantSecretary, FederalReserveBankof Atlanta 1 OnNovember5,2014,theConferenceofChairselectedEmilyK.Rafferty,chairoftheFederalReserveBankofNewYork,aschairof theconference’sexecutivecommitteefor2015.TheconferencealsoelectedRoyA.Vallee,chairoftheFederalReserveBankofSanFranciscofor2015,asvicechair,andThomasA.Fanning,chairoftheFederalReserveBankofAtlantafor2015,astheexecutivecommittee’sthirdmember. 2 OnDecember4,2014,theConferenceelectedDennisP.Lockhartaschairfor2015–16andEricS.Rosengren,presidentoftheFederal ReserveBankofBoston,asvicechair.TheconferencealsoelectedMariaR.Smithassecretaryfor2015–16andJoelWerkema,Federal ReserveBankofBoston,asassistantsecretary.

442 101stAnnualReport|2014 ConferenceofFirstVicePresidents TheConferenceof FirstVicePresidentsof theFederalReserveBankswasorganizedin1969tomeetperiodicallyfortheconsiderationof operationsandothermatters.Conferenceofficersfor2014arelistedbelow. ConferenceofFirstVice Presidents–2014 KennethC.Montgomery,Chair, FederalReserveBankof Boston GregoryStefani,ViceChair, FederalReserveBankof Cleveland JeanneMacNevin,Secretary, FederalReserveBankof Boston TerriBialowas,Assistant Secretary, FederalReserveBankof Cleveland

443 15 Index A Autoloans,90 Automatedclearinghouse(ACH)services,97 Abbreviations,342–343 ABSs.SeeAsset-backedsecurities Accountingpolicies,63–64,325–327,348–361 B AccountingStandardsCodification(ASC),350 Balancesheets AccountingStandardsUpdate,360–361 Boardof Governors,321 Accumulatedothercomprehensiveincome,335,395 FederalReserveBanks,20,34,139–140,150,185,211 ACH.SeeAutomatedclearinghouseservices BankHoldingCompaniesandChangeinBankControl Acquisitions,81–83 (RegulationY),122–123 Advancedforeigneconomies(AFEs),14,16–18,28–29,32, Bankholdingcompanies(BHCs) 177 Banksaffiliatedwith,291 AdvisoryCouncils Capitalplanning,52–53 CommunityDepositoryInstitutionsAdvisoryCouncil, Complaintsagainst,85–86 425 ConsolidatedSupervisionProgram,76 FederalAdvisoryCouncil,424 Creditquality,30 AFEs.SeeAdvancedforeigneconomies Developmentsin2014,47 AffordableCareAct,14,27 Enhancedprudentialstandards,60–61,115–116 AIG.SeeAmericanInternationalGroup,Inc. Equityprices,16 AmericanInternationalGroup,Inc.(AIG),55 Liquidityrequirements,40–41 AML.SeeAnti-moneylaundering Profitabilityof,30 Anti-moneylaundering(AML) RFI/C(D)system,53 Complianceriskmanagement,56,65–66 Supervisionof,49,51,53 Compliancewithregulatoryrequirements,56–57 Surveillanceandoff-sitemonitoring,58–59 Internationalcoordination,66 BankHoldingCompanyAct,71–72 AOCI.SeeAccumulatedothercomprehensiveincome BankHoldingCompanyPerformanceReports(BHCPRs), Appropriatemonetarypolicy,163,164,169,199,205,238, 58 241,245,275,278,282 BankMergerAct,72 ASBA.SeeAssociationof Supervisorsof Banksof the Bankof Japan Americas Assetpurchaseprogram,17,18 ASC.SeeAccountingStandardsCodification BankSecrecyAct/Anti-MoneyLaunderingExamination Asia Manual,57,65 Bondyields,17 BankSecrecyAct(BSA),56,65–66 Economyof,18,31 BankServiceCompanyAct,54 Asset-backedsecurities(ABS),67 BankingOrganizationNationalDesktop,70 Assetpurchaseprogram,18–20,32–33 BankingOrganizationSystemicRiskReport,70 Assetsandliabilities Bankingorganizations,U.S.SeealsoBankholding Commercialbanks,300 companies;Commercialbanks FederalReserveBanks,20,109–113,292–293,296–297 Affiliationwithbankholdingcompanies,291 Valuations,38–40 Creditdefaultswaps,16–17 Associationof Supervisorsof Banksof theAmericas Enhancedprudentialstandards,115–116 (ASBA),59 Internationalactivities,55–56 Audits Offices,291 Boardof Governors,318–339 Overseasinvestmentsby,73 FederalReserveBanks,340–397 Regulationof,71–74 FederalReserveSystem,52 Supervisionof,49–71 byGovernmentAccountabilityOffice,399–400 Bankruptcies byOfficeof theInspectorGeneral,398 Cityof Detroit,31

444 101stAnnualReport|2014 BaselCommitteeonBankingSupervision(BCBS) BudgetControlActof 2011,13 Capitaladequacystandards,62 Budgets,FederalReserveSystem Enhancedprudentialstandards,61 Boardof Governors,404–408 Liquiditycoverageratio,16 Budgetperformance,2014,401–402,404,409–410,413 Supervisorypolicies,62–63 Capitalbudgets,2015,403,406–408,411–412 BaselIII,16,40 Currency,412–415 BCBS.SeeBaselCommitteeonBankingSupervision FederalReserveBanks,408–412 BEA.SeeBureauof EconomicAnalysis Operatingexpensebudget,2015,401,404–406,410–411 BearStearnsCompanies,Inc.,373 Trendsinexpensesandemployment,402–403 BenefitsEqualizationPlan(BEP),329–330,386 Bureauof EconomicAnalysis(BEA),176,213 BEP.SeeBenefitsEqualizationPlan;Bureauof Engraving Bureauof EngravingandPrinting(BEP),99,338,413–414 andPrinting Businessfixedinvestment,12 Businesssector,8–9,12,26–27,29 BHCPRs.SeeBankHoldingCompanyPerformance Reports BHCs.SeeBankholdingcompanies Biggert-WatersFloodInsuranceReformAct,80,87 C Boardof Governors CallReports,58,68–69 Accountingpolicies,325–327 Canada Accumulatedothercomprehensiveincome,335 Economyof,18,32 Advisorycouncils,424–426 CAOs.SeeCommunityAffairsOffices Audits,318–339 Capital Balancesheets,321 FederalReserveBanks,346,358 Budget,404–408 CapitalAdequacyof BankHoldingCompanies,Savings Cashflows,323 andLoanHoldingCompanies,andStateMember Commitmentsandcontingencies,338 Banks(RegulationQ),121–122 CommunityDepositoryInstitutionsAdvisoryCouncil, Capitaladequacystandards,61–62 425 Capitalleases,327 Discountratesfordepositoryinstitutionsin2014, Capitalplanning,52–53,116 126–127 CARS.SeeCentralAccountingReportingSystem Divisions,417–421 Cashflows,Boardof Governors,323 FederalAdvisoryCouncil,424 Cash-managementservices,101–102 Financialstatements,318–339 CCAR.SeeComprehensiveCapitalAnalysisandReview FunctionsforReserveBanks,335–336 CDSs.SeeCreditdefaultswaps GovernmentPerformanceandResultsActrequirements, CentralAccountingReportingSystem(CARS),102 119 CentralBankCounterfeitDeterrenceGroup,415 Leases,327–328 CentralDocumentandTextRepository,70 Litigation,285–286 CFPB.SeeConsumerFinancialProtectionBureau Members,417 CFTC.SeeCommodityFuturesTradingCommission ModelValidationCouncil,426 Chairs,Conferenceof,FederalReserveBanks,441 Officers,417–421 ChangeinBankControlAct,72 Operationsandservices,324–325 Checkcollectionservice,97,126 Operationsstatements,322 Chile,economyof,32 Policyactions,121–127 China Policystatements,125–126 Economyof,18,31 Postemploymentbenefits,334 C&Iloans.SeeCommercialandindustrialloans Postretirementbenefits,333–334 Civilmoneypenalties,325 Property,equipment,andsoftware,326,327 CivilServiceRetirementSystem,332 Retirementbenefits,328–332 CLOs.SeeCollateralizedloanobligations Bonds CMBSs.SeeCommercialmortgage-backedsecurities Corporate,12–13,38–39 Coin.SeeCurrencyandcoinoperations Foreign,16–17,28–29,31 Collateralizedloanobligations(CLOs),40,44 Generalobligationbonds,31,153 Collectionof ChecksandOtherItemsbyFederalReserve Municipal,16,30–31 BanksandFundsTransfersthroughFedwire Borrowing.SeeDebt (RegulationJ),126 Branches.SeeFederalReserveBanks Collectionservices,FederalReserveBanks,97,101 Brazil,economyof,18,31–32 Commercialandindustrial(C&I)loans,13,27 BSA.SeeBankSecrecyAct Commercialautomatedclearinghouse(ACH)services,97

Index 445 Commercialbanks Lawsandregulations,86–91 Assetsandliabilities,300 Mortgageservicingandforeclosure,76–78 Creditavailability,16 Policyanalysis,88–91 Regulatoryreports,68–69 Risk-focusedsupervision,78 Commercialcheckcollectionservice,97 Supervision,75–86 Commercialmortgage-backedsecurities(CMBSs),39,40, Consumerbehaviorresearchsurveys,88–89 265,374 Consumercomplaints,85–86 Commercialpapermarket,40 Consumercomplianceexaminertraining,84 Commercialrealestate(CRE)loans,27,39,152,178,253, ConsumerComplianceOutlook,78 265 ConsumerFinancialProtectionBureau(CFPB),79,83, Committeeof SponsoringOrganizationsof theTreadway 337,398 Commission(COSO),103–104 Consumerpriceindex(CPI),151 CommitteeonInvestmentPerformance,389–390 Consumerprices,9,24–25 CommodityFuturesTradingCommission(CFTC),55,65 Consumerspending,10,25 Communityaffairs.SeeConsumerandcommunityaffairs ConsumersandMobileFinancialServices,88 CommunityAffairsOfficers(CAOs),91 Continuingprofessionaldevelopment,70–71 CommunityBankRisk-FocusedConsumerCompliance CoreLogic,11,26 SupervisionProgram,78 Corporatebonds,12–13,38–39 CommunityBankingConnections,59–60 Corporatecredit,15–16,27,29 Communitybanks,48–50,69 Corporatedebt,15–16,27,29 CommunityDepositoryInstitutionsAdvisoryCouncil,425 COSO.SeeCommitteeof SponsoringOrganizationsof the CommunityDevelopment,91–93 TreadwayCommission CommunityDevelopmentFinancialInstitutions,91 Costrecovery,96 CommunityReinvestmentAct(CRA) Counterfeitdeterrence,415 Examinationfrequencycycle,78 Counterterrorismactivities,66 Mergersandacquisitionsinrelationto,81–83 CPI.SeeConsumerpriceindex Requirementsof,80–81 CRA.SeeCommunityReinvestmentAct Complaintreferrals,85 CRE.SeeCommercialrealestateloans ComplianceOutlookLive,79 Credit Complianceriskmanagement,65–66 Availability,11,16,27 ComprehensiveCapitalAnalysisandReview(CCAR),40, Corporate,15–16,27,29 43,52,61,116 Primary,127 Comptrollerof theCurrency,Officeof the(OCC),54,76, Risk,375 83,116 Seasonal,127 ConcentrationLimit(RegulationXX),125 Secondary,127 Conditionstatements Smallbusinesses,27 FederalReserveBanks,302–306,344–346 Creditdefaultswaps(CDSs),16,17,30–31,374–375 Conferenceof StateBankSupervisors,67 Creditriskmanagement,64–65 Conferences,FederalReserveBanksOfficers,441–442 Creditriskretention,117 Congress.SeeMonetarypolicyreportstoCongress; CreditRiskRetention(RegulationRR),123–124 specificlegislationbyname CriticalInfrastructure.SeeCyberSecurityandCritical CongressionalBudgetOffice,14,27 InfrastructureWorkingGroup Consolidatedsupervision,49–57 Currencyandcoinoperations,98–99,338,351,412–414, ConsolidatedSupervisionProgram,76 413–415 Consolidation,350–351 CurrencyEducationProgram,415 Consumerandcommunityaffairs Currencyrisk,376 BankHoldingCompanyConsolidatedSupervision CyberSecurityandCriticalInfrastructureWorkingGroup, Program,76 58 Communitydevelopment,91–93 Consumercomplaintsandinquiries,85–86 D Consumerlawsandregulations,86–87 Consumerresearch,88–91 DCCA.SeeDivisionof ConsumerandCommunity CoordinationwithFederalbankingagencies,83–84 Affairs Emerging-issuesanalysis,90–91 Debt Enforcementactivities,79–80 Corporate,15–16,27,29 Examinations,75–86 Federalgovernment,27 Examinertraining,84 Household,26,41,43 Floodinsurance,79–80,87 Nonfinancialsector,41,43

446 101stAnnualReport|2014 Debtsecurities,352–353,374 E Deferredcredititems,358 ECB.SeeEuropeanCentralBank Delinquencies.SeeForeclosures ECI.SeeEmploymentcostindex(ECI) Deloitte&ToucheLLP,104,318–320,339–341 ECOA.SeeEqualCreditOpportunityAct Depositoryinstitutions Deposits,357 Economy,U.S. Discountratesin2014,126–127 Activityreview,140–141,150–152,176–177,187–188, Loansto,361–362 213–214,225–227,249–252,263–264 Reserverequirements,290 Businesssector,8–9,12,26–27,29 Reservesof,292–293,296–299 Financialmarkets,14–18,28–31,43–44,139–143,150, Depositoryservices,99–102 152–153,176,178–179,185,188–190,211,214–215, 223–224,227–228,249–250,252–253,262–263, Deposits 264–266 Depositoryinstitutions,357 Forecastuncertainty,173,209,247,284 FederalReserveBanks,293,298–299,357 Governmentsector,13–14,27–28 Treasury,357 Householdsector,10–11,25–26,41,43,88–90 Derivativeinstruments,374–377 Housingsector,11–12,28 DesignatedFinancialMarketUtilities(RegulationHH), Interestrates,10–11,22,23,90 123 Labormarket,7–8,10,18–19,22–24,28,214 Designatednonfinancialcompanies,55 M2monetaryaggregates,16,31 Detroit,Michigan Outlookandprojections,143–145,153–156,161–164, Bankruptcynegotiations,31 179–181,190–193,198,200,215–218,228–232,236, Directors,FederalReserveBanks,427–438 237,253–256,266–269,274 Discountrates,126–127 Policyactions,18–21,32–34,121–127,145–148, Disposablepersonalincome,11 156–159,181–183,193–196,211–213,218–221, Divisionof ConsumerandCommunityAffairs(DCCA), 224–225,232–234,256–259,269–271 60,75,79,81–82,84,86,88–90 Prices,9–12,24–25 DNP.SeeDoNotPayprogram Recenteconomicandfinancialdevelopments,7–18 DoNotPay(DNP)program,100–101 Stateandlocalgovernments,14,27–28 Dodd-FrankWallStreetReformandConsumer Tradedeficit,151,177 ProtectionAct Uncertaintyandrisk,169,171–173,205,207–209, Capitalplanning,116 245–247,282–284 CapitalsurchargeforGSIBs,118 EdgeAct,49,54,56 Consumerfinancialprotection,337 E&I.SeeEquipmentandintangibles(E&I) Credit-riskretention,117 ElectronicPaymentSolutionCenter,100–101 Designatednonfinancialcompaniesregulations,55 Emergingmarketeconomies(EMEs),13,17,18,25,31–32, Enhancedprudentialstandardsimplementation,48,60, 151–153,177,179 115–116,118 Fairlendingenforcement,79 EMEs.SeeEmergingmarketeconomies FederalReserverequirements,37 EmployeeBenefits,Officeof,328,386 Financialmarketutilitiesregulations,54–55 Employment,7–8,22,150.SeealsoLabormarkets; Financialsectorconcentrationlimits,117 Unemployment Floodinsurance,87 Employmentcostindex(ECI),8,24 Incentivecompensationreporting,66 Energyprices,9,10,12,22,25 Liquidityrequirements,116–117 Enforcementactions Outreachandtraining,84 FederalReserveSystem,58,74,79–80 Regulatorycapitalframework,116,118 Enhancedprudentialstandards,48,60–61,115–116,118 Regulatorydevelopmentsin2014,115–118 EnhancedPrudentialStandards(RegulationYY),122–123, Risk-managementstandards,117–118 125 Savingsandloanholdingcompaniesauthority,54 EqualCreditOpportunityAct(ECOA),79,83 Stresstesting,39,43–44,52–53,116,125 Equipmentandintangibles(E&I),10,12,26 Volckerrule,117 Equipmentandsoftware,384–385 DOJ.SeeJustice,U.S.Departmentof Equitymarketsandprices,15–16,29 Dollarexchangerate,17 Equitypriceindexes,15–16 Dollarliquidityswaps,355,369 ETFs.SeeExchange-tradedfunds Dollarrollmarkets,29 EuropeanCentralBank(ECB) D&T.SeeDeloitte&ToucheLLP Monetarypolicy,29

Index 447 Policyrates,190 FederalHousingFinanceAgency,67 Purchaseof euro-areasovereignbonds,16–17 FederalOpenMarketCommittee(FOMC).SeealsoOpen Examinationsandinspections marketoperations Anti-moneylaundering,56–57 Annualorganizationalmatters,131–139 Consumerandcommunityaffairs,75–86 Appropriatemonetarypolicy,163,164,169,199,205, Criticalinfrastructure,58 238,241,245,275,278,282 Cybersecurity,58 Assetpurchaseprogram,32–33 FederalReserveBanks,49,103–104 Authorizations,132–136 Fiduciaryactivities,57 Economicoutlook,143–145,153–156,164,179–181, Informationtechnologyactivities,57 190–193,198,200,215–218,228–232,236,237, Securitiescreditlenders,57–58 253–256,266–269,274 Securitiesdealersandbrokers,governmentand Economicreview,140–141,150–152,176–177,187–188, municipal,57 213,225–227,250–252,263–264 Specialized,57–58 Financialmarketdevelopments,139–140,150,152–153, Trainingprogram,84 176,178–179,185,211,223–224,249–250,262–263 Transferagents,57 Financialreview,141–143,178–179,188–190,214–215, ExaminerCommissioningProgram,70 227–228,252–253,264–266 Exchange-tradedfunds(ETFs),41 Forecastuncertainty,173,209,247,284 Expenses.SeeIncomeandexpenses Foreigncurrencyoperationsanddirectives,134–138 Exports,13,25,151,177 Inflationoutlook,164,167–168,200,203–204,237, 241–243,274,278–280 Meetingminutes,129–284 F Members,422 FairCreditReporting(RegulationV),123 Monetarypolicystrategiesandcommunications,18–21, FairHousingAct,83–85 138–139,175–176,185–187,211–213,224–225, Fairlendingenforcement,79 259–260 Fairvaluemeasurement,359–360,378–384,390–391 Notationvotes,148,159,183,196,221,235,271 FAM.SeeFinancialAccountingManualforFederalReserve Officers,422–423 Banks Policyactions,18–21,32–34,145–148,156–159, FarmCreditAdministration,58,67 181–183,193–196,218–221,232–234,256–259, FASB.SeeFinancialAccountingStandardsBoard 269–271 FATF.SeeFinancialActionTaskForce Summaryof EconomicProjections,6,161–164, FBOs.SeeForeignbankingorganizations 197–209,235–247,272–284 FDIC.SeeFederalDepositInsuranceCorporation SystemOpenMarketAccount,20,21,34,105–108,139, FedCommunities.org,92 150,176,212,249,262 FederalAdvisoryCouncil,424 Uncertaintyandrisks,169,171–173,205,207–209, Federalagencysecuritiesandobligations 245–247,282–284 FederalReserveBankholdings,289,353–355 FederalReserveAct,37,54,72 Openmarkettransactions,287–288 FederalReserveBankof Atlanta,304–305,307–309 FederalBankingAgencyAuditAct,399 FederalReserveBankof Boston,302–303,307–309 FederalDepositInsuranceCorporation(FDIC),48,56,80, FederalReserveBankof Chicago,304–305,307–309 83,116 FederalReserveBankof Cleveland,302–303,307–309 FederalEmergencyManagementAgency(FEMA),58,80 FederalReserveBankof Dallas,9,304–305,307–309 FederalFinancialInstitutionsExaminationCouncil FederalReserveBankof KansasCity,304–305,307–309 (FFIEC) FederalReserveBankof Minneapolis,304–305,307–309 BankSecrecyAct/Anti-MoneyLaunderingExamination FederalReserveBankof NewYork,14,302–303,307–309, Manual,57 347–348,352–355,362–365,367–368,373,377 Banksupervisiontraining,70 FederalReserveBankof Philadelphia,25,302–303, Boardresponsibilities,336–337 307–309 BSA/AMLworkinggroup,65 FederalReserveBankof Richmond,302–303,307–309 Coordinationwithotherbankingagencies,83–84 FederalReserveBankof SanFrancisco,304–305,307–309 Regulatoryreports,68–69 FederalReserveBankof St.Louis,304–305,307–309 TaskForceonSurveillanceSystems,59 FederalReserveBanks Federalfundsrate,14,19–20,23,28,33–34,170,206,244, Accountingpolicies,348–361 281 Assessments,359 Federalgovernment Assetsandliabilities,20,292–293,296–299 Debt,27 Audits,340–397 Shutdown,27 Automatedclearinghouse(ACH)services,97

448 101stAnnualReport|2014 Balancesheets,20,34,139–140,150,185,211 SystemOpenMarketAccountholdingsandloans, Branches,291,427–440,427–4340 105–108,348–349,363–371 Budget,408–412 Taxes,360 Capital,346,358 Thriftplans,301–392 Cash-managementservices,101–102 Treasurysecuritiesservices,100 Collectionservices,101 Wholesalesecuritiesprograms,100 Commercialcheckcollectionservice,97 FederalReserveConsumerHelp(FRCH),85 Commitmentsandcontingencies,385–386 FederalReserveSystem.SeealsoBoardof Governors; Conditionstatements,302–306,344–346 FederalReserveBanks Conferences,441–442 Accountingpolicies,63–64 Creditoutstanding,292–293,296–299 Audits,52 Currencyandcoinoperationsanddevelopments,98–99 Budget,401–403 Deposits,293,357 CommunityDevelopment,91–93 Directors,427–438 Complianceriskmanagement,65–66 Efficiencyimprovement,98–99 Credit-riskmanagement,64–65 Equipmentandsoftware,384–385 Developmentsin2014,47–49 Examinations,103–104 Enforcementactions,58,74 Fairvalue,359–360 Examinationsandinspections,49 FedLineaccesstoservices,102–103 Financialstabilityactivities,37–45 FedwireFundsService,97 Foundingof,37 FedwireSecuritiesService,98 Incentivecompensation,66 Financialstatements,109–113,340–397 Internationalactivities,55–56 Fiscalagencyservices,99–102 JointForum,63 Float,98 Macroprudentialsupervisoryapproach,42–44 Governmentdepositoryservices,99–102 Maps,2–3 Incomeandexpenses,104–105,307–312,345,397 Operatingexpenses,401–402 Informationtechnology,103 Organization,417–442 InterestinconsolidatedVIEs,357 Overview,1–2 Interestratesondepositoryinstitutionsloans,290 Publicnoticeof decisions,73–74 Intradaycredit,102 Regulatoryreports,67–69 InvestmentsheldbyconsolidatedVIEs,107–108, Regulatoryresponsibilities,71–74 355–356 Retirementbenefits,332 Liquidityswaps,355 Safetyandsoundnessresponsibilities,49–60 Loansandothercreditextensions,107,292,294–295, Staff development,70–71 296–297,351–352,361–362 Supervisionresponsibilities,49–60 NationalSettlementService,98 Supervisoryinformationtechnology,69–70 Notesoutstanding,356–357 Supervisorypolicy,60–69 Officers,314,439–440 Surveillanceandoff-sitemonitoring,58–59 $100note,redesigned,98 Trainingandtechnicalassistance,59–60,70 Openmarkettransactions,287–288 FederalTradeCommissionAct,79,87 Operatingexpenses,410–411 FedLine,102–103 Operations,volumeof,313 FedwireFundsService,97,126 Operationsandservices,347–348 FedwireSecuritiesService,98 Paymentsservices,100–101 FEMA.SeeFederalEmergencyManagementAgency Postemploymentbenefits,394–395 FFIEC.SeeFederalFinancialInstitutionsExamination Postretirementbenefits,392–394 Council Premises,108,384–385 Fiduciaryexaminations,57 Pricedservices,95–98,109–113 Finance Recoveryof directandindirectcosts,96–97 Business,12–13 Restructuringcharges,360,395–396 Household,10–11 Retailsecuritiesprograms,100 Housing,11–12 Retirementplans,386–391 FinancialAccountingManualforFederalReserveBanks Riskmanagement,98–99 (FAM),348 Salariesof officersandemployees,314 FinancialAccountingStandardsBoard(FASB),360 Securitiesholdings,353–355 FinancialActionTaskForce(FATF),66 Structure,347

Index 449 FinancialandBankingInformationInfrastructure FSB.SeeFinancialStabilityBoard Committee,58 FSOC.SeeFinancialStabilityOversightCouncil FinancialCrimesEnforcementNetwork(FinCEN),65–66 Financialholdingcompanies G Supervisionof,53–54 Financialmarketutilities(FMUs),44,49,54–55,117–118 GAAP.SeeGenerallyacceptedaccountingprinciples FinancialMarketUtilitiesSupervisionCommittee GAO.SeeGovernmentAccountabilityOffice,U.S. (FMU-SC),55 GDP.SeeGrossdomesticproduct Financialmarkets,14–18,28–31,43–44,139–140,150, GeneralElectricCapitalCorporation,Inc.,55,61,118 152–153,176,178–179,185,188–190,211,214–215, Generalobligationbonds,31,153 223–224,227–228,249–250,252–253,262–263 Generallyacceptedaccountingprinciples,107,325, FinancialRegulators’TrainingInitiative(FRTI),59 348–349 FinancialResearch,Officeof,337 GLBA.SeeGramm-LeachBlileyAct FinancialStabilityBoard(FSB),45,63 Globalsystemicallyimportantbankingorganization FinancialStabilityOversightCouncil(FSOC),44–45,49, (GSIB),61,118 61,115 GoDirectprogram,101 Financialstatements Goldstock,292,296–297,351 Boardof Governors,318–339 GovernmentAccountabilityOffice,U.S.(GAO),399–400 FederalReserveBanks,109–113,340–397 GovernmentPerformanceandResultsAct(GPRA),119 Governmentsector,13–14,27–28.SeealsoFederal FinCEN.SeeFinancialCrimesEnforcementNetwork government;Stateandlocalgovernments FirstVice-Presidents,Conferenceof,FederalReserve Governmentsecuritiesdealersandbrokers,FederalReserve Banks,442 examination,57 Fiscalagencyservices,99–102 Government-sponsoredenterprises(GSEs),98,104,106 FitchRatings,31 GPRA.SeeGovernmentPerformanceandResultsAct Float,FederalReserveBanks,98,292,296–297 Gramm-LeachBlileyAct,53 FloatingRateNote,29,100 Grossdomesticproduct,5,7,10,13–14,16,22–23,25,27, Floodinsurance,79–80,87 43,143,153–155,164–165,177,179,186–187,201, FMU-SC.SeeFinancialMarketUtilitiesSupervision 213,239,276 Committee GSEs.SeeGovernment-sponsoredenterprises FMUs.SeeFinancialmarketutilities GSIB.SeeGlobalsystemicallyimportantbanking FOMC.SeeFederalOpenMarketCommittee organization Foodprices,9 Forecastuncertainty,173,209,247,284 Foreclosures H Mortgages,77 H.2release,74 PaymentAgreement,76–77 HELOCs.SeeHomeequitylinesof credit Preventionactions,77 HFIAA.SeeHomeownerFloodInsurance Servicereffortstoaddressdeficiencies,77–78 AffordabilityAct ForeignAssetsControl,Officeof (OFAC),65–66 HOLA.SeeHomeOwners’LoanAct ForeignBankSupervisionEnhancementAct,73 Holdingcompanies Foreignbankingorganizations(FBOs),68 Incometaxallocation,126 Foreignbanks.Seealsospecificbanksbyname Holdingcompanyregulatoryreports,67–68 Deposits,293 HomeAffordableModificationProgram,90 Enhancedprudentialstandards,115–116 Homeequitylinesof credit(HELOCs),67,83–84,90 Supervisionof,55–56,69 HomeOwners’LoanAct(HOLA),72–73 U.S.activities,56 HomeownerFloodInsuranceAffordabilityAct(HFIAA), Foreignbonds,16–17,28–29,31 80,87 Foreigncurrencyoperations Householdsector,10–11,25–26,41,43,88–90 Authorization,134–138 Housingactivity,11–12,28 Denominatedassets,353–355,367–369 HousingandUrbanDevelopment,U.S.Departmentof Directives,136 (HUD),67,85 Liquidityswaps,355 HUD.SeeHousingandUrbanDevelopment,U.S. Foreigneconomies,16–18,31–32.SeealsoAdvanced Departmentof foreigneconomies;Emergingmarketeconomies; specificcountriesbyname I FRBNY.SeeFederalReserveBankof NewYork FRCH.SeeFederalReserveConsumerHelp IAIS.SeeInternationalAssociationof Insurance FRTI.SeeFinancialRegulators’TrainingInitiative Supervisors

450 101stAnnualReport|2014 IDIs.SeeInsureddepositoryinstitutions Justice,U.S.Departmentof (DOJ) IMF.SeeInternationalMonetaryFund Fairlendinglawsenforcement,79 Imports,13,177 Incentivecompensation,66 L Incomeandexpenses Boardof Governors,325 Labormarkets,7–8,10,18–19,22–24,28,217 Disposablepersonalincome,11 LargeInstitutionSupervisionCoordinatingCommittee FederalReserveBanks,104,307–312,345,397 (LISCC),49,51,55 Pricedservices,109–113 LatinAmerica IndependentForeclosureReview,76–78 Bondyields,17 Inflation,9–10,22,24–25,155–156,164,167–168,200, LCR.SeeLiquiditycoverageratio 203–204,237,241–243,274,278–280 LeadershipConferences,441–442 Informationtechnology(IT) LegislativeandRegulatoryConference,60 Budget,411–412 Leveragedloans,39 FederalReserveBankdevelopments,103 Liabilities.SeeAssetsandliabilities FederalReserveexaminationof activities,57 LIBOR.SeeLondoninterbankofferedrate Securitypractices,103 Liquiditycoverageratio(LCR),16,40,116–117 Supervisoryactivities,69–70 LiquidityRiskMeasurementStandards(RegulationWW), Inspections.SeeExaminationsandinspections 122,124 InspectorGeneral,Officeof (OIG),398,405,407–408 Liquidityrisks,40–41 Insuredcommercialbanks.SeeCommercialbanks Liquidityswaparrangements,355,369 Insureddepositoryinstitutions(IDIs),61,117 LISCC.SeeLargeInstitutionSupervisionCoordinating InteragencyPolicyStatementonIncomeTaxAllocationin Committee aHoldingCompanyStructure,126 LitigationinvolvingBoardof Governors Interestonexcessreserves,21,35 AmericanBankersAssociation,etal.,285,295 Interestrates,10–11,22,23,90 Artis,286 InternalRevenueService(IRS),65 Ball,286 InternationalAssociationof InsuranceSupervisors(IAIS), Blair,285 64 CitiMortgage,Inc.,286 InternationalBankingAct,73 CommunityFinancialServicesAssociationof America, Internationalfinancialmarkets,16–18,31–32 Ltd.,285 InternationalMonetaryFund(IMF),351 Crisman,286 Ferrer,286 InternationalStandardsfortheProfessionalPracticeof Goldstein,Trustee,286 InternalAuditing,104 Johnson,285 Internationaltrade,13,25,151,177 LoanSyndicationsandTradingAssociation,285 Internationaltraining,59 NACSetal.,285 InternationalTreasuryServices,100–101 Nobles,285 Intradaycredit,102 Ramey,285 InvestibleMarketsIndex,389 Richardson,285 Investments Richter,285 Businesssector,12,26–27 StateNationalBankof BigSpring,286 Energysector,12 Wise,286 Fixed,12 WMILiquidatingTrust,285 InvoiceProcessingPlatform(IPP),100–101 LMIconsumers.SeeLow-andmoderate-income IOER.SeeInterestonexcessreserves consumers IPP.SeeInvoiceProcessingPlatform Loans.Seealsospecifictypesofloans IRS.SeeInternalRevenueService FederalReserveBankholdings,292,294–295,296,297, IT.SeeInformationtechnology 351–352,361–362 SystemOpenMarketAccount,107 Localgovernments.SeeStateandlocalgovernments Londoninterbankofferedrate,30 J Low-andmoderate-incomeconsumers(LMI),82,91 Japan Economyof,17–18,32 M Equityperformance,31 Joblosses.SeeUnemployment M2monetaryaggregates.SeeMonetaryaggregates JointForum,63 Macroprudentialsupervisoryapproach,42–44 JPMorganChase&Co.,373,376 MaidenLaneIILLC,350,377,378

Index 451 MaidenLaneIIILLC,350,377,378 Servicereffortstoaddressdeficiencies,77–78 MaidenLaneLLC,350,375,378 MOU.SeeMemorandaof understanding Malaysia Municipalbonds,16,30–31 Economyof,18 Municipalsecuritiesdealersandbrokers,FederalReserve Maps,FederalReserveSystem,2–3 examination,57 Marginrequirements,301 Mutualholdingcompanies(MHC),73 Marketrisk,374–375 MBSs.SeeMortgage-backedsecurities N MCDX,16,30 MedicarePrescriptionDrug,Improvementand NationalBankersAssociation(NBA),59–60 ModernizationAct,394 NationalCreditUnionAdministration(NCUA),58,83 Members NationalExaminationData,69 Boardof Governors,417 NationalFloodInsuranceAct,79 FederalAdvisoryCouncil,424 NationalFloodMitigationFund,80 FederalOpenMarketCommittee,422 NationalInformationCenter(NIC),58,69–70 Membershipof StateBankingInstitutionsintheFederal NationalMonetaryCommission,37 ReserveSystem(RegulationH),121 NationalSettlementService,98 Memorandaof understanding,66 NationalUrbanLeague,60 NBA.SeeNationalBankersAssociation MENA.SeeMiddleEastandNorthAfrica NCUA.SeeNationalCreditUnionAdministration Mergersandacquisitions,81–83 NIC.SeeNationalInformationCenter Metlife,Inc.,55 NorthAfrica.SeeMiddleEastandNorthAfrica Mexico Economyof,18,31–32 MHC.SeeMutualholdingcompanies O MichiganSurvey.SeeThomsonReuters/Universityof OCC.SeeComptrollerof theCurrency,Officeof the MichiganSurveysof Consumers OFAC.SeeForeignAssetsControl,Officeof MiddleEastandNorthAfrica Off-sitemonitoring,58–59 FinancialRegulators’TrainingInitiative,59 Officers MinorityCouncilof theIndependentCommunityBankers Boardof Governors,417–421 Association,60 Conferencesof,441–442 Minority-ownedinstitutions(MOIs) FederalAdvisoryCouncil,424 Trainingandtechnicalassistance,59–60 FederalOpenMarketCommittee,422–423 ModelValidationCouncil,426 FederalReserveBanks,314,439–440 MOIs.SeeMinority-ownedinstitutions OIG.SeeInspectorGeneral,Officeof Monetaryaggregates(M2),16,31 Oilprices.SeeEnergyprices MonetaryControlAct,96 ONRRP.SeeOvernightreverserepurchaseagreements Monetarypolicy $100note,redesigned,98 Appropriatemonetarypolicy,163,164,169,275,278, Openmarketoperations.SeealsoFederalOpenMarket 280 Committee Developments,18–21,32–35 Authorizations,132–134 Normalization,175–176,185–187,211–213,224–225 Volumeof transactions,287–288 Overview,5–6,22–23 Operatingleases,328 Statementonlonger-rungoalsandstrategy,18–21, OTS.SeeThriftSupervision,Officeof 138–139 Overdraftservices,102 MonetarypolicyreportstoCongress Overnightreverserepurchaseagreements(ONRRP),15, February2015,5–21 21,30,35,139,152,175,178,185–186,189,212,214, July2014,22–35 223–224,249–250,263 Moneylaunderingprevention.SeeAnti-moneylaundering Moneymarketmutualfunds,40–41 P Moody’sInvestorsService,31 MorganStanleyCapitalInternational,389 PartnershipforProgress(PFP),59–60 Mortgage-backedsecurities(MBSs),15,19,20,28,29–30, Pay.gov,101 33,104,106,186,287,289,353–355,363–367 PaymentAgreement,76–77 Mortgageinterestrates,90 PaymentSystemRisk(PSR),95,102,123,126 Mortgageregulations Paymentsservices,FederalReserveBanks,100–101 Foreclosurepreventionactions,77 PCEs,Personalconsumptionexpenditures Interest-onlymortgageloans,90 Penalties.SeeCivilmoneypenalties PaymentAgreement,76–77 PensionEnhancementPlan(PEP),330–331

452 101stAnnualReport|2014 PEP.SeePensionEnhancementPlan P,Privacyof ConsumerInformation,123 PerformanceReportInformationandSurveillance Q,CapitalAdequacyof BankHoldingCompanies, Monitoring(PRISM),58–59 SavingsandLoanHoldingCompanies,andState Personalconsumptionexpenditures(PCEs),7,9,11, MemberBanks,121–122 22–25,150,164,167–168,176–177,187,203–204, RR,CreditRiskRetention,123–124 242–243,251,279–280 V,FairCreditReporting,123 Personnel,Management,Officeof,332 VV,ProprietaryTradingandCertainInterestsin,and Policyactions RelationshipswithHedgeFundsandPrivateEquity Boardof Governors,121–127 Funds,124 FederalOpenMarketCommittee,18–21,32–34, WW,LiquidityRiskMeasurementStandards,122,124 145–148,156–159,181–183,193–196,218–221, XX,ConcentrationLimit,125 232–234,256–259,269–271 Y,BankHoldingCompaniesandChangeinBank PostPaymentSystem(PPS),100–101 Control,122–123 Postemploymentbenefits,334,394–395 YY,EnhancedPrudentialStandards,122–123,125 Postretirementbenefits,333–334,392–395 Regulatorycapitalratios,40 PPS.SeePostPaymentSystem Regulatoryreports,67–69 Premises,FederalReserveBanks,108,384–385 REITs.SeeRealestateinvestmenttrusts Presidents,Conferenceof,FederalReserveBanks,441 Relationshipbanking,91 Pricedservices,95–98,109–113 ReportontheEconomicWell-BeingofU.S.Householdsin Prices 2013,88–89 Consumer,9,24–25 Reportsof ConditionandIncome(CallReports),58 Energy,9,10,12,22,25 Repurchaseagreements.SeeOvernightreverserepurchase Food,9 agreements;Reverserepurchaseagreements Housing,11 Resolutionplanning,48 Primarycredit,127 Retailsecuritiesprogram,100 PRISM.SeePerformanceReportInformationand Retirementplans,332,386–391 SurveillanceMonitoring Returnonaverageassets(ROA),47 Privacyof ConsumerInformation(RegulationP),123 Returnonequity(ROE),47 Privatesectoradjustmentfactor(PSAF),96–97 Revenue.SeeIncomeandexpenses Professionalfees,384 Reverserepurchaseagreements,288,289,293.Seealso ProprietaryTradingandCertainInterestsin,and Overnightreverserepurchaseagreements RelationshipswithHedgeFundsandPrivateEquity RFI/C(D)system,53 Funds(RegulationVV),124 RiegleCommunityDevelopmentandRegulatory PrudentialFinancial,Inc.,55 ImprovementAct,53 PSAF.SeePrivatesectoradjustmentfactor Riskassessment,38–40 PSR.SeePaymentSystemRisk Risk-BasedCapitalReportingforInstitutionsSubjectto PuertoRico theAdvancedCapitalAdequacyFramework,70 Generalobligationbondratings,31,153 Risk-focusedsupervision,78 Riskmanagement,64–66,98–99,117–118 ROA.SeeReturnonaverageassets Q ROE.SeeReturnonequity QRM.SeeQualifiedresidentialmortgages Roth401(k),332 Qualifiedresidentialmortgages(QRM),117 RustConsulting,Inc.,77 R S RapidResponseprogram,60,78,84–85 Realestateinvestmenttrusts,30 Savingsandloanholdingcompanies(SLHCs) Realestateloans.SeeCommercialrealestate(CRE)loans Regulationof,72–73 Recoveryplanning,48 Supervisionandregulationof,49,54,67,76 Regionalbanksupervision,69 SCOOS.SeeSeniorCreditOfficerOpinionSurveyon Regulations DealerFinancingTerms DD,TruthinSavings,123 SDR.SeeSpecialdrawingrightscertificates H,Membershipof StateBankingInstitutionsinthe Seasonalcredit,127 FederalReserveSystem,121 SEC.SeeSecuritiesandExchangeCommission HH,DesignatedFinancialMarketUtilities,123 Secondarycredit,127 J,Collectionof ChecksandOtherItemsbyFederal Securities.SeealsoFederalagencysecurities;Treasury ReserveBanksandFundsTransfersThrough securities;specifictypesofsecurities Fedwire,126 Resellandrepurchaseagreements,352–353

Index 453 SystemOpenMarketAccountholdings,106–107, Summaryof EconomicProjections(SEP),6,161–164, 363–371 197–209,235–247,272–284 SecuritiesandExchangeCommission(SEC),41,55,67,74 SupervisionandRegulationStatisticalAssessmentof Bank Securitiescredit,74 Risk(SR-SABR),58 Securitiescreditlenders,57–58 Supervisorypolicy SecuritiesExchangeAct,57,74 Accountingpolicy,63–64 Security Capitaladequacystandards,61–62 CyberSecurityandCriticalInfrastructureWorking Complianceriskmanagement,65–66 Group,58 Consumerandcommunityaffairs,75–87 Informationtechnology,103 Credit-riskmanagement,64–65 SemiannualReportonBankingApplicationsActivity,71 Enhancedprudentialstandards,60–61 SeniorCreditOfficerOpinionSurveyonDealerFinancing Incentivecompensation,66 Terms(SCOOS),30,40 Informationtechnology,69–70 SeniorLoanOfficerOpinionSurveyonBankLending Internationalcoordination,62–63 Practices(SLOOS),12,13,16,26,27,178–179,215, Policymakinginitiatives,67–61 253 Regulatoryreports,67–69 SEP.SeeSummaryof EconomicProjections Staff development,70–71 SeparateTradingof RegisteredInterestandPrincipalof SupplementalRetirementPlanforSelectOfficersof the Securities,389 FederalReserveBanks,386 SharedNationalCredit(SNC)Program,64–65 SupplementaryFinancingAccount,293 SHED.SeeSurveyof HouseholdEconomicsand Surveillance,58–59 Decisionmaking Surveyof HouseholdEconomicsandDecisionmaking Short-termfundingmarkets,15 (SHED),89 SIFI.SeeSystemicallyimportantfinancialinstitutions Surveyof MarketParticipants,14 Surveyof PrimaryDealers,14,28,152 SLHCs.SeeSavingsandloanholdingcompanies Surveyof ProfessionalForecasters,25 SLOOS.SeeSeniorLoanOfficerOpinionSurveyonBank Surveyof Termsof BusinessLending(STBL),27 LendingPractices Surveyof YoungWorkers,88–90 SmallBusinessAdministration,60 Swapcontracts,381–384 Smallbusinesses SystemAssurancefortheFederalReserve,103 Bankrelationships,91 SystemOpenMarketAccount(SOMA),20,21,34, Borrowingconditions,27 105–108,139,150,176,212,249,262,348–349, SNC.SeeSharedNationalCreditProgram 363–371 Software.SeeEquipmentandsoftware Systemicallyimportantfinancialinstitutions,54 SOMA.SeeSystemOpenMarketAccount S&P.SeeStandardandPoor’s500 Specialdrawingrightscertificateaccount,292,296–297 T Specialdrawingrightscertificates(SDR),351 Specializedexaminations,57 TALF.SeeTermAsset-BackedSecuritiesLoanFacility SR-SABR.SeeSupervisionandRegulationStatistical TaskForceonSurveillanceSystems,59 Assessmentof BankRisk TDF.SeeTermDepositFacility Staff development,70–71 Technicalassistance,59–60 StandardandPoor’s500(S&P500),16,29,31,215,252 TermAsset-BackedSecuritiesLoanFacility(TALF),362, Stateandlocalgovernments,14,27–28 378 Statememberbanks TermDepositFacility(TDF),21,30,35,125–126,175,357 Complaintsagainst,85–86 Thailand,economyof,32 Developmentsin2014,47 ThomsonReuters/Universityof MichiganSurveysof Financialdisclosures,74 Consumers,11,25,26,177 Supervisionof,51,53 Thriftplans,332,391–392 Statementsof Condition ThriftSupervision,Officeof (OTS),49 FederalReserveBanks,302–306,344–346 TIPS.SeeTreasuryInflation-ProtectedSecurities Statementsof operations,322 Tradedeficit,151,177 STBL.SeeSurveyof Termsof BusinessLending Trainingprograms,59–60,70,84 Stresstesting,39,43–44,52–53,116,125 Transferagents,57 STRIPS.SeeSeparateTradingof RegisteredInterestand Treasury,U.S.Departmentof the Principalof Securities Bureauof EngravingandPrinting,99,338,413–414 SubcommitteeonSupervisoryAdministrationand Cashholdings,293 Technology,69 Cashmanagementservices,101–102 Subprimeborrowing,43 Collectionservices,101

454 101stAnnualReport|2014 Currencyincirculationandoutstanding,292–293, UnitedKingdom 296–299 Bondyields,17 Deposits,357 Economyof,17,18,31–32 ElectronicPaymentSolutionCenter,100–101 Universityof MichiganSurveys.SeeThomson InteragencyTaskForceonStrengtheningandClarifying Reuters/Universityof MichiganSurveysof theBSA/AMLFramework,66 Consumers TreasuryInflation-ProtectedSecurities,15,25 Unregulatedpractices,consumercomplaints,86 Treasurysecurities U.S.Congress.SeeMonetarypolicyreportstoCongress; FederalReserveBankholdings,289,292,296,297, specificlegislationbyname 353–355 Openmarkettransactions,287–288 V Paymentservices,100–101 Retailsecuritiesprogram,100 Variableinterestentities(VIEs),103–104,107–108,350, Services,100 355–356,357,373,378,381,384 Wholesalesecuritiesprogram,100 Vice-Presidents,Conferenceof,FederalReserveBanks,442 Yields,14–15,28–29 VIEs.SeeVariableinterestentities TruthinSavings(RegulationDD),123 Volckerrule,117 U W UDAP.SeeUnfairorDeceptiveActsorPractices Wages,8,24 Uncertaintyandrisk,169,171–173,205,207–209, Warehousingagreements,358–360 245–247,282–284 Wholesalesecuritiesprogram,100 Unemployment,22,23–24,27,150,156,160,166,176,202, 240,277 Y UnfairorDeceptiveActsorPractices(UDAP),79,84 UniformBankPerformanceReports,58 Youngworkerssurveys,88–90

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APA

Federal Reserve (2013, December 31). Annual Report of the Federal Reserve Board, 2014. Annual Reports, Federal Reserve. https://whenthefedspeaks.com/doc/annual_report_2014

BibTeX

@misc{wtfs_annual_report_2014,
  author = {Federal Reserve},
  title = {Annual Report of the Federal Reserve Board, 2014},
  year = {2013},
  month = {Dec},
  howpublished = {Annual Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/annual_report_2014},
  note = {Retrieved via When the Fed Speaks corpus}
}